“When all is said and done, more is said than done”
- Aesop
“At the end of the day” carries the ignominious distinction of loitering atop the hierarchy of most hated office jargon.
Occasionally it serves as a kind of Occam’s razor to effectively filter out noise and verbal digression.
But it’s mostly intellectual laziness masquerading as the intelligent distillation of prevailing conditions … a kind of axiomatic device used by individuals, neither of who want to engage in any serious or nuanced discussion, to arrive at a nebulous but superficially acceptable agreement about the invariability of some future reality.
At the end of the day, “we’re headed to Quad 4” is both wholly true and wholly nebulous in terms of its utility.
In macro space, initial conditions matter and economic and market conditions are always path dependent.
Yes, the eventual traversal to Quad 4 is effectively a mathematical certainty, but it’s the sequencing that matters. Your PnL hinges, almost singularly, on effectively risk managing the path between here and that eventuality.
Don’t confuse the (still dim) Quad pivot light at the end of the forecast tunnel with the end of the tunnel itself. We’re still very much in the middle of the Quad 2 tunnel.
Anyhow, at the end of the (yester)day … the dollar & real rates are again the back foot, the VIX remains stubbornly insistent on making lower lows, the BoC is going lone wolf on the Taper messaging, the April Fed regional surveys continue to show the demand-supply imbalance in the domestic goods economy continues to get imbalanced-er while Ag/steel/lumber prices remain in full Viagra formation and ETH/BTC pushed north of 0.04 as the digital asset metaverse continues to see lumbers Viagra formation and raise it a rocket ship and laser eyes NFT.
Back to the Global Macro Grind…..
With nothing in the way of high-frequency domestic data so far this week, the market’s been left to ponder bigger picture dynamics while continuing to passively indulge in the melodic rumble of the Biden #Brrr which remains the baseline to the larger reflationary policy orchestra.
I discussed our evolving outlook for the historic Quad 2-palooza last week while promising to game out the probable derivative implications.
That promise lines up with the tilt in my inbox, which is littered with all manner of “in the end” type questions, so let’s (re)discuss:
First, remember that an inherent side effect of large-scale interventionism is a distortion of the price discovery mechanism in markets and a further perpetuation of “zombie” dynamics.
A company that is otherwise operating unprofitably or inefficiently represents excess supply. Excess supply represents a disinflationary force and a productivity drag ... which perpetuates slower growth … which perpetuates the low rates which helped cultivate the problem in the first place.
This remains the larger policy paradox for global central banks and the Fed in particular. It has, arguably, only been further perpetuated by pandemic related policy initiatives.
Second, the secular trend of technology driven disinflation has not meaningfully ebbed, “yet”.
This “Trickle Up” phenomenon whereby a few monopoly firms buy or organically birth technological innovation carries significant implications beyond those related to prices.
Notably, while productivity improves in the aggregate, on net, capital accretes disproportionately in the direction of IP capital. Capital concentrates and aggregates and power/influence become increasingly centralized.
I say “yet” because some version of secular phase transition is percolating alongside the promise of transformational change associated with the evolution of the crypto/digital asset space.
The decentralization of policy/banking/compute power/etc carries appeal within the prevailing inequality zeitgeist and in the context of the 4th Turning. Decentralization decentralizes power and slows/reveres the concentration of capital.
What if, instead of Facebook and Google getting paid by advertisers, you (the person watching the add or creating the YouTube content) received the value instead. The appeal and growth in use of the Brave browser and appreciation in value of the BAT token is wholly unsurprising.
Brave/BAT may not be the ultimate “winner” or represent the fully formed future-state, but the decentralization and de-concentration of value accretion it takes aim at it will almost certainly garner further support.
Anyway, at the end of the day, once we annualize the reflationary impulse, the world will likely be left with the same deflationary capital concentration, the same disinflationary demographics, the same inequality and more debt.
If you have lower population growth and largely static productivity growth, what do you have? … You have less demand for “stuff”, still pervasive overcapacity and a broad disinflationary impulse … which means an eventual pivot back to the same slowflation/long duration proxy trades that have defined most of the last 10 years.
Will the decentralization evolution occur fast enough and/or will burgeoning fed-fiscal policy coordination be enough to sustainably pivot away from the underlying structural forces that shaped the domestic & global macro-scape over the last decade+?
I don’t know. But I do know we won’t know the real answer to that over the next 1-3 quarters.
As an aside … beware any punditry that acknowledges the unprecedented nature of both peri-pandemic conditions and the magnitude of the associated policy response, but then goes on to “evaluate” the market and pontificate on the invariable direction of prices based on conventional, wholly “precedented” metrics whose signaling value was established using historical analogs that, they just finished telling you, are not, in fact, analogous to the anomalous condition set that defines the current setup.
To quickly wrap this up …
At the end of the day, the Quad and allocation discussion will probably hinge on the slope of the inflation line into 4Q21 (see Chart of the Day below).
If the demand-supply imbalance in the goods economy continues to flow through prices at the same time that a similar imbalance begins to take more conspicuous shape in the services economy then that line may inflect higher, and with stagflationary consequences. And if we layer another few trillion in fiscal spending on the demand side to any already supply bottlenecked and production constrained economy, the primary impact may flow primarily through prices, not real output.
Quad 3 carries a decidedly different allocation blueprint.
Stay tuned.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.53-1.74% (bullish)
UST 2yr Yield 0.14-0.18% (bullish)
SPX 44104-4198 (bullish)
RUT 2198-2289 (bullish)
NASDAQ 13,747-14,099 (bullish)
Tech (XLK) 139.95-144.02 (bullish)
Energy (XLE) 46.91-50.41 (bullish)
Financials (XLF) 34.69-35.70 (bullish)
Utilities (XLU) 64.65-68.31 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 280 (bullish)
DAX 15059-15493 (bullish)
VIX 15.21-18.74 (bearish)
USD 90.70-91.92 (bearish)
EUR/USD 1.187-1.209 (bullish)
Oil (WTI) 60.03-65.16 (bullish)
Nat Gas 2.48-2.81 (bullish)
Gold 1 (bearish)
Copper 4.08-4.38 (bullish)
Silver 24.71-26.70 (bearish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
