Great Failures

This note was originally published at 8am on June 24, 2013 for Hedgeye subscribers.

“It was not the common people who were to blame for these failures…”

-Jack Weatherford


“Rather, it is the great ones among you who have committed these sins. If you had not committed great sins, God would not have sent a punishment like me upon you.”


Don’t worry, I’m not going to go all religious on you this morning. That’s just what Genghis Kahn told the elite of Bukhara after conquering their centrally planned city. “He then gave each rich man into the control of one of his Mongol warriors who would go with him and collect his treasure.” (Genghis Kahn and The Making of The Modern World, pg 7)


Maybe Bernanke and his central planning ideologues around the world should do a little summer reading on my man Genghis and reflect upon how plundering the purchasing power of free peoples ends…


Back to the Global Macro Grind


And over the #Waterfall bonds go. No matter where you think we were last week, here we are – lots of Global Macro tourists who didn’t respect the VELOCITY + VOLUME of the water approaching our bifurcation point (2.41% = the dam) = soaking wet.


So, to start, Hedgeye Risk Management will, in #OldWall style, “reiterate” the following Global Macro positions:

  1. 0% asset allocation to Commodities
  2. 0% asset allocation to Fixed Income
  3. 0% asset allocation to Emerging Market Debt and Equity

As the US Treasury 10yr Yield rips through our critical intermediate-term breakout line of 2.41% to 2.60% this morning, everything starts to happen a lot faster. The aforementioned 0% asset allocations were already in motion. We affectionately called Commodities, Bonds, and Emerging Markets #BernankeBubbles for a reason. When they pop, there’s no more flow!


If you’ve ever tried suspending yourself in mid-air after living in a bubble that’s popped, it doesn’t end well. Neither does living a centrally planned life where everyone in a so called “free-market” is at the beck and call of an un-elected man named Bernanke.


That’s all history now. If you didn’t know that the anti-gravity “smoothing” experiment using the most debt leverage in world history has another side of the trade (deflating debt, commodities, emerging markets, etc.), now you know.


There are two big potential drivers of asset deflation:

  1. #StrongDollar (US Dollar Index) from her 40yr low (in 2011 when Commodities and Gold peaked)
  2. #RatesRising at an accelerating rate from the 0% bound

No, it’s not the common people who are to blame for deflation. It’s the conflicted and compromised politicians who have been cheered on by those who get paid by Commodity, Fixed Income, and Emerging Market inflations whose bar tab is up.


Deflation? If you inflate a bubble to its max, there will eventually be deflation. And, yes, there will be blood. Deflation is only a bad word if you are long the thing that is deflating.


But can our institutionalized world of short-term price performance chasing handle a stronger currency and rising interest rates? Can we handle this thing call a long-term cycle turning?


And what would more of the same do to our insecure world?

  1. #StrongDollar (+3.2% YTD) = #CommodityDeflation (CRB Index -5.7% YTD), so more of that would be cool #Consumption
  2. #RisingRates (+48% YTD move in UST 10yr Yield) = bad for anything bonds, and good for my hard earned Savings Account
  3. A massively asymmetric shift in the way we have all been paid to invest and allocate capital for the last decade

In chaos theory, we call a big macro cycle turning a Phase Transition. Leading towards this current point of entropy, there were a series of what we call Emergent Properties warning us of a pending phase transition.


Some investors get hurt during phase transitions; some prosper. I have a great deal of respect for Bill Gross and what he has built at @PIMCO, but if you read his last 3 tweets, you can get a sense of who doesn’t win if this keeps happening.


Stop whining.


It’s time to start winning. The USA has never achieved what all these vaunted elites of economics peddle to you as the desired outcome of all this central planning (real inflation-adjusted economic growth) without a #StrongDollar and #RisingRates.


To be clear, there will be pain before we all prosper (that’s why we have been cutting our US Equity exposure for 3 weeks). In the early 1980s and the early 1990s, Great Failures in asset allocation became as readily evident as they are this morning:

  1. Emerging Markets (MSCI EM Index) = -5.6% last week and are now -14.7% YTD
  2. Latin America (LATAM EM Index) = -8.1% last week and is now -20.5% YTD
  3. Silver = -9.1% last week and is now -34.2% YTD

Whether it’s the commodity bubble or the emerging market debt bubble, it’s all the same thing. US Central planners committed the great sin of devaluing the hard earned currency of the American people – and now some have to pay the price for that.  The punishment happens the faster rates rise. And I don’t think The People want to go back to the zero bound all over again.


Our immediate-term Risk Ranges are now (new format!):


UST 10yr Yield 2.41-2.61%

SPX 1566-1622

VIX 16.16-20.45

US Dollar Index 81.21-82.69

USD/YEN Yen 96.54-98.76

Oil (Brent) 100.23-103.73

Gold 1257-1357


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Lest Occasion Be Given

“Idleness is the enemy of the soul.”

-Saint Benedict


There were some major contradictions in Benedict of Nursia’s “rules.” Monks not being able to openly debate what they were being told to read was one of them. I started reading Stephen Greenblatt’s Pulitzer Prize Winner, The Swerve – How The World Became Modern, this weekend. That’s what has me thinking about that.


Benedictine Rule provided the foundations for western monasticism. “Let there be complete silence. No whispering, no speaking – only the reader’s voice should be heard there… no one should presume to ask a question about the reading or about anything else, lest occasion be given.” (The Swerve, pg 27)


Reading and writing makes me think. Thinking requires what Einstein called for – constant questioning of premise. Some people don’t question either Keynesian Economics or the US Federal Reserve’s policies whatsoever. Markets, on the other hand, take occasion to debate policy makers all of the time. They front-run the next decision that will be imposed on us from upon high.


Back to the Global Macro Grind


From the holy heights of Chaos Theory the globally interconnected ecosystem gives us this thing called economic gravity. As US employment #GrowthAccelerating continues to surprise on the upside, expectations for Fed tapering get pulled forward.


Last week’s market pricing of gravitational-risk was as closely aligned with what has been happening for 6 months as any week in 2013. Here were the big week-over-week moves, bundled within our core Hedgeye Global Macro Themes:

  1. #StrongDollar – US Dollar Index +1.6% on the week; up for 3 weeks in a row, and +5.9% for 2013 YTD
  2. #RatesRising – UST 10yr Yield +25 basis points on the week to a fresh weekly closing YTD high of 2.74%
  3. #EmergingOutflows – MSCI Emerging Markets and Latam Equity indexes -2.4% and -4.3% on the week, respectively

Yes, our Macro call for the last 6 months still has some serious flow to it:

  1. Dollar Up = Commodities Down
  2. Commodities Down = Commodity Linked Emerging Markets Down
  3. Emerging Markets Down = Emerging Outflows Up

Follow the flow. All that moulah has to, eventually, flow somewhere; especially as money’s prior flows start going the other way (at an accelerating rate).


So, you can either be long US Dollars and US Consumption Equities on the following fundamentals:

  1. Employment #GrowthAccelerating
  2. #HousingsHammer ripping a +12.2% y/y gain in US Home Prices (wealth effect)
  3. Consumption #GrowthAccelerating from 1.0-1.2% to 2.0-2.4% in the last 6 months

And/or, you can being long US Dollars and US Consumption Equities because you can’t be long anything else!


Lots of clients are asking us what we’re going to do with Gold, Treasuries, and Emerging Markets from here. And our answer is more of the same. We update our dynamic asset allocation model daily. Here’s the latest on that:

  1. Commodities = 0%
  2. Fixed Income = 0%
  3. Int’l Equities = 0%

Zero percent is about as clear a statement as we can make. And while we’ve had 0% in Commodities and Fixed Income for some time now, I don’t think last week’s combination of #StrongDollar + #RatesRising gets us less confident in that positioning.


Why would it? In macro there is this thing called momentum that trumps valuation. When negative PRICE MOMENTUM meets VOLATILITY and OUTFLOWS  (all at once), that’s uber bearish.


Having 0% asset allocation to International Equities is probably the position we’ll hold for the least amount of time. But, with Emerging Markets (MSCI EM) -13% and Latin American Equities (MSCI Index) -19.7% YTD, respectively, we’re in no rush.


For now, with both the Russell 2000 (IWM) and US Consumer Discretionary (XLY) US Equity market indexes hitting fresh all-time highs at +18.4% and +21.8%, respectively, occasion has been granted by the gods of our meritocracy to keep questioning consensus and reading more books.


Our immediate-term Risk Ranges are now:


UST 10yr 2.55-2.74%


VIX 14.14-16.49

USD 83.39-84.59

Yen 99.13-101.71

Gold 1179-1242


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


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Three for the Road


Biggest thing consensus has missed in 2013 is #StrongDollar driving Commodities Down, and US Stocks up



"People who lose money always need someone to blame."
- Jim Chanos


On this day (July 8) in 1932 – The Dow Jones Industrial Average reaches its lowest level of the Great Depression, closing at 41.22.






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China’s Ministry of Finance recently issued an announcement requiring all departments in the central government to cut general expenditure for 2013 by 5%.  Some local scholars said that the central government’s move indicates that China may see a slowdown of economic growth in 2H 2013, and it may have a slight effect on Macau’s gaming industry.



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