“Depression is your avatar telling you it’s tired of being the character you are trying to play.”
-Jim Carrey
Despair not macro shield brethren!
Today we bury the stale reflection of old avatars!
Today we shrug off the quiet desperation and refuse our daily ration of echo chamber & animus
Today we exfoliate our soul
& rebirth in the warm glow of psych-emotional metamorphosis
On this day we checkout from the vacant promise of tired conventionalism
And unshackle from the terminal drudgery of practiced conservatism
We cast aside the albatross of routine & learned bias
Cast a circumspect eye at the daily cabaret of conditioned responses
Today we trade passive-aggressive pretension for humble benevolence
And with the fundamental curiosity of a child we observe, again, for the first time
Today, we purge apathy
Plant empathy
And Harvest Cosmic Karma
Today we log off from serial myopia
We look both inward and to the horizon in an attempt to channel the infinite
Our Armor is Authenticity
Our Shield Ambition
Our Sword Humanism
Into the breach
We leave none unbaptized
Today we eat gas station sushi & ride solo in the HOV lane!
Today, amigos, we etch our legacy onto the tapestry of eternity!
On this day, we talk about …. Cheese!
Back to the Global Macro Grind ….
“The early bird gets the worm but the 2nd mouse gets the cheese”
That remains one of our core functional macro mantras.
It’s meant to capture the notion that Macro phase transitions are not priced in overnight and there is no shortage of 2nd mouse opportunity with respect to shifting or building exposure following a legitimate cycle inflection
From a process perspective, it also captures a few notable realities. We discuss this at somewhat regular intervals but it may not be obvious or explicit to new jedi’s.
The same process that gets you #Out … is also the process that doesn’t get you in (not always, at least)!
Here, our Historical BTC positioning chart which we’ve profiled before is illustrative.
If we’re focused on 2nd Mouse Opportunity associated with the breakout to Bullish TREND:
- BTC Bottomed ~$17K
- Went Neutral TREND at ~$26.8K
So we missed the first 57% of the move on an 80-vol asset (we either had no position or lost some on tactical shorts)
In larger context:
- We were long the 2021 mania
- We got you #Out at ~$51K
- Made money on the short side from $51K → $16K
- BTC Bottomed ~$17K
- BTC went to Neutral TREND at ~$26.8K
- We missed the $17K → $26.8K move (57%) move off the bottom
- We got long on 10/23 at ~30.5K
So, we missed the first part of the move but captured the 30.5K → 70K breakout following the flip to Bullish TREND
In other words, +130% in 2nd Mouse Opportunity.
And that is the larger point:
- Using the #VASP and our larger Quantamental process you will avoid large drawdowns as you will have min exposure as we approach the TREND line and no exposure during TREND breakdowns
- You will likely also miss the first part of a move as our conviction/positioning won’t structurally shift until we recapture Bullish TREND
Being Risk Management-centric, we’re okay with that trade-off and inherent Process “constraint”.
It’s a feature, not a bug.
Next ….
Asymmetry: This is one of those trivial things where semi-frequent reminders nonetheless remain helpful.
Markets are selectively efficient, and to get paid on a view you don’t necessarily need for it to be right (absolute), you just need the probability distribution to shift to more/less probable and consensus to capitulate in the same direction.
The Signal got us out of duration (long-end TSY’s) and rate sensitivity (XLU) early and consensus has now capitulated on the willful silliness that was 7-8 rate cuts for 2024 in January.
At this point:
- Markets have shifted to pricing 1-3 cuts for the year with July barely hanging on as the start date
- GDP and Inflation estimates continue to solider northward
- SPX Rev/EPS Revision Trends are holding positive and reflecting acceleration
- Fiscal/Deficit spending is not expected to retreat, at least not near-term/pre-election
- Financial stability concerns will drive a taper in QT, which suggests a more favorable liquidity environment (with some chop in the interim)
- No Landing (and/or Soft Landing) are consensus
So, the natural follow-on question is whether the asymmetry that characterized year-end/January has effectively reversed … and does the risk now sit in the opposite direction?
- Yes. Or a conditional “Yes”, at least in the context of the framing above.
- Again, the opposite (recession or aggressive dovish scenario) doesn’t actually have to happen. The market just needs to price that scenario to more/less probable for the associated positioning to be profitable.
- We’ve already faded the extreme dovish positioning at the start of the year. Fading the converse wouldn’t be particularly surprising.
- It could manifest as a short-term countertrend move or propagate in a way that sparks a bigger self-reinforcing spiral
Either evolution is fine.
Our Risk Management process is regime/direction agnostic and can absorb the uncertainty and path dependence of either scenario.
We were Bullish and Long (a lot of stuff) through the ongoing cyclical slowdown last year.
It would be Macro Poetic to be tactically & notably short at points during an acceleration.
On the other side of asymmetry and (potentially) fading extreme No Landing positioning, sits the other primary risk.
Primary Risk: Too-Far-Too-Fast on Rates
A primary risk associated with protracted Quad 2/Quad 3 is potential overheating and the flow through impact to rates volatility.
The Chart of the Day below visualizes the idea using 2018 as a case-study. As the chart annotation highlights …
Quad 2 is generally but CONDITIONALLY Bullish. Measured, Progressive Rate increase reflecting a strong/strengthening economy are typically absorbed by markets. Most of 2018 was characterized by a progressive rise in yields and positive equities/housing performance, until … a crescendo in inflation angst drives a break-out in rates vol and a too high, too-fast dynamic in yields. Equities then end up with an acute bond problem. The risk of a (negative) overheating scenario is higher in Quad 2 simply because inflation is already accelerating.
Now, lastly for today ..
Consumer | LESS BAD
While the Fed Regional Manufacturing & Services Survey data for March continues to come in mixed (stable but stalled), ‘Less Bad’ continues to propagate across the domestic consumer data-verse.
- NY Fed Credit data (Feb) = Credit Availability & Consumer Financial Sentiment Improving
- Univ Michigan = Household Financial Conditions Improving
- Census Pulse Survey = latest march data = Difficulty Paying for Usual Household Expenses & Food Insecurity declining & sitting at year+ lows
- Household Balance Sheet | 4Q23 Household DFA (Distribution of Financial Accounts) data: The bottom 50% of Households showed the first improvement in net financial position since the hiking cycle began with Assets (Debt + Equity ownership) rising $45B Q/Q vs a Consumer Credit (Increase in Consumer Debt) increase of $17.7B.
- Excess Cash | 4Q23 Household DFA data = While real purchasing of aggregate cash for the bottom quintile of income fell again, real cash balances across every other income cohort increased in 4Q23 for the first time since 1Q23
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.32-4.49% (bullish)
UST 10yr Yield 4.16-4.36% (bullish)
UST 2yr Yield 4.49-4.76% (bullish)
High Yield (HYG) 77.06-77.92 (bullish)
SPX 5123-5277 (bullish)
NASDAQ 16,075-16,571 (bullish)
RUT 2031-2112 (bullish)
Tech (XLK) 205-212 (bullish)
Insurance (IAK) 113.19-116.24 (bullish)
S&P Momentum (SPMO) 78.02-81.66 (bullish)
Healthcare (PINK) 29.68-30.61 (bullish)
Nikkei 38,710-41,445 (bullish)
VIX 12.41-14.90 (bearish)
USD 102.86-104.75 (bullish)
Oil (WTI) 79.47-83.20 (bullish)
Nat Gas 1.61-1.90 (bearish)
Gold 2145-2211 (bullish)
Copper 3.93-4.16 (bullish)
NVDA 858-960 (bullish)
Bitcoin 60,906-72,550 (bullish)
Best of luck out there today,
Christian B. Drake
Macro analyst
