“Of course not, but the authorities decided it that way, and they are the ones that rule.”
Geronimo was a famous Apache warrior and medicine man who fought plenty a battle against the authorities in this country. Last week, Daryl Jones wrote a great morning missive about the American legend. At the same time, DJ brilliantly introduced a new nickname for Ben Bernanke – He Who Sees No Bubbles.
Since I am usually the author of making up names for people here at the firm, this was a welcome change. I can only use the Squirrel Hunter joke so many times. While Geithner’s sense of perceived wisdom is a joke and anyone with a YouTube who has watched him knows what I mean. Time reveals all truths.
This morning the New York Post is floating the idea that Chief of Walking Bull Government at JP Morgan, Jamie Dimon, is interested in taking Timmy Geithner’s job. While that, on the margin, would definitely be US Dollar bullish, we don’t expect to hear such an announcement anytime soon.
One of the most bullish factors helping the Bombed Out Buck register an uncharacteristic +0.6% week-over-week gain last week was the call for Geithner’s resignation. Again, that was bullish for what we call an immediate term US Dollar TRADE. Unfortunately, the intermediate term TREND is for Geithner to continue to rule. The best way to ensure a weak US Dollar policy, is for Obama to keep Geithner in his seat.
Whether you like it or not, Bernanke and Geithner are, as Geronimo would say, “the ones that rule” – at least for now. While it may be bullish for immediate term stock market prices, in the long term, this will make what we knew as American Capitalism, dead.
Great Depressionista turned He Who Sees No Bubbles hopefully has a few history textbooks that date past 1938. Most economic historians will recall that the US Government dropped short term interest rates to 0.05% in 1938, stoking a annual stock market gain of +25% that year.*Special note to He Who Sees No Bubbles: from 1939 onward, the US stock market cratered, losing 34% of its value over the course of 3 long hard years.
You don’t have to call upon the Apache spiritual insights and sing to the heavens at Turkey Creek to get a signal as to why the stock market lost its upward price momentum after 1938. Once those that rule cut rates to ZERO, the only way for them to go was UP!
The rate of return on 3-month Treasuries is lower this morning than it was at the lows of 1938. This morning, you basically pay “the ones that rule” in this country to hold your hard earned savings.
That special rate of return = 0.01% (minus real-world inflation). Yes, Jamie Dimon’s timing to exit JPM is, as usual, very much on point. He gets this. If you ran a Government sponsored bank, you would too. Borrow at ZERO, then lend long to your citizenry – this is as good as it gets!
The US Dollar is getting hammered this morning, trading down -0.8% (for a world reserve currency, that’s a big one-day drop), and markets from lands far and wide have a distinct speculative smell of Geronimo’s good ole American West.
Using marked-to-market, real-time prices, commoners like me have the following macro levels to flash into He Who Sees No Bubbles:
1. SP500 futures indicated up almost a full 1%, taking YTD gains to 22% (only 3% away from 1938’s YTD gain!)
2. Gold prices are hitting new all-time highs this morning, trading up to $1165/oz (yes, all-time is a long time!)
3. Copper prices are hitting fresh 14-month highs at $3.19/lb (Dr. Copper does have a better forecasting track record than Ben)
For those who are allowed to see price bubbles overseas, check these out:
1. China closed up another +0.92% at 83.4% YTD
2. Russia is trading up +1.4% so far this morning at +131% YTD
3. Norway is trading up +1.9% so far this morning at +50% YTD
Norway? Who cares about Norway? Maybe the “authorities” of perceived wisdoms would like to tell you that Middle Eastern, Russian, and Norwegian stock markets aren’t leading indicators for gas pump inflation – but we don’t wake up here in New Haven having to think what those Who See No Price Bubbles do.
I took my cash position up to 67% in the Asset Allocation Model with the US stock market hitting its YTD high last Tuesday. The market has since corrected -1.7% from that high, but Friday did not represent either an opportunity to press shorts or raise more cash. You see, “the authorities decided it that way.” They want me to save nothing and chase prices higher. You know, like a monkey – so, for now, I will – monkey see, monkey do.
Into week’s end, I invested 7% of that cash into Australian (EWA), Taiwanese (EWT), and American Tech (XLK) stocks last week. Thankfully, I bought them while they were down (Thursday and Friday). On the heels of another sequentially higher Consumer Price Inflation report, plus calls for Geithner’s resignation, the US Dollar was up – but these rational market reactions will only lasts as long as they last. For now, it’s time to go back to a levered land run by He Who Sees No Bubbles.
My immediate term TRADE lines or resistance and support for the SP500 are 1079 and 1115, respectively.
Best of luck out there this week,
XLK – SPDR Technology — We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).
EWT – iShares Taiwan — We see a pending trade pact with the Chinese as the next positive catalyst. We bought back the bullish TREND position we continue to fundamentally see in Taiwan on 11/20.
EWA – iShares Australia —We remain bullish of Glenn Stevens at the RBA and how Australia is issuing its citizenry a rate of return. With growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.
XLU – SPDR Utilities — We bought low beta Utilities on discount on 10/20.
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.
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.
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.