Looking Back

This note was originally published at 8am on June 26, 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 farther back you can look, the farther forward you are likely to see.”

-Winston Churchill

It continues to both fascinate and frustrate me that our said leaders in our governments haven’t learned a damn thing about the relationship between debt and growth.

While plenty of both Bush and Obama’s economic advisors dismissed the seminal conclusion in Reinhart & Rogoff’s This Time Is Different, that certainly doesn’t mean that history isn’t rhyming.

Allow me to write this one more time in block letters. Once a country has crossed the proverbial Rubicon (90% Debt/GDP), DEBT SLOWS GROWTH. There is no other growth “policy” left other than getting out of the way.

Back to the Global Macro Grind

Breaking “news” this morning is that someone in Europe has a new plan to pile more debt-upon-debt. Great. Meanwhile, the US (via the Washington, DC based and US tax payer backed IMF) is wholeheartedly cheering it on. Just great.

Atta boy Timmy – you would have nailed it if you just had a bigger bazooka, right?

Right. And bears use baby wipes in the bush. Markets get how ridiculous all of this is becoming. Markets are now starting to get worried that the US fiscal cliff is getting closer too. Markets don’t lie; politicians do.

US Fiscal Cliff?

Get the denominator in the Deficit/GDP ratio right, and you’ll get the timing of the US Fiscal Cliff right. That’s just math. If #GrowthSlowing continues, GDP will fall and the Deficit/GDP ratio will rise, faster.

Looking Back, when we made this call in Q1 of 2010 on Europe, we signaled this sovereign “credit risk” pop on the short-end of the curve. We called it the “Sovereign Debt Dichotomy” (Hedgeye Macro 2010 Quarterly Theme) because not all debt maturity problems and sovereign credit risks occur on the same duration.

So, if you want a real-time risk management signal for the US Fiscal Cliff, we have your back in the Chart of The Day. Watch 2-year Treasury bond yields which have recently popped back above my long-term TAIL risk line of 0.28%. That is one of the biggest Bernanke balls that is still being held under water. When/if it pops, he’ll blame Congress.

Blame Congress? Blame Europe? Blame Hedgeye?

Yep, blame everyone that you can other than yourself. That’s US Politics 1.0. And it’s dying on opacity’s vine.

Looking Back, at all of this - and I mean all of it - from when Krugman told the Japanese to “PRINT LOTS OF MONEY” in 1997 to when Bush II gripped and ripped the money printing and spending handles, to Obama following through on both - I think the fundamental conclusions won’t be the same as Japan’s or Europe’s, but as Mark Twain would say, they will rhyme.

DEBT SLOWS GROWTH.

Where am I seeing the Growth Slowing signals accelerate on the downside this morning?

  1. Spain issued 3-month pig paper at 2.36%! (versus 0.84% at their last auction)
  2. Italian CDS is pushing back up towards 600bps after printing a bomb of a Retail Sales report (-6.8% y/y)
  3. Cyprus is asking for a Spanish style (or is it Greek) bailout equivalent of ½ the country’s GDP
  4. Japan passes its tax hike bill in the Lower-House (doubling the consumption tax to cover deficit spending)
  5. Germany’s DAX snapped its last line of consequential support (our immediate-term TRADE line of 6251)
  6. Chinese stocks are in the midst of their longest losing streak in 6 months (down -9.3% since May 2nd)

Oh, but that’s everywhere else. The USA is going to “de-couple” this time. This Time Is Different!

  1. US stocks are down for 3 of the last 4 days (down -3.2% since our 100% Cash call)
  2. US stocks (SP500) have snapped their immediate-term TRADE line of 1318 support
  3. US Treasury Yields (10yr) remain in a Bearish Formation, with a wall of resistance between 1.69-1.93%

Maybe you can click your red shoes and believe that there is no place like investing at home until month/quarter-end (Friday). But you better not be long anything pro-cyclically American in the meantime:

  1. Energy stocks (XLE) lead losers, down -2.53% for June (down -10.3% YTD)
  2. Industrial stocks (XLI) are 2nd worst, down -1.63% for June (barely up at +1.03% YTD)
  3. Tech and Consumer (XLK and XLY) stocks both broke immediate-term TRADE support yesterday

When both leaders (Tech) and losers (Energy) are snapping, that’s bad.

Oh snap. Looking Back, it’s only the countries that don’t find it in themselves to change that end up like Japan or Argentina have for the last 20-30 years.

Do not stand idle. We have to stop these people before it’s too late. Stand up, and be the change in our society. Be patriots, and lead from the front. We are already there. We are Hedgeye. And we are not Looking Back.

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1558-1593, $88.27-94.27, $81.96-82.66, $1.24-1.26, and 1305-1318, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Looking Back - Chart of the Day

Looking Back - Virtual Portfolio