Great Inflations

This note was originally published at 8am on November 04, 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 fear of another great inflation remained with him all his life.”

-Niall Ferguson

 

Inflation is a centrally planned policy. Period.

 

History is littered with examples of governments devaluing their fiat currencies for short-term political resolve. Keynesians can call their goals “price stability” and “full employment” all they want. The People are starting to call that a joke. In the long-term, banning both gravitational forces and the truth about long-term prices will be difficult.

 

The aforementioned quote comes from an excellent book that I am in the middle of studying – Niall Ferguson’s High Financier – The Lives and Times of Siegmund Warburg. In the Post 1913 Federal Reserve Act Period (Chart of The Day), there are very few merchant bankers (not to be confused with central or too-big-to-perform bankers) who rival Warburg’s legacy.

 

What’s most interesting to me about Warburg (like it is with most revolutionary capitalists), is where he came from. Context and experience are some of the things I personally thank God for every day of my life. For Siegmund Warburg, context and experience are what made him the change that the British and American banking systems needed to see.

 

“I brought something to England which was a little bit different because I was a damn foreigner, a German Jew.”

-Siegmund Warburg (High Financier, page 233)

 

You don’t have to take my word for it on any of this. I’m just a Canadian who came to the American Financial Empire in 1995 and studied the source code of Keynesian economic dogma at Yale in my cutoff jean shorts.

 

Take Harvard’s word for it – Ferguson’s book has 104 pages of footnotes.

 

You don’t have to take Warburg’s word for it either – few in the Establishment of the British economic elite did after he became a British citizen in 1939. But when a post WWII debt-laden England resorted to debauching the British Pound, Warburg called them out on it, big time.

 

Great Inflations?

 

Warburg lived through Germany’s hyperinflation of the 1920s and the politicized central banking that perpetuated it. Today’s good ole boy network money printing is not a new strategy. We don’t have that hyperinflation (yet) either. But the manic financial media seems hell bent on cheering on its catalysts.

 

WTIC and Brent Crude oil prices are trading at $95 and $112/barrel this morning. Deflation? Pull up any long-term chart that doesn’t use 2008’s $150/barrel oil price as its anchoring point in the analysis (all-time high), and you’ll conclude what every man, woman, and child from Kenya to Vietnam already has – Keynesian monetary policies are exporting generationally high levels of food and energy inflation.

 

Warburg didn’t believe in trading prop, levering up his client deposits, or front-running client capital. His strategy was to simply keep his bank’s balance sheet liquid and conservatively positioned throughout the British and French currency devaluations of the 1950s and 1960s. He also avoided getting train wrecked by the US Dollar Devaluation that ensued under Nixon and Carter in the 1970s.

 

Warburg fundamentally believed that “inflation was primarily a political phenomenon caused by governments who do not have the courage to either reduce their expenditure or to cover it by taxation.” (High Financier, page 36). Sound familiar?

 

The sad and pathetic reality about Western Economic Leadership in the 21stcentury (read case studies of both Bush/Obama US Administrations, the 8 or 9 Japanese PM’s they’ve had in the last decade, or … uh, Europe!), is that this is all very familiar.

 

“To sin by silence when they should protest makes cowards of men.”

-Abraham Lincoln

 

The metaphor that Ferguson and I make between the British Empire’s peak (then) and America’s (potentially now) is a very important debate that needs to be had. If we repeat history’s mistakes, our children have no business forgiving the elephantine intellects endowed upon us from our Ivy League institutions.

 

In the late 1940’s and early 1950’s Warburg was at least as critical of British policy as Hedgeye and many others are of US fiscal and monetary policy today.

 

Then?

 

“By the September 1949 devaluation, which saw the Pound’s dollar value reduced by 30% from $4.03 to $2.80, his Wartime enthusiasm for Labour had waned significantly… he argued in a highly critical memorandum written in August of that year … The country was spending too much on defence. Profits and pay were on a much too high level… the employers indulge frequently in illusions as to the profits …” (High Financier, page 131)

 

Now?

 

But, but, but … if you don’t adjust them for inflation, ‘corporate profits are great’… and we continue to beg for The Bernank and/or the Italian Job from Super Mario, to cut, print, cut… beg, cut, print… print, bail, cut…

 

If you’ve been awake since 2006 and watched Big Government Interventions A) shorten economic cycles and B) amplify market volatilities, you get it. Great expectations for Great Inflations have become the root of the common man’s heartache.

 

My immediate-term support and resistance ranges for Gold, Oil, German DAX, and the SP500 are now $1724-1784, $92.66-94.86, 6105-6413, and 1251-1267, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Great Inflations - Chart of the Day

 

Great Inflations - Virtual Portfolio


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more