No Surer Means

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

-John Maynard Keynes


If you study the history of John Maynard Keynes and his economic ideas, experiments, and failures, you’ll come to a very simple conclusion – he was a world class storyteller, not a Risk Manager.


Before he became politically conflicted and compromised (in his early 40s), Keynes had it absolutely right on what debauching a currency functionally does to a society. After World War I, the policies to inflate across Eastern Europe made that crystal clear.


Ironically enough, explaining this in the 1stbook to make him world famous – The Economic Consequences of Peace (1919) – is what made Keynes popular with the Austrian, German, and Russian people:


“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency”, wrote Keynes. “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” (Wapshott’s Keynes Hayek, page 22).


Tomorrow at the FOMC meeting, someone should ask Ben Bernanke what he thinks about that.


Back to the Global Macro Grind


I call out this linkage between currency and inflation this morning because last week’s stabilization of the US Dollar continues to improve not only my outlook on the US economy but the Consumer Confidence within it. US Consumption, don’t forget, represents 71% of US GDP.


Closing flat week-over-week at $78.63, the US Dollar Index has gained +7.6% since Ben Bernanke signaled the end of Quantitative Guessing II. We’ve called it guessing, because that’s what it was – a guess that a second stock and commodity market inflation could magically boost the US economy into what Bernanke calls “escape velocity.”


On the two mandates that he is scored on – full employment and price stability – guessing didn’t work out for him.


What has actually worked quite well for Bernanke is getting out of the way. Since the elixir of QE3 hope has been temporarily removed from the almighty table of letting losers win, 3 big things have materialized:

  1. Strong Dollar
  2. Deflating The Inflation
  3. Rising Consumer Confidence

Last week’s preliminary December reading on US Consumer Confidence from the University of Michigan improved again, sequentially, to 67.7 (versus 64.1 in November). It’s not a great reading. But it’s certainly better than bad.


Last week’s Deflating The Inflation (Hedgeye Macro Theme from Q311) was also additive to US Consumer Purchasing Power:

  1. CRB Commodities Index (basket of 19 commodities) = -2.2% week-over-week
  2. Oil Prices (Brent and WTIC blended avg) = -1.2% week-over-week
  3. Gold and Copper = -2.0% and -0.8% week-over-week, respectively

Just as an fyi, most Americans don’t have enough money to buy an ounce of Gold, nor should they if their outlook is in line with Hedgeye’s for a potential US Dollar appreciation of another +5-10% higher from here.


That’s not to say we don’t want you to own some gold. That’s just a friendly reminder that the idea is to buy low, not high. Gold’s intermediate-term TREND line of resistance remains overhead at $1743/oz and there is no long-term TAIL support to $1568/oz.


Back to what Strong Dollar means for America…

  1. Stronger Employment
  2. Stronger Consumption
  3. Stronger Society

If you can have a Keynesian refute Keynes’ view of the same to me, just tweet me @KeithMcCullough.


My immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1, $107.11-109.55, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


No Surer Means - Chart of the Day


No Surer Means - Virtual Portfolio

Weekly Asia Risk Monitor: Mind the TRENDS Across Asia

Conclusion: Despite consensus focus on a singular catalyst (Eurozone crisis), economic gravity throughout Asia has not ceased to exist.



  • Equities: down -1.9% wk/wk on a median basis; India led decliners, falling -3.8%.
  • FX: down -0.4% wk/wk vs. the USD on a median basis; India led decliners, falling 1.5%.
  • Fixed Income: 2yr sovereign yields generally declined, led by Australia (-16bps wk/wk); 10yr yields also generally declined, led by Vietnam (-38bps wk/wk); Indian 30yr yields fell -20bps wk/wk.
  • Credit: ho-hum week across Asian credit default swaps markets; 5yr CDS up only +1.2% wk/wk on a median percentage basis.
  • Rates: 1yr O/S swaps flat wk/wk on a median basis; India and Indonesia declined dramatically: -12bps and -40bps, respectively.


Despite consensus hoopla, China is not pricing in a dramatic easing of policy. If it is, it must also be pricing in what must also accompany a dramatic easing of policy – dramatically slowing domestic and international growth.


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India remains a value trap and we see mounting risks on the horizon.


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Japan held its TRADE line of support; critical to watch heading into next week’s data (Tankan Survey) and post-Eurozone summit period.


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Refer to our note titled “Asian PMIs Disappoint” from earlier in the week. The analysis below picks up where that piece left off.


Growth Slowing:

  • Wang Shouwen, head of China’s Foreign Trade Department, sees ovesas demand putting “severe pressure” on exports next year. Chong Quan, deputy trade representative at China’s Ministry of Commerce sees China’s export situation as “quite serious”.
  • China’s ruling organization, the Politburo, pledged that China will maintain “prudent” monetary policy, “proactive” fiscal policy, and its “unswerving stance” on property market regulation in 2012. The PBOC is backing them up on the marginally hawkish side; despite offshore rates and forward rates for the CNY continuing to fall, the PBOC continues to strengthen the yuan’s central reference rate (up +0.4% wk/wk). China is not going to appease consensus calls for broad-based easing just yet!
  • China’s Nov growth data came in as sour as our expectations and models were suggesting: Chinese industrial production growth slowed to +12.4% YoY vs. +13.2% prior – the lowest rate since Aug ’09. YTD fixed assets investment growth slowed to +24.5% YoY vs. +24.9% prior – an 11-month low. On the “bright side” retail sales growth ticked up +10bps to +17.3% YoY.
  • Taiwanese exports slowed in Nov to +1.3% YoY vs. +11.7% prior – a 25-month low. Shipments to Europe fell -21.9% YoY vs. +6.1% in Oct. Stealthily, imports fell -10.4% YoY vs. +11.8% prior. It could be that EU bank balance sheet reduction is weighing heavily on trade financing in Asia – a trend we expect to continue over the intermediate term. We’ll follow up with more on this topic next week.
  • Japanese machine orders growth slowed in Oct to +1.5% YoY vs. +9.8% prior. The country’s final real GDP reading for 3Q was revised down to +5.6% QoQ SAAR vs. a prior reading of +6%. YoY growth remained in negative territory for the third consecutive quarter at -0.7%.
  • As a preview to next week’s Tankan business survey, Japan’s Ministry of Finance Business Sentiment Index came in nasty in 4Q: the all-industry index fell -2.5% QoQ vs. +6.6% prior; the large manufacturers index fell -6.1% QoQ vs. +10.3% prior. This bad survey data rhymed with the Economy Watchers Survey: the current index ticked down to 45 vs. 45.9 prior; the outlook index ticked down to 44.7 vs. 45.9 prior.
  • Australia put up a garbage Nov jobs report: the unemployment rate ticked up to 5.3% vs. 5.2% prior; payrolls growth slowed to -6.3k MoM vs. +16.8k prior (driven lower by a -39.9k MoM decline in full-time employment).
  • Amid nationwide flooding, Thailand’s consumer confidence index ticked down in Nov to 61 vs. 62.8 prior – the lowest reading since Oct ’01.
  • Malaysian industrial production and export growth slowed in Oct to +2.8% YoY and +11.4%, respectively (vs. +3% and +16.6%, respectively).

Deflating the Inflation:

  • Chinese CPI slowed to +4.2% YoY in Nov vs. +5.5% prior. Zheng Jingping, chief engineer at the National Statistics Bureau, sees Chinese CPI coming in at a 4% rate in 2012 – the same estimate the State Council had for 2011.
  • Chinese PPI slowed to +2.7% YoY in Nov vs. +5% prior – the lowest rate since Dec ’09.
  • Taiwanese CPI slowed in Nov to +1% YoY vs. +1.3% prior; PPI slowed to +5.3% YoY vs. +5.8% prior.
  • South Korea PPI slowed in Nov to +5.1% YoY vs. +5.6%.
  • Australia’s TD Securities unofficial CPI gauge slowed in Nov to +2.1% YoY vs. +2.6% - the lowest rate since Feb ’10. The series remains highly correlated with official inflation measures, so we expect Aussie headline CPI to trend lower in the coming quarters – in line with our estimates.

Sticky Stagflation:

  • Based on our primary sources, both buy-side and sell-side consensus appear to be interpreting India’s yield curve as a signal that the central bank will succeed in taming inflation (international funds increased their holdings of rupee debt to a record $23.5B as of 12/7). On the contrary, we interpret the inversion of the 10yr/1yr spread as a signal that stagflation remains a key headwind to the Indian economy. Slowing growth is priced into the long end of the curve and an inability to cut rates because of sticky inflation and FX weakness (marginally above all-time low vs. USD) continues to be priced into the short end of the curve. Regarding the rupee specifically, it’s on track (down -13.9% YTD) for its worst year since 1991 outside of 2008 – a clear signal to us that the RBI may have to materially slow Indian growth by hiking rates, end its QE program, and reign in its budget deficit (which we called for them to “miss” early in the year). Those actions should restore much-needed credibility in India’s currency, on the margin. Sadly, swaps markets are not pricing in such an outcome and we remain the bears on the Indian rupee. Our “India’s Nasty Trifecta” call (bearish on Indian equities, FX, and fixed income) continues to play out in spades and has driven alpha across all three asset classes in the YTD.
  • “To QE3 or not to QE3? That is the question.”: South Korea, Indonesia, Philippines, and New Zealand all kept rates on hold this week – even as economic growth data (both domestic and international) continues to deteriorate. It appears Asia expects the western world to respond to this crisis like it has responded to the last crises: “PRINT LOTS OF MONEY” (per Paul Krugman).

King Dollar:

  • The Reserve Bank of Australia lowered its benchmark policy rate by -25bps to 4.25% - the first back-to-back rate cut since 2009. The RBA cited a 2012-13 inflation outlook that is “consistent with the central bank’s target” and a deterioration in “financing conditions” (i.e. rising wholesale funding costs for Aussie banks). Australia’s inflation outlook (as measured by the -87bps peak-to-trough decline in the 5yr breakeven rate), swaps market (124bps of cuts priced in over the NTM), and the Correlation Risk (TRADE positive correlation r² w/ S&P 500 = 0.97) all point to a lower AUD/USD exchange rate over the intermediate term from a fundamental perspective.

Eurocrat Bazooka:

  • China is allegedly to create a new investment vehicle to manage $300B in EU/US assets. The fund is to mimic SAFE Investment Corporation Ltd., which yields ~$570B, has 65.8% of its assets in FDI and equity securities. If this new fund is real and anything like SAFE, it won’t be used to bail out ailing EU sovereigns. It will, however, look to buy European corporate assets on the cheap – something EU leaders haven’t been particularly in favor of (protectionism).


  • While the acceleration was anticipated by our models, we must tip our hats to a rock solid 3Q real GDP report in Australia: +2.5% YoY vs. +1.4% prior.


  • Amid a 2yr-long equity market rout and monetary and regulatory tightening that has targeted off-balance sheet lending, Chinese corporate bond sales are on pace to break their quarterly record in 4Q. The $107 billion QTD issuance has coincided with at -104bp drop in average high-grade yields. In the YTD, Chinese corporations have raised $7.50 in the debt markets for every $1 in equity capital.
  • Amid a -52% YTD decline in trading volume, the Shanghai Futures Exchange is seeking to include institutional and foreign investors to attract capital and help China expand its global influence in setting global benchmark prices in key commodities.
  • Hong Kong’s Financial Secretary John Tsang said that the territory is likely to ease property market restrictions as the global macro environment continues to “trend downwards”. It appears they are willing to cling to a dramatic property bubble as a potential avenue for economic growth amid waning manufacturing and exports. Inflation is not growth and we remain bearish of Hong Kong equities (from a price).
  • In contrast with Hong Kong, whose Indefinitely Dovish bias continues to perpetuate domestic inflation, Singapore actually imposed new taxes and restrictions on its property market – specifically an additional 10% levy on foreign and corporate purchases. Finance Minister Tharman Shanmugaratnam’s show of prudence makes Singapore attractive to us as a sustainable, long-term investment destination (as opposed to Keynesian economic volatility): “We have always had open markets and must keep them that way. However, the reality is that investment flows into our property market are now larger than before, and unlikely to recede as long as interest rates remain low. The additional buyer’s stamp duty should help cool investment demand, and avoid the prospect of a major, destabilizing correction further down the road.” In the near term, however, it does decrease domestic investment (“I”) and foreign capital flows into Singapore’s economy – the latter of which should incrementally weigh on the Singapore dollar amid rapidly slowing export growth.
  • Due to resistance from the two largest coalition parties as well as opposition-led groups, India backtracked on its commitment to open up its $396B retail sector to significant foreign direct investment. The plan was expected to help India tackle its chronic inflation issue by lowering production and wholesale costs throughout the supply chain, but opposition from grassroots organizations and Indian farmers successfully derailed the mission. We did learn one important lesson from this outcome: Singh’s government is weak and it is unlikely that it will be able to enact meaningful regulatory changes going forward (large changes to the tax code likely to be debated in 2012; unlikely to see any deltas).

Darius Dale



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The Week Ahead

The Economic Data calendar for the week of the 12th of December through the 16th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - 1. cal

The Week Ahead - 2. cal

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Bullish TRADE: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY), Long Healthcare (XLV)


I covered my short position in SPY this morning and bought Consumer Discretionary (XLY), taking my asset allocation in the Hedgeye Asset Allocation Model to US Equities up from 3% (on yesterday’s open) to 9%.


With the EUR/USD oversold on a catalyst (EU Summit) we were calling for, everything has a time and price. As the US Dollar strengthens, US Consumer Confidence continues to strengthen (Michigan Consumer Confidence reading was up to 67.7 in DEC vs 64.1 in NOV). Like it did in our US Consumption models in 2009, Deflating the Inflation has its perks.


I know the Keynesians want exports. I just want them to go away. This is not an export economy. It’s a Consumption economy. And whoever figures out that political message first will start to get the political economy right too.


Across all 3 durations in our risk management model, I stand by the note I wrote on Wednesday:

  1. On up days towards long-term TAIL resistance (1270) = sell/short
  2. On down days towards immediate-term TRADE support (1231) = buy/cover

It’s a multi-factor, multi-duration view. It’s what we do. And it should continue to help you think about doing what seems logical in this environment of Big Government Intervention and Volatility – buy low and sell high.




Keith R. McCullough
Chief Executive Officer


Bullish TRADE: SP500 Levels, Refreshed - SPX

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