“The dollar is our currency, but it’s your problem.”
That’s an interesting way to look at the world’s reserve currency; particularly if you’re the United States Treasury Secretary. That’s where John Connally Jr. found himself for a very short period of time (1). Hedgeye economic history does not remember him or Richard Nixon’s political strategy to devalue the dollar well.
In the end, I don’t think history will remember US Treasury Secretaries Hank Paulson or Tim Geithner well either. At least not when considering them alongside this critical score. All pleasantries associated with how they say they saved us from the crisis they helped create aside, the price in the US Dollar Index chart doesn’t lie; professional politicians absolving themselves from it as an accountability metric do.
Storytellers like Paulson and Geithner would have you believe that the US Dollar’s shining moments come to Bear (pardon the pun) when the world is flying for “safety.” And while it is true that if you burn the credibility of your country’s currency to a low enough level that it will eventually bounce (2008), amidst fear enveloping world markets last week the US Dollar went no bid…
Last week, the US Dollar Index was down another -1.38% week-over-week, closing at a fresh 2011 YTD low of $75.72.
For those of you keeping score:
So, if the idea is to try what the French (1950s), British (1960s) or Japanese (1990s) have already tried – devalue your way to prosperity – it looks like Timmy is right on plan.
You don’t need to watch Charles Ferguson’s documentary Inside Job (2010) to understand the basic concept here. We’ve berated this point for 3 years and now you have socially transcending technologies (YouTube) making what drives The Keynesian Kingdom easy to see.
As of this morning’s latest viewership readings, here’s another way to look at the score:
So, The People get it. They trust the US Government on financial matters as little as they ever have (that’s saying a lot). They know that US Dollar Debauchery = The Inflation.
But does Wall Street get it? We think it’s starting to. We can see it in the math.
Consider the following 6-week correlations:
In summary, what these correlations have been telling you for the last 6 weeks is that Burning The Buck is driving The Inflation UP and the US stock market DOWN. This is interesting, but not surprising … particularly if you believe that the causality behind this correlation is primarily Big Government Intervention (deficit spending and dollar devaluation).
Since the US Dollar and stocks are developing a POSITIVE correlation now (like they did in Q2/Q3 of 2008), and the US Dollar and Commodity prices continue to have very high NEGATIVE correlations (like they did in Q2/Q3 of 2008), what should we be proactively managing risk towards?
Well, I think the scenario analysis is pretty straightforward:
1. US Dollar DOWN from here
= immediate-term TRADE upside in the price of oil to $107/barrel; intermediate-term TREND upside to $109/barrel (+7%)
= immediate-term TRADE upside in Commodities (CRB Index) to 365; intermediate-term TREND upside to 373 (+6%)
= immediate-term TRADE downside in SP500 to 1251; intermediate-term TREND downside to 1231 (-4%)
2. US Dollar UP from here
= immediate-term TRADE downside in WTI Crude Oil to $96/barrel; intermediate term TREND downside to $91/barrel (-11%)
= immediate term TRADE downside in Commodities (CRB Index) to 348; intermediate term TREND downside to 333 (-5%)
= immediate term TRADE upside in SP500 to 1312; intermediate-term TREND upside to 1352 (+6%)
I also think that The Keynesian Kingdom of stock market cheerleaders should see this as a short-term solution. The best way to DEFLATE The Inflation and have guys like me get bullish on another US stock market rally is to have a Strong US Dollar policy.
As for the US deficit and debt problems that stand in the way of having the international investment community trust American politicians and the US currency again – well, Mr. President, I guess it’s your problem.
My immediate-term support and resistance lines for the SP500 are now 1276 and 1292, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Notable news items from the last few days and price action from Friday’s trading session.
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.
TODAY’S S&P 500 SET-UP - March 21, 2011
Looking at day three of what we called the "Short Covering Opportunity;" we are seeing rallies across the board to lower-highs. As we look at today’s set up for the S&P 500, the range is 16 points or -0.25% downside to 1276 and 1.00% upside to 1292.
As of the close yesterday we have 0 of 9 sectors positive on TRADE and 4 of 9 sectors positive on TREND.
CREDIT/ECONOMIC MARKET LOOK:
Treasuries were weaker of Friday.
MACRO DATA POINTS:
WHAT TO WATCH:
COMMODITY HEADLINES FROM BLOOMBERG:
Generally, European markets are trading higher for the third day, with the Telecom sector higher on the AT&T deal. Eastern Europe continues to outperform with Kazakhstan, Ukraine and Hungary leading the way.
No MACRO data point on the calendar today
Most Asian market traded higher, with the exception of India and Pakistan down -0.22% and 2.06%, respectively. The markets benefited from Prime Minister Naoto Kan saying he sees the light at the end of the tunnel for Japan’s crisis.
"Things always become obvious after the fact.”
- Nassim Taleb
Cygnus Atratus, or the Black Swan, hit us three times in the past week with the combination of an earthquake, tsunami, and nuclear disaster in Japan. Nassim Taleb popularized this term after writing a book titled “The Black Swan,” which analyzed the misconception of investment risk. His conclusion was that the highly improbable is much more probable than standard measures of risk suggest.
Alongside the disaster in Japan, Obviously Obvious continues to prevail globally as tensions accelerate in the Middle East with the recently imposed no-fly zone in Libya; deficits increase and consumer confidence wanes in the United States; and sovereign debt issues continue to rear their ugly heads in Europe.
CALL-OUT OF THE WEEK
With the SP500 down for 3 of the last 4 weeks and the peak-to-trough correction being -6.5%, the call-out this week is more of a question. Was that it, or is volatility in US Equities signaling that there is more downside to come? With Global Growth Slowing and the VIX in what we call a Bullish Formation (bullish TRADE, TREND, and TAIL), we definitely need to see a re-test of the SP500’s 1256 close for an answer.
Bullish on Chinese Equities and/or US Treasuries? We’ve been bearish on Chinese Equities for well over a year now and have been working our Q1 Global Macro Theme of “Trashing Treasuries” since Q4, so we get the bear cases in both. But can we be mentally flexible enough to make the turn on either? Early signals in our quantitative setups are telling us that it’s time to focus our work on the long side of both.
MACRO POSITIONS IN THE VIRTUAL PORTFOLIO
Longs – China (via CAF); Healthcare (via XLV); CORN (via CORN); GOLD (via GLD); Canadian Loonie (via FXC); Energy Producers (via XLE); Chinese Yuan (via CYB); Yield Curve Flattener (via FLAT)
Shorts – Spain (via EWP); Italy (via EWI); Industrials (via XLI); Homebuilders (via XLB); Treasuries (via SHY); Transports (via IYT)
NOTABLE RESEARCH HIGHLIGHTS
Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.