This note was originally published
at 8am on July 26, 2012.
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“… modern finance has changed the world, and not in a way that we should celebrate.”
That’s what one of my favorite economic historians, Roger Lowenstein, wrote in a provocative Bloomberg article in May titled “Banks’ Hyper Hedging Adds To Risk of Market Meltdown.”
Market meltdown? Shh, keep that on the down low. That only happens in other people’s markets. With the almighty American “but earnings are great” season showing the worst beat-miss spread for US corporate revenues since Q3 of 2008, everything in the US stock market is going to be fine, provided that Bernanke does more of what has not worked.
The sad reality of the culture of short-termism that we have perpetuated in both our politics and banking system is that when the revenue misses ramp, the pressure to cheat does too. Whether it’s guys marking up their books into month and quarter end, or gals rolling the bones on black into a central planning event, it’s all one and the same thing – unsustainable.
Back to the Global Macro Grind…
That probably all made less sense to you with the SP500 at 1376 last Thursday or at 1419 last quarter. But, after 4 consecutive down days (-2.8% correction) in US stocks and The #GrowthSlowing risk management signal (10 year Treasury Yield) hitting a freshly squeezed morning YTD low of 1.40%, that darn Canadian hockey player is going to show up on the score sheet again.
If you peel back the onion to when this whole thing started to unravel (2007), it’s a lot easier to agree with me that we are not only behaving Japanese from a policy perspective, but that both our stock and bond markets are too.
Lower long-term highs on lower and lower stock market volumes became the norm in Japan inasmuch as people piling into “expensive” Japanese Government Bonds did. That’s been going on for 20 years. Bernanke has only been at this for six.
To review, what Bernanke is doing by attempting to maintain a 0% return on fixed income savings accounts in perpetuity is superimposing what we have coined as “3D Risk” on all macro markets:
- The Dare – he’s daring you to chase yield (make sure you get those high dividend stocks as the companies miss revenues!)
- The Disguise – he’s distorting the long-term asset allocation “opportunity” in financially liquid assets like Gold and Oil
- The Delay – he’s inspiring companies to delay financial restructuring under the assumption that cost of capital will never go up
All the while, he’s failing miserably to achieve either of his 2 “mandates” (full employment and price stability). Five years into this mess, we have an unemployment disaster and the highest levels of market price volatility ever.
Did I mention ever is a long time?
The best news we’ve had this week is that Ron Paul had a big win getting his “Audit The Fed” bill passed in the House by a rock solid margin of 327-98. In response to the victory, Dr. Paul said “it is up to us to re-assert ourselves.” Amen to that.
Bernanke’s response: “this is a nightmare scenario.”
Yes it is Ben, for you.
I like to fight. I really like Fighting The Fed (Q2 2012 Hedgeye Global Macro Theme). But I also like timing – as in what a lot of people say they cannot do (take their word for it, they can’t). And once again, with Johnny Hilsenrath at the WSJ floating another Fed rumor ahead of next week’s FOMC decision, the timing game is on.
The manic media is as complicit in this entire gong show of Expectations Mismatch as anyone else. One of the top economic headlines on Bloomberg this morning is “Central Banks Search Tool Kit for Untried Ideas Amid World Slowdown.”
Bernanke talked about “tools” in his latest testimony. While it should scare the hell out of you at this point to hear about more “untried ideas” coming out of the government, allow me to define the 2 main tools Bernanke is talking about:
- Printing Money, Monetizing Debt, Bailing Out Losers, etc.
- Whispering through Fed mouth-pieces
Bernanke’s boys at the Fed and Treasury will be whispering about my calling them whispers (they call them “communication tools”). Whatever you want to call them, they are what they are – they drive the biggest risks to bank prop trading and asset management hedges that markets have seen since WWII – #expectations.
Shakespeare said expectations are the root of all heartache. With the SP500 down -1.8% for July and Q312 to-date, Bernanke’s mouthpieces may be creating the biggest risk of them all. If Lowenstein’s “market meltdown” happens from here, the central planners will see that this time is different. They’ll have no one to blame but themselves.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, German DAX, and the SP500 are now $1586-1612, $100.73-103.91, $83.35-84.14, $1.20-1.22, 6311-6433, and 1331-1348, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer