“As of last month, I and most of my colleagues were expecting to increase our federal funds rate target a few times a year until the end of 2019”
–Janet Yellen, speech at the Commonwealth Club, San Francisco, California, 1/18/17
Year: The year was 2008.
Month: The month was December.
Day: The day was that preceding my last interview at @Hedgeye with Keith.
The Plot: I was leaving my PhD program and wanted to join one of the only finance firms (in the world?) that was growing headcount and whose growth trajectory was up and to the right. It was a semi rag tag operation of maybe 5 or 6 people at the time. I offered to work for free.
The Conflict: It was also the night of my 2nd MMA fight. I decided not to cancel despite having the interview the next morning. While I still wanted to win the fight, my primary concern shifted to protecting my face.
The Climax: Black eyes 0, New Job 1.
The Moral: Life is largely a serial collection of randomness so, within reason, you should generally do what you feel internally, and convictedly, compelled to do (don’t cancel the fight). And a Bayesian probability framework probably represents the most useful method of navigating that randomness.
(Bayesian) Case-In-Point: Having absorbed and propagated the culture, I’ve been able to update my hiring probability. If I actually came to the interview with a black eye, my chances of being hired would likely have been enhanced, not diminished.
The Arc: Every great growth story deserves a good origin story.
Back to the Global Macro Grind…
A few years ago I recounted the risk management requisites of Picture Day back in grade school. Basically, in an acute annual exercise in thug efficiency optimization, bullies would wait until picture day to punch a kid in the face.
Yesterday was another picture day for macro investors. With both the dollar and bond yields rising the most since the election, the market bullied anyone not seated at the #CoolTable of growth accelerating.
What Happened?
- Janet made the statement in our headline quote above = hawkish = Dollar/Rates ↑
- Wilber Ross indicated he would renegotiate NAFTA after becoming Commerce Secretary = Peso and Canadian dollar ↓ = $USD ↑
- Theresa May: Residual Hard Brexit concerns = GBP ↓ = $USD ↑
And, not to be outdone by policy and political risk, we had the actual data:
- U.S. Industrial Production: Industrial Production rose +0.8% sequentially while improving to +0.5% YoY, marking the first month of positive year-over-year growth in 15-months and breaking the longest non-recession streak of negative growth ever. Moreover, capacity utilization was higher year-over-year for the first time in 23-months. Yes, comps are moderately harder the next two months (and warmer weather in January won’t help Utilities production) before easing again in March and one month does not a positive Trend make, but 15-months of negative comps and improving growth make for a nice 2nd derivative yellow brick path.
- U.S. CPI: Headline Inflation accelerated for a 5th consecutive month, taking consumer price growth to its highest level in 32-months (since May 2014) at +2.1% in December. With reported CPI’s and 2017 inflation revision trends accelerating globally, it’s not just a domestic phenomenon. Expect the current price growth trend to continue at least through trough energy/inflation comps in 1Q17.
Instead of telling you what it all means, let’s do this instead:
Here’s a list of domestic, fundamental macro measures with a key commonality. The exercise is to identify that commonality.
- Consumer Confidence
- Business Confidence
- Wage Growth
- ISM Manufacturing
- ISM Services
- Industrial Production
- Capacity Utilization
- Durable Goods (ex-Defense & Aircraft)
- Auto Sales
- Retail Sales
- Revolving Credit Growth
- Disposable Personal Income Growth
- CPI
- PPI
If you guessed a positive 2nd derivative trend you are (likely) the lucky winner of a good day yesterday.
A positive 2nd derivative trend in the above is, by definition, Growth & Inflation Accelerating.
And if you agree with the premise that macro investing is more about better/worse than good/bad, then the collective improvement in that data = better = good = good for the exposures we’ve been yammering about every morning for the last couple months.
Quad2 and/or Trump Trades can, of course, get overdone, currency correlations aren’t perpetual (Dollar Up/Stocks up remains the prevailing relationship, for now), multiple major policy announcements all supporting the same trade won’t happen every day, and known-unknown and unknown-unknown risk is elevated currently, but being able to operate within that dynamic uncertainty is the whole point of our risk management process.
Sell the top end of the risk range, buy the bottom end - provided that it holds and that our research view remains unchanged – repeat.
Remember, also, the name of the company is Hedgeye Risk Management, not Hedgeye Maximum Momo Management.
The goal is to capture most of beta’s upside while sidestepping all or most of its drawdowns.
Markets don’t progress linearly and there will always be countertrend moves to stress ones process and conviction.
Correctly calling Trend inflections is cool. Correctly risk managing a countertrend move is cool too. Having the process and wisdom to know the difference gets you a rarified seat at macro’s Cool Table.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.33-2.50%
SPX 2
VIX 10.77-13.25
USD 100.00-103.10
Oil (WTI) 50.59-54.39
Gold 1161-1220
Enjoy the coronation show,
Christian B. Drake
U.S. Macro Analyst
