Hello Darkness My Old Friend Ive Come to Talk to You Again Because of the Vision Softly Creeping
" Because a vision softly creeping,
left its seeds while I was sleeping …
And the vision that was planted in my brain
Still remains, within the sound of silence"
My father-in-police passed abroad a few weeks ago. The moment when nosotros received the telephone telephone call, my family was on a quick weekend trip with some friends to 1 of my wife's favorite places in the country, St. Augustine FL. His death was sudden and unexpected; the world lost a great man in the blink of an middle.
Most readers know that I also lost my brother in Oct of 2020, it too came out of left field. Information technology's been a challenging year and a half.
Readers may recognize the above iconic introduction every bit one of the greatest songs e'er written, Paul Simon and Art Garfunkel's, The Sound of Silence.
For a reason unbeknownst to me, the more recent and admittedly unconventional organization released by the rock groupingDisturbed is something in which I found comfort after losing my brother. My begetter-in-law was a student of music; a brilliantly talented musician skilled on many instruments; the piano, accordion, saxophone; he had only recently picked his clarinet back upwardly after not having touched it for years and he played as brilliantly as he had 20 years prior.
For years, while working total time as a banker, too raising money for countless charities, he moonlighted every bit a DJ. Both his musicality and knowledge of its history were vast; music was one of his many passions.
In an effort to find some peace & solace, I revisited this Simon & Garfunkel classic. The return felt eerie, initially but too fresh from my brother's expiry. Though, this time, in understanding my father-in-law's dear for music, I took it a lilliputian deeper, excavation more into the song's history and original meaning.
For example, did you know that when initially released in 1964, these lyrics were an abject failure?! Simon and Garfunkel broke up, with Garfunkel heading dorsum to college while Simon attempted to pursue a solo career in England.
Those who savour the version of this song that became an overnight sensation accept producer Tom Wilson to thank, for it was his perseverance and drive that brought Simon and Garfunkel back together past rearranging the original stripped down acoustic version and calculation drums and some electric guitar to the initial flop. The freshly reworked piece became an overnight awareness and past 1966 the song had reached number ane on the Billboard Hot 100 sending Simon and Garfunkel on their style to distinction.
Simply what does the vocal mean?!
Decades ago, during a live performance, Fine art Garfunkel gave listeners an explanation,"the vocal is about the inability of people to communicate with each other … emotionally"; the writer is literally confessing, to the darkness for he feels no ane is listening to him …"Hello darkness my one-time friend, I've come to talk with you again." Ultimately, to the masses who walk aimlessly, blindly going about their business without "listening" (or heeding important warnings) …"And in the naked light I saw, ten 1000 people, maybe more."(a probable reference to humanity as a whole) "People talking without speaking. People hearing without listening, people writing songs, that voices never share; and no 1 dared disturb the sound of silence."
These lyrics are relatable to and then many things going on in the world today … exist it political, the dangers of social media, the indoctrination of children inside schools … at times, the masses appear to be moving through life, ignoring imminent signals. The authors were likewise attacking mod "consumerism" and how the masses had caved to the advertizing industry equally guild followed:
" And the people bowed and prayed
To the neon God they made…"
I won't walk you lot line by line, though the meanings of these lyrics struck a chord as I sat downward to write this alphabetic character, for they are timeless and cross countless barriers.
Today, with a 24/7 financial media presence, it's almost impossible to avoid the "neon Gods" equally the macro tourists marketplace themselves to the masses; bells, horns, scrolling tickers, pomp & circumstance … what oftentimes boils down to superficial theatrics.
Markets, however, aren't about flashy things or racket, markets are driven by data. The electric current economic authorities, or "machine" is driven past price, volume and volatility; influenced past market place construction, liquidity (or lack thereof which matters most at item moments in time) as well as human behavior (emotion).
Those reading our notes go data and our interpretation of how it will move markets over a full investing cycle, noting smaller trading cycles within the larger, more powerful trending bike.
Nosotros're aware that non every correct call has translated into perfect results over the years, we freely and openly admit that while we strive for perfection, very few things are ever perfect, leaving the door open for constant comeback. All the same, one matter we accept done very well over the years is to document and publish our thoughts via these notes, storing them on our website for future reference. This catalog of assay and thinking is done with more intellectual honesty, integrity, and without question, better accuracy, than a majority of those "esteemed" Wall Street economists and Federal Reserve officials (neon Gods) which the mainstream portrays as "experts".
More importantly, we've spotted, warned, sidestepped and adventure managed around massive drawdowns.
"Fools" said I, "Y'all do not know
Silence similar a cancer grows
Hear my words that I might teach y'all
Take my arms that I might reach you
But my words, like silent raindrops fell
And echoed in the wells of silence
Nosotros'd not exist so arrogant as to phone call every investor a fool. In fact, we'd humbly submit that it's the market and information that betrayal the fools when the masses, which include some very smart people, ignore or pretend that some extremely pertinent signals don't matter, while repeatedly allowing themselves to exist influenced and blinded by emotions, with fright & greed being most prevalent ones, though many more can adversely affect both thought process and determination making, every bit we discussed last month.
We presciently warned readers on January 26th, 2020, virtually the impending market crash looming when we penned, "The importance of History … and male child, is information technology "rhyming" today". In the face of a select few names which were defying gravity and with every commentator under the dominicus screaming that markets would continue to go to the moon, as Wall Street analysts literally fabricated upwardly new "valuation metrics" for companies like $TSLA (at the fourth dimension), we provided you with data and a few history lessons, writing:
"Current members of the FOMC proceed to hide backside the statement, "the economy is strong". Delight, ask yourself what that means relative to investing? Economies accelerate or decelerate; earnings grow or tedious; credit is extended or tightened; companies have the ability to pay/ringlet their debt or they don't; this is what creates concern CYCLES.
At present inquire yourself what is currently happening around the earth (including the United states of america)? The data suggests deceleration" OSAM 1/26/2020
Nosotros reminded you of what Citigroup CEO Chuck Prince "infamously said" in July of 2007:
"As long as the music is playing, you've got to get up and trip the light fantastic toe. Nosotros're yet dancing."
On Jan 22nd, 2020, Bridgewater Capital CIO, stated:
"We've probably seen the finish of the Blast-Bust bike"he later qualified argument with"as we know it";admitting the"Fed is in a box, they can't tighten and they can't ease."
As we fast forwards to today, it is nearly impossible to miss the parallels…
From the White Firm … Jen Psaki, July 2021:
"We're seeing prices get back to pre-pandemic levels … a projected increase in inflation this year, it's expected to come up back down to about 2.ii next year. They have not inverse that, and that is aligned with a number of outside economists as well."
Federal Reserve member Bostic March 25, 2021:
"We don't' see inflation every bit a major concern in the coming months"
Bostic again on March 23rd, 2021:
"I expect the increase in inflation to exist temporary"
And so February 25th, 2021:
"Excessive aggrandizement is NOT something Fed will have to worry about for A LONG TIME"
I could fill volumes of pages with how wrong these "Market Gods" have been for years, decades fifty-fifty … recall"subprime is contained", Ben Bernanke, or"I don't believe another financial crisis volition occur "in our lifetimes."Current Treasury Secretarial assistant Janet Yellen
Friday Yellen merely said that she,"Doesn't wait a recession in the U.South."; so that should make you experience better (insert eye roll & palm meet brow emoji)
Regardless of what yous choose to believe, nosotros didn't get lucky in writing what we did in January of 2020, it was in the information … both growth and inflation were decelerating before anyone had e'er heard of Covid; as is the instance today, both growth and inflation are now decelerating … only today things are MUCH WORSE.
Today, nosotros have a decelerating economy, disinflation, slowing earnings, and tightening credit all at the same time … coming off the largest everything bubble in history!
In 2020, GDP wasn't rolling over from vii% to 0-ish% as it is today. With over 10% of earnings components being reported, corporate earnings are now downward 14.half-dozen%, interest rates take spiked to in a higher place 2018 taper tantrum levels, and mortgage rates have skyrocketed, all of which we'll discuss below.
Moreover, the level of corporate debt dorsum then was just north of $ten Trillion, while today information technology's pushing over $12 Trillion with nearly $i trillion of not-financial debt globally that needs to be refinanced this year alone…
As nosotros published in our 4Q2018 note:
"Our national debt is well in excess of $21,000,000,000,000… That'southward TRILLION. Every 100-ground point increase on interest rates equates to more than $210,000,000,000 billion in our price to carry that debt."
Today, less than 3 ½ years afterwards, it'due south nearly 30% greater sitting north of $30,283,200,409,185, the majority of which has a duration of 4 to 5 years; any sustained increase in bond yields will cripple our country as debt servicing costs balloon. At what bespeak will information technology engulf our tax receivables?! With every 100-basis point increment nosotros could watch debt service balloon past over $300 billion dollars per year.
We provided readers with a simplified but detailed explanation in 2018 of how this worked, which still holds true today, but again, today it's worse.
Currently, headline aggrandizement is roughly viii.v% and while it is rolling over (which many, including the Fed, refuse to acknowledge), it's problematic for many reasons outside of the obvious.
Simply you can still find CEOs of major corporations, along with Federal Reserve officials, maxim the aforementioned ignorant things … and so I guess you should believe them …
For instance,April 4 thursday , 2022, JP Morgan CEO, Jamie Dimon stated:
" The U.s. Economic system is strong"
Seriously, ane week following his higher up statement, on April 13th, 2022, JP Morgan reported 1Q2022 data … acquirement was downwardly $one.v-billion, expenses were up $500-million, credit costs were up $5.v-billion, net income was down $6-billion, while, for the beginning time in a very LONG time, credit reserve build was upwards $900-meg (and while nosotros realize that'due south not a lot for JPM, it's a change in mindset of things to come) – all of this resulting in YoY earnings per share Downwardly 42% YoY.
- Auto loan originations down 25% (citing low inventory)
- Habitation loan originations down nigh 40% (involvement rate spike in a two-month time span)
- Investment banking fees downwards 31% (less debt and equity underwriting activity)
Consumer loans were one of very few things accelerating … but is this was not a good sign, because people NEEDED to borrow money! Additionally, they cited "the Russian/Ukraine state of war" as a 1-time charge; what makes the lack of dealing with Russian entities a i-time charge?! All of this BEFORE the upcoming quarter, when they volition exist experiencing the most difficult base of operations effects that financial companies have e'er seen.
Withal, in his letter to shareholders, Dimon continued to tout growth and a strong economy:
"If the Fed gets it simply right, we can have years of growth, and inflation will eventually offset to recede. In any event, this process volition cause lots of consternation and very volatile markets.
Dimon'due south advice for the Fed:
" The Fed should not worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility."
Obviously, his definition of potent is quite different than ours … which is why we will happily stick with the data while he panders to his ogling fans.
I find it hard to believe that more than investors haven't concluded the majority of Wall Street does piddling but effort to sell you stock, while Federal Reserve officials try to peddle confidence and promise, and so few of them (i) tell you the truth, while (ii) providing you with a proper risk management procedure?!
These incompetents are truly trying to bulldoze forward while looking into the rear-view mirror; and then, we ask you, are these the "Neon Gods" to bow earlier?!
" Hear my words that I might teach yous…"
Over the past few weeks, along with $JPM, a myriad of large fiscal institutions reported earnings. Equally the media and Wall Street pundits cheered about how they "beat" Wall Street earnings estimates, they're without question, selling you propaganda!
Ahh, the games people play.
Yeah, it is true many of these institutions "vanquish"Wall Street estimates, but looking a little deeper, you realize that those same analysts had already cut their YoY earnings estimates by nearly -60% (in the case of $C).And so, when the company reports that it is downwardlyonly-44%, it is by no ways a "beat", it's what you would phone call a blood bathroom. Allow'southward all say it together folks, propaganda!
Information technology is definitely NOT is a sign of growth or good things to come; but hey … you lot tin can always hope, right?
The irony is these numbers existence reported are for 1Q2022 equally nosotros noted to a higher place, nevertheless the financial sector volition face their toughest year over year comps in 2Q2022, which aren't reported until July.
"Hope" is Not a take chances direction process, but if you're looking at bong atmospheric condition names for a sign of things to come, these large financial bellwethers that reported alongside $JPM have shown direct upward carnage and devastation in their YoY earnings reports. These are Non "beats":
Goldman Sachs ($GS) DOWN -42% YoY
Citigroup ($C) DOWN -44% YoY
Morgan Stanley ($MS) Downwards -seven% YoY
Usa Bancorp ($USB) DOWN -32% YoY
PNC ($PNC) Downwardly -21% YoY
Wells Fargo ($WF) DOWN -16% YoY
Depository financial institution of America ($BAC) Downward -12% YoY
The simply large cap financial institution to show an increment in YoY earnings terminal week was Land Street ($STT) Upwardly +8%
With earnings existence cannibalized, DOWN 20 to forty% YoY; next quarter'southward comps being exponentially worse, a pancaked yield bend, mortgage rates having shot up at their fastest pace in the modern era (equally we'll hash out beneath); with only 3% of outstanding mortgages available for refinancing that economically brand sense … how do yous recollect information technology bodes for employees?!
Remember how we've been telling you lot that employment is a late cycle indicator?! As earnings collapse and margins get compressed!
And while I don't wait you to accept our word for it, the carnage isn't solely in the financial sector – do you lot remember those used machine prices? See CARMAX ($KMX). And and then there is $NFLX, who just lost $350 billion in marketplace cap overnight. The listing of names is countless with more large cap names on the chopping cake as advertising acquirement continues to plunge.
Merely my words, like silent raindrops fell
And still … the almost recent headlines from theprophetsof the Federal reserve:
On April 10thursday Fed official Mester said:
- There is an increased risk of recession, but the model forecast is for expansion to continue
- Inflation is being driven by reasons other than monetary policy. The Fed'due south goal is to protect it from being embedded
On April 21st Fed Chair Powell said:
- Won't count on Supply-Side Healing to tackle inflation
- Non counting on Aggrandizement having peaked in March
- US labor market is too hot; "unsustainably hot"
- fifty BPS hike will be on the table for May FOMC meeting
Which couples brilliantly with what Fed official Waller stated on April thirteenth:
- The economy can take aggressive Fed activity
More chiefly, this one is actually factual, and then you improve pay very shut attending as we'll remind y'all beneath:
- The Fed can't set supply chains; THE FED CAN PUSH DOWN DEMAND
So, if we can't count on the "Supply-Side" healing to tackle inflation, the only matter the Fed tin can do is cripple demand … so let'due south talk most what "pushing downward need" or Need DESTRUCTION really ways in real time.
Terminal month we warned yous about the fasten in mortgage rates, noting:
• "As 30-year stock-still mortgage rates just spiked to a iv.66% average making the boilerplate house roughly 13-15% LESS affordable than last twelvemonth as most home buyers decide purchase cost based off what monthly payment they tin afford; begging the questions:
- Who'due south going to be refinancing at these levels?!
- Who is left to refinance with rates being so low for and so long?
- How will this move in rates touch on borrowing via habitation equity lines?!
- And more importantly, how large of an impact will this take on housing prices?!"
Since publishing last calendar month, the 30-yr fixed rate mortgage has shot up to nearly 5.25%, including points and fees. That is roughly a 200 to 225 basis points increase since December (in some, less creditworthy circles, they've eclipsed well over 6.25%+).
With both the size and speed of this move being unprecedented, we exercise accept a bit more clarity to some of the above questions we asked last month.
At these levels, per Danielle DiMartino Booth of Quill intelligence, at that place are only 3% of mortgages in the US able to exist refinanced economically … meaning, why would you refinance a 3% mortgage at 4% mortgage UNLESS yous were so strapped for cash that y'all needed to cash-out refi at a higher interest rate (uneconomical), which again, ties dorsum to what we wrote in 2018:
"Lower involvement rates equals refinancing Smash."
Good luck underwriters!
Additionally, a 200 to 225-footing-betoken movement crams down affordability past roughly 25% – a move like that in four months also distorts price expectations because a would-be seller who simply watched his neighbors dwelling sell for $500k a few months ago isn't willing to take $400k for his home today. But at the same time, the buyers tin't beget the firm at $500k with the increased rates…
The Fed left involvement rates too low for also long, allowing anyone with a pulse and the ability, to refinance at bloodless levels…
Again, don't take our word for information technology. This isn't merely an opinion … Information technology'S IN THE DATA!
Last calendar month we brought the spike in mortgage rates to your attention; today we'll cite a very recent written report out of Redfin on April eleventh, citing data from Jan 2022 through end of March 2022 showing a vehement DECLINE in 2nd home sales (holiday homes) of virtually 35% from the previous quarter, and down forty% from its peak 1yr prior.
Adding insult to injury, in an effort to make housing more "affordable" to the first time home buyer and primary home heir-apparent, Fannie Mae and Freddy Mac areirresolute some rules up on Apr i st calculation charges of between i-iv% for buyers of 2nd homes.
"Effective April 1, 2022, upfront fees on certain high balance loans sold to Fannie Mae and Freddie Mac will increment between 0.25% and 0.75%. Also constructive on April 1, 2022, the upfront fees for mortgage loans on 2nd homes volition increase between 1.125% and 3.875%."
It's important to understand iind habitation sales were downwards January – March 2022 and the NEW fee (penalty) didn't begin until April anest, 2022. While nosotros sympathize that twond home sales are relatively modest compared to full habitation sales (approximately half-dozen%), the MBA mortgage purchase index was down -9.55% in March and permits take been trending downward likewise.
Every bit the data suggests less than 3% of loans areeconomically sound refi'south with rates over 5%, the yield bend pancaked to inverted; does anyone want to tell me where growth is going to come from as the financial sector faces their toughest comps NEXT Quarter?!
You lot did say something about pushing downwardly need, am I right Fed official Waller?! We'll just call it for what it is … extremely tearing DEMAND DESTRUCTION in an already decelerating economical environment.
Equally we said, nosotros would non be and so arrogant as to call everyone a fool, stating, "in fact, it is the market and data that are doing and so." Let's await at some of that data:
- The yield curve is nigh flat 2s, 5s, 10s; with the 10s & 30s recently inverting temporarily
- NY Fed confidence numbers: registeredtheir lowest in the 9 years they've been tracking the data
- NFIB Modest business organisation Optimism Index just concluded:Owners expecting better business conditions over the next half-dozen months decreased 14 points to a net negative 49%, the lowest level recorded in the 48-year-one-time survey.
- University of MI Consumer sentiment survey is well beneath Acme Pandemic lows with income expectations thelowest they've been in about l years
- Housing affordability has been reduced by over 25% in roughly 3 months with the meteoric rise in mortgage rates
- Over x% of the South&P companies have reported west/ earnings growth currently -14.6% YoY (financials -28.iii%) every bit we've notwithstanding to head into the worst of comps.
- March retail sales DECELLERATED significantly MoM (Month over Month) from Feb'southward up eighteen.18% to March's up 6.88%. This is a massive RoC deceleration and merely a matter of fourth dimension before it goes negative equally Bank of America credit carte du jour data shows the consumer literally hit a wall mid-March … only as nosotros've been telling you they would; no more tax refunds, no stimulus, no authorities transfer payments, no child taxation credits. All of this adds upward toa $i.3-TRILLION-dollar blackness hole…
All at a time when spending on necessities like food, fuel and housing is at the highest levels of the modern era and over fifty% of Americans don't have more than $1,000 in a bank account.
Is this where we remind you consumer spending comprises lxx% of Us GDP? Meanwhile, we sentinel in existent time as the confidence of the top quintile that represents 40% of that spending (who are those who make over $100k per year) has shrunk at ane of the fastest paces in history!
- Auto Sales were down -24.90% in March (CarMax: $KMX has been a Big warning to investors)
- Runway Traffic decelerated -3.12 in March from +5.69 as many companies accept stockpiled inventory heading into an enormous consumer spending halt with:
- Inventory costs and warehousing prices are at the highest on record (h/t to Danielle DiMartino Booth for the of import telephone call out)
Just as we've been educating you on employment being a lagging, late bicycle indicator, this information is tardily cycle behavior equally well – these signals ARE NOT SUBTLE, they are undeniable and screaming at the proverbial "fools", but still these words "echoed in the wells of silence"
" And the people bowed and prayed
To the NEON GOD they made"
We've all heard the adage, "Don't fight the Fed" which simply means that when the Federal Reserve is being "accommodative" the broader market indices will probably move college with the increase in money supply and accommodative measures! This is a alert to short sellers, to just ride the Fed Put; sit down back and enjoy the ride.
And so, forgive me if I'm slightly confused…
The Federal Reserve is now tightening into ane of the swiftest economic contractions from a growth perspective in the modern era. So far, they take hiked rates by only 25 bps, but they continue to talk a linear fifty-bps hike for each of May, June, and July. On December xvth, they halted purchases of MBS and that acquired the mortgage market to fall autonomously in short order. Now they are talking nigh a broad balance canvass reduction.
As the Fed talks remainder sheet reduction, we'll note that even they aren't dumb enough to exist outright "selling" anything to exercise and then. Outset, they bought most things on their balance sheet at much lower yields and with yields having spiked, prices would be downward from where they paid; no bueno! They volition allow these items to mature and roll off. The Fed was the largest buyer in the Treasury and MBS markets for years, so this leaves an enormous void in both markets (good luck to the coin eye banks).
Earnings estimates are existence slashed at a precipitous step, and Federal Reserve officials are literally telling you that to fight inflation, they NEED markets to go lower.
Don't believe me?!
On April sixthursday, the former President of the Federal Reserve Banking concern of NY and Vice Chair of the FOMC (Federal Open up Marketplace Commission) Bill Dudley penned an op-ed for Bloomberg, which you lot can read hither, titled:
"If Stocks Don't Fall, the Fed Needs to Strength Them – Tightening financial conditions will be key to getting aggrandizement under control."
His opening paragraph starts by telling youthe Fed needs to inflict pain on both stock and bond holders; NO, I AM Non KIDDING.
"It's difficult to know how much the U.Southward. Federal Reserve will need to do to get inflation under control. Only one matter is certain: To be effective, information technology'll have to inflict more losses on stock and bond investors than information technology has so far."
There are quite a few things in this article I would push button back on Dudley for, though i thing is for certain … these guys are extremely dangerous, linear thinkers. At the same time, when they tell you that they're trying to bring pain to both bond and equity holders, and their tool is a blunt instrument, not a surgical pocketknife, believe them … The decision of the piece reads:
"Investors should pay closer attending to what Powell has said: Financial conditions need to tighten. If this doesn't happen on its own (which seems unlikely), the Fed will accept to shock markets to achieve the desired response. This would mean hiking the federal funds rate considerably college than currently anticipated. One mode or another, to get inflation under command, the Fed will demand to push bond yields higher and stock prices lower."
At the same fourth dimension the whole of Wall Street is still telling you that the economy is strong and while the markets might be"volatile", residuum assured, they should motion higher (on lower earnings, compressed margins and the Federal Reserve working against them ??). And so … now it'southward ok to fight our NEON Gods at the Federal Reserve?!
As if this wasn't plenty, on Apr 22nd, Federal Reserve voting member Loretta Mester appeared on CNBC, at a time when all markets were downward between 2-iii%, and this was the opening back and forth:
Sarah Eisen: "You merely heard, another really steep sell off, an ugly solar day on Wall Street; is this role of the plan to see tighter financial conditions?!"
Mester: Well, Yeah, but not necessarily all at in one case!
They're telling you they want to destroy demand and bring markets downwardly, yet the trouble with linear thinking is that markets are fractal; they're all interconnected in one way or another. To think that one can orchestrate an orderly sell off in fiscal markets past providing a linear expectation of how many 50-basis-indicate raises the Fed is planning on doing while not expecting a consummate meltdown that ripples throughout the financial system is heed-numbingly ignorant as it is arrogant, particularly given the extreme leverage and illiquidity that's in the arrangement.
Every bit Hedgeye CEO recently put it in a chat with Danielle DiMartino Booth:
"I notwithstanding retrieve and some people recollect I'thou bananas on this, I think that they're done if that's the case; DONE RAISING Involvement RATES. I don't remember the market volition conduct 2 dorsum-to-back 50 bps hikes. I call back information technology's going to be a far stretch for them to get beyond the May 50 bps without markets collapsing further from where they already take.
Markets are non-linear … who the hell told these people that they're going to exist able to accept a linear schedule of rate hikes and a linear reaction by capital markets?! That's the f*cking stupidest thing I've ever heard of so far or at to the lowest degree the dumbest matter that'south come up out of my own rima oris so far" Keith McCullough, Hedgeye Investing Summit 38:46
Nosotros reiterate what we wrote in 2018:
" Our opinion has been the same for years at present, nosotros have held the line; given the absurdly high debt levels from government to corporate, consumer all the way down to student, nosotros do Not believe that we have the capacity to absorb higher interest rates. Equally stated earlier, information technology is exactly what markets have told Fed chair Powell, the FOMC and the rest of the globe in Q4, specifically in December immediately following the concluding 25-bp raise of the Fed Funds rate."
Markets are saying the same thing today as they did in 4Q2018, unfortunately for investors who call up markets always go up, today, headline inflation is at viii.5% and while this figure is declining, headline inflation volition remain high, whether 7.5%, 7.0% or half dozen.5% over the next few quarters. The Fed Simply cares most absolute levels, while the market ONLY cares most directionality and RoC (Rate of Alter). So, the Fed volition heighten until the system cracks … and where it cracks start and hardest is what we've been trying to effigy out.
"And the sign flashed out its alarm In the words that information technology was forming And so the sign said, "The words on the prophets are written on the subway walls In tenement halls And whispered in the sound of silence"
At the onset of this slice, I told you that my favorite version of the sound of silence was a re-release by a rock band named,Disturbed. In an interview, "Disturbed" front man David Draiman offered his interpretation of The Sound of Silence.
"If you lot listen to the intricacy of the lyric it'due south talking about someone who is enveloped in the darkness, who welcomes information technology, who feels like he is a bit of an outcast in a globe full of anarchy, who feels someone who's an introvert in a earth total of extroverts, who feels like someone who'southward bearing witness to things that they can't come up to terms with and who's trying to express words that fall on fears and unfortunately wisdom that doesn't stop upwards getting developed. Tremendously poignant."
I'm no prophet … though, admittedly I sometimes walk to the trounce of my ain drum. Nosotros volition always tell you lot what the data says and our interpretation of information technology, whether it'south the pop opinion or not. Nosotros are living in a earth of chaos, we've got countries similar Sri Lanka defaulting on debt and having nutrient riots, uprisings in Peru & Pakistan, weekly riots in countless European countries similar France & Germany, Australia, and New Zealand. Cathay has locked downwardly and having food riots, with millions of people who are nearly starvation.
Where I would disagree with Draiman, is that I can and have come to terms with things. The data doesn't lie. It'southward the pundits and macro tourists who go on to bow to NEON Gods who tin't come to terms with what'due south well-nigh to occur.
We've been consistent with our words, data dependent, and prescient with our warnings. Without question, it feels lonely out at that place at times. The handful of months between the time the market signals are visible until the time when every bull and market prognosticator under the sun starts crying on television begging for Federal reserve intervention because their portfolios have been crippled can experience like an eternity, every bit if you're alone on an island hoping clients have the aforementioned resolve you do.
As much every bit we endeavor to communicate, our words will sometimes fall on deafened ears. Nosotros offering these notes monthly in an effort to educate our clients, friends and prospective clients, along with the message that nosotros'd love the opportunity to help navigate some of their assets in these rocky waters.
Then, hello darkness my old friend , as nosotros noted in September 2021, nosotros're staring at another probable implosion in uppercase markets, on top of the already 20% plus drawdowns in many major indices as of today; similar to what occurred in 4Q2018 and 1Q2020. In both of those scenarios we protected our clients well, and nosotros program to practice an even better task over the side by side 3-nine months of challenging times.
To our clients, while we could take handled the exact bottoms and re-accelerations slightly better, we learn and get better from each feel and now, nosotros're no longer alone. With our expanding research, our connexion to the Hedgeye risk direction squad, and constant dialog with other managers, we've never been more than continued and comfortable with our positioning and our viewpoint. We're amend at communicating to you, and we are always here to respond your questions and/or concerns…
Throughout the quarter, your assets with us have seen dramatically reduced volatility and our performance is, without question, crushing major indices.
We'll continue focus on managing our risk, seeking out asymmetrical risk advantage set ups, letting our winners run while cutting our losers before they become problematic. Disinflation/Deflation continues to be the prominent investing authorities over the next 2 quarters. Nosotros remain firm in our process and subject area…
As always, we're happy to discuss our market thoughts along with these strategies and more than, never hesitate to reach out with any questions or concerns. Thank yous for your continued trust and support!
Expert Investing,
Mitchel C. Krause
Managing Principal & CCO
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Source: https://othersideam.com/q1-2022-hello-darkness-my-old-friend-ive-come-to-talk-with-you-again/
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