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.
This seemed to be a digestion week with a minor consolidation of the QEver announcement. Stocks & the Euro gave up a bit; Gold-Silver were flattish. The two big movers were Oil and Treasuries. Oil suffered what looked like a flash crash this week and was down about $10 intra-week. The Oil ETFs closed down 5%-7% on the week. Treasuries rallied 2.5%-4% depending on duration and coupon to close just above their 200-day moving averages.
So it seems that this is a pause before the next move. There is not much to say but to wait.
2. U.S. Stock Market
The same steady but watchful feeling was voiced by Lawrence McMillan of Option Strategist who wrote:
- “In summary, we remain bullish, even though we realize that overbought conditions could generate a short-lived decline at any time.”
He has been right so far. Not so right has been Mary Ann Bartels of BAC-Merrill Lynch. Ms. Bartels had confidently predicted a 10% correction in September on August 22 (see clip 4 of Videoclips of August 20 – August 24, 2012). On August 22, she liked defensive stocks because they were breaking out – Pharmaceuticals, Beverages etc. And now?
- Mary Ann Bartels – “if we are right and we channel up..you can get to into the low 1,600s….the financials have broken out…the pocket we like are the regional banks. This is a play on what the Fed is doing..buying the mortgages…we are getting a rotation out of the defensives…the sector the market will chase is materials...”
June 4, 2012 was the day the S&P bottomed after the steep correction in May. That was the day Ms. Yamada told BTV’s Tom Keene that the bull is long in the tooth and declared a 2-3 year topping pattern. The SPX closed at 1398.96 that day. This week, Ms. Yamada was bullish and said to CNBC FM (Fast Money):
- “I think you probably have the possibility here for an assault on the 2007 peaks”.
Wrong but consistent is Doug Kass who opined on CNBC FM-1/2 on Tuesday:
- “I think that the investment environment is growing more dangerous. The world’s economies, the profit outlook are weakening. Just the time where sentiment is expanding and so are valuations, so that’s a potential cocktail to me.”
Keith McCullough of Hedge-Eye summarized the feelings of those who don’t like Bernanke’s QEver on CNBC’s Kudlow Report on Monday:
- “All I think Bernanke has done is compress 3 years of equity returns into the 3 months ahead of the election.”
3. U.S. Treasuries
It took this entire week for Treasuries to recover the steep fall of last Friday, the day the 30-Year Treasury fell by over 3 points. That one-day fall was an aberration, almost a day long “flash crash” type. Of course, a flash crash by definition is what Oil suffered when it fell by 4-5 points in a about 15 minutes. On contrast, Treasuries fell all day on Friday, September 14. That fall seemed like liquidation caused by some sudden realization.
We opined last week that the sudden realization was probably due to the comment “there is incredible downside to 30-Year Treasury” of Jeffrey Gundlach to BTV’s Tom Keene on Thursday evening. The key being “sudden”, we think. Because this week, Treasuries rallied as Gundlach told CNBC’s Gary Kaminsky that “10-year rates could go up by 100 basis points before year-end” (see clip 2 below).
Kudos to Tom Keene for bringing in Gary Shilling to respond to Gundlach. Shilling has been consistently bullish on long maturity Treasuries and he remained so this week (see clip 3 below). His main theme is:
- “Deleveraging in the private sector is swamping everything that is happening both on the monetary and the fiscal fronts“
Interestingly, Gundlach said this week:
- “it is more likely that the Fed buys all the U.S. Treasury bonds that exists…”
Any way, the battle is on between Gundlach-Gross and Shilling-Rosenberg.
A recent Stratfor video about the China-Japan dispute made the following comment:
- “China is in a crisis. It’s economy is slowing more rapidly than expected; unemployment is on the rise in many manufacturing centers; and the Communist Party’s facade of unity is appearing increasingly fragile as the generational leadership transition approaches. Meanwhile, its increasingly aggressive moves in the eastern South China Sea is threatening its relations with regional partners. Even the anti-Japanese protests, as it swept over Chinese cities over the weekend, is making Beijing uneasy. Anecdotal evidence suggests that many of the protestors are unemployed young men and in at least a few cases, calls to bring down Japan interspersed with expressions of anger against the Chinese Government, or even calls to bring back Bo XiLai.”
Jim Chanos hinted at something similar when he said on Thursday “we are not political scientists, but something is different“. He then went on to call the Chinese stock market “ a classic emerging market roach motel, but a really big one” (see clip 4 below). Both Jim Chanos and Gary Shilling (see clip 3 below) spoke about the problem of hot money leaving China and the risks of a credit boom going bust.
Speaking of the perils of proximity to China, India tested its long-range strategic missile, Agni-IV this past Wednesday. This mobile missile can reach every city in China, including the cities on the remote China-Russia border. India has also moved two tank brigades to the Chinese border to add offens
ive power to its light, mountain infantry divisions. India is also raising a mountain strike corps of about 40,000 soldiers in ins North-East border with China. These are belated moves that may only serve to reduce the huge advantage China has with 220,000 troops facing India in the north-west and 180,000 troops facing India in the north-east.
The USA has affirmed to China that the Senkaku-Diaoyu islands fall under the USA-Japan treaty. So we don’t expect a military conflict between China-Japan, at least not until China’s military advantage becomes much greater. But we do expect China to try and teach India a humiliating military lesson by 2015-2017 before India’s military-nuclear buildup becomes a true deterrent.
The 3-minute Stratfor video is a worth listen:
Does the outbreak of violent anti-US protests make an Israeli attack on Iran’s nuclear facilities more likely or less likely? We don’t know of course. But the real question is what happens if Israel does attack? A point of view was offered by Karim Sadjadpour and Blake Hounshell in a Washington Post opinion – What if Israel bombed Iran? The view from Washington. We recommend a reading.
- Raymond Dalio on CNBC Squawk Box on Friday, September 21
- Jeffrey Gundlach on CNBC SOTS on Wednesday, September 19
- Gary Shilling on BTV Surveillance on Thursday, September 20
- Jim Chanos on CNBC Squawk Box on Thursday, September 20
1. “possibility of an unmanaged downturn” – Ray Dalio with CNBC’s Andrew Ross Sorkin – Friday, September 21
Raymond Dalio is the legendary Founder & Co-CIO of Bridgewater Associates. It is rare to hear Mr. Dalio on TV. Mr. Dalio’s comments are included in several clips. Fortunately, CNBC has provided a detailed transcript on CNBC.com. A few excerpts are below:
Dalio on Europe:
- “So I think in the next couple of years, I think that we’re going to have a depression in Southern Europe, and it’s going to be a managed depression….there’ll be a deleveraging and restructuring of debt.”
- “Deleveragings– restructuring of debt and austerity are deflationary and they are negative for growth. Printing of money is inflationary and it’s positive for growth. I think we’re going to see both because you have to lower the debt-to-income ratio…. you have to have a higher level of growth than you have of interest rates. And so that process will continue and it’ll be a ten-to-15-year managed depression.”
- “I think the euro…is likely to stay together,.. although in later years, it’s more risky. I think the euro is controlled by Southern Europeans, for the most part. It’s a vote of the members. And it will be run that way. And that’ll help to achieve the balance.”
Dalio on the USA:
- “…there’s the possibility that you don’t have that right mix and that you could have an unmanaged downturn. I think the odds of that are comparatively low, but I worry about it because it’s a significant possibility.”
- “you need a balance between austerity and sometimes debt restructurings and monetization. If you have too much monetization, you’re going to have an inflationary problem. You have too little stimulation, monetary policy and fiscal policy, you’re going to have a depression. Being in the betting business, I also know when I don’t know. …I would say that there are reasonable risks that it will not be managed well.”
Dalio on Gold:
- “I think gold should be a part of everybody’s portfolio to some degree because– it diversifies the portfolio. It is the alternative money. We have a situation now where– when you have too much debt– too much debt leads to printing of money to make it easier to service. So all of those things mean that some portion– should be in– in gold.”
- “Gold is my cash. It’s an alternative version of cash. So over the long term, it’s not the best investment. Over long term, it’s a little bit better than cash over long term.”
Dalio on Social Disruptions:
- “I don’t know whether we’re beyond the point of being able to successful manage this. And I worry then about social disruption. I worry about another leg down in the economies causing social disruptions. Because deleveragings can be very painful, it depends how they’re managed.”
- “But when people get at each other’s throat, the rich and the poor and the left and the right and so on, and you have a basic breakdown,that becomes very threatening. And for example, Hitler came to power in 1933, which was the depth of the Great Depression because of the social tension between the factions. So I think it very much is dependent on how the people work this through together and worry about the social elements.”
Dalio on Competitiveness:
- “I think that what needs to be done more is- an understanding of how that competitiveness affects future growth. In other words, to what extent is it an indicator of future growth?”
- “In other words, imagine that you now have– these indicators– that show if you change this thing or that thing by this…somehow it will have that effect on growth. I think that that’s what’s needed to get past the rhetoric, get past the conjecture, get past the politics and the vested interests. And I think we’re working toward that with Harvard Business School.”
We suggest you read the full transcript on CNBC.com or watch the clips. Then compare this interview to the one below, the interview of Jeffrey Gundlach by CNBC’s Gary Kaminsky. In our own humble opinion, Gary Kaminsky was able to get far more out of Gundlach than Sorkin was able t
o get out of Dalio. Andrew Ross Sorkin clearly has a high caliber traditional intelligence. But he has never done what Dalio does. Sorkin never seems to think like a man who has to obtain returns. That is why he was not able to get Ray Dalio to articulate his insights on investments that might illuminate our own thinking. That is our loss.
2. 10-yr yields could go up 100bps by year-end – Jeffrey Gundlach with CNBC’s Gary Kaminsky – Wednesday, September 19
Last week, we featured a long conversation between Jeffrey Gundlach and Tom Keene at BTV. This week, Gary Kaminsky sat down with Gundlach for a detailed conversation. The conversation is in two clips:
We will mainly feature comments that were not covered in detail in our last week’s coverage of Gundlach.
10-Year Treasury Yield
- “I think the 10-Year Treasury yield bottomed out and the prices peaked in July of this year.I don’t see any investment value in the 10-year Treasury at all…. I have been saying the yield on the 10-Year could rise 100 basis points… even before year-end. For this reason, we have gone to the lowest interest rate exposure in history in the summer of this year…I think the 10-year Treasury rates can go up because it is so unattractive as as an investment at 1.8%.”
Fed’s Exit from endless QE
- “There is no exit,.. I think it is more likely that the Fed buys all the U.S. Treasury bonds that exists than that they are going to…start selling them… I have no concept of what the Fed exit strategy would look like nor does a viewer/investor need to have a concept because it is way out in the future.. the Fed is doing exactly the opposite, they are expanding their balance sheet…they are working on QE3 and QE infinity.”
think the bank stocks are sort of reasonably valued where they are
today. I don’t think they are a great short. They are so challenged. How
is a bank really going to grow and make money?”
this is environment there is too much risk that something bad is going
to happen in the European situation which every one now thinks it is
so-called resolved which is just absurd. It is a circular financing
scheme that needs to have one fundamental question answered and as yet
it is not answered: Will Germany pay the debts of the periphery or not? Many
of us suspect the answer will ultimately be No. If that’s the case, the
banking system is vulnerable to a significant risk.”
- “I don’t like risk assets at the level they are at today… in the short-term I am not very positive. In the longer term I think these policies that the Fed is trying to put in place means that you want to be involved in real businesses and real assets that can have the ability to preserve purchasing power and move forward… I won’t buy them today because everything is so high…”
- “I think the obsession with Apple is truly remarkable social phenomenon..When you watch CNBC, everybody wants to talk about Apple…this fixation, obsession with Apple – to me that means the stock is over-believed and over-bought.”
- “If you think we are going to get inflation, you want to own the Spanish stock market, you want to own natural gas, you want to own agricultural commodities and short things like Apple and S&P. Now that we have had the inflationary fix, Apple is up about 15% and Natural Gas is up 40%. These are pair trades.”
Buy & Hold – completely out of the door
- “You can’t own Treasury Bonds, you have to move into international bonds. I like for the first time in years the floating rate notes senior in the capital structure of corporate bonds which look attractive versus traditional junk bonds, mortgage backed securities and finally, really safe dividend paying stocks and I mean really safe.. I don’t mean technology stocks., I mean consumer product companies like Campbell Soup, Kraft…”
- “I think if you are a buy and hold person, you will be disappointed…you will end up with something like 5% or so in the nest case.This is a market where buy and hold is completely out of the door….people have to be much more active than before...”
The second clip has really interesting thoughts about what a Bond fund should be doing and what should be the maximum size of a bond fund.
In the clip below, Gary Shilling responds to Gundlach’s distaste of Treasuries.
3. Deleveraging in the private sector swamping QEs – Gary Shilling on BTV Surveillance – Thursday, September 20
Last week, Jeffry Gundlach told Tom Keene that “there is incredible downside in the 30-Year Treasury Bond“. So this week, Tom Keene invited Gary Shilling, the most vocal bull on the 30-Year Treasury for his response. Kudos and thanks to Tom Keene. This is what need from FinTV anchors; getting diversity of opinions by asking guests to respond to others who disagree with them.
- Keene – Jeff Gundlach told me that..he has to be very defensive owning bonds. You push against that, don’t you?
- Shilling – Defensive against a rising asset? I don’t quite understand that. But I think yields are going lower; you look at all the money that is flooded in by the central banks and now it is virtually global with the Bank of Japan in there. And what’s happening? You don’t see any effects on inflation because there is simply too much supply in the world. Money is pushing on a string . Deleveraging in the private sector is swamping everything that is happening both on the monetary and the fiscal fronts.
- Shilling – We have had commodity inflation since last year; tangible assets – houses, commercial real estate they have been deflating in the last 5 years….Wages, my goodness, real wages are going down, they have been going down for 3 years – people who lose their jobs, people who are out of word for 6 months; surveys show when they get a job they actually work for less money than they got in their previous job.
- Shilling – I think we are going down for a hard landing in China…5-6% is a hard landing for China; they need 7-8% growth to keep the economy stable to accommodate new entrants to the labor force..they are really hit by two things
- the delayed effects of the early restraints they had..they were trying to deal with inflation and the housing bubble.and
- their exports; they are heavily export oriented; their consumer sector is tiny, 34% of GDP in consumption, that’s way off the charts. Even Russia has 58%, US has 71%, UK has 66%.
- Shilling – If you combine a command economy which they partly have with a market economy which they partly have, it is the worst to control..you look at the hot money that went into China in anticipation of a higher Yuan, ..now the money is flowing out. They have a devil of a time dealing with that economy. Earlier when they stimulated the economy, they did it through banks – basically that 12% of GDP in stimulus was run through the banks, local governments, they stole the land from the farmers, they sold it developers using the bank money to finance the development…Now the banks are loaded with bad debts. so now they are having to turn to fiscal stimulus – they are unleashing projects..
- Shilling – Job 1 for Chinese leaders is to stay in power and they know more than one dynasty has been thrown out because of labor unrest related to high unemployment. They are going to get the economy revived one way or the other. But the point is, in the meanwhile, is that really the death-knell to the decade long commodity bubble and it has been a bubble. It started in 2002 right after China joined the WTO.
- Shilling – Back in the 1980s, everyone thought Japan was going to take over the world…now they have had 20 years of deflationary depression…China, I am not sure, is that different…
4. Two Givens: Central banks will ease & China will stimulate – Jim Chanos on CNBC Squawk Box – Thursday, September 20
Jim Chanos, the founder & president of Kynikos Associates, has been correctly bearish on China for awhile. We have featured his comments on these articles on several occasions. Today we only include comments that are either new, different or differently stated. Because the message is still important and needs to be understood.
- there’s two givens in the world financial markets that central banks will ease and China will stimulate and it’s always around the corner.
- we’re not political scientists but something’s different. the Bo Xilai thing — if you pick up on upheavals and tumult, this is going our way, too. but unexpectedly. But that is an added layer of risk, you’ve seen the nationalism come out the Spratly Islands and
the disputed over the Japanese/Chinese islands.
- when Europe gets worse or better, that has a lot to do with China, too. European economies depend more on China than they do the U.S. So the export-driven aspect of China is high, but so are the imports, so we’ve cautioned people that china’s net exports is a very small part of their economy, but gross exports is very large, it’s almost 40% of the economy. Sort of 40% exports, 37% imports for net 3%, but if the 40 drops to 35, you can have problems.
- the other interesting thing that’s new in China is that we are beginning to see not the trade export balance decrease, which has been happening, but now capital is going out of China. So they’re actually seeing a deficit in terms of investment. Hot money is leaving….it’s a huge, huge change and it’s going to make the policy much harder to implement from Beijing,
- if you would look at our portfolio and say what’s really sort of overweight, it would be China.
- look at corporate profits, look at what’s happening on the ground, corporate profits are imploding over there take a look at the Chinese stock market. it’s gone nowhere despite having one of the highest rates of growth of any emerging market or any market, GDP growth has been 9%, 10% for years and you’ve made no money in the Chinese stock market
- As a western investor I would take issue with almost any of the corporate accounting in China. Indeed you look at the biggest of companies, state-owned enterprise, and they don’t earn their profits in cash..it is all transactions with affiliates. They don’t return on capital enough of their cost of capital…. it’s at designed for short sellers, designed to suck western capital into the country and never let it go back out and I keep pointing this out to people that you’re almost in a classic emerging market roach motel except it’s a really big one, in that it is very difficult to earn adequate returns of capital and get your capital back as a western investor in China.
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