macro 3q themes - docs.hedgeye.com
TRANSCRIPT
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2Q 2012 Themes Recap
• LAST WAR; FED FIGHTING: We take a historical look at U.S. Federal Reserve policy to contextualize the impact of Ben Bernanke's Policy to Inflate, Extend & Pretend rock-bottom interest rates, and Burn the Buck on the broader economy and financial markets from Main Street to Wall Street.
• BERNANKE’S BUBBLES: A highlight of the top ten leverage price bubble charts perpetuated and encouraged by The Bernank's policy stance.
• ASYMMETRIC RISKS: In a macro environment of slow global growth and historically low interest rates we present asymmetric risks to capitalize on over the intermediate term. Low equity market volatility is but one signal of what's ahead for investors.
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“UNDER CAPITALISM, MAN EXPLOITS MAN. UNDER COMMUNISM IT’S JUST THE OPPOSITE.”
-JOHN KENNETH GALBRAITH
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The 112th Congress Created A Spending Cliff in 2013 . . .
• On August 2, 2011, the United States public debt was projected to meet its statutory limit
• The advent of the Tea Party led to a showdown over what had been formerly a routine course of action in increasing the debt ceiling
• Ultimately, a compromise was reached via the Budget Control Act of 2011: If Congress failed to act and produce a deficit reduction bill of at least $1.2
trillion in cuts, then Congress could grant a $1.2 trillion increase in the debt ceiling, but this would trigger “sequestration”
Across the board cuts of $1.2 trillion split between security and non-security from 2013 to 2021
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…Which Coincides With A Series Of Tax Increases
• Lower tax rates afforded by the 2010 extension of the “Bush Tax Cuts” expire on DEC 31, 2012;
• Provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which expired on DEC 31, 2011 will be felt by consumers in 2013 as they file their 2012 tax returns;
• The Middle Class Tax Relief and Job Creation Act of 2012 Expires on DEC 31, 2012; • Various other tax relief measures, including the partial expensing of investment property,
expire on DEC 31, 2012; and • Provisions for Obamacare that increase tax rates on earnings and investment income for high
income taxpayers begin in JAN 2013.
“Education is when you read the fine print. Experience is what you get if you don’t.” -Pete Seeger
Key planned tax increases include:
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Consensus Expectations Are Not Pricing In The Cliff
1. CONSENSUS: Bloomberg consensus GDP growth estimates for 2013 are +2.4%
2. REALITY: The CBO has incorporated all spending cuts and revenue increases and has an estimate of +0.5% GDP growth for 2013
3. PROBABILITY: THE CLIFF COULD REASONABLY EQUATE TO A 2% - 3% DRAG ON GROWTH IN 2013
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If Policymakers Do Manage To Avert The Fiscal Cliff, Federal Debts And Deficits Will Continue To Grow Unabated…
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The CBO’s Alternative Fiscal Scenario Supports The View That Avoiding The Cliff Could Extend High Deficits
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So In The Last Six Months Of A Presidential Election Year, Congress Has To…
1. Try to avert a meaningful cut in federal spending (or absorb the pain)
2. Agree on avoiding massive looming tax increases
3. Negotiate another debt ceiling compromise
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From Now Until November, Obama Versus Romney Will Be A Critical Macro Factor
The race is within the margin of error on national poll aggregates.
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Almost As Important As The Presidency Is Control Of Congress
• Currently based on the Real Clear Politics poll aggregate, the Democrats have a narrow +1.3 advantage in the generic congressional vote That said, Republicans have led in the last 3 major polls
• According to InTrade, the Republicans are at a 53.4% probability of controlling the Senate
• In terms of the House of Representatives, the Republicans are just over 80%
• But, with Congressional approval at ~18%, nothing is certain in terms of re-election / incumbency
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Remember Reagan: Under Romney Presidency, Regime Change At The Fed Could Be Dramatic
“I’d be looking for somebody new. I think Ben Bernanke has overinflated the amount of currency that he’s created. QE 2 did not work, it did not get Americans back to work, it did not get the economy going again … We’re growing now at one to one-and-a-half percent.”
Republican Nominee Mitt Romney, September 6th, 2011
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Obama Has Been More Tight Lipped On His Intentions Relating To Bernanke
• Bernanke was originally a Bush appointee in February 2006 to a 14-year term and a 4-year term as Chairman
• President Obama re-appointed Bernanke to a 4-year term in 2009
• In 2010, Bernanke was approved by the Senate by a margin of 70 – 30, the narrowest margin ever for the Governor of the Fed
• From a political perspective, separating himself from Bernanke may be a prudent move for Obama, though it could prove difficult
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In Terms Of Economic Policy, President Obama Has Made A Proactive Strike
• In a ceremony at the White House on July 9, 2012, President Obama proposed extending the Bush tax cuts, but only for those making less than $250,000
• According to President Obama:
"I'm not proposing anything radical here. I just believe that anybody making over $250,000 a year should go back to the income tax rates we were paying under Bill Clinton.“
"The money we're spending on these tax cuts for the wealthy is a major driver of our deficit," Obama said, adding that they are also the "least likely to promote growth.
• This policy, while political in nature, is consistent with recent polls from both the National Journal and Bloomberg that indicated 2/3rds of those polled approved of extending the tax cuts for those that make under $250,000
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But The Differences Between The Candidates Remain Meaningful
Obama Romney
Author of Obamacare Would repeal Obamacare
Repeal Bush tax cuts for households making over $250K
Make Bush cuts permanent
Lower corporate taxes manufacturing industries
Lower corporate taxes to 25% across the board
Favor increased stimulus spending to grow economy
Focus on increased deregulation
Cut some spending and increase taxes on the wealthy to narrow deficit
Cut non-discretionary security spending by 5%
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The Election Will Have A Direct Impact On The U.S. Dollar
1. Obama Presidency, Republican Senate and Republican House -> Dollar bullish?
2. Obama Presidency, Democratic Senate, Republican House –> Dollar bearish?
3. Romney Presidency, Democratic Senate, Republican House -> Dollar bullish?
4. Romney Presidency, Republican Senate, Republican House -> Dollar bullish?
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Meanwhile, The Solutions From The Eurocrats Continue To Have Predictable Outcomes
Data Source: Greenlight Capital 48
Current HEDGEYE Macro Positions
LONG -> Utilities via XLU SHORT -> Industrials via XLI -> Energy via XLE -> Gold via NG (Nova Gold)
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THIS PRESENTATION WAS PREPARED BY: KEITH MCCULLOUGH, DARYL JONES, MATT HEDRICK AND DARIUS DALE.
FOR MORE INFORMATION AND A COMPLETE LISTING OF RESEARCH PLEASE VISIT: WWW.HEDGEYE.COM
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3Q 2012
OBAMA VS ROMNEY
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