THE CASCADE – PINECONE MACRO RESEARCH MARCH 18TH, … · 2019. 5. 1. · THE CASCADE – PINECONE...

THE CASCADE – PINECONE MACRO RESEARCH MARCH 18TH, 2019

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Financial Justice Warriors

This tweet got a lot of traction this weekend, so I decided to write a little about it. First and foremost, I come from the Austrian School so I can assure you I come from the Financial Justice Warrior school as well. I understand these people all the way to their core, because I was one. Their stance is one that I applaud and commend from a societal, political, and even economic point of view. However, from a trading/investing point of view, these people just do not get it. As investors we MUST see the world as it is, not as we believe it should be. The world as it is – is a world dealing with the middle of a Fourth Turning and the late innings of a long term debt cycle. This is a time that ends up seeing fiscal/monetary/political policies that shock conservative thinkers. We live in an era where MMT and populism and “socialism” become the answers the people seek. You can either bet against asset prices because you disagree with these ideas or you can first make handsome profits, because they will first lead to a blow off in many assets. A lot of money managers tell me they are responsible to their clients and they must be prudent in protecting them from this insanity. I understand and empathize with this and I do not manage other people’s money, so it is easy for me to write about how others should handle



this…but…I think ignoring a blowoff in certain assets *could* make one a poor fiduciary. Part of being a great steward of the capital of others is having an intimiate understanding of short and long term cycles and “playing” them. If you believe as I do that the political left will take power in the next few years and will implement policies that de-link government spending from debt – you recognize that capacity/labor/inflation will all be pushed to their limits and the misallocations of capital today – may be nothing compared to where they are headed before this story ends. When you add to this the fact that US stocks are now a macro imput and not just a guage or an output – you realize that policy makers have a mandate to ensure that US stock prices stay on a trajectory that makes investing in them rather important. If stocks go too low – pensions, tax reciepts, and many other important variables take a hit that is unacceptable today. Knowing this, we know that dips or crashes will be defended, even with policies we deem insane. Sure, trees do not grow to the sky and this cycle – like all cycles will find an end – it is just that the end of this long term cycle could be more distant than FJWs want to think. Stripping the link from government spending to debt buys time, fiscal stimulus buys time, make work projects or UBI buys time, free school or healthcare buys time. Negative interest rates or war on cash policies buy time. The point is – the bullets left for our overlords that buy time are still there. The government has a deeper bench than the doom lovers want to believe. Why not make money on the insanity and then make money on the other side? FJWs have missed out on a decade of amazing returns while they seeked justice and more “appropriate” policies. They have been angry at central banks, the government, corporate leadership, and investors chasing misallocations of capital. They are not wrong, but they have also not made any money. If you want to be “right” then sell everything and buy gold and wait for many years. If you want to make money for the next few years, get long the assets that will do well during the insane late innings of this cycle and this Fourth Turning.



US Stocks S&P 500 - Weekly

I have been bearish (wrong) lately and despite a very bullish chart here – I am staying bearish. I am not willing to short this market but lean bearish. You will see why in the chart that follows. With that said, the close last week above my red line was significant. It would not be shocking to see a test of the old channel line – and even the all-time highs. This is why buying in late Dec was vital.



Bristlecone Index & SPX (Blue Line) – Weekly

I usually only show the Bristlecone but decided to overlay the S&P this week because I wanted to illustrate that cyclicals are finally not underwriting the move higher in stocks. Cyclicals have not been keeping up lately, which when added with yields falling, suggests this move in stocks could be ready to roll over. This is why I remain bearish for now on stocks.

VIX - Weekly

This VIX, unlike yields and cyclicals, is saying buy stocks. Last week, we retested the top of “The Line” and the 200W, then promptly made new lows.



The Dollar

$DXY – Weekly

The dollar retraced most of last week into a bit of a demand zone which could come into play this week. We are now in a fight between supply (red) and demand (green) within the year long range (blue). Like I keep saying (and not always heeding) you cannot get excited either way with the dollar until this range gives way on a weekly closing basis.



Bonds

2yr Yield – Daily

Been bullish on the 2yr and I am still bullish – I expect a test of the lows in yields for the year.

5yr Yield – Daily

I have been pounding the table on this one – I am long (betting on lower yields) and I expect us to go much lower from here. This trade was a great setup.



10yr Yield - Daily

The 10 is also a long – I think yields are headed lower shorter term.

30yr Yield - Daily

The 30 is the only maturity I am not long. The 30 is bouncing between a couple trendlines right now and still screaming steepener between the 30 and the 2 or the 5.



Currency of the Week

USDCNH – Daily

In my opinion getting long the dollar against the yuan is a great risk reward right now. The upside is near 7 and you can put a stop at 6.65 for a great risk reward trade. The pair is in a well-defined falling channel that looks ready for an imminent breakout.



Commodity of the Week

Wheat Futures (Continuous) – Weekly

Wheat – like many soft commodities is very interesting right now. You can see that we are bouncing off of trendline support but also just below an important horizontal area and the 200W. Wheat, corn, sugar, soybeans, soybean oil, coffee, and cotton are all at make or break levels. March and April will be very important for the direction of ags.



Stock of the Week

AMZN – Amazon - Weekly

Amazon is “the” stock in my mind and it is at a crucial level right now. How Amazon handles this horizontal area may tell you how the overall market is going to act in the weeks to come. Keep a close eye on AMZN.



Ratio of the Week

OIH/XLE – Oil Services ETF vs Energy Sector ETF - Monthly

This ratio captures how poorly oil services has fared lately. OIS is being dramatically outperformed by the run of the mill major oil stocks despite the fact that the XLE is negative over the past five years. Oil services is in a depression. I am going to watch this carefully for signs that there is trouble in shale land. The way I see it at least – XLE has more shale exposure than OIH. I prefer investing in off shore oil vs shale and thus I watch more companies that are in OIH. Despite my views on oil and shale – I know waiting for offshore to outperform shale may be a story that takes a lot of time. I use this ratio as a proxy to keep an eye on that battle for the signal that it is time to do a deeper dive.



Dumpster Fire of the Week

EWW – Mexico ETF - Weekly

Mexico has a lot going for it but AMLO has not really been one of those things in the eyes of markets. Mexican stocks have been a dumpster fire since late 2017 and after failing on a retest of the underside of support and a trendline – we are now threatening to break below a bear flag – which could even usher in new lows. This is going to be a great buy at some point, but I am not going there yet. Also, FWIW there are some famous macro guys out there touting Mexican assets and have been since it looked like AMLO would win. Speaking of Mexico – I think it is time to get short the peso – as you can see…great setup.



Charts of the Week

This (white line/blue circles) is the percent of small businesses seeing cost of labor as their “single most important problem.” As you can see the last few times we got up here it predicted a recession. Chart via @ThePainReport

This chart via Robin Brooks shows one of the reasons I am very bearish the rand (ZAR). A ton of money found its way into SA during the QE years which leaves SA very susceptible to outflows.



Looks like China still has more slowing to do.



Gundlach included this slide in his most recent presentation. We all know that this is true, but man this is intense when you see it on a chart.

Despite this, there are plenty of folks itching to sell the dollar and even buy the euro. This chart really shows you just how many more bullets the Fed has than their peers. Speaking of, Financial Justice Warriors (FJWs) in the US love to point to BBB and corporate credit overall as a huge problem and it is – but remember – the ECB and BOJ have ALREADY bought corporate bonds.



I found this chart very interesting and pretty scary. Obviously sales of semis can overshoot pretty hard on here like in 01 and 09 but this is still worth watching.



Tweet of the Week

Read of the Week: Great piece from the FT on Dutch Disease and the USD. Listens of the Week: The Market Huddle this week is a MUST. Kevin Muir’s take on MMT is well worth your time. He touches on what I have recently wrote about in the Greenbacker piece. Also, Tim Ferriss had on Graham Duncan who is an allocator and it was a great interview. I highly recommend this one as well. Watch of the Week: Hedgeye’s Neil Howe with a quick video about The Fourth Turning. Oh and Billions is back and that is certainly a must watch. The first episode was awesome.

This tweet is the beginning of a great thread from Jawad. Something I have been intellectually wrestling with is the tension between the Silicon Valley bubble and Tim Urban’s “Fourth Planet” idea. Basically innovation and change is going parabolic and we may not recognize our world thanks to technology in say 25 years. Nobody wants to hear it is different this time – but the good reasons to pour money into startups *may* be better than any time in history based on the pace of world changing innovation.

https://ftalphaville.ft.com/2019/03/13/1552487003000/How-to-diagnose-your-own-Dutch-disease/

https://ftalphaville.ft.com/2019/03/13/1552487003000/How-to-diagnose-your-own-Dutch-disease/

https://www.youtube.com/watch?v=Dd5oshwcjMs




https://tim.blog/2019/02/28/graham-duncan/



https://youtu.be/8Yfb2zQjKWE

https://twitter.com/jsmian/status/1106888860259233792



I am grateful for your time and your readership. Thank you. Your Macro Analyst, -Chase Taylor

Quote of the Week

“If you have nothing to stir you up and rouse you to action, nothing which will test your resolution by its threats and hostilities; if you recline in unshaken comfort, it is not tranquillity; it is merely a flat calm.”

― Seneca

Disclosure: Pinecone Macro Research, LLC is an independent research firm. Pinecone Macro’s letters are based upon information gathered from various sources believed to be reliable but are not guaranteed as to accuracy or completeness. There are risks in investing. Any individual report is not all-inclusive and does not contain all of the information that you may desire in making an investment decision. You must conduct and rely on your own evaluation of any potential investment and the terms of its offering, including the merits and risks involved in making a decision to invest. The information in this letter is not intended to be, and shall not constitute, an offer to sell or a solicitation of an offer to buy any security or investment product or service. The information in this report is subject to change without notice, and Pinecone Macro assumes no responsibility to update the information contained in this report. There is risk in trading markets. Pinecone Macro is not an investment advisor. My letters are based upon information gathered from various sources and believed to be reliable, but are not guaranteed as to accuracy and completeness. The ideas and trades I share are my own and are for informational and educational purposes only and should not be construed as investment advice. Accordingly, you should not rely solely on the information in making any investment. You should always check with your licensed financial advisor to determine the suitability of any investments.

THE CASCADE – PINECONE MACRO RESEARCH MARCH 18TH, … · 2019. 5. 1. · THE CASCADE – PINECONE...

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