“I update constantly.”
-Tim Minto
In Superforecasting by Phil Tetlock, they call him Captain Minto for good reason. In the 3rd season of the IARPA forecasting tournament, Tim Minto (a 45 year old Canadian Software Engineer) won with a ridiculous Brier Score of 0.15. How did he do it? Bayes Theorem.
Do you have a Bayesian forecasting process? Or do you go with the Old Wall “feel” thing? “In simple terms, the theorem says that your new belief should depend on two things – your prior belief (and all of the knowledge that has informed it) multiplied by the diagnostic value of the new information.” (Superforecasting, pg 170)
Before the US Treasury 10yr Yield hit 1.57% this morning, our belief was that classic #LateCycle economic factors (like #EmploymentSlowing) would drive the long end of the curve to all-time lows. The “new information” on labor slowing wasn’t new. It was in Janet Yellen’s favorite labor market indicator (Change in Labor Conditions Index). She should have listened to it.
Back to the Global Macro Grind…
Q: What’s Yellen’s update going to be this week? A: Dovish.
Yep. After going from hawkish (DEC) to dovish (MAR) to hawkish (MAY)… she’s going back to dovish.
While I won’t give her credit for being correct in her prior beliefs on either GDP growth or the employment cycle, she gets a sticker from Hedgeye for updating on the latest NFP (non-farm payroll) and JOLTS labor information.
What if she stays hawkish?
Oh boy, if you think blaming Brexit this time (or China last time she had to pivot dovish) carries some volatility, wait until you see what she makes her reflation trade look like on a Dollar Up, Rates Up (into a slow-down) move.
But neither I, nor my colleague Don Kohn (former Vice Chair of the Federal Reserve under Bernanke), thinks she’ll do that.
Back to the latest “market conditions” and US economic updates:
- US Retail Sales for the month of May will be released today (we’ll update our predictive tracking algo for US GDP intraday)
- Major Global Equity markets continue to crash as growth expectations and long-term sovereign bond yields do
Yep. The Fed might care more about “levels” than they do rate of change, but that doesn’t mean that rate of change doesn’t matter more than their linear-optimal-utilization model “levels” do.
What happens when the “level” implies a rate of change crash in prices?
- Japanese Stocks (Nikkei) dropped another -1% overnight, taking its crash from the 2015 cycle peak to -24.3%
- Chinese Stocks (Shanghai Comp) remain in crash mode, down -45% year-over-year in rate of change terms
- German Stocks (DAX) are down -1.4% this morning, taking its crash to -23% from the 2015 cycle peak
“Reflation” country (equity) indices like Australia and Russia are down -2% and -3%, respectively, this morning as Dollar Up, Rates Down asks the risk management question of the month: #Reflation or #Deflation, from here?
And how, by the way, do you reflate asset prices when NIRP (negative rate policy) is being read as a banking #Recession?
Not that holding the equity bulls to consistent account matters anymore (the bull case changes every 6 weeks), but whoever is looking for “earnings to rebound in Q2” has to go both non-GAAP and “Ex-Financials” to get there with yields crashing and curves flattening.
Oh, and how about that thing called equity volatility?
Front month US Equity VIX just went from 13 to 21-22, in a week. Since both the April and June US stock market “rallies” to lower-all-time-bubble highs came on decelerating volume, should this move surprise anyone other than people who chase charts?
Or were people chasing moving monkey averages aware of the causal factor called #TheCycle all along?
So many questions. Such a messed up consensus. Don’t forget that up until late last week, in CFTC futures & options net positioning terms, Wall Street was net LONG SP500 and net SHORT the 10YR Treasury!
With our long-term cycle call firmly intact, our immediate-term TRADE signal actually says the 10yr is immediate-term oversold at 1.55% inasmuch as the beloved barometer (SP500) is at 2067.
I guess that signals that Yellen’s update would be another buy/cover signal (for stocks) on the “news.” It’s perverse, but it’s reality. The new bull case needs the Fed, not real economic and/or earnings growth.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.55-1.70%
SPX 2067-2104
RUT 1140-1170
Nikkei 155
DAX 9
VIX 15.88-22.77
USD 93.11-96.01
Oil (WTI) 47.62-51.39
Gold 1
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
