Editor's note: In the second paragraph below, the original version inadvertently read "...consensus was positioned for a rate cut." We apologize for the error. Of course, we meant rate "hike."
THE HEDGEYE EDGE
From an asset allocation perspective, when growth is slowing and inflation is tracking well below target central bank levels, the dogmatic policy response is to ease.
Because the market is currently sniffing a dovish policy shift from the Fed, we decided to take down our U.S. Dollar exposure and add some gold. Remember, as we outlined three weeks ago, consensus was positioned for a rate hike (short gold and oil and long dollars). The risk embedded in a disappointment (which we called out) is now unfolding.
Aside from the week-to-week policy whispers (you’ll get more of it tomorrow at the ECB meeting), remember that the modern day Fed has never normalized policy into a late-cycle slowdown. This has been somewhat baked into market expectations over the last few weeks. But many Fed members remain hell-bent on hiking the federal funds rate this year. It’s possible that they, and actual market participants, will be disappointed.
As our CEO Keith McCullough wrote yesterday, our core long ideas right now are:
- Long the Long Bond
- Long Gold
- Long Cash
Gold loves down Dollar and down rates. Period.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
- Inflation expectations have crashed
- Relative central bank policy around the globe has exacerbated a strong dollar deflationary environment
- The Fed won’t sit on its hands. They’ll either “kick the can” or hike into a late-cycle slowdown which could spiral into QE4 which would crush the dollar.
We always model a high and a low range estimate in the Hedgeye Predictive Tracking Algorithm Model for any country’s GDP. For Q3, here are those two scenarios:
A) HIGH: Q3 2015 GDP (E) 1.5%
B) LOW: Q3 2015 GDP (E) 0.1%
Notice that this range of Hedgeye estimates (should it even be remotely correct) is country miles apart from the 3.7% Q/Q SAAR. A deceleration even using that methodology is probable.
Cue the cowbell.
LONG TERM (TAIL) (the next 3 years or less)
Cyclical and secular headwinds are matching up at the same time for a deadly combination. Our expectation is that global central banks will all drive interest rates right to zero (devalue until it’s over).
After that, we’ll see what happens.
Read a history book. You will want some gold when it all ends.