"A little knowledge is dangerous. So is a lot.”
-Albert Einstein
We have learned a little about a lot in the last few weeks. If the Bombed Out Buck stops burning, most things priced in bucks stop going up.
A little knowledge about this dominant global macro inverse correlation can be dangerous. If you get the timing wrong, you can really get whipped around. Does market timing matter? After the last 18 months, you tell me…
The reality is that most people have a lot of knowledge that they cannot time markets. They have tried. So take their word for it. However, some people can time markets, and they should continue to outperform this year as a result of their risk management discipline.
A little knowledge about the US Dollar’s impact has had the Gold bears pile on with their “gold bugs will get crushed if the Dollar rallies” call. Combine that view with a little perceived knowledge that the “IMF is selling gold” and you have some short sellers of yellow rocks that believed that their “information” was going to get them paid. Perceived knowledge can be dangerous.
With the US Dollar breaking out again above my critical immediate term TRADE line of $76.20, most things priced in US Dollars are set to open down this morning. Crude oil is down at $77.28/barrel. Copper is down at $2.91/lb. Gold is up.
Gold is up. Yes. Market prices don’t lie; people do. The IMF was indeed selling gold, but it wasn’t to the Chinese! It was to India. For the first time in 9 years, the IMF sold the equivalent of 8% of the annual global production of gold to a country. That’s a lot!
India just bought 200 tons of gold. That’s a 56% addition to India’s current gold reserves of 358 tons, and that puts India in the top 10 holders of gold globally. More important than the size of this purchase is the supply side of this equation. If the Chinese want to get anywhere in the area code of what I would consider a reasonable level of gold as a percentage of total Chinese reserves, they’d need to buy 10 times that.
A little knowledge about what China needs can be dangerous. If the US Dollar goes up, a lot of those things that people think China needs will go down. A lot of knowledge about China’s intentions of moving away from the US Dollar as their main currency exposure can also be dangerous. With only 1% of total reserves held in Gold, you can get very dangerous upside price targets in gold if you truly believe in your knowledge of China’s long term intentions.
Since I have a 10% position in it, I get a lot of questions about gold. Is being long gold consensus? What if I continue to be right on the Dollar’s relationship with asset prices? Could an up Dollar mean down gold?
Usually, the best way to answer a macro question is to let Mr. Macro Market give it to us, real time. As surprising as this is, since October 21st when the US Dollar marked its year-to-date lows, it has rallied a full 200 basis points, and the price of Gold has not budged. On the morning of 10/21 Gold was trading $1055/oz, and this morning it’s trading up (despite the US Dollar being up) at $1058/oz.
Is Gold going up because it’s a global currency that countries can trust? Is Gold going up because there is more demand than supply? Is Gold going up because we are witnessing the initial phase of a massive Global Diversification trade away from a world that held 64% of total currency reserves in US Dollars?
I’ll let you dig in on some of the answers to these questions. My only advice helping augment your search for this knowledge is this: don’t call an “expert network” for the answer unless you speak Mandarin and the call you are making is long distance…
Ahead of the Bernanke’s FOMC decision on rates tomorrow, the US Dollar is breaking out from an immediate term TRADE perspective. My immediate term TRADE line for the US Dollar, again, is $76.20 and my intermediate term TREND line is $77.59.
Is Bernanke going to pander to the most politicized policy America has ever seen, or is he going to rightly signal an end of an emergency level of ZERO percent for America’s citizenry of savers? I have no idea. The US Financial System is far too conflicted and compromised for me to hazard a guess. For God, for Country, and for Gold … or something like that… that’s what a little Ivy League knowledge will get you this morning from New Haven about the Fed’s upcoming decision – not a lot.
My immediate term support and resistance levels for the SP500 are now 1023 and 1065, respectively.
Best of luck out there today,
KM
LONG ETFS
EWZ – iShares Brazil — President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.
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.
XLU – SPDR Utilities — We bought low beta Utilities on discount (down 1%) on 10/20. TRADE and TREND bearish.
FXC – CurrencyShares Canadian Dollar — We bought the Canadian Dollar on a big pullback on 10/20 and again on 10/28. The TREND and TAIL lines for the Canadian Dollar remain bullish.
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.
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
XLY – SPDR Consumer Discretionary — We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. The sector is finally broken, from an immediate term TRADE perspective.
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.
UUP – PowerShares US Dollar — We re-shorted the US Dollar on strength on 10/20. There continues to be no government plan to support it.
FXB – CurrencyShares British Pound Sterling — The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.
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.