He looks determined without being ruthless
Something heroic in his manner
There's a courage about him, doesn't look like a killer
Comes across so calm
Acts like he has a dream
Full of passion
You don't trust me, huh?
You know why
I do, we're not supposed to trust anyone in our profession anyway
- Raekwon The Chef, Incarcerated Scarfaces
18 years ago my entire AAU team was hype for like the entire month of July because Raekwon shouted out Connecticut in Only Built for Cuban Linx.
18 years ago today I got beat up in an Iowa parking lot at a national tournament by a bunch of white kids …. for being a (the only) white kid on that same bball team.
Besides the fact that the 90’s was unequivocally the best decade in a kind of ‘you had to be there’ way, that Wu-Tang is (still) forever and that effectively no one is now capable of being hype about anything for more than 24 hours at this point in the dopamine-as-a-service and attention-as-a-currency arc of humanity…
That anecdote is really just a conduit for a better one…..
“I just want to wake up & crush people” - Keith McCullough, July 2009
Sensei delivered that stirring gem during our internal morning meeting in July 2009
There was no malicious intent. It wasn’t about ‘other people’. Just inspired (and inspiring) tenacity in passionate pursuit of an iconoclastic dream.
I wrote down that quote & taped it to the door of our conference room for most of 2H09.
That same competitive passion still exists. The same heroic determinism still anchors the larger vision of Hedgeye and defines our collective analytical grind, daily.
I’m pretty sure we’re still the most blue, white-collar analytical supergroup on the street.
Wake Up. Crush it. Work to try and do it better tomorrow.
Back to the Global Macro Grind ……
Alright, I’ve got something for everyone this morning, amigos.
A macro charcuterie of analytical morsels for those with a discerning pallet of objectivity.
Progressing, in parallel, along the bear-to-bull and duration sensitive continuum …..
Factory Orders: Yesterday’s May print marked the first year-over-year decline since October 2020 and a record 8th consecutive month of RoC deceleration. This, of course, accords with the ISM Mfg Data and the Fed Regional Survey data which remain down only, underscoring the burgeoning Industrial Recession already on discrete display globally.
Real Rates: Real Rates are back over 2% for the first time since 2008 and the Prime Rate is now 8.25%.
Trap Door Risk: The move in real rates and inexorable ascent in the prime rate offers a convenient case study vis-à-vis the cycle. Suppose it’s 2Q22 and you have both ‘excess’ savings and a HELOC. Further suppose you use your HELOC (whose interest rate is tethered to the Prime Rate) to buy some land or property for $200K. Your HELOC is structured at Prime + 2% so at 3.0% prime rate you are paying 5.0% or $833/mo in interest. Fast forward through the most expedited tightening campaign in history and the Prime rate has more than doubled to 8.25%, the HELOC rate is 11.25% and you are now paying $1876/mo in interest expense. Simply extrapolate that out and you have a fairly clean model for the progression and growing precarity associated with the cycle …. You can afford the HELOC payment and you have excess savings to help pay it … until you don’t. Then you get the trap door scenario with respect to debt service capacity and other discretionary consumption, by extension.
Mind the Gap(s): The yawning gaps between VIX and HYG, Tech and TLT and real yields vs SPX/NDX Forward P/E continue to grow. A reckoning in one direction or another appears to be fully in queue. Remember, relative calm generally just represents the cumulation of latent risk/volatility
ISM: We’ll get the ISM Services data later this morning. The Fed Regional Services Surveys have been in contraction for 13-consecutive months and both the ISM and S&P Services PMI have been a textbook series of lower-lows with some month-to-month chop. In case it’s not clear (which it is), demand conditions have long re-commandeered the driver’s seat from the supply-side with respect to being the primary influence on price trends across the goods economy. And as we highlighted, again, last week …. The services economy continues to faithfully follow the trajectory of the goods economy on a lag, and with the goods economy still making lower lows then the readthrough to Services is ……
Labor: We’ll likely get some signal calibration in the Initial Claims data this morning and some insight as to whether last week’s decline was a reflection of the underlying still-too-tight reality or an inability for seasonal adjustments to fully account for the new(ish) holiday (Juneteenth). It’s likely a little more the latter.
Liquidity: The TGA refill has been mostly benign thus far, as the short-end focus of issuance has seen the Fed RRP balance decline, suggesting money markets funds are absorbing a large percentage of that issuance and leaving reserves mostly unaffected. At the same time we’ve begun to see a small decline in total money market fund balances …. whether households are pulling liquidity because they need it for essential and pseudo-discretionary purchases or it’s being pulled to pile on and further “chase risk in the new bull market” remains TBD.
A Trinity of (GDP) Saviors?: for anyone in the market for some anchor points for a bull case (or a balancing agent for bears), the below should satisfice:
- New Home Sales/Construction: New Home Construction remains the relative & primary beneficiary of prevailing conditions because of ATL resale inventory levels and because the top slant of the economic K remains relatively resilient, thus far. The rise in activity in the new home market will help Resi Investment as a support to GDP.
- ChipWars: The chart below is Construction Spending on Electrical Manufacturing Facilities. This represents the nexus of the digital evolution, re-shoring, and strategic geopolitical and policy initiatives. We continue to push nose-bleed levels on construction put in place, monthly
- Auto Sales: Auto Sales were +4.19% M/M and +20.6% Y/Y in June. With autos north of 20% of Total Retail Sales, the gain will help juice the reported June RS data.
Shrimp (in name only): BTC Shrimp (those owning <1 BTC) are currently absorbing coins at a rate of 33.8K/mo. This compares with issuance of approximately 27K/mo. Meanwhile, the percent of supply last active 1Y ago (ie long-term holders) is now at 69.1% and making higher all-time highs.
TAIL-stradomus: We don’t do convicted TAIL prognostications … except for this morning. If I had to make a kind of sweeping, big factor progression vis-à-vis the evolution of the domestic cycle domestically it would be some version of the following: policy/credit tightening/k-shape frictions give way to recession à this gives way to rate cuts à which gives way to both a fresh housing cycle (centered on the resale market) and a large refi wave à which provides a discretionary consumption unlock and impulse.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.76-3.97% (bearish)
UST 10yr Yield 3.66-3.99% (neutral)
UST 2yr Yield 4.65-4.99% (bullish)
High Yield (HYG) 73.51-74.83 (bearish)
SPX 4 (bearish)
NASDAQ 13,303-13,864 (bullish)
Healthcare (PINK) 25.96-26.78 (bullish)
Shanghai Comp 3135-3244 (bearish)
Nikkei 32,480-33,916 (bullish)
VIX 13.17-17.08 (neutral)
USD 101.89-103.51 (neutral)
USD/YEN 142.30-145.15 (bullish)
Oil (WTI) 67.83-72.94 (bearish)
Gold 1911-1972 (bullish)
Copper 3.61-3.94 (bearish)
Bitcoin 28,501-31,777 (neutral)
Best of Luck out there today,
Christian B. Drake
