“The Unites States periodically reaches a point of crisis in which it appears to be at war with itself.”
- George Friedman
In US markets, we call those cyclical points of deflationary crisis #Quad4. In Friedman’s Long Cycle framework, they can happen when what he calls the Institutional & Socioeconomic Cycles collide. Neil Howe came up with that first – he calls them “4th Turnings.”
As Friedman argues in a chapter of The Storm Before The Calm that he aptly titled How America Changes:
“We tend to evaluate America based on day-to-day news stories and immediate trends and feelings, but the larger wheels of America are driven by two very orderly cycles…” (pg77). Meanwhile Quad2 or Quad3 to #Quad4 economic cycle shifts are not orderly!
Back to the Global Macro Grind…
Welcome to another Macro Monday @Hedgeye where we’re measuring and mapping immediate-term TRADEs and intermediate-term TRENDs within the lens of the long-term TAIL risks of The Cycle.
As usual, let’s start with what the Global Currency market is signaling:
- US Dollar Index was -0.4% last wk but signaled a series of higher-lows throughout the week and moves to Bullish TRADE today
- EUR/USD was -0.1% last week and is signaling Bearish TRADE but still Bullish @Hedgeye TREND
- Yen appreciated another +1.5% vs. USD last week and remains Bullish on both my TRADE and TREND durations
- GBP/USD bounced +0.9% last week but is currently signaling Bearish TRADE and Neutral @Hedgeye TREND
- Russian Ruble dropped -3.4% vs. USD last week, breaking bad to Bearish TRADE and TREND
- Chinese Yuan appreciated another +1.0% vs. USD last week and remains Bullish TRADE and TREND @Hedgeye
One of the hardest things for humans to do is weigh signals and thoughts that are counter to one another.
That’s why I built my risk management #process to be agnostic to that and objectively score Bullish or Bearish, across durations, with volatility as my leading indicator.
In FX, for example:
A) Russia’s currency volatility spiked alongside a breakout in both the volatility of Oil and Russian Stocks … whereas
B) China’s currency volatility continues to break-down as economic data continues to #accelerate into a legit #Quad2
While some may “feel” like being long a #Quad2 Asset Allocation in the USA, that stopped working in JUN. What’s started to work in SEP is long a #Quad4 portfolio as #InflationAccelerating gains of #Quad3 in Q3 peaked at the end of AUG alongside a falling Dollar.
Instead of making a “big call” on it definitely being #Quad4 now instead of #Quad3, all I’ve done is:
A) Taken my net LONG Tech position to zero
B) Reduced my #Quad3 Gross and Net Long exposures to Commodities and
C) Started Shorting Oil late last week
Since neither Tech nor TIP (Treasury Inflation Protection) outperform in #Quad4, I sold the rest of my TIPs on Friday as well and added more duration (longer-term Treasuries) to my portfolios as longer-term Treasuries were on sale on Friday.
Last week the UST 10yr Yield was up +3 basis points (= buying opportunity in IEF and TLT) to 0.69% but the yield remains:
A) Bearish @Hedgeye TRADE and
B) Bearish @Hedgeye TREND …
And that’s bullish for Treasury Bonds, making it a no brainer in Asset Allocation terms. While Long-term Treasuries work fine in #Quad3 relative to something like those terrible Financials (XLF), they really work when US markets are in #Quad4 crisis.
The other big Asset Allocation I’ve had since June is long both Chinese (KBA and KWEB) and EM Equity (EEM):
A) Chinese Stocks (Shanghai Comp) was +2.4% last week and remains Bullish @Hedgeye TRADE and TREND
B) Emerging Markets Equity (MSCI) was +1.5% last week and remains Bullish @Hedgeye TRADE and TREND as well
That said, both are signaling lower-highs within their Bullish @Hedgeye TRENDs. There’s zero percent surprise in that Similar Set alongside the US Dollar Index signaling higher-lows. So I took down my gross exposure to KBA, KWEB, and EEM on the bounce.
Gold was the other big Full Investing Cycle Asset Allocation that was:
A) Up +0.5% last week, beating SPYs and QQQs, but…
B) Signaling lower-highs alongside USD signaling higher-lows
Selling something that’s up towards the top-end of its @Hedgeye Risk Range is embedded risk management because, that way, I’m not chasing charts. There are no rules against buying some of my Gold and Chinese Equities back on sale this week.
And, again, I don’t have to know if markets are “definitely” moving to a #Quad4 in Q4 USA vs. #Quad2 in Q4 China setup either. I just have to keep moving as both the economic data and my market signaling process does into the end of Q3.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.63-0.71% (bearish)
UST 2yr Yield 0.10-0.15% (bearish)
SPX 3 (bearish)
RUT 1 (bearish)
NASDAQ 10,585-11,239 (bearish)
Financials (XLF) 24.27-25.19 (bearish)
Shanghai Comp 3 (bullish)
VIX 24.59-32.34 (bullish)
USD 92.66-93.70 (bearish)
EUR/USD 1.17-1.19 (bullish)
USD/YEN 104.05-105.80 (bearish)
GBP/USD 1.26-1.30 (neutral)
Oil (WTI) 35.21-41.59 (bearish)
Nat Gas 1.91-2.31 (bearish)
Gold 1 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
