This note was originally published at 8am on December 23, 2014 for Hedgeye subscribers.
“And who is the author of all this?”
-Napoleon Bonaparte
While it’s getting difficult to pin down who, specifically, nailed the narrative of worldwide #deflation, crashing long-term bond yields, and flattening yield curves as the driver of the all-time high in the SP500… that’s what makes a market!
The aforementioned quote comes from a section in The Theory That Would Not Die titled “Enlightenment and the Anti-Bayesian Reaction” (page 30) where Napoleon realizes that Pierre-Simon Laplace wasn’t as full of it as those who weren’t yet enlightened.
Much unlike the perma bulls, bears, and partisan hacks in our profession, Laplace was a math, stats, and probability guy. In forecasting terms, he didn’t cling to religion or failed academic dogmas. As the facts changed, he did – or at least he had a framework (Bayes Rule) to try.
Back to the Global Macro Grind…
While I can try to explain why the SP500 can drop 103 points in a straight line (in 7 days), then ramp 106 points in 4 days, I don’t think that’s where I add value. There are legions of pundits on the #OldWall that use 1-factor moving averages than can help you with that.
Using my #waterfall metaphor for multi-factor, multi-duration risk management, I’m much more comfortable trying to explain market moves in terms of what is happening beneath the headline US stock market index price.
What’s interesting, but not surprising, is that some of the big Global Macro factors that concerned consensus on December 16th (when the SP500 closed -5.1% lower at 1972) are actually worse today than they were then.
No, I’m not talking about where Russia is trading (-41% YTD). I’m talking about really big US economic risk indicators like:
- #Deflation Expectations Accelerating
- Yield Spread Compression
- Risk Ranges Widening
“So”, now that I am in the holiday cheer spirit, allow me to knock those pins down, one by one:
- #DEFLATION – with Oil reversing intraday and Gold dropping -1.7%, the CRB Commodities Index (19 commodities) dropped another -1.5% yesterday to a fresh YTD low of 237 (that’s -15.4% YTD, crashing -25% since June)
- YIELD SPREAD – the belly of the curve is even flatter, but the big one almost every objective strategist monitors (10s/2s spread) has compressed another 7bps this morning to a fresh YTD low of +146bps wide (-38% YTD)
- RISK RANGES – for the SP500 and her inverse brother (VIX), immediate-term risk ranges are as wide as they have been in almost 3 years (SPX = 1958-2084, VIX 14.28-23.87)
But #NoWorries, “the market is up”…
Not clear what that means, but if the “market” includes things like global bond markets, international equity markets, commodities, currencies, etc., that CNBC type statement would make a 16th century dude who called the world “flat” look smart.
Asia (ex-Japan, which we’re actually net long for now via the DXJ) continues to trade much more in line with global #GrowthSlowing than the Dow does. Dr. KOSPI (South Korea) was down another -0.3% overnight to -3.5% YTD. Australia (struggling alongside Canada, Brazil, etc. with #deflation expectations) was -1.1%, and both the Hang Seng and Thailand failed @Hedgeye TREND resistances too.
All the while, High Yield and Junk started going down again yesterday. Remember that part of the December 16th #Deflation Dominoes? I do. Down Yen and Euro à Up Dollar à Down Oil, Commodities, etc. (#deflation) à Down High Yield Energy Bonds.
In other words:
- Don’t be levered long Commodities, Energy Stocks/Bonds, Russia, etc.
- Stay with #StrongDollar, but don’t confuse that with US growth accelerating in Q4 vs Q3
- As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT)
After the 2000 and 2008 crashes, who is the author of all this risk management speak?
Don’t blame me. It’s Mr. Macro Market’s message. And, at a bare minimum this morning, I wanted to remind you of it as those who are in the business of being willfully blind into year-end won’t.
Our Global Macro Risk Ranges are now:
UST 10yr Yield 2.05-2.22%
SPX 1958-2084
VIX 14.28-23.87
USD 88.91-90.36
Oil (WTI) 52.05-56.99
Gold 1167-1199
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
