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This note was originally published at 8am on October 01, 2012 for Hedgeye subscribers.

“This country is insanely great.”

-Steve Jobs

That’s what Steve Jobs told President Obama at a fundraising dinner in California in February of 2011. He went on to add that what he was worried about “is that we don’t talk enough about solutions.”

I disagree with Jobs on the 2nd part of that statement. America’s academic and political elite talk plenty about solutions. What worries me is that they’re always talking about government solutions.

Jobs’ aforementioned quote comes at the end of the Introduction in The 4% Solution where James Glassman writes “that government needs to get out of the way of enterprise for growth to take off.” I like that. What I don’t like is that the rest of the book goes on and on about more ways the government can help.

Back to the Global Macro Grind

To review last week’s US Economic data: Big Government Intervention continues to A) shorten economic cycles and B) amplify market volatility. The stock market isn’t the economy.

If you think the stock market is the economy, we’ll that didn’t look very healthy last week either. It was the biggest down week for stocks since June and, since Bernanke’s most recent Policy To Inflate top, US stocks are down for 8 of the last 10 days.

Why? Economic Gravity can’t be “smoothed” away by government solutions:

  1. US GDP Growth for Q2 of 2012 was reported last week 69.27% lower than where it was 6 months ago
  2. Chicago’s Purchasing Managers Index (PMI) report for SEP dropped -6.2% mth-over-mth in SEP to 49.7
  3. Within the PMI report, New Orders and Employment dropped from 54.8 and 57.1, to 47.4 and 52, respectively

Whether you want to talk to me about Q2 or the last month of Q3, from a US growth perspective, that’s just nasty. On the inflation front, the news wasn’t much better. Prices Paid (within the same PMI report for September) ripped higher from 57 to 63.2!

Repeat after me: Policies To Inflate Slow Growth. Period.

Plenty a Keynesian academic advisor to Obama will continue to hide from that 1970s like conclusion, until they can’t. Maybe that’s why Romney is finally distancing himself from Harvard Keynesian Economist (and advisor) Greg Mankiw this morning.

The #2 Most Read story on the Economy tab of Bloomberg.com this morning: “Romney Bashing Bernanke Rejects Mankiw’s Monetary Views.” That doesn’t mean Romney is going to be President. It just means he just found a way to land a punch.

Back to the US Economic Data. Here’s how US GDP Growth fell -69.27% in the last 6 months:

  1. Headline quarterly GDP fell from 4.10% in Q411 to 1.26% in Q212
  2. Consumer Goods fell from 1.29% in Q411 to 0.08% in Q212
  3. Fixed Investment fell from 1.19% in Q411 to 0.56% in Q212
  4. Inventories fell from +2.53% in Q411 to down -0.46% in Q212
  5. Exports minus Imports didn’t do a darn thing to move the needle

The Obama/Bernanke money printing theory suggests that if A) you devalue your currency, B) you’ll see “exports” rise. Whereas, in the real world, when you print money A) input + consumer costs rise, and B) real-inflation-adjusted growth slows.

Adjusting for inflation is annoying to government guys who take car service to work because they don’t have to pay for gas or that pastry spread awaiting them at their next Washington meeting. That must be why the aforementioned Real GDP print only implies a +1.52% “Deflator.”

What’s shocking (and sad) is that the US Government’s “Deflator” (the number they subtract from the nominal, inflated, growth in order to print the “real” number) has been marked down by more than 27% since Q4 of 2011 AS PRICES INFLATED!

If Housing was really “back”, shouldn’t we be seeing that in the rental component of US Government reported “inflation”? How about Prices Paid rising +11% in last month’s PMI report alone? Or how about oil prices +30% off the YTD lows, +160% since 2009?

Nope. On the margin, Bernanke sees none of it impacting consumption or costs. No inflation. Touchdown Seahawks!

In a country that used to be considered Insanely Great, I don’t have to wonder how America’s next innovator likes them Apples. We can do a lot better than lying to people. Progress starts with telling people the truth. It’s only from there that we can move forward.

My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1770-1783, $110.61-112.98, $79.41-80.31, $1.27-1.29, 1.59-1.70%, and 1432-1451, respectively.

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

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