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Inflation Is Popular

“In spite of the cost of living, it’s still popular.”

-Kathleen Norris


That’s what Kathleen Norris had to say about inflation in the Roaring 20’s. She was a romance novelist from California. Writing books between 1911 (“Mother) and 1941 (“The Venables”), Norris made more money than most female authors of her time. She was well known for her San Francisco perspective on living the upper-class lifestyle. To this day, inflation remains popular at the high end of America’s society.


After WWII, inflation has been a popular short-term market solution for easy money politicians. With the exception of the late 1970’s and early 1980’s, most of the revisionist economists advising Washington have been able to get away with pretty much anything on this front. The US government has changed the calculation for inflation 9 times since 1996, so we’ve pretty much made this popularity-fest permanent.


If you are wealthy and fully invested right now, inflation has to be popular with you. The politicized Federal Reserve is keeping interest rates at an “emergency” rate of ZERO percent, so that the bankers get paid while savers in America pay the bill. We call this the Piggy Banker Spread and the US government underwrites it. At +285bps wide this morning (10-yr yield minus 2-yr), it is within 0.08% of its all-time widest spread ever. Oink, oink.


If you are poor and fully committed right now, inflation is not popular with you. It’s your cost of living. You feel it at the pump. You feel it in your wallet. No matter where you go, there it is. Don’t even try thinking about saving either; you wouldn’t be making any money on those treasury bonds or cash-savings accounts anyway. So you may as well buy yourself another scratch bingo card and hope to live another day; the rest of us will buy iPads.


In the moment, Ben Bernanke is popular amongst many politicians and long-only market participants. Sadly, Greenspan was too. Since Volcker left, Washington has had zero credibility in proactively managing inflation risk.


Most mathematicians understand that the global economic system and the prices born out of it are leading indicators. Bernanke is a historian trapped in his own confirmation bias. If you are in the inflation ‘doesn’t bother my cab ride to work’ camp (only the cab driver’s margins), you won’t agree with this morning’s reality. Inflation is a leading indicator that is marked-to-market every day. Here are some global inflation readings to consider this morning:

  1. After shooting up another +7.8% last week, oil prices are hitting 17 month highs ($85.35/barrel).
  2. After melting up another +5.9% last week, copper prices are hitting 20 month highs ($3.61/lb).
  3. 2-year US Treasury  yields are up +37% in the last month and hitting new highs again this morning at +1.10%
  4. Russian stocks are up again this morning, inflating their petrodollar stock market to +12.1% YTD
  5. Japanese stocks were up again overnight, inflating their currency debased stock market to +7.5% YTD
  6. Turkish inflation for March was reported at +9.6% year-over-year growth

Now if you aren’t living in Istanbul, you probably don’t see the inflation that 73 million people in Turkey do. If you wake-up on Park Avenue and take the US Government’s word for it, you probably don’t see the +18% food inflation that 1.2 billion people in India aren’t paid off to be willfully blind to ignore.


Wall Street is funny and sad altogether this way. While the revisionist historians are getting well versed on the sovereign debt chapters of Reinhart & Rogoff’s “This Time Is Different”, they don’t seem to be spending a whole lot of time getting what will be born out of Piling Debt Upon Debt Upon Debt - INFLATION.


For 7% of the price some of these analytical savants are willing to pay for an iPad, they should buy the book and focus on chapter 12. That’s where the boys show you the risk embedded in Reactive Fiat Currency Management. Inflation is not new. According to the Reinhart & Rogoff data, the 5-year moving average for all countries (for the years 1500 through 2007) is currently breaking out to the upside.


Now you might say that wage inflation in America is low, because in Friday’s hawkish employment report, it was. I have a simple question in response to that – what is a poor person in this country to do then as their wages remain low and everything they buy goes up in price?


I suppose this is why Ben Bernanke is overseeing the highest percentage of Americans living on food stamps since WWII (11%). Almost 1 in 4 American children are forced to eat off that same program. I don’t see any Piggy Bankers eating off those troughs and I doubt Kathleen Norris would write a best-selling romance novel about this either.


Even though we disagree with the conflicted and compromised government calculations, our forecast is that we are going to see a meaningful sequential acceleration in both global and US inflation for the months of March and April.


All the while, the Keynesians at Groupthink Inc. will be parroting what those who never see inflation until it’s too late always do: “This Time Is Different.”


Sadly, there is nothing different about this at all. This is the high-low society that politicians from Moscow to Mumbai have been paid to create as their political powers maintain an explicit mandate to keep inflation popular.


I shorted the SP500 for an immediate term TRADE on Thursday at 1180. My immediate term support and resistance lines are now 1170 and 1182, respectively.


Best of luck out there today,



Inflation Is Popular - pic



The Macau Metro Monitor, April 5th, 2010


CASINO REVENUE UP 57% IN QUARTER South China Morning Post

Macau casino revenue soared to a near-record MOP 13.569BN in March 2010 (a record MOP 13.937BN was set in January 2010), up 42.4% from a year ago and 1.3% higher than February, according to the Macao Daily News. The rebounding economy and robust liquidity on the mainland have fueled VIP gambling volumes, while tourist arrivals rose 15% in the first two months this year. First-quarter casino revenue rose 57.2% from a year ago to MOP 40.91BN, putting Macau on pace to hit a record MOP 160BN this year.



Gaming operator Melco Crown has finally explained why it terminated an agreement to acquire a Macau Peninsula site where it planned to build a casino. “Our decision to terminate the agreement to acquire the Macau Peninsula site was based on our view that Cotai has established itself as the primary location for future development projects,’’ the company said in its annual report, filed on Wednesday. Melco Crown terminated the agreement to purchase the HK$1.5BN site in December 2009. According to an earlier report in the Sydney Morning Herald, the land is owned by companies associated with the third wife of Stanley Ho Hung Sun, Chan Un Chan.


Melco Crown also mentioned it is finalizing a revision to its land lease agreement for City of Dreams that would expand developed gross floor area by ~1.6MM sq ft. so that it may consider adding an apartment hotel tower at CoD.


Finally, Melco Crown states that its agreement with New Cotai to operate the Macau Studio City casino remains in place. However, the company notes that the formal opening of Macau Studio City has not yet been announced and that there are consensus problems amongst the resort developers – eSun Holdings, CapitaLand Integrated Resorts and New Cotai – regarding the development and the timing for the completion of financing.


On the First day of the second quarter, the S&P 500 was higher in an uneventful, pre-holiday trading session.  The biggest tailwind for stocks today was the upbeat and inflationary manufacturing surveys out of China, Japan, the UK, Europe and the US.


As reported Friday morning, payrolls rose 162,000 vs. the 184,000 consensus, while the unemployment rate was unchanged at 9.7%, in line with consensus. The payrolls increase was the largest since March 2007, though temporary 2010 Census hiring boosted the figure by 48,000. Net revisions were +62,000, with February payrolls revised to (14,000) from (36,000), and January revised to +14,000 from (26,000).


Some Hedgeye observations:

  • March unemployment rose to 9.8% (9.7% reported) net of census hiring
  • March employment gain of 162,000 was 114,000 net of temporary census hiring
  • The government continues to overstate the employment numbers

In early 2010, we learned that it’s the government bias to overstate payroll employment levels (to understate employment declines during recessions).  This bias was confirmed by the BLS’s benchmark revision published with the January 2010 employment report.  In January, the BLS had indicated that the underlying assumptions were failing to account for certain job losses.  We will not know the extent to which the government is making up the numbers until the next benchmark revision is published in February 2011 - after the November 2010 elections.


The better-than-expected economic data (and a declining dollar) helped fuel the outperformance on the part of market most leveraged to the REFLATION trade.  The Dollar index declined on Wednesday and Thursday last week and declined 0.47% for the week.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.66) and sell TRADE (82.31). 


With dollar down and commodities up on Thursday, the best performing sector on Friday was Energy (XLE).  Within the XLE, the E&P and oil services stocks led the sector higher.  Both subsectors finished higher every day last week.  The Materials (XLB) was the second best performing sector, with the precious metals stocks were among the best performers on the day.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (82.34) and Sell TRADE  (85.79). 


The Financials (XLF) outperformed by 10bps, with asset managers, life insurers, and guarantors providing the bulk of the outperformance.


The Hedgeye Risk Management models have all nine sectors positive on TRADE and TREND.  On Thursday, Technology (XLK) was a notable underperformer and the only sector to decline on the day. The software group was a notable laggard, with much of the focus on the weakness in MSFT.  The biggest loser was RIMM, which was down after the company missed on February quarter sales and units growth. 


Consumer stocks were higher on the day, but underperformed on a relative basis.  Consumer Discretionary (XLY) slightly outperformed Consumer Staples (XLP) on the back of the strength in Retail and names leveraged to the autos.


The VIX declined slightly on Thursday, down 0.7%.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.32) and sell TRADE (18.01).  We are currently long the VXX.


In early trading, gold is trading higher and stronger economic growth.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,114) and Sell TRADE (1,127).


Copper is trading at a 20-month high as China’s manufacturing expansion and shrinking global inventories helping drive copper higher.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.40) and Sell TRADE (3.67).


In early trading, equity futures are trading above fair value in reaction to encouraging non-farm payrolls data released while the markets were closed Friday, although the unemployment figure muted the impact of the payrolls information.  As we look at today’s set up the range for the S&P 500 is 12 points or 0.7% (1,170) downside and 0.3% (1,182) upside. 


Today's MACRO highlights are:

  • ISM Non-Manf. Composite - March data
  • US Pending Home Sales - February data

Howard Penney

Managing Director













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The Week Ahead

The Economic Data calendar for the week of the 5th of April through the 9th of April is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

The European Credit Markets Smell PIIGS

Position: Short the Euro via FXE


As we noted in our post “Politics vs. Pragmatism” last week, despite the decision by the EU and IMF on 3/25 to “safeguard financial stability” in Greece, sovereign debt imbalances (especially among the PIIGS) remain at large and continue to heighten investors’ fears.  Regarding Greece, most recently credit markets are clearly indicating heightened risk via rising bond yields.


In the first chart (below) we highlight that since 3/25 the yield on the 10YR Greek Bond has jumped a hefty 25bps. And while 10YR yields for the other PIIGS have held pretty steady over the last weeks (chart 2), we’d expect to see them to push up in the coming weeks as Greece shares more of the “sovereign debt” spotlight. Note that Portugal’s credit rating was recently cut to AA- by Fitch Ratings; we’d expect to see a downgrade of Spain in the coming weeks. For reference on the total debt and budget deficit constraints afflicting the PIIGS, see chart 3.


Where else is this fear showing up?

  • The equity markets of Spain, Greece, and Portugal are among the worst global performers YTD, down -7.3%, -4.6%, and -3.6% respectively.
  • Moody’s downgraded five of the nine Greek banks it tracks yesterday, saying the “country’s weakening macroeconomic outlook and its expected impact on these banks’ asset quality and earnings-generating capacity.” (a lagging indicator, but representative of consensus).

As we’ve said before, the lack of policy from the European Community to address the sovereign debt issues of its member states will continue to shake markets. We’re currently short the Euro versus the US dollar via FXE in our model portfolio, trading a range of:  buy/cover at $1.32 and sell/short at $1.36.


Matthew Hedrick



The European Credit Markets Smell PIIGS - e1


The European Credit Markets Smell PIIGS - e2


The European Credit Markets Smell PIIGS - e3


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