“You know, I think I should put some mountains here. Otherwise, what are the characters going to fall off of? And what about stairs?”
- Laurie Anderson
That’s the opening volley in a book I started reading last night called The Trouble With Gravity, Solving The Mystery Beneath Our Feet, by Richard Panek. The book “feels” timely and topical.
Feelings are what a lot of people who are levered long “stocks” and/or late cycle Credit have with VIX > 31. Panic is what they “feel” at VIX > 51. Now that the rate cuts didn’t work, the President of the United started feeling the need for shale bailouts and payroll tax cuts.
And… the new President of the ECB (European Central Bank), Christine Lagarde, is feeling like it could be a “2008 style crisis.” But, it’s not 2008, Madame Lagarde. It’s a little more like 1987.
Back to the Global Macro Grind…
For those of you that remember what happened to illiquid, levered long, high beta, US Equities & Credit in 1987, it happened slowly, then all at once. Some of you look back on that period fondly, because it was the catalyst for you to start your Distressed Funds.
For mostly everyone else long “risk”, they had to re-think their risk management process for the next 3-5 years.
Obviously today is not 1987. It’s 2020. And there’s a LOT more leverage in the market today than there was back then. While every cycle has an economic sine-curve that rhymes, no cycle has the same precise emergent properties, other than #accelerating market volatility.
In today’s Chart of The Day, you can see where today’s point-to-point #acceleration is US Equity Volatility fits:
A) Going back 35 years, there are only 2x that the VIX ripped through 31, held 41, then went > 51…
B) The time and space between 21 and 51 is more like 1987 than 2008
What’s similar to 2008 is the early (Q1 and Q2 of 2008) panic-policy-response by the Bernanke Fed… which didn’t work… so many market participants moved to beg for corporate bailouts and fiscal (Hank The Market Tank Paulson’s Bazooka) response.
That’s why Trump insinuating he has a “major economic package” (which includes bailouts) is, if anything, a little early.
For Dow Bro fans (people who talk about “the market” in Dow points), they’ll recall that in 1987 the Dow crashed 508 points in a single day. “That’s nothin’ bro, the Dow moves 1,000 points a day these days!”
Yeah, but 508 points back then was a -22.6% crash, in a day. Today that would be a 5,650 point down day, eh bro.
Back then it was West Germany and Japan ringing the loudest #cowbell alongside the USA in response. The Reserve Bank of New Zealand opted not to ease. Like I said, no market crash is precisely the same in terms of outcome or central planning response.
So how do governments and central banks get the VIX back below 51, then 41, then 31? The Bank of England (BOE) did their panic-rate-cut of 50 basis points today… and the yield on the UK 10yr went UP alongside the Pound (that wasn’t the plan, eh).
On breaking the back of accelerating volatility though, that’s the most important question.
If you can let me know, precisely, at what time, price and, most interestingly, “market valuation”, that would be great. Reminder, though: valuation (especially on the wrong, crashing, EPS number) is not a catalyst.
What is a catalyst is time and space. When will the singularity of Global Macro market signals imply that we’re coming out of #Quad4. That’s when the rate of change of GROWTH and INFLATION are no longer #slowing at an accelerating rate, at the same time.
If I had to pick a time on the calendar (I really don’t, but clients really want me to!), I’d say the landing time is sometime in late-April to late-May, after companies have reported a continued #slowing in corporate profits, with no idea on profits for Q2.
But that’s just picking a likely time of a probable outcome.
What’s much harder (which is why I don’t do it) is picking THE spot (market price) where it’s all “priced in.” All I know is nothing is priced in until you price out this @Hedgeye Phase Transition in market volatility.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.47-0.88% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 61.26-66.99 (neutral)
REITS (VNQ) 83.00-92.23 (bearish)
Tech (XLK) 81.95-92.15 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 198 (bearish)
DAX 106 (bearish)
VIX 35.64-58.36 (bullish)
USD 94.50-97.64 (neutral)
Oil (WTI) 29.41-35.99 (bearish)
Gold 1 (bullish)
Copper 2.47-2.57 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
