Suffocating Stagflation

This note was originally published at 8am on January 31, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It’s nice and breezy here. In Cairo one suffocates.”

-Hosni Mubarak

 

Suffocating your citizenry with stagflation is apparently a problem; particularly when that citizenry is young, hungry, and unemployed. By definition this is the Egypt you are seeing on your flat panel TVs today.

 

Hosni Mubarak  became the 4th President of Egypt in 1981. While this may be a very old country (established in 3100 BC), this 21st Century Social Revolution is being driven by the very young. Almost two-thirds of Egyptians are under the age of 30 years old , and of the 79 million people who live in Egypt, approximately 40% of them live on less than $2 a day.

 

The Egyptian government has been telling its people that inflation is currently running around +12%. The people of Egypt obviously don’t believe that. They shouldn’t. However they do believe that the country is running double-digit unemployment. They don’t have jobs.

 

Captains of Keynesian Big Government Intervention don’t use the word ‘stagflation’ very much for a reason. The last time these bubble makers plugged the world with stagflation was in the mid-to-late 1970s. That’s when US Federal Reserve Chairman, Arthur Burns, was attempting to monetize America’s debt as President Jimmy Carter bet that it would not create any globally interconnected risk. Sound familiar?

 

At Hedgeye, we call it stagflation when real-world inflation readings are growing faster than economic growth. Even if we were lemmings enough to believe the Egyptian government on a +12% inflation number, that would be plenty enough to justify calling this situation for what it is. Egyptian GDP is only running +5% at this stage of what Groupthink Inc. in Davos, Switzerland would have you believe is an “emerging market boom.” It’s sad.

 

We’ve been berating this point for the last 6 weeks, because it’s time. It’s time to recognize what America’s debauchery of the US Dollar is doing to global inflation. If US monetary policy makers are still in the camp of the willfully blind and want to believe there’s no real-world inflation out there because The Ber-nank’s conflicted and compromised calculation of CPI says so, Godspeed having the world agree with them on that.

 

And for all of the Fiat Fool fans who are still out there cheering this on because it’s good for the inflation in our portfolios, here’s some global starvation math we can’t hide from – immediate-term inverse correlations between the US Dollar Index and 3 major global food prices:

  1. Corn = -0.91
  2. Rice = -0.90
  3. Wheat = -0.85

Those are extremely high (and alarming) correlations. So the next time someone tells you that the US Dollar and the policy that backs it doesn’t matter to the price of the #1 food staple for 3 BILLION of the world’s people (rice), forward them the math. Risk managers like me wouldn’t be perpetuating higher food prices by trading them with a bullish bias if we didn’t fully expect American policy makers to let its currency burn.

 

Burning Bone? Pull up the chart. The US Dollar Index is down for 4 out of the last 5 weeks and down almost 4% since the 1st week of January.  Chaos theorists don’t have to look very far to find that incremental grain of sand that tipped the Egyptian pyramid of risk into turmoil. This is what you get when you debauch the world’s reserve currency. Global Inflation is a policy – and it’s priced in US Dollars.

 

Inflation kills emerging markets. Inflation kills bond markets. These are historical facts and they are also reflected in last week’s bearish price action in emerging markets:

  1. Egypt = down -15.7%
  2. Chile = down -4.2%
  3. Turkey = down -4.1%
  4. Brazil = down -3.5%
  5. India = down -3.2%
  6. Thailand = down -2.5%

We’ve been writing about Chinese Growth Slowing As Inflation Accelerates for the last few months as well. Chinese Equities, at down -2% for the YTD, are now OUTPERFORMING 15 other country equity markets, including all of the ones on this list. Inflation’s contagion is broadening its base.

 

Stagflation doesn’t just stop when a politician tells it to. Stagflation is sticky. Since The Ber-nank opted for Quantitative Guessing (QG2) with his fear-mongering friends in Jackson Hole, WY, the 19 commodity component CRB Commodities Index has inflated by +27%.

 

While that may be up less than what US stock market volatility (VIX) is up in the last 2 weeks (+29%), that’s still up a lot – and we think that both globally interconnected markets and the people living in this world outside of Washington, DC have noticed.

 

Since the beginning of 2011, given our outlook of Global Growth Slowing as Global Inflation Accelerates, I have not been bullish on stocks or bonds in general. That’s why I have such a large asset allocation to Cash. Last week, I raised my Cash position to 67% versus 61% at the end of the week prior. I’ve sold all of our oil and German equity exposures (and there are no rules against buying them back).

 

The updated Hedgeye Asset Allocation Model is as follows:

  1. Cash 67%
  2. International Currencies 21%
  3. US Equities 6%
  4. Bonds 6%
  5. Commodities 0%
  6. International Equities 0%

Again, this isn’t an asset allocation model for a fund mandated to be fully invested. This is where I’d be positioned as an individual or family who has made positive absolute returns in all 3 of the last 3 years. We’ll have plenty of opportunities in the coming weeks and months to buy things on sale.

 

My immediate term support and resistance levels in the SP500 are now 1273 and 1288, respectively. On Friday, I covered my short position in the SPY and moved the Hedgeye Portfolio to 8 LONGS and 7 SHORTS. I’ll continue to trade US Equities with a bearish bias provided that we don’t see a close above 1288 in the immediate-term.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Suffocating Stagflation - EGY


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more