Ignorance and Leverage

“When you combine ignorance and leverage, you get some pretty interesting results.”
-Warren Buffett
 
Last night CNBC had clips of Maria Bartiromo interviewing Tim Geithner. That was quite the combo.  Combining economic ignorance with the levered long leader of the willfully blind is pretty interesting Mr. Buffett, indeed!
 
On the question of leverage, Geithner proclaimed his mystery of faith stating that “credit is the oxygen”…
 
On the question of plans to address the Burning Buck… well… Geithner didn’t have any…
 
I couldn’t make this up if I tried, but rather than provide Bartiromo with a proactive plan to address the Currency Crisis, Geithner said that he doesn’t usually talk about daily activity in the currency markets. Timmy, understanding that the daily analysis is more of a real-time risk management approach, how about weekly or monthly? Quarterly? Annually? Newsflash: the US Dollar is down another -2.2% this week and has lost -16% of its value since March! Wakeup.
 
Never mind the marked-to-market price, Geithner went on to point out that the US Dollar’s strength was most readily apparent when the world was screaming with fear. Finally, he concluded that, as a result of how the US Dollar acted during last year’s apocalypse, the US Dollar’s strength remains readily apparent.
 
This guy was serious. Under this line of thinking, I guess all we have to do is create another Global Leverage Crisis and we’ll get our currency back! While hope is not an investment process, I can only hope that the Chinese and Japanese didn’t watch the YouTube of those CNBC clips…
 
This morning the Buck continues to Burn. Are they Bombing Out The Buck? Or are they just getting started? Niall Fergusson at Harvard thinks that the bombing is going to be for another -20% down move in the US Dollar within the next 6-12 months. I like Niall’s research, a lot. But Niall, if that happens… all I have to say is ‘lock the barn doors Sally’, because every American with a pitchfork is going to be coming at those of us who work in Financial Services.
 
Away from not trusting him, my biggest issue with Tim Geithner has to do with competence. He doesn’t do global macro, so I don’t think he really has any idea how to approach this secular Global Currency Diversification exercise. Being a New York centric banking man has its privileges to the Groupthink Suite.
 
If Geithner’s answers pertaining to the US Dollar last night weren’t alarming enough, here’s what the Treasury issued as a statement to The Client (China) this morning:
 
“Both the rigidity of the renminbi and the reacceleration of reserve accumulation are serious concerns which should be corrected to help ensure a stronger, more balanced global economy consistent with the G-20 framework”…
 
Again, I couldn’t make this up if I tried, but Geithner is so clueless right now that he is choosing to antagonize the Chinese in the Treasury’s semi-annual report on currency policy. The Chinese are already a net seller of US Treasuries and Dollars. What are you doing Timmy? Wakeup.
 
If you are looking for another opinion on this other than mine and Fergusson’s, here’s Alan Greenspan’s this morning: “I’m not overly concerned about the most recent decline in the dollar”…

Gee, thanks Alan. You haven’t been concerned about this country’s currency for a long time. Now your boy, Bernanke, is following your lead. We issue our citizenry a ZERO percent return on their savings accounts, fire up the inflation machines, and are teeing up Investment Banking Inc. to pay out more bonuses on the back of this Piggy Banker yield curve in 2009 than we did in the year that preceded this said “Great Depression”!
 
Never mind the long term implications of the US Dollar trading close to 38 year lows. This, of course, is all just fantastic for the US stock market in the immediate term. We Bomb the Buck, and everything priced in bucks reflates. Yesterday, I called this the Minsky Meltup. Today, I’ll call it the same.
 
The Minsky Model isn’t one that the levered loan originators of Investment Banking Inc. like to read about. Shhh – keep that under wraps. Ignorance and leverage is a powerful compensation structure for those who have an entitlement to game the US Financial System.
 
My immediate term upside resistance level this morning for the SP500 is at yet another higher-high (1103) and my immediate term TRADE support line is at another higher-low (1069). Meltem’ up boys, and hope that the American people are as ignorant as Geithner in understanding that the last crisis was born out of a weak-dollar debt-financed asset-price-appreciation bubble.
 
Best of luck out there today and have a great weekend with your families,
KM
 

LONG ETFS
 
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.

 
SHORT ETFS
 
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.

USO – US OIL Fund 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.