“He saw his parents’ savings melt away.”
Yesterday was not a good day for me. You couldn’t have had a good day if you were having a good month.
Yesterday was not a good day for American, German, or British people who have savings accounts either. That’s what centrally planned policies to inflate do – they punish the conservative saver. They pay the debtor.
Bernanke gets that and so do The German People who are paying the German Government to lend Germany money this morning (short-term yields on German Bunds have gone negative). I guess the upside to the Bernanke model is that 3-month US Treasuries are yielding 0.00%. That way no one wins or loses. Fair share “free-market” capitalism baby.
The aforementioned quote comes from a book I cracked open this past weekend by Nichalas Wapshott titled “Keynes vs Hayek.” Plenty of people have written on this topic since the debate between the two schools of thought emerged in the 1920s. Wapshott’s is the most recent. So far, it’s a healthy reminder of how history rhymes.
I fundamentally believe it’s very difficult for a human being not to superimpose his or her personal experiences in life into the passions of their opinions. Call it context or perspective – it’s all one and the same thing to me. If you’ve studied enough economic history, you provide yourself an opportunity to walk down life’s path in other people’s shoes.
Keynes was born into a British family of the academic elite who found himself scaling the wall of the Ivory Tower by the time he was in his teens, whereas Hayek was more of a commoner solider “in the Austrian army on the Italian front who returned to find his home city of Vienna devastated and its people’s confidence broken.” (Wapshott)
“The Austrians mostly read English and were conversant if not persuaded by the English tradition; the English on the whole could not read German and largely ignored the works of Austrian and German theorists.” (Wapshott)
Hayek wasn’t an elite student. He actually didn’t start studying the “political economy” (reading Marshalian and Keynesian economics) until he went to war. Eventually, his views came to be shaped by his personal experience (inflation melted his parents savings away). His critique of an inconclusive social science experiment (Keynesian Economics) remains as relevant today was it was in the 1920s.
It’s a good thing Einstein figured out how to communicate in English.
Back to the Global Macro Grind…
My introduction this morning isn’t meant to proclaim my mystery of Hayekian faith. I’m not a Republican or a Democrat. I’m not a Keynesian, and I’m not a Hayekian. My name is Keith McCullough and I do my own work.
I do not believe that policies to A) Inflate B) Pile-debt-upon-debt, or C) Bailout losers, is the long-term path to American economic prosperity.
To the contrary, I think debauching the US Dollar does exactly what it did yesterday - it stimulates inflation in asset prices and, as a result, slows Consumption Growth.
US GDP = 71% Consumption Growth.
Last time Brent Oil prices spiked like this, US GDP Growth slowed to 0.36% (Q1 of this year). And while that seems like a long time ago versus yesterday’s no-volume stock market reflation, that is not something I am going to let the Keynesians forget.
It’s the Policy To Inflate, Stupid.
As the US Dollar strengthened throughout Q2 and Q3, we saw some Deflation of The Inflation and, presto! US GDP growth recovered sequentially:
- Q111 US GDP Growth = 0.36%
- Q211 US GDP Growth = +1.34%
- Q311 US GDP Growth = +2.01%
The interconnectedness doesn’t lie; central planners do.
And no, I don’t feel shame in calling out these policies to inflate as stupid. Forrest Gump could tell you that stupid is as stupid does too. And there are a lot of “smart” people in the Ivory Towers of Keynesian economic forecasting that don’t look so smart anymore.
The economy is a globally interconnected ecosystem that could not care less about the short-term “political economy” of a few European bankers yesterday who begged Bernanke for a bailout.
The Global Economy of supply and demand ticks on this morning (in real-time):
- China reported their lowest level of manufacturing (PMI) strength since 2009 (47.7 for NOV PMI vs 50.4 OCT)
- Britain reported their lowest level of manufacturing (PMI) since June of 2009
- South Korea reported a 3-month high in inflation (CPI) of 4.2% NOV vs +3.6% OCT
Growth Slowing and Inflation Rising. Do the Keynesians get it? They will when they see Q4 US GDP Growth Slow, sequentially, again like it did in Q1 as Consumption Growth slows.
In the meantime, while there seems to be a language barrier between Mr. Macro Market’s real-time messaging and the Fed’s central mandate for “full employment and price stability”, the common man’s savings are being melted away as the precious few pander to their banking losses being saved.
My immediate-term support and resistance levels for Gold (back above $1736 TRADE support), Brent Oil (Bullish Formation), France’s CAC40 (Bearish Formation), and the SP500 (bullish TRADE; bearish TAIL) are now $1, $109.42-111.37, 3074-3208, and 1, respectively.
Best of luck out there in December,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP - December 1, 2011
There is plenty relevant MACRO data today: – UK PMI hits 47.6 (lowest since 09), South Korean inflation rises sequentially to +4.2% November vs +3.6% October, Brazil cuts rates for the 3rdtime in a row, etc… Bottom line is that all of this remains much more a policy to inflate than it does equate to bare knuckled economic growth – there’s a difference – inflation slows consumption growth at $110/barrel. As we look at today’s set up for the S&P 500, the range is 45 points or -3.53% downside to 1203 and 0.08% upside to 1248.
SECTOR AND GLOBAL PERFORMANCE
- ADVANCE/DECLINE LINE: 2306 (2416)
- VOLUME: NYSE 1667.75 (+81.53%)
- VIX: 27.80 -9.27% YTD PERFORMANCE: +56.62%
- SPX PUT/CALL RATIO: 2.33 from 2.07 (+12.78%)
CREDIT/ECONOMIC MARKET LOOK:
- TED SPREAD: 52.89
- 3-MONTH T-BILL YIELD: 0.01%
- 10-Year: 2.08 from 2.00
- YIELD CURVE: 1.83 from 1.73
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Jobless claims, est. 390k, prior 393k
- 9am: Fed’s Lockhart to give welcome at real-estate conference
- 9:05 am: Fed’s Bullard to speak at Bloomberg event in NY
- 9:45am: Bloomberg consumer comfort, est. -49.0, prior -50.1
- 10am: Construction spending, est. 0.3%, prior 0.2%
- 10am: ISM Manufacturing, est. 51.8, prior 50.8
- 10am: Freddie Mac mortgage
- 10:30am.: EIA natural gas
WHAT TO WATCH:
- Nov. retail comp. sales may gain 3.1% as heavy promotions, early store openings helped holiday results: Retail Metrics
- Thousands of workers in southern China went on strike in past week, disrupting work at companies including one that supplies equipment to IBM
- House scheduled to vote on eliminating public financing for election campaigns
- Senate may consider as early as today payroll tax provision for employers included in Democratic legislation
- Senate Agriculture Committee hears from CFTC Chairman Gary Gensler, SEC Chairwoman Mary Schapiro on oversight of Wall Street Reform Act, 10am
- House Financial Services Committee hears from Housing Secretary on health of FHA single-family insurance fund, 10am
- House Energy and Commerce Committee marks up broadband spectrum legislation, 10am
- House Financial Services subcommittee hears from CEOs of Fannie Mae, Freddie Mac, head of Federal Housing Finance Agency, at oversight hearing, 2pm
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Mugabe’s Seized Farms Boost Profits at British American Tobacco
- Goldman Says Commodities May Rally in 2012 as Brent Surges
- Dollar Proves Best Bet as Investors Shun Stocks for Safety
- China’s Manufacturing Contracts for First Time Since 2009
- Natural Gas Battered in U.K. by Milder Winter: Energy Markets
- RBA Straddles Record House Slump, Mining Boom: Chart of the Day
- Oil Rises to Near Two-Week High Amid Supply Risks, Euro Optimism
- Cotton Crop Reaching Record Makes Goldman Bearish: Commodities
- Gold May Climb on Central Bank Efforts to Tame European Crisis
- Copper Declines on Weakest Chinese Manufacturing Since 2009
- Stocks, Euro, Commodities Surge as Central Banks Boost Liquidity
- Tin May Rebound 11% as China Supports Demand: Chart of the Day
- Vale Matching Slim’s Rating Signals Debt Cost Cut: Brazil Credit
- Codelco Starts Legal Action to Annul Mitsubishi’s Anglo Deal
- Australian Court Freezes A$858 Million of Magnitogorsk’s Assets
- Indonesia Spending $200 Billion Boosts Krakatau: Freight
- Gold Average Signaling Third Monthly Rally: Technical Analysis
- Copper Falls in London After China’s Manufacturing: LME Preview
- Palm Oil Demand May Gain 3% in 2012, Indonesian Group Says
ITALY – stocks look much different on the MIB index readings than they do on the DAX – so if you need to get paired off do it that way, but Italy failing at its first line of TRADE resistance (15,460) is a big problem. So is the Euro failing at 1.34 – both remain in Bearish Formations and the NOV PMI data across Europe supports the markets intermediate-term view as well
CHINA – when China started cutting in SEP 2008, they were serious about a serious slowdown in Chinese demand – this morning’s HSBC PMI print for NOV of 47.7 was awful (worst since 09) and Chinese stocks rallied less than they fell prior to the cut.
- Iran Clings to Oil Lifeline as U.S. Pushes Tighter Sanctions
- Qatar’s $5 Billion Bond Sale Caps Issuance Surge: Arab Credit
- U.K. Expels Iranian Diplomats as Tehran Faces Isolation
- Yemen’s Saleh Still Acting Presidential in Risk to Gulf Plan
- Citigroup Deal Haunts Pandit as Saudis Claim $383 Million
- Indonesia Tax Breaks May Spur 40% Bank Growth: Islamic Finance
- VTB Capital Said to Hire 4 Bankers From Credit Suisse Dubai
- Iran Oil Sanctions Set to Shrink Circle of Foreign Buyers
- Qatar Shares Climb Most in Three Weeks After Central Banks Act
- Iran Would Hit U.S. Bases in Germany in Case of War, Bild Says
- Glencore, Spain’s Cepsa in Talks Over Oil Accord, Expansion Says
- Shuaa of Dubai Cuts 29 Jobs as It Restructures Amid Losses
- Saudis Seek Compensation From $100 Billion Climate Funding
- Almarai Seeks to Raise $400 Million From Sukuk Sale in 2012
- Dubai Islamic Lender Tamweel Hires Banks for Possible Bond
- Statement by UANI on French Shipping Company CMA CGM Ending Exports
- EU to Widen Sanctions on Iran, Including Possible Oil Embargo
The Hedgeye Macro Team
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Conclusion: Don’t get too excited by the centrally-planned easing of financial conditions this morning. History suggests, if anything, they are likely to be a precursor to deteriorating economic data and financial market conditions.
It is not a secret that our intermediate term outlook for the global economy is somewhat dour based on an outlook of tepid economic growth and sticky inflation. The question now, of course, is whether today’s coordinated policy actions should change that. For our thesis to change, today’s action would have to change the outlook for either inflation or growth.
For starters, with consensus focused squarely on the central planning of central bankers in hopes that it will ignite the year-end Santa Claus rally, we thought it might be value-add to offer some contextual analysis around what just happened.
Per the Federal Reserve’s monetary policy press release from today:
“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity… These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.”
This sounds vaguely familiar to their September 18, 2008 press release:
“Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures… The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks… All of these reciprocal currency arrangements have been authorized through January 30, 2009.”
Appropriately based on this policy action, and as highlighted in the chart below, the Fed Dollar liquidity swap line rate has adjusted from 1.1% to 0.6% in short order, which will allow cheaper access to U.S. dollars for the cash-strapped European banks. Ironically, the noteworthy takeaway here is that assuming a constant U.S. dollar OIS rate and flat discount rate of .75%, when the Fed’s new measures kick in on December 5th it will be roughly 15 basis points cheaper for European banks to borrow U.S. dollars from the ECB than for U.S. banks to get them from the Fed.
Equity Market Context
Accepting the fact that this is 2011 and NOT 2008 (an assertion we’ve maintained throughout the year), looking at a chart of the “market reaction” to the 2008 action, we saw the S&P 500 rip +98.7 points (or +8.5%) higher in a span of just two days.
The “market”, of course, went on to fall -578.55 points (or -46.1%) from the centrally-planned lower-high to economic reality nearly six months later.
As it relates to today’s market action, the SP500 ended the day up +51 points. Interestingly, the commodity markets are showing little of the return to risk on as WTI oil is only up 0.70% and the CRB index, more broadly, is only up +1.09%. So, interestingly while there is clear shift into equities, we are not seeing the same follow through into commodities, which would imply that the outlook for economic growth has not been altered meaningfully as a function of this concerted policy action.
Credit, Funding, and FX Market Context
In terms of the credit markets, the reaction also seems to be somewhat tepid. The yield on the Italian 5-year bond, a good proxy for the European sovereign debt issues, closed at 7.5%, which was down only marginally on the day by -13bps and still at, or near, its all-time highs. As well, both LIBOR and Euribor have not moved meaningfully. In fact, the LIBOR 3-month spread is at 43bps and the Euribor 3-month spread is at 99bps, both of which remain at highs for the year. Finally, the Euro, which touched 1.355 intraday today, is now near its lows of the day as highlighted in the chart below.
A stealth takeaway in amid all the hysteria could be that the EUR/USD exchange rate is potentially allowed to trend lower at an accelerating rate. There has been speculation by many market participants that the rate has been artificially supported by the repatriation of European banks’ forced US dollar-denominated asset sales amid a drying up of USD-liquidity. Presuming that they can soon borrow US dollars at a very attractive rate from the ECB starting on December 5th, we would expect to see less repatriation on the margin from European banks. Ironically, the centrally-planned assault on investor hedges might actually be the catalyst for systemic correlation risk if the EUR/USD no longer has the support of cross-border repatriation.
From our vantage point, while this recent round of action does, on the margin, ward off imminent liquidity concerns for ailing European banks, it does nothing to address the solvency issues created by the marked-to-market value of their sovereign debt exposure – arguably the primary risk facing the global financial system today. Nor does it materially impact the looming specter of slowing global growth.
Moreover, presumably our central planners aren’t taking such drastic measures because they think “earnings are fine”. Perhaps their access to and analysis of exclusive interbanking data suggests to them that such aggressive measures are needed (yes, we think reducing the cost for insolvent European bankers to obtain access to our currency is an “aggressive” measure). They and the Chinese saw the need to attempt to ward off further deterioration in financial/capital market conditions in early September of 2008 and that was actually appropriate foresight.
Daryl G. Jones
Director of Research
Positions in Europe: Short France (EWQ)
UK Chancellor of the Exchequer George Osborne’s Autumn Statement speech yesterday, an update to a similar speech on the country’s economic outlook and budget last given in March of this year, laid out the impact of Austerity’s Bite via downside revisions to GDP, higher unemployment, and persistent inflation versus previous estimates. Importantly, Osborne announced that Britain will need two extra years of austerity beyond April 2015 to meet its deficit reduction plan.
For a people already reeling from austerity’s impact and GDP that is likely to slip into recessionary territory as soon as Q4, an extension of austerity signals government budget mismanagement, which prolongs an already weak consumer and business environment that feeds in to slower growth and reduced tax receipts, which, along with spending cuts, are essential to paying down the deficit.
Taken together, we think the BoE is likely to cut its main interest rate and expand its asset purchasing program over the medium term to aid weak to negative growth over the longer term. We expect inflation to remain sticky, despite improving comps in 2012, and see weaker trade demand from its main trading partner (EU countries) as the region’s sovereign and banking crisis presses on. We’ll stick to making near-term trading calls on the Pound, as the EUR and USD crosses remain extremely volatile and influenced by headline risk.
Key Points in the Autumn Statement include:
- 2011 GDP will only grow 0.9% versus its last forecast of 1.7%, according to the independent Office for Budget Responsibility (OBR) that prepares forecasts for the Treasury
- 2012 GDP was cut to 0.7% from 2.5%
- Only in 2015 will growth return to a healthy 3%
- OBR doesn’t see CPI reaching the target rate of 2% until the end of 2013
- Net debt will peak at 78% of GDP in 2014-5, compared to 67.5% in 2011
- Unemployment will rise to 8.7% in 2012 versus 8.1% in 2011
- Europe’s sovereign debt and banking crisis should negatively impact trade. Around half of UK Trade is with the EU, its largest trading partner, helping around 300K businesses and leading directly or indirectly to 3.5MM jobs.
- The State Pension age will rise to 67 versus 66 between April 2026 and 2028
- State workers will see a pay raise of only 1% (versus 2%) when the current pay freeze expires at the end of 2013
- 700,000 public sector workers (versus 400,000) will be cut over the next 6 years
- Spending cuts of £8.3 Billion in 2015-6 and £15.1 Billion in 2016-7 will be carried out on top of the already £80 Billion planned over 5 years
- A fuel duty increase of 3 pence/L will be delayed to August 2012 versus January 2012
- £30 billion of new capital investment for investment in infrastructure (road and rail networks), superfast broadband, extra money for schools and housing, and increasing the regional growth will be allocated
- Up to £21bn will be given to strengthen the flow of credit to smaller businesses that do not have ready access to capital markets
- In total, the government needs to borrow an extra £112 billion by 2016
In the past we've traded the UK via the etf EWU in Hedgeye Virtual Portfolio.
In general, the commodities that we monitor for the purpose of monitoring important trends for the restaurant and food industries posted mixed moves over the last week. Chicken Wings were up again as coffee and dairy costs came down.
Beef – WEN, JACK, CMG, TXRH
The outlook for beef in 2012 remains bullish from a price perspective and we continue to believe that restaurants with exposure to beef costs will see a dramatic increase in this item next year. As we have been highlighting for some time, smaller cattle inventories and healthy demand from emerging markets are indicating that prices could continue to gain despite the strong trend in 2011. It is important to note that while the export outlook is good, 80% of domestic beef production is reliant on consumption here in the U.S., according to cattlenetwork.com. If unemployment gets worse, consumers could begin to substitute beef for chicken. Today, at least, surging equity market seem to be reviving prospects for commodity demand but – while it is less clear what the markets will do in 2012 – the supply side picture is far more clear.
Chicken Wings – BWLD
Chicken wings continue to march higher. Last week, we highlighted commentary from TSN that suggested that food service companies may focus more on chicken in 2012. Given that processors such as SAFM are decreasing production, this could imply higher wing prices next year. Our stance remains that 1Q12 will be difficult for BWLD as high wing prices pressure margins and the company does not have the option of preserving margins while driving sales through promotion, as it did in 3Q. Higher wing prices do not necessarily correlate with EPS declines but, clearly, when prices are at extreme levels they become more relevant. We expect wing prices to be up 55% or 60% year-over-year in the first quarter.
Grains – WEN, TXRH, CMG, PNRA, DPZ
Wheat and corn were up over the last week and continue to trade with a high inverse correlation to the US Dollar over the short-term. 92% of winter wheat in the 18 top producing states is emerged with 52% of the crop in good or excellent condition. The quality of the winter wheat is ahead of the previous year. Uncertainty around the debt crisis in Europe has been leading investors to exit grain markets, according to some commentators. CFTC data showed that noncommercial traders increased their net short position in wheat to the widest level since early 2006 during the week ended November 22nd.
Corn prices have traded lower on economic concerns over the last number of weeks but are trading higher today as equity markets gain following the action taken by the many of the world’s most important central bankers this morning. Corn prices remain up year-over-year, but there are several data points that suggest that downward pressure could continue. Brazil is set to releases some of its corn stocks next year to meet demand from meat producers that are currently combating higher prices. Ukraine is also stepping up its exports at these elevated prices levels. The country may ship a record amount of corn in November, according to some researchers. The International Grains Council also said, during the week, that the world corn harvest in 2011-12 will be less than expected even a month ago on a reduced outlook for harvests in the U.S. and Mexico.
All in all, declining wheat costs will be good for DPZ and PNRA while declining corn prices, if the trend continues, will be a positive for almost all industry players given how expensive the gain has become.
Chicken – Whole Breast
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