Entitled Credit

This note was originally published at 8am on March 12, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“If your success was due mostly to chance, how much credit are you entitled to take for it?”

-Daniel Kahneman


That’s an outstanding question from one of the outstanding contributors to our profession in the last decade. Now that The Baupost Group’s ($22B) founder Seth Klarman focused his recent quarterly letter on Dan Kahneman’s work, I feel special.


Do you feel special? Do you need someone “smart” to validate your ideas for them to be good ideas? Kahneman’s focus in Chapter 20 of “Thinking, Fast and Slow”, The Illusion of Validity, at a bare minimum will get you thinking about what you really know.


“The illusion of skill is not only an aberration, it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions – and thereby threaten people’s livelihood and self-esteem – are simply not absorbed.” (Kahneman, page 217)


Back to the Global Macro Grind


Threaten how people get paid in any diameter of this business, and I can assure you they, deep down, want you to fail. That’s the kind of adversity I live for. Welcome to Wall St 2.0.


On Larry Kudlow’s WABC Radio Show this weekend, Larry asked me a very simple question related to this topic of what Old Wall Street really wants: “Keith, do you think that Wall Street types want a weak dollar?”


Yep. Big time.


How else can you explain the US Dollar Index’s most recent history and the Street being willfully blind to its realities?

  1. Down -19% from Bernanke’s start date (2006) to the thralls of Qe2 (Q211)
  2. Down -12% from Obama/Geithner start date (2009) to the lows of 2011
  3. Down -4% from Bernanke’s January 25thpush to debauch to 2014 to the lows 1 month later (last wk of Feb)

Actually, the “smart” people would call this correlation instead of causality. Right. Right. Like there is no causality between the largest money printing and debt monetization in US history and the US Dollar that underpinned it.


Let’s get serious here folks. The reason why we’re one of the few Wall St 2.0 firms focused on the US Currency’s Credibility is that we don’t get paid exclusively by the short-term inflations of asset prices (stocks, commodities, etc.) born out of debasing it.


This American Purchasing Power point holds plenty relevant for the upcoming US Presidential Election too. There is currently a very high correlation between President Obama’s approval rating and the inflation of the US stock market. That’s why we have back-tested and built the Hedgeye Election Indicator using real-time market indicators. We’ll be updating that every Tuesday morning.


Back to the market.


Last week was a good week for my Strong Dollar = Strong America theme:

  1. US Dollar Index = recovered a +0.81% appreciation to $80.04
  2. CRB Commodity Inflation (18 commodity index) = deflated by -1.2% to 317
  3. Short-term US Treasury Yields (2-yr yields) = rose +18.5% to 0.32%

Since this all happened on the heels of continued Romney momentum in the Republican primary (sorry CNN fans, I know this wasn’t their headline), we’re left to wonder whether this weekend’s Rasmussen poll of Romney 48% vs Obama 43% will line up with our Hedgeye Election Indicator’s directional signal tomorrow morning.


Like everything we build here, our election indicator is built with math, not partisan politics. If you’re a Democrat and it’s hard to read the Rasmussen data point, tough cookies. It should be equally hard for Republicans to read our last Election Indicator of an Obama +58.4% probability to win.


I’m not a Republican or a Democrat. I am Canadian – and couldn’t be more proud to not be pigeon holed into being associated with an American political party. So, hopefully, for Election 2012, we can become one of your objective and bi-partisan sources in handicapping the #1 issue in this country – the economy.


On that score, there was a lot of spin on last week’s unemployment reporting – so let’s un-spin it:

  1. The US unemployment rate did not improve month-over-month, staying at 8.3% (only down 0.7% year-over-year)
  2. Taking out the government’s random Birth/Death “Adjustment”, the monthly payroll print was +28,000 y/y (yawn)
  3. At 63.9%, the US Labor Force Participation rate was second lowest ever (to January 2012’s print)

The lowest Labor Force Participation rate ever? Yes, ever is a long time. And so is the Entitled Credit that both the Bush and Obama Administrations have taken for stock and commodity market inflations that have netted out to ZERO US jobs added in the last decade. It’s the Weak Dollar Policy, stupid.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar Index, and the SP500 are now $1691-1710, $104.98-108.65, $79.36-80.24, and 1364-1383, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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