“It requires a mindset to switch from narrow to broad.” -David Epstein
The answer to the title of this morning’s Early Look depends on how you’ve been positioned for Global #Quad 4 in Q3. Almost all of your core LONGS were ramping towards #overbought yesterday as your shorts were trying to creep towards #oversold.
To think about the “market” the way we do requires what David Epstein has now made popular in his NY Times Bestseller, Range. He, of course, didn’t come up with the idea of being a generalist in a “specialized” world on his own. Danny Kahneman won a Nobel Prize for it.
Epstein cites Kahneman/Tversky both effectively and often in Range. Here’s a great excerpt to consider as it relates who how “specialized” and “sectorized” the over-supplied asset management business has become:
“The trouble with using not more than a single analogy, particularly one from a very similar situation, is that it does not help battle the natural impulse to employ the INSIDE VIEW. We take the inside view when we make judgements based narrowly on the details of a particular topic that is right in front of us… Our natural inclination to take the inside view can be defeated by following analogies to the OUTSIDE view. The outside view probes for deep structural similarities to the current problem in different ones. The outside view is deeply counterintuitive because it requires a decision maker to ignore unique surface area features of a topic.”
Sound or “feel” familiar? For Macro Tourists jumping from headline to headline, it should. Both the multi-factor Quads and multi-duration @Hedgeye TRADE/TREND/TAIL signaling processes are designed to disintermediate anchoring on human biases and inside views.
Back to the Global Macro Grind…
Trying to communicate and teach our #process isn’t easy. But, as long as I’m still on the right side of the grass, I’ll keep trying my best to be transparent and accountable to our #process in every Early Look I write.
Here’s a live example of the inside vs. outside view of what’s driving the latest US Equity Futures FOMO this morning:
- INSIDE VIEW – Hong Kong’s chief executive Carrie Lam capitulated this morning, withdrawing the extradition bill, and “stocks” ripped +3.9% higher on the news driving a worldwide rebound in stock market futures
- OUTSIDE VIEW – locals (the Chinese) had been buying equities for the last week ahead of “news” that they knew was coming; the biggest bear market bounces came from market prices that are still in #crash mode (Hang Seng, Copper, KOSPI, etc.)
The outside view should ALWAYS consider an A/B Test of these two time-series:
A) What Quad a country’s economy is in and likely trending towards
B) What a market price has been doing within the lens of a multi-duration framework
On our longest-term duration (Hedgeye’s long-term TAIL), President Xi himself told the politburo to “prepare for a long-term struggle” yesterday. “Long-term”, to him, means through the year 2049… not the next 49 minutes of Futures FOMO trading.
Do you think a short-term “solution” in Hong Kong had anything to do with:
A) China’s PMI #slowing (again) to a contractionary 49.5 for AUG … and/or
B) USA’s ISM #slowing (again) to a contractionary 49.1 for AUG?
Of course it did. Political problems are born out of economic #slowings (and market crashes). If you don’t believe that, believe Bullard begging for an “aggressive 50 basis point cut” after HIGH BETA and inflation expectations got pounded by #Quad4 in AUG.
If I’ve written and said this thousands of times, now I’m going for millions:
The ROC (rate of change) of GROWTH and INFLATION are THE two most CAUSAL factors driving ASSET ALLOCATION, SECTOR STYLES, FACTOR EXPOSURES… and, yes, POLICY moves.
“So”… if you just look at US “stocks”, on “surprisingly weak” #Quad4 cycle data yesterday where were you able to book gains?
A) Utilities (XLU) blasted the “valuation” bears to new highs, closing up another +1.8% in a down tape
B) REITS (XLRE) ramped to new Full Investing Cycle highs, +1.4% on the day
C) Financials (XLF) got hammered for an absolute loss of another -1.0% and a nasty relative one to Utes/REITS/Staples
What I did in Real-Time Alerts was #timestamped. I covered my Dow Bro (DIA) short, covered my Comms (XLC) short, covered my Germany (EWG) short, and covered my Tesla (TSLA) and PENN shorts.
That’s just using my short-term “outside” signal to capitalize on the short-term “inside” selling that came from a complacent setup on Friday. Today, I get to reset using another short-term “inside” bounce to lower-highs on something that hasn’t changed the #Quad4 view.
I built this data-driven decision making process to be constantly probing for deep, structural, similar sets (fractal patterns) that are embedded in The Quads. If you’re looking at everything across multiple factors and durations, you’ll be humbled by what you see.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.41-1.61% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
Utilities (XLU) 61.38-63.87 (bullish)
REITS (VNQ) 90.45-93.34 (bullish)
Financials (XLF) 25.49-27.05 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 200 (bearish)
DAX 116 (bearish)
VIX 15.76-22.55 (bullish)
USD 97.38-99.19 (bullish)
GBP/USD 1.19-1.22 (bearish)
Oil (WTI) 53.07-56.55 (bearish)
Gold 1 (bullish)
Copper 2.49-2.60 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
