Ben's Spinal Tap

One by one, all of the asset bubbles perpetuated by politicized central bankers and levered long investors alike are popping. Commodities from copper to soybeans, to everything CNBC’s “Fast Money” was flashing that you load up to the gills with in May – pop, pop, bang!

“Demand Destruction” quickly became the bull market narrative (crude down, stocks up), but that seemingly has not played out. How much of the pain trade can they hold the line on here in August? Who flinches first? Who do you trust? Those would be three questions I’d start with this morning as we head into Bernanke’s inevitable painting of both sides of the political fence today.

This is why I moved to 85% cash at S&P 1284 last week. Realizing full well that that positioning doesn’t get the asset management community paid on the management fee side of their existence, I’m ok with that. I protect my family’s hard earned capital over Wall Street’s compensation structures. At a young age, when I left home to play hockey, I trusted my left hand to shoot the puck, and my right one to throw a fist. Wall Street has proven to throw people under the bus as regularly as a pro scout would if you broke your leg – be careful who you trust out there. Trust your own work, stand up for yourself, and live to play another day. Your cash is king.

That “cash is king” phrase is more than something catchy that I was taught on the trading floor at Credit Suisse First Boston in 1999. The US Dollar is trading at a 6 week high this morning versus the Euro, and currencies levered to commodities deflating (Aussi, Canadian, Russian, etc…) are getting hit hard. If you are in cash, and that cash is US$ denominated, your august performance is off to the relative performance races.

Ben Bernanke’s rhetoric this afternoon holds the keys to the US Dollar, your home, and your portfolio’s fate. The big immediate “Trade” lower in everything commodities is behind us. In order to establish deflation as an intermediate “Trend”, Bernanke needs to step up the hawkishness and get people to actually believe that he is not going to behave like the “Helicopter Ben” cartoons we’ve been posting. Crude, Gold, and Commodities trading at $119/barrel, $892/oz, and 401 (CRB Index), respectively, is not going to break open my wallet to start buying stocks again. Crude, Gold, and Commodities closing under $103.51, $859, and 382, will however. C’mon’ Big Ben! I’ll call you “Big Brown” and drop the “Helicopter” stuff if you show some spine here.

In the meantime, Asian investors ran for the exits again overnight. “Demand destruction”, of course, is a horrific thought if you’re a “growth” investor. I am thankful that we sold our China long position. Chinese stocks broke my short term momentum indicator overnight, closing down another -1.9%, and stocks in Hong Kong did the same, trading down -2.5%, through my critical support level. Indonesia raised rates to 9%, and stocks there fell another -1.9%, while the Philippines reported a July inflation rate of +12.2% year over year – a 16 year high.

Asian growth is slowing. “Trend” line inflation in Asia is accelerating because wage inflation there is secular. Wage inflation was a critical component of the US Bear market in the 1970’s because ¼ of Americans were part of a union. That clearly is not the case today, but stocks don’t trade on today, or yesterday – they trade on the prospects for tomorrow… and if Obama has anything to do with it, US wage deflation won’t be what I am writing about next.

Good luck out there today,
KM