This note was originally published at 8am on January 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Someone has to stay on the line and say, no, we can do this by cutting spending and reducing the size of government.”
Last night, Larry Kudlow had an outstanding interview with New Jersey Governor Chris Christie. For those of you who still care about this country’s currency and long term fiscal health, I think this is the most positive message we can find from a professional politician in America.
I’ll go through the abominations that are the US Federal Budget Deficit and Global Food Inflation in a minute, but first I want to recap what this American patriot is doing about it at the state level. Christie isn’t hiding behind “the depression” or “the deflation.” He doesn’t waste his time fear-mongering and storytelling like Paul Krugman and Ben Bernanke either – he’s bellying up to the battle field, Staying On The Line, and fighting Big Government Spending:
- Cutting Spending – he’s cut 9% of NJ government spending (that’s year-over-year in US Dollars)
- Cutting Corporate Taxes – unlike Illinois, which loves commodity inflation and raising taxes
- Doing More With Less – his spending is smarter and he’s focused on doing a better job with less
Now we can surely have a debate about how screwed up NJ was relative to the rest of America (dropping the corporate tax rate in NJ takes Christie from the 50th highest state in the Union to #48), but the point here is that we have an American leader who isn’t giving political lip-service to being the change we all want to see in this country.
Delivering on political promises isn’t easy. That goes for operating in the asset management industry too. We’ve institutionalized and bureaucratized America’s corporate and government organizations in this country to a point where Staying On The Line and fighting the Fiat Fool headwind is actually quite hard to do. The self interest associated with personal job security in this environment often trumps long term planning and risk management.
So let’s consider the Captain of this country’s possum plan to cut the deficit by $400B over the next 10 years in the context of this massive entitlement of cheap US Dollars and Big Government Spending:
- Analytical Incompetence: The President of the United States’ spending cut plan was based on the wrong base of spending numbers. Immediately after the State of the Union address (where Obama loosely mentioned his $400B plan), the Congressional Budget Office (CBO) raised its 3-year budget deficit forecast by over $1 TRILLION dollars. Yes, $400B in cuts were planned using the wrong denominator of spending.
- Deficit Context: Understanding that competent forecasters like Hedgeye Risk Management were already predicting that the CBO’s estimates were 34% too low, this upward revision by the CBO made our estimates look light! Versus the CBO’s August, 2010 estimates (no, that wasn’t too long ago), yesterday’s $3.28 TRILLION 3-year US Budget Deficit forecast was +46% higher! Now you know why Peter Orszag left.
- Being off by a TRILLION matters to Global Markets: Yesterday, post the CBO revision and Bernanke’s FOMC statement pandering to the political wind, we saw the currency market press the Burning Bone to fresh 5-week lows and saw one heck of an inflation trade emerge across equity, commodity, and bond markets intraday.
Now some people think this is “all good” – if you’re short bonds like I am, I agree, inflation is good. If you’re long inflation oriented commodities and equities (Energy stocks (XLE) were up +2.4% and Basic Material stocks (XLB) were up +2.1% yesterday), that’s good too.
If you are the other HALF of Americans (155M people) who don’t have positions in any of this stuff (or HALF of the world’s population that depends on rice as their #1 food staple), well – you can just suck it up. By the way, the inverse correlation between the USD and Rice is currently -0.89%.
Some facts on Global Food Inflation trends from this morning’s headlines:
- The United Nations “strongly advises” not delaying food supplies to Egypt (whose stock market is down -10.3% this morning), Tunisia, Algeria, Morocco, Yemen, etc…
- Bangladesh (that’s another 150M people = the world’s 8th largest population), is DOUBLING rice imports this morning on “panic buying.”
- Turkey (72M people) is seeing short-term Turkish debt get hammered this morning on inflation concerns (2-year yields at 7.97%!).
Now why, in all the parameters of American self-interest, would it serve a long-only US-centric equity or commodity portfolio manager to agree with Ben Bernanke and the BLS (Bureau of Labor Statisitics) that there is no inflation?
That answer, and why the only reading in the free world that doesn’t see inflation (Bernanke’s), are pretty obvious…
But do we think that suspending inflation disbelief by using a conflicted and compromised US government person’s inflation calculation will have the unintended consequences associated with Global Inflation Accelerating cease to exist?
Maybe in the very short run…
And in the long run, Big Government Spending Keynesians will tell you we’ll “all be dead”…
“But we should arrange our earthly affairs, for the short run in which we have to live…” (Ludwig von Mises)
Finally, this morning in Davos, ECB Chief Jean-Claude Trichet admitted he’s not going to continue to be as willfully blind to the inflation as The Ber-nank. He told Bloomberg’s Francine Laqua that “we will do what is necessary… our credibility is based on that doctrine.”
Indeed, Mr. Trichet, indeed. The credibility of a nation’s currency depends on it.
And maybe that’s why the Euro continues to strengthen relative to the Debauched Dollar this morning. God knows their sovereign risks are at least as bad as Illinois’… but God also has real-time quotes and sees that the ECB doesn’t have ZERO percent interest rates. Nor does the ECB have the entrenched broken promise of an “independent” US Federal Reserve in lagging all of Asia and Europe from here in raising interest rates to fight inflation.
Whether it’s fighting this US Budget Deficit or the charlatan storytelling that blue-collar and unemployed Americans see no inflation, I salute those American patriots like Governor Chris Christie who are Staying On The Line.
My immediate-term support and resistance lines for the SP500 are now 1288 and 1300, respectively. For the 1st day since January 18th, I tilted the Hedgeye Portfolio back to the short side yesterday. We now have 9 LONGS and 10 SHORTS.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer