“Always make decision that prioritize your inner peace.”
- Izey Odiase
As many of you know, the OODA loop is the cycle of Observe-Orient-Decide-Act that was developed by United States Air Force Colonel John Boyd. Keith discusses the OODA loop quite frequently and the phrase has many broad applications to investing, running a business, and several other decision-making processes.
As one of Boyd’s former colleagues Harry Hillaker accurately wrote:
“The key is to obscure your intentions and make them unpredictable to your opponent while you simultaneously clarify his intentions. That is, operate at a faster tempo to generate rapidly changing conditions that inhibit your opponent from adapting or reacting to those changes and that suppress or destroy his awareness. Thus, a hodgepodge of confusion and disorder occur to cause him to over- or under-react to conditions or activities that appear to be uncertain, ambiguous, or incomprehensible.”
Now as investors we don’t necessarily have opponents . . . or do we? One could argue that if you manage a fund, other funds are your opponents. Other times, the market itself can feel like our opponent. However, perhaps the most important opponent to consider for many of us is ourselves. (I know this holds true for me!)
On that last point, the reality is that many investors have defeated themselves this year. That’s not intended to be a low blow. This is a very tough game and it has been an extremely challenging year. Afterall, it’s not typical that we have 25%+ drawdowns in both bonds and equity. In fact, as of this morning both the QQQ and TLT are down roughly -32% in the YTD.
As always though, we must play the game in front of us. While we haven’t nailed every single move right this year, we have been pretty steadfast in our view that repeated #Quad4s is not good for risk.
But, what to make of the action yesterday? Is the bottom in? Or is this just another bear market rally intended so suck in the weak hands one more time? Only time will tell, but our view is that this is a time to Observe and Orient. (One point to observe from yesterday is that TLT closed down on the day . . . )
Back to the Global Macro Grind…
A big part of the reason we wouldn’t be chasing this rally is the fact that we face three #Quad4s in front of us (which includes Q4 2022, Q1 2023, and Q2 2023). And it’s not just the U.S. economy that has this precarious set-up in front of it!
In fact, the mode and median outcomes for the 18 other major economies we track closely are also in #Quad4 for the next three quarters. Personally, that fact right there is enough to keep me positioned conservatively and prioritizing my “inner peace”.
Alongside this economic set-up in our GIP models is the reality of monetary policy continuing to tighten. As highlighted below in the Chart of the Day, we currently have 5.69 additional rate hikes in store for the rest of 2022 according to Fed Funds Futures. Effectively, this is the equivalent of two more additional 75 basis point hikes by year-end.
Similar to the GIP model that projects global #Quad4s well into next year, most major economies are also likely to continue to see aggressive interest rate hikes into 2023. The epicenter of this is likely to be the Eurozone, which has lagged most of the interest rate hike regimes globally. We get Eurozone CPI on Wednesday and consensus estimates are for a 10% Y/Y increase, which would keep it near levels last seen in the 1980s. Meanwhile, the rate on the ECB deposit facility is only +0.75% . . . something has to give.
Policy makers in the Eurozone really don’t have much of a choice but to up the ante in the fight against inflation. The strong dollar is also amplifying an already inflationary dynamic in Europe. We probably see the result of this inflationary dynamic best in sentiment indicators from the continent. Just this morning the Eurozone Zew Economic Index clocked in at -59.7 for October.
To put this report in perspective, it's down from its June 2021 cycle peak of 84 and now resides at levels lower than the depths of the pandemic. In fact, the last time we saw Eurozone economic sentiment this low was during the abyss of the Great Financial Crisis in 2008. Now could this be the bottom in sentiment? Perhaps . . . but then again, inflation is running double digits and monetary conditions are tightening aggressively. It is probably unlikely.
Finally, I wanted to comment on China’s GDP, Retail Sales, and Industrial production this morning. Unfortunately, I can’t because the National Bureau of Statistics decided to delay the release of this data and hasn’t provided an updated release date. Only in 2022 would a major economy delay the release of such important data!
Given there is no China data to report this morning, I’ll wrap it up this morning with our current top ranked Macro ETFs as of yesterday:
- UUP, GRU, XLE, CORN, CTA, XOP, WEAT, KMLM, UVXY, SQQQ, PFIX
So, there you go, even in a #Quad4 bear market there are some things to buy.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.70-4.06% (bullish)
UST 2yr Yield 4.10-4.54% (bullish)
High Yield (HYG) 69.99-73.27 (bearish)
SPX 3 (bearish)
NASDAQ 10,107-11,028 (bearish)
RUT 1 (bearish)
Tech (XLK) 112-124 (bearish)
Utilities (XLU) 60.28-65.95 (bearish)
Energy (XLE) 76.98-83.70 (bullish) `
Shanghai Comp 2 (bearish)
Nikkei 25,801-27,331 (bearish)
DAX 12,005-12,838 (bearish)
VIX 28.97-34.75 (bullish)
USD 110.75-114.26 (bullish)
Gold 1 (bearish)
TSLA 199-239 (bearish)
Bitcoin 18,394-20,295 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
