“A Canadian is someone who knows how to make love in a canoe without tipping.”
Unlike its more populous neighbor to the South, which fought a protracted War of Independence from 1775 – 1783, Canada’s ascent to nationhood was peaceful. Canadian representatives travelled to London in 1866 to negotiate with British parliament and the British North America Act was passed in 1867 naming the Dominion of Canada a sovereign nation.
So, what exactly is a Dominion? As the story goes, when the representatives from Canada were in discussions in London, the lead representative Sir John A. McDonald (who would go on to become Canada’s first Prime Minister) suggested the new country’s name be the Kingdom of Canada. The British representatives were concerned this term would offend the Americans and conversely the Canadians were reticent to accept the British suggestion of a colony.
Sir Leonard Tilley, a member of the Canada group, who had the habit of reading a chapter of the bible before bed, stumbled upon the seventy-second Psalms which reads:
"He shall have dominion from sea to sea, and from the river to the ends of the earth."
Tilley suggested the name the next morning and it was quickly accepted. The Dominion of Canada was born. To this day, Canada’s coats of arms bears the expression, “A Mari Usque Ad Mare”, or “From Sea To Sea”.
Happy Canada Day from your Canadian buds at Hedgeye!
Back to the Global Macro Grind…
Needless to say, this note isn’t about a celebration of Canada. In fact, the ways in which both Canada and the United States gained nationhood are in some ways representative of what’s going on in current geopolitical circles.
It is, in effect, the battle of the country versus the greater region. Some of these battles are violent and some are not. In Europe, of course, we’ve seen the impact of the consensus prognosticators voting against a country leaving its region. The result was the pound and a number of other global macro markets selling off.
Despite this dramatic sell off, Treasuries have continued to make higher highs. In fact, both the 10-year and 30-year U.S. Treasuries are at new all-time lows, respectively. The U.S. 10-year is at 1.37% and the U.S. 30-year is at 2.20%. So the flight to something, maybe safety, continues.
The rationale behind this rally in Treasuries can largely be attributed to a general view that being invested in “safe” assets is a good bet given the volatility in global markets due to the shifting geopolitical landscape. In the Great Britain, most pundits did not expect a “leave” victory. At the same time, in the U.S. most pundits are not expecting a Trump victory.
At Hedgeye, we are extremely non-partisan but with our acquisition of Potomac Research we are increasingly finding ourselves analyzing politics in the U.S. As much as we, like many, did not feel that Trump would get the nomination, he got it. At the same time, most pundits do not think Trump will gain the Presidency.
Despite the naysayers of a Trump Presidency, the polls are starting to suggest the race is tightening. According the Real Clear Politics aggregate, Clinton is up on Trump by +4.8, which is outside the margin error. Further, in one of the most recent polls by Rasmussen, Trump is up against Hillary by +4.0%. According to Rasmussen:
“Trump now earns 75% support among his fellow Republicans and picks up 14% of the Democratic vote. Seventy-six percent (76%) of Democrats like Clinton, as do 10% of GOP voters. Both candidates face a sizable number of potential defections because of unhappiness with them in their own parties.”
So, the big shift has been that more Democrats are now considering voting for Trump. Whether this shift towards Trump continues remains to be seen, but the late inning shift does make us reminiscent of Great Britain where the “anti-establishment” vote ruled the day.
The combination of market volatility and uncertainty related to Brexit means that funds have dramatically underperformed in the year-to- date. In fact, according to Bloomberg, hedge funds are off to their worst start since 2011. According to Hedge Fund Research’s Global Hedge Fund Index, hedge funds have lost 1.8% this year.
A key reason hedge funds have underperformed is that many funds are crowded into similar trades. In that vein, a recent investment / trade idea we’ve had is related to Australian housing. We think there is still alpha left in this one and according to our Financials Team the short thesis is as follows:
- One Trick Pony - We had assumed Australia's lifeblood was digging holes in the ground, but we found instead that the country's real lifeblood is pouring the foundation into those holes and then selling it.
- Over-construction - Construction is running amuck. There are almost 15x as many residential construction cranes in Australia per capita as there are in the major cities of North America.
- King of the Bubbles - Australia's real home prices rose +120% between Q1 1990 and Q4 2014. Even Canada - another favorite property bubble of ours - which rose +67% over the same time period - looks modest by comparison.
- Living on a Prayer - Australians are literally banking on the assumption that home prices keep going up forever. Home equity extraction in Australia dwarfs what was seen in the U.S. in the 2004-2006 bubble top.
Those are just the bullet points, but if you’d like more info on the short Australian housing then please email .
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.36-1.57%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research