This note was originally published at 8am on December 13, 2012 for Hedgeye subscribers.
“Socialism would make our society comparable to that of the white ant.”
After the market close last night I was excited to crack open the biggest brick in my reading pile – The Last Lion: Defender of The Realm (1940-1965). This puppy is 1182 pages long; could take awhile – so prepare for plenty from the Old Man on 10 Downing St.
Comparing Britain’s rise and fall from global economic (and currency) power of the early 20th century is very appropriate when considering what the United States of America is doing under Bush/Obama in the 21st. Churchill has always resonated with me, not because I am like him, but because he wasn’t liked by the burgeoning British #PoliticalClass.
“Churchill had a natural sympathy for simple people because he himself took a simple view of what was required… That was no doubt why the man-in-the-street loved him and the intellectuals did not… For that reason, Churchill had “dislike and contempt”, of a kind that transcended politics.” (Preamble, page 6)
Back to the Global Macro Grind…
Reading the preamble to Churchill after watching the gong show that became Ben Bernanke’s rock-star presser yesterday may very well have done the unthinkable to me last night – it made me think.
How conflicted, constrained, and compromised are we in America at this point to even consider some of the un-qualified spew that comes out of an un-elected and un-accountable professor who is literally making it up at this point on the fly?
Educating yourself to contextualize this moment in economic history is one thing – having common sense is entirely another. Bernanke admitted yesterday that his entire policy framework is based on forecasts that you should have no confidence in.
Finally, I think global markets actually took his word for it on that.
To review Bernanke’s 2012 experimentations (actually he called them “innovations” yesterday, and smirked):
1. January 25th, 2012 – right when Global Growth was accelerating (I was as bullish as anyone in the world on the prospects for US and Global Consumption growth on JAN24), he arbitrarily decided to move his 0% interest rate Policy To Inflate out to 2014 from 2013. Stocks and Commodities ripped for the next month, then topped.
2. September 13th, 2012 – after whispering sweet bailout promises to whoever got the memo (other than me) from Jackson Hole, Bernanke pushes his 0% interest rate Policy To Inflate out to 2015 and beyond. Stocks and Commodities continued to rip for another day, then topped.
3. December 12th, 2012 – whoever was front-running the Fed’s latest “innovation” (knowing he’d move to “targeting” an unemployment rate that you may not see until 2017-2020) didn’t even stick around for the full press conference. Stocks and Commodities topped, intraday!
After perpetuating all-time highs in Housing, Education, Oil, Gold, and Food prices (2006-2012), he pushed out 0% rates 3x in 10 months, from 2013 to 2017 and beyond. Each time, the market rallied less (for less time) on less volume. Atta boy Ben!
And people wonder why the commodity/stock market casino of front-running whatever Bernanke makes up next doesn’t reflect the underlying fundamentals of A) the economy and/or B) corporate revenue/earnings growth? Wonder no more. His explanation of what he is doing and why yesterday was so scary that even Gold wouldn’t keep going up.
And boom! Gold and Silver fall another -1.2% to 2.4%, respectively, this morning. To me at least, it’s like watching White Ants marching over their own expectations cliff. If you’re really long this stuff (say, for example, you own 21% of the Gold ETF), what, precisely, is your next catalyst? 2050?
As Churchill said, “Never, ever, give up!” And I won’t in contextualizing the moment markets are in within the lessons of history learned. Gold has been up (year-over-year) for 12 consecutive years. One might assume that the market has sufficiently discounted:
- Japan cutting to zero (and now setting the Yen on fire)
- USA cutting to zero (and then re-defining zero)
- Europe readying itself to create the fiscal/debt union to accomplish Japanese/American Style Zero
Zero. Think about what zero means. If the risk-free rate is zero, going forward it’s going to be increasingly difficult to beat zero.
I think most people who run money get that. And if you’re being honest with yourself (all you have to do is look at the balances in your equity market accounts versus where they were in December 2007 to get the point), you’d be happy to get back to zero (break-even). Like the Nikkei post its real-estate/asset 1980s price bubble, the SP500 keeps making lower long-term highs.
As I’ve written multiple times since stocks bottomed at higher-lows in November, there will be a great economic opportunity born out of food and energy price deflation if we allow Bernanke’s Bubbles (Commodities) to pop.
Deflating The Inflation Expectations out there will definitely take time – but at this point you don’t even have to have faith. You don’t have to believe the Keynesian intellectuals who are failing all-over themselves anymore either.
Just be a simpleton, like me. Think mean reversion, gravity, and White Ants.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, Shanghai Composite, and the SP500 are now $1684-1719, $105.43-109.65, $3.61-3.71, $1.29-1.31, 1.66-1.72%, 2035-2095, and 1419-1432, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer