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.
“We just won round one in the currency wars”
So said Jim Rickards on CNBC Squawk Box on Wednesday, January 19, 2010 (see clip 3 of our last week’s article ). He had begun the topic by stating that QE2 was really about getting the Chinese to revalue their currency. In his judgement (clip 1 in our November 13 – November 19, 2010 article), China was exporting deflation to us and Bernanke wanted to export inflation to China.
In that article on November 20 , we had discussed this argument in our opening section titled “Bernanke’s America’s Financial President Declares War on China”. In that section, we quoted the explicit declaration by Bernanke in Frankfurt on Friday, November 19.
- Bernanke – The current international monetary system is not working as well as it should. Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals.
- Zervos – There is no subtle innuendo in his Frankfurt speech, just brazen and downright aggressive warnings to major emerging market trading partners of the U.S.
This QE2 war against China seemed dumb to us. So in the second section of our November 20 article , we asked “Is Bernanke the Best Commander & Is Currency War the Best Tactic?” With a request for indulgence from our readers, we reprint a couple of paragraphs from that section below:
- This (imposing tariffs against Chinese exports to America) would make the action China-specific and not against the entire world. Secondly, this would not subject the US Dollar to debasement or subject the American people to the unintended consequences in the treasury market.
- But, these actions would require the President, the Treasury Secretary and the US Congress to wage this financial war against China. But, none of these three want to have anything to do with any such action. They have willingly abdicated their responsibilities to the willing warrior Ben Bernanke.
- This is why Bernanke has become the only and absolute commander of this war against China. The only weapon his Fed has is monetary policy and the infamous Quantitative Easing with all its side effects. This is a weapon that, Eurasia’s Ian Bremmer says, is like the US punching itself in the face to punish China.
- So here we are off to another war, under the most dubious of reasons, with a strategy with hosts of unintended consequences for the American people & the world, and without any realistic chances of success. No wonder, CNBC’s Rick Santelli said on Friday that Bernanke’s speech almost made him cry.
Winning the first round in currency wars = Losing the Middle East?
On Friday, we saw the first enormous and completely unintended consequence of Bernanke’s Financial War. When inflation ravaged the poor across the emerging world, Bernanke did not care about the “unintended consequences” of his QE2. He was too busy congratulating himself on the 20% S&P rally and the 30%+ Small Cap rally. When Tunisia blew up, Bernanke did not care.But when Egypt blew up on Friday morning and when it was clear that the Obama Administration was deeply worried about a complete breakdown of its Mid-East policy, did Bernanke begin caring?
Perhaps, he found out yesterday that exporting inflation to China may create tension in China but it can also fan an explosion in poorer, middle eastern countries teeming with poor, educated young men who can’t find a job and can’t feed themselves. Perhaps, Dr. Bernanke should read the business wire article we read on Friday with quotes from people rioting in Egypt:
- I have all the education in the world. I have a Master’s degree too but I can’t find work and I don’t even have the money to buy milk for my one-year old child.– Ahmed;
- I only eat dry bread. I can’t afford meat. Hosni (Mubarak) eats lobster and caviar every day. I want him to leave, I want his family to leave, I want them all to go – Guindy, aged 24.
“Sell Emerging Markets, Buy U.S. Treasuries” – A Prescient Call on Tuesday, June 25
This was a call by Marc Faber of the Gloom, Boom & Doom report who, just a month ago, had termed US Treasuries as a “suicidal investment”. But on Tuesday June 25, he said:
- Treasury Bonds right now are oversold, and as of tonight, I got a buy signal on US Treasuries…..Treasuries are the best place for the next ten days and probably for the next 3 months..as is the US Dollar. But Equities in the US will outperform emerging markets because they may go down less than the emerging markets. I think a correction is coming in the order of 10% on the S&P and 20-30% in Emerging Markets. (see clip 1 below).
But the Bond King saw it differently on Fed Day, Wednesday, January 26. He advised CNBC Viewers to lean against the Treasury Curve, meaning sell the long maturities Treasuries. When the Bond King speaks, the markets listen, at least for that moment. The Bond Market listened and the 30-Year Treasury Bond sold off by more than a point.
CNBC’s Jim Cramer piled on to what Bill Gross said and asked “Who Needs Bonds”? Listen to the contempt in Cramer’s voice in this clip . And this is a man who has repeatedly said on air that a large portion of his own money was in Muni Bonds, New Jersey G.O.s, “because you should stay rich once you get rich” or words to that effect. So will the real investor Cramer stand up and disclose whether he needs Bonds or not?
Marc Faber was not the only guru to call for a correction in the S&P this week. On Wednesday, January 26, noted technician Tom Demark called for an 11% correction and a “precipitous decline as early as tomorrow” (see clip 2 below).
On January 24, Bob Janjuah , the self-described “skeptical strategist” from Nomura predicted a 10% correction in the S&P over the next 2-3 months. His most interesting prediction is that the US Economy will fall back to 2% GDP in the second half of the year. This dovetails with the conviction of David Rosenberg and the comment by Larry Summers that he sees a slowdown in the US as a greater risk than inflation.
What’s going on with our favorite “Factor-based Quants”?
Through out the fall of 2009, we wrote about the volatility-crunching, low-volume, grinding stock market rallies that take place when the major players in the equity markets are factor-based quantitative managers. We chide ourselves for not having followed this story in late 2010 and in 2011.
But fortunately for us, Zero Hedge did. We recommend readers to not just walk but run to the article Quant Wipeout In Process? on Zerohedge.com. This article reviews a research piece by Morgan Stanley’s Quantitative & Derivative Strategies group. To requote the salient sentence from Zero Hedge’s quote of MS analyst Charles Crow, “market conditions over the last two weeks are somewhat reminiscent of that during the August 2007 ‘Quant Crisis’. In only a few days, a number of quantitative long-short equity funds experienced unprecedented losses in seemingly ‘normal’ market conditions. “
This is what happens when a great deal of money is invested in same or similar strategies usually by quantitative trading techniques. When one player has to sell, the market impact sometimes throws many other models into a sell mode leading to a major sell off.
Why do managers follow such models? Because investors still have the conviction that computer models work better than discretionary investors! And of course, the factor-based Quant models work most of the time, statistically speaking, and deliver modest profits in a consistent manner. Just like running to collect pennies on the street in front of a steam roller. Statistically speaking, you make small amount of money consistently until of course you get run over.
But the beauty of investing other people’s money is that the investors get run over by the steam roller. The Managers wait for the volatility to subside and then start a new Quant fund.
- Marc Faber on Bloomberg’s Street Smarts on Tuesday, June 25
- Tom Demark on CNBC’s Closing Bell on Wednesday, June 26
- Robert Kessler on CNBC’s Street Signs on Tuesday, June 25
- George Soros with CNBC’s Maria Bartiromo on Wednesday, June 26
- Jim Rogers on CNBC on Wednesday, January 26 & Thursday, January 27
1. Marc Faber with Bloomberg’s “Street Smart” with Matt Miller & Carol Massar (11:26 minute clip) – Tuesday, June 25
Marc Faber, the publisher of the Gloom, Boom & Doom report made the best call of the week. He is a colorful speaker and makes several calls, a great many of which turn out wrong. But this one hit the bulls-eye and so we give this clip our pole position the week.
Mr. Faber is rather derisive of President Obama. We choose to not include those comments in our summary. If you watch the clip, you can hear them. He is just as dismissive of Ben Bernanke. His choicest quote is “After he (Bernanke) sees the disaster he has created, he may resign” – (minute 04:30 of the clip).
- Faber– For the last two years from March 2009, the emerging markets universe has performed fantastically well, and industrial commodities have done fantastically well, the US has underperformed everything basically and now we have a change. I think for awhile, the US may outperform, may not go up, but it may go down less than emerging markets.
- Massar – So you would advise investors, Mark, at this point to invest in the US but at the same time, let me go back to December, you told Bloomberg News “US Treasuries, longer term are suicidal investments”, you caused quite a stir in the blogosphere on that statement. So help me out here, you say US will outperform but US Treasuries are suicidal here..
- Faber – Let me explain. First of all in the long run, for sure US Treasuries and most Govt bonds are a suicidal investment. But as a shorter term time frame, I think for the next 3 months or so we have a situation where stock markets have become very overbought, and emerging markets in January, most of them failed to make a new high above the November-December highs and that is a negative sign. And recently some of them have sold off considerably. Plus the Chinese market is giving you a signal that something is not right in the Chinese economy because it is going down, So my view would be you have to shift right now for the next 3 months out of emerging markets, they may correct 20-30%, out of industrial commodities and into US Equities on a relative basis, they may not go up but they may go down less than the others and I think the sentiment recently was very very optimistic about the inflation trade, commodities, equities and overly negative about Treasury Bonds. So Treasury Bonds right now are oversold, and as of tonight, I got a buy signal on US Treasuries, but not for the long term. I think it is a rally that may last 2-3 months.
- Miller – US Treasuries & US Equities – the place to be right now, you are saying Mark, at least for the short term
- Faber – Well, Treasuries are the best place for the next ten days and probably for the next 3 months, as is the US Dollar. But Equities in the US will outperform emerging markets because they may go down less than the emerging markets. I think a correction is coming in the order of 10% on the S&P and 20-30% in Emerging Markets. (emphasis ours)
2. The Bear Case – Tom Demark on CNBC’s Closing Bell with Bill Griffeth (04:34 minute clip) – Wednesday, January 26
Bill Griffeth introduced the topic by stating that the Dow had nudged above the 12,000 level and that it had been up for 8 straight weeks, the longest winning streak for the Dow for the past 9 months. Mr. Griffeth added that his guest, Tom Demark, sees as much as an 11% correction “any time now”.
Mr. Demark is a well known technician and his Demark models & indicators are used by many.
- Demark – We see at least 11% decline from current market levels if not more. Everything is aligning such that market could experience a precipitous decline as early as tomorrow. (emphasis ours).
- Griffeth – You see a top where we sit today. How significant could that top be in your view?
- Demark – It could be a very significant top. The weekly as well as daily “13”s (extremes in his work), are appearing right now the monthlies is probably a month away but sometimes it does miss on a monthly basis. So we are there right now, the Nasdaq and the broader stock indices such Russell in the small cap have already topped, there are a number of stocks, if you look at them, they have topped as well. We generally get a lead in the Gold market. Go back to 1980, the Gold market topped January 20-21 and stocks topped the following February. Commodities are topping across the board, two weeks ago we received a sell signal in oil and we also generated a sell signal in Copper.
- Griffeth – Right now for you, it is all about Cash then?
- Demark – yes it is, the only haven is cash that we see right now. Everything is aligning psychologically, 12, 000 on the Dow, 1,300 on the S&P.
3. The “Fiscal” State of the Union – Robert Kessler on CNBC Street Signs with Erin Burnett & Steve Liesman (08:19 minute clip) – Tuesday, January 25
Robert Kessler, CEO of the Kessler Companies, manages Treasuries. He usually illustrates his points with interesting figures. This clip is no exception. In fact, this clip is a real eye-opener to those who think of the U.S. as down & out, especially when compared to the streaking EM countries.
Mr. Kessler calls the United States Balance sheet as the “best balance sheet in the world”, in fact not only the best but the “most transparent and the most liquid” as he added. Here is his table:
Household Assets: $68.8 Trillion
Corporate Assets: $26.2 Trillion
Small Business Assets: $9.9 Trillion
Total Assets: $105 Trillion
Household Debt: $13.9 Trillion
Corporate Debt: $13.6 Trillion
Small Business Debt: $ 5 Trillion
Public Debt: $14.1 Trillion
Total Liabilities: $46.6 Trillion
Total US National Wealth: $58.3 Trillion
This is what we are worth today. So why do people feel such a great need to sell the U.S. Dollar and the great emotional desire to Short U.S. Treasuries?
As Mr. Kessler said ” there is no country in the world that comes close to that number. That is why we are probably the reserve currency of the world as well.”
In the rest of the clip, Steve Liesman discusses the debt coverage ratios, the issues of debt-worthiness, the ability to sell debt to outsiders plus Social Security & Medicare.
The most decisive comment from Mr. Kessler is at the end:
- This is a country that will react when it needs to react….We are in a period of time that usually takes 7-10 years to get out of it which is a financial, consumer led recession. We are in the 3rd year. The best performing asset in that period of time tends to be US Treasuries. And yet for the last 3 years, we have heard about the end of the bubble in Treasury markets.(emphasis ours)
4. George Soros with CNBC’s Maria Bartiromo (06:25 minute clip) – Wednesday, January 26
George Soros is probably the best investor of the last 20 years. So when we get a chance to listen to him, we take it. His interview with Maria Bartiromo is in 3 clips:
- Soros says European Crisis being Resolved
- Soros warns Euro Crisis could divide Europe
- A Little Inflation Good for the Economy
Interestingly, none of these articles caught what Soros calls the Great Drama of 2011 in the USA, the Municipal Bond crisis. Read the crisp q&a below:
- Bartiromo – Would you avoid Muni Bonds?
- Soros – I would be very careful and I think that probably the difficulty of selling Bonds or the cost of selling Bonds will also go up which will actually reinforce the crisis.
Below we include some excerpts from his comments about Europe:
- The euro was supposed to bring about convergence, and effectively it created divergence and that is now being perpetuated,
- So you are going forward with this new structure. You’re going to have a two-speed Europe, and that is going to be politically very disruptive.
- I think the euro is clearly here to stay. There’s a clear commitment to the euro. But it could put into motion this very divisive political force of two Europes.
He is negative on the UK “I don’t think they (UK austerity measures) can possibly be implemented without pushing the economy into a recession.”
5. Jim Rogers on CNBC – Wednesday, January 26 & Thursday, January 27
- Go Out and Accumulate RMB (05:41 minute clip) – Thursday, January 27
- Commodities Check (04:09 minute clip) – Wednesday, January 26 – 07:50 pm
A couple of excerpts below:
- If the world economy gets better, commodities are going to make a fortune. If the world economy does not get better, commodities are the place to be because they are going to print more money, and that’s how you protect yourself
- Nothing goes straight up or straight down, But these corrections (in commodities) will be nothing more than corrections in a major bull market which has years to go
- Throughout history, go back and look, you know we had huge inflation in the 70s, stocks were not in a good place to be…This is the time when you should own real assets, not stocks and bonds.
In response to a question by CNBC’s Yousef Gamal El-Din about his views about the turmoil in the Middle East, Mr. Rogers said:
- Yousef, you are going to see higher food prices, you are going to see more governments topple in the next year or two, because food is the most dramatic, the most important to many people, especially when people are unhappy any way and then you have food prices going up, that causes, that;s the snap, that’s what causes people to get into the streets. You are going to see more governments failing. I own commodities which are going to benefit from most of the things happening in the Middle East.
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