The Gravitational 15 declined just 5 basis points last week despite being net long in our exposure during an absolute bloodbath in markets, writes Landon Whaley Friday. He's presenting at MoneyShow Orlando Feb. 9.

With last week’s “give back,” we are still up north of +14% for the year, with a bit more time left in 2018 to pad our stats further.

Last week, we introduced a new phrase to the Whaley Global Research lexicon: the “Old Institution.”

When we refer to the “Old Institution,” we are referring collectively to the majority of global financial (and financial-adjacent) institutions that still evaluate and discuss economies and financial markets in an outdated, dogmatic manner.

“Old Institution” includes but is not limited to: Wall Street firms, every central bank on Earth, organizations like the International Monetary Fund (IMF), foreign banks, traditional media, think tanks like the Organization for Economic Cooperation and Development (OECD), and anyone else exhibiting the characteristics outlined below.

These organizations’ motives (including self-interest and profit incentive) vary widely, but the way they evaluate and communicate about economies and markets very much overlaps and does huge disservice to investors who follow their lead.

The Rearview, the Forecast, or the Now

The Old Institution focuses either on lagging data that is often significantly revised or on forecasts of what will happen six to twelve months away. This rearview mirror and forecast-oriented approach means they are always months late and a dollar (euro, yen, pound, loonie, real, etc.) short to shifts in Fundamental Gravities, as well as to bull-bear regime shifts in financial markets.

In contrast, we focus on better understanding what’s happening right now. This “Focus on Now” approach allows us to filter out the noise of backward-looking narratives and forecasts that are sure to be proven wrong. Our “Now” philosophy reduces the likelihood of missing even the slightest economic or financial market development, and it routinely positions us to be among the first to detect an economic or financial market regime shift.

Forget the levels, focus on the ROC

Another aspect of this lagging and often heavily revised data that these traditional institutional players focus on almost exclusively is the data’s “levels.” Their “levels” obsession means they fail to spot shifts in Fundamental Gravities until months after the fact. Headline risk says ROC gets you piad.

By the time the data has deteriorated (or accelerated) to “levels” that send them a clear signal, asset classes have already responded to the new economic conditions. In short, by the time the Old Institution acknowledges the changed environment, the low-risk, high-reward trades are as dead as disco.

In contrast, we focus our attention on the slope, or the rate of change (ROC), across both economic and financial market data. I like to say that what matters most in macro occurs at the margin. The ROC gets you paid, while the “levels” get you left behind.

Narrative driven vs. data dependent

Another contrast between us and the institutional players is that they depend on narrative rather than data. No matter what occurs across global economies or financial markets, these folks scramble to find the narrative that fits best. This particular peccadillo isn’t just the domain of the media—every party included in our definition of the “Old Institution” is guilty of this one.

For example, back in November, Mario Draghi, president of the ECB, gave a speech in which he blamed everything from the weather to sickness for what he called a “soft patch” in the eurozone economy. He said this after nearly a year of slowing economic data across both core and peripheral economies, with Germany, the largest eurozone economy, just one quarter away from a technical recession, and stock market crashes in multiple countries.

Rather than acknowledge the litany of data signaling much more than a “soft patch,” the head central banker clung to a narrative driven by inclement weather and disease.

In contrast, we depend steadfastly on data. We focus exclusively on the data and nothing but the data, rather than the narrative du jour being spun about it. Remember, data doesn’t lie, but narratives do.

Extrapolation or Thomas Bayes?

The Old Institution (and their followers) are prisoners of the moment and simply extrapolate the most recent events or trends across economies and global markets forever into the future.

For example, in July, all three primary gauges of U.S. inflation (consumer, core and producer prices) had been accelerating for six to 24 months, depending on the gauge. Based on this most recent trend, the Old Institution and its followers kept calling for inflation to ramp even higher for the remainder of 2018 and well into 2019. They simply looked at what inflation had been doing and extrapolated that trend forward.

In contrast, we take a Bayesian approach to evaluating markets, updating our view of economies and asset classes as each piece of data rolls in. We will never be perma-bullish or perma-bearish. We aren’t trying to drive trading activity, get clicks or attract advertisers. We are trying to get the big macro calls correct so you can position yourself accordingly, before the Old Institution and its devout followers figure out what’s happening.

In “The Playbook” from the July 16 edition of Gravitational Edge, we said, “Despite everyone’s belief that inflation is pulling a Superman and going up, up, and away, we believe inflation—along with growth—will begin to slow towards the end of 2018 and heading into 2019.”

Rather than use the highly scientific technique of straight-line extrapolation, we had evaluated U.S. inflation using our models, which take into account factors like “base effects” and the non-periodicity of economic cycles. We realized that inflation was likely to peak within two months and alerted our clients accordingly. All three gauges of U.S. inflation peaked in July and have been in a downtrend ever since.

Trust yourself when all men doubt you

This data-dependent, Bayesian approach of focusing on Now and on the slope of economic and financial market data is how we are able to consistently position ourselves before markets move.
Throughout this year, we were one of the only firms flagging the slowing growth reality in places like China, Germany, Brazil and South Korea, while the Old Institution clung to the narrative of a “globally synchronized recovery.” We not only pointed out these Fundamental Gravity shifts but we told you exactly what kind of impact they would have on the asset classes in those economies.

In addition to alerting our clients, I made these calls publicly before equities crashed in China, Germany, Brazil and South Korea and months before these developments were headline news.

This approach is also how we anticipated and positioned correctly for the U.S. market carnage of Q4 2018. We alerted our research clients the week of September 24 (we are happy to provide that week’s reports to anyone who asks; simply drop us a line) and were positioned correctly heading into October’s “sea of red.”

Once again, I made this view public on October 9, 2018, calling for a decline in both U.S. tech and consumer discretionary stocks. Over the next 14 trading days, the Technology Select Sector SPDR ETF (XLK) declined -10.6% and the Consumer Discretionary Select Sector SPDR ETF (XLY) declined -11.1%.

The Bottom Line

The bottom line is that if you want to be a consistently successful investor, you must forget what you’ve always been told by the Old Institution and embrace a new way of analyzing economic and financial market data.

As we close out 2018 and begin a new year, it’s time for you to do what the Old Institution has never done: put your interests first.

It’s time for you to embrace being data dependent, process driven and risk conscious so you can routinely sidestep dangers most investors never see coming and position for opportunities most investors miss.

Please click here and sign up if you’d like to receive the latest edition our research reports as well as to participate in a four-week free trial of our research offering, which consists of three weekly reports: Gravitational Edge, The 358 and The Weekender.

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.