"Seek to understand more than to be understood.”
-St. Francis
That’s an important quote about one of the most important attributes of a great analyst (or leader for that matter): empathy. Can we find it within ourselves to see someone else’s point of view? If we can, we’ll learn a lot faster – and make less big mistakes, as a result.
In #behavorial psych, one of the glaring risks of not being empathetic and open-minded is called the Fundamental Attribution Error. “At the heart of it is the tendency of human beings to attribute the negative or frustrating behaviors of their colleagues to their intentions and personalities, while attributing their own to environmental factors.” (The Advantage, pg 32)
Sound familiar? It sure does to me. I can assure you that both in my business and life I have made this mistake more times than I can count. Whether or not I’ve had this stage of the “market call” right or wrong isn’t the point this morning. Win or lose, my #1 goal should be to seek and understand the #truth; not data and excuses that support my position.
Back to the Global Macro Grind…
Understanding the bounce (in stocks, oil, etc.) this morning has to start with understanding what caused some of these big things to crash to begin with. If we can’t contextualize reality, the mistakes we’ve made along the way are going to compound.
So, like a good Bayesian, reset. Like, every day.
No, it’s not easy. Yes, it’s a grind. And yes you’re going to be humbled many more times than you feel “smart.” Most people in this profession are smart. That doesn’t differentiate us. What does is how you behave into and out of big macro market Phase Transitions.
What were the causal factors behind China, Emerging Markets, Oil, Junk Bonds, Bond Yields, etc. crashing?
1. GROWTH: the #LateCycle is meeting the secular = #Slowing
2. INFLATION: #Deflation continues to win the debate; inflation expectations have crashed
3. EARNINGS: with 480 of 500 companies (SP500) reporting, Q215 Revenues -3.9%, EPS -2.7%
I’d say those are 3 pretty important causal factors that all proved to be A) true and, more importantly, B) non-consensus. And that’s really the other place (alongside risk managing our behavior) to differentiate oneself in this profession - not being a groupthinker.
Alongside ramping SUPPLY and slowing DEMAND (happens at the end of every cycle), what else proved to be causal?
1. CHINA: slowing, panicking, centrally-planning
2. VOLATILITY: undergoing a very bullish Phase Transition from its all-time cross asset class lows (JUL 2014)
3. LIQUIDITY: chart/performance chasing on decelerating volume (higher); puke on accelerating volume (lower)
Ok, there are 6 things we should have had right. I can keep going, but I won’t. Because the point of this morning’s strategy note is to seek truth and position for what happens next.
Since “valuation” isn’t a catalyst in a #GrowthSlowing market where rev/eps forecasts are too high, what (if anything) is going to change what caused this?
1. GROWTH: US and European growth expectations remain way too high given the Q3 and Q4 #LateCycle comps
2. INFLATION: the #Deflation could stop crashing (if the Fed does Qe4), but is that really the bullish camp’s catalyst?
3. EARNINGS: revenue and earnings expectations for Q3 and Q4 remain way too high as well
4. CHINA: oh great, they’re cutting rates this morning – look how well that worked last go-round
5. VOLATILITY: what does “investing” look like in High Beta, High Growth Style Factors in a 29-47 VIX range?
6. LIQUIDITY: yesterday’s US equity volume was +58% and +40% vs. its 1mth and 1yr averages, respectively
Sure, you can blame the “machines”, my brother’s father-in-laws’ son, or we simpleton’s paying “too much attention to the data”? Or you can ask yourself what you missed and question whether or not you should be selling what you should have on today’s bounce.
You see, this most recent rout (SP500 and Russell 2000 experiencing 11.1% and -14.2% drawdowns from all-time highs) is, after all, from the all-time highs!
And there are compelling things to consider on the long side here that I personally missed (Gold’s most recent ramp) that are coming off 4-yr lows. As you can see in today’s Chart of The Day, the 1st blast higher in US Equity Volatility in 2011 wasn’t its last.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.98-2.13%
SPX 1
VIX 29.03-47.13
EUR/USD 1.12-1.16
Gold 1131-1168
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
