100% Recession Odds… UPDATE [DIRTY DOZEN]

People form opinions at their own pace and in their own way; the notion that new information could be instantly processed was one of those ivory-tower assumptions that had little to do with reality. This gradual absorption of information by investors explained why markets moved in trends, as new developments were gradually digested. But market psychology was more subtle than that; there were times when investors' reactions accelerated. Human beings do not simply make forward-looking judgments about markets, the CC traders recognized; they react to recent experiences. ~ Sebastian Mallaby’s “More Money Than God”

In this week’s Dirty Dozen [CHART PACK], we look at what Fund Managers are saying, discuss rising market liquidity and other various risks. We then cover the bear market rally signals, along with what we’d need to see for a more sustainable run, but we caveat all this with 100% recession odds and a continued bear market, plus more…**Note: Enrollment into our Collective kicks off today and will be running until the end of the week. The Collective is our full-kit soup-to-nuts service that provides research, theory, and a killer community that consists of dedicated traders, investors, and fund managers from around the world. We’ve been told that there’s nothing else like it on the web. If you’d like to tackle markets with our group (whom, I should note, has been having a great year in markets), then just click the button below and sign up. And, as always, don’t hesitate to shoot me any Qs!*** 

1. Nature is healing… (h/t @NKozev)

 

2. Summary of the latest BofA Fund Manager Survey with highlights by me.

 

3. And the two most interesting charts from the report. Risk “categories” are rising while liquidity is quickly deteriorating at a troubling pace…

 

4. But markets don’t move in straight lines, and this market remains oversold and unloved, while some important leads are inflecting up. So we should be open to a potential bear market rally kicking off soon.

 

5. Breadth indicators are turning around. R3K % Advancers is positive for the first time in over a month. McClellan Summation is turning up from very low levels while the Oscillator is above zero, etc…

 

6. A daily close above this range would signal a bear rally is odds on and give us an entry for a swing trade. For us to get excited, though, we’d need to see confirming breadth thrusts and bond volatility lower + yields steady or come down.

 

7. The liquidity backdrop is still not conducive to positive equity returns. The rate-of-change for spreads on junk debt remains elevated, financial conditions continue to deteriorate and are at levels that signify high crash risk, plus 10yr yields are 2stdev above their 12-month average. You don’t want to be aggressively adding risk unless there’s a clear inbound catalyst to shift these conditions.

 

8. BBG’s 12-month Recession Probit Indicator (an aggregate of 17 various hard econ, financial, and market inputs) has joined the 24-month model in giving 100% odds of a recession within the next year.

  

9. And to be Captain Obvious, you don’t want to own a lot of equity risk right before a recession. Here are the average 90day returns via @Mrblonde_macro.

 

10. Some good news for the Fed, though, it looks like they’re well on their way to hitting their goal of making more people unemployed.

The chart below shows how the housing market historically leads the labor market. Here the Unemployment Rate is inverted, so a lower dark green line means a higher unemployment rate (h/t @MichaelKantro).

 

11. Last week, we discussed the major “Squeeze” in BTC and ETH currently underway and how these compression regimes tend to lead to big trends. We’re directionally agnostic and will look for the market to tip its hand before getting in. With that said, if the market breaks higher, then Galaxy Digital Holdings (GLXY) is a nice leveraged way to play the move.

 

12. Via the FT “In striking recent research, Luis Martinez, an economist at the University of Chicago, used data on night-time light intensity from satellite imagery to show that Chinese GDP growth over the past 20 years may have been about a third slower than reported each year, leaving its economy significantly smaller than the US, rather than slightly larger.

I’m reminded of a Taleb quote on the fragility of centralized systems, “on its face, centralization seems to make governments more efficient and thus more stable. But that stability is an illusion.” Because “although centralization reduces deviations from the norm, making things appear to run more smoothly, it magnifies the consequences of those deviations that do occur.”

Thanks for reading.Stay frosty and keep your head on a swivel.