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“Wall Street exists to sell securities to people.”

-Jim Chanos

In a solid interview Lasse Heje Pedersen had with Jim Chanos in Efficiently Inefficient, Chanos went on to add that since people on the Old Wall are in the business of selling you securities, “most of the stuff you are going to hear all the time is bullish.” (pg 130)

Unless this is your first day on the job (if it is, it’s a great day to start short selling US Equities btw), I think you get that being bearish, skeptical, and cynical about Wall Street’s consensus (some of the time) can save (and make) you and your family a lot of money.

As Bernard Baruch taught Congress in 1917, “a market without bears would be like a nation without a free press… There would be no one to criticize and restrain the false optimism that always leads to disaster.” (Efficiently Inefficient, pg 123)

Will Markets Crash (again)? - Bear crossing cartoon 09.29.2015

Back to the Global Macro Grind

To be crystal clear on my view, I think the tail end of this 3-day short squeeze in everything “reflation” (commodities, stocks, junk bonds, etc.) is going to lead to another market disaster.

Not to be confused with the macro market disaster you should have already avoided in the past 6-18 months, I think this next leg down from classic slow-volume-lower-highs (total US equity volume -11% vs. 1mth avg in last 3 days) in Global Equities could be epic.

Yes, on the US Equities part, I get that more “people are bearish” than when we first started making this call (#Deflation call was 18 months ago; US Equities SELL call was July 2015). But ignorance never led to the end of a bear market – it perpetuates the epic part of a crash.

No matter how “bearish” you think “sentiment” is right now, I can assure you that consensus isn’t positioned bearish. If it wasn’t way too bullish in July, we wouldn’t have had the first -14% and -26% draw-downs (from July) in the SP500 and Russell.

If it wasn’t positioned too bullish in January 2016, we wouldn’t have A) seen the worst JAN ever and/or B) seen the crowd sell last week’s lows. And if they didn’t sell last week’s oversold lows (new weekly closing lows), we wouldn’t have had that kind of a bounce!

This is the point.

  1. The oversupply of fund managers who are selling low and chasing high (chasing momentum) is unprecedented
  2. Hedge Fund return correlation to US Equity Beta is at an all-time high (see Chart of The Day)
  3. And the amount of leverage hedge funds are using vs. daily market liquidity is also unprecedented

At both the lower-lows and lower-highs, that’s why I’d characterize my inbox as follows:

  1. Emotional
  2. Manic
  3. Frustrated

You see, I’m just a guy with a keyboard. I’m that new guy on a Wall St that isn’t trying to sell people securities. I’m the guy with 0% conflicts of interest (no prop desk front-running people, no positions, no banking/brokerage, etc.) who has been more right than wrong lately.

So, people vent to me. People talk to me. People trust me. I get a ton of feedback.

When I say “I”, it’s really the wrong thing to say. As you know, there is no I in Hedgeye. The collective feedback I receive has a huge multiplier since we’re not only the fastest growing Independent Research provider on the 2.0 Wall, but we also have one of the biggest research teams.

In rate of change terms, a day doesn’t go by where I don’t see #GrowthAccelerating direct messages about what people think (read: sometimes hope) is going on vs. what is actually going on. To summarize all of it:

  1. Most people missed calling the causal factors behind what I’ll call Phase 1 of asset #bubbles popping
  2. Many are constantly over-weighting what they need (the upside risk) instead of what is (the downside risk)
  3. The ever-changing “bullish” thesis drift away from our core bear case is as far from reality as it’s been

That’s why I think markets are entering what I’ll call Phase 2 of our Bear Case – the crash. Since many things are already crashing, it’s really not that hard of a word to use. You can forward this to your friends who are still debating our “recession” call, and just fast forward to #crash.

As we’ve documented, you don’t have to have a recession to have a US stock market crash. You simply have to have profits slowing to negative (year-over-year) for 2 consecutive quarters and/or credit spreads sustaining a breakout above their historical mean.

Markets also crash when the “fundamentals” (growth and profits slowing) are being perpetuated by this thing called market volatility. That’s why the “biggest 3-day bounce since November of 2008” should remind you of a very important lesson: what happened after that.

Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research views in brackets):

UST 10yr Yield 1.61-1.84% (bearish)

SPX 1811-1938 (bearish)
RUT (bearish)

NASDAQ 4165-4564 (bearish)

Nikkei 147 (bearish)

DAX 8 (bearish)

VIX 20.99-28.97 (bullish)
USD 95.35-97.87 (bullish)
EUR/USD 1.09-1.14 (neutral)
YEN 111.65-116.68 (bullish)
Oil (WTI) 26.13-32.65 (bearish)

Nat Gas 1.89-2.09 (bearish)

Gold 1151-1252 (bullish)
Copper 1.98-2.10 (bearish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Will Markets Crash (again)? - 02.18.16 Chart