Interesting Videoclips of the Week (September 17 – September 23)

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.

1. Bernanke Giveth & Bernanke Taketh Away?

On another Wednesday, on November 3, 2010, Chairman Bernanke launched QE2. This aggressive decision trashed the U.S. Dollar, launched precious metals, commodities into a higher orbit and transmitted inflation to emerging markets. This is not just our opinion or the considered opinion of many pandits and savants. It is what the charts prove.

This past Wednesday, on September 21, 2011, Chairman Bernanke launched Operation Twist. With this massive $400 billion dollar program, the Fed will buy Treasuries of longer maturities and finance this program by selling Treasuries of short maturities of three years or less. A full 29% of this amount will be used to buy Treasuries of maturities between 20 years & 30 years.

This is not just a Twist but a Torque. The QE2 program was a force. It pushed liquidity into the more leveraged economies and markets. It pushed the Dollar lower and pulled precious metals, commodities higher. The new Twist program is not a force. There is no new money injected into the markets. What is bought is paid for by what is sold. The objective is to turn short maturity rates higher and turn long maturity rates lower. In other words, a $400 billion Financial Torque Wrench .

The result of the Bernanke Torque is likely to turn the money flows going into the emerging markets back into the USA. It is likely to turn the spread between growth of emerging economies & US economy back towards its long term average.

If we are right, then the US Dollar is likely to rise in the coming weeks and emerging currencies are likely to fall relative to the Dollar. After fighting QE2-injected inflation for the past few months, central banks in EM countries are likely to face the torque of shifting their policies to fight deflationary outflows of capital.

Is this why EM Debt and EM currencies fell apart on Thursday and Friday? These asset classes had maintained a relative resiliency in the face of the European mess. But immediately after the Bernanke Torque announcement, these asset classes fell apart.  Is this just a steep but short correction or is it a major trend reversal? The latter, we think.

This is why the Bernanke Torque may end up taking away what Bernanke QE2 gave to EM.

* The Greek letter “tau” is the traditional symbol for torque. So those so inclined could call this program the Bernanke Tau.

2. Bernanke Torque & the Banks

The Federal Reserve is the nation’s Central Bank.  Chairman Bernanke is entrusted with the oversight of banks. He understands banks. Yet, he has launched a program that compresses the net interest margins in the entire banking sector.

Is the banking sector no longer important to Chairman Bernanke? Has he given up hope that Banks will increase their lending? Or does he believe that a stronger economy is more likely to increase lending than lower net interest margins? After all, the banks are sitting on $1.6 trillion of reserves already.

While we ask questions, Dick Bove, a visible banking analyst, proclaims. Read his proclamations in Fed Has Broken Banks & Doesn’t Know It on CNBC.com. There he makes the wild accusation that the government “is committed to breaking the hold of the banking system on the U.S. economy.” If Mr. Bove means the Obama Administration, he might have a case. But why would the Chairman of the Federal Reserve be committed to cutting down the banking system? We don’t get it.

But we also don’t get how the Bernanke Torque is supposed to help the American economy? An economy that has “significant downside risks” according to Bernanke himself?

3. The Bernanke Torque & US Treasuries

Wednesday was Christmas, Deewali and every joyous festival known to the long duration Treasury market. In less than two hours after the Fed announcement on Wednesday, the 30-Year Bond rallied by 3 points and its yield dropped by 18.8 basis points to 3.01%. On Thursday, the next day, the 30-Year Bond rallied by over 4.5 points and its yield dropped by 21 bps to 2.80%. On Friday, it suffered a minor setback, relatively speaking. The price dropped by 2 points and its yield rose by about 10 basis points to 2.90%. 

We cannot but help recall the action in the 5-Year Treasury after the QE2 announcement on Wednesday, November 3, 2010.  The 5-year Treasury rallied on that Wednesday and Thursday. The 5-year Treasury closed that Thursday at a yield of 1.03%.  Its price fell a bit on Friday and the yield rose by 2 bps to 1.05%.

Then, despite the weekly purchases by the Fed, the yield on the 5-Year Treasury kept rising upwards and within a short period reached 1.51%.  By April 8, 2011, the 5-Year yield had risen to 2.34% (on that day, the 10-year yield was 3.60%, the 30-year yield was 4.66%, the S&P closed at 1328).  The point being that the Treasury market had fully priced in the entire bullish impact of QE2 within two days of the Fed’s announcement.

The question is does this behavior repeat? Has the two day, 7 point rally in the 30-Year Treasury Bond already priced in the entire bullish impact of the Bernanke Torque? We shall see.


4. The Greatest Insurance You Can Buy

We have steadfastly maintained that the best insurance you can buy for tail risk is an adequate position in 30-Year Treasury Bond. Nothing we know works as well. It was QED this week. The beloved safe havens of Gold & Silver got demolished. Only a large position in long duration Treasuries protected portfolios.

The two people that have remained committed to their bullish posture are David Rosenberg and Gary Shilling. This week, the yield on the 30-Year touched Shilling’s target of 3%. We received a call this week from a friend and a reader about our coverage of Treasuries. The congratulations go entirely to Rosenberg, Shilling and the few others who had the courage to tell simple folks like us to stay long 30-Year Treasuries.

But is the call a signal of sorts? Does it add to what we see as a precedent of QE2 as discussed in section 3 above? It sort of does to us.

But that does not mean the cycle low of the 30-Year yield is here. The spread between the 30-Year & the 10-Year yields has been around 50 bps at previous cycle lows. This spread closed at 107 bps this past Thursday. So it may have a lot further to go. And the low in bond yield is not reached until the economy is well within the recession.

5. The US Stock Market

The US stock market loved QE2. In contrast, the US stock market hated the Bernanke Torque.  In fact, this week ended up being the worst week for the Dow since October 2008. Chairman Bernanke has stated unequivocally that the S&P 500 & US small caps are, to him, the strongest signals of the health of the US economy, an economy with “significant downside risks” as the Fed statement stated. So again, we wonder why he launched the Bernanke Torque.

The action in the US Stock market has been governed by the fundamentals of the European mess and the technical levels of the S&P.  Let us look at the technicals first.

None of the serious technical levels identified on September 10, 2011 (US Stock Market section of Videoclips of September 3 – September 9) h
ave been breached yet. But we did get pretty close to those danger levels intra-day on Thursday.

According to Mary Ann Bartels of BAC-Merrill, the severe decline on Thursday confirmed a “bear flag”, which creates risk to 1020-910 on the S&P.  She does not expect the first support of 1100 to hold and the risk to her is to 1020, 25% decline from the high. The flag break also raises the risk, she says, of a full blown bear market test of 910, 30% off the high.

The 1140 level of Lawrence McMillan broke this week. But, he feels that bulls still have a chance to rescue the market. We encourage readers to read his views and view his charts at Option Strategist. His point:

  • In summary, the last two days have violated some important technical levels, but they have also generated yet another severe oversold condition. The next short-term rally may tell a lot about the condition of the market. If it cannot carry beyond 1160, then the trend is bearish, and we would look for a bottom sometime in October.

If your bathroom seems clogged, you got to check your plumbing. If you worry about your heart, you need to check the plumbing of your blood vessels. You could do so indirectly via Cholesterol tests or you could get an MRI of your aorta. We do both.

The plumbing of the stock market is often analyzed best by volatility measures. This is why we featured Dr. Najarian’s Volatility Playbook clip a month ago (see clip 1 of our Videoclips of August 15-August 21). We urge readers to read his comments from that clip again.

During the first significant decline in August, the spread between the Spot VIX and the 3-month VIX futures reached a high  of 20, according to this Dr. J of TradeMonster. At that time, the high on the Spot VIX was around 48. This marked a capitulation and the S&P rallied back to above 1200. Then during the decline in the following week, this spread reached almost 16.5 and Spot VIX reached into the mid-40s. This told Dr. Najarian that another capitulation point had been reached and he told CNBC Fast Money viewers to expect a 500 point rally soon. The S&P rallied again to above 1200.  On this Thursday, September 22,  the Spot VIX touched about 43.60 and the spread between the Spot VIX & 3-month VIX futures went up from 1 at the beginning of the week to about 9 points.  Both the VIX and this spread then backed off.

Even we can see the pattern of lower highs in the differential between Spot VIX-3-month VIX futures. How did Dr. Najarian express this in his Volatility Playbook on Thursday’s Fast Money show?

  • even after a 900-point drop in the Dow Jones, nearly a 1,000 points there and a commensurate drop in the S&P 500, we can’t get the VIX to explode through or towards that 48 level. So that’s telling me a lot about how sticky this 1120-ish level has been and that’s why I still look for it to hold.  

And so far it has. We caution readers that both the bullish and bearish levels mentioned above could prove correct. The Najarian & McMillan methods are more near term while the Bartels method is more intermediate-term.
 
Now back to the fundamentals or lack of thereof in Europe.

6. Come Monday, Risk Will Be Back On

This is the bold bet made on Friday on Bloomberg TV by Terrence Keeley, a Managing Director of BlackRock. Mr. Keeley is the man who oversees relations with IMF and Sovereign entities at BlackRock. In his own words, “We are in the middle – Larry Fink, in particular, in the middle of every important conversation where a private-public partnership can be part of the resolution” (see clip 1 below)

Based on these meetings and the “lets fix this, lets do something” attitude he sees in the IMF meetings, he told Bloomberg’s Erik Schatzker “I do wager that they will.”  This bold bet and his reasoning behind it earned Mr. Keeley’s interview our pole position for this week.

When you read it, guess the name of the central banker, a woman, who told Mr. Keeley that the “euro will be dissolved within a year”.  How many Central Bank governors are women?

7. Does that mean Gold & Silver rally on Monday?

They should given the pounding they took this week, shouldn’t they? Gold fell by $100 and Silver fell by almost 15% on Friday. How powerful is the Bernanke Torque? By Friday, GLD & SLV had fallen by 9% and 22% from Tuesday’s close.

If Mr. Keeley wins his bet, then Gold & Silver should rally on Monday. Then CNBC Fast Money viewers should thank Jon Najarian again for asking viewers to buy SLV below $30. He did so at the depth of Silver’s decline in the 12:30 edition of Fast Money on Friday. They should also thank Joe Terranova of Virtus (Mr. T  of Fast Money) for asking viewers, a week or two ago, to buy SLV Puts when SLV was trading around $39. Kudos to Mr. T for a great call.

8. Bernanke & the Global Economy

The US Stock market is the last resilient or semi-resilient risk class left. European credit has been in a meltdown phase. EM credit is on its way. EM equities & European equities are already in a bear market. Commodities have broken down and precious metals don’t seem precious anymore.

The US market is the only class standing.  It’s ability to stand will depend on whether the US economy goes into a recession or avoids it. When Bernanke himself, who cannot afford to tell the whole truth, talks about “significant downside risks“, we all should worry. George Soros, who does not have to mince his words, says we may be already in a recession (see clip 2 below).

So what will the upcoming earnings season tell us?  That will really decide whether the next oversold rally in the US stock market is to be bought or sold. What about China? Jim Chanos says that the slowdown there has already begun (see clip 3 below). He makes a case that instead of the publicized 9% growth rate, China’s growth rate, after write-offs, may actually be Zero. India is already experiencing a slowdown due to the sustained campaign of rate increases.

After all the above, we still don’t have a clue how the Bernanke Torque will help the U.S. economy. So we wonder whether this week’s program was an act of desperation on the Chairman’s part.

If we call Bernanke’s behavior desperate, what adjectives should we use for the actions in Brazil? They intervened to support the Real and imposed tariffs on goods from China & Korea. The country that may have been the greatest beneficiary of globalization, capital flows and free tra
de is now turning the other way.  Only a Torque can force such a turn. 

9. Bernanke Torque & Municipal Bonds

One by one, credit markets are falling apart. European credit was the first to sell off. High Yield Bonds followed. This week Emerging Market Debt fell apart. But two markets have remained immune to the 2011 credit contagion – Investment Grade US Corporate Credit (IG) and Municipal Bonds. 

The IG market is blessed by superb fundamentals, the mountain of cash sitting in corporate balance sheets. The Bernanke Torque might actually benefit this sector. Large US companies might be able to issue long maturity debt to lock in very long term funding thanks to the drop in long Treasury yields.

But not all is so rosy. On Friday, Pfizer was downgraded from AAA to AA+.  What happens to corporate ratings if the markets believe we are in a recession, not just a simple recession but a recession that might be hard to get out of (as David Rosenberg said on September 8 in clip 3). Remember until last week, the view was that EM Debt is safe because EM countries have strong fundamentals and huge currency reserves. But IG problems are tomorrow’s story, if at all.

The Municipal Bond market may be a more timely story. Are the fundamentals getting worse? The Obama Plan threatens to reduce the federal tax exemption on Muni interest for the “rich”. The mere inclusion of this is a signal, we think. A bear market due to a recession would substantially reduce capital gains tax receipts that have helped state budgets. State & Local Pension Plans remain woefully underfunded at least on an actuarial basis.

On top of all this, comes the Bernanke Torque. By collapsing the yield on the 30-year Treasury, Bernanke has removed the one safe asset, the one guaranteed long term return asset Pension Plans could buy. So state & local governments will have to spend more out of lower revenues to fund their pension plans.

So we wonder whether the Muni market will wake up one day and remember there was once an apparition named Meredith.

Jim Rogers is far more intelligent and colorful than us. Read his comments in clip 4 below about the impact of Bernanke’s policies on pension plans, companies, state & local governments and the American savers. In short:

  • He (Bernanke) is killing the people who save and invest and that is really hurting a very, very, very large part of the population


Featured Videoclips:

  1. Terrence Keeley on Bloomberg’s Inside Track on Friday, September 23
  2. George Soros on CNBC Closing Bell on Wednesday, September 21
  3. Jim Chanos on Bloomberg’s Street Smart on Tuesday, September 20
  4. Jim Rogers on CNBC Strategy Session – Thursday, September 22

1. Come Monday, Risk Will Be Back On (07:07 minute clip) – Terrence Keeley with Bloomberg’s Erik Schatzker – Friday, September 23

This is the bet Terrence Keeley, Managing Director at BlackRock, made with Erik Schatzker, anchor of Bloomberg’s Inside Track on Friday morning. Mr. Keeley, according to Eric Schatzker, is the Head of the BlackRock group that deals with IMF and Sovereign entities.

Every other videoclip featured today deals with analysis of the European problem and the world of macro investing. But this is the only clip that makes a bet, and that too on both direction and time. And this bet was made on National TV before the U.S. markets opened. 

This clip amply deserves the pole position of the week.  We thank BlackRock’s corporate communications group and Bloomberg’s segment producers for helping us get this clip and the transcript. Below are key excerpts from the transcript.

  • KeeleyThis the first time I’ve attended an IMF annual meeting with the same sense of urgency, the same sense of purpose, the same sense of immediacy. In bilateral meetings, I can’t tell you how clear it is, with finance ministers, central bank governors, that there is something that must be done, something must come out of this weekend.

  • KeeleyErik, there’s a role for the IMF to play. There’s a role for the Europeans to play. There’s a role for governments to play. And there’s a role for private capital to play…. And I have to admit, it’s absolutely true. We are in the middle – Larry Fink, in particular, in the middle of every important conversation where a private-public partnership can be part of the resolution…Understand this, too. I think there’s, again, a misunderstanding. The pledges that will come out of this weekend for support for the euro zone still do not resolve the issues that must be solved by Europeans themselves.

  • KeeleyThere is $20 trillion in the hands of central banks and sovereign wealth funds. Those assets, too, Erik, are very, very misallocated to low-risk assets at the expense of investments which could spark growth, infrastructure, bank recapitalization, any number of things…..  Let’s not discount in these dark hours, I mean, we’re rushing to negative yields on treasury bills as we did in the fall of 2008. Let’s not discount what that $29 trillion in ready capital that does not have to go to parliaments for approvals could do when properly focused.
  • Keeley Central banks and sovereigns, themselves, have a ban in the periphery. Say, they start coming back in to Italian debt, say they start coming back into Spanish debt, what happens to yields?…  The core stabilizes. And then we’re back to the races. So this risk on trade, this risk off-trade mentality which dominates right now could easily slip on a dime.    I will make you the following bet. Come Monday, risk will be back on. We will see more consoling statements….The IMF could mobilize another trillion dollars if needed. The EFSF could be expanded and probably will be expanded. The ECB is providing the last line of defense right now in the periphery for the core.  This will continue. We will see Greek funds come through. It’s a very dark moment. I would argue that the fear will be given over to greed before too long.
  • KeeleyI had a meeting yesterday, Erik, with a central bank governor who will go unnamed, who said that she didn’t think the euro would exist in one year, that the euro would be dissolved. I promise you, by the end of this weekend, she will not hold that same position....(she? Janet Yellen? how many central bank governors are women?) … And I think this unanimity of purpose, the sense of urgency, the sense of immediacy, will pervade every – and certainly, been in every meeting that I’ve been in, and will continue to pervade the weekend….    I think there will be unanimity of purpose by the end of the weekend. And I think you’ll see far more consoling statements. Christine, new in the job, obviously, finding her way, but certainly saying the right things.   And the attitude here in Washington, at the IMF meetings is let’s fix this. Let’s do something. I do wager that they will.


This is a terrific interview. Kudos to Erik Schatzker for asking the right questions and letting his guest speak.  But, come on Erik, you wondered aloud what odds Terry Keeley would give you? Didn’t you see that you win either way with this wager.

You win the reward if you win the bet. If you lose the bet, then come Monday, Risk is ON, Greed replaces Fear and your ratings increase. And Bloomberg TV gets to trumpet your interview as proof of how Bloomberg puts viewers in a money making position before the markets move. Then, you could deduct your losses on the wager as a promotional business expense. Now, don’t you think you should have eagerly accepted the wager right there and then on National TV?  

2. More Dangerous Than LehmanGeorge Soros on Eurozone Crisis with CNBC’s Maria Bartiromo  (05:12 minute clip) – Wednesday, September 21

  • Soros – I think that you could have two or three of the small countries default or leave the Euro provided it is prepared and done in an orderly way. If it were to happen unprepared, it could actually disrupt the global financial system. But that’s why it’s important to allow for it to happen, and then those countries have a genuine choice. It doesn’t mean that they are being pushed out. They then have a genuine choice of making the internal adjustments, taking the pain within the Euro or leaving the Euro, in which case their  currencies would depreciate and it would be something happening to the whole country.
  • Bartiromo so you think it’s possible then we’ll see defaults from these smaller countries, but that doesn’t impact the euro?…I mean, the U.S. market is just trading directly on what happens in Europe, and so much talk around this troika, the EU, the IMF, and the ECB on whether they’re going to give that next tranche of money to Greece. Greece says it runs out of money in October. Do you feel we are seeing implementation of austerity that would warrant this next tranche of money?
  • SorosI‘m pretty sure that the Greeks will pass whatever law the troika asks for in order to get the next tranche and basically the European powers will want to extend that tranche. So I think the climax won’t come in September because they’re not prepared for it. They have to create this EFSF, the bailout fund. It’s a potential European treasuries but it’s not yet in existence, So they want to bring it in, and then in December if at that time Greece hasn’t delivered, then it would not get the next tranche.
  • Bartiromo –  is what’s happening right now in the U.S. and Europe worse than the Lehman brothers fallout?
  • Soros – It is a more dangerous situation, and I think that the authorities when push comes to shove will do whatever it takes to hold the system together. Because they know that. Because the alternative is just too terrible to contemplate.
  • Bartiromo – Do you think that it’s appropriate that in all of this the U.S. dollar becomes the safe haven even though there are real economic issues in the United States right now?
  • Soros –  yeah, this is a liquidity problem because — and let me explain this. It’s a little bit complicated. The European banks are the main source of credit to the emerging markets according to bis, in March this year the European banks had claims of $3.5 trillion.The American banks had claims of $740 billion, and the Japanese banks had $310 billion. So you can see that Europe is the main source of credit to the emerging markets.
  • Bartiromo –  do you think we’ll see a double dip here in the U.S.?
  • Soros – I think we are in it already.
  • Bartiromo – Is the market expecting that? Do you think things get worse from here? How does it play out in the U.S. right now?
  • Soroswe have a slowdown and basically a conflict about whether the rich ought to pay taxes to create jobs or not, and there was a deal in the making which would have balanced the budget over the long term but would have allowed short-term fiscal stimulus, which would have been the right policy. that was rejected. It fell apart, so it will come to the electorate next year to decide what they want.
  • Bartiromo – But, George, do we have that much time? I mean, if we’re in this recession now, this double dip right now, if we don’t get something going in this economy, where will the jobs come from?
  • Soros – well, we will have a slowdown. we will have a double dip.

We are disappointed in this interview because we are left wanting more. Maria Bartiromo had the opportunity to let Mr. Soros amplify his statements, to probe the impact on EM and to get more detailed analysis of what to do in December. She did not do so. We should really throw a flag but we are gentle, charitable souls. So we will simply assume that Ms. Bartiromo did not have enough time for a more substantive interview.

But Maria, you owe us one. Could you get Mr. Soros back and let him state his views in detail. You might also ask him how to trade on his views. 

3.  Jim Chanos with Bloomberg’s Carol Massar  (15:07 minutes) – Tuesday, September 20

This is an excellent interview by Carol Massar of Bloomberg. It is a long clip but a must watch in our opinion. It covers Europe, China and then touches on shorting the Health Care sector in the US.

  • Chanos – Following the Short selling ban in the US (in September 2008), the funding crisis got worse in the banks in October-November of 08. Sure enough, when they did the short selling ban in Europe, the funding crisis got worse….They keep forgetting that the largest short sellers and purchasers of credit default swaps in financial institutions in times like these are other financial institutions, basically hedging their bets on their counterparties. If they cannot do that, they begin to pull and that’s what we are seeing. Again, the regulators don’t understand how the markets are interrelated in these things.  They figure if they stop the short selling, it will stop the problem. Short selling in these shares were the symptom, not the disease…We were short the European banks prior to the ban, we can’t do anything now….
  • Chanos – There seems to be a continuing reliance on kicking the can down the road..we are going to solve the debt crisis in Europe by adding more debt..and as I said a few months ago, the can is kicking back. Markets are sick of these solutions, they know the accounting is no good..look at the European stress tests a year ago on the Irish banks, they said they needed a few billion euros, they ended up needing 30 billion euros…so these stress tests are a joke, the accounting is a joke and the markets are beginning to say no more..
  • Massar – is the situation likely to be fixed some time soon or is it going to linger on for next 3 months, 6 months….?
  • Chanos – roughly 25% of our GDP is Government spending right now, which a lot of people think is too high, in Europe, the number is 45-50%..so this is really so built into the structure of European economic system, that starting down this austerity path that the Germans and others feel is really necessary, is going to as Greece has found out and Ireland has found out, is not going to increase growth, it is going to decrease growth and we are in this weird trap of the fact that no one seems to have ever taken macro economics 101 in terms of trying to cut their way to prosperity..
  • Massar – Do you foresee another recession at this point and does it give the opportunity to go out and take out more short positions?
  • Chanos – I am not a macro guy..and you also know that while every one is focused on Europe, I am focused a little further East, That’s the interesting wild card in 2012 and we think the Chinese growth engine is beginning to sputter.
  • Massar – when does it come undone and what are the implications? Is it akin to the crisis we went through with our property bubble?
  • Chanos – It is happening. It is going down. Right now, the property stocks are leading on the way down, followed by the financial institutions in China. We have a proprietary sales model and we take a survey every week and that data came in last night. And in September, one of the seasonally strong months in China, condo sales in the Tier 1 & Tier 2 cities, were down 50-60% vs. a year ago. So this is happening..It is not something that is going to happen, it is happening as we sit here.

Below is a summary of the points made by Mr. Chanos on China (the emphasis are ours). We thank Bloomberg PR for sending it to us.

On the Chinese government’s balance sheet:

“The Chinese government’s balance sheet directly does not have a lot of debt. The state-owned enterprises of the local governments and all the other ancillary borrowing vehicles have lots of debt and its growing at a very fast rate. The assumption is that the state stands behind all this debt. We see that the debt in China, implicitly backed by the Chinese government, probably has gone from about 100% of GDP to about 200% of GDP recently. Those are numbers that are staggering. Those are European kind of numbers if not worse.”

On how a Chinese property bubble will play out:

“I think that will be the surprise going into this year, and into 2012 – that it is not so strong. The property market is hitting the wall right now and things are decelerating. The CEO of Komatsu said last week that he is having trouble getting paid for his excavator sales in China. Developers are being squeezed. They’re turning to the black market for lending, this shadow banking system that is growing by leaps and bounds like everything in China.

“Regulators over there are really trying to get their hands around the problem. In the meantime, local governments have every incentive to just keep the game going. So they will continue with these projects, continuing to borrow as the central government tries to rein it in.”

Chanos on his long and short positions:

“We are short Chinese banks, the property developers, commodity companies that sell into China, anything related to property there is still a short.”

“We are long the Macau casinos. It’s our long corruption, short property play. We feel that there’s American management and American accounting. They are growing at a faster rate even than the property developers.”

On the IMF lowering growth estimates for China:

“A lot of p
eople are assuming that half of all new loans in China are going to go bad. In fact, the Chinese government even said that last year relating to the local governments. If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%.  Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero.”
 

Then the conversation shifts to the drag of China on the world.

  • Massar – So the deleveraging story that is going around the world, it comes to China then?
  • Chanos – I think again, the story that people are missing is that China is the world’s growth engine and remember it accounts for nearly 1% of world’s GDP growth, it is 10% of the world’s economy growing at 10% a year, that is going to be a bigger drag going forward than people think.
  • Chanos – ..the world believes that China is an engine of growth and will continue no matter happens in the West and it is not immune. Remember net exports as a % of Chinese GDP is de minimis, it is only 5%, everything there is focused in fixed investment, building and construction. People have to keep their eye on that. That’s the elephant in the room. 


At this point, Ms. Massar asks about the Buffet rule, the need for the rich to pay more in taxes and the carried interest tax break. We leave this to the readers to watch. 

The final part of the discussion was about short opportunities in healthcare the US.

  • Chanos – We covered our shorts (last year) when we saw the (Obama health care) bill….I am beginning to rethink that position and we are reexamining health care again. On a bipartisan basis, people are beginning to realize that we cannot address our budget deficit problem without addressing health care. We pay twice what the rest of the world does…We are looking to add shorts going into next year. There is no way you can do meaningful deficit reduction, no way unless you begin to address runaway health care costs. And health care companies, basically in the US, get over half of their revenues from the US Government & State Governments. And yet, they have profit margins twice that of the S&P 500. They grow faster. And sooner or later, we are going to have to address that fact. 

The most candid and funniest exchange was when Chanos (he laughed aloud as he said it) acknowledged that he was short Netflix but its is still not a profitable position yet. Ms. Massar asked him about Coinstar.

  • Chanos – we are short both (Netflix & Coinstar). The observation I would make is that Coinstar, which operates the red box kiosks, has held up fine. But all this started with Netflix when Reed Hastings realized correctly that the DVD business is dying. Yet, that is 80% of Coinstar’s revenues are from rent DVD and 2/3 of their cash flow.

4. Jim Rogers on Brazil’s Trade war – Jim Rogers on CNBC Strategy Session  (08:12 minute clip) –  Thursday, September 22

It took some fast action on the part of CNBC Strategy Session to get Jim Rogers at a moment’s notice as it were. Mr. Rogers was visibly and audibly out of breath when he began speaking. Good work, Strategy Session. 

  • Faber – Jim, let’s get right to it in commodities. Why the selloff and what are your expectations?
  • Rogerseverything is being killed right now as you can see. partly as you may know Brazil has sort of ignited a trade war and then put on big tariffs with the people in Asia and right now China’s trying to get the Europeans to let them open up the trade with China more and the Europeans are saying, no. So China is saying no, we won’t bail you out. So there are all sorts of trade tensions developing. Not a good world.
  • Faber – No it’s not. you know, Interesting you bring up Brazil. of course earlier we mentioned Real.  What is the takeaway in terms of the so-called trade war you just mentioned? How important ultimately is that going to become?
  • Rogers – well, I hope to tell you war doesn’t break out, you know, throughout history when you’ve had trade wars it’s caused depression. You saw what happened in 1930. It led to depression. Ultimately it led to war. So I hope it can be contained. I was very surprised to see Brazil do that – one of their largest trading partners is China and Korea. Yet they certainly hit China and Korea with 30% tariff increases. It’s not fun.
  • Faber – No and the Real of course is down sharply as well. You know, in terms of Currencies here, we’re also seeing a backup almost across the board except of course for the U.S. Dollar. Last time you were with us you talked about the Dollar perhaps being a short-term buy. You still think so?
  • Rogerswell, I own the Dollar. As we talked last time, and I think the Dollar is going to go higher. At least I hope it is. That’s why I own it against major currencies. It’s going up against Real, going up against the Euro, up against everything right now. There are various reasons for that one of which is everybody is panicked and for some reason they are rushing into the U.S. dollar. The U.S. Dollar is not a safe haven if you ask me but I do own it.
  • KaminskySo many viewers want to find a safe haven ri
    ght now.
    If you wanted to park some money and just wanted to be safe what would you do?
  • Rogers – well, right now I would only have the U.S. dollar or Swiss Franc if I were putting new money to work, or agriculture. Agriculture prices are getting banged right now. contemplating buying Swiss Francs, more Dollars, and Agriculture.
  • Faber – Looking at the losses in copper today, Jim, of course concern about the Chinese economy. Do you share that concern? Or is this overdone today?
  • RogersChina has been trying to cool this economy off for a couple years. They raised interest rates six times, raised reserve requirements a dozen times. They’re doing their best to cool things off. So no. They want to cool it off I expect them to continue to do it and that is causing more slowdown around the world. The major problems are coming from the West, from Europe and the U.S. We’re much worse off than we were in 2008 because the debt has gone through the roof since 2008. At least in 2008 there was a possibility that governments could bail us out. Right now of course the governments have gotten deep into debt themselves.
  • Faber – right. of course we moved a lot of the debt from private hands to public hands –  are you talking largely about Europe when you say that, Jim?
  • Rogers – About the U.S, too. The U.S. Government quadrupled its debt in that period of time when you take into consideration the thing which the off balance sheet guarantees. You know, they took Fannie Mae and Freddie Mac’s off balance sheet derivatives positions. Those are trillions of dollars. No, the U.S. Government is in much worse shape. Everybody is in much worse shape. All governments around the world. And, you know, Pension Plans are getting killed with low interest rates, very low interest rates. Pension plans have to be funded by somebody. So companies are funding them. States and Municipalities have to fund them even more. I mean, this idea of Bernanke’s interest rates, low interest rates are good. He is killing the people who save and invest and that is really hurting a very, very, very large part of the population.
  • Kaminsky – Jim, we tried to make that point earlier in the program. Let me ask you about Europe and the banks. You hear what the banks say. They don’t need capital. The market says they do need capital. You have a good feel on this. What is your read about the European banking system and the need for capital?
  • Rogers – It does need capital. They’ve got all these Greek bonds, these Irish bonds, they all need capital. The only solution that will work is if they can all gather in a room and say, okay, we’re going to have to write off loans. we’ll have to take big losses; you, whatever bank x, you’ll suffer. we’re going to put a ring fence around all of you and support all of you to keep this system alive so that people can take money out of the banks so checks can clear, etc. etc. But they’re going to be huge losses taken. If they don’t do it now, you know, the market makes them do it in a year or two, David, Gary, then it’s going to be uncontrolled chaos. Right now you could have controlled default, if you did it now. If you don’t, if you wait a while, it’s going to be uncontrolled default.

Rogers & Soros come together again, at least on this point of uncontrolled chaos.


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