This note was originally published at 8am on February 28, 2014 for Hedgeye subscribers.
“To me being a gangster was better than being President of The United States.”
While I’m not sure if one of New York City’s most infamous mobsters (1955-1980) said it that way, Ray Liotta did in Goodfellas. So that’s good enough for me. Great flick. Just like the Bernanke and Yellen Fed... really funny.
Henry: “You’re a pistol! You’re really funny. You’re really funny!”
Tommy: “What do you mean I’m funny?”
Henry: “It’s funny, you know. It’s a good story; it’s funny, you’re a funny guy!”
Tommy: “What do you mean? The way I talk? What?” (everyone becomes quiet)
Henry: “It’s just, you know, you’re just funny – the way you tell the story and everything.”
Janet "Mother of All Doves" Yellen is funny too.
She had us all right cracked up on the @Hedgeye HQ floor yesterday. The best part about her is that she actually believes what she said. On CNBC, Anthony, The Mooch, Scaramucci (not a character in the movie) called her an “intellectual stud.”
Back to the Global Macro Grind …
But Janet, seriously, just get the heck out of here already. While it was fun buying everything other than US Dollars as you were outlining your qualitative policy to passively inflate, we have to go out there on the Street today and live in the real world.
Here’s what happened in the market yesterday as the Fed’s price fixing policy (“rate guidance”) took hold:
This is very Q1 2011. The Dollar Down part isn’t funny because it’s an explicit #InflationAccelerating signal:
In other words, while she might look and sound like a crazy lady on TV, she actually has more power than the President of the United States at this point on the cost of living for Americans. This is plainly a Policy To Inflate. And it’s very dangerous, on many levels.
But don’t worry about the Dollar DOWN = Food, Gas, and Gold UP thing, because the “US stock market is up.” Yep, a whole +0.3% for 2014 to-date vs. the CRB Commodities Index and Gold +7.9% and +10.6% YTD, respectively.
After being “up” (in Burning Peso terms) +460% last year, Venezuela’s stock market was up +1.9% yesterday too. But Chavez was funny. Tommy: “Funny how? I mean, what’s funny about it?” (Goodfellas).
As John Allison states plainly in The Financial Crisis and The Free Market Cure, “countries do not go bankrupt the way businesses do. They typically hyperinflate – that is, print valueless money – and move to some form of authoritarian government.” (pg 8)
Authoritarian government? Think that’s funny? Or should we just take this un-elected lady’s word for it?
While the 80% of America who can’t invest in inflation gets jacked with it, we can make money (not funny for the “inequality” pitch). So protect yourself against US Currency Devaluation (new YTD lows this morning) and buy other countries’ currencies!
As you can see in the Hedgeye Asset Allocation Model:
In other words, while the funny lady was cracking us all up yesterday, we didn’t jump into the market and buy things exposed to ~71% of the US economy (CONSUMPTION). We just ramped the #InflationAcccelerating position.
While it’s both comical and counter-intuitive to the Keynesian economist contingent that you buy bonds when inflation starts to breakout, the fact is that’s precisely what you do when the entire world knows the Fed has 0% credibility in fighting real-world inflation.
You buy commodities to own inflation. You buy bonds because you know that inflation slows growth. #InflationAccelerating to all-time bubble highs in 2011-2012 drove bond yields (growth expectations) to all-time lows (bonds to all-time highs) in late 2012 too.
Anthony: “Tommy, no, you got it all wrong”
Tommy: “You mean, let me understand this… ‘cause, ya know maybe its just me, I’m a little f’d up maybe, but I’m funny how?”
Henry: “Just… you know, how you tell the story”
Ben, Janet, and Tommy are Gangsta though – ask Cramer and The Mooch.
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.64-2.79%
Brent Oil 108.05-110.71
Natural Gas 4.23-5.14
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Though a price increase likely should have happened years ago, Prime is good enough that an extra $20 bucks won't chase many away.
Editor's Note: Below is a brief, complimentary excerpt from Hedgeye Retail analysis. For more information on our services, click here.
Step 1 for Amazon was to get users hooked on its Prime service. Check. Mission accomplished.
Now, the company is going after price. And, while $20 may not seem like a big increase, when things change, people notice.
That being said, we have to admit that nine years is a long time to hold price steady. One could certainly argue that Amazon should have done this a number of years ago.
But all that really matters is what Prime offers. It's a sticky enough service that many won't be chased away by the $20 price hike.
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Takeaway: This week we take a step back and consider where we are in the cycle.
Sizing up the Cycle
There's not too much incremental in this week's labor market report, so rather than make something out of nothing from the data, we'll try and offer a bit of context on where we are in the cycle. The trendline rate of improvement suggests that the year-over-year change in rolling NSA claims should converge to zero sometime in the late-April/early-May time period as the chart below shows. Historically, that "zero convergence" has marked the metaphorical late innings of the economic expansion. Consider the last two cycles. Progress converged to zero around December 2006 and April 1999. The expansion persisted for some time thereafter, and equities continued to rise, but both were indications that the cycle was nearing the end of its expansion - arguably fueled by late-stage rotation into equities by retail investment. We don't want to imply that we can pin the tail on the donkey perfectly with this data series, but it has, in the past, been a useful leading indicator and we expect it will again serve as such in this current cycle.
The 2-10 spread fell -1 basis points WoW to 237 bps. 1Q14TD, the 2-10 spread is averaging 242 bps, which is higher by 1 bps relative to 4Q13.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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