Serfdom's Road

This note was originally published at 8am on April 11, 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 seldom that liberty of any kind is lost all at once.”

-David Hume


I shifted reading gears this weekend from Lincoln (“Team of Rivals”) and Bastiat (“The Law”) to Jefferson (“Undaunted Courage”) and Hayek (“The Road To Serfdom”). From a research perspective, I think it’s important to draw on history’s lessons in order to contextualize where we might be going next. While socialist leanings have impregnated our economic policies, liberty has not yet been lost.


Inasmuch as it was critical for investors to consider alternatives to Big Government Intervention strategies of the 1970s, it most certainly is now. If you didn’t know that Debauching Dollars perpetuates The Inflation, now you know.


Before I start digging into some of F.A. Hayek’s thoughts in “The Road To Serfdom”, let’s take our noses out of our text-books and consider some real-time market prices – here are some of the major week-over-week moves in Global Macro from last week:



  1. US Dollar Index = DOWN -1.3% to $74.86, closing on its YTD lows and down for 11 of the last 15 weeks.
  2. Euro = UP +1.4% to $1.44 versus the USD, closing at its YTD high after having its best quarter ever against the USD in Q12011.
  3. Canadian Dollar = UP +1.1% at $0.95 versus the USD, closing at its YTD high and remains a good way to be long Global Inflation.


  1. CRB Commodities Index (19 commodities) = UP +2.2% at 368, registering fresh weekly closing highs for the YTD (+11%)
  2. Crude Oil = UP +4.5% to $112.79/barrel, setting a new 32 month high and a new YTD high of +23.4% in 2011!
  3. Gold = UP +3.2% to $1474/oz, locking in a new all-time high – and, as we like to say at Hedgeye, all-time is a long time!

Countries (Equities)

  1. USA = DOWN -0.3% with the SP500 closing -1.1% off its February 18th, 2011 YTD closing high of 1343.
  2. China = UP +2.1% with the Shanghai Composite locking in a higher-high for 2011 YTD of +7.9%.
  3. Russia = UP +0.7% with the Russian Trading System (RTSI) moving into the #1 spot in Global Equities YTD at +19.9%.

There were obviously many other moves across global asset classes (i.e. global bond yields rising alongside inflation expectations) that mattered as well, but as a Chaos Theorist my job is to deliver you the deep simplicity of the point.


The point is correlation risk to the price of the US Dollar. That’s why I started with Currencies - because that’s where policy lives. The Inflation is an American policy. Whether The Bernank and Timmy Geithner want to be willfully blind to this or not, their monetary and fiscal policies are driving inflation through a US Dollar devaluation.


Not everyone agrees with this assessment. Not everyone likes being held accountable either. But if Americans want to tell the world with a straight face that Serfdom’s Road is the best path to prosperity – the rest of the world is just going to keep walking further and further away.


F.A. Hayek was not a fan of socialism or centrally planned economies. Neither am I. He wrote this many moons ago (1944) about “free markets”, but I think it’s worth re-reading, slowly – “the freedom of our economic activity which, with the right of choice, inevitably also carries the risk and the responsibility of that right.”


Never mind the privilege associated with giving one currency (USD) the “reserve currency” right. Never mind one man (The Bernank) abusing that right. There are risks and responsibilities associated with all that is a “free market” to begin with. Without accepting these risks and responsibilities at face value, President Obama, you are starting to blur the lines between political and economic freedom.


The good news here is that Americans are going to have this debate about Big Government Intervention, debts, and deficits out loud for the entire world to see. If you listen to Harry Reid or John Boehner long enough, you might say that’s really bad news too – but transparency is progress – if only it reveals how ridiculously politicized our economic policies and planning have become.


Hayek’s spite for central planning was born out of watching the Germans debauch and devalue their way to hyperinflation (1920s) and new left-leaning ideas coming out of Britain in the 1930s (Keynes).


“Hayek cited the new enthusiasm for socialist planning in Britain as an example of such misguided ideas. The economists who had paved the way for these errors were members of the German Historical School, advisors to Bismarck in the last decades of the 19th century.” (Hayek, “The Road To Serfdom, page 4)


I’m not a Keynesian. I’m not an Austrian. I am Canadian American. And I am looking forward to engaging in this generational economic debate. Is America going to entrench herself in a Hamiltonian posture of federal controls? Or is America going to revive her individual freedoms embedded in a Jeffersonian resolve?


I don’t know the answers to these questions. But I do know the risk management that will be required in taking either of these paths. The path to the dollar devaluation of the Keynesian Kingdom leads to Serfdom’s Road. And while I doubt I’ll feel that personally, the 44 million Americans on food stamps who are out there fighting The Inflation policy every day, sadly, will…


My immediate-term support and resistance lines for the SP500 are now 1320 and 1339, respectively. On a week-over-week basis I drew down the Cash position in the Hedgeye Asset Allocation Model last week to 40% versus 43% in the week prior. My allocation to US Equities is now 6%.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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