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…

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  1. Nature is healing… (h/t @NKozev)


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


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


  1. 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.


  1. 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…


  1. 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.


  1. 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.


  1. 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.



  1. 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.


  1. 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).


  1. 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.


  1. 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.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.