“Please allow me to introduce myself, I’m a man of wealth and taste. I’ve been around for a long, long time, Stole many a man’s soul and faith.”
-The Rolling Stones
What a year! Cancelling 2020 is one candidate for cancel culture that we can all likely agree on. Home schooling, working from home, the great recession, and the dang virus. Seriously, what’s next? Are the Toronto Maple Leafs going to win the Stanley Cup!?!?
On the positive side, as stock market operators, it has definitely been an interesting year. It is also a year that has both afforded us many gains and taught us all a lot of humility. Being humbled, even if briefly, is never a bad thing.
The game to play now is the one in front of us. What will the world look like in the next three, six, or nine months?
We’ve been clear on our call that we think we are heading into a #Quad3 type scenario, which is combination of decelerating growth and accelerating inflation. For those of you that aren’t familiar with the lingo of Hedgeye Nation, that’s called Stagflation. Obviously a big asset allocation shift we’ve made recently is to position long of commodities – Oil, Corn, Cocoa, Cattle, and so forth.
Forecasting can be challenging in the best of times. This is typically why we let the math and predictive tracking algorithms do the talking. As John Kenneth Galbraith famously said:
“The only function of economic forecasting is to make astrology look respectable.”
Indeed.
Back to the Global Macro Grind…
As we peer into the intermediate future, there are two big topics looming: the U.S. election and COVID-19 (we will get the economic data in a second).
As many of you know, I’ve been closely following COVID-19 since the initial WHO report from mid-January. (To the extent you want to be added to my regular write up on this topic, please email .)
The positive is that we’ve learned a lot and the initial forecasts, to Galbraith’s, point were really bad. COVID-19 is ultimately proving to have lower fatality rates and a higher asymptomatic population than most “experts” initially believed.
That of course doesn’t mean it's going away. In fact, COVID-19 is coming back with a vengeance in America. Daily new case count has basically doubled over the past couple of weeks in the U.S. and hospitalizations are rising around the country. The biggest concern we see is that R0, the transmission rate, is above 1 in approximately 36 states.
The takeaway from broad community transmission is that cases will likely continue to accelerate and things will get worse before they get better. We certainly get the getting “worse” is subject to interpretation, but the reality is that as cases accelerate it will negatively impact a lot of industries and general mobility.
Absent a miracle vaccine, this will be a constant and ongoing buzz. Obviously, the tricky thing about viruses is that they are viral and if left unchecked grow exponentially. We don’t need the “experts” to tell us that based on recent growth rates (averaging 49% week-over-week), the next few weeks or more look challenging.
In times of national duress, the political winds shift meaningfully. At the start of the year, it seemed somewhat reasonable that President Trump would get re-elected and the Republicans would likely retain the Senate. Over the last few weeks, a lot has changed on this front. Currently, based on the Real Clear Politics poll aggregate Biden is up by 9.2 (close to his largest lead) and in the betting markets has a 23.1 point edge.
A lot will happen between now and Election Day. If 2016 taught us anything, it is that polls can be imprecise at best as prognostication tools. That said, the set up today is a big Biden win with likely follow through to Congress. That isn’t a political comment (I’m a Canadian that leans right after all!), but certainly has significant implications for investing – taxes, regulation, infrastructure spending, social media, etc. Our D.C. based team will be updating us in real time on the market and investing implications as we head into the fall.
On the U.S. domestic front this morning, we received an interesting data point on Mortgage Applications that came in at +14.6% year-over-year, but, and there is always a but, the data set showed the second weekly decline.
Now we certainly aren’t suggesting that housing is going to crash from here, though it is getting increasingly evident that we may be closer to a peak. We’ve attached this data series in the Chart of the Day.
Globally this morning, we are seeing more of the acceleration off the trough. As my colleague Darius Dale wrote in his morning data dump, the following countries showed an acceleration in PMIs:
→ Australia (51.2), Indonesia (39.1), South Korea (43.4), Taiwan (46.2), Japan (40.1), China (51.2), India (47.2), Russia (49.4), Turkey (53.9), Spain (49.0), Italy (47.5), France (52.3), Germany (45.2), Eurozone (47.4), UK (50.1), South Africa (53.9)
Global demand picking up, even if incremental, is supportive of our long commodities theme.
So even though 2020 has been a tough year, keep the faith as there will always be accelerating economic data, decelerating data, and opportunities for positive investment outcomes.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.62-0.73% (bearish)
UST 2yr Yield 0.12-0.19% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 9713-10,181 (bullish)
Tech (XLK) 100.22-105.37 (bullish)
REITS (XLRE) 33.25-36.02 (bullish)
Utilities (XLU) 54.68-58.64 (neutral)
Financials (XLF) 22.12-23.68 (bearish)
Shanghai Comp 2 (bullish)
Nikkei 22008-22471 (bearish)
DAX 119 (bearish)
VIX 29.70-37.68 (bullish)
USD 96.49-97.93 (bearish)
Oil (WTI) 36.70-41.23 (bullish)
Nat Gas 1.51-1.81 (bearish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
