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“With physical time, there is no need to know why a cycle exists – only that it does.”

-The Fourth Turning

If there’s one quote that links cycles to the behavioral side of markets in The Fourth Turning, that’s it. With the Old Wall bearish on interest rates in 2013 (and bullish on them in 2014), never have so many told macro stories about growth that have gotten so few paid.

Delaying Time - p7

You can call it framing data, confirmation bias, emotional baggage – or some combination of all three. It’s all there, all of the time. And it’s your job to fight it’s behavioral gravity.

Sounds easy, right? Not so much. That’s why process matters. The best we can do each and every morning of our macro day is accept what is – not what we need it to be.

Back to the Global Macro Grind

If only consensus could delay the 3rd quarter due to the 1st quarter’s “weather”…

In other news, it’s Q3 and US growth, as an investment style, got pounded yesterday. If you don’t want to acknowledge that Biotech Stocks (IBB) and the Russell 2000 (IWM) were down -2.6% and -1.7%, respectively, just quote the slow-growth Dow. It was -0.26%.

If I go all interconnected macro on you, and move beyond the typical US stock market centric naval gazing  that is the Dow or the SP500, you’ll also note that yesterday’s US #Q3Slowing signals were manifest:

  1. Bond Yields – 10yr UST Yield failed, hard, at yet another lower high (2.81% TREND resistance intact)
  2. US Dollar – remained no bid within the context of a bearish TAIL risk view ($81.17 USD Index resistance)
  3. Volatility – front-month fear (VIX) once again ripped off the Braveheart line of 10, closing at 11.33

But, but, the Russell is still “up” this year. Yep, a whopping +1.8% YTD (and it’s July).

Instead of trying to justify why an equity market “should see multiple expansion”, we say you deal with what you have. US Equities trade at 16x earnings because we have boomer-style-stagflation. In that part of the cycle, bonds get multiple expansion, not stocks.

As you try to navigate this mess of “it’s different this time” narratives, always know where the other players positions are. Here are the most recent net long/short positions in macro from a CFTC Futures/Options perspective:

  1. BONDS – 10yr Treasury still has a net SHORT position of -27,891 contracts (that’s -25,538 shorter wk-over-wk)
  2. US STOCKS – SPX (Index + Emini) has a net SHORT position of -53,081 contracts (that’s +39,668 LONGER wk-over-wk)
  3. US DOLLAR – ramped to its biggest net LONG position of 2014 last week = +20,197 contracts

In other words, post the lagging economic indicator (i.e. old news of US #GrowthAccelerating that you should have been long of, in size, last year) that was US “jobs recovery” on Thursday:

  1. Consensus kept shorting bonds thinking rates will rise (consensus has had this view all year)
  2. Consensus hedge funds did what they usually do in US Equities (covered shorts high, after shorting low in May)
  3. Consensus ramped up the long rates, long USD bet that it should have had on in Q1 of 2013 as growth was accelerating

The hedge fund net positioning part is important. Whether or not you agree with AQR’s recent research view that hedge funds have a +0.93 correlation to beta right now or not, reality is that hedge funds are highly correlated to the levered long side of growth.

Hedge fund assets under management are also at all-time highs (approximately $2.7T), so the confirmation bias and emotion you see in the futures and options markets is important to monitor. It’s a collective snapshot of behavior.

In the immediate to intermediate-term (3 weeks to 6 months) most hedge funds are forced to chase performance – and the best way to play catch-up when you aren’t beating your bogey is to get long, with leverage.

Yes, from the asymmetric point that is the Russell 2000’s all-time high of 1208 (March 2014), that is scary.

So is the concept that an un-elected-central-planning-committee can delay things like economic cycles and time. As Ray Dalio appropriately says, most successful risk managers realize that nature is testing us, and she’s not that sympathetic.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.50-2.64%


RUT 1168-1208

VIX 10.32-12.61

USD 79.71-80.43

Gold 1

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Delaying Time - Chart of the Day