“In an ideal world, every shot would hit the bull’s eye.”
- Daniel Kahneman
Wait on it… #Noise – A Flaw In Human Judgment… is up next on my #behavioral reading list.
The author of one of the foundational books of the Hedgeye #process, Thinking, Fast and Slow, kicks off his recent book with what I love – a competition.
Think of it like 4 Wall Street firms nowcasting what the US economy was going to do in Q4:
- Team A’s shots are “tightly clustered around the bull’s eye” – i.e. accurate
- Team B’s shots are “biased because they are systematically off target”
- Team C’s shots are “noisy because its shots are widely scattered” – i.e. no obvious bias
- Team D’s shots are “both biased and noisy”
When nowcasting the ROC’s (rates of change) of big things like GROWTH (or Revenues) and INFLATION (or COGS and margins), what team do you play for?
Back to the Global Macro Grind…
The best team to be on is Team A and the best team to play against is Team B. Particularly at this stage of what my Partner, Neil Howe, calls The Fourth Turning, the most biased of “believers” play for Team B. They are proactively predictable.
In other words, I’d much rather play against:
A) A Perma Bear on US stocks
B) A Perma Bull on Gold and/or
C) A Deflationista
Than a literal monkey throwing darts for Team C. Even monkeys can get lucky.
The #1 goal of The Game is to A) not lose the hard earned capital you have so that B) you can compound Full Investing Cycle Returns across cycles. If you nowcast the pending Quad right, you’re playing for Team A alright.
So let’s do China vs. USA in 2021 with real-time economic (Quad) updates:
A) CHINA – reported an eye-popping PPI (Producer Price Inflation) #acceleration to +13.5% year-over-year for OCT
B) CHINA – that’s up from +10.7% in SEP and crushing Chinese HIGH YIELD issuers who are levered to property bubbles
Since Q1 of 2021, we’ve been nowcasting nasty #Quad3 Stagflation in China. And now, with the slowest China REAL GDP GROWTH rate since entering the WTO, I’m pretty sure most people on Team A get that.
Chinese stocks (and High Yield Bonds) certainly do. The Shanghai Composite Index is down -2.8% in the last month alone and getting smoked by both our India (INDA) and Indonesia (IDX) Asian EM Longs.
On the USA side:
A) Our GIP Model (The Quads) Nowcast for Q4 of 2021 just #accelerated to +5.66% year-over-year growth
B) That’s a +79 basis point #acceleration from our #Quad3 in Q3 real-growth slowing nowcast (GDP was +4.87% real)
Imputing what Team D (biased and noisy) looks at (Real GDP Quarter-over-Quarter SAAR), our +5.66% year-over-year #acceleration gives us a +7.49% headline GDP Nowcast.
And plenty of people on Team B took the literal BOTTOM of the #Quad3 in Q3 slow-down in August as their forward-looking indicator to “go to cash” and/or call for a massive “Lehman-like contagion” from China to the USA…
Thanks for coming out to The Game guys.
Moving onto the next part of The Game, as Sang-Woo said in Squid Game, “we’ve already come too far to end this now.” It’s November the 10th and you’re either going to buy-the-damn-QQQ-dip or you are not.
Team B will say that “everyone is bullish.” Heck, let’s make Hussman Captain of Team B. He KNOWS it’s a bubble! (Player 1 Question: if you’re so good at analyzing bubbles, why weren’t you long of this one?)
And Team A will say, yes, of course we’re melting-up into more and more bubbles. That’s what happens in #Quad2.
Behaviorally, you can observe some of the bearish positioning noise through the lens of Futures & Options markets. All it took was the 1st down day in 9 for SPY to ramp Implied Volatility (vs. 30-day realized) to a +24% PREMIUM.
PREMIUMS are born out of what? People buying protection (i.e. puts).
What’s most interesting about yesterday’s epic 1-day US stock market correction is what happened in the NASDAQ. The implied volatility DISCOUNT of -1% from 1-week ago today ballooned into a +41% PREMIUM vs. 30-day realized.
If Team A’s competition doesn’t know what that signals, that’s good for Team A. Mi-Nyeo wasn’t the smartest player in the Squid Game, but at least she had the Street Smarts to acknowledge “I’m good at everything, except the things I can’t do.”
She was pretty good under pressure. We’d take her on Team A. I’d turn her into a Vol Trader vs. Team B’s noise.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.43-1.65% (bullish)
SPX 4 (bullish)
NASDAQ 15,345-16,168 (bullish)
Tech (XLK) 159.95-169.89 (bullish)
Utilities (XLU) 65.95-67.61 (bearish)
Energy (XLE) 56.77-60.19 (bullish)
Financials (XLF) 39.63-40.95 (bullish)
Shanghai Comp 3 (bearish)
VIX 14.62-18.13 (bearish)
USD 93.25-94.52 (bearish)
CAD/USD 0.800-0.811 (bullish)
Oil (WTI) 79.05-85.91 (bullish)
Nat Gas 4.86-6.01 (bullish)
Gold 1 (bearish)
TSLA 1001-1290 (bullish)
Bitcoin 61,870-68,139 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
