This note was originally published at 8am on November 10, 2014 for Hedgeye subscribers.
“The system was blinking red.”
That’s what the 9/11 Commission Report told us, after the fact. That’s what I’ll tell you after the next “risk on” move happens in markets like it did in early October. It’s all part of a signaling process I use to identify phase transitions in markets.
This is also the #process that my friend Jim Rickards applied to tracking terror related events in markets. As Rickards writes in The Death Of Money, “no one trades in isolation.” And there is plenty of market wisdom in that.
Jim says he’s “careful to document and time-stamp the signals and analysis in real-time… it would not be credible to look at the tape in hindsight… we wanted to see things in advance.” (Rickards, pg 36). That’s what I do, every market day.
Back to the Global Macro Grind…
But, but… the “market won’t go down on that anymore. What is the next catalyst? How do we know it’s going to go down?” I get some version of those questions all of the time. The answer is that the “market” isn’t just some naval gazing US equity index.
To review the #process:
- I write down and document (#notebook) every timestamp and market signal that matters to the “market” every morning
- I contextualize time/price within a multi-factor (global equities, FX, etc.) and multi-duration picture (TRADE, TREND, TAIL)
- I always assume market dynamism, duration mismatch, and non-linearity – the macro market is a complex ecosystem
Within a dynamic ecosystem of colliding, non-linear factors, I’ll almost always register #divergences. In your natural ecosystem of life, a divergence would be that it’s snowing 10 miles from where you see no precipitation.
Here are some of last week’s most notable equity market #divergences in my notebook:
- Hong Kong’s Hang Seng Index down -1.9% vs. Japan’s Nikkei stock market index +2.8%
- The Dow +1.1% vs. Italy’s MIB Index down -3.5% week-over-week
- Brazil’s Bovespa Index down -2.8% vs. the Russell 2000 flat on the wk
Meanwhile you saw big time bearish divergences in Emerging Market Equities versus something like the SP500 which closed +0.7% on the week at its all-time high:
- MSCI Emerging Markets Index down -2.4% on the week to -1.1% YTD
- MSCI Latin American Index -4.5% on the week to -5.8% YTD
Emerging Markets have looked a lot like the Russell 2000 (a US growth index) and the 10yr Treasury Yield (another US economic #GrowthSlowing proxy) as of late – and that shouldn’t surprise anyone who realizes that global growth continues to slow.
But but, if your “market” is simply what the SP500 is doing, I can show you #GrowthSlowing divergences there too:
- Consumer Discretionary (XLY) stocks were down -0.1% in an “up SP500 market” last week
- Slower growth, Consumer Staples (XLP) stocks beat “the market”, closing up another +2.2% on the week
Since our #Quad4 deflation playbook says you buy Consumer Staples (XLP) and Healthcare (XLV), last week’s divergences at the sector level certainly made a lot more sense to us than the consensus “gas prices are down, so buy the consumer” meme.
Growth and inflation expectations are obviously causal to market prices. But so are central planners burning their respective currencies at the stake.
While many US only “market” people think the US Dollar’s rise is a sign of their savior, it’s not (if you had #RatesRising it might be, but they fell again last week to 2.30% on the UST 10yr Yield). It’s a sign of global economic duress.
Last week had both the Japanese and European central planners devaluing their currencies, at the same time:
- Euro (vs USD) down another -0.6% on the week to -9.4% YTD
- Yen (vs USD) down another -2.0% on the week to -8.1% YTD
By any long-term measure, these are massive annualized currency moves.
And since the market I look at is coming off all-time lows in cross asset class volatility (FX, Equities, Commodities, Fixed Income – see our #VolatilityAssymetry slide deck from July of 2014), I see the FX market as the biggest blinking red light of all.
It’s warning the world that this grand central planning experiment is failing where it matters most, in economic growth terms.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.26-2.38%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer