Tipping Point

“There’s an invisible tipping point – when we get there, it’s far too late.”

-Seth Klarman

 

Seth Klarman founded the Baupost Group in 1982 and runs north of $22B.  He’s done a better job than most managing risk out there over the course of the last 30 years – one of the hallmarks of his risk management strategy is doing nothing.

 

“I’m convinced, and have done this over the years, to invest in cash when there is nothing else out there that excites me. Cash is risky too, but less risky than making an overpriced investment.”

 

I pulled these two quotes from a Klarman transcript that was making the rounds in recent weeks. One of our sharpest clients sent it to me after a dinner I hosted in NYC where we had a lively Portfolio Manager debate about the only question that matters to the institutional investment community right now – when does the Fed’s music stop?

 

Whether it was in a New York restaurant or the meetings I’ll be doing in Boston today, I’ll be having the same discussion. Sophisticated investors get that this won’t end well for America – the only thing between now and “when we get there” is daily performance.

 

That only thing is a pretty big thing. The institutionalization of our industry has put short-term performance chasing in the hot-box of misunderstood market tail risks that remain. It’s omnipresent. It’s invisible – but it’s there. And after the next market crisis, you’ll be able to see it very clearly.

 

Presidents Bush and Obama don’t get how globally interconnected markets work. Neither do the Treasury Secretaries and Fed Heads that have advised them. When the entire game is all about gaming the game, sometimes the government guys who are being gamed forget that…

 

Now some people who think Hank Paulson and Timmy Geithner are “smart” will take issue with that – and that’s fine. Most of these people have never traded a market in their life – and if they did, they’d know that being smart doesn’t give you a birthright to being right.

 

This is where I think both the President of the United States and whoever is left in terms of his economic advisors have made some grave mistakes in the last few weeks. Market risk is all about expectations. They have set up both the catalysts and the fundamentals for a US Dollar crash.

 

Crash? Yes, Mr. President, get all the “smart” central planners of your economic universe to unite in Washington – and ask them what happens to a market and an economy when that country’s currency crashes. Oh, wait – the rest of the world is already trading ahead of you on this. As the US Dollar was crashing in Q2 of 2008, the petro priced in dollars went to $150/barrel. Then US Consumption crashed. Then Paulson puked.

 

Is the US Dollar going to retest those lows? Does the President want to experiment with that? Does the bubble in Big Government Intervention need a US currency crisis to get out?

 

Here are the market’s expectations and calendar catalysts:

  1. May 16 – thanks to the market expectation genius of Geithner, that’s the date he gave the world on US debt default
  2. June – last night President Obama outlined “June” as his “deficit deadline”
  3. July 1 – The Bernank is out of bullets (end of Quantitative Guessing II)

Nice. Since all of these professional politicians want to go grandma and children on me now every time they talk about America’s spending future, who in the high-schools of central planning decided to put all of our moms and kids on the trolley tracks for both the biggest monetary and fiscal policy showdowns in US financial history in the same 6 weeks?

 

You can say what you want about the politics of it all. You can say to yourself that The Inflation born out of burning our currency at the stake isn’t there. You can say whatever you damn well please. But the market price says all you need to know right now – it doesn’t lie like our politicians do.

 

Fed fans, don’t worry. These guys are on it. One of the cheerleaders of Big Government Intervention and easy money, St Louis Fed Head James Bullard, had this to say last night on the risk management matter of the June date that he helped impose as a market expectation:

 

“This is very much a live debate within the Federal Reserve. There is a lot of uncertainty about the optimal way to proceed as we haven’t been in that situation.”

 

Awesome. We’ve never done this before so we have no idea how it ends – so we’re talking about that “live” now because it’s almost May.

 

Sleep tight everyone.

 

My immediate-term support and resistance lines for the SP500 are now 1310 and 1327, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Tipping Point - Chart of the Day

 

Tipping Point - Virtual Portfolio


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more