Editor’s Note: In this series of articles, we include important or interesting videoclips with our 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.
The week ended on a different note than it began. The front & back of this week reflected in a sense the turmoil that must be going on at the Fed. Taken together, we see that the Fed is the primary force behind the rallies in all risk assets in the world.
Monday 10:00 am was a pivotal moment or so we thought that day. That was when Bernanke said that “no actual operations have been conducted as a part of these tests.” Essentially, Mr. Bernanke told the markets that all talk about reverse repos or draining liquidity was just a test and that the liquidity would continue to flow as it has for the past several months.
This was the green signal for risk assets. The dollar instantly sold off, commodities rallied, stock market rallied 1% and the long treasuries rallied almost a point. Rick Santelli of CNBC called this as soon as it happened and told viewers that this was a green signal. It was Jim Bianco who astutely asked in his commentary “Did the Federal Reserve Ease on Monday?”
To quote Mr. Bianco “In essence this is a watered down version of an easing announcement…everything from gold to stocks took off after this announcement. If the Federal Reserve is offering free financing for a long time, why not take it and buy anything/everything?”
This is the most accurate description of the real fundamental behind the explosive rally in all risk assets.
Fast forward to Friday morning. An article by Krishna Guha in the Financial Times suggested that the Fed would change its wording about how long current low rates would last. This was the exact opposite of what Bernanke said on Monday morning. Naturally, the market action was also the exact reverse. Dollar strengthened, Commodities fell hard, Dow Jones fell by 100 points and long treasuries sold off. The 2 year Treasury yield rose above 1%, a clear reflection that the markets believed the Guha article.
There you are. The only real question in the markets is when and how the Bernanke Fed will drain liquidity. All risk assets in the world depend on this answer. This is the lesson of this week, we think.
That is why we wait for the Fed statement on November 4.
Bernanke & The Wolves
This is a battle that commenced in 2006 and it plays out the same way every year. This is a classic case of one being from Mars and the other from Venus.
Bernanke is a rational thinker and he, above all, pays attention to the fundamentals of the US Economy. In our opinion, he believes that the fundamentals of the economy drive asset class performance. This school of thought was clearly articulated by Eric Rosengren of the Boston Fed and by Prof. Anil Kashyap this week on CNBC. (See clips 2 & 3 below).
The performance money gang thinks very differently. They have a firm image of Bernanke as Helicopter Ben. They think Bernanke is weak and like wolves they feed on his dovishness. Every year since 2006, these financial wolves have kept selling the dollar short and marching commodities higher until Bernanke is forced to take a stand.
At some point, Bernanke realizes that rising inflation expectations from high oil, gold and base metal prices threaten his monetary policy and the US economy. Then Mr. Bernanke takes a stand.The financial wolves immediately get out of commodities, stocks and rush into long Treasuries.
This is what happened after the Fed meeting on October 31, 2007 & October 29, 2008. Recall that November 2007 & November 2008 were terrible for stocks and commodities but great for long Treasuries.
Clearly we do not mean to suggest that it is all Ben Bernanke. For some time it has been clear that there are two schools of thought at the Fed, the economy-focused school (see clips 2 & 3) and the pre-emptive tightening school. When Kohn & Dudley speak, we hear the first chorus and in the Warsh editorial in the WSJ, we hear the second group. In our naive and ignorant view, Bernanke seems to sing with one chorus and then the other, partly to keep his options open and, hopefully, to keep markets on edge.
So far, October 2009 is marching to the 2007/2008 tune. Which Bernanke will show up on November 4? On that will depend the fate of risk assets in November & December.
Mary Ann Bartels of BAC-Merrill Lynch wondered this week whether market seasonals may be backward? She compared the current rally to 1938 & 1975. She pointed out that both these years has great rallies (63%, 52% respectively) that began in March after a major bear market. These rallies peaked in November and corrected into January, a seasonally strong period.
Market Signals from Fidelity & CNBC?
Shorting the Dollar and Buying Emerging Markets has been this market’s quasi-religious faith for the past 6 months. Markets do not have referees who blow a whistle to announce the end of the game. But, one can often hear bells ringing.
Last week, academician Niall Ferguson of Harvard-Oxford put forth his thesis that the US Dollar would fall by 20% against the Euro in the next 5 years. This week, Paul Krugman launched an attack on China for keeping its currency undervalued against the Dollar in the New York Times. CNBC devoted one whole day this week to its Sense of the Dollar special.
This week, Fidelity launched a Foreign Exchange Trading Platform for its brokerage clients. In his CNBC interview, Mr. Burton of Fidelity said that their customers can now buy 8 foreign currencies in a regular brokerage account (see clip 8 below). Brokerage Firms have a nearly perfect record of providing new capabilities to their customers at the tail end of the underlying trend.
This Friday, CNBC launched a new show called Trading The Globe. This show is meant to uncover the mysteries of international investing and focuses on emerging markets. This week Fidelity launched its International Trading platform to allow its customers to buy & sell international stocks in 12 markets in their brokerage accounts.
Are these bells that we hear? But for whom do they toll? For an upturn in the Dollar or for underperformance by Emerging Markets?
Note: Ours is simply a poi
nt about market signals from media decisions or announcements. We are delighted to see Tim Seymour, a hedge fund manager, host CNBC’s new show. This is a major step for CNBC and us viewers. We wish Mr. Seymour good luck and hope to benefit from his experience. We also appreciate the new capabilities launched by Fidelity.
The King of Crowded Trades
Dennis Gartman said on Friday that shorting the dollar was the most overcrowded trade. It is seldom that we have the courage to disagree with Mr. Gartman. There is no doubt that dollar is extremely oversold and it is crowded short.
But it is recognized as an overcrowded trade. Laszlo Birinyi said this week that he is beginning to see the relative strength of Dollar ETFs turn up (see clip 1 below). So the mere fact that shorting the dollar is recognized as a crowded trade makes it unfit to be crowned as the King of Crowded Trades.
We have another candidate for this throne. The Certainty of Future High Inflation, or Future HyperInflation as many call it. Belief in resurgence of inflation has become an article of faith today. This belief is supported by many facts, the ridiculously high deficits, the massive & unstoppable supply of US Treasuries to fund these deficits. You hear this belief on CNBC several times a day. This army of believers has great generals, Julian Robertson, David Einhorn to name a couple. They have reportedly put on huge positions that create puts on long Treasuries after a few years.
This conviction in future high inflation in America is even greater than the conviction in China’s secular growth.
Frankly, we are not believers. We are persuaded by the rational arguments of David Rosenberg of Gluskin-Sheff, Bill Gross-Tony Crescenzi of Pimco, Peter Fisher of Blackrock (see clip 4 below) and Jan Hatzius of Goldman Sachs (see clip 5 below). They see inflation coming down through 2010.
Like David Rosenberg, we see deflation in the real economy, in incomes of American families and in prices of most non-commodity products. We hear Christina Romer tell the Congress that the current stimulus would not add anything to the American economy after mid-2010 and that unemployment would remain near 10% well into 2010.
The only inflation we see is in Asset Prices and perhaps in Television anchor salaries. Is that why CNBC Anchors see inflation everywhere?
What protects portfolios against bursting of asset price bubbles? The same investment that benefits from deflation and unemployment. 30-Year US Treasuries!
We were relieved to hear CNBC’s Fast Money take shots against Treasuries on Friday. They used to trash Treasuries virtually every week. Then they stopped. Perhaps, because they simply could not tolerate the rally. Now, Joe Terranova and the gang are back. It would be perfect for Treasuries to have a bad auction next week and for 10-year to break the 3.50% level ahead of the Fed meeting. Then, the Terranova gang would engage in a whoop-dedo celebration. How we miss those Fast Money anti-Treasury rants from June 2009?
30-Year Treasuries for anyone? And just before the Fed meeting on November 4?
This week we feature the following clips:
1. Laszlo Birinyi as Co-Host of Squawk On The Street – Thursday, October 22
Mr. Birinyi is a highly respected market analyst. He is well known for his quantitative and unbiased analysis of what the markets are saying. To hear him speak for an hour is a rare treat.
Laszlo makes the profoundly simple observation that there is no stronger force in the markets than momentum and you cannot forecast when momentum will end – it ends when it ends. He asks how can you forecast this market for which there is no precedent. This we feel is the important takeaway. To us, it means that he is a bull as long as and only as long as the momentum in the markets is strong and sustained.
Mr. Birinyi is no longer as enamored of Financials as he was in September 2009. He is also cutting back on energy. When asked about the Dollar, Laszlo observed that Dollar-ETFs have begun to show some relative strength.
His interview is in 3 clips;
Watch these clips.
2. Fed In The Cape – Erin Rosengren, President of the Boston Fed with Steve Liesman – Thursday, October 22 – 9:35 am
Mr. Rosengren expects a strong 3rd & 4th Quarter but what happens after that is a question. Does the private sector take over from the Fed & Government? The Fed needs to be more certain about the economy before it begins to take the stimulus away.
Mr. Rosengren also discussed how the Dollar plays into the Federal Reserve policy:
3. Pressure to Hike Rates – Anil Kashyap, Professor, University of Chicago with Steve Liesman – Monday, October 19 – 10:10 am
Professor Kashyap is a noted expert in Fed policy. He was asked to comment about the Barrons’ cover story which argued that it was time to raise rates.
- Kashyap’s response – “I don’t know whose economy they are looking at, but there is zero chance that the Fed is gonna raise rates. It doesn’t make any sense to do so right now”.
- Liesman – “Why should they stay at zero right now?”
Kashyap – “Because the economy is severely depressed and there is no inflationary pressure”
Liesman asked him why the reverse repo tests right now:
- Kashyap – “getting the plumbing right in the background is a good idea when the time comes. These things are going to be one of the tools they will use to get rid of the massive number of excess reserves that are in there”
Liesman then asked him about the dollar and the need to raise rates to support the dollar:
- Kashyap – “That be a second order consideration. you got to worry about the strength of the economy and inflation, the dollar plays one role in that and I think they want the market to determine the strength of the dollar and they are not going to act on it”.
What candor and what clarity? Essentially to heck with the dollar!
This interview was 10 minutes after the Bernanke statement on Monday at 10 am. Are you surprised that the performance gang crushed the dollar and rallied commodities & stocks on Monday?
A long time ago we were taught about the Uncertainty Principle. It seems to apply here. The Fed & Prof. Kashyap say that the market forces should determine the dollar. They do not seem to realize that the Fed is the dominant player in the market on this topic. The Fed statements are the forces that persuade the performance gang to act in the direction suggested by the Fed statements.
With respect to Prof. Kashyap, his friends at the Fed create the market prices that the Fed then circularly relies on. We know the Fed understands this elemental principle. We know that they understand that the Bernanke Fed is itself creating the weak dollar. Yet, the Fed and their advisors like Kashyap keep feeding the anti-dollar Taleban because they think they can control them at the right time.
We wish that the Fed and Prof. Kashyap would spend some time studying the Taleban in Pakistan. The Pakistani Generals are now realizing that creating the Taleban to support their short term tactical goals was easy but controlling the Taleban after it becomes strong is extremely difficult.
The Financial Taleban are much faster, much more ruthless and posses far greater capital than the Pakistani Taleban. We hope that the Bernanke Fed understands that it is vital to crush the anti-dollar mission of the performance money gang now before it gets out of hand.
4. What’s Next for the Fed? – Peter Fisher of BlackRock with Steve Liesman – Thursday, October 22 – 3:55 pm
Peter Fisher, the Co-Head of Fixed Income at BlackRock needs no introduction to our readers. When Mr.Fisher speaks, we listen.
- Liesman – “Peter, let us talk about exit strategies. Is the Fed ready to do it? Is the Fed able to do it?”
Fisher – “Yes, the Fed is certainly ready. A lot of its programs are self-liquidating….The asset purchase programs, it is not obvious how the Fed gets out of those. But I think the bigger problem the Fed faces isn’t technical. The challenge the Fed is going to have is to set its relationship with the Banking system. How is its balance sheet going to interact with credit creation? …We sort of have thrown all the rules to the wind and now we have all these programs up and running. I don’t think the Fed can go again to the way it was.”
A few minutes later, CNBC’s equity reporter Bob Pisani asks a question:
- Pisani – “Lets move away from Fed policy and talk about what investors are doing. Investors are so far this year are shunning the US stock market. They put zero money into stock mutual funds on a net basis and they are continuing to pile into Bond mutual funds even as the stock market hits new highs. What would you tell investors who continue to put money into Bond funds as if they are not ever going to go down?”
Watch this clip and hear the pain in Pisani’s voice. This is the real lament of CNBC anchors & reporters. Here they spend all this time promoting the stock market and their ungrateful viewers do not listen to their wisdom. The viewers keep investing in bonds. CNBC anchors take this as a personal affront. They just don’t get that they are in the service business and they should give their viewers the Bond coverage the viewers want.
Sorry, CNBC Anchors. This is not the 1980s & 1990s and these are not your old viewers who would listen to you prattle with stock mutual fund managers about the virtues of buy & hold mutual fund investing. These are the new, wizened viewers. They are not going to change. Perhaps, you should.
Mr. Fisher provides a succinct answer to Pisani’s question:
- Fisher – “Well, some day bond funds will go down. So let us be clear about that. I think there is an asset allocation going on and investors are thinking hard about the right mix of equities and bonds. Over the last years, people have been very overweight equities, many baby boomers like myself had a very big allocation to equities. I think, the crisis has been a wake up call to think harder. It does not mean you have zero in equities. It just means you are rebalancing into bonds. I think that is what is going on in the mutual fund flows.”
Steve Liesman then spoke about the end of Fed’s buyback of Treasuries & mortgages and asked Fisher what he was doing about his portfolios.
- Fisher – “Portfolio Managers at BlackRock have been shying away , are underweight mortgages, agency mortgages. There are other things that are a little more attractive. We are a little nervous about how things unfold, how the Fed will behave in the future…. there is a lot of uncertainty about that...Treasuries, we are actually, that’s a tougher question in a sense, because there is uncertainty about the path of real rates and where inflation is going.. real rates – if inflation is going to be zero, then 3.5% on some of your portfolio may be attractive.”
So now both BlackRock & Pimco are bullish on 10-year Treasuries.
5. Goldman’s Economic Forecast – Jan Hatzius with Steve Liesman – Tuesday, October 20 – 1:35 pm
Mr. Hatzius, chief US Economist at Goldman Sachs, was awarded the Lawrence Klein award for the most accurate forecast. He is a very smart economist and we urge readers to watch this clip.
According to this clip,
- Mr. Hatzius expects that growth contributions from inventories and federal stimulus will peter out by the second half of 2010,
- He does not think inflation is a significant threat, at least for next few years,
- He predicts monetary tightening is highly unlikely before the end of 2010,
- He expects treasury yields to come down further,
- He expects 10-year note yields to continue their slide towards 3% over the next few months as final demand remains sluggish and disinflation continues.
So BlackRock, Goldman Sachs, Pimco & David Rosenberg are all on one side, the side that is bullish on Treasuries. On the other side, you have CNBC Fast Money, Jim Cramer, Larry Kudlow, almost all CNBC anchors and their equity mutual fund manager guests.
Which side should you be on? That is for you to decide.
6. Dick Bove’s flip-flop on Wells Fargo – Wednesday October 21, 2009 – 8:05 am & 3:20 pm
Dick Bove, financial strategist at Rochdale Securities, is a regular on CNBC and other Financial networks. On Wednesday morning, after the release of its earnings, Mr. Bove was positive on Wells Fargo.
Later in the day, at 3:20 pm as we recall, Mr. Bove downgraded Wells Fargo to a Sell. This caused a fast and furious sell off in Bank stocks and in the broad market in the last 40 minutes of trading on Wednesday.
Mr. Bove has been criticized for changing his mind so quickly and without any apparent trigger. We wonder whether the criticism is justified. The error in our judgment was in his morning comments. It seems as if Mr. Bove spoke positively without analyzing the earnings in detail. That may be as much the fault of financial networks who demand instant comments after the release of earnings.
May be we are wrong, but, in our opinion, it took courage on Mr. Bove’s part to correct his mistake and to downgrade the stock as soon as he changed his mind. He could have waited for a few days and then made his downgrade. That might have been cautious and more protective of his reputation but it would have been unethical and injurious to market’s integrity.
But, as we said, we could be wrong.
7. Richard Bernstein, Dennis Gartman & David Rosenberg on Squawk Box – Monday, October 19 – 8:05 am
Three luminaries together in one clip. What can we say except Watch this clip.
8. Fidelity Expands Global Platform – James Burton, President, Fidelity Retail Brokerage with Mark Haines – Thursday, October 22 – 10:31 am
Fidelity is an advertiser on CNBC. So we assume it is obligatory for CNBC to accommodate major product announcements by a significant advertiser like Fidelity. We did not mind because this is an interesting announcement.
Mr. Burton announced that Fidelity now allows its brokerage customers to buy and sell Foreign currencies (about 12 of them) in their regular brokerage accounts. This might be the first such capability for individual investors. As an example, Mr. Burton said that customers can now buy and hold say the Australian Dollar in their accounts.
But Mr. Burton did not say and Mr. Haines did not ask whether Fidelity pays its customers the overnight rate for holding the Australian Dollar or other currencies. We seriously doubt that they do. In fact, we could not find any mention of the daily interest on Fidelity’s description of the FX platform on their website.
If true, this is a major deficiency and an injurious one to Fidelity’s customers. When you hold cash, you get interest on your cash regardless of how tiny it might be. When hedge funds buy and hold the Australian Dollar or other currencies in their Prime Brokerage accounts, they are paid an interest on their currency holdings.
So, if Fidelity does not pay such interest, they are hurting their individual customers. In other words, hedge funds get interest on their currencies while individuals do not?
In contrast, FXA, the Australian Currency ETF, has a yield of 2.54%. So a Fidelity Customer who invests say $10,000 in the Australian Dollar at Fidelity gets zero interest but an investor who invests $10,000 in FXA gets an annual interest of $254. Both get the appreciation or depreciation of the Australian Dollar. As we said, this would be a major deficiency of the Fidelity Platform if Fidelity does not pay interest on Foreign currency positions.
We are not as concerned about Fidelity as we are about Mr. Haines & CNBC. As CNBC viewers, we are concerned that Mark Haines did not ask this very simple question of Mr. Burton. He merely allowed Mr. Burton to wax eloquently about Fidelity’s new product announcement. As a result, a journalist’s interview became a product commercial.
We do not mean to suggest that Mr. Haines was unethical. We have enough respect for his orneriness (if that is a word) to think that. But, in our opinion, his questioning showed that he has never invested in foreign currencies. In this case, his lack of knowledge became a detriment to CNBC’s viewers.
This is our persistent point about CNBC’s journalist anchors. They cut their teeth in the 1990s when investing meant buying & holding stock mutual funds or a few stocks. Today, CNBC’s viewers trade stocks, bonds, commodities and foreign currencies. But CNBC’s anchors remain uneducated about such investments.
9. Neel Kashkari with John Harwood – Tuesday, October 20
Neel Kashkari needs no introduction to American investors. This young ex-Goldman man was put in charge of the $700 billion TARP program a year ago. He was vilified by the media and abused by the US Congress during his testimony.
John Harwood of CNBC sat with Neel Kashkari to discuss his views. We were impressed. This series of clips is a must-watch in our opinion.:
We were appalled at the treatment meted out to Neel Kashkari by Representatives Kucinich & Cummings during his testimony to their committee. We felt the attacks were brutal and racially tinged. That is why we titled our article Is Kashkari a Chump Or Was Congressman Cummings Abusive?
10. Erin Burnett’s Series on Investing in Iraq
Erin Burnett visited Iraq with a group of institutional investors a couple of weeks ago. Her coverage of the opportunities in Iraq was shown in a series of clips all week on her shows. All 9 clips are worth watching. These include 2 interviews with General Petraeus. We include a couple below as illustrations of her work:
- Water in the Desert – Tuesday, October 20, 2009 – 2:28 pm
- Investing in Iraq – Tuesday, October 20, 2009 – 9:44 am
We commend Ms. Burnett for the breadth of her coverage. Her natural optimism, enthusiasm and passion for such international subjects come through vividly in the clips.
We must confess to our own opinions about America’s venture in to Iraq. Simply put, we think Iraq has a good chance of being recognized by history as one of America’s most successful foreign policy ventures. That does not mean we excuse the rush into that war or the utter lack of post-war planning. It was an imperialist invasion in some ways. But, history might judge it as a means to finally allowing the Iraqis to become a modern country and perhaps becoming a catalyst for change in the middle east.
For analysis and details on why we feel so, take a look at 3 of our articles on Iraq:
- Iraq & Tibet – Strategic Will of The American & Chinese People – July 26, 2008
- Iraq Is ASuccess While Tibet Remains A Problem -MacroViewpoints & Charles Krauthammer – February 14, 2009
- When America Withdraws from Iraq? What Then? – July 18, 2009
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