Goodbye For Now...and Some Market Parting Shots

There’s something against human nature in saying goodbye. Even the individualistic among us are innately programmed to stay within a group, pack or family unit. We’ve all been in that situation where you are parting ways with someone you know you’ll never see again, but you just can’t bring yourself to say the equivalent of “have a nice life”, instead settling for something along the lines of “see you again soon.”  

So it is with a tinge of sadness that I must say goodbye and end my term at what I’ve come to call Legacy Macro Man. I’ve accepted a new position back in the corporate world that will consume not only my waking hours, but will also lead me into some new markets that I have not dealt with in the past.

Over the past couple of weeks I’ve been thinking broadly about how to analyze, manage and make money in these markets. I realized how much I have learned during my relatively brief spell in the blogosphere. I’ve learned a lot about trading not only from the folks that follow this blog, contribute their comments, and reach out to me directly, but also from the “competition”...the endless array of brilliant people posting their thoughts on social media or their own blogs.  

As a PM, I spent years pouring over my own research, sell side research, research from a small group of independent consultants, and information and ideas from colleagues and personal contacts. It isn’t necessarily that the people posting ideas for free on the internet are better than these people that do it for a living (even though many of them do that as well), but they are most certainly different. And different is the one and only thing that generates alpha. Those contacts and new approaches to trading and investing will stay with me forever.

With that I’ll end the sappy stuff and leave you with a few market observations:

1) Inflation...still not dead! A while back I pontificated on the risk to a quick acceleration of inflation. Bill McBride over at Calculated Risk posts this chart monthly, which incorporates some alternative measures of inflation.  

You can see they are all ticking up...then look at my favorite alt-inflation measure, the NY Fed underlying inflation gauges:

The full data set measure, which takes in a wide variety of non-price data, has moved from 2% to over 3% very quickly, and shown little sign of slowing down this year even though stocks have been (at best) chopping around and credit spreads have been widening.

Lastly, Ben Hunt over at Epsilon Theory had a great post earlier this week highlighting not only the risks from inflation, but the potential that the market will soon realize just how big a threat it because of the reversal of some statistical anomalies in wage growth data.  When you combine that kind of insight with Ben’s penchant for thinking up market metaphors related to his farm animals, you can really see his genius.

Combine those factors with the following: unprecedented fiscal stimulus, a tight labor market, a highly volatile equity market, widening credit spreads, Chinese tariffs, Russian sanctions, a really ugly geopolitical scene specifically in the Middle east, and a presidential administration led by satirical cannon fodder like John Bolton and Larry Kudlow...and tell me again, where is forward rate vol?? Really cheap relative to equity vol. Buy it.

2) The long USD trade. It’s coming back. Trump is the figure that people around the world love to hate but the USD seems to have fallen into that category too. Last year, USD got hammered despite the Fed finally following through on its rate hike projections and a good year for growth...the game changer was the resurgence in growth throughout the rest of the world, specifically in Europe. Many of the indicators I highlighted last year as supporting the resurgence in growth and perpetuating EUR appreciation are showing signs of wear:

Those figures in retail, PMI and the surprise index are hardly illustrating or portending an economic trainwreck but they do show that currency traders might have gotten a little ahead of themselves in pushing EUR above 1.23 earlier this year.

Now, I have a visceral and philosophical opposition to charts that don’t have a proper axis, so with my apologies I’ll post this one to quickly illustrate how the market is long EUR:

Despite EURUSD trading in a very narrow range.

Economic divergence, extreme positioning and little price movement...combined with an abundance of geopolitical risks---buy USD.

And lastly, I can’t sign off without a comment on EM. Trump’s foray into the morass of tariffs, sanctions and the Syrian conflict have triggered some serious divergence in some big EM markets.

EM investors were limit long RUB and Russia rates with the steady increase in oil prices, then with the new sanctions these guys are caught with their hands in the collective cookie jar. The Turkish lira has suffered with a variety of internal stresses, a widening c/a deficit, and risk of spillovers from Syria. And ARS suffered in late ‘17 and early this year after the government and central bank collectively allowed for higher inflation and lower real rates.

Meanwhile, ZAR continues to outperform after Zuma’s departure and some positive signals on the reform front. MXN has outperformed on optimism about a NAFTA agreement sometime in the next month and acquiescence, ambivalence, or ignorance about election risk, depending on who you ask.

But most importantly is the China. CNY continues to appreciate. There is always room for 21st century Kremlinology that attempts to interpret the signals and objectives of the Chinese authorities. Maybe this is an oversimplification, but this is a momentum trade. The government and PBoC have sustained a number of trends in the past ten years, and the current one is to disincentivize additional export capacity to allow for a gradual moderation of credit growth and increase in consumption. Maybe that changes in the near future, but it is tough to argue that isn’t where we are now.

So long as that is the case, and it is overlaid with continued decent global growth and renewed growth in global manufacturing demand and commodity prices, it still paints a positive medium-term picture for EM assets. In light of my view that we could see a short-term bounce in USD, I would look to to overweight the high beta, commodity producing “dogs”--especially in Argentina, which should benefit directly if China implements import tariffs on US soybeans--at the expense of the EMFX outperformers, who in my opinion, really don’t have anywhere to go from these levels.

And with that..farewell!! You won’t have heard the last of me--I will stay in touch with TMM and throw in an occasional anonymous guest piece--most likely on some emerging markets issue I have stuck in my craw. And I will post some brief commentary via Twitter, a medium I’ve come to like quite a bit. Follow me here: @EMinflationista.

Shawn

TeamMacroMan2@gmail.com

@EMinflationista