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This note was originally published at 8am this morning, September 2, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

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“Losers assemble in small groups and complain about the coaches and other players. Winners assemble as a team and find ways to win. "
-Bob Stoops

 
Bob Stoops, or Big Game Bob, as he is known in the collegiate football arena is the head coach of the Oklahoma Sooners. As head coach of Oklahoma, he’s coached one of college football’s storied programs through one of the most successful decades ever, going 179-29 from ’99 – ’09 and winning a national championship in 2000. That same year, he was awarded the Paul "Bear" Bryant Award for Head Coach of the Year, in addition to the 2000 and 2003 Walter Camp Coach of the Year awards.
 
Unfortunately, for him, he’s earned the moniker for what he has not accomplished on the field, rather than his prowess on the gridiron. After having won the title in 2000, he took three more Oklahoma teams to the BCS National Championship game (2003, 2004 and 2009) – losing each time and “earning” his sarcastic nickname.
 
As any good football coach will tell you, however, you must have a Short Memory to excel in the sport. Whether it’s a quarterback who throws an interception or a cornerback that gets beat deep, you’ve got to be able to shake it off and refocus on the task at hand. I myself gave up a few sacks earlier in my collegiate career on the blind side, but I never once dwelled on any negative play, always focused on my next assignment. I was, however, careful not to have Too Short a Memory, as I was determined never to get beat by the same move twice.
 
When it comes to fiscal and monetary policy in Japan and the U.S., there have been plenty of mistakes made throughout the past few decades (i.e. near zero interest rates fueling asset bubbles; Piling Debt Upon Debt; Fiat Foolery in Financial Markets, etc.). Those mistakes have led to balance sheet recessions, depressed economic growth, and increased volatility in financial markets.

EARLY LOOK: Loser's Assemble - chart1

 
Unfortunately for the citizenry of Japan and the U.S., the Fiat Fools in charge have memories that are either too long (U.S.) or too short (Japan). Take Japan for example – after two decades of below trend GDP growth which largely stemmed from Piling Debt Upon Debt, the Professional Bureaucrats there are fighting with one another to see who can offer the biggest stimulus and government intervention package. Two decades of lessons not learned…
 
In response to Prime Minister Naoto Kan’s recently-unveiled 920 billion yen stimulus program, Ichiro Ozawa kicked off his campaign to become Japan’s new prime minister (sixth since 2006) by pledging to “stop the rise in the yen by all means”, which includes intervention in the currency market. In addition, he also one-upped Kan by promising a 2 TRILLION yen stimulus program to attract voter support from those that think the government isn’t doing enough to spur the economy. Unfortunately, for him, the citizenry of Japan supports the more fiscally responsible Kan by a factor of 4:1 – a clear vote against even bigger government.
 
Having a long enough memory reminds us that despite over 100 TRILLION yen in stimulus spending from 1991-2000, Japan was still mired in below trend GDP during the decade (an average of 1.5% Y/Y vs. an average of 4.6% Y/Y during the 1980’s). The Bank of Japan’s quantitative easing program (March 2001 through March 2006) which took excess reserves on Bank Balance Sheets from $53B to $386B (+628%) and accelerated purchases of long term government bonds failed to spur the kind of credit expansion that one would expect with a already flat yield curve that compressed a further 63bps from the start of QE until the trough on 6/12/03. What happened, however, was investment as a % of GDP fell ~200bps from 1Q01 to 1Q04 and the bond bubble burst in mid-2003, which sent the 10-year JGB yield up 119bps in less than three months.
 
Fast forward to today, we see that in typical loser fashion, both Kan and Ozawa have assembled in their respective subgroups to complain – Kan whining about Ozawa’s connection to a funding scandal; Ozawa whining about Kan’s inability to do what is “necessary” to support the Japanese economy. Needless to say, we believe Japan is too short on memory and political wherewithal to “find a way to win”, and, as a result, we are short both its currency and equity market in our Hedgeye Virtual Portfolio.
 
Shifting gears to our side of the Pacific, we see a similar setup in Washington, where the mid-term elections have set the stage for an almost unbearable amount of finger pointing and whining amongst Democrats and Republicans alike. Much of it has to do with the expansionary monetary and fiscal policy coming from the Fed and the White House, where Helicopter Ben and his Über Long Memory has the Fed running plays not seen since the Great Depression.
 
The amount of finger-pointing in the last two weeks alone would derail any solid team’s championship hopes. Below are a few of the more notable ones:

  • Obama (8/17): “We have a choice between the policies that got us into this mess and the policies that are getting us out of this mess.”
  • House Republican Leader John Boehner (8/24): "President Obama should ask for and accept the resignations of the remaining members of his economic team, starting with Secretary Geithner and Larry Summers, the head of the National Economic Council… Now, this is no substitute for a referendum on the president's job-killing agenda. That question will be put before the American people in due time. But we do not have the luxury of waiting months for the president to pick scapegoats for his failing 'stimulus' policies."
  • Obama (8/30): “Unfortunately the [jobs] bill has been languishing in the Senate for months – held up by a partisan minority that won’t even allow it to go to a vote. That makes no sense… and there’s no reason to block it other than pure partisan politics.”
  • Rep. Paul Ryan, R-Wis., ranking Republican on the House Budget Committee (8/30): “The Democrats' stimulus policies are failing miserably and the spending will buy the United States a lost decade similar to Japan's.”

It’s obvious the leaders in Modern Day Rome are more focused on each other’s perceived failures to effectively implement a winning strategy. And, as to be expected, the scoreboard is running in the wrong direction for Team U.S.A. 2Q GDP was revised down 80bps to a modest 1.6%; unemployment is at 9.5% and looks to trend higher after yesterday’s ADP employment report miss and the trailing four week average of initial jobless claims rose to a YTD high of 504k; ABC Consumer Confidence fell wk/wk to (-45); and the Rasmussen Presidential Approval Index averaged (-16) for the entire month of August – one point off the all-time low on a monthly basis.
 
Despite what Jeremy Siegel and Barton Biggs tell you this morning, evidence of slowing growth is all around us. Considering, can we count on the Fiat Fools in Washington to come together as a team and lead us to a fourth quarter comeback for the ages?
 
I wouldn’t bet on it. Keep managing risk.
 
In the meantime, our CEO Keith McCullough and Managing Director Daryl Jones will be joined by former White House Deputy Chief of Staff Karl Rove to discuss the midterms elections on Tuesday, September 7th at 2:30pm. If you are a institutional subscriber or a prospective institutional subscriber and would like to join email us at sales@hedgeye.com.
 
Darius Dale
Analyst