The Fed vs. The Cycle

11/29/18 07:55AM EST

“You may hate gravity, but gravity doesn’t care.”
-Clayton Christiansen

Powell gives the market dovish reasoning to believe why they shouldn’t have been long either US or Global Growth (and/or short US Treasuries) for the past 2 months… and that’s the beginning of the next bull market in Tech stocks? #cool

I’ll fade that hope this morning and stay with the #process. 

If both the Global and US economies remain in #Quad4, you should simply stay positioned for #Quad4. If growth and inflation slow faster, bond yields will go down faster – and Powell’s dovish coos will get Treasury Bond Bulls paid.

Back to the Global Macro Grind… 

The Fed vs. The Cycle - 11.28.2018 Quad 4 rhino cartoon

CLIENT: “So my Old Wall brokers called and told me to buy stocks (again) yesterday because the Fed going dovish for all the reasons why I shouldn’t have been bullish for the last 2 months is the catalyst.” 

RISK MANAGER: “Interesting, what stocks did they tell you to buy?” 

CLIENT: “Oh, Tech stocks, Energy stocks – and some Industrials too… because we have Trump/Xi this weekend.” 

RISK MANAGER: “Oh, ok. Do you know what those stocks do when the Fed goes dovish in Quad 4?” 

CLIENT: “No, can you remind me?” 

Sure. As opposed to making brokered, banked, and un-back-tested “calls” like those, our independent research and risk management #process is designed to help you make patient decisions when your competition is panicking.

I don’t want to spend too much time reviewing what should be obvious this morning to anyone writing down what’s actually happening after another 1-day panicking-of-the-new-narrative-seeking-bulls, but here’s a quick recap:

  1. After US stocks had another bounce to lower-highs on decelerating volume, Chinese stocks dropped -1.3%
  2. After a small correction from its Quad 4 in Q4 highs, the US Dollar has resumed its ascent
  3. A disastrous #Quad4 Deflation of Oil continues (WTI down -35% since OCT)
  4. Both short and long-term Treasury Yields are hitting fresh Quad 4 in Q4 lows
  5. And the Quad 4 in Q4 economic data continues to roll in… 

CLIENT: “Oh, right. The data. Please tell me more about the data.” 

RISK MANAGER: “No problem, here you go – Darius Dale has been preparing for this part of the season, for the entire season.” 

“Hey fellow Data Dependent’s, thanks for checking in.

Regarding Powell’s comments, diligent study of the last 3 economic cycles reveals the Fed ending its tightening cycle was indeed a panacea 2/3rds of the time (i.e. in the late 80’s and in the mid-2000’s). The other 1/3 of the time matters too: 

A) When I layer on the context of actual economic activity via our historical GIP Model regime data, I see that the US economy was in a favorable Quadrant for risk assets 60% of the time from the cessation of tightening to the eventual ending of those two cycles: in Quads 2-3-1-4-2 in the five quarters from FEB ’89 through 1Q190 and in Quads 4-1-3-2-1 in the five quarters from JUN ’06 though 3Q07.

B) Then when I look at the Fed pausing in MAY of 2000 – i.e. the one time ending rate hikes didn’t matter to the stock market – that was in the context of the US economy being in Quads 2-3-4-4 in the four quarters ended 1Q01. The purpose of this note is to alert investors to the fact that the aforementioned path is much more akin to our current dour outlook of Quads 4-4-3-3 in the four quarters ended 3Q19E. 

All told, as I wrote in my 11/27 note, investors would be remiss to analyze and act upon Fed policy pivots in a vacuum. The GDP, CPI, and corporate Profit Cycles matter most and Powell’s less-hawkish comments today have little to no bearing on our forecasts for either.” 

CLIENT: “Wow, thanks – I haven’t read that anywhere else.” 

Of course you haven’t. That’s the point. The Old Wall didn’t make the Quad 4 in Q4 call back on SEP 27th… because they don’t even know what the damn quads are! Whereas everything we do and say depends on back-testing it against our own process. 

They may hate me and hate that I moved to Long Treasuries, Short Junk (instead of buying every draw-down in Tech Stocks) when they were mostly all talking up the “risks of rates breaking out to the upside” for the last 2-3 months… 

But economic gravity does not hate. It just doesn’t care. 

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

UST 10yr Yield 2.98-3.10% (bearish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 53.58-55.60 (bullish)
Shanghai Comp 2 (bearish)
VIX 17.09-23.68 (bullish)
USD 96.00-97.50 (bullish)
EUR/USD 1.11-1.14 (bearish)
Oil (WTI) 48.06-53.91 (bearish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

The Fed vs. The Cycle - 11.29.18 EL Chart

© 2020 Hedgeye Risk Management, LLC. The information contained herein is the property of Hedgeye, which reserves all rights thereto. Redistribution of any part of this information is prohibited without the express written consent of Hedgeye. Hedgeye is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information.