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“Information is the currency of democracy.”
-Thomas Jefferson
 
I wonder what Jefferson would think of America’s currency today. I know what the Chinese think – and that’s not good…
 
I wonder what the Chinese, Brazilians, and Russians think about the G7 meetings today. After all, the G7 club represents the self-proclaimed leaders of the “industrialized” world (UK, France, Germany, Italy, Japan, Canada, and the US)…
 
I wonder if Washington and Tokyo realize that the old world of view global economic policy has been compromised…
 
That shot across the bow that the world heard from Rio de Janeiro to Chicago on Friday was real. The G7 that was formed in 1976 is no longer relevant. The world’s balance of global economic and political power is shifting, big time. It’s time for those who fail to acknowledge reality to wake-up and get with the global macro program.
 
One of the sharper investors I know sent me a note on Friday, expanding upon the point I made about ex-Goldman Partners. I’ll take her word for it in telling me that the number one differentiator that one of Goldman’s finest saw in themselves versus their competition was a “failure to acknowledge reality.” Pretty simple.
 
Consider the commentary coming out of the G7 meetings from the Top 2 countries in global GDP this morning (USA and Japan):
 
1.      US Treasury Secretary: “It is very important to the United States that we continue to have a strong dollar”…

2.      Japan’s Finance Minister: “If currencies show some excessive moves in a biased direction, we will take action”…

 
Now consider the marked-to-market scoring of these comments:
 
1.      US Dollar reacts in the OPPOSITE direction of Geithner’s intentions, trading down again to $76.86…

2.      The Japanese Yen (versus USD) is little changed at 89.76

 
There is no need to comb over the specifics of what these two gentlemen intended to say or the impact they hope to achieve. Hope is not an investment process. Neither is listening to compromised and conflicted G7 countries for global currency strategy.
 
Japan’s ex-finance minister, Nakagawa, was found dead this weekend. The current Minister of Finance, Hiroshisa Fujii, has only been in office for a few months. At 77 years old, I don’t think I am going to be looking for him to evolve his thinking anytime soon either.
 
As for Timmy Geithner, can someone get the man a 6 month chart? His aforementioned comment about “continuing to have a strong dollar”, remains a failure to acknowledge reality.
 
We are short Japan via the EWJ etf. We are short the legacy US Equity benchmark index (the Dow) via the DIA etf. We don’t want to be long of political compromise. We don’t want to be long of financial leverage. We want to own liquidity, sobriety, and unlevered growth.
 
Look at the Dow and Japan’s Nikkei for the YTD:
 
1.      Closing down -1.8% last week, the Dow Jones Industrial Average is THE worst performing major stock market in the world at +8.1%

2.      Closing down again last night, the Nikkei is the 2nd worst performing major equity index at +9.2% YTD

 
After sending the Japanese and American Olympic bids home packing on Friday, Brazil’s stock market charged higher, closing up another +1.2%, taking the Bovespa’s 2009 YTD gain to +63%. Brazil’s exports to China are now outrunning their exports to the USA. Japan’s year-over-year export’s for August were down -36% year-over-year!
 
The world is changing at its most expedited pace in decades. Japan’s equity market is now broken on both my immediate and intermediate term durations (TRADE and TREND), whereas Brazil remains bullish on both. We must respect and acknowledge this New Reality.

My immediate term support/resistance lines for the SP500 are now 1022 and 1040, respectively. US Equities now have the lowest allocation in our Global Asset Allocation Model. We’ll continue to manage risk around our Japanese short position, trading it with a bearish bias.
 
Best of luck out there today,
KM


LONG ETFS
 
EWA – iShares Australia EWA has a 30 day SEC dividend yield of 2.74%.  With Glenn Stevens (our favorite central banker) signaling that policy discipline will take precedence over politics, growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

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. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

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
 
USO – US OIL Fund We shorted oil on 9/30. The three Fed Heads just put rate hike rhetoric right on the table. If the Buck stops Burning, Reflation stops working.

DIA  – Diamonds Trust 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.