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"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street”
-President Barack Obama

Now isn’t that a heroic one-liner from a President who is in a must need situation for a political win? If he understands the math associated with who financed these bonuses, I should hope he is including He Who Sees No Bubbles (Bernanke) and Timmy Geithner in this all encompassing populist attack on bankers.
 
There is another Political Fat Cat in Italy who has been living rather large as of late. He figured hot tubbin’ with teenagers was cool until his wife found out. Italian Prime Minister, Silvio Berlusconi, learned his lesson the hard way this weekend after taking a statuette of the Milan Cathedral in the melon.
 
Berlusconi is no hockey player. Apparently a broken nose in Italian Government gets you a couple days in the hospital. In hockey speak we call this getting your medicine.
 
Whether it is world markets cheering for another dose of Big Government Intervention in Dubai this morning (the UAE is trading up over +10% on “news” of a Abu Dhabi hybrid government bailout) or the reality that we have created Citigroup bankers who are too big to fail, the conclusion here is pretty obvious. Fat Cats aren’t just purring on Wall Street. They are in Washington and they will be seeing politically broken noses when their citizenry figures out the simple truth.
 
In the US, the truth of the matter isn’t about Democrats or Republicans. It’s about a bubble in Big Government. The Fat Cats in investment banking are simply paying themselves via the system of rules that our government empowered them with. Populist anger with banker bonuses should not be one-dimensional. For a politician in this country to call that out as something that they didn’t help finance is over the top. It’s time for the President to “get” this too.
 
Back by popular demand this morning, for all you Piggy Banker fans, this is the way banker compensation works. There is this thing called the Piggy Banker Spread (financiers call it the Yield Spread). It’s the spread between the short end of the yield curve and the long end (10-year minus 2-year Treasury Yields). This morning that spread is trading within 3 basis points (or 0.03 percent) away from its widest spread EVER!
 
Ever, President Obama, is a long time. You are currently signing off on fiscal and monetary policy that creates this Fat Cat Spread for the bankers to chow down on. Yes, this is how the math associated with borrowing from your citizenry’s savings accounts works. You give prudent American savers ZERO as a rate of return. At the same time, Piggy Bankers borrow at ZERO. Then they lend that money out to the citizenry (after they pay themselves) at higher rates of return.
 
Sorry Big Man, your definition of Fat Cat has a broken nose. And this one might take more than a few days in the hospital to fix.
 
Away from the most politicized US Treasury and Federal Reserve in modern finance, what’s driving this? Fear. This is the classic political move of fear-mongering to create a crisis that the politicians want to be credited in solving. The short end of America’s yield curve has been fear-mongered into the pig trough. This morning’s rate on 3-month US Treasuries is 0.02%. Yeah, I’m sure the Chinese love that as much as I and anyone with an American savings account does.
 
Fortunately, free markets are pricing in reality on the long end of the curve. Yes, the Fat Cats with broken political noses can tell you we need to maintain “an emergency level of ZERO percent for an exceptional and extended period”, but at the same time the rest of the world is free to mark these assertions to market. We are now seeing an intermediate and long term breakout in the yield of 10-year US Treasury yields as a result.
 
At 3.52%, I have 10-year yields busting a move above both of the most influential lines in my global risk management model:
 
1.      Intermediate term TREND line = 3.41%

2.      Long term TAIL line = 3.21%

 
At the same time I have the US Dollar breaking out to the upside above both its TRADE and TREND lines:
 
1.      Immediate term TRADE line = 75.33

2.      Intermediate term TREND line = 76.30

 
Are these two factors (US Dollar and US Treasuries) highly correlated? You bet your Madoff they are. They are leading indicators for the President Obama and his internal czars of Perceived Financial Wisdom to have a mea culpa on interest rate policy too.
 
This week is a critical one for those of us who are still data dependent. On Tuesday and Wednesday, we are going to see a continued REFLATION of the US producer and consumer prices. Yes, there was a time in the land of nod when He Who Sees No Bubbles (Bernanke) said we were going to have a Great Depression in prices. But, once again, the data has proven him wrong. The YTD low for CPI in the US was established all the way back in July at -2.1%. Now year-over-year inflation is about to go positive.
 
Bernanke’s inflation forecasting track record speaks for itself. It’s flat out awful. He would never be hired by us knuckleheads of the gridiron to manage marked-to-market P&L risk. That’s why they saved a special place for him in academia and Washington where forecasting is a revisionist historian’s profession.
 
I am looking forward to the US Government’s latest storytelling this week. The Fed’s Open Market Committee decision on Wednesday won’t disappoint in terms of political pandering. Fat Cats with broken noses dancing on the hot-stove of You Tube should be an interesting show.
 
My immediate term support and resistance levels for the SP500 are now 1096 and 1113, 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.   

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.