“There is only one kind of shock worse than the totally unexpected: the expected for which one has refused to prepare.”
- Mary Renault
What’s more shocking this morning? A) that the Fed finally “sees” the inflation we have been long of for the last year or B) that consensus Global Macro positioning (futures & options contracts) was betting they’d be blind to it in perpetuity?
Back to the Global Macro Grind…
I gotta give it to my Carlyle boy, PE Powell. He didn’t leak this Fed Shock to anyone in NYC. Maybe it’s a Zoom thing? No idea, but shocking the short-end of the yield curve like this doesn’t happen very often!
For those of you who have some touristy type friends who are new to this whole cross-asset-class correlation and @Hedgeye GIP modelling thing, here are some basics about bond yields and the yield curve:
A) The ROC (rate of change) of employment growth and inflation move the long-end of the yield curve
B) The Fed moves the short-end
“Shocking the short-end” means what it means. I guess consensus was quite literally shocked into believing that the Fed now believes in the Hedgeye Inflation Nowcasts!
To review (not new news this morning), our current headline CPI Nowcasts for the next 3 quarters are:
- Q221 = 4.62%
- Q321 = 3.99%
- Q421 = 3.84%
Front-running our own models, if I plug what I’m still looking for from Oil ($75 WTI), that Q4 of 2021 Nowcast will shoot back above +4% inflation, no problem. That’s a 2 bagger on the Fed’s “optimal average”, or whatever they call it.
Whether it was buying TLT puts (which just paid out huge for those of you short Duration, pre expiration) on that recent spike or shorting Gold @Hedgeye TREND Signal resistance of $1919/oz, it was for 2 very simple and #process driven reasons:
A) Our Street High Inflation Nowcasts were implying sticky, high, and TRENDING inflation (not “transitory”)… and
B) Our “call” for a re-acceleration in the ROC of US employment growth is pending
I know people want to be famous for making “big calls”, but fame is fickle… and I don’t do this to make big calls that front-run my own #process. I do this to save and make money.
For the most-of-you who aren’t Macro Tourists (chasing Old Wall headlines and 50-day Moving Monkeys)… and the some-of-you who are new to doing macro the way we do it here, the 2 big things about saving and making money are:
A) Not having double-digit drawdowns of your hard earned capital (Gold’s Drawdown is -14% from its Cycle Peak) and …
B) Compounding returns on your capital by staying with the #FullCycle Investing process, not trying to be early
Especially on the big stuff, sometimes it’s ok being a little late. If you have patience with the process, that is.
So, is the Fed “late”? Yes, really late relative to how we’ve been positioned (long INFLATION since June of 2020). But the Fed is early relative to how the Buy Side is positioned for inflation. Don’t forget that the current net LONG position of +238,882 UST 10yr Bond futures & options contracts is a THREE YEAR HIGH for that bet.
The bet, being that “inflation is transitory” and it’s going to “end in the next few months due to base effects”, that is…
What else? The other big thing that happens when the Fed shocks the short-end of the curve is that the US Dollar has a short-term pop. We call this a Counter @Hedgeye TREND move.
Unlike the long-end of the curve and big #Quad2 Asset Allocations (like Long European Equities) which aren’t doing much of anything this morning post yesterday’s Fed Shock, the Global FX market is still absorbing this short-term shock.
Short-term shocks, like episodic-and-non-TRENDING calls I’ve made, monthly, on US Equity Volatility this year, are what they are. They’re short-term, and sometimes explosive, multi-standard deviation move resets.
So, on that side of our core #Quad2 Asset Allocations, there are a bunch of moves to make this morning. I’ll be shorting US Dollars, buying plenty of other FX exposures, and buying Commodities like Silver and Rare Earths (REMX), for example.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.47-1.66% (bullish)
UST 2yr Yield 0.15-0.23% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 13,817-14,224 (bullish)
DAX 15,509-15,797 (bullish)
VIX 14.24-18.84 (bearish)
USD 89.59-91.61 (bearish)
EUR/USD 1.194-1.226 (bullish)
GBP/USD 1.394-1.422 (bullish)
USD/CHF 0.89-0.91 (bearish)
Oil (WTI) 68.83-72.61 (bullish)
Nat Gas 3.04-3.38 (bullish)
Gold 1 (bearish)
Copper 4.27-4.66 (bullish)
Silver 26.67-28.32 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
