“Wide acceptance of an idea is not proof of its validity.”
-Dan Brown (The Lost Symbol)
I’ve decided to preface my first note of 2010 with a quote from the author of the Da Vinci Code. Dan Brown’s latest thriller, The Lost Symbol, is set in Washington, D.C. How fitting…
That’s exactly where He Who Sees No Bubbles (Ben Bernanke) has staged his storytelling since he joined the US Federal Reserve as a governor in 2002. Ever since, the man, the myth, the legend - of everything Great Depressionista - has been politicizing monetary policy with a mandate to keep the real rate of return on American savings accounts at zero.
Clearly, Harvard University symbologist, Robert Langdon, wasn’t invited (it was more of a Groupthink Inc. event), but there were plenty of revisionist historians who assembled at the American Economic Association’s conference in Atlanta yesterday. The Bloomberg headline coming out of the meeting was, “Bernanke Says Low Rates Didn’t Cause House Bubble; Regulation Best Answer.” How fitting …
Heck, maybe that’s the best call we can make on 2010. Those with Perceived Wisdom of how the US Financial System works are just going to keep making stuff up! Greenspan and Bernanke cutting rates to zero, twice, didn’t create any debt levered priced bubbles. Take their word for it!
We shouldn’t just pick on He Who Sees No Bubbles in 2010. That would be mean. My new year’s resolution is to spread the love. There were multiple members of Groupthink Inc. at the storytelling event in Atlanta yesterday, and here are two of the most representative conclusions that this consistently inaccurate group of wise men came up with:
1. “It is not likely that we have robust growth anytime soon” –Joseph Stiglitz
2. “Lingering credit constraints are a key reason why I expect the strengthening in economic activity to be gradual.” – Donald Kohn
Donald Kohn is a much more accomplished storyteller for the Fed than Bernanke. He has been an economist supporting cut-to-zero bailout policies, well, since they were invented. Having seen none of this coming, he is now the Fed’s Vice Chairman. He apparently sees no reason to agree with me (or 99% of Americans who earn fixed incomes from their savings accounts) that consumer spending is being constrained by the Fed giving us ZERO return on our money.
This is where the Fed’s unscientific narrative is dead wrong:
1. That we need more debt and credit to fix our debtor nation problem.
2. That we silly people who save wouldn’t know what to do with a risk free rate of return if we ever see it again.
3. That main street inflation with $81/barrel oil and $3.34/lbs copper is nowhere to be seen.
In September of 2007, the Fed Funds Rate was 5.25%. We need to get at least half way back to that rate, over time, unless we want to become Japan. Savings build investment dollars. More investment dollars put into the hands of hard working American entrepreneurs is what builds the next Google or Nike. The Big Government Decade we just experienced failed. “Wide acceptance of an idea” that we need to fear rates hikes “is not proof of its validity.”
Two of our three Macro Investment Themes for 2010 are Buck Breakout and Rate Run-up. Both of these themes are correlated. Both of these themes stand on the other side of the two aforementioned quotes coming out of Groupthink Inc.
Sorry Mr. Stiglitz, reported growth is going to be robust for at least the next 6 months (Q4 and Q1 GDP). At the same time, reported inflation is going to continue to rise, as will asset prices. The US Dollar is breaking out to the upside as a leading indicator that the Fed Heads are staring in the rear-view mirror again.
At the same time, yields across the US Treasury curve are also breaking out across all three of my key investment durations (TRADE, TREND and TAIL). The long term TAIL breakout levels for 2-year and 10-year Treasury yields are 0.96% and 3.29%, respectively.
My intermediate term TREND lines (3 months or more) of support for the US Dollar and the SP500 are $76.31 and 1081, respectively. Provided that those two lines hold and the aforementioned move in the bond market continues to confirm higher-highs in the prices of copper and oil this morning, the Fed will remain behind the curve.
In 2009, they called for emergency levels of zero percent rates because we were in a “Depression.” The Fed has it wrong again already in 2010. How fitting…
Best of luck out there today,
XLV – SPDR Healthcare — Buying back the bullish position Tom Tobin and his team maintain on the intermediate TREND term for the Healthcare sector.
VXX - iPath S&P500 Volatility — For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.
EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.
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.
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 Russia — We 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 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.
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.