(Editor's note: What follows below is a complimentary excerpt from Hedgeye CEO Keith McCullough's "Morning Newsletter." We send these market notes out every weekday morning before 9am ET, along with our immediate-term risk ranges on select asset classes. To learn more about this excellent Hedgeye research product and how you can become a subscriber, please click here.)
MACRO GRIND
Since #RatesRising and #DebtDeflation have been the two Q313 themes most of our clients want to talk about, that’s what I have focused my time ranting about. That, however, doesn’t mean that our 3rd major Macro Theme for Q3 doesn’t exist. In fact, today is as glaring an example as any in which #AsianContagion should be jumping off your screens.
Reviewing the risks of #AsianContagion:
- Some overvalued Asian currencies are breaking down from an intermediate-term TREND perspective
- Some Asian debt markets are getting increasingly nervous about the negative deficit impact of a weakening currency
- When both a country’s currency and debt deflate, you get local inflation and local #RatesRising – that’s bad
From a process perspective, our Senior Asia analyst, Darius Dale, called out the following equity divergences 24 hours ago:
- Indonesia -5.6% DoD vs. a regional median delta of -0.2%
- Thailand -3.3% DoD vs. a regional median delta of -0.2%
- India -9.1% MoM vs. a regional median delta of -1.2%
Then, on Indonesia in particular, he called out yesterday’s key economic data point:
- 2Q Current Account Balance - current account deficit widened to a record on both a nominal basis and as a % of GDP
And finally, we get this morning’s Bloomberg headlines (under Economy):
A) “Rupiah Forwards Plunge To Lowest Since 2009 As Bond Risk Surges”
B) “Rupee Drops To Record on Fed Tapering Concern”
These macro headlines (i.e. old news) come after Indian, Indonesian, and Thai markets move. The proactive risk management Macro Trick is to know they are moving (and why) before consensus realizes it. This macro theme is 1.5 months old.
Indonesian stocks are -11% in the last 3 days and India’s stock market continues to be one of the worst in the world for 2013 YTD – all for Hedgeye playbook reasoning (this kind of stuff confuses Keynesians who think weak FX is a good thing!).
Again, to review in the most simplest of complexity’s terms:
- Currency Burns, then local
- Inflation Accelerates and Growth Slows; and finally
- Deficit worries (and credit risk) rise; and bonds fall (#DebtDeflation)
If you want to be really worried about something other than the US Bond market crashing, we’d suggest Asia (ex-Japan). That’s not a new Hedgeye Jedi Macro mind trick as of this morning either. That’s what was already trending.