“We are rightly focused on reducing biases. Let’s also worry about reducing noise.”
- Daniel Kahneman
For those of you who are focused on fading your feelings and making better decisions in particular moments of “clock” or market-time that matter, I highly recommend watching my Investing Summit conversation with Buddy Carter yesterday.
Reducing both emotional biases AND the noise of Old Wall Media narratives is critical to generating alpha. As Carter reminded us, there has never been MORE noise and what he calls “uninformed volume.”
As Kahneman goes on to explain in Noise, “bias is a compelling figure, while noise is the background to which we pay no attention. That is how we remain largely unaware…” (pg 220). Don’t be uninformed and unaware!
Back to the Global Macro Grind…
Market memes and economic narratives come and go because cycles do. INFLATION (going all CAPS on you already this morning!) is not only TRENDING noise, it’s running close to MAX volume in MSM media.
Looking backwards, the Macro Tourists and Joey Journos who perpetuate today’s Meme Machine, have 100% visibility on what already happened with big things like INFLATION and market returns.
Looking forward, who gets you in/out at Full Investing Cycle turns in big things like GROWTH, INFLATION, and PROFIT CYCLES? Certainly not some laser-eyed dude on Twitter or Chrome Dome Cramer on CNBC.
Did you hear about Putin and/or inflation?
Yesterday’s headline INFLATION (CPI) ROC (rate of change) #accelerated to a 41 year high at +8.54% year-over-year. Energy, at +48.3% year-over-year inflation, drove a big part of new highs, and I’ll get into that, but I have one question:
Whose risk management #process called for #InflationAccelerating in June of 2020?
A: ours did. And who is telling you that with almost 100% certainty that #InflationSlowing is what all of the aforementioned arm-chair macro quarterbacks are going to be making noise about at this time next year?
The Question isn’t “what month” does INFLATION peak? It’s WHEN does the market price in that it has peaked?
On that score, yesterday’s Cycle High print of +8.54% year-over-year matters because a higher INFLATION rate makes the probability of #InflationSlowing higher. Why? Two words: Base Effects.
That’s right. Now we’re talking mathematically, instead of emotionally and/or politically. That’s how you reduce noise in addition to reducing your Recency Biases (giving greater importance to recent events).
Fully loaded with those Recency Biases (have you heard about “food inflation”?), here’s where the base effects get us:
A) The quarterly Cycle Peak for INFLATION lands in Q1 of 2022 at +7.96%
B) Our US INFLATION (CPI) Nowcast slows from +8.5% in March 2022 to +6.82% in Q3 of 2022
I know. I know. You hear lots of noise about the “levels” of INFLATION. Those are on mute in both my Long/Short portfolio and my Long Only Full Investing Cycle Asset Allocations.
I do not do “levels.” I do Rate of Change.
Where could I be wrong on that? Well, if I am “wrong”, I won’t sit on my current #Quad4 Disinflation Asset Allocations trying to be intellectually “right.” I’ll simply change my positioning for data and/or market prices changing.
The #1 factor in getting INFLATION right or wrong from here is the price of Oil:
A) Oil (WTI) would have to average > $144/barrel in Q2 of 2022
B) Oil (WTI) would have to average > $154/barrel in Q3 of 2022
Since the average price of Oil that drove the +8.54% INFLATION rate in March of 2022 was $108/barrel… and:
A) The top-end of my Risk Range™ Signal is currently at $104.41/barrel… then
B) The probability of us being “wrong” on DISINFLATION is both low and falling
I know. I know. Tell me another story about Oil Supply, Putin, the 1970s, etc. I hear you, but I am not listening. Ask my wife - I have no problem hearing LOTS of things and not remembering a thing that was said.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 2.25-2.88% (bullish)
UST 2yr Yield 2.27-2.60% (bullish)
High Yield (HYG) 79.27-81.53 (bearish)
SPX 4 (bearish)
NASDAQ 13,105-13,945 (bearish)
RUT 1 (bearish)
Tech (XLK) 145-156 (bearish)
Gold Miners (GDX) 37.63-40.41 (bullish)
Utilities (XLU) 73.22-77.95 (bullish)
VIX 20.19-27.24 (bullish)
USD 98.77-100.80 (bullish)
USD/YEN 121.75-126.72 (bullish)
Oil (WTI) 93.13-104.41 (bullish)
Gold 1 (bullish)
Silver 24.30-26.17 (bullish)
Bitcoin 39,008-44,091 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
