“The view of money as credit, rather than a commodity, has always had a strong following.”
-Felix Martin
Historically speaking (and in practice) it’s hard to disagree with Martin on a general statement like that. In a chapter he titled “What Is Money?” he goes on to cite one famous example “provided by the siege of Valletta by the Turks in 1565…
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"As the Ottoman embargo dragged on, the supply of gold and silver began to run short, and the Knights of Malta were forced to mint coins using copper. The motto they stamped on them in order to remind the population of the source of their value: Non Aes, sed Fides – “Not the metal, but trust.” (Money, pg 16) |
Today in Turkey we have a wannabe central currency planner by the name of Erdogan who says he wants to have the “image of a President who is influential on monetary policy.” Both the FX and Equity markets believe him. The Turkish Lira is crashing.
Back to the Global Macro Grind…
In the face of our April of 2018 US Dollar Bottoming call are you long of that beautifully synchronized EM (Emerging Markets) pie chart in your P.A.? How about in your client accounts? In what currencies do you own EM debt or equity?
If you are, I certainly hope you aren’t overweight Argentina, Indonesia, or Turkey this year. As their fiat currencies move into crash mode, local inflation ramps and their respective economies slow.
Evidently Erdogan doesn’t quite get the link between devaluing a country’s currency and inflation #accelerating. This morning he said that he’ll bring “lower inflation because borrowing costs will fall.”
I couldn’t make that up if I tried.
When crazy stuff like this starts to happen, the crypto crowd should get excited. While I’d rather own US Dollars right now than Bitcoin, I certainly have an open mind to broadening my non-EM currency and non-EM equity exposure. That said, I like liquidity.
The thing that really stumps me is why so many hedge fund guys out there got amped up on the long side of Bitcoin 6 months ago but didn’t get loud and large on the short side of at least 1-3 of these Emerging Market currencies?
Not only is there plenty of liquidity in Global FX markets, unlike Bitcoin, you can play the short side of the market in size. You also have weekly and monthly catalysts as Emerging market growth and inflation data gets reported.
That’s one of the biggest reasons why the US Dollar gets a bid – the rest of the world’s Emerging (Market) Risk is that US growth doesn’t slow, cyclically, like other countries do. To the contrary:
- Late cycle US inflation continues to #accelerate all the while…. and
- Late cycle US Earnings Growth continues to #accelerate too
On part A) US #InflationAccelerating is being priced into the UST 10yr Yield tapping the top-end of the immediate-term @Hedgeye 2.93-3.03% Risk Range this morning and on part B) here’s your real-time EPS Season update:
- 91% of the SP500’s companies have reported aggregate year-over-year EPS growth of +23.7%
- Tech Earnings (55 of 68 companies have reported aggregate year-over-year EPS growth of +30.3%)
- Russell 2000 (1758 companies have reported aggregate year-over-year EPS growth of +41.9%)
In other words, despite the 1st materially more difficult year-over-year comparison, US companies have “comped the comps.” The probability of that continuing to happen starts to fall as China, Europe, and Emerging markets see real growth slow.
But… until that happens (Q2 or Q3?)… our #GlobalDivergences call has to be one of the main reasons why being net LONG these 3 Factor Exposures is crushing plenty of Asian, European, and EM equity portfolios for 2018 YTD:
- Inflation accelerating via Energy (XLE) +6.9% YTD
- US Innovation and Organic Growth via Tech (XLK) +9.3% YTD
- Late-Cycle US Domestic Growth + Inflation via Russell 2000 (IWM) +4.2% YTD
We’ve obviously been plenty loud on being long Commodities, Energy, and Tech. I haven’t been The Bull on the Russell though. That was a good thing up until the end of Q1 of 2018 when the Russell was -2% YTD.
Now the better idea is to buy the damn dip in the Russell and short Industrials (XLI), Staples (XLP) and/or the SP500 (SPY) itself against it. At the sector and factor exposure levels, there’s always a long/short portfolio out there that can beat the Old Wall’s consensus.
The view of earning returns on your money as alpha, rather than beta, has always had a strong following.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now as follows:
UST 10yr Yield 2.93-3.03% (bullish)
SPX 2 (neutral)
RUT 1 (bullish)
NASDAQ 7041-7499 (bullish)
Energy (XLE) 74.01-78.02 (bullish)
Industrials (XLI) 70.60-75.78 (bearish)
VIX 12.11-16.71 (neutral)
USD 91.75-93.11 (bullish)
Oil (WTI) 68.12-72.49 (bullish)
Bitcoin 8 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
