“The United States was born in battle. Its institutions were forged in war.”
- George Friedman 

And you thought risk managing Tech Stocks was tough in #Quad4? Try one of those short-cycle realities during what Neil Howe calls a generational Fourth Turning!

In Friedman’s The Storm Before The Calm, he writes about the longer-term Institutional Cycle: “Every eighty years or so, the United States shifts the way its political institutions work. The broad framework of the Constitution stays in place, but the federal and state institutions change their relationships to each other and change the way in which they work.”

“So far there have been three such shifts. Each was made necessary because the existing arrangements no long worked.” (pg 95)

#Quad4 In Q4 It Is - 10.02.2020 get well cartoon

Back to the Global Macro Grind…

Welcome to another Macro Monday @Hedgeye! On the 1st day of every week we measure and map the prior week’s Global Macro market moves within the context of The Cycle.

As usual, let’s review what happened in the Global Currency market last week:

  1. US Dollar Index corrected -0.8% to signal a big higher-low (Bullish @Hedgeye TRADE) and is +1.1% in the last month
  2. EUR/USD bounced +0.7% last week to -1.2% in the last month and is Bearish TRADE, Bullish TREND @Hedgeye  
  3. Yen appreciated +0.3% vs. USD last week and remains Bullish on both my TRADE and TREND durations
  4. GBP/USD bounced +1.5% last week to -3.1% in the last month and is Neutral @Hedgeye TREND
  5. Brazilian Real fell another -2.1% vs. USD last week to -6.0% in the last month and remains Bearish TREND
  6. Turkish Lira devalued another -1.5% vs. USD last week to -5.6% in the last month and remains Bearish TREND  

We’re often asked why the US Dollar can’t appreciate vs. other countries who are willing to devalue the purchasing power of The People in those countries. Evidently in both Brazil and Turkey, they absolutely can! That would perpetuate #Quad4 in the USA.

On that score, the probability rose from > 43% last week towards 57% that the USA is in #Quad4 in Q4 of 2020. The probability of the USA being in #Quad3 fell to < 41%. Whoever is still “rotating” into #Quad2, is probably going to keep getting rotated YTD.

The easiest place to see #Quad4 probability rising is in the Commodities market:

  1. Commodities (CRB Index) deflated -2.9% last week to -4.8% in the last month, breaking to Bearish @Hedgeye TRADE  
  2. Oil (WTI) deflated -8.0% last week to -11.5% in the last month, breaking bad back to Bearish @Hedgeye TREND  
  3. Coffee deflated -4.1% last week to -17.0% in the last month, breaking bad to Bearish TREND @Hedgeye too 

In US Equity Sector Styles, you got the same #Quad4 message last week (same one we’ve had for a month):

A) Energy Stocks (XLE) deflated another -2.9% last week to -16.8% in the last month
B) Utilities (XLU) appreciated +3.4% last week to +0.5% in the last month

Don’t like Utes or #Quad4 because you like your FAAMG stahks? Wake up and smell the coffee. Oil matters to the model.

While the index (NASDAQ) finally bounced on the weekly (it was +1.5% last week, with SPY up the same, up for the 1st week in 5), one of the most widely held stocks in human history, Microsoft (MSFT), was down another -0.8% last week:

A) NASDAQ is -8.1% in the last month
B) MSFT is -11.0% in the last month

Both are currently signaling Bearish @Hedgeye TREND with NASDAQ Volatility (VXN) not “rotating” out of the wrong regime of volatility at 36.44. For that to happen it needs to break-down and hold below 31.

So, is the Fed going to buy the NASDAQ? Maybe. Right before the election? Unlikely.

Despite everything the Fed has done in 2020, isn’t it amazing that #Quad4 is now the probable economic outcome? Almighty and powerful they were, for 3-6 months… then The Gravity got them!

So now it’s back to the gravity of both the short and long-term cycle vs. the effervescent Old Wall hope that the Fiscal bails out The Fed. The bond market continues to toy with that central market and economic planning idea:

A) UST 10yr Yield popped back up to yet another lower-cycle-high of 0.70% last week… while
B) High Yield OAS Spread came in -27 basis points to +510bps over Treasuries

Despite the Fed buying Junk Bonds (instead of buying poor people meals, which can be done, MMT style btw), the gravity got Junk “investors” for +39 basis points of spread widening in the last month too.

Gold liked the Down Dollar move last week (Gold was +2.1% on the week, beating SPY like Tom Brady’s vs. Rookie Herbert’s age this year at +25.2% YTD) but is starting to signal lower-highs alongside inflation (top end of my Risk Range = $1929/oz).

Commodity Deflation sensitive countries like Russia (down -7.0% in the last month) and Australia (down -4.2% in the last month) are signaling #Quad4 probabilities rising. If only the Fed could bend and smooth Global Gravity too…

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

UST 10yr Yield 0.63-0.72% (bearish)
SPX 3 (bearish)
RUT 1 (bearish)
NASDAQ 10,546-11,423 (bearish)
Tech (XLK) 110.01-119.16 (bearish)
Utilities (XLU) 56.64-60.99 (bullish)
VIX 25.06-29.85 (bullish)
USD 93.36-94.94 (bearish)
USD/YEN 104.84-105.99 (bearish)
GBP/USD 1.27-1.30 (neutral)
Oil (WTI) 36.98-39.90 (bearish)
Gold 1 (bullish)
Silver 22.56-24.94 (bearish)
MSFT 198-213 (bearish) 

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

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