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Unintended Consequences

This note was originally published at 8am on July 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Increasing taxes on successful risk takers will slow the accumulation of equity and discourage risk taking.”

-Edward Conard

 

This weekend I finished reading Edward Conard’s “Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong.” On an ABC scoring scale, I’ll be nice and give the book a B (minus). The book’s title is a borrowed one – and the “truth” is written from a partisan perspective (Conard was a Managing Director at Bain who made a million dollar contribution to a Romney Super Pac).

 

If you are well versed in Global Macro markets, economic history, and frameworks of economic thought, you don’t have to start reading this book until page 195 where Conard asks 3 important questions: “How does America protect its economy from another crisis? How does it reduce unemployment and revive growth? And how does it balance the federal budget – by raising taxes or cutting costs?”

 

Good questions; average at best answers. Not once did he use modern day math (Chaos or Complexity Theory) or any aspect of current Behavioral Economics (Kahnmen/Tversky/Taleb). He focused mostly on how bad the likes of Keynesian “multiplier-effect” economists like Christina Romer have been in advising Obama. But everyone who doesn’t do drugs knows that just as well as an MBA from Harvard does.

 

The only question Conard answered really well (that I haven’t read anywhere else) was the unemployment question. That’s why I gave him the Hedgeye Quote of The Day. Central planners like Ben Bernanke and Tim Geithner (who have never had to take on risk with their own after tax capital and meet a payroll in their life), do not get this very simple relationship between risk capital and hiring.

 

Take it from me (a small business owner in America). It’s one of the main reasons why US Unemployment is high and US Consumer Confidence is low. People don’t trust this will end well.

 

Back to the Global Macro Grind

 

In the last 3 weeks, the USA has had some terrible economic data related to hiring and confidence:

  1. NFIB Small Business Survey in June plummeted to a fresh YTD low of 91.4 versus 94.4 in May
  2. US unemployment rate of 8.2% for June didn’t budge as non-farm payrolls missed badly (again) at 80,000
  3. University of Michigan Consumer Confidence for early July got smoked to another YTD low of 72 (versus 73.5 2 weeks ago)

That last data point actually came at 10AM EST on Friday morning after the US stock market was already up +1% on the day. Bad news for America is obviously bullish for the only part of the bull case that’s left (Qe rumors and bailouts). Throw a little China “rate cut” rumor on top of that fire into Friday’s close, and you had yourself one mother of a no-volume rally. It was the market’s 1st up day in the last 7.

 

Hooray. Now what?

 

1.   ASIA: After the Chinese didn’t deliver on the USA manufactured lie of the day (Premier Wen actually told the media he wants it “clearly understood” that China’s #GrowthSlowing continues at an accelerating rate), stocks in Shanghai closed down another -1.7%, hitting fresh YTD lows. Like US Small Business and Consumer Confidence, fresh lows are great, right?

 

2.   EUROPE: Despite the no-volume rally in US Stocks (down 29% volume day versus my top 10 down days in Q2) on Friday, Europe opened like a wet Kleenex. Spanish, Italian, and Russian stocks all remains in crash mode this morning at -25%, -22%, and -20%, respectively, from their YTD tops. More bailout debt is only going to structurally slow real (inflation adjusted) growth further.

 

3.   COMMODITIES: while US stocks were flat to down last week (depending on the index), Commodity Inflation had some rip-roaring fun in the sun, with the CRB Index up a full +2.4% on some good ole fashioned food (corn!) and oil (+3.1% wk-over-wk) inflation. Better yet, the CFTC weekly options data showed a +8.9% wk-over-wk pop to 1.05 million contracts!

 

To put that commodity price speculation into perspective, that 1.05 million number is the highest level of commodity inflation betting since, you guessed it, April 3rd, 2012. The Chinese, just fyi, aren’t going to cut rates if food/energy starts to rip again. That perpetuates civil unrest.

 

Q: What else peaked on April 2nd, 2012? A: The SP500 (at 1419).

 

And so it begins…

 

Another week of storytelling and fun at the gong show that has become our centrally planned market. Will Ben Bernanke deliver the elixir of #BailoutBull drugs at this week’s Senate and House meetings? Will US Housing not slow from its epic Q1 weather highs? Will earnings, un-adjusted for guys marking up their books into month-end, matter as they slow?

 

Only time and price will tell. All the while, the Unintended Consequences of a No Trust; No Volume marketplace will continue to play a much larger role in whatever centrally planned life someone writes a book about next.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1549-1588, $96.95-102.91, 83.01-84.33, $1.20-1.23, 6429-6743, and 1338-1365, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unintended Consequences - Chart of the Day

 

Unintended Consequences - Virtual Portfolio



Great Inflations

“Asset price inflation is not growth.”

-me

 

I know. You probably need something more profound than a quote from me to kick off your morning. As Bernanke and Draghi unite this week, how about we all take a deep breath and channel our inner Shakespeare? Since in neither the short nor the long run we aren’t all yet dead, we’re best served to always remember that “expectations are the root of all heartache.”

 

When it comes to performing day-to-day in our centrally planned markets, those expectations obviously go both ways – and fast. On Thursday morning at 5AM EST, US Equity Futures were down 5 handles and Spain’s IBEX was crashing (-33% from its YTD top). This morning, the SP500 is +4% (53 points) higher, and Spain is still crashing (now only down -25%).

 

Great short-term inflations of asset prices are awesome, right? So is pretending the Fed and ECB can “smooth” and suspend economic gravity. As we continue to make a series of lower long-term highs versus those established when #GrowthSlowing started, globally, again in March 2012, our governments continue to A) shorten economic cycles and B) amplify market volatility.

 

Back to the Global Macro Grind

 

First, let’s go through that ‘inflation slows growth’ thing again with a real life example, US GDP:

  1. Q4 2011 US GDP Growth = 4.10%
  2. Q1 2012 US GDP Growth = 1.97%
  3. Q2 2012 US GDP Growth = 1.54%

So, let’s do more of what has not worked (whatever it takes really), to make sure we keep that asset price speculation (stocks and commodities) in play. Just so that we end up with no real (inflation adjusted) economic growth at all!

 

Look on the bright side, even though your run of the mill sell-side anchoring “economist” has been off by 33-57% so far with their 2012 US GDP Growth estimates, the stock market went up for the last 48 hours, so they can say they were right on the bull case anyway.

 

That line of storytelling is as ridiculous as the assumption that begging for Bernanke to give you $1700 Gold and $100 Oil is a “growth” policy for the economy.

 

That doesn’t mean I can’t be completely wrong here.  Evidently this market isn’t short-able, until it is. Meanwhile the Correlation Risk signals are starting to go hog wild (again), doing exactly what they did in February/March.

 

Got Great Expectations? Here’s last week’s CFTC data on commodity contracts leaning to the long side:

  1. Oil +6% wk-over-wk to 140,636 contracts
  2. Sugar +17% wk-over-wk to 128,093 contracts
  3. Ag (farm goods basket) +4% wk-over-wk to 856,446 contracts

All in, we’ve crossed the proverbial Rubicon again of > 1.0 million CFTC contracts (1.17M this past week), where the entire Street is expecting Great Inflations from Bernanke and Draghi. *Note: these are all time highs in contracts outstanding.

 

As most of these perma-commodity bulls learned in April/May, what is expected to keep going up, comes down – and hard. Maybe this time is different though? Maybe this is going to be like Venezuela where a centrally planned stock market (up +109% YTD) is governed by explicit currency debauchery?

 

I am hearing the Venezuelan commoner’s life is mint these days. Also hearing that if Bernanke goes all-in Obama with Qe3, life for the 71% is going to be just rosy too.

 

Who knows. All we know is that the biggest loser in all of this is what were our “free” markets. Sadly, some still think the stock market is the real-time economy. All the while, these Great inflations continue to deflate both growth and The People’s trust.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1, $105.18-108.26, $82.40-83.26, $1.20-1.23, 6, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Great Inflations - COTD July30

 

Great Inflations - Virtual Portfolio


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Nike: Product Alert

While watching the Olympic Opening Ceremonies today (on delay thanks to NBC), you can do so in your new Nike FlyKnits. Today's release of the racer (2 colorways) and Trainer (10 colorways) should make this splash a big one. Olympic hype is useless if not backed by product. $150 anyone?

 

Nike: Product Alert - 1

 

Nike: Product Alert - 2


Raise The Roof: The US Housing Market

Our macro team has taken a cavalcade of data and examined it with an objective viewpoint to determine just how well we’re doing since the 2007 housing crisis that led to the 2008 financial crisis. The results? A meaningful housing recovery is years upon years away but the US market seems to have stabilized – a positive catalyst for the US dollar and economy.

 

Mortgage rates are absurdly cheap right now. Perhaps you read about Facebook Founder and CEO Mark Zuckerberg refinancing his estate at a 1%. If the government’s plan was to flood the US with cheap money, it’s certainly working out quite nicely.

 

It’s important to understand that the US housing market has two large underpinnings to it. First, a house is the primary asset for many Americans.  As the value of a house increases, so does their net worth, and their confidence related to future spending.  Second, homebuilding and construction is a major driver of employment in the U.S.  As the chart below highlights, more than 2 million jobs were shed in the construction sector since 2006, of which almost none have come back.

 

 

Raise The Roof: The US Housing Market - HOUSING constructionjobs

 

 

According to recent data from the National Association of Realtors, housing inventory is at the lowest level since June 2002. Looking at the chart below, you can see that 2011 saw a massive drop in the amount of available homes. The recent uptick is merely cyclical and inventory is expected to continue to improve.

 

 

Raise The Roof: The US Housing Market - HOUSING inventory

 

 

One of the biggest metrics of course is home prices. If anything, the perception alone is a major concern for the US homeowner as a person’s house is their single largest asset they own. Home prices go up, net worth goes up; it’s a beautiful thing – even if it did lead to a bubble that popped in the late 2000s.

 

The chart below highlights the Case-Shiller national median home price going back three years.  The national median home price, at least according to this series, bottomed in the first couple of months of 2012 and has been on the rebound for the last few months according to data through April. This is corroborated by data released from Zillow that shows the median home price nationwide was up 0.2% year-over-year in Q2 2012 for the first time in five years.

 

 

Raise The Roof: The US Housing Market - HOUSING homeprices

 

 

So what does this all mean? It means we’re a lot better off than we were five years ago. The overall enthusiasm in this recovery is a good thing, but we would caution on expecting an accelerating recovery from these levels because of both the large amount of shadow inventory and artificially low level of interest rates.


THE WEEK AHEAD

The Economic Data calendar for the week of the 30th of July through the 3rd of August is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - TheWeek


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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