"Spend each day trying to be a little wiser than you were when you woke up. Day by day, and at the end of the day, if you live long enough ... you will get out of life what you deserve."
-Charlie Munger
One of the most valuable things you can do as an investor is read. Among other things, reading helps you acquire new knowledge, implement quality habits, and better understand historical context. It is the short cut to “getting wiser."
There also a myriad of scientifically proven health benefits from reading, which include:
- Improved intelligence – Avid reading broadens exposure to vocabulary, which improves scores on reading tests for kids and in general is correlated with higher scores on intelligence tests.
- Slowing of age-related brain decline - According to a recent study in Neurology, regular reading may slow the decline of memory and brain functions due to aging and keep minds sharper for longer. In addition, activities such as reading may make Alzheimer’s 2.5 less likely; and
- Improved relaxation and sleep – We all know that sleep is critical to performance and according to a study from Sussex University reading may reduce stress by as much as 68 percent, which can be critical before going to bed.
Personally, I have a series of journals, blogs, and research I read every morning, which provide context for the day. Then I have a pile of books that I'm working through when I have more extensive downtime. But I’m sure I could get off the screen even more and flip those pages!
Included in my library is a series of investment books. One of my favorites is Seth Klarman's, "Margin of Safety: Risk-Averse Value Investing Strategies For The Thoughtful Investor."
Admittedly, value investing is not exactly in vogue. And to be fair, there are a lot of factors that now impact the market which didn't when Klarman first wrote the book (Example: 0DTE options), but many of the lessons still ring true.
As Klarman famously wrote in his book:
"Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands."
Indeed.
Back to the Global Macro Grind ...
Later this morning we get January PCE, which is the final key piece of inflation data reported in February and is widely considered the Fed’s preferred measure of inflation. Going into the print, Core PCE is expected to increase by +0.4% M/M, which is the largest increase since January last year.
Not surprisingly, expectations for PCE have increased on the back of “hotter-than-expected” PPI and CPI reports. That said, even if PCE accelerates by +0.4% M/M it would still be a deceleration to +2.9% Y/Y. That’s good, right?
Well maybe, but it still keeps the preferred measure of inflation a fair bit higher than the Fed’s target of 2.0%. Even if today’s number is cooler than more inflated expectations, we still face the issue of what is happening in the real world.
Unfortunately, on that front, there are plenty of examples of inflation re-accelerating. A few big examples of this are:
- The CRB Index, a broad measure of commodity prices, is up just over +7% in the YTD;
- Since early December of last year, global shipping rates have more than doubled. (We are long BDRY, a globally shipping rate ETF, in Portfolio Solutions);
- Housing prices in the Case-Shiller Index accelerated to +5.5% in the most recent data for December, versus 5.0% in the November data;
- Oil is up 11% in the YTD and up Y/Y by about 1%; and
- Finally, inflation expectations for the year head in Consumer Confidence came in at +5.2%, which is a more two year low, but remains well above the Fed’s target.
What does all this mean? Well, on a very basic level it means you should probably believe the Fed when they say they aren’t going to cut rates until at least the summer.
According to Fed Funds Futures, the closest date for a rate cut is now June. And even there, the probability of a cut has been decreasing consistently. At the moment, there is a 58% chance of a cut, the lowest we’ve seen this year.
Now this re-acceleration in inflation isn’t necessarily a bad thing if growth also accelerates. In our vernacular, this is called #Quad2, and is generally a risk-on environment for equities. Our GIP model has this as the highest probability outcome for Q3 and Q4 2024, though the probabilities are close.
At the moment, our positioning in Portfolio Solutions reflects potential outcome:
- Macro ETFs by Size Rank: FDRXX, BUXX, TFLO, TBIL, UUP, INDA, SMIN, EPHE, QQQ, EWY, PINK, EWN, XLP, TUR, KBWP, PJP, ITB, KEMX, XLG, PFF, IWO, EWD, IPO, IAK, SPMO, MSOS, IBIT, AMLP, KSA, ITA, PFIX, BDRY, CPER, FXI, UGA
For you wise investors, that’s a good mix of growth, inflation re-accelerating, rates going higher / staying elevated, and positive economic inflections.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.35-4.55% (bullish)
UST 10yr Yield 4.19-4.38% (bullish)
UST 2yr Yield 4.52-4.75% (bullish)
SPX 4 (bullish)
NASDAQ 15,650-16,205 (bullish)
RUT 1 (bullish)
Tech (XLK) 199-208 (bullish)
Insurance (IAK) 108.96-112.14 (bullish)
S&P Momentum (SPMO) 73.26-78.02 (bullish)
Healthcare (PINK) 29.36-30.80 (bullish)
Shanghai Comp 2 (bullish)
BSE Sensex (India) 71,753-73,516 (bullish)
VIX 12.82-15.88 (bullish)
USD 103.59-104.63 (bullish)
EUR/USD 1.073-1.085 (bearish)
Oil (WTI) 76.33-79.70 (bullish)
Nat Gas 1.48-1.98 (bearish)
Copper 3.75-3.95 (bullish)
NVDA 695-835 (bullish)
Bitcoin 53,908-64,144 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
