“Look, I want to hear your opinion.”
-George F. Kennan
One of the hardest things to do in this profession is to check your position at the door and listen to the other side of the trade. Some opinions matter; some don’t. The market’s opinion always matters – so don’t just hear Mr. Market; listen to him very closely.
Our all-star energy analyst, Kevin Kaiser, and I had the opportunity to debate one of our best short ideas with the top holder of the stock yesterday. This wasn’t this 70 year old hedge fund manager’s first rodeo. Herniated disc in his back and all, he took the meeting with us during the market open. He had plenty of other things going on, but he really listened to our opinion. #Respect
At one point in the meeting, the debate between Kaiser and the analyst in the room got so intense that the PM decided to call the CEO of the company in question. He got the exec on the phone within a minute, told him what the bear case was (right in front of us), and asked for his opinion. Watching him listen to the CEO’s answers made me smile. Questioning and listening like that is not easy.
Back to the Global Macro Grind…
This game isn’t easy. Laden with our individual confirmation biases, we are all hostage to being human while we play it. There is a real-time score on every decision we make. Our opinion is marked to market every day. If you don’t love that; you don’t love the game.
I’m not always sure if I am getting dumber or smarter each day. From a Global Macro Strategy perspective, that’s why I find it useful to study history – and not just market history – but the history of decision making. What was the process? Were they making decisions within an open network of information? What dogmas, agendas, and conflicts of interests impacted those decisions?
I just finished reading George F. Kennan’s brick of a biography. It’s thick because the man lived 101 years and kept strategizing until the very end. He never retired because he never stopped questioning, listening, and thinking. He was one of the most introspective and self-effacing strategists I have ever studied. If you had a seat at the table in a meeting with him, your opinion mattered.
“The thing you were planning for took place the day before yesterday, and everyone who wants you to know why in the hell you didn’t foresee it a long time ago.” –George F. Kennan (pg 277)
Which brings me to today…
Mr. Macro Market’s opinion (#StrongDollar, Down Gold, Up Stocks) into Ben Bernanke’s testimony to Congress today is now old news. Why in the hell didn’t people foresee that there would ultimately be an end to these ridiculous expectations of endless QEs?
Why isn’t my opinion on expecting no more incremental easing equally ridiculous?
This is what makes a market. This is also why I spend so much time on both the road (seeing clients) and on Twitter (reviewing credible criticism of my positions). It’s not personal. Everyone’s goal in this game is to be right for the right reasons.
The aforementioned Kennan quotes came out of the US State Department policy planning meetings of 1. At the big turns in US policy history (post WWII in this case), respecting the pattern of decision making is critical.
Is Bernanke at the turn?
If you use the economic data for an opinion, he definitely should be. He’s been effectively easing monetary policy now since the day he took his seat as the head of the Fed in 2006. It’s been a long death march for conservative US Savers that needs to end.
What major macro markets have already front-run him making the turn?
- US Dollar Index = Bullish Formation (anything tighter, on the margin, is bullish for a currency that’s been devalued)
- Gold = Bearish Formation (up for 12 straight years with the last 6 of them becoming Bernanke’s bff, ending)
- US Treasury Yields = Bullish Formation (provided that our long-term TAIL risk line of 1.82% on the 10yr holds)
But will 1.82% on the 10yr hold? Will Bernanke acknowledge economic gravity? I don’t know. But neither my opinion nor yours will matter come 10AM EST. Pencils down – your central planning overlord will issue his un-elected opinion.
I think I know how our CYA State of The Union in this country got to this point. But the more history I read, the less I know about how politically conflicted and compromised it really was all along.
There’s nothing I can do about that history now. Neither can you. The best we can do each and every risk management morning isn’t playing the game we’d all like to play. It’s to play the game that history has put in front of us.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $102.16-105.13, $3.26-3.39, $83.57-84.69, 101.49-104.62, 1.82-2.01%, 12.18-13.79, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: Keith bought back shares of Lennar (LEN) this afternoon on strength in the nation’s housing market.
Keith bought shares in Lennar (LEN) at 12:34pm today at $42.34. Miami-based Lennar is one of the country’s largest new home builders.
Keith writes of his purchase of LEN stock, “(I’m) buying back our long #HousingsHammer position on an immediate-term TRADE oversold signal.”
Keith has already had two winning trades on the long side of LEN since March.
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Takeaway: We still don't see material upside to 2013 consensus estimates across consumer staples.
Offered with minimal commentary, other than to say that revenues were marginally light of consensus and EPS modestly ahead, on average. We still don't see material upside to 2013 consensus estimates across consumer staples.
Here's an all-encompassing look at Q1 consumer staples earnings in a single chart.
Takeaway: It’s critical to pay close attention to what the US dollar is doing. If you get the dollar right, you get a lot of things right.
It’s critical to pay close attention to what the US dollar is doing in the immediate term, as it serves as a good indicator of what lies ahead in the intermediate and longer term.
- On a three week basis, the S&P 500 versus the USD has a remarkable, positive correlation of +0.91. That is just fantastic. (Correlation of course is a statistical measure of how two securities move in relation to each other. Correlation varies from +1 to -1. Values close to +1 indicate a high-degree of positive correlation while values close to -1 indicate a high degree of negative correlation.
- Meanwhile, the 10-year bond yield positive correlation versus the USD is +0.92 on a 3-week basis. That’s better than fantastic.
- To top it off, gold has a negative 3-week inverse correlation of -0.87 against the dollar.
Is that telling you something?
Bottom line: If you get the dollar right, you get a lot of things right. The dollar is getting stronger folks, not weaker. And that’s why we’re not ready to get off the bullish rocking horse.
Check out the chart below. It shows the performance of the USD index which has risen sharply since January. Note the table which shows the key correlations between the dollar and the S&P 500, commodities, 10-year Treasury and gold.
Volcker – The Triumph of Persistence, by William L. Silber (2012)
- Published in 2012, this book provides fresh (and timely) historical context on the causal factors affecting the US Dollar
- Monetary Policy Style: critical contrast between the McChesney/Volcker Feds and the Burns/Bernanke Feds #study
- The book’s mapping of the sequence of political decisions made prior to Gold’s top in 1980 is well done (Chapter 11, New Territory)
- “Five American Presidents (3 Democrats, 2 Republicans), spanning nearly half a century, have called on Paul A Volcker to serve…” (pg 1)
- “Do not suffer your good nature to say yes when you ought to say no” –George Washington quote hanging in his father’s office (pg 15)
- “I never got along with the coach” –Volcker on his basketball coach @Princeton (1) #athlete (pg 17)
- “Morgenstern… left his mark by turning Paul into a professional skeptic” #German born economist, author of Theory of Games (pg 17)
- “Martin thought economists’ forecasts rivaled the accuracy of fortune tellers” #WilliamMcChesnyMartin, one of Volcker’s heroes (pg 21)
- “Kennedy Pledges He Will Maintain The Value of The Dollar” @NYTimes headline #1960, Gold was $35/oz - #perspective (pg 23)
- “Gnomes are imaginary, but speculators are not.” #1960s roots of our friend @DougKass macro machinations? (pg 27)
- “All I can remember after that was a word flashing in my brain like a yellow caution sign: Bullshit” #Samuelson #Keynes policies (pg 31)
- “Hayek’s words forever linked inflation and deception deep inside my head. And that connection, which undermines trust in government” (pg 33)
- “Charles de Gaulle pursued Gold the way Henry VIII did wives.” #1965 context #zeigeist of the times very different than today (pg 42)
- “If the US could change the rules in March 1968 and stop selling Gold… it could amend them further” #1968, Martin #StrongDollar (pg 50)
- “Failure to maintain those promises undermines trust in America. And trust is everything.” #1969, epic #StrongDollar quote by #JFK (pg 53)
- “Preserving the Dollar’s status had been the focus of Volcker’s favorite committee” #1969 Volcker Group, de Gaulle resigned 1969 (pg 60)
- “Chairman Martin wants to raise the discount rate.” But #LBJ wanted nothing of it (neither did Nixon) #USD credibility 1969 (pg 69)
- “Soon after becoming Fed Chairman in February 1970, Burns began to ease…” sound familiar? #Bernanke, didn’t work either (pg 72)
- “We can’t afford to risk a downturn, no matter how much inflation” –Nixon #1970 w/ #Burns Fed, conflicted/compromised (pg 73)
- “August 15, 1971… Nixon stunned the world in a televised Sunday night address” #GoldStandard, gone – thanks Nixon (pg 79)
- “The Coming Devaluation of the Dollar” @NYTimes May 1971, yep #sad – where it all started #Burns/Bernanke (pg 101)
- “If I have to talk to Burns again I’ll do it. Next time I’ll just bring him in” –Nixon, goodbye “independent” #FederalReserve (pg 105)
- “I don’t give a shit about the Lira” –Nixon, #1972 Dollar Debauchery (pg 110)
- “The difficulty is that no one is ever prepared to move except in a crisis” –Volcker #1973 (Shultz announced a 10% USD devaluation) (pg 117)
- “Burns exploited Volcker’s fixation with public service to persuade him to accept the Presidency of the Federal Reserve of NY” #1975 (pg 125)
- “The public’s resentment made sense, considering that consumer prices surged by 12% during 1974”, #output of 1971 Policies To Inflate (pg 129)
- “Whip Inflation Now” #WIN buttons for Jimmy Carter, elected into office #1976 to do a job he didn’t accomplish; #1970s = Stagflation (pg 133)
- “It’s the same old story – lack of confidence in US government policies” –Currency Analyst (in #Frankfurt), sound familiar? (pg 139)
- “Volcker participated in the Dollar rescue by requesting an increase from 8.5% to 9.5% in the discount rate” #1978 (pg 140)
- “I am not particularly eager to make a major move now or in the fore-seeable future.” –Volcker #1979, so #Gold rallied one last time (pg 156)
- “I think there’s a need to come in here as inconspicuously as possible… at diverse hotels” –Volcker #1979, no #Bernanke style #leaks (pg 165)
- “The price of Gold hit an all-time high of $850 an ounce on Monday, January 21, 1980” #study history vs causal #Fed factor (pg 182)
- “Jimmy Carter ended his honeymoon with Paul Vocker on October 2 , 1980, a month before the presidential election” #compromised (pg 190)
- “Partisan politics ought not be around the Dollar” –William McChesney Martin #Patriot #1980
- “Milton wants to abolish the Fed” –Arthur Burns #1980, the American #zeitgeist was very 2011 @RonPaul #libertarian (pg 194)
- “Do we really need the Fed” –Ronald Reagan #1980 message resonated with common sense (pg 195)
- “We obviously have a credibility problem – by “we” I mean the United States” –Volcker #1980 in “To Be or Not To Be a Central Banker” (pg 197)
- “People have to change their expectations and their behavior… that is always an uncomfortable process” –Volcker #1980 (pg 198)
- “I was very pleased to read a prediction that the price of gold will nosedive below $300/oz” –Reagan #1980 #StrongDollar leadership (pg 200)
- “None of us really understands what’s going on with all these numbers” –David Stockman (#Reagan’s Budget Director) #classic (pg 209)
- “He now refers to you as Paul rather than Chairman Volcker” #Reagan understood #StrongDollar tax cuts #commodities (pg 214)
- “I think we’ll re-appoint Paul Volcker for about a year and a half. He doesn’t want a full term” –Reagan #1983 #winning (pg 233)
- “Having 2 or 3 $40B institutions in trouble is a horse of a different color” –Volcker in #1984 as #ContinentalIllinois was imploding (pg 243)
- “Keynesians such as Samuelson said it was impossible, monetarists such as Friedman said Fed was doing wrong” #1985 Volcker right (pg 247)
- “Volcker resigned twice, but only one stuck” post #1985, James #Baker politicized everything all over again #PlazaAccord (pg 252)
- “The role you have played has been invaluable” –Margaret Thatcher on #Volcker #1987 (pg 265)
- “I may be old but I am persistent” –Volcker #2010, #Volcker Rule
- “Foreigners hold Dollars because America has demonstrated fiscal and monetary integrity” #basic, pure #Constitution (pg 298)
An easy read that will educate people on how central planning has become so causal to American Purchasing Power (US Dollar) and inflation/growth expectations.
Keith R. McCullough
Chief Executive Officer
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