“The life and light of a nation are inseparable.”
-James A. Garfield
That’s the opening quote to a fantastic US #history book I cracked open this past weekend: Destiny of The Republic – A Tale of Madness, Medicine, and the Murder of a US President, by Candice Millard of Kansas City, Missouri.
After serving only 200 days as President of the United States (MAR-SEP of 1881), Garfield was shot by a whacko loser by the name of Charles Guiteau. Not unlike many of us, Garfield never thought of himself as part of a “class.” While he was raised poor, he empowered himself with the light of self-education. He was one of the smartest Presidents America has ever had.
Being “smart” isn’t a big differentiator in this profession. On paper, I don’t really know anyone who is dumb. But thinking that an un-elected-central-planning-bureau can smooth our economic lives and provide us with a pre-18th century enlightenment is. While hope is not a risk management process, that’s all I have left that America’s currency finds her footing.
Back to the Global Macro Grind…
As I alluded to in yesterday’s Early Look, 1 was one of the best economic periods in American history for a reason. The US understood the value of owning what was becoming the world’s reserve currency. There was no Federal Reserve to devalue it.
Fast forward 100 years, and we have ourselves quite a scene to observe in global macro markets every day. Places like Argentina (who had the same standard of living as the US in 1920), missed having Presidential periods of sustained real (inflation adjusted) economic growth like 1 (Reagan) and 1 (Clinton) where the value of America’s currency rose with interest rates.
Our Global Macro Theme of 1H13 of #StrongDollar + #RatesRising is gone now. And, on many levels, that’s just a sad thing. It provided for what George Gilder recently coined as “information surprise” in the US economy. It was the life and light that the current @FederalReserve isn’t allowed to understand.
In case you are thinking about moving to another country, here’s what’s headline news around the world this morning:
1. New Zealand’s Prime Minister, John Key, is calling for a new country flag to represent the “end of the colonial era”
2. Swedish Consumers are enjoying #StrongCurrency Tax Cuts (Consumer Prices, CPI, -0.2% y/y for FEB)
3. UK Industrial Production #GrowthAccelerating to +2.9% y/y as the British Pound tests fresh 3yr highs
In other words, there is plenty of life and light in this world. You just have to stop navel-gazing politically in the US and realize that countries are racing against America as she always has against them.
But why do these headlines matter? What do these countries currently have in common?
1. NEW ZEALAND’s #StrongCurrency Policy (the Kiwi) has generated some of the strongest real GDP growth rates in the non-EM world. Consumer Confidence (which tracks the strength of a country’s currency) is testing all-time highs.
2. SWEDEN, while still recovering from its loss to the Canadian hockey team in the Gold medal game @Sochi, continues to reap the rewards of having a currency that can’t be devalued by some Japanese bureaucrat
3. UNITED KINGDOM continues to remind all those who followed in the footsteps of a raging Keynesian policy to devalue the Pound that real-inflation-adjusted economic-growth in the UK has accelerated alongside the purchasing power of its people
Don’t worry, all is not yet lost. But the US stock market’s volume could be. At the all-time highs in the SP500, volume has been as dead as a doornail. In both monetary policy and in market interest (CNBC ratings at all-time lows), the US is starting to emulate Japan. The land of the rising sun and “forward rate guidance” (Japan) saw its stock market volume hit 5 month lows last night too.
What if the life and the light were to just leave? And I mean literally. What if enough of us get what’s going on to simply not show up as the last lemming to buy the all-time bubble high from someone else who doesn’t call the all-time high price bubbly? What if all there is left is the last short seller covering his shorts high after shorting the January lows?
If, if, then statements aren’t new to evolution. Neither were they new (yesterday) to a part of this world (Latin America) that has tried, tried, and tried again to devalue its currencies as the best path to political power and prosperity.
Argentina, Brazil, Chile (Equities) were all down -1.2-1.6% yesterday as hedge funds continue to race to get net longer of a US stock market they got way too short of only a month ago (-80,000 net short futures/options contracts in Index +E-mini).
Latin American Equities (MSCI Index) are down almost -10% YTD as its people deal with unsustainable debt levels, deficit spending, and failed Policies To Inflate their way out of it via currency devaluation. The purchasing power and currency of The People are inseparable.
Our immediate-term Global Macro Risk Ranges are now as follows (Top 12 Daily Trading Ranges is a separate subscription product):
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on February 25, 2014 for Hedgeye subscribers.
“To defeat the aggressors is not enough to make peace durable. The main thing is to discard the ideology that generates war.”
- Ludwig von Mises
Von Mises is considered by many to be one of the fathers of libertarian thought in the United States. He wrote, lectured and taught broadly on many topics beyond economics, including sociology, philosophy, and engineering. As his student F.A. Hayek said, he was “one of the best educated and informed men I have ever known.”
Despite von Mises massive amount of writing and incredibly influential friends and students, such as Jacques Rueff the monetary advisor to Charles de Gaulle, Italian President Luigi Einaudi, and novelist Ayn Rand to name a few, there were periods in his career in which von Mises work was largely ignored. Nonetheless, his ideas remained durable.
The animal kingdom has some profound examples of durability as well. Three of the best examples of durability include:
- Planarian worm – Can regenerate large portions of its body and if cut in half can become two separate functioning worms;
- Cockroach – Has extreme radiation resistance (likely to survive a nuclear war), can survive for weeks with its head cut off and can live for months without food; and
- Rat – Fine swimmers, can chew through steel, can go for a couple of weeks with no food or water and can eat almost anything as a diet.
Luckily, living in the modern world doesn’t require us to go for weeks without food or chew through steel, but as stock market operators the first two months of the year have required durability. Specifically, January started with an almost 6% dive in the SP500 and February has seen more than a hundred point positive recovery. Obviously timing the markets is a much chagrined strategy, though an ability to do so would certainly have helped in the first two months of the year.
Back to the Global Macro Grind...
On the topic of durability, any investor that has put money into Brazil over the past four years has had to endure a halving (think Planarian worm) of the Brazilian stock market. In part, which is highlighted in the chart of the day, this has been driven by the dramatic decline in Petrobras (PBR), the largest single component of the Bovespa. As the chart of the day shows, from its peak PBR has lost more than 80% of its value.
This coming Thursday at 11am ET, we are going to host a conference call on Brazil with the explicit title, “Brazilian Equities Down -50% From 2011 Peak, Time to Buy?” On the call, we will review the bearish thesis, but take a more opportunistic look at getting long of Brazil. At ~ 7.0x earnings versus a peer mean of ~12x earnings, PBR may be an interesting way to play a recovery in Brazilian equities. If you aren’t currently a Macro subscriber, please email firstname.lastname@example.org for details on how to access the call.
On the macro news flow front this morning, China is once again dominating. While most global stock markets are either up or down small, the Shanghai Composite is down just over 2%. There are three key factors that appear to be weighing on Chinese equities:
- The Shanghai Property Index closed -2.2% and hit a fresh 8 month low;
- Many of the major publicly traded developers continued to sell off, even as the major banks all said there was no change to real estate related loan policy and have not halted real estate financing operations; and
- Finally, there was a report that an Executive Director of the Bank of China was arrested in a corruption probe.
The key benefit to Chinese investors of increasingly liquid stock markets is that they can get out of the way, and remain durable, by selling, which they did in spades in the last 24 hours.
Flipping back to the U.S. for a second, it is interesting to note that the SP500, and equities generally, have recovered nicely in February, the assets and sectors that are performing the best remain those that most embody slowing growth and accelerating inflation. Specifically, while the SP500 is now down only -0.04% on the year, gold is up +10.9%, healthcare is up +6.9%, and utilities are up 6.5%. So, yes, slowing growth and accelerating inflation endures!
Interestingly, from a stock perspective, the fact that lower yielding stocks outperformed last year actually benefited a number of short calls we made in the MLP sector. Disappointing MLP fundamentals only added to the macro tailwind last year, which carried into this year when one of our Best Idea shorts Boardwalk Partners (BWP) got cut in half after reducing their distribution by 80%.
The next big short on our horizon, and on our Best Ideas list, is Kinder Morgan (KMI). Barron’s kindly quoted my colleague Kevin Kaiser and wrote this weekend:
“Kinder Morgan's valuation is crazy," says Kevin Kaiser, an energy analyst at Hedgeye, an independent Connecticut research firm and the company's most visible critic. "The distributable cash flow is overstated because the maintenance capital is understated." He thinks Kinder Morgan MLP units could drop below $50 and the GP below $20 -- both roughly 40% lower than the current quotes.”
Tomorrow, Kaiser will be discussing the durability of Kinder Morgan and MLP accounting in a conference call with energy accounting expert Julie Hannink from CFRA (email email@example.com for details). It’s not clear to any of us that MLPs or their distributions are durable enough to be starved of capital expenditures.
Our immediate-term Macro Risk Ranges are now as follows:
UST 10yr Yield 2.68-2.81%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
TODAY’S S&P 500 SET-UP – March 11, 2014
As we look at today's setup for the S&P 500, the range is 27 points or 0.70% downside to 1864 and 0.74% upside to 1891.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.41 from 2.41
- VIX closed at 14.2 1 day percent change of 0.64%
MACRO DATA POINTS (Bloomberg Estimates):
- 5:30am: Bank of England’s Carney, others speak in London
- 7:30am: NFIB Small Business Optim, Feb., est. 94 (pr 94.1)
- 7:45am: ICSC retail sales
- 8:55am: Redbook weekly sales
- 10am: JOLTs Job Openings, Jan. (prior 3.99m)
- 10am: Wholesale Inventories, Jan., est. 0.4% (prior 0.3%)
- 4:30pm: API weekly oil inventories
- President Obama to attend Democratic National Cmte, Democratic Senatorial Campaign Cmte events in New York
- Vice President Biden meets with Colombian President Juan Manuel Santos before attending inauguration of Chilean President Michelle Bachelet in Santiago
- 12:25pm: OMB Director Burwell speaks at Economic Club of Washington on Obama’s proposed FY15 budget
- 11am: John Brennan delivers remarks on 1st yr as CIA director
- 4pm: Sec. Jeh Johnson before House Homeland Security panel on agency’s 2015 budget proposal
- U.S. election wrap: Florida primary tomorrow
WHAT TO WATCH:
- Blackstone said to plan $5.5b Gates Global bid with TPG
- Lloyds trader said to tip off BP on $500m currency deal
- Ackman to show internal documents in Herbalife China webcast
- SoftBank’s Son vows "price war" if T-Mobile deal approved
- Russia holds firm on Crimea as Ukraine bolsters its defenses
- Malaysia widens search for missing jet to Malacca Strait
- Microsoft’s Titanfall game is being released
- Bank of Japan sticks to easing plan as sales-tax bump looms
- Sean Combs is said to bid $200m for MSG’s Fuse TV network
- Jimmy Iovine’s Beats Music is said to raise up to $100m
- House panel to probe GM recall of vehicles on ignition switches
- Repo fire-sale proposal said within reach
- Insurance cos. attempt to escape U.S. bank capital requirements
- Honda makes Acura stand-alone division to boost luxury lineup
- Energy Future said to hold last-minute talks to ease bankruptcy
- Blackstone buys majority stake in Accuvant for $150m: WSJ
- Wells Fargo reverses ban on staff making P2P loans, FT reports
- Apple said to seek exclusive iTunes releases: L.A. Times
- American Eagle Outfitters (AEO) 8am, $0.26 - Preview
- Arcos Dorados Holdings (ARCO) 8am, $0.16
- Dick’s Sporting Goods (DKS) 7:30am, $1.11 - Preview
- John Wiley & Sons (JW/A) 8am, $0.85
- Springleaf Holdings (LEAF) 7:30am, $0.45
- Synta Pharmaceuticals (SNTA) 6:45am, ($0.30)
- Transcontinental (TCL/A CN) 10:30am, $0.34
- Caesars Entertainment (CZR) 4pm, ($1.52)
- Diamond Foods (DMND) 4:01pm, $0.08
- Furiex Pharmaceuticals (FURX) 4:05pm, ($1.06)
- Inter Parfums (IPAR) 4:05pm, ($0.17)
- NCI Building Systems (NCS) 4:01pm, ($0.01)
- VeriFone Systems (PAY) 4:01pm, $0.27
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Iron Ore Bear Market Deepens Amid China Credit, Surplus Concerns
- WTI Trades Near 3-Week Low as Supplies Seen Rising; Brent Stable
- Nickel Pioneer Shut Out as China Cuts Smokestacks: Commodities
- Copper Rebounds as Barclays Says Worst Selling May Have Passed
- Corn Extends Slump to One-Week Low as USDA Signals Ample Supply
- Gold Climbs Toward Four-Month High as Ukraine Spurs Haven Demand
- Indonesian Exchange Sets Daily Suggested Opening Bid for Tin
- Corn Extending Rally With Wheat for CBH on Ukraine Supply Risk
- Rebar Rises After Biggest Three-Day Decline Since October 2011
- Japan’s Giant Tsunami Wall Fails to Stop Atomic Power Fears
- Palm Oil Drops as Prices at 18-Month High Seen Cutting Demand
- Ukraine Crisis Endangers Exxon’s Black Sea Gas Drilling: Energy
- Record Bullish Oil Bets May Deepen Any Slump: Chart of the Day
- Tin Shipment Seized by Indonesian Navy En Route to Singapore
The Hedgeye Macro Team
"Prediction is very difficult. Especially about the future"
You are invited to join Hedgeye's Macro Team and Director of Research Daryl Jones for a special thought leadership and investing discussion with Laurence C. Smith, Professor and Chair of Geography and Professor of Earth & Space Sciences at UCLA and author of THE WORLD IN 2050.
Natural resource demand, population demographics, economic globalization and climate change will be the ascendant, global forces shaping civilization over the next half century.
We will explore the implications of these emerging dynamics, the challenges for governments and society and prospective investment opportunities born out of a sweeping shift in the distribution of people and power.
The call will be held on Thursday, March 13th at 1:00pm EST.
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 744597#
- Materials: CLICK HERE (Slides will be available approximately one hour prior to the start of the call.)
ABOUT PROFESSOR LAURENCE C. SMITH
Dr. Laurence C. Smith is Professor and Chair of Geography and Professor of Earth & Space Sciences at UCLA. His research includes topics of Arctic climate change, hydrology, carbon cycles and satellite remote sensing. He has published over 70 peer-reviewed articles including in the journals Science, Nature, and PNAS and won more than $7.7M in research funding from the National Science Foundation and NASA. In 2006 he was named a Guggenheim Fellow by the John S. Guggenheim Foundation and in 2007 his work appeared prominently in the Fourth Assessment Report of the United Nations' Intergovernmental Panel on Climate Change (IPCC). He is currently serving on steering committees for the National Research Council, NASA, and the World Economic Forum. He receives frequent requests to deliver keynotes at public and private speaking events, and in 2012 and 2014 was an invited speaker to the World Economic Forum in Davos.
His general-audience book THE WORLD IN 2050: Four Forces Shaping Civilization's Northern Future (Plume: New York, 2011; U.K. edition titled THE NEW NORTH, Profile: London, 2011 with translations in 14 languages) synthesizing cross-cutting trends in natural resource demand, population demographics, economic globalization, and climate change with particular emphasis on northern countries was winner of the Walter P. Kistler Book Award and a NATURE Editor's Pick of 2012. His work has received coverage in The Wall Street Journal, The Economist, The Los Angeles Times, The Washington Post, The Globe and Mail, The Financial Times, Discover Magazine, NPR, CBC Radio, BBC and others.
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