“Everyone, except an economist, knows what ‘money’ means.”
-A.H. Quiggin 

That’s the opening volley from the opening chapter of a provocative book I just finished reading called Money, by Felix Martin. He’s a British fund manager who founded a firm called 1167 Capital. He’s also a macro economist. 

What is money? What is a macro economist? What is Hedgeye? 

I can tell you a lot about money. I can tell you that a lot of people think they know a lot more about money than we do. I can also tell you what kind of money the world is short of right now. Some people really hate this kind of money: US Dollars. 

Back to the Global Macro Grind… 

It’s Macro Monday @Hedgeye HQ and I’m heading into NYC to meet with some big money! 

For those of you who are new to following us and our #process, welcome. Monday’s are the days when we contextualize last week’s macro moves within our multi-factor, multi-duration framework of intermediate-term TRENDs and long-term TAILs. 

While Global Equities struggled (again) last week, there was one clean cut winner in the world of big time (big money baby!) Global Asset Allocation and that was the US Dollar: 

  1. The US Dollar Index was +1.4% on the week breaking out to Bullish TREND @Hedgeye
  2. The Euro dropped -1.3% vs. USD last week broke down from neutral to Bearish TREND @Hedgeye
  3. The Yen broke too, falling -1.3% last week, and is a new Bearish TREND @Hedgeye
  4. The Pound fell another -1.6% last week and is also a new Bearish TREND @Hedgeye
  5. The Swedish Krona lost another -2.4% of last week and remains Bearish TREND @Hedgeye
  6. The Russian Ruble depreciated another -1.2% last week and remains Bearish TREND @Hedgeye 

What's Money? - z usd

If you didn’t know that the Swedish Krona and Russian Ruble are already DOWN -5.5% and -7.2% respectively for 2018 YTD vs. the US Dollar, now you know. Apparently some people think it’s better to be long US Dollars than those currencies. 

Unlike many who have written books on the topic, I’m not ideological about money. Especially when it comes to FX, I have no problem being bullish or bearish on any of this fiat stuff. Going both ways is a lot more fun than trying to be famous. 

As we explained last week, one of the great lessons of macro-economic and market history is that when the Global economy moves out of Quads 1 and 2, demand for what consensus has been short of (US Dollars) goes up. 

That’s not an opinion. That’s a historical fact. Maybe I’ll write a book about that. 

In other inverse US Dollar correlation news last week: 

  1. Gold dropped another -1.1% taking its 1-month decline to -1.8% vs. USD’s +2.4% gain
  2. Copper got tagged for another -2.7% weekly decline taking it to -7.8% YTD = Bearish TREND @Hedgeye
  3. UST 2yr Yield rose another +3 basis points to +2.48% = Bullish TREND @Hedgeye
  4. US 5yr 5yr-Forward Break-evens rose another +5bps to 2.27% = Bullish TREND @Hedgeye
  5. Emerging Market Equities (MSCI) fell -1.0% last week breaking bad to Bearish TREND @Hedgeye 

“So”… we have ourselves a Global Macro TREND of accelerating US and Emerging Market inflation where the EM part can really breakout if A) their currencies break-down and B) commodities continue to break-out. 

These correlations aren’t perpetuities, but for now some Global Equity markets like falling FX, some don’t: 

  1. Japan’s Nikkei had a big week (relative and absolute) closing +1.4% vs. the SP500 flat
  2. Australia’s stock market index bounced +1.3% on the down AUD/USD move
  3. EM Equity markets like Poland and Indonesia dropped -1.0% and -6.6%, respectively 

No, we haven’t had you buying EM equity markets like Poland (-6.6% YTD) and Indonesia (-6.9% YTD) this year. We’ve been trying to get you out of EM (and US) Equity exposures that we liked when their country GIP models were in Quads 1 and 2. 

We’ve also been trying to get your asset allocation to commodities (and related equities) up. There’s always a bull market somewhere in macro. Check out these commodity moves: 

  1. Lumber up another +4.0% last week to +32.5% YTD = Bullish TREND @Hedgeye
  2. Cocoa up another +3.7% last week to +48.9% YTD = Bullish TREND @Hedgeye
  3. Corn up another +3.4% last week to +8.5% YTD = Bullish TREND @Hedgeye 

Got late cycle inflation? Uh, yeah. 

You have it developing, right on time (as it always does at this stage of the US cycle) in wages too. Today’s Chart of The Day is what macro economists call the ECI (Employment Cost Index: Wages & Salaries). #Hoowah! 

And what happens to companies that have #accelerating inflation in their cost structures (wages and input costs) with A) slowing demand and/or B) bloated inventories with C) a lack of pricing power? 

A: Industrials (XLI) down -3.2% last week to -3.3% YTD = Bearish TREND @Hedgeye 

We’ll reiterate that we don’t know everything about what money is yet, but we do know a money short call when it’s working for the right reasons against a consensus of a “globally synchronized recovery” gone bad. 

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

UST 10yr Yield 2.82-3.08% (bullish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Energy (XLE) 71.14-74.92 (bullish)
Industrials (XLI) 72.22-74.83 (bearish)
Nikkei 215 (bullish)
USD 90.01-91.99 (bullish)
EUR/USD 1.20-1.23 (bearish)
YEN 107.08-110.22 (bearish)
GBP/USD 1.37-1.40 (bearish)
Gold 1 (bearish)
Copper 3.03-3.12 (bearish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer

What's Money? - 04.30.18 EL Chart