Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. 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.
We Doubled Down on Our Bet
Last week, we made a public bet that “America will solve its debt crisis before and better than any other debt-laden country.” Then we asked “Would any Financial TV Anchor care to bet against us?“.
This week, we became specific and asked a couple of CNBC Anchors whether they would take our bet. We did so on Thursday when the debt ceiling mess got messy. Will they accept or will they chicken out?
Our basic view was and is:
This week, we found a well-respected ally in Paul McCulley, the retired bond guru from Pimco. Mr. McCulley uses the same term “cathartic” to describe the debate on the debt ceiling and feels (in the words of CNBC’s Steve Liesman) that out of this will come a better fiscal outlook for the country. (see clip1 below).
Europeans, Turkish and Lebanese are Laughing at US!
So reported Tyler Mathisen & Bob Pisani of CNBC. We confess that the thought of Europeans laughing at America gets us upset. America is merely going through an emotional debate about its future. America is a fighting society. Sweeping problems under the rug for a pretense of stability is a European trait, not American. This is why Europe is a disaster waiting to happen and America will come out stronger.
Sean Egan of Egan-Jones feels the same way. He argues that with a haircut of merely 30% on Greek Debt, the ECB will blow up all its capital (see clip 2 below). On Friday, Prime Minister Zapatero of Spain announced early elections and the Wall Street Journal voiced doubts about France. So we wish Tyler Mathisen would set those Europeans straight and stand up for America.
Tyler Mathisen merely reported the European view. His colleagues Simon Hobbs went nuts on MSNBC’s Hard Ball on Friday evening. We must admit Mr. Hobbs is entertaining when he rants perhaps because, unlike Jim Cramer, he knows little and is usually wrong.
Bob Pisani came back from a trip and informed us viewers that Turkish (& Lebanese) fund managers were upset with America. Apparently, they were afraid that the debt ceiling debate would hurt global growth. That is a realistic comment unlike the tendency of Europeans to laugh at America.
The reality is that the rest of the world, especially emerging markets, have been great beneficiaries of the devaluation of the U.S. Dollar by the Ben Bernack. When investors realize that America is getting its act together (does the Bernack have to leave for that?), fund flows could revert back to the USA. That would be awful for emerging markets.
As far as Turkey is concerned, the Chiefs of the Turkish Army, Air Force and Navy resigned on Friday. This marks a sudden worsening of the tensions between the secular Turkish military and APK, the Islamic party that rules Turkey. So we dare say Turkish fund managers have more urgent worries than pointing fingers at America.
We do think that stability, especially a choreographed illusion of stability, is dangerous in the long run. Greenspan was so afraid of financial volatility or instability that he kept the Fed Funds rate at 1% far longer than necessary. We saw the result of this imposed stability. The Obama Administration has desperately tried to maintain the illusion of Pakistan’s stability. We encourage all to read the recent article in the Washington Post by Karin Bruillard titled Violence in Karachi exposes deep divides. According to the article, 490 people in Karachi were killed in targeted ethnic killings in the first six months of the year and also reports that the Baluchis are killing Panjabi settlers in Baluchistan.
So if the Af-Pak region gets more unstable and bloody, what happens to the U.S. disengagement from Afghanistan? And if America decides to stay on in Afghanistan, what happens to the $1 trillion cuts in war spending assumed by Senator Harry Reid?
From what we read, it appears that the most choreographed illusion of stability is in China. We hope it is not an illusion because the world economy cannot afford instability in China. According to Steven Roach, the Chinese leaders are “appalled’ at America’s behavior. Are we ever allowed to be appalled about their actions in Tibet?
So, we welcome the emotional catharsis America is going through in full view of the world.They can laugh at us. How do we know we are correct? Just look at the price action of US Treasuries!
Speaking of Economy
Why bother to speak about the U.S. economy? The GDP date released on Friday speaks volumes. Q2 GDP came in at 1.3% and the final Q1 GDP was revised downwards from 1.9% to 0.4%. And this is the “recovery”? Martin Feldstein said this week the Jobs picture will not get better for a few years. For an even more depressing view of the U.S. economy, see clip 4 below.
Is anyone surprised that Treasuries rallied furiously this week? The 10-year closed at 2.80%. the 7-year closed at 2.09% and the 5-year closed at 1.35%. The greatest store of value, if we dare call it that, remains in the 30-year which stubbornly maintains a 4-handle yield (4.13%).
Perhaps both the 30-year and the U.S. Dollar suffer from the Bernack-QE3 syndrome.
The U.S. Stock Market
We can’t help noticing that recently the weekly action in the U.S. stock market has more to do with the positioning of the big funds. Two weeks ago, the market was oversold and got good news last week. So the S&P rallied by over 2% last week. By end of last week, the market was overbought and got bad news. So the S&P fell by over 3% this week.
Despite the decline, the S&P held its 200-day moving average. So does this oversold market rally if the debt ceiling gets extended next week? Will it maintain its swing trading range or will it break out of that range?
It may well depend on the economic data we get next week.
Our Apologies
Last week, we used the wrong last name for Bloomberg’s Sheila Dharmarajan in our article. We were appalled when we noticed it midweek. We contacted Ms. Dharmarajan to apologize. The lady was very gracious and we thank her. We hereby apologize to our readers for our unforced and awful error.
As an aside, we were pleasantly surprised to be able to speak with Ms. Dharmarajan. In stark contrast, CNBC hides its Anchors behind a protective veil and keeps them isolated from “masses”. CNBC’s paranoia reminds us of Mughal rulers who used to restrict their wives to inner chambers and deploy “eunuch” warriors to guard their chastity.
We congratulate Bloomberg for their trust in their Anchors.
CNBC Squawk Box, MSNBC Morning Joe & Coaching NBA Games
This week, we simply could not watch CNBC’s Squawk Box until Friday. The week was all about the political machinations of the Debt Ceiling fight. Initially we tried to flip between MSNBC’s Morning Joe and CNBC’s Squawk Box. If it were a fight, it would have been stopped early in the fir
st round.
It was evident that Joe Kernen, Becky Quick and Andrew Ross Sorkin were totally out of their depth in discussing the events on the Hill. In contrast, Joe Scarborough and his team were superb. Unlike most political anchors, Mr. Scarborough is an ex-professional. He was a Congressman and he won elections. He was a Congressman when President Clinton wiped the floor with Gingrich and his Republicans. So listening to him discuss President Obama, Republicans & Democrats was like listening to Phil Simms or Troy Aikman discuss quarterback play. And his show had veteran insightful guests all week. And above all, Scarborough’s show is fun to watch.
This brings us to basketball strategy. Smart coaches change their lineups when the game needs the change. Coaches sometimes go small when they need speed & penetration and go big when they need post-play & rebounding.
Why couldn’t CNBC do that this week? They have Rick Santelli, Larry Kudlow, John Harwood and they could get other politically savvy guests as co-hosts. Why didn’t CNBC change the Squawk Box line up or just add other guest-hosts to help Kernen-Quick-Sorkin? Guess CNBC doesn’t work that way! Guess they believe in using the same lineup regardless of the type of game they need to play! Rather dumb, we think.
As we were writing this section, CNBC’s Carl Quintannia tweeted “I told my 11-yr old cousin Madonna lives a few blocks away. He said, “Who?”. Cute and interesting. We must admit we miss Carl on Squawk Box. Perhaps, more importantly, Squawk Box misses Carl a great deal. They needed him this week. This paragraph was triggered by his tweet. Thanks Carl.
Ours is an inquiring mind. Carl Quintannia lives on the Upper East Side of Manhattan or so we heard on CNBC. Does that mean Madonna lives on the Upper East Side as well? Could you enlighten us Carl?
Speaking of Madonna, we must include a favorite song of hers. If you like it, thank Carl Quintannia. If you don’t, blame him.
If you watch the clip, notice Urmila*’s hand movements. We recall one Washington Redskins (we dislike this name) cheerleader comment a couple of years ago that she was mesmerized by the thousands of artistic hand movements used in Indian dances. This cheerleader with a few others was invited to join the cheerleading group of an Indian Premier League Cricket team. We have to take her word for it because, honestly, we don’t notice artistic hand movements when we watch Item Songs.
* Maria & Tyler, note again that names ending in “a” sound suffix are feminine names in the Indo-European language family.
Speaking of tweets, you can now reach us on Twitter @MacroViewpoints.
Featured Videoclips:
Last week, we began the practice of changing CNBC’s titles of videoclips in favor of more direct and relevant titles. We feature the following clips this week:
- Paul McCulley on CNBC Squawk Box on Friday, July 29
- Sean Egan on CNBC Squawk Box on Friday, July 29
- Bernard Beal on CNBC Strategy Session on Tuesday, July 26
- Lakshman Achuthan on CNBC Squawk Box on Thursday July 28
We don’t necessarily watch our featured clips during the week. Before we begin writing these articles on Friday late evening, we go through CNBC’s videos for the week. Then we pick and choose the videos we deem interesting. We can’t do that for Bloomberg or FBN clips because they don’t provide a complete list of their segments for the week. So featuring a Bloomberg or FBN clip is a hit or miss.
1. Better Fiscal Outlook for America – Paul McCulley with CNBC’s Steve Liesman – Friday, July 29
Paul McCulley was a senior bond manager at Pimco for many years. We always found it useful to listen to his views. This clip is no exception. Actually, it is better than his previous clips because he is now independent and can say what he likes.
- Liesman – Let me ask you about the debt ceiling debate. If you were managing money again right now, how concerned would you be about what’s happening right now in Washington?
- McCulley – in a short term perspective, I would be very concerned. It is a big big event from a short term perspective from the standpoint of how the markets readjust to the fundamental change in the rules of the game. But from a longer term perspective it wouldn’t disturb me, in fact it would actually make make me somewhat positive because in a democracy you ultimately you need to have cathartic moments when you debate the long term future and we are having it right now.
- Liesman – So you feel out of this comes a better fiscal outlook for the country?
- McCulley – yes, I do. Democracy is not an efficient process. We are seeing it at the height of inefficiency right now. But ultimately we need to have this debate about how we are going to structure our economy for an aging society in a global framework and I actually think it is a positive long term that we are having the debate. But I certainly wish we could do it in a more efficient way.
- Liesman – ….would you be playing treasuries to rally here or to sell off?
- McCulley – I would play them as the ultimate safe asset. Not withstanding all this debate about ratings and so forth. It’s not about the ability of Uncle Sam to meet his debts. It’s about political willingness at this particular juncture. But there’s no question that U.S. Treasuries particularly short term U.S. Treasuries are the ultimate safe assets. I mean it’s right up there when you talk about your portfolio, it goes with green peace.
- Liesman – What happened to the bond market vigilantes? These were people who over a continuing period of time kept the government more in line when deficit spending was out of line. They would sell off treasuries. They don’t do that any more.
- McCulley – that phrase was coined 2 1/2 decades ago about bond market vigilantes telling the central bank when they were pursuing inflationary policy. We won the war against Inflation. The bond market vigilante went into risk vigilante which is against debt and governance. The bond market vigilante of our youth, won the game. We don’t have an inflation problem. We have a fiscal issue.
- Liesman – the Fed is appropriately very accommodating for, as far as the eye can see, because we’re in some liquidity trap, which means, essentially, that monetary policy is not effective.
- McCulley – Doesn’t mean that the Fed is not very competent, simply means that the private sector is delevering and doesn’t want credit at any price. I think the Fed is doing a great job.
If you wonder where the bond vigilantes are alive and well, see the next clip.
* the CNBC title of this clip is Debt Ceiling Debate
2. the biggest problem is in Europe – Sean Egan on CNBC Squawk Box – Friday, July 29
Sean Egan is the head honcho at Egan-Jones Rating Company. Egan-Hones does not get its fees from issuers of capital and that distinguishes them from Fitch, Moody’s and S&P.
- Egan – keep in mind with AAA-rated securities, you’re allowed to keep almost nothing in capital. If it moves down, all of a sudden, all the financial institutions we’ve been trying to recapitalize, over the past 3-4 years, all off a sudden need more capital and therefore can’t lend into the market. By the way, the shadow banking system is gone. …I think it’s about 2% or 3% for moving from a AAA to a AA.
- Sorkin – So we are worried about the banks?
- Egan – worried about the banks and other financial institutions Not only domestically, but internationally, it’s the same sort of rules they are faced with.
- Egan – …also a lot of people still believe in the Cap-M model, risk free rate, that will go up. Then you have the secondary affects of the increased borrowing costs of the other institutions. Fannie Mae, Freddie Mac – they are slippage. The problem is the breakdown from AAA to below AAA and the capital to absorb this.
- Egan – but the biggest problem is the problem isn’t here, it’s in Europe, and we might get sucked into that. The ECB, which is at the heart of it all, has capital between 5 and 10 billion euros.(note – sound awfully low to us)…They haven taken on massive obligations from the banks in the periphery countries and also from the sovereign debt itself. Now, at the latest go-around for the Greece haircut, we estimate 25%, we’ve seen estimates up to 50%. depends on the discount rate you use. But if you’re an institution, the ECB, if you’re talking about a haircut of 30%, you’ve blown out your capital and there’s no easy place to get that capital. And furthermore, they don’t have the fire brigade organized to solve the problem. Watch the funding cost of the Spain and Italy, they are creeping up. The bond vigilantes are alive and well, they are vacationing in Europe.
* the CNBC title is Impact of a Possible Downgrade
3. 7,000 Muni Credits on Downgrade Watch from Moody’s? – Bernard Beal on CNBC Strategy Session – Tuesday, July 26
Mr. Beal is the CEO of M.R. Beal & Co., an investment bank. Mr. Beal’s remarks are interesting because they point to serious damage to Muni Bonds in case of a downgrade of America’s AAA rating. The most negative stance has been by S&P which has warned that there is at least 50% chance of a downgrade of US Sovereign credit within 90 days depending on the outcome of the debt limit debate.
- Beal – three things that are happening. none of them are good.
- the first is that Municipalities are so dependent on Federal Transfer payments they have had to adjust. Yesterday, the State of Maryland pulled a transaction of about $300 million that they were going to come to market because of the uncertainty in the Federal Government with the debt.
- the second thing is that many of the Municipalities have to get these payments from the Federal Government on a monthly basis. That’s about $500 million a month. As you know, States unlike the Federal Government have to have balanced budgets by the Constitution, with the exception of Vermont, which by practice balances its budget anyway. It is the uncertainty causing the problem.Maryland pulled the deal because they did not know whether they were going to be a AAA credit or a AA credit. They didn’t know, and the potentiality — this was a refunding deal. The potential rate they would have had to pay meant reduced savings.
- That has caused Moody’s to say they are going to look at all 15 AAA States for a possible downgrade in the event of a Federal Downgrade. and that’s going to mean increased borrowing costs for each of those states. And it’s going to trickle to local businesses.
- There’s a third thing. The Federal Government often issues through the Treasury Department what are called SLUGS. State and Local Government Securities. State and Local governments require these securities to refund their debt. It makes the debt work more efficiently. Whenever we have come up against a debt ceiling, one of the first things the Federal Government does is close the SLUG window. It’s been closed since May 6. It makes it very difficult for Municipal Governments to refinance their debt. It means that their cost refinancing goes up. It makes it much less efficient.
- Hopefully, we’ll get, I doubt that, we’ll get a permanent solution to the debt ceiling problem, but hopefully we’ll get more than just a short-term band-aid fix. We’ll get something that will allow people to have some confidence that the market is going to stabilize and allow people to go out and borrow again.
- I think you will see these 15 — some of them, not all of them — but some of the 15 AAA Sates be downgraded. but Moody’s has already indicated they are going to put another 7,000 credits on watch for a possible downgrade in the event that the Federal Government is unable to raise the debt ceiling and solve this problem. It’s not clear quite frankly even if they are able to raise the debt ceiling that we won’t have these downgraded. but it is clear that if they don’t — that’s where interest rates are going to go up.
- the first is that Municipalities are so dependent on Federal Transfer payments they have had to adjust. Yesterday, the State of Maryland pulled a transaction of about $300 million that they were going to come to market because of the uncertainty in the Federal Government with the debt.
* the CNBC title of this clip is Washington Uncertainty Hurts Markets.
4. More Frequent Recessions – Lakshman Achuthan on CNBC Squawk Box – Thursday, July 28
Economic Cycle Research Institute (ECRI) is known for the relative accuracy of its economic forecasts. Mr. Achuthan is the main spokesperson for ECRI and its managing director. Mr. Achuthan’s views are mostly a repeat of what he said on July 7 on CNBC Squawk Box (see clip 1 of our Videoclips of July 4 – July 8 article).
Today, we focus on what is new in his comments, something which David Rosenberg has argued. On June 13, Mr. Rosenberg said the following to Bloomberg’s Betty Liu (see clip 1 of our Videoclips of June 11 – June 17 Week):
- when you have a manufacturing inventory cycle, recessions are usually separated 5 years apart. But when you have a Balance Sheet recession, we are talking about credit contraction, asset deflation, for example residential real estate, these sorts of Balance Sheet recessions, the downturn happens every two, two & half years.
- Because of two trends that are undeniable and they dictate more frequent recessions since the 1970s. So over many different political ..policy constructs for the US, we have seen the pace of growth in each expansion stair-stepping down. Since the 1990s, we can say it is globalization, its demographics, a whole bunch of things, it’s observable that the pace of growth in each expansion has been going down. And the reason we got away with not having frequent recessions for the last 20 something years is because we’ve been in a very mellow low business cycle. Academics call it the great moderation. They like to put great in front of everything.
- So cycle volatility was low and now it is not. Look around you; look in the rear view mirror – cycle volatility is high, trend growth is low. We can agree on that. When you combine those two things, every downturn has a higher risk of turning into a recession.
We appreciate the points Mr. Achuthan made. But we don’t see the evidence. He did not provide any and the CNBC Squawk Box anchors did not ask him to provide some.
We would have liked to see charts of the cycle volatility over the past 20 years and we would have loved to hear WHY cycle volatility has risen or why the great moderation is now over? Mr. Achuthan did not provide any charts and he did not give any explanation for this change. Amazingly, the brain-trust of CNBC Squawk Box, Kernen, Quick, and Sorkin, never bothered to ask him. Instead, Mr. Sorkin merely remarked “I have been thoroughly, thoroughly depressed”. How brilliant?
In our comments about the appearance of Mr. Achuthan on July 7, we criticized him for wearing his intelligence on his sleeve and in his speech. We are happy to note that Mr. Achuthan was different in this appearance. He was subdued, polite and took pains to state his points patiently despite the rather juvenile attempts of CNBC’s Kernen to throw him off stride. Perhaps, Mr. Kernen thinks his antics are funny.
* the CNBC title for this clip is Economic Impact of Debt Default
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