“Insight is the discovery of new patterns.”
Whereas “intuition is the use of patterns they’ve already learned.” That’s how Dr. Gary Klein differentiates intuition vs. insight in a fantastic new book I cracked open this weekend called Seeing What Others Don’t – The Remarkable Ways We Gain Insight.
In that excerpt in particular, Klein was analyzing the decision making #process of firefighters who “build up patterns that apply in making rapid decisions in emergencies.”
“Firefighters often changed their beliefs about a complex fire as they learned more details… surprises forced them to rethink what was going on and replace erroneous beliefs.” (pg 27) Is that how you risk manage non-linear market and economic risks? I do.
Back to the Global Macro Grind…
Maybe I learned about macro risk management from my Dad (firefighter for 38 years) – maybe I just had enough humility to learn it from Mr. Macro Market himself. Like in most things macro, I should never be sure.
While we won’t be sure until we move out further in time, with every US Jobs Report we’re becoming more sure that the peak in the latest of #LateCycle US economic indicators peaked when the cycle did.
As you can see in today’s Chart of The Day (with my doodles):
- The peak (year-over-year rate of change) in both non-farm and private payroll growth was in FEB 2015
- Non-farm (NFP) payrolls have slowed from 2.34% in FEB to a YTD low of 2.09% in AUG
- Private payroll growth has slowed from 2.71% in FEB to 2.37% in AUG
But, but – there are no buts. Until enough people believe that “it’s different this time,” the recent #history of the US Labor Cycle slowing is what it is. Alongside slowing Growth, Inflation, and Revenues/Earnings – it’s all part of the #LateCycle slowing, ex-“China.”
The good news about this is that some of it is being priced in. On Friday’s print, US stocks (SP500) dropped -1.5% and the UST 10yr Yield fell to 2.11%. Despite both “bouncing” (again) this morning, that is what it is now too.
On the pricing in of it all, here are some things to consider when contextualizing your next series of decisions:
- SP500 was down -3.4% last week, taking its 1-month drop to -8.2% and draw-down from the all-time high to -9.8%
- The US Dollar (Index) was up then down to end last week and has lost -1.7% of its value in the last month
- At 2.12%, the 10yr UST yield dropped 6 basis points (bps) last wk and is down -10 basis points in the last month
- Utilities (XLU) and Healthcare (XLV) stocks dropped, despite rates falling, -5.1% and -4.3% last wk, respectively
- US 5yr Break-Evens (inflation expectations) fell another -10bps last wk (-17bps in the last month) to 1.16%
In other words, that’s what it means when both GROWTH and INFLATION are starting to (not finished) price in the slowing. In classic #LateCycle form, as the data slows, the US Dollar’s gains have alongside falling interest rates.
Futures and Options positioning is becoming quite bearish on growth and inflation too. Here’s the update on CFTC non-commercial net LONG and SHORT positions:
- SP500 (Index + Emini) net SHORT contracts ramped -113,152 last wk (most bearish move all year) to -153,997
- EURO net SHORT position is at one of its least bearish positions in a year at -59,691 contracts
- YEN net SHORT position fell to its lowest of 2015 at -20,994 contracts
What you can see here is a relatively new pattern of big macro players putting on a collectively bearish bet on both US growth and the currency appreciation expectations that used to be built into a June “rate hike.”
Now that June has come and gone, the doves are starting to cry at the Federal Reserve about September. This morning’s @WSJ update has a Fed voting member who was relatively hawkish (San Francisco Fed Head, Williams) going dovish too.
From NY Fed Head, Bill Dudley, to the West Coast’s Williams what you can also see here is a new pattern of the Fed becoming concerned about a “falling stock market” (Williams’ words, not mine).
If the Fed just says “NO SEP HIKE”, will that clarity perpetuate less short-term volatility in both FICC (Fixed Income, Currencies, and Commodities) and Global Equities? I think it might.
And the only reason why I think that is because my front-runner (my risk range process) is finally signaling tighter ranges in not only rates this morning, but the EUR/USD pair and, to a relative degree, the SP500.
Is that a signal or noise? Intuition or insight? I’m not sure. I rarely get more sure until the market opens and I can risk manage the fire, in real-time.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.07-2.19%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer