This note was originally published at 8am on July 01, 2013 for Hedgeye subscribers.
“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