“Wild randomness is uncomfortable.”
-Benoit Mandelbrot
Back to The Brot this morning in trying to explain why one of the NFL’s best backs (yes, my RB1 in Fantasy), Adrian Peterson, only ran for 19 yards last night and how Janet Yellen could be pivoting for the 6th time in 9 months later this week.
Hawkish-dovish-hawkish-dovish-hawkish, then dovish? Loss of 2 yards, 1 yard gain, loss of 4 yards, 2 yard gain. I guess the Fed should just pre-announce the play to the entire world and run it right up the middle, Vikings style!
As Mandelbrot goes on to remind us, “there is much in economics that is best described by this wilder, unpleasant form of randomness…” (The Misbehavior of Markets, pg 41). Random behavior usually perpetuates more “surprises”, not less.
Back to the Global Macro Grind…
What’s not random is the Federal Reserve pivoting to dovish whenever they want to try to centrally plan market prices higher. Commonly called “reflation”, I’m hearing they’re going to broaden that market reality’s definition to “transitory” too.
Why are crashing inflation expectations (Oil prices for example from $105/barrel) “transitory”, but bear market bounces not equally transient? Why would an aging running back’s production ever re-accelerate back to the glory days of his injury-free youth?
With Fed Fund Futures implying a 15-20% chance of a Fed rate hike this week, Janet better not try to get cute with this and raise them anyway. In addition to #GrowthSlowing, she’ll have #Deflation Risk On again too.
Or is it already on?
That’s an interesting question I haven’t spent enough time debating in my morning rants. What happens if and when the Fed pivots back to devaluing the Dollar… and the Dollar doesn’t go down? Will the longer-term TAIL risk of Commodity #Deflation resume?
Last week’s moves in macro markets looked a little like that:
- Rates stopped going up (week-over-week, UST 2yr Yield down 2 beeps, UST 10yr up 2 beeps)
- Utilities (XLU) resumed their league leading YTD S&P Sector return, +1.7% on the week to +13.8% YTD
- Financials (XLF) continued to trade like Peterson’s yardage, down -1.7% on the week to -0.9% YTD
- But the US Dollar ended up closing the week up +0.7% to -2.6% YTD
- And Oil and Commodities (CRB) indices deflated -5.9% and -1.0% on the week, respectively
Deflate-gate this was not. Although Patriot fans (yes, I am one) felt some non-transitory deflation when QB Jimmy Garoppolo went down, hard, suffering a sprained AC joint yesterday. When your receiver (Julian Edelman) is your new Backup QB, that’s a problem.
But I do think there will be a definitive market deflation if Yellen makes another policy mistake.
What else went down vs. up (in Global Equities) last week?
- Energy Stocks (XLE) got tagged for a -3.2% loss, eating into those Q2 “reflation” gains, when the Fed went dovish
- Tech Stocks (XLK) rocked out a +2.3% weekly alpha move after Intel (INTC) and Apple (AAPL) ramped the bears
- European Stocks (EuroStoxx600) sucked wind (again) dropping another -2.2% on the week to -7.7% YTD
- Italian Stocks (MIB Index) got drubbed by their homeland’s guy, Draghi, crashing another -5.6% to -24.4% YTD
- Japanese Stocks (Nikkei) went down another -2.6% to -13.2% YTD after moarrr BOJ “buying” fumbled
Oh, and my precious currency, Gold got sacked for a -1.8% loss, pairing its epic lead for 2016 back to +23.1% YTD. And now that looks like a great buying opportunity if you believe the Fed is both data and SP500 dependent.
More good news is that the massively net LONG positioning in pretty much everything US stocks corrected as the US Equity market has in the last few weeks. Here’s the updated CFTC non-commercial (hedgies) net LONG positioning of major macro markets:
- SP500 (Index + Emini) net LONG position down -79,747 contracts last week to +113,534
- Russell 2000 (mini) net LONG position down -15,166 contracts last week to +8,183
- 10YR Treasury net LONG position down -56,539 contracts last week to +72,415
- Crude Oil net LONG position up +34,607 contracts last week to +360,492
- Gold net LONG position down -30,136 contracts last week to +248,858
In other words, after spiking to > +2.3-2.9x on a 1-year z-score, the SP500 and Russell net long positions are back down to +1.18x and 1.90x, respectively. Meanwhile the Long Bond (10yr) z-score is down to 0.92x – Gold and Oil are 1.07x and 0.83x, respectively.
Yep. You already knew that. The Fed got everyone to be long everything (stocks, bonds, stocks that look like bonds, Oil, Gold, etc.) on the concept that bad economic data is good for asset reflation.
This, unlike many things in markets, is not wild and crazy randomness. That may not make the economic puritan in you comfortable. It certainly doesn’t make the 2016 growth bulls “right” on stocks for the right reasons either.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.50-1.73%
SPX 2105-2161
Nikkei 168
VIX 14.02-19.95
USD 94.50-96.42
Oil (WTI) 42.38-45.22
Gold 1
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
