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“Everywhere, the basis of political power is growing more fragile.”

-Moises Naim

Not every book I read is well timed and/or pertinent to my research, but many of them are. It’s part of my #process. I build an inventory of books that I think are relevant to where we are in the macro debate, and I pull forward that inventory when a topic flares up.

How about the fragility of markets, economies, and the politicians who are trying to centrally plan them? Got Europe, China, Japan (oh, and the US)? Yep. It’s on.

We’ve finally reached the beginning of the end of this grand policy experiment. As a politician, all you can do now is panic & print. No, you can’t print growth. I think that’s why the plannings, panics, and printings are all accelerating again. Global growth is slowing.

Fragile Power - macro call cartoon

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Back to the Global Macro Grind

The aforementioned quote comes from a book I finished last month called The End of Power, where the author, Moises Naim, cites very relevant work by Max Weber on the behavioral side of politics/power:

“He who is active in politics strives for power, either as a means of serving other ends, ideal of egoistic, or as power for power’s sake, that is, in order to enjoy the prestige-feeling that power gives.”

But (and here’s the connection to the market-driven-politics that have been accelerating since the last economic cycle peaked in 2007), “that prestige-feeling is a fragile emotion. And these days, its half-life is getting shorter.” (Naim, pg 76)

Think Varoufakis.

Moving along… since that Greek dude is off in the sunset and his communist/socialist partner Tsipras is folding like a cheap Canadian pup-tent this morning, that brings us to your macro morning US equity futures ramp!

Yesterday they ramped the S&P Futures by what, +27 handles? By day’s end, they closed up +4. But I think that was on the 4-finger Johnny threat to anyone who isn’t on the do-it-yourself program (Jason Pierre-Paul) in China who dared sell a stock.

This morning’s futures wood (+22 handles) is on Greece saving itself from itself, again. And the macro market correlation to that trade is very straightforward:

  1. Euro Up (vs. USD) +1% to $1.11
  2. Commodities Up (Dollar Down) +1-2%
  3. European Stocks +1.5-2%, across the board

But, again, this has nothing to do with growth. Neither did Chinese stocks “rallying” overnight (when almost 50% of the stocks in the market are still halted). Nor will US equity values going up on negative (think profit cycle) -4% year-over-year earnings growth in Q2.

It has everything to do with the fragility of the power – and the last gasps of it that many are all clinging to (in many mainstream media cases, they’re begging for it), which is, of course, the next central-market-plan.

So what am I going to do from here? Here are my thoughts, from an asset allocation perspective:

  1. CASH – I am going to raise cash to 52% (love selling on green, buying/covering on red)
  2. US EQUITIES – keeping my net position (+4%) low, and my Style Factor setups the same – long LOW BETA; Short HIGH BETA; LONG Healthcare, REITS, Consumer Staples; SHORT Cyclicals and Reflation sectors
  3. INT’L EQUITIES – we’ve been out of European Equities since April so nothing do to there (not buying them) as #EuropeSlowing remains the tail wagging the dog; still like Japanese Stocks, but only on oversold days
  4. COMMODITIES – after being net LONG them for part (not all – didn’t nail that) of the reflation trade in Q2, all we’ve signaled is sell those in Q3, and we’ll keep doing so as #StrongDollar’s long-term bullish TAIL continues to wag that #Deflation dog
  5. FIXED INCOME – still The Treasuries Bull, and won’t apologize for that (was The Bear in 2013 and have been bullish since early 2014 – like any long-term investor, I’m staying with slower-for-longer); Short Junk + Credit Risk; Long Liquidity
  6. FX – probably the best place to be incrementally allocating right now – buying US Dollars on all pullbacks (selling commodities and commodity linked stocks/bonds/countries, on centrally-planned ramps, bounces, etc.)

That is all.

Call me the crazy long-term guy, but I haven’t seen a cycle slowing this clearly since the summer of 2008. No, my call then had nothing to do with Lehman and Bear…

As the economic cycle slowed, central planners started to panic. And, ultimately, their panic perpetuated the crisis. Back then it was the so called “capitalists” (George Bush, Hank Paulson, Tim Geithner, etc.). Now it’s the socialists and communists.

As you can see in Europe and China, their emotions are a little more fragile too.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.19-2.45%

SPX 2035-2087
DAX 105
VIX 15.59-21.08
USD 95.82-97.56
EUR/USD 1.09-1.12

YEN 121.90-123.45
Oil (WTI) 49.62-55.29

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Fragile Power - z chart DAY