“There are three kinds of lies: lies, damned lies, and statistics.”
-Mark Twain
I’ve always appreciated the quote above from Mark Twain about statistics. If a number validates an argument, then we are much more prone to agree. That means there is statistical evidence after all!
Yesterday, CPI came in below expectations and it was full cowboy up time for the stock market! Specifically, the Headline CPI number missed expectations and slowed. This was good for 0.0% M/M and +3.2% Y/Y. Both decelerations.
But as always, the devil is in the details.
Heading in to the CPI report, Bloomberg had this article pasted on the front page of their website:
“Health Insurance Is About to Boost US Inflation After Months of Relief”
As it turns out, the exact opposite happened. Not only did the health insurance not boost CPI, it was a major detractor.
The little followed category of health insurance came in at -34% Y/Y. This Y/Y decline was good enough to shave close to 20bps off the headline number on an annualized basis. Had it actually increased, as many were expecting, CPI likely would’ve exceeded expectations.
Lie, damned lie, or just a statistic? Hard to tell, isn’t it?
We’ve zeroed in on this line item in the Chart of the Day. As you can see, this line item has actually been a decent contributor to the downside in CPI in the last 6+ months. Now conversely, it was also a reasonable contributor when CPI was accelerating.
That said, when taken in conjunction that Non-Farm Payrolls have been revised lower for every month this year . . . it does make you wonder about the veracity of these government statistics.
Back to the Global Macro Grind…
In other “good news”, it seems that Congress is on the verge of passing a spending bill that will avoid an imminent government shutdown. In an interestingly bi-partisan vote, a total of 209 Democrats and 127 Republicans voted for the measure. Now it is off to the Senate and President Biden to ratify.
In practice, Speaker Johnson’s bill does little other than set up another showdown in early 2024. Some parts of the government will be funded through January 19th and other parts through February 2nd, which is, ironically enough, Groundhog’s Day.
It is great that the government will remain open through the holidays. The cost of the spending is real though. According to the CBO, the federal government will be spending at a deficit clip of more than -$2.0 trillion annualized into 2024.
As if that won’t put enough of a strain on the Treasury, we also have some massive issuance in the queue for the next twelve months. Based on our estimates, there is almost $8.4 trillion in debt that matures in the next year.
So, we have $2 trillion in deficit spending and $8.4 trillion in maturities coming down the pike. This all comes before any spending needed around slowing growth!
Not to worry though, former Treasury Secretary Janet Yellen said yesterday that she disagrees with Moody’s negative outlook on the U.S. Nothing like talking your own book!
We can wax philosophically and raise risks all we want, but the job in this business is still to make money. And yesterday investors, by and large, made money if they were long risk.
But just be aware, yesterday was a very unique day and our partners at Tier1 Alpha made a very interesting observation on this:
“Overall, yesterday was a pretty rare move all the way around, marking only the 5th time in history SPX has had a return stronger than 1.90% while the VIX index was under 15.”
Perhaps we will look back in hindsight and it will mean the bottom is in and we are off to the races.
Or perhaps not and investors have once again become too complacent. Time will tell.
As Tier1 Alpha also notes, the market is now very underhedged for a systematic event. So, at a bare minimum insurance is cheap (although perhaps you knew that from the CPI numbers yesterday).
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.57-4.98% (bullish)
UST 10yr Yield 4.43-4.75% (bullish)
UST 2yr Yield 4.80-5.11% (bullish)
High Yield (HYG) 72.94-74.75 (bearish)
SPX 4 (bearish)
NASDAQ 13,201-14,185 (bullish)
RUT 1 (bearish)
Tech (XLK) 169-184 (bullish)
Energy (XLE) 81.21-86.40 (bearish)
VIX 13.76-19.65 (bullish)
USD 103.92-106.65 (bullish)
Oil (WTI) 73.72-81.83 (bearish)
Gold 1 (bullish)
Copper 3.55-3.72 (bearish)
MSFT 348-377 (bullish)
TSLA 204-240 (bearish)
Bitcoin 34,992-37,971 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
