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Till Thursday, there was hardly anything to write in this week’s commentary. The stock market went up in small steps every day, the U.S. Dollar kept going up in modest increments every day, the VIX kept slipping a bit every day, the economic data kept coming in stronger every day and Maria Bartiromo kept getting happier every day. Then on Thursday, just moments before the close, an exultant Maria asked viewers to “Giddyup”.
As if on cue, the stock market opened weaker on Friday, dropped 68 points and recovered to close down only about 25 points. More interestingly, the U.S. Dollar slipped on Friday, or as Dr. Greenspan would say, the Euro, the Pound & the Yen all bounced against the Dollar. The University of Michigan sentiment number came in weaker than expected. And it was the first down Friday in 2013. So many anomalies in one day or just small anomalies reflecting a pause that refreshes just in time for Bernanke on Wednesday?
Another same old was the “breaking news” reported by CNBC’s Kate Kelly that David Tepper was still bullish. Mr. Tepper was reluctant to speak with her about his outlook and so she found someone “familiar with his thinking“. According to this someone, David Tepper predicts that the U.S. stock market could rise 20% or more this year based on a strong U.S. economy unless “there’s an unexpected downturn in Europe“.
The stock market had an even more celebrated supporter this week. Alan Greenspan opined that “we are significantly undervalued“, the “we” being the U.S. stock market. He explained the strength in the U.S. economy by his most favored indicator (see clip 1 below):
- “asset prices generally are underestimated with respect to how they impact the economy as a whole. And both home prices and stock prices have been very powerful for us this year”
With all this wonderfully cheerful backdrop, some one had to get a bit more negative. And that some one was Bill Gross with a tweet on Friday morning:
- “Gross: Still like 5-10 year treasuries here. Seasonal economic stats should slow about now”.
May be that is why Treasuries yields fell during this week of daily stock rallies, daily stronger data releases and hotter inflation numbers. This week, the 30-year yield fell by 4 bps, the 10-year yield by 7 bps to close just below 2% and the 5-year yield by 6 bps. This might be the biggest anomaly of them all in this past week.
If Bill Gross was a wet napkin on the economy, Henry Blodget was a soaking wet blanket on Wednesday on CNBC Squawk Box:
- ” the biggest concern I have about the stock market is profit margin. We are at record highs for corporate profit margins. Every time in the past we have gotten to this level, or even close because we’ve never gotten here before, profits haven’t stayed there, they have collapsed violently. And you get a huge correction. Nobody ever sees it coming, it’s not something you can predict.”
How did his fellow guest-host Curtiss Arledge of BNY brush him off?
- “I do think profit margins are likely to decline, but I think in the context of earnings growing faster. I think that’s going to be the offsetting factor.“
This folks is the secret to the Bernanke game in 2013:
- QE raises asset prices; Rise in asset prices impacts the economy positively, which Arledge et al argue will lead to earnings growing faster which in turn will raise asset prices.
And remember, thanks to Bernanke’s QE4ever, the music never stops in this game. And because to markets, eventually means never for now.
- Alan Greenspan on CNBC Sqauwk Box on Friday, March 15
1. Stocks are significantly undervalued – Alan Greenspan on CNBC Squawk Box – Friday, March 15
This is an excellent interview. Now that he is no longer the Fed Chairman, Dr. Greenspan actually makes us understand what he is thinking and saying.
Does he want to use the phrase ” Irrational Exuberance”?
- I don’t think it’s quite appropriate in this environment. In fact, basic way of looking at this degree of exuberance is equity premium – a measure of whether the stocks are overvalued or undervalued. and right now, by historical calculation, we are significantly undervalued. The reason why the stock market has not been significantly higher is there are other factors compressing it lower. But irrational exuberance is the last term I would use to characterize what is going on at the moment.
Is this a Fed-fueled rally?
- I think you can fully explain the rally in terms basically of the removal of what is called tail risk. That is what has been sitting out there virtually most of this year and part of last as well has been the European problems which have every characteristic of caving in the economies of the world as a whole. And that has been temporarily removed. The result is removing that key factor has allowed the markets to move up. It’s not because earnings are moving al
l that well. As you know, earnings are either — expectations at least have been either flat or down for a while. What it’s basically doing is the valuation structure. And it still has a way to go, as far as I can see.
How far are we in the Housing cycle?
- I would say somewhere in the middle, but we have a good way to go. The data I look at are essentially — well, I should say price is critical issue. Home prices are moving up. In fact, they’re moving up a little bit faster than I think the data show largely because the data are delayed. But the critical elements that determine whether or not market prices of homes are rising is essentially the issue of what is happening to home ownership. The underlying demand as you know has essentially gone down very sharply after the crisis. And it’s still in fact, the latest data that we currently have is that home ownership rates are still at the bottom of the recent decline. I‘m almost certain they have turned up and I am reasonably certain that the rise has generated a significant and important rise in home equity. Meaning the equity of homes which has basically moved a lot of underwater mortgages into positive ground. In fact, a good part of the seeming strength that we’re seeing in the economy very recently is coming from both the stock market and home prices. That is asset prices generally are underestimated with respect to how they impact the economy as a whole. And both home prices and stock prices have been very powerful for us this year.
Does he think what the Fed is doing is working?
- “I think that the best way of looking at the current period is to recognize that asset prices are what is creating a much larger element of support in here than most of the macro economic models have forecasted. Almost everybody assumed when payroll tax went up there was going to be a dent in consumer expenditures. It didn’t happen. It’s true that disposable income went down. but we forget that a significant part of economic activity is essentially the asset values of the economy. both home values, which have a very important. but almost as importantly are stock prices.”
- “well, I think it’s relative to everything else. the strong dollar depends to a large extent on what’s happening in Europe. i would put it the other way around, what’s happening to the euro. to the extent that the euro becomes significantly stronger the dollar will become weaker and vice versa. That is the key variable that will continue to grow.”
Regulatory Push against Banks
- “well, it’s a question what you’re expecting banks to do. the greater the tightness on banking — let me be more explicit. The higher the capital levels, which is really what it’s all about, the safer the system will lower the economic growth. And the issue has always been with a degree of intermediation, whether banking or nonbank institutions. it’s always been an issue of where is the optimum point. well, it’s very difficult to tell. Because there is no question that as you get to higher and higher leverage the ability of the economy to expand is actually increasing. However, there are consequences to that. It becomes unstable. So I would say that I would prefer to see a much higher level of capital in the banking and indeed in the financial system generally fully recognizing and accepting that economic growth will be less because of that but it will also be less volatile and less chances of significant economic contractions.”
Banks Too Big to Fail?
- “well, the the issue of too big to fail is the most important regulatory issue that there is. At the moment we are doing very little, if anything, to address that problem. My basic view is that we should not be supporting the banks the way we are. Because, look, if you look at the big banks you see a significant premium on what they’re paying for their liabilities relative to even the medium size and the smaller banks. And this is caused by the fact that everybody in the market is presuming in the next crisis none of these banks will be allowed to fail. If they’re not going to be allowed to fail you’re not going to lose your money on an adventure.”
Separate Commercial & Investment Banking?
- “No. Well, basically because if you look at the history of the United States and you look at the value added of finance & insurance it’s gone from a little over 2% of the GDP at the end of world war II to 8% now. This rise has been going on consistently. And what it is basically saying is finance is becoming an ever more important part in economic activity. remember, the income that is originated consolidated within the banking and the financial system. not because they’re trading with each other. but the the demand from the nonbanks, I should say the nonbanking communities, main street if you want to put it that way, depends increasingly on the quality and the nature of the financial services we are getting. It’s they who are causing the demand to rise. The system is getting increasingly more sophisticated as it needs to as the economy gets more complex. So breaking up the banks in that sense does not make sense. However, as I have said many times in the past I’m not in favor of breaking up the large banks, but if push comes to shove and there was no other way to eliminate the too big to fail problem, which is getting worse, not better, has not improved since the crisis began, I would be in favor of breaking up the banks. I hate very much to see that happen. but it’s less worse.”
The one data point he watches every morning
- “the yield on the 10-year note is still a great deal. What I actually look at before the markets open is obviously the futures. I look at what’s happening to bond markets in Europe. I look at basically what economic data comes out. But there’s no question if I don’t know what the 10-year note is doing I don’t feel I know what the structure of the money markets are doing.”
Bank of Japan
- “well, they’ve tried every conceivable policy that you can imagine to try to break the back of this deflation process, which is really going on since the market crash in 1989-1990. I think there’s a fundamental problem which exists in Japan which is really difficult to deal with. they’re doing the best they can. and that’s the fact that the population is aging, the labor force is going down. and it also means that investment in longer lived assets such as buildings are fairly soft. And the reason for that is buildings house people. If you have fewer people you have less building. And i think that is an overhang on these markets which we’re not taking into consideration. And one of the reasons why they’re having such difficult times there i can’t say i know the answer. But i do know what’s been done has not been working all that well”.
- “No, it is not…. I don’t think Dodd/Frank will actually be fully implemented.think for two reasons. I think the conceptual framework on which Dodd-Frank is constructed is faulty. In other words, it has the same characteristic of problems that are econometric models which are about the most sophisticated thing we had in 2008. All failed. The Fed’s very good model failed. IMF failed. JPMorgan’s model failed. They all failed. and Dodd-Frank has one of those aspects to it that reminds me of this – that it’s getting too much in the way of unexpected responses to what regulations were actually implemented. That tells you something is fundamentally wrong. And when you keep, the SEC keeps pulling back the regulations, you know that’s the problem.
Will Bernanke Stay on after 2014?
- “I would hope so. But I can fully understand if he’s had enough.”
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