"If you have an important point to make, don’t try to be subtle or clever. Use a pile driver. Hit the point once. Then come back and hit it again. Then hit it a third time-a tremendous whack.”
-Winston Churchill
We’ve been pretty clear on our view of crypto coming into this year. In fact, as Churchill said, at times we’ve probably made our point with a pile driver. And then a tremendous whack. Crypto, including Bitcoin, has the quantitative attributes of a commodity and in many ways is a levered bet on beta. We’ve been bearish on the space since early 2022 as we started to enter a #Quad4 environment.
Yesterday, investors got another reminder of the risk imbedded in the crypto ecosystem with the absolute free fall of prices in many assets on the back of the purported FTX bankruptcy. If the details we have heard are correct, FTX went from a valuation of some $32 billion to one dollar in a day.
IN ONE DAY.
These are the type of things that happen in #Quad4 environments. Dubious business models get revealed in spades . . . the SPACs with no business plan, profitless TAM stories, the Monkey GIFs, and the companies that sell bananas in the metaverse.
You may think the last point about selling bananas in the metaverse is a joke, but in an article about their investment in FTX, Sequoia wrote this about a meeting with Sam Bankman-Fried:
"That's when SBF told Sequoia about the so-called super-app: "I want FTX to be a place where you can do anything you want with your next dollar. You can buy bitcoin. You can send money in whatever currency to any friend anywhere in the world. You can buy a banana.
Suddenly, the chat window on Sequoia's side of the Zoom lights up with the partners freaking out.
"I LOVE THIS Founder," typed one partner.
"I am a 10 out of 10," pinged another."
Perhaps this event will mark the bottom. Typically, though, true bottoms occur when investors are so fatigued by an asset class that they give up -- not when they are frothing at the mouth to buy the damn dip.
Back to the Global Macro Grind . . .
This morning at 8:30am ET we got the river in the game of global macro poker . . . October U.S. CPI came in at 7.70%. Although, there is also a chance that it is not much of a river card at all. We have CPI declining in Q4 versus Q3, which is probably not a total surprise given more challenging comps and the recent declines in commodity prices. For Q4 our CPI forecast is +7.63%, which is a decline from 8.33% in Q3.
Regardless of where the number landed today, it won’t change the facts at hand. Global growth is slowing, monetary conditions are tightening, and inflation remains high and sticky. On the last point, I was reviewing our global inflation monitor on the plane ride out to Dallas. We’ve used this as the Chart of the Day today and as you can see in as much as U.S. CPI may be decelerating . . . that is not the case in much of the world.
In fact, the Eurozone’s October CPI print came in at +10.7% last week. For those that like history, this is an all-time high. In addition, today's Denmark CPI hit a new high of +10.1% and Norway's CPI also hit a new high of +7.5%.
Norway is actually an interesting case study this morning. PPI in Norway for October actually decelerated from +52.4% to +19.8%, while CPI accelerated from 6.9% to 7.5%. We've been highlighting these abnormal divergences between global PPIs and CPIs for a while. Mathematically, the gap will inevitably narrow ... but this narrowing is likely to involve both PPI declining and CPI increasing as it did in Norway this morning.
In part, this is due to the so-called Cantillon effect, which postulates that if a central bank pumps money into the economy, the resulting increases in price does not happen evenly. Some price increases happen immediately, while others happen over time as inflation gets embedded into an economy.
Despite what may happen today in the U.S., the spectre of high and sticky inflation looms large for central bankers. Just yesterday Richmond Fed President Tom Barkin verified as much when he said:
"If we back off for fear of a downturn, inflation comes back even stronger and requires even more restraint."
We obviously saw the same general concern from Fed President Powell last week in the Fed's hawkish pivot to higher rates for longer.
So regardless of what happens today with the data, you likely won't see much of a change from us, though we may get a chance to add to core positions. At the moment our top ranked Macro ETFs (which are updated daily in my Morning Shift note) are:
- UUP, KMLM, CTA, PFIX, XLP, BTAL, XLV, SQQQ, RRH, XOP, XLE, KRBN, TUR, MSOS
Admittedly mostly a boring list of longs, but sometimes boring isn't so bad.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 3.98-4.30% (bullish)
High Yield (HYG) 71.34-74.05 (bearish)
SPX 3 (bearish)
NASDAQ 10,108-10,797 (bearish)
RUT 1 (bearish)
Energy (XLE) 86.16-93.78 (bullish)
Consumer Staples (XLP) 70.24-73.61 (bullish)
Healthcare (XLV) 128-134 (bullish) `
Shanghai Comp 2 (bearish)
Nikkei 27,001-28,010 (bearish)
DAX 12,920-13,793 (bearish)
VIX 24.11-29.48 (bullish)
USD 109.40-113.21 (bullish)
Oil (WTI) 84.08-92.79 (bearish)
Gold 1 (bearish)
Copper 3.28-3.79 (bearish)
Keep your head up and stick in the ice,
Daryl G. Jones
Director of Research
