This note was originally published at 8am on September 20, 2013 for Hedgeye subscribers.
“The Fed is the greatest hedge fund in history.”
That’s what Buffett told students at Georgetown University yesterday. He was trumpeting “how much money” the Fed makes: “it’s generating $80 billion or $90 billion a year probably… and that wasn’t the case a few years back.”
Now isn’t that just fantastic. One of the greatest financial minds in US history is now marketing a political message that is about as anti Benjamin Franklin as it gets. Anti-savings that is. Where in God’s good name do you think these said “profits” come from?
They come out of American savings accounts. Even the Fed itself (St. Louis Fed) reminds us that the “growth rate of real GDP has been higher on average when the personal savings rate is rising than when it is falling (Gilder, pg 72).” The Founding Fathers wanted our children to respect their piggy banks, not some un-elected money printer clipping our hard earned coins.
Back to the Global Macro Grind…
As George Gilder goes on to absolutely nail this topic in his new book, Knowledge and Power, “the entrepreneur is the savior of the system because he capitalizes himself. He is his own most important capital… socialists believe their mission is to seize capital for the masses…” (Gilder, pg 77)
That’s what Mr. Buffett should be marketing. It’s time to get our money out of the Fed’s hands and back into the hands of The People. We know how to generate returns. We’re the ones who are going to be doing the hiring when we make money. All the Fed’s “profits” do at this point is tax the American consumer. It’s called Down Dollar driven inflation. It’s regressive.
Moving on… where the rubber meets the road here is in terms of the purchasing power of your hard earned currency. While I was disgusted with Bernanke’s decision to debauch the Dollar again this week, that doesn’t mean he’s going to win this war for good. In the last 24 hours, both the data (economic gravity) and Mr. Market are fighting back:
Economic data? Yes, as in the stuff Bernanke has un-objectively ignored since almost every high-frequency US economic data series we follow started to accelerated in July.
Now most Fed apologists (which are mostly those who get paid by A) Government Power and/or B) Down Dollar) will whine about the impact of #RatesRising on the “housing’s recovery” instead of focusing on what really drives housing demand – confidence.
Although US Savings are at generational lows, US Net Worth is currently tracking at an all-time high. We’d argue that’s been largely driven by real (inflation adjusted) #GrowthAccelerating more so than anything else. US Home Prices up +12.4% y/y obviously helps, but the demand for housing won’t be impacted until the 30-yr mortgage rate blows through 6% (it’s at 3.79% today, get over it).
In other words, the greatest threat to US growth recovering is the government intervening in the economic cycle. There has never been a sustained US economic recovery that didn’t coincide with:
1. Strengthening US Dollar
2. Rising US Interest Rates
Why doesn’t every discussion about the Fed start and end with that?
While Buffett might love the impact Bernanke has on his P&L (fat net interest margins are driven by marking the short-end of the curve at 0% - that pays insurance companies (Berkshire) in size), I’d like to remind him that the “greatest hedge fund manager in history” is also the only un-elected central planner in US history to attempt to ban the economic cycle.
What is an economic cycle?
$USD/Interest Rates Higher --> Energy/Commodities/Inflation lower --> Real Consumption Growth Higher --> Pro-Growth Equities Higher
With all due respect Mr. Buffett, why don’t you and your pal, Mr. President, want the rest of us “middle classers” to have that?
Sadly, there are very few leaders in Washington who have my back on this. That’s one of the reasons why I have the highest CASH position in the Hedgeye Asset Allocation Model since July 23rd. I don’t trust this rally to all-time highs anymore.
The biggest thing Bernanke lost this week was whatever was left of the trust I had in someone at the Fed doing the right thing. The timing was perfect. And he chose politics instead. If growth slows from here, Gold help him. Because history won’t.
Our immediate-term Risk Ranges (we have 12 of them in our Daily Risk Range product) are now:
UST 10yr Yield 2.70-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – October 4, 2013
As we look at today's setup for the S&P 500, the range is 15 points or 0.46% downside to 1671 and 0.44% upside to 1686.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
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THE MACAU METRO MONITOR, OCTOBER 4, 2013
SJM HAS BIGGEST SLICE OF SEPTEMBER'S CASINO MARKET Macau Business
SJM led the competition for casino gross gaming revenue in September with 25%. Sands China Ltd kept the second-largest share of the market at 22%. Galaxy Entertainment Group Ltd had 19% and MPEL had 14%. WYNN had 11% and MGM had 10%.
So you know your country has a serious credibility problem when the Yen looks stronger than your own currency. Unreal. USD/YEN continues to break down through our 97.35 TREND support. 98.23 is the new resistance now. The Nikkei was down hard on that this week.
There was basically nothing going on in the Middle East this week. No big headlines. Nothing. But #DownDollar on reckless "Sky Is Falling!" fear-mongering from Treasury Secretary Jack Lew about US Debt Default burned the buck. It also pushed Brent Oil back above TAIL risk line of 108.61 to 109.23 here. That's not good. It's called a #tax on consumers. Bad for growth.
Take a look at Italy. It is up +1.1% this morning for the MIB Index. That gives the Italians the nod as one of the best stock markets of the week. Government saving people from government? That there is an epic market catalyst, I guess. We play the cards we're dealt here at Hedgeye. The Global Government Gong Show.
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WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Fascinating to watch a US President who doesn't get markets try to scare "folks" with market rhetoric @KeithMcCullough
I am not a product of my circumstances. I am a product of my decisions. - Stephen Covey
Twitter's just released IPO documents suggest a valuation of $12.8 billion for the microblogging service, underscoring the seven-year rise of a still unprofitable company that has helped revolutionize how people share information. Twitter is seeking to raise $1 billion and has pegged the fair value of its common stock at $20.62 a share. There are 620 million shares outstanding. (Bloomberg)
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