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 Dog That Did Not Bark?
In a classic Sherlock Holmes tale, the fact that the guard dog did not bark proved to be the clue. We wonder if that is what happened this week. Since this intoxicating rally began with the Bernanke speech on August 27, we have noticed a behavior pattern. Each up day in the market has been followed by a few choppy days that reduced the overbought condition of the stock market. This choppy period has been followed by another big up day on strong data in Asia or weak US data that could lead to more QE. During these up days, the S&P rarely gave entry opportunities and the market closed strong near the day’s highs.
The Tepper corollary, as we call it, held up on Friday October 8. The Payroll number was bad and the market took it as a buying opportunity despite the clear statement from Fed bigwig James Bullard that QE2 was not a sure bet. After the strong Friday, the market chopped around on Monday & Tuesday. Predictably, Wednesday was an up day with strong numbers from Asia and a good earnings report from CSX.
But like the dog that didn’t bark, the market did not close on its highs on Wednesday. In fact, the afternoon was a weak session that featured a drop of almost 50 points from the day’s high. Is this a sign that the Tepper corollary is failing?
In fact, this week seemed to signal emerging doubts about QE. On Monday, the market faded when comments from Fed Vice Chairman Janet Yellen proved less than profuse about the prospects of large QE2. Then on Thursday, the market sold off on the rumor of a China-Fed deal for a smaller QE2 in exchange for a revalued Yuan (see clip 3 below). Then on Friday, Bernanke sort of disappointed market bulls with a less than clear guidance about the size of QE2.
This makes us wonder whether James Bullard is serving as the herald for Ben Bernanke. Recall that Mr. Bullard first spoke about QE2 and then Ben Bernanke gave the Jackson Hole speech confirming what Bullard had hinted. Last week, on October 8, Mr. Bullard stated that QE 2 was not a done deal. He repeated it after the release of the disappointing payroll number. Bullard made it a point to say that private sector jobs had increased and this was what the Fed would look at. Then a week later, Bernanke gave a rather insipid endorsement of QE2 and refused to provide any specifics.
This behavior is reminiscent of the August-October 2007 period. Go back and look at the explosive rally from Mid-August to Mid-October in 2007. It was led by EM and Commodities. FCX rallied by 60% from mid-August to October 31, 2007, the date of the Fed meeting; EEM rallied by 40% in the same period. (In the rally from August 26, 2010 to this Friday, FCX and EEM have rallied by 46% & 18% resp.) The Fed statement on October 31 was more hawkish than expected. That began the steep decline in November 2007.
Jim Bianco suggests in clip 3 below that the markets have begun to doubt the size of QE2. Ajay Kapur, a fervent EM bull for years, compares today’s euphoria about Asia & EM to 1993 and 1999 in clip 1 below. David Rosenberg argues in clip 2 below that markets are likely to react with disappointment than euphoria after the Fed announcement.
We are struck by the concern about commodity prices expressed by James Hamilton in clip 5 below. His approach and philosophy seem very similar to that of Ben Bernanke. We wonder whether Chairman Bernanke is as concerned about the message of commodity prices as James Hamilton sounds. We do recall that whenever Ben Bernanke was faced with exploding commodity prices, he reacted in the next Fed meeting with a more hawkish tone.
The Foreclosure Mess, Bank Stocks, the Investment Horizon of Smart Money
When we first wrote about the David Tepper interview, we highlighted his words “in the near term everything will do well” (see last two paragraphs of clip 1 in our September 19 – September 25 Videoclips article). At no point in his interview, did Mr. Tepper claim to be making a long term bet.
Smart investors are the first ones to take profits and the first ones to bail out on their own pronouncements. The steep declines in Bank stocks on heavy volume leads us to wonder whether Mr. Tepper or Tepper-like agile investors are already out of bank stocks.
And why shouldn’t they be out? This foreclosure mess seems like a quagmire. We simply remind readers that when Maria Bartiromo asked whether there are any Bank stocks she would buy before earnings, Meredith Whitney said “No, No.”
Treasuries & Dollar
You would think that concerns about bank balance sheets would create a rally in Treasuries. Not this week. The 30-Year Treasury Auction on Thursday was pathetic. Since then, the long end of the Treasury market has seen nothing but selling. This week, TBT, the double short Treasury ETF crossed above its 50-day moving average.
We think that the entire Treasury curve had rallied on expectations of massive QE2 (remember Tepper said everything would do well on QE). With doubts about the size of QE2, isn’t it natural for long Treasuries to sell off? In this context, we feel like Mr. Berkowitz felt about the St. Joe stock. We love it when the price of what we intend to buy goes down. Let us remind readers that Charles Nenner had warned about cycle pressures on interest rates in October & November and suggested waiting a bit to buy Treasuries.
The bounce in the US Dollar after the Bernanke speech points to the rising doubt about the size of QE2. So far, FX and Treasury Markets have reacted to the prospect of disappointment on November 3. Will the stock market follow suit? Or will the melt-up continue?
Bernanke for Financial President!
This was our slogan in our March 2009 article titled In Bernanke We Trust . In December 2009, we celebrated his selection in our article Ben Bernanke – Time Magazine’s Person of the Year . In that article, we wrote “Think back to November 2008. America was in the midst of an executive transition. The Bush Administration was a lame duck and Hank Paulson, the Bush Treasury Secretary, essentially became powerless. The Obama Administration was in no condition to step in and decided to back away arguing that America can have only one President at one time.”
On this Thursday, Jim Bianco spoke of “a rumored deal between China & the Fed” (see clip 3 below). At first, this comment struck us as odd and upon reflection it seemed insightful.
Who is running economic policy today? Larry Summers is virtually gone. Tim Geithner, the Secretary of the Treasury, is neither to be seen or heard. President Obama is involved in an election and is planning a trip to India, Indonesia and Australia after the election. We seem to be back in the dysfunctional days of Fall 2008 when the executive branch gave up control of economic policy. Today, like in Fall 2008, it seems that Ben Bernanke, the Chairman of the Federal Reserve, is also running America’s economic policy.
You see Mickey Levy, Chief Economist at Bank of America, lamenting the fact that monetary tools are being applied to address non-monetary factors (see clip 4 below). You see James Hamilton, a classic monetarist, talking about the need to depreciate the US Dollar (see clip 5 below). You see the insightful and connected Jim Bianco talking about a China-Fed deal, not a China-US deal (see clip 3 below).
Folks, do you see what we think we see? Has Dr. Ben Bernanke become America’s Financial President? Our tongue-in-cheek comment of December 2009 seems to have become a semi-reality in October 2010.
We confess to being petrified. The American system depends on multiple branches of government that jostle with ideas for power and influence. The system is not made for a single power figure.
In today’s dysfunctional environment,
- Dr. Bernanke is launching a novel experiment called QE;
- Dr. Bernanke is deliberately devaluing the US Dollar;
- Dr. Bernanke is flooding vast regions of the world with cheap money;
- Dr. Bernanke is negotiating the scale of his moves with China.
And he is doing all this without a legislative mandate and seemingly without advise or consent of the executive branch. Talk about Absolute Power! We don’t believe either Hillary Clinton or Bob Gates or even these two together could act with such impunity on the world scene.
A Historic Change in America’s Trade Posture?
After World War II, America persuaded Germany and Japan, two aggressive mercantile powers, to shed their aggression in exchange for access to America’s markets. This visionary act established peace in the world and created a system for global trade. During this period, America never used its political, military and economic might in an all-out effort to increase its exports.
This long standing policy appears to be changing before our eyes without any analysis or debate. Has the Obama Administration embarked on a mercantile policy to increase US exports using all the powers that America commands? What would be the unintended consequences of such a 180 degree change in long standing American trade and economic policy?
These questions were first raised by Stratfor a few months ago. If Stratfor’s analysis proves true, then this change in American trade policy could be the equivalent of the invasion of Iraq. Until President Bush invaded Iraq, America’s military policy eschewed unprovoked invasion of another country. The rise of Iran to a dominating position in the Middle East was one of the unintended consequences of that change in long standing American military doctrine. The longer term consequences will not become clear for another decade or so.
We were reminded of Stratfor’s comments about a new mercantile American policy by the discussion of a China-Fed deal and the specter of Chairman Ben Bernanke running all aspects of American economic policy. We hope we are being needlessly alarmist or unduly focused on tail risk. But we shudder to think of the unintended consequences of a new mercantile American policy.
This week, we feature the following videoclips:
- Ajay Kapur on CNBC Street Signs on Thursday, October 14
- David Rosenberg on CNBC Fast Money on Tuesday, October 12
- Jim Bianco on Reuters on Thursday, October 14
- Mickey Levy on CNBC Squawk on the Street on Thursday, October 14
- James Hamilton on CNBC The Call on Friday, October 15
1. Betting on Asia – Ajay Kapur with CNBC’s Erin Burnett (04:32 minute clip) – Thursday, October 14
Ajay Kapur is now the Head of Equity Strategy – Asia at Deutsche Bank. Thanks to interviews by Erin Burnett, we have listened to Mr. Kapur for a couple of years. We heard a distinct change in his attitude in this clip. Since Asia is now the love of the investment world, a change of heart in one of Asia’s long term admirers seems like an important signal to us.
- Burnett – Back in May, CEOs , 60% of them thought that Asia would be strong in six months, now less than half do, and when it comes to China, 10% now think China would be weaker in 6 months and only 1% thought that back in May. Yet, investor money is flying into Asia at a record level. What do you think, bubble or not?
- Kapur – ..I have met 70 clients and except for one, 69 were bullish on Asia and Emerging markets. The rationale was not so much based on fundamental growth; there is a lot of liquidity in the system and that liquidity is going to chase Asia & Emerging Markets & if that creates a headache for emerging market policy makers that’s still not yet a problem, we will deal with it later on. So there is massive divergence between what Asian economies are doing, leading indicators are going down, and what Asian equity markets are doing; reminds me a bit of 93 & 99.
- Burnett – OK, but then how does it end? Like eventually if the economic indicators are going down, the stock markets will follow?
- Kapur – eventually it is probably going to be an inflation problem in Asia & Emerging Markets that will make central bankers raise rates, but right now they really can’t do that too aggressively because that just sucks up more capital. They don’t want to see their currencies go up and so they get very frustrated and then they impose capital controls. So thats how the story normally ends – Inflation, higher interest rates and capital controls.
- Burnett – Now let’s talk about the other key issue when it comes to Asia, the US Dollar….over the past 3 months, the S&P 500 is up 7% and the US Dollar is down 8%…What ‘s the right bet of what would go up right now, the S&P 500 or the U.S.Dollar?
- Kapur – (He avoids the question by punting the ball to DB FX people and quotes their views in a wooden, semi-dismissive manner)..the trade you talked about is the same trade, QE2 trade…having said that, the sentiment on the Dollar is maximum bearish right now, the sentiment on Gold & Asia is very bullish..
- Burnett – So Asia is too bullish and Dollar is too bearish?
- Kapur – That’s exactly right. I am saying that I am moderately constructive but I don’t want to go overboard with this where if we get any disappointment with QE2 on November 3, the sentiment could turn quite radically and quite quickly. People are poorly positioned for that.
- Burnett – That positioning would mean Dollar going up and Asia taking a hit?
- Kapur – Yes
Then Ms. Burnett asked where Mr. Kapur would put money right now. Mr. Kapur gave his best ideas – countries like Hong Kong, parts of Korea and its high quality companies, smaller Asean countries like Malaysia and Philippines.
2. David Rosenberg on CNBC Fast Money Half Time Report (begins at minute 07:58 of the 13:01 minute clip) – Tuesday, October 12
David Rosenberg needs no introduction to readers of this Blog. If there is an economist we would follow with eyes closed and ears shut, it would be Mr. Rosenberg. Melissa Lee asked him what is going to happen at the Fed meeting and what the market’s reaction would be.
- Rosenberg – ...when you measure how far bond yields have come down since the Fed first started hinting QE, you could argue that there is anywhere from $500 billion to a trillion dollars size in terms of what the market is anticipating right now….they are going to announce something and it would probably be used as an excuse to sell this market, buy the rumor, sell the fact. My sense is that if there is risk based on what is priced in, it is probably going to be more of a disappointment than an upside surprise from here.
- Brian Kelly – You have talked a lot about the potential for deflation in this economy, the Fed comes out and buys a trillion dollars of securities and is able to increase inflation, how does that fit into your model of what the economy is going to do and specifically deflation?
- Rosenberg – …there is no question that the Fed has the power to pump liquidity, commercial bank balance sheets, the question is is it going to turn around the velocity of money and will those funds get transmitted into economic activity, that’s the real question that has to be answered. I guess I will go back to QE1 and that wasn’t $500 billion or a trillion dollars. It was 1.7 trillion dollars of QE. and the underlying rate of inflation when they first brought it in was 2%, today it is 1% along with an unemployment rate that is close to 10%. So the Fed can certainly direct the funds into the system, the question is do they get redeployed in the real economy? that is the great unknown.
- Lee – Depending on the size of QE, does that impact your forecast for the year? Does that move the needle either in a good way or a bad way depending on whether they do $500 billion or a trillion?
- Rosenberg – doesn’t really matter. at this stage…, you can argue that they have to do more than a trillion just to move the needle.
- Lee – Trillion is a big number
- Rosenberg – you got to start talking about numbers that would finance the entire deficit………. you are talking about what is already priced in…. all I can really say is that we already know they went $1.7 trillion in round one and it is really hard to disentangle what the market impact was?…Size doesn’t really matter in this case. What is going to matter in this case? Did this turn around the velocity of money? Did this fire up the money multiplier? Are we seeing actual improvements in household balance sheets and credit generation cycle and that is not something we can answer in the next month or so ; it will be in the next year
We strongly urge readers to go the Gluskin Sheff website and download the October 12 Lunch with Dave report. We think it is a must read.
3. Jim Bianco on Reuters Insider (03:46 minute clip) – Thursday, October 14
Jim Bianco has made the point all week that the Fed is about to embark on a major experiment without laying out a case for doing so. He is absolutely correct.
Mr. Bianco wrote on Wednesday, October 13 that “In some respects, this is unique in the Federal Reserve’s history. The Federal Reserve is about to embark on a major policy, one of the most significant in its 90 year history, yet they have not made an argument as to why it is needed nor are market participants asking/demanding/pleading for it….The Federal Reserve seems hell-bent on starting QE2 by the end of the year. Why are they doing it? How will it help the economy? When will they know if they did enough, or too little? None of these questions have been answered. Hopefully Bernanke will take a stab at them on Friday. We hope the Federal Reserve can articulate its reasons for QE2, because we have yet to come across a compelling argument for it.”
Jim Bianco makes the same point in this videoclip. When asked about whether there is any doubt about the size of QE, Bianco said “.. some doubt is beginning to creep in…there is supposed to be a deal between the Chinese and the Fed – they will revalue the Yuan devalue the Dollar and in exchange the Fed will do a little bit less QE, not none but less. The markets are up on the idea that the Fed is going to print a lot of money, that money has to find a home in stocks and if they don’t print the money then we have pushed markets too far. That’s the doubt that is starting to set in.”
Then Jim Bianco said he did not expect the Treasury to start a currency war by calling China a Currency Manipulator on Friday, October 15.
4. Say No to QE2 – Mickey Levy with Steve Liesman on CNBC’s Squawk on the Street (04:25 minute clip) – Thursday, October 14
Mickey Levy, Chief Economist of Bank of America, essentially agrees with the doubts about QE2 expressed by Jim Bianco above. His basic point is that more QE by the Fed is not going to address the factors that are inhibiting growth. For example, all the QE in the world is not going to address the issue of foreclosures.
Near the end of the clip, Mr. Levy said “the Fed has changed its rationale for QE, if everybody thought there was deflation, more QE would be appropriate remedy to combat deflation and expectations of deflation. However what the Fed has done is say, the economy is growing at a moderate pace but not fast enough, let’s get the unemployment rate down..I don’t think that is a wise reason.”
Finally Mr. Levy said that while there may not be short term negative effects of QE, “but there are long run problems that really exacerbate the exit policy and keep in mind that the Fed is the only credible game in town. We need them to maintain their credibility and I am concerned that we are using monetary tools to address non-monetary factors that are inhibiting growth. “
The emphasis in the above quote was ours. We have made the point for 2 years that Bernanke is the only person who is active in steering the US economy. He began using monetary tools to make economic policy in the fall of 2008 and he is still doing it. As we said, Bernanke is now our Financial President.
5. Ready to Act – James Hamilton with Steve Liesman on CNBC’s The Call – Friday, October 15
James Hamilton is a distinguished professor of economics at the University of California at San Diego.
- Steve Liesman – Would additional QE work to bring down interest rates?
- James Hamilton – …Yes, if you buy enough long term bonds, you could move the price and change the yield. It takes a lot of quantitative easing though to get much change in the interest rate.
- Liesman – How much QE equals how much change in interest rates according to your models?
- Hamilton – Our estimate is that another 400 billion in long term purchases might move the 10-year yield by 13 basis points.
- Liesman – Thats a lot of QE for not a lot of move
- Hamilton – Its a totally different mechanism from the traditional Fed operation. You really gotta take the supply off the market and it is a huge market.
- Kudlow – You are looking at it through interest rate channels…what about monetary channels, in other words, the Fed buys bonds, it injects new cash into the economy balance sheet grows and then presumably M2 grows and then money GDP grows. Are their risks to that scenario if the Fed goes too far through monetary channels?
- Hamilton – yes, there are risks of acting but there are risks of not acting. Unemployment is as high as it is right now, as long as it has been and as long as it is likely to continue. That’s a very destructive thing. You got to weigh those factors. I think the Chairman was correct when he said this morning that there is a lot of excess capacity in the economy, a lot of slack and a potential for lot of stimulus without running into inflation.
- Kudlow – Didn’t Milton Friedman teach us…that money stimulus has the shortest impact on unemployment, no long term effects at all.
- Hamilton – Well that’s as long as we are at full employment or potential output but we are far below that now that Milton Friedman would agree very much that there would be a potential for increasing output without inflationary consequences. And the Fed has created a lot of potential money and so far it is just sitting in Banks and with the Fed. As long as it just sits there, I don’t think it has proven to be inflationary.
- Liesman – Jim, how do you get from a 0.13% decline in interest rates to what impact does it have on GDP, what impact on the price level, on employment?
- Hamilton – well, its a mistake to assume too much from these kinds of policies. Fed cannot solve all of our problems….it might increase credit to small businesses….if it did lead to dollar weakness, it might potentially lead to more exports..I think it is a plus but it is not enough to solve all of our problems.
- Liesman – is there a limit that is created by the rise in commodity prices, can the Fed get essentially the wrong kind of inflation?
- Hamilton – well, thats one thing that does worry me, the response of commodity prices and my opinion is that some of that move last month was in anticipation of what the Fed was doing..what they would really like to see is a broad inflation where wages go up..
- Liesman – right, but can they choose the inflation they get?
- Hamilton – not so well as you would like. and I think that may be the ultimate limiting factor if we see relative prices changing without any benefits in terms of wages, the Fed will decide they can’t go too far this road I think.
- Kudlow – …the Dollar, the risk to the Dollar – if it keeps falling, I don’t know that it will, but everyone seems to think the Dollar is gonna go down, isn’t that dangerous? yeah, it may promote exports but it also is inflationary..it also drives commodity prices up, you yourself wrote a couple of years ago that $150 Oil did a lot of damage to the US economy. Why don’t we worry about a stable dollar rather than letting it collapse?
- Hamilton – there is no doubt that if we got back to $150 oil that would be very serious and that’s why we say we have got to watch these commodity prices carefully. But if the Dollar depreciation takes place slowly, in an orderly way, I think a little depreciation would a good thing. The Dollar is overvalued on a competitive basis at the moment and I think it would be potentially hopeful to see some depreciation.
- Liesman – If you were making policy on November 3rd, would you announce this big $400 billion or $800 billion program, or would you say do $100 billion each month.? How should the Fed make this announcement of QE?
- Hamilton – well, I think a $100 billion is not enough to do anything, but on the other hand it is a tricky business and they probably don’t want to come out with a full trillion at the beginning. There are some differences in the FOMC on this issue and these differences will prevent them from coming out with both barrels at the beginning. So I expect they will announce something incremental as they continue to monitor the situation. But I think we will see some announcement at the next meeting.
The emphasis in the above quotes is ours. You see and hear a monetarist talking about the need to depreciate the US Dollar. Remember when the monetarists would tell you that the Dollar was the exclusive preserve of the Treasury. Well, that was before the evolution of Chairman of the Fed Bernanke to America’s Financial President Bernanke.
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