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This note was originally published at 8am this morning, October 12, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"I didn't even like coke that much, it was just a case of getting on whatever train I needed to take to get high.”

-Carrie Fisher

On many levels, the Big Government American Life of the late 1970s became a scary place. As consensus gets paid to snort QE and blow its mind on whatever M&A machination they can dream up because “money is cheap”, please remember that we’ve seen government sponsored trailers to this movie before.

In 1977, as Jimmy Carter was being sworn in as President of The United States and the Fed’s Chairman, Arthur Burns, was finishing his experiment of monetizing US Treasury debt, “Star Wars Episode IV: A New Hope” came to the big screen. In the meantime, Princess Leia (Carrie Fisher) was snorting lines of cocaine on the set of “The Empire Strikes Back.”  

If you didn’t know that’s what was going on behind the scenes, now you know. Yesterday, in the spirit of Columbus Day, the now 53-year old Fisher admitted that she didn’t even really like doing coke, but she was quite happy to get high anyway.

Hope, of course, is not an investment process and neither is chasing this market higher in the face of what you really know is going on. Inflation is running up again. Both companies and consumers alike are starting to get squeezed.

Before you have a “New Keynesian” who got submarined by stagflation circa 1981 send me a reply explaining how everything is “deflationary”…  but earnings for the companies my buddies and I are long are “going to be great”…  but “we need QE3 anyway”… let’s look at some real-time prices:

  1. CRB Commodities Index hit a new YTD high yesterday for 2010 (up +13% since August!).
  2. Copper prices are up +28% since August and are now testing their all-time peak prices of 2008.
  3. Chinese stocks have rallied +20% since their July lows.

China, Copper, and Commodities? Yes, Dear Congress person, these are what we call demand drivers of long term secular inflation that are augmenting your Burning of the Buck as you provide the stimulus for Jobless American Stagflation.

Now please don’t take my word for this concept of long-term secular inflation. Have all of your analysts read pages 180-201 in Reinhart & Rogoff’s ‘This Time Is Different.’ Chapter 12, “Inflation and Modern Currency Crashes”, is very timely reading when you consider the history of global inflation going back to the year 1500.

Yes, going back that far in time is a long time. But so is life and, as Rose Bertin aptly put it, “there is nothing new except what is forgotten.” The chart on page 181 of the median inflation rate, using a 5-year moving average, tells you all you need to know. Ever since the world convinced itself that the US should be trusted to debauch the world’s reserve currency, prices have gone up.

In today’s world inflation is, like politics, a local phenomenon that’s backed by the credibility of the government who oversees its currency. So let’s strap the accountability pants on and snort down some local inflation readings from this morning:

  1. UK Consumer Price Inflation (CPI) was reported at +3.1% year-over-year (+110bps above what even the government calls acceptable).
  2. Brazil is raising its inflation forecast for 2011 to +4.98% - that’s pretty precise because they change the estimate as prices change.
  3. Korea’s Posco (the 3rd largest steelmaker in the world) cuts earnings guidance by 7% due to “commodity costs” rising.

All the while, back here in the Empire of the Fiats, after the US Dollar has lost -13% of its value over the course of the last 19 weeks, Ben Bernanke is going to fear-monger you into trusting that everything you put in your car or grocery basket is deflating. Keep snorting on that QE idea dude. Arthur Burns did.

Ahead of Heli-Ben’s deflation speech at the Boston Fed on Friday, think about what’s really going on behind the scenes here folks. The US government is broke and can’t afford to tell Americans on Social Security that professional politicians would rather pay themselves than the political piper.

As my partner, Howard Penney wrote yesterday, health insurance premiums are rising, poverty is up (43 million on food stamps), and the nation's unemployment rate is nearly 10% and now the government is expected to announce this week that more than 58 million Social Security recipients will go through another year without an increase in their monthly social security benefits.

As a point of reference, Social Security and Supplemental Security Income benefits are adjusted annually to reflect the increase in inflation; the average CPI-W for the third calendar quarter of the prior year is compared to the average CPI-W for the third calendar quarter of the current year and the resulting percentage increase represents the percentage that will be used to adjust Social Security benefits beginning for December of the current year.

The projection will be made official on Friday, when the Bureau of Labor Statistics releases inflation estimates for September. Those on Social Security haven’t had a raise since January 2009, and now it looks like they won’t be getting one until at least January 2012.

Now you know why Bernanke’s speech in Boston is titled “Revisiting Monetary Policy In A LOW INFLATION Environment”…

Keep taking whatever train you boys at the Fed need to get on to help CNBC cheer that stock market higher. We know what’s going on behind the scenes.

My immediate term support and resistance lines for the SP500 are now 1153 and 1173, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Inflation Wars: Snorting QE - fisher