The Great Enemy Of The Truth

"The great enemy of the truth is very often not the lie - deliberate, contrived and dishonest - but the myth - persistent, persuasive, and unrealistic."
-John F. Kennedy


Modern day Rome (Washington) has rendered itself a very sad place. When it comes to storytelling, that is…


JFK’s prescient point in 1962 may very well explain the fall of the modern day Keynesian Empire as much as it explains who our professional politicians see when they look in the mirror.  Collectively, the myths of their “pretended patriotism” can be “persistent, persuasive, and unrealistic.”


As I sat beside Bloomberg’s Deirdre Bolton yesterday, watching Timmy Geithner represent the US government’s latest storytelling to the Chinese, I couldn’t help but notice the shadows that became Mr. Geithner. Both the proverbial shadow of global doubt and the two Chinese flags enveloping Timmy’s conflicted representation of the American “truth” were ominous.


As Geithner prepares to reach the heights of hypocrisy this morning (speaking in London), here’s our version of the sad truth - America is 3-6 months away from becoming the global spotlight that is a European debtor and deficit disaster.


Remember, the math doesn’t lie; politicians do. Here the latest:

  1. Fed’s Balance Sheet: last week the Federal Reserve’s balance sheet expanded by another $14.8B on a week-over-week basis, after the Fiat Fools signed off on the Fed buying another $21B in Mortgage Backed Securities (on the week!). This puts the Fed’s balance sheet at a new sequential peak of $2.35 TRILLION dollars (Transparency/Accountability check: Bernanke said he was going to reduce the size of the Fed’s Balance Sheet)…
  2. America’s Balance Sheet: post yesterday’s $42B in 2-year Treasury issuance, the United States of America’s total debt balance has officially eclipsed the $13 TRILLION dollar mark, or 86% of projected 2010 GDP (as a reference point for sovereign debt/GDP ratios, our Managing Director of Macro, Daryl Jones, has Spain’s 2010 Debt/GDP at 69%).
  3. America’s Off Balance Sheet Liabilities: post another day in the life that has become the fictional equivalent of extend and pretend until another professional politician can hold the bag for our kids, this mother nut of debt does not cease to exist. I have recently finished reading David Walker’s “Comeback America”, so for the sake of time this morning, let’s use his estimate from 2008 of $42.9 TRILLION dollars and persuade ourselves that since Walker left working for Groupthink Inc. in Washington (he worked on these numbers for 4 presidential administrations), his estimate from almost 2 years ago is plenty conservative/low.

Now Walker calls this America’s “$56 TRILLION Financial Hole”, but the hole is actually getting deeper. That’s what happens when you keep digging in with more debt. This is the sad truth. From Hank The Market Tank Paulson to Tricky Dick Fuld, America has not learned the most important lesson of the 2008 crisis: borrowing short to fund long term liabilities heightens the probability of a balance sheet blowup. Instead of Lehman’s, now it’s America’s.


Back to Timmy being engulfed by the Star Spangled Banner’s shadow of doubt…


When Bloomberg’s Peter Cooke asked Geithner about America’s financial positioning, Timmy was quick to acknowledge that all of the aforementioned TRILLIONS of issues have the USA in a “very strong position”…


Too make things worse… the man, the myth, that would be Keynesian Legend in a Roman Empire past… went on to say that it’s the Europeans who face the “difficult challenge of trying to restore sustainability to an unsustainable system”…


All righty then…


With a calculation of the world’s most significant Debtor Nation in hand, your risk management choice this morning is clear. Believe the government or your gut. The myth that America’s deficit and balance sheet issues are not heading down the same path as Europe’s is both “persistent and persuasive”, indeed. It is also unrealistic.


I re-shorted the SP500 (SPY) into yesterday’s closing rally, and I will re-short it again on strength. My allocation to US Equities mirrors Bernanke’s Japanese style monetary policy at zero percent. After all, if you want to take their word for it – the risk free rate of return in America is actually zero. Risk free is where I want my family and firm’s hard earned incomes to be, for now…


My immediate term support and resistance lines for the SP500 are now 1047 and 1108, respectively. The SP500’s long term TAIL of support is now 1074. This powder keg of government-sponsored volatility remains.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Great Enemy Of The Truth - JFK

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