Deep Profit #RecessionRisk Rising

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
- Henry Hazlitt

For a little while (last year) I had some dishonest people trying to gaslight me saying everything I know I “learned from Ray Dalio.” Never met the man. But I have read a lot of books. His book Principles was published in 2017 – that was 18 years into my career.

Prior to that, I’d read/studied and, most importantly, incorporated ANY learning from ANY economist, mathematician, or strategist to my evolving PROCESS. One of the more influential books I ever read (I’ve written about it many times) is Economics In One Lesson by Henry Hazlitt.

I’m not the only battled-tested market practitioner who #liked that book. Universa’s Spitznagel wrote in The Dao of Capital that if he was “able to get my children to read one economic text in their lifetime, God forbid it would be Hazlitt’s.” (pg 19)

Back to the Global Macro Grind…

Yes. I am different. I hope you are proud of being so too.

We do it differently here at Hedgeye. We don’t kow-tow to the Old Wall or its tired and broken media. We don’t start our day with their latest talking-points. We measure and map markets and economies within the context of our proprietary data-driven #process.

Old Wall Talking Points:

1. Inflation’s peak is in so you buy stocks
2. A “shallow recession” is priced in, so you buy stocks
3. It’s above the 50-day, so you buy that stock

After 23 years, just wow on those 3 things, but here’s my simple back-tested (i.e. market history) rebuttal:

1. When GROWTH and INFLATION SLOW, at the same time, that’s #Quad4 (and you SELL Cyclical and GROWTH stocks)
2. A shallow recession (like 2001 when you could barely see it) combined with a DEEP PROFIT RECESSION ends careers
3. WMT was above its 50-day for a few days – I hope you didn’t buy that Bearish @Hedgeye TREND (signal) stock!

Since I’m the one who invented The Quads (sorry Ray didn’t), I won’t waste your time and space reminding you about point #1 again today. On point #2, here’s the market’s update on Deep Profit #RecessionRisk Rising:

1. Yield Curve: 10s/2s inversion of -24 basis points is

A) A new CYCLE LOW for #Quad4 getting “priced in”… and
B) The most inverted the UST Yield Curve has been since 2000

2. If you bought US Growth Bubble Stocks (1 vintage) from March to July of 2000, I hope you learned something
3. The Fed says they’re not really “paying much attention” to either The Curve or Profit Recession Risk (they must be “transitory”)

As you can see in today’s Chart of The Day, not many people who deliver you your morning click-bait have profitably risk managed either an inverted Yield Curve like this or a pending Profit Recession (like WMT just pre-announced):

1. Yield Curve Inversion of 2006 didn’t last long because the curve steepened as the Fed went uber dovish (2008 recession)
2. Yield Curve Inversion of 2019 didn’t last long because the pandemic happened (Fed went dovish, steepened the curve)
3. Yield Curve Inversion of 2022 is the real deal – this is inverting at the fastest pace, ever, and ever is a long time

‘But, but, KM… everyone is bearish… and I was crushing it until July… but now…”:

1. Good, everyone (except the Fed) should be bearish on #RecessionRisk Rising (because it is)
2. Corporates and non-Old Wall humans alike getting bearish = spending cuts at both companies and in terms of consumption
3. Everyone is bullish on Top Gun 2, and everyone still goes to see it!

Now go from Maverick back to Hazlitt before you look at the latest SEC probe into Coinbase and the popping of the epic Crypto Growth Bubble:

A) Don’t just look at the “immediate-term” effect of WMT being down -10% and SPY futures “not seeing it” yet…
B) Look at the longer-term effects of both The Cycle and “any act of policy… and how its affects ALL groups”

Looking at LOW to NO income Americans #slowing in Real Income and Consumption terms is just sad to watch at this point (see WMT and T commentary for details on everything to NOT being able to pay their cellphone bills).

HIGH INCOME earners haven’t seen a Wealth Effect Crash like this since… drumroll… the year 2000.

Before panic-buying at the next lower-high for this 2022 Bear Market and US #ProfitRecession, please take the time to review our Q3 Macro Themes deck on how Wealth Effect impacts both GDP and recessions (slides 51-59).

My Top 10 SHORT Positions (by current SIZE):

1. FXB
2. JNK
3. HYG
4. FXE
5. FXF
6. EPOL
7. XLY
8. EWI
9. QQQ
10. IWM

You’ll note that my US EQUITY Shorts moved down the list (the prices moved down for the last 2 days, so I covered-SOME) as my both my FX and European Equity Shorts moved back up the list (the prices moved up, so I shorted-MORE). Keep that inventory moving!

I’m not supposed to have “feelings”, but I will be happy to send you many more SELL signals for Commodities, QQQ, Tech (XLK), Consumer Discretionary (XLY), Retailers (XRT), etc. if the Old Wall genuinely believes that the next 3 quarters of a Profit Recession is “priced in.”

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:

UST 30yr Yield 2.97-3.22% (bullish)
UST 10yr Yield 2.74-3.09% (neutral)
UST 2yr Yield 2.94-3.30% (bullish)
High Yield (HYG) 73.33-77.35 (bearish)           
SPX 3 (bearish)
NASDAQ 11,005-12,096 (bearish)
RUT 1 (bearish)
Tech (XLK) 125-139 (bearish)
Utilities (XLU) 68.06-70.90 (bullish)
VIX 22.09-29.14 (bullish)
USD 105.84-108.61 (bullish)
EUR/USD 0.998-1.028 (bearish)
GBP/USD 1.179-1.209 (bearish)
Oil (WTI) 93.16-101.41 (bearish)
Nat Gas 6.20-8.99 (bullish)
Gold 1 (bearish)
Copper 3.18-3.49 (bearish)
Bitcoin 18,604-24,646 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer