“It is much easier to identify and label the mistakes of others than to recognize our own.”
- Daniel Kahneman
That’s an important behavioral quote from one of the Top 3 books I have Hedgeye Interns read, Thinking, Fast And Slow. It’s also a quote Jim Rickards used to introduce a chapter in his well-timed book, Aftermath. If I wrote a book this morning, I’d call it For Whom The Cowbell Tolls.
If you’re long assets in your portfolios, it’s really easy to identify how much money you just lost. After multiple panic-rate-cuts and “capitalists” begging for “fiscal” bailouts, short selling bans, and stock market shutdowns, it’s harder to recognize what the next “catalyst” might be…
Away from not respecting where we were in The Cycle pre-virus, the biggest mistake consensus bulls on Credit and Equity made was being levered long assets irrespective of where we were in the profit cycle. They were depending on central bank “liquidity” to protect the house.
Back to the Global Macro Grind…
There’s storytelling about “liquidity”, then there are illiquid credit and equity markets. In Credit, clearly it wasn’t different this time. With the Russell 2000 having crashed -43% from its cycle peak (you have to be +75%, from here, to get back to breakeven) it wasn’t either.
You get it. And now they, fully loaded with Bill Ackman begging/crying on TV, have tried almost everything to make it stop.
“They” are the believers that central-market-and-government-planning can bend and smooth economic gravity. It wasn’t easy to identify the mistakes embedded in their market expectations until everything crashed, in a month.
Now what?
Well, hopefully, as both a profession and people we have the self-effacing opportunity to not suck everyone into the “liquidity” trap next time we’re clearly past the peak of an economic cycle. Negative year-over-year profit growth wasn’t a BUY signal for levered credit and “stocks.”
“Next time” is a long way from here, btw.
From here, our job is to make the next best decision we have with the new data and market signals we’ve been delivered. Remember, play The Game you are in (a global breakout in cross-asset-class volatility), not the one you’d like to and/or need to have.
Dollar Up, Everything Down. Yep.
That signal was as clear as the sun rising in the East late last week. That’s when US Treasury Bond and Gold Volatility started to look like Global Equity Volatility. When all of that Vol is in the same Phase Transition, the right risk management decision is to raise Cash.
Q: If central-market-planners can’t do it, who’s going to knock Volatility back into a volatility bucket that makes assets investable?
A: No one “person” with the next big “plan” will. Time and space will.
#Quad4 in Q2, ends (maybe) in mid to late Q2. Everything we do in between now and then is measuring and mapping within the same risk management process we’ve employed to get us in the cash position we are in today.
On that score, here are the Top 3 Things (Institutional Research email I send out at 6AM EDT) I’m thinking about this morning:
- USD – epic #Quad4 move for the US Dollar as CASH is where you go when you can’t trust Equity, Treasury Bond, or Gold Volatility; every quarterly #Quad4 call we’ve made (Q418, Q319, and Q220) has resulted in what back-tested as probable (Dollar Up), but the pace of this move is now being perpetuated by Global Central Bank panic & a Currency War; EUR/USD smoked to $1.08 this morning GBP/USD down to $1.15
- BOND VOL – the MOVE (UTS Bond Vol) moved out last week, then European Rates blew up, and overnight the Australian’s (RBA) opted for another panic-rate-cut and the Australian 10yr Yield ramped +23bps in their face back up to 1.41%; this is the central-bank “liquidity” narrative crash; with Real Yields rising, Gold has immediate-term downside in my Risk Range to $1420/oz
- SPY – crash = 29.2% from its employment cycle peak with immediate-term downside towards the next circuit breaker (-7%) and then we’ll see what happens, but that’ll be a very short term #oversold signal that you can cover shorts on and then we go from there to the next play; VIX 76 is no place for “valuation” as a catalyst b/c most companies have no idea what their Q2 earnings are going to be; Russell 2000 crash = 43% from its Cycle Peak
And here are your Top 3 Callouts from Quadzilla (Darius Dale sends these to premium macro subscribers by 630AM EDT):
Top 3 Callouts:
1. More evidence of central bank policy impotence over the past 24hrs:
a. Brazil (BCB) cut rates -50bps yesterday to an ATL of 3.75% – the Bovespa Index closed down -10.4% in spite of the news
b. Indonesia (BI) cut rates -25bps overnight to 4.5% – the Jakarta Composite Index closed down -5.2% in spite of the news
c. Australia (RBA) cut rates -50bps overnight to an ATL of 0.25% – the S&P/ASX 200 closed down -3.4% in spite of the news
2. More leading soft data evidence of the draconian impact of SAR-CoV-2 containment measures:
a. Canada CFIB Business Barometer Index: -10.7pts to 49.8 in MAR – the lowest reading since MAR ‘09
b. Brazil CNI Industrial Confidence Index: -4.4pts to a 4mo low of 60.3 in MAR
c. Germany IFO Business Expectations Survey: -11.4pts to 82.0 in MAR – the lowest reading since JAN ‘09
3. More evidence of global disinflationary pressures to boot:
a. Eurozone Headline CPI: -20bps to a 3mo low of 1.2% YoY in FEB
b. Canada Headline CPI: -20bps to a 4mo low of 2.2% YoY in FEB
c. Japan Headline CPI: -30bps to a 4mo low of 0.4% YoY in FEB
Red, in rate of change terms, is bad. Green is good. The only green on my screen right now is cold hard US Cash. I’ll stay with that until the same process that proactively prepared us for this tells me to go the other way.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.48-1.24% (bearish)
SPX 2 (bearish)
RUT (bearish)
Utilities (XLU) 48.34-59.08 (bearish)
Tech (XLK) 68.55-80.61 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 155 (bearish)
DAX 7 (bearish)
VIX 44.26-90.98 (bullish)
USD 96.11-102.70 (bullish)
EUR/USD 1.07-1.11 (bearish)
GBP/USD 1.14-1.21 (bearish)
Oil (WTI) 20.02-30.05 (bearish)
Gold 1 (bearish)
Copper 2.01-2.33 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
