“The 50-50 rule: Anytime you have a 50-50 chance of getting something right, there’s a 90% probability of getting it wrong.”
Over the the Thanksgiving break, we stock market operators use only one rule of thumb. Related to Rooney's quote above, we assign a 50-50 chance of falling asleep after the second helping of turkey. In reality, that sneaky critter tryptophan turns that 50 – 50 chance into a more than 90% probability of sleep.
In fact though, the rule of thumb that eating turkey leads to sleep is really just a fallacy. Take it from our good friends at Wikipedia:
“A common assertion in the US is that heavy consumption of turkey meat results in drowsiness, due to high levels of tryptophan contained in turkey. However, the amount of tryptophan in turkey is comparable to that contained in most other meats. Furthermore, post-meal drowsiness may have more to do with what is consumed along with the turkey, carbohydrates in particular. It has been demonstrated in both animal models and humans that ingestion of a meal rich in carbohydrates triggers release of insulin. Insulin in turn stimulates the uptake of large neutral branched-chain amino acids (BCAA), but not tryptophan (an aromatic amino acid) into muscle, increasing the ratio of tryptophan to BCAA in the blood stream. The resulting increased tryptophan ratio reduces competition at the large neutral amino acid transporter (which transports both BCAA and aromatic amino acids), resulting in more uptake of tryptophan across the blood–brain barrier into the cerebrospinal fluid (CSF). Once in the CSF, tryptophan is converted into serotonin in the raphe nuclei by the normal enzymatic pathway. The resultant serotonin is further metabolised into melatonin by the pineal gland. Hence, this data suggests that "feast-induced drowsiness"— or postprandial somnolence — may be the result of a heavy meal rich in carbohydrates, which indirectly increases the production of sleep-promoting melatonin in the brain.”
That is a long winded way of saying: when it comes to blindly accepting conventional wisdom, don’t be a turkey!
Back to the Global Macro Grind...
In the cartoon above, from our illustrious cartoonist Bob Rich, we highlight the ongoing dilemma being contemplated by investors. Are the most recent data points hawkish or dovish? If so, what will the Fed do next? The bigger question of course is whether we are all just being turkeys with this continued myopic Fed focus.
It is more than a rule of thumb to suggest that any future shift in rates by the Fed should be based on their economic outlook, the problem with the economic projections of the Fed is that there isn’t a 50/50 chance they are correct. In fact, there is a more than 90% probability they are wrong.
The range of GDP projections from the members of the Federal Reserve started the year at 2.6 – 3.0% GDP growth. Just six months later in June, those projections were down at 1.8 – 2.0%. Now certainly we get better than most that making economic projecting is challenging in the best of times, but from the mid-point that is a more than 30% change in the projection in just six months. As my thirteen year old niece would say . . . #OMG!
Still despite the proven inaccuracy of Fed projections, the consensus view remains that the Fed will raise rates in December. According to a Bloomberg report out this morning, investors are selling U.S. government bond ETFs at the fastest pace in 14 months. As well, money managers withdrew $4.1 billion from U.S. fixed-income funds in November, the most since September 2014.
Now we certainly give money managers credit for being savvier, as it relates to the markets, than most members of the Federal Reserve, but the Chart of the Day shows that their “projections” may be almost as inaccurate as the Fed. As the chart highlights, in September 2014, the last time investors were selling Treasuries at this rate, it was basically at the peak in 10-year yield. So the moral of the story is: only turkeys sell at the lows.
In China this morning, the turkeys are seemingly coming home to roost with equity markets getting clobbered down almost 6% across the board. The cause du jour of this sell off is a broad, and likely overdue, crackdown on Chinese brokerages. The primary concern is CITIC Securities, which is being investigated by the Chinese version of the SEC for a supposed inflation of its derivatives business by a mere $1 trillion yuan (or $165 billion for those of you who are counting in U.S. dollars).
To add a bit of fuel to the sell-off in Chinese equities, the only piece of economic data released was, not to mince words, abysmal. Specifically, industrial profits came in for September at -4.5% year-over-year. Given that data point, we probably shouldn’t be surprised that Chinese nickel producers announced today that they are reducing production in 2016 by 20%. But, hey, maybe more stimulus will help?
Things obviously aren’t great in China, but then there is Japan. According to recent government data, the Japanese work force could fall from 64 million in 2014 to 56 million in 2030, a decline of over 8 million people. In other news, the U.S. Federal Reserve is projecting inflation will accelerate in Japan over the next decade. (That’s a joke!).
Contemplating Japan and China reminds us of one of our favorite quotes from the Oracle of Omaha:
“Only when the tide goes out do you realize who’s been swimming naked.”
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.18-2.29%
Oil (WTI) 40.18-43.64
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research