21# Signal 2 Noise

In today’s issue:

• If the facts don’t fit, change the facts

• A liquidity intro

S2N Updates

Once again, thanks for the comments; they were all useful. I have added something new to the site that I believe some of you will find useful. If you click on the link, it will take you to my notes section. When I read my various news and research sources every day, I try to keep a note of things that pique my interest. Most of the stuff won’t make it into the daily newsletter, but some of it is quite newsworthy.

I have also added an Ideas, To-Do List, and Roadmap section. I am a great believer in communication and sharing my vision. I also think it is nice for users to have an idea of what is coming soon. It is not fully complete yet. You can access this under Macro Tools if you are looking for where I placed it.

Performance Review

To learn more about the colour coding for statistical significance, read this blog post.

Chart Gallery

I am a visual person and personally get the most value out of looking at clean charts. There are too many charts to include in the newsletter, but I think having these 6 key charts in our daily newsletter is worth the space. I am only including 1-years worth of data, but I have all the various time frames available in the chart gallery on the site.

Economic News Today

New Signals

I have cut back on some of the screens I had that were more noise than signal. I also ran the screener this morning when Asia had been open for only a few hours, so it was a much smaller list and a good opportunity to explain a few things without an overwhelming list. The Nikkei Index 1-month return crossed a threshold; as you can see, it has a Z-Score of -1.15. The 5-year lookback means I used 5-years of 1-month data to see what a normal monthly return is. A -1.15 Z-Score means the current month is more than 1 standard deviation away from its norm. You can also see that the Nikkei is on a 5-day down-trending streak. When the section is ready, you will find out more statistical details on each signal.

S2N Comments

If the facts don’t fit, change the facts

I wrote yesterday about the release of the US CPI monthly inflation report. The number was worse than consensus expected, which usually results in the market selling off. The market was having none of that and continued to make a new high. The Wall Street Journal (WSJ), a paper I respect and enjoy reading, put out an article by a well-respected journalist who simply reversed reality to fit her narrative. She had this to say: “… with the S&P 500 closing at a new peak Tuesday after inflation data came in cooler than many investors feared.” The bold is my emphasis. She simply could not let go of the idea that markets could go up with negative news. So she simply made the negative news positive.

To make this even more laughable, another journalist at the WSJ wrote on the same day: “Inflation has come in slightly higher than expected for a second straight month.” Talk about an editor hedging his bets.

Liquidity Intro

This is a very big subject and needs me to write in greater detail on Insights. However, I will just share a few of the charts that are updated daily, giving you a picture of quantitative easing (QE) and tightening (QT).

The green line shows the FED’s Balance Sheet which is currently sitting at $7.5 trillion. The orange line is the liquidity pumped into the system. It gets a bit complicated, but the calculation is TGA + RREPO. The TGA is the Treasury General Account, which is the U.S. government’s operating account that is maintained by designated depositaries, primarily Federal Reserve Banks and their branches, to handle daily public money transactions. In plain English, this is the government’s current account.

The RREPO is the reverse repo rate, another complicated subject. I will share something on RREPO tomorrow. Just stay with me a little longer. We do some manipulation to get Net Liquidity.

With Net Liquidity we can run an analysis and have a look at how correlated the SP500 is with Net Liquidity. In the chart below, I loop through a range of 1 to 30 days to shift the SP500 to achieve the highest correlation against Net Liquidity. Currently shifting the SP500 1 day behind the Net Liquidity Index gives us the highest correlation of 0.46 which is actually pretty high. You can see that over the last year the SP500 has been rallying without the help of liquidity, which is quite interesting. In a more in-depth post, I will share more history and draw deeper conclusions. I am simply highlighting the fact that seemingly logical relationships don’t always hold true. This is complex stuff.

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