Swanney: "Would Sir care for a starter of some garlic bread perhaps?"
Renton: "No, thank you. I will proceed directly to the intravenous injection of hard drugs, please."
-Trainspotting (1996)
Before he played Obi Wan Kenobi in Star Wars Episodes 1-3, Ewan McGregor captivated audiences with a brilliant on-screen performance of Scottish junkie Mark Renton in the film adaptation of Irvine Welsh’ 1993 novel “Trainspotting”.
Like Mark Renton, markets today are battling the addiction of cheap money – a regime that had persisted for more than a decade and brought with it many sensational levered beta highs.
The jittery motions of today’s investors are reflected in the manic behavior of markets with the Fed punchbowl, or its absence, always in center focus. Accordingly, following the dual arm intravenous injection of record low rates and Federal deficit monetization over the course of the pandemic, investors have not responded well to the sobriety imposed on them by a stagflationary Quad 4 and the vicious pace of monetary tightening this year.
With the same screams and itches of a withdrawing addict, many are crying out for a reversal in course. Look at Ark’s Cathie Wood yesterday with her open letter to the Fed, or ravenously cheering on negative inflections in economic data in anticipation of the Fed’s recommencement of their “supply”.
Back to the Global Macro Grind…
Because of this junkie behavior, tomorrow morning’s CPI print carries a great deal of event risk and will be watched very carefully. Whether the inflation number comes in marginally above or below expectations does not change the invariably negative setup before us and the lengthy downhill path remaining in this increasingly probable, protracted Quad 4 slog.
Recall, risk is broadly characterized by outcomes and probabilities which are generally known to the decision-maker; uncertainty, however, describes the set of outcomes and/or probabilities which are not known. For good reason, markets hate uncertainty.
Unfortunately, uncertainty in the world has been grossly enlarged and not properly discounted as we contend with the fragility of today’s overindebted global economy; the wrecking ball effects of the dollar’s reflexive rise on the dollar-based global financial system; a new regime of elevated inflation volatility fueled by confounding global energy policies; and, of course, the full-scale, escalating western proxy war with a nuclear superpower. In a complex system, the phenomena of emerging properties and interaction effects allow for exponential rises in uncertainty and the prospect of soft landings is nothing but expert hubris.
Regarding uncertainty and exponentiality, we can look to credit derivatives where they are on full display in both corporate and sovereign instruments, particularly in the case of Swiss bank Credit Suisse where the insurance premium for default on the bank's debt is clearly rocketing higher in a frantic attempt to deal with the epic rise is systemic risk and uncertainty. To observe the brewing sovereign bond mess, my colleague Ryan Ricci prepares a weekly table of sovereign CDS spreads in our Systemic Contagion Risk Tracker. Needless to say, credit markets are not chasing highs like their equity market counterparts.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.58-4.00% (bullish)
UST 2yr Yield 4.03-4.35% (bullish)
High Yield (HYG) 69.95-72.97 (bearish)
SPX 3 (bearish)
NASDAQ 10,209-11,185 (bearish)
RUT 1 (bearish)
Tech (XLK) 114-125 (bearish)
Utilities (XLU) 62.15-67.81 (bearish)
Energy (XLE) 70.44-85.65 (bullish) `
Shanghai Comp 2 (bearish)
Nikkei 25,680-27,210 (bearish)
DAX 11,827-12,570 (bearish)
VIX 28.85-34.47 (bullish)
USD 110.10-114.21 (bullish)
EUR/USD 0.961-0.995 (bearish)
Oil (WTI) 78.27-94.99 (bearish)
Nat Gas 6.21-7.20 (bearish)
Gold 1 (bearish)
TSLA 202-246 (bearish)
Bitcoin 18,542-19,998 (bearish)
Have a great day out there,
Drago Malesevic
Financials & Macro
