Macro Eagle’s September Review and The Big Picture (5 min read)

If you need to catch up on what happened over September (and that was a lot), Macro Hive just published a great wrap-up piece, so now we can focus on joining the dots.

Let’s start with our big picture view that the unequal distribution of growth over the past decades is leading to the obvious political reaction whereby Western politics moves economically left (interventionist state/fiscal policy) and politically right (“nation first”) with the “establishment” getting targeted from both sides.

Needless to say, Green policies tick both boxes – which is why we’re sure green policies will go from strength to strength in the years to come, especially if they adopt a more “localist” tone (as they have in the Nordics and Bavaria). So – how did September fit into all of this? On the fiscal side Germany announced a “Climate Change” fiscal package, the Dutch announced a significant fiscal loosening, Italy is aiming for 2.2% deficit (higher than the last government). On “nation first”: Brexit alive and kicking, rumours the White House is looking to limit US investments in China, Kurz increased his majority in Austria, Japan/South Korea spat continues. And while we are at it, I would also put the Hong Kong protests in that category.

Britain

Boris is setting up quite a record. He has a 100% track record of defeats in the Commons, has lost the party’s majority, has lost at the Supreme Court, has lost his brother (who quit as an MP), has been savaged by Cameron’s new book, has been hammered with allegations of improper behaviour … but is doing GREAT in the polls (see below). And from what we saw in Manchester: the grassroots love him! Hence, as long as the polls have him in the lead, he will stick with his “no ifs, no buts” strategy. His uncompromising strategy makes electoral sense and even if he is forced to extend on Oct 19th he probably won’t have to fear the dive in the polls that May had when she extended in March (and which Labour is hoping for), because he will do so kicking and screaming.

So, the real question is what the other side will do, especially if Labour and LibDems will make an electoral pact. Which won’t happen with Corbyn in charge. Which is why we think that that “coup attempt” against deputy leader Tom Watson at the Labour party conference, was really to make sure Watson doesn’t get the top job if Corbyn is removed. Labour just got overtaken in the polls by the LibDems. We think we have seen peak-Corbyn. Wouldn’t be surprised if something is cooking there. Big picture we stick to our view that either Boris gets a deal (with lots of last-minute drama and a classic EU case of 4am agreement) or we have an extension with election. In both cases we think GBP trades higher, so we’re staying long. But this one will be choppy.

United States

While impeachment makes for great TV, what really matters are the polls. The amount of hyperventilation and fireworks coming out of the White House will be highly negatively correlated to his poll performance: if his chances go down, the noise will go up.

And, as we have been saying for a while, Warren is now a real possibility. In fact, the betting market (PredictIt) has her as the winning Democratic nominee (see graph) … and on the question which party will win the 2020 election it has the “Democrats” ahead. Now, our views on Warren’s policies don’t matter. What matters are four things. First, that we do think she fits the political cycle (i.e. she is riding the “Great Awokening” wave – which is economically left and, certainly with regards to China, as “US first” as Trump). Second, if the Market celebrated the arrival of Trump (which it clearly did) then by definition it can’t be happy if he is out – trough election or impeachment. Three, don’t take too much comfort from the election being one year away. It all kicks-off with Iowa and that’s in February. Fourth, ignore the Nixon/Clinton precedent – they each tell you the polar opposite: if you want to make the case for “markets up/incumbent strengthened” then you pick Clinton’98 and if you want “markets down/incumbent chopped” then you pick Nixon’73. Useless.

How to Trade

We have seen many charts showing how the 4th quarter tends to be the best for the S&P500 (see left chart below). That’s correct – if we look at say the 20 years average. But two words of warning: First, by September, the 20-year cumulative average has the S&P up by 1.6% … well, this year, we are at +18% and even if nothing further happens, would be one of the best years ever. Second, if you compare the cumulative monthly performance last year with the 20y average (right chart), it was as if it was the mirror opposite: in 2018 you got taken to the cleaners for being long risk in Q4! So, adding to our calendar-caution mentioned above … We’re going to stay light and watch the news (and rugby). At the same time the world is showing signs of rationality: WeWork’s mission “to elevate the world’s consciousness” didn’t find any buyer and Neuman is out. Unreasonable IPOs are having a tough time.

Always Look on the Bright Side of Life

Heard Michael Dobbs, the author of the “House of Cards” novels, say at the Conservative Party Conference that “to write fiction, take reality and water it down to make it credible”. Good one. Anyways, September had some incredibly funny moments, too good to be true. Gold medal goes to the guy who called into Farage’s LBC show. Forget the Brexit/Remain debate, just focus on his dry British humour. Silver medal goes to Ukrainian President Zelensky who at a conference showed a hilarious video about an imaginative WhatsApp chat of World Leaders. Time will tell if Zelensky is a good President, but being a real-life comedian, he promises to become one of the funniest. Bronze medal goes to Chancellor Merkel’s “lost in translation” moment with Queen Maxima … “Which Franz?”

With such a momentous month ahead of us we cannot do more than wish you BEST OF LUCK and MAY THE MARKET BE WITH YOU!

Bobby Vedral is a macro-political analyst who runs MacroEagle. He is also the UK representative of the German Economic Council (Wirtschaftsrat Deutschland) focused on the German-British relationship post-Brexit.

Bobby left Goldman Sachs in March 2018, where he was a Partner and Global Head of Market Strats. His previous responsibilities included Systematic Trading Strategies, eProduct and FX/EM Structuring. In his external functions he was Member of the ECB’s FX Consulting Group. Before Goldman Sachs, Bobby worked at Deutsche Bank and UniCredit/HVB.