Faulty Interventions

“Intervention based on faulty theories of causes could easily make the problem worse.”

-Sylvia Nasar

I just started reading Sylvia Nasar’s “Grand Pursuit.” Her aforementioned quote comes from Chapter II titled “Must There Be a Proletariat? Marshall’s Patron Saint”, where Nasar focuses on Alfred Marshall’s contributions to the study of economics in the late 1800’s.

Ultimately, Marshall had a relatively easy go at it – certainly easier than I feel we have it in going after the Keynesians (Krugman, Bernanke, Dudley, etc.) here in 2011. All Marshall had to disprove were the dogmas of Malthus, Mill, and Marx (both “The Communist Manifesto” (Marx and Engels) and Mill’s “Principles of Political Economy’ were published in 1848).

By the time Marshall was finally able to put together his most influential British textbook (“Principles of Economics”) in 1890, the socialist ideas of “fair share” and left leaning Big Government Interventions had been broadly debased in the public forum.

A lot has happened since then, but the way academics cling to their dogma has not. Since becoming the Chairman of the US Federal Reserve in 2006, Ben Bernanke has operated on a faulty theory that his central plannings would:

A) maximize full employment and B) provide price stability.

Rather than some version of the opposite occurring, the exact opposite has occurred since Bernanke became responsible for his policy recommendations. Or has he been held responsible? As far as these eyes can see his policies have helped perpetuate:

A) shortened economic cycles and B) amplified price volatility.

Economics is not a “hard” science. It’s a social science that needs more math. The long-term history of economics is one where the dogmas of the older academic generation ultimately get rejected by the new generation.

In his 30s, Alfred Marshall was refuting Karl Marx… and by the time the 1920s rolled around, a 34 year-old currency trader (John Maynard Keynes) was refuting all of the British academic elite’s economic conclusions…

What’s different this time is that it’s taking a little longer to accept that Keynesian Economic theories of “causes” is what is making our global economic problems worse.

It’s Policy, Stupid. And we plan on standing on the front lines of this generational economic debate.

Back to the Global Macro Grind

I shorted the SP500 on the market’s opening strength yesterday (935AM EST, Time Stamped at 1244 SPX), and I plan on doing more selling throughout this morning’s Global Macro rally to yet another lower set of highs.

Here’s your real-time Global Macro economic data check:

  1. Chinese Exports for OCT dropped again sequentially to +15.9% vs +17.1% in SEP (Asian Growth Slowing)
  2. India’s Industrial Production growth dropped to its lowest level in 2 years (+1.9% SEP)
  3. Thailand Consumer Confidence plummeted to 62.8 OCT vs 72.2 SEP (food/energy inflation and floods)
  4. Indonesia surprised with another 50bps rate cut to 6% citing “external factors”; stocks closed down on that
  5. France’s inflation rate rose again in OCT to +2.5% as Industrial Production growth in France has moved to negative -1.7% y/y
  6. British PPI input prices up +14.1% y/y in OCT! ouchy

Most of this economic data has nothing to do with what’s going on with Princess Nancy or Super Mario.  It has everything to do with the two things that drive economic demand most in our models – Growth and Inflation.

Does the trifecta of Keynesian experimentation (Cutting rates to ZERO, then doubling down with Quantitative Easing) in Japan, USA, and now Europe (in that order) perpetuate rising inflation and slowing growth? You’re darn right it does.

This has already been empirically proven by some of the more mathematically oriented Keyensians themselves in “This Time Is Different” (Reinhart & Roggoff).

What are the real-time leading indicators saying about this (ie market prices):

  1. US Stocks are making lower-highs across all 3 durations in our risk management model (TRADE, TREND, and TAIL)
  2. US market Volatility is making higher-lows across all 3 durations
  3. European bond and stock markets continue to test a series of all-time lower-lows

Both the economic data and the markets that reflect upon that Growth and Inflation data are refuting Keynesian economic resolve. As the facts change, what do we do, Sirs?

I can tell you what I am going to do – I am going to keep doing what I have been doing since late 2007 when I decided not to be suckered in by these Faulty Interventions and broken assumptions about how it is that globally interconnected markets and economies work.

My immediate-term support and resistance ranges for Gold (we’re long GLD), Oil (bullish breakout – perpetuating European Stagflation), German DAX (broken), and the SP500 (we’re short SPY) are now $1, $94.21-98.46, 5, and 1, respectively. Our DOR, Daryl Jones, will be hosting our “Best Ideas. Period” call at 11AM EST.

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

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