“I am determined that the American Dollar must never again be hostage in the hands of international speculators.”
-President Richard Nixon, 1971
In Currency Wars (page 86), Jim Rickards highlighted that very sad day in US Economic history (August 15th, 1971) when Nixon abandoned the Gold Standard and officially made the US Dollar a political football. We’re all hostage to its Correlation Risk now.
In the 1970s, Nixon would say “we’re all Keynesians now.” Jimmy Carter, George W. Bush, and Barack Obama’s economic policies of the 1970’s and 2000’s would agree with that. But are we? Collectively, I think America is smarter than that. When something doesn’t work, we stop doing it – eventually. Monetarily, Reagan got that right. Fiscally, Clinton did. The People forced them to.
With Correlation Risk running at generational highs, “speculators” take their cue from the US Dollar. And the US Dollar takes its lead from policy makers. Markets are hostage to what the Dollar does because this is what we asked for. We asked for Bernanke. We asked for bailouts. Now that we see how this movie ends (Europe), are we going to be asking for more?
Back to the Global Macro Grind…
Last week the USD was up for the 2ndweek in a row, trading up +0.96% to $80.26 on the US Dollar Index. Since Bernanke has trained them to expect short-term asset price inflation, Stock and Commodity Markets really do not like it when that happens. In the face of US Dollar strength, stocks and commodities were both down for the 2nd consecutive week.
The bad news about short-term commodity price inflation is that it Slows Global Economic Growth. If you are a country like India or Japan (and you are a net importer of Oil) you really get jammed by this sort of thing.
India’s Sensex Index was down another -0.54% last night (down -12.1% from where it topped when growth started slowing in February) after reporting that it’s Wholesales Price Index for April inflated, sequentially, to +7.2% versus +6.9% in March.
The good news about short-term stock and commodity price inflations is that they deflate. Sometimes fast. That’s plainly obvious to anyone who has blown up other people’s money being levered long Commodities at the Q1 tops of 2008, 2010, 2011 – and now, 2012.
With the US Dollar up +0.96% last week, here’s your highly correlated move lower in Commodity prices:
- CRB Commodities Index (19 Commodities) = down another -2% (down -11% from their February 2012 top)
- WTIC Oil = down another -4% (down -11% from its February 2012 top)
- Gold = down another -4% (down -11% from its February 2012 top)
I couldn’t make up how linear and correlated these moves have been since February if I tried. God only knows Bernanke has avoided discussing the words Dollar, Correlation, and Risk like the bubonic plague (for good career risk management reason). But that certainly doesn’t mean these Correlation Risks to market prices cease to exist.
You see, if I was tasked with “price stability”, the last thing I’d do is bring up the causality (policy) driving people to “speculate” on up/down Gold and Oil prices. Accountability isn’t a word in Washington. And that’s just plain sad too.
Accountability in performance is definitely a word in the asset management community. Looking at the latest CFTC Commodities options data (Bloomberg) consider the following:
- Bullish bets on commodity contracts (19 CRB components) dropped -19% week-over-week last week! (723,239 contracts)
- Bullish bets on Gold contracts tanked -20% last week (to 92,498 contracts) = lowest level since December 2008!
- Bullish bets on US Farm Goods swooned -15% week-over-week to 435,801 contracts
In other words, if you bought the top in Commodities in February – and you did that with leverage – you’re definitely blowing up right here and now. Gold and Copper are down another -1.5% and -2.8%, respectively this morning!
Yes, that’s an exclamation point. I don’t use them that often. But they are very appropriate. We are fighting the Fed, and winning.
As a reminder, our Top 3 Global Macro Themes for Q2 of 2012 are:
1. The Last War: Fed Fighting
2. Bernanke’s Bubbles (Commodities)
3. Asymmetric Risks
These were not easy calls to make at the end of another Q1 YTD top in Global Equities and Commodities. Neither was it easy to write a note titled “Selling Opportunity” in US Equities when they went green momentarily on Friday.
This Globally Interconnected Game of Risk is not easy. Neither is it going to be easy to convince the American People that they should be Dollar Hostages for another one of these Qe’s. Been there, done that (multiple times) – and it didn’t work.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1, $109-45-113.89, $1.28-1.30, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer