The Club

This note was originally published at 8am on August 26, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Stop fighting us and play ball.”

-The Club (1998)

 

I am writing this morning’s Early Look from my favorite place on earth – from my office on Lake Superior.

 

There are no central planners here. There are no Keynesians. There is no one who can even attempt to give me a wink and a nod as to what today’s speech from the Almighty Federal Reserve Chairman may bring…

 

And I like that. I don’t ever aspire to ever be in the area code of The Washington/Wall Street Club.

 

Any pro who has played this game for real knows what The Club is all about. It can make you laugh. It can make you cry. It’s where a good ole boy by the name of Warren Buffett gets his wheels greased. It’s where former Fed Heads whisper sweet nothings into privileged ears. It’s where the heart of most of America’s leadership and credibility problems in global financial markets resides.

 

The aforementioned quote comes from a Complexity Theorist by the name of Martin A. Armstrong. Like me, he has his own models that include fractal math. Like me, his macro forecasts are better than the government’s. Unlike me, he went to jail.

 

Whether or not he was innocent of alleged Japanese bond fraud isn’t the point of this morning’s note. The point is about The Club. If you’ve studied economic history as closely as I have, you’ll at a bare minimum respect not only the generational contributions Armstrong has made to the risk management field, but also his tabulation of the history of The Club’s market manipulations.

 

“On February 4th, 1998, Warren E. Buffett was forced to come out and state that he purchased in London $910 million worth of silver. Buffett added: “Berkshire has no knowledge of the actions or positions of any other market participant…” (Martin A. Armstrong)

 

Right Mr. Buffett. You and Mr. Sokol never know anything about nothing. Right.

 

According to Armstrong, after the Buffett disclosure, the then journalistically relevant WSJ called demanding an answer: “How did you know”? (as in how did you know the large premium price paid for Silver in London instead of buying it cheaper in New York during the silver panic was Buffett’s order before it was news?). Armstrong replied, “It was my job to know!”

 

Indeed, Mr. Armstrong. Indeed. It is our job to know that someone always knows something.

 

Who knew Warren Buffett was going to get another sweetheart deal on Bank of America before it was announced yesterday morning? Was the stock up +11% the day prior on huge volume by happenstance? Or did someone in The Club know?

 

If you didn’t know this is how Old Wall Street operates, now you know…

 

Back to the Global Macro Grind

 

Despite Buffett making an investment that puts him in a preferred position ahead of every single common stock holder in BAC, the US Financials ETF (XLF) closed down on the day yesterday. For 2011 YTD, the Financials are now down -20.63%. Since their YTD hopeful highs established in February 2011, the Financials have once again crashed (down -26.1% since FEB 17).

 

If you were carrying some orange jump suit risk into the day (long the Financials on the pending “news” at the open), you couldn’t have been happy with the day’s ultimate outcome. I guess The Club’s perpetually preferred returns aren’t what they used to be.

 

Ahead of The Club’s next move in Jackson Hole today, here are some other globally interconnected realities associated with a global market place that doesn’t trade on what Joe Kennedy’s friends know anymore:

  1. US stocks (SP500) = down -15.0% since Bernanke’s 1stever Global Press Conference on Money Printing (April 2011)
  2. German stocks (DAX) = down hard this morning (-1.8%) and continue to crash (down -27% since late April)
  3. Greek stocks (Athex Index) = gone – down another -1.2% this morning and down -48% from their 2011 high
  4. UK Stagflation = reported this morning with Q211 GDP growth only 0.7% y/y and headline inflation running at +4.4% y/y
  5. US Stagflation = to be reported at 830AM EST (ie GDP somewhere around 1%, but subject to 81% downside revisions)
  6. Gold = rallies, big time, off of the Hedgeye TRADE line of support that we gave you yesterday ($1705/oz)

To a large extent, Gold’s 2011 performance reflects a repudiation of Keynesian Economics. The Club’s heavy hand of Big Government Intervention in financial markets is running out of bullets.

 

The People of the United States of America don’t like ZERO percent interest rates of return on their hard earning savings accounts inasmuch as they don’t like being gamed by an old man giving Bank of America a buzz from his bathtub.

 

Americans want Transparency, Accountability, and Trust.

 

Armstrong’s open attacks on The Club probably have something to do with him being put in the slammer. So I better end my morning missive here today or plan on being in Thunder Bay, Ontario for an extended stay.

 

Armstrong’s view is that “the Crash of 2007 has been an accumulation of this trend that finds coordinated trading to seek that guaranteed perfect riskless trade with political backing…”

 

Before we get all warmed up by Buffett’s storytelling that Bank of America has a “great management team” and whatever else he had to say yesterday to get printed on his preferreds – just remember Buffett’s #1 reason for buying the same preferred stock position in Goldman Sachs in 2008. He said it was because he knew his old boys in Washington would bail them out.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1705-1811, $81.21-85.20, and 1107-1182, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Club - Chart of the Day

 

The Club - Virtual Portfolio


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