“It's a recession when your neighbor gets a job; it's a depression when you get yours."
- Harry Truman, updated for current cycle.
The world – and the U.S. in particular – harbors a pervasive fascination with rubber-necking tragedy.
From a decade+ of bad news = good dynamics to Gilt market dramatics to Yen-tervention’s to endlessly superfluous pivot clickbait speculations, Doom-scrolling the timeline for the next dopamine hit has transcended guilty pleasure to degenerate normality.
Atrophying executive function is the ‘secular grower’ and #Attention – its acquisition and retention – is the currency of whatever economic future-state we’re slouching towards.
Back to the Global Macro Grind…
So, price stickiness is threatening to evolve into the inimical ‘unanchored’ variety and the collective macro-policy implications continue to open up the surface area of risk for a globe entrenched in a leveraged, structural short dollar/short vol position and for a Fed in the throes of a credibility crises and attempting to walk the razors edge of real economy price stability and full financial market dislocation.
And the real-time rubber-necking has gone into overdrive as policy makers panic react to evolving nonlinear market conditions, monetary & fiscal policy that is increasingly working at cross-purposes and rising prospects for counterintuitive outcomes.
Zoomed out, the cadence and logic/factor flow underpinning prevailing conditions remains largely unchanged:
Huge swaths of the population – flush with pandemic stimulus cash and fresh off personal life-work balance epiphany – decide not to re-enter the labor force → Supply goes down while demand remains elevated, thus cultivating an acute demand supply imbalance → prices for the stuff (goods & labor) in imbalance go up → Fed tightens to combat and tamp down that price inflation with an express goal of demand destruction and increasing unemployment, but ….. → savings are down or depleted, prices remain elevated and the cost of major household expense centers (housing) are step functioning higher …. driving individuals to seek employment (while labor hoarding occurs for employers who have spent a year+ desperately recruiting workers) → labor market slack actually diminishes and prices remain elevated (COLA increase of +8% Y/Y, Wage growth of 6%+ now will flow through to demand/price conditions next year) → the exact opposite outcome of the policy intention.
Again, there is nothing new or profound about this take but it’s the back half of it that remains an interesting and reasonable potentiality to consider vis-à-vis short-to-intermediate term inflation dynamics.
Longer-term (and with the right equilibrium policy level) that condition set will help drive demand-supply renormalization and disinflation. But over the investible future it will remain a delightful dumpster fire at the macro-policy nexus.
Anyway, I wanted to pivot the discussion this morning to focus on a few bigger picture conceptual frameworks.
In the latest 4Q Macro Themes presentation we reduxed the largest reflexive relationships and the most prominent loop dynamics playing out across domestic and global macro for those who aren’t macro-centric or who aren’t already intimately familiar with them from having lived through it multiple times.
Not because they are new or novel to Hedgeye, but because they continue to define the cross-asset class interplays that matter.
Quickly:
- These are stylized versions of self-reinforcing macro loop dynamics but they capture what matters with respect to the cross-asset class interplays that are playing out.
- And you can interject endless nuance into this, shift the interplay of things or change where the cycle is initiated but this is basically how it plays out empirically.
Volatility-Liquidity Loop: This remains both the most obvious and, based on how recurrently it (still) plays out, most underappreciated modern market structure fragility:
- volatility spikes → liquidity goes down → price moves get amplified → vol spikes more → and you get stuck in a negative vol-liquidity-price spiral.
And once you hit critical condition thresholds across one or multiple nodes in the loop is when you get non-linear outcomes.
Our Currency, Your Problem:
The twin $USD loops are really a kind of integrated nested loop that work to amplify each other.
- Quad 4 Growth slowing drives $USD demand → Fed Tightening (in the present instance) drives a relative policy divergence that drives (real) rates higher and further dollar demand → a strong $USD drives Fx weakness and inflationary pressure in RoW → RoW Central banks are forced to chase the fed and tighten into a stagflatioanry slowdown → which exacerbates the slowdown and causes the policy/growth divergence relative to the U.S. to widen further → that (relative) growth slowdown which drove the $USD strength to begin with gets amplified …. And around it goes.
- For foreign CB’s attempting intervention to support their currency, it’s a similar paradox: Sell U.S. Treasuries to support the currency -→ drives Treasury rates higher → which drives a rate differential/divergence with support $USD demand → the $USD rises further …. And around it goes.
De-Zombification?
The post GFC period was characterized by serial interventionism in a way that distorted price discovery and perpetuated the “zombie” dynamics depicted on the left:
- Low Rates drive asset price/collateral inflation and speculative allocations → which suppresses default rates and/or extends the life of unprofitable companies → a company that is otherwise operating unprofitably or inefficiently represents excess supply → Excess supply represents a disinflationary force and a productivity drag → which perpetuates slower growth → which perpetuates the low rates which helped cultivate the problem in the first place.
This remained the primary policy paradox for global central banks and the Fed in particular in the Post GFC era.
Whether we overcome the debt & demographic dynamics that have underpinned the zombification cycle remains TBD. But the longer inflation persists, profit cycle pressure persists and rates remain elevated, the higher the probability that decade(s) long zombification cycle slams into reverse.
While it would support healthy productivity and output longer-term, it would be a negative for growth, financial asset inflation and employment/profitability over the nearer-term.
I’ll hard stop it there this morning as we’re fully in #LateLook territory at this point and let you rubber-neck the open.
Futures are green, all good bros! Quad 4 cancelled!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.70-4.07% (bullish)
UST 10yr Yield 3.65-4.09% (bullish)
UST 2yr Yield 4.06-4.53% (bullish)
High Yield (HYG) 69.93-72.88 (bearish)
SPX 3 (bearish)
NASDAQ 10,061-11,064 (bearish)
RUT 1 (bearish)
Tech (XLK) 112-125 (bearish)
Utilities (XLU) 59.87-65.17 (bearish)
Energy (XLE) 76.78-83.90 (bullish) `
Shanghai Comp 2 (bearish)
Nikkei 25,600-27,315 (bearish)
DAX 11,901-12,650 (bearish)
VIX 29.01-34.94 (bullish)
USD 110.15-114.41 (bullish)
Oil (WTI) 83.30-93.02 (bearish)
Nat Gas 6.21-7.14 (bearish)
Gold 1 (bearish)
Copper 3.30-3.58 (bearish)
Best of luck out there today,
Christian B. Drake
Macro
