The New Deal

"Every organization must be prepared to abandon everything it does to survive in the future."
~ Peter Drucker

The worst part about the long weekend is that it’s over. Time with my family is always the most important to me. This Thanksgiving we had plenty to be thankful for, including this wonderful opportunity to be a part of a great team that’s fighting the good fight, helping rebuild of one of America’s most precious industries, the US Financial Industry.

As it has been for the last 6-9 months, studying the Depression was part of my weekend reading assignments. I am definitely thankful that my wife puts up with me on this front – losing myself in “The Forgotten Man” or “FDR” doesn’t exactly make me the most exciting husband to be around! The more I study Roosevelt, however, the more I have come to appreciate his challenging the loss of corporate America’s moral compass.

American history always finds its hero. For whatever brief period of time, Franklin Roosevelt earned that respect. Let me be clear, I am not making the case here for FDR’s economic accomplishments. I am calling out a man who calmed a nation. He was an objective man who found answers in what he used to call his “brain trust” – a group of academics and intellectuals that weren’t part of the Wall Street groupthink. He was a man of principle whose voice powered over his physical ailments. He was a man of integrity. He led by example.

The summary point of my studying FDR’s rise to the Presidency is that the economic realities between now and the Great Depression are very different; however, the credibility issues associated with American leadership are very similar. Roosevelt said that the Depression was the result “of the lack of honor of men in high places.” Think about that. Then think about what we have gone through in the last 12-18 months.

When I woke up this morning thinking about whether or not it’s the right call to be completely sold out of my US Equity position (we are now short the S&P500 via the SPY), I couldn’t help but conclude that the depression some are feeling in the halls of their own financial institutions is very real, because it should be. Inflexible organizations that don’t change will probably go away.

Now that November has passed, we’re looking back on an S&P500 that was down almost 8% for the month while the Chinese stock market appreciated closer to +9%. History is always crystal clear. Facts remain the toughest tonic for compromised credibility to swallow. Gold shone brightly in November as well, closing the month +13%. How could that be? Maybe the clear cut answer for Obamerica’s “New Reality”, like Roosevelt’s “New Deal”, is going to be to attempt to re-flate.

Re-flation isn’t a word… at least not one that has found its way into the Street’s narrative fallacy yet. Everyone from CNBC to Prince Alalweed is busy trying to convince you that deflation is going to last forever and that bankers who have flip-flopped jerseys are the answer to your leadership prayers. Re-flation is what Roosevelt initially tried to accomplish in 1933 by inflating gold and de-flating the US Dollar. Since there was a cat named Hitler introduced into the global macro picture in 1934, it’s not entirely clear how the domestic re-flation story would have played out. As Hitler’s regionalist and racist intentions became clear, the world hunkered down and repatriated their dollars closer to home.

Fortunately, today’s “New Reality” doesn’t have a Hitler. While we have the nuisances of Chavez, Ahmadinejad, and Putin, the power of their collective voice diminishes alongside the price of oil. Re-flating will most definitely turn up their non-sensical volume again, so if you’re in that inflation camp, be careful what you wish for.

In Asia, those living in India and Pakistan are waking up to the dire realities that are associated with expedited deflation. Commodity price erosion is not only a function of weakening economic demand, but it ignites the beasts of social unrest. When people are losing money and killing one another, bad things happen. If these two countries weren’t stationed at the heart of the world map’s panic button, I’d be less concerned. Make no mistake, the canaries in these coal mines have nuclear capabilities. No matter what the mass media told you on Friday doesn’t change the fact that a major geopolitical risk card was just turned face up on the world’s economic table.

Whether it’s old geo-political associations or old boy networks, we need to be prepared to “abandon everything” to survive in this uncertain future. This Thanksgiving allowed us all to pause, and give thanks… but today is December 1st… and “The New Reality” of a globally interconnected marketplace will be waiting for no one. We need to open our minds to new ideas, or someone in China will first. Americans want to win and so do I. I’ll take the lead from FDR, “I pledge you, I pledge myself to a new deal for the American people.”

Best of luck out there in December,
KM

Long ETFs

GLD -SPDR Gold Shares –LME Gold fell by 1.7% in trading this morning, the first decline in 3 sessions.

TIP –iShares Lehman TIPS Bond –2 & 10 year treasury yields sank to record lows of 0.95% and 2.88%, respectively.

OIL - iPath ETN Crude Oil –Light Sweet Crude futures fell below $52 per barrel in trading this morning despite statements made by OPEC leaders that further production cuts in December were likely.

EWG – iShares Germany - Retail sales fell by 1.6% s.a. in October from September, according to data released today by the Federal Statistics Office.

FXI –iShares China – PMI data issued by CLSA declined to 40.9 in November from 45.2 in October, the largest one month decline since the purchasing manager’s survey was begun in 2004 (a PMI managed by NBS declined by a comparable amount). The yuan declined by 0.7% to 6.8848 USD, the largest single day drop since the fixed exchange rate ended in 2005.

Short ETFs

SPY –S&P 500 DR –S&P 500 futures traded as low as 870.9 before 7AM this morning.

IFN - iShares India – Export data for October showed a year-over-year decline of 12.1% , the first decline since 2001.Finance minister Palaniappan Chidambaram has been appointed to head the Home Ministry after in the wake of the terrorist attacks in Mumbai, with Prime Minister Singh assuming control of the finance portfolio personally. The seven month ban on trading futures for basic commodities such as rubber and soybean oil was lifted by Prime Minister Singh’s administration in light of declining inflation levels.

EWU – iShares United Kingdom – PMI data measured by the The Chartered Institute of Purchasing and Supply was released today at the lowest level since 1992, with the Index registering at 34.4.

UUP – U.S. Dollar Index – The USD is weakening against the Yen this morning.

EWJ – iShares Japan –The BOJ board will hold an emergency meeting tomorrow to discuss options to increase liquidity for corporate borrowers. Labor ministry statistics show that monthly wages declined by 0.1% year-over-year in October, the first decline YTD.

FXY – CurrencyShares Japanese Yen Trust – The yen climbed 1.2 % to 119.18 EUR and 94.13 USD this morning.

Keith R. McCullough
CEO & Chief Investment Officer


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