Credibility's War

“Indeed, policies such as competitive currency devaluations risk unleashing a wave of destructive protectionism.”

-Dennis C. Blair, US Director of National Intelligence (February 2009)


On my flight back to New York last night I was reviewing my institutional client meetings in Denver and Kansas City and thought to myself, God help us all if Ben Bernanke continues to engage in this currency war against US Consumers and Savers.


Since the word war is not one you want to bark out loud on a US flight, I decided to keep it to myself and keep thinking. Jim Rickards’ recent book, Currency Wars, provides an excellent historical perspective on why using that word didn’t come out of thin air.


In addition to the aforementioned quote from the US Director of National Intelligence, Rickards starts Chapter 3 “Reflections on a Golden Age” (page 37) with the following quotes:

  1. “We’re in the midst of an international currency war.” –Guido Mantega, Finance Minister of Brazil (2010)
  2. I don’t like the expression currency war.” –Dominique Strauss-Khan, Managing Director IMF (2010)

Well, I don’t like DSK and I couldn’t care less what he, or any of his conflicted and compromised cronies of the Keynesian Kingdom, think about our expressions. American Patriots, Unite. We are fighting for the credibility of our currency.


Back to the Global Macro Grind


If there’s ever been a morning where the currency war is on the tape, it is this morning:


1.       FED – in a central planning speech in NYC last night, Bernanke’s pandering Fed Head from San Francisco, Janet Yellen, said “I consider a highly accommodative policy stance to be appropriate in present circumstances.”  (must be hard times at Facebook – great depressions perhaps in Southern California too?)


2.       BOJ – mincing zero words on currency war, the Bank of Japan’s equivalent of Bernanke, Masaaki Shirakawa, stated plainly that “The BOJ will pursue powerful easing.”


Powerful words from un-elected, but very powerful and politicized people.


The Japanese Yen, of course, went down on that – but the US Dollar didn’t. Why? That’s simple – this is war. As I am sure Einstein would agree, Credibility’s Currency War amidst the 3 major fiat currencies of the world (USD, EURO, YEN) is relative. For politicians at least, it’s a short-term race to the bottom.


Plenty of the Fed’s excuse makers say “there’s a difference between correlation and causality.” That must be a one-liner they are teaching at Western business schools or something because it certainly doesn’t apply to what’s actually going on in markets right now. We have plenty of causality (monetary policy) and plenty of correlation risk – ask anyone who trades in real-time.


A simple illustration of long-term causality is in our Chart of The Day. This is The Policy To Inflate Mechanism of Keynesians:

  1. 10-year chart of the Federal Reserve’s Balance Sheet (Total Assets/GDP)
  2. 10-year chart of the ECB’s Balance Sheet (Total Assets/GDP)
  3. 10-year chart of the Bank of Japan’s Balance Sheet (Total Assets/GDP)

What you’ll quickly notice in this chart is that one of these lines (Japan’s red line) is not like the others. That’s because Japan, under the un-qualified academic advice of Paul Krugman in 1997 to “Print Lots of Money”, actually listened to the Keynesian and went on, and on, and on with  “Quantitative Easing” until 2006.


Why did the BOJ stop printing money in 2006?


Take a wild guess. Because the said elixir of Quantitative Easing did not work.


Subsequent to 2006, both the ECB and Fed (the blue lines in the chart) decided to start acting Japanese, printing moneys in 2007 and 2008, respectively. Since then, the currency war between Europe and the United States of America has gone on, and on, and on.


The only people that I know that think this Keynesian experiment (with other people’s money) gone bad is going to ultimately end well are people who are paid to be willfully blind to its economic gravity.


To suggest that this 10-year chart of money printing and explicit Policies To Inflate has nothing to do with all-time record highs in food and energy prices (2008-2012) is a professional embarrassment.


If you want a solution to this Global Economic mess, it’s the Monetary Policy, Stupid. There has never been a country, in world history, that has debauched their currency’s credibility and achieved long-term economic prosperity.


So, next time you hear someone like Janet Yellen, Ben Bernanke, or some other conflicted and compromised European or Japanese politician tell you that this time is going to be different – please remind them, for the sake of our kids, that never is a long time.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Euro/USD, and the SP500 are now $1, $119.04-122.64, $79.61-80.26, $80.03-83.12, $1.29-1.32, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Credibility's War - Chart of the Day


Credibility's War - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 12, 2012

As we look at today’s set up for the S&P 500, the range is 36 points or -1.00% downside to 1355 and 1.63% upside to 1391. 












    • Up from the prior day’s trading of -2133
  • VOLUME: on 4/11 NYSE 790.20
    • Decrease versus prior day’s trading of -18.72%
  • VIX:  as of 4/11 was at 20.02
    • Decrease  versus most recent day’s trading of -1.81%
    • Year-to-date decrease of -14.44%
  • SPX PUT/CALL RATIO: as of 04/11 closed at 2.04
    • Increase from the day prior at 1.52 


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 2.03
    • Down from prior day’s trading of 2.04
  • YIELD CURVE: as of this morning 1.74
    • Decrease from prior day’s trading at 1.75 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:15am: NY Fed’s Dudley speaks in Syracuse on economy
  • 8:30am: Trade Balance, Feb., est. -$51.8b (prior -$52.6b)
  • 8:30am: PPI (M/m), Mar., est. 0.3% (prior 0.4%)
  • 8:30am: Jobless Claims, week of Apr. 7, est. 355k (prior 357k)
  • 9am: ECB Executive Board member Peter Praet speaks in New York
  • 9am: Atlanta Fed’s Lockhart will moderate panel discussion on U.S.-Mexican relations at Atlanta Fed
  • 9:45am: Bloomberg Consumer Comfort, week of Apr. 8
  • 10am: Freddie Mac mortgage rates
  • 10am: New York Fed’s Cumming, Fed Board’s Liang speak on panel on financial reform proposals at conference in New York
  • 10:30am: EIA natural gas
  • 11am: NY Fed’s Dudley speaks in Syracuse on the economy
  • 12:30pm: Philadelphia Fed’s Plosser speaks on economic outlook to National Economists Club in Washington
  • 1pm: Minneapolis Fed’s Kocherlakota speaks to Chamber of Commerce in White Bear Lake, Minnesota
  • 1pm: U.S. to sell $13b 30-yr bonds (reopening)
  • 2:35pm: NY Fed’s Dudley visits medical device manufacturer in Skaneateles Falls, NY
  • 3:30pm: Fed’s Raskin speaks in Los Angeles on the economy 


    • Federal Election Commission considers request from Sen. Dianne Feinstein’s campaign to waive contribution limits, allow replacement of millions of dollars lost in embezzlement scheme
    • VP Joe Biden holds town hall in Exeter, N.H. noon
    • IMF Managing Director Christine Lagarde speaks at the Brookings Institution, 11am
    • White House conf. to preview Barack Obama’s participation in 6th Summit of the Americas in Cartagena, Colombia, 9am
    • Adm. Jonathan Greenert, chief of naval operations, speaks at National Press Club, 7:30am 


  • Trade deficit in the U.S. may have retreated in February as imports cooled from a record, economists est.
  • Google releases results after the close of trading; watch cost-per-click, click-through rates
  • Federal Reserve Vice Chairman Janet Yellen endorses view that borrowing costs likely to stay low through 2014
  • BlackRock plans to start a bond-trading system that will allow investors to bypass investment banks
  • Roche reiterates it seeks talks with Illumina, says publicly available info doesn’t justify higher price
  • Shell deploys oil-spill response vessel after finding “a light sheen” of oil between Mars, Ursa production areas in Gulf of Mexico
  • Oaktree Capital raises $380.2m in IPO, bringing in about 27% less than originally sought
  • Sony will cut 10,000 jobs, about 6% of its workforce, two days after reporting record loss
  • Wal-Mart hosts investor meeting in Toronto
  • Nokia slides for second day as analysts cut price targets following profit warning
  • FDA advisory panel recommends whether to tighten approval standards for breast transilluminators, how to classify blood irradiators
  • North Korean makes final preparations for missile launch 


    • Cogeco Cable (CCA CN) 5:59 a.m., C$0.98
    • Rite Aid (RAD) 7 a.m., $(0.14)
    • Eldorado Gold (ELD CN) 7 a.m., $0.18
    • Corus Entertainment (CJR/B CN) 7 a.m., C$0.37
    • Fastenal (FAST) 7:50 a.m., $0.34
    • Commerce Bancshares /MO (CBSH) 9 a.m., $0.67
    • Novagold Resources (NG CN) 9:15 a.m., C$(0.05)
    • JB Hunt Transport Services (JBHT) 4 p.m., $0.52
    • Google (GOOG) 4:01 p.m., $9.64
    • Bank of the Ozarks (OZRK) 6 p.m., $0.51     


  • Top Analysts See Copper Rising Even as China Slows: Commodities
  • Palm Oil Drops Most in Two Months as U.S. Soybean Acres May Gain
  • Oil Advances to One-Week High After U.S. Fuel Stockpiles Decline
  • Copper Rises for Second Day on China Policy-Easing Speculation
  • IEA Sees Oil Market Better-Supplied for First Time Since 2009
  • Gold May Decline as Traders View U.S., Europe Stimulus Unlikely
  • Sugar May Fall on Brazil Production Speculation; Cocoa Drops
  • Commodities Will ‘Drift Lower’ as Stimulus Ends, UBS Says
  • Indonesia’s Mineral-Ore Ban Probably to Be Diluted, S&P Says
  • Thai Sugar Output May Climb to Record on Yields, Board Says
  • German Power’s Longest Slump Squeezes EON, RWE: Energy Markets
  • Argentina Stifles Shale Oil Interest With Seizure Threat: Energy
  • Gold Holdings Signal Slump, Credit Suisse Says: Chart of the Day
  • IEA Says Crude Market Is Better Supplied
  • Corn, Wheat Advance as Freezing Weather Threaten U.S. Crops
  • Shell Falls Most in Two Months on Gulf of Mexico Oil-Leak Probe
  • Trafigura to Buy $130-Million Stake in Indian Oil Refinery 





US DOLLAR – sheepishly, the Fed’s Janet Yellen gave a speech in NYC last night that said what she always says – she’s all for devaluing the US Dollar until she’s told to retire. USD not moving much anymore on these comments; maybe because it hasn’t worked; maybe because political change is coming – we will see. Currency War is on.






EUROPE – certified train wreck in motion in Spain and Italy again with both stock markets following their respective bond markets (lower); Italian bond auction yielding 3.89% (vs 2.76% last) on 2015 notes – and get this, the Japanese say, hey, we have our own issues, we aren’t buying pig paper.






JAPAN – the BOJ’s Shirakawa said exactly what we have been saying he’s ultimately going to have to say “The  BOJ  WILL  PURSUE  POWERFUL  EASING” – that’s the go to Bernanke move (Policy to Inflate), and it stopped Japanese Equities from going down for the 1st day in 9 (+0.7%); Yen down on that obviously, but can go down a lot more.










The Hedgeye Macro Team



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Despite dollar weakness, macroeconomic concerns contributed to what was a soft week for commodity prices.  Grains, coffee, chicken and dairy all declined on the week with hogs, soybeans, and rice posting modest gains.  Chicken wings were flat on the week but are now up 110% versus this time last year.  The most important take away from this note is that BWLD is, in our view, going to have to add one incremental topic to its upcoming EPS call: chicken wing prices.  The recent presentation at the TAG conference, incredibly, bore no mention of the company’s most important input cost.







As we near the high-traffic summer season, the topic of gas prices is continuing to feature in news reports and the conversations of everyday Americans.  As the national average retail gasoline price is currently just below $4, having increased through 2012 to-date in an expeditious manner.  Much of the resulting negative impact has been mitigated by the favorable weather that has boosted economic activity but weather is no longer a significant factor in the data. 







WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.


BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.


CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.


DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.


SONC: We've seen a rising employment, declining unemployment – consumer confidence has improved somewhat, but at this point, I wouldn't say that we've seen a negative impact from gas prices that we can discern.







Supply: Producers are facing obstacles to ramp up herd sizes in still-elevated feedstuffs and gasoline prices.


Demand: On April 6th, beef prices hit an eight-month low as the “pink slime”, or lean fine-textured beef, controversy and economic concerns weighted on demand expectations.  Today, prices are rising as speculation mounts that export demand for U.S. beef may increase. 


A survey of cattle-industry leaders suggests the average price for cash cattle will continue its recent decline, down another 91 cents to $120.99 per cwt this week.


Comments: One interesting data point we read this week is that it takes the net revenue from roughly six calves to cover the development and production costs of each replacement heifer. 





Supply: According to the International Coffee Organization, coffee production for the season started in October will be 1.9% higher than estimated a month ago.


Demand:  News reports during the last week highlighted the weaker dollar as lifting investor demand in coffee, cocoa, and sugar.  J.P. Morgan said today that global coffee demand may accelerate to 2% in 2012/13 after falling by 1% a year earlier because of “adverse macroeconomic conditions”.  We are not going with that call at this point, given our Macro Team’s outlook. 


Comments:  Falling coffee prices are good for company margins as long as demand is not falling so fast as to impact sales to a significant degree.  Starbucks has its coffee needs locked into fiscal 2013.





Supply: Egg sets placements continue to contract at around the same rate, -6%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production.  As the chart below shows, supply is not showing any clear signs of picking up.



WEEKLY COMMODITY CHARTBOOK - egg sets wing prices





















WEEKLY COMMODITY CHARTBOOK - chicken whole breast









Howard Penney

Managing Director


Rory Green



Will Pressure Bust Pipes In Japan?

Conclusion: Mounting political pressure is incrementally supportive of our bearish long-term thesis on the Japanese yen vs. peer currencies. Additionally, we update our fundamental outlook on the Japanese yen, JGBs, and Japanese equities across multiple durations.


Our fundamental research view on the yen remains particularly bearish over the long-term TAIL and of all the potential ways to play our Japan’s Debt, Deficit and Demographic Reckoning thesis, shorting the yen vs. peer currencies (particularly the USD) remains our highest conviction idea.


As always, however, we don’t want to be short the yen at every price. In fact, as we highlighted in our MAR 30 note titled “Digging Deeper Into Japanese Sovereign Debt Risk”, our bearish intermediate-term view on global equities and high-grade sovereign S/T interest rates leads us to expect further JPY strength vs. peer currencies over that duration – absent a material acceleration in Japanese sovereign debt crisis risk (more on that later).


Will Pressure Bust Pipes In Japan? - 1



From a political perspective, the pressure upon the Bank of Japan to end deflation grows seemingly by the day. In just the last few weeks alone, there has been a handful of what we’d consider critical signals in support of our view that the Bank of Japan’s balance sheet will expand materially over the long-term TAIL as the BOJ is forced to pursue its recently-adopted +1% inflation target: 

  • MAR: BOJ Governor Masaaki Shirakawa – openly opposed to accelerated BOJ financing of JGBs – agreed  to a 30% pay cut;
  • MAR: BOJ Deputy Governor Kiyohiko Nishimura was questioned by parliament on the idea of the BOJ adopting a measure similar to the Fed’s Operation Twist;
  • APR: The Liberal Democratic Party – the ruling Democratic Party of Japan’s largest opposition party – rejected BNP Paribas SA Economist Ryutaro Kono’s appointment to the BOJ’s monetary policy board, citing his hawkish lean and lack of commitment to combating deflation by any means necessary (the 9-member BOJ board currently has two vacant seats and appointees need to be approved by both houses);
  • APR: Shirakawa and Prime Minister Yoshihiko Noda met for ~1hr to discuss monetary policy; at the current pace (16 YTD), Shirakawa is on pace to exceed last year’s record total for Diet appearances;
  • APR: PM Noda announced that Economic and Fiscal Policy Minister Motohisa Furukawa will lead new ministerial meetings on the topic of overcoming deflation; Finance Minster Jun Azumi, Economy, Trade and Industry Minster Yukio Edano, and Financial Services Minister Shozaburo Jimi will all be in attendance at the regular meetings;
  • APR: The DPJ asked four of the five remaining non-governor BOJ monetary policy board members to meet later this month to discuss countering deflation. 

All told, we expect this level of political pressure to continue accelerating indefinitely, with the composition of the BOJ board likely getting incrementally dovish in the near term and finally cracking in a material way from a balance sheet perspective after Shirakawa’s departure as BOJ Governor one year from now. Recent moves in Japanese breakeven rates are also signaling this view.


Will Pressure Bust Pipes In Japan? - 2



As previously mentioned, we  do not expect the yen to depreciate dramatically in the intermediate term unless a near-term Japanese sovereign debt crisis becomes a probable risk (as opposed to the tail risk that it remains currently).  Until that happens, we’d expect both JGBs and Japanese equities to trade as expected in an environment of yen strength. We quantify those relationships in the charts below.


Will Pressure Bust Pipes In Japan? - 3


Will Pressure Bust Pipes In Japan? - 4


Japanese equities, which we flagged last week as having snapped their immediate-term TRADE support, have corrected -5.9% since the USD/JPY cross peaked on MAR 14 (+3.5%). There remains additional downside risk from a mean reversion perspective, given the Nikkei’s +21.3% YTD melt-up to its MAR 27 cyclical top. 10yr nominal JGB yields are down -6pbs (-6.5%) from their cyclical top on MAR 15.


Turning our attention to our daily handicapping of the probability of a near-term Japanese sovereign debt crisis, the latest data points would suggest increased, but not heightened risk:



We are encouraged by Japan’s ability to get through the MAR maturity calendar unscathed. That said, however, the 2Q maturity wall looks quite hefty on a quarterly basis, suggesting to us that Japan isn’t out of the woods just yet from a refinancing risk perspective.


Will Pressure Bust Pipes In Japan? - 5


Turning to the new issuance calendar, the latest L/T bond auction (last Wednesday; 10yr maturity; ¥2.3 trillion offered), which was the first of FY12, posted the lowest bid-to-cover ratio (2.73%) and highest average yield (1.01%) in four months. 


Will Pressure Bust Pipes In Japan? - 6


We’re also closely monitoring the performance of Japanese bank equity and CDS, given their risk exposure to the JGB market (25.1% of assets). There’s nothing overly worrisome to report here, with the exception of Nomura’s 5yr CDS, which is up +56bps (+21.2%) from a trough of 257bps on MAR 19 to 320bps.


Will Pressure Bust Pipes In Japan? - 7



One of the key indicators we’ve been watching to signal to us increased risk in the JGB market are L/T-S/T nominal yield spreads. This is due to our expectation that the JGB yield curve would steepen in an environment where a structural increase long-term inflation expectations and deteriorating credit fundamentals would slow the growth in demand for L/T JGBs relative to the short end of the curve – where default risk is not imminent – in an environment of accelerating supply. Recent trends here would suggest decreased risk of this event.


Will Pressure Bust Pipes In Japan? - 8


Other key indicators we’ve been monitoring are L/T JGB CDS. Both the 5yr and 10yr tenors have really come in over the last few months, declining -51bps and -43bps, respectively, from their YTD highs to 104bps and 141bps, respectively. The credit default swaps market is definitely not signaling increasing risk of a JGB sovereign debt crisis – an event that could potentially lead to default given Japan’s heavy debt service and refinancing burdens.


Will Pressure Bust Pipes In Japan? - 9



We’ve compiled a list of quotes and statements below that we think are helpful in gauging consensus sentiment around a near-term JGB market crisis. While no one person/entity’s thoughts are omnipotent, we often find taking nuggets like these in conjunction to be helpful in vetting our own research conclusions:

  • “The risk of a tumble in government bond prices would increase if taxation and social security reform are left unsolved for years… Japan must quickly overhaul the tax and social security systems to prevent government borrowing costs from spiraling in the next decade.”  [Yasuhiro Sato, chairman of the Japanese Bankers Association]
  • “The country’s financial assets are dwindling with the aging population dipping into savings. Any delays to the reform that’s being debated may raise concern that bonds may be unable to be absorbed domestically in the long run, say, in 2022. But there are no signs of a JGB price plunge in the near term." [Yasuhiro Sato]
    • Refer to slide 80 of our presentation for a view of what this looks like graphically
  • “Japanese bond yields may rise toward the summer because of the cyclical economic recovery, uncertainty about the Bank of Japan’s policy stance and Japan’s political risks.” [Tetsuya Miura, chief market analyst at Mizuho Securities]
  • Japan risks going down the same road as Greece as the cost to fund the world’s largest public debt rises in [the] years ahead. When local investors reach their limit for funding the nation’s bonds, the Bank of Japan will either have to monetize the debt or we will need foreigners to purchase bonds and yields will jump to 3 percent. That will be the start of Japan becoming Greece.” [Takatoshi Ito, deputy vice finance minister from 1999 to 2001]

Japanese sovereign debt and currency risk poses a challenge for even the most sophisticated investors to wrap their heads around due to the idiosyncrasies of the JGB and JPY market(s). That said, however, every challenge poses a great opportunity for those looking to beat the odds and nail the major moves from both a timing and directional perspective. We will continue to update our thoughts on this subject, depending on the level and proximity of risk.


Darius Dale

Senior Analyst


JCP: RonJohn’s Circle Gets Tighter


JCP CFO Michael Dastugue is the next victim to Ron Johnson's company wide overhaul. COO Michael Kramer will replace Dastugue in the interim. While we’d ordinarily be less than thrilled with the prospect of a COO assuming the finance ranks, Kramer served as CFO at ANF (2005-2008) and Apple Retail (2000-2005). The only thing that bugs us here is that the finance function still remains very far removed from Ron Johnson in the org chart.


As it relates to the stock near-term, this is a big nothing.


New Structure:

JCP: RonJohn’s Circle Gets Tighter - new structure JCP


Legacy Structure:

JCP: RonJohn’s Circle Gets Tighter - old structure JCP


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