“The most profound difference is in their divergent approaches to failure.”
- Matthew Syed
While he could have easily been writing about the objective and data-driven difference between the Aviation and Asset Management industries, in Black Box Thinking, Matthew Syed was contrasting “two of the most safety critical industries in the world: Healthcare and Aviation.”
“In the airline industry, aircraft is equipped with two, almost-indestructible black boxes, one of which records instructions sent to the onboard electronic systems, and another which records the conversations and sounds in the cockpit. If there is an accident, the boxes are opened, the data is analyzed, and the reason for the accident is excavated. This ensures that procedures can be changed so that the same error never happens again.” (pg 9)
Imagine we could audit the decision-making #process of ALL Asset Managers PRIOR to and DURING both stock market crashes and economic recessions? Think about how much of your hard-earned capital would have been saved by simply understanding when bad is bad.
Back to the Global Macro Grind…
“Oh, no, no, no, you little Mucker. Bad is good.” Heard on every Old Wall (Sell Side) desk trying to make a year-end bonus yesterday.
*And heard never in ANY historical back-test when entering a Recession. See 2001 and 2008 US Recessions for details.
You don’t need a black box for this. You don’t need a 50-day or “200-week” (my new Old Wall fav) #MovingMonkey to analyze it either. You do need #history (a long-term ROC time-series of the data) and some forward looking #math (Signals & Nowcasted Quads), however.
What was bad yesterday? The SEP ISM report was way worse than any of the 2022 Bulls (or CFOs) ever called for:
- ISM Manufacturing #slowed to a 29-month Cycle Low of 50.9 in SEP vs. 52.8 in AUG
- ISM NEW ORDERS #slowed, big time, to 47.1 in SEP vs. 51.3 in AUG
- ISM EMPLOYMENT #slowed, big time, to 48.7 in SEP vs. 54.2 in AUG
So, seeking desperately for a new narrative, that’s when Bond Yields fell and Brokers started barking like dogs to BUY STAH-KS!
It wasn’t just Old Wall Brokers (Cantor desk trader guy, who has never modeled a Quad in his life, jumped on CNBC, panting with “high conviction”) who went bullish. For the umpteenth time this year, the BUY SIDE chased the rally off the crashed-out-lows too.
Per one of the big Prime Brokers, yesterday’s desk flow was in the 90th percentile of BUY SKEW days (looking back 52 weeks)!
If the narrative was, “we really need bad to be good for our bonuses”, I’d agree with that 100%. But, unless this is 2012 or 2015 (when the ISM New Orders broke down through 50 and we did not have a US recession), bad is just bad heading into 3 more QUARTERS of #Quad4 Recession.
To review what DECELERATING DATA does to our already Recessionary US Nowcast, this is what that ISM report did yesterday:
- Q3 of 2022 GDP #slowing to +1.30% year-over-year
- Q4 of 2022 GDP #slowing to +0.50% year-over-year
- Q1 of 2023 GDP #slowing to +0.22% year-over-year
- Q2 of 2023 GDP #slowing to -0.16% year-over-year
In order to simplify for those who don’t read math well, I’m actually doing a disservice to the #process by using words like “good” or “bad”…
The ROC (rate of change) of the GROWTH and INFLATION data is either ACCELERATING or SLOWING. If/when the data is SLOWING at its fastest pace AND an economy is entering a recession, then you can say that bad is just bad.
What’s interesting about our GDP NOWCAST right now is that SEQUENTIALLY (the aforementioned Nowcasts aren’t sequential, they are year-over-year) our Q322 number has #slowed to +0.6% and the beloved Atlanta Fed is up at +2.4%!
So even if you want/need to believe that “bad is good”, the Fed’s “top forecaster” says GDP is good. So is good all good? How about CPI not falling below 8% next week? Is that good or bad now that people are chasing another “Fed Pivot” narrative?
There remains a profound difference in our divergent approach to risk managing prior failed assumptions.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.48-4.01% (bullish)
UST 2yr Yield 3.85-4.37% (bullish)
High Yield (HYG) 70.13-73.32 (bearish)
SPX 3 (bearish)
NASDAQ 10,429-11,090 (bearish)
RUT 1 (bearish)
Tech (XLK) 117-126 (bearish)
Utilities (XLU) 64.50-70.77 (bearish)
Energy (XLE) 67.08-77.93 (bearish)
DAX 11,809-12,668 (bearish)
VIX 27.60-34.11 (bullish)
USD 110.44-114.95 (bullish)
Oil (WTI) 76.01-84.93 (bearish)
Nat Gas 6.25-7.67 (bearish)
Gold 1 (bearish)
Copper 3.20-3.51 (bearish)
TSLA 238-277 (bearish)
Bitcoin 18,212-20,255 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
