“Maturity is achieved when a person postpones immediate pleasures for long-term values.”
-Rabbi Joshua Loth Liebman
Since we actually have a Rabbi on staff at Hedgeye Risk Management (for compliance purposes and not for reasons of faith), one would expect that he would be the one to take the lead in quoting a Jewish religious leader to start off the Early Look. Ironically, it is not Moshe Silver, but Daryl Jones, the hockey playing goy, who has decided to quote Rabbi Liebman this morning.
For those who didn’t know, Rabbi Liebman was the author of book entitled, “Peace of Mind”, which was on the New York Times best seller list for more than a year and in fact reached the top of the list for a period of time. To say Rabbi Liebman was no schlepper, would be an understatement. He graduated from the University of Cincinnati at 19. By the time he was 27, he was an ordained Rabbi and leading his own synogogue.
Despite passing away at the early age of 41, Rabbi Liebman left us with some memorable quotes from his writings. As I was reflecting on the disparities of fiscal policy among nations, this quote stuck with me. One on hand we have central bankers in some nations that are acting prudently and “postponing immediately pleasures for long-term values.” While on the other hand there are certain central bankers and government leaders that continue to endorse erroneous fiscal policy with such chutzpah that we can only be concerned.
Chinese Premier Wen Jiabao of China, who is no schmendrik in our books, of course has been on the proactive and rational end of endorsing prudent fiscal and monetary policy. Yesterday, while speaking to his colleagues in the Chinese government, he indicated that the Chinese economic growth path was “unbalanced, uncoordinated, and unsustainable.” This morning the news out of China is that Jiabo is warning of the “latent risk” in Chinese banks and is pledging a crackdown on property speculation.
So, not only does Premier Jiabao see bubbles, he is trying to proactively prevent them. Whether he will be successful before we have some sharper correction in China is yet to be seen, but the reactions we are getting from the private sector in China (if we can call it that) are certainly positive. Specifically, two major Chinese banks, ICBC and Bank of China, announced this morning they will slow lending after a record year in 2009. While there are many investors that still aren’t kosher with China, we like this proactive fiscal leadership.
The risk of being a klutz as it relates to managing your budget and fiscal policy is that on the day of reckoning, when you are on the verge of default, is that there may not be anyone to support you. Greece has its well publicized issues, which were emphasized by the egregious rates that it had to pay for debt yesterday in its $5BN Euro offering of 10-year notes (300 basis points above Berlin), and today we see where its neighbors stand on a bailout for the nation. According to the German economic minister, Germany will not be offering Greece “even one cent.”
In contrast to China, yesterday we had two members of the U.S. Federal Reserve system, Chicago Fed President Charles Evans and St. Louis Fed President James Bullard give spiels on the economy. Evans indicated that he needs to see “signs of sustainable growth” before supporting tightening and Bullard stated he thinks policy makers should remain “very accommodative”. The leaders of the Fed continue to prove one thing, they are great shmoozers, but in terms of showing proactive leadership and moving past Depressionista level interest rates, they continue to fall short.
While we may be Fed Up With The Fed, there are nations and leaders that continue to show fiscal leadership. With the mazel tovs barely behind them for winning a gold men in Men’s Ice Hockey, Prime Minister Stephen Harper of Canada proposed a budget yesterday with aggressive federal spending cuts. The budget would position Canada to be the first member of the G-7 to erase its deficit by 2014.
Not everyone is receiving this budget well. As a columnist in Toronto’s Globe and Mail wrote today about the Harper strategy:
“We're going to ignore the environment, because you don't care. We're going to balance the budget, because you do care. We're willing to risk a fight with public servants, because you want us to. We're not going to spend money on anything new, because you don't want us to.”
Prime Minister Harper’s leadership here is admirable. We continue to be bullish on Canada.
Focusing on a nation’s fiscal and monetary policy is critical before making an investment in any nation. We need this policy to be “mature” and to “postpone immediately pleasures for long-term values.” After all, as history tells us, countries cannot issue debt in perpetuity without consequences.
Daryl G. Jones
XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red.
XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.
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).
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.
EWP – iShares Spain — The etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We shorted Spain for a TRADE, and have a bearish bias on the country. Massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.
IWM – iShares Russell 2000 — With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10 and added to it on 3/2; we got the entry price that the risk manager makes a sale on strength.
GLD – SPDR Gold — We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.
XLP – SPDR Consumer Staples — Another capitulation squeeze is in full motion for the short sellers of everything "consumer". Shorting green as inflation starts to creep into the system again.
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.