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Fed Appoints McCullough Director of New ‘Division of Transparency’



The Federal Reserve Board has announced the appointment of Keith R. McCullough as Director of the newly formed Division of Transparency, effective immediately. In addition to this newly formed role, Mr. McCullough will also serve as a special senior advisor to the Federal Open Market Committee (FOMC).


"Mr. McCullough is a highly regarded economist and market practitioner. His firm Hedgeye has robust expertise in macroeconomic modeling, monetary policy design, and policy communications," said Stanley Fischer, vice chairman of the U.S. Federal Reserve.  "We look forward to his expertise in a wide range of monetary policy decisions and recommendations to the FOMC's subcommittee on transparency. Hopefully he will also enable us to finally have some degree of accuracy in our economic projections.”


As senior special adviser to the Board, Mr. McCullough will contribute his expertise to the monetary policy decision-making process and help support related work of the Federal Open Market Committee (FOMC). In particular, McCullough will assist in the work of the subcommittee on accountability of financial projections. Mr. McCullough has been an avid Fed observer and critic for almost two decades.


As a division director, Mr. McCullough will advise the Board and the FOMC on the conduct of monetary policy, including open market operations and the discount window.  In recent years, he has played a central role in critiquing the FOMC's monetary policy process.  In particular, he has wondered, perhaps too rationally, why the FOMC has maintained its zero interest rate policy (ZIRP) despite near full U.S. employment. 


"Keith has had a long and distinguished career in finance. And while he has often referred to me as the “Mother of All Doves,” I am grateful to have the benefit of his advice and counsel as division director,” said Federal Reserve Board Chair Janet L. Yellen. “We all look forward to continuing to work together in this important, new role."


Mr. McCullough founded Hedgeye Risk Management in 2007 during the throes of the financial crisis and has served as its CEO since. He is also co-chair of the NYC Bi-Policy Center, the only Washington, D.C.-based think tank actively promoting bipartisanship to address the key challenges facing the United States since 2013.


“The truth of the matter is that I likely would never have opted to go advise “The Bernank” had he called when he was chair. But when Chair Yellen called, I felt like I needed to go serve the best economic interests of this fine nation. It’s for my kids. And my kids’ kids. And the kids of my kids’ kids.” McCullough said.


Mr. McCullough does not have a PH.D in economics, has never served the Federal Reserve in any fashion, and was never a professor at any fancy University with a French sounding game.  In addition to creating the “ESPN of Finance” at Hedgeye, he has also coached his son’s Mite Hockey Team, the Mid-Fairfied Rangers, to the Connecticut state finals.


When reached for comment long time Fed critic Peter Schiff responded simply, “Buy Gold!”


For media inquiries, contact


Takeaway: Takeaway: Vegas’s supposed strong recovery has been less than inspiring. Baccarat is another example

  • Slight growth in Baccarat was prevalent until last summer but growth has slowed to a crawl – the trend is now lower
  • Some analysts had expected a surge in Strip baccarat as Chinese VIPs looked outside of Macau for gambling destinations
  • With Baccarat no longer the growth driver, Strip gaming revenues could be under pressure.  Indeed, February GGR fell 4% YoY on the Strip and down 8% on a hold adjusted basis.
  • We remain skeptical of Street expectation of a V-shaped or U-shaped recovery in Las Vegas. RevPAR remains a bright spot but YoY growth in the Las Vegas hotel segment continues to underperform the national average.



Dissonance Reduction

This note was originally published at 8am on March 18, 2015 for Hedgeye subscribers.

"Indecision may or may not be my problem."

-Jimmy Buffett


Per our friends at Wikipedia:


“Cognitive dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas or values at the same time, or is confronted by new information that conflicts with existing beliefs, ideas or values… [H]umans strive for internal consistency. When inconsistency (dissonance) is experienced, individuals tend to become psychologically uncomfortable and they are motivated to attempt to reduce this dissonance, as well as actively avoiding situations and information which are likely to increase it.”


We use the term “friends” perhaps less loosely than one might think. Personally, I’m a sucker for their intermittent fundraising campaigns; I honestly can’t remember the last time I didn’t donate $5 dollars when prompted. This is likely because of my own dissonance reduction.


In their marketing language, there is a sentence that reads, “If Wikipedia is useful to you, take one minute to keep it online another year by donating whatever you can today.” The reason this command is so effective is because it induces feelings of cognitive dissonance in anyone who initially chooses not to donate. Of course the reader finds Wikipedia useful. As such, not donating and continuing to peruse the page puts the reader’s actions in direct conflict with each other. The more of the page consumed the more guilt he or she feels until, finally, the reader relieves that stress by recalling that all it takes is “one minute” to donate whatever small amount he or she feels like parting with.


I just avoid the stress altogether now by donating every time I’m prompted. Call me a sucker for dissonance reduction – which is typically achieved in four ways:


  1. Adapting one’s behavior or choice to the dominant cognition
  2. Justifying one’s behavior or choice by changing the conflicting cognition
  3. Justifying one’s behavior or choice by adding new cognitions
  4. Ignoring or denying any information that conflicts with existing beliefs


Dissonance Reduction - Fed forecast cartoon 03.02.2015


Back to the Global Macro Grind


Poor Janet Yellen. There is no “donate” option when it comes to setting monetary policy. In fact, the Federal Reserve’s own dual mandate of “maximum employment” and “price stability” often sends conflicting signals as it pertains to the most appropriate path of monetary policy. Transforming all of the oft-conflicting legions of economic data into one policy prescription requires a fair amount of dissonance reduction along the way. In recent statements and testimonies, the Fed has achieved said dissonance reduction in the traditional manners:


  1. Adapting one’s behavior or choice to the dominant cognition (e.g. maintaining hawkish guidance amid forecasts for a pickup in wage growth and broader economic growth – despite emerging evidence that neither the domestic nor global economy can withstand “policy normalization”)
  2. Justifying one’s behavior or choice by changing the conflicting cognition (e.g. looking through price instability by deeming it “transitory” and sticking with existing  guidance so long as policymakers can be “reasonably confident” that inflation will return to their +2% target)
  3. Justifying one’s behavior or choice by adding new cognitions (e.g. adding “international developments” to the list of factors the FOMC will consider in setting monetary policy)
  4. Ignoring or denying any information that conflicts with existing beliefs (e.g. blatantly ignoring market-based signals like trending yield curve compression and/or the impact of a rising USD on the demand for and prices of domestically produced goods and services)


Going back to the legions of economic data the Fed factors into its policy debate, yesterday we held a conference call to dissect the domestic labor market from both a cyclical and secular perspective. We also quantified the impact of job losses in the energy sector, which has been a key area of focus in our recent discussions with our buy-side clientele. Additionally, we included a deep dive on wages and offered a well-researched view on why we have yet to see meaningful wage growth in the current cycle.


In the latter half of the presentation, we make a fairly robust case for why the Fed should be tightening monetary policy and an equally, if not more robust case against said tightening. The presentation is concluded with an analysis of historical tightening cycles and what tightening may imply for key asset classes.


***CLICK HERE to access the video replay and accompanying presentation (77 charts and tables)***


The conclusions of the presentation were as simple as the supporting analysis was complex:


  • Even beyond the headline numbers, the labor market is actually quite healthy. The current energy-related headwinds to employment growth are being drowned out by broad-based strength across other sectors.
  • That said, however, we have not yet reached full employment and slack continues to dissipate in a painfully slow manner.
  • While there are structural headwinds to wage growth, we may not understand their full impact on restraining wages for quite some time because wage growth typically doesn’t pick up until late in the economic cycle.
  • The case for monetary tightening is supported by ample evidence of the U.S. economy being soundly in the middle stage of business cycle and that deflationary forces are indeed transitory.
  • The case against monetary tightening is supported by ample evidence that the Fed is well ahead of the curve and the (growth and inflation) data, as well as emerging evidence that the U.S. economy is in the latter stage of the business cycle with increasingly probable catalysts to perpetuate a downturn.
  • While the Fed has gone to painstaking lengths to reassure investors that the path to policy normalization will be “gradual” and “data dependent”, history would suggest otherwise. The median length of time and cumulative increase in the Fed Funds Rate over the last five tightening cycles is 47 weeks and +300bps, respectively.
  • This is interesting given the current consensus positioning across the investment community: the U.S. dollar tends to weaken in the months following the initial rate hike, which is supportive of the tendency of the prices of crude oil and gold to appreciate after the initial rate hike. As it pertains to interest rates, the long end of the curve tends to back up fairly dramatically, particularly six and 12 months following the initial rate hike – with the noteworthy exception of the last tightening cycle which saw consistent spread compression. Lastly, the stock market (S&P 500) initially falters shortly after the first rate hike, but ultimately tends to recover six and 12 months later.


So what is an investor to do with this information? Our best advice is to remain “patient” and “data dependent”. Why attempt to front-run the Fed when the Fed itself doesn’t even know what it plans to do? Why not just follow the trends in the data, keeping in mind that A) the FOMC’s forecasts for both growth and inflation have experienced a large degree of tracking error in the post-crisis era and B) the voting constituency of the 2015 FOMC is much more dovish than the aggregate body (i.e. lots of hawkish commentary emanates from non-voters)?


While such a strategy obviously requires more active risk management of factor exposures, the recent breakout in cross-asset volatility leaves investors with little choice.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.24% 
SPX 2029-2105 
RUT 1222-1251

VIX 13.91-17.43 

USD 98.65-101.22

Oil (WTI) 41.59-47.05

Gold 1131-1162 


Keep your head on a swivel,




Darius Dale



Dissonance Reduction - Chart of the Day

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

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Takeaway: No smoking gun but big move in the stock brings valuation closer to peer group.

We are removing RHP from the Hedgeye Best Ideas list.  We still like RHP’s fundamental positioning given the long demand tail endemic in the group segment.  However, the strong run in the stock – up 29% since we put RHP on Best Ideas on 09/18/14 versus +9% for the peer group – has narrowed the valuation disparity to the hotel REIT sector.  RHP’s EV/EBITDA discount has narrowed from 2.5 turns to approximately 1 turn, which we feel is appropriate given its small size and narrow focus.  

Cartoon of the Day: The Human Torch!

Cartoon of the Day: The Human Torch! - Draghi cartoon 03.31.2015


"The euro is down -1% to $1.07 on neither inflation nor employment data doing anything month-over-month (EUR/USD down because markets expect Draghi to deliver more cowbell in attempts to create inflation, which looks impossible right now)," Hedgeye CEO Keith McCullough wrote this morning