Your Problem

This note was originally published at 8am on March 21, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The dollar is our currency, but it’s your problem.”

-John Connally

 

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 (1971-1972). 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:

  1. The USD is down for 9 of the last 12 weeks as the USA printed its highest monthly deficit on record in February ($223B)
  2. The USD has lost -7% of its value since the 1st week of January when it became clear that mid-term election promises would be broken
  3. The USD is down -11% since Geithner took office as the 75th United States Secretary of the Treasury

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:

  1. “Quantitative Easing Explained” (The Bernank) = 4,371, 553 views (http://www.youtube.com/watch?v=PTUY16CkS-k)
  2. “Every Breath You Take” (Columbia Business School) = 1,725,495 views (http://www.youtube.com/watch?v=3u2qRXb4xCU)

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:

  1. USD vs WTI Crude Oil = -0.88
  2. USD vs CRB Commodities Index = -0.75
  3. USD vs SP500 = +0.58

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,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Your Problem - Chart of the Day

 

Your Problem - Virtual Portfolio


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