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“The best way to find out if you can trust somebody is to trust them.”
-Ernest Hemingway
 
Hemingway was an American veteran of World War I. He was a writer and a journalist. He was well known for developing protagonists in his fictional writing who were, per Wikipedia, “stoical men who exhibit an ideal described as grace under pressure.”
 
President Obama, now that the Chinese have preemptively attacked your currency policy ahead of this week’s meetings, we all sincerely hope you are the non-fictional character who is up for the task. This is no time for prepared speeches. This is your time to face The Client and her investments in America.
 
Ahead of Tuesday’s meetings with China, here are two explicit shots across America’s bow:
 
1.       “The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation”
- Liu Mingkang (Chairman of the China Banking Regulatory Commission)
 
2.       “I’m scared and leaders should look out… America is doing exactly what Japan did last time”
- Donald Tsang (Chief Executive of Hong Kong)
 
Memories on Wall Street may very well last as long as a crackberry minute, but the views of The Client (China) imply that she has not lost her historical perspective. One of the major contributors to the 1997 Asian Crisis was Japan’s ZERO percent policy. Asia remembers.
 
Do we remember? Do we care? Do we have a proactive plan to stay ahead of the predictable risks embedded in debt driven devaluation? Or are we simply going to react to the outcomes associated with our compromised monetary policy decisions, AFTER the fact?
 
Ben Bernanke probably won’t answer any of these questions tonight at the Economic Club of New York. The home crowd will be choke full of NYC bankers and carry trading financiers alike. Provided that he doesn’t take any of the aforementioned Chinese criticism to heart, Ben should be just fine. No one in the Levered Long or Piggy Banker room needs to be veering from the path of the willfully blind just yet - not into year-end bonus time.
 
Or do they? Re-read these Chinese comments! These are as aggressive as they get. Our Hedgeye agent in China is inching towards slipping an Indian proverb under Obama’s hotel room door ahead of these meetings: “listen or thy tongue will keep thee deaf.”
 
China has once again flat-out dismissed how “deeply” Obama’s Chief Squirrel Hunter feels about anything US Currency. There was no credibility in Timmy Geithner’s “strong dollar” policy rhetoric while speaking in Asia last week. As a result, there is once again no bid for Burning Bucks this morning.
 
Is the Buck Bombed Out or setting up to Burn again? This is THE question for the US stock market, and anything priced in US Dollars this week. There are 3 critical events that will determine the US Dollar’s direction from here:
 
1.      Bernanke’s ‘In De Club’ NYC banker speech tonight
2.      President Obama’s response to Chinese currency attacks
3.      The US Consumer Price Inflation report on Wednesday
 
If you follow the intermediate term TREND line of American political pandering, you’ll be betting on carry trading (Burning Buck) into and out of events 1 and 2. That’s what global markets are already doing this morning. The US Dollar is re-testing her YTD lows, trading down -0.35% to $75.07. Yes, these are all marked-to-market, real-time.
 
Event #3 will be very interesting to see play out. For now, I am not short the US Dollar into that print. When it comes to reported deflation, contrary to narrative fallacy belief, the lows of reported deflation here in the US came with the July 2009 CPI report of -2.1%.
 
I say narrative fallacy (Taleb) belief because that’s all the Great Depressionista storytelling was. It is both shocking and saddening all at once to see that American politicians have used Bernanke’s academic studies as a backstop to get the Debtors, Bankers, and Politicians paid.
 
A lot of people tell me that the Dollar Down call from here is consensus. After covering my short position in the US dollar last week, I implicitly agree with that – but only in the immediate term. In the intermediate to long term however, both my quantitative resistance levels and the politicized headwinds for the credibility of America’s currency remain bearish.
 
President Obama, now is your time to build The Client’s Trust. Shake those hands firmly, listen, and understand.
 
My immediate term TRADE lines of support/resistance for the SP500 are now 1074 and 1116.
 
Best of luck out there today,
KM

LONG ETFS


FXE – CurrencyShares Euro TrustWe bought the Euro on 11/12 on a down move against our short position in the British Pound. A bullish formation in the Euro remains and we think the ECB could hike before the Fed does.

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 on 10/20. TRADE and TREND bullish.

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.   

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

EWY – iShares South Korea South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.  

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.