Test: True or False?

“There was no way to test whether they were true or false.”
-Seth Stephens-Davidowitz 

That was true of Old Wall economists and strategists, before the internet, of course. It was also what Karl Popper thought to be true of Freud “famously claiming Sigmund Freud’s theories were not falsifiable.” (Everybody Lies, pg 45)

But “Was Freud Right?”.  That’s the title of chapter 2 in Everybody Lies. On many levels, including the author’s own hypocritical views of the “big data” he’s mining for, this has been one of the more entertaining books I’ve read this year.

Fortunately for my team, if we woke up every morning lying about economic data, we’d get fired (that’s our accountability check). Our independent research is either data driven or dead on arrival. We don’t get paid to bank or broker.

 

Back to the Global Macro Grind…

Welcome to Macro Monday where I get paid to measure, map, and contextualize last week’s macro market moves within the context of intermediate-term TREND and long-term TAIL opportunities.

While the Nasdaq closed at yet another all-time (which, in the context of human history, remains a very long time) high of 6605 on Friday (+22.7% YTD) it was a big week for Reflation’s SEP-OCT reflation too:

1. US Dollar Index was down for the 1^st week in 5, -0.8% at -8.9% YTD
2. British Pound was +1.7% last week signaling immediate-term #Overbought at +7.7% YTD
3. CRB Commodities Index had a “reflationary” week, +2.1% at -4.0% YTD
4. Oil continued along the path of a new Bullish TREND @Hedgeye +4.4% at -9.8% YTD
5. Gold bounced +2.3% with rates having a down week = +11.9% YTD
6. Copper ramped another +3.4% last week to +24.1% YTD
7. Corn bounced +0.8% but remains bearish TREND @Hedgeye = down -7.2% YTD
8. Palladium ripped another +7.2% to +43.6% YTD
9. Rice was +2.5% to +18.0% YTD and remains Bullish TREND @Hedgeye
10. Lumber inflated another +3.0% to +19.7% YTD post hurricanes

Interestingly, on a very short-term duration (weekly) the Treasury Bond market didn’t read it as reflationary. US Bond Yields were actually down, across the board, and the curve (UST 10yr minus 2yr Yield) compressed:

1. UST 2yr Yield down 1 basis point on the week to 1.49%
2. UST 10yr Yield down 7 basis points on the week to 2.27%
3. Yield Spread (“the curve) -7bps to +78 basis points wide

This is where having a multi-duration risk management overlay matters. To me, last week’s bond yield correction was:

A) From the top-end of the @Hedgeye Risk Range for the 10yr Yield = 2.26-2.39%
B) Sell the “news” (in bond yield terms) after predictably hawkish inflation data (CPI and PPI)

Despite Global Yields being down this morning, UST 10yr Yield is up 2 basis points to 2.29% as copper blasts +2.4% higher and Oil remains well bid at +1.3% and back above $52/barrel. Remember: get Oil right and you’ll get headline (sequential) inflation right.

That said, with bond yields down last week, the “Yield Trade” came back to life – that had to be frustrating for those who are long of reflation when I think they should be (they just need to buy it at the low-end of the range, not the high):

1. Utilities (XLU) were +1.3% on the week to +11.5% YTD
2. Consumer Staples (XLP) were +1.4% on the week to +5.5% YTD
3. REITS (MSCI) were +1.6% to +2.5% YTD

That’s what I call a counter-TREND Sector Style move – one that I would not chase. In fact, I’d fade all of those moves and short them alongside long-term Treasuries (TLT) this morning.

Some other US Equity Style Factor moves I’d fade from last week are:

A) LOW YIELD stocks were -0.6% on the week to +19.7% YTD
B) HIGH YIELD stocks were +0.7% on the week to only +0.7% YTD
C) HIGH BETA stocks underperformed LOW BETA by 80 basis points

By fading I mean doing the opposite of the counter-TREND moves. Instead of shorting High Beta, in Real-Time Alerts I signaled buy-more high beta via one of our 2017 US Growth favs, Biotech (IBB), for example.  

The best way to test true or false in macro markets is by timestamping your views instead of spinning them. Markets don’t lie; some of the economists and strategists on the Old Wall do.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.26-2.39% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
RMZ 1147-1179 (neutral)
Nikkei 205 (bullish)
DAX 120 (bullish)
VIX 9.10-10.39 (bearish)
GBP/USD 1.30-1.33 (bullish)
Oil (WTI) 50.04-52.35 (bullish)
Gold 1 (bearish)
Copper 3.04-3.21 (bullish) 

Best of luck out there this week,
KM 

Keith R. McCullough
Chief Executive Officer