Keith McCullough: Think of markets fractally. Like a fractal pattern or sandpile theory. You drop grains of sand every single day that are data points and market moving. To me every single day those data points are either destabilizing or not destabilizing at a faster rate.
What you’ll find is that all these things, these grains of sand continue to fall and are, at this point, destabilizing the deflationary pile at an accelerating rate. That’s all you really need to know. You don’t have to call the day of the recession or anything like that, you just have to be prepared ahead of that destabilization.
I am, again, uniquely and squarely focused on Quad 4 (i.e. U.S. Growth and Inflation slowing) in Q3. And then when I decide via my process – not by licking my finger or waking up to a tweet – that’s when I’ll make the decision to buy or sell the things that I like. That’s the whole point of risk management. Timing matters. Quad 4 matters.
The easiest thing to do amidst all this Tweet driven US Equity Vol is to keep buying the damn dips in Treasuries. The 10-year Treasury yield is getting hammered (again) this morning -9bps to 1.45% as The Curve continues to compress during #Quad4 in Q3.
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When the U.S. is in Quad 4 interest rates fall. What happened Friday? The market cut interest rates. The 10-year Treasury yield goes to 1.45% and the Dollar was down a full percent on the week. So again, the market basically said “You know [Fed Chair] Powell, we agree with President Trump at least for today and you’re going to be cutting by 50 basis points or more in the very near future. And if you don’t, we’re just going to do it for you.”
But in order to reflate asset prices the Fed has to be more dovish than the market expects and break the dollar. This is the whole point. Our view continues to be that the US Dollar should peak sometime here during #Quad4 in Q3. In order to really reflate assets prices the Fed must devalue the dollar explicitly and be more dovish than the market expects.