The Quads of The Gods

07/08/19 07:39AM EDT

“It’s the language God talks.”
-Richard Feynman 

That’s what one of America’s greatest physicists had to say about calculus. “You had better learn it” said Feynman. Agreed. The ROC (rate of change) embedded in our 4 Quadrant risk management #process, is as critical as critical gets. 

While I’m in family-vacation-mode both my wife and I take turns getting some hard core reading done. The aforementioned quotes from Feynman come from what will undoubtedly be the #1 NY Times Best Seller of 2019, Infinite Powers (a calculus book)! 

Not as exciting as an Elon Musk tale or Cloud Story 4? As Cornell Applied Math guru, Steven Strogatz, goes on to remind us, “for reasons nobody understands, the universe is deeply mathematical.” That’s cool. Your Full Cycle Investing #process should be too. 

The Quads of The Gods - z 04.04.2019 the cycle cartoon

Back to the Global Macro Grind…

It might be the heart of the summer-time, but it’s still Macro Monday @Hedgeye! For those of you who are new to our measuring and mapping #process, on the 1st day of every week we review weekly macro moves within @Hedgeye TREND views. 

First, let’s start with the Global Currency market: 

  1. US Dollar Index was +1.2% last week to +1.2% YTD bouncing back to Bullish TREND @Hedgeye
  2. EUR/USD was down another -1.3% last week to -2.1% YTD and remains Bearish TREND @Hedgeye
  3. Yen corrected -0.5% vs. USD last week to +1.1% YTD and remains Bullish TREND @Hedgeye
  4. GBP/USD was down another -1.4% last week to -1.8% YTD and remains Bearish TREND @Hedgeye
  5. Swiss Franc corrected -1.6% vs. USD last week to -1.6% YTD and remains Bullish TREND @Hedgeye
  6. South Korean Won was down another -1.6% vs. USD last week to -5.2% YTD and remains Bearish TREND @Hedgeye 

As opposed to staring at the Dow in points, there’s a lot of economic information in last week’s currency market moves: 

A) US Economy - no matter what the Fed does, USD is strong when the ROC is in Quad 4
B) Global Economy - both Europe and Asia continue to #slow and their currencies remain weak in kind
C) #PeakDollar is a process that will take time and space to play out – don’t forget it’s a #CurrencyWar 

Alongside ongoing US Dollar resilience (making lower-highs within a longstanding Bullish @Hedgeye TREND), last week saw an ongoing Quad 4 weakening of inflation expectations: 

  1. Commodities (CRB Index) was -0.1% on the week (down -7.9% year-over-year) and remains Bearish TREND @Hedgeye
  2. Oil (WTI) was down another -1.6% on the week (down -10.7% year-over-year) and remains Bearish TREND @Hedgeye
  3. Copper was down another -1.9% on the week (down -8.5% year-over-year) and remains Bearish TREND @Hedgeye
  4. Wheat was down another -2.3% on the week (down -7.1% year-over-year) and remains Bearish TREND @Hedgeye
  5. Soybeans were down -3.1% on the week (up +1.0% year-over-year) and remain Bearish TREND @Hedgeye 

Right, right. Next to Elon’s storytelling, you had the trumping up of “great China progress” that evidently didn’t do jack for the things the Chinese are allegedly going to buy ungodly amounts of… 

Why do we care about The ROC (rate of change) on both a week-over-week and a year-over-year basis? That’s how headline INFLATION is calculated. As a result, our conviction (i.e. math) in #InflationSlowing (Quad 4 in Q3) went up last week. 

Even though your qualitative Old Wall pundits who only promote “stocks” won’t break-down the math for you this morning, last week’s all-time SPY high included Sector Style performance that was quintessentially Quad 4

  1. Energy Stocks (XLE) which are Quad 4 Shorts were down -1.0% last week and remain Bearish TREND @Hedgeye
  2. Industrials (XLI) which are Quad 4 Shorts were only +0.1% last week and remain Bearish TREND @Hedgeye
  3. Quad 4 LONGS like REITS (VNQ) and Staples (XLP) were +2.5% and +2.3% last week and remain Bullish TREND @Hedgeye 

Oh, I know, those “Techs” and FAANGS and Cloud Bubbles were up last week, but NASDAQ at +1.9% just didn’t beat the summer REIT ramp! Then, of course, there’s the Quad 3 and Quad 4 dog with fleas that I call Russell (IWM) which was only +0.6%. 

Unlike Gold (another beauty #FullCycleInvesting Quad 4 LONG from Q418), which is +8.2% year-over-year, the Russell 2000 (IWM) is down -6.2% year-over-year and still down -9.5% from where the US Economic and Earnings Cycle peaked in Q3 of 2018. 

Especially on the bounce in bond yields into week’s end (UST 10yr Yield +3bps on the week), I’ll buy-the-damn-dips in both Treasuries and Bond Proxies (Utes and REITS) and short the rips in both Cyclicals (Energy and Industrials) and the Russell Value (IWN). 

I’m well aware that what my teammates and I do when making Full Cycle Asset Allocation, Sector, and Factor Exposure calls isn’t what you’re used to getting from The Establishment and/or linear econs with their “valuation” views on TV. 

Having a process that’s grounded in calculus shouldn’t make us contrarians. By the time I’m long gone from this profession, I humbly submit that our process will become more of a consensus. After all, the rest of the universe is measured and mapped this way. 

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

UST 10yr Yield 1.95-2.07% (bearish)
UST 2yr Yield 1.67-1.88% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 58.84-61.59 (bullish)
REITS (VNQ) 85.60-90.71 (bullish)
Financials (XLF) 26.64-28.46 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 207 (bearish)
DAX 12129-12751 (bullish)
VIX 12.11-17.42 (neutral)
USD 95.03-97.25 (neutral)
EUR/USD 1.12-1.14 (neutral)
USD/YEN 106.88-108.85 (bearish)
GBP/USD 1.25-1.27 (bearish)
USD/CHF 0.97-0.99 (bearish)
Oil (WTI) 55.04-60.15 (bearish)
Nat Gas 2.12-2.43 (bearish)
Gold 1 (bullish)
Copper 2.64-2.74 (bearish)
Bitcoin 93 (bullish) 

Best of luck out there this week,

KM 

Keith R. McCullough
Chief Executive Officer

The Quads of The Gods - Why Rate of Change 10Y UST Yield Case Study

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