“No one can see in the work of the artist how it has become.”
With long-term bonds yields down (Long Bond Up) and Oil Up yesterday, the SP500 took another peak at all-time highs. Perfect. If ole Nietzsche was still kicking around he might have warned that “with everything perfect, we do not ask how it came to be.”
Or, for the many who are in the business of being long-only anything (or everything) - stocks, bonds, commodities, etc. – who really cares about auditing the narrative on why? As long as the clients don’t ask any questions … all good.
I have to take the other side of the German philosopher on “no one can see.” The poor guy didn’t have Google, You Tube, or Twitter. You don’t have to look very hard to see how perma bull narratives have become. There’s one for every asset class, all of the time.
Back to the Global Macro Grind…
I didn’t wake up this morning reading Nietzsche. In fact, I do not enjoy quoting the man at all. His name is too artistic. I was just spell-checked into the boards on his name 3x in a row!
He’s dog-eared in my Grit book where Angela Duckworth makes an astute point about our profession (anyone with an establishment of perceived wisdoms really) that “mythologizing natural talent lets us all off the hook. It lets us relax into the status quo.” (pg 39)
In hindsight, there’s no doubt that the status quo of a macro market price has a comfortable narrative that lulls everyone to a level of preceded complacency.
“You just have to buy stocks” (as long as they weren’t Chinese, Japanese or European)… because:
- Growth is slowing
- Rates are at all-time lows
- There’s no alternative
Ah, the artistry of that puck-head Mucker. Did I just slip one past the goalie there and start the narrative with the #1 thing very few asset management marketing decks mention as THE causal factor?
- What if US Growth didn’t slow?
- What if the Fed wasn’t forced to pivot back to dovish (multiple times) as a result?
- What if the Dollar didn’t stop going up, and Oil, Junk, etc. didn’t stop crashing?
Oh boy. I don’t think I would have been able to complement this morning’s all-time high in the Equity Beta Navel Gazer with Long Bond Up, Oil Up… would I?
Looking a little deeper into how the latest all-time high in SPY has become:
- VOLUME: yesterday’s Total US Equity Market Volume (including dark pool) crashed -26% vs. its 1yr avg
- VOLATILITY: remained like a ball-under water (sub 14-15 on front month), sucking everyone back to VIX 10-11
- PRICE: SPY has only moved > +/- 0.5% in 5 of the last 31 trading days (will day 27 of complacency be today?)
The price of an asset class, of course, is a function of its realized volatility. So… if you smash volatility, and hold it down there with “there’s no alternative to stocks”… and keep registering all-time highs on crashing volume, what is a short-seller to do?
Cover. Capitulate. Cry.
Yeah. Poor little hedgie, cry me a river. Life has been so hard that you have to deal with some adversity every 3-4 months before volatility ramps like a bat out of hell and you’re running reluctantly levered long again…
Seriously. From a price, volume, and volatility perspective… this has to be the best time to be a short seller of anything US Equity beta since … well, every time the VIX goes to 10-11!
That said, you do have to wait and watch for that 11 VIX handle. Mainly because the damn thing keeps going to 13 (sucking bears back in) and then backs right off, squeezing Style Factors like High Short Interest, High Leverage, High Beta, etc. in a hurry.
So what’s next?
I think you know what I think is coming next. But you also know that I don’t know when. Do you? Moreover, can you tell me what happens to stocks and long-term bonds if Oil is done going up for the next 3 months?
I say Long Bond Up, Gold Up, Low Beta-Safe Yield Up… and Low Quality Narratives Down.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.49-1.59%
Oil (WTI) 42.18-49.45
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer