The Last Entitlement

This note was originally published at 8am on January 25, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“When a milestone is conquered, the subtle erosion called entitlement begins its consuming grind.”

-Pat Riley

 

It’s Game Time. And tonight, America’s currency needs a big win. So, as a little pre-game prep for President Barack Obama’s State of the Union speech, I thought I’d toss him a little love from 5-time NBA Championship Coach, Pat Riley.

 

On the pre-game wire (US Dollar Index trading $78.16 as of 7AM EST), across durations, world currency markets are betting against America’s credibility and fiscal resolve:

  1. US Dollar Index immediate-term TRADE line resistance remains overhead at $80.05
  2. US Dollar Index intermediate-term TREND line of support ($78.66) is broken
  3. US Dollar Index long-term TAIL line of resistance remains firmly entrenched up at $81.62

Sure, some privileged Americans are willing to turn a blind eye to their sovereign currency, employment, and inflation levels. Some, like The Ber-nank, still fundamentally believe that America’s stock market is the barometer of her long-term health. All the while some “Wall Street Bankers”, according to the #1 headline on Bloomberg this morning, are “partying in Davos.” Ah, the storytelling about the depression and the deflation – nice.

 

The only problem with all of this is the other HALF of Americans who have $2,000 or less in some form of a stock and bond market account. For them, America’s leadership needs to stand ready to sacrifice tonight or else their team, to borrow another thought from Pat Riley, will continue to regard their “former greatness as a trait and a right.” Then, “half hearted effort becomes habit” … and “the champion is sapped.”

 

The world’s history of great Empires sides with me on this. From the Roman and British Empires of political entitlements past, I can only hope we’ve learned something. We’ve already crossed the proverbial Rubicon of senatorial deficit and debt spending. Time is no longer on this entitled state’s side.

 

The Last Entitlement in this country isn’t Social Security or Medicare – it’s cheap capital. And if the US Dollar is abused any further, “subtle erosion” of America’s global economic power will continue its “consuming grind.”

 

If there’s one picture that shows this most obviously (see the chart below), it’s the series of lower-highs and lower-lows that Presidents Bush and Obama have chosen to oversee with their Big Government Intervention, Spending, and Dollar Devaluation policies.

 

Yes, inflation is a policy. And no, it doesn’t have to be this way. It wasn’t this way under Reagan; it wasn’t this way under Clinton either. Both of these Presidents had an explicit strong US Dollar policy that led to two of the most productive decades of job growth in US history. Whereas, under Presidents Bush and Obama, America witnessed a decade (2000-2010) of net ZERO American jobs created and now we’re staring down the pike of American style Jobless Stagflation that we haven’t seen since Jimmy Carter blessed the Fed’s Arthur Burns “monetization” of US debt.

 

The Last Entitlement is perpetuated by a completely politicized US Federal Reserve. It prints the moneys. It prints the asset inflation. It justifies its actions with politicized fear mongering that permeates the American psyche.

 

It also shortens economic cycles. It amplifies asset price volatility. And, if you haven’t noticed, it doesn’t work.

 

All of this can be conquered if America holding the world’s reserve currency in the palm of her hand is respected again. We also need to respect the cost of capital or continue to run the risk of handing it out to these Bankers of America who continue to hoard it and destroy it via the Piggy Banker Spread.

 

Respect, unlike entitlements, is earned. And God help us all if we don’t have it within us to recognize this after the last 3 years.

 

In case you didn’t get the message from China’s President last week, the rest of the world is starting to bet against America’s currency too:

  1.  President Hu called the US Dollar reserve system “a product of the past”
  2.  President Hu warned that Americans need to keep the USD at “stable levels given implications to global liquidity and capital flows”

What he meant by that, Mr. Ber-nank, is global inflation being priced in US Dollars.

 

This morning you are seeing Global Inflation Accelerating continue to have its impact on major Emerging Markets:

  1. China was down another -0.68% overnight, taking it to -4.7% already for the YTD
  2. India was down another -0.95% overnight, taking it to -7.5% already for the YTD
  3. Brazil remains flat for the YTD and broken from an intermediate term TREND perspective.

Meanwhile, it’s not just emerging stock and bond markets telling you that US government sponsored Dollar Debauchery perpetuates inflation. India’s central bank Governor Subbarao just said at a ceremony in Mumbai that he is quote-un-quote “desperate” to cool inflation.

 

All the while, just to highlight the divide between our myopic Keynesian Consensus (that’s somehow patting itself on the back in Washington for “saving” us again) and Free Market Libertarians who are getting ready to move to Canada, consider these 2 American quotes from the last few days:

 

1.  “A more active government also attracts opportunists, who perceive that a national emergency can serve as a useful pretext for achieving their own objective.” –Steve Hanke (“On Democracy versus Liberty, GlobeAsia, February 2011)

 

2.  “Oh, and what evidence is there that the economy’s capacity is damaged during booms?” –Paul Krugman

 

Sadly, the unaccountable Big Government Intervention Bubble Making Machine of the Krugman camp dominates both the President and the Chairman of the US Federal Reserve’s craws. Before you know it, they’ll be asking to regulate food inflation in commodity markets. At least that’s what France’s Nicolas Sarkozy said he wants to do this morning. C’est la regulated socialist market vie!

 

Dear Mr. President, it’s Game Time, and this Burning Buck stops with you.

 

My immediate term support and resistance lines for the SP500 are now 1285 and 1295, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Last Entitlement - respect


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