“Ignorance more frequently begets confidence than does knowledge; it is those who know little, not those who know much, who so positively assert that this or that…”
Having fun out there yet?
If like us, your conviction on what an appropriate gross and/or net exposure should be has wavered in recent weeks, Darwin’s quote probably resonates with you. With respect to financial markets, I, for one, don’t understand how anyone could’ve had enough conviction to positively assert anything beyond a simple “I don’t know” in recent weeks, but that’s just me. What do I know?
Without speculating on the level of ignorance (or lack thereof) implied by the views of any market participant(s), we continue to tip our hat to the “QE is effective; see, I nailed it all along” community – if for nothing other than their unwavering confidence.
Does QE actually “work”, however? Moreover, how does one go about determining its effectiveness? This debate really centers on the question we asked in the video we published earlier last week:
“Does the price of money determine the pace of economic activity or does the pace of economic activity determine the price of money?”
Without getting all philosophical before breakfast, our answer to that question was simply, “It’s reflexive.”
Considering, it would seem that trying to determine the causality behind the demonstrable acceleration in economic growth we’ve witnessed in the YTD is little more than a fool’s errand. Was QE responsible for producing economic growth or were expectations of QE’s eventual demise the stimulus the economy needed?
Sourcing the data, the reflexive relationship between the US dollar, US interest rates and the slope & magnitude of real GDP growth is almost impossible to disregard without being completely subjective or grossly qualitative. Whether you’re looking at the current economic cycle or the past three decades of economic cycles, the data speaks for itself:
- 2013: In calculating monthly averages for the DXY and UST 10Y Yields, we see that the USD and US rates were most strong (on a YTD percentile basis) in the JUL/AUG/SEP periods. Coincidentally, that’s precisely when the ISM Non-Manufacturing and Manufacturing surveys, Conference Board Conference Board Consumer Confidence Index readings and the NFIB Small Business Confidence Index readings were also recording their strongest levels in the YTD (on a percentile basis). Moreover, the slope of the DXY and UST 10Y has tracked the slope of the aforementioned high-frequency growth data nearly perfectly in the YTD.
- 1 (trailing 30Y): In calculating quarterly averages for the DXY and UST 10Y Yields, we see that concomitant QoQ appreciations in both indicators are closely associated with both relatively rapid economic growth and periods of #GrowthAccelerating. Specifically, Real GDP growth has averaged +4.2% on a QoQ SAAR basis in #StrongDollar + #RatesRising periods; that compares to +2.4% for #WeakDollar + #RatesFalling periods. From a 2nd derivative perspective, GDP growth tends to accelerate +23bps on average in the former environment and decelerate -23bps on average in the latter environment.
To our knowledge, qualitative assertions have yet to trump basic arithmetic in any debate.
The more we reflect and debate internally as a team, the more we find ourselves squarely in the camp of: “Who cares about causality anyway?” As investors, all we really want to do is isolate the signals – be they quantitative or fundamental – that give us the best probability of being right on the slope of growth, inflation and/or policy.
From there, we can begin to speculate in financial markets using reasonably accurate assumptions for what we believe to be the three most important factors in determining asset prices.
With respect to financial markets, what matters most is what everyone thinks everyone else thinks about QE and the only way to record any consistency or accuracy in attempts to measure that is to set aside our own dogmas.
In short, we do not think it is helpful to engage in the debate surrounding the causal impact of QE upon the economy. In our view, it is impossible to determine causality without being qualitative or subjective because we don’t have accurate data about the expectations and intentions of all the agents that make up an economy.
As such, all we can really do as investors is interpret the signals as they come and play the ball as it lies. Focusing our attention on anything else is a clear deviation from the task at hand (i.e. making money).
Regarding the task at hand, we do know that QE and its associated expectations are causal to the prices of many assets globally. As such, the name of the game remains isolating the signals that give us the best forward-looking read on growth, inflation and/or policy – or the eventual tapering of said policy:
- Quantitative: Solid comeback for the US Dollar Index right to our TREND line of 81.39 resistance this morning; will it hold? US Treasury rates (10Y Yields) – which are now trading demonstrably above their 2.63% TREND line – are suggesting a DXY breakout has become an increasingly probable event.
- Fundamental: Analyzing economic data like a Fed Head would imply tapering is a spring of 2014 event at the earliest. Moreover, the lack of liquidity in the bond market should take a mid-to-late-DEC tapering squarely off of the table: primary dealer inventory is -73% off its 2007 highs and equivalent to a mere 0.8% of outstanding US corporate credit vs. a peak of ~4% in 2007. Please note our emphasis on the word “should”, as what we think the Fed should do and what the Fed does are quite often two very different things.
- Correlation Risk: While three days does not a trend make, very immediate term correlations are signaling what may be a return to the pro-growth trade of #StrongDollar + #RatesRising = positive US equity beta amid decidedly negative EM beta that has: A) dominated much of the past year; and B) was interrupted by a return to the post-crisis playbook of “QE = short US dollars; buy everything else” in the weeks since SEP 18 (i.e. the day of the Fed’s “no taper” surprise). See the Chart of the Day for more details.
So what do investors do with all of these convoluted signals? In a phrase: #GetActive. If you’re not yet familiar with our call for active mangers to outperform over the both the intermediate term and long term, please ping us for a review of our 4Q13 Macro Themes.
Indeed, it would seem that stock-picking will become increasingly important as we start to move away from what has been an elongated period of minimal return dispersion at the sector level – likely due to the strong performance of typically low-beta, high-yielding sectors in an era of institutionalized yield chasing.
For those of you who are keen to add new techniques to your analytical toolkit, we’ve built a model that backtests exceptionally well in screening for prospective alpha at the single security level. For more on that, please CLICK HERE for the data and CLICK HERE for the accompanying manual. Email us if this is something you’d like to discuss further.
Our immediate-term Risk Ranges are now:
UST 10Y Yield 2.64-2.79% (bullish)
SPX 1 (bullish)
VIX 12.29-14.55 (bearish)
USD 80.93-81.53 (neutral)
Pound 1.58-1.60 (bullish)
Gold 1 (bearish)
Keep your head on a swivel,
Associate: Macro Team
Client Talking Points
A solid comeback this morning for the US Dollar right to my TREND line of $81.39 resistance. So will it hold? If it does, and Janet Yellen loses Bernanke’s (perceived) control of the bond market, this is going to get really gnarly. Fast. #StrongDollar + #RatesRising is what I loved for all of 2013. (Gold loathed it). That was until Bernanke opted for the epic no-taper blunder.
Look at the divergence born out of a #StrongDollar move. Over in Japan, the Nikkei loved it. It was up +2.2%. Why? Because it loves Burning Yen vs USD. And Emerging Asian Markets like India (-1%) and Indonesia (-1.4%) didn’t like it at all. Don’t forget what a pervasively #StrongDollar got you in July – a currency crisis in some of these Emerging Market markets (and inflation).
2008 Oil Bubble... 2011 Gold and Foreign Currency Bubbles... 2012 Food Bubble... 2013 stock market bubble... Just how many bubbles can Ben Bernanke foment under his Fed watch? The next one to pop is the one no one can get out of...MBS. And that’s why this Andrew Huszar Wall Street Journal Op-Ed article is so timely. Finally! Someone explaining the truth of Too Big To Fail bond positions.
|FIXED INCOME||6%||INTL CURRENCIES||20%|
Top Long Ideas
In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.
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.
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
QUOTE OF THE DAY
Failure is not fatal, but failure to change might be. -John Wooden
STAT OF THE DAY
Obamacare has reached only about 3% of its enrollment target for 2014 in 12 U.S. states where new online health insurance marketplaces are mostly working smoothly, according to a new report. States with functioning exchanges have signed up 49,100 people compared with the 1.4 million people expected to be enrolled for 2014, according to Avalere Health. (Reuters)
Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.
THE MACAU METRO MONITOR, NOVEMBER 12, 2013
PARTNER IN LAWRENCE HO'S RUSSIAN INVESTMENT ARRESTED Macau Business
A Russian newspaper, Kommersant, reported on November 7 that Oleg Drozdov had been detained for investigation by Russian law enforcement. It’s reportedly regarding alleged malpractices by a business called OOO Vladivostokservis and relates to the construction of a solid waste treatment facility in Vladivostok in the Russian Far East. The investigation relates to events in 2009 and 2010 and is said to involve 367 million roubles (US$11.2 million, or 89.72 million patacas).
Summit Ascent - a company controlled by Lawrence Ho - said it was paying US$9.02 million for 46% of Oriental Regent Ltd, a holding company that currently owns 50% of First Gambling Company of the Far East LLC. First Gambling in turn has a gaming licence in Primorye, the Russian Far East province of which Vladivostok is the capital. Melco International Development Ltd – which also holds a stake in MPEL – would pay US$980,392 for a 5% stake in Oriental Regent.
Drozdov is an indirect minority shareholder in Oriental Regent. He controls 30% of it via Elegant City Ltd, a British Virgin Islands company that is in turn wholly owned by Mr Drozdov.
The estimated total investment for the first phase of the casino resort complex to be constructed at an ‘Integrated Entertainment Zone’ in Primorye – next door to China’s northeastern Heilongjiang province – is about US$130 million. It will have a 119-room hotel, approximately 800 slot machines, 25 VIP gaming tables and 40 mass-market gaming tables.
PUBLIC ADDRESS 2014: GOVT TO PUSH CASINOS TO PROMOTE MORE RESIDENTS TO MANAGEMENT POSITIONS Macau Business
Macau CEO Fernando Chui said the government would push large companies, including the six gaming operators, to promote more residents to management positions. He did not set any minimum ratio for Macau residents in these posts. The government will continue to “firmly” ban migrants from working as casino dealers. Chui did not clarify if the government is planning to ban non-local croupiers by law, as requested by several labour unions.
Macau SMEs will get some help in expanding to Hengqin Island, as there are plans to create an area only for Macau businesses at the new Chimelong theme park, scheduled to open next month.
The cash handout scheme will continue in 2014, handing even more money to both permanent residents and non-permanent residents. Permanent residents will receive a record MOP9,000, while non-permanent residents will get MOP5,400. Last year, permanent residents received MOP8,000 and non-permanent residents MOP4,800.
This note was originally published at 8am on October 29, 2013 for Hedgeye subscribers.
“The new coins helped to wash away the old aristocratic order.”
That, of course, is not what the 16th century European aristocracy had in mind. As my man Jack Weatherford explains in an excellent chapter of Indian Givers, “Silver and Money Capitalism”, “the silver coins at first promised to strengthen the feudal order…” (pg 19). Never blindly believe what the government promises you.
Weatherford first penned Indian Givers in 1988 (then updated it in 2010) after writing about the history of porn in Japan in 1986. His writings are some of my favorites in economic history because his narratives are fully loaded with the inconvenient truths about government plans versus outcomes.
You can only lie to The People about policies that aren’t working for so long. In the end, the history of markets, money, and businesses are marked-to-market. And even though it may take a long-time for bad policy (like burning your currency) to fail, I thoroughly enjoy the thought of my son or daughter reading about how the 2013 Fed sucked in so many group-thinkers.
Back to the Global Macro Grind…
There’s another Indian Giver making headlines this morning:
BREAKING: Rajan Raises Key Rate to Fight Inflation –Bloomberg
Booyah! That’s right, yo. India’s got a new central banker in the house- and he goes both ways (on rates). This is the 2nd interest rate HIKE in 2 months for Governor Raghuram Rajan. And the Indian stock market absolutely loved it, closing up +1.65%!
Huh? I thought that the other 90% of Bloomberg/CNBC headlines have been implying that if the US, Europe, or any country were to raise rates that the world as we know it would end?
Newsflash: it would.
But like during the 17th century enlightenment, it would end for the better! #EndofBackwardness
Indian Giver giveth to The People of India the following via a rate hike:
2. Lower currency adjusted inflation
3. Breakout in Indian stock market
And yes, everything in the land of causal currency policy action is relative, but consider the alternative model (which Bernanke, Yellen, and most French Bureaucrats are begging for – Down Currency, Down Rates):
- India’s Rupee was in freefall in Q2 of 2013, having its biggest down days ever (yes, ever is still a long time)
- India’s Consumer Price Inflation (yes, calculated in Rupees!) hit new highs as the Rupee crashed
- India’s real-inflation-adjusted economic growth slowed and its stock market hit its YTD lows in AUG 2013
Then, Rajan raised rates (twice) and:
- India’s Rupee stabilized
- India’s Inflation slowed
- India’s growth stabilized
The Keynesian-anti-dog-eat-dog-currency-debauchery-department at Dartmouth better get on this. This Indian Giver is going off the reservation versus what they’re teaching undergrads for $63,282/yr.
It’s hockey season, so it’s a good time to take a shot at Dartmouth’s Big Green Keynesian mouthpiece-in-chief, dogmatic Danny Blanchflower. He’s the guy you may have seen recently on Twitter with his jersey yanked over his head by @HedgeyeSnakeye and @DanHannanMEP (Todd Jordan and Hedgeye fav Daniel Hannan).
Blanchflower was the guy who warned that British austerity was going to mean #EOW (end of the world) for the UK economy a few years back. He’s also of the ideology that a #StrongEuro and #StrongPound is bad for “exports”, or something like that.
In other news…
The slope of UK economic growth just clocked a 3-year high and both the British Pound and British stock market (FTSE) are breaking out to new highs as the world comes to realize that ending Mervyn King’s QE Pound Getting Pounded experiment hath ended.
- Currency Up (Pound has ripped from $1.49 vs USD to $1.61 in the last 3 months)
- Rates Up (10yr British Gilt Yield of 2.59% are up +81 basis points year-over-year)
- UK GDP #GrowthAccelerating to a 3yr high
No, I’m not saying that India and the UK are seeing economic growth booms. I’m simply reminding you that this is the only way out of a Down Currency, Rate Repression government policy.
No, the aristocratic order of Big Government Intervention doesn’t like paying The People instead of plundering them via currency devaluation taxes. And I for one like that very much.
Our immediate-term Risk Ranges are now as follows (we have 12 Big Macro Risk Ranges in our new Daily Trading Range product):
UST 10yr Yield 2.40-2.57%
BSE Sensex 20132-21279
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.