This note was originally published at 8am on November 29, 2013 for Hedgeye subscribers.
“Whenever you feel like criticizing any one . . . just remember that all people in this world haven’t had the advantages you’ve had.”
-F. Scott Fitzgerald
Yesterday, I read a great column in the New York Times by Nicholas Kristof about compassion and empathy. The point of the article was to look at the distinction between asking someone to be personally accountable versus recognizing in a civil society that it is our responsibility to help others.
The origin of the article was based on some comments Kristof had received from a number of recent columns he’d written on the federal food stamps program. The gist of the feedback was that we shouldn’t be subsidizing families that are “too lazy” to take care of themselves. As Kristof writes:
“Let’s acknowledge one point made by these modern social Darwinists: It’s true that some people in poverty do suffer in part because of irresponsible behavior, from abuse of narcotics to criminality to laziness at school or jobs. But remember also that many of today’s poor are small children who have done nothing wrong.
Some 45 percent of food stamp recipients are children, for example. Do we really think that kids should go hungry if they have criminal parents?”
The current public debate over healthcare personifies this dilemma we face when trying to emphasize with those that were given less in life. (Unfortunately, the inability of the government to execute on the implementation of Obamacare has somewhat tainted this debate.)
In “A Theory of Justice” the philosopher John Rawls proposed the veil of ignorance to help us in determining our role in helping others and as a way to find morality in many situations. According to Rawls, under the veil of ignorance:
“No one knows his place in society, his class position, or social status; nor does he know his fortune in the distribution of natural assets and abilities, his intelligence and strength, and the like.”
As a result, since a person may occupy any position in society after the veil is lifted, the person must then evaluate any position from all perspectives of society.
Certainly, the idea that I could wake up one day and not be preparing for a festive thanksgiving with friends and family, but rather be a homeless person wandering the icy streets of New York provides a different perspective as to how to treat those that are less fortunate.
Back to the global macro grind...
As it relates to the U.S. equity markets, today is a day that is a bit of a market veil of ignorance as it is historically is the lowest volume trading day of the year. As a result, there probably won’t be a lot of read through from the market action today. Internationally, there has actually been a slew of data out over the last 24 hours and some key points to highlight include:
- Euro-area unemployment dropping to 12.1% from 12.2% in October and Eurozone flash CPI coming in at a anemic 0.9% (but higher versus last month’s 0.7%);
- German retail sales came in at -0.8% month-over-month versus and estimate of +0.5%; and
- Japanese unemployment came in at 4.0%, CPI inline at 1.1%, and industrial production disappointed versus growing 0.5% month-over-month versus an estimate of 2.0%.
In aggregate the big macro data points this morning do not point to any reason for the policy makers in Japan or Europe to change their views. If anything, there is only increased support for the current extremely dovish policies that are in place.
As it relates to Japan, though, late last week we actually encouraged investors to consider taking off the Abenomics trade, as my colleague Darius Dale wrote there are a number of reasons to consider booking gains, namely:
- The Fed will likely dominate headlines with surprising levels of dovish monetary policy amid a 3-6M monetary and fiscal policy vacuum in Japan;
- Sentiment towards Japanese equities amongst foreign speculators has reached euphoric levels; and
- Speculators have recently adopted an overwhelmingly bearish position on the yen. Historically, the USD/JPY cross has faded hard from such asymmetric setups in the futures and options market. Moreover, what’s bullish for the yen has been almost perfectly bearish for Japanese stocks.
In my purview the point on sentiment may be the most compelling reason to take a break on the long Japan equity trade. Specifically, in the YTD, foreigners have purchased a net ¥13-plus trillion of Japanese shares – the highest total on record. This contrasts with a net ¥6T of net sales amongst Japanese institutional investors.
Moreover, the aforementioned foreign/domestic bifurcation has intensified in recent weeks. The most recent weekly data shows a net purchase of ¥1.3T by foreign investors, which represents a 7M-high. Conversely, net sales of domestic assets by Japanese retail inventors hit ¥174B last week – the largest weekly divestment since 2008.
I think we can all agree, buying when the locals are selling is rarely a good thing!
Switching gears, in the chart of the day today we highlight a key point from our expert call last week with Dr. Tancred Lidderdale from the Energy Information Administration. As the chart shows, for the first time in more than twenty years, U.S. production of crude oil has surpassed imports. Arguably, even the environmentalists when wearing the veil of ignorance would agree that increased U.S. oil independence is a good thing.
I’ll be heading to my first Apple Cup later today, which is the annual match-up between Washington University and Washington State in Seattle. Wherever you spend the rest of the holiday weekend, I hope it is a great one.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.69 - 2.82%
SPX 1795 - 1814
DAX 9206 - 9345
VIX 11.91 - 13.31
USD 80.35 - 81.15
Gold 1226 - 1289
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research