Hedgeye - Cohn Crash?

“Coming out of my crash, I was so broke I couldn’t muster enough money to pay for a ticket to Texas.”
-Ray Dalio

I threw a little Macro Tourist Destination of The Day click-bait at you with that Cohn title today, eh! Glad you opened this. And don’t worry, the names Cohn and Stormy Daniels aren’t inputs in my fundamental or quantitative research processes.

Process trumps politics. Always has – always will. While we’re not calling for a US stock market crash, we certainly aren’t bullish on plenty of Global Equity markets that the crowd remains long of here in 2018.

Zero percent of the incoming Global Macro economic data has had to do with either Trump Tariff talk or Gary Cohn. Whether or not those news items matter to the pending data will be scored like all data is – in real-time and from a rate of change perspective.

Back to the Global Macro Grind…

After spending last week seeing clients in London, I spent the last 2 days seeing some of our New York City based accounts. I’m starting to believe that the #1 risk to Global Macro markets would be an arrest of the US Dollar’s decline.

To be clear, intermediate-term bottoms are processes, not points. Bearish intermediate-term @Hedgeye macro TRENDs have a central tendency to draw consensus macro into the position AFTER the move. Then a potential bottoming process begins.

Mathematically speaking, bottoming processes start with a series of immediate-term TRADE signals of higher-lows. Not surprisingly, both the US Dollar Index and front-month US Equity Volatility (VIX) are signaling higher-lows, at the same time.

Are the USD and VIX one and the same thing right now?

I’m only “starting to believe” this because the computing power of my signaling process is. I don’t just wake up in the morning believing a major macro market factor SHOULD do something. I’m focused on what markets are actually doing.

Let’s look at these two factors (USD and VIX) separately and consider some non-consensus realities:

USD – always loses when the world is in a “synchronized Global recovery” – why? That’s pretty straightforward. The world funds their “risk on” gross long positioning in things like Emerging Market currencies and equities in Dollars. It’s really easy to buy things like EM when their countries are in what we call Quad 1 (when real growth is #accelerating and inflation is slowing). At the top of economic cycle accelerations (Europe for example) the crowd chases ideas like “Draghi is going to taper” or tighten, so the EUR/USD is relatively strong until Draghi pivots back to explicitly dovish too.
VIX – cross asset volatility in general absolutely hates it when the price of every carry trade (in Dollars) goes up. When prices continue higher on a TRENDING basis, volatility breaks down on a TRENDING basis. Everyone who has ever run money knows that it’s easier to be long of assets with falling volatility than those with rising volatility. When measuring and mapping the volatility of volatility, one simple explanation for the US stock market signaling lower-highs right now is the immediate-term @Hedgeye Risk Range of 15.11-23.37 VIX is signaling higher-lows, daily.

I’m always happy to hear any arguments against what I just wrote. Since I’ve been on the road seeing clients for the last 2 months I haven’t heard one argument that would change my risk management view on these correlating factors. So, please, fire away!

Some of the biggest reasons why I don’t get convincing pushback on this is that:

While its signaling higher-lows, USD is still Bearish TREND @Hedgeye and portfolios aren’t impacted by it meaningfully yet
Our sequencing #process (price, volume, and volatility) is proprietary and factual based on its inputs
Our forecast for #GlobalDivergences is the only one on Wall Street right now and can only be refuted with time and space

What is the truth? Give me more time, space, data, and market signals and I’ll give you what people are willing to believe as the truth. The fact of the matter is that most Macro Tourists jump from headline to headline instead of time series to time series.

For all of us striving to do our jobs (generate alpha), we should be very thankful for the breakout in the Macro Tourist industry.

Are US equity futures down this morning exclusively because of a dude named Cohn? Surely, there’s some emotional and political reflexivity associated with that headline. But there’s a lot more to it than that!

Coming into the headline political news, don’t forget that the NASDAQ had rallied all the way back to within -1.9% of its all-time closing highs on A) decelerating VOLUME and B) an implied volatility DISCOUNT of -35% (vs. 30-day realized).

In my model, even though I still like the NASDAQ at a price (i.e. the LOW end of the @Hedgeye Risk Range), God himself could have replaced Gary in his super special political seat and I’d have still told you to make sales at those lower-highs anyway.

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

UST 10yr Yield 2.80-2.94% (bullish)
SPX 2 (bullish)
RUT 1 (neutral)
NASDAQ 7149-7443 (bullish)
Energy (XLE) 65.29-69.40 (bearish)
REITS (RMZ) 1006-1049 (bearish)
Nikkei 200 (bearish)
DAX 116 (bearish)
VIX 15.11-23.37 (bullish)
USD 89.11-90.61 (neutral)
EUR/USD 1.21-1.24 (neutral)
Oil (WTI) 60.03-64.26 (bullish)
Gold 1 (bullish)
Copper 3.07-3.21 (bearish)

Best of luck out there today,

Keith R. McCullough
Chief Executive Officer