"Tis a common proof... That lowliness is young ambitions ladder."
Don't worry - I didn't spend the last week reading Shakespeare. I did, however, brush up on my late 19th century global central banking history, and that's actually where I came across that quote. The quote was in reference to an unproven country that decided to take their economic destiny into their own hands - the United States of America.
While many a British short seller of America's 20th century has rendered himself a secure job as a Scottish golf caddy, I left Edinburgh yesterday wondering what an American short seller of China's 21st century might end up doing... super size them fries for me there laddy!
On this continent, US investors should continue to open their minds to The New Reality of global macro winds that continue to blow onto her shores. They're real, and oh' are they a changin'.
While the easiest thing for an American investor to do is assume that he is smarter than everyone else and that the Chinese are making up their numbers, it's also proving to be the dumbest thing to do.
Whether you're having a pint in the highlands of the United Kingdom or sippin' on some Sapporo in Japan, if you have a television today you're going to see Madoff as frequently as you see Michael. They are both performers. They are both American. If your investment thesis is that the rest of the world lies, please take a look at the man in the mirror and re-adjust that set.
This morning I am waking up to a Chinese stock market that is hitting another fresh year-to-date high. In addition to effectively signaling that Q2 GDP will be reported at a higher growth rate than the +6.1% that was reported in Q1, Chinese central bank chief, Zhou, said China's reserve policy is aimed at "liquidity, safety and returns." I like that.
All the while, the American manic media is anchoring on Zhou's comment that China will not make any "sudden" changes to their currency policy. This has investors who completely missed the mother of all REFLATION trades perplexed. Hate to break it to you CNBC, Zhou's comments aren't perplexing - buying REFLATION stocks high at the lows of a Broken Buck in mid-June is!
When it comes to managing his largest position, no rational risk manager would ever signal to the world that he is going to start behaving like a crackberry addict. Do US centric investors think we are going to get a memo one day from the Chinese that 'today is the day we are blowing out of Treasuries'? C'mon. Let's be serious here.
Inclusive of locking in another higher-high last night, the Shanghai Stock Exchange is seriously in the green for 2009. At a closing price of 2,975 I'll proactively predict that you're going to see a cover story on Barron's sometime soon about a "China bubble". Right now, most people who missed the crash are bubble pros don't forget. That's what the "I'm smarter than you" does.
What is it that you do? I think that's the question that people managing countries, currencies, and companies will have to answer in the 21st century. As the Chinese sign a hugely relevant deal with Hong Kong this morning to settle international trade in Chinese Yuan, I think they are telling us what it is that they do. They are taking their destiny into their own hands.
China is The Client. China wants "liquidity, safety, and returns." China wants the world to buy into one of the 33 IPO's they have on tap ($10B in issuance).
China doesn't want Bernie Madoff. China doesn't want Alan Stanford. China doesn't want any more US Treasuries (April Treasury data shows that the Chinese actually had a net outflow of US Treasuries to the tune of $4.4B. Outflows mean they are a net seller).
I know, I know... a billion dollars isn't what it used to be in this country. But then again, the Dollar isn't going to be the world's dollar like it used to be either. As we think about this "150 years" that will grip post weekend at Bernie's headlines this morning. I think we need to keep thinking about what them British caddies are still whining about missing 100 years back. The lowliness in which some currently regard this young Chinese economic power is their ambition's ladder.
I continue to think that the bubble and crash callers will be frustrated by a US market that, while still trading -61.8% lower than the Chinese stock market YTD, will continue to trade in a proactively predictable range. This morning I have downside support for the SP500 at 910, and upside resistance at 930.
Best of luck out there this week,
EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.
QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.
EWC - iShares Canada - We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.
XLE - SPDR Energy - We think Energy works higher if the Buck breaks down.
CAF - Morgan Stanley China Fund - A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.
TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.
XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.
XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.
SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.
UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback.
EWW - iShares Mexico - We're short Mexico due in part to the repercussions of the media's manic Swine flu fear. The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.
"Tis a common proof... That lowliness is young ambitions ladder."