“The data did not remotely fit a bell curve.”
-Benoit Mandelbrot
Anytime I want to go all non-linear on you in the morning (post all-time highs), you know I am going to bring out The Brot. The aforementioned quote comes from The (mis)Behavior of Markets where Mandelbrot explains Pareto’s 1909 Income Curve.
In case you didn’t know, now you’ll know that Pareto was one of the first to introduce “power laws” into economics. Pareto wasn’t a mainstream econ – he was an “Italian Industrialist who did not begin serious work in economics until his mid-forties...”
He explained that “society was not a social pyramid with the proportion of rich to poor sloping gently from one class to the next… Instead it was more of a social arrow – very fat at the bottom where the mass of men live, and very thin at the top...” (Mandelbrot, pages 152-155). Makes sense. It’s a good thing we’ve had some common-sense-econs for hundreds of years too.
Back to the Global Macro Grind…
Did you know that:
- The Wealthiest 10% of American Households Own 85% of US Financial Assets?
- The Top 20% of American Income Earners Constitute 2/5ths of US Consumer Spending?
- If You’re In The Top 20% (and you’re Long Nasdaq in 2017) You’re Feeling Pretty Sweet?
Oh yeah, “High End Consumption” in America is highly tethered to Asset Price Inflation. That’s because all you rich people own all the assets! See today’s Chart of The Day (Asset Price Inflation vs. Luxury Goods Consumption) for the details on that.
After collapsing for 2 years into mid-2016 (when the GDP and US Profit cycles bottomed), “high end” discretionary consumption has begun to re-accelerate on a short-lag to stocks ramping back to ATHs (all-time closing high for Nasdaq = 6102 yesterday).
I know. Partisan-fin-journos (who have never run a business in their life) are probably shocked by the concept that when sales and profits accelerate (and government tells us that they’re going to cut our corporate tax rates), that we spend more.
Throw your “I’ve been bearish for 6 months using a 9 month PMI lag” chart-thing on that!
As you know, I’m in the camp that most things tethered to “reflation” (Commodities, ISMs, PMIs, China, Russia, etc.) will continue to roll over. But, on a real (adjusted for inflation) basis, that’s great for both “low” and high-end US consumption.
*Reminder: Consumption = approximately 70% of US GDP
Is that why US equity volatility (VIX) continues to get smashed to cycle lows? Could it be that US employment, profit, and consumption growth are all going to do what they always do at this stage of the cycle and accelerate?
Oh boy. Look at what the front-month of US Equity Volatility (VIX) did yesterday:
- Closed with a 9-handle at 9.77
- Flashed a refreshed risk range of 9.55-11.78
- Continues to signal bearish on all 3 of our risk management durations (TRADE, TREND, and TAIL)
In other words, from both an intermediate-term TREND and a long-term TAIL risk perspective, Mr. Market continues to signal that being short equity volatility in the face of consensus expecting Trump Volatility is where the real 6 month returns have been.
No, I am not saying that after the VIX crashed -60% (and the Nasdaq ramps +19%) in 6 months that this is where you “buy stocks” and lever yourself up long, after the move…
I’m simply reminding those of you that bought stocks on corrections that you’re richer today than you were 6 months ago… and you’re probably going to spend more than you thought you could, 6 months ago.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.27-2.41% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6022-6126 (bullish)
XOP 33.48-36.10 (bearish)
VIX 9.55-11.78 (bearish)
USD 98.40-100.10 (bullish)
Oil (WTI) 45.00-47.92 (bearish)
Gold 1 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
