“If you really don’t know what’s going on, you don’t even have to know what’s going on to know what’s going on.”
Sadly, one of my favorite authors and financial writers, George Goodman, passed away this weekend. He was 83 years old. After graduating magna cum laude from Harvard and winning a Rhodes Scholarship, Goodman published his first novel, The Bubble Makers – then went onto to join the “US Army Special Forces in 1954 in the intelligence group known as Psywar.” (Wikipedia)
“Goodman’s first non-fiction book, The Money Game (1968), was a number one bestseller for over a year. In the book he memorably introduced the catchphrase “assume a can opener” to mock the tendency of economists to make unjustified assumptions.” (Wikipedia)
Over the years, I’ve cited The Money Game many times. Today’s quote comes from that book and my Early Look is dedicated to Goodman who taught me a great deal while he wasn’t watching. Taped on the insert of one of my notebooks is that “a man is really at his best, his most fulfilled, when he’s on his way to becoming what he is going to become…” I’m grateful for that opportunity, every day.
Back to the Global Macro Grind…
If you really don’t know what’s going on in markets for 2014 YTD, now you know. It’s sitting right there in front of you on your screen. That is the score. That is Mr. Macro Market’s Game. And we’re all tasked with playing the game that’s in front of us.
On the heels of Asian Equity markets getting banged up last week, Japan opened 2014 for stock market trading overnight and got smoked for a -2.4% drop in the face of a barely up Japanese Yen. Get the Yen right, and you’ll get the Nikkei right – for now.
China reported yet another #GrowthSlowing data point last night as well. Its Services PMI print for DEC slowed to 50.9 versus 52.5 in NOV and Chinese stocks dropped another -1.8% on that. For 2014 YTD, the Shanghai Composite is already down -3.3%.
With Japan and China -2.4% and -3.3%, respectively, what other big Equity indices are down so far for the YTD?
- SP500 -0.9%
- MSCI World Index -0.9%
- MSCI Emerging Latin American Index -2.1%
- MSCI Emerging Market Index -2.3%
- MSCI Asia ex-Japan Index -2.4%
This shouldn’t be a huge conceptual surprise given that the US Dollar is +0.9% YTD. Emerging Markets in particular do not like #StrongDollar. But those of you who embraced that reality into the USD’s 2013 highs (July) know what’s going on there too.
Can the US Dollar continue higher? With Janet Yellen being confirmed tonight, I doubt it. But my doubts are often wrong, so we’ll deal with whatever Mr. Macro Market decides on this front. Is there any other way to accept what’s really going on?
From a long-term @Hedgeye TAIL risk perspective, where the US Dollar Index is at is significant in that it’s a principal and directional driver for other massively interconnected global macro risks. Check out the last price of the following Big 3 Macro levels vs. our TAIL lines:
- US Dollar Index long-term TAIL line = $81.12
- Copper’s long-term TAIL line = $3.33/lb
- WTIC and Brent Oil long-term TAIL lines = $98.26 and $108.89, respectively
While Dollar UP, Oil DOWN doesn’t yet have the correlation risk in our model that we’d jump up and down about (30 day and 180 day USD/Brent Oil correlations are +0.21 and -0.45, respectively), that doesn’t mean the Mr. Macro Market won’t change that.
On last week’s +0.5% move in the US Dollar Index:
- WTIC Oil was down -6.3%
- Brent Oil was down -4.7%
- Oil Volatility (VIX) was +30.9%! to 20.60
As I am sure Goodman would agree, volatility in an “asset class” that everyone and their brother is net long of breeds contempt. A breakout towards 30-40 Oil VIX would most certainly wake up consensus – because consensus is big time long of oil.
Looking at last week’s closing CFTC Futures/Options consensus positioning, here’s what I mean by that:
- BULLS: Crude Oil is the biggest net long position in Global Macro right now at +381,392 contracts
- BEARS: Japanese Yen is the biggest net short position in Global Macro at -143,384 contracts
In other words, if you are long Oil and the Nikkei on Down Yen expectations, join the club.
I don’t feel like we need to make a call for the sake of making a call right here and now on things like Oil and Yen. Going into last week we weren’t short Oil, so I missed that – but won’t miss shorting it on the bounce if it fails at TAIL resistance again. If Brent or WTI crude oil recapture TAIL supports, so be it.
That’s what’s going on in macro. The game is constantly changing. And it’s our job to change alongside it.
Our immediate-term TRADE Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer