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Inflation Is a Lie

This note was originally published at 8am on May 22, 2014 for Hedgeye subscribers.

“Inflation is taxation without legislation.”

-Milton Friedman


It’s a good thing for Janet Yellen that Milton Friedman isn’t around to call her out. Ben Bernanke can get paid another $400,000 to spew to a bunch of head-nodders that there’s no inflation at $110/barrel oil and the all-time high in US rents too, I guess.


Friedman also said that a “government solution to a problem is usually as bad as the problem.” #Agreed. But the Federal Reserve is becoming a much larger problem than that. These people aren’t even elected.


“So”, after Soybeans, Oil, and Orange Juice prices inflated another +2.4%, +1.7%, and +1.3%, respectively, yesterday, Mr. Macro Market took the Fed’s commentary (Federal Reserve Minutes were released intraday) that there is no #InflationAccelerating risk as a sign to buy more inflation. 

Inflation Is a Lie - Inflation 04.29.2014


Back to the Global Macro Grind


On US rents (34% of Americans have to rent, and like it) and cost of living hitting all-time highs this week, this is what one of the most uninformed members of the US Federal Reserve, Bill Dudley, had to say:


“prices look likely to firm, somewhat”


Thanks for coming out Bill. And yes, I’m calling you out. When our kids look back on this period of US economic history, they’ll call you a lot worse than that. They might even call guys like you Jimmy Carter.


While it’s part of winning a hockey game, name-calling is no way to win a debate. Alongside #RentRipping, here’s more YTD #InflationAcclerating data:


  1. CRB Foodstuffs Index +21.9% YTD
  2. CRB Commodities Index +10% YTD
  3. Coffee +57.6% YTD
  4. Nickel +42.1% YTD
  5. Lean Hogs +28.3% YTD
  6. Soybeans +19.2% YTD
  7. Cattle +15.4% YTD
  8. Palladium +15.4% YTD
  9. Orange Juice +10.9% YTD
  10. Oil +7.9% YTD


Oh, right. Oil is only +8% YTD vs. US growth stocks (Russell 2000) and US Consumer Discretionary (XLY) down -5.7% and -3.9% YTD, respectively. No worries. Ben Bernanke said there was no inflation with Oil at $150 in Q2 of 2008 either.


It’s one thing for me to rant about this using real-time prices paid. It’s going to be an entirely different thing when the 80% of people in this country getting jammed by the Fed’s Policy To Inflate revolt.


As the late Robert Heinlein astutely observed, “there is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for him.” But he’s dead now too. So Janet doesn’t have to deal with him either.


Inflation Is a Lie - Chart of the Day


In other real-time (price, volume, volatility) news:


  1. PRICE – SP500, Nasdaq, and Russell all bounced to lower-highs (down -0.6%, -5.2%, and -8.7% from their bubble highs) yesterday
  2. VOLUME – total US Equity market volume was DOWN again on the UP-day (-9% and -31% versus its 1 and 3 months averages)
  3. VOLATILITY – front month VIX got smashed to a fresh YTD closing low of 11.91


And you buy stocks when volatility is at its oversold lows, right? Only if you are doing it with other people’s money! Must #chase daily #performance. Must short low and cover high. Must bang head against Old Wall.


No thanks.


If you bought US stocks at this level in the VIX in August of 2013, you were down -3.5% (in the SP500) in less than 2 weeks after that. The most recent time-spanking you’d have had buying US growth stocks (Russell 2000) with a “low VIX” in Jan-Mar 2014 is more like -7-9%.


But, if you play this game with real-ammo, you already know that.


Other than front-month-frustration for growth bears trying to express their fears in VIX (which has not been a recommendation in the Hedgeye Macro Theme playbook in 2014 due to 6,000 hedge funds trying to do the same, at the same time), where is US stock market sentiment at?


  1. II’s Bull Bear Survey just flashed a fresh new Q2 high in consensus bullishness
  2. After another no-volume bounce, Bulls have chased back up to 57.2% (from low 50%s at the YTD lows)
  3. The Bull/Bear Spread has widened +30% to the Bullish side since mid-April to +3890 basis points wide


In other words, the point here isn’t that 65-70% of people are bullish. It’s that only 17-19% will admit they are bearish! Do not underestimate the #behavioral risk to this US stock market that is called career risk management.


Not only has the Fed implicitly imposed a short-term performance chasing hyperactivity on equity fund managers being forced to chase yield, bubbles, etc., they’ve made a large % of the hedge fund business a levered long beta strategy.


But I digress. Having someone at the Fed explain what that means to Maxine Waters will be as difficult as these people trying to convince you that cost of living isn’t at all-time highs. While lies about inflation in Washington can most definitely live, they can’t live forever.


Our immediate-term Global Macro Risk Ranges are now:


RUT 1085-1121

VIX 11.84-14.02

USD 79.61-80.23

Brent Oil 109.05-110.99

Gold 1285-1315

Copper 3.08-3.19


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

Our Process Is Different

“Because our process was so different… we felt it had real power.”

-Ed Catmull


As I grind through the end of it, Creativity Inc. is turning out to be one of the best business books I’ve read in a long time. Chapter 4, “Establishing Pixar’s Identity”, is all about process – “trust the process.”


For my team, that’s going to sound very familiar. As real-time market prices, volumes, and volatilities change, we feel that our process is better than our #OldWall competition’s, if only because we change.


Our Process Is Different - Busines

“What is the nature of honesty? If everyone agrees about its importance, why do we find it hard to be frank? How do we think about our own failures and fears? Is there a way to make our managers more comfortable with unexpected results?” (Catmull, pg 82)


Back to the Global Macro Grind


This is going to be one of the shortest Early Looks of the year because a European Central Planner can change my decision making process by doing something drastic to the Global Currency Market in the next few hours.


While I’d only have to work 6 hours a day if I had the inside information that Mario Draghi may have whispered to his favorite cronies, I still wouldn’t know how to position until I saw the reaction to this version of “whatever it takes.”


That’s the main point about my process. I react to what Mr. Macro Market tells me to do – I don’t tell him what to do. It’s taken me a long time to embrace the reality of not only information surprises, but how the market scores them.


Just to set the manic media’s volume on this ECB decision right:


  1. “Euro, stocks, hostage to ECB’s ability to surprise” –Reuters
  2. “Draghi’s rate tonic seen piquing taste for the stronger stuff” –Bloomberg
  3. “Live Blog: ECB’s Draghi poised to unveil stimulus” –CNBC


In other words, no one needs moarrr central-planning-cowbell moarrr than those trying to sell advertising. And everyone in the financial media is leading every lemming who will trade alongside the implied trend of the headline, until the market goes the other way.


That’s why contextualizing the #behavioral side of markets across multiple factors and durations is as critical as it has ever been. I’ve been doing this for almost 17 years now and I have never seen macro consensus positioning get run-over so consistently.


That’s not to say that Draghi can’t do something wacky this morning and burn the Euro through my $1.35 EUR/USD long-term TAIL risk line of support. It’s simply to remind you that everyone and their brother is worried that he will, at the same time.


“So”, deal with it. How do I deal?


  1. Have a process
  2. Have a plan
  3. Plan to change the plan, if the market tells you to do so


On the process, I’m constantly vetting, evolving, and hopefully improving ours by stress testing it with the best buy-side minds in the world. Yesterday I was in Boston. Coming out of every meeting I was told that our “macro calls” for 2014 have been different.


Being different can also mean being wrong. “So”, what’s the plan if I am wrong this morning and the EUR/USD doesn’t hold $1.35?


  1. If it snaps $1.35 in the moment, I won’t freak-out – I’ll wait and watch for confirmation
  2. A sustained breakdown in the Euro would probably mean a breakout in the US Dollar
  3. A breakout in the US Dollar would probably mean a breakdown in commodity #InflationAccelerating


In other words, the plan is that the plan could change. If I take myself out of the emotion of what will be this morning’s moment, there are other big time macro events that could then change the plan yet again:


  1. US Employment Report is on Friday
  2. US Federal Reserve June meeting (where I think Yellen will get incrementally dovish)
  3. Stanley Cup Finals


Yes, the process of printing moneys, destroying currencies, and compromising the trust of The People who have to eat the cost of living born out of that has real power too. Our job is to help you risk manage it.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.41-2.61%


RUT 1104-1151

USD 80.16-80.79

EUR/USD 1.35-1.37   

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Our Process Is Different - Chart of the Day

Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement

Takeaway: We remain bullish on FXE and GLD into Thursday's ECB policy meeting.

While we don’t have a crystal ball on how the ECB will act tomorrow, we do know that the Bank has historically surprised (when the ECB last cut the benchmark interest rate in November 2013, from 0.50% to 0.25%, it was widely unexpected by consensus). Frankly, we wouldn’t be surprised if Draghi underwhelms the market’s lofty expectations this time around, and we’re setting ourselves up to buy the EUR/USD (etf FXE) on weakness as we think 1) the sell-off is largely priced in following weeks of rumors about the ECB’s intent to act, and 2) the predictable dovish monetary response by the Federal Reserve as growth surprises to the downside should continue to aid our bearish call on the USD.  (Here we look forward to the FOMC statement on the 18th for confirmation.)


The headline CPI estimate in the Eurozone came in lighter than expectations yesterday, increasing at an annual rate of +0.5%  for the month of May while consensus expected +0.6%. Today’s preliminary Q1 Eurozone GDP release printed in-line with expectations at +0.9% year-over-year. With the Euro coming off -2.0% from the March 18th high of $1.3934 and Gold (priced in USD) decreasing -4.5% over the last month, the market expects something from the ECB tomorrow. Draghi’s “whatever it takes rhetoric” about fighting what he has labeled a “Japanese” style deflation risk in recent weeks has successfully strengthened the market’s expectation of a dovish policy move at 7:45 a.m. EST tomorrow morning. In a survey of economists released by Bloomberg, 44 of 50 expect the ECB to implement a negative deposit rate. In a separate survey, 56 of 58 expect a cut in the benchmark interest rate. Consensus estimates expect the ECB to cut its deposit facility rate from 0.0% to -0.10% with the benchmark interest rate being cut from 0.25% to 0.10%.  


We believe Gold is a hedge against future dollar devaluation and the price activity in both the Euro and Gold have legitimized this view. We added Gold (etf GLD) on the long-side to Hedgeye's investing ideas list on May 22nd:




The Euro-Gold correlations have trended much stronger relative to historical interaction since the ECB’s first mention of an asset purchase plan back in February:  


Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - FXE vs. GLD ETF


Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - Euro vs. Gold Spot


Gold has historically held a meaningful negative correlation to the arithmetic mean of the U.S. Dollar and ten-year treasury yields. As growth surprises to the downside, the expectation for future dollar devaluation in response to Fed policy response increases. Judging by the move in Gold and currency markets into the meeting, anything short of a significant move from the European central bank is widely unexpected. 


Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - Gold vs. Euro Spot Chart YTD with Annotations


Also, the anticipation of even easier policy from the ECB moving forward has pushed sovereign debt yields across the Eurozone to historically low levels. Ten-year yields have come in significantly over the last year: 


Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - European ten year yields


After receiving a $125Bn IMF aid package just two years ago, Spanish yields now hover approximately 30bps over ten-year treasuries. Portugal, which just exited its IMF bailout program in March, borrows at ~100 bps over treasuries. A Bloomberg article published yesterday noted just how drastic this shift has been:


“Bond yields in Germany and its predecessors haven’t been this low since at least the early 1800s, when French forces under Napoleon Bonaparte fought wars throughout the European continent.”


The Federal Reserve is up next on June 18th, and we expect a dovish statement after a horrendous revised Q1 GDP print last week.


We continue to play the sector variances in the market as growth slows and inflation accelerates in the U.S. by remaining long  of utilities (XLU +12.6% YTD), REITs (+15% YTD), and commodities (CRB +9.0% YTD; GLD +8.7% YTD). We remain short of consumption-driven sectors that negatively diverge as the consumer is squeezed with inflation:  XLY (-1.2% YTD) and IWM (-2.6% YTD). As the prospect for future dollar devaluation increases, we like leaning long of inflation in Gold terms as consensus GDP comps for 2H14 become merely impossible. Despite the slowdown, our non-consensus call into Q2 of 2014 remains just that: NON-CONSENSUS. JPMorgan recently cited that its clients have not been as short of treasuries since 2006. Bullish bets on Gold peaked in Mid-March, right before the Euro began selling off from its YTD highs.


Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - gold levels


Reiterating Our Long GLD and FXE Position Into The ECB Policy Statement - eur.usd spot



Macro Team











Poll of the Day Recap: 76% Think the VIX Is Heading Higher

Takeaway: 76% said HIGHER; 24% said LOWER.

In today’s Morning Newsletter, Hedgeye Director of Research Daryl Jones questioned the lack of current market fear writing:


"…The area of foreign policy may be one key area in which the amount of concern or fear is lower than reality warrants.  From the Taliban in Pakistan, to the potential for an Iranian nuclear arsenal, to the ongoing conflict in the Ukraine, foreign policy risks remain.  Certainly these global hot spots create buying opportunities more often than global calamity, but at a VIX of sub 12, not a lot of calamity is priced in.”


But we wanted to know what you thought, so today’s poll question was: Is the VIX heading higher or lower?


Poll of the Day Recap: 76% Think the VIX Is Heading Higher - a storm is coming 246411

At the time of this post, 76% said HIGHER; 24% said LOWER.


Of those who voted HIGHER, they explained:

  • "I voted higher because, darn it, it can't really drift much lower, can it? Hey, everything is calm and serene...until it's not. It works until it doesn't, then a little panic sets in. One thing is certain: nothing is certain as long as the Fed keeps micro-managing my checking account."
  • "Currently, VIX is unusually low, so the expectation is steady, if not healthy robust growth.  The VIX will jump much higher when this rosy expectation isn't being realized."
  • "The risk reward on the VIX is definitely up. So higher."
  • "DJ said it best. The market is not expecting the unexpected. When unexpected things happen, reactions in financial markets turn flat-out violent."

However, this voter, who said it was heading LOWER, pointed out: "Like shorting the SPX, the VIX has been the pain trade of 2014. Of course a geopolitical event could send the VIX to 20 in a millisecond, but what type of event? Until such event happens, I believe the VIX will stay within KM's risk range of 11.## to 14."


Hedgeye Retail: $NKE Continues to Innovate with New Patent

Takeaway: It's another arrow in Nike's quiver that differentiates it from its competition.

 Hedgeye Retail: $NKE Continues to Innovate with New Patent - Brands Nike Fire and ice 046145


NKE Files Patent for Form Fitting Shoe

  • "A footwear customization kit is disclosed. The kit comprises a container including an article of footwear, a stand, a steaming bag and a set of instructions. The article of footwear includes a customizable portion that can be deformed when heated. The stand and the steaming bag can be used to heat the article of footwear in a steam environment. The stand includes a base portion and a footwear engaging portion. The stand can also include a detachable portion configured to engage the base portion in one position and the footwear engaging portion in another position.

Hedgeye Retail: $NKE Continues to Innovate with New Patent - chart1 6 4


Nike leads the footwear category in innovation and the margin isn't even close. We're not as excited for a form fitting shoe as we are for the in-store FlyKnit customizer, but it's another arrow in NKE's quiver that differentiates it from its competition. It's much easier to take price when its associated with technical innovation. Even if the wholesale partners (FL, FINL, DKS, etc…) don't initially carry this technology, it is something that Nike can wave in front of them as an incentive to strengthen its leverage over these retailers.


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Editor's Note: This is a complimentary research excerpt from Hedgeye Retail sector head Brian McGough. Follow Brian on Twitter @HedgeyeRetail


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