“It is seldom that liberty of any kind is lost all at once.”
I shifted reading gears this weekend from Lincoln (“Team of Rivals”) and Bastiat (“The Law”) to Jefferson (“Undaunted Courage”) and Hayek (“The Road To Serfdom”). From a research perspective, I think it’s important to draw on history’s lessons in order to contextualize where we might be going next. While socialist leanings have impregnated our economic policies, liberty has not yet been lost.
Inasmuch as it was critical for investors to consider alternatives to Big Government Intervention strategies of the 1970s, it most certainly is now. If you didn’t know that Debauching Dollars perpetuates The Inflation, now you know.
Before I start digging into some of F.A. Hayek’s thoughts in “The Road To Serfdom”, let’s take our noses out of our text-books and consider some real-time market prices – here are some of the major week-over-week moves in Global Macro from last week:
There were obviously many other moves across global asset classes (i.e. global bond yields rising alongside inflation expectations) that mattered as well, but as a Chaos Theorist my job is to deliver you the deep simplicity of the point.
The point is correlation risk to the price of the US Dollar. That’s why I started with Currencies - because that’s where policy lives. The Inflation is an American policy. Whether The Bernank and Timmy Geithner want to be willfully blind to this or not, their monetary and fiscal policies are driving inflation through a US Dollar devaluation.
Not everyone agrees with this assessment. Not everyone likes being held accountable either. But if Americans want to tell the world with a straight face that Serfdom’s Road is the best path to prosperity – the rest of the world is just going to keep walking further and further away.
F.A. Hayek was not a fan of socialism or centrally planned economies. Neither am I. He wrote this many moons ago (1944) about “free markets”, but I think it’s worth re-reading, slowly – “the freedom of our economic activity which, with the right of choice, inevitably also carries the risk and the responsibility of that right.”
Never mind the privilege associated with giving one currency (USD) the “reserve currency” right. Never mind one man (The Bernank) abusing that right. There are risks and responsibilities associated with all that is a “free market” to begin with. Without accepting these risks and responsibilities at face value, President Obama, you are starting to blur the lines between political and economic freedom.
The good news here is that Americans are going to have this debate about Big Government Intervention, debts, and deficits out loud for the entire world to see. If you listen to Harry Reid or John Boehner long enough, you might say that’s really bad news too – but transparency is progress – if only it reveals how ridiculously politicized our economic policies and planning have become.
Hayek’s spite for central planning was born out of watching the Germans debauch and devalue their way to hyperinflation (1920s) and new left-leaning ideas coming out of Britain in the 1930s (Keynes).
“Hayek cited the new enthusiasm for socialist planning in Britain as an example of such misguided ideas. The economists who had paved the way for these errors were members of the German Historical School, advisors to Bismarck in the last decades of the 19th century.” (Hayek, “The Road To Serfdom, page 4)
I’m not a Keynesian. I’m not an Austrian. I am Canadian American. And I am looking forward to engaging in this generational economic debate. Is America going to entrench herself in a Hamiltonian posture of federal controls? Or is America going to revive her individual freedoms embedded in a Jeffersonian resolve?
I don’t know the answers to these questions. But I do know the risk management that will be required in taking either of these paths. The path to the dollar devaluation of the Keynesian Kingdom leads to Serfdom’s Road. And while I doubt I’ll feel that personally, the 44 million Americans on food stamps who are out there fighting The Inflation policy every day, sadly, will…
My immediate-term support and resistance lines for the SP500 are now 1320 and 1339, respectively. On a week-over-week basis I drew down the Cash position in the Hedgeye Asset Allocation Model last week to 40% versus 43% in the week prior. My allocation to US Equities is now 6%.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on April 06, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Lincoln’s ability to retain his emotional balance in such difficult situations was rooted in an acute self awareness.”
-Doris Kearns Goodwin, Team Of Rivals
I’m still grinding through this American classic, “Team of Rivals – The Political Genius of Abraham Lincoln.” The aforementioned quote from Kearns Goodwin comes from Chapter 23 which is titled, “There’s a Man In It”, which dissects the subtleties of leadership qualities that were uniquely possessed by both Lincoln and Ulysses S. Grant.
It’s an outstanding chapter in American history to reflect upon not only because of its constitutional gravity – “give me liberty or give me death” – but because it reminds us that this country is built on the backs of American character and resolve. What you are seeing from the said-leaders of US Government today looks nothing like it. These pretending patriots remind me more of pigs at a trough than Leaders At The Front.
If Timmy Geithner wants to go moral-compass on me for writing that, bring it. My definition of leadership on the ice, at my firm, and in the community is a heck of a lot different than his, and I’ll stand up and say that to his face. YouTube the man. Watch him mimic the hand gestures of Larry Summers. Geithner doesn’t have a sense of self awareness. He is a bureaucrat - not the leader America needs on the front lines of this US Debt-Ceiling Debate.
As we predicted, the US Government Shutdown and Debt-Ceiling Debate has replaced Japan and the Middle East as top headline news. This “news” is real-time – and the entire world is watching. If we think that we can call Europeans “pigs”, point fingers at other countries for The Bernank’s inflation, and come out of this generational debate about deficits and debts smelling like a rose, think again.
So let’s rethink…
One of Bloomberg’s top headlines this morning = “Geithner Says Failure To Raise Debt Limit Would Trigger a Financial Crisis.” And, expanding upon his leadership thoughts, this is what our squirrel hunting bureaucrat had to add to the global risk management conversation:
“You will shake the basic foundations of the entire global financial system… I’m totally confident that Congress will act to avoid that… It will be inconceivable that lawmakers will not act in time…”
Well Mr. Unaware, conceive reality – this government could (and should) shutdown. During both Bush and Obama’s administrations (you advised both), you worked tirelessly at putting America’s balance sheet in this position. Shame on you for reverting to your go-to move of fear-mongering so that we can do more of what got us into this colossal disaster of fiscal sense. Shame on you Geithner. Shame on you.
I’m neither a Republican nor a Democrat. So instead of looking for an angle on me Timmy, why don’t you take a good and hard long look at what Mr. Macro Market is telling you about your Patriot Pig commentary:
Of course it takes two to tango in Burning The Buck - both a fiscal and a monetary policy central planner. Tag, Bernank and Timmy, you’re it – and either your boss (who has read Lincoln quite closely from what I hear) has “an acute self awareness” of what the American people think about finding fiscal “change we can believe in”, or he doesn’t.
As for the rest of us, Yes We Can.
The most obvious way to make money on this in 2011 has been to be long of The Inflation Policy of the US Government (short the US Dollar, and short US Treasury Bonds). But, Dear Americans and Canadians alike, please don’t confuse our profits with patriotism. There are 44,000,000 Americans on food stamps (all-time high). While a small some of us are getting paid, most of us are getting plugged.
But be careful out there levered-long traders of the risk management gridiron - being long The Inflation Policy isn’t a new idea. Hedge Fund net long exposure to commodities recently backed off its YTD high, but that was an all-time high (which is saying something given how much our industry was chasing commodity inflation in 2007-2008 as The Bernank’s “shock and awe” interest rate cuts delivered us $150/oil). All-time, is a long time…
Interestingly, but not surprisingly, that inflationary period of 2007-2008 also gave birth to the first time that US Import Prices from China were UP on a year-over-year basis. That is, the first time until now – and Americans are going to take this in more places than the pump.
For these reasons, fully loaded with the long-term causality associated with creating them (burning our currency and credibility at the stake), Mr. Geithner it’s you who may very well “trigger a financial crisis.” And, perversely, most modern day politicians of the 112th Congress are longing for more of that.
My immediate-term support and resistance lines for oil are now $106.22 and $109.78, respectively. My immediate-term support and resistance lines for the SP500 are now 1322 and 1341, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP - April 11, 2011
Over night the best performing markets are in the Middle East; Qatar and Kuwait up 1.03% and 0.88%, respectively. The IMF is coming around to the Hedgeye view and has lowered its forecasts for economic growth in the U.S. As we look at today’s set up for the S&P 500, the range is 19 points or -0.62% downside to 1320 and 0.82% upside to 1339.
SECTOR AND GLOBAL PERFORMANCE
We are on day 6 of perfect with 9 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.
CREDIT/ECONOMIC MARKET LOOK:
Treasuries fall as economists estimate that U.S. data will show inflation quickened and Pimco’s Bill Gross set a bet against govt. debt.
MACRO DATA POINTS:
WHAT TO WATCH:
COMMODITY HEADLINES FROM BLOOMBERG:
ASIA PACIFIC MARKTES:
Keith bought PNK in Hedgeye virtual portfolio since it hit his quantitative hurdles and we like the near term earnings outlook.
I was down in Houston for the Final Four (Huskies!) and took a trip out to Lake Charles to visit L’Auberge and the GM of the property. L’Auberge is PNK’s largest property. Our conclusion is that the property may be tracking well ahead of Street’s expectations in Q1 and the outlook for this year is quite promising. L’Auberge should contribute to an estimate-beating quarter for PNK. We'll have a full earnings preview out shortly.
We are currently at $25 million in Q1 EBITDA for the property but that number probably needs to go higher by another $2 million. L'Auberge's Q1 should be a record quarter. While March gaming revenues will be flattish to last year, profitability will be up handsomely due to better cost controls and lower promotional allowances. The current GM replaced the Dan Lee hired GM and has been on the job for only 6 months. From my visit, I’m fairly certain that we are in the early innings of significant improvement at this property.
PNK has gained or maintained market share on a 12-month rolling basis in each property since Q4 2010. In addition, of the regional states that have reported revenues, March has been above expectations. We continue to like PNK and most of the regionals as we head into the Q1 earnings season.
They say that half of all marketing dollars are wasted -- you just don't know which half. Yes, Nike's $2+bn in Demand Creation leaves a lot to play with, but you gotta hand it to 'em, they always seem to come out on top.
Check this out... Go to www.cnn.com. Then click 'Sports', which will have, of course the leading story of the day -- Tiger's raging comeback on the final da of The Masters. Then click on the story, and you get the image below. Why is it that the two names up top -- the two that are sprinting into the final stretch -- each have Swooshes next to their names?
No, it's not because Nike has a crystal ball to only select the best athletes. But it DOES have the organizational process to capitalize on those sports assets whenever the opportunity presents itself. My point here is that Tiger might very well end up losing this one. I don't know and I don't particularly care.
What I do care about is that seeing continued evidence that the strategy is in place to monetize some pretty expensive players. Oh, and by the way, keep in mind that sales of Tiger merchandise never fell off anywhere near as much as his public perception since events from 2-Thanksgivings ago. In fact, at times they were up. The installed base of sales and distribution points remains huge, is likely headed higher.
Does this make me anymore inclined to own the stock today? Nope.
But is the long-term story intact? Absolutely.
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