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“I make many changes, and reject and try again, until I am satisfied.”


Managing risk in these globally interconnected times isn’t easy. That’s why we do it. You have to have your feet on the floor early every morning. You have to acknowledge new price data for what it is. You have to consume it, synthesize it, reject it – and try again…

This morning we are waking up to a whole host of Chinese numbers. On balance, they continue to confirm the conclusions embedded in all 3 of our Global Macro Themes for Q2 (Sovereign Debt Dichotomy, Inflation’s V-Bottom, April Flowers/May Showers) and remind us of one of the most important calls we made at the beginning of 2010, Chinese Ox In A Box (white hot loan and money supply growth in China would lead to inflation and government tightening).

We don’t try to shape the data to our investment themes. Sometimes it just does. The data is always changing, and our task as risk managers is to objectively change with it. Whether it’s the people who entered the year raging long everything China (after an 80% up year for China in 2009) or those who entered the month of May levered up long everything USA, it’s all one and the same. Making macro calls remains a competitive process. There will be winners and losers.

The biggest losers around the world today are those citizens who are hostage to the local inflation that they are experiencing in their domestic economies. At the end of the day, China is now importing the inflation associated with a politically charged Western World that creates fiat currencies out of thin air in order to attempt to solve for its sovereign debt problems.

Piling Debt Upon Debt Upon Debt results in long term inflation; particularly in countries where currencies are being debased. Last year, Timmy Geithner and Ben Bernanke debauched the Dollar. This year it’s Jean-Claude Trichet’s turn in clipping coins via a devaluation in the Euro. For those strategists who thought this wouldn’t end in a cyclical spike in global inflation, think again…

Here is a summary of the most important (inflationary) Chinese economic data released in the last 48 hours that took the Shanghai Composite down another -1.9% overnight to -19.2% for 2010 YTD:

  1. Chinese imports spiked to +49.7% year-over-year growth
  2. Chinese loan growth up +51% sequentially (m/m) in April to 774B Yuan (versus 511B Yuan in March)
  3. Chinese property prices (70 cities) +12.8% year-over-year representing the largest jump since 2005
  4. Chinese inflation (CPI and PPI) up again sequentially to +2.8% and +6.8% y/y, respectively
  5. Chinese Industrial Production (April) +17.9% versus +18.1% y/y in March
  6. China’s Money Supply (M2) for April slowed month-over-month by 100bps, but is still up +21.5% y/y!

Again, Inflation’s V-Bottom is a global reality born out of one of the world’s largest importers (China) buying things that are priced in Western Fiat Currencies. For those perpetual inflation doves and stock market bulls who don’t think creating 1 TRILLION Euros isn’t going to debase Europe’s currency value, try again…

After The Keynesian Elixir was applied to those wannabe short sellers of everything Friday May 7th oversold lows, we got what we wanted to see yesterday – the gut check. Did you chase or did you sell?

We sold… all day long…

For transparency purposes, here is my accountability card with time stamps (all EST) in the real-time Virtual Long/Short Portfolio at www.hedgeye.com (if you’d like to receive them real-time throughout each risk management day please email ):

  1. 955AM – sold CIT
  2. 1005AM – sold BBBY
  3. 1010AM – sold PRSP
  4. 1045AM – sold SPY
  5. 320PM – sold MYGN
  6. 327PM – shorted BRK.A
  7. 335PM – shorted BX

While ECB Chief Jean-Claude Trichet is lucky that the Coinage Act that was signed into law by President George Washington in 1792 is no longer strictly or universally applied (death sentence to politicians who clipped the citizenry’s coins), that doesn’t change the fact that the Euro is getting smoked right back to new lows again this morning. These politicians have no idea where their inflationary decisions fit in the halls of the last 3 centuries of global economic history. Nor do they care. It’s sad.

Some people have a blind trust that US and European governments are doing the right thing for markets. Some people don’t see the largest Sovereign Debt Bubble in world history as a leading indicator for inflation. Some people don’t see any risks in global markets until it’s too late.

My job as your Risk Manager isn’t to be willfully blind. It’s to make as many changes as I can to my positioning until it feels right. I need to accept and reject data as it finds its way into the correlations associated with marked-to-market pricing. I need to respect that consensus can be right or wrong longer than I can remain solvent. I need to be accountable to every decision I make, because getting it wrong is the only path to figuring out how to get it right again.

My immediate term support and resistance levels for the SP500 are now 1143 and 1168, respectively. On a breakdown and close below 1143, I see no support for the US stock market until 1107. Yesterday I raised my Cash position in the Asset Allocation Model to 58%, dropping my allocation to US Equities from 6% to 3% on strength.

Best of luck out there today,


Try Again - USDEURO