“Laughter and tears are both responses to frustration and exhaustion. I myself prefer to laugh, since there is less cleaning up to do afterwards.”
-Kurt Vonnegut
If you really want to laugh this morning, go back to the #1 headline fear Macro Tourists had at this time (at Davos) last year. That’s when the British Pound was going to allegedly crash and burn on Brexit.
Looking back, that’s when the Pound’s capitulation and bottoming process was officially underway. It’s been straight up from there. Fortuitously, we were on the right side of that ramp.
This isn’t to say that the US Dollar’s “bottom is in.” That’s a dangerous call to make. But that’s the point. After something has gone down for a year, you’ll have an exhaustive list of reasons why it will continue lower. That’s why consensus bottoms are processes, not points.
Back to the Global Macro Grind…
As you know, consensus can remain right for longer than a contrarian investor can remain solvent. That’s another reason why I personally have had to learn the lesson of patience. Fortunately I learned those lessons trading other people’s money.
For me, “patience” = #process.
On something that’s going straight up or straight down, my risk management #process works the same way. After identifying the causal and/or correlation factors that are driving the up or down move, what I do with big macro markets is:
A) Measure and map the daily @Hedgeye Risk Range using my core 3 factors (PRICE, VOLUME, and VOLATILITY)
B) Sequence where implied vs. realized volatility is moving within the context of my risk range
C) Measure and map where market positioning is relative to itself historically
On point A) today is the first day of 2018 that I’m registering an immediate-term #oversold signal in the US Dollar vs. 3 major currencies:
- Euros
- Yens
- Pounds
If I look at the US Dollar Index itself, it’s almost (but not quite) at the low-end of my immediate-term 88.55-91.40 @Hedgeye Risk Range.
That said, things that are correlating inversely to USD on the order of -0.9 on a 30-day duration (Oil, Gold, SP500) are mostly signaling immediate-term #overbought within their respective risk ranges:
- Oil (WTI) = $63.80-66.34
- Gold = $1
- SP500 = 2
That basically means that if the USD has any bounce from my exhaustion signal, we might actually get more than miniscule “corrections” in things that have effectively gone straight up.
No, that doesn’t mean that the USD is a long here. To me this is simply the spot where I wouldn’t press it on the short side. That’s what Macro Tourists do (they sell #oversold lows). The USD has been Bearish TREND @Hedgeye since Q2 of 2017 don’t forget.
Longer-term, what would reverse the Bearish @Hedgeye TREND signal on USD?
- The USD Index making a series of higher-lows (instead of signaling lower-lows within my risk range)
- FX volatility breaking out broadly to Bullish TREND (currently most foreign currencies have Bearish TRENDs in volatility)
- Something causal like #GlobalDivergences to manifest into reported growth and inflation reports
Since that last point is a research call that we are just starting to make (see our Q1 Macro Themes deck for details), I have some patience with that developing as well. Why? Because that Q417 and Q118 Global GDP data hasn’t yet been reported!
As you can see on slide 42 of our current Macro Deck, our timing for #GlobalDivergences to become apparent starts tomorrow with USA’s Q417 report and should have follow through for the next 3-6 months of Global GDP reports.
If you are new to our GIP (Growth, Inflation, Policy) data-driven modelling process, what you can see here in the Chart of The Day (slide 42) is the emergence of Quad 3s and 4s. Quad 1s and 2s are good = #GrowthAccelerating. Quad 3s and 4s = #GrowthSlowing.
History has taught us more than a few things on the US Dollar, but for the sake of brevity this morning here are a few to remember:
- When the entire world is in a “Globally Synchronized Recovery”, the Dollar goes down vs. everyone else’s currency
- When #GrowthSlowing emerges globally and the US is still accelerating, the Dollar strengthens from its lows
So I have some reason to believe something that the market obviously doesn’t yet (or it wouldn’t be anchoring on Mnuchin headlines and taking the USD to lower-lows)… but I also have time. I need more data to be reported on the fundamental front too.
I need more time to think, laugh, and hopefully not cry. There’s no crying in making macro market calls. I don’t sell at the bottom-end of my range and buy at the high-end either.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.52-2.69% (bullish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
VIX 9.64-12.65 (bearish)
USD 88.55-91.40 (bearish)
EUR/USD 1.21-1.24 (bullish)
YEN 109.01-111.04 (bullish)
GBP/USD 1.38-1.42 (bullish)
Oil (WTI) 63.80-66.34 (bullish)
Nat Gas 2.98-3.50 (bullish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
