"Don't let your ego get too close to your position, so that if your position gets shot down, your ego doesn't go with it."
- Colin Powell
When someone starts a conversation or a long tweet with "few understand this," you can bet that most people do. Or that it isn't worth understanding.
Personally, I've accepted that most people probably understand more than I do about markets and life. Even if it is not most, it is certainly more than few.
The reality is that by the time some "blue check mark" on Twitter is revealing an earth-shattering investing secret to the universe with those three words, they've already lost.
The biggest challenge many of us have is to curb our thinking that we know more than the market. Or that our analysis is more insightful than another investor's research. It's not. (Well okay, sometimes Hedgeye research is a little bit better.)
In fact, the biggest advantage we may have is to actually admit that we "don't know" and to not let our ego get in the way of making money. Or as Colin Powell says, "too close to our positions." After all, the goal of the stock market game is not to be intellectually correct, but to make money.
It goes back to the old adage:
"Look around the poker table. If you can't see the sucker; you're it."
My personal investing goal of 2022 is to not be that sucker. What's yours?
Back to the Global Macro Grind…
So, heading into 2022... what would the mainstream media have you believe based on their self-anointed ability to predict the future?
Well, here are some top headlines as of this morning:
- "Big S&P 500 Bear Market Case Sees Inflation Eating Everything" → Bloomberg
- "IPOs Record Year Ends On Low Note For Most Newcomers" → WSJ
- "What Real Time Indicators Highlight About Omicron's Economic Impact" → The Economist
- "CIO Poll Highlights Inflation, COVID Pandemic, and The Fed Raising Rates As Their Biggest Fears" → CNBC
Anyone else want to get short inflation, long equities, short of COVID stocks, long of new issues, AND long bonds?
Now obviously I'm joking, this game is much more nuanced than taking the opposite side of headlines. But reviewing these titles does give you a sense of consensus thinking, because by the time it is a headline or tweet . . . everyone knows it.
More practically as we head into 2022, it is worth reviewing the current implied volatility premium of the equity markets. As the Chart of the Day below shows, we have built up IVOL discounts across equity sectors. In other words, the so called "Santa Claus Rally" to end the year has led to some complacency sneaking into the market. Interestingly, the only major U.S. equity sector with an IVOL Premium is Healthcare.
On the other hand, CFTC futures positioning is not really extreme at all at the moment. If there is one call out, it may be that positioning in commodities is by and large, shorter across the board. Importantly though, investors aren't short of commodities. They just happen to be much less long than they have been in the last year.
The action in the last week or so has been interesting. While the SP500 and Nasdaq have gone to new all-time highs, the CRB Index and Russell 2000 have lagged. To some extent, of course, this is what we would expect in #Quad1 or a narrow #Quad4... so this is somewhat validating our thesis.
Could Omicron ruin things heading into 2022 and lead to a sharper deceleration in both growth and inflation? At this point, that also seems unlikely. While positive daily COVID tests both globally and in the U.S. are increasing at a staggering pace (up some 46% and 76% respectively week-over-week), massive lock downs, and meaningful slowing of economic not only seems unlikely, but we haven't seen it yet in our real-time data trackers.
As my colleague Neil Howe (who will be joining me on the Macro Show today) said at the outset of Omicron:
"If Omicron is very transmissible but not very virulent, that could be a sign that Covid is on its way to becoming a "common cold" virus--which is the path many biologists had always expected."
So far that is what the data is suggesting.
At this point, we will be sticking with the Quad playbook heading into 2022. If the data and market signals change, our views will change and we will let you know. Our process might not be as sexy as the grandiose prognostications of the "high lords" of the Old Wall and Mainstream Media, but it is practical and it works.
As always, thank you for the support and the great discussions in 2022. And all the best to you and yours into the New Year.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.38-1.55% (neutral)
UST 2yr Yield 0.61-0.78% (bullish)
SPX 4 (bullish)
NASDAQ 14,903-16,094 (bullish)
RUT 2139-2298 (bullish)
Tech (XLK) 166.01-179.36 (bullish)
Consumer Discretionary (XLY) 191-210 (bullish)
Housing (ITB) 76.30-83.84 (bullish)
REITS (XLRE) 49.21-51.98 (bullish)
VIX 15.13-21.21 (bearish)
USD 95.72-96.75 (bullish)
EUR/USD 1.124-1.137 (bearish)
Oil (WTI) 67.76-77.28 (bearish)
Nat Gas 3.54-4.11 (bearish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
