Distant Peoples

This note was originally published at 8am on May 01, 2013 for Hedgeye subscribers.

“the unnatural task of holding in submission distant peoples...”

-Edward Gibbon


Edward Gibbon was an 18th century British historian who became famous for his 6 volume work, The History of the Decline and Fall of the Roman Empire (published between 1776-1788). Contextualizing Roman history is critical in order to attempt to scrutinize the rise and fall of any post 18th century economic empires (Britain, USA, or Japan). Governments plundering their people doesn’t end well.


Alongside Clausewitz (Prussian military theorist), Gibbon was also a favorite of America’s 1st grand strategist in the US State Department, George F. Kennan, whose biography I am waist deep in right now (it starts off slow, but the meat and potatoes of this book start in the post WWII period; I’m studying it now so that I can contextualize Russian policy – a country ETF (RSX) that we re-shorted yesterday).


The reason why I’m highlighting Gibbon’s quote this morning is that it’s FOMC d-day. Via debauching the world’s reserve currency, Ben Bernanke’s Fed has held distant peoples (including those in the US who don’t live in D.C.) in an unnatural submission to a Policy To Inflate food and energy prices. End it man – let #StrongDollar manifest. The People need a consumption #TaxCut.


Back to the Global Macro Grind


For those who were paid to see no inflation at the all-time highs in Oil (2008), Gold (2011), and/or Food Prices (2012), all I can say is shame on you. The People know the truth. And now they are ready to receive the communion of #CommodityDeflation.


I never grew up thinking about which “class” I was in. Class warfare is stated plainly in the opening sentence to Marx’s Communist Manifesto. I’m more of a freedom and meritocracy type of a guy myself. The last word of the last sentence of Darwin’s On The Origin of Species is “evolved.” People who think they can centrally plan other people into submission should evolve too.


To be clear, these are two different ideologies that you see in both political and economic thought. One camp thinks the market and economic system is one that can be “smoothed” and controlled with certainty (policy action). The other believes the global economic system is open, interconnected, and non-linear. You know which camp I’m in.


If you study the last 42 years and back out the Bernanke years (Down Dollar, Up Commodity Inflation to all-time highs), most US market historians understand the power of a #StrongDollar (“tighter” money than you have today, combined with fiscal conservatism). Unless left wing Marxists are levered up on their credit cards at home, I think even they get the #StrongDollar thing too.


So when will Bernanke acknowledge economic gravity and get out of our way?


US economic growth has accelerated from +0.38% in Q4 of 2012 to +2.5% in Q1 of 2013. The US Dollar strengthened the entire way through this #GrowthAccelerating period as #CommodityDeflation took hold.


Look at both the US Consumption side of the US economy (very strong in Q113) and the consumption sectors of the US stock market (here are the inflations and deflations for 2013 YTD):

  1. US Healthcare Stocks (XLV) = +18.68% YTD
  2. US Consumer Staples Stocks (XLP) = +17.31% YTD
  3. US Consumer Discretionary Stocks = +15.12% YTD 


  1. CRB Commodities Index (19 commodities) = -2.3% YTD
  2. Brent Crude Oil = -5.9% YTD
  3. Cattle = -6.7% YTD
  4. Corn = -7.6% YTD
  5. Wheat = -7.9% YTD
  6. Coffee = -9.7% YTD
  7. Sugar -10.8% YTD
  8. Gold = -12.1% YTD
  9. Copper = -13.2% YTD
  10. Silver = -20% YTD

Do you hear me now, Ben? Do more of this. Do more of nothing.


On a 3 month duration, the US stock market gets this inasmuch as it did in 1983-89 and 1993-99 (#StrongDollar periods). Our intermediate-term TREND correlation between the USD and US Stocks (SPY) = +0.72. USD vs Commodities (CRB Index) on a 3 month duration is -0.71. It’ll keep working, unless Bernanke says he’ll devalue the Dollar again. Distant Peoples, Unite!


Our immediate-term Risk Ranges for Gold, Oil, US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1367-1492, $98.07-104.83, $81.58-82.63, $1.29-1.31, 97.11-100.93, 1.66-1.76%, 11.67-14.29, and 1575-1610, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Distant Peoples - Chart of the Day


Distant Peoples - Virtual Portfolio


TODAY’S S&P 500 SET-UP – May 15, 2013   

As we look at today's setup for the S&P 500, the range is 28 points or 1.47% downside to 1626 and 0.22% upside to 1654.










  • YIELD CURVE: 1.73 from 1.72
  • VIX  closed at 12.77 1 day percent change of 1.75%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, May 10 (prior 7.0%)
  • 8:30am: Empire Manufacturing, May, est. 4.00 (prior 3.05)
  • 8:30am: PPI M/m, April, est. -0.6% (prior -0.6%)
  • 8:30am: PPI Ex Food & Energy M/m, April, est. 0.1%
  • 9am: Total Net TIC Flows, March (prior $53.6b)
  • 9am: Net Long-term TIC Flows, March (prior -$17.8b)
  • 9:15am: Industrial Prod, April, est. -0.2% (prior 0.4%)
  • 9:15am: Capacity Util, April, est. 78.3% (prior 78.5%)
  • 9:15am: Manuf (SIC) Prod, April, est. 0.0% (prior -0.1%)
  • 10am: NAHB Housing Market Index, May, est. 43 (prior 42)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $750m-$1b notes in 2023-2031 sector


    • 10am: Senate Appropriations panel holds hearing on budget requests for Air Force, Army
    • 10am: Senate Environment Cmte holds hearing on EPA budget
    • 10am: House Ways and Means Cmte discusses draft of small business, pass-through entity tax plan
    • 10am: House Financial Svcs panel holds hearing on Dodd-Frank Act, taxpayer-funded bailouts
    • 1pm: Attorney General Eric Holder testifies on DOJ oversight
    • 1pm: House Foreign Affairs Cmte holds hearing on preventing a nuclear Iran
    • 1pm: House Cmte on Small Business holds hearing on patent reform implementation
    • 2:30pm: Senate Appropriations panel hears from acting Energy Sec. Daniel Poneman on DOE proposed budget
    • 2:30pm: Senate Banking panel hearing on “Improving Cross Border Resolution to Better Protect Taxpayers and the Economy”


  • U.S. says Apple, publisher colluded to fix e-book prices
  • Wal-Mart to inspect Bangladesh plants, won’t sign safety pact
  • German economy barely expands, France enters recession
  • Google said to plan introducing music service rivaling Spotify
  • Merlin Entertainments reconsiders GBP3b IPO: Times of London
  • Itau to pay Citigroup $1.37b to reclaim Credicard
  • J.C. Flowers buys Partners Group’s stake in Cabot Credit
  • HSBC signals 14,000 jobs cuts With $3b cost savings plan
  • ThyssenKrupp to cut 3,000 jobs as loss widens, confirms outlook
  • KPN, partly owned by America Movil, raises $3.78b in share sale
  • Chinese premier signals reluctance on stimulus to boost growth
  • Citigroup, BofA, others report monthly charge-offs
  • Pershing, Greenlight, SAC report end-of-qtr holdings
  • MSCI index changes to be announced ~5pm


    • Deere (DE) 7am, $2.72 - Preview
    • First Majestic Silver (FR CN) 7am, $0.18
    • Macy’s (M) 8am, $0.53 - Preview
    • Computer Sciences (CSC) 8am, $1.00
    • Pinnacle Foods (PF) Bef-mkt, $0.27
    • Power of Canada (POW CN) 2:07pm, C$0.52
    • Jack in the Box (JACK) 4:01pm, $0.31
    • Acxiom (ACXM) 4:05pm, $0.16
    • Sapient (SAPE) 4:05pm, $0.12
    • Boardwalk REIT (BEI-U CN) 4:10pm, C$0.71
    • Cisco Systems (CSCO) 4:30pm, $0.49 - Preview
    • Skechers U.S.A. (SKX) 4pm, $0.16
    • Freehold Royalties (FRU CN) 5pm, C$0.97
    • NetEase (NTES) 6pm, $1.23


  • Iron Ore Tumbles Into Bear Market on China Growth Concerns
  • Latest Corn Crop in Decades May Raise Costs for ADM: Commodities
  • Gold Drops to 3-Week Low in Worst Run Since February on Dollar
  • WTI Falls a Fifth Day in Longest Run of Declines Since October
  • Gold Premiums in India Jump as Central Bank Curbs May Cut Supply
  • Shell Targeted With BP in EU Price Fixing Probe for Oil: Energy
  • U.K. Within-Day Natural Gas Declines as Demand Forecast to Fall
  • Death Cross on Lumber Chart Signals Decline: Technical Analysis
  • Goldman Sachs Lowers Sugar Price Forecasts on Brazil Weather
  • Copper Reaches One-Week Low as Economies Weaken and Stocks Swell
  • Iron Ore Seen Strong Into 2014 on China Steel Demand, Supply
  • Lead Demand Exceeded Output in March, Study Group Reports
  • Rail Revival Is Lifeline to Biggest Africa Copper Mines: Freight
  • Corn Drops as Dry Midwest Weather May Accelerate U.S. Planting






















The Hedgeye Macro Team













The Macau Metro Monitor, May 15, 2013




According to the official gazette, SJM Cotai has gotten the green light.  The company will pay the government a total premium of MOP2.15 billion (US$269 million) for the land.  It has already paid MOP800 million for the land premium.  SJM first filed its request in 2006.


The project was announced in October last year and includes a five-star hotel, a gaming venue and car park. CEO Ambrose So said earlier that he expected that SJM’s Cotai project could break ground this year and be completed by “between 2016 and 2017”.



A Nevada jury on Tuesday ordered LVS to pay a Hong Kong businessman $70 million for helping the casino giant enter Macau.  The verdict was the latest development in a long-running legal dispute between Sands and Richard Suen over the role Mr. Suen played in helping the company obtain a casino license in Macau.


Sands spokesman Ron Reese said the company would "aggressively" appeal Tuesday's verdict. The latest judgment followed a retrial of Mr. Suen's lawsuit, first filed nine years ago, against the company after Sands appealed an earlier verdict awarding him $58.6 million.


Suen alleged in his lawsuit that Sands owed him $328 million for introducing company executives to key Chinese officials. Sands officials denied Mr. Suen's claim that his efforts led to the company's securing a license.



The average non-performing loan ratio in China's banking system edged up to 0.96% at the end of March from 0.95% at the end of 2012, the China Banking Regulatory Commission (CBRC) said.


The weighted average capital adequacy ratio (CAR) of Chinese banks was 12.3% at the end of March, which is not comparable to previous data as tougher bank capital rules were introduced in January this year, the CBRC said.  "According to calculations based on the new rules, the overall capital adequacy ratio has decreased," the CBRC added.



Macau visitor arrivals in package tours decreased by 2.0% YoY to 739,091 in March 2013.  Package tour visitors mainly came from Mainland China (533,170), with 199,991 coming from Guangdong Province, followed by those from Taiwan (45,703); Hong Kong (41,859) and the Republic of Korea (40,738).  


In March 2013, the hotels and guesthouses received 915,766 guests, up by 20.4% YoY. The average length of stay of guests held stable from a year earlier at 1.4 nights.

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#StrongDollar Truths

“This means that truth is not a constant but is actually created.”

-George F. Kennan


The aforementioned quote comes Kennan’s 1947 State Department memo titled “Psychological Background.” He was writing about Stalin’s Russia, but he could have very well been writing about Putin’s Russia and/or Bernanke’s US monetary policy today.


The leadership is at liberty to put forward for tactical purposes any particular thesis which finds it useful to the cause at any particular moment and to require the faithful and unquestioning acceptance of that thesis by members of the movement.” (George F. Kennan, pg 260)


Who are the members of the US Dollar Devaluation Movement? Don’t blame the bureaucrat at the printing press for all of this. There’s no fair share in that. You have to lop together the entire Bush and Obama Administrations alongside Bernanke and his pandering press. Weak US Dollar policy created the weakest America you have seen since the 1970s. #StrongDollar is the only way out.


Back to the Global Macro Grind


This is why Kennan is so very relevant to US history. Truman’s paper pushers in Washington needed someone who not only lived the game (Kennan lived in Russia), but had a completely different perspective on how to play it going forward. Evolving as time and facts do is as American as most Americans want to believe they are. The American collective eventually sniffs out the truth.


One of my investing heroes, Ray Dalio, always asks: “What is the truth?” And I suspect that if you are held accountable to the returns in your accounts every day, that’s an important question for you to answer too. But do central planners trying to uphold their academic dogmas and/or the conflicted media who fawns over them want the truth? Or do they want to save face and access?


Sadly, those are rhetorical questions at this point. When it comes to Fed front-running, policy leaks, selective disclosures, IRS preference checks, spending scandals, etc etc. at this point, The People actually expect the government to be lying. That’s not good. Until it is. And I think, with CNBC ratings hitting all-time lows as markets hit all-time highs, conflicted and compromised sources are getting the message.


Americans may not be as smart as a TV pundit, but they generally know the truth when they see it.


If you have studied the last 40 to 100 years of US Federal Reserve Policy and the US Dollar history born out of its causal maneuverings, you’ll come to a very different definition of the truth about what Americans trust and respect. The highest confidence, hiring, and consumption periods in post WWII history were 1 (Reagan) and 1 (Clinton). They were also the strongest periods for the US Dollar.


If you need a Canadian to explain that to your elected Congressman and/or wanna be financial market TV star who has never actually played the game, fine – it will take some time though – take it from someone who spent the last 3 years at CNBC trying to explain this to them. In the meantime, the market is doing a really good job explaining it to everyone else who gets paid to listen.


What is the truth? Forget about what I think – let’s look at the scoreboard:

  1. US Dollar up another +0.4% yesterday to a fresh YTD high of $83.79 = +5.0% YTD
  2. #CommodityDeflation (CRB Index – 19 Commodities) -0.4% yesterday to 287 = -2.4% YTD
  3. US Stocks (SPY) up another +1% yesterday to a fresh new all-time closing high of 1650 = +15.7% YTD

Indeed fellow Americans (and Canadian green card holders), a #StrongDollar sponsored US #TaxCut!


And yeah, I heard the loser whining about how Bernanke’s Friday night whispers to the WSJ about tapering QE was going to create a swoon in stocks. It didn’t though. It ripped my Dollars and rates of return (on my hard earned savings account) higher. The swoon came in the end of the world #EOW trade instead.


If you want #EOW, get out there and beg for more of what Gold and Treasury bulls really want – Bernanke to debauch the hard earned currency of the American People and our credibility as a creditor nation while they’re at it.


If you want your economic liberties and freedoms back, get out there and start yelling like this crazy Canuck is about #StrongDollar.


If you want real (inflation adjusted) US Consumption Growth (ie 71% of US GDP), you want what I want. If you want to spend the rest of your years trying to sell fear to goose your ad revs or ratings, you want crisis. That’s un-American.


I may not be able to love this country as much as those of you who were born here. But my wife, kids, and Made In America company can.


If my speaking the truth needs to come across as aggressively as a Patriot ripping across British lines did, so be it.  I care more about results than political style, in case you couldn’t tell.


The truth about #StrongDollar, Strong America that I speak of doesn’t need to be created. It’s always been there – it’s a constant. This isn’t Russia.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are $1, $100.39-103.89, $82.63-83.94, 100.06-103.09, 1.82-1.99%, 12.12-13.49, and 1, respectively.


Best of luck out there today and God Bless America,



Keith R. McCullough
Chief Executive Officer


#StrongDollar Truths - Chart of the Day


#StrongDollar Truths - Virtual Portfolio

Trade of the Day: EPU

Takeaway: Keith covered his short today of EPU, an ETF that tracks the Peru stock market.

Keith covered his short today of EPU, an ETF that tracks the Peru stock market.


Keith covered his short of EPU at 3:28pm at $40.36, booking a nice gain for his efforts. EPU is the iShares MSCI All Peru Capped Index Fund.


Keith writes of his trade, “Short commodity-linked countries; Buy consumption - risk manage the range - rinse and repeat.”


Peru produces more silver than any country in the world, and also is a major gold producer.


Trade of the Day: EPU - epu