"Restlessness and discontent are the first necessities of progress.”
I have been very critical of both the US Treasury and the Federal Reserve. This isn’t about starting a fight. This is about the restlessness and discontent that anyone with a pulse in this fine nation feels. I have worked hard to own myself. I will not be paid off to be willfully blind.
It’s ok to be critical of people, plans, and processes if you end up being right. That is The Necessity of Progress. I am not right all of the time, but I wake up every morning expecting to be. Those who don’t like the sounds of that have probably never had the honor of playing for a Championship team. Winners expect to win.
In the last 24 hours, both He Who Sees No Real-Time Data (Bernanke) and the Squirrel Hunter (Geithner) have lost America’s trust, again! First, Geithner was YouTubed (called out) by Bloomberg’s Hugh Son, who revealed that Timmy’s pattern of withholding information on his own taxes repeats (he told AIG to limit their disclosures). Then, Ben Bernanke sent the following note to those who have been chowing down on the government sponsored Piggy Banker Spread:
“The Federal Reserve Thursday released an advisory reminding depository institutions of supervisory expectations for sound practices in managing interest rate risk… In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases.”
I call the Yield Spread (the difference between 10-year and 2-year Treasury rates) the Piggy Banker Spread, not to be critical of the bankers, but simply to call it for what it is. If both Geithner and Bernanke are going to sign off on this old-boy-network fear-mongering of the next “Great Depression”, and that allows the bankers to take whatever rate of return we used to have on our savings accounts in order to finance their own bonuses, why wouldn’t they chow down?
Take Robert Stickler’s word for it this morning (Banker of America’s spokesperson), “some people will be getting very good bonuses because they had a very good year.” Gotta love that Stickler! These guys actually think their bonuses are due to their own intellect. Newsflash: It’s the Savings Rate Stupid!
If you have time this weekend, take 10 minutes to watch Bloomberg’s all-star, Erik Schatzker, get the new Bank of America strategy for 2010. BAC’s new Captain, Brian Moynihan, doesn’t believe in doing anything structurally different. He sees no need to separate commercial banking and American savings deposits from all of the risk-taking businesses that his boys want to engage in with your money. This guy was hired to feed the pig.
At the beginning of December, I wrote about the following three bubbles, on the following three durations:
1. Gold: immediate term (3 weeks or less)
2. Short Term Treasuries: intermediate term (3 months or more)
3. Piggy Banker Bonuses: long term
You can look up the charts of gold and treasuries. I keep score. Unlike our compromised and conflicted Secretary of the Treasury, my firm shows everything that we do on our portal, real-time. We are accountable and transparent. We sold all of our gold (GLD) in the Asset Allocation Model, and now we are short it.
We are also long the US Dollar via the UUP (etf). Long UUP (Dollar); short SHY (short term treasuries); and short GLD (gold) is all really the same macro call. I continue to believe that the US Federal Reserve will be signaling an end to “extended and exceptionally” low interest rates because the economic forecast embedded in that view is simply unreasonable and unsustainable.
While the inverse correlation between the SP500 and the US Dollar that we picked up on in February of last year (see our note to President Obama from 2/24/09 titled, “Breaking The Buck”) continues to decay, we are reminded that powerful macro correlations are never perpetual. That said, since the gold price peaked and the Bombed Out Buck bottomed in early December, Gold versus US Dollar continues to have an impressively high r-square.
The Fed’s version of economic forecasting is far from a science. The days of the old boy networks of Wall Street/Washington Perceived Wisdoms are finally coming to a much appreciated halt. I don’t need to believe in Bernanke and his best buds Big Government friend, Paul Krugman, to manage my risk. Nor do I need to subscribe to the ‘we are the chosen ones’ mantra that permeates the craws of any one of Robert Rubin’s disciples (Geithner).
I need to answer the bell every morning at 4:03 AM in a passionate search for the truth. It changes every day. That’s The Necessity of Progress.
My immediate term support and resistance levels for the SP500 are now 1130 and 1145, respectively.
Best of luck out there today,
XLK – SPDR Technology — Buying back Tech after a healthy 2-day pullback. Next to Healthcare, this remains our favorite sector in the SP500.
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 — The VIX broke down to our immediate term oversold line on 1/6/10 and the II Bullish/Bearish survey is far too complacent, prompting us to add to our position on VXX.\
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.
GLD – SPDR Gold — As the gold price inches up toward the immediate term resistance line of $1137/oz, we’re going to take the other side of a long-standing bullish position.
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.