Interesting Videoclips of the Week (December 12 – December 16, 2011)


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. Downgrade them all, why don’t you?

On October 22, we asked in utter frustration for a downgrade of Germany, France and all European countries in one stroke. If everybody becomes AA, then markets might look ahead, we wrote. We thought of this every day this week. Because, the stock market sold off in every afternoon fearful of a downgrade after the close. Market Pandits keep telling us that the markets have priced in the downgrades. But the real markets act fearful every day.

So we renew our call for a single mass downgrade of all economies in Europe. Let us get it over with. Why maintain the charade when the market is simply not going to buy all the Euro debt that needs to be bought whether the debt is rated AAA on paper or AA? This death by thousand cuts is actually worsening the intra-Europe conflict. Witness Friday’s explicit criticism of Angela Merkel by Mario Monti.

This may be why Michael Platt of BlueCrest Capital says (see clip 1 below):

  • Platt – The probability that the market is putting on a Eurozone breakup, in my opinion from evidence I’m seeing from option pricing across the different markets, is steadily rising…We’re going into 2012, and in our opinion, it’s only going to get worse.

But he doesn’t see the EMU breaking up, at least not yet.

  • Platt – I believe that the eventuality of a European breakup is so awful, that more and more drastic measures will take place as time goes by.

Mr. Platt thinks the ECB could address this problem if allowed and funded to do so. Kyle Bass of Hyman Capital agrees that the current situation is unsustainable. But Mr. Bass sees no other way out except (see clip 3 below):

  • Bass – they are going to have to restructure a lot of their debts..I think eventually the EMU is gonna  have to break up
    because you are going to need the adjustment mechanism that these
    countries need of a much weaker currency and it is very difficult to go
    through a hard restructuring and become competitive as a nation unless you have a currency adjustment mechanism that is associated with your restructuring.

Will either scenario change whether EU countries are rated AAA, AA+ or AA? We don’t think so.

Meanwhile, according to Bloomberg news, BlakcRock’s Investment Institute wrote this week:

  • BlackRock – We now believe that we’re in for a full-fledged recession, including one in France and Germany, that could cut GDP by 1 percent to 2 percent…..Short-term austerity measures could worsen the recession, defeating their very purpose of closing budget gaps.”

They were being circumspect at least compared to the dire & explicit warning from IMF’s Christine Lagarde about risks for Europe.

2. The Fed Meeting

The Dow was up over 100 points ahead of the Fed statement on Tuesday. It closed down 66 points in a big reversal after the Fed statement. The Euro broke the important technical level of 1.30. The next day Gold fell very hard and so did Oil. This was one of the rare Risk OFF signals from Ben Bernanke.

3. The Santa-Claus Rally

What a beautiful rally it was this week? We speak of the terrific rally in US Treasuries, of course. Record low yields, record bid to cover ratios. Investors received the Treasury supply as if it were manna from heaven. Seemed like investors agreed with our own private description of Treasuries as God’s Own Paper. If the U.S. Dollar can be called the King Dollar, why can’t US Treasuries be called God’s Own Paper? After all, what other currency proudly proclaims “In God We Trust”?

Ours is a secular statement. Since August, Treasury investors have joyously said “Thank God” while stock investors have cried “Oh God” as they watched the unrelenting sell off in stocks.

Let us hasten to add that we have no wish whatsoever to offend any one with our liberal use of the word “God”. And if any one is offended, we apologize for the offense taken and committed. Finally, our use is non-denominational and non-specific. 

After all, the rally in Sovereign Bonds was not just in the USA but in China, Germany and the UK as well.

4. Ouch!

We are mortified that we did not warn readers about the universal exuberance in the technician views described in last week’s article (see section 2). Diverse and different predictors like ElliottWave Forecast, Bollinger, Cramer and DeMark all spoke of a major rally, an explosive rally. This demonstrates again that pandit-unanimity is often a contrary signal. We apologize to our readers for omitting the necessary warning.

What did they say this week?

Adam Johnson (of Bloomberg TV) tweet on Friday:

  • Tom DeMark tells me 1. $SPX still has another up move 1313-1340 (defending his call) 2. Euro due to bounce 3. Germany now a Buy.

ElliottForecast tweet on Monday:

  • If our short term bullish view on SPX500 is correct, the next leg up should start no later than Wednesday — Our timing cycles are calling for a peak in SPX500 by the end of next week (b4 xmas) which goes well with our preferred wave count.

Lawrence McMillan of Option Strategist

  • Rather heavy selling
    over the past six days (with the exception of last Friday) has resulted
    in a deeply oversold condition. That should produce a short-term rally,
    but after that the picture is far less rosy. Both equity-only put-call ratios are now rising, which places them on sell signals……That has resulted in
    breadth generating sell signals. Volatility indices ($VIX and $VXO) have
    been registering a short-term bullish divergence by generally declining
    even though $SPX was falling.

This week, our featured clips are all mega bearish. Will this prove to be another contrary signal for the stock market next week? 

Michael Hartnett of BAC-Merrill Lynch discusses Risk Liquidation this week:

  • $94bn of inflows into money-market funds past 6 weeks is the biggest inflow into cash since Jan’09. This points to some liquidation of risk positions and highlights bearish consensus. Meanwhile, global long-only equity redemptions of $23bn in past 5 weeks means we move very close to a “buy” signal for equities.


5. Emerging Market Managers’ Blinders

The EM strategist of JP Morgan predicted on Friday that the Emerging Market Equity Index will rise by 25% in 2012. He reminded viewers of CNBC’s Trading the Globe that he has been negative on Emerging markets for the past year or so. Now he is positive. Why the change? He explained that until recently central banks in Emerging Markets were tightening. That is why Emerging Markets underperformed. Now the EM Central Banks have begun easing and so he has turned bullish.

This illustrates what we have come to believe of the EM community. They have blinders on, to be blunt. They take for granted that EM growth is secular and essentially permanent. The only danger they see is inflation and tightening of rates by EM central banks. This is not just true of EM equity managers but of EM Debt managers as well. The EM Debt managers tend to primarily hedge against interest rate risks. That is why Treasuries are mainly used in EM Debt portfolios as shorts against EM Sovereign or corporate debt as an interest rate hedge.

In other words, the only slowdown EM managers seem to consider is one that might result from inflation and/or rate hikes. This seems to be the stance of the JPM strategist who predicts a 25% gain next year.

In our humble opinion, EM countries are all critically dependent on developed economies in one way or another:

  • Market Access – most EM countries are exporters to DM. These countries have become efficient exporting machines but have not developed internal consumption. As such, these economies are very susceptible to protracted and/or deep slowdown in DM economies.
  • Capital Inflows – economies like India that are not export driven are highly reliant on capital inflows from DM for their growth. India, for one, cannot sustain its growth without continuous capital inflows. In DM countries, a weak currency creates demand for industrial production. In India, industrial production drops when the Indian Rupee weakens, a symbol of capital outflows.
  • Both – that case study may be China which depends on US & Europe for both access their markets and for imports of FDI.

The outlook for 2012 in DM seems to be slowdown PLUS capital crunch. In this scenario, we do not see how EM countries could maintain their growth. Perhaps, we are the ones wearing bli
nders!

Speaking of EM, RGE Monitor updated its medium-term scenarios for China on Friday. Their tweet said:

  • increase in probability of “crash and burn” scenario to 30% from 22%.


6. India’s Retail FDI Initiative

All discussion we hear about this is economic. We have a different view. The common joke in Pakistan goes:

  • Every other country has an army. The Pakistani Army has a country.

A slight modification provides our own dictum about India:

  • Every other [democratic] country has an electocracy. The Indian Electocracy has a country.

This is because every single initiative in India is Of the Electocracy, By the Electocracy and For the Electocracy.

Take the case of the Retail FDI initiative in which WalMart, Tesco, etc, will be allowed to operate with 100% ownership in exchange for $100 million of capital injections and other requirements. This is a good idea that can improve the Indian retail supply chain significantly. But then, why wasn’t this initiative proposed two & half years ago after the ruling Congress Party won a huge election victory. Because the Congress electocracy did not need it then. As an article in the New York Times put it succinctly in the summer:

  • The politicians see no need for 9% economic growth. They feel a 7% growth rate is sufficient for reelection.

Remember this when you think about India. The politicians will do just enough to get reelected. The rest of their time is spent in using government patronage to get rich. This is why the entire economic reform agenda was deemed unnecessary and shelved after the election victory two & half years ago.

Today, the Congress Party is virtually under siege because of a mass movement against corruption in government. The opposition parties have thrown their support behind the mass movement. The fight against corruption unites both the urban middle class and the rural poor.

The Congress party has been desperate to change the topic. And so, a popular theory goes, they introduced the Retail FDI initiative fully expecting a firestorm. Because a firestorm against a retail initiative was far better than a firestorm against government corruption. The retail initiative is good for India’s farmers because it could break the stranglehold of middlemen and small town traders on pricing, transport and financing. The farmers are the main constituency of the Congress party while traders are the main constituency of BJP, the main opposition party.

This was the political calculus behind the sudden introduction of such a divisive initiative besides the urgency to bring in foreign capital to support the Rupee. We think this retail initiative will be brought back again as soon as it is politically needed. We could even see this initiative signed as an executive order by the Indian cabinet at a politically opportune moment. But we doubt any major retailer would feel comfortable putting in a lot of capital until they see stability and certainty.

In general, we think 2012 will be a year of political conflict, social unrest and internal strife in most countries and continents. This is not the stuff of PE expansions, we argue.

Featured Videoclips:

  1. Michael Platt on Bloomberg TV’s InsideTrack on Thursday, December 15
  2. Robert Prechter on CNBC’s Closing Bell on Wednesday, December 14
  3. Kyle Bass on CNBC’s Squawk on the Street on Wednesday, December 14
  4. John Taylor on Bloomberg TV’s Street Smart on Thursday, December 15
  5. Howard Lutnick on CNBC’s Closing Bell on Thursday, December 15

1. Significantly Worse than 2008 – Michael Platt with Bloomberg’s Stephanie Ruhle & Erik Schatzker (14:56 minute clip) – Thursday, December 15

The phrase “must-watch” tends to get overused until it loses its impact. We are guilty of this overuse as anybody else. But once in awhile, we see a clip that amply deserves the Must-Watch accolade. This is such a clip. Any one who has the slightest interest in investing must watch the interview of Michael Platt.

Michael Platt, Bloomberg tells us, is the founder and head of BlueCrest Capital Management, a $30 billion hedge fund in Geneva, Switzerland.  Why should you listen to him? According to him (minute 12:44 of the clip),

  • He has delivered trading profits of $17 billion to his investors. Blue Crest International is up 350% with never a more than 4% drawdown and no down year.
  • Since inception, his returns have been 15% net or 20% gross. This year, his fund is up 10% on a gross basis.

The excellent and detailed summary below is courtesy of Bloomberg Television (emphasis ours).

Platt on Europe’s sovereign debt crisis:

  • “The level of concern of what we have about what is going on in Europe is absolutely huge.  When you evidence all over the markets that they are pricing for the potential of the eurozone break up, it is contrary to what everything is set by policy makers and by central bankers. We distill it down essential fact that we continue to focus on at BlueCrest Capital Management – if you look at the debt of Italy at 120% of GDP, which is increasing at a real rate of 5%, and if you look at the GDP, which now is forecast next year to be declining, arithmetically their debt is going to blow up.  And we don’t see anything happening at the policy level that gives us any indication that there’s anything that’s going to convert this situation from where it is now to a much more substantial and real crisis in the future.”

On whether a blow up of Italy will force a breakup of the Eurozone:

  • “We need much more radical measures to prevent this from happening.  If Italy and Spain are forced to roll their debt over,
    if they have to pay rates between 5 and 7% for this, then the situation in Europe is unsustainable.  We’re not going to have any euro bonds, we’re not going to have a full political and fiscal union where the transfers will take place.  It seems what we’re going to have is an attempt to control the European situation through continued austerity, which is pro-cyclical.  As the economy slows down, we end up with more austerity which creates more slowdown.  We also have a requirement for banks to increase capital, therefore we’re looking at a 3 trillion euro takedown in European balance sheets.  There’s basically nowhere I can see where we can get any growth from.”

On whether cultural and political divides between nations in Europe have played a role in the crisis:

  • “Absolutely, it’s about the cultural and political divide.  The reality is that there is no willingness within the Eurozone to share wealth.  In the United States, if California is having a really difficult time, the rest of the United States will send money to California.  This is not the case in Europe.  There is no willingness to transfer money across boundaries in a long-term and sustainable way.”

  • “The market prices the probability of a euro breakup to be distinctly non-zero, despite what the politicians say.  I believe that the eventuality of a European breakup is so awful, that more and more drastic measures will take place as time goes by.  The ECB is probably the only institution that can tackle this problem, but it doesn’t have a mandate to do so…As time goes by, my view of what’s required is a radical change of policy from the ECB to tackle this problem.”

More on Europe’s problems:

  • “The probability that the market is putting on a Eurozone breakup, in my opinion from evidence I’m seeing from option pricing across the different markets, is steadily rising…We’re going into 2012, and in our opinion, it’s only going to get worse.”

  • “There is a sensible argument you should not price and the whole loan in response to where the government trades because the government has the ability to remove assets and put them on their own balance sheets.”

  • “The problem with Europe is that almost every part of it has gone wrong now.  The banks are undercapitalized…If banks were hedge funds, and you mark them to market properly, I would say that probably most of them are insolvent.  [Most of the banks in Europe are insolvent right now] if they were marked like I am at a hedge fund, yes.”

On whether BlueCrest’s relationship with banks has changed:

  • “I do not take any exposure to banks at all if I can avoid it.  All the money at BlueCrest Capital Management is in Two-Year U.S. government debt, Two-Year German debt, we have segregated accounts with all of our counterparties.  We are absolutely concerned about the cre
    dit quality of the counterparties.”

On whether he’s afraid of taking risk right now:

  • “Absolutely.  The main thing that’s driving our decision about where to lend money or where to place our funds under management, the vast majority is dollars which we keep in two-year notes.  We have a chunk of euros, which we keep in German two-year paper.  We’re not interested in taking any peripheral debt risk at all and we’re not interested in taking any bank credit risk right now.”

On the United States and Germany:

  • “I think they’re the best of the bunch.  I feel pretty good about the United States.  I don’t really have an issue because I think the complete control that the authorities have, particularly the Fed and its bond buying program, we do not have issues about having money in Two-Year securities in the United States.  In Europe, you’ve got to put your euros somewhere.  It is a much more difficult place to make a decision.  Two-year German notes seem like a reasonably safe bet right now, certainly compared to anything else.”

On making money in a crisis:

  • “The most important thing to remember about crises is you do not make your money going into the crisis.  When you go into a crisis such as 2008, markets trade against positions. People have positions on and people need to get risk off.  All the things that people thought were a good idea start going into reverse.  The big money you make in trading is more in the aftermath of the crisis.  In 2009 we made 60% with no down months on our master fund.”

On whether BlueCrest is looking at illiquid investments:

  • I would not touch an illiquid product with a barge pole, to be honest. We’re going into an environment where banks need to delever.  Illiquid assets will be coming on to the streets everywhere.  The price of liquidity in my opinion will go up.  I don’t want to own any illiquid assets whatsoever. The strategy at BlueCrest is to be in super liquid products, things that can be turned around in a day.”

  • “It would have been the end of my business in 2008 had I done such a thing.  Anyone who had an illiquid position within their hedge funds, there were runs on those hedge funds because people wanted to get the cash out and not be side pocketed with the illiquids.  In 2008 I paid out $9.5 billion to the street because I was the only hedge fund that was up a lot and completely liquid.

On whether we’ll see a repeat of the 2008 credit crunch and whether those that hold illiquid assets will get crushed:

  • “That’s what I think, yes.  I think so.  In my opinion, what’s going on now is significantly worse than 2008…The European debt situation is fundamentally completely unstable.  The process of refinancing your debt with a real rate of 5 when you have negative GDP growth, and we are heading into a recession in Europe, arithmetically can turn all of the countries in Europe, given enough time, into Greece.”

On how closely tied America’s futures and the potential for investment are to Europe’s debt crisis:

  • “Clearly it would be a huge drag on the U.S. economy.  We’re talking about in Europe is a situation of instability driven by pro cyclical policy, removing the ability of banks to invest in sovereign debt.  We’re talking about pro-cyclical policy of governments not being able to deficit spend by law. We’re talking about existing deficits that need to be closed. We’re talking about an increase in the amounts that governments will have to find when they’re forced to refinance their rolling over paper this year at real rates of interest, which are way beyond anything they will ever be able to achieve in terms of growth.”

On how BlueCrest continues to make money through the slowdown:

  • “Because we are traders and do not take any credit risk and we’re super liquid.  In the time that BlueCrest has been around, we have made $17 billion of trading profits for our investors…so in an environment like this where we are a very secure trading strategy, taking no credit risk, not buying anything illiquid, that is the kind of thing investors frankly really want to hear from someone like me.”

On where he’s seeing investment opportunities:

  • “I think the major opportunities will come post the blow up.  I think for the time being you want to keep it quite simple.  You do not want to take any credit risk.  I think volatility in certain markets is very underpriced compared to what’s potentially about to happen.  I think if we go into a crisis scenario, things like German bunds could be more expensive than they are right now.  And I think as the crisis intensifies through the process of governments refinancing and deficits becoming more unstable and growth deteriorating in particular, I think those kinds of trades will play out in the market and be profitable.”

On moving BlueCrest from London to Geneva:

  • “I did not really want to be exposed to the Eurozone. I don’t want to be exposed to regulation coming out of the Eurozone.  Most of my clients come from the United States.  I am not really marketing to the Eurozone anyway.  So it didn’t make much sense for me to be in the Eurozone as a business.”

2. Greatest Buying Opportunity Ever – Robert Prechter with CNBC’s Maria Bartiromo (04:00 minute clip) – Wednesday, December 14

Yes, Robert Prechter did actually talk about the greatest buying opportunity ever, the one he sees coming several years down the road. In the meantime, he advocates safety and cash.

For those who may not remember this once a year guest, Robert Prechter is the founder & CEO of Elliott Wave International. He has been bearish for a couple of years now.

  • Bartiromo – …to tell us why he thinks we are in the late stages of a 1930 depression, here is Robert Prechter, ..
  • Prechter – … we get to talk once a year and I will try to curb my answers..
  • Bartiromo – don’t curb your answers, we want it all….your charts show a pessimistic outlook for the markets. Tell us if history is repeating itself.
  • Prechter – history repeats but never exactly. I think the big difference between the last 10 years and the top of the late 20s & early 30s is the size of it. This one is much much bigger. The overvaluation in stocks and in other markets was much greater than it was in 1929 in terms of dividends and book value.  And there is also a whole lot of ultimately unpayable debt out there than there was in the 1929. This is why it is a big deal.
  • Prechter – … valuations are still very high, the yield on the S&P is 2.2%; it should be more than double that….back in 2000 & 2007 guess what we had, record earnings both times… were they great times to sell stocks or buy stocks? They were great time to sell stocks. Record earnings tend to occur a few months or even quarters after the high. They occurred in Q3 2000, after the high in the first quarter in stocks, they occurred in early 2008 after the late 2007 high in stocks, we had record earnings again in the 2nd, 3rd quarters of this year, after the top in April. People look at lagging indicators such as cash flow or how corporations are doing. They need to look at leading indicators.
  • Bartiromo – if you are looking at depression type environment, how do I manage my money?
  • Prechter – … Look at what has happened this year. Most people recommended foreign stocks, They are down 10-30%, they have recommended commodities, the CRB is down 10%+ this year, the thing that almost everybody hated, the bond market, the bulls didn’t like it because we were going to have a recovery, the bears didn’t like it because they expected hyper inflation, that market is up 20%, the best total return of any sector. We are in safety, we are in cash. We have ways to go, several more years before we are going to be buying. But I think it is going to be the greatest buying opportunity ever, when it comes.


 
3. Great Restructuring of Europe’s Sovereign Debt – Kyle Bass with CNBC’s David Faber (11:07 minute clip) – Wednesday, December 14

Kyle Bass is no stranger to readers of these articles. He has been one of the most accurate and early predictors of the European mess. Here he gives his views about last week’s Euro deal and reiterates his views about the coming writedown of European Sovereign debt.

  • Bass – … If you get out a blank piece of paper and look at it, that is the plan they are working out of right now. Everything is an agreement in principle. There are no details. It is very difficult to arrange such a disparate group of people and get them all to cede their fiscal sovereignty to a central taxing authority. I say in the absence of that, it will not work.
  • Faber – Is there anything they can do that you believe will work?
  • Bass – yeah, they are going to have to restructure a lot of their debts..I think eventually the EMU is gonna  have to break up because you are going to need the adjustment mechanism that these countries need of a much weaker currency and it is very difficult to go through a hard restructuring and become competitive as a nation unless you have a currency adjustment mechanism that is associated with your restructuring and…historically that is what has worked, so I think history is likely to repeat itself…
  • Faber – your focus is on capital mobility and capital flight from many of these countries and banks in those countries..
  • Bass – I tend to think that the coordinated action of the dollar liquidity facility by the Fed and the G-7 central banks was one of wanting to put an air bag..again to inject as much liquidity into a system that is having a solvency problem and they are serving their purpose from a perspective of stability, liquidity in a default environment.. again they are putting an airbag for the fall that’s about to happen
  • Bass – if you were a Greek or a Spaniard or a Portuguese citizen why on earth would you leave your deposits in your host country’s banking system when in fact there is nothing prohibiting you from setting up accounts in Switzerland, Norway, Canada and Australia…places where you know they have more structural stability in their banking system even in the event of a crisis…. with the advent of enormous capital mobility that we have today, as studies have shown with Rogoff and Reinhart, capital mobility is a essential precondition to these kinds of runs…
  • Bass – what we are talking about today, in the eurozone… we have seen deposit runs annualizing at about 28%, the Greek national bank announced last night that they lost over 4.5% of their deposits in the month of October.  The point being in the end just before the defaults, you are going to see deposit flight and you are seeing it in the European peripheral countries… not only you are seeing it you are seeing it at an accelerated pace ..which makes complete sense to me.. and the counterbalancing argument there is that these governments  don’t want these capital flights to happen … but that happens when you lose confidence..
  • Bass – …doomsday machine…ECB and Governments guaranteeing debts of their banks which in turn buy the debts of their countries that is making that guarantee, pledging it at the central bank to get more money to go and buy more debt of those countries….it is a circular reference that Institutional Investors around the world are going to buy…today, there are no buyers for peripheral bonds other than host country banking systems
  • Bass – I will ask you a simple question (to Simon Hobbs of CNBC). How many of your relatives and extended family would you sign a joint and several liability agreement with? The answer with me is None. And secondarily, either in EMU or EC, they don’t have any money to recap their banking system. 
  • Bass – The ECB and more importantly Bundesbank, Weideman and Schauble know they are going to have to print a lot of money..clearly they are printing some now… the question is in my opinion do they ta
    ke the nuclear option and print it all pre-default or post-default? In my opinion, they print post-default to recap their system.
  • Hobbs – they know that on their own they will be destroyed by  the markets, there will be no banking system left for many of them. That is why they will stick together.
  • Bass – I disagree with you. I think they will maintain structural stability in the banking systems. That doesn’t mean bank equity is worth anything. That doesn’t mean that sub debt or senior debt is worth anything. It means that payment functions will continue to function. Remember in the Lehman scenario, the payment systems worked perfectly, the derivative contracts settled perfectly. The thing that went wrong with Lehman was that their senior unsecured debt was in money market funds and the money market funds broke the buck. That’s what scared everyone. In this scenario, the payment systems will function because I think global governments are well aware of this. That is evidenced by the G-7 dollar liquidity facility. But Simon, in the end, this bill is due, no one can pay it and so if you go the nuclear option, then you go try to print, think about this Simon, 2.6 trillion dollars worth of debt rolls into the Eurozone next year between bank debt in Euroland and sovereign debt.
  • Faber – that’s out of 18 trillion in total credit, correct?
  • Bass – no the 18.5 trillion is in the periphery. I am talking about the totality in Europe. Again, there aren’t any buyers of this debt in that kind of size . So these facilities that we are kicking around – there is no levered EFSF, they couldn’t even get the 3 billion euro bond issue done  and they want to get 200 billion done….The ESM is trying to get accelerated to the middle of next year but it has some treaty problems, …basically what I see is I don’t see any thing yet….. In the end, the picture is so large and the leverage in the banking system is so enormous that when you start delevering there is no way out of this scenario…and that’s what is happening.
  • Faber – collateral chains are shortening— Why should people be focused on that? Why is that of importance?
  • Bass – …this is more of a plumbing and with this plumbing concept, you have sovereign wealth funds and investors all over the world that deposit their securities in institutions like prime brokerage all round the world… those securities are lent and relent and relent…what’s important is with the advent of MF global and the fact that world governments are not going to behind investment banks if they fail again…customers are pulling their collateral, ending relationships in Europe, US and Asia — that takes the grease out of a highly levered banking system and that is also what is driving these dollar liquidity scenarios
  • Bass –  and remember this problem has been misdiagnosed for the last 3 years. If you remember in the beginning of Greece, it was just a liquidity problem..I don’t remember when it morphed from a liquidity problem to a solvency problem. But we are talking about injecting a lot of liquidity into a solvency problem. And it’s the right thing to do but I think the markets are reading it improperly and I think they will figure it out later on.

4. “they’re taking money home” – John Taylor with Bloomberg’s Lisa Murphy – Thursday, December 15

John Taylor is the founder of FX Concepts LLC, the world’s largest currency hedge fund according to Bloomberg TV. He spoke to Lisa Murphy on Thursday, December 15.

Mr. Taylor was one of the first FinTV guests to warn about a terrible 2012. The markets are now beginning to come around to his view. He might not have been so lucky about shorting the Euro. He may be proven right but he might have been too early. 

The detailed summary below is courtesy of Bloomberg Television (emphasis ours).

On where he thinks the euro should be trading:

  • It seems to me that [the euro] should be a lot lower than it is.”
  • “I think there’s a distinct possibility [that the euro will drop to parity with the dollar]. What’s surprising to me is that it’s part of the policy settings that Europe ought to have. It really ought to be at parity. Things could be better for the Mediterranean states. They would sell more products, they’d import fewer products because they’d be expensive. That would help current account balances.”
  • “If Mario Draghi just came out and made a statement, you know, Gee whiz, I think the euro’s a little high, all of us would be happy to oblige and the currency would drop sharply.”


On why the euro is still high:

  • “All the European banks have to raise capital. This is very difficult for them. So instead of raising the capital in order to increase their capital ratios, they’re bringing back assets that were overseas, into Europe. So, that means a building that was maybe financed in New York by Hypobank out of Germany, that financing is going to Citibank, or J.P. Morgan, and a German bank is moving its money back into Germany, and that buys euros.”

  •  “The easiest place for [European banks] to cut back is in the U.S., Asia and Latin America, so they’re taking money home.

On following these money flows into Europe:

  • It’s extremely hard to follow. One of the easiest ways to follow it is, looking at the number of deals being brought to private equity people from European banks where they are trying to sell things — not just a loan, but a whole subsidiary they don’t want anymore. They’re going to take the dollars they get for that, buy euros, and send it home. That flow has increased dramatically…on a percentage basis, around 400%, or 500%.”
  • “In fact, there are so many things to be sold that European banks aren’t going to get good prices at all“.


On FX trading:

  • “The European banks are in trouble, so the euro goes up. That seems wrong. In 2008, we had a crisis in the mortgage market, and the dollar went up.”

  • “For the same kind of reason because J.P. Morgan Chase, Citibank had to bring money home in order to protect their capital position in the U.S. So, also, the central banks of Asia and everybody are trying to protect Europe. They want Europe to do well.”

  • “So enough though we look at it as a good deal, the central bankers might because they want to protect their brethren.”

On Washington, D.C.:

  • “One of the things [I’m watching in Washington, D.C.] is, what is Ben Bernanke going to do? If we do QE3, that’s bad for the dollar.”

  • “What are the Republicans and Democrats going to do about extending the tax benefits that existed in 2011 into 2012?  If they don’t, that will put the U.S. into a recession, which is again one of these perverse things that will strengthen the dollar. The dollar is negatively correlated to its growth: when the U.S. is doing great, the dollar goes down. When the U.S. is doing lousy, the dollar goes up.”

On currencies in Europe:

  • The Norwegian krone is one of the best currencies because they have all the oil. They don’t belong to the European Union so they’re completely free -they can do what they want. [The krone] a strong currency, a stable currency.”

  • “We own more dollars than anything else but in Europe our favorite currencies are Norway and Sweden.”

  • “The Canadians are looking fairly good because they’re close to us. We have the best economy. They import a lot of raw materials we need, and we’re using them, so they look very good.”

  • “For Norway, the price of oil is somewhat dominated by the OPEC decisions. If OPEC keeps the supplies tight, oil won’t go down very much. I’m more worried about Australia, New Zealand, countries that are selling a lot to China.”

  • [If China slows down], I think commodities could do something like they did in 2008, I’m not saying it will be that aggressive, but if they dropped in half, it will really kick Australia in the teeth.”

  • “I am long the Australian dollar, and short New Zealand.”

On why he is long the Australian dollar and short New Zealand:

  • “Looking behind the scene, it looks like a lot of money is coming into Australia to develop the mineral sector. Capital inflow into Australia is very strong. The export market is turning down, but capital inflow is very strong. New Zealand doesn’t have that capital inflow so therefore it’s not protected by that.”

5. “I am absolutely convinced QE3 is coming” – Howard Lutnick with CNBC’s Maria Bartiromo (05:54 minutes) – Thursday, December 15

Howard Lutnick is the Chairman & CEO of Cantor Fitzgerald. He has always struck us as a shrewd man. He is also plain spoken. Below are the more interesting views expressed by Mr. Lutnick:

  • “You know what is happening to these big banks is Basle III is gonna put so much pressure on things these banks do that are capital intensive….they are not going to be in the business of securitization like things any more, so that’s why Cantor Fitzgerald went into the commercial real estate lending business. So we are going to lend and securitize because the banks are going to step out of that business”.
  • “look at the big banks – they are firing people in NY & London and they are hiring in Brazil and Asia – where the rules don’t go against you, that’s where they are going to be hiring people – classic, classic stuff – lower regulations on wall street firms, that’s where the jobs are going to be.”
  • “I am absolutely convinced QE3 is coming. Operation Twist – the Fed owns so many 3-year notes. They are selling 3-year notes and they are buying 6-7-10 year paper. They are going to do huge amounts of QE3 but mostly in mortgages. Their goal is to get mortgage rates down so people can refinance but they have a big problem. Because Fannie Mae & Freddie Mac are not letting people refinance.  The idea is low interest rates is nonsense because the Federal Government, FNM/FRE are in the way – it is not happening.”

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