“Memory is the true justice… or the creator of new horrors.”
-Richard Flanagan 

That’s a quote from a soldier in The Narrow Road To The Deep North that Richard McGregor uses in the preface of a timely/topical book I’m reading titled Asia’s Reckoning. I highly recommend it.

“How does it end? More to the point, where does it end? There is no shortage of scenarios in which America’s postwar world comes under challenge and starts to crack.” –Richard McGregor 

I don’t know how and when it “ends.” 

Thankfully that’s not what our clients pay us to opine on. What they pay us to do is measure, map, and monitor economic cycles in China, Europe, USA, etc. 

Ultimately, economic cycles have causal impacts on both political cycles and government policy moves. So we want to stay 3-12 months ahead of those as best we can. 

Back to the Global Macro Grind… 

I’m in Chicago, IL for Day 2 of meetings with Institutional Investors. The general guideline for a 1-hour meeting is to: 

A) Review The #Process (4 Quadrants, TRADE/TREND/TAIL Signals, #Behavioral Sentiment Overlays, etc.)
B) Explain the most probable economic scenario (Quads) for each country that the client is interested in
C) Outline what we’d be long/short in all of those countries across Asset Classes, Sector Styles, and Factor Exposures 

How Does It End? - zef

Our meetings generally do not start with open ended political questions like: 

A) How does it end for Xi and China?
B) How does it end for Trump?
C) How does it end in the Middle East? 

As you might imagine, starting any data-driven meeting with what I personally think about political “endings” might mean the end of my adding value to someone’s investment and risk management process. 

That said, if someone is politically inclined and wants to use our economic and market-timing tools to augment the rigor of their political opinions, all the power to them!

One example of this from a meeting yesterday (where the client clearly did not like Trump) was a Portfolio Manager concluding that: 

A) If we’re right and the US economy continues to slow into Quad 3 into a Presidential election year … and
B) If further #GrowthSlowing means the Fed has to get more dovish (from here) in kind to inflate asset prices…
C) Then cost of living (gas prices) is going to drive the “inequality” wedge in America deeper and deeper 

And… the rest of his political thoughts followed a path we’re hearing more and more about in meetings these days – and that’s that the political “end” for Trump could result in truncating and/or “ending” something yuuge like Tax Reform… 

Again, that’s not how we make economic, market, and policy calls. But that’s how some people use our process.

Moving along… because the Early Look is late this morning, here were the Top 3 Things (an early morning email I send our top Institutional clients usually before 6AM EST) in my notebook:

  1. CHINA – 2nd down day in a row for Chinese Stocks taking the 2-day decline post Politburo meetings to -2.2% in Shanghai as locals apparently didn’t like Xi’s comments about “tightening” – it’s not clear if he was misquoted but it is clear that Copper just failed @Hedgeye TREND resistance (again) in the last 48hrs…
  2. ENERGY – post a nice alpha day for both Oil and Energy Stocks (XLE +2.1% on the day to +19.6% YTD), this isn’t the day to buy either as both are close to the top end of their respective @Hedgeye Risk Ranges; that said, consensus remains underweight Energy and needs to keep buying the damn dips as the US economy digs deeper into #Quad3
  3. 10YR – yields still in Counter @Hedgeye TREND bounce mode from their global lows back in March (German 10yr +3bps this morning to +0.05%) with the UST 10yr Yield risk range = 2.45%-2.63%; what’s the next catalyst to see 2.45%? Existing Home Sales #slowed yesterday and we’re at +1.62% for Friday’s US #GrowthSlowing headline GDP report 

Instead of telling you how it ends, I’ll stick with telling you how the process is playing out. 

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

UST 10yr Yield 2.45-2.63% (bearish)
UST 2yr Yield 2.28-2.44% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 56.75-58.42 (bullish)
REITS (VNQ) 83.90-88.98 (bullish)
Energy (XLE) 66.81-68.92 (bullish)
Financials (XLF) 26.25-27.75 (bearish)
Shanghai Comp 3147-3295 (bullish)
VIX 11.35-15.52 (bearish)
USD 95.80-97.50 (bullish)
EUR/USD 1.11-1.13 (bearish)
USD/YEN 110.91-112.52 (bullish)
GBP/USD 1.29-1.31 (bearish)
USD/CHF 1.00-1.02 (bullish)
Oil (WTI) 61.95-66.31 (bullish)
Gold 1 (bullish) 

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

How Does It End? - Chart of the Day