“They get to see all of my mistakes.”
-Ray Dalio (The New Yorker, July 25th, 2011)
Recent history is marked-to-market. That’s a good thing because it helps us rethink, rework, and learn faster. Modern day multi-media tools from YouTube to Twitter have revolutionized and expedited our quest to find the right sources of alpha. Old Wall Street’s “sources” are either wearing orange jump suits or dying on opacity’s vine.
Per the same New Yorker article that I cited yesterday (“The Machine – How Ray Dalio built the world’s richest and strangest hedge fund”, by John Cassidy at The New Yorker), Ray Dalio has a “rule of radical transparency” that has ultimately shaped the risk management culture at Bridgewater Associates.
Transparency: I like that word; particularly when someone is practicing it out loud.
As a practical matter, I do find it very interesting (but not ironic) to note that two of the most successful Global Macro Risk Managers of our generation (George Soros and Ray Dalio) both started their firms during the mid-1970s. Soros and Dalio hung up their own shingles in 1973 and 1974, respectfully.
What was very unique about the 1970s was that there was this economic reality called The Stagflation. It was man-made by central planners and, ultimately, it ran all of the Keynesians right over. Big Government Interventions that were focused on devaluing the US Dollar perpetuated rising inflation and slowing growth (stagflation).
I’m not sure how either Soros or Dalio’s macro models scored The Stagflation then, but this is how Hedgeye scores it now:
- Growth Slowing At An Accelerating Rate
- Inflation Rising (and remaining) Above The Real Growth Rate
- Monetary and Fiscal Policy that perpetuates 1 and 2
The Stagflation: In the US and across most of Western Europe, that’s basically what you have right here and now. In fact, if you take the US Government’s word for it and use the Q1 2011 US GDP number (revised down by 81% to 0.36%), and then “trust” that headline Consumer Price Inflation was 3.3% in Q1 - that’s a ratio of 10:1 of inflation over growth. That’s nasty.
Causality? What drives The Stagflation? That’s easy. Keynesian Politicians.
This is what Nixon, Carter, Bush II, and Obama all had/have in common. They and their economic “advisors” were/are all Keynesians. And all 4 of their Administrations oversaw horrible employment decades combined with horrifically low Presidential approval ratings.
Today, this country doesn’t like The Stagflation any more than it didn’t in the 1970s. Back then, they called it the Misery Index (unemployment + inflation). On this very common sense calculation, the Obama Administration ranks 3rd worst in American history to Nixon and Carter. Not surprisingly, Reagan, Clinton, and Kennedy are the Top 3.
Back to the Global Macro Grind…
Let’s take a ride around the world and take a gander at some stagflation callouts from this week’s Global Macro Economic Data:
- JAPAN – reports a down -1.3% GDP number for Q2 2011. Keynesians celebrated that as “better than expected due to the tsunami effects.” Non-Keynesians remind realists that Japan’s GDP was negative for the 6 months before the tsunami!
- UNITED KINGDOM – reports an awfully high Consumer Price Inflation (CPI) print for July of +4.4% (versus +4.2% in June); the British (homeland of the Keynesians) are now running 10:1 inflation over GDP growth like the Americans are.
- GERMANY – reports a huge sequential slowdown in economic growth for Q2 2011 of +2.8% (cut in half versus Q1 GDP growth of +5.2%). If you didn’t know why German stocks have crashed since May 2011 (down -22%), now you know.
Elsewhere in Global Macro, commodities, currencies, and bond markets continue to signal that Global Growth Slowing remains reality:
- CRB COMMODITIES INDEX – closed at 330 yesterday and remains well below Hedgeye’s intermediate-term TREND line of 348
- WTIC OIL – trading $86 this morning continues to be broken across all 3 of our risk management durations (TRADE/TREND/TAIL)
- DR. COPPER – leads to the downside this morning (down -1.3%) and has now broken its long-term TAIL line of support ($4.10/lb)
- EUR/USD – continues to hope and pray to hold above its intermediate-term TREND line of resistance = $1.44
- UST YIELDS – 10-year yields remain broken across all 3 of our risk management durations (downside support = 2.06%!)
- UST YIELD SPREAD – continues to compress (10s minus 2s = +209 basis points) and is down -25% since Q1 Growth Slowed
There are no buts. Stocks aren’t “cheap” either. Our 2011 call on US Equities has not been that stocks will get as cheap as they did during The Stagflation of 1974 (7x earnings). But it has been that buying Equities as Growth Slows And Inflation Accelerates is Misery’s Mistake.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $79.10-91.79, and 1098-1256, respectively. Yesterday I bought Silver (SLV) and sold half of our long China (CAF) position in the Hedgeye Asset Allocation Model, taking my allocation to International Equities down to 6% and keeping my allocation to US and European Equities at 0%.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on August 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Weather forecast for tonight: dark.”
When 2011 is all said and done, we’ll separate the winners in this Globally Interconnected Game from the whiners. Whoever had their growth estimates right will have had a lot of other things right.
In the meantime, we’ll have to deal with politicians, journalists, and bankers obfuscating this very simple fact – Global Growth Has Been Slowing Since The End of 2010.
That’s it. That’s what Wall Street, Washington, SocGen, and the Government of France all have in common this morning – their top-line estimates for GDP Growth are still way wrong. And, as a result, being long any of their conflicted promises that are associated with using the wrong GDP assumptions will continue to be wrong. Markets don’t lie; politicians do – and the market has this right.
Markets don’t trade on politicians, journalists, and bankers using the wrong sources – they trade on expectations. To amplify this point about Growth Expectations, let’s take a step back and review where these “blue chip” forecasters were on these matters in Q1 of 2011:
Forecasts for 2011 US GDP Growth:
- Bank of America = 3.2%
- Barclays = 3.1%
- Citigroup = 3.1%
*Disclaimer: these estimates must have all been based on the exact same Keynesian model for garden variety “recovery”
Forecasts for 2011 SP500 Returns:
- Bank of America (David Bianco) = 1400 (up +11.4%)
- Barclays (Barry Knapp) = 1420 (up +13.0%)
- Citigroup (Tobias Levkovich) = 1400 (up +11.4%)
*Disclaimer: two of these forecasting czars opted for round numbers on the absolute; one opted for the rounded off % return
2011 Reported Numbers (Year-To-Date):
- US GDP Growth Q1 2011 = 0.36%
- US GDP Growth Q2 2011 = 1.29%
- SP500 YTD Return = DOWN -10.9%
3 investment banks with conflicted analysis + 3 train wrecks versus expectations = priceless.
Actually, that’s not fair – there is a price to pay for Wall Street/Washington groupthink. It’s being marked-to-market in every American’s 301k each and every day. While I’ll be the first to admit that this is not 2008 (it’s 2011), all it took to remind me how bad Wall Street’s forecasting models remain at calling growth slowdowns was another growth slowdown!
There isn’t really a trickle-down effect associated with getting growth estimates this wrong – it’s more like a waterfall. To borrow a frightening quote from Bank of America’s CEO, Brian Moynihan, on yesterday’s conference call, “think about it this way and you’ll have to trust us”:
- COUNTRIES – when they are wrong on GDP assumptions, they are wrong on their DEFICIT/GDP assumptions.
- RATINGS AGENCIES – when they see countries with DEFICIT/GDP assumptions rising, their ratings start falling (on a lag)
- BANKS – when their GDP assumptions are wrong, their assumptions for their net interest margins and cash flows are wrong
That last point is less clear to your average journalist attempting to “trust” Brian Moynihan on the numbers. What does it mean?
- Banks make money on a spread (the Yield Spread – that’s why La Bernank wants to keep rates of return on your savings low)
- When growth slows, the Yield Spread compresses (the 10s/2s spread has compressed by 28% in the last 6 months)
- When the Yield Spread compresses, Bank of America, Barclays, and Citigroups NIM (net interest margin) and cash flow declines
So… if you get that… and you’re still using Hedgeye’s GDP estimates for 2011 instead of a conflicted and compromised Street’s… you would have immediately recognized anything coming out of SocGen, the Government of France, or Bank of America’s mouths yesterday as irrelevant and/or wrong.
I continue to forecast that the sun will rise in the East today.
My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1684-1794, $77.20-88.29, and 1087-1137, respectively. We bought Goldman Sachs yesterday in the Hedgeye Portfolio and we remain short Citigroup.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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The Macau Metro Monitor, August 16, 2011
ANGELA LEONG INCREASES STAKE IN SJM Macau Business
Stanley Ho's 4th wife, Angela Leong On Kei, bought 5MM shares of SJM in an off-exchange transaction and 750k additional shares through the market. Her stake in SJM rose from 8.11% to 8.21%. At the same time, Stanley Ho reduced his stake in SJM to 0.09% from 0.18% by selling 5MM shares, also in an off-exchange transaction.
SALES OF NEW PRIVATE HOMES UP 17% IN JULY Strait Times
1,386 new private homes were sold last month in Singapore, +17% MoM.
TODAY’S S&P 500 SET-UP - August 16, 2011
If you didn’t know it now you do - GLOBAL GROWTH IS SLOWING. As we look at today’s set up for the S&P 500, the range is 159 points or -8.84% downside to 1098 and 4.36% upside to 1257.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: 2548 (+1698)
- VOLUME: NYSE 1105.36 (-12.00%)
- VIX: 31.87 -12.35% YTD PERFORMANCE: +79.55%
- SPX PUT/CALL RATIO: 2.10 from 1.79 (+17.52%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 27.14
- 3-MONTH T-BILL YIELD: 0.02%
- 10-Year: 2.29 from 2.24
- YIELD CURVE: 2.10 from 2.04
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30 a.m.: Import Price Index, est. (-0.1%), prior (-0.5%)
- 8:30 a.m.: Housing starts, est. down 4.6% to 600k, prior 629k
- 8:30 a.m.: Building Permits, est. down 1.9% to 605k, prior 617k
- 9:15 a.m.: Industrial Production, est. 0.50%, prior 0.20%
- 9:15 a.m.: Capacity Utilization, est. 76.9%, prior 76.7%
- 11:30 a.m.: U.S. to sell 4-wk bills
- 4:30 p.m.: API Inventories
WHAT TO WATCH:
- WSJ is unconvinced of wisdom of Google's purchase of Motorola Mobility
- Carlyle Group said to be in exclusive talks to buy Pharmaceutical Product Development
- Nokia rises for second day after Google/MMI deal amid buyout speculation and as analysts say deal may benefit Windows Phone OS; J.P. Morgan values Nokia’s patent portfolio at EU5.4b
- German Chancellor Angela Merkel meets with French President Nicolas Sarkozy; press briefing at 12:30 p.m. NY time
- IMF’s Lagarde, writing in the FT, urges policymakers to include measures to support economic growth in the short term as they implement fiscal tightening plans under market pressure
- COPPER – the Doctor gets Singapore + Germany = bad; Copper leading to the downside this week is a very bearish signal for global growth; Copper’s TAIL line of support broke last week (4.10/lb) – no support to 3.81/lb
MOST POPULAR COMMODITY HEADLINES FROM BLOOMBERG:
- China Set to Achieve ‘Soft Landing,’ Conference Board Says
- Sino-Forest Says Investigators Won’t Report Until Year End
- Bananas in Cooled Ingersoll Trucks Help India Cut Food Waste
- Gold Gains a Second Day in London on Concerns Growth Is Slowing
- Soros, Mindich Cut SPDR Gold Share Holdings in 2nd Quarter
- Oil Supplies Decline to Five-Month Low in Survey: Energy Markets
- Oil Falls on Speculation Slowing Economy Will Curb Fuel Demand
- Sugar Climbing 6% as Brazil Crop Drops Amid Importer Demand
- Copper Drops on Speculation China, U.S. Slowdown to Hurt Demand
- Western Europe Faces Higher Construction Costs on Commodities
- Commodities May Be Poised to Decline 9.7%: Technical Analysis
- Pemex Bonds Trading Safest to Petrobras in Year: Mexico Credit
- Uranium Spot Prices Fall as Vacation Season Cuts Demand, Ux Says
- Corn Drops as Rally to 2-Month High Slows Demand; Soybeans Fall
- Copper Extends Drop After Report on Germany’s GDP: LME Preview
- Oil Declines as Investors Speculate Global Economy Is Slowing
- EUROPE: crash continues Germany down hard on a real big slowdown in; FTSE down -1.2% on stagflation.
- GERMANY – when the best of a bad bunch is crashing, you get paid to pay attention; Germany’s Q2 GDP growth was cut in half sequentially to 2.8% vs 5.2% in Q1; German stocks down another 2% and crashing (down -22% since May)
- ASIA: no follow through; watch Singapore who leads in the East, down hard -1.5% overnight and signaling continues Asian growth slowdown
- SINGAPORE –Singapore advises China and the rest of the region on upside/downside scenarios and now Singapore stocks are leading the East to the downside (down another -1.5% overnight)
Fed Data Points To An Overall Improved Lending Environment
Yesterday afternoon the quarterly Federal Reserve Senior Loan Officer Survey was released. Across all asset classes banks are now more willing to make loans. This is evident both in the net percentage of banks easing/relaxing standards and in the net percentage of banks increasing/reducing spreads on loans.
Borrowers are also emerging from the woodwork as demand for all loan types, save one, rose in the most recent survey. The sole exception being residential mortgage, where banks reported that demand fell yet again this quarter. Roughly 75% of the bankers surveyed predicted that 2H11 mortgage origination volume would be flat with volume seen in 1H11. The remaining 25% was split between expecting it to be up or down.
C&I Loans Continue to Move in the Right Direction
All trends are positive in C&I lending. More banks reported strengthening C&I loan demand again in 3Q. Lending standards are easing and spreads are contracting in C&I loans.
CRE Loans Also Now Moving in the Right Direction
CRE loan demand rose again in the 3Q survey coming on the heels of last quarter's strongest advance in years. Meanwhile, lending standards eased again this quarter - the second month in a row.
Residential Real Estate - Standards Finally Ease (Slightly) but Demand Continues to Fall
The residential real estate segment finally caught a break this quarter as banks reported a net easing of standards in 3Q11 for both prime and nontraditional loans. That said, the net easing was minimal with just 1.9% (net) of respondents easing standards on prime residential real estate loans and 4.2% (net) easing standards on nontraditional residential loans.
Also of interest is the fact that in spite of the modest easing of standards, demand continued to decline. Bankers reported lower demand (-1.9%) for prime residential real estate loans and home equity lines of credit. Nontraditional loan demand fell at 12.5% of banks surveyed (net).
Consumer Loans Show Improvement
On the non-mortgage consumer side, the percentage of banks expressing increased willingness to lend increased from Q2. Beyond this, the demand for these loans rose while lending standards eased.
Joshua Steiner, CFA
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