This note was originally published
at 8am on March 11, 2013 for Hedgeye subscribers.
“Knowledge, indeed is a desirable, a lovely possession.”
Part I of John Meacham’s Thomas Jefferson – The Art of Power is called “The Scion” (Beginnings to 1774). I absolutely loved it. It brought me back to Jefferson’s formative years. Like Einstein, he was very much self-taught and self-motivated to challenge perceived wisdoms.
“Jefferson studied fifteen hours a day, rising at dawn and reading until two o’clock each morning… for Jefferson laziness was a sin.” He’d say “of all the cankers of human happiness, none corrodes it with so silent, yet so baneful, a tooth, as indolence.” (pg 19)
To a degree, this is how I think about doing Global Macro Research. There is absolutely no other way to contextualize short to intermediate-term market risks without studying the longest of long-term histories. Knowledge isn’t allocated – it’s hard work.
Back to the Global Macro Grind…
Having been on the road talking to clients about our Commodity Bubble theme for the better part of the last 3 months, I still don’t think the long-term investment implications of #StrongDollar Knowledge is as pervasive as the US Dollar’s strength has been for 2013 YTD.
That’s not to say everyone doesn’t get it. Some clients know this cold. It’s just a friendly reminder that the fulcrum piece of our bullish view of the US stock market isn’t what consensus bulls consider bullish, yet.
As you can see from Darius Dale’s Chart of The Day, #StrongDollar = Strong America:
- Reagan: Avg price of USD during Presidency = $115.25; avg price of Oil = $16.53/barrel
- Clinton: Avg price of USD during Presidency = $97.89; avg price of Oil = $19.69/barrel
- Obama: Avg price of USD during Presidency = $79.52; avg price of Oil = $102/barrel
In other words, if President Obama figures this out (like Clinton did, getting fiscally responsible under a Republican House in his 2nd term), this could be the biggest economic opportunity he has seen yet. Barry, think legacy my man.
Really? Why? How?
- Fiscal and Monetary Policy are causal to currency moves
- Fiscal opportunity = Sequestration (tighter, and more conservative on spending, is bullish for the US Dollar)
- Monetary opportunity = get Bernanke’s Policy To Inflate out of the way (i.e. out of market expectations)
The first (fiscal) step is A) trivial and B) already in motion. The second (monetary policy) step is A) nuanced and B) being handicapped by market participants, daily. Do you think the currency, commodity, stock, and bond markets are going to wait for Bernanke’s permission to sell their over-indexed position to US Treasuries? C’mon.
Market players are data dependent. And the risk to Bernanke’s ZIRP (zero percent rate policy) has always been his forecast. His 6.5% unemployment rate target was based on his own expectation that labor market conditions wouldn’t improve until he is long gone from his seat (2016-2017). With the unemployment rate now at 7.7%, our call for a “6-handle” on the US unemployment rate by Q413 remains intact.
There is nothing more dangerous in this game than someone’s forecast – so don’t take our word for it on this. Ask Mr Market:
- US Dollar Index just closed up for the 5th consecutive week at a 3.5 year high of $$82.71 (+4.6% in 5wks)
- US 10yr Treasury Yield was up big (+20bps) last week; now trading at a 6-mth high of 2.05% this morning
- US Stocks (SP500 and Russell2000) are trading at their YTD highs and all-time highs (Russell = 942), respectively
Sure, 6 month and 3.5 year highs might not get the long-term investors knowledge on #StrongDollar impact triggered, yet – but all-time highs (a long-time) in stocks has them asking themselves the questions: “what am I missing? what’s next?”
How about more of the same? Look at expectations for commodity inflation (weekly CFTC futures and options contract data):
- Total Commodity Net Long Positions = down another -9% last wk to 405,885 (down 70% from the Bernanke Top in SEP12!)
- Gold net long contracts = down another -27% last wk to 39,631 (down -61% YTD!)
- Oil net long contracts = down only -4% last wk to 167,498
Again, because we know Obama calls them “middle class folks”, we know this is a huge opportunity for him. Imagine seeing him get on TV, weekly, championing what Reagan and Clinton did – Strong Dollar, Down Oil! It’s a Tax Cut!
With the immediate-term TRADE correlation between Brent Oil and the US Dollar now at -0.97, that Presidential leadership message (and getting the Bernanke put out of the way), would eviscerate what’s left of the net long position in Oil, fast. And, to borrow from Jefferson’s knowledge, oh what a “lovely possession” that would be for most of us, indeed.
Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1549-1585, $109.35-111.34, $82.07-82.91, 93.46-96.15, 1.94-2.06%, 11.68-14.34, 921-949, and 1528-1565, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer