This note was originally published at 8am on July 03, 2013 for Hedgeye subscribers.
“I am quite unable to see why Heaven or any other Power should object to our telling the Moslem what he ought to think.”
It’s no wonder why history remembers Lloyd George’s decision making process in Paris in 1919 as so politically conflicted and morally confused. Balfour (British Foreign Secretary 1916-191) and Henry Wilson (George’s chief of the British Imperial Staff) would almost come to blows on big imperialist planning topics (like what to do in Turkey).
“Also overlooked were the Turks themselves. Almost everyone in Paris assumed that they would simply do as they were told. When Edwin Montagu, the British Secretary of State for India cried, “Let us not for Heaven’s sake, tell the Moslem what he ought to think, let us recognize what they do think.” (Paris 1919, Six Months That Changed The World, pg 380)
Does getting a bunch of pompous politicians in a room in Paris solve or perpetuate the world’s long-term risks? Post WWI, the answer to that was a disaster. There’s no reason to believe that trying to centrally plan the Egyptians or Portuguese this morning is going to be a success story either. Our centrally planned world is long of political arrogance and short of human empathy.
Back to the Global Macro Grind…
From a globally interconnected risk perspective, this morning is one of the uglier ones I’ve seen in the last few months. It’s not just Egypt jamming oil prices up and Portuguese bond yields blasting higher either. Here’s what’s going on:
1. ASIA – Indonesian stocks (-3%) and the Hang Seng (-2.5%) led a broad based ex-Japan meltdown in Asian Equities overnight. China printed another miss on the Services PMI front (53.9 vs 54.3) in June and it has become clear that Asian #GrowthSlowing is a reality. Every single Asian Equity market other than Japan is now bearish TREND @Hedgeye.
2. EUROPE – Greek stocks continue to crash this morning (-30% since May 17th); Portugal’s stock market is down -5.7% (10yr bond yield in Portugal tested 8% for the 1st time since November); and the rest of European major Equity markets are trading straight down (Spain -3%, Germany -1.8%, etc); every European Equity market remains bearish TREND @Hedgeye.
3. CURRENCIES/COMMODITIES – Dollar down small so far, and that’s not a good thing for US Equities (6mth correlation between SPY and USD = +0.76); Brent Oil is testing a breakout back above its $104.95 TREND line @Hedgeye this morning – any sustained close above that price could impose a sequential tax on global consumption in July-August.
Then of course you have Snowden banging around in Bolivia with Morales (or will they be dining in Vienna this evening?) as Obama fans try to put out multiple fires, including another delay on Obamacare.
What on earth could possibly go wrong?
They begged for (and obtained) a mandate for global central planning and now we’re going to have to deal with their mess. How much longer this can continue is anyone’s guess. All the while, there’s one mother-load of their sovereign debts we can short while we wait.
Under our new Global Macro Theme (that was born out of a Q2 one #EmergingOutflows) we are going to roll with emerging #DebtDeflation here in Q312. Yesterday we re-shorted the iShares USD Emerging Market Debt Bond Fund (EMB) and we’re looking forward to introducing a whole new bag full of short ideas in our upcoming Q3 Hedgeye Macro Themes Call. Basically, short politicians.
So if you can’t buy Sovereign Storyteller’s Debt – and you can’t buy Asian or European Equities, what’s left?
- US Dollars
- US Equities
- Beer, Wine, etc.
It’s a good thing US Equity markets close early today. You can get an early start on allocating some of your hard earned 2013 US Equity gains to option #3.
Since we have 26% of the Hedgeye Asset Allocation in US Dollars this morning and only 14% in US Equities (60% is in Cash, which means 0% allocations to International Equities, Fixed Income, and Commodities), we don’t feel like we’ll look entirely naked if the tide rolls out on our 1592 intermediate-term TREND line of support for the SP500 either (5 LONGS, 4 SHORTS @Hedgeye).
Buying anything US Equities is no way to live. Utilities (XLU) versus Consumer Discretionary (XLY) already has a +215 basis point performance spread for Q312 to-date (Utilities -1.28% vs Consumer Discretionary +0.87%). Don’t forget that #StrongDollar and #RisingRates punishes Yield Chasers, people investing in MLPs that can’t pay their dividend (LINE), etc.
As for Heaven and Power, and for the Moslem and Canadian out there that some American central planner wants to pass personal judgment on next, well – on this 4th of July, I’ll be betting on the men and women who will fight for their freedoms, all day long.
Our immediate-term Risk Ranges are now:
UST 10yr 2.41-2.63%
Happy 4th of July, and best of luck out there today,
Keith R. McCullough
Chief Executive Officer