Minsky Meltup

10/15/09 08:08AM EDT

“It is what people actually did in the stock market that counted – not what they said they were going to do.”
-Jesse Livermore
Jesse Livermore knew a thing or two about managing real-time market risk, sometimes. He was an American, born in 1877 in Acton, Massachusetts. He was famous for both making and losing a lot of money. He was one of the first well known Stock Market Operators to explain what he was thinking.
When I think about shorting stocks, I think about my process. That always starts with what not to do. While Livermore profitably called both the 1907 and 1929 US stock market crashes, he also called for crashes that never came. Being early on the short side is called being wrong. Global Market Operators need to manage the risk associated with bad timing, acutely.
Early last week, I knew exactly when and why I was about to be wrong. After all, we did author the Burning Buck. So I covered my short position in the Dow, and started taking up my invested position again. I express this both in terms of drawing down the position I have in US Cash in our Asset Allocation Model and by expanding the breadth of the long/short ratio of positions in our Virtual Portfolio.
I thought that there was a heightening probability that the US Federal Reserve would signal an end to the narrative fallacy of perpetual deflation and the “Great Depression.” I thought they would create a squeeze in the now consensus position of short the US Dollar. I thought this was setting up for a series of higher-lows in the US Dollar and the associated series of lower-highs in the prices of everything priced in Burning Bucks.
Mucker, think Again.
Yesterday, you saw the unthinkable. Fed Head, Donald Kohn, inspired lower-lows in the Burning Buck and forced anyone short anything priced in those Bucks to run for the exits. “It is what people actually did in the stock market that counted.”
This morning, the Buck continues to Burn. America’s Compromised Currency is trading down another -0.37% at a new YTD low of $75.27 and, other than her all-time low set during the 2008 US stock market crash, there is no line of support for her now. It’s sad, but true…
In stark contrast to the Heli-Ben Bernanke Doctrine of US Dollar Devaluation, this is what the world’s most impressive central banker, Glen Stevens, had to say this morning from his pulpit at the Reserve Bank of Australia:
“If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework” …

No, Global Market Operators on the East side of this world didn’t run for the exits on that. They actually took both the Australian and Hong Kong stock markets to fresh YTD highs at +33% and +53%, respectively.

It isn’t just a bald dude in Australia who is reaping the economic harvest associated with a credible rate of return for his Creditors. For the last few weeks, Brazil has been explicitly signaling that easy money is over and that they are setting up for a rate hike. At +36% YTD, the Brazilians Real is the best performing currency in the world for good reason. Brazil’s stock market tacked on another +2.4% yesterday, taking the Bovespa to New YTD Heights of 66,201. That’s up +73% YTD!
All the while, countries like Brazil and China are issuing IPOs with legitimate organic top line growth while America’s originators of levered long debt piles are tee’ing up the likes of Steve Schwarzman and Henry Kravis for liquidity events in IPOs like Dollar General. It’s sad, but true…

Some people think that I think that the US Federal Reserve is stupid. On the contrary, I think they know exactly what they are doing here. Being willfully blind to prices accelerating around the world like this is no different than Bernanke telling you that $150/barrel oil wasn’t inflationary. The US government has changed the complexion of reported inflation 9 times since 1996 for a reason folks. This fictional exercise in storytelling needs book ends.

No matter where we go this morning, here we are. Right back where this mess started – in a meltup of levered up US asset prices that is making Hyman Minsky rollover in his grave.

The Minsky Model wasn’t so popular for the levered long crowd under Bush and it wont be under Obama either. Their Burning Buck policies stand in stark contrast to those of Reagan and Clinton. This isn’t a Republican/Democrat thing. This is a very politicized thing. This is what happens when debtors have no other way out.

Minsky warned that capitalist economies create debts. Crises are then born out of debt financed speculation on asset prices (private equity, levered loans, etc…). Eventually, asset prices pop – then those prices collapse – then conflicted governments, devalue, re-lever, and set them up for the next fall…

Maybe that’s not Minsky to a tee… call it the Mucker Minsky Model if you want. And remember, as we watch these asset prices meltup to higher and higher-highs, stay on the watch for “what people actually do in this market, not what they say they are going to do.”

My immediate term TRADE lines of support and resistance moves to higher-lows and higher-highs this morning. Those lines are 1061 and 1099, respectively.

Best of luck out there today,

XLU – SPDR Utilities
We bought low beta Utilities with a reasonable dividend yield on 10/13.

EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

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.

XHB – SPDR Homebuilders We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

WTIC Oil traded just north of our overbought line on 10/12. With the US Dollar hitting another higher-low, we shorted more of oil’s curve.

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.

© 2022 Hedgeye Risk Management, LLC. The information contained herein is the property of Hedgeye, which reserves all rights thereto. Redistribution of any part of this information is prohibited without the express written consent of Hedgeye. Hedgeye is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information.