This note was originally published at 8am this morning, October 18, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
"Blind belief in authority is the greatest enemy of truth."
— Albert Einstein
If you need a solid dose of anti-academic dogma, read “Einstein: His Life and Universe” by Walter Isaacson. Never again will you accept the Blind Beliefs of modern day academics who purport to know exactly what is going on in your life and the global economy.
In addition to an ominously timed story titled “The Return of the LBO”, Barron’s ran an interview with Vincent Reinhart this weekend titled “The Case for Quantitative Easing.” If you haven’t read it yet, you should. It will cost you 5 debauched bucks to get a consensus opinion that’s worth about that much.
Vincent Reinhart shouldn’t be confused with his wife, Carmen Reinhart, who co-authored one of the most important empirical works in modern economic times (“This Time Is Different” with Ken Rogoff). Carmen is a self-taught Cuban-American who came to America with her family and 3 suitcases in 1966, whereas Vincent spent almost his entire career as a yes-man at the Federal Reserve.
If you don’t want to waste 5 Burning Bucks (the US Dollar closed down again on a week-over-week basis last week for the 17th out of the last 20 weeks), here’s a recap of some fairly shocking one-liners in the Reinhart interview (*reminder – Reinhart was a Greenspan “consigliore”):
1. Barron’s: “You must feel some vindication that the very policy you have been pushing for several years is now being embraced”
Reinhart: “It’s too early to take credit until they actually do something meaningful.”
2. Barron’s: “Quantitative easing has very little history in economics.”
Reinhart: “There was one other important case study, the 1930s, when short term rates were about zero from 1932 onward.”
3. Barron’s: “Is that a good or a bad thing?”
Reinhart: “That depends on your outlook. Certainly you can’t expect the Chairman of the Fed to go around making speeches saying ‘hooray, we are depreciating the currency. Yet dollar weakness is a good thing as long as it is limited, controlled and gradual.”
Maybe a better acronym for QE is government sponsored BS.
While we do applaud the Barron’s interviewer for giving Hedgeye some knucks calling QE “financial kryptonite” (in our Q4 Macro Themes presentation from 3 weeks ago we coined QE “Krugman’s Kryptonite”), we’re hardly going to support another professional politician with no market practitioner background for pandering to the academic dogma of a Fed Chairman who is still lost in his historical studies of the Great Depression.
I think the groupthink embedded in these quotes is pretty obvious, so I won’t dissect it in detail, but I will summarize the risk in what both Reinhart and Ben Bernanke aren’t telling you.
1. With 43 MILLION Americans in line for the Food Stamp program and a 9.6% unemployment rate there should be no credit given to the charlatans of the broken promises associated with ZERO percent rates and Big US Government Market Intervention.
2. Quantitative Easing has plenty of history – it’s just not the history that fits the storytelling of those who perpetuated Jobless Stagflation in both the mid-1930s (Germany and USA) and Japan since 1997.
3. Debauching a country’s currency and attempting to fear-monger its citizenry into believing that the rate-of-return on their hard earned savings accounts should be ZERO as the government implodes itself with debt is something the Fed Chairman should be protecting Americans from rather than perpetuating via its politicized policy making.
As Washington fat cats take pictures petting their pooches in front of some inflated art like Vincent Reinhart did for his interview, remember this … and remember it well… Americans aren’t paid off to have Blind Belief in short-term dollar depreciation oriented stock market rallies. They know who is getting paid by the Piggy Banker Spread in 2010 – and it’s not them.
Americans want someone in government to tell them the truth. The enemy of truth is the posturing of truth itself.
My immediate term support and resistance lines for the SP500 are now 1167 and 1181, respectively. As the bulls were Snorting QE on Wednesday, I finally re-shorted the SP500 (SPY) near its intra-week high. I titled an EL note last Monday “Defend Yourself” and I am currently living that strategy out loud.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer