As the leverage cycle rolls over alongside the economic cycle, access to capital will continue to tighten. This will lead to some mega blowups in the land of levered long hedge funds.
Keep your eyes on this developing "Trend”.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
The Chinese machine of athletic perfection picked up its 51 gold medals and the Beijing Olympics have ended. The US Presidential election is set to take (or drop) the baton in the global news flow relay this morning. The Democratic National Convention will launch into the spotlight tonight.
What matters here is timing. This week will refocus traders on the compressed duration that exists between now and November’s Election game time. From an economic, racial, and class perspective, this is setting up to be one of the most divisive elections in US history. Alongside this reality comes heightened potential for market tail risk.
Within the construct of our ‘RIPTE’ US Economy macro “Theme” (Re-regulation, Inflation, Protectionism, Taxes, and Employment), there are plenty of reasons explaining why McCain’s recent rebound has been beneficial for the market. We have issued our regression analysis in past portal postings, so I won’t rehash the “t”-stats in this morning’s note, but the math says that Obama’s popularity has a statistically significant inverse correlation to the S&P 500. Alongside his recent month-long-slide in the polls, the US market has levitated to the high end of its trading range.
Considering the re-flation “Trade” of last week (CRB Commodities Index was +3.1%; US Dollar down -0.51%), Friday’s weight-lift in the US stock market was impressive. That said, from a quantitative perspective, we have moved to a critical crossroad in global commodities and currency markets, where volatility looks primed to pick up. Last week’s US market volume was as bone dry as it has been all year.
Now that commodity driven inflation is understood domestically, I think global growth and geopolitical risk move to the top of your macro focus list. Asian growth in particular remains misunderstood by US centric investors. This morning we had another negative GDP report out of South East Asia’s 2nd largest economy, Thailand, and stocks in Bangkok closed down another -0.55% as a result. Thailand’s GDP for Q2 came in below expectations at +5.3%, and this is not good considering that inflation for July was last reported at almost double that rate. Government officials in Thailand raised rates last month for the 1st time in 2 years. Alongside inflation, cost of capital in Asia continues to rise in the aggregate – this continues to drag down Asian equity prices.
Thailand’s inflation partly reflects the regional dynamic of wage inflation. This is something that US economists have not had to worry about, yet. Enter an Obama government, and that changes – hence the negative correlation the US market has to his chances of victory. Asia’s inflation story is misunderstood largely because it is much more like that which the US had to deal with in the 1970’s, with both prices and wages rising in tandem. If you look at an economy like Pakistan’s for example, which is running with close to 30% year over year inflation, you can understand, partly, why the masses are literally stoning the Karachi Stock Exchange. Pakistan’s stock market bounced for a day post the Musharraf ousting, but has since lost -11% in the 4 trading days that have followed.
Russia is also dealing with misunderstood wage inflation, and this will eventually put Putin in a domestic political pickle. When you have +20-25% annual wage inflation, you have a problem! Despite oil’s rise last week, the Russian stock market continued to decline. Russia’s RTS Index is trading down another -1.1% so far this morning, and has lost another -14% of its value in August alone. The lower house of Russian Parliament is calling on Medvedev and Putin to recognize South Ossetia as an independent state this morning as well. That’s only going to create more confusion in what continues to be an alarming geopolitical situation.
With the US political stage being moved to front center, do not forget that domestic fires are burning in political hotbeds throughout the world. Geopolitical factors matter to markets that trade on global macro. The summer is ending - it’s almost game time – get ready to “Trade”.
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