EARLY LOOK: No more Bullets

This note was originally published at 8am this morning, August 30, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK in real-time, published by 8am every trading day.

 

 

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“Show me a guy who can’t pitch inside and I’ll show you a loser.”
-Sandy Koufax

 

 

EARLY LOOK: No more Bullets - Sandy Koufax

 

 
Keith is vacationing this week in his hometown of Thunder Bay, Ontario.  As a result, various members of the Macro team will be batting leadoff and writing the Early Look throughout the week.  So, rather than just the McCullough fastball coming at you every morning, this week you will get an opportunity to see some other pitches from the Hedgeye Research Bullpen.
 
Sandy Koufax at his prime was one of the best pitchers the game of baseball has, and perhaps ever will, see on the mound.  He played his entire career with the Brooklyn / Los Angeles Dodgers.  The peak of his career was from 1961 to 1966.  In that period, Koufax won three unanimous Cy Young Awards (the first three time winner in baseball), he pitched four no hitters (the first pitcher in baseball to do so), and on September 9, 1965 he became the sixth pitcher in the modern era to throw a perfect game.
 
Then in 1966, at 30-years old, after pitching in the Major Leagues for only nine years, Sandy Koufax retired. Many baseball pundits called it premature, but Sandy knew the truth.  He was out of bullets.
 
As I contemplate the economic leadership of the country, primarily Chairman Bernanke and Secretary Treasury Timmy Geithner, I have no doubts that they are smart men and have had some good seasons in their careers. Their challenge now, of course, is to play the game in front of them.  While 0% interest rates for an extended period is an interesting experiment, akin to playing around with the knuckleball in practice, it is not indicative of a Perfect Policy Game.
 
Chairman Bernanke gave us a bit of an inside look at his next pitches on Friday when he stated the following in his speech:
 
“Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists–namely, that the FOMC increase its inflation goals.”
 
The Chairman indicated he would only use the additional policy bullets above if the U.S. economy slowed further and that he is expecting the U.S. economy to pick up in 2011.
 
The economic view from Hedgeye remains quite divergent from Chairman Bernanke’s.  We are pretty sure we couldn’t see a Koufax fastball, and we definitely don’t see an economic recovery in 2011.  The implications of Bernanke’s hope for a recovery in 2011 being wrong is the likelihood of more monetary pitches being thrown at the U.S. economy.
 
Unfortunately, we aren’t sure we have the right pitchers on the mound.  As Sandy Koufax said:
 
“A guy that throws what he intends to throw, that’s the sign of a good pitcher.”
 
One good metric for evaluating the economic leadership and their ability to know what they are pitching is the unemployment rate.  In the chart below, we’ve highlighted the unemployment of the G-7 over the past three years.  In order to further emphasize this point, we’ve highlighted directly below the increase (a positive number), or the decrease (a negative numbers), of unemployment for these nations over the past three years:
 
-          Canadian unemployment increased by 1.9%;
-          French unemployment increased by 1.7%;
-          German unemployment decreased by (1.3%);
-          Italian unemployment increased by 2.0%;
-          Japanese unemployment increased by 1.6%;
-          U.K unemployment increased by 2.5%; and
-          U.S. unemployment increased by 4.9%.

 

 

EARLY LOOK: No more Bullets - chart1

 

 

The scoreboard obviously doesn’t lie.  The score as it relates to the one critical factor of unemployment suggests that the economic leadership team of the United States needs to go down to the minors for some seasoning to work on their ability to hit the strike zone.  Most disconcerting, of course, is that one core objective of the stimulus plan was to offset an increase in unemployment.  When we see unemployment set to accelerate and government debt growing, it’s pretty clear our pitchers in Washington “didn’t throw what they intended.”
 
The one key takeaway from Chairman Bernanke’s speech should be that he remains somewhat naïve about how much the U.S. economy has slowed, and its ability to regain trend line growth.  But even if he does find economic faith and begin to understand the economic reality of the United States, the fact remains, the Chairman’s out of bullets.
 
Daryl G. Jones
Managing Director


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