This note was originally published at 8am on February 14, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Hayek reminded his audience, the perfect market does not exist.”
Another day, another major easing by another major central bank. Japan’s decision to inject another 10 Trillion yens of liquidity into the market reflects, well, that they think they’re going to have a liquidity problem!
Ostensibly, Keynesians have been cheering on this type of Japanese behavior since 1997. That’s when Bernanke’s bud, Paul Krugman, told Japan to “Print Lots of Money.” Fifteen years later, Japan will have to roll over 242 Trillion Yens in debt (principal + interest) or 24.7% of its current marketable sovereign debt load in 2012.
Bubble in Keynesian Economics. Perfect.
Back to the Global Macro Grind…
Keynesians would have you believe that they can centrally plan markets so that we never have hard landings. Hayekians will take the other side of that. Market’s rarely, if ever, price tail risk perfectly. In real-life, Keynesian expectations perpetuate tail risks.
As Hayek reminded us, “economic decisions in real life are made by individuals based on partial knowledge of current conditions coupled with their best guess of what may happen. Each individual comes to a different judgment about what those conditions might be. Some get the decision right, some wrong.” (Keynes Hayek, page 180)
Dynamic, non-linear, and interconnected – words that you’ll never hear from a US central planner – but these are the Global Macro Risk Management days of our lives. There is no such thing as the Perfect Market, no less the perfect consensus pricing of globally-interconnected risk. Anyone who tells you otherwise is in the business of selling you a fairy tale about certainty.
So what happened on the “news” this morning?
- No one cared about the Moodys “news” because it’s a year old
- Japanese Yen snapped its intermediate-term TREND line of 0.013 (YEN/USD)
- Copper snapped an immediate-term TRADE line of $3.88/lb support
Notice Greece isn’t the new Global Macro news this morning. Neither is Apple. If you didn’t know that the legacy news cycle operates on a lag relative to Hayek’s “moving picture”, now you know…
Other than tacking another crumpled Barron’s cover to the cork-board behind my desk, I have no idea what to tell you about The Old Wall and its propensity to delve into these deeply intellectual debates about big round numbers.
What I can tell you is what my baseline 3 factor model (Price, Volume, Volatility) is saying about the SP500 at 1351:
- Price: all closes below 1363 are lower long-term highs versus the flailing one people chased in April of 2011
- Volume: just flat-out nasty volume signals (ie no volume) are being registered, daily now, at these lower highs
- Volatility: the VIX is making a series of higher long-term lows and building immediate-term TRADE support at 18.31
That’s an immediate-term view of the SP500. I have no idea where the SP500 or the Dow is going to close in 3 years, never mind when it’s going to pin the tail on the 15,000 donkeys. Each and every day, we reserve the free-market right to change our minds about probabilities, scenarios, and risks. As the Inflation and Growth data changes, we do.
What’s up next for the data?
- Inflation Expectations continue to rise, sequentially, so look for that in the US import price report today – then the PPI and CPI reports on Thursday and Friday.
- Growth Expectations continue to slow, sequentially, so look for that to be reconciled by the Global Macro data, daily.
Not everyone has a process to absorb Global Macro economic data so, to a degree, it shouldn’t be a surprise that people gravitate toward the “news” that’s being pumped into them. Our timing on the rate of change in both Growth and Inflation can often be early. Perfectly timing markets with 100% accuracy also implies some orange jump suit risk that we’re not willing to take on.
In addition to 10 Trillion reasons why the Japanese are implicitly acknowledging the severe Deficit/GDP issues associated with running a -2.3% year-over-year GDP number in Q4, here are some other Global Growth Slowing signals of the last 48 hours:
- Chinese Equities failed at intermediate-term TREND resistance (2372 Shanghai Comp) again, closing down -0.3% overnight
- French Equities failed at long-term TAIL resistance (3565 CAC) again, and are down for the 4thtrading day of the last 7
- US 10-year Treasury Yields failed at intermediate-term TREND resistance (2.03%), again this morning (1.97% last)
And, don’t worry, I get it – I’m highlighting the negative signals – but I also get that these are very big ones. Without Japan, China, Europe, and the US confirming whatever Apple and Greece did in the last 24 hours, I get paid to ask the question – again – how perfect has consensus been in the last 4 years in missing the most perfectly interconnected market signals?
My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1712-1760, $115.79-120.03, $1.30-1.33, and 1342-1362, respectively.
Best of luck out there today and Happy Valentine’s day to my beautiful wife Laura,
Keith R. McCullough
Chief Executive Officer