This note was originally published at 8am on January 20, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“I am trying to re-shape and improve my central position.”
-John Maynard Keynes
After getting publically steam-rolled for his failed government “stimulus” experiments of the late 1920s, that’s what Keynes finally admitted to Hayek in 1932. Keynes went on to tell Hayek that changing his views is “probably a better way to spend one’s time than in controversy.”
Classic. Can you imagine if Ben Bernanke and Larry Summers had it in them to change their central planning strategies as the facts have? Sadly, you probably can’t. That’s the anchor of Academic Dogma in our Ivy League towers that will take time to creatively destruct.
Keynes, of course, used willful blindness to alternative economic strategies like Hayek’s just as well as Bernanke and Geithner do: “Keynes admitted in a Treatise on Money that ‘in German, I can only clearly understand what I already know – so that new ideas are apt to be veiled from me by the difficulties of the language.” (Keynes Hayek, page 139).
It’s a good thing Albert Einstein was able to Re-Shape The Debate of his time in English…
Back to the Global Macro Grind…
Solution - the 3 core factors our team focuses on from a Fundamental Macro Modeling perspective when we look at countries are:
Since our models have actually worked in calling the big Growth and Inflation turns for the last 4 years, we think it’s high-time to Re-Shape The Debate on how leaders (running countries, companies, or trading P&Ls) consider these 3 factors.
Rather than compounding Keynesian mistakes in forecasting Growth and Inflation by slapping random multiples on the economic growth that countries do or do note generate (with a 30-80% tracking error in their forecasts), this is what we do:
- Measure the Slope (accelerating or decelerating) of Growth and Inflation
- Apply Predictive Tracking Algorithms to all Growth and Inflation data we can find to generate an estimated range of outcomes
- Hammer out the reps each and every morning across all of Global Macro to adjust our models for any new Growth/Inflation data
Then, on a risk adjusted basis, we decide if there is:
A) An acceleration in the existing slope (going from good to great is the same thing as going from bad to toxic)
B) A deceleration in the existing slope (going from great to good is the same thing as going from toxic to bad)
C) A centrally planned policy to attempt to arrest the gravitational force of the slope
Hopefully I didn’t lose you yet (I didn’t write it in German, but it’s math – which, seemingly, Bernanke and Summers should understand even if I wrote this in Mandarin-Canadian).
If I did lose you, here’s what it means in term of what’s changed from a Fundamental Macro Modeling perspective since we’ve made an explicit change in our call on Global Macro markets in December (we’re long Growth (Equities) and out of Fixed Income):
- GROWTH: US, Chinese, and German Growth (our Big Mac-cro 3) have all decelerated at a slower rate = bullish
- INFLATION: Globally, we’ve seen a Deflation of the Inflation (US CPI dropped from 3.4% NOV to 3.0% in DEC) = bullish
- POLICY: Bernanke/Geithner haven’t been able to debauch the US Dollar and Germany is being fiscally/monetarily conservative
What would make our models change back to the bearish side (i.e. Growth Slowing re-accelerates on the downside and Inflation re-accelerates on the upside)?
- Ben Bernanke goes to Qe3
- Obama and Geithner go way left on fiscal spending
- Germany folds to French demands for Euro bonds (money printing) and bank bailouts
After 4 long years of Jobless Stagflation, look at what getting Bernanke, Geithner, and Sarkozy out of the way is doing – yesterday’s US jobless claims print of 352,000 was the best jobs number we’ve seen since March of 2008!
Strong Dollar = Stronger Consumption (inflation deflates), Stronger Confidence, and Stronger Employment. Period.
Whoever is begging Bernanke for policies to inflate (Qe3) is effectively begging for my model to break down (begging for Inflation to accelerate and slow real (inflation adjusted) US, Chinese, Brazilian, etc. Consumption Growth).
If you’re an exporter in Michigan, you don’t like this. If you’re making BMW’s in Germany, or putting gas in yours in New Jersey, you love it. The only people that want weak currencies are the people who need them to get paid.
Rather than having CNN focus a US Presidential Debate on “open marriages”, it’s time to get real in this country. It’s time to get serious about the evolution in our economic thinking. It’s time to Inspire, Re-work, and Re-Shape the Real-Time Economic Debate.
My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Shanghai Composite, German DAX, and the SP500 are now $1640-1672, $109.85-112.11, $1.26-1.30, $80.19-80.97, 2263-2353, 6260-6467, and 1293-1315, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer