Monday, January 23, 2023

Morning Note: A Tad Bit Complacent, We Presume...

So, while our proprietary index (-33) says recession looms,

and the 2yr treasury yield (orange) rolls below the fed funds rate (white) -- signaling rate cuts on the horizon (as recession looms),

and fed funds futures also predict rate cuts are coming (as recession looms),

and the treasury yield curve (everybody's favorite recession signal) is as inverted as it gets (although one looks for it to re-steepen as the economy reaches the precipice), as recession looms,

the stock market is enjoying a very decent start to the year,

and the cyclical sectors are outperforming defensives as if we're bolting out of a recession (that never was) -- (that's healthcare, staples and utilities below the red zero line on the next graph):

Well.... hmm... Either it's indeed blue skies dead ahead, or equity market actors are getting a tad bit complacent (if not overconfident) amid what remains a pretty precarious setup... For the moment, we'll presume the latter, but we'll remain open to all possibilities.

Here's the link to yesterday's video dip into the weeds, in case you missed it.

Asian stocks were relatively quiet overnight, with China shuttered this week for the lunar holiday... Japan equities, however, did deliver a 1.3% gain on the session.

Europe's up nearly across the board so far this morning, with 17 of the 19 bourses we follow trading up as I type.

US stocks are mostly higher to start the session: Dow down 23 points (0.07%), SP500 up 0.15%, SP500 Equal Weight up 0.20%, Nasdaq 100 up 0.54%, Nasdaq Comp up 0.54%, Russell 2000 up 0.23%.

The VIX sits at 19.96, up 0.55%.

Oil futures are up 0.64%, gold's down 0.59%, silver's down 4.31%, copper futures are down 0.35% and the ag complex (DBA) is down 0.13%.

The 10-year treasury is down (yield up) and the dollar is up 0.11%.

Among our 36 core positions (excluding options hedges, cash and short-term bond ETF), 20 -- led by AMD, Albemarle, Dutch Bros, tech stocks and MP Materials -- are in the green so far this morning. The losers being led lower by silver, gold, utilities stocks, Amazon and treasury bonds.

The current structural (labor friendly/populism) regime, as we see it, says odds favor 3 and 4 below in the coming years:
"...there are four levers that policy makers can pull to bring debt and debt-service levels down relative to the income and cash flow levels required to service debts:

1. Austerity (spending less)
2. Debt defaults and restructurings
3. Transfers of money and credit from those who have more than they need to those who have less than they need (e.g., raising taxes)
4. Printing money and devaluing it"
--Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail 

Have a great day!

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