Flawed Beliefs

“The 1st reason we miss insights is that we are gripped by a flawed belief.”

-Gary Klein

As Q3 of 2015 is #timestamped into the market history books, that’s an important quote for those trying to be introspective about what went right and wrong. Alpha generating insights should have an element of surprise. Market risks change, every day.

A good example of a flawed belief would have been thinking US GDP “feels like” +3-4% in Q3. It will be lucky to be half of the low-end of that range (you’ll get the preliminary look at Q3 GDP at the end of October, and final Q3 GDP at the beginning of December).

An even better insight would have been to fade the “rates are going up, because it’s time” belief. While many of your competitors will lament “the worst Q3 for stocks since 2011” today, you can celebrate the absolute and relative performance of the Long Bond.

Back to the Global Macro Grind

With month and quarter-end, you’ll get a lot of “recap” type notes from the Old Wall and its media. And while contextualizing the history of market moves is critical to obtaining future insights, I don’t like to dwell too much on what we already know happened.

What’s next?

Well, for those of you who didn’t take the advice to “not pay so much attention to the data” in Q3, let’s kick off the advent of Q4 with the most recently reported European economic data:

  1. Eurozone CPI (inflation reading) deflated to -0.1% y/y in SEP vs. +0.1% AUG
  2. Germany’s CPI slowed to 0.0% in SEP vs. +0.2% AUG
  3. Producer Price (PPI) #Deflation was -0.9% y/y in France, -2.9% y/y in Italy, and -9.9% y/y in Greece

Yep. It’s a good thing Greece and the rest of Europe is fixed. Maybe their stock markets moving into #crash mode (German DAX -23% since April) will supersede Draghi’s flawed belief that #Deflation risks were dead (in June).

Given the #EuropeSlowing Q3 Macro Theme we introduced in July was accurate, the most recent European data implies that Draghi could/should very well “surprise” markets with another devaluation of the Euro in Q4.

What else might surprise?

  1. Classic #LateCycle gainers like employment + wage growth + consumption slow, sequentially, in the USA?
  2. Both Japan and Europe start slowing at an accelerating rate into recessions?
  3. As China continues to slow, they make up numbers to suggest they aren’t?

I don’t think the China thing would surprise people. Maybe the European and Japanese slow-down will. On the beloved “super-mid-cycle” USA thing people have been pitching, well… the risks to their beliefs are being drawn-down (in P&L terms) daily.

Having spent the last 2-days seeing Institutional Investors in NYC, here are some more things people are thinking about:

  1. What if Hedgeye’s forecast for a top-down GDP slowdown combined with a bottom-up earnings one is still right?
  2. What happens if we get another rate-of-change #EmploymentSlowing report on Friday?
  3. What does the Fed do if both US Employment + GDP reports slow, ahead of the DEC “rate hike” meeting?

Those are obviously thoughts about the US (newsflash: most US based investors still navel gaze at the US). But what if the most basic non-Consensus Macro thought of all is presenting itself to you (in live quote terms) on your screen, every day?

What if we’re entering a Global Recession?

Can the US “de-couple” from that? If the Fed is forced to cut their growth and inflation forecasts again (alongside every major economy on that) and the Dollar falls – what if Oil and Gold rise on that?

Is the new bull case going to be “US Economy To De-Couple On Rising Gas Prices”?

I’ll stop asking questions that challenge the flawed belief system that has been consensus throughout 2015. In other news, “Wall Street Strategists cut year-end SP500 target to 2173.” #Gripping analysis.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:

UST 10yr Yield 2.04-2.15% (bearish)

SPX 1 (bearish)
RUT 1077-1135 (bearish)
DAX 9101-9893 (bearish)

VIX 23.39-28.97 (bullish)
USD 94.82-96.99 (neutral)
EUR/USD 1.10-1.14 (neutral)
YEN 118.69-121.52 (bullish)
Oil (WTI) 43.68-47.41 (bearish)

Nat Gas 2.50-2.69 (bearish)

Gold 1115-1153 (bullish)
Copper 2.20-2.35 (bearish)

Best of luck out there today,

KM

Flawed Beliefs - 09.30.15 Chart