What Have You Learned?

This note was originally published at 8am on September 05, 2013 for Hedgeye subscribers.

“Wealth actually springs from the expansion of information and learning.”

-George Gilder

And here we were all thinking that innovation, growth, and wealth depended on what the Fed says next. Silly boys and girls of Keynesian academic dogmas we are sometimes…

In Chapter 5 of Knowledge & Power (pg 38), George Gilder nails something my Canadian craw has had a hard time articulating to both my partisan Democrat and Republican friends:

“Believing that a weaker dollar is just the thing to spur a sluggish economy… they miss the consequent devaluation of all the assets of the country… abashed by Ivy League expertise, the great peril of establishment Republicans from the time of both Bushes… all cherish the illusion that leading Yale, Harvard, and Princeton economists possess vital wisdom about the economy. They generally don’t. Their preoccupation with static macroeconomic data blinds them to the actual life and dynamics of entrepreneurship.”

Back to the Global Macro Grind…

To learn (from new information channels) or not to learn, remains the question. Those of us building businesses on the back of our own risk capital actually have no other choice. It’s all about learning.

How quickly can we learn from our mistakes, biases, and dogmas? How flexible are we in implementing the constant change that we need in order to be successful? How readily do we dismiss perceived wisdoms for our visions of that change?

Sounds like the process of economic maestros in the Republican and Democrat parties, no? How about the “economists” of the #OldWall who Bush and Obama lovers cite as having “blue chip estimates” on the economy, markets, and #EOW (end of the world) risks?

On January 1^st, 2013 here were #OldWall’s year-end (2013) forecasts for the SP500 and US GDP:

1. Goldman (David Kostin): SPX 1575 on GDP of 1.9%
2. Morgan Stanley (Adam Parker): SPX 1434 on GDP of 1.4%
3. JP Morgan (Tom Lee): SPX 1580 on GDP of 1.8%

Now, to be fair, most buy-siders who get it would call Parker a perma-bear and Lee a perma-bull, so to see their views diverge is no surprise. What was surprising to me was that the most bullish guy on #OldWall (Tom Lee) wasn’t in the area code of what we call Bullish Enough.

Fast forward to this past weekend’s Barron’s forecasts (don’t laugh), here are the “revised” #OldWall forecasts:

1. Goldman (Kostin): SPX 1750 on GDP of 2.2%
2. Morgan Stanley (Parker): SPX 1600 on GDP of no one is sure
3. JP Morgan (Lee): SPX 1775 on GDP of 2.5%

#NailedIt

All these Keynesian “certainty” models do is anchor on the most recent SPX high and GDP report. Christie and Clinton better sign all these dudes up to advise them alongside Larry Summers (whose economic forecasting track record rivals Parker’s).

Stop it. I’m not trying to be mean. I’m an ex-athlete who is humbly trying to be one of your coaches. I’m just a little voice of annoyance in your ear so that you don’t get run over (I’ve never had a great coach who didn’t make me want to punch him every once in a while, fyi).

As a country (and a profession), after the mother of all global economics crises, what have we learned? Mr. Market helps us all learn in a hurry. Here are the main lessons of 2013:

1. Be long growth (US growth stocks)
2. Be short slow-growth (Gold, Bonds, MLPs, etc)

And that makes sense because, as the score board shows, even the most bullish of perma bulls weren’t Bullish Enough on US GDP Growth at the beginning of the year. Bears have been fighting the #GrowthAccelerating data since December. The best growth data of the 2013 (JUL-AUG) has coincided with the highest 10yr bond yields. That’s not Mucker’s genius. That’s just called an economic cycle.

Now you might say that the sell-side is “too bullish” because:

1. The average SPX “target” has gone from 1531 to 1708
2. The average GDP “target” has gone from 1.8% to 2.3%

But, if you are me, you’re saying who cares?

The consensus “forecast” by the sell-side only matters when it’s way outside of what your process says could happen. That’s already happened this year. Old News. The new news is that #OldWall’s latest forecast isn’t a forecast – it’s literally the last report:

1. SPX closing high for the YTD = 1709
2. US GDP Growth for Q213 = 2.4%

#Anchoring

At the same time:

1. VIX just failed @Hedgeye TREND resistance of 18.98 (again) = down -11% for SEP to-date
2. II Bull/Bear Survey just clocked the lowest reading of “Bulls” since November 2012 at 37.1%

And that’s all I have to say about that.

Our immediate-term Risk Ranges are now (you can get all 12 Big Macro ranges in our new Daily Trading Range product):

UST 10yr Yield 2.74-2.94%

SPX 1643-1668

Nikkei 13739-14099

VIX 14.96-17.81

USD 81.81-82.67

Yen 98.49-100.12

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer