Bennie Put!

Oh but they're weird and they're wonderful
Oh Bennie she's really keen
She's got electric boots a mohair suit
You know I read it in a magazine
B-B-B-Bennie and the Jets

Elton John - Bennie and the Jets **with lyrics**

Last week the Federal Reserve could not have been clearer in its Open Market Committee Statement that it wants more inflation. "Measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability," the statement said. By saying that the inflation rate is too low the Fed is signaling that it wants more inflation to hopefully reduce unemployment. Is it any wonder that gold has moved above $1,300 per ounce and the dollar continues to fall.

Back in the day when Alan Greenspan was in charge, we had what was known as the Greenspan Put; whenever the economy or the markets got into trouble Greenspan rode to the rescue by cutting rates. This Greenspan Put led to asset inflation; real estate, bonds, equities, and commodities. It ended badly.

Fast forward to today and we have the Bennie Put. Unfortunately for Ben he doesn't have the luxury of cutting rates since they are already at zero. No, instead his only real alternative is quantitative easing (QE2), printing money to buy treasuries, mortgages, or other assets. The value of that newly printed money goes down, and new bubbles are created.

There is an old saying in the investment business, "Don't fight the tape, and don't fight the Fed." The "tape" is simply an assets price trend, or momentum, and the Fed controls the $$. 

There's often a tendency in our business to over-think things, this is clearly not one of those times. The Fed has given the "all's clear" signal for risk assets, and the markets are responding. So far this month the S&P 500 is up nearly 9%, and gold is up about 5%. On the other hand, long-term treasuries have lost about 1%. 

I'm not saying that we should throw caution to the wind, I'm just saying that in a diversified portfolio a bit more risk exposure should be fine, after all we have the Bennie Put watching our backs.

But Bennie makes them ageless
We shall survive, let us take ourselves along
Where we fight our parents out in the streets
To find who's right and who's wrong

Now I'm not the only investor who feels this way, hedge fund manager David Tepper also believes in the Bernanke Put. For those not familiar with David Tepper, he is a Pittsburgh native who went to Pitt and CMU, and then went on to amass fortune (recently #62 on Forbes wealthiest list with $4.2 billion) and fame as the head of Appaloosa Management. Last year his hedge fund made a tidy profit of about $7 billion. In 2003 he gave CMU $55 million for the new David A. Tepper School of Business. Listen to his interview on CNBC:

Hedge Fund Titan David Tepper - CNBC.com

War Has Been Declared:

Not conventional warfare, but currency warfare. Brazil's finance minister, Guido Mantega, recently stated, "We're in the midst of an international currency war, a general weakening of currency. Devaluing currencies artificially is a global strategy and this threatens us because it takes away our competitiveness." This is also known as competitive currency devaluation. Countries resort to currency devaluation to make their exports more affordable and their imports more expensive, therefore hopefully stimulating their economy at the expense of their trading partners. This is often attempted during periods of global economic stress, and generally does not end well (see Great Depression). Since all nations have "FIAT" currencies, a currency can only devalue "relative" to other currencies, (or relative to some hard asset like gold). Unlike most wars the winner of the currency devaluation war is usually not much of a winner.

The main culprits in this war are the United States with it's stated policy to devalue the dollar via Quantitative Easing, and the Chinese who have pegged the Yuan to the dollar. Countries like Japan and Brazil have seen their currencies strengthen versus the dollar and at least in Japans case are actively intervening in the currency markets. The Euro has also strengthened versus the dollar.

Investment Implications:

If you're in a conventional war, and you have the misfortune of being located in the losing country, you want to try and get as many of your assets outside of your country as soon as possible; usually starting with loved ones. In a currency war the same analogy holds true. You want to get as many of your assets denominated in currencies that will appreciate relative to your losing currency. If the US is successful in "winning" this currency war (winning as defined by devaluing their currency the most! ), then as US citizens/investors need to think about allocating assets to other currencies. We use gold first and foremost as the ultimate currency hedge, but we also have allocations to international equities (particularly emerging markets), international fixed income, international real estate, and Chinese Yuan. 

Oh! what a tangled web we weave when first we practice to deceive! -- Sir Walter Scott 1808 

This famous quote instantly came to mind when I read in today's WSJ about the Feds manipulation of the TIPS market (HEARD ON THE STREET: Fed Tips Inflation Expectations - WSJ.com ). 

TIPS (Treasury Inflation Protected Securities) are Treasury securities designed to reflect investors inflation expectations out five to ten years. We buy them as inflation hedges with the full realization that they are based on the governments own calculation of CPI. They are not perfect inflation hedges, but they are better than nothing. Now we find out that since the Fed is purchasing Treasury securities, the spread between treasuries and TIPS is distorted. Not to worry, the Fed also stepped in to buy $550 million in TIPS to hopefully keep the spread at what they feel the free markets would price it at. WOW, what is the real market interest rate and what is the real market inflation expectations??? Don't worry, I'm sure they'll get it right.

Scary Sign Of What's To Come: 

Her Majesties Revenue & Customs (the UK's IRS) has proposed that all employers simply send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and then pay the employees the net amount via a bank transfer. This is being sold as a massive productivity improvement since employers would no longer be responsible for deducting taxes from employees pay checks. Everyone will eventually get their democratically assigned allotment when the bureaucrats get done with their calculations. And if you have any questions with your deductions you won't have to bother your boss, you'll just call your friendly, always helpful, HM Revenue & Customs representative. I'm sure there's more than a few people in Washington salivating over this plan!

Ah! Paree!

Last week my lovely wife and I went to Paris to celebrate our 25th wedding anniversary. Why Paris? Well, other than the obvious fact that it is easily one of the worlds most beautiful and romantic cities, it is also the only non-stop international flight out of Pittsburgh (how's that for romance). After a rather cramped but pleasant 8 hour flight, we were greeted with a $100, two hour taxi ride into the city. Other than that the trip couldn't have been nicer. We stayed at the Hotel LA Tremoille just off the Champs-Elysees, and everyone we met couldn't have been more helpful or nicer. We were able to dine at several of the bistros visited by Anthony Bordain in the 100th episode of "No Reservations" ( Paris - Anthony Bourdain: No Reservations Travel Guide - Travel ... ) and ate and drank our way to a happy place. 

I found the automatic 15% gratuity on every tab an interesting socialistic expression, "We're French and all of our service is equally good." I was also amused at the VAT (Value Added Tax) that was attached to each tab, not that it was there, but in how it was implemented. Certain items, such as frog legs and escargot, had a lower VAT than other items. Just the governments way to reward some at the expense of others.

None of these are complaints, just amusing observations; we loved Paris and can't wait to take the girls there for some real food.

Be careful out there, and keep the light's on,

Chris Wiles

www.rockhavencapital.com

For prior Rockhaven Views visit:

www.rockhavencapmgmt.blogspot.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.