This week I’d like to coddiwomple through the Wall Street narrative for the current drawdown risk we’re seeing in markets and discuss the real cause of the recent carnage, writes Landon Whaley Tuesday.

“Coddiwomple” is not a word many people are familiar; it means to travel in a purposeful manner towards a vague destination. I can’t think of a single word that better describes investing in financial markets. Markets are headed toward vague destinations, we don’t know where they’re headed. Despite this reality, if we want to be successful investors, you and I must remain purposeful in the way we approach markets as they move towards their vague destination.

With a little over a month to go, it’s fair to say 2018 has been a good year for us. We’ve nailed all the major macro calls to be made this year before they occurred: crashes across China, the eurozone, Brazil and South Korea. We also stayed long the U.S. stuff that had been working for the better part of two years throughout H1 2018, and then correctly pivoted to make the call for the U.S. FG4-in-Q4 environment.

Our ability to make these calls accurately and repeatedly is born out of our time-tested, proven and repeatable process, anchored by the Gravitational Framework.

One reason for our success is that Wall Street’s behavioral and dogmatic shortcomings are baked into our process, which gives us a distinct advantage. Judging by the plethora of explanations Wall Street gives to explain why Q4 has been challenging for markets, our advantage isn’t going away any time soon.

By far, the number-one culprit being blamed for the Q4 carnage is trade.

Kristina Hooper, the chief global market strategist for Invesco (one of the largest financial institutions on Earth), believes “This sell-off is largely driven by growing concerns over the trade situation and therefore it will take a positive development in trade to take pressure off markets.” Her comments mirror what many on Wall Street and the media believe—showcasing just how clueless these folks really are.

Correct me if I’m wrong, but hasn’t there been a “trade situation” for the better part of 2018? And yet despite this political (not economic) reality, U.S. markets managed to behave just fine for nine months. No, what Wall Street and most other investors are missing is an understanding of the current Fundamental Gravity.

U.S. markets are exhibiting more downside risk than we’ve seen in over two years because we are in a Fundamental Gravity #4 environment, characterized by slowing growth and inflation. Period.

The slowing Q4 growth data so far is confirming this FG reality: ISM, ISM New Orders, Durable Goods, Durable Goods (ex-Defense & Aircraft), Retail Sales, Capital Goods Orders, Case-Shiller and FHFA Home Price Growth, Existing Home Sales, Pending Home Sales, Fed Regional Surveys, Markit PMI and the NFIB Small Business Optimism Index.

In fact, the latest ISM data suggests a Q4 annual growth rate of +2.5%, which is a meaningful slowdown from Q3’s annual growth rate of +3.0%. And as of this week, you can add slowing durable goods orders and weaker consumer confidence to the list of deteriorating data. We discussed the slowing inflation data in detail here last week.

Couple all of this with tightening central bank policy and you’ve got yourself a classic FG4 environment.

This lack of understanding is why we saw investors buying the eight-day bounce at the beginning of November. And how has that worked out?

The reason Wall Street clings to narratives like “trade situations” is that they find it difficult to do what we do to build our macro themes: contextualizing economic and financial market data. It takes a lot of discipline to measure and map the slopes and extremes across thousands of economic data points and financial market data from over 200 global markets. Even if you can get your hands around all that data, it’s even more difficult to decipher the signal from the noise and generate a playbook for how to be positioned.

Wall Street is in the business of looking at what’s already happened and telling you who or what is to blame, good or bad.

We are in the business of staying data dependent and process driven so we can tell you what’s likely to happen going forward and help you be positioned before market moves occur, and not after.

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Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:42.

Watch Landon Whaley discuss When Markets Cycle  in a short video here.
Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:51.

Landon Whaley interviews Adrian Manz: How I approach stocks here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 7:48.

Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:14.

Landon Whaley interviews John Carter: How I started trading here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:37.