• Global ‘Black Hole’ Risk Rising: A Discussion With Danielle DiMartino Booth

    Former Fed advisor Danielle DiMartino Booth will discuss key economic developments and the outlook for Fed rate cuts with Hedgeye CEO Keith McCullough.

“Wild animals never kill for sport.”
-James Anthony Froude 

Good quote… but, not to be confused with either the new beginning of the bull market that just ended or something with scientific standing (like the Froude Number by William Froude), James Anthony Froude was simply a storyteller. 

Do you like it when people tell you a story you want to hear? In some parts of my life, I sure do. I just don’t want a political ideologue or Perma Bull salesman telling me what to do with my portfolios. 

The crucial point recognized by William Froude was that because the underlying physics remains the same, objects of different sizes moving at different speeds behave in the same way if their Froude numbers have the same value.–Scale, pg 74 

Back to the Global Macro Grind…

After a huge selling opportunity last week… and after the 4-day selloff in US Equity Momentum, High Beta, and Tech Stocks (all underweights or shorts in Quad 4)… mathematically speaking, what’s changed this morning? 

  1. SP500: there’s less downside in the immediate-term @Hedgeye Risk Range than there was 4 days ago
  2. US DOLLAR: there’s less upside in the immediate-term @Hedgeye Risk Range than there was 4 days ago
  3. OIL: there’s less downside in the immediate-term @Hedgeye Risk Range then there was 4 days ago 

Of course time and price changes. So does the economic data. But there is absolutely nothing in either the GROWTH or INFLATION data in the USA that has changed our Quad 4 in Q4 outlook. 

After The 4-Day Selloff - 11.13.2018 nesting bull and bear cartoon

Short at lower-highs and cover lower, eh. 

Maybe we’ll get another one of those bounces to lower highs in the next 4 days. Since I’m in Boston for 3 days, I’d certainly appreciate a bounce before I walk into certain meetings! There’s nothing like a bounce to get people to believe a selloff is over. 

Since we’re the only firm to have gone bearish on China, EM, and Europe pre going bearish on US growth and inflation, it’s important to contextualize the recent 4-day selloff in the US as only part of the 2018 Global #GrowthSlowing story. 

As of this morning’s market prices, here’s a summary of some of the crashing interconnected parts: 

  1. Chinese Stocks (Shanghai Comp) have crashed -26.1% since JAN
  2. South Korean Stocks (KOSPI) have crashed -20.4% since JAN
  3. Italian Stocks (MIB Index) have crashed -22.4% since MAY
  4. Greek Stocks (ATG Index) have crashed -28.9% since JAN
  5. Oil (WTI) has crashed -26.9% since OCT 

And you thought having to be up +15% (from here) in the Russell 2000 to get back to break-even with where the IWM chart peaked at the end of AUG was bad? Oh boy… 

Let’s forget that the NASDAQ is down -11.2% since the end of AUG for a second and ask ourselves why these macro market crashes started in either JAN or MAY of 2018? 

A) In JAN of 2018, the “globally synchronized recovery” peaked and rolled in rate of change terms
B) In MAY of 2018, “global inflation” expectations peaked and rolled in rate of change terms 

A good market-based proxy for inflation expectations is the CRB Commodities Index (because it has 19 commodities in it). It peaked in MAY of 2018 and has corrected almost the exact same as the NASDAQ has since (-11.1%). 

Is all of this irony or interconnectedness?   

Are there self-similar sets in motion as a result of growth and inflation expectations slowing?

“The scaling methodology introduced by Froude has now evolved to become a powerful and sophisticated component of the toolkit of science and engineering and has been applied with great effect to a very broad and diverse range of problems.”

-Scale, pg 75 

No offense to the wizards of Old Wall Street who are going to give me a magic market “multiple” for where the US stock market stops going down (after not telling me where it would stop going up), but I think I’ve moved on from that kind of debate. 

In other real-time market and economic (data) news this morning: 

  1. Germany’s preliminary y/y GDP for Q3 of 2018 slowed to +1.1% from +2.3%, so the peak of that cycle is in
  2. Eurozone Industrial Production for SEP slowed to +0.9% y/y and continues to slow alongside China’s economy
  3. US Treasuries are falling, compressing the Yield Spread (10s minus 2s) back down to +25 basis points 

You’d have to work at the ECB or without an internet connection to not know that Europe is slowing at this point. But what about the fine folks at the Fed? When are they going to wake up to the reality that they are tightening into Quad 4

The aforementioned Yield Spread is indeed what Powell calls a “market signal”, so if you think the recent 10 basis points of Yield Curve compression (since Oil crashed) is going to matter to markets, just wait until the Fed inverts the curve! 

US Federal Reserve voters never kill inflation expectations for sport. They believe they save market lives. And while I believe the Powell Put is a lot lower, I also believe that they believe what they believe. So stay tuned for the Fed to flinch in 2019.

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

UST 10yr Yield 3.05-3.25% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7127-7433 (bearish)
Utilities (XLU) 53.07-55.98 (bullish)
Consumer Staples (XLP) 54.90-57.30 (bullish)
Industrials (XLI) 69.13-73.60 (bearish)
Shanghai Comp 2 (bearish)
VIX 15.67-23.82 (bullish)
USD 95.50-97.75 (bullish)
EUR/USD 1.11-1.14 (bearish)
Oil (WTI) 55.52-62.14 (bearish)
Nat Gas 3.42-4.22 (bullish)
Gold 1192-1224 (neutral 

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

After The 4-Day Selloff - 11.14.18 EL Chart