She's Absurd

“So I hope you can accept nature as She is – absurd.”

-Richard Feynman


That’s what one of America’s great physicists, Richard Feynman, had to say about how quantum mechanics explains life. I think it describes markets well too. It “describes nature as absurd from the point of view of common sense. “ (American Prometheus, pg 79)


What Do You Care What Other People Think?” Good question. That was also the title of the book Feynman published in the year of his death (1988). It’s a question that I’d love to hear almost everyone in this profession answer out loud.


Yesterday, I asked you if the latest bear market correction was going to be 1%, 2%, or 5%. In case you care what consensus thinks, not one of you answered 1% (which means it’ll probably be 1%). Yesterday’s -0.4% drop in the SP500, put the 2-day correction from her all-time high at -1.1%. #Absurd


Back to the Global Macro Grind


I know, the absurdity of challenging perceived wisdoms in one of the last professions that has been forced to face the fiddle of accountability. If you don’t want to see any of it, turn Twitter off and watch the channel the rest of us have on mute.


To review reality (2013 YTD):

  1. Consensus came into 2013 long slow growth, Gold, and Bonds
  2. Consensus is now selling slow growth, Gold, and Bonds, but too scared to buy growth

But not just any kind of growth – our nature is to not buy “expensive” looking growth. Absurdly, in a growth investor’s market, expensive gets more expensive (Tesla, TSLA +18% pre-market).


“Oh, so you’re telling me growth is back Mucker? Ok, then I’m going to go buy an Emerging Market”




As you can see in Darius Dale’s Chart of The Day, Emerging Market Growth is SLOWING as the slope of US and Japanese Growth is ACCELERATING (and large components of European growth is STABILIZING).


Just model the slopes of lines. Simple is as simpleton does from Thunder Bay, Ontario. In our GIP (Growth, Inflation, Policy) model here @Hedgeye, the G and I (Growth and Inflation) are doing 1 of 3 things from a slope perspective:


And that’s just about it.


Markets pay a higher multiple for companies showing what?

  1. Revenue Growth Accelerating
  2. Margins Expanding

So why is my macro model considered so absurd? It’s the same thought, but for countries:

  1. GDP growth going from slowing to stabilizing to accelerating = LONG
  2. GDP growth going from accelerating to slowing (on the margin) = SHORT
  3. Inflation slowing (via strong currency) + GDP Growth accelerating = REALLY LONG

That’s 2013:

  1. US employment, housing, and consumption growth went from slowing (Q412) to stabilizing, to accelerating
  2. Emerging Market growth (China, Brazil, etc) went from slowing to slowing at an accelerating pace

All the while, July’s YTD high in #StrongDollar gave local inflation to “emerging markets” like India as the Rupee started to crash. Show me GDP Growth Slowing + Inflation Accelerating (India) and I’ll show you a stock market that is down YTD.


I’m not sure why I went off on all of this today. Probably just a function of the absurdity of me having to come up with something in 45 minutes or so at the top of the risk management morning. Thanks for reading my rant.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.57-2.73%



VIX 11.62-13.94

Yen 96.16-98.71

Copper 3.05-3.25


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


She's Absurd - Chart of the Day


She's Absurd - Virtual Portfolio






In the plenary meeting held yesterday, lawmaker Chan Wai Chi accused the government of lacking transparency in allowing casino operators to grant sub-concessions, going even further to say: “The government didn’t see a penny of this money.”


In response, Secretary Tam said that WYNN, SJM, and Galaxy – the three existing casino concessionaires – had declared the money earned through the establishment of sub-concessions as profit.  “They paid taxes over that money, because they had to declare it as profit. Therefore, the government charged taxes over that income,” Tam reasoned.  Tam refuted the accusations of lawmakers on the irregularity of the casino sub-concession contracts and added that the government “had no intention of deceiving anyone”.  Moreover, he added that the government is planning to study the casino concessionaires’ contracts in 2015: ““We can renew the existent contracts for another five years or we terminate the contracts and launch a new public tender [to replace them],” he explained. 



The MGM Macau is to close an 18-table premium mass-market area on its main floor for refurbishment next month.  MGM China CEO Grant Bowie says his company will spend US$56 million (MOP448 million) on the MGM Macau this year.
The casino will also revamp a high-limit slot-machine room. 



According to Prime Minister Lee Hsien Loong, Singapore's economic growth forecast for this year is between 2.5%-3.5%.  This is higher than the previous official forecast of between 1-3%.  In the first half of 2013, Singapore's economy grew by 2%.

August 8, 2013

August 8, 2013 - 8 8 2013 7 34 31 AM

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EM + Commodity Leverage = Crashing

#CommodityDeflation. It's bad news for commodity linked equity markets. Brazil has been the poster child of this and what we call #EmergingOutflows here at Hedgeye. The Bovespa was down -2.1% yesterday and continues to crash. It's down -22.2% year-to-date.


On a related note, the only country that’s worse off year-to-date than Brazil? Yet another mining tape. You guessed it. (Or not.) It's Peru which has gotten whacked -25% year-to-date. 


EM + Commodity Leverage = Crashing - Brazil Peru

[VIDEO] #Asian Contagion Q3 Macro Theme #3


It sounds ominous doesn’t it? In this final installment of Hedgeye’s Q3 Macro Themes, CEO Keith McCullough warns investors of both the bullish and bearish implications of what’s going on in Asia. Keith weighs in on what to buy, what to sell, and how to avoid getting steamrolled in what has become an increasingly precarious global macro environment.


China & Japan should have you worried

Takeaway: Without China to fuel the engine, Asia's economic racecar looks to be in for a long pit stop.

(Editor's note: This article was originally posted on Fortune.)


By Moshe Silver, Hedgeye


FORTUNE -- Right now, Japan's equity markets are being buoyed by the same "Print-And-Spend" policy that the Federal Reserve used to pay off Wall Street, emanating from the same ivory tower that paid untold trillions in bonuses to America's failed bankers. Meanwhile, a motley crew of high-level economists including Ben Bernanke's Princeton colleague Paul Krugman continue to exhort the Japanese to "Print! Print! Print!" their way to prosperity. As if printing more dollars and yens was some restorative, magical monetary panacea to cure a nation's economic ills.


China & Japan should have you worried - chja


One of Krugman's areas of expertise is, of course, the "liquidity trap." This is when bond yields sink so low, the market treats them like cash. He has written that Japan's "lost decade," the 10 (or 20, depending on who you ask) years following the collapse of Japan's real estate bubble, was an extended liquidity trap. Like cockroaches dosed for generations with insecticides, in a liquidity trap the markets become immune to further cash injections. In Keynesian economics, the central bank's job is to manage interest rates by adding or withdrawing liquidity -- buying or selling bonds in the open market. Thus, in the liquidity trap government policy is incapable of stimulating economic growth.


Krugman has argued that Japan's government hasn't thrown enough cash into the system. With the Abe government firmly in place after last month's elections, Krugman and his Keynesian buds have a ringside seat at a real live social experiment: Will Abe-nomics, with its tsunami of banknotes, bail out Japan, or will the economy continue to lag?


Mind you, not everyone thinks Japan is lagging. Some observers point out that most Japanese kept their jobs during the "lost decades," and that measured by standard of living, foreign trade, and the strength of the currency, Japan's decades weren't "lost" at all. This must also be seen through the lens of cultural values and expectations: The Japanese value stability of employment more than the ability to climb the corporate ladder.


Anyway, for the time being Shinzo Abe, the well-liked -- and re-elected -- Prime Minister, is printing Yen for all he's worth, and Japan's stock market is inflating like a giant balloon at the Macy's Thanksgiving Day Parade. Abe's winning the election could provide the political stability for much-needed economic reforms, but for now he's mirroring America's experiment in putting free money in bankers' pockets. This policy should work well for their equity markets -- until it doesn't.


But don't look anywhere else in Asia for comfort. The rest of Asia's policymakers are well and truly out of ammo as Asian economic growth has been nearly cut in half since 2010.


And if you weren't worried about China, now would be a good time to start.


China has been the main driver of growth in the region, accounting for nearly 38% of all Asian GDP last year. Now the Chinese government is acknowledging that growth is in a downturn, publicly forecasting growth in the 7% range -- well below the double digits of only three years ago.


China's fixed capital formation grew like Topsy during the expansion years. But many of these were empty make-work projects designed only to inflate GDP, leaving the country awash in unused airports, unfinished roads and office buildings -- and in bank loans for these projects with no revenues.


China's banks are a loudly ticking time bomb. Their assets are bloated to an estimated 270% of GDP. A huge percentage of those "assets" are already in creditor limbo, having secured roads and bridges and tunnels and airports to Nowhere. China's banks face a potential crisis as investment in major fixed asset projects declines amid eroding liquidity throughout the financial system.


Rising rates should hit China's markets too, pushing Asian rates higher. This will clobber the region's capital-intensive economies, many of which expanded capacity specifically to serve Chinese demand. Rising rates -- globally, but especially in the "safe haven" U.S. Treasury market -- coupled with a strong Dollar, should punish overvalued Asian currencies, sparking inflation, but in the context of economic decline. This spells economic trouble and the potential for social unrest.


Hedgeye Senior analyst and keen-eyed Asia watcher Darius Dale says Chinese policy makers are starting to appear less concerned about a possible domestic asset price bubble. This could give them more flexibility in some kind of easy-money policy aimed at domestic stimulus. Any such policy move is likely to be slow to be implemented and much slower to take effect.


Dale cautions that massive debt rollovers generally slow economic growth by sucking liquidity out of the financial system, "diverting incremental credit from productive enterprises." Perhaps more crucial is the impact on a fragile economy, which can hamper the creation of a stable economic base by diverting liquidity away from marginally productive business, or from temporarily unproductive ones that are merely trying to weather the economic storm.


Finally, any debt rollover China's leaders may contemplate will almost surely not be offset by a significant increase in private savings. Without China to fuel the engine, Asia's economic racecar looks to be in for a long pit stop.


Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.




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