“Conservation of energy, the first law of thermodynamics, is one of the most fundamental universal realities.”
- Vaclav Smil
There are no scientists or stochastically oriented mathematicians at the Fed. Their best idea in “diversifying the views” on their forecasting “committee” was to hire a lawyer to run it.
While PE Powell started using components of my 13yr old modeling language this year (he’s not the only one, ha!) he definitely didn’t understand how to employ “base effects” in his model. Why? That’s easy. He personally doesn’t have one.
Yeah, you’re right, he probably has some linear model that someone sends him from an Old Wall Econ. But he definitely doesn’t have our proprietary nowcasting model. That’s the one that’s still calling for TRENDING, not “transitory”, inflation.
Back to the Global Macro Grind…
So what’s the man going to do A) if he continues to be wrong and B) if we continue to be right?
I think the market has already answered that question for us:
A) Upward pressure on what the Fed moves (i.e. the short-end of the yield curve)… and
B) The commensurate flattening of the Yield Curve as the long end prices in pending #Quad3 Stagflation
Not to be confused with Raging Global #Quad2 (which was our nowcasted view in Q4 of 2020 before China was the 1st major economy to signal real economic growth slowing back in March of this year), #Quad3 Stagflation can wreak havoc on:
A) Financials (specifically yield curve sensitive US Regional banks) and Smaller Cap Stocks… but
B) The Fed’s credibility and, maybe more importantly, predictability!
That’s the thing with having a lawyer in there instead of someone who is modelling this non-linear ecosystem of colliding economic factor exposures fractally: he’s harder to predict… because he doesn’t know what’s going to happen next!
Obviously The Game has changed on ye Olde Wall where everyone knows that someone always knows…
When the Fed is going to make a real policy shift, that is. That’s a sad story of insider trading and crony capitalism that I’ll let the dudes who are still short the NASDAQ and Commodities lament about on their clickbait sites.
Guys like me don’t want (you should go to jail for that) and/or need that “call” from someone in the know. The Global Macro market, across asset classes, is very good at knowing what I need to know on my Full Investing Cycle durations.
So why is the 10s/2s Spread, or shape of the Yield Curve, continuing to signal further compression:
A) 2yr UST Yield is signaling Bullish @Hedgeye TREND with immediate-term upside to 0.26%... and
B) 10yr UST Yield is signaling Bearish @Hedgeye TREND with immediate-term downside to 1.18%
In other words, if we’re right on our TRENDING inflation nowcasts… and Powell has to simply read those numbers on a big Cycle Time lag… the Yield curve will probably compress to +92 basis points wide (118-26) from its +105bps wide level this morning.
To put a +92-105bps Curve Shape in context, all you have to do is go back to where Global #Quad2 peaked (i.e. in Q121 before China #slowed and our short Hang Seng (EWH) position collapsed). That’s when the UST 10s/2s Spread was +160 basis points wide.
What’s next? Again, it’s not what the Fed says at tomorrow’s FOMC meeting (although the probability that they make a mistake there is not zero). It’s what the data (and markets that front-run that data) do before they speak at Jackson Hole…
Pre yesterday’s ramp in Copper and Cattle prices, here’s where The Quads had Hedgeye’s proprietary INFLATION nowcasts:
A) Q3 of 2021 = 4.69% headline CPI
B) Q4 of 2021 = 4.55% headline CPI
Observation: those are 4% numbers with upwards biases towards 5% and beyond if our “Rent” models are right (if I front-run our models and plug in 3.6% for Shelter vs. its recent print of 2.6%, we’re pushing 5% reported inflation heading into Q4 of 2021).
If Powell (or anyone at the Fed who had this completely wrong) was honest with The People, they’d remind you that they were in “wait and see on inflation, if and when it gets to 2%”… then they called it “transitory” at +3%... and now they have a problem.
You don’t have a problem, because you know what to do with this economic reality – pivot to #Quad3 Stagflation in Q4 of 2021 where you remain long of both the NASDAQ and Commodities (CRB Index), which both closed at new Cycle Highs yesterday.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.19-1.44% (bearish)
UST 2yr Yield 0.18-0.26% (bullish)
SPX 4 (bullish)
RUT 2136-2251 (bearish)
NASDAQ 14,456-14,996 (bullish)
Tech (XLK) 148.95-155.90 (bullish)
Shanghai Comp 3 (bearish)
VIX 14.17-21.46 (bearish)
USD 91.62-93.08 (bearish)
Oil (WTI) 67.65-76.08 (bullish)
Nat Gas 3.66-4.18 (bullish)
Gold 1 (bullish)
Copper 4.22-4.61 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
