“I have been a lone rider so often for so long that I’m not even bothered by it anymore.”
-Benoit Mandelbrot
That’s a great quote from one of the greatest books I’ve ever read on risk management, The (Mis)Behavior of Markets – A Fractal View of Financial Turbulence, by Benoit Mandelbrot and Richard Hudson.
While sometimes I wish I could be harder core and say I’ve been a lone rider, I really can’t. The last 8 years of my career has really been a story of collaboration. Since 2008, without my teammates and clients pushing our every assumption I think I’d be as mediocre as many “macro” hedge fund returns and consensus growth forecasts have been.
As a firm, it’s never bothered us to be the lone rider. Instead of trying to be validated by an establishment of academics, strategists, and economists, we’ve had a lot more fun beating down their Old Wall. There’s a passion and perseverance to this. God willing, I have it in me to help my team carry on for years to come.
Back to the Global Macro Grind…
Yeah, I get a little reminiscent at this time of the year. I get to sleep in for a few weeks (until 5-6AM which is huge!), write a few less Early Looks (as the sun is rising over Lake Superior – love that), and spend time with my family and friends.
Two weeks of this ends on Sunday. And I’ll be ready to crank back into top-gear for the final run of the season.
In some ways, this time of the year reminds me of the summer of 2007. That was a time when it was as clear as it is today that both the economic and profit cycles were slowing… but “stocks” wouldn’t go down.
I, being the inexperienced macro moron back then, was “too early” shorting US Equities from AUG-OCT … and I got fired on November 2nd, 2007 for being down less than 4%. The SP500 was down over 6% that month. And the rest is history.
This summer is different in that the latest “bear case” isn’t that #GrowthSlowing continues, equity multiples compress, and stocks crash (again).
No, no, no.
This time the bears are still the same bears you could have dialed up a year ago. The “valuation” bears on both bonds and their Safe-Yield proxies. These are the bears that are still clinging to their caves hoping for bond yields to “break-out.”
But how, precisely, do bond yields break-out if both US and Global Growth continues to slow?
Send me an email. I’d love to print a differentiated view on this macro matter. For now, everything I get sent on the topic is pretty much the same thing. “It’s crowded, expensive, unsustainable….”
Sounds like the bear case on stocks too, doesn’t it?
- “Stocks can’t make all-time highs every other day”… (they did in 2007, until OCT)
- “Stocks are super expensive, especially on GAAP earnings” … (true at all 3 bubble highs, 2000, 2007, 2016)
- “Everyone is long” … (true, from a net positioning perspective, in both stocks and bonds right now)
If the bond bears are wrong, can the perma US Equity bulls be wrong?
A) Sure, anything can happen
B) If Europe and Japan are leading indicators, yes
I hate to remind non-Global Macro investors on this, but for posterity I will this morning:
- European Bond Yields have crashed alongside GDP growth expectations – and European stocks have too
- Japanese Bond Yields have crashed alongside GDP growth expectations – and Japanese stocks have too
Weird, eh?
Not really. And this is the punch-line on why the USA is different (for now). When US GDP was tracking sub-1% in Q1, plenty of crashing in equity prices was happening into the FEB 2016 lows. Bond yields were crashing too.
When everything “bottomed” (allegedly in Q2) and GDP was barely > 1%, stocks and bonds ramped to all-time highs in sync. I called this American Goldilocks in an Early Look note last week.
But what happens if/when US GDP falls back below 1% again? What happens if Oil can’t recapture $51-52? What happens to the US #ProfitRecession in Q3 and Q4 and into 2017? How about credit spreads? Long-term Yields? Unicorns? Helicopters?
Oh boy.
Instead of buying bad companies like Hain Celestial (HAIN) “because they’re gonna be bought, bro” (before they have to report their real numbers) prospective buyers of “everyone can buy everyone” might actually do some accounting due-diligence…
Lord knows that those PE and Hedge funds who levered up long at this stage of the cycle in 2007 didn’t. In many ways, I guess they thought they were the smartest lone riders in the room back then too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.47-1.61%
SPX 2165-2195
NASDAQ 5130-5269
Nikkei 16033-17105
VIX 11.02-14.65
USD 94.51-96.53
Oil (WTI) 40.08-46.92
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
