Is the market still recovering from the US inflation figures or the subsequent price action? Just imagine if China were to announce a fiscal stimulus program in the upcoming days.
The next justification for stale shorts
First, let's anticipate the next excuse the trapped shorts might use to justify their positions: Declining inflation data is indicative of a widespread economic slowdown. Yawn! In their mental models, the impacts of monetary policy are asymmetric, and the possibility of interest rate cuts holds no significance.
Inflation can fall as bond yields rise
Certainly, it remains entirely possible for bond yields to continue rising due to substantial Treasury issuance, even as inflation further declines. A lot depends on developments in other bond markets worldwide and the appetite for US assets.
The most difficult rally to call so far this year
Out of the three major rallies we have predicted thus far this year, the most recent one proved to be the most challenging. A clear opportunity to hit the target only emerged within the last 24-48 hours, and if you blinked, you missed it. Just a week earlier, there were false positive signals from rising bond yields, a strong ADP jobs report, and misleading Cleveland Fed nowcasting suggesting a resurgence in inflation.
Here's an accurate account of how fortunate we were:
Thankfully, we: i) attributed the rise in bond yields to increased US Treasury supply rather than shifting inflation expectations, ii) emphasized the unreliability of private economic data as an indicator of official government statistics (such as the NFP vs ADP), and iii) like others, eagerly awaited a response from the Cleveland Fed to gain insight into the breakdown of their inflation forecast. In other words, there were plenty of banana peels to slip on, but it was also possible to avoid them.
Superforecasters vs. Domain Experts
There is ongoing debate surrounding superforecasters versus domain experts, with academic literature suggesting that the former tend to make more accurate predictions. We generally agree that external statisticians are better equipped to make objective assessments of likely outcomes. However, it is seldom mentioned that the realm of possible outcomes is usually defined by subject matter experts. Hence, statistics is a branch of mathematics, not science.
We strongly believe that the best approach to making accurate forecasts is when top domain experts collaborate with analytical minds within a rigorous scientific framework. The art lies in knowing when to trust in talented individuals and not blindly following the false signals off a cliff. Prioritizing the Goldman Sachs inflation thesis over individual data releases is one such example.
Haters will always hate, it's all they know
Meanwhile, the haters will continue to hate us for bringing to light their own shortcomings. There's not much as can do to change that, but only to say that everyone is welcome here. They choose to exclude and isolate themselves.
Eager shorts better wait till after the China stimulus announcement
Although the momentum indicators for the S&P 500 are stretched and in overbought territory, initiating a short position before a potential China stimulus announcement appears to be a risky trade, even if the levels seem more appealing than they did a week ago.
Anyway, why do you want to go short? It's such a negative and unproductive mindset. Especially when so many others are already on the same bandwagon.
