Predicting More Inflation

“You put together a collection of these subtle anomalies and then you have something that will predict future prices pretty well.”
- Jim Simons

As most of you know, if there was a “Quant” who might also be called The Man, it’s Renaissance Technologies founder, Jim Simons.

Since founding his hedge fund in 1982, he’s absolutely crushed it by “predicting prices pretty well.” Unlike people who are going to buy the Russell on a Barron’s cover that says “Small Cap Breakout”, Jim doesn’t stare at Moving Monkeys.

While some would have loved for Greg Zuckerman to have unearthed Ren Tech’s code in his latest book The Man Who Solved The Market, I love that you’re going to have to study pattern recognition much more deeply than what the “50-Day” is going to tell you. Similar Sets, Fractal Patterns, String Theory – load up those reading lists for the holidays!

Back to the Global Macro Grind…

Welcome to Macro Monday @Hedgeye! For those of you who are new to our pattern recognition #process, welcome. On the 1^st day of every week we review the prior week’s macro market moves within the lens of out multi-factor, multi-duration model.

Let’s start with the Global Currency market:

1. US Dollar Index broke @Hedgeye TRADE support closing down -0.6% last week (this should happen in #Quad3)
2. EUR/USD was +0.4% last week to -3.5% YTD and remains Bearish TREND @Hedgeye  
3. Yen was +0.8% vs. USD last week and inching back towards Neutral @Hedgeye TREND
4. GBP/USD continued to breakout +1.7% last week and remains Bullish TREND @Hedgeye  
5. Russian Ruble was +1.6% vs. USD last week and remains Bullish TREND @Hedgeye alongside Oil prices
6. Mexican Peso was +1.3% vs. USD last week and is +5.5% year-over-year and Bullish TREND @Hedgeye  

Oh, you didn’t hear about the greatest “trade” deal in the history of Mexico? Mexican Stocks were down -2.1% last week, leading losers in what was yet another broadly underwhelming greatest “stock market of all time” Global Equity picture:

1. London’s FTSE (Equity Index) was down another -1.5% last week and remains Bearish TREND @Hedgeye  
2. Germany’s DAX corrected -0.5% last week as incoming data knocked the German economy back into #Quad3
3. US Consumer “Stocks” (XLY) were down -0.6% last week with USA’s economy still in Stagflation, i.e. #Quad3 

The Stag in the #LateCycle USA Stagflation came right on time via Down Dollar and Accelerating Commodity Prices:

1. CRB Commodities Index had a great week, reflating another +2.6%, and remains Bullish TREND @Hedgeye  
2. Oil (WTI) ramped +7.3% last week and remains Bullish TREND @Hedgeye during #Quad3 
3. Energy Stocks (XLE) led US Sector Style gainers at +1.4% last week and remain Bullish TREND @Hedgeye  

Not yet long Oil, Energy Stocks, or Cocoa (NIB)? Cocoa prices inflated another +1.5% last week and are +18.3% year-over-year. It won’t take long for the non-quants to start chasing what our subscribers have been buying on dips for the last 2 months.

As everyone who understands my PRICE/VOLUME/VOLATILITY model knows, it’s the vol of vol (or the volatility of volatility) under-going a Phase Transition that perpetuates the flows of The Machine.

Oil’s Volatility (OVX) is a great example of that. OVX crashed another -18.3% last week to down -40% year-over-year, perpetuating Up Price on Up Volume post a big ROC (rate of change) wave of Insider Buying by Energy Execs during #Quad4 in Q3.

Yeah, I know bro, the Dow was -0.1% last week. So boring with so many other things moving that the crowd is not long of…

Bond Yields saw another head-fake “steepening” on Friday’s super #LateCycle US Jobs Report:

A) UST 2yr Yield was flat on the week at 1.61% (down -115bps year-over-year as The Cycle peaked in Q318)
B) UST 10yr Yield popped +6bps week-over-week and is down -106 basis points year-over-year

All that jobs report did was ensure that people who don’t do ROC (rate of change) Macro are still long the “consumer” with the XLY down -0.6% last week, and #accelerating Wage Inflation, which should predict further #slowing of US corporate profits pretty well.

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

UST 10yr Yield 1.70-1.85% (bearish)
UST 2yr Yield 1.52-1.65% (bearish)
SPX 3091-3166 (bullish)
RUT 1 (bearish)
NASDAQ 8 (bullish)
Energy (XLE) 57.91-60.44 (bullish)
VIX 11.50-16.67 (bullish)
USD 97.15-98.30 (neutral)
EUR/USD 1.09-1.11 (bearish)
USD/YEN 108.13-109.62 (bullish)
GBP/USD 1.29-1.31 (bullish)
Oil (WTI) 56.09-60.21 (bullish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer