“Each of these cycles rises and falls; each causes the others to rise and fall.”
-Howard Marks
I’ve learned a lot from economists. There are the Academic (linear) Econs who have never risk managed markets successfully across cycles in their lives. There are the Market Practitioner Econs (like Marks and Soros). Then there are the Macro Tourists!
The Tourists are special. Instead of going from cycle to cycle, they bounce from CNBC headline to headline. This morning they’ll chase the US Equity and Oil futures to lower-highs on tanker attacks. #fun
One of the most insightful concepts that links macro-economic data to markets is what Soros calls Reflexivity. That’s essentially what Marks is saying in the aforementioned quote. Each cycle is affected by the rise and fall of other cycles.
Back to the Global Macro Grind…
Yesterday was Day 2 for DD and I meeting with NYC based clients. One of our best meetings was with one of the world’s longest standing Credit Hedge Fund teams. If only we could broadcast a LIVE meeting like that @HedgeyeTV!
We didn’t discuss anything but cycles and catalysts. That’s all they care about – the cyclical TREND vs. all the immediate-term TRADEs potentially embedded therein. We didn’t spend 1-minute on Mexican Trade Deals/Wars.
One of the most important parts of the discussion/debate (these guys aren’t Nodders) was differentiating what Macro Tourists think they see from a “YTD” perspective vs. The Cycle itself.
What the best investors in the world do is risk manage the Full Cycle, across The Quads. What does Full Cycle Investing mean? Again, think of it in Quad terms:
A) The Chinese Economic Cycle peaked in 2017 and has been slowing (Quads 3 and 4) for 9 quarters in a row
B) The European Economic Cycle peaked in 2017 and has been slowing (Quads 3 and 4) for 7 quarters in a row
C) The Emerging Market Cycle peaked in 2017 and has been slowing (Quads 3 and 4) for 6 quarters in a row
D) The US Cycle peaked in Q3 of 2018 and has been slowing for 3 quarters in a row in demand and inflation terms
That’s why the “long-term” investors who sold China, Europe, and EM at their respective equity market highs in 2017 and re-allocated to US Growth Equity (Quads 1 and 2 Sector Styles and Factor Exposures) crushed it in 2018. #GlobalDivergences
It’s also why those same longer-term investors who saw Quad 4 in Q4 of 2018 coming in the USA, double-crushed it by selling Cyclicals and re-allocating to Treasuries, REITS, and Utilities.
Since the Old Wall dude pitching “YTD” numbers probably doesn’t even know what Quad 4 is, here’s the return profile that simplifies the #PeakCycle US High Beta Equity to Treasuries-and-Bond-Proxy pivot most obviously:
A) The Russell 2000 (a broad measure of US “stocks”) is currently down -12.7% since SEP of 2018
B) Utilities (XLU) are currently on a +16.9% run since SEP 26 of 2018
That’s not a “relative” return since we made the call to Buy Utes (XLU) on SEP 27th of 2018. That’s an absolute +16.9% return vs. Russell (IWM) DOWN -12.7% since the US Growth, Inflation and Earnings Cycle peaked in Q3 of 2018.
Forget hedge fund performance and fees “under pressure.” You could have charged 5 and 50 for that.
Again, no stock picking required. Just measuring and mapping The Cycle and how Sector Styles and Factor Exposures rise and fall within The Cycle. Layer in some fancy stock picking on top of that and I’d say asking for 6 and 60 might fly!
If you’re not into the reminder on the Full Cycle Investing thing and want something short-term, how about yesterday?
- Semiconductor Stocks (SMH) down -2.1% on the day = Quad 4 Shorts
- Energy Stocks (XLE) down -1.3% on the day = Quad 4 Shorts
- Financials (XLF) down -1.0% on the day = Quad 4 Shorts
- Utilities (XLU) up +1.3% on the day = Quad 4 Longs
- REITS (VNQ) up +0.3% on the day = Quad 4 Longs
But, but, KM, REITS and Utilities are “expensive.” You’re damn right they are. We cycle people love that. Especially during a Quad 4 hurricane (bond yields crashing), insurance against your prior pro-cyclical portfolio gets more and more expensive!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.03-2.19% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
Utilities (XLU) 58.11-61.00 (bullish)
REITS (VNQ) 86.20-90.32 (bullish)
Financials (XLF) 25.49-27.82 (bearish)
Shanghai Comp 2811-2942 (bearish)
VIX 14.50-20.01 (bullish)
Oil (WTI) 50.15-54.86 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
