Tough Questions

“Computers are useless; they can only give you answers.”

-Pablo Picasso

Amen to that, Pablo. It’s amazing how much time and effort we all spent at school and currently spend at work learning strategies and techniques for finding the right answers compared to how little time we spend learning to ask the right questions.

Implicit in any commitment to discovering the truth is a commitment to systematically asking ourselves tough questions – the answers to which may not be derivable from reported data that is inherently backward-looking in nature.

Furthermore, such questions extend well beyond the typical, “Where can I be wrong?”, instead opting to traverse the realm of, “Where am I not even looking?”

With respect to the latter question, we are in a unique position to help. In meetings with clients, it’s clear that our commitment to remaining truly independent (no banking, trading or asset management) helps us foster a level of trust with our clients that does not appear to be abundant in this industry. Having a senior roster loaded with meaningful buyside experience doesn’t hurt either.

Getting right into it, Keith, Ryan Fodor and I spent much of this past week up-and-down the west coast visiting with clients and prospective clients from various strategies and disciplines.

As usual, the topics of discussion ranged far and wide, but if there was one central theme throughout all of the meetings it would’ve been the general lack of conviction and/or answers with respect to the three most important factors in macro risk management. Below we introduce the relevant debates and where we currently stand, recognizing that we need to and will do more work on certain topics:


  1. Where does domestic economic growth go from here? We think the trend in US growth data will be negative (2nd derivative) over at least the next 3-6M.
  2. What are the catalysts for #GrowthSlowing? Fundamentally speaking, we think monetary and fiscal policy uncertainty (mostly monetary policy uncertainty) will weigh on consumer and business confidence. Furthermore, GDP comps get difficult as CPI/GDP deflator comps get easier, at the margins.
  3. Regarding the equity market, will growth-related style factors continue to work? Not likely. We would sell/underweight over-exposed names.


  1. Where does inflation go from here? We think domestic disinflation is now a rear-view phenomenon as easy comps and a weak dollar provide upward pressure on CPI and PPI readings. We would expect both TIPS and Gold to make higher-lows (to all-time lower-highs) in this scenario.
  2. What about declining energy prices? That’s a major offset to our Growth Slowing as Inflation Accelerates (i.e. Quad #3) call and a primary reason we’re not more explicitly negative on so-called “risk assets” more broadly. We’re not wed to the aforementioned fundamental view and would happily change our minds if we saw material declines in the crude oil market – something we do not expect to see as long as the USD remains bearish from a TREND perspective.


  1. When does the Fed taper? Probably not one week before Christmas (the FOMC meets DEC 17-18). In fact, we are increasingly of the view that the Fed is aware of the systemic risk present in the bond market and is potentially setting up to never commence tapering. They will likely accomplish this by setting far-too-aggressive targets for GDP growth and shifting their focus to combating a perceived risk of deflation, at the margins.
  2. What happens if the Fed does taper? If Janet Yellen isn’t as smart as we’re giving her credit for and she thinks the bond market can withstand a shock to the system, we think tapering will be short-lived (think: $85B per month down to $75B per month back up to ~$100B per month). Credit markets need two-way flows to function property and QE is really the only source of meaningful liquidity amid bond mutual fund and ETF outflows (-$7.3B in the most recent week). The Street’s inability to take on meaningful inventory means: A) most of the risk has been transferred to buy-side balance sheets; and B) buy-siders are ultimately forced to sell to each other during market routs. That invariably leads to gaps down in prices when macro fundamentals (i.e. the flows) change. Think about what happens to bond prices when levered-long bond fund A tries to unwind its illiquid positions at the same time Bill Gross (MBS) and Michael Hasenstab (EM) are trying to unwind theirs…
  3. How will tapering – if any – affect the stock market? We continue to think the great rotation out of debt and back into stocks is: A) still on; and B) will provide a structural bid to the equity market. That said, however, we now think that bid could be from lower prices as proxy hedging activity from distressed fixed income investors (not to be confused with investors that invest in distressed debt) weighs on broader asset prices in the interim.
  4. What happens if the Fed is still engaged in LSAP when we slip into the next recession? To be clear, we aren’t calling for an “R-word” here, but that’s definitely something to think about. Implicit in the current prices of many so-called “risk assets” is the assumption that the Fed can “smooth” the economic cycle and/or do away with credit risk altogether. What happens to those asset prices when everyone figures out they (i.e. the Fed) can’t – all at the same time? Next year will mark the fifth year since our last recession ended; the average length of time between the 12 recessions since WWII has been just that.

We’ll obviously be focused on answering these questions in greater detail in our research notes and presentations in the coming weeks and months; please feel free reach out to us in the interim if you’d like to discuss anything in real-time.

Going back to our opening discussion, there’s really only two ways we can add value with a business model like ours:

  1. Making you money
  2. Making you think

Hopefully today we did our job with respect to the latter category.

On an unrelated note, if any of you plan to be in New Haven this Saturday for The Game, shoot us a quick email and we can meet up for a beer at the tailgate.

Our immediate-term Risk Ranges are now as follows:

UST 10yr Yield 2.63-2.83%


VIX 11.85-13.61

USD 80.42-81.39

Brent 105.88-110.29

Gold 1

Keep your head on a swivel,


Darius Dale

Associate: Macro Team

Tough Questions - Chart of the Day

Tough Questions - Virtual Portfolio