“As our circle of knowledge expands, so does the circumference of darkness surrounding it.” Einstein had that right, and it looks like investors are being forced to come to grips with the same as the realities of a US dollar crisis pile on.
“Demand destruction” has of course been the tag line for the bubble-watching bulls throughout the summer – inflation was going to abate, the US consumer was going to lever up again, and up, up, and away we go…
Unless there is a typo on my screen, oil at $146/barrel and gold at $982/oz look painfully sticky if you’re still holding that levered long thesis. The most obvious “demand destruction” looks like that which people have for paying money managers who don’t understand how to manage risk. The tail risk on this market has always been an implosion within the ranks of the 25,000 hedge funds out there – and, unfortunately, that horse and his tail have left the barn.
Bernanke and Paulson will ultimately be blamed for the devaluation of the US dollar. Deleveraging of global risk will continue to equate to US and global equity market selling as a result. Amidst the appropriate litigation and redemptions that will ensue on the way down, opportunities will inevitably emerge; but only for those who are long the holy grail of a well managed portfolio – liquidity.
The good news is that recent history has proven that Bernanke and Paulson will pander to the political wind on cue. As markets capitulate, the two guys who are allegedly “in charge” of what was the world’s reserve currency will be forced to face the fiddle of the cold, hard, reported facts. Just because they ignored those facts, certainly does not mean they will cease to exist.
Asia faced the reality of the facts overnight, and crushed stock markets again after the Bank of Japan cut its economic growth outlook to +1.2% for 2008. While it’s interesting that Japan is relatively “cheap”, I have seen plenty of “cheap” countries and markets get a lot cheaper as top-line growth slows and costs inflate. This is called stagflation.
On the heels of the world’s 2nd largest economy closing down another -2%, stocks in Hong Kong chased those that were headed for the exits in everything “Ch-India”. Country performance was abysmal in Asia as a result: China -3.4%, Hong Kong -3.8%, Taiwan -4.5%, Korea -3.2%, Thailand -3.1%, and India smoked for another down -4.7% move after Fitch cut their Indian country credit outlook (the Indian Rupee is now -9% for 2008 to date).
It is global this time, indeed, folks. After Europe’s bounce day yesterday, selling has resumed on the heels of the UK reporting an 11-year high in consumer price inflation. With the FTSE trading down -1.3%, what’s happening in London pales in comparison to some of the secondary country indices. We’ve been talking about the crash in Ireland and Denmark, whose markets were down 2-3% again respectively yesterday morning, but this US dollar crisis is hammering European export-led economies elsewhere at euro 1.60. Romania for instance is down -3.5% this morning. While snake-oil salesmen try to sell you everything “global ETF”, a more sober strategy than “global diversification” might just be “get out”.
Some people ask me for cheerier notes, but at the end of the day, that’s not my job. My firm is built on dealing you the river cards of facts, and synthesise them as they lay. Self perpetuating “investment” agendas with the circumference of global investment banking and/or two-and-twenty fees both compromise the ability for many others on Wall Street to issue you these economic facts real time.
We have a real crisis in the US dollar. It will get darker on the way down, unless someone sane starts to provide the leadership required to let free market capitalism mark banks, portfolios, and houses to market. Marking to propped-up models of government sponsored support will not work in the end.
• First published by Keith McCullough, CEO and Chief Investment Officer at
Research Edge LLC
in New Haven, Connecticut, USA. 8:00am EST, July 15, 2008