This note was originally published at 8am on March 20, 2015 for Hedgeye subscribers.
“It was the transformation of the ocean from a death sentence to a sort of giant river.”
After a mentally exhausting month on the road where I was debating investors on what the Fed could and should do, now we have the proverbial giant macro river card priced into the marketplace, and I can go back to reading my books and brackets.
Since my NCAA brackets are basically an uneducated guess from a 5’9 right-hand-only-dribble-Canadian who doesn’t know the difference between the SEC and whatever division UAB played in this year, my picks did well yesterday.
Go figure. Guessing works some of the time – but it gets you run over in macro markets most of the time. So let’s go back to analyzing the transformation of an interconnected, but non-linear, global currency, commodity, fixed income, and equity market.
Back to the Global Macro Grind…
The transformation of the oceans (across the last six centuries) is a fantastic metaphor for macro markets to consider as you watch your basketball brackets this weekend. If you’re not into doing either – let me save you the required reading and give you the history point:
“The most lasting impact of the deep water revolution, wasn’t the shifting of the spice trade, the fall of the Ottomans, or even the rise of the British Empire… Deepwater navigation cracked the world open, launching the Age of Discovery, which in turn condensed the world both culturally and economically.” (The Accidental Superpower, pg 31)
Never mind not having a modern day #process to contextualize and risk manage the oceans. Trading macro used to be a death sentence for people who A) didn’t have live quotes and/or B) liquid macro securities that helped them express their macro themes.
Today, all of that has changed. Currency markets are some of the deepest and most liquid in the world – and most central planners wake up every morning looking for ways to manipulate them.
Last night, BOJ (Bank of Japan) overlord Kuroda was trying to jawbone the Yen lower by suggesting he could come up with some moarrr “innovative monetary policy.” What he meant by that is he can do moarr and moarrr of what has not worked, and take Japan’s annual money printing from 80-90T Yen to something greater than 100 TRILLION Yens…
Yeah, these guys are totally awesome. As they are blowing up the purchasing power of The People, they are providing us an excellent map of how to navigate the River Alpha of Global Macro returns.
How did Kuroda impact macro markets?
- Yen Down (Dollar Up) = Nikkei Up
- With Burning Yens testing YTD lows, Weimar Nikkei ramped to a 15yr high at +12.2% YTD
- Janet’s attempts to devalue the US Dollar past 1-day were foiled
Oh, then Draghi woke up and gave the Greek guys a buzz telling them to just float it out there that they are “feeling confident” about their talks with the Germans:
- After hitting fresh YTD lows (see Chart of The Day), Greek stocks bounced +3% on that and…
- The Euro (vs. USD) bounced to another lower-highs too at $1.06…
- So Janet doesn’t have to intervene just yet –until Euros and Yens are both on their lows again, I guess
This is, of course, the problem with trying to centrally plan your own domestic waterways as the rest of the world is trying to boil the currency ocean. If your “policy” is linear and local in its design, it’s going to get wiped out by non-linear global macro risks.
“So”, Janet, while I’m a fan of the no policy mistake move this week… and I think that the move you made on the non-impatience vs. “patient” was cute… in trying to devalue the Dollar from here, I think you’re up this river without a paddle until you make your next move.
How do we invest in these #StrongDollar + Down Rates Global Macro waters? No real change from where I’ve been:
- Commodity #Deflation = rocks, so avoid those (reiterating the asset allocation of 0%, which we’ve had for 6 months)
- US Equities = domestic consumption opportunities abound (Russell 2000, Housing, Consumer, Healthcare)
- Int’l Equities = owning central plans to ramp stocks markets (Japan, Germany, Italy, Spain, etc.)
And in FX and Fixed Income you obviously own what the long-term investors in Global #Deflation and #GrowthSlowing do – US Dollars and Long-term Treasuries. It’s a Giant Macro River, and I’m happy owning the deepest and most liquid parts of it.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.91-2.05%
Best of luck out there today and have a great weekend,
Keith R. McCullough
Chief Executive Officer