"It is not the function of our government to keep the citizen from falling into error; it is the function of the citizen to keep the government from falling into error."
– United States Supreme Court decision in American Communications Association v. Douds
Before I start getting into one of the most critical long term TAIL risks that I am currently seeing develop in my interconnected global macro model (analytically incompetent Congressmen starting an economic war with China), allow me to paint a few mathematical lines around the core of the issue – unawareness.
1. US Dollar: for the week-to-date = DOWN -1.8% (just another week of the same debauchery)
2. Chinese Yuan: for the week-to-date = UP +0.90% (its best week in 28 months)
Now President Obama has been crystal clear in rhetoric on making decisions “based on facts” so we, as citizens, should hold him accountable to that in order “to keep the government from falling into error.”
To be fair, maybe our immediate term TRADE duration (3-weeks or less) is too short term for the economic sophisticates managing America’s currency risk from Washington, DC. So let’s look at currency “manipulation” on our intermediate term TREND duration:
1. US Dollar: has declined in 13 of the last 16 weeks, and has lost over -8% of its value since early June when CNBC started begging Bernanke for QE2.
2. Chinese Yuan: has been stable, not losing more than 0.5% of its value in any given week for the last 3 months.
If the intermediate term TREND of US Dollar devaluation and Chinese Yuan appreciation doesn’t fit your partisan politicking, let’s blow the charts out to the longest of long term so that your local politician who is gasping for the over-compensation air of re-election at the mid-terms can get “smart” on the math.
1. US Dollar: after Nixon abandoned the gold standard (1971) and endowed both the Fed and Congress with the inalienable right to manipulate the world’s reserve currency via the US Federal Reserve Fund Rate, the US Dollar has only made a series of lower-highs and lower-lows.
2. Chinese Yuan: since China de-pegged its currency in 2005, the Chinese Yuan has only appreciated in value. This morning’s price is the highest price ever for the Chinese Yuan. By our math, ever is a long time.
For the mathematically challenged, we’ve provided a picture of the long-term US Dollar chart so that you can forward it to Chuck Schumer (Democrat – New York) and Sander Levin (Democrat – Michigan). Before we YouTube what these professional politicians had to say on this matter, here’s what the Chinese said overnight:
1. “Large fluctuations in the US Dollar’s exchange rate may impede the global economic recovery.” –Chinese Central Bank
2. “The appreciation of the renminbi cannot solve the trade deficit with China and can’t fix the US unemployment problem.” –Jiang Yu
3. “Pressure cannot solve the issue, rather it may lead to the contrary.” -Jiang Yu (spokesperson for the Foreign Ministry in Beijing)
Back to America’s conflicted, compromised, and confused:
1. “We have to figure out ways to change behavior” –Tim Geithner
2. “The U.S. economy is trying to pick itself up off the ground, China’s currency manipulation is like a boot to the throat of our recovery.” –Chuck Schumer
3. “Chinese practices have led to a staggering US Trade Deficit… and it’s deeply disturbing.” - Sander Levin
You got that right Colonel Sander Levin – the comments coming out of your mouth are Deeply Disturbing on so many levels that are obvious to any educated American on global risk matters right now that I can end with that. If your objective is to fear-monger uneducated Americans into going anti-China, shame on you.
Chuck Schumer became a member of the New York State Assembly in 1975. Sander Levin assumed office in Michigan’s 12th district in 1983. If these two characters want to point fingers at China for US government spending, deficit building, and debt incursion rather than hold themselves accountable to zero US private payroll adds in the last decade, they can go ahead and try – maybe that gets the next lemming in line to vote for them again, but in the age of the internet, I don’t think Americans are that stupid. Gentlemen, you have been YouTubed.
What do the alleged “non-partisan” people in Washington have to say about all this? Eswar Prasad, Senior Fellow at the Brookings Institute, concluded that “as the US mid-term election nears, the temptation of grandstanding on China will be irresistible to most Congressman.”
Thank you, Mr. Prasad.
The fact of the matter is that US Dollar depreciation is aided and abetted by stock market cheerleading to keep the US Federal Funds rate at ZERO percent anytime this country has an economic problem. That horse has been beaten to a dead pulp and has only equated to a high/low society whereby guys like me get paid to trade the volatility of commodity prices born out of that Dollar Depreciation as America’s poor get jammed with higher prices.
Mr. President, you tell me who is lying here, because it certainly isn’t market prices. The price of oats are up +24% in the last month alone (I eat oatmeal for breakfast). On our immediate term TRADE duration here are the highest inverse correlations to the USD Dollar:
1. Sugar = 0.90
2. Oats = 0.88
3. Cotton = 0.86
4. Corn = 0.85
5. Oil = 0.79
*note to Chuck – these are very high inverse correlations.
According to the US Census Bureau, there were 43.6 MILLION Americans living in poverty in 2009 and the latest reading on Americans who live off of food stamps is about that same number (which is at a 15 year high). Professional politicians who are pointing fingers at the Chinese this morning get one big fat middle one from me – their fear-mongering is Deeply Disturbing. It’s US monetary policy, stupid.
My immediate term support and resistance lines for the SP500 are now 1111 and 1134, respectively. With the US stock market being immediate term TRADE bullish, I have upped my asset allocation to US Equities to 6% this week and taken my position in cash down to 46%. With US Congress imposing this kind of systemic risk to our financial system however, I’ll be a net seller all day today.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT
Subscribe to Hedgeye to receive research and portfolio positions in real-time. This note was originally published and emailed to subscribers at 8am, this morning, September 17, 2010.