“One-month does not a trend make”
-Mary Daly on CPI deceleration, 11/10/22
We try not to traffic in hyperbole but yesterday’s 3-sigma+ cross-asset class palooza was some epic shit to survey in real-time, even for hardened market vets.
Were you turbo long into the warm green glow of yesterday’s god candle of easing financial conditions?
Were you degen short and hostage to an intensifying FOMO impulse?
Or did you come in low gross and largely flat …. take a breath …. put some space between you and the emotion and myopia of the moment and execute?
This game doesn’t require genius. Most of the time EQ > IQ, Wisdom > Intelligence & Full Cycle Process > the alternative.
But if you’re still triggered or just exhausted from the endless Dramamine ride of 2022, perhaps take a moment to indulge in the fact that ….
Despite cumulative profits built during a historical crypto bull run (w/ leverage), endless Inside info, endless order flow frontrunning, ICO distributions, political connections, ivy league pedigree, VC scam projects dumped on retail over & over, etc, etc … Alameda still managed to blow through all of it and all of FTX equity and user funds to lose $10B dollars! It’s actually amazing how that is even possible!
They may have been blessed with some privilege or opportunity, but they are not better than you at this game.
As we close the week on daylight savings, your gentle annual reminder …
Keep #SpringingForward, let the competition #FallBack!
Back to the Global Macro Grind …
Alright. I’d like to keep it reasonably tight and contextualize prevailing conditions using the same process as always and through the lens of the same conceptual scaffolding we’ve been using all year.
The older I get, the more I prefer ‘stick-and-move’ bullet points. I’m getting older ….
Disbullief! Many times the easiest way to contextualize or internalize something is to simply adopt and consider the converse perspective. For example, “imagine we didn’t have epic squeeze action during the heart of a bear market” Or “imagine there wasn’t ‘cash on the sidelines’ after one of the most expedited drawdowns in history?”. Appropriate reframing can level up the intuitive obviousness of some dynamics and help ease any angst associated with it. We came into the day with 2 longs and 4 short
Rational Exuberance …. If we’re pushing towards the low end of the risk range(s), still in the throes of an acute global $USD correlation Trade, inflation is still the locus of policy/mkt concern and CPI prints a prospective peak (i.e.) does it make sense that the dollar & rates go down and equities bounce as the worst case scenario isn’t realized and hard(er) landing risk declines on the margin? Of course.
Rational Risk Management: We came into yesterday with 2 longs and 4 shorts (low gross, low net). It wasn’t an epic PnL day but it was effective risk management. Now we get to Fade that squeeze as we push towards the top end of the risk range(s).
Rational Questions … Is a cartoonish +15.9% surge in the GS non-profitable tech basket a sign of macro inflection or squeeze dynamics in overdrive? How about the bull flattening in the curve?
Whatever Dude, I bet you’ll now trot out some confirmation bias …. We don’t anchor on frequentism but historical analogs always offer some prospective insight. We profiled the 2000-2002 period in our 4Q Themes deck as reasonably analogous. Any guesses on how many of the fourteen 6%+ rallies in the Nasdaq over that period actually marked the bottom? Answer starts with a “Z” and ends in a “O”. h/t @WesleyJMattox
Copy Pasta …. I wrote the following back in early July when the pivot hopium really began to crescendo. I’ve literally copy-pasted it into notes multiple times since, despite the manic oscillations and , nothing has changed for almost a year now.
….. here’s the issue, and there’s nothing particularly profound about this take, but I think the gravity associated with it still allows it to define the near-term macro-policy nexus … What’s a likely outcome if they don’t hold the hawkish line sufficiently long enough? Equities rally, financial conditions ease, the $USD falls, everything priced in dollars (oil, commodities, etc) goes up, still acute demand-supply imbalances re-worsen and inflation expectations don’t re-anchor. Everything their fledgling tightening campaign aspired to gets unwound
Again, there is nothing profound in that take but it’s been a simple conceptual primitive all year. Have we moved beyond this being the anchoring reality yet? How many days like yesterday can we get before we get yet another hawkish stiff-arm?
Quantifying FOMO …. I’ll do a longer note on this in an attempt to front-run the infinite queue focused on a prospects macro inflection once price starts to move. The short version remains this: Bottoms/Tops remain processes, not points, and we may not perfectly nail the bottom. We probably won’t. The FOMO risk is pretty straightforward. The risk is that we remain some amount of net short up to the SPX TREND line before getting a confirmation of Bullish reversal. We/you have made money the entire way down and have pretty deftly navigated the bounces. Are you okay with potentially missing some of the first move off the bottom?
2nd Mouse Opportunity: “The early bird may catch the worm, but the 2nd mouse gets the cheese”. This remains one of our functional macro mantras. Macro phase transitions are not priced in overnight and there will be plenty of 2nd mouse opportunity with respect to shifting or building exposure. There will be more than enough time to pile on and ride exposure alongside a certified macro inflection (think multiple Quad 1s/2s) – that’s when you’ll see protracted/durable deployment of sidelined capital + rising new net flows.
To be clear, I’m just trying to front-run some of the angst that will invariably start to percolate. The time for FOMO Long and 2nd mouses is not yet.
Crypto … to quickly touch on the space since the CT timeline has been in full (sur)reality mode this week. Everything remains Bearish TREND. In other words, no change from when we went bearish back at ₿TC $40K. If you haven’t had the time to keep up with the tragi-tainment the simulation writers have cooked up for the last episodes of the 2022 season, I’ve documented it pretty well in my twitter feed and in the “On-chain & Anecdata” section of the Crypto Tracker.
Now, to dispense with the analytical foreplay, here’s the sufficiently distilled conclusion from our perspective
My Offer Is This …. “You can have my offer now if you’d like. My offer is this …. Nothing!” Inclusive of yesterday’s dramatics nothing has changed from a #VASP Trend perspective. Not one TREND level on anything we’re short in #Quad4 was violated to the upside. If that changes (today or otherwise), we’ll be loud in signaling that.
Putting In a … Shift! Mary is right, 1 month does not a Trend or macro regime shift make. We expected a modest deceleration in CPI in October and expect 7.63% for 4Q. Reshoring and global/geopolitical externalities will keep some prices “uncomfortably” sticky but we should see services inflation follow the deceleration observed in goods prices on a lag in the same we saw ISM Services follow the trajectory of ISM Mfg on a lag. On the price side of those surveys, goods inflation is moderating & ISM mfg Prices Paid have fully retraced and a similar evolution should characterize the Services side. Disinflation will be TRENDing as we push into 2023.
Quad4, By Definition: The rate of change slowing of Growth and Inflation at the same time is the definition of Quad 4. “Proper” Quad 4 is now in motion.
Phase III: Yesterday likely marks the transition to Phase III of the Bear Market in High Beta/Growth and the beginnings of investible treasuries/gold (i.e. more conventional Quad 4 positioning). It may take some time but we expect the “relief vibe” associated with peak inflation/peak hawkishness to slowly give way to “recession vibe”
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.99-4.41% (bullish)
UST 10yr Yield 3.78-4.32% (bullish)
UST 2yr Yield 4.30-4.83% (bullish)
High Yield (HYG) 71.57-74.40 (bearish)
SPX 3 (bearish)
NASDAQ 10,105-11,301 (bearish)
RUT 1 (bearish)
Tech (XLK) 116-132 (bearish)
Energy (XLE) 86.56-93.79 (bullish)
Consumer Staples (XLP) 70.70-73.95 (bullish)
Healthcare (XLV) 129-136 (bullish) `
Shanghai Comp 2 (bearish)
Nikkei 27,075-28,029 (bearish)
DAX 12,923-14,280 (bearish)
VIX 22.90-29.86 (bullish)
USD 107.75-113.36 (bullish)
EUR/USD 0.969-1.023 (bearish)
USD/YEN 140.04-151.23 (bullish)
GBP/USD 1.114-1.180 (bearish)
CAD/USD 0.724-0.753 (bearish)
Oil (WTI) 84.01-93.11 (bearish)
Nat Gas 5.51-6.91 (bearish)
Gold 1 (bullish)
Copper 3.30-3.85 (bearish)
Best of luck out there today and enjoy your weekend,
Christian B. Drake
