This note was originally published at 8am on June 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
"I could not have asked for anything more... I played great for four days and couldn't be happier."
Feel-good fans couldn’t have asked for more in Rory McIlroy’s victory at the 2011 US Open yesterday. Irish eyes were smiling on the 22 year old European as he bear-hugged his Dad on Father’s Day.
And then, Europe decided not to bailout Greece…
As a result, Global Macro markets are Asking For More this morning. Unfortunately, more debt is not enough. While I am not sure who remains sober enough to realize that this time isn’t any different than most of the sovereign debt crises of the last 600 years (they end in restructuring and/or default), it seems there are at least a few fiscally conservative members of the Fiat Fool Coalition who are willing to concede that point.
On the heels of the Irishman’s victory, German Finance Minister, Wolfgang Schaueble, delivered the tough love concession to world markets this morning: “If the Greeks can’t or don’t want to make the necessary decisions, then we can’t move forward on this track.”
Risk Manager’s translation: first, deliver on the promises you made on spending cuts and selling assets, or stop Asking For More.
Fair enough Germany. Greece, play the ball as it lies.
Confusion is starting to breed contempt across asset classes this morning:
- CURRENCIES: EURO/USD is re-testing it’s critical intermediate-term TREND line of $1.42 support
- COMMODITIES: Oil prices are getting hammered down to 4-month lows on US Dollar strength ($91.61/barrel)
- COUNTRIES: Spanish and Italian stocks are getting tagged (down over 2%) as peripheral contagion concerns mount
This, of course, should all make sense to everyone who has been in Hedgeye’s camp that The Correlation Risk associated with La Bernank debauching the US Dollar can start as the US Dollar stops going down.
As a reminder, into and out of La Bernank’s last rock-star presser (April), the US Dollar Index was down -17% since Obama & Geithner started overseeing Nixon/Carter Deficit/Devaluation life in America (2009). In April, the USD was testing its all-time lows.
Today, the US Dollar Index is bidding for its 3rd consecutive UP week, and it’s up a full +3.8% since the beginning of May. Again, if you didn’t know what The Correlation Risk to an up US Dollar looks like, look at the prices of virtually everything priced in US Dollars (housing, stocks, commodities, etc.) since, well, the beginning of May!
Hedgeye calls this Deflating The Inflation (Q2 Macro Theme).
And, yes, like Growth Slowing As Inflation Accelerates (which we called for 6 months ago), we will be extra sure to remind our competition that we called this first too. As Rory Mcllroy reminded us yesterday – it’s ok to be young, confident, and on your risk management game.
What could continue to strengthen the US Dollar from here (and Deflate The Inflation)?
- Quantitative Guessing (QG2) ending 10 days
- US Debt Ceiling compromise within 3-6 weeks
- European Contagion (ongoing)
No, this Global Macro Risk Management setup isn’t very difficult to understand. It’s pretty simple to get right – if you get the US Dollar right. And since we have been right on 21 of the 22 calls we have made on the US Dollar since the founding of Hedgeye in 2008, we think we get this.
We also get being in Cash.
Here’s how the Hedgeye Asset Allocation Model flushed out week-over-week:
- Cash = 49% (down 3% week-over-week from 52% last Monday)
- Fixed Income = 18% (Long-term Treasuries and US Treasury Flattener- TLT and FLAT)
- International Currencies = 18% (Chinese Yuan – CYB)
- International Equities = 6% (Germany and China – EWG and CAF)
- Commodities = 6% (Gold – GLD)
- US Equities = 3% (US Healthcare – XLV)
As US Dollar strength Deflates The Inflation, we’ll be in a very good position to buy things on sale. The key will be to be patient on prices. Ultimately, a strong US Dollar is the only way out of this Keynesian mess. Lower-prices are going to be an important catalyst for Global Consumption. In terms of bullish catalysts for Chinese, German, and US Equities, I couldn’t Ask For More than that.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1532-1549, $91.60-98.29, and 1259-1276, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer