“Whenever I took a position I wrote down the criteria I used to make my decision.”
-Ray Dalio
That’s from a chapter in Dalio’s Principles titled “Where I’m Coming From.” He goes on to explain his #process:
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“I could run data through the system as it flowed at us in real time and the computer could work just as my brain worked in processing it and making decisions. The result was Bridgewater’s original interest rate, stock, currencies, and precious metals systems. Our system was like an EKG on the economy’s vital signs: as they changed, we changed our positions.” (pg 41) |
That’s not dissimilar from the Hedgeye Macro #process. It’s both economic data and market dependent. It’s rules based using growth and inflation as major inputs. And, most importantly, it goes both ways.
Back to the Global Macro Grind…
Does your process go both ways? How about across durations? Does your model have the flexibility to be bullish on the “long-term” but bearish in the immediate-term? How do you incorporate market-timing in your risk management process?
While it would be incredibly valuable for every successful money manager in the world to write a book about their process, that ain’t happening anytime soon. Unless you’re “just a research guy” like me, you should probably keep your process private!
Since part of the art of running money is raising money to manage, we can all assume that many people, PMs, and platforms have been able to successfully market that their process is differentiated.
Process, process, process. Cheers to all of you who have that!
One critical part of our process that seems to help our subscribers is market timing. A good example of that is looking ahead at macro Calendar Catalysts that have a high probability of surprising the booming Macro Tourism industry.
Let’s consider this morning’s inflation’s expectations catalyst within that lens:
- Headline Inflation (CPI) will be reported for the month of FEB – consensus continues to look for inflation to accelerate
- Market positioning (futures & options contracts) is mega long of inflation expectations as a result (short Treasuries)
- UST 10yr Yield has ticked down to 2.88% with an immediate-term @Hedgeye Risk Range of 2.81-2.93%
In other words:
A) As the UST 10yr Yield has backed off its YTD highs in the last 3 weeks, Wall St. keeps shorting Treasuries … and
B) We have a catalyst that would/should be a headwind to the consensus that inflation is going to “breakout”
To be clear, both inflation expectations and bond yields (both the short and long-end of the curve) HAVE BEEN breaking out since September of 2017. Why? That’s when Oil in particular began an epic move to the upside. Bond yields loved that.
But now what?
As you can see in today’s Chart of The Day (slide 27 in the Hedgeye Macro deck), Bloomberg Consensus Estimates vary from ours in Q118. Consensus is simply straight-lining what was recently reported in JAN as the forecast for the quarter.
Our forecast has more than a few callouts to make:
- Within our Q1 forecast we have FEB as the low monthly forecast because that’s when base effects are steepest
- In Q2 and Q3 our inflation forecast accelarates again…
- Then our outlook for inflation slows again in Q4
Are those too many changes in direction to risk manage? Does Mr. Market owe us low-vol and linearity? Of course not. Moreover, if this is all Macro Tourists want to trade on every day, why not talk about it with some precision?
In terms of market positioning, what are the precise net SHORT positions (CFTC futures and options) we’re talking about?
- UST 2yr Treasuries had a net SHORT position of -91,333 contracts as of last week
- UST 5yr Treasuries had a net SHORT position of -460,158 contracts as of last week
- UST 10yr Treasuries had a net SHORT position of -310,868 contracts as of last week
Unlike an opinion that “there is too much Treasury issuance for bond yields to fall”, those aren’t opinions. Those non-commerical CFTC positions are facts.
My opinion at 2.95% on the UST 10yr Yield was that the next move for bond yields would be down, not up. I wasn’t making a call with massive downside in UST yields. I was simply making the call that, at that time/price, I wasn’t going to chase yields.
If I’m wrong on the inflation forecast, our entire readership will know I’m wrong. Then I’ll have to go back and figure out what in my process led me the wrong way. If I’m right though, the crowd won’t be.
Writing down my criteria for decision making is what I do. Having to explain it to all of you makes me less-bad than consensus at this. I think it just forces me to learn faster when I make mistakes too.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.81-2.93% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7121-7630 (bullish)
Biotech (IBB) 108-116 (bullish)
VIX 13.75-22.75 (bullish)
USD 89.40-90.65 (neutral)
Oil (WTI) 60.01-63.02 (bullish)
Copper 3.08-3.17 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
