“How do I know I’m right?”
-Ray Dalio
After making many mistakes, that’s how a seasoned and successful veteran of The Game thinks. As Dalio explains in Principles, “my painful mistakes shifted me from having a perspective of ‘I know I’m right’ to one of how do I know I’m right?” (pg xiv)
While it’s taken me almost 20 years of learning on the job (at first with other people’s money – and for the last 10 years having to show all of my subscribers every mistake I make in Real-Time Alerts), I agree wholeheartedly with Dalio in making “believability-weighted decisions.”
While executing on a process like his (“operate by principles and systemize your decision making”) isn’t easy, it’s absolutely doable. But you need both a quantitative risk management and a fundamental research process running at the same time.
Back to the Global Macro Grind..
Being right in this business of making market calls over time has a lot more to do with not being really wrong than it does being on the right side of every single market move.
While you’d hardly characterize the SP500 correcting -2% or -3% from last week’s all-time closing highs as something that’s gone really wrong, you might say that being long Bitcoin during its -52% crash from the December highs has.
I know. I get it. No one who “believes in the blockchain” (I do, I do!), has ever experienced a draw-down, anxiety, or crash in their crypto holdings. Everyone on TV is nailing that stuff – buying the lows, selling the highs – all of the time…
But… let’s say you were one of the poor bastards sitting at home who got sucked into the manic CNBC coverage of the thing in December who owns it 108% higher. You realize that when you’re wrong by -52%, you need to be up +108% to get back to break-even, right?
That’s why market timing matters. You can get things really wrong if you don’t respect or have a risk management #process to understand when and why something is signaling immediate-term #overbought or #oversold.
This is why some of the largest Hedge Fund Platform businesses in the world spend a lot of time stopping a lot of their PMs out. Once someone who is running money has a draw-down of -3.5-4.0% of capital, the come-back math starts working against them.
Here’s the simplest of ways to show that:
While the ole “stop-loss” is one of the oldest risk management “rules” there is, you probably wouldn’t be surprised to learn how many people lose a lot more money than they ever thought they could by not using them. I sure did!
One spot where that “tap on the shoulder” (i.e. your boss or client says “take down your exposure to these positions”) started happening yesterday was in what we call the Bond Proxy part of the US market.
While the draw-downs in these positions have obviously been much larger since both Oil and Reflation started ramping higher in SEP 2017, yesterday they made the 2018 YTD losses more pronounced:
- REITS (VNQ) were down another -2.2% on the day to -6.3% YTD
- Real Estate (XLRE) was down another -1.8% on the day to -3.7% YTD
- Long-term Treasuries (TLT) were down another -1.7% on the day to -4.9% YTD
These exposures are marketed by some on the Old Wall as “lower-risk” and “higher yielding” positions in your portfolio. But, in sharp contrast to the SP500 and Nasdaq which are already UP +5.6% and +7.9% for 2018 YTD respectively, these exposures have been horrible.
That’s not to say there won’t be a massive buying opportunity in long-term Treasury Bonds and their Equity proxies when either US Growth and/or Reflation rolls over. Not being really wrong on that starts with not being wrong in timing the economic cycle.
That’s right. I used that dirty word again. #Timing.
If the bond market wasn’t worried about both the sustained breakout in Oil and the timing of a “breakout in wage inflation” (which may or may not happen in this morning’s US Jobs Report), then why is the UST 10yr Yield up +33 basis points in the last month alone?
Timing obviously matters.
To have a view like we have that Reflation has a subtle rollover in the coming months is a fundamental research view on reported (headline) inflation. Our quantitative risk management #process helps me time when “putting that position on” is a higher probability weighted decision.
Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.60-2.82% (bullish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
Biotech (IBB) 111-119 (bullish)
RMZ (REITS) 1078-1125 (bearish)
DAX 120 (bearish)
VIX 9.70-15.20 (bearish)
USD 88.20-90.55 (bearish)
EUR/USD 1.22-1.25 (bullish)
Oil (WTI) 63.44-66.66 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
