“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest.”
-Confucius
I was on a flight to Denver, Colorado last night. Whenever I am flying, I enjoy a tremendous amount of focus time on my research. As my long time associate, Tanya Clark, will attest, I have relatively aggressive stacks of books, papers, and magazines that board these planes.
My goal is to lighten the load, materially, before I land. Mission accomplished last night. Tanya will have the next stack waiting for me wherever I am flying to next. This is the grind. There is always something new to study. There are always opinions and histories to consider. If you want to fly these global macro markets independently, you better not be sleepy.
The most interesting read of last night’s flight was Andy Xie’s “Why One Bubble Burst Deserves Another.” It was cross asset class and thoughtful. Calling out the US Federal Reserve and the US Financial System for what it has become is at least finding the mainstream now. That’s progress.
Xie’s nearest term “call” is actually for the US Dollar to strengthen. His view is that “when the Dollar reverses, the short squeeze could cause a global crisis.” Knowing a thing or two about the dominant inverse correlations currently associated with a Burning The Buck, I’d agree with that.
Tactically, from an immediate term TRADE perspective, the US Dollar is getting washed out. In our upcoming Q4 Macro Strategy Call, I will be calling this quarterly investment theme the Bombed Out Buck. Both on our Macro Morning Call and in our intraday Macro Notes, I have been signaling this for the last few weeks, so this won’t be a surprise to most of you. There are always very important Macro TRADEs to consider within the confines of opposing TRENDs. This is risks management.
My favorite central banker in the world (Glenn Stevens at the Reserve Bank of Australia) is Acknowledging Reality this morning by becoming the 1st major central banker to move away from the Bernanke Doctrine of Currency Devaluation. Stevens RAISED rates by 25bps to 3.25%, and the Australian stock market went UP!
Australia’s leadership provides a stiff reminder to both The Client (China) and the world that issuing a real rate of return will both strengthen a country’s currency and attract foreign investment (Australia’s stock market is +26% YTD ). Unless they’d like to imitate Japan, the US Federal Reserve should not perpetually maintain an interest rate of ZERO for America’s citizenry of savers and foreign investors alike. As the Fed signals this change in rate rhetoric, the Buck should stop Burning.
If Dollar Down got the Debtors, Bankers, and Politicians paid, it’s going to be fascinating to watch US Dollar Denominated Creditors (American and Chinese alike) take back some of that REFLATION for themselves. Both the VIX (breaking out from a TREND perspective) and Gold price (hitting new highs this morning) are telling me that could happen sooner than consensus expects. Dollar UP is going to wreak some serious havoc in most things priced in Bombed Out Bucks.
Heck, even ole Rosie, who provided the most entertaining reading of last night’s flight, should finally start getting paid again on his bearish US Equities stance. He now claims to be “neutral” on equities despite calling them “25% overvalued” – whatever that means. David Rosenberg’s recent Special Report titled “The Case for Commodities, Credit and Canucks” might need a little re-working. There is no Cowboy Up for Alberta’s Oil price if that Buck starts to go up!
Rosie is an ex-Merrill Man, and he gets a little annoyed when we real-time risk managers call him out. He opened his missive stating that “I stand accused of having missed the turn…” Canadian newsflash: Rosie, you aren’t being accused of missing it – you missed it!
If short the US Dollar proves to finally be the consensus that Xie purports it to be, and the Buck stops Burning, a lot is going to change in global capital markets. That has not happened yet, but if it does I think both Rosie and Roubini are going to start looking genius again. They’ll be all over the wires and TV’s, and I doubt they’ll be saying they are “neutral.” Canucks who own bank and base metal stocks are not going to be smiling either.
So that’s my Rosie Xie scenario analysis. Now back to the grind…
This morning, no matter where I go, here are those darn live market prices again. I can’t hide behind a 22 page revisionist treatise on how I really never make mistakes – nor do I want to. Wall Street and Bay Street may not like this thing called YouTube, but it’s here for good. Professionals are now accountable to the replay.
This morning, the US Dollar Index is trading down -0.44%. Therefore it’s not surprising to see the US Equity futures indicated up. Again, Dollar Down = things priced in Dollars up…
At $76.30 however, that’s another higher-low for the US Dollar. On the margin, that’s a less bearish position than the Burning Buck has been in for the past 6 months (a series of lower-highs and lower-lows). As the facts change, I most certainly will. If the US Dollar continues along this socialized path to Japanese bureaucracy, breaking down through the $75.80 line again, I will be very wrong in having only a 3% Asset Allocation to US Equities (after selling into yesterday’s strength) and short oil.
Top 3 reasons for the Buck Burning lower this morning:
1. The Chinese are at the IMF meetings in Istanbul reminding the world that they want a “Super Sovereign Reserve Currency”
2. Fed Heads (Fisher and Dudley) came out dovish on rate hikes yesterday
3. The Australians raised rates, reminding the Chinese that they’ll take all that Chinese investment capital away from the US that they can get
Reflection, imitation, and experience. These are the things that make this macro game so great. I am grateful for an industry that perpetuates piles of required reading material. Every opinion should be heard. Every voice should have the opportunity to be right or wrong. That’s what makes flying with stacks of papers, books, and magazines so much fun.
The three most critical lines in my macro model this morning are: SPX 1048, US Dollar Index 77.14, and VIX 26.15. Dollar down -0.57% was US Equity bullish yesterday (SPX +1.5% on staggeringly low volume), and it will be again here on the open. As prices change, my risk management moves will. I have immediate term downside support for the SP500 at 1021.
As for Rosie, Xie, and Me, the best we can do is admit the bitterest of lessons when we are wrong. Experience can only make us all more right.
Best of luck out there today,
KM
LONG ETFS
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 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.