This note was originally published at 8am on September 13, 2012 for Hedgeye subscribers.
“It took a lot of hard work to get us into this mess.”
-Neil Barofsky’s Dad
The more I learn, the scarier Washington, D.C. gets. The aforementioned quote didn’t come from a politician. It came from Barofsky’s freshly printed tell-all book about crony socialism, Bailout (page 32). That time it was about TARP. This time it’s about Qe. Unless you want to wander on into the next politically perpetuated crisis willfully blind, I highly recommend you read it.
I wasn’t born in this country, but I do love it – and I will fight for its liberties. Hell would freeze over before the Founding Fathers of the Unites States of America signed off on a centrally planned market event like the one an un-elected academic will host today.
Whether he wants to accept responsibility or not, Ben Bernanke has signed off on the #1 thing that has been driving stock and commodity markets for the last 2 months – expectations. Up or down, whatever happens today will be Bernanke’s Mess.
Back to the Global Macro Grind…
A) Market up = mess for the economy: that’s right, if the man pushes 0% money out to 2015, 2016, then infinity and beyond, that’s a mess for a lot of people in this country. Just ask a retiree living on a fixed income, or a small business owner. When your cost of living is rising faster than your income, that’s called a tax hike.
B) Market down = mess for the market: yep, since corporate revenue growth is slowing at its fastest rate since 2008, where do you think corporate margins go from their all-time peak? What do you think a collapse in the Fed’s final bubble (1st it was internet stocks, 2nd housing; now it’s commodities) is going to do to companies like Caterpillar (CAT) who aren’t prepared for that?
But, like it was in October 2007 (up double digits YTD), the “market is up” and we don’t hold the Fed accountable to its mandate? As a reminder, that mandate is:
- Price Stability
- Full Employment
Meanwhile, this is what we have:
- Price Volatility like markets have never ever seen (ever is a long time)
- Unemployment that’s higher than where it was on January 20, 2009 (7.8%)
So we better empower this guy to do more of whatever has not worked. And I mean really beg for it. If this insanity can only end in a blow up, I say get on with it so that I can start hiring again and get on with my day.
Since I have nothing else to write about this morning, let’s just review where we stand pre-game (1230PM Bernanke release):
- Financials (XLF) are up +3.83% in less than 2 weeks, front-running the Fed
- Energy stocks (XLE) are up +3.96% in less than 2 weeks, front-running the Fed
- Basic Materials (XLB) are up +3.76% in less than 2 weeks, front-running the Fed
Front-running? Bad word, for people who actually take on the Orange Jump Suit risk to be in the know pre-game. But that’s the game of expectations Ben Bernanke and his group-thinkers have perpetuated; that’s where the money’s at. Follow the money.
If 2 weeks of causality (Fed policy expectations) is too short-term for you, let’s look at the last month instead. Here are the inverse correlations between the US Dollar (down) and everything big that people are being forced to chase (30 day correlations):
- Gold -0.96
- Silver -0.95
- CRB Commodities Index -0.94
- Eurostoxx600 -0.86
- SP500 -0.74
In other words, get the US Dollar right, and you get everything but the US Economy right. Gold, last I checked, is not a “Full US Employment” trade. It wasn’t in the 1970s either.
Back to the two risk management words never uttered by our Central Planner in Chief (Correlation Risk), if I shorten that back up to 2 week correlations front-running Bernanke, the SP500’s inverse correlation to the US Dollar goes higher to -0.86. That’s because it’s closer to the main event. And that’s being driven by the aforementioned moves in the Financials and Commodities.
As Neil Barofsky says at the end of Chapter 2, “I might be completely on my own” (page 38) in calling Bernanke out on this mess of expectations at this point. But I doubt it.
When I started this firm in early 2008, I vowed to fight Old Washington and Wall Street for the truth. “What is the truth?” If that ruffles the odd feather, I’m doing my job. That’s what Canadian-American Patriots fighting for the purchasing power of their dollars do.
My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Russell2000, and the SP500 are now $1709-1756, $114-116.22, $79.45-80.94, $1.26-1.29, $1.69-1.77%, 830-846, and 1419-1451, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer