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Empirically Bankrupt

“Much of the profession is empirically bankrupt because it is no longer taught economic history.”

-Charles Kindleberger


That quote comes from Chapter 12 “The Scandal of Money” (pg 115) in one of the only forward thinking economics books of 2013 (George Gilder’s Knowledge and Power).  It’s market practitioners like me vs the government PH.Ds. And it’s on.


The reason why Gilder gets it is that he combines the weaponry of A) economic history and B) math (chaos theory). The late Charles Kindleberger, of course, wrote one of the most important market history books ever (Manias, Panics, and Crashes) in 1978.


Keynesian economists (who Kindleberger alluded to as “the profession”) don’t do non-linearity, entropy, etc. They are all about “smoothing” cycles, and “equilibrium” (or something like that) which are designed to promise the end-user (Big Government Interventionists) certainty. NEWSFLASH: markets, bubbles, and economies are grounded in uncertainty. Embrace it.


Back to the Global Macro Grind


If you don’t get what I am talking about, take a few minutes to watch and listen to Janet Yellen’s confirmation hearing yesterday. Watching a human being’s body language is always as important as attempting to listen to what it is they are trying to say.


If you don’t want to study the kinesics of it all (the study of lying) or read economic history, read my friendly competitor’s (Zervos) rant yesterday about how he loves Yellen. There’s no math or history in his analysis; it’s all about the storytelling.


Critical to #KeynesianCrack storytelling is the fear-mongering and the emotion of it all. Just so you know the difference between our perspectives, David Zervos is a Ph.D. who worked for the Federal Reserve in Washington, D.C.  I’d boil down his backslapping of his groupthink tank’s (The Fed’s) anti-dog-eat-dog-economic-cycle-gravity-banning-central-planning idea as follows:

  1. “Optimal Control Policy”
  2. “Rule evolution”
  3. “Equilibrium risk-free”

Like many in Washington, he’s entertaining – and he gets markets right too. But how he thinks this all ends for America, her former “free” markets, and economy is about as far off on another planet as I’ll ever be. To him, I’ll sound crazy this morning.


Calling our kings and queens crazy? People often ask me what I’d do differently if I was at the Fed. Since I’m not the central planning type, I’d either do what Volcker did (end the madness of stagflation policy), or just shut the place down.


People also ask me what I’d ask our almighty Federal Reserve Ph.D.’s if I was in Congress. Well, since I have never voted for a politician in my life, I doubt being in Congress is in the cards, but here are some questions for my friends sipping the Keynesian chartreuse:

  1. What the hell is an “optimal control” policy model and why use any model when every model the Fed has used has failed?
  2. Does “rule evolution” mean that when the prior optimal policy doesn’t work, you just change the rules?
  3. How do you think keeping the “risk free rate” at 0% ends when the bond market turns on your expected “equilibrium”?

Traditional anti-Marxists would call trying to mark markets to some damn “optimal” model and/or price floors just plain dumb. But I won’t do that this morning. I am Mucker. How dare I challenge a Ph.D. “science” of charlatans?


Yes I called them charlatans. If you don’t think I’m crazy yet – watch this video I made for my Washington friends yesterday titled #Yellen: Tools, Crickets, and Crack: http://app.hedgeye.com/media/697-yellen-tools-crickets-crack?media=all&page=1


Yep, too many pucks to the head. But before these Ph.D.’s bubble (and blow) up markets for the umpteenth time in world history, I’ll be standing on the front lines against their academic dogmas. Yes, Mr. Zervos – I’m the one who knocks.


Back to how we risk managed the event risk of Yellen being who she is (The Mother of All Doves), we made the playbook move of buying slow-growth Yield Chasing assets that drive what Jefco calls the “spooooz” higher.


But do not mistake Gold, Bonds, and Utilities leading yesterday’s short squeeze to another all-time US stock market (SPY) high for rising growth expectations (the Russell Growth Index was down). Remember, a Policy To Inflate nominal is not real economic growth.


Oh, and I sold all my Gold and Bonds by 11AM EST. Yellen’s darting eyes toward Nero Corker (the Keynesian overlord from Tennessee) did me in. I just couldn’t stomach being long their empirical bankruptcy for more than a few more hours. Keep moving out there!


Our immediate-term Risk Ranges (its math – we have 12 Big Macros in our Daily Risk Range product) are now:


UST 10yr Yield 2.66-2.81%


VIX 11.99-14.41

USD 80.53-81.41

Pound 1.59-1.61

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Empirically Bankrupt - Chart of the Day


Empirically Bankrupt - Virtual Portfolio






“If we’re given the chance to build a casino in Japan or Taiwan, we would at least be spending HK$20 billion or HK$30 billion,” Deputy Chairman Francis Lui said. “We have the financial capacity to do that.”


Galaxy also plans to invest HK$10 billion to develop leisure and sports facilities on Macau’s neighbouring Hengqin Island. The investment includes the costs of land acquisition and construction on the island that is being developed by local and international companies as an entertainment destination.

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November 15, 2013

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TODAY’S S&P 500 SET-UP – November 15, 2013

As we look at today's setup for the S&P 500, the range is 24 points or 1.15% downside to 1770 and 0.19% upside to 1794.       










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.43 from 2.40
  • VIX  closed at 12.37 1 day percent change of -1.20%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Import Price Index m/m, Oct., est. -0.5% (prior 0.2%)
  • 8:30am: Empire Manufacturing, Nov., est. 5.00 (prior 1.52)
  • 9:15am: Industrial Production m/m, Oct., est. 0.2% (prior 0.6%)
  • 10am: Wholesale Inventories m/m, Sept., est. 0.4% (prior 0.5%)
  • 11am: Fed buys $0.75b-$1b in 2024-2031 sector
  • 1pm: Baker Hughes rig count


    • 9am: House to consider H.R.3350, “Keep Your Health Plan Act of 2013;” last votes no later than 3pm
    • 9:30am: U.S. Chief Negotiator Dan Mullaney, EU Chief Negotiator Ignacio Garcia Bercero hold press conf. in Brussels following EU-U.S. trade talks
    • 10am: Janet Woodcock, dir., FDA’s Center for Drug Evaluation and Research, testifies at House Energy and Commerce hearing on implementation of FDA Safety and Innovation Act


  • Moody’s downgrades 4 U.S. banks on federal support review
  • Kimberly-Clark plans to spin off $1.6b health-care unit
  • Google win in copyright suit may bolster web search dominance
  • Berkshire adds $3.7b Exxon stake in biggest bet since IBM
  • Paulson sticks with gold wager as Soros buys mining companies
  • Soros joins Ubben in taking Microsoft stake as dividend raised
  • Icahn discloses holdings in Apple, Nuance
  • Credit card cos. report Oct. charge-offs, delinquencies
  • Wall Street bid on cross-border swaps quashed by U.S. regulator
  • AMR bid for merger suit deal said to turn on meeting U.S. number
  • Morgan Stanley said to seek broker dual status in mortgage push
  • AstraZeneca, generic drugmakers face class action on Nexium
  • N.Y. Fed seeks dismissal of examiner’s suit over Goldman Sachs
  • Barrick, Goldcorp said to seek sale of Marigold mine in Nevada
  • Comcast said to plan to sell movies through its cable service
  • Zulily raises $253m, pricing IPO above increased range
  • China to release Plenum details in next wk: Morgan Stanley
  • UBS, Sumitomo Mitsui had talks on investment bank venture: WSJ
  • U.S. investigates major banks’ currency trading: NYT
  • Eli Lilly CEO sees no rev. gain for at least a yr: Le Temps


    • Maximus (MMS) 6:30am, $0.49


  • Billionaire Paulson Sticks With Gold Wager as Prices Rebound
  • Gold Analysts More Bullish on Fed Stimulus Outlook: Commodities
  • Rice Plan Signals End of Era as New World Farmers Beat Old Japan
  • WTI Oil May Gain on Signs Fed to Maintain Stimulus, Survey Shows
  • Wheat Rises on Import Demand Gain as Egypt Buys French Supply
  • Gold Swings in London as Investors Weigh Fed Stimulus Outlook
  • India’s Vegetable Oil Imports Rise 4.8% to Record in 2012-2013
  • Copper Declines on China Demand Concern as Power Spending Slows
  • U.K. Gas Climbs to 7-Mos. High as Cooler Weather to Boost Demand
  • Rebar Has Weekly Loss With China Leaders Silent on Policy Detail
  • Gasoline Profit Plunge Pressures Europe Refiners: Energy Markets
  • Shale Revolution Spreads With Record Wells Outside U.S.: Energy
  • Yellen Says Review of Bank Commodity Activity Could Bring Limits
  • WTI Set for Longest Run of Weekly Losses Since 1998 on Supplies

























The Hedgeye Macro Team














Ambition and Avarice

This note was originally published at 8am on November 01, 2013 for Hedgeye subscribers.

“Sir, there are two passions which have a powerful influence on the affairs of men.”

-Benjamin Franklin


And, in case you wondered whether or not your central planning overlords in Washington have yet to eliminate those two passions, they have only amplified them: “These ambitions are ambition and avarice; the love of power and the love of money.”


Franklin went on to add that, “separately each of these has great force in prompting men to action; but when united in view of the same object, they have in many minds the most violent effects. Place before the eyes of such men, a post of honour that shall be at the same time a place of profit, and they will move heaven and earth to obtain it.” (The Liberty Amendments, pg 23)


That’s why we all have no choice other than to Embrace Uncertainty in macro markets. There is nothing normal about a man from an un-elected US post moving your entire risk exposures with a whisper to the Wall Street Journal. Therefore you should not invest “normally.” Either #GetActive and do real-time macro or, as Dan Och recently said, “macro will do you.”


Back to the Global Macro Grind


BREAKING: Budget Deficit In US Narrows To 5 Year Low on Record Revenues –Bloomberg News


Not to be confused with the fear-mongering headlines Bloomberg/CNBC were running about how a US debt “default” could spell the 6th #EOW (end of the world) event of 2013, the fine folks in NYC’s groupthink tank finally nailed it.


Eleven months ago, we got ragingly bullish on the US Dollar because the only 2 factors in the (P) part of (POLICY) in our GIP (Growth, Inflation, Policy) Model @Hedgeye were Dollar Bullish:


1. FISCAL FACTOR: US Deficit/GDP was going to get cut in half to 4% (it was just reported at -4.1%, so we were off by a bit) because A) sequestration is good (spending down) and B) US #GrowthAccelerating would drive the denominator (GDP) up

2. MONETARY FACTOR: US #GrowthAccelerating would surprise those anchoring on last year’s Q412 GDP report of 0.14%, the Fed would fall behind the curve, #RatesRising would surprise to the upside, and tapering expectations would take hold


So easy a hockey head can do it. Then, sadly, the Fed gave into the mega Bond Bull Lobby on September 18th, 2013, smoked the Dollar, took rates back down, and the MONETARY FACTOR for USD Bulls was lost (again).


But the FISCAL FACTOR (which can only be obfuscated by the Fed as opposed to arrested like Bernanke did with USD and Bond Yields) continued along its path of least resistance and US Government Revenues were +15.2% year-over-year in September (not a typo)!


Oh, and the SP500 ripped the front-teeth out of all those #OldMedia mouth-pieces who shorted the October 2013 fear-mongered low about a US default when the US credit position was in its best position in half a decade. #NewAllTimeSPYHighs


And so it begins, after all-time SP500 and Russell2000 highs in October (SPY = +4.5% OCT 2013), it’s November. What in god’s good name are we supposed to do next?


To answer the question in any country, I always go back to the playbook:


  1. USA: FISCAL = hawkish (bullish USD); MONETARY = dovish (bearish USD)
  2. EUROPE: FISCAL = hawkish (bullish Euro); MONETARY = hawkish (bullish Euro)
  3. UK: FISCAL = hawkish (bullish Pound); MONETARY = hawkish (bullish Pound)


And to be clear, when I say hawkish or dovish, I mean what’s happening from a 2nd derivative perspective (i.e. what’s happening on the margin relative to the last 3-6 months).


This is why we’re #EuroBulls (see our Q413 Global Macro Theme deck) relative to being as bullish as we were, literally up until September 18th (shame on you Bernanke), on US growth. Same playbook; different relative pick.


Everything in macro is relative. Every asset allocator has a choice. And when push comes to shove in the coming 3-6 months, what will it be, German stocks or US stocks?


While the Russell2000 dropped -1.9% from its all-time performance chasing high in the last 2-days, German stocks hit a fresh all-time high. Fortunately, Mr. Market keeps score; not you or me. He gets it.


Since I’ve been bearish on Commodities and Fixed Income relative to Equities for the better part of a year now, I consider this shift to European Equities vs US Equities within an asset class that I like. If the Fed leans on the long-end of the curve, you can still be long US Equities, just not the Equities that worked best in 2013. The Growth Style Factor gets repressed by Bernanke’s intervention.


Having had an asset allocation to Commodities of 0% all year (CRB Commodities Index is 19 Commodities and it’s -6.1% YTD, on its YTD lows), getting long Gold for the 1st time in a long time gets interesting here too. I haven’t pulled the trigger yet, but front-running the next Hilsenrath article is a compelling catalyst.


How would that work? On a Friday, Bernanke’s boys float a headline to the WSJ that there won’t be a December taper, the Dollar gets slammed, Rates fall, and Gold rips. Oh yes, ambition and avarice matters in the land of the conflicted and compromised. And we aren’t yet dumb enough to not front-run proactively predictable behavior.


Our immediate-term Risk Ranges are now:


UST 10yr Yield 2.48-2.60%

SPX 1740-1771

DAX 8971-9061

USD 79.21-80.35

Euro 1.35-1.37

Gold 1314-1341


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Ambition and Avarice - Chart of the Day


Ambition and Avarice - Virtual Portfolio

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