“Doubt is not a fearful thing, but a thing of great value.”
Feyman was one of the greatest physicists in American history. When I think about massive opportunities - how much progress our profession can make in terms of both forecasting #process and accuracy - I often think about how he once described the medical field.
Phil Tetlock reminded me of that in his recent book, Superforecasting, where he wrote that “it was the absence of doubt – and scientific rigor – that made medicine unscientific and caused it to stagnate for so long.” (pg 30)
Tetlock made that point on the heels of a classic Feynman one that it’s “of paramount importance, in order to make progress, that we recognize this ignorance and this doubt. Because when we have the doubt, we then propose looking in new directions…”
Back to the Global Macro Grind…
Are we doubting the US government and its Establishment “blue chip” forecasters? Or are we hoping that their US GDP and employment forecasts for 2016 are right?
On Wall Street, doubt only has great value if it forces us to answer questions more accurately than prevailing and perceived wisdoms. There’s a lot of money to be made betting against those. But your timing has to be right.
With another rate-of-change #slowing in non-farm payroll (NFP) growth for the month of April at +1.9% (vs. #TheCycle peak of +2.3% in Q1 of 2015), the big money in macro that was made last week was right where it’s been made all year long:
- Long Bond (TLT) up another +2.1% last week to +8.2% YTD
- Utilities (XLU) up another +0.8% last week to +12.8% YTD
- Gold up another +0.3% last week to +21.9% YTD
That’s right. As growth slows, long-term bond yields fall. Despite consensus being bearishly positioned in the 10yr US Treasury (see CFTC net positioning data below), the 10yr Yield dropped another -5 basis points last week to 1.78%.
With the 10yr Yield down a healthy -49 basis points for 2016 YTD, I’m glad I didn’t get sucked into buying the Financials (XLF) because “they’re cheap.” They’re already -0.8% for the month of May and -2.9% YTD as cheap gets cheaper when using the wrong numbers.
While the SP500 was down for the 5th week in the last 7, according to one prominent bull who chased its chart in April, it was “only down -0.4%.” Isn’t that great. Not down a lot is the new up.
In other big Global Equity market down moves last week:
- Hong Kong’s Hang Seng was -4.5% on the week to -8.2% YTD
- Italy’s MIB Equity Index was -4.1% on the week to -16.7% YTD
- Emerging Market Equities (MSCI) were -4.1% on the week to +1.4% YTD
So far we’ve missed being long EM (which is mostly up YTD, albeit up less than what we really like in TLT, XLU, GLD) and that’s mainly due to our concern that if we’re really right on our Q2 forecast for 0.5% US GDP growth, macro markets will be in Quad4.
What’s Quad4? In our rate-of-change GIP (growth, inflation, policy) model Quad4 is when the Dollar stops going down and rates keep going down. That’s also what happened last week:
- US Dollar Index +0.9% on the week to -4.8% YTD
- CRB Commodities Index -2.7% on the week to +2.1% YTD
- Oil (WTI) -2.7% on the week to +9.7% YTD
- Energy Stocks (XLE) -3.3% on the week to +8.2% YTD
- Copper -5.7% on the week to +0.3% YTD
In other words, there’s a big difference between Quad4 (DEFLATION) and Quad3 (REFLATION). And while Chinese demand plummeting (exports and imports -1.8% and -10.9% y/y in April, respectively) is part of the narrative, so is what the US Dollar does.
Now that consensus has smashed Fed Funds probability of a June “rate hike” to only 8%, how much lower can the US Dollar go after registering a 16 month low in late April? Here’s consensus on that (non-commercial CFTC futures and options positioning):
- US Dollar net LONG position at its LOWEST level of 2016 (+9,083 contracts) registering a 1yr z-score of -2.11x
- 10YR Treasury net SHORT position at its HIGHEST level of 2016 (-103,914 contracts) = 1yr z-score of -1.74x
- SP500 (Index + E-mini) net LONG position at its HIGHEST level of 2016 (+30,589 contracts) = 1yr z-score +2.24x
You’d need some serious cognitive dissonance to maintain all 3 of these bets in your portfolio. Being bearish on USD when bearish on growth makes sense, but only until you hit Quad4.
Consensus being bearish on bonds while chasing US Equity Beta (in April) might explain why High Beta Stocks (SP500) got crushed last week (-3.2% to -1.2% YTD). Meanwhile the great value remained in being long doubt via Low Beta US Stocks (+1.3% on the week to +8.2% YTD).
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.71-1.83%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer