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“Unlike lying, an imagined reality is something that everyone believes.”

-Yuval Noah Harari

Or at least people don’t “feel” like they are lying when they are obfuscating the truth about either the economy or the profit cycle. As long as enough perma bull people are paid to perpetuate the spin, everything is ok – until it isn’t.

As Harari explains in an excellent chapter called The Tree of Knowledge, “over the years people have woven an incredibly complex network of stories… and the kinds of things people create through this network of stories are known in academic circles as fictions, social constructs, or imagined realities…” (Sapiens, pg 31)

For example, if the Old Wall wants you to imagine that Friday’s 1% GDP report was a “beat” (when the expectation for the past 2 years has been +3-4% growth), that’s fine. Your 2016 portfolio returns, however, have sided within being long asset allocations that do well when GDP growth slows from 3 to 2 to 1. So start your March off right - short the Financials (XLF) – buy more Utilities (XLU).

Imagined Realities - Growth cartoon 0624.2014

Back to the Global Macro Grind

What our profession refers to as “month-end” can sometimes be as magical as Disneyland. On no volume at all (the sellers take a break), prices can levitate – and, as long as you close your eyes, you can believe that you are actually flying (or tell your kids they are).

Then the ride ends, and you’re back in another line thinking “why am I doing this?” Why are you suspending the very basic belief that life is just a long line of hopeful expectations? Cycles take time to play out.

With US “stocks up” for the 2nd straight week last week, “ex-stocks” here’s how the rest of the ride went in Global Macro:

  1. US Dollar was +1.5% week-over-week, getting back to almost break-even at -0.6% YTD
  2. Euro (vs. USD) was down -1.8% week-over-week to +0.7% YTD
  3. Yen (vs. USD) pulled back -1.2% week-over-week to an FX War leading +5.5% YTD
  4. Commodities (CRB Index) bounced +1.3% week-over-week to a deflationary -8.2% YTD
  5. Oil (WTI) bounced too, +3.6% week-over-week, but remains -15.9% YTD
  6. Gold corrected for the 2nd straight week, but only -0.6% week-over-week to +15.3% YTD
  7. US 10yr Treasury Yield barely budged, closing +2bps week-over-week to 1.76% (-51bps YTD)

In other words, last week was what we call a counter-TREND (i.e. counter to what’s been really working) move where the asset allocations that are really working (positive absolute returns) barely corrected.

Meanwhile, back on Space Mountain (Global Equities), here’s how the week looked:

  1. Italian Stocks (MIB Index) +3.4% on the week to -18.4% YTD
  2. US Small Cap Stocks (Russell 2000) +2.7% on the week to -8.7% YTD
  3. Nasdaq +1.9% on the week to -8.3% YTD
  4. SP500 +1.6% on the week to -4.7% YTD
  5. European Stocks (EuroStoxx600) +1.6% on the week to -9.4% YTD
  6. Japanese Stocks (Nikkei) +1.4% on the week to -14.9% YTD
  7. German Stocks (DAX) +1.3% on the week to -11.4% YTD
  8. Emerging Market Stocks (MSCI) -0.8% on the week to -7.4% YTD
  9. Asia (Ex-Japan) down another -1.3% on the week to -9.2% YTD
  10. Chinese Stocks (Shanghai Comp) -3.2% on the week to -21.8% YTD

Yeah, the “bounce” was fun. But when everyone got off the ride, they looked at their YTD equity return and vomited.

As you probably noted, “Dollar Up” weeks still hammer the poor bastards who are long “EM, China, etc.” … and they give hope to those begging for the currencies in the equity markets they are long (Italy and Japan) to be devalued…

But what happens when the music stops? What happens when everyone comes to realize that the truth about US growth is somewhere in between 0 and 1.5% and the rest of the world’s #GrowthSlowing and #Deflation risks have not gone away?

From a US Equity Style Factor perspective, Mr. Macro Market just reminded us that it’s being long the following exposures that gives you the biggest bang for your buck (provided that you weren’t long any of them during the decline!) on bounces:

  1. High Short Interest Stocks were +3.9% last week to -3.1% YTD
  2. Small Cap Stocks were +3.7% last week to -6.2% YTD
  3. High Beta Stocks were +3.7% last week to -10.5% YTD

*Mean performance of Top Quintile vs. Bottom Quintile (SP500 companies)

Yep. Getting on some of these rides is definitely racy, but if you’re awesome at threading the needle and whipping your entire portfolio into all of the things that have crashed… you’re all set, until they start crashing again.

On that score, after another #Deflation report out of Europe this morning (Eurozone CPI -0.2% y/y FEB vs. +0.3% JAN) and the Chinese panicking with another “RRR cut” (post their stock market dropping another -2.9% overnight), the German DAX just gave back all of last week’s “bounce” (-1.6%) and remains in crash mode at -24.4% from last year’s #bubble peak.

Enjoy whatever is left of the month-end markup in US stocks. Both March and the February US Employment data are coming. And our version of this interconnected story will be non-fiction.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.68-1.81%


Nikkei 155
USD 96.43-98.48
YEN 111.43-114.70
Oil (WTI) 27.72-34.41

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

Imagined Realities - 02.29.16 Chart