This note was originally published at 8am on November 08, 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 crisis, he came to believe, was a consequence of the self indulgence of the older generation.”
-Niall Ferguson (High Financier, page 64)
That’s what Siegmund Warburg thought about European governments coming out of the 1920s. I wonder what he’d think about them now? Top 3 headlines on Bloomberg this morning: 1. Olympus (massive Japanese corporate fraud), 2. Berlusconi (budget vote on the Italian Job) and 3. Cain (to grope or not to grope, remains the question).
Alleged or not, there is a pattern here. Self Indulgence by 21st century central planners is really wearing on The People. When I write about Old Wall Street, I don’t mean old people – I mean the mentality, opacity, and process that is what these conflicted people do. Governments, banks, and their legacy media “contacts” are all intertwined like never before. The People get that too.
Good News: Wall Street 2.0 is going to change that. The truth is very difficult to hide on Twitter. How else would sources with no real names be building higher levels of credibility than both heads of state and the manic media correspondents who are tasked with being “connected” with them? Change is good.
Back to the Global Macro Grind…
On October 4th(at the US stock market’s 2011 bottom), Harvard’s Ken Rogoff wrote an Op-Ed in the Financial Times titled “Debt, Deficits, and Deadlock: Welcome to 2012.” While I think Rogoff’s “This Time Is Different” is one of the most important empirical works in recent economic history, in the belly of his article he made a statement that blew my mind:
“…it is absurd to be worrying excessively about a 1970s stagflation.”
Notwithstanding the inflammatory wording of the statement, given the data that’s emerged in both recent history (and across the longest of long-term data in his book) that piling-debt-upon-debt-upon-debt with fiat currencies produces inflation, I have no other choice this morning than to highlight something many of these academics have a hard time dealing with – real-time market prices.
- Brent Oil prices are pushing back toward $115 (ie up +15% from the time of Rogoff’s article)
- WTIC Oil prices are pushing back above our long-term TAIL line of $93.88/barrel to $96.12 (up +23% since October 1st)
- Gold is moving back into a Bullish Formation (bullish TRADE, TREND, and TAIL), up +10% since early October
At the same time, European economic data continues to show classic signals of Stagflation (Slowing Growth, Accelerating Inflation):
- British Retail Sales drop -0.6% y/y in October (a 4 month low) as British GDP is tracking at 0.5% y/y w/ +5.2% inflation
- France’s Services PMI report dropped to a rock bottom 44.6 in OCT, signaling a recession in French Consumption Growth
- Italy’s inflation for OCT was +3.8% (vs +3.6% in SEP) as unemployment hit a new highs and GDP growth is signaling recession
Never mind the “absurdity about worrying about stagflation”, if oil prices remain near generational highs (using the 2008 all-time peaks is not what a long-term investor should be normalizing), there is a very high probability that Western Europe is entering an intermediate-term period of negative GDP growth and accelerating inflation growth (ie Stagflation).
Before the Keynesians hit the roof on these calculations (accepting responsibility for their policy recommendations? how absurd!), let’s bring in another market practitioner’s view. In his most recent monthly note titled “Pennies from Heaven”, Bill Gross asks a very simple question: “Can you solve a debt crisis by creating more debt?”
Of course not.
Why? Because, as Reinhart & Rogoff empirically prove in “This Time Is Different”, once a country crosses the proverbial Rubicon of 90% debt-to-GDP (Japan, USA, Italy, etc), creating more debt structurally impairs/slows whatever economic growth that was left.
So, as we worry about the worries of the day – the crises that politicians have created so that they can now save us from the “depression” of it all – remember that the US Treasury market has had this right all year long. Growth Slowing is structural. And, as a result, I’ll Self Indulge and ask Mr. Rogoff why it is so “absurd” to be “worrying” about these very probable Global Macro risks?
My immediate-term support and resistance ranges for Gold (Bullish Formation), Oil (Bullish Formation), German DAX (bullish TRADE; bearish TREND) and the SP500 (bullish TREND; bearish TAIL) are now $1745-1797, $93.88-96.28, 5894-6073, and 1255-1268, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer