American Ignorance

“If ignorant both of your enemy and yourself, you are certain to be in peril.”
-Sun Tzu

Sun Tzu was a heroic Chinese General who authored The Art of War. While the timing of Sun’s writings remains a debate, some of his strategies remain timeless.
 
Don’t worry, I am not going to impose career risk at year end and infuse my views of President Obama’s new military strategy. I know what I don’t know. I will, however, remind the President that he may not know what he doesn’t know about this country’s newly revealed weakness – our currency.
 
Currency is built on credibility. Currency is backed by trust. Currency is what allows you to gain leverage against your enemies. If you have political currency, that helps. But you better be damn sure you have credible economic currency standing behind it. Wars are financed.
 
Never mind the very high correlation between recently waning American Consumer Confidence readings and Presidential approval ratings (despite the stock market sitting just inside of YTD highs). Now is the time to take a long hard look at this Global Game of Risk and think through America’s newfound vulnerability. Timmy Geithner may not get this, but Americans do. The Buck is Burning.

The days of entering geo-political and military conflict as the CREDITOR nation are over. The United States of America is now the DEBTOR nation. If we think our enemies are ignorant of this New Reality, we are “certain to be in peril.”
 
The US Dollar got hammered again yesterday, breaking down to lower-YTD-lows. Lower-lows, in my risk management model, are very bad. The only lower-lows that the US Dollar Index have not breached are those that were a leading indicator for the 2008 global equity market crash.
 
I have been saying this while doing meetings in CA this week, and I’ll write it again this morning. At a price, DOLLAR DOWN is bearish. That price is anything with a 74 handle on the US Dollar Index or lower.
 
This morning the US Dollar Index is trading at $74.41. From here, why is Dollar down bearish? For starters, across hundreds of years of country currency history it has been. Sure, there have been plenty of currency devaluation (REFLATION) rallies in stock markets. These are the daily market battles we engage in today. However, there has never been a country who has torched their currency and come out the winner of a global economic war.
 
Given the economic Generals on his team (Geithner, Summers, Romer, etc…), my greatest fear about the world today is not some whack job who needs to be smoked out of his cave in Afghanistan – it’s the Perceived Wisdom of Washington on systemic US currency risk. I fear America is becoming ignorant of herself.
 
To find the most obvious signs of American Ignorance in our financial leadership, you just have to realize that Geithner has been at the Treasury and/or Fed since 1988. He is the system. Less obvious is Bernanke; but very obvious are the bubbles that he is willfully blind to.
 
As a reminder, here are bubbles, across durations, that He Who Sees No Bubbles (Bernanke) is ignoring:
 
1.      Immediate term = Gold

2.      Intermediate term = Short Term US Treasuries

3.      Long term = Government financed Banker Bonuses

 
Another immediate term bubble being created by American Ignorance is that in price of the Japanese Yen. Again, Geithner has never proactively managed risks ahead of any bubble he has been part of creating. So take his word for it right now when he says he sees no currency risk. He never has.
 
Dollar DOWN, at a price, has many unintended consequences. One is bubbling up the Yen to 14-year highs. As a reminder, when it comes to sovereign currency and debt – CURRENCY UP doesn’t get DEBTORS PAID. It gets them to blow up.
 
Japan is still the world’s 2nd largest economy. It is also an island economy with negative population growth. This, we know (I hope). What we don’t know is what exploding debt will look like if exploded upon mountains of debt. This ticking time bomb is levered.
 
In trying to arrest recent currency strength in the Yen, Japan’s latest bureaucrat leader, Hatoyama, has reverted right back to his predecessors longstanding view of Quantitative Easing. Put simply, the latest government solution in Japan is not unlike General Motors – zero percent financing to commercial banks – and if you didn’t know how that war ended, ask now ex-CEO of GM, Fritz Henderson, this morning. Now he knows.
 
Japan’s latest stimulus is for another 10 Trillion Yen. Let me put that in block letters in an attempt to take the numbness of it all away. TEN TRILLION YEN.
 
I know. I know. That’s only $115 BILLION DOLLARS. Heck, what’s a US Dollar worth anymore anyway?
 
President Obama, I’ll send that credibility question right back to your aide who is prepping my special tax audit. But remember, when it comes to the Global Economic War of the 21st century, the Chinese are watching your Burning Buck very closely.
 
My immediate term support and resistance lines for the SP500 are now 1082 and 1117, respectively.
 
Best of luck out there today,
KM

 


LONG ETFS

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).

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
 
FXY – CurrencyShares Japanese Yen
We took the opportunity to short a 14-year high in the Japanese Yen on 11/27.  The BOJ will definitely be intervening if the unintended consequences of a Geithner Buck Burning persists.

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.

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.


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more