This note was originally published at 8am on March 28, 2013 for Hedgeye subscribers.
“Paris is now become a furnace of politics.”
In the beginning, Thomas Jefferson fell in love with France. Eventually, he started falling out of love with some of her socialized parts. The aforementioned quote came from a letter he wrote to a friend in 1788 and went on to add that “all the world is run politically mad. Men, women, children talk of nothing else.” (Thomas Jefferson: The Art of Power, page 215)
Only 225 years later, free-market capitalists living in Paris probably still feel the same. Jefferson’s timing was, as usual, prescient. On July 14, 1789, The People stormed the Bastille Saint Aintone and the French Revolution went full throttle. All the while, George Washington was officially named the 1st President of the United States.
Imagine Americans were paralyzed by France’s politics then inasmuch as our global crisis-seeking media is now? That’s no way to live. There’s always a crisis somewhere in this world. There’s a crisis developing for those calling for a US crisis too.
Back to the Global Macro Grind…
Put another way, there is a crisis in the crisis. And, no, I am not saying that you shouldn’t be shorting countries whose economies have been socialized and compromised by modern Marxist regimes. If you are bearish on Italy, just short Italy.
Quantitatively speaking, Fear’s Furnace appears to be alive and well in Europe. Consider the following signals:
- The Euro remains in a Bearish Formation (Bearish across all 3 of our core durations: TRADE, TREND, and TAIL)
- Germany’s DAX just broke its immediate-term TRADE line of 7865 support (this week); TREND support = 7695
- Italy’s MIB Index (-6% YTD) has been bearish TRADE and TREND for over a month now (Italian CDS now > 300 too)
So that’s bad – for them. But is everything that’s bad for them bad for you? Hopefully you aren’t reading this letter from Milan. But if you are, A) I hope it’s from vacation and B) that great cup of coffee you are drinking is going to get more expensive before you finish it.
In Euros, that is.
When your currency starts to get torched by politicians, you probably should start freaking out. If people really start freaking-out about Europe, what they are going to do with their fiat moneys next is more of what they are already doing – buying American:
- European investors will buy US Dollars
- European investors will buy US Stocks
- European investors will buy US Treasuries
And while the last part of that is something I probably need to risk manage more aggressively now (the fund flow bid to US Treasuries), the first two parts of that (#StrongDollar, Strong US Equities) is more of what we continue to like anyway.
The reason why this is confusing consensus is that for the last 3 years, this is not the way that the Global Macro market worked. To review: 2010-2012 was the US Dollar Debauchery period of The Ben Bernank (i.e. the period where the entire capital market world learned to just front-run the poor guy’s Policies to Inflate).
Today, the marginal debaucherer of currency is Japan – and the to-be Bernanked (cutting rates to zero) zone is Europe. That, in turn, puts further downward pressure on Euros and Yens relative to Dollars – and puts purchasing power in the back pockets of Americans.
Or non, mes amis? Not so cool for those using the old correlation playbook of 2010-2012 either:
- Dollar Up = Stocks and Commodities Down, globally
- Dollar Down = Stocks and Commodities Up, globally
That’s when the game was less hard. Remember, “get the Dollar right and you’ll get a lot of other things right”? That’s still right, but in a completely different way:
- Dollar Up = US and Asian Stocks Up
- Dollar Up = Brazilian, Russian, and Emerging Market Stocks Down
- Dollar Down = Commodities and Basic Materials Stocks Up
I know. Up, Down – all around. This is enough to make a man mad. Just be thankful you aren’t trying to trade S&P futures on what some French dude down on the Eastern edge of Paris was whispering to the Old Media’s twitterati , circa 1789.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST10yr Yield, VIX, and the SP500 are now $1591-1617, $106.75-110.48, $82.79-83.66, $1.27-1.29, 1.84-1.96%, 11.31-14.29, and 1554-1568, respectively.
Happy Easter Weekend to you and your families,
Keith R. McCullough
Chief Executive Officer