Chicken Fried

“Well, it’s funny how it’s the little things in life that mean the most,
Not where you live or what you drive or the price tag on your clothes,
There’s no dollar sign on a piece of mind this I’ve come to know.”
- Zac Brown Band

As I was going through the morning grind today while writing the Early Look, I had a few intellectually respectable quotes to lead off with. Then the Zac Brown Band played on my Spotify, and it resonated with me.

A lot of Hedgeye subscribers like their beer cold and their chicken fried, and that’s okay. Some like to galivant around the country clubs of Fairfield County in the summer and winter in Palm Beach, and that’s okay, too. (Heck I joined a Yacht Club a few years back, just don’t tell my friends back in Alberta!)

Earlier this week, we launched a portfolio management competition called “HedgEye On The Prize”. Some of our subscribers may view this competition as “beneath” them, but for many others, it's a great way to learn and develop a process that will help them compound their family’s hard earned capital responsibly.

When I think about using our Quantamental approach, I consider a few things:

1. Are the assets I want to be “long of” or “short of” aligned with bearish or bullish Trends in our Risk Range model?
2. What economic, or Quad, environment are we in? This helps me find the best proverbial fishing holes.
3. Then if I’m investing in a specific stock, what are the catalysts? Do we have any sort of unique, and non-consensus insight? . . . if so, that may be a place to make bigger bets.

Of course, that is a simplification of what our 45+ person research and data team does every day. But the output of that work informs the conclusions in those three areas and helps us all make better investment decisions over time.

Back to the Global Macro Grind…

Out of curiosity last night I went back to the Fed Minutes from roughly a year ago from the FOMC Meeting September on 15^th and 16^th in 2020.  At that point, the consensus view of Fed members based on outputs from their models (so 18 different projections) was:

• The vast majority believed Headline PCE for 2021 would be in the range of 1.5 → 1.8%; and
• The vast majority believed that the risks to PCE were weighted to the downside.

As Paul Harvey used to say, "we know the rest of the story."

On the PCE front, the last report for Headline PCE in August came in at +4.3% Y/Y, which was more than 150% larger than the Fed’s estimates from less than a year prior. Even the Core reading at +3.6% Y/Y, was more than double their projections.  To the Fed’s credit, at least now they are admitting that inflation is here, even if it may be transitory.

Now is probably a decent time to look at some of the global inflation data that has been reported the last couple of days:

• France PPI +11.6% Y/Y for September;
• Sweden PPI +17.2% Y/Y for September;
• Spain PPI +23.6% Y/Y for September; and
• German Import Prices +17.7% Y/Y for September.

Yes, those are European data points and those aren’t consumer prices, but as we have been harping on for awhile now inflation is global and PPI / Input Prices naturally lead consumer prices. The divergences we now see between PPI and CPU globally are literally the highest on record. Maybe some of this is transitory, but the likelihood is that CPIs will be dragged higher. 

One intelligent way to hedge against inflation is to be long of it.

We’ve been making the call to be long of inflation since last summer, when the Fed was still worried about deflation.  Our top Macro ETF Exposures continue to reflect that today:

• Top Macro ETF Exposures: BKLN, IVOL, INDA, EPOL, QQQ, THD, NORW, XLE, JO, XOP, UNG, INFL, URA, XLF, KRE, BLOK, CANE

Now that doesn’t mean go out and chase prices that are up on a hockey stick, like natural gas which put in a 10% price increase on Monday. But our inflation call remains.

In many commodities, there are also are real supply and inventory shortages. In fact, today we learned that stockpiles at the Cushing, Oklahoma storage hub has fallen to 31.2MM barrels, which is down more than 50% Y/Y. Not good.

But that's more anecdotal. Let’s look at the real data on some U.S. commodities:

• Crude oil stocks in total -12.6% Y/Y;
• Natural gas stocks -11.8%;
• Heating oil stocks -22.0%;
• Power coal stocks -35.5%;
• Gasoline stocks -4.1%; and
• Propane stocks -25.1%.

I could go on, but you get the picture. Inventories of commodities that drive, power, and heat our economy have seen major drawdowns since last year. In many cases, record drawdowns.

Will some of these shortages and supply/demand imbalances resolve themselves with time? Of course! And the key tell for that may well be when the Fed inflation estimates finally incorporate a view of inflation for higher for longer.

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:

UST 10yr Yield 1.53-1.72% (bullish)
UST 2yr Yield 0.36-0.51% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 14,801-15,390 (bullish)
Tech (XLK) 153.93-161.87 (bullish)
Utilities (XLU) 64.39-67.99 (bearish)
Energy (XLE) 56.28-59.43 (bullish)
Financials (XLF) 38.94-41.50 (bullish)                                                
Shanghai Comp 3 (bearish)
Nikkei 28,325-29,526 (bullish)
DAX 15,314-15,822 (bullish)
VIX 14.09-17.91 (bearish)
USD 93.05-94.13 (bearish)

Keep your head up and stick on the ice,

Daryl G. Jones
Director of Research