“Obviously, a forecast without a time-frame is absurd.”
Timing matters. Anyone who runs their own money and/or works on the buy-side knows this. That’s how we get paid. Wall Street & Washington Establishment economists and strategists have a different compensation scheme.
On the topic of timeliness, Phil Tetlock reminded us in a chapter of Superforecasting titled Keeping Score, “they’re relying on a shared implicit understanding, however rough, of the timeline they have in mind… as time passes, memories fade, and tacit time frames that once seemed obvious to all become less so” (pg 52).
We obviously make plenty of mistakes. But we try to be crystal clear on timing. Our call since July of 2015 has been that Q2 of 2016 has the highest probability of what looks like recessionary US economic data of #TheCycle. I wanted to reiterate that this morning.
Back to the Global Macro Grind…
US Retail Sales “beat Wall Street expectations” on Friday and the US Retail Stocks (XRT) careened to the downside taking them to the edge of crash mode (greater than 20% decline from #TheCycle peak) at -19.4% since July of 2015.
For US Growth Bulls (not to be confused with stagflation realists) the month of May looks a lot more like #TheCycle than March did. The SP500 has been down for 3 straight weeks and, don’t look now, but is down for 6 of the last 8 and back to flat YTD.
In addition to the Retail Sector (XRT), leading last week’s US Equity decline were:
- Consumer Discretionary Stocks (XLY) -1.5% week-over-week to -0.1% YTD
- Small Cap Stocks (Russell 2000) -1.1% week-over-week to -2.9% YTD
- Financials (XLF) -1.1% week-over-week to -4.0% YTD
Since it would have been absurd for me to chase charts in March-April and tell you to buy #LateCycle Sector Styles while maintaining the most bearish US GDP forecast on Wall Street, I guess I don’t have to be the macro moron for May-to-date!
Meanwhile, the Old Wall’s media continues to run absurd headlines like this:
“SP500 Still Cheap Based On The Fed Model” –Bloomberg
So I still say short what appears to be “cheap” and keep buying what continues to get more expensive:
- Utilities (XLU) were up another +1.1% last week to +14.1% YTD
- The Long Bond (TLT) was up another +1.1% last week to +9.8% YTD
- Municipal Bonds (MUB) were up another +0.3% last week to +1.9% YTD
Oh, I know. Munis are so boring. Indeed. And so is the return of one’s capital during a #LateCycle consumption and employment slow-down vs. chasing hopeful charts to get a return on capital of greater than 0%.
Maybe that’s why everyone is getting long the Gold chart again. As you can see in today’s Chart of The Day, they did so when the Yield Spread started to break down in 2011 too.
With the 10yr Yield falling another -8 basis points last week to 1.71%, the Yield Spread (10yr yield minus 2yr yield) pancaked to a fresh YTD low of 95 basis points last week. Flapjack flattening is not bullish for the Financials. It’s bullish for Utes, baby!
In other macro market news last week:
- The US Dollar put together its 2nd up week in a row, closing +0.8% on the week to $94.60 and -4.1% YTD
- Gold dropped -1.5% on that, correcting to +20.1% YTD
- And Dr. Copper got pounded for a -3.6% Quad4 #Deflation, taking it back into the red at -2.2% YTD
Or was the Doctor ill due to “Chinese Demand Slowing”? Since mostly everything in macro (and life) is multi-factor and multi-duration, I won’t deny China’s export/import data slowing mattered. But so did markets looking more like Quad4 than Quad3.
As a reminder, our non-absurd specificity on timing has the USA moving from Quad3 to Quad4 in Q2. What happens in Quad4 is that the US Dollar RISES as US Interest Rates FALL. This is what happens when bad equals bad. People go to cash.
The only outlier on Quad4 last week was Oil ramping +3.7%. That, of course, is a huge problem for US GDP. If the BEA doubles the Deflator to 1.6%, that is. If they used the Fed’s preferred calculation for inflation, the US would already be in a #Recession.
If you’re keeping score on all of this:
A) The Fed wants to call the stock market “cheap” using their “model”
B) But the Fed doesn’t want to calculate GDP using their model’s definition of inflation
Obviously, that’s absurd too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.69-1.79%
Oil (WTI) 43.69-47.80
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer