CHART OF THE DAY: What Unelected Fed Bureaucrats Continually Miss

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... When it comes to establishment economists, they don’t think in rate of change terms – they think about levels.


And that, for those of us who have evolved in this profession, is a damn shame. It’s not like 2nd derivatives (high-school math) are new. It’s not that people winning Nobel Prizes in Behavioral Economics should be epiphanies to these central-market planners either. What’s super sad about all of this is that no leader in either our established government or media holds these unelected people to account."


CHART OF THE DAY: What Unelected Fed Bureaucrats Continually Miss - 06.22.16 Chart

Behavioral Revolution

“Maybe something as dramatic as a scientific revolution is in store for us.”

-Robert Shiller


I know. Sometimes I sound a little bearish (on growth). But that’s a good thing (in alpha space). After all, the year-over-year rate of return from this day in June of 2015 in #GrowthSlowing (TLT) is +15.1% vs. the beloved US equity beta of the SP500 (-1.6%).


Maybe I should have started a 2 & 20 operation on that.


Kidding. What I signed up for when I went down this path to start Hedgeye was to sit on the front lines of what my favorite professor in New Haven (Shiller) told me could be in store – a revolution. A Behavorial Revolution in the study of economics, that is.


Back to the Global Macro Grind


By the time I got to Yale in the 1990s, the revolution was well underway. “The debate between behavioral finance researchers and defenders of the efficient market hypothesis was just beginning.” (Misbehaving, pg 168)


Little did I know what I didn’t know back then. That said, almost 20 years later, I don’t think the head of the Federal Reserve knows how to apply basic behavioral economics to her decision making process now either.


Behavioral Revolution - Yellen cart 06.07.2016


In what seemed like an exasperating moment for the Fed Chair yesterday, when Senator Pat Toomey (PA) asked Janet Yellen if she’d yet considered that 0% rates might be a bad thing in the years 2017 and beyond… she answered “no.”




Upon further questioning by another gentleman on the Senate Banking Committee (sorry, these aren’t leaders in my life – I don’t know them all by name), when he asked Yellen why she didn’t consider her favorite labor market indicator bearish (now that her Change in Labor Market Conditions Index has been negative on an absolute basis for 5 months in a row), she muddled an answer about “levels.”


You see, when it comes to establishment economists, they don’t think in rate of change terms – they think about levels.


And that, for those of us who have evolved in this profession, is a damn shame. It’s not like 2nd derivatives (high-school math) are new. It’s not that people winning Nobel Prizes in Behavioral Economics should be epiphanies to these central-market planners either. What’s super sad about all of this is that no leader in either our established government or media holds these un-elected people to account.


We’re probably going to need a crisis to change that.


How else do you think this scary movie of abysmal forecasting (and monetary policy based on those forecasts) is going to play out? Will it get so bad that they just give up on it? Or are we about to enter the next frontier of OMG market operations?


Senator Reed (RI) gave us a looksy into that yesterday.


Yep. If Hillary wins, you know that Larry Summers is the front-runner to take over for Janet Yellen, right? If you didn’t know, now you know. He’s going to try to combine FISCAL policy with MONETARY!


Oh yeah, baby. We’re talking maybe a 50-year Treasury Bond issuance to finance building “bridges and roads” … and heck, anything someone in Big Government Spending land has ever dreamed of. Didn’t you hear, there’s supposed to be a “multiplier” on that!


Maybe that will make non-behavorial-linear-economic forecasting great again.


The way that math works is that you take The People’s taxes to securitize and finance the G (Government) in GDP = C + I + G (Consumption + Investment + Government Spending) equation … and voila, you’ll have a better forecast for GDP!


Don’t worry about the debt side of that equation. As Summers taught us with the Harvard Endowment’s, that stuff is for the birds.


After 8-9 years of printing and easing, Janet Yellen said that “considerable uncertainty about the economic outlook remains.” And per Senator Reed, that’s only “because you have one hand tied behind your back.”


Imagine what the next government can do with both hands in your pockets? Maybe Shiller was right. Maybe something dramatic is in store for us. But is that going to be a good thing? Or will that finally expedite the revolution?


Our immediate-term risk ranges (with intermediate-term TREND research view in brackets) are now as follows:


UST 10yr Yield 1.54-1.72% (bearish)

SPX 2055-2095 (bearish)
RUT 1125-1175 (bearish)

NASDAQ 4 (bearish)

Nikkei 150 (bearish)

DAX 99 (bearish)

VIX 16.26-22.67 (bullish)
USD 93.52-95.28 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 103.09-105.95 (bullish)
Oil (WTI) 46.14-51.06 (bullish)

Nat Gas 2.41-2.79 (bullish)

Gold 1 (bullish)
Copper 2.00-2.14 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Behavioral Revolution - 06.22.16 Chart

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

“Status quo, you know, is Latin for 'the mess we're in'.”

                                                     ― Ronald Reagan


MONEY AIN’T A THANG: Really - it’s not an issue for Donald Trump, but despite claims that he’s worth over $10 billion, the same can’t be said for his campaign. His war chest – if you’d even call it that - currently holds only $1.3 million. That’s about the size of a congressional campaign. Hillary Clinton, on the other hand, has outraised him by a long shot, boasting $42 million in cash, and climbing at an even faster rate than the primary, putting the Republican front-runner on ice with less than five months to go. Recent FEC filings also show that Trump’s campaign has rented his own venues, jets, and hotels, and that Trump continues to loan the campaign money – bringing the total amount of Trump loans to $45.7 million. If Republican pockets aren’t deep enough, Trump promises that he will personally fund his own campaign...


GENERAL ELECTION GROUND GAME: Clinton now holds early leads in four key swing states - FL, VA, MI, WI – further underscoring our point that having an organization really does pay off. If Trump wants to stay in it, he’s going to need boots on the ground – and fast. His campaign currently employs only 69 staffers, while Clinton woefully outnumbers him with 685. Trump boasts that he runs a lean, tight-knit campaign, but that won’t cut it. In states like battleground NC, Clinton employs around 100 staffers, while Trump counts 10. Though, with the race looking tighter in PA and OH, Trump has an opportunity to be competitive in two of the most critical states this fall.


FAR WORSE THAN FUNDRAISING: When all is said and done, it’s not the money, organization, or events that people remember – it’s the message. “Make America Great Again” was a sturdy slogan during primary campaign –  something supporters could hang their hats on - but now, that message appears to be muddled. Though Trump held campaign rallies last week in five states run by Republican Governors (four were potential battleground states - AZ, NV, GA, NC) - not one of them appeared on stage with him. If that doesn’t sound the alarm, then what does?


CLINTON’S CLAIMS: Clinton cautioned voters of a “Trump recession” in a speech on the U.S. economy, implying that electing Trump, “the king of debt,” would send the economy into a tailspin. In a speech outlining what won’t make America great again, Clinton feels that she’ll be the one to unite the nation, moving the U.S. economy into prosperous times like never before. She’s taking her message to Capitol Hill today to strategize with House Democrats, while Trump is expected to counterpunch in a speech to badly-needed donors this afternoon.


SANDERS STILL STEAMING: The fire under Bernie Sanders’ campaign might have gone out, but he’s got quite the large amount of steam leftover. His mission – reform the Democratic platform. He’s recently recruited a number of Democratic senators to support the reform of the superdelegate system, a framework knocked even by Trump as undemocratic and elitist. The continued push by Sanders and his cohorts, combined with Clinton’s interest in winning over his supporters, is likely to push the issue onto the agenda in Philadelphia.


ELECTION PREVIEW WITH SCOTT REED: We spoke with Washington insider Scott Reed on the upcoming presidential election, the lay of the land for Senate and House races this fall, and the overall effort businesses play in campaigns and politics. Reed highlighted the importance of Trump getting his message back on track after releasing his top campaign manager, while betting his fate on three factors: VP pick, the convention, and the first debate. Reed also keyed in on Senate elections – predicting Republicans retain the Senate with wins in OH, PA, NH, NV, and FL, but dropping seats in WI and IL. A replay of the call can be found here.


#BELIEFSYSTEM BREAKDOWN: One of our top three 2Q16 macro themes warned of a breakdown in the central banking #BeliefSystem. In other words, investor faith that the Fed and global central banks can “save the day” is faltering. Every day now we hear about Fed “credibility problems.” Indeed, Janet Yellen was peppered by Congressmen with questions yesterday about the Fed’s faulty forecasting. Meanwhile, St. Louis Fed head James Bullard made headlines last week saying that the Fed was “backing off the idea that we have dogmatic certainty about where the U.S. economy is headed in the medium and longer run.” That’s a big deal. All of this, while the industrial recession continues, corporate profits continue to go negative, employment growth slows and global economy stalls. We continue to reiterate that the biggest risk to investors is believing in the Fed’s rosy economic forecast. The belief system is breaking down.


WHY IPAB WON’T GET TRIGGERED TOMORROW (& IT WON’T MATTER IF IT IS): Our Healthcare Policy Advisor Emily Evans shared her insight on why the Medicare Trustees report probably won't trigger IPAB and the action for Medicare cost reduction at CMMI will happen anyway. You can read her piece here.


5G WIRELESS RULES ON FCC JULY AGENDA: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on how the FCC's 5G rules could boost wireless ecosystem leaders like VZ and CCI. You can read his piece here.




Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

The Macro Show with Keith McCullough Replay | June 22, 2016

CLICK HERE to access the associated slides.


An audio-only replay of today's show is available here.

TIP: Adding Treasury Inflation-Protected Securities to Investing Ideas (Long Side)

Takeaway: We are adding TIP to Investing Ideas today.

Editor's Note: Below is a brief summary of our thesis from Hedgeye CEO Keith McCullough. We will have an additional update in this weekend's edition of Investing Ideas.


Once the government decides to actually allow the developing TREND of +1.5-2.0% inflation into its reported numbers, we'll see a commensurate drop in Real GDP. Don't forget that in Q1 of 2016, US GDP would have been negative (sequentially) if the US used a Deflator of 1.6% instead of understating inflation (in the Deflator) at 0.7%.


This idea is a lower-volatility way to play "reflation." Long Gold would be a higher volatility one. I like both, from a price (low-ends of their respective risk ranges).


You're getting TIP (Treasury Inflation Protection) on sale today because US Treasury Bond Yields are up on "no Brexit" speculation. US Treasury Yields "up" is just a TRADE, not a TREND. The intermediate-term TREND there remains down, obviously, as real (trending) economic growth continues to slow.

TIP: Adding Treasury Inflation-Protected Securities to Investing Ideas (Long Side) - GDP cartoon 01.29.2016



get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.