We were impressed by the sheer simplicity and the directness of the question. The answer is also clear. The action on Wednesday, Thursday & Friday seemed to mirror Kotick’s indicators. 2. Heavy Hitters Weigh In – William Gross, Robert Doll & Daniel Tischman on Squawk Box – Monday, September 21 – 8:43 am Joe Kernen makes a point to ask and Bill Gross makes a point to state that he likes 30-Year Treasuries at 4.2% and 10-Year Treasuries at 3.50%. So Mr. Gross laid to rest the questions we had raised in our article of last week (see clip 6 of our article Interesting Videoclips of the Week (September 13 – September 19)). If you do not wish to watch these clips, you could read the CNBC Exclusive Transcript on www.cnbc.com. America’s greatest advantage is that hardly any nation in the world would prefer China to America. Mr. Atteberry is a believer in inflation. He thinks that the 10-Year Treasury yields will go to 6% in five years. Unlike many managers who come on CNBC, Mr. Atteberry is consistent. He does not like corporate bonds either. As he explains, if treasury yields rise, then so will corporate bond yields. His recommendation is that investors keep their maturities very short. As we said, this puts the housing recovery in a true perspective. Watch this clip.
Editor’s Note: In this series of articles, we include important or interesting videoclips with brief comments. Our Web Software does not permit embedding of the clips into our articles. So we shall have to be content to include the links to the actual videoclips. We are very happy with the tremendous response from readers to this series of articles. We thank them sincerely and profusely.
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.
Bernanke & The Fed Statement on Wednesday, September 23
1997 was a dream year for long suffering Michigan fans like us. The story of Michigan’s national championship was written by their defense. It was what we called a “learning” defense. Besides the talent, it was a smart defense that became better as the game went on and it learned what the opposing offense was trying to do. Then, the Michigan defense dominated in the fourth quarter.
Bernanke has been a learning Fed Chairman. In 2006, he was raw and made mistakes. He came in promising transparency and that was nearly his undoing.
He confused transparency with showing his hand. He was taught this lesson in September 2007, when he did what he thought was the right thing to do. He cut rates more than the market expected and the performance money gang penalized him. They mistook him for Helicopter Ben again and they took risk assets on a wild ride. Bernanke understood the lesson and became hawkish in the next meeting on October 31, 2007. The surprised performance money gang bolted out of risk assets and ran into long Treasuries. (see last week’s article for details).
This week Chairman Bernanke showed us that he has learned his lesson. This was no naively transparent Bernanke. This was the cold, professional Bernanke who cut up the performance money gang so skillfully they did not even know it for about 30 minutes. The Fed statement on Wednesday, September 23, sounded dovish and these momentum guys rallied for about 30 minutes and then they woke up.
Bernanke had given a bit of a warning the evening before. He let it leak out that the Fed was speaking to dealers about draining liquidity via a technical process called Reverse Repos. This may be why the markets did not rally before the Fed statement. Then Bernanke issued what most people assumed was a dovish statement. It was. But in this dovish statement, the Fed said softly that it was ending its Treasury buyback in October and that they were slowing down the pace of their MBS buying,
Bernanke spoke softly and stuck a knife in the gut of momentum players who expected continued liquidity from the Fed. The soft tone fooled them for about 30 minutes. Then they sold and sold creating what technicians called an Outside Reversal in stocks, Oil & Commodities on Wednesday.
The astute James Bianco had said (in an earlier CNBC interview), that the Fed now employs a slight of hand. They issue a benign sounding statement on Fed day. But a day or so later, they make another statement about their intent. This is exactly what the Bernanke Fed did this week.
They spoke softly on Fed day. A day later, the Fed released a tough editorial by Fed Member Kevin Warsh that was to be published on Friday morning. This was a no-nonsense Fed statement that promised tough and forceful action. In another slight of hand, this appeared to be a statement by a solitary Fed member and not by the Chairman, Ben Bernanke. This led the Fed watchers and CNBC Anchors to wonder whether there was a dissension at the Fed. Hogwash, we say.
This is no longer the naive transparency preaching Bernanke. This was a smart, deft Bernanke who created doubt and fear among the momentum speculators. This was a “Speech is given to man to conceal his thoughts” Bernanke who understands that fear is the best antidote to speculation. (see our June 20 article Bernanke-Greenspan, Bush-Obama & An 18th Century French Diplomat)
As we said, Bernanke has been a learning Chairman and he has now become the master. When the time comes to drain liquidity, when the time comes to end programs and when, finally, the time comes to raise interest rates, we are confident that Bernanke will act with force and with guile.
The Fed & America’s monetary policy are in good hands.
Treasury Rally
Rick Santelli kept pointing out to confused CNBC anchors that the only asset to retain its rally on Fed afternoon was the Treasury market. Steve Liesman kept pointing out to skeptical CNBC Anchors that the 30 year Treasury Bond began rallying in earnest a few weeks ago when the Fed announced it was not renewing its Treasury Buy Back program. But that fell on deaf ears and all week we heard from CNBC was how market rates were going up because of future inflation.
On Thursday, September 17, Jim Cramer had issued a Sell Treasuries call with great fanfare on his Mad Money program. The next day, Larry Kudlow had firmly backed this Sell Treasuries call. Cramer & Kudlow reissued their Sell Treasuries call this week both before and after the Fed meeting. This emboldened committed anti-Treasury jihadists like Sue Herrera to highlight the Sell Treasuries shrap* all week. Then on Friday, Ms. Herrera woke up and smelled the 30-year Treasury Bond rallying by more than one point.
Frankly, we hope that CNBC Anchors continue to sneer at long Treasuries and shout warnings about a huge prospective rise in interest rates in the future. The Treasury market keeps laughing at these people and keeps rallying.
The fear of future inflation has led many performance managers to build up large positions in what is called a curve steepener – Buying the 2 year Treasury Note & Shorting the 30-Year Treasury Bond is probably the most popular example of this trade. The Warsh editorial essentially knifed the holders of this trade. The 2 Year Treasury Note sold off and the 30-Year Treasury Bond rallied on Friday probably due to unwinding of a portion of this trade.
In our comments last week about Cramer’s Sell Treasuries call, we had noted our own empirical observations that a rise in Treasury yields in October is followed by a sharp decline in November. We were relived to see that a major Wall Street Firm come out with its 4Qtr Seasonal Bias Model which said “yields historically rise through October before beginning a sharp rally starting in November”.
This week, one of our old articles entered this Blog’s Top 10 Most Popular Articles list. The arti
cle titled, Mo-Force is On Board the Deflation Wagon, was written on October 4, 2008, a couple of weeks before the start of the huge Treasury rally in November 2008. This article wondered whether big performance money had begun buying Treasuries because of their fears about deflation. Over the past few weeks, we noticed readership of this old article grow steadily. This week, the steady rise in viewer hits enabled this article to get to the 9th spot in viewer hits since inception.
We are intrigued by this development. Does this portend another leg of the Treasury Rally? We will wait and see.
A Shout Out
Finally, we need to give a shout out to Steve Cortes of CNBC Fast Money. In the last week of August, Mr. Cortes had predicted on Fast Money that SPY, the S&P 500 ETF, and TLT, the 20-year plus Treasuries ETF, would meet around 100. To put it more clearly, Mr. Cortes had predicted that SPY would fall from its level around 105-107 to 100 and TLT would rise from its level around 95-96 to 100. Will this prediction come true? We shall know soon.
We appreciated this interesting prediction. Unfortunately, Mr. Cortes failed to realize that he was committing the unpardonable sin of being bullish about Treasuries on Fast Money. He has not been seen on Fast Money’s four person “trading desk” since the return of Anchor Melissa Lee in early September. Our loss, we lament!
* Shrap is the polar opposite of Mantra. Mantra is a benevolent invocation while Shrap is a malicious invocation intended to cause damage.
This week, we feature the following clips:
1. Pausing for Perspective – Jordan Kotick with Maria Bartiromo – Wednesday, September 23 – 3:28 pm
Jordan Kotick has had a hot hand all summer and so we were interested in hearing his views. Mr. Kotick talks about South American markets which according to him are the global leaders. Then he discusses currencies. His general outlook is one of a pause in the up trend. Then Maria Bartiromo asks the real question:
Near the end of this clip, Doll and Gross discuss their views about the concurrent rally in risk assets like stocks, commodities and anti-risk assets like Treasuries. Bob Doll says that the Treasury rally will fail and stocks will continue to go up. In response, Bill Gross says his views are just the opposite.
There are two more clips of this terrific trio of guests:
3. Fed Leaves Rates Unchanged – Bill Gross, Ken Volpert & Ken Heebner with Erin Burnett & Steve Liesman – Wednesday September 23 – 2:15 pm
This is a terrific segment. Erin Burnett invites Bill Gross & Ken Volpert, the two biggest bond managers in the world and Ken Heebner, a great stock manager to give their views immediately after the release of the Fed Statement. Watch this clip.
Bill Gross takes this opportunity to again state that he finds the 30-Year Treasury at 4.20% and the 10-Year Treasury at 3.50% attractive. He says we could see a bull flattener in Treasuries – yields on 30-Year Treasuries & 10-Year Treasuries could come down more steeply and the spread between the 30-year Treasury yield & the 2-year Treasury yield could narrow. He also tells Erin Burnett that, in his opinion, deflation is the greater risk.
Erin Burnett seems surprised. Why? See the next clip.
4. Julian Robertson with Erin Burnett of StreetSigns – Thursday, September 24
This is the most interesting interview of the week. Julian Robertson is the legendary founder and manager of the Tiger Fund. This interview is in four different clips:
Unlike Bill Gross, Julian Robertson thinks inflation is the bigger risk. Unlike Bill Gross, Julian Robertson dislikes long maturity Treasury Bonds. He says that “I am not so berserk about shorting stocks as I am about shorting bonds”.
Our memory is a bit hazy and we cannot remember the specific year in the 1990s, in which Julian Robertson called the Ten Year Japanese Government Bond (“JGB”) the greatest Short Opportunity in the world. Like US Treasuries today, shorting 10 Year JGBs was a very popular trade among smart macro managers and they described the opportunity in glowing terms like “Short of the century”. This trade never worked out for any of the brilliant minds that advocated it.
In our experience, people tend to make the same type of mistake again and again but with in a different environment. Mr. Robertson says in his interview that there are similarities with today’s USA and Japan. Yet, he puts on the same trade in the USA (shorting long maturity US Government Bonds) that failed in Japan in the 1990s.
Robertson’s big trade of 2008 was a curve steepener – Buying the short maturity Treasuries & Shorting the long maturity Treasuries. His thesis was inflation. Mr. Robertson turned out to be totally wrong last year. But, as he said to Erin Burnett, the trade did not lose him money because of the spectacular rally in short maturity treasuries.
This is the real talent of great Hedge Fund managers like Julian Robertson. They structure their trades very well and they manage their risk extremely well. Therefore, they do not get hurt even when they prove to be totally wrong in their outlook. They make huge amounts of money when they are right but lose little when they are wrong.
In contrast, inexperienced managers and many individual investors commit the cardinal sin of not managing their risk. As a result, they make little when they are right and lose a ton when they are wrong.
Robertson’s Armageddon Scenario
Mr. Robertson discusses an Armageddon scenario caused by a refusal by China & Japan to buy Treasury Bonds. In such a scenario, he thinks that US Inflation could go to 20% and US interest rates could go to 20%.
We think he is wrong. Our reading of American History suggests that America would behave very differently. Consider how America dealt with the Bretton Woods system. The Bretton Woods system, established in July 1944, was a monetary and an exchange rate system. Over the next three decades, the system became more and more onerous to America and especially to its politicians. So, President Nixon abruptly terminated the Bretton Woods system in 1971 and, in essence, canceled America’s obligations under that system.
The current system is often described as Bretton Woods II. If and when it fails, America will act unilaterally to end it. In other words, no American President will tolerate extreme inflation and extreme interest rate increases that result from actions from China and/or Japan. Instead, in our opinion, America would essentially cancel its debts to such offending nations unilaterally. America would unilaterally declare a lower value for the massive holdings of securities held by China, Japan et al and/or stop paying interest and/or principal.
This is the way America behaved in 1971 and before that. Nations like China, Japan and others understand that they are playing in the American Financial System and they have accepted the inherent risks with open eyes.
This is why we do not believe that China or Japan will ever create the risk of the Armageddon that Julian Robertson describes. This will remain so as long as America remains the overwhelmingly dominant military power in the world. China understands this with great clarity. This is why China is proceeding on two fronts:
5. Stop Trading, Listen to Cramer– Jim Cramer with Erin Burnett – Thursday, September 24 – 2:45 pm
Jim Cramer celebrates the “shorting bonds” trade of Julian Robertson and restates his opinion that the 10-Year Treasury is the most overvalued security of all.
Erin Burnett has clearly chosen to go with Jim Cramer, apparently her best friend at CNBC, and go against Bill Gross, her most frequent guest on CNBC. We are not sure this is a winning bet for her.
6. Will Interest Rates Soar to 20% – A panel discussion with Erin Burnett – Thursday, September 24 – 2:16 pm
This is a much more balanced discussion of Julian Robertson’s Armageddon scenario. The panelists are Mark Zandy, economist at Moody’s, David Lutz of Stifel Nicolaus and Zane Brown of Lord Abbett.
7. Thomas Attebery on PowerLunch – Wednesday, September 23 –
Thomas Atteberry of First Pacific advisors is Morningstar’s reigning Fixed Income Manager of the Year. He is interviewed by the four person Power Lunch Anchor Team. The interview is in two clips:
8. Housing Market Moves – Diana Olick of CNBC with Maria Bartiromo – Thursday, September 24 – 4:34 pm
Diana Olick is CNBC’s Housing reporter and a favorite of ours for her knowledge, honesty and courage. In this clip, her graphics tell us a different story of the recovery in housing than what the bulls tell us. Specifically, Diana breaks down the new home sales by price points:
9. President Luiz Inacio Lula da Silva of Brazil with Maria Bartiromo –
Brazil is one of the most important economies in the world. It is an agricultural superpower and a major exporter of commodities. President Lula is an articulate leader. We encourage readers to listen to his three-part interview with Maria Bartiromo:
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Interesting Videoclips of the Week (September 20 – September 26)
