“Exit light, enter night, take my hand. We’re off to never never land.”
-Metallica, “Enter Sandman”
We might not have a lot of Metallica fans on our reading list. Then again, maybe we do? You never know with people.
But there’s no doubt that these #Quad2 markets can at times feel like we are entering “never never land”. And all that really takes is a serious upside rip in the U.S. dollar. The Bitcoin aficionados saw that more than most with an almost 30% sell off in Bitcoin in 24 hours Sunday thru Monday (albeit after an epic rip to the upside).
To some, a decline in the price of an asset by near 30% is akin to a new bear market. But in the wild world of crypto currencies, it’s not totally clear what a correction of 30% means. Especially after that comes on the heels of a more than doubling of the asset over the last month or so.
But like most asset classes that are priced daily, crypto currencies can be risk managed. To help you in doing so, we’ve introduced a brand new product called Bitcoin Trend Tracker. It highlights daily the math behind what is driving the price of Bitcoin. If you’d like more information on how to subscribe to this product, please email .
The beauty of trading with math is that you can ignore the narrative of the day and focusing on the underlying characteristics of the asset classes. As we show in the Chart of the Day, the nature of Bitcoin at the moment is that it has very high volatility ( 82 realized Vol) and is highly inversely correlated to the USD dollar (-0.89 on a 90-day basis). That, of course, doesn’t mean you shouldn’t own it, but you should understand that on dollar up days it will be prone to serious drawdowns.
You should also understand that “I made money,” doesn’t necessarily equate to “store of value,”
Back to the Global Macro Grind...
We are back to some serious #Quad 2 energy this morning though, comrades:
- Copper +1.9%;
- Natural Gas +3%;
- Oil +1.4%;
- Russia +1.3%;
- China +2.2%; and
- 10-year yield up to +1.16% (closing in on the top of our 1.18% risk range).
All the aforementioned prices are going to new cycle highs, which is, of course, continuing to validate our global #Quad2 call (growth accelerating, inflation acceleration, and policy incrementally dovish). But how about that energy sector? After an absolute beat down last year, it is now leading all sectors and the $XLE is up 11% YTD.
Meanwhile, last year’s fan favorite technology, $XLK, is down -0.26%. The fundamental narratives also abound with oil as there is an increasing expectation that demand picks up as COVID vaccines are rolled out. While hard to measure (we prefer the obvious math), there is likely something to the idea that increased mobility will drive a rate of change improvement in oil demand especially vis-à-vis the tough comparisons of Q1 and Q2 2020.
On the topic of COVID, our Demography Sector Head Neil Howe and I are doing a special update call this Thursday, so stay tuned for the details on that as we will be opening up access broadly. One of the most interesting topics we will be discussing is going to be the new variants of COVID that are emerging. While evidence suggests they aren’t more deadly and/or likely to lead to higher hospitalizations, the evidence is becoming quite clear that the R-naught (level of transmission) is naturally much higher . . . perhaps as much as 50% or so. If you pull up a chart of COVID cases in the U.K., this higher transmission rate is very obvious. Well on the positive for COVID, the vaccine roll-out is happening in earnest . . . we are likely to hear more and more about the new COVID variant in the U.S. in coming weeks. We also had more than 300,000 new positive tests in the U.S. a couple days ago, which was a new high.
Now, of course, we will also have more government intervention coming later this week with Biden’s stimulus plan to be introduced on Thursday. The purported price tag on that likely to be in the trillions with rumored $2,000 checks to be mailed to eligible individuals. If there is one takeaway at all, it is that this is likely to continue to perpetuate the dollar based inflation ($USD remains bearish in our models) that has helped us generate such great returns over the past couple of months. As Washington, DC catalysts go . . . we also have new articles of impeachment to be voted on later this week. Though with less than 200 hours left in the Trump Presidency and Senate on recess, it's not clear what, if any, impact those will have.
As it relates to economic data this morning, there is some to take note of:
- Weaker Chinese credit data - Across the board we saw a rate of change slow-down in Chinese credit data in December with total social financing – 414 BN CNY in Dec, MO Money Supply down to a 11 month low, M1 Money Supply came in at the slowest rate of change in 11 months, and M2 Money Supply the slowest rate of change since March 2018;
- Japan Surveys – It was a mixed bag with the Japanese soft data with the Economy Watchers Survey Current Conditions -10.1 points to 35.5 in December and the Expectations Index up +0.6 points to 37.1 in December, which confirms our #Qaud2 forward outlook for Japan;
- NFIB Small Business Data in the U.S. – Across the board this data came in incrementally softer with the optimism index -5.5 points to a 7-month low, capex plans -4 points to a 7-month low, and sales expectations -14 points to a 7-month low.
As we wrap up here this morning, we will leave you with one more of our favorite rock n’ roll quotes from Led Zeppelin:
“And as we wind down the road, our shadows taller than our souls. There walks a lady we all know, who shines white light and wants to show everything still turns to gold. And if you listen very hard the tune will come to you at last, when all are one and one is all to be a rock and not to roll. And she’s buying a stairway to heaven.”
Have a great day!
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.98-1.18% (bullish)
SPX 3 (bullish)
RUT 2011-2142 (bullish)
NASDAQ 12,601-13,218 (bullish)
Tech (XLK) 126.72-131.83 (bullish)
Energy (XLE) 38.19-43.38 (bullish)
Financials (XLF) 29.05-31.82 (bullish)
Utilities (XLU) 60.34-62.96 (bearish)
Gold Miners (GDX) 34.48-38.99 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
