This note was originally published at 8am on February 21, 2014 for Hedgeye subscribers.
“We live in a house, and therefore we consume the house.”
Yep, I am Canadian.
I lived in a Canadian house until I was 24 years old and have the flag tattooed on my back. Consequently, I will be consumed by my confirmation bias today as Canada’s men try to beat America’s like our women did yesterday.
Don’t worry, I’m not competitive or anything. When my all-American wife (Laura in Lacrosse) wasn’t looking one day, I hung a massive Canadian flag over my son Jack’s bed. As he was sleeping, I subliminally got him in the mind!
Admittedly, I have started to teach all 3 of my children that the USA is the best in the world, at creating asset bubbles. Just like John Allison does in the aforementioned quote about real-world economics, I have to call it like it is.
Back to the Global Macro Grind …
“In economic terms, spending on housing is consumption, not investment… houses are not used to produce other goods… thus the misinvestment in housing in housing shifted resources from production to consumption.” –John Allison (pg 8)
No, “misinvestment” isn’t a word that spell-checks inasmuch as “misinformation” did for a Canadian hockey player (me) in the mid-1990s when it was introduced to me by one of the great leaders in my life (former US Olympic Hockey Coach, Tim Taylor).
“Mucker, you don’t really have any moves… so you need to start waggling the blade of your stick when you are carrying the puck up ice to give the defense some misinformation.” –Tim Taylor
Try it – it works!
Longer-term, an un-elected central planning bureau (The Fed) forcing investors to chase short-term price inflations (and “yields”) to all-time bubble highs won’t work. Anyone who didn’t sleep through the deflation of asset prices in 2008 will get that.
I had a lot of feedback on John Allison’s “fundamental themes” yesterday (mainly because I left 3 of his top 6 out). They are:
1. “Individual financial Institutions (#OldWall) made very serious mistakes that contributed to the crisis
2. “The deeper causes of our financial challenges are philosophical, not economic”
3. “If we don’t change direction soon, the United States will be in very serious financial trouble in 20-25 years”
In other words, the government (and The Federal Reserve) created policies based on academic ideologies (weak currency “boosts exports”, cheap money “boosts housing”, etc) that are A) very short term in nature and B) misaligned with making long-term investments in productive, job generating, assets.
Newsflash: Gold is the least productive major “asset class” in the world – so it loves #InflationAccelerating-slow-growth government policies to fix prices (rates and wages) and devalue the purchasing power of The People in exchange for debt.
The Canada vs. USA score won’t lie today. Neither will the misinvestment, misinformation, or misalignment of the US stock market’s YTD score vs. economic reality (after torching their currencies, Venezuela was +460% last yr and Argentina is +10% YTD).
If you peel back the -0.5% and +9.5% YTD returns of the SP500 and Gold, respectively, and look at the S&P’s Sector Returns:
- Slow-growth-yield chasing Utilities (XLU) lead the charge at +6.7% YTD
- Consumer Sectors (XLY and XLP) lead losers at -2.6% and -3.0% YTD, respectively
- Interest Rate Sensitive Financials (XLF) are underperforming the SP500 at -1.9% YTD
#InflationAccelerating A) slows consumption growth (hurts consumer stocks) and B) encourages investors to chase “yield.” That’s why the Financials (XLF) suck relative to Utilities (XLU) this year inasmuch as they did at the start of 2011.
Put another way, as the Financials, Rates, and the US Dollar go, so will real-economic growth in America. The only modern periods of sustainable US economic growth (i.e. greater than 4% GDP) came in the 1983-1989 (Reagan) and 1993-1999 (Clinton) years. You saw a sneak preview of interest rates and the US Dollar breaking out to the upside in Q3 of 2013 too (US GDP ramped to +4.12%).
That wasn’t my house versus your house. That wasn’t Canada vs. the USA either. That’s how real-world economics works. The only misinformation about it in the US, Japan, Venezuela, etc. today is in how governments and their central-planning-access starved media group-thinkers sell it to you. From a free market capitalist perspective, it’s so very un-American.
Our immediate-term Macro Risk Ranges are now:
Best of luck to both Team Canada and Team USA 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.
Takeaway: Net/net, we'll take it, even if the U.S. Government is this country’s lowest margin customer.
- "Under a provision of 1941 legislation known as the Berry Amendment, the Defense Department must buy boots, uniforms and certain other items that are 100% U.S.-made. It can make exceptions if U.S. manufacturers don't have the capacity to make what it needs, and has done so for athletic shoes needed for boot camp."
- "But now, under pressure from the domestic shoe industry and lawmakers, particularly those from Massachusetts, Maine and Michigan that have some of the country's few remaining shoe plants, the military is going to review its exemption for U.S.-made sneakers."
- "New Balance Athletic Shoe Inc. and Wolverine Worldwide Inc. both say they could provide 100% U.S.-made athletic footwear for the military. Others expressing interest include Capps Shoe Co., a maker of military shoes, and two producers of military boots: Wellco Enterprises Inc. and the Danner unit of LaCrosse Footwear Inc."
Takeaway from Hedgeye’s Brian McGough:
While this is good on the margin for Wolverine Worldwide (WWW), the reality is that the lowest margin customer in the country is…
The US Government -- unless you're supplying rockets and other things that explode (and even then, margins are questionable).
But hey, the orders tend to be steady, and they always pay on time.
Net/net, we'll take it.
Join the Hedgeye Revolution.
This note was originally published March 06, 2014 at 08:08 in Morning Newsletter
“What’s in a name? That which we call a rose by any other name would smell as sweet.” -William Shakespeare
The big picture
What’s in a bubble?
I’ve been channeling my inner 1999 for the last 3-days in California. I’ve done Los Angeles, San Diego, and San Francisco. And while it would be cute to tell you that I can actually smell a bubble, these types of things don’t have a particular scent.
At the all-time highs, they just look sweet.
All-time highs? Yep. It’s not just Yelp (YELP) and Facebook (FB). It’s Barney Frank’s American Housing dream. The all-time highs in the largest component of American cost of living are here. It’s called rent.
Oh, you don’t rent? Ok, you’re like me then. You’re big time – you own. But don’t confuse the 20% of us who are long asset price inflation with the rest of them (80% of Americans) who get pulverized by Policies to Inflate. The cost to live in this country has never been bubblier.
What’s in the cost of living?
Unless you’re like the “folks” in Washington who take car service to work, you have to put gas in the transportation thing too. And if you can’t afford a car, you can always save some money and take the bus, or walk…
What’s in the all-time high in American “inequality”?
- The Housing Bubble
- The Commodity Bubble
- The Bond Bubble
One by one, central planners at the Fed blow these bubbles up so big that, like Jim Carey in The Truman Show, we start to live inside them. There’s an effervescence to that, I guess.
Or at least that’s what Oaktree’s Howard Marks said in our back to back presentations at the CFA Society’s Annual Forecast Dinner in San Diego on Monday night. He called the cov-light-pik-toggle-bond thing being “back” – an “effervescent bubble.”
As we went back and forth in the Q&A part of the event, Marks made an astute observation about real-world life. The average American has $20,000 in post tax income, but spends approximately $22,000 a year.
So, if you ramp up the Top 3 things Americans have to pay for (if they don’t pay for their kids to go to school), the Bush/Obama/Bernanke/Yellen Policy to Inflate should drive cost of living up to say $25,000-30,000/year. That’s why the US Savings (as a % of disposable income) is retracing its 2008 crisis lows. Like their government, Americans once again have to borrow to spend.
In other news, inflation slowed US consumption growth again in February:
- USA’s ISM Services report for FEB (reported yesterday) slowed to its lowest level since FEB of 2010
- The Employment component of the ISM Services Series dropped < 50 (largest m/m drop since NOV 2008)
- US Services PMI (Markit data series) slowed from 56.7 in JAN to 53.3 in FEB
No worries though, it’s all “weather.”
If you want to join the Federal Reserve and believe that (and tell the 80% that inflation doesn’t slow growth), you can start turning on the Weather Channel and buying the all-time highs in social media every day they forecast yesterday’s sunny news.
I’ll be selling stocks (and buying Commodities, Bonds, and Foreign Currencies) into that. Because, like in Q1 of 2011, Down Dollar and Down Rates were signaling a US consumption growth slowdown inasmuch as they did in Q1 of 2008.
As for retracing my California travels of 1999, Q1 of 2000 wasn’t exactly the time to be wearing rose colored glasses either.
- CASH: 31%
- US EQUITIES: 3%
- INTL EQUITIES: 10%
- COMMODITIES: 16%
- FIXED INCOME: 20%
- INTL CURRENCIES: 20%
Our immediate-term Macro Risk Ranges are now:
UST 10yr Yield 2.59-2.75%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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