“Even great men bow before the Sun; it melts hubris into humility.”
-Dejan Stojanovic
One of my favorite cities in the world is Mexico City, or Ciudad de Mexico (CDMX).
If not for the killer air pollution, elevated earthquake risk, and sinking buildings (the Aztecs built the city on a lake), I could easily see myself living in what some call the “New York City of Latin America”.
The city’s central neighborhood, where the Spanish began building atop the ruins of the conquered capital of the Aztec Empire in the 16th century, is called Centro Historico and houses the opulent Palacio de Bellas Artes, an early 20th century, all-marble national theater built with an eclectic mix of Neoclassical exterior and Art Deco interior – think Arc De Triomphe meets Rockefeller Center.
Inside this landmark structure one will find the large frescos of Diego Rivera, most notably “Man, Controller of the Universe”, a recreation of a mural originally commissioned for the lobby of 30 Rockefeller Plaza that had been removed and destroyed due to criticism over its romanticized communist iconography and Rivera’s refusal to remove a portrait of Lenin from the work.
The central scene of the painting depicts a workman, controlling heavy machinery with the use of a joystick device, nested within vivid imagery representing humankind’s scientific mastery of the natural sciences. The remainder of the mural is filled with scenes of contemporary social life depicting class struggle and visions of socialist utopia.
While on holiday this time last year, I sat in front of Rivera’s piece reflecting on the dangers of today’s “cult of experts” and Eisenhower’s warnings about the capture of public policy by a “scientific-technological elite” in his famous farewell speech. As I examined the painting’s main scene once more, I smirked and thought: “this must be how central bankers view themselves”.
Back to the Global Macro Grind…
The economy and financial markets are fundamentally different from the deterministic systems observed in the natural sciences; they are systems unrivaled in their complexity.
Expert hubris in central banking and financial risk management has had disastrous consequences in recent history and can be explained by a thirst for top-down control and the willful conflating of social science for natural science.
Frequentist methods offer a false sense of precision and confidence – the parameters they are built upon fail at exactly their moment of critical need. Take the performance of a 60/40 portfolio this past year as an example.
Dealing with complexity requires humility.
At the core of the Hedgeye process, which combines economics, behavioral psychology, Bayesian inference, and the historical-cultural method, is this very acknowledgement.
The name of the game has always been capital preservation and steady compounding, not fairytales of “Santa Rallies” or hopes of “Soft Landings”.
Few things speak to expert hubris and the illusion of control quite like the “Soft-Landing” narrative.
Heading into 2023, we are met by an invariably negative setup and lengthy downhill path remaining in this increasingly probable, protracted Quad 4 slog:
- We have a slowing consumer marred by face-ripping inflation in core consumer cost centers and trailing nominal wage growth, evidenced by the evaporation of excess pandemic liquidity and record credit card balance growth
- A higher cost of money came with demands for profitability, spurring layoffs in unprofitable tech. As the slowdown in growth broadens and a higher hurdle rate depresses new projects, the corporate profit recession will take more victims.
- We remain in a new, higher inflation volatility regime brought on by deglobalization, confounding energy policies, war, and a wholesale disregard for fiscal prudence at a time of record government indebtedness
- The liquidity withdrawal (M2 YoY decelerated to a 60-year low of 0.0%) brought on by rate hikes and now full-stride QT is a nightmare for today’s financialized and leverage economy
- There remains a worrying question about treasury market stability considering the level of government indebtedness and deficit spending, maturing debt schedules and rising debt service costs, and a diminished appetite from foreign buyers
In a complex system, the phenomena of emerging properties and interaction effects allow for exponential rises in uncertainty, and, for good reason, markets hate uncertainty. The inverted yield curve captured in this morning’s chart of the day speaks clearly to the implications of the above.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.47-4.08% (bullish)
UST 10yr Yield 3.44-3.97% (bullish)
UST 2yr Yield 4.17-4.39% (bullish)
SPX 3 (bearish)
NASDAQ 10,118-10,801 (bearish)
RUT 1 (bearish)
Tech (XLK) 120-128 (bearish)
Consumer Staples (XLP) 73.62-75.90 (bullish)
Shanghai Comp 3001-3139 (bearish)
Nikkei 25,655-27,231 (bearish)
DAX 13,671-14,217 (bearish)
VIX 20.13-25.20 (bullish)
USD 103.36-107.01 (bullish)
Gold 1 (bullish)
Silver 22.99-24.90 (bullish)
TSLA 100-137 (bearish)
Bitcoin 16,124-17,118 (bearish)
Best of luck on the last trading day of year and wishing everyone a happy new year.
Drago Malesevic
