“Very simple mechanisms, sufficiently scaled, can end up looking like magic.”
- Francois Chollet, creator of Keras (deep learning platform)
When I first started writing research, I had a generally tendency towards trying to boil the analytical ocean in every note.
At some point (early on, fortunately), I enjoyed the same epiphany shared by anyone with longevity in the space.
No one gives a shit.
Even if there is select alpha embedded, no one is interested in reading a wall of text, replete with (real or fabricated) nuance.
I get the impulse …. the exists perceived ‘scarcity value’ in complexity and there’s an inherent inclination to overweight sophistication in modeling and decision making.
And there are certainly times when depth and nuance matter.
But the longer you do this the more you invariably come to appreciate the elegance in simplicity. And by not perpetually drowning readers in manufactured nuance, they will recognize when you’ve made a purposeful effort to highlight or elaborate on a specific dynamic.
More broadly, it’s generally small but elegant conceptual pivots that provide for transformative evolution that catalyze a phase transition for a sector (or humanity).
Consider the conceptual pivot associated with the AI/ML revolution in the visual below. That pivot led to a wholesale shift in terms of approach to AI and ushered in profound change as practical application with its increasingly ubiquitous integration in everyday application.
If you sub “prices” in for “answers” in that visual, it’s a decent proxy representation for how the Hedgeye Quantitative Process (machine learning box) compares to “Classical” Investing (classical programming box).
Back to the Global Macro Grind…
Yesterday’s CPI data was amenable to simplification treatment. Below was our quick take distillation ….
Today was supposed to be a big day.
Inflation is in the throes of multi-decade surge and price dynamics sit at the nexus of policy, macro and markets - serving as both catalyst and recipient within that dynamic three way feedback loop.
You know the deal …. Inflation accelerates, policy tightening expectations rise, real rates and financial conditions tighten and markets (eventually) get stiff armed. If the market begins to sniff out a stagflationary outcome or a policy mistake, you get an expedited curve flattening as policy expectations anchor the front end while falling growth/inflation expectations send the long end lower. The aggregate level of debt elevates and amplifies the sensitivity to this cycle. There are, of course, variations on the preceding and path dependence (where you are in the cycle when inflation begins accelerating/diverging) matters but it’s not really more complicated than that at a base level.
In any case, the would-be potency associated with today’s top shelf inflation data was fully diluted as Powell effectively preannounced a +25 bps hike last week, taking any ‘data dependence’ bite out of the release vis-à-vis policy implications. And because supply constraints continue to persist and energy and select commodity prices have gone vertical alongside the Russia-Ukraine conflict and won’t show up until next months data, the near-term trajectory (for energy, food & shelter … and the Headline) is essentially pre-ordained.
So what do you do with all that?
Nothing really. Or nothing different anyway. With Vol holding in the f-bucket and no change in macro projections for ongoing Trend decel domestically, you just keep risk managing your Quad 4 + Energy exposures in the same way as yesterday, and the day and week(s) before. New day, same process.
Again, just because we’re self-charged with tactical risk management and high frequency contextualization doesn’t mean the larger macro cycle arc is whimsically flipping direction.
- Will it be positive if we make progress towards a resolution in Ukraine? Of Course
- Are we going to continue to slow towards zero growth? Yes
- Will inflation remain elevated near-term, then begin to leak lower? Yes
- Are corporate earnings going to slow towards zero? Yes
- Is meaningful macro deceleration in the face of rising TSY yields, widening IG/HY spreads, peak margins/corporate earnings, stagflationary commodity price dynamics, intensifying geopolitical frictions, a cessation in the QE liquidity palooza and epic global/local indebtedness going to show up in prices? Of course.
- Are we really going to successfully “normalize” policy and have a meaningful, conventionally tightening cycle … hiking into a slowdown at current debt levels and with the forward yield curve already inverted? Of course not.
And will the weather (TRADE setup) change on a daily basis? Yes.
Is the Climate (TREND) going to inflect in the near-term? No.
With respect to incremental updates on the weather, here is KM’s Top 3 things for this morning …
What a difference 2-days makes post my big #oversold (equities) and #overbought (USD and Gold) signals… this is setting up #nice (again) because Tourists are 100% trading Russia headlines – any resolution there does NOT resolve for Deep #Quad4 in Q2…
- EUROPE – rates and equities continue to trade together (both higher this morning on the Putin headlines), but to where? It’s very typical for a bear market to bounce towards the top-end of its Risk Range, suck consensus back in, then spit them out again – DAX Risk Range is very wide (b/c volatility is very high) at 12,491-14,208, for example. German 10yr Yield is also at the top of its -0.17 to +0.30% range
- VIX – getting the 3-handle off front-month VIX should get Perma Bull chart chasers foaming at the mouth and that’s almost the perfect setup to start selling into more aggressively again with A) VIX anywhere < 28 and B) SPX anywhere > 4330. Implied Volatility DISCOUNTs are back in QQQ -10% and XLY -10% (vs. 30-day realized) and those remain amongst my fav shorts alongside the Russell (IWM)
- 10YR – if the “war is over”, why not ramp up the rate hikes again? The market actually just did that taking 2022 expected hikes to 6.56x – just wait until the headwall of the March-May US Deep #Quad4 data hits and the Fed is tightening into that – it has nothing to do with Russia. I’m finally getting more aggressive buying TLT and BNDD with UST 10yr Yield right at the top of my Risk Range
How about the weather across the crypto-verse?
If you’re not immersed in the daily digital asset flow (i.e. you don’t receive our daily Crypto Quant product), here’s a short selection of what’s happening (over the last 24 hours!):
- U.S. Biden releases EO with express intent to lead crypto innovation
- Dubai: Creates crypto legal framework
- S. Korea: elects pro-crypto president
- Ukraine Crypto Donations go above $110M
- Goldman advances initiative to offer crypto directly to clients
- EBAY teases digital wallet in Investor Day presentation
- Stripe partners with FTS to launch support for crypto transactions
- State Street announces it will offer crypto custodial services for institutions by year-end
- Wyoming senator Lummis finalizes bill to fully integrate fully #bitcoin and crypto "into our financial system is almost ready!"
I touched on $LUNA, $UST & the Terra Defi ecosystem briefly last week and I continue to field all manner of questions as we build out our institutional crypto product.
The most frequent and most basic remains some version of ‘what are you looking at now?’.
During this latest bera, I’ve focused a fair amount of attention (and capital) on ThorChain
Thorchain (and its native token $RUNE) is the first and only fully decentralized cross-chain DEX that allows you to Trade/Swap native L1’s and other coins.
So, for instance, you can swap your ETH for BTC …. with one click, with an easy and intuitive UI and with no bridge, no wrapper and no complicated, higher-risk multi-step process.
Like other DEXs, the liquidity pools (where the swaps occur) are built using user deposits. Those depositor’s earn yield from the transactions that occur within the pool. For example, the current yield in the BTC pool is 21% (nowhere else can you get that kind of yield on native BTC).
The security and tokenomic structure are compelling, they just launched synths (more on that another time) and with the coming integration with $LUNA and $UST has the potential to become a liquidity black hole as the first only fully decentralized stable coin combines with the first fully decentralized, cross-chain DEX.
Disclaimer: I own $RUNE & $LUNA ($RUNE + $LUNA = #RUNATIC) and lp in the ThorChain liquidity pools, so I am effectively shilling my own bags here … but that doesn’t mean the project is not objectively interesting/compelling. The Pools and Liquidity dashboard for ThorChain can be found here >> ThorSwap and you can begin down the rabbit hole at ThorChain.org if your so inclined.
Lastly, and because it’s Friday ….
ICYMI: So, we went with c-list celebrity for president in season 1. Then the writers opted for Pandemic and have chased that with War. Now it looks like we’re going with giant spiders falling from the sky for season 4 >> HERE. Empirically, the probability that we live in a simulation is rising, not falling.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.67-2.01% (neutral)
UST 2yr Yield 1.32-1.78% (bullish)
High Yield (HYG) 81.02-83.01 (bearish)
SPX 4143-4330 (bearish)
NASDAQ 12,628-13,616 (bearish)
RUT 1 (bearish)
Tech (XLK) 141-153 (bearish)
Energy (XLE) 70.60-79.26 (bullish)
Gold Miners (GDX) 34.85-40.13 (bullish)
Utilities (XLU) 66.70-72.71 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 24,313-25,890 (bearish)
VIX 28.01-37.60 (bullish)
USD 97.05-99.80 (bullish)
EUR/USD 1.079-1.117 (bearish)
Oil (WTI) 101.59-126.44 (bullish)
Nat Gas 4.30-5.10 (bullish)
Gold 1 (bullish)
Best of luck out there today. Enjoy your weekend,
Christian B. Drake
Macro analyst
