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    A Decade of Revolution Declare Your Research Independence

“Compelling reason will never convince blinding emotion.”

-Richard Bach

Particularly when I look back to those all-time US stock market highs, the botched “reflation” call, etc. in June/July, I can’t count how many times people told me in either meetings or in the media that there was compelling reason for the Fed to raise rates.

Now, “due to international developments” and stocks/commodities/yields crashing, the New York Federal Reserve calls a September rate hike, “less compelling.” Cool. So do Fed Fund Futures.

And I suspect that the oversold bounce we are getting in everything that crashed has largely to do with the catalyst socialized market participants beg for when they don’t get what you can’t print growth – moarrr central planning #cowbell!

Less Compelling? - Deflation cartoon 02.24.2015

Back to the Global Macro Grind

It’s a good thing they bounced stocks/commodities from the lows. Imagine they didn’t?

Since a lot of people are blaming “China” for all of this, how did markets react to the Chinese cutting rates (again) a few days ago? That did nothing but scare macro markets. So… what markets really needed to see was moarrr – and in the last 24hrs they got it:

  1. Rampant rumors that Mario Draghi is going to tell you he can do whatever it takes at Jackson Hole
  2. Rumors that the Fed’s Vice Chair (Fischer) is going to double-down on the dovish Dudley comments (at Jackson Hole)
  3. And since the Chinese can’t dominate the dialogue at Jackson Hole, they just “bought stocks” with State moneys!

Yep. Gotta love the Chinese central-planning dudes. They just went all Japanese on the stock market and bought it themselves.

Wouldn’t that be fun – if the Fed did the same?

Moving along… once markets get through this bounce (after the biggest move in volatility since 2008, it should be big, no?), I still recommend we respect/understand the following risks that caused many of the crashes (defined as price declines of 20% of more in anything that ticks):

  1. #LateCycle Slowdown (locally and globally)
  2. #Deflation (obviously)
  3. #LiquidityTraps
  4. #Volatility Asymmetry
  5. #Credit/Profit Cycles Slowing

Apologies if I left a few out this morning.

Just in case you missed the last one, here’s the update (post 484 of 500 SP500 companies reporting Q2):

  1. Revenues -3.8% YoY
  2. Earnings -2.5% YoY

Old news, eh. How about this Chart of The Day? This shows you the classic go-to-move for my Old Wall buddies - back-end loading earnings and revenue estimates into Q3/Q4. Given what’s happened to macro markets in the last 3 months, good luck with that.

The other big problem (maybe the biggest of all since it’s so obvious in our model) is what I’ve been walking Institutional Investors through for the last 2-days of meetings in Boston and NYC – the GDP Comps for Q3 and Q4.

Comps, meaning comparative base effect or year-over-year comparison. Yes, they matter a lot more than some made-up PMI indicator with a random “lag.” And our call remains that on the US consumer side (toughest Christmas comps since 2007), it’s really going to matter.

Forget consensus being objective and reviewing the causal factors of phase 1 of this crash – they probably won’t do that. Parker at Mogan Stanley reiterates 2275 SPX! Instead, they’ll pivot, hard, to whatever bull case they can find – and that’s definitely “Lower Gas Prices.”

Yep. Everything was awesome at $100-150 Oil, and it’s awesomer at $40. That makes a ton of sense. Even though US Rents are ripping to higher all-time highs and represents 24% of the Median US Consumer’s spending budget vs. Gas at 6%.

Oh, but that part of the country doesn’t matter. Right, right. And Consensus Macro hasn’t perpetuated inequality behaving that way either. How do “high-end” consumers “act” on 10-20% stock/commodity market draw-downs. Can’t wait for those compelling Christmas comps.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.99-2.19%

VIX 23.25-43.42
EUR/USD 1.08-1.16
Oil (WTI) 37.66-40.98

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Less Compelling? - z x Chart of the Day