Editor's Note: Below is a complimentary Early Look written by Hedgeye CEO Keith McCullough on 5/4/16. In it, McCullough discusses our process, Wall Street's poor economic forecasting track record, and why our GDP model has been spot on over the last 5 quarters. McCullough also nails the April "jobs bomb" ahead of the BLS's monthly jobs report that Friday. Click here to get the Early Look delivered in your inbox weekday mornings.
* * * *
“Isn’t it time for such sloppy guesswork drawing to a close?”
Yesterday was a good day. The Long Bond was up big and I spent the day meeting with some of the largest hedge funds in my home state of Connecticut. I absolutely loved the debates.
The aforementioned quote (from a great book I’m reviewing called Superforecasting) really nails a common thread we hear from the sharpest institutional investors in the world when it comes to The Establishment’s US GDP forecasting process.
In one meeting in particular, the PM (who oversees an entire office of hedge fund PMs) read an excerpt from a sell-side note that said “GDP feels like it’s going to be 2.5% in Q2.” A feel? Really? I don’t feel anything in our predictive tracking algo, but we’re at 0.3%.
Back to the Global Macro Grind…
Let me take that back. I do feel something. I feel really good when A) our GDP forecast is a long way from Old Wall consensus and B) consensus positioning in the SP500 (Index +E-mini futures/options contracts) is leaning as long as it has been for all of 2016.
Oh you bombastic Hedgeye boy, you.
Yep. I’m proud of both my people and process. We’ve actually been, on average, within 20-30 basis points of getting the US GDP number right for the last 5 quarters (the historical standard error in our model is 35 basis points).
The main reason why we’ve been so much more accurate than any other research department on accurately forecasting one of the most important factors in any economic model (growth) is that, instead of “feeling” it, we use modern-math and machines.
“After all, we live in an era of dazzlingly powerful computers, incomprehensible algorithms, and Big Data… isn’t it time for such sloppy guesswork drawing to a close? … The point is that if you have a well-validated statistical algorithm, use it.”
-Phil Tetlock, Superforecasting (pg 20-21)
While I am sure our forecasting #process will continue to evolve alongside technology and time, for now I probably sound overly confident that what we do crushes what they keep doing. With statements like this, how do you feel about it?
- “A rate hike could be appropriate, if the data is as expected.” –John Williams (San Francisco Fed Head, yesterday)
- “The economy is offering mixed signals, but favors unemployment data.” –Dennis Lockhart (Atlanta Fed, yesterday)
Given that a recently reported GDP of 0.5% isn’t in the area code of “as expected”, I don’t think Williams has a lot of credibility as a Wall St. forecaster. But Lockhart’s Atlanta Fed actually has a “GDP Now” tracking model (that has recently had an intra-quarter standard error of 200-250 basis points!) that is NOT mixed. It’s flat out bad. So he’s “favoring” non-GDP data.
I know. I know. You’re probably saying to yourself that the Fed is obviously dovish now (US Dollar at a 16-month low, post Janet Yellen’s recent rate-cutting-of-the-hikes), so this banter from Williams, Lockhart, Bullard, etc. is just popycock and posturing.
I don’t disagree with that. Neither would most people I meet with.
In modern forecasting, we deal with everything in rate of change terms and then probability-weight surprises vs. expectations.
As the rate of change in the economic, profit, and credit cycle continues to slow, the probability continues to rise that the Fed’s latest of #LateCycle indicators (Employment) starts slowing at a faster pace.
In other words, you’re one NFP (non-farm payroll) jobs bomb away from both Trump and Sanders sounding really right on the economy.
I’m sure we have absolutely nothing to worry about if Trump or Sanders becomes President of the United States. But last night’s voting machine in Indiana reveals that it’s more than just Hedgeye (and the Bond Market) that gets what’s really going on in the US economy.
Instead of those who were “feeling” US GDP was going to be 3-4% with “falling gas prices” (last year), now they have to spin that into rising gas prices are good for US Consumer Confidence as both the conference board and Univ. of Michigan report hit new YTD lows.
It’s either sloppy guesswork or just the conflict of interest ridden cabal of The Establishment consensus doing what they think they have to do before it becomes obvious to The People right before The Election.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.72-1.87%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer