“We’re all just troglodytes with a keyboard trying to muddle our way through this.”
- Mike Taylor, 3/17/21, Hedgeye Investing Summit
It’s time. Hopefully you’re not afraid of heights!
A year ago, alongside the largest exigent macro shock in a century, no negative y-axis was left unscathed as we careened over the COVID Cliff.
Now, it’s the positive y-axis’ turn to re-scale and re-venge!
As we annualize the pandemic plunge and traverse what is effectively the slowest moving, biggest known-known in macro modernity, the epic Quad 2 bonanza is now set to begin, in reported RoC terms.
So, as we stand upon the foothills of macro renormalization and contemplate our glorious ascent up the cliffs of Services Consumption growth, let us, together, pray with confidence as we call to mind the manna of our central planning fathers:
May your stimmy be plentiful. May your Bitcoin be scarce.
May your dollars be weak and your BTFD and TINA biases strong.
May your dots be unchanged, your VIX suppressed, your inflations eternally transient and your policy forever accommodative.
May the market gods look down upon your frenzied speculation in bemused approval ….
And may the reflationary fates conspire to confirm the enduring market truth that a bubble which does not remain a bubble is not a bubble.
Back to the Global Macro Grind…
Yesterday was Day 2 of our Investing Summit.
It was a packed day of $$$ content from all our guests.
Mike Taylor (@Mike_Taylor1972) served as the day’s grand finale.
If you’ve never been exposed to Mike, your frontal cortex has not been properly exfoliated. And if you failed to get exposure to his ‘garbage trade’ recommendation on our last investing summit, well, ….. your account is probably staring up at those who did.
As is customary, Mike came with his personality & penetrating insight and left with your unfettered admiration.
If you don’t know why our overloaded server went into full spinning wheel buffering mode or why his first idea spiked 14% immediately after he mentioned it … I’ll make you work for it, a little.
Here’s the replay link to that conversation for those interested - CLICK HERE
The last day of the Summit kicks off today at 11am. (reminder: It’s free! – CLICK HERE)
Separately, as the Quad 2 exuberance proliferates, I wanted to offer a gentle reminder that, despite policy maker protestations, macro and market cycles remain subject to homeostatic constraints.
What does that mean in the context of current conditions?
Recall, the post-GFC policy playbook is one defined by forward guidance acting as volatility warden with the express purpose of cultivating a self-optimizing, low vol, long carry dynamic to drive asset market reflation.
While this dynamic is self-reinforcing and reflexive, it also self-regulates in a number of ways:
First, and simply, any lagged flow through to confidence and the real economy dampen expectations around further, incremental accommodation.
Second, Growth and Policy divergences tend to evolve in an accordion like fashion.
In short, the unprecedented fiscal/monetary mix underpinning Quad 2 policy aspirations are successful in cultivating both domestic and global reflation and a weaker dollar, until they aren’t.
That is, to the extent the policy divergence drives a meaningful growth divergence, that relative attractiveness will drive capital flows to U.S. assets – flows which also (directly or indirectly) support the dollar and (directly) drive a disinflationary impulse and an associated rise in real yields.
This homeostatic macro regulation was on discrete display in 2018 alongside our Global Divergences call and again in 2020 and is the same confounding circularity faced by (domestic) policy makers at every attempt at every large-scale intervention.
With the policy divergence driving widening yield differentials and an increasingly divergence in growth expectations, we’re beginning to see some of this evolution manifest. At this point, we’re effectively back to the tight rope walk policy makers were attempting to walk in early/mid 2020.
That is, the Fed/Fiscal needs to continue to go big enough to drive a reflationary impulse globally such that ROW can take the handoff and a protracted run of global Quad1/Quad2 can support durable $USD pressure, but without driving a divergence so large that is catalyzes a negative feedback loop that ultimately undermines the reflationary agenda.
This doesn’t sit as an imminent risk but will certainly be worth monitoring more intently as we push though the heart of Quad 2 and progress towards a prospective inflection to Quad 4 into year-end.
With respect to the right now, here’s this morning’s Top 3 from KM, post-Powell as the Quad 2 train continues to steam forward:
- 10YR – yields around the world higher, again, this morning and evidently that’s good for Germany’s “stocks” with the DAX +1% to a new Cycle High alongside yesterday’s all-time closing SPY high – UST 10yr Yield ramping to 1.72% is a new Cycle High with The Curve steepening to a new Cycle High of +157bps wide on 10s/2s – great for the Financials (XLF)
- SECTORS – rates rising is bad for certain Sectors of “stocks”, eh – with both Utes (XLU) -1.6% and Staples (XLP) -0.2% on the day yesterday keeping them both DOWN for 2021 YTD (only 2 negatives in the Top 11 GICS Sectors); long Financials (XLF) was up another +0.7% yesterday to +16.8% YTD (it’s not about “growth vs. value”, it’s about Rate Sensitivity)
- VIX – big bullish Vol of Vol Signals yesterday delivering higher-highs in my Risk Ranges for everything from SPY to Energy (XLE) and Financials; top-end of my VIX Risk Range caved in to a lower-high of 23.59 with the downside in my Range falling to 17.54 and implied vol PREMIUMS in both XLF and XLE of +17% (that’s bullish for both)
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.52-1.73% (bullish)
UST 2yr Yield 0.13-0.18% (bullish)
SPX 3 (bullish)
RUT 2 (bullish)
NASDAQ 12,620-13,806 (bullish)
Tech (XLK) 126.05-135.96 (bullish)
Energy (XLE) 51.01-54.90 (bullish)
Financials (XLF) 33.53-35.37 (bullish)
Utilities (XLU) 58.50-64.00 (bearish)
Gold Miners (GDX) 30.79-34.64 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 292 (bullish)
DAX 14190-14901 (bullish)
VIX 17.54-23.59 (bearish)
USD 91.10-92.39 (bearish)
Oil (WTI) 63.06-66.97 (bullish)
Nat Gas 2.43-2.73 (bearish)
Gold 1 (bearish)
Copper 3.99-4.22 (bullish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
