“It's like everyone tells a story about themselves inside their own head. Always. All the time. That story makes you what you are. We build ourselves out of that story.”
- Patrick Rothfuss
Who doesn’t enjoy a good story? I know my six-year old daughter sure does. As she has gotten older, the stories I tell her get more advanced.
The other night I told her a story about a wizard from a far-away land in the east who invented an invisible trinket that could be used to buy anything. The trinkets were limited in supply, but she could be given trinkets by helping the wizard solve problems. However, the wizard had never been seen and nobody knew anything about his (or her) true identity.
After I told her the story, she of course had a lot of questions about the invisible trinkets. How were they different from real money? How would she not lose them if they were invisible? And of course, why did they had enough value to help her buy her next Barbie?
This, of course, is the childhood version of Satoshi Nakamoto and Bitcoin. It’s sounds fanciful enough and like any good story there must be some suspension of disbelief to truly enjoy it.
The interesting thing about economic stories (as we call them narratives), is that if they are repeated over-and-over enough they can become true. Or at least close to true. These narratives can even have the potential to have an impact on the real-world economy.
Suffice it to say, the Bitcoin narrative has gone from narrative to reality. The adoption we are seeing is real as corporations begin to add it to their balance sheets, broadly approve its use for purchases, as the network effect (those that own bitcoin) has become more and more expansive. It also doesn’t hurt that its primary perceived peers, the U.S. Dollar and Gold, continue to struggle to hold their value in #Quad2.
This pervasiveness is, in part, why we decided to roll out a Bitcoin Tracker, so investors could understand the true quantitative nature of the asset. Now given its volatility, we would of course be hard pressed to call Bitcoin, or any other crypto asset, a currency.
As Robert Schiller wrote in his book “Narrative Economics”:
“An economic narrative is a contagious story that has the potential to change how people make economic decisions, such as the decision to hire workers or wait for better times, to stick one’s neck out or be cautious in business, to launch a business venture, or to invest in a volatile speculative asset.”
Has Bitcoin gone from contagious story to economic reality? It sure is starting to seem so. But then again, every great story must eventually come to an end.
Back to the Global Macro Grind…
Speaking of stories, the #Quad2 story continues with its fervor. In the Chart of the Day, we’ve attached a portion of our Daily Quant product produced by one of our Macro gurus Christian Drake. If you want a good story, take a look at these relative factor exposure performances:
- Energy +20.8% YTD versus Utilities -1.24%;
- High debt / enterprise value +10.1% YTD versus low debt / enterprise value +4.1%;
- High short interest +10.7% versus low short interest 2.5%; and
- High beta +11.9% versus low beta +0.9%.
Suffice it to say, if you get the macro economic conditions right (i.e. the Quads), you will get a lot of other things right. In fact, more important than getting these factors right, is getting them wrong. Many of the hedge funds that have struggled with performance so far in Q1 clearly had these factors bass ackwards. When it comes to investing, we can tell ourselves all the stories we want, but unless those stories go viral . . . they aren’t going to change much.
The data coming in this morning continues to be supportive of our #Quad2 “story telling” in as much as the factors have, to wit:
- Japanese core machinery orders came in at +5.1%, versus an expectation of -6% decline and up from +1.5% in the prior month (this was the fastest rate of change in more than 7 years).
- Oil prices are up again this morning for the 11 of 12 days as WTI is now solidly above $60 per barrel; and
- U.K. January inflation came in at 0.6% with core inflation higher at 1.4%, both of which were sequential.
None of the above data points are, of course, significant on a standalone basis, but they are part of the continuing fractal set of data that supports the idea of accelerating growth and inflation. Currently, 89% of the world’s economies are tracking in Quad2 for Q1 and we expect this to accelerate to 98% in Q2.
Given that, are you long enough of #Quad2?
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.18-1.33% (bullish)
UST 2yr Yield 0.09-0.14% (bearish)
SPX 3 (bullish)
RUT 2181-2342 (bullish)
NASDAQ 13,608-14,228 (bullish)
Tech (XLK) 133.35-139.58 (bullish)
Energy (XLE) 40.22-46.98 (bullish)
Utilities (XLU) 61.15-63.65 (bearish)
Gold Miners (GDX) 33.17-35.24 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 292 (bullish)
DAX 134 (bullish)
VIX 18.94-24.07 (bearish)
USD 89.78-91.32 (bearish)
Oil (WTI) 56.22-61.98 (bullish)
Nat Gas 2.80-3.13 (bullish)
Gold 1 (bearish)
Copper 3.65-3.91 (bullish)
Silver 26.19-28.14 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
