This note was originally published at 8am on July 01, 2013 for Hedgeye subscribers.
“All looting would wait until after complete victory.”
Of all the successful wartime innovations of Genghis Kahn versus oppressive 13th century kingdoms, his looting policy was one of the most unique.
“He ordered that a soldier’s share be allocated to each widow and to each orphan of every soldier killed” … “this policy ensured him of the support of the poorest people in the tribe, but it also inspired loyalty among his soldiers.”
“By controlling the distribution of all the looted goods, he had again violated the traditional rights of the aristocratic lineages...” (Genghis Kahn and The Making of the Modern World, pages 50-51). The trust of The People was his currency.
Back to the Global Macro Grind…
You can study the last 80 years of economic history or the last 800 and you will come to the same basic conclusion: Politicians eventually plunder The People, until The People push back. The pattern of behavior is not that complicated really. Think it through.
On and off for the last 40 years or so, the United States of America has engaged in the same economic plundering that European Aristocratic regimes tried inasmuch as the Ming Dynasty of 14th century China did. It works, until it doesn’t.
Economic plundering occurs when people who get paid by their political ascent devalue the purchasing power of their people. Nixon started it in 1971 and Carter continued it; Reagan and Clinton got rid of it; then Bush II and Obama resuscitated it. The only sustainably strong periods of US economic growth (1983-89 and 1993-99) in the last 40 years occurred when the Dollar wasn’t being devalued.
But you already know that…
As a result, you also know why both real (inflation adjusted) US GDP growth and the US Consumption side of the US stock market has performed so well in the last 6 months. #StrongDollar = #CommodityDeflation.
To review the last 6 months:
No, this is not new – but last week was a friendly reminder to those who live in fear of #StrongDollar Commodity and Debt Deflation that there is indeed another side to this globally interconnected trade.
Last week’s absolute and relative performance of the same was pronounced:
And, of course, after the worst month for US stocks in 2013 (SP500 -1.5% for the month of June), Consumer Discretionary (XLY) was the only S&P Sector to close up (+0.5%) for the month.
Can we handle a 3-6% stock market correction? Can we handle #RisingRates? Can we handle the truth?
Since most Commodities trade via the world’s reserve currency, pervasively bullish moves in that currency (US Dollar) can perpetuate a global consumption #TaxCut.
Guys who are marketing 2 and 20 on levered long Gold Funds and/or Super Sovereign Credit Bubble funds (whose base premise is that savers should earn 0% rates of return in perpetuity, and like it) don’t like this at all.
But I do. I think The People do too.
And why, by the way, should it be any other way? Why should we support aristocrat bond fund managers like Bill Gross begging for Bernanke to superimpose more slow-growth policies on the US Economy?
But don’t worry, Paul Krugman agrees with Gross now – so we’ll have to deal with Bernanke being pressured by both “intellectual” and asset management aristocrats for the next 3 months as we try to handicap their tapering whispers.
Where to from here? I don’t know. I think I know what the two potential paths look like though:
Americans have a choice. But the scarier reality is that so do their politicians. So stand up and be heard, before it’s too late.
Our immediate-term Risk Ranges are now:
UST 10yr 2.47-2.74%
Best of luck out there this week. And Happy Canada Day!
Keith R. McCullough
Chief Executive Officer
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“Wisdom is not wisdom when it is derived from books alone.”
Horace was the prominent Roman poet during Augustus’ reign. He died at the age of 56, in 8 BC. Despite his fear that his “books would eventually become food for vandal moths” (The Swerve, page 84), his wisdoms didn’t die alongside him.
History teaches those of us who care to study it more than we’ll ever be able to know. The more I read, the more I realize that I know very little. History also gives me a tremendous appreciation for both empathy and context.
If you can’t empathize with another person’s perspective, how can you criticize it? If you can’t contextualize today within yesterday, how can you handicap where we may be going next?
Back to the Global Macro Grind…
Given that I have a degree in Keynesian economics, I feel relatively comfortable disagreeing with many of its assumptions. Admittedly, doing it with my own money instead of theorizing from a textbook helped expedite my learning process.
“Don’t think, just do” is something else that Horace wrote. But just doing isn’t enough. You have to be held accountable to what you are doing. Learning from your mistakes is an invaluable lesson. Doing it with other people’s money is called responsibility.
I suggest both the Fed and the President of the Unites States consider that when affecting either the value of our currency and/or the risk-free rate of return on our hard earned savings. On both major factors, there is responsibility in their policy recommendation.
How does this tie back to the US economy?
So why fight history? That’s what Bernanke is currently trying to do. If you are a Bernanke fan, at a bare minimum, you have to acknowledge that he is trying to “smooth” the pace of US Dollar gains and #RatesRising at this point. Why should we let him?
In the very immediate-term, we know what an acceleration in #StrongDollar and #RisingRates does:
And that’s all bad for who? Bingo – those who are long 1, 2, and 3. Meanwhile, who gets paid?
The first two compensation pools of people are obvious. Those populations, by the way, are much larger than the partnership group at PIMCO that gets paid in size if Bonds outperform growth stocks in perpetuity.
The third constituency is for crazy people like me. You know, people who don’t wake up every morning trying to scare the hell out of you, burn your currency, and hand your tax-dollars over to bankers who pay themselves. We are Growth Investors.
Whether I’m investing in a low-dividend yielding big cap growth stock like Starbucks (SBUX) or private growth company like Hedgeye, it’s all the same bet. We aren’t betting on the end of the world. We are betting on brands and people. We are betting they grow.
Put another way, here’s how the market has been scoring this for the last month:
Bernanke, you got a problem with that?
I didn’t read this in your Keynesian Econ 101 book, bro. It’s on the tape. This is not only consistent with the 1 (Reagan) and 1 (Clinton) bi-partisan periods of US growth investing (where US GDP averaged over +4% during each period), it’s been a consistent market message for the last 180 days. Read and respect its message.
For the last 6 months, here are the #StrongDollar correlations to major market moves:
No, no, no. The Mucker is not considered a wise man in Washington. Nor does he want to be. But please, my friends, please - don’t let an un-elected body of perceived wisdom at the US Federal Reserve mess this one up again. The gravity of Mr. Market’s wisdoms have spoken. They are the most pro-growth signals we have seen in years. Only your government can mess this one up this time.
Our immediate-term Risk Ranges are now:
UST 10yr 2.44-2.77%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – July 15, 2013
As we look at today's setup for the S&P 500, the range is 48 points or 2.27% downside to 1642 and 0.58% upside to 1690.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
THE MACAU METRO MONITOR, JULY 15, 2013
SJM BELIEVES CONSOLIDATING SMALL CASINOS WILL BOOST PROFIT Ming Pao Daily News
Casino operators have been adding more non-gaming facilities to their casino and resort projects in Cotai to lure more different customers. According to some financial reports, SJM’s EBITDA of one gaming table in its bigger size casino can reach US$5,000, as compared to the US$1,729 at its other casinos. The overall performance of SJM was dragged down by small or third-party operated casinos. SJM CEO Ambrose So said although Grand Lisboa has a higher operating efficiency, there is little room to add more gaming tables. The situation will improve when the casino operator's project in Cotai is operational.
HONG KONG HORSE BETS EXCEED LAS VEGAS CASINOS Bloomberg
Bets on horse races in Hong Kong are poised to exceed wagers at Nevada's casinos for a second straight year. Wagers of HK$93.8 billion ($12 billion) from 83 horse-race meetings in the fiscal year to June 30 were 19% more than Nevada’s combined take in the 11 months through May. Bets at the club, set up in 1884 when Hong Kong was under British rule, exceeded those in the U.S. gambling hub in fiscal 2012 for the first time in about a decade.
The Jockey Club is seeking to raise sales further by keeping more Hong Kong residents from taking the one-hour ferry ride to Macau and through revenue-sharing agreements, CEO Winfried Engelbrecht-Bresges said. The goal is to lure back about a third of the HK$26 billion Hong Kong residents bet in Macau the past year, he said.
CHINA JUNE NEW YUAN LOANS CNY860.5 BILLION; ANALYSTS EXPECTED CNY800 BILLION NASDAQ
Chinese financial institutions issued 860.5 billion yuan ($140 billion) of new yuan loans in June, up from CNY667.4 billion in May. This was above economists' expectations, which had forecast June's newly issued yuan loans at CNY800 billion.
Total social financing, a broader measurement of credit in the economy, came to CNY1.04 trillion in June, down from CNY1.19 trillion in May. Total social financing in June was the lowest monthly tally this year. China's broadest measure of money supply, M2, was up 14.0% at the end of June compared with a year earlier, lower than the 15.8% rise at the end of May. The figure was below the median 15.2% increase forecast by 20 economists polled by Dow Jones.
PACKAGE TOURS AND HOTEL OCCUPANCY RATE FOR MAY 2013 DSEC
Macau visitor arrivals in package tours increased by 7.7% YoY to 721,104 in May 2013. Visitors arrivals in package tours mainly came from Mainland China (547,803), with 174,678 coming from Guangdong Province, followed by those from China (43,926); Hong Kong (30,048) and the Republic of Korea (25,011).
There were 99 hotels and guesthouses operating at the end of May 2013, providing 28,065 rooms, up by 16.4% YoY; guest rooms of 5-star hotels accounted for 66.5% of the total. The average length of stay of guests decreased by 0.1 night YoY to 1.3 nights.
PHILIPPINES FINDS OKADA MAY HAVE VIOLATED LAWS OVER CASINO LAND Bloomberg
Philippine investigators found evidence that Japanese billionaire Kazuo Okada used companies that aren’t qualified to develop a casino in Manila. A fact-finding panel recommended criminal charges against Okada and other parties for possible violations of a law against using front companies to own land. Separately, the panel didn’t find sufficient evidence to recommend charges on bribery, it said. Claro Arellano, prosecutor general, said there will be a further investigation.
“We built the current land-owning scheme based on advice from the Philippines’ prominent lawyers, so our understanding is that it’s legal,” Nobuyuki Horiuchi, a spokesman for Universal Entertainment.
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