Hello. It’s Friday. Thanks for signing up. I’m Brent Donnelly.
The About Page for Friday Speedrun is here.
Here’s what you need to know about markets and macro this week
Before we get started… I was at a GIC-sponsored conference with Fed Governor Chris Waller and many others this week. Here’s my full am/FX write-up covering Day One.
am/FX is my daily macro note that goes to a couple of thousand traders and investors. I made that issue free for your weekend reading pleasure. If you like it, you can subscribe here.
Global Macro
The big story of the week was confusion. There is a famous quote that goes something like “War is long periods of boredom punctuated by moments of terror” and that’s what markets have felt like over the last six weeks.
Here’s a chart of VIX, a simple and user-friendly gauge of equity volatility.
Those three spikes are the bursts of terror that accompanied the March collapse of the three banks that all started with “S”. Since then, there has been a grinding decline in volatility as global macro players can’t settle on a good story. The best times for global macro are when there is a definitive narrative and that narrative is exciting. Right now, the winds are swirling in all different directions.
For example:
Empire State (NY regional economic data) was strong, Philly was super weak.
Nonfarm payrolls, the benchmark jobs number, has beaten expectations 12 months in a row. But other measures of the jobs market like Initial Claims are showing weakness.
China reopening is happening, and the data there was super strong this week. But it kinda feels like everyone knows that everyone knows about China reopening. Like, of course the data will be strong year-over-year when you are comparing to a period when COVID-zero was still in force. It sounds circular, but positive surprises aren’t that surprising!
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And when it comes to US earnings, despite some dire warnings from a few companies like CDW… Things are not yet terrible. These images from the main page of CNBC give you a sense of what “mixed” looks like.
I am in no way advocating you use CNBC as a source of information; I just ended up there by accident.
If and when the US data pick a direction … Here is how I am interpreting the relationship between US economic data and the stock market right now.
The SPX Frown (true right now, but not always)
The reaction function of stocks does not always look like this because sometimes very bad can be good, too. But right now, I believe this frown accurately shows the current stock market reaction function to US data.
Stocks
When the VIX is falling, it usually means stocks are either going up or going nowhere and people don’t feel the desire to buy options because they expect things to remain placid. Here’s the S&P this week:
Stocks are just about perfectly unchanged.
You will start to hear about the “Sell in May and Go Away” thing as May 1st approaches. This is an oft-recurring seasonal pattern where stocks tend to go sideways and deliver subpar returns from May to September. There is some debate on whether this is random or not, but I come down strongly on the side that it is NOT random.
Here is a detailed explanation of why I think seasonality is (sometimes) real.
In funny stock market news, Ark Invest issued a $2,000 / share Tesla price target for 2027. Sure, anything is possible, but Ark is well-known for placing deliberately absurd targets on stocks in order to generate media attention. Here’s another gem: $1,500 target on Zoom, a $60 stock. Again, anything can happen. I am not faulting Cathie Wood for being wrong. Everyone is wrong at various times. I’m not faulting her bad price target predictions—forecasting is hard. I am faulting what I see as Ark’s use of deliberately absurd price targets to generate media attention.
The reason I bring this up is that it’s important to know the biases and affectations of the people you are reading about. If someone is always bullish and their target is always 20X current price and they never change their tune regardless of any new information… That target is not useful. Ignore it. Do your own work, or go to Aswath Damadoran’s site. He’s not always right, either, but he’s intellectually honest and will update his view if new information comes in. He values TSLA closer to $120.
Even if you’re not interested in valuations, this Barry Ritholz MiB podcast with Aswath is great. Anyone new to finance: I strongly recommend you give it a listen. The number one takeaway should be that if you want to succeed on Wall Street, you need to understand data and stories. Not just one or the other.
Oh and here’s TSLA this week.
Price wars, like the one TSLA is engaging in, are very rarely good for any company in that industry and Tesla has cut prices six times or so. I have lost count. Musk is again repeating his annual prediction that full-self driving is right around the corner and will save the day. Here’s what he said this week:
"We're the only ones making cars that technically, we could sell for zero profit for now and then yield actually tremendous economics in the future through autonomy," he told analysts on a conference call on Wednesday. "I'm not sure how many people will appreciate the profundity of what I've just said, but it is extremely significant."
C’mon, man. The story with TSLA was supposed to be high-margin growth. Margins are contracting and growth has peaked. Yuck.
And here is this week’s 14-word summary of this week’s stock market action:
We know less about the economy right now than we did a week ago.
Bonds
The 10-year yield is establishing a firm range 3.30%/3.65%. You can see the big drop in yields after the Great Banking Crisis of 2023 (cough) and since then we have made a bunch of tops around 3.50%/3.65%. As US lending standards continue to tighten, demand for bonds should remain strong because less lending almost always means less growth and lower inflation.
Tighter lending, lower growth, lower inflation, lower yields, and higher bond prices seem most likely to me over the next six months or so.
Fiat Currencies
This was a really bad week for cyclical currencies like CAD and BRL. This, despite calm equity markets. It’s kind of unusual to see steep drops in those currencies when not much is going on in stocks and bonds because those currencies usually trade in line with global growth expectations.
Part of the explanation here is that while stocks held up OK this week, there were medium-sized drops in the prices of crude oil, copper, and gold. As exporters of those things, the currencies of Canada and Brazil are sensitive to moves in commodity prices.
Crypto
Here’s what I said about crypto in last week’s Speedrun:
The perception that the Fed is done raising rates was part of the recent crypto resurgence, so it will be interesting to see if crypto stays supported next week or is just lagging the broader narrative a bit (as it often does). In other words, with yields and the USD strengthening today and NASDAQ lower, the next $500 higher in ETH is going to be a lot tougher than the previous $500. Sometimes, crypto gets the macro memo a few days after tradfi.
And here’s what ETH did this week.
This setup, where one asset class gets the memo a bit later than others, can create juicy trading opportunities. This style of analysis and trading is called intramarket or crossmarket or lead/lag trading and it’s a subject I cover extensively in my books. Lead/lag analysis will never give you the answers to the test, but it will give you some clues to the answers now and then.
Everyone should use a probabilistic approach to markets … And you can use lead/lag analysis to further tilt the probabilities in your favor. Same thing for seaonality, as I explained in the link way up there near the start. Good traders and analysts collect as much information as possible and note the probabilistic lean of each nugget to get an overall view. Ideally, you get a bunch of evidence all suggesting your market will move in one direction, and you pounce.
Commodities
Along with the dedollarization mania that gripped FinTwit over the last month or so, there was a less extreme, but still clearly visible excitement over the long gold trade. Long gold is a logical extension of a belief in dedollarization and gold has been flirting with the all-time highs.
This week, we corrected as traders squared up excess risk into the weekend. Gold is holding in OKish, but as counterintuitive as this sounds… I would rather be long gold above $2100, once it breaks out to new all-time highs, not here just ahead of the mega horizontal resistance. I would guess that the breakout through 2100, if it comes, will be similar in its spectacularness to that crazy clean break of $20,000 in bitcoin around Christmas 2020.
Alright. That was five minutes. You’re done.
Get rich or have fun trying.
Sorry for the weird cornucopia of chart styles this week. I’m at the Saratoga airport with bad Dunkin Donuts wifi—cutting and pasting from the Web as I flounder without my main trading and analytics platforms.
Links of the week
Mesmerizing:
Here is a mesmerizing twin tool-assisted Mario Speedrun. I present this in recognition of the new Mario Bros. movie, which I give 3.6 out of 5 stars.
Jack Black and Luma are worth the price of admission and the animation and music are solid. The script is way below average, considering the incredible volume of material they had at their fingertips. Still, an OK way to spend ten bucks (or $135 in my case, after tickets and concessions for a family of 4).
Interesting:
India’s population (green line) is now greater than China’s (red line)
What’s old is new again
Once upon a time… The Libertarian dream of the internet. Sounds a bit like the Libertarian dream of crypto.
https://www.eff.org/cyberspace-independence
Looks like satire, but it’s real
A one-hour PBS documentary explaining the internet in 1995.
Smart / Interesting:
She knew Sam was trouble when he walked in.
https://www.theblock.co/post/226981/taylor-swift-ftx-shaquille-oneal-lawsuit
Music
This concert footage from just after Chester Bennington died gave me goosebumps and might make you cry a little bit. The crowd takes over where Chester left off.
Watch from 2:30 to 3:30. You don’t need to be a Linkin Park fan to get why this is sad and beautiful.
Superb effort for airport WiFi, fantastic as always Brent.
This is such a good weekly email