“There’s this really cool thing called Bitcoin – it’s like this nerd, libertarian thing.”
-Jed McCaleb
For those of you who don’t know who he is, Jed McCaleb is one of the big players in the young history of crypto who crushed it. He created Mount Gox and also became the CTO of Ripple in 2013.
When Bitcoin was in what we called bubble territory (DEC of 2017), McCaleb’s Ripple stake put him in the world’s Top 50 richest people. That’s an incredible achievement. As a capitalist, I salute his success.
Crypto’s headline price (Bitcoin) crashed to its YTD lows yesterday. That takes its epic decline to -66% from where people were pumping and dumping it in 2017. For those who bought it up there, they only have to be up +194% to get back to break-even.
Back to the Global Macro Grind…
Whatever your political, ideological, religious, etc. leanings, in macro market risk management what is really cool is having a dispassionate #process that objectively helps you change your mind.
Unlike investing in great growth companies, macro markets have a central tendency to mean-revert. Sometimes they do that slowly; sometimes they do that all at once. Emerging market and crypto exposures are good examples of the all-at-once risk thing.
If you look back at hedge fund performance history in particular, some of the biggest flameouts have been in Emerging Markets and Commodities. We should all be aware of that humbling reality. What goes straight up can come right back down, in a hurry.
This brings me to what I’m most concerned about being long of this morning: Commodities.
To review why many of our clients have been long of Commodities since Oil started to breakout to Bullish TREND in SEP 2017:
- It’s what we call a Quad 2 move
- In Quad 2, both GROWTH and INFLATION (the 2 most important FACTOR exposures in our model) are #accelerating
- When both growth and inflation are #accelerating at the same time, commodities and bond yields are rising
- That’s why our asset allocation #process still has us A) Long Commodities and B) Short Treasuries
- That’s also why our sub-sector picking #process has us A) Long Energy and B) Short Utilities
At the US Sector Style level, yesterday would not have been a good day to be long of anything but a Quad 2 portfolio:
- Energy Stocks (XLE) led gainers +0.5% on the day to +6.9% YTD
- Utilities (XLU) and Real Estate (XLRE) led losers on the day and are -7.8% and -2.7% YTD, respectively
So rear-view looking performance obviously doesn’t concern me. What concerns me is both the relative and absolute performance opportunity going forward as the US economy moves from Quad 2 to Quads 3 and 4.
That’s a big fundamental research process concern that is based on our growth and inflation forecasts for both Q3 and Q4 of 2018. It’s one that I discuss and debate with our clients daily. It’s also one that Mr. Market’s signals are debating daily too!
Today is a critical day to have the humility to listen to Mr. Market on that front.
Today we’re going to get a hawkish headline US inflation #accelerating report. What commodities, bond yields, equity sectors, etc. do on the “news” matters more than the news itself.
Right on time (in conjunction with “news” that the market has been discounting for the last 9-10 months), my quantitative signaling #process is registering lower-highs within @Hedgeye Risk Ranges for big macro exposures like:
- UST 10yr Yield
- Oil
- CRB Index
Yes, their market price “levels” are all still signaling Bullish @Hedgeye TRENDs. But rates of change matter more to me than levels do. And, mathematically speaking, lower-highs are the only way to start to break-down the positive price momentum of a Bullish TREND.
Within the lower-high signal of the CRB Index, Ag prices (Corn, Wheat, Soy) look the riskiest. Corn’s intermediate-term @Hedgeye TREND line of support = $3.82 and it’s currently trading below that price. That’s A) new and B) not good.
Having been bullish on Corn, should I spend my entire career discussing why I should never sell it and/or be short of it? Should I come up with some crop-chain technology presentations to talk about why the price should never adopt #accelerating volatility?
Of course not. Put another way, if I did that I’d be at risk of this not so cool draw-down and crash thing that some on the Old Wall wouldn’t mind seeing me do!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.82-3.02% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Energy (XLE) 75.02-77.66 (bullish)
VIX 11.04-16.62 (bearish)
USD 93.08-94.63 (bullish)
Oil (WTI) 63.95-69.04 (bullish)
Nat Gas 2.85-3.02 (bullish)
Copper 3.03-3.33 (neutral)
Corn 3.65-3.98 (bearish)
Bitcoin 6 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
