Exceprted from Raoul Pal's exclusive Global Macro Investor letter, [9]
All together now
From a very top-down perspective, I find it interesting that most macro funds tend to align themselves in groups that share ideas, however I find the uniformity of views amongst these groups somewhat troubling. That is not to say that everyone is wrong but that too many firms have the same views and same positions.
The three groups tend to be:
- the newer New York macro and credit community,
- the older New York macro funds and,
- the London and Geneva crowd.
All three tend to be somewhat distinct from each other but the views held within each group are similar.
This is the groupthink effect.
However, it is not totally ubiquitous as there are many who hold very different views. The very macro-orientated tend to be broader in their opinions than those who are crossing over into macro from credit, multi-strat or event driven.
Summary of views
The first group (and the majority with whom I met in NYC) have extremely similar views generally. These are as follows:
- The US economy is fine and the lagged effect of lower oil prices on consumption is about to kick in along with real wage growth.
- Inflation is going to rise with wage growth.
- The European equity market is a better investment that the US market.
- Chinese equities are a trade worth having on.
- Japanese stocks are still an opportunity.
- The Euro is going lower and the dollar higher.
- Energy prices are going to rise.
- Global growth is fine and EM is not much of a risk.
Positioning
In terms of positions, people were very light on dollar positioning, had zero bond exposure at best or were short, were long Chinese equities, long oil names, long German equities, long Japanese equities and generally long US equities. Many had on specific EM trades such as Argentina or Venezuela, Puerto Rico or Greece (yeah, it’s an EM now).
I’m a tad different...
Just to be clear, my views are startlingly out of consensus. My view is that shorting the Euro is the best risk reward trade in macro, US bonds are setting up to be a stunning opportunity on the long side, oil carries significant downside risk, the US and elsewhere are potentially heading into recession, equity volatility is highly likely, EM is a major risk and Germany is at the risk of leading Europe into a recession.
Pure macro heaven (or hell)
My overarching belief is that this is the most “pure macro” environment we have been in for over a decade, probably since the Asian Crisis in the late 1990s, and I just don’t think people understand what is going on.
My entire thesis rests neatly on the US Dollar. Nothing else matters and if my view is wrong on that, then it is likely wrong on many things. What is really weird to me is that most people agree with my views on the dollar but don’t have the trade on, and were less versed on the macro knock-on effects of a strong dollar. Groupthink has tended to isolate particular parts of the US or global economy and ignore the bigger picture.
...
My views
In New York I presented a very different spin on the world to almost anyone else. I am wildly and comfortably out of consensus.
I think that the dollar is the only thing that matters. My view remains that we are in the early stages of what will prove to be one of the biggest dollar bull markets in history, and it is going to reap devastation on the global economy...
The Chart Of Truth
If you care about one chart and one chart only that sums up the entire risk to the world it is this: the DXY is forming a perfect wedge. It is going to break during the summer and the dollar is going to explode higher...
[10]
If this wedge breaks then I think the dollar will finish the year around 110 to 115, which would be consistent with the pattern of other dollar bull markets with an annual gain of over 20%.
In a nutshell
So, as you will see from all of the points below (and above), I fear that many people may well be backing the wrong horses.
Clearly I can be wrong, and for me to be proven wrong is pretty simple: if the dollar does not rally further then the status quo can be maintained and we can continue with this lacklustre global expansion for a while longer.
If the dollar rallies again from here then it is game over and the exit doors are small.
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While mostly cost-prohibitive for the average investor, here is Raoul Pal's exclusive Global Macro Investor July letter...
