“My life has been the study of risk.”
-Benoit Mandelbrot
God bless Benoit Mandelbrot’s soul. He died in 2010 at the age of 85. If you haven’t seen his last TED talk, I highly recommend it alongside one of my favorite risk management books, The (Mis)Behavior of Markets. That’s where the aforementioned quote comes from.
“As a scientist, all of my research has, in one way or another, veered between the two poles of human experience: deterministic systems or order and planning, and stochastic, or random, systems of irregularity and unpredictability.” (page 5)
Read that a few more times and think about it in the context of trying to understand macro markets. There is a community of people in the establishment who simply opine on how to order and centrally plan economic gravity; then there’s us – the humble servants of the market Gods who have come to realize, through losses and learning opportunities, that dynamic systems are non-linear and irregular.
Back to the Global Macro Grind…
What do you spend more time on, deliberately studying markets and their risks… or chasing and/or reacting to rumors? In the short term, those aren’t mutually exclusive options. Since just about any central-market-planning voice can move markets, there’s risk in that too.
Yesterday’s “rumor” du jour came from a popular Federal Reserve voice by the name of Zervos. Not to be confused with a Greek god or the French writer, this Ph.D. is of the Old Wall banking system. As far as former Fed guys go, he’s quite creative in his macro musings.
He was floating the idea that Janet Yellen might take a flyer on her San Francisco Fed colleague John Williams’ idea to raise the Federal Reserve’s inflation target to 4%. Since Yellen speaks at Jackson Hole on Friday, this interrupted all of Old Wall Media’s headlines that Fed Vice Overlord Fischer was saying “we’re close to our targets”.
Rates Down (yesterday), Yield Chase Up on that…
So yes, in the short-term, rumorings and musings matter to markets; especially in the week of “the connected” @JacksonHole. Ever since Ben Bernanke used this central planning podium to move markets in the summer of 2010, we’ve had to deal with this market irregularity.
But, once you move beyond the short-term brokering of such rumors (there’s good money and a nice travel lifestyle in that)… and you move into the intermediate and long-term, what do irregular policy actions (trying to bend and/or smooth gravity) deliver, economically?
- They certainly haven’t delivered sustainable, above TREND, real economic growth
- They’ve widened the divide between us and them, in real purchasing power terms
- They’ve crushed productivity, as we all live in perpetual fear of, god forbid, short selling… on fundamentals
The productivity point is one that one of the world’s largest asset managers made to us in recent meetings in California. The PM asked whether all this “Fed Watching” was distracting companies from investing in real things as opposed to the next frontier of rumors…
Even if you go Ex-Energy, Ex-GAAP-Earnings, Ex-GDP with your narrative that everything ZIRP, NIRP, TWIRP is good, you’ll still have a very hard time convincing a rational human being who isn’t bought and paid for by the system that US Productivity at generational lows is…
So getting back to work this morning, measuring and mapping real things (even if they’re really being distorted by rumors!) like the PRICE, VOLUME, and VOLATILITY of asset prices… maybe we should all just go back to day-trading Oil futures. Isn’t this productive?
- After failing @Hedgeye TAIL risk resistance of $52.11, WTI had its biggest down day in 3 weeks yesterday
- At $47/barrel, that puts Oil (WTI) at +2.9% in the last week but -1.5% in the last 3 months
- Oil Volatility (OVX), meanwhile, has oscillated between 35 and 45 for 3 months with some #WickedChop
Not to be confused with the perception of intellect required to bend/smooth economic gravity via moving goal post “targets” (i.e. Wicked Smaht), ironically it’s the wicked chop itself that is not only killing the banks/brokers who employ Fed people, but their active clients.
Total US Equity Market Volume (including dark pool) was down -18% yesterday vs. its 1yr average. On Friday, it was down -24%. Yeah, if you go Ex-Summer, it was due to it being the summer (year-over-year). But isn’t this really more about studying risks than rumors?
The risk of every centrally planned market bubble is that everyone is afraid to sell it. That’s right – at the very top, even the bears are reluctantly net long of it. Then boom! Something stochastic, random, and “unpredictable” happens.
Then we see the losses. Then they have another learning opportunity to realize some humility.
Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND research view in brackets):
UST 10yr Yield 1.48-1.60% (bearish)
SPX 2165-2192 (bullish)
RUT 1 (neutral)
NASDAQ 5157-5263 (bullish)
XOP 34.53-37.95 (neutral)
RMZ 1 (bullish)
Nikkei 165 (bearish)
DAX 100 (bearish)
VIX 11.09-14.49 (bullish)
USD 93.92-96.25 (bullish)
EUR/USD 1.10--1.13 (bearish)
YEN 99.20-102.35 (bullish)
Oil (WTI) 41.11-49.80 (bearish)
Nat Gas 2.50-2.75 (neutral)
Gold 1 (bullish)
Copper 2.12-2.18 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
