“It was as if an avalanche was coming at us.”
-Bank of England Guy (1992)
That’s a quote from an excellent chapter in Niall Ferguson’s The Square and The Tower titled “Breaking The Bank of England.” Ferguson takes us back to how George Soros became a billionaire in the FX market. It’s an epic market history, indeed.
Does the economic consensus born out of the market’s TREND matter? Big time. Per Soros, “Reflexivity is, in effect, a two way feedback mechanism in which reality helps shape participants thinking and the participants thinking helps shape reality.”
“Most of the time I am a trend follower”, Soros observed… “but all the time I am aware that I am a member of a herd and I am on the lookout for inflection points…” (pg 326).
Back to the Global Macro Grind…
From a risk management #process perspective, I call inflection points in @Hedgeye intermediate-term TRENDs Phase Transitions. Both incoming economic data and daily market signals provide me with what aspires to be an objective lookout.
You can call it an avalanche, tsunami, crash, or whatever… when something big in macro undergoes a trending Phase Transition from Bullish to Bearish @Hedgeye TREND, you do not want to be long of that disaster exposure in your portfolio.
Many of those disasters (China, Europe, EM) are bouncing this morning. There’s no irony in that given:
- Most Bearish @Hedgeye TRENDs signaled immediate-term #oversold this week… and
- Today is both month and quarter-end
Is there a central tendency for Institutional Portfolio Managers to not sell their largest holdings in the last days of the month and the quarter? What will they do on Day 1, 2, and 3 of the new quarter? Will they stay with losers or find new winners?
One of the biggest losers for a full year now has been LONG “cheap” European Equities (especially rate sensitive European Financials) vs. under-weight and/or SHORT “expensive” US Growth Equities.
Perversely, as the European economy continues to slow, there will be a time to buy the living daylights out of “cheap” European exposures (they need to get cheaper first). And, no, the catalyst will not be “valuation.”
It will be bank bailouts and money printing.
Yep. The good ole modern era pivot of the European Central Bank (ECB) finally realizing that their Establishment Econs need to cut their growth and inflation outlooks, panic, and protect the house.
German and Swiss sovereign bond yields have been signaling this since the European Inflation/Deflation Cycle peaked around this time last year, don’t forget. In the last two days alone though, ECB officialdom started to leak more dovish on the margin:
- The ECB Economic Bulletin said “the balance of risk is skewed to the downside” (that’s new)
- The ECB is “considering buying more long-term bonds next year” (Reuters story this morning)
This comes on the heels of rancid mainline European consumption data for Q2:
- Spanish Retail Sales #slowed to -0.4% year-over-year in MAY vs. +0.7% in APR
- German Retails Sales #slowed to -1.6% year-over-year in MAY vs. +1.2% in APR
Those aren’t typos. Those are NEGATIVE year-over-year growth rates. If the USA was printing those “levels” of US consumption growth, the SP500 might be trading at 1000. We’d be entering a US recession.
So, with the Euro (vs. USD) and German Bund Yields having a counter @Hedgeye TREND bounce this morning, what do you do? You Sell The Bounce. You sell the bounce in rate sensitive German, Spanish, and Italian equities too.
If our predictive tracking algos on European Growth and Inflation continue to be accurate, we’re going to see some serious Quad 4 (growth & inflation slowing at the same time) economic data in Q418. Eurozone inflation is going to fall below 1% by Q119 too.
Yes, I’m on the lookout for inflections in both the economic data and market signals. Neither have me taking the other side of the Bearish @Hedgeye TREND. The ECB buying stocks into the close (like the Bank of Japan does) might!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.81-2.93% (bearish)
SPX 2 (neutral)
RUT 1 (bullish)
NASDAQ 7 (bullish)
DAX 12031-12605 (bearish)
VIX 13.36-18.92 (bullish)
USD 93.75-95.26 (bullish)
EUR/USD 1.14-1.17 (bearish)
Oil (WTI) 66.54-74.48 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
