Imperial Ignorance

This note was originally published at 8am on March 07, 2014 for Hedgeye subscribers.

“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 (1986-2007). 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.

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 1^st) = -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 7^th, 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%

SPX 1848-1884

VIX 13.01-15.65

USD 79.49-80.22

EUR/USD 1.37-1.39

Gold 1321-1355

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer