“Chaos is a ladder. Many who try to climb it fail, and never get to try again.”
- Petry Baelish
Everything matters.
It’s just that some “everything’s” matter more than others.
For those who’ve endured the ‘privilege’ of being force-fed my macro morsels for the last 15 years you know I generally avoid trafficking in manufactured nuance and ‘maintenance’ research.
Volatility (mkt chaos) is an alpha ladder and the nursery for market & macro phase transitions. And it’s the primary duration toggle in our risk management model. Rising volatility accordions the measurement period tighter & vice versa.
It’s also the primary toggle governing my research output.
When conditions are shifting and macro is moving is when the high(er) frequency curation & contextualization matters.
Implicit in note frequency (and independent of the content) is a signal with respect to how much you should be paying attention.
In effect, getting a message is, itself, an implied message.
What’s moving and what’s the message?
Back to the Global Macro Grind ….
So, domestic Consumer Confidence remained in flooded basement formation, rising inflation expectations served up a fresh entre of anti-pivot stagflationary angst, German Unemployment rose to (a higher than expected) 5.6%, French Consumption spending fell to (a larger than expected) -5.9% Y/Y, Home Price Growth remains in middle-finger formation (crashing in a way that lets you know the Quad 4 reaper is knocking but also in a way that doesn’t matter at all wrt improving affordability), LQD saw its largest outflow ever, BTC miner capitulation is in full crescendo, the Yield Curve continued its migration to Hades and levels enthusiasts and nominal mongers were frenzied over Black Friday and Cyber Monday sales rising +2.3% and +5.1% Y/Y, respectively … which risk management enthusiasts and gravity mongers gently reminded them means real sales volumes are decidedly negative.
And if you’re somehow just now entering the market for global growth and/or domestic profit recession canaries, South Korean Exports & Industrial Production would invite to indulge in their October vintages which collapsed to the lowest levels since the Pandemic trough.
Oh, and Powell will have another go at credibility salvaging today with Financial Conditions sitting at 2-month lows while the simulation writers decided SBF speaking at the NYT conference was a sufficiently surreal capstone to a year in which the world showed meaningful progress in its mission to devolve into a satirical version of itself.
So, what’s moving and what matters?
The fully distilled Macro 101 interpretation of the above - layered atop the existing macro data mosaic - is this:
Revenue & Profits come from spending → But there is (increasingly) less money (CB liquidity) → there is increasingly less wealth/tappable equity (wealth effect) → there is increasingly less discretionary income (negative real income growth for the longest stretch ever) → There is increasingly less savings to spend and cushion cushion consumption → there is increasingly less spendable credit (higher rates, tighter standards and constricting credit availability → Higher Rates means higher debt service and lower share of wallet for other discretionary consumption → So, you have less people with increasingly less real income, increasingly less savings and spendable credit, increasingly less purchasing power and historically difficult comps and profit growth is going to (accelerate/decelerate)? (Circle one).
For an impatient populace immersed in instant gratification culture and endless social media dopamine loops, the cadence of macro evolution and the timeline over which the above plays out is excruciatingly plodding.
Our expectation around that evolution has remained largely unchanged.
That is, the collective consensus exhale associated with peak inflation will gradually give way to the angst of recessions reality & the further migration south in the profit cycle as the (local & global) deceleration takes fuller shape and the main thrust of higher rates makes its way through the real economy.
To further layman-ize:
- The locus of concern was inflation. And inflation dis-inflating is an ostensible positive as it removes much of the worst-case-scenario risk. If growth can still be reasonably argued to be in the “okay” zone, then disinflation effectively equates to goldilocks and the soft-landing narrative can live to die another day.
- That’s a sirenic development that provides scope for some countertrend price action, but ….
- If that growth continues decelerating then the goldilocks mask comes off, revealing outright recession and an intensifying Quad 4, which carries diametric implications.
Basically, the expected sequencing is this: Peak Inflation → Consensus Exhale/Relief → Transition to Internalizing Recessions Reality.
We think part 3 is now fully in motion. (which is also the answer to “what’s moving and what matters” currently)
Flat Tires: I’ve seen this metaphor variously floated on twitter and I’ll poach it because I think its sufficiently captures the dynamic. If you get nail or other puncture in your tire, the tire doesn’t go flat right away ---- everything is mostly fine initially but gradually progresses to full incapacitation somewhere down the (literal) road.
Conceptually, macro-policy dynamics aren’t materially different. Recall, the outside lag on policy – the Feds view of how long it takes enacted policy to flow through the real economy – is something like 6-18 months. In other words, the largest impulse of the rates crescendo has yet to make its way through to main street activity, capex proclivity and profits. The fact that macro conditions are reflexive and self-reinforcing only amplifies the uncertainty/risk associated with policy lags.
Chicken Cutlet Theory: Full Chicken breast are the scourge of flavor enjoyooors and strident keto/paleo disciples because they are notoriously resistant to simple marination. Fileting the breast makes it decidedly more amenable to absorbing the seasoning and enhancing flavor. It’s mostly about optimizing the surface area of exposure. The more surface area the greater the capacity for impactful interaction.
As we’ve highlighted, slowing growth increases macro fragility & expands the surface area of risk for both known and unknown unknowns. The Quad sequencing and expectation for protracted Quad 4 conditions represents a further expansion of the risk surface area and higher probability that acute volatility clusters will continue to manifest.
And this is trivial, but for whatever reason needs to be occasionally reemphasized:
A “call” doesn’t have to play out in actuality or in an absolute sense. It only needs to shift towards more probable.
Was our baseline expectation for 4 Quad 4’s in a row?
Yes.
Do we have perfect conviction in that call?
Of course not.
But thus far we’ve only needed the market to go from discounting that potentiality from 0 to something more than 0 to get paid.
We think that probability shift still has runway.
New Day, Same Ladder, Next Rung.
Christian B. Drake
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.67-4.02% (bullish)
UST 10yr Yield 3.62-3.96% (bullish)
UST 2yr Yield 4.34-4.59% (bullish)
High Yield (HYG) 72.99-75.25 (bearish)
SPX 3 (bearish)
NASDAQ 10,849-11,325 (bearish)
RUT 1 (bearish)
Tech (XLK) 126-134 (bearish)
Energy (XLE) 88.80-93.98 (bullish)
Consumer Staples (XLP) 73.22-77.39 (bullish)
Healthcare (XLV) 133-138 (bullish) `
Shanghai Comp 3039-3169 (bearish)
Nikkei 27,793-28,395 (bullish)
DAX 13,904-14,589 (bearish)
VIX 19.94-25.76 (bullish)
USD 105.52-110.11 (bullish)
Nat Gas 5.90-8.02 (bullish)
AAPL 137-148 (bearish)
Bitcoin 15,713-17,713 (bearish)
