• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

This note was originally published October 05, 2010 at 08:00 in  

“Great spirits have always encountered violent opposition from mediocre minds.“

-Albert Einstein

EARLY LOOK: Japan's Jugular - Einstein

 

I am currently in the middle of reading Walter Isaacson’s “Einstein: His Life and Universe.” For a young chaos theorist fighting the winds of Washington and Wall Street Groupthink, Einstein’s independence of thought is highly motivating.

Chaos and Complexity Theory are the most important mathematical discoveries since Einstein’s General Theory of Relativity. While we don’t give out our mathematical models here in New Haven, we distribute both their factors (inputs) and themes (outputs).

Like any other dynamic ecosystem in this universe, global markets are constantly changing. As a result, analyzing time, space, and gravity are seemingly rational places to start each and every risk management morning. Trivial points in time like a price-to-earnings ratio are what they are – of very little value to our research.

At 2PM EST today we’re going to introduce the 3 global macro risk management themes that we think will matter most to global investors in the 4th quarter of 2010 (if you are a qualified investor and would like to sign up for the call, please email sales@hedgeye.com).

For Q4 2010 our Hedgeye Macro Themes are as follows:

 

EARLY LOOK: Japan's Jugular - 0 q4 THEMES

In sharp contrast to other “top-down” or “global macro” oriented sell-side research that calls everything “long-term”, we focus acutely on time (duration) and space (price). It’s all good and fine to come up with a “long-term” investment thesis (been there, tried that), but if you get time and price wrong, you’re best advised to get a job in academia.

I don’t disrespect academia. I just don’t want my firm, family, or country’s risk management system overseen by academics. Einstein himself would be the first to call out the long-term career risk associated with academic dogma. As markets evolve, we need to evolve the risk management process alongside them.

Living in the violent opposition of mediocre industry standards is one of the tremendous investment opportunities in global finance today. Schumpeter called this creative destruction. God bless the learning opportunities that are born out of the failures of Fiat Fools.

Unfortunately, Washington and Wall Street Groupthink doesn’t get this yet. Neither do the Japanese Bureaucrats who continue to believe that the best way to solve for structurally impaired economic growth is to throw more failed government policy action at the problem.

We’ll go through the why on this with a 68 slide presentation this afternoon, but the bottom line is that what you are seeing from Japan this morning is ultimately an admission that QE (Quantitative Easing) didn’t work.

In fact, after cutting interest rates from ZERO POINT ONE percent (0.10) to ZERO POINT ZERO percent (0.00), the most recent edition of a Japanese Heli-Ben (BOJ Governor Shirakawa) dropped the QE acronym altogether for a new one – CME (Comprehensive Monetary Easing).

EARLY LOOK: Japan's Jugular - japanchart

The best part about CME versus the QE that is sponsored by “New Keynesian Economics” academic dogma (Bernanke, Krugman, Stiglitz, etc.), is that I can actually understand what CME means. It’s very “comprehensive” to see that the Japanese can’t cut interest rates (until they raise them) again.

I’m certain Einstein would be a fan of CME. When failed ideologies like QE meet their maker of gravitational force, the next best step for a failed academic is to stop what they are doing. Then either retire, or change as the facts have. After all, it was Keynes himself that would be asking “New Keynesians”, what do you do now Sirs?

My immediate term support and resistance lines for the SP500 are now 1126 and 1144, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer