“Success isn’t measured by money or power or social rank. Success is measured by your discipline and inner peace.”
- Mike Ditka
A popular book around the Hedgeye office is “The Sports Gene: Inside the Science of Extraordinary Athletic Performance." That probably doesn't comes as a big surprise. We have an office filled with competitive, "Type A” people, many of whom coach youth sports or have kids that play sports. Now, before you begin thinking this is another Early Look all about hockey ... let's discuss soccer.
One of the more interesting studies in the book is a study from the University of Groningen related to youth soccer players in the Netherlands. The researchers looked at 10,000 soccer players and how their speed evolved (or didn’t) over time, and ultimately what that meant for future success.
In particular, the study concluded from their shuttle sprint scores that, “You need a minimum speed.”
To simplify: If you don’t have a fundamentally high level of speed deriving from fast twitch muscles, your chances of becoming pro diminish meaningfully. The study also concluded that, “You can’t make slow kids fast.”
Now that doesn't mean that just because you, or your child, aren’t genetically predestined for athletic greatness you should quit sports. But it does suggest that you should be realistic about expectations. Simply put: someone with a 40th percentile shuttle sprint has long odds of playing in the Premier League.
There is also evidence that grit, time invested, and attitude all help. While these attributes can’t overcome a lack of appropriate genetic gifts, they can absolutely level the proverbial playing field. In the world of investing we often see the same thing.
Some people will ultimately be more talented at the stock market operating game; but discipline, rules, developing the appropriate emotion skills, and hard work can help the rest of us schmucks mightily improve our portfolio performance.
Back to the Global Macro Grind…
Getting the economic regime right helps a lot. To use a fishing analogy, it's like having a fish finder to determine which sectors or stocks to consider given the environment. To that end, we’ve had a lot of questions about what #Quad we are in right now, since our #Quad map currently shows Q3 2021 is #Quad4 (even though Keith has been crystal clear on this topic in his morning missives).
At the start of the quarter on July 1st, we had a 95.1% conditional probability of being in #Quad4 (mathematically). As the quarter has progressed, the probability of #Quad3 has gone from 2.4% to 32.3%. So, on a rate of change basis, the probability of #Quad3 has been accelerating. This fact, combined with our market signals (heavy weight on those in these interesting COVID comparison times) are what has underscored the #Quad3 call.
Beyond Q3, it gets even more interesting. It's a fair fight in Q4 between all the regimes:
- #Quad4 conditional probability at 36.5%
- #Quad3 at 18.1%
- #Quad2 at 15.1%
- #Quad1 at 30.3%
Anyone else wishing for the glorious days of #Quad2s for as long as the eye could see? Loading up on speculative small caps certainly was fun for a couple of quarters!
But as investors, it’s our job to be vigilantly Macro aware to protect our family’s and our client’s hard-earned capital. Playing the game is also fun because of the daily score. In addition to the fact that all of us can play against the pros.
It’s also reassuring to know that we didn’t need the Federal Reserve to tell us yesterday what we already know: #StickyStagflation is here. But we did appreciate Chairman Powell validating our #Quad3 call with his comment yesterday, “The concept of “transitory” is that price increases will happen. We’re not saying they will reverse . . .”
Investing takes a lot of gumption. Think about China for a second. Given everything that's happened over the last few weeks, who is going to have the mental fortitude to load up Chinese equities if #Quad2 prevails in early 2022? (Speaking of which, the PBOC is adding $4.6BN of liquidity this morning through seven-day reverse repos.)
On the topic of today’s economic data, we are getting what we would expect from Europe:
- German July unemployment dropped by -91K and the unemployment rate dropped to 5.7%, versus 5.9% in the prior month. As we anticipated, the economic recovery is picking up some steam in Europe; and
- Eurozone economic sentiment improved to an all-time high of 119.0, and improvement over the prior reading. The prior data point underscores this sentiment point. Companies are more confident, so they are hiring. As a result, consumers are more confident since the labor market is improving.
Confidence matters and as Henry Ford famously said:
“Whether you think you can or you can’t, you’re right.”
Indeed.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.20-1.43% (bearish)
UST 2yr Yield 0.18-0.25% (bullish)
SPX 4 (bullish)
RUT 2143-2264 (bearish)
NASDAQ 14,501-14,995 (bullish)
Tech (XLK) 149.07-155.99 (bullish)
Energy (XLE) 46.98-52.75 (bullish)
REITS (XLRE) 45.62-46.93 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 27,104-28,220 (bearish)
DAX 15,209-15,817 (bullish)
VIX 15.27-21.85 (bearish)
USD 91.65-93.11 (bearish)
Oil (WTI) 67.35-75.11 (bullish)
Nat Gas 3.68-4.18 (bullish)
Gold 1 (bullish)
Copper 4.31-4.65 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
