"We don't rise to the level of our goals, we fall to the level of our systems" ~James Clear

I spent 12years in the military on nuclear submarines. Every day was training day. If the game day had ever come you wouldn't have read about it in the newspapers because there might not have been any newspapers left to read. A very solemn start to the morning with this one. The point is that although we had one aim for every patrol, the dangers were everywhere. So we had to train for them. Fires, hydraulic bursts, loss of control, reactor scram, the list goes on and on. Then there is the mundane managing food for an 8-week patrol when you are pushed into week 14. As an engineer, we have no shore support. We have to plan what spares we take with us make sure all our documentation is up to date etc because there is no internet no phones no email. My job is not to provide 100% capability to the Captain if that 100% has an impact on availability. There was always a compromise. If like our bodies a piece of equipment is mission-critical then we normally have two fitted. If we cannot have two then we protect the one we have, or we run it at less than maximum to increase its availability.

What's the point Chris?

Sometimes knowing that your goal is to make x% this year, but today might not be the day you make money. What if it is your system telling you today is the day you protect what you already have so that you can play from a stronger position tomorrow.

FOMC today could be a doozy or it could be a snoozy. I know which way I am leaning. You could have all kinds of plans for the next 3 years for this or that investment (goals) but on a day like today it could be your training (systems) that either keep you from mistakes or allow you to see through the fear to capitalise.

Factors: SPLV Low Beta tops the list alongside its recent bed fellow DEF Defensives. Who would have thought coming into this year QQQ Secular Growth would be up 17.82% YTD and MTUM Momentum would only be up 8.56%.

Sectors: Risk-off the factors say well I raise you XLU Utilities 1.72% on the day. Utilities topping the charts does not a sexy day make. These moves all coming on increased individual ETF volume, total market volume was down on the "correction" yesterday.

Fixed Income: Long duration all the way EDV Extended Duration and TLT 20+yr Treasury topping the list yesterday and building on 3M momentum. A big divergence on 1M here though. Is this just a use mismatch or an important duration mismatch?

FX: The usual safety currencies are here FXY Yen FXF Swiss Franc but FXB British Pound sticking its nose in here. A sneaky little short you say? CYB Chinese Yuan made all the headlines on the equity side but why does everyone have to have glamour trades. Take the HKD what about just the boring trade of USDHKD moving from 7.75 to 7.85 on the HKD peg. Why when it gets to 7.85 do people have to come out and declare the peg about to break.

Commodities: Down day UNG Natural Gas getting tagged and again this morning in the futures. SLV Silver acting more like a commodity than a precious metal?

Have fun today.

FOMC tomorrow can we remember the stealth hike last time out? Chairman Powell managed to get the market to price in a hike simply by admitting they might have to think about thinking about interest rate hikes. As a Hedgeye subscriber, I have seen this chart many times.

The "higher than consensus" numbers keep getting higher. Many now use base effects in their vocabulary I have learnt from Keith McCullough and his former Hedgeye partner Darius Dale. This chart shows CPI inflation peaking here in Q2 at 4.85% then slowing (estimate) to 4.70% in Q3. Does this classify as "disinflation"? Of course it does the number is smaller. How is the market going to price it in? Inflation falling from a cycle peak to a number 199bps higher than the highest in the last two years.

Then we have a question from @Ross Moger  Bonds are wrong? Which ones are wrong is the important question he asks. From the chart above inflation although peaking doesn't look all that transitory if the model is to be believed. Hedgeye also has rent data that has not been included here which could push the numbers above 5%.

The long end of the curve is pricing in slower growth. Now we have to be careful here it is slower growth globally. UST are the safety trade of the world, not just US citizens/companies/asset allocators. Now, this has born out recently with weakness in China and Hong Kong also Japan is starting to move in sympathy. So the long end move can be linked to slowing growth and massive short positioning stopped or closed.

This leaves us with the front end and Mr Powell. I do not know over what time period the targetted inflation (2%) is being averaged (AIT) but this could start to make the economists look a little silly.

I think the market knows this and if it doesn't come from him the market will show him what exactly will be top of agenda at Jackson Hole.

This brings us to Fridays RVDB with  @Ash Bennington  @Raoul Pal  and @Julian Brigden . I really enjoyed this one, for whatever reason 2-3 years ago I never got on board with Julian interviews but now they are incredibly insightful. I have obviously over time learnt exactly what I don't know and it is best to just shut up and listen. Julian discussed a bear flattening of the yield curve. Where long end yields start pricing in lower growth as a reflexive measure that the Fed is going to have to raise rates and curb growth :)

So what can we do with this?

As trades not long term positions I am:

Short GBPUSD with the curve flattening and hence spread compressing financials will not be in for a good time. FTSE100 has a ~20% top weight in financials. 2nd weight is Staples which will suffer margin compression due to inflation. Against USD strength from the short end rising. This is not perfect but I had a spike this morning to open a short into.

Long Gold but not yet. A spike in the USD will cause some market shenanigans from which we can take advantage. As I am writing I think Silver is sniffing this out down -2.5% as it maintains its"commodity hat" not its precious hat. I will be using any weakness to build my position in Gold.

@Petr Pinkhasov @Jeremiah S @Weston Nakamura @John Ahearn @Matt Daniell @Claudio Delgado @Sam Colt @Ralph Humphrey 

What do we think chaps? What were your thoughts on Julians flattener call on friday? Is the Fed walking headfirst into a policy mistake? Will they talk it down prior to their conflab at Jackson Hole?

Sorry, no chitty chatter today I have been busy climbing trees with the boys.

Have a great day everyone.

What if in this game of chicken we can't even see the other car lights yet? What if the other driver is waiting in a Five Guys drive-thru because they know the rubber doesn't hit the road until after earnings season is finished or until September quarter-end or......

While we all think we are playing the same game I doubt anyone on this forum is playing the same game in quite the same way.

Factors: Everyone up on the week. SDY Divi Yield SPLV Low Beta at the bottom of the pile. If you look up the chart some ETFs with a close 1W performance are close to those with very different 1M/3M performance. IWF Growth MTUM Momentum is both up +3% on the week but MTUM -0.1% against +8.62% over 3M. How strange. Important? Who knows.

Sectors: XLE Energy XLU Utilities are strange bedfellows both down on the week. XLC Communications tops the chart but a huge part of that came on Friday with FB Facebook SNAP Snapchat having big moves on earnings. XLRE Real Estate looks jolly interesting here strong 1M/3M/YTD momentum and it straddles two worlds one the positive push in rents and two should the Fed have to step in fallings rates.

Fixed Income: The bond market purports to be the market of truth where all the clever ones play but to me, it looks like the one with the least direction. Now I must admit divergence of direction does not mean that as a whole it is wrong. Inflationary periods are marked by divergence in Hedgeye parlance Quad 3 Stagflation is where divergence and "this market doesn't make sense" reaches a crescendo. EMB EM USD bonds vs EMLC EM Local Ccy bonds are they telling a story?

FX: FIFO First In First Out Asia area down Europe and Americas up. FXC Canadian Dollars up on the week and reversing some of the 1M/3M underperformance. UUP USD strength continues slowly grinding higher across all timeframes. It is not quite a wrecking ball but it is flirting with a trend break of 93.29. We were flirting with the trend on 31st Mar and look how that turned out over the next 6 weeks.

Commodities: UNG Natural Gas seems to have gone under the radar, I don't hear of many talking about the "molecules of freedom" as they were talking about lumber. Does anyone remember when China was selling their strategic CPER Copper reserves? Was Dr Copper on a forced sabbatical for a couple of weeks?

Divergences EMB vs EMLC CPER vs USO GLD vs SLV

We have already touched on the first one. Copper vs Oil will we see the Dr signal slowing growth but Oil continue to signal inflationary pressures? Will Gold signal slowing growth and live up to its precious moniker while Silver continues for a time to keep its "industrial metal" hat on?

@Weston Nakamura @Petr Pinkhasov 

Per the title, if I link posts externally e.g. twitter and someone wants to view them do they need a login?

Not many people understand this, the USD has been deflated by almost 50% against "molecules of freedom".

Have a good weekend everyone ;)

Whether you like him or not, Keith McCollough is a smart cookie. This is stolen almost entirely from a recent Macro Show and bits and bobs from myself sprinkled around the edges.

Gold ≠ Gold Miners = Equities

https://exchange.realvision.com/post/what-do-gold-miners-need-in-order-to-mine-gold-6000338aac6848f87f866ce1

I made a previous post here regards input costs to extract gold for the ground.

Why is gold going up? Many will say growth will slow from a base effects peak. Good point but if that is true what will you be doing from a portfolio perspective? Going into this "lower growth" period you move up the equity curve into quality. Are gold miners quality?

The chart below says no. My daily charts show where the flows are going, so from a balance of risk Gold Miners may not be the best expression of gold prices.

Just like my snide comment a couple of days ago about gold bugs not commenting about Gold up on a USD up day. They sure shout from the rafters about manipulation on Gold down with USD down days.

How perplexing will GLD up GDX down UUP up be over the coming days/weeks (months?). [I don't think months :)]

Let me draw you back to a super important time in market history. You could not move for teets and news reports and newsletters and podcasts.

Phase 1 of the US-China trade deal.

What was meant to happen in October on a farm in Iowa finally happened over the weekend of 24th Nov 2019. Monday 25th (my birthday for future reference) markets opened all joyous rainbows and puppy dogs as far as the eye could see.

Maybe there was a problem with turkey day?

I know in hindsight it is very easy to pick these little times of panic and point and laugh. These news events are just that tiny tiles in a huge mosiac.

OPEC+ increasing production has been the news of the week coupled with Delta and our inner view Options expiry. Two days does not make a complete reversal but will this just be another tiny tile?

That said the immediate term it feels like some have breathed a sigh of relief I can see a higher low coming. A pullback not to the recent lows of Mon-Tues but just to form a higher low to build the next move.

Factors: SPHB High Beta +3.1% and more than 6% in 2days which feeds what I said above. SPLV Low Beta was the only factor down on the day -0.42%. MTUM Momentum again following XLF Financials.

Sectors: XLE Energy topping the day in equities +3.49%. What we have to watch is this second strong day in price came on lower volume.

Fixed Income: We seem to have passed through a period very similar to April daily performance is mirroring YTD could this be another USD up scare? All the deflationistas saying at the start of the year "rates are going up too fast" "the market won't take it" Will they now also admit rates may have fallen too fast? Anyone?

FX: FXC Canadian Dollar +0.9% biggest mover on oil strength. FXB British Pound this was a surprising one as it didn't seem to take part at all the previous day. "safety" was sold UUP Dollar FXY Yen GLD Gold.

Commodities: GBTC Bitcoin bounce on some dude with a beard talking to some chap that builds cars that crash? 

@Petr Pinkhasov I stole the name, hope you don't mind ;)

I talked yesterday about the mimicry of the hedge fund community. During a period of dominance at the end of the '90s in the '00s where they had a large position in the market, their winning trades and styles were mimicked by others.

What I want to discuss today is a trade that I think may not be repeated anytime soon. George Soros' shorting of Sterling against the Bank of England. The mimicry I opened with occurred when George Soros and Stan Druckenmiller by discussing openly their position permitted for others to copy. Permission was not explicit what I mean was by talking about it this gave a "smart money" safety net for other traders to do the same. Eventually, the BOE had to give in and the GBP was devalued by 25%.

Now let us separate a winning trade for a moment and think about this. In 1992 the UK had a population of 57million people. On Black Wednesday, September 16, 1992, 57million people had their wealth cut by 25%.

Today what is the trade de jour that everyone must be in? ESG. Environmental, Social and Corporate Governance. The positive flywheel is that everyone must be doing their part. Everyone must pick a side and that is the side fighting inequality, climate change and social justice et al.

Now return to Mr Soros could you see any Hedge Fund, asset allocator or investment vehicle openly backing a trade like the one above with today's ESG backdrop?

Whether the trade was correct in its thesis regardless of if it was executed perfectly. The current mimetic schema is that of ESG.

On top of that, the hedge fund community is no longer the dominant force in the marketplace. Add to this trying to get any kind of "bond vigilante" trade or "breaking the back of currency x" past an investment committee.

In the ESG could family offices, large capital allocators face the social media backwash of their capital impacting millions of people in such a direct way?

I guess we found out that the best play was to be long the "crap". What fell the most bounced the most.

SPHB High Beta +3.53% on the day winner and puts it back in the top 3 equity YTD returns of those ETFs I have here.

Another ETF changing over the last couple of months has been MTUM Momentum. Why did it outperform XLK Tech or QQQ Secular growth so much? During its last rebalance in April, it had a large allocation shift into Financials. Risk-off sectors/factors like XLU Utilities SPLV Low Vol came out at the bottom of the list although still positive on the day.

XLP Consumer Staples remember that transitory inflation thing everyone keeps talking about? Staples are some of the largest employers (rising wages) producing high volume (raw material costs) low margin (passing price increases) goods producers. That little concoction smells a lot like margin compression to me. Even if we are transitioning to a risk-off period I would not be seeking safety in staples.

Have a great day everyone.

I am reading a book by Luke Burgis called Wanting. It is his take on Mimetics. This is the process by which wants and desires are not singularly. Human desire is mimetic - we imitate what other people want.

It is the reason hipsters all end up looking the same even though they desire to not look like everyone else. They do not want to wear/use/have that which is popular. Other people see "hey that guy looks cool not giving a F*** cutting his own path" that they want what they have. Pretty soon there are lots of hipsters but no one wants to admit to being a hipster.

Mimetics to Peter Thiel is much like Raoul Pals exponential age driven by network effects. One is biological the other is technical. Will the outcome be the same when one is not driven by our subconscious?

There is a section early in the book that references George Soros breaking the Bank of England trade. It is where Soros coined the term reflexivity in his book The Alchemy of Finance.

"In situations that have thinking participants, there is a two-way interaction between the participants thinking and the situation in which they operate"

There is a  Mimetic answer to why this trade worked. Soros's large bet signalled to other investors that the "smart money" had it figured out. This gave them the safety net to make the trade also. This additional selling pressure on the Sterling (£) eventually was too great for the Bank of England to cover and caused a 25% devaluation against the USD.

It reminds me of this chart produced by Hedgeye. It shows the shift from hedge fund capital dominance to global ETF dominance. How does this link to mimetics?

A super clever chap (they were almost always men) would have an interesting trade idea. They would discuss it internally, the idea is starting to spread. The trade would be given the green light positions started etc and it would make its way into the PMs monthly/quarterly newsletter. Along the way, there will be dinners and meetings. Throw in a conference or two and if the trade is going well a little TV spot will come calling. All the while picking up momentum especially if the trade is working so well that others have to follow else fall behind.

There are two parts one positive where you feel that the idea is good so you mimic the long position. Maybe not in the direct company/country/currency maybe you put your little twist by buying suppliers to the original idea. In this way, you follow the trend but can stand out a little. The other is negative what if it goes against your own thesis. What if the person with the idea recently left your company on bad terms. Your desire would be to take the opposite side.

You are rambling now Chris....!

HF are no longer the dominant factor and to overcome this they use leverage.

January - High Short Interest

February - Cyclicals

March - Short Term Interest Rates

April - Small Caps

May - HODLers

June - Reflation?

July - Long Term Interest Rates

What this ends up causing is piling into winning trades with huge leverage where when the underlying current changes (factor flows) it causes blow-ups. Whether it is a momentum trade or a trend follower we are all trying to mimic the winning trades. We have our little ways to find them that differentiate us but ultimately we are trend followers.

What I can say is the speed with which we can mimic each other is constantly speeding up. The speed by which our machines can mimic those trades is huge to the point it feels like the "alpha" is chewed up and spat out faster and faster as each one comes along.

Did anyone order a boatload of volume?

All Factors and Sector ETFs having a down day yesterday.

SHPB High Beta continuing its poor performance here in line with XLE Energy. 5 of the top 10 holdings of SPHB are energy names. DEF Defensives were down with the crowd but on falling volume. Now this is where I am on the fence in these short term trades. Do you buy something down that others seem not to be selling, or with everything down do you buy the crap because it will bounce the most?

Fixed income risk-off therefore duration for the win. On such a high trading volume day EDV Extended Duration up on low volume. Was everyone that trades it in already before the end of last week so now just riding gains? TLT IEF Treasuries across the curve doing well of course.

FX safety trades all around with FXY Yen UUP US Dollar FXF Swiss Franc doing well. My focus was on GLD Gold after spending so much time bearish from last year I am building back my gold position.

Commodities risk-off sling everything out..... Except for the widowmaker UNG Natural Gas how interesting. 16.27% 1M performance and 32.16% over 3M do we have some mimetic desire creeping in? Or as CFTC positioning pointed to a huge short position, as HF longs in oil started falling they have had to cover their shorts to remain neutral?