“Calculus is as much about mysteries as it is about methodology.”
-Steven Strogatz
The waiting and watching for the US and Global economies to hit #Quad4 in Q3 is over. Curves, Motion, and Rate of Change. The mystery of where we wash out and into the next Quads will be revealed during our Q4 Macro Themes call at 11AM EST!
On the Bayesian mystery of it all, math guru Strogatz reminds us that the “fruitfulness of these mysteries has been a testament to the value of pure curiosity. Puzzles about curves motion and change might seem unimportant at first glance…
But because they touch on such rich conceptual issues and because math is so deeply woven into the fabric of the universe”, the solution to these mysteries often gets you into the right asset allocations before the crowd does. (Infinite Powers, pg xvii)
Back to the Global Macro Grind…
It was a late night and an early morning for my teammates and I as we were putting the finishing touches (and cartoons) into our Q4 Macro Themes deck, so I’ll keep this morning’s Early Look brief.
Here’s how we’re summarizing the Top 3 Things in macro that are becoming MORE probable in our #process:
- Quad 4, Then Quad 2 or Quad 3?: Was the TTM lesson in Full-Cycle Investing just another mid-cycle slowdown or was it a harbinger of recessionary quarters ahead? In the presentation, we’ll detail the myriad of downside risks associated with our baseline projection of a narrow inflection into #Quad2 in 4Q19E for both the US and global economies. We’ll also provide investors with a playbook for how risk manage the uncertainty associated with these divergent-but-not-disparate regimes.
- EPS #Slowing: After a decade of waiting for Godot on wage growth, we’re finally at a point in the domestic business cycle where the relationship between labor and profits starts to matter, big time. In the presentation, we’ll detail the downside risks to the consensus 4Q19E/2020E EPS recovery narrative.
- #InflationAccelerating: As you can probably tell by now, our confidence in stochastically driven projections for recoveries in both the US and global economies is low – as is our faith that Wall St. is going to be right on corporate profits meaningfully recovering in short order. Where we do have conviction, however, is in the return of inflation over both the intermediate and long terms. After a year in which it has paid to take on duration risk in every asset class, we now think the consensus portfolio is under-positioned for a phase transition in inflation expectations.
The biggest mystery is whether the recent downward tilt in both US and Global economic data puts us in #Quad2 or #Quad3 in Q4 of 2019. We’ll remain vigilantly data dependent on that front. Our best solution is waking up to the next day of data.
The easiest curves and ROCs (rates of change) to solve for right now are:
- #EarningsSlowing with
- #InflationAccelerating
So let “secular growers” eat TAM (short IGV) while they report A and B (while I wander on out into the decimated frontier of pulverized inflation expectations).
On today’s front, here’s what I’m thinking from yesterday’s #Quad4 in Q3 immediate-term TRADE #oversold signals:
- US DOLLAR – the #1 catalyst for the Fed to cut rates more aggressively (as they should during #Quad4) is both the US stock market going down and HY Spreads widening at the same time – that’s happened in the last 2 days and Fed Fund Futures ramped, big time – to get the US Dollar Down they’ll need to go 50bps and dove it right up
- CURVE – as probabilities on the OCT Fed Cut Ramped, the bottom fell out of 2yr Treasury Yields yesterday, and the Yield Curve steepened to +12bps wide on 10s/2s… so I covered my Financials (XLF) short in my p.a. and bought/covered (for now just for a trade) new long exposures I’ll review in our Q4 Macro Themes presentation
- ENERGY/CANADA – there’s no suspense in what you buy during INFLATION expectations bottoming here in OCT as Long Energy works in either #Quad2 or #Quad3, so I did that on an immediate-term TRADE #oversold signal in both XLE and Canadian Equities (EWC) yesterday
For those of you looking for my pre-rant to this rant, my Top 3 Things are published to Institutional subscribers by 6AM EST every risk management morning. If you want to know what I’m doing while I’m thinking, I’ve always been 100% transparent on that.
To be clear on the Long Energy/Canada exposures, not unlike buying Treasuries at this time LAST YEAR, I fully expect to be thrashed around trading these exposures from the long side for the next month of #Quad4 in Q3 getting fully priced in.
I’m also expecting the Fed to bite, hook/line/sinker, on the need to resuscitate INFLATION EXPECTATIONS, right as the comparative base effects for headline US INFLATION start to ease. If they don’t do that, I’ll recommend prayer.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.55-1.77% (bearish)
UST 2yr Yield 1.41-1.65% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 63.20-65.35 (bullish)
REITS (VNQ) 91.61-93.73 (bullish)
Energy (XLE) 55.55-59.57 (neutral)
Nikkei 214 (bearish)
VIX 13.66-22.19 (bullish)
USD 97.86-99.44 (bullish)
Oil (WTI) 52.00-56.13 (bearish)
Gold 1 (bullish)
Copper 2.51-2.61 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
