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You Will Survive

“Did you think I’d lay down and die? Oh no, not I – I will survive.”

-Gloria Gaynor


I’m thinking some of the bond bears need some love this morning, so I thought I’d bring you some of that with Gloria Gaynor’s 1978 Grammy Award Winning disco love track, I Will Survive!


“At first I was afraid… I was petrified.

Kept thinking I could never live without you by my side…

But then… I grew strong. And I learned how to get along”


‘Oh, as long as I know how to buy the Long Bond, I will get along… I know I will stay alive. And I’ll survive. I will survive! Hey, hey…’


You Will Survive - gg1


Back to the Global Macro Grind


Being born in the 1970s, I still get what living without all of the entitlements in the world means. Savings matter. So does saying thank you to the people who helped bring me along in my #blessed life.


One of the greatest gifts I’ve ever received was the time in which I entered this business. From my first trading internship at Williams Trading in the summer of 1998, to my first job @FirstBoston in 1999, I saw both the hedge fund business hockey stick and the Tech #Bubble manifest, then collapse.


For my 1st three years on the buy-side, the SP500 was down on the year (2000, 2001, 2002), so I learned how to A) not lose other people’s moneys first, then B) get really long when people hated stocks in 2003-2006. Oh, and then another #Bubble in 2007. Market crash. Epic recovery. Then this…


But what is this?


I’ll go through what I think this is on our flagship research call (Q4 Macro Themes) today at 1PM EST (ping for access). But to summarize it in hash tag terms, here it is:


  1. #Quad4 – where both US growth and inflation (in rate of change terms) are slowing, at the same time
  2. #EuropeSlowing – and why Draghi’s central planning drugs will be hard pressed to arrest it
  3. #Bubbles


Oh, yes. #Bubbles.


How does your portfolio survive an early cycle global recession as asset prices are deflating and #Bubbles are popping?


  1. Raise Cash  (mine is at 62% in my asset allocation model this morning)
  2. Be big on the long side of Long Term Treasuries (TLT, EDV, etc.)
  3. On pullbacks add to Munis, and maybe some Healthcare and Consumer Staples stocks


While this call may have sounded aggressive with the 10yr UST yield at 2.63% less than 3 weeks ago, it should have. While I don’t get paid like I used to (just putting the position on, in size), I still wake up at 4AM wanting to win, just like you do.


In Signal Terms (Real-Time Alerts), I issued 33 SELL signals (13 BUYS) in the month of September. Most of the sells were in US and European equities. Most of the buys were bonds. And I’d still buy more long-term bonds if there’s another opportunity!


When something big and contrarian like this is going your way, you don’t run for the exits during no-volume market head-fakes. You press it (or, as the great Stan Druckenmiller would say, “you spread your wings”).


That said, almost 100% of the questions I got in mid-September had to do with:


  1. Selling Bonds
  2. Buying Stocks


When the right questions should have been:


  1. How big do I make the Long Bond position on the recent pullback?
  2. How big do I get on the short side of the Russell 2000’s liquidity trap?


Markets don’t go from #bubble mode to buys on a -3.2% correction (that’s where we are for the SP500). However, on a -10.2% draw-down (Russell 2000’s drop from its all-time #Bubble high on July 7th 2014), levered long players start to freak out.


As they should.


What is the catalyst to reverse the Long Bond’s (TLT) total return of over +18% (vs Russell -7% YTD loss)? I don’t think there is one. If there is one catalyst we have been warning investors of all year long that matters most here, it’s the cycle.


That is it. The cycle, slowing.


And if one ISM slow-down print (yesterday’s was reported at 56.6 for SEP vs 59.0 for AUG) can smoke the 10yr Treasury Yield down to 2.39% in a day, what do you think the next bad jobs report and/or US GDP miss is going to do?


Personally, I don’t say buy FogDog.com or the FireEye on that. Stay with our Macro Playbooks, and you will survive this #bubble.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.36-2.53%


RUT 1067-1118

VIX 14.84-17.93

EUR/USD 1.26-1.28

WTI Oil 89.01-92.14


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


You Will Survive - UNITED STATES

Managing Dovish Paradox

This note was originally published at 8am on September 18, 2014 for Hedgeye subscribers.

“The tools for managing paradox are still undeveloped.”

-Kevin Kelly


That’s the opening volley in the latest #behavioral book I have cracked open, The Rise of Superman, by Steven Kotler. It’s a book about flow, as in athletic flow – where world class athletes “completely redefine the limits of the possible.”


Managing Dovish Paradox - s2


When it comes to central planning limits, there are none (yet). And that’s making your job as a Risk Manager all the more challenging. No matter what you think the Fed, ECB, and BOJ should do, you have to operate within the paradox of what they will do.


When you’re forced to operate within a paradox, life gets tougher. By definition, a paradox is a “statement that apparently contradicts itself and yet might be true” (Wikipedia). But what happens when the promised output of the policy within the paradox isn’t true?


Back to the Global Macro Grind


The good news on the truth is that Janet Yellen actually rolled with it yesterday. When former WSJ reporter (now of The Economist fame) Greg Ip asked her why the Fed continues to cut its growth estimates, this is what Janet said:


So, there’s been a little bit of downgrading… you are certainly right, there has been a pattern of forecasting errors.”


“So”, what we have within the Policy To Inflate America’s cost of living to all-time highs, is a pattern within the paradox. And it’s that very pattern (forecasting errors) that the entire edifice of consensus clings to like a free-climber to the mother of all centrally planned cliffs.




Oh, and to make matters worse, now every Mickey Mouse macro journo in America has figured out what the “dots” are…


That’s not good. Because the only thing worse than the buy-side trading on the Fed’s first “rate hike” expectations (which have been wrong all year), is the manic media agreeing that both the Fed and Wall Street consensus growth forecast is going to be accurate.


Forget this time – if all of consensus nails US GDP growth being +3% for the next 6 quarters, that would be different!


In other news:


  1. Fed Keeps ‘Considerable Time’ Pledge As Growth Moderates” –Bloomberg
  2. Asset bubbles absolutely love incremental easing
  3. Ali-bubble (BABA) will be the biggest IPO in US history


Fortuitously, we aren’t yet brain-dead from trying to front-run the proactively predictable behavior of the Fed, and we got longer of asset price inflation on red (Monday and Tuesday, we moved to 12 LONGS, 4 SHORTS in Real-Time Alerts and cut our Cash position to 34% in the Hedgeye Asset Allocation Model).


But, on the damn dip, we didn’t buy into momentum bubbles or illiquid small cap US equity exposures. We went with:


  1. Moarrr #GrowthSlowing Bonds
  2. Stocks that look like Bonds (Utilities)
  3. International Growth Equity exposure (China, India, etc.)


Inclusive of the centrally planned pop, the Russell 2000 (small cap Style Factor) is still down -0.9% for 2014 YTD versus a proxy for the #GrowthSlowing Long Bond (TLT) which is +11.1% YTD.


No, long-term interest rates haven’t re-tested their YTD lows (they just hit those 3 weeks ago, so now you have the bounce in rates to lower-highs). And, no, the US Dollar hasn’t backed off its multi-standard deviation overbought highs (yet), but give these things time.


With time you get more data. And Janet made it very clear yesterday that she doesn’t want to be put in the dot-box; she wants to be “data dependent.”


Which, to me, means that if we are right and US GDP slows in Q3 and/or we have one more bad jobs report, market expectations will push those dots out (again). The Fed’s paradox is that the lofty growth expectations embedded in the dots just aren’t true.


Our immediate-term Global Macro Risk Ranges are now (we have 12 big macro ranges in our Daily Trading Range product, which includes our bullish/bearish intermediate-term TREND signals for each asset allocation):


UST 10yr Yield 2.39-2.62%

RUT 1143-1161

BSE Sensex 26588-27971

USD 83.79-84.83

Pound 1.61-1.64

Gold 1216-1266


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Managing Dovish Paradox - Chart of the Day

October 2, 2014

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Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.


Takeaway: The Hedgeye Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and noteworthy quantitative signals.

CLICK HERE to view the document. In today’s edition, we highlight:


  1.  Why investors should continue to decreasing their exposure to DM Equities
  2. What those who must remain invested in this asset class should rotate into
  3. The market dislocation in Hong Kong small-caps


Best of luck out there,


Darius Dale

Associate: Macro Team


TODAY’S S&P 500 SET-UP – October 2, 2014

As we look at today's setup for the S&P 500, the range is 36 points or 0.98% downside to 1927 and 0.87% upside to 1963.                             













  • YIELD CURVE: 1.90 from 1.87
  • VIX closed at 16.71 1 day percent change of 2.45%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: Challenger Job Cuts y/y, Sept. (prior -20.7%)
  • 7:30am: RBC Consumer Outlook Index, Oct. (prior 52.4)
  • 7:45am: ECB seen holding refinance rate at 0.5%
  • 8:30am: Init Jobless Claims, Sept. 27, est. 297k (prior 293k)
  • 8:30am: ECB’s Draghi holds news conference
  • 9:45am: ISM New York, Sept. (prior 57.1)
  • 9:45am: Bloomberg Consumer Comfort, Sept. 28 (prior 35.5)
  • 10am: Factory Orders, Aug., est. -9.5% (prior 10.5%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: U.S. to announce plans for auction of 3M/6M bills, 3Y/10Y notes, 30Y bonds
  • 12pm: Fed’s Dudley speaks in New York
  • 1pm: Fed’s Lockhart speaks in Atlanta
  • 8pm: Fed’s Bullard speaks in Tupelo, Miss.



    • President Obama speaks on economy at Northwestern University
    • Supreme Court may issue list of cases it plans to consider
    • Senate, House out of session
    • FHFA Director Mel Watt, housing experts, community leaders hold town-hall meeting at Detroit Public Library
    • 11am: IMF Managing Director Christine Lagarde delivers remarks on “The Challenges Facing the Global Economy”
    • U.S. ELECTION WRAP: No Democrat in Kan. Race; Debates in Alaska



  • BofA CEO Brian Moynihan Named Chairman as Crisis Struggles Fade
  • Draghi Buying Spree Seen Starting Modestly in ECB Program
  • WTI Slips Below $90 for First Time in 17 Months on Supply
  • Tesla’s Musk Says Company Will Introduce New Product Next Week
  • Box Said to Delay IPO Until 2015 on Market Volatility
  • Citigroup Ordered to Turn Over Banamex Files to Pension Fund
  • Trump Entertainment Pegs Casino Survival on Icahn’s $100m
  • Ebola Patient’s Flight Spanned 4 Airports on 3 Continents
  • RealD Gets Takeover Offer From Yahoo! Activist Starboard Value
  • Sands’ Adelson Predicts Macau High-Roller Rebound in 2 Months
  • ‘Pirates’ Sequel to Film in Australia as Lower FX Cuts Cost



    • Actuant (ATU) 8am, $0.52
    • Constellation(STZ) 7:30am, $1.15
    • Global Payments (GPN) Bef-mkt, $1.14
    • McCormick (MKC) 6:30am, $0.81
    • Resources Connection (RECN) 4pm, $0.14



  • WTI Crude Slips Below $90 for First Time in 17 Months on Supply
  • Rubber Slumps to 2009 Low as Producers Seen Needing to Do More
  • Pork Wounds Heal as Hogs Profit From U.S. Corn Bust: Commodities
  • Gold Climbs on Demand for Alternative Investment as Stocks Drop
  • Europe Skirting Freeze Preserves Gas Stocks Amid Ukraine Crisis
  • Copper Swings as Dollar Remains Near Highest Level Since 2010
  • Corn Declines on Outlook for Abundant U.S. Harvest; Wheat Climbs
  • Arabica Coffee Rises to One-Month High While Cocoa Futures Drop
  • Saudis Cut OSPs Deeply to Regain Asian Mkt Share: Bernard Leung
  • FinEx Capital Expanding in Commodities Led by Simon Smith
  • OPEC ’Appears to Be Gearing Up for Price War’: Commerzbank
  • Thailand Shifts Away From Buying Crops as Junta Tackles Reserves
  • Pacific Sees Storm Deja Vu as Atlantic Starts to Run Out of Time
  • Investors Pull Most Money From Commodity ETFs in ‘14 on Glut
  • Gold Sales at Perth Mint Reach 11-Month High as Prices Retreat


























The Hedgeye Macro Team


















Takeaway: Brazil’s economic and political malaise appears set to continue. We think investors should remain uninvested/underweight Brazil.

Where We’ve Been On Brazil

Obviously the title of this note is a bit harsh. Brazil is a $2.4T economy with a population of over 200 million individuals; our harsh criticism of the country’s disastrous Growth/Inflation/Policy dynamics is in no way aimed at them – with the noteworthy exception of a few government officials.


Brazil is an economy that we’ve been generally negative on over the years due to perpetual fiscal and monetary policy mismanagement. In fact, we were bearish on Brazilian equities and the BRL for over a year leading up to our bullish February 27th presentation titled, “Time To Buy Brazil?”. Concurrent with that research recommendation, the iShares MSCI Brazil Capped ETF (EWZ) declined -25.8% (vs. a +12.8% gain for the MSCI All-Country World Index), while the WisdomTree Brazilian Real Strategy Fund (BZF) declined -8.4%.




Fast forward to today, we were fortunate to have booked gains on June 3rd in the EWZ ETF (+11.2% vs. a +4.3% advance for the MSCI All-Country World Index), Petrobras-PBR (+21.4%) and the BZF ETF (+3.9%). Moreover, since our bearish July 14th note titled, “SELL BRAZIL?”, the EWZ ETF has plummeted -15.8% – including a -9.6% plunge in the week-to-date alone – and is underperforming the MSCI All-Country World Index’s -3.6% decline (since 7/14) by a whopping 1219bps!


It’s worth noting that our call then wasn’t to short Brazil, but rather to just completely divest your exposure. At the time there remained enough open-the-envelope risk to perpetuate a squeeze higher in Brazilian financial assets – most notably the entrance of Marina Silva into the presidential race.


Rousseff’s Policies To Stagflate Look Set To Continue

Unfortunately for what had been crowded Brazil longs, Silva’s presidential hopes now appear rather bleak.


According to a Datafolha poll released yesterday on Folha de S.Paulo’s website, Rousseff would garner 40% of votes in the first round, while Silva would get 25%. The survey of 7,520 interviewees conducted September 29-30th with a margin of error +/- 2ppts. also showed that Rousseff would win 49% of votes in a potential head-to-head runoff on October 26th compared to Silva’s projected 41%. An August 28-29th poll showed that Silva actually had a lead of 10ppts. in the same runoff scenario versus Rousseff’s then-projected 40%.


In line with our July concerns, Rousseff used the bully pulpit afforded to her by her incumbency and her lion’s share of TV and radio ad time (which is based on congressional representation) to attack Silva’s campaign promises to cut inflation in half, promote central bank autonomy and establish an independent fiscal oversight committee, labeling them as “recessionary” and “inconsistent” with her promises to continue supporting the same lower-class she herself emerged from.


Furthermore, Rousseff was able to aggressively tout the benefits of the welfare programs championed by her Worker’s Party (PT) – which have helped to lift many millions of Brazilians out of poverty since former Brazilian president Lula da Silva introduced them during his tenure. Her promises to expand Bolsa Familia (cash transfer program) and Minha Casa Minha Vida (affordable housing) in conjunction with President Lula campaigning on her behalf appears to have been too much for Silva to overcome.


Ironically, it is because of the expansionary nature of such programs, other fiscal tomfoolery (e.g. “loans” to BNDES) and interference with the setting of interest rates, that inflation has exceeded the midpoint of the central bank’s target range for 48 consecutive months. Now the country is mired in recession with ZERO scope to ease either monetary or fiscal policy.




Moreover, we expect the stagflation to continue through at least year-end amid an exodus of foreign capital that is weighing on the exchange rate (down -9.5% MoM). It’s worth reiterating that Brazil is a current account deficit nation that requires foreign capital to plug the hole between gross domestic investment – which, at 18%, actually remains far too low on a comparative basis versus its peers – and gross national savings. All things being equal, slower net capital inflows directly translate to a slower pace of economic activity in Brazil.






Even If Silva Surprises, It’s Unlikely To Matter

Again, a Rousseff victory and four more years of fiscal and monetary policy mismanagement is likely in the cards for Brazil. Investors who are still holding out hope for a come-from-behind victory out of the Silva camp will be sorely disappointed when they consider the following arguments:


  • Aecio Neves is currently being endorsed by nearly one-fifth of the Brazilian electorate, which means harnessing the support of his base could potentially decide the election in the 2nd round runoff. While that appears positive for Silva’s chances given his anti-incumbency stance and the adversarial nature of his Social Democratic Party’s (PSDB) relationship with Rousseff’s Worker’s Party (PT), he and Silva have been aggressively attacking each other for weeks on the campaign trail. Getting behind Silva and her left-leaning Brazilian Socialist Party (PSB) would be a tough sell to his supporters.
  • Moreover, a recent Datafolha poll showed that of those casting their vote for Neves in the first round, 58% would switch to Silva in the runoff versus 24% to Rousseff, effectively confirming what’s already being priced into the markets – i.e. a Rousseff victory.  
  • Even if Silva were to somehow pull off the now-presumed impossible and deliver an upset on Sunday, her ability to govern and enact the structural reforms Brazil so desperately needs is VERY limited. Currently, her coalition only has 36 members of Congress; this compares to 391 in Rousseff’s alliance and 142 in Neves’ camp. Aside from a common disdain for the Rousseff administration, the ideological divide between the PSB and PSDB is likely too great for Silva to overcome in terms of forming a large-enough coalition to govern effectively.


All told, the outlook for Brazilian politics is looking increasingly like a lose-lose situation for investors. While arresting the rate of fiscal deterioration and monetary policy mismanagement is positive on the margin, we don’t think that’ll be supportive enough to perpetuate either sustainable economic growth, rising structural growth expectations or the steady stream of capital inflows that would come with it.


Be it another four years of Rousseff or four years of a likely ineffective Marina Silva administration, we think investors should prepare for another four years of Brazil failing to live up to its growth potential.


Budgetary Shenanigans Continue as Brazil Trudges Towards Junk Status

One key issue we continue to highlight is the fact that Brazilian policymakers failed to failed to respond to 12-18M of consensus expectations for [and actual] US monetary and fiscal policy tightening with credible tightening of their own. Both the current account deficit and sovereign budget deficit are actually wider now as a percentage of GDP than they were when last year’s “taper tantrum” began: -3.4% in 2Q14 versus -2.9% in 2Q13 and -3.8% in 2Q14 versus -3.2% in 2Q13, respectively.




Be it “over-promising and under-delivering” or “creative accounting”, not much has changed with respect to Brazilian monetary policy. For example, outgoing Finance Minister Guido Mantega just authorized a withdrawal of 3.5B reais ($1.4B) from Brazil’s sovereign wealth fund to help meet fiscal targets. In defending the move, he remarked, “Nothing is more legitimate than using that fund to cover part of expenses.” Well, maybe except tax revenues…


In addition, Brazil’s primary budget deficit “unexpectedly” widened in AUG to 10.4B reais from 2.2B prior after the government cut taxes and boosted spending ahead of the election. The total primary surplus accumulated over the TTM fell to 0.9% of GDP from a revised 1.2% in JUL and is well shy of the Finance Ministry’s 1.9% target for the current fiscal year.


With trends like these, it’s no surprise to see that Moody’s just recently cut its ratings outlook for Brazil to “negative”. It is likely that they join Standard & Poor’s in rating the country just one level above junk status at some point over the intermediate term.


Investment Conclusion: Remain Uninvested/Underweight Brazil

Our Tactical Asset Class Rotation Model (TACRM) is currently generating “SELL” signals for the iShares MSCI Brazil Capped ETF (EWZ), the iShares MSCI Brazil Small-Cap ETF (EWZS) and the WisdomTree Brazilian Real Strategy Fund (BZF):




Moreover, TACRM is also generating “high-conviction SELL” signals for both EM Equities and Commodities, as well as a “low-conviction SELL” signal for Foreign Exchange. All three of these primary asset class signals corroborate the aforementioned “SELL” signals being generated for Brazilian equity and currency exposure:




In addition to those quantitative signals, we remain negative on the Chinese economy – i.e. Brazil’s largest export market – as well as emerging market asset prices broadly. If you’re looking to get up to speed on our latest thoughts on these fundamental research views, we encourage you to review the following notes:



The reason we aren’t recommending that you short Brazil here is two-fold:


  1. Good luck finding a reasonably-priced borrow or inexpensive put options here!
  2. The country is currently in recession. It won’t be in recession indefinitely. In fact, base effects would suggest Brazil is likely to be on the road to what may ultimately turn out to be another disappointing recovery by the first quarter of next year. Surely by 2Q15.






Again, Brazil isn’t going to remain in recession permanently so the risk/reward of shorting it down here is not as favorable as we’d like. We are by no means arguing that Brazil has turned the corner from an economic growth perspective, but there’s a lot more green on this table than one might expect given the recessionary nature of the Brazilian economy:


BRAZIL: WHAT A FREAKING DISASTER… - Brazil High Frequency GIP Monitor


All told, we think Brazil’s economic and political malaise appears set to continue. As such, we think investors should remain uninvested/underweight Brazil.


Poor Brazil; the country just can't seem to get out of its own way...




Darius Dale

Associate: Macro Team

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