“So, what you do is …."
- Me (to a quickly disinterested audience)
Here’s the deal ….
If you require me to pay you with a check, there is a (very) good chance you will be waiting an inconveniently long time to get paid.
I have two people who I still have to pay with a check. Which is a problem, for them, since:
- I may or may not have checks, and ….
- If I do, I may or may not know where they are, and …
- If I do, I may or may not have any blank envelopes and/or stamps, and ….
- Even if I can check all the boxes above, the inertia associated with finding said checks, filling them out and getting them mailed out means it will pretty much never not be at the bottom of my to-do hierarchy.
Now, pocket that anecdote for a moment.
I want to quickly relay another one. Don’t worry, I’m going to attempt to stick the synergistic 1+1=3 anecdote landing ….
I went on vacation for the first time in like 3 years a couple weeks ago. It was glorious.
Anyway, It was a group of us across the age spectrum and I was repeatedly asked about crypto.
The financial conservatives and those retired and/or on fixed income budgets were particularly interested when I told them I effectively get a risk-free 20% yield on my stablecoins (i.e. dollars, to simplify).
That interest faded quickly.
Here’s how the conversation/response went response to the “how?”
So, what you do is …. You need a fiat onramp so you need to setup an account on a CEX. Use the CEX to purchase some U.S. sanctioned stablecoin or just buy BTC or ETH. You could just buy $UST on coinbase but that’s an ERC-20 version of $UST which is not the version you want. So you need to also setup an account on a different exchange or create a separate defi wallet where you can swap for native $UST. After you swap, you can to send your $UST to a Terra Sstation wallet, which you also need to create, … from there, you connect to the primary defi application for the ecosystem to deposit your stable coins and earn yield. Now, when swapping make sure you have enough to pay the gas fees which may or may not be high and, also, for each of those wallets you’ll have to remember a 12-16 word seed phrase b/c you’ll irreversibly lose all access to your money if you lose or forget it. There’s not really any customer service or anything so double check your transactions before sending (or send a small test amount) because if you send to the wrong address you can’t recover it. And, note, for security purposes, its best not to save it digitally or write it down on anything that can be destroyed by fire or water. To get your money back, you just do the above in reverse. And you just kind of have to guess-timate with respect to taxes b/c nobody really knows what going on as far as taxes go.
If you ever find yourself leading with “so, what you do is … “ in a conversation with a non-digital or crypto-native generation, just shut it down.
What’s the point?
The overlap of the Venn diagram between those who still operate on a check-centric transaction basis and those whose eyes glaze over during the explanation above is significant. Those same people also happen to have the most money/assets.
The tech innovation and social-cultural-digital evolution is real, but the UI/UX remains extremely lacking.
Simplicity is critical.
Back to the Global Macro Complexity Simplifying Grind…
So, crude is perched at decade highs, commodities just had their largest rally since the 1970’s, the known and unknown unknowns are piling up, conventional macro-factor-market correlations are going schizo, cross-asset vol is in Viagra formation, thin liquidity in combination with short-term YOLO option buying & associated hedging (i.e. selling into weakness, buying into rally’s) have put equities on an hourly/daily Dramamine ride, the Fed knows policy can’t ameliorate supply-side shock conditions but they are going to try anyway, Quad 4 with a side of stagflation is inevitable and we are invariably going to be tightening into a slowdown.
And that is just the hyper-cyclical churn amidst a secular 4th Turning tide which is seeing generational frictions intensify, the progressive erosion of institutions, a retreat from globalization and centralization and an accelerating trivergence where blockchain, AI and IoT bridge the gap between the physical and digital worlds and pervade your everyday experience at an accelerating rate.
Fully internalized all that? Fully clear on how to position, across durations?
Trying to optimize or risk manage macro exposure at the nexus of all of the above is obviously challenging. It’s impossible if your positioning chases macro tourist headlines.
Attention inflation is real and our collective capacity for critical and 2nd order thinking is being depreciated.
Remember, the art of the GIP/Quad model sits in the original ‘analytical overhead’ associated with conceptualizing a novel framework – then figuring out how to dynamically measure, map, and operate inside of it.
This provides a decision making framework that operates across market and volatility regimes and independent of headline noise and any short-term “Brownian motion”.
But there are also layers to the global process – a kind of nested set of processes that act as successive sieves for filtering data.
Many of them can also be thought of as process heuristics …. conceptual frameworks for zooming out, simplifying the complex and distilling out (lets say 80%) of what matters in a tractable way.
Lets engage in the simplification exercise across a few different macro domains:
Weather ≠ Climate
- Don’t confuse a change in Weather (short-term/countertrend price action) with a change in Climate (macro inflection). We’re in the midst of a macro phase transition (climate change). This should underpin you’re broader approach to markets and risk management.
- If money is more getting more expensive, real rates are rising, financial conditions are tightening and a historic liquidity bonanza is slamming into reverse, does that proceed with no volatility … and will that volatility have no (negative) price consequences? … and what if all of that is occurring at the same time that we’re seeing organic macro deceleration … a dynamic where Quad 4 is both catalyst for amplifying the impact of those conditions but then also beneficiary of those conditions serving to amplify the Quad 4 conditions in a non-virtuous cycle.
- On a Trending basis, you’re approach and positioning should be largely opposite to that employed last year.
Quad 4 = Destiny
- Comp dynamics and prevailing conditions make the Quad 4 trajectory trivial. Remember, its not about absolutes or levels it’s about front-running inflections and the slope of the RoC line.
Higher Oil = Deeper Quad 4
- With growth slowing and Quad 4 inevitable from a macro accounting perspective, the net impact of higher oil/commodity input prices is likely to be a higher deflator and lower real growth. Don’t overthink it.
February Façade
- As we’ve highlighted recurrently, Delta broadly dented domestic and global macro back in August and the dampening in actively was discrete. Then we got the bounce. We are likely to see a replay of that with Omicron in the reported late Dec/Jan data and the rebound bounce in February.
- That is, in fact, what we are seeing with sequential strength in the February ISM and Fed Regional Survey Data … sequential improvement inside of Trend deceleration. Don’t confuse the weather with the climate.
Housing = 1-factor model:
- It’s always the same story. When rates aren’t moving they don’t really matter to housing. When they are moving they are all that matters with Housing devolving into a single-factor rates-centric model during periods of large-scale concentrated rate increases.
- Alongside the +70bps increase in 10Y yields since early December, 10Y Yield-Housing Equity negative correlation has ramped back to prior peak levels.
- In addition to the backup in TSY yields, mortgage financing has been further pressured by the increase in MBS Spreads.
- Recall, this time last year, the continued decline in MBS Spreads helped drive 30Y FRM rates lower, supporting housing activity in the face of rising TSY Yields. Now, instead of dampening the flow-through impact of rising TSY yields, it is amplifying it (albeit modestly, so far).
- So, we’ve effectively hit the critical rate increase threshold that has, historically, triggered marginal demand destruction and housing equity price correction.
- shallow Quad 4 environments have been historically favorable for housing as expectations for policy easing increase and long-end rates decline alongside flagging growth/inflation expectations.
- Presently, however, the market has been beset by cross-dynamics with deep Quad 4 being priced into equities (benchmarks and at the sector/style factor level) while inflationary dynamics have supported nominal yields with derivatives markets increasingly pricing in tightening – a confluence that effectively sits diametrically to the rates/policy expectation conditions that define favorable housing investing decisions in shallow Quad 4 environments.
- A necessary (but not necessarily sufficient) condition for us to re-enter on the long-side would be for the 10Y Yield to break from bullish to bearish TREND.
Policy | Another day, another tautological headline parade…
“Powell is attentive to the risks of inflation … and the Fed will monitor the Russia-Ukraine situation closely” … at first blush that may pass as insight underpinning policy calculus. At second blush, you’re quickly reminded that that is wholly nebulous commentary with almost negative utility and opportunity costs (you’ll never get that 30s back).
I mean, what’s the opposite of that? …. “The Fed is not attentive to inflation and will not monitor the Ukraine situation closely” …which doesn’t make any sense since his job is literally, to monitor inflation and consider and buttress against all macro contingencies and externalities.
If there is some signal to harvest it’s that the Fed is verbally pushing back against the decline in real rates. The Fed fund futures and eurodollar curves steepened post presser as powell effectively pre-announced the +25bps hike – a preannouncement that leaves hawkish optionality open but also probably sucks some near-term vol out of the market as the CPI and NFP data now effectively carry zero policy implications.
Between “Huh” and “Danger”…
Of course, the best way to distill and convey an idea or sentiment is without any words at all. That is why memes have become society’s apex object.
Keith Channeled Bob Rich on twitter yesterday afternoon in response to a cycle question on twitter.
If you want to know where we are, where we’re headed (and if you know that you broadly know how to be positioned) and bypass the macro & fintwit myopia ….
We are “between “huh” and “Danger”.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 2.09-2.29% (neutral)
UST 10yr Yield 1.72-1.94% (neutral)
UST 2yr Yield 1.32-1.54% (bullish)
High Yield (HYG) 81.96-83.69 (bearish)
SPX 4 (bearish)
NASDAQ 13,007-13,988 (bearish)
RUT 1 (bearish)
Tech (XLK) 146-157 (bearish)
Consumer Staples (XLP) 73.56-76.69 (bullish)
Energy (XLE) 67.71-73.68 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 25,894-27,113 (bearish)
VIX 26.13-34.29 (bullish)
USD 96.08-97.85 (bullish)
Oil (WTI) 95.28-114.63 (bullish)
Nat Gas 4.18-4.93 (bullish)
Gold 1 (bullish)
Bitcoin 34,870-44,994 (bearish)
Best of luck out there today,
Christian B. Drake
Macro analyst
