This note was originally published at 8am on January 14, 2013 for Hedgeye subscribers.
“Our affairs are not conducted entirely by simpletons and dunderheads.”
Per the Urban Dictionary, a “dunderhead” is, amongst other things, an idiot, dunce, numskull, or bonehead. With public opinion of him falling in early 1942, Churchill was irritated. Losing the war was one thing; being chastised by Ivory Tower academics was entirely another.
“Singapore fell on February 15 (1942). It was death foretold – too few defenses, a weak commanding general, a demoralized garrison, and too savvy an enemy … Churchill had no need to resort to hyperbole… he informed Roosevelt that the fall of Singapore was the greatest disaster in our history.” (The Last Lion, page 484-485)
While the 113th United States Congress has yet to prove that it is the worst in free-market history (the 112th is a tough compare), it still has time. I’m just elated that these economic dunderheads of the #PoliticalClass have been out of this market’s way for the last few weeks. Geithner leaving and Congress being out of the way definitely helped the Russell2000 close last week at an all-time high.
Back to the Global Macro Grind…
This is the first Global Macro morning that I can remember where the names Boehner and Reid aren’t in the Bloomberg’s “Most Read.” Today it’s all about Chinese growth (acceleration) and Japanese currency (debauchery).
Neither of those macro stories are new. That’s the point about consensus macro – by the time it becomes this newsy, the big moves in the related markets have already occurred.
From their intermediate-term troughs/peaks in November 2012 (as global growth stopped slowing):
- Chinese stocks (Shanghai Composite) are up +18%
- Japanese Yen (vs the US Dollar) is down -11%
Especially in the context of the SP500 and US Dollar Index being +8.7% and -2.1% from their respective November 2012 lows/highs, respectively, those are massive moves in Asian markets.
The move in Japanese Equities has been even more powerful than China’s. Since November 13th, the Nikkei225 is +25%! Krugman/Bernanke Playbook 101: burn your currency at the stake, admit nothing about it publicly, and point at the daily closing price of stocks.
How will what Jim Rickards coined the Currency War end? I don’t know. But it probably won’t end well. So, as you ride the bull of higher-lows and higher-highs in stocks out there, just keep that in mind. Remember, in Chaos Theory, our daily objective is to embrace uncertainty.
CONSENSUS WATCH: On Friday I highlighted the massive shift from bearish to bullish we have seen in US Equity market sentiment in the last two months. Today, it’s worth reminding you that the sentiment in Commodities has done almost the exact opposite.
Last week’s CFTC (futures and options) net long commodities figures revealed the following realities:
- Total net long positions down another -5.4% wk-over-wk to 654,443 contracts (down -51% from all-time highs in SEP 2012)
- Gold’s net long position dropped another -13% wk-over-wk to 92,115 (lowest level since August 2012)
- Corn’s net long positioned dropped another -15% wk-over-wk to 115,113 (lowest since June 2012)
In other words, when it comes to risk managing the Commodities Bubble, you are best served doing the exact opposite of what the hedge fund community is doing. This may be the most glaring intermediate-term example of BUY HIGH, SELL LOW I have seen in a decade.
Both Gold and Corn prices went up on that last week. What better bull case do you need other than consensus dunderheads who call themselves “smart” getting bearish? While we have deflated the inflation in commodity prices (CRB Index -8% from its SEP 2012 lower long-term high) for the last 3 months, that certainly doesn’t mean they can’t re-flate.
With the US Dollar Down hard last week (-1.2%), here’s where the beta-juice was to Down Dollar:
- Platinum +4.8%
- Corn +4.2%
- Coffee +4.1%
At the same time, we saw some of the widest global equity market divergences (by geographic region) that we have seen in some time. Europe saw Germany down -0.8% on the week, but Italy was +3.2%. In Asia, Vietnam was +8.6% versus Indonesia -2.4%.
What do we simpletons do with all of this? We stay with the research and risk management process; we do our best to incorporate all of the real-time economic data and price changes (across multiple factors and durations) in our models; and we keep moving.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST10yr Yield, and the SP500 are now $1642-1671, $109.98-111.48, 3.64-3.75, $79.39-79.98, $1.31-1.33, 1.84-1.97%, and 1459-1485, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer