This note was originally published at 8am on August 05, 2014 for Hedgeye subscribers.
“When we hang the capitalists, they will sell us the rope.”
That wasn’t a very nice thing to say. But Stalin wasn’t nice; especially to economists! “In 1930, Stalin arrested Nikolai Kondratieff and shipped him off to Siberia. His crime: daring to defy the most linear of ideologies – Marxism – by suggesting that the long-term performance of market economies is cyclical.” (The Fourth Turning, pg 110)
Kondratieff died in the gulag, but his “long wave” cycles will live on for as long as gravity does (let’s hope someone isn’t empowered to centrally plan that away!). For longer-term risk managers, they are also called super-cycles (45-50 years). They are a tad longer than the monthly performance chasing thing you see your peers wrestling with in an oversupplied asset management industry today.
If you aren’t into the 45-50 year thing, how about 20-25 years? This is what demographer and economic historian Neil Howe calls a “turning” within your saeculum (lifetime). Like the Four Seasons, there are roughly four turnings in your life. I had a Real Conversation @HedgeyeTV with Neil about this recently that you can watch here: https://www.youtube.com/watch?v=h6vYv9O0dEM
Back to the Global Macro Grind…
Now if you don’t want to think about a long-term US economic cycle (which is 62 months into an expansion) rolling over, you can always ditch the 25 yr demographic reading for a 50-day moving monkey (chart). When those break, oh baby do the emotions kick in!
Obviously, using a 1-factor point-and-click model that my 4 year old daughter could figure out isn’t a multi-duration, multi-factor, interconnected Global Macro risk management process, so let’s move on…
What I wake up trying to do every morning is identify the intermediate-term-cycles within longer-term ones. Trust me, I don’t read a non-fiction book every 10-days for kicks and giggles. I do it in order to make myself less dumb. And that’s not an easy thing to do!
Not to be confused with an economic cycle, when considering the shorter-term market cycle within the “long-wave”, a really basic 3-factor model I use is:
Therefore, if I am looking at something like the Russell 2000 (IWM)
- PRICE – is -7.0% in the last 2 months and below my intermediate-term TREND resistance line of 1175
- VOLUME – accelerates on the DOWN days and decelerates on the UP ones (yesterday’s was -18% vs its 3 mth avg)
- VOLATILITY – is breaking out on the front-month, undergoing what we call a bearish to bullish phase transition
And if I want to be long the upside down of that #GrowthSlowing message (long the Long Bond):
- US Treasury 10yr Yield of 2.49% this morning remains well below my intermediate-term TREND level of 2.81%
- Fund Flows have turned back to bullish on the “safe” side of Fixed Income (after being bearish in 2013)
- Implied volatility in being long TLT (+12.5% YTD) vs Russell 2000 (IWM) -3.4% YTD is as low-stress as it gets
If you want a proverbial rope to hang yourself with in this game, start calling your best performing long ideas (on a lag) “low-stress.” Before you know it, you’ll be having a nervous breakdown.
One thing that starts to stress me out is being bullish on something macro that the crowd starts to dog pile (50-day moving avg is intact, bro!). So one place I watch very closely on that sentiment score is futures and options positioning.
Yesterday I wrote about how there was a net SHORT position of -41,210 contracts SP500 (SPX Index + Emini) that consensus short sellers (those who cover high and short low) built into Friday’s close being a catalyst for a bullish no-volume “bounce.”
We got that. But how about in the things I like (like Gold, Pounds, and Bonds)?
- Gold = net LONG position of +122,092 contracts (vs. its 6 month avg of +100,747)
- British Pound = net LONG position of +31,046 contracts (vs. its 6 month avg of +34,681)
- UST 10yr = net LONG position of +7,090 contracts (vs. its 6 month avg of -40,094)
In other words, Consensus Macro is:
- Too long Gold (after it’s up +7.4% YTD) so I should sell some
- Too bullish on what’s been the best major FX position vs USD for the last year, but not wacky bullish
- No longer short, but not yet Bullish Enough on longer-term UST Bonds
So, provided that our longer-wave economic cycle call is giving us confirming evidence (both sequential data and market prices), we just say “buy more” long-term bonds on all pullbacks to @Hedgeye TRADE and TREND lines of support.
As far as the history of socialists vs. capitalists is concerned, Stalin’s followers can eat their own ropes. One of the few things I agree with him saying is that “print is the sharpest and strongest weapon of our party.” That’s why I like to print our #process, every day.
Our Immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.43-2.54%
Best of luck out there today (and Happy Anniversary, Laura),
Keith R. McCullough
Chief Executive Officer