This note was originally published at 8am on March 14, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Economics is haunted by more fallacies than any other study known to man.”
This weekend I reviewed one of the classics in my library – Henry Hazlitt’s “Economics in One Lesson.” The aforementioned quote is the first sentence of the book. Hazlitt first wrote it in New York in 1946 then edited it 32 years later from his office in Wilton, Connecticut.
This is a very popular book (over 1 million copies sold) for very good reason. It’s grounded in common sense. And the lesson in 2011 (33 years after Hazlitt reiterated the lesson 32 years after 1946) is the same as it was when the Keynesian Kingdom was imploding in 1979:
“Governments everywhere are still trying to cure by public works the unemployment brought about by their own policies.” (Hazlitt, “Economics in One Lesson”, pg 208).
Have no fear however, the European Financial Stability Facility is here. Or is that the 15 TRILLION in Yen being deployed by the Bank of Japan this morning? Or is that the 223 BILLION in deficit spending by the US government for the month of February? Who cares as long as it doesn’t affect me? Right? Nice moral compass.
Last week’s Global Macro news had plenty of international risks (Risk Management in One Lesson – risk is always on), but a lot of it is staring you right in the face here at home. This should remind you that the highest deficit spending month in the history of America isn’t working:
- US Deficit – despite the unanimous call of The People to govern US Government spending. Expenses ran up +5% year-over-year in February to their highest level ever (ever is a long time Mr. President)
- US Home Prices – despite the US Government daring Americans to take on more leverage, Corelogic’s reading on US Home Prices fell -5.7% for the month of January (y/y) and are now running at a -18% annualized pace (see our Macro Slide Presentation on Housing Headwinds)
- US Consumer Confidence – despite the US stock market rallying +98% in the last 2 years, the Michigan Consumer Confidence reading had its 8th largest drop since the data started getting tabulated in 1978 (falling -12% in March to 68.2 versus 77.5 in February)
“The policy of inflation, as I have said, is partly imposed for its own sake. More than forty years after the publication of John Maynard Keynes’ General Theory, and more than twenty years after that book has been thoroughly discredited by analysis and experience, a great number of our politicians are still unceasingly recommending more deficit spending in order to cure or reduce unemployment.” (Hazlitt, pg 204, 1978)
Last week, we learned that the tough short-term love associated with a strengthening US Dollar may not be what stock market inflation fans like The Bernank want, but it’s definitely what the other HALF of Americans who don’t own stocks need – a Deflation of The Inflation.
Here’s what happened to the price of things we actually need to buy (with the US Dollar Index trading up +0.5% week-over-week to $76.78):
- CRB Commodities Index = DOWN -3.0%
- Oil = DOWN -3.1%
- Copper = DOWN -6.3%
No, that probably didn’t make anyone who is long of The Stock Market Inflation happy, but it did give the rest of us lower prices at the pump this weekend. Contrary to manic media delusions of common sense, gas hitting $4/gallon is negative for consumer confidence (see the score).
The Deflation of The Inflation was also good for those of us who raised a high asset allocation to CASH when everything from US Equities to Commodities were locking in their intermediate-term cycle highs last month. In the last 3 weeks, with the SP500 deflating -2.9%, I’ve taken the CASH position in the Hedgeye Asset Allocation model down from 61% to 43% (Risk Management in Another Lesson – buy red, sell green).
On a week-over-week basis the Hedgeye Asset Allocation moved to the following position:
- Cash = 43% (down from 49% last week)
- International Currencies = 27% (Chinese Yuan and Canadian Dollar - CYB and FXC)
- Commodities = 15% (Gold, Oil, Corn, and Grains – GLD, OIL, CORN, and JJG)
- International Equities = 6% (Germany – EWG)
- US Equities = 6% (Energy and Healthcare – XLE and XLV)
- Fixed Income = 3% (US Treasury Flattener – FLAT)
I’m definitely not saying that this was the perfect setup. I am saying that managing risk proactively in a risk management environment of Heightening Price Volatility preserves capital. Alongside Price Volatility (VIX) putting on a +28.8% move to the upside since the US stock market topped on February 18th, some other crystal clear risk management signals have reminded people that they are still there:
- Growth expectations (measured in US stock prices or UST bond yields) are finally coming down
- Risk spreads (CDS, TED Spread, Sovereigns) are widening
- International stock markets are deflating (36 of the top 60 countries in our Global League Table are DOWN for the YTD)
Now I suppose that we can all celebrate Big Central Planning this morning as the Greek stock market moves up another +3% making it the world’s best performer for the YTD. Or maybe not…
What goes up, must have gone down a lot. That’s what happens to market prices that aren’t exactly as free as they used to be.
My immediate-term support and resistance levels for WTI crude oil are now $98.55 and $103.31, respectively. My immediate-term support and resistance lines for the SP500 are 1292 and 1313, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer