“This story illuminates, as only great history can, not only the past but also the present.”
That’s how the late Richard Holbrooke (1) ended his foreword to the latest macro strategy book I started reading this weekend – Paris 1919: Six Months That Changed The World, by Margaret Macmillan (winner of the Samuel Johnson Prize).
With the US launching its first drone attack on Pakistan since the US election, I am certain that the likes of Holbrooke (former United States Special Envoy to Afghanistan and Pakistan) could illuminate the history of this US engagement for us. Maybe his sons will tell his stories. Maybe they won’t. Someone always knows something in this world. History teaches us that the herd tends to get the truth on delay.
Markets teach us different versions of the truth. They also reflect upon history. Market prices build upon stories told. Whether those stories are fact or fiction is of less concern to me than what people will expect happens next. Holbrooke said his only regret about the 1919 Peace Conference story was that “it was not available a decade ago.” The book was published in 2003. The truth was now 86 years old.
Back to the Global Macro Grind…
“What is the truth?” That’s the most important question to one of the best macro risk managers of our generation (Ray Dalio), so it’s definitely one of the most important ones to me. From a behavior economics perspective, I really care about the truth of expectations.
Is it true that rising US Treasury bond yields are a pro-growth signal? Is it true that rising yields (combined with a #StrongDollar) predicted the truth about both the 1982 and 1993 US economic growth recoveries? How do you know the truth if you haven’t studied history?
I started on Wall Street during an internship in 1997. The people have changed. But the game of expectations hasn’t. Some people try to game the game by front-running inside information. Apart from potentially going to jail and having history write about you as a cheater, what’s the downside in that? Inside information is, after all, the truth.
Then there’s the knucklehead hockey player approach to mapping expectations about the truth (I don’t like orange jump suit risk):
- First, have a quantitative process that signals what the truth about expectations are, across multiple-durations
- Then, overlay a multi-factor model of research that helps contextualize those market expectations (correlation and/or causality)
- And finally, either move – or choose to do nothing
With a multi-duration, multi-factor model contextualized by history in hand each morning, you can:
- Do nothing
- Do more of what you have been doing
- Unwind everything you were doing and do the opposite of that
Contextualizing yesterday’s newsy “breakout” in bond yields is a good working example of how people get whipped around:
- US Treasury yields have been breaking out on our TREND duration for almost 3 weeks (1.82% breakout signal)
- The causal factor in driving Treasury yields higher, faster, continues to be economic data (jobs, housing, confidence)
- Most who are clinging to getting inside info from Bernanke on when the Yield Chasing thing is over, are getting run-over
Again, as I wrote 3 weeks ago, Front-running The Fed is a legal and profitable business. All you have to do is have an accurate process that signals how wrong Bernanke’s forecasts on growth are going to be and then act accordingly. By the time he tells his boys and/or his boys tell their Washington “consultants” that he’s going to “taper”, Mr. Market will have already moved.
So, if you still think both Old Wall and Bernanke are too bearish on growth, how do you front-run the herd’s expectations changing?
- You don’t do nothing (especially if you are long Yield Chasing securities like Utilities, Treasuries, MLPs, etc.)
- You do more of what’s working – buy growth, which includes US Dollars, Consumer, Healthcare, and Financials
At a capitulation point (like yesterday) people who are still bearish on #GrowthSlowing (like we were until late November 2012) have to go with option #3 (unwind everything they were doing and do the opposite of that). That’s when you really get paid. #Flows!
When people said “sell in May and go away”, they must have meant selling the end of the world #GrowthSlowing trades and buying the living daylights out of #GrowthAccelerating. That’s not me pushing a progressive agenda; this is just the score May 2013 will record:
- Utilities (XLU) down -7.4% for May 2013 to-date
- Financials (XLF) up +6.6% for May 2013 to-date
That’s about as eye opening an equity sector level divergence (one the key risk factors in our multi-factor risk management model) as you will ever see on a 1-month duration. So is a +31% one-month rip (+52 basis points) in 10yr US Treasury yields in Bernanke’s face.
Unfortunately (for Bernanke’s legacy), I can’t tell you what history will tell you about all the unintended consequences associated with the US Federal Reserve and Bank of Japan seeing rates rip off of the zero-bound.
All I can tell you is that the present is already reflecting asymmetrically on the past – and May 2013 has been illuminating.
Our immediate-term Risk Range for Gold, Oil (Brent), Corn, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $101.74-105.28, $6.36-6.71, $83.92-84.58, 101.23-103.67, 1.98-2.18%, 12.29-14.82, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
The Macau Metro Monitor, May 29, 2013
EASIER ENTRY VISAS TO TAIWAN IN AUGUST Macau Business
The Taiwan government announced that it will be easier for visitors from Macau to get a multiple entry visa. The policy may be implemented in August. Those measures include a plan to “loosen visa procedures for mainland, Hong Kong and Macau travellers to allow multiple entry” visas, the government’s statement says.
Currently, Macau citizens are able to apply online free of charge for Taiwan visas. If the request is accepted, all tourists will have to do is print out the visa agreement. The entry permit will be valid for three months and will allow visitors to stay on the island for a month.
CASINO AIR TEST DOESN'T COVER VIP ROOMS: GOV'T ACCUSED OF BEING "SOFT" ON CASINOS IN SMOKING BAN Macau Daily Times, Macau Business
Trade unions blamed the government for being too lenient towards casinos in the enforcement of partial smoking bans in all gaming venues. Representatives of casino staff unions said nearly half a year after the tobacco control law came into effect, the government is yet to conduct air quality tests on VIP rooms where tobacco smoke is most dense and the authority has also failed to take legal action against gaming facilities that cannot meet ventilation requirements.
The Health Bureau conducted a second check on the casinos that failed to meet the requirements in the first test last month. A total of 28 out of the city’s 46 gaming venues – including slot parlours - or 63.6% of the total, had air quality issues.
UNIVERSAL SAYS ROBINSONS TALKS ON CASINO PUT ON HOLD Bloomberg
Universal Entertainment Corp. said talks with Philippine billionaire John Gokongwei’s Robinsons Land Corp to jointly build a casino in Manila were put on hold. Robinsons Land, the Manila-based developer, said in December that it had signed a preliminary agreement with Universal for the project.
Universal will consider developing a casino in the Philippines on its own or with other partners. Universal boss Okada faces a U.S. criminal investigation related to his Philippine casino project, with the U.S. asking to intervene in a lawsuit by WYNN accusing Okada of making improper payments to Philippine gambling regulators.
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Takeaway: Domestic and international headwinds are weighing on Mexican capital markets and that’s not something that we see reversing anytime soon.
This note was originally published May 28, 2013 at 15:11 in Macro
- Mexican capital markets are getting hammered from both sides – domestically on political risks and internationally on rising duration risk – and that’s not something that we see reversing anytime soon – at least until President Nieto’s reform agenda gets firmly back on track. Using the yield on the 10Y US Treasury as a proxy for financial repression in the US, it’s no surprise to see that Mexican 10Y yields have a +0.85 positive correlation to their American counterparts on a trailing 3Y basis.
- Additionally, with no trustworthy way of modeling intraparty and interparty political risk, we have deferred to our quantitative risk management signals, which have confirmed a TRADE & TREND breakdown in the Mexican equity market. We have interpreted that to mean there is a high probability of more political consternation ahead.
- With super-sovereign yields backing up globally now (review our detailed thoughts HERE, HERE, HERE and HERE), it’s no surprise to see one of the favorite yield chasing plays of US and Japanese investors throughout recent years is getting tattooed. Moreover, with everything we now know about EM crises cycles (CLICK HERE for our 120+ page presentation), it’s getting a lot easier to spot these risks in real-time and reallocate assets before it’s too late.
- We’ve obviously been the bulls on domestic equities and USD exposure in the YTD, but for those of you who must remain invested in emerging markets, we continue to like consumption-oriented markets like the Philippines, India and Indonesia in lieu of commodity/inflation oriented markets such as Russia, Brazil, South Africa and Peru. If you’re looking to play our thesis in the FX market, we continue to warn of material downside across the currencies of Latin American and African commodity producing nations.
Two weekends ago, National Action Party (PAN) Chairman Gustavo Madero decided against his party’s wishes to remove 45-year-old former Finance Minister Ernesto Cordero from his post as PAN Senate leader (24 of the PAN's 38 senators signed a letter in support of Cordero). The internal struggle atop the PAN, one of Mexico’s three main political parties, has accentuated the divide between PAN lawmakers willing to work with the ruling Institutional Revolutionary Party (PRI) and those who believe the party must mount a robust opposition to the galvanizing Pena Nieto in order to mitigate the risk becoming irrelevant (i.e. Cordero and the 24 senators that openly support him).
The key issue with this is that President Pena Nieto's PRI, which remains short of a majority in Mexican Congress, needs support from the conservative PAN to advance his economic reform agenda, which includes re-working the Mexican Constitution to overhaul state oil behemoth Pemex and to broaden the tax base. It would be hard to argue that President Nieto’s reform agenda has not been the primary driver of positive sentiment among international investors surrounding Mexico’s economic outlook in the YTD, so to the extent this creates a sustained rift within the PAN, you could see incremental selling pressure upon Mexican capital markets.
All that being said, some solace should be taken in the fact that Madero has openly stated that removing Cordero was merely an attempt to improve relationship between PAN party leaders and senators, insinuating that the move was unrelated to differences about party’s future in the “Pact For Mexico” alliance (i.e. the tri-party political vehicle responsible for streamlining economic reforms). At any rate, it’s tough to see how much of the reform agenda is permanently derailed by this act until the political dust settles, which, last month, included allegations of corruption upon PRI officials at the state level.
With no trustworthy way of modeling intraparty and interparty political risk, we have deferred to our quantitative risk management signals, which have confirmed a TRADE & TREND breakdown in the Mexican equity market. Specifically, we have interpreted that to mean there is a high probability of more political consternation ahead.
Since early last week, the Mexican political scene has been relatively quiet with no major developments regarding the now-shaky Pact For Mexico and President Nieto’s economic reform agenda. What has weighed on Mexican capital markets in recent days has been rising investor expectations that the Federal Reserve’s QE program is poised to be pared back at some point over the intermediate term.
Mexico, due to its proximity and economic integration with the US (as opposed to a recessionary Europe and structurally slower China; the US accounts for 80% of Mexican exports) has been a darling for yield-chasing capital during the Ben S. Bernanke financial repression era. As such, we’re really starting to see Mexican capital markets break down in recent weeks amid the recent backing up of global interest rates. Through yesterday’s close:
- Mexico’s benchmark IPC Index fell -4.2% MoM and -9% on a trailing 3M basis;
- The Mexican peso (MXN) dropped -1.1% WoW vs. the USD and -2.6% MoM;
- 3M Implied Volatility on the USD/MXN increased +16.9% WoW and +24.4% MoM through yesterday’s closing price of 11.485 – the highest level since last SEP;
- Yields on 2Y sovereign peso bonds are up +21bps WoW and 14bps MoM; and
- Yields on 10Y sovereign peso bonds are up +39bps WoW and +68bps MoM.
Net-net, Mexican capital markets are getting hammered from both sides – domestically and internationally – and that’s not something that we see reversing anytime soon – at least until President Nieto’s reform agenda gets firmly back on track. Using the yield on the 10Y US Treasury as a proxy for financial repression in the US, it’s no surprise to see that Mexican 10Y yields have a +0.85 positive correlation to their American counterparts on a trailing 3Y basis.
With super-sovereign yields backing up globally now (review our detailed thoughts HERE, HERE, HERE and HERE), it’s no surprise to see one of the favorite yield chasing plays of US and Japanese investors throughout recent years is getting tattooed. Moreover, with everything we now know about EM crises cycles (CLICK HERE for our 120+ page presentation), it’s getting a lot easier to spot these risks in real-time and reallocate assets before it’s too late.
We’ve obviously been the bulls on domestic equities and USD exposure in the YTD, but for those of you who must remain invested in emerging markets, we continue to like consumption-oriented markets like the Philippines, India and Indonesia in lieu of commodity/inflation oriented markets such as Russia, Brazil, South Africa and Peru. If you’re looking to play our thesis in the FX market, we continue to warn of material downside across the currencies of Latin American and African commodity producing nations.
Best of luck navigating these globally-interconnected risks.
Takeaway: Here's a look at Keith's top tweets today.
We're big on process; experience takes time - and so does proving out a repeatable process in up/down tapes
Rule #1 @Hedgeye is the same one Buffett liked pre the whole govt gig (dont lose $$)
Main problem with bond bulls and stock bears is the same problem - they are all too bearish on US #GrowthAccelerating
When the 2013 bears said sell in May, they meant Gold, Utilities, and Bonds, eh?
US Dollar straight back up this morning; US Equity Futures straight up; + correlation remains very strong
Takeaway: We bought FedEx (FDX) at 9:48am this morning at $97.84.