Roped In

This note was originally published at 8am on March 22, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“In the contest between inflation and deflation, the rope is the dollar.”

-James Rickards


I’ve finally jumped into a book I’ve been really excited about, James Rickards’ “Currency Wars”, and the preface does not disappoint. From a risk management perspective, I couldn’t agree more with the aforementioned quote.


Rickards takes the currency debate right up the middle on the Chairman of the Federal Reserve reminding us that “by printing money on an unprecedented scale, Bernanke has become a twenty-first century Pangloss, hoping for the best and quite unprepared for the worst.”


As a reminder to The Ben Bernank and his central planning followers, hope is not a risk management process.


Back to the Global Macro Grind


On Tuesday, I bought back my Strong Dollar position via the UUP. Yesterday, I sold my only remaining long Commodity position (Oil), taking my asset allocation to Commodities back down to ZERO percent.


Even though he’s never traded a Global Macro market with his own capital at risk in his life, Bernanke would probably smile when considering my 0% strategy move. The man likes zeroes.


The Zero Bound, or a 0% “risk-free” rate of return, concept is littered with unintended consequences. If you don’t believe that, ask the Japanese. They’ve had 20 years of anemic economic growth and will have 25% less people living in Japan come 2050.


If you do believe in the globally interconnected risk associated with the world’s reserve currency, you probably get why this entire “contest between inflation and deflation” comes down to what Bernanke/Geithner do to US Dollar policy (monetary and fiscal). When it comes to commodities inflating/deflating the CRB Index (19 commodities) has a 60-day correlation to the US Dollar of -0.64%.


Correlation? Yes Keynesians of the academic gridiron, unite! Correlation Risk in markets doesn’t always imply causality. But sometimes it does.


So why get long the US Dollar right here?

  1. It’s going up today, and we know performance chasers just love a good chase
  2. It is breaking out above our intermediate-term TREND support line of $79.33 again
  3. It has fortified its base, holding our longer-term TAIL support line of $76.11
  4. The Japanese Yen has moved into crash/crisis mode (bullish USD/YEN)
  5. The Euro continues to fail at $1.33 resistance as European Growth Slowing continues

Got Growth Slowing?


Apparently consensus doesn’t want to agree with us on this yet. In a note earlier this week I highlighted the Credit Suisse call to action that “economic momentum indicators suggest global and US growth is still well above consensus” – and while the people I used to work with there are good people, that call on growth is simply just wrong this morning.


1.   ASIA: China and India, in particular, are showing glaring signs of Growth Slowing sequentially here in March. Whether it was India’s stock market down another -1.8% overnight (down -6.1% since the Feb YTD top) on a mounting deficit problem or both the Shanghai Composite and Hang Seng snapping their respective immediate-term TRADE lines of support in the last week as China’s PMI (HSBC) was printed overnight at a fresh 4-month low – it’s all there. #GrowthSlowing


2.   EUROPE: Inflation Slows Growth; particularly when Europeans have to deal with Brent Oil prices of $122-127/barrel – never mind being bent over a barrel by that sneaky little Keynesian critter called debt (which structurally impairs long-term growth). Looking at Europe’s PMI numbers for March, here’s what the river cards look like:



A)     France 47.6 MAR (exp. 50.2) vs 50 FEB

B)      Germany 48.1 MAR (exp. 51) vs 50.2 FEB

C)      Eurozone 47.7 MAR (exp. 49.5) vs 49 FEB



D)     France 50 MAR (exp. 50.3) vs 50 FEB

E)      Germany 51.8 MAR (exp. 53.1) vs 52.8 FEB

F)      Eurozone 48.7 MAR (exp. 49.2) vs 48.8 FEB


Now we all know that Swiss turned American bankers can get creative in their accounting, but by our Canadian-American math, this morning’s Global Growth data is well below consensus.


How about US Growth?

  1. It has never NOT slowed with oil prices over $100/barrel (that’s why the FEB ISM number dropped 3% from JAN)
  2. Since 71% of US GDP = Consumption, real (inflation adjusted) growth slows, big time, when inflation accelerates
  3. Q4’s US GDP print of 3.0% carried a 0.86% Deflator; that deflator should double or triple in Q1

In other words, our Global Macro Model will not be surprised if US GDP growth gets cut in 1/2 , sequentially, from Q4 of 2011 to Q1/Q2 of 2012. If we don’t see a Strong Dollar (like we did in Q4) soon, you’ll see weakening US Consumption.


So that brings me to a comma, instead of a full stop. If you are staying one step ahead of me, you’re going to ask if Strong Dollar would get me more bullish on both US Economic Growth and US Equities. The answer to that (as it was every day in January 2012 up until Ben Shalom Bernanke decided to debauch the Dollar on January 25th), is yes.


Whether our almighty central planners like to admit it or not, we’ve all been Roped In. This “contest between inflation and deflation” has been called “risk on and risk off.” But risk is always on – especially the globally interconnected stuff. Risk never sleeps.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1623-1671, $122.12-124.89, $79.33-80.58, and 1395-1409, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Roped In - Chart of the Day


Roped In - Virtual Portfolio

Leaders Ask Questions

“They answered questions nobody had yet asked.”

-Nassir Ghaemi


In August of 2011, The New York Times reviewed a fascinating psychology book I am reading right now – A First-Rate Madness, by Nassir Ghaemi. The title of the NYT article was well timed, “What Befits a Leader In Hard Times?” Good question.


As most of you who follow Global Macro country, currency, and commodity markets will recall, by September of last year, most things that were down hard yesterday were crashing. If it was your money that someone else put at risk in Q1 of 2011, they were hard times.


Leaders ask hard questions. You don’t have to be in the business of Risk Managing other people’s money to get that. Neither do you have to go to business school. All you need to do is be held accountable to every penny in your company’s account or point on the scoreboard.


Back to the Global Macro Grind


“For leaders in any realm, creativity is not just about solving old problems with new solutions, it’s about finding new problems to solve.” (A First-Rate Madness, page 38).

  1. Old Problems: housing, unemployment, fraud.
  2. New Problems: growth, inflation, policy.

That’s right, it’s The Policy, Stupid. I don’t have to be in bed with Bill Clinton to understand a simple marketing message like that. Away from his shady extra-curricular activities, there’s a lot the man was able to accomplish from both a leadership and growth perspective. Raging Republican fans will agree that Ronald Reagan was a leader who asked the right basic economic questions too.


Being a Canadian-American who will vote for neither of these conflicted and compromised US political parties (both Bush and Obama were Keynesians in their economics; that’s why the net jobs added in America in the last decade = ZERO and GDP has averaged 1.7%), I think there is a tremendous opportunity in this country to simplify a solution to our New Problems:


Strong Dollar = Strong America. Period.


Now before Keynesian Export geeks go haywire (fyi, devaluing your currency to “boost” exports is a broken solution to an Old Problem – no country in world history has devalued its way to long-term economic prosperity), check out my Chart of The Day again. Then look at it again  - and again, and “Again!” (channeling my Herb Brooks to Bernanke and Geithner):

  1. 1 (Reagan): US Dollar Index average = $115.18; Oil price average = $22.16/barrel; US GDP average = 4.31%
  2. 1 (Clinton): US Dollar Index average = $92.93; Oil price average = $18.63/barrel; US GDP average = 3.84%

The US Economy (and, increasingly, the Global Economy) runs on Consumption Growth. In terms of US GDP, that’s 71% of the number. If you Deflate The Inflation (via Strong Dollar), you’ll ramp real (inflation adjusted) Consumption Growth.


Don’t be afraid of this idea because it’s new – the US Dollar Index is currently at $79.81, so you have no idea (neither do I) how well this idea could actually work.


Embrace it. And Try it. Because I can guarantee you that if Oil goes to $22, $42, or even $62 tomorrow, Americans, Canadians, and Europeans alike are going to have one hell of a summer party.


Who will this upset? Let’s ask some simple questions:

  1. If the American, Canadian, and European Saver and Consumer get paid via Strong Dollar, who doesn’t?
  2. If the Chinese, German, and Brazilian cost of goods sold (raw commodities) go down via Strong Dollar, what goes up?
  3. If the stock, bond, currency, and commodity markets of the world stop trading on what the Fed does, who loses?

I could take a full year off from waking up at 4AM to write you these morning missives and write a pretty snazzy Ph.D thesis on this. But, if I do that, this opportunity to lead and change the world will have passed me by. I’m a critic of Dollar Debauchery, but I also have a solution.


Yesterday was the 2ndlargest down day (-1.02%) for the US stock market in 2012. US Equity Volatility (VIX) is up almost +20% in a straight line from where the VIX has bottomed, multiple times, since the US debt, leverage, and fraud peak of 2007.


If you look at the US stock market Sector Studies for April to-date, all that glitters is no longer Gold:

  1. Energy (XLE) = down -7.8%!
  2. Basic Materials (XLB) = down -3.2%
  3. Industrials (XLI) = down -2.7%

In other words, as Growth Slows Globally, the Old Solution (Easy Money) to Old Problems (Housing, Unemployment, Fraud) isn’t a long-term solution at all. The New Solution (Strong Dollar) to New Problems (Growth, Inflation, Policy) may be tough for many of the conflicted, compromised, and constrained (answers to questions 1-3) to accept. But that is precisely the point.


Asking 90% of those people (Presidents, Prime Ministers, CEOs, etc.) why getting them paid by short-term Policies To Inflate is good for long-term growth and economic prosperity remains The Question that no leader in this country has yet had the courage to ask.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $121.67-124.76, $79.21-80.06, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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The Macau Metro Monitor, April 5, 2012




The major daily newspaper, Asahi Shimbun, reported that Sega had purchased the Sea Gaia resort in the Miyazaki prefecture.  The 700-hectare property, which houses a major hotel, tennis courts, spa and golf course, was owned by a foreign consortium but has operated at a loss.  Sega has bought the property for 40 billion yen and there were questions on the casino prospects to which representatives of Sega responded that the deal had not been conditional on casinos becoming legal in Japan or that the resort would obtain a licence.  However, they said that when casinos are legalized, they would consider it carefully.


Meanwhile, according to the newspaper, Sega continues to build on its casino investments in other countries where they are permitted.  The publication also noted that Konami had approval for the manufacture of casino slots as far back as 1996 and will therefore be ready to supply machines once casinos are permitted in Japan.


On March 31, the chief secretary to the Ministry of Tourism in Japan said casinos would help to stabilise the Japanese economy after the natural disaster of last year and help create a fund for special relief measure.  An all-party bill is expected to be presented to the Japanese National Assembly before April 2013, which will demand the approval of a resort casino "as an exception."


Many of the less wealthy Japanese cities and prefectures have cited an interest in such a project, although the National Assembly is likely to choose initially between Tokyo and Osaka as a location.  Other cities and prefectures that have indicated interest in the project include Kanagawa, Wakayama and Okinawa.

Covering Gold, Selling USD on Oversold/Bought Conditions

Keith covered our GLD short position in the Hedgeye Virtual Portfolio this morning at $157.86 on the etf for a 3.28% gain, as gold finally became immediate-term TRADE oversold.

Covering Gold, Selling USD on Oversold/Bought Conditions - gold

The inverse correlation between gold and the USD remains strong at -0.62 over the past 15 days and -0.75 over the past 90 days. Along with covering our short in gold, we sold our long position in the USD etf UUP at $22.12 this morning.

Covering Gold, Selling USD on Oversold/Bought Conditions - usd.go


Fundamentally, we think that gold remains under pressure as QE3 is unlikely.  The FOMC Minutes from the March 13th meeting released yesterday showed no immediate indication of further quantitative easing.  The release stated that,


“Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook, while a bit stronger overall, was broadly similar to that at the time of their January meeting…In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, they agreed to keep the target range for the federal funds rate at 0 to ¼ percent, to continue the program of extending the average maturity of the Federal Reserve’s holdings of securities as announced in September, and to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities.”


The lack of incremental easing is a headwind for treasuries, which in turn is a headwind for gold, as gold competes with real yields.


The chart below highlights this relationship.


Covering Gold, Selling USD on Oversold/Bought Conditions - gold.10


Kevin Kaiser


ECB Presser YouTubed

-- At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25%, respectively, which is in-line with consensus expectations. Draghi did not drift far from his statements last month on growth (expects the Eurozone economy to recover gradually in the course of the year); inflation (close to 2% over the medium term); and money supply (broad stabilization off subdued pace).


You can find Mario Draghi’s Introductory Statement to the press conference here:


Draghi again stressed the work of the two 36 month LTROs as decisive measures to put Europe back on track, yet (again) wasn’t able to show material evidence that real lending has happened in response to these huge liquidity dumps, and called on governments and banks to continue reforms and repair balance sheets to support recovery. He noted that today’s projections do not take into account the impact of the second LTRO.


Draghi did not indicate any intention for a third LTRO, said today’s decision to keep rates unchanged was unanimous, and stressed that the Bank pays particular attention to any signs of pass through from energy prices to wages.  Broadly, Draghi’s answers in the Q&A were vague, including on such questions as Greek bank recapitalization steps, unemployment rate risks in countries like Greece and Spain, and the real impact of the LTRO.


Below we present the Q&A highlights:

-When will the LTROs reveal their full force?    MD: I cannot answer when. I can answer what we do and what we watch. We look at consolidated bank balance sheets country by country to see if liquidity creation translates into deposits (banks buy securities, buildings, bonds, for example) and increases in required reserves.


-Greek banks were hit hard by the PSI deal. Will the ECB have to drop certain banks as counterparties?   MD: Greek banks capital has been wiped out. A €50 Billion recapitalization fund for Greece has been set up, €25 Billion of which is available immediately. The ECB will decide which banks are viable for counterparties for monetary policy operations, which is still in the works.


-Are you stepping up your inflation rhetoric given your new sentence to the introductory statement “have to address inflation pressures in a firm and timely manner”?   MD: Not stepping up rhetoric on inflation. To the extent energy prices rise, pass through pressures must be monitored.


-Are banks getting addicted to cheap money?   MD: there’s no sign of addiction to ECB loans. LTROs are a window opportunity for governments to take fiscal consolidation and structural reforms, and benefit from relative peace on financial markets.


-On the inflation calculation…   MD: We can have everyone at 2% inflation, without having to have higher inflation rates for the stronger countries.


-We see youth unemployment rates in Spain and Greece at extremely high levels; are there damaging effects from fiscal consolidation?   MD: Growth can come from foreign demand and short term interest rates (which are negative at present time). Supply reforms must be taken. High youth unemployment rates develop mostly in countries that have had dual labor markets. Under one wing there are firm laws and benefits; other the other wing there are younger worker that are typically temporary, or hired on a short term basis. So during crisis, the latter group was the first without a job. So we must see reforms to better distribute the weight of labor market movements.




Matthew Hedrick

Senior Analyst

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