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Unproductive Works

“Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”

-John Stuart Mill


John Stuart Mill was arguably the most influential philosopher of the nineteenth century and his writings are still widely studied.  Mill is probably best known for “On Liberty”, which discusses the limits of power that can be justly exercised by society over the individual.  Underscoring his views on liberty are the harm principle and the idea that the individual should have the right to act as she wants as long as those actions do not harm others.  To Mill, protecting and defending individual rights in the face of a potentially tyrannical majority are critical.


One way a majority can negatively influence the rights of the minority is through capital allocation by the government.  We often cite the long run historical work of Reinhart and Rogoff that highlights when government debt-as-a-percentage of GDP reaches 90%, or more, economic growth slows.  Certainly governments play a critical role in providing certain services that are critical and broadly benefit society, but, at a point, government works become unproductive.


With all that is happening in the world, I’m sure many of you missed the U.S. budget numbers for March.  As I said on twitter ( @HedgeyeDJ ), they were, in one word, ugly.  The federal government received $171 billion in revenue and spent $369 billion for a total budget deficit of -$198 billion, or 5.5% year-over-year monthly growth in the deficit. This is the largest March budget deficit of any nation, ever. 


Almost exactly a year ago, in a note titled “The Case of the Missing Stimulus”, I wrote:


“Interestingly, if we look at government spending in the 2008 – 2010 period we can actually see the impact of the stimulus act on government ledgers. In fact, according to usgovernmentspending.com the U.S. federal government spent $2.98 trillion in 2008 and $3.59 trillion in 2010. So, the net increase over this period was just over $600 billion, which roughly equates to the spending portion of The Stimulus.”


My point in that note was that while there was a one-time step up in government spending, there has not been a step down as the stimulus plan has been anniversaried.  A year later the same story holds. 


The Chart of the Day today highlights government outlays by month going back ten years.  The conclusion is that the “one-time” increasing in government spending for the stimulus plan has led to a seemingly permanent increase in government spending.  Given the anemic growth we’ve seen in the U.S. over the last 18 months, it is pretty clear this spending fits the category of Unproductive Works.


At 11 am eastern today we will be holding our quarterly theme call. (Please email if you are qualified subscriber and do not currently have the dial in information.)  The quarterly theme call is our summary of what we think will matter in the coming quarter from a global macro perspective and the best way to play the themes via asset allocation.  The themes for this quarter are as follows:

  • The Last War: Fed Fighting - We take a historical look at U.S. Federal Reserve policy to contextualize the impact of Ben Bernanke's Policy to Inflate, Extend & Pretend rock-bottom interest rates, and Burn the Buck on the broader economy and financial markets from Main Street to Wall Street.
  • Bernanke Bubbles - A highlight of the top ten leverage price bubble charts perpetuated and encouraged by The Bernank's policy stance.
  • Obvious Asymmetric Risks - In a macro environment of slow global growth and historically low interest rates we present asymmetric risks to capitalize on over the intermediate term. Low equity market volatility is but one signal of what's ahead for investors.

Underlying much of the discussion today, will be our view that global growth is slowing.  On that note, and despite rumors to the contrary, Chinese GDP growth came in at 8.1%.  This was well short of the estimate of 8.4% growth and dramatically below the “whisper” number of 9.0% that was floated yesterday.  This is the 5thconsecutive decline and the slowest growth rate in three years.  As our Asian Analyst Darius Dale would likely tell you, the actual number shouldn’t surprise anyone as the Chinese have already told us they are going to slow growth.


In other global macro news, European sovereign debt issues are once again front and center.  Yesterday, I wrote a note on Spain and the impact of further decline in real estate prices on Spanish growth (if you didn’t read the note and want a copy, ping ).  Spanish 5-year CDS are wider again this morning at 492 basis points.  Meanwhile, Spanish equities are down another -2% taking their return in the year-to-date to -14%.  As if that wasn’t bad enough, Spanish CPI was also up +0.7% for the month.  (Not so great for the 23% of Spaniards that are unemployed.)


If you are looking for a positive catalyst today, Chairman Bernanke speaks at 1 pm today in New York.  Even if he doesn’t hint at it, no doubts rumors of QE 3, 4, 5, and 6 will be spreading faster than Chinese growth ahead of his speech.


As you head into the weekend and start contemplating the upcoming Presidential election, I’ll leave you with a quote from a guy that knows a thing or two about U.S government, former President George Washington, who said:


“Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.”




The 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, $118.89-122.64, $78.74-79.66, $79.83-83.02, $1.31-1.33, and 1, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Unproductive Works - Chart of the Day


Unproductive Works - Virtual Portfolio


The Macau Metro Monitor, April 13, 2012




Singapore's 1Q GDP growth came in at 9.9% in seasonally adjusted and annualized terms, higher than the 6.3% median forecast in a Dow Jones poll.  The Monetary Authority of Singapore (MAS) restored a narrower trading band for the local dollar, reflecting reduced tolerance for volatility, while continuing with its policy of a modest and gradual appreciation of the Singapore dollar nominal effective exchange rate policy band.  There will be no change to the level at which the band is centered, it added.


Along with its policy review, the MAS said it now expects CPI to average between 3.5% and 4.5% this year, higher than its earlier estimate of 2.5%-3.5%.  It said its core inflation measure, which strips out private road transport and accommodation costs, will average between 2.5% and 3% in 2012, higher than the earlier estimate of 1.5%-2%.



The government will spend around MOP4.1 billion (US$513 million) in this year’s cash handout scheme, which starts on April 24.  Permanent residents will each receive MOP7,000, while non-permanent residents will get MOP4,200.



Sands Cotai Central welcomed over 84,000 visitors during the first six hours of its opening.  In total, Sands China properties – Sands Macao, Venetian Macao, Plaza Macao and Sands Cotai Central – welcomed over 200,000 visitors on Wednesday, the company said.

The Joker

This note was originally published at 8am on March 30, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I’m a joker

I’m a smoker

I’m midnight toker

I get my loving on the run.”


-The Steve Miller Band


Technically speaking today is the last business day before April Fool’s Day.  Last year, as some of you remember, I pulled off a decent prank as I removed Keith from his post as CEO of Hedgeye and we replaced him with the The Most Interesting Investor In The World. 


For those of you that missed last year’s joke, I’ve posted the mock video of The Most Interesting Investor In The World directly below.  Our readers that are in tune with popular culture will recognize that it is a spoof of Dos Equis Most Interesting Man In The World:




In my opinion, although perhaps it is because I wrote the script for the You Tube video above, the best line is:


“He shorts naked, with his clothes on.”


But to be even more fair, April Fool’s Day jokes can at times completely miss their mark, especially in times like this when global macro markets really need our utmost focus.  So, this year, we are putting April Fool’s to the sidelines.


Ironically, or perhaps not, Steve Miller is from Wisconsin, which, setting aside the Republican primary battle, is really the current battleground of U.S. politics.  As ABC News wrote this morning:


“While the national media attention has been focused on the upcoming GOP primary in Wisconsin, there’s another political battle gearing up in the Badger State, and it involves both Democrats and Republicans.


On Friday, the Government Accountability Board of Wisconsin is expected to certify the 1 million petitions turned in in January to recall Republican Gov. Scott Walker. With a special gubernatorial election pending, Democrats and Republicans in the state are bracing for a tight race ahead.


A special election is tentatively scheduled for June 5, with a Democratic primary to take place four weeks earlier, on May 8. (Those dates will be made official after the recall is certified.)  Three Democrats have declared their candidacies – former Dane County executive Kathleen Falk, Wisconsin secretary of state Doug LaFollette and state senator Kathleen Vinehout.”


On many levels, the June 5 election will be a critical leading indicator for President Obama’s re-election chances.


On that front, President Obama currently has a 60.4 probability of getting re-elected based on InTrade.  This correlates very closely with the Hedgeye Election Indicator (HEI), which currently shows a 62.3 chance of Obama getting re-elected.  Our proprietary index is based on rigorous back testing.  In effect, we’ve determined that there is a short list of real time market-based indicators that move ahead of President Obama’s position in conventional polls.


Setting all joking aside, in the Chart of the Day, I’ve flagged a note passed along yesterday by my colleague Darius Dale in which he wrote:


“Broadening our read-through on volatility as a measure of investor complacency, we’ve created a proprietary cross-asset class volatility index that uses an unequally-weighted average of the following volatility indices:


CBOE SPX Volatility Index (VIX);

Merrill Lynch U.S. Treasury Option Volatility Estimate Index (MOVE);

CBOE Oil ETF Volatility Index (OVX);

JPMorgan G7 FX Volatility Index; and

JPMorgan EM FX Volatility Index. 


On this score, the Hedgeye Global Macro VIX is at levels last seen since early OCT ’07. Note: that date is coincident with the all-time peak in U.S. equities amid consensus faith that “shock and awe” interest rate cuts and other modes of central planning would ultimately prove effective in delivering a shallow, manageable domestic growth slowdown.”


So The Chart of the Day, no joke, shows that volatility, per Darius’s point, is at a very complacent level.  In fact, this is a level that previous flagged both U.S. equity market and global equity tops.


The global macro action this morning is once again in Europe.  Eurozone Financial Ministers are meeting in Copenhagen today (beginning at 11:30am GMT) and tomorrow to discuss strengthening the region’s firewall via EFSF/ESM.  As well, Rajoy will present Spain’s 2012 budget this afternoon with a statement expected around 12pm GMT (deficit target 5.3% of GDP down from 8.5% last year).


If there is one key red flag this morning in Europe it is from Germany.  Specifically, German February retail sales came in weaker at -1.1% month-over-month versus the estimate of +1.1%.  Now, clearly, this is but one data point, but Germany is definitely the positive bell weather in Europe to focus on. Well, until Germany turns negative.


As it relates to our negative thesis on the Yen, this morning we had two supportive data points:


1. Japan Industrial production unexpectedly fell as strengthening yen hurt outlook for exporters earnings; and

2. Japan February consumer prices unexpectedly increased +0.1%  year-over-year versus -0.1% estimates.


But data points, as always, are only data points.  So, this morning I will leave you with one last quote from Steve Miller:


“The question to everyone’s answer is usually asked from within.”




Our immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1652-1688, $122.25-124.67, and 1391-1416, respectively.


Keep your head up and your stick on the ice,


Daryl G. Jones

Director of Research


The Joker - Chart of the Day


The Joker - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 13, 2012

As we look at today’s set up for the S&P 500, the range is 38 points or -2.42% downside to 1354 and 0.32% upside to 1392. 











    • Up from the prior day’s trading of 1684
  • VOLUME: on 4/12 NYSE 756.67
    • Decrease versus prior day’s trading of -4.24%
  • VIX:  as of 4/12 was at 17.20
    • Decrease  versus most recent day’s trading of -14.09%
    • Year-to-date decrease of -26.50%
  • SPX PUT/CALL RATIO: as of 04/12 closed at 2.11
    • Increase from the day prior at 2.04 


GROWTH SLOWING – away from the economic data (which now includes US employment gains slowing), Copper and 10yr UST yields are the most obvious signals this morning with Copper moving into a falling knife formation (-1.6%) and 10yr slicing back through our intermediate-term TREND support of 2.03% to 2.01% last. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 2.01
    • Down from prior day’s trading of 2.05
  • YIELD CURVE: as of this morning 1.73
    • Decrease from prior day’s trading at 1.77 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:00am, Fed’s Dudley speaks in Buffalo on the economy
  • 8:30am: CPI (M/m), Mar., est. 0.3% (prior 0.4%)
  • 9:55am: U.Mich, Apr. P, est. 76.2 (prior 76.2)
  • 1pm: Bernanke speaks in New York on financial crisis and policy response
  • 1pm: Baker Hughes rig count
  • 2:15pm: Dudley visits cancer center in Buffalo 


    • President Obama speaks on benefits of trade with Latin America at Port of Tampa, Fla. 1:20pm
    • Obama departs Tampa for Cartegena, Colombia, for April 14-15 Summit of the Americas
    • Mitt Romney speaks to NRA annual meeting in St. Louis. 1pm 


  • JPMorgan Chase, Wells Fargo are first two big U.S. financial cos. to report 1Q earnings
  • CPI probably rose at slower pace in March.
  • Google gives founders share-issuing power at investors’ expense: corporate-governance experts
  • U.S. video-game industry sales fell 25% in March, NPD says; watch GME, MSFT, EA, SNE
  • Best Buy said to probe ex-CEO Dunn’s relationship with employee
  • China’s below-forecast GDP growth of 8.1% may mark end of slowdown
  • Spanish banks’ ECB borrowings climb to $300b in March
  • Infosys sales forecast misses est.; follows report SAP off to slower 1Q start in North America; watch IT services stocks
  • North Korean long-range missile launch fails
  • Judge to consider approval of L.A. Dodgers bankruptcy plan
  • Week Ahead preview: G-20, IMF Meetings, Goldman, Iran Talks 


    • JPMorgan Chase & Co (JPM) 6:58 a.m., $1.17
    • Shaw Communications (SJR/B CN) 8 a.m., $0.38
    • Wells Fargo & Co (WFC) 8 a.m., $0.73    


  • Sugar Traders Extend Longest Bear Streak Since ‘07: Commodities
  • Corn Climbs on Signs of Rising U.S. Export Demand; Soybeans Drop
  • Oil Drops First Time in 3 Days on China Slowdown, Naimi Pledge
  • Copper Falls, Extends Second Weekly Drop as Chinese Growth Slows
  • Gold May Decline as Some Investors Sell Following Weekly Advance
  • Cocoa Advances as Some Investors May Be Buying; Sugar Retreats
  • Coffee Crop in Vietnam Gets Boost From Heavy Rain, Aids Fruiting
  • Commodities to Gain 5-20% in Second Half, Credit Suisse Says
  • Gold Set for Rebound With Support at $1,600: Technical Analysis
  • Cheniere Shale-Gas Exports Hinge on U.S.-Asia Price Gap: Energy
  • Nuclear Halt in South Korea Seen Boosting Coal: Energy Markets
  • Oil May Fall After Iranian Nuclear Program Talks, Survey Shows
  • India Said to Consider 16% Increase in State Rice Purchase Price
  • Sugar Traders Seen Bearish for Seventh Week
  • ING Investment Favors Indonesian Coal Bonds on Asian Resilience
  • Kansas Farmers May Increase Soybean Planting After Wheat Harvest
  • Citigroup Countersued by Rajaraman in Singapore Over Gold Losses 










EUROPE – certified train wreck remains in motion – it’s not different this time – you can’t ban economic gravity when imposing Stagflation on your people (Italian CPI +3.3% with Growth flat to down); Sold our long Germany position yesterday and re-shorted France because we think the gap between Spain -12% YTD and France’s CAC +2% YTD is going to narrow #Mean Reversion.





CHINA – GDP growth slows from 8.9% Q4 to 8.1% Q1, missing whatever whisper found its way into the mo mo community yesterday (someone should tell them Global Macro isn’t like small cap rumoring); Chinese stocks acted fine on that because they act inversely with Commodity inflation and Chinese bank lending. Commodities bulls freak out.










The Hedgeye Macro Team


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