"Be wary of the arrogant intellectual who comments from the stands without having played on the field."
Helicopter Ben Visits Japan
"Bernanke met Haruhiko Kuroda, the central bank governor, for lunch Monday," Bloomberg reports. "The BOJ issued no statement on the substance of those talks, which come three weeks before its next policy meeting as it confronts a fresh strengthening in the yen this year that risks undermining inflation and weakening the appetite for investment and wage increases." Interestingly, Bernanke has been weighing in on the efficacy of helicopter money recently.
OUR TAKE: As the BOJ's negative interest rate policy (NIRP) fails and continues to draw the ire of the Japanese public, the likelihood that central planners turn to helicopter money is rising.
Earthquakes, Unforeseen Events & Brexit
The OECD will hold off on publishing its Composite Leading Indicators (CLIs) – "an effective tool during periods of extreme volatility" – until September in order to properly assess the Brexit shock. In a press release, the OECD compared Brexit to an unforeseen event like a natural disaster:
"The CLIs cannot, however, account for significant unforeseen or unexpected events, for example natural disasters, such as the earthquake, and subsequent events that affected Japan in March 2011, and that resulted in a suspension of CLI estimates for Japan in April and May 2011.
The outcome of the recent (23 June) Referendum in the United Kingdom is another such significant unexpected event, which is affecting the underlying expectation and outturn indicators used to construct the CLIs regularly published by the OECD, both for the UK and other OECD countries and emerging economies."
OUR TAKE: As Hedgeye Director of Research Daryl Jones wrote in today's Early Look "So the moral of the story is: if you don’t like the numbers, just suspend reporting them. That’s one way to deal with adversity anyway. Practically speaking, it is pretty difficult to call Brexit an unforeseen event. Perhaps it was viewed as improbable, but hardly unforeseen."
A pre-Brexit survey of 8,2000 firms in the U.K., conducted by the British Chambers of Commerce, found that "UK economic growth was uninspiring in the run-up to the EU Referendum." The BCC found that services sector sales continues to fall and manufacturing sales remained at historically "low ebb."
OUR TAKE: In our Q3 Macro Themes, the Hedgeye Macro team warned that "Europe's cyclical and structural growth and inflation headwinds" combined with political risk would cause ... #EuropeImploding. More to come.
Equity Market Bull & S&P all-time highs
"We don’t have the rising (bond) yields that would typically check the market rally, that’s one of the reasons we keep going higher," Jim Paulsen, chief investment strategist at Wells Capital Management told Reuters. Paulsen continues: "I certainly think (low bond yields) are creating problems in the bond-like stocks. I wouldn’t want to be sitting in utilities or REITs right now."
OUR TAKE: We've been The Bulls on Long Bonds (TLT) and Utilities (XLU) on U.S. #GrowthSlowing. That's been the right call and we're sticking with it (see chart below). As for Paulsen's call against bonds and utilities, it is what it is ... a whole lot of bull.
Taleb: The Importance Of Probability
"One thing it took me 30 years to realize is that the way people compute future performance of portfolios is wrong because they take alpha and simply apply it as if you were invested in that strategy. But if you have any uncle point, in other words if you hit ruin, then you never realize that return," author and distinguished professor Nassim Taleb tells Bloomberg.
The "uncle point" Taleb is talking about is the point at which you have to reduce your position or take a loss. Now, an investor might have realized their expected returns if they were able to wait for a downturn to mean revert but "uncle points," like a margin call, prevent such long-term patience. Taleb's conclusion? "People [therefore] underestimate how much protection they need."
OUR TAKE: Taleb's analysis is always thoughtful and this video is no exception.