“All quiet on the western front. He had fallen forward and lay on the earth as though sleeping.”
-Erich Remarque
I’m going to be honest. The last few weeks have made me feel very smart. Everything rallies will do that to an investor.
Even my legacy position in small cap value IWN (don’t tell Keith!) is up 8% in the last month. And that one has been an absolute dog this year.
Low volatility regimes are great. As long as they last. But, they are also eerie.
The best measure of equity volatility is the VIX. It closed yesterday at 12.9. This is down some -35% YTD and on the lows of the year. By and large, it is also back to the lowest levels we’ve seen since before the pandemic.
As our partners at Tier1 Alpha wrote earlier this week:
“Five-day realized vol has fallen to 4% and three-day is at 2% and volumes have fallen approximately 37% from last year's Thanksgiving week, suggesting Black Friday weekend was about shopping for anything OTHER than equities."
The short-dated vol surface reflects these stark realities with a giant slope of indifference.”
Said another way, it is full cowboy up, risk on time! Which is great, until it isn’t.
Other than everything rallying, the other great thing about low volatility regimes is that protection gets very cheap. If you didn’t get a chance to buy long dated put protection for sale on Cyber Monday, now is your time!
Back to the Global Macro Grind . . .
To be fair, not everything has rallied in the last month. Both natural gas and oil have been beaten down like rented mules. Natural gas is down some -50% and oil is down over -5% in that period. Oil in particular is a pretty good gauge of economic demand.
More concerning for oil is probably the fact that it didn’t rally with OPEC+ deciding to take another million barrels per day out of production. On one hand, with U.S. production hitting an all-time high of 13.2MM barrels per day in September, you can’t blame them. But, on the other hand, this also probably means that they are seeing weak economic demand.
We have seen this validated in the global data this week. Most noteworthy is probably the PMI reports from China:
- China November Services PMI slowed to 50.2 (almost contractionary); and
- China November Manufacturing PMI slowed to 49.4 (remaining contractionary).
Suffice it to say, but China needs more cowbell! In fact, it is so bad that one major China bank has banned its analysts from writing about bad economic news.
This week in U.S. data has been interesting. For those of you looking in the rearview mirror, Q3 GDP was revised higher to a +5.2% annualized SAAR. This was up from the previously reported +4.9% number.
Interestingly, Government spending was revised higher and Consumption was revised lower. The fact that Government spending was revised higher shouldn’t be totally surprising. As we’ve written about, we are currently in the midst of a some 2 trillion annualized deficit spending spree. Think that will be an issue in the upcoming election?
Way back in the days of October, this deficit, which is almost 3x the GFC bailout, was a concern for Treasuries. Now, it is buy, buy, buy!
In fact, in the month of November the U.S. has added some 210BN to its balance sheet, which if annualized is . . . wait for it . . . more than 2.4 trillion! No credit risk there, obviously.
In the U.S. this week, we had the trifecta of Personal Income, Spending, and PCE prices released:
- Headline PCE slowed to +3.0% Y/Y from +3.4% and Core PCE (ex-food and energy) slowed to +3.5% Y/Y from +3.7% Y/Y;
- Conversely, Aggregate Private Sector Income growth accelerated by 40bps to +5.4% (largely driven by comps); and
- Real Consumption also accelerated by 10bps to +2.2% Y/Y (also comp driven).
As we show in the Chart of the Day, wage growth is on a long downward trend. Well, that is, except for government wages, which came in at +8.0% Y/Y and hit a new cycle high.
If you are confused by all of the market dynamics and recent economic data, you aren’t alone. The Fed is as well.
On Tuesday Fed Governor Waller said:
“He's increasingly confident that policy is well-positioned to slow the economy and get inflation back toward 2% target and if inflation goes down, there is no reason to insist rates remain really high. And the Fed policy response should be to lower the policy rate”
Then yesterday NY Fed President Williams said:
“I expect it will be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2% longer-run goal on a sustained basis.”
It’s no wonder the American people have little faith in their government.
As for us, we’ll just continue to play the game in front of us. At the moment, these are our top ranked Macro ETFs by Size Rank:
- TFLO, BUXX, TBIL, BTAL, NLR, GLD, URA, BNDD, URNM, IAK, XLG, EWM, EWY, SPMO, INDA, KBWP, AAAU, AMLP, PPLT, ETHA, SHY, EZA, MTBA, GXG, SMIN, BITO, UUP
Forecheck, backcheck, pay cheque!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.46-4.68% (bearish)
UST 10yr Yield 4.27-4.53% (bearish)
UST 2yr Yield 4.63-5.01% (bearish)
High Yield (HYG) 74.21-75.90 (bearish)
SPX 4 (bearish)
NASDAQ 13,896-14,350 (bullish)
RUT 1 (bearish)
Tech (XLK) 182-186 (bullish)
Energy (XLE) 83.05-85.65 (bearish)
Utilities (XLU) 61.50-63.41 (bullish)
Shanghai Comp 3003-3066 (bearish)
BSE Sensex (India) 65,602-67,750 (bullish)
VIX 12.36-15.81 (neutral)
USD 102.64-104.54 (neutral)
EUR/USD 1.082-1.099 (neutral)
Oil (WTI) 73.53-78.92 (bearish)
Gold 1 (bullish)
Copper 3.70-3.88 (bearish)
MSFT 370-385 (bullish)
AAPL 187-192 (bullish)
NVDA 462-504 (bullish)
Bitcoin 36,999-38,881 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
