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The Castle

“Every revolution evaporates and leaves behind only the slime of a new bureaucracy.”

-Franz Kafka


There may not be a better literary analogy for the situation in Greece than Kafka’s classic, The Castle.  The book was inspired by the actual bureaucracy of the Habsburg Empire, which Kafka was forced to deal with during his life.  (Having just had multiple visits to the Connecticut DMV, we can certainly empathize with Kafka’s experiences.)


In The Castle, the narrator, K, arrives in a village governed by a mysterious bureaucracy that is operating in a nearby castle.  In seeking shelter at the town’s inn, K claims to be a land surveyor summoned by the authorities in the castle.   Very quickly he is notified that the castle contact is an official named Klamm, who informs K in a note that he will report to the Council Chairman.


Subsequently, the Council Chairman informs K that due to bad communication between the castle and the village he was erroneously requested.  In lieu of this, the Council Chairman offers him a position to serve as a caretaker in service of the school teacher.  Despite this generous offer, K, still unfamiliar with the processes of the village, continues to try and reach Klamm, which is considered a major taboo by villagers.


The villagers hold the officials and the castle in the highest regard, despite not really understanding what it is they do.  In fact, the actions of the officials are never explained.  Despite this, the villagers often provide justifications for the officials’ actions through long monologues.   In fact, everyone seems to have an explanation for the officials’ actions, despite their contradictory nature and clear ambiguity.  The villagers actually praise this ambiguity as another compelling feature of the official!


Kafka is describing a society in which the bureaucracy has become predominant at the expense of practicality, efficiency and all else.   In the real world of course, the rapid growth of a bureaucracy is likely to stunt growth and innovation.   If Greece sounds like a case study of this, well it should.


The Castle - Greek iceberg cartoon 06.30.2015


Back to the Global Macro Grind...


Distinguished economist and market practitioner Daniel Lacalle wrote a very thoughtful piece on Greece as a special Hedgeye contributor this past weekend.  In the note (a must read), he touched on this very issue of bureaucracy.


According to Lacalle:


...The real drama is that none of the measures announced will solve Greece´s real issues. No, it´s not the euro, or the austerity plans. It´s not the cost or maturity of debt. Greece pays less than 2.6% of GDP in interest and has 16.5 years of average maturity in its bonds. In fact, Greece already enjoys much better debt terms than any sovereign re-structuring seen in recent history.


Greece´s problem is not one of solidarity either. Greece has received the equivalent of 214% of its GDP in aid from the Eurozone, ten times more, relative to gross domestic product, than Germany after the Second World War.


Greece´s challenge is and has always been one of competitiveness and bureaucratic impediments to create businesses and jobs.


Greece ranks number 81 in the Global  Competitiveness Index, compared to Spain (35), Portugal (36) or Italy (49). In fact it has the levels of competitiveness of Algeria or Iran, not of an OECD country.  On top of that, Greece has one of the worst fiscal systems and limits job creation with a combination of agressive taxation on SMEs and high bureaucracy. Greece ranks among the poorest countries of the OECD in ease of doing business (Doing Business, World Bank) at number 61, well below Spain, Italy or Portugal.


Between 1976 and 2012 the number of civil servants multiplied by three while the private sector workforce grew just 25%. This, added to more than 70 loss-making public companies and a government spend to GDP figure that stands at 59%, and has averaged 49% since 2004, is the real Greek drama, and one that will not be solved easily.”


Greece's structural problem is bureaucracy, which is, currently at least, being arbitrarily defended by its citizens, despite broad evidence of its inefficacy. You can request a replay of the conference call he held with Keith on Monday by emailing .


In the most recent news from the Eurozone, Greek PM Tsipras continues to do his best to emulate officials from The Castle.  In contrasts to all standards of logical reason, according to commentary in the WSJ this morning, his most recent letter to creditors appears to actually “increase the fiscal gap”.  Leave it to a bureaucrat to believe that when your country is in economic meltdown mode, the right move is to take steps backwards!


As emphasized in the cartoon in the middle of this note and the Chart of the Day, the bigger issue with Greece is that it has the potential to be the tip of the iceberg in Europe.  If history over the past decade tells us anything about Europe, it is that the area’s fiscal and competitive imbalances are contained, until they are not.


As an example, while Portugal’s deficit is fully funded for 2015, its longer term fiscal metrics remain disconcerting.  With a public debt-as-percentage-of-GDP at 130% and a deficit-as-a-%-of-GDP still running at 4 – 5%, is far from out of the woods.  Certainly, the country, as evidenced this year, can fund via debt when times are good, but in deeper recessionary scenario when the deficit naturally broadens, that debt loan will likely give creditors pause.


Luckily for me, I’m back home celebrating Canada Day and shielded, at least for a day or two, from the dysfunction from the Eurozone.  Although in Canada, there is this little thing called a housing bubble to consider...


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.19-2.49%

SPX 2052-2093 
Nikkei 19
VIX 14.21-19.01
USD 94.01-96.41 
Oil (WTI) 57.80-61.20


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Castle - COD z EL. yields

July 1, 2015

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July 1, 2015 - Slide8

Mr. Volatility

Client Talking Points


If you took down both your gross/net exposure to U.S. equity beta pre this breakout in volatility, you might feel better than most right now. Bullish breakouts in volatility rarely feel good for anyone; unless they can crack 14.21 on front-month VIX, this central planning panic continues to signal #on – don’t forget it’s #LateCycle U.S. please. 


Chinese central-market-planners did not like the market’s reaction to a 49.4 PMI (June) so they tried to jawbone it (again) and this time it did not work. The Shanghai Composite is down -5.2% (down -16.1% month-over-month) and below @Hedgeye TREND resistance.


+1.4%-2.4% bounce in the FTSE and CAC and +1.7%-2.1% for the IBEX and DAX, but not one of the bounces were above @Hedgeye TREND resistance. Liquidity and levels matter here – so we would be in wait/watch mode; chasing high and freaking out low hasn’t worked; buying on the low-end and selling on the top-end of the risk ranges has.



**The Macro Show - CLICK HERE to watch today's edition at 8:30AM ET with Macro Analysts Darius Dale and Ben Ryan and CEO Keith McCullough.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We came out of the earnings report being very positive about management doing all the little things right. They continue to prove that they are some of the best operators in the industry. Importantly, many small cap restaurant companies with an undisciplined unit growth strategy experience significant labor inefficiencies as they expand. ZOES is in a different class of companies.  In a quarter where ZOES opened 12 new company-owned restaurants they managed to decrease both COGS and labor. We view ZOES as one of the best small cap growth names.  The company is set-up for long-term success for the following reasons:

  1. Superior brand positioning
  2. Management philosophy and execution
  3. Unit opening geographic profile
  4. Early-stage average unit volumes and returns

PENN’s new property, Plainridge Park in Massachusetts, had a strong opening. We expect slot win per day of $400, above Street expectations. In addition, June state gaming revenues will begin to roll out in 1-2 weeks. We expect June to be as strong as May, setting up Q2 to be estimate-beating quarter for PENN.


After a Fed-fueled week of strength in slow-growth, yield-chasing asset classes and long duration fixed income, both the Dollar and interest rates re-couped their losses from Fed Week. The dollar declined, rates increased, and as a result, those long of gold took some pain. Will this continue? Will a long, sustained rate liftoff ensue? We don’t think so. We continue to repeat that the chance of further downward revisions to forward looking growth estimates from the Federal Reserve and consensus macro is much more likely than not. The attempted suspension of economic gravity from policy makers weakens the currency and puts pressure on bond yields. We remain long of this set-up with gold and long-duration fixed income.

Three for the Road


Every European Equity market remains bearish TREND @Hedgeye - waiting & watching, not chasing



Concentration is the secret of strengths in politics, in war, in trade, in short in all management of human affairs.

Ralph Waldo Emerson


700 million pounds of chicken is purchased and 190 million pounds of red meat/pork purchased in the week leading up to July 4th.



The Macro Show Replay | July 1, 2015



We will be hosting our highly-anticipated Quarterly Macro Themes conference call on Tuesday, July 7th at 1:00PM ET.  Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications. 




#SecularStagnation: Amid consensus expectations for a return to “normal” economic conditions, our analysis shows ample evidence of secular stagnation. In light of that, we reiterate our “lower-for-longer” thesis on growth, inflation and interest rates and continue to find the FOMC’s hawkish guidance wholly misplaced.


#EuropeSlowing: With our proprietary GIP (growth, inflation, policy) model we’ll outline the top 6 European countries that will be most impacted by real-GDP slowing as inflation accelerates in the back half of 2015. The timing of ECB head Mario Draghi’s eventual response will be critical in terms of risk managing the EUR/USD exchange rate, as well as any associated spillover risks.


#ConsumerCycle: Consumption peaks late cycle and with domestic and global growth set to slow alongside easing inflation comps in 2H15 it looks increasingly likely 1H15 marked the current cycle peak in household spending growth.  We'll contextualize the current cycle, discuss the implications and detail how best to be counter-cyclically positioned as the consumer cycle enters its twilight. 



  • U.S. Toll-Free Number:
  • U.S. Toll Number:
  • Confirmation Number: 13612090
  • Materials:  CLICK HERE (the slides will be available approximately one hour prior to the start of the call)


As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to .


Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.


Kind regards,


The Hedgeye Macro Team

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