This note was originally published at 8am on April 05, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“They answered questions nobody had yet asked.”
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).
- Old Problems: housing, unemployment, fraud.
- 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):
- 1983-1989 (Reagan): US Dollar Index average = $115.18; Oil price average = $22.16/barrel; US GDP average = 4.31%
- 1993-1999 (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:
- If the American, Canadian, and European Saver and Consumer get paid via Strong Dollar, who doesn’t?
- If the Chinese, German, and Brazilian cost of goods sold (raw commodities) go down via Strong Dollar, what goes up?
- 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:
- Energy (XLE) = down -7.8%!
- Basic Materials (XLB) = down -3.2%
- 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 $1626-1663, $121.67-124.76, $79.21-80.06, and 1393-1408, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer