“You cannot conceive the many without the one.”
-Plato
The meerkat is a small mongoose found in southern Africa. They are cute little critters with broad heads, large eyes, a pointed snout, and long legs. The meerkat is much more appealing than its distant relative . . the lemming.
At this point, you might be rightfully asking where I am going with this and what, if any, relation does this have to the markets or economy. The reason I bring up meerkats is that recently Keith has recommended that our team read a book by Andrew Chen called, “The Cold Start Problem: How to Start and Scale Network Effects.”
In the outset of the book, Chen states something that would be appalling to many tech venture capitalists. Specifically, he writes that “Metcalfe’s law is a simple, academic model that fails the test of real life messiness.” Instead, he proposes a few alternatives, including Meerkat’s Law.
Meerkats are a highly social creature that live in groups of thirty to fifty animals. Interestingly, these clusters of meerkats are called “mobs” or “gangs”. (Thank me for that fact the next time you play trivia with your kids!) By hanging out in groups, they are able to more effectively avoid predators by having many sets of eyes that can stay alert to avoid a larger group of potential threats.
Unfortunately, if they are too few meerkats in the mob it is likely that a predator will evade the watch and pick off individual members and the population will be at risk. Conversely, if there are too many meerkats in the gang then resources become limited (in the case of meerkats this usually means bugs and fruits) and the group starts to shrink / underperform. In the network world, this is called “overcrowding”.
To me this is a somewhat long-winded analogy for our recent Hedgeye Live conference in Greenwich, CT. One question we received after the conference is whether all of our speakers, both internal and external, are operating in an echo chamber of, to simplify, bearishness. (Although we are long many assets as I highlight at the bottom of the note!)
It is certainly possible that is the case. An alternative idea is that we are a gang of thoughtful meerkats sounding the alarm for the market predators all around us. Time will tell.
Back to the Global Macro Grind . . .
At +4.9% Y/Y on Headline and +5.5% on Core, yesterday’s April CPI report was basically exactly in line with consensus expectations. It was also a deceleration from the prior month and on the Headline side the first time CPI has been below 5.0% in two years. The immediate reaction from Fed Funds futures was to largely take any future rate hikes off the table.
On one hand, this slowing of inflation is good for the consumer. On the other hand, even at 4.9% on Headline we remain at the highest level of CPI since the early 1990s (setting aside a brief period in 2008 when CPI spiked to 5%). So, by any historical measure we remain at very high levels of inflation. Further compounding the issue for consumers is that we now on to the 25th straight month of negative real earnings.
We will get another important inflation related data point at 8:30 a.m. today with April PPI. Expectations are even more muted than they were for CPI with a consensus estimate of a +0.3% M/M increase for Headline PPI and +0.2% increase for Core PPI.
Over in Europe, the inflation story is less sanguine. Both today and yesterday, we had CPI for April reported across Europe. Other than Greece printing a +3.0% CPI number, all of the European reports were higher than U.S. CPI. Most notable of these was Germany, which came in with a hot +7.2% CPI print. This is likely why we have had a flurry of hawkish comments out of the ECB in recent days with the general sentiment being that rate hikes should continue into the September / October time frame.
Although no longer part of Europe, or at least the Eurozone, the U.K. raised rates again this morning taking its benchmark rate to the highest level since 2008. In its commentary, the BoE also made it clear that more rate hikes may be needed if inflationary pressures persist. Hawkish is as hawkish does.
Back in the U.S. the recently decelerating inflation data may soon be overshadowed by the looming debt ceiling issue. In the Chart of the Day, we take a look at 1-year credit default swaps on U.S. Treasuries. At the moment, they are north of 150bps. To put in context, this is up some 10x from December of 2022 and also higher than we saw in the 2011 debt ceiling showdown. It's also well above the current CDS levels of the likes of Greece, Mexico, and Brazil.
Not to be a pesky and over alarmed meerkat, but if we are to believe Treasury Secretary Yellen the next few weeks are critical on this front. According to Yellen, the Treasury risks running out of room to stay under the debt ceiling by as soon as June 1st. Said another way, this may be the day that the government runs out of options to fund itself. X-Day, as they call it, is getting closer . . . so buckle up!
At the moment, our top Macro ETF positions on the long side are as follows:
- FDRXX, BTAL, IIGD, IEF, XLP, XLV, SLV, IGIB, AAAU, GLD, GDX, TLT, CTA, PFIG, PINK, BNDD, EWJ, SIL, GDXJ, RYU, PPLT, PSCC, XLU, SQQQ
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.63-3.90% (bearish)
UST 10yr Yield 3.29-3.58% (bearish)
UST 2yr Yield 3.75-4.21% (bullish)
High Yield (HYG) 74.03-75.08 (bearish)
SPX 4046-4159 (bearish)
NASDAQ 11,812-12,362 (bearish)
RUT 1 (bearish)
Tech (XLK) 146-153 (bearish)
Gold Miners (GDX) 33.03-36.32 (bullish)
Utilities (XLU) 67.89-69.75 (bullish)
Staples (XLP) 76.01-77.99 (bullish)
Nikkei 28,464-29,496 (bullish)
VIX 16.01-20.75 (bullish)
USD 100.75-101.99 (neutral)
CAD/USD 0.729-0.751 (bearish)
Oil (WTI) 67.11-75.03 (bearish)
Oil (Brent) 70.83-79.04 (bearish)
Gold 1 (bullish)
Copper 3.74-3.94 (bearish)
Silver 24.73-26.41 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
