The Unintended Consequences Of ZIRP On Commodities

Takeaway: We are loudly reiterating our call that the unwind of ZIRP and QE will continue to deflate the easy money credit boom it fabricated.

Editor's Note: Curious about what will happen during the Great Unwinding of the Federal Reserve's zero interest rate policy (ZIRP)? Below is a brief excerpt from a research note written by Hedgeye Macro analyst Ben Ryan sent to institutional subscribers last week. To read the note in its entirety ping


... And click here to join us on The Macro Show today with Hedgeye CEO Keith McCullough. It's free


The Unintended Consequences Of ZIRP On Commodities - money funds


According to Ryan: 


The excessive amount of capital in play in commodity industries is only beginning to decelerate and inflect.


Using a sample of 34 different producers in 4 different sub-sectors, commodity producer debt as a % of corporate credit outstanding has multiplied ~2.5x in 10 years. This group’s aggregate debt level is up ~5x in 10 years. The chart below shows the jump in commodity producer debt as a share of aggregate corporate debt levels.   


Click image below to enlarge 

The Unintended Consequences Of ZIRP On Commodities - commod leverage

SPECIAL EDITION of The Macro Show: Why Markets Are Crashing






2 Key Charts Underpinning Our Recession Call

Editor's Note: Want a better understanding of why our macro team thinks the likelihood of a U.S. #Recession in Q2 or Q3 of 2016 is significant? Wall Street is completely missing this. It has to do with the relationship between labor income and corporate profitability.


See below a brief excerpt from a research note written by our U.S. Macro analyst Christian Drake explaining this relationship. To learn more about how you can subscribe to our institutional research email


... And click here to join us on The Macro Show today with Hedgeye CEO Keith McCullough. It's free


2 Key Charts Underpinning Our Recession Call  - recession cartoon 12.22.2015


According to Drake:

Labor Income ↑ = Profitability ↓

With labor rising, topline (GDP & Corporate Profit estimates) decelerating and inventories spiking (see the recent wholesale inventory data), the probability that positive hiring perpetuates continued margin contraction is more likely than not.  


Take a closer look at the charts below.


2 Key Charts Underpinning Our Recession Call  - labor income


2 Key Charts Underpinning Our Recession Call  - profit

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10-Year U.S. Treasury Yield
2.16 2.03 2.10
S&P 500
1,865 1,950 1,921
Russell 2000
991 1,059 1,025
NASDAQ Composite
4,440 4,614 4,615
Nikkei 225 Index
16,804 17,905 17,240
German DAX Composite
9,507 10,022 9,794
Volatility Index
22.17 28.98 23.95
U.S. Dollar Index
98.66 100.12 99.14
1.07 1.10 1.08
Japanese Yen
116.41 118.99 118.06
Light Crude Oil Spot Price
28.41 32.99 31.21
Natural Gas Spot Price
2.02 2.31 2.14
Gold Spot Price
1,068 1,098 1,078
Copper Spot Price
1.91 2.02 1.98
Apple Inc.
93 101 99
564 616 593
Alphabet Inc.
704 748 731
McDonald's Inc.
113 119 116
Facebook Inc.
92 100 98
Intel Corp.
30.06 33.07 32.74

Recessionary Data Pending...

Client Talking Points


The biggest tell yesterday was volatility – i.e. no change – it remains in what we call a Bullish Formation with an immediate-term risk range of 22.17-28.98. #Deflation’s Dominoes end with massive volatility and a breakout in credit spreads.


China was hammered another -3.6% overnight in Shanghai after Trump reminded the world he wants to eviscerate Chinese trade – that would have to be super bullish for macro markets, no? #GOPDebate .


After every high profile pundit tries to call the bottom, Oil takes another leg down – this is #Deflation and it is not “transitory.”  Oil is crashing again this morning down -5.2%, this ensures Producer Prices in America are in a #Recession.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

McDonald's boasts style factors that are best in class for turbulent times in the market, big cap and low beta and it has handily been outperforming the market and its competitors as of late. One of the biggest aspects of competing in their space is value offering.


McDonald’s has ceded share in the value category primarily to Burger King over the last two years. Now that they are launching a national value platform with a full slate of media support, MCD will recover the value customer.


General Mills' business seems to be starting to pick up steam, as the company is working to improve merchandising and advertising on core business.


In addition they have executed a few small, but meaningful M&A deals showcasing the change in managements thinking. The divestiture of Green Giant to B&G Foods, for instance, although a profitable business, was a good move for them given their lack of focus/investment in the brand (they have more opportunities like this throughout their portfolio, in addition to SKU rationalization).


GIS continues to look for more sizeable acquisitions in emerging markets, but the string of pearls approach may remain most effective domestically.


After the worst start to a year literally EVER for U.S. equity markets, TLT caught a bid in the first week of trading as the centrally-planned Chinese stock markets traded limit down earlier in the week. It was the largest central bank liquidity injection from Beijing since Chinese markets crashed in September.


TLT remains one of our strongest long idea calls heading into 2016 as junk bond markets begin to crack.   

Three for the Road


VIDEO | Here's what we really think about the #Fed and QE… cc @KeithMcCullough @HedgeyeDDale



Impatience never commanded success.

Edwin H. Chapin


According to an analysis by Bloomberg Intelligence, Apple Inc. could owe more than $8 billion in back taxes as a result of a European Commission investigation into its tax policies.

CHART OF THE DAY | How To Play Defense In A Recession and Rising Rate Environment

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to join Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale on today's The Macro Show. It's FREE!


"... Within the housing related equity complex, REITs provide the best relative returns during recession and rate risk environments.  As can be seen in the Chart of the Day below, REIT’s are essentially the Utilities of the Housing industry. While the r-square isn’t exceedingly high, the relative return distribution plots as you would expect and want in a growth slowing environment."  


CHART OF THE DAY | How To Play Defense In A Recession and Rising Rate Environment - CoD 2


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