Interesting Videoclips of the Week (August 15 – August 21)

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.

Bernanke – Last Week & Next Week

Last week, we wrote:

  • This is NOT Bernanke doing QE3. It is Bernanke inviting investors to engage in QE3 if they wish to….So Chairman Bernanke delivered a sharp, powerful monetary easing into the economy. Sorry, he invited the Treasury market to deliver this powerful dose of liquidity.
This week, we found a voice who agrees with us about the importance of Bernanke’s move, actually a voice who expressed it better and more emphatically. Jon Brynjolfsson (hedge fund manager and Ex-Pimco bond manager) told CNBC’s Power Lunch on Tuesday, August 16:

  • I think that the Fed announcement last week was bigger than QE1, bigger than QE2 combined..The Fed essentially deputized the private sector to buy about $4 trillion worth of Treasury securities, up to 2 years and some even longer than 2 years, put them under private sector balance sheets – in effect, the largest QE event we have seen in history of mankind.
But the stock market kept asking all week, “what are you going to do for us next week, Ben?” There is desperate hope that Bernanke will announce some plan next week at Jackson Hole to provide support to the stock market. Because, what needs to be done is in Europe.  

So unless Bernanke finds a way to become the Chairman of the ECB in addition to the Chairman of the FED, he should not announce any other plan. Let the stock market go where it wants. It will find its level.

A Bold Call by CNBC’s Rick Santelli

Bernanke should wish fervently that the call made by Rick Santelli on Thursday, August 18, comes true:

  • I like making bold calls. I think in the month of August, we will define the low in equities and lows in rates. That doesn’t mean we will have quick reversals, we might spend quarters close to these levels but the critical mass in Europe will come to a conclusion this August.
Now that is a bold call. 

Stocks, Treasuries & Gold

Last week, we quoted Mihir Dange, a trader at Arbitrage LLC, saying that he had sold Gold and bought stocks. Well, he was too early in both trades. Gold went more asymptotic to a vertical line than it did last week. Mr. Dange updates his views in clip 3 below. This week, noted technician Louise Yamada raised her long term (2018, as we recall) target to $5,000.

Treasuries are another asset that finds money running in to it. George Goncalves of Nomura said he is seeing buyer exhaustion for the 10-Year Treasury and that’s why it can’t break below 2%. He added this  buyer exhaustion is driving money into the 30-year (see clip 4 below).  Robert Rodriguez of First Pacific warns that if the 10-Year yield breaks 2% and stays below 2%, then it would be an indication of far more volatility on the downside (see clip 4 below).

On the other hand, trader Jeff Kilburg told CNBC Fast Money that he sees the 10-Year yield making a fast run to 1.67% (see clip 5 below). And Gary Shilling reiterated his 3% target on the 30-Year and actually raised it (in price) to 2.60% on the 30-Year yield.

Well, if the 10-Year Treasury yield breaks down to 1.67% and/or the 30-Year Treasury yield gets to 2.60%, then stocks will get much cheaper than they are today.

A short term technical call was made on Thursday by Jon Najarian on CNBC Fast Money based on the action of the VIX (see clip 1 below). He jumped in on Friday’s Fast Money Half Time show to urge investors to stay long for next week. He believes we will see an up 500 point day in stocks very soon. This is not a fundamental call and it is not a classic technical call based on charts. It is what we might call a plumbing call, a call based on the internal plumbing of the stock market as measured in the spread of the Spot VIX and the three-month VIX futures.

A more classically technical call is discussed by the noted John Bollinger in clip 2 below. It is a well-reasoned technical call. John Bollinger also suggest buying financials after they base and turn higher. Doug Kass of Seebreeze Partners does not want to wait. He recommended buying Financials right now for a 10-15% upside in weeks and a 100% gain in 12 months.

And then, like so many gurus before him, John Bollinger discusses shorting Treasuries. Unlike his discussion on stocks, Bollinger seems to base this trade on fundamentals – He says inflation is accelerating and that is why Treasuries are a short. So good a short that he recommends it for widows and orphans.

With great respect, we would venture to point out that Shorting Treasuries as a strategic trade has been a widow-maker and an orphan-maker trade.

Corelation = 1?

If you watch the clips, you will observe that all the trades are essentially the same. You will hear that Gold & Treasuries will continue to go up if Stocks go down and vice versa. And all these depend on getting clarity from Europe.

What Will Europe Do Next Week?

Who knows? All we know that the world is being held hostage by European leaders. The place is in a total mess, financially, and politically. The balance sheets of European banks seem opaque by any reasonable standards. There is no institution that has the authority or the ability to take decisive action. The currency structure created by the Fina-Crats in Brussels is now colliding with social and political reality of individual European countries.

This week, Merkel & Sarkozy, the power pair of Europe, demonstrated to the world how utterly clueless they are and how they far they are from any effective solution. What might a reasonable solution look like? See El-Erian’s comments in clip 6 below.

The simplest action Trichet can take is to cut interest rates in Europe and state his intention to cut again. That he can do alone. Will he? We doubt it. After all, this is the monetary “genius” who raised rates twice this year.

A Second Battle for Independence in India

We have been vocal proponents of the Tea Party campaign to focus on the deficit and to use the Debt Ceiling Extension as a lever to bring about a reduction in the deficit. We believe the Tea Party came to fore because the people felt the establishment wings in both parties were deaf and blind to the wishes of core America. Our conviction was that noisy, rancorous debate and protest is vital to a democracy. This view is contrary to the European tendencies of maintaining a facade of calm rather than fight to change.

This week showed why America and India are very similar in spirit though they appear vastly different to the superficial eye. This week, urban India exploded into an impassioned popular movement against corruption endemic to India’s Institutions. It was sparked by an emotional outpouring of support for Anna Hazare, a 73 year Gandhian who has been waging a campaign against corruption in Government.

We have written that India is still governed under pre-Independence British Laws designed to suppress the Indian people. This week the Indian Government showed that it still behaves like the colonial British Administration and Anna Hazare showed that Gandhi’s tactics still work just as effectively in India.

     (a rally in Delhi – src NYT)                         (Anna Hazare – src NYT)

This, we think, has the potential to change the political life in India. The parliamentary democracy in India has been successful, certainly far more successful than any other that of any other emerging market in the world. But the current parliamentary system has essentially disenfranchised the middle class. The votes in India are rural and poor. The strategy and tactics necessary to win the rural poor and the leaders the tactics throw up are against the interests of the newly emerging middle class. The fact is  almost 1/3rd of the Members of Parliament have been indicted for major crimes including murder.

The middle class has become wealthier and more vocal in the past 5-7 years. They find no one in the Indi
an parliamentary system speaks for them or for their interests. This struggle has come to fore in the moral and much needed campaign against corruption in Government. After all, media reports suggest that $1.5 trillion has been whisked away into Swiss & other Banks. This amount is equal to 100% of India’s 2009 GDP. 

This is not a simple or easy challenge. India can count about 200-300 million members in its rising middle class and about 0.8-1 billion people in its poorer classes. These classes run across 26 different language groups with more than 4-8 different ethnic groups within each language group. So you can see why any democratic movement in India tends to get very loud, very rancorous and very messy. But it always works and it makes Indian society better.

Perhaps, it works because India has enjoyed a Federalist and democratic tradition since the very beginning of Sanskrut culture some 5,000 years ago. In fact, before Greeks discovered India, several states in India were run as “Gan-Rajya” or ruled by “Gan” or people rather than by kings. So we do bristle a bit when people blithely term Greece as the birthplace of democracy.

India is a beacon to almost all Asian and Middle Eastern countries as well as major African countries. India has already delivered a full democracy with civil rights to its billion people, something that other Asian, Middle eastern and African countries wish they could. So what happens to India becomes quickly relevant to most emerging markets in the world.

Now India has begun a process to transform its parliamentary system into one that is equally responsive to both the poor and the middle class. This will be a very messy process that may border on anarchy.

But both India & the USA will reap sustained significant benefits from the change that core India and core America have demanded. A large short term stock market correction is a small price to pay, we think.

The Original Yahoo, the Ultimate Yahoo is No More

When Mary Meeker initiated her coverage of YAHOO on the day it went public, she titled her report “Do You Yahoo? Yes, We Do! Jerry Yang, the founder of the Company gave himself the title of Chief Yahoo.

Jerry Yang was a fan of Shammi Kapoor, the great Bollywood Star, and his iconic song “Yahoo”. In fact, according to media articles, Jerry Yang named his company Yahoo because he loved the Yahoo song below.

This week, Shammi Kapoor passed away. The city of Mumbai treated his funeral as a celebratory event with people lining up along the road and loudspeakers blaring away the “Yahoo” song. That is when his son realized that “Yahoo” had been Shammi Kapoor’s mantra for all Bollywood lovers. 

Shammi Kapoor was a humble man, despite his success and stature. Had Jerry Yang behaved as humbly as Shammi Kapoor did all his life, Yang would have sold his company to Yahoo to Microsoft.

Our Blog used to be called Cinema Rasik and we are always first and foremost Rasik of Cinema. So we had to insert this tribute to Shammi Kapoor in the stock market section.

To us, Shammi Kapoor was and will always be the Original Yahoo, the Ultimate Yahoo. We have never seen any one like him before and we doubt we will ever see another like him.

Featured Videoclips

  1. Jon Najarian on CNBC Fast Money on Thursday, August 18
  2. John Bollinger on CNBC Fast Money on Thursday, August 18
  3. Mihir Dange on CNBC Squawk on the Street on Friday, August 19
  4. Robert Rodriguez & George Goncalves on CNBC Strategy Session on Friday, August 19
  5. Jeff Kilburg on CNBC Fast Money on Thursday, August 18
  6. Mohamed El-Erian with Bloomberg’s Tom Keene on Wednesday, August 17

1. A Capitulation Signal from the VIX? – Jon Najarian on CNBC Fast Money – Thursday, August 18

This segment is covered in two separate clips. The first one begins at minute 03:54 of the clip titled Word on the Street, the first segment of Fast Money.

  • Najarian – I think in particular we talked about mid-day today taking a look at the unusual activity in the VIX and looking for that capitulation by the people that had to have the coverage, Melissa, going into next week. If we didn’t see it that could have been a catalyst for a very bad next week. Luckily, we did see it. 
  • Najarian – not only did the Dow surge down to more than 500, but the VIX broke to 45 to the upside. Thus it created a spread between the Spot VIX and the Futures of almost 16 1/2 points. That was the capitulation we were waiting for. It’s textbook, just what you would expect into this weekend. Now people have protection in place. So at least if there is a panic next week, it won’t be because they didn’t have protection.
  • Finerman of Fast Money – does that make you a seller of the VIX and a buyer of the S&P?
  • Najarian – In fact, Karen, that’s exactly what I did into that final 30 minutes of trading. As I saw the break setting up, I sold out of most of my VIX call spreads. I still held onto about a 20% piece just in case there is something crazy tomorrow. But it was enough reason for me to do what I thought would happen and react to it as it was happening.
  • Finerman – you talked about the 16 spread, calendar spread. How wide is it in a normal expiration? what would you be seeing?
  • Najarian – Normally it’s not in backwardation at all, it’s in contango. When …the markets hit the skids hard last week, we had the spread go out to 20 points, 20 points higher than the three-month out futures. Like I say, that was a capitulation. We saw that nice run to the upside, a 10% rally off that level. Now we have seen something pretty close, not quite the same, but close today coming just before the expiration.

The second clip is titled Volatility Playbook and in that Jon Najarian provides a prediction for “very soon”.

  • Lee – Jon, what are they buying? It is expiration Friday tomorrow.

  • Najarian – …They are buying September at the money puts most aggressively; traded nearly 160,000 of those I That is in the SPY ..that  what the retail is buying the pros are buying more sophisticated strategies..They are buying at the money 115 puts paying $5 = 4.3% premium; …they are ..protecting against another day like today by purchasing these puts ..It is costing them just 4.3%.. to do that – which is actually quite cheap given the vacillations that we have seen in the markets and it keeps them from getting flushed out on days like today….

  • Lee – How do you use this information to inform you which way the markets are going to go…

  • Najarian – When you want to play the contrarian..when you get too many people leaning one way and right now they are all panicked on the purchase of the protection side..that may be it is a sign we are ready to go the other I said.about the capitulation in the VIX today, I think they are getting ready to go the other way…..I would not be surprised at all to see a 500 point move in the other direction very soon..
So if you believe in understanding the plumbing of the stock market as a clue to near term behavior, you might want to consider what Dr. Najarian explained above. We don’t understand plumbing of any kind but we respect those who do. That is why we give this clip our pole position for this week

2. W-Shaped Bottom for the S&P 500 – John Bollinger on CNBC Fast Money – Thursday, August 18

John Bollinger is a well known technician and the creator of Bollinger Bands, the widely followed construct.

  • Lee – What are the charts telling you about where the markets are headed next?
  • Bollinger – We just made an important low in the market a week ago, eight trading days ago or so. Everybody was looking for a V-bottom. They thought after a couple strong days on the upside, we had the lows behind us and would be headed higher. The markets typically don’t trade that way. Typically we make what are called W-bottoms. We come down, make a low, bounce, come back and retest that low. And that’s where we are now. We have had our bounce. We are now pulling back to find out if people want to buy stocks at the levels of the prior low.
  • Lee – Using that W analogy it would indicate we are at the second dip on that W and we are headed higher. Is that the correct interpretation?
  • Bollinger – Well, yeah. But we need to form the bottom first. We came down, bounced. We are selling off now. The key is that sometime in the next few days, we’ll try to make a low in the market and turn higher. If that second low occurs inside the lower Bollinger band, the first was outside the lower Bollinger band, that combination of a low outside, a very high volatility low outside the lower band followed by a low inside the Bollinger band has good forecasting potential for higher prices. But that’s going to need to play out for the next three, four days. We are just starting to enter into that set-up now. 
  • Kelly of Fast Money – Everybody seems to be talking about retesting the low. Everybody is looking for those lows to hold. Do the bands give a target on where the market could go if it doesn’t hold?
  • Bollinger – That’s why we look at the low in relation to the bands, not in relation to the prior low. Often you get that. you come down and you undercut the old low. Everybody panics, there is a huge regurgitation of stocks that occurs, high volume, high volatility. But if you look in relation to the Bollinger bands, the second low is not beneath the lower bands. So it’s not a new relative low. it’s a new absolute low. But it’s not a new low relative to the Bollinger bands. That’s what we look for and that’s the possibility building up here. If it fails, of course, you do classic charts and look at prior support levels that make sense and see whether investors want to buy stocks there.
  • Lee let’s talk about sectors and you say financials will be a great opportunity in three to five years based on the charts. Why?
  • Bollinger – If you look, these things are very low historically. They are very low in terms of short histories, they are very low in terms of long histories. So it suggests that we start to take a look at them.… It’s early yet. You want to see them stop going down, bounce a bit, probably build a base while people figure out that their perceptions of the companies going forward were too dark. Then when they start to turn up again, that’s the time that you should buy them. I think the entire financials sector and many of the companies — individual companies, some you have talked about on the show like BAC, will present the opportunities and they will be very long-term positive buying opportunities. but we are not there yet. again, we are just starting to set it up.
Notice so far, Bollinger has restricted himself to purely technical indicators. Now he gets into fundamental predictions. His trade below seems based on his fundamental belief that inflation is accelerating.  

  • Lee – you say Treasuries will be a great short opportunity. Great short opportunity, at what level? What are you waiting for?
  • Bollinger – I think that this is a widows and orphans short that you can play for a couple of years. We are making historical low yield levels on Treasuries,  five, ten, 20 years at a time when inflation is accelerating. I think it will continue to accelerate; yields in one and a half to two and a half range across the maturity will become normal yields like 5% or 6%, a couple of years out. That will be a huge opportunity for investors to take the short side of a trade. I know most people aren’t comfortable playing the short side of the market. Here is an opportunity that will develop. We again want to wait for the Treasuries to stop going down, build a base and turn high. That’s where the opportunity will be. 
Our only question is what happens if inflation does not accelerate? We also note that Shorting Treasuries as a strategic long term call has killed Hedge Fund Managers. In other words, the trade has been a Widow-maker and an Orphan-maker rather than a trade for Widows and Orphans.

3. Gold Bubble Forming? – Mihir Dange on CNBC Squawk on the Street – Friday, August 19

Mihir Dange is a Gold Options Trader with Arbitrage LLC. CNBC’s Melissa Lee and Simon Hobbs are  the interviewers.

  • Lee – Does the ascent in gold concern you as a trader? We went 21 days from $1,600 up to $1,700. We went 10 days up to $1,800. Does that matter?
  • Dange – Absolutely. It makes me very nervous. Technically, everything is very, very bullish. We need a huge break to the downside to break all the bull trends right now. Some say maybe we’re creating a bubble. It is possible. But if we see this up at $1,900 or $2,000 next week, yes we are creating a huge bubble right now.
  • Lee – What kind of break are you talking for that up trend to be broken?
  • Dange – We would need something like if we settled down on the day today. We traded $1,881 on the high side. We would need some kind of tremendous move where it would be like a $80 move basically up and back down and settle down on the day. That would kind of show that blow off top with tremendous buying at the top and settled down.
  • Hobbs – $80 move, though. That isn’t a big percentage of where we are now. You are describing a trap door potentially that would alarm a lot of people holding gold.
  • Dange – Oh, absolutely. Realistically, we are looking at a bull trend. We have to break a lot of numbers to the downside to get back into bearish territory. We left a tremendous gap down lower at $1,668.70, which is $200 lower. We will at some point go and fill that gap, whether that happens a month from now, a week from now, a year from now, it’s really tough to tell.
  • Lee – Do you think the CME steps in raising margin requirements? What do you ahead of that?
  • Dange – Usually, traditionally, the raising of the margin creates a little bit of a sell off. They raised margin last time. It didn’t really do much. I think as long as there are problems in the Euro zone, there are problems here, the stock market doesn’t perform well, you’re going do see a flight to quality. In the middle of the night, last night 4:00 is where we saw the stock market sell off and that’s where you saw gold explode.

4. Importance of the 2% Level of 10-Year Treasury Yield – Robert Rodriguez & George Goncalves on CNBC Strategy Session – Friday, August 19

Robert Rodriguez manages $16 billion at First Pacific and George Goncalves is the Head of Rates at Nomura.

  • Rodriguez – the problem that we keep coming back to and which is what I mentioned earlier this week at my firm, is the 2% level on the ten-year treasury bond, I felt that if the 2% level would be breached and stay there, it would be an indication of far more volatility on the downside….it would be implying far more recessionary elements.
Rodriguez is cautious today and his cash levels are at 35%-40%. His investments are limited and very concentrated. He thinks the U.S. Government and the Congress are “still delusional” and says “we have approximately 15 months to really start demonstrating fiscal rectitude in this country.”

  • Rodriguez – …the Fed multiplier is collapsing, the money multiplier is collapsing, the lending isn’t occurring. The Fed policy has been attacking the wrong problem for three years. This has been a complete mess on monetary and fiscal policy. Europe has a very serious challenge. So when you’re looking at these major economic centers, be it the United States or Europe, the uncertainty is rising, and when uncertainty rises, the willingness to commit capital long term decreases.
  • Rodriguez – We have been very reticent on committing capital over the past year. we’ve been raising liquidity out there. Unlike ’08-’09, I argued this would be more like Chinese water torture, over a longer period of time. So our goal is to deploy capital in a very, shall we say, measured way.Over the last year the total capital committed has only been about 3% and we’re still at about 35% cash.
Goncalves talks about the 10-year and the fact that Institutional Funds are running away from short term paper of European Banks.

  • Goncalves – The fact that we crossed 3% and made a quick run to 2%, the pace of the drop is indicating we are heading towards a slowdown, a significant slowdown, a recession.
  • Faber – You it on the desk and listen to the market rumors about this. Europe, in particular. Give us a sense what it is day to day sitting at the desk. Are you hearing about short-term funding, difficulties and are these, in fact, just rumors are or we seeing a problem?
  • Goncalves – Concerns are real and you’re seeing it in the money market. You’re seeing a flight into only money market funds. The institutional funds that were buying a lot of these European Banks, they’re not rolling over that paper. that’s clear as day.
  • Faber – You are absolutely seeing institutions not buying commercial paper by your banks?
  • Goncalves – That’s being done. You’re see that in the weekly stats that come out. That’s all public information. The money funds are really just hunkering down and resorting to cash. The big irony is the Fed created all of this money and most of the money ended up in Europe. Now they’re whittling down that stock. 
  • Goncalves – I still think you can play the bond market. Be careful, a lot of easy gains have been made already. Market has had a pretty big move. Big disconnect is on the Yield Curve. That’s why you’re seeing a pretty big powerful move.….You’re already seeing buyer exhaustion on the Ten Year. It’s having a hard time breaking under 2%. We have bad news out there and we’re still above 2% – Buyer exhaustion at the ten-year at the 2% level. That’s moving people up the curve to the 30 year.
The CNBC title for this clip is Stocks vs. Bonds.

5. 10-Year Yield going to 1.67%? – Jeff Kilburg on CNBC Fast Money
– Thursday, August 18

Jeff Kilburg of Treasury Curve has been correct in his calls on the Treasury Market for some time. In fact, Joe Terranova congratulated Kilburg on the show about the accuracy of his forecasts about the 10-Year Treasury.

Melissa Lee begins this segment by displaying an annual chart of the 10-year Treasury yield since 1800. This chart was provided by the well known technician John Roque. Melissa quotes Roque as saying we are on track to test the 1945 low of 1.67% on the 10-year Treasury. Then she introduces Jeff Kilburg.

  • Lee – Do you see 1.67% any time soon?
  • Kilburg – It would be hard to argue, Melissa, No doubt about it. The insatiable thirst for Treasuries persists and we are seeing that today. There was absolute panic, fear and some pandemonium in the market when it went below 2%….we are going to continue to look at the 10-Year for leadership..
  • Kilburg – Now that we are under 2%, we squeaked out a 1.97%, I think you are going to see the HFT, the High Frequency Systems, come in and test out the yield that Melissa alluded to that 1.67% which is an old, old historical low…
  • Kilburg – If we don’t get clarity out of Europe here shortly, they are going to continue to dig into that yield and once we get 1.67%, the machines take over and it could ugly pretty quick
  • Kilburg – Are we going to muddle here a little bit or are we going to go after that 1.67%? I think we are going after it..
The CNBC Title for this clip is “T-Bill Yields Head for Record Lows”.

6. Mohamed El-Erian with Bloomberg’s Tom Keene – Wednesday, August 17

Tom Keene quoted the statement of El-Erian from his article Europe’s Central Bank At Sea –
After some considerable volatility, a smaller and more robust currency union will emerge; and more importantly, Europe will avoid the euro’s demise and a total breakdown of the Eurozone.

  • Keene– Dr. El-Erian, are you suggesting that peripheral Europe will peel away from core Europe?

  • El-Erian – I think there is a high chance of that. I wrote that at Dallas airport changing planes on Sunday. So I didn’t know what was gonna come out of the summit. But you look at the three possibilities:

    • 1) a complete breakdown , that is in nobody’s interest,

    • 2) a complete fiscal union, that means Germany has to be writing checks for a very long time – unlikely,

    • 3) a much smaller, much better integrated fiscally stronger Eurozone with the possibility that one, two or three countries may have to take a sabbatical. I think that is where we are going, Tom.

  • Keene – If we do that, don’t we get a rush almost a physics vacuum of money into that core Europe, thereby diminishing the exports of Germany, France and say the Netherlands as well?
  • El-Erian – You saw yesterday how the Euro responded …Germany is basically saying “I am going to strengthen the core and I want all these other countries to abide by our rules and we are going forward on that”. So the Euro’s reaction was, hey may be, Europe is not as weak as it looks… …Europe has to make compromises and right now the most important compromise is to stabilize the core. last week, France got a real scare when it saw its CDS go up 180 when it saw one of its banks under pressure ..that’s why France is now signed up for stabilizing the core.
  • Keene – How does Switzerland remove itself from this Swiss Franc strength?
  • El-Erian – All the economies that have caved under the burden of appreciation, Switzerland, Brazil, are all saying enough guys, we don’t want any more of your capital but they just don’t know how to slow it..It is very tough and that speaks to these imbalances Tom, and how difficult it is to adjust global economy when only one side is adjusting..
  • Keene – let me ask you about investing, do you still suggest that emerging markets will come back in 2012? Do we need to go long Brazil, right now?
  • El-Erian – remember, when you invest in Emerging Markets, you underwrite the bad technicals. The bad technicals are very are small relative to the capital that comes in and the capital that goes these markets will inevitable overshoot on the way up and then overshoot on the way down..we are in the overshooting process of the way down right now.

    • First we think that the most systemically important emerging economies can manage their success…they have the balance sheet, they have the internal growth dynamics,
    • Second, we hope that the world can accommodate their success…so you want to look right now at selective opportunities…this is not yet the time to buy an emerging market index….the time will come but it is not yet now…but it is the time now to pick up selective opportunities and then wait and see how the adjustment proceeds.

  • Keene – as far as the peripherals to slip away, which institution should we look for to affect that transaction or will it be nation to nation, like Germany and Greece that negotiate that parting?
  • El-Erian – I suspect it will be bilateral. We don’t have a process for it. Some people say it will happen because we don’t have a process. I think it is the other way around. We will have an ad hoc way of doing it. Not only because it is in the interests of the Eurozone but ultimately it is also in the interests of a country like Greece..Remember Greece has two distinct issues…it has too much debt and it is not competitive enough…it is difficult to see Greece overcome these issues within the Euro zone..

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