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This note was originally published at 8am on May 13, 2013 for Hedgeye subscribers.

“Do we really need the Fed?”

-Ronald Reagan

Don’t go all Democrat on me. It was just Mother’s Day and I’m still in a light-hearted Canadian mood. Remember, I am not a Republican either. Both Nixon and Carter devalued the Dollar and monetized the US Debt inasmuch as Bush and Obama have. I’m just a man in a room analyzing it all (and trying my best to front-run the Fed’s next move).

Front-run? Yep, this email may not make it through your compliance firewall due to the nature of its title. There are two ways to front-run the Fed: Strategy 1. By getting inside information (hire a “consultant” in Washington) or Strategy 2. By getting growth and inflation right before consensus does. We do the latter strategy.

The zeitgeist of American distrust in the Fed was very similar to today when Reagan wondered the aforementioned quote out loud in 1980. If you are thinking through what a post Fed slowing of bond purchases looks like, the early 1980’s aren’t a perfect fit but studying the time period helps you contextualize how to front-run a pattern of expectations shifts.

Back to the Global Macro Grind

Gold has been front-running the Fed since Bernanke said he’s print to infinity and beyond (September 2012). On the heels of John Hilsenrath’s WSJ article on Friday night, the Gold price is down another -1.3% this morning to $1427/oz. Its worst YTD start since 1982.

In other words, by the time the Central Planner in Chief comes to agree with economic gravity, Gold’s price inflation will be long gone. Gold’s last central planning cycle top ended in early 1980 – not 1982 (US economy started to recover in 1982). This time, Gold stopped going up 2 years before economic acceleration as well (Gold’s all-time bubble top = 2011).

So, to get Gold right, you need to get the rate of change in the economy right. How do you front-run economic gravity?

  1. Get the USD Dollar right
  2. Get US Consumption right
  3. Get US Treasuries right

We like to think it through in that 1-3 order actually – and that’s primarily because that’s how we have built our GIP (Growth, Inflation, Policy) Model. There is no better front-runner for the marginal rate of change in country’s fiscal/monetary policy than her currency.

If you disagree with that, you probably aren’t short the Yen or long the US Dollar. If you share our position on both, you probably agree that on the margin (y/y):

A)     US fiscal policy is tighter (sequestration) and monetary policy can’t get any looser (less bond buying than $85B/mth = tighter)

B)      Japanese monetary policy (CTRL+PRINT) and fiscal policy (about the spend their brains out) is looser

This makes for a phenomenal cocktail if you are bearish of the 2nd to last Fed policy bubble (Commodities). Oh, and the last of Bernanke’s Bubbles is in Treasuries, fyi.

We’ve been crystal clear on getting out of (and shorting) Commodities, Gold, etc. Whereas we have been quiet as of late on how to trade Treasuries in and around Bernanke’s super secret “communication” tools. We were actually bullish on Treasuries until November of 2012 because our GIP Model was still signaling #GrowthSlowing. That’s no longer the case.

With US Employment, Housing, and Consumption #GrowthAccelerating both sequentially from Q412 to Q113 and again here in Q213, this is what we mean by front-running the Fed. The Fed is behind us on acknowledging the market’s shift in growth expectations. Gold does not like real-inflation adjusted economic growth.

What we like is what the Global Macro market still likes YTD:

  1. US Dollar Index +1.25% last wk and +4.3% YTD
  2. Commodities (CRB Index) -0.7% last wk and -2.4% YTD
  3. Gold -1.9% last wk and -15% YTD

Don’t kid yourself – someone who operates under Strategy 1. of Front-Running knew that Hilsenrath was going to pop that in the paper on Friday night. Someone always knows something. Never stop respecting that.

If you didn’t freak-out about Sequestration or Cyprus, should you finally freak-out about this Fed policy shift? Is this the end-of-the-world trade the bears have been waiting on while not calling for it for the right reasons (#GrowthAccelerating)? What do you do now?

  1. Why not start with doing more of the same – short more Commodities, Gold, etc.
  2. Why not then cut your asset allocation to Treasuries to 0% (we did on Friday)

If you’re not going to 100% cash this morning, your 1st two go-to-moves are out and out of the bubbly stuff. Then you have to decide where you buy/sell US Dollars and US Equities. On those fronts I’ll probably:

  1. Keep buying every dip in US Dollars when it hits the low-end of our immediate-term risk range
  2. Keep risk managing the TRADE range for US consumption stocks within their bullish intermediate-term TREND

Channel your inner progressivism this morning. Do you really have to be long a 0% interest rate forever expectation? If you are long US Dollars and/or US stocks, do you really need the Fed?

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and SP500 are now $1427-1478, $100.28-105.52, $82.37-88.36, 99.04-101.93, 1.82-1.92%, 11.97-13.61, and 1615-1649, respectively.

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

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