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Capital Brief: Clinton & Warren Team Up To Trash Trump

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.


Capital Brief: Clinton & Warren Team Up To Trash Trump - JT   Potomac under 1 mb


“It doesn't matter how smart you are unless you stop and think.”

― Thomas Sowell


So far, so good for Donald Trump 3.0, who has maintained a relatively low profile while his campaign continues to improve on all fronts (except his poll numbers). His newfound path forward continues to drive donations and improve its advertising capabilities, focusing on digital media outside of his well-worn Twitter account. The Republican nominee has rolled out websites and attack ads, as he continues to pitch his agenda to supporters and reshape his demeanor.


These factors signal that the Trump campaign is finally gaining some footing and it couldn’t come at a better time - with less than three weeks until the convention Trump still hasn’t nailed down key party endorsements or even solidified speakers for the convention.


Hillary Clinton and MA Senator Elizabeth Warren teamed up to trash Trump, knocking him for his self-promotional trip to Scotland and for his celebratory musings amidst Brexit global turmoil. Clinton and Warren highlighted their blue-collar upbringings, promoted the importance of strong union values, and called for the need to rebuild the middle class.


While many progressive tongues were wagging at the prospect of the two women on the ticket, we feel Warren’s appearance is more of an affirmation of Clinton’s commitment to winning over the progressive wing of the party. Further, Clinton’s increasingly robust surrogate list continues to cast a large shadow over Trump, who seems to have very few major allies by comparison.


Freedom Partners Action Fund, a super PAC financed by the network of billionaire brothers Charles and David Koch, has pledged $2.7 million in television and digital ad buys in the OH Senate race where incumbent Senator Rob Portman faces a tough battle with former Governor Ted Strickland. News of the spending spree comes just days after the group announced it will spend $1.2 million on advertising in the NV Senate race where Senate Minority Leader Harry Reid’s open seat is up for grabs.


Republicans are stepping up their fundraising efforts ahead of what will be a dogfight for the House and Senate (perhaps at the expense of the White House) - and we expect no changes to this strategy for the foreseeable future.


A Brief History Of The US #CreditCycle From Past To Present

Takeaway: Delinquencies are rising and credit conditions are tightening as the U.S. economy heads into the 9th inning of economic expansion.

A Brief History Of The US #CreditCycle From Past To Present - The Cycle cartoon 03.04.2016


As is typical in any #LateCycle economy, U.S. companies are resorting to all manner of corporate chickanery to mask financial deterioration. In response to a Wall Street Journal article about companies inflating their financial results by obscuring generally-accepted accounting principles (GAAP), Hedgeye Senior Macro analyst Darius Dale wrote, "The U.S. #CreditCycle continues to deteriorate and no amount of non-GAAP accounting will stop it."


A key callout for our Macro team has been the rollover in the credit cycle. Essentially, the natural progression of any economy in the final stages of expansion is for a protracted breakout in corporate credit spreads. (Hence our short Junk Bonds call.)


As proof of deteriorating fundamentals in the credit cycle, Dale offered the following charts with key takeaways for investors:


Click to enlarge

A Brief History Of The US #CreditCycle From Past To Present - credit darius 2


A Brief History Of The US #CreditCycle From Past To Present - credit darius 3 

Europe's Got 99 Problems (And Brexit's Just One)

Takeaway: Despite today's pop, European equity markets like Italy and Germany are crashing.

Europe's Got 99 Problems (And Brexit's Just One) - Growthslowing europe


If you think Brexit fallout and uncertainty are the only catalysts for further European equity declines, think again.


As Hedgeye CEO Keith McCullough writes in a note sent to subscribers earlier this morning:


"As we’ve outlined since the beginning of the year, #EuropeSlowing will become more obvious when Germany, France, Italy, Spain, etc. lap peak cycle GDP comps in Q2/Q3 - #Brexit was just a preview to what Europe will look like as the causal factor (#GrowthSlowing) becomes obvious; watch out below if EUR/USD $1.05 breaks."


Here's what that damn #EuropeSlowing data looks like this morning... a sea of red:



This is what #EuropeSlowing looks like in equity market terms...


Take a look at Germany's DAX... just terrible:



And Italian equities:



And here's the European equity market drawdown map with the pop today versus the crash from 2015 highs for context:


Europe's Got 99 Problems (And Brexit's Just One) - european equities 6 28


In essence, bear markets bounce but peel back the charts a little bit further to reveal the underlying reality.


And now for a bit of math:


Using the 35% drawdown in Italian equity markets as an example...



Don't do that to your portfolio. We've told our subscribers to have a 0% allocation to International Equities for some time now. Here's why:


Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




Daily Market Data Dump: Tuesday - equity markets 6 28


Daily Market Data Dump: Tuesday - sector performance 6 28


Daily Market Data Dump: Tuesday - volume 6 28


Daily Market Data Dump: Tuesday - rates and spreads 6 28


Daily Market Data Dump: Tuesday - currencies 6 28

CHART OF THE DAY | Japan: "Every Key Growth & Inflation Measure Is Slowing"

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.


"... As the Chart of the Day below details, EVERY key category of Japanese high-frequency growth and inflation data is slowing on a trending basis, with every growth metric experiencing some form of contraction and headline CPI and PPI in deflation territory as well."


CHART OF THE DAY | Japan: "Every Key Growth & Inflation Measure Is Slowing" - 06 28 16 Chart of the Day

Japan’s Referendum

“I was instructed by the prime minister to take various, aggressive responses to ensure stability in financial and currency markets.”

-Taro Aso, Finance Minister of Japan


While unilateral intervention in foreign exchange markets by Japan’s Ministry of Finance appears unlikely in the context of staunch opposition from key G7/G20 allies – the United States in particular – we can only hope that any such measures have a better, more lasting impact than Abenomics, which itself has seen its various “arrows” come under tremendous fire of late.




  • A Nikkei poll published 6/6 showed that 81% of respondents said the recent consumption tax hike delay will not affect their spending, with 57.6% citing the inevitability of a tax increase at some point in the future and another 20.7% citing an increase in economic uncertainty. That’s not good in the context of real consumer spending tracking at -0.4% YoY and slowing on a trending basis as of the latest reported data (April).
  • A Eurekahedge poll published 6/9 showed that only 5% of respondents expect the Nikkei 225 Index to end the year at/near 20,000, down from 85% in last year’s survey. Only 16% of respondents deemed Abenomics as a success – a figure that is down from 72% last year. Despite their disproval of the program, a whopping 90% of respondents expect the BoJ to double-down on what allegedly hasn’t worked – i.e. incremental QQE and NIRP – by year-end.
  • A Yomiuri poll published 6/20 showed Prime Minister Shinzo Abe’s approval rating slipping to 49% from 53% previously amid rising discontent with economic policy.
  • That same day, a Mainichi poll showed Abe’s approval rating declining to 42% in June from 49% in May. 61% of respondents supported changes to the Abenomics agenda.
  • A Yomiuri poll published 6/21 showed that 89 of 117 Japanese firms characterized the domestic economy as “stalling”, with the majority of firms citing sluggish consumer demand.
  • An Asahi poll published that same day showed that majority of Japanese firms (51% of respondents) believed that Abe would fail on his goal to expand Nominal GDP to ¥600T by the end of FY20 – a goal that requires a CAGR of +4.6% from FY15, which is a whopping 3.4x the CAGR in the five years ending in FY15.
  • A Kyodo poll of Japanese households published one day later showed 62.2% of respondents expressed doubts about the effectiveness of Abenomics.


Tough crowd.


Japan’s Referendum - Abenomics cartoon 02.25.2016


Back to the Global Macro Grind


In order to understand the drivers of the aforementioned shifts in popular sentiment, it’s worth reviewing the myriad of economic and financial market factors that have each contributed to the marginal demise of Abenomics.


Starting with markets:


  • The easiest place to start seeking evidence of failure is within the Japanese equity market. The benchmark Nikkei 225 Index is down -26.6% since peaking in late-June of 2015. Perhaps even more damning, the TOPIX Banks Index is down -27.5% since the BoJ introduced its NIRP back on January 29th of this year.
  • The confluence of NIRP, QQE worth ¥80T annually and forward guidance (Japan’s 2Y OIS Rate has collapsed -35bps YTD to -0.30%) have been unable to stem the rise in the Japanese yen, which is up +17.5% YTD vs. the U.S. dollar and +22.8% since the USD/JPY cross hit its Abenomics era peak of 125.63 on June 5th of last year.
  • It’s worth noting that both the Nikkei 255 Index and the USD/JPY cross are back trading at levels last seen just prior to the BoJ’s surprise expansion of QQE in late-October of 2014.
  • This dramatic appreciation has led to a collapse in long-term inflation expectations in Japan, with 5Y5Y Forward Breakeven Rates -119bps narrower YoY to 0.2%. Yes, that’s -180bps shy of the BoJ’s +2% “price stability” mandate – the same mandate that remains in a perpetual state of “we’ll accomplish our goal in two years’ time”.


Turning to the Japanese economy:


  • As the Chart of the Day below details, EVERY key category of Japanese high-frequency growth and inflation data is slowing on a trending basis, with every growth metric experiencing some form of contraction and headline CPI and PPI in deflation territory as well.
  • In the 10 quarters since Abenomics began in late-2012/early-2013, the Japanese economy has experienced a sequential contraction in Real GDP 50% of the time!
  • One of the lone bright spots of the Japanese economy during Abenomics has been CapEx growth, which bottomed at -7.2% YoY in 4Q12 and subsequently accelerated to its post-crisis peak growth rate of +11.5% in 3Q15. That has since slowed to +4.3% YoY as of 1Q16. The confluence of cycling peak base effects, the aforementioned melt-up in the JPY (the two series have been co-integrated for the past 10-12 years) and serious doubts about the efficacy of Abenomics among Japanese corporations portends a deep recession in CapEx in the near future.


Alas, it would seem the aforementioned repudiation of Abenomics, at the margins, is well deserved. More importantly, however, this shift in sentiment comes ahead of very critical upper house elections, which are scheduled to take place on July 10th.


Abe’s Liberal Democratic Party (LDP) is hoping to win 57 of the 121 seats in play (1/2 of the total are up for election every three years); pairing that with the 65 seats it already has would give the party a standalone majority in the upper house for the first time since 1989. In order to win the two-thirds majority Abe is seeking in order to ratify Japan’s postwar constitution, the LDP/NKP coalition needs to win a combined 86 seats – which is nothing shy of a tall order.


Some in the LDP consider that an achievable goal, but we’re not so sure. The same 6/20 Yomiuri poll referenced above showed that 35% of respondents said they would vote for the LDP in the proportional representation ballot, down from 42% in the previous poll. Given that the other parties did not notch a noticeable increase in support, we are keen to note that the growing displeasure with Abenomics is occurring in the absence of viable alternatives.


While perhaps unlikely, the magic number on the downside for the ruling coalition is a combined 46 seats; anything less would represent a loss of their mandate in Japan’s House of Councillors in just three short years.


Regardless of outcome, the results of Japan’s upper house elections will have lasting implications for global financial markets – mostly via USD appreciation or depreciation pressure.


Unfortunately, I’m not willing to speculate on the outcome of said elections. Be it Brexit or Donald Trump’s presumed ascendency to the GOP nomination, I think investors the world over have probably learned their collective lesson with regards to betting on political outcomes.


If Abe wins a strengthened mandate for his Abenomics agenda, expect a confluence of aggressive fiscal and monetary stimulus (e.g. ¥10T supplementary budget, helicopter money, etc.) that is reminiscent of his initial splash. If, however, the LDP and NKP coalition falter in their goal to win a majority of seats up for election, expect a confluence of aggressive fiscal and monetary stimulus that reeks of desperation.


Specifically, next month’s upper house elections are unlikely to have a material influence on the likely path of policy given the state of the Japan’s economy and its financial markets, but the market may interpret said policies as either a renewed and sustainable push towards [very investable] reflation or a continued breakdown of the central planning #BeliefSystem amid woeful demographic trends.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.44-1.62% (bearish)

SPX 1 (bearish)

Nikkei 149 (bearish)

YEN 101.15-105.19 (bullish)

EUR/USD 1.09-1.12 (bearish)

Oil (WTI) 44.91-48.62 (bullish)

Gold 1 (bullish)


Keep your head on a swivel,




Darius Dale



Japan’s Referendum - 06 28 16 Chart of the Day

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