Hawkish-Dovish-Hawkish

“Which way you go depends on where you are.”

-Jordan Ellenberg

Since I’ve been wrong being long both Gold and long-term bonds (and their proxies) for the last week, I started reading How Not To Be Wrong – The Power of Mathematical Thinking, by Jodan Ellenberg.

And since I’m still wrong this morning, I better keep reading!

Mathematically speaking, unless you have the unique storytelling ability to stay with intermediate-term, multi-quarter, Global Macro TRENDS… and, at the same time, nail every counter-TREND move… you’re more like me than you thought. You’re wrong sometimes too.

Back to the Global Macro Grind…

Counter-TREND moves (i.e. an immediate-term TRADE move that’s in the opposite direction of what’s been working from an intermediate to long-term perspective) are critical to consider and contextualize because:

A) They challenge the premise and conviction of your position

B) They’re sometimes the catalyst for you to change your mind

Consider how many times Janet Yellen has changed her mind in the last 10-12 months. With both GDP and productivity slowing (in rate of change terms), her Federal Reserve has pivoted 7x, since December.

That’s right. If you’re still keeping score since the 1^st rate hike into a slow-down (DEC 2015), the Fed has gone from hawkish (DEC) to dovish (MAR) to hawkish (MAY) to dovish (JUN) to hawkish (AUG) to dovish (SEP) to currently… hawkish?

Yep. And if we’re right on the profit, employment, and GDP cycle slowing to its slowest point in Q4 (we’re at 0.4% q/q SAAR GDP), she’s either going to pivot for the 8^th time (back to dovish) or make her 2^nd policy mistake of #TheCycle and hike into the slow-down.

Fun, eh?

‘But Keith, look at Fed Fund Futures – I hear you on the data, and Honeywell (HON), PPG Industries (PPG), and Dover (DOV) said you’re right on the #DoubleDipRecession call on cyclicals… but they could still raise rates anyway, right?’

Sure.

And that, “folks”, will be the most dovish of all deflationary catalysts. So I say the hawks (i.e. people who have been long the Financials all year on last year’s rate hike mistake) should just make this the new US President’s 1^st move – a rate hike for the holidays!

Which way you go on rate policy (hawkish or dovish) obviously depends on where you are in #TheCycle, but it also depends on where Wall Street is positioned. As I’ve reviewed for months now, on 3 dovish Fed pivots, everyone is long pretty much everything (again)…

From a non-commercial CFTC Futures & Options positioning perspective, here’s that data:

1. SP500 (Index + E-mini) = +0.75x on a 1yr z-score
2. Russell 2000 (E-mini) = +1.94x on a 1yr z-score
3. 10YR Treasury = 1.68x on a 1yr z-score
4. Crude Oil = 1.45x on a 1yr z-score
5. Gold = 0.56x on a 1yr z-score
6. Copper = 1.43x on a 1yr z-score
7. US Dollar = -0.90x on a 1yr z-score
8. British Pound = -1.89x on a 1yr z-score

In other words, with both the Federal Reserve and Bank of England (BOE) tripling down on dovish at their recent meetings, Wall Street believed them and not only shorted the USD and Pound on that, but bought everything asset inflation in those currencies.

While it’s interesting and exciting that Gold is currently the least bullish consensus position inasmuch as chasing small cap stocks is the most bullish, where macro markets are today (in correction mode, ex-Oil) is largely a function of where they were overbought to.

And now, with Oil signaling immediate-term TRADE overbought within its long-term TAIL risk setup (@Hedgeye TAIL resistance = $52.11/barrel for WTI) and the Russell 2000 selling off -1.2% last week, I expect Oil to become the #1 consensus long in macro again.

With Oil at $50 is the cyclical recession over (again)? Or was that just an epic v-bottom TRADE within an ongoing crash in over-supply? What if we “freeze” supply, forever? Then is Oil $55-60? Or is it back to $45?

Having not been long Oil (or short it, thank God) for this recent +10% month-over-month pop, I’ve been wrong on that inasmuch as I’ve been wrong being long Gold for its recent -5% month-over-month drop.

While I’d love to have nailed each and every one of those TRADES, I don’t think my team or subscribers would be able to keep up with me trying. They’re having a tough enough time keeping up with this fickle Fed.

Our immediate-term Global Macro Risk Ranges and intermediate-term TREND Research Views (in brackets) are now:

UST 10yr Yield 1.49-1.79% (bearish)

SPX 2144-2174 (bearish)
RUT 1 (bearish)

NASDAQ 5 (bullish)

XOP 35.91-40.20 (bullish)

RMZ 1105-1200 (bullish)

Nikkei 165 (bearish)

DAX 104 (bearish)

VIX 12.28-16.26 (bullish)
USD 95.25-97.40 (bullish)
EUR/USD 1.11-1.13 (bearish)
YEN 99.99-104.46 (bullish)
Oil (WTI) 45.19-51.55 (bearish)

Nat Gas 2.87-3.22 (bullish)

Gold 1 (bullish)
Copper 2.12-2.21 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer