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. “It’s starting to go his way”…
Was this “sort of in a nutshell‘ rationale for the equity rally, asked CNBC’s Joe Kernen of Goldman’s Jim O’Neill. Mr. O’Neill’s response was sort of yes with the following clarification:
- but he [Draghi] certainly followed up with some further very strong indications of the sorts of things the ECB is considering;
- a lot of people are thinking hang on a minute here, there’s something new going on and we have yet to find out the real details – I’am part of that camp.
A terrific rally in risk assets; Six straight days of gains in the S&P, the best 6-day win streak since July 2010 on “indications” of “sorts of things” the ECB is “considering“? This is certainly Hopium and that of the pure, concentrated kind.
But Hopium often works for a short period of time, especially when coupled with bearish positioning and really bearish sentiment.
2. U.S. Stock Market
This week’s rally was on low volume with little adrenalin. That chemical was also absent on Financial TV where we couldn’t find any exuberance about the rally. Complacency bordering on apathy was the more prevailing sentiment. This was well reflected in the VIX which closed below 15. The weekly update from Lawrence McMillan of Option Strategist was just as inertial:
- In summary, the indicators remain bullish, and so we expect the market to continue advancing for the intermediate term.
The lack of a short-term forecast might have to do with his note that 1410-1420 is “likely to provide some resistance for now.” Another slight note for caution came from Helene Meisler of RealMoney who tweeted on Friday:
- If anyone out there follows TRIN for Nasdaq, have you ever seen it in the 40s three days in a row? I see once in summer 2010.
A more direct warning was tweeted by Elliottwave Forecast on Wednesday:
- There are many signs pointing another trap in risk on ,amazing .#SPX
- Expecting a 3 waves minimum move in RISK OFF very soon .#SPX
3. U.S. Treasuries
Unlike the US stock market, the action in Treasuries was turbulent. All the three auctions were rated ‘D’ by Rick Santelli. On Thursday morning, the yield on the 10-year reached 1.70%. Carl Quintannia (CQ) asked Jim Cramer whether the 10-year yield would get to 2%. Cramer replied “very easily”. CQ tweeted this exchange:
- 10-yr going to 2%? “Very easily” — @jimcramer @CNBCSquawkSt
So Keith McCullough of HedgeEye tweeted his rebuttal:
- 10yr going to 1% on #GrowthSlowing, not easily – but easier than going to 2%
Thursday morning action seemed to favor the Cramer-CQ view. That noon’s 30-Year auction was really bad . It shot through the When-Issued range to price at 2.825%, a steep sell off from the 2.56% yield level seen the Thursday before.
But as the 30-Year bond began rallying just after the auction was done and closed up almost a point from the auction level. It added a half-point on Friday. The 10-year yield closed on Friday at 1.66% which prompted Jeff Kilburg to tweet on Friday:
- We did not get two consecutive closes above 1.67% in #10yr ~#BondBullsDieAnotherDay
We are nowhere as smart as these pros we quoted above. Ours is an old empirical belief – it is rare for all 3 auctions in a week to fail & after a painful sell off, the 30-Year auction historically pays off for those with guts to buy it.
But does the performance on Thursday afternoon and on Friday suggest a near term rally in Treasuries? Tom McClellan of the famous McClellan Oscillator suggests the reverse in his article Open Interest Gives A “Tell” For T-Bonds. He bases his conclusion on the insight below:
- “Here is the key insight: open interest numbers for T-Bonds will tend to rise during periods when prices are moving in the direction of the dominant trend. T-Bond open interest will tend to fall as prices make corrective moves.”
So what is his conclusion?
- “In the past, when there have been divergences this severe between prices and open interest, it has led to price declines that were more significant in magnitude than what we have seen thus far. Th
e implication is that T-Bond prices have more distance yet to go downward in order to fulfill the implications of this open interest divergence.”
Those who wish to hear about the longer term views about Treasuries might want to check out clips 1 & 2 below. Gary Shilling reiterated his target of 2% for the 30-Year T-Bond and David Rosenberg said nothing to make us think he has become less bullish on Treasuries.
4. Erudition & Sycophancy
We are simple folk. Mohamed El-Erian of Pimco is far from simple. His TV persona is erudition incarnate, or so it appears to us. That is why his comments confuse us. On August 9, El-Erian reportedly (via Bloomberg’s John Detrixhe & Tom Keene) warned investors to be wary of a steepening yield curve. Specifically, he is reported to have said:
- “What we would caution is rather than the level of the rates, the shape of the curve,…The long end is exposed to a lot more risk.”
But the very next day, he told Bloomberg’s Linda Yueh that Global Recession Risk was ‘A Third’. If you watch the 20:53 minute clip of her conversation with Mr. El-Erian, you will notice (at minute 13:35) him nodding his head about the world being in a synchronized slowdown. Then he specifically put the risk of a global recession by the end of this year at 1/3. He didn’t just say this. He gave datapoints to justify his call. And then El-Erian included US in his list of “cleanest dirty shirts” or markets with solid fundamentals whose bonds will do Ok.
It is rather rare for the yield curve to steepen in the midst of a global synchronized slowdown that could become a global recession in 5 months. So we wonder, which El-Erian is correct?
- The El-Erian of August 9 who warned of a lot more risk in the long end of the Treasury market OR
- the El-Erian of August 10 who warned of a global recession in 5 months & who said US Bonds should do OK because US is a cleanest dirty shirt with solid fundamentals?
And if Mr. El-Erian seems erudition incarnate on TV, Bloomberg’s Linda Yueh was sycophancy incarnate at the beginning of this interview. We were so revolted that we may now view with kind tolerance the perkish disdain of BTV’s Sara Eisen who jeered at Gary Shilling for “hiding out in the 30-Year Bond“. Yes, we know that her statement shows that Ms. Eisen has never ever owned the 30-Year Bond in her life and that she is totally clueless about its volatility. But at least Ms. Eisen shows spirit, a quality sorely lacking in the utterly obsequious Ms. Yueh at the start of the El-Erian interview.
5. “Steal a little, but don’t be a bandit”
A couple of weeks ago, we wrote that we see signs that the environment in India may be changing. But India is at that stage where even a good deed makes you despair. A perfect case study is a story reported by Reuters on Friday.
This is a story from India’s largest state – Uttar Pradesh which is bigger than Brazil in population but ranks below most other Indian states by any measure of development. Shivpal Singh Yadav, a state minister and uncle of the young Chief Minister Akhilesh Singh, was speaking to a group of local government officials on Thursday. With seemingly the best of intentions, he told them:
- “If you work hard, and put your heart and soul into it…then you are allowed to steal some. But don’t be a bandit.”
Believe us, this is a big change and for the better. It shows a commitment from the UP Government to cut down on corruption in its ranks and to focus on development. So the permission to “steal some” is OK because the primary message is “don’t be a bandit” and the secondary message is “work hard with your heart and soul“. Again, believe us, the term bandit is not a flowery adjective. The term is absolutely reflective of reality in India’s northern states.
Unfortunately for this minister, these comments were caught by a local TV camera and played on newscasts across India to the embarrassment of the young chief minister who had projected himself as an agent of change. But this fiasco in itself could end up putting greater pressure on the UP government to improve. And even a small progress in UP means measurable progress for India.
We look upon this as another straw in the wind, another small sign that things might be making a small turn for the better.
- Gary Shilling on BTV Surveillance on Thursday, August 9
- David Rosenberg on CNBC Squawk Box on Thursday, August 9
- Meredith Whitney on CNBC Squawk Box on Wednesday, August 8
1. Another 5-7 years of Deleveraging – Gary Shilling on BTV Surveillance – Thursday, August 9
One characteristic of BTV Surveillance is that they give enough time to their expert guests to express themselves. It is very helpful to simple folks like us. Dr. A. Gary Shilling has been one of the most accurate forecasters in recent years. So it was a delight to hear him comment at length with smart prodding by BTV’s Tom Keene.
- Keene – Why are interest rates so low?
- Shilling – 3 reasons –
- One, I think we are in a global recession, the US, Europe & China which reduced the demand for credit…
- Secondly, Treasuries are a safe haven, there are very few others and
- Thirdly, I think there is going to be increasing concern about deflation as the economies of the world deteriorate.
- Keene – what gets us to the Shilling deflation vs. everybody else’s call for controlled disinflation?
- Shilling – Deflation means that supply exceeds demand…we already have deflation, we have deflation in tangible assets and in financial assets..in wages,
- Shilling – let’s say we are through the risk of deleveraging which has another 5-7 years to run and the Fed starts to get rid off the excess reserves and the politicians say wait a minute, the economy is just beginning to recover and you want to run through another 1937?
- Shilling – Fed is much more political than it was 5 years ago because they have gotten into fiscal policy whether they wanted to or not..
- Keene – Do you stand by a double-digit house price decline?
- Shilling – yeah, I think it is still in the cards….there is about 2 million in excess inventory over and above normal working levels…in the normal run, we build about 1.5 million houses a year – so this is a huge overhang…3 ways you can get rid of them
- one, is foreclosures, dump them on the market, prices take a nosedive,
- second, modifications, kick the can down the road..
- third, this is the most intriguing – – convert those to rentals,
- Shilling – deleveraging in the private sector is so so massive, so immense that it is overwhelming what the fed has done – 2 trillion USD in balance sheet expansion, trillion & half deficits
- Keene – stock market continue to go up?
- Shilling – I don’t think so….
- Keene – you are focused on the disaster that is college student loans…how broken is our college system?
- Shilling – it really is broken..if you look at the previous model, it is what economists call price discrimination, colleges chart basically huge tuition, but only the very wealthy pay it..they use the money to subsidize down and buy the student body they wanted… that model meant they could raise tuition indiscriminately.. there are two problems
- one the middle class is really getting squeezed, people on the bottom are either going to state schools or they are getting completely subsidized…
- 2nd – a lot of students go through that with the assumption that go to college makes you smart, yeah…its the reverse, smart people go to college..now…they have soft majors…they come out with soft majors and they have no jobs and huge debts…
- Shilling – at the rate at which we are going, it is going to take another 5-7 years to delever the consumer sector in this country and the financial sector globally – we are about 5 years into it..the total tenure of 10 years – big deal, that’s the normal deleveraging after a major financial catharsis
- Eisen – besides hiding out in the 30-year bond, how do you invest?
- Shilling – right now, if you go from 2.5% to 2% on the 30-year and now we are 2.6% on the 30-year, you make 12.8% on a coupon bond, if it happens over a year and you collect two coupons and 18.3% on the zero-coupon going from 2.5% to 2% – it is called convexity…
- Keene – how do you link your view on rates, on deflation on what we need in this economy – jobs?
- Shilling – Again, everybody is looking for this magic bullet, everybody is looking for a monetary bullet, a fiscal bullet, something that is going to right this economy — we are going to the salad days of the 1980s – I don’t think that’s true. We are unwinding excess leverage and it is not very much fun… but the risk is people constantly say do more, do more,..and the Fed does…and it creates a residual problem out there
Basically, Gary Shilling says the only cure is time, another 5-7 years.
2. Exports collapse sign of global downturn – David Rosenberg on CNBC Squawk Box – Thursday, August 9
In this clip, David Rosenberg may actually appear rosi-er than usual. But that is only because his comments follow the utterly gloomy comments above from Gary Shilling. While we are happy that Squawk Box showed smarts by inviting David Rosenberg, we would have been much happier had he been invited for an entire hour. And Squawk Box, if you do invite him as a guest host, don’t restrict his comments. Let David Rosenberg speak on any investment topic he wants to discuss.
Below are the comments that CNBC highlighted while Rosenberg was speaking:
- European Instability is a major risk factor for U.S. Growth
- U.S. Drought is worst in at least 5 decades
- Beware of U.S. drought causing agricultural disaster
- Expect food price inflation to stunt U.S. growth
- World exports collapsing is a sign of global downturn
- July ISM exports data at weakest level since global downturn
- Fiscal cliff causing companies to pull back on investments
A summary of Rosenberg’s views can be found at Economy Should Be Growing At Faster Pace on CNBC.com. A few excerpts are below:
- The overall story is that with the massive intervention by the U.S. government and the Federal Reserve, they did manage to terminate the Great Recession in the mid part of 2009,” he told “Squawk Box.” “But the reality is that we never had much of a recovery, at least in the economy. And in terms of what we’re seeing going forward, I still think that there’s more downside risk than upside potential.
- The Fed took rates to zero, then they tripled the size of their balance sheet. We had unprecedented fiscal stimulus for a peacetime economy,” Rosenberg said. “If this was a normal cycle, we’d be averaging 8 percent GDP growth this cycle. We barely averaged more than 2, and a lot of that was just inventory reinvestment.
- Here we go into three years of fiscal recovery and each of those three years we had double-dip scares, and that’s not normal in the context of a plain-vanilla cycle,” he said. “On top of that we have this fiscal bog that we’re in right now creating a lot of uncertainty for the private sector.
3. Inflection Point re Munis – Meredith Whitney on CNBC Squawk Box – Wednesday, August 8
Last week, Ms. Whitney spoke about Banks on BTV Surveillance. This week, she returned to her old favorite. As we write this, we are not sure which favorite we mean – Squawk Box or Andrew Ross Sorkin. Ms. Whitney’s relationship with her TV hosts is usually formal or combative, especially with Joe Kernen. But this week, she exhibited a different side as she asked Andrew Ross Sorkin to “coo to” her.
But she did not say anything that would make optimists to coo either to her or to their muni bond portfolios. Just the title of the CNBC.com article says it all – Municipal Finances Reaching an ‘Inflection Point’. Below are some excerpts:
- You haven’t seen state and local governments cut to the degree they have. Now you reach a point where it’s an inflection point: At what cost am I going to honor my pension obligations?
- I never advise my clients on municipal bonds. That was never part of my argument,” she said. “It was an aside. It happened to be what ’60 Minutes’ focused on. But what I’ve advised my clients on doing is, look where the growth is going to come from.
- It cannot come from these vortex economies like California, Arizona, Nevada, areas that powered our economy. Where growth is coming from — I mean, Texas is a juggernaut, Florida’s back on its feet. You’ve seen incredible growth from what people call ‘silicon prairies’ — right-to-work states that have clean balance sheets that are creating jobs, that are investing in education.
But at least her final point was optimistic:
- What always attracts me is how the U.S. is going to reconstruct itself, how it’s going to reinvent itself, and it does it every 60 years…It’s a very dynamic economy.”
Send your feedback to email@example.com Or @MacroViewpoints on Twitter.