“The optimistic bias may well be the most significant of the cognitive biases.”
After a beautiful long Easter weekend with my family on the East Coast, I really don’t feel like writing negatively this morning. The S&P Futures will do that for you on their own.
Growth Slowing, globally, isn’t the “pessimist’s” view – it’s the realist’s view. As Risk Managers, we do not get paid to have an Optimistic Bias. We get paid to have a repeatable risk management process that is biased to the Global Macro data. On the margin, growth is either slowing or accelerating. We’re ok with being early in signaling either direction.
Since global growth data has been slowing for at least 6 weeks, why was Old Wall Street consensus so optimistic about the March Employment report? Some people call it perma-bull, but Kahneman’s behavioral psych explanation is a little nicer: we “tend to exaggerate our ability to forecast the future, which fosters optimistic overconfidence.” (Thinking, Fast and Slow, pg 255).
Back to the Global Macro Grind…
Fortuitously, in the last 3 weeks, as Growth Slowing became more obvious, I raised the Cash position in the Hedgeye Asset Allocation Model to 79% (versus 61% two weeks ago). That should put us in a great position to buy on red this morning.
Or does it?
If I feel like I am too long this morning, I can’t imagine what my overly optimistic competition is feeling.
Today is not a day to freak-out and sell on red. Today is a good day to wait and watch. Since most of Europe is closed, the Top 3 Risk Management Signals to watch will be the US Dollar Index, SP500, and 10-year US Treasury Yield:
1. US DOLLAR: after rising +1.4% last wk (its 1st up week in the last 4), the USD needs to show A) some follow through and B) no more policy to debauch it. If the US Dollar Index can hold its head above $79.51 intermediate-term support, that’s bullish.
2. SP500: if the SP500 closes below 1391 support (my immediate-term TRADE line), that’s bearish and it puts 1331 in play over my intermediate-term TREND duration (next 3 months or more). Since 3 of the last 4 YTD SP500 tops occurred in the Feb-May periods, you want to be very careful on time and price here.
3. TREASURIES: plenty who suggested “growth is back” and “bond yields could breakout (buy equities!)” have just seen the 10-yr yield drop -14% in a straight line (from 2.40% to 2.06%). That’s going to leave a mark on asset allocation moves. The long-term TAIL of Growth Slowing remains with 10-yr yield resistance up at 2.47%. Now we’ll see if 2.03% support holds.
This is the 3rdtime that Bernanke has made a formal decision to Debauch The Dollar with a Policy To Inflate (2010, 2011, and 2012) and the 3rd time that his policy has ignited short-term asset price inflation that, in turn, slowed growth.
Other than those who get paid by commodity price inflation, who wants QE 4, 5, and 6? Remember last year when Q1 GDP slowed to a halt (0.36%)? Back then, expectations were for 3.5-4% growth. Today, the perma-bulls are still talking about US Growth north of 3%. That’s an Optimistic Bias if I ever saw one.
Real (inflation adjusted) US Growth could get cut in half again from here if Bernanke decides to debauch further. If he doesn’t, Strong Dollar has every opportunity to emerge the victor in Bernanke’s War.
Strong Dollar Deflates The Inflation. Strong Dollar = Strong Consumption. Strong Dollar = Strong America.
The risk to all of that, of course, is that now I’m being the optimist.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, 10-year US Treasury Yield, and the SP500 are now $1, $121.61-124.18, $79.51-80.16, 2.03-2.18%, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer