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“The most important quality in a leader is that of being acknowledged as such.”

~ Andre Maurois

Now that the immediate term bubble in gold has popped and, to some extent, the intermediate term bubble in government debt has started popping, we are left with the mother of all long term bubbles – The Bubble in US Politics.

 

In Q4 of 2009, I called this a Banker Bonanza (a long term bubble in banker bonuses). However, to be balanced, one’s investment thesis must evolve. Since US politicians were the underwriters of Investment Banking Inc.’s compensation structure, I need to make room for them.

This global market’s supply of revisionist Crash Callers and Bubble Watchers continues to expand, so I want to be careful here. Hanging out with the consensus monkeys isn’t cool. The best way I know to make an actual call on a bubble is to A) quantify it and B) put a time stamp on it.

From here on in, we are going to be marking The Bubble in US Politics to market. We already have a name for the accountability metric: the Piggy Banker Spread. This, of course, is more commonly referred to by some as the ‘yield spread’ (the spread between the yield on 10-year US Treasuries and 2-year Treasuries – ask your local Congressman how it works).

Naturally, bubbles may be observed at their most inflated levels when looking backwards. That’s probably why so many Wall Street perma-bulls have turned into Bubble Watchers. Once someone like me has the audacity to call one of these a “bubble”, all they have to do is be on a distribution list  who forwards them our work, and tah-dah! Slap some Crayola looking charts together for effect, and they make it their own view.

In the rear view, the peak of the 2009 Piggy Banker Spread was +286 basis points wide. Again, this is as wide a spread as the politicians and bankers have ever had to chow down on. And, “AGAIN!” (Herb Brooks), EVER, is a very long time!

This morning, as we prepare for Super Bowl game day of The Bubble in US Politics, the Piggy Banker Spread is trading at +277 basis points wide. Yields on 2-year bonds are trading up at 0.85% (I know, we mice of the citizenry can take that for a rate of return on our savings accounts and cry someone a river about it – no one in Washington cares), and 10-year Treasuries are yielding 3.62%.

Why is Wednesday January the 27th, 2010 the “Super Bowl” in US Politics? Here’s my macro calendar:

1.       First, Timmy ‘The Squirrel Hunter’ Geithner and Hank ‘The Market Tank’ Paulson will be YouTubed by America testifying in front of the House.

2.       Then, Ben ‘He Who Sees No Bubbles, Inflation, or Real-Time Data’ Bernanke will pander to his politicized seat at his 215PM EST FOMC meeting.

3.       Finally, President Obama will issue his first State of the Union Address this evening.

Hooo-wah! What a great day for politics. Or maybe not…

This may very well mark the top of the Perceived Wisdoms embedded in American finance. Or wait a minute, has that horse long left the barn?

Political power can be scary. Political power backstopping the compensation structures and employment of a chosen few is downright frightening. And I don’t think the American, Chinese, or Canadian people buy into any of it anymore. Mr. Bubble Boy in US Politics, if you didn’t know that – now you know.

While this Super Bowl of politics will have the American media’s attention today, that doesn’t mean that what’s occurring on the rest of the global macro scene ceases to exist. Here’s my top 6 list of real-time risk factors to consider within your daily risk management process:

1.       Chinese equities continued to get pounded overnight, trading down another -1.1% to -8.9% YTD

2.       Weakness in Asian currency and equity markets broadened (Australian and Indian stocks lost another -1.5% and -2.9%, respectively)

3.       Rusal (the world’s largest aluminum producer) came public in Hong Kong and closed down -11% (worst HK IPO since early December)

4.       The PIGS (Portugal, Ireland, Greece, and Spain) continue to see country level CDS blow out as equity markets weaken

5.       Global CDS (credit default swaps) for 54 countries in the macro model have now seen volumes ramp up almost +15% since October

6.       Hungary issued $2B in sovereign disaster debt; they denominated the debt in US Dollars and it was their largest debt raise in 5 years

I know, that’s a lot to be concerned about - and on Super Bowl Wednesday, who in Washington needs to be bothered by any of it. Plenty of these said leaders have been elected and paid to be willfully blind. That’s a critical skill-set required for job retention when living in The Bubble of US Politics.

The SP500 has broken my intermediate term TREND line of 1096. I have immediate term TRADE support at 1077. I have a zero percent allocation to anything Asia Equities and/or anything Commodities. I remain bullish on the US Dollar and have a +52% position in our Asset Allocation Model to cash.

Best of luck out there today,

KM

 

LONG ETFS

 

XLV – SPDR Healthcare — We bought back our bullish intermediate term view on Healthcare on 1/22/10.

EWC – iShares Canada — We remain bullish on the intermediate term TREND for Canada. With a pullback in the ETF, we bought Canada on 1/15/10 and 1/21/10.

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).

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

 

GLD – SPDR Gold Shares We re-shorted Gold on a bounce on 1/25/10. We remain bullish on the US Dollar and bearish on the intermediate term TREND for the gold price as a result.

 

IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.
 
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 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.