“ELI5: Explain It To Me Like I’m 5”
- Step 2, (Richard) Feynman Technique for Learning Mastery
It’s Friday. And Friday’s are reserved for self-effacement and secrets.
Here’s a secret…
Most people, most of the time, only kind of know what you’re talking about.
They’ll pretend they do, employ in some customary ‘active listening’ affirmations and offer some obligatory nods.
But it’s all just a conditioned masquerade – an implicitly learned, finely calibrated defense mechanism to guard against the perception of being vulnerable or inferior.
I’ve recounted this anecdote previously, but back on the first day of my PhD program, my professor offered the following piece of memorable advice with respect to evaluating one’s place within the program’s intellectual pecking order:
“Regardless of what they say, nobody really knows anything. Most of the time ‘I don’t know’ is the right answer”.
That reality holds across the investment space and at the professional/institutional level as well.
I don’t know all kinds of stuff. And what I’m well versed in right now (because I happen to be actively immersed in it), I may have mostly forgotten 6-months or a year from now.
The amount of information turnover we’re hostage to is historically elevated … and accelerating.
Ceaseless dopamine loops brought on by an attention and instant gratification economy that has evolved in recursive, self-reinforcing fashion has left us, collectively, cerebrally schizo and inattentive, at least on the margin.
Anyway, I try to give the #ELI5 intro whenever I’m discussion some domain specific topic.
There have been multiple instances where, after the conversation, everyone in the conversation privately messaged me some version of ….
“thanks for the ELI5 setup … I wouldn’t have been able to follow the rest if I didn’t have the pedestrian pretext”.
In other words, no one in the conversation really understood what we were supposed to be considering at a nuanced level but, yet, no one actually said anything – effectively voting to waste a collective 6 hours and ensuring no improved understanding or further action/consideration.
This happens all the time. It’s silly, unnecessary and carries massive opportunity costs.
ELI5 sits as a kind of sister axiom to Einstein’s “If you can’t explain something simply, you don’t understand it well enough”.
Anyway, that rounds out what has turned into a ‘macro simplification’ trilogy spanning the past couple weeks.
Back to the Global Macro Grind…
So, the since-athon is back …..
SPX had its best 3-day gains since Nov 2020, median home prices rose at the fastest pace sequentially since 2017, mortgage rates spiked to the highest level since 2019, breakevens hit a new high, tightening expectations hit a new high (futures pricing in almost 8 hikes this year now) but so did rate cut expectations (for 2023/24), the yield spread cratering continued to new lows, negative equity-bond correlations remain the scourge of risk-parity strategies and pie-chart allocation enthusiasts, the BTC price range has been the dullest in years while equities continue to log crypto-esque ranges, VIX products - in an ironic/poetic twist - remain a source of consternation for being to volatile and the TINA debate wrt U.S. equites has bifurcated and crescendoed.
Let’s discuss ….
Curve Consternation: In a further nod to the impending policy mistake, the curve continued its Trend flattening yesterday and the forward curve moved further into inversion as the market priced in almost 8 hikes for the year. As has made the eye candy rounds on fintwit the past 24 hours, the market has now moved to price in a full rate cut into 2023/24.
Path dependence: If the Fed is, in fact, making a policy mistake and tightening into a slowdown, that action feeds back to impact the path of evolution in macro conditions - serving to both drive and amplify the deceleratory impulse. It’s a seed that supports nonlinear evolution in conditions and one that investors tend to under or inaccurately consider.
Probability Shifts: This is a trivial point but worth an occasional redux: It’s not about absolutes or things actually happening or coming to fruition. It’s about shifting probabilities. If the market is pricing in 8 rate hikes and we think they get 1 (or maybe two) … we don’t need them to actually only hike once to be ‘right’. A shift in probability away from 8 to something less will have reverberations across asset classes that will get you paid if you’re on the right side of it.
The Real Face of Capitulation?: As we face a multi-quarter slowdown and traverse beyond the heart of the volatility fireworks, its perhaps worth noting that capitulation only sometimes comes masquerading as fear. Most painfully, it comes in the drab garb of apathy. A slow leak lower as hope transitions to indifference, conviction withers and bids and interest go limp. Price decays and once majestic and memetic ideas (‘secular growth’, etc) go out, not in a dramatic last stand, but with a silent whimper.
Options Flow: Today is options expiration. Yearly/Quarterly expirations are typically the largest and some $2T in notional SPX options were set for March expiration. The prevailing Fed post-mortem (i.e. why options dynamic helped drive positive equity performance) is that the massive event premium (FOMC) priced into derivatives saw implied volatility collapse in the wake of the actual event. Dealers unwound delta hedges associated with those options by buying the indices. Buying continued as those puts were closed, skew fell and broader positive reflexivity played out in prices. I’m not a derivatives strategist but we’ve seen this same dynamic play out recurrently into OpEx – this time it was more dramatic given the event risk, that it was a quarterly expiry and that the event was so close to expiration. That fact that we were approaching the low-end of the risk range only opened up the potential for counter-Trend price fireworks. Broadly, expiration opens up the scope for a wider distribution of outcomes (in either direction). With the tail now done wagging the dog, we think the trajectory in Fundamentals again takes the drivers seat wrt defining sector/style factor performance.
Housing: I detailed our current view around Housing last week but with Builder Confidence falling in March, Mortgage Purchase Apps making lower highs and Mortgage Rates spiking further, the cautionary data continues to layer. New Construction will remain a beneficiary of disproportionate and acute inventory tightness in the resale market, but rising HPI + expedited backup in 30Y FRM mortgage costs + construction input price inflation + supply constraint is not a factor constellation supporting a housing long. This morning’s EHS data will show deceleration and while there may be some activity pull-forward alongside the rates backup, conditions are likely to worsen nearer-term. You’ll see housing hit RTA when we begin to pivot on that view.
Crypto: If you haven’t already, take a moment to watch this clip < SenWarren > and tell me objectively:
A) Is this a leader on an objective journey of discovery, understanding and thoughtful consideration?, or ….
B) Is it a hysterical exhibition of derailed woke-progressivism, remarkable in its explicit agenda/ulterior motive pushing?
We deserve the 4th Turning that we are getting!
….oh, and $RUNE is only up a casual +54% since I showcased it last week!
Tactically, and practically, what do you do with the incrementals above?
Here’s KM’s Top 3 for this morning:
Yesterday was the best short selling opportunity in both US Equity and High Yield in March…
- QQQ - you got another shot right at the top-end of my Risk Range™ Signal with an uber complacent & capitulatory implied volatility DISCOUNT of -27% vs. 30-day realized, right at options expiration. Inclusive of the 3-day bear market bounce, don’t forget that NASDAQ is still down -15.2% from its #Quad2 Cycle Peak and implying lower-lows from here in my range
- OIL – if you have Tourist type friends that are long of the #PeacePipeTrade, tell them that neither Oil nor European Stocks (or Euro Bond Yields or The Euro) are signaling that the war is ending this weekend; WTI busting a move back above my immediate-term TRADE #VASP Signal level of $100.16/barrel and we remain long of Energy (XLE) and Gold Miners (GDX)
- HIGH YIELD - best short-selling opportunity of the month in both HYG and JNK yesterday (Old Wall Bond desks aren’t making that call, ever) with a classic Counter @Hedgeye TREND bounce to lower highs; TREND support for the critical High Yield OAS Spread = +319bps over Treasuries. Don’t forget we have SP500 Earnings #Slowing from +30% y/y in Q421 towards 0-5% in Q2 of 2022
More broadly (and since baseball season is back on), how should you think about the approach and process?
Are we going to get stuff wrong? Of course.
But the goal is to take high probability swings at strikes. What does that mean if we translate from baseball to macro parlance:
A) If were right on the Quad projection and it’s an exposure we like then it’s a strike.
B) If (A) is true and that exposure is Bullish Trend and at the bottom end of the risk range, then that is a high probability swing (its over the heart of the plate, not paint low & outside). The converse obviously holds for shorts as well.
If you don’t have a repeatable process for signaling when to take high probability swings at macro strikes in the heart of the strike zone, what, exactly, are you doing?
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.72-2.29% (bullish)
UST 2yr Yield 1.57-2.05% (bullish)
High Yield (HYG) 79.65-82.48 (bearish)
SPX 4100-4423 (bearish)
NASDAQ 12,405-13,691 (bearish)
RUT 1 (bearish)
Tech (XLK) 138-153 (bearish)
Energy (XLE) 70.70-79.42 (bullish)
Gold Miners (GDX) 35.94-39.60 (bullish)
Utilities (XLU) 69.13-72.23 (bullish)
Shanghai Comp 3064-3351 (bearish)
Nikkei 24,301-26,997 (bearish)
DAX 12,546-14,714 (bearish)
VIX 24.30-37.82 (bullish)
USD 97.75-99.74 (bullish)
Oil (WTI) 89.56-125.28 (bullish)
Nat Gas 4.37-5.07 (bullish)
Gold 1 (bullish)
Copper 4.44-4.88 (bullish)
Have a great weekend,
Christian B. Drake
Macro analyst
