Legislating Inflation

This note was originally published at 8am on February 22, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Inflation is taxation without legislation.”

-Milton Friedman


Since one of America’s chief champions of free-market capitalism, Milton Friedman, died in 2006, we’ve had Ben Bernanke running the US Federal Reserve. Bernanke has never raised interest rates. Never is a long time.


The Bernank’s fans (most of them get paid by inflation) will tell you that, in the short-run, Legislating Inflation is what we need to stop The Deflation (i.e. free-market prices falling). In the long-run, I think that conflicted and compromised policy for the few will be dead.


It’s a good thing President Obama is considering a cut in the US corporate tax rate today – because Bernanke’s 2014 cheap money policy is imposing a Consumption Tax on the 71%.


Back to the Global Macro Grind


The way that my Keynesian Economics professors at Yale taught me to calculate US GDP Growth is as follows:


GDP = C + I + G + (X-M)


C = Consumption. That’s 71% of US GDP. Genius calculus will reveal rising “export/manufacturing” doesn’t budge the GDP number.


So, if you have a Policy To Inflate via US Dollar Debauchery, you are putting a Consumption Tax on the American People. Most human beings who drive to work, pay for their kids to go to school, and feed their families get this.


Yesterday, the US Dollar Index was down another -0.45%.


At the same time: 

  1. Oil was up another +2.5%
  2. Gold was up another +2.0%
  3. Energy Stocks led SP500 advancers at up +0.7% 



On the day, the SP500 barely closed up (+0.07%).


So, this whole Legislating Inflation thing that is occurring both fiscally (no budget yet; no deficit discipline either) and monetarily, is only good for the US stock market to a point.


This revelation, of course, is not new. Almost the exact same thing happened to commodity and stock prices into the highs of February 2011. All the while, Obama’s central planning advisors (David Axelrod, Larry Summers, Tim Geithner, etc) couldn’t believe that US Growth slowed like it did in Q1 of 2011 (down to 0.36%!).


How? Who? Why?


After you calculate the C + I + G + (X-M), you have to subtract what we call the “Deflator” from the GDP number. As inflation rises, the deflator gets bigger, and yes, sorry, real economic growth (adjusted for inflation) gets smaller.


This is why we are so intensely focused on the marginal relationship between Growth and Inflation. Since everything that matters in Global Macro is priced on the margin, this is what we need to solve for within the aforementioned GDP equation.


My call here is as crystal clear as it was at this time of last year. From this time and price, Inflation Expectations Rising Will Slow Growth sequentially (as in month-over-month). Markets typically don’t like that.


Where’s the Inflation Rising data? 

  1. Hong Kong’s Consumer Price Inflation rose to 6.1% in JAN vs 5.7% DEC
  2. India’s Consumer Price Inflation rose to 7.7% in JAN vs 7.5% (WPI) DEC
  3. Italy’s Consumer Price Inflation stayed sticky at 3.2% JAN vs 3.2% DEC 

Where’s the Growth Slowing data? 

  1. Germany’s manufacturing PMI stopped improving in FEB at 50.1 vs 51.0 JAN
  2. Japanese Exports plummeted to -9.3% y/y in JAN and Japan printed their largest monthly trade deficit ever!
  3. Taiwan Exports were down -8.6% y/y in JAN (lowest demand reading since 2009) 

*Some obvious points about all this data: A) its Global Macro data, not Greek, B) there’s plenty of January data here instead of February and C) the inflation data (causal in slowing real growth) has only accelerated to the upside here in February.


So, do we suspend all disbelief and chase 3-year highs in US Equity prices because the Dow is approaching a big round number? If I’m paid to do it with other people’s money, I might roll the bones on that. Then again, I might not.


Until we stop Legislating Inflation to cheer on stock and commodity markets (David Axelrod), we won’t A) stop seeing shortened economic cycles and B) amplified market volatility.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, and the SP500 are now $1731-1756, $118.72-121.78, $1.30-1.33, and 1352-1365, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Legislating Inflation - Chart of the Day


Legislating Inflation - Virtual Portfolio


TODAY’S S&P 500 SET-UP – March 7, 2012

As we look at today’s set up for the S&P 500, the range is 23 points or -0.55% downside to 1336 and 1.16% upside to 1359. 














  • ADVANCE/DECLINE LINE: -2509 (-1923) 
  • VOLUME: NYSE 877.82 (24.29%)
  • VIX:  20.87 15.62% YTD PERFORMANCE: -10.81%
  • SPX PUT/CALL RATIO: 1.63 from 2.04 (-20.10%)


USD – this is not a political comment, it’s a correlation one – Romney’s momentum rising/falling is starting to track the US Dollar Index and our new Hedgeye Election Index (Obama at 58.4% before Super Tuesday results). The back-test is meaningful – send us a note if you want the data series. US Dollar Index = +2% since Romney won Michigan/Arizona and you see what happened to inflation in the face of that (deflated, fast). 

  • TED SPREAD: 40.85
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 1.96 from 1.94
  • YIELD CURVE: 1.68 from 1.67 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:00am: MBA Mortgage Apps, week of Mar. 2 (prior -0.3%)
  • 8:15am: ADP Employment Change, Feb., est. 215k (prior 170k)
  • 8:30am: Nonfarm Productivity 4Q F, est. 0.8% (prior 0.7%)
  • 10:30am: DOE inventories
  • 3:00pm: Consumer Credit, Jan., est. $10.45b (prior $19.308b) 


  • President Barack Obama visits Daimler truck manufacturing plant in Mt. Holly, N.C., delivers remarks on economy, 12:45pm
  • House, Senate in session:
    • House Financial Services subcommittee holds hearing on modernizing Securities Investor Protection Corp., 9:30am
    • Senate Agriculture holds hearing on healthy food, nutrition as part of farm bill drafting, 9:30am
    • House Energy and Commerce hearing on gasoline prices, 10:30am
    • Congressional Progressive Caucus holds news conference on home foreclosures, 12:15pm 


  • Apple to host iPad event; watch for details on processing speed, display, pricing, effect on potential suppliers, 1pm
  • Mitt Romney won 6 states including Ohio; Rick Santorum captured 3, signaling fight for Republican delegates may last months
  • SocGen, Generali, UniCredit joined firms saying they would participate in Greece’s debt swap
  • Sprint said to plan end to network-sharing deal with Falcone’s LightSquared
  • Netflix explores putting film streaming service on cable systems
  • JHL Capital Group says subsidiary of Clear Channel Communications Inc. improperly moved $656m to its parent
  • Freddie Mac faulted with FHFA for oversight of loan servicers
  • Calpers may cut assumed rate of return for 1st time since 2004
  • Delphi investors can’t block Tokio Marine offer, judge ruled yesterday 


    • Fresh Market (TFM) 6 a.m., $0.38
    • Children’s Place (PLCE) 6:30 a.m., $0.90
    • Ciena (CIEN) 7 a.m., $(0.04)
    • Brown-Forman (BF/B) 7:30 a.m., $1.01
    • American Eagle Outfitters (AEO) 8 a.m., $0.35
    • Laurentian Bank of Canada (LB CN) 8:54 a.m., C$1.26
    • Hot Topic (HOTT) 4 p.m., $0.20
    • Men’s Wearhouse (MW) 4:01 p.m., $(0.13)
    • Express (EXPR) 4:01 p.m., $0.68
    • H&R Block (HRB) 4:03 p.m., $0.07
    • Semtech (SMTC) 4:30 p.m., $0.31
    • Pall (PLL) 5:01 p.m., $0.74
    • Canadian Western Bank (CWB CN) 7 p.m., C$0.55
    • HudBay Minerals (HBM CN) Post-Mkt, C$0.15 


OIL  - both Brent and WTIC continue to hold all 3 durations of support  (TRADE, TREND, TAIL) in our model with Brent Oil’s refreshed risk management range = $120.83-123.98. It would have to break $118 (and WTIC break $102) for us to consider this a tailwind of Deflating The Inflation for the benefit of US Consumption. 

  • Boar Hunter Sets Sights on China After MF Global: Commodities
  • Oil Rises on Forecast of U.S. Fuel Supply Drop, Jobs Increase
  • Copper Swings Between Gains, Losses on Stocks, Slowdown Signals
  • Soybeans Climb for Second Day as Chinese Demand May Strengthen
  • Gold Gains in London as Drop to Six-Week Low Attracts Buyers
  • Robusta Coffee Falls as Supplies May Increase; Cocoa Advances
  • Palm Oil Seen Rallying 24% as World Cooking-Oil Supply Drops
  • Australian Beef to Compete With Brazil, India as Demand Surges
  • Jinchuan Plans to Raise Nickel Output, Look for Mines Abroad
  • Goldman Takes Lead in M&A List Spurred by Natural-Resource Deals
  • New Iraq Oil Terminal Starts Pumping Today, Minister Says
  • California Nuclear Backlash Mounts After Japan Meltdown: Energy
  • Netanyahu Sees Red Sea-Negev Rail Spurring China Trade: Freight
  • China to Buy Corn If Prices Are Right, Reserve Chief Says
  • India’s Singh Demands Urgent Review of Cotton-Export Ban
  • Australian Wool May Tumble 8% as Slowing Economy Hurts Demand
  • Copper Demand to Grow At Least 6% This Year, Tongling’s Wei Says 









SPAIN – never mind Greece, pull up a chart of the IBEX = straight down and, more importantly, this is the 1st major European stock market to snap its intermediate term TREND line (8499). Spanish Equities are down -4% all of a sudden YTD. Debt structurally impairs growth – these economies and markets are stagflating, big time – and even a Keynesian can’t stop gravity in perpetuity.















The Hedgeye Macro Team



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Old Habits

“He was a man of habits.”

-Benjamin Wallace


Earlier this week I cited a book I am enjoying, “The Billionaire’s Vinegar.” Today’s quote summarizes the unique persona of Michael Broadbent. Becoming the world’s most prominent wine auctioneer didn’t just happen.


Neither does risk in these globally interconnected markets. There is no such thing as “risk on” and “risk off.” In real life, risk is always on. Risk never sleeps.


Habits in this business can be as polarizing as a legacy media channel’s partisanship. Fortunately, Old Habits on Wall Street and News Media 2.0 are dying on opacity’s vine.


Back to the Global Macro Grind


I personally have a habit of selling on green and buying on red. Most of the time it saves me from grossly violating Rule #1 – Don’t Lose Money. Some of the time it doesn’t.


Buying too early is also called being wrong. The lynx-eyed Jeff Gundlach at Doubleline says “an investor is a trader who is under-water.” Great one liner – primarily because it royally annoys Captain Stock Picker. Especially after a day like yesterday.


Yesterday’s Short Covering Opportunity in everything that was immediate-term TRADE oversold was as obvious to me as the Short Selling Opportunities we were signaling 2.5% higher with the SP500 at its YTD highs last week.


On red, after a 3-day correction in Global Equities and Commodities, here’s what I’ve done in the Hedgeye Asset Allocation Model:

  1. Cash = 46% (down from 58% on Friday)
  2. Fixed Income = 24% (no change)
  3. US Equities = 18% (up from 12% on Friday)
  4. Commodities = 9% (sold Corn, bought Oil)
  5. International Equities = 3% (bought Canada)
  6. International FX = 0%

I’m not saying this positioning is right or wrong. The market will decide my fate on that. I’m just TimeStamping what I did. Repeatable Process is a habit too.


Getting longer here certainly has risks. In the Hedgeye Portfolio I went into yesterday’s open with 11 LONGS, 9 SHORTS. This morning I have 13 LONGS and 7 SHORTS. I’ll most likely tighten that up, selling some on green today.


Why sell on green? Isolating the USA, here are some of the risk management signals jumping off my notebook page today:

  1. SP500 broke immediate-term TRADE support of 1364 and now has a lower-high of resistance up at 1359
  2. Equity Volatility (VIX) broke out above immediate-term TRADE resistance of 17.72 yesterday; upside to 23.17
  3. US Equity Volumes continue to flash gnarly negative skew – accelerating volumes on the down days, not up ones
  4. S&P Sector Rotation call we made last week remains crystal clear (Utilities (XLU) best yesterday; Financials (XLF) the worst)
  5. S&P Sectors that have broken their immediate-term TRADE lines = 5 of 9 (XLB, XLI, XLF, XLV, and XLE)
  6. 10-year US Treasury Yields continue to signal Growth Slowing (trading below my TREND line of 2.03%)
  7. Yield Spread (10yr minus 2yr) is down 3bps week-over-week; benign but not bullish at 167bps wide
  8. US Dollar Index has moved back to bullish TRADE and TREND after Romney wins in Michigan and Ohio

That last point is probably the one that rings the political gong louder than any other. Why? Because people are partisan. But the math trumps partisanship and the fact of the matter is that the US Dollar Index is up +2.1% since Romney won in Michigan last week (see our newly minted Hedgeye Election Index). Causal? Correlated? Does it matter which?


Strong Dollar = Strong America. Period.


That’s the most bullish long-term (and sustainable) economic strategy I can paint for Americans right now. Sadly, it’s also the most unexpected. Old Habits, and the economists and politicians who get paid to pander to them, won’t agree with this because none of them have tried it in the last decade (i.e. so none of them can take credit for it when it works).


To get a stable and strong US Dollar will take both fiscal and monetary sacrifice. God forbid the stock market goes down for a few weeks to get there. But inflation expectations will go down too. Whether it was $20/barrel (average price of oil) between 1 or 1, these were the most bountiful decades or US job creation and economic prosperity, ever.


Ever is a long time. Old Habits of debauching your currency for short-term political votes should be held accountable to ever, too.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $120.83-123.89, $79.32-79.91, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Old Habits - Chart of the Day


Old Habits - Virtual Portfolio


The Macau Metro Monitor, March 7, 2012




An international law firm founded by Bill Gates' father, K&L Gates, has filed a writ at the High Court against MPEL.  The firm is seeking a court order to find out how much of MPEL's property represents money that ex-employee of K&L Gates, Navin Kumar Aggarwal, took, or his net winnings, or both, and to have MPEL pay what it owes.  K&L Gates claims that Aggarwal transferred at least HK$34 million from the client accounts to Melco and gambled with that money and other funds.  He made a net loss of at least HK$9.9 million.  K&L Gates also says MPEL received the misappropriated money knowing it was not entitled to do so, that the money did not belong to Aggarwal and that the former partner had a history as an unsuccessful gambler, among other things.


The filing says Aggarwal took millions of dollars from the escrow accounts of clients, including those four parties.  Four clients had been repaid a total of HK$117 million, the writ said.  The clients are Hui Kau-mo, Mark Lightbown, Golden Bridge United Holdings Group (HK), and Laxmi Niwas Jhunjhunwala.   


Initially the figure involved was put at HK$16.6 million. Prosecutors later revised it to HK$780 million.  The criminal case is scheduled for a brief hearing on April 2 at Eastern Court.



Macau's secretary for economy and finance, Francis Tam Pak Yuen, says Macau GGR growth is expected to be up only 'low double-digts or high single-digits' in 2012.  Macau government estimates regarding the growth of the casino industry are traditionally very conservative.


Taking into account the expected revenue from direct taxes from gaming included in the 2012 government budget, presented in November last year, that would actually mean a contraction of the sector, opposing the general view among industry players and analysts.


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