Confusion of Aims

“A perfection of means, and confusion of aims, seems to be our main problem.”
-Albert Einstein
Alan Greenspan and Ben Bernanke have perfected the art of Wall Street expectations. In doing so, these two Lords of Leverage have achieved their means. Cutting interest rates on America’s hard earned savings accounts to ZERO, and using American deposits to socialize Wall Street losses has a price, however. This “confusion of aims, seems to be our main problem” as we head into 2010.
In the end, mentally inflexible habits die hard. So will an American policy of abusing her status as the world’s reserve currency and using that currency to create limitless credit. Excessive credit creates asset price bubbles. Then they pop. That’s what you are seeing in Chinese property stocks this month. That’s what you saw in everything US real estate only 14 months ago. If you didn’t get paid to know these things, now you know.
The good news out of all of this is that some of us are still alive to write about it. The new rules of New Reality finance are that we can now expose the incompetence of Washington’s Perceived Financial Wisdom real-time. Wikipedia, YouTube, and Google are stubborn little accountability critters that way.
The sad news, as we head into another holiday season, is that the percentage of Americans living on food stamps has now hit 11%. Before Greenspan and Bernanke bailed out the tech and real estate bubbles, that number was closer to 6%. This is what we get for giving them the keys to America’s vaults of savings deposits.
Even though these guys ignored their own compromised data last week (the Consumer Price Inflation (CPI) report went straight up into the right (+1.8% y/y), the data itself is plenty convincing! He Who Sees No Inflation (Bernanke) gets paid to be willfully blind.
Fortunately, I am not the only risk manager who has figured out that an elderly person who lives on a fixed income and puts gas in her car is financing the Piggy Banker Spread (the Yield Spread is +275 basis points wide this morning). In the last three weeks we have seen a tremendous amount of marked-to-market price momentum build against the Fed Chairman’s case for an “extended and exceptional” period of ZERO percent interest rates.
Here are those accountability checks:
1.      The US Dollar has broken out to the upside on both an immediate term (TRADE) and intermediate term TREND basis

2.      US Financial stocks (XLF) have broken down on both a TRADE and TREND basis

3.      The yield on long term US Treasuries has broken out to the upside with 10-year yields now trading in what we call a Bullish Formation

What’s bullish for interest rates is bearish for bonds. That’s what I mean by Bearish and Bullish Formations. In our risk management model that’s what you get when all 3 of our core investment durations (TRADE, TREND, and TAIL) have prices that are above or below the marked-to-market price. In this case long term bonds yields are in a Bullish Formation.
For 10-year yields, those levels are as follows:
1.      TRADE = 3.43%

2.      TREND = 3.40%

3.      TAIL = 3.21%

At 3.62%, last week we saw the highest yield for 10-year Treasuries in the last 4 months. In conjunction with that breakout in bond yields, we also saw a 3-month high in the price of the US Dollar Index and a 3 month low in the price of the US Financials Index (XLF). Yes, all three of these factors hinge on one thing – He Who Sees No Inflation (Bernanke) seeing the light. The market is already discounting a Fed hike in early 2010.
While the banking division of Goldman Sachs may like to see the free money rates on the short end of the yield curve in perpetuity, the rest of America doesn’t get those preferred borrowing terms. Goldman’s “research” call is that the Fed keeps rates at ZERO well into 2011. How convenient that would be, for them…
Since I covered our long standing short position in the US Dollar on November the 10th and called it the Bombed Out Buck, I have some credibility in calling Goldman’s currency analyst out on this today. This is what he said this morning about getting run over on the short side of last week’s US Dollar squeeze:

“Timing was clearly not optimal, and we were too early in fading the recent improvements in U.S. data and the impact of Greek budget tensions… balance of payments situation remains very dollar negative. We would therefore continue to look for opportunities to position tactically for dollar weakness.”

Goldman didn’t have our inflation forecasts for November CPI and PPI. So I don’t blame them for “tactically” missing why the Dollar could pop, and US Financials (like their own stock) drop. This isn’t called “not being optimal.” This is called being wrong.

Conservative American savers on Main Street are being wronged. It’s time for He Who Sees No Inflation to “get” that. President Obama should. It’s not that complicated. And a confusion of aims is not what is going to get him the political win that he needs against Wall Street.

My immediate term support and resistance lines for the SP500 are now 1089 and 1116, respectively.

Best of luck out there today,


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 BrazilAs 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.

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.




RSX – Market Vectors RussiaWe shorted Russia on 12/18 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.  

EWJ – iShares JapanWhile 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 DiscretionaryWe 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.