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“Whoever is careless with the truth in small matters cannot be trusted with the important matters.”
~ Albert Einstein

At 4:15AM this morning, I was driving down Highway 95 listening to President Obama’s address to Russian students. No matter what your politics, Americans should be proud of this man’s oratory skills. On that score, he is truly gifted.

In the eyes of the Russians, I am sure the content of the speech is subject to debate. When it comes to the truth – there are always two sides to a story. Recent American economic history with the Russians remains scarred. Do the Russians actually trust us? Do we have any reason to trust them? President Obama is asking the Russians for a “fresh start”, and it will be interesting to see if that incorporates America changing as we are asking for as much in return.

Relationships are built on trust. Being careless with the global financial truth is what America’s currency currently has issues with. Surely, when it comes to US intelligence agencies like the FBI, CIA, etc, we are at least perceived to be on the cutting research edge of information transfer. That said, when it comes to our intelligence on global finance we are in the midst of a colossal Credibility Crisis. Being careless with the truth includes not understanding it.

My contention isn’t a partisan one – it’s a political one. Understanding global macro is a regimented daily exercise in objectivity, not a CYA job security show. From Bush to Obama, we have empowered an economic team of group-thinkers. We have reactive and politicized points of action. We don’t have a proactive risk management process.

In 1913, the US Federal Reserve was created to protect the US currency and her country from crises, not to perpetuate them. Fixing this will take time. The truth of the matter is that we have a team of lawyers, politicians, and professors who don’t have a repeatable/practical investment process that they hang the country’s balance sheet on every morning. Washington doesn’t do global macro. Obama’s team doesn’t have the tools to show him the truth.

Understanding that Obama’s intention of asking for a “fresh start” was more of a point on foreign policy, understand this: the Russians, like us and the Chinese, care about money. After Obama is done shaking hands with Medvedev (who can’t seem to look people in the eye), the global macro debate will move on to Italy and the G-8 Summit. The only “fresh start” you’re going to see there is a renewed squeezing of America’s standing as the fiduciary of the global economic system.

No, the Chinese aren’t selling their largest position (US Treasuries) “suddenly”, but they are selling it down gradually. Yesterday’s Treasury auction bids were MIA and, as a result, the yield on 10 year Treasuries made a 2-week high at 3.54% . The recent Treasury data shows China as a net seller of Treasuries. The Russians have already told us they are selling; quietly, the Japanese continue to do the same.

The truth is that China has political issues. The truth is that America does too. The New Reality is that all of this, from Madoff/Stanford to what you are seeing on the streets in Western China (Urumqi protests), is being You Tubed, to the world, real-time.

You Tube is a 21st century metaphor for Transparency. The truth is harder and harder to hide. While plenty a short seller of everything China states that China “makes up their numbers”, what would the Russians call Dick Fuld’s interpretation of “level 3 assets”? We’re hosting our Q3 Investment Themes call this morning for our subscribers and Andrew Barber will walk through China’s latest disclosure and transparency efforts. At least they are improving.

Chinese stocks finally had a down day last night, closing -1.1% at 3089, taking the Shanghai Stock Exchange to +69.7% YTD. The truth is that relative to the SP500 and Dow Jones indices being down YTD, that’s pretty impressive. So is Chinese economic growth. The head of the Chinese central banking research bureau is out with comments this morning suggesting that Q2 GDP growth in China could come in close to +7.5% year-over-year. That would be a sequential (quarterly) acceleration – those are good.

Am I suggesting that you run out and buy China right here and now? Of course not. After a decade on the buy-side, I know better than to hold a conference call suggesting people buy things at immediate term tops. We have been “long of” China since December of last year, and we are going to walk through why you should not be short it.

Despite Japan trading down modestly overnight (-0.34%), The New Reality remains that those who are shaking hands with The Client (China) in Asia are seeing their business improve alongside the stability of relationships with their neighbor. Taiwanese exports for June improved again overnight, and the stock market there traded up another +1% as a result. Indonesian stocks put in a +2.4% session, and both South Korean and Indian equity markets recovered into positive territory as well.

The truth is that the world’s economies are as interconnected as they have ever been. The truth is that China has financial credibility right now. The truth is that America needs to wake up and smell the robusto beans. “Fresh starts” may begin with speeches, but need to end with actions that trade partners can trust.

I continue to see the US stock market as range bound. I have intermediate term TREND support at 873, and long term TAIL resistance up at 954. Manage your risk around that range.

Source: America's Economic Credibility Crisis