Don't Oversimplify Your Process

“The goal is to simplify but not oversimplify.”
-Benoit Mandelbrot

 I’m almost 20 years into this gig and I can assure you that getting macro markets more right than wrong over the long-term is not simple. If the answer was as simple as using simple-moving averages, I’d save myself a lot of time and use those.

 So what should you use? Mandelbrot taught me that “the key to it is multifractals” (or what I call being multi-factor, multi-duration). Remember, “the definition of a fractal: a pattern or object whose parts echo the whole, only scaled down…

 By contrast, a multi-fractal has more than one scaling ratio in the same object – some parts of the object shrink quickly, others slowly” (The (mis)Behavior of Markets, pg 208). Indeed, sometimes risk happens slowly, then all at once. 

Back to the Global Macro Grind…

 In addition to Macro Mondays (youge process day @Hedgeye), I was thinking about doing Fractal Fridays. Then I thought about working every Friday this summer … and bagged the idea. #golf

 You see, when I write about how the principles of power-laws and fractal geometry have influenced my Global Macro Risk Management #process over the years, I write less about what to do next – and more about why I’m doing what I’m doing.

 I’ll always make time for that. But I also trust and respect that many of you already get why I do what I do and you want to get into applying the principles of the process so that we can save and make more money.

 So let’s get on with it this morning! Here are 10 Big Macro things to think about:

1. “Dow Bro! It’s down for 8 days in a row bro!” (and it broke their Moving Monkey levels too). No worries guys. The fractal guys finally registered an immediate-term #oversold signal on red yesterday so the Dow is set to bounce into month-end.
    
2. Month-end? Yep. That always matters. Winners like US Consumer Discretionary (XLY +5.4% month-to-date) have a central tendency to continue to win while losers like US Industrials (XLI down -2.9% month-to-date) just look like losers.
   
   
3.  Energy Stocks (XLE) were losers in June (down -3.1% month-to-date) but not losers for the quarter. I’ll be making the decision to keep (or not to keep) Energy in my Top 3 Sector Style picks (long side) on our Q318 Macro Themes call next week.
   
   
4.  REITS (VNQ) are green so far in June (up +1.4% for month-to-date) after A) UST 10yr Yield reiterated signaling lower-highs and B) our @Hedgeye TREND signal on VNQ went from Bearish to Bullish in a potentially major Phase Transition. Stay tuned.
   
   
5.  US Tech (XLK) had another rock-solid month and quarter = +1.6% month-to-date and +11.1% YTD and will remain in my Top 3 Sector Style picks (alongside Consumer Discretionary) in our Q3 Macro Themes deck.
   
   
6.  NASDAQ and Russell 2000 continue to signal higher-highs as being long US Domestic #GrowthAcccelerating in Q2 of 2018 continues to pound Chinese, European, and EM Equity #GrowthSlowing Equities. No change to our views there.
   
   
7.  Short Spain? Yep. We’ve been bearish on Spanish stocks for almost a year now. They are down another -0.7% this morning and, get this, down -17% since last summer when the entire edifice of Old Wall consensus said “Buy Europe.” #EuropeSlowing
   
   
8.  Short Singapore? Yep. No bounce there this morning with the Singapore Straits Times Index down a nasty -7.1% in the last month alone. Philippines stock market is down -7.7% in the last month too. EM & #ChinaSlowing reiterated.
   
   
9.  Oil (WTI) is +1.0% this morning as OPEC meets in Vienna and, as I outlined yesterday, it’s either going to hold @Hedgeye TREND support of $65.87/barrel or fail here and potentially undergo a Bullish to Bearish @Hedgeye TREND Phase Transition.
   
   
10.  10YR Yields continue to diverge globally as our #GlobalDivergences and #UnderweightEM calls continue to manifest across reported growth and inflation data. Italian and Greek 10yr Yields down this morning, but this risk-on movie is not over. 

All of this is happening within the backdrop of our ongoing #StrongDollar view. People can explain the Russell’s Q2 breakout via a breakout in the US Dollar or a break-down in Global Growth relative to the USA punching out a peak cycle growth rate…                     

Since Dollar strength and a widening relative growth spread aren’t mutually exclusive, I’m cool with both explanations. 

That’s a multifractal pattern too. Big Macro fractal patterns, themes and trends aren’t simple to see when they originate, but they become easier to understand with time and space. Their parts ultimately echo the whole. 

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

UST 10yr Yield 2.87-2.99% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Energy (XLE) 73.07-77.15 (bullish)
REITS (VNQ) 78.25-80.40 (bullish)
Industrials (XLI) 72.05-74.59 (bearish)
DAX 124 (bearish)
VIX 12.06-14.99 (bearish)
USD 93.40-95.10 (bullish)
EUR/USD 1.14-1.17 (bearish)
Oil (WTI) 64.50-67.26 (neutral)
Nat Gas 2.89-3.03 (bullish) 

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer