This note was originally published May 24, 2013 at 08:04 in Newsletter
“To you from failing hands we throw the torch. Be yours to hold it high.”
-Lieutenant-Colonel John McCrae
Most of you probably haven’t played for the Montreal Canadiens, but if you had, you would know that the quote above is painted on the wall in the Canadiens locker room. The idea is that current players are expected to live up to traditions of the past. The line itself is taken from a poem called, “In Flanders Fields”, which was written by Dr. John McCrae in World War I.
McCrae enrolled at the age of 41 with Canadian Expeditionary Force following the outbreak of World War I. Instead of joining the medical corps, which he had the option to do based on age and training, he instead volunteered to join a fighting unit as a gunner and medical officer and was immediately sent to the German front in Belgium.
Flanders is a region in Belgium where Germany launched the first chemical attack in the war during the second battle of Ypres. At the conclusion of the battle, McCrae was inspired to write the poem after seeing the poppies grow on the graves of the dead at Ypres, thus the opening line of the poem, “In Flanders fields the poppies blow.” To this day, Canadians wear poppies on Remembrance Day in memory of those who died while serving in the Canadian military.
Back to the global macro grind . . .
This idea of transition from past to present is one we discussed in great detail on an expert call yesterday with Jim Rickards, the author of “Currency Wars: The Making of the Next Global Crisis”. The focus of our discussion of transition related to the Federal Reserve. Specifically, what will happen as Chairman Bernanke’s term ends in January 2014?
On a basic level, if Bernanke moves on, whoever comes in to lead the Fed will be burdened with unwinding the most dovish monetary policy in the history of central banking, including the longest run of zero interest rate policy and a quantitative easing program that is without parallel. Ultimately, the Fed will have to unwind the $3.4 trillion in securities on its balance sheet. That torch is passed to you Mr. or Mrs. Next Fed Head!
One area in which we would hope to see an improvement from the next Chairman of the Federal Reserve is in economic projections. In the Chart of the Day, we look at the U.S. GDP growth projections supplied by the Fed going back to the 2010. Here is the skinny:
- In 2010, the Fed’s peak GDP growth projection was 3.5%, which missed the actual number by 32%;
- In 2011, the Fed’s peak GDP growth projection was 3.7%, which missed the actual number by 51%; and
- In 2012, the Fed’s peak GDP growth projection was 2.7%, which missed the actual number by 19%.
If you didn’t know that economics isn’t a science, well, now you know.
In terms of improving their internal models, we may just send the new Chairman of the Federal Reserve a Hedgeye dart board and some darts. On a serious note, the fundamental problem with such shoddy projections is that the Federal Reserve is actually setting monetary policy based on these numbers, which currently involves purchasing $85 billion in securities monthly. It should be no surprise then that we have market volatility.
Speaking of central banking induced volatility, the Nikkei had a 7% intraday swing yesterday. What was the catalyst you ask? The Bank of Japan’s Kuroda came out midday and said that the “BOJ has announced sufficient monetary easing.” Obviously, the markets don’t believe him. Neither do we and therefore we are keeping our short Japanese Yen recommendation in our Best Ideas product. We are also negative on JGBs on the recent break out above 1% on the 10-year.
No surprise, the Keynesian economic standard bearer Paul Krugman is taking the other side of our research this morning in an op-ed in the New York Times and calling, “Japan the Model”. Like a fledgling hedge fund analyst that has to defend his position to the seasoned portfolio manager, Krugman finds the facts that best support his case. We behavioral economists call this framing.
Interestingly, on one hand Krugman is heralding the success of Japanese monetary policy because “Japanese stocks have soared”. Conversely though, he tells us not to worry about the recent sharp sell-off in Japanese equities when he writes:
“I’m old enough to remember Black Monday in 1987, when U.S. stocks suddenly fell more than 20 percent for no obvious reason, and the ongoing economic recovery suffered not at all.”
You can’t have your cake and eat it too Dr. Krugman!
Our ever savvy Healthcare sector head Tom Tobin offers an alternative thesis to the long decline of Japan’s economy, which is simply that over the last 50 years the population growth rate has been in steady decline. Not surprisingly, this decline in population growth has correlated very closely with GDP growth. That’s not our prognostication on the holy pages of the New York Times, but rather the simple math.
The fundamental problem that Keynesian economists who advocate printing to infinity and beyond have is that they can’t explain how printing leads to more jobs and higher employment. Simply put, that is because debasing a currency doesn’t incentivize companies to invest and hire. In fact, it does the opposite.
We are happy to continue to trade the market volatility induced by Keynesian economics, but at some point we do hope that the torch is passed on from these charlatans.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Weimar Nikkei, and the SP500 are now $1343-1424, $101.61-103.92, $83.24-84.29, 101.42-103.69, 1.95-2.05%, 13.11-15.73, 14,271-15,097, and 1634-1657, respectively.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research