This note was originally published at 8am on May 14, 2015 for Hedgeye subscribers.
“One of the key benefits of experiments is they allow you to get surprises early.”
I thought that was an excellent quote from the co-founder of Intuit from a solid chapter in Learn Or Die titled “It’s Time To Bury Caesar” (i.e. the “kind of boss who gives thumbs up or down on all decisions” pg 170).
Thumbs down? If that’s how you run your investment team or firm, I’m thinking that’s probably not going to end well. It would be the equivalent of a coach getting in your face after every mistake. It doesn’t build confidence. The insecure mind is weak.
Be creative… take chances… fail fast… learn, pivot, evolve. Yeah, I like that. And so do the people you lead. Provided that experimenting is on a progressive path, you should wake up every morning looking forward to that element of surprise.
Back to the Global Macro Grind…
Oh, you don’t like getting scored on right away? You don’t like losing money? Too bad. That’s the game. If the New York Rangers buckled after going down 1-0 last night (or 3-1 in the series for that matter), they’d be golfing today.
I don’t know about you, but I need a real-time signaling mechanism in order to risk manage the many early surprises Mr. Macro Market provides us an opportunity to learn from.
Some of the big ones (counter-TREND moves) as of late are as follows:
- Dollar Down, Euro Up
- Dollar Down, Oil up
- Euro Up, German Stocks Down
What is the market telling us?
- The US economy is experiencing a #LateCycle slowdown
- The most lagging of cyclical indicators (Labor) is slowing, in rate of change terms
- The Fed has no policy shift for that other than to push out the “dots” on rates #LowerForLonger
Now you might say, “but rates have gone straight up in the last few weeks.” Yep. And I’d say back that:
A) US rates have de-coupled from the US Dollar move and moved in sync with European Bond Yields
B) US Dollar has traded in sync with the rate of change in high-frequency economic data
Yesterday’s key US economic data (Retail Sales missing at 830AM) immediately crushed the US Dollar (10yr fell to 2.20% on the “news” too, then traded back up as German Yields rose).
What up with US Retail Sales #slowing, bro? Was it the nice April weather? Nope, it was the cycle:
- After bouncing in March, Retail Sales were dead flat at 0.0% sequentially in April
- After slowing from cyclical highs of +4-5% (since November), year-over-year Retail Sales are now 0.9%
Not cool. If you are one of the consensus bulls on US Consumer (XLY) and Retail (XRT) stocks, that is … Yes, on bounces I’d short both of those Sector Style Factors in the US stock market. I’m adding both to the bear side of our Macro ETF Playbook today.
Got SELL ideas with #timing on top? While the Euro and Oil will continue to signal immediate-term TRADE overbought within their longer-term TAIL risk setups, I wouldn’t be selling those short, other than for short-term trades.
On the road yesterday in Boston, Darius Dale and I were spending a lot of time on risk managing the short-term within our longer-term view. That can be summarized in a picture (slide 52 of our Q2 Macro Themes deck) as follows:
- US Dollar Index can trade as low as 90.11, before it resumes its longer-term breakout
- Euro (vs. USD) can trade as high as $1.19-1.20, before it blows up again on Draghi devaluation
- Oil (WTI) can trade as high as $71.38/barrel, before it resumes its longer-term #deflation
The calendar catalyst for that are:
- May 29th = downward revision to US GDP
- June 5th = US jobs report
- June 17th = FOMC meeting
For now, this is what I believe the market is signaling as a probable continuation of what’s become a big ole macro Pain Trade.
And while I was surprised early by some of these v-bottom bounces in things like Euros and Oil related securities, one of the key benefits to being crazy enough to get up and write to you every day is that I get to change my mind. Timing matters.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.95-2.32%
Oil (WTI) 55.47-61.71
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer