Trading the Bernanke Bubble

02/07/2013 8:00 am EST


Keith McCullough

CEO, Hedgeye Risk Management

Former hedge fund manager Keith McCullough talks about the trades that will work and those that won't in the current deflationary environment.

My guest is Keith McCullough today.  We’re talking about something he calls the “Bernanke Bubble”, so Keith what is this?

It’s just money printing, and if you look at what Ben Bernanke was hired to do, he was hired to print money.  Since he joined the Federal Reserve in 2006, he has never raised interest rates, so when you don’t raise interest rates and you perpetually create an expectation that the dollar is going to go down and commodities are going to go up, you get an ongoing bubble that continues to perpetuate itself, so now we think that he’s at the end of his rope.  He’s gone to QE3 and QE-infinity and beyond in terms of its implication, and now the slope of the line in terms of the Fed’s balance sheet is starting to slow, so as that starts to slow we think the dollar starts to rise.  The dollar has probably the most asymmetric setup in all of global macro right now; it’s coming off a 40-year low, and again commodities are coming off all-time highs, so again, this is what really you’re looking at, which is the bubble’s already starting to pop; it’s already starting to pop in oil and gold, and we think it’s going to continue to manifest across the commodity complex.

What about the idea that at some point inflation is going to catch up with all this and that’ll drive commodity prices up from here?

Yeah, I think inflation was the threat until he went to infinity and beyond.  Now the biggest threat is deflation because when you create a bubble the only thing it can do is deflate; this is the lesson of tech, this is the lesson of the real estate bubble, and then bubble number three, which is, of course, the commodity bubble, so Greenspan and Bernanke have created three unique bubbles in the last 15 years and we go bubble to bubble to bubble and every time we get to one, most people are really scared to bet against it, but this one I think is a little easier to bet against because like I said the oil price, for example, has been making lower highs since 2008, and now gold made a lower high throughout this year because its all-time high was, of course, 2011.

Alright, so how do I play this as an investor or a trader; what do I do?

Well, first I say you stay the heck away from the kinds of things that are levered on the parameter to commodities, so gold miners, we’re very bearish on gold miners; a lot of people are invested in these gold mining ETFs, the GDX for example, like these things are going to get crucified if we’re right, on the commodity, because if you’re planning a seven-year mine, you have to have some type of an assumption on what the commodity price is, so again, what we’re going to expect is that the curve of expectation on oil prices, gold prices, etc., are going to go down and therefore the valuations embedded in a lot of these equities that are linked to commodities are going to also go down, so they’ll look cheap on the way down, but cheap will get cheaper because they’re going to have to continue to reflect a lower commodity price.

And how about the dollar; should I be long the dollar then?

Yes, I think being long the dollar; you can win three different ways.  Now, most people would say well there’s still Ben Bernanke, well maybe not, he is starting to whisper that he could be done by 2014, but you also have the Europeans behaving like the Americans did, and then the Japanese behaving like the Japanese do, so again, three different currencies; it is a currency war.  Jim Rickards and I have done conference calls on this; he’s written a great book on it, but at the end of the day, at the same time that the Japanese go back to print lots and lots of money, which Paul Krugman’s been telling them to do since 1997, it has not worked, but that’s what they’re going to do and the Europeans, don’t forget, can cut interest rates to 0%.  As they cut to 0%, the euro will be under pressure.  I think the dollar can go up that way too, so there’s three real big ways that you can win on being long in the dollar; domestically versus the euro and versus the yen, and that, to me, is a pretty good set up.

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