Raoul Pal GMI July2015 Monthly

raoul@globalmacroinvestor.
com
Monthly Publication No.132 July 2015

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In this edition:
Housekeeping
Introduction Groupthink... Again
Trade Recommendations Buy December 2016

Eurodollar Calls
The Business Cycle
Charts to make you go Hmmm
Dow Transports
European Energy Stocks
MSCI Emerging Markets
Currency Volatility
Wheat
Sugar
Bitcoin
Positions (both open and closed out)
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The Global Macro Investor 2015
raoul@globalmacroinvestor.com

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Housekeeping
th
th
I will be in London on 7 and 8 July and am available for meetings should you wish to discuss
the many important developments that are happening, from the dollar bull market to the risk of
recession and also the global commodity super cycle bust.
Ive just completed a group of meetings with GMI members in NYC and there is plenty to discuss
with regards to how everyone is thinking or is positioned.
Please let me know if you would like to set up a meeting.
I look forward to seeing you.
Introduction
Groupthink Again
As mentioned above, I have recently held a series of meetings in New York with GMI members
and I think these will provide a good start for this Monthlys discussion.
All together now

From a very top-down perspective, I find it interesting that most macro funds tend to align
themselves in groups that share ideas, however I find the uniformity of views amongst these
groups somewhat troubling. That is not to say that everyone is wrong but that too many firms
have the same views and same positions.
The three groups tend to be: the newer New York macro and credit community, the older New
York macro funds and the London and Geneva crowd. All three tend to be somewhat distinct
from each other but the views held within each group are similar.
This is the groupthink effect.
However, it is not totally ubiquitous as there are many who hold very different views. The very
macro-orientated tend to be broader in their opinions than those who are crossing over into
macro from credit, multi-strat or event driven.
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Summary of views
The first group (and the majority with whom I met in NYC) have extremely similar views
generally. These are as follows:
The US economy is fine and the lagged effect of lower oil prices on consumption is
about to kick in along with real wage growth.
Inflation is going to rise with wage growth.
The European equity market is a better investment that the US market.
Chinese equities are a trade worth having on.
Japanese stocks are still an opportunity.
The Euro is going lower and the dollar higher.
Energy prices are going to rise.
Global growth is fine and EM is not much of a risk.
Positioning
In terms of positions, people were very light on dollar positioning, had zero bond exposure at
best or were short, were long Chinese equities, long oil names, long German equities, long
Japanese equities and generally long US equities. Many had on specific EM trades such as
Argentina or Venezuela, Puerto Rico or Greece (yeah, its an EM now).
Im a tad different
Just to be clear, my views are startlingly out of consensus. My view is that shorting the Euro is
the best risk reward trade in macro, US bonds are setting up to be a stunning opportunity on the
long side, oil carries significant downside risk, the US and elsewhere are potentially heading into
recession, equity volatility is highly likely, EM is a major risk and Germany is at the risk of
leading Europe into a recession.
Pure macro heaven (or hell)

My overarching belief is that this is the most pure macro environment we have been in for over
a decade, probably since the Asian Crisis in the late 1990s, and I just dont think people
understand what is going on.
My entire thesis rests neatly on the US Dollar. Nothing else matters and if my view is wrong on
that, then it is likely wrong on many things. What is really weird to me is that most people agree
with my views on the dollar but dont have the trade on, and were less versed on the macro
knock-on effects of a strong dollar. Groupthink has tended to isolate particular parts of the US or
global economy and ignore the bigger picture.
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A Discussion Of Views
This is not going to be a confrontational discussion of who is right or wrong; the markets will
deliver that in due course. But I want to debate the core beliefs of many, the risks to the widely
held views and highlight why I think my view may well need to be given more credence.
1. Oil the lagged consumption effect
I find the arguments for a consumption-based pick-up one of the weaker arguments and it
seems to be based more on hope than reality. It is also very widely held as a view.
Models have flaws too
There are just too many assumptions made based on economic models and not enough of an
understanding of the overall picture or indeed of the behavioural aspects of economics.
Strict economic models basically suggest that a fall in input costs always equals a rise in
consumption due to extra disposable income. This makes the dangerous assumption that
people are econo-people and not real life people. It also makes dangerous assumptions about
global supply and demand being a zero sum game.
So, lets jump to it, the following chart is the chart of Oil YoY versus Real Personal
Consumption
The chart makes one immediately assume that Consumption is increasing as oil falls but we
need to dig in a bit to see what is really happening
Having an eye for this stuff, as soon as I looked at the chart of Consumption I could see clearly
that it was nothing but a 6-Month lag to ISM...
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This clearly suggests that Consumption will moderate going forwards. So why is this? Well the
answer is pretty clear to me
Firstly, the Oil Patch hit economic growth as revenues disappeared from the oil industry. That
brought down ISM, obviously
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Secondly, consumption patterns persist until job losses mount, which takes a toll on
Consumption
Thirdly, job losses just lag the ISM
Thus, this whole argument about consumption boosting the economy is backwards looking and
muddled thinking.
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The fall in oil prices does not lead to a boost in overall GDP, as any pick-up in finished goods is
offset by the fall in gas sales and other energy products. At best, it is GDP neutral.
However, once you understand that the loss of oil revenues and oil production are drags on
GDP, especially considering the USs new-found oil renaissance (due to the double hit of loss of
energy sales revenues plus the compounded effect of loss of economic production due to
closing of rigs etc.), then you can see that people are looking at the oil price cut in EXACTLY the
opposite way to reality.
The fall in the oil price will kill consumption and will not give it an overall boost. I see it no other
way.
Europe just lags the US
In countries that are not big oil producers, there is no loss of economic growth from the loss of oil
production. Thus Europe saw a pick-up in overall consumption, but this again is misleading
because as US growth slows, then so will EU growth in due course and that consumption spike
will be short-lasting.
We also must then throw in the behavioural economics element, and that is the changing
consumption patterns of the US.
Changing consumption patterns
The two biggest cohorts of the demographics of consumers are the Baby Boomers and the
Millennials.
The Baby Boomers have suffered two busts in recent years and are thus less amenable to
spend any increase in disposable income hence the pick-up in savings over the period of
lower oil prices (and the falling in the savings rate as oil bounced). Their marginal propensity to
consume has fallen versus their marginal propensity to save. This makes complete sense.
Baby Boomers have changed their behaviour at the margin and economists, with rigid models,
dont capture this.
The Millennials on the other hand, just do not spend. They need any extra income they have to
pay off student debts. Their marginal propensity to save is higher than their marginal propensity
to consume.
Debt damage
In a nutshell, there is too much debt and too much psychological damage from the last two
crises and that has changed consumption patterns.
So, with a change in consumption patterns and the shift in the US from oil consumer to oil
producer, there is almost zero chance that a consumption spike is coming.
Job losses and a fall in consumption is likely
In fact, the most likely economic impact from the fall in the oil price is the lagged loss of
consumption and the lagged loss of jobs. Those numbers are going to start to appear in the
coming months and add to my view that the economic event on the horizon is a recession and
not an expansion.
I think the whole consumption-is-going-to-increase argument is groupthink and is not borne out
by evidence or rigorous analysis. It sounds appealing at first hearing, but that is it. Im still very
bearish on oil and that is going to have an even bigger effect if it starts to fall again. More on this
later
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2. Inflation is going to pick up, led by wage growth

Firstly, we have to test the assumption in this statement. It assumes there is wage growth
This is the chart of Average Hourly Earnings
Looking at the last five years, we can see there is now very limited wage growth and it has, in
fact, collapsed since the last recession (and has stayed low).
Hearsay is no substitute for facts

Hearsay would tell you that there are wage rises in some companies and an increase in
minimum wage in some states, but there is no data that shows the potential pick-up in average
hourly earnings.
So, lets just assume for now that the pick-up in earnings from Wal-Mart etc., is offset by a loss
in EPS, which is clearly happening. Lets also assume that the loss of earnings from the oil
sector more than compensates for the wishful thinking headlines of some low paid sectors.
The point being that anecdotal evidence is no basis for economic analysis. There is no evidence
that earnings are on the rise via the corporate sector as a whole.
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Also, the new increased minimum wage argument is again a failure of model-based economics
over behavioural economics. If you are a restaurant or service business, you will not increase
your wages if you can avoid it. You will take it out of total compensation (i.e. tips) or you will hire
less people, e.g. cut the servers from the restaurants and just have the waiters take the food out
themselves.
Studies have shown time and again that increasing the minimum wage has very little benefit in
terms of total wages paid out. Wages only rise in a growing economy.
So, I think the assumption of higher wage growth is false.
Secondly, I also note that the correction between wages and CPI is in fact lagged by three
months. Falls in CPI follow through to a fall in wages, and not the other way around
The evidence from CPI would suggest that the fall in CPI is due to a fall in overall business
activity (the oil sector) and that will lead to a fall in unit labour costs.
This is more than fully supported by the chart of Unit Labour Costs (overleaf) versus the ISM.
ULC lag the ISM by one year (CPI lags ISM by three quarters)
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I like to use a probabilistic framework for my economic analysis as opposed to a model-based

approach. Using the evidence above, the balance of probabilities would suggest that wage
growth is in the process of topping out.
I see absolutely zero evidence that wage growth is going higher and will lead inflation higher.
The entire basis for the bond market sell-off is wrong. The entire basis for the Feds
future increase in rates is wrong too.
This is a big concern. This is groupthink at its worst.
3. Europe is the best place to invest

Let us first address the elephant in the room: Greece.
The Greek situation is evolving quickly, but I simply refuse to accept that a second EU state
forced to close its stock market and banks in order to bail-in to pay the creditors, is anything but
negative for the EU as a whole.
Hello? Draghi?
Whatever happened to Draghis, Whatever it takes? It was a lie. So far, Cyprus and Greece
have been sacrificed for the sake of the German creditors and the troika. How can that be the
backstop to a harmonious and creditworthy EU?
There is no backstop. Draghi and the entire ECB/EU/IMF are a sham.
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Wrong price
CDS prices in Europe are WILDLY wrong. I am long CDS on Spain and expect them to continue
to rise. It makes absolutely zero sense for CDS to be priced at 90bps. The basing pattern is
clear and a breakout is occurring. I think they should be at least at 200bps to 300bps
considering Podemos and the elections and the Greek/Cypriot precedent
Eye on the horizon

But lets not get wrapped up in the Greek tragedy, our job is to look forwards.
Germany and the DAX

I am more worried about the groupthink that the DAX is the best investment right now. People
are massively overweight Europe and Germany in particular. The idea is that the weaker Euro is
excellent for Germany.
So, lets test that assumption first. If we look at the DAX in US Dollars (i.e. after youve hedged
the currency) you can see that we have a large failed rally at play and the potential for the break
of the trend-line
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The DAX is just not that strong and everyone is long.
Weaker Euro does not equal higher earnings

Let us now test the assumption that the weak Euro is going to help German corporate earnings.
Overleaf is the chart of German EPS growth and the Euro. Firstly, German earnings are
generally inverse to the Euro, i.e. Euro down is earnings down, but lets assume that correlation
has changed, then we can see that the fall in the Euro has had zero impact on German
companies
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If we look at German Exports then there is a false assumption there too. Exports have not risen
with the weaker Euro
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In fact, German Exports are just a lag of ISM
So, as I have pointed out many times over the years, the EU is just a lagged US business cycle
and nothing more.
The risk to German equities is weakness in the US, which I think is coming
The Yen is eating Germanys lunch

I also think one of the biggest macro shifts in the world is misunderstood and is going to be the
main reason that Germany does less well than expected.
We live in a relative world and Germanys biggest competitor, Japan, has had a massive termsof-trade shock in its favour. Japan is going to eat Germanys lunch at these exchange rates
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Assumptions, assumptions
So, if you are long the DAX based on the Euro, you are making a false assumption. If you are
long the DAX hedged against FX risk then you are seeing the risk of a larger top.
And then there is the other elephant in the room

If you want to know the risk of having the supposed best balance sheet in Europe then just look
at the derivative exposure of Deutsche Bank. Their derivative book is 100% of world GDP.
Just take that in for a moment. One bank has more derivatives on its balance sheet than
all of the worlds sovereign debts added together. Sure, most are netted off, until they
arent.
I stand by my view that DB will likely go bust in the next down-cycle and the Germans will have
egg all over their faces when they have to bail out their own, and see their own debts to GDP
explode
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So keeping all that in mind, I think you better closely assess how long the market is of the DAX
and the recent technical breakdown.
Everyone is now hoping that the next round of EU QE will push prices higher. I am not so
convinced
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Finally, with regards to Germany, Ill leave you with the chart of German PMI. This economy is
about to go into recession.
You have been warned.
4. Chinese Equities
I have no really strong view on Chinese equities. We know they are a bubble. We know that it
looks strikingly like the late 1920s US. We know that the debt situation is a mess. We know that
growth is imploding. We know that the PBOC have had to cut rates to prop up the banks.
So why the hell does everyone own Chinese equities?
Because Louis Gave from Gavekal told them to.
Louis story of the institutional underweight of Chinese equities being the biggest risk to
portfolios in the world is compelling and, based on a potential inclusion in MSCI indices which
is in turn based on the potential SDR inclusion was just the story everyone needed to buy
Chinese stocks. It justified getting involved in a bubble to tack on a bit of performance.
I really like Louis and I think he is a smart guy but he is peddling China funds and a Chinese
research service. I like the story but I think it is based on too many ifs.
I sincerely doubt that MSCI would add China to anywhere near full weight anytime soon. Ashares just dont qualify. And I also think that the most popular future series from MSCI will likely
be MSCI Asia ex-China, much like it was MSCI ex-Japan for the last two decades. China is
really untradeable for most and speculative at best. I think the whole underweight story does not
stack up.
Now, could Louis be right? Sure. Should we be involved considering everything we know about
China? No. Definitely not.
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Excuses, excuses
Some of you have found a separate excuse to buy China and that is based on Chinese Internet
plays. Again, anyone thinking that this is the justification of buying into the large speculative
bubble in history is being nave.
No country has ever had this much of their market cap based on margin accounts. No country
has ever had this much margin debt as a percentage of GDP. No country has ever had this
much retail money piling in. No country has ever seen their stock market cap rise by $4trn in a
year.
The baseline groupthink assumption is that the government wont let the market fall. The faith in
the Chinese Government is extraordinary.
Ill stick to what I know. This is a bubble and bubbles burst. This is not a market to be long of,
regardless of the reason.
This is what a crash looks like
Can it recover and bounce? Sure. Id leave this trade well alone. There are much higher quality
trades out there.
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5. Japanese Equities
I dont have too much to say about this trade. I like the story. I think if Japanese companies
managed to make money when the Yen was at 80 then they can make plenty of money with the
yen at 124.
The only reason I dont currently have this trade on is based on two observations: everyone else
has it on and Japanese companies are not immune to the global business cycle, which I fear is
close to contracting, and that is not the time to be long anything but the most beaten up sectors
or markets (Uranium, Greece, Cyprus, etc.) which still have to be approached cautiously.
Id rather take profits if youve got the trade on and re-buy into a bigger sell-off. Its a small exit if
everyone has to get out.
Simply put, Japanese earnings will not rise if global demand falls. If that is the case then
everyone is long and wrong, for now at least.
6. The Dollar is going higher

Clearly, I love this trade. But the most interesting thing from the visit to New York is that when
asked how people were positioned, almost no one had the trade on and if they had it on, it was
only small. The average position size was 20% of full risk, for those who actually had a position.
I love a market that is implicitly short gamma. Basically if the dollar starts to move then everyone
has to chase it.
Ill cover this more fully when I discuss my own views
7. Energy Prices are going to rise

Ive covered this very fully in my last few publications so Ill spare you the full debate and sum it
up in two sentences and two charts.
1. Production is still increasing globally and is at all-time highs.
2. It is all about the dollar.
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And here are the charts

Its the dollar, stupid
And positioning has exploded again
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Summary point:
You cannot be long the dollar and long oil.
One of those legs is going to negate the other. It is not a consistent macro bet.
I remain concerned that the stronger dollar will negatively impact energy prices going forward
and that people are positioned too early for a recovery.
8. Global growth is fine, as is EM

The argument goes that the fall in the oil price is beneficial to the global economy and that will
support global growth, and that EM governments dont carry much debt so the region is relatively
safe.
Firstly, when you look at the chart of World PMI, you can only draw the conclusion that world
growth is slow and the trend is firmly lower. It is only a matter of months before the world stalls
entirely
Triple shock China, Commodities and the Dollar

As I have mentioned many times over the last few months, the combination of the collapse of
Chinese demand and the rise in the dollar has wiped out something like $5trn of commodity
revenues from the global system and maybe the same again in knock-on effects. Much of this
has yet to filter in but commodity bear markets and dollar bull markets change the balance sheet
of countries and corporations all over the world.
Sure, there are some benefits to consumers, but this is more than wiped off by the devastation
this commodity collapse reaps on entire countries.
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On my travels, I heard a few people proffer the argument that the fall in commodity prices is a
zero sum game and that the loss of revenue is compensated for by the pick-up in consumption.
This is model-based thinking at its most concerning. If this were the case then there would never
be a recession!
The same argument is/was brought out when interest cuts were made. It proved to be a false
argument then too. When people see bad things happening they change their spending
patterns. When companies see bad things happening, they change their production plans and
their hiring plans. That kind of analysis is what behavioural economics brings to the table
realism.
Bad economic events are not positive events. Leave that kind of commentary to CNBC.
So lets assess the damage in EM world you can see that the EM PMI is in recession
territory
Again, all we need to know to better understand what is going on is to realise that commodity
prices have collapsed and that badly effects EM, and global demand is slow, which also effects
EM, and finally we know that almost the entire global private sector increase in debt since 2009
has come from EM corporates.
When the dollar goes higher, those firms (which are almost always funded in US$) find it hard to
pay back debts and, when their output prices collapse too, then its a house of cards
Commodity producers and exporters

We can look at this in two ways:
If we take a commodity-producing nation like Brazil, we can see that the economy is cratering
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There is no rosy picture for a commodity producing nations. Even Canada is seeing the
beginnings of a recession.
If we flip across to a non-commodity producing nation with high debts, such as South Korea we
can see that the economy is slowing
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Business Conditions are falling off a cliff
As are Exports
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And that will drag down GDP sharply into a recession
I think the situation in emerging markets is dire and people are not realising the extent of it yet.
Personally, when I look at the chart of the KRW I think that it is going to trade at new all-time
lows in due course (new highs on the chart)
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When I look at the short-term chart, we are about to test a very key level indeed. The neckline
for the inverse head-and-shoulders comes in at around 1135. Next stop 1300
And I have been pointing out for a long time that the chart of the KOSPI is an accident waiting to
happen. It is the biggest failed rally I have ever witnessed
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Total debt to GDP in South Korea is the highest of the emerging markets, outside of China.
If there is a black swan out there, it is South Korea.
But EM in general is in very bad shape indeed. It is a US recession away from a full collapse and
a renewed dollar rally away from the tipping point.
In a nutshell
So, as you can see from all of the points above, I fear that many people may well be backing the
wrong horses.
Clearly I can be wrong, and for me to be proven wrong is pretty simple: if the dollar does not rally
further then the status quo can be maintained and we can continue with this lacklustre global
expansion for a while longer.
If the dollar rallies again from here then it is game over and the exit doors are small.
My views
In New York I presented a very different spin on the world to almost anyone else. I am wildly and
comfortably out of consensus.
I think that the dollar is the only thing that matters. My view remains that we are in the early
stages of what will prove to be one of the biggest dollar bull markets in history, and it is going to
reap devastation on the global economy
The Chart Of Truth

If you care about one chart and one chart only that sums up the entire risk to the world it is this:
the DXY is forming a perfect wedge. It is going to break during the summer and the dollar is
going to explode higher
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If this wedge breaks then I think the dollar will finish the year around 110 to 115, which would be
consistent with the pattern of other dollar bull markets with an annual gain of over 20%. I think it
does the same in 2016 too
The trade I presented in NYC as the best and easiest risk reward trade in the world is shorting
the Euro. Sadly the trade has moved a little in my favour so the risk reward is less good today,
but it is still compelling.
I think the Euro is about the break the head-and-shoulders top and head down to parity against
the dollar
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Why the risk reward is so good is that the chart could well be an inverse head-and-shoulders
with the neckline at 1.15. It is possible but its my least likely outcome
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Easy stop-loss
If the dollar were to break that upside level versus the Euro then I would be forced to
dramatically reassess my view on the world.
Thus we have a stop-loss at 1.15 (4 points away) and the target would be 1.00. That is a clean
3:1 risk reward (it was a 5:1 when I presented it!).
Id also add in that no one has the trade on, and that everyone wants it on, and that gives it the
chance of dramatic acceleration to the downside if the trend-line breaks.
If you dont have this trade on then I urge you to do so.
Also, I like to keep an eye on the knock-on effects. If the Euro goes then
the Aussie goes
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The CAD goes
And the whole ADXY goes
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And if they go, then Oil goes along with the rest of the commodity markets (the chart is of the
CRB Index)
Bonds I love em, no one else does

The next trade I discussed in NYC is that of buying US bonds. Bonds are almost universally
reviled. The structural underweight by asset managers is almost the largest in history and hedge
funds are either short or flat.
No one owns bonds.
What we do know is that the risk reward is stacking up nicely. If the Fed raises rates (which I
dont think they do) the yield curve will flatten and the long end will rally. If I am right and global
growth slows further in Q3/Q4 then bonds will fly.
A rising dollar also leads to falling bond yields (as it lowers inflations and slows growth). The
following chart is US 10 Years versus the DXY (inverted)
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The risk reward of buying bonds is looking very good. The massive trend-line comes in at
2.70%, giving an upside risk of 40bps and the downside target is 1.00% or lower, giving a
minimum of 3:1 risk reward on buying the most under-owned major asset in the world
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Volatility trades
The other trade idea I presented was buying VIX calendar spreads, i.e. buy front month and sell
six months out.
Even with the spike in vol over the last few days you can buy July futures for 17.8 and sell Jan
2016 for 18.85. If nothing happens youll get the roll down and thus positive carry, but if the
market sells off (remember we have had FX vol, commodity vol and bond vol and that only
leaves equity vol to come) then the short-dated futures will spike and the longer-dated will rise
less.
Although the curve has steepened, this is still the cheapest way to hedge.
Im going to wait for the recent spike to calm down before adding this trade. I like it a lot.
Eurodollar calls
Finally, the other trade I presented was buying the December 2016 Eurodollar 99.75 calls for 1
tick.
This trade is an absolute bargain if my view is right and will cost you 0.5 ticks if I am wrong. I
think the Fed will go to negative rates in the next recession.
By looking at past history of the lengths of business cycles there is something like an 80%
chance of a recession by the end of 2016.
If that is the case then December 2016 Eurodollars will trade at 100 or even above (See Euribor
for details).
Thus the upside is a stunning 50:1 risk reward, if you assume you can always sell this back for
half a tick if we are wrong.
To be clear, you risk half a tick to make 25.
Ill take that bet all day.
This is the best single hedge against a recession or worse. You HAVE to have this trade
on. You can risk 1% of your NAV over the next eighteen months and the potential gain is
50%.
Wow.
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Trade Recommendation:
Buy December 2016 Eurodollar Calls for 1 Tick
So, as ever, lets see how my views pan out. I am very comfortable with where I am wrong and
where I am right. That makes it a rather good opportunity.
It might be a busy summer.
An Update on Recession
In the last Monthly, I showed you the long list of indicators that were suggestive of a recession.
To update you:
The indicators that are in full recession territory are as follows:

US Industrial Production
US Manufacturing New Orders
Durable Goods Orders
Dallas Fed
Kansas Fed
US Retail Sales 3MMA
CPI
SPC Adjusted Earnings Per Share
The indicators that are near recession:

AA Carloadings
CASS Freight Shipments Index
Milwaukee ISM
The big surprise, as ever, was the ISM, which ignored every single other Fed index and
bounced. Personally, I dont get it. I know the seasonal adjustment facts were large last month
but it is still a mystery as to why the ISM rose.
So, now we are at the point where the CESI up-cycle should come into effect. My view remains
that the CESI is going to rally on the bringing down of US data and not the beating of existing
forecasts.
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The entire rally in the CESI from March has been based on the collapse of Q2 estimates of GDP
from 3.5% to 2% and, with marginally less misses in the economic data, the CESI has risen.
The entire economic game is now about Q3. The estimates for this quarter remain at 3%. I think
those estimates are too high and Q3 will come in lower, thus the only way for CESI to continue
to rise is for forecasts to come down again first. Note that GS just lowered its entire year forecast
to 2.5% from 3%. I think there is more of that to come.
If that set-up occurs, where the CESI up-cycle shows a fall in GDP forecasts (and well know in
the next month or so) then that would set us up for a very lacklustre GDP ahead of the next
CESI down-cycle and thus the risk of a full recession will rise significantly.
It is a tough call from the data so far, but I think that a recession is still likely in 2015.
____________________________________________________________________
37

__________________________________________________________________________
The Business Cycle

Well, that was an unexpected bounce in ISM again. ISM is trying its best to make me look like
an idiot
With the big Boeing orders at the Paris Air Show, we should see the ISM continue up for a few
months now, but the bounce should be subdued
The orders were less than last summer or the summer before so the seasonal bounce in ISM
New Orders should also be subdued
____________________________________________________________________
38

__________________________________________________________________________
And that should bring GDP to around 2%...
But the point is that if this ISM up-cycle is not a large one (as was the case in 2007 and 2008)
then when things roll over again in Q4 things could get ugly quickly.
Just look, for example, at AAR Carloadings
____________________________________________________________________
39

__________________________________________________________________________
Or Durable Goods Ex-Transports
The oil bust is really spreading across the economy and Non-Residential Fixed Investment is
collapsing and should keep ISM lower
____________________________________________________________________
40

__________________________________________________________________________
The Milwaukee Fed is still falling
The Chicago PMI is still not bouncing
____________________________________________________________________
41

__________________________________________________________________________
Cass Freight is diverging
Over in Asia, the CESI is expecting to rise there soon
____________________________________________________________________
42

__________________________________________________________________________
Probably led by huge pessimism in China
Electricity Production in China is picking up a tad
____________________________________________________________________
43

__________________________________________________________________________
But the PMI is still going nowhere
Japan is not seeing much of a pick-up from the weaker Yen it looks to me that it is going to go
into recession
____________________________________________________________________
44

__________________________________________________________________________
Japanese Exports to the US are slowing again
But the trade balance has shot up and that might well start to put a floor under Yen weakness for
now
____________________________________________________________________
45

__________________________________________________________________________
But inflation has failed to take hold
I discussed Korea earlier in the Monthly growth is close to full recession territory
____________________________________________________________________
46

__________________________________________________________________________
And IP is too
Australia is getting into real trouble Exports are very weak
____________________________________________________________________
47

__________________________________________________________________________
And Exports to China have utterly collapsed
Ditto for Hong Kong Exports
____________________________________________________________________
48

__________________________________________________________________________
And Singapore Exports
Also in Indonesia
____________________________________________________________________
49

__________________________________________________________________________
In Europe, Italy is bizarrely seeing the strongest PMI
But the LEI has turned over again
____________________________________________________________________
50

__________________________________________________________________________
Spain is seeing a meaningful pick-up in mortgages, which is helping a lot
But the LEI has rolled over there too
All in all, its still not a great picture. The US is slow, Europe is slowing (led by Germany) and
Asia is slow or actually in a recession
____________________________________________________________________
51

__________________________________________________________________________
Charts to make you go Hmmm

Chart 1
Dow Transports
This is an ominous divergence truly spectacular
____________________________________________________________________
52

__________________________________________________________________________
Chart 2
European Energy Stocks
The SXEP has broken a head-and-shoulders top
And that is part of the biggest top pattern in probably all of stock market history
____________________________________________________________________
53

__________________________________________________________________________
Chart 3
MSCI Emerging Markets

This is going to break soon
____________________________________________________________________
54

__________________________________________________________________________
Chart 4
Currency Volatility
The CVIX looks like its ready to explode higher again
____________________________________________________________________
55

__________________________________________________________________________
Chart 5
Wheat
Wheat prices have caught on to the El Nio risk. El Nio is usually a negative for grains, so lets
see
____________________________________________________________________
56

__________________________________________________________________________
Chart 6
Sugar
One of the crops that really might see upside from El Nio is sugar. This is a great place to own
it
____________________________________________________________________
57

__________________________________________________________________________
Chart 7
Bitcoin
Bitcoin is starting to look like it has based and can move higher finally
____________________________________________________________________
58

__________________________________________________________________________
Positions
Tail Risk
Trade Recommendations
Buy 3-Yr Spanish CDS
Entry Date
Entry Price
YTD
nd
60
30.00%
Entry Price
YTD
Feb 2
2015
Core Trades
Entry Date
rd
US 30-Yr Bonds
Nov 3 2014
3.06%
-6bps+1.48%
US 10-Yr Bonds
Feb 2
nd
2015
0.0166
-69bps+0.68%
Sell Credit Suisse
Feb 2
nd
2015
19.72
-23.27%
Sell UBS
Feb 2
nd
2015
15.45
-22.17%
Feb 2
nd
2015
1274.46
-8.01%
Feb 2
nd
2015
227.29
15.56%
Aussie 2-Yr Bonds
Feb 2
nd
2015
1.98
-4bps+0.81%
Buy Mar 2016 Eurodollar Futures
Mar 2
nd
2015
98.97
31 ticks
Closing Date
ITD%
$1.74
$10.10
Entry Date
Entry Price
YTD
Dec 1 2014
st
113.69
1.79%
Sell AUD
st
Dec 1 2014
0.8491
9.29%
Sell EEM
st
Dec 1 2014
40.79
2.87%
Sell SPX
Feb 2
nd
2015
2020.85
-2.05%
Buy JPY
Mar 2
nd
2015
120.13
1.89%
Gold
Bitcoin
Closed Out Trades 2015
Buy Apr 2015 WTI /Sell Mar 2016
Inception
Date
Mar 2
nd
2015
Short Term Risk

Sell ADXY
____________________________________________________________________
59

__________________________________________________________________________
Long Term Risk

Entry Date
Entry Price
% Since
Inception
Feb 8 2013
th
0.091
-17.13%
st
212
23.89%
Bombed Out Markets

Bank of Cyprus
Other Long Term Investment

Bitcoin
Nov 1 2013
st
Buy 6.5 Strike USD/RMB Call
Dec 1 2014
0.65%
0%
Buy ASE Index (Greece)
Feb 2
nd
2015
755.42
-0.99%
Buy URA
Feb 2
nd
2015
11.65
-13.10%
____________________________________________________________________
60

__________________________________________________________________________
Background
Raoul Pal has been publishing The Global Macro Investor since January 2004
to provide original, high quality, quantifiable and easily readable research for the
global macro investment community. It draws on his considerable experience in
running a hedge fund and advising many more.
The Global Macro Investor has one of the very best, proven track records of any
newsletter in the industry, producing extremely positive returns in 7 out of the
last 10 years.
Raoul Pal retired from managing client money at the age of 36 in 2004 and now
lives in the tiny Caribbean island of Little Cayman in the Cayman Islands.
He is also the founder of Real Vision Television, the worlds first on-demand TV
channel for finance: www.realvisiontv.com.
Previously he co-managed the GLG Global Macro Fund in London for GLG
Partners, one of the largest hedge fund groups in the world.
Raoul moved to GLG from Goldman Sachs where he co-managed the hedge
fund sales business in Equities and Equity Derivatives in Europe. In this role,
Raoul established strong relationships with many of the worlds pre-eminent
hedge funds, learning from their styles and experiences.
Other stop-off points on the way were NatWest Markets and HSBC, although he
began his career by training traders in technical analysis.
Should you wish to receive information about membership please email us at

info@globalmacroinvestor.com. The number of members is STRICTLY
limited, with only a few free spaces coming up each year, as the membership is
full. If there are no free spaces available, a waiting list will apply.
Except for use granted to the named subscriber, this publication may only be
reproduced, stored or transmitted in any form or by any means, with prior
permission in writing from the publishers.
Raoul Pal, The Global Macro Investor, Little Cayman, Cayman Islands
1st July 2015
____________________________________________________________________
61

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Monthly Publication No.132 July 2015

Introduction Groupthink... Again

Trade Recommendations Buy December 2016

The Business Cycle

Charts to make you go Hmmm

European Energy Stocks

MSCI Emerging Markets

Positions (both open and closed out)

Monthly Publication No.132 July 2015

All together now

Monthly Publication No.132 July 2015

Inflation is going to rise with wage growth.

The European equity market is a better investment that the US market.

Chinese equities are a trade worth having on.

Japanese stocks are still an opportunity.

The Euro is going lower and the dollar higher.

Energy prices are going to rise.

Global growth is fine and EM is not much of a risk.

Pure macro heaven (or hell)

Monthly Publication No.132 July 2015

Monthly Publication No.132 July 2015

Monthly Publication No.132 July 2015

Thirdly, job losses just lag the ISM

Monthly Publication No.132 July 2015

Monthly Publication No.132 July 2015

2. Inflation is going to pick up, led by wage growth

Hearsay is no substitute for facts

Monthly Publication No.132 July 2015

Monthly Publication No.132 July 2015

I like to use a probabilistic framework for my economic analysis as opposed to a model-based

3. Europe is the best place to invest

Monthly Publication No.132 July 2015

Eye on the horizon

Germany and the DAX

Monthly Publication No.132 July 2015

The DAX is just not that strong and everyone is long.

Weaker Euro does not equal higher earnings

Monthly Publication No.132 July 2015

Monthly Publication No.132 July 2015

In fact, German Exports are just a lag of ISM

The Yen is eating Germanys lunch

Monthly Publication No.132 July 2015

And then there is the other elephant in the room

Monthly Publication No.132 July 2015

Monthly Publication No.132 July 2015

Monthly Publication No.132 July 2015

Monthly Publication No.132 July 2015

6. The Dollar is going higher

7. Energy Prices are going to rise

Monthly Publication No.132 July 2015

And here are the charts

And positioning has exploded again

Monthly Publication No.132 July 2015

8. Global growth is fine, as is EM

Triple shock China, Commodities and the Dollar

Monthly Publication No.132 July 2015

Commodity producers and exporters

Monthly Publication No.132 July 2015

Monthly Publication No.132 July 2015

Business Conditions are falling off a cliff

Monthly Publication No.132 July 2015

And that will drag down GDP sharply into a recession

Monthly Publication No.132 July 2015