“We’re in the insurance business.”
- Elwyn Berlecamp
That’s how the late mathematician and computer scientist who worked with Jim Simons on the Medallion Fund described what it was that Renaissance Technologies did.
“Medallion’s system would buy when these brokers sold, and sell the investments back to them as they became more comfortable with the risk.” -The Man Who Solved The Market, pg 110
At US Equity VIX > 31, that’s easier said than done. What Berlecamp was explaining was how their system traded Deutsche Marks. Don’t forget that Currencies have much lower volatilities than “stocks” do.
Back to the Global Macro Grind…
“Feeling” like it just got tougher to manage Global Equity and Commodity risk? Join the club of humans affected by US Equity and Oil Volatility of 41 and 51, respectively, this morning. In the short-term, these are un-investable asset classes with that level of volatility.
Welcome to Macro Monday @Hedgeye. It’s going to be a fun one with everyone and their brother and sister trying to handicap when the Fed tries to bailout them out of what were the all-time SPY highs on February the 19th!
Nothing about our measuring and mapping process changes this morning. So let’s review what macro markets did last week within the context of our #Quad4 (in both the USA and China) economic view.
Starting with the Global Currency market:
- US Dollar Index corrected -1.1% last week but is still +0.1% in the last month and remains Bullish TREND @Hedgeye
- EUR/USD bounced +1.6% last week and is at the top-end of its Risk Range this morning within its Bearish TREND
- Yen ramped +3.2% vs. USD last week, moving back to Neutral @Hedgeye TREND
- GBP/USD dropped another -1.1% last week to -1.6% in the last month and remains Bearish TREND @Hedgeye
- Mexico’s Peso fell another -3.6% last week to -4.5% in the last month and remains Bearish TREND @Hedgeye
- Russian Ruble dropped another -4.0% last week to -6.9% in the last month and remains Bearish TREND @Hedgeye
In other words, if you’re just staring at a Moving Monkey of USD, you’re missing the interconnectedness of what’s been going on in Dollars, globally, since Global Macro markets (ex-US Equity & Credit bubbles) started pricing in #Quad4 5-6 weeks ago.
Bubbles? Nah, buying Tesla (TSLA) at $925/share or paying peak prices for some Credit Index with Q4 Earnings Growth at 0% wasn’t bubbly. That was perfectly rational Wall Street behavior that America’s government should bailout via multiple rate cuts!
Commodities deflated, big time (again) in #Quad4 US Dollar terms last week:
- CRB Commodities Index deflated -8.7% last week and remains Bearish TREND @Hedgeye
- Oil (WTI) deflated another -16.2% last week and remains Bearish TREND @Hedgeye
- Lumber deflated another -13.3% last week and remains Bearish TREND @Hedgeye
And you thought Gold having a textbook @Hedgeye Risk Range correction (i.e. from the top-end of its Risk Range, where you sell-some) ruined your day on Friday. Gold corrected -5.0% last week and is trouncing most asset allocations in 2020, ex-Treasuries.
Got “nowhere to go”? C’mon man. #Quad4 + VIX > 31 = Long Treasuries, across the curve:
A) UST 2yr Yield down -44 basis points last week (and smoked again this morning) remains Bearish TREND @Hedgeye
B) UST 10yr Yield down -32 basis points last week and remains Bearish TREND @Hedgeye
Bearish TREND in Bond Yield = Bullish on those bonds. High Yield OAS Spreads blew out by +141 basis points last week to “500 Over.” That’s another way to think about #Quad4 + VIX > 31, Short High Yield Credit!
In US Equity terms, it was a bloodbath. And it should have been. There is no fundamental reason why an investor should have been chasing US Credit or the following US Equity Factor Exposures with the US economy heading back into #Quad4:
- LEVERAGE (High Debt to EV companies) was down -13.8% last week and remains Bearish TREND @Hedgeye
- HIGH BETA stocks were down -15.0% last week and remain Bearish TREND @Hedgeye
- SMALL CAP stocks were down another -13.6% last week and remain Bearish TREND @Hedgeye
In other words, if you have friends who chased the “charts” when gross long hedge fund exposure peaked, they paid the fundamental price. All 3 of those Factor Exposures were down big vs. beta (SPY) which was -11.5% on the week itself.
So what do you do? When the Fed says go, do you buy buy buy? Or should you already have bought the non-Equity & speculatively pro-cyclical Credit asset allocations that are ripping (Treasuries in particular) pre-cut?
Pre-virus, all of the fundamental GROWTH (peaked in Q3 of 2018), INFLATION (peaked at +2.3% y/y in JAN), and EARNINGS #slowing data was plainly obvious in the ROC (rate of change) math.
Post-virus Fed Cuts would only get me to gross up #Quad4 Equity Longs like LOW BETA, LARGE CAP QUALITY, and SAFE YIELD, if PE Powell can convince markets that US Equity Volatility can hold below 31.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.03-1.40% (bearish)
UST 2yr Yield 0.70-1.23% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 8 (bearish)
Utilities (XLU) 61.11-71.01 (bullish)
REITS (VNQ) 86.19-95.72 (bearish)
Consumer Staples (XLP) 56.77-62.80 (bearish)
Tech (XLK) 84.14-96.27 (bearish)
Nikkei 21107-22600 (bearish)
DAX 113 (bearish)
VIX 20.45-44.59 (bullish)
USD 97.90-100.01(bullish)
EUR/USD 1.07-1.11 (bearish)
USD/YEN 107.54-111.42 (bullish)
GBP/USD 1.28-1.30 (bearish)
Oil (WTI) 44.26-50.56 (bearish)
Nat Gas 1.64-1.87 (bearish)
Gold 1 (bullish)
Bitcoin 8 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
