“Not all officers were careerists. There were young men who believed in a better way.”
-Robert Coram
In one of my favorite non-linear Macro Strategy books, Boyd - The Fighter Pilot Who Changed The Art of War, that’s how Robert Coram described the US military post Vietnam.
“Throughout the military were hundreds of company-grade and field-grade officers who were contemptuous of senior officers and their outdated dogma… they had seen their friends killed by the idiocy of their commanders.” (pg 318)
Yep, I get that sometimes I “sound” contemptuous and/or critical of the Old Wall and all of its dogma. After seeing people’s hard earned capital implode, many times, in the last 20 years with glaringly avoidable Cycle Risks on my screen, I won’t apologize for that.
Back to the Global Macro Grind…
“These officers needed new ideas about war. They needed a military theory that would enable them to win wars. They needed to love America more than they loved their careers.” -John Boyd
There are plenty of careerists working at the US Federal Reserve who come up with these dogmatic “dot plot” projections that are rarely right but, for some reason, considered reasonable forecasts by “Blue Chip” Old Wall economists (who have the same forecasts).
In today’s Chart of The Day, we’re showing you the widest divide between in Dot Plot Dogma vs. what the market thinks (Fed Fund Futures)… in the history of dot plot projections…
What could possibly go wrong?
In order to begin to try to answer that question, I think you have to start with what could make the PE Powell and his Fed heads make it right. They have to catch up to the market’s expectation for faster and more aggressive rate cuts.
Until they do that, we’ll call the Fed Not Dovish Enough.
Setting aside both the “year-to-date” FOMO and multiple month-end markups we’ve seen in SPY in 2019 (April, July, October), Fixed Income markets have been front-running the US Equity market ever since the US economic and profit cycle peaked in Q3 of 2018.
Yesterday’s Bond Market reaction was simple: curve flattening.
For people who only do story “stahks”, what that means is:
A) The short-end of the curve (2yr Yield) goes up and/or doesn’t go down as …
B) The long-end of the curve goes down
This is quite simply because:
A) The market runs the long end of the curve and …
B) Fed policy projections run the short-end of the curve
Until the Fed gets as dovish as Fed Fund Futures have become, The Curve can’t “steepen” for real. That’s why the curve moves from inversion to wicked steepening when even the Fed realizes the US economy is entering a recession.
In other words, the short-end of the curve eventually collapses alongside the Fed’s dots crashing.
On the heels of yesterday’s Q3 US GDP report (which was right on the screws where the Hedgeye Predictive Tracking Algo had US GDP nowcasting towards before the Old Wall consensus caught up to our #Quad4 in Q3 call for the US economy), where are our “dots”?
A) Quad 3 in Q4 of 2019
B) Quad 3 in Q1 of 2020
C) Quad 4 in Q2 of 2020
Since many of you want me to make up my mind on Quad 2 or Quad 3 here in Q4, I already have. I own 0% Quad 2 Asset Allocations, Sector Styles or Factor Exposures in my personal accounts this morning. And all incoming data since Q4 started has been #Quad3.
For those of you with the Telecom Tom “chart” showing “PMIs” going straight up into the right, unfortunately that did not happen this morning with China’s Manufacturing PMI #slowing (again) to 49.3 in OCT. Yep, that’s a new 7 month low. #NoBounce
Amidst all of the tweetfare on the “trade deal” Chinese stocks didn’t bounce overnight either. They were down for the 3rd day in the last 4, despite the USA centric stock market FOMO into month-end. What are the Chinese acting on that some American careerists can’t (yet)?
Back to that dot on #Quad4 in Q2 of 2020…
If you’re looking for “the low” of The Cycle… the probability continues to rise that that’s when the Fed finally is Dovish Enough.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.65-1.85% (bearish)
UST 2yr Yield 1.52-1.67% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Utilities (XLU) 63.00-65.14 (bullish)
REITS (VNQ) 93.11-95.98 (bullish)
Shanghai Comp 2 (bearish)
VIX 12.12-15.95 (bearish)
USD 96.84-98.02 (bullish)
Oil (WTI) 53.09-57.38 (bullish)
Nat Gas 2.21-2.75 (bullish)
Gold 1 (bullish)
Copper 2.59-2.71 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
