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. Deflationary Recession?
When we landed at Newark on Wednesday morning, little did we know we were about to witness history being made. We don’t recall a three day move in interest rates like we saw this week. The 30-Year bond yield fell from 2.84% on Tuesday evening to 2.52% on Friday, a rise of almost 7% in price. The 10-year yield fell below 1.5% to close at 1.45%, a record low.
Despite this drop, the US 30-Year Bond is still the high-yielder among desired sovereigns. The 30-Year German Bund yields 1.67%, almost 90 basis points below the US 30-Year yield. Notice that the 30-10 year yield spread in German Bunds is 50 basis points, while the 30-10 year yield spread in US is 107 basis points. If you look back, you will see that 50 basis points is average spread between US 30-10 year yields at the bottom of the interest rates cycle. We saw this in 2008 when the 10-year and 30-year yields bottomed at approx. 2% and 2.50% resp.
But that was before the various QE programs of Chairman Bernanke. No one expects any QE from the Bundesbank but hopes of a US QE remain ingrained in the markets. So we wonder whether the bottom of this interest rate cycle will have to wait until all hopes of QE disappear from the US Treasury markets.
Rick Santelli said on Friday afternoon that “the lower I see rates go, the more depressed I get to the message Treasuries, Bunds & Gilts are sending“. He is absolutely correct because the message is one of a global deflationary slowdown.
Peter Cohen made the same point in greater detail in his conversation with CNBC’s Gary Kaminsky:
see the world in the most difficult place since I have been active in
the business world. And I don’t see an easy way out to the problems we
face, starting with Europe coming to the United States, our extreme
overleveraged position that we have just being masked right now by the focus on Europe.
China is slowing down, Japan has its issues. The whole world is in an overleveraged, very precarious position and its got me worried.
We guess Mr. Cohen doesn’t understand the “Investing for the New World” clarion call of BlackRock’s Larry Fink (see section 4 below).
2. Global Slowdown
The Non Farm Payroll report on Friday was stunningly bad. At 69,000, the number was a huge miss of 150,000 expectations. And April was revised downwards to 77K from 115K. Within 90 minutes of the payroll report came the miss in the ISM. ECRI reported that its Weekly Leading Index fell to the lowest level since January and the index’s annualized growth rate fell to minus 0.6%. Clearly, the largest and so far the strongest economy in the world is slowing down.
The US stock market has been pricing in a slower economy based on its performance in May. But the scale of the payroll miss was greater than what had been priced in. This is why the US stock market simply gave up on Friday. There was no intra-day bounce at all and the close was bad with the S&P breaking its 200-day.
How bad was Friday? And how bad were the financials? Bespoke tweeted after the close:
- There haven’t been this many 52-week lows on a single day for the S&P 500 since October.
- 13% of S&P 500 stocks above their 50-days after today. 1% of Financials are above their 50-days, lowest of any sector.
As Lawrence McMillan of Option Strategist pointed out “oversold conditions persist and should still be able to generate a sizeable rally” even though “the market just cannot get a rally together that is strong enough to erase the oversold conditions“.
Much depends on whether the 200-day is recovered by the S&P quickly and without a serious breach.
3. Emerging Markets
This week, India’s growth rate fell to 5.3%. The WSJ asked whether Indonesia could be the next India? Art Cashin remarked on Friday that “India is sinking into the sea”. So the sentiment regarding India seems washed out. For a more detailed analysis of why the fall in India was foretold way back in July 2009, read our adjacent article: India’s Economic Mess – So It Was Written in 2009 & So It Happened.
But there is still hope about China even though China’s Manufacturing PMI was a big miss on Thursday evening. This is despite China’s massive stimulus spending. How massive? According to Richard Bernstein, the PBOC balance sheet is now 50% larger than the Fed’s balance sheet.
Last June, we stated our conviction that India was in the midst of a credit bubble. That bubble is clearly deflating before our eyes. We believe that the credit bubble in China was much greater than the one in India. The steep fall in the Indian Rupee (from 44 in August 2011 to 56 this week) has been the result of the bust of the bubble. But, this fall in the Rupee has also served as an escape valve for pressures and a stabilizing factor for India’s domestic economy.
In contrast, the Chinese currency has not depreciated to any serious degree. So there are few, if any, escape valves for the Chinese economy. Besides a serious slowdown in its exports to Europe and USA, China also faces the structural problem of getting its citizens to spend more on consumption.
In other words, the process of deflating the credit bubble may be just beginning in Emerging Markets.
Gold, the only real alternative to fiat currencies, exploded immediately after the release of the NFP number on Friday morning. With growth slowing in the USA, the strength of the US Dollar might be fleeting and Gold remains the sole substitute. This could be the message of the Gold move or it could simply be the expectation of a QE move from the Fed.
Next week should be interesting. Does Draghi cut the Euro interest rate? At 1% overnight rate, the 1-10 year German yield curve is inverted. This seems asinine to us. But if he cuts the rates, how low will the Euro go? Will such a fall be acceptable to Bernanke? How does Gold react? We wait to find out.
5. It is Maria Bartiromo’s Fault – She Propagates Bad News – Larry Fink on Charlie Rose
Frankly, this sort of blew us away. We have listened to Larry Fink tell the world (since June 2011) that investors should stop being chicken and if he could, he would be “all in” in stocks. On February 29, he told CNBC’s Maria Bartiromo that investors should get off the sidelines because they “have a greater risk if” they “don’t start acting now“.
Mr. Fink appeared on Charlie Rose show on May 31. May was a terrible month for stock investors. So we expected some sort of contrition, some explanation from Mr. Fink. Read what he said in response to Mr. Rose’s “where is the market?” opening question:
- The market right now represents a lot of fear. We as humans are having a hard time adapting to the new realities of media. We were bombarded with information. And there are so many channels of media today. Media sells and it sells well if there is bad news. And so, in my mind, Media propagates bad news. And I am not suggesting there is not great news or bad news right now, but we are having a hard time as investors, as leaders of our countries, as CEOs of large companies. We are having a hard time deciphering the good news and the bad news. And it is leading us to this overt fear,…, and we are now investing more and more for the short term.
This is sort beyond the pale, we think. This is the justification for what Larry Fink terms his clarion call, what he calls Investing for the New World? We are simple folk and Mr. Fink is a brilliant man. But we don’t understand how this is a new world; we don’t get why this is different from the grand old mantra of equity-fee-collectors – buy and hold stocks for ever.
Maria Bartiromo is Mr. Fink’s favorite anchor and he is her favorite guest. She represents financial “media” more than any one else. So we wonder, how does Ms. Bartiromo feel when her most favored guest says she propagates bad news and it is really her fault that investors are not investing for the “New World”. Does she cringe? Will she now dedicate herself to spreading the bullish ” buy for the long term” cheer? We shall wait and see.
Ms. Bartiromo is of course not responsible for what Mr. Fink says on another show. So we might be a trifle unfair in linking her to Mr. Fink’s statements. But that goes with the territory of being a Hall of Fame Cable TV host. And it goes with giving Larry Fink a pass on February 29, 2012 when he appeared on her show. Mr. Fink fudged his record in his conversation with her and she allowed him to get away with it. Not done, Ms. Bartiromo, not done at all.
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