THE HEDGEYE EDGE
Sometimes the macro rotation and allocation playbook is relatively straightforward. As growth slows and "reflation" deflates, you want to be buying A) Long-term Bonds and B) stocks that look like bonds. Bond proxies and defensive yield consistently outperform alongside the dual deceleration in demand and prices and Utilities remains the canonical go-to sector for growth slowing, defensive yield exposure.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
In the globally coordinated central-banking game of rotate-the-QE, ECB President Mario Draghi et al hold the policy ball currently with the next main event calendar catalyst being Jackson Hole on August 27-29th. Relative strength in the domestic economy and expectations for divergent monetary policy paths in the U.S. and EU have and should continue to support dollar strength in the nearer-term – with the stronger $USD, in turn, perpetuating the deflationary environment via declining import prices, declining business investment and ongoing declines in things priced in those dollars (namely commodities).
Away from Deflation’s Dominos, we also expect domestic growth to decelerate in 2H15 – a reality that should further extend the prevailing outperformance in low-beta, low-short interest style factors. In other words, being long “boring”, relative inelastic cash-flows with yield worked in July and should continue to work from here.
LONG-TERM (TAIL) (the next 3 years or less)
In a global Macroeconomy constrained by secular demographic headwinds, ongoing over-indebtedness, top-heavy income distributions and pervasive liquidity trap conditions, lower-and-slower-for-longer remains our baseline expectation for growth, inflation and the level and path of interest rates.
We don’t want to hold everything at every price but the reality of slower-for-longer is that re-rotation into Utilities, REITS and the like will be recurrent whenever the slope of (cyclical) growth turns negative and the quantitative setup is favorable.