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“Only the wisest and stupidest of men never change.”
This has been a fascinating, yet consistent, week. As sure as the sun rises in the east, you’re going to continue to see the market’s CNBC meme machine freak-out whenever we see a downtick. This glaring groupthink remains the asset for domestic bulls and, importantly, it went global this week with China.
Today, the crash callers of everything they missed (or trying to sell bearish books on) are staring at the 3rd consecutive up day for the US stock market, and a straight up 2-day move in Chinese equities.
One of our best risk managers at the firm, Andrew Barber, wrote a thought inspiring Chinese sentiment piece yesterday. I won’t regurgitate that this morning, but I will show in his Chinese river card. China closed up +1.7% last night, taking its two-day “shame on you for doubting us” rally to +6.2%. For all of those out there keeping score on gold medal performance: the Shanghai Composite Index is +62.6% YTD (-14.7% off its highs) while the SP500 is +11.5% (-0.49% off its highs).
This business has a sneaky way of making the “smartest” of Wall Street savants look silly. It’s a good thing no one ever accused me of being “smart”! That’s what the sell side gets paid to call their clients. I’m just another ex-hockey player grinding it out here on the early shift with my team.
Grinding works. So we’re going to stick with the game plan. As the US government Burns The Buck, everything priced in those bucks is going to continue to reflate. Erik Shatzker (Bloomberg), who I think is one of the most analytical synthesizers of everything global macro, asked me yesterday if this can continue to persist. I said, simple is as simple does. And with the US Dollar down again yesterday, yet again US stocks were up.
The only thing more dangerous than taking financial advice from a Canadian hockey player (or in Erik’s case Canadian media mogul), is taking it from guys who can do math and say “eh” at the same time! As the math changes, I do. I may not be the wisest or the stupidest risk manager in this market, but through trial and error at least you can depend on me to change.
Back to the Burning Buck (which is down another -0.47% this morning and threatening to break down through a critical level of support), you can depend on Ben Bernanke not changing this morning in Jackson Hole. At 10AM EST, he’ll pander. That’s what global currency traders are betting on, and I think they’ll be right.
As Bernanke panders to the most politicized monetary policy this country has ever seen, the Buck will Burn. For all you weekend warrior crash callers, take a look at this one: USD down -12.5% now since March – for the “world’s reserve currency”, now that’s a crash!
Of course, nothing draws a crowd to this business like something in the rear-view mirror. This morning we can add 2 more highly visible US based market economists to our year long Breaking/Burning The Buck Macro Theme: Mohammed El-Erian (PIMCO) and Joseph Stiglitz (Columbia University). Here’s what they said:
1.       El-Erian: “The question is not whether the dollar will weaken over time, but how it will weaken… The real risk is that you will get a disorderly decline.”
2.       Stiglitz: “The current reserve system is in the process of fraying… the dollar is not a good store of value. Right now, the dollar is yielding almost no return and yet anybody looking at the dollar has to say there’s a high degree of risk.”
So now the crash callers can’t ignore this. All in the same week, we’ve had Buffett, PIMCO, and Stiglitz come out explicitly with our call of The New Reality. In the immediate term, this will continue to be bullish for anything priced in dollars. In the intermediate term (3 months or less) consensus will morph into concern (inflation). In the long term, “King Dollar” will be dead.
No, I don’t mean dead, like going away dead. I mean dead as in being so dominant as the owner of the world economic debate. A strategy of creating limitless credit at the sign of every economic downturn in our home currency is over. Don’t freak out about it, just understand it, and deal with it.
Come Q4, Bernanke’s financial forecasting fallacies will be You Tubed for the umpteenth time. When he speaks in Jackson Hole this morning, think back to what he thought he saw coming down the pike at this same Federal Reserve retreat in August of last year. It’s professionally embarrassing. Even Main Street America gets this now – it’s time President Obama does too. Time to change, big man.

In the ABC/Washington Post poll this morning,  “49 percent now express confidence that Obama will make the right decisions for the country, down from 60% at the 100-day mark in his presidency… 49% now say they think he will be able to spearhead significant improvements in the system, down nearly 20% from before he took office…”

Americans aren’t all the wisest or the stupidest. As the Buck Burns, the Bankers, Debtors, and Politicians get paid. Americans don’t. And as the stock US stock market tests new year-to-date highs this morning, we’ll all just have to sit back and think about that…
I have immediate term TRADE resistance for the SP500 at 1,019… what was yesterday’s resistance now becomes your support. That line is 999.
Have a great weekend with your families,


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 reflation call.

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.   

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.

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