Too Far Too Fast?

“It did not last: The Devil howling “Ho!
Let Einstein be!” restored the status quo.”
-J.C. Squire

Since our entire Independent Research & Risk Management #Process stands on the shoulders of principles Einstein revealed to the world (Time, Space, #Acceleration, etc.), I feel pretty good when I review the history of Newtonian dogma that is now well over 300 years old.

Back then, “science already had a theory that explained the nature of the universe: the one presented more than two centuries before by Isaac Newton…. and now this disheveled German sought to replace Newton?... Einstein not only had to convince the world the relativity was true… he had to make the case that it was more true than Newton.” -Einstein’s War

What’s been the Rate of Change truth since the “Globally Synchronized Recovery” of 2017 peaked and rolled over in 2018? The truth is that the US economic cycle peaked 3-4 quarters after China, Europe, EM, etc. peaked. Today the hope is that the “bottom is in” for all of their sine curves.

 

Back to the Global Macro Grind…

Hope, of course, is not a risk management process. This will be Day 3 for DDDD (Data Dependent Darius Dale) and I meeting with Institutional Investing clients in New York City.

The #1 question, particularly on bond yields and cyclical “value stocks”, has been “has the market moved too far too fast.”

Since I don’t work for the CCP, I reserve the unalienable right to change my mind on the answer to that question, daily. As of right now, both the global economic data and my macro market signals say the answer is yes.

To summarize what’s in my ROC (rate of change) notebook this morning:

1. UST 10YR – yield drops -6bps this morning to 1.87% after failing for the umpteenth time @Hedgeye TREND resistance – Global Yields lower pretty much across the board too post a #Quad4 CPI print out of the UK for OCT (10yr Gilt Yield -5bps to 0.76%) – did the latest “the bottom is in” (for Global Growth expectations) go too far too fast? My macro market signals say yes
2. US DOLLAR – will Powell be Dovish Enough in his speech today? USD says no as it has moved back to Bullish @Hedgeye TREND in the last week – lower-highs (i.e. our #PeakDollar call), yes, but higher-lows too… and that is not what “the bottom is in for China” hope trade needs; looking for some compression in the Yield Curve today if Powell isn’t Dovish Enough (yet) as well
3. CHINA – don’t tell anyone but Asian Equities didn’t have CNBC style FOMO or a year-end performance chase – post rancid ROC (rate of change) economic data coming out of China this week, Shanghai Comp down another -0.3% overnight and -2.3% in the last month with the Hang Seng moving back into #crash mode, down another -1.8% overnight and -20% since our #ChinaSlowing call in Q1 of 2018

So it’s a good thing you and I bought Cocoa (NIB) instead of Copper. Alongside the ongoing macro market signal from Dr. KOSPI (down -0.8% overnight after failing at Hedgeye TREND resistance), Dr. Copper if down another -0.6% and signaling the same.

From an economic data perspective, here are Darius’ Top 3 ROC notes:

1. GERMAN INFLATION - CPI readings for OCT represent the first shot across the bow to the hawkish price action in Global Rates. German Headline CPI slowed to 1.1% year-over-year, which represents the slowest ROC since NOV ’16. That renders our nowcast for Quad 2 down to only the slimmest of margins with respect to the inflation aspect
2. UK INFLATION - UK CPI slowed to 1.5% year-over-year in OCT, which also represented the slowest ROC since NOV ’16. Have global bond yields overpriced in the scope of our projected Quad 2 European recoveries, insomuch that they likely overpriced in rising recession risk in late-AUG? The “levels” of these data would seem to suggest so
3. EUROPEAN MANUFACTURING – the IP #recession in the Eurozone improved to only down -1.7% year-over-year in SEP (vs. -2.8% year-over-year in AUG when Global Yields were crashing to new lows). European IP Base Effects (comps) fall off a cliff in Q4, all but ensuring pending stabilization, but is down -1% or flat the new stable?

We’ll be buying the damn dips in certain European Equity markets on our marginal #Quad2 nowcast, but that’s not our “highest conviction” idea. It’s just a better idea than chasing the idea that Chinese Industrial and Secondary Industry demand/growth has “bottomed.”

Our highest conviction position is that US and Chinese #InflationAccelerating are going to continue to perpetuate #Quad3 Stagflationary economic conditions which should continue to pressure corporate profit margins.

Does PE Powell have conviction in that economic nowcast (incoming data has our nowcast at 0.60% for Q4 US GDP)? Absolutely not. Look at the Fed’s linear “dot plot” vs. ours. We’ll see when the market can convince him that both relativity and the ROC (rate of change) are true.

But it’s certainly not from yesterday’s lower-highs in either the US 10yr Yield or in “value” stocks that have been bid up into a year-end performance chase on a #BeanDeal and/or Chinese Industrial economic recovery.

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

UST 10yr Yield 1.65-1.95% (bearish)
UST 2yr Yield 1.50-1.71% (bearish)
SPX 3033-3109 (bullish)
RUT 1 (bearish)
Utilities (XLU) 60.72-64.67 (bullish)
REITS (VNQ) 89.61-95.00 (bullish)
Energy (XLE) 57.94-62.21 (bullish)
Shanghai Comp 2 (bearish)
DAX 122 (bullish)
VIX 12.03-15.34 (bearish)
USD 96.90-98.74 (bullish)
Oil (WTI) 54.61-58.32 (bullish)
Gold 1 (bullish)
Copper 2.60-2.71 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer