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.
What a fall has it been?
On Wednesday, ADP’s number of private jobs created in May came in at 38,000, a ridiculously low number. It shocked the markets. But, based on ADP’s rather dismal track record, the smart play would have been to play for a more upbeat number on Friday or so said the smart traders on CNBC Fast Money. The actual Non Farm Payroll number came in at 54,000, a horrific figure. It shocked everyone, except perhaps Rick Santelli who predicted 55,000.
This was the final dismal number of the week and it capped off a string of worse than expected data. When we left for a extended trip on April 15, the outlook for the global economy was sunny and strong. That was not just our observation but that of ECRI’s Lakshman Achuthan. But on Friday, June 3, Lakshman (a celebrated name for about 4,500 years) told MSNBC’s Tom Roberts that, we should not have expected the growth in employment to continue. Why? Because “only twice in the last decade, we have had the kind of job growth we have had from February to April, of 200,000+….and then it throttled back. This time around, it seems to be no different”.
Did Mr. Achuthan (another celebrated name) use this wisdom to predict a dismal payroll number? We doubt it. Does this serve as a demonstration to CNBC’s Economics “Professor” Steve Liesman that economists mainly serve to explain what happened before?
What about the future? Mr. Achuthan said “…when we look at forward looking indicators not only for the US but for the global economy, we have a global industrial downturn…the US won’t escape it, China won’t escape it, Europe won’t escape it…..we are all along for the ride…”
Then the final declaration – “This is not a soft patch, this is going to be something that sticks with us in to the fall…we should prepare for it…being forewarned is forearmed…” And he flashed a big smile as if he was letting us in his secret. But,
Isn’t This Deja Vue All Over Again?
With apologies to Yogi Berra, of course. We saw this in 2008 and in 2010. Chairman Bernanke succeeds brilliantly in propelling commodity prices to new moons. The price of essential commodities empties the pockets of the vast majority of people in the US and in the world. Couple this with stagnant wages and you create an economic contraction for the majority of people. Why does it surprise anyone that such explosive rallies in commodities lead to economic slowdown?
Why? Because Chairman Bernanke and his cohorts around the world have convinced themselves that high commodity prices are equivalent to strong growth and high stock prices are equivalent to economic strength. Why else would Trichet have raised rates last month and why else is he expected to signal another rate increase in the next ECB meeting?
We argued a couple of years ago that America’s greatest problem was lack of income, lack of adequate income in the core middle class. Without new jobs, society cannot increase wage income. But the Fed can increase interest income with modest increases in Fed funds rates. Savers are getting killed by minuscule CD rates. And small businesses cannot borrow at rates anywhere close to current short term rates and many cannot borrow at all.
Meanwhile, Banks are borrowing money from the Fed at these minuscule rates and buying Treasuries.
Should We Shoot All The Banks?
This time with apologies to Shakespeare. The Fed is too aware of the dangers hidden in Bank Balance sheets. Any rise in the Fed Funds rate could seriously injure the Banks. This approach is unlike the American approach to the S&L crisis in 1990 and very similar to the Japanese approach that has been so successful in helping Japanese Banks and the Japanese Economy for the past 20 years!
Europe is working on a more grandiose version of this approach. They will keep loaning just enough money to tide Greece and other sick PIIGS every year. This will enable European Banks to count their loans and bonds as creditworthy. So the plan is to postpone the inevitable in the hope that the problem will go away.
The World is drowning in Debt. So until Debt is restructured and Bank balance sheets are cleaned up, we would have to live with this zero rate mess for the foreseeable future.
Bond Bears – Were They Killed Or Just Gored?
Last week, Larry Kudlow heaped contempt on Bond Bears and asked whether they were dead yet. The fall in rates has been almost vertical. But we wonder whether this Wednesday’s huge Bond Rally had elements of an emotional peak. The 10-Year Treasury yield broke through 3% to close at 2.94% and the 30-year yield dropped to 4.14%. It was like a dam broke and water fell vertically into a ravine. Rick Santelli predicted that by Thursday’s close, the 10-year yield could drop to 2.90%-2.85%.
But, Thursday morning, the 30-year dropped by point by 9:30 am. Was it the very slight weakness in Jobless Claims or the fear that ADP could be a head fake? The actual number on Friday was much weaker than expected. But after an initial rally, Treasury prices fell. Then the Non-Manufacturing ISM came in a little stronger than expected and Treasuries began selling off. They rallied to close a bit higher as stock prices fell into the close.
We are not experts but rather simple observers. It feels as if progressively weaker data will be needed to keep Treasuries rallying further. Also it feels as if Treasuries might fall much more on stronger data than they might rally on weaker data. And then, you have the curious underperformance of the 30-Year Treasury Bond.
So is it time to recall the Chuck Daly Dictum or is the possibility of another QE troubling the long Bond?
Our Best QE2+ Indicator
There are so many indicators that seem to smell QE2+. One is Gold, another is the US Dollar. But the cleanest and best indicator to us is the spread between the 30-Year Treasury and the 10-Year Treasury. The 10-year and the 30-Year are both called long maturity Treasury securities and their prices move in the same direction in bull markets and in bear markets.
For the past 3 decades, the spread between the 30-year Treasury yield and the 10-Year Treasury yield stayed lower than 100 basis points. In fact, this spread went over 100 basis points only 3
times in the past 3 decades prior to March 11, 2010. These three occasions proved to be terrific buying opportunities (see the section Did Rick make an Actionable Call? in our Videoclips article for March 7- March 13, 2010).
This long term resistance was decisively broken during the week of August 23, 2010, the week of Bernanke’s Jackson Hole QE speech. The 30-10 spread crossed 100 on Tuesday, August 24 and has never looked back. The peak of the 30-10 spread was 158 basis points and that was on Friday, November 5, 2020, one day after Bernanke’s editorial in the Washington Post and two days after his announcement of QE2 in the FOMC meeting on November 3, 2010.
So when we want to decipher the market’s thinking about QE2+, we look at the behavior of this spread. On Tuesday, the day before the ADP & ISM, the 30-10 spread closed at 116 bps. Then it closed at 120 bps on Wednesday, at 122 bps on Thursday and at 124 bps on Friday, June 3.
This tells us that the Bond market is beginning to factor in higher probabilities of additional QE as the data continues its downward slope.
CNBC & Lloyd Carr
Lloyd Carr was the Coach of the University of Michigan Football Team, a disciple of Michigan’s beloved Coach Schembechler, Coach Carr consistently won at Michigan. But he disappointed ardent fans like us who felt, with good reason, that he was not a championship coach. On the other hand, we always worried whether his replacement would be far worse than Coach Carr. That is exactly what happened. The Michigan Team has been a very performer in the post-Carr period.
We thought of this analogy all week. We were often critical of Erin Burnett and the late Mark Haines (we praised them often as well). But now that they are both gone, we find ourselves deeply disappointed in the shows they used to anchor.
This is not really a criticism of the anchors who replaced them. Chemistry is a delicate art. You can’t just mix ingredients at hand and hope for tasty sweetness or spice. And if you don’t have real chemistry and rapport between anchors, you miss the real sauce that makes many CNBC shows fun to watch.
Since we believe in making constructive suggestions when we criticize, here we go:
- We thought Simon Hobbs shared a rare chemistry with Mark Haines. Their rapport was good enough, we felt, for a stand up comedy show. But Simon Hobbs does not exhibit a rapport with Melissa Lee. Melissa Lee also comes across as rather tepid, boring and very different than her personality on Fast Money. So we think a change in necessary.
- Our first suggestion – CNBC should try out Guy Adami as Melissa’s co-anchor for the two-hour Squawk on the Street show. Guy and Melissa enjoy a very natural and funny rapport, to put it delicately. Guy used to be sales trader and he would perfect for the 9-11 am period. He could provide really helpful pre-market commentary and can be alert for reversals that often occur around 10 or 10:30. He could also bring in Tim Seymour in 9-9:30 period to interpret the overnight data and market action. With this anchor duo, we could withdraw our long standing recommendation for a 15 minute Fast Money edition at 8:45 am.
- The other show that has fallen even more steeply is Street Signs at 2 pm. Brian Sullivan is a veteran anchor from Bloomberg. But he has been paired with Amanda Drury. Frankly, the result has been rather painful to watch. There is simply no chemistry here. Brian would do much better as a solo anchor. In contrast, the pairing of Michelle Caruso Cabrera and Brian Sullivan comes across as more natural and fun. Michelle brings energy that enlivens Brian’s relatively subdued personality.
- If Michelle moves to Street Signs, Simon Hobbs could co-anchor Power Lunch. His acerbic wit would be a good match with gentle Sue.
We would like to point out that, as viewers, we have a real stake in the selection of anchors for CNBC shows. And who would know more about how anchors come across than us viewers. Finally, chutzpah is a global characteristic, isn’t it!
We feature the following videoclips this week:
- John Taylor on CNBC Squawk Box on Thursday, June 2
- Doug Kass on CNBC Fast Money on Friday, June 3
- ….the consumer is stretched, so this consumer recovery that many shows have been talking about, we in the food industry we have really seen yet and we are not particularly optimistic about it. I think for the next two years, it is going to be incredibly challenging… – Douglas Conant, Campbell Soup President/CEO (minute 04:58 of the clip).
- ….if you look at the statistics right now, the debt defaults that are occurring even in lower middle markets are at an all-time low equal to about 2007…it says that hey, there might be another credit cycle coming... – Michael Tokarz, MVC Capital Chairman (minute 02:38 of the clip)
1. Investing Beyond US Dollar – John Taylor on CNBC Squawk Box – Thursday, June 2
John Taylor is the Chairman & CEO of FX Concepts. In a previous appearance on Squawk Box, he had predicted a 4-3-2-1% GDP progression for 2011. The Squawk Box crew and guest host Steve Rattner do a good job of asking questions and John Taylor answers succinctly.
- Kernen – You were a complete outlier (in his previous appearance)…..and your forecast was for a recession by the end of the year. The economic data in the last three months has at least so far gone the way you said it would go. Do you still believe we will be in a recession by the end of the year?
- Taylor – Yeah. I am afraid that cutting the deficit means cutting final demand, it means the economy is going to slow. It might not be a bad thing to cut the deficit but when you cut the deficit, you are going to get a recession, you are going to get a slowdown, the more you cut the deficit, the worse it is going to be..
- Rattner – Why do you think we are going to be in a recession this year when all this deficit cutting, if it happens at all, is going to take effect somewhere down the road?
- Taylor – I must say that next year is going to be truly miserable. This year ..is is a glide past down to a truly miserable year.
- Rattner – We are I think talking about the real economy and not the markets. You are saying that the real economy is going to be in a recession even though the 1.5 trillion deficit is still pumping money into the economy?
- Taylor – Last time, I said I was looking for a 4-3-2-1…and the first quarter came in at 1.8%. I said may be the second quarter will bounce back to 2.5 to 3. As corporations that everybody’s expecting to do a lot of capital expenditures, they are looking at 2012 too. How can they not look at the future?
- Kernen – QE2 will end?
- Taylor – Yes, of course.
- Kernen – QE3 will start or no?
- Taylor – No….well, eventually it will start, I will argue. But the Fed has to really see the economy printing minus numbers first
- Quintannia – Is there any validity to the argument that QE in general operates with a lag?
- Taylor – …I don’t think QE2 works very well, basically it puts money into bank’s hands, the banks are investing it in markets driving market prices up….but it is not putting money in the hands of the consumer or small businessmen. Great for trading.
- Rattner – So presumably you must be incredibly bearish about the US stock market.
- Taylor – I won’t throw “incredibly” in there…I would look at a number around 1,000 as being quite respectable.
- Quintannia – How much of this pivots around what home prices do? Is it relevant to the consumer’s ability to spend or has it moved past that?
- Taylor – I think it is extremely relevant. Almost any individual in this country is dependent on the value of his house in order to feel well, in order to go out and buy a new car, go on a vacation and everything…house prices look terrible.!
- Kernen – So what are you doing in Forex?
- Taylor – Well, we are still in the last hurrah, we think of growth which means we owning things like Australia, like South Africa, Turkey, the marginal high interest rate countries that are doing all right, the emerging market is doing better than everyone else I would call that the last hurrah because as the US and Europe begin to slow down, they are going to slow down as well.
- Kernen – Then what would you do?
- Taylor – Buy Dollars……This bit about raising the debt ceiling is good for the Bond market and good for the dollar….the more trouble we have with the debt ceiling, the stronger the bond market will be…..when we do something, it is going to drive the dollar up…Europe is falling apart……we can handle the austerity…we need the austerity in the long run, everybody is going to look and say well the US is doing what it has to do…
- Taylor – Definitely there’s going to be a recession.. I mean it’s not even unusual for there to be a recession now, the last recession was 07-08, we are now talking about late 11-12.
2. Economy Needs QE3? – Doug Kass on CNBC Fast Money (07:08 minute clip) – Wednesday, June 1
Doug Kass is a frequent guest on CNBC Fast Money and he is always an interesting speaker. He opens his comments with:
- What was the most conspicuous thing today to me was the profound weakness in financials. I think this is a omen for a double dip in housing and its impact on financials. A lot of people have told me that in isolation residential real estate was such a small percent of GDP that it didn’t matter. But we found out that it does matter. The second thing is the obliteration of a week’s gains in only three hours of trading this morning was conspicuous…. It was an important day and to me it was a reality blow to the groin of a of a largely bullish investment community that has been convinced that a smooth and a self- sustaining economic recovery was in place. My mantra is not that. My mantra is uneven and inconsistent growth.
A summary of his comments can be found at Aha Moment Has Arrived for Stock Investors on CNBC.com. A couple of excerpts are below:
- Look at the market action between the end of QE1 last year and surprise start of QE2,….Stocks did poorly especially energy, technology and consumer discretionary. The S&P dropped 12%, the CRB dropped 5%.
- most investors should be under-invested until there’s more economic clarity.
- if you’re a more aggressive type, asset managers look like an interesting areas to short.
Send your feedback to [email protected]