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“Truth is what stands the test of experience”

-Albert Einstein

 

I suppose that it’s only fitting that Washington is going to stand up today from Martha’s Vineyard and tell you, with a straight face, that Ben Bernanke is the Almighty Savior for averting the next “Great Depression”. This has to be the hyperbole of the year.

Being the “expert” of everything “depressions”, you’d think that Mr. Bernanke would get the joke. With China running high single digit GDP, the US on the verge of reporting positive year-over-year GDP growth in Q4, oil and copper having doubled… these guys have to be kidding me.

Per Wikipedia, “a study by the Martha's Vineyard Commission found that the cost of living on the island is 60 percent higher than the national average and housing prices are 96 percent higher…”… nice place to tell America stories from, I guess. The only Depression I see at Martha’s is Dick Fuld no longer being able to show his mug there.

Storytelling and groupthink run rampant these days, so don’t get upset about the conflicted message embedded in America’s financial leadership. We’ve all been there and done that – just deal with it, have your own investment process, and capitalize on it. This morning’s marked-to-market reaction to the Bernanke re-appointment from the island retreat where alleged food bank lines are forming doesn’t rhyme with the Depression narrative.

Asia sold off across the board. This makes sense, because the losers here are America’s creditors. As Bernanke panders to a ridiculous notion that we are in a Depression and holds this country’s hard earned savings accounts at a zero percent “emergency rate”, the US Dollar continues to weaken. As the dollar weakens, the Debtors, Bankers, and Politicians get paid. The Chinese Creditor and American Saver foots the bill.

Some might argue that China sold off -2.6% because China Construction Bank (2nd largest bank in China) said there is excess cash in the Chinese banking system right now and they’d like to stave off asset bubbles (at least they admit it!). Some might argue that China was down because it was up a cumulative +7.2% in the three trading days prior. I wouldn’t disagree with either argument. Those, combined with America’s compromised currency, provide the collective wisdom of global macro crowds.

Of course, there are many other factors in macro this morning that sing a different tune than the blues of those staving off starvation at Martha’s this morning. Consider this non-fiction 3 factor reading list:

  1. The US Dollar is down another -0.1% to $78.21, testing another critical breakdown of the $78 line (which has only been sustainably broken once in the last 38 years)
  2. Israel RAISED rates to +0.75% and the Tel Aviv 100 Index shot up another +0.78% on the news (that market is up +64% YTD, and they don’t believe in ZERO rates)
  3. Spain is trading higher this morning after reporting the lowest levels of producer price deflation since 1976 (-6.7% y/y); Dollar down = Euro up = import EU deflation

Again, a Burning of The Buck that’s sponsored by a political Bernanke backboard of “he knows his Depressions”, is simply moving more and more capital away from the United States of America and to other markets in this world. The world is a large place.

Rather than qualify my investment opinion (I have learned the “not to do” part of that lesson the hard way), it’s more palatable in these days of increasingly interconnected global markets to just follow the money.

I am certainly no Jerry McGuire, but I can definitely show you the money. Yes, some of it is at Martha’s… but a heck of a lot more of it is on China’s balance sheet right now. As Bernanke panders to the politics of his job security, understand this: The Client (China) is watching.

Whether American politicians get this or not, foreign capital flows to country’s with positive rates of return. If you don’t want to believe that, ask someone in Japan what ZERO rates of interest do to attract investment.

This morning’s move by the Israelis is not unlike those that have recently been signaled by both the Australians and Norwegians. All three of these countries want to show in higher Fed Funds equivalent lending rates to both The Client (China) and their domestic savers. This isn’t complicated to understand. Unless you are still living the narrative fallacy of Martha’s Depression.

I said I was going to keep selling US Equities yesterday, and I did. US Equities now have the lowest allocation in our real-time Asset Allocation Model. I don’t have to recommend you keep your hard earned capital in a country that’s as conflicted and compromised in her monetary policy as America is. I don’t have to be perpetually bullish on US Equities. Everything has a time and a price.

My immediate term TRADE resistance for the SP500 is now 1034. A correction to the my immediate term TRADE support line of 1005 is as perfectly probable as Bernanke and Obama telling you they were the Americans who averted Martha’s Depression. Make sure you have some sunscreen on boys. The You Tube cameras are on.

Best of luck out there today,

KM

LONG ETFS

 

EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.  

 

EWZ – iShares BrazilPresident 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. 

 

QQQQ – PowerShares NASDAQ 100We 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.  

 

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. 

 

 

SHORT ETFS

 

 

XLP – SPDR Consumer Staples – We shorted XLP on a bounce on 6/21. One way that investors chase a bearish USD is buying international FX leverage in global consumer staples. Shorting green.

DIA  – Diamonds Trust - We shorted the financial geared Dow on 7/10, 8/3, and 8/21. 

 

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.