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Our three best macro ideas today are complementary plays on the unwinding of currency and financial asset bubbles at a likely peak of the global capital cycle, the most leveraged in history:

Shorting US stocks at proven, historic-high valuations relative to underlying fundamentals with abundant catalysts for a near-term bear market leading to a US recession; Shorting the overvalued and weakening Chinese yuan and China contagion plays to express the unwinding of a credit bubble that is unprecedented in scale and already bursting; and Buying precious metals commodities at record deep value compared to the global fiat monetary base and related miners at record cheapness to the underlying fundamentals with an increasing number of important new signals showing rising US and global inflationary pressures and a hamstrung Federal Reserve that is unable to stop them.

These themes represent what we believe are the biggest macro imbalances in the world. By constructing a portfolio across them, we strive to position our clients to profit from the emerging storm rather than be swept up in it. Our goal is to generate high absolute return and alpha (risk-adjusted relative performance) vs. popular benchmarks and crowded positions among investors and investment managers. It is very late in the global economic business and investment cycle. China and other emerging markets are already in a financial crisis that is spreading. Meanwhile, US financial asset bubbles are set up to burst on their own as well as to get caught up in the contagion.

The Hamstrung Fed

The Fed is raising interest rates late in the economic cycle. The problem is that inflationary pressures have finally reached critical mass where they have rendered the Fed’s monetary policy ineffective. The Fed cannot fight inflation and prevent financial asset bubbles from deflating at the same time. If the Fed raises interest rates to any further significant degree, higher rates will burst US financial asset bubbles. However, if the Fed does not raise rates substantially, rising inflation itself will burst US financial asset bubbles. In either case, there is no escape from bursting financial asset bubbles. There is likely no escape from future rising inflation either.

With the Fed on the tiller of the world reserve currency, its recent rate increases have already contributed to a temporarily strong dollar and the bursting of financial asset bubbles in China and other emerging markets. Our hedge funds have benefitted from our short positions in those markets.

Many emerging markets are already in bear markets (down more than 20%) relative to their January highs just this year. The FTSE All World Ex US Index as we show below is down 13% since January 26. Global equity market contagion now threatens to drag the US market down with it. Our US equity shorts were successful in February and March for our hedge funds, but the US stock market has chugged higher to our mild frustration. Weakening market internals give us confidence to stay short. Even while pushing to new highs recently, the US stock market is running out of steam. Market internals are weakening across multiple breadth indicators. These indicators are diverging compared to the January prior high in the S&P 500: substantially lower new 52-wk highs, much lower % of stocks above 70 on RSI, and much lower percent of stocks above 200-dma. We strongly believe the US stock market is poised to follow the rest of the world down.