“When you find yourself on the side of the majority, you should pause and reflect.”
- Mark Twain
I’ve been reading the cult classic "The Inner Game of Tennis" by W. Timothy Gallwey recently. It was originally published in 1974 and has since been republished many times. While tennis is often used to frame several of the learnings in the book, the deeper message is really about developing peak mental performance. The novel was early in discussing the concepts of being "in the zone", calming the mind, positive reinforcement, and learning by doing.
The book starts by talking about our two selves: Self 1 (the teller) and Self 2 (the doer). To simplify: maximizing performance in many ways comes down to what Self 1 is telling Self 2 to do. The application of this concept for stock market operators is obvious, and Monday was a great case study in harnessing these inner selves.
At 2:39pm on Monday with the VIX eyeing 30, Keith sent a real-time alert to Buy the SPY, which was subsequently followed by Buy signals on XLI at 2:43pm and XLK at 2:54pm. The market subsequently bottomed at right around 3:15pm. Was that lucky, or was that good process? Well, what it certainly wasn’t was us adopting contagious groupthink.
As for the luck factor, when you have a repeatable process that measures and maps price, volume and volatility daily, it probably wasn’t luck either. A key tenet of Gallwey’s book relates to “seeing nonjudgmentally – that is, to see what is happening rather than merely noticing how well or how badly it is happening”. If you were to see Monday’s stock market action through the judgement of contagion group think, it would’ve been easy enough to sell the bottom, rather than buy it.
But if your Self 1 had a process that ignored the Bloomberg headlines calling for a -20% drawdown and a doer that acted on that process, it would’ve been easy enough to see that most (if not all) measures of contagion risk told a very different story. A story that that ended in Monday’s events being another example of an episodic and non-trending U.S. equity volatility spike.
Later today our Macro Team will be going through their 110 slide quarterly themes presentation. As usual, the presentation will be light on groupthink and heavy on data as we start to position for Q4 and beyond. Please email if you would like access to this premium presentation.
Back to the Global Macro Grind . . .
Yesterday we got a slightly more hawkish Fed with Powell giving an explicit indication that the tapering process could start soon would likely conclude around the middle of next year. Shockingly enough, the world didn’t end and the market didn’t collapse. In fact, equity volume day-over-day on the up move yesterday was actually up +36%. As a result of this move, the lower end of our VIX Risk Range has, well, moved lower to 15.13 as of this morning.
But since the global debt contagion and a more Hawkish Fed haven’t led to a -20% drawdown in equities, maybe it will be slowing global economic data? In that vein, we did get some slowing data this morning with the Eurozone PMIs, which all posted sequential declines this morning:
- Eurozone Manufacturing PMI came in at 58.7 – the 15th month of expansion, but lowest reading since February 2021;
- Eurozone Services PMI came in at 56.3 – the 15th month of expansion, but lowest reading in 4 months; and
- Input prices reached a 21-year high as “demand overwhelmed supply”
Slowing growth and accelerating inflation . . . .sounds a little like #Quad3, which is, of course, how we have been positioned. From a purely modelling perspective, all else equal, slowing economic data in Q3 likely sets the table for a higher probability of that data accelerating into Q4.
While the supply chain issues globally are real and inflationary, if we take this morning’s Eurozone PMI at face value they are also, at least on the margin, a negative for economic activity. But as the releases note, part of the challenge is “the resilience in demand”. We saw this in spades in Tuesday’s U.K. Manufacturing Order Book for September, which rose to +22 . . . the highest level for U.K. manufacturing orders since 1977. Slowing economic data may well be more about limited supply then a drop off in demand.
Our Q4 themes presentation later today will focus on three key topics:
- USA: #Quad2 in Q4? – Sticky-high inflation enduring through Q4 remains the high probability setup amid still pervasive demand-supply imbalances (btw shipping costs as of this morning are up +330% Y/Y). But what about growth? Well one primary driver for growth accelerating, could be the recent topping and now decline in global daily COVID cases. The U.S. is now ~-25% below the recent peak and trending lower.
- Global Inflation’s Acceleration – While some measures of inflation may decline, the global spread between PPI and CPI is as high as it as ever, literally, been. We think the Cantillon effect will be on full display in Q4 as the printing of money has led to dramatic PPI inflation, which will lead to continued follow through on specific consumer inflation.
- Long Emerging Markets – With the odds of #Quad2 increasing and the odds of #Quad4 decreasing, one of the key beneficiaries may well be emerging markets that benefit from a weaker dollar. Now not all emerging markets are built the same, and we have certainly had a great run on our short China call from two quarters ago, but a number of emerging markets are starting to looking interesting as longs on both our Quad model and Quantitative Signals.
On the topic of inflation, in the Chart of the Day today we focus on Rent Inflation. Specifically, the chart looks at the acceleration of rent price expectations 1-year ahead from the NY Fed. As of the August report, these expectations are sitting at a 9.99%. Will national shelter prices actually go up that much in the next year? Perhaps not, but at 1/3 of CPI they don’t need to go up double digits to continue to support sticky and high inflation.
While the groupthink crowd has anchored on headline CPI decelerating slightly in August, we are literally not seeing or the prospects for inflation peak anywhere in the real world.
Hopefully you can join us on the call later today!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.28-1.40% (bullish)
UST 2yr Yield 0.21-0.27% (bullish)
SPX 4 (bullish)
RUT 2189-2260 (neutral)
NASDAQ 14,668-15,409 (bullish)
REITS (XLRE) 46.07-48.15 (bullish)
Tech (XLK) 151.81-159.90 (bullish)
Utilities (XLU) 64.22-67.46 (bearish)
Energy (XLE) 46.35-51.80 (bullish)
Shanghai Comp 3 (neutral)
Nikkei 29,248-30,806 (bullish)
DAX 15,162-15,913 (bullish)
VIX 15.13-24.73 (bearish)
USD 92.18-93.52 (bearish)
EUR/USD 1.169-1.187 (bullish)
Oil (WTI) 69.01-73.61 (bullish)
Nat Gas 4.66-5.56 (bullish)
Gold 1 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
