The Seeds of Manipulation

When people learn no tools of judgment and merely follow their hopes, the seeds of political manipulation are sown.”

-Stephen Jay Gould

Modern day science lost an important mind when Stephen Jay Gould passed away in 2002. He was only 60 years old, but had already contributed a great deal of biological research on the evolution of man. Many of Gould’s research essays were collected in volumes with titles like “Ever Since Darwin.” He developed the theory of “punctuated equilibrium”, where evolutionary change occurs much more rapidly than during longer periods of stability.

I wake up every morning with a hope that our financial leadership and thought processes about markets and risk evolve. Hope, unfortunately, is not an investment process, and I often find myself getting frustrated. Sometimes it’s pretty obvious in my writings; I get that.

But do politicians around this world get it? Let’s consider this morning’s global macro news run:

  1. “I wish there was a miracle, but all we can do is persist with our efforts.” –Bank of Japan Governor Masaaki Shirakawa
  2. “All we can do on the Monetary Policy Committee is stand ready to react” –Bank of England Deputy Governor Charles Bean
  3. “The only way we will change them is by forcing them to change” –Senior United States Senator (NY) Chuck Schumer on China

Collectively, I don’t even know how to start summarizing these statements. This is getting bad. The Bubble in Global Politics seemingly has no peak in sight. We are all hostage to the Seeds of Political Manipulation.

Setting aside how ridiculous Schumer’s comments about America’s Creditor (China) are, let’s consider where these comments from Japan and the UK are coming from this morning.

  1. In Japan, the BOJ left interest rates unchanged at ZERO percent for the umpteenth time in the last few decades (really successful economic policy model for America to follow by the way – who needs to evolve and learn from that?) and implemented a fresh 20 TRILLION Yen, 3-month loan facility, to inject more liquidity into their politically compromised bureaucratic bubble economy.
  2. In the UK, with Gordon Brown leaning as far left as he can possibly bend in order to save his political career, monetary policy politicians are trying to reconcile why this thing called inflation has reared its ugly head into their compromised government inflation reporting system. Inflation in the UK is running up +3.5% all of a sudden. That’s well above their stated target. That’s what happens when you burn the value of your currency.

Again, I can’t go on the record addressing these China comments from Schumer. I just deleted what I wrote about them. I cannot get my head around them in anything that resembles a professional way. Back to Japan and the UK:

  1. What is 20 TRILLION Yen going for these days anyway?
  2. In the UK, are they admitting what American monetary policy makers wouldn’t dare? That setting policy is a reactive exercise?

We regularly beat this point to a dead pulp, but real people in this world are coming up with real proactive plans to prevent crises. Meanwhile, we have mathematically and scientifically incompetent politicians around this word sowing the seeds of their own mindless market manipulation, then reacting to what they themselves planted?

Now I have a headache.

Back to the math, twenty TRILLION Yen equals $222 BILLION Dollars. Oil is trading up at $83/barrel and copper at $3.40/lb this morning. Western and Japanese governments are creating more money than God himself could count.

Printing moneys for an “extended and exceptional” period of time will end with inflation that politicians will be reacting to and “wishing for a miracle” that the rest of us who aren’t paid to be willfully blind don’t see.

Sorry China. That’s all we can say this morning about Schumer’s comments. Sorry. He’s just another American politician who “has learned no tools of judgment” who is “merely following his own political hopes.” Please don’t sell your Treasuries. Please.

My immediate term support and resistance lines for the SP500 are now 1144 and 1163, respectively. I have 17 longs and 8 shorts in the Virtual Portfolio, and if the market is up today on these hopes of globally socialized losses, I intend on selling into them.

Best of luck out there today,

KM

LONG ETFS

USO – United States Oil — Despite a sharp correction in oil prices on 3/15/10, the price of WTIC oil remains in a bullish intermediate term position with TREND line support at $77.39/barrel. Buying on red.

 

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

XLP – SPDR Consumer StaplesConsumer Staples was the best performing sector on 3/15/10 in our S&P Sector Model and was immediate term overbought.

 

SPY – SPDR S&P500We 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 SpainThe 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 2000With 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 TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.