This note was originally published at 8am on February 02, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Poverty wants some things, Luxury many things, Avarice all things.”
Yesterday, one of our young Jedi analysts at Hedgeye, Kevin Kaiser, sent me a highlight from “The Grocer” (an industry trade rag) that inflating food prices are making ordinary breakfast items like orange and apple juice a “luxury.”
Now a Wall Street analyst at a sell side investment bank would find a way to dress this data point up with a pig’s lipstick and call it an “affordable luxury”, whereas someone working for The Ber-nank in DC probably calls something like breakfast “non-core” or “free.” But we simpleton, non-recipients of government bailout moneys, just call it what it is – inflation.
Six months ago we didn’t have Global Inflation Accelerating…
- We had a US Dollar Index that wasn’t being debauched (+7.7% higher at $83)
- We had a CRB Commodities Index (19 commodity basket) that was -30% lower in price
- We didn’t have Quantitative Guessing Part Deux either
While I’ll be the first to admit I remained too bearish on US Equities in December of 2010 (but appropriately bearish on emerging markets and bonds), I’ll also be the first to remind the fire engine index-chasers of all the emails they were sending me on August 24th of 2010 that I was “crazy” to be covering my short positions in the SP500 (SPY), Russell2000 (IWM), and Consumer Discretionary stocks (XLY).
Back then, free markets pricing in a strong US Dollar and low inflation was a bullish signal to buy US Equities. Today, you have the latest Big Government Intervention scheme Debauching the Dollar and perpetuating higher inflation. Back then, I dropped my Cash position to 46%. Today, I’ve raised it to 67%. All the while, understanding that I’m not one of these perma-bulls who needs to be invested trying to get back to a 2007 high-water mark gone bad.
Yesterday, we saw a new high-water mark established in the real-world inflation reading. With the US Dollar getting burned at the stake (down 1% on the day, making a move towards a 6 month low), the CRB Commodities Index was hitting a freshly squeezed 6-month high. All Luxury Things considered, if you are one of the 44 MILLION Americans who lives on food stamps, how do you like them apples?
Now setting aside the inconvenient truth that there’s never been a global economic powerhouse that has devalued its way to prosperity, let’s give the ole Ber-nank a little something to bring to his dance with America’s new Chair of the US Financial Services Sub-Committee on Domestic Monetary Policy, Ron Paul, on February 9th. Here are the 6-month price percentage moves in some of the things people need to live with:
- Cotton = +125.7%
- Sugar = +82.6%
- Corn = +59.0%
- Coffee = +41.4%
- Rice = +40.5%
- Oats = +36.6%
- Copper = +36.1%
- Lumber = +33.8%
- Oil = +25.1%
Yeah, I guess for the sake of professional policy makers in DC who get dinner for free and a car service to work, I should stop there. To make the Top 10 things that may or may not be considered Luxury Things, you really need to have inflated on the order of +25% or more. Pork bellies are only up +10.7% in the last 6 months – so go have yourself some powdered Keynesian Kool-Aid with some sausage links for lunch and like it.
Over that same 6-month period:
- The Buck has Burned almost 6% lower and now has an inverse correlation to the price of rice and wheat of -0.91!
- The 112th Congress jacked up America’s Budget Deficit projections by 34% (CBO upward revision from August to January)
- The countries most affected by global inflation (Asia, Africa, and the Middle East) have started to display some fairly evident social unrest
So where does that leave the almighty American Consumer? That’s easy, pull up some charts of US Consumer stocks – and pull up some big ones like Proctor & Gamble (PG), McDonalds (MCD), and Target (TGT).
Sure, since most people in this business read points of view in terms of how it directly addresses their personal positioning, I’m sure you can find me some US Consumer stocks that used to look like Coach (before the man-purse idea didn’t fly Captain Lew to the moon), but overall, Consumer Staples (XLP) and Consumer Discretionary (XLY) are the 2 worst sectors in the entire US stock market all of a sudden for a reason, down -1.84% and -0.97% in the last 3 weeks of trading, respectively.
On a more positive note, this morning The Mu-barak turned on the internet. So now all of our Egyptian friends can start tweeting Hedgeye’s 6-month table of real-world inflation to their friends again. Social networking tools are going to continue to revolutionize the transparency and accountability standards that The People of this world hold their governments to. That’s a Luxury Thing of personal liberty that I can believe in.
My immediate term TRADE lines of support and resistance for the SP500 are now 1290 and 1308, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer