“History is not the past but a map of the past, drawn from a particular point of view, to be useful to the modern traveler.”
-John Jay Chapman
I thought the quote at the start of this note was an apt description of how we use history at Hedgeye. As you know, we are very quantitative in our methods, but we still incorporate the valuable context of the economic map provided by history in our views.
Speaking of history, on this day 263 years ago, one of the first corporations in America was formed . . . The Dismal Swamp Company (yes, that’s actually the name!). The Dismal Swamp Company issued one share to each of its 12 founders to... wait for it... “finance the development and resale of swampland in Virginia and North Carolina.”
Among the first twelve shareholders was a young soldier and surveyor by the name of George Washington. (This shareholder eventually became the first President of the United States.) Despite a distinguished list of initial shareholders, the Dismal Swamp Company’s operating track record would ultimately be, well, dismal.
For the next 46 years, from 1763 to 1809, the company would make no money. None. It finally managed to eke out a small profit in 1810. But just four years later, it was completely out of business. So much for the first attempt at selling the dream of owning swamp land to unwitting Americans!
The point of this story is to highlight that one of the first companies in America is a map for the modern day story-telling of founders to sell shares and raise money. Think about it: prominent founders, an untapped new market (in this case swamp land), and the promise of untold riches.
Sounds familiar . . .
The most prominent story at the moment that investors are being “sold” is Artificial Intelligence. On the back of Nvidia’s blow out quarter last night, that story is going to only gain momentum in the short run. While certainly the pick and shovel makers of this most recent gold rush seem to be benefiting (i.e. those companies like Nvidia that provide the computing power for AI investment), it is less clear how the technology will meaningfully benefit (in the way of growth and expanding margins) the many companies that are touting it on their conference calls.
Time will tell how this all ultimately plays out, but as modern travelers we have the map of history to guide us.
Back to the Global Macro Grind . . .
In addition to blow out earnings from Nvidia, we also woke up to Fitch placing the U.S. on credit watch.
Now certainly Nvidia and the other tech behemoths have become important drivers of the market, but this pales in comparison to the Treasury Market with some $24 trillion in securities outstanding. While the track record of ratings agencies isn’t the best, this quote from the Fitch note last night was spot on:
“The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness.”
One would presume this all gets solved by June 1st, or X-Day, but that assumes our fine public servants in Washington can work together to resolve things . . . and sadly the map of history isn’t super supportive on that point.
Setting aside AI and the debt ceiling for a minute, the one problem that may be more challenging to solve in the short term is global economic gravity. Consider some of the major global economic data points we’ve recently received:
- Eurozone May Manufacturing and Services PMIs both decelerating to 55.9 and 44.6, respectively;
- Germany Q1 GDP slowing to -0.5% Y/Y versus +0.8% Y/Y in Q1 (released this morning);
- Eurozone April CPI at +7.0% Y/Y and U.K. CPI at +8.7% . . . still running hot;
- China Caixin Services and Manufacturing PMIs both decelerating into April;
- U.S. May Manufacturing PMIs going back to contractionary to 48.5.
Now maybe I’m guilty of cherry picking those data points. Or maybe, it is what it is . . . global economic data is generally decelerating, while inflation remains high.
In the U.S., an interesting data set that we follow closely is Redbook Weekly Retail Sales. It is not perfect and can be volatile. But it generally has a high correlation with monthly Retail Sales. In the most recent report, Redbook Weekly Retail Sales came in at 1.6% Y/Y. This is near the cycle lows. And it's meaningfully down from where it started the year at +10%.
Despite what may be happening in a handful of select stocks, the economic data continues to slow.
This has been very evident in the weekly measure of retail spending. The high-end consumer is not immune either. To that point, the Chart of the Day today highlights Luxury Good Consumption, specifically on pleasure boats, aircraft, jewelry and watches (all the things rich people buy). As of the most recent data point, luxury goods consumption is down -12.8% Y/Y.
Perhaps this economic cycle will defy the historical maps of cycles . . . though that is probably unlikely.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 3.36-3.79% (neutral)
UST 2yr Yield 3.90-4.45% (bullish)
High Yield (HYG) 73.39-74.62 (bearish)
SPX 4071-4191 (bearish)
NASDAQ 12,202-12,719 (bearish)
RUT 1 (bearish)
Tech (XLK) 149-158 (bearish)
Gold Miners (GDX) 30.38-34.45 (bullish)
Staples (XLP) 73.40-77.74 (bullish)
Shanghai Comp 3191-3294 (bearish)
Nikkei 29,460-31,545 (bullish)
VIX 16.24-20.91 (bullish)
USD 101.78-104.16 (bullish)
EUR/USD 1.071-1.093 (bearish)
USD/YEN 135.43-140.33 (bullish)
Gold 1 (bullish)
Copper 3.54-3.78 (bearish)
Bitcoin 25,900-27,832 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
