"Holding onto anger is like drinking poison and expecting the other person to die."
- Buddha
Wise Mind is a core Mindfulness skill in Dialectical Behavior Therapy. It’s a kind of cognitive therapeutic that aspires to a state of mind whereby reason and emotion are balanced such that one can effectively navigate and communicate during emotional crisis periods.
The Wise Mind represent the overlap in the Venn diagram between Emotional Mind and Reasonable Mind and serves as the bridge between states.
Practically, attempting to engage with someone in emotional mind from a reasonable/logic mind perspective is terminally flawed.
Such an approach faces a fundamental incompatibility as acute emotional distress fully occludes executive functioning leaving the (emotional) person incapable of processing or internalizing your rational overtures, however ‘correct’ or well intentioned. They literally cannot hear you.
Similarly, engaging with an emotional mind to someone who is also in emotional mind produces a kind of constructive interference that generally only serves to amplify the emotional state of both individuals.
The therapeutic goal, distilled, is to progressively build a new default reflex to emotional stress. That objective can be sufficiently simplified to “Go Opposite”
All emotions activate us to respond and the type of activation has evolved as a biological heuristic. Go Opposite builds the capacity to respond opposite from what our biological response would activate us to do.
Go opposite is a type of dialectical therapeutic primitive. A base-layer conceptual anchor that can be built upon with supporting strategies that all tether back to and serve that simple fundamental objective.
Back to the Global Macro Grind ….
Analytical primitives - fundamental conceptual anchor points that function to filter macro ‘stimuli’ and orient your perspective - are similarly critical.
Our base-layer A/B process (A= Quad/Fundamental view, B = #VASP Signal) and the underlying componentry could be viewed as an integrated collection of macro analytical primitives.
Remember, the art of the GIP/Quad model sits in the original ‘analytical overhead’ associated with conceptualizing a novel framework – then figuring out how to dynamically measure, map, and operate inside of it.
Implicit in the construction of the model are the primitives:
- RoC: Our transformation and filtering of the macro data is decidedly rate of change centric. Nested within that RoC-centricity is the notion that macro is simply about Better/Worse, not Good/Bad.
- Policy: Policy both shapes and responds to the extant growth/inflation environment and the market’s pricing of both in a variable, two way communication loop …. active participant, passive observer, both and neither.
In the immediate orbit of those primitives are others:
- Volatility: Volatility remains the primary exposure/positioning/rotation toggle. Whether it’s an explicit consideration or discrete model parameter, investors are either long or short volatility.
- Go Opposite: ‘Go Opposite’ generalizes beyond anxiety disorder therapeutics. From a macro and market practitioner perspective, simply ‘going opposite’ sits as a perpetual alpha source pool. Basically, Volatility ↑ (usually b/c growth RoC ↓) à High beta/High Growth exposure ↓ and vice versa.
- Liquidity: That liquidity matters is obvious to the point of being tautological. “Obvious” does not preclude investors from being willfully blind to the attendant implications however (more below).
That’s just a select cross-section of functional primitives but let’s extend/apply the above to prevailing conditions.
Starting with yesterday’s Fed communication dramatics: “I am delighted by the market’s reaction to Jackson Hole” – Kashkari
- Ha!
- “Don’t Fight The Fed”: For many, this sits as the singular macro investing primitive. We would subscribe to a modified version of it. Macro alpha lies not in fighting the fed during the heart of the cycle, but in fading the fed and effectively timing the markets front-running of the policy inflection. The Fed has now resorted to explicitly telling you they want asset prices to go down.
- “Don’t Fight the Liquidity”: Sometimes it’s just not that complicated. Crypto’s Dramamine ride is quintessential case-study. Volatility is rising (negative for high beta speculative), macro liquidity is in reverse (higher rates + QT), retail liquidity is in reverse (asset prices ↓, discretionary income ↓), market participation/liquidity is weak and falling (new address activity and on-chain transaction volume both ↓) and aggregate token/coin supply is rising. In other words, and simply, you have less people with less money and crypto ‘supply’ increasing. Can you really have more than sirenic false dawns & chop PvP markets so long as those conditions persist?
- Don’t Fight the Derivative: One could interpret the income domestic high-frequency data in a couple ways .. which are really the same way. Either we are stalling or we are in intensifying contraction. In either case the slope of the line is negative … and if you’re operating within the Quad framework, those are the same thing. In words, no change to our Trend view on the trajectory for domestic activity.
Now, allow me to quickly redux some macro and housing thoughts.
In both cases the reasoning is decidedly non-sophisticated but has (and continues) to define the evolution in both macro and market conditions.
Remember, slowing growth increases macro fragility & expands the surface area of risk for both known and unknown unknowns – the shifting balance of risk seeds the next volatility cluster in Trending macro decelerations.
The next vol catalyst may not be apparent, but its (always) in queue.
On the “Fed Pivot” (from 7/6):
So, the Fed pivot is imminent and the post-GFC pavlov bid to high beta, unprofitable, expensive growth is ripe for front-running, right?
We are indeed baby stepping towards policy capitulation and they will need to pivot, at least rhetorically and/or on the margin. I think they know that.
But here’s the issue, and there’s nothing particularly profound about this take, but I think the gravity associated with it still allows it to define the near-term macro-policy nexus …
What’s a likely outcome if they don’t hold the hawkish line sufficiently long enough?
Equities rally, financial conditions ease, the $USD falls, everything priced in dollars (oil, commodities, etc) goes up, still acute demand-supply imbalances re-worsen and inflation expectations don’t re-anchor.
Everything their fledgling tightening campaign aspired to gets unwound … with a good chance re-inflation ultimately leads to a larger disinflationary/deflationary bust.
All of those things need a credible reset.
On Housing (from 7/13): in the context of the continued policy posture and as 30Y FRM rates push back towards 6%:
We’ve seen the first impulse move higher in housing equities alongside the recession concern catalyzed decline in rates. Historically, Quad 4 is positive for housing because rates fall and the market prices in a dovish pivot in policy.
The risk here – with inflation at 41Y RoC highs and the Fed facing a macro condition set it hasn’t seen in at least 40 years – is that the policy pivot comes on an extended lag as the Fed focuses almost exclusively on re-anchoring inflation/inflation expectations. Long end rates may fall in response as growth/inflation expectations get marked lower (+ for housing) but could also be accompanied by a protracted deterioration in activity/fundamentals.
This macro-policy conjuncture effectively has an n = 0 wrt to cycle analogs (almost no currently active investors have traversed a similar macro dynamic).
Again, macro primitives anchor and orient how you interpret the incoming data. And, equally important, they provide some calm cerebral harbor to fall back to in order to re-anchor and re-orient your perspective in periods of accelerating volatility and intensifying macro tourist myopia. We’ll explore macro primitives further.
For now, #Patience …. in the land of myopia, the Full Investing Cycle process remains king.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.10-3.34% (bullish)
UST 10yr Yield 2.85-3.16% (neutral)
UST 2yr Yield 3.19-3.45% (bullish)
High Yield (HYG) 75.02-78.06 (bearish)
SPX 3 (bearish)
NASDAQ 11,802-12,711 (bearish)
RUT 1 (bearish)
Tech (XLK) 135-146 (bearish)
Utilities (XLU) 74.87-78.27 (bullish)
Healthcare (PINK) 24.72-26.63 (bullish) `
Shanghai Comp 3 (bearish)
Nikkei 27,808-29,403 (bullish)
DAX 12,709-13,560 (bearish)
VIX 20.15-28.25 (bullish)
USD 106.52-109.85 (bullish)
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst
