This note was originally published
at 8am on November 15, 2012 for Hedgeye subscribers.
“We can do anything if we do it together.”
-William S. Knudsen, 1938
That’s how great business men and women think. Since its their own capital at risk, they know that the only way to win is through trust, teamwork, and collaboration. Markets didn’t see any of that from President Obama yesterday. Markets have a vote too.
The aforementioned quote comes from the beginning of Chapter 3 in Freedom’s Forge, “The World of Tomorrow.” Pre WWII, Post Depression, was arguably the greatest period of collaboration between competent US Business leaders and Washington in US history. Unfortunately, it took a crisis for politicians to cooperate with credible business sources. Maybe we need another.
From both a global growth and US earnings cycle perspective, this is not the late 1930s. “In 1939, the American steel industry was at its lowest capacity in twenty years” (page71). Today, American corporate profit margins are coming off all-time peaks. If Romney Republicans and Democrats alike are being advised by Neo-Keynesians, don’t expect them to get what I see. They haven’t all year.
Back To the Global Macro Grind…
Setting aside the money printing thing (and investors being forced to chase stocks into their April and September tops), the biggest Global Macro Research call of 2012 has to be Global Growth surprising on the downside.
Since piling more debt-upon-debt-upon-debt structurally impairs long-term economic growth (Reinhart & Rogoff 101), this really shouldn’t have surprised as many economists and strategists as it did.
Like Americans of the late 1930s, we need to evolved our risk management, modeling, and forecasting processes. We need more doers advising Washington – less talkers. They do not know what they don’t know.
Risk happens fast…
The SP500 snapped our long-term TAIL line of 1364 yesterday and then quickly drew-down another 9 handles to close the day down another -1.4%. From The Bernanke Top, that puts the SP500’s correction at -8.1% (Russell 2000 down -10.5%). That’ll leave a mark.
But what have we learned? How many more times do you want to go through this? Japan has been doing it for 20 years and is now quadrupling-down on the same monetary policy that has not worked.
The Japanese Yen is getting hammered again this morning as the leader of the LDP (Abe) is begging for “unlimited easing” going into Japan’s December 16th election. Don’t blame them – they are doing precisely what Princeton and Yale taught them to do.
So, down Yen = up Dollar… and the Correlation Risk associated with Strong Dollar is on:
- US Dollar up for the 8th of the last 9 weeks (bullish TREND – see Chart of The Day)
- Euro snaps TREND line support of $1.28 (EUR/USD)
- Yen drops back into a Bearish formation at $81.22 (USD/JPY)
I know, I know – I should be whining about the US fiscal cliff this morning. Not. With Italian GDP -2.4% y/y in Q3 and France seeing the fruits of a socialist Hollande vote (going into a recession), do not forget that the rest of the world’s fiscal and monetary risks do not cease to exist. They’re all going off the #KeynesianCliff now.
We all knew this would end badly. So don’t tell me “stocks are cheap” if you use the wrong numbers. You are better than that. Tell me you’ve learned something since the October of 2007 all-time high in US Equities and proactively prepared for this moment.
Across our core risk management durations, here’s why I am more bearish today than I was yesterday:
- CHINA – Shanghai Composite down another -1.3% overnight to a 1 month low (-17.5% since #GrowthSlowing began)
- JAPAN – Nikkei getting whipsawed by Hilsenrath like attempts to scare Equities higher, but remain -13.9% since March
- SOUTH KOREA – KOSPI down another -1.2% overnight almost back to flat YTD remains bearish TREND in our model
- GERMANY – DAX was the last holdout of the European majors; now snapping its 7118 TREND line
- SPAIN – stocks are trying to rally on another “request for bailout” rumor; that’s so Q2; IBEX is bearish TRADE and TREND
- RUSSIA – RTSI continues to crash (down -21.8% from the Global #GrowthSlowing top of March 2012)
- BRAZIL – Bovespa down another -2.1% yesterday, moves back into the red YTD (bearish TAIL remains)
- CANADA – TSX Composite cracked its TREND support of 12,131 this week, down -1.6% yesterday post Obama’s presser
Sure, that’s just a snapshot of globally interconnected risk across the majors of Global Equity markets. But guess what – if you look at what’s happening in Commodities and Currencies, from a volatility perspective, it’s even worse.
We’ve said this for a very long time, and I’ll say it again this morning – the USD arresting a 40-year decline is the most asymmetric risk that can occur, across asset classes, to what you’ve been used to for the last 10 years of your investing life.
Yes, there’s a lot going on. It’s a lot of hard and humbling analytical work to contextualize – which makes it next to impossible if the media and political elite refuse to acknowledge our voices. Rise up, and help us help them understand this together.
Our immediate-term risk ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1714-1748, $108.19-111.10, $3.41-3.47, $80.58-81.33, $1.26-1.28, 1.53-1.68%, and 1346-1364, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer