This note was originally published at 8am on February 18, 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 am but mad north-north-west: when the wind is southerly I know a hawk from a handsaw.”
You know when a French policy maker is more hawkish than you about inflation, that you’re a pretty dovish and left-leaning central banker. Despite all of the fiat Pig Paper flying around Europe these days, The Ber-nank’s Burning Buck continues to lose credibility versus the Euro by the day.
Ahead of the Almighty Central Planning meetings this weekend in Paris, France’s Finance Minister, Christine Lagarde, said this morning that, “we clearly need to keep inflation at bay”… and that “too much inflation is not going to be conducive to growth.” On the margin, European policy rhetoric continues to be more hawkish than America’s – and that’s saying something.
After hearing President Obama on his fiscal plans to amplify America’s Disaster Deficit and listening to Ben Bernanke profess to the world that he sees no inflation, we re-shorted the US Dollar this week. It’s already down a full 1% from where we shorted it. It remains broken across all 3 of our core risk management durations (TRADE, TREND, and TAIL). And, unnervingly, it has no long-term support to its post 1971 closing lows.
If you study the history of the US Dollar pre and post President Nixon abandoning the gold standard (1971), you’ll see that it’s become fashionable for US Presidents and their politicized heads of the US Federal Reserve to act in unison (both from a fiscal and monetary policy perspective) to attempt to debauch and devalue their way to political prosperity.
In trying to get re-elected in 1972, “Nixon wanted a large dollar depreciation to goose the US economy, but Pompidou feared that this step would saddle Europe with a larger loss of competitiveness.” (“Exorbitant Privilege” by Barry Eichengreen, page 76). And when Pompidou was the one criticizing Nixon on not being hawkish enough, the US definitely earned its currency credibility problem.
Preceded by Charles de Gaulle, Georges Pompidou was the President of the French Republic from 1969 until he died in 1974. If Nixon wanted a tutorial on how to run a deficit and devaluation strategy, these French gentlemen had as much experience as any of the world’s post WWII central planners.
In 1972, Nixon had his modern day Ber-nank (Arthur Burns) cut interest rates and this caused the US Dollar to do exactly what it’s doing now – weaken. Sadly, Burns was then politically wedged into attempting to monetize the US Federal Debt thereafter (i.e. buying Treasuries) and The 1970s Inflation that was born out of these short-term political decisions was obviously President Jimmy Carter’s to deal with by the time the horses left the barn.
Now I’m not suggesting that the Obama/Bernanke team is as dovish and left leaning on the central planning front as the Carter/Burns combo was, but I am saying that if the US Dollar continues to be debauched that it’s going to be a tight race.
Yes, I think Bush/Bernanke had many of the central planning tendencies that Nixon/Burns did. And, yes, there’s been good reason why no Federal Reserve chief has tried to monetize the US debt since. Most of the Keynesians were evaporated by Paul Volcker. Now they’re back.
In Dollar Debauchery do Americans trust? Does the Rest of the World have any reason to trust America as the fiduciary of the world’s reserve currency? Is global trust an entitlement, or is it earned out there in this interconnected global economy every day?
These are important questions that Keynesian ideologues don’t need to help us with – because the answers are marked-to-market on your screens every minute of every trading day.
To be crystal clear on my Global Macro positioning here, I am hawkish and long of The Inflation.
As a Long/Short Global Macro Risk Manager who isn’t pigeon holed into being long-only French or American stocks, there are many ways to capitalize on these Hawkish Winds:
- LONG - Food Inflation (Wheat, Corn, Soy)
- LONG - Currencies of countries with hawkish central banks (Chinese Yuan, Canadian Dollar, Swedish Krona)
- LONG - Financials in socialized countries that have made banks too big to fail (JP Morgan, Goldman Sachs, CIT)
- SHORT - Sovereign Bonds of countries with deficit and currency devaluation central planners (US Treasuries, Japanese Government Bonds)
- SHORT - Currencies of countries with dovish central banks (USA, Japan)
- SHORT - Emerging Markets (India, Brazil, or countries in the Middle East)
Sure, US-centric, long-only, perma-bull strategists like Bob Froehlich and Don Luskin who I debated on Kudlow last night can belly up to the blow horn and howl “Dow 14,000” whenever they have a live wire on TV. But if you are Froehlich and you said “Dow 14,000” in January of 2008 and again in February 2011, have you really taken any lessons from the most recent crash and evolved your investment process? I think Americans have.
The British, the French, and the Japanese have learned this lesson of abusing entitlements the hard way. It’s taken many years and many charlatan politicians telling stories about Big Government Deficit Spending and Currency Devaluation being the way of the future. It’s taken many a Hawkish Wind to stand up to the tyranny of centrally planned economies and markets too.
But when the wind of a bond, currency, or stock market turns southerly, I think most of the people who have empowered these said fiduciaries with our hard earned moneys “know a hawk from a handsaw.”
My immediate term support and resistance levels for the SP500 are now 1328 and 1342, respectively.
Enjoy your weekend and best of luck out there today,
Keith R. McCullough
Chief Executive Officer