Doves vs. Hawks

“Derived from the placid nature of the bird of the same name, the term is the opposite of hawk.”
-Investopedia 

Many thanks to our friends at non-mainstream-media (Investopedia) who have absolutely no partisanship in their economic and/or market definitions. Knowledge and truth have never been in such short “headline-news” supply.

Investopedia’s definition of Doves vs. Hawks is straight to the point. It also differentiates what the Fed just did yesterday vs. what plenty of hawks are begging for the ECB (European Central Bank) to be.

With yesterday’s Dovish Fed Decision out of the way, what happens (from here) if the Fed pivots back to hawkish as the ECB reminds the world that they are neither hawks, nor do they have hawkish data? Oh boy. This is going to be a lot of fun!

 

Back to the Global Macro Grind…

To be clear, there is a ton of money to be saved (and made) by simply front-running proactively predictable central-market-planning behavior. Case in point: what the Fed just did was based on Reflation Rollover data that is 4-5 months old.

So, from the Fed’s perspective, what if: 

1. Reflation’s Rollover (i.e. Inflation #Slowing) slows, in rate of change terms, for the next 3-6 months?
2. US Wage Inflation #Accelerates for the next 3-6 months?
3. And both US GDP and Profits continue to #Accelerate through Q3?

From a Labor Economist’s (Janet Yellen) vantage point, each of those 3 things are hawkish on the margin. When you put all of them together, they’re outright hawkish vs. where the market is positioned (Down Dollar, Down Rates).

Then if you consider the Draghi and/or the ECB’s perspective, what if:

1. Both European Consumer and Producer Prices continue lower (as opposed to their forecast for higher)?
2. The South of Europe in particular sees no US style wage growth and is drowned in a demographic divergence?
3. And trending European consumption and manufacturing data continues to slow in rate-of-change terms?

I’d say that could be double-hawkish, especially considering that the most consensus of macro “hedges” right now are “protecting portfolios against a pending ECB taper.”

I’m neither positioned for rates ripping higher in the US nor the German 10yr Yield collapsing back to its lows, yet. I’m just thinking out loud here and effectively repeating what I’ve been discussing with Institutional Investors all week.

I do have the FX piece of the thought process in play (short EUR/USD) and I’ve been early (i.e. wrong, for now) on that. But I do have the other parts on that are working, namely:

1. Long US Growth (Nasdaq 100 made another all-time high at +22.4% YTD yesterday)
2. Short Reflation (I re-shorted Oil via USO in Real-time Alerts yesterday after waiting for the top-end of my risk range)
3. Short Levered Energy Stocks (i.e. cyclical “value”)

And I’ve also been explicit of this little-known-fact to the Consensus Macro crowd that chased “BUY EUROPE” (cover of Barron’s in Q217) on “relative valuation to US stocks”… and that’s that places like France, are still France…

Since these facts are rarely reported this way, allow me to provide you some recent USA > Europe scores:

1. Germany’s DAX is down another -0.4% this morning and -5.0% from its YTD high in Q217
2. France’s CAC is flat this morning and -4.5% from its YTD high in Q217
3. Nasdaq 100 is beating the German DAX by 830 basis points in the last month alone 

For those of you just getting into running other people’s money and/or your own, an eight-hundred-and-thirty-basis-point performance spread = 8.3%. In a month, that’s youge!

So what, other than telling us that Consensus Macro came into the year: 

1. Short Euros (as a Le Pen winning in France hedge)
2. Long Dollars (on the Trump Trade)
3. Long Energy (on the year-end charts)
4. Underweight Tech (on the year-end charts)
5. Short Pounds (post the Brexit lows)

Is Mr. Macro Market telling us right now with this move in the European Equity market vs. the historic rip to all-time highs in US growth exposures?

I think it’s telling us that the Fed moved back to dovish, that a hawkish ECB is more of a fear than a reality, and that Europe isn’t “different this time.” It’s still Europe – and instead of thinking out loud, I better get on with being fully positioned for that.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now: 

UST 10yr Yield 2.22-2.35% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
DAX 12101-12476 (bearish)
VIX 9.23-10.32 (bearish)
USD 93.20-95.29 (neutral)
EUR/USD 1.14-1.17 (neutral)
Oil (WTI) 45.10-48.89 (bearish)
Nat Gas 2.84-3.09 (bearish)
Copper 2.69-2.90 (bullish)
AMZN 1006-1059 (bullish)
FB 159-169 (bullish)

Best of luck out there today,
KM

Keith R. McCullough
Chief Executive Officer