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The Hedgeye Macro Playbook is a periodic, deep-dive update to our active Macro Themes and Thematic Investment Conclusions.

CLICK HERE to download the associated presentation in PDF format (25 slides).

Key conclusions: 

  • We believe the counter-TREND rally in reflation has legs to ~$71 on WTI and ~90 on the DXY. From that level of consolidation we think the USD resumes its structural uptrend. We don’t think Draghi will allow a sustainably stronger EUR to weigh on capital markets activity or inflation expectations within the Eurozone and expect the ECB to react by Jackson Hole 2015. We believe investor consensus simply needs to capitulate on the expectation for a tighter Fed [in absolute terms] before it can refocus on the policy divergence between Europe and Japan [in relative terms].
  • We remain bullish on bonds and bond-like equities and we think U.S. interest rates are likely to put in yet another lower-high into or on the June 17th FOMC meeting where Yellen will have to acknowledge in her press conference the marked slowing of economic momentum – which we think continues throughout the balance of the year.
  • Neither consensus among the investment community nor policymakers at the Federal Reserve have yet to fully internalize our rate-of-change work on the intensifying demographic headwinds to consumption growth, consumer price inflation and wage inflation. Most econometric models are calibrated to historical population dynamics – if at all – and simply fail to account for these headwinds amid perpetually misguided expectations of +3% annual real GDP growth, +2% core PCE inflation and +3-4% annual wage growth.
  • In conjunction with this view, we don’t think the Fed will ever be able to justify hiking interest rates – unless it is truly a political exercise. By the time September and/or December rolls around, the current economic cycle will be noticeably slowing into a likely recession sometime in mid-to-late 2016. If you think domestic economic growth is slow now, just wait until base effects steepen throughout the balance of the year.
  • In the context of our bearish growth forecast, we believe the domestic labor cycle is likely past peak from a rate-of-change perspective.

CLICK HERE to download the latest refresh of our Tactical Asset Class Rotation Model (32 slides).

Tomorrow morning (5/19) at 8:30am EST, we will run through the playbook live in lieu of our standard Macro Show. We will also host a live Q&A session at the end of the prepared remarks. Please email your sales counterpart to the extent you require a permanent passcode to our [daily] morning call.

As always, feel free to ping us with any follow-up questions.

Enjoy the rest of your respective evenings,

DD

Darius Dale

Associate