“Inflation is taxation without legislation.”
-Milton Friedman
This week we have focused our Hedgeyes on lying. Markets don’t lie; people do. We get it. But does America’s brain-trust of “smart money” who accuses China of making up their numbers get that we make up ours too? It’s an interesting question for interconnected times…
This morning, we are waking up to Anton Valukas (bankruptcy examiner for Lehman Brothers) accusing ex-Lehman CEO, tricky Dick Fuld, of “being at least grossly negligent.” Ok. When I read that, it seems to make sense. But is it true?
What if we were waking up to the headlines of the Bank of China’s executives being accused of the same? Well, sadly, we know the answer to that question too. Some people in the hedge fund community who are currently short China, would be forwarding the email – “did you see this?”
That’s what people in this business do. Do they see themselves in the mirror? Sometimes. Do they, collectively, understand the hypocrisy of some of their narrative fallacies? Sometimes. I think David Einhorn called this “fooling some of the people all of the time.”
Let’s shift gears to a more actionable matter that considers the umbrella of the same theme – lying about inflation. As my defense partner Daryl Jones pointed out in yesterday’s note, the most obvious problem about reported inflation is that governments report the numbers.
Let’s set aside that problem for a minute and simply consider that even if China and the US are making up the numbers, that the last reported monthly Made-off number is at least apples-to-apples against the current one. Then, lets back that data series up… chart it… and, for another minute, consider that even if these are Made-up numbers, that they have intermediate TRENDS to discern, relative to themselves.
Now let’s take this a step further and consider both the interconnectedness of global price inflation and two countries that are, for the sake of our standing argument, lying about inflation:
- China’s year-over-year Consumer Price Inflation (CPI) – deflation bottomed in July of 2009 at -1.8%; went positive y/y in Q4 of 2009; and is currently running up +2.7% as of January.
- USA’s year-over-year Consumer Price Inflation (CPI) – deflation bottomed in July of 2009 at -2.1%; went positive y/y in Q4 of 2009; and is currently running up +2.6% as of January.
Wow. Maybe these guys are in cahoots with one another and making up the numbers together!
At a bare minimum, no matter what your definition of truth, you can’t tell me that China or the USA is experiencing year-over-year DEFLATION in prices. Sure, you can ex-out things that normal people buy, like say gas and food, and say what you will about prices on Park Avenue – that’s fine. But the truth is that, even on your compromised and conflicted calculation, CPI is running up +450 and +470 basis points in China and the USA, respectively, in the last 9-months.
Since March 9th of 2009, the SP500 is up +70.1%. Is that deflationary? Or were Americans so bubbled up on this side of the ocean that we can’t stop lying to ourselves that the 2006-2007 price comparison that Groupthink Inc. will have you believe is the next “great depression” is nothing but just that – another lie?
Depending on how one’s portfolio is positioned this morning, they could well argue that I am making up the numbers to fit my thesis here too. That’s fine. I’ll one up you and suggest then that I am making up numbers about Made-off numbers…
If you want to take the authority on everything that really has scared the life out of people in the last 6-weeks (Sovereign Debt), take Reinhart & Rogoff’s word for it rather than mine. Chapter 12 of “This Time Its Different” is called ‘Inflation and Modern Currency Crashes’ and there’s a great chart on page 181 that shows the median inflation rate (5 year-moving average) for all countries from the year 1500 to 2007.
I know. It’s funny how politicians and liars alike have left out this part of the Piling Debt, Upon Debt, Upon Debt story out of their recent narrative fallacies. This, unfortunately, is how the story always ends – with inflation.
Milton Friedman was right when he said that “inflation is taxation without legislation.” And Mr. Macro Market is right on the pin with this again this morning. Global bond yields have done nothing but go up since the Chinese CPI report from last night. Next week, prepare for India and the USA to make up more of the same trends in their CPI numbers. They’ll be inflationary again too.
My immediate term support and resistance in the SP500 is now 1132 and 1156, respectively.
Have a nice weekend and best of luck out there today,
KM
LONG ETFS
CAF – Morgan Stanley A Share — Now that all of the inflation data we have been calling for is on the tape, China's stock market looks like it wants to tell us the news is now baked into the expectations cake. Buying China low.
XLV – SPDR Healthcare — Healthcare was down again on 3/9/10 in the face of “Obamacare” inspired fear. While we fear we may be early here, it’s better than fearing fear itself.
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.
SHORT ETFS
SPY – SPDR S&P500 — We moved to neutral (from bearish) on the S&P500 on the week of February 22. At 1139, for the immediate term TRADE, we’ll go back to bearish. This market is finally overbought. We shorted SPY on 3/5/10.
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 again on 3/5 as every sovereign debt risk has a time and price to be short of. We 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.
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.