“Don’t reward bad behavior.”
-Elliott Spitzer
Ha! Now there’s a guy I should be looking to for some advice. Perversely, if he was doing the rounds on Wall St. like I was yesterday, some people would definitely listen to him … if he gave them a road map on how the Fed is going to bailout this stock market decline.
Door to door, meeting to meeting, this was the general path of Institutional Client questioning:
“Nice call on Quad 4. Provided that you continue to be right on the data, doesn’t that mean the Fed is one and done in December? I heard they might not even go in December… doesn’t this setup great for a big stock market rally? Where do we bottom?”
Back to the Global Macro Grind…
If you google “Bailout Quotes”, you see that ‘People Also Ask’:
- How much did Goldman Sachs get in bailout money?
- How much did the bailout cost?
- How much did banks get in bailout?
These aren’t Institutional Investors. All they really want to know is when the Fed goes dovish and why that’s not good for stocks. Meanwhile, I’m already positioned for the Fed going dovish, in the right kinds of stocks (Bond Proxies like Utes and REITS).
Obviously as the Mr. Market starts to discount that:
- Growth is slowing
- Inflation is slowing
- Profits are slowing
Then longer-term interest rates:
A) Fall … and
B) The Curve compresses
After a two-day bounce in most things that have been crushed in Quad 4, the Yield Curve (10s/2s kind) is compressing to a fresh YTD low of +12 basis points wide this morning.
To put that 12 beeps in context:
- The Curve was +80 basis points wide in FEB (i.e. as the “globally synchronized recovery” peaked)
- The Curve was +55 basis points wide in MAY (i.e. when Commodities and Inflation Expectations peaked)
On those Inflation Expectations falling, here’s your latest data dump from @Hedgeye Jedi Darius Dale:
Domestic Inflation Resumes Its Downtrend In November: Headline CPI decelerated -30bps to 2.2% YoY in NOV, driven down by a -566bps deceleration in Energy CPI (to 3.18% YoY), a -268bps deceleration in Wireless CPI (to -3.3% YoY), as well as a -46bps deceleration in Transportation Services CPI (to 3.35% YoY). It’s nice to see that our inflation nowcasting tools continue to be more accurate than consensus fears of accelerating wage growth spilling over into reported inflation over the short-to-intermediate term – a faulty assumption we’ve long since debunked. Core CPI ticked up marginally to 2.2% YoY – a reminder that, as we currently stand, the Fed does not have nearly as much air cover in the form of reported economic data to support a materially dovish pivot at next week’s FOMC meeting. Core PCE – the Fed’s preferred inflation metric – is probably the only data point they could hang their hat on currently after it ticked down to an 8-month low of 1.78% YoY in OCT. All told, we remain of the belief that the Fed will tighten into a #Quad4 slowdown – which has historically been a really negative [and unnatural] catalyst for risk assets, across economies. Absent a material decline in equities or a widening of credit spreads from here, it’s unlikely the Fed will have the ability to fully adopt a dovish policy bias until 4Q18E Headline GDP prints a 1-handle on January 30th (according to our latest nowcast). That could set the stage for risk assets to make capitulatory lows to start the year – a la 2016.
I know, for some of you who have this forwarded to you for free, that’s just too much data! Btw, if you’d like to pay for all of the data-driven components and predictive tracking algos that lead me to my morning research rants, ping
Back to what a lot of people (and I mean a lot!) are hoping comes after the aforementioned A and B parts of the story. Rates fall, Curve compresses… and C) Fed goes dovish!
Yes. But what happens when the Fed is going dovish (from hawkish) and… the economy continues to slow?
I know memories on the Old Wall can be either selective or short, but what happened coming out of the late 2007, 2010, 2015 cycle slow-downs? What if you “bought stocks” on the Fed bailout theory in JAN 2008, JAN 2011, and JAN 2016?
Since I don’t believe that any cycle is the same and I do believe that, instead of chasing other people’s narratives, we should continue to measure and map A) what economic Quad we’re heading toward and B) what my quantitative market signals are suggesting in kind…
I don’t believe that JAN-MAR of 2019 is going to be anything like anything other than JAN-MAR of 2019. And, for now, my signaling process is suggesting lower-lows in all of the parts of the US Equity market that we’re still short, including US Tech.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.78-3.03% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
REITS (VNQ) 79.12-83.41 (bullish)
VIX 16.34-25.72 (bullish)
GBP/USD 1.24-1.28 (bearish)
Oil (WTI) 49.18-53.58 (bearish)
Nat Gas 4.08-4.75 (bullish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
