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"Show me a hero and I will write you a tragedy."
-F. Scott Fitzgerald
If you spend enough time in the group-think tanks of Washington economics, you start to believe in your own storytelling. On Jim Lehrer's PBS town hall with Ben Bernanke this weekend, the Federal Reserve Chairman stated plainly that he was "not going to be the Federal Reserve chairman who presided over the second Great Depression."
Ben Bernanke, thank you so much for saving me. You are my hero.
This is the very same man who is allegedly an academic messiah of Depression histories. This is the very same man that no less than 3 months ago was signing off on a compromised and conflicted fear-mongering campaign that bailing out Wall Street had to be done or the end of the earth cometh. This is the very same man who is using his history books and lagging economic indicators to prognosticate the future of America's economy. This is a tragedy.
Obviously, if Bernanke was the hero of this story the US currency wouldn't have traded down for the 3rd consecutive week last week. Alongside Goldman printing $5/share in earnings and Citigroup paying a trader $100M (yes, that's million), 99% of Americans who are allowed to, get the joke. The joke is that Bernanke doesn't get that he is the lemming that's getting the Debtors, Bankers, and Politicians paid.
Lemming? That's harsh Keith. Yes, folks, and so will our commoner lives be if I am right and we see what I have been calling for in the 4th quarter - reflation morphing back into inflation. While the high side of my Range Rover macro theme for Q3 was off the mark, my other 2 macro themes (Burning The Buck and Reflation Rotation) continue to play out in lock step.
This morning you are seeing the US Dollar Index trade down again to $78.56. This is only the 4th time in almost 40 years that the $78 level has been tested. That matters.
Since March, the world's reserve currency has basically crashed. I know, I know - Barron's is calling for "Hello 9,000: The Dow's Run Is Far From Over", but there is a loser in the game of everything priced in US dollars reflating - the Dollar! The US currency has lost -12% of her credibility in less than 4 months. That's a crash.
Rather than appearing on 60 Minutes, PBS, and writing Wall Street Journal Editorials, I suggest Mr. Bernanke starts spending some time looking at real-time, marked-to-market, leading economic indicators. Since it's clear that he hasn't done the math, here are some things to look at:
After keeping a completely politicized "emergency" level of a Fed Funds rate at ZERO, look at what these prices have done in the last 2 weeks:
1.      The CRB Commodities Index +7.5%

2.      Oil +15%

3.      Copper +14%

4.      Gold +5%

5.      SP500 +11%

6.      10-year US Treasury yields 3.71%

As Bernanke hinged his cart to the conflicted, saying that he'll change his monetary policy "when the economic outlook requires us to do so", the world simply sold more US Dollars, and continued to buy everything else. If America is willing to let her currency burn, why hold any more of it?
Have no fear, our super heroes Hillary Clinton and Timmy Geithner are here. This week, China is sending their B-team to Washington to meet with our equivalents of Dora The World Peace Explorer and her buddy Go Go Goldman Diego to talk about China's largest invested position. How do you think these meetings are going to go? Go Go doesn't do global macro...
Again, maybe... just maybe, Main Street isn't as stupid as Washington makes them out to be. Maybe they see the Reflation Rotation coming for Christmas 2009. Maybe that's why President Obama's approval rating just hit a new low.
Maybe people get that the "Great Depression" narrative fallacy was a purely political one. Maybe China gets that this situation is going to end wherever they decide it will. Maybe today's CNBC heroes are writing the history of the American currency tragedy right before our very eyes.
Keep those eyes wide open. The level of group-think we are seeing in the US market is generational in scope. My refreshed levels for the immediate term TRADE in the SP500 are 948 support and 990 resistance. If the Buck continues to Burn, we'll get our 990, and the said Great Depressionista bankers will get their raise.
Best of luck out there today,


QQQQ - PowerShares NASDAQ 100
-With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don't need as much financial leverage.

EWA - iShares Australia-EWA has a nice dividend yieldof 7.54% on the trailing 12-months.  With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's reacceleration, there are a lot of ways to win being long Australia.

CYB - WisdomTree Dreyfus Chinese Yuan- The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

COW - iPath Livestock - This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

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.

- Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

XLI - SPDR Industrials - We don't want to be long financial leverage, which is baked into Industrials.

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.

DIA  - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.

EWJ - iShares Japan
-We're short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY - SPDR Consumer Discretionary
- As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9 and again on 7/22.

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.