Geithner Groupthink Inc.

“When your work speaks for itself, don’t interrupt.”
-Henry Kaiser

Now that one economic crisis is out of the way, it is time to proactively manage toward not perpetuating another one. This morning we are being reminded that risk management is a daily and global exercise. Gold, Greece (down -3%), and the United Arab Emirates (down -6%) are getting rocked.
 
If there is one thing that Americans should realize by now, it is that reactive risk management doesn’t work. Today, our immediate-term focus should be on the economic leadership being provided to President Obama by his Wizards of Perceived Financial Wisdom. These guys impose serious systemic risk.
 
For starters, within the first 3 minutes of Tim Geithner’s Friday interview with Bloomberg’s Al Hunt, take his word for it:
 
1.      “I’m not an economist.”

2.      “Economists don’t know much about the future.”

3.      “Personally, I wouldn’t associate myself with any estimates on what these things might actually do.”

 
Ok. Maybe you shouldn’t take his word for it. You definitely shouldn’t have taken his word for it when it comes to filing his own taxes. I guess he’s not really an economics or a tax guy. He’s just the head of the US Treasury and former head of the New York Federal Reserve (2003).
 
At one point in Friday’s interview, when asked about what grade he would give himself, Geithner proclaimed “I am a very tough grader.” Then he suggested we grade him “by the policies we create.”
 
Uh, ok…
 
Not to be “very tough” on you Timmy, but if I only started with the policies that you helped established post 2003 at the New York Fed, this would be embarrassing enough. You know, some of the bigger policy moves, like signing off on the elimination of leverage ratios for the 5 major levered long banks. Timmy, you don’t want us to audit all of the policy you have signed off on or been a part of creating since you joined the Treasury in 1988 do you?
 
Here’s some advice. Stop blaming Goldman for compensation practices that you signed off on, and resign. This will save the US some credibility before it is too late. You are now trying to save your political career by throwing bankers under a bus that you drove. You are now arguing that “we want to see fundamental constraints in how senior executives are paid.” I just want fundamental constrains on how you were able to empower the system to pay them.
 
Need more history on Geithner other than where he worked and what policy he implemented? Look no further than one of his mentors - Larry Summers. Rather than take my (Jack Meyer’s) word for it, just read the Boston Globe article by Beth Healy last week titled, “Harvard Ignored Warnings About Investments.” That will get you up to speed on how a forefather of Geithner Groupthink Inc. (Summers) thought about managing risk.
 
In that article, Harvard professor, Harry Lewis nails my overall point on the matter right on the head in saying, “Whether or not anyone in particular made a mistake in this situation, it shows a fundamental structural problem. The power is just in the hands of too few people with too little accountability.’’
 
Geithner called this an “era of irresponsibility in high bonuses.” I call it an era of unbelievable incompetence. That’s all I have to say about that.
 
This morning, away from waking up to a reminder that interest rates on the short end of the US Treasury curve cannot stay at ZERO forever, we are being reminded that things priced in dollars, including petrodollars, go down when the price of dollars goes up. Fancy that.
 
I called 3 things bubbles last week. All 3 had different durations:
 
1.       Gold = immediate term

2.       Short Term Treasuries = intermediate term

3.       Banker Bonuses = long term

 
Since gold and 2-year Treasuries are down -6% and -27% since we made that call last Wednesday, Geithner can grade us with an A in proactive risk management. Yes, Timmy - proactive means before risk is revealed, not after.
 
This morning the Treasury is going to proclaim its mystery of faith suggesting that the “cost” of the TARP is $200B lower than where they thought it would be in August. These flailing politicians are also going to try to convince Americans that these are “savings” and that they are going to help either create jobs or pay down the deficit. Are you kidding me? This is the problem with Geithner Groupthink Inc. – these guys think Americans are that stupid.
 
Timmy, we know you are not an “economics” guy, but here’s how the math really works. Keeping interest rates at ZERO has funded massive spreads in what we affectionately call the Piggy Banker curve (or Yield Curve). Bankers with the special privileges (that you and the Fed have signed off on) borrow short on the cheap and lend long at some of the highest Yield Spreads EVER to the American citizenry. Then they keep all the moneys, and pay you back with it.
 
The real “cost” of these Banker bonuses comes out of Americas savings accounts. Geithner helped underwrite his own grading system. It’s not Goldman’s problem. It’s the Savings Rate Stupid. You created the rules of the system. The bankers are doing exactly what you empowered them to do.
 
My immediate term support and resistance levels for the SP500 are now 1088 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
 
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 -0.3%. 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 and 12/2.

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.