Good Men Prefer to be Accountable

The title of this week’s report is a quote from Sir Michael Edwards, a South African business executive who had a reputation during his career for publicly holding people accountable who were not accustomed to accountability.

My Dad always stressed the importance of taking accountability and more importantly, proactively taking accountability before someone else demands it of you. This idea of accountability is so ingrained in me that it’s the one behavioral trait that I am most sensitive to in other people. 

It drives me nuts when people avoid accountability. I spent the 15 years before launching my own asset management firm working for two of the largest sell-side investment firms in the world.  Both firms spent obscene amounts of capital on the research silos of the their respective firms. 

However, I couldn’t find one macro or market-related research analyst that would give a definitive answer in their research writings.  It was always an endless parade of both the bull and bear case for a particular market. 

They always straddled the fence and would never definitively pick a side. In both my asset management firm and in this weekly report, accountability is the bedrock principle of my work.

Accountability is the reason I give a specific bias on each Focus Market each week.  Even a NEUTRAL is my stand on a particular market.

Accountability is the reason I give specific price levels for entering and exiting every single trade idea that’s published.  What’s more important in trading than the price in which you enter and exit trades?

Accountability is the reason I diligently track the performance of every single trade idea that could have been executed in real-time.  What good would it do you if I throw trade ideas at you constantly but never monitor which ones could have been executed and how they performed?  That’s why I have an entire page dedicated to tracking the open trade ideas.

Accountability is the reason that every single closed trade is posted to our website for the world to see.  Anyone can visit our site and see which Focus Market we traded, the publication date of the report that recommended that trade, the entry and exit price, and the resulting performance of that trade. That said, what’s the one thing that’s sorely lacking in this centrally planned world that we are living in currently? Accountability.

Last week was further evidence of the dearth of accountability out of the Fed with both the release of the FOMC minutes from June as well as Yellen’s press conference. I entered the week thinking it was too soon for the Fed to shift from the dovish message that they have been providing. I doubted that the Fed would acknowledge the real risk; the fact that the S&P 500 continues to hit new all-time highs despite a lack of fundamental underpinning for such a move higher.

Prior to the Fed announcement last week, CPI was reported at 2.1%, which means that the year over year CPI rate has now accelerated sequentially higher for four consecutive months and is above the Fed's target. In addition, the unemployment rate has also dipped well below the Fed’s previous 6.5% threshold guidance, in other words the Fed has now met both its mandates as set down previously.

The Fed announcement that followed this particular data acknowledged that economic activity has rebounded since the officials last met in April and that the labor market is continuing to show improvements. The Fed slashed their full-year growth expectations from the 3% guess this March, to 2.2% last week.

So, while economic activity and the labor markets are rebounding, the Fed is now less optimistic about the outlook for US economic growth. Essentially the Fed just came out and said what we’ve been discussing all year.

A quick look at how markets reacted to the statement shows that the trend towards pricing in slower US economic growth is continuing. The US Slow Growth Index gained 1.6% last week versus the US High Growth Index, which gained a similar 1.5%.

Ah, but with all things financial, don’t get enamored with the headlines, the devil is in the details. While the US Slow Growth Index only slightly outgained the High Growth Index, it did so on volume that was 40% higher than its weekly average over the last six months.

The US High Growth Index’s gain last week occurred on volume that was 20% lower than its weekly average over the last six months. The gain for the US Slow Growth Index also managed to push it above its 2014 high from April, making a new year-to-date high and closing the week at the highest level since May 22, 2013.

Conincidentally, May 22, 2013, was the day Bernanke dropped the Taper bomb for the first time. Last week’s gain in the High Growth Index was unable to push the index to a new all-time high and it still sits 40 basis points below the 2014 made back on March 7.

It should also be pointed out that both indices outperformed our US Equity proxy, SPY by 60-70 basis points on the week. Recall that earlier I said that CPI was reported at 2.1% and that year over year CPI rates had now accelerated higher for 4 consecutive months. So finally, even the shoddy calculations that the government uses to determine inflation is actually starting to show….inflation.

Gold had a monster week last week and showed the first signs of life in months. Other than a proxy for crisis, what is gold generally thought to be? A hedge against inflation. The CRB BLS Foodstuffs Index gained 3.1% last week, has gained 18% since the middle of February and is now up 23% for the year.

The proprietary energy index that I monitor is up 12% since bottoming on January 9 and it gained 4.5% in just the last two weeks. All measures of inflation, both real-time and man calculated are ripping to the upside.

What will higher and higher levels of inflation do for the US economic growth picture? 

Will inflation act as a headwind or a tailwind?

You know my stance on this, inflation oriented markets and markets that perform well during slowing US economic times will continue to outperform their higher growth counterparts and the broader markets. Trade the markets you have a strong conviction in with a process that gives you a significant edge over other participants and you’ll come out way ahead.  Not every market needs to be traded every day that it’s open.