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Seeing The Forrest Through The Trees

“It’s there if no one else has told you.”

-          Forrest Chang, Hedgeye Risk Management

No, I didn’t spell Forrest wrong in the title.  Granted some days we have the odd typo in our research, today Forrest - with two RRs - is actually the name of my colleague, Forrest Chang.  Not only does Mr. Chang, an MIT graduate, run our Oceanside, California office, but he also has a Budha-esque quality to him.

Yesterday I emailed our Operations Team to inquire as to whether the MP3 for our sovereign debt call was on the portal for our subscribers.  His response was the quote above: “It’s there if no one else has told you.”  As I read his email response, I thought that’s logical.

Like most deep simplicity, his statement has a much deeper meaning.  One would expect nothing less from a computer scientist of Mr. Chang’s genius.  As you know by now, Keith and I like to apply many analogies, and more often than not sports analogies, to our business and to global macro investing.   In this instance, do your own work, DJ go to the site and look yourself, was what Forrest was telling me.

So, as we survey the global macro landscape today, what “is there because no one had told us”?  Well, I would say a few things:

  1. Bank of China earnings – The Bank of China reported earnings over night.  Not surprisingly, the Bank of China posted a fourfold jump in profit based on loan growth and lower write downs.  Now the first part was to be expected given massive loan growth in China, but fewer write downs?  What of the mystical empty Chinese cities that these loans are supposedly underwriting?  Despite conspiracy theories, Chinese loans still appear to be money good for the most part.
  2. Iron Ore Prices –Vale is the second largest mining company in the world, so when Vale speaks, our commodities team listens.  Last night Vale sent a document to its customers saying it was raising iron ore prices to $122.20 per tonne, versus $57 per tonne year last year.  That is a 114% increase.  I don’t need a degree from MIT to know that is inflationary. 

Incidentally, if you are looking for a market with duopoly pricing power, Vale and its competitor Rio Tinto Group control roughly2/3rds of the global iron ore market.  So, yes, they have pricing power.  And yes, when they raise price by 114% year-over-year that is inflationary for all things steel.

  1. U.K. Inflation – A common debate in economic circles these days is whether we are in an inflationary or a deflationary environment.  I’m not sure if anyone has told me, but it appears that inflation is here based on data out of the U.K. this morning. 

The Brits printed a Consumer Price Index this morning that was up +3% year-over-year for February.   Yes, that is a February number and it is now March. Yes, that is a deceleration from January’s +3.5%.  And, yes, it is still inflationary.  We expect global inflation numbers to go up in March versus February.

Just as a MIT computer scientist and a Yale hockey player are juxtaposed, so too is the leadership in the global macro markets this morning.

We have been criticized for being too pro-China at times, but when a country and its leadership both do and says the right things, it is hard not to get a little bulled up.  In a speech to major CEOs last night Premier Wen Jiabao said:

“They must not fight a trade war or a currency war because this will not help us in meeting the current difficulties.”

This is an admittedly savvy appeal to the capitalists who run some of the largest companies in the world ahead of Congress’ manipulator meetings tomorrow.

In Europe the continuing debate regarding the PIIGS, namely Greece, rages on with nary a real leader in sight.  Will the IMF provide bail out monies? Will the EU provide bail out monies? Does Germany like Greece, or not?

In our picture of the day today, posted below, we see a perplexed and confused looking European Central Bank President Jean-Claude Trichet, with the caption, “Smells Like a PIIG in Here . . .”   As we stated on our Sovereign Debt Call last week (email us at if you want the replay), sovereign debt issues rarely end with one country. 

Not surprisingly, we continue to favor the Chinese leadership to the European confusion.

On an ending note, we couldn’t help but highlight a quote that we read from CNBC pundit Dennis Gartman yesterday.  Garty wrote:

“We remain long of restaurant chains and other companies that keep making higher highs.”

Setting aside the fact that Dennis has probably never analyzed a restaurant (our own Howard Penney is one of the world best restaurant analysts), what kind of a thesis is being long companies that make higher highs?  Come on Dennis, there is responsibility in recommendation.  This isn’t a game, people depend on us.

Keep your head up and stick on the ice,

Daryl G. Jones

Managing Director

Seeing The Forrest Through The Trees - Trichet