This note was originally published at 8am on October 09, 2013 for Hedgeye subscribers.
“You get embarrassed as a professional athlete. There has to be accountability in our room. That’s not acceptable. Not even close.”
- Shane Doan
Last night I trekked out to the dilapidated Nassau Coliseum with a few colleagues to watch a National Hockey League game between the New York Islanders and the Phoenix Coyotes. We worked to put a group together to buy the Coyotes and now own a piece of the team, so we had a bit of an emotional investment in the game.
The end result was a 6 – 1 trouncing of the Coyotes by the Islanders. For those that play sports or are fans of sports teams, you will be, on some level, accustomed to losing. It happens. It is part of the game. But Coyotes’ Captain Shane Doan’s point from above is adroit - if you lose you also have to be accountable. No doubt old school Coyotes Coach Dave Tippet made sure of that in the locker room last night after the game.
Given the current dysfunction in Washington, the one thing that we can all smile about this morning is that the Founding Fathers actually built a high level of accountability into the system. This is particularly true in the House of Representatives where elections occur every two years. But how does this all end? Who gets held accountable? And when can we go back to focusing on research and not the soap opera of Washington D.C.?
In terms of the first question, this probably all ends with a whimper, rather than a bang, despite the manic intimations of the media or fear mongering politicians. Keith and I did a short clip on HedgeyeTV (yes, the crazy lads at Hedgeye built their own T.V. studio!) and if the credit default swaps of U.S. government debt are telling us anything, it is that there is no imminent risk of a credit default.
In the Chart of the Day, we highlight a more interesting trend related to U.S. creditworthiness, which is the long-term federal deficit-to-GDP chart. The key takeaway from this chart is that the creditworthiness of the U.S. has actually been improving over the last three years based on this key metric. (Incidentally, it shouldn’t surprise anyone that the lagging indicators called rating agencies downgraded U.S. debt basically at the bottom.)
Last week, we brought in former Speaker of the House Newt Gingrich to discuss how the government shutdown is likely to play out. To summarize his view; it was that the Republicans push through some small reforms on the Affordable Care Act and likely come to some agreement on future tax reform or discretionary spending cuts with the White House. Speaker Boehner’s rhetoric has shifted from focusing on Obamacare, to focusing on the idea of a negotiation, which certainly underscores this point.
Our Healthcare team is currently doing a poll that is asking people the simple question: “How will the government shutdown end?” So far the results are as following:
- 2% - Shutdown ends, debt ceiling raised, Democrats make massive concessions
- 48% - Shutdown ends, debt ceiling raised, Republicans get very little in return
- 18% - Shutdown ends, debt ceiling raised, on concessions either side
- 18% - Shutdown continues, debt ceiling raised, on concessions either side
- 15% - Shutdown continues, debt ceiling raised, and the World Ends
So, there you have it. Almost half of those polled agree that the likely outcome is that the shutdown is ended and debt ceiling is raised, but the Republicans get very little for their actions.
The more interesting point is that almost 15% believe that the world could end (i.e. the U.S. has some form of a default). So, if you are wondering why there is volatility in the markets currently, it is because of this not so small minority that are pricing in the end of the proverbial world trade. In all likelihood, though, there is some form of resolution before the Oct. 17th deadline.
Incidentally, if you’d like to take the poll it can be found here: http://poll.fm/4ft5s
Shifting from policy makers to monetary policy, the writing appears to be on the wall this morning that President Obama intends to nominate Janet Yellen as the next chair of the Federal Reserve. In the coming days, there will be many assessments of Yellen, but I thought this one from Justin Wolfers, an economist at the University of Maryland and friend of Yellen’s, was particularly interesting:
“If Yellen had been in charge of the Fed over the past few years, millions fewer would be jobless, and we would be less concerned about the danger of deflation. The point is that Yellen’s pragmatic reading of the macroeconomic tea leaves has led her to avoid the errors of her theory-bound colleagues who have seen the threat of inflation around every corner. Both hawks and doves should applaud this appointment.”
Translation: according to Wolfers, Yellen is a miracle worker.
The reality is that is not really her broad reputation among stock market operators. Or those of us that operate in the real economy. The great Julian Robertson of Tiger Management fame, and likely a proxy for what many astute money managers think, said on CNBC earlier this week that Yellen is, “way too easy money.”
The broader implication of more easy money is a weaker dollar and a deceleration of economic growth. Whether it be the yield spread compressing, short term treasuries nearing the zero bound, or oil breaking out to the upside, the implications of more, and perhaps accelerated easy money, is ultimately slower growth. If that is the path our policy makers go down, it will be more embarrassing than just losing some hockey game.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.60-2.67%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research