“Every reform movement has a lunatic fringe.”
- Theodore Roosevelt
We had some fireworks in crypto land yesterday! Terra, aka Luna, fell some 95% in a day to roughly $0.75. The peak of this coin, just over a month ago, was $116. If my math is right, that is some $100BN+ in market cap that has been eviscerated.
Not unironically, the literal peak in Luna occurred in early April just as one of the keynote speakers at Bitcoin2022 in Miami highlighted his Luna tattoo and went on to describe “crypto” in the following terms:
“I was a macro investor my whole life, we try to see around corners, we try to understand the trends of the world, put big bets on them, and then tell stories, so my role has been telling stories–trying to pull people into the tent… and as more people get comfortable, the tent grows and fills.”
Believe them when they tell you the truth.
That all said, if you’ve been around markets long enough, you know that this happens. People tell stories to raise capital, some companies succeed, others fail, and adverse macro environments pound weak companies. That’s capitalism for you.
So, even though most De-Fi and Crypto assets are starting to trade like they are going out of business, there will be winners. But the key is to remember is that these are asset classes. They are not cults of wealth creation.
In part, this is why we introduced our Crypto Quant Tracker. To educate investors on the fact that the crypto space, like any other tradeable asset, has correlations and characteristics that give it asset specific style factors. In some environments, those assets will do very well. In others, like #Quad4 . . . not so much.
The other reason we introduced our Crypto Tracker was to tell people when to buy AND sell. Since Bitcoin turned Bearish Trend in our models, the asset is down -40%.
And as Bernard Baruch famously said:
“I made my money by selling too soon.”
Indeed.
Back to the Global Macro Grind…
By now you are likely saying “enough with the victory laps Jonesy, get back to the grind”. And you are spot on. This game isn’t about counting your victories or wallowing in self-pity at losses, it’s about getting up and grinding everyday to improve.
At +8.3% Y/Y and +0.3% M/M, the April U.S. CPI report exceeded all 40 of the estimates on Bloomberg yesterday. Literally, no Wall Street economist got it right. The key takeaway from the report is that inflation is likely to stay higher for longer than expected. In fact, if used car prices hadn’t declined for the 3rd straight month, this would have been a new 40+ year high in inflation.
The Core version of CPI, which excludes energy and food, actually beat expectations by more than Headline and came in at +6.5% Y/Y and +0.6% M/M. This is important because the Fed likes to focus on this metric due to the volatility of commodity prices.
As Keith appropriately said yesterday:
“This report solidifies that the Fed will raise by 50 basis points at the next two meetings, no matter what the stock market does.”
If the equity market continues to decline, perhaps the “Fed Put” will come back into play. That seems unlikely with inflation running at north of 8% and U.S. unemployment at 3.6%. Or at least, it doesn’t fit with the Fed’s dual mandate of “price stability and maximum sustainable employment”.
But if you don’t believe us, then believe Chair Powell himself who said the following when asked about former Fed Chair Volcker last month:
Chair Powell: “I think he was . . . the greatest economic public servant of the era”
Senator Shelby: “So you’re prepared to do what it takes, without any reservation, to protect price stability?”
Chair Powell: “Yes.”
For those that forget their history, Volcker raised the Federal Funds Rate to 20%, which ultimately led to a recession and 10% unemployment. Yes, increasing interest rates rapidly leads to slowing growth.
Despite the Fed only hiking 75 basis points so far, we are already seeing signs of growth slowing in the U.S. economy. In our Q2 Macro Mid Quarter Update yesterday (ping for access), we highlighted a series of important data points that we are following on this front:
- ISM Services new orders have collapsed to 54 from their post pandemic peak of near 70 and have been falling for six months;
- ISM Manufacturing has also been in declining for 6+ months and is now at near the lowest levels post pandemic of 55.4;
- NFIB Business Confidence Forward Outlook came in at -50 in the most recent report, which was the lowest reading in 30+ years; and
- Pending home sales are down some 20% from their October peak.
That all said, the most challenging comparisons for the economy come in the months ahead. In June 2021, Retail Sales were up +33% Y/Y, Core Capital Goods were up +23% Y/Y, and Durable Goods were up +42%. The economic comps literally do not get tougher.
So, the inflation scare could turn into a growth scare? That seems plausible and we are positioned accordingly. These are our top MACRO ETF Positions by rank as of yesterday, which are updated daily in my Morning Shift note:
- UUP, BAB, BNDX, GLD, IDX, XLU, TLT, SHY
Call us lunatics if you will, but we remain positioned conservatively.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 2.78-3.12% (bullish)
UST 2yr Yield 2.53-2.78% (bullish)
High Yield (HYG) 76.02-77.98 (bearish)
SPX 3 (bearish)
NASDAQ 11,109-12,276 (bearish)
RUT 1 (bearish)
Tech (XLK) 129-140 (bearish)
Utilities (XLU) 69.63-73.01 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 25,601-26,820 (bearish)
VIX 28.06-37.59 (bullish)
USD 102.07-104.81 (bullish)
Oil (WTI) 98.44-109.99 (bullish)
Nat Gas 6.59-8.90 (bullish)
Gold 1 (bullish)
Copper 4.02-4.40 (bearish)
TSLA 705-851 (bearish)
Bitcoin 25,743-35,076 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
