“Vladimir: Well? What do we do?
Estragon: Don’t let’s do anything. It’s safer.”
- Samuel Beckett, “Waiting for Godot”
To many critics Samuel Beckett's play, "Waiting for Godot" is considered one of the most significant English language plays of the 20th century. In a nutshell, the plot revolves around the two characters Vladimir and Estragon, who are (you guessed it) waiting for Godot.
The first act opens with Vladimir and Estragon meeting by a leafless tree. Estragon updates Vladimir on his most recent troubles, which involved sleeping in a ditch the previous night and getting beaten by some unknown assailants (so just when you start feeling sorry for yourself about a couple of small cap exposures going against you, just remember life could be worse!).
Eventually a boy comes by who is a messenger from Godot and relays that Godot will not be arriving tonight, but instead will arrive tomorrow. So, Godot's arrival is delayed. Eventually in the Final Act, the messenger boy arrives again, though this time claims that he does not know Vladimir and Estragon and that Godot will not be arriving after all.
In life, we are all waiting for something. Some of our readers are waiting for us to not have any more philosophical rants in these notes. Other subscribers want less hockey talk on the Macro Show. But whatever it is you are waiting for in life, it is probably best for your sanity and mental health to make sure it something that has some decent probability of arriving or occurring. (For instance, I don’t spend any time waiting for my hair to grow back.)
So, the question is: does a #Quad4 deflationary style market crash want to meet us now? Well, so far, our analytical and quantitative “messengers” are saying no. And those that are waiting for it in the shorter term, may in fact, be doing just that ... waiting.
That's not to say we aren't going to have some fun pin action in #Quad3 ... it is after all both accelerating inflation AND slowing economic growth. And heck, now we also have a resurging pandemic. BUT, cross asset volatility remains muted, equity volatility is still in the investable bucket, and economic data, while decelerating, is still showing decent organic growth.
Back to the Global Macro Grind...
On the last point about recent economic data showing decent organic growth despite sequential deceleration, the July U.S. Retail sales number from yesterday is worth a review. Now at headline value, the -1.1% decline from June was a sequential decline and a miss on the expectations of linear economists. But as the Chart of the Day highlights on a 2-year average growth basis, we are still running at near +10% Y/Y growth and up some +17.2% from pre-pandemic levels.
Now this isn’t to say slowing retail sales and last week’s sharp deceleration in August’s Michigan Consumer Confidence, which came in at a -12.3% decline versus July, are data points to completely dismiss. In fact, they are very consistent with what we would expect in #Quad3. That is the growth decelerating component to this economic regime.
But what about oil? Surely oil’s decline of some 11 or 12% from its July peak is telling us “something”? For those that are “Waiting for the Crash”, maybe oil is the messenger boy indicating that its arrival is imminent. Then again, maybe oil is simply telling us that in the short term (as the data is implying) there is a reprieve in demand as COVID resurges. That said: oil is up between 0.6 – 0.8% this morning, and not going no-bid as it would in a deep #Quad4.
On the inflation side of #Quad3, most of the global inflation data we are getting this morning continues to accelerate:
- U.K. July PPI +4.9% Y/Y, versus the prior reading of +4.4. This was also a sequential acceleration from +0.4% to +0.6%;
- Austria July CPI comes in at +2.9%, versus the prior month at +2.8%;
- Portugal July PPI at +10.2%, versus the prior month at +8.9%;
- On the negative, though, both Eurozone and U.K. CPI were basically flat in July versus their June readings.
So, in aggregate the data is #Quad3 inflationary, with a little easing. But with the Baltic Dry Index hitting its highest levels since 2010 and container shipping rates between China and the U.S. up some 7x from 2019, it is probably not too difficult to realize that we are unlikely to see a meaningful reprieve in inflation anytime soon. It also likely fair to say: are you shipping me?!?
Now, in the spirit of not making you wait any longer, these are top ETF exposures based on signal rank re-reranked as of yesterday:
- LQD, QQQ, XLI, EWD, INFL, XLRE, EWL, EWG, XLU, EWG, XLE
As you will notice, energy equities $XLE is back on the list and Sweden $EWD has jumped to near the top of the list. Interestingly, Gold has also gone back to bullish TREND in our risk ranges with a range of $1,723 - $1,821.
Then again, what do we know? For as Samuel Beckett also famously wrote:
“People are bloody ignorant apes.”
Of course, recognizing that is probably half the battle when it comes to stock market operating.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.20-1.40% (bearish)
UST 2yr Yield 0.19-0.26% (bullish)
SPX 4 (bullish)
RUT 2160-2237 (bearish)
NASDAQ 14,616-14,941 (bullish)
REITS (XLRE) 46.09-47.32 (bullish)
Tech (XLK) 152.60-156.16 (bullish)
Utilities (XLU) 66.97-69.76 (bullish)
Energy (XLE) 47.63-50.26 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 27,206-27,948 (bearish)
DAX 15,690-16,033 (bullish)
VIX 14.75-19.04 (bearish)
USD 91.94-93.31 (bearish)
Oil (WTI) 66.01-71.09 (bullish)
Nat Gas 3.78-4.26 (bullish)
Gold 1 (bullish)
Copper 4.16-4.35 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
