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. The Real & Permanent 1% & 99%
On this Veteran’s Day, we are honored to begin with the clear vision of Michael Hayden, a retired Four-Star General, a former director of the CIA (2006-2009) and the longest running director of the National Security Agency. Read General Hayden’s clear statement to CNBC’s David Faber:
- right now because of decisions we’ve made, we have 1% of our nation defending the other 99%, and frankly that may surprise some of your viewers, but even more importantly, it is more or less a permanent 1% defending a permanent 99%. We need to be sensitive to that…. the general population, the 99%, understand the debt they owe to that 1%. One has to think that over the long term is that how we want to self-organize? Is that how we want this Republic to be defended?
The rest of his conversation with David Faber is about the upcoming decision on Iran. General Hayden believes that will be a decision for the next Administration. Our thanks to David Faber for this interview on Veteran’s Day.
Whenever we hear the 1% & 99% terminology, now we will always think first of the 1% that is defending our freedom, the freedom of the 99%.
There are so many things deeply wrong with Europe. The first is that this rich, prosperous population of 550 million continues to depend on the lives and the monies of 300 million Americans for their defense. That is frankly disgusting. It is also symbolic. A people who won’t defend themselves, who won’t spend enough on their own defense – can we really expect they will have any mental fortitude to set their societies on the right fiscal track? Shouldn’t we expect them to live the happy life of working little, retiring early and living off state provided pensions?
Any way, the real problems in Europe are just beginning, we think. Greece was a sideshow. Italy is the first real thing – the 3rd largest bond market in the world, a rich country that has to sell debt of 300 Billion Euros next year. And then you have France waiting its turn. This week, we saw how precarious is France’s standing. A rumor, a mistake about downgrading France was enough to send French 10-year yields soaring by 20 basis points in a short time.
The real scale of the European problem was explained by Sean Egan, President of Egan-Jones Ratings Company. He says the real hole in Europe is 2.5 Trillion Euros (see clip 2 below). If you concur with him, can you remain bullish? Beyond the year-end, that is.
By the way, the IMF warned on Friday that the rich countries may face recession next year.
3. The US Economy – Recession or Not?
As we have learned from Chairman Bernanke, the S&P 500 determines whether America goes into a recession or not. We see the verdict of the S&P 500 every week. This week, the ECRI weekly leading indicator rose to a eight week high and the annualized growth rate also improved. But the co-founder of ECRI remains adamant. Lakshman Achuthan said to CNBC Squawk Box this past Monday:
- Right here as of September, this economy, the U.S. economy, is dipping into a recession … and nothing that has transpired changes our view…what’s undeniable is the contagion in the forward looking indicators. that has not changed.
So readers are invited to place their bets.
4. The U.S. Stock Market
A sudden bit of news from Italy drove the US Stock market down almost 400 points on Wednesday. No big deal. It was just an interruption in the week long rally, a sudden indigestion that was resolved overnight. Laurence McMillan of Option Strategist called this being “blindsided”. But as he has consistently maintained, as long as SPX support at 1215-1220 holds, the bulls have the upper hand.
Tom DeMark also seems to have moved his goalposts forward. He had called for a top modestly above 1255 two weeks ago after 4-5 successively higher closes (see clip 5 of our Videoclips of October 24 – October 29 article). Bloomberg’s Adam Johnson (@AJInsight) tweeted DeMark’s update on Friday afternoon:
- Tom DeMark to me $SPX working higher to 1313, may take another 5-7 days. Still several successfully higher closes away from the top,
Adam Johnson also tweeted Tom McClellan’s prediction of a rally into December on Friday afternoon.
And frankly, if you get the direction of the US Stock Market right, you will get right the direction of all risk assets.
By the way, is Gold a Risk Asset or a Safe Haven? These days, Gold seems to be trading with Stocks and not against. May be, it is like Oil once again.
5. The Real Chindia Story
During the week of June 14, 2008, we heard Dr. Jeffery Sonnenfeld of Yale say to Erin Burnett, then of CNBC,:
is an incredibly historic moment for India and the rest of the world;
it is roughly 40 years ago that high in the Himalayas…where India
meets China, we had these two great superpowers locked in war and now we
have this great economic contest…
To us, this was Celebrity Panditry at its worst. So we described our concerns about an escalating military competition between China and India in our first article on this subject.
Today, over three years later, this military competition is front and center news in Asia. This week, Asia Sentinel published an article titled India Raises its Game vs. China. The first paragraph reads:
- The Indian Ministry of Defense’s clearance for a US $13 billion military modernization plan – the country’s most ambitious one-time military expansion ever – is causing ripples in global diplomatic circles.
What does this plan include?
- induction into the Indian army of 90,000 more soldiers over the next five years. The expansion package, firmed up last week, will also entail raising four new divisions along the India-Chinese border..
- positioning of supersonic Brahmos cruise missiles in Arunachal Pradesh, considered a marked shift in Indian military strategy via-a-vis China from defensive to offensive.
What is the backdrop of this competition?
- Harsh V. Pant writes in Yale Global Online that this is indeed a time of great turmoil on the Asian strategic landscape, and India is trying to make itself relevant to the regional states. “With its political and economic rise, Beijing has started dictating the boundaries of acceptable behavior to its neighbors, thereby laying bare the costs of great power politics.”
- Beijing’s growing regional heft and muscle-flexing vis-à-vis its neighbors, writes Pant, “have now resulted in a regional balancing effort.” India’s role in the region thus becomes crucial to offset China’s aggressive maneuvering in and around Asia.
- Many of these nations have also made direct overtures to India. Last month, New Delhi hosted two heads of states — Vietnamese President Truong Tan Sang and Burmese President Thein Sein in quick succession. Both countries currently share a certain amount of antipathy to China.
- Tokyo too, has agreed to a substantial increase in bilateral defense engagements with New Delhi.
What does China say? The excerpts below are from an article in the Liberation Army Daily published on November 9. The article, written in Simplified Han, provides its own translation into English.
- India has begun to rival China as a reality. China has been adhering to the “peaceful rise” development concept, but was misread in some countries as “emerging threat”, particularly in the construction of the Chinese military has made in development, it is that some countries “headache.” Recently, the East China Sea, South China Sea issue is constantly exposed some of the countries on China “jealousy envy hate” mentality. International and regional security environment for China and its controversial country are negative, it would be beneficial to a country that is India.Recently, the U.S. and India closer to the distance to India as its strategic alliance. Japan is eager to pull the Indian military forces into East Asia.
- In recent years, India’s economic growth to strengthen army building to provide a guarantee. At present, India became the darling of the international arms market, from the United States, Russia, Europe and Israel received a large number of advanced weapons, India’s military expansion in the border areas are thus assured.
- In fact, India’s second phase expansion program, 100,000 more troops is greater than the intention of the political military purposes. Make the necessary precautions in the premise, if we continue to build China’s peaceful diplomacy with neighboring countries and the security strategy, will naturally attempt to offset India.
6. The Pentagon’s Cold War posture on China
On Wednesday, November 9, 2011, the same day as the above article in China’s Liberation Army Daily, the Washington Times published an article titled Pentagon battle concept has Cold War posture on China. Below are a couple of excerpts:
- The Pentagon lifted the veil of secrecy Wednesday on a new battle concept aimed at countering Chinese military efforts to deny access to areas near its territory and in cyberspace.
- The Air Sea Battle concept is the start of what defense officials say is the early stage of a new Cold War-style military posture toward China.
- The plan calls for preparing the Air Force, Navy and Marine Corps to defeat China’s “anti-access, area denial weapons,” including anti-satellite weapons, cyberweapons, submarines, stealth aircraft and long-range missiles that can hit aircraft carriers at sea.
- A senior Obama administration official was more blunt, saying the new concept is a significant milestone signaling a new Cold War-style approach to China.
- “Air Sea Battle is to China what the maritime strategy was to the Soviet Union,” the official said.
- The concept, according to defense officials, grew out of concerns that China’s new precision-strike weapons threaten freedom of navigation in strategic waterways and other global commons.
None of this means that a conflict is near or that relations will get frosty. But this is the stuff that lowers intermediate term multiples of markets, in this case Asian markets.
- Bill Fleckenstein on Bloomberg InBusiness on Friday, November 11
- Sean Egan on CNBC Squawk Box – Tuesday, November 8
- Jim Grant on Bloomberg Money Moves on Thursday, November 10
- Jim Rickards on Bloomberg Money Moves on Thursday, November 10
- Robert Kapito on CNBC Squawk Box on Monday, November 7
1. Is Your Money NEVER Safe in a Futures Account? – Bill Fleckenstein on Bloomberg’s InBusiness With Margaret Brennan – Friday, November 11
Last week (clip 1), Rick Santelli invited a Clearing Expert to explain how
customers can protect their monies in a Futures Account. The first
answer was “direct the firm to buy Treasury Bills and hold them in your name“. This was sound advise indeed.
This week Margaret Brennan of Bloomberg brought us a client of MF Global
who had done precisely that and still lost access to his money. Why?
An all-important caveat. Read on for more details.
This client is a sophisticated investor, a man who manages a hedge fund.
This story shows how Individual Investors, even Institutional Pros in
their individual accounts, get treated shabbily on Wall Street
regardless of their sophistication or wealth. Any one who has ever
worked as a Broker or as a Private Wealth Manager knows that.
This client is the well known professional Bill Fleckenstein. Hear the story in his own words.
- Brennan – Bill, you are one of the customers fighting to get access to your cash account. Have you had any progress?
– No and I should point out that this is just for me personally and not
my fund. But we are not gonna get any progress, we don’t think, for a
little while longer. I do think there is some possibility that the money
will show up because it occurs to me that if in fact seg (segregated)
funds were misappropriated, there would have to be several people
involved with that and I am surprised that it that were the case,
someone has not been charged with the crime yet. It might just be the
sheer volume of people heading for the exits combined with bad systems
could have resulted in this missing 600 million. I know that’s an
optimistic viewpoint but I think it might be possible.
– I know that you have said you wished you had gotten out, gotten your
business out of MF Global weeks before the bankruptcy but you at the
time thought that your accounts were collateralized, that they were safe
and that they were insured. What did you just learn now?
– I had in fact collateralized my position with T-Bills in my name and I
had been led to believe by people who understood this that I would be
safe. And in fact, I would have been fine and it still would be fine if
there was no fraud, misappropriation of seg funds. So the moral of the
story is if there is misappropriation of seg funds, i.e., fraud, nothing
protects you. And if that doesn’t happen, you don’t need anything. It is
rather perverse. I think the dissemination of information on the part
of the authorities here has been particularly poor. I think somebody
ought to stand up and say here is what we think is going on, we might be
wrong or not but I think a lot of people have been badly damaged, badly
injured by the way this has been handled…..A lot of people had their
entire businesses and they have really been injured. I think the
Government and the Authorities have done themselves no favors in how
they have handled this.
- Brennan – SIPIC Insurance does not apply to those commodities…. do you have any advise to those people who are fighting?
– … part of this is the front of the MF Global statement said Member
SIPIC. But the SIPIC only applies to what ever they may have done in
non-futures oriented accounts. So I think people have to understand that
SIPIC does not cover anything that has to do with Futures accounts. And
you have to understand also that if unfortunately you are in a place
where fraud has occurred, then nothing really protects you, which is
sort of going to be a surprise to most people. I had always assumed
incorrectly of course that if you held T-Bills in your account, then no
matter what happened, you would be safe but that is not in fact the
wish to thank Mr. Fleckenstein for sharing his story with us. Frankly,
after hearing his tale, we wonder why any individual would want to open a
Kudos to Margaret Brennan for following up on this story and completing
the saga begun by Rick Santelli last week. Frankly, we are a bit
disturbed by the relative silence and inaction of both Bloomberg &
CNBC about this disaster. Don’t they realize that if Individual
Investors get scared or fed up with the investing industry, that would be a
semi death knell for their ratings?
2. 2.5 Trillion Euro Hole in Europe – Sean Egan on CNBC Squawk Box – Tuesday, November 8
Sean Egan and his downgrade of Jefferies are well known to readers of this Blog. So rather than devote any introductory remarks to that history, we go right to his views. The first part of his comments are about the worsening mess of Europe. His numbers are scary.
Sean Egan is interviewed by Michelle Caruso Cabrera (MCC), Andrew Ross Sorkin (Sorkin), Joe Kernen of CNBC and by Barry Knapp of Barclays.
– … You have to remember that Italy is not growing. If a
country isn’t growing, its debt is growing as a result. So any
interest rate beyond 2.5% is a problem. And with Italy’s growth shrinking,
as a result of the austerity measures that are putting in place, we are
beyond it. Basically, if it doesn’t come down in the very near future,
we have gone from the Greece problem to the Italy problem and possibly
the Spain problem.
- MCC – You know all the counters right, they have
about 8-12 billion interest payments last year, Greece did not have close to that..they have 500 billion in tax revenues, Greece never
had that – their economy at least functions, no growth economy but
fundamentally different from Greece which doesn’t function – these are
the counterpoints – none of that sways you?
- Egan – it doesn’t win the day
- MCC – not even the fact that they have got so much more tax revenue compared to the interest payments ..
- Egan – Greece is becoming dysfunctional…. I’m saying people aren’t paying taxes. They’re going around the tollbooths. There are riots. It’s gone, basically. It’s going to take time to put it back on track. Italy is where things are focused. If you have a interest rate on a ten-year north of 6%, it’s very, very difficult to bring it back. And then it brings us to the next question. how are we going to solve the problem?
- Egan – There have been three bites at the apple with this whole European crisis.
- The first one has been that Greece was going to default and the recoveries are going to be much less than expected.
- Second one was that the major European banks are going to have to take significant write-downs on their exposure. And it’s going to hit their cost of funds and their equity prices. That’s already happened.
- We’re in the midst of the third. The third is that there isn’t going to be enough money to save all the countries. And, therefore, we’re going to have the golden rule. That is that Germany and to a lesser extent France are putting up the gold. They and their banks are going to be fine. But the others are going to be weak. We’re in the middle of that. And the manifestation of it is the ten-year on Italy spiking up well above 6%. It doesn’t matter whether Berlusconi stays or whether he writes love poems or whatever. I’m sorry. It doesn’t matter. We’re beyond it.
- And now we’re moving into the fourth phase, fourth bite at the apple, if you will. and that is how this is ultimately going to be resolved.
- The first one has been that Greece was going to default and the recoveries are going to be much less than expected.
- Kernen – How can they fix it?
- Egan – One is that you can find some massive growth. And that’s very difficult to find.
- Kernen – and another rescue? something else has to happen then.
- Egan – well, that’s a first thing. The second thing is that somehow funds are found to fill the hole. And the hole is massive. We calculate it at about $2.5 trillion euros. So either the U.S. steps up in a major way…for a big portion of Europe. It’s not just limited to Italy. It’s not just limited to Greece. It’s the whole thing. 2.5. So the U.S. or the IMF, China is not good for the whole thing. They’ve had trouble just getting off a small offering for the EFSF. So that’s a problem…. You have the funds being found. You have massive defaults which is a real problem. Or you have a Clintonesque type moment – that is where you come clean and say listen, we can’t afford that. We simply cannot afford it. The only solution is a massive printing of currency….you have a huge, huge hole here. It’s massive.
- Knapp – what does the $2.5 trillion represent?
- Egan – … if you take the debt of all the sovereign countries and their banks and they’re joined at the hip. That has been about 90% correct…..You take anything, a 50% hair cut. so it’s $5.1 trillion in terms of the total debt of the countries and the related banks.
- Knapp – the whole of Europe?
- Egan – no, that’s just weaker countries. You know, Greece, Spain, Italy, Belgium, Portugal. You take that. it’s 5.1 trillion. You take a 50% hair cut, you’re roughly up 2.5 trillion euro. Credit down – even if it’s only two trillion or 1.5 trillion, it’s massive.
The above is a candid analysis. It is rather bearish, in our opinion, for risk assets until there is a Clintonesque moment as Mr. Egan put it. A gap of 2.5 Trillion Euros is not a hole. It is a Financial Grand Canyon.
At this point, Andrew Ross Sorkin turned the conversation to Jefferies:
- Sorkin – I want to move the question to Jefferies. Indulge me. You made a big call last week and sent the stock reeling. In retrospect, it doesn’t necessarily look like it was the right call in that they were able to get rid of half of their exposure to Europe literally in a day. And the exposure that they had didn’t seem to be nearly as much as you were arguing.
- Egan – I’m glad you brought it up. I don’t know if you saw our report.
- Sorkin – I saw the report and I also saw you come on the broadcast.
- Egan – okay. There were the two principle reasons for our taking — this is one notch cut from BBB plus down to BBB. The reason for our taking that action was that buyer behavior has changed as a result of MF Global. Basically, as a result of the problems in the last four years, you have a whole new infrastructure of risk managers. And those risk managers are charged with making sure that their firms’ assets are safe.They can constantly access it…. If you have — your assets at MF Global and 150,000 accounts that were frozen, even if they’re frozen for a couple hours and it’s been a week that they’re frozen.
- Sorkin – you said that company — 77% of the equity tied up in liquid PIIGS and that was not the case. correct?
- Egan – No. That was completely accurate. Let me continue. That was tertiary. That not the primary reason for the cutting. It wasn’t a secondary reason. It was a tertiary reason for it. The primary reason is that buyer behavior has changed in the industry whereby life is more difficult for medium sized brokerage firm. I’m sorry. But that is the reality. The risk managers have relatively little up side and huge down side, if their firms’ assets are tied up and frozen for a period of time. So the buyer behavior changed and changed significantly. That’s point one. Point two is that the leverage was 12.9 to 1. It’s no the as high as a 40 to 1 as in the case of MF Global but it’s 12.9. That’s close to the major firms. But there is a huge difference between the major firms and Jefferies.
- Sorkin – Were you surprised they were able to cut their exposure literally in a day and marked it properly? They almost did it to prove to the market that they could.
- Egan – We advised Jefferies. I was on a call with them, my senior analyst. I suggested to them, we don’t want any inside information, often times it is not good information any way for making credit decisions. But we suggested that they issue press release, explaining their position to the public and they have done that. They took the additional step of liquidating some of their sovereign exposure. and that’s fine.
- Sorkin – does it change your outlook?
- Egan – No. it doesn’t change the primary, secondary reason for our taking the action, the buyer behavior and they’re going to see it over the next couple quarters. The buyer behavior is that buyers want some comfort that the medium sized brokers have the capital to withstand hits. And it’s not at a sufficient level in our opinion. So we took a minor at adjustment. We cut it one notch. and we would like them to raise some additional capital. And hopefully they will. Because it’s not just sovereign exposure. We mention it. I also put in the page from the 10-Q.
- Knapp – 2.9 in terms of leverage. that’s all? You want no leverage in financial institutions?
- Egan – It’s 12.9 to 1 – 13 to 1 if you take the shareholders’ equity divided by total assets, it’s essentially 13 to 1.
- Knapp – But if you go much below that, ROEs just disappear, right? There was the McKinsey study that came out in earlier in September that went through the hits to fixed income businesses by Basle III. You’re talking about 65% ROE hits to various fixed income businesses as a result of just where Basle is. If you take the leverage much below 12, does the business model even work?
- Egan – the environment is changing. well, No.
- Knapp – absolutely. we’ve gone from 25 to 30 to 12.
- Egan – You have to be fairly naive to assume that after MF Global with 150,000 accounts being frozen and some people not even knowing if they can get back what portion they’re going to get back. You have to be fairly naive to assume that the market isn’t going to react to that. And I’m sorry. If you’re a money manager and if your account is just frozen, flat out frozen and you don’t know when you’re going to get it back and you don’t know if you’re going to get 100 cents on the dollar, you are going to say why should I take this risk. They should do the right thing for their clients and for the market, They should raise capital.
- Sorkin – When whether you make a call like that, do you take into consideration the possible bear raid that’s going on in the market at the time only because it did come right after MF Global clearly the markets were in a very sensitive place and you saw what your call did to the market and specifically to Jefferies.
- Egan – Our job is to issue timely, accurate ratings. and we did just that. You know, we didn’t cut it to below investment grade. We didn’t say this company is terribly managed, although they did send the SEC after us. We said that the leverage was too high and that the environment has changed.
- Kernen – … I guess I get uncomfortable when firms squawk too much. You’re not short. You don’t have any vested interest.
- Egan – We have nothing. We don’t hold any securities…. We have no reason for doing anything but calling it the way we see it. We do get requests from clients. And fortunately in this case, nobody asked for a report on Jefferies. You know, I can imagine if somebody did then we would have — it’s significantly higher legal expenses. But they did not. And we just called it the way we see it.
- MCC – So the real focus on this one particular data seems to be controversy about – the 77% of their equity locked up in PIIGS. Was that right when you said it or not?
- Egan – It’s completely right. If you look at the exposure on the asset side, it was exactly accurate and we have only so much room to write a report. They can look at the whole balance sheet. We could have just as easily mentioned the $4.8 billion in structured finance assets or the variable interest entity assets were $18 billion. ….Those are our less important issues than the change in environment and the relatively high leverage for their position in the market.
- Knapp – Describing it as tied up is a little misleading, right? You’re basically just saying the value of those assets was equal to 77% of their equity. And there is a leverage ratio. So the numbers are always going to look high if you said that recovery was zero on those assets, it would wipe out 77% of the equity. But it’s not the same thing, right? Recovery is not zero. Obviously the VAR on that was, the velocity of VAR was really low because they blew it all out in the deck. I think people may have misunderstood that.
- Egan – I don’t think they misunderstood it at all. I think the reason why the market moved is because there’s realization that it was, that the business has changed for the medium sized brokerage firms and they have to reduce the leverage. If they don’t, their cost of funds is going to increase.
- Knapp – So what do you think is the optimal level then?
- Egan – A brokerage firm is riskier than a bank in our opinion. It doesn’t have the backing of a big portion of the capital via the FDIC and therefore the leverage in our opinion should be less than a bank. The assets, the primary assets go down the elevator every single day. So our view is that there should be less leverage than is in the industry, among most of the players in the industry, actually.
This is an excellent discussion. Actually, it is exactly the discussion people want to hear. Kudos to both CNBC and Mr. Egan. Mr. Barry Knapp, the guest host from Barclays asked good, pertinent and important questions.
This discussion also suggests that stocks of Fixed Income dominated Wall Street Firms may under-perform until the environment changes for the better.
3. Put Down the Canoli, Pick Up the Croissant – Jim Grant on Bloomberg’s Money Moves – Thursday, November 10
Put down the Canoli, Pick up the Croissant – with this funny re-tweet, Bloomberg’s Deidre Bolton let Jim Grant speak about Europe.
Essentially, Mr. Grant made his usual points that the ECB is buying lower quality assets, the Fed has nationalized the entire yield curve and central banks around the world are debasing their currencies. His memorable quote was ECB is implementing the MF Global trade. Of course, he knows but in his ardor, Mr. Grant forgets that a Central Bank hardly ever faces Gambler’s Ruin like MF Global did.
We are more interested in a nugget Mr. Grant found in the FED disclosure. This is pure Gold and we are glad he shared it with Bloomberg’s viewers.
- Grant – The New York Fed is leveraged more than 100:1, the Federal Reserve System as a whole starting this year, in a disclosure virtually unnoticed in January, from now on, it will NOT charge mark-to-market loss against capital but rather keep a running tab at the Treasury.
We are also interested in his discussion about Farmland.
- Bolton – prior to our discussion on Europe, we were talking about Farmland..there is a lot of interest in farmland, in buying farmland and for a few different reasons…
- Grant – We have been following this for awhile. The story on Farmland is it trades most infrequently, it is a very illiquid asset, it is a very popular asset, a lot of money chasing it.. The richest corn ground in America is situated in Iowa, such land in Iowa recently changed hands at almost $17,000 an acre..but the yield on a rental basis, if you were to rent this land to a farmer who would then grow corn, the rental yield is 2.5-3% based on what assumptions you use . This is the rock bottom of the rental yields of the past 40 years. So Farmland like so many other assets, it is levitating in price in part to the level of interest rates.. So in the day of the last farm depression in mid -late 1980s, this land would have been trading at $5000-$6000 dollars, priced to yield upwards of 7-8%.. …You are buying Farmland at exactly the wrong time…Gold you cannot value because it yields nothing. Farmland you can because you can go back and see what grows on it., what that price is, and you can figure out what the margin of safety – margin of safety is vanishingly thin in some of the richer sections of America’s farm ground.
4. A Lost Decade is the Best Case for USA? – Jim Rickards on Bloomberg TV’s Money Moves – Thursday, November 10
James Rickards is a Senior Managing Director at Tangent Capital. We have featured his comments (on CNBC Squawk Box) about QEII in the past. Mr. Rickards has argued that QEII was really intended to force China to raise its currency. In fact, currency wars is his favorite topic. This week, he appeared on Bloomberg’s Money Moves show to promote his book.
In this clip, Mr. Rickards is joined by Jim Grant who provides a preface of sorts to the topic. The first point made by Mr. Grant is the most interesting.
- Grant – They say you cannot get out of a depression without printing massive amounts of money. In the depression of 1920-21 after the first World War, hugely severe, 14% down in industrial production, real GDP down close to 10%, 12% unemployment, commodity prices down 40% from top to bottom, it lasted for 18 months and it gave rise to the proverbially roaring 20s. Public policy in that depression consisted of two things – running a budget surplus and the Fed tightening and raising interest rates. So Paul Krugman, tell us why did that depression ever end?
- Rickards – I said the interest rates should have been raised in 2009 and the banks should have been allowed to fail. People said, “Oh my goodness, wouldn’t that have meant massive unemployment in 2009?” My answer is yes but we would be growing today. What we have got the policymakers Janet Yellen, Ben Bernanke, one after the other say we don’t want repeat the mistakes of Japan, but they are making every single mistake, they are doing exactly what Japan did. Why are we surprised we don’t have any growth?
- Bolton – So you think, without a doubt we are headed for a lost decade?
- Rickards – That would be my best case although the worst case would be far worse than that. The problem with the Fed is they think they are toying with the thermostat, hold the money supply up, if it gets too hot, dial it down a bit. It is not a thermostat. It is a nuclear reactor with fuel rods and control rods. You can dial it up and down but if you get it wrong, you have a catastrophe. Not that the house is too hot, but the whole thing melts down.
- Grant – This is the problem of the Fed morphing without issuing a press release to tell us they are morphing from central banking to central planning. That is the problem with central banks the world over. They are in the business of imposing prosperity by financial means rather than treating prosperity as a co-product of actual growth.
- Bolton – what about people who say what are their choices though given the problems we are in?
- Grant – …What they are doing is incalculable harm. We are not Japan. Japan has a problematic view towards failure. They will not admit it, they will not price it. They will not move on to the next thing. America has that capacity. But just as you (Rickards) say, that capacity is being bleached out of us through public policy.
- Rickards – Jim is right. We showed the capacity in 1990-1991. We had a decade of the S&L crisis. And the RTC came in.. I was in the RTC doing deals before they had furniture. It was a new agency. We went in and were operating out of boxes and we were buying loans from the Government. They put all that, all the junk, they closed the institutions. They put the junk in the RTC. They sold it to Wall Street and they got it done in two years. This is going to drive on for ten years.
Mr. Rickards taught us something we did not know about Gold and made us feel much better about American Dollar, particularly compared to China.
- Rickards – England had a very successful gold standard in the 19th century with 20% backing. And historically, the US was about 40%. Interestingly, we are 17% today. Market value of gold is 17% of M1. So US has never really gone off the gold standard. We have a kind of shadow gold standard…. China, they have 4 times the M1 but only 1/8th our gold.
So shouldn’t the Chinese currency really depreciate against the U.S. Dollar? But Deidre Bolton did not ask and Jim Rickards did not volunteer.
5. BlackRock’s View on the Markets – Robert Kapito on CNBC Squawk Box – Monday, November 7
Robert Kapito is the President of BlackRock. Below are his views:
- Kapito – I don’t think cash is a great idea. There’s a huge tug of war right now between those investors who don’t want to take any risk and those, of course, feel the need to take risk because they need income. Everyone needs income, not only individuals but also pension plans who are behind their bench marks.
- Kapito – So what I told Greg I would come here and give you a couple ideas to create that income for your clients and those watching CNBC (doesn’t this seem at least a bit condescending or arrogant?).
- Kapito – At BlackRock, we’re very big on dividend paying stocks. Dividends used to be a huge portion of your total return. And then, of course, during the bull market no one focused on dividends but were back to the basic investing. I want to even focus a little further than that and say dividend paying stocks that are focused on infrastructure because if we’re going to employ millions of people in America, we’re going to have to invest in infrastructure sooner or later. I look at companies like Southern company. Here’s a company paying a 4% dividend. This is a company that’s involved in a huge nuclear project in Georgia. a coal project in Mississippi. These are the type of companies that are continue to pay a higher dividend. And then when the projects kick in, do even better. There are other companies, if you want to invest globally, CCR, for example, builds all the roads and tunnels in Brazil. They have almost a 7% yield on their stock. There’s others, even here. Communications, Centurylink, you’re almost at an 8% yield. It’s the third largest telecommunications company. So I would say high quality dividend paying equities. They’re at very low PEs right now. This is the way to go while you wait this out.
- Kapito – There’s a couple other things I would point out. Gold, we still like gold. we invest in it because we like to own gold physically through our ishares called IAU. But also gold stocks in particular have underperformed with the price of gold is a very good hedge. It’s taken on as the alternative currency. And I’ll even give you a number. Today we think gold can actually go over the $2,000 mark because we know things across the world aren’t going to go straight up. so, therefore, there’s going to be some shocks. we think that will be reflected in gold.
- Kapito – Let me talk about another revenue opportunity then since you mention that which is Municipals. Here’s an area that, again is very underlooked….You can invest in the third largest economy — the eight largest economy in the world which is California. and right now you can earn around 3% or 4% in some of the municipalities….If you look at this closed in fund sector, some of New York closed end funds are yielding 6%. So here’s an opportunity for clients out there around the world to catch up a little bit on income.
- Kapito – And the last thing for those that are fixed income investors that cannot buy Munis or don’t want, to the high yield area, quality high yield area in bond market is still very exciting. We bought some seven-year Sprint paper the other day at 9%. So there are opportunities. If you’re waiting on the sidelines sitting in cash, we think you’re going to be waiting a long time and you need to start to ooze out some of this money into the quality either dividend paying stocks or into the bond market. but in the higher quality end of the market.
One caveat. This message from BlackRock has been consistent all year and it has been wrong since July. Larry Fink, the CEO of BlackRock said in the summer that he would be 100% in equities if he could. Then came the huge decline in August-September. Kapito could be right and probably will be. But if the US sees a recession next year, then just about eveything he recommends today is likely to go down. A dividend of 4% or even 8% doesn’t let you sleep at night if you are down 10% or 15% on your principal.
Send your feedback to email@example.com OR @MacroViewpoints on Twitter