“42 years is far too short a time to get to know such excellent and admirable humans.
I don't know half of you half as well as I should like;
and I like less than half of you half as well as you deserve."
-Me, 12/25/22 (h/t Bilbo Baggins)
I went with the Bilbo Baggins Lord of the Rings intro to lead off my holiday dinner speech.
It was received with blank stares and thunderous silence.
Ironically, the reception actually proves the veracity of the “how-well-I-know-you” comment!
Perhaps being unfamiliar with the Bilbo speech says more about “the company I keep” than about me … that’s what I’m choosing to tell myself at least.
It’s worth noting that the speech L came directly on the heels of a similarly epic gift giving L.
For whatever reason my daughter’s gift list this year was shoe-centric (slippers, crocs, sneakers, boots, etc).…
But there’s a hard nonintuitive, non-commonsensical truth about transitioning from girls/kids sizes to womens/adult sizes:
Girls/kids shoe sizes end at size 4 and women’s shoe sizes begin at size 5.
But you don’t just cleanly transition up …. As it turns out, a kids size 4 is equivalent to woman’s size 6!
There is a massive WTF shoe size discontinuity that they don’t teach you at dad school.
Anyway, I bought all women’s size 5’s (all too small) and took an egregious holiday L.
Back to the Global Macro Grind ….
In investment & macro fundamental performance space, the L’s on the long wrong only side were relentless in 2022.
That didn’t change yesterday:
Sales Fails: The U.S. ushered in the weekend with an exquisitely underwhelming 0% PCE growth and the largest sequential decline in Durable Goods orders since the pandemic. Japan greets investors back with negative Retail Sales growth and the worst print in five months. Meanwhile, Mastercard (Spending Pulse) data shows holiday spending up a full zero percent on real basis.
Wat? U.S. Retail Sales in October were better than expected but primarily because Cali chose to fight inflation by … issuing stimulus checks! Spain just blinked and decided to do the same while Japan is tightening policy …. by doing more QE.
#DownOnly: Japan Industrial Production accelerated (down) to -1.3% Y/Y, South Korean Business Confidence fell -3pts to 71 and all the concurrent-to-lead indicators on global activity and the domestic profit cycle remain #DownOnly …. Japan Machine Tool Orders Y/Y (-7.7% Y/Y), South Korean Exports (-13.9% Y/Y), Singapore Electronic Exports (-20.2% Y/Y), Taiwan Electronic Exports (-15.2% Y/Y). Oh …. and TSLA is flirting with a casual $1T decline in bubble cap and probably set to shed another couple Twitters in market cap this morning.
What Said Fed? The Dallas Fed extended the streak of Ls out of the Fed Regional Surveys, dropping -4pts to a reading of 18.8 and replete with capitulatory commentary such as “Recession is now being planned for and acted upon.”
Nicki-leaks latest: Nick was out again highlighting the deceleration in home prices and the new Fed market rent index. This (re)framing of HPI relationship to reported CPI will obviously continue. Again, as we highlighted back on 10/25 …. “The Fed, of course, knows the HPI data flows through OER/Shelter CPI Inflation on a lag. They spoke to the deceleration in market rate rents for the 1st time last week (10/17)… so they are baby-stepping the communication and will fully pivot to this framing, but only when it becomes convenient.” It is becoming progressively more “convenient”.
Liquidity: There were zero fed bids in the 2Y TSY auction, M2 money supply down Y/Y for 1st time in 60 years in 2022 & QT is progressing.
Aptly, 2022 will close with unresolved ambiguities and more questions than answers:
- Can deglobalization & inflation targets associated with peak globalization coexist?
- Can housing affordability really improve materially if supply falls faster than demand?
- Is increased leverage for labor a positive if it means inflation ↑ (or sticky) which is a net negative for purchasing power for most of the people supplying that labor?
- Fragility manifests first on the fringes then metastasizes inward … In the present case we’re seeing acute fragility at the high beta/unprofitable fringe (i.e. unprofitable Tech layoffs ↑↑, etc) that is set to propagate up the “quality” hierarchy as conditions deteriorate further and the main thrust of higher rates makes its way to main st/real economic activity. Can we really see this inward propagation reverse so long as Quad 4 remains the prevailing macro trajectory?
- If liquidity is contracting can the stuff priced in that liquidity really inflect?
The liquidity question remains the most top-down and both the most simple and perhaps most important question.
Is a financialized and leveraged global economy more than just a single factor model anchored on liquidity when that liquidity is experiencing outsized moves?
Again, if liquidity is contracting (M2 and spendable credit both declining) what happens to stuff priced in that liquidity (profits, asset prices, etc)?
To redux crypto-as-a-case-study because it cleanly illustrates the point:
Volatility is elevated (negative for high beta speculative), macro liquidity is in reverse (higher rates + QT), retail liquidity is in reverse (asset prices ↓, discretionary income ↓), market participation/liquidity is weak and falling (new address activity and on-chain transaction volume both ↓) and aggregate token/coin supply is rising. In other words, and simply, you have less people with less money and crypto ‘supply’ increasing. Can you really have more than sirenic false dawns & chop PvP markets so long as those conditions persist?
We have been short crypto based on the gravity of that simple underlying reality all year.
Lastly, to 180 this bad boy, inject some holiday vibe and wrap it on a lighter note.
I kindly invite you to take a moment to rubberneck some shenanigans and indulge in a couple of my favorite examples of dudes (& girls) taking (very) public Ls over the past year:
A lesson that comes primarily with age/experience is that “unlearning” is many times more impactful to (life & market) performance than de novo learning.
As always, today is the next best opportunity to level up your awareness, deconstruct then reconstruct your conceptual framework and level up your process.
Remember ….
“Calls” come and go. Process they can’t take from you!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.40-3.97% (bullish)
UST 10yr Yield 3.39-3.90% (bullish)
UST 2yr Yield 4.17-4.39% (bullish)
SPX 3 (bearish)
NASDAQ 10,119-10,884 (bearish)
RUT 1 (bearish)
Tech (XLK) 119-128 (bearish)
Shanghai Comp 3010-3137 (bearish)
Nikkei 25,517-27,455 (bearish)
DAX 13,613-14,392 (bearish)
VIX 20.08-25.31 (bullish)
USD 103.39-107.14 (bullish)
EUR/USD 1.029-1.069 (bearish)
Gold 1 (bullish)
Silver 22.88-24.93 (bullish)
TSLA 103-141 (bearish)
Bitcoin 16,114-17,401 (bearish)
Best of luck out there today,
Christian B. Drake
