“We have always found, where government has mortgaged all its revenues, that it necessarily sinks into a state of languor, inactivity, and impotence.”
- David Hume
With all due respect to the late Scottish empiricist, that is hardly how US and European governments sees themselves today. At the all-time highs of corporate debt, central banks and their governments consider themselves omnipotent.
Have no fear, your globally coordinated G-7 #cowbell day is here!
Yep. They’re going to have a meeting. It’s going to be huge. Everything you’ve empirically been concerned about since the US economic cycle started slowing in Q4 of 2018 is going to be bullish. Sell your Treasuries and Gold now! (kidding)
Back to the Global Macro Grind…
The aforementioned Hume quote was used by Jim Rickards to introduce Chapter 2 of his recent book, Aftermath. The chapter is appropriately titled “Putting Out Fire With Gasoline” and, being the son of a retired firefighter, I quite get the metaphor!
“The choir of dire debt admonitions has gone silent for now. This is strange.” (Rickards pg 55)
Strange is as strange does, Jim. The US stock market just had its biggest bounce day since October of 2008! (not a good leading indicator)
All clear? Again, I wouldn’t walk into a burning HIGH BETA + LEVERAGE equity building without my Dad’s green light inasmuch as I’m not going to chase the US Equity Sector Styles and Factor Exposures that just had a mini-crash because a central banker says he’s on it.
To review the causal factors that drove last week’s Global Equity draw-downs:
A) China’s economy is heading straight back into #Quad4 in Q2
B) China’s manufacturing and industrials economy is slowing from a secular peak in 2007
C) China’s cyclical slow-down is the fastest, ever (see all-time low in PMI yesterday for details)
D) USA’s economy is pricing in another #Quad4 in Q2
E) US inflation peaked in JAN of 2020 at 2.3% headline (year-over-year) and is now deflating
F) US profit growth continued to #slow, pre-virus, in Q4 of 2019
That last point was probably a little lost on people who chased “Credit” asset allocations to their all-time highs only 2 weeks ago… and I’m sure those perma bulls are on their knees begging for PE Powell to ring that cowbell like only a rock star could on Saturday Night Live…
But, to review the fundamental reality of pre-virus Earnings Season:
A) 483 of the SP500’s companies have reported aggregate year-over-year earnings of 0.6%
B) Industrials and Consumer Discretionary EPS recessions #slowed to -4.6% and -7.7% year-over-year, respectively
C) Utilities earnings grossed up the aggregate EPS average with earnings +20.3%
So, ex-Utilities and REITS earnings growth, what did you really have pre-virus? You had what you always have #LateCycle. You also owned the #1 Equity Sector Style in the US stock market yesterday, with Utes (XLU) leading the bounce at +5.9% on the day.
Still own Tech?
Yeah, I know. There was nothing bubbly or imbalanced about the market caps or story stocks people plowed into at the all-time highs 2-weeks ago. Secular Growers that have never seen A) an economic cycle or B) a cyclical shock should be all good if we back out earnings slowing.
So I say you short Tech (XLK) today vs. Utes (XLU) long side.
Yep, sell what the buy-side is grossly exposed to on the biggest bounce since Buffett said the bottom is-in for “stocks” (October of 2008). Sell down your gross long exposure or outright sell it short. #Quad4 is the only Economic Quadrant where making that call makes sense.
But, but what about “liquidity”???
Well, there was an epic level of liquidity on sale on Friday’s US stock market lows. And I’m pretty sure you all know you need either a stock market crash and/or credit to stop trading to get the “liquidity” that people who don’t proactively manage cycle risk are looking for.
The Bank of Japan (BOJ) provided 500 Beeeelion Yens in liquidity on Monday morning. “Stocks” bounced +0.95% (Nikkei 225) on the “news”… and then sold off -1.2% again last night. Thanks for coming out.
The Reserve Bank of Australia (RBA) rang the central market planning cowbell last night. They cut rates by 25 basis points and “stocks” ramped “off the lows” on the open, then sputtered and puttered into the close, closing up a whopping +0.78% on the day.
Sputtering and puttering is what economies do when they’re at the slowest point of their economic cycle. Pre-virus-Chinese-secular-slowing and US equity/credit market bubbles aside, what happens if what Wall Street is begging for turns into a 1-2 day bounce to lower-highs?
Globally Coordinate #Cowbell sounds terrific, until it appears to be impotent beyond a few market days.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.04-1.36% (bearish)
UST 2yr Yield 0.72-1.18% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
Utilities (XLU) 61.93-71.65 (bullish)
Tech (XLK) 84.39-97.07 (bearish)
Nikkei 207 (bearish)
DAX 110 (bearish)
VIX 21.38-44.99 (bullish)
USD 97.12-100.03(bullish)
EUR/USD 1.06-1.11 (bearish)
Oil (WTI) 43.45-51.51 (bearish)
Gold 1 (bullish)
Copper 2.52-2.62 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
