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CHART OF THE DAY: Economic Weapons of Mass Destruction


CHART OF THE DAY: Economic Weapons of Mass Destruction - 10Y vs NSA

Economic Weapons of Mass Destruction

“There lived a certain man in Russia long ago,
He was big and strong, in his eyes a flaming glow,
Most people looked at him with terror and with fear,
But to Moscow chicks he was such a lovely dear.”

-Boney M


Over the course of history, Russia has certainly been known for its strong leaders.  The Boney M song, “Rasputin”, from which the verse above was taken, is about one of the most enigmatic of Russia’s leaders: Grigori Rasputin.


Rasputin was a Russian mystic that lived from 1869 – 1916.  He became an advisor to the Romanovs, the reigning royal family in Russia at the time, after being asked to try and heal their son Alexei, who suffered from hemophilia.  Probably more by the stroke of luck than any knowledge of medicine, Rasputin was successful in healing Alexei and became a key advisor and intimate to the Czar’s family, especially his wife Alexandra Feodoronva.


From 1906 – 1914, many Russian politicians and journalists used Rasputin’s influence over the Romanovs to discredit them.  His influence only accelerated with the advent of World War I when the Czarina took over domestic policy, with Rasputin as her key advisor. 


Eventually, Rasputin’s influence created contempt amongst the Czar political allies and rivals.  Ultimately, a group of conspirators led by the Czar’s first cousin Grand Duke Dmitri Pavlovich, murdered Rasputin.  Rasputin had the last laugh as he wrote to Czar Nicholas shortly before his death that if he were killed by government officials, the entire imperial family would be killed by the Russian people.


Rasputin’s prophecy came true a short 15 months later when the Czar, his wife and all their children were murdered by assassins during the Russian Revolution.  Directly and indirectly, Rasputin has been pointed to as a key catalyst for the fall of the Romanovs.


Certainly, the current situation in Syria does not have direct parallels to the Russian Revolution, but to be seen to be under the influence of a Russian, especially the Botox laden Putin, will not be a positive turn of events for President Obama.  In part, Obama backed himself into a corner by deciding to go to Congress to get approval to use military force in Syria, even as he acknowledged he didn’t legally need Congressional approval.


When it became clear that Congress wasn’t going to support the action, the door was left open for the Russians to propose a more “commercial” solution.  Of course now President Obama has lost all leverage and, as a friend of mine who runs a major investment bank said, has been completely re-traded.  So much so that President Assad is now making demands on the United States (via Russian TV of course)!  As the state-owned Syrian newspaper put it bluntly in a headline on Thursday, “Moscow and Damascus have pulled the rug out from under the feet of Obama.”


Given the turn of events, it is no surprise then that President Obama’s approval rating has plummeted close to all-time lows.  Currently, on the Real Clear politics poll aggregate, 7.6% more people disapprove then approve of Obama.   As it relates to foreign policy, 17.6% more Americans disapprove of the job he is doing.  It seems the President has become a lame duck quicker than most second term Presidents.


My colleague Keith McCullough proposed a unique idea yesterday to James Pethokoukis at the American Enterprise Institute yesterday, which was to turn Larry Summers loose on the Russians.  As Keith said in the interview:


“We really need to embrace the weapon that we have as a country, which is the most powerful weapon that we’ve had for a very long period of time, which is, of course, the currency of the people, and that currency has basically been de-botched and devalued ’til the cows come home. We need to start to stand up for these things and that’ll help us stand up against guys like Vladimir Putin. Bring in, probably, a guy like Larry Summers to deliver the message because you do need somebody to stand up with a backbone and actually say it in a really forceful way, which, at a bare minimum, that’s what Larry Summers can do. $65 oil would be fantastic for the American people and it would be absolutely pulverizing to Putin’s power.”


As we’ve been writing for a while, a strong dollar equals a strong America.  If the rumors from the Japanese press this morning are even remotely true and Larry Summers is destined to be the next Chairman of the Federal Reserve then it is very bullish for the U.S. dollar and bearish for commodities.  The action this morning, with gold down, oil down and the U.S. dollar up, is likely only the beginning of the sustained move we will see if Chairman Summers becomes more than prophesy.


Of course, there is economic data at play here as well.  On that note, jobless claims came in at the lowest absolute number since 2000 at 228,000 yesterday.  Year-over-year improvement on this data series moves to -23.8% versus -13.2% last week and the rolling 4-week average is -14.5%.


In the Chart of the Day, we show what this improving data series means for interest rates as we chart the 10-year yield versus the 4-week rolling initial claims.  As you can see from the chart, there is a very tight correlation between the labor market improving and interest rates going up.


The combination of a continued improvement in the U.S. labor market and increasing chatter of the likelihood that Larry Summers takes over the Federal Reserve will combine to be an economic weapon of mass destruction for bonds, gold, oil and the Russians alike.


Our immediate-term Risk Ranges are now as follows:


UST 10yr Yield 2.86-3.03% (bullish)

SPX 1 (bullish)

Nikkei 14117-14638 (bullish)

USD 81.39-81.93 (bullish)

Brent 110.54-113.91 (bullish)

Gold 1 (bearish)


Enjoy your weekend.


Daryl G. Jones

Director of Research


Economic Weapons of Mass Destruction - 10Y vs NSA


Economic Weapons of Mass Destruction - Virtual Portfolio

September 13, 2013

September 13, 2013 - dtr



September 13, 2013 - 10yr

September 13, 2013 - spx

September 13, 2013 - dax

September 13, 2013 - nik

September 13, 2013 - dxy

September 13, 2013 - euro

September 13, 2013 - oil

September 13, 2013 - natgas



September 13, 2013 - VIX

September 13, 2013 - yen
September 13, 2013 - gold

September 13, 2013 - copper

Early Look

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The Flow Show

This note was originally published at 8am on August 30, 2013 for Hedgeye subscribers.

“Neither a borrower or a lender be; For loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”

-William Shakespeare, “Hamlet”


Shakespeare taught us many lessons in his writings.  But the quote from Hamlet above is very apropos for those of us who are stock market operators. The lesson is simple: be careful with financial leverage.


Financial leverage is like the blue meth sold by Walter White and his colleagues in the acclaimed TV show Breaking Bad.  It is both very addictive and hard to get off the streets.  It can also make the sellers very rich in a short period of time.


In the last fifteen or so years, we’ve seen innumerable debt fueled bubbles.   The Asian debt crisis, the stock market bubble of the early 2000s, the housing bubble, the sovereign debt crisis, and the list goes on.  Shakespeare is correct: returns generated from borrowing dull our analytical focus. 


In the spirit of another quote from Shakespeare, “brevity is the soul of wit”, let’s get directly to the global macro grind . . .


Next Wednesday, with all of Wall Street well rested and back from the Hamptons, we are going to update our emerging market outflows theme.  Like most macro trends, emerging market outflows is unlikely to be a month or quarter long trend.  With the dollar and interest rates being key supporting factors, this one also has legs.


In fact, my colleague Darius Dale looked at the last strong dollar period, from 1995 – 2001, and the MSCI Emerging Market Index CAGR’ed at -5.3% versus the SP500 at +15.8%.  So, reasonably, if interest rates are just starting to turn, and the dollar is only in the early stages of a long term strengthening, then emerging markets can be expected to underperform for some time.


In the Chart of the Day, we’ve highlighted recent emerging market equity and bond outflows.  As the chart shows, the last four months have been staggering for outflows and emerging market asset classes have performed commensurately.  As they say, follow the flows (or at least the projected flows).


After the first big correction is when the “value” investors usually start to get interested in a stock or asset class.  No doubt that guy from Franklin Templeton who originally cut his teeth marketing Snoopy is licking his chops right now on emerging markets.  The problem is that cheap can get a lot cheaper.


Currently, on an EV/EBITDA basis emerging market equities are still trading at slight premium to the long run mean versus the MSCI World Index.   In times of crisis, like in the 1998/1999 period, emerging markets trade at a multiple that are closer to the 30% of the rest of the world (versus north of 70% now).  When the proverbial brown stuff hits the fan, emerging markets go no bid.


We will be sending out an update of our emerging market chart book later this morning (ping sales@hedgeye.com if you don’t get it) and will also be hosting a call on Wednesday, September 4th at 11:30am eastern.  Even if you aren’t invested in emerging markets, this will be an important call in helping to understand global asset allocation flows.  Or as we like to call it: The Flow Show.


Speaking of flows, EPFR Global came out with some date this week that highlighted some of the key fund flows in the year-to-date.  No surprise, emerging markets lead in outflows with almost $7.8 billion in outflows.   On the positive is the United States, which has seen $83 billion in inflows, but in the category of sneaky positive is Europe, which has $9.4 billion of YTD inflows mostly over the past nine weeks.   


Europe may only be bouncing on the bottom in terms of an economic recovery, but the money has to flow somewhere.   Even more sneaky has been the improvement of sovereign yields in the European periphery, with both Italy and Spain both solidly at 4.5% or below (some of the best levels in years).  If the sovereign debt issues in Europe are truly behind us, the flows into Europe will only continue.


It only helps the investment outlook in Europe to have more sane central bankers like Mark Carney, formerly head of the Bank of Canada, running things.  In his first newspaper interview since taking over the Bank of England, Carney directly acknowledged the risks of low interest rates when he said:


“We have the responsibility to assess emerging vulnerabilities in the economy such as housing, make those assessments and recommend action.  Interest rates are principally an instrument of monetary policy for achieving the inflation outcome and there are other tools that address risks."


Well said, Mr. Carney.  Well said.


Speaking of central bankers, this long weekend will give us all some time to consider what might happen at the Fed next if either of the two front runners, Janet Yellen or Larry Summers, take over.  Hawk or Dove? Shakespearean tragedy or comedy? To flow, or not to flow?

All joking aside, policy matters so this choice will be critical in contemplating asset allocation in coming years.  As Shakespeare said about vision and strategy:


“See first that the design is wise and just; that ascertained, pursue it resolutely.”

As it relates to the leadership change at the Federal Reserve, we can only hope this is the path that is pursued.


Our immediate-term Macro Risk Ranges are now as follows:


UST 10yr Yield 2.70-2.93% 

SPX 1625-1663 

VIX 14.59-17.44

USD 81.39-82.11 

Euro 1.32-.134 

Gold 1350-1427 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Flow Show - CHART

The Flow Show - vp






TODAY’S S&P 500 SET-UP – September 13, 2013

As we look at today's setup for the S&P 500, the range is 37 points or 1.15% downside to 1664 and 1.04% upside to 1701.                        










  • YIELD CURVE: 2.47 from 2.47
  • VIX  VIX closed at 14.29 1 day percent change of 3.40%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: PPI M/m, Aug., est. 0.2% (prior 0.0%)
  • 8:30am: PPI Ex Food and Energy M/m, Aug., est. 0.1%
  • 8:30am: Retail Sales Advance M/m, Aug., est. 0.5%
  • 8:30am: Retail Sales Ex Auto and Gas, Aug., est. 0.3%
  • 9:55am: UMich Confidence, Sept. prelim, est. 82 (prior 82.1)
  • 10am: Business Inventories, July, est. 0.2% (prior 0.0%)
  • 11am: Fed to purchase $3b-$4b in 2019-2020 sector
  • 1pm: Baker Hughes rig count


    • Medicare Payment Advisory Commission meets, 9:30am
    • CFTC holds closed meeting on enforcement matters, 10am
    • President Obama holds talks with Emir of Kuwait Sheikh Sabah al-Ahmad al-Jaber Al Sabah; topics to include defense, energy


  • Twitter files IPO w/ SEC; Goldman said to be lead manager
  • Derivatives would face transition fees under Obama proposal
  • Goldman sees risk of gold below $1,000 as U.S. economy gains
  • Vodafone’s $10.2b Kabel Deutschland bid wins shareholder support
  • U.S. House Republicans lack fiscal plan as Oct. 1 deadline nears
  • Dimon boosted JPMorgan compliance as examiners lost trust: WSJ
  • Japan to consider corporate tax cut in stimulus package
  • Obama to name Summers as next Fed chief, Nikkei says, citing unnamed people
  • Europe’s biggest phone cos. brace for AT&T entry into mkt
  • Hoyer says Obama could strike Syria without Congress vote


    • No S&P 500 cos. expected to report today


  • Goldman Sees Risk of Gold Below $1,000 as U.S. Economy Gains
  • Gold Traders Most Bearish Since June as Syria Eases: Commodities
  • Goldman Lifts Soybean Price Outlook as USDA Downgrades U.S. Crop
  • Soybeans, Corn Steady After USDA Releases U.S. Harvest Outlook
  • Pemex Holds Emergency Response Meeting on Gulf of Mexico Storm
  • Spot Gold Reverses Gain, Slumps to Five-Week Low as Silver Drops
  • Copper Set for Weekly Loss as Investors Prepare for Fed Meeting
  • Indonesia Commodity Exchange Fails to Sell Tin for Second Day
  • Commodity Outlook Is ‘Quite Benign,’ Goldman’s Jeff Currie Says
  • Blythe Masters Shows Resilience as Dimon Lauds ‘Impressive Job’
  • Natural Gas Rises a Second Day on Lower U.S. Stockpile Increase
  • Glencore Agrees to Progress Study of $3 Billion Congo Iron Mine
  • Tropical Depression to Bring ‘Threatening’ Floods to Mexico
  • Record Soybean Crop to Boost India Meal Sales to 6-Year High


























The Hedgeye Macro Team














Takeaway: EM debt and EM FX should continue to broadly decline while EM equity returns should become increasingly bifurcated at the country level.



  1. We remain bearish on emerging market debt (both USD and local currency paper) and emerging market currencies with respect to the intermediate-term TREND and long-term TAIL. Irrespective of idiosyncratic country fundamentals, we think #StrongDollar, #RatesRising and #DebtDeflation will be hard for any emerging market to overcome in this environment. There will, of course, be relative winners and losers, but we think you can continue to extract absolute returns with a passive strategy.
  2. On the LONG side of EM equities from here (TREND and TAIL duration), we like South Korea, Poland, Thailand and Mexico. While absent from our EM Crisis Risk Index due to the lack of cross-country comparable data, Taiwan also looks solid fundamentally (stable currency, great BOP dynamics, mature and liquid financial markets…).
  3. On the SHORT side of EM equities from here (TREND and TAIL duration), we like South Africa, Nigeria and Indonesia. We’re also inclined to loop India and Brazil back into this mix, but they’re so bombed-out on longer-term durations (i.e. 1Y, 18M and 3Y), one has to start to wonder how much more downside is left.


When EM capital and currency markets were appropriately tanking into their late-JUN lows, making money on the short side of the emerging markets space was so easy even a bunch of former football and hockey players could do it. While never in search or need of validation for our research conclusions, we’d be lying if we said it wasn’t gratifying to see world-class investors such as Ray Dailio adopt what is essentially our #EmergingOutflows thesis.


As highlighted by our EM divergence monitor (full methodology below), just about any asset that had been previously perma-bull marketed to investors as an “emerging market” was down double digits on a trailing 1M, 3M and 6M basis at the JUN 24 low in the MSCI Emerging Market Index.


(prices and performance figures as of 6/24)



Flash forward to today, we’re seeing some pretty solid dead-cat bounces uniformly across the EM space on a WoW basis; in fact, the only primary or secondary asset class that isn’t up is Peruvian equities (down -0.1% WoW). Looking to performance across the 1-3 month time frame tells a different tale, however, in that the performance is decidedly less uniform.




In line with this market signal, we think it will become increasingly important for equity investors to become “country-pickers”.


It’s worth stressing that by “country-pickers”, we are not referring to the traditional “ABC country has great demographics and will be XYZ percent of global GDP by 2030” perma-bull marketing that is found in every emerging market fund prospectus on the planet.


Conversely, in a #StrongDollar, #RisingRates environment, we think the direction, supply and cost of global capital flows will increasingly determine the trend rates of growth, inflation, urbanization and reformation across the emerging market space – just as the USD and US interest rates did on the way down.


Specifically, we believe it to be flat-out intellectually dishonest to suggest that a pervasively weak dollar and cheap, excessive global capital haven’t perpetuated a golden era in EM economic and financial market conditions during the most recent EM “boom” cycle as it had done in the two previous cycles (late-70s to the early-80s and late-80s to the mid-90s).


Simply put, the absolute return strategy of gathering assets and aggressively “diversifying” into emerging markets is over and, quite frankly, it’s been over for a while now (FYI, EM equities peaked when the USD bottomed in 2011 – alongside other consensus carry trading strategies such as gold, commodities and EM currencies).






In light of this updated view, we thought it would be helpful to rehash where we think intermediate-to-long-term investors will be most rewarded for investing their hard-earned capital on the long and short side of emerging markets:


  • We remain bearish on emerging market debt (both USD and local currency paper) and emerging market currencies with respect to the intermediate-term TREND and long-term TAIL. Irrespective of idiosyncratic country fundamentals, we think #StrongDollar, #RatesRising and #DebtDeflation will be hard for any emerging market to overcome in this environment. There will, of course, be relative winners and losers, but we think you can continue to extract absolute returns with a passive strategy.
  • On the LONG side of EM equities from here (TREND and TAIL duration), we like South Korea, Poland, Thailand and Mexico. While absent from our EM Crisis Risk Index due to the lack of cross-country comparable data, Taiwan also looks solid fundamentally (stable currency, great BOP dynamics, mature and liquid financial markets…).
  • On the SHORT side of EM equities from here (TREND and TAIL duration), we like South Africa, Nigeria and Indonesia. We’re also inclined to loop India and Brazil back into this mix, but they’re so bombed-out on longer-term durations (i.e. 1Y, 18M and 3Y), one has to start to wonder how much more downside is left.








Below, we present our latest Hedgeye Macro Emerging Market Crisis Risk Index as some support for these selections. You’ll note that we didn’t just pick the absolute best vs. the absolute worst; other factors (such as accessibility and quantitative signals contributed to our thought process):
















Please email us any time you’d like to receive our more nuanced thoughts on a specific country and/or its capital and currency markets. We’ve done all the analytical heavy-lifting and we continue to monitor for critical deltas and inflection points each day so it’s no trouble at all for us to assist you in that regard.


Have a great evening,


Darius Dale

Senior Analyst



To help clients get a better grasp of all the moving parts across EM capital and currency markets, we have created a dashboard to systematically monitor performance divergences with the intent on flagging developing, existing, and dissipating trends in the marketplace. The dashboard is specifically programmed to highlight divergences in EM primary and secondary asset classes that are in excess of [1] standard deviation relative to their respective sample means.


The dashboard is grouped into three distinct buckets (i.e. samples): Asset Classes, Regions and Countries. Realizing that we could and should do better than implementing an all-or-nothing strategy in emerging markets, this multi-tiered setup will allow us to spot the development and dissipation of said trends at the level most appropriate for any given investor.


Lastly, we thought it would be best to use actual ETFs, rather than the benchmark indices themselves to track said divergences because: A) the universe of liquid ETFs most likely accurately reflects the universe of broadly investable emerging market securities and asset classes; B) the ETFs are all both un-hedged and priced in US dollars, which means they automatically adjust for deltas in the currency markets; and C) ETFs have an underlying fund flow element to them that influences price trends – which is precisely what we’re trying to capture with our #EmergingOutflows thesis.


It’s also worth noting that whenever there was a collection of ETFs that represented a particular asset class, region and/or country, we selected the specific ETF in our sample based on a combo score of size (AUM) and liquidity (average daily trading volume).

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