Professional Forecasting

“We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.”

-John Kenneth Galbraith


I have that quote scotch taped on the insert of my investment notebook. I keep it there not to remind myself how wrong the consensus groupthinkers tend to be, but to always remember that I don’t know what I don’t know. Mr. Macro Market knows all.


I have never been afraid to shoot the puck or make a call on markets. You can call that brave or arrogant. I call it strapping it on every morning and playing the game to win. For any of you who have done anything at the highest level in your life, you get this. Confidence beats cowardice.


What gives me confidence is my investment team and market prices. Before I make a call on anything out there, I check with what Mr. Macro Market tells me to look at, then I ask my analysts what they think. That’s it – we start each day by admitting that we may not know what market prices are telling us.


Every three months, we change our Top 3 Macro Investment Themes. Why do we change them? Well, that’s easy – because market prices change. We get a lot of questions on where we will wash out on our Q2 Macro Themes. We are waiting until the seconds run out on the game clock for Q1 to do that.


Any professional athlete, entertainer, or investor worth their title wakes up every morning reviewing their performance. Sometimes people don’t like others talking about performance. Sometimes people appreciate accountability. But no matter where you go in the morning, there your performance will be.


By next Thursday, my Macro Team’s performance will be on the scoreboard for Q1 of 2010. While I myself have made plenty of tactical mistakes out there, I think my teammates have performed admirably on nailing down 3 big macro moves. As a reminder, our Q1 macro calls have been:

  1. Buck Breakout (bullish on the US Dollar; bearish on commodities, gold, euro, etc…)
  2. Chinese Ox In A Box (bearish on Chinese stocks; bullish on Chinese yields and currency)
  3. Rate Run-up (bearish on US Treasuries)

My biggest question every morning is where do our macro themes start to go wrong. The score is the score. What matters from here is what to make of it. Am I becoming consensus? Where do I sell the US Dollar? Should I cover my short position in gold? Should I short Chinese stocks again, or should I be long them?


Well, the good news is that my business model allows me to change my views on all of this with a click of a button. The conflicted and compromised ratings models of the Investment Banking Inc. can’t do that for you but I, like the buy-side, can. We call that cool.


Becoming consensus isn’t cool. Neither is not knowing that you don’t know that consensus can remain longer than you can remain solvent. I have learned this lesson plenty enough times in my career to never disrespect it.


So, before I wrap up, let’s quickly look at consensus relative to what Mr. Macro Market is telling me this morning relative to our Q1 Macro Themes:

  1. US Dollar is overbought anywhere north of $81.92 on the USD Index. The big breakout line (support) is the immediate term TRADE line at $80.45.
  2. Chinese stocks got spanked again last night, trading down -1.2% on the SSEC, and breaking my immediate term TRADE line of support of 3034.
  3. US Treasury rates blasted right through every line of resistance I have in my macro models yesterday, across durations.

The least consensus call we have left is that rates are going to continue to Run-up. As a reminder, our call on US interest rates going higher is fairly straightforward and it’s based on 3 forecasts:

  1. The Data – we think inflation (CPI), globally, will accelerate sequentially in March vs. February. We think unemployment rates (including the USA) are setting up to drop, sequentially, for the next 3 months, and that reported global growth will continue to surprise to the upside.
  2. The Decision – Bernanke is preparing to remove the “extended and exceptional” language from consensus policy.
  3. The Debtor – whether USA’s The Creditor be China or the US taxpayer in California, Piling more Debt Upon US debt Upon Debt from here is bearish for government bonds (we are short IEF and MUB).

Here are three fresh quotes that support our forecast for higher interest rates, globally, this morning:

  1. Sovereign Debt - “Our financial support demonstrates our commitment to finding a fair and equitable solution for all stakeholders in the wider interest of the economy.” -UAE Supreme Fiscal Committee chairman, Sheikh Ahmed Bin Saeed Al Maktoum, on bailing out Dubai World at a price.
  2. Sovereign Debt - “in an emergency, such aid would have to be provided as a combination of the International Monetary Fund and joint bilateral measures in the euro zone.” –Germany’s Merkel on pushing the Greeks to higher lending rates at the IMF.
  3. Sovereign Debt - “We have clearly underestimated the impact on the euro from the European sovereign crisis and perhaps also from the broader macro adjustment that it portends.” –Goldman Sachs, capitulating on their bullish view of the Euro.

At least someone at Goldman is admitting that they too don’t always know what they don’t know. Cheers to professional forecasting. If you want to get in this game, be prepared to win and lose - because everyone, whether they like you personally or not, will be keeping score.


My immediate term support and resistance levels for the SP500 are now 1147 and 1177, respectively.


Best of luck out there today,



Professional Forecasting - Professional Forecasting




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