“In academia there is no difference between academia and the real world; in the real world there is.”
-Nassim Taleb
That was Taleb channeling his inner Yogi Berra in the opening chapter to his latest book, Skin In The Game. I started reading it this past weekend. He jumps around a lot but, as always, he’s thought provoking.
“Skin In The Game is about four topics in one: a) uncertainty and the reliability of knowledge… b) symmetry in human affairs… c) information sharing in transactions, and d) rationality in complex systems and the real world.” (pg 3)
Real world risk management is where I live. I’ve spent 10 years building Hedgeye’s research business. More than ever before I’m focused on what the data (and markets) are doing as opposed to what an academic thinks they should be doing.
Back to the Global Macro Grind…
If a revisionist economist of the Old Wall’s establishment tells you we were in a “globally synchronized recovery”, you should believe them. In rate of change terms, you should also believe that story ended at least 3 months ago.
If you ask a far more successful non-linear strategist (Mr. Market himself), rather than looking for “multiple expansion and an acceleration in global growth in 2018”, he sees what we see: #GlobalDivergences.
We’ll reiterate that view with both economic and market data at 11AM EST today during our Q2 Macro Themes Call. If you’d like access to the show via @HedgeyeTV, ping . It’s pay-per-view!
In a world where everyone wants more “data”, what Portfolio Managers should really want is to see something in the readily available data that their competition doesn’t quite yet see as risk.
Did every PM who chased last week’s lower-highs in both the NASDAQ and the SP500 see that their competition got as net LONG as they’ve been since January’s all-time highs?
Here’s the latest Consensus Macro Positioning report from the CFTC (non-commercial futures & options):
A) SP500 (Index + E-mini) net LONG position ramped +122,159 contracts last week to +209,207 contracts
B) In context, that +209,207 net LONG position scored +1.96x on a 1-year z-score… and
C) In the last year, that z-score includes the lowest US Equity Volatility period EVER
Oh yes – I’m going all CAPS on you and your favorite linear economists this morning. EVER remains a LONG time!
This consensus macro positioning comes on the heels of another one getting un-wound in the last month and that was the net SHORT position in US Treasuries that was born out of consensus inflation expectations:
A) US 2yr Treasury net SHORT position dropped to -105,177 last week
B) US 5yr Treasury net SHORT position dropped to -421,428 last week
C) US 10yr Treasury net SHORT position dropped to -262,511 last week
While that’s plenty of net SHORT exposure to the wrong side of the market (UST 10ryr Yield tapped the low-end of my @Hedgeye Risk Range around 2.72% yesterday), that wasn’t the peak of the net SHORT position relative to itself.
That’s the whole point about sequencing market moves within the context of both historical and expected future events (like pending economic data)…
If you are deliberately measuring and mapping all of these factors with rate of change discipline, you lose sight of real world risks less often. You’ll also beat your competition more frequently.
Back to the point about the lowest US Equity Volatility EVER…
- Yesterday was the 7th day of 2018 with the SP500 dropping more than 2% in a day
- That’s the highest number of days since 2011 (and it’s only April)
- 2011 was also a year I moved back to bearish on US stocks after being bullish in 2009-2010
No, don’t think what I did in 2011 was any different than what one should do when there’s what we call a Phase Transition (in this case from bearish to bullish) in equity market volatility.
What’s “different this time” about the TRENDING breakout in US Equity Volatility is that it comes on the heels of:
A) The all-time low in Global Equity Volatility (in 2017) and
B) The all-time low in Cross-Asset Class Volatility (in 2017)
Don’t worry. After US #GrowthAccelerating for 7 straight quarters through a Potential Cycle Peak in Q1 of 2018, a slow-down in either headline US GDP and/or the US Profit Cycle ain’t got nothin’ to do with real world rate of return risk!
*Note: I used the word “potential” next to cycle peak for a reason
That reason is the same raison d’etre (channeling my French Canadian roots, eh) that we built this independent research business on – to remain apolitical and data driven. If the cycle continues to #accelerate, I’ll let you know.
Part of yesterday’s reasoning for a -2.23% SP500 decline came on a sequential slow-down in the ISM in the USA (ticking down from 60.8 in FEB to 59.3 in MAR).
Part of this morning’s reasoning for a -1.4% decline in Germany’s DAX is the sequential slow-down in its PMI reading for the month of March too. Germany’s stock market is down -12% since JAN on non-Trump-tariff reasoning, btw.
On the Old Wall (and in its media) there is no difference between rates of change in the Global Macro Data and the latest Trump Tourism headline of the day; in the real world of cross asset class returns there is.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.70-2.81% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Biotech (IBB) 101-109 (bearish)
Nikkei 203 (bearish)
DAX 115 (bearish)
VIX 16.95-26.34 (bullish)
USD 88.55-90.29 (neutral)
EUR/USD 1.22-1.24 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
