Did You Catch Janet Yellen’s ‘Crazy’ Response on Zero Rates?


In this brief except from The Macro Show this morning, Hedgeye CEO Keith McCullough weighs in on a head-scratching moment between Fed chair Janet Yellen and Sen. Pat Toomey (R-PA) during her testimony before the Senate Banking Committee.

The Astonishing Audacity Of Central Planners

The Astonishing Audacity Of Central Planners - central bank cartoon 04.22.2016


It's shaping up to be quite a week for central planners.


This week we've listened to the hand-wringing of Fed, ECB and BOJ officials. And it's only Wednesday. Here's a brief recap:


What was striking about Fed head Janet Yellen's testimony before Congress yesterday was the surprising contrast between fact and fiction.


Fiction: “The U.S. economy is doing well,” Yellen said and continued by reiterating her “expectation is that the U.S. economy will continue to grow.”


Fact: “Considerable uncertainty about the economic outlook remains,” Yellen continued, saying she was watching persistently low productivity growth, pressure from China's "considerable challenges" economically, Brexit risk, and a "loss of momentum" in the jobs market.


Another bit of fiction. Yellen made sure to underscore that this jobs market weakness was "not a deterioration." It was likely "transitory," she said.


Not true.


As Hedgeye CEO Keith McCullough pointed out in this morning's Early Look, Yellen was asked directly about her favorite labor market indicator, the Change in Labor Market Conditions Index, being negative on an absolute basis for 5 months in a row. She responded with an answer about the importance of “levels" in which she essentially suggested that the rate of change wasn't important.


That's sad because, in addition to Yellen's favorite indicator rolling over, the rate of change in jobs growth is rolling over too. Proof? Take a look at the chart below. Non-farm payroll growth has been "deteriorating" since February 2015.


The Astonishing Audacity Of Central Planners - employment 5 6


In other central planning news...


On Tuesday, ECB head Mario Draghi, said that European policymakers "stand ready" to act in the event of a Brexit vote. 


  • “In particular, the ECB is ready for all contingencies following the U.K.’s EU referendum,” Draghi said.
  • During the Q&A, Draghi explained, "It would be difficult to speculate about one outcome [but] we’re trying to be ready to cope with all possible contingencies.”


In other words, fire up the helicopter?


The Astonishing Audacity Of Central Planners - Helicopter money 05.20.2016


Rounding out the central planning trifecta...


Yesterday, Bloomberg report that sources familiar with Japan's Ministry of Finance had ruled out unilateral intervention in the event of a Brexit surge in the yen. More likely, sources said, would be a joint intervention via the G7:


"This time, the G-7 probably would issue a statement to address any turmoil on Friday, and if there were joint intervention it would probably make that public, according to the people familiar with the talks. The G-7’s last joint currency intervention was in the wake of the 2011 Japan quake, when a statement was issued."


Meanwhile, BOJ Governor Haruhiko Kuroda (who was at the Ministry of Finance from 1999 to 2003) has warned about the "big" impact that currency gains could have on Japan’s inflation. On Monday, Kuroda said that the BOJ stands ready to add stimulus if needed.


But what makes policymakers so sure the intervention would be successful? The yen is up 13% this year despite the BOJ's negative interest rate policy and all the jawboning out of the Ministry of Finance.


The Astonishing Audacity Of Central Planners - usdjpy


As flummoxed central planners all over the world continue to flounder amidst stagnating economic growth, we continue to reiterate that the central planning #BeliefSystem is breaking down.

More to come.

Hedgeye Guest Contributor | Thornton: Doom and Gloom Brexit Fears Are Overdone

Takeaway: If the U.K. votes to exit the EU, the economic effects will likely be much smaller than most gloom and doom estimates.

Editor's NoteBelow is a Hedgeye Guest Contributor research note written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. 

Hedgeye Guest Contributor | Thornton: Doom and Gloom Brexit Fears Are Overdone - Brexit cartoon 06.16.2016


I was in Amsterdam recently and listening to news reports of the gloom and doom that would occur if the U.K. voted to exit the EU. The economic motivation for the creation of the EU was that it would permit the free flow of labor and capital among the member nations and would reduce or eliminate restrictions on trade. If this was all the EU did, there would be no rationale for exiting the EU because economic theory shows that the net benefit of removing such restrictions is unequivocally positive. Consequently, any move that would inhibit the flow of labor and capital and reduce trade would be unequivocally negative.


But this is not all the EU does. The EU sets all sorts of regulations, transfers wealth among member nations, etc. These other aspects of being in the EU create winners and losers. But economic theory cannot tell us whether the net benefits of these other aspects of the EU are positive or negative. Consequently, it is essentially impossible to know whether the U.K. would be worse off or better off if it exits the EU.


I have no idea whether the U.K. will be better or worse off, so I don’t have an opinion about how the vote should turn out. Nevertheless, I am very confident that the negative effects of exiting are overestimated by many of those who favor remaining in the EU would like people to believe.


My reason is rooted in uncertainty.


Since it is virtually impossible to know whether the U.K will be better or worse off, those who favor remaining in the EU will have a strong incentive to overestimate the economic consequence of exiting. Of course, those in favor of exiting have the same incentive in the opposite direction. But they have a weaker economic argument. They have to argue that the net benefits of reduced regulations, wealth transfers, and the like are not only positive but more than offset the negative effects from the reduced mobility of economic resources and more trade restrictions. This is much more difficult because there is no fundamental economic theory that says this must be so.


Proponents of staying understand this advantage. Moreover, they can use standard economic models to provide estimates of the effect of exiting the EU on income, employment, trade, etc. It is not surprising that many of these estimates are very large. The more uncertainty and fear they can create, the more likely it is that those who are uncertain whether they should vote remain or leave, will decide to vote to remain.


There is another reason to believe that the effect on economic activity will be smaller than many proponents of remaining in the EU suggest. While the movement of labor and capital will be less free and trade more difficult if the U.K. exits, economic forces will tend to mitigate these negative effects. Specifically, trade between the U.K. and other EU members that has been mutually beneficial will remain mutually beneficial. Consequently, governments and firms will have an incentive to maintain those relationships. While some countries might retaliate against the U.K., this is unlikely to persist so long as the continuation of these relationships is in the longer-run economic interest of all parties.


I predict that if the U.K. votes to exit the EU, the economic effects will be much smaller than most of the estimates I have heard. I don’t expect this will happen. I expect the U.K. to vote to remain in the EU on June 23 because two powerful forces—fear of the unknown and inertia—will push the vote in that direction.


However, should it happen, I will write a follow up essay in a year or two to see whether my prediction is correct.

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What Tesla Buying SolarCity Tells Us About The Economic Cycle

Takeaway: This is what always happens at the end of the economic cycle. Profits peak => M&A peaks

What Tesla Buying SolarCity Tells Us About The Economic Cycle - Peak cycle cartoon 04.15.2016


On The Macro Show today, Hedgeye CEO Keith McCullough was asked by a subscriber about how to interpret Tesla's (TSLA) purchase of SolarCity (SCTY) within the context of the economic cycle.


Below is McCullough's response:


"This is always what happens at the end of the cycle. First, the rate of change in corporate profits peaks. Those are the profits by which a company would fund or underwrite an M&A transaction, or issue dividends or buy back stock for that matter.


Then, when the rate of change in profits peaks, you get the final blast of M&A transactions because companies are trying to sell to the next greatest fool who is willing to pay the highest price. That’s how private equity and M&A works.


What Tesla Buying SolarCity Tells Us About The Economic Cycle - m a


Now that we’re past the peak, you’re seeing some of the most outlandish things. Microsoft buying LinkedIn, for instance. Why? Because Microsoft's business is slowing so they have to buy something with that high a multiple? Why is Elon buying SolarCity? Because SolarCity could go away?


These are the days of our lives. The M&A announcements that you see at the end of the cyle start sounding more and more ridiculous. Tesla and SolarCity should sound ridiculous. And that’s why Tesla shares are down on the news."

Quick Take: A Good Spot To Buy Gold | $GLD

Takeaway: Gold is up 19% year-to-date. Buy gold between $1250-$1265.

Quick Take: A Good Spot To Buy Gold | $GLD - gold bar


What do you do with yesterday's pullback in Gold prices?


Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:


"GOLD – especially if you haven’t been long it yet, good spot to buy some down here in the $1250-1265 range with immediate-term upside to $1305-1310; short Copper on the other side of it around $2.10-2.15 with downside to the YTD lows; great way to stay with the reality that global growth hasn’t 'bottomed.'"


Daily Market Data Dump: Wednesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products




Daily Market Data Dump: Wednesday - equity markets 6 22


Daily Market Data Dump: Wednesday - sector performance 6 22


Daily Market Data Dump: Wednesday - volume 6 22


Daily Market Data Dump: Wednesday - rates and spreads 6 22


Daily Market Data Dump: Wednesday - currencies 6 22

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