"Higher, Further, Faster, Baby!"
- Captain Marvel
Have you Marveled at the cognitive dissonance pervading consensus narratives? Do you live in perpetual fear of portfolio Ragnarök or hulking geopolitical risks? Or have you gone unconventional Tony Stark on your process to Avenge former shortcoming so you can plunge heroically into the macro-verse?
Apologies, I’ve been immersed in an infinite, round-the-clock Marvel movie loop since Disney+ unleashed the latest streaming juggernaut on my kids.
For investors engulfed in the infinite tail-chasing tweet loop of Trade War surreality over the last two years, is it finally Endgame and time for a cathartic exhale?
Back to the Global Marco Grind ….
It’s Friday which, of course, means it’s the day after the day before today and the top questions in my inbox are the same as they were two days before tomorrow … all of which isn’t not obvious, right?
Too much playful linguistic acrobatics to close an exhausting week of chop? …. Let’s keep it tight post holiday party festivities @hedgeye last night and get into what’s Trending and Topical in my inbox, starting with the top Tourist destination …
Q: Battle or Infinity War?
- To be clear, yesterday was not the Tariff/Trade Endgame. It was the prospective (unconfirmed) end of a single battle that, together with some clarity around the U.K. election and official passing of the ECB torch, pseudo-freed the market of a two-headed uncertainty albatross into year-end.
- As we’ve highlighted, the lack of further escalation and some measure of tariff roll back carries some positive signaling value and is a net positive relative to extant conditions. But it’s still a net negative relative to the pre-Trade War environment, the substantive issues of concern remain as intractable as they ever were and the probability of a realized phase two/three agreement or push towards re-globalization over the next year is essentially zero.
- The Trade War is multi-dimensional and partial cessation of hostilities with China free’s up “resources” to deploy against Europe et al. as the march to restructure global commerce soldiers on.
Q: You seem to be indifferent and/or agnostic to the #BeanDeal?
- There’s a tendency to misinterpret or mischaracterize our view on trade dynamics. They have a direct economic effect (i.e. U.S. companies paying $30B in tariff costs annually with a flow through drag to profitability and flow through pressure to consumer prices) and even larger, derivative effects globally via confidence, capex decisions, hiring decisions, etc.
- Our contention remains that the rate-of change Trend in Growth & Inflation define the investing environment. Almost everything else represents a fringe dynamic that serves to amplify or dampen the GIP-defined trend, especially if a particular growth regime/Quad environment looks set to persist for multiple quarters. The Machine, modern market structure fragilities, policy, politics and topical headlines all play a role – and are captured/considered in our Risk Management process - but they are not the defining factors.
- In other words, the Trade War certainly matters … but as an amplifier to a growth curve that was already and independently inflecting negatively. And for economies that were gearing towards positive inflection, it’s acted as a drag on the underlying cycle – cultivating L-shaped “stabilizations” rather than more U or V-shaped rebounds.
Q: Is some resolution of geopolitical and Trade uncertainty a risk to your outlook?
No, in fact, with the $USD (finally) breaking Trend support and inflation expectation ramping, yesterday’s mania only served to get our inflation accelerating exposures paid faster. Energy being the second best sector performer yesterday (+1.84%) and leading sector performance MTD (+3.19%) is not random happenstance.
Let’s take it even further.
Suppose the sum of all bullish capitulation fears comes to pass. That is, trade tensions recede further, Central Banks remain accommodative, the hand-off to fiscal stimulus continues to baby step forward (U.K., Japan, Korea, India, Hong Kong, Chile have all announced fiscal stimulus measures) and the combination of easier base effects, the lagged flow through of coordinated central bank easing and the Fed’s stated intention to let things run hot all occur …. What happens?
The dollar retreats, the wave behind rising inflationary pressure swells and inflation accelerating exposures get paid.
And if that reflation constellation fails to transpire, we get a further entrenchment of Quad 3 (or Quad 4) and the Fed is forced to catch down to that reality, then the Fx and inflation exposure playbook is largely the same.
Q: Is positioning such that we are primed for a capitulation and price gap higher?
This line of questioning implicitly takes aim at the derivatives market and is inextricably bound up in the dynamics highlighted above. That is, with high, collective long equity positioning, trailing realized volatility at multi-year lows and central bank decisions/Brexit/Impeachment/Trade Deadline/Year-end Repo-funding risk, etc. all coalescing around a similar timeline, we’ve seen implied volatility premiums build and Skew ramp as left tail risk protection and other hedges have been put on.
To the extent we cleanly hurdle that collective concern basket, that protection will get sold and, in isolation, will be a short-term support to prices.
Q: What should I make of the spike in Initial Jobless Claims?
Jobless Claims ramped +49K to +252K, accelerating to +18.3% Y/Y and marking their highest level since September 2017. Continuing Claims, meanwhile, accelerated to +6% Y/Y as the late-cycle labor signals continued to layer.
The peri-holiday period is always noisier across the super-high-frequency (weekly) data and the Thanksgiving calendar shift is likely having some distortive effect. We don’t take an overly convicted view of any single week in isolation so we wouldn’t read too much into it, yet.
But given that Initial Claims have been one of the most consistent lead indicators of the cycle historically and peak improvement in Claims is now rearview, a prospective negative inflection is certainly worth a highlight – particularly given that domestic labor momentum is clearly slowing, a growing swath of labor indicators are past peak, the cost of labor is rising and the rise in Initial Claims is always a one-way street higher once the inflection takes root.
Like Thanos, it’s not always clear who’s the villain and who’s the protagonist amidst Trade Wars, rampant policy maker interventionism and evolving market narratives.
And less than half will survive the annual relative performance finger snap, which is also poetically Thanos’esque.
Thankfully, by chasing process and not headlines, you can avoid having to actively avenge the infinite pitfalls of emotional/political bias and be both author and protagonist in an autobiographical market narrative of pro-active risk management.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.71-1.91% (bearish)
SPX 3087-3180 (bullish)
RUT 1 (neutral)
NASDAQ 8 (bullish)
Utilities (XLU) 62.38-63.71 (bullish)
REITS (VNQ) 90.26-93.80 (bullish)
Energy (XLE) 58.00-61.16 (bullish)
Gold 1 (bullish)
Copper 2.59-2.85 (neutral)
Have a great weekend,
Christian B. Drake
