“Overconfident professionals sincerely believe they have expertise, act as experts, and look like experts. You must struggle to remind yourself that they may be in the grip of an illusion.”
-Daniel Kahneman
Humans are notorious for being overconfident. This cognitive bias leads to individuals having an inflated belief in their abilities, judgement, and knowledge.
History is overflowing with examples of overconfidence.
In a study that asked one million high school students to rate their leadership abilities, 70 percent rated their skills as above average. Additionally, 60 percent put themselves in the top tenth percentile in terms of getting along with others.
In a poll of college professors about their teaching abilities, two-thirds rated themselves in the top 25 percent.
The most disturbing example of overly generous self-assessment relates to driving. A full 93 percent of Americans in one study rated themselves as better than average drivers. Remember that the next time you're driving on I-95!
I could go on, but you get the point.
To be fair, having confidence is important. but overconfidence can lead to bad decision making. In the financial markets, this means loss of capital.
That is something we all want to avoid, but to avoid that requires an honest and sincere assessment of your own knowledge and abilities.
Back to the Global Macro Grind...
Last week’s October Michigan Consumer Confidence report was not an illusion. The headline Consumer Sentiment number declined by -7.4% month-over-month to 63. In addition, both Current Economic Conditions and Consumer Expectations were down -6.6% and -8.0% M/M, respectively.
As if consumer sentiment slowing wasn’t enough, the report got more concerning.
Inflation expectations in the year-ahead took a big jump to +3.8% year-over-year. This compares to +3.2% in September. It is also the highest number since May 2023 and well above the pre-pandemic range of 2 – 3%.
Yes, inflation has come down from its peak. And yes, inflation is now reaccelerating.
In fact, last week’s September CPI and PPI reports both accelerated:
- Headline CPI accelerated by 50bps M/M to +3.7% Y/Y
- Headline PPI accelerated by 60bps M/M to +2.2% Y/Y
To be fair, we did get a disconfirming data point in U.S. Export and Import prices late last week:
- Import and Export prices both slowed to -1.7% and -4.1% Y/Y, respectively.
But in aggregate, the data reported late last week confirmed what the bond market has been telling us for the last month: inflation isn’t going away anytime soon. The catalyst for deflation officially taking hold will likely be the Fed finally telling us inflation is structural!
Thankfully, contrarian indicators have no illusions about their inability to predict the economic future.
On another note, we have some big news to report. After roughly a year and half of development, we recently launched an Artificial Intelligence (AI) signaling product called HedgAI. These buy low and sell high signals are generated using Hedgeye's proprietary Artificial Intelligence algos. We are offering it for free through year-end. You can get access (and receive the list in your inbox every morning) HERE.
Interestingly, this morning HedgAI singled Google $GOOGL as buy and signaled to close a buy of the Nasdaq 100. The initial reaction of investors will be to ask why the signal to buy $GOOGL? But as we like to say . . . with HedgAI, we don’t ask why. That is a bit tongue in cheek.
But the point is: this is just another way of looking at the markets. We provide the inputs and the machine responds with decisions. We have our doubts whether AI, in markets or otherwise, will replace humans entirely . . . but time will tell!
Back in the real world of fundamental human research, our Systemic Contagion Risk Monitor is starting to percolate. It likely won’t surprise you that Israel CDS has tripled in the last month. More interesting, 45 of the 49 sovereign CDS we track are up on average 22% M/M as highlighted in the Chart of the Day below.
On a more granular level, Bank of America noted today that their credit card delinquencies have increased 50% Y/Y from 1.4% to 2.1% this morning. In conjunction with this earnings release, Bank of America CEO Brian Moynihan noted that, “U.S. consumer spending continues to slow.”
This is a bit of an about face for CEO Moynihan who noted just under three weeks ago that:
“The U.S. economy is expected to continue tightening over the next year, but a recession is likely to be averted thanks to resilient consumer spending.”
We aren’t sure which Brian Moynihan to believe. The one from today? Or the one from three weeks ago? Either way, he has a nice suit, some fancy degrees, and runs a big bank . . . so he has created the illusion of being an expert.
Despite what the experts may say or not say, we are sticking to our #Quad3 stagflation views.
As of the close yesterday, these are our top Macro ETFs by size rank: Cash, TBIL, TFLO, UUP, CTA, IVOL, URA, PFIX, NLR, SMIN, URNM, UNG, BUXX, IAK, DWSH, INDY, XLE, INDA, PSCE, EWJV, BTAL, MSOS, USO, XOP, BDRY
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.71-5.01% (bullish)
UST 10yr Yield 4.57-4.86% (bullish)
UST 2yr Yield 4.98-5.16% (bullish)
High Yield (HYG) 72.03-73.40 (bearish)
SPX 4 (bearish)
NASDAQ 13,071-13,659 (bearish)
RUT 1 (bearish)
Energy (XLE) 85.22-91.23 (bullish)
Utilities (XLU) 55.51-60.51 (bearish)
VIX 16.17-20.44 (bullish)
USD 105.36-106.99 (bullish)
EUR/USD 1.046-1.064 (bearish)
USD/YEN 148.17-150.14 (bullish)
GBP/USD 1.205-1.233 (bearish)
Oil (WTI) 82.89-89.05 (bullish)
Oil (Brent) 84.37-91.54 (bullish)
Nat Gas 2.93-3.55 (bullish)
Gold 1 (bullish)
Copper 3.49-3.67 (bearish)
Silver 20.56-23.15 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
