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It's Your Problem

This note was originally published at 8am on May 09, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The Dollar is our currency, but it’s your problem.”

-John Connolly, US Treasury Secretary (1971)


That’s the quote Jim Rickards uses to start Chapter 5 of Currency Wars. From an economic history perspective, it’s a critical quote to contextualize as President Richard Nixon was the first Republican President to go all-in Keynesian.


I’m not a Republican or Democrat. I am Canadian. So sometimes I just have to laugh when Republicans blame Obama for everything. It’s as if these partisan political pundits think we are dumb enough to believe that the likes of Nixon and Bush didn’t uphold the same monetary and fiscal policies to debauch the Dollar.


At least Nixon admitted it when he said plainly, “we’re all Keynesians now.” But are we? Inquiring minds in this country would like to know. Are we as numb to economic reality as the economically partisan media? Being Keynesian (Republican or Democrat) is partisan you know. And that probably had something to do with Republican veteran Lugar losing to the Tea Party in Indiana.


Back to the Global Macro Grind


You can blame Greece or Canada at this point, but the market doesn’t care to hear the excuses. The global economy is as interconnected as it has been for the last 5 years. The idea of “de-coupling” is only something the Sell-Side could make up.


If you didn’t know that the US Dollar is still the world’s reserve currency and that its daily, weekly, and monthly moves are driving what we call The Correlation Risk, now you know.


The US Dollar Index is having its 6th consecutive up day (touching $80 this morning), and one of our major Global Macro Theme calls for Q2 2012, Bernanke’s Bubbles (as in Commodities), are popping.


Since the Old Wall begged for Bernanke to do it, market expectations became addicted to it. Now it, as in “It’s Your Problem”, is on the tape.


Deflating The Inflation of easy money Commodity bubbles in Gold, Oil, etc. are riding the following immediate-term TRADE correlations to the US Dollar: 

  1. Gold -0.85
  2. Palladium -0.81
  3. Copper -0.67
  4. Oil -0.84
  5. Heating Oil -0.82
  6. Soybeans -0.79 

If you want to call these mathematical ironies, you can. As a matter of fact, you can call anything in this profession whatever you want to call it until you have to report your performance results back to your clients. If you are just a pundit, not held accountable to the TimeStamps of what you say and when, I can’t help you from yourself. Twitter’s gotcha!


In our 50 slide Q2 Global Macro Themes Deck (April 2012) we walked through the Top 10 Bernanke Bubbles (email sales@hedgeye.com if you’d like to review it with refreshed risk management levels).


The aforementioned immediate-term TRADE correlations anchor on 6 commodities. If you want to look at The Correlation Risk from a bigger picture perspective, here’s how the USD Index is trending versus some fairly major stuff: 

  1. CRB All-Commodities Index (19 Commodities) = -0.93
  2. S&P 500 = -0.85
  3. Euro Stoxx 600 = -0.84 

It’s Your Problem” or its your opportunity now. It’s a major performance problem if you are long anything US, European, or Japanese Equities (all Keynesian Policy Bubbles) or commodities. It has been since the middle of March.


Now plenty people who are long Gold (I have a zip lock bag of the stuff in my desk, fyi) will quickly say that’s precisely why they are long Gold – because it’s “protection against all the money printing and Keynesian central planners” of the world.


Fair e-nuff.


But what if the world is pricing in an end to the Nixonian madness? They did in the early 1980’s. What if we are on the verge of actually getting off the iQe drugs? Gold being up for 12 consecutive years naturally implies some mean reversion risk to the idea that Americans are dumb enough to vote for Dollar Debauchery for much longer.


In addition to their Keynesian economic policy making teams, Bush and Obama have one thing in common – Ben Bernanke. This is not unlike what Nixon and Carter had in common – Arthur Burns (who was also tasked, politically, with devaluing the Dollar and monetizing US Treasury debt).


Got Causality? 

  1. Dollar Debauchery in both the 1970’s and 2000’s perpetuated commodity price inflation
  2. Dollar Debauchery in both the 1970s and 2000’s perpetuated fear-mongering by policy makers to back their policies
  3. Dollar Debauchery in both the 1970s and 2000’s perpetuated a lack of confidence/trust and employment growth 

Both GDP Growth and US Employment Growth were as nasty as they have ever been (by decade) in both the Nixon/Carter and Bush/Obama periods of raging Keynesian Economic policy influence.


So, here’s a little reminder from little old me in New Haven, CT this morning to all of the Keynesians, from Larry Summers to Ben Bernanke, and all of their offspring – It’s Your Problem now. If that sounds like I am picking a fight, that’s old news. I did that in our April Themes presentation too. We are officially Fighting The Fed (and winning).


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Euro (EUR/USD), and the SP500 are now $1585-1647, $110.92-113.87, $79.42-79.88, $1.29-1.31, and 1349-1366, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It's Your Problem - Chart of the Day


It's Your Problem - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 23, 2012

As we look at today’s set up for the S&P 500, the range is 40 points or -2.33% downside to 1286 and 0.71% upside to 1326. 












    • Down from the prior day’s trading of 2143
  • VOLUME: on 5/22 NYSE 846.67
    • Increase versus prior day’s trading of 6.09%
  • VIX:  as of 5/22 was at 22.48
    • Increase versus most recent day’s trading of 2.14%
    • Year-to-date decrease of -3.93%
  • SPX PUT/CALL RATIO: as of 05/22 closed at 1.83
    • Up from the day prior at 1.58 


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.74
    • Decrease from prior day’s trading at 1.77
  • YIELD CURVE: as of this morning 1.45
    • Down from prior day’s trading at 1.48 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, week of May 18
  • 10am: House Price Index (M/m), Mar., est. 0.3% (prior 0.3%
  • 10am: New Home Sales, Apr., est. 335k (prior 328k)
  • 10am: New Home Sales (M/m), est. Apr., est. 2.1%  (prior -7.1%)
  • 10:30am: DoE inventories
  • 11am: Fed to purchase $1.5b-$2b notes in 8/15/2022 to 2/15/2031 range
  • 1pm: U.S. to sell $35b 5-yr notes
  • 2pm: Fed to purchase $4.25b-$5b notes in 5/31/2018 to 5/15/2020 range
  • 2pm: Fed’s Kocherlakota speaks in South Dakota 


    • President Obama attends campaign events in Colo., Calif.
    • Mitt Romney won Republican primaries in Arkansas, Kentucky yesterday
    • Nuclear Regulatory Commission Chairman Gregory Jaczko, who is resigning, holds news conference in Charlotte, N.C., 9:30am
    • Senate in session, House not in session
    • Senate Finance holds hearing on health-care delivery, with testimony from UnitedHealth, Advocate Health Care, Kindred Healthcare, Renaissance Medical Management officials, 10am
    • NRC staff meets on agency’s yearly assessment of safety for Entergy Corp.’s Vermont Yankee nuclear plant, 5:30pm
    • Financial Industry Regulatory Authority holds final day of annual conference 


  • Merkel faces Hollande pleas to shed “taboos” at summit
  • Morgan Stanley defended its role in Facebook’s IPO after a Massachusetts regulator subpoenaed the bank
  • Facebook investor sues Nasdaq over “mishandled” stock offering
  • PetroChina looking at American, Caribbean assets, Jiang says
  • U.S. April new home purchases forecast to rise 2.1% from March to 335k annual rate
  • Barclays to raise $5.5b from sale of BlackRock stake
  • U.K. retail sales fall most in two years as rain hits demand
  • Japan’s April exports rise less-than-forecast 7.9% Y/y
  • ECB’s Lipstok says no need for additional ECB stimulus at the  moment, “no guarantee” Greece will keep euro
  • BofA to buy back $330m of mortgages from Freddie Mac
  • RailAmerica reviewing alternatives including possible sale
  • SEC Chairman Schapiro says SEC’s JPMorgan review focused on VAR models
  • U.S. consumer bureau seeks comments on prepaid debit card rules
  • More CFOs willing to pay bribes, global survey finds 


    • Suntech Power (STP) 6am, $(0.49)
    • Big Lots (BIG) 6am, $0.69
    • Canaccord Financial (CF CN) 6:30am, C$0.09
    • Hormel Foods (HRL) 7am, $0.41
    • Trina Solar (TSL) 7am, $(0.27)
    • Bank of Montreal (BMO CN) 7:30am, C$1.35
    • Zale (ZLC) 7:30am, $(0.20)
    • Apollo Investment (AINV) 7:30am, $0.21
    • Genesco (GCO) 7:35am, $0.74
    • American Eagle Outfitters (AEO) 8am, $0.20
    • CAE (CAE CN) 8am, C$0.20
    • Eaton Vance (EV) 8:30am, $0.48
    • NetApp (NTAP) 4pm, $0.63
    • Pandora Media (P) 4:02pm, $(0.18)
    • PVH (PVH) 4:03pm, $1.26
    • Hewlett-Packard (HPQ) 4:05pm, $0.91
    • Synopsys (SNPS) 4:05pm, $0.55
    • Semtech (SMTC) 4:30pm, $0.31
    • Bristow Group (BRS) 5pm, $1.03



GOLD – plain ugly since the February top (down -12.7%) and this remains one of our top Global Macro short ideas that we’ll be discussing on our Best Ideas call at 11AM. Get the US Dollar right, and you’ll get a lot of big beta in macro right. 

  • Mining Slump Feeds M&A as Projects Overrun Budgets: Commodities
  • Wheat Drops for Second Day as Price Surge Prompts Farmer Selling
  • Rubber Set for Glut on Weaker China Growth Hurting Prices
  • Copper Slumps as Euro-Area Crisis May Threaten Chinese Growth
  • FreePort Founder Sells Diamonds as Investment Bet on China
  • Oil Drops a Second Day on Iran Agreement, Rising U.S. Stockpiles
  • Gold Declines in London as European Crisis Concern Boosts Dollar
  • Cocoa Falls to Three-Week Low in New York After African Rains
  • New Robusta Harvest in Indonesia’s Sumatra Seen Boosting Exports
  • Iron Ore Heads for Worst Run Since October as China Demand Slows
  • EU Farm Income May Drop for First Time Since 2009 as Prices Fall
  • Rubber Retreats to Lowest Level in a Week on Greek Exit Concern
  • Commodities to Gain on China’s Stimulus Pledge: Chart of the Day
  • Oil Falls for Second Day on Iran Agreement
  • Cotton Extends Slump to Lowest in More Than Two Years on Demand
  • Palm Oil Drops to Lowest This Year on European Crisis Concerns
  • Commodities Drop to Five-Month Low as Greece Concern Cuts Demand 










ITALY – getting powdered again this morning (down -2.5%, crashing since March = -23.4%) after reporting the worst consumer confidence reading in Italy since 1996 (pre-Euro). Germany/France draw-downs chasing the Spanish and Italian ones; DAX and CAC down -11.5% and -15.5% from March. Nothing is going to happen at their 3hr dinner tonight.






JAPAN – finally seeing consensus walk our way on the massive interconnected global macro risk associated with Japan’s fiscal and debt problems. This is an Export economy that just missed another export number – that’s bad. Japanese stocks down for 23 of the last 33 days (draw-down = -16.6%). Japan matters to Global Demand.










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Long Time Leaving

“I been a long time leaving, but I’m going to be a long time gone.”

-Willie Nelson


I think we have been pretty clear on this – Global Growth is slowing and the USA is not going to “de-couple” from this globally interconnected world. This time is not different.


Last night on CNBC I asked Goldman’s chief of everything US economic forecasting, Jan Hatzius, when he was going to cut his US GDP forecasts again. He didn’t really answer the question.


That doesn’t mean that you don’t have to answer it for yourself and/or your clients out there today. Real-time risk waits for no one.


Back to the Global Macro Grind


Willie Nelson is also known as the Red Headed Stranger. He’s the kind of Red-White-and-Blue blooded American we Canadian folks from Northern Ontario grew up respecting. He was born during a legitimate Great Depression (1933). He was self-made. And he didn’t wake up every morning looking to point fingers at anyone but himself.


That’s who I am. That’s who many of you are. That’s why this entire political Gong Show that has become our policies and markets gets us so fired up. That’s also why we are going to lead from the front and change it. The day you stop blaming everyone but yourself, is the day you start to lead.


Morgan Stanley got a subpoena last night for doing what it is that the Old Wall does. So, they put out a press release admitting as much – but, in doing so, entirely missed the point – i.e. what it is that they do during the IPO process doesn’t make sense to The People. This is a huge political football going into the US Presidential Election.


Since Morgan Stanley was a recipient of socialized bailout policies, now that’s their problem to deal with. That’s the other side of the Hank Paulson trade. It’s now the US stock market’s problem too. The US Financial Sector ETF (XLF) is laden with the Too Big To PR names.


In the last 2 days I have basically yard-sale’d my Global Equity exposure. On Monday morning we had 27% US Equity and 12% International Equity exposures, respectively. I’ll go into the open with the following:

  1. US Equities 6% (Healthcare = XLV)
  2. International Equities = 0%
  3. US Dollar = 9%

I’m not going to apologize for playing this game fast. Sometimes you have to. I’ve been a Long Time Leaving this charlatanic parade of storytelling. There are only so many times you can assure people that growth “is back” or it just “feels like” an economic recovery.


Enough of the “feel” already.


Quantitatively, this doesn’t feel like anything other than what the score is telling you. Growth Slowing has been plainly obvious to any economist/strategist who has live quotes and real-time data since March.


Inclusive of this morning’s selloffs, here are the asset price draw-downs (ie real-time indicators) since February-March:

  1. Japanese stocks (Nikkei225) = -16.6%
  2. Hong Kong stocks (Hang Seng) = -13.3%
  3. Indian stocks (BSE Sensex) = -13.5%
  4. German stocks (DAX) = -11.8%
  5. Italian stocks (MIB) = -23.8%
  6. Russian stocks (RTSI) = -27.5%
  7. Commodities Index (CRB) = -12.3%
  8. Oil (WTIC) = -17.8%
  9. Gold = -13.0%
  10. Copper = -14.1%

If you bought into any of the cockamamy “surveys” that growth “feels” fine, you can tell me how that’s going to feel in your P&L today. We, as a profession, have been living through growth slowdowns for 5 years and we are better than some of the said sources on growth have repeatedly proven to be.


You’ll note that I didn’t include Spain or the US stock market in the draw-down table. But they are in our refreshed Chart of The Day. You’ll recall that you’ve had plenty of opportunity to sell US Equities in the last 3 months; plenty of opportunity to ask yourself ‘heh, why on God’s good earth would the US, China, and Japan “de-couple” from mean reversion risk?’


Even if you didn’t say it to yourself that way, you probably thought about it in terms of what we have coined as The Correlation Risk. Get the US Dollar right, and you’ll get pretty much everything else right. That’s not a perma-strategy. Nothing is. It’s just the one that’s not losing you money right here and now.


With the US Dollar up for the 4thconsecutive week to $81.80 this morning, here’s your refreshed immediate-term inverse correlations between the USD and everything else:

  1. SP500 = -0.95
  2. Euro Stoxx600 = -0.96
  3. MSCI Emerging Market Index = -0.97
  4. CRB Commodities Index = -0.93
  5. US Treasury 10-yr Yield = -0.93
  6. Copper = -0.97

How does that “feel”?


I’ve been a Long Time Leaving the broken forecasting processes of the Old Wall. Most of these outfits have missed every single Growth Slowing call since 2007. Unless they change what it is that they do, they might just be a long time gone soon too.


My 27 person research team and I will be grinding through our long/short positions on our Best Ideas Conference Call this morning at 11AM EST. Please ping if you’d like access to Risk Managed Buy-Side Research built by buy-siders.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, EUR/USD, and the SP500 are now $1, $90.13-93.28, $1.26-1.28, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Long Time Leaving - Chart of the Day


Long Time Leaving - Virtual Portfolio


CONCLUSION: We continue to flag what we view as heightened risk for a JGB market rout; for now, however, the coast remains clear.


POSITION: Short the Japanese yen (FXY).


In the wee hours of the morning (US time) the international ratings agency Fitch downgraded Japan’s long-term local-currency sovereign debt rating one notch to A+; additionally, the agency reduced the country’s long-term foreign currency debt rating two notches to the same level. This action is critical in nature because we are now one step (i.e. a downgrade from another “Big 3” agency: S&P = AA- w/ NEG outlook and Moody’s = Aa3 w/ STABLE outlook) closer to triggering a ~$78B capital shortfall across the Japanese financial system.




One catalyst we see in accelerating the time frame of additional downgrades is that Japanese bureaucrats may wait until scheduled Upper House elections in the summer of 2013 to hold elections in the Lower House, per Azuma Koshiishi, secretary-general of the DPJ. Unless the LDP has backed off of their demand to dissolve the Diet prior to negotiating on the VAT hike, there will be no progress made on this front for over one full year – a major catalyst for further downgrades of Japanese sovereign debt further per commentary out of both of the remaining agencies.


The most recent downgrade (today) had a fair impact on the currency market, with the USD/JPY cross jumping from ¥79.58 to as high as ¥79.77 within minutes following the downgrade.




Looking to the Japanese sovereign debt market – which has been a key focus of ours this year as it relates to potentially being the next domino in the context of our Sovereign Debt Dichotomy theme – prices are not confirming Fitch’s worry that “[t]he country’s fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk.”


Two, ten and thirty-year nominal JGB yields have trended down in recent months to ~7, ~9 and ~2 year lows, respectively. From a market demand perspective, a couple of recent developments highlight the [arguably] well-deserved complacency within that market in that the BOJ failed to receive enough offers from financial institutions for its recent Asset Purchase Program open market operation (only ¥480.5B of a ¥600B target); this is in addition to failing to meet a ¥310B target (¥174.7B offered) for its Rinban operation (purchases of JGBs w/ a maturity < 1yr). For now, Japanese financial institutions can’t get their hands on enough JGBs!




Given the impressive demand conditions, it’s no surprise to see that L/T-S/T nominal JGB yield spreads have compressed meaningfully over that same duration. Part of this is due to the risk that the BOJ decides on implementing further easing measures in its monetary policy meeting, which is currently underway (results published tomorrow). Increasing the [bond] duration of their purchases and potentially acquiring foreign assets are two policy initiatives we think they may pursue if they do decide to incrementally ease at the current juncture.




For context, we’re of the view that the Cabinet Office’s recently upgraded 2012 economic outlook and the central bank’s increasingly hawkish fiscal 2012-13 inflation guidance limits the need for them to pursue further easing measures in the near term; a chart of medium term breakeven inflation expectations in Japan confirm our view. On the flip side, the threat of rolling blackouts this summer ranging from 7-20% of peak consumption (depending on region) could force downward pressure on the Japanese economy over the intermediate term and force the central bank to react preemptively to maintain Japanese Real GDP growth, which, after four consecutive quarters of YoY contraction, accelerated to +2.7% YoY in 1Q12.




Jumping back to JGB risk, Japanese sovereign credit default swaps of the 5yr and 10yr tenors have backed up a fair amount in recent weeks, widening +18bps and +31bps, respectively, from their YTD lows. As the table below highlights, however, the widening seen in Japanese swaps recently has dramatically lagged the region, lending credence to our view that Japanese sovereign debt risk on this metric is merely accelerating as a function of global financial market contagion borne largely out of Europe. The same can be said regarding the recent widening of Japanese bank CDS as well, though perhaps to a lesser degree, given their outsized exposure to JGB risk (25% of total assets).








All told, we continue to flag what we view as heightened risk for a JGB market rout – particularly from current prices. That said, however, our call has not and will not invoke the consensus storytelling that simply focuses on highlighting the unsustainable nature of Japanese fiscal imbalances; rather we will continue to stay finely in tune with any/all catalysts that we find material enough to potentially shift sentiment within this market. For now, the coast remains clear and we remain bearish on the JPY vs. the USD from a long-term TAIL perspective – of course trading it with a bearish bias over the intermediate term, given its preponderance to appreciate in the context of our TREND-duration fundamental Global Macro view.


Darius Dale

Senior Analyst





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