Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. Our Web Software does not permit embedding of the clips into our articles. So we shall have to be content to include the links to the actual videoclips. We are very happy with the tremendous response from readers to this series of articles. We thank them sincerely and profusely.
This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerances.
The Fed Meeting on August 10
No question this was a major meeting. Look at the move in the markets from Monday August 9 to Friday August 20 – The Dow has fallen from 10698 to 10213, the SPX has fallen from 1127 to 1071, EDV, the zero coupon ETF, has rallied from 90.71 to 100.57, TLT, the coupon Treasury ETF, has rallied from 99.74 to 105.90. Extraordinary moves indeed. This is what happens when Ben Bernanke disappoints the bullish consensus built going into the Fed meeting.
If past history is any guide, then the post-Fed move might last for at least a month or two. That is until Mr. Bernanke changes his mind and throws more liquidity into the system.
The economic data continues to come in worse and worse. Just look at the Jobless numbers and the Philly Fed. True to seasonal form of currency crisis years, the decline in the Euro that began last week accelerated. The worries about the European periphery resurfaced, the Euro hit a one-month low against the Dollar and the German Bund yield fell to all time lows.
We have been focused on the 30-10 year yield spread for awhile. This spread peaked at 125 basis points on Monday, August 9, an all-time record. Since that day, this spread has fallen every single day . It closed at 105 basis points on Friday, August 20.
As the great Rosenberg put it on Monday “The Big bull flattener in bonds seems to be starting.” His old firm, Merrill Lynch, recommended the 30-10 year flattener on Monday, we understand. His old colleague Jim Caron (ex-Merrill, current Morgan) threw in the towel and recommended the 30-10 year flattener on Friday on Bloomberg Radio . Mr. Caron reluctantly agreed that this flattener means that the 30-Year yield would come down more than the 10-Year yield.
This has been an amazing week for the 30-Year Bond. How sweet was the 30-Year auction on August 12 that yielded 3.954%? But we might be in the early innings of the Bond rally. Gary Shilling, one of the most outspoken bulls on the 30-Year Bond, reiterated his 3% target on CNBC Fast Money this week (see clip 4 below).
But we wonder whether the 100 basis point level on the 30-10 year yield spread (a resistance for decades) will now function as support in the near term. If it does, it might allow investors to reload again on 30-year bonds. This spread tends to bottom at around 50 basis points before the end of a major major bond rally as far as our empirical observations suggest.
Perhaps public pronouncements from veteran investors like Doug Kass and celebrity speakers like Jeremy Siegel might assist in a creating a countertrend reversal in yields. Rosenberg himself wrote about this risk and Dennis Gartman acknowledged it on Fast Money on Monday (see clip 2 below).
Professor Jeremy Siegel of Wharton wrote an opinion in the Wall Street Journal on Wednesday arguing that Bonds are in a bubble similar to the Nasdaq bubble. This is so dumb that we choose not to spend any time on it. We would rather investors hear Gary Shilling dismiss this drivel in clip 4 below. We do include Siegel’s own appearance in clip 5 below.
We respect the views of Doug Kass more. After all, Mr. Kass is a veteran investor and his major calls, in equities, have been more right than wrong (his minor calls have a more mixed record). Mr.Kass pronounced shorting Treasuries as the Trade of the Decade. Rather over the top, we think. We recall hearing these calls about the JGBs through out that bull marker. See clip 3 below for Mr. Kass’ views and clip 2 below for Mr. Gartman’s. Clip 6 below features responses to Prof. Siegel from Tony Crescenzi of Pimco and Rick Santelli of CNBC.
The stock market succumbed to the Jobless numbers, Philly Fed on Thursday and followed that decline into Friday. For those who care, the media featured a confirmation of the Hindenburg Omen on Friday. Walter Zimmerman of United ICAP spoke on CNBC about a head & shoulders chart forming on the S&P 500 and suggested that investors should protect themselves from a steep fall in the S&P, if that index breaks 1010. Given that the S&P closed at 1071, we may have some time. But early warnings such as Zimmerman’s can pay off big and the costs at today’s VIX level is not high. You can even call it protecting against tail risk.
Of course, tail risk in the S&P 500 is easy to protect against. But what about tail risk from the bursting of the biggest leveraged debt bubble in world history. Kyle Bass of Hayman Partners argues that restructuring of the world’s debt is inevitable and if he is right, he doesn’t “see how you can be long stocks.” He also argues that the Fed will not be able to raise interest rates until the US restructures its own debt. See clip 1 below but with a stiff drink in hand. It has to be evening somewhere in the world.
JLo, Mariah Carey, David Beckham and others
As an antidote to the Kyle Bass clip or as a pick-me-up after, you may want to watch the CNBC StreetSigns clip about insuring the prize assets of celebrities. We feel uncomfortable in writing about the specific assets this clip discusses, but it will make you chuckle. It made our dull Friday afternoon a bit more lively.
This week, we feature the following videoclips.
- Kyle Bass on CNBC Strategy Session on Tuesday, August 17
- Dennis Gartman on CNBC Fast Money on Monday, August 16
- Doug Kass on CNBC Strategy Session on Wednesday, August 18
- Gary Shilling on CNBC Fast Money on Wednesday, August 18
- Jeremy Siegel on CNBC PowerLunch on Wednesday, August 18
- Tony Crescenzi, David Dietze and Rick Santelli on CNBC The Call on Wednesday, August 18
- Week-long series on Bonds by Erin Burnett on CNBC StreetSigns
1. Kyle Bass on CNBC Strategy Session – Tuesday, August 17
Kyle Bass is the Managing Partner of the hedge fund Hayman Investments. In this detailed interview, Mr. Bass explains the tail risk he sees. Tail risk is the risk to a portfolio from a very low probability major, major destructive event. Any one who lost money in 2008 should understand the need for understanding tail risk and the need for protecting one’s net worth against such tail risk.
We include some of the discussion by Kyle Bass below. But we urge all to watch both clips.
Ahead of the Money (10:24 minute clip)
Kyle Bass begins speaking at minute 02;37 of this clip:
- Bass – My opinion is very simply that when you study zero interest rate policy in developed countries, if in fact you are headed to the zero interest policy due to the fact you are trying avoid painful restructuring in the private and the public sector which is why we went there, and you run double digit fiscal deficits and you are piling on debt while you are at zero interest rate, you are putting yourself into a position where you are in a trap. I think ZIRP is a trap. I think the only way out of that trap is a painful restructuring down the road. Now you can stay in the trap like Japan has for 20 years until demographics change which is happening to them right now. But I don’t believe we can afford to have the rates move up. You develop this non-linearity between revenues and expenses. That’s why countries, when you talk about Debt-to-GDP, ,multiples of GDP or multiples of revenue, you get into a position where if your revenues start growing in a linear fashion, your debt starts to grow exponentially, when debt gets to be 60-70-80 and even 100% of GDP,
- Faber – But we are not there in the United States, we are at 53% of GDP,
- Bass – there is no doubt that there are worse comparisons (than US), …there are 4.5 trillion dollars worth of bonds that the social security administration owns,….., when you add 4.5 trillion to the on balance sheet obligations, we are at a high number already..
- Kaminsky – If the Fed starts raising interest rates, what are the implications on the markets that are relying on zero interest rates to function?
- Bass – I just don’t think they (the Fed) can do it. If 50% of our debt rolls every year, a move in the short term rate immediately affects the income statement for the US. So it is not that the weighted average cost of capital would move over time, it would move immediately.
- Kaminsky – So when they get together and have these Fed meetings,…., it is almost like your sense is that these meetings are more or less for show because they recognize that given the balance sheet that they have created they can’t move the rates. Is that crazy scenario?
- Bass – That’s my opinion.
- Faber – Well, that’s an opinion that is outside the mainstream. you seem to be saying that the Fed is doing the bidding in some sense of the Federal Government; there is a combination there of politics, policy and I am not naive but nonetheless one does hope that they are separate.
- Bass – What you have to do is think about the world in its totality. You have to think about how much additional sovereign debt does the world have to issue this year just to plug the fiscal deficits. There is a finite amount of capital in the world (chart of total global debt of $188 trillion with population = $6.5 billion leads to debt per person = $30,000). We think, just to plug the fiscal deficits the world has to issue $4.5 trillion worth of new debt. That assumes the existing debt stock rolls, the new debt of $4.5 trillion. Where does that come from? If you look at Banks in the US, Bank securities portfolios increased by 26% year-over-year. All they are doing is buying Treasuries. Fed does not want that to happen, right? The Fed wants the yield curve to flatten, they want the banks to go lend……The point I am trying to make is where does the $4.5 trillion come from Dave? Last year, we printed it. The developed world printed 12% of GDP or 40% of government expenditures. This year, what happens?
- Faber – ….Its a good thing if growth starts to pick up and tax receipts do start to pick up, correct?
- Bass (laughs) – yeah, ah, I think when you start talking about looking at tax receipts increasing, you have to look at the Bush tax cuts and you have to look at GDP. Our Q2 GDP will be restated on Aug 27. The Q2 GDP number was 2.4%. I would be flat amazed if the revision is isn’t 1% or lower…….I don’t think we can move (on raising rates) until we restructure.
- Faber – You think here in the US we need to restructure as well.
- Bass – Much further down the road but yeah.
Then the group went into a discussion about Pension Plans and what they have told their sponsors about where interest rates will be in the future. At this point, Bass said:
- Bass – One of the things people think about when they invest is, they are taught like we have been taught in our lifetime that everything is a cyclical problem. Things go up, they go down, you buy low, you sell high. Everything is cyclical and everything will come back. What we are seeing here is a secular change and the secular change happens once every 100 years.
Bass’ Best Investment Ideas Best Investment Ideas (08:45 minutes)
- Faber – You are not a believer in European Stress tests. They keep going there. I don’t know if they are pushing the can down the road….
- Bass – First thing you have to start here is how those Bonds (bonds issued by Greece, Spain etc,) are being bought. If you look at the Spanish auction, 80% of the auction goes to BBVA, Santander, and their Pension Fund and they run to the ECB and repo it. So they have an unsecured lender to buy their own bonds. There is somewhat of market shenanigans going on with ECB to create perceptions….What’s important though, when you look at things from a 3rd person’s perspective, take a step back and just compare the US stress test to the European one quickly. The US Stress Test had one central regulator overseeing the test, it failed 47% of the banks which required an immediate injection of $75 billion of capital. In Europe, 26 organizations oversaw the stress test,…., and the European Banking System is 3.5 times the size of the US Banking system relative to its GDP. So it is infinitely more levered than ours is. And their banking stress test passed 92% of their banks, one Greek bank failed and it required $3.5 billion euros of additional capital. I mean, there was no stress test……It didn’t contemplate a sovereign write-down. If the operative issue around the world today is are the Sovereigns are going to end up restructuring…there are a handful of them that I have no doubt in my mind that they will restructure.
- Faber – Why don’t we move on to one you believe will restructure…..Japan.
- Bass – When you study Keynesinism, you understand what counter cyclical spending means and you understand how the Governments are allocating their resources. If you have to define the Keynesian end point, I define it in one single sentence. When your debt service exceeds your revenue. When your debt payments exceed all the revenue you make, you are in a permanent structural deficit. So you look at Japan today, Japan has 1 quadrillion yen of total market debt – a 1,000 trillion yen of debt. Everyone says we know they are 200% of GDP, but when you boil it down and look at the government, the government has 40 trillion yen of receipts. They have the same amount of tax receipts in nominal terms that they had in 1985 and their expenses were 200% of what they were.
- Faber –…..they owe that debt to themselves…………
- Bass – Their largest national asset in the past has been their self funding characteristic. They have a large personal savings rate and a large corporate savings rate as a result of their trade surplus. When you add those two together and you couple that with their demographic problem, their personal savings rate is headed below zero right now, their corporate savings rate is roughly 4% and they are running 10% deficits. Their 2 largest owners of JGBs announced this year that they will be a net seller. Overnight, through a demographic shift. Their population decline is a secular decline
- Kaminsky – Is it the change in population that ultimately forces this restructuring?
- Bass – What did Madoff and Stanford teach us? They taught us that you can keep a ridiculous ponzi scheme going for a very long time as long as you have one ingredient – more people entering the scheme than exiting the scheme. In Japan, last year, the working age population peaked. From now on they are in an inextricable secular decline. So the rubber is meeting the road there, today. How are they going to fund themselves going forward? Here is an interesting point. Their revenues are roughly 40 trillion yen and their expenses are roughly 97 trillion yen. They are spending more than twice they make. If you just look at interest expense, debt service and social security expenditure, you add these three line items together, it is more than their revenue. They are already at the Keynesian endpoint…….If they have to look externally to fund themselves, I believe they have to pay up 100-200 basis points. Every 100 basis points move costs then 25% of their revenues in interest expense.
- Faber – What are you doing in terms of managing the money entrusted to you? Where are you putting it?
- Bass – Given our views of the world and the fact that we don’t believe we just solved the biggest levered debt crisis the world has ever seen with some more debt, we have to be very careful trying to earn nominal returns until the tail events pay off….there is a very interesting corollary you can draw between the US housing market and Japan. In Japan, the one asset that has never gone down and never hurt a Japanese buyer has been JGBs. Their stock market is down 75%, their real estate market is down 70%, where does the Pavlovian warmth reside in Japanese investor? Its in their bonds. So at a time at which the Bond, I think, is the most risky asset or one of them in the world, the pricing of that asset using the Black-Schultz model is the best it has ever been. So you have this huge convex moment that you can put enormous positions on in Japanese interest rates very cheaply. And that’s where we are in the tails of our fund and I think in the center we love some bank debt situations that are more event driven, we have some high yield, we have a big position in a liquidation that’s somewhat famous here, we have 90% of our capital debt long the United States, and we have 10-15% of our capital bet against some sovereigns in Europe and bet against Japan (slide shows 35% in US Mortgages, 25% in Bank Debt, 17% in US Distressed and 23% in US High Yield).
- Kaminsky – 90% long United States, all in sort of special situations.
- Bass – Correct.
- Kaminsky – And no viewpoint in terms of the S&P or the stock market, special situations that are catalyst driven?
- Bass – Right. Given my outlook on the world, I don’t know how you can be long stocks. (emphasis ours)
- Faber – Really, at all?
- Bass – I don’t know how.
- Faber – Because?
- Bass – If we get a global restructuring, if the European periphery starts restructuring, and Japan restructures, global GDP will not be +4%; it might be -4% or -5%. And we still have deflation. M3 is contracting at an alarming rate today because the Fed can supply the markets with as much credit as it can at 0% rates but what they are realizing, what Bernanke is realizing today he can’t change the borrowing proclivities of the people who just got wiped out in 08. In the 1930s, I am sure your grandfather told you we got wiped out with debt, we think the only debt you should have is a small mortgage.
- Kaminsky – Compare how you see the world in 2008 and how you see the world today….Are you as negative and as concerned about where we are today as you were then?
- Bass – I will answer it with a question. How many of your problems you kicked down the road that have eventually gotten better?
- Faber – Allright. Kyle Bass, thank you for this uplifting appearance. It has been helpful. I am going to start drinking.
Well said, David Faber. We owe our sincere thanks to the FaberInksy duo. No one but these two and no show but Strategy Session could have done this interview or invited Kyle Bass.
Allow us to add our two cents to this dialogue. We think that if the Bass scenario becomes realistic in the next 3-5 years, there is another time-honored restructuring that may take place in the world. It is called generating revenues, collecting assets by that historical method of invasion, war and massacres. We don’t believe it was a coincidence that a major war took place after the last deflationary decade in the world. Human behavior has not changed at all and human reactions will rule again.
That is the tail risk we are worried about in addition to the financial tail risk Mr. Bass discussed.
2. Gartman vs. Kass – I – or Dennis Gartman on CNBC Fast Money (04:20 minutes) – Monday, August 16
In full disclosure, we have a great deal of respect for Mr. Gartman. The Gartman Letter (“TGL“) he writes is a renowned investment newsletter. We have said on this blog that our wish is to trade interest rates like Bill Gross. A parallel wish of ours is to be able to trade macro like Dennis Gartman. We learn when we listen to him. We also wish we could look a tenth as distinguished as he does.
Melissa Lee opened the segment with “Do you sell your government bonds now that the Fed buying? Dennis Gartman has the answer. Do you think the Fed is going in aggressively tomorrow?”
- Gartman – Well, I am not sure the Fed is going to come in aggressively. We know the Fed is going to come in. We know they are going to be buying Treasury securities. They know they really don’t have any choice. Because their mortgage backs have literally flown off the table on them. They have gotten caught in a convexity change which a lot of mortgage backed hedgers have always had that problem; now the Fed has that problem. Their mortgage backs have gone away and in order to make sure there are reserves in the system they have had to come and buy Treasuries. Do I think they will be aggressive? I am not sure they will be aggressive. But you don’t want to go short of something the Fed wants. I have owned bonds for awhile. It has been a nice hedge against at the same time being long of a few stocks. Even I have to say though, it is getting a little sporty up here and may be reducing my long position makes some sense. But will I be short of it? No. It is like watching people try and pick the top of the JGBs back in Japan in the 1990s. (emphasis ours). That went on for a very long time. This one could also.
- Najarian – Dennis, real quick today, we saw TBT, the double inverse for the TLT, huge wash out volume there today. So that could be playing into what might go on tomorrow, like you say, you don’t wanna be shorting what the government might be buying but you may not want to be caught long at the time either…
- Gartman – Very understandable. Like I said, I own, I am long a lot of bonds in my ETF and in my hedge fund and I am probably going to reduce the size of that long position. But am I going short? Not yet. We are getting to this very interesting spot here where the physics takes over, the value of an 01 really becomes important here. When yields go from 9% to 8%, you get x amount of price movement but when yields go from 3% to 2%, you get 3 times that amount. That’s is what is happening. The value of an 01 is becoming very important here.
We don’t ever quibble with Dennis but we do wish to humbly point out that the calculus of the dollar value of an 01 is Mathematics and not Physics.
Then in response to a question from Steve Grasso, Dennis Gartman said that he was agnostic of Gold, that he can make the case for Gold to go higher and he can make the case for Gold to go lower. But he does not want to be short of any Gold.
3. Gartman vs. Kass – II – or Doug Kass on CNBC Strategy Session (from minute 06:00 of the 12:43 minute clip) – Wednesday, August 18
Doug Kass is a veteran hedge fund investor and the head of Seebreeze partners. In this clip, Doug Kass recommends shorting US Treasuries as the Trade of the Decade.
- Kass – …The greatest trade of the current decade is going to be shorting US bonds. And on Wall Street, there is really no difference between early and being wrong (really Doug, surely Nouriel Roubini would differ and he would be right, wouldn’t he?). I think you have to average into the position. That’s precisely what I am doing.
- Quintannia – ….You say we are getting close to a speculative blow-off. What are the reasons for that blow-off and why now?
- Kass – Well, for the first time since 1962, the dividend yield on the Dow has eclipsed the yield on the 10-Year Bond. This means that Bonds are overvalued relative to stocks and/or overvalued in an absolute sense. So, I have basically valuation, fundamental and sentiment grounds…..
Watch the clip for the rest of the comments of Doug Kass. Frankly, Doug Kass does not make either a valuation or a fundamental case for a long term trade in our opinion. You can argue for a pull back to say 2.75-2-85% on the 10-year yield. But on the points Mr. Kass states, there simply is not a case for shorting Treasuries as the Trade of the Decade.
Actually, if you short a newly issued 10-Year Treasury for a decade, you have to pay Uncle Sam par value of the Note AND semi-annual coupons for 10 years. So say, you short the current 10-Year Treasury Note (priced at 100.125 with a coupon of 2.625%). After ten years on August 15, 2020 you would have to pay the Treasury $100 for every note shorted at $100.125. So your profit would be 12.5 cents. But during the 10 years you would have to pay $2.625 every 6 months for a total payment of $52.50. So the net loss on this trade (not worrying about present value analysis) would be $52.375 on initial capital received of $100.125, or a simplistic loss of 52.30%. This is the Trade of the Decade?
To work, this trade has to be timed just right and closed just at the right time. But Mr. Kass does not explain how to do so. Frankly, we recall many hedge fund managers talking of shorting the JGBs as the Trade of the Century in the 1990s. They could still be right. After all, they have 85 years left to go on that trade.
We give this one to Dennis Gartman.
4. Shilling vs. Siegel – I – or Gary Shilling on CNBC Fast Money (from minute 16:45 of the 20:45 minute clip) – Wednesday, August 18
Dr. A. Gary Shilling is one of the most outspoken bulls on the 30-Year Treasury Bond. He has been absolutely right. Fast Money invited Dr. Shilling to discuss his response to the Wall Street Journal article authored by Professor Jeremy Siegel (with Jeremy Schwartz) which argued that Treasury Bonds were in a Bubble. Simon Hobbs hosted the show in absence of Melissa Lee.
- Hobbs – Gary, What’s your take on Professor Siegel’s comments today?
- Shilling – I think he is trying to catch up. I had a debate with him at Wharton in March 06. He blasted me for advocating 30-Year Bonds. Since then, those Bonds have rallied 18% if you bought a coupon and 35% if you bought a 30-Year zero-coupon while the S&P 500 has declined 15% since then. I think he is playing the record that he perennially plays that is long stocks only.
- Shilling – I have been a bull on 30-Year Treasuries since 1981 when I said in print that we were entering the bond rally of a life time. They yielded 15% then. They are now down, of course, to 3.7%. My goal is 3%. If that happens, you make another 14% appreciation on the coupon bond and 24% on the 30-Year zero. I have never never never bought Treasury Bonds for yield. I couldn’t care less what the yield is as long as it is going down. (emphasis ours). I buy them for the same reason that the professor buys stocks – appreciation. The yield is insignificant as far as I am concerned as long as it is going down.
- Finerman – Gary, this is Karen. What would make you get out of this trade besides reaching your 3% target? Is there anything that will change your thesis here?
- Shilling – If we suddenly saw the economy take off like a scalded dog, consumers go from a savings spree………to their spend-thrift ways, if we saw rage of inflation rather than the deflation I am forecasting, 2-3% deflation, you would have to see a complete revival of the economy and end of the deleveraging that has now taken over after the 3 decades of leveraging up for consumers and 4 decades for the financial sector.
5. Shilling vs. Siegel – II – or Jeremy Siegel on CNBC Power Lunch (05:31 minutes) – Wednesday, August 18
Michelle Caruso Cabrera begins the segment in a blow-hard fashion by flashing the title “The Great American Bond Bubble” in large letters.
- Siegel – Yes. Most certainly….They are looking at the slow growth, they are looking at almost deflation in the US and saying oh, that’s what is going to happen in the next 5 years, over the next 10 years. You have go back to the few weeks after the crisis after Lehman Brothers when everyone panicked and ran into bonds to see yields as low as they are now and they cannot represent value for investors in the future…….They (TIPS yields) are telling us how frightened people are, people are willing now to put their money in securities that will give them no yield after inflation, like safety is the only thing that they are looking at, like they are willing to take no yield. I think it is a sign not that they are predicting deflation. I think it is a sign of tremendous risk aversion of the order we saw in the few weeks following Lehman Brothers even though when you look objectively what has happened to earnings, yes we are going through a slow patch, you look at the world economy., the emerging markets etc. we see that we are not falling into that crisis depression of the 1930s. There is no way we are moving into that direction now. People fear it and they are grasping for it at this time.
We understand these points but how does this in any way compare to the tech bubble? If you bought Cisco in 2000 at around $82, today when it trades at $22, you are down $60 on your principle after holding it for ten years, a loss of 73%. This is what a burst bubble looks like. But today if you buy a 10-year Treasury yielding 2.625%, ten years later you will get back your principal and 26.25% total interest on your invested principal. Prof. Siegel finds these two situations comparable?
Watch the rest of the clip for Siegel’s rambling comments. At no point, does Prof. Siegel discuss his valuation metric for where the 10-Year Treasury should trade today. Rather pathetic we think.
The best question of the session came from CNBC’s Melissa Francis at minute 04:18 about the comparison between internet stocks and treasuries. Siegel dodged the question and gave a rambling answer about pessimism and optimism.
This is what Tony Crescenzi of Pimco called Bond Bubble Babble (see clip 6 below). Babble is the right word for Siegel’s analysis, we think.
6. Bond Bubble to Pop? – Tony Crescenzi, David Dietze and Rick Santelli on CNBC’s The Call (06:07 minutes) – Wednesday, August 18
This segment was in response to the Siegel article about the Great American Bond Bubble. This is a good segment. Rick Santelli was forthright as usual and said “….I could come up with concrete reasons why you would make a lot of money in Treasuries should certain things happen”. David Dietze pointed out ” we learned in 2009 that a dividend yield is not nearly as safe as the payout on a government bond….”. Tony Crescenzi pointed out that the dividends on the high quality stocks selected by Jeremy Siegel “those dividends didn’t help in the lost decade of course”. Then Tony Crescenzi described how bonds are valued. Watch this clip.
We have a high degree of respect for Tony Crescenzi and we think it is important in this debate to explain how bonds are valued. So we refer readers to Crescenzi’s article Bond Bubble Babble on cnbc.com. We include some excerpts below:
- By standard valuation metrics, Treasury yields are not misaligned with historical norms. Specifically, yields are low because both inflation and the fed funds rate are low.
- Of utmost importance to a bond investor is getting his or her money back….This makes the bubble argument moot, essentially, because the risk of a loss of principal on bonds held to maturity is lower.
- A demographically aging population is likely to have a lasting appetite for bonds, which are higher in the capital structure than other asset classes.
- Investors, having experienced two shocks in equity prices in a decade, are unlikely to suddenly become enamored with equities with the same verve as existed in the 1990s before the financial bubble burst. Note that households represented 50% of the stock market’s capitalization in 1999. After the bubble burst, they pulled back. Yet, even as the equity market recovered and the Dow hit its all-time high in 2007, households did not return, representing just 37% of the stock market’s capitalization in 2004-2007. In other words, despite a long passage of time and a rally in stock prices, investors did not return to the stock market with the same verve as in the 1990s. If investors did not return after the bursting of the financial bubble in 2000, how could we expect them to return after the recent shock?
7. Week long Series on Bonds – CNBC’s Erin Burnett on StreetSigns
One of our complaints about CNBC is that the network does not discuss any investing topic at length. That usually requires a series of segments rather than one segment on one show.
So we were happy to see a week-long series on the Bond Market from Erin Burnett on her 2 pm show StreetSigns. We list the clips below to show her broad coverage of the bond market. Kudos to Erin Burnett and StreetSigns. We wish all CNBC Shows would follow this example and run at least one week long series on an important topic. The 5 clips are:
Tracking Treasurys – Jim Caron of Morgan Stanley – Monday
- Erin, any reason you avoided Goldman Sachs or David Rosenberg? Didn’t Mr. Caron predict that 10-year Treasury yields would go to 4.5% by June 2010 and to 5.5% by december 2010? Why didn’t you ask him about this forecast? More importantly, why didn’t you invite a guest who has been right on Treasuries? Look what Mr. Caron said on Bloomberg Radio 4 days after your interview.
Time to Jump on Junk? – John Fenn of Citi on High Yield Bonds – Tuesday
- By far, the best clip of this series. Watch it.
The Muni Bond Bet – Bob Auwaerter of Vanguard on Municipal Bonds – Wednesday
- A good clip. Nice to hear an expert speak clearly.
The Case for Corporate Bonds – Kevin Giddis of Morgan Keegan on Corporate Bonds – Thursday
- Decent clip.
Emerging Market Bonds On Fire – Zane Brown of Lord Abbott on EM Bonds – Friday
- The worst clip of the series. You can tell by the blow-hard title of the clip that this is a rah-rah guy piling on the EM bandwagon. Every CNBC Anchor has a personal favorite guest, high pitch salesman. Ms. Burnett’s favorite is Zane Brown. We have heard Mr. Brown a number of times courtesy of Erin Burnett. We do not recall a single instance when he has provided an insight or added value. He has been dead wrong, for example, in dissing US Treasuries.
- Unlike US Bonds, you need to take into account foreign exchange when you discuss Emerging Market Bonds or International bonds in general. Zane Brown did not seem to understand this basic fact. Frankly, we don’t understand why this man was asked to discuss EM Bonds and why he gets invited again and again on StreetSigns.
We like to offer an alternative or a solution when we criticize. So we suggest the Mapping Your Global Strategy clip on Tim Seymour’s new CNBC Show Trading the Globe.
- At minute 05:32 of this 11:13 minute clip, anchor Tim Seymour asked Rebecca Patterson of JP Morgan “.. is this an FX Trade or is it just reaching for yield and emerging markets give you the best bang for the buck?” A smart question from a smart anchor of an expert guest. Watch this discussion and this clip. Near the end at minute 08:51 Tim Seymour tells viewers about Emerging Market Bonds and EM Bond Funds “Be Careful, you may be buying the Top”.
In spite of our dislike of her last clip, we think this series by Erin Burnett was an excellent, well-executed idea. We thank her for it.
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