“A 90 percent drop. That was bottom.”
-Bill Browder
As you wince at yesterday’s -0.1% drop from the SP500’s all-time closing high, remember what a real “rout” looks like. If you’re long the Russian stock market right now, you’re in the midst of an -18% draw-down from what we called Reflation’s Peak.
Have you ever lost -18% to -90% of your (or other people’s) capital? The aforementioned quote comes from one of the more gripping parts of Red Notice, where Bill Browder explains how it felt when his fund (Hermitage) lost 90% of its capital.
“It’s hard to describe what it’s like to lose $900 million. I could feel it in the sides of my stomach, as if I had been emptied out from the inside. It was also public humiliation…” (pg 137)
Back to the Global Macro Grind…
I actually worked for a multi-strat hedge fund that lost a lot more than -18% of its client capital in less than 6 months. If you want the details, I wrote a book about it with Rich Blake titled Diary of a Hedge Fund Manager. I wasn’t a very good writer back then.
While I’m sure it’s been fascinating and exciting to be long “cheap” Russian stocks and short “expensive” American ones this year, anyone who has the Reflation Long vs. Real Growth Short Portfolio on (with leverage) is down more than -18% too.
Remember the ABC’s of how Hedgeye thinks about Global Macro:
A) “Expensive” macro exposures get more expensive
B) And “cheap” macro exposures get cheaper
C) Provided that the prevailing direction of growth and inflation TRENDs don’t change
I know that doesn’t make me a “valuation” puritan. There’s nothing pure about me, really. I’m just like the rest of you – a human being with plenty of flaws who is not going to apologize for his investment process.
I realize there’s a mainstream media fascination with the valuation discussion. What’s much more interesting to me is who is getting paid out there this year and why. If you stayed with the “Short Reflation” position into yesterday’s lows, you’re crushing it.
Was that the bottom?
“Bottom?” Most people who get their research for free (watching Old Wall TV) are still trying to call the “top.” And while the SP500 tapped the top-end of my 2 risk range yesterday, a major asset class hit fresh YTD lows.
That’s right. Commodities are a massive macro exposure that both equity and fixed income investors need to have an accurate intermediate-term view on if they want to outperform. As of yesterday’s close:
- The CRB Index was down another -1.6% on the day
- It’s down -9.6% in the last 6 months (TREND duration)
- And it’s down double digits now (-10.12%) for 2017 YTD
Back to the ABCs of macro, all you had to do to NOT have a draw-down on the commodity and/or energy components of your portfolio was forecast that INFLATION was going to peak and roll, in rate of change terms.
With this smack-down in both Oil and the CRB Index in June, reported inflation is going to rollover at a faster rate, but for now this slow-moving train wreck is so visible that even Janet Yellen can almost see it:
- US Consumer Price Inflation (CPI) peaked at +2.5% in Q117
- US Consumer Price Inflation SLOWED in May to 1.9% year-over-year vs. +2.2% in April
- Hedgeye is forecasting that CPI doesn’t stop slowing until at least Q1 of 2018
So maybe that’ll be the bottom in reported inflation, but macro markets have an incredible ability to “price in” the bottom before the reported data (which comes on a lag) and/or rear-view-mirror-macro-economists (like the Fed) figure it out.
While it’s somewhat comical to see some pundits call Yellen’s comments “hawkish”, when it comes to her revising her “inflation forecasts” on a lag, she cut the Fed’s forecast and will have to keep cutting it, throughout 2017.
That’s a big reason why the 10-year Yield did precisely what my signal said it should have done and dropped to the low-end of my 2.12-2.25% immediate-term risk range on the Dovish Hike yesterday.
Then both the 10yr Yield and the Financials (XLF) bounced because... drumroll… that’s what they do when bond yields hit the bottom of my risk range and bounce. Gold backed off its intraday highs in a hurry on that too.
Where will the 10yr Yield bottom in 2017? How about inflation expectations? Russian stocks? Commodities? Oil? Levered Energy Oinkers that our Institutional clients are short like GEL, SEMG, and TEP? I don’t know yet. But I’ll let you know when I think I do!
Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.12-2.25% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6150-6357 (bullish)
XOP 31.05-33.88 (bearish)
VIX 9.55-11.52 (bearish)
EUR/USD 1.10-1.13 (bearish)
Oil (WTI) 44.03-46.51 (bearish)
Nat Gas 2.85-3.06 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
