America's Throne

This note was originally published at 8am on July 05, 2013 for Hedgeye subscribers.

“The caliphs fell, and the Caesars trembled on their throne.”

-Edward Gibbon


#Fireworks, love’m! But Americans need to remember what fighting for their independence means. For as long as conflicted, compromised, and centralized power remains in the hands of political plunderers, there remains a credible threat to freedom.


As I watched American Independence light up the sky last night in Connecticut, I couldn’t stop thinking why this can’t all turn out the way it always has in this country. Lincoln called it “government of the people, by the people, for the people”; not for MSNBC’s politicians.


Do we have to fight for our hard earned currency, free-markets, and economic liberty? Genghis Kahn bled for this 800 years ago inasmuch as Americans did before and after 1776. “The Mongols did not find honor in fighting: they found honor in winning.” (Genghis Kahn, pg 91)


Back to the Global Macro Grind


Despite the US stock market’s run of the mill -3-5% correction from her all-time highs, what’s really #winning in 2013?

  1. Short Fear
  2. Short #GrowthSlowing
  3. Short Gold, Treasuries, etc.

Shorting America’s currency and growth expectations works until it doesn’t. It worked for the last decade actually. That’s why plenty a hedge fund growth investor had the style-drift of buying Gold as politicians built the mother of all Bernanke Bubbles in bonds.


Gold and Treasuries hate growth.


If you ask Mr. and Mrs. Gold Bond for inside info on what this morning’s US Employment Report is going to look like, their answer won’t be any different than the answer their boss (Mr. Market) has been giving you since April:

  1. Gold and Silver -1.2 and -3.2%, respectively, this morning – and both continue to #crash (Gold -26% YTD)
  2. 10yr US Treasury Yields are testing 3-month highs again this morning, backing up to 2.54%

So why should you pay the caliphs and consultants in Washington such a premium for that super-secret whisper on when and how Bernanke is going to taper, when you can just build a real-time market model to front-run them?


And why, by the way, is it so bad for America (not slices of the asset management business or Federal Reserve talking head speech fees) to see Gold crashing and #RatesRising?


Higher rates and crashing Gold were pro-growth signals in 1982 inasmuch as they were again in 1993. This isn’t a new concept. It’s called a cycle. Anyone who spent their days whining for a half-decade past those two dates doesn’t run real money anyway.


Kahn once said, “there is no good in anything until it is finished” … and the reality is that if you believe in economic gravity, there will be no sustained path to US growth until central planners get out of the way and let the Dollar strengthen alongside #RatesRising.


We know why there is a constituency of Bernanke believers out there who want the opposite of what most Americans should want – they get paid to believe! Follow the money:

  1. They run levered-long Gold funds
  2. They have (levered) net long Treasury Bond positions
  3. They earn fees and/or advertising revenues to promote slow-growth and/or fear

Don’t blame me for that. It’s called a conflict of interest in what was consensus.


I was not the author of this trouble; grant me strength to exact vengeance.” –Kahn (Genghis Kahn, pg 107)


And while vengeance may be a bad word for those who are being avenged, it’s also called #winning – USA style – for the rest of us who are promoting the only free-market path to prosperity and growth that US central planners from Bush to Obama haven’t yet tried.


Whether today’s jobs report “beats” or not, the timing remains ripe to avenge America’s Throne of Independence via #StrongDollar.


Our immediate-term Risk Ranges are:


UST 10yr 2.45-2.64%

SPX 1602-1634

VIX 14.93-17.59

USD 82.72-84.04

Euro 1.28-1.30

Gold 1183-1264


Best of luck out there today and enjoy your liberties this weekend,



Keith R. McCullough
Chief Executive Officer


America's Throne - chartoftheday

America's Throne - VP

Dinero Caliente

“Never memorize something that you can look up.”

 -Albert Einstein


I used to have something of a photographic memory.  Lately, however, a plot of my capacity for short-term recall and a YTD chart of Gold would probably be hard to distinguish. 


I’d proffer that my bout with Cognitive Deflation is only transient and simply the byproduct of late nights with infants, serial overconsumption of caffeine, and serial under-consumption of exercise.  At least that’s what I tell myself. 


Either way, I’ve come to more closely relate to the aphoristic wisdom embedded in Einstein’s quote above.


With some beach time on the August calendar, I’m holding out hope the downtime catalyzes some needed cerebral exfoliation. 


Back to the Global Macro Grind….

We have been negative on emerging market debt and equities for most of 2013 with #EmergingOutflows & #AsianContagion headlining our 2Q13 and 3Q13 Macro Investments themes calls, respectively. 


The story of emerging market pain is one birthed from emergent strength in the U.S. dollar, acceleration in U.S. growth and the associated reversal in unprecedented Fed policy driving an expedited reversal in Hot Money & Yield Chase Flows out of developing economies.   


We’ve presented the principal conclusions of our research and suggested positioning in recent presentations, but it’s probably worthwhile to take an illustrative, didactic tour of capital flows to understand how the cycling of capital into and out of emerging economies can work to propagate negative economic and market impacts in an archetypical scenario.


Capital Flows to Emerging Economies for 3 Principle Reasons:


1.   External:  “Push” flows occur for reasons external to the capital-importing economy and generally relate to relative investment attractiveness.  Perhaps the simplest way to understand it is in the context of U.S. interest rates.  If growth slows, policy turns easy and interest rates in the U.S. decline, investment yields available in emerging economies become relatively more attractive and capital flows accordingly. Historically, this has been the largest driver of rich-to-poor capital flows.  It’s also generally the most volatile.   

2.   Internal:  “Pull” flows are catalyzed by improving economic fundamentals, sound policy and/or trade & capital market liberalization initiatives.  Pull flows provide firmer bedrock for sustained inflows. 


3.   Financial Globalization:  Here we’d highlight the ongoing, global trend towards Financial & Capital market integration and the proliferation of conduit investment vehicles allowing broad institutional and retail access to developing economies.   A secular shift in portfolio allocations towards international diversification holds positive longer term opportunity for developing economies.  However, in compressed periods in which flows chase performance, it can work to amplify volatility in market prices.     


It’s the potential transience of “push” and portfolio (i.e. equity & debt) flows that are of most concern to capital-importing countries, particularly given the reality of hyper-fast capital mobility.


So, what happens when the Hot Money starts to flow?


In a generalized model, the body of empirical evidence points to a number of discrete macroeconomic impacts:


1.   Currency Appreciation:  Absent Central Bank intervention the demand for foreign currency drives the exchange rate higher.


2.   Consumption Growth:   The influx of foreign capital provides for a higher level of domestic investment.  This higher level of investment is generally accompanied by a decline in the domestic savings rate.  Consumption rises as consumerism displaces saving.  


3.   Rise in the Money Supply & Inflationary Pressure: Stemming from a rise in economic activity along with any attempts by the central bank to quell the currency appreciation.


4.   Widening of the Current Account Deficit:  Don’t worry if you don’t remember the details about what the Current Account is.  Here, it’s sufficient to understand that imports rise relative to exports generally due to an appreciating currency and rising consumption. 


It’s not difficult to understand how the confluence of the above dynamics can work to drive recurrent boom and bust cycles for emerging and formerly, capital-rationed, economies.  Consider how the interaction of the above factors, which initiates with a large influx of foreign capital, can work to drive a self-reinforcing cycle in both directions:


U.S. growth slows, Bernanke cuts to 0%, institutes financial repression and forces capital to search out yield. Capital flows into the EM economy causing increased investment, falling domestic savings and rising domestic consumption.  Incomes rise alongside accelerating growth, driving a further increase in consumption in a positive, reflexive cycle.  Further, foreign capital inflows along with diverted domestic savings provide a bid for real (i.e. housing) and speculative financial assets.  Net wealth increases alongside inflating asset values.  Faster growth, higher incomes, and rising net wealth all serve to increase capacity for credit. Credit expansion then serves to amplify the cycle.  Everything is great, until…….

U.S growth starts to inflect to the upside, #StrongDollar starts to sniff out a Fed Policy reversal, and “push” flows begin to reverse.  


When portfolio capital starts to exit, asset prices deflate and credit gets tighter, investment and consumption both decline.  The currency depreciates, driving local inflation higher at the same time that aggregate demand accelerates to the downside. If demand is local and the debt is denominated in foreign currency, the debt burden on business is amplified.  Declining demand in the face of a crashing currency and elevated inflation can leave policy makers handcuffed. 


Thus, capital flows, this time the expedited exportation of foreign capital, catalyze a reversal of the boom cycle described above with some version of a self-reinforcing, contractionary cycle playing itself out.   


Of course, country specific fundamentals, policy decisions, and monetary systems matter and understanding the prevailing risk for a particular country is more nuanced, but the generalized model described above captures the broader dynamics that tend to drive the cycle. 


Further, given the large-scale proliferation of EM related investment vehicles whereby investors indiscriminately bought ‘international diversification’ without a real understanding of the underlying exposures, it’s unlikely they will be overly discriminate in their selling.  Historical precedent suggests #StrongDollar driven outflows from emerging markets are protracted. 


In short, we don’t think #EmergingOutflows have bottomed yet. 


Hopefully the decline in my recollective ability has.


Our immediate-term Risk Ranges are now:


UST 10yr yield 2.49-2.74%
VIX 13.23-14.78

USD 82.61-83.48

Brent 106.99-109.27

Gold 1 


Enjoy the weekend.  


Christian B. Drake

Senior Analyst


Dinero Caliente - vv. EL


Dinero Caliente - vp 7 19

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


TODAY’S S&P 500 SET-UP – July 19, 2013

As we look at today's setup for the S&P 500, the range is 31 points or 1.15% downside to 1670 and 0.69% upside to 1701.    










  • YIELD CURVE: 2.23 from 2.23
  • VIX closed at 13.77 1 day percent change of -0.07%

MACRO DATA POINTS (Bloomberg Estimates):

  • G-20 finance ministers and central bankers meet in Moscow
  • See GMEET for more on G-20 finance ministers’ talks
  • 11am: Fed to purchase $2.75b-$3.5b in 2020-2023 sector
  • 1pm: Baker Hughes rig count


    • House in session, Senate schedule TBA
    • 9am: Sen. Mark Udall, D-Colo., Agriculture Sec. Tom Vilsack, Interior Sec. Sally Jewell host event to announce federal, local, private partnership to reduce risks of wildfire to Colorado’s water supply
    • 10:30am: FCC open meeting to consider status of competition in video programming industry, possible rule to update program supporting high speed broadband in schools, standards for communications for disabled people

WHAT TO WATCH         

  • Google shrs decline as shift to mobile curbs 2Q avg. ad prices
  • Microsoft 4Q profit misses by biggest margin in at least decade
  • Vivus settles proxy fight giving First Manhattan board control
  • Charter said to work with Goldman on Time Warner Cable bid
  • Detroit filed the biggest U.S. municipal bankruptcy
  • Merck to pay $23m to settle Vioxx drug-purchase lawsuits
  • SoftBank $8.5b Universal bid said rejected by Vivendi
  • Electrolux raises U.S. forecast amid improving housing market
  • Whirlpool to release results at 6am
  • Allianz joins AIG on FSB’s list of too-big-to-fail insurers
  • Toyota sudden-acceleration settlement set for final approval
  • OECD proposes plan for crackdown on companies’ tax avoidance
  • Silverstein denied right to seek $3.5b from airlines
  • Apple, U.S. Home Sales, Facebook, Ford: Week Ahead July 20-27


    • Baker Hughes (BHI) 6am, $0.65 - Preview
    • Schlumberger (SLB) 6am, $1.10 - Preview
    • SunTrust Banks (STI) 6am, $0.67
    • Whirlpool (WHR) 6am, $2.42
    • Autoliv (ALV) 6am, $1.38
    • General Electric (GE) 6:30am, $0.35 - Preview
    • Honeywell (HON) 6:30am, $1.21 - Preview
    • Laboratory of America Holdings (LH) 6:45am, $1.80
    • First Horizon National (FHN) 6:55am, $0.19
    • Interpublic Group (IPG) 7am, $0.22
    • VFC (VFC) 7am, $1.17
    • State Street (STT) 7:13am, $1.18
    • First Niagara Financial Group (FNFG) 7:15am, $0.18
    • Rockwell Collins (COL) 7:25am, $1.15
    • Manpowergroup (MAN) 7:30am, $0.89
    • Kansas City Southern (KSU) 8am, $0.95 - Preview
    • Ingersoll-Rand (IR) 8am, $1.08


  • China Seen Ramping Up Global Wheat Imports After Rain Hurts Crop
  • Gold Bulls Dominate for Longest Run in Bear Market: Commodities
  • Thailand Faces Loss on Rice Sales to Drain Record Stockpiles
  • Commodities Reach 3-Month High in Best Weekly Run Since February
  • WTI Oil Trades Near Highest in 16 Months to Narrow Brent Spread
  • Gold Extends Gain in London, Rises 0.7% to $1,293.35 an Ounce
  • Copper Erases Decline, Trades at $6,910.25 a Metric Ton on LME
  • Corn Falls for a Third Day as Rain Set to Ease U.S. Crop Stress
  • Arabica Coffee Rebounds Before Possible Frost as Cocoa Advances
  • Rebar Rises for Eighth Day as Iron Ore Rallies, Inventory Drops
  • Hedge Fund Exit May Signal Commodity Rally End: Chart of the Day
  • Global Oil Prices Vulnerable to Geopolitical Unrest: Bull Case
  • Asia’s Bitter Harvest: The Hidden Human Toll of Palm Oil’s Boom
  • Commodities Daybook: WTI Crude Sheds ‘Broken’ Benchmark Status
  • China’s First Gold Exchange-Traded Funds Miss Targets


























The Hedgeye Macro Team


















Preconstruction costs on Wynn Cotai casino resort have exceeded the initial estimates by more than 5%, Wynn Macau said.  The “additional works” were expected to bring the total costs incurred by its contractors to about HK$1.59 billion (US$204.2 million) by the end of this month.


In January, Leighton Contractors (Asia) Ltd said Wynn Macau had selected it to design and build the Cotai casino-resort and the “first component of works” would cost A$222 million (US$203.5 million at current exchange rates).



Macau former triad head Wan Kuok-koi, better-known as “Broken Tooth Koi” conceded an interview to a HK media outlet and revealed his ambition to step back into the gaming business. 


Asked what he plans to do in the future, Wan said he would talk with people to know more about what’s happening. “I don’t have much time. If I act slowly now, I will be slow. (I will join) the gaming industry, of course. There will be a new casino hall open next month. But there will not be any ceremonies, just to be low profile. I will not manage that personally.”



Travellers International Hotel Group Inc will spend US$600 million (MOP4.8 billion) to expand its Manila casino resort in the next three years, saying the postponement of its US$1-billion IPO will not delay its investment.  Travellers, a joint venture by casino operator Genting Hong Kong Ltd and Philippine conglomerate Alliance Global Group Inc, said it could borrow the money while it waited to list its shares.


The company deferred its planned listing until September or October because of market volatility.  The proceeds will fund an expansion of Resorts World Manila that should be completed by 2016.


Love the Smell of Burning Yens In AM!

Takeaway: Nikkei is up a Gozilla-like +43.8% year-to-date.

Take a deep whiff. Again. You smell that? It's the smell of Burning Yens back in the air.


That's what happens when the US Dollar stabilizes on Dovish Ben not being quite dovish enough, and Team Abe and Aso ready to win an election this weekend.


Cue the Nikkei.


Love the Smell of Burning Yens In AM! - NKY


Japan is enjoying a nice +5 day run and was up another +1.3% overnight. In fact, the Nikkei is up a Gozilla-like +43.8% year-to-date. It's the best-looking (liquid) equity market in the world right now next to the USA.


Ahhhh. Nothing quite like the smell of Burning Yens.

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