Bernanke's Burden Of Proof

“I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
-Alan Greenspan
 
I understand that Wall Street memories can be as short a New York crack-berry minute; particularly into year-end bonus time. After a 63.8% rally from the March 2009 lows, you have a lot of people proclaiming their mystery of faith as “long term” investors again. It’s funny to watch.
 
At 52.2%, this morning’s II Bullish to Bearish Survey shows the highest weekly reading of bulls for 2009 to-date. The Depressionistas (bears) have been blown out of the water. Only 16.7% of institutional investors in the survey were allowed to admit they are currently bearish.
 
That said, I am begging you. Yes, begging you, ahead of Ben Bernanke’s FOMC testimony today, to take 3 seconds to remember what Alan Greenspan told Henry Waxman on Capitol Hill just over a year ago about his forecasting and risk management process.
 
The aforementioned quote was in response to Greenspan being questioned on his free-market ideology. One “maestro.” One view. One man who became “very distressed” … for a few months, before he started giving $50,000 dinner speeches again, I guess…
 
Here’s the rest of that riveting revelation of our Wizard of Oz, captured by David Leonhardt at the NY Times:
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working”

“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Well, it’s all good and fine for Greenspan to chalk up the failure of his free money leverage Doctrine to being “shocked.” But that doesn’t do me or this country’s future any good if He Who Sees No Bubbles (Bernanke) goes right back to upholding it.

Since Bush, Greenspan, Obama, and Bernanke have embarked on this cut rates to ZERO campaign of socializing Wall Street losses and privatizing levered up gains, the percentage of participants in the USDA’s Food Stamp Program has almost doubled.

No, that’s not a typo. The percentage of people in this country needing food stamps to eat has gone from 6% during Greenspan easy money Tech bubble in 1999 to over 11% today. One in four American children now participate in some form of food assistance program. How’s that for “God’s work.”

This is plain sad. President Obama, these are your Fat Cats. Those who subscribe to starving their population’s fixed income by cutting the rate of return on their savings accounts to ZERO, and reflating the cost of everything they have to pay for in their everyday lives.

Despite yesterday’s November report showing a massive ramp in the monthly Producer Prices (+2.7% year-over-year inflation), this is what He Who Sees No Inflation (Bernanke) had to say to US Senator, Jim Bunning’s request for reconciliation of the math:

“I continue to expect slack resources, together with the stability of inflation expectations, to contribute to the maintenance of low inflation in the period ahead.”
 
Are you kidding me Ben? First of all, what does that mean? Second of all, what in God’s good name does that do for the 99% of people on Main Street who are paying 2 times what they did last Christmas at the pump? Thirdly, are you kidding me?
 
The sad reality is that the Fed Chairman is an academic who specialized in researching the history of the Great Depression. He is not a risk manager. He is not a forecaster. He has never seen a price bubble, nor should you expect him to.
 
This morning you are going to get another inflating price report at 830AM via US Consumer Prices for November. Then, you are going to see Bernanke get You Tubed for the umpteenth time at 215PM when he tells the free world that he sees no price inflation. The Chinese will be watching.
 
The problem with Bernanke has already been established by Greenpan himself. Again, re-read the aforementioned quotes. “Again”… “Again”… “Again!”
 
The bankers are getting paid in size by the government. The Piggy Banker Spread (the spread between 10-year and 2-year Treasury yields) is +272 basis points wide this morning. That’s only 4 basis points (0.04%) off of the fattest spread EVER. Yes, Mr. Bernanke, Mr. Geithner, and President Obama – you have set the table, and now the bankers are simply chowing down on what you served up. Don’t put the onus solely on them for eating.
 
All the while we are seeing Mr. Macro Market bake the long term effects of price inflation into the cake. Greenspan and Bernanke may have an admittedly “significant or permanent” impairment in their vision, but I can tell you this – Americans don’t get paid to wake up every morning willfully blind.
 
We are now seeing marked-to-market prices breakout to the upside in classic Federal Reserve rate hike leading indicators. Both the US Dollar and long term US Treasury yields have broken out above my intermediate term TREND lines to the upside (those breakout lines are $76.30 USD and 3.41%, respectively).
 
Greenspan and Bernanke can run from Mr. Macro Market, but they can’t hide. Prices don’t lie. The outputs of their Perceived Wisdoms do. History has a funny way of writing herself that way. While it may be hard for Washington to see this in their crack-berry caves of Groupthink Inc., with time it becomes crystal clear.
 
My immediate term support and resistance levels for the SP500 are now 1100 and 1115, respectively. I am sure we will test the top end of that range if Bernanke ignores this morning’s inflation data and panders to the most politicized monetary policy wind in US economic history this afternoon.

That’s why I invested 7% of the cash in my Asset Allocation on yesterday’s market down move. I moved longs versus shorts in the Virtual Portfolio to 21-11. Bernanke’s burden of proof remains something the risk manager in me cannot ignore.
 
Best of luck out there today,
KM

 

 

LONG ETFS
 
VXX – iPath S&P500 Volatility For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.

 

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.