“Laozi, The Old Master, retreats from the world, leaving his wisdom behind.”
- The Dao of Capital
For those of you who haven’t yet studied Chinese history (and how you might consider your behavior, decision-making, etc. differently than a panic-stricken American hedgie), Mark Spitznagel does a great job summarizing pertinent parts of it in The Dao of Capital.
“As the story goes, the gatekeeper realized that Laozi was leaving for good, forever taking with him all the wisdom he possessed, and entreated The Old Master to write down his thoughts for posterity. Laozi complied and wrote down a concise treatise of some 5,000 Chinese characters… what is undeniable is the efficacy of the words which have lasted more then 2,000 years.” (pg 31)
Gravity, ROCs (Rates of Change), and Cycles have lasted longer than that. It’s your job to deliberately measure, map, and contextualize The Cycles we are in. Don’t look for short-cuts. It’s always numbers over narratives. It requires zero knowledge to believe in a narrative.
Back to the Global Macro Grind…
“But, Keith… where could you be wrong?!?”
A younger analyst jumped on me on an Institutional Client zoom call yesterday with that question. It wasn’t a unique question. People ask it frequently. I just appreciated the interruption and excited tone!
My answer to it, channeling my inner Coach Belichick (“onto Cincinnati”), is always the same: “on all of it.”
The entire point of our proprietary measuring and mapping process is that if/when the ROC (rate of change) of the data changes, we change. When we’re “wrong”, it’s our job to get on the right side of it.
Unlike things like “valuation” and how markets “look” and “feel”, the ROC isn’t an opinion. It’s a mathematical fact.
For those of you who #PayAttention to all of the deliberate study and discipline embedded in my Risk Management and Global Asset Allocation #process, you’ll know that where I thought The Quads were going to be “wrong” was in NOT being BEARISH ENOUGH.
That’s right. That’s being wrong. Not being bullish or bearish ENOUGH, that is.
Why? Because, over the course of calling every #Quad4 there’s ever been, my #VASP (Volatility Adjusted Signaling Process) has gotten better and better at FRONT-RUNNING Quad Pivots.
Fed “pivots” chase (economic) Quad Pivots on a 6-12 month lag. Think “transitory”… or now what they don’t consider #RecessionRisk.
So, back to answering the client question – where the initial Quad Model was “wrong” was in initially nowcasting that Q3 of 2022 could see a slight sequential GROWTH #accleration to what we call #Quad1. The incoming data has been so bad that that’s now a #Quad4.
So our Real-Time Nowcast for the US economy for the NEXT 4 QUARTERS are now as follows:
- Q3 of 2022 = #Quad4
- Q4 of 2022 = #Quad4
- Q1 of 2023 = #Quad4
- Q2 of 2023 = #Quad4
If you’re new to our Bayesian measuring and mapping process, FOUR STRAIGHT #Quad4s is the WORST economic outlook possible.
So that’s this morning’s update and, while some shorter-term-single-factor-moving-monkey charting experts may think they “see” something different (they did during the March bear market rally into month-end too), the Yield Curve doesn’t.
On the heels of Fed Heads commenting on yesterday’s Inflation Cycle “news”, the UST 2 year yield ramped +19 basis points day-over-day to 3.06%, inverting the Yield Curve to yet another new Cycle Low of -32 basis points this morning.
As one of The Old Masters of Macro (Druckenmiller) taught us, “never, ever, invest in the present.” That’s what Macro Tourists, Cramer, and Bullard do. Fade your “feelings”, block out the narratives and noise, and position for FOUR STRAIGHT #Quad4s.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 2.56-2.99% (bearish)
UST 2yr Yield 2.80-3.15% (bullish)
High Yield (HYG) 74.81-78.40 (bearish)
SPX 3 (bearish)
NASDAQ 11,412-12,507 (bearish)
RUT 1 (bearish)
Tech (XLK) 132-145 (bearish)
Utilities (XLU) 69.55-75.75 (bullish)
Healthcare (PINK) 25.01-26.12 (bullish)
VIX 21.42-27.07 (bullish)
USD 105.21-108.07 (bullish)
Oil (WTI) 92.83-98.92 (bearish)
Gold 1 (bullish)
Copper 3.19-3.57 (bearish)
Bitcoin 20,062-24,696 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
