“It's impossible to work under conditions where they confused negativity with objectivity. You can't fool the fans.”
-Marv Albert
As Washington and Wall Street become one and the same, politicians and bankers are having a very hard time fooling the citizenry. Americans are not stupid. The fear- mongering associated with maintaining a ZERO percent rate of return on American savings is a tax. Borrow from the people to pay the bankers? The fans don’t like it.
This morning’s Bloomberg National Poll saw those who see this country headed in the right direction drop to 32% in the first week of December. That number was 40% back in September and continues to fall, despite the stock market’s climb. Timmy Geithner thought that Burning The Buck would get the Debtors, Bankers, and Politicians paid. The score there ends up being 2 out of 3. There is a bubble in Big Government. The politicians are losing political capital.
Only 26% of respondents rated the Treasury Secretary “favorably.” That’s bad. I’ve said this before and I’ll say it again this morning: I think Geithner should either resign or be fired. Replace him with Paul Volcker, or someone with credibility. Sustainably strong markets are built on confidence. America’s is waning.
On Friday, we are going to get the University of Michigan Consumer Confidence report. Our head of US Strategy, Howard Penney, continues to be as right as the sun rising in the East on his consumer confidence forecasts. The short term highs we saw in American Confidence readings are now in the rear-view. We have already seen the Michigan survey drop from 73.5 in September to 70 in October to 67 in November. December will be another lower-high versus September.
In our macro models, lower-highs are bad. We aren’t just seeing this in America’s Confidence readings (this week’s ABC/Washington Post reading dropped to minus -47!). We are seeing this across global commodity and equity markets. We are seeing confidence in certain Sovereign Debt markets implode. What we are seeing is a Minsky Moment, of sorts. Piling debt, upon debt, upon debt … and socializing the losses of economic systems has a price. “You can’t fool the fans.”
Some people were fooled into thinking that credit issues from Dubai to Greece were one-day trading events. That couldn’t be further from the truth. I see no irony in the timing of between the world’s reserve currency collapsing to lower-lows (October and November) and the popping of sovereign debt bubbles. Never underestimate the power of 63% of this world’s debt being denominated in US Dollars. Crashing that currency has many unintended consequences.
Stock markets in the Middle East and Europe have two things in common – a price and a date. On October 14th, both the Athex Index in Greece and the DFM Index in the United Arab Emirates put in their highs for the year. Since October 14th, here’s what prices have done:
1. UAE (inclusive of trading down another -6.4% this morning) = DOWN -35%
2. Greece (inclusive of trading down another -2.4% this morning) = DOWN -27%
CNBC might tell you that these aren’t risks. Apparently the local fans from Dubai to Athens are on the other side of that opinion. By any mathematical consideration, over a 2-month duration, these are called stock market crashes. “You can’t fool the fans.”
Now the fun part. As the US Dollar rallies, all of these levered up REFLATION trades start to really unwind. If a Burning Buck got the DEBTORS paid. A Bottoming Buck calls in those chits. This is why I raised my Cash position into November end. In the immediate term, Dollar DOWN and Dollar UP were going to be bearish.
Across the board, here are the REFLATION markets that have all of a sudden broken what we call our immediate-term TRADE line of support:
1. Japan’s Nikkei
2. Hong Kong’s Hang Seng
3. Australian stocks and dollars
4. Canadian stocks and dollars
5. Russia’s RTSI Index
6. UK’s FTSE Index
7. US Financial stocks (XLF)
8. The CRB Commodities Index
9. Oil
So if you didn’t know that there was a high inverse correlation between US Dollars and most things priced in Dollars, now you know.
The fans definitely know. I had dinner with some of the more thoughtful investors in Boston last night. The weather was crisp. Their thoughts were sharp. These guys are far less bullish than consensus has recently become. I guess it’s only fitting that last week marked the YTD low on the bearish side of the Institutional Investor survey (at the market top). These Boston boys are apparently allowed to be bearish.
Importantly, these investors are not Crash Callers. These are simply market craftsmen who were smart enough to sell some of their REFLATION P&L before it started to unwind. Everything has a time and price. In the end, a strong currency is what these Americans crave. For now, we just need to respect and understand that the math associated with the REFLATION score is proactively predictable.
After moving my Asset Allocation to ZERO on the International Equity side a few weeks back, I put my first toe back in the Brazilian waters yesterday, buying back our bullish long-term TAIL position in the Brazil ETF (EWZ). I have dropped my position in US Cash down from 67% last week to 58% this morning. I feel like taking my time. So I will.
Respect the fans. They set marked-to-market prices. They vote real-time.
My immediate term support and resistance levels for the SP500 are now 1085 and 1101, respectively.
Best of luck out there today,
KM
LONG ETFS
EWZ – iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero. On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.
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.
