“Similarity has two faces: causal and derivative.”
-Amos Tversky
If you want to undo bad, touristy, and qualitative #MacroProcess, you have to re-read Thinking Fast, And Slow by Danny Kahneman then The Undoing Project by Michael Lewis. I didn’t pull the behavorial component of my #process out of thin air!
When measuring and mapping macro market factors, quantified context is king.
Rate of change is obviously second derivative but it’s also causal. As Tversky goes on to explain, “it serves as a basis for the classification of things, but is also influenced by the adopted classification.” (Lewis, pg 114)
Back to the Global Macro Grind…
At the most basic modelling level, we classify “rate of change” two ways:
A) Sequentially (week-over-week and month-over-month)
B) Year-over-year
As long as we have a time-series of historical data, we can contextualize causal factors (like market moves and reported economic data) in rate of change terms. We don’t need qualitative opinions. We need accurate data. Then we observe what Mr. Market thinks about that.
A real-time example of seeing our #process in motion was how Mr. Market reacted (Bond Yields ripping) to yesterday’s US Durable Goods report. Since that was the last critical economic report for the quarter (preliminary Q317 GDP is released tomorrow), it obviously mattered.
Instead of watching Old Wall TV on mute, here’s how we contextualized the data:
- Durable Goods #accelerated to +2.2% sequentially and to +8.3% year-over-year
- Durable Goods (ex-aircraft & defense) #accelerated to +6.1% year-over-year
- Capex (Capital Goods Orders) #accelerated to +7.8% year-over-year
Then we plugged the data into our proprietary GDP predictive tracking algorithm and voila:
A) Our year-over-year GDP forecast for Q3 ticked up +2 basis points to 2.33%
B) That imputes a sequential (q/q SAAR) GDP forecast that is 8 basis points higher at +3.26%
Since B) is what the Old Wall will anchor on when the headline GDP report comes out tomorrow, we also care to consider our forecast within the context of consensus expectations:
A) Bloomberg Consensus for Q3 GDP = 2.5%
B) Atlanta Fed Tracker = +2.72%
Just because the Atlanta “now-cast” seems more precise doesn’t mean it’s more accurate. If it were more precise than our process, we’d use it. The Atlanta Fed’s intra-quarter tracking error is over 200 basis points!
What are the investment takeaways from this Durable Goods ramp?
- Hard Data (GDP, Profits, Capex, etc.) is becoming very hard for 2017 US Growth Bears to accept
- “Soft data” like “Capex Plans” (see Chart of The Day) led to accelerating hard data, as it usually does!
- US Growth #Accelerating has been both derivative and causal to growth oriented returns in 2017
Capex #Accelerating has been one of the most important un-reported realities in the US economy this year. Since US Capital Spending just came out of the thralls of a 2-year recession, our call has simply been that this #acceleration in capex should continue.
US GDP Up => Profits Up => Capex Up
Yep. Similarity here has been both causal and derivative too.
Our immediate-term Global Macro Risk Range (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.32-2.46% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
RMZ 1140-1163 (bearish)
Nikkei 218 (bullish)
DAX 122 (bullish)
VIX 9.23-11.84 (bearish)
USD 92.90-94.00 (neutral)
EUR/USD 1.16-1.18 (neutral)
YEN 112.42-114.45 (bearish)
Oil (WTI) 51.22-52.69 (bullish)
Gold 1 (bearish)
Copper 3.10-3.24 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
