This note was originally published at 8am on June 25, 2014 for Hedgeye subscribers.
“That which hath been is now; and that which is to be, hath already been”
That’s the opening volley in one of the most recommended books Institutional Investors have offered up to me in the last year: The Fourth Turning – What Cycles of History Tell Us About America’s Next Rendezvous with Destiny. I’m finally reading it on my family vacation this week in the homeland.
Back to the Global Macro Grind…
One of the best ways to insure yourself against groupthink is not anchoring on a confirmation bias that “it’s different this time.” That’s why so many thoughtful buy-siders like The Fourth Turning. Its main premise is pretty much the only protection against long-term risk – mean reversion.
In order to contextualize mean reversion risk, I think you need to:
- Study #History (so that you can contextualize where you are)
- Understand #Math (2nd derivative moves and how they are a leading indicator for mean reversions)
- Embrace Uncertainty (from a #Behavioral perspective, accept that risks happen fast, and slow)
Or at least that’s what my ongoing studies (which started with being immersed in linear-supply/demand Keynesian Economics @Yale in 1995) and risk management experience in real-time markets has led me to believe, so far…
If it is indeed, “different this time” (as the Ben Bernanke’s and Mohammed El-Erian’s of the world would lead you to believe), I’ll be dead wrong on my fundamental #history #math #behavioral framework. But none of us will know that until I’m long gone anyway.
That’s one of the most humbling points William Strauss and Neil Howe make in The Fourth Turning about cycles. They are long. And by the time you read enough #history to know that you just happen to be alive within one of them, you’ll wish you had read more, sooner.
What was America like 80 years ago?
“We were proud as people, but modest as individuals…” –Strauss/Howe
How important are you, personally, to this world today?
“Fewer than two people in ten said yes when asked around WWII… Today, more than six in ten say yes. Where we once thought ourselves collectively strong, we now regard ourselves as individually entitled.” –Strauss/Howe
That’s page 1 of the book. Since it was written in 1997, I’m betting that 7, 8, or 9 in ten central planners think of themselves as the epicenter of the universe today. How else could someone at the Federal Reserve wake up every morning fundamentally believing that they can bend economic gravity?
Gravity? How do Strauss/Howe define cycles?
“Each cycle spans the length of a long human life, roughly eighty to one hundred years, a unit of time the ancients called the saeculum. Together, the four turnings of the saeculum comprise history’s seasonal rhythm of growth, maturation, entropy, and destruction:”
- The First Turning is a High
- The Second Turning is an Awakening
- The Third Turning is an Unraveling
- The Fourth Turning is a Crisis
The good news is that after a decade of Bush/Obama inflation policies slowing real-consumption growth and perpetuating “inequality”, we’re already solidly in The Fourth Turning in America.
You’ll get the updated US GDP report for Q114 to remind you of that today. Inclusive of the central-planners making up that US inflation is only running in the “low 1%” range, real (inflation-adjusted) GDP growth will be revised to negative, yet again.
The only way out is time.
Eventually, time runs out on broken policies. Sometimes this happens slowly; sometimes it happens all at once.
Now that US equity volatility (VIX) has made another all-time-higher-low at 10.61 (June 18th, 2014), we’ll see if it really is different this time – or if the crisis phase of US growth being infected by Federal Reserve Policies to Inflate is to be what it hath already been.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:
UST 10yr Yield 2.46-2.64% (bearish)
SPX 1925-1962 (bullish)
RUT 1155-1195 (neutral)
India’s BSE Sensex 24801-25716 (bullish)
USD 80.17-80.51 (bearish)
Pound 1.69-1.71 (bullish)
WTIC Oil 105.71-107.28 (bullish)
Gold 1295-1338 (bullish)
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer