“Wherever there is prediction, there is ignorance, and probably more of it than we think.”
- Daniel Kahneman, #Noise
If I turn out to be right that Peak Cycle INFLATION, Rates, and Fed Hawkishness is in, I’ll be happy with that. If the bond market wasn’t signaling the same thing, I wouldn’t be making this call.
How about my competition? You know, the legions of Linear-Econs, Strategists, and CIOs who didn’t think INFLATION could double from +2% this year, never mind get to +6.8%? Now they’re all looking for inflation!
I’m not being “mean” about this. Kahneman, who has much more gravitas than I’ll ever want to have, asks “have we checked whether the experts we trust are more accurate than dart throwing chimpanzees?” (pg 146)
Back to the Global Macro Grind…
Yes. It’s us vs. them. Yes we use proprietary predictive tracking algos to measure and map the economic cycle. No, they don’t. And yes, my #VASP (Volatility Adjusted Signaling Process) front-runs my Quads. They don’t have either.
On the difference between our #process and theirs:
“Despite all of the evidence in favor of mechanical and algorithmic prediction methods, many decision makers will reject decision-making approaches that deprive them of the ability to exercise their intuition…
As long as algorithms are not nearly perfect – and, in many domains, objective ignorance dictates that they will never be - human judgment will not be replaced.” -Kahneman
BREAKING: Powell says it’s “not a number”, it’s a “judgment call”
Thanking my macro gods for that. You should be too. Front-running the Fed (with numbers) continues to be a very profitable venture. If you get the ROCs (rates of change) of The Quads right, you’ll front-run the Fed, right?
Before I get into the ROC numbers, the behavioral (market sentiment) setup into PE Powell’s judgment call was:
A) lots of worry that he’d make a Policy Mistake, like he did prior to Christmas of 2018
B) lots of worry because lots of people are just worried about their performance this year
Having been (I think) the only person who made the call that Powell was going to make a Policy mistake tightening into a #Quad4 economic slowdown in October of 2018…
I thought that A) he wouldn’t make that same mistake because B) the data isn’t #slowing into #Quad4, yet!
Since Objective Ignorance is a thing (that’s what Kahneman calls it), never underestimate the power of Macro Tourism. If you’re Macro Aware, you know that the bond market RAISES rates for the Fed in #Quad2.
That’s precisely what happened since #Quad2 started hitting:
A) During this fastest #Quad2 in modern American history (in Q2), UST 2yr Yield went from 0.10% to 0.28%
B) Coming out of #Quad3 in Q3 (real growth slowing), 2s ramped from 0.20% to 0.72% during #Quad2 in Q4
And… wait on it… literally as PE Powell priced in 3 RATE HIKES into 2022’s Fed “forecast”, the UST 2yr Yield ramped to +0.72% (i.e. the top-end of my model driven fractal range), then faded like a Fed flower to 0.64% this morning.
Both that and the long-end of the curve are signaling the same thing (lower-highs on 10s). To me that means that either my current positioning for #Quad1 or Narrow #Quad4 DISINFLATION in Q1 of 2022 is going to be right.
Why is it still #Quad1, economically (and not #Quad4)? A: yesterday’s data:
A) US Retails Sales #accelerated to +18.2% year-over-year GROWTH in NOV vs. +16.3% in OCT
B) US Mortgage Demand #accelerated another +0.8% last week (DEC number) to an 11-month high
There are plenty of bearish narratives out there that don’t say a peep about what my predictive algos are saying about these ROC Numbers. To summarize what they mean for US GDP in Q4 vs. what was a slowdown in Q3:
A) Q421 US GDP is #accelerating to +5.69% year-over-year growth vs. +4.90% actual in Q321
B) Sequentially, that has our GDP Nowcast at +7.53% in Q4 vs. Q3
Even the Atlanta Fed has gone from basically 0% growth (when Macro Tourists went to Cash and bought Gold back in SEP at the #Quad3 in Q3 Cycle lows) to “nowcasting” +7% for Q4!
What do you think PE Powell is going to do in 2022 when both INFLATION and GDP growth are #slowing, from there? A: take out 1, then 2, of 3 rate hikes? Heck, he might even be cutting rates by Q3 of 2022.
That’s why, as of yesterday’s “news”, his peak hawkishness is probably in.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.35-1.55% (neutral)
UST 2yr Yield 0.58-0.72% (bullish)
SPX 4 (bullish)
NASDAQ 15,019-15,927 (bullish)
Tech (XLK) 168.04-177.94 (bullish)
Housing (ITB) 78.08-84.06 (bullish)
Shanghai Comp 3 (bullish)
DAX 15,185-15,932 (bullish)
VIX 14.68-23.38 (bearish)
USD 95.80-96.64 (bullish)
Oil (WTI) 65.16-74.20 (bearish)
Nat Gas 3.46-4.18 (bearish)
Gold 1 (bearish)
Copper 4.16-4.41 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
