This War Is It

“Sometime they’ll give a war, and nobody will come.”

-Carl Sandburg


Since we started Hedgeye in 2008 with a macro view that the Fed couldn’t devalue their way out of a cyclical slowdown, I can’t tell you how many times I’ve been asked how I think this all ends.


“This” being the grand central-planning experiment of our time.


You know, the one that’s based on the linear-economist premise that “shock and awe” rate cuts, bazookas, and currency devaluations can not only smooth economic cycles but raise the heavens and part the seas…


But what happens then the US economic cycle slows into a stiffening demographic (secular) headwind? What happens when all of the world’s growth and inflation expectations start to slow, at the same time?


If you didn’t know the answers to these questions, now you’re starting to know. It ends how it all started. It ends in the capitulation of the Currency War. This is it. This is the war that nobody, other than we Wall Street types, will come to fight for.


This War Is It - currency wars

***Catch Keith LIVE on The Macro Show at 9am ET. Click here to watch/interact.


Back to the Global Macro Grind


Got capitulation via devaluation? After Vietnam devalued the ding Dong (their currency) yesterday, Kazakhstan opted for the -23% daily-devaluation overnight. If you don’t follow Global FX, you do now.


“But I’m an equity guy.” Yep. Totally get it. I used to be too. Then I got crushed by the macro and decided I better do some macro before the macro did me. Interconnected risks between policy moves, currency crashes, and equities matter, big time.


In the last year alone, “Emerging Market” Equity outflows have almost doubled the outflows they saw during the 2008 crash. Why the 2-bagger? Because when my boy Bernanke devalued the US Dollar to its post Nixon low (2011) chart chasers rammed their asset allocation pie charts into countries that “emerged” with strong currencies on the other side.


In other words, the outflow is a function of the prior inflow. Chase high; puke low.


Now a US Equity only guy/gal should be quick to say something like “but the market is only -3% off its all-time high.” And last I checked, that was true in NOV of 2007 and MAY of 2000  too. This is what happens at cycle tops – trailing returns look awesome.


But then you start to see the internals (and externals) break-down, crash, and challenge all of that awesomeness. And that is precisely what you are seeing right now. From a Global Equities perspective, in the last month alone, here are some draw-downs:


  1. Greece -18%
  2. Russia -13%
  3. Singapore -11%
  4. Hong Kong -10%
  5. Germany -10%
  6. Turkey -9%
  7. South Korea -8%
  8. Australia -7%
  9. United Kingdom -6%
  10. USA (Russell 2000) -5%


And voila. There it is, the Russell (2000 stocks) is “outperforming” the rest of the global growth and inflation slowing gong show. And the SP500 is outperforming that better yet. “So” everything must be fine. Global reflation and growth must be fixin’ to rip!


Let’s get serious here and not make the mistakes many equity only investors did in 2000 and 2007. Let’s not ignore the growth and inflation slowing data. Let’s not close our eyes when we look at the bond market either.


What say you Mr. USA Bond Market?


  1. TREASURIES (10yr) = 2.11% this morning after dovish Fed Minutes (that reflect dovish data)
  2. JUNK = making lower-lows (4yr lows), daily, as spread risk widens (as it always does when growth slows)


There’s that darn combo Hedgeye keeps using, #GrowthSlowing.


But what does it mean when the entire edifice of central-planning and those that market asset management at its alter are promising 2x the baseline growth (GDP) that is actually occurring? *reminder, Hedgeye is at 1.4% q/q SAAR and 1.6% y/y


Every single perma-bull economist/strategist in the US has not only a “3-4% US GDP” forecast in the 2H of 2015, but has it mapped in excel as far as the linear-seeing-eye can fathom, into 2016 and beyond.


That, to put its duration in historical context, implies the greatest economic expansion since WWII. And I’m thinking less American realists sign up to come fight for an un-elected central planning war today than they did for The People back then.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.07-2.18%

SPX 2061-2090
RUT 1190-1213
VIX 13.49-15.83
USD 95.62-98.19
Oil (WTI) 40.07-42.65


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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