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

-Stephen Jay Gould

If you have their email addresses, take a minute this weekend and send a US Senatorial Manipulator this message: STOP with the “China is a manipulator” fear-mongering; LOOK in the mirror; and FOCUS on fixing the problems with your own currency, deficit, and balance sheet.

Last night, after Timmy Geithner made his best policy decision as US Treasury Secretary to-date by not calling our largest creditor names, it was an American donkey race between Schumer, Hatch, and Baucus to see who could prove their analytical incompetence on global macro matters first.

Now most readers of the Early Look know that I am not a Geithner fan, but I am a fan of giving credit where credit is due. Geithner had the political spine to fight the protectionist wind on this issue because he finally understands the alternative. If the US continues to aggravate its Big Creditor, and China decides to unload the nuclear economic option (selling US Treasuries), the US economy would be blown to smithereens.

We’ve been hammering on this since we introduced our Q3 Macro theme of American Austerity last week (email if you’d like the 35 slide presentation with our US GDP model), but its important to repeat and review 3 critical factors in the US economic model that are changing:

  1. GDP growth
  2. Deficit spending
  3. Debt accumulation

Jokes about these ridiculous IMF assumptions for US GDP growth aside, we are finally starting to see some rational macro economists take down their US GDP growth targets for the back half of the year. At the same time, the Krugmanites of ‘feed a man a fish for a day’ (as opposed to teaching him to respect the cost of capital and access to it for life) are begging for more US government spending handouts as the US debt balance climbs.

Clearly some in Congress don’t get the relationship between debt and compounding interest expense, or they wouldn’t be mooning their Chinese landlord. If China starts selling US Treasuries, rates will rise sharply and so will America’s interest expense line. Ask the Greeks how this math works.

US Balance Sheet Update: here are the most recent data points on the debt accumulation that Senatorial Manipulators have been signing off on:

  1. US National Debt leapt $166 billion in a single day last week, the third-largest one day increase in U.S. history
  2. The Federal Reserve’s balance sheet expanded another $1.6B week-over-week to $2.34 TRILLION DOLLARS

Chuck Schumer is the modern day version of a Senator from Rome circa 71BC. He waves his orator’s plumage from upon high and purges the citizenry’s life savings as he feeds on his fish ponds of entitlements that he and his professional politician friends in Washington have created for themselves.

Hearing Schumer fear-monger Rumsfeld style about “great depressions” and the lack of Chinese transparency as he gorges himself on the fruits of this great nation’s legacy is over the top. This is the Senatorial Manipulator from New York who oversaw the biggest gong shows in US financial history. Madoff, Lehman, AIG? Wake-up dude.

In other news… President Obama’s approval rating from “independents” surveyed in the Gallup poll has dropped below the 40% line for the first time ever. With only 38% of theoretically independent votes telling us that they don’t think the President of the United States gets it, it’s probably time he puts a muzzle on some of his economic storytellers. Americans think politicians are lying to them and our deficit and debt math supports that claim.

All of this keeps us as bearish as we can be on the US Dollar (short UUP). Politicians may lie; but markets don’t - and we think that with the US Dollar Index down for the 5th consecutive week, we are onto something here that our Professional Politicians need to be paying acute attention to.

Despite the US stock market putting on a 3-day rally from its July 2nd YTD low, from its October 2007 and April 2010 ZERO-percent-money-cycle peaks, the SP500 is down -31.6% and -12.1%, respectively. We’re not currently short the SP500 (SPY) but we are waiting and watching for our selling opportunity.

Our immediate term TRADE lines of support and resistance are now 1006 and 1076, respectively.

Have a great weekend and best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Senatorial Manipulators - SEN