Rigorously Frugal

“I am for a government rigorously frugal and simple, applying all the possible savings of the public revenue to the discharge of the national debt; and not for a multiplication of officers and salaries merely to make partisans."

-Thomas Jefferson


In the spirit of searching for historical answers to the current problems in my head, I have started reading “Founding Brothers: The Revolutionary Generation” by Joseph J. Ellis. Suffice it to say, some of these common men rose up in the most American of ways – in a meritocracy.


American political history, like Washington and Wall Street storytelling, can be romantic. After all, for many, it’s all about twisting facts to fit a certain fiction that consensus can consume as believable. The reality of life seems to be that we never quite realize we are making history in the moment.


If Jefferson wasn’t partisan in his politics, John Adams wouldn’t have lost his marbles as many times as he did going off on Jefferson’s duplicity. Watch what people do, not what they say – we all have some form of partisanship in our lives. We are human. With that understood, it’s easier to consume the quotes of great leaders and storytellers at face value. The aforementioned Jefferson quote is brilliant when I consider it in the context of today’s conflicted professional politicians.


George Washington, John Adams, and Thomas Jefferson certainly had their political differences. Most men with a point of view do. One thing these “Founding Brothers” had in common, however, was their concept of frugality.


Per our friends at Wikipedia, frugality “is the practice of acquiring goods and services in a restrained manner, and resourcefully using already owned economic goods and services to achieve a longer term goal.”


You can tell stories about how frugal you may be but, within the context of our fore-fathers definition of the word, as an American society we have veered far from it. Being Rigorously Frugal is a solution that I’d like to put forth to this colossal American balance sheet mess. Everything starts with respecting the cost of capital and savings.


In the chart of the day, we’re showing the long term TAIL of the US Savings Rate going back to 1971 (when America was endowed with the world’s reserve currency). Today, US Savings are only 3.6% of GDP and, never mind “applying all the possible savings of the public to discharge the national debt”, our professional politicians get overly paid to perpetuate a levering up of our diminished savings!


As a reference point, Brazilian and Chinese savings as a percentage of GDP are approximately 4x and 10x America’s, respectively. Throughout the global economic downturn of 2008, neither of these countries fear-mongered their citizenry into believing that we were experiencing a “great depression.” Throughout the global economic upturn of 2009, both of these countries had the political spine to tighten monetary policy in the face of inflating prices.


Hopefully, you are already murmuring that China and Brazil are different than the US. From a growth perspective, they are – we get that. There is a huge difference between unlevered organic growth and levered deficit Spend-And-Hope growth.


Chinese savings (including corporate and household) have amassed to 49.5 TRILLION Yuan. Yes, that’s a lot of Yuan ($7.3 TRILLION US Dollars) – and guess what the wealth effect is for anyone bearing that Chinese Yuan is when China allows their currency to appreciate?


A large number of Americans living in the modern day Roman Empire of Fiat Fools don’t win here. If they aren’t Rigorously Frugal, that is. Gluttons of government sponsored over-consumption get taxed on anything we import from China or Brazil as the value of their respective economies and currencies appreciate. It doesn’t have to be this way, but until we change ourselves, the world will likely change us.


America is not alone in its addiction to cheap fiat moneys and over-consumption. The difference between America and the UK as of the past few months however is that the British are making the hard decisions that the “multiplication of officers and salaries” in the Officialdom of Washington aren’t willing to make.


Both Adams and Jefferson were more than half a decade dead by 1886 (they actually both died within 5 hours of one another), but that was the last time Britain had a Chancellor of The Exchequer as young as recently appointed George Osborne.


Osborne is my age and apparently agrees with my solution to this mess. This is what he had to say last night after he made cuts to healthcare spending, public salaries, housing subsidies, etc:


“I’m not going to hide hard choices from the British people… This is an emergency budget, so let me speak plainly about the emergency that we face.”


Maybe Osborne and newly elected PM, David Cameron, aren’t as Rigorously Frugal as implied by the 79% asset allocation to cash I moved us to on June 9th, 2010; certainly not as Rigorously Frugal as the 96% cash position I moved to on September 18th, 2008; but, directionally at least, frugality is as frugality does.


The beauty of having cash savings is that you can invest those hard earned moneys opportunistically. Since June 9th, the SP500 is +3.6% higher. I have been investing opportunistically. I have been picking my spots. This morning the cash allocation in the Hedgeye Asset Allocation Model is down to 61%.


I’ve always been conservative in my finances. I’ve never used leverage in running a fund. This doesn’t make me the Street’s favorite hedge fund manager, but it certainly keeps me alive. That’s all this Rigorously Frugal believer of what I think I will call a “Revolutionary Generation” 30 years from now has to say about that.


My immediate term support and resistance lines in the SP500 are now 1087 and 1129, respectively. Yesterday, on market weakness, we raised our asset allocation to International Equities from zero percent to 3% by buying a country that has a very respectful savings rate - Singapore (EWS).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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