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

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

“China must never forget, because it can never be humiliated again.”
-Tom Miller

If you’re looking for a timely and topical read on China’s long-game, I recommend a book I read over the holidays titled China’s Asian Dream, by Tom Miller. Xi’s 30-year plans won’t be easily derailed by short-term US antagonism. 

The aforementioned Miller quote refers to a popular Chinese slogan, “wuwang guochi”, which means ‘never forget national humiliation.’ “This visceral four-character phrase is taught in schools to this day.” (pg 7)

Despite what Trump tweeted about “big progress” with China, there is no progress in either this morning’s economic data or how markets are responding to it. China and Europe are still #slowing and the USA remains in Quad 4.

Back to the Global Macro Grind…

While there was another short-term bounce in Global Equity markets (to lower-highs) into what turned out to be a train-wreck-year-end to be long of late-cycle Global Equity Beta, our intermediate-term call to be short stocks and long Treasuries is intact.

Short US Equity Sector Styles that get crushed in Quad 4, that is. To review our data-driven risk management process in motion, here’s how our Top 3 Sector Shorts did during Quad 4 in Q4 of 2018: 

  1. Energy (XLE) crashed -24.3% in Q4 of 2018
  2. Industrials (XLI) had a draw-down of -17.8% in Q4 of 2018
  3. Tech (XLK) has a draw-down of -17.2% in Q4 of 2018

And no, we’re not buying those sectors because someone might call them “cheap” (on the wrong numbers) this morning. “Valuation” is not a macro catalyst. Accelerations and decelerations in both the economic data and our market signals are. 

If you had a great 2018, you obviously have an evolved data-driven process and get that. If you’re new to subscribing to our process and haven’t implemented that risk management overlay into what it is that you do, you should. Timing matters.

So let’s start 2019 doing the standard @Hedgeye A/B test:

  1. What’s the economic data doing (in rate of change terms) this morning?
  2. What’s the multi-duration @Hedgeye TRADE, TREND, TAIL signal saying in kind?

On the ROC (rate of change) PMI data: 

  1. China’s PMI #slowed to 49.4 in DEC to its lowest level since FEB of 2016
  2. Russia’s PMI #slowed to 51.7 in DEC vs. 52.6 in NOV
  3. India’s PMI #slowed to 53.2 in DEC vs. 54 in NOV
  4. Australia’s PMI #slowed to 54.0 in DEC vs. 54.6 in NOV
  5. Indonesia’s PMI #accelerated to 51.2 in DEC vs. 50.4 in NOV  
  6. Turkey’s PMI #slowed to 44.2 in DEC vs. 44.7 in NOV
  7. Spain’s PMI #slowed to 51.1 in DEC vs. 52.6 in NOV
  8. France’s PMI #slowed to 49.7 in DEC vs. 50.8 in NOV
  9. Germany’s PMI #slowed to 51.5 in DEC vs. 51.8 in NOV
  10. Italy’s PMI #accelerated to 49.2 in DEC vs. 48.6 in NOV

If you only want to look at the #accelerations (Indonesia and Italy), that’s cool. You can see whatever you want to see, obviously. I choose to consistently contextualize those data points within intermediate-term @Hedgeye TRENDS (3 months or more)…

And they’re still both Bearish @Hedgeye TREND.

My market signal confirms not to buy crashing Italian Equities too: 

  1. Italian stocks down -1.5% this morning taking their crash to -26.4% since MAY of 2018 = Bearish @Hedgeye TREND
  2. Chinese stocks down -1.2% this morning taking their crash to -30.7% since JAN of 2018 = Bearish @Hedgeye TREND
  3. German 10yr Bund Yield smoked for another -7 basis point drop to 0.17% 

Yeah, that’s gotta be a killer for the “I’m short German Bunds because they’re expensive” crowd. But it’s great for us… and really, that’s all I care about with the UST 10yr Yield of 2.66%. Maybe their “relative value” teams should get long the Long Bond! 

Since long-term sovereign yields care more about inflation vs. deflation expectations than they care about Tower Tweets, German and French Yields collapsing to new lows on the long-end of the curve this morning are looking at the same ROC data we are: 

  1. German inflation (CPI) #slowed -0.5% to +1.2% year-over-year in DEC
  2. Spanish inflation (CPI) #slowed -0.5% to +1.7% year-over-year in DEC 

The Euro is down on that ROC data too. It remains Bearish TREND @Hedgeye as it has been since April of 2018. Don’t forget that the hope for the “Fed to go dovish” has to be put in relative context to what the ECB does in response to the European data. 

And don’t forget to continue to evolve your investment process this year. There’s tremendous market share to take in the AUM space from those who are showing no progress. 

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

UST 10yr Yield 2.64-2.84% (bearish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Industrials (XLI) 60.28-66.60 (bearish)
Energy (XLE) 54.06-59.92 (bearish)
Shanghai Comp 2 (bearish)
DAX 108 (bearish)
VIX 21.51-36.23 (bullish)
USD 95.50-97.13 (bullish)
EUR/USD 1.12-1.15 (bearish)
Oil (WTI) 41.72-48.37 (bearish)
Nat Gas 2.91-3.79 (bearish)
Gold 1 (bullish)
Copper 2.59-2.72 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

No Progress, Still #Quad4 - Chart of the Day