“Galileo and Kepler ventured beyond the static world of Archimedes and explored how things moved.”
- Steven Strogatz

As the US economy enters explicit periods of #Quad4 (growth and inflation slowing at the same time), we know how the Fed moves (quickly to cut rates). When that’s not enough, Wall Street begs Congress to move with moarrr corporate bailouts and levered fiscal spending.

The toughest part of this for a super #LateCyle (Equity or Credit) bull to deal with is that, no matter what the latest central-market-plan, economic gravity doesn’t cease to exist and/or get fully “priced in.”

Really smart people have struggled with this timing problem since Galileo’s Renaissance Italy. “The laws of motion they were discovering were written in an alien language. The language, as yet unknown, was differential calculus.” (Infinite Powers, pg 59)

 Deep #Quad4 - 05.29.2019 Quad 4 cartoon

Back to the Global Macro Grind…

Welcome to another Macro Monday @Hedgeye! Whether were in a raging bull/bubble market or a crashing bear, we will relentlessly measure and map all economic data and market signals for you within the context of our Full Investing Cycle asset allocation model.

Let’s start with the Global FX market and why being long a lot of US Cash continued to work last week (hint: the laws of motion in #Quad4):

  1. US Dollar Index ramped +4.1% last week and remains Bullish TREND @Hedgeye (as is should be with the world in #Quad4)
  2. EUR/USD fell another -3.8% last week and remains Bearish TREND @Hedgeye  
  3. Yen corrected -2.7% vs. USD last week moving from Bullish to Neutral TREND @Hedgeye 
  4. GBP/USD continued to collapse, down another -5.3% last week, and remains Bearish TREND @Hedgeye
  5. Mexican Peso crashed -10.2% vs. USD last week and remains Bearish TREND @Hedgeye 
  6. Norway’s Krone crashed -15.0% vs. USD last week and remains Bearish TREND @Hedgeye  

Yes, when the global economy (which in China, Europe, and EM has been #slowing, in calculus terms, for over 2 years now) #slows at its fastest pace, people get scared and go to cash. The US Dollar remains the world’s reserve currency.

US Dollars were also up +8.5% and +7.7% vs. Indonesian Rupiah and South African Rand, respectively, last week. And you know it’s not just #Quad4, but Deep #Quad4, when Commodities, late cycle Credit, and Equities all crash, in Dollars, at the same time:

  1. CRB Commodities Index was down another -12.0% last week taking its crash to -29.1% in the last month alone
  2. Oil (WTI) crashed another -29.5% last week taking its crash to -58.1% in the last month
  3. Copper crashed another -16.4% last week … and has been Bearish TREND @Hedgeye for over 2 years (who could see that coming?)
  4. Silver collapsed -14.6% last week taking its crash to -32.7% in the last month

Oh I know. Silver is not Gold. And paper Gold and Silver aren’t the same as the physical version of either. Regardless, neither asset enjoys it when its volatility undergoes a bearish to bullish Phase Transition. Gold Volatility at 37 this morning says Gold can easily correct towards $1402.

In addition to being long US Dollars in the last month of particularly nasty #Quad4 economic risk:

A) Long Coffee worked – it was +12.1% last week and is +14.1% in the last month
B) Orange Juice worked – it was +6.9% last week and is +5.2% in the last month

Remember, while the language of fractal math is still alien to plenty of linear “valuation” experts, it’s still a fact that it’s the particular that matters most (at a particular point in The Cycle) in macro risk management, not the “averages” or “ratios” of things.

Orange Juice, in particular, has gone from non-keto compliant to virus defensive, eh.

The other thing that continued to “work” is being outright long the volatility of assets. Front-month US Equity Vol (VIX) rocketed +66% higher last week and is +324% in the last month alone. It was for sale late Friday morning, but some people wanted to “buy stocks” instead.

As I’ve been trying to warn people at VIX > 31, virtually ALL of Equity becomes uninvestable in that particular window of time. Ask REITS (VNQ). They crashed -24.9% last week and are down -39.9%, in a month!

Yeah, I’ll come back to buying certain Sector Styles (Utes, Staples, REITS), but not until my volatility signal gives me the green light. Being a “long-term” Full Cycle Investor requires you to be really discerning in the short-term of particular #Quad4 times.

What I’m not going to be buying are Factor Exposures like:

A) LEVERAGE
B) SMALL CAP
C) HIGH BETA

With US Equity Beta (SPY) down another -15% last week (crashing -32% in the last month), as you can see in today’s Chart of The Day, those Factor Exposures were down -21-23% last week and –44-50% in the last month!

Meanwhile, High Yield OAS Spread widened way out to +1,013 basis points over last week. Whoever wants to buy that super #LateCycle exposure because Mnuchin is going to write “big checks” can be my guest. I’ll happily short more Junk and Levered Loans on that lunch-time bid, if I get it.

Immediate-term @Hedgeye Risk Range with TREND signal in brackets:

UST 10yr Yield 0.63-1.23% (bearish)
SPX 2138-2548 (bearish)
RUT (bearish)
Utilities (XLU) 45.18-55.46 (bearish)
REITS (VNQ) 52.27-71.02 (bearish)
Tech (XLK) 66.14-78.96 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 152 (bearish)
DAX 7 (bearish)
VIX 45.86-91.17 (bullish)
USD 98.16-104.88 (bullish)
EUR/USD 1.06-1.09 (bearish)
USD/YEN 102.65-111.96 (neutral)
GBP/USD 1.11-1.20 (bearish)
Oil (WTI) 19.35-28.41 (bearish)
Gold 1 (bearish)
Copper 2.02-2.34 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer

Deep #Quad4 - Chart of the Day