“Individually focused and collectively adrift, we wonder if we’re heading towards a waterfall”
- Neil Howe, The 4th Turning
There’s no sugar-coating things brohs!
As we breach the threshold of history’s next gate and attempt to navigate the intensifying convulsions of the 4th Turning, I’ll endeavor to serve as your humble Sensei of Zen.
I’m your Zensei!
Now gather close …. for today is a day of the sweetest vintage.
A day we unshackle from the chains of learned helplessness, extricate ourselves from the hollow trappings of modernity and self-absorption and Marshall the fates in the service of psycho-spiritual metamorphosis.
Today we welcome our rendezvous with spiritual catharsis with open arms & supplicant ego.
A day we cast aside the reputational albatross of divisiveness and splintered cultured, rebirthed in a fresh humanism and with renewed ambition.
Today we shed the oppressive yoke of collective disenchantment, veto the Faustian bargain of perpetual short-termism and redirect the entropy of lost purpose to the service of something greater than ourselves.
From this moment, we no longer view our own life trajectory from the shadows as some kind of passive observer of someone else’s journey. Today we define the destination & lead from the front.
With new resolve, we dedicate to architect a new saeculum whose construction we will never see completed and whose fruits only future generations are likely to harvest.
With that inspired call to action, I ask you to channel that energy and frenzied motivation and prepare for some …… reading!
The above is tongue in cheek (but only kinda) but is really meant to serve as a sincere appeal to read The Fourth Turning if you haven’t already (or read it again).
The cycle context is macro critical as The 4th Turning crescendo climaxes here in real-time.
It’s also critical context ahead of the imminent release of The Fourth Turning Is Here
If you skip the rest of this note to order it or dive in, mission accomplished.
Back to the Global Macro Grind …..
“Eventually cynical alienation hardens into brooding pessimism. … eliciting a mix of paralysis & apathy… people can now feel but collectively can no longer do.”
– Neil Howe
So let’s do ….
As pretext to contextualizing yesteday’s high frequency data, I want to redux one of Monday’s Top 3
Caveat (awareness): Warmer weather, Omicron comps, statistical updates/distortions, COLA increases, minimum wage increases for 23 states, inflation index adjustments to the tax rate (i.e. less taxes collected/more nominal income) all (positively) impacted the January figures to some varying degree. Meanwhile, credit card delinquencies are at cycle highs, auto loan delinquencies are at all-time highs, Supplemental SNAP benefits just expired and an end to the Student loan moratorium is in queue. Can you cleanly disentangle all of that? Of course not. Macro (& nuance) awareness matters with respect to contextualizing and orienting in tactical space but that’s just one dimension of Cycle awareness. Cycle gravity drives TREND returns and there remains no change in the cycle trajectory.
Now ….
Credit: Revolving credit (i.e. credit card debt) rose +11.1% (M/M annualized) in January, accelerating +10bps to +15.6% Y/Y. We’ve detailed the evolving Demand deceleration, Savings ↓, Credit Card Balance Growth ↑↑, Credit Card Interest Rate ↑↑ dynamic for quarters now and revolving credit trends are showing no relent despite the cost of that debt exploding. A meaningful deceleration in consumption in conjunction with a meaningful decline in revolving credit growth would be a notable signal that consumers are indeed beginning to tap out. Preliminary BofA card spending data for February showed a notable drop-off.
Consumer: Redbook sales fell to a new cycle low at +3% in the latest week – that data is reported nominally so real sales growth went negative. Meanwhile Consumers Optimism around their Personal Financial Situation fell to an all-time low (data back to 2010) in the latest month according to Fannie Mae.
As we highlighted yesterday …
K-Shape Comeuppance → If you have excess savings and a low MPC then you generally enjoy higher rates on that largely idle cash. If you have little liquid savings and a lot of debt whose cost tethers directly to the fastest increase in rates ever is not standard of living … and since you are not the owner of capital or excess savings (which are not mutually exclusive) you generally become the ‘owner’ of job loss and acute income insecurity as the cycle turns south. We’ve now reached the transition/discontinuity point where the short-term treatment (pandemic related policy support) exacerbates the underlying (inequality) disease. The 4th Turning crescendo remains in motion …
Curve (from KM): I’ve been signaling a Yield Curve Inversion on 10s2s of greater than 100bps for about 6 months now so the Old Wall is going to “analyze” what that meant in 1981 now with the curve at a bone-chilling new Cycle Low of -107bps this morning. All the while the longest end of the curve (30yr Yield) continues to breakdown below the 10yr yield which is a nasty #GrowthSlowing Signal too.
Curve, pt2: As a reminder, Inversion is the pre-text, Re-steepening is the (recession) Signal. The Curve flattens as the cycle ages and policy tightening supports short-rates while dampening the longer-term growth/inflation outlook. Re-Steepening begins alongside expectations for a Policy Mistake/overtightening as the market begins to discount policy easing and short-end rates begin to slide. Actual rate cuts then begin shortly thereafter followed by Recession. That is the typical (& historically consistent) procession.
JOLTS: The historically wide spread between Job Openings and available workers remains a primary source pool of angst for policy makers explicitly focused on resolving the persistently acute labor market imbalance. Almost all of the alternate measures (Indeed, UBS, etc) of Job Openings have shown notable deceleration – a slowdown which consensus expects to manifest in today’s JOLTS reading for January. A couple quick points:
- The response rate to the JOLTS survey (& in survey data more broadly) has been in steady and meaningful decline post-COVID (JOLTS current response rate = 30% vs ~60% in 2019) which means the reported data is more model based and likely less accurate in capturing the underlying reality.
- Also, reported Job Openings have likely been in secular inflation as it’s become virtually costless to post a job opening (relative to the intensity of doing so historically) so employers have progressively cast a wider without necessarily having an acute need or desire to hire. The implication is that the series isn’t exactly apples-to-apples when making historical comparisons.
Mortgage purchase Applications: After two weeks of consecutive 28Y lows, Mortgage Purchase volumes went dead cat to start march, rising +11.2% W/W (-42.3% Y/Y) to 154.4 on the index (lowest since 2014 outside of the last two weeks). The asterisk associated with the last two weeks still apply. That is:
- Despite the retreat in institutional/investor interest, the share of all-cash home purchases remains at elevated levels and so the magnitude of decline in purchase apps may continue to modestly overstate the decline in aggregate transaction volume.
- Feb Distortion → The Purchase app series has seen a somewhat anomalous pattern of mid-February weakness over the past few years which subsequently resolves higher. We don’t have a great explanation for the recurrent, transitory distortion but it’s been pronounced in each of the past two years. All/some of the observed weakness in recent weeks may/may not show a similar pattern. The bounce in the latest weeks suggests a continuation of that February pattern.
- New Week, Same Conclusion: Higher highs in the terminal rate and higher-for-longer across the curve = lower-for-longer with respect to demand/supply conditions for housing.
Rates Vol: Rates Vol remains on the boil with MOVE up another +5.1pts yesterday and +30 bps in the past month. Policy angst and the associated rates volatility has led equity vol, Fx vol and Fx correlation trades over the TTM. Through the lens of housing, recall the cadence from October/November, which saw:
- Rates Vol (MOVE) and terminal policy rates pricing both peaked
- Nominal TSY/30Y FRM Rates Peaked
- Housing equities-rates correlation peaked
- MBA Purchase Apps bottomed
- Housing related equity outperformance began
The (liquidity supported) bounce in equities followed the same rates vol-centric timeline.
We are on back on the wrong side of that factor confluence currently.
Of course, after you get reflexive pricing and asymmetry is lost, you get scope for some countertrend action.
The issue – as we’ve seen recurrently, and when the Quad4 trajectory remains unchanged – is that medium-term challenges remain unresolved & devoid of catalysts for durable inflection so all you really get is more chop.
“During each turning, Americans celebrated an ethos of frenetic and laissez-faire individualism yet also fretted over social fragmentation and economic and technological change that seemed to be accelerating beyond society’s ability to absorb it”
- Neil Howe
Does that resonate (institutional decay, cancel culture, intensifying geopolitical frictions, crypto, AI, etc)?
Cycle awareness remains your quantum of Zen in the storm of macro-social volatility.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.81-4.01% (bullish)
UST 10yr Yield 3.83-4.09% (bullish)
UST 2yr Yield 4.68-5.05% (bullish)
High Yield (HYG) 72.95-74.90 (bearish)
SPX 3 (bearish)
NASDAQ 11,261-11,729 (bearish)
RUT 1 (bearish)
Tech (XLK) 133-141 (bearish)
Defense (ITA) 114-118 (bullish)
Shanghai Comp 3 (bullish)
DAX 15,145-15,688 (bullish)
VIX 18.12-22.97 (bullish)
USD 104.01-105.84 (bullish)
EUR/USD 1.050-1.067 (bearish)
Oil (WTI) 73.94-80.88 (bearish)
Nat Gas 2.24-3.12 (bearish)
Gold 1 (bullish)
Copper 3.90-4.15 (neutral)
Silver 20.02-21.76 (bearish)
TSLA 181-210 (bearish)
Best of luck out there,
Christian B. Drake
