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McCullough: ‘The Ber-nank’ and the Japanese Housewives

“By and large, mothers and housewives are the only workers who do not have regular time off. They are the great vacationless class.” --Anne Morrow Lindbergh

Japanese Equities closed down -2.1% last week and have been making a series of lower-highs from their leverage-cycle peak for more than 2 decades. Japanese housewives are not happy.

In an especially interesting survey from the Sompo Japan Life Insurance Companylast week, it appears that Japanese housewives are getting plugged by global inflation. Their secret savings (or what the Japanese called hesokuri) fell -18% in 2010 to their lowest levels since late 2007. Not ironically, that’s also when US Consumption rolled into the red for the 1st time after 64 consecutive quarters (or 13 years) of being positive.

As Ludwig von Misessaid, inflation is a deliberate policy that government people choose without openly stating it to the public. Whether or not a humble looking man with a beard calls it that or not from his perch upon-high at the US Federal Reserve is of no concern to the rest of the world. Unfortunately, the large majority of the world’s population doesn’t consider US owner’s equivalent rent (42% of US CPI) inflation.

Whether they be Japanese housewives or folks in India and Indonesia (the 2nd and 4th largest country populations in the world, respectively), energy and food prices matter – big time.

In the Japanese survey, vegetable prices, energy bills, and higher tobacco taxes ranked #1, #2, and #3 as top concerns. In Japan, don’t forget that it’s the women who make most of the budgeting decisions in Japanese households (my colleague Darius Dale and I scoured the survey looking for all of the offsetting goodies Japanese women found associated with Japanese style Quantitative Guessing (QG), but couldn’t find any).

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Hitoshi Nishimura | Taxi Japan | Getty Images

Quantitative Guessing in Japan has obviously failed.

That should be no surprise however as it’s been empirically proven at this point (based on analysis from Reinhart & Rogoff’s, "This Time is Different") that when a country crosses the proverbial Rubicon of debt/GDP thresholds (over 90% of debt / GDP), long-term economic growth is structurally impaired.

The Keynesian/Princeton-connection of Paul Krugman (who told the Japanese to “PRINT LOTS OF MONEY” in 1997) and Ben Bernanke really don’t like it when Global Macro Risk Managers call out these simple concepts like real-world inflation and structurally impaired growth. That’s because their charlatan storytelling is largely focused on fear-mongering about depressions and deflation.

Whether you want to do your own channel checking on this and call the 57,000 Japanese housewives in the survey or the 44 MILLION Americans that are currently on food stamps (all-time high; nice job Ben), I think that calling anyone who lives on a budget will render the same answer.

If you’ve been positioned long-dong silver anything Emerging Markets in the last 3 months (stocks or bonds), you see the same inflation readings that housewives and I are talking about. It’s on your screen.

There’s really 1 thing that can crush both Bond and Emerging Market investors alike – inflation. When the “reflation” trade becomes the inflation, it can start to hurt equity market returns too.

For the YTD, here’s what’s going on in Global Equities outside of where Apple is trading:

  1. Indonesia = down -9.7%
  2. India = down -6.6%
  3. Peru = down -7.4%
  4. Egypt = down -5.9%
  5. Philippines = down -7.1%
  6. China = down -4.0%

Chinese growth slowing is perpetuated by inflation accelerating.

When the Government of Thailand cut its GDP forecast in HALF this week (versus 2010’s +8% growth) to 4-5% for 2011 they weren’t thinking about how many cashmere sweater-sets Macy’s is selling on snow days.

They pointed to one issue - Chinese growth slowing.

Yes, at a point, Chinese demand slowing should take the edge off The Ber-nank’s inflation trades.

The inflation is sticky, but it can come off its highs. In fact, in the last 24 hours, we’ve seen the following 3 immediate-term TRADE lines break in our Global Macro risk management model:

  1. Brazil’s Bovespa Index immediate term TRADE line support = 70,554, broken
  2. Copper immediate-term TRADE line support = $4.31/lb, broken
  3. Basic Materials Sector ETF (XLB) immediate-term TRADE line support = $38.51, broken

And yes, part of these rollovers in inflation readings have to do with sober governments in Emerging Markets either raising interest rates or signaling that they will (Brazil raised +50bps yesterday and the Chinese signaled).

But the best way to fight Global Inflation Accelerating, is for the world to see a sustainably strong US Dollar. That’s where the real popular political juice is. That’s where American credibility in the global financial community can find her footing again.

That’s what I and the hardest working global class we have, housewives, want to see.

Prior to founding Hedgeye Risk Management, Keith built a track record as a successful hedge fund manager at the Carlyle-blue Wave Partners hedge fund, Magnetar Capital, Falconhenge Partners, and Dawson-Herman Capital Management. He got his start as an institutional equity sales analyst at Credit Suisse First Boston after earning his Bachelor of Arts in Economics from Yale University, where he captained the Yale Varsity Hockey Team to a Division I Ivy League Championship. Keith is also a Contributing Editor to CNBC TV, Fortune Magazine and author of Diary of a Hedge Fund Manager (Wiley 2010).