The Cleanest Shirt is Actually Pretty Dirty

By Kevin Muir of the Macro Tourist

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Remember last November when it seemed like everyone was a US dollar bull? Either they thought Trump would usher in the next Reaganesque US economic free market nirvana, or they were convinced there was this massive US dollar emerging markets short position from the years of USD debt issuance.

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Nothing better illustrates the one sided nature of US dollar sentiment than the early December 2016 issue of The Economist.

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It was tough to find anyone who thought the US dollar might decline. Which is exactly why it did.

Fast forward to today. After six months of near constant dripping lower, suddenly with the break of some long term support, the pundits are now convinced the USD is headed much lower.

And maybe we are. Who knows? This market has certainly been difficult to trade lately, so perhaps we are due for an easy, trending, simple US dollar breakdown.

I don’t have an outright view on the US dollar. Longer term, I am a mega bear, but over the short run, I am not sure I want to jump on the negative bandwagon.

But I would like to point out how much the US dollar decline is affecting other asset classes.

I would make the case that the US dollar is currently the only thing that matters.

Let’s start with gold. Now that we have broken out above $1300, the trading community is becoming quite enamoured with our precious little yellow friend.

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And there can be no denying, that’s a good looking chart. And far be it from me, a huge Hereford of a gold bull, to suggest something’s not quite right about this rally, but I can’t help but wonder if this is truly the rise the bulls are looking for.

Have a look at gold priced in Euros.

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The price of gold in Euros has been declining for all of 2017.

And even gold priced in Yen has been somewhat stagnant for this year, although it has recently broke out.

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Coincidentally, that breakout occurred shortly after Kuroda gave his Jackson Hole interview where he expressed skepticism that the Japanese economy would be able to wean itself off of the extraordinary monetary stimulus programs.

I hope I am wrong, but I worry that gold is merely mirroring the US dollar’s recent decline.

What happens if we get a Euro reversal? Will gold be able to hold up?

Speaking of the Euro, Mario’s got a real problem.

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It’s amazing that the ECB has more than doubled their balance sheet over the past couple of years, yet the Euro has rallied hard.

A move of this magnitude is making Draghi’s attempted escape from balance sheet expansion much more problematic.

After becoming investors’ favourite trade, European stocks have been sucking wind over the past few months.

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This trade is the bane of my existence as Eurostoxx has been my favourite stock index, but it has been a complete dud of a call recently.

Yet what happens when you price the Eurostoxx in US dollars?

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Suddenly it doesn’t seem so bad. Maybe the Euro is not only driving the gold price, but also the stock market?

Could it be that the direction of the US dollar is the most important variable out there right now?

And if so, how much pain can Mario & Co. take before they back off the attempted ECB tapering? After all, it’s tough to meet your inflation target when your currency is rising at a 20% annual rate.

What’s going on? And more importantly, is there a trade in here?

We have witnessed the difficulty for European stocks to rally given the strength of the Euro, but shouldn’t that Euro weakness have the opposite effect on American stocks? Shouldn’t this dramatic decline in the US dollar give US stocks a tailwind?

Let’s have a look. Here’s the S&P 500.

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It’s not getting destroyed, but given how far the US dollar has fallen, you might expect it to be up a little more.

What does that S&P 500 look like to the Swiss National Bank and all the other European investors that are using another currency?

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Bingo! Ugly. This is a terrible looking chart.

Although the US equity market does not seem that weak, on a relative basis, it is pretty well the shittiest index out there.

Here it is versus European stocks.

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Even with the terrible performance of European stocks over the past coupple of months, they are still way ahead of US stocks.

Versus the world, the US is not underperforming quite as badly, but it’s still lagging.

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And when you compare the US to emerging markets, American stocks look like a real dog.

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But, but, wasn’t Trump supposed to be the business friendly President? Weren’t investors flooding into the US because of all the deregulation, infrastructure spending, and tax cuts?

Well, I have spoken about this recently (Sell US – Buy Japan?).

As summer comes to an end, and investment committees meet in early September, I don’t see how at the margin, America doesn’t get a downgrade from asset allocators throughout the world. The simple fact is that the much hyped Trump optimism has been sorely misplaced. He hasn’t accomplish any of his promised goals, and the recent infighting makes any progress increasingly unlikely. I don’t want to make any political judgements, I would rather just concentrate on what the chaos means to the market. Infrastructure, tax cuts – the chances of a transformative piece of legislation being passed – out the window. Trump’s supposed superb business acumen – if it ever truly existed, also vanished. And we haven’t even dealt with the potential of a debt ceiling disaster. It’s a complete shit show, and to think money managers will be standing at the door ready to invest in America is foolish. Long term money is overweight US assets, so the recent disorder will cause some serious trimming of American securities.

I just didn’t expect a prominent pension plan manager say it out loud. Imagine my surprise when the world’s largest private-sector pension fund manager said the following (from Bloomberg):

A leadership vacuum in the world’s biggest economy has driven the largest private-sector pension fund in Finland to cut the weight of U.S. stocks in its 45 billion-euro ($53 billion) portfolio.

“It seems as if there is no president in the U.S.,” Risto Murto, chief executive officer of Varma Mutual Pension Insurance Co., said in an interview in Helsinki on Wednesday. “If I look at what is the moral and practical power, there is no longer a traditional president.”

I don’t want to make a political judgement – Trump is what he is. If you want to debate politics, go somewhere else. I only care what he means to the markets, and there is no doubt that although he views himself as quite the stock market whisperer, the reality is that American stocks are stinking compared to the rest of the world.

Investors piled into America in the initial stages of his Presidency, but have spent the next six months exiting.

Is this exodus approaching the end? I don’t know, but I do know that if the US dollar rallies from here, it will not be good for US stocks.

The weakness of the US stock market has been masked by a falling US dollar.

For my money, I still like buying other countries’ stock market against selling American equities.

For example, here is a chart that is making the rounds.

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The Canadian stock market is trading at less than 2 times book, while the US is still above 3. Maybe it makes sense to take a punt on the Great White North. I am not trying to shill my own country, I don’t think it much matters what you buy (for me, I am concentrating on Japan) – as long as you skip the US equity market. It’s expensive, over owned, and actually performing poorly in real terms. They used to call it the cleanest white shirt in the dirty laundry pile, well, I am pretty sure Trump has gotten it a little muddy.

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