“The world is divided into hosers and hosees. Your job as a fighter pilot is to be a hoser.”
-John Boyd
Earlier in his military service (when they called him The Ghetto Colonel), John Boyd loved teaching his fighter pilot students how to “hose the bastards” (Boyd, pg 95)
As he refined his mathematical messaging, he explained that it was all about The ROC (rate of change). Those fighter pilots who could handle when the ROC changed fastest, weren’t going to be the hosees.
While the stakes are much lower, my job as a Risk Manager of markets is to handle the heat of those rate of change moments too. Is it a TRADE or a TREND? Stay with the #process or panic? After a bad day, now what?
Back to the Global Macro Grind…
On the equity side of the market, I had a bad day yesterday. That’s pretty easy to see with Utilities (XLU) and REITS (VNQ) red during a centrally-planned-cowbell ramp. In Treasuries and Gold, I had an awesome day (new Full Cycle highs).
Now what?
As I’ve recently renamed what I do #FullCycleInvesting (all I did was rename the #process for those of you who are “longer-term” from an Asset Allocation, Sector Style, and Factor Exposure perspective), “now what” is easy to answer:
A: The Cycle
Huh? Yep. Two words with one thing. To get to what’s next, one has to have measured and mapped what got us here to begin with. It’s The Cycle, stupid.
Oh, your Fama/French friends who have been long Small Cap Value from where The Cycle peaked in Q3 of 2018 don’t like those words? Too bad. I’ll love their strategies (and all of “Value” Investing) when we’re heading into Quad 1.
Quad 4 explains why the Russell (IWM) is still down -10.9% from that cycle peak. Quad 4 economic and market conditions also fully explain why PE Powell is being pushed into rate cuts currently.
You get that the ECB, Fed, PBOC, RBA, etc. wouldn’t be either going wholesale dovish or engaged in a Currency War if:
A) GROWTH didn’t slow
B) INFLATION didn’t slow
C) PROFITS didn’t slow
Right? ‘Oh yes, KM. We do get that but … can’t “stocks” just keep going higher on Trump Tweets and cowbell?’
Of course they can. But A) “stocks” look very different from a Full Cycle Investing perspective if you define them the way modern money managers do (by sector, style, factors) and B) they haven’t gone higher without going violently lower first!
We just had the biggest December draw-down in “stocks” EVER…
And the worst month of May for US Equity Beta since the 1970s. So… if we keep getting The Cycle right, from here, with the SP500 -0.95% from an all-time high, what could possibly go wrong?
Since yesterday’s SPY ramp came on #accelerating volume (Total US Equity Volume was +11% vs. its 1-month average) and implied volatility closed at a -12% DISCOUNT to what’s been realized in the last 30 days…
The very-short-term market signal suggests that consensus is genuinely concerned (i.e. chasing) the idea that Trump Tweets and combo-cowbell of ECB and Fed easing can change the ROC (rate of change) of The Cycle to delta positive.
But, again, back to the intro of this note, is that a TRADE or The New Hope of a new TREND?
A) Is the Fed going to be able to CTRL+Print Earnings Season?
B) What if the Fed isn’t Dovish Enough today?
C) What if Trump’s Tweets are like the ones that sucked some into the April SPY highs?
I don’t know on B and C (I hope The New Hope does!), but I have 100% “conviction” that the Federal Reserve can’t print PROFIT and/or JOB growth from this stage of The Cycle. In the next 2 quarters, we’re comping The Cycle peak.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.03-2.17% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
Utilities (XLU) 59.07-61.18 (bullish)
REITS (VNQ) 87.78-90.92 (bullish)
Financials (XLF) 26.25-27.56 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 200 (bearish)
VIX 15.00-19.11 (bullish)
USD 96.30-97.43 (bullish)
EUR/USD 1.11-1.13 (bearish)
Oil (WTI) 50.76-54.81 (bearish)
Nat Gas 2.28-2.46 (bearish)
Gold 1 (bullish)
Copper 2.61-2.72 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
