The Fed's First Cousin

“Yeah, my wife is my cousin or whatever, but it’s not like what you think.”

-Donnie Azoff


In The Wolf of Wall Street, Donnie (whose real name is Danny) is a beauty of a storyteller. In real life, Danny was convicted of securities fraud and money laundering. And, yes, he married his cousin.


Jordan Belfort: “Is she like your first cousin?”


Donnie Azoff: “Her father is the brother of my mom… and she grew up hot.”


The Fed's First Cousin - don1


Back to the Global Macro Grind


Hot, as in inflation. Yep, but if you ask the sheep at the Fed, it’s not like what you think. Even though commodity inflation accelerated to fresh YTD highs yesterday (CRB 19 component Commodities Index = +11.4% YTD), it’s sort of like the cousin thing.


You see, as long as the Fed doesn’t call it what it is, you and I can keep making money buying it. In the meantime, just don’t tell 80% of Americans that they are getting it “jammed down their throat” (Jordan Belfort told his brokers to do that with Steve Madden’s stock):


  1. CRB Food Index up another +2.1% this week = +22.8% YTD
  2. Nickel +2.7% this week = +32.3% YTD
  3. Gold +3.1% this week = +9.1% YTD


I know. I know. You can’t eat Gold. But instead of whining about it on down days in 2014, you can certainly buy it!


Reality is that very few of the world’s savants made Gold one of their top Global Macro LONG positions in 2014. It’s still nowhere in the area code of consensus. And yesterday it broke out above @Hedgeye immediate-term TRADE resistance of $1285/oz.


How high can Gold go?


  1. If we’re right and the inflation-accelerating-slows US growth setup is similar to 2011, Gold can go a lot higher
  2. From an immediate-term TRADE perspective, the new risk range is $1/oz
  3. From an intermediate-term TREND standpoint, $1381 is resistance


Put another way:


  1. Gold has immediate-term upside of +2.1%
  2. Gold has intermediate-term upside to +14.9% YTD


That sure as heck beats being long something that is going to keep getting eaten by the Fed Policy To Inflate. US Consumer Discretionary stocks (XLY) are down -0.43% YTD. And, all things considered,  being levered long to the recent edition of the US #HousingSlowdown pretty much sucks wind right now too.


Where the real pin action has been since the Fed cut its US Growth estimates on Wednesday is in:


  1. INFLATION stocks like Energy (XLE) +13.43% YTD
  2. SLOW-GROWTH #YieldChasing stocks like Utilities (XLU) +16.13%


But, whatever you do… and no matter what you hear from Consensus Macro… don’t call any of these investment Style Factors inflation’s cousin.


Jordan Belfort: “I heard some stupid $h-t. I … I didn’t even want to bring it up. It’s just stupid.”


Donnie Azoff: “$h-t with me?”


Jordan Belfort: “You know, just… people say $h-t. I don’t even know. I don’t even listen to it…”


Donnie Azoff: “What do they say?”


When an un-elected-central-planner devalues the Dollar, it’s inflation, stupid.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.47-2.67%


RUT 1155-1189

USD 80.28-80.63

Brent 112.12-116.42

Gold 1


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


The Fed's First Cousin - Chart of the Day


TODAY’S S&P 500 SET-UP – June 20, 2014

As we look at today's setup for the S&P 500, the range is 37 points or 1.66% downside to 1927 and 0.23% upside to 1964.                                                 













  • YIELD CURVE: 2.19 from 2.17
  • VIX closed at 10.62 1 day percent change of 0.09%


MACRO DATA POINTS (Bloomberg Estimates):


• No major economic reports scheduled

• 1pm: Baker Hughes rig count



    • House in session; Senate schedule TBA
    • President Obama meets with New Zealand PM John Key
    • SEC Chairman Mary Jo White speaks at Economic Club of N.Y.
    • 9am: House Judiciary hearing on net neutrality/antitrust law, w/FTC Commissioner Joshua Wright
    • 9am: House Ways/Means Cmte hearing on IRS treatment of tax-exempt orgs.
    • 9am: House Maj. Whip Kevin McCarthy, Rep. Paul Ryan, N.J. Gov. Chris Christie speak at Faith and Freedom Coalition
    • 9:30am: House Nat. Resources panel  Nat. Gas Gathering Enhancement Act (H.R. 4293), Energy Infra. Improvement Act (H.R. 1587)
    • 9:30am: House Veterans’ Affairs Cmte hearing on Sr. Exec. Service performance subpoena



  • Shire rejects AbbVie’s $46.5b takeover bid as too low
  • Siemens lifts Alstom Energy bid to $19.9b, defying GE
  • Obama sending advisers to give Iraq time to form govt.
  • Energy Transfer “high level” talks to acquire Targa terminated
  • BofA must face U.S. suit claiming mortgage-securities fraud
  • Oracle sales, profit miss estimates amid transition to cloud
  • Icahn urges Family Dollar CEO to seek sale “immediately"
  • Revel casino files for bankruptcy, seeking savior at auction
  • U.K. May budget deficit little changed after 1-time 2013 boost
  • NYC Fifth Avenue tower sells to Thor-led group for $595m
  • Verizon said meeting with Dish on possible spectrum sale: NYPost
  • U.S. GDP, Housing Data, Nike, Wimbledon: Week Ahead June 21-28



    • CarMax (KMX) 7am, $0.67
    • Darden Restaurants (DRI) 7am, $0.94



  • Gold Options Signal Sustained Rally as Yellen Shakes Out Boredom
  • Brent Heads for Second Weekly Gain on Iraq Violence; WTI Steady
  • China Miners’ Loss Is BHP Gain as Iron Slumps 44%: Commodities
  • LNG Rally Fading on New Supply as Nukes Set to Restart: Energy
  • Copper Gains Most in Three Weeks as Zinc Trades at 16-Month High
  • Gold Falls With Rally Seen Overdone as Investors Close Positions
  • Soybeans Slide on Expectation U.S. Farmers Expanded Planting
  • Asia’s WAF Purchases for July Stable; Nigerian Imports to Rise
  • Digital Shipping Platforms Cutting $684 Million Errors: Freight
  • Rising German Coal Use Imperils Emissions Deal: Carbon & Climate
  • Kansai Electric Said to Agree With Cheniere to Purchase U.S. LNG
  • RBI, Finance Ministry Said to Work on Iran Oil Payment Process
  • Energy Traders Pay More Than 100 Million Euros to Meet New Rules
  • China Metal Probe to Push Copper to LME Depots: Chart of the Day


























The Hedgeye Macro Team














Early Look

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ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher?

We continue to field arguments against the inflationary read-through on the commodity squeeze. Sharp increases in livestock and poultry prices over the last ten years in the face of stagnant wage growth, a decline in savings rates, and a declining U.S. dollar illustrate this reality in staggering fashion.


If Janet Yellen’s commentary yesterday is any indication, the fed will continue to promote yield-chasing from financial intermediaries and those lucky enough to hold equities and fixed assets. The PCE survey from the BLS reports the top quintile of income earners takes 66% of the aggregate income in the basket from interest, dividends, and investment related income. Needless to say, a majority of Americans consume meat.


2013 Meat Consumption Per Capita (KG/Person):

  • United States: 106.9
  • China: 53.5
  • World Average: 34.9

The average consumer we have continuously highlighted is reaching insolvency. Median net income margins have consistently compressed over the last five years to about 1.38% with savings rates decreasing over the same period.


Last Ten Years:

  • USD Index: -9.8%
  • Trailing 1-year U.S. Personal Savings Rate: -9%
  •  S&P GSCI Livestock Index: +69%
  • U.S. Private Sector Avg. Hourly Earnings (Real): -43% 


ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 10 year chart usd vs. gsci vs. savings rate


A survey from both the USDA and the University of Oklahoma’s Department of Agricultural Economics this week provide evidence that people are eating the higher price tags (adding to the pain, they drove to the store --> WTI and Brent hovering at 9-month highs).

  • “This month’s survey shows consumers are willing to pay 11-35% more for steak, pork chops, and chicken wings"

-       Food Demand Survey from the University of Oklahoma’s Department of Agricultural Economics


  • The USDA’s Weekly Retail Beef Feature Activity Report highlighted a sharp decline in the number of food retail outlets featuring beef


ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 10 yr. price chart


Last Ten Years:

  • Live Cattle: +71%
  • Lean Hogs: +65%
  • Chicken Breast: +40%


 ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 06.19.14 Performance Table


Disease or not contributing to the advances YTD, this kind of headline inflation is tangibly relevant on the wallet. Unfortunately most people were not granted the opportunity to add to their inflation hedges out of the FOMC statement yesterday where the Fed provided a downward revision to its 2014 GDP estimate for the SEVENTH year in a row:

  • Headline CPI printed at +0.4% Tuesday vs. +0.2% expected (Inflation surprises)
  • Full-year growth estimates cut to 2.1-2.3% from 3% at the Fed (coincident response as growth misses)
  • 16 of 19 commodities in the CRB in positive territory on the year (prospect for future dollar devaluation increases; dollar down, cost of living up)

 ALL-TIME HIGHS: Can Livestock and Poultry Prices Go Higher? - 05.27.14 Median Consumer Overview  2



Ben Ryan


Poll of the Day Recap: 75% Are Feeling The ‘Pinch’ of Higher Prices

Takeaway: 75% voted YES; 25% voted NO

Keep doing the same thing we have been saying all year, buy #InflationAccelerating and slow-growth #YieldChasing assets.


Everywhere you look these days, prices are going up. Meats, poultry, eggs and fish prices just hit an all-time high. U.S. rents are at an all-time high. Gas prices are soaring again. Etcetera, etcetera. 


We wanted to know if your wallet was feeling it too: Are you personally feeling the ‘pinch’ of higher prices?


Poll of the Day Recap: 75% Are Feeling The ‘Pinch’ of Higher Prices - pinch 


At the time of this post, 75% voted YES; 25% voted NO.


Those who voted YES had this to say:

  • Yes, most definitely.  Ironically, I was at Sam's Club yesterday and picked up a few items.  I would have liked to purchase a few steaks as I've done in the past.  I didn't purchase any steak as it's a bit of a luxury item and I need to be even more frugal than I typically am with three teenagers at home.  Now, I try to make bulk purchases of hamburger when it's on sale (about $3.50 a pound) along with other grocery items.
  • I'm noticing but I'm fortunate that its not changing my life now. I worry about small business people from landscapers to limo drivers to food trucks whose inputs are spiking. They are suffering and sooner or later we will all start to pay as they have no choice but to raise prices.
  • Commodity prices are inflating, driving energy and food prices up, due to a weak dollar and higher percentage of disposable income (due to low wages) spent on them (higher demand).
  • I increased the rent 30% on an apartment and I found a new tenant before even advertising it.


Those who voted NO reasoned:

  • It's a matter of adjusting family spending accordingly.  Prices are higher, but, just like another comment, good home budgeting matters.  People are generally wasteful and buy unnecessary things to "keep up with Jones'” -- so if they're feeling it and "can't" manage it, it's no surprise.
  • Prices are definitely higher, but not feeling it yet... good home budgeting, good cash flow management, and earning a good job trump poor monetary policy... my next move is a new car with better gas mileage.
  • Prices are noticeably higher, but I'm not feeling the pinch. This question could have rephrased to focus more on the economic impact of higher prices on people and the markets.
  • "Pinch"?  What "pinch"?  The Fed says there's no inflation. I mean, if we can't trust our own government...


Would Controversial American Apparel CEO Dov Charney Have Been Ousted If Stock Was $100?

Takeaway: If this was a $100 stock (or even a $10 stock) the Board would tolerate a lot more than if it were trading at $0.64.

Editor's note: This is an excerpt from retail sector head Brian McGough's morning research. Click here for more information on options available to Hedgeye subscribers.


APP - American Apparel Board Suspends Dov Charney as CEO and Declares Intent to Terminate Him for Cause; Names John Luttrell as Interim CEO


Would Controversial American Apparel CEO Dov Charney Have Been Ousted If Stock Was $100? - dov

  • "The Board of Directors of American Apparel, Inc. today voted to replace Dov Charney as Chairman and notified him of its intent to terminate his employment as President and CEO for cause. It is expected that the termination will be effective following a 30-day cure period required under the terms of Mr. Charney's employment agreement."
  • "'We take no joy in this, but the Board felt it was the right thing to do,' Mr. Mayer said. 'Dov Charney created American Apparel, but the Company has grown much larger than any one individual and we are confident that its greatest days are still ahead.'"


Key Takeaway: While it comes as no surprise that Charney was pushed out due to issues with his personal conduct and poor judgment, we find it hard to believe that this had absolutely nothing to do with the company’s performance.


If this was a $100 stock, or even a $10 stock (and probably even a $5 stock) the Board would tolerate a lot more than if it were trading at $0.64.


The key takeaway from where we sit is that Charney owns 27% of this company and the board, acting in the best interest of its shareholders, made the decision to disconnect the founder from the company. One other situation comes to mind. Chip Wilson at LULU who also owns 27%.


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