Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. 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.
1. Is 2011 Europe’s 2008 or Worse?
This is not a question to be asked lightly. The signs are ominous. But the European Governments seem to be panicking, if not the ECB. We recall the old adage that once Government & Central Banks panic, then investors can stop panicking.
Unfortunately, we see no visible signs of panic in Trichet & the ECB. In our opinion,Trichet should have cut interest rates this week after Bernanke’s surprise move to freeze the Fed Funds rate for next two years. That he can do. He should have summoned his lawyers and found a way to guarantee depositors in Italian, Spanish and French banks. He did not.
Instead he expressed some worry about the upside risk to inflation. Of course, this is the man who raised interest rates a couple of months ago in a repeat of his stupidity in raising interest rates in 2008. Jim Cramer called him a buffoon and then a moron. But the real danger may be that Trichet is not stupid just obedient; totally obedient to the wishes of Germany.
So a great deal depends on the meeting on Tuesday between Angela Merkel and Nicolas Sarkozy. These two have to agree to essentially convert the European Financial Stability Fund (EFSF) into Euro-Tarp, a trillion dollar Euro-TARP. And unlike in American 2008, this Euro-TARP must be allowed to buy both European Sovereign Debt AND put equity capital in Banks OR guarantee European depositors. To do this, Euro-TARP should be expandable to $2 trillion.
If Kyle Bass, a smart hedge fund manager, is correct, then Merkel will go along until Germany has to put up the cash and then Merkel will back away (see clip 2 below). If this risk is not enough, 17 European Parliaments have to ratify the EFSF beginning with Netherlands. If they don’t, then the European crisis will expand into a European Sovereign contagion AND a European Banking contagion until the European Monetary Union breaks.
So we should treat the rest of August as our vacation from Euro troubles until the ratification process begins in Europe in September. Until then we should pray that Sarkozy and Merkel say the right words.
2. Bernanke as Financial President, Again!
We first used the term “Financial President” on March 21, 2009 in our article In Bernanke We Trust . We think he single-handedly rescued the global financial system from November 2009 onwards.
We turned very negative on Chairman Bernanke as a result of QE2. That QE2 was a disaster is self-evident, we believe. We again referred to him, this time with derision, as Financial President on October 16, 2010. On November 6, 2010, we asked whether Bernanke’s Absolute Power Corrupts Absolutely? We followed up by another article on November 20, 2010.
Today, we resurrect the Financial President title with admiration. On Tuesday, August 9, Chairman Bernanke essentially informed the World that he plans to keep the Fed Funds rate at Zero% for another two years. This is a simple decision and, as simple folk, we applaud this move.
This is NOT Bernanke doing QE3. It is Bernanke inviting investors to engage in QE3 if they wish to. And how can they not? By freezing the Fed Funds rate to 0% for two years, Bernanke has converted the two-year note into an overnight T-Bill, he has converted the three-year note in to a One-Year Treasury, he has converted the Five-Year note into a Three-Year Note and the Seven-Year note into a Five-Year note. Actually Bernanke did nothing of this sort. The Treasury market did it for him.
So Chairman Bernanke delivered a sharp, powerful monetary easing into the economy. Sorry, he invited the Treasury market to deliver this powerful dose of liquidity. This is a bold, dramatic invitation, a leader’s exhortation, the type we wish President Obama emulates. In one stroke, Bernanke invited Bond investors to drop their yield requirements for corporate bonds, commercial mortgages and all fixed income investments. This will allow Corporations to issue debt at a much lower cost and liquefy their balance sheets. Bernanke added certainty to the calculations of corporate CFOs and investors. And
he did it without spending a dime and without eliminating any of his options.
If the U.S. Economy clicks in to a decent recovery, the bond market will raise the interest rates for Treasury curve. And if this turns out to be a sustainable recovery, then the market will demand a rise in the Fed Funds rate and Bernanke can oblige.
We are in the Achuthan-Rosenberg-Taylor camp of a protracted slowdown into 2012-2013 bordering on recession. In this scenario, it is a given that the Fed Funds rate will remain at 0% until mid-2013. So, in our opinion, Bernanke has given nothing away. He has simply codified today what would have been the reality until 2013.
Today, Chairman Bernanke is all alone. President Obama seems clueless and his political advisers have no ideas. They have bottled up Tim Geithner, the Treasury Secretary, because of their political fears.
So Ben Bernanke is again our Financial President. With a decelerating economy, with a stock market in decline, with consumer confidence in tatters, Bernanke will rule as Financial President as long as he maintains low rates and keeps gas & food prices down.
In our opinion, Gold and the U.S. Dollar will determine the success of this move by Chairman, nay Financial President Bernanke. If Gold goes down and U.S. Dollar stays stable, then Bernanke’s move will be judged a winner.
We are simple folk and we think simply. You should listen to a smart guy and to that end we give you Howard Lutnick, Chairman of Cantor Fitzgerald, in clip 1 below.
3. Thank You, Tea Party and Fie on you, S&P
As Rick Santelli said this week, there is a market rating and there is a rating by agencies. The Bond Market clearly and unequivocally pronounced USA as a AAA issuer and downgraded France to less than AAA.
We have written on at least two separate occasions that the fight over the Debt Ceiling was a good thing. It was a hall mark of a people who care passionately for their country, of a people who are willing to fight to keep America independent and free of the European disease. And we made a bet with some CNBC anchors that America will solve its debt problems faster and before any other debt-ridden country.
Unfortunately, the S&P elite are so European in their outlook
that they simply don’t get America. Fie on that Corporation, we say. It is the only F-word we were taught. We are relieved to see that Sean Egan, the head of the only truly independent ratings agency feels, like we do (see clip 5 below). Mr. Egan said:
- Some people don’t like the give-and-take in Congress about the debt ceiling debate. From our perspective, it’s a huge positive,.. You worry about a democracy if there isn’t a lot of noise. In our view, the best policy comes out of the give-and-take.
We would rather have what the Europhiles call the “Tea Party Anarchy” than the anarchy we saw in England this week.
4. Treasuries, Gold
What a phenomenal move in Treasuries? The surprise Fed move created a raging bonfire of Shorts and the 10-Year yield dropped to 2.03%. Gold also exploded to a new high on Wednesday. The similarity in price action however generated contrasting predictions. People buying gold may feel like it is the safer option for them and how they want to invest their money. They may look into buying gold american eagles as an investment and start from there, it is worth looking at if they want to delve into gold.
Marc Faber laughed at the idea that Gold could be in a bubble but pronounced Treasuries as a bubble and claimed that Shorting long dated Treasuries is the Trade of the Century (see clip 4 below). We don’t get it. An asset that guarantees return of 100% of your capital and pays you a guaranteed semi-annual interest is a bubble but an asset that does neither and costs money to store safely is not a bubble. But then we are simple folk and not intellectual-sounding celebrity analysts who proclaim they buy gold rings for their girlfriends (see clip 4 below).
Of course, we do believe that long duration Treasuries are way overbought and that a tactical short position in the 30-Year Treasury (unloved & jilted by Chairman Bernanke) may make sense. But remember we speak tactically. We recall that in a mere seven months, the 10-Year Treasury yield rose from 2.05% in early December 2008 to 3.90% on June 10, 2009. But ownership of Treasuries, in our opinion, remains a core strategic necessity until the massive amount of “Debt overhanging the World” (to quote Robert Prechter) gets wiped out.
What about Gold? Jeffrey Christian of the CPM group thought the top of the Gold rally might be here. Mr. Christian had the same opinion a few days before on August 3. So his timing may be off. In contrast, Mihir Dange , of Arbitrage LLC, said on Monday, August 8, that just because a market is overbought doesn’t mean it is going to go down and advised the trend is your friend. He was right. But on Thursday, a mere three days later, Mr. Dange said he had sold his Gold on Wednesday and bought stocks. He added that this was only the second time in his life that he had bought stocks, the first was in December 2008. This seems to be man who may have the timing on Gold right. We may be biased because, from his name, he is a fellow Marathi guy.
But Mr. Dange’s timing in stocks does not seem to be as good. We recall that stocks did not bottom until March 2009, a full three months after his first ever buy of stocks.
This was probably the craziest week in the stock market that we have seen. The first four days were the only 4-day period in history in which the Dow moved by more than 400 points. On Monday, VIX, the volatility index, jumped 50% to 48. This peak level led Ralph Acampora to predict a sustained rally to new 2011 highs within the next 4 months or so. He made his case to CNBC’s Maria Bartiromo in charts that showed that in all instances, except one, the stock market mounted a sharp rally to new highs within 4 months of VIX touching 48. It did so in 1997, 1998, 2001, 2002 and in 2010.
What is the exception? The Lehman led financial crisis on October-November 2008. This may be an important exception because this period may be Europe’s 2008.
The 400+ point rally after the Fed decision on Tuesday relieved many investors. But the sudden and unexpected 500+ point decline on Wednesday frightened investors who sold their mutual funds and stocks. CNBC’s Herb Greenberg reported that Insider buying saw a sharp rise on Wednesday. The last time such buying was seen was in November 2008 according to a guest on CNBC Fast Money.
The Option Strategist site wrote “…the current market is at least as oversold as it was on that date (October 10, 2008), in the dark days of the financial crisis…..most of the technical indicators are at oversold levels on a par with – or even exceeding – those of October-November 2008.” We are reminded that the actual bottom of the stock market was reached in March 2009, a full 4-5 months after the peak (or is it nadir) of the oversold state.
Robert Prechter told Bloomberg’s Tom Keene that “this decline is more severe” than the one in 2009. He added “the advance-decline ratio on Monday for example was the greatest on record going back to 1926.” But Prechter views this as a confirmation that the stock market is in what he calls Wave 3 in the Elliot Wave Model. His conclusion is that we are in another decline in the ongoing bear market.
The most interesting point was made by Marc Faber (see clip 4 below):
- The only thing I have to say – basically the market has sold off in such a rapid way and with so much momentum that I am smelling as if something really wrong happens in the next 2-3 months.
So if 2008 turns out to be a parallel for 2011, then stocks could mount a rebound for a few weeks and then sell off again. No one foresaw how low the 2008 stock market would go until it bottomed in March 2009. If this is the case in 2011-2012, then the ultimate low in Treasury yields may be much lower than today’s levels, may be at Shilling’s target of 3% for the 30-Year Treasury.
6. Rosenberg, Shilling Were Right Again
David Rosenberg and Gary Shilling proved to be absolutely correct this time just as they were prescient in 2008. We recall that David Rosenberg was almost jeered on a couple of CNBC shows earlier in 2011 and Gary Shilling was openly mocked on CNBC Fast Money. Once again, any one who listened to these two won big.
In stark contrast, gurus like Jim Rogers, Nassim Taleb and virtually every long-only stock manager (people we like to call equity-fee-collectors) advised shorting Treasuries, buying TBT (the double short Treasury ETF) or or avoiding Treasuries. Once again, they proved to be horribly wrong.
David Rosenberg steadfastly recommended owning a bar bell of long duration Treasuries and Gold. What a spectacular call? Gary Shilling predicted that the 30-Year Treasury yield would get to 3% and advised against stocks and commodities. Again a terrific call.
We congratulate these two Experts and thank CNBC-Bloomberg for inviting them for the benefit of viewers like us.
7. Why Would You Lend to the U.S. Government for N%?
We recall that Jason Trennert from Strategas asked this question a few weeks ago when the 10-Year Treasury yielded 3%. But then, this has been a favorite question of his and a vast majority of CNBC “expert” guests for the past several years.
Remember 2006, especially June 2006? It was the month when inflation fears were running high. We recall Dylan Ratigan speaking eloquently about rampant future inflation in June 2006. It was the time when David Faber and others talked about 10-year rates going to 7-8% and way beyond. The stock market was about to rally significantly and commodities were ramping up.
This was the perfect time to bash US Treasuries by asking what “idiot” would loan money to the U.S. Government for 5% or so? But if you were such an idiot and bought the 10-year Treasury Auction on June 8, 2008 at a yield of 5.125%, how did you do?
The answer is you were up 45% as of Friday, August 12, 2011. You received 5 years of coupons at 5.125% and you got capital gains of 19%. If being called an idiot is the price of getting 45% total return in 5 years, that too in a security that guarantees return of invested capital, we shall wear the idiot label with pride.
Allow us to borrow a question from Marc Faber (see clip 4 below) and ask “how many CNBC Anchors own US Treasuries in their personal portfolios?” The answer we believe is None. Why? Ask your favorite CNBC Anchor.
8. Trading Signals from CNBC-Bloomberg?
We believe that the behavior of TV Anchors and Financial TV networks can provide fairly reliable trading signals for viewers. Below are two that seem consistent with the opinions of traders expressed above:
- James Grant (of Grant’s Interest Observer) showed up on CNBC Squawk Box on Thursday morning to talk about Gold standard for the US Dollar. Mr. Grant wants a “modernized, 21st century gold standard that checks the capacity of central banks to print money.” His comments are summarized in Tie Central Banker’s Hands, Return to Gold Standard on CNBC.com.
- We remind readers that Mr. Grant was invited as a guest on June 10, 2009 to discuss his negative views about US Treasuries. That week, we asked “whether CNBC’s anti-Treasury hype on June 10 would end up signaling a peak in long maturity Treasury Rates“.
- The answer was YES. The 10-year Auction on June 10, 2009 (priced at 3.90%) turned out to be the absolute bottom of long maturity treasuries for 2009.
- This Thursday, Walter Zimmerman made a guest appearance with CNBC’s Maria Bartiromo. Mr. Zimmerman predicted that the S&P will go down to to 570 – down > 50% from this week’s levels. Mr. Zimmerman has a history of making rather outsized predictions in his appearances with Maria Bartiromo. And, if you check CNBC.com, you will notice that his appearances tend to be followed rather quickly by a stock market rally.
- This week, Robert Prechter, the Elliott Wave guru, was invited both by Maria Bartiromo and Bloomberg’s Tom Keene. Mr. Prechter told CNBC that investors were being provided a generational opportunity to sell stocks from now until 2016. Mr. Prechter argued that Debt is overhanging the World and Deflation would be the result.
Will this pattern repeat again? Will the guest appearance of Jim Grant signal at least a short term top in Gold? Will the appearance of Zimmerman-Prechter signal at least a short term bottom in stocks? We shall know soon.
- Howard Lutnick on CNBC Closing Bell – Tuesday, August 9
- Kyle Bass on CNBC Strategy Session on Monday, August 8
- Jeffrey Gundlach on CNBC Strategy Session on Monday, August 8
- Marc Faber on Bloomberg’s Street Smarts on Tuesday, August 9
- Sean Egan on CNBC Closing Bell on Thursday, August 9
1. Flight to Safety Moves – Howard Lutnick with CNBC’s Maria Bartiromo – Tuesday, August 9
Howard Lutnick is the Chairman/CEO of Cantor Fitzgerald. We called him “eminently sane” in our discussion about CNBC Hall of Memories clip on June 4, 2009 in which Jim Rogers and Larry Kudlow eclipsed the zany antics of Dan Akroyd and Steve Martin. This is the clip in which Larry Kudlow exclaimed “why any one would want to buy treasury bonds right now is beyond me“.
So we expected to “eminently sensible” comments from Mr. Lutnick. Our expectations were met and more.
- Bartiromo – Let me get your take on the Fed, saying they will leave rates where they are, exceptionally low levels until 2013. How will that impact your business?
- Lutnick – Bernanke, now that we closed up 400 points, is walking around doing a victory lap. Because what he is telling you, you can’t stay in credit assets. If rates are gonna be so low, you have to get in equity markets and get in the curve. The Fed is trying to force people out of credit market and back up to the equity part of the curve. They don’t have many tools left but they are trying to shoot them all now.
- Bartiromo – Is that a good bet, Treasuries?
- Lutnick – Treasuries is a safe haven, Why else would they run to Switzerland? Switzerland is a place to hide and Gold is a place to hide. Treasuries double-a plus whatever you call them are the only place to hide for say China, they have a trillion dollars in treasuries. If they sold Treasuries, what in the world could they buy? the Euro? come on.
- Lutnick – It is incredibly inconsistent. How can you could they say the United States AA+ when at least it issues debt in its own currency. France they say is AAA and France borrows in Euro. France cannot get out of its debt burden, Italy cannot get out of its debt burden. They are all in that together. That’s the one that should have been downgraded. The US may not be perfect but it is better than all, all of the alternatives.
- Bartiromo – But do we have a plan is the issue? I asked Deven Sharma why he didn’t down grade France. He believes France has a plan in place and US doesn’t. .
- Lutnick – Well, he believes that France has a plan in place. The United States can fix itself. It is going to have to make tough choices and make those tough choices in a political environment very very difficult. But the fact is there is no better market than the U.S., no better economy in the world than the U.S. and at least we have an economy in our own currency. Anybody who doubts those two things, an economy in their own currency, the proof is in the markets. People buy Treasuries, not running to buy French Debt.
- Bartiromo – Where is the money moving right now, Howard?
- Lutnick – People have been saying we are going to see higher rates. We are just not going to see them until we have an economy and the Fed has told you that’s years and years away. It was a very negative thing to say about our economy, a fascinating choice but I guess they don’t have many bullets left in the gun.
- Bartiromo – So what do you say about our economy? Are things worse than anybody expected?
- Lutnick – Things are bad here and I think they getting worse in Europe…. remember two weeks ago, Trichet in Europe was saying he was a hawk. That word is over. I think you are going to see Europe starting to cut rates, they are behind us, their rates are too high, their economy is weak they will start cutting, our economy is weak, we’re heading into a recession and right now it feels that way right now. And Europe is so hot on our tail going south, you will see them start cutting rates big and and they are going to start following us and you will see the dollar rally rally rally.
- Bartiromo – What’s the implication if Europe worsens, what’s the implication for the U.S.?
- Lutnick – the U.S. is just in a very very tough place. So that’s what Bernanke is trying to do, trying to push money into the equity market. If he can push money into the equity market. remember spread trades off Treasuries and Treasury interest rates are zero, then even if the spreads widen to credit, 200 basis points above treasuries, but Treasuries at zero, you’re still buying at 2%. So who is gonna buy corporate bonds at 2%? So they are forcing them to get into the equity markets. That’s the way in the Fed’s view we grow out of this. If you can force money into the equity markets, force the markets up. You let companies take more risk in equity market and how they grow. it’s the only gun the Feds have left but at least they’re shooting it.
2. Europe’s Zone of Insolvency – Kyle Bass on CNBC Strategy Session – Monday, August 8
Kyle Bass is the managing partner of Hyman Capital. He provides a different macro perspective than the usual nonsense you hear on TV.
- Faber – Tell me your latest thoughts in terms of ECB and willingness to buy Spanish and Italian bonds and it would appear at least and perhaps you disagree, the willingness of Germany to go along with that.
- Bass- I think that what the market is seeing today is looking at the core and you see the stress really show itself in Italy today. There’s a realization in the marketplace that a bailout of this size required for Italy and Spain will cost France and may be even Germany their AAA ratings. Remember when Italy was a different story do to high domestic ownership of sovereign bonds and its cooperative banking system and now all of sudden 200 basis points later, Italy is in a crisis. Think about the world in which we live in and the enormity of the debts that have been taken on and the country’s subsequent ability to pay those debts. You move from stability to crisis in 200 basis points. This is what we are seeing again – cans kicked down the road in Europe. Several countries have failed into a zone of insolvency years ago. The U.S. isn’t in that zone.
- Faber – For our viewers who haven’t listened in the past, what’s the zone of insolvency that you are discussing here?
- Bass – Like at home when you can’t pay your bills. You have a situation with Greece where they spend 15% of their sovereign government revenue on interest alone and on balance sheet they are borrowing at 4.5%. the bond in the marketplace, their ten-year bonds today are yielding 15%., 2-year money is at 20% – they are borrowing at 4% and spend 15% of sovereign revenue on interest. Greece is insolvent.
- Faber – diminishing margin of the utility of so-called saves – a new save comes out to bailout countries and say everything is safe and then yields continue to go up. Is that what you expect will ultimately happen again here?
- Bass – I do. You have a scenario in which this is supposedly the sixth save for the euro zone and I have seen the press report that now that this crisis is involved, let’s move on to the next problem. I think when you understand the mechanisms of this European Financial Stability Fund. Today it has 440 billion euros in lending capacity. They have to raise 780 billion euros in debt to fund this. The pesky democratic parliaments that are basically the membership of the euro zone have to vote to ratify these agreements that the Eurocrats are making. They haven’t even ratified the new lending capacity.
- Kaminsky – Let me ask you three questions here. Are we in a global recession? Do the European banks have enough capital and number three, what about Japan? You were very concerned about their debt levels. Obviously not on the front page now. What’s your scenario now?
- Bass – the European banking system is about three times as levered as the US banking system. They haven’t recapitalized their system because they don’t have lender of last resort like the Fed and United States. I think U.S. banks are in much better shape than European banks and they don’t have money to recap banks because they don’t have a mechanism to print money like we do. that’s question one. I forgot question two.
- Faber – Are we in a global recession?
- Bass – if it means that growth is sub 2% for a couple quarters, yes. I think we are in a recession again.
- Kaminsky – you have questions about the Japanese market and how it’s sold and financed. what happens in Japan and how does that effect a world that is looking to refinance itself?
- Bass – Imagine a scenario in which you have the world’s either second or third largest economy in Japan and it is just 1% away from a crisis. They have the largest on balance sheet sovereign debt in the world, they have the worst democratic profile in the world and they are running one of the highest fiscal deficits in the world and you have the inability to self-finance starting to show itself. Think about Italy. Italy went from completely solvent and safe to unsafe overnight when rates moved 200 basis points.The convexity in Japan – if rates move at all, they can’t pay their bills. They spend 50% of their sovereign revenue today on debt service. you’re going to see, a lot of people are asking today, what are the implications of the U.S. downgrade? the implication of the u.s. downgrade is that rating agencies are actually being pragmatic about balance sheet…it doesn’t take a genius to see in the U.S. when you bring in 2.3 trillion of revenue and spend 3.7 trillion, that maybe we’re not AAA.
- Faber – I want to come back to Europe, Kyle, before we say good-bye. You know, Germany today CDS wider, France up sharply, so their spreads widening. In Italy and Spain, they have seen a decrease in yields. a rather significant one over the short-term. what’s the end game here?
- Bass – I think French have to be all in because the French are in more trouble than the United States in my opinion. The Germans on the other hand publicly, I would be doing exactly what Merkel is doing. I would be trying to show as much solidarity as I could. I would be trying to ratify the situation through dramatic austerity measures and cuts and I would be say toting the public line like they are with regard to keeping solidarity within the European union. The day that the piece of paper is slid in front of them where the European periphery says you need to sign joint and severally liable with us, Merkel is not going to sign that piece of paper.
- Faber – you don’t think they’ll do it?
- Bass – no way.
- Faber – then what happens?
- Bass – then you have restructuring. Think about the crisis we went through in 2008. What did we do? we pretended it didn’t happen. We smoothed the volatility with the global central banks of the world by printing money. We didn’t delever. the only delevering that went on was forced delevering through foreclosure. The Governments have now relevered that and more. So now total credit market Debt to GDP is higher than it was three years ago. So what has to happen here is we just need to delever and delevering will be voluntary or involuntary and what we’ve seen throughout the world is it will have to be involuntary and violent as opposed to voluntary and measured.
- Faber – What are you doing in terms of your portfolio to position yourself for what you expect.
- Bass – it’s really tough. Even maintaining this view of the world for the last few years has been really tough. We’re invested mostly in the United States. We’re about 60% of our portfolios invested in fixed income credit and event driven scenarios in the US. We don’t think Europe is going to be able to make its way through this so we’re hedging by using European instruments and then in Japan, you know, it’s interesting at a point in time in which the underlying instruments meaning their bonds are the riskiest they’ve ever been in their history, the price on the optionality on their interest rates is the cheapest it’s ever been given the structural anomaly and the modeling, Black-Scholes modeling that is used. It’s a very complicated answer to a very difficult question.
3. King of Bonds on Downgrade – Jeff Gundlach on CNBC Strategy Session – Monday, August 8
Jeffrey Gundlach is no stranger to the readers of this Blog. He has been the best predictor of the Bond market and credit risks.
- Faber – tell us what you think with that Ten-Year Treasury in light of of course that downgrade from S&P.
- Gundlach – I just think the downgrade is outright silly. Rating agencies are supposed to be opining on the payback ability of various entities and payback ability of the United States is absolutely positively 100%. They just run the printing press. So what they are really looking at here is the risk of print and pay. But what they are supposed to focus on is the probability or the wherewithal to pay and the wherewithal is there. So what happened on Friday in my opinion is not really a downgrade of U.S. bonds. It’s a downgrade of the U.S. dollar. In other words what they are worried about is what you’re going to get in terms of the payback is going to be worth less. that’s not their job. It isn’t their job.
- Faber – but they don’t how to do their job any way Jeffrey. You knew that. look at the mortgage securities from ’06 on.
- Gundlach – Right. The downgrade second I heard that I said to myself, the bond market is going to rally on Monday…. I was talking about the Treasury market because this is just another sign post along the way to a weaker economy. As we talked about in previous shows earlier this year, remember back in March or April, I said once QE2 goes away… the whole thing is going fall apart because the economy needs all of the stimulus to create even moderate GDP growth.
- Gundlach – and if you start to address the deficit through the debt ceiling shenanigans and now through potentially more of a cattle prod to work in that direction, that’s going to mean a weaker economy. And if you are going to address the deficit even incrementally, low treasury bond yields make sense. So 2.37% on the 10-year is awfully low, It’s actually now lower than the low closing yield back last fall. If we close at this level, we’ll take out the low close of last fall. and if that’s the case, then Treasury yields will go lower amidst this atmosphere of fear.
- Kaminsky – Jeffrey, you were right about Treasuries and you were right about High Yield. What’s happening in the high yield markets today?
- Gundlach – I hate it. As I said back in March & April, I thought the high yield bond market was most overvalued in history.…I said government bonds would greatly outperform or at least break even to high yields bonds and now it’s just absurd how govt bonds have outperformed. High Yield bonds are tanking as CMBSs issues, as are Subprime Stuff.
- Gundlach – ….there is tremendous illiquidity, there’s fear all over the place. And on the margin this tiny downgrade of treasuries is negative for high yield bonds.…If they are now opining on the investment success of dollar based investments, …
- Faber – I wish we had more time with you. Bank of America is another name you talked about in the past when you were talking specifically about weakness in subprime.
- Gundlach – I hate Bank of America.
- Faber – Still?
- Gundlach – It’s a freight train. This whole thing about what’s going on in the stock market and banks is a freight train…Get off the tracks. The momentum towards lower prices on the Banks is overpowering at this point. There is no way that you are putting in any kind of enduring bottom. I have been saying to investors on B of A – don’t own stocks and their bonds. They said wait a minute – isn’t the government going to bail them out? Don’t they have a put from Uncle Sam? I say yeah but not $11 a share. It is going to be a put at $3 a share or a $1 share. …the losses in the portfolio are enormous. The hot potato of Countrywide never should have been taken down. It is really toxic. The liabilities that are coming out today with AIG and putbacks and GSEs, this is just another chapter in the book. This is not the conclusion.
4. Faber on Fed Decision, Treasury market, Gold – Marc Faber on Bloomberg Street Smarts – Tuesday, August 9
Marc Faber, Editor of the Gloom, Boom & Doom Report, is always an interesting listen. This time, he suggests something that we all should consider and watch for. Here he speaks with Carol Massar and Matt Miller of Bloomberg.
- Massar – Do you think they (Fed) did the right thing? Giving a time commitment in terms of keeping rates low through 2013?
- Faber – I think they did the right thing in that they did not announce QE3. The market is likely to move still lower. We are very oversold, we can have a rebound like we have today. May be, we will have a rebound next week. But generally I think we will take out the July lows of last year, S&P at 1010 and after that we will get a kind of QE3 announcement.
- Massar – You think we will get a QE3 ultimately?… What do you think the Fed is waiting for here?
- Faber – I think the Fed is underestimating the severity of the coming economic downturn and essentially they have spent their bullets. It is very difficult to do QE3 right here because you have Gold prices rising and you have the dollar going weak and so there are unintended consequences of doing QE3 right here.
- Miller – Is there anything though Marc that they could do? I mean besides nothing…
- Faber (laughing) – Actually the best thing they could do for markets would be to collectively resign.
- Miller (laughing)– and you think that will be good for the US equity markets?
- Faber – everybody in the world has become a Keynesian. Everybody thinks the Govt. should do this, the Govt. should do that, the Fed should do this, the Treasury should do that. I think sometimes the best thing to do is do nothing. And I welcome the decision at least today that they are not doing anything worse than what they have actually done.
- Massar – where are we going in Treasuries?
- Faber – I personally think that the long dated Treasuries are a bubble and it will be one of the worst investments longer term if you buy the 10-year, 30-year US Treasury. So I am a bit puzzled that Treasuries are now yielding, are essentially near record lows. And I would rather sell Treasuries. The stock market peaked out on the second of May, on the S&P at around 1370, We are now around 1100. So many stocks are down 20% or so. We are very oversold, I think a rebound is coming but you can forget about a new high this year. That is out of the question because the technical picture is horrible, horrible.
- Faber – The Treasury market is another example of a gigantic bubble..In my opinion, Treasuries, long dated Treasuries are the Short of the Century here.
- Miller – what do you think here of Gold, Marc? Is that a bubble?
- Faber – I don’t think it is a bubble, but I think the gold market has exploded on the upside recently and that a correction is overdue. But as I have always maintained for the last 12 years, every responsible adult should gradually accumulate gold because not owning any gold is to trust the government. And I don’t understand, people at Bloomberg, I don’t know anyone who owns Gold physically. This is mind boggling to me. All the Bloomberg employees are intelligent people, they listen to the news everyday, they make the news every day and hardly any one owns any gold. It can’t be a bubble.
- Miller – you can’t buy anything with it,,,,,you can’t do anything with it, right?
- Faber (laughing) – I disagree with you, I tell you, you give your girlfriend copper rings and I will give them gold rings and I will keep them longer, that’s for sure.
- Massar – I will take the gold rings. Anywhere else you see any opportunity? Are you buying stocks on dips that we are seeing at this point?
- Faber – I think right now the technical picture is so horrible that I would use a rebound as a lightening opportunity. In other words, I would reduce based on how much you are involved in equities. They will move lower but I think at some stage, you ought to move back into emerging economies because the fundamentals of emerging economies are far better than the fundamentals of European Countries, better than that of the United States. The only thing I have to say – basically the market has sold off in such a rapid way and with so much momentum that I am smelling as if something really wrong happens in the next 2-3 months. Because the market is a discounting mechanism. Frequently like March 2009 the market started to go up, I think people were baffled, why it goes up. And now it starts to go down and may be after 3 months people were wake up and scratch their heads and say now we know why the market started to go down because there is geopolitical problems, may be the middle east blows up, may be the economy is horrible…..
5. U.S. gets Downgrade; Why Not France? – Sean Egan on CNBC Closing Bell – Thursday, August 11
Sean Egan is the head of Egan-Jones, an independent ratings agency that does not accept fees from Issuers of Debt.
Maria Bartiromo promos the interview by saying “one rating agency says that it is lunacy that France has its AAA rating while the United States has been downgraded to AA+ by Standard & Poors“.
- Bartiromo – What are the implications of that weakness with European Banks?…How bad are things would you say in terms of the banking sector in Europe?
- Egan – If you look at Greece and look at what kind of debt they can support, you find out very quickly they can’t support much debt. After this latest bailout, they have about 400 billion Euros of debt and they’re running a deficit. How much can an entity, that is borrowing, support if they’re running a deficit. Furthermore, it extends to beyond Greece to the Greece Banks. Same problems exist in Portugal and Ireland. You add it all up, you have a very significant hole that needs to be filled over the next couple of years. It translates onto the Banks because they are going to have to take haircuts as a result.
- Griffeth – So when President Sarkozy and Chancellor Merkel meet on Tuesday to discuss this problem, what are their options?
- Egan – There are some structural changes that have to be out in place. Today, the way the bailouts have been conducted has been rather ad hock. You need to look at how to solve the problems and how to solve them in an effective way. Perhaps one of the first steps is to give the ECB the power to guarantee bank deposits. Right now, they’re replacing those deposits with their own cash. That gets to be very expensive very quickly. So you need to solve that. It is capital for the ECB. Then you have to address a problem of recapitalizing some of the banks. In the U.S., we’ve been recapitalizing the banks the past four years. We have an S.W.A.T. team in place in the form of FDIC and the bank problems in the U.S. are pretty much non-existent.
- Bartiromo – Now let’s get into France versus U.S. Do you think France gets downgraded or not?
- Egan – We have already downgraded France. We have a AA- current rating. We’re not paid by the issuers, we represent institutional investors and try to help them make money. Our view on the French Banks is that the equity might be under pressure because the normal bailout is to come in at the equity level, you dilute shareholders. As far as depositors, you don’t have to worry about that. Debt holders, you might have to worry about although historically France has backstopped its banks. Some other countries, interestingly enough are more vulnerable. In the case of the UK, they might not have the stomach for the massive additional bailouts that they do in France.
- Griffeth – Is the U.S. still AAA on your books?
- Egan – No. We put the U.S. as negative watch as of March 1st and then we downgraded it as of July 16th. We did that ahead of the other rating firms. U.S. is a fantastic credit, it is a reserve currency, we have gotten a handle on the problem. Some people don’t like the give-and-take in Congress about the debt ceiling debate. From our perspective, it’s a huge positive, it is almost like a baby. Worry about a baby if it doesn’t cry. You worry about a democracy if there isn’t a lot of noise. In our view, the best policy comes out of the give-and-take. we think the U.S. is getting a handle on its problems and we don’t worry about the U.S. We don’t worry about the U.S.’s financial system, any of the top banks. We don’t worry about at all. It’s Europe where the action is.
- Bartiromo – that’s really interesting. So what would you need to see to upgrade the U.S. then?
- Egan – I think if the debate is continued, Debt to GDP is the primary measure for credit quality. If that comes under control, we would probably take a positive action. We think the ultimate result is probably going to be a push back in some of the retirement benefits, if the baby boomers retire. If you deal with that, the U.S, will regain its real AAA. In case of Europe, the major overhang, not only you have some of the baby boomer generation, buy you also have the biggest thing, the biggest problem and that is correcting some of these political problems, then dealing with the haircuts that are coming up of the periphery Sovereign countries and the periphery banks.
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