This note was originally published at 8am on September 18, 2012 for Hedgeye subscribers.
“These guys can do whatever they want, whenever they want.”
Sounds like the American Dream, right? Right. That, and the Fed proclaiming their mystery of faith this morning that “unemployment would be close to 7%... if it wasn’t for consumer doubt”, will get you a free scratch-and-sniff at the Washington Sticker Institute of fair play.
The aforementioned quote comes from Chapter 3 of Neil Barofsky’s Bailout, where he explains how Hank Paulson and Tim Geithner got a “blank check” to bailout GM, AIG, etc. “Well, the good news is that we didn’t approve an illegal transaction as our first official act…” (page 50)
At the highs, market volumes and equity fund inflows are dead right now because the America’s trust in the political system is. Both Bush and Obama have signed off on giving un-elected central planners like Ben Bernanke un-precedented powers to do Whatever They Want.
Back to the Global Macro Grind…
For Obama, evidently that’s working. His probability of winning the US Presidency just hit a new high in our weekly Hedgeye Election Indicator. Week-over-week Obama just picked up another +220 basis points in our model, taking him to 63%. Romney is in trouble.
What does another Obama Administration mean for the US economy? Is there still a chance that Obama loses? How do you dynamically risk manage this binary event if and when the probabilities change in the coming weeks?
Last night, our Director of Research, Daryl Jones, and I enjoyed a dinner with pollster Scott Rasmussen. Daryl will have a more detailed note on Rasmussen’s current election thoughts tomorrow. The bottom line is that he still sees this one too close to call.
What isn’t too close to call is what the rest of the world’s interconnected risks are doing in the face of Ben Bernanke devaluing the US Dollar and ripping inflation higher (India consumer price inflation hit +10.03% this morning) for the sake of short-term political votes.
Across our durations in our risk management model, here are some key Global Equity market callouts:
- Asian Equities continue to make lower-highs versus those established before growth slowing started, globally, in March
- Chinese Equities, down 3% in 2 days this wk, continue lower as China won’t “stimulate” during Bernanke commodity inflations
- Japanese Equities (down -11% since the March top) continue to languish as their 20yr experiment with Keynesian economics fails
- European Equities (EuroStoxx50), down -1.2% this morning, are now making lower-highs versus those established in March
- Italian Equities (MIB Index), down -1.8% this morning, are leading today’s decline; no Spanish bailout imminent for them
- Russian Equities (like Japan, down -11% from the March top), are getting tagged for a -1.7% decline this morning (Oil down)
Did something bad happen in the last 24 hours; what’s all the economic gravity and commotion about?
It’s called Correlation Risk to the US Dollar. Sadly, those two words are not part of the Washington, D.C. central planning narrative. And yes, dear Keynesian academics, we get that sometimes (like now) causality (monetary policy) perpetuates correlation.
All it took to get things like Oil and Russian Equities down was stopping the US Dollar from going down. The US Dollar Index remains the other side of the Ben Bernanke trade. He can do and say whatever he wants until that massive asymmetric risk goes the other way.
What would happen to stocks and commodities if the US Dollar recovered its last 6 weeks of losses? What if there was political leadership on the fiscal or monetary side to drive the US Dollar Index back to its July high of $84?
I don’t know. What I do know is that $84 on the US Dollar Index is +7% higher than where Bernanke Burned The Buck to yesterday – and that if a +0.14% move off the lows gets you this kind of constipation in Global Equity markets this morning, he may be spending more time in the men’s room than Paulson did in October 2008.
Since the speculation that Bernanke will do Whatever He Wants pre-election has found its way into commodities (and commodity linked stocks and currencies) more so than anywhere else, it’s going to be critical to monitor our immediate-term TRADE duration risk in things like oil in the coming weeks and months.
Across durations, here’s how Brent Oil looks in our risk management model:
- Immediate-term TRADE line = $114.69/barrel
- Intermediate-term TREND support = $105.85/barrel
- Long-term TAIL risk line = $111.47/barrel
In other words, the Ball Under Water trade (Dollar Down) just stopped going down, and Oil’s immediate-term TRADE line of momentum snapped almost instantly. If anything real drives the Dollar up +3-6%, our TAIL risk line for the Oil price comes into play, fast.
That, of course, would be good for Consumers, globally. But, perversely, it will be very bad for the stock market (and Obama’s chances), in a hurry. If you didn’t know Obama has already figured this out, now you know. He’s smart. And for the next 50 days his boys will say whatever they want to tell you Dollar Down, Oil Up is about everything other than what the Fed is doing when you aren’t looking.
My immediate-term risk ranges of support and resistance for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1739-1785, $112.49-116.86, $78.56-79.99, $1.28-1.31, 1.73-1.87%, and 1439-1474, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer