Grossly Exposed To Rates Rising?

“… the mental demands of being in such an exposed position.”
- Susan Schwartz

Imagine your Full Investing Cycle portfolio was grossly exposed to both Duration & Deflation Expectations? Imagine you weren’t long either Commodities or their commensurate Equity exposures during #Quad2?

The aforementioned quote asks you to envision being “on the side of a cliff, 200 feet above the ground” with nothing but your rock climbing process and mental constitution. Could you hang there, in thin air, being exposed to your convictions?

It’s also a quote from a great biography that one of our loyal subscribers sent me to help me think about both my herniated back and my process: JFK’s Secret Doctor – The Remarkable Life of Medical Pioneer and Legendary Rock Climber, Hans Kraus.

Back to the Global Macro Grind…

Good morning fellow market climbers and welcome to another Macro Monday @Hedgeye! On the 1^st day of every week we measure & map the rates of change of it all – oh, yes, I mean all of it – deliberately studying The ROC.

Let’s start with The ROC (rate of change) of the Global Currency market:

1. USD Index was down for the 2^nd week in a row taking its Bearish @Hedgeye TREND move to -2.1% in the last 3 months
2. EUR/USD was flat week-over-week taking its 3-month return to +2.1% = Bullish TREND @Hedgeye  
3. Yen continued to break-down vs. USD, down another -0.5% last week to -1.6% in the last 3 months = Bearish TREND
4. GBP/USD continued +1.2% higher last week taking GBP’s 3-month appreciation to an impressive +5.7%
5. Canadian Dollar was up another +0.6% vs. USD last week to +3.6% in the last 3 months = Bullish @Hedgeye TREND
6. Aussie Dollar was up another +1.4% vs. USD last week to +8.0% in the last 3 months = Bullish TREND @Hedgeye  

What do the Canucks and Australians have in common with the Chileans? Oh they have lots of real rocks! Natural Resources, eh! The Chilean Peso was +1.8% vs. USD last week to +7.1% in the last 3 months.

Obviously Full Cycle Investors who study The ROCs on a multi-duration basis have realized that being long of things that inflate in Devalued Dollars has made sense since we made that call in June of 2020. Here’s how Long Commodities did last week:

1. CRB Commodities Index inflated another +1.8% last week to +21.7% in the last 3 months
2. Copper inflated another +7.6% last week to +26.4% in the last 3 months
3. Nickel inflated another +5.5% last week to +23.4% in the last 3 months
4. Corn inflated another +1.0% last week to +26.2% in the last 3 months
5. Bitcoin inflated another +16.0% last week to +210% in the last 3 months

Oh no I didn’t. I didn’t trigger you already this morning by calling Bitcoin a Commodity, did I? Unlike the real rocks one mines Down Under, I don’t think you need a backhoe to mine it. Unlike corn on the cob, I don’t think you can eat it either.

If the marketing pitch doesn’t like calling Bitcoin a Commodity, just call it an Asset that inflates in #Quad2, ok? (btw commodities are assets)…

Moving along, what about the US Asset Class called Equities? Last week you could have:

A) Been long SPY, which corrected -0.7% from her all-time closing high
B) Been long Energy (XLE) and Financials (XLF) which inflated another +3.4% and +2.8%, respectively… or
C) Been long Utilities (XLU) and Staples (XLP) which deflated another -1.9% and -1.1%, respectively

Yep, like completely missing both The Cycle and its ROCs, you’re pretty much off the side of a cliff being long Deflation and/or Duration at this point. In the last 3-months alone (i.e. TRENDING Full Cycle Returns):

A) Energy Stocks (XLE) have inflated +28.3% vs.
B) Utilities (XLU) deflating -3.3%

Them be some damn #StrongQuads climbing them macro mountains! Imagine you had #WeakQuads and you were long something like Gold, which was down another -2.2% last week, taking it to -4.4% in the last 3-months…

All of this, of course, is being perpetuated by the proactively predictable breakout in long-term interest rates:

A) UST 10yr Yield ramped another +13 basis points last week = +51 basis points in the last 3 months
B) Yield Curve (10s/2s) steepened +13bps last week to +123 basis points wide = +56bps in the last 3 months

And High Yield OAS Spread continued to collapse, in kind, down another -4 basis points last week to a new Cycle Low of 3.19% (that’s down a big -103 basis points in the last 3-months alone too).

But why? Why did the Nikkei go up another +1.7% last week? Why did the yield on a 10yr Mexican Government Bond pop +49 basis points last week alone to 6.08%?

Ask The ROC of The Cycle. It doesn’t lie – people without Macro Awareness climbing at these Global #Quad2 heights do.

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

UST 10yr Yield 1.22-1.38% (bullish)
SPX 3 (bullish)
RUT 2 (bullish)
NASDAQ 13,820-14,144 (bullish)
Tech (XLK) 134.70-139.08 (bullish)
Energy (XLE) 43.06-47.11 (bullish)
Utilities (XLU) 61.05-62.54 (bearish)
Nikkei 29143-30680 (bullish)
VIX 19.17-23.30 (bearish)
USD 89.93-90.99 (bearish)
EUR/USD 1.201-1.219 (bullish)
USD/YEN 104.21-106.26 (bullish)
GBP/USD 1.375-1.404 (bullish)
CAD/USD 0.78-0.80 (bullish)
Oil (WTI) 57.12-61.58 (bullish)
Gold 1 (bearish)
Copper 3.71-4.14 (bullish)
Bitcoin 48,306-55,633 (bullish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer