Bernanke's Lure

This note was originally published at 8am on September 24, 2013 for Hedgeye subscribers.

“It has exerted its pull on the West for a thousand years.”                                                                                          

-Scott Anderson                                   


That’s what Scott Anderson called the “lure of the East” in a fascinating new book I just started studying about the history of the Middle East called Lawrence in Arabia (2013).


“That lure brought wave after wave of Christian Crusaders to the Near East over a three-hundred year span in the Middle Ages. More recently, it brought a conquering French general with pharaonic fantasies named Napoleon… Europe’s greatest archaeologists in the 1830s… hordes of Western oil barons… and con men to the shores of the Caspian Sea in the 1870s.” (pg 15)


While 1,000 years is a long time, the lure of central planners clipping coins and/or devaluing the currency of The People has been in motion for at least 2x that. “In 64 A.D., in a naïve attempt to deceive the populace, Nero decreased the silver content in the coins and made silver and gold coins slightly smaller” (The History of Money, pg 52). Bernanke hopes no one has read that history.


Back to the Global Macro Grind


What is it, precisely, that gave both the Roman and Ottoman Empires the audacity to plunder the purchasing power of their people? After 200 years of operating as an independent bank, what made the British Empire so soft that it felt it had to socialize (nationalize) the Bank of England in 1946? What was the US “Free-Market” Empire and why have we empowered the Fed to change it?


My apologies in advance for thinking this morning. If you disregard the vacuum of history in which Bernanke thinks (1930s) and  contextualize the moment that his Fed is in (within the construct of long-term history which will ultimately judge Bernanke when he is long gone), it’s getting scary again. But you already know that – and the sad thing is that some of his Fed heads do too.


Yesterday, Dallas Fed Head (Fisher) basically admitted two things:

  1. The current White House Administration has politicized the US Federal Reserve
  2. By not doing what they led the market to believe what they’d do (taper), the Fed is losing credibility

Check. check.


I think most people who aren’t paid not to “get” it understand this now. If you don’t understand the history of un-elected politicians devaluing currencies, you have some reading to do. Self-education is the best long-term path to not becoming a lemming.


I’m not that smart. I think most people who have seen my SAT scores get that too. But Mr. Market is a very smart cookie, and what I tend to get (on a lag) is what he (or she) is telling me to get. I don’t wake up every morning trying to bend economic gravity.


Bernanke thinks he can “smooth” gravity, cycles, etc. He’s telling the entire bond, currency, and stock markets they are wrong. #Wow, bro. So let’s rewind the tapes and go to the score – what have markets done since Bernanke didn’t taper?

  1. US Dollar went straight down (now bearish TREND after being bullish for the better part of the last 9-10 months)
  2. US Interest Rates went straight down (still bullish TREND, but lost the immediate-term TRADE momentum line of 2.80% 10yr)
  3. US Growth Stocks stopped going up; slow-growth Utilities stopped going down

Now isn’t that last part perfect. Great job Ben. Instead of US growth expectations accelerating, now they are slowing again.


This is the first 2013 US stock market “correction” that I will not buy because Bernanke has decided that the opposite of what I want is what he wants. To review, what I want is A) what was happening and B) what every American should want:


1.       #StrongDollar

2.       #RatesRising

3.       #GrowthAccelerating


To be fair, there are a lot of people who are in the business of slow-growth (Gold, Bond, MLP, etc.) investing who have a pre-determined path as to what they want (more money to manage). But that’s not what The People want.


You don’t have to go back 2,000 years to get this either:

  1. 1983-89 US Growth > 4% GDP with #StrongDollar (Reagan’s avg = $115.25 USD) and Down Oil ($16.53/barrel avg)
  2. 1993-99 US Growth > 4% GDP with #StrongDollar (Clinton’s avg = $97.89 USD) and Down Oil ($19.69/barrel avg)

And maybe Hillary is smart enough to get what Obama doesn’t – and maybe that’s the only way out of this mess:

  1. Obama’s average USD (US Dollar Index) is the lowest in Presidential history at $79.52
  2. Obama’s average Oil price (Brent Oil) is the highest in Presidential history at $102.01/barrel

But that’s more than a few years away and sadly, at some point, someone in this country is going to realize that empowering both Putin and Middle Eastern kings via a Down Dollar, Up Oil policy is no different than doing the same via an un-elected Federal Reserve.


There is no doubt in my mind that the Fed is exerting its misplaced fear-mongering pull on the President. The lure is also to get you, The People, to fear the alternative (“if rates rise, housing will collapse”) when in reality it’s the government policy itself that is luring us away from the free-market system that gave America its empire to begin with.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.59-2.80%

SPX 1681-1730

VIX 12.93-14.98

USD 80.01-80.98

Euro 1.34-1.36

Brent 107.03-109.13


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Bernanke's Lure - Chart of the Day


Bernanke's Lure - Virtual Portfolio

Expert Call TODAY on US Pipeline Regulation, Rates, Maintenance, and MLPs (New Dial-In Code!)

Continuing our work and research on Kinder Morgan, midstream MLPs, pipeline safety, and FERC rates and regulations, we will host an expert call TODAY, October 8th, at 11am EST with Elisabeth Myers.



  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 356924#
  • There will be no presentation or slides associated with this call

Elisabeth Myers is the founding principal of Myers Energy International.  An energy lawyer with twenty years of experience, she specializes in the regulation of oil and natural gas pipelines and represents companies before federal and state regulatory agencies with respect to rate and regulatory issues.  She has litigated before the FERC, the California Public Utilities Commission, the U.S. Courts of Appeals, and the U.S. Supreme Court.  She advises on pipeline safety compliance issues under the U.S. Department of Transportation's Pipeline and Hazardous Materials and Safety Administration regulations.  Her clients have included major oil companies; a state regulatory commission; a producer trade association in rulemakings restructuring the natural gas industry; oil refineries; farmers in the mid-west seeking interconnects with interstate pipelines; independent producers and marketers of oil, natural gas, and natural gas liquids with respect to various regulatory and related transactional issues; municipalities and municipal gas distribution systems, and chemical manufacturers. 


Ms. Myers also has extensive knowledge of Kinder Morgan, as she litigated against SFPP in ground-breaking rate cases before the CPUC and FERC in the mid 2000s.


Topics of Discussion:

  • What’s the current state of pipeline regulation in the US?  How does the regulation of oil/product lines differ from natural gas?
  • History of pipeline regulation…  Where have we come from and where might we be going?
  • Pipeline safety and compliance…  Are companies spending enough on maintaining their pipelines?  Are they spending too much just to increase the rate bases (“gold-plating”)?  Is a certain level of spend mandated or regulated?
  • The growing prevalence of MLPs…  What’s it mean for US energy infrastructure, consumers, and investors?
  • MLPs, income taxes, and regulated rates…  Are MLPs “tax-advantaged” securities?  Why does the FERC permit an income tax allowance for MLPs?
  • And more...

If you have any questions for Ms. Myers, please send them to me at .


Kevin Kaiser

Senior Analyst

October 8, 2013

October 8, 2013 - dtr



October 8, 2013 - 10yr

October 8, 2013 - spx

October 8, 2013 - nik

October 8, 2013 - mib

October 8, 2013 - vixB

October 8, 2013 - euroB



October 8, 2013 - dxy

October 8, 2013 - natgas

October 8, 2013 - gold

October 8, 2013 - copper


Dear Mother

“You know, men do nearly all die laughing”

-T.E. Lawrence


As a young enlightened man in the field of war in the Middle East, that’s what T.E. Lawrence wrote to his Mom in 1916. At the time, he was also tasked with writing a weekly letter to the “Mother” (Britain’s War Office) of his homeland. Not surprisingly, this is when he started to “incense his military superiors” with on-the-ground truths (Lawrence in Arabia, pg 125).


“We edit a daily newspaper, absolutely uncensored, for the edification of twenty-eight generals; the circulation increases automatically as they invent new generals. This paper is my only joy. Once can give the Turkish point of view of the proceedings of admirals one dislikes, and I rub it in my capacity as editor-in-chief.” (pg 125)


Ah, the power of the pen. You either have it, or you do not. For an amateur writer like me, I get that my moments are fleeting. But, especially when attacking the tyranny of government spin, I feel as liberated as a man who believes in truth and freedom can feel. That’s why I do this at the top of every risk management morning - to feel free.


Back to the Global Macro Grind


This is not a “free-market.” At least not in its purest definition. At any given moment of the trading day, the government can announce that it is officially saving us from itself. For that, I’ll be damned if I give thanks and praise.


Can money buy your freedom? What if the purchasing power of that “money” is being burned at the stake? What if your money is borrowed from the future of your grandchildren?


These aren’t new questions this morning. Montaigne started asking these questions in 1571 with “Essais” and Shakespeare personified the money/power/freedom conundrum with the Merchant of Venice too.


Can the world’s reserve currency (US Dollar) hold its long-term TAIL risk line of $79.21 support?


It’s still the #1 question in my notebook this morning. And I suspect it will be for some time to come. If you ask Gold, the answer is maybe. If you ask Bernanke, Obama, and Boehner, it’s no.


In addition to the US Dollar’s TAIL risk line imposed upon us by central planners, here are some critical US TREND lines to consider:

  1. US Treasury 10yr Yield = 2.58% TREND support
  2. US Equities (SP500) = 1663 TREND support
  3. US Equity Volatility (VIX) = 18.98 TREND support

That last one is what’s going to drive the other two. For all of 2013 I’ve been Bearish on Fear (VIX). As of the last 2 weeks, that’s changed. I am as afraid of US government intervention in our markets and economies as the VIX has become.


Yesterday’s move on the front-month of fear (VIX) was telling – follow Mr. Market’s flow:

  1. US Equities had a big newsy down-open in the pre-market built on the false media message that the US could “default”
  2. US Bonds and Credit Default Swaps didn’t care about all of the “default” fear-mongering; stocks acknowledge the same
  3. US Equities eventually lifted off the lows and were only down -0.3% by lunchtime

Then …

  1. As the lunch-time lull passed, US Equity market players started to realize that this correction is not just about “default” noise
  2. Almost everything that’s been killing it YTD (Growth Stocks) started to roll over in the early afternoon
  3. Financials (XLF), Consumer Discretionary (XLY), and Small Caps (IWM) all ended up closing down -1.2-1.3% by end of day

And all this happened as US Equity Volatility (VIX) broke out above the @Hedgeye TREND line (18.98) for the 1st time since June. Our process would suggest that there was absolutely no irony in that.


I won’t re-hash the Growth “Style Factors” that I outlined in yesterday’s Early Look again, but the risk management point to embrace was a very simple one. As a market expectation, #GrowthAccelerating has plenty of downside.


The US Government is not going to default on its debt, but it may very well slow growth.


Put another way, the longer that both the fiscal and monetary policy sides of the US House lean on:


A)     Down Dollar

B)     Falling US Interest Rates


The less likely it is that the US economic cycle will be allowed to occur.


Policies to Inflate (devaluing the Dollar) don’t create economic growth; they perpetuate inflation. Under our #StrongDollar + #RatesRising scenario (that may have died 2 weeks ago), inflation is not an issue. Now it is. Mother, be forewarned.


Our immediate-term Risk Ranges are now as follows (we do all 12 Global Macro ranges in our Daily Trading Range product):


UST 10yr Yield 2.60-2.68%


VIX 16.23-20.15

USD 79.67-80.71

Euro 1.34-1.36

Brent 107.97-109.99


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Dear Mother - Chart of the Day


Dear Mother - Virtual Portfolio


TODAY’S S&P 500 SET-UP – October 8, 2013

As we look at today's setup for the S&P 500, the range is 14 points or 0.31% downside to 1671 and 0.53% upside to 1685.                           













  • YIELD CURVE: 2.29 from 2.29
  • VIX  closed at 19.41 1 day percent change of 15.95%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Bus. Optimism Index, Sept., est. 94
  • 7:45am: ICSC weekly sales
  • 8:55am: Johnson/Redbook weekly sales
  • 10am: IBD/TIPP Economic Optimism, Oct., est 43.5 (prior 46)
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 11:30am: U.S. to sell 4W bills
  • 12:25pm: Fed’s Pianalto speaks on economy in Pittsburgh
  • 12:30pm: Fed’s Plosser speaks in Johnstown, Pa.
  • 1pm: U.S. to sell $30b 3Y notes
  • 7:50pm: Bank of Japan issues minutes of Sept. 4-5 meeting
  • 9pm: Bank of Japan’s Nakaso holds news conference


    • IMF issues World Economic Outlook; Chief Economist Olivier Blanchard gives press conference during annual meeting, 9am
    • FDIC Board Reviews Deposit Insurance Fund
    • House, Senate in session
    • Senate Armed Forces Committee Hearing on Sequestration
    • SEC Commissioner Michael Piwowar attends Chamber of Commerce’s Center for Capital Markets Competitiveness discussion on “Advancing and Defending the SEC’s Core Mission,” 11:30am


  • U.S. default specter has Japan joining China warning on debt
  • U.S. loses $1.6b from shutdown costing $160m/day
  • Alcoa begins earnings season for 1st time since drop from DJIA
  • Alcatel-Lucent to reduce 10,000 jobs worldwide as losses mount
  • Morgan Stanley seen leading bank profit gains
  • IMF to publish World Economic Outlook, 9am
  • McKesson is in advanced talks to buy Celesio: DJ
  • America Movil, AT&T discuss entering Europe: Telegraaf
  • Vodafone plans to spend $2b on Indian mobile unit buyout: FT
  • U.S. approves China co.’s takeover of Mooney Airplane: Xinhua
  • North Korea has restarted Yongbyon nuclear reactor: Yonhap
  • German exports gained in Aug. as euro-area economy recovered


    • Alcoa (AA) 4:03pm, $0.05
    • Wolverine World Wide (WWW) 6:30am, $1.03, preview
    • Yum! Brands (YUM) 4:15pm, $0.92, preview


  • Cocoa Touches 23-Month High on Shortage Outlook; Sugar Climbs
  • Rubber Glut Shrinking as Car Sales Expand to Record: Commodities
  • WTI Crude Advances as Impact of U.S. Shutdown Seen Limited
  • Morgan Stanley Increases Iron Ore Outlook as Deficit Persists
  • Soybeans Poised for Longest Rally in Four Months on U.S. Weather
  • Copper Rises in London as PMI Report in China Signals Growth
  • Goldman’s Currie Says Gold Is ‘Slam Dunk’ Sell After Shutdown
  • Rebar Gains on Stock Market Rally as China Returns From Holiday
  • Crude Supplies Increase for Third Week in Survey: Energy Markets
  • Asia’s Chocolate Craving Paces Global Demand: Chart of the Day
  • Battery-Stored Solar Sparks Utilities Backlash: Climate & Carbon
  • Iron Ore Demand Expands 7.5%, Keeps Market in Deficit: Bull Case
  • Olam Sees Smaller Arabica Coffee Surplus as Robusta Supply Gains
  • Vale Sees Iron-Ore Market Oversupplied From 2015 on New Capacity


























The Hedgeye Macro Team













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