Central Planning's Curse

This note was originally published at 8am on August 25, 2014 for Hedgeye subscribers.

“Ideas have consequences.”

-Richard M. Weaver


That’s the introductory quote from Hamilton’s CurseHow Jefferson’s Arch Enemy Betrayed The American Revolution, by Thomas Dilorenzo. And oh isn’t that an appropriate thought now that our central planning overlords have talked down at us from upon high from the Tetons in Jackson Hole.


Big ideas, moreover, can have big consequences, and there are probably no ideas in American political history bigger than the ones debated by Alexander Hamilton and Thomas Jefferson at the time of the founding.” (pg 1)


Japan has had the same failed central economic planning ideas for decades. Now both the un-elected US and European monetary policy duo of Janet Yellen and Mario Draghi and are hell bent on executing on the same. It’s the economic curse of devalued currencies. And I don’t think it will end well.


Central Planning's Curse - 789


Back to the Global Macro Grind


The number one thing I have had wrong in 2014 is how dovish Draghi was going to get in the face of what was a decent European economic rate of change acceleration. Ever since he decided to devalue the Euro in May, the European economy has slowed, sequentially.


I thought Yellen was going to be more dovish than consensus thought at Jackson Hole (she was). But I didn’t think her headline impact was going to be trumped by Draghi. He said he “stands ready to adjust” his Euro devaluation policy stance further. Whatever that means… the currency market believes him.


“So”, following the bouncing macro ball:


  1. Euro (vs USD) is getting smoked to fresh YTD lows of $1.31 this morning
  2. US Dollar Index is now breaking out to fresh YTD highs of $82.59
  3. Commodities (CRB) index, led by oil’s decline, are retracing most of their YTD gains


And our macro playbook would call the alleviation of the #InflationAccelerating tax (on Americans) good, on the margin. But what’s good for the country with the consumption tax cut is bad for the economy who gets the devaluation tax.


The other thing that’s not good is what the US bond market thinks:


  1. US Treasury 10yr Yield has fallen back to 2.39% this morning (down -63bps YTD from 3.03%)
  2. US Treasury Curve Yield Spread is compressing to a fresh YTD low of +189bps (bps = basis points)
  3. US growth expectations (Russell 2000) are still down for the YTD as well


But, but, there are no buts…


I am bearish on both US and European growth, and both US equity futures and European stocks are up on whatever it is that Draghi is going to do next.


BREAKING: Draghi Pushes ECB Closer To QE As Deflation Risks Rise –Bloomberg


That’s one of the most read headlines of this morning. Alongside Germany’s IFO (business climate index) dropping to a fresh 4 month low of 106.3 (vs. 108.0 last month) and France’s Prime Minister resigning over the economy, that is…


“So” you just have to buyem when they are up on this, right? No thanks.


If the US Dollar and rates were rising alongside US growth expectations, I’d be right bullish on being long US growth right now. But that’s not happening. The #InflationAccelerating of the first half of 2014 is sticky. In other words, you aren’t getting a cheaper cup of coffee and a rent reduction this morning.


Over time, what we call a 4th Quadrant move in our GIP Model (Growth, Inflation, Policy = GIP) becomes a big idea. But going there (both Growth and Inflation slowing, at the same time) requires a big asset price reset. This happened in Q3/Q4 of 2008, don’t forget.


I don’t think it’s 2008. I think it’s Q3 of 2014. While every economic cycle rhymes with parts of others, we haven’t seen all three of the major Currency War central planners (Japan, USA, and Europe) try to devalue (print moneys, monetize debt, bend gravity, etc.) at the same time like this.


If US and European growth continues to slow, at the same time (and both Yellen and Draghi get easier and easier into that)… and it ends well… I’ll be wrong on that too. In the meantime, 200 years after Alexander Hamilton’s Euro style Central Planning Curse was imposed on the American people, Jefferson is rolling in his grave.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.34-2.46%

SPX 1967-1997

RUT 1130-1171

VIX 10.91-14.12

USD 81.67-82.59

EUR/USD 1.31-1.33

Gold 1271-1301


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Central Planning's Curse - Chart of the Day

Buy The Long Bond

Client Talking Points


The latest central plan was the only news that mattered last week with the EuroStoxx600 up +1.6% on the week as the EUR/USD was torched -1.4% to 1.30 and ticking down to 1.29 again this morning. The DAX is holding 9648 TREND support.


Brent Oil is breaking $100 as both it and WTIC remain bearish TREND signals @Hedgeye. If there’s one thing U.S. growth bulls bring up in every conversation with us right now its falling oil prices – we don’t think it’s incremental enough.


UST 10YR Yield dropping 3 basis points this morning back to 2.43% with no immediate-term support to 2.32%. A weak employment report probably gives Janet Yellen what she needs to be dovish (again) at the September Fed meeting – buy the long bond.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.


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.

Three for the Road


FX: Pound hammered -1.2% vs USD on Scottish Independence fear



Progress always involves risk; you can’t steal second base and keep your foot on first.

-Fredrick Wilcox


Argentina stock market up another +6.1% last week to +93.2% year-to-date.

September 8, 2014

September 8, 2014 - Slide1



September 8, 2014 - Slide2

September 8, 2014 - Slide3

September 8, 2014 - Slide4

September 8, 2014 - Slide5



September 8, 2014 - Slide6

September 8, 2014 - Slide7

September 8, 2014 - Slide8

September 8, 2014 - Slide9

September 8, 2014 - Slide10

September 8, 2014 - Slide11

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

CHART OF THE DAY: Hey, Consensus Macro, This Time Isn't Different


CHART OF THE DAY: Hey, Consensus Macro, This Time Isn't Different - Chart of the Day

The Velveteen Bear

“You become. It takes a long time.”

-Margery Williams


That’s a quote from one of the best children’s books I have ever read to my kids, The Velveteen Rabbit. It was also cited in Brene Brown’s recent #behavioral book, Daring Greatly (pages 110).


“Real isn’t how you are made… it’s a thing that happens to you.”

“Does it hurt?” asked the Rabbit. “Does it happen all at once, like being wound up – or bit by bit?”

“It doesn’t happen all at once,”  said the Skin Horse. “You become. It takes a long time.”


While that resonates with me as a husband, Dad, hockey coach, etc., it really hits the nail on the head in becoming a Velveteen Bear on the US stock market. I haven’t been this bearish since the fall of 2007. Getting really bearish is a process. It takes time.

The Velveteen Bear - v7


Back to the Global Macro Grind


After Europe moved back into crisis mode (easing, printing, praying) and we received the worst US jobs report in 7 months, you just have to buy the all-time-bubble high in SPY on that, right? Right. Maybe with other people’s money.


After almost (I reiterate, almost!) having its first-four-down-days in a row of 2014 on Friday, the SP500 rallied from down to up on the day, to close up a whopping +0.2% on the week. That’s 5 consecutive “up” weeks. #hooray


In other news, the Russell 2000 (which derives 80% of its revenues from the US) flashed yet another bearish divergence, closing down -0.4% on the week to pretty much flat for 2014 YTD.


To give US equity bulls credit, this is what I liked about last week:


  1. After the ECB torched the Euro, the US Dollar (vs. the Euro) was up another +1.4% on the week
  2. The US 10yr Treasury Yield rose +12 basis points on the week to 2.46%
  3. The Yield Spread (10yr minus 2yr) widened +10bps on the week to +195bps


Not only was that something to like last week, it was something I loved all of last year. Dollar Up, Rates Up – that’s what should drive a US growth bear insane.


Other than the Russell 2000, what I don’t like in 2014 is that a key component of the Dollar Up, Rates Up storyline is missing - rates are down, hard, in 2014:


  1. Inclusive of last week’s bounce to lower-highs, the 10yr yield is -19% (or -57bps) YTD
  2. For 2014 YTD the Yield Spread (10yr minus 2yr) is still crashing (-26%) or down -70bps


In conjunction with these classic early cycle slow-down macro signals (which most European growth bulls said weren’t growth slowing signals until the ECB reminded them how fast things were slowing), you’ve seen:


  1. Early Cycle Stocks (Housing, Consumer Cyclicals, Regional Banks, the Russell, etc.) underperform
  2. Slow-growth #YieldChasing Stocks (Utilities, REITS, Big Cap Dividend Stocks, etc.) outperform


In case you aren’t long something like Argentina (stock market up another +6.1% last week to +93.2% YTD) whose economy still sucks, and you’ve stayed with the long #YieldChasing thing:


  1. Utilities (XLU) were up another +0.8% last week to +14.9% YTD
  2. REITS (MSCI index) were up another +1.0% last week to +19.6% YTD


Seriously. Who needs to be long the spoos when you can be long the good stuff!


While Ocham’s Razor (boil it down, simplify) is a really sexy concept, you can’t over-simplify. While a stronger Dollar (burning Euro) has toned down some of the commodity #InflationAccelerating that we saw in the first half of 2014, at some point you have to ask yourself if it’s going to be incremental enough to stop an early cycle US slowdown that’s already in motion?


To contextualize that key risk management question, don’t forget that the US is 63 months into this economic expansion. And the jobs market (both ADP slowing for 2 consecutive months and last week’s jobs report), which is a classic late-cycle indicator that strengthened, well, at the end of the cycle… is starting to hint that the bond market has #Q3Slowing nailed.


If US jobs and housing data slows, at the same time, what do you think Janet is going to do next? That’s right. She’ll do A) what Draghi just did and B) the Japanese are going to keep trying – moarrr incremental easing… That’s bullish for bonds and anything stocks that looks like a bond. And that’s all your cuddly Velveteen US Growth Bear has to say about that.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr yield 2.32-2.46%


RUT 1151-1181

VIX 11.34-12.92

EUR/USD 1.29-1.32

Gold 1


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


The Velveteen Bear - Chart of the Day


TODAY’S S&P 500 SET-UP – September 8, 2014

As we look at today's setup for the S&P 500, the range is 15 points or 0.68% downside to 1994 and 0.06% upside to 2009.                                                               













  • YIELD CURVE: 1.94 from 1.95
  • VIX closed at 12.09 1 day percent change of -4.35%


MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: U.S. to announce plans for auction of 4W bills
  • 11:30am: U.S. to sell $26b 3M bills, $23b 6M bills
  • 3pm: Consumer Credit, July, est. $17.0b (prior $17.255b)



    • Senate, House return from summer recess
    • 8:45am Treasury Sec. Lew speaks on tax reform
    • 9:30am: HHS SEC. Burwell speaks to students, staff and faculty
    • U.S. ELECTION WRAP: Roberts Shakes Up Campaign; Polls
    • Obama’s immigration delay forced by Republican amnesty attacks



  • Electrolux to acquire GE’s appliances unit for $3.3b
  • FMC buys Cheminova for $1.8b as CEO tweaks break-up plan
  • Facebook’s WhatsApp takeover faces fast EU review, Almunia says
  • EU seeks to extract Google concessions to rescue antitrust pact
  • CenturyLink said seeking to acquire Rackspace for cloud services
  • Brent crude declines below $100 for first time since 2013
  • Alibaba M&A spree to be questioned at Waldorf as IPO starts
  • U.K. races to extend powers to Scots to blunt independence drive
  • Scotland independence seen risking $23b of power projects
  • Disney’s ‘Guardians’ leads slowest box office weekend since 2001
  • EU Banks sidestepping bonus cap face crackdown from regulators
  • German trade surplus at record as exports rise to all-time high
  • GM to introduce hands-free driving in Cadillac model in 2016
  • Schumer draft proposal on inversions could reach back 20 yrs
  • Ryanair said poised for $11b purchase of Boeing Max Jets
  • Rakuten in talks to buy U.S. online shopping operator Ebates
  • U.S. expands air offensive to protect Iraqi dam from militants
  • Ukrainian deaths test cease-fire as both sides report casualties
  • U.S. gasoline falls to $3.4631 a gallon in Lundberg Survey



    • Campbell Soup (CPB) 7am, $0.49
    • Casey’s General Stores (CASY) 4pm, $1.25
    • FuelCell Energy (FCEL) 4:10pm, ($0.03)
    • Korn/Ferry Intl (KFY) 4:05pm, $0.40
    • NCI Bldg Systems (NCS) 4:05pm, $0.09
    • Triangle Petroleum (TPLM) 5:58pm, $0.15



  • Nickel Climbs to 9-Week High on Philippine Ore Supply Concerns
  • Brent Crude Declines Below $100 for First Time in 14 Months
  • Raw Sugar Rebounds From 7-Month Low While New York Cocoa Drops
  • Gold Bulls Retreat as $1.6 Billion Erased From ETPs: Commodities
  • Palm Oil Rises to Two-Week High as Exports May Expand on Waiver
  • Gold Trades Little Changed Near 12-Week Low on U.S. to Ukraine
  • Corn Declines as Traders Weigh Record U.S. Production Outlook
  • Philippine House Body Approves Bill Banning Mineral Ore Exports
  • Drillers Piling Up More Debt Than Oil Hunting Fortunes in Shale
  • BNP Paribas Said to Curb Commodity-Trade Finance to Trafigura
  • China Aluminum Exports Rise With Steel as Demand at Home Wanes
  • Hedge Funds Reduce Bullish Gas Bets as Volatility Slides: Energy
  • Clearinghouses Get CFTC Scrutiny So Solution Isn’t Problem
  • China’s Import Drop Caused by Falling Commodity Prices, CBA Says
  • Credit Suisse Sees Aluminum Rally Overdone Amid Plentiful Supply


























The Hedgeye Macro Team

















the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.