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Best of luck out there,


Darius Dale

Associate: Macro Team

Boom-Bust Cycle

This note was originally published at 8am on September 11, 2014 for Hedgeye subscribers.

“The Panic of 1819 was the first boom-bust cycle of the economy caused by government monetary policy.”

-Thomas Dilorenzo


It was an inevitable consequence of the Hamiltonian system of government debt accumulation combined with a government-run bank that prints money in order to fund the debt.” (Hamilton’s Curse, pg 68)


Sound familiar? It shouldn’t. Unless you’ve studied economic history, you might actually think that all of this won’t end in panic. Unless it’s different this time, it always has. Give it some time.


While a sub 2% US GDP growth economy could hardly be described as a “boom”, we have had some booming bubbles develop within the Fed’s 0% experiment. From real estate, to MLP #YieldChasing, to the latest Silicon Valley bubble, I think we’ll all look back and call it epic.


Boom-Bust Cycle - 45


Back to the Global Macro Grind


Forget about the bubble talk for a second, rewind the tapes (or just watch it trade in real-time today) and watch Apple’s (AAPL) volume and intraday price moves. That’s no bubble – that is a mania.


Manias are much more fun to watch than bubbles – people do the craziest things. Watch Go Bro (GPRO) trade, or watch the new squeeze quant algos jam these no-borrow-high-short-interest stocks. It’s pure, unadulterated, price momentum chasing.


While mo mo manias are entertaining, the bubble in momentum chasing US equity market cap is downright frightening. Pop Quiz: if you add up Apple, Facebook, and Alibaba’s proposed market caps, what do you get?


A: $1 TRILLION Dollars


Yeah, that’s normal. And so is paying $350 for an iUgly watch and, at the same time, telling the world there is no inflation “because there’s deflation in technology” (in other news, fully loaded with Oil’s recent decline, USA’s cost of living just hit another all-time high).


If you add Google, the Top 4 in the Silicon Valley bubble get you to $1.25 TRILLION. To be fair, BABA is not really a “valley” name – the “smart money” in there didn’t want to give Alibaba $20 million. It wasn’t a “good idea” back then. So they’ll give them $25 Billion now instead!


And if you back out Exxon (just to make my storyline better), here’s what you can get for $1.25 TRILLION:


  1. Berkshire Hathaway = $235B
  2. Wal Mart = $230B
  3. GE = $230B
  4. Chevron = $225B
  5. Johnson & Johnson = $210B
  6. Citigroup = $125B


Remember that while I am sure I am wrong on my $29.99 watch from WalMart not being as cool as the iWatch, Apple (AAPL) has $600 billion reasons (market cap) why that fashion statement has been discounted by the market, just a bit.


Now, to be fair (again, I am a fair guy!) for those of you who know everything about Apple (AAPL), you’ll recall that there is a precedent for this stock blowing up (split adjusted, it went from where it is today to $55 in less than a year). Never mind what the US stock market bubble would do if AAPL dropped 50% from here (still trading at a $50B premium to my preferred iBear watch outlet, WMT), what if it dropped 5, 10, or (deep breaths) 25%?


Just asking.


I know. Every boom-bust bubble call needs a catalyst. Here’s mine – US #GrowthSlowing.


Oui. C’est tout, mes amis. En Francais, that means that is it.


That’s all I think I need to get right from here in order to get both bonds (long the Long Bond and anything equities, like XLU, that looks like a bond) and the stock market bubble right. I think I need to get the rate of change in US growth right.


While I don’t think AAPL will get cut in half from here, US GDP growth could, easily, from this headfake Q2 bounce of 4%. More importantly, US GDP growth could be half of consensus expectations (Old Wall consensus = 3% GDP growth and +3.3% 10yr yield), for Q3 and Q4.


And that’s our bullish scenario. The bearish one, of course, is that 1/3 of America (you and I) figures out that 2/3 of Americans are already in another early cycle recession. After 63 consecutive months of US economic expansion, that’s what booming bubbles within the cycle eventually do – they bust.


Our immediate-term Global Macro Risk Ranges are now (I update my Top 12 Macro Ranges in our Daily Trading Range product, with intermediate-term TREND views, daily, as well):


UST 10yr Yield 2.31-2.53%

SPX 1983-1999

RUT 1154-1169

VIX 11.34-13.56

Pound 1.60-1.63

Gold 1241-1281


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Boom-Bust Cycle - Chart of the Day

Dollar, Nikkei and Gold

Client Talking Points


The USD is signaling immediate-term TRADE overbought vs. both the Euro and Yen this morning, so watch-out if this starts to reverse (this is where the USD Index topped in 2013 as well). Inverse correlations between the USD and big stuff like Oil and Gold are running -0.8-0.9 on 60-90 day correlation durations.


One of the biggest benefactors of Draghi going for the devaluation drugs in May has been Japanese stocks – they love the smell of Burning Yen. The Nikkei’s round trip recovery came on worsening economic data, but it is +17% since May 19th as the Dollar Yen trade got torched.


2014 round-trip for both the CRB Index and Gold on this massive FX move (biggest since 1997, which by the way isn’t a riskless reference point in macro history), and Gold’s exhaustion level on the downside is 1203-1211 inasmuch as the USD Index is exhausted on the upside in the 84.92-85.67 range.

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.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


FX: Draghi continues to burn the Euro, down to $1.27 vs USD, signaling immediate-term TRADE oversold



Stop walking through the motions of a conditioned routine and start consciously taking action on your visualized intent.

-Steve Maraboli


As part of its holiday strategy, Toys"R"Us plans to hire 45,000 seasonal employees at its stores and distribution centers nationwide, more than doubling the company's workforce.

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.

CHART OF THE DAY: An Effective -3% Fed Funds Rate For An Economy That's Allegedly "Humming Along"?


CHART OF THE DAY: An Effective -3% Fed Funds Rate For An Economy That's Allegedly "Humming Along"? - Chart of the Day

Yo, FX Go!

“Listen: there’s a hell of a good universe next door; let’s go.”

-E.E. Cummings


With a body of work that included almost 3,000 poems, E.E. Cummings was one of the most prolific poets in America’s 20th century. If he was around today, he’d probably tell you the aforementioned quote was about centrally planned economies.


You got it, yo. It’s all about jamming our noses into 18th century export-models and burning the purchasing power of The People at the stake. Rip some lip. You know, bro – get those asset prices hooked and up and out of the water!


This is Master of The Universe type stuff. Janet, Mario, Haruhiko - God put you on earth to do this, yo. Let’s go!


Yo, FX Go! - 3gp


Back to the Global Macro Grind


As you can see, when left to my own 45 minutes of creative writing devices in the early morning, I get flashback moments to what my first English professor @Yale deemed “un-grade-able” work …


Getting back to where I have some competence - central questions about centrally planned currencies:


  1. Did the devalued currency model work for the Argentines or Japanese?
  2. What happens when all 3 of the major players in the FX War (Japan, Europe, USA) are at 0%?
  3. Coming off the all-time lows in FX, Fixed Income, Commodity, and Equity volatility, what could go wrong?




  1. No
  2. They’ll tell you that 0 minus 0 is actually greater than 0
  3. Everything


No way. Everything?


Uh, yeah, yo. Let’s go there:


  1. When USD goes up or down, a lot, the machines chase this thing called the Correlation Trade
  2. In 2011, with Buck Burning to all-time lows, the Correlation Trade = Long Commodities, Gold, FX, etc.
  3. In 2014, with Euro and Yens Burning, the Correlation Trade = Short Commodities, Long Nikkei, etc.


Causality or correlation? Please. The causal factor that drives all of this are market expectations that central planners only do one thing when the economic data (always) misses their growth forecasts – they get easier…


Easier, as in dovish = devaluing…


At the first sniff of #EuropeSlowing (in May) Mario’s Italian and French bureaucrat buddies immediately focused on devaluing ze Euros. That gave the USD a surrender bid. Then, as the Abenomics experiment started to fail, the market started speculating that there were another 3-legs to the 3-legged Japanese devaluation stool.


That’s right – 0 minus 0 = moarrr than 0. And 3-legged central planning stools really have 6, or 10 legs. This is so ridiculous at this point that my jokes aren’t funny.


Moving along. If you are into the monthly performance chasing thing, here is the wood (6-week USD correlations):


  1. USD’s 6 week inverse correlation to Gold -0.95
  2. USD’s 6 week inverse correlation to Commodities (CRB Index) -0.93
  3. USD’s 6 week inverse correlation to Brent Crude Oil -0.92
  4. USD’s 6 week positive correlation to Japanese Stocks +0.89
  5. USD’s 6 week positive correlation to Swiss stocks +0.83
  6. USD’s 6 week positive correlation to Austrian stocks +0.82


In other words, as it became glaringly obvious that both Japan and Europe’s economies were slowing, you either bought the living daylights out of the Mother’s Index in Japan or something in Austria, and you crushed it.


“#Boom, crush. Night, losers. Winning. Duh!”

-Charlie Sheen


Oh, and what happens if and when my rates call plays out “fundamentally” – i.e. US #GrowthSlowing here in Q3 (then Q4) takes hold… the Fed freaks, and starts to devalue the Dollar again?


Bingo. This entire bongo board of Correlation Risk turns upside down and you do the opposite, fast.


As a result, volatility (across asset classes) is already signaling to me that we could very well see the mother of all historical volatility breakouts in FX, Commodities, and Equities. But no worries. For now, the central planners call this “price stability”, yo.


Out immediate-term Global Macro Risk Ranges are now:



RUT 1115-1144

VIX 12.91-14.98

USD 84.61-85.33

EUR/USD 1.27-1.30

WTI Oil 90.42-93.95

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Yo, FX Go! - Chart of the Day


TODAY’S S&P 500 SET-UP – September 25, 2014

As we look at today's setup for the S&P 500, the range is 34 points or 1.07% downside to 1977 and 0.64% upside to 2011.                                                         













  • YIELD CURVE: 1.97 from 1.98
  • VIX closed at 13.27 1 day percent change of -11.12%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, Sept. 20, est. 296k (pr 280k)
  • 8:30am: Durable Goods Orders, Aug., est. -18% (prior 22.6%)
  • 9:45am: Markit US Services PMI, Sept., est. 59.2 (prior 59.5)
  • 9:45am: Bloomberg Consumer Comfort, Sept. 21 (prior 37.2)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City Fed Mfg Activity, Sept., est. 6 (prior 3)
  • 1pm: U.S. to sell $29b 7Y notes
  • 1:20pm: Fed’s Lockhart speaks in Jackson, Miss.



    • Senate, House out of session
    • President Obama speaks at UN meeting on Ebola
    • Congressional Black Caucus holds 44th legislative conference: speakers incl. Reps. Lewis, D-Ga.; Rep. Becerra, D-Calif.
    • 9:30am: Gen. David Perkins speaks on role, U.S. Army’s future
    • U.S. ELECTION WRAP: Ads Pulled; Possum Festival; Cosmo Endorse



  • U.S.-Arab Strikes Hit Islamic State Oil Refineries in Syria
  • U.K. Seeks to Criminalize Rigging of Seven More Benchmarks
  • DHL Beats Amazon, Google to First Scheduled Drone Delivery
  • Pimco’s ETF Probe Is Said to Be Separate From Broader SEC Sweep
  • Apple to Release Fix for IOS Update Issues in “Next Few Days”
  • Ford Tops Hiring Pledge Adding 14,000 Workers in U.S. Since 2011
  • Shorting Alibaba Costs 7% to Borrow Shrs Following Biggest IPO
  • Harvard Names Stephen Blyth to Run $36.4b Endowment
  • Gold Downside Risk Seen ‘Significant’ to Goldman Sachs’s Currie
  • GE Said to Pick Banks for Australian Consumer Finance Unit Sale
  • Microchip Deadline to Make Offer for CSR Extended to Oct. 15



    • Diamond Foods (DMND) 4:01pm, $0.15
    • Micron Technology (MU) 4:02pm, $0.81
    • NIKE (NKE) 4:15pm, $0.88 - Preview
    • Progress Software (PRGS) 4:15pm, $0.33
    • Scholastic (SCHL) 7am, ($0.84)
    • Thor Industries (THO) 4:15pm, $1.23



  • China’s Forex Watchdog Uncovers $10 Billion in Fraudulent Trade
  • Currency to Oil Benchmarks Targeted as U.K. Extends Penalties
  • Sweet-Sour Spread Will Narrow Further When OPEC Cuts: Julian Lee
  • Vale Sees China Iron Ore Imports Rising to Absorb Seaborne Glut
  • Copper to Aluminum Fall as Stronger Dollar Curbs Investor Demand
  • Gold Premium in India Seen Doubling as Festivals Fuel Demand
  • Rubber Drops for Five Days to Five-Year Low on Demand Concern
  • UkrAgroConsult to Cut Ukraine Corn Crop Estimate to 25.9m Mt
  • Blackouts Threaten South Africa Growth as Utility Decays: Energy
  • EU Can Cope With Russia Gas Disruption Under Normal Winter: Citi
  • LME Aluminum Canceled Warrants in Detroit Rise Most Since 2012
  • France Imports Wheat From Canada and Belgium in Sept. 24 Week
  • Uganda’s Tea Production on Course to at Least Match Last Year
  • WTI Trades Near 1-Week High as U.S. Supplies Drop; Brent Steady


























The Hedgeye Macro Team

















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