Market update for a friend

I spend more time than I probably should exchanging views with other market participants, most of whom are friends. It can take up a lot of time. My exchanges with one guy in particular, a macro guy with a strong background in economics, usually capture best where I’m at. I’ve posted my side of these exchanges a few times in the past. The similarity in backgrounds usually leads to a very efficient exchange of ideas—even when we don’t agree. We just speak the same language.

I had the impulse this weekend to write up my views because I changed my positioning last week. But, busy with other stuff, I never got around to it. Lucky, my macro/economist friend wrote me an email today soliciting my views. This forced me to hammer them out. Here they are, excising, of course, the personal pleasantries in the first para, and the salutation in the last:

“As for the markets, I just took down much of my long equity exposure, the day USDJPY broke 100. I think the dollar has more to rally and, even though the correlation to equities has been low, if for whatever reason the dollar rally accelerates, stocks could take a breather. I have had a good run so I don’t mind taking equity risk down and re-assessing. I am keeping positions in less than a handful of key equity names and will continue to watch. Still have long AAPL, short precious metals, for example.

My only high conviction positions right now are: being long dollars (biggest position is USDMXN, which I think is technically most vulnerable) and short silver, gold and a little bit of oil. My view on there being a bubble in commodities that is unwinding has not changed, despite the mini-crash in precious metals last month. On a scale of 1-10, risk is now a 5 for the book. I had been running closer to 9 for a while.

I am still bullish on the fundamentals in the US. Europe’s day of reckoning will come, but in my base case it is a fair ways down the road. EM will grow less than expected, but expectations are not too high. I don’t expect any blowup in EM. Further upside in USDJPY is mostly idiosyncratic here, and fairly heavily positioned, but USDJPY coming off hard would be one of the clearest indications of risk off/position liquidation I can think of.

I feel there is too much fear of a Fed exit (there is risk, of course, but IMO we are overpricing it, both in timing and magnitude of impact). And the wedge between valuations and fundamentals is less than what ppl argue, not least because the macro continues to heal under the surface (HH debt better, jobs slowly better, budget improving fast and not “priced in”).

US growth will still be anemic—structural/latent globalization issues will keep a lid on US wage growth, but too many ppl are too deeply pessimistic and are hanging their hats on the Fed blowing things up–because all their theses so far have been wrong. It’s like at the end of the football game and the team is betting everything on the long pass (the Hail Mary play) because they are so far behind in the score.

The above language may seem a bit cryptic and not fully fleshed out, but I hope it’s better than not putting the views out at all.

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