“If we knew what we were doing, it wouldn’t be called research, would it?”
-Albert Einstein
After listening to Larry Kudlow cajole Hank Paulson last night, I thanked my lucky stars that men of this intellect and foresight were watching over my family between 2003 and 2007. On behalf of all Americans, I suppose they want me to thank them for saving our lives from the crisis they perpetuated.
I guess Kudlow is so caught up in running for the Republican party that he forgets demanding Bernanke provide what he called “shock and awe” liquidity to the system on all stock market down days. At the same time the ex- Goldman CEO reminds us that he “never second guessed my partners at the Fed.”
Kudlow called Paulson’s self serving Revisionist Research a “brilliant account” of saving us from their own compensation depression. They reminisced about Paulson’s Christian Scientist leanings and Kudlow’s prior addictions being saved by prayers to God. The whole thing was just scary, as Perceived Wisdom, combined with abused political and media power, usually is.
Turning the page back to reality this morning, the Chinese obviously watched that interview and had to wonder what in God’s good name they are doing betting the ranch of their currency reserves on a politically and religiously loaded American fraternity of conflicted interests.
Chinese stocks sold off again overnight, leading most of Asia to close lower, despite the CNBC oriented market cheering that’s always met with an American market up day. The Chinese don’t get paid to be willfully blind. Nor do they see any long term risk management in “never second guessing” the thought processes of two highly politicized men like Bernanke and Greenspan.
China, India, and Australia have an explicitly different view on monetary policy than America, Britain, and Japan. This is new. While 74% of “economists” thought the Reserve Bank of Australia’s Glenn Stevens was going to raise rates again overnight, he didn’t. That’s the point. He doesn’t have a Wall Street or a Washington consensus to pander to.
Countries that are leaning toward the once stated independent Federal Reserve policy (1980s, under Paul Volcker) of fighting inflation and asset price speculation continue to do just that, irrespective of being concerned with what their stock markets might do on any given minute, week, or month.
Australia has already raised rates 3-times in the last 3 months. China and India have both tightened bank reserve requirements, and raised short term lending rates. In the US, rather than manage risk like this proactively, we subscribe to reactive management, setting rate policy based on the blowings of the political wind. That’s what I have been referring to as the Bubble in US Politics.
Can you imagine Michael Bloomberg stepping up this morning and suggesting that New York City’s property prices are speculative? Could you ever imagine any American politician saying anything of the like, ever?
On Monday morning, the Mayor of Shanghai called property prices “too high.” This is AFTER property stocks in China have been getting hammered for the last 6 months. This isn’t about propping up a CNBC market quote folks. This is about learning from research associated with American asset price bubbles.
The China Banking Regulatory Commission warned lenders last night, again, about “hot money” in the property market. These guys are being both consistent in their message and vigilant in their execution of it. This isn’t leftist political rhetoric. This is called meaning what you say.
Now our call for Q1 has been that the Chinese Ox will be in a Box, so this is fine relative to the positioning of our intermediate term investment call. But please, please, do not mistake this for our grandstanding and making this a crash call. That’s what the fire engine chasers are doing AFTER the property bubble in China has already popped.
The Chinese property component of the Shanghai Composite Index closed down another 1% overnight, taking the overall Shanghai stock market index to down -10.5% for the YTD. After the fact, former Morgan Stanley research analyst, Andy Xie, is making headlines saying that the “property bubble is set to burst.”
Now don’t get me wrong, Xie does some great research. He’s by no means a consensus monkey. But calling for something to crash, after it has been crashing is probably a little bit more about selling research than making a long term call from here that you can make money on.
On January 10th, China’s State Council guided to explicit guidelines on property lending. Chinese lenders have to abide by a minimum 40% down-payment for 2nd mortgages, and price home loans 10% above the benchmark lending rate of 5.3%. Sound like an “easy money” bubble economy to you?
If you missed seeing this coming, that’s fine. But please don’t let a man purporting to be a researcher tell you that it’s either new this morning or that it wasn’t foreseeable. That’s what Larry Kudlow and Hank Paulson are telling you about 2008, rather than reminding you of all that they said and did between 2003 and 2007. History doesn’t start on the date they decide.
My immediate term support and resistance levels for the SP500 are now 1062 and 1098, respectively.
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.
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
UNG – United States Natural Gas Fund — Macro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it.
XLE – SPDR Energy — The Energy ETF was up +1.7% on 1/29/10 and we remain bearish on both oil and commodity prices for the intermediate term. Shorting green.
SPY – SPDR S&P 500 — The SP500 broke our intermediate term TREND line earlier this week and remains broken. The 4Q09 GDP report confirms that Bernanke has to raise interest rates. ZERO is not a perpetual policy unless the USA wants to become Japan. We shorted SPY on 1/29/10.
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 Treasury — One 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. Russia’s GDP fell 7.9% in 2009.
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.
