Forcing 0%

“The Fundamental Force for Divergence: r > g”

-Thomas Piketty


I’m about a third of the way through Piketty’s 685 page NYT “Best Seller,” Capital In The 21st Century, and I have to admit that I don’t think I’m going to make it to the end. Like most Keynesian and/or Marxist economic diatribes written from a loft in Europe, there’s a lot more text than teeth.


That said, if Piketty had any experience risk managing markets, he’d have been able to hammer home why one of his core arguments is accurate. The aforementioned quote points to a simple relationship between growth (g) and returns (r). It explains the widening divergence between rich and poor.


True or False? “When the rate of return on capital significantly exceeds the growth rate of the economy, then it logically follows that inherited wealth grows faster than output and income” (Piketty, pg 26). True; especially when real growth is 0%. That’s when only those long inflation and/or #YieldChasing get paid.

Forcing 0% - 567

Back to the Global Macro Grind


The main issue most mainstream “economists” educated in the West tend to have is taking the government’s word for it on inflation. If you don’t know what real world inflation is, there’s absolutely no way you can have a real forecast for real (inflation adjusted) consumption g (growth).


It took Piketty to page 102 to address “The Question of Inflation”, but using multi-century government data sets he was still able to discern a very basic trend in made-up government inflation data: “the first crucial fact to bear in mind is that inflation is largely a twentieth-century phenomenon.


“More precisely, if we look at average price increases over the periods 1 and 1, we find that inflation was insignificant in France, Britain, the United States, and Germany: at most 0.2-0.3% per year. We even find periods of slightly negative price movements.” (Piketty, pg 103)


Negative price movements?


Oh the horror. Commonly fear mongered in 3-card Keynesian Monte as the great threat of “deflation”, most humans have got along just fine when the prices of primitive things like food and shelter have fallen in price.


Forget getting lost in the weeds on why there’s no way the 0.2-0.3% inflation reading is precise. It’s the forest (i.e. long-term and secular slope of the line in general prices and/or cost of living) that has been straight up into the right since 1913.


What happened in 1913?


Oh, right. That was the Federal Reserve Act of 1913 – when the US allowed an un-elected body of central planners begin with their Policies to Inflate via destruction of the purchasing power of The People (i.e. the value of their hard earned currency and savings).


Back to the relationship between real growth (g) and returns (r):


  1. If real-growth is +3-4% (1, or 1), lots of people are getting paid (savers too!)
  2. If real growth is 1.7% (Bush and Obama decade), less people are getting paid (not the savers though)
  3. If real growth is -1% (US GDP growth in Q1 of 2014), people who are long inflation and/or #YieldChasing get paid


If you have nothing, you can’t make a return on nothing. That’s a simple concept. What’s less obvious is that if you have something, and save it  (during this Federal Reserve Regime) you still get nothing, minus inflation.


“So”, when growth slows, you’re forced to buy asset price inflation (commodities, REITS, etc.) so that you can earn what you need (something greater than 0%) just to keep up with the cost of living.


When growth accelerates and the central planning agency RAISES rates, you get paid to both save and invest. (hint: you can’t grow unless you have savings to invest, unless you start levering yourself up).


Two real-time examples of countries going opposite way on this right now are the USA and the UK:


  1. The British Pound is +4.2% in the last 6 months vs the US Dollar
  2. As the Pound strengthens, UK inflation has weakened to its lowest level since 2009 (+1.5%)
  3. As US inflation accelerates (vs. decelerating at this time last year when the USD was strengthening), real-growth is slowing


What the US and UK bond markets are expecting are two different policy paths:


  1. US rates are falling again as the world anticipates Yellen gets less hawkish (less tapering, more dovish)
  2. UK rates are rising as the world expects the Bank of England to get more hawkish and get off 0%


I could ground myself in an academic hole and write a doctoral thesis on how the divergence between rich and poor is being perpetuated by Fed Policies to Inflate. But I won’t. Too expensive. The inflation of a Western Economics Education is hitting all-time highs too.


Our immediate-term Global Macro Risk Ranges are now:



RUT 1136-1175

VIX 10.73-13.29

Pound 1.68-1.70
Brent Oil 110.13-113.78

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Forcing 0% - Chart of the Day


Client Talking Points


No need to cut any growth expectations in the UK, provided that they continue to talk up a rate hike and let the Pound rise. CPI is lowest since 2009 at +1.5% year-over-year in May, and UK consumers like it. Home prices accelerated again to +9.9% in May (vs 8%) too (we still like UK and India’s growth profiles).


After ramping +4.3% last week both Brent and WTI have corrected a whopping 1/10th of that this morning; with U.S. rents at all-time highs and Food prices +21% year-to-date, its intellectually dishonest to not call cost of living #InflationAccelerating in the U.S. at this point of 2014.


U.S. 10-Year Yield back down to 2.59% seems to agree wholeheartedly with inflation slowing U.S. consumption growth; the immediate-term risk range for the 10yr is 2.46-2.65% ahead of what we think will be a dovish Fed statement tomorrow on U.S. economic growth.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


BOE talking rate hikes again this morning - love that @KeithMcCullough


“The positive thinker sees the invisible, feels the intangible, and achieves the impossible.”

-Winston Churchill 


29, the number of seconds it took the United States to score its first goal In the 2-1 victory over Ghana in a World Cup Match yesterday. Ghana completed 445 passes to just 283 for the Red, White and Blue. Per the official FIFA match stats, Ghana had 65 dangerous attacks to just 22 for the U.S., including 21 attempts at the goal to just eight for the U.S. side.

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LEISURE LETTER (06/17/2014)

Tickers: PENN, RCL


  • Wed-Thur June 18-19: Todd in Macau for meetings
  • Wed-Thurs June 18-19:  Hedgeye Cruise survey (pre-CCL F2Q)
  • Thurs June 19: LA May revs released


PENN – PENN and the Cordish Companies unveiled project details for 'Live! Hotel & Casino New York' to the Village of South Blooming Grove Board of Trustees.  The $750 million “Live! Hotel & Casino New York” is slated to include an upscale boutique 300-room hotel with luxury suites; a destination spa and fitness center; over 3,000 slot machines; more than 250 live table games; several marquee restaurants; as well as a live entertainment venue and a spacious conference center.

Takeaway: The balancing act of building with enough pizzazz to draw visitation and gaming spend while earning a sufficiently high ROIC to keep investors happy - while also considering the risk of cannibalization in seven years when metropolitan NYC opens to casino expansion.


RCL – signed an agreement with Taiwan International Ports Co. worth $33.3 million to build a cruise ship pier in outlying Penghu County to allow the company's cruise ships to dock there.  RCL will have a 51% stake in the investment.  The new pier will be complete in 2016 and will allow for cruise ships as large as Oasis of the Seas to dock there.

Takeaway:  Project aims to increase cruise awareness in China


Japan Gaming Legislation – The legislative process to approve gaming will on Wednesday when Hiroyuki Horsoda, the deputy secretary-general of the ruling Liberal Democratic Party, will introduce an integrated-resort legislation promotion bill.  Upon passage of this bill, a second bill will be introduced to set the standards by which Japan will open to legalized gambling (wagering via table games and slot machines).

Takeaway:  It's important that this bill reaches agreement in the Lower House as the much tougher battle will be in the Upper House, which may occur in Fall 2014.


Macau Visitation Rules - Secretary for Security Cheong Kuoc Van announced Macau reduced to five days, from seven, the permitted stay for Chinese passport holders who transit in the enclave effective from July 1.  Previously, mainlander Chinese were allowed to enter Macau, stay for up to seven days if they were in transit, and traveling on to a third country.  

Takeaway:  More of a headline to appease the Mainland than an issue that will negatively impact Macau visitation.


Indonesian Gaming Expansion – the first phase of Treasure Bay Bintan, an integrated-resort nearly five times the size (upon completion) of Marina Bay Sands, will open by year end.  The integrated-resort, developed by Landmarks Berhad, could cost around $4 billion and will be located just next to Bandar Bintan Telani Ferry Terminal - a 45-minute ferry ride from Singapore.  Spanning 90 hectares, the first phase of Treasure Bay Bintan will add 1,500 hotel rooms to the island. The third and final phase of the development will open in 2020. Upon completion the resort will encompass 338 hectares. 

Takeaway: A potential threat to Singapore integrated resorts. 


Beijing Home Sales - home sales in Beijing fell 34.9% YoY during the first five months of 2014. The city said real estate developers sold 3.29 million square meters of housing during the period.  Housing starts fell 0.3% to 4.84 million square meters.  Sales of commercial buildings fell 33.6% YoY to 4.54 million square meters.


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

June 17, 2014

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Shoe Shine?

This note was originally published at 8am on June 03, 2014 for Hedgeye subscribers.

“Dude, look at your dirty shoes – you need a shine!”

-Joe (NYC)


Yesterday I was getting my shoes shined in NYC at one of my favorite spots – on the corner of Avenue of the Americas and 46th Street, right across from the building where I got fired.


Not that I keep track of the when and the why, but I wrote a book about it so it’s out there. Carlyle fired me for being “too bearish” on the US #ConsumerSlowing on November 2, 2007. My 1st son was born on November 7th. And the SP500 dropped 6% by the end of the month.


Yep, risk happens slowly, then all at once. You know when your shoes are dirty too. If you go to my spot, tell Joe I sent you. He’ll chirp anyone who is looking NYC serious with dirty shoes. Within a block, they all look down. They may not like it, but the truth is staring at them from their feet.


Shoe Shine? - boston shoe shine kids archive 66761 600x450


Back to the Global Macro Grind


Our preferred US Equity Growth index to be short of in 2014 remains the Russell 2000. In addition to being down -0.5% on Friday, it dropped another -0.7% yesterday to -3.1% YTD.


BREAKING: SP500 hits all-time highs –CNBC


Yep, as bond yields crash YTD (peak-to-trough decline in the 10yr Treasury Yield = 20%) and the Russell delivers negative returns, the world’s most consensus short position (SPX Index + E-mini) hit another new high on no volume yesterday. #hooray


Whatever you do, don’t look at your shoes yet.


Total US Equity Market Volume was -28% versus its 3-month average (and the average continues to crash!) and the US Equity market’s breadth (advancing vs. decline stocks) was negative yesterday too (46% gained in price, 50% declined). #dirty


But, but, you have to buy the SP500 … because it’s up, right?


As long as you buy SPX vs short Russell (IWM), I’m into that. From a risk Style Factoring perspective, the SP500 is not the Russell:


  1. SP500 has plenty of #InflationAccelerating components (like Energy and late-cycle Industrial companies taking price)
  2. SP500 has many more slow-growth #YieldChasing components (Utilities, REITS, Telecom, etc.)
  3. SP500 has way more consensus short sellers who tend to short low and cover high


Like the FTSE in the UK, the SP500 is much more multinational too. If you want the pure play on short US domestic growth, it’s the Russell.


While there’s no doubt that it’s a lot easier to call the macro game from the seat I have today than the one I used to be in, that doesn’t mean that market truths cease to exist. #OldWall hasn’t been there to help coach Portfolio Managers through US growth slowdowns. We have been.


Being right in an environment with Rising Variance at both the country and sector level gets easier if you know the macro economy we are in. With US #InflationAccelerating perpetuating US #ConsumerSlowing, here are the Top 3 US Equity Sectors you still want to be long:


  1. Energy (XLE)
  2. Utilities (XLU)
  3. REITS (VNQ)


To reiterate the Sector Style Factors you do not want to be long:


  1. Consumer Discretionary (XLY)
  2. Housing (ITB)
  3. Financials (XLF)


If you leave being US Equity market centric (life is easier that way), buying currencies and stocks in countries who had what the USA had last year (#StrongCurrency + #RatesRising and inflation deflating), current equity markets we still like on the long side are:


  1. United Kingdom (EWU)
  2. India (INP)
  3. Brazil (EWZ)


In addition to being long Bonds (TLT), Inflation Protection (TIP), and Commodities in 2014, it’s what you aren’t long when growth slows (bubble multiple stocks) that has made all the difference too.


My call wasn’t consensus in November 2007, and it wasn’t in January of 2014 either. While we need to be loud about seeing something that we don’t think the Street is paying attention to, we don’t want that to feel dirty to you. We want to help augment your process and keep your shoes shiny.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.57%

RUT 1089-1155

VIX 10.94-13.59

USD 80.05-80.75

British Pound 1.67-1.69

Brent Oil 108.42-110.76


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Shoe Shine? - SPX

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.