“We live in a society exquisitely dependent on science and technology, in which hardly anyone knows anything about science and technology.”
- Carl Sagan
That is a fascinating quote.
Its implications are profound. And with deepening technology integration, we’re going to remain increasingly hostage to those implications - collectively, we’ll serve as both participant and observer in an ongoing, real-time case study in non-linear outcomes associated with increasingly complex systems.
You don’t need to abstract from reality or look backward to find potent examples.
The power grid is down and, apparently, no one knows what to do about it. More TV/video games and less school as the pandemic driven reduction in live classroom learning will invariably drag on already underwhelming comparative reading/math scores.
More engagement and dependency on the science/technology, less foundational understanding of the principles defining its (growing) complexity.
Maybe part of the K-shaped economic and wealth distribution is attributable to an increasingly divergent/barbell knowledge distribution. Is that divergence (partially) product of trained laziness and willful ignorance associated with the (profitable) cultivation of “distraction” culture or a mental defense mechanism against a relentless onslaught of daily stimulus. It’s a slippery and complex slope.
Machine Learning and AI is becoming ubiquitous but, as we’re becoming increasingly aware, it’s not without bias or unintended derivative effects. Scientists understand the elegant simplicity in how deep learning models function but there still exists a trade-off between complexity and interpretability.
In other words, even the minority of people who know about science and technology and are responsible for driving its evolution don’t strictly “understand” its output.
Anyway, in other science and technology news that (still) hardly anyone understands….
- Blackrock is now “dabbling”
- Deutsche is building out crypto custody for institutional clients
- Bill Gates and “bond kings” have changed their mind about it.
- Canada beat the US in launching the first etf … and to a frenzied response.
- You can now pay your electric bill with it in Portugal or your taxes with it in Switzerland
- Coinbase reportedly has more than 5 (undisclosed) Fortune 500 clients (i.e. big dogs not named Elon)
… and that is just a selection of updates from the last 24 hours!
We don’t do “tribes” or dogmatic maximalism, but we do use probability.
Regardless of your view on any particular Coin, NFT, CBDC or underlying technology, the probability that the digital asset space and the infrastructure supporting it will be bigger 1/3/5 years now is effectively 100%. You will be exquisitely dependent on it.
Of course, the process of price discovery when transitioning through the steepest part of a sigmoid adoption curve, remains dynamic and volatile.
If you remain exquisitely dependent on narratives to actively risk manage your crypto exposure, we humbly submit there remains a better way. If you would like to learn more about our in-depth Crypto Quant investing research please reach out to .
Back to the Global Macro Grind…
I generally silo our housing related research from my U.S. macro coverage, but given the size of housing as an asset class, the outsized role it’s played in the peri-pandemic period and the macro dynamics shaping both fundamental and equity related performance for the sector, I like to offer selective updates highlighting any evolution in our thinking – particularly at emerging hinge points.
We’re at a prospective thesis pivot point currently.
In reviewing yesterday’s Housing Starts data, we offered a quick common sense, balance-of-risk distillation of the fulcrum macro and fundamentals factors that are shifting within the sector.
To wit:
Housing-related equities have had a monster performance run, fundamental mojo remains strong, the tail on WFH/deurbanization is likely to remain a support and reported data over at least the next month or two will remain solid.
The broader question, however, is simply: after a +200% run off the March low and with a broad swath of indicators at cycle and/or multi-decade highs and some emergent stagnation vis-à-vis incremental gains, what are we playing for from here?
The tailwind list is progressively eroding. Consider the following:
- Mean Reversion: We are at/above historical average cycle peak levels across a number of volume metrics. We could certainly go a bit higher (and probably will, particularly on the New Construction side with existing supply almost nonexistent) but any former positive asymmetry has collapsed and arguably shifted in the other direction.
- Quad 2: Reflationary Macro regimes aren’t necessarily a death knell to the housing cycle but housing equites generally underperform, at the least, as the curve steepens and rising rates feedback negatively to affordability/demand/HPI. With Retail Sales growth hitting nosebleed levels to jumpstart the year, the curve steepening to cycle highs, commodities making multi-year highs and breakevens breaking out, Quad 2 dynamics have been on conspicuous display. We expect reflationary conditions to continue to characterize domestic/global macro through mid-year, at least.
- Rates: 10Y TSY yields are now +80bps off the lows with the balance of risk to the upside given our expectations around protracted Quad 2. As we’ve highlighted, the continued decline in MBS OAS spreads into 2021 allowed mortgage rates to continue to decline to record lows despite the progressive back-up in long-end treasury rates. MBS OAS spreads overshot pre-pandemic levels to a low of +11bps on February 9th and have subsequently retraced to +20bps (see Chart of the Day below). The simple point is that Spread Compression allowed for a transient detethering of treasury rates and mortgage financing costs – and that detethering has now transitioned to re-tethering and with any further backup in treasury rates will put upward pressure on mortgage rates.
- Input Costs: Down Dollar, residual and ongoing supply constraints and cycle-high demand continue to flow through resi construction commodity input costs. Total resi input cost inflation accelerated to +5.4% Y/Y as of Wednesday’s January PPI data, marking a 28-month RoC high and with further acceleration in queue.
- Affordability: The confluence of rising rates, accelerating input costs, a diminished capacity to extract further price increases in the wake of a year-long run of double-digit HPI increases and rising prospects for some measure of demand ebbing is not an overly favorable factor conjuncture.
- Comps & Wild-Cards: Comps get meaningfully steeper after we traverse trough Covid comps in March/April and the rate-of-change data will invariably deteriorate. And post-vaccine conditions remain a wild-card, particularly for disproportionate pandemic beneficiaries. As vaccine disbursement progresses, weather inflects and a more pronounced macro renormalization materializes, will households exodus from housing related activity/projects and associated spending with the same fervor that characterized their engagement with it over the past year? Who knows but, on the margin, the answer will be a definitive ‘yes’.
Could we go higher …. particularly on the New Construction side with existing supply almost nonexistent?
Sure, but it’s time to cast a more circumspect eye and more seriously consider the growing asymmetry of the setup across the US housing equity landscape.
At this point - and for an exposure that remains exquisitely dependent on Rates/Quad2 - there are just better places to allocate incremental capital.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.20-1.34% (bullish)
SPX 3 (bullish)
RUT 2 (bullish)
NASDAQ 13,812-14,138 (bullish)
Tech (XLK) 134.52-139.18 (bullish)
Energy (XLE) 42.02-47.10 (bullish)
Utilities (XLU) 61.49-62.99 (bearish)
Gold Miners (GDX) 32.41-34.83 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 280 (bullish)
VIX 19.05-24.25 (bearish)
USD 89.94-91.29 (bearish)
Oil (WTI) 56.54-61.72 (bullish)
Nat Gas 2.71-3.28 (bullish)
Gold 1 (bearish)
Happy Friday. Best of luck out there today.
Christian Drake
Macro Analyst
