“They say music has the charm to soothe a savage beast, but I’d try a baseball bat first.”
That’s somewhat of a blunt quote. But I like it. Welcome back from your long weekend.
In the last 48 hours, we’ve seen some of the biggest ideological rock-stars of the central-market-planning bubble come out singing. At one point, the BOJ (Bank of Japan) said they’d really like to have a hymn at the G7 meetings to “soothe markets.”
Then came the ensemble of Eurocrats, led by Draghi, who said the “ECB is ready to do its part.” Then the Russians, the Qataris, etc. on “freezing production”… But now what? What happens when the market no longer believes them? What happens when the music stops?
Back to the Global Macro Grind…
By definition, bulls begging for more central-market-planning cowbell (not the most soothing music btw) validates most of my concerns on both #Deflation and #GrowthSlowing. The funniest mainstream market headline yesterday had to be “Japanese stocks rocket on stimulus rumors” (after a government report that Japan’s GDP slowed another -0.4% in Q4).
Sure, both Japan and Europe had 1-day bounces within their respective stock market crashes yesterday, but neither of them were able to show follow through this morning on either the FX Burning Experiment or equity “reflation.” They are losing control.
Day trades are fun to watch, but the savages of this bear market know that it’s all about nailing the intermediate-term TRENDs that’s getting us fed. So don’t be afraid of “rallies”; take a deep breath and contextualize them.
Here’s how FX (foreign exchange) vs. Equity markets looked last week:
- US Dollar Index down for the 2nd week in a row, -1.1% to -2.7% YTD
- Euro (vs. USD) up for the 2nd week in a row, +0.9% to +3.6% YTD
- Japanese Yen (vs. USD) up (again, despite BOJ begging) +3.2% on the week to +6.2% YTD
- SP500 and Russell 2000 -0.8% and -1.4% to -8.8% and -14.4%, respectively, YTD
- EuroStoxx 600 and Spain -4.1% and -6.8% to -14.6% and -17.0%, respectively, YTD
- Nikkei (Japan) smoked -11.1% on the week to -21.4% YTD
In other words, the transmission mechanism (or belief system) that either the Europeans or Japanese can devalue their currencies and reflate their stock markets is crashing. Moreover, the hope that “Down Dollar” will reflate US stocks was dead wrong too.
While the inverse correlation between the US Dollar and commodities, junk bonds, and emerging markets remains consistent, what’s actually happened in the last 15-30 days is that the SP500 has developed a POSITIVE correlation to USD of +0.5-0.7.
Since that’s super short-term, I would simply monitor that (as I do with all things “new” issued by Mr. Macro Market himself). What it might be signaling is that the only way out for the USA is via a #StrongDollar, Strong America policy.
The problem with that, of course, is that we need to continue down perdition’s path of #Deflation first. If you isolate US Equity signals alone last week, there was plenty of asset #Deflation despite “Down Dollar”:
- MLPs (the epicenter of inflation expectation oriented “assets”) down -14.4% on the week to -29.2% YTD
- REITS (MSCI Index) -4.3% on the week to -9.6% YTD (diverging big time from Utilities being +5.2% YTD)
- Financials (XLF) down another -2.2% on the week, leading US Sector Style losers at -14.0% YTD
Sorry, Jamie (JPM) – the market is well aware that you have massive cyclical exposures to levered Energy companies, Real-Estate, and Yield Spread compression. You’re a smart guy, but you can’t centrally plan a “market bottom” inasmuch as Draghi and Kuroda can’t.
Dimon would do well to remember Richard Whitney’s famous “walk across the NYSE floor” on Thursday October 24th 1929 to very loudly and very publicly buy huge quantities of US Steel and other stocks at prices above the market. Those who don’t know what happened next should Google “Tuesday, October 29, 1929.”
Ignorance never ends bear markets; it perpetuates them.
Other than Oil deflating another -4.7% last week (-22.9% for the YTD alone) and Bond Yields continuing to crash (UST 10yr Yield down another -9 basis points on the week to 1.75%) what other US Equity Style Factor messages were in the market last week?
- LEVERAGE: High Debt (to EV) Stocks led losers down another -4.1% on the week to -9.4% YTD
- SIZE: Small Cap Stocks were down another -3.5% on the week to -13.4% YTD
- BETA: High Beta Stocks underperformed beta (SP500) again, -2.9% on the week to -17.5% YTD
*Mean performance of Top Quintile vs. Bottom Quintile (SP500 Companies)
Imagine being long a bunch of levered small caps that are trading with super high betas? No wonder why these people are begging to give up more of their free-market liberties for a little more (perceived) central-market-planning “security.”
#Deflation is economic gravity’s beast. If you want to try to “soothe” it, you’re going to need a lot more than the BOJ, ECB, PBOC, OPEC, and Fed’s baseball bats.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.60-1.79%
Oil (WTI) 26.03-31.39
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer