LAST WAR: FED FIGHTING

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1 2Q 2012 LAST WAR: FED FIGHTING MAY 2012 THIS PRESENTATION WAS PREPARED BY: THE HEDGEYE MACRO TEAM 1

2 Hedgeye Risk Management is not a broker dealer and does not make investment recommendations. This presentation does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. For more information, including Terms of Use of our information, please go to Hedgeye Risk Management LLC All rights reserved. 2

3 1Q12 THEMES RECAP 3

4 Strong Dollar = Strong Consumption: worked for us in January (until Bernanke s January 25 th Policy To Inflate speech). Deflating the Inflation II: that continues to work for us as the US Dollar continues to make a series of long-term higher lows. Growth Slowing s Bottom: that worked until it didn t (January 25 th ); since February, Growth Slowing has gone global again. 4

5 2Q 2012 LAST WAR: FED FIGHTING LAST WAR: FED FIGHTING 5

6 The effects of printing dollars are global; by engaging in quantitative easing, the Fed has effectively declared currency war on the world. Rickards, James ( ). Currency Wars: The Making of the Next Global Crisis (Kindle Locations ). Penguin Group. Kindle Edition. 6

7 To finance the American revolution, the Continental Congress printed the first fiat money called Continentals. Due to rapid inflation, the term not worth a continental came to mean utterly worthless Treasury Secretary Hamilton urged Congress to establish the first Bank of the United States. It became so dominated by banking and special interests that its 20-year charter was not renewed The political climate become more palatable to a central bank and a new 20-year charter was established. Ardent Central Bank foe, Andrew Jackson, was elected president in He was successful in his vow to kill the central bank, with the charter expiring in

8 America, which had no central bank during this period considered the first age of globalization, also experienced inflation. The St. Louis Fed wrote about this period: Economic performance in the United States... Was superior under the classic gold standard to that of the subsequent period of managed fiduciary money The panic of 1907, initiated by the Knickerbocker Trust and other New York banks attempting to corner the copper market, created the perceived need for a lender of last resort. A group of Wall Street bankers drafted The Federal Reserve Act of 1913 in secret at the exclusive Jekyll Island Club The Banking Act of 1935 included the creation of the Federal Open Market Committee (FOMC) as a separate legal entity, removal of the Treasury Secretary and the Comptroller of the Currency from the Fed s governing board and establishment of the members terms at 14 years. 8

9 The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act. - FAQ on federalreserve.gov 9

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12 Achieving price stability is not only important in itself, it is also central to attaining the Federal Reserve's other mandate objectives of maximum sustainable employment and moderate long-term interest rates. - Chairman Ben S. Bernanke 12

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16 Fed money printing on a trillion-dollar scale may be new, currency wars are not. Currency wars have been fought before twice in the twentieth century alone and they always end badly. At best, currency wars offer the sorry spectacle of countries stealing growth from trading partners. - James Rickards, Currency Wars China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday. - China Daily, September 24 th,

17 2Q 2012 BERNANKE S BUBBLES BERNANKE S BUBBLES 17

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29 2Q 2012 ASYMMETRIC RISKS ASYMMETRIC RISKS 29

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50 This presentation was prepared by Keith McCullough, Daryl Jones, Howard Penney, Matt Hedrick, Rory Green, Darius Dale, and Kevin Kaiser. For more information and a complete listing of research please see: or sales@hedgeye.com 50