Exit Spending

“Few men of action have been able to make a graceful exit at the appropriate time.”

-Malcolm Muggeridge


This weekend’s G-20 meetings in Toronto resulted in exactly what Professional Politicians were hoping for – no timeline that they’ll be in office to see through. How’s that for the new era of rhetorical “accountability”?


There were a lot of interesting quotes coming out of the meetings, but I thought the compare and contrast between the the world’s largest Creditor and Debtor nations to be the most poignant:

  1. China’s President Hu Jintao – “The deeper impact of the global financial crisis has yet to be overcome, and systemic and structural risks remain very serious.”
  2. US President Barack Obama – “We can’t all rush to the exits at the same time. What we have to recognize is that the recovery is still fragile.”

After seeing a big sequential deceleration in US economic growth in Q1 of 2010 (GDP dropping to +2.7% from +5.6% in Q4 of 2009), you’d think that the game plan would be for the US to change the plan. Think again. The US government sounds like it will keep pounding Big Keynesian Spending.


In sharp contrast to China’s sequential acceleration in Q1 GDP growth (from +10.7% in Q409 to +11.9% in Q110), as of Friday’s Q1 GDP release US economic growth is headed in the wrong direction all of a sudden. We think consensus growth estimates for the back half of 2010 and beyond look way too HIGH.


This, of course, makes the consensus 2010 and 2011 US deficit and debt to GDP calculations too LOW. As a result, with the world’s eyes hyper focused on these deficit and debt ratios, both the US Dollar and US stock market will remain in very precarious prospective positions.


The ultimate conclusion of the G-20 meetings doesn’t reflect the world that the Chinese or Brazilians would like to see. Remember, these 2 countries have been tightening monetary policy. The goal of “cutting deficits in half by 2013” really ends up being the conclusion that debt-laden-deficit-spending countries need as their stock and bond markets continue to discount that both economic growth and deficits in 2011 will be worse than expected.


The biggest problem with Professional Politicians in Washington right now is that they aren’t proactively nipping this 2011 deficit/GDP problem in the bud. Instead, the US Economic Commander in Chief is trying to push another $55 BILLION jobs bill through the Senate so that he can try to kick the unemployment rate can down the road for a few more quarters to get him through the midterm elections.


This is not the time to ramp up US government spending. It’s time for American Austerity. Or at least something that sounds like it rhetorically (see all Western European countries for the playbook).


The Creditor agrees. Chinese Foreign Ministry spokesman Qin Gang told reporters in Beijing late last week that an appreciating Chinese Yuan won’t solve U.S. economic problems:  “The appreciation of the Yuan cannot bring balanced trade. A strengthening Yuan cannot help to solve U.S. problems of unemployment, overconsumption and low savings rate.”


Not to take sides, but we have to agree with the Chinese on this. We’ll go through this new theme of American Austerity on Thursday when we hold our Q3 Macro Themes Conference Call (email if you’d like to participate).


Whether you agree with the US government calculations of savings and unemployment rates or not is not the big picture macro point we will be making. We get that government calculations are conflicted and compromised – so we simply compare these bad apples to the bad apples reported in years past. While it does get tricky when the government changes the calculations (forcing us to compare bad apples to bad oranges), we can live with our forecasting model.


What we can’t live with is this idea that government spending is good. Not here, not now. America will continue down the Fiscal Road to Perdition until its political leadership comes to grips with the reality that today is still 2010, not 2013.


Both the SP500 and the US Dollar were down -3.7% and -0.4%, respectively last week. For the world’s reserve currency gone fiat, that was the 3rd consecutive week-over-week decline. The US Dollar Index is now broken from an immediate term TRADE perspective ($86.57 TRADE line resistance) and the Euro moves to bullish from an immediate term TRADE position as a result ($1.22 TRADE line support). The exit of spending apparently has a stabilizing effect on a currency.


My immediate term support and resistance levels for the SP500 are now 1068 and 1087, respectively. We remain short the US Dollar Index (UUP) in the Hedgeye Virtual Portfolio.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Exit Spending - apple


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