Bull/Bear Narratives

“Evolution does not rely on narratives, humans do.”

-Nassim Taleb


That’s just a money quote from Taleb on page 207 of Antifragile. Apparently Jaime Dimon liked the book so much, he called his bank antifragile. I assume he wasn’t talking about the Bear Stearns part. If you’d like my review of the book, please send me a note.


Reviewing the Bullish Narrative for US and Asian stocks requires one to evaluate the bearish one. The big one our institutional clients debate with me comes from a player I respect, Francois Trahan. His Bearish Narrative is grounded in inflation concerns.


His call is a lot like mine was at the end of 2010. I get that inflation expectations rising would be bad. But our call is Strong Dollar will drive the opposite – Commodity Deflation. That’s not just a narrative; that’s precisely what we have been seeing for all of February.


Back to the Global Macro Grind


Strong Dollar = Commodity Deflation? That’s also what we have been seeing for 2013 YTD:

  1. US Dollar Index +2.3%
  2. CRB Commodities Index -1.0%
  3. SP500 +6.3%

Within the SP500’s +6.3% YTD return, the worst performing Sector ETF is Basic Materials (XLB) which is down -1.54% for February and underperforming badly at +2.34% YTD. If you want to be bearish on something, be bearish on Commodities and related stocks.


There’s also a Nouveaux Bear camp that thinks Commodities falling is the leading indicator that A) Global Economic Growth is going to slow and B) the US stock market is going down in flames. I have debated Dennis Gartman on this 2x on live TV in the last week.


Finally, there’s the central planning camp (led by Ben Bernanke) that is still bullish on the stock market’s “valuation”, and never thought we had the inflation we are deflating to begin with (Bernanke said in his testimony “I have the best track record on inflation since WWII”).


So, what is the Bearish Narrative?


A)     Trahan: Debauched Dollar will drive us back to the bubble highs in Oil (2008), Gold (2011), and Food Prices (2012)

B)      Gartman: Strong Dollar will drive Commodity Prices down, if Oil, Gold, Corn, etc go down, stocks are going down

C)      KM: I’m actually just bearish on The Taro Aso and The Bernank lying to uninformed people


I usually have a decent Bearish Narrative on something (like the Yen here), but the bear case for Asian and US stocks is all over the place right now. Maybe that’s why the only down day for stocks in the last 4 came on a catalyst that none of these bears had to begin with (Italian Election). That’s not a research call, that’s being right for the wrong reasons (otherwise known as luck).


Another Q: KM, what about The Correlation Risk (inverse correlation vs USD) call that you used to trade Macro on during 2010-2012? First, Correlation Risks are not perpetual. And, second, our intermediate-term TREND correlation model is changing, big time, right now:

  1. Intermediate-term TREND correlation between US Dollar and CRB Index = -0.96 (short Commodities!)
  2. Intermediate-term TREND correlation between US Dollar and SP500 = +0.33
  3. Intermediate-term TREND correlation between US Dollar and MSCI Asia (Equities) = +0.52

In other words, both the Americans and the Chinese are loving Strong Dollar in more ways than one. It’s taking down Energy and Food Inflation. And it’s a tax cut that our central planning overlords are unable to provide.


That’s great for the one thing we haven’t had, sustainably, under either the Keynesian Bush or Obama regimes – real (inflation adjusted) economic growth. Of course, the government is always my Bearish Narrative, but I think my bullish one for stocks is still intact.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $110.67-112.68 (Oil is bearish TRADE and TREND now; a very bullish catalyst for the economy), $81.28-82.13, 91.71-94.67, 1.85-1.96%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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