“You know, and I know, that we do not live in a world of Econs.”
I know, and you know, that isn’t true in our profession. We live in the world of an un-elected Federal Reserve’s inaccurate forecasts.
As for the other 99% of the world’s population, Thaler is quite right in emphasizing that “we live in a world of humans. And since most economists are also human, they also know that they do not live in a world of Econs.”
That’s how he introduces his new book, Misbehaving – The Making of Behavioral Economics. If you have friends who live in a world of linear-forecasting Econs, buy it for them. Humans need to learn that “the premises on which economic theory rests are flawed.” (pg 6)
Back to the Global Macro Grind…
I spent all of this week speaking with Institutional Investors in California. From Santa Monica to San Francisco, there wasn’t one meeting that didn’t ultimately end up focusing on what the Federal Reserve is going to do next and why.
“I hear you on #TheCycle, but could they raise anyway?”
“What happens if they don’t raise? Do we rip?”
“If they raise, then when is the earliest they can start cutting again?”
Yep. Those are the three scenarios:
- Raise rates in June or July and September
- Do nothing
- Raise then cut in September
The last one might raise your eyebrows this morning as it’s the furthest away from your local hedgie hyperventilating about the “Fed’s Minutes” (Bond Yields have since pulled back and every Long Bond and Utilities Bull who bought that damn dip are getting paid).
But don’t forget that the only reason why the US stock market didn’t crash in FEB-MAR 2016 is because that’s precisely what the Fed did in going dovish and pulling “5 hikes” back to 2 (or now my boy Johnny Williams in CA says 2-3!).
Janet Yellen went dovish (i.e. cut rhetorically) AFTER she raised, making her the only American Econ of this decade to have RAISED RATES into a US Economic slow-down AND then immediately CUT them.
#Sweet. Now what?
Should she raise them into another slowing Q2 slowing GDP report, corporate profit recession, and a few more NFP #EmploymentSlowing reports? If she does, the proceeding cuts are going to be super sweet, no?
As you can see in today’s Chart of The Day, Janet’s favorite “indicator” is one she calls her “Change In Labor Market Conditions Index.” After being green for, drumroll, #TheCycle… it started to go red (like it always does)… as the US economic cycle had already peaked and rolled.
Since this data series goes back to the 1970s, you can see that the probable outcome (from here) is for the 3 red bars just reported to go really red sometime soon. Does Janet want to be the catalyst in expediting that? When it’s really red, she has to be dovish.
In other words, this summarizes my high probability forecast:
- In a dead-heat with being SP500 dependent, Yellen is labor data dependent
- If she hikes for the sake of hiking, she’ll be cutting faster than she hiked
- Because there is a 0% chance she stays tight during #LateCycle Employment slowing
So, instead of staring at an Atlanta Fed GDP Now forecast (that is subject to an intra-quarter downward revision of 200-250 basis points), gaze deeply again at Janet’s preferred indicator.
The last 3 months have registered the lowest readings since this time (June) of 2009. Can you imagine if Bernanke was clueless enough on #TheCycle to start raising rates in the summer of 2009?
I can. And so can the world of Econs. He’d have blown our reflated asset price world to smithereens.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:
UST 10yr Yield 1.71-1.91% (bearish)
SPX 2038-2097 (bearish)
RUT 1081-1149 (bearish)
NASDAQ 4 (bearish)
Nikkei 166 (bearish)
DAX 99 (bearish)
VIX 13.16-16.98 (bullish)
USD 94.56-95.97 (bullish)
EUR/USD 1.11-1.13 (bearish)
YEN 108.42-110.74 (bullish)
Oil (WTI) 46.29-49.97 (bullish)
Nat Gas 1.97-2.20 (bearish)
Gold 1 (bullish)
Copper 2.03-2.12 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer