Monthly Observations
December 2018 Issue

EMMA Program was up 1.1% in December and down 1.7% in 2018. 
There were many significant happenings in the last quarter of 2018 but the defining theme is the repricing of asset classes. 
Investors have not decided if a recession is coming. Conflicting signals abound. If one looks at yield curve inversion, higher interest rates, corporate debt, falling business confidence, and deflating real estate markets around the world, a very gloomy picture emerges. However, a strong labor market, still-solid earnings growth and consumer spending point only to a slowdown, not a recession. Political gridlock in Washington is probably a net positive as no major changes are expected.

With safe haven demand pouring into U.S. treasury and supported a modest rally in precious metals, yields plunged in November/December, giving the Fed a bit more room to hike rates. Although the federal reserve is eager to show its independence from political influence, it is also overtly political to insist on an unsustainable rate hike path given on-the-ground conditions. We are counting on an effective central bank put if markets deteriorate further from here. But if we have a big crash, the political and social backlash can prevent a quick solution like 2008 and could even lead to a recalibration of capitalism itself.
It is striking that in most of 2018 risk sentiment was remarkably stable in the U.S. Worldwide growth had been sluggish and trade regime change were plain for all to see. Europe, Japan, emerging markets, and most commodities have been falling for a year but we only started caring about fundamentals recently.

As we first wrote about in August, the market types play a big part in how aggressively one goes after trades. The current market is moving toward a high volatility-high correlation environment. This is the area where there is a marked risk-on/risk-off mechanics - an event or a sentiment shift can move entire asset class. And this is where we should thrive as macro managers.
2019 promises to be a year of cross currents. As the U.S. and China are still the (slowing) growth engines, our major ongoing theses are for continued central bank policy divergence between U.S. and the rest of the world. Dollar should stay relatively strong against non-safe haven currencies.  Rate hike should slow down or pause, lending support to precious metals (see below matrix). Crude oil on the other hand should rebound to $50s and stay there. Downside risk dominates as OPEC is reluctant to carry shale producers – a repeat of 2016/17. Plus, a flood of WTI export is coming from Permian in 2020.

The massive repricing in the last few months is not over yet. After this phase transition, it is likely that the world manages to muddle through without triggering a crisis. If that is the case, the next few months will be critical as we do not profit from stagnant conditions. It is not about good or bad; it is all about Rate of Change.
EMMA program is currently open to investors. Please let us know if you'd like more information.


Jeff Lee, CTA

Kronos Management, LLC
Copyright © 2019 Kronos Management, All rights reserved.

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