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Credibilty Crisis

|Includes: BAC, Morgan Stanley China A Share Fund (CAF), GS

 

 
The credibility of the US Financial System and those who think they are leading it continue to weigh on my mind. This is not a Geithner Saturday Night Live skit or an Obama Washington DC media cocktail party we are watching folks. We are playing with live ammo here.
 
In a perverse way, the Breaking of The Buck will continue to auger bullishly for our intermediate-term investment in REFLATION. In the long run however, America’s long standing stature as the world’s currency reserve will be dead.
 
Bad habits die hard for a reason. If a part of the whole that is trying to exist in a dynamic ecosystem (like, say, the global economy) doesn’t have the flexibility or objectivity to evolve, it’s likely to go away. Take Darwin’s thesis on that – God knows you shouldn’t take a hockey player from Thunder Bay, Ontario’s word for it.
 
But what is a man’s word worth in the world of finance these days? Does America’s handshake with The Client (China) matter anymore? What are the repercussions for the people we have leading this US Financial system down the road to hell in a hand-basket?  Do you really think these people have what Nietzsche referred to as credible “senses”?
 
These questions are best served to be considered within the framework of a book – heck, maybe I’ll take some time off and write one - then CNBC will have to quote me. Maybe I won’t! Someone has to wake up every morning calling these cats onto the carpet, or my son Jack is going to be living in a country that’s as compromised and conflicted as we allow it to get.
 
This morning, the Banker of America, Kenny Lewis, is compromising whatever inch of respect that his handshake had left with The Client. Remember, The Client, is what we at Research Edge call China (yes, you little trickster of a strategist who likes to call our coined phrases your own, have at it!). The cost of Kenny’s handshake was $7.3 billion in liquidity via his sale of China Construction Bank.
 
While I am sure that BAC’s conflicted US centric Board is completely ignorant of The New Reality, at least we can remind someone over there who is allowed to be objective (when no one is looking ) that selling stock in The Client’s face isn’t cool.
 
On this score of compromising America’s credibility with the Chinese, what is very interesting this morning is the contrasting headlines between the Top 2 stories being read on Bloomberg:
 
1.   &nbs... “Most Stocks, Index Futures, Copper Rise on China’s Spending”
2.   &nbs... “Bank of America Said to Raise $7.3B From China Construction Sale”
 
Who really “gets” this? President Obama? Do you get it?
 
By the self-enhancing nature of his perceived to be self deprecating speech this weekend, Obama certainly fancies himself as a smart man. I actually think he is smart, but I also think his economic team wears world class blinders when it comes to understanding the interconnectedness of global markets.  Rather than reading his latest fiction novel, why doesn’t someone pass the Oracle of Obama some of the required reading that’s being issued real-time and being reflected in marked-to-market prices?
 
Larry Summers’ lap dog, Christina Romer, gets YouTubed daily with her professorial take on macro economic factors. One of her favorite lines in supporting her economic views is “we’re in line with blue chip private market forecasters.” Unfortunately, I am not kidding you on that either. It’s embarrassing and sad all at the same time. Professors teach impractical theories about markets for a reason.
 
What in God’s good name is a “Blue Chip” Wall Street forecast anyway? Are these the forecast of Kenny Lewis’ compromised and conflicted “economists” at Investment Banking Inc.? Or are these the “forecasters” from the not so much Government State Enterprise banks, like say Goldman Sachs? Wait – are the Goldman guys private forecasters to Geithner?
 
So many questions. So little time...
 
The credibility issue here remains folks. As bullish as I am on a continued generational short squeeze, let me be clear in stating that this remains an immediate to intermediate term view. Dollar down = REFLATION. That’s pretty much it, but in the long run... unless we take a good hard long look in the mirror and understand that the only way that our markets will recover from here is if Chinese demand continues to recover... it will not end well.
 
On weakness, I bought back our long position in China (via the CAF closed end fund) yesterday. The Chinese are reporting that the growth they are seeing in urban fixed investment is now running up +31% on a year-over-year basis. On the heels of fantastic auto sales for April yesterday, the Chinese macro data continues to impress. All the while the lack of American credibility continues to depress. The US Dollar is down again here in early morning trading. US Futures like that. As they should, for now...
 
Enjoy the REFLATION trade while it lasts. I have the reward outrunning the risk here in the US market for the first time in a week. I have upside reward of +3% to the SP500 line of 938.
 
Best of luck out there today,
 
KM