This note was originally published at 8am on July 29, 2013 for Hedgeye subscribers.
“An island cannot rule a continent.”
I don’t know about you, but I find myself putting most consensus channels of market and “economic” information on mute these days. Life is simpler that way. Markets can be simpler too – if you take big government politics out of them.
Thomas Paine wrote “Common Sense” anonymously in 1776. It was only 48 pages long but one of the most influential writings in US history. As US historian, Joseph Ellis, recently wrote: “both the style and the substance of Common Sense were true to its title… replicating the vocabulary of conversations by ordinary Americans in taverns and coffeehouses…” (Revolutionary Summer, pg 11)
Sometime after filling up my tank with $4.24/gallon gas this weekend, I was reading that book at home. Then I got out of my chair and glazed over Obama’s comments about the next Fed Chairman in the NY Times. He said he wants a “Fed Chairman that can step back and look at that objectively and say, let’s make sure that we are growing the economy.” Then I started laughing.
Back to the Global Macro Grind…
The final blow to anyone who is full of it is usually the truth. We see this in every aspect of our lives, so there’s no reason why any of these people who operate under the assumptions of big government Island Economics will be remembered by history any differently.
Although at varying paces, time tends to solve disconnects between fact and fiction. But in between now and then we have to deal with real-time market prices and expectations.
The expectations that the outgoing (and incoming) Fed Chairman is going to try to “grow the economy” with a weak currency are pervasive. Last week’s rumoring of either Larry Summers or Janet Yellen running the Fed had something to do with:
- America’s Purchasing Power (US Dollar) dropping -1.1% wk-over-wke
- Consensus buying the living daylights out of Gold futures and options contracts
- The net long position in Oil futures and options contracts hitting an all-time high
As history buffs like to remind short-term political types, all-time is a long time.
If the President of the United States thinks that having the all-time low (of any US President) in America’s Purchasing Power alongside the all-time high in gas prices is success, that’s just plain funny and sad all at the same time. #Half-BakedClassWarfareIsland
Mr. President, if you are more than just lip servicing people who are on fixed budgets, have Bernanke or Yellen get on 60 Minutes and announce to the world that the USA is raising interest rates next weekend. Both the Gold and Oil price will crash. And The People will like it.
Instead, here’s what futures and options contracts (i.e. our entire profession trying to front-run the Fed) are betting on:
- Total CFTC Commodities futures and options contracts were +7.4% wk-over-wk to +615,140 contracts
- Crude oil contracts were up another +10% wk-over-wk to +334,094 = all-time high
- Gold contracts ripped +26% wk-over-wk to +70,067 (up for 4 weeks in a row)
Yep. So much for the only bull case for Gold that made any short-term sense (that “everyone is short Gold”). Everyone is getting right levered long the Bernanke Bubble again! It’s still crashing YTD (-21.4%), but who cares? Isn’t this just great for the country?
To be clear, the opportunity to replace Bernanke with someone who doesn’t devalue the Dollar, monetize a record amount of US debt, and socialize crony banker losses, is one of the biggest President Obama has had in his career.
But does he get that?
I doubt it – that said, I did take my kids to see Monsters University yesterday, and that movie reminded me that there always is a chance! Meanwhile, Mr. Market is actually begging for a Fed head who gets having a #StrongDollar #RatesRising policy (i.e. a pro-growth policy):
- The Russell2000 is = +7.3% for the month-to-date, and +23.4% YTD
- Top 25% EPS Growth Stocks = +6.1% for the month-to-date, and +23.7% YTD
- Low Yield (growth) Stocks = +5.1% for the month-to-date, and +26.4% YTD
But, if Obama wants to get Summers or Yellen in there, we can always go back to the Island Economics that both he and Bush II had. How does a 0% rate of return on your hard earned savings accounts forever, $2000 Gold, and $160 Oil, sound?
Our immediate-term Risk Ranges are now as follows (*reminder: 12 Global Macro Risk Ranges are in our new Daily Trading Range product as well):
UST 10yr Yield 2.50-2.64%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer