“More than yesterday, Less than Tomorrow”
- Our House, Daily
That’s a regular pre-bedtime expression in our house.
A daily ritualistic reply to the question of ‘how much do I love you?’.
Interestingly, despite it becoming a kind of conditioned reflex response, it’s never really lost the emotional potency attached to it.
Given that my work and life incestuously (and incessantly) co-mingle, I harbor a healthy internal tension between amusement & disdain that it’s been effectively co-opted as a functional mantra by policy makers in the prevailing jihad against inflation’s prospective un-anchoring.
It’s impact – in volatility space – remains similarly potent.
In fact, if you invert it you get a functional mantra for market prices under the yoke of protracted Quad 4!
Less than yesterday, more than tomorrow …unless you’re the $USD.
Back to the Global Macro Grind…
If you’ve never indulged in the clip of Pelosi responding to the question of whether her husband engages in insider trading overlaid with the classic Chappelle sketch then your timeline probably needs a re-basing.
Here’s the Link (not optional, I’ll wait) …
Its potency also seems to never dilute … I think I watch it literally every time it gets pushed across my feed.
The clip showcases the progressively intensifying social friction associated with privilege engaged in ceaseless self-serve’ism. It also underscores yesterday’s data from the Census Bureau (released its 2021 report on Income and Poverty in the United States (Here)) which showed real income growth flat and inequality rising to a new post-WWII high.
Beyond highlighting the empirics around our uniquely American perpetual inequality generation engine, the Pelosi theatrics offer an entertainingly convenient segue to another Chappelle classic: “When Keeping It Real Goes Wrong”
A sketch that policy makers, faced with an anomalous macro factor set they were (partially) complicit in cultivating, were again forced to hijack as a working policy mantra.
2Y Yields hit a 15Y highs yesterday while Real Rates continued their inexorable march northward.
To set the Real Rates stage, let’s take a quick step back.
The real rates story is also a story of the $USD. To review:
The $USD remains the ‘strange attractor’ around which Trending global macro correlations typically coalesce.
Market correlations build and decay but, much of the time, the interconnected macro-verse orbits around phase transitions in the global reserve currency and acute macro fx correlation trades predominate.
It’s important to remember that the dollar functions within a two way communication and feedback loop, both cause and effect - catalytic agent and passive recipient.
Quad 4 sits as the prevailing global (& local) reality, representing a macro condition set that perpetuates a stronger $USD - which carries both direct and derivative implications as the effects generally cascade as the appreciating dollar serves to tighten financial conditions, further exacerbates already acute dollar liquidity dynamics, further vice-grips non-U.S. holders of dollar denominated debt, directly impacts real rates and further hamstrings the flexibility of other global Central Banks.
Most macro integrations of consequence are reflexive cycles and a strong $USD inside prevailing Quad 4 conditions functions as a positive feedback loop with negative consequences whereby slowing growth begets a strong dollar and a stronger dollar cultivates tighter global financial conditions (and the other attendant effects above), which serves to further pressure growth and around we go.
Now, given the extent of global financialization and the collective corporate & sovereign debt levels, the world is entrenched in a structural short dollar position (which, by extension, is also basically a structural short Volatility position).
Rising real rates and declining liquidity are the scourge of pie chart allocators or anyone in a leveraged short dollar position (which is everyone). The demand-supply imbalance (re)emerges in dramatic fashion during credit unwinds or tightening financial conditions as the hunt for increasingly scarce dollars crescendos. *See the IMF chiefs comments from yesterday suggesting 25% of EM nations are now at or near debt distress levels.
Rising Real rates – which, to reiterate, is achieved via a stronger dollar/hawkish policy as rising policy rates anchor the front-end while falling growth/inflation expectations fall at a growing spread to nominal rates - is also the singular transmission channel for policy makers on a campaign to restore credibility and armed with a single (inflation) mandate.
Keeping it real goes wrong, by design! …. in consumption and investment space! … with getting and keeping it Real(er) remaining a core policy transmission objective.
TINA (there is no alternative, to equities) was a sultry vixen, but Real Rates represent fresh temptation in the macro Tinder pool.
And in the present instance, policy/growth divergences (U.S. vs EZ, for example) amplify dollar strength while geopolitical dynamics and the global energy situation (food & energy prices ↑ in spite of strong $USD) only (negatively) amplifies the growth impacts.
Which brings us to yesterday’s inflation data.
I won’t clutter your inbox or frontal cortex with yet another CPI take, but the fact that core inflation accelerated (and was 2X estimates) while core services/shelter/grocery/electricity price growth hit cycle/multi-decade highs while median CPI and Sticky/Core Sticky CPI accelerated further anchors the prevailing macro and policy reality.
Commodity disinflation in the face of sticky core and wide acceleratory breadth and still tight labor markets is not the stuff pauses & pivots are made of. Yesterday’s data only calcifies the higher-for-longer policy trajectory and reinforces the intensifying (global) Quad 4 dynamics (and everything highlighted above) that have been on display for almost 3 quarters now.
Indeed, with a dramatic bear flattening, further curve inversion and the fed funds future spread hitting new wides (pricing in cuts in 2H23), the market unanimously voted in favor of “Hard Landing”.
None of the above is really new - we’ve been broken-record’ing it for almost 10-months - its just newly contextualized within the same process.
Our #Process mantra remains not-new either: More than yesterday, less than tomorrow.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.11-3.47% (bullish)
UST 2yr Yield 3.38-3.82% (bullish)
High Yield (HYG) 73.28-76.20 (bearish)
SPX 3 (bearish)
NASDAQ 11,217-12,199 (bearish)
RUT 1 (bearish)
Tech (XLK) 128-139 (bearish)
Utilities (XLU) 73.30-78.80 (bullish)
Energy (XLE) 76.95-82.26 (bullish)
Best of luck out there today,
Christian B. Drake
Macro & Housing
