“Prejudices are what fools use for reason.”
-Voltaire
Voltaire was a writer, philosopher, and playwright. He was one of the central figures of the Enlightenment. His real name was Francois Marie Arouet, but allegedly used upwards of 178 pen names during his time attempting to stave off being incarcerated.
On May 30th we will anniversary the 232nd year of Arouet’s death. While there are plenty of changes that have occurred in France since then, like Voltaire back in his day, we are comfortable being short the aristocracy of French politics. We call them these men the Fiat Fools.
Born in Lyon, France, the leader of the Fiat Fools is a 67 year old by the name of Jean-Claude Trichet. After being put on trial (charged with 8 others for banking irregularities at Credit Lyonnais) and cleared in 2003, Monsieur Trichet has led quite a life for himself as President of the European Central Bank. While I have had plenty of criticism reserved for Messrs Greenspan and Bernanke over the last few years, Mr. Trichet was also a critical part of the pied-piping for Fiat Fools.
This morning, Trichet is making headlines calling for a “quantum leap” to prevent the “bad behavior” of finance ministers and professional politicians across the fields of the Eurozone that he helped fertilize. Reaching the heights of hypocrisy is apparently something that the Frenchman feels no shame in doing. After all, who is actually going to hold the man accountable for laying the railway tracks of deficit building like he did as the Finance Minister of France?
World class leadership in hand, upward and onward we go this morning as the price of Keynesian Political Prejudice is priced into the Euro. The Euro is hitting 4-year lows this morning after the US Dollar traded higher for the 4th consecutive week. The US Dollar Index is up +16% and the Euro down -18% since their November 2009 levels.
Have no fear however. Our call this morning will not be to pile on to the “parity call” that has quickly become the most deserved and consensus trade in global macro. Both our immediate and intermediate term duration targets for the Euro are converging in the $1.21-1.22 range. Whenever these durations converge, my own mathematical prejudice is to cover my short position.
In Global Macro, for every short position covered there is a new opportunity to consider on the short side elsewhere. I laid out my intermediate term upward bound target for the US Dollar on Thursday, but it’s worth putting in print again here this morning as you have less and less reason to trust the calculus of some sell-side analyst who picks “parity” as his risk management level. My intermediate term upside target for the US Dollar Index remains $86.97.
Duration Mismatch is one of the most important drivers of making money in Global Macro. We are in early days of imputing the governing factors of chaos theory into global markets. That is a very good thing. It gives students of the modern day portfolio Enlightenment the edge.
The issues that Trichet is facing won’t be dissimilar to what Bernanke has coming down the pike. We’ll go through the timing of Spanish versus American debt maturities on our Monthly Macro Call tomorrow afternoon. This is a trivial exercise even for the most basic of calendar watchers. Please email if you’d like to participate. We will have our customary Q&A where well informed buy-siders can ask questions anonymously.
Back to our call for this morning, our call is what our call was in the middle of last week when we sold everything we could on US Equity market strength. Our allocation to US Equities in the Hedgeye Asset Allocation Model remains Bernanke’esque at ZERO percent. We remain short the SP500.
Both our immediate term and intermediate term TRADE and TREND lines for the SP500 are broken. What was longstanding support for US Equities is now resistance at 1144 (TREND) and 1183 (TRADE), respectively. Surely, this market has every opportunity to bounce, but our Q2 Macro Theme of May Showers looks like it will remain as long as A) it’s May and B) the SP500 continues to make a series of lower-highs.
Perversely, the Prejudices of Fiat Fools are all of a sudden making German Equities more attractive than most equity markets around the world. If you are a country exporting to China, and you sell the Chinese things that don’t look like Fat Middle Fingers, a Euro of $1.21 might be just what the German doctors of pseudo conservative fiscal responsibility have been waiting 60 years for. Intermediate term TREND line support for Germany’s DAX is currently intact down at 5,912.
Best of luck out there today,
KM
