Growth Crisis

“Europe does not just face a debt crisis, Europe also faces a growth crisis.”

-David Cameron


Growth Slows As Inflation Accelerates. I wrote that in every other Early Look note between February-April of 2008 and 2011 and, unless the US Dollar doesn’t catch a credibility bid soon, I’ll write it again from February-April of 2012.


Why is it that people in our profession didn’t believe me then? Why is it that they don’t believe me now? Do less people believe me less? I really have no idea on what the answers to these questions are. The only thing I am certain of is that my process for intermediate-term economic forecasting using the US Dollar as my lead indicator for Growth and Inflation has not changed.


Sadly, neither has the broken processes of those who had both the 2008 and 2011 Growth Slowdowns wrong.


Back to the Global Macro Grind


Britain’s Prime Minister David Cameron gets this. The Chinese, Indians, and Brazilians get this. So why is it that the Crack Keynesian economists, who got the USA, Japan, and Italy into this mess to begin with, don’t?


That’s pretty simple. It would mean they’d have to hold themselves accountable for structurally impairing the long-term economic growth prospects of Global GDP via Keynesian/Fiat Policies to Inflate.


Got data to support these attacks on the aristocracy of our academic elite?


Let’s look at yesterday’s American Institute of Supply Management Report (ISM) for February (see Chart of The Day):

  1. GROWTH: Slowed -3.1% sequentially (month-over-month) to 52.4 from 54.1
  2. INFLATION: Accelerated +10.9% (month-over-month) to 61.5 from 55.5 (Prices Paid)
  3. POLICY: Dollar Debauchery began January 25th after Ben Bernanke push his Policy to Inflate to 2014

So why didn’t markets go straight down on that yesterday?


I have no idea – they didn’t until May of last year either. Markets will do what they do, until they don’t. The German hyper-inflation of the 1920s saw its stock and commodity markets rise as real (inflation adjusted) German Growth Slowed to all-time lows too.


No worries. According to the Chairman of The US Federal Reserve’s CYA Career Risk Management campaign:

  1. GROWTH: Qe2 (ended Q2 of 2011) was supposed to get us a US Growth acceleration to 3.5-4% (it was 0.36% in Q1 2011)
  2. INFLATION: never – at all-time highs in food and energy prices, you’ll never see it, ever (it ramped to 4-6% in 2011)
  3. POLICY RESULTS? Bernanke said this yesterday and I almost fell out of my chair:

“We’ve had about 2.5 million jobs added … and we’ve seen big gains in stock prices…”


Oh. Ok. Now that the stock market is up, we need to do more of what we did from an inflation policy perspective last year – because, uh, it actually worked? This is the kind of groupthink, dogma, and confirmation bias that almost every behavioral psychologist of the modern Millennium shuns. Enough of the Great Depression fear-mongering thing already.


It’s ok to admit it.


We have a pending Growth Crisis in Japan, Western Europe, and the United States of America. Like an AA meeting, we might have to all say it together: “we are addicted to easy money, inflation, and debt – they structurally impair growth.”


Got math to support these plainly visible claims? Let’s look at how US Growth (GDP) did as the US Dollar Strengthened in Q4 of 2011:

  1. US Dollar Index and American Purchasing Power rose +6.7% from mid October to the end of December 2011
  2. US GDP Growth Accelerated from +1.34% in Q2 2011 (highest inflation quarter of 2011) to +2.98% Q4 2011
  3. US Consumption Growth Accelerated from +0.38% in Q2 2011 (lowest since Q1 of 2009) to +1.17% Q4 2011

The math is so trivial that only an un-elected Central Planner can obfuscate it to the Muppets in Congress at this point.


Facts about US Economic Growth:

  1. US Consumption represents 71% of US GDP – get that right, you’ll get mostly everything else right
  2. Export Manufacturing won’t move anything but the political dial – debauching the Dollar for “export” growth has not worked
  3. Strong Dollar Deflates The Inflation = Higher Real-Inflation Adjusted Consumption = Higher US Growth

Setting aside the accounting irregularities of the US Government on silly things like birth/death adjustments to the US Employment report and using a GDP “Deflator” that’s usually understating US inflation anywhere between 50-1000% (GDP Deflator for Q4 was 0.86%, when CPI and PPI blended averages for Q4 were approximately 500% higher), you should feel better now.


You shouldn’t feel better about America’s long-term Growth Crisis. You should just feel better because I am telling you the truth.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $123.29-126.41, $78.11-79.22, and 1, respectively.


We’ll be hosting our Sovereign Debt and Demographic Reckoning Conference Call on Japan at 11AM EST. Please email if you are interested in participating.


Best of luck out there today and Happy Birthday to my beautiful little girl, Callie.




Keith R. McCullough
Chief Executive Officer


Growth Crisis - Chart of the Day


Growth Crisis - Virtual Portfolio


TODAY’S S&P 500 SET-UP – March 2, 2012

As we look at today’s set up for the S&P 500, the range is 12 points or -0.81% downside to 1363 and 0.07% upside to 1375. 












  • ADVANCE/DECLINE LINE: 1033 (-1982) 
  • VOLUME: NYSE 814.48 (-26.71%)
  • VIX:  17.26 -6.35% YTD PERFORMANCE: -26.24%
  • SPX PUT/CALL RATIO: 2.29 from 2.48 (-7.66%)


  • TED SPREAD: 40.85
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 2.01 from 2.03
  • YIELD CURVE: 1.73 from 1.74 

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:45am: ISM New York
  • 1pm: Baker Hughes rig count
  • 8pm: Fed’s Bullard speaks on U.S. economy in Vancouver 


    • President Barack Obama visits wounded service members at Walter Reed hospital in Bethesda, Md.
    • House not in session, Senate in session
      • Senate meets to resume consideration of surface transportation bill, 10am 


  • Yelp priced 7.15m shares at $15 each in IPO after offering them at $12-$14 apiece
  • European leaders agreed to provide capital faster for planned permanent bailout fund
  • Settlement talks continue over blame for Deepwater Horizon sinking, oil spill; trial will otherwise begin March 5
  • Sands China profit beat estimates on jump in Macau casino sales; watch LVS
  • President Obama said to have told Wall Street donors that Democrats can’t unilaterally stop accepting money from big- dollar PACs
  • U.S. ITC may announce whether it will review judge’s finding that Motorola Mobility infringed one Microsoft patent and not six others, 5pm
  • Washington state Republican presidential caucuses take place tomorrow 


    • Big Lots (BIG) 6 a.m., $1.74
    • Exelis (XLS) 7am, $0.56
    • Genesco (GCO) 7:35am, $1.67
    • TransAlta (TA CN) 8:54am, C$0.24 


OIL – down 1% this morning but the lines that matter most continue to hold as the US Dollar’s bid remains fleeting. If Iran doesn’t send a missile somewhere soon, we’re going to need another line of storytelling out of Washington, fast. Immediate-term supports for Brent and WTI = $123.29 and 106.12, respectively. 

  • Copper Bull Streak Extends to Longest Since October: Commodities
  • Oil Heads for Weekly Decline After Saudi Arabia Denies Sabotage
  • Cocoa Falls as Rains May Boost Crops in West Africa; Sugar Rises
  • Soybeans Set for Third Weekly Gain on U.S. Sales, Drought Woes
  • Gold May Fall in London on Speculation Fed Will Refrain From QE3
  • Copper May Decline as Shanghai Stockpiles Increase to a Record
  • Bangladesh Plans to Import 100,000 Tons of Sugar From Brazil
  • Palm Oil Posts First Weekly Decline in Four as Exports Weaken
  • Economic Surprises Signal Rising Metals Demand: Chart of the Day
  • Coal to Japan Seen Near Record in Xstrata Talks: Energy Markets
  • Aluminium Bahrain Seeks to Keep Bribery Suit Against Alcoa Alive
  • Palm Oil Imports by Pakistan to Slump as Strike Shuts Factories
  • Oil Prices May Rise Next Week as Gasoline Gains, Survey Shows
  • Oil Falls as Saudi Arabia Denies Sabotage
  • Rubber Gains to 5-Month High as U.S. Data Boosts Demand Outlook
  • Saudis Suffered No Sabotage to Oil Facilities, Ministry Says
  • Russia Plans $8 Billion Siberia Investment to Boost Coal Exports 









RUSSIA – the most popular man with Putin right now has to be The Bernank. Putin gets paid in Petro-Dollars, and with the Petro straight up, Dollar straight down, what more could our comrade want heading into this weekend’s election? Russia +25.2% YTD. That’s probably a depression or deflation signal, or something.






YEN – this is easily the most recognizable downward dog pattern that consensus still isn’t talking about. Straight down again (-0.46%) vs the USD this morning, the Japanese are about to engage in selling more sovereign debt than even the Americans and Europeans could. We have a 100 slide deck and conference call on Japan at 11AM EST today if you want to get up to speed on it.










The Hedgeye Macro Team


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


The Macau Metro Monitor, March 2, 2012




Some lawmakers have called on the government to extend the gaming ban on public servants to casino staff, as part of a draft bill on restrictions for access, stay and gaming in casinos.  The draft law, which applies to slot parlours,  raises the minimum age to enter and work inside a casino from 18 to 21. 


The law proposal was discussed at the Legislative Assembly’s first standing committee yesterday but the suggestion gathered no consensus.  Lawmakers are now waiting for the Administration to put forward the final version of the bill before signing their report. The proposal could be ready for voting in April.



The Macau Executive Council kept the income subsidy scheme of helping low-salary permanent residents flat YoY at MOP 4,400 despite inflation reaching almost 6% in the last 12 months.  “There are other measures launched by the government to alleviate low-income earners’ living pressure,” Executive Council spokesperson Leong Heng Teng said.

Shorting EWI: Italy Trade Update

Positions in Europe: Short Italy (EWI)


Keith shorted EWI in the Hedgeye Virtual Portfolio today with the etf overbought on its immediate term TRADE duration. Our thesis on Italy remains intact: the country’s public debt overhang will continue to compromise growth and compress tax receipts as PM Monti continues to press the austerity button that should crimp confidence and spending and heighten unemployment.  And recent fundamentals are reflecting this weakness: Retail Sales were down -3.7% in DEC Y/Y vs -1.8% in NOV; Business Confidence fell to 91.5 in FEB vs 92.1 in JAN; the Unemployment Rate rose to 9.2% in JAN vs 8.9% DEC; and CPI remains elevated at 3.4% in JAN Y/Y vs 2.6% for the Eurozone aggregate.


We’re forecasting a long TAIL to Europe’s sovereign debt ‘crisis’, especially under a scenario in which the current Eurozone fabric is maintained (that is to say Greece and Portugal don’t “default” and stay in the Union), which we think is probable given Eurocrat resolve. As the goalposts continue to change (think ISDA ruling on Greek debt) and uncertainty abounds (think structure around the ESM and EFSF or terms and outcome of a “fiscal compact”) we expect volatility ahead across European markets and we’ll tactically take advantage of these price swings.


Matthew Hedrick

Senior Analyst


Shorting EWI: Italy Trade Update - 1. MIB

Retail: Spotlight on the Mid-Tier

February comps came in largely ahead of expectations shining the spotlight on mid-tier weakness ever brighter.


February sales reflect a solid start to the year for retailers…most of retail that is. The beat-to-miss ratio was favorably skewed with 14 companies coming in ahead of expectations compared to only 4 misses. The most notable callout from the morning is the fact that on the same month that JCP and DDS join the ranks of the SSS alumni, KSS was one of the few retailers to come in below expectations shining the spotlight on mid-tier weakness ever brighter. This is consistent with our view that the increasingly competitive pricing dynamic playing out in the mid-tier is heating up.


Here are some additional callouts:


  • The High/Low-end department store performance spread remains intact. JWN comps came in 4+ pts above consensus at +10.2%, SKS +6.6% & M +4.6% while KSS came in (-0.8%) as one of the key misses on the morning. JWN highlighted a shoe clearance event that typically takes place in March as a driver of 200-250 bps of comp during the month with a negative 150-200bps impact on March however excluding the event’s contribution, comps would have still come in ahead of estimates by 2 pts.  
  • Off-price retailers ROST and TJX continue to outperform with both reporting +9% in February ahead of expectations. Notably the spread between the blended off-price comp and total monthly comp increased from +3.9% to +4.1% in February. Both retailers highlighted favorable weather as drivers of spring apparel sales during the month. Exiting 2012, guidance from both TJX and ROST suggested upside to consensus 2012 EPS expectations. As pricing continues to heat up at the mid tier (see KSS), we expect the off-price channel to continue to outperform.  
  • KSS: was the clear underperformer (-0.8%) vs. (-0.1%E) and is now the last mid-tier retailer standing with both JCP and DDS no longer reporting monthly comps. KSS highlighted children’s, women’s, footwear and home as slightly positive to negative; all categories that were positive callouts among other companies reporting this morning.
  • GPS: was one of the biggest upside surprises of the day +4% vs. (-1.6%E) with positive comp growth across all of the domestic businesses. The first round of merchandise designed at the new Global Creative Center in NYC hit stores on February 10th. CEO Glenn Murphy did not comment specifically on the Feb MTD performance of the new spring product on last week’s call but not surprisingly was optimistic regarding the creativity at the new global hub.
  • TGT: beat expectations in both January & February by 2 pts up +7% this month. February performance was notable given an increase in comp transactions, average transaction size, better than expected traffic and comp increases in every region. Further, TGT comped positively across all of its major categories for the first time in over a year (see table below).
  • LTD: came in +8% vs. +7%E after increasing guidance for the month from LSD to MSD. Consistent with guidance given on the Q4 call, the company again highlighted merchandise margins down in all segments.
  • ROST, TJX, TGT were all positive regarding their inventory position at month end while WTSLA highlighted low inventory levels resulting in weaker top line results.
  • At a category level, Handbags, Footwear and Accessories continue to perform well at the high-end (JWN, SKS) with men’s and women’s apparel highlighted by TGT, M, BKE, SKS, ROST.


Longs: LIZ, NKE, RL



Matthew Darula



Retail: Spotlight on the Mid-Tier - high low comp


Retail: Spotlight on the Mid-Tier - Total SSS


Retail: Spotlight on the Mid-Tier - TGT SSS grid