Sunday, December 27, 2015

The 2016 macro surprise that no one talks about

Trend Model signal summary

Trend Model signal: Neutral
Trading model: Bullish

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading model component of the Trend Model seeks to answer the question, "Is the trend getting better (bullish) or worse (bearish)?" The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below.

Update schedule: I generally update Trend Model readings on my blog on weekends and tweet any changes during the week at @humblestudent.

The boy who cried wolf
We all remember the story of the boy who cried wolf. The villagers got one false alarm after another, which made them increasingly annoyed. When the wolf finally came, his warnings were ignored and he suffered the consequence.

I want to tell a more modern story of the boy who cried wolf. In this case, the wolf is inflation. In the wake of the Great Financial Crisis (GFC), there was a cacophony of voices (myself included) who warned that all the QE and money printing would eventually result in runaway inflation and USD devaluation. Even Warren Buffett was caught up in that frenzy when he penned his "unchecked greenback emission" NY Times Op-Ed in 2009:
Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
Despite these dire forecasts of doom,  the USD has rallied in the wake of the GFC and gold prices are roughly flat from that period. That thesis of secular runaway inflation turned out to be wrong.

Today, a different kind of inflationary wolf pack stalks the landscape. Instead of the specter of secular runaway inflation, the cyclical inflationary wolves are gathering. When they descend on the flock in 2016, it will be the macro surprise that almost no one is talking about.

The full post is at our new site here.

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