The Bernank Tax

This note was originally published at 8am on January 27, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“This book is chiefly addressed to my fellow economists.”

-John Maynard Keynes


This morning’s Early Look is chiefly addressed to anyone looking for an alternative to the Keynesian Economic Dogma that’s failing us. The aforementioned quote is the opening sentence of Keynes’ “General Theory” on economic Storytelling of 1936.


After blowing up his personal accounts by levering himself up on the long side of commodities (rubber, corn, etc.) in the late 1920s, Keynes lost the confidence of not only The People, but of the politicians. The latter constituency is not easy to lose!


The “General Theory” ended up being an alternative for academic economists to opine on versus Marxism. It wasn’t a Global Macro market practitioner’s framework or anything that resembled real-world (or what we call Prices Rule) economics.


That’s why it’s so critical for Ben Bernanke to fear-monger politicians today with threats of the “alternative” scenario. That’s also why he, like Keynes, is losing The People. We can only watch people getting paid at The Great Davos Depression for so long until we figure out we’re the ones paying for the champagne.


Speaking of popping out of bed feeling a little bubbly, this morning I am going to formally start calling Ben Bernanke’s Japanese 2.0 policy The Bernank Tax.


Why am I calling it a tax? Because that’s exactly what it is – whether it’s a tax on the hard earned savings accounts (interest income) of Americans and/or a food/gas tax that a family in India is going to have to incur as a result of debauching the world’s reserve currency – it’s a tax on Global Consumption. Period.


Back to the Global Macro Grind


The Bernank Tax was also a tax on YTD stock market returns yesterday. As the US Dollar fell, the Old Wall did exactly what Bernanke is daring them to do – bid up Inflation Expectations (Gold, Oil, TIPs, etc.). Stocks opened strong in the morning, then went red by the afternoon as Growth Expectations started to fall.


Get the slope of Growth and Inflation Expectations right, and you’ll get a lot of other things right.


What’s going to make this really interesting is that The Bernank Tax is going to become a hot potato for President Obama now in the General Election. Provided that Romney figures out the marketing message, what is Obama going to say if/when the US stock market starts going down on US Dollar down days?


That’s not part of the Keynesian playbook, fyi. But it’s measurable – in real-time. And maybe that’s why Obama is making the best decision I have ever seen him make from an economic leadership perspective – getting rid of his fiscal Dollar Debaucherer in Chief, Timmy Geithner.


Now I know that you know that my Storytelling on this matter is getting pretty tasty. This is my counterpunch to one of my investment mentors, Warren Buffett, and his “my poor Secretary should pay lower Taxes” thing. Where’s the fair-share in him only paying her $60k, by the way?


As is the case with all non-fiction Storytelling, here are the inverse correlations, across durations, between what the US Stock Market (SP500) has done versus the US Dollar Index (USD) in the last 3 years: 

  1. 3-year = -0.68%
  2. 1-year = -0.22%
  3. 4-month = +0.44% 



That sneaky little Mucker got them didn’t he!


Huh? What the math is telling you here (and yes we get these are correlations, but we also get that the longer-term causality of cheap money only amplifies my point) is that for the last 3 years, the Fed’s go-to move of debasing the US Dollar worked (dollar down = stocks up).


But a funny little thing started happening on the way to the Hedgeye forum in the last 4 months… Since the thralls of September 2011, as the US Dollar started to stabilize/strengthen (from a 40-year low), so did the US Employment, Confidence, and Consumption picture (also from 40 year-lows).




If you haven’t heard this story from a Paul Samuelson and/or any of the Keynesians who are still brave enough to parade their charlatan textbooks around an Ivy League campus yet, I can give you 50 million copies (textbook revenues) of reasons why.


Never mind the rest of the debate – this point about The Bernank Tax on the citizenry is very simple to understand. If you want to tighten your duration inside of the last 4 months on this, have at it. Here are more inverse correlations between SP500 and USD: 

  1. 30-day = +0.04
  2. 60-day = +0.31
  3. 90-day = +0.23 

Yep. Instead of US stocks going up on dollar down days, they’re starting to go up on dollar up days. Makes sense. While, in the long-run, we may all be dead - in between now and then, we all have to pay for things with real dollars to live.


The Bernank Tax doesn’t yet cap what Charles Ketterring called the one thing no one has ever been able to tax, “thinking.”


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1677-1727, $110.57-112.41, $1.29-1.32, $78.91-80.26, and 1310-1333, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Bernank Tax - Chart of the Day


The Bernank Tax - Virtual Portfolio


In preparation for RCL's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • “We already have a good level of booking [for 2012], and we're particularly pleased that those bookings are at a higher load factor and at a higher price than they were a year ago.”
  • “As you may recall, we had [fuel] options for 2012 at a strike price of $100, and for 2013 at a strike price of $90. After the quarter close, we sold the 2012 options, and we will be realizing a small gain in the fourth quarter. The 2013 options had been prepaid and have a book value on September 30 of approximately $11 million.”
  • “Switching to the demand environment, our load factors and APDs are ahead of the same time last year for both the fourth quarter and 2012. In the fourth quarter, we expect to finish with double-digit yield improvements in the Caribbean, but lower yields than last year in the Eastern Mediterranean and Asia. Fortunately, the Caribbean accounts for 47% of our capacity in the fourth quarter, while the Eastern Med and Asia represent only 13% and 2%, respectively.”
  • “We saw very strong close-in demand for the third quarter, but we are hesitant to forecast a continuation of this strength in the traditionally weaker fourth quarter, particularly given all the uncertainty in the market today.”
  • “The percentage of our inventory that has been sold for 2012 is higher than the same time last year and this has consistently been the case since April.”
  • “Looking forward, 2012 will be the first year of no capacity growth for the Royal Caribbean International brand since 1994.”
  • “We will continue our Royal Advantage revitalization program with equally substantial makeovers of Grandeur of the Seas and Rhapsody of the Seas in early 2012.”
  • “Overall, we anticipate modest improvement in onboard and other revenue spend per guest per night. The primary reasons this revenue stream is growing more slowly than ticket yield are decreased gaming spend and the changed composition of our guest mix. Within the guest mix, onboard spend per guest per night will increase this year for U.S. customers.”
  • “Looking ahead, the Caribbean product, where we will have over 60% of our capacity this fall and winter, is shaping up nicely. We will have all four of our Solstice-class ships sailing in this market and will be debuting the Celebrity Silhouette next week to our Northeast trade partners before we begin a series of 12-night Eastern and Southern Caribbean itineraries from Cape Liberty from November to April.
  • The Caribbean is performing well, and we are on pace to finish ahead of where we finished in Q4 2010 and Q1 2011. Our non-Caribbean products, which represent 40% of our capacity, are also performing well.”
  • “Our ambitious Solsticeizing program continues with Celebrity Infinity in just a couple of weeks and will be followed by the Celebrity Summit and Celebrity Millennium in January and April.”
  • “October was fairly solid to-date in terms of the close-in bookings. I think just as we get more into the winter months, we tend to take a little bit more conservative view. We have taken, as I'm sure you've calculated by now, a little bit of a haircut into the fourth quarter. We saw a little bit more weakness in the Eastern Med. The Caribbean seems to be holding up fairly strong.”
  • “We have reduced our capacity in the Eastern Med by 17%. So, the way we look at Eastern Med is that, that's something that makes its way over to Greece or down into the Holy Land.”
  • “What I was referring to there was the fall and winter of this year and into the beginning of 2012. So, 60% of Celebrity's capacity will be in the Caribbean in that time period...outside of the Caribbean, it will be predominantly South America and Australia and New Zealand during that time. Around the rest of the year, it's Europe in the summertime when we're outside of the United States...and Bermuda.”
  • “I'll just add that at the corporate level about 29% of our inventory next year will be within Europe. And if you look at the Eastern Med and Holy Lands, that represents about 9% of our capacity for the full year.”
  • [2012 capacity filled] “We said that we were slightly less than 25% sold out, and by year-end, we generally were about half sold out.”
  • “Some of the shifting was marketing expense from third quarter fourth quarter, as we intend to have a fairly intense period of marketing coming up soon for our brand and a variety of other general and administrative costs."
  • “I will point out one currency that we don't normally talk about that we're more sensitive to this time of the year is the Brazilian real, but we did see a little bit of haircut in fourth quarter on a constant-currency basis mainly due to the Eastern Caribbean. There were some other small adjustments outside the Caribbean, but in totality, it was less than a full percentage point."

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Black Gold

"In my humble opinion, we should now have reached peak oil. So it is high time to close this critical chapter in the history of international oil industry and bid the mighty peak farewell."  

- Ali Samsam Bakhtiari, Vice President of the National Iranian Oil Company 


To say that oil makes the world go ’round is an understatement.   Every day we consume almost 85 million barrels of oil.  At $112 per barrel, the current price of Brent oil, this is $9.3 billion of oil consumed every day, or $3.4 trillion per year. Global GDP is estimated at just over $65 trillion, so the cost of oil itself, setting aside additional refining, distribution, and marketing costs for oil and oil products, is more than 5.2% of global GDP.


A meaningful move in the price of oil has a clear and definite impact, all things equal, on GDP.  While it is not a zero-sum game, as global consumers spend more on oil and energy products, they clearly spend less in other areas. 


The value of the U.S. dollar is a key driver of the direction of oil.  In fact, the correlation of Brent to the U.S. dollar on a three year duration is -0.67.  Globally, oil is priced in U.S. dollars, so dollar down equates to oil up, and vice versa. 


As we’ve reiterated many times, dovish U.S. monetary policy is a key driver of the price of the U.S. dollar.  In turn, as noted above, the U.S. dollar inversely drives the price of global commodities priced in U.S. dollars.   Keith has started calling this The Bernanke Tax.   By keeping interest rates and monetary policy at levels not seen even in the Great Depression, Chairman Bernanke is explicitly adopting a weak dollar policy.  As oil and other commodities prices inflate, they take global GDP share.  Unfortunately, what’s good for the oil company, is negative for the consumer.


In the United States, The Bernanke Tax is seen most directly on purchases of gasoline for motor vehicles.  According to a recent report in Scientific American, Americans spent more than $490 billion on gasoline in 2011.  This was an increase of more than $100 billion over 2010, despite the number of miles being driven in the United States remaining relatively flat.  In aggregate, U.S. consumption of oil as a percentage of GDP very closely parallels the global numbers at just over 5%.


The other key factor, setting aside geopolitical concerns for the time being, in analyzing oil is global supply, specifically the idea of peak oil.  U.S. geologist M. King Hubbert is widely considered the father of peak oil theory.  Hubbert first created peak oil models in 1956 to accurately predict that United States oil production would peak between 1965 and 1970.   Models have since been used to predict, with reasonable accuracy, the peak of various fields and regions around the global.


Tomorrow, at 11am EST we will be hosting a conference call with geologist and renowned peak oil theorist, Jeffrey Brown, in a presentation call titled, “Peak Oil: Fact or Fiction?”.  (If you don’t subscribe to our energy vertical and would like details on the call, please email .  Obviously our research isn’t pro bono, but our Head of Sales Jen Kane will work with you.) Jeffrey has prepared a detailed presentation that outlines the case and support for peak oil, and much higher oil prices. 


Despite the rapidly accelerating price of oil over the last decade, the concept that global oil production is peaking is far from mainstream.  In fact, investors polled at a Credit Suisse energy conference revealed that 94% of investors believe that peak oil is at least twenty years or more away or will never occur.  As well, energy company earnings only make up 12% of SP500 earnings versus 30% in 1980.


Peak oil advocates point to a multitude of supporting evidence to defend their case.  The historical evidence revolves around looking at the production of a number of the world’s largest oil producing areas, most notably the North Sea and the continental United States.  An analysis of the peaking of these oil producing areas follow very similar patterns of decline, which are supporting evidence of M. King Hubbert’s models.  In effect, oil is a finite resource, which on a global basis has very predictable decline patterns.


The other, and more obvious, support for peak oil is simply the price of oil. Over the course of the last decade, the price of Brent oil is up 454%.  In a typical commodity market without supply constraints, or really any type of market for that matter, production should increase to create greater supply to offset dramatic price hikes.  In the last decade global oil producers have seemingly been able to grow production at a level that offset accelerating prices.  The domestic natural gas market is the contra example of this as accelerating prices routinely lead to more production and a natural correction in price. 


The counter case for peak oil is that there is more oil out there, we simply have to explore to find it and invest to get it out of the ground.  In fact, our friend the ever thoughtful Peter Orszag, recent penned an article for Bloomberg flagging the impact that development of fracking technology in the United States has had on oil production by increasing access to so called “tight oil”.  As Orszag writes:


“In 2010, oil companies produced 5.5 million barrels per day of domestic crude [in the U.S.].  The Energy Information Administration estimates that figure will rise to 6.7 million barrels per day by 2020, mostly because of the continued development of tight oil, in combination with the development of offshore resources in the Gulf of Mexico.” 


Assuming that EIA’s forecasts prove correct, U.S. oil production is on a path to grow 22% over the next decade and reach aggregate daily production levels not seen since 1994.  If this occurs, the idea of peak oil becomes seriously questionable.


So, is peak oil fact, or fiction? We will dig into this debate tomorrow morning at 11 am EST with peak oil expert Jeffrey Brown.  While these types of discussions are rarely conclusive, this conference call will outline the key theory behind peak oil, which will enable us to evaluate its validity as data points reveal themselves in the coming years.


Regardless of the side you are on in the peak oil debate, J. Paul Getty left us with one truism about oil:


“Formula for success: rise early, work hard, strike oil.”


I’d actually add to that slightly:


“Formula for success: rise early, work hard, strike oil, AND subscribe to Hedgeye.”

Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Black Gold - peak oil early look chart


Black Gold - VP heut


CMG is one of a long list of the companies we follow that is priced for perfection.  Others include MCD, SBUX, YUM, DPZ, PNRA and BWLD.  Given the early read in this earnings season, companies that are priced for perfection need to put up an exceptional quarter to keep the momentum going.  We believe CMG will post some of the best numbers in the industry but whether or not it is going to be enough to keep the stock going higher is difficult to say.  


Looking out to 2012, we see two important metrics that will help to determine how the rest of the year is going to shape up. 


Chipotle is trading near its all-time highs and at 21x EV/EBITDA NTM, making it the most expensive stock in the space.  We’re not making any call into the quarter; this business model has clearly surprised to the upside over the last few years.  Here are two key points we will be watching for any sign of weakness.  It should be noted that two other companies that the Street loves, MCD and SBUX, printed strong numbers last week but traded down because they missed expectations.


Is the company taking further price and did pricing impact traffic in 4Q11?  The company suffered in early ’09 from a drop off in traffic after pricing was taken up to protect margins.  While food inflation has subsided, we expect a continuation of margin pressure from those items that CMG relies on.  CMG took significant pricing in 2009 and traffic did fall off precipitously.  One could argue that the brand is stronger now, but we will be watching to see if the divergence between Food Away from Home CPI and CMG pricing grows any larger in 4Q.  If, on the margin, other companys' offerings are perceived to be better value than Chipotle's, we would expect that to negatively impact traffic (second chart).  







Is the company continuing to drive strong returns on incremental investment as it grows?  This is a key metric we follow for restaurant companies that are growing.  If the ROIIC were, any time soon, to come down from the best-in-class level it is currently at, we would expect the stock to trade at a much lower multiple.  While we could see a dip in the stock price if the street’s expectations - particularly the anticipated 10.4% comp - are not met, we do not expect any larger correction until the ROIIC comes down much, much further.  





Howard Penney

Managing Director


Rory Green



The Macau Metro Monitor, February 1, 2012




Janauary Macau Gross Gaming Revenue was up 34.8% YoY to MOP 25.040 BN (HKD 24.309 BN, USD 3.13 BN). 



Ponte 16 has submitted its extension project application with the Macau government.  The company plans to invest $800 million catering a floor area of 400,000 sq ft., including a shopping mall, and expanding the current casino floor, and expect to complete in 2013.



The number of tourists during Chinese New Year was lower than expected according to the tourism industry insiders, but still managed to achieve single digit growth.  During the week long holidays in mainland China, from January 23 to 29, the average room rate at guesthouses rose by a staggering 28.1% from the same period of last year to almost MOP 560.  The prices at five-start hotels increased 9.1% to more than MOP 2,400.  The average occupancy rate at three to five-star hotels actually grew by 4.6 points from the 2011 Chinese New Year to 91.9%.  This figure even reached 94.9% at five-star hotels, up by 3.7 points.



Average housing prices in 100 major cities in China fell 0.18% in January compared with December, China Real Estate Index System says.  This is the 5th consecutive sequential decline. 



Singapore created 121,300 jobs last year which caused the unemployment rate to fall to 2%, a 14-year low.

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