“They have their Dollar, we have our God.”
-Erdogan
Now if that’s not the Quote of The Week (tied with “Financing Secured”) in Global Macro, I don’t know what is! Turkey’s President Erdogan has gone completely off the rails this morning as the Turkish Lira continues to crash.
Blame Trump, tweets, or tariffs?
This is actually the 1st morning that I can remember in 2018 that the Top 5 stories on Bloomberg’s landing page didn’t contain the name Trump in any of the headlines. So I’ll use it for the 1st time in my headline in 2018 instead!
Back to the Global Macro Grind…
And a good #StrongDollar morning to you all! Do some of these political whack jobs matter to macro markets in the moment? Of course they do. But are they the ones who have been driving the rates of change of The Cycle all along?
Nope.
Over the intermediate to long-term, the Global Economic Cycle is THE causal factor. Angry dudes invoking their Gods vs. my highest conviction asset allocation (US Dollars), is just an entertaining side-show born out of it.
To review the Top 3 Global Macro Themes @Hedgeye for Q3 of 2018:
- #StrongDollar
- #HaveRatesPeaked?
- #ShortEM
Did I mention a strong US Dollar and its reflexive impact on The Cycle? Literally every major foreign currency crisis since you were all born was perpetuated by a strong and strengthening US currency. That is not new this morning.
Today is obviously not the day to buy Dollars. It’s the day to sell some to the crowd with:
- The Euro (which has been breaking down since April) signaling immediate-term #oversold (low-end of the range)
- The Pound (which has been getting pounded since April) signaling immediate-term #oversold
- Rubles, Argentine Pesos, Brazilian Reals all moving toward the low-end of their respective @Hedgeye Risk Ranges
Oh, right. But the guys and gals on Old Wall TV are telling you that the Euro is “down on Turkey” and the Pound is “down on Brexit”… and Argentina and Brazil’s currencies are “down on…”
Quad 3 and Quad 4.
Again, these currencies have either been breaking bad or crashing since April. All you’ll see in mainstream media today are a bunch of Macro Tourists jumping from headline-to-headline instead of from The Cycle’s time-series to time-series.
Moving along… have rates peaked?
First, let’s frame up what Long Bond Bears were snarling about coming into this week:
- Close to a weekly record of US Treasury Bond issuance ($239B vs. $294B in a week back in March)
- The highest levels of reported US consumer and producer price inflation going back to 2011-2012
- Trump
Joking on part C), sort of…
Our response to the Supply Guys on Treasuries, is “that’s great – the world is going to need a lot more of those if we’re right on the USA heading toward Quad 4 in Q4.”
And, since getting the long-end of the US Treasury curve right is best predicted by getting forward headline inflation (and its market expectations) right, we’re mostly focused on the rate of change of our commodity price sample basket anyway.
For those of you who are new to our risk management #process, we have a proprietary predictive tracking algorithm that accurately predicts future headline Consumer Price Inflation (CPI)…
And it’s suggesting headline inflation peaks on today’s July 2018 CPI print and will fall more than 100 basis points from this “level” of inflation by Q1 of 2019 (see our inflation forecasts in today’s Chart of The Day).
Do you think the bond market is going to start discounting the inflation cycle? Or do you think it’s all about Trump, Tweets, and Turkey?
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.88-3.01% (neutral)
SPX 2 (bullish)
Utilities (XLU) 52.22—53.85 (bullish)
REITS (VNQ) 80.75-83.99 (bullish)
VIX 10.05-14.33 (neutral)
USD 94.15-95.81 (bullish)
EUR/USD 1.14-1.16 (bearish)
YEN 110.20-112.10 (bearish)
GBP/USD 1.27-1.30 (bearish)
Oil (WTI) 66.07-68.89 (bearish)
Gold 1 (bearish)
Bitcoin 6106-7195 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
