This note was originally published
at 8am on July 25, 2013 for Hedgeye subscribers.
“We have the ability to lie – not just to others, but also to ourselves.”
As I was flying back from the Fortune Brainstorm Conference last night, I was grinding through the back half of Ariely’s The (Honest) Truth About Dishonesty thinking about his aforementioned quote. With Twitter policing the pundits in real-time, and the fun cops (SEC) taking some “smart money” guys down, do we really have the ability to lie in this profession like we used to?
I like Ariely’s book because I have my own self deceptions that we’ve been building a firm around this vision of unearthing the Old Wall’s storytelling for over half a decade now. But that’s hardly the total truth. Reality is that the tectonic industry plate-shift from opacity to transparency is much bigger than I’ll ever be. I’m just a Mucker on the front lines of it all.
Wall Street was a closed-network that paid a massive premium for inside information, front-running, etc. Now that is dying on opacity’s vine as an open-network (Twitter is The New Tape) transcends accountability. There are no more “grey areas” to compound returns in. The crowd can see most things now; it can quickly conclude what is black and white.
Back to the Global Macro Grind…
“We want explanations for why we behave as we do and for the ways the world around us functions. Even when our feeble explanations have little to do with reality. We’re storytelling creatures by nature, and we tell ourselves story after story until we come up with an explanation we like…” –Dan Ariely (pg 165)
So, let me tell you a story this morning…
And allow me to start with the non-fictional parts, which are called market prices. Isn’t that where I should begin? Or should I begin with a thesis on where the last market price should be? Stylistically, there’s a critical difference.
The difference is where your storytelling starts…
There’s a clear divide between how we attempt to risk manage macro market moves and how some on the Old Wall do. Never mind starting with a macro theme or thesis, some just skip all of that and hire guys who gets told by other guys what Bernanke and Co. are going to say next (yes, almost the entire old boy network is still guys).
Do I think our Global Macro Themes are good lines of storytelling? Sure. So do our clients. Increasingly I’m hearing that’s really because we don’t start with an insider’s whisper or a theme at all – we start with the market’s last price.
To review, when I say we start with last price:
- I’m contextualizing the market’s last price within 3 core risk management durations (TRADE, TREND, and TAIL)
- TRADEs are 3 weeks or less; TRENDs are 3 months or more; TAILs are 3 years or less
- Context (TRADE/TREND/TAIL) is dynamic (i.e. it refreshes every 90 minutes of new price/volume/volatility data)
In other words, that’s where my storytelling starts – with my own pictures of the market’s message; not with where I want the market to be. Then my analyst team and I work backwards on things like long-cycle data, mean reversion risks, catalysts, etc. in order to probability weight whether or not there are any themes to discern.
Does this risk management process prevent me from making mistakes? Of course not. From a macro risk manager’s perspective though, I’d say that having the humility to start my every day with what Mr. Market thinks has prevented me from making the really big macro mistakes. But that’s just my version of the story.
In other news, #StrongDollar is still bad for Gold bulls:
- US Dollar Index = +0.4% yesterday; Gold -2%
- Immediate-term TRADE correlation between USD and Gold is still -0.91
- Long-term TAIL risk correlation between USD and Gold is still -0.87
I can tell you some great stories about #StrongDollar, Strong America – and I can remind you that the combination of #RatesRising and #StrongDollar is both the enemy of Gold and growth fears…
But I’ve already used up my best content on that.
The market’s 2013 macro message is trumping pretty much everything the Old Wall consensus wanted it to be. If you waited for the super secret insider whisper that Bernanke is going to taper, you were late. Mr. Market didn’t lie to me.
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.47-2.71%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer