“I’d rather be a bookie than a goddamn poet.”
Barring some alliteration here and there, I’m not a goddamn poet either. I’m a Risk Manager. And when I think about risk, I think in probability and rate of change, not the consensus corner of the hedge fund community’s panic attacks.
When you wake up in the morning do you want someone to hold your hand and tell you what to do? Or do you have your own process and group of market practitioners like me to help augment it?
From his perch at the CIA during WWII and the Cold War, Sherman Kent, helped US Presidents make decisions using probability language. “If the National Intelligence agency said something is “probable”, it would mean 63-87% chance it would happen. Kent’s scheme was simple – and it greatly reduced the room for confusion.” (Superforecasting, pg 56)
Back to the Global Macro Grind …
If you want to be 100% certain, there’s a bookie in the clink I can put you in touch with. His name is Madoff. If you want credibility in making Macro Calls on Wall Street, you better be right at least 63% of the time.
If you simply think something is “possible” (not probable)… like say a Fed “rate hike” into a slow-down… Kent “suggested the word “possible” be reserved for important matters where analysts have to make a judgment but can’t assign probability.” (pg 56)
“So.. you’re saying there’s a chance.”
-Dumb & Dumber
That’s about as useful as some of these regional Fed Heads (like John Williams at the San Francisco) have been in outlining their “chance for 3-5 rate hikes” in 2016. There’s no process in that. There’s only confusion. And market confusion breeds contempt.
I don’t make a call on something unless I think there’s at least a 67% chance that I’m going to be right. “Where could you be wrong Keith?” Well, folks, I could be wrong on all of it. How about you? What are you going to do if I’m right on rates again?
Being The Bull on the Long Bond since this time last year has not been easy. I’m almost starting to feel like the Long Bond Bookie of Twitter. But, if you think I fold with Q2 consumption and employment #GrowthSlowing here, you’ll be 100% wrong on that.
So, let’s go right to the wood and let me reiterate what I did in Real-Time Alerts yesterday:
- COVER signal = US Retailers (XRT) which were getting pounded to new lows (still bearish TREND)
- BUY signal = McDonald’s (MCD) which is still my favorite Big Cap US Equity (bullish TREND)
- BUY signal = Utilities (XLU) which is still our favorite US Equity Sector Style (bullish TREND)
- SHORT signal = JP Morgan (JPM) which signaled immediate-term TRADE overbought (bearish TREND)
- COVER signal = Kinder Morgan (KMI) which signaled immediate-term TRADE oversold (bearish TREND)
- COVER signal = Encore Capital (ECPG) which signaled immediate-term TRADE oversold (bearish TREND)
- BUY signal = Occidental Petroleum (OXY) which signaled immediate-term TRADE oversold (bullish TREND)
- BUY signal = Long Bond (TLT) which remains my favorite way to play US #GrowthSlowing (bullish TREND)
- COVER signal = PRA Group (PRAA) which signaled immediate-term TRADE oversold (bearish TREND)
- SHORT signal = Regional Banks (KRE) which signaled immediate-term TRADE overbought (bearish TREND)
Q: “Are we clear?” –Colonel Jessup
A: “Crystal” –Kaffee
I didn’t build this place to play possum. I built it with no conflicts of interest – no bankers, no brokers, no bookies – so that we could bring transparency and accountability back to a profession in dire need of it.
I don’t make calls assuming I’m going to be right. We all get things wrong on Wall Street. But over my dead body are my subscribers going to be getting “possible” when I make a call. They are going to get probable and why.
Why do I think the aforementioned 10 moves were the highest probability decisions I could make yesterday?
- US GROWTH continues to slow
- US Consumption and Employment GROWTH slowing are more important to the Fed than CPI
- US INFLATION is reflating from deflationary lows – that’s not to be confused with a breakout of hyperinflation
- US 10yr Yields (intermediate-term, not 2-day moves) map the rate of change in GROWTH more so than INFLATION
- If the Fed RAISES RATES (June) into this slow-down, they’ll be the catalyst for DEFLATION (down yields) again anyway
That last part (5) is the part Consensus Macro got smoked by when they bought the Financials (XLF) and shorted “expensive” Utilities (XLU) in December 2015 on the DEC Rate Hike. The Fed drives the Dollar; the Dollar doesn’t drive the Fed.
While her rookie Dollar Debaucherers in Regional Federal Reserve offices are more “preferred outcome” dependent, what we have learned in 2016 is that Janet Yellen has been data dependent, but on a lag.
As #LateCycle growth slowed, she cut out 3 of the 5 hikes. If she hikes for the sake of hiking, she’ll prove that she’s not politically tied to the Democrat party. She’ll probably blow up the commodity, stock, and bond markets all at once right before the election.
And at that point, we all might be aspiring poets anyway.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.68-1.88%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer