• Navigate This Market Turbulence: All Hedgeye Research → 3 Months 66% Off

    Preserve. Protect. Grow. Former hedge fund manager and CEO Keith McCullough has successfully navigated the Dot Com Bust, Great Financial Crisis and Crash of 2020. Get 66% off the smartest investing insights money can buy.

“Everything should be made as simple as possible, but not simpler.”
-Albert Einstein
Simple is as simple does. For now, the driver of macro market moves remains the direction of the US Dollar. While I understand that correlations in global macro trends are not perpetual, I also appreciate that they can remain simple and profitable for as long as they want to.
No matter where you go this morning, there it is – that US Dollar finally has some semblance of a bid, and most things priced in dollars are for sale. Will this last 3 hours, 3 days, or 3 weeks? We will have to let Mr. Macro decide. We will then have to manage risk accordingly.
Last week, the US Dollar continued to crash. I know, I know – Washington gets paid to be willfully blind on this score, but that doesn’t mean that the score ceases to exist. It’s global this time, and the Chinese are watching more than just tire tariffs…
The Burning Buck lost another -1.8% on the week, taking the 2009 currency crash to -14% since March (yes, President Obama – that’s “the truth”). Ben Bernanke should dust off some of his pre-1930 history books and take a gander at what was happening around the world to currencies like Germany’s at the time. The world has never seen an outright currency crash in a major economy that didn’t carry far reaching consequences.
In the face of the US Dollar hitting fresh YTD-lows last week, the US stock market hit fresh YTD-highs. In the short term, this surely made anyone long this setup smile. In the intermediate term, this will surely lead to a Reflation Rotation (year-over-year deflation becoming inflation in Q4). In the long term, you know that plenty of things associated with this alarming long term TAIL will be dead.
The TAIL is what we call our longest term duration here at Research Edge. The TAIL is also where bad things happen versus expectations. The TAIL can also be subbed for what Nassim Taleb coined a Black Swan. Not all tails are the same…
Chasing TAIL isn’t a bad day job - from a risk management perspective that is! Our definition of an investment TAIL is simply something we have observed fortifying itself over a duration of 3 years or less. In sharp contrast to a Black Swan type tail event (defined on the tails of a probability curve), our TAILs are proactively predictable. They are basically long term investment trends.
I don’t mean to mix metaphors or mathematical terms here. Rather, I mean to submit that different risk management models compliment one another. I have learned a great deal from Nassim Taleb. He is one of the world’s pre-eminent risk managers for a simple reason – he has his own process and it’s grounded in math. One of Taleb’s “Ten Principles for a Black Swan-proof world” is to “counter-balance complexity with simplicity” – that’s a beautiful mathematical conclusion.
Chaos (or Complexity) Theory is one of the most relevant mathematical revelations in modern history. How many people manage your money in this interconnected and dynamic ecosystem called the global marketplace using it? That’s a tail I’d like to see some perceived to be money mavens chew on…
Back to chasing the TAIL. In our intraday Macro note today, I’ll be posting our “Chart of The Week.” While this point is clear enough for a monkey to understand when showing it with a picture (and colors), let me make it emphatically one more time with prose – the US Dollar’s TAIL is BROKEN.
So, even though the US Dollar has a +0.55% bid this morning, don’t mistake that with anything other than an immediate term TRADE that you can proactively manage risk around. Across all three of our investment durations (TRADE, TREND, and TAIL), the Buck is Burning. Here are those levels:
1.      TAIL = $82.86

2.      TREND = $79.39

3.      TRADE = $78.37

In our risk management model, we call this a Bearish Formation. That’s simply when the TAIL line remains above the TREND line, and the TREND line remains above the TRADE line. This is where you get paid to chase TAILs. They can, and will, remain dominant for longer than plenty a super “smart” monkey in this business can remain solvent.
So what do we do with this today? For one, don’t freak out and call for a crash in everything priced in US Dollars. The Crash Callers continue to get run-over in 2009. Take comfort in them being, predictably, on the bid to cover. Provided that we don’t see a breakout and close above the $78.37 immediate term TRADE line in the US Dollar, take the market’s associated weakness with a US Dollar UP day as an opportunity to cover some shorts and buy things priced in bucks that are red.
That’s it. Simple is as simple does. My immediate term TRADE line of support for the SP500 is 1019.
Best of luck out there this week,


VXX – iPath VIX We bought volatility horribly the first time on 9/3. With the VIX testing our 23 level of support on 9/10, we added to the position.  

XLV – SPDR Healthcare
We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

EWH – iShares Hong Kong The current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.  

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

LQD – iShares Corporate Bonds
Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

EWU – iShares UK We’re bearish on the UK’s leadership and monetary policy to weather its economic downturn. Although we’re seeing improved fundamentals within the country and across Europe we continue to see the country’s financial leverage as a headwind and increasingly the data suggests that inflation is getting ahead of growth. With the FTSE reaching a YTD high on 9/9, we shorted EWU.

DIA  – Diamonds Trust We shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.