Distant Peoples

“the unnatural task of holding in submission distant peoples...”

-Edward Gibbon

Edward Gibbon was an 18th century British historian who became famous for his 6 volume work, The History of the Decline and Fall of the Roman Empire (published between 1). Contextualizing Roman history is critical in order to attempt to scrutinize the rise and fall of any post 18th century economic empires (Britain, USA, or Japan). Governments plundering their people doesn’t end well.

Alongside Clausewitz (Prussian military theorist), Gibbon was also a favorite of America’s 1st grand strategist in the US State Department, George F. Kennan, whose biography I am waist deep in right now (it starts off slow, but the meat and potatoes of this book start in the post WWII period; I’m studying it now so that I can contextualize Russian policy – a country ETF (RSX) that we re-shorted yesterday).

The reason why I’m highlighting Gibbon’s quote this morning is that it’s FOMC d-day. Via debauching the world’s reserve currency, Ben Bernanke’s Fed has held distant peoples (including those in the US who don’t live in D.C.) in an unnatural submission to a Policy To Inflate food and energy prices. End it man – let #StrongDollar manifest. The People need a consumption #TaxCut.

Back to the Global Macro Grind

For those who were paid to see no inflation at the all-time highs in Oil (2008), Gold (2011), and/or Food Prices (2012), all I can say is shame on you. The People know the truth. And now they are ready to receive the communion of #CommodityDeflation.

I never grew up thinking about which “class” I was in. Class warfare is stated plainly in the opening sentence to Marx’s Communist Manifesto. I’m more of a freedom and meritocracy type of a guy myself. The last word of the last sentence of Darwin’s On The Origin of Species is “evolved.” People who think they can centrally plan other people into submission should evolve too.

To be clear, these are two different ideologies that you see in both political and economic thought. One camp thinks the market and economic system is one that can be “smoothed” and controlled with certainty (policy action). The other believes the global economic system is open, interconnected, and non-linear. You know which camp I’m in.

If you study the last 42 years and back out the Bernanke years (Down Dollar, Up Commodity Inflation to all-time highs), most US market historians understand the power of a #StrongDollar (“tighter” money than you have today, combined with fiscal conservatism). Unless left wing Marxists are levered up on their credit cards at home, I think even they get the #StrongDollar thing too.

So when will Bernanke acknowledge economic gravity and get out of our way?

US economic growth has accelerated from +0.38% in Q4 of 2012 to +2.5% in Q1 of 2013. The US Dollar strengthened the entire way through this #GrowthAccelerating period as #CommodityDeflation took hold.

Look at both the US Consumption side of the US economy (very strong in Q113) and the consumption sectors of the US stock market (here are the inflations and deflations for 2013 YTD):

  1. US Healthcare Stocks (XLV) = +18.68% YTD
  2. US Consumer Staples Stocks (XLP) = +17.31% YTD
  3. US Consumer Discretionary Stocks = +15.12% YTD 

Vs.

  1. CRB Commodities Index (19 commodities) = -2.3% YTD
  2. Brent Crude Oil = -5.9% YTD
  3. Cattle = -6.7% YTD
  4. Corn = -7.6% YTD
  5. Wheat = -7.9% YTD
  6. Coffee = -9.7% YTD
  7. Sugar -10.8% YTD
  8. Gold = -12.1% YTD
  9. Copper = -13.2% YTD
  10. Silver = -20% YTD

Do you hear me now, Ben? Do more of this. Do more of nothing.

On a 3 month duration, the US stock market gets this inasmuch as it did in 1983-89 and 1993-99 (#StrongDollar periods). Our intermediate-term TREND correlation between the USD and US Stocks (SPY) = +0.72. USD vs Commodities (CRB Index) on a 3 month duration is -0.71. It’ll keep working, unless Bernanke says he’ll devalue the Dollar again. Distant Peoples, Unite!

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, EUR/USD, USD/YEN, UST10yr Yield, VIX, and the SP500 are now $1, $98.07-104.83, $81.58-82.63, $1.29-1.31, 97.11-100.93, 1.66-1.76%, 11.67-14.29, and 1, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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