“To be or to do? Which way will you go?”
-John Boyd
I had some great feedback on both this Blackhole of Quad 4 Market Risk and using the Mad Major’s (John Boyd) OODA Loop decision-making framework in order to deal with it. Sincerely thanking you all for that. I’m 11 years in here @Hedgeye, but these are still the early days!
If you’re using The Quads and a multi-factor, multi-duration Global Macro Risk Management overlay, you didn’t need Trump Tweets to get you OUT of major blackholes of Asset Allocation like Commodities and Asian Equities. They’ve been signaling Bearish @Hedgeye TREND for the entire JUN/JUL ramp in SPY.
Put simply, Mr. Market (who is global, not local) nailed this. And now the unprepared have to make some hard decisions. If they were long of both the Fed Cut and a China “Trade Deal”, what is their next catalyst? Which way will they go, from here?
Back to the Global Macro Grind…
For our power-users, the catalyst has always been The Cycle. The two aforementioned market catalysts wouldn’t have become consensus catalysts if:
A) China, Europe, and EM didn’t start #SLOWING in Q1 of 2018
B) USA didn’t move, abruptly, into Quad 4 in Q4 of 2018 in kind
Yep, lots of tweets and lots of bounces to lower-highs in lots of things along the way, but if you asked some of the bellwether macro Generals in the field like:
A) Dr. KOSPI
B) Dr. Copper
They’d have told you to sell every lower-high in both Asian Equities and Commodities for the past 10 months, never mind, in many cases, for many large Asset Classes, for the past 19 going on 20 months.
Therefore, until our call on The Cycle changes, I’m not changing.
Yes, we’re potentially t-minus 3 months on that. But… as any of your friends who got smoked during the worst December in the history of US stock market Decembers (a very long time!) knows, the deepest part of a blackhole is hard to time.
What triggers a blackhole of macro market risk? A: a cluster of volatility. What perpetuates the follow through? A: when multiple clusters of volatility start to collide and TREND. While the TRENDing part of that has not yet happened in US Equity Beta, yet, the recent cluster of vol is crystal clear.
The largest blackhole near the Milky Way is argued to be M87.
Not to be confused with the last time “US Stocks” had a “great start to the year” (the only JANUARY better than this year’s was 1987’s), M87 is still massively hugely big. The equivalent of that, in market risk terms, was obviously another Quad 4 my risk management #process called (2008).
As you can see in today’s Chart of The Day, this is how we measure and map the mother of all globally interconnected markets risks:
- X-axis = Treasury Bond Market Volatility (The MOVE Index)
- Y-axis = High Yield OAS Spread
- Dots (in years) = are sized for the % of Corporate Credit as a % of GDP
Instead of setting your portfolio on fire this morning and selling everything at the low-end of their respective immediate-term @Hedgeye Risk Ranges, I suggest you get LIVE quotes of what’s on my X and Y axis up on your main dashboard. It should replace what the Dow Bro is doing, in points.
With the UST 10yr Yield crashing into a blackhole this morning (multi-standard deviation move vs. what Mr. Market told you was the probable range of risk prior), the MOVE Index is MOVING out and to the right… as HY Spreads widen.
Ordinarily (early or mid-cycle), this wouldn’t concern me. From an epically asymmetric Triple PEAK in US GDP Growth, Inflation, and Profits (i.e. in Q3 of 2018), it doesn’t concern me personally (because my entire net worth is positioned for it)… but it absolutely should concern anyone who chased Fed FOMO last week.
Where and when does this 3-D pic of market risk stop moving OUT and UP into the right of the Milky Way of Old Wall emotion? I don’t know. What I do know, is that the catalyst to stop it A) isn’t “Valuation” …
It isn’t B) a Fed Cut this week either (old news)… and on C) Tweets - they don’t quite trump The Cycle call either.
UST 10yr Yield 1.81-2.05% (bearish)
UST 2yr Yield 1.68-1.85% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
Utilities (XLU) 58.98-60.61 (bullish)
REITS (VNQ) 87.12-89.60 (bullish)
Financials (XLF) 27.34-28.30 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 21001-21810 (bearish)
DAX 11 (bearish)
VIX 12.76-19.35 (bullish)
USD 96.90-98.63 (bullish)
USD/YEN 106.48-109.03 (bearish)
Oil (WTI) 53.89-57.74 (bearish)
Gold 1 (bullish)
Copper 2.58-2.70 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
