This note was originally published at 8am on February 19, 2013 for Hedgeye subscribers.
“He knew that he had a gift: the power to make people trust him.”
With the Chinese allegedly hacking US corporations and the Keynesians in an all-out currency war with the world’s savers this morning, what could possibly go wrong? The US stock market doesn’t seem to care. Do you trust it?
The aforementioned quote about old-school trust comes from an excellent leadership book I’m reading titled “Ike’s Bluff: President Eishenhower’s Secret Battle to Save The World.” Since I am finishing up our year-end review process, trust is a factor I thought a lot about while I was in London last week. The people you choose to work with either get it, or they don’t.
Americans believed in President Dwight Eisenhower, big time. He had the highest approval rating of any post WWII President, not because he gave the best speeches (he hated the teleprompter, and it showed) – it was because poll after poll revealed an endearing quality that the modern polarizing #PoliticalClass has not been able to achieve – the underlying trust of The People.
Back to the Global Macro Grind…
I trust Mr. Market. I believe in his real-time signals. I trust that The People ultimately trust his scorecard too (he might be a she by the way). You don’t have to like someone in order to trust them.
You don’t get paid to play the market you’d like to have either. You get paid to play the game that’s in front of you.
“That’s just too complicated for a dumb bunny like me.” –President Eisenhower (page 29)
Or is it?
At the end of the day, it’s all about your attitude. Sure, it really is hard to let Mr. Market humble you into the daily position of A) embracing uncertainty and B) accepting that risk doesn’t care about your positioning.
You can, however, dynamically (daily) risk adjust your positioning based on the highest probabilities that Mr. Market is giving you. Would you play any other game any other way? For us, since late November, that overall Global Macro position has been:
- Long US Dollar, Short Japanese Yen
- Long Equities (Asian and US specifically, not Europe)
- Short Gold and Treasury Bonds
I can be a dumb bunny too. That’s why I maintain a model that accepts dumb government policy as causal to currency moves. That’s also why we get currencies more right than wrong. Stocks, Bonds, and Commodities tend to react to big policy driven currency moves.
The US Dollar was up for the 2nd consecutive week last week (+1.8% over that time) and for the #1 concern my competitors are signaling as the US stock market’s greatest risk (inflation), Strong Dollar did what it should have done – it Deflated The Inflation:
- CRB Commodities Index = down another -0.9% last week (down -2.2% in the 2 weeks of Dollar Up)
- Gold = down another -3.5% last week to a fresh YTD low (down for the last 2 weeks as well)
- Silver = down -5.3% on the week and Food Prices deflated too (Cocoa -4.1%, Corn -1.4%, etc.)
Now a lot of people in this world (especially Americans) like it when the purchasing power of their hard earned currency appreciates. Others (like Venezuelans for example) don’t have a say in the matter. Their overlords debauch their currency whenever they please.
Eisenhower was lucky in that he was able to compete with British and French debaucherers of currency. These were weak governments who were addicted to debt and the cowardly messaging of #ClassWarfare. No one trusted that then – and they don’t trust it now.
Not all Equity markets like Commodity Deflation. Brazil’s Bovespa Index is the poster child for commodity exposure – it was down another -1% last week and is now down -5% for 2013 YTD.
What could really get this US and Asian Equity party started would be another blast higher in the US Dollar from here:
- Then Oil will eventually start to mean revert versus the rest of the CRB Commodities Index (which is breaking down)
- And Consumers, globally, will get a much needed TAX CUT at the pump
What’s actually quite amazing is that US Consumption hasn’t been hammered with Brent Oil trading up here at $117-118. In our GIP Model (Growth, Inflation, Policy), a Brent Oil price that is in a Bullish Formation is an explicit headwind.
But maybe that’s more of a headwind for those cheering on a weak currency in Europe. Enter France:
- France’s CAC40 snapped its immediate-term TRADE line of 3711 support in the last few weeks
- French Services PMI of 43.6 in JAN was god awful relative to A) itself (45.2 in DEC) or any other major country
So, the French have economic issues that, evidently, weren’t resolved with a 75% tax rate…
Now that their economic data really sucks again, the first thing their conflicted and compromised #PoliticalClass does is jawbones for a weaker Euro – then they tell the world they really didn’t do that at the G20 meetings, n’est-ce pas? But, with the CAC and the Euro breaking immediate-term TRADE support, who do you trust? Mr. Market doesn’t trust them.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1602-1652, $116.09-118.91, $3.67-3.72, $1.31-1.33, 92.53-94.38, 1.96-2.05%, and 1516-1524, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer