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A perfection of means, and confusion of aims, seems to be our main problem.”
-Albert Einstein
 
If that Einstein quote doesn’t summarize the failure of Obama and China to communicate this past week, I don’t know what does…
 
In my recent years of international travel, it has been fascinating to observe the diametrical shift in how the wizardry of American finance is perceived. Long gone are the days of giving America the benefit of the doubt. Foreign investors are rightly challenging the perceived wisdoms embedded in the US Financial System.
 
I am in Vancouver, British Columbia this morning. It’s early, but the coffee is good. The news hour at 3AM local time kicks off with Canadian hockey wonder, Sydney Crosby, carrying the Olympic torch in a pre-Olympic games event. For a small town hockey boy like me, these moments in Canadian hockey history are magical. The 2010 Winter Olympics will be too.
 
Then the news shifts to the not-so-magical. The New Reality bites – if you are American that is. President Obama ends his trip to Asia with a trip to South Korea and, by and large, his trip is being rightly depicted as a loss by the international media.
 
A loss of what? One more loss in The Game of Risk. This is a game of balance of global power shifting – shifting away from America, towards China in global finance.  We can wakeup pretending that this isn’t a New Reality, or we can look at this like foreign investors do, and understand that it is.
 
What is The Game of Risk? Well, it’s a very popular board game produced by Parker Brothers. However, the game was not an American invention. It was a French one. It was originally released in another time when Macro really mattered to global investors – 1957.
 
Per our friends at Wikipedia, The Game of Risk is “a turn-based game for two to six players. The standard version is played on a board depicting a stylized Napoleonic-era political map of the Earth, divided into forty-two territories, which are grouped into six continents. Players control armies with which they attempt to capture territories from other players. The primary object of the game is "world domination," or "to occupy every territory on the board and in so doing, eliminate all other players”…
 
This is either a really good or bad metaphor for China vs. USA, depending on where you live and/or how you get paid. As I said while in a meeting in Calgary, Alberta a few days ago, I’m definitely not Jerry McGuire, but if all you do in global macro is follow the money – you are probably going to end up finding the right answers. America is a “show me the money” economy, and the rest of the world likes playing that way too.
 
China is acquiring everything from African gold mining assets to Australian copper mines. They are doing deals all over the game-board of The Game of Risk. From Russia to Canada, they don’t really seem to care so much for anything other than moving toward their end game. All the while, America doesn’t seem to get where China is going with this.
 
China is doing less and less with Japan. These countries really don’t like each other, fyi. And now America’s myopic financial leadership is giving China every reason to be doing less and less with us. I am now “us.” My young family is American. For any American team in this game, this is plain embarrassing and sad all at once.
 
Consider the most recent marked-to-market price momentum of China versus Japan. For the month of November:
 
1.      Japan -4.8%

2.      China +10.9%

 
Last night the Nikkei in Japan dropped another -1.3% (we are short Japan via the EWJ), meanwhile China chugged forward by another +0.53%. The Shanghai Composite Index is +82.4% for 2009 to-date. At +6.8% for the YTD, Japan is the worst performing major equity market in the world.
 
Why does this matter? Because, for whatever reason, America’s financial thought leaders don’t know what they don’t know. They are so focused on the narrative fallacy of the Great Depressionistas that they can’t understand that every day we maintain a policy of ZERO rate of return for both our Creditor and Citizenry alike, we become more and more Japanese. Economically speaking, that’s not good.
 
At 0.74%, this morning you are seeing the lowest rate of return on 2-year US Treasury yields that we have seen since the US stock market crash of 2008. When we called that crash, we were very much focused on the US Government crushing the value of US currency. From a Burning Buck perspective, the only difference between this morning’s obvious correlation of US Dollar weakness to the short end of the US yield curve is this – Obama doesn’t know what he doesn’t know.
 
There has never been a winner in the global macro Game of Risk that sustained her economic power via a crashing currency. From Germany in the 1920’s to Japan in the 1990’s, this hasn’t been for a lack of effort! Top country players have definitely tried it. Newsflash for all you board game fans: it hasn’t worked.
 
As I wind up my morning missive (patiently awaiting the Canadian hotel staff to fire up some room service!), I will leave you with a thought about all of this from Tversky:
 
“It’s frightening to think that you might know something… but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.”
 
If you don’t travel internationally, get a satellite dish. Turn on the world.
 
My immediate term upside/downside levels for the SP500 are 1096 and 1020.
 
Best of luck out there today,
KM

LONG ETFS

FXE – CurrencyShares Euro Trust
We 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.

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

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.

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 and 11/16.

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.