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Great Inflations

This note was originally published at 8am on July 30, 2012 for Hedgeye subscribers.

“Asset price inflation is not growth.”



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 $1590-1624, $105.18-108.26, $82.40-83.26, $1.20-1.23, 6351-6852, and 1360-1392, respectively.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Great Inflations - Chart of the Day


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

As we look at today’s set up for the S&P 500, the range is 17 points or -1.13% downside to 1390 and 0.08% upside to 1407. 











    • Down versus the prior day’s trading of 300
  • VOLUME: on 08/10 NYSE 566.08
    • Decrease versus prior day’s trading of -1.68%
  • VIX:  as of 08/10 was at 14.74
    • Decrease versus most recent day’s trading of -3.53%
    • Year-to-date decrease of -37.01%
  • SPX PUT/CALL RATIO: as of 08/10 closed at 1.64
    • Down from the day prior at 1.82 


  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.66%
    • Unchanged from prior day’s trading
  • YIELD CURVE: as of this morning 1.40
    • Unchanged from prior day’s trading 

MACRO DATA POINTS (Bloomberg Estimates)

  • 11am: Fed to purchase $1.5b-2b notes due 2/15/36-5/14/42
  • 11am: U.S. Treasury announces plans for auction of 4-wk bills
  • 11:30 am: U.S. to sell $32b 3-mo. bills, $28b 6-mo. bills
  • 4pm: USDA weekly crop condition 


    • House, Senate in recess
    • President Obama begins three-day bus tour through Iowa
    • State primary elections in Minn., Conn., Fla., Wis.
    • EPA advisory panel meets on methods for estimating emissions from animal feeding operations. 1pm


  • Google said to cut ~4k employees in its Motorola unit
  • Standard Chartered said to work on New York’s monitor demand
  • Julius Baer agreed to pay $880m for Bank of Americas Merrill wealth management business outside U.S.
  • Electronic Arts sees new Windows as central mobile game platform
  • Peltz said to win board seat at Ingersoll-Rand, WSJ says
  • Japan 2Q GDP rose annaulized 1.4%, less than median forecast 2.3% growth and 5.5% in 1Q
  • Greece 2Q GDP contracted 6.2%
  • “Bourne Legacy” tops weekend NA box office with $40.3m
  • Quarterly mutual fund/hedge fund disclosure deadline this week
  • Mitt Romney picks Paul Ryan as running mate for Republican ticket
  • NBC says weekday daytime Olympic viewership a record, Up 31%
  • Guggenheim Partners in talks to buy Aviva stake: Telegraph
  • Kodak is scheduled to disclose in bankruptcy court the winners of an auction of >1k patents
  • Tech cos. spend more on fewer acquisitions: PwC
  • Egypt President Mursi removes military aides
  • Europe GDP, Standard Chartered, Wal-Mart: Week Ahead Aug. 13-18


    • Sysco (SYY) 8am, $0.54
    • AuRico Gold (AUQ CN) Pre-Mkt, $0.09
    • Groupon (GRPN) 4:01pm, $0.03
    • Wuxi PharmaTech (WX) 4:30pm, $0.32
    • Uranium One (UUU CN) 4:37pm, $0.02
    • InterOil (IOC) 4:45pm, $0.06
    • SouthGobi (SGQ CN) 5pm, $(0.04)
    • Iamgold (IMG CN) 5:40pm, $0.20
    • B2Gold (BTO CN) Post-Mkt, $0.04


  • Hedge Funds Reduce Wagers After Longest-Ever Rally: Commodities
  • Oil Bulls Boost Bets Most in More Than 17 Months: Energy Markets
  • Copper Declines in New York as Japanese Growth Misses Estimates
  • Oil Advances Amid Concern Middle East Tensions May Curb Supply
  • Corn, Soybeans Fall as Rain May Aid U.S. Crop Amid Demand Threat
  • Iron Ore Drops to Lowest Since 2009 as Chinese Purchases Decline
  • Gold Gains on Stimulus Bets as Holdings Climb to All-Time High
  • Robusta Coffee Rises as Stockpiles Decline Further; Cocoa Climbs
  • China Daily Steel Output Falls in July as Prices at 33-Month Low
  • Cooking-Oil Imports by India to Decline on Record Stockpiles
  • Rubber Drops to Lowest in Almost Three Years on Slowing Growth
  • Noble Profit Rises 39 Percent on Record Metals, Energy Sales
  • Japan’s Utilities Lose $46 Billion as End of Era Nears: Energy
  • Obama to Urge Agriculture Bill as USDA Buys $170 Million of Meat
  • Palm Oil Declines on Increasing Output, Weak El Nino Forecasts 





USD – on the margin, Paul Ryan is USD bullish – not only will he likely keep Bernanke in a box through September (no Qe), but he’ll bring some much needed focus to the fiscal debate pre debt-ceiling. If intermediate-term TREND support of $81.79 on the USD holds, a whole whack of correlation risk comes back online 2H AUG and into September.









JAPAN – another big country w/ another big miss on the #1 factor that we think will continue to surprise these Keynesian quacks on the downside in the coming months and years – GROWTH; in other Asian Equity news, Chinese stocks fell another 1.5% after not delivering any said stimuli that the media was calling for last wk.






ISRAEL – something is going on; not sure what it is – but the TelAviv25 just snapped its only line of TRADE support, down 1% this morning and Oil is ripping (+1% to $114 Brent), despite the Dollar not being down a bunch. Geopolitical risk is hard to put our finger on, so we let markets tell us when someone might know something.






The Hedgeye Macro Team

Moral Markets

Takeaway: Yep, today it’s a race to the bottom. Who can implement the more left-leaning 2-stroke combo of Monetary and Fiscal Policy?

“Moral purpose characterized the march in an age of increasing amorality and political duplicity.”

-Victor Davis Hanson (The Soul of Battle)


Markets don’t have morals; people do. People and politicians plan; markets rise and fall. All the while our society changes. Contrary to many economically partisan beliefs, the stock market’s price doesn’t always reflect that either.


Some say that market prices reflect the health of a country. We say a country’s currency does. Some say that market volumes “don’t matter.” We say they reflect The People’s trust in the market’s price.


Newly minted Republican VP candidate Paul Ryan says fiscal and monetary policy have causal effects on jobs, growth, and inflation expectations. President Obama says Ryan is an ideologue. Both are probably right. If there ever was a pervasive economic ideology of both the Bush and Obama Administrations, Keynesian Economics swallows the cake.


Back to the Global Macro Grind


Everything that really matters in Macro Markets happens on the margin. We think that, on the margin, Paul Ryan is going to be US Dollar bullish over the intermediate-term TREND (3 months or more). He will, at a bare minimum, change the economic debate.


To contextualize that, across our core risk management durations (TRADE/TREND/TAIL), here’s how the US Dollar looks:

  1. TRADE = bearish (resistance = $83.06)
  2. TREND = bullish (support = $81.69)
  3. TAIL = bullish (support = $78.62) 

In other words, like it did in the early 1980s, our math thinks the intermediate (TREND) to long-term (TAIL) resuscitation of a decade of political Dollar Debauchery is coming to an end. With the inverse of what Dollar Down has meant to Global Consumers for the last 10 years now in play (Brent Oil prices up +337.5% since August 13th, 2002), that’s a very good thing.


Back to this whole ideologue vs. demagogue thing…


As a reminder, our ideological framework on what inflates/deflates currencies (i.e. the only risk management process that’s really worked across the last 99 years of economic history post the Federal Reserve Act of 1913) has 2 key components:

  1. Monetary Policy
  2. Fiscal Policy 

If short-termism (politics) is driving both of these policies the wrong way (printing money and deficit/debt spending as far as the eye can see in order to prop up stock market prices), you ultimately get a nasty employment, growth, and stagflation situation in store for your people. Sound familiar?



  1. Britain 1960s
  2. USA 1970s
  3. Europe/USA today

Yep, today it’s a race to the bottom. Who can implement the more left-leaning 2-stroke combo of Monetary and Fiscal Policy?


Thankfully, I’m not a Bush Republican or an Obama Democrat so I don’t have to shape my storytelling to a partisan conclusion. Economically speaking, I’m center-right. I don’t lever my family or firm up with debt. I’d rather die than beg for a bailout.


Both Bush and Obama were center-left. Krugman vs Bernanke is hard left versus center-left (Bush and Obama had Geithner and Bernanke).


Ideologically speaking:

  1. Keynesian Economics = center-left
  2. Hayekian Economics = center-right

Paul Ryan is a professional politician, but not unlike many successful politicians who have come before him he has effectively borrowed what Margaret Thatcher did in the late 1970s, slamming it down at the Tory Convention, saying “this is what we believe!”


Hayekian Economics.


What do you believe? It’s hard for me to believe that more than 1 out of 100,000 Americans can explain the difference between Keynesian and Hayekian Economics, never mind which one they believe. That will change. Unless this time is different, of course.


Do you believe piling more debt-upon-debt, taxing, and spending, is going to give you the elixir of promised economic growth? Do you believe that easy monetary and fiscal policy debauches your currency and gives you inflation in food/energy, perpetuating a slow growth, no jobs, economy?


Do you believe in partisan fairy tales? Moral Markets don’t. Because they aren’t moral. This election is now going to be all about something that’s at least a little closer to what’s been driving us all apart.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Russell2000, and the SP500 are now $1611-1628, $110.89-115.35, $81.79-83.03, $1.21-1.23, 790-803, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moral Markets - 1111. el


Moral Markets - Virtual Portfolio

We The People: Why Paul Ryan Matters

Takeaway: Romney's choice of Paul Ryan as a running mate could be the key to winning the election. Ryan's proposal is just what the market ordered.

It was announced on August 11, 2012 that Republican Presidential candidate Mitt Romney had chosen Congressman Paul Ryan (R-WI) as his running mate for the 2012 election against Barack Obama.


Up until now, Romney’s choice for a vice president had been closely guarded with many names being thrown in the hat over the past few months. The choice of Ryan is both important and symbolic. Ryan is young, fierce and a tough fiscal conservative. Only 42-years-old, Ryan has been in office since 1998, beginning his political career at the young age of 28. The Chairman of the House Budget Committee, he is perhaps best known for “The Path To Prosperity: A Blueprint for America’s Renewal” (TPFP) which is an alternative 2012 budget proposal seen as a response to President Obama’s 2013 budget proposal.


The Republican consensus (according to several polls) is that Ryan is the best choice Romney could have made for the VP nominee. In a year where debate surrounding the nation’s struggle with debt and budget deficit has taken center stage, Ryan’s proposal aims to solve these issues through drastic measures of spending cuts and austerity programs. While “The Path For Prosperity” was approved in the Republican-controlled House, Democrats killed it in the Senate when it came to a vote in May.


There is no argument that Ryan will invigorate the Romney campaign and act as an integral part of developing his policies once in office. How Ryan will accomplish this, however, remains to be seen. Balancing complex mathematics and economics, there are essentially four main issues at hand in order to make Ryan’s budget work. They are:


  • A total revamp of the Medicaid/Medicare programs, replacing it with a coupon/voucher system
  • Do away with the Patient Protection and Affordable Care Act (aka Obamacare)
  • Fix America’s tax laws to plug loopholes and deduction issues
  • Reduce overall government spending on different fronts

Earlier this year, Hedgeye Healthcare Sector Head Tom Tobin weighed in with his outcome of what would happen should Romney set about implementing Ryan's policies:


Our primary conclusion is that if indeed Romney wins the presidency, and by association and praise, Paul Ryan’s policy recommendations are then implemented, that this will come to be seen as a great deal for the Healthcare Industry.   As it relates to Medicare, the primary source of savings, Paul Ryan’s plan doesn’t  begin until 2024, a full 12 years and several election cycles away.  Additionally, Medicare still grows under this assumption, just at a lesser rate.”


We The People: Why Paul Ryan Matters  - RYAN impact medicare


Hedgeye Director of Research Daryl Jones summarizes the other parts encompassing the Ryan budget quite nicely:


• Healthcare – The Ryan budget would convert the current Medicare system to a system of premium support payments and would increase the age of eligibility of Medicare.  On Medicaid, the federal share of Medicaid would be converted to block grants to the states, which would grow with population and CPI-U.  The Ryan budget would repeal all components of the 2010 Patient Protection and Affordable Care Act (more commonly known as Obamacare). Finally, several limitations of punitive damages in medical malpractice would be implemented;


• Other spending – Under the Ryan budget, mandatory and discretionary spending, other than that for mandatory healthcare (outlined above) and social security, are cut from 12% of GDP in 2010 to 6% of GDP in 2022 (this is below pre-WW2 levels); and


• Revenue – Under the Ryan budget, federal government revenues grow from 15% of GDP in 2010 to 19% of GDP in 2028, and remain at that level thereafter.  For comparative purposes the long run average of federal government revenue as a percentage of GDP from 1960 – 2011 is 17.6%.   So, in essence tax receipts in Ryan’s proposed budget are slightly above the long run percentage of taxes as share of the U.S. economy and ~27% above current levels.


At our current rate, America is on an unsustainable path of spending. Ryan’s budget is a scary proposition for most but it may be the only viable option on the table right now. Counting on a split Congress and the President to get their act together and pass something is like counting on Oscar The Grouch to be polite and cordial. Should we succeed, it could act as the ultimate bullish catalyst for both the markets and the economy; hard to complain about that.


Mass win per table per day popped to an all-time high in July despite the additional SCC tables

  • Following a disappointing opening of SCC in April, win per table is moving in the right direction
  • Mass continues to set all-time highs for table productivity which bodes well for LVS margins
  • Amid the hysteria, VIP productivity is only down to September levels but should start climbing again in September with the opening of the Sheraton rooms



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