This note was originally published at 8am on August 28, 2012 for Hedgeye subscribers.
“My government, will correct all of this.”
-Stephen W. Kearny
General Stephen Watts Kearny was one of the central figures in mid 19th century Western American history. Albeit for very brief periods of time, he was the Military Governor of both New Mexico (1846) and California (1847).
The aforementioned quote comes from Chapter 12 of the most recent book I’ve been reading on the conquest of the American West, Blood and Thunder, where “On August 14th, 1846, two days after the Navajo raid on Las Vegas, General Kearny marched with his Army of the West into the town’s central plaza…” and proclaimed his mystery of ill-fated central planning faith.
Within 6 months (January of 1847), Kearny’s “government” was nowhere to be found as the dead (scalped) body of the Governor he put in place in New Mexico (Charles Bent) “lay naked on the floor in a congealed pool of blood.” (page 221) The risk management lesson here is one that is never the same, but usually rhymes – beware of short-term government promises.
Back to the Global Macro Grind…
Stock and commodity markets appear to have been promised that European and American central planners are once again going to provide them the elixir of a no-volume but “up year-to-date” life in Jackson Hole, Wyoming this weekend.
That’s all good and fine, until it isn’t. Super Mario Draghi just cancelled his trip to the central planning summer play-land of the modern American West, and the Gold price doesn’t seem to be pleased by that turn of events this morning – not one bit.
As a refresher on how the market’s game of front-running both the Fed and ECB works, both political pandering entities are charged with keeping market prices up through money printing, bailout promises, and currency debasement.
Here’s the update on what US Dollar Debauchery has done for this 30-day bull run in stocks and commodities (inverse correlations between USD Dollar Index and the big stuff people are speculating on):
- Gold = -0.85
- Silver = -0.87
- Oil (WTIC) = -0.81
- CRB Index = -0.74
- CRB Raw Industrials Index = -0.79
- SP500 = -0.83
European and Global Equities alike get even more pop on the Fed’s Qe rumoring with 30-day USD inverse correlations for the EuroStoxx600 and MSC World Equity indices currently running at -0.88 and -0.86, respectively.
So, your “governments” are going to “correct all of this” by attempting to convince you that asset price inflation (commodities in particular, because that’s what’s driven the beta of the equity indices) is growth.
*note to real-world consumer self: inflation is not growth.
Maybe that’s why old Chavez is having such a tough time in the Venezuelan national polls, falling behind Radonski for the first time in a long time by a fairly wide margin (47.7% to 45.9%) despite the Venezuelan stock market being up +153% YTD!
Pardon? You mean people aren’t as stupid as politicians think they are? You mean the stock market being “up year-to-date” doesn’t reflect the fully bought and paid-for political messaging of the common man’s economic health?
Venezuela, by the way, devalued its currency in the last year. See Darius Dale’s Chart of the Day for what looks suspiciously Weimar Republic, 1920s style.
Maybe I have this wrong. Maybe Americans are truly as dumb as the politicians who are making these short-term broken promises of “price stability, full employment, and economic growth”…
Maybe I don’t.
Now that 2 of the world’s Top 4 economies (China and Japan) have guided down their GDP growth expectations this month (Japan did last night), maybe someone sane out there is starting to figure this out too. The US Treasury Bond market certainly just did.
Looking at what’s happened to market prices in the last week isn’t the end of this story, but it’s certainly instructive:
- US Treasury Yields have dropped -13% in basically a straight line (from 1.89% to 1.64% on the 10yr this morning)
- US Stocks (the SP500 and Russell2000) have fallen from their mid-August highs to make lower-highs versus March
- US Equity Volatility (VIX) = +22% “off the lows” (in a week), bouncing hard off our 14-15 TAIL risk zone
- Asian Equities: China made a fresh YTD low yesterday (-16.5% since May); Japan = -12% since the March top
- European Equities: DAX, CAC, IBEX – pick your index have all made lower-highs on lower and lower volumes
- US Dollar Index = down -3% in August, from its top to bottom
I know, I know. This whole Currency Correlation thing doesn’t fit the Bernanke/Geithner narrative because someone in their group-thinking Keynesian business schools told them “correlation is not causality.”
Someone better tell that to the entire market that’s keying off the causality that is the latest rumor about what Bernanke does next then, because US Dollar bets (CFTC contracts) just went from +311,000 on the bull side in June to -132,000 on the bear side pre Jackson Hole.
Correcting All of This will be abrupt. What started as a localized grievance against money printing (late 2007) and bank bailouts (2008-2009) now moves to a national debate about the stability of your hard earned currency and long-term (inflation adjusted) economic health.
Our immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr Treasury Yields, and the SP500 are now $1640-1679, $112.28-114.26, $81.11-82.01, $1.23-1.25, 1.63-1.76%, and 1401-1419, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer