Macro Journalism

“I was a liberal arts major at Yale and wanted to become a journalist.”

-Scott Bessent

So was I. No, but seriously. Upon explaining to then Defensive Backs Coach Tony Reno (now Head Football Coach and a beloved mentor) that I wanted to be a sports broadcaster over dinner during a home recruiting visit, he remarked (paraphrasing):

“I’ve got some great news for you. Yale has the #1 communications program in the country. We ship students down-the-road to ESPN [in nearby Bristol, CT] all the time.”

Much like Scott Bessent (former CIO of Soros Fund Management), I eventually learned that Yale does not have a journalism major, though I’m guessing that he probably learned that much sooner than I did – especially given that: A) I had never heard of Yale until I met Coach Reno my senior year of high school; or B) I didn’t have the wherewithal or the means to confirm.

Specifically, you tend to take a lot of people’s word for it when you don’t have internet access at home. In fact, you could make an argument that he could’ve literally said anything positive about this mysterious place called “Yale” and I would’ve bought it. I was just excited for the opportunity to go to college. For a variety of reasons – mostly unfortunate – most people don’t go to college where I’m from.

Back to the Global Macro Grind

In reviewing my 2nd favorite book of all time, Inside the House of Money, I re-learned that Mr. Bessent and I have a fair amount in common – we both got our first jobs on Wall St. working for another Yalie (he: Jim Rodgers; me: Keith McCullough). Additionally, from the teachings of our respective mentors we both learned to have enough confidence in our own work to stand apart from the herd:

  • Steven Drobny (author): “What did you learn from Jim Rodgers?”
  • Scott Bessent: “I learned about doing primary research. To just keep digging and look where nobody else is looking. He used to have me do these spreadsheets before there was Excel. Barron’s used to have an issue that ranked the stocks of industry groups and we’d flip it upside-down to look at the worst performers to buy and the best performers to short.”

To be crystal clear, I’m no Scott Bessent. While I hope to someday improve upon his process, performance and impact on the industry, I humbly acknowledge that I have a long way to go.

Disclaimer intact, that passage resonated with me a lot because I had a very similar experience learning how to model economies like companies instead of countries. I can recall sitting in Keith’s office at the crack of dawn in 2009 and marveling at how seemingly simple modeling growth and inflation using a Bayesian Inference Process appeared to be. If the “comps” are tough, the growth rate is overwhelming likely to slow in the forecast period. If the “comps” are easy, the growth rate is overwhelmingly likely to accelerate in the forecast period. I thought to myself, “This seems too simple. Why in the world do so few investors think to do this?”

I still have that same thought. Having been one of, if not the most, accurate firms on Wall St. forecasting domestic and global economic growth over the past few years, I continue to marvel at how simple and effective, yet non-consensus modeling the economy from a rate-of-change perspective is (CLICK HERE for a more detailed discussion). Moreover, as we penned in our GDP recap note from yesterday, our forecasting process is signaling both incremental and material degradation to U.S. economic growth over the intermediate term:

“U.S. Real GDP growth slowed right on queue into steepening base effects in 3Q15. Moreover, these “comps” are set to remain extremely difficult for the next four quarters, which implies the sine curve of underlying U.S. economic growth that oscillates between +1% and +3% is likely to mean revert back to the low end of that range of probable outcomes over the next few quarters.”

Another quality Mr. Bessent and I have in common is a passion for seeing everything, which coincides with a general disdain for missing stuff. As macro investors, it’s our job not to miss stuff. In pursuit of this outcome, one thing Mr. Bessent added to his investment process is a top-down quantitative overlay that signaled, at the bare minimum, emerging regime changes and also the occasional legitimate investment opportunity:

  • Steven Drobny: “Do you use technical analysis as a behavioral analysis tool?”
  • Scott Bessent: “Yes and we also use it to keep us on top of things we might not be seeing. We have a system that screens about 1,400 stocks and commodities around the world every week. We never trade based on it, but if all of a sudden 10 stocks in Indonesia show up, then we’ll look at Indonesia.”

It was in the reading of this passage that I got the first idea to develop what would eventually become our Tactical Asset Class Rotation Model, or TACRM for short.

Like Mr. Bessent’s quantitative overlay, the primary function of TACRM is to provide investors with an unparalleled degree of advanced market color. TACRM is especially useful in alerting investors to critical breakouts and breakdowns for every liquid factor exposure across the liquid global macro investment universe (~200 in aggregate) and collating those signals in a manner that significantly enhances one’s ability to identify existing or developing regime changes at the primary asset class level. It does this by employing resoundingly robust quantitative methods:

Macro Journalism - chart2 EL

So what is TACRM signaling today?:

  • TACRM is generating a sell signal for each of the seven primary asset classes tracked by the model, which implies investors should be taking advantage of opportunities to raise cash.
  • Within U.S. Equities, our preferred style factor exposure(s) – low-beta, large-cap liquidity – is dominating the leaderboard from the perspective of bullish risk-adjusted VWAP momentum across  multiple durations. Homebuilders – a factor exposure we’ve liked all year – is now bringing up the rear and perpetuating a great deal of internal debate about the outlook for the domestic housing sector.
  • Within Domestic Fixed Income, Credit and Equity Income, we continue to be on the right side of the market’s #Quad3 vs. #Quad4 debate, with REITS and TIPS at opposite ends of the leaderboard. Recall that the former is one of two factor exposures we’ve liked on the long side of the U.S. equity market and that we’ve been anticipating another round of #GlobalDeflation post the ECB’s 10/22 statement.
  • Also in line with our current investment themes, the U.S. Dollar is atop the leaderboard in FX from the perspective of bullish risk-adjusted VWAP momentum across  multiple durations. The CHF, EUR, SEK and AUD are bringing up the rear.
  • International Equities, Emerging Market Equities and Commodities are all still overwhelmingly bearish from a breadth perspective. In fact, only one factor exposure in each asset class is signaling bullish from the perspective of risk-adjusted VWAP momentum across  multiple durations: New Zealand, Argentina and Sugar. I personally wouldn’t chase either of them here, but have at it if you’re the gambling type.
  • Perhaps most importantly, Global Macro Volatility is still accelerating on a trending basis per TACRM’s proprietary calculations, having been in that state since the week-ended 10/3/14. The implications of this are two-fold. 1) All things being equal, a sustained increase in volatility forces most investors to take down their risk, at the margins, which probably caps upside and forces markets to rally to lower-highs. 2) The average investor reduces their lookback window when volatility is trending higher, meaning that he/she is more sensitive to incremental data in the context of forming a bullish or bearish narrative. For what it’s worth, we think the preponderance of incremental data is likely to continue to be negative (see Chart of the Day below).

CLICK HERE to download the complete TACRM report.

Unfazed by one of the most proactively predictable squeezes to a lower-high in S&P 500 history (the net short position in non-commercial S&P 500 and S&P 500 e-minis contracts came in -2.5 standard deviations below its TTM average on 9/18; recall that any Z-Score in excess of +/- 2 sigma has historically been a tradable/investable contra indicator), we continue to have upmost conviction in our #SuperLateCycle and #GlobalDeflation themes.

Why? Because both global macro markets signals (highlighted above) and the rate-of-change across key economic data (detailed summaries below) continue to support our conclusions, at the margins.

Stick with the #process.

Our immediate-term Global Macro Risk Ranges are now:

 UST 10yr Yield 1.98-2.19% (bearish)

SPX 2008-2099 (bearish)
VIX 13.55-19.48 (bullish)
EUR/USD 1.08-1.11 (bearish)
USD/JPY 119.02-121.31 (neutral)
Oil (WTI) 43.08-47.26 (bearish)

Gold 1141-1164 (bullish)

Keep your head on a swivel,

Darius Dale


Macro Journalism - chart1 EL