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Bernanke's Blue Pills

This note was originally published at 8am on July 18, 2013 for Hedgeye subscribers.

“I only take Viagra when I am with more than one woman.”

-Jack Nicholson


Obviously Jack Nicholson doesn’t trade Oil or Gold futures. All you need to bid up the futures curve of inflation expectations are a few Washington whispers and some dovish Bernanke Blue Pills – and, oh baby, will some of the old boys in Chicago chase!


With time, trading losses, and substance abuse, I’ve seen some men in this business get dumber, faster. Yesterday, one of my Senior Analysts on the Hedgeye Macro Team, Christian Drake, reminded me why: “Keith, neuro-plasticity and de Novo brain cell creation are generally fixed by the time you enter adulthood… except for one notable exception:”


“The hormonal milieu present in pregnant women works to create new neural circuitry and further develop parts of the brain responsible for reasoning and problem solving. So, if you’re a female and need a cerebral kick-start, get pregnant.  If you’re gender deficient (i.e. male) you have to resort to more nuanced methods of warding off cognitive deflation.” 


Back to the Global Macro Grind


“Cognitive Deflation”. Bro, that’s what I’m talking about. I love that stuff!

On Twitter, I affectionately call some of the people I do not know, “bro.” If I’m really in a good mood, I might call one of these beauties something like “princess.” But that’s a special name that usually calls for very special circumstances.


When it comes to fading consensus, you need to pay attention to where the bros are at all times. If Bernanke understood how markets trade, he’d pick up on this pretty quickly.


Toning down the raging net long position of over +325,000 contracts in Oil futures and options contracts (and giving Americans a long awaited Tax Cut at the pump), would be easy. Just have Obama tell the bros that Bernanke is out of pills.


A version of that happened yesterday. Since the last thing Bernanke actually wants is for Gold Bond bulls to crash again, the shift in expectations was at first very subtle – then it happened all at once.


Viagra really should be sponsoring C-SPANs Congressional testimony coverage at this point. Here was the play-by-play:

  1. Bernanke’s testimony said nothing new (he wasn’t incrementally more dovish than when he spoke last time)
  2. The US Dollar Index immediately went from red to green
  3. And both Gold and Oil futures went from green to red

Both Gold and these bastardly looking Gold Miners (GDX) then started going really red – and my contra-stream of bros on Twitter were quick to say “buy the dip, he’s going to say something else.”


He didn’t.  Then there was more red, the bros turned into crickets, and the blue pill rally was over.


I know. It’s so anti-climactic at this point that it could make you cry. But why should it? Why do we need the entire world to wake-up every morning with the hope of a false dawn? Why has this game turned into purely front-running the Fed?


As Melvin Udall (Jack Nicholson in As Good As It Gets) said to his dog Verdell, “Don’t be like me. Don’t you be like me!” And since we aging men don’t have much upside left, we need to switch it up from time to time anyway.


The upside to the Hedgeye plan for Cognitive Deflation (i.e. getting it through the thick skulls of the bros that Bernanke is done and Oil could go to $65), would be the most exciting bull market catalyst for US stocks of the year – sustainable growth!


Think it through. Both Reagan and Clinton did:

  1. Average Price of Oil 1983-1989 = $22.16/barrel
  2. Average Price of Oil 1993-1999 = $18.63/barrel

Both Presidents signed off on massive #StrongDollar Tax Cuts that drove US Consumption growth through the roof:

  1. Average US GDP Growth 1983-1989 = +4.31%
  2. Average US GDP Growth 1993-1999 = +3.84%

So what say you to leader of the bros, President Obama?


I say it’s time to get rid of this un-elected academic. The bros can handle it. They are big boys who can always find something else to chase. Buying into any gold rally lasting for more than 4 hours requires medical attention anyway.


Our immediate-term Risk Ranges are now:


UST 10yr yield 2.46.-2.75%

SPX 1663-1701

VIX 13.25-15.01

USD 81.96-83.59

Brent 106.99-108.95

Gold 1210-1294


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Blue Pills - Blue Pills


Bernanke's Blue Pills - vp 7 18

August 1, 2013

August 1, 2013 - dtr



August 1, 2013 - 10yr

August 1, 2013 - spx

August 1, 2013 - nik

August 1, 2013 - dax

August 1, 2013 - dxy

August 1, 2013 - euro

August 1, 2013 - oil



August 1, 2013 - VIX

August 1, 2013 - yen

August 1, 2013 - natgas
August 1, 2013 - gold

August 1, 2013 - copper

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Liberty's Flows

“We are sowing the seeds of Ignorance, Corruption, and Injustice, in the fairest field of Liberty.”

-John Adams


According to Joseph Ellis in Revolutionary Summer, that’s what John Adams wrote to Joseph Hawley on August 25, 1776. Adams could have said that about heavy-handed government in August of 2013 – and, in principle, he’d still be right. But betting against the prospects of American growth rising above compromised politicians has often been wrong.


Politics versus people - that’s not new. Americans generally dislike socialists and/or plutocratic pomp. On August 13, 1776, George Washington called the British out like most of us call out conflicted central planners today: “Their cause is bad; their men are conscious of it, and if opposed with firmness and coolness… victory is most assuredly ours.” (Revolutionary Summer, pg 86)


I like that, a lot.


Back to the Global Macro Grind


I also like seeing all of the growth factors in our multi-factor model rip to the upside. It’s especially fun to watch on days like yesterday when my contra-stream (I built one on Twitter of market pundits who are wrong at least 65% of the time) starts whining.


Winning versus whining – that’s not new either. There are a lot of losers out there who whine but, over time, Americans eventually put those people on mute and roll with winners who have principles they can associate with.


There’s been a lot of whining about US GDP “dropping to 1%” in Q213 – but that didn’t happen either. US GDP has by no means had a championship season, but it’s been a heck of a lot better than Q412’s 0.38% - and it’s what happens on the margin in macro that matters to us most. Here’s the Q213 breakdown:

  1. Consumption (C) = +1.8% quarter-over-quarter, contributed +1.22% to Q213 GDP
  2. Investment (I) = +9.0% quarter-over-quarter, contributed +1.32% to Q213 GDP
  3. Government (G) = -0.4% quarter-over-quarter, contributed -0.1% to Q213 GDP 

In other words, government spending fell as Consumption and Investment rose. Good, eh? It’s not a new story in America. It just hasn’t happened in a while – and that’s the point.


Since C + I + G + (EX-IM) is the GDP equation, whiners (particularly partisan ones) will add that:

  1. Net Exports (EX-IM) = +5.4% quarter-over-quarter, but contributed negatively to GDP by -0.81%
  2. Inventories contributed positively to GDP by +0.4%
  3. Inflation (PCE Deflator) was at its 2nd lowest level ever of +0.8%

But let’s get real here – who really cares about those line items when the big stuff (Consumption and Investment growth) is finally going the right way for once?


To give them some air-time, the Princeton/Yale/Harvard Keynesian Econ 101 textbooks will also whine about “net exports being down because the Dollar went up” and “disinflation is a threat to our academic dogma” – but again, who cares?


I went to Yale and, admittedly, was confused about this “inflation is good, deflation is bad” concept. My family doesn’t buy into the class warfare labeling thing, but we do buy (and invest) more when the purchasing power of our hard earned currency appreciates.


Is Bernanke’s fear-mongering about “deflation” really the hobgoblin?


We answer that on slide 36 of our current Global Macro Themes deck (ping if you’d like a copy) where we outline a recent study by Atkeson & Kehoe that spans a time period of 180 years (across 17 countries) that found no relationship between deflation and depressions.


The objective study actually found a greater number of episodes of depression with economies experiencing inflation than with deflation. Over the 180 year time period:

  1. 65 out of 73 deflation episodes had no depression
  2. 21 out of 29 depressions had no deflation

So what say you President Obama? Yes, we know. We know that you know that we know.


Bernanke’s cause is no longer saving us from the end of the world. That was so 3-5 years ago. Perversely, it’s to talk down growth in order to uphold un-precedented (and un-elected) central planning power on the order that this country hasn’t seen in 237 years.


But he’s conscious of it. So is the country.


Mr. Market gets it too. That’s why all of these end of the world (#EOW) trades that were driven by an explicit Policy To Inflate (Gold, Treasury Bonds, etc.) are coming unglued. That’s also why growth investors are getting paid.


Liberty flows. She still plays to the hands of the independent minds. We don’t have to be long Bernanke Bubbles in order to get paid. We have to be right on the slopes of the lines in our model.


Growth’s slope is up; Inflation’s is down – and unlike the government, I like that, a lot.


Our immediate-term Risk Ranges are now as follows (12 big macro risk ranges are in our new Daily Trading Range product):


UST 10yr 2.52-2.71%


Nikkei 135

VIX 11.96-13.85

Yen 97.12-101.01

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Liberty's Flows - Chart of the Day


Liberty's Flows - Virtual Portfolio


TODAY’S S&P 500 SET-UP – August 1, 2013

As we look at today's setup for the S&P 500, the range is 17 points or 0.22% downside to 1682 and 0.79% upside to 1699.                              










  • YIELD CURVE: 2.30 from 2.27
  • VIX closed at 13.45 1 day percent change of 0.45%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Bank of England rate decision; est. 0.5% (prior 0.5%)
  • 7:30am: Challenger Job Cuts Y/y, July (prior 4.8%)
  • 7:30am: RBC Consumer Outlook Index, Aug. (prior 50.7)
  • 7:45am: ECB announces interest rates; est. 0.5% (prior 0.5%)
  • 8:30am: ECB’s Draghi holds news conference
  • 8:30am: Init Jobless Claims, July 27, est. 345k (prior 343k)
  • 8:58am: Markit US PMI Final, July, est. 53.2
  • 9:45am: Bloomberg Consumer Comfort, July 28 (prior -27.3)
  • 10am: Construction Spend M/m, June, est. 0.4% (prior 0.5%)
  • 10am: ISM Manufacturing, July, est. 52 (prior 50.9)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 5pm: Total Vehicle Sales, July, est. 15.8m (prior 15.89m)


    • House Energy and Commerce Cmte hears from Medicare and Medicaid Services Administrator Marilyn Tavenner on Affordable Care Act implementation
    • 8:30am: Energy Dept’s Bioenergy Technologies Office, Advanced Biofuels USA hold conf on bioindustry role in American energy
    • 9am: SEC Commissioner Troy Paredes discusses finl regulation at Chamber of Commerce’s Center for Capital Markets Competitiveness event
    • 9:30am: Senate Energy and Natural Resources Cmte hearing on the political status of Puerto Rico
    • 10am: House Armed Services Cmte hearing on “Initial Conclusions Formed by the Defense Strategic Choices and Management Review”
    • 1:30pm: API briefing on oil, natgas industry jobs, economic analysis by PricewaterhouseCoopers


  • U.S. trade agency issues ruling on Samsung import limit
  • Tenet, Health Management accused of paying kickbacks to clinic
  • Macy’s makes final bid to block Martha Stewart goods at rival
  • Walgreen investors sue CEO over $80m DEA painkiller fine
  • Lloyds prepares to resume dividends as Osborne weighs sale
  • Apple’s new iPad mini likely to have Samsung display, WSJ says
  • Citigroup ordered to pay $10.8m for soured RBS investment
  • Celltrion says reports of stake sale to AstraZeneca inaccurate
  • Tourre jurors end first day of deliberations without verdict
  • Dish customers blocked as Raycom Media accord expires
  • Congress votes to reverse rise in student-loan interest rates
  • China pledges to keep growth within “reasonable zone”
  • U.K. factory growth strengthens as recovery builds momentum
  • Australia to raise tobacco excise to narrow budget shortfall
  • July Auto Sales: July SAAR May Be 15.8m



    • Alliant Techsystems (ATK) 7:01am, $1.92
    • AltaGas (ALA CN) 7:45am, C$0.21
    • Ameren (AEE) 7:48am, $0.46
    • Ansys (ANSS) 7:09am, $0.71
    • Apache (APA) 8am, $2.00 - Preview
    • Arena Pharmaceuticals (ARNA) 7am, $0.18
    • Automatic Data Processing (ADP) 7:30am, $0.57
    • Avon Products (AVP) 7:01am, $0.26
    • Barrick Gold (ABX CN) 6:31am, $0.56 - Preview
    • Becton Dickinson (BDX) 6am, $1.48
    • BGC Partners (BGCP) 8am, $0.13
    • Bombardier (BBD/B CN) 6am, $0.09
    • Cameco (CCO CN) 8:23am, C$0.18
    • Cardinal Health (CAH) 7am, $0.77
    • Catamaran (CCT CN) 6am, $0.44
    • CenterPoint Energy (CNP) 8:15am, $0.26
    • Chesapeake Energy (CHK) 7:01am, $0.41 - Preview
    • Cigna (CI) 6am, $1.60
    • Clorox (CLX) 8:30am, $1.34 - Preview
    • CME Group (CME) 7am, $0.90
    • Colonial Properties Trust (CLP) 7am, $0.33
    • ConocoPhillips (COP) 7am, $1.29 - Preview
    • Covidien (COV) 6am, $0.89
    • CVR Energy (CVI) 8am, $1.62
    • CVR Refining (CVRR) 8am, $1.66
    • Dentsply Intl (XRAY) 7am, $0.65
    • DirecTV (DTV) 7:30am, $1.34 - Preview
    • Dynegy (DYN) 7:30am, $(0.29)
    • Enbridge (ENB CN) 7am, C$0.39 - Preview
    • Enterprise Products (EPD) 6am, $0.69
    • Exxon Mobil (XOM) 8am, $1.89 - Preview
    • Fluor (FLR) 9am, $1.01
    • Fortis (FTS CN) 7am, C$0.32
    • Fortress Investment (FIG) 7am, $0.20
    • Genesee & Wyoming (GWR) 6am, $1.11
    • Gildan Activewear (GIL CN) 6:31am, $0.94
    • Halcon Resources (HK) 7:30am, $0.06
    • HCA Holdings (HCA) 7:03am, $0.91
    • IGM Financial (IGM CN) 10:30am, C$0.76
    • Imperial Oil (IMO CN) 7:55am, C$0.98
    • Incyte (INCY) 7am, $0.01
    • Iron Mountain (IRM) 6am, $0.31
    • ITT (ITT) 7am, $0.45
    • Kellogg (K) 8am, $0.98 - Preview
    • LKQ (LKQ) 7:30am, $0.25
    • Magellan Midstream (MMP) 8am, $0.54
    • Marathon Petroleum (MPC) 7:03am, $1.90
    • MSCI (MSCI) 7:30am, $0.53
    • Mylan (MYL) 7am, $0.67
    • New York Times (NYT) 8:30am, $0.13
    • NII Holdings (NIHD) 6:30am, $(1.16)
    • Nu Skin Enterprises (NUS) 7:30am, $1.20
    • Ocwen Financial (OCN) 7:30am, $1.02
    • PBF Energy (PBF) 8am, $0.79
    • PPL (PPL) 7am, $0.47
    • Procter & Gamble (PG) 6:58am, $0.77 - Preview
    • Quanta Services (PWR) 6:07am, $0.37
    • Quintiles Transnational (Q) Bef-mkt, $0.44 - Preview
    • Sally Beauty Holdings (SBH) 7:30am, $0.43
    • Scana (SCG) 7:30am, $0.54
    • Targa Resources (NGLS) 7am, $0.14
    • Teco Energy (TE) 7am, $0.27
    • Teradata (TDC) 6:45am, $0.71
    • Time Warner Cable (TWC) 6am, $1.65 - Preview
    • TMX Group (X CN) 6am, C$0.83
    • Vulcan Materials (VMC) 8am, $0.16
    • Western Refining (WNR) 6am, $1.20
    • WPX Energy (WPX) 7am, $(0.19)
    • Xcel Energy (XEL) 7am, $0.39

PM :

    • Activision Blizzard (ATVI) 4:05pm, $0.08
    • American International Group (AIG) 4pm, $0.86
    • Apartment Investment & Mgmt (AIV) 4:05pm, $0.48
    • Bill Barrett (BBG) 4:15pm, $(0.01)
    • Consolidated Edison (ED) 6:43pm, $0.57
    • DCT Industrial Trust (DCT) 4:10pm, $0.11
    • Edison International (EIX) 4pm, $0.66
    • Extra Space Storage (EXR) 4:05pm, $0.49
    • Fairfax Financial Holdings (FFH CN) 5:01pm, $(12.40)
    • Federal Realty Investment Trust (FRT) 4:30pm, $1.12
    • FleetCor Technologies (FLT) 4:01pm, $0.95
    • Home Properties (HME) 4:30pm, $1.09
    • Kodiak Oil & Gas (KOG) 4:01pm, $0.13
    • Kraft Foods (KRFT) 4pm, $0.67 - Preview
    • Leap Wireless (LEAP) 4:05pm, $(1.02)
    • LeapFrog Enterprises (LF) 4:01pm, $(0.08)
    • LinkedIn (LNKD) 4:05pm, $0.31 - Preview
    • MercadoLibre (MELI) 4:01pm, $0.63
    • Mohawk Industries (MHK) 4:01pm, $1.66
    • MRC Global (MRC) 4:15pm, $0.38
    • ON Semiconductor (ONNN) 4:03pm, $0.13
    • OpenTable (OPEN) 4:31pm, $0.47
    • Osisko Mining (OSK CN) 4:05pm, C$0.05
    • PerkinElmer (PKI) 4:05pm, $0.48
    • Piedmont Office Realty Trust (PDM) 5:02pm, $0.34
    • Public Storage (PSA) 5:14pm, $1.77
    • ResMed (RMD) 4:05pm, $0.62
    • SBA Communications (SBAC) 4:01pm, $(0.10)
    • Southwestern Energy (SWN) 5:15pm, $0.52 - Preview
    • Synaptics (SYNA) 4:15pm, $1.30
    • Tesoro (TSO) 4:31pm, $1.43 - Preview
    • ValueClick (VCLK) 4:05pm, $0.39
    • Walter Energy (WLT) 4:01pm, $(0.75)



  • Japan Purchases First Oregon Wheat Since Discovery of GMO Crop
  • p Commodities Market, Industry News »             
  • Burger Costs Rising With Beef Supply at 21-Year Low: Commodities
  • Pan Pacific Sees Copper Surplus at 5-Year High on Slowing China
  • Wheat Rises a Fifth Day on Speculation Chinese Demand to Gain
  • WTI Rises to One-Week High on Fed Stimulus, China Manufacturing
  • China Makes First Investment in South African Wine Industry
  • Gold Swings Expand as Jobs Help Gauge Stimulus: Chart of the Day
  • Palm Climbs to One-Week High as Malaysian Exports Signal Demand
  • Coffee Exports From Indonesia’s Sumatra Surge to Four-Year High
  • Barrick Takes $8.7 Billion Writedown, Cuts Dividend on Gold Drop
  • Rebar Extends Monthly Gain as China Manufacturing Strengthens
  • No Rebound for Uranium Seen as Japan Plants Idle: Energy Markets
  • Chile Copper Output Up for Second Month as Strikes Ebb: BI Chart
  • COMMODITIES DAYBOOK: U.S. Beef Production Plunges to 21-Year Low
  • ANZ Opens 50 Ton Gold Vault in Singapore as Asian Demand Climbs


























The Hedgeye Macro Team

















JULY GGR 29.485BN MOP (28.626BN HKD, 3.691 BN USD), up 20% YoY



South Korea's Incheon city said a $290 billion plan to transform a fishing village into a rival to Macau has collapsed. Incheon Free Economic Zone official Jung Mi-hyun said luxury hotel operator Kempinski AG, a key member of the development consortium, failed to raise a promised $40MM by the end of July.  Kempinski's Korean unit KI Corp. is the largest shareholder in the consortium, Eightcity Co. Korean Air Lines Co. is the second-largest.


Park Seong-hyun, vice chairman of Eightcity, said the company is still trying to attract investment to the project and Incheon city is also responsible for the delay in raising the money on time.


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