“By continuing a process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
-John Maynard Keynes
I tend to surprise some investors whenever we are talking “macro” and I remind them that John Maynard Keynes wasn’t (initially) a government Yes Man. Today’s manic financial media tends to think of him as a beacon for big government spending. Don’t forget that Keynes made a name for himself by chastising and mocking the British government’s economic policies.
Most economic strategists and forecasters get respect after they are dead. I get that. That’s just the way life goes. Keep in mind that Keynes was only 36 years old when he penned some of his most influential writings.
Warren Buffett wrote an Op-Ed this morning that will get a lot of people’s attention. In that piece he cited Keynes’ aforementioned quote. Since this sounds a lot like what I have been pounding the monkey cage on for the last 3 months, I smiled and took a big bite of my banana.
I could care less if your run of the mill revisionist Wall Street economist disagrees with me on the US Government Burning The Buck. 1. It’s a mathematical reality, and 2. If Buffett (and now PIMCO this morning as well) supports the “view”, there will be more than one dog barking from here on in. Monkeys get excited when dogs bark.
One of the key differentiators between the time that Keynes made this critical point on currency led inflation and today is this thing called You Tube. In all economic crises past, governments have been able to maneuver “secretly and unobserved.” That’s changed. We’re watching every move that the old boys in De Club are making. They will be held accountable.
PIMCO calls it the “New Normal”, and I get how that ring tone nestles nicely into the Street’s narrative. Nine months ago, I labeled it “The New Reality”, and despite getting overridden by PIMCO, I’ll humbly re-submit one of our core Q4 2008 Macro Themes. The New Reality of financial forecasting is to uphold these 3 basic principles: Transparency, Accountability, and Trust.
That’s it – very simple. Show us, Mr. Geithner, what it is that you do. Be accountable to your global macro investment process and what you are doing to this country’s currency. We’ll decide whether or not we trust you. That’s The New Reality.
Whether it’s Buffett finally You Tubing the US Government’s debt issuance as a “gusher of federal money” or PIMCO’s Curtis Mewbourne posting on his company’s website that he effectively sees the US Dollar as losing its status as the world’s reserve currency, it’s all the same point – it’s the point we continue to hammer on. It’s the point that those who are surveying the world as an interconnected marketplace of colliding economic factors understand. There is no “I” in USA.
Some people use monkey charts - I use mathematical inputs born out of complexity theory to come up with my risk management levels. Complexity theory allows me to find deep simplicity in investment conclusions. That’s all my Q3 Macro investment Theme of Burning The Buck boils down to. One simple and dominating investment point that’s been born out of a very dynamic ecosystem of interacting global macro factors.
So, Dear Mr. Buffett – before we run into the long term TAIL of inflation output (Q409), here’s the intermediate term TREND call. US Dollar down = everything priced in US Dollars up. US Dollar up = everything priced in US Dollars down. That’s it. That’s still the call.
Inverse correlations in global macro aren’t perpetual. As they morph into consensus, returns get crowded out. With respect to our Q3 Burning The Buck theme, we haven’t seen daily, weekly, or monthly returns crowded out yet.
On Monday, with the US Dollar up, I made purchases. Yesterday, with the US Dollar down, I made sales. Buy low; sell high – rinse and repeat.
In sharp contrast to the zero-accountability model that most “economists” and sell side “strategists” abide by, The New Reality model of responsibility in recommendation here at Research Edge empowers me to be fully transparent with every market move I make. All of the long and short sales I made in our virtual portfolio have a time stamp on our portal at www.researchedgellc.com. No, I don’t have a “conviction buy” list versus a “buy” list. Whatever that means…
With the US Dollar down yesterday, I made long sales in COW (cattle/pork ETF), XLB (Basic Materials ETF), and Cardinal Health (CAH). On the short side, I shorted CKE Restaurants (CKR), Darden Restaurants (DRI), Eli Lilly (LLY), Research In Motion (RIMM), and AutoZone (AZO).
All of these tickers were green when I sold/shorted them. I like selling green bananas to the monkeys who will eat them. With the US Dollar trading up this morning, I’ll be looking to buy/cover on red. I learned these rules as a child watching street lights. I know, a monkey could do the same.
My immediate term TRADE support for the SP500 is now 979 and I have immediate term upside resistance at 1,000.
Best of luck out there today,
XLK – SPDR Technology — Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.
EWC – iShares Canada — We bought Canada on 8/11. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.
USO – Oil Fund—We bought USO on 8/10 and 8/17. As the Buck breaks we want to be long oil.
QQQQ – PowerShares NASDAQ 100 — We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.
EWG – iShares Germany —Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe’s largest economy, which posted a positive Q2 GDP number.
XLV– SPDR Healthcare — Healthcare has lagged the market as investors chase beta. With consumer confidence down and the reform dialogue turning negative we like the re-entry point here.
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.
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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient 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.
VXX – iPath VIX –As the market rolled over and volatility spiked, we shorted the VXX on 8/13.
UUP – U.S. Dollar Index – We believe that the US Dollar is a 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 US dollar.
DIA – Diamonds Trust- We shorted the financial geared Dow on 7/10 and 8/3.
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.
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.