“Methods adopted to reduce noise can simultaneously reduce bias.”
- Daniel Kahneman
I’m obviously biased, but I think the best way to reduce the noise & bias of both Linear Econs and Perma Bears alike is to adopt my ROC (rate of change) Signal & Quad risk management #process.
Kahneman agrees with me. In his latest book that I am studying (Noise – A Flaw in Human Judgement), he reminded me that the “extent of disagreements” in the economic outlook “is much greater than we expect.”
“System noise, that is, unwanted variability in judgement that should ideally be identical, can create high economic costs and errors of many kinds” (pg 21). See officialdom’s views on #InflationAccelerating for the last 12-18 months for details.
Back to the Global Macro Grind…
Getting the ROC of TRENDING INFLATION wrong for the last 12-18 months is one thing. Getting the recent SEQUENTIAL ramp in real US GROWTH is entirely another.
Yes, I’m going all CAPS on you on those words this morning because they are particularly important, mathematically:
A) We define TRENDING as 3 months or more (i.e. this is the 6th straight QUARTER of INFLATION #accelerating)
B) We (and everyone else I think) defines SEQUENTIAL #accelerations as month-over-month (i.e. shorter term)
Examples using economic facts instead of hoped-for fictions:
A) USA’s Quad Count for the last 6 quarters has been 2-2-2-2-3-2 (#Quads 2 and 3 = INFLATION #accelerating)
B) US Retail Sales and Industrial Production #accelerated SEQUENTIALLY in OCT vs. SEP
For those of you veterans of the Signal & Quad #process, you know that the 3 in that 2-2-2-2-3-2 Quad Count was when real US GROWTH #slowed during #Quad3 of Q3 2021.
There were big Asset Allocation pivots to be made for 3 months. Some people made them on time. Some people were a little late, but eventually made them. Others didn’t make them and are still hoping for a US economic slowdown to continue in Q4.
Right on the screws in-line with the #Quad2 in Q4 US LABOR #acceleration in OCT:
A) US Retail Sales #accelerated to +16.3% year-over-year GROWTH in OCT vs. +13.9% in SEP
B) US Industrial Production GROWTH #accelerated to +5.1% year-over-year in OCT vs. 4.6% in SEP
Again, these are ROC (rate of change) facts that should not be subject to your daily dose of click-bait and/or “unwanted variability in judgment that should be identical.”
Oh, but, but… “the consumer should be slowing and these numbers reflect higher prices.”
Uh, yeah. That’s why we’re long of BOTH the GROWTH and INFLATION Sector and Factor Exposures in US Commodity, Credit, and Equity markets. When the data is slowing on a real CONSUMPTION basis, we’ll be positioned for #Quad3 Stagflation.
To put the importance of yesterday’s #Quad2 data in context:
A) Headline Retail Sales is the 9th ranked feature in our proprietary GIP Nowcasting model (i.e. The Quads)
B) Industrial Production (year-over-year) is the 8th ranked feature
There are 30 core features in our GIP model and 28 key market Signals that front-run them (see yesterday’s Early Look #process note for details on some of the 28).
Monthly Initial Jobless Claims (year-over-year) are the 3rd ranked feature. Each feature in the model is ranked for marginal impact on the ROC of FUTURE (to be reported) headline US INFLATION and GDP.
So you can click on or read whatever narrative you want about the US economy. These aren’t narratives. These are the reported numbers and the market absolutely nailed them.
THE SCORE: In addition to closing just inside new all-time highs for SPY and QQQ yesterday, 2 of my Top 3 Risk Range™ Signal Strength LONGS (Tech and Consumer Discretionary) were up +1.1% (XLK) and +1.6% (XLY), respectively vs. 2 of my Top 3 Risk Range™ Signal Strength SHORTS (Utes and Staples) down -0.5-0.6% on the day.
For #Quad2 in Q4 to-date: Consumer Discretionary (XLY) = +15.3%, Tech (XLK) = +13.1%, Consumer Staples (XLP) = +5.7%, and Utilities (XLU) are only +5.2%. Those historical Full Investing Cycle Returns aren’t subject to debate either.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.45-1.67% (bullish)
UST 2yr Yield 0.38-0.59% (bullish)
SPX 4 (bullish)
NASDAQ 15,617-16,124 (bullish)
RUT 2 (bullish)
Tech (XLK) 163.76-170.27 (bullish)
Utilities (XLU) 66.01-67.75 (bearish)
DAX 15,940-16,310 (bullish)
VIX 14.66-18.85 (bearish)
USD 93.55-96.08 (bullish)
EUR/USD 1.130-1.154 (bearish)
USD/YEN 112.92-114.93 (bullish)
Oil (WTI) 78.55-84.21 (bullish)
Bitcoin 58,159-69,417 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
