Is Bigger Better?

“Any fool can make things bigger, more complex, and more violent. It takes a touch of genius - and a lot of courage - to move in the opposite direction.” -Albert Einstein


Is Bigger really Better? That question can be asked to a lot of constituencies, and I actually don’t want to know the answer to all of them! When it comes to the US Government’s balance sheet however, I think that the marked-to-market price of US Dollars has already answered the question.


Whether you are a Dallas Cowboy or Federal Reserve fan, you are waking up to a little nausea this morning. The Cowboys hosted the biggest fan base to ever see an NFL football game (over 105,000 people) last night, and they lost. The US Federal Reserve expanded America’s balance sheet to her largest size ever last week ($2.14 TRILLION), and the US Dollar lost value for the 3rd consecutive week.


Now I am certain that Cowboys fans will find some wins, but will the USA’s Bigger Debt is Better Plan find a special place in the hearts and minds of fans across the nation? Is Bernanke/Geithner America’s Team?


While America’s Household Balance Sheet expanded by over $2 Trillion Dollars last quarter to $53.1T, a US Dollar ain’t what it used to be. Despite the SP500 ripping the Depressionistas for a +58% loss since March, America’s Household Net Wealth is still -17% from its Q3 of 2007 peak ($64.7 Trillion Dollars).


American Consumer confidence was still tracking down at -49 per the weekly ABC/Washington Post Consumer confidence reading last week (all time low is -54), and after President Obama appeared on every TV show other than Sunday Night Football yesterday, one has to wonder if he scored any points.


Is Bigger Government really better? Is Bigger Debt really better? What do Americans dislike more? Government or Debt? Interesting questions for interesting times…


Last week, the Fed’s Balance sheet expanded by another $52 Billion Dollars. That was the 6th consecutive week of bigger debt taking the year-over-year expansion of the Fed’s Balance sheet to +$1.15 Trillion Dollars. Yes, I am spelling out Billion and Trillion this morning for a reason. Bigger Debt = bigger word count for KM’s Early Look.


In the short term, this is high octane gas for the Burning The Buck tailgate party. In the intermediate term, it has equated to a US Dollar crash move of -14.5% since March, and like I said prior, a +58% REFLATION move in stocks. Debtors, Bankers, and Politicians get paid. Creditors get the bill.


It’s sometimes ok to get the bill if you are winning, but even after a generational move in US stocks, America’s Team is sitting at the bottom of the Global Macro League standings. On Friday, Brazil’s Bovespa hit another new YTD high at +62%. Mid-week, the Russians were staring down a +100% YTD stock market move. In Vietnam last night, stocks added on another +1.2% move, taking their YTD run-up to +83%.


All the while, American politicians are whining, not winning. They thought they’d get paid in political capital if they fixed the stock market. They are getting paid alright – via political football season!


As we head into the two major macro events this week (Fed meeting on Wednesday and the G-20 on Thursday/Friday), President Obama and Ben Bernanke have to find a way to reconcile how to tell both Americans and the World that only 3-6 months ago we were having a Great Depression, but now the Recession is “very likely” to be over…


Bigger Debt and bigger storytelling is what we should expect to see in the coming days. This is what it is. How we can go from said Depression to hoped for Recovery (ostensibly skipping the recession) in 3-6 months? All the while we are Burning The Buck with a reckless “emergency rate of ZERO” percent for our Creditors. America’s financial forecasting team’s storytelling must be far more sophisticated than we fans are…


The US Treasury is going to issue another $112 Billion Dollars in US Debt this week. At the same time, the US Federal Reserve will be politically pressured to maintain their planned $1.25 Trillion Dollar MBS (Mortgage Back Securities) buy-back program. All the while the Chinese will be in Pittsburgh (G-20) smiling at us like I would if I had to look at Timmy Geithner for more than 3 seconds face-to-face…


Alan Stanford has apparently hired a Bigger is Better legal team that they are calling a “Champagne Defense” this morning. When Bernie can set the bar so high, what’s a $7 Billion Dollar lie worth in this country these days anyway? Again, “any fool can make things bigger, more complex” … especially if we let them…


All of this is plain sad and it might just mark the end of the US Dollar going down, for now. Then again, it might not. Real-time market prices will rule my macro model in analyzing it all the while. All Ben Bernanke has to do on Wednesday is change his rhetoric that Bigger Debt isn’t a perpetual plan. Now that he doesn’t have to worry so much about job security, heck, there’s always some hope that he may stop pandering…


With year-over-year deflation morphing into late Q4 inflation, and the USA setting up to print a much larger than expected Q4 GDP number, the Bigger is Better balance sheet policy will be under fire. Bigger American savings accounts are most easily achieved by giving Americans something Bigger than ZERO as a rate of return.


My immediate term TRADE levels for the SP500 are now 1050 (support) and 1079 (resistance).


Best of luck out there this week,
KM

 

 

LONG ETFS

 

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. 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. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

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
 
LQD – iShares Corporate Bonds
Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

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. We shorted EWU on 9/9.

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.


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