“Truth is not enough to stop false narratives.”
- Robert J. Shiller
We’ve been enjoying reading “Narrative Economics” around the office. After all, everyone loves a good story, and the financial markets are replete with them.
When I was coming out of college back in 1998, the most fanciful narratives were related to the internet bubble. If you missed out on that awesome period of narrative economic history, you sadly missed learning about great internet stories like boo.com, pets.com, Webvan, Global Crossing, Egg Head Software, and so on.
It was a heady time between 1995 and the peak in 2000, as the Nasdaq rose some 400%. At the time, the Wall Street Journal even suggested investors “re-think” the “quaint” idea of profits. Of course, we know how that all ended, as the Nasdaq eventually declined by close to 80% from its peak to trough.
Today we have all sorts of fascinating narratives infiltrating the financial markets. The SPAC boom, the crypto market, the “cloud”, ESG investing, and the narrative of free money and loose monetary policy are just a few we could name. Just like the internet boom, not all of these will lead to economic bust. In fact, had you bought the likes of Apple or Amazon during the internet bust you’d be quite happy today.
But think about the SPAC market for a second. Currently, we are averaging about 5 SPAC IPOs per day. Which means that by October, we will have roughly 500 SPACs outstanding. There will be some winners in this market no doubt (and our research team has already found many), but when demand for an asset class that is based purely on future story telling is off the charts... that should tell you something.
The point of narratives and bubbles of course is to be aware of them and take risk appropriately when the signs are there. For as Mark Twain famously said:
“History doesn’t repeat itself, but it often rhymes.”
Indeed.
Back to the Global Macro Grind...
In his quarterly themes deck yesterday, our Industrials Sector head Jay Van Sciver addressed false narratives head on with this:
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“We think the size of ESG has led to more inflows targeting an insufficiently large investment universe. That, combined with less traditional/retail trading, has led to tremendous gains for naïve, counterintuitive strategies. That NKLA’s shares are still above their SPAC offering price and BLNK, PLUG, and BTC have soared to absurd prices signals, to us, untethered valuations chasing idiotic stories. That said, fighting the froth is likely to prove unrewarding as the economy reaccelerates amid renewed stimulus and inflationary concerns (Quad 2). Instead, we are looking for industries & names with exposure to strong narratives that are, so far, underrecognized. Our newer, favored shorts tend to have more ‘staples’ character, with muted/negative exposure to the post-pandemic recovery.” |
His point is simply that whether a narrative is true and based in facts or, if it may not matter so much if it false in certain market periods. But, to be sure, there are also economic fundamentals at play driving many of these “stories”. In part, there is economic growth that is underlying much of this. As we highlight in the Chart of the Day, we are likely to see year-over-year economic growth that is near 70-year highs in Q1 and to some extent in Q2 of 2021. While this growth comes on the back of easy COVID comps, that acceleration is still real and buoyed by the free monies of central banks.
As it relates to Industrials specifically, we are already seeing data in the ISM Manufacturing numbers, as an example, that is returning to near all-time highs. As a result, the earnings cycle and recovery in Industrials is, and will be, real with NTM (next twelve month) earnings growth expected to be up more than 50%. It should be no surprise then that both Industrials (+2.17% YTD) and Materials (+7.0% YTD) are out performing the market so far by a decent margin.
Commodities are a big driver. As commodity prices continue to increase into #Quad2, those companies that both produce the commodities and sell into those end markets will continue to do well. As Keith noted this morning, the likes of corn and energy stocks have been going absolutely vertical. The inverse correlation with the dollar, combined with an incremental increase in demand (perceived or otherwise), is an amazing elixir to drive prices higher. On the topic of energy, U.S. oil production is also expected to be down again in 2021 according to a recent update from the EIA and in total will be down about -8% from its 2019 peak. Nothing like supply and demand fundamentals to buoy a narrative!
While there isn’t a lot of economic data out this morning, the data that is out continues to support global #Quad2. To wit:
- Russia – Headline CPI +51 basis points to 4.9% year-over-year in December and the fastest rate of change since April 2020;
- Turkey – Industrial Production +64 basis points to +11.0% year-over-year and the highest reading since January 2018; and
- Eurozone – Although a lagging November number, Industrial production was up for the 7th month in a row and a better than expected month-over-month increase of +2.3%.
Lots of headlines again out of Washington this morning, though not a lot that ultimately matter. We are fairly certain to get the second impeachment of the Trump Presidency, though it will likely not matter much as his Presidency will be over by the time it reaches the Senate where the bar is still high for a conviction (2/3’s of the Senate). The relevant news for us #Quad2 aficionados is the coming Biden stimulus. While the final price tag is still uncertain, there will be lots of checks mailed to people! And as it relates to the dollar, that’s likely to be most important to our models. We will also likely to see student loan forgiveness and “Baby Bonds” . . . so different forms of free monies. With an increase in dollars and continuing weakening dollar, a lot of things will go up . . . for example Bitcoin currently has a -0.804 correlation to the dollar.
Just as a reminder, Christian Drake and I will be doing an overview of our new BTC Crypto Quant product today at 12:00pm and then tomorrow at 12:30pm Neil Howe and I will be giving an update on COVID-19 globally. As usual, it will be more data than narrative. If you’d like more information on how to subscribe to these products, please email .
Have a great day out there, comrades.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.98-1.22% (bullish)
SPX 3 (bullish)
RUT 2035-2170 (bullish)
NASDAQ 12,701-13,263 (bullish)
Tech (XLK) 126.71-131.80 (bullish)
Energy (XLE) 39.03-44.25 (bullish)
Financials (XLF) 29.25-31.99 (bullish)
Utilities (XLU) 60.33-62.96 (bearish)
Gold Miners (GDX) 34.60-39.40 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 260 (bullish)
DAX 134 (bullish)
VIX 20.27-27.06 (bearish)
USD 89.20-90.48 (bearish)
Nat Gas 2.41-2.89 (bullish)
Gold 1 (bearish)
Copper 3.51-3.73 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
