“All looting would wait until after complete victory.”
Of all the successful wartime innovations of Genghis Kahn versus oppressive 13th century kingdoms, his looting policy was one of the most unique.
“He ordered that a soldier’s share be allocated to each widow and to each orphan of every soldier killed” … “this policy ensured him of the support of the poorest people in the tribe, but it also inspired loyalty among his soldiers.”
“By controlling the distribution of all the looted goods, he had again violated the traditional rights of the aristocratic lineages...” (Genghis Kahn and The Making of the Modern World, pages 50-51). The trust of The People was his currency.
Back to the Global Macro Grind…
You can study the last 80 years of economic history or the last 800 and you will come to the same basic conclusion: Politicians eventually plunder The People, until The People push back. The pattern of behavior is not that complicated really. Think it through.
On and off for the last 40 years or so, the United States of America has engaged in the same economic plundering that European Aristocratic regimes tried inasmuch as the Ming Dynasty of 14th century China did. It works, until it doesn’t.
Economic plundering occurs when people who get paid by their political ascent devalue the purchasing power of their people. Nixon started it in 1971 and Carter continued it; Reagan and Clinton got rid of it; then Bush II and Obama resuscitated it. The only sustainably strong periods of US economic growth (1983-89 and 1993-99) in the last 40 years occurred when the Dollar wasn’t being devalued.
But you already know that…
As a result, you also know why both real (inflation adjusted) US GDP growth and the US Consumption side of the US stock market has performed so well in the last 6 months. #StrongDollar = #CommodityDeflation.
To review the last 6 months:
- US Dollar Index = +4.3% YTD
- CRB Commodities Index = -6.6% YTD
- US Consumer Discretionary Stocks (XLY) = +18.9% YTD
No, this is not new – but last week was a friendly reminder to those who live in fear of #StrongDollar Commodity and Debt Deflation that there is indeed another side to this globally interconnected trade.
Last week’s absolute and relative performance of the same was pronounced:
- US Dollar Index = +1.1% wk-over-wk to $83.19
- CRB Commodities Index = -0.9% wk-over-wk to 275
- US Consumer Discretionary (XLY) = +2.5% wk-over-wk to $56.40
And, of course, after the worst month for US stocks in 2013 (SP500 -1.5% for the month of June), Consumer Discretionary (XLY) was the only S&P Sector to close up (+0.5%) for the month.
Can we handle a 3-6% stock market correction? Can we handle #RisingRates? Can we handle the truth?
Since most Commodities trade via the world’s reserve currency, pervasively bullish moves in that currency (US Dollar) can perpetuate a global consumption #TaxCut.
Guys who are marketing 2 and 20 on levered long Gold Funds and/or Super Sovereign Credit Bubble funds (whose base premise is that savers should earn 0% rates of return in perpetuity, and like it) don’t like this at all.
But I do. I think The People do too.
And why, by the way, should it be any other way? Why should we support aristocrat bond fund managers like Bill Gross begging for Bernanke to superimpose more slow-growth policies on the US Economy?
But don’t worry, Paul Krugman agrees with Gross now – so we’ll have to deal with Bernanke being pressured by both “intellectual” and asset management aristocrats for the next 3 months as we try to handicap their tapering whispers.
Where to from here? I don’t know. I think I know what the two potential paths look like though:
- Fed tapers; the US Dollar continues to strengthen, and we buy back our US Consumption #GrowthAccelerating position
- Fed doesn’t taper; the US Dollar is devalued (again), Food, Gold, and Oil prices rip, and we’re back to US #GrowthSlowing (again)
Americans have a choice. But the scarier reality is that so do their politicians. So stand up and be heard, before it’s too late.
Our immediate-term Risk Ranges are now:
UST 10yr 2.47-2.74%
Best of luck out there this week. And Happy Canada Day!
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on June 17, 2013 for Hedgeye subscribers.
“None of them are easy.”
Making money in Global Macro markets hasn’t been easy for the last 6 months. It hasn’t been easy for the last 6 years either. I doubt the next 6 weeks will be any different. None of this is easy.
Justin Rose turned pro in 1998 and won his first Major Championship golf tournament yesterday. Rose is still only 32 years old but he is a veteran of the game. He is a South African born Brit who lives in the US. He is highly respected by his peers. He is a grinder.
Usually it takes a while, but eventually most grinders in both this business and in life find a way to win. Progressively building a repeatable process that you can evolve is the key. There are no easy wins. You have to keep learning.
Back to the Global Macro Grind …
Getting out of the way on the long side of both the US Dollar and the US stock market last week was another win for us. Today, with the Dollar and US Equity Futures up, we’ll probably get tagged with a loss.
But what is it that we do when we have a bad day? Do we fold on the process or do we embrace its challenges. Justin Rose was the 1st British player to win the US Open since Tony Jacklin (1970), and he won by shooting over par. Winning is always a challenge.
One day obviously doesn’t a TRADE never mind a TREND make – so today will be a critical one to test if it ultimately refutes or confirms what’s been developing out there in Global Macro for the last few weeks. This is all relatively new (and bearish for US stocks):
- US Dollar Index snapping $81.21 TREND support
- USD/YEN breakdown below 96.31 TREND support
- US Equity Volatility (VIX) breakout above immediate-term TRADE support of 14.52
Not unlike the greens at Marion Golf Club in northwest Philadelphia, there are plenty of elements striking down on us all at the same time out here. Whether it’s overnight buy-and-hope from Japan or gusts of wind slowing Chinese growth (Singapore Exports -4.6% y/y for May), it’s all out there. There’s No Easy Money.
At the same time as Down Dollar drove Up Oil (bearish for consumption) last week, we have a Syrian conflict to consider. We also have The Bernank’s almighty central planning to deal with this week. The latter scares me more than the former. Bernanke can, at any time, directly confiscate my ball and #StrongDollar theme. The dudes in Syria would at least need some lightning to get me off the course.
So what will our anti-free-market overlord say? Or better yet, what will he do? Will he say he will taper the green? Or will he allude to his Caddy Shack style gopher “communication tools” that can appear and disappear with a whisper of a Washington “consultant”?
Who knows (some in the aristocracy of connections actually do), but into Ben’s decision, here’s the bond market’s setup:
- US Treasury Yields (10yr) have bullish immediate-term TRADE support at 2.06%
- US Treasury Yields (10yr) have bullish intermediate-term TREND support at 1.83%
- Immediate and intermediate-term resistance for the 10yr are 2.27% and 2.41%, respectively
In other words, after another outstanding US weekly Jobless Claims report and US Retail Sales #GrowthAccelerating last week, economic gravity is pushing bond yields higher and Bernanke thinks he has to try to “smooth” that.
But how does a man bend and smooth gravity? And what would it mean, God forbid, if he just stopped with the nonsense of it all and just got out of the way? We are half a decade past the pin on an economic crisis that will only re-appear without tapering.
If he pushes out the tapering – he’s going to push down the Dollar. If he pushes down the Dollar, he is going to press oil and commodity prices higher. If commodities re-flate, real (inflation adjusted) US Consumption growth is going to stop accelerating.
But you already know that …
#StrongDollar is the path of least resistance to a sustained US economic growth recovery. And it’s getting less easy for Bernanke to spin the ball away from gravity’s hole using his anti-dog-eat-dogmatic government driver.
Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1361-1412, $105.84-108.66, $80.09-81.21, 93.56-96.31, 2.06-2.27%, 14.52-18.67, and 1605-1651, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer
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June numbers should show that regionals are not out of the woods
- May’s YoY GGR growth looked better than recent months but that’s what the Math had predicted
- The Math is projecting a sequential drop in GGR growth – down 4-5% from June of last year
- The states’ should start releasing data - as soon as this week – and estimate reductions are likely for PNK, ASCA, BYD, and PENN
TODAY’S S&P 500 SET-UP – July 1, 2013
As we look at today's setup for the S&P 500, the range is 60 points or 3.01% downside to 1558 and 0.73% upside to 1618.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.16 from 2.13
- VIX closed at 16.86 1 day percent change of 0.00%
MACRO DATA POINTS (Bloomberg Estimates):
- 8:58am: Markit U.S. PMI Final, June, est. 52.4
- 10am: Construction Spending, May, est. 0.6% (prior 0.4%)
- 10am: ISM Manufacturing, June., est. 50.5 (prior 49)
- 11:30am: U.S. to sell $30b 3M bills, $25b 6M bills
- U.S. Weekly Rates Agenda
- House, Senate not in session
- NCUA deadline for comments on its consultation on federal credit union ownership of fixed assets
- U.S. deadline for financial institutions to stop dealing in the rial, Iran’s currency, or face sanctions
WHAT TO WATCH
- Onyx seeks suitors after rejecting $120/shr Amgen bid
- Nokia buys out Siemens in wireless gear venture for $2.2b
- Euro-area PMI contracts less than estimated
- Chinese PMIs fall as slowdown persists
- Apple seeks to trademark ’iWatch’ in Japan
- U.S. 10Y ylds belong at 2.20% as Fed too optimistic: Gross
- SAC’s Cohen said to have declined to testify for grand jury
- Russell reconstitution effective as of Friday’s close
- Final Russell 1000, 2000 membership lists posted today
- News Corp. to start trading as FOXA, NWSA
- U.S. Weekly Agendas: Finance, Industrials, Energy, Health, Consumer, Tech, Media/Ent, Real Estate, Transports
- North American M&A Agenda
- Canada Weekly Agendas: Energy, Mining
- U.S. Jobs, Iran Sanctions, Croatia, Wimbledon: Week Ahead July 1-6
- No earnings scheduled by S&P 500 cos.: Bloomberg data
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- LME Seeks to Reduce Lines at Warehouses Where Wait Is 100 Days
- Hedge Funds Cut Gold Bets as Goldman Lowers Outlook: Commodities
- Rusal Urges Further Aluminum Capacity Cuts to Bolster Prices
- WTI Crude Gains After Quarterly Drop Amid Egypt Mass Protests
- Gold Gains in London as Record Quarterly Drop May Spur Demand
- Copper Rises Before Report Seen Showing U.S. Manufacturing Gain
- ICL Falls to 19-Month Low on Corn Prices, Laws: Tel Aviv Mover
- Raw Sugar Climbs in New York Before July Delivery; Cocoa Drops
- Copper Warehouses Emptying as China Imports: Chart of the Day
- Gas Exporters to Defend Pricing System as Courts Reject Oil Link
- Bullish Natural Gas Bets Fall to Three-Month Low: Energy Markets
- Dutch Gasoline Exports to U.S. Reach 11-Month High: BI Chart
- Africa’s Richest Man Vies With China Over Nigerian Tomatoes
- Rebar Declines as Pace of Manufacturing Growth in China Slows
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