“When we are no longer able to able to change a situation – we are challenged to change ourselves.”
-Viktor E. Frankl
As egotistical as many successful stock investors seem on the outside, a common attribute for many of them is, ironically, their ability to change their minds. Now often some poor analyst in their employ is blamed for the mistake, but when the facts and/or thesis changes, the position is rightfully exited.
Hubris is a dangerous thing and in investing it can be downright deadly. The ability to adapt to new information and admit mistakes, on the other hand, can be an immensely valuable skill.
The ability to adapt, of course, is hardly new to our species. A recent article in Smithsonian magazine based on new research actually argues that the ability to adapt is maybe the most important skills and has enabled homo sapiens to thrive over the last 1.85 million years.
According to this article:
“What results from these analyses is the realization that there is no simple, clear picture; no obvious mechanism as to why the genus we know as Homo came to arise and dominate. What we've long thought of as a coherent picture—the package of traits that make Homo species special—actually formed slowly over time.”
So if it was not our unique skill set that allowed us to thrive, what was it? Well, according to the article, the answer is quite straight forward:
“That early Homo species would have had to cope with this constantly-changing climate fits with the idea that it was not our hands, nor our gait, nor our tools that made us special. Rather, it was our adaptability.”
So, of course, it begs the questions: when are the Old Wall consensus economists going to adapt their projections for 3% U.S. economic grow in perpetuity?
Back to the Global Macro Grind...
The 3% growth projection noted above may seem like a non-sequitur, but the comment was actually born of out attending the Bloomberg Markets Most Influential conference earlier this week and comments from William C. Dudley, the President of the New York Fed. Since Bloomberg radio and TV called him one of the smartest men in the world, it seems only prudent that we pay attention to his comments.
Aside from his comments that all will indeed be well if we hit 3% in growth in perpetuity, Dudley also indicated he doesn’t have a lot of faith in that happening. We’ve paraphrased below, but a couple of interesting comments from Dudley were as follows:
- The Fed is difficult to manage as it relates to the economic estimates that come in from various methods (Takeaway: this transparency and democracy stuff related to setting policy may be less effective if the inputs aren’t systematic, which they are not);
- Dudley said not to overweight the “dots . . . he has a wide confidence interval in his dots (Takeaway: we would agree as the fascination with the dots is reaching near epic proportions, so they are certainly soon to be irrelevant);
- According to Dudley, the Fed doesn’t care about the dollar per se, but too strong of a dollar is an economic deterrent (Takeaway: the Fed cares about the dollar, and, shockingly still doesn’t get the economic value of a strong dollar policy); and
- There are reasons to be patient on monetary policy and as an example monetary policy was tightened too quickly during the Great Depression (Takeaway: if you didn’t know whether Dudley was dovish, now you know. But really Bill, a Great Depression reference?).
On one hand, we certainly appreciate Dudley acknowledging the flaw in forecasting--it shows his adaptability. Conversely, the Great Depression and strong dollar fear mongering is a little disturbing, but certainly difficult to read much from brief comments on a thirty minute panel! And who are we to judge...
As for Hedgeye, we don’t know what the Fed is going to do next and frankly despite my comments above, Fed watching is a bit of fool’s errand. In our analysis, as the data changes, we adapt. It is that simple.
The most recent change for us recently has been the view that the U.S. economy is now likely in what we call Quad 4, which is an environment in which growth is slowing, inflation is slowing, and monetary policy is loose.
Especially on inflation, this is an about face for us. But that fact is that headline inflation is now down to +1.8% for the quarter, which is a deceleration. Along with that many commodities are now deflating incrementally, and Brent Crude in particular is down more than -12% on the year.
Even as inflation is decidedly decelerating, we do continue to get mixed data on growth (some good, some bad). But as my colleague Darius Dale recently highlighted, we think it’s important to highlight the risk of #GrowthSlowing given where consensus expectations for growth remain – i.e. out to lunch. Moreover, the lack of dispersion among forecasts remains a key risk.
Specifically, in the previous five quarters, the standard deviation of growth is 0.44% and peak to trough is 122 basis points. Meanwhile the forward consensus projections for the next five quarters have a standard deviation of 0.02% and peak/trough spread of 18 basis points. We don’t know much, but we do know those projections will be missed.
Our immediate-term Global Macro Risk Ranges are now (with intermediate term TREND signal in brackets)
RUT 1115-1149 (bearish)
Shanghai Comp 2 (bullish)
VIX 13.14-14.99 (bullish)
Pound 1.62-1.64 (bullish)
Copper 3.01-3.09 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.
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Best of luck out there,
Associate: Macro Team
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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
This note was originally published at 8am on September 10, 2014 for Hedgeye subscribers.
“Mr. Bohannon, Do you want to build this railroad?”
-Senator Grant in the AMC T.V. show, “Hell on Wheels”
Similar to our office, I’m sure most of you don’t have much time to watch T.V., but every once in a while a great show comes around that is really hard to turn off. A popular one at Hedgeye as of late is AMC’s, “Hell on Wheels.”
The show is about the epic struggle to build a trans-continental railroad. Setting aside the obvious struggles of weather, dealing with Native tribes (who felt their treaties were being violated), and limited technology, the building of the transcontinental railroad also occurred at a time when the nation was healing itself from the Civil War. As a result many former Union and Confederate soldiers worked side-by-side on the railroad.
As Wikipedia describes it:
“The First Transcontinental Railroad (known originally as the "Pacific Railroad" and later as the "Overland Route") was a 1,907-mile (3,069 km) contiguous railroad line constructed between 1863 and 1869 across the western United States to connect the Pacific coast at San Francisco Bay with the existing Eastern U.S. rail network at Council Bluffs, Iowa, on the Missouri River.”
The epic struggle to connect the two sides of the continent took more than six years, but once it was completed dramatically changed the face of commerce in the United States.
Who knows, perhaps the iWatch will do the same?
Back to the Global Macro Grind...
In the global macro world, the epic struggle du jour seems to be related to Scottish independence. Simply, will the Scots decide to leave the United Kingdom, or not?
A few weeks ago, no one was even considering this as a potential global macro issue, but after a recent YouGov.Com poll that showed a slight majority of Scots voting Yes (51%) to independence versus No (49%), the British pound was sold dramatically and Scottish independence became a hot topic with the manic media.
So, will the Scots vote for independence on September 18th? If we rely strictly on the YouGov.com poll, it would seem there is a real chance of this occurring. Practically speaking, though, as we have written often in the past it is very unwise to rely strictly on one poll. In fact, there are a couple of key quantitative points that speak in contrast to the YouGov.com poll:
- First, the YouGov poll that showed a 2% edge for the Yes side was literally the second poll ever (of those polls approved by the British Polling Council) to show the Yes side ahead. The other Yes poll was taken by the Scottish National Party back in mid-2013;
- Second, the most recent poll aggregates (though some admittedly occurred before the most recent debate in which pro-independence leader Alex Salmond was widely judged to have won) still show a lead for the No vote outside the margin of error. Specifically, a poll aggregate issued by Strathclyde University on September 1st showed the No side ahead by 10 points and a poll aggregate from The Guardian on September 3rd showed a similar 10 point lead.
- Finally, the online betting website, Bet Fair, shows the market for Scottish Independence at more than 2:1 for No independence. (Incidentally, there have been almost $5 million pounds wagered on Bet Fair for this topic.)
In the Chart of the Day below, we show the impact that the series of YouGov.com polls have had on the British Pound. While certainly there are other factors at play, the increasingly pro-Independence polls have been a defined catalyst for aggressive selling of British Pounds.
Setting aside the polls and betting markets, the most notable reasons for Scotland to stay a part of Great Britain are related to the Scottish economy itself. Hedgeye’s European Analyst Matt Hedrick highlighted a number of major risks to the Scottish economy should the Scots pursue independence, including:
- Currency – UK politicians have stated that Scotland could not use Sterling. The country would have to issue its own currency
- Central Bank – until the formation of a central bank there is no backstop for sovereign debt
- Massive Capital Flight –investors could pull money out of Scottish banks en masse that would destabilize the financial system
- EU Membership – it’s unclear if an independent Scotland would be granted EU membership, which could have huge trade implications
- Regulation – uncertainty if banks would remain regulated under the UK regulatory authority? Tax and trade regulations also uncertain
- Economic Drag – prominent financial firms likely to move to London
- Budget – the Institute for Fiscal Studies pointsout that Scotland's Deficit could be 4.6% if independent. Low credit quality could negatively impact debt raises, and push the country's debt and deficit levels higher, a vicious cycle.
It is certainly possible, even if unlikely, that the most recent YouGov.com poll is the harbinger of Scottish Independence. But for this to be accurate it would fly in the face of all other polls, the betting markets, and really any semblance of rational analysis by the Scots related to their own economy. So our view continues to be that the No vote will prevail and the British Pound will rally accordingly.
That said, given the weak nature of the Scottish economy and the fact that 2 out of every 3 Scots are on some form of social welfare, over the long run a Great Britain without Scotland might actually be a stronger economy and certainly more healthy from a fiscal perspective. So on some level, perhaps the British Pound is in a win-win situation given its recent sell off. A No vote leads to a relief rally and a Yes votes leads currency traders to asses s United Kingdom’s much improved fiscal health without Scotland, which leads to a long term tail wind for the Pound.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.31-2.52%
Shanghai Comp 2261-2362
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
TODAY’S S&P 500 SET-UP – September 24, 2014
As we look at today's setup for the S&P 500, the range is 21 points or 0.39% downside to 1975 and 0.67% upside to 1996.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.96 from 1.99
- VIX closed at 14.93 1 day percent change of 9.06%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, Sept. 19 (prior 7.9%)
- 10am: New Home Sales, Aug., est. 430k (prior 412k)
- 10:30am: DOE Energy Inventories
- 11:30am: U.S. to sell $13b 2Y FRN
- 1:00pm: U.S. to sell $35b 5Y notes
- 12:15pm: Fed’s Mester speaks in Cleveland
- 1pm: Fed’s Evans speaks in Washington
- 10:30pm: Reserve Bank of Australia’s Stevens speaks in Melbourne
- President Obama, world leaders address UN General Assembly
- 10am: Obama delivers UNGA address; then lunches w/ UN Sec. Ban Ki-Moon; chairs panel on foreign fighters in afternoon
- 4:50pm: Sec. of State Kerry attends Syria Ministerial at UN
- Senate, House out of session
WHAT TO WATCH:
- Citizens raises $3b pricing U.S. IPO below marketed range
- Verizon said to hire TAP advisors for tower sale by end of year
- Starbucks to buy remainder of Japanese unit for $913.5m
- GM forecasts 70,000 Cadillac sales in China as unit separates
- U.S. holiday retail sales seen rising 4.5% on labor mkt gains
- Global equities have modest upside potential, Barclays says
- Wal-Mart partners with Green Dot for checking accounts
- Home Depot breach said to feed card, account frauds: WSJ
- Gross’s Pimco Total Return ETF draws SEC scrutiny, WSJ says
- 21st Century Fox said to discuss acquisition of Starz: LA Times
- German Business Confidence declines more than forecast
- A month of bombs dropped in one night of U.S. strikes on Syria
- Accenture (ACN) 7:01am, $1.10 - Preview
- AGF Management (AGF/B CN) 8am, C$0.18
- KB Home (KBH) 8:30am, $0.41 - Preview
- Paychex (PAYX) Bef-mkt, $0.46
- Vail Resorts (MTN) Bef-mkt, $(1.93)
- HB Fuller (FUL), 5:20pm, $0.76
- Jabil Circuit (JBL) 4:02pm, $0.01
- Worthington (WOR) Aft-mkt, $0.64
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Iron Ore Price Outlook Cut by Top Shipper as Supply Surges
- WTI Trades Near 16-Month Low Before Stockpile Data; Brent Slips
- Diamond Dealers Face Loan Drought After Losing Bank: Commodities
- Rebar Closes at Record Low as Australia Cuts Iron Ore Outlook
- No Drought Relief Seen for U.S. West Without Deep Mountain Snows
- U.K. Winter Gas Declines in Longest Streak Since June on Ukraine
- India Court Cancels 214 Coal Mine Permits Allocated Since 1993
- Rubber in Tokyo Falls to 5-Year Low as China Growth Seen Slowing
- BofA Peeks Inside Venezuela’s Gold Vault to Ease Default Concern
- Uranium Rally Threatened by Surplus as Mine Strike Eases: Energy
- CF-Yara Talks Show How Shale Gas Is Shaking Up Fertilizer World
- Europe’s Biodiesel Demand to Rise 43% in 2015-2020, Neste Says
- Europe-U.S. Oil-Product Cargo Flow Rises 21% in Broker Survey
- Copper Falls to Lowest in Three Months on China Demand Concern
The Hedgeye Macro Team
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