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This note was originally published at 8am on June 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.

“Duration neglect is normal in a story, and the ending often defines its character.”

-Daniel Kahneman

I’m a storyteller. So are you. We tell ourselves, our families, and firms stories every day. We tend to frame each story within the framework of how we think. How we think drives our decision making. In the end, we are all accountable for those decisions.

I made a decision to go to 100% Cash in the Hedgeye Asset Allocation Model yesterday. That’s a first. If you’ve been reading my rants for the last 5 years, I don’t have to explain why at this point. You know where I stand. I do not think that this ends well.

Some people think that it will end just fine. Some people think doing more and more of what has not worked is the only way out. Many people thought the very same thing in 2008, and the moneys in their accounts are still underwater to prove it.

Back to the Global Macro Grind

You can call me short-term. You can call me the longest of long-term. You can call me whatever you want – that’s all part of the storytelling too. I was never supposed to be a name in The Game. The Old Wall was never supposed to fall.

The Old Wall used to get away with making up Perma characters in their storytelling. Someone was always the Perma Bull. Someone was always the Perma Bear. Some of us call that fiction. Some of us just permanently manage risk, both ways.

I have by no means perfected the risk management process. The day that you think you have is the day you are about to get clocked. The plan is always grounded in uncertainty. The plan is always that the plan is going to change.

As The Game changes, the process evolves. Sometimes the process signals that it’s time to just get out of the way.

To review why I am already out of the way this morning:

  1. I have no idea what our Central Market Planner in Chief is going to say
  2. If Bernanke delivers the Qe3 drugs, food/energy inflation will slow real growth further
  3. If Bernanke doesn’t deliver the drugs, a world full of Correlation Risk comes into play

In other words:

A)     You cannot beg for Qe and have Accelerating Growth at the same time – the world needs growth, not more debt

B)      If you do not get Qe, the US Dollar stops getting debauched, and Commodity Bubbles continue to pop

So that’s why, at this time and price, I have a 0% asset allocation to Stocks and Commodities. Why I have a 0% asset allocation to Currencies and Fixed Income is simply because I know how to manage my immediate-term risk.

I sold both our US Dollar (UUP) and US Treasury (TLT) positions before yesterday’s plundering. That doesn’t mean I cannot buy either of them back. There are no centrally planned rules associated with how much Cash I can be in. At least not yet.

Back to the #1 thing that Bernanke will not mention today that is driving both causality and correlation in real-time market pricing – The Correlation Risk. Here’s how the last 2 months of Correlation Risk between the US Dollar and everything “risk” has looked:

  1. SP500 = -0.91
  2. Euro Stoxx600 = -0.96
  3. MSCI World Index = -0.95
  4. CRB Commodities Index = -0.94
  5. WTIC Oil = -0.94
  6. Copper = -0.93

No matter what storytelling they continue to feed you (and they is all encompassing at this point, from the Old Wall to Washington, DC and Paris, France), this is all that matters right now.

Get policy right (causality), and you’ll get the US Dollar right. Get the US Dollar right (correlation), and you’ll get a lot of other market things right.

We’ve been right 32 out of 33 times since firm inception (2008) on the US Dollar. That’s probably why I haven’t spent the last 5 years trying to get back to a bull market top break-even. I may be wrong this time. If I am, I’ll at least know why.

European central planning storytellers have played their hands. In my own accounts, with 100% liquid Cash (and illiquid Hedgeye stock), I’m holding a hand of kings. For their last no-volume hurrah, Bernanke Beggars better hope he has 4 aces.

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1589-1640, $94.84-97.59, $81.32-81.97, $1.24-1.27, and 1329-1362, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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