This note was originally published at 8am on August 05, 2013 for Hedgeye subscribers.
“In general, our Generals were out generalled.”
While that’s what John Adams wrote to his wife, Abigail, in October of 1776, it wasn’t an entirely accurate summary of what happened. The planned escape of American forces in October was based on a British battle lost, but it also helped them win the war.
Per Joseph Ellis in Revolutionary Summer, on September 5th, 1776, American General, Nathanael Greene, advised George Washington that a “retreat is absolutely necessary, and that the honor and interest of America require it.” (Ellis, page 135)
Although it wasn’t Washington’s style to retreat, Greene was right in advising the Continental Army to do what the Continental Congress probably wouldn’t understand. Out generalling the conventional wisdom of politicians requires flexible leadership.
Back to the Global Macro Grind…
With the US stock market closing at yet another all-time high on Friday (SP500 +19.9% YTD), I’m advising the US Government to retreat from Quantitative Easing and let free-market prices start to clear.
While Bernanke has the Congress right freaked-out about the idea of interest #RatesRising, it’s the only way out of the long-term slow-growth problem they have perpetuated under both Bush and Obama economic policy making regimes.
Let the US Dollar strengthen and let US interest rates rise and you’ll get two big things:
1. Continued #CommodityDeflation
2. #Debt Deflation
Deflation isn’t a bad word inasmuch as retreat isn’t – so don’t let your local Keynesian of the Princetonian Econ 101 Regimen sucker you into thinking so. Inflations have caused more depressions in the last 180 years than deflations have (*Atkeson/Kehoe study).
What’s better, filling up your gas tank 10x for $100/pop, or filling it up 10x for $50? Send that brain teaser to someone on team Bernanke that takes a tax payer funded car service to work.
Tapering expectations have already:
- Raised the value of American Purchasing Power (US Dollar) by +3% YTD
- Deflated the value of Commodities (CRB Index, 19 commodities) by -4% YTD
- Crushed the net long futures and options spec positions in everything but Crude Oil contracts
If and when the debate moves from tapering to tightening, I think that we’ll finally get after some deflation at the pump. But we’re nowhere near having an economic General in the Obama Administration stand up for the little guy on this front (yet).
Looking at last week’s CFTC futures and options activity, a #StrongDollar #RatesRising week had the following impact:
- Total CFTC net long commodities position dropped -15% wk-over-wk
- Gold’s net long position fell for the 1st week in 5, down -7% wk-over-wk to +65,517 contracts
- Crude Oil’s net long position fell for the 1st week since late June, -5% wk-over-wk, to +318,819
To put that +318,819 net long position in Crude Oil in context, that’s 1-week removed from its all-time high. If you’re telling me Obama and Bernanke couldn’t smoke the oil price via monetary policy, I’ll buy you dinner (on them) for life.
#CommodityDeflation has helped drive the core of US Consumption Growth for the last 2 quarters, but that’s going to be less of a tailwind if Oil prices continue to trend higher. Last week, Brent Oil was up +1.7% - and it’s up another +0.3% this morning to $109.30/barrel. Our long-term TAIL risk line (to the upside) for Oil = $107.71/barrel.
Put another way, after getting smoked by Bernanke’s Policies To Inflate for the last 6 years, the US Consumer just got some purchasing power back and won a few quarterly battles. But if we don’t back off (taper) and eventually tighten, it’ll be your every day American who loses the inflation war.
Our immediate-term Risk Ranges are now:
UST 10yr 2.54-2.72%
Brent Oil 107.99-109.67
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer