“They had no heads. The frenzy was all they had… the urge, and the urge was all they felt.”
-Tom Wolfe (Back To Blood)
In between my son Jack’s hockey practice and his 6th birthday bender, I’d like to say that it surprised me this weekend when I glanced at the cover of The Economist’s headline: “The Perils of Falling Inflation.” But, sadly, it did not. PhD Keynesian Economists are officially the world economy’s greatest threat.
The urge for policy makers to do something has reached a tipping point. Un-elected and un-checked, Janet Yellen’s Federal Reserve is likely to embrace this unprecedented Policy To Inflate that the Europeans (ex-UK) have just reiterated via an ECB rate cut. Incrementally easing monetary policy into an economic acceleration of +2.84% US GDP, that is.
The Economist’s sub-title makes the media as complicit as Nero (The Emperor “who fiddled while Rome Burned” -Wikipedia): “In both America and Europe central bankers should be pushing prices upwards.” I couldn’t make this up if I tried. After Deflating The Inflation (from the 2011-2012 all-time global inflation highs), these people want the all-time highs in food and Oil prices again!
Back to the Global Macro Grind…
Deflating The Inflation is not DEFLATION. That’s one of the many buzz words regressive economists use to fear-monger you into believing you should allow them to A) devalue your hard earned currency and B) earn 0% on your savings, forever.
In the 1980s/1990s, we had < $20 Oil. I might call that “deflation”, but Brent Oil at $105? And if the 2 best post WWII US Growth periods (1983-89 and 1) were reflexive #StrongDollar “deflation” periods, what’s the problem with deflation again?
A study we highlighted in our Q313 Macro Themes deck by Atkeson and Kehoe spanning a period of 180 years (17 countries) found 0% relationship between deflation and depressions. There were actually more depressions during periods of inflation than deflation. That won’t shock anyone who lives in the real world.
In other news, look at what happened in macro markets last week:
- Dollar Up (+0.6% US Dollar Index)
- Rates Up (+13bps to 2.75% on the UST 10yr)
That’s what I want. That’s not what my Federal Reserve loving Keynesian types (Zervos and Hatzius) want. Neither do guys and gals who are in the business of being levered long Gold, Bonds, or anything Equities that looks like a bond.
Again, with a stronger Dollar + #RatesRising, look at what else you got last week:
- Gold down another -1.9% to -23.6% YTD #crashing
- REITs and MLPs -4.1% and -1.9, respectively, lagging the Financials (XLF) +1.2%, big time
- Emerging Markets (MSCI EM) -1.7% and MSCI LATAM Index -2.8% (to -12.9% YTD)
No, this is not what all of #YieldChasing investor styles want. They want what Bernanke and Yellen taught the Japanese and Europeans to want – a “risk-free” rate of 0% that punishes savers and forces Mom & Pop to buy into the slow-growth Gold Bond Bubble thing under the cowardly veil of a “deflation” threat.
In markets, eventually tends to happen quickly. Eventually, the mother of all “deflations” will be in the price of overvalued, over-stimulated, and over-owned debt that policy makers are urging investors to buy into. To a large extent, that’s been our call for the better part of 2013 – that a stronger US Dollar + #RatesRising would prick the Bernanke Gold Bond Bubbles.
So how is Janet Yellen going to reflate Gold, Bonds, MBS, REITS, etc. if:
A) Economic gravity doesn’t cooperate with her (more GDP of 2.84% and US monthly employment report beats?)
B) Fund Flows continue to front-run her?
Solving for A) is already in motion. She’ll do what every central planners going back to Nero did and change the rules. She’ll make up a new unemployment target of 5.5-6% and she’ll cry wolf about “deflation” when it’s Deflating The Inflation that gave the USA growth surprises on the upside to begin with!
As for B), Bernanke and Yellen have been highly ineffective in convincing the buy-side that this ends well. Looking at last week’s ICI Fund Flow data, the flows continue out of Fixed Income and into Equities:
- Equities: after a record weekly inflow in the wk prior, US equity fund flows were up another +$7.9B w/w
- Fixed Income: another -$4.1B in outflow last wk following -$2.3B in the wk prior
All the while, the US IPO market is partying like 1999 with 192 IPOs ($51.8B) for 2013 YTD!
The urge to surge! It’s all about the urge to inflate asset prices, baby! These people have no heads. This is a bubble frenzy. To bubble up, or not bubble up (every prior asset bubble the Fed has perpetuated), remains Mr. Market’s question.
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.64-2.77%
My heartfelt thank you goes out to all the service men, women, and veterans around the world who have watched over us while we sleep,
Keith R. McCullough
Chief Executive Officer
THE MACAU METRO MONITOR, NOVEMBER 11, 2013
SANDS CHINA SEEKS REVOLVING LOAN OF US$1.5 BLN Macau Business
Sands China has approached banks to arrange a US$1.5-billion, (MOP12 billion) six-year, revolving credit facility. The casino operator has approached its current lenders and targets to invite more than 10 banks to become senior lenders, Bloomberg reports. The news agency says the pricing is thought to be at an all-in rate of slightly under 200 basis points over Libor.
CHINA'S OCT. NEW YUAN LOANS AT 506.1 BLN Xinhua
According to PBoC, China's new yuan-denominated lending in October amounted to 506.1 billion yuan (82.44 billion U.S. dollars), an increase of 700 million yuan YoY. This was below Dow Jones estimate of 600 billion yuan.
LOUIS XIII RAISES US$133.5 MLN FOR COTAI CASINO Macau Business
Louis XIII Holdings raised HK$1.03 billion (US$133.5 million) for a planned casino resort in Cotai. The proceeds from the combined sale of equity and zero-coupon convertible bonds will fund construction of its US$1-billion casino resort.
The financing deal included a share placement of HK$735 million, and HK$300 million of convertible bonds taken up by the Ontario Teachers’ Pension Plan.
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TODAY’S S&P 500 SET-UP – November 11, 2013
As we look at today's setup for the S&P 500, the range is 30 points or 1.28% downside to 1748 and 0.42% upside to 1778.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.44 from 2.32
- VIX closed at 12.9 1 day percent change of -7.26%
MACRO DATA POINTS (Bloomberg Estimates):
- 6:15am: Bundesbank’s Lautenschlaeger speaks in London
- 12pm: Bundesbank’s Weidmann speaks in Basel
- U.S. Rates Weekly Agenda
- FX Weekly Agenda
- Iran faces United Nations nuclear-monitoring test
- Veteran’s Day, most federal govt. offices closed
- EU, U.S. begin 2nd round of negotiations on Transatlantic Trade and Investment Partnership at wk-long talks in Brussels
WHAT TO WATCH:
- Shire buying ViroPharma for $4.2b will gain blood-disease drug
- Transocean reaches $1.1b div. accord with Icahn
- Apple said developing curved iPhone screens, new sensors
- Amazon introduces Sun. deliveries with U.S. Postal Service
- China economic rebound gives boost to Xi amid reform summit
- Cooper not yet entitled to $35/shr from Apollo, judge says
- CPPIB/Dexus A$2.8b Commonwealth fund bid is accepted
- “Thor” tops N.A. box office, at low end of ests. w/ $86.1m
- Typhoon Haiyan hits Vietnam; up to 10k Philippines deaths
- Silver Wheaton (SLW CN) 6:30am, $0.23
- Gogo (GOGO) 7:30am, $(0.31)
- CCL Industries (CCL/B CN) 8:15am, $0.45
- Assured Guaranty (AGO) 4pm, $0.61
- Sotheby’s (BID) 4pm, $(0.47)
- Rackspace Hosting (RAX) 4pm, $0.16
- Hologic (HOLX) 4:01pm, $0.37
- Strategic Hotels & Resorts (BEE) 4:01pm, $0.13
- SemGroup (SEMG) 4:05pm, $0.36
- Sunstone Hotel Investors (SHO) 4:15pm, $0.29
- Northern Tier Energy (NTI) 4:45pm, $0.40
- Legacy Oil + Gas (LEG CN) 8:30pm, $0.08
- Premier (PINC) Aft-mkt, $0.29
- News Corp (NWSA) Aft-mkt, $0.02
- Athlon Energy Inc (ATHL) Aft-mkt, $0.16
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Gold Vault Opens in China as Bullion Goes From West to East
- Hedge Funds Cut Bullish Gold Wagers on Fed Outlook: Commodities
- Copper Rises for Third Day After China’s Industrial Production
- Brent Rises Second Day After Iran Talks Fall Short of Agreement
- Gold Drops to Three-Week Low as Jobs Data Spur Tapering Bets
- Corn Extends Rebound From Three-Year Low on U.S. Harvest Outlook
- Cocoa Falls After Bullish Bets Climb to Record; Coffee Rallies
- Oil Bets Drop to Four-Month Low as Glut Expands: Energy Markets
- Money Managers Cut Cocoa Net Long to 64,649 Contracts by Nov. 5
- Gold-Mining Puts at Four-Year Low Signal Worst Is Over: Options
- Rice to Sugar Crops Damaged in Philippines by Super Typhoon
- Russia May Become Major LNG Supplier After Novatek’s China Deal
- Commodities Seen by Hackett May Be Near Low of 3-Yr Bear Market
- Palm Oil Output in Malaysia Advances to Highest in 13 Months
The Hedgeye Macro Team
This note was originally published at 8am on October 28, 2013 for Hedgeye subscribers.
“The powers delegated by the proposed Constitution to the federal government are few and defined.”
In other news, one of Bloomberg’s leading headlines this morning takes the other side of Madison’s Federalist Papers: “Yellen Poised to Rival Obama with Financial Power.” Isn’t that just terrific!
Have no #EOW (end of world) fear, yet. There are plenty of voices in America (and abroad) who still believe that an un-elected, un-checked, and un-accountable Federal Reserve is about to meet its maker – The People.
“Unlike the modern Statist, who defies, ignores, or rewrites the Constitution for the purpose of evasion, I propose that we, the people, take a closer look at the Constitution for our preservation.” –Mark R. Levin, The Liberty Amendments (pg 12)
Back to the Global Macro Grind…
I’m not a Tea Party person, but I often wonder why more dogmatic Democrats don’t show “folks” like Mark Levin some love. Some of these Constitutionalists hate the Republican party more than Dems do!
Irrespective of your politics or Sox/Cards affiliation, every morning in America is a great one where we can “take a closer look at the Constitution” and the un-precedented power both Bush and Obama have put in the hands of Bernanke and Yellen.
I read Levin’s new book in 8 hours. At a bare minimum, it was worth my time to re-realize what I didn’t remember about the US Constitution. At a maximum, it made me think. Unless Americans want their currency to burn, Venezuelan style, they better start thinking about this, and fast, too.
Last week’s US #GrowthSlowing signals in equities we’re definitely considering what Down Dollar, Down Rates means:
- Slow-Growth Indices led last week’s US stock market strength: Utilities (XLU) +2.0%, REITS +1.8%, MLPs +1.7%
- Pro-Growth Indices flashed their 1st major negative divergence of 2013: Russell2000 +0.3%, Financials (XLF) -0.2%
If you broaden your vantage point to currencies and commodities, you can see the causal Fed factor at work here:
- US DOLLAR: down another -0.6% last wk and down -3.4% in the last 3 months to now NEGATIVE -0.7% YTD
- GOLD: up another +2.7% last wk and up +1.7% over the same 3 month period as Mr. Market front-runs the Fed
All the while, what the Fed is really sponsoring here (volatility instead of price stability) flashed its 1st major divergence versus the “US stock market at all-time highs” thingy in 2013. Stocks up = VIX up.
Not to be confused with every other US equity market rally of 2013 that we were long of (we’re short this one):
- US Equity Volatility (VIX) is making a series of higher-lows (instead of lower-lows) now
- The 11-handles that the VIX saw in both March and August of 2013 were aligned with US #GrowthAccelerating
No, this has nothing to do with being a Republican or Democrat. It has nothing to do with social issues either. It has everything to do with Mr. Market’s expectations of what causal impact the Fed’s “no-tapering” decision could have on the slope of US economic growth.
To review US economic growth’s slope in 2013:
- #GrowthAccelerating: Q4 2012 GDP of 0.14% accelerated to +2.48% by Q2 of 2013
- ISM and PMI “New Orders” pinned 60-handles in Q3 of 2013
- The first batch of OCT 2013 weekly and monthly US economic data has slowed, sequentially
“Sequentially” is an important word. How many of your favorite political market/econ pundits could even tell you what it means? *Hint: slope of the line.
And away from this week’s FOMC decision to pander to the Bond Bull Lobby, you’ll be getting more of what you saw in the US Consumer Confidence (U of Michigan survey) last week (73.2 OCT vs 77.5 SEP, #GrowthSlowing). Here’s the Macro calendar:
- Thursday: Chicago PMI for October should slow sequentially from September’s 55.7
- Fiday: ISM for October should slow sequentially from September’s 56.2
I know. Who cares? It’s all about the Fed right? Yeah, right.
More like it’s all about your investing Style Factors. To get those right, you need to get the slope of these growth lines right.
And if, god forbid, we take a few hours to consider the Constitutional conflict of interest in the Fed trying to “smooth” things embedded in the line (like gravity and/or growth), we might actually drive ourselves right nuts.
I can get nuts. I felt nuts selling at the all-time highs of October 2007 too.
Our immediate-term Risk Ranges are now as follows:
UST 10yr Yield 2.44%-2.60%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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