“The Bank all of a sudden became all of a sudden the bill broker and banker of last resort.”
-Felix Martin 

While it could be, the aforementioned quote isn’t about the IMF to the Argentines this morning. It’s actually about the Bank of England in the 19th century. Felix Martin does a nice job recounting that part of Global Macro history in Money (pg 201). 

So who’s going to bailout Argentina? While it was all part of what was already happening, I guess some were surprised to see the Argentine Peso drop another -8% in a day this week. Its currency #crash story of 2018 is neither new nor surprising. 

How about Brazil’s 10yr Bond Yield ripping to +12.33% as Quad 3 Stagflation becomes economic reality? Bloomberg headline “news” is having a tough time blaming Trump for Brazil and Argentina. But I’m sure they’ll find a way. 

Back to the Global Macro Grind … 

Long Utes (XLU) and long-term Treasuries (TLT)? On both an absolute and relative basis, it was a solid day for both of those macro exposures yesterday. Utilities were the only sector in the SP500’s Top 10 Sector Styles that weren’t down on the day. 

Long USA vs. Europe, EM, etc. - 07.24.2018 TLT cartoon

In sharp contrast to the following 1-month returns: 

  1. Italian Stocks down -7.7%
  2. Brazilian Stocks down -12.1%
  3. Russian Stocks down -8.8%
  4. South African Stocks down -9.9%
  5. Turkish Stocks down -27.2% 

Long USA listed Utilities (XLU) at +2.4% in the last month sits plenty fine with my retirement money. In the last 3-months, Utes are +5.3% vs. a sea of bloody return red across plenty of alternative macro exposures too: 

  1. Gold Miners (GDX) down -16.3%
  2. Silver (SLV) down -11.4%
  3. Soybeans (SOYB) down -16.8%
  4. Agriculture (DBA) down -12.2%
  5. Sugar (SGGFF) down -22.7% 

Why are US Bond Proxies crushing it on the long side in the last month especially? That’s pretty straightforward. In the last month alone, the US 10yr Treasury Yield is down -12 basis points to 2.84%. Long the Long Bond, Utes, and REITS like that.

And they like that a lot more than being long #PeakCycle inflation expectations (Agriculture, for example) or “globally synchronized demand” equity exposures at the country level when their countries move into Quad 3 or Quad 4

To review: 

  1. Quad 3 = real growth #slowing as inflation continues to accelerate
  2. Quad 4 = real growth and inflation #slowing, at the same time 

*36% of the world’s economies are likely to be in #Quad4 next quarter vs. 55% in #Quad3 currently here in 3Q18E 

The easiest way to have “conviction” in a Quad 3 Stagflation call is for a country’s currency to be crashing. Since inflation is local (reported in local currency), obviously the price of everything you import and buy locally is going up in local FX. 

So Argentina’s Macri can call the IMF and literally beg them for a bailout, but there’s nothing he or the Brazilians or the Turks can do to get themselves out of Quads 3 and 4 until they stop lapping their respective #PeakCycle economic growth rates of 2017. 

And that’s why we don’t buy macro exposures that are either going straight down or crashing on “valuation.” We buy them when our models start to forecast trending Phase Transitions in growth and/or inflation. 

On that score, here are 3 fresh economic data points from this morning that confirm both slowing and accelerating @Hedgeye TRENDs: 

  1. German Retail Sales #slowed (again) to +0.8% year-over-year in JUL
  2. Spanish Retail Sales #slowed (again) to -0.6% year-over-year in JUL
  3. US Aggregate year-over-year Earnings Growth #accelerated to +25.3% in Q218 

That last data point is based on 495 of the SP500 companies having now reported yesterday’s news. And while next quarter is when the 2-year base effect starts to get materially more difficult, relative to China, EM, and Europe #slowing, long USA was the place to be. 

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

UST 10yr Yield 2.78-2.89% (bearish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 53.03-54.67 (bullish)
DAX 12178-12608 (bearish)
VIX 11.61-14.50 (bearish)
USD 94.15-96.50 (bullish)
EUR/USD 1.13-1.17 (bearish)
Oil (WTI) 65.01-71.10 (bullish)
Nat Gas 2.81-3.01 (bullish)
Gold 1179-1222 (bearish)
Copper 2.61-2.75 (bearish)
Corn 3.49-3.73 (bearish)

Best of luck out there today and have a great long weekend,

KM 

Keith R. McCullough
Chief Executive Officer

Long USA vs. Europe, EM, etc. - CoD German Retail Sales