Unmoored Power

“Power may have become remarkably unmoored from size and scale.”

-Moises Naim

 

May have? Never have so few been able to roil so many in Global Macro markets. As Naim goes on to write in an excellent chapter titled “How Power Lost Its Edge”:

 

“Insurgents, fringe political parties, innovative startups, hackers, upstart citizen media, leaderless young people, and charismatic individuals who seem to “come from nowhere” are shaking up the old order… each is contributing to the decay of power of navies, television networks, traditional political parties, and large banks…” (The End of Power, pg 51)

 

Sound familiar? This is what I’d call a secular Phase Transition in a mega-factor in markets today. It’s #behavioral. It’s transcending. And, no, it’s not going away.

 

Unmoored Power - zzz5555

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Back to the Global Macro Grind

 

If you thought US stock market volatility and/or 2% down days were going away, you probably weren’t setup for an alpha generating day yesterday. To put that -2.1% drop in the SP500 in context:

 

  1. It was the 1st > 2% down day since October 9th, 2014
  2. There have only been 5 down days of > 2% in the last 2 years
  3. There were 20 > 2% down days in the JUN-DEC period of 2011

 

What happened in both October 2014 and 2H 2011? Global Growth #Slowed, and Treasury Bonds rocked. Yesterday was also the biggest one-day drop in the 10yr UST Yield since October. Fed Fund Futures saw probability drop on a SEP rate hike too.

 

Can you imagine the US Federal Reserve raising rates into both a #LateCycle slow-down and European Gong Show Part Deux? Don’t forget that the last time Europe was in “crisis” was 2H of 2011. Oh, the memories.

 

This thing called an ongoing Phase Transition in cross-asset-class-volatility was up just a tad yesterday. Front-month VIX was +34.4% on the day to close at its highest level since US equities were “down YTD” in JAN-FEB.

 

Which leads me to a very basic risk management question:

 

If central-planning powers over markets are being unmoored by economic gravity (China, Europe, USA – all slowing at the same time), why wouldn’t the cross-asset-class-breakout-in-volatility you’ve witnessed since July of last year continue?

 

To review the #history of it all:

 

  1. US Equity Volatility (VIX) on July 2nd, 2014 bottomed at 10.82
  2. US Equity Volatility proceeded to rocket +142% to 26.25 by October 15th, 2014
  3. Then VIX closed right at 12.11 (at long-term-higher-lows) on May 21st and June 23rd of 2015

 

All the while, West Texas Crude Oil crashed (-44.4% since the all-time low in cross-asset-class-volatility in July of 2014 when we made our big Macro Theme call called #VolatilityAsymmetry) and multiple rounds of global “easings” were required.

 

Oh, and you’ve had the fastest 6 months of M&A (+60% year-over-year) since 1980…

 

But don’t tell anyone who does pro-cyclical macro about the 1981 recession and/or that buybacks, M&A, etc. are an implied signal that corporate profits (and margins) are slowing. Got to manufacture some EPS , eh!

 

In other news that probably won’t be reported by the mainstream financial media today – whatever was left of the base-effect bounce in European growth continued to slow this morning:

 

  1. German Retail Sales slowed from +1.0% to -0.4% (year-over-year)
  2. Greek Retail Sales and Producer Prices still suck at -1.9% y/y and -4.6% y/y, respectively
  3. Italian unemployment is still stuck at 12.4% while its PPI deflated -1.9% y/y alongside a 0.1% CPI
  4. Austrian and French PPIs (Producer prices) saw y/y #deflation of -0.9% and -0.5%, respectively
  5. Eurozone CPI stopped re-flating (from #deflation) at a whopping 0.2% JUN vs. 0.3% MAY

 

As a result, any objective “economist” should be cutting his/her European “growth” expectations in the 2H of 2015 inasmuch as they’ll ultimately have to cut their real-growth estimates for US and Chinese GDP in Q3 and Q4.

 

But #NoWorries, the Chinese pumped up the Shanghai Composite index +9% intraday today (biggest intraday move since 1992) by floating another rumor that the National Pension Fund will “buy stocks.”

 

Heck, when growth and earnings are slowing, someone needs to buy the damn things. God forbid they actually have another 2% down day here at home. The average M&A multiple in the aforementioned #bubble = 16x EBITDA.

 

In 2007 (i.e. the last US cycle peak) the peak M&A multiple was 14.3x. So we’ve certainly unmoored from that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.19-2.48%

SPX 2048-2094
RUT 1
VIX 14.21-19.66
USD 93.84-96.16
EUR/USD 1.11-1.14
Oil (WTI) 57.67-61.29

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unmoored Power - zz 06.30.15 chart


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