People Minimize Debt

“Unlike neoclassical macro theory, which assumes that private-sector corporations are always maximizing profits, it assumes that some companies may respond to daunting balance sheet damage by minimizing debt.”

-Richard Koo


I’m in the middle of reading Richard Koo’s revised edition of “The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.” The aforementioned quote summarizes Koo’s thoughts on what he coined in another book as a “Balance Sheet Recession.”


This morning, ahead of this Greek confidence vote, I want to do a little extending and pretending of my own with Koo’s conclusions – you know, just to get the intellectual juices going.


Let’s pretend for a moment that the American Consumer is Koo’s “private-sector corporation.” Then, let’s extend ourselves into the fictional land of nod and go as far as to assume that people, instead of companies, minimize debt when you scare the hell out of them.


I know, I know. This Mucker guy is coming up with some radical economic theory over here on the east side of Yale’s campus. But, seriously, I didn’t need to get into this academic institution to be told how to think.


Lessons from The Greek Gong Show: America needs to re-think, re-learn, and re-consider what makes this economy tick. It’s not that complicated. First, we need to stop what we are doing and get back to the basics of human behavior.


Behaviorally, if you want to scare the hell out of people, just fear-monger about “Great Depressions.” That’s Bernanke’s bailiwick. That’s why Washington loves him. That’s why he was appointed by a modern day Republican and cheered on by a modern day Democrat.


Modern day Western economics are partisan. Both Republicans and Democrats pin their hopes on Keynesian economists. Hope, alas, is not a long-term risk management process. Both Bush and Obama had to learn this lesson the hard way. Bernanke’s “confusion” and “frustration” with the economy is finally breeding contempt.


As Koo appropriately notes in the Preface of his 2009 Edition of “The Holy Grail of Macroeconomics”, “I realized that no constructive discussion could occur until I proved that some of the “lessons” from the Great Depression that underpin their views are themselves wrong.”


Koo’s realization is an extension of Nasim Taleb’s idea of a “Narrative Fallacy ( “The Black Swan”, 2007), where Taleb alludes to humans having a propensity to build stories around facts.


The fact of the matter is, and I’ll say this for a 3rd time this morning, when you scare the hell out of them, People Minimize Debt.


Again, people are different than countries – particularly socialist ones. Only a moron would look to solving his or her solvency problems by Piling More Debt Upon Debt, like Greece, Japan, and America have.


Back to this morning’s reality show of extend and pretend, here’s what the Fiat Fool in Chief of Greece had to say this morning ahead of the Greek confidence vote:


“We are determined as a country, as a government, to be on track with the program, to move forward, to do what is necessary, in order to put our country into a fiscally much more viable position.”


Seriously. This guy is serious about maximizing debt until he blows his country’s balance sheet, bond, and stock markets to smithereens.


Global Markets are obviously very nervous about lying Greek politicians. Never mind what the Greek stock and bond markets do today. Don’t forget that the Greek stock market was down -35.6% in 2010 and has crashed, again, down another -27% since rallying to lower-high in February 2011. Markets discount future events.


What got us here is something I have been writing about since 2007. What is going to get us out of it isn’t doing more of what’s imploding the Greek, Portuguese, and Irish markets – Politicians Maximizing Debt.


In the meantime, the entire world is watching and Global Growth Is Slowing. This is largely a function of people being afraid. In the real world, confidence matters.


That’s why US demand for mortgages, stocks, and commodity exposure is falling. That’s why US stock market volumes have been bone dry on this 3-day rally to lower-highs. It’s the Debt Maximization Experiment of the Keynesians, stupid.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1 (we remain long GLD), $91.29-97.63 (we remain on the other side of the Goldman Oil Bulls), and 1 (we have no position, but a bearish bias at the top end of the 1291 range).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The Macau Metro Monitor, June 20, 2011




In response to the report on ownership change in Macao Studio City (MSC), the Office of the Secretary for Transport and Public Works reiterated that the MSC project should be strictly consistent with the government's revised development plan in 2008 and that should include film production projects.  It added that the transfer of shares needs to be handled according to the local laws and that Macau needs to modify some laws to meet social development.



Passenger traffic at Singapore's Changi Airport grew 11.3% YoY and 1.1% sequentially to 3.77MM in May.


Composite CPI for May 2011 increased by 5.19% YoY and 0.66% MoM.  The price index of Recreation & Culture decreased by 1.26% on account of lower charges for outbound package tours.


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Malcolm Knapp released estimated casual dining comparable restaurant sales for May yesterday.  This data point will likely ease investor fears of a slowdown in Q2 after preliminary April data released by Knapp in May indicated a slowdown in casual dining trends. 


Estimated comparable restaurant sales growth in May was 2.2%.  Final April comparable restaurant sales growth was +1.5% (versus the prior estimate of +1.6%).  The sequential acceleration from April to May, in terms of the two-year average trend, was +50 basis points.


Comparable guest counts for the casual dining industry, according to Knapp Track, grew +0.4% in May on a year-over-year basis.  The final April guest counts growth number was -0.1% (versus the prior estimate of +0.2%).  The sequential acceleration from April to May, in terms of the two-year trend, was +15 basis points.


While our last Knapp Track data update took somewhat of a bearish stance, supported by gasoline prices, retail sales data, and increasing uncertainty, this month’s data is slightly more positive on the margin.  Gasoline prices have come down for the time being and it seems that casual dining comps were better in May based on the preliminary data.  Gas prices are still elevated, however, and with the possibility that operators may have to take price to protect margins absent a meaningful and near-term decline in commodity prices, the outlook for the summer is less than certain.  I still favor CAKE on the short-side; management’s guidance on commodity costs is too low for the back half of the year and the Street’s expectations need to come down.  The company should meet expectations, however, in 2Q.  CBRL is the obvious candidate on the short-side if one believes gas prices are set to bounce higher from here.  However, gas prices are just one aspect of my own bearish stance on CBRL, a concept that I think is clearly suffering from mismanagement and is in secular decline.



Howard Penney

Managing Director

Run Rick Run

Conclusion: Texas Governor Rick Perry seems to have the hot hand in the race for the Republican nomination, but his emergence verifies our continued belief that this is a weak and poorly organized field of candidates.  This bodes positively for President Obama’s re-election efforts.


This weekend, two-term Texas Governor Rick Perry spoke at the Republican Leadership Conference in New Orleans and according to reports, he brought the house down.  Governor Perry drew a sharp and partisan line between the political left and right that played well with his audience.  The three key themes of his twenty-five minute speech were the need to cut government spending, cut government interference, and to, generally, get the United States back on track.  It should be no surprise that Perry received favorable reviews after this speech, as he himself said, “I’m preaching to the choir here. I understand.”


This speech capped off a strong month for Governor Perry in terms of perception of being a legitimate presidential candidate.  While he isn’t yet making a serious dent in national polls and hasn’t yet participated in candidate debates, he has seen a startling move on the InTrade Republican nomination futures market.  We’ve posted the chart of the futures contract for whether he will gain the Republican nomination below.  In the span of one month, this contract has gone from being priced below $3, to a current price of $18.80, so an effective increased of likelihood of his getting the nomination from 3% to almost 19%.  This has occurred despite the fact that he has not officially entered the race.  Interestingly, according to InTrade Perry has almost double the chance of receiving the nomination versus Governor Pawlenty of Minnesota.


Run Rick Run - 1


The rapid ascent of Governor Perry, at least on this measure, verifies the obvious challenge to Republicans in this electoral cycle, which is that they do not have a candidate, or candidates, that will clearly drive the Republican base.  While former Massachusetts Governor Mitt Romney is currently the front runner in many polls, and according to InTrade has a 32.5% change of obtaining the nomination, his position remains precarious as front runner. 


In the broader polling data related to the Republican Presidential Nomination at Real Clear Politics, the RCP averages for the Republican nomination show a similar story.  That is, a race that is poorly defined with no real front runner.  While much of the data is about a week old, Romney still leads with 24.4% of those polled saying they are going to vote for him in the primary.  Interestingly, his two closest competitors, Sarah Palin and Rudy Giuliani, at 16.0% and 11.0% respectively, haven’t even declared they are running for the nomination.  We’ve posted a summary table of these polls below.


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Currently, if the advisors of any Republican candidate are concerned, it would have to be those of Romney.  In effect, Romney has been running for President for well over  six years, has substantial name recognition advantage over the competition, and, clearly, has a much more developed fundraising network.  Despite these advantages, Romney still has only a narrow lead over the field.  As well, the recent visibility of Governor Perry provides support to the idea that Romney remains very vulnerable.


Some political strategists that we are in contact with have suggested that Governor Perry is just what they Republican Party needs to defeat Obama.  Perry is a motivational and fiery speaker, has strong views related to the minimal role of government, has a largely successful track record as Governor in Texas, and has the social conservative credentials that will aid him immensely in the Republican primaries. 


President Obama is going to have a very difficult time defending the economic performance of his administration.  More than anything else, perhaps the best proxy of this is the misery index. The misery index is basically a combination of unemployment and consumper price inflation and hit a 28-year high last month.  We have an index that measures a similar dynamic called the Hedgeye Inflation Index, which is posted below.  Specifically, this index measures the delta between what people pay versus what they make.  Collectively, both of these indices show that that average American isw getting squeezed.  It is likely that by September 2012, there will be limited improvement of these measures.  So, to the extent that President Obama can shift focus away from the economy, he stands a much better chance of gaining re-election.  In theory, a candidate such as Rick Perry would open that door for President Obama.


Perry has two characteristics that may not aid in his ability to win a general election for the Presidency.  First, he is extremely socially conservative.  He opposes all legal recognition of same sex marriage.  In addition, he is pro-life and has opposed government funding for elective abortions.  Much of this is underscored by his evangelical faith, which has led him to, among other controversial decisions, encourage the teaching of intelligent design in schools.  Second, Perry has been a strong advocate of State rights, so much so that he has mused publicaly about Texas seceeding from the Untied States.  As he said on April 9, 2009:


“I believe that our federal government has become oppressive in its size, its intrusion into the lives of our citizens, and its interference with the affairs of our State. That is why I am here today to express my unwavering support for efforts all across our country to reaffirm the States' rights affirmed by the Tenth Amendment to the U.S. Constitution. I believe that returning to the letter and spirit of the U.S. Constitution and its essential 10th Amendment will free our State from undue regulations, and ultimately strengthen our Union.”


Collectively, these views are increasingly out the mainstream believes of Americans. 


This, of course, is a short and nuance summary of some of Governor Perry’s more controversial stances, but they are important to consider especially given the positive response Perry has received.  In a short period of time, he has become a legitimate Presidential candiate.  The question remains: which party wants him to run more?  Just perhaps, there are a few Democratic strategists out there who are saying, “Run Rick Run”, as well.  If nothing else, it will certainly elongate an already muddy Republican primary.


Daryl G. Jones

Managing Director


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