“He who lives by the crystal ball will eat shattered glass.”
-Ray Dalio
I’ve recently finished reading, “The Fund”. This is the controversial book that Rob Copeland wrote about Ray Dalio and Bridgewater Associates. Spoiler alert: it does not paint a very flattering picture of the firm or the man.
In reading the book, I did think it was interesting that Copeland really had almost nothing positive to say about Bridgewater. Personally, I don’t know much about Bridgewater, but I imagine it can’t all be bad. . . though it doesn’t sound like the most pleasant of places to work.
Regardless, it offers an interesting view, with lots of insider baseball, about one of the most successful hedge funds in history. . . at least in terms of raising assets. Needless to say, things are never as they seem from the outside.
One takeaway though is that Dalio has been less than perfect in his market prognostications. He has, in his words, eaten glass a number of times. Personally, I don’t begrudge the man that. It is all part of the game.
If there is an important lesson, it is probably that even the smartest, wealthiest, and most successful investors have their flaws. They will also be wrong frequently over long periods of time.
While Dalio critiques the idea of using a crystal in the above quote, that is essentially exactly what every institutional or individual investor is trying to do. Explicitly by having a position on, you have a view of the future.
Back to the Global Macro Grind ...
One of our views of the future that has come to fruition in the past week is the idea of inflation staying higher for longer. We’ve been previewing this with survey data, highlighting commodity prices, and tracking global shipping rates. This was reinforced in spades with this week’s February CPI and PPI data:
- Headline CPI accelerated on a Y/Y basis to +3.2% from +3.1% in January. It also accelerated on M/M basis to 0.4%, which is 4.8% annualized; and
- Headline PPI accelerated to 1.6% Y/Y and +0.6% M/M, which compares to the January data of 0.9% Y/Y and 0.3% M/M.
The most interesting takeaway from these recent releases of inflation data was Core Services ex-Shelter, which we know is a focus of the Fed. We’ve included this metric in the Chart of the Day. It accelerated to a six-month high in February at 4.5% Y/Y.
So, yes inflation is accelerating!
This recent inflationary data has, of course, had a real impact on the expectation of rate cuts. As of this morning, the first rate cut is now priced in for June. But the probability of this cut is 59%, while just a month ago the probability was at 82%. Those investors begging for cowbell may have to wait a bit longer.
You can have on all the uncorrelated global macro trades you want, but getting the direction of inflation right has paid off. Especially if you were short / underweight fixed income assets and long of inflationary assets.
The next chapter of economic data that might surprise people is a reacceleration in U.S. economic data. I know, I know . . . but inflation is hotter and monetary conditions are tighter, which should constrain economic growth. That is all true, but it doesn’t change the fact that we will be getting easy comparisons into March and beyond.
To put that in perspective let’s consider Retail Sales. As my colleague Christian Drake wrote yesterday:
“ . . . if sequential growth in March is zero (+0.0% m/m), year-over-year growth for the Headline and Control Group would accelerate +130bps and +110bps, respectively.”
So, even if Retail Sales show flat sequential growth, we get a Y/Y acceleration. Mind you in February Retail Sales were up +0.6% sequentially. . .
This idea of easier comps and subsequent accelerations in the coming months is in play across much of U.S. economic data.
As for us, we update our macro positions daily in Portfolio Solutions (there is true truth and transparency in that!) and, at the moment, this is the set up:
- Top Ranked Macro ETFs By Size: FDRXX, BUXX, TFLO, TBIL, INDA, PINK, ITA, EIS, QQQ, IWO, AMLP, IBB, ITB, SPMO, KEMX, PJP, XLG, KBWP, IBIT, EWN, CNCR, FXI, PFF, IAK, BDRY, EWY, EPHE, EWD, IPO, EWM, XLP, ETHE, BLOK, KSA, CPER, UGA
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 4.09-4.33% (bullish)
UST 2yr Yield 4.48-4.71% (bullish)
SPX 5073-5198 (bullish)
NASDAQ 15,904-16,353 (bullish)
RUT 2014-2080 (bullish)
Tech (XLK) 205-212 (bullish)
Insurance (IAK) 110.55-115.18 (bullish)
S&P Momentum (SPMO) 77.42-80.61 (bullish)
VIX 13.11-15.43 (bearish)
USD 102.28-103.90 (bearish)
Oil (WTI) 77.84-81.97 (bullish)
Copper 3.88-4.08 (bullish)
MSFT 405-430 (bullish)
AAPL 165-176 (bearish)
AMZN 172-181 (bullish)
META 480-515 (bullish)
TSLA 158-187 (bearish)
NVDA 821-939 (bullish)
Bitcoin 65,003-74,001 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
