Friday Speedrun: May 5, 2023
The cool kids are running the stock market
Hello. It’s Friday. Thanks for signing up. I’m Brent Donnelly.
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Here’s what you need to know about markets and macro this week
Global Macro
It was a bad week for Jerome Powell, but it could have been worse. On Wednesday at 2:30 p.m. Eastern Time, he declared that the US banking system was sound and resilient.
91 minutes later, at 4:01 p.m. this came out:
*PACWEST SAID TO WEIGH STRATEGIC OPTIONS, INCLUDING SALE
If a company says “We are weighing strategic options,” it’s secret business jargon code for “We are fooked.” It’s an instant downward repricing of the stock and thus a last resort for any company. One might expect that the leader of the Federal Reserve might have had some idea this PACW announcement was coming but it seems he did not.
Investor confidence was bent but not broken, though, and markets learned to love again as Friday's jobs data showed that the world is not (yet) ending. In fact, corporate earnings were much better than expected this cycle (down around 2% YoY vs. 6.7% expected) and the US jobs market stays strong in the face of rising doubts.
Last week, I talked about the discrepancy between soft and hard data and the difference between coincident and forward-looking data. This week, the soft data improved a bit, the hard data was full speed ahead, and the forward-looking stuff depends on how bad you think the fall in deposits and lending will impact the economy in the future.
Most people, including me, think the impact of tighter lending will be severe, but lags are long and variable and with such a huge shortage of labor in the US, it’s hard to know if or when the US slowdown will ever arrive.
To give you a sense of how badly misunderstood this economic cycle has been… Here’s an insane chart.
Number of consecutive months NFP beat or missed in a row
For most of my career, the US employment story was always about demand. That is, “How much demand is there for labor?” Demand determined the level of hiring because there were always enough workers lying around if American companies needed them. Now, the story is about supply. There is so much demand for labor but the labor force is not big enough to satisfy the demand.
This is why economists keep getting the number wrong. Traditional forecasting models are built with variables like oil prices, credit spreads, Initial Claims, and other measures that use demand for labor to estimate hiring. But in a shortage market, demand going up and down doesn’t matter.
The simplest way to look at this is to compare supply and demand for labor. At the most basic level, Demand is the number of job openings and Supply is the number of unemployed people. Here’s the chart. Note the orange line (supply) always exceeded the blue line (demand) from 2000 to 2017 or so. That is why wages never went up in any meaningful way in that time period.
Supply of labor (orange) vs. demand for labor (blue)
Gray line below shows surplus or shortage
The US jobs market remains strong. At some point, the labor shortage will be absorbed but nobody has any idea when. Economists have been calling the turn for a year and have been dead wrong. When we finally see weak jobs growth, it’s a game changer, but there is no reason to front-run that weakness. Trade it when you see it.
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Stocks
The stock market continues to split into two main cliques like my Grade 7 schoolyard at Alta Vista Public School in Ottawa. The cool kids (AAPL, NVDA, MSFT, MCD, MNST, etc.) are over in one area playing frisbee and baseball, eating cool ranch Doritos and Gobstoppers and Big League Chew, while the nerds (PACW, KRE, FHN…) are over by the portables talking about perpendicular bisectors and eating ants on a log out of Tupperware containers Mom packed in their TMNT lunchboxes.
Cool kids: AAPL, MSFT, NVDA, and anything remotely resembling the most cynical view of American Diabetes and Obesity Consumerism (Pepsi, Yum Brands, Monster Beverage, McDonald’s, General Mills, Mondelez).
Nerds: PACW, KRE, FHN, and all the banks.
Now it’s important to understand that I am using the 1980s/1990s version of the word "nerd” here. “Nerd” was a potent and soul-crushing insult in the 1980s. Now it’s a cutesy term for all the richest people. Let me digress for a sec:
Excerpt from: “When did the word ‘nerd’ evolve to mean cool?”
Being an avid fan of some of the challenging crossword puzzles in The New York Times, I occasionally even delve into the puzzle archives and attempt some of the ones from yesteryear.
Recently, I was working on a puzzle from Sept. 15, 1995, in which one of the clues was "teen outcast," with its answer as "nerd."
I sent an e-mail to New York Times crossword puzzle editor Will Shortz mentioning that this definition highlights how the meaning of nerd has ameliorated in the intervening 22 years.
Mr. Shortz agreed with my assessment and was kind enough to send me a list of the 127 occasions nerd has been featured in the puzzles since Dec. 6, 1993, along with the clues that accompanied the word.
In 1994, for example, two of the clues for nerd were: "Hardly Mr. Cool" and "Common butt of jokes." Nineteen ninety-five featured these two nerd clues: "One who is socially challenged" and "dork."
Contrast this with the manner the word has been defined in more recent times: In 2013, "Brainy person and proud of it," in 2015, "Almost any character on The Big Bang Theory," and in 2017, "Brainiac stereotypically" and "Homework lover."
Dictionaries also reflect the change in the meaning of the word nerd.
The Encarta World English Dictionary's first definition says "Offensive term that insults someone's social skills," while its second definition has "single-minded enthusiast."
Increasingly, the term evokes luminaries, such as Bill Gates, Steve Jobs and Mark Zuckerberg; their imagination and grasp of innovative technology has transformed the world.
So why has the sense of nerd become more positive in the past two decades?
The aforementioned celebrities are proof that many people labelled nerds as adolescents went on to become very wealthy and imparted a higher status to the word. After all, being a billionaire is seen as cool in society notwithstanding that the billionaire at one time may have been given the nerd label.
So, I am using the term “nerd” to mean “outcast” as it meant in the 1980s/1990s…
Here’s a chart:
Cool kids and nerds
Remember: “How is the stock market doing?” is rarely a useful question to ask. You need to know a bit more than index-level action. As explained a few weeks ago, the indexes give you a superficial view of the stock market. You need to look under the hood to really know what is going on.
Here is this week’s 14-word summary of this week’s stock market action:
The US economy and earnings are OK (for now). Regional banks are not OK.
Bonds
Since the day Silicon Valley Bank went under, US 10-year yields have been mostly within a 3.30% / 3.65% range (see chart). We get keep getting this weird mix of banking worries (lower yields) and strong US data (higher yields). That keeps things bouncing around in a band.
It looked like the PACW announcement might take us through the bottom of the range but today’s strong jobs data saved the day.
US 10-year yield in 2023 (hourly chart)
My view is that falling deposits, slowing money growth, and tightening lending standards will eventually drive more bank failures and downward pressure on the economy and yields, but first we need to mop up the excess labor demand.
Fiat Currencies
It’s poor form to blame your asset class when your returns are not great but FX traders can be forgiven for their middling alpha over the last month or so. EURUSD has been in a 200-point range for a month and USDJPY is exactly where it was in February before the recurring games of regional bank wack-a-mole started.
Sometimes, in trading, it’s just about surviving the lean times until the weather turns sunny again. The barren fiat currency trees will offer sweet, low-hanging fruit again soon. For now, the key seems to be whether EURUSD can unlock 1.1100. Here is the chart:
EURUSD with major tops at 1.1080/1.1095 marked in red
1.1100 in EURUSD has been like a steel brick in BrickBreaker as tons of gamma sellers lurk up there and it’s become a huge technical level. If you trade anything that has any relationship to the USD, I would set an alert for 1.1100 in EURUSD because a break there could signal a new leg of commodity strength and USD weakness across the board.
Why would I care about a horizontal line on a chart? Isn’t technical analysis dumb, like reading the entrails of a pig to predict the lifespan of the king? No. Technical analysis is not astrology… It can often reveal underlying supply and demand in markets and allow superior risk management and trade structuring. It can also be an exercise in apophenia, though, so you need to be careful.
Further reading here:
Crypto
BTC not doing much but remains well-supported as the megacap NASDAQ flies like Icarus up, up towards the sun. I heard some bitcoiners on a Twitter Spaces this week saying that Bitcoin is doing exactly what it was designed to do because it rallied after the banking crisis in March. Ermm…
Sure, yes, it did. But so did the NASDAQ and so did front-end rates. As I have said many times, crypto is a hedge for loose monetary policy. It’s a high-beta NASDAQ proxy with a bit of gold beta on the side. Megatech and bitcoin have separate fan bases that make different arguments but functionally NASDAQ and BTC are still very close to the same thing right now. That has been true for ages.
This is not a criticism of bitcoin and maybe one day BTC will be a diversifier of some sort or a means of payment or whatever. For now, stablecoins make much more sense as a means of payment and bitcoin and NASDAQ futures are fungible within a portfolio (vol-adjusted). So BTC is fun, but not particularly idiosyncratic as an asset.
It’s like NASDAQ and gold had a really smart-looking baby.
Bitcoin (bars) vs. NASDAQ (blue line)
People like to get excited about the idea that the supply of bitcoin increases very slowly. How about the supply of Apple shares? It has collapsed.
Apple shares outstanding (top chart) vs. number of bitcoins in the world (bottom chart) 2012 to now
Anyway, this comparison is not apples to AAPLs but the massive decline in Apple shares outstanding is one major argument for its relentless rocketship emoji path over the last 10 years. They also make expensive phones and they have this app store thing, I think.
Commodities
Commodities are near the lows as they continue to disappoint most everyone as there are few commodity bears and many bulls. This is a somewhat permanent feature of commodity markets. There is always a core group of hard-core oil and gold bulls out there and no amount of new information will disrupt their structural view.
The size of these two groups has grown tremendously since 2020 because 1) the War in Ukraine made oil an “obvious bet” at $100 … and 2) the new insane fiscal and monetary orthodoxy makes owning hard assets more and more attractive. As an investor, the logic of holding gold and crypto as insurance for the long run makes sense.
As a trader, I remain agnostic and would rather wait for gold to break $2100 before playing from the long side. Oil seems like a much worse bet to me on all time horizons.
Keep in mind that if you’re long gold, your opportunity cost is 5% per year so if gold goes nowhere for a few years (like it has from 2020 to now)… You get smoked on the carry. Anyhoo.
I recently had lunch with a veteran commodity trader who used to trade in the gold and oil CME pits back in the day and he said:
“You have to understand that oil and gold are not just commodities… They’re personality types. And that is still true today.” If you asked GPT-3 for these stereotypes, it might offer something like this:
Gold bull stereotype: Libertarian, doesn’t trust the government, enjoys conspiracy theories, reads Minsky and has lots of books about Weimar Germany on his bookshelf, has been writing blog posts about JPM physical vs. paper gold discrepancy and manipulation since 2002. Stares longingly at Times Square Debt Clock waiting to hear an explosion sound. Posts charts showing how USD has lost 98% of its purchasing power since 1912.
Oil bull stereotype: Republican, anti-ESG, climate change skeptic, drives a Hummer, runs a $2B AUM commodity hedge fund that’s either up or down 45% every year, has a “Don’t Tread on Me” flag in his mancave.
I know these stereotypes are sort of cartoonish. But that's kind of the point. As you get older (especially in the markets), don't become a cartoon.
BTW … “Crypto bull stereotype” would be a natural third personality type here but I will refrain because the target audience for Friday Speedrun is younger readers. I am fine alienating oil and gold boomers but I don’t want to alienate anyone under 30.
Alright. That was 6.8 minutes. You’re done.
Get rich or have fun trying.
Links of the week
Interesting / funnyish
A brief history of “Nobody wants to work anymore!”
Music
Here is the first video I ever saw of Phoebe Bridgers, during peak COVID in September 2020. She’s one of my favorite artists of this decade. Listening to this right now brings me right back to that exact day / time / place when I hit peak derealization during COVID in 2020.
“Songs are like emotional bookmarks in time,” says Fran Healy (lead singer of Travis). “When you hear a song you are transported to those times and feel strong echoes of the feelings you felt.”
True.
Funny / smart
In order to understand recursion, you must first understand recursion.
Useful background information on AI
Bari Weiss interviews Sam Altman. This is not a hard-hitting interview but some of the stuff on government oversight and regulation of AI I found particularly interesting.
"The stock market continues to split into two main cliques like my Grade 7 schoolyard at Alta Vista Public School in Ottawa. The cool kids (AAPL, NVDA, MSFT, MCD, MNST, etc.) are over in one area playing frisbee and baseball, eating cool ranch Doritos and Gobstoppers and Big League Chew, while the nerds (PACW, KRE, FHN…) are over by the portables talking about perpendicular bisectors and eating ants on a log out of Tupperware containers Mom packed in their TMNT lunchboxes."
This is when you know that you are passionate about markets. Thanks!
Alright those stereotype descriptions cracked me up. Good one!