THE HEDGEYE EDGE
Leading indicators of inflation such as the CRB Commodities Index and crude oil have recently broken down in the context of our quantitative risk management process (so have currencies that trade against the USD like the Chinese Yuan). This is a key factor contributing to our recent addition of the U.S. dollar on the long-side of Investing Ideas.
A currency position is always relative, and when looking at the U.S. economy relative to other major economies of the world, the outlook for growth is much worse elsewhere. #EuropeImploding is one of our big 3 Macro Themes for Q3 2016. For the next 3 quarters, our proprietary Growth, Inflation, Policy model has Europe tracking squarely in a growth-slowing environment which should be supportive of accommodative policy from Draghi.
INTERMEDIATE TERM (TREND)
Looking at the set-up domestically against, say, Europe, the futures market for federal funds is not pricing in a rate hike until at least the end of 2017 (probability of 63% in November of 2017). So for policymakers to talk down the dollar, it’s likely they’ll have to elect for easing policy (QE), forget shifting their tone toward policy normalization.
LONG TERM (TAIL)
We’ve been bullish on the U.S. dollar since 2013 from a long-term TAIL perspective, partially driven by a relatively favorable demographic picture.
For example, from 2016 through 2023, the cumulative spread in basis points between the U.S. growth rate for the 35-54 year old population bracket and the growth rate of the Eurozone’s 35-54 year old bracket is nearly 200 basis points (2%).
Now, 2% may seem like a small number, but that age bracket (peak earners and spenders) supports a growing elderly population. In other words, in Europe you’ll have a relative shrinking of the productive age demographic supporting a growing retirement-age population.
One way to pay off growing future obligations (nominal remember), when you have a shrinking producing population, is currency devaluation (less debt to pay in real terms).
ONE-YEAR TRAILING CHART
