“Follow the money”
– All The President’s Men
Everyone is obsessed over the most recent inflation print, so maybe you were expecting an Early Look on Inflation…
Wrong! Go back the Macro Theme numero uno: Recession > Inflation.
Inflation should have been a big topic in June of 2020 when Hedgeye got all subscribers long of commodities. Now we are getting subscribers short of commodities. Inflation is where the ball was, not where it is going.
For a few comments on inflation though, I look at it in terms of the Fed and what they are going to do with the current set up: high inflation and strong labor on a level’s standpoint (what the fed cares about). With most other global economies also raising rates. Is there a little bit of “Well, he did it too so I’m not in the wrong?” I don’t know or care, because again they missed inflation from June 2020 till today…
With all the above information, the Fed at the next meeting will raise rates (again) and keep their same hawkish stance. Good thing Hedgeye has had you short the market since January 2022.
I gave this analogy on the Macro Show on Tuesday but want to put it in writing. If the Fed keeps its same stance, I firmly believe this is where we are heading:
Imagine you just ran up Mount Everest and set a new world record. Congrats!
But on the way down the mountain, you decided to sprint. For any mountaineer that is the opposite of what you do because you will trip, you will fall, and you will break bones.
So now you are stuck blowing a whistle praying that someone will come help you because you are stuck on top of a mountain with a broken leg. One person passes by (the Fed), instead of helping you get to the bottom, they start throwing rocks at you...
On that cheery note, let’s look at how we ended up in this hole, with a broken leg, and praying that someone will come help us.
Back to the Global Macro Grind…
I have had a recent obsession with the quantitative tightening that the Fed has been talking about. Specifically, what they are trying to do with their balance sheet. Josh discussed on the Macro Show on 7/7 that the only time the Fed has attempted this was in Jan 2018 to Jul 2019 (the market was expecting half of the runoff we will see this year). So, we do not have a lot of historical data to compare to and don’t know for sure the exact impacts. Although, I will give you some background on how large U.S. balance sheets are and the markets they are currently impacting.
For some background, the Fed’s balance sheet is only $8.9 T (yes that is a lot). But I found a much larger data set for the assets and liabilities of U.S. Commercial Banks, which have $22.6 T in assets (reported by the Fed). So, a measly 150% bigger. I’m going to focus on this for today even though the news probably has you focused on the Fed’s smaller number.
Just by looking at the rate of change of total U.S. commercial bank asset’s these banks have been tightening since Dec 2021. More specifically, there was a large rate of change deceleration from Feb 2021 till March of 2021 (due to the largest base effects in their B.S. ever, ATHs). Then there was a much smaller re-acceleration until December of 2021 when the B.S. started tightening. What happened in January of 2022? The S&P 500 peaked on 1/4/2022 at 4,794. Essentially, one month after U.S. commercial banks started tightening the S&P 500 peaked. The chart below outlines this timeline. Oh by the way, this chart has not stopped decelerating just yet.
The next little nugget in this data is looking at Loan & Lease Assets YoY ($11 T account). These are commercial & industrial loans, real estate loans, consumer loans, and other loans. Watching this gives you a peak into global FX volatility.
The rate of change of Loans & Leases of Commercial banks have been leading global FX Volatility by 13 weeks since 2012 (0.51 correlation). It is not perfect due to the daily volatility seen in global FX, although the rate of change is speaking volumes.
Looking at Commercial & Industrial Loans YoY ($2.7 T account) we can find trends relating to Initial Jobless Claims. C&I Loans are simply loans from commercial banks to other businesses. Specifically, every time there has been a trending spike in initial jobless claims, jobless claims will peak on average 12 months after the C&I loans starts to decelerate. The only time this relationship didn’t hold was during the 2020 pandemic where C&I loans decelerated only 15 days before peak initial jobless claims.
On the other hand, every deceleration in C&I Loans is not necessarily met with trending spikes in initial jobless claims. Currently C&I Loans are at their levels last seen in 2020 and still meaningfully accelerating. This notion is not perfect but using it in conjunction with the earnings and profit recession, we have some time until peak unemployment.
This last line item I wanted to look at has been the source of one of my favorite charts while at Hedgeye. Deposit Liabilities YoY ($18 T account) is money that commercial banks will have to pay back in the future. A deceleration means that people are having less money in the bank. Less money with commercial banks equates to decreased liquidity in the financial systems.
How much money you ask? Currently deposit liabilities are growing at 5.6% YoY, 3 months ago it was growing at 8.4% YoY, and in Jan it was growing at 11.5% YoY. The difference between growing this account at 5.6% and 8.4% is $479 B and the difference between growing at 5.6% and 11.5% is $1 T.
Also, in this chart is ON RRP or overnight reverse repurchase agreements. The fed uses ON RRP to create a floor for interest rates. The financial system has been opting to put money into ON RRP instead of with treasuries. Less money in treasuries drains liquidity in the banking system. ON RRP hit an all time high of $2.3 T on 6/30 and currently sits at $2.2 T. Less liquidity has an impact on all bonds although the high yield market will always see the cracks first (i.e. $HYG is down -15% from its cycle high and we have been bearish on it since 2/28).
My takeaways from this are simple. Until we start to see changes in the current trends, I do not believe we have seen the worse for the: S&P 500, Global FX Volatility, Initial Jobless Claims, and High Yield Bonds.
The next time someone mentions a peaking process to you ask them if they have followed the money. More specifically, the rate of change of the money flows of the global economy.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 2.79-3.15% (bullish)
UST 2yr Yield 2.78-3.25% (bullish)
High Yield (HYG) 72.80-75.30 (bearish)
SPX 3 (bearish)
NASDAQ 10,852-11,690 (bearish)
RUT 1 (bearish)
Tech (XLK) 124-134 (bearish) `
Shanghai Comp 3 (bullish)
Nikkei 25,796-26,856 (bearish)
DAX 12,332-13,101 (bearish)
VIX 24.65-30.85 (bullish)
USD 105.19-109.11 (bullish)
EUR/USD 0.990-1.038 (bearish)
USD/YEN 134.99-139.23 (bullish)
CAD/USD 0.763-0.776 (bearish)
Oil (WTI) 92.64-105.39 (bearish)
Nat Gas 5.10-6.87 (bearish)
Gold 1 (bearish)
Have a great day,
Ryan Ricci
Macro analyst
