“Hold your tongue and say ‘sofa king.’”
-Every kid, ever
It’s a fine line, comrades.
Maintaining macro-hyperawareness remains a delicate dance on the psycho-emotional edge of immersion and obsession.
Like markets and collective macro conditions, the tipping point is dynamic and conditionally dependent, not fixed.
Last night, I dreamed about QRA and Janet going rogue, rugging the long-end, and Powell, Federal Interest Expense and Biden's re-election odds by extension.
The night before, about the government and Mt. Gox market dumping BTC into an illiquid Sunday market and fully rugging the transition to positive net BTC ETF flows.
Since I’ve apparently breached the obsession event horizon, I’ll attempt to lighten up a bit this morning.
Besides, game-ification remains one of the most potent means of helping internalize messaging.
Here’s the game …
I’m going to give you a selection of well-known quotes. Your job is fill in the rest of the quote:
- “Great minds think alike, ...”
- “The early bird gets the worm, ...”
- All of humanity's problems, stem from man's inability to sit quietly in a room alone ...”
- “Some of the January data are at depressionary levels, …”
Almost every clever quip and cutesy aphorism represents a partial truth. Time and collective human bias have subjectively filtered the quotes to emphasize one side or the other.
To complete the quotes:
“Great minds think alike, though fools seldom differ.”
“The early bird gets the worm, but the second mouse gets the cheese.”
The third is kind of a trick question as there is no official "other half" of the quote.
But it represents a different version of the same thing. It’s true and insightful in a certain sense, but it omits the similarly true antithetical reality that human progress, innovation and evolution were also birthed from that same truth.
Now, how about the fourth and last quote?
“Some of the January data are at depressionary levels. We currently have 35 positions in our long-only portfolio." – Keith McCullough, infinity times over in the past year.
Did you hear both sides of that statement? Were you biased to a particular side or interpretation? Were you able to reconcile the confliction and execute?
Risk managing cognitive dissonance remain an exercise in “ands.” As does life, IMO …
More “ands,” fewer “buts.” More commas, fewer periods. More bridges, fewer walls.
Back to the Global Macro Grind ….
Let’s probe some macro RoC truths in the context of the quote above and the superficial dissonance between our fundamental and positioning/risk management views.
Comp-sternation: A core arc underpinning our expectations for monthly Quad 4s in January/February was the confluence of further organic deterioration amplified by base effect dynamics and some of the hardest comps of the cycle for the consumer and capex economies.
Comp-sternation | Consumer Discretionary: The surge in Omicron created the comp distortion that supported the growth rebound in January last year. As can be seen in the Restaurant and Discretionary Retail traffic data below, the most comp-sensitive parts of the consumer economy have definitely not been able to clear that comp hurdle in January.
Comp-sternation | Mfg-Industrial Economy: We’ve seen almost universal deterioration across the most recent, high frequency January data reported MTD. Below is summary visual across the Manufacturing-Industrial economy. Again, the rate of change truth is self-evident.
NFP: The employment data is notably hostage to Comp-sternation conditions as well. As is visualized below, both the absolute gain and favorable weather conditions (note: the opposite dynamic/negative weather conditions characterized January 2014) create very difficult comps for January (and Feb to lesser extent). The Y/Y slowdown associated with employment will then flow through the aggregate hours data, the aggregate income growth data, etc.
Fragility At The Fringes: This has been the functional macro mantra and the slow moving cycle reality over the past two years.
Again, conceptually, it describes the idea that fragility emerges first at the fringes of both markets (high beta, high growth, non-profitable companies) and macro (income cohorts most vulnerable to large cost of living shifts). The distress progressively metastasizes up the quality and vulnerability hierarchy, typically in a feed-forward, self-reinforcing fashion.
In the context of the labor market, we’ve seen this begin to play out in a more pronounced way recently as the concentrated cuts in non-profit tech companies (i.e., some of the most fragile) that characterized 4Q22/1H23 have begun to move up the "quality" hierarchy – Paypal cutting 2,500 jobs and UPS cutting 12,000 positions are easy examples from the past 24 hours.
Credit Cycle: Yesterday’s NYCB dramatics (-38%) and a fresh cratering in Regional Banks (Regional Bank Index = -6%) served to re-highlight the (still) simmering credit risk within distressed areas of the economy.
More broadly, one dynamic that sits at the macro-policy nexus and remains without a clear answer, is the relief gap in rates.
Rates moved from 0 to 5% at the fastest pace ever. Those who termed out debt or locked in at low rates, have remained largely insulated from the rate increase.
But for any household or entity sensitive/vulnerable to rate increase who was viable at 0%-2% rates and is progressively bleeding out at 5% … they need something on the order of 10 cuts (not 1 or 2 or 4) to really make a difference – that is, for variable rates/refinancing opportunity to move back to break-even and stop the progressive weakening. Again, this is a lagged credit cycle impact that progressively intensifies over time for those sensitive as debt maturities hit and need to be rolled at significantly higher cost and/or the balance sheet bleeds to zero over time.
How this barbell dynamic ultimately resolves remains unclear?
QRA (& Composition): The exuberance around less than expected total issuance on Monday was tempered by yesterday’s announcement around the composition of that issuance. Alongside the ~170B increase in net issuance, the composition of that issuance will shift away from bills and toward coupons, with ~500B increase in coupon issuance and ~300B reduction in bill issuance.
The implication is that the reduction in bill issuance will reduce the drain on RRP (source of demand/funds being used to absorb bill issuance) and likely pushes out the timeline on Fed QT. Recall, the primary liquidity/financial stability concern was that after the RRP was exhausted, bank reserves would get drawn down toward “critical floor level” more quickly and the Fed would have to halt QT in order to offset the reserve drain.
*Of course, actual issuance can change and, for now, the balance of issuance risk remains "for more" (see last night’s House passage of the 78B tax reduction bill).
Market Structure Risk: I highlighted this on twitter yesterday but we’ll redux it here, as it’s a critical component in tactical risk management in both directions. And, again, if you are unfamiliar or have only a weak sense of flow dynamics and the attendant market implications, the Tier1 offering remains the #1 product you didn't know you needed.
As your comfortability with market structure dynamics improves, the veil on what once seemed like esoteric and intractable market voodoo gets lifted to reveal a systematic, actionable and many times straightforward interpretation of flow dynamics and their increasingly impactful on volatility and price conditions.
As of this morning, dealer Gamma has flipped back to negative (Tier1 Alpha Flip Line = 4882) and 1-month realized SPX volatility look set to cross (above) 3-month realized vol. If a breakout in 1-month vs. 3-month persists, that forces the systematic chart chasers (CTAs, Vol Control Funds, etc.) to sell weakness in size.
Now, one last risk management reality masquerading as a game to bring us home.
Indulge in the following ….
Yellen
2014: “The LMCI (labor market conditions index) is our most important labor market indicator.“ - Yellen
2018: LMCI discontinued … due to offering zero value
Powell
2022: “There is no room for a nuanced interpretation of inflation”
2023: “Core PCE Services Ex-Shelter will be key in guiding our view on inflation”
2024: “It’s important to consider the aggregates and the broad scope of inflation”
Ha!
Data dependence remains a pseudo-truth.
The data on which policy is dependent is conditionally determined, not a static set. And any shift along the reactive-to-proactive policy continuum is necessarily subjective and is paid for with the optionality associated with amorphous data dependence.
PS – The note title and headline quote carry no specific relevance other than to offer some TBT amusement!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 3.92-4.18% (bearish)
UST 2yr Yield 4.20-4.45% (bearish)
High Yield (HYG) 76.75-77.93 (bearish)
SPX 4 (bullish)
NASDAQ 15,008-15,627 (bullish)
RUT 1 (bearish)
Tech (XLK) 195-205 (bullish)
Insurance (IAK) 103.56-108.38 (bullish)
S&P Momentum (SPMO) 67.14-70.55 (bullish)
Shanghai Comp 2 (bearish)
BSE Sensex (India) 70,295-73,003 (bullish)
VIX 12.55-15.09 (bullish)
USD 102.95-103.90 (bullish)
GBP/USD 1.262-1.274 (bullish)
Oil (WTI) 72.87-79.18 (neutral)
Gold 2007-2070 (bullish)
Uranium (URA) 29.13-31.11 (bullish)
MSFT 391-410 (bullish)
AAPL 180-195 (bearish)
AMZN 152-162 (bullish)
GOOGL 137-149 (bearish)
TSLA 170-209 (bearish)
NVDA 578-635 (bullish)
Bitcoin 39,163-43,908 (bearish)
Best of luck out there today,
Christian B. Drake
