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.
Baa-Aadab Baa-Mulahiza Hoshiyaar
This is how the Herald would announce the imminent arrival of a royal communique from a Mughal Emperor. The word Aadab means deep respect, the word Mulahiza means with utmost attention bordering on fear and Hoshiyaar means be very alert. The suffix Baa means “with”. So the herald’s call commanded the Emperor’s subjects to be very alert with deep respect, with utmost attention & trepidation.
Not being heralds, we cannot demand such attention. So we request readers to await the arrival of Bernanke’s statement on Tuesday, September 21. We hope readers concur with our assessment of Bernanke as the King of Markets at least for this market period. For those who don’t, Bernanke’s last Fed statement was on August 10 and his Jackson Hole speech was on August 27. Look at the market impact of these two statements:
- From August 9 close to August 26 close – Dow fell from 10,698 to 9,986 and the S&P 500 fell from 1,127 to 1,047.
- From August 26 close to September 17 close – Dow rose from 9,986 to 10,605 and S&P 500 rose from 1,047 to 1,125.
Is there any sensible investor who would not be alert, focused and await Bernanke’s next statement with respect bordering on trepidation? Is this why many risk assets such as Aussie-Yen, Euro and Euro-Yen reversed on Friday to close on their lows, as Brian Kelly of CNBC Fast Money noted on Friday afternoon? His colleagues, Guy Adami & Tim Seymour, warned of a downside move next week. These are smart professional traders and surely they have their own complex reasons for their predictions.
We are simple folk bordering on being simpleton. Naturally we prefer the simple explanation. Besides the market reaction to the last two Bernanke (Fed) statements, we remember both, the big up move in risk assets after the September 2007 Fed meeting and the big down move in risk assets after the October 2007 Fed meeting. We have no idea whether the Fed will signal an “easier stance” or whether they will signal a “not that much easier” stance. So we will approach next Tuesday’s Fed meeting with caution.
Gold, Currencies & Treasuries
The surprising event of the week was the intervention by Japan to stem the rise of the Yen against the Dollar. So far this has proved to be a short term event. The U.S. Dollar weakened against the risk currencies and the Treasury curve steepened. Gold and Silver continued their rally. Much of this action reversed at least for an afternoon on Friday. European CDS, especially those of the European periphery, widened this week. But risk assets took this in stride. This lends credence to our belief that the markets are looking ahead to what the Fed says next week.
US economy
This Thursday, the evening news programs on all networks led with the depressing fact that 1 in 7 Americans are now below the poverty line. Many of those who are above this terrible line are struggling with a lack of income. This we have felt for some time is the biggest problem for America and American families. Robert Shiller of Yale speaks (see clip 2 below) warns that we are on the brink of a possible downturn in confidence and he describes the depth of anger in America. This is not a positive development by any means and it does not portend well for the global economy.
EM Economies
This anger is beginning to create troubles for China and India. Given the depth of the anger against Chinese “manipulation” of their currency, Secretary of Treasury Tim Geithner had to face strong criticism in his Congressional briefing. In contrast, no one expressed any criticism of the actual manipulation of the Yen by Japan.
For those with access to Stratfor, we urge reading of their article Looking to 2012 – China’s Next Generation of Leaders. This article we feel is a required first step to begin understanding the next curve in US-China relations and the trajectory of China’s own progress. We were glad to see Stratfor echo our core belief that the PLA is getting more emphatic about its goals and its stake in China’s leadership. Not a positive development in our humble and often stated opinion.
Like China, America’s trade relations with India are getting more difficult. Ironically, the stakes may be higher because of the visit by President Obama to India in November. Media reports say that President Obama has directed his senior aides to ensure that his visit is not merely symbolic and that he wants to leave a transformative imprimatur the way President Clinton did in March 2000. President Obama wishes to assure India that the US considers India on par with China as a global player and as “an indispensable partner” of the United States.
But tactical issues are threatening to cloud this long term strategic vision. The Outsourcing issue has become front and center with the ban on Outsourcing by Ohio and the US legislation to hike H1-B and L-1 visa fees. On the US side, the provisions of the Nuclear Liability Bill in India have become a problem. This is a victim of the BP oil spill. The rhetoric and actions of the Obama Administration against BP has forced India to be much stiffer in potential liabilities against nuclear suppliers like GE. No Indian politician can survive if he or she agrees to a lower liability for nuclear accident by a US company when USA reacted the way it did against the BP oil spill.
These two issues make it difficult to get agreements on the bilateral investment treaty and the US-India nuclear accord, the two agreements that were to be the signature events of President Obama’s trip.
The tragedy is that these issues were deemed to be rather simple and an antidote to the Tyrannosaurs Rex of US-India issues, the US support for Pakistan and its tacit acceptance of cross-border terrorism from Pakistan. President Bush was deft, nuanced and skillful in building a warm relationship with India while maintaining American access in Pakistan. Unfortunately, President Obama has not exhibited any of these qualities. Strange but true. So a less than successful visit would not be positive for trade and investments relations.
For these and other reasons, we are not sanguine about global trade for 2011 and without robust global trade, we find it hard to remain complacent about the Global economy. We hope we are wrong, very wrong in our assessment.
Featured Videoclips
- Jan Hatzius on CNBC Power Lunch on Monday, September 13
- Robert Shiller on CNBC Squawk Box on Wednesday, September 15
- Doug Kass on CNBC Fast Money – Friday, September 17
- Jeffrey Gundlach on CNBC Power Lunch on Thursday, September 16
- Bernie Marcus on CNBC Squawk Box on Friday, September 17
1. Hatzius on Taxes – Jan Hatzius on CNBC Power Lunch (06:23 minute clip) – Monday, September 13
Jan Hatzius is the Chief Economist of Goldman Sachs. He has been more right than wrong and certainly far more right than most of his economist colleagues. Steve Liesman is a rational reporter and respected by his guests. This mutual respect makes this a good clip.
Thanks to CNBC, you can read a quick summary of the Hatzius comments at Ending Bush Tax Cuts Will Hurt Economy at cnbc.com. The CNBC chosen title is somewhat misleading as the excerpts below demonstrate:
- “We are still in a very, very gradual final demand recovery,….Final demand has only been up a little more than 1 percent over the last year….and that’s with fiscal stimulus…“.
- But, according to Hatzius, a double dip recession is only a 25-30% probability. He said that the higher probability outcome is “no recession and a very moderate, gradual, sluggish recovery“.
- Extending the Bush tax cuts for all income levels beyond year-end would add a “couple tenths” to US economic growth, while allowing the tax cuts to expire would result in “well over a percentage point” hit….If everything was allowed to expire,as is the current legislation at the end of this year, that would be a major impact...”
- Hatzius also said the Federal Reserve is likely to do more quantitative easing, either later this year or early next year, as the unemployment rate drifts higher. Goldman forecasts the unemployment rate will rise above 10 percent.
2. Post-Crisis Aftershocks – Robert Shiller on CNBC Squawk Box (06:58 minute clip) – Wednesday, September 15
We like listening to Robert Shiller, the well known Yale Professor who was prescient in calling the Housing bubble. He is rational, modest in his pronouncements and insightful in his comments. He is all three in this clip. The Squawk Box crew also rises to this occasion by asking sensible and sharp questions. Why can’t they do this with all guests?
- Becky Quick – …What do you think of the idea that mortgage applications are dropping even though rates are at historically low levels?
- Robert Shiller – Well, I think people are in a hesitant,… they are waiting and seeing, that’s why mortgage rates can stay so low and sales stay so low, right now, there is exceptional uncertainty about the outlook for home prices..because we were just ending a government support program and the question is will the downturn resume? But on the other hand mortgage rates are so low, that it is a suggestion that this might not be a bad time to buy.
- Quick – So, what will push it in one direction or the other? If you are worried that this could happen again, are you arguing for more government intervention?
- Shiller – I think we need more Government support for the economy, we are in a weak and a transitional state right now, you know we have had this sense of recovery since some time in 2009 and it is fading..and I think this is really a time for economic stimulus.
- Quick – You are not talking about a tax credit for home buyers, right?
- Shiller – It was never my proposal, somehow I have too much respect for free markets..advocating the government going in and supporting the buying of houses..this always rubbed me the wrong way..but we do need something, …we have to do something
- Joe Kernen – What kind of stimulus?And while we have you here, how about the tax cuts? Let them expire for everyone? or let them expire for 2%? You would stimulate , the government stimulating with one hand and sucking money out of the top 2% on the other hand?
- Shiller – .. I think we have a big issue with inequality in this country..and so increases in the higher level….
- Kernen laughs & interrupts – I can’t believe you can look me straight in the face and say that..
- Shiller – I can’t see you (a classic smiling Shiller response)
- Kernen (somewhat deflated) – well, ok…So if it is 40% of consumer spending, go ahead and let that go through which takes money out of the private sector and go ahead and let the government stimulate with that money they are taking, that makes sense?
- Shiller – I think that the real issue is jobs and we have to focus on creating jobs..the tax cuts are not the central issue..If we just forget them, the real issue is getting hiring programs back..things that we haven’t been focused enough on employment rate
- Kernen – Don’t businesses create jobs? …You don’t want government jobs per se right?
- Shiller – I do want government jobs too..but I think that we are at a brink of a possible downturn in confidence and the public anger at this widespread unemployment is actually building, it is not getting better although the economy is recovering, the anger is building. and that is a problem because that undermines confidence
- Carl Quintannia – What would say people are more angry about Robert? The lingering unemployment issue..or the wave of policy measures that are intended to address the unemployment issue? Because people are angry about both
- Shiller – I think that the …I can’t explain all of the political views that ..but the anger is about Jobs, Housing and the Rich..You have got bailouts that were perceived as favoring the rich, and here I am on the brink of losing my job, my house and this anger is very significant...and it is not something we can quantify and thats why I think economists underreport it..this is underlying hesitancy to spend that we see right now or the hesitancy to hire is related to the sense of anger & disorientation..
The emphasis in the above excerpts is ours. We think the point Prof. Shiller makes is extremely important. We try to to speak to as many people as we can and we can vouch for the sense of anger that is just bubbling under the calm countenance of people. This anger is not just at the things Prof.Shiller describes. It is at the direction of the country, at the stock market which is seen as a playground of the rich or the connected and at the exploding budget deficits.
As the above clip shows, CNBC Anchors seem utterly clueless about this anger. Perhaps that is only to be expected. CNBC Anchors get very high salaries, their jobs are protected by contracts and the Anchors are coddled by the network to the point their egos get sky high. No wonder every CNBC anchor and reporter (except a few like Santelli, Cramer & Kudlow) completely misses how their viewers feel. That goes double for the stock mutual fund managers, the spiritual brethren and ad-revenue masters of CNBC anchors. These equity-fee collectors have to tune out the anger, otherwise they could not play the perma-bulls they play on CNBC.
We add that this anger is across all levels of networth including the highest echelon represented by Mort Zuckerman and Bernie Marcus (see clip 5 below). So CNBC Squawk Box should not remain so sanguine about their own viewer base. Speaking personally, these days we often find ourselves gravitating towards Morning Joe on MSNBC rather than watch the perma-bull debates on Squawk Box.
3. Has the Market Topped? – Doug Kass on CNBC Fast Money Halftime Report (03:24 minute clip) – Friday, September 17
Doug Kass of Seebreeze Partners is a veteran investor. He has a knack of making calls on TV and many of his calls, especially the bullish ones, have proved to be right. This time, Mr. Kass is bearish.
A summary of his comments can be found at Doug Kass Starting to Short Market at cnbc.com. A couple of excerpts are below:
- Given the three things that largely impact the market—technicals, fundamentals and valuation placed on the fundamentals and sentiment—famed strategist Douglas Kass said Friday he’s starting to short the market.
- “I’m souring on all three,” explained Kass, founder and president of Seabreeze Partners. “In technical analysis, it’s not the level that’s important, it’s the manner to which the market moves to a level. This has been a weak one technically.”
He added “if you are bearish, this is exactly what you want to see, weak financials, lousy breadth, a small cabal of stocks like Salesforce, Apple and Amazon holding up and masking a deteriorating market and a few new highs on both the NYSE and Nasdaq.”
4. Bonds, Bubbles & Bears – Jeffrey Gundlach on CNBC Power Lunch (06:41 minute clip)– Thursday, September 16
Jeffrey Gundlach is a well-respected fixed income manager. We were glad to hear his views in this clip.
In this clip, Mr. Gundlach expresses his view that America has issued so much debt that a “polite default” is only a matter of time. Hear his own words:
- Gundlach – The problem is that the United States has $70 trillion of promises to pay on a future value if you put everything all together, the bonds, social security, medicare, growing stimulus packages and all that against a $14 trillion actually shrinking economy. Basically the country needs inflation to pay off that debt, but inflation is not happening for the time being. There is no inflation, there is deflationary forces. When I say a default, I am really talking about,….. a lot of people in this country need social security and they think they are going to get it, this is a big issue and it is not being addressed……………
- Caruso-Cabrera – When you say default, I immediately think, ugh, I shouldn’t buy Treasuries. Am I thinking incorrectly?
- Gundlach – Well, I am talking about all of the promises to pay. Treasury Bonds are obviously not going to default any time soon. What you could see though, when I say polite default, some mechanism, may be we tax maturities on Treasuries, may be for higher earners we increase tax rates for the payments on Treasury Bonds..something has to happen for $70 trillion of promises to pay and a $14 trillion dollar economy. And these are issues that aren’t for today, they are very important looking out for a 3-5 year investment horizon because policies must change in Washington to address the deficit and the promises to pay for the entitlement programs..
- Herera – How do you invest against that backdrop then? I know you lightened up significantly on Treasuries..where are you putting money to work given the environment you just outlined to us?
- Gundlach – Well, these ideas are not terribly helpful for the typical investment horizon..they are really long term ideas. Shorter term for real investment horizons, the reason that I sold down Treasuries below 2.50% on the 10-year is that the math doesn’t work..When you have a Treasury yielding 2.4%, even the rate goes down on QEII to say 2%, your return is only 6% & or so, not any good over a 1-year horizon. You are better off buying some credit that has the potential for higher returns than that, even if the economy remains a little bit weak, so we sold Treasuries to buy some below investment grade corporate bonds for the first time this year and our most significant weighting is in non-guaranteed mortgages which is really priced for an ongoing housing depression., but has the potential to return in the double-digits over the next couple of years we believe.
- Caruso-Cabrera – You recommend that for the novice investor, the average investor out there and how easy are those products to get? ….
- Gundlach – It is almost impossible for the individual investor to do that directly. They really have to go through funds and Investors should look at funds that really have the earning power those securities provide by looking at weightings portfolios have. …
Gundlach added that his funds have 55% of their portfolios in these securities and those securities would do pretty well if the economy gets better. He explained that these securities depend on housing rather than interest rates at this stage.
We commend Michelle Caruso Cabrera for asking the question about Individual Investors. But that allowed Mr. Gundlach to pitch his fund. We must also criticize Michelle and her partners Sue Herera & Tyler Mathisen for failing to ask very basic questions such as:
- How often do you publish your portfolio holdings? Industry norms require publishing every six months. That is ridiculous. Hear Mr. Gundlach boast about his returns since April 2010, less than 6 months ago. How can investors verify his holdings unless he publishes these at least monthly?
- Secondly, Mr. Gundlach said that he sold Treasuries when the 10-Year yielded 2.40%. But since then the 10-Year Treasury yield has backed up to 2.75%. Now if the 10-year Treasury yield drops to 2% (he clearly considers this to be a real probability) then investors would get close to 10% return, a healthy return that would beat the optimistic forecasts of most stock mutual fund managers. So we would have asked Mr. Gundlach whether the 10-year Treasury at 2.75% or the 30-Year Treasury at 3.90% should be attractive to an individual investor because of the double digit return possibility, their liquidity and tax-free status from state & local taxes.
Clearly none of the three CNBC anchors thought of asking these rather basic questions. That is because they are journalists who really know very little about investing. These veteran CNBC anchors have substantial networth themselves. So our basic question to Michelle, Sue & Tyler is “where have you CNBC Anchors invested your money?”
5. Bernie Marcus, Home Depot co-founder, on CNBC Squawk Box – Friday, September 17
In clip 2 above, we quoted Robert Shiller about anger in America. We opined that this anger is spread across people of all levels of networth. In this clip, you can see and hear the anger of a billionaire, a founder of a great American company. The comments of Mr. Marcus are in two clips:
A summary of his comments can be read at Geithner Needs ‘Reality TV Show’ at cnbc.com. A few excerpts from this summary are included below. But you have to watch the clips to witness his passion.
- “My solution is that you take a guy like Timothy Geithner and put him in a new reality show. It’s called ‘Timothy Geithner Does Small Business’, something like [the porn movie] ‘Debbie Does Dallas’ or another one from that popular porn site www.fulltube.xxx, and it ends up the same way,” said Marcus. ”Basically, what they’re doing to small business is very similar in this case [to what ‘Debbie’ did to Dallas.]”
- To play out his story, Marcus said Geithner would have to deal with the state, federal and local regulations that he contends stymie business, and then the public official may understand the challenges that small business people face.
- He said that George W. Bush started the spending, but “he’s a novice when it comes to this new guy. They write checks for $10 million the way I write checks for breakfast.”
- “Eventually [Rep.] Barney Frank [D-Mass.] is going to tell people who are on unemployment ‘You can have a house for $250,000, don’t worry about it because we’re going to finance it anyway.’ ”
- “This is where we’re going. And someone has to say ‘Stop, no more.’ These are two organizations that are basically not run business-like. They aren’t intelligent, they aren’t bright, that brought us to the brink of disaster.”
As we said, watch the clips to see his passion.
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