Procrastinate Till Tomorrow?

“Never put off till tomorrow what you can do the day after tomorrow.”

-Mark Twain

Phew. Thank goodness for Friday’s month-end markup in both Energy related securities and the bank stocks. That gets us to today. Then we have tomorrow. But what happens the day after that? Will #TheCycle just go away?

While it was both exciting and frightening to watch, the economic and #ProfitCycle forced both OPEC and European Banks into panic mode last week. Without centrally-planned-rhetorical-reflation-ramps, I’m not sure I’d be so bullish on ground hog days.

Are you seeing your former P&L’s shadow? Or is that just two massive market crisis reminders (Deflation and Banks) that tying two rocks together doesn’t make them float? For equity markets to “rip” (from here), I’d say they need to do more than float – they need to inflate.

Back to the Global Macro Grind…

Reflation or Deflation? From here, that remains the question. Since the growth slowing or accelerating question has already been answered on each of the last 6 “rates rising” scares of the last 16 months, reflation on/off is where there’s still plenty of market beta.

But, at this stage of the growth cycle, what kind of beta do you want? High or low beta? Realizing they are completely different setups in your portfolio is critical at this stage of the game. Here’s how they’ve looked for the last 2 weeks:

1. The week before last, Low Beta was +2.3% vs. High Beta +0.8%
2. And last week, High Beta was +2.7% vs. Low Beta -1.3%

While the YTD returns (Low Beta +10.4% vs. High Beta +9.0%) are somewhat similar, the recent weekly moves have been polarizing. That’s because these SP500 Style Factors imply two very different reflation vs. deflation outcomes.

Notwithstanding that OPEC had to bailout energy bulls last week, Oil (WTI) was up +8.5% on the week and that is what it is (75% of its YTD return in a week!). It was really the only big macro mover when you look at most things FICC in context:

1. US Dollar Index dead flat on the week, keeping it at -3.2% YTD
2. Euro vs. USD -0.1% on the week to +3.4% YTD
3. Japanese Yen -0.3% on the week to +18.7% YTD
4. British Pound dead flat on the week, keep it at -12.0% YTD
5. Canadian Dollar +0.3% on the week at +5.4% YTD
6. CRB Commodities Index +1.8% to +5.4% YTD
7. Oil (WTI) +8.5% on the week to +11.3% YTD
8. Gold -1.8% on the week to +23.7% YTD
9. Copper +0.4% on the week to +2.6% YTD
10. UST 10yr Yield -2 basis points on the week to -68 basis points YTD

That’s right, in Q4 it will be very hard to knock out the massive lead Gold and Long-term Bonds have for 2016 YTD returns but, from a week to week perspective (since June’s high) Oil’s bid for sustained “reflation” has had a serious case of procrastination.

Why is that?

There are obviously many reasons (some secular, some cyclical) but the simplest one is that it’s a lot easier to see #GrowthSlowing to its cycle low than it is to believe that central market plans (OPEC, Fed, Banks, etc.) can keep markets believing in an asset inflated tomorrow.

Maybe that’s why today’s macro move that matters most came out of the UK. That’s right, PM Teresa May put a timeline on tomorrow. She’s looking for Brexit negotiations to start as early as Q1 of 2017.

Before you get your hopes up that the Fed eases on that (or was it China slowing that they eased on? It’s getting hard to keep track!), macro markets immediately priced this “news” as follows:

1. British Pound DOWN -0.75% to $1.28 vs. USD
2. FTSE pops UP +1.1% to fresh YTD highs = +11.6% YTD
3. Spanish and Italian Equities snore, down small on the day (and still in crash mode YTD)

In other words, if there’s a short-term devaluation of a currency, markets still believe in short-term reflation of assets trading in that currency.

It’s obviously horrible for the poor people (i.e. the 90% or more of humans who don’t own “stocks”) who continue to lose the purchasing power of their hard earned currency. But who really cares about them anymore anyway?

And I mean that with some serious sadness in my heart.

Because as long as we continue to put off till tomorrow what should have been done for many years now (prioritizing free market principles and respecting the purchasing power of The People), a better tomorrow (for them) may not come until many tomorrow’s after that.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.51-1.62%

SPX 2141-2183

VIX 12.01-16.75
USD 94.90-96.10
Oil (WTI) 43.27-48.91

Gold 1

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer