“I can only say: I’m sorry America.”
In the opening sentence to his recent WSJ op-Ed (which the NY Times wouldn’t publish), “Confessions of a Quantitative Easer”, that’s what Andrew Huszar wrote. Since he ran the biggest Fed bond buying program in US history, that was a big apology.
I had the pleasure of hosting Andy at our new Hedgeye headquarters in Stamford, CT yesterday for our 1st segment of a series @HedgeyeTV that we’re calling Real Conversations.
The short-term headline of our conversation is that Andy doesn’t think the Fed tapers tomorrow. The longer-term implication of our conversation is that Andy thinks the Fed has been politicized, allowing “QE to become Wall Street’s new Too Big To Fail policy.” So don’t look for an actual “taper” of consequence, any time soon.
Back to the Global Macro Grind…
Not to be confused with Ben Bernanke’s take on the whole thing, Huszar left “Fed-up” because he didn’t believe in how “the central bank continues to spin QE as a tool for helping Main Street.”
Yesterday at the Federal Reserve’s 100 year birthday party (the one that no one in America cared to celebrate), Bernanke went on and on saying that the “Fed’s willingness, during its finest hours” … was to “stand up to political pressure.” Got-it.
Moving along… the entire global currency market, which has picked up some volatility as of late (JPM’s FX Volatility Index was +3.7% last wk to +8.1% YTD), awaits our central planning overlord’s decision tomorrow.
We’re short the US Dollar in our Q413 Global Macro Themes deck and we re-shorted the US Dollar (UUP) on its bounce to lower-highs last week in #RealTimeAlerts. Huszar’s take on it all simply confirmed what we were thinking.
From a risk signaling perspective, where do we stand on the FX War’s Big 3?
- US Dollar (Index) = Bearish Formation (bearish on all 3 of our core risk mgt durations – TRADE, TREND, and TAIL)
- The Euro (EUR/USD) = Bullish Formation (bullish on all 3 of our core risk management durations)
- Japanese Yen (USD/JPY) = Bearish Formation
The bearish intermediate-term TRENDs in both the US Dollar and Yen make sense as (relative to the ECB, whose balance sheet has shrunk) the Fed and BOJ have been the marginal debaucherers of their currencies as of late.
Japan has been doing this for over a year now, while the Fed re-engaged in Buck Burning with the no-taper decision in September. So that makes getting long the Yen versus the US Dollar here interesting. Warning: it’s early.
Looking at the leans in Global Macro consensus (net long or short positions in CFTC futures and options contracts), here’s where the game is currently at:
- USD = +6,730 net long contracts (versus +7,725 three months ago)
- EUR = +15,115 net long contracts (versus +39,803 three months ago)
- JPY = -129,614 net SHORT contracts (versus -90,060 three months ago)
In other words, consensus A) in US Dollar bulls isn’t as sure as it was 1yr ago (when the net long position in USD was +19,471), B) is more worried about another ECB rate cut (even though the European economic data continues to accelerate) and C) is wacky net short the Yen (now that it’s down -16% vs USD for 2013 YTD!).
So what do you do with that? Start yelling to the heavens that “it’s a bloody currency war and a race to burn everything; buy bitcoin!” Or do you buy Yen in early 2014 as consensus marks the bottom?
I’ll tell you how I used to think about stuff like this – dogmatically. I was certain that my research view was going to be right (until it would be very wrong) and had a complete disrespect for market timing.
Note to self (sponsored by Dan Och at OZM): if you disrespect Mr. Macro Market’s timing signals, he’s going to “do you” some humbling P&L exercises.
Our track record risk managing currencies is better than a moving monkey’s, primarily because we use risk controls:
- Buying a currency, I wait for an immediate-term TRADE oversold signal within a bullish TREND
- Shorting a currency, I wait for an immediate-term TRADE overbought signal within a bearish TREND
Those are the easiest calls to make. The toughest are the ones that eventually have the biggest TRENDING reversals (bearish to bullish reversals or vice versa). Buying the Yen versus the USD would be a potential example of that in early 2014. But, for me, I need to take my time and score the bottoming process (they are processes, not points).
In parallel to the quantitative signaling, what we do as a research team is try to play out scenarios and catalysts (preferably with tangible macro calendar catalysts). What if Huszar is right and the Fed’s Policy is To Big To Fail? What if the Fed doesn’t taper in DEC, then the US economic data continues to slow in JAN? What if you’re looking at no taper in 2014 and a Yellen Qe6?
If that were to play out, I’ll be really sorry for America too.
Our Financials team will be hosting a call on “Mortgage Mayhem” at 1pm today to discuss the coming January upheaval in the mortgage market from the new QM regulations. The speaker will be industry authority, Larry Platt, an attorney with the law firm of K&L Gates. If you’re an Institutional investor and would like access to the call, email .
Our immediate-term Global Macro Risk Ranges are now:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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TODAY’S S&P 500 SET-UP – December 17, 2013
As we look at today's setup for the S&P 500, the range is 50 points or 1.21% downside to 1765 and 1.59% upside to 1815.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.54 from 2.55
- VIX closed at 16.03 1 day percent change of 1.71%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:30am: Current Acct Balance, 3Q, est. -$100.4b (pr -$98.9b)
- 8:30am: Consumer Price Index m/m, Nov., est. 0.1% (pr -0.1%)
- 10am: NAHB Housing Market Index, Dec., est. 55 (prior 54)
- 4:30pm: API weekly oil inventories
- Two-day FOMC meeting starts
- Senate in session, House not in session
- Senate to consider bipartisan budget agreement reached Dec. 10
- 8:50am TSA Administrator John Pistole delivers keynote remarks at Air Line Pilots Association
- 9am, FOMC 2-day closed meeting on interest rates starts
- 9:30am Sens. Amy Klobuchar, D-Minn., Christopher Coons, D-Del. hold news conf. on U.S. manufacturing sector
- 10am Sen. Tom Coburn, R-Okla. holds news conf. on “Wastebook” annual report on federal spending
- 10am ADBE, ANLY among witnesses set to testify at Senate Judiciary Cmte hearing on limiting so-called patent trolls
- 10:30am Interior Sec. Sally Jewell and Gov. Martin O’Malley, D-Md., make offshore wind energy announcement
- 10:30am Senate Homeland Security Cmte holds hearing on safety at federal facilities post Washington Navy Yard massacre
WHAT TO WATCH:
- FOMC begins 2-day meeting on interest rates
- Charter said to tap Goldman Sachs for Time Warner Cable bid
- Sherwin, NL, ConAgra must pay $1.1b in lead paint lawsuit
- MetLife said in talks for stakes in AMMB’s insurance units
- Goldman Sachs aluminum antitrust suits sent to New York
- Nasdaq must face some investors’ claims over Facebook IPO
- Facebook to start showing video ads this week, WSJ reports
- U.S. Senate set to consider Dec. 10 budget agreement
- Glaxo to end doctor payments amid marketing practices review
- Herbalife clean audit a setback for Ackman’s pyramid case
- SAC manager Steinberg’s jury to begin deliberations
- Detroit seeks to pay UBS, BofA $230m to cancel swaps
- U.K. inflation nears BOE’s 2% target w/unexpected slowdown
- Europe car sales up 3rd month on new Volkswagen models
- German ZEW investor confidence rises as economy gathers pace
- Japan to add military hardware amid growing China tensions
- FactSet Research Systems (FDS) 7am, $1.22
- Heico (HEI) 5:14pm $ 0.40
- Jabil Circuit (JBL) 4:02pm $0.54
- Sanderson Farms (SAFM) 6:30am, $2.19
- VeriFone Systems (PAY) 4:01pm $ 0.26
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Indonesia’s Cabinet to Discuss Ore Ban Amid Freeport Queries
- Chocolate Eaters Drive Record Cocoa-Output Deficit: Commodities
- Gold Declines in London Before Fed Meeting; Palladium Advances
- Brent Falls From One-Week High; U.S. Fuel Supplies Seen Rising
- Ivory Coast 2013-14 Cocoa-Bean Arrivals 43% Higher as of Dec. 15
- Copper Swings Between Gains and Drops Before Fed Policy Meeting
- China Finds More U.S. Corn Shipments With Unauthorized MIR162
- Palm Oil Drops as Record Global Soybean Output May Hurt Demand
- Commodity Investments Seen by Barclays Set for Record Outflow
- Citigroup Divests Metalmark Holding to Comply With Volcker Rule
- Buffett $1 Billion Order Shows Wind Power Rivals Coal
- Ex-Mizuho Derivatives Trader Banned for Lying to U.K. Watchdog
- Hong Kong Exchanges Bulls at Highest Since 2011 on LME: Options
- China Said to Buy 87,200 Tons of Rubber for State Reserves
The Hedgeye Macro Team
THE MACAU METRO MONITOR, DECEMBER 17, 2013
TOURISM CHIEF FORECASTS SLIGHT RISE IN CHRISTMAS VISITORS Macau News
Macau Government Tourist Office (MGTO) Director Maria Helena de Senna Fernandes says she expects Macau’s number of visitor arrivals around Christmas to increase slightly. Senna Fernandes said that with the mainland’s new tourism law that took effect on October 1 i.e. ban of zero fee tours, many travel agencies in the mainland had adopted a “wait-and-see attitude”, which may reduce the number of mainland visitors who would usually visit Macau as part of a tour group. She said that as a result she still expected the number of total visitors to increase slightly around Christmas, with the rise being in the number of tourists traveling independently.
This note was originally published at 8am on December 03, 2013 for Hedgeye subscribers.
“We had invested very heavily over a very long period of time in the education of quality leaders.”
John Allison retired in 2010 after building one of the best banks in US history. “BB&T made it through the sub-prime crisis without a single quarterly loss… In Allison’s 19 years as CEO, BB&T grew from a statewide bank… to a $152B bank operating in 11 southern states and the District of Columbia.”
“We had really strong presidents … they had a much higher level of authority than our competitors… they were held responsible – they owned the process.” –Allison (Knowledge and Power, pg 172)
Sounds like our central bank, right? Ha! Especially the crony boys from mediocre-land (downtown at the New York Federal Reserve Bank). That’s where you’ll find below-average-at-best Bill Dudley and his whipping boy Simon Potter. These guys aren’t leaders. They are academic group-thinkers. And one day, all of their conflicted “smoothing” decisions will come home to roost. Mark my tweets.
Back to the Global Macro Grind…
If you want to get into the holiday anti-Fed mood, pick up a copy of the book John Allison published this year – The Financial Crisis and the Free Market Cure. It contains 0% of the Fed-access-propaganda you see paraded around with CNBC’s Keynesian peacocks every day. They are real thoughts from a real-time risk manager of banking and non-linear market risk.
“In my career, the Fed has a 100% error rate in predicting and reacting to important economic turns… because it is trying to arbitrarily set the single most important price of the economy – the price of money… setting wage and price controls from the time of Diocletian to Nixon, has proven in every case a disaster for economies and the people entrapped by them.” (Knowledge and Power, pg 175)
In other news this morning, after stuffing the New York financial media with crab cakes and vino last night, the Fed’s anti-dog-eat-dog-price-controller-of gravity, currency, and rates (Simon Potter) proclaimed his mystery of faith that “operationally, market participants generally characterize the exercise as smooth, with minimal disruptions.”
Potter, of course, is talking about what Thomas Jefferson surely had in mind - a reverse-repo-facility from the Fed that will look over Americans while they sleep. Chartreuse for everyone in NYC. This is the new America we all believe in, baby! (I’ll have a Bud Light pls)
Meanwhile, US stocks are pinned by a vacuum of Fed stimulated performance chasing all-time bubble highs, on no volume, and rising implied volatility signals.
By “minimal disruptions” what the NY Fed means is that @PIMCO doesn’t have to worry about economic information surprises being market-to-market on the long-end of the yield curve.
As evidenced by June and August spikes in US #RatesRising, there is nothing “smooth” about US currency and/or rate markets trading freely anymore. Oh, and The Fed needs to find a way to get people out of an MBS market bubble that doesn’t trade, don’t forget.
That’s why yesterday’s story within Mr. Macro Market’s score was so revealing. Follow the bouncing ball of events in the order that they appeared:
- 10:00 AM – ISM of 57.3 for NOV surprised on the upside (driven by New Orders of 63.6 and Employment at a fresh YTD high)
- 10:14 AM – US stocks put in their low of the day as the market got briefly confused about great news being bad re Fed-taper
- 12:30 PM – SP500 stops going up at an all-time high of 1810 as #RatesRising push higher, Gold lower
4:00PM EST – US stocks close on their lows of the day; US Equity Volatility (VIX) closes at the high of the day
In other words, to John Allison’s point, the Fed continues to look silly whenever it hinges policy on its forecasts. Its 2013 forecast on US consumption and employment growth were dead wrong. So now the Fed is behind the curve, making stuff up, in a Sisyphean fight for its academic dogma.
We’re going to get a 3% handle on US GDP this week (Thursday) and all the Fed’s open-market-storytelling communications will be able to do is make up more reasons why you should think this is still 2008. Fear, forever.
And guess what – if you let them, they might just perpetuate their own reality this time. The next crisis is going to be a central planning one. America hasn’t invested in Paul Volcker type leadership at the Fed. We are hostage to un-elected NYC banking group-thinkers.
10yr Yield 2.71-2.81%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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