“When no one understands, that’s usually a good sign that you’re wrong.”
-Victoria Schwab

There are two reasons why I’m borrowing from Victoria’s thoughtful observation about humans this morning: 1) she’s a Millennial and 2) she wrote Vicious.

In case you didn’t know: 1) I’m a middle aged Gen X guy and 2) I just experienced a vicious short squeeze in February.

C’mon people, empathize with me! I’m not the only one who got caught with my shorts on in early FEB. Looking back (at CFTC futures & options data), that was the most consensus net SHORT positioning in SPY ever!

Being Right and Wrong - Chart of the Day

Back to the Global Macro Grind…

Yeah, it would have been nice to get that CFTC positioning data in real-time (we’re now getting it on a 1-month delay post the government shut-down)… but life’s not nice sometimes.

And I get it. Some of you like it more when I write about being wrong instead of being right. For a decade now, every single #timestamp I’ve had wrong, every market move, and every GDP nowcast – every mistake I make is right there.

You know who else likes it? I do.

Yep. That might sound a little OMG to your friends who had perfect SAT scores, have really never had anything wrong on an establishment test in their life, and might melt-down if they made as many public mistakes as I do on Twitter.

In my chosen fishbowl of market life, you can see that I make some sort of a mistake, every single day.

God willing, I have the anti-fragility to incorporate that real-time market feedback into all that I do… and make parts of my #process better, over time. If I don’t evolve, I’ll make more mistakes more often. Then I’m dead or irrelevant to you.

The latest Hedgeye Macro mistake was outlined in a note we published to Institutional Subscribers intraday yesterday that we titled “Q4 GDP: It’s Not You; It’s Me.”

In that note, my now Partner and Managing Director of all things Macro data @Hedgeye (Darius Dale) started with:

“I spent all morning trying to figure out why our predictive tracking algorithm and the Federal Reserve all got Q4 GDP wrong… Why were we “wrong” and not just plain wrong? Easy – because even the most astute bean counters of the data would’ve been hard pressed to find signs of acceleration across key high-frequency variables:

  1. Two-thirds of the 30 factors that comprise our stochastic nowcast model for US Real GDP growth deteriorated on a sequential, or quarter-over-quarter (QoQ) basis
  2. Importantly, each of those factors are dynamically weighted according to their trending relationship to GDP, which we determine by regressing deltas rather than absolutes and testing for cointegration across cycles. We even solve for multicollinearity by using nonlinear interpolation techniques to determine the magnitude of the nowcasted delta from the base rate (of GDP)
  3. Each of the top 11 factors deteriorated on a QoQ basis, meaning that the model recorded a negative signal from each of the most relevant high-frequency indicators an investor could’ve employed to track domestic economic growth throughout the quarter

In other words, you can be right and wrong on parts of your #process, most of the time.

If you don’t follow the math embedded in Darius’ words, in the Chart of The Day (slide 30 of the current Q1 Macro Themes deck) we show you point #3, color coding it for rate of change.

Again, simplifying the complex:

  1. When almost everything was as green as green gets in that chart (Q318), we called that #PeakCycle
  2. When green goes to lime green and yellow, that’s called #slowing ROC (rate of change) data
  3. When yellow goes to amber and red lights, you better hope for a lot of #cowbell if you’re levered long

Moreover, if you flow it through to corporate profits and equity market returns during the period of ROC #slowing:

  1. The GROWTH rate of SP500 Earnings got cut in HALF from Q318 (#PeakCycle) to Q418
  2. The Russell 2000, NASDAQ, and SP500 had crashes/drawdowns of -27.2%, -23.6%, and -19.8% from #PeakCycle
  3. The High Yield Credit market shutdown in December of 2018

And while it’s entirely possible that there’s a 9-14 basis point government revision to the final GDP report that makes us “right” on the screws for our Q418 GDP nowcast, we really don’t care … because it’s onto the next.

As most of you know, it’s almost the end of Q119 now, so what matters most (as it always does), is what’s going to happen next. For Q1 of 2019, we’re now-casting another sequential slow-down from those #PeakCycle 2018 GDP prints:

We’re at +1.59% for headline GDP (q/q SAAR) for Q1 of 2019.

Whether that’s right or wrong to the decimal point isn’t the point of the measuring and mapping process. It’s to inform us on the direction of the two most causal factors affecting market returns: GROWTH & INFLATION.  

Whether it’s the growth rate of a company’s revenues or earnings, we think most people understand that getting the direction of those major factors right is a lot more important than nailing a tax or government adjusted number.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:

UST 10yr Yield 2.61-2.73% (bearish)
UST 2yr Yield 2.45-2.54% (bearish)
SPX 2 (neutral)
RUT 1 (neutral)
NASDAQ 7 (bullish)
REITS (VNQ) 83.00-85.57 (bullish)
Housing (ITB) 34.01-36.20 (bullish)
VIX 13.41-18.19 (neutral)
USD/YEN 110.40-112.15 (bullish)
GBP/USD 1.28-1.33 (bullish)
Oil (WTI) 54.33-57.99 (bullish)
Gold 1 (bullish)

Best of luck out there today,
KM

Keith R. McCullough
Chief Executive Officer

Being Right and Wrong - CoD GDP Driver Heatmap