Peak FUD?

“Everything works out in the end.  If it hasn’t worked out yet, then it’s not the end.”
- Tracy McMillan

Being weird or eccentric is cool. Having enough self-awareness to recognize it and sufficient psycho-emotion depth to internalize and accept the implications helps. 

At least that’s what I tell myself.

When I was younger I used to only do things in three’s … a kind of personal homage to baseball (3 strikes, 3 outs, 3x3 innings, etc) and maybe a subconscious expression of a deeper tethering to Sierpinkski gaskets and the underlying order of the universe.

Anyway, maybe Covid somehow cultivates eccentricity or maybe I’ve just breached some critical threshold on boredom but I’ve taken to performing everything with Palindromic parameters:

• Want to do 40 mins of treadmill work … how about we make it 40:04
• Want to do 4 sets of deadlifts … let’s make the rep scheme 8558.
• Want to get up at 4am … nah, we’ll nudge that to 4:04.
• What’s better than BTFD’ing $100 of ETH? … buying $101 of ETH!

Of course, pretty much any cyclical or periodic phenomenon can be defined palindromic’ally provided you partition the phases appropriately.

• ADADA (Acceleration (up) →  Deceleration → Acceleration (down) → Deceleration → Acceleration (up)) … Defines the business cycle and macro sine curve.  
• GVG (growth → value → growth(?)) …. do we complete the rotation palindrome as we comp out of the largest reflationary impulse any of us will ever see and debt, demographics, tech driven disinflation, etc again take the macro driver’s seat?
• Pick some naturally recurring dynamic and it can typically be generalized to a palindromic sequence.

Then again, I may just be slowly slipping into eccentric madness.  Hopefully it’s a low volatility sloth-speed descent which, in relative terms, would sit in favorable juxtaposition to the epic clustering in crypto vol.

I’ve recurrently described the real and prospective growth in the crypto-verse as perhaps the most asymmetric medium/longer-term setup in macro. 

If the promised future-state and apparent breakneck evolution in the digital asset and infrastructure space turns out to be simply dust in the wind, my delusion and psychopathic descent will be confirmed and complete.     

Back to the Global Macro Grind ….

So, in a nod to Sell in May enthusiasts, equity volumes went away (YTD lows), breakevens took a breather which breathed some mojo into tech, Dalio prefers Bitcoin to bonds, Spreads on those bonds continue to plumb cycle lows, supply line inflation remains in nosebleed formation, rent price inflation is set to go double diggies (dragging headline inflation with it), the Quad 2 and Crypto FUD-coasters remain alive and engaged with ETH IVOL breaching 200, nothing says tacit acceptance than a Fed Governor presenting at a crypto conference and the fate of a fully decentralized & transparent future state is being shaped by .... two billionaires in a closed door meeting!

Okay, enough with the analytical foreplay. 

A quick highlight trinity ahead of today’s edition of Quad 2 FUD:

CBDC’s:  “First they ignore you, then they laugh at you, then they fight you, then you win.”

Leal Brainard spoke at the Consensus21 conference yesterday with the messaging centered around the Fed’s “sharpened focus” on CBDC development.

First, and most obvious, is that the digital asset space has achieved enough relevance and legitimacy that she’s actually speaking at it (and serving as opening band for Dalio’s appearance).  Second, digital payment systems are ascendant and the Fed-Treasury want to anchor and shape the development. 

It’s happening.  Accept it and play the game your in.  

Below is a chart we profiled a couple quarters ago which shows the evolution in sentiment around CBDC’s from global central banks.  It’s effectively a case study in the “first they ignore you ….” progression.  It could also be a proxy chart/trajectory for the trudging acceptance of crypto and digital assets at large.   

Granted, the complete centralization of money with no intermediaries and no privacy via a Fed overlorded digital payment system is basically the antithesis of the crypto ethos, but that’s a separate discussion.

Housing:  Cycle FIFO?

First, the latest on the Existing Market side: 

1. Median price growth printed north of 20% Y/Y in April, marking the first such rate-of-change exploit in history.
2. With Purchase Apps remaining in Trend retreat off the January highs and Pending Home Sales softening in recent months, another month of decline in closed transaction volume was unsurprising.
3. Sales Growth remains disproportionately centered at the high-end with Sales of homes priced greater than $1M up +212% Y/Y and those priced $750K-1M up +146% Y/Y (see chart below).
4. Home de-listings are occurring at an accelerating rate. 
5. Notably, it appears we may be seeing the early emergence of a negative feedback dynamic with affordability breaching a critical threshold and feeding back negatively to dampen demand.  

In short, Supply looks to be ceding control of the driver’s seat to affordability with respect to defining the trend in volume growth. 

Further evidence of such a transition will certainly matter as supply-driven constraints on volume growth carry decidedly different implications than an outright retreat in demand.  The former would argue for continued volume solidity and HPI acceleration while the latter would likely signal the crest then ebbing in both.   

More broadly, given that Housing was one of the first sectors to stage a legit V-shaped rebound, the evolution in housing conditions sits as an interesting (prospective) microcosm and harbinger for the evolution in macro dynamics.  

That is, are we seeing homeostatic market control play out to equilibrate conditions:  demand-supply imbalance => price ↑ => price ↑↑ => demand destruction => supply-demand rebalance => price pressures transitory(?).

Note that despite price increases and fundamental imbalance, saw mills are not planning any large-scale production increases or capex … which could be interpreted as the industry taking the “transitory” side of the inflation discussion. 

Meanwhile, on the New Construction Side:

Housing Starts fell -9.5% sequentially (still +68% Y/Y against trough Comps) to 1569K.  The locus of weakness was Single-Family which fell to the lowest level since August, dropping -13.4% M/M to 1087K (+58.7% Y/Y)

The April “Showers” are open to some interpretation.  

1. It’s perfectly plausible that the vertical ascent in resi input costs is dampening interest and activity.  Lumber prices rising +300% (although lumber futures are now down -23% off the highs of a couple weeks ago) and total input costs accelerating to an ATH (and by a lot) over the span of a few months is not what one would characterize as a fundamental catalyst cocktail for unbridled sanguinity.   
2. But …..
3. SF Permit activity remained relatively strong (-3.7% M/M, +70.7% Y/Y) so a more reasonable interpretation may be that interest remains robust but supply constraints are limiting actual production capacity.  This would accord with the demand-supply imbalances pervading almost every domestic industrial-manufacturing indicator in 1H21. 

We’d give the explanatory advantage to #3, at least currently.   

Lasty, and this is really a two part-er, I wanted to re-highlight the chart below.

The risk(s) associated with a choppy recovery in employment is probably duration dependent.  To the extent we get some version of an uneven labor recovery, it opens up the potential for a lower-amplitude, longer-period cycle. 

In short, while it probably cultivates elevated macro chop in the near-term, it also probably increases the odds that the growth cycle endures for longer. 

Globally, prevailing conditions suggest a similarly supportive evolution.  

The U.S. is clearly on the lead edge of large-scale vaccination and reopening efforts with other DM and EM in successive tow.  This will continue to provide for a staggered recovery – a kind of progressive reopening on a global basis characterized by a progressive renormalization in global supply chains and a progressive build in external demand.

This staggered cadence is preferable to a globally synchronized renormalization impulse (and the attendant “overheating” and policy reaction implications) with respect to the prospects for a protracted reflationary cycle as ROW renormalization will work to resolve domestic demand-supply imbalances while also helping propagate .  

That is a purposefully Panglossian framing of the potential evolution in global conditions, but it’s not a tail probability. 

In the end, everything works out as FUD births volatility … volatility births opportunity … and opportunity (and equality of opportunity) remains the sangre vital of the competitive, humanist investor.

Of course, in cycle space, there is no ‘end’ …. only the next beginning …. only the sweet melody and palindromic cadence of life and market aspirations.  

Immediate-term @Hedgeye Risk Range with TREND signal in brackets:

UST 10yr Yield 1.58-1.72% (bullish)
SPX 4070-4232 (bullish)
RUT 2142-2297 (bullish)
NASDAQ 13,001-13,830 (bullish)
Tech (XLK) 131.02-139.56 (bullish)
Energy (XLE) 51.25-54.85 (bullish)
Financials (XLF) 36.65-38.49 (bullish)
Utilities (XLU) 64.20-66.77 (neutral)                                                
Shanghai Comp 3 (neutral)
Nikkei 276 (bearish)
DAX 15050-15598 (bullish)
VIX 15.80-26.40 (bearish)
USD 89.27-90.73 (bearish)
Oil (WTI) 61.88-67.65 (bullish)
Nat Gas 2.89-3.12 (bullish)
Gold 1 (bearish)
Copper 4.44-4.82 (bullish)
Silver 26.79-28.74 (bullish)

Best of luck out there today,

Christian B. Drake
Macro Analyst