Friday, April 24, 2015

Thoughts on Japan, the Yen & Gold

After anticipating the large retracement decline (see Herein the Nikkei coming into 2014, we have remained bullish on Japan since the end of Q2 last year (see Here). Rallying ~45 percent above the lows of last April, the Nikkei has outperformed the SPX by approximately 25 percent over the past year - rising above 20,000 this week for the first time in 15 years. 

Over that same timeframe the yen has fallen sharply, weakening ~15 percent and making currency-hedged ETFs, such as Wisdom Tree's Japan Hedged Equity Index - DXJ, widely outperform non-hedged equity indexes such as iShares - EWJ. 

With a much anticipated April 30th Bank of Japan meeting on deck next week, we find the yen curiously situated near critical long-term support, while feathering a potential breakout from last summer's large leg lower. 

Over the past few months, the drum-beat for expanding the BOJ's already significant quantitative easing program have grown louder, as inflation continues to miss their 2 percent target and as Prime Minister Shinzo Abe won a major political victory this past December. As such, respected members of Abe's ruling party - such as Kozo Yamamoto, have become outspoken proponents of further easing, recommending increasing asset purchases of government and corporate bonds as well as ETFs.

While we continue to remain bullish on Japanese equities over the long-term (especially relative to the U.S.), the BOJ's appetite for influence here with the yen remains suspect. Although further easing is more likely at some point later this year, the consequences of "beggar thyself" policies have had significant negative affects on the purchasing power of Japanese households and squeezed corporate profits in Japan. 

With the yen currently situated on long-term support, will the BOJ risk destabilizing the foreign exchange market if they surprise the markets next week? Our educated guess is no - and expect that the yen and Nikkei will continue to move out of the negative correlation extreme they have traded in over the past two years. 

Because of this, we continue to favor an unhedged equity position in Japan and still like the prospects for gold - which have moved in lock-step fashion with the yen and broadly disappointed over the past year.  

Click to enlarge image

Sunday, April 19, 2015

Buffett or Beal? Place Your Bets With Oil

"He said Exxon Mobil remains a 'wonderful company' even though '... its current earnings power has been diminished significantly from what it was a year ago, as is true with all oil companies. We have other uses for the money.'" Warren Buffett - Berkshire's Buffett says sold Exxon Mobil stake for acquisition, stock buys - Reuters

"'You can make some decent loans today that are very well secured,' he says, 'The only place for oil prices to go is up over the medium to long term.  Short Term anything can happen, but oil is not going to go down over the next seven years.'" - Andrew Beal - The Billionaire Banker Ready to Bet on Oil - Forbes

*  *  *  *  *  *

Who are we to judge the investment prowess or possible misstep of either self made man. They are in fact both billionaires many times over - granted, one significantly more than the other. That said, we find the difference of opinion interesting, considering their respective approaches with capital and age. Buffett's unabashedly popular, 84 and in the twilight of his legendary investment career. Beal is 62, press-shy and arguably in the sweet spot of growing a private banking empire. 

Notoriously conservative when it comes to risking his bank's capital, Beal pulled his bets early in 2004, concerned about the already frothy conditions prevalent in the commercial and residential real estate markets. Patiently waiting in the wings as the financial crisis swelled and swallowed the market in 2008, Beal placed his chips and took an early piece of the pot in the distressed debt markets.

Today, Beal has his private bank squarely focused on energy companies, whose credit prospects have soured, as regional banks collectively shun financing with the price of oil plummeting over the past year. "When oil was $130 a barrel they were all lending like crazy. Now it's $50, and they don't want to make a loan", said Beal. 

Where public companies now see immanent risk in the energy sector, Beal finds tremendous opportunity. What does he see that they don't? Put simply - relative value, without the condition of satisfying shareholders immediate concerns. From his perspective, the collapse in the price of oil today offers more opportunity in the energy sector over the long-term than say the U.S. equity markets. "I'm not predicting a crash, but there will be a lot of disappointed investors", he said.  

Buffett's Performance By Decade
At the end of the day, quarter - or year, what really matters to investors such as Beal or Buffet is the relative value and risk of their invested capital over the long-term. If they estimate correctly and size accordingly, outperformance will take care of itself.  For Buffett, the shear size of Berkshire Hathaway has made it increasingly difficult to move the needle. Thirty years ago, he would routinely outperform the S&P 500 by over 20%. With Berkshire Hathaway swelling to the fourth largest publicly traded company in the world - it's closer to 3% these days. All things considered, it's still impressive and reflecting back over his career in its entirety - it's an unparalleled colossal feat. 

So why is Buffett divesting his shares in Big Oil as investors such as Beal see great relative value in the sector? For starters, he's managing a very large and complicated conglomerate of interests and will likely use the proceeds to fund new opportunities he's had better luck with in the past - such as the acquisition of Kraft by Heinz. Over the past several years, Buffett's hot hand has been twice rebuffed by his investments in Big Oil, buying ConocoPhillips near the peak in oil prices in 2008 and selling that investment for a substantial loss in 2009. We know at that time he used the proceeds to help fund the BNSF Railway acquisition that went on to generate billions in profits for Berkshire. Today, he's likely looking to do the same by exiting Exxon with basically a marginal profit from his 2013 investment and putting that capital to work in an area he has had greater success with in the past. 

Will it bear the same fruit that the BNSF Railway acquisition provided Berkshire shareholders? From our point of view - not likely. When it comes to the recent Kraft acquisition, Heinz is paying top dollar for a company that generates a modest return - even if they succeed at lifting the same operating margin to where Heinz currently enjoys (~6% post-tax return on capital). Moreover, the public equity investment in Kraft will  very much be at risk to the whims of the U.S. equity markets, which from a variety of metrics is richly valued relative to world indexes and other asset classes - especially commodities. 

Despite the carnage witnessed in the commodities market over the past year, we've gravitated to the relative value opened up in some of the hard asset sectors - such as oil and precious metals. To a large extent, we approach precious metals as simply a higher beta emotional proxy of the same investment thesis. A thesis that is either propelled ahead or anchored to inflation expectations and greatly motivated by trends in the dollar and real yields. With the U.S. dollar index recently stretched to a relative performance extreme (see Here), and with inflation beginning to move out of the trough it has remained in over the past two years, the long-term prospects for hard commodities remains extremely attractive in our opinion. 

A relative performance chart that frames what we suspect will be shrewd timing on the part of Beal - and which we have closely followed over the past year, is the SPX:Oil ratio. Our general impression reflected by the ratio is that markets are currently traveling away from a cyclical pivot from the disinflationary trend that began in 2011, to another reflationary upturn. 

As shown below in the chart, there is a broad asymmetrical structure in the ratio, defined by the blowoff moves in 1985/1986 and 1998/1999. Both moves were completed in market environments where equities strongly outperformed commodities, as oil prices collapsed - reinforcing a powerful positive disinflationary feedback in equities. 
In 1986, the oil market stabilized after the supply-driven decline was absorbed and the Fed eased aggressively in the first half of that year. By the end of 1986, oil prices had risen nearly 70 percent above the lows from late March. The relative performance between equities and oil would remain range bound over the next decade, as the ratio worked its way higher, ultimately breaking out in 1997.

Over the past several months, we have contrasted the comparative performance and price structures of the 1985/1986 supply-driven decline, the 1998/1999 secular blowoff and the large demand-driven crash in oil in 2008/2009. Although we firmly agree with Beal that anything can happen over the short-term, from a variety of perspectives, oil appears to be moving constructively out of another major low and away from the cyclical disinflationary trend that had broadly worked against the commodity markets since 2011. 

In fact, from a comparative perspective with the 1985/1986 blowoff, the current market appears to be completing the pivot faster than initially estimated, with the ratio breaking down sharply below the lows from late January last week. All things considered - and as revealed in previous notes with insights drawn from the 1940's low-yield market environment, we are more inclined to speculate that the ratio will trend lower as it did from the 1998/1999 pivot, as the equity market rally cools in the U.S. and commodities once again take the outperformance baton.  

Tuesday, April 7, 2015

Scarcity & Oversupply: The Intriguing Market Dynamics Between EUR:USD, Bunds & Oil

While we don't exactly prescribe to an Ignorance is Bliss methodology that some of our more technical brethren might apply, if you adopt a purely fundamental perspective or bias in the market, you certainly run the risk of finding yourself several steps ahead - or behind, of where the rubber meets the road. 
When it comes to the currency markets this is especially true. 
Simply put, prices on Wall Street move much faster than prices on Main Street. 

If this wasn't quite the case, economists market opinions would likely be held in much higher esteem by participants who know all too well the profound disconnect that exists between the two perspectives - and which are greatly muddled these days by the many active hands and mouth pieces of the world's major central banks. 
As the venerable late German economist Rudi Dornbusch theorized in his ground breaking exchange rate overshooting hypothesis, goods' prices are sticky - or slow to change in the short run, while prices of currencies are flexible. This factor differential often causes exchange rates to overshoot and compensate for an exogenous shift in market conditions or monetary policy, that in the longer-run will move antithetic to short-term induced currency flows and behavioral reflexes.  
"According to the model, when a change in monetary policy occurs (e.g., an unanticipated permanent increase in the money supply), the market will adjust to a new equilibrium between prices and quantities. Initially, because of the "stickiness" of prices of goods, the new short run equilibrium level will first be achieved through shifts in financial market prices. Then, gradually, as prices of goods "unstick" and shift to the new equilibrium, the foreign exchange market continuously reprices, approaching its new long-term equilibrium level. Only after this process has run its course will a new long-run equilibrium be attained in the domestic money market, the currency exchange market, and the goods market.
As a result, the foreign exchange market will initially overreact to a monetary change, achieving a new short run equilibrium. Over time, goods prices will eventually respond, allowing the foreign exchange market to dissipate its overreaction, and the economy to reach the new long run equilibrium in all markets." - Exchange Rate Overshooting Hypothesis - Wikipedia
When it comes to the the euro dollar exchange rate over the past year, we have witnessed this pronounced reaction, which has not only been motivated by the significant actions on the part of the ECB, but as well as expectations to varying degrees that the Fed will need to raise interest rates, at the very least - before the ECB begins to tighten. The net effect in the currency markets delivered an unprecedented  9 month rally in the U.S. dollar index - and a cascade in the euro that caused the currency to fall back to levels last seen at the start of 2003. 
From a longer-term fundamental perspective of what primarily drives an exchange rate - namely inflation, the significant differential that exists today between the U.S. and Europe - should ultimately portend that the euro will strengthen over the dollar in the long-term, as stronger U.S. inflation rates at home should weaken the dollar. Generally speaking, a country with higher inflation typically sees their currency depreciate relative to their trading parters, as competitive conditions are compensated and a longer-term equilibrium is established in the market. Conversely, a country with lower inflation is reflected with a strengthening currency, as its purchasing power increases relative to other currencies.  
What Dornbush's model simply represented was the actual road that markets more typically traveled on their way back to a long-term equilibrium, after shifts were made in monetary policy that most economist at that time (1976) more likely approached from an efficient market theory perspective. Today, throw in a dash or heaping spoonful of Soros's reflexivity and the active and visible hand(s) of our monetary stewards - and that cliff in the road can ironically extend well below the rational expectations of most (ourselves included). 
Adding significant fuel to the fire over the past year has been expectations in the market that the Fed will need to begin raising rates, with most participants relying on recent Fed tightening cycles for comparative market contours and guidance. Similar to the compensation in the currency markets from the ECB's crawl towards QE over the past year, the expectation that stronger U.S. growth will at the very least require the Fed to raise interest rates before the ECB - made dollar assets extremely attractive and focused capital flows, further motivating the overshot that nearly delivered parity in the euro dollar exchange rate from around 1.40 last May. 
Although we continue to believe that it's grossly misguided (see Here) to expect a similar magnitude tightening regime from ZIRP as there was in recent (~past thirty years) cycles, the drawn out nature of the Fed's now painfully transparent march/stumble towards normalizing monetary policy, has provided an enormous window for participants to build flows and expectations in. While we believe their bark is much bigger than their bite when it comes to actually tightening, the dollar has followed - as it has in the past (and as Dornbush's model would imply), in over-compensating with strength during this prolonged and relatively esoteric expectation phase. 
What happens to the dollar when the Fed actually begins to tighten? If past is prologue - and which we expect will ultimately be a significantly less aggressive tightening/normalizing cycle (but obviously still enacted relative to the extremely low inflation rates within Europe); the dollar should depreciate as a long-term equilibrium is re-established which reflects the inflation premium present in the U.S.. As shown in the Figure from Neuberger Berman, the dollar has strengthened in the previous four cycles during the expectation phase of tightening and typically begins to weaken even before the first rate hike is made by the Fed. For traders, this dynamic is commonly described as buy the rumor - sell the news; however, these days with the expectations of tightening beginning to modulate with U.S. economic growth, we think the reality may become: buy the hype - sell the bluff. 

All things considered - and as we described in recent notes, the concentrated flows and behavioral biases taken up over the past year in the respective trends of the euro and dollar, has pushed the U.S. dollar index to a relative performance extreme, arguably last witnessed at the secular peak in the index in February 1985. In our opinion, despite the retracement rally in the U.S. dollar index this week, the extreme overshot in the euro dollar exchange rate may now be in the markets rearview mirror, which should go a long way in engendering a rising tide in inflation expectations, as the markets work their way back to a longer-term equilibrium.
From our perspective, assets positively impacted by rising inflation expectations, such as - precious metals and oil, should outperform, with retracement declines susceptible in the government bond markets. With German 10-year bunds yielding less than 0.2 percent - while Germany's core CPI is expected to come in ~ 1.1% this year, it seems safe to speculate that the move in bunds has also lived up to expectations of Dornbush's overshooting model. The same could be said with oil, although you would be hard pressed to read as much in the financial media - which has continued to gravitate towards the fundamental supply side of that story, rather than the inherent denominating calculus in the currency markets that appears far more consequential to the price of oil today. 

In either example, both German bunds and oil have witnessed market extremes (scarcity and oversupply) affected by the same overshooting dynamic, that we suspect will be normalized over the course of this year - as both assets work their way back to a longer-term equilibrium. 
         “If the ECB needs to execute the full                          “We don’t have much room left, but
         program, it is going to be challenging                          we’re still answering the phones,” 
         if it stays like this,” said Elie El Hayek,                       says Mike Moeller, who manages 
         global head of rates and credit trading                         the company’s Cushing tank farm. 
         at HSBC. “There are not enough long-                       “Not everybody who calls is going
         term bonds unless there is a short-term                         to get space.” Oil Storage Squeeze
         selloff.” ECB Bond-Buying Program                          May Lead to Another Price Crash
         Could Hinge on German Debt Supply                        - Bloomberg 3/12/15
         - WSJ 3/30/15

Just how extreme was the move in yields in Europe? What took Japan over six years to travel, Germany exceeded in 16 months. A markets fundamentals were significantly overruled and overshot by profound shifts in monetary policy. Despite the conventional market wisdom now built around these relatively short-term moves, like Dornbush's model would suggest, we expect these assets to rebound/retrace back to their new long-term equilibriums; which in the case of the euro dollar exchange rate, oil and German 10-year yields - is likely substantially higher than current market conditions reflect.  

Tuesday, March 31, 2015

The Great Titration Continues

Over the past two weeks, China's Shanghai Composite index shattered overhead resistance (see Here) - tacking on another ~10% to its already prodigious returns for 2015. To date, the SSEC is up roughly 85% over the past year, with the vast majority of gains realized since last July. To put it mildly, China's equity markets have been set on fire, trouncing world indexes that has seen the S&P 500 tread water over the past four months. 

Consequently, the SSEC's steep trajectory has resulted in growing skepticism by those who have either a) looked for a crash in China to no avail over the past several years or b) simply expect that what goes up must come down. Our general perspective, however, remains that the breakout in China is real - and there's more than just ephemeral speculative spirits behind the move. 

The fine folks at BCA Research had a nice piece up on China yesterday (see Here), which hit on a number of the key factors greatly impacted by the significant move in their equity markets over the past year. We highlighted the main points below with emphasis on their parting statement.

  • Rising stock prices increase household wealth and boost confidence, which in turn supports consumer demand. 
  • The numbers of investor accounts in the Shanghai Stock Exchange recently hit 125 million, almost triple the level in 2007 during the previous equity mania. 
  • This amounts to over 16% of the urban population, compared with a mere 6% eight years ago.
  • Consumer confidence has surged to its highest level in recent years, a highly unusual development considering the weak growth environment. 
  • Rising consumer confidence will eventually benefit retail sales.
From policymakers’ perspective, however, a much more important consideration is the funding mechanism of the stock market. - The Feedback Loop of a Bull Market - BCA Research Blog


From our perspective, the recent surge in investor participation in China should be received with less speculative skepticism and more as a positive quantifier that the potential for the economy can transition from being driven solely by exports and infrastructure construction - to a greater capacity for domestic growth and consumption. 

With their equity markets acting as a wealth transmission mechanism to a growing percentage of the population, the great titration from communism to capitalism continues. While we wouldn't be surprised to see a modest short-term retracement decline, considering the outcome and proportions of the historic breakout pattern - as well as the discrete traction and growing confidence from President Xi Jinping's major reform initiatives, we believe the potential in Chinese equities remains substantial.

For further reading on this idea and concept, see:

Tuesday, March 24, 2015

Old School Currency Parables

And the LORD commanded the fish, and it vomited Jonah onto dry land. - Jonah 2:10

Delivered from the swirling seas of U.S. dollar strength, the euro rose sharply over the past six sessions - roughly up 4.25% through Monday's close. And although it's just a blip on the 11 month downtrend that saw the euro lose nearly one quarter of its value, the winds have shifted for the moment in the currency markets with all the wrath and fury of Old Testament scripture. 

A few weeks back, we carried a nautical theme through the story of Jonah (see Here), speculating that the currency markets were poised for significant trend reversals - with a technical set-up in the yen similar to the upside reversal in the summer of 1998. Two weeks ago, the yen was flirting below long-term support as the currency tested the lows from early December. While the subsequent upside move in the yen (~1.25%) has been weaker than its European counterpart, it currently resides above long-term support and is positioned going into the end of the month with similar positive strength and momentum divergences - with the lows from last December. 
Considering our long-term read of the dollar (see Here), the structural and pattern similarities with the yen - circa August 1998, dovetails into a general reflationary thesis that would be driven on the back of broad dollar weakness. As mentioned in the past, the yen has exhibited strong positive correlation with the trends in precious metals over the past four years. At this point, we suspect this relationship would maintain correlation and continue to look for gold and silver to lead the respective reflationary pivot in assets most closely tied to rising inflation expectations. 
Over the past few months - where we have expected to see a correlation shift, is between the extreme negative correlation between the yen and the Nikkei. Overall, this longer-term reversal has started to materialize, with the yen treading water over its December low - while the Nikkei has rallied another 10%. Although we suspect it will be sawtoothed moving away from the correlation extreme, we still believe both assets will trend together over time for a spell. Our 1987 Nikkei comparative continues to be an excellent guide towards future expectations in the Nikkei - as it has been over the past year. 

Sunday, March 22, 2015

Size Matters & Their Estimates are Still Too Damn High

With the U.S. equity markets continuing to make and trade near their all-time highs, and as the U.S economy further distinguishes itself as the best street in an otherwise downtrodden neighborhood, it's easy to get lost in the minutia of yet another Fed meeting deliberating a strong dollar and future rate hikes - and forget where we currently reside in the trough of the long-term yield cycle and the considerable history that brought us to this point. Looking back at the span of the broader cycle, you'll find it was a period in history that encompasses 70+ years of remarkable growth - the last 30+ of which were traveled with increasingly benevolent credit conditions, in which the U.S. has enjoyed elevated equity market valuations on the back of a proportionately massive secular downdraft in yields. 

Click to enlarge Figures
Figure 1
Historically speaking, the significant investments and advancements in the world economy that took place directly after World War II, helped drive growth - inflation and eventually yields to such icarus heights, that countries, corporations and individuals have enjoyed the voluminous book-end benefits of a declining rate environment for well over 30 years. Comparatively, the secular peak in yields in 1981 was over three times as high as the previous secular peak in 1921 - and the broader span from trough to trough of the current move (1941-2021' ~80 years) will likely be over twice the previous cycles length (1901-1941'). Simply put, there's a lot of debt out there in the world. Raising rates here at home in the U.S. will have significant knock on effects throughout the financial markets - especially if the balance of the world is aggressively easing monetary policy. Believing that the broader system can normalize and reboot to the next long-term cycle without a prolonged period of transition (i.e. some call it secular stagnation - we like transitional divide) - even proportional and commensurate with the previous trough, is illogical even along the irrational continuum we often find ourselves walking out on. 

The underlying takeaway for us, is that participant expectations - as well as most members of the FOMC, have found themselves significantly ahead of reality when it comes to the prospect of rate hikes. This has been one of the main drivers of the dollar's moonshot over the past eight months, which has been motivated by persistent expectations of a more traditional tightening regime normalizing policy (as it has in recent past), while the rest of the world opens their monetary spigots. Over the past two years, by the FOMC's own telegraphed forecasts to the market, they have speculated that short-term rates would rise above ZIRP to around three percent by 2017. In our opinion, this outcome remains exceedingly optimistic when you consider the long-term yield cycle and what we can glean about the trough from the previous cycle.

Figure 2
Over the past four years since we first started sharing our thoughts on the market, we've commented on the relative symmetrical retracement in yields from their secular peak in 1981, extrapolating a mirrored projection that has rightfully guided our future expectations of lower for longerMany times, complexity can be distilled with a simple solution or explanation. Einstein's genius frequently displayed this kind of elegance. "It is the theory that describes what we observe", he said - and his theories were as elegant as his understanding brilliant. Along those lines, although admittedly less brilliant (but certainly simple), we've observed great symmetry in the rise and return of the long-term yield cycle, with the basic theory that the return would be commensurate with the rise - as markets and economies wrangled with the complex and interconnected webs of their respective credit and growth cycles. 
Figure 3
Figure 4
Interestingly, the relative symmetry represented in the current yield cycle is not unusual and quite characteristic when you look back at history. The previous cycle (from trough to trough) spanned 40 years to the month; a period in which yields rose for 20 years - followed by a 20 year decline. Unlike the current downtrend in yields that has trended to the trough with increasingly more symmetry with the mirrored rise in yields from 1941 to 1981, the previous cycle exhibited an asymmetric return below the 1901 lows, as economies pushed up against the limits and unbalances exposed and magnified during the great depression - and markets stumbled their way across the transitional divide to the next growth cycle. 
Figure 5
When we approach future market expectations from a comparative perspective of low yields facilitated by extraordinary monetary policies following a financial/debt crisis, you arrive at a similar appraisal with the mirrored return profile - in that yields will be low for the foreseeable future. Even for long-term investors, patient may well prove to be an understatement when it comes to the length of the broader cycle's trough. As shown above in Figures 3 and 4 - and especially evident below in Figure 6, the historic profile of the previous trough throws cold water on expectations that the Fed will be capable of raising the fed funds rate to ~ 3 percent by 2017 - or even 2027. Moreover, if our theory that the broader cycles "size matters" and influences the proportions of the return, it should be noted that the previous trough in yields followed a significantly smaller secular peak and cycle. All things considered, while they may look to raise rates marginally off ZIRP over the next year, expectations are still too damn high with respect to the magnitude of the potential move. Nevertheless, as mentioned in previous notes and implied by the mirrored return and historic analogs, we would still estimate that risk over the intermediate-term is for higher yields. The difference, however, is that we do not expect a sustained move higher - and would look for a trough range to continue to develop, with a mid-point ~ 2.25% for the 10-year. 
Figure 6
In many ways - although the Fed likely had good intentions at the time and was dealt a very difficult hand to play, their increasingly transparent policy approach with the market appears to have severely limited their capacity to act - as misplaced as it may be these days. With the majority of the worlds largest central banks continuing to ease aggressively, while rate hike expectations in the U.S. remain steadfast, the dollar has reached a level in such a short period of time that it now limits the Fed's ability to tighten without causing serious dislocations and distortions around the world - that would inevitably reach back with known and unknown consequence in the U.S. Although the consensus opinion in the market is that the dollar is on a secular updraft that could continue for years, considering the strong ties of globalization that bond us with the world and proportions and profile of the long-term yield/growth/debt cycles - in our opinion, those expectations are as misplaced as looking for a secular rise in yields today.  

As mentioned in previous notes, we expect the dollar to once again modulate and follow last years move in yields back down into the trough of its long-term range, as expectations come in with regards to the magnitude and timing of potential rate hikes and as markets slowly transition and stumble their way across the transitional divide to the next growth cycle. Despite it's current disposition - and contrary to popular opinion in the market these days, we expect lower for longer will eventually apply to the world's primary reserve currency as well. If not, the Fed's haunting specter over the past two decades - that of deflation, will eventually drift over onto our shores. That said, we suspect it will be more of a push and pull with cyclical inflationary and disinflationary moves across the transitional divide, with the markets currently situated for another reflationary upturn. 

To a large degree this relies on the trend of the two largest reserve currencies in the world (dollar/euro), which from a long-term performance perspective of its proxy (U.S. dollar index) - is almost as stretched as it was at its secular peak in February 1985. 
Figure 7
Similar to the relative performance extreme registered in 10-year yields at the end of 2013 (which was also the closest move from a relative performance perspective with its secular peak in 1981), the USDX may be poised to complete a more symmetrical retracement of the potential blowoff move in the dollar that began last spring. If so, Treasury Secretary Lew's  "strong dollar/strong U.S" will be just a faded memory come Christmas and a potential foreboding premonition for what has been leading strength in U.S. markets over the past several years. 
Figure 8
Figure 9