“If you want to get open under the basket, don’t just run towards the hoop – run to the free throw line first, then cut to the baseline to get open. Get High to Get Low. “
-Coach Ken Smith, Windsor CT basketball
Standing on stage in a Speedo with a freshly shaven body while a bunch of guys cheer for you elicits kind of an odd feeling.
The whole competitive bodybuilding scene is a singularly peculiar, multifarious mix of culture and personality and I do miss parts of it…kinda.
For the un-indoctrinated, the canonical approach to (natural) bodybuilding contest preparation, from the nutritional side, goes something like this:
In the 3 months leading up to contest day, you progressively tighten up the diet by concomitantly lowering total consumption and shifting your macronutrient profile increasingly towards protein and polyunsaturated fats (think olive oil, fish oil, mixed nuts, etc).
At some point, as caloric intake declines, you initiate or increase caffeine consumption for its beneficial thermogenic and appetite suppression effects. Nearer the end, if you need to further accelerate progress (and it’s the mid-2000’s when it was still legal) you may add in some measured amount of additional stimulant (via ephedrine) to help augment fat loss.
In general, the diet-stimulant combo works exceptionally well - for a while. Continue the regiment too long and the impact starts to diminish and ultimately reverse.
While there is some definite science underpinning the contest preparation process, there’s an undeniable element of art in manipulating all the diet and exercise dynamics so that your physique peaks exactly on contest day.
There is also the invariable, post-contest frustration. Inevitably, following the aesthetic ‘peak’ on contest day, the veins start to disappear, muscle definition fades, and you begin to smooth out as both diet and fluid balance renormalize to sustainable levels. After a week or two of physiological adjustment, you’re back to feeling (and looking) normal.
Does that over-consume à diet à stimulate à adjustment cycle look familiar?
Bodybuilding contest preparation is not dissimilar to monetary stimulus in the aftermath of a multi-decade credit binge. After the fun time (pizza eating/credit amplified consumption to offer both sides of the analogy) comes the diet/deleveraging and the stimulants/monetary stimulus to help things along - followed by the inevitable, but necessary, let down on the back end of the whole process.
Consensus continues to believe we’ll start the QE reversal adjustment process today with something on the order of a $5-10B reduction in monthly purchasing. Maybe it’s fully priced in, maybe not. Ultimately, measured policy normalization is a healthy and necessary adjustment and one we think justified given the positive breadth of the data YTD.
Back to the Global Macro Grind…..
There are three primary fiscal policy catalysts on the calendar in the near term:
- Oct 1st – Government Funding: the current Continuing Resolution, which provides funding for government operations in the (now all too familiar) event there is no official budget, ends on September 30th.
- Late October - Debt Ceiling: The latest statements from Treasury Secretary Lew, place the breach date between the end of October and mid-November.
- Year End - Sequestration/Fiscal 2014 Budget – Spending levels decline in accordance with sequestration if Congress fails to reach an agreement on an alternative.
Government funding, the Debt Ceiling, and the fiscal 2014 budget are three discrete events that have coalesced into a single, policy amorphism as each political side threatens standoff or promises compromise/concessions on one as a condition for an accord on another.
The majority of recent reports suggest the appetite of Republicans to present a united front in tying a delay in Obamacare implementation and other spending and tax initiatives to the Sept 30th government funding deadline is fading – which leaves the debt ceiling as the brinksmanship event of choice.
So, does the Debt Ceiling matter?
In large part, the debt ceiling matters as a political issue only in so much as the debt level exists as a partisan point of contention and a pervasive populous concern. For both the politico and the populous, the precedent appears to be that debt generally only matters when the slope is going the wrong way.
Consider the broader realities existent in 2011 vs. those prevailing today. The contrast is both illustrative and stark.
In 2011, when the Debt Ceiling clash roiled equities, we were still well north of $1T in deficit spending, the US credit rating hung in the balance, Europe was still on the brink, confidence remained near trough, QE was only midstream, and fixed income remained fully bid.
Presently, deficit spending is in retreat, the US credit rating isn’t a headline concern, confidence has inflected, Europe is stable-to-improving, policy is re-normalizing, and fund flows have begun a secular reversal.
Clearly, both the macro and sentiment dynamics have changed materially since Debt Ceiling 1.0. So has the trajectory of debt spending.
In the Chart of the Day below, we show the Trend in the deficit-to-GDP ratio. As can be seen, after reaching a peak of ~10% in 2009, the ratio has showed steady decline with accelerating improvement over the last year alongside stronger economic growth, higher taxes, a retreat in stabilizer payments, and a number of non-recurrent inflows.
We expect the ratio to retreat further as the domestic macro data continues to reflect ongoing, albeit modest, improvement.
Indeed, yesterday, in its latest update to the long-term budget outlook (Here), the CBO projected deficit spending would continue to drop over the next few years, falling to 2% of GDP by 2015 with the Debt-to-GDP ratio declining to 68% from its current level of ~73%.
Yes, the long-term budget outlook, saddled with unsustainable growth in entitlement obligations, remains dire. We’ll break down the budget outlook in detail, by duration, in subsequent notes, but the key takeaway here is that the outlook for both growth and debt spending over the intermediate term remains positive.
Markets and political strategy move on the slope of the line (better/worse, not good/bad) not on a highly uncertain, 12 year forward projection.
At present, the Trend slope of improvement in domestic growth, credit, confidence, and deficit spending are all positive and both Treasury Yields and the $USD (our key price signals as it relates to concern over the debt ceiling) remain Bullish from a price perspective.
#RatesRising has been reflecting that positive fundamental reality as have market prices as pro-growth exposure continues to get marked higher (new YTD high yesterday for the QQQ’s and another new all-time high for the R2K) while the underperformance spread for slow growth, yield chase assets (Utilities, MLP’s) continues to expand.
Notably, policy normalization and #RatesRising alongside Trend improvement in debt and deficit levels also holds important implications for future fiscal policy initiatives.
If we actually allow rates to go higher over the next couple of years – monetary policy can again be used as a tool to help offset employment and output drags stemming from fiscal policy decisions aimed at putting the budget on a sustainable long-term course.
If we stay at zero percent until projected debt/deficit ratios trough in 2015/16 we lose that optionality. To reiterate the basketball strategy quote from my AAU coach above: “Go High to Get Low”.
Perhaps the journey starts today.
Our immediate-term Macro Risk Ranges are now as follows:
UST 10yr Yield 2.82-2.99%
Christian B. Drake
Risk Managed Long Term Investing for Pros
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THE MACAU METRO MONITOR, SEPTEMBER 18, 2013
GAMING REVENUE EXPECTED TO GROW DURING NATIONAL DAY HOLIDAY Macau Daily News
Gaming operators projected that visitor arrival in the coming National Day holiday will stay flat compared with last year while gaming revenue will go up about one-third compared to normal days. VIP business operators are holding over a hundred rooms for their clients for the long holiday. Wednesday is normally the quietest day in a week; gaming operators tend to provide privileges such as hotel accommodation and coupons for high-end guests in the mass market in order to maintain a steady number of guests across the week.
MACAU LEGEND PLANS TO RAISE $300 MILLION THROUGH SHARE SALE Bloomberg
Macau Legend Development Ltd plans to raise about $300 million by selling new shares next year to fund a redevelopment of Fisherman's Wharf. It expects to spend about $1 billion to revamp its Fisherman’s Wharf and plans to fund that The casino operator expects to spend about $1 billion to revamp its Fisherman’s Wharf gaming complex in the world’s biggest gambling hub. It plans to fund that through the share sale and by raising debt, according to co-chairman Carl Tong.
The proposed share sale may take place as soon as early 2014 and will raise Macau Legend’s public float to about 25-26% from the current 15-16%, Tong said. The company is also looking to refinance existing syndicated loans through debt issuance.
TODAY’S S&P 500 SET-UP – September 18, 2013
As we look at today's setup for the S&P 500, the range is 34 points or 1.45% downside to 1680 and 0.54% upside to 1714.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.47 from 2.48
- VIX closed at 14.53 1 day percent change of 1.04%
MACRO DATA POINTS (Bloomberg Estimates):
- 7am: MBA Mortgage Applications, Sept. 13 (prior -13.5%)
- 8:30am: Housing Starts, Aug., est. 920k (prior 896k)
- 10:30am: DOE Energy Inventories
- 2pm: FOMC Rate Decision, Sept., est. 0%-0.25% (pr 0%-0.25%)
- 2:30pm: Fed’s Bernanke holds news conference on FOMC meeting
- 9:30pm: BoJ’s Kiuchi speech and press conference
- BoJ’s Kuroda speaks in Tokyo
- President Barack Obama speaks to Business Roundtable on economic proposals aimed at job creation
- Financial Accounting Standards Board, Intl Accounting Standards Board joint public roundtable meeting in London
- 10am: House Armed Svcs Cmte hears from military heads on 2014 defense budget
- 10:15am: Energy Sec. Ernest Moniz, EPA Admin. Gina McCarthy testify before House Energy and Commerce Cmte on combatting global warming
- 2pm: House Ways and Means panel hearing on IRS’s exempt organizations division
- 2pm: Cary Sherman, CEO of Recording Industry Assn of America; Randall Rothenberg, CEO of Interactive Advertising Bureau, testify before House Judiciary hearing on voluntary agreements in intellectual property
WHAT TO WATCH:
- JPMorgan said to agree to pay $200m to SEC over London Whale
- Drop in home loans keeps Fed from tapering MBS purchases
- Starwood property said to plan deal for Waypoint Management
- Dow Chemical suspends sale of plastics additives on low bids
- Sega said to win auction to buy bankrupt game co. Index
- Electronic Arts elevates sports video unit head to CEO: WSJ
- Boeing’s larger 787 completes test flight
- Auto-parts co. Visteon may move to Hong Kong listing: CEO
- Sharp to raise as much as JPY166b through share sale
- Apache to sell $112m in Canadian assets in 2 separate deals
- Dollar Tree takes up $2b share buyback; enters JPM agreements
- Volkswagen may build small SUV in Tennessee
- Tesla CEO Musk sees driverless cars road-ready in 3 years: FT
- Walgreen moves workers to private health care exchange
- AT&T to expand in Latin America with America Movil: Reuters
- Pandora wins licensing dispute against songwriters, publishers
- Blackberry introduces new Z30 handset with 5-inch screen
- Apogee Enterprises (APOG) 4:30pm, $0.25
- Clarcor (CLC) 6:26pm, $0.66
- Cracker Barrel Old Country Store (CBRL) 7am, $1.35
- FedEx (FDX) 7:30am, $1.50 - Preview
- General Mills (GIS) 6:56am, $0.70 - Preview
- Herman Miller (MLHR) 4pm, $0.38
- Manchester United (MANU) 6am, $(0.03)
- Oracle (ORCL) 4:01pm, $0.56 - Preview
- Steelcase (SCS) 4:01pm, $0.26
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gold Declines a Third Day to Six-Week Low Before Fed Statement
- China’s Choking Cities Means Job Cuts at Steel Town: Commodities
- WTI Crude Rises for First Time in Four Days Before Fed Decision
- Copper Climbs Before Federal Reserve Concludes Policy Meeting
- Corn Rebounds From One-Month Low as U.S. Insurance Claims Rise
- Coffee Rebounds in London Before Vietnam Crop; Sugar Declines
- Aluminum Cuts Seen by Wood Mackenzie Too Small to Reduce Glut
- German Power Premium Most Since ’98 Tests Voters: Energy Markets
- Rebar Falls to Seven-Week Low as Purchases Slow, Iron Ore Drops
- U.K. Millers Poised to Buy British as Sun Boosts Wheat Quality
- Australia Sugar Cane Crop Seen Curbed in 2014 If Drought Spreads
- Goldman Sees Commodity Consumption Signs of Life Outside China
- Coffee Supply Gains Spur Bearish Price Outlook: Chart of the Day
- Iron Ore Seen Extending Slump by UBS as Global Supplies Increase
The Hedgeye Macro Team
“The great thing about fact based decision is that they over rule the hierarchy.”
Many of our large institutional investing clients we speak with here at Hedgeye remain focused (and rightfully so) on the direction of leadership at the Federal Reserve. Given their focus, we thought we would go ahead and highlight a few fun (frightening?) facts about the mighty Fed:
1) The greatest long term period of economic growth in the United States? That was between the Civil War and 1913 when there was no Fed.
2) Prior to the creation of the Federal Reserve, the estimated rate of inflation in the United States was 0.5%. It is estimated to be at 3.5% in the ensuing century.
3) The permanent income tax was introduced the same year as the Federal Reserve.
4) Congress promised in 1913 that if the Federal Reserve Act was passed ... it would eliminate the business cycle.
5) The value of the U.S. dollar has declined, by some estimates by more than 95% since the Fed was created.
6) There have been 10 recessions since 1950 (arguably many Fed induced).
I borrowed some of these points above from a blog called End of the American Dream. It kind of begs the question, as Jeff Bezos would say, whether the best fact-based decision is to overrule the Federal Reserve hierarchy in its entirety.
Now take a moment to ponder the points outlined above, and then ask yourself: Would ending the Fed be the worst decision the Federal Government ever made?
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