Takeaway: Worth the money. Take out your wallet and buy the book.

Hedgeye Risk Management CEO Keith McCullough shares some of his thoughts on Volcker – The Triumph of Persistence, by William L. Silber (2012).


Bottom line on the book according to McCullough is that it's an easy read that will educate people on how central planning has become so causal to American Purchasing Power (US Dollar) and inflation/growth expectations.


BOOK REVIEW: VOLCKER - volckerbook


Summary Thoughts

  1. Published in 2012, this book provides fresh (and timely) historical context on the causal factors affecting the US Dollar
  2. Monetary Policy Style: critical contrast between the McChesney/Volcker Feds and the Burns/Bernanke Feds #study
  3. The book’s mapping of the sequence of political decisions made prior to Gold’s top in 1980 is well done (Chapter 11, New Territory

Content Highlights

  1. “Five American Presidents (3 Democrats, 2 Republicans), spanning nearly half a century, have called on Paul A Volcker to serve…” (pg 1)
  2. “Do not suffer your good nature to say yes when you ought to say no” –George Washington quote hanging in his father’s office (pg 15)
  3. “I never got along with the coach” –Volcker on his basketball coach @Princeton (1945-1949) #athlete (pg 17)
  4. Morgenstern… left his mark by turning Paul into a professional skeptic” #German born economist, author of Theory of Games (pg 17)
  5. “Martin thought economists’ forecasts rivaled the accuracy of fortune tellers” #WilliamMcChesnyMartin, one of Volcker’s heroes (pg 21)
  6. “Kennedy Pledges He Will Maintain The Value of The Dollar” @NYTimes headline #1960, Gold was $35/oz - #perspective (pg 23)
  7. “Gnomes are imaginary, but speculators are not.” #1960s roots of our friend @DougKass macro machinations? (pg 27)
  8. “All I can remember after that was a word flashing in my brain like a yellow caution sign: Bullshit” #Samuelson #Keynes policies (pg 31)
  9. “Hayek’s words forever linked inflation and deception deep inside my head. And that connection, which undermines trust in government” (pg 33)
  10. “Charles de Gaulle pursued Gold the way Henry VIII did wives.” #1965 context #zeigeist of the times very different than today (pg 42)
  11. “If the US could change the rules in March 1968 and stop selling Gold… it could amend them further” #1968, Martin #StrongDollar (pg 50)
  12. “Failure to maintain those promises undermines trust in America. And trust is everything.” #1969, epic #StrongDollar quote by #JFK (pg 53)
  13. “Preserving the Dollar’s status had been the focus of Volcker’s favorite committee” #1969 Volcker Group, de Gaulle resigned 1969 (pg 60)
  14. “Chairman Martin wants to raise the discount rate.” But #LBJ wanted nothing of it (neither did Nixon) #USD credibility 1969 (pg 69)
  15. “Soon after becoming Fed Chairman in February 1970, Burns began to ease…” sound familiar? #Bernanke, didn’t work either (pg 72)
  16. “We can’t afford to risk a downturn, no matter how much inflation” –Nixon #1970 w/ #Burns Fed, conflicted/compromised (pg 73)
  17. “August 15, 1971… Nixon stunned the world in a televised Sunday night address” #GoldStandard, gone – thanks Nixon (pg 79)
  18. “The Coming Devaluation of the Dollar” @NYTimes May 1971, yep #sad – where it all started #Burns/Bernanke (pg 101)
  19. “If I have to talk to Burns again I’ll do it. Next time I’ll just bring him in” –Nixon, goodbye “independent” #FederalReserve (pg 105)
  20. “I don’t give a shit about the Lira” –Nixon, #1972 Dollar Debauchery (pg 110)
  21. “The difficulty is that no one is ever prepared to move except in a crisis” –Volcker #1973 (Shultz announced a 10% USD devaluation) (pg 117)
  22. “Burns exploited Volcker’s fixation with public service to persuade him to accept the Presidency of the Federal Reserve of NY” #1975 (pg 125)
  23. “The public’s resentment made sense, considering that consumer prices surged by 12% during 1974”, #output of 1971 Policies To Inflate (pg 129)
  24. “Whip Inflation Now” #WIN buttons for Jimmy Carter, elected into office #1976 to do a job he didn’t accomplish;#1970s = Stagflation (pg 133)
  25. “It’s the same old story – lack of confidence in US government policies” –Currency Analyst (in #Frankfurt), sound familiar? (pg 139)
  26. “Volcker participated in the Dollar rescue by requesting an increase from 8.5% to 9.5% in the discount rate” #1978 (pg 140)
  27. “I am not particularly eager to make a major move now or in the fore-seeable future.” –Volcker #1979, so #Gold rallied one last time (pg 156)
  28. “I think there’s a need to come in here as inconspicuously as possible… at diverse hotels” –Volcker #1979, no #Bernanke style #leaks (pg 165)
  29. “The price of Gold hit an all-time high of $850 an ounce on Monday, January 21, 1980” #study history vs causal #Fed factor (pg 182)
  30. “Jimmy Carter ended his honeymoon with Paul Vocker on October 2 , 1980, a month before the presidential election” #compromised (pg 190)
  31. Partisan politics ought not be around the Dollar” –William McChesney Martin #Patriot #1980
  32. “Milton wants to abolish the Fed” –Arthur Burns #1980, the American #zeitgeist was very 2011 @RonPaul #libertarian (pg 194)
  33. “Do we really need the Fed” –Ronald Reagan #1980 message resonated with common sense (pg 195)
  34. “We obviously have a credibility problem – by “we” I mean the United States” –Volcker #1980 in “To Be or Not To Be a Central Banker” (pg 197)
  35. “People have to change their expectations and their behavior… that is always an uncomfortable process” –Volcker #1980 (pg 198)
  36. “I was very pleased to read a prediction that the price of gold will nosedive below $300/oz” –Reagan #1980 #StrongDollar leadership (pg 200)
  37. “None of us really understands what’s going on with all these numbers” –David Stockman (#Reagan’s Budget Director) #classic (pg 209)
  38. “He now refers to you as Paul rather than Chairman Volcker” #Reagan understood #StrongDollar tax cuts #commodities (pg 214)
  39. “I think we’ll re-appoint Paul Volcker for about a year and a half. He doesn’t want a full term” –Reagan #1983 #winning (pg 233)
  40. “Having 2 or 3 $40B institutions in trouble is a horse of a different color” –Volcker in #1984 as #ContinentalIllinoiswas imploding (pg 243)
  41. “Keynesians such as Samuelson said it was impossible, monetarists such as Friedman said Fed was doing wrong” #1985 Volcker right (pg 247)
  42. “Volcker resigned twice, but only one stuck” post #1985, James #Baker politicized everything all over again#PlazaAccord (pg 252)
  43. “The role you have played has been invaluable” –Margaret Thatcher on #Volcker #1987 (pg 265)
  44. “I may be old but I am persistent” –Volcker #2010, #Volcker Rule
  45. “Foreigners hold Dollars because America has demonstrated fiscal and monetary integrity” #basic, pure#Constitution (pg 298)


Morning Reads on Our Radar Screen

Takeaway: A quick look at some stories Hedgeye is reading this morning.

Keith McCullough – CEO

Obama's Nomination Of Janet Yellen Is A Blow To Recovery-Starved Americans (via Forbes)

New CEO cuts Chesapeake Energy's lifestyle largesse (via Reuters)

Red Sox Grind Rays Down and Out of the Playoffs (via NYT)


Morning Reads on Our Radar Screen - dollar1


Josh Steiner – Financials

GM Executive Warns of Impending Auto Bubble (via Free Beacon)

GM Ramps Up Risky Subprime Auto Loans To Drive Sales (via IBD)

Gates’s Future Fuels Speculation as Microsoft Seeks New Chief (via NYT)


Jonathan Casteleyn – Financials

Fidelity Billionaire Johnson Taps ETFs as Profits for Funds Fad (via Bloomberg)


Kevin Kaiser – Energy

Ex-Chesapeake CEO McClendon raises $1.7 billion to drill in Utica Shale (via Reuters)


Tom Tobin – Healthcare

Oxford Nanopore Raises $64 Million for Infrastructure (via Bloomberg)


Brian McGough – Retail

What you should know ahead of Nike’s analyst meeting  (via Marketwatch)

Filling a void: Saks CEO Stephen Sadove is joining J.C. Penney’s board (via Dallas News)


Jay Van Sciver – Industrials

Fastenal Misses Q3 Earnings, Sales (via Zacks)


Matt Hedrick – Macro

Germany's Greens turn frosty towards any alliance with Merkel (via Reuters)

INVITE: Pipeline Maintenance Expert Call (Tuesday, 10/15)

Continuing our work on Kinder Morgan (KMI, KMP, KMR, EPB), other midstream MLPs, and the maintenance CapEx debate, we will host an Expert Call with Richard Kuprewicz on Tuesday, October 15th, at 11am EST.


This call will focus on long-haul oil and natural gas pipeline maintenance: 

  • How does pipeline age affect pipeline maintenance?
  • How does pipeline location affect pipeline maintenance?
  • What demands the most attention and $$$ – main lines or “the moving parts”?
  • What are the most common issues?  Repairs?  Preventative maintenance and spending?
  • What is mandated / regulated in terms of maintenance spending?
  • What is mandated / regulated in terms of pipeline inspection and testing?
  • Do pipelines spend too much (gold-plating)?  Do pipelines spend too little?  How can we know?
  • Are there coming significant changes to pipeline safety / inspection regulation?
  • How do changes in owner / operatorship (M&A) affect pipeline maintenance?  A discussion of different approaches to maintaining the same systems.

Richard Kuprewicz, President of Accufacts Inc., is a leading expert on pipeline safety and maintenance issues.  He specializes in gas and liquid pipeline investigation, auditing, risk management, siting, construction, design, operation, maintenance, training, SCADA, leak detection, management review, emergency response, and regulatory development and compliance.


He consults frequently with various local, state and federal agencies, NGOs, the public, and pipeline industry members on pipeline regulation, operation and design, with particular emphasis on operation in unusually sensitive areas of high population density or environmental sensitivity.


An engineer by training, Mr. Kuprewicz has more than 40 years of experience in the oil and gas sector.  He spent the majority of his career at Arco Products and Arco Transportation, serving as manager of, and senior technical advisor on, its oil and natural gas pipelines.  He founded Accufacts – a pipeline regulatory and safety advisory firm – in 1999.


We will send out a call reminder, as well as the dial-in information, on Monday, 10/14.  If you have any questions for Mr. Kuprewicz, send them to me at .


Kevin Kaiser

Senior Analyst


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[video] Keith's Macro Notebook 10/9: China, Europe, US Dollar

Expert Call Replay and Notes - Pipeline Regulation, Rates, MLPs, Kinder Morgan...

Yesterday (10/8) we hosted an expert call with Elisabeth Myers, an energy lawyer with twenty years experience in oil and natural gas pipeline regulation, rates, safety, and compliance.  Ms. Myers litigated on behalf of shippers against SFPP and CALNEV (Kinder Morgan subs) for ~10 years in several ground-breaking cases before the FERC and CPUC.


Listen to the replay, and see below for our key takeaways and notes.


Key Takeaways

  • Regulation is always "playing catch-up."
  • Regulation of oil/product lines is very different from that of natural gas lines.
  • "De facto deregulation" of oil/product lines over last 10-20 years.  Gets little FERC attention.
  • FERC takes regulation of natural gas lines much more seriously, especially over last ~4 years; regulated under a consumer protection statute (NGA).  
  • No expectation of a change in FERC policy re: MLP income tax allowance "any time soon."
  • No regulation of pipeline maintenance spending; DOT / PHMSA may come in "after the fact, if there is an issue."
  • Pipeline only incentivized to "gold-plate" in twelve months leading up to a rate case; otherwise, the incentive is to cut costs.
  • LP investors are getting their own money back; it's only sustainable if MLP can continue to issue new equity and debt.

 Rate Setting Basics (2:55 mark)

  • Both a federal and state component to regulation of pipelines … Rates typically set by pipeline filing tariffs, and settlements.
  • Oil pipeline rates are largely regulated under the principle of settling with the shippers … If the pipeline can’t settle, then they have to cost-justify it … Primarily we are dealing with cost-based regulation for oil pipelines in the event there is a dispute.”
  • Similar for natural gas.  Natural gas pipelines are clearly cost-based regulation.

 “Unjust and Unreasonable” Rates (7:38 mark)

  • Oil Pipelines…  Indexing is the most prevalent way of changing [oil] rates …  Every year an index is established, and what that means is that any [oil] pipeline can file, basically automatically, an increase across the board for all of its rates within that index …  The oil index can be applied annually.
  • In the 2010 – 2011 reporting period, about 26% of oil pipeline companies were reporting over-recoveries on their FERC Form 6 …  Some are substantial … Colonial was ~$250MM (annually) over-recovered.
  • Natural Gas Pipelines…  There is no indexing for natural gas lines.

FERC Resources and Attention (11:18 mark)

  • Staffing…  Can count on 1 or 2 hands how many staff are allocated to oil pipeline issues …  Natural gas, in contrast, is well-staffed.  Perception is that FERC indexing for oil pipelines was supposed to take care of the issue of unjust and unreasonable rates ... Perception is that shippers on oil pipelines tend to be major oil companies, can take care of themselves, don’t need regulators' help ...  Seems forgotten that many pipelines have monopoly power.
  • Statutes…  Oil pipelines regulated under the Interstate Commerce Act (ICA, 1887) – designed to protect shippers and consignees … Natural gas pipelines under the Natural Gas Act (NGA, 1938) – it is a consumer protection statute ...  Natural gas rates as well as sighting are regulated under the NGA.

Trends in Regulation (14:55 mark)

  • "De facto deregulation" of oil lines over last 10-20 years ...    Index increases have been unchallengeable by shippers ... Protests and appeals dismissed ... Trend of light-handed regulation of oil lines is here to stay unless new FERC chairman comes in, or cases get up to the Court of Appeals, and Court mandates change.
  • In contract, on natural gas side, circa 2009, FERC called in natural gas lines for excessive rates; all proceedings were resolved with lower rates via settlement ...  Commission is much more in tune to regulating natural gas lines ...  Consumers can't protect themselves.

Maintenance Spending (19:10 mark)

  • Pipeline safety is regulated, not spending ...  Nothing that says "you must spend X to maintain your pipeline"...  FERC presumption is that pipeline operators are "prudent."
  • On gold-plating...  If pipeline is coming in for a rate case, it may be incentivized to over-spend.  If on the other side, during a rate settlement, the incentive is to cut costs.  "Typically you don't really have 'gold-plating' going on unless you want to put, in a specific 12-month period, which is going to be your test period of 'representative costs,' you might want to bump that up.  But, over time, once you establish a rate, the incentive is to cut costs as much as possible."
  • Reorganizations / restructuring (via acquisition) often results in lower cost structures for pipelines ...  This can lead to future rate cases. 

Income Tax Allowance for MLPs (23:45 mark)

  • C-Corp's given an allowance for income taxes in rates to avoid double-taxation of its investors ...  At the same time, pass-through entities (MLPs, LLCs, and LPs) do not pay income taxes ...  "However, the FERC, in its infinite wisdom, has decided that it will nonetheless allow a pass-through entity to collect an income tax allowance in its rates."
  • 2004 FERC Court ruled that could not give allocation for "phantom tax" ...  FERC then reversed decision and established principle on "policy basis."
  • Raised same issue of "phantom tax" with CPUC ...  CPUC found that there should be no income tax allowance for SFPP ...  Rates were lowered, "major settlement payments."
  • California's decision are not binding at FERC or other states ... "I do not think that the FERC will change its policy on income tax allowance any time soon."

More on MLPs  (31:15 mark)

  • Cash is flowed through to the LP investor, not income, which is why there is no tax liability ... Cash reduces the basis, or capital account ...  LP investors are "getting their own money back" ...  When LP investor sells unit, it pays a capital gains tax.
  • On GP/LP relationship... Surprised that Kinder Morgan's partnership agreement expressly disavows fiduciary duty (of GP to LP) ...  Partnership agreement signed on behalf of GP and all of LP investors by same persons ...  Cash distributed to GP / LP based on IDR splits (currently 50% / 50%) ... The income follows the cash to the GP, and then the LPs are allocated losses to "balance the books." 
  • FERC is currently "quite happy" with the MLP structure ... FERC does not want to hear anti-MLP arguments ... Stark contrast to CPUC's decisions with respect to KMI's 2007 "go-private" transaction.
  • A sustainable model?  MLPs - Kinder Morgan referenced - only sustainable if able to raise debt and equity to pay cash distributions ...  More concerned with what happens to shipper clients if the MLP "folds;" what happens to customers that rely upon the pipeline?

Q&A (42:10 mark)

  • Typical natural gas rate case?  Tariffs vs. complaints.  Typically natural gas shippers are in reaction mode, i.e. protesting tariffs; burden of proof is on the shippers ...  FERC can file proceeding against gas pipeline under Section 5 of NGA ...  Burden of proof is on the FERC, not the pipeline.
  • Are useful lives / depreciation expenses argued often?  Not a "hot topic," but it is an issue that does get litigated from time to time ...  Shippers tend to rely upon the FERC to regulate useful lives, as it has depreciation experts on staff.  
  • Mandated / regulated level of CapEx?  No - nothing regulated by FERC.  DOT / PHMSA will come in "after the fact, if there's a problem" with Corrective Action Orders / compliance plans.  
  • Importance of CPUC income tax allowance decision?  Very significant decision - but not binding in other jurisdictions ...  It is "reasoned decision making" - there is no tax liability, therefore there should be no tax allowance ... Ratepayers are paying personal income taxes of investors in MLP.
  • Victories and defeats in Kinder Morgan cases?  Major victory was overturning SFPP's "grandfathered rates"  ...  Disappointment was losing the income tax allowance case at the FERC (which they won at the CPUC).
  • Respond to FERC Commission Spitzer's comments in December 2007 Order on Complaint (FERC Docket OR07-14-000)?  "Let me first say that as an officer of the court, and in filing these pleadings, basically, it's not under oath, it is my ethical duty not to mislead the tribunal.  That's one of the things that I could be disbarred for.  We put into our pleadings for this case facts and evidence that we had obtained in the public record, in the records in our other proceedings related to SFPP, and in understanding how the MLP structure - with respect to Kinder Morgan - worked.  And I stand by what we said there.  We were since, since this order came out, the CPUC has pretty much vindicated what we said.  CPUC did not throw us out for making these same allegations.  Instead they offered us the opportunity to develop them with evidence, to cross-examine witnesses that Kinder Morgan put on, and to actually prove our point.  In stark contrast to this [FERC] Order, which was an Order on Complaint, basically dismissing it peremptorily without any further procedures.  I stand by what we said; and, frankly, as I said a few minutes ago, if the only way that the MLP structure can continue to pay out cash distributions at the level it's paying out is to issue new units or borrow money, to me, that is a classic example of ponzi.  And in my discussions with some SEC folks early on in these cases, they said, 'Wow, that's amazing to us.'"   


Kevin Kaiser

Senior Analyst


Markets Mute Fear Mongrels

Client Talking Points


How did the United States' top creditors respond to Obama & Boehner fear-mongering “default” spew? Well, they both went up (China & Japan). China is actually up both days since the holiday week conclusion. It's bounced back and is now in positive territory year-to-date. We remain long China (new position) via the FXI exchange traded fund.


Most European Equity markets don’t care about the US fear-mongering either. The Eurostoxx600 is also up this morning. Over in Germany, the DAX is holding all lines of support. Meanwhile, Italy’s stock market is hitting a fresh year-to-date high post the USA smackdown to oversold. Bottom line: The global response to Washington is to put conflicted politicians on mute.


You would think the big Janet Yellen Fed news would be Dollar bearish. You would probably think the news would be Gold bullish too. Think again. It's certainly not the case this morning. That’s because the U.S. Dollar was oversold alongside S&P 500 into yesterday’s close and Gold continues to crash year-to-date.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

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.

Three for the Road


On the road seeing clients in Boston today. I'll walk through why I like China and Germany better than US Equities



Fall seven times and stand up eight. –Japanese Proverb


The new $100 bill costs 12.5 cents to produce — a 60% increase over the 7.8 cents it cost to print the older version of the bill. The U.S. government has printed 3.5 billion of the new $100 bills, which it began delivering to financial institutions yesterday.

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