“The secret to happiness is a small ego. And a big wallet. Good wine helps, too. But that’s not really a secret, is it?”
- Robert Louis Stevenson, “Dr. Jekyll and Mr. Hyde”
Recently, I’ve been re-reading Andrew Lo’s compelling book, “Adaptive Markets: Financial Evolution at the Speed of Thought.” For me, one of the great quotes in Lo’s book was the following:
“The Jekyll-and-Hyde personality of financial markets, oscillating between wisdom and madness, isn’t a pathology. It’s simply a reflection of human nature.”
While computers and algorithmic trading certainly have found a significant role within markets today, don’t ever start to discount the impact of human nature and emotions. This impact is on full display daily with a little FOMO here, some TINA over there, and even some GTFO now and again.
While there is clearly no secret to markets, one certainty that will happen time and time again is that some stock market operators will always make the worst possible decisions at the worst possible times.
This flawed decision making is amplified when external actions make investors feel more secure. The Fed dumping money into the system post the pandemic is a prime example. The bigger the backstop by the Fed, the more risk tolerant investors became.
This concept is supported by a couple of studies that Andrew Lo mentions in his book concerning automobile safety:
- Following the introduction of seat belts and other safety improvements in vehicles in the 1960s, University of Chicago economist Sam Peltzman looked at the data in 1975. The conclusion was that any increases in driver safety were offset by more erratic driving, so ultimately more accidents and pedestrian fatalities; and
- Similarly in 2007, Russell Sobel and Todd Nesbit looked at NASCAR races and found that every time a new safety device was introduced, crashes actually INCREASED.
Said another way: the safer vehicles became, the more risk drivers took, which ultimately led to more adverse outcomes.
Back to the Global Macro Grind…
When I went to bed last night, the U.S. equity futures were up meaningfully, and as of this writing they are now notably in the red. Talk about Dr. Jekyll and Mr. Hyde!
While it seemed to have been overlooked yesterday, the Chinese economic data certainly made me feel a bit bipolar. On one hand, Q1 GDP “grew” at +4.8% Y/Y, which was an acceleration versus Q4 2021 at +4.0%. But on the other hand, that headline number didn’t jive with a lot of other economic indicators from China and hid the slowing we’ve seen into March. When looking below the hood of the Chinese engine, this is what we see:
- Home sales by value dropped -26.2% Y/Y in March;
- The nationwide jobless rate hit a two-year high of +5.8%;
- March Retail sales fell -3.5% Y/Y, which was the worst decline since April 2020; and
- Both industrial production and fixed asset investment slowed meaningfully from January – February to March.
Now, of course, some of this is due to lockdowns that have been implemented broadly across China, but the Shanghai lockdown only began on March 27th. China data is only going to decelerate into April. The challenge Chinese policy makers face from here is how much can much they actually ease with inflation, as measured by PPI, running near 25-year highs.
In the Chart of the Day, we look at the China Composite PMI going back ten years. In contrast to the GDP report, it shows an economy that has floated near the contraction line of 50 for most of Q1 and been slowing for 18 months. No matter how you slice it, slowing Chinese economic activity is not good for global growth.
Back in the good old U.S. of A, we haven’t seen meaningfully slowing economic data yet, but Q2 is just getting started! Conversely, we have seen financial conditions tighten as the markets price in an aggressive series of hikes in 2022.
Real yields are now positive for the first time since before the pandemic and mortgage rates have hit near 10-years at 5+%. We saw real-world follow through on the later point as current sales and buyer traffic fell to post pandemic lows in yesterday’s NAHB Housing report.
Meanwhile, St. Louis Fed President James Bullard seemingly upped the ante yesterday by suggesting a 75-basis point hike can’t be ruled out. But hey, why not throw in a few jumbo hikes to go along with the 8.5 expected hikes for the remainder of 2022!
Unfortunately, we may eventually end up in a similar quagmire as China where inflation is still relatively high, but growth and employment are deteriorating . . . which may require an easing of policy. (Incidentally on the topic of growth, ~10% of the SP500 has reported and Q1 earning growth are tracking down -14.6% Y/Y . . .)
It should be no secret as to our current positioning. At the moment, these are our top Macro ETFs by rank:
- XLU, EWM, XLRE, GLD, BNDD, UUP, PINK, TLT, EWA, GDX, IDX, SLV, ITA, URA
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 2.46-2.91% (bullish)
UST 2yr Yield 2.35-2.58% (bullish)
High Yield (HYG) 79.15-81.25 (bearish)
SPX 4 (bearish)
NASDAQ 13,007-14,061 (bearish)
RUT 1 (bearish)
Tech (XLK) 143-153 (bearish)
Gold Miners (GDX) 38.32-41.91 (bullish)
Utilities (XLU) 74.77-77.43 (bullish)
Healthcare (PINK) 26.87-28.15 (bullish)
Shanghai Comp 3132-3259 (bearish)
Nikkei 26,301-27,561 (bearish)
DAX 13,840-14,526 (bearish)
VIX 20.01-25.66 (bullish)
USD 99.11-100.96 (bullish)
EUR/USD 1.076-1.096 (bearish)
Oil (WTI) 91.70-109.77 (bullish)
Nat Gas 5.93-7.85 (bullish)
Gold 1 (bullish)
Copper 4.63-4.83 (bullish)
Silver 24.51-26.59 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
