“Hide in plain sight.”
-Thirty Six Stratagems

If I have a developing bias, it’s that both the Chinese and US governments are lying to us about the respective states of their economies. “States” being where the actual GROWTH and INFLATION data is currently tracking in ROC (rate of change) terms…

Then there’s the broader bias I have which is that China is playing the long-game whereas US Institutional Investors are “feeling” the short-term FOMO & Fed Cut Cowbell like I’ve never seen before. To a degree, that’s a career risk management bias for many.

On Xi’s long-game, the aforementioned quote is “one of the Thirty Six Stratagems, an essay from ancient Chinese folklore. All of these stratagems are designed to defeat a more powerful opponent by using the opponent’s own strength against him without his knowing he is even in a contest.” -The Hundred Year Marathon

"Risk In Plain Sight" - 07.11.2018 China cartoon

Back to the Global Macro Grind

Since a broad measure of US “stocks” (Russell 2000) peaked +16% higher at this time last year, every headline driven FOMO Futures bounce to lower-highs has had both Global and Local #Quad4 economic risk hidden in plain sight.

If you disagree with that, the #GrowthSlowing ROC data disagrees with you. From a top-down perspective, 87% of the 39 countries and regions we track showcased TRENDING deceleration in manufacturing in August.

The “risk” that’s been in plain sight for “stocks” has obviously been global too. I’ll be shorting German Stocks (EWG) in my p.a. (personal account) for the umpteenth time in the last 1.5 years today after seeing a German Factory Order report of -5.6% year-over-year.

Not to be confused with either Old Wall TV pundits who “feel” like they need to see a US “recession” to make a timely risk management call, Industrial Germany is IN a #Recession.

Yeah, I know. Eventually you buy cyclical stocks during both earnings and broadening recessions. But I’m not making that call, yet.

Do our subscribers want me to make that “all clear #Quad 4 is priced in” call? Oh yeah. Big time. You’d have to see the FOMO in the LIVE Q&A of The Macro Show to believe it. Or just look at where the futures & options market is pricing in “risk” this morning:

  1. Implied Volatility on SPY is trading at a -31% DISCOUNT to what’s been realized in the last 30-days
  2. Implied Volatility on Tech (XLK) is trading at a -30% DISCOUNT to what’s been realized in the last 30-days
  3. Implied Volatility on Financials (XLF) is trading at a -26% DISCOUNT to what’s been realized in the last 30-days

Think about the crazy complacency (by the bulls) and capitulation (by the bears) embedded in that fact-based picture of FOMO. As you can see in today’s Chart of The Day, only 1-month ago today, post SPY getting body slammed in the 1st week of AUG:

  1. Implied Volatility on SPY was trading at a +71% PREMIUM to what had been realized in the month of JULY (i.e. the peak)
  2. Implied Volatility on Tech (XLK) was trading at a +63% PREMIUM to what had been realized in the month of JULY (i.e. the peak)
  3. Implied Volatility on SPY was trading at a +37% PREMIUM to what had been realized in the month of JULY

Yes, risk of The Cycle #slowing at a faster rate happens slowly, then all at once. In China, Europe, and EM’s case, The Cycle has been slowing for a longer period of time. They didn’t have Trump, Tweets or, most importantly, Tax Reform!

As is everything in this long-war the USA will be in with China, it’s not what the Macro Tourists are staring at every day that SAVES and makes you a lot of money, it’s what your risk management #process sees.

If your daily risk management process doesn’t consider where risk is actually being priced within the context of prior risk, what are you really considering each and every market day other than your “feel” based FOMO?

“But, but, but… they’re gonna have another meeting… and they’re gonna cut rates”…

Yep, I hear you Mr. Inbox. “But” this – China has CUT the RRR rate 6 TIMES since 2018. In what part of that time-series did you get paid to chase a lower-high in anything Asian Equity, Copper, Commodities, etc.?

I get it. At some point I’ll get this wrong. That’s The Game. But what if selling both Global and US Equity “Risk” this morning works again for the right reasons? I have plenty of gross LONG exposure (Treasuries, Gold, REITS, Utes, etc.) against that SHORT book btw.

I also have plenty of examples where I make a lot of money when the FOMO crowd loses theirs. Put simply, if I’m wrong on #Quad4 in Q3 from today’s lower-highs, the CNBC crowd will finally have had it right!

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

UST 10yr Yield 1.41-1.61% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 61.33-63.98 (bullish)
REITS (VNQ) 90.21-94.12 (bullish)
Financials (XLF) 25.58-27.26 (bearish)
Shanghai Comp 2 (bearish)
DAX 117 (bearish)
VIX 16.45-22.16 (bullish)
GBP/USD 1.20-1.23 (bearish)
Oil (WTI) 53.02-56.94 (bearish)
Gold 1 (bullish)
Copper 2.50-2.62 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

"Risk In Plain Sight" - Chart of the Day