“The reductio is a kind of mathematical judo."

-Jordan Ellenberg

In chapter 8 of How Not To Be WrongThe Power of Mathematical Thinking, Jordan Ellenberg explains how to use the reductio. That’s when “we first affirm what we eventually wish to deny, with the plan of defeating it by means of its own force…

“If a hypothesis implies a falsehood, then the hypothesis itself must be false.” (pg 131)

Did I want to deny that US growth wouldn’t go to 0% (like it has every other cycle)? Of course I did. I was long Gold and Bonds. But as that hypothesis started to imply falsehoods, I was forced to do what I didn’t want to do and I changed our positioning.

Quad 2 - Bull and bear extra cartoon

Back to the Global Macro Grind…

Sure, I would have loved to have more than a week to change our positioning, but markets aren’t always polite. They don’t have to take their time to allow everyone out in an orderly fashion. Sometimes it’s just a stampede.

Unless this is your 6th month on the job, you’ve seen massive long-term bulls buck the TREND and turn on you before. When that happens, your first objective is to pray for the clowns and get the heck out of the way.

As Gary Shilling reminded us at Macrocosm 2016, “they’re mad as hell, and they’re not going to take it anymore.” By “they”, he meant The People of the United States of America who have been living in a slower-for-longer and unequal growth environment since 1999.

Does that mean we’re on the cusp of a raging bull market in stocks?

At the all-time highs, one might argue we’ve already been in one. Another might argue that bull markets can last a long time. And another might argue that the #GrowthSlowing components of this one can move into a bear market as new ones take over.

Keep arguing. But if you want to do so with us, let’s have an argument about the actual data.

Ultimately, our #process attempts to solve for environmental shifts and phase transitions. Some of you might think of these shifts as “sector rotations.” In our GIP Model, those only happen when you shift from one quadrant to the next.

As a reminder, this is how our GIP (Growth, Inflation, Policy) model works:

  1. There are 2 core factors = GROWTH & INFLATION
  2. The underlying modeling premise is rate of change
  3. GROWTH and INFLATION are either accelerating or decelerating (in rate of change terms)

As you can see in our Chart of The Day, that gives us 4 quadrants (Hedgeye Jedis call them “quads”):

  1. QUAD 1 = Growth Accelerating; Inflation Slowing
  2. QUAD 2 = Growth Accelerating; Inflation Accelerating
  3. QUAD 3 = Growth Slowing; Inflation Accelerating
  4. QUAD 4 = Growth Slowing; Inflation Slowing

What US markets just did was signal a move from QUAD3 (stagflation) to QUAD2 (where both growth and inflation are accelerating, at the same time). Some of the phase transitions in QUAD2 are:

  1. Dollar Up
  2. Rates Up
  3. Financials Up, Utilities Down
  4. Industrials Up, Consumer Staples Down
  5. Lots of people off-sides

Yeah, during economic stagflation the general population is “mad as hell.” Think about it, most people don’t work on the Old Wall and/or get compensated by its asset “flation” – they’re just getting “stagged.”

Put simply, a big reason why Trump won is that Americans were in QUAD3.

Now some people are super partisan obviously, so the idea of a Trump presidency feels more like DEFCON 4 or 5. But there’s nothing in our GIP model (30 data points monthly, 90 quarterly) that cares about people or their politics.

Currently, this is where our predictive tracking algo has Q4 GDP:

  1. Upwardly revised q/q SAAR GDP to +1.5% from +0.5%
  2. Upwardly revised y/y GDP to +1.7% to +1.4%

And for those of you who are thinking how we dare change our mind due solely to Trump’s victory. This is a reminder that the GIP model revisions had nothing to do with Trump.

They had everything to do with the 13 data points that have been registered for Q4 to-date with one of the bigger ones that matters being a “Retail Sales Control Group” number ramping +4.2% on a q/q SAAR basis.

Does the #TrumpTrade matter? Of course it does. But that’s just a market expectation that registers as a quantitative signal in my TRADE/TREND/TAIL component of the #process. That’s purely a price, volume, volatility signal, that I analyze across durations.

The US Dollar has been bullish from a long-term TAIL perspective going back to when our GIP model signaled QUAD1 in 2013. Whereas the long-term TAIL risk line for the US 10-year Treasury Yield is 2.31%.

Can the data slow and the signals reverse? Of course. Is that the high probability bet I’d have on right now? No. For now, it’s up to those who haven’t changed their positioning to QUAD2 to prove that doing what I didn’t want to do wasn’t a good decision.

Our immediate-term Global Macro Risk Ranges with intermediate-term TREND Research views (in brackets) are now:

UST 10yr Yield 1.72-2.43% (bullish)

SPX 2130-2199 (bullish)
RUT 1175-1350 (bullish)

NASDAQ 5140-5342 (bullish)

XOP 35.00-39.15 (neutral)

RMZ 1060-1115 (bearish)

Nikkei 167 (bullish)

DAX 108 (neutral)

VIX 12.07-22.08 (bullish)
USD 98.51-101.60 (bullish)
EUR/USD 1.06-1.08 (bearish)
YEN 104.99-111.17 (bearish)
Oil (WTI) 43.00-46.65 (bearish)

Nat Gas 2.52-2.88 (bearish)

Gold 1190-1246 (bearish)
Copper 2.30-2.60 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Quad 2 - 11.18.16 EL Chart