“Give a man a fish and he will eat for a day. Teach him how to fish, and he will sit in a boat and drink beer all day."
- George Carlin
I was on a family vacation in Killington, VT earlier this year, and the house we rented had a collection of frosted glasses with inscriptions on them. All were clever, but the aforementioned quote was my favorite. It’s funny how when you learn new things (fishing, in this example), they can have a way of becoming a passion. It’s funnier still when you come to realize that things you never expected to have interest in sometimes become the things you’re most interested in down the road.
So it has become for me with macro. To be fair, I’ve always found macro interesting, so it’s not really a great analogy. While my focus for the last 20 years+ - Financial Services and Housing – has considerable overlap with macro, I had never developed an adequately rigorous framework for it until I took on responsibility for the sector back in early 2021.
As Keith likes to say, there’s no substitute for deliberate study. There’s also no substitute for total immersion. The world is too complex and too busy to do things part-time and have an expectation of excellence. To be fair, I still split my time between Macro and Financials and Housing (and a few other things), but I think those things have natural adjacencies that complement each other, rather than taking away and defocusing.
The last 2.5 years have been a journey of sorts with ups and downs and twists and turns. I think we’ve gotten a lot of things right, and we’ve certainly had our fair share of getting things wrong. Getting better over time doesn’t mean always getting things right in the future. That’s called perfection, and no one in this business is perfect. Rather, it means getting things right more often. Meliora is the Latin word for better, and it also happens to be the motto of my alma mater, the University of Rochester. Meliora can be both an adjective and a noun. The adjective simply being “better”, while the noun is ‘always better’, or the constant pursuit of being better. Meliora is a good descriptor for my personal professional aspirations, those of our macro team and those of our firm as a whole.
Back to the Global Macro Grind…
With that in mind, our goal with introducing a monthly Quad framework is aimed squarely at the heart of being better. How so? We’ve long operated on a multi-duration basis. Keith’s Signals, for example, are framed across three different durations, each catering to a different constituency of the markets. The shorter-term, or TRADE, duration was born from the desire to move quickly, risk-managing ahead of month-end Hedge Fund constraints. The intermediate-term duration, or TREND, is tethered to the quarterly corporate earnings cycle and larger macroeconomic data like GDP. The longer-term framework, or TAIL, is geared toward those investors who truly hold a longer-term investment horizon and aren’t as sensitive to shorter-term volatility and moves.
Fundamentally, the same principles can apply. Our Quarterly GIP framework – GIP being an acronym for Growth-Inflation-Policy (i.e., if you can probabilistically anticipate rate of change shifts in growth and inflation, you can anticipate monetary policy) – also functions primarily as an intermediate-term framework given its inherent quarterly duration.
However, just as there is significant volatility across the shorter-term signal within the intermediate-term TREND, there can be and often is, volatility in the monthly fundamental data within the intermediate-term framework. As such, we think it’s helpful to be aware of both.
The monthly Quad framework was developed with a goal similar to that of our Quarterly GIP, namely, to probabilistically forecast the likelihood of a given growth and inflation regime on a monthly basis. We backtested our framework and found that it predicted accurately the direction of the rate of change in growth roughly 75% of the time. Looking back more recently, over the last few years, it has accurately predicted that directionality in 25 of the last 28 months (May 2021 – August 2023). Of course, like talk, backtests are cheap. The real question is, how will it perform moving forward?
The other vector of interest, of course, is inflation. Prior to 2021, inflation had become so unremarkable that it only infrequently warranted much airtime. Since 2021, however, one could strongly argue that it has become the single most important factor for risk asset prices.
Consider the sequencing of inflation vs the broader risk asset backdrop over the last few years. Following inflation’s peak period of Q1 2022 through Q3 2022, a period during which risk asset prices broadly retrenched, the fastest period of disinflation occurred during 1H 2023. This period also saw significant risk asset price reflation. However, beginning with the return to reaccelerating inflation in July (data reported mid-August), risk asset prices have resumed their downtrend.
The outlook for inflation through year-end is for high/sticky-high price dynamics driven by largely flat base effects, resurgent oil prices and still-lagged shelter components.
Another thing to understand about the monthly Quad framework is that the monthly Quads tend to bounce around quite a bit more than the Quarterly Quads do. This is, in a not tongue in cheek way, a feature, not a bug. If all the monthly Quads did was perfectly reflect the Quarterly Quads, that wouldn’t be particularly helpful. The whole point is to reflect the fundamental sine wave within the sine wave.
With that in mind, the chart on slide 23 in our Macro Themes Deck illustrates our Monthly outlook over the coming 12 months. For access, please ping .
While we haven’t yet completed the broader asset backtest against this new monthly framework, we were able to run it against the S&P 500. We used average S&P 500 prices for the month and compared those with average prices of the preceding month rather than using end-of-month prices since it’s common for month-end prices to be distorted/manipulated. What we found was both interesting and what we consider a general proof of concept since we really didn’t know going in whether equity prices would in fact map/correlate with these monthly Quad regimes. Again, we detailed those results in our Themes Deck on slide 24.
The monthly framework backtests at what we would consider an impressively high level of roughly 75% in terms of directional accuracy on the growth side and monthly equity returns map broadly, as in, on average, to that monthly framework. The monthly Quad framework is not intended to be a single factor model or any sort of replacement for anything else, but rather another point for consideration in the process.
If we can help shine light on the three individual points within the quarter, in addition to providing context on the quarter itself, we think that’s a move in the right direction.
Moving on to the broader fundamental backdrop. Nothing characterizes the tone and tenor of the most recent themes presentation like slide 62, which Christian titled Stag-Tember -> Shock-Tober.
There are a myriad of headwinds facing the Q4/Q1 period. These range from student loan payment resumption to lagged higher rates/credit tightening effects finally catching up, to the halting of ERC processing to the rolloff/expiration of a wide variety of government funding programs to a growing body of both for-profit (UAW) and non-profit (Kaiser Permanente) strikes.
Against this, as we profiled in the deck, there is the projected growth in IRA/BIL/CHIPS-related spending, but taken in totality, the headwinds meaningfully outweigh the tailwinds in contribution.
On top of that, oil prices and interest rates remain in bullish trend, with both repeatedly pushing to new cycle-highs. Back in 1H22, I wrote about how the 12 recessions since 1946 have coincided with an oil price rise of either severe or moderate intensity (prices are currently up 30-40% from recent trough levels). I also wrote about how the 10 recessions since 1954 have all been preceded by an increase in short-term interest rates (rates are currently higher by 5.25% in the last ~18mos).
Bigger picture, sticky-high inflation coupled with still-low unemployment are likely to keep the Fed on the higher-for-longer warpath for the foreseeable future. Meanwhile, although the government bought itself another 45 days of funding through mid-November, the sacking of Speaker McCarthy likely doesn’t bode well for proper fiscal functioning over the intermediate/longer term.
As always, we’re endeavoring to contextualize the what, the why and the when, across multiple durations and multiple asset classes/reference entities.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.52-4.99% (bullish)
UST 10yr Yield 4.42-4.85% (bullish)
UST 2yr Yield 5.03-5.19% (bullish)
High Yield (HYG) 71.95-73.24 (bearish)
SPX 4 (bearish)
NASDAQ 12,991-13,356 (bearish)
RUT 1 (bearish)
Tech (XLK) 160-166 (bearish)
Energy (XLE) 87.37-92.70 (bullish)
Utilities (XLU) 54.73-60.44 (bearish)
DAX 15,018-15,562 (bearish)
VIX 16.12-20.49 (bullish)
USD 105.15-107.21 (bullish)
CAD/USD 0.726-0.739 (bearish)
Oil (WTI) 87.13-93.29 (bullish)
Gold 1 (neutral)
Copper 3.57-3.78 (bearish)
Silver 21.00-23.13 (bearish)
MSFT 307-322 (bearish)
AAPL 167-175 (bearish)
NVDA 403-448 (bearish)
Bitcoin 26,007-28,290 (neutral)
To your continued success and risk management,
Josh Steiner
Managing Director
