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. Minimum Now but QE3, QE4, QE5 later?
“It’s the minimum that the Fed could have done“, said David Rosenberg to CNBC’s Maria Bartiromo on Thursday about the Fed’s decision to merely extend Operation Twist by six months until December 2012.
In his view, the statement contained “the most downbeat assessment” from the Fed. The Fed downgraded it’s GDP forecast for the next two & half years. The 2012 GDP forecast was lowered from 2.65% to 2.15%, 2013 from 2.90% to 2.5% and 2014 from 3.35% to 3.25%, a total reduction of 1%. Rosenberg added:
- “there is not one Fed official that [says] that the unemployment rate is going to be below 6.3% by 2014. And that’s the level we got to the in September of ’08….if you don’t get to the level that we were at when we were ten months into the worse recession since the 1930’s. that tells you something. QE3, we could be talking about QE 4 or QE5 based on this forecast alone.”
Komal Sri-Kumar of TCW said on BTV’s Street Smart that the fall in gold is an indicator of upcoming deflation and he thinks that the European contagion will be transmitted to the US via the financial sector. Once that happens, he says “we will probably have to start the floodgates with QE3 & QE4” (see clip 1 below).
Lawrence Goodman of the Center of Financial Stability and a former adviser at the Treasury told CNBC Fast Money (minute 07:18 of the clip):
- “…The scary thing is
that the economy is actually starting to slow, actually starting to slow
pretty hard….I think it [our indicator] paints an even more dismal
picture than what the Fed is seeing…that is showing is that the
economy is slowing dramatically…the numbers we released today show a 0.2% yr/yr increase in the entire monetary sector, the broad monetary sector of the economy…down from a high this year of 2.7% in February…”
ECRI reported on Friday that the annualized growth rated of their Weekly Leading Indicator fell to -3.6%, the lowest rate since mid-February. This is consistent with the February top of Mr. Goodman’s M4-based indicator. The slowdown in the economy was confirmed in a dramatic fashion when Philly Fed came in at -16%, a shocking drop.
2. U.S. Treasuries
The Economy is slowing down, the data is awful, the Fed extended its buying of the 6-30 year Treasuries and stocks fell for the week, including a hard fall of 250 points on Thursday. So Treasuries must have had a good week, right?
Actually, Treasuries fell across the curve and Treasury yields rose by 7-10 basis points for the week. The long maturities closed on Friday on their lows and the 10-Year yield closed at 1.67%, a level Jeff Kilburg has noted as pivotal. In fact, he tweeted on Friday:
- “Close above 1.67% is bearish for prices Folks ~ YES, 1st time i have said that in a Loooong time ~ 1.8%-2.10% range coming if it does”
But Robert Kessler, a loyal bull on Treasuries, continues to find the 10-Year Treasury attractive at these levels (see clip 5 below).
3. The U.S. Stock Market
Speaking of levels, 1,340 on the SPX and 21 on the VIX were critical to Lawrence McMillan of Option Strategist for confirmation of buy signals. “If that confirmation takes place,” he wrote a week ago, “a strong bullish phase should ensue.”
That confirmation was received and, true to his word, Mr. McMillan told CNBC Fast Money on Tuesday:
- “the equity put-call ratio got as high up as it did last August which was a decent time to get in, another ration the total put-call ratio…, that gave only its 16th buy signal in the last about 14 years. Out of those 16 signals, 12 have been profitable and every single one has registered a 100 point gain on SPX. So I am looking for a 100 point gain from yesterday’s close [target 1,440]. The time varies.. in 2008 it happened in 8 days, in 2002 it took 6 months, depends on the volatility of the markets. We really exhausted a negative contrary extreme – there was an awful lot of put buying in the last few months…SPX broke out above 1,340.. it used to be support, then it became resistance, hopefully now it is support again….”
That was Tuesday and his hope was dashed within 48 hours as the S&P crashed below the 1,340 level to close at 1,325 on Thursday. It limped back to 1,335 on Friday. Mr. McMillan discussed this break in his weekly opinion on Friday afternoon:
- “The stock market had
just about everything going for it in technical terms this week, but
then the fundamentalists delivered a nasty blow…
- In summary, the
technical indicators remain bullish, except for breadth. We are going
to give the upside the benefit of the doubt. But if $SPX should decline
further, or if $VIX should close above 21, or if the put-call ratios
should roll over, then we would have to relinquish our currently bullish
High school tried to teach us the Uncertainty Principle, that the act of watching an electron in itself changes the behavior of the electron. This week, in a weird variation of this principle, the index used to measure market volatility became the most volatile index itself. VIX fell by 13.36% on Monday, rose by 33bps on Tuesday, fell by 6.20% on Wednesday, exploded by 16.47% on Thursday and fell by 9.81% on Friday to close down 3 points on the week. What does this mean? Would Dr. Jon Najarian fire up his ‘Sonar’ and report the findings to CNBC Fast Money on Monday?
On Tuesday, the day before the Fed statement on Wednesday, we saw a number of tweets about the trading patterns for Fed days and option expiration weeks. The most accurate and most beneficial tweet was from CNBC’s Amanda Drury on Tuesday morning:
- “Dow has fallen in the wk following June quadruple witching for 13 yrs in a row, with avg decline of 1.57%”.
Do they say “full marks” in Australia? If so, then full marks to Ms. Drury. The Dow did decline by about 1% this week.
This week, the talks between Iran and the major powers broke down. Then on Friday, Syria, reportedly shot down a Turkish airplane. Is that why Oil rallied by 2% on Friday, one of its best days in recent months?
Or was it because of Friday’s change in the term structure of Oil as Dennis Gartman said to CNBC Scott the “Judge” Wapner?
- “….the only thing you can count on to change the dynamic is the term structure of the futures markets has to change, what we have seen over the past several months is contagos have gotten wider and wider in WTI; Brent, which was in a huge backwardation has itself gone into a contango…markets that go to a contango tell you that supply is far outpacing demand…now what is interesting is you have had that term structure moving bearishly for about 2.5-3 months..”
- “today, interestingly enough, you had the term structure in WTI reverse rather sharply, I pay attention when the term structure shifts, historically it shifts before the flat price moves and the fact that the term structure came in today, acted bullishly for the first time in months is interesting and may signal a short term bottom in the energy market.”
Mark Newton of Greywolf concurs with Dennis Gartman and says “we are closer to a low at least in the short term” (see clip 2 below).
Getting back to Mr. Gartman’s point, we wonder whether the term structure came in on Friday because of the prospect of instability & violence in the Middle East? Seemingly informed people suggest that the Saudis were on a mission to shoot down the price of oil because that would cause very serious economic problems for Iran, its main antagonist. This fit in with American sanctions which were designed to make Iran fold on the nuclear issue.
Things changed this week in the aftermath of unsuccessful talks between Iran and world powers. The New York Times reported that “Iranian politicians and military commanders said Wednesday that their
country would never relinquish what they called its nuclear rights,…”. In another article, the New York Times wrote, “With high-stakes negotiations over Iran’s nuclear program
at an impasse, the Obama administration is under mounting pressure to
rethink a diplomatic exercise that many argue is simply stringing along
the rest of the world” .
Back when talk of an Israeli attack on Iranian nuclear installations was loud, we suggested that a bar-bell of 30-Year Treasuries and Calls on Oil & Oil stocks would serve as portfolio insurance. The Treasuries proved to be superb insurance during May’s stock market debacle. Now, if Dennis Gartman is correct on this being a short term bottom in the energy market, re-establishing those Oil Calls might come in handy when the Middle East gets hotter.
5. India – Can the news get any worse?
CNBC’s David Faber reported on Tuesday that he was hearing really negative things about India from his sources. Every newspaper, every global think tank in the world has written articles about India’s economic mess. We are delighted to have David Faber finally join the chorus. We have heard that Mr. Faber is a man with intelligence, with brains and that his sources inside Private Equity and Wall Street M&A are second to none.
The way we see it, Mr. Faber is a classic case of Analytical Intelligence or rear-view intelligence. So we wonder whether his comments about India signal that a relative bottom for India may be near. It is dangerous to write this publicly as the Indian Rupee keeps sliding to all time lows vs. the Dollar. But we may not alone in sensing opportunity in India. This Thursday, JP Morgan upgraded Indian equities to “overweight”. On Friday, IKEA announced their plans to invest 1.5 billions Euros in India’s retail sector.
Something important happened in Indian politics this week, in our opinion. Sonia Gandhi, President of the Congress Party & India’s current Viceroy in our illustrative terminology, gave in and nominated Pranab Mukherjee, the current Finance Minister, as her candidate for the President of India. He is expected to win easily. Mr. Mukherjee is viewed as a competent and pragmatic administrator but not necessarily a loyalist of the Gandhi-Nehru family dynasty. Mrs. Gandhi’s first choice was a Muslim loyalist who is currently India’s Vice President.
This is the first pragmatic step we have seen recently from Sonia Gandhi and we may well see more. The next election (in 2014 unless held sooner) will decide the political future of Rahul Gandhi, her son. So she, we think, will try to improve governance of her chosen cabinet a least until the election. This is a turn for the better.
We wrote about the credit bubble in India on July 9, 2011 and provided a tongue-in-cheek indicator to suggest a top in the Indian economy on July 2, 2011. This week, we went the other way and asked a Leading Question: Can India Be the First ‘Fallen Angel’ to Fly Again?
6. Sikkim – a remote corner of India
As we have written, it is impossible to not become very bullish on India when you look at the micro story. Away from the Government, away from the macro mess, the story on the ground is secularly bullish.
(Sikkim is the tiny state in orange) (Kanchenjunga – 3rd highest peak on earth – src Wikipedia)
Sikkim (Demazong), the remote Indian state located on the Indo-Tibetan border, is the least populous and among the least developed state in India. We drove through Sikkim during a ten day trip this past May. We saw and heard nothing but optimism about the economy and the opportunities for children. We regularly saw smiling young boys and girls walking 2-4 miles to their school.
Tom Friedman had written in wonderment about Indian billboards advertising Master’s Degree in Physics. Those are near the major cities. In a small, remote little town-village in Sikkim, a rest stop for travelers, we saw the following ad:
Notice the blue door wall in the center of the small cafe. The ad on that blue door is the ad in the left picture – an ad for an English language school. Notice it is the only ad posted anywhere in the cafe. This is among the least populated areas in India and you still see the focus on education. The young man in the green shirt was our driver and the black shirt of the young woman was a Kentucky Wildcats shirt.
Gangtok, Sikkim’s capitol, has an absolutely marvelous 5-star hotel. Surrounded by hills, this lush opulent hotel is just made for sheer relaxed pleasure. About 26 km from Gangtok, is the famous Tsongo Lake. This 12,000 feet high lake is located just near the India-Tibet border and adjacent to the extremely strategic Nathu La Pass.
(snow capped peak in the center – destination) (What the peak looks like when you get there)
But the road is awful. The picture below doesn’t do it justice. For about 3 hours, you drive up a ridge and down a valley on roads that can barely accommodate a car and half, with a hill on one side and a ravine on the other. But once you get there, it feels ethereal.
About 15 km from Tsongo Lake is the mega-strategic Nathu La Pass in which Tibet juts in between Sikkim and Indian protectorate of Bhutan. Look at the map above. A fast attack through the Nathu La pass would enable the Chinese army to enter Bangladesh and cut off the entire northwestern India which is connected to India through and only through a small area called the Siliguri neck. The road above is also used by Indian military vehicles. Our guide told that across the border China has built a 4-lane highway for Chinese Military. Only Indian citizens are allowed to go to the Nathu La pass. This pass is just across the peak in the pictures below:
( the Nathu La pass is beyond this peak) &nb
sp; (the peak and the road – a telephoto picture)
This was May, one of the hottest months in India. Our young escort joked “look at the snow all around us. They tell us about Global Warning but it is reverse“.
Getting back to the Indian economy. This trip was in May, the month in which the Indian Rupee was falling hard. But every hotel in our trip was 100% full and so was every single airplane. The 4-hour plane fare from Mumbai cost us about $550 and Gangtok Mayfair, about $250 per might. Gangtok will get its own airport in 3-4 years and then people will be able to fly directly into Gangtok rather than driving about 4 hours from the airport in the plains. At that time, the Gangtok Mayfair will be about twice as expensive. It will still be worth every penny.
During our drive back, we took the opportunity to do water rafting in the Teesta, the Himalayan river that flows from the Kanchenjunga into Bengal. During the 11km water-rafting course, you can still see the destruction unleashed by a Himalayan flood in 1986 – beautiful and frightening at the same time.
- Komal Sri-Kumar on BTV’s Street Smart on Thursday, June 21
- Mark Newton on CNBC Squawk on the Street on Friday, June 22
- Bill Gross on BTV Market Makers on Monday, June 18
- Meredith Whitney on BTV Surveillance on Monday, June 18
- Robert Kessler on CNBC Squawk Box on Tuesday, June 19
1. It is going to be a very major contagion – Komal Sri-Kumar on BTV’s Street Smart – Thursday, June 21
Komal Sri-Kumar, chief global strategist at TCW Group, visited BTV’s Adam Johnson & Trish Regan. We found his comments refreshingly candid and insightful.
- the fall in stocks is foretelling that the global economy is in a slowdown, it is universal; it started with Western Europe, UK is already in a double dip recession, Chinese economic growth is in a slowing and it is coming to US in the second half of the year..
- price of a basket of commodities is going down,… falling price of gold is an indicator of deflation to come...just like we have stock prices which foretell you what is going to happen to the US economy, falling prices of gold, falling price of commodities is telling you the whole world is going into a recessionary framework & you are getting an adequate warning of that…
- there is a major deterioration coming and that is going to be transmitted to the United States not in the form of S&P corporate earnings in a big way – the biggest transmission mechanism is going to be the financial sector…this is a contagion that passes through the financial sector
- whether it is as big in 2008 or not depends on how we manage it…it is going to be a very major contagion & it has not yet fully reflects in prices…the US has very limited power to manage it; …the US ability to react is going to be limited but once it happens, we probably will have to start the floodgates with QE3 and QE4.
- I do worry about a liquidity crisis if the European situation worsens & that has not yet figured in Bank sector prices.
Both Adam Johnson & Trish Regan pronounced Komal as Komaal. May be, that is how Mr. Sri-Kumar prefers it, but we doubt it. But we did not hear Mr. Sri-Kumar correct either Adam or Trish. If we are correct then Mr. Sri-Kumar lived up to his name Komal which, we believe, means soft or delicate. Does Mr. Sri-Kumar know that he might an answer to the question Why India Tends to Collapse So Often?
2. Near a Bottom in Oil but not in Gold & Buy Dips in S&P – Mark Newton on CNBC SOTS – Friday, June 22
Mark Newton is the chief technical analyst with Greywolf Execution Partners. Here he speaks with CNBC’s David Faber, Simon Hobbs and Melissa Lee.
- Lee – I want to focus on oil.… To think that at the beginning of June we were at $100 a barrel, and we’ve reached the 200 day moving average yesterday. Where do we got from here?
- Newton – my thinking is we’re closer to a low, at least in the short term. We are starting to get very oversold, there are signs of downside exhaustion, also widespread pessimism, crude has fallen 30%, and now everybody is bearish on crude as it approaches former lows from October. So there are a few things to look at. One is the spread WTI vs, Brent which I think is gonna continue to contract. So my thinking is that energy which as a whole is down down about 8% thus far this year, It is better to be long energy going into the 2nd half of the year.
- Newton – I think WTI will stabilize more so than Brent. Brent has been in a more vicious decline.
- Faber – what’s downside exhaustion? is that a technical term?
- Newton – there’s a few indicators. one are DeMark indicators that are starting to reflect signs of just widespread exhaustion meaning that it is very difficult for prices to decline too much more at least in the short run. You are getting TD Sequential and TD Combo buy signals on WTI crude for the first time really since the decline began 4 months ago. So that coupled with rampant oversold conditions. we are also seeing signs of positive divergence – price has fallen, but momentum is starting to gradually stabilize here. for me that’s a real short-term positive.
- Newton – I think we will at least see a decent bounce, potentially 15-20% from lows on WTI. Energy is down 8%, it is really the only ma
jor sector that is down for the year. So it makes sense to look at these energy stocks which have really been overdone.
- Lee – let’s talk gold here, we did go negative for the year.
- Newton – Gold has been range-bound over the last year. It’s break in the last few days is somewhat technically bearish. It makes me think we can get down to 1500. We have seen a few lows near 1525-1500 in the last 9 months, So this level I think will be tested and likely breeched. However, as you get into the months from August to October, it tends to be bullish for Gold seasonally. That is the time to own gold. So we will see a resumption of the uptrend into the fall.
- Hobbs – On the stock market? 1285 is the near term call of the Goldman Sachs report. Do we get there?
- Newton – I think it is very possible. Near term 1300-1305 is the level I am looking at. If we’ve reached that, it’s likely we will test the June lows and lower than that. We could potentially get down as low as 1275 to 60.
- Newton – If you look at the daily chart, we got up to 1360. That’s a level that has marked two prior lows from April. That’s a serious level of resistance. As of yesterday, we fell and broke support right near 1330 to 1340 on very heavy volume and poor breadth. So short term we’re still in a downtrend from late March as part of an overall advance from 2009. So it’s a seasonal correction, we saw the same thing last May and even in May 2010.
- Hobbs – So you are talking about a 5% correction?
- Newton – That’s right. I still like buying dips in the S&P. Our market is in much better shape technically than a lot of the rest of the world. So a pullback in the next couple of weeks would offer a decent opportunity to get involved.
- Newton – I have legitimate concerns about the longer term . We have seen a weakening of the trend since 2009. On the monthly chart, we have made virtually no progress since 2000. Near term, pullbacks are buyable but have concerns over the next couple of years we could pull back.
3. Germany is a Credit Risk – Bill Gross on BTV Market Makers – Monday, June 18
Bill Gross appeared as a guest on the new BTV show Money Makers hosted by Stephanie Ruhle and Eric Schatzker.
Gross on what he sees happening in Europe:
- “I would be leery of German bunds simply because there are a few scenarios in which they can do well. If they will do well, if Germany leaves the zone and some way or another move back to the deutsche mark opposed to the euro and pay off obligations in euros and benefit because of it. Otherwise, increasingly, as we have seen over the weekend in terms of Greece, this kick the can environment adds liabilities to the German balance sheet day after day. They have what they call it a target 2 type of liability where they assume constant liabilities from Spain, Italy, and others as they move to the German Bundesbank. Increasingly, as the months move on, Germany becomes more and more liable for the euro balance sheet despite the possibility that Greece departs. Germany to me is a credit risk and certainly in terms of its tight shirt and shrinking shirt at the sleeves, is not an attractive market.”
On countries like Germany and Japan:
- “We were making a point in internal discussions that these clean dirty shirts have to fit. To the extent that these have been shrunk at the dry cleaners and the sleeves are up to the elbows in terms of low yields then perhaps you do not want to wear that shirt either. That is the case in Germany, not necessarily the case in Japan. In Germany, we have seen a bubble of some proportions as money is moving from Greece and other peripherals into the heart and the core of euro land. Would I buy a two-year German Schatz at close to 0% yield? Probably not. It is not only the dirt on the shirt, but the fit in terms of the yield that is important as well.”
On whether he would go long subprime or get into the distressed space:
- “We want yield, but we want what we call safe yield. We want to invest in the cleanest dirty shirts, which appear to be the United States and perhaps the United Kingdom. To that extent, we’re looking at mortgages, non-agency mortgages, not subprimes, but agency mortgages which provide a 1.5%-2% yield. These are instruments which because they prepay so rapidly at 25-30% a year, really present a two to three year maturity like the portfolio that Jamie Dimon was mentioning and they yield 1.5%-2%. These are not the heydays of bond investing, those were back in 1981, but to the extent you can beat a two-year treasu
ry at 27 basis points with a mortgage that resembles that at 1.5 to 2 is what we are doing.”
On whether Germany has the ability to rescue Spain:
- “I think the ECB as representative of euro land as a core has the ability. The question is do they have the will. Any central bank has the potential to increase their money supply to buy obligations and to write checks if they are willing to suffer the currency depreciation that comes from that. Up until this point, the euro has gone down in value. Will the ECB be willing to permit a 10-15-20% decline from this point forward? It’s not very German-alike in terms of their attitude. It’s not very Austrian in terms of their monetary policy, but increasingly the market expects them to at least move closer to the margin in that regard.”
On whether Spanish bonds will ever become attractive to PIMCO:
- “Of course. If a bond manager says there is no price, then he is not thinking straight. I think at these levels with these types of market technicals, probably not. What euro land, the EU, and the ECB want, they want the PIMCOs of the world, the Chinese and their associated agencies to come back in the water. PIMCO and others basically sense a lot of sharks in the surface. A lot of fins protruding from the surface. It’s not a safe environment as long as the EU and the global economy is delevering, which it continues to do.”.
On whether there’s a point where intervention has to happen in Spain because they won’t be able to rescue themselves:
- “They say 7%, but that is a fictional number. No one really knows. What’s important to me and to PIMCO going forward is to look at the entire zone and not the falling dominoes in Greece, Ireland, Portugal, and perhaps Spain, but to look at the core. Imagine a financing rate for the core if you used Italy and France together, not Germany because they are a little on the too-high quality side and too low yield, but together Italy and France yield about 4% of the total. That’s still too high a rate relative to nominal growth. What the EU wants is nominal GDP growth. They want to reflate. They want some inflation as well. 4%-types of financing is still above that 1%-2% nominal GDP growth that they are experiencing. Rates in Spain, Ireland and Greece another matter, but rates at the core are still too high and they need the private market to come back in.”
4. Citi is not going to come back – Meredith Whitney on Bloomberg Surveillance – Monday, June 18
Bloomberg Surveillance is the new morning BTV hosted by Tom Keene. The excellent summary below is courtesy of BTV PR.
Whitney on Jamie Dimon’s testimony before Congress last week:
- “He had a couple tough questions, but he is, like nobody else, the antithesis of Blankfein. He charms. He’s incredible. He gave the senators a massage and they gave him a massage back. You see a complete juxtaposition between the two, and it’s theater…I think what you saw last week is everybody’s trying to argue for, oh, JPMorgan, come rebuild your branches in our hometowns and create jobs. As we said, it’s political theater.”
- “I don’t think this could have happened at a worse time for the banking industry and I was surprised that things went as well as they did last week. I was very surprised because it’s a very difficult trade to explain. I don’t think it’s been explained well at all…Hedging for credit and to take such a disproportionately weighted bet seems curious to me…What’s clear in the last couple of months is that it’s hard to argue that some of these transactions aren’t proprietary trades.”
On Dimon saying that increased regulation will stymie bank lending:
- “I just don’t think so. It stymied the velocity of money, the velocity of liquidity in the system because you have to hold more capital. It just slows down the system. But in terms of lending, absolutely not. The fact is, so much of the loan book is mispriced across the market. So you have to have re-pricing in the market. Banks have to figure out a basic way to make money again.”
On whether banks are not lending to small business because of fear of increased regulation:
- “This is the biggest misconception about small business. Small businesses fund themselves like consumers. So small businesses have funded themselves since the early 90s with home equity loans and credit card loans, and those are both contracting. So it’s not that banks are not lending to small businesses. Banks aren’t lending to consumers.”
- “I still think of Citi as a pre-reverse split-type institution, a $2.70 stock. That’s down from $47 or mid $40s where I made a call on October 31, 2007, and it hasn’t come back. It’s not going to come back.”
On whether banking is reinventing itself:
- “It has to. It so clearly has to. Over the last 15 years you’ve seen incredible consolidation and this too-big-to-fail concept and the supermarket structure evolve. It’s so clear that the supermarket structure doesn’t work anymore, so the big banks are getting smaller and the smaller banks are getting bigger. I think that you will see a very different financial market in 5-10 years. Very different than you see today.”
On the U.S. economy:
- “It just has to rebalance itself. So the areas that grew our economy the last 30-50 years are the ones that are the most challenged and struggling right now. So you’re rebalancing that with the center part of the United States that’s booming. So you go to Texas and Oklahoma and North Da
kota. Some of these states have very small populations but are getting incredible immigration and emigration from California and high tax zones, so the U.S., this is great. Every 60 years or so the U.S. economy reinvents itself. It’s in that process right now regionally. And it just takes time.”
On whether to invest in regional banks now:
- “I think there will be banks you are going to be able to buy. That’s where the real growth is. Ultimately, the big banks are going to be much smaller institutions. So you want to be not only where institutions are getting bigger, but also where the markets are getting so much bigger. So huge tail winds from the central corridor. I’m sure people can figure it out for themselves.”
- “Well, you think about what happened over the last 15 years and is the system better for it? So Tom Hoenig who I think is one of the smartest financial leaders argues is that the U.S. was an incredibly dominant financial super power for 25 years when industries were specialized, and you had higher profitability. Once you got to this supermarket structure and too-big-to-fail system and post-Glass-Steagall world, you had pricing just marginalized. And if you look at your but for leverage, these institutions just weren’t that profitable. So because margins became razor-thin, they had to take more and more risk. And in doing so, with depositor’s money or at least the benefit from a lower cost of funds from depositor’s funds, meaning a higher credit rating because they had these banking divisions.”
On what concerns her most right now:
- “I cared about and I still do, about the reconstitution of the United States. The demographic shifts, the state arbitrage, where businesses are moving. You have more businesses investing outside of California in other states like Texas, Oklahoma, Indiana. More business development in those states. And rich people, by the way, have the greatest mobility. So you leave these ghost towns with high structural unemployment, a very low tax base, and these towns keep having to raise taxes, which you get the flight of the deep tax base anyway. So the bond market is a side event of all of this. What really matters is the real divide between have and have nots in this country. Where you want to be invested. Where businesses want to be invested. Because in these towns where businesses are leaving and taxes going up, home values are going down and are continuing to go down.”
5. 10-Year Treasury still attractive – Robert Kessler on CNBC Squawk Box – Tuesday, June 19
“Barron’s calls him the real bond-king“, said CNBC’s Becky Quick speaking of Robert Kessler, Founder & CEO of Kessler Companies. Gillian Tett of the Financial Times was a guest host. Ms. Tett, we seem to recall, was vocally bearish on Treasuries in March-April 2012. Of course, that proved to be a superb buying opportunity.
- Quick – When we look at Treasuries at 1.5%, that makes a lot of people think, oh, my gosh. why would you give the government money tore ten years, expecting a yield of 1.5%? what makes it still attractive?
- Kessler – for some reason we have a problem with zero, which is where the Federal Reserve is. And the Federal Reserve has been there the last three years and that anchor is really determining these other rates that we’re looking at. And as long as we think the Federal Reserve is going to be at zero, then rates have no place to other than to meet that zero. And, in fact, we have countries all around the world right now where rates are negative. An amazing thing – Switzerland, minus a quarter of 1% for a five-year treasury. So people are paying to give the government money to know they’re going to get the money back.
- Kessler – We’re so used to looking at these rates and we hear on television all the time, “I wouldn’t buy a Treasury“. We’ve been hearing “I wouldn’t buy a treasury for 30 years“. Every time the rates ratchet down, those are too cheap, “I wouldn’t buy that“. We’re at 1.60% and, of course the same thing is taking place.
- Kessler – So, if you look at the past 200 years, take a very long period of time,…if you look at Treasuries over the last 200 years, the average rate is really 3-3.5%. and yet, everyone talks about the average rate as being 7% from 1982 on.
- Kessler – And 1982 was an anomaly. It was after the ’70s. We don’t get inflation in this country very often, As you look at that spike, that’s once every 200 years (200-year chart of Treasuries displayed on TV).
- Kessler – so when people say the bull market in Treasuries started in 1982, I think that’s probably wrong. The bull market in Treasuries probably started in 2007 mostly because the whole process of creating credit and debt culminated as we got into 2006/2007. And normally bull markets in Treasuries take place from that de-leveraging process and that’s what we’re in right now.
- Quick – what about the way the Fed is printing money right now?
could they get us back into an inflationary cycle as bad as if not worse than what we saw back at the ’70s into the ’80s?
- Kessler – the problem is that money isn’t going any place. That money is basically sitting in banks and we don’t have what he call velocity, meaning someone’s out borrowing it and spending it. you have a consumer which is leading this recession, not just here, but in Europe.
- Sorkin – you don’t think one day that will happen? you don’t think there’s going to be a tipping point?
- Kessler – probably, but not in the immediate future. I think one of the big mistakes, at least I hear all the time, is “we’re going to buy these big cap dividend stocks because in the long term, that will be a good investment”. Every time I hear the long term, I know someone’s losing money.
- Kernen – you think that’s the wrong strategy, buying at 4% dividend Pfizer or something like that?
- Kessler – I mean, sounds good. it’s seductive. I have heard “why don’t we buy AT&T, it has a very nice dividend”. And if go back two three years ago when the market really took a fall, AT&T dropped 47%. I mean, we have a very short memory about the reaction in markets... I think this country appears to be going into a recession and it’s certainly not being helped by Europe and if Europe’s in a recession we’re in a recession .
- Kessler – …if you look at the Japanese markets,…had you owned JGBs you would have outperformed the Nikkei average consistently, 3% gain versus 0. In the United States, we are facing that same de-leveraging process, …, and if we’re facing it for the next decade,…then that 3% from the Treasury market might seem attractive.
Send your feedback to [email protected] Or @MacroViewpoints on Twitter.