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The Call @ Hedgeye | March 28, 2024

“Never give a sword to a man who can't dance.”
-Confucius

Chaos theorists will remind us that any complex system of consequence requires predictable patterns of behavior. Without an understanding of the deep simplicity associated with those repeatable patterns, one can surely lose his mind in trying to figure out what exactly is going on... that’s why using a global macro investment process is such a powerful weapon. Behavioral patterns repeat.

Confucius reminds us that the scariest part about this investing game is issuing swords to men who can’t dance. Women, on balance, are simply better dancers. Sorry guys. Last night, my favorite contrarian market indicators – the men of CNBC’s Fast Money – we’re at it again. God bless America for their presence in this game – without being able to take advantage of their predictable patterns of behavior, we wouldn’t be able to consistently outperform the market. These guys are consensus.

Dylan and Joey kept talking about this “long gold, short America” trade… given that I just started investing more aggressively in America over the course of the last 48 hours (and started shorting gold for the first time in forever) I found their comic relief fascinating, particularly given the timing…

Today’s markets do not trade on valuation. They trade on price. Price momentum governs predictable human behavior, and within the bounds of this interconnected global market place of interrelated factors, those behavioral patterns can be profited from.

Timing in these volatile markets is everything. When American stocks are hitting 3 months lows, and gold 7 month highs – you do not enter the game “long gold, short America” and call that a unique investment idea. I call that risk.

If you use a one factor model (price), and all you know is that you need to chase it, that’s cool – at least it’s a process. But don’t for one second think that there aren’t a world full of global macro pros out there who aren’t watching you, and waiting on you to do the perfectly predictable.

Fundamentally, I get the gold trade. I have been talking about it since 2005. Until recently, I was long gold in our Asset Allocation Portfolio, and if I get the momentum correction that I am looking for, I will cover my short position and consider it on the long side once again. This isn’t an emotional relationship – this is math.

The intermediate “Trend” in gold remains bullish, but at a price. The real support line for gold is all the way down at $824/oz. Understanding that some of the Fast Money traders who love gold up here are the same cats that loved crude oil at $140/barrel, I hope someone is at least mindful that what goes straight up can indeed come down. Support is -16% lower from where I shorted gold yesterday afternoon.

Gold is what you own as a safety currency when everything around you is in crisis. Asset classes like Gold and Cash can “re-flate” while other asset classes like stocks, bonds, real estate, etc… deflate. 

After we took a good hard look at yesterday’s intraday low in the SP500 of 782, we issued a note to our macro clients titled “Buying/Covering” (www.researchedgellc.com <http://www.researchedgellc.com> ). At 782, the US market was only 4% away from its November 20th, 2008 capitulation low. Yesterday’s lows came on much lower volatility (VIX 50 rather than VIX 80), and much lower volume. The only volume of consequence in my macro model was the audible kind – that sound of Fast Money traders chirping something about “long gold, short America”… C’mon guys… at least try to respect that there is a fiduciary aspect to this profession.

As always, putting that 782 SP500 line in context is critical. This had the SP500 down -50% from the Fast Money “buy everything Chindia” highs of 2007, and down a stiff -15.4% for 2009 to-date. Are we really investors “for the long run” here folks, or are we one factor model price chasers? My Dad, who is a firefighter, has always warned me of the psyche of those who chase his fire engines – they are not emotionally stable.

On an intermediate basis, Volatility (VIX) remains bearish. Unless the VIX can close above $53.44, I am very comfortable buying American stocks. I have not minced words and I am accountable for this call – unless we have another 6 standard deviation event, I do not think that the US stock market will penetrate that November 20th low.

What other signals in my 27 factor global macro model are signaling my conviction?

1.      The US$ is overbought anywhere north of the 88.11 line in the US Dollar Index

2.      Gold is overbought on an immediate term basis anywhere north of $983/oz

3.      The SP500 is oversold on an immediate term basis anywhere under the 790 line

4.      Other than the Russian stock market, there are NO major global equity indices that have penetrated and closed below their Oct/Nov lows

5.      China and Brazil continue to add to their YTD positive performance

6.      Credit has improved materially, particularly when it comes to global counterparty risk; the TED spread is 400 basis points lower than Oct/Nov


The inverse correlation between the US Dollar and the SP500 has been the anchor of this year’s call to remain bearishly positioned on US stocks. With the exception of one week where the US$ weakened, the US$ has been as relevant a heavyweight champion of global macro as gold has – but guess what, these factors are now very much correlated.

The US$ is trading down overseas this morning to the tune of -77 basis points. The S&P Futures are trading up +106 basis points. And looky here Joey… gold is trading down off of its 7 month highs as a result. How ironic…

Other than telling CNBC’s viewers that you love gold and hate US stocks based on a revisionist price, I have one question for Dylan and Joey… what is it exactly that you do? I know what it is that I do … and I am now Long America, Short Gold - thanking you for your predictable behavior. Sincerely,

Keith R. McCullough

Long America, Short Gold - etfs021909


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