“Gravity explains the motions of the planets, but it cannot explain who sets the planets in motion.”
- Isaac Newton
Instead of a lazy and conflicted Old Wall media chorus making pleas to “not fight the Fed”, I think a lot more time should be spent on not fighting economic gravity. Ironically enough, it was during a pandemic that Newton saw the light:
“The story goes that he saw an apple fall. The Black Plague having chased him from Cambridge in 1665, Newton was strolling on his mother’s farm in Woolsthorpe, and he saw an apple fall to the ground, and he asked himself: could the same cause the motions of matter?” -The Trouble With Gravity, pg 68
If you were strolling somewhere yesterday and you saw a barrel of oil crash through $0/barrel, did you ask yourself anything new? Since I personally don’t believe The Fed sets the planets in motion, I’ll say that the causal factor on that was gravity too.
Back to the Global Macro Grind…
As opposed to thinking about the world the way Aristotle did (that the Earth was the center of the universe), Newton thought in ROC (rate of change) terms.
“Calculus allowed Newton to divide an orbit, or any curve, into as many small increments as the universe allowed: an infinite number of infinitesimal triangles.” (pg 73)
Yep, if a basic inverse-square model crushed an almost 2,000 year old mental (and religious) model of Aristotelian logic, why on my God’s good earth should I believe in the Bernanke Fed model of a “new normal” of market volatility?
Oil Volatility just went to 226, bro!
Set aside how dead-wrong Bernanke’s 2006 thesis was on that and think about short-term volatility of 226, mathematically, for a second… and keep thinking…
If you thought VIX 43 was “high” and un-investable, OVX (Oil Volatility) is 5x higher than that!
And what does Oil trading at a negative price per barrel mean? A: 3 words and 1 number = Deep #Quad4 Deflation. That’s right, unlike some short-term-crony-marked-to-model price of a High Yield or Junk bond, that’s the free market price when:
A) Demand crashes into
B) Oversupply
Surely, the intellectual argument shall be something along the lines of this being a “one off”, or something like that. But this is the world’s deepest and most liquid component of a major asset class – one that you should have been short of in #Quad4.
The Fed’s fan club argument would be that ‘well, we didn’t do enough about that.’ That’s a counter-factual. And yes, technically speaking, we don’t know what oil and/or its volatility would have done if PE Powell started buying it…
But he didn’t buy barrels of oil… and he didn’t buy bank “stocks” either.
Of course, the follow on Fed fan club argument to that will be … ‘well they just might buy oil and stocks next’… and they might. Heck, when you fundamentally believe you can bend and smooth economic gravity, you must feel pretty almighty.
But, in the meantime, the economic gravity of the matter still happened.
What happens next? Well, pre-virus-ex-March, and pre-oil-negative-per-barrel-deflation, the gravity of a US Earnings Depression remains front-center this morning:
A) 54 of the SP500’s companies have reported an aggregate year-over-year EPS depression of -29.5%... and
B) Financials (20 of 65 have reported) have printed an overstated aggregate y/y EPS depression of -50.7%
Yes, the banks overstated earnings in Q1 of 2020. Inclusive of this epic post Q1 crash in Oil and related unsecured realities, what do you think bank earnings are going to look like come the end of Q2?
I know. If we “look past” all that, click our heels, and just believe that The Fed will get this to the “other side”, it’s all good. In the meantime though, fighting the Fed (shorting the Financials) has been awesome. Gravity explains those gains too.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.56-0.79% (bearish)
UST 2yr Yield 0.16-0.28% (bearish)
SPX 2 (bearish)
RUT 1160-1250 (bearish)
REITS (VNQ) 68.95-79.90 (bearish)
Consumer Staples (XLP) 56.06-61.17 (bullish)
VIX 36.09-49.93 (bullish)
USD 98.90-100.99 (bullish)
Gold 1661--1797 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
