“The most physically and emotionally demanding part of your four years…”
-West Point
So I’m sitting there in bed this morning, wide-eyed at 3-something AM … It’s Day 1 for me coming back from vaca and I just couldn’t sleep. That’s just the way the grind goes. I love it.
The aforementioned quote comes from the handbook for new cadets at West Point. In her recent book, Grit, Angela Duckworth published what a typical day at Beast Barracks looks like.
Commonly referred to as “Beast”, it’s “designed to help you make the transition from new cadet to soldier.” The opposite of Beast would be something like the Fed’s “Economic Symposium” in Jackson Hole, Wyoming. That’s where you sleep in.
Back to the Global Macro Grind…
Sure. I get it. If you don’t drink at the whisper-sessions (on Wyoming time), you’re probably up doing some fly-fishing or something. You have to get up early for that. But make no mistake, this is where central planners get paid to lounge.
BREAKING: Fed’s Fischer Signals Close To Targets (ex-GDP)
Yeah. Definitely. As a central-smoother of the US economy, you definitely have to back out 1% GDP if you’re going to proclaim to have nailed it. Reminder: if they actually use their “target” (+2% as the Deflator) real GDP will fall closer to 0% than rise to +2-3%.
But have no fear, the latest Fed forecast is here! Fischer “expects GDP to accelerate in the next few quarters”… which is almost mathematically impossible if inflation continues to rise (in rate of change terms) and real consumption slows from its cycle peak.
All of this will be reported, twisted, and tied together on Friday when Janet Yellen proclaims her mystery of ‘I gotta raise or retire’ faith. Ironically enough, Q2 USA GDP will be reported with a 1% handle in front of it on Friday as well.
So… is it Dollar Up or Dollar Down on that? How about rates?
Last week was a little squirrely on the hawkish-dovish-hawkish-dovish-hawkish (they’ve pivoted 5 times in the last 7 months) Fed watching front. With the US Dollar (Index) down -1.3% on the week:
- Rates (UST 2yr and 10yr) rose +4 and +6 basis points, respectively, to 0.75% and 1.58%
- But Commodities (Oil in particular) ramped +3.3% (CRB Index) and +9.1% (WTI) on the week, respectively
- And Safe-Yield Stocks like REITS and UTES dropped -1.9% and -1.2% on the week, respectively
In other words…
An inflation hawk might have read last week as “inflation is going to hit the Fed’s target and they’ll raise rates in SEP or DEC”, so we better keep chasing Energy Beta, cover shorts, and sell the Long Bond proxies we were never long to begin with.
At least that’s what the Sector and US Equity Style Factors looked like:
- Energy Stocks (XLE) were +2.5% on the week vs. the SP500 dead flat (0.0%) on dead volume
- High Beta Stocks were up another +2.0% on the week, taking their 3 month ramp to +9.6%
- High Short Interest Stocks were +1.2% on the week = +10.3% in the last 3 months
*Mean performance of Top Quartile vs. Bottom Quartile (SP500 companies)
Uh, cover high after shorting low in FEB and JUN? Duh. If you look at sentiment (i.e. how PMs are positioned vs. what they say about sentiment in some Old Wall survey), here’s the latest:
- US STOCKS: SP500 and Russell 2000 net LONG positioning scored +2.0x and +2.8x on 1-yr z-scores
- TREASURIES: 10YR net LONG positioned pulled all the way back to +22,286 contracts (0.4 on a 1-yr z-score)
- US DOLLAR: registered the 2nd most bearish positioning to the British Pound in all of Big Macro futures/options
“Bearish positioning” means the 1-year z-score is A) negative and/or B) really negative (i.e. when it’s more negative than a -2.0x). US Dollar and British Pound have 1-year z-scores of -0.8x and -2.5x, respectively, as of last week.
So what the heck does it all mean? At 11 VIX can stocks never go down as long as GDP isn’t greater than 2%, but not less than 1%? How about long-term bonds and their “safe-yield” proxies – is it over for them, but never for high-beta-low-quality?
Do you think I really know? Do you think someone else does? Now you know why, instead of cajoling with central planning types in Jackson, I’m perfectly happy crawling out of my Beast Hole every morning and trying to think it through for myself.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.48-1.61%
SPX 2167-2192
RUT 1
VIX 11.03-14.44
USD 93.99-96.50
Oil (WTI) 40.37-49.31
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
