#Quad3 Stagflation, It Is

“This unconstructable and unvisualizable dogmatism.”
- Arnold Sommerfeld

I like that quote. It’s the leadoff quote Matthew Stanley used in Chapter 2 of Einstein’s War: How Relativity Triumphed Amid The Vicious Nationalism of World War I (pg 38).

With consensus officially long of “stocks” (net LONG Russell 2000 = +2.38x on a 1yr z-score) and short of Treasury Bonds (net SHORT position of -330,125 in 5yr Treasuries = -2.23x on a 1yr z-score)…

Will positioning your hard earned net wealth for #Quad3 in Q1 of 2020 triumph post the year-end performance chase?

Back to the Global Macro Grind…

It’s Macro Monday @Hedgeye! Welcome back to The Game within the game where we contextualize last week’s Global Macro moves within the lens of both The Quads & The Signals (TRADE, TREND, and TAIL).

Let’s start where the Old Wall consensus rarely starts (with the Global Currency market):

1. US Dollar Index was down another -0.5% last week after breaking bad to Bearish @Hedgeye TREND as it should in #Quad3
2. EUR/USD was +0.6% last week and has moved from Bearish to Bullish TREND @Hedgeye  
3. Yen fell another -0.7% vs. USD last week and remains Bearish TREND @Hedgeye  
4. GBP/USD was up another +1.5% last week and remains Bullish TREND @Hedgeye  
5. Canadian Dollar was +0.7% vs. USD last week and remains Bullish TREND @Hedgeye 
6. Russian Ruble was +1.3% vs. USD last week to +5.3% year-over-year and remains Bullish TREND @Hedgeye  

With Russia’s economy having been in #Quad1 for the last 2 quarters + it being another great way to be long of both Oil and #InflationAccelerating, being long Russian “Stocks” trounced the Russell 2000 (+0.3% last week) up another +3.7% last week.

It wasn’t just Russia that ramped, it was most of the Commodities complex (which loves Down Dollar):

1. CRB Commodities Index was up another +1.5% last week and remains Bullish TREND @Hedgeye 
2. Oil (WTI) reflated another +1.5% last week to +10.6% year-over-year and remains Bullish TREND @Hedgeye 
3. Cattle was up another +2.1% last week to +7.9% year-over-year and remains Bullish TREND @Hedgeye  
4. Lean Hogs reflated another +2.9% last week to +2.9% year-over-year and remain Bullish TREND @Hedgeye  
5. Coffee was up another +4.9% last week to +9.1% year-over-year and remains Bullish TREND @Hedgeye 
6. Copper bounced +2.1% last week to +0.5% year-over-year but remains Bearish TREND @Hedgeye  

Just because Copper (and the KOSPI and Singapore’s stock market) have been signaling Bearish TREND while headline US Inflation (and Commodities) have been #accelerating, doesn’t mean it can’t eventually breakout. Energy is an input cost for Copper!

Oil Volatility (OVX) continued to collapse, down another -11% last week to 26.76. That’s very bullish for both the Commodity (Oil) and Energy Stocks (XLE), which were up another +1.0% last week, generating alpha for those of you who bought it on sale.

Despite Treasury Bond Yields being down on the week (both 2s and 10s down 1 basis point week-over-week) and Gold beating small cap “stocks” (i.e. the Russell) at +1.1% week-over-week, REITS corrected -2.7% last week, leading Sector Style losers.

So I’d buy the damn dip (again) in REITS (VNQ) ahead of #Quad3 in Q1 of 2020.

Alongside Commodities & Energy Stocks, what else should you have in your #Quad3 Asset Allocation and Sector Styles?

A) Treasury Inflation Protection (TIPs) which remain Bullish TREND @Hedgeye  
B) Tech Stocks (XLK), which were up another +2.0% last week and remain Bullish TREND @Hedgeye
C) Emerging Market Stocks (MSCI Index +3.6% last week) in countries that are in either Quad 1 or 2

Conviction in #Quad3? That only goes up with A) Inflation Accelerating for all of December and B) hard economic data (like the control group for US Retail Sales #slowing to a 7 month low on Friday) #slowing.

With consensus buying what they shouldn’t in #Quad3 (Small Cap Stocks) and selling what they shouldn’t (Treasuries and REITS), our headline GDP Nowcast for Q419 just #slowed (again) to 0.36%.

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

UST 10yr Yield 1.71-1.91% (bearish)
UST 2yr Yield 1.52-1.68% (bearish)
SPX 3113-3184 (bullish)
RUT 1 (neutral)
NASDAQ 8 (bullish)
REITS (VNQ) 90.05-93.90 (bullish)
Energy (XLE) 57.85-61.17 (bullish)
VIX 12.25-16.88 (neutral)
USD 96.50-97.73 (bearish)
EUR/USD 1.10-1.12 (bullish)
USD/YEN 108.21-109.75 (bullish)
GBP/USD 1.30-1.34 (bullish)
Oil (WTI) 56.65-60.89 (bullish)
Gold 1 (bullish)
Copper 2.61-2.85 (neutral) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer