He Who Sees No Inflation

“A perfection of means, and confusion of aims, seems to be our main problem.”
-Albert Einstein
 
Is there inflation on Main Street America? If you want the right answer to that question, don’t ask the willfully blind in Washington. They have enough political issues to deal with right now and can’t handle this ugly truth.
 
What’s ugly is what you don’t see on CNBC. The participants in the USDA’s Food Stamp Program has almost doubled since He Who Sees No Inflation (Bernanke) took the helm. A shockingly high 11% of Americans are now on food stamps. Almost 1 in 4 American children are in the program. Creating a high-low society by starving American savings accounts of fixed income yield, and plugging them with food, energy, and medical care inflation seems to be our main problem.
 
On Friday we saw US Consumer Price Inflation (CPI) reported at +2.7% year-over-year growth for December. That’s not only a 6-month high, but a massive +480 basis point move off of what Bernanke labeled a deflation problem of “Great Depression” proportions. You have to be kidding me Ben. I thought you were “data dependent”?
 
Plenty a political pundit and Washington academic who has been prognosticating a benign CPI here in the US is seeing their inflation forecast blown out of the water once again. This isn’t new. These guys didn’t see inflation with oil at $150/barrel either. Newsflash: for Main Street, $65-85/barrel oil is still inflationary.
 
Both the energy and medical care services components of the December CPI report came in higher than the CPI average of +2.7%. Energy was up +18.2% and Medical Care Services were up +3.4%. Again, we can be willfully blind to these realities, but it doesn’t change the fact that year-over-year price inflation is here to stay for the foreseeable future. Inflation is the nasty price a citizenry pays when their government clips the value of their coins.
 
This isn’t just an American problem. It’s a problem for countries who are levering up their balance sheets with debt and debasing their currencies. The United Kingdom reported a record one-month pop in inflation this morning. At +2.9% year-over-year CPI growth, the UK hasn’t seen inflation accelerate this fast in 13 years. That’s a long time.
 
When asked about the numbers, this is what the UK’s Prime Minister, Gordon Brown, told reporters in London this morning: “I don’t think you should read too much into one month’s figures.”
 
Oh, ok. We trust you Mr. Big Government bailout. Sure…
 
Now, even though her headline inflation is a good deal lower than that of the US or the UK, China still took a +1.4% year-over-year inflation reading quite seriously and went ahead and raised interest rates for the 3rd time in 3 weeks last night.
 
China raised rates on 1-year bills to 1.92% and continues to show that they are willing to manage the inflation risk their citizenry faces, proactively. After all, in a state-managed economy, you don’t have to come up with a political dance to solve for a mathematical reality.
 
Stock markets around the world have obviously weakened on all of this accelerating inflation data. In a perfect world, one could argue that this price reaction makes sense. Then again, this world’s western political leadership is far from perfect. Paying the bankers a Piggy Banker Spread at the expense of fighting Main Street inflation obviously has an implied “confusion of aims.”
 
My immediate term support and resistance levels for the SP500 are now 1131 and 1151, respectively.
 
Best of luck out there today,
KM
 
 
LONG ETFS

EWC – iShares Canada
— We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF on 1/15/10 we bought Canada.
 
XLK – SPDR Technology
— We bought back Tech after a healthy 2-day pullback on 1/7/10.
 
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).

VXX - iPath S&P500 Volatility — The VIX broke down to our immediate term oversold line on 1/6/10, 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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.

 
SHORT ETFS

IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.
 
FXE – CurrencyShares EuroWe shorted the Euro ETF on strength on 1/11/10. From an intermediate term TREND perspective we remains bullish on the US Dollar Index.

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.

SHY - iShares 1-3 Year Treasury BondsIf 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.


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