“I have started to think that the great, decisive moments that broadly govern our lives are far less conscious at the time than they seem later when we are reminiscing and taking stock.”
- Sándor Márai
Today is our annual company meeting. We will take time to review 2022 - discuss the wins, scrutinize the mistakes, and lay out plans for 2023. We've had another strong year, so it will be a positive vibe. As always, though, analyzing and discussing where we went wrong this year will be the best use of our time.
The Annual Review of Psychology had an interesting study on just this topic in a 2017 article titled, “Learning From Errors”. The conclusion was as follows:
"Experimental investigations indicate that errorful learning followed by corrective feedback is beneficial to learning. Interestingly, the beneficial effects are particularly salient when individuals strongly believe that their error is correct: Errors committed with high confidence are corrected more readily than low-confidence errors. Corrective feedback, including analysis of the reasoning leading up to the mistake, is crucial."
If we apply this study to learning from our mistakes as investors, the implication is that we should focus more of our review on investments that we were most confident in, but ultimately got wrong. There are a fair number of venture capital firms that may be served well by this in their year-end reviews!
We often discuss the importance of using a notebook in your investing process. After all, how are you going to learn from your mistakes if you don't write then down?
The benefit of disciplined study and process improvement in your investing can be massive. For example, if you can take your annual return from 11% to 15% or your positive trade ratio from 51% to 53% the positive compounding effects on your family and customer's hard-earned capital can be massive over time.
We will always make mistakes in life and investing, but the key is to learn and evolve from them. Especially in those instances where you’ve had very high conviction . . . but were ultimately wrong. In fact, as it turns out, those are the easiest errors to correct.
Back to the Global Macro Grind…
The opportunity to take stock on inflation came with yesterday's CPI report. While it is old news at this point, both Headline and Core CPI slowed faster than expectations. Specifically, Headline CPI came in at +7.1% Y/Y and Core CPI came in at +6.0% Y/Y.
The immediate reaction from risks assets was a rip higher, but ultimately stocks closed near their lows. The biggest miss on the day was probably from J.P. Morgan, who, heading into the print, had various probabilities (all round number probabilities of course!) for a potential move in the SP500 based on the inflation number. No surprise, J.P. Morgan had no scenario where the SP500 closed up, or down, between +2% and -2%, which is where it did. Another golf clap for The Old Wall!
Stepping back for a second, it is important to take stock of the historical significance of the current inflation regime. As the Chart of the Day shows, even with the recent deceleration we are still at levels of inflation not seen since the early 1980s. In fact, inflation in 1982 averaged a mere +6.2%. Incidentally, the Fed Funds rate ended 1982 at +8.95%. Meanwhile, if things go as they should today the FOMC target rate range will be at 4.25% - 4.50%.
As has been the case for most of the year, investors will be hanging on Chair Powell’s every word. The bulls will be looking for some hint of incremental dovishness. While conversely, the bears will be looking for incremental and/or continued hawkishness. Our view of the most likely outcome is that Powell sticks with the mantra of “higher for longer” because while inflation has slowed, wage growth remains high, unemployment remains low, and key consumer cost centers are still ramping at +7.7% Y/Y. (The consumer cost center basket from CPI includes: food at home, medical, shelter, wireless, and utilities.)
In the last couple of days, we’ve also had a series of inflation reports from Europe. This morning U.K. CPI came at +10.7% Y/Y, Sweden at +11.5% Y/Y, and Spain at +6.8% Y/Y. This is on the back of German CPI from Tuesday which registered +10.0%. Now, on the positive, in some cases inflation is decelerating. But if we sit back and consider those numbers, good gosh are they awful. Luckily, the ECB can do something about it on Thursday. With a current interest rate of 1.50%, there isn’t a lot of discussion about the ECB getting dovish given these levels of inflation!
On the other hand, the economies of Europe are clearly slowing (which should eventually slow inflation!) and we had another reminder of that with Eurozone Industrial Production which slowed to +3.4% Y/Y from +5.1% Y/Y in the prior month. This is on the back of yesterday’s Eurozone Zew Economic Sentiment Indicator, which came in at an ugly negative -23.6.
Luckily there is a solution for when country data is not great, which is to simply not report. This is what we are getting from China this morning as the CCP decided to no longer report COVID-19 data, or at least drastically alter what they are reporting. Sadly, Keith won’t let us get away with that today at the Hedgeye Annual meeting!
At the moment our current Macro ETF long positions are as follows: UUP, BTAL, IEF, ITA, XLP, XLV, GDX, GLD, PPLT, BUL, EWJ, PINK, XLU, SLV, TUR, SQQQ.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.38-3.76% (bearish)
UST 10yr Yield 3.39-3.73% (bearish)
UST 2yr Yield 4.16-4.48% (bullish)
High Yield (HYG) 73.87-76.32 (bearish)
SPX 3 (bearish)
NASDAQ 10,719-11,410 (bearish)
RUT 1 (bearish)
Tech (XLK) 126-137 (bearish)
Consumer Staples (XLP) 75.21-77.50 (bullish)
Healthcare (XLV) 137-141 (bullish)
Utilities (XLU) 69.86-72.92 (bullish)
Shanghai Comp 3123-3235 (neutral)
Nikkei 27,500-28,255 (bullish)
VIX 19.11-25.47 (bullish)
USD 103.69-107.99 (bullish)
Oil (WTI) 68.01-79.04 (bearish)
Nat Gas 5.20-7.23 (neutral)
Gold 1 (bullish)
Silver 21.90-24.37 (bullish)
TSLA 155-187 (bearish)
Bitcoin 16,333-17,997 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
