“History always produces sparks. But some sparks flare and then vanish, while others touch off firestorms.”
- Strauss & Howe, The Fourth Turning
Last week I aspired to serve as your humble Zensei.
I remain committed to that role but this week I’ll also larp as your grizzled macro shaman.
Both analytical homily’s draw inspiration from The Fourth Turning.
The Headline quote above begins an exposition that explores how predictable cyclicality can exist within a complex, dynamic system characterized by free will and all manner of chance and accident.
“History always dishes out accidents. What matters most is not the accidents themselves, but societies response to them.”
Empirically, history has demonstrated cyclicality in generational archetypes. The zeitgeist associated with the collective experience of each archetype/generation shapes how they receive & respond to situations.
The nature and sensitivity of response represents the psycho-emotional backboard against which social/technological/geopolitical sparks are received … and determine whether those sparks benignly dissipate or propagate and intensify.
That’s a vast oversimplification but that’s the gist of it.
Like the 4 phases of the saeculum, there are 4 Quads in the GIP model.
And there is persistent cyclicality in the economic and policy zeitgeist associated with each. And each demonstrates a unique sensitivity to macro stimuli.
Stimuli or stressors that would benignly dissipate in a Quad1 or Quad2 high growth environment, spark firestorms during the throes of a Quad 4 unraveling.
What matters most is not the stimulus itself, but “macro’s” response to it …. which has been historically consistent and is (mostly) predictable.
It’s internalizing this broader reality and building a framework for operating inside of it that allows you to execute effectively (and calmly) at the frenzied nexus of macro complexity and uncertainty.
Back to the Global Macro Grind …..
It was exactly a year ago that the tightening jihad commenced and approximately 11 months ago that we introduced the FOBS (Fed Operation Break $hit) moniker – a kind of broad arc conceptual construct for understanding the probable interconnected macro-policy evolution.
The breaking of ‘stuff’ reached a local climax in Oct/Nov alongside the crescendo and cresting in rates vol and simmering existential angst for the pound et al.
We clearly reached another breakpoint last week – a spark that continues to flare and looks set to engulf Credit Suisse this morning.
Remember how the liquidity-volatility loop plays out:
- volatility spikes → liquidity goes down → price moves get amplified → vol spikes more → and you get stuck in a negative vol-liquidity-price spiral.
That is the reflexive feedback loop that drives non-linear (price) outcomes.
And, in the present instance, the macro-verse has remained rates vol-centric with volatility shocks propagating outward and leading equity and cross-asset class vol.
Again, it’s not the specific ‘grain of sand’. Global macro dynamics will always produce sparks …. it’s the sensitivity threshold inherent in the macro condition set (i.e. The Quad) that makes the market implications both predictable and inevitable.
Getting comfortable with the inevitability helps mute any angst associated with the uncertainty of not knowing what the specific spark will be or when exactly the tinder box will ignite.
Alright, lets quickly examine the latest fundamental sand grains to fall atop the Quad 4 pile:
- CPI: Acute financial stability risks will always outweigh medium-term price risks but, in isolation, yesterday’s price data was not supportive of a hawkish relent. The chart below is not what one would objectively characterize as “progress” or “mission accomplished”
- Real Earnings Growth: Real earnings growth held negative for a record 23rd consecutive month in February. You know the story well (savings rate ↓, savings ↓, revolving credit ↑, etc).
- NY Fed Consumer Survey: In an inauspicious encore to last month’s largest sequential decline ever, households Expected Income Growth leaked lower again in February while Expected Household Spending Growth fell for a 4th consecutive month.
- Rates Pricing: From a near-certain 50 bps hike to no hikes to 25bps …. (and back to zero this morning) in the span of a week. Again, the market is not pricing anything with precision or conviction at the moment. It’s simply a reflection that macro conditions and expectations are not the same as they were a week ago.
- NFIB: Hollow, dead-cat victory with small business sentiment bouncing +0.6 pts to sit just north of cycle lows. With the Forward Outlook falling, Compensation Plans rising, Earnings & Sales still negative, Inventory Satisfaction deteriorating, and Inflation and Labors Cost concerns both ticking higher , February was largely a potent dose of ‘meh’. And inclusive of a nascent banking crisis, asset price deflation, tighter credit and higher spreads, March doesn’t look set to materially diverge from underwhelming either.
- Crude/Commodities: When you get the confluence of Quad 4 demand destruction and canonical Quad 4 $USD strength the Oil & Commodity charts …. Look exactly like the current oil & commodity (-21.2% off peak) charts …. Bathed in alarming hues of rouge and exuding that special down-and-to-the-right vibe.
- META: With job loss announcements inflecting and Jobless Claims signaling a potential inflection after last weeks increase, the labor weakness continues to META-stisize with Zuckerberg completing the layoff hat-trick, announcing the firing of another 10,000 workers on the way to fulfilling his ‘year of efficiency” agenda.
And lastly, If you’ve remained willfully blind to the scope and pace of ai evolution, it’s time to shed that techno-phobia.
- GPT4: in the last 24 hours, we’ve seen GPT4 turn a napkin sketch into a fully functional website with code, autonomously hire (trick) a human to help it bypass a captcha, identify and detail vulnerabilities in smart contracts, interpret/generate quality copy across a broad cross-section of domains, effectively ace (top 10%) standardized tests, generate prompts that when integrated with Midjourney/DALL-E can autocreate movies in a (very) short period of time, etc.
The future is here, its just not (and won’t be) evenly distributed.
To the continued slaying of life’s demons and securing your seat in Valhalla!
Skol!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.60-4.04% (bearish)
UST 10yr Yield 3.48-4.13% (bearish)
UST 2yr Yield 4.00-5.10% (bearish)
High Yield (HYG) 72.38-74.22 (bearish)
SPX 3811-3976 (bearish)
NASDAQ 11,017-11,593 (bearish)
RUT 1 (bearish)
Tech (XLK) 133-142 (bearish)
Defense (ITA) 111-118 (bullish)
Shanghai Comp 3 (bullish)
Nikkei 27,072-28,226 (bearish)
VIX 21.06-29.13 (bullish)
USD 103.11-106.38 (bullish)
EUR/USD 1.048-1.074 (bearish)
USD/YEN 133.09-138.08 (bullish)
GBP/USD 1.176-1.218 (bearish)
Gold 1 (bullish)
Copper 3.87-4.09 (bearish)
TSLA 163-193 (bearish)
Bitcoin 18,997-25,911 (bearish)
Christian B. Drake
