“I think we all have to fight the werewolf within us somehow.”
-William Kempe
The last few weeks have been annual review time at Hedgeye. By virtue of my being at the company almost since day 1 and the fact that I'm now the ripe old age of 50, I am, as people say, in management.
In my second to last review of 21 reviews, my colleague Geoff Gregoire brought up a game called 'Werewolf in Town.' I had never heard of it before. It is a Russian social deduction game, which was created by Dimitry Davidoff in 1986.
The game models a conflict between two groups: the werewolves and the townspeople. At the start of the game, every player is divided into one of two groups. The game then has two phases.
In the night phase, the werewolves can decide to kill some townspeople. In the day phase, the townspeople (which include the werewolves in their midst) can vote to eliminate a werewolf. These phases alternate.
The phases continue until one side achieves their so-called “win condition”. For the townspeople, this entails eliminating the werewolves. While for the werewolves, this means getting to the point where they are at numerical parity with the townspeople.
The twist in the game is that the werewolves are given the identity of their “teammates”, or other werewolves. Conversely, the townspeople only receive information that tells them how many werewolves are playing.
So, in essence, you have an informed minority competing against an uniformed majority. Said another way: smaller numbers with perfect information compete against a large group with very limited information. Sound a little like the stock market game?
No surprise, the group with perfect information has a significantly greater chance of winning. In fact, computer simulations show that 50 werewolves have a roughly 50% chance of winning in a group of 10,000 townspeople.
So, also like the stock market, the odds are stacked mightily in favor of those with the best information, despite their dramatically smaller numbers.
Back to the Global Macro Grind ...
The trick with the stock market game is that you can never have perfect information. If you do have it and you use it, it probably won’t be long before you are leaving your office in an orange jump suit . . . and none of us want that!
One way in which we’ve improved our information legally is to partner with Tier1 Alpha. This partnership has allowed us to have an even better understanding of market structure, which we know is increasingly driving market prices, especially on shorter term durations.
As Tier1 noted this morning, dealers remain largely in positive gamma territory. This tends to dampen volatility. Specifically, Tier1 wrote today:
“With dealers sitting firmly in positive gamma, it’s unlikely we will see a massive volatility shock come in without an exogenous event, since we’ll be finishing up the week with a light calendar.”
The townspeople can sleep easier at night in a positive gamma situation!
Next week things will get more interesting with CPI on Tuesday. Our current view here is that CPI could come in a bit lower than expected (before then re-accelerating), which would be a nice reprieve for bond bulls. Interest rate sensitivity positions have not had a great few weeks and as a bag holder of a small position in XLU I know!
Interest rate cut expectations dropping isn’t so good for interest rate sensitive positions. As of this morning, rate cut expectations for March are all but off the table. Fed Fund futures now imply a less than a 15% chance of a cut in March. The uniformed masses sure got that one wrong.
The more interesting question is whether we have a rate cut by May. On that front the probabilities have changed meaningfully as well. At the moment, there is a roughly 60% chance of a cut and a 40% chance of no cut. In layman’s terms, this is basically a coin toss.
It turns out cowbell may take a little longer than many investors expected. Although, as we are seeing in China, cowbell doesn’t always bring the expected outcome. Maybe this most recent dose of cowbell will lead to a reprieve in the steady decline in Chinese equities, but with growth and now inflation slowing, as evidenced by the almost twenty-year low in China’s CPI yesterday, we have our doubts.
At the moment in our Portfolio Solutions product, we have a wide range of Macro ETFs:
- BUXX, TFLO, TBIL, SHY, GLD, SPLV, KBWP, AAAU, PJP, INDA, EWA, UUP, URA, AMLP, BBN, URNJ, MSOS, IAK, STXT, PINK, ITB, EPHE, XLG, PFF, MTBA, NLR, EWD, SMIN, EWN, IEF, SPMO, BOAT, BDRY, WEED
We find with the go anywhere strategy, it is much easier to avoid the werewolves.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 3.87-4.22% (bearish)
UST 2yr Yield 4.20-4.54% (bearish)
High Yield (HYG) 76.78-77.68 (bullish)
SPX 4 (bullish)
NASDAQ 15,282-15,950 (bullish)
RUT 1 (bearish)
Tech (XLK) 198-208 (bullish)
Insurance (IAK) 105.14-108.01 (bullish)
S&P Momentum (SPMO) 70.73-75.15 (bullish)
Healthcare (PINK) 28.26-29.99 (bullish)
Shanghai Comp 2 (bearish)
BSE Sensex (India) 71,005-72,563 (bullish)
VIX 12.40-14.57 (bullish)
USD 103.19-104.92 (bullish)
Oil (WTI) 71.00-78.01 (bearish)
Gold 2017-2079 (bullish)
Copper 3.62-3.88 (bearish)
Uranium (URA) 29.48-32.36 (bullish)
MSFT 398-419 (bullish)
NVDA 658-726 (bullish)
Bitcoin 43,155-48,118 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
