“It’s not what you look at that matters, it’s what you see”
- Henry David Thoreau
The boundaries defining NSFW have clearly become more ambiguous over the last 6+ weeks. Whether that boundary truly existed in the first place – beyond the blatantly offensive or HR pretensions to political correctness – is open for debate.
In any case, if you have a family you know that, at times, the singular source of exfoliation for your secluded, WFH soul is spontaneous kid-tainment.
While we were alone together last week, this vintage Gem happened to re-bless my stream.
That clip is really just a more amusing manifestation of “its not what you’re looking at, it’s what you see”
Do you hear “Fork and Knife” or do you hear the pseudo-NSFW version? … Is it really NSFW if there is no underlying intent?
Back to the Global Macro Grind …
Investing during a macro phase transition or acute volatility cluster (and, really, macro and market analysis in general) is very much just an infinite analytical loop of “it’s what you see” that matters:
Do you see an unprecedented collapse in macro activity or do you see an unprecedented policy response?
It’s worth re-highlighting that, at this point, the conversation has fully coalesced around the idea that this ‘stimulus’ represents an attempt at maintaining a kind of economic stasis. That is, that it’s just sufficient enough to replace lost activity with hopes that transient inactivity doesn’t morph into significant economic atrophy. It’s not stimulus. Stimulus may or may not be ‘Phase 4’ - a macro ergogenic designed to drive economic hypertrophy. As any physique athlete knows … a “maintenance program” and a “mass phase” are decidedly different regimes.
Do you see a raging bounce in U.S. stock benchmarks or do you see equity vol that refuses to meaningfully backslide?
Or better yet, does financial market volatility really decay in the aggregate or just get moved around and oscillate between relative concentration and relative dispersion? As we’ve now seen repeatedly, stability and “great moderations” simply represent a cumulation of latent risk that emerges in explosive slowly-then-all-at-once fashion.
Do you see the Fed supporting the market or as destroying signaling value?
Is the Fed backstopping bonds serving as a stabilizing agent or is it serving as a lifeline to otherwise zombie energy produces which, in turn, serves to exacerbate the supply problem that is driving the deflationary spiral in oil and self-defeating with respect to getting “inflation back to target”. And if the go forward assumption is for a credit backstop during times of stress then BTFD conditioning will invariably erode signaling value in credit.
- Do you see a consumer tax cut as oil plunges or do you see tens of thousands of lost energy jobs, billions in deferred or lost investment, a spike in bankruptcies and protracted rout across an entire sector?
- Do you see the immigration pause as prospective job protection or a secular growth depressant for an economy already set for 0% population growth absent foreign inflow?
- Do you see in absolutes (good/bad) or in rates of change (better/worse)?
We are going to see another 3-5 million in lost employment in this morning’s initial claims data – a figure which continues to understate the devastation in the domestic labor market as it fails to capture reductions in hours or workers who fail to qualify for jobless benefits.
Consensus is at 4.5M, which would bring the 5-week total since the hard stop disruption in domestic activity to 26.5M – a profoundly tragic total that implies a complete wipeout of cumulative post GFC employment gains in just over a month.
In fact, as can be seen in the Chart of the Day below, it effectively wipes out 22 years of gains, taking employment back to 1998 levels!
Yes, many of those are furloughed workers who still have benefits and can be re-onboarded quickly but many will not.
I know the coverage around this has been ubiquitous and desensitizing but take a moment to internalize the gravity of those losses. The speed and scale of lost livelihood and collective consumption capacity is, simply, staggering.
Do you see direct impacts or derivative effects?
Handicapping the network effects is always where the macro alpha lies. But precisely quantifying the diffuse and inherently unknowable derivative effects this magnitude of shock may propagate is mostly intractable.
What we do know is that there exists multiple daisy chains of fragility.
If a significant number of households are living paycheck to paycheck and small business (which, collectively, represent the largest source of incremental hiring & investing and which, collectively have little to no cash cushion) revenue is levered to those paychecks then a relatively small change at the beginning of the chain can cascade, amplifying the effects as it propagates downstream.
You can also get cascading deflation as a demand shock begets both a strong $USD and a commodity price shock which further propagates a deflationary spiral as changes in energy prices remain THE primary driver of changes in domestic headline inflation and as financial conditions tighten globally, EM economies come under increasing distress and global commerce decelerates … which feeds back changes in energy prices remain THE mafioso driver of changes in domestic headline inflation
We also know that hysteresis always characterizes shocks of this magnitude. The notion that we’ll see a full and expeditious recovery and that consumers and businesses don’t retrench – favoring some measure of savings and cushion building over consumption, investing and/or incremental hiring – is unrealistic.
Do you see what I mean about all of this?
The discussion above isn’t some kind of fabricated abstraction.
The collective view built around the mosaic of dynamics above directly relates to your expectation around the magnitude and slope of recovery … and by extension, the outlook for the consumption/investment/profits associated with that recovery.
Now, everyone’s favorite question ….. Do you see a durable inflection or a bear market rally?
Or does the attempt to cleanly classify it obscure a more fundamental reality.
That is, if your process is “label” or “narrative” agnostic and dependent on extant Volatility/Price/Volume/etc conditions … it doesn’t really matter if you call it ‘recession’ or ‘Quad 4’ or ‘bear market rally’ … .they’re all just different states of a single, dynamic complex system.
If you’re process is built to operate dynamically within that system, the speed at which you move may slow or quicken but the risk management process directing those moves remains unchanged.
As always, we’ll be live on The Macro Show at 9am ….. with our “Forkn” knife ready for the daily global macro risk management buffet.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.53-0.77% (bearish)
UST 2yr Yield 0.17-0.26% (bearish)
SPX 2 (bearish)
RUT 1150-1247 (bearish)
NASDAQ 8035-8759 (neutral)
Consumer Staples (XLP) 56.88-61.08 (bullish)
Healthcare (XLV) 93.00-102.01 (bullish)
Utilities (XLU) 56.18-61.68 (bullish)
Tech (XLK) 83.07-90.47 (neutral)
Financials (XLF) 20.03-23.45 (bearish)
Best of luck out there today,
Christian Drake
Macro Analyst
