“If you didn’t get the message, that’s a message”
- DMX
The Date: late 1990’s
The Setting: 2 AM, Central Connecticut, post-concert
The Protagonist(s): Me, DMX, a couple friends
The Narrative Arc: Leadership and the burden of responsibility
The Sermon:
DMX: What are you going to do if I fall off?
Entourage Guy 1: I don’t know?
DMX: What are you going to do?
Entourage Guy 2: Nothing … just back to the block
DMX: How are you going to eat if I don’t keep grinding?
Entourage Guy 3: Shrug
DMX: (rhetorical, to everyone): See? It’s not just me. No one eats if I don’t make this happen….
DMX: Where’s [Entourage guy 4]?
DMX: That’s right, not here. He didn’t get the call.
DMX: Sometimes if you don’t get the message, that’s the message!
The voice, the delivery, the energy was the same feel and vibe you get in the music but with an equilibrating dose of kindness and humbleness that only comes through in intimate personal interaction.
Amidst the drinking and haze of marijuana smoke, the exchange (I’m pretty sure I have this all on video somewhere) above remains etched in my cerebral cold storage.
The saying is that the line between genius and madness is fine, if it exists at all.
Would Earl Simmons have been DMX without the internal conflict(s) that shaped him as an artist and fed the demons he battled with as a man? Would he have traded genius for inner peace or “normality”?
Would you make the trade in the other direction?
None of this really has anything to do with investing but “if you ain’t get the message, that’s the message” is an important life subtlety to internalize.
The personal epiphany that “sometimes what is not said can be what matters most,” is one you always remember.
Back to the Global Macro Grind…
So, the long, cathartic Jobless Claims exhale continues as the labor exodus moderates further and the psychological toll associated with acute income and housing insecurity ebbs as net employment accelerates.
Meanwhile, the Quad 2 message from 1Q GDP was anything but cryptic:
The domestic consumption juggernaut is in queue and the 10% growth recorded in the 1st quarter was just a preview of what’s to come as the easiest comps in modernity converge with accelerating organic improvement and Service sector renormalization to cultivate some historic, impending growth prints.
Funny guy: sticks up pointer, middle and ring finger, says “Read between the lines”
Are households setting up for a Ruff Ryde (if you know, you know) associated with “reading between the (Quad 3/Stagflationary) lines”.
To be clear, a stagflationary regime does not anchor our current outlook or our current allocation preference, but I do think it represents the most interesting potentiality to consider.
If you’re not macro immersed, here’s how we’re trending on the Price side … Inflation expectations are at 10y highs, Prices Paid are at/near all-time highs, Ag prices are at cycle highs, Shipping/cargo/transport costs are going vertical, lumber prices have gone full nosebleed and home price growth is at all-time RoC highs to name a few off the top of my head.
Meanwhile, Headline CPI is only at 2.5 year highs and Core CPI hasn’t done much of anything, yet.
How is that?
Adjusting the inflation basket weightings for price changes observed in pandemic items (i.e. the stuff households were actually buying over the past year) paints a more inflationary picture, but one singular component, Shelter, is acting as a discrete depressant on reported inflation growth.
Look at the trend in Shelter CPI below?
I’ve touched on this recently but I want to re-emphasize it because I (still) keep getting asked about it.
Shelter inflation represents roughly 32% of the CPI basket with Owner’s Equivalent Rent (OER) representing just over 24%. In other words, any outsized trend in this series can/does define the trajectory of reported Headline Inflation.
After running at ~3.5% Y/Y and at a positive spread to broader inflation for the last half decade+, Shelter Inflation has been more than cut in half over the past year.
What’s going on, again?
Now, so there’s no ‘reading between the (contextualization) lines’ and nothing is lost in translation, here is the methodology description pulled directly from BLS (HERE):
Specifically, the respondent is asked: How much rent (are you/is the tenant) paying for this (house/apartment) now?
Be sure to probe these situations to determine if any rent obligation will be forgiven.
- If the landlord expects payment in full, regardless of when, enter the full rent amount that is due.
- If some or all of the rent is being forgiven, enter the amount the landlord/manager has agreed to accept.
- If the rent is not paid or not expected to be paid AND the landlord/manager is unsure about the future, enter $0.00.
So, landlord expectations around rent collection – which is directly impacted by pandemic related eviction/rent moratoria - carries through to directly impact the calculation of reported shelter/rent inflation.
The eviction moratorium (along with migration outflow from high priced urban apartments) is clearly flowing through to rent collections and reported housing inflation.
What you are likely to see – and we’ll work to tighten up the timing estimate on this – is a hard reversal in Shelter/Owner’s Occupied Rent Inflation, which will have an immediate and meaningful impact on reported Headline Inflation. If the OER reconverges to the trend in single-family home price growth, the acceleration could come with some measure of sticker shock.
And you don’t have to take my word for it. Just ask renters (see Chart of the Day below). They think rent price inflation is coming. Probably just believe them.
More broadly, prevailing demand-supply imbalances (housing, Goods economy at large) are real and acute and supply chain issues may not resolve in benignly.
- Lagged vaccination/reopening trends in RoW will continue to weigh on global production/global supply chains
- The imbalances observed in the domestic Goods economy is likely to manifest in the Services economy as demand recovers faster than supply (i.e. hiring to service that demand), potentially compounding ongoing/residual price pressure in the goods economy.
- As I highlighted last week, 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.
Again, don’t be fooled. No one really knows how the interplay of unprecedented policy and global peri-pandemic macro conditions ultimately plays out.
The layering of assumptions constrains any convicted/precise estimation and almost no one actively making decisions has lived through a period of pervasive supply shortages.
Outside of the toilet paper/cleaning supplies/etc dynamic, when was the last time you remember America not having an overabundance of ‘whatever’?
Anyway, monitoring for a prospective shift in stagflationary conditions towards the center of the probability curve will be interesting from here.
In the meantime, we’ll continue to explicitly feed you the Quad 2 message as you read the fundamental lines and bask in the RoC radiance that will pervade the 2Q macro data.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.57-1.72% (bullish)
UST 2yr Yield 0.15-0.19% (bullish)
SPX 4127-4227 (bullish)
RUT 2 (bullish)
NASDAQ 13,431-14,219 (bullish)
Tech (XLK) 140.22-144.04 (bullish)
Energy (XLE) 46.71-50.95 (bullish)
Financials (XLF) 34.93-36.79 (bullish)
Utilities (XLU) 65.19-67.87 (neutral)
Shanghai Comp 3 (bearish)
Nikkei 280 (bullish)
VIX 16.07-18.89 (bearish)
USD 90.24-91.45 (bearish)
EUR/USD 1.198-1.216 (bullish)
Oil (WTI) 61.82-65.12 (bullish)
Nat Gas 2.65-3.04 (bullish)
Gold 1 (bearish)
Copper 4.21-4.59 (bullish)
Best of luck out there today,
Christian B. Drake
Macro Analyst
