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Dollar Devaluation Good?

Takeaway: Does any historical data actually exist that supports currency debasement as a fruitful economic policy?

Late last week, we joined the Peterson Institute for International Economics for its Twelfth Annual Stavros Niarchos Foundation Lecture titled: “Globalization, Multipolarization, and Currency Wars: The Imperative of Systemic Reform”. The lecture, given by PIIE senior fellow and director emeritus C. Fred Bergsten, argued that currency manipulation is the single biggest challenge facing the world economic system and costs millions of US jobs. He also offered bold proposals for countervailing intervention and ties between the IMF and WTO in evaluating currency misalignments.

 

From our vantage point, Bergsten’s speech centered on five key points, which have subsequently paraphrased below:

  1. Currency wars are very sizeable, widespread and could get worse;
  2. Currency wars have very large economic ill-effects on the US economy and the economies of the EMU periphery;
  3. These developments stem from a gaping hole of int’l economy architecture;
  4. Policies could and should be adopted to counter ill-effects; and
  5. US should multilaterally initiate a major effort and be ready to act unilaterally, if necessary (i.e. “it’s time to declare war on int’l currency war”).

Regarding point #5 as articulated above, Bergsten suggested that the US – even if on its own – should immediately pursue one or more of the following rectifying actions through existing int’l agencies:

  1. Countervailing intervention in the open market;
  2. Imposing taxes on the FX reserves of manipulating countries;
  3. Applying duties to the imports of manipulators; and
  4. Submission of its case to the WTO to apply for across-the-board import restraints.

In so many words, Bergsten basically argued – as he has developed a reputation for doing – for a de facto 1971-style adjustment of US monetary policy. Essentially, he feels that the US should wage an all-out war on currency manipulators, with the ultimate result a likely USD devaluation akin to when President Nixon abandoned the international gold standard.

 

Did we miss something?

 

If we can recall – or better yet, pull up the charts – the 1970s turned out to be the worst decade in modern US history from an economic perspective. Politicized agents such as President Nixon, Treasury Secretary Connally, Fed Chairman Arthur Burns, President Carter, etc. all conspired to weaken the US dollar vis-à-vis its international counterparts – perpetuating a near decade-long stagflation in the process.

 

It wasn’t until President Reagan and Fed Chairman Paul Volcker came in the early 1980s and completely inflected US monetary policy (and the expectations embedded therein) that the US was finally able to overcome stagflation and recessionary levels of economic growth. A similar inflection occurred in the mid-to-late 1990s when a similar bout of USD hawkishness helped the US escape recession, generate wealth and alleviate poverty on a large scale.

 

No sir, the data doesn’t lie; the strongest periods of economic growth (i.e. the 1980s and 1990s) the US has seen in the modern era  have coincidentally occurred when the USD was strengthening and/or persistently at very high levels (using the US Dollar Index as a time-tested proxy). While some might accuse us of conflating correlation with causation, we market practitioners don’t really care to make the distinction. Charts often tell stories that even the “smartest guys in the room” fail to comprehend.

 

What we do care to demarcate, however, is the FACT that no period of sustained USD debauchery has produced anything on the order of sustainable economic growth. Certainly not in the 1970s when the Nixon/Carter/Burns trio was breaking the buck; nor in the 2000s when the Bush/Obama/Greenspan/Bernanke foursome were inflating bubble after bubble (particularly in housing and commodities) in a spectacularly-failed attempt to create economic growth.

 

TIME’S A’CHANGING?

President Reagan said it best: “I was very pleased to read a prediction that the price of gold will nosedive,” and we echo his sentiments exactly. If the price of gold is signaling anything to us today, it’s that we may be at another historical inflection point in US monetary and fiscal policy that, like the others before it, will only be broadly recognized after the fact.

 

A deviation from perpetual QE, burgeoning federal debts and deficits, etc. would all be hugely positive for the US economy at large. What is bullish for the US’s consumption-based economy is not further currency debasement, but rather a policy to backstop the US dollar from the politicized elite, many of whom astutely realize that inflation, not real economic growth, is the only thing they can actually produce at the stroke of a keyboard. And as our friends at MIT’s Billon Prices Project and at Shadowstats have shown, inflation exists – even if it is no longer politically palatable to accurately report it.

 

It’s either that or the price of gold has been lying to everyone for twelve consecutive years… Whatever you do, don’t pull up a chart(s) of $100-$150 crude oil (or $4-5 gas) or $8 corn or $4 copper or $200 cotton – all of which are priced internationally in previously-deflating US dollars.

 

For thousands of years, politicians have resorted to currency debasement when times have gotten tough economically. By our count, not one economy in world history has come out on the other side of currency debasement better off without a marked deviation from those policies to inflate. If anything, currency debasement has historically been a coincident indicator for sustainably slower economic growth and a leading indicator for the collapse of entire empires.

 

We’d be utter fools to make such a prediction for the US of A at the current juncture. We will, however, warn of the pending collapse in the credibility of the international economist community. For far too long, academics have been espousing their theories upon economies and the politicians and financial markets that dictate them without any empirical proof of their validity or effectiveness.

 

The US is not an export economy. Please stop recommending policies to devalue and inflate in the hopes of pursuing your elixir of life that is exporting goods and services to Mars. If you fine folks need something to replace the gaping hole in your respective schedules that will inevitably come with a cessation of such practices, try digging up some historical data that actually supports currency debasement as a fruitful economic policy.

 

That’ll keep you guys busy…

Dollar Devaluation Good? - Strong Dollar Strong America


Bullish: SP500 Levels, Refreshed

Takeaway: The immediate-term TRADE overbought signal we issued last week didn’t last long.

POSITION: 11 LONGS, 8 SHORTS @Hedgeye

 

The immediate-term TRADE overbought signal we issued last week didn’t last long, but the down -0.5% move we had the day after was the biggest down move in 10 days. We call these bear scraps within a very Bullish Formation.

 

Intraday Thursday was actually the 1st time I was net short (in #RealTimeAlerts) since November 29th, so I think the call got  some attention. But so should have my covering shorts and getting back to net long on Friday morning.

 

That Consumer Confidence reading (+10% m/m in May vs April was that good, and all support lines for SPY held).

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE overbought = 1678
  2. Immediate-term TRADE support = 1647
  3. Intermediate-term TREND support = 1558

 

In other words, I listen to my wife and my machine (in that order). Overbought was as overbought did (for a day), as it will again (higher) and oversold will lower.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish: SP500 Levels, Refreshed - SPX


WWW: Presentation Materials for 1pm Call

Takeaway: See attached link to presentation materials for today's 1pm conference call on WWW.

See attached link to presentation materials for today's 1pm conference call on WWW.

CALL DETAILS

  • Date: Monday, May 20th at 1:00pm EDT
  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 465419#
  • Materials:CLICK HERE

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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.

MACAU KEEPS PACE

We are keeping our 15-20% growth forecast for the full month of May following another solid week in Macau.  Daily table revenue averaged HK$885 million the past 7 days, up 22% YoY.  Month to date ADTR has climbed 18% YoY.

 

In terms of market share, MPEL, our favorite stock in the group, was the significant mover from last week with share growing to 14.1%, right in-line with recent trend.  MGM and Wynn continue to track above trend, while SJM and LVS are below.

 

MACAU KEEPS PACE - FF

 

MACAU KEEPS PACE - aa


Weimar Nikkei

Client Talking Points

Weimar Nikkei

The Nikkei jumped another 1.5% overnight, and Japanese equities are up 77.3% since November. Wow. That’s what happens a country debases its currency. Yields on Japanese government bonds (JGBs) rose 5 basis points overnight, and now are above Keith’s long-term TAIL risk line of 0.81% to 0.85%.

Gold and Silver

Silver prices are down 4% this morning, the biggest percentage move this morning. Gold itself is immediate-term oversold now that consensus is starting to lean on the short side (74,432 short contracts in the CFTC futures/options data this morning is the highest since the data has been available in 2006.)

Asset Allocation

CASH 39% US EQUITIES 18%
INTL EQUITIES 18% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 25%

Top Long Ideas

Company Ticker Sector Duration
IGT

Decent earnings visibility, stabilized market share, and aggressive share repurchases should keep a floor on the stock.  Near-term earnings, potentially big orders from Oregon and South Dakota, and news of proliferating gaming domestically could provide near term catalysts for a stock that trades at only 11x EPS.  We believe that multiple is unsustainably low – and management likely agrees given the buyback – for a company with the balance sheet and strong cash flow as IGT.  Given private equity’s interest in WMS (they lost out to SGMS) – a company similar to IGT that unlike IGT generates little free cash – we wouldn’t rule out a privatizing transaction to realize the inherent value in this company.  

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. 

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

Three for the Road

TWEET OF THE DAY

As volatility seeps into the Japanese government bond complex, the game of interconnected risk rolls on.”-- @KeithMcCullough

QUOTE OF THE DAY

“If you’re going through hell, keep going.” – Winston Churchill

STAT OF THE DAY

$1.1 billion, the price that Yahoo! Reportedly is paying for Tumblr


European Banking Monitor: Greece Inflects To The Upside

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Major widening (+205 bps) at Greek bank EFG Eurobank caused the average European bank swap to widen by 2 bps, but the median was actually tighter by 6 bps. French, Italian and Spanish banks continued to post overall, steady improvement.

 

European Banking Monitor: Greece Inflects To The Upside - rr. banks

 

Sovereign CDS – Sovereign swaps were modestly tighter around the globe last week with the exception of Japan and Spain, where swaps widened by 6 and 1 bps, respectively. Despite the sharp increase, Japanese swaps remain 3 bps below their levels from one month ago.

 

European Banking Monitor: Greece Inflects To The Upside - rr. sov 1

 

European Banking Monitor: Greece Inflects To The Upside - rr. sov 2

 

European Banking Monitor: Greece Inflects To The Upside - rr. sov 3

 

Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 14 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Greece Inflects To The Upside - rr. euribor

 

ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Greece Inflects To The Upside - rr. facility

 

 

 

 

 

 


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