This note was originally published
at 8am on April 05, 2013 for Hedgeye subscribers.
“Kennedy Pledges He Will Maintain Value of Dollar”
-New York Times, 1960
As William Silber points out in Volcker – The Triumph of Persistence, that’s what JFK was rolling with 2 weeks before the 1960 US Presidential Election. It was a pro-growth campaign about American progress. A #StrongDollar has always symbolized that.
After LBJ, Nixon, and Carter spent 15 years devaluing the Dollar, this progressive conservative American mantra lost its place in the vernacular of what Hayek called the Political Economy. Why? Currencies and the central bankers that manipulate them get politicized.
After watching Bernanke devalue the Dollar as aggressively as any Fed Chairman since Arthur Burns (1970s), now you are watching the Japanese take a page out of his un-American playbook. That’s not a partisan comment either. Long-time Democrats will recall Kennedy’s thoughts about the US Dollar and monetary policy were crystal clear:
“Price stability belongs on the social contract. We give the government the right to print money because we trust our elected officials not abuse that right, not to debase the currency by inflating… Failure to maintain those promises undermines trust in America. And trust is everything.” (Volcker, pg 53)
The world no longer trusts the Japanese.
Back to the Global Macro Grind…
But do Americans trust President Obama and Ben Bernanke? Does Wall Street? Do we trust that if the US unemployment rate continues to surprise on the downside in 2013 that these politicians will get out of our hard earned currency’s way?
Today is a big day on that score. While it’s tough to get comfortable with a number that the US government effectively makes up, we’re confident that the market is confident that Bernanke is somehow confident betting the entire bond bubble farm on one made-up number.
To be balanced, if there’s one thing we are overly confident in, it’s that Bernanke’s growth forecasts will continue to be wrong. We think both US employment and consumption growth surprises to the upside during #StrongDollar periods like the one you are seeing now.
Does the market like this? Which market? First, let’s look at what USD Correlation Risk is telling us on a 1-month duration:
- US Dollar vs SP500 = +0.84
- US Dollar vs Brent Oil = -0.71
Hooowah! Al Pacino couldn’t have said it better. Like taking a flyer in a Ferrari for free, American Consumers absolutely love #StrongDollar, Down Oil. Basic Materials and Energy stocks, not so much.
Commodity-linked country stocks markets don’t like it either:
- Russia – RTSI down again this morning and down -13.3% since January 28th 2013
- Brazil – Bovespa is a big commodity index, and continues to be just nasty YTD (-10.3%)
For Commodities overall, the last 2 months have been flat out nasty:
- Rubber -21.1%
- Silver -15.2%
- Corn -14.2%
- Copper -10.9%
- Platinum -10.7%
- Wheat -9.0%
- Brent Oil -7.9%
- Soybeans -7.8%
- Lean Hogs -7.4%
- Gold -7.4%
So, I guess if you are really long commodities, being long Gold right now would be your outperformer!
Long-time market history fans know that Gold has been annihilated, multiple times, during #StrongDollar periods. Until Nixon and Connolly (his politically compromised Treasury Secretary – the guy who rode in the car with JFK during the assassination) figured out how to Burn The Buck for political victory (1971), US Dollar strength (particularly in the 2nd half of 1969) crushed the Gold bugs.
But this is much larger than #AngryBugs at this point. This is really the first opportunity since Q1 of 2009 where #StrongDollar Commodity Deflation has provided a real-time Tax Cut to American Consumers of food and oil.
The Fed’s Bill Dudley would disagree with me on this, but I don’t think you can eat platinum or rubber. That said, producers who need such things to make what we consume will pay less for their inputs, if pervasive Dollar strength continues.
So, again – I call on the great market minds in Washington D.C. to do what’s right and:
- End the most dovish Fed policy in US history
- Continue with the shift toward conservatism in fiscal policy
- Spread the love about #StrongDollar’s benefits (Obama, Yes You Can!)
Especially at the pump and at our dinner tables, we can trust that a lot more than we’ve trusted the #PoliticalClass under any of the Nixon, Carter, Bush II, or Obama regimes. “And trust is everything.”
Our immediate-term Risk Range for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1548-1588, $105.68-108.93, $82.52-83.41, 94.04-96.35, 1.76-1.92%, 12.31-14.61, and 1549-1574, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer