America's Economic Credibility Crisis

“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.

Comments

[Trend is No...:]

One point I would add as someone who sees clients clinically who struggle with issues of trust and money is that the interconnected nature of our economic ties, whether in a marriage or an economy, does not entitle us to more or less trust than any G-8 power. Trust works best if awarded or received in increments; small increments of trust build up as consumers, communities and countries can witness to the best of their ability: 1) acknowledge of errors without minimization or rationalization 2) repair attempts aimed at the root of the violation of trust, and 3) measures of accountability for the consequences of failed behavior.... In other words, who cares about China's power and address the main issue: investor trust is not a marketing scheme to managed via informational asymmetries. It is a teachable moment! Who better than Obama to help us with this lesson as a community organizer and teacher.

Jul 07 01:23 PM

[Larry House:]

Art Cashin of UBS sees 877 on the S&P as the completion of a head and shoulders pattern--quite negative. You see it as a support level. We'll see.

Jul 07 02:22 PM

[Graham and ...:]

I'm with Art Cashin, a bear.

And the Chinese market is going down (finally!) as people realize its interdependence with the U.S.

Jul 07 02:24 PM

[Jason Rines...:]

I liked you comment until you got to Obama. He could have been the most notable President since Washington or Lincoln by attacking our financial state capture. Hiring the same management team that caused the crisis shows the investment community it's shady business as usual in Washington. He has already squandered the majority of his political capital which is why this House and Administration ram home bills without reading them, written by aides. These bills stink, stick the taxpayer with all the liabilities asign more power, not less to the Federal Reserve and is conducting an experiment in deficit spending approaching that of Weimar Republic. So the exact opposite of your points 1,2,3 are what Obama is doing. Community activist? Yeah, he's communist instead of a fascist like Bush how lovely.


On Jul 07 01:23 PM Trend is Not Destiny wrote:

> One point I would add as someone who sees clients clinically who
> struggle with issues of trust and money is that the interconnected
> nature of our economic ties, whether in a marriage or an economy,
> does not entitle us to more or less trust than any G-8 power. Trust
> works best if awarded or received in increments; small increments
> of trust build up as consumers, communities and countries can witness
> to the best of their ability: 1) acknowledge of errors without minimization
> or rationalization 2) repair attempts aimed at the root of the violation
> of trust, and 3) measures of accountability for the consequences
> of failed behavior.... In other words, who cares about China's power
> and address the main issue: investor trust is not a marketing scheme
> to managed via informational asymmetries. It is a teachable moment!
> Who better than Obama to help us with this lesson as a community
> organizer and teacher.

Jul 07 03:49 PM

[Dave Wrixon:]

So one day is a trend now?

This is typical of Yanky Doodle Dreaming!


On Jul 07 02:24 PM Graham and Dodd Investor wrote:

> I'm with Art Cashin, a bear.
>
> And the Chinese market is going down (finally!) as people realize
> its interdependence with the U.S.

Jul 07 04:05 PM

[Dave Wrixon:]

Obama is the first Lame Duck before his first 100 days were out.

If the Russians are not looking him in the eyes, that is because they are not interested in what he is really thinking!


On Jul 07 03:49 PM Jason Rines (iThinkBig) wrote:

> I liked you comment until you got to Obama. He could have been the
> most notable President since Washington or Lincoln by attacking our
> financial state capture. Hiring the same management team that caused
> the crisis shows the investment community it's shady business as
> usual in Washington. He has already squandered the majority of his
> political capital which is why this House and Administration ram
> home bills without reading them, written by aides. These bills stink,
> stick the taxpayer with all the liabilities asign more power, not
> less to the Federal Reserve and is conducting an experiment in deficit
> spending approaching that of Weimar Republic. So the exact opposite
> of your points 1,2,3 are what Obama is doing. Community activist?
> Yeah, he's communist instead of a fascist like Bush how lovely.
>

Jul 07 04:08 PM

[conceptwizard:]

When the US payment deficit pumps dollars into foreign economies, these banks (have) little option except to buy US Treasury bills and bonds which the Treasury spends on financing an enormous, hostile military build-up to encircle (today's) major dollar-recyclers China, Japan and Arab OPEC oil producers. essentially a process by which they finance their own endangerment.
Up to now it's continued, but, given the reckless dollar glut in recent months, with less enthusiasm by bigger buyers and hints of a possible end game or at least less buying than previously - mostly among BRIC (Brazil, Russia, India and China) and OPEC countries but other emerging economies as well getting more interdependent on themselves than on America.

For starters, the six SCO (and other BRIC) countries intend to trade in their own currencies to benefit by what America "until now has monopolized for itself." China's central bank governor Zhou Xiaochuan wants a new reserve currency "that is disconnected from individual nations." It was discussed in Yekaterinburg.

Foreign nations are taking steps to avoid being the unwilling recipients of yet more dollars that face lower valuations the more of them America prints. If SCO countries and Brazil have their way, America no longer (will) live off the savings of others....nor have the money for unlimited military expenditures and adventures. For these nations and many others, it can't come a moment too soon.

Jul 07 05:41 PM

[jhartz:]

Having long ago lost the cachet of being a creditor nation, and by now putting our sovereign currency at risk, America will soon be left with no real negotiating tool but that of being the BADDEST MUTHA@#$#ER in the world.

Those of you who try to rationalize what this administration, the banksters and Congress are doing to this country better pray real hard that our "BIG STICK" proves to be adequate to the challenge of protecting our shores from enraged foreign creditors.

Jul 07 06:06 PM

[nobby73:]

Geithner went to reassure them their Dollar investments were safe and was laughed at by a bunch of students.

When your leaders swear blind there are weapons of mass destruction, but they know you are lying and you know they know, they realize you are actually trying to hoodwink your own people and they treat you with the contempt you deserve. As far as they are concerned, a new leader changes very little, they just see the system.

Jul 07 06:40 PM

[Trend is No...:]

Jason,

quite right about Obama! My comments stem more from his potential than his reality; but steps 1, 2, 3 are more for individuals and families now to learn how to treat one another as it apparent that hyper-inflation is imminently apart of our future lament; I wonder if elite monied interests really wanted to acknowledge, to repair and be held accountable; what would it look like in context considering that the world's population will have 9 billion people in 25 years with scarce resources and a deteriorating environment;
I suspect it would look like having one foot in US and one foot in some haven where people can be bought; thanks for the response



On Jul 07 03:49 PM Jason Rines (iThinkBig) wrote:

> I liked you comment until you got to Obama. He could have been the
> most notable President since Washington or Lincoln by attacking our
> financial state capture. Hiring the same management team that caused
> the crisis shows the investment community it's shady business as
> usual in Washington. He has already squandered the majority of his
> political capital which is why this House and Administration ram
> home bills without reading them, written by aides. These bills stink,
> stick the taxpayer with all the liabilities asign more power, not
> less to the Federal Reserve and is conducting an experiment in deficit
> spending approaching that of Weimar Republic. So the exact opposite
> of your points 1,2,3 are what Obama is doing. Community activist?
> Yeah, he's communist instead of a fascist like Bush how lovely.
>

Jul 08 01:38 AM

[T.Stamps:]

Obama is a fake and a socialist.

Jul 08 10:40 PM