"If you want to lift yourself up, lift up someone else."
-Booker T. Washington
Is your team with you, or just around you?
If you don’t have an intuitive sense of what that means, there’s a good chance it could be the latter.
Whatever your answer, are your current team dynamics a byproduct of happenstance, or a product of the purposeful cultivation of cohesion & shared purpose?
Down days, acute volatility clustering and challenging market environments have a sneaking ability to unveil true investor convictions, modeling and process vulnerabilities and the underlying health of team kinetics.
As they say, everyone has a plan - and every team works well - until you get punched in the face.
Did distress and acrimony surface in 4q18/1q19/May or did you, collectively, do your best work on your worst day?
Why bring this up as Spoo’s re-breach 3K to the upside and the great, positive, cross-asset performance bonanza of 2019 rages on?
Because it’s a culture and internal zeitgeist discussion to have while the sun is shining ... in Sept/Oct 2018, not December 24th, 2018 …. before policy intervention, active vol suppression and grabby short squeezes invariably morph into a vol amplification regime whereby a vol spike cultivates a liquidity vacuum that drives a negative vol-liquidity-price spiral. Before your risk management finger is in the midst of earning its callouses.
Back to the Global Macro Grind ….
So, the IMF cut its growth forecast for the 4th time, the RBNZ is readying its unconventional policy strategy for its virgin run and the BOE promised data independence in pledging to remain dovish come what will from the ongoing, slow motion, tragicomical Brexit train wreck.
“Come what will” happened to be a cratering in UK factory activity as the CBI fell the most in 10 years yesterday to christen Boris’ first day.
In other words, it’s more of the same in terms of Trending, high-frequency global macro data.
In other ongoing, train-wreck news: Eurozone PMI’s.
The German PMI is now legitimately flirting with a 30-handle! as the headline reading fell to a fresh low of 43.1, marking a 7th consecutive month of contraction as manufacturing mojo in the epicenter of EU industrial activity continued to tank in July.
It was the same story for the broader region as French Business Confidence continued to deteriorate and the Eurozone Manufacturing PMI missed estimates while making another lower low at 46.4. With the Swiss 10Y down to -0.70% and German 10Y Bunds down at -0.38%, bonds remain a reflection of the underlying fundamental reality.
In other words, more of the same.
Suffice to say, this puts increasing “courage to act” onus on Draghi …. which puts more pressure on the Fed to actively ease so as not to drive a re-divergence in policy … which puts more pressure on Trump to put more pressure on the Fed and re-ramp the accusatory bombast against the ECB, PBOC, etc. (i.e. the ‘currency manipulators’) … which puts pressure on an increasingly incredulous FinTwit obsessed with rocks and glass houses analogies vis-à-vis Trump demanding a weaker dollar & Fed rate cuts while simultaneously lambasting that same activity out of other central banks/policy makers.
But I digress ….
Stateside, the Richmond Fed posted its largest sequential drop in 2 years and lowest print in 79-months which, together with a seventh consecutive month of negative growth out of the Chicago Fed (worst stretch since 2009) in July, served to spray Round-Up across whatever green shoots were being cultivated out of June NFP, Retail Sales & underlying consumer price growth.
Meanwhile, the U.S. Justice Department announced it’s stepping up its investigation into anti-competitive practices out of big tech.
Recall, we saw this last year when both Trump and Pelosi voiced concern around monopolistic and anticompetitive behavior out of the FAANG+ complex and again in early June when the DoJ , FTC and House Judiciary Committee first announced the start of formal antitrust investigations – each instance served to catalyze mini price tantrums across the former teflon tech collective.
While existential, break-up risk remains low, the more tangible concerns are the same as they have been.
Large-cap tech (Amazon, Alphabet, Facebook, etc) remain index and benchmark heavyweights, ubiquitous constituents within ‘smart beta’ and ‘factor exposure’ vehicles and poster-child recipients of bottomless passive flows.
Indeed, as has been recurrently highlighted again recently, just 4 tech stocks (Apple, Facebook, Amazon and Microsoft) have accounted for more than 19% of the gain in the SPX YTD.
The risk of increased scrutiny and tighter regulation to market sentiment and operating momentum (higher costs/lower sales) remains fairly self-evident.
More broadly, globalization, consolidation and the more conspicuous emergence of domestic/global oligopolies have played a principal role in lifting returns on equity and financing buybacks, a dynamic which has served as a secular support to equities while helping to anchor inflation – a double sided coin as, on the one hand, it’s a driver of the ‘lowflation’ problem confounding policy makers while, on the other hand, it has episodically nurtured the “goldilocks” environment whereby central banks could continue easing in the face of tightening labor markets and improving growth.
To the extent inequality and antiestablishment push back, further political scrutiny and regulatory screw-tightening serve to stymie those dynamics in a meaningful way – or push them into reverse – it’s obviously a market negative.
Lastly, next week looks set to host the latest iteration of the “when all is said & done, more is said than done” trade negotiation hamster wheel as Lighthizer et al. travel to China to resume talks.
I’ve used Aesop’s axiomatic truthiness before but, at this point, I’m not sure there’s much left to say concerning our now entrenched “next-verse-same-as-the-last-verse” political surreality.
In other words, more of the same in political tourism space.
In other, other words, keep focused on #FullCycle Investing, the gravity of the cycle and the outlook for the slope of the growth and inflation lines (which will dictate the central bank policy reaction … which may or may not feedback to impact the 2nd derivative trend in growth/inflation).
Anyway, when all of yesterday’s data is said and done … our growth (slowing) expectations and our proclivity for #FullCycle allocation to bonds, gold and Quad 4 sector/factor exposures = more of the same.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.00-2.15% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 8090-8280 (bullish)
Utilities (XLU) 58.71-61.39 (bullish)
REITS (VNQ) 86.94-90.51 (bullish)
Financials (XLF) 27.70-28.40 (neutral)
Shanghai Comp 2 (bearish)
Nikkei 21134-21857 (bearish)
DAX 12156-12525 (bullish)
VIX 11.99-15.99 (neutral)
USD 96.15-97.75 (bullish)
Oil (WTI) 54.01-58.08 (bearish)
Gold 1 (bullish)
Copper 2.66-2.76 (bearish)
Best of Luck out there today,
Christian B. Drake
Macro Analyst
