This note was originally published at 8am on March 24, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“It is no other than the instinctive effort of every people towards liberty.”
It’s both sad and exciting to watch Portuguese politicians fall on their swords of Keynesian storytelling this morning. And oh the irony of Portugal’s PM bearing the name of the great Greek philosopher. Socrates’ decision certainly adds to the philosophical field of ethics. For the first time, he’s actually doing what he said he’d do – resigning.
There is, of course, no ethics in assuming that you can plunder your people with deficits and debts without the rest of the world eventually noticing. That’s why Portuguese bonds continue to crash this morning (2-year Pig Paper yields hitting new highs of 6.83%). That’s how the broken handshakes are going to be priced in this brave new transparent world of Fiat Fool Finance – with a trashing of promissory notes that were based on lies.
Instinctively, whether you are watching American Idol or a piggy politician, you know when someone doesn’t pass the smell test. While fibbing is part of any political process, flat out lying is punished with much more asymmetric outcomes. There is an Instinctive Effort of every person in this world to find the truth.
The truth about sovereign debt is that more of it is not good. At least not when your country has crossed what we have called The Rubicon of deficit and debt ratios (as a percentage of GDP). As a reminder, those 2 critical risk management levels are as follows:
- Deficit/GDP greater than 9%
- Debt/GDP greater than 90%
If you are reading this note in America this morning, this should remind you that we will not be immune to crossing the proverbial Rubicon of Fiat Fool Finance.
Timing unknown. Fundamentals known.
As the Japanese press toward 210% Debt/GDP, if you didn’t know the Japanese Bureaucrats have already handcuffed their citizenry’s long-term liberty with these liabilities, now you know…
Socrates (the 399 BC one) was penning his thoughts about ethics 3 centuries before Julius Caesar finally crossed The Rubicon. For Caesar, that meant passing the point of no return. That was the beginning of the end for the professional politicians of the Roman Empire. On that historical score, today is a very good day for Portugal’s version of Socrates. The People refuse to be plundered.
As Bastiat predicted in 1850, in plundering The People, “in this you will not succeed… so long as the legal plunder is the basis of legislation within” (“The Law”, page 15). And behold that Instinctive Effort of The People of Portugal this morning – they refuse to let Big Government Interventionists plug them with austerity measures any longer. They’d rather see the aristocracy, who gets paid by the bond market, fail.
Back to the grind…
Not surprisingly, the immediate-term reaction in both US and European stock market futures to this “news” is that if the market isn’t going down immediately on this, well we better suit up in our BTD Gear and chase these suckers higher…
To a degree, this illustrates the continued short-term performance pressures building within the temples of the hedge fund community. For 2011 YTD, how else would you explain a stock market like Greece’s being the world’s best performer?
Drum-roll… it’s called short covering in consensus short ideas…
Been there, done that – and I’m actually still trying to do it every day. How does a “fundamental” long/short Risk Manager make money shorting Fiat Fool countries who think “This Time Is Different” (Reinhart & Rogoff, 2009) when anyone who hasn’t been living under a rock for the last 18 months knows how this movie will ultimately end? Evidently, you wait, patiently, on price.
As a refresher, there is this thing in risk management called mean-reversion. Those who subscribe to it know that what crashes, eventually bounces – and what bubbles, eventually pops…
For the year ended 2010, the 3 worst performing stock markets in the world were:
- Greece = DOWN -35.6%
- Spain = DOWN -17.4%%
- China = DOWN -14.3%
In 2011, for the YTD, the tables have turned:
- Greece = UP +13.9%
- Spain = UP +8.0%
- China = UP +4.9%
So, I guess it’s a good thing we’re long China after being bearish on Chinese stocks for the last year…
Ultimately, whatever crack-pot “strategist” tells you this all means Greece, Spain, and Portugal are all systems go now probably missed proactively making the call 2 years ago that these stock and bond markets would selectively self-destruct on multiple durations.
Net net net, our long-term call on this gigantic Keynesian experiment going very bad remains as follows:
1. Crossing The Rubicon of deficits and debt ratios will ultimately result in governments and their promissory notes self destructing
2. Debauching the value of fiat moneys will result in both Price Volatility and The Inflation
3. Fiat Fools and their policies to inflate will ultimately go away
They won’t go away forever. That’s Wall Street. You always bring in a new cattle class to bank and broker commissions. But Roman history and 1970s Style Stagflation fans alike remember Caesar as well as they remember Nixon – with an Instinctively Effortless smell.
My immediate-term support and resistance lines for WTI Crude Oil are $101.78 and $106.98, respectively. My immediate-term support and resistance lines for the SP500 are 1280 and 1309, respectively. Manage your risk around these ranges.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer