Your Weekly Update, Dialing Down Risk A Bit, And Let's Talk Some More About Gold

In this weekend's video update I talk about dialing back risk a bit, opportunity at the margin, why gold's been a real drag of late and why the long-term setup remains constructive. 

Morning Note

As I've expressed on recent video commentaries and in client meetings, the core adjustments we've made over the past several weeks have been primarily focused on adding to our defensive sector exposure (read consumer staples), raising our cash level and increasing the support mechanism expressed by our use of SP500 options... I.e., dialing back the portfolio's volatility a bit for what should be obvious reasons.

Now, you wouldn't necessarily know it by today's action. 

Although, that said, as I type we're capturing just over half of the SP500's decline, and only 31% of the Nasdaq's hit... Thing is, those two indices are down 1.87% and 3.70% respectively.. So, yes, we're definitely feeling it today.

The relief we're getting is coming from our increased cash level, healthcare, staples and of course our SP500 put options... But, oddly enough, gold is not providing the support one might anticipate given the action we're seeing across all asset classes; which has been largely the case the past several weeks.

I believe the following does a good job capturing what underlies these short-term dynamics, while putting it all in its proper long-term context: 

Quick Note on The Fed

There'll be no rate hike announced after today's Fed meeting, so it's all about the statement and the press conference.

As I've expressed herein of late, while the Fed has to sound tough on inflation, the short-term nature of the problem is largely (there are other factors) about passing-through-higher-prices-to-the-consumer due to a supply shock (read oil), or perhaps the risk of a further supply shock that's presently priced into everything petrol.

So, at first blush, one would think that a hawkish Warsh would be bullish for the dollar, net-bearish for equities, as well as precious metals and other commodities.

Notice I didn't say net-bearish for bonds... Not that it won't be, likely may, but, frankly, it perhaps shouldn't be... Meaning, an aggressive Fed looking to tighten financial conditions into a supply shock is uber-dangerous from a broader economic perspective... Which, all else equal, could very well have investors bidding up (yields down) the long-end of the yield curve out of fear that the Fed will live up to its historical rep as the ultimate expansion killer.

Now, that said, our longer-term position remains that -- while indeed there may be yet another hike or two on the near-term horizon -- the structural playbook is to suppress at least the short-end of the curve (where the treasury will be doing the bulk of its borrowing) and to inflate the economy's way out of the daunting headline debt/GDP ratio over multiple years going forward.

Let's face it, fiscal restraint is in no way whatsoever on the cards, whoever wins in 2028!

As for next week’s midterms, a split Washington is the likeliest outcome, and gridlock cuts both ways: no new stimulus, but no austerity either... The deficit is on autopilot (entitlements plus a rising interest bill), so nothing coming out of Congress changes the math... Expect debt-ceiling and funding brinkmanship in 2027 instead.

The Setups That Matter, Long-Term -- And Your Weekly Macro Roundup

This weekend's video commentary will take more than one NFL halftime, start to finish, but, clients, this is absolutely one you'll want to take in (start to finish).

Quick Note

One more quick commentary before this weekend's macro assessment.

Suffice to say that markets (from bonds to precious metals) are reflecting notable uncertainty... My reference yesterday to the economically-defensives (staples, healthcare, long-term treasuries) rallying against very negative action in virtually all other corners, has flipped on its head... I.e., yesterday's winners are -- along with virtually everything save for the energy-related space and, ironically, tech [flat after yesterday's drubbing] -- today's losers... Gold glimmered a bit at the open, but even it has rolled over (down 1%) as I type.

Of course, any or all of the above, given the present environment, may have reversed by the time you receive this.

So how to think about all this on an October Friday? As I chatted to our team this morning, I am macro-ambiguous in the very short-term... Meaning, there are sufficient macro and market cross-currents -- which I know I don't need to list for you right here -- to make the short-term trader (that's not us, btw) utterly dizzy, I'm certain.

But, like I said yesterday:

"...while we forever assess short-term dynamics (separating signal from noise) as we test our theses (and as we determine whether any tactical and/or additional hedging action makes sense), make no mistake, our strategy will always reflect our longer-term structural view on global macro realities."

Stay tuned…. 

Quick Note

Just a quick note followed by a brief macro update while away from the office this week...

A modest gain in our core allocation on the week is giving way this morning to broad selling in virtually everything growthy, including commodities and our non-US equity exposures... All else the same, the one intuitively-speaking surprise is the 2% drubbing gold is taking as I type.

Here's our tentative view on the action in gold taken from the synopsis below... "Since inception" refers to when we added it to our core allocation:

"GLD is -1.9% on a day when the long end is rallying and the dollar is only +0.16%. Gold is being sold as a funding source, not on its macro drivers. With GLD at +125% since inception, it’s the obvious place to raise cash."

We're noting some interesting breakdown in this year's correlations across certain asset classes -- as, with regard to rates and oil in particular, I pointed out in last weekend's video.

Suffice to say that markets are beginning to -- for the moment -- price the economic threat posed by high energy prices and a newfound fear that the AI-spending train may have already run its course... While the latter is without doubt an ultimate potentially-serious economic and market headwind, we remain skeptical that the day is yet upon us.

That said, the latest action in markets is consistent with typical late-cycle dynamics.

Note -- supporting the economic headwind view -- the following core positions action this morning:

XLP (consumer staples) +2.58%,  XLV (healthcare) +1.37%, TLT (Long-term treasuries, which we have a call option on) +1.27%... Again, the position you might otherwise expect to be doing well this morning is GLD (gold), down 2%... While there are a few other pockets of relative strength in our core mix, suffice to say that there's not enough there to fully offset the drubbing in tech-related, non-US and commodity exposures on the day so far... Of course, while we forever assess short-term dynamics (separating signal from noise) as we test our theses (and as we determine whether any tactical and/or additional hedging action makes sense), make no mistake, our strategy will always reflect our longer-term structural view on global macro realities. 

I'll offer up a more robust analysis of all things macro over the weekend.

Stay tuned...

The Fed 'Potentially' Adding Insult to Injury -- And Your Weekly Macro Update

In this week's video prelude we'll explore last week's inflation numbers, the latest action in oil and its rocky relationship with interest rates, and, among other things, an under-the-surface look at what's really troubling markets of late.