Reference: "This Is Everyone's New Favorite Theme": Hartnett...

Reference: "This Is Everyone's New Favorite Theme": Hartnett Says Dollar Has Begun Its 4th Bear Market Of The Past 50 Years

Here is why:

The coming age of secular USD weakness, Hartnett says that the greenback's heebie-jeebies are driven by

i) US federal deficit: $1.8tn last 12 months, 6.5% of GDP;
ii) US debt ceiling deadline approaching with budget deficit $378bn in March, shrinking cash balances to just $109bn, means US govt on track to run out of cash by July 4th (we'll show shortly why that's not the case);
iii) rising US debt default probabilities 5Y CDS at 45bps vs. 15bps a year ago;
iv) US banking crisis means US dollar less of a 'safe haven';
v) 'Petroyuan' argument gains steam as the war has been forcing countries to conduct deals in alternate currencies;
vi) China and Japan reducing Treasury holdings, foreigners own $7.4tn of Treasuries.

And..

Away from FX and Hartnett's preferred trade, looking at other assets this is how he sees the latest "tale of the tape":

Inflation slowing, Fed hiking cycle over, recession expectations universal, yet UST 30-year can’t break below 3.6% (200-dma) because we’ve already traded 8% to 4% CPI, but labor market yet to crack; US govt deficit growing too quickly.

In the near-term, however, it still all boils down to one key question: recession/hard landing or soft/no landing, and here's what Hartnett is looking at to determine who has the upper hand:

Next 6 months it’s “recession vs Fed cuts”; best tells who’s winning are HY bonds, home builders, semiconductors… In other words, HYG <73, XHB <70, SOX <2900 recessionary... but if levels hold, it’s a no/soft landing.


But watch out for surprises


Hartnett then reminds readers of his preferred asset allocation which is long 25/25/25/25 (stocks, bonds, commodities and cash) with an emphasis on cash, gold, commodities, EAFE/EM, small cap, industrial's, banks; offset this by shorting 60/40, bonds, US$, stocks, US, large cap, tech.

How can his preferred portfolio allocation be affected? Well, there may be Bullish Surprises, with a list of potential bullish surprises below…

-Russia/Ukraine/NATO war ends,

-immigration + ChatGPT = back to disinflation,

-arms race in tech spending,

-new fiscal "bailout" culture = no recession,

-why sell when policymakers panic so easily,

-stocks less dangerous than bonds.

... or, worse, Bearish Surprises: and a list of bear surprises…

-hard landing after ferocious Fed tightening & 430 rate hikes,

-biggest credit events set to shadow banking & government debt,

-state intervention = lower productivity, corporate profits,

-coming China/Taiwan/U.S. conflict,

-bulls must wait until bond market forces YCC on Fed.

Hartnett expects the FED tightening cycle to end May 3rd 2023, with rate cuts to follow over the next 18 months.