This note was originally published at 8am on November 30, 2012 for Hedgeye subscribers.
“America is the only country that is constantly being reborn.”
-William Knudsen, 1945
I’ll be turning my attention to a fresh new history book this weekend. I’m looking forward to that. I always do. It’s the only way I learn how to proactively manage for future risks – by contextualizing history’s behavioral patterns and economic cycles.
The aforementioned quote comes from the conclusion of the book I have been reviewing as of late – Freedom’s Forge. It’s an interesting quote. It probably makes an American feel good. As much as I respect Bill Knudsen, it’s completely inaccurate too.
How do you think the Chinese and Germans feel about that? If you’ve studied the last 400-500 years of economic history, you’ll recall that global economic hegemons are slowly, but constantly, changing. Before its war with Britain began in 1839, China had almost 1/3 of Global GDP. In the last 3 years, the USA has fallen from 23% to 21% of Global GDP. Where will it go from here?
Back to the Global Macro Grind…
Now that the bull case for US stocks has gone from “growth is back” (Q112) to “but earnings are great” (Q212) to the government is going to save us from themselves (Q3/Q4 2012, Qe and #Keynesian Cliff), is America Reborn? As what?
If we really are asking to be reborn, maybe we should consider birth rates. Looking at America’s birth rates (officially released this morning), as US GDP as a % of Global GDP has fallen in the last 3 years, the USA’s birth rate has fallen -8% to a record low.
Japan has a negative population growth rate. And while the Keynesian Quacks who have been perpetuating unlimited Quantatitive Easing, Currency Devaluation, and Debt Financed Government Spending in Japan for the last 20 years doubt they’ve had a causal impact on the correlation between Japan’s economic decline and societal despair, to me at least, gravity is readily apparent.
So, let’s “get a deal”, kick the can, print some more money, and do more of that…
It’s sad to watch. And while I think I am doing my own part in being the change we need to see in our profession, my hope for an America “Reborn” on the principles of equality, liberty, and “free” markets is fleeting.
My hope for a Strong Dollar isn’t a risk management process either – and risk, of course, works both ways – so the best I can do is attempt to risk manage a tape that’s begging for more of what will ultimately make America look more like a European Social Democracy.
In terms of US Equity performance chasing, where is American risk trading into month-end?
- SP500 has rallied back from the thralls of its Q4 lows (on no volume) to down -4% from its Bernanke Top
- US Equity Volatility has been stamped right back down to its long-term TAIL risk zone of 14-15
- SP500 close > 1419 (TREND resistance) = bullish; a close below 1419 = bearish
All the while, despite the Dollar Debauchery (Cliff can kicking and Qe4 rumors have the US Dollar down for 2 weeks in a row), the US Treasury Bond market doesn’t care:
- UST 10yr Bond Yields down 7 basis points on the week, from 1.69% to 1.62%
- Treasury Bond Yields remain in a Bearish Formation, reflecting Global #GrowthSlowing expectations
- Yield Spread (10yr minus 2yr Yields) has compressed another 5 basis points wk-over-wk to +137bps wide
Now some still think the US stock market is the global economy, so just a reminder on our answer to that:
- CHINA – Shanghai Composite hit a fresh 3yr low this week; no China “stimulus” in sight
- COPPER – lower-highs continue since March (we shorted Copper yesterday)
- BOND YIELDS - Treasuries are going to beat Corporate Bonds in November (Corporate #EarningsSlowing)
But, again – if you are more concerned about what the government can do for your year-end bonus in December, all we need to see are 2 things:
- Japanese Style Can Kicking on the #KeynesianCliff
- Rumors from Hilsenrath (WSJ) into the close on Bernanke doubling (heck, tripling) his monthly printing
Who would have thunk? The great American Republic of “free-market liberties” reborn as a casino of market expectations driven by what Pelosi and Boehner might say next. Think about it in historical context before you beg for more of it – then think about it again.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1704-1732, $109.88-111.49, $3.43-3.62, $79.94-80.58, $1.29-1.31, 1.57-1.67%, and 1406-1419, respectively.
Best of luck out there today and enjoy your weekend,
Keith R. McCullough
Chief Executive Officer