“Is it just an accident, or is some deeper pattern at work?”
Both the aforementioned quote and title of this morning’s Early Look come from Chapter 4 of a fantastic #behavioral book I’ve been citing titled Seeing What Others Don’t – The Remarkable Ways We Gain Insights.
I don’t mind repeating myself when it comes to great books and great processes. In fact, that’s the most important point about having a repeatable #process - Rinse & Repeat. The 3 core factors in our macro model remain: history, math, and behavioral psych.
With that perspective, if we are humble enough to accept that we really don’t know what we don’t know about Global Macro and all of its developing patterns, coincidences and curiosities will reveal that correlations often perpetuate causality. Soros called that reflexivity.
Back to the Global Macro Grind …
“Coincidences are chance occurrences that should be ignored except that every so often they provide us with an early warning about a new pattern… they should be listened to, rather than ridiculed, because they just might be onto something.” (Seeing What Others Don’t, pg 45)
Now, instead of “they”, substitute Mr. Macro Market’s signals and now we’re talking the same language. The only way to save and/or make real money in this profession is to understand new patterns before consensus does. We call those Phase Transitions.
In macro, many times a “new” pattern is simply a cyclical regurgitation of an old one. In order to respect the “deeper patterns at work”, we simply need to know the #history of it all. While patterns are rarely identical, their #behavioral aspects often rhyme.
On that long-term pattern score, let’s consider the multi-duration #history message of the US Dollar:
- TAIL (long-term): after being devalued to a 40yr low in 2011, the US Dollar put in a long-term bottom and has started to recover
- TREND (intermediate-term): after one of its biggest 6-month ramps (ever) starting in Q3 of 2014, it’s up another +5.5% YTD
- TRADE (immediate-term): down -1.1% last week and -2.2% in the last month, is now hostage to Dovish Fed expectations
Longer-term I think the Dollar is recognizing the pattern of devaluation that European and Chinese planners think they’ll need to engage in as their respective secular (demographic) headwinds become as relevant as Japan’s have been (see Macro Themes deck for details).
From an intermediate-term TREND perspective, the US Dollar has been wrestling with not only the aforementioned competitive Currency War devaluations but the weekly back and forth amongst US economic policy navel gazers on a “rate hike.”
And while the “dots” on a rate hike continue to be pushed out (anyone remember they were “supposed to hike” in June?), Mr. Macro Market’s most immediate-term message to the Federal Reserve (Fed Fund Futures < 30% probability of a SEP hike) is don’t do it (again).
What if they do? You know, “just to get off of zero because it’s time”, or something like that...
Well, I say we go backwards and look at TRADE and TREND duration risk for clues on what markets could reverse:
- EUR/USD is +2.7% in the last month – #FedHike would = Dollar Up, Euro Down
- Japanese Yen is +3.8% m/m and Up Yen drove the Nikkei -1.6% overnight - #FedHike = Up Nikkei
- Oil (WTIC) is +1.7% in the last month (crushing stocks); Up Dollar = Down Oil #Deflation Risk ON
- Copper is +4.9% in the last month (big Dovish Beta); Up Dollar = Copper Crash still ON
- Emerging Market Stocks (MSCI) +1.8% last week and would likely resume their crash on #FedHike
- Chinese Stocks (Shanghai Comp) +1.3% last week would probably keep crashing no matter what!
Then there’s the expectations impact of the almighty FED DOVISH headline on US stocks (“they’re gonna rip, bro!”). And that’s where things are starting to look not only curious, but coincident. Check out the following 1-month correlations:
- US Dollar Index DOWN -2.2% month-over-month
- SP500 DOWN -5.9% month-over-month
- USD vs. SPX 30-day correlation POSITIVE +0.80
Yep. Maybe Ed has had this right all along. Maybe it’s RISING gas prices on Down Dollar, that is the new pattern of bearish US GDP growth!
If you’ve studied post WWII economic #history, you’ll recall that a #StrongDollar is the only long-term pattern of purchasing power strength that Americans have enjoyed. In fact, a #StrongDollar was coincident with two of the most popular Presidents in US history:
- 1 (Reagan) had the strongest of #StrongDollars (see Chart of The Day), sub $20/oil and ~4% real GDP
- 1 (Clinton) had the 2nd strongest USD period and average < $20 Oil with ~4% GDP too
So, maybe… just maybe – everyone is staring at the tree ahead of this week’s Federal Reserve decision (Thursday) instead of the forest.
Maybe consensus on BOTH bearish US Equities (-205,684 net SHORT position in SPX Index + Emini non-commercial CFTC contracts = fresh YTD high), and Fed Fund Futures (implying no hike) have it right…
After all, it would be no coincidence if a slowing US economy was the signal amidst the noise. When the economy is slowing, the Fed gets dovish and the Dollar falls. And yes, from a TREND perspective, stocks probably will too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.12-2.24%
Oil (WTI) 43.03-48.01
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer