"He got nothing from fellow Democrats. But now Republicans have come to his rescue by liberating the pipeline from green purgatory. You’re welcome, Senator."
Intelligence Briefing Takeaway — 5.27.23
It’s time for some Tip O’Neill. The 47th Speaker of the United States House of Representatives once said, “A good lesson in keeping your perspective is: Take your job seriously but don’t take yourself seriously.” In his decade-long stint as Speaker through 1987, the Massachusetts Democrat gave new meaning to crossing the aisle. In 1991, President George H. W. Bush awarded O’Neill the Presidential Medal of Freedom for his dedication to serving the public for 50 years, “while maintaining his humor, humility and touch with the people.”
QI PORTFOLIO STANCE
Politics will, once again, rise to the fore and set the economy’s course. Pre-pandemic, credit was already compromised. Rather than be capable of going at it alone as the Fed did post-GFC, a combined monetary and fiscal response was required but misallocated too universally, inducing an inflation shock. The under-appreciated risk of the debt limit, budget resolution, and removal of direct fiscal support in a post-GOP House of Representatives reality should act as anchors on long-maturity Treasury yields. A continued flattening bias underlies the building stresses on household finances as the global and U.S. economies enter recession. Deteriorating demographics & plummeting household formation add to the risk that Fed overtightening elongates and deepens the downturn as Powell tries to kill the Fed Put.
QI QUICK QUILL CALLS
• Short Transports – Use the risk rally to take advantage of a sector literally running on fumes. Port volumes and freight rates have given back their post-pandemic gains, and then some. American trucking Outbound Tender Rejection Rates have broken to record lows. Truckers’ pricing power has been decimated. Yet the sector’s stock prices have held up. Shorting a basket of stocks or an ETF in the Transport sector, particularly one exposed to global trade, makes sense to QI here and now. [Weekly Quill, 5/17/2023]
• Bull Steepener in Treasuries. The Great Flattening we first forecasted in June 2021 has run its course. We see the slope of the yield facing steepening pressure going forward as Fed rate hikes are removed from short-term yield upside and recession pressures down long-maturity rates. Powell has the latitude to maintain his tight stance, including QT continuing to run ‘in the background.’ [3/20/2023]
• Maximize Cash. The bear market we have predicting Q4 2021 is here and only mid-innings at best. The recession we have been predicting since Q1 is increasingly accepted. Politics could catch anyone flat-footed, but not likely in a divided congress; a defensive path is the most prudent. [9/23/2022]
• Overweight the U.S. Dollar. Overweight domestic Utilities within U.S. equity portfolios and underweight companies and sectors with high international exposure, namely Technology, Materials, and Consumer Staples. The U.S. Dollar will likely stay stronger for longer as the world realizes no pivot is coming. [9/19/2022]
• Short Consumer Discretionary. Shorting the most discretionary of the Durable spending sub-sector, namely recreational boats, recreational vehicles, and autos. [8/31/2022]
• Short Travel & Leisure. As the impulse from the Employee Retention Credit fades and recession bites, a pair trade of long Telecom Services & short Travel & Leisure is appropriate. [8/30/2022 – we were far too early – reiterating 5/8/2023]
• Long Automation, Robotics, & AI. Automation will continue thriving in America as high labor costs, on-shoring, and near-shoring gain momentum. While QI still advocates maximum cash positions at this time, we believe these subsectors will outperform on a relative basis. [7/26/2022]
• Short High-CRE exposed Banks. Shorting a basket of small-to-mid-cap banks with high exposure to Commercial Real Estate makes much sense to QI. Rates are rising, which is good for net interest margins, but CRE defaults are just starting. [7/26/2022]
• Short Inflation Breakevens. With recession in the books, we reference the duration of the last two occurrences of 2s/10s yield curve inversions — the 9 months in 1999-2000 and the 7 months in 2006. Because deflation in shelter will filter through with a lag, short inflation breakevens. (i.e., long TLT, short TIPS) [5/3/22 updated 7/6/22]
• Long Volatility. As the Fed tightens, weak liquidity gets tighter, and asset price volatility rises. The VIX looks increasingly inexpensive. Look to build VIX entry points when stocks are in blind rally mode. [4/5/22]
• Short Autos. Macro fundamentals suggest a downside for the auto sector. Auto Retailers, in particular, who’ve reaped huge gains are likely to see those go into reverse. [3/24/22]
• Short/Sell Commercial Real Estate. With record low cap rates pushing 2%, half of 2007's prior record, if you own anything in CRE, even Industrial, sell and sell now.
ON QI'S RADAR
• Be mindful of rampant corporate credit creation in a higher-cost environment. More credit spread widening is likely on offer.
• Chinese stimulus of new will not be as it was in prior rescues and bailouts; be wary of going ‘all in’ until we see proof the economy has reopened
• Desalinization will be one of the biggest domestic and global plays in the next decade to go long opportunistically