This note was originally published
at 8am on January 07, 2013 for Hedgeye subscribers.
“Give us the news and we will finish the job.”
That’s what Churchill said to President Roosevelt in the spring of 1941 as the British were still pleading for America’s hand in taking down one of Germany’s most important ships - The Bismarck (The Last Lion, page 359).
With the US Dollar on the cusp of another long-term breakout from its bombed out base, that’s what I am still begging for. President Obama, get the Fed and Congress out of our way and we will let free-market pricing Finish The Job.
Strong Dollar, Strong America.
Back to the Global Macro Grind…
The US Dollar was up smartly last week. Closing +1.1% to $80.50, that was the 11th week out of the last 15 that the US Dollar Index closed flat to up. And the global economy liked it.
For the US stock market to have its best up week in a year on an up week for the US Dollar is not only progressive, but very new. If you want any chance at sustained US and Global Economic Growth, you need to see this Dollar strength confirmed.
For what feels like forever, we have warned of the Fed/Congress (monetarily and fiscally) perpetuating what we call The Correlation Risk (Debauched Dollar = Inflated Asset Prices, not real-inflation adjusted economic growth).
To be clear, this opportunity for the US Government to get out of the way is fleeting – but we just saw, on a very immediate-term basis, what that could look like if Obama gives us that news.
Look at these positive 15-day immediate-term TRADE correlations:
- US Dollar vs. SP500 = +0.48
- US Dollar vs. MSCI Emerging Markets Index = +0.79
- US Dollar vs. US Treasury 10yr Yield = +0.62
Again, these are very immediate-term changes in the Global Macro Risk Factoring of the market – but they are not new to US and Global Economic history. During both the Reagan (1983-1988) and Clinton (1993-1999) sustained US Economic Growth periods, we had A) Strong Dollar and B) Deflated Commodity prices.
*Class Warfare fans: that would be good for lower-income populations and bad for the only class I’ll call a “class” - the #PoliticalClass.
Importantly, if I push the duration of these US Dollar correlations out to 120-days (i.e. when we were of the view that Global Growth was still slowing), here’s what the negative Correlation Risk looks like:
- USD vs SP500 = -0.75
- USD vs MSCI EM = -0.73
- USD vs UST 10yr Yield = -0.57
In other words, the Weak Dollar, Slow Growth world can come back in a hurry if policy makers think more policy that hasn’t worked is the answer. That said, for now (as in what someone needs to forward to Axelrod to read right now), as global economic growth goes from SLOWING to STABILIZING:
A) The US Dollar has stopped going down
B) Commodities have stopped inflating
C) Both Bonds and Gold have started to go down (relative to stocks), big time
That last point is driving Gold/Bond bulls nuts, because it too is very new. But it makes sense. That’s precisely the reason why most growth investors who own Gold now didn’t buy it in the 1990s. Absolute returns were a lot higher in productive assets (Tech).
Last week’s signals from the US Treasury market were both explicit and fundamentally driven:
- Global Growth Data (across Europe and Asia in particular) continued to stabilize/accelerate
- US Employment Data continued to stabilize
- Tim Geithner said he’s leaving
All of this was good news for both global growth and the US Dollar. They have both causal and correlated relationships. They are also reflexive. And they are screaming at us from a quantitative risk signaling perspective:
- US Treasury 10yr Yield long-term TAIL risk breakout line = 1.84% (TREND support under that at 1.70%)
- Yield Spread (10yr minus 2yr, a good proxy for marginal slope of growth) = +19 basis pts wider wk-over-wk
- US Dollar Index moved back into a Bullish Formation (bullish on all 3 of our core durations: TRADE/TREND/TAIL)
There’s a very unique opportunity for the President of the United States to provide both American savers and those starving from food/energy inflation globally to Finish The Job here. Yes We Can buy into him just getting US government out of the market’s way.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1636-1664, $110.01-113.06, $3.63-3.75, $80.24-80.58, $1.30-1.32, 1.84-1.96%, and 1434-1477, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer