This note was originally published at 8am on September 25, 2014 for Hedgeye subscribers.
“Listen: there’s a hell of a good universe next door; let’s go.”
With a body of work that included almost 3,000 poems, E.E. Cummings was one of the most prolific poets in America’s 20th century. If he was around today, he’d probably tell you the aforementioned quote was about centrally planned economies.
You got it, yo. It’s all about jamming our noses into 18th century export-models and burning the purchasing power of The People at the stake. Rip some lip. You know, bro – get those asset prices hooked and up and out of the water!
This is Master of The Universe type stuff. Janet, Mario, Haruhiko - God put you on earth to do this, yo. Let’s go!
Back to the Global Macro Grind…
As you can see, when left to my own 45 minutes of creative writing devices in the early morning, I get flashback moments to what my first English professor @Yale deemed “un-grade-able” work …
Getting back to where I have some competence - central questions about centrally planned currencies:
- Did the devalued currency model work for the Argentines or Japanese?
- What happens when all 3 of the major players in the FX War (Japan, Europe, USA) are at 0%?
- Coming off the all-time lows in FX, Fixed Income, Commodity, and Equity volatility, what could go wrong?
- They’ll tell you that 0 minus 0 is actually greater than 0
No way. Everything?
Uh, yeah, yo. Let’s go there:
- When USD goes up or down, a lot, the machines chase this thing called the Correlation Trade
- In 2011, with Buck Burning to all-time lows, the Correlation Trade = Long Commodities, Gold, FX, etc.
- In 2014, with Euro and Yens Burning, the Correlation Trade = Short Commodities, Long Nikkei, etc.
Causality or correlation? Please. The causal factor that drives all of this are market expectations that central planners only do one thing when the economic data (always) misses their growth forecasts – they get easier…
Easier, as in dovish = devaluing…
At the first sniff of #EuropeSlowing (in May) Mario’s Italian and French bureaucrat buddies immediately focused on devaluing ze Euros. That gave the USD a surrender bid. Then, as the Abenomics experiment started to fail, the market started speculating that there were another 3-legs to the 3-legged Japanese devaluation stool.
That’s right – 0 minus 0 = moarrr than 0. And 3-legged central planning stools really have 6, or 10 legs. This is so ridiculous at this point that my jokes aren’t funny.
Moving along. If you are into the monthly performance chasing thing, here is the wood (6-week USD correlations):
- USD’s 6 week inverse correlation to Gold -0.95
- USD’s 6 week inverse correlation to Commodities (CRB Index) -0.93
- USD’s 6 week inverse correlation to Brent Crude Oil -0.92
- USD’s 6 week positive correlation to Japanese Stocks +0.89
- USD’s 6 week positive correlation to Swiss stocks +0.83
- USD’s 6 week positive correlation to Austrian stocks +0.82
In other words, as it became glaringly obvious that both Japan and Europe’s economies were slowing, you either bought the living daylights out of the Mother’s Index in Japan or something in Austria, and you crushed it.
“#Boom, crush. Night, losers. Winning. Duh!”
Oh, and what happens if and when my rates call plays out “fundamentally” – i.e. US #GrowthSlowing here in Q3 (then Q4) takes hold… the Fed freaks, and starts to devalue the Dollar again?
Bingo. This entire bongo board of Correlation Risk turns upside down and you do the opposite, fast.
As a result, volatility (across asset classes) is already signaling to me that we could very well see the mother of all historical volatility breakouts in FX, Commodities, and Equities. But no worries. For now, the central planners call this “price stability”, yo.
Out immediate-term Global Macro Risk Ranges are now:
WTI Oil 90.42-93.95
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer