“Too many of us take great pains with what we ingest through our mouths, and far less with what we partake of through our ears and eyes.”
-Brandon Sanderson
So, the latest chapter of 11th hour political theatrics comes to a close with a lapse in unemployment benefits, eviction/loan moratoria, household and small business aid and a government shutdown narrowly averted.
While the larger tragi-comical tome of legislative ineptitude continues to be written, the market is now cleared to persist in its apathetic view of near term fundamental softness as it marinates in the reflationary optimism associated vaccine disbursement and the more conspicuous emergence of reported Quad 2 data.
I hope you had a happy and healthy holiday with your loved ones.
If you’re bolted to the chair and tuned in this morning/this week, we salute you.
Back to the Global Macro Grind ….
Our morning missive generally strives for tactical and actionable research alpha, but we occasionally enjoy straying from the normal, prosaic brain candy to some global macro eye candy during slower market periods.
Indeed, while the internet is full of food for investment thought, it’s mostly low on analytic calories and/or macro-nutrient density.
The chart selection below offers a mini macro buffet of enticing analytical morsels that defined 2020 and will continue to shape the macro-scape over the coming year…..
A Preview, Not a Coincidence: Perhaps the Fed expanding asset purchases to a level that almost exactly offsets increased issuance/deficit spending (or that DM central bank balance sheet expansion is almost equal to aggregate fiscal stimulus) is merely coincidence and not overt debt monetization …. Perhaps. And the fiscal-monetary “cooperation” is only set to increase further with Yellen taking the helm at Treasury.
FedNOW: Digital Currencies are coming. They are, in fact, already here. Just accept and embrace it. When I first began highlighting the FedNOW initiative about a year ago, I was surprised at the general lack of awareness. That is probably still the case. If you are unfamiliar with FedNow (see: HERE and HERE), it is a Fed designed and implemented instant, digital payment infrastructure that effectively gives the Fed a direct line to every household and business in the country. If you want an infrastructure capable of bypassing “middle men” (primary dealers) and making direct disbursements to households in lieu of junk bond purchases and isolated socialism for wall street and the 1%, FedNow is a discrete step in that direction. Indeed, just ask the Fed itself : “Thinking ahead, FedNow, coupled with a directory service with accurate information on where to route payments for final distribution to households or businesses, has the potential to solve some of the challenges the government faced when distributing pandemic relief payments” (Loretta Mester, September 2020)
Negative Yielding Debt vs Global Rates: This is obviously an outcropping of administered markets, the price insensitive bid from central banks designed to push investors out the risk curve and down the quality ladder. At one point during the year, high yield when fully oxymoron with a large chunk of “high yield’ EU corporate debt going at negative yields. Corporates and sovereigns have taken full advantage of the rate environment and (this is an oversimplification) have continued to solve a debt problem with more debt. Of course, this means global rates can never truly “normalize” and any large-scale, sloppy back up in rates probably presents a buying opportunity in bonds.
FAAMG vs NIPA: There has been zero growth outside of mega-cap tech in recent years as FAAMG has been the singular source of SPX revenue and profit growth – a reality apparent in the national statistics as well with an unprecedented divergence opening up between SPX and NIPA (total National) Profits. More broadly, the concentration of profits sits as a microcosm for the increasing concentration of domestic wealth and the growing recognition of the entrenched K-shaped distribution of wealth and opportunity cultivated by current policy.
Richer-er-er! Distribution of Assets: So long as the inequality and wealth concentration engine driving the convergence in the chart below persists Value won’t sustainably beat Growth, Cyclicals won’t sustainably beat Duration proxies, earnings won’t see a broad and sustainable acceleration and the 4th Turning will invariably continue towards its terminal end.
VOL up, Stocks Up: The put call ratio fell to all-time lows as option volume from individual investors spiked alongside the bonanza in short-dated OTM call options which saw 2-week, single stock option volume in tech/S&P500 balloon to 75% of total option volume. In short, zero commission costs, stimulus liquidity and the collective retail realization that, if they act in concert, they can weaponize dealer gamma to propagate self-reinforcing upside! Be on the lookout for this factor pattern to emerge again… we know how it ends.
Please Show Me the Second (or Third) Cycle in that Tulip Bubble Chart! Crypto’s maturation continues to take shape. Whether you buy into the notion of bitcoin as the quintessential digital store of wealth or crypto as functional infrastructure for global payments and commerce, BTC is not going away. Regulation may be antithetical to the crypto ethos but it’s basically an inevitability. And regulation certainly ≠ banned .. quite the opposite from a price perspective probably as regulation opens the door for broader scale institutional adoption.
SPX vs Consumer Confidence: The divergence here is notable but as unsurprising as it is anomalous. The gap is going to close one way or another but we’d argue the reconvergence occurs largely in the direction of equities alongside the prospects for a multi-quarter reflationary environemtn and a Fed with a fresh, remixed framework explicitly designed to let things run hot.
Retail Sales vs Industrial Production: The spread here also sits as a proxy for the divergence in the goods and services economies as the Goods economy remains the relative beneficiary of the Covid catalyzed shift in consumption away from Services. That shift along with ongoing supply and production constraints has driven a collapse in inventory to sales ratio, supporting both prices and production as inventory rebuilding plays out. Expect durables inflation to continue to support reported aggregate price growth before eco renormalization progressively shifts inflationary pressures back int eh direction of housing and services.
GIP: As it stands, we continue to expect a reflationary Quad 2 environment to define the domestic and global economies in 1H21.
The chart set above captures the collective surreality we’ve all been forced to occupy over the past year.
And as has been on more discrete display, the policies responsible for propagating k-shaped outcomes are the same as those fueling the zeitgeist underpinning growing socio-economic frictions and the increasing concentration of corporate wealth.
The real work of transformative and inclusive policy is far different than the politics of sound byte solutions to complex problems.
Addressing those policy liabilities and constraints remain both the challenge and the opportunity in the year(s) ahead.
As always, today represents your best opportunity to be the change you’d like to see.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.90-0.98% (bullish)
UST 2yr Yield 0.11-0.16% (neutral)
SPX 3 (bullish)
RUT 1 (bullish)
NASDAQ 12,475-12,942 (bullish)
Tech (XLK) 124.99-130.74 (bullish)
Energy (XLE) 37.20-40.90 (bullish)
Financials (XLF) 27.99-29.21 (bullish)
Utilities (XLU) 60.23-62.45 (bearish)
Gold Miners (GDX) 33.96-37.19 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 265 (bullish)
DAX 131 (bullish)
VIX 20.23-25.30 (bearish)
USD 89.57-90.92 (bearish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
