“The story of gravity is older than the story of the universe.”
- Richard Panek
Ex-Junk and Levered Loans, I’m getting a LOT more questions about where “we bottom” than I am about where to sell the next bounce. For the 2nd time in 3 trading days, the US stock market crashed on #Quad4 economic gravity. So far, that was the worst 1-day drop since 1987.
“The investigation into why things fall didn’t begin until a couple of millennia ago, and the idea that an actual tangible something might be the cause of all that falling would have to wait until the 17th century” (Gravity, pg 11). But what do we know today?
The relationship between market volatility and gravity is a mathematical one. It’s really insensitive to views on “valuation” too. Since this level of volatility is new to anyone running money, I’m not willing to believe that everyone knows when “stocks” (and now Gold) stop falling.
Back to the Global Macro Grind…
As Panek went on to remind me about narratives, “all stories have to start somewhere”…
And this fractal Phase Transition that started in both US and Global Equity market volatility that is now finding its way into Credit, Gold, and Treasury Bond Volatility started when The Cycle started to slow at a faster rate.
To review what everyone who does ROC (rate of change) math should have seen coming:
- China started #slowing in early 2017
- European economies started #slowing at the end of 2017
- Most major EM countries were #slowing by Q1 of 2018 as well
Then the US Economic Cycle peaked, alongside US Inflation and Corporate Profit Growth, in Q3 of 2018. If you’re asking for a friend who has been long Small Caps since, the Russell 2000 needs to be up +67% (from here) to get back to Q318’s Full Investing Cycle break-even.
That’s right. The Crash of 2020 has the Russell down -40.4% from its cycle peak. The SP500 is down 29.5% from its February 19th Full Employment Cycle peak (assuming the ROC, rate of change, in jobless claims bottomed around there).
“Valuation” is not a catalyst that will stop #Quad4 economic gravity.
Like in 2001 (9/11), all the virus did was #accelerate a Global Slowdown that is over 2 years old and #accelerate a US Consumption Slowdown that started when the US Cycle peaked back in Q3 of 2018 too.
Why is US Equity Volatility now > 81 (instead of 31) and why are High Yield Spreads > +800 Over?
A) We don’t yet have the depths of the #Quad4 March and Q2 of 2020 data yet
B) We have no idea where “earnings” are going to be other than very negative on a year-over-year ROC basis
So, like the guys and gals who boughtem too early in either 2001 or 2008, I humbly suggest we all learn the lessons of both economic and market history when gravity has the US #slowing from a super late cycle employment peak.
Yes, I know, plenty of “capitalists” and socialists alike are begging for both corporate and “fiscal” bailouts. And heck, we might get them. But we might get more volatility in the US Treasury and Credit markets before that takes hold. Mnuchin is already panicking with a Paulson sized bazooka!
As you’ll recall how this worked in 2008:
A) Treasury Bond Yields bottomed in March, then proceeded to rise from there until October (then they crashed, again, from there)
B) Gold peaked in February/March of 2008, in conjunction with that… and
C) HY Spreads continued to widen alongside the MOVE moving out, no matter what The Fed and Congress did
Today, all of that volatility, across asset classes, is starting to move at a faster rate. Gold Volatility > 41 and heading towards 51? Oil Volatility is at 130 and knocking out RECORD highs, daily! In Global Macro terms, that’s worse than 1987.
What to do other than keep doing what I always do? I’m measuring & mapping all of it so that I am market-signal rather than emotionally dependent. What to buy? Yesterday I started buying the US Dollar back. We’ll see if that works first. There’s volatility in that puppy still too!
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.56-1.11% (bearish)
SPX 2 (bearish)
RUT (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 49.14-59.90 (bearish)
REITS (VNQ) 63.43-79.81 (bearish)
Consumer Staples (XLP) 49.50-58.07 (bearish)
Tech (XLK) 70.02-84.03 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 161 (bearish)
DAX 8130-10007 (bearish)
VIX 39.13-86.04 (bullish)
USD 95.25-99.43 (bullish)
Oil (WTI) 23.43-34.04 (bearish)
Nat Gas 1.61-1.95 (bearish)
Gold 1 (bearish)
Copper 2.31-2.48 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
