“A few things work fantastically well and have tremendous impact.”
-Richard Koch
Koch is a British author who has written 20 books on business and idea generation. His most notable book was called The 80/20 Principle. That, of course, was based on the Pareto Principle – or the law of the critical few.
Especially in markets, there are a few vital factors that trump most of your political fears and/or emotions. For example, if you get the trending rates of change in both growth and inflation right, you’ll get a lot of things less wrong.
There are always a few massive consensus positions that can have tremendous market impact when they reverse. For example, if you were long of FAANG and short of long-term Treasuries… you didn’t not have a good March.
Back to the Global Macro Grind…
With the end of March comes the end of the 1st quarter of 2018. It was a quarter marked by massive reversals in the aforementioned two things in particular. Facebook (FB) and the UST 10yr Yield peaked in FEB and got smoked in March.
Smoked? Really? Is the 10yr Yield dropping -20 basis points a good ole fashioned smoking?
On an absolute basis, obviously not. But think about what that move in bond yields did to US Equity Sector Styles that were getting smoked in JAN-FEB like Utilities:
A) For the month of March Utilities (XLU) are up +2.5% absolute and +6.5% relative to the SP500
B) For the month of March Basic Materials (XLB) are down -6.3% absolute and -2.3% relative to the SP500
While Reflation’s Rollover wasn’t much in basis points of headline “inflation” either, being long of “reflation” from the peak of inflation expectations with the UST 10yr yield at 2.96% in FEB was a terrible portfolio position to take.
Our job as your Global Macro Risk Manager is to try to help you avoid getting smoked.
That’s the whole point about our Quarterly Macro Themes product. It’s to proactively prepare you for market risks that are becoming A) increasingly probable in our data driven model, but are priced as B) improbable by consensus.
To review, our Q1 Macro Themes were:
- Reflation’s Rollover (Part II)
- #GlobalDivergences
- Underweight EM
“So”… I think we did our job, especially with Themes 1 and 2. Theme 3 is starting to get more interesting by the day as the US Dollar continues to make a series of higher-lows. Long EM (Emerging Markets) wouldn’t like a breakout in the US Dollar.
In fact, if inverse correlations and carry trades are still trending, there aren’t many things in Global Macro that would enjoy a breakout in USD. That said, before it breaks out, it needs to bottom.
Is The US Dollar Bottoming? That question will be one of our Q2 Macro Themes that we’ll introduce next Tuesday (the @HedgeyeTV video presentation will be at 2PM EST, ping for access).
Per Hedgeye Research Jedi, Ben Ryan:
“Peak Dollar bearishness came midway through Q1 which was driven by carry trades and fund flows associated with the low-volatility, global growth accelerating backdrop of 2017. We’ll outline reasons and provide specific set-ups to exemplify why a reversal in the US Dollar continues to be a major risk to aging consensus fund flow narratives.”
That’s right. Our #GlobalDivergences call (which we’ll reiterate as a Macro Theme again in Q2) feeds the beast of a potential USD bottoming call. We’re quite happy that the “Globally Synchronized Recovery” crowd disagrees with that.
What are a few other big macro things that consensus doesn’t agree with us (yet) on?
A) That both Global Growth & Inflation expectations have put in a cycle peak
B) That US GDP growth could drop to +1.56% q/q SAAR (headline) in Q118 vs. +2.9% in Q417
Yep. After being higher than consensus on US GDP growth for 5 quarters in a row, now we’re the lowest on Wall Street from a headline nowcasting perspective.
While the sequential slow-down in headline GDP is largely a function of how good the prior 3 quarters were in terms of US #GrowthAccelerating (our Top 2017 Theme), I’m not convinced that Macro Tourists will understand the bean counting on that.
With Trump fans trumpeting the +3% US GDP prints for the past 3 quarters, #NeverTrump people would absolutely love to see a +1% handle on GDP. They’ll be able to blame everything from Stormy Tariffs to the headline of the day…
In the very short-term manias of mainstream media moments, these headlines can have tremendous behavioral impact. There have been fantastic market opportunities in those too.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.74-2.84% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
DAX 115 (bearish)
VIX 16.53-26.43 (bullish)
USD 88.59-90.20 (neutral)
Oil (WTI) 61.04-66.64 (bullish)
Copper 2.93-3.08 (bearish)
AAPL 162.69-172.77 (bearish)
AMZN 1 (bullish)
FB 145-165 (bearish)
GOOGL (bearish)
TSLA 250-299 (bearish)
Bitcoin 7 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
