Hedgeye Q4 Risk Call Focuses on Japan, US Fed Policy and US Consumption

Investors and risk managers urged to consider the "Japanese Jugular," the Fed's appetite for "Krugman Kryptonite," and America's coming "Consumption Cannonball"

Oct 06, 2010, 14:36 ET from Hedgeye Risk Management

NEW HAVEN, Conn., Oct. 6 /PRNewswire/ -- Investment opportunities and, more importantly, areas to consider when managing for risk in business or portfolios were the topics of the Hedgeye Risk Management Q4 Risk Call yesterday.  Hedgeye CEO Keith McCullough and his macro research team, supported by extensive research, highlighted three themes on the call:

The Japanese Jugular – Hedgeye Managing Director Daryl Jones presented data to support the expectation that the Japanese economy will continue to bleed in Q4 2010, exposing Japanese government bond and equity markets to serious risk.  Keynesian pipe dreams will collide in the near term with the hard realities of Japan's weakening exports, and in the long term with its debt, deficits and demographics. These will fuel a potential economic and financial collapse.

"Japan has one of the oldest populations of any modern nation, and the average age of its citizens will continue to accelerate," explained Mr. Jones  "Longer term, this will make it difficult for Japan to fund its long term deficits."

Krugman Kryptonite – As the US Federal Reserve signals its intent to use more Krugman Kryptonite (printing money and/or quantitative easing), Hedgeye presented its analysis of the short- and long-term implications behind the faulty math of Dr. Paul Krugman, Nobel Laureate and New York Times columnist. Dr. Krugman has argued since January of 2009 that the US government's stimulus package was too small.

Hedgeye CEO Keith McCullough, who shorted the U.S. dollar on June 7th in the Hedgeye Risk Management Portfolio, described Krugman's view as "academic dogma," adding "it doesn't work. There is a negative benefit from government spending."  Mr. McCullough also refuted the oft-cited example of World War II spending, which in fact resulted in a multiplier of just 0.8. He predicted that the Fed's continued application of "Krugman Kryptonite" will result in higher government debt and a weaker US dollar.

Consumption Cannonball – Hedgeye Managing Director Howard Penney explained how a confluence of factors is creating a "consumption cannonball" in the US.  Weak private sector job growth and underemployment, lack of credit, declining home prices, expiring tax cuts, and weak consumer confidence, are conspiring to settle Americans' weak spending power down for a long winter's nap.  The only positive notes – declining debt and a higher savings rate – are unlikely to inspire many spending sprees.

"The next three to six months will be very trying for consumers as it relates to discretionary spending," said Mr. Penney.  "In aggregate, we expect consumer discretionary spending in the United States to be negative in the next two quarters."

The slide presentation from the conference call is available upon request.

About Hedgeye Risk Management

Hedgeye Risk Management is a real-time investment research and media firm. Focused exclusively on generating and delivering actionable investment ideas in a proven buy-side process, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts, all with buy-side experience, covering Macro, Financials, Energy, Healthcare, Retail, Gaming, Lodging, Leisure, Restaurants, Food and Beverage.  The independent firm is united around a vision of uncompromised real-time investment research as a service.  Visit www.hedgeye.com for more information.

SOURCE Hedgeye Risk Management