• Navigate This Market Turbulence: All Hedgeye Research → 3 Months 66% Off

    Preserve. Protect. Grow. Former hedge fund manager and CEO Keith McCullough has successfully navigated the Dot Com Bust, Great Financial Crisis and Crash of 2020. Get 66% off the smartest investing insights money can buy.

“I ask you to judge me by the enemies I have made.”
-Franklin D. Roosevelt
Where did all of the Great Depressionistas go? It is funny and predictable all at the same time. This is Wall Street. We tell stories until they stop making sense – then we drop the context of the narratives altogether, hoping that no one YouTubes us.
It wasn’t too long ago that the Roubinis and Rosenbergs were calling for the end of the US stock market as we know it. After clocking another fresh YTD high on the SP500 last night, I’d have to agree with them. A +62.3% nine-month Minsky Meltup puts an end to what we knew as the Depressionista storytelling, for now…
But why is it that we stop remembering history? How can we go from everyone becoming an expert on 1929-style crashes to dismissing 1933-style recoveries? That’s easy to answer. Wall Street and Washington have what neuroscientists have labeled “Confirmation Bias.”
Per our friends at Wikipedia, Confirmation Bias is “an irrational tendency to search for, interpret or remember information in a way that confirms preconceptions or working hypotheses.” For the common sense crowd, this isn’t new – writers like Francis Bacon (1) and Leo Tolstoy (1) had observed Groupthink phenomena a long time ago…
The reason why I quoted FDR is to contextualize this Confirmation Bias point. Right here and now, how many “economists” and “strategists” are reminding you of the Q4 US Dollar Devaluation period of 1933? The time period is in the same area code of what the Depressionistas sold a lot of books about. Wasn’t the 1933 recovery that made FDR plenty of enemies worth mentioning?
By October of 1933, Roosevelt had devalued the US Dollar by -30%! Then, on October 22nd of 1933, he and his Cornell farmer/economist friend, George Warren, decided to Burn the Buck further by announcing that they’d buy gold in the open market. No one in FDR’s old boy network of Washington economic advisors supported the decision. Plenty of the James Warburgs (the “smart” Wall Street banker crowd) were initially up in arms, but FDR pushed his policy forward.
In Q4 of 1933, FDR effectively Bombed Out the Buck by another -10%, and ran over every patriotic short seller of his policy while doing it. Equities, from Britain to America REFLATED, big time, and John Maynard Keynes became a modern day George Soros.
Today is October 20, 2009, and the US Dollar is trading down again, hitting fresh YTD lows of $75.20. At the same time, on the heels of what didn’t look like Depressionista earnings out of Apple to me, US equity futures are looking to open at higher-YTD-highs. There is no narrative fallacy here folks – this is math.
A monkey or a brain surgeon can figure this out at this point. So don’t get upset with FDR or Obama or whomever might be running you over covering their consensus short position at the highs. Just see this immediate term story line for what it is. Respect it. Manage risk around it.
Across the world today, I am surveying headlines that hardly look deflationary to me. Ben Bernanke was in San Francisco talking about Asia and suggesting that “the United States must increase its national saving rate”. That’s cool Benny, but in what country should we save? And at what rate?
In the US, Japan, and the UK interest rates are effectively ZERO this morning. So American Savers and Creditors alike, even though everything priced in US Dollars is going up, you might want to take a gander at how much slower those US prices are going up versus everywhere else.
Here’s a peak at what the Global Equity Depressionistas have in terms of YTD losses on the short side:
1.      Russia, up another +1.1% this morning to +130% YTD

2.      Turkey, up another 0.87% this morning to +86% YTD

3.      Brazil, up +1.6% yesterday to +79% YTD

4.      China, up 12% in the last 3 weeks (up another +1.5% overnight) to +69% YTD

5.      Australia, up another +1.1% last night to +33% YTD

6.      Hungary, up another +0.61% this morning to +73% YTD

Who cares about Hungary or Turkey? Probably the people who have been smart enough to buy low and flow capital there. The New Reality is that the world is increasingly interconnected. Capital flows, real-time, to rates of return that earn her respect.
Capital chases yield. Yield generates returns. Returns build Savings. Savings drive Investment. 1920’s America or 2010 China, anyone?
You don’t need me to remind you of 1933 economic history to understand how capital flows. Capital chases yield. That’s been a long standing capitalistic pursuit that investors have embraced for generations. So don’t get upset about the US Government’s transparency issues this morning. Just understand this Burning Buck policy and profit from it.
There is still immediate term TRADE upside to the SP500’s 1107 line. Then we’ll be overbought again. However, provided that the Buck continues to Burn, all pullbacks to immediate term SP500 support of 1079 should be bought, not sold. Get out there and make some enemies in the Depressionista camp while you are at it too! I’m starting to have some fun with this.
Best of luck out there today,


EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund
A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

XLP – SPDR Consumer Staples
Strong day for Consumer Staples on 10/16, prompting a short versus our low beta long position in Utilities (XLU).

XHB – SPDR Homebuilders We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

WTIC Oil traded just north of our overbought line on 10/12. With the US Dollar hitting another higher-low, we shorted more of oil’s curve.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realis