This note was originally published at 8am on February 01, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“I would rather be a man of conviction than a man of conformity.”
-Martin Luther King, Jr.
When I read, I flag pages and write in them. It’s my way of taking some time to get lost in thought and scribble about what lessons history might provide me in preparation for today. Last night, as I was finishing "The Autobiography of Martin Luther King, Jr.", I found that timeless leadership quote.
It’s certainly not a quote for modern day American politicians. As King goes on to say on page 342, “… there comes a time when one must take a position that is neither safe, nor politic, nor popular, but he must do it because Conscience tells him it is right.”
While I can’t imagine that Presidents George Bush or Barack Obama have a conscience that would lead them to believe that burning America’s currency at the stake is right, there are certainly many Men of Conformity who have been advising them by example of cowardice.
Whether you think Henry VIII clipping his citizenry’s coins caught up to him in the end, or whether you think that modern day American Presidents backing fiscal and monetary policies that debauch America’s dollars will equate to many globally interconnected consequences, no man, woman, or child will ultimately make the call on either. History will. And in this case, I’d rather be the man who sides with history’s lessons.
Before I dig in on the unintended consequences associated with a debasement of the world’s reserve currency, let’s look at what the US Dollar has done across multiple durations:
- Immediate-term TRADE (3 weeks or less): down, literally, almost every day since the President’s State of the Union Address and the Fed’s January FOMC statement.
- Intermediate-term TREND (3 months or more): up for 7 out of 8 weeks post US Midterm election promises, but down for 5 out of the last 6 weeks on the probability increasing that those promises are broken.
- Long-term TAIL (3 years or less): lower-highs and lower-lows -a national embarrassment.
Now if you can show me one man in an American position of fiscal or monetary policy setting power who shows any conviction in backing a strong US Dollar – just one man – I’ll readily accept this claim and consider why he has had no impact on the US Dollar where it matters – on the tape.
If you’ve studied economic history across long-dated cycles (yes, beyond The Ber-nank’s preferred point-in-time academic dogma of the great depression), you’ll already have learned that currency crashes and inflation are globally interconnected risks.
In fact, most modern day risk managers who have read Reinhart & Rogoff’s "This Time Is Different" have learned that there is a pattern that has repeated across 8 centuries of economic data. A simple way to consider this would be to re-read, rethink, and re-learn the lessons Reinhart & Rogoff outline in Part IV – Banking Crises, Inflation, and Currency Crashes where the sequence of chapters are as follows:
- Chapter 10 – Banking Crises (America has been there, done that)
- Chapter 11 – Default Through Debasement (America bailed some of these currencies (stock prices) out, but the national story is far from over)
- Chapter 12 - Inflation and Modern Currency Crashes (America is in motion on this front – and in some cases, cheering it on)
So rather than reacting to the next country that erupts into social chaos against governments who are lying to them about real-world inflation, my advice would be for both the President of the United States and his Keynesian advisors to do the required historical reading. Remember gentlemen, conviction or not, a successful national currency landing will depend on whether your preparations meet this opportunity.
All is not yet lost. With some conviction and focus, America can arrest the social unrest associated with Global Inflation Accelerating – but this can no longer be willfully neglected. Again, for the 44 million Americans on food stamps, it’s time.
If you don’t think it’s time, take a gander at this morning’s Global Macro grind:
- The CRB Commodities Index (19 commodity basket) was up another +1.8% yesterday closing at its highest levels since October of 2008.
- Inflation, as measured by the CRB basket, is up +29% since Ben Bernanke opted for Quantitative Guessing II in Jackson Hole, WY.
- Dr. Copper is hitting a record high this morning at $4.48/lb (all-time records aren’t deflationary are they Mr. Ber-nank?)
- Oil prices are breaking out again to new intermediate-term highs with WTI Oil breaking out above our immediate term TRADE line of $90.21
- Food prices, measured by the UN’s basket, continue to hit all-time highs – from corn to rice, yes, this is a crisis for the world’s poor.
- South Korea’s inflation rate shot up to +4.1% in JAN versus 3.5% in DEC
- Indonesia’s inflation rate continues to rise with CPI for JAN 7.02% versus 6.96% for DEC
- Brazil’s CPI is now tracking up +11.5% y/y in JAN versus 11.3% in DEC
- Ivory Coast, which is seeing massive inflation in Cocoa prices, became the 1st country to default on their debt overnight ($2.3B in Eurobonds)
And again, for those fans of the Fiat Fools who say this has nothing to do with a humble looking bald man with a beard, that’s just a charlatan’s way of ignoring the math. Here are the refreshed inverse correlations between the US Dollar Index and major global food prices:
- Cocoa = -0.91
- Wheat = -0.90
- Rice = -0.88
Notwithstanding that US farmers are planning to plant the fewest acres of rice since 1989 (they make more money planting things like corn), and the global supply shortages we are seeing associated with flooding and/or countries engaging in revolutions, the simple reality here is that mostly every major food staple in the world is keying off of what the US Dollar does every day – and yes, Mssrs Obama and Bernanke, that Burning Buck stops with you.
My immediate term TRADE lines of support and resistance for the SP500 are now 1276 and 1297, respectively. I remain long of inflation and bought my Sugar (SGG) back in the Hedgeye Portfolio yesterday. Being long inflation also means being short bonds and emerging markets.
Being long inflation is an explicit conviction that the Ben Ber-nank will remain a Man of Washington Conformity.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer