This note was originally published at 8am on November 28, 2012 for Hedgeye subscribers.
“The fuel that makes people work is profit.”
If you want to know one of the critical business leadership differences between Obama and FDR, I highly recommend reading the book I just finished reviewing, Freedom’s Forge, “How American Business Produced Victory in WWII”, by Arthur Herman.
The aforementioned quote comes from an excellent chapter (page 244) near the end of the book titled “Victory Is Our Business.” Being a businessman, I absolutely loved it. Empowering the best and brightest of this country to lead is the answer, not Congress.
Tom Girdler was a steel man. He was tough; he was an innovator; and he knew how to get things done. Bill Knudsen and Henry Kaiser (key FDR businessmen) were doers leading from the front too. These guys would put Harry Reid and Johnny Boehner to shame.
Back to the Global Macro Grind…
If you want to tax me and my profits, that’s fine – I’ll just have less money to hire with. So just know that. I am not Warren Buffett. Most of us aren’t. Using him as a beacon for making the USA more like France is a joke. It’s elitist too.
The US stock market took an intraday nose dive yesterday after Harry Reid spoke about whatever he was trying to say. Today’s market “catalyst” is Obama “speaking with business leaders.” A market that hangs on the government’s next move is no “free” market. Yes They Can do this – and yes, they (Bush and Obama, Republicans and Democrat politicians) built this.
This is called a bubble in US Politics. So, when you are forced to live in a bubble of Big Government Intervention (government has been taxing and slowing growth in this country for a decade), what do you do?
- You buy Bonds (10yr UST Yield falls again this morning to 1.62%)
- You hold a large Cash position (our asset allocation to Cash = 58%)
- You pray that someone issues you more cash now (special dividend)
Prayer, of course, is not a risk management process for your portfolio – but if God is listening, he can provide you some perks. Check out these “special dividends” from the likes of Las Vegas Sands (LVS) and Costco (COST) in the last 48 hours. Special.
Now, if you aren’t long Costco this morning, you aren’t getting anything special (US futures down 5). If you are Costco, you are explicitly telling your investors that what you see coming down the pike isn’t special either. Taxing Profits changes behavior.
In other globally interconnected news:
- Chinese stocks move to within a hair of crash mode (-19.9% since March)
- Russian stocks move back into crash mode (-20.1% since March)
- Brazilians stocks are only down -17.6% since March (not quite crashing yet)
Perma Bull marketing firms used to call the B, R, and C (Brazil, Russia, China) a big component of the “BRICs.” Remember those? Those were the big growth engines of the world, until Bernanke started taxing their profits.
There are two big taxes that I, the businessman, can see, real fast:
- Tax Rate
- Rising Expenses
In the people business (provided that you give your employees great benefits like healthcare, dental, etc.), costs to run a small business in America are going up. If you work for the US Political Bubble and don’t get that, try it with your own money.
In Global Cycle businesses (transports, mining, etc.), when Bernanke devalues the currency in which your cost of goods sold (food, energy, etc.) are primarily priced, your margins are going down.
Since long-term commodity, healthcare, etc. inflation is sticky, there’s deleverage to your profits when global growth slows (sales slow faster than your costs). Then businesses are forced to right size their cost structure (i.e. fire people).
And on and on the profit cycle goes…
Or so it should. This is the fulcrum fault line in Keynesian Economic (Central Planning) assumptions – these people that both Bush and Obama empowered aren’t business people. They are academics who fundamentally believe they can “smooth” the profit cycle.
In March 2012, when we started making the global #GrowthSlowing call, this is why we got so loud about it. Yes, Bernanke was able to suspend the pricing of this economic gravity for 3 months. But now we are all hostage to it, again.
On Qe3, Emerson said that “for every benefit you receive, a tax is levied.” On taxing under the veil of class warfare, Andrew Jackson reminded Americans that “the wisdom of man never yet contrived a system of taxation that would operate with perfect equality.”
I’m here to remind you that a tax is a tax – and it’s up to you to figure out who is in your back pocket before it’s too late.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1730-1758, $107.52-110.38, $3.43-3.56, $80.06-80.63, $1.28-1.30, 1.55-1.68%, and 1383-1419, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer