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“We have taken this economy back from the brink.”
-President Obama (September 9th, 2009)
 
Time stamp and YouTube it. Last night’s US Presidential speech will surely find its place in US History. Every one of them does. Rarely, in the moment, do we know how prescient or shortsighted Presidential conclusions really are. Particularly when it comes to immediate term economic prognostications, Presidents have an awful historical batting average.
 
Have we taken this economy bank from the brink? Or have we taken Wall Street back from the brink? Are they one and the same? What about a country’s currency? Does a crashing currency signal coming back from, or going toward, The Brink?
 
Hope may be part of this President’s process, but it is not an investment process. That isn’t a politically partisan point. It is, as our President likes to say, “the truth.” It’s the Research Edge truth at least!
 
Our Managing Director of Healthcare, Tom Tobin, often says that the US Government’s plan is to “create a crisis, so that they can solve it.” Again, from Bush to Obama, Tobin has said the same thing. One created “weapons of mass destruction”, the other went with “great depression.” Politicians get paid to fear-monger. It’s the sad “truth.”
 
My greatest fear, when analyzing the global economy, is that the United States of America’s political leaders don’t get it. Again, from Paulson to Geithner, this isn’t about being politically partisan  - it’s about America’s economic policy becoming as politicized as it has ever been.
 
For those of you who aren’t economically paid and politically scored on being willfully blind, let me remind you of something that’s been happening in America this week. The United States of America’s currency is crashing.
 
Dear Mr. President,
 
I am not going to yell at you from a cheap Congressional seat, but I am going to say that one more time. Under your administration’s watch, like President Bush’s, you are Burning The Buck. I can only “hope” that you don’t write me back saying “that’s not true”…
 
Respectfully,
Keith R. McCullough
New Haven, CT
 
So what do we do with that this morning Mr. Righteous Mucker? Good question. Everything in investing starts with asking the right question at the right time. I think THE question this morning should be: Have we taken the US economy back from the brink, or are we about to go right back over it?

In order to attempt to answer THE question that only we “macro” guys care about (i.e. what’s the market going to do today), let’s consider 3 major events that occurred in the real-time US economy yesterday:
 
1.      At 1033, the SP500 made a higher-high for the YTD

2.      At $77.01, the US Dollar Index made a lower-low for the YTD

3.      President Obama defined the economy’s scorecard by only 1 of these 2 factors

 
To ignore “the truth”, of course, does not mean that it ceases to exist. Someone needs to pass someone in Washington an economic history book that dates back more than the last 200 minutes on their crackberry. Try the last 200 years. Maybe throw in another country or two. Maybe get the Great Depressionista Professor, Ben Bernanke, to order up the required reading.
 
The “truth” is that there has never been an economy that has sustained itself with her currency being on The Brink. Never. The US Federal Reserve monetizing the nation’s debt is no different than the government of Zimbabwe doing so. It’s country balance sheet bearish. It’s country currency bearish. It’s country credibility bearish. If you revert to doing it consistently enough, creating free moneys from the heavens will provide you a bridge to economic hell.
 
Those who have been critical of my Burning the Buck investment theme for 2009 are now losing a lot of money. Since March, the “truth” is in the math. The SP500 is up +52.8% and the US Dollar Index is down -13.5%. The political leverage that the US Government thought they would get by betting on the stock market being the “economy” has been almost 4:1 (Dollar crash versus Wall Street reflation).
 
So, if the US economy’s “Brink” is defined only by her stock market price, why is it that Obama’s Administration continues to see lower-lows in their approval ratings?
The “truth” is that Americans aren’t as stupid as Washington/Wall Street keeps telling them they are. The “truth” is that this isn’t new. For hundreds of years a citizenry of savers and consumers look to their currency as a barometer of their own personal Brink!
 
I’ve said my piece this morning. If I just marked the YTD bottom in the US Dollar, so be it. Take it from me, the Burning Buck Boy, to call what his own bottom looks like in the rear view mirror. Dollar up will = everything priced in Dollars down. That’s why I have been selling for the 3 out of the last 4-days of this rally. President Obama is too smart not to understand this investment thesis. The Chinese get it. They’ll force him to get it too. China is The Creditor of this mess.
 
My intermediate term TREND target for the SP500 remains my Range Rover target of 1041. My first line of immediate term TRADE support is 1016. As opposed to the last 2 trading days, my risk management model is saying that the risk in the US stock market finally overrides the reward.
 
Best of luck out there today,
KM


LONG ETFS

VXX – iPath VIX We bought volatility on its lows on 9/3 ahead of last Friday’s employment report.

XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

EWH – iShares Hong Kong
The 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.  

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.

 
SHORT ETFS
 
EWU – iShares UK We’re bearish on the UK’s leadership and monetary policy to weather its economic downturn. Although we’re seeing improved fundamentals within the country and across Europe we continue to see the country’s financial leverage as a headwind and increasingly the data suggests that inflation is getting ahead of growth. With the FTSE reaching a YTD high on 9/9, we shorted EWU.

DIA  – Diamonds Trust We shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.