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"Not everything that is faced can be changed. But nothing can be changed until it is faced."
~ James Baldwin

Although the title of this note implies I may be teeing myself up for another rant about monkeys clanging for bananas, I’ll spare you my attempt at a zookeeper’s humor. I’m going to shift the Washington/Wall Street global macro debate this morning to a much more sophisticated place – a children’s television series.
 
Our subscribers in the UK will need no introduction here, but The Clangers are an iconic musical band of British characters who originated from the series of “Noggin” books. Yes, to all you Mom’s and Dad’s out there – you know Noggin! – it’s the network of Dora The World Peace Explorer and Sheila Bair’s best buds, Go Go Goldman Geithner.
 
Although the US government refuses to face the fiddle on this, the Buck continues to Burn. The US Dollar Index is trading down for the 5th consecutive week, hitting new year-to-date lows yet again this morning. Meanwhile, the Three Willfully Blind mice (Bernanke, Summers, Geithner) say nothing about the common man’s currency.
 
According to Wikipedia, “The Clangers looked similar to mice, anteaters and, from their pink colour, pigs. They wore clothes reminiscent of Roman armour and spoke in whistles”…  Cash for the Compromised and Conflicted Clangers who are debasing our Currency - ah the alliteration…
 
My submission is that our children will look back on this period in American history for what it is – amazing and ridiculous, all at the same time. We wake up to a Treasury Secretary clanging the alarm bells that Sheila Bair needs to fall in line and let the Federal Reserve oversee this entire gong show. We wake up to Larry Summers not saying a word about the currency his economic team is at least supposed to attempt to support. We need to wake up this morning and seriously smell the coffee here.
 
Get your local 200-day Moving Monkey to pull up a 38-year chart of the US Dollar (1971 is when Nixon abandoned the gold standard, officially making the US Dollar the world’s currency reserve whereby bankers have had the almighty powers to create limitless leverage). That clanging monkey will quickly come to realize that there is no support for the US Dollar other than the only reference point that remains – the 38-year LOW that we established last year BEFORE the US stock market crashed.
 
The Clangers would rather spend their time talking about another $2B in socialized aid for clunkers this morning than address this point. At the same time you have Wall Street analysts waiving off one of the bastions of what was once American corporate credibility (General Electric) having to pay $50M for fudging their numbers as a “small sum for GE.” Non-fictional stories do have inconvenient truths…
 
Think about that thing the Rolling Stone dude said was wrapped around the face of humanity for a second and think some more. The Clangers are running around this country accusing the Chinese of “manipulating” their numbers as they continue to crush whatever credibility we have left. Again, history has a hard core way of writing herself long after the impacts of these political decisions have been made. For everything that happens to this country between now and that, the best investment advice I can give you is this – pray.
 
Hope and prayer are a cornerstone of many people’s lives, but hope is not an investment process. If The Clangers think for one more second that the American public is stupid, this is only going to get ugly. This morning’s weekly read on US Consumer confidence (the ABC/Washington Post weekly poll) quantifies this point. As the US stock market makes daily and weekly highs, Obama’s approval ratings and the American consumer confidence that backs it continue to threaten to make new lows.
 
Politicians, Bankers, and Debtors are all under the same short term gun here – if the Clangers don’t Burn The Buck, not one of these three core constituencies gets paid. As those recipients of a crashing currency frolic in their “Roman armours and speak in whistles”, there are two big losers here: America’s Creditor (China) and her Common Man.
 
Part of yesterday’s intraday stock market recovery was based on the US Savings rate dropping from a 14-year high of 6.2% to 4.6%. This launched a squid onto the face of the super duper smart short seller of everything American consumer. Trust me, I shorted the US Consumer Discretionary ETF (XLY) a few days ago – I get the pain trade.
 
America’s New Reality remains: if the Clangers are going to give away cash and keep interest rates at this fictional storytelling level of ZERO, guess what? People won’t save!
 
If you always keep in mind who gets paid, your macro conclusions will be far less trivial than Go Go Geithner and Burning Buck Bernanke’s current Depression paralysis. The Bank of England’s chief, Mervyn King, is signaling to the global macro crowd that he is done with Quantitative Easing. This comes on the heels of the world’s most competent central banker, Glenn Stevens at the Reserve Bank of Australia, signaling that his next move is to take interest rates up.
 
This Noggin Horse has left the barn folks. Reflation’s Rotation is in motion. Come Q4, reported inflation will be upon us here in the USA, as will Ben Bernanke chasing his own Clanger tail right up the slope of the yield curve that continues up into the right.
 
My immediate term TRADE target for the SP500 is 1,006 and my downside support moves to a higher-high at 986.
 
Best of luck out there today,
KM


LONG ETFS

XLV– SPDR Healthcare Healthcare has really struggled over the course of the last four days giving us a reasonable re-entry point. Buying red.  

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.

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.

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.

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.

GLD – SPDR Gold - 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.


SHORT ETFS

XLP – SPDR Consumer StaplesWith the US dollar looking to put in an immediate term low, this sector’s recent “theme” of being a weak USD beneficiary should dampen.

XLI – SPDR IndustrialsWe don’t want to be long financial leverage, which is baked into Industrials.

EWI – iShares ItalyItalian 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 and 8/3, which is finally overbought.

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, 7/22, and 8/3.

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.