“You're looking for players whose name on the front of the sweater is more important than the one on the back”
-Herb Brooks
The Americans scored in overtime last night to beat Canada 6-5 at the World Junior Hockey Championship in Saskatchewan. This ends Canada’s gold medal streak at 5, and reminds young American hockey players that miracles still happen on ice. The USA name on the front of those jerseys last night were powered by pride. Great job boys – congratulations.
Unfortunately, off the ice, American politicians and bankers alike, continue to focus on the names on their backs. I do commend Senator Chris Dodd for exiting the building this morning. He was willfully blind to the leverage-fest he signed off on in Connecticut, and now its time for him to retire his jersey to the state and feel shame. Game over.
Meanwhile, He Who Sees No Inflation (Bernanke) has a few weeks left of focusing on the name on the back of his jersey. This week he has taken the zero accountability model straight to the job retention bank as he looks for the Senate to re-confirm him as Maestro-man of the year, part deux.
Off the ice, we live in a Debtor Nation that continues to be fueled by a severe level of group-think that only credit upon credit, and debt upon debt, can solve our losing problems. This morning, the Bernanke/Greenspan debt doctrines have gone municipal as the New York Metropolitan Transportation Authority will be first in line to sell 2010 issued “Build America Bonds.”
Timmy Geithner has signed off on a 35% Treasury rebate, so this has his banker boys watering at the mouth. It’s a new season for banker bonuses folks, and what better way to get this debt party started than by plugging municipalities and states with some Big Debtor Government sponsored liabilities.
In the first eight months of the “Build America’s” debt pile legislation, muni-bond sales have already totaled almost $70B. I know, I know – a billion dollars ain’t what it used to be to these politicians so, in 2010, they are going to likely double state and local bond sales just so that we can get a sip of that trillion dollar cup.
There is no World Championship cup for becoming the leader of the Debtor Nations. Ask 1920’s Germany or 1990’s Japan about that. Nevertheless, this morning’s global macro news run is definitely seeing other countries compete with team USA for a shot at the debtor title:
1. Greece: The Finance Minister told Bloomberg worry no more. They have plenty of private buyers of debt willing to underwrite a reduction of their national deficit (currently running at 12.7% of GDP), in exchange for imposed stagflation on the Greek citizenry.
2. Philippines: The Government is looking to sell $1.5 billion in US Dollar Denominated bonds in order to plug their deficit.
3. Iceland: After being run-over by Fitch last night, seeing their foreign currency issuer default rating downgraded, it’s time to jack up inflation and consumer borrowing costs again. Debt levered dog sledding time boys – gotta keep whipping the citizenry. Make’m yelp!
I know, I know. Who on the Big Government Debt team has any care about the name on the front of their country’s jersey? Piling debt upon debt is for their teammates kids to have to deal with some day. This self centeredness and short-termism that Bernanke and the boys on Team USA perpetuate globally is plain sad.
All the while, the Chinese seem to be marching down a different path at their own, well deserved, pace. Since President Hu’s year end remarks that China will be focused on “quality” growth going forward (as opposed to speculative loan growth), Chinese officials continue to focus on the name on the front of their jerseys. Yes, to some extent, that’s the mandate of state capitalism and I get that. But, to me at least, China’s cash reserve position seems to be powered by pride.
China is this decade’s Creditor Nation. America is the Debtor Nation. China’s central bank chief, Zhou, stated plainly yesterday that speculative investments “pose a risk to the quality of bank loans.” America’s central bank chief, Bernanke, stated that he sees nothing other than a regulatory problem that drives this country’s asset price bubbles.
Hmmm… It seems to me that China is ending America’s gold medal streak at the World Championships of Financial Leadership and Credibility.
The SP500 closed one point above my immediate term TRADE target yesterday, making a higher-high at 1136. My refreshed, immediate term, levels of support and resistance are now 1125 and 1138, respectively.
Best of luck out there today,
KM
LONG ETFS
UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).
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 12/14/09.
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 12/8/09 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.
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
RSX – Market Vectors Russia — We shorted Russia on 12/18/09 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 10/30/09 and 12/2/09.
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.
