Tough day for equity bulls. Don’t forget about USD.

I don’t need to highlight the details of the carnage. Whether warranted or not, the moves have been remarkable in global equities, currencies and rates. I’ve been fortunate to have been largely unexposed to equities for some time – save for some OTM calls in FB, PANW, and ASHR instead, opting to focus my portfolio on oil and CAD. (More on the one-sided moves in CAD shortly). That said, I did step in on Friday and buy some December PANW and MU ITM (which are now OTM) calls. Believe it or not, the US is not as weak as it anecdotally seems. Technology and the financial crisis have forever changed/evolved/broken traditional US economic dynamics. US manufacturing is forever gone. The conventional metrics used to measure today’s economic activity are thusly antiquated. What metric takes into account technology’s role on productivity? How do “free services” that transact solely in information factor into GDP estimates? If Uber provides you with a ride from point A to point B that costs 10% less than a NYC taxi, how does the fact that the ride is of much higher quality factor into CPI estimates? Before you call me pollyanna, I do not believe that all is not well on the western front. That said, it’s certainly not as bad as the tea leaves seem to imply. In this market, though perception is reality.

So what do you do? Get back to basics. Simplify things. My understanding of the “macroscape” has remained largely unchanged: the US will muddle through at ~3%, oil will suffer from supply/demand dynamics and believe it or not, the dollar will rise. The only real wrench that’s been thrown in has been EUR. Recently, EUR has been a great risk indicator, due to ECB QE and its relatively new status as a funding currency in carry trades. Participants get scared, they cover their Euro short and the dollar falls. Participants find their risk appetite and sell Euros to boost global shares. Given China, oil, recent US economic prints, the current market selloff – add whatever else you’d like, the market has found plenty of reasons to believe the Fed won’t hike in September. This has removed the bid in USD and we’ve seen US 10yr yields back below 2%. At some point, USD will regain its luster due to either the realization that the US economy is, at worst, the best house in a shitty neighborhood, and/or it will once again viewed as a safe haven asset. Remember, FX flows impact currency appreciation.

In short: oil has room still to fall and the dollar will rally.

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