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Imperial Ignorance

“I implore Imperial Heaven to pardon my ignorance.”

-Daoguang Emperor


Reigning over the Manchu Qing dynasty in China from 1820 to 1850, even by modern central-planning-overlord measures, this guy Daoguang was a whack job. He, like some in Big Government today, thought he was put on this earth to bend economic gravity.


But, “in 1832, Daoguang’s fears of looming crisis converged in one defeat… the government forces were not used to the mountains… many of the troops from the coastal garrisons were opium smokers, and it was difficult to get any vigorous response from them… When nature began conspiring against the Chinese empire… panic was likely to set in.” (The Opium War, pg 49)


So, don’t panic. Blame the weather.


I heard on TV that #InflationAccelerating slowing real US Growth is different this time. And the echoes of Daoguang’s ignorance has the New York Federal Reserve’s back on that: “I, the son of Heaven, am Lord of this World. Heaven looks to me that I preserve tranquility.” (pg 50)


Back to the Global Macro Grind


Yep, things are getting weird. And the President of the NY Fed, Bill Dudley, is getting weirder. You won’t remember him for being a below-average at best Keynesian economist at Goldman Sachs (1). He’s infamous for his completely out of touch with reality comment in March of 2011 that food prices ripping to all-time highs didn’t matter because iPads were cheap.


No, CRB Foodstuff’s Index fans (which is up another +1.6% this week to +14.0% YTD), you cannot eat an iPad. With US #InflationAccelerating to another fresh YTD high yesterday (CRB Index +10% YTD and the USD hitting another fresh YTD low), you can’t eat Gold (+12.1% YTD) either.


Imperial Ignorance - ipa


But Dudley, who completely missed calling for the 2008 crash, is comfy that the current growth slowdown is all about the “weather” and that US GDP is going to start tracking right back to +3%. As for the Fed’s dual mandate to raise rates when either employment recovers or inflation accelerates, yesterday Dudley called that “obsolete.”


In other dial-a-Fed guy (or gal) to Burn Your Currency news:

  1. The US Labor market data continued its deteriorating @Hedgeye TREND this past week
  2. NSA (non-seasonally adjusted) rolling y/y claims only dropped -3.5% last week
  3. The last 7 jobless claims data points (most recent data point 1st) = -3.5%, -4.4%, -5.6%, -5.1%, -5.7%, -7.3%, -7.9%, -8.5%

In other words, as our all-star-non-Keynesian US Financials analyst Josh Steiner said yesterday, “since we’re looking at the rate of change in year-over-year initial jobless claims, a more negative number is better as it implies a faster rate of improvement.”


That’s also one of the main reasons why we didn’t start to get bearish on inflation slowing real US growth until 8 weeks ago – the slope of growth, or continued improvement, in the US employment cycle. *Note: employment gains peak at the end of a cycle


Yes, we were the US employment #GrowthAccelerating bulls for all of last year, primarily because the rate of change in both weekly and monthly US employment data (leading indicators) was improving. That’s why the Fed should have started to taper in July-September 2012. They didn’t – because they act on a lag to lagging economic data.


To review how the Fed 1913 Act was supposed to work – it was a dual mandate:

  1. Full Employment
  2. Price Stability

In English, that means that the Fed is supposed to:

  1. Get looser (cut rates) when the rate of change in employment is deteriorating and inflation is slowing
  2. Get tighter (raise rates) when the rate of change in inflation is accelerating and employment is improving

Instead, the Bernanke/Yellen/Dudley Fed:

  1. Is now changing the goal posts on what was their official 6.5% employment target – Janet, we hit it too soon; change it!
  2. Will never fight inflation, so the bond market assigns 0% credibility to the Fed raising rates with #InflationAccelerating

That’s why Dudley’s March 7th, 2014 comments about the Fed Act of 1913 being “obsolete” are very much consistent with his comments about inflation in March of 2011 – eat it.


He’s un-elected and un-accountable to the American people. So, for now, like a Chinese bureaucrat posing as our god, he can say and do whatever he damn well wants. And yes, that will affect the credibility of your currency and liberty, in real-time.


So enjoy your US jobs report day in what has become the no-volume-American stock market casino. And pray that the Fed’s imperial ignorance on the impact of price-fixing rates at 0% never perpetuates a panic.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.59-2.77%


VIX 13.01-15.65

USD 79.49-80.22

EUR/USD 1.37-1.39

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Imperial Ignorance -  USD


Imperial Ignorance - rta44


TODAY’S S&P 500 SET-UP – March 7, 2014

As we look at today's setup for the S&P 500, the range is 36 points or 1.55% downside to 1848 and 0.37% upside to 1884.                               










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.39 from 2.40
  • VIX closed at 14.21 1 day percent change of 2.30%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Trade Balance, Jan., est. -$38.5b (prior $38.7b)
  • 8:30am: Nonfarm Payrolls, Feb., est. 147k (pr 113k)
  • 12pm: Fed’s Dudley speaks in New York
  • 12:30pm: Former Fed Chairman Bernanke speaks in Houston
  • 1pm: Baker Hughes rig count
  • 3pm: Consumer Credit, Jan., est. $14b (prior $18.756b)


    • 8:30am: Medicare Payment Advisory Commission meets on synchronizing benchmarks across payment models


  • Employers in U.S. seen adding 149k jobs in Feb.
  • Safeway to be bought by Cerberus’s Albertsons for $9.2b
  • Putin pressed to ease Ukraine standoff under sanction threat
  • Chaori Solar is first bond default in China onshore market
  • Keystone XL public comment period ends today
  • Cliffs postpones mtg record date to accommodate Casablanca
  • Merrill Lynch seeing management turnover, WSJ reports
  • Twitter paid $36m for 900 IBM patents to build portfolio
  • Ford to move pickup production from Mexico to Ohio van plant
  • Judge orders Duke to clean up North Carolina coal ash: Reuters
  • BP says Asian regulators join price-manipulation probe: WSJ
  • Mexico said to look for Oceanografia CEO as contracts reviewed
  • Amcol says new Minerals buyout proposal superior to Imerys’s
  • U.S. Retail Sales, Budget Hearings, China: Wk Ahead March 8-15


    • Big Lots (BIG) 6am, $1.39
    • Foot Locker (FL) 7am, $0.76 - Preview
    • Genesco (GCO) 7:22am, $2.18
    • Penn West Petroleum (PWT CN) 6:31am, C$(0.04)
    • Peregrine Pharmaceuticals (PPHM) 8am, $(0.06)


  • Corn Set for Bull Market as U.S. Exports Gain Amid Ukraine Woes
  • WTI Crude Set for First Weekly Loss Since January; Brent Stable
  • Gold Defying Goldman Sachs With Coffee Percolating: Commodities
  • Copper Reaches 15-Week Low as China Default Fuels Demand Concern
  • Aluminum Buyers in Japan Said to Agree to Pay Record Fee
  • China Says It Has No Time Line for Decision on Syngenta GMO Corn
  • Gold Trades Below 4-Month High as Palladium Near Highest in Year
  • Arabica Coffee Rebounds Amid Slowing Sales in Top Grower Brazil
  • Years Needed for U.S. Gas Exports to Blunt Russian Energy Sales
  • Duo Who Built Trading Empire Set Sights on JPMorgan Unit: Energy
  • Aging El Nino Buoys Get Fixed as Weather Forecasts at Risk
  • South Africa Takes No Sides in Platinum Strike, President Says
  • LNG, Shale Among Risks for European Gas Shipments, Gazprom Says
  • Rebar Falls to Post Weekly Loss Amid Chaori Solar Bond Default

























The Hedgeye Macro Team














March 7, 2014

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Your House

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.”

-John Allison


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.


Your House - boom


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:

  1. Slow-growth-yield chasing Utilities (XLU) lead the charge at +6.7% YTD
  2. Consumer Sectors (XLY and XLP) lead losers at -2.6% and -3.0% YTD, respectively
  3. 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:


SPX 1811-1848

Nikkei 14124-14966

VIX 13.31-15.98

USD 79.91-80.55

Pound 1.65-1.67

Gold 1296-1339


Best of luck to both Team Canada and Team USA today,



Keith R. McCullough
Chief Executive Officer


Your House - Chart of the Day


Your House - Virtual Portfolio

VIDEO | Epic: The Paradigm Shift From Bonds Into Stocks

American-Made Shoes for America’s Team

Takeaway: Net/net, we'll take it, even if the U.S. Government is this country’s lowest margin customer.

Should America Build a Strategic Shoe Reserve?

American-Made Shoes for America’s Team - shoe

  • "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.


American-Made Shoes for America’s Team - armyboots

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