“What is the truth?”
-Ray Dalio, Principles
This may or may not be true, but I believe that is essentially the most important question Bridgewater’s Ray Dalio asks himself, every market day. He doesn’t start with what he’d like to be the truth. The truth may be on the other side of his positioning.
Our new “math guy” friend, Jordan Ellenberg (author of How Not To Be Wrong) asks, “are we trying to figure out what’s true, or are we trying to figure out what conclusions are licensed by our rules and procedures? Hopefully these two notions frequently agree, but all the difficulty, and thus all the conceptually interesting stuff, happens at the point where they diverge” (pg 393).
My “rules and procedures” govern my rate of change process. There is no doubt some risk to abiding to a process. But there are far more risks in not having one. Unbelievably, in 2017 I find more emotion, confirmation biases, and ideologies in macro positioning than I’ve ever seen in my career. I think there’s huge opportunity in that over-supply. But only for those who find the truth.
Back to the Global Macro Grind…
Today is my favorite day of the quarter. It’s Macro Themes Day @Hedgeye! Quarterly, what we try to do is highlight the Top 3 Global Macro Themes that are becoming more probable, but are not yet consensus.
What is the truth about consensus?
- It’s either Bullish
- Bearish
- Or not Bullish or Bearish Enough
Especially on Theme #3, which we’ve non-creatively hash-tagged as #TrumpTrades, for 2 months now consensus on US #GrowthAccelerating has not nearly been Bullish Enough.
If it was Bullish Enough, how did the Nasdaq just register 3 consecutive (daily) closing all-time highs?
Obviously our #TrumpTrades Theme has a lot more to do with the manifestation of Trump’s alleged policies, their timing, and global macro market impact than it does the QQQs.
But I just like calling out the Nasdaq because it’s 5,551 record close yesterday is an inconvenient truth for whoever missed it. Yesterday’s NFIB Small Business Confidence epic ramp to 104 (highest level since 2004) was the truth too (see Chart of The Day).
I know, I know. “This can’t be happening KM. It’s all happened too fast. This has to correct. It’s too expensive. Do you know how bad earnings season is going to be? Don’t you know that I know more than the market knows?”
Translation: ‘I missed the move and I’m probably buying/covering on all pullbacks.’
No worries brothers and sisters. I’ve been there, done that. From our Fixed Income PM blowing up our hedge fund @Carlyle in 2007 to being squeezed for a -38% loss in Reebok (I was short it into them being taken out by Adidas), I’ve been wrong, a lot.
And that is, precisely, why I continue to evolve and build the components of my research and risk management process. If I’m wrong less about the big moves, I’ll spend less time whining and complaining about how “wrong” the truth really can be.
Back to our Macro Themes for Q1 of 2017… the other 2 debates we’ll engage investors in this morning (the call is at 12:30PM EST – if you’d like access, we’ll have a LIVE feed up on @HedgeyeTV, so ping for the link) are:
- #Quad123
- #Reflation’sPeak
If you’re a growth and/or QQQ/SPY bear, don’t worry… I’ll give you plenty of potentially bearish pivot points to consider in the FEB-APR time-frame. The problem with that timing is that you’ll have had to wear being wrong for 3-6 months at that point… but, again, the truth about the timing is that if you nail accelerations and decelerations (rates of change), you generate alpha.
On the #Quad123 Theme, I’ll do my best to simplify the complex that is embedded in our GIP (Growth, Inflation, Policy) model. But the upshot of the “call” is that expedited “pricing in” of #Quad2 should start finding a topping process in that FEB-APR window, then we flip back to #Quad3 (for a quarter or less), then we ramp back up into #Quad1 for the back half of 2017 (Q2 through Q4).
On the #Reflation’sPeak Theme, I think I’ll be most convincing (because the year-over-year math is). Clearly, consensus is bullish on inflation accelerating. But I think the inflation reports in Q1 will be so rate-of-change-hawkish that it should suck the Macro Tourists into chasing the top. Put simply, we’re looking for a deflation of the 2016 reflation in Q2 and beyond.
Any questions on that? If you have time, please tune in.
The only thing better than measuring and mapping both market and economic data is having sharp clients question both our premise and process. Being questioned, after all, helps you get closer to the truth, faster. I don’t like to learn slow.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.35-2.55% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
XOP 40.09-42.81 (bullish)
RMZ 1115-1185 (neutral)
Nikkei 186 (bullish)
DAX 110 (bullish)
VIX 10.40-13.45 (bearish)
USD 101.50-103.75 (bullish)
EUR/USD 1.03-1.06 (bearish)
YEN 115.00-118.50 (bearish)
Oil (WTI) 50.76-55.09 (bullish)
Nat Gas 2.89-3.50 (neutral)
Gold 1135-1196 (bearish)
Copper 2.45-2.63 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
