"The Rum Tum Tugger is a Curious Cat:
If you offer him pheasant he would rather have grouse.
If you put him in a house he would much prefer a flat,
If you put him in a flat then he'd rather have a house."
-T.S. Eliot
In T.S. Eliot’s poetry book, Old Possum’s Book of Practical Cats, "Rum Tum Tugger" is the rebellious contrarian looking for attention. If you give him something, he wants the exact opposite. In markets, being a contrarian can be a lonely occupation. Just ask Peter Schiff!
Prior to Hedgeye, I worked at a couple of private equity firms that were great long term allocators of capital, but they were new to public markets. The challenge they faced was discomfort with the daily “emotion” of the market and trying to determine what was “priced in.”
At one firm in particular, it was routine for the head of the shop to come in and reset our portfolio based upon that day’s headlines in the Wall Street Journal. While I don’t begrudge him (the pull of consensus can be strong!), it didn’t necessarily equate to successful investment returns. After all, by the time something is on the front page of a newspaper or website, it is likely fairly widely known.
Consider today’s top headlines on Bloomberg:
- “Global Bond Plunge Wipes Out $2.6 Trillion, Exceeding Losses of 2008 Financial Crisis”
- “Stocks as Inflation Hedge Is New Catch-All Narrative for Market Rally”
- “Bitcoin Futures Point to Potential Gains”
While that is one financial website, it is safe to assume that those headlines are all well known and, to some extent, basically priced in. FOMO, or the Fear of Missing Out, can be a difficult feeling to overcome. But to the extent you are feeling the urge to chase your FOMO, take a pause and consider whether that is the best positioning of your portfolio for the next play in the game.
None of us can change what has happened, or mistakes that have been made. Everyday we get a new opportunity to adjust our portfolios for the game ahead of us. That said, the starting point for that portfolio adjustment probably shouldn’t be based on headlines in Bloomberg or the Wall Street Journal if you are a Curious Cat...
Back to the Global Macro Grind…
As you know, we’ve been tracking global inflation data very closely and this morning we got updated inflation data from the United Kingdom:
- U.K. February PPI +0.8% M/M and +10.1% Y/Y → new 30-year high;
- U.K. February CPI +0.8% M/M and +6.2% Y/Y → also a new 30-year high; and
- U.K. Retail Prices accelerate to +8.2% Y/Y.
The commentary was also noteworthy from the ONS as they highlighted that “the drivers of inflation were diverse with increases in a variety of recreational and cultural goods and services and there no large offsetting numbers”.
Similar to the recent CPI report from the U.S. . . . inflation is basically pervasive.
So if you didn’t know, now you know that global inflation is continuing to accelerate. Then again, of course you knew that. We’ve been outlining that every day. It is literally in the top headlines of every major newspaper. The key question to consider from here is whether we get an acceleration, or will the rate of change start to slow?
While it is somewhat incremental, in the last week there are some cracks emerging in the case for inflation continuing to accelerate. Specifically, in the last month we’ve had negative performance in lead, lean hogs, platinum, lumber, cocoa, coffee, and cattle to name a few. Is this the first evidence of slowing inflation? Possibly . . . time will tell.
One would think that at some point interest rates will have an impact on inflation (and of course growth). While the rate increase cycle is just beginning globally, much of it is priced into futures markets. We’ve been highlighting the charts of Fed Funds Futures and the 1-Year Forward OIS Spread between 10s and 2s (so a view on the yield curve a year from now) fairly regularly.
On the first point, we continue to get new highs in the expected number of rate hikes for the remainder of the year and at the moment we have just under 8 more hikes priced in. Meanwhile, the expected yield curve in a year continues to go lower . . . currently at -0.33 basis points (so inverted).
Back in the real world, the most immediate impact of all of this has been on mortgage rates. The 30-year fixed rate is back at mid-2019 levels and is up more than 30% YTD. Financial conditions are tightening for the average consumer and rather quickly. At the moment, U.S. housing has the positive tailwind of low inventory, but we do see this impact of higher rates in this morning’s Mortgage Applications data with total market index down -8.1% W/W and the refi index falling off a cliff -14.4% W/W.
Now perhaps, like the headlines suggest, stocks are the new inflation hedge. Maybe it is true and we should pile in. History, of course, tells us a slightly different story. In fact, back forty years ago when U.S. CPI was this high, the trailing P/E on the SP500 was single digits . . .currently the trailing 12 months P/E on the SP500 is ~25X.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.87-2.41% (bullish)
UST 2yr Yield 1.63-2.22% (bullish)
High Yield (HYG) 79.71-82.51 (bearish)
SPX 4107-4535 (bearish)
NASDAQ 12,375-14,275 (bearish)
RUT 1 (bearish)
Tech (XLK) 139-158 (bearish)
Energy (XLE) 69.90-78.12 (bullish)
Gold Miners (GDX) 36.07-39.11 (bullish)
Utilities (XLU) 69.23-71.57 (bullish)
Shanghai Comp 3077-3341 (bearish)
Nikkei 24,345-28,141 (bearish)
DAX 13,304-14,848 (bearish)
VIX 21.68-34.76 (bullish)
USD 97.70-99.56 (bullish)
Oil (WTI) 93,13-114.49 (bullish)
Nat Gas 4.43-5.30 (bullish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
