Volatility Breakout

“Do I believe the solutions to all our problems is to simply spend more money? No, of course not.”
- Stephanie Kelton

As you’re dealing with the draw-down risks associated with a breakout in the VIX above 30, I’d hit the button and buy Kelton’s book, The Deficit Myth. I just finished reviewing her book – it’s the best one I’ve read on simplifying MMT.

No, that doesn’t mean I’m a born again MMT fan (I’m the KMT guy, remember!). It just means that I have a much better understanding of it. That will help me debate its economic and market impact going forward.

In kind, I think MMT economists would serve the country well spending some time understanding not only our Quad framework, but the causal and explicit impact that a devalued fiat currency has on low and middle income earners in an economy.

Back to the Global Macro Grind…

Welcome to Macro Tuesday @Hedgeye where Monday isn’t the 1^st trading day of the US macro market week, and what’s going on around the world didn’t cease to exist because people chasing AAPL and TSLA for their “splits” thought it did.

Let’s start with what happened in the Global Currency market last week:

1. US Dollar Index had a Counter @Hedgeye TREND bounce of +0.4% last week and remains Bearish TREND
2. EUR/USD corrected -0.5% last week but is +4.4% in the last 3 months and remains Bullish TREND @Hedgeye  
3. Yen corrected -0.8% vs. USD last week and also remains Bullish TREND @Hedgeye 
4. GBP/USD corrected -0.6% last week but is +5.4% in the last 4 months and remains Bullish TREND as well
5. Canadian Dollar was +0.3% vs. USD last week and is also signaling Bullish TREND @Hedgeye  
6. Turkish Lira was devalued another -1.3% vs. USD last week taking its 3-month devaluation to -9.2%

Yes, MMT economists say we can give everyone a job at $15/hour. But if that country is devaluing its currency, the Cost of Living isn’t static. It moves, in real-terms. And real moves can often be non-linear, don’t forget! Turkey is learning that lesson now.

In conjunction with last week’s short-term US Dollar appreciation, we saw some short-term deflation of market prices:

1. NASDAQ was down -3.3% but is still +17.7% in the last 3 months and remains Bullish TREND 
2. Oil was down -7.4% but is still +4.1% in the last 3 months and remains Bullish TREND  
3. Gold was down -1.6% but is still +12.8% in the last 3 months and remains Bullish TREND 
4. Lumber was down -16.3% but is still +80.8% in the last 3 months and remains Bullish TREND  
5. Silver was down -3.9% but is still +45.5% in the last 3 months and remains Bullish TREND

Short-term deflations of inflating prices (intermediate-term) happen during #Quad3. So do ongoing inflations!

1. Copper inflated another +1.4% last week and has inflated +21.7% in the last 3 months = Bullish TREND
2. Palladium inflated another +5.0% last week and has inflated +22.3% in the last 3 months = Bullish TREND
3. Coffee inflated another +5.4% last week and has inflated +31.4% in the last 3 months = Bullish TREND
4. Lean Hogs inflated +11.5% last week and have inflated +14.8% in the last 3 months = Bullish TREND

In other words, The People will pay those inflated prices in devalued dollars as we KMT people got paid being long of Copper (CPER), Palladium (PALL), Coffee (JO), and Hogs (COW) in ETF and ETN terms.

Of course there’s always TAAS (there are alternatives to SPY) somewhere. The Long Bond (10yr Treasury) was flat week over week and didn’t feel the pain that being long something like the Russell 2000 (IWM) has across the Full Investing Cycle.

Russell (IWM) was -2.7% on the week to -11.8% from its Cycle Peak (Q3 of 2018) and is only +5.7% in the last 3 months. The Financials (XLF) were up +0.3% last week but are dead money flat at 0.0% return in the last 3 months.

Being long something like Chinese Stocks (Shanghai Comp is +14.9% in the last 3 months) and selective Emerging Equity Markets has absolutely pounded the US “Value” play of Long Russell and/or Financials.

*Remember, 3 months or more, in our model = @Hedgeye TREND.

The Bearish @Hedgeye TREND remains a friend of the European “Value” bears. London’s FTSE was down another -2.8% last week taking its 3-month loss to -8.6%. Spain’s IBEX lost another -2.0% last week, taking its 3-month loss to -7.6%.

Not ironically, my recent Volatility Breakout signals for both the NASDAQ (VXN) and SP500 (VIX) now look like what volatility in US Small Caps (Russell) and the FTSE and France/Spain have since June. Stay tuned on all of that non-linearity!

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

UST 10yr Yield 0.60-0.74% (bearish)
UST 2yr Yield 0.11-0.16% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
NASDAQ 11,209-12,115 (bullish)
Financials (XLF) 24.27-25.55 (bearish)
Shanghai Comp 3 (bullish)
VIX 24.53-36.08 (bullish)
USD 92.03-93.33 (bearish)
EUR/USD 1.17-1.20 (bullish)
USD/YEN 105.34-106.74 (bearish)
GBP/USD 1.30-1.33 (bullish)
Oil (WTI) 38.23-44.07 (bullish)
Nat Gas 2.38-2.74 (bullish)
Gold 1 (bullish)
Silver 25.85-28.96 (bullish)
Copper 2.92-3.09 (bullish) 

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer