Come On Into The Water

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

-John Maynard Keynes 

 

You’d think with all the Keynesian government people running the world today that they might from time to time consider some of Keynes thoughts about inflation. What you’d think a politician should do and what they actually do are often two different things. It’s sad; it’s unfortunate; and it’s all part of the Bubble in Politics.

 

If you combine a Big Bailout Keynesian spender with local inflation of the borrowing cost of money, you get a politician who has a serious problem. After all, politics are local. Finally, that’s what the Prime Minister of Greece is admitting in front of YouTube cameras worldwide this morning. He is tapping the EU and IMF for immediate help. In the Kubler-Ross Model of Five Stages of Grief, they call this the “Acceptance” stage.

 

My friend Todd Harrison, who runs Minyanville, has been using The Five Stages of Grief as a metaphor for the storytelling your local politicians and investment bankers alike gave you in May of 2008. It’s two years later and it’s almost May again. Like the Bear Stearns credit default swaps that were blowing out to the upside back then, politicians and levered long only managers alike want you to believe that Greece is just a “one-off event.”

 

This morning, Greece’s PM George Papandreou will remind the world of a long standing saying that we Hedgeyes have here in New Haven, CT: markets don’t lie; politicians do. Yesterday we saw credit default swaps in Greece rocket higher by 158 basis points to 644, and this morning you are seeing yields on 10-year Greek bonds spike to over 9%, which is a massive spread of 575 basis points relative to German bunds of the same duration.

 

No matter what European and Western politicians tell you about short term resolve, we want to remind you that these are the very early innings of a long and protracted sovereign debt default cycle. Borrowing an old Goldman 2007 saying, “it’s going to be global this time”, indeed.

 

In the face of attempting to fund long term debt obligations with marked-to-model short term government paper, we are also seeing global spikes in inflation. Yes, I realize that every portfolio manager in America who bought the 2007 top, crashed, then sold the 2009 low, wants to tell you that your 401k is still 30-40% underwater because we are going to “double dip.” I guess all I have to say about that is swim in these incompetent Street macro forecasting waters at your own risk. As Quint said in Jaws, “The cage goes into the water... you go into the water... the shark is in the water...”

 

My favorite central banker in the world sees these waters for what they are – dangerous. This morning, this is what Glenn Stevens at the Reserve Bank of Australia had to say about monetary policy: “Our task is now to manage a new economic upswing… this will be just as challenging, in its own way, as managing the downturn.”

 

Interestingly, this global macro man made this comment at the University of Southern Queensland, in Toowoomba, Australia. Maybe that’s how far away you need to be from the Greenspan Groupthink ideologies of Washington, DC to have read South Korea’s announcement for a +25% price hike for hot rolled coil (steel prices) by May 3rd for what it is – inflationary.

 

South Korea’s Posco is Asia’s 3rd largest steelmaker and they, like most manufacturers, must mark its prices to market so that they can earn a spread. In the good ole USA, Ben Bernanke has a different ideology on that. He price fixes the rate of return on my savings account at ZERO percent and makes that the marked-to-model borrowing cost of his cronies in the US banking system. Nice!

 

Bernanke continues to miss the inflation that he missed in 2008 that absolutely crushed the US Consumer. He is a good natured historian, so we can’t get upset about this anymore. When it comes to being a proactive risk manager of global interconnectedness, he is simply incompetent.

 

It’s actually quite amusing to watch some of the sell-side analysts who work for the banks that get paid the Piggy Banker Spread tag along with Bernanke’s compromised and conflicted message that he sees no inflation.

 

Yesterday’s Producer Price Index (PPI) report gives us one more chance to reiterate one of our three Q2 Macro themes - Inflation’s V-Bottom. In an intraday note to our macro subscribers yesterday, this is what Howard Penney wrote about the report:

 

“Stagnating consumer confidence figures suggest that most consumers don’t trust the direction the country is going in.  We are in agreement with that sentiment and think that most politicians lie and Washington’s free money man, Ben Bernanke, can’t see inflation.  Or, at least, he doesn’t want to -- until he has to.

 

The PPI rose 6% year-over-year in March and was up 0.7% sequentially - more that the 0.5% consensus estimate on Bloomberg.  The PPI report recorded its largest annual gain since September 2008 and was up on the back of a 2.4% rise in food prices, its sixth straight monthly increase. The increase can be attributed to a 49.3% increase in prices for fresh and dry vegetables (meats and eggs also contributed to the increase in prices for finished consumer foods.)”

 

Now, we understand that Captain Sell-Sider doesn’t get paid as fat a margin on that Piggy Banker Spread if Ben Bernanke raise interest rates. That’s the joke about this entire inflation story. The stock market inflates every other day and “by a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

 

If you are waking up in America this morning, and standing in the food stamp line like 11% of your countrymen, just look on the bright side. At least this isn’t Greece, yet… “come on into the water” and buy yourself some government paper.

 

My immediate term lines of support and resistance for the SP500 are now 1203 and 1214, respectively.

 

Best of luck out there today.

KM

 

Come On Into The Water - vbottom

 


Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more