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. How Desperate is Ben Bernanke?
Gary Shilling has been warning about the onset of deflation in the American economy. David Rosenberg is worried about a deflationary outcome in the overall economy. Lakshman Achuthan says the US economy is in a recession. This is what made us write last week:
- “So we would not be surprised to see Bernanke announce the “mother” of all QEs next week. Such aggression has been his hallmark. Clearly, he sees what many of us do, a simultaneous slowdown in Europe, China and now America. Deflation is often the result of a global economic slowdown. And Bernanke has sworn to fight deflation.”
On Friday, we heard how desperate Bernanke really is. We heard that from Kevin Warsh, an ex-colleague of Bernanke on the FOMC:
- “the Fed revealed
they are really worried about the state of the economy..they concluded that the economy is at stall speed or worse…They revealed a
concern that markets are unsure and they decided to go big….He thinks –
better step in before economy loses any more momentum..” - “it’s because they
are worried about what they see. If they believe the economy and
prospects were moving even slowly to a higher path, I don’t think they
would have decided to be nearly as aggressive”
We concur with Mr. Warsh. We think Bernanke is almost petrified. And why shouldn’t he be? Europe is already in a serious recession. We learned this week that China may be facing a shortage of cash (see clip 3 below). If this is even a little true, forget the possibility of a meaningful stimulus from China.
Deflation is a by product of a post-credit-bust slowdown. Bernanke has studied the 1930s and he has seen the deflation in Japan. So he is doing everything he can to somehow bring in the fire of inflation. That is why we called him a modern Prometheus, the fire-bringer.
Unlike Prometheus, Bernanke cannot bring fire of inflation to the American economy. But he can do the next best thing – raise inflation expectations. Viewed in this context, the explosion in Gold, the rise in commodities, the rise in asset values, the fall in the US Dollar and the rise in Treasury yields at the long end is not a negative consequence for Bernanke. Those are precisely the outcomes he is striving for.
2. The Dimmer Switch
Bernanke has understood that his earlier QEs failed because the effects were transient and the forces of deflation regained the upper hand when the stimulus ended. That is why he has embarked on a permanent QE and why he stressed that his QE3-forever will continue even after the recovery resumes and inflation becomes visible. As Kevin Warsh said on Friday (see clip 2 below), “the dimmer assuredly is going in one direction“. Which means Bernanke will increase the size of the monthly purchases if he feels QE3 is not having the desired effect.
This is a variation of the Gambler’s Ruin game. But Bernanke has infinite time and unlimited money, or so he believes.
3. Bernanke the Politician
We wish Bernanke had been a more honest central banker in his press conference. Instead, he tried to be political with his claim that his QE3-forever was for main street and to improve employment. It even moved Kevin Warsh to contempt, well as far as a Fed-head can be contemptuous:
- “I think the iPhone
4 is going to do more to the real economy than QE3. So I worry a lot
about the efficacy…They might be over-promising and
under-delivering….the benefits are infinitesimal…I don’t like the
bang for the buck..”
But CNBC’s Jim Cramer dutifully echoed the Bernanke spin about his stimulus being for main street. In contrast, Marc Faber was scathing and honest:
- “First they
create the property bubble and destroy the wealth of poor people, then
the poor people have to rent and the rents have been up over the last 12
months. What a great achievement. Thank you, Mr. Bernanke.”
We leave it others to discuss whether the Bernanke action amounts to the Fed stepping into the Presidential Election. They are smarter than us and have larger megaphones.
4. Will QE3-forever be like 2007 or like QE2 in 2010?
The US economy was gradually improving in 2010 and the Emerging Market economies had momentum. Europe was early in its crisis. So QE2 was like adding gasoline to an already lit fire. That is why inflation was the result with food prices going berserk in EM and Oil rallying hard. The strength of the global economies was the main reason the weak Dollar helped US exports.
But what if Bernanke is correct in panicking? What if we are in the midst of a global slowdown? That is what happened in August-October 2007. The economy had already begun its descent. Bernanke saw that and acted aggressively. He stunned the markets in the September 17, 2007 meeting just the way he did last week. The rally in risk assets was ferocious and Treasury yields rose up hard. But the effects proved transient. All of Bernanke’s horses and men could not prevent the slowdown that began in November 2007.
Our base case is that the 2007 scenario is more likely to repeat in 2012 than the 2010 scenario.
5. The real serious risks of Bernanke’s gamble
We are not concerned about Bernanke creating serious inflation down the road. We are on whimsical record as saying we will meet Godot before we see inflation in America. But seriously, we don’t see inflation risks until incomes and jobs increase simultaneously in America. The other reason is the world’s biggest problem – the huge debt load that is weighing down virtually every Government. Jeffrey Gundlach argues similarly (see clip 1 below):
- “inflation is very hard to come by in the world today with the tremendous shrinkage from the all the overhanging debt.”
Our axiom is that American prosperity, American financial system depend on the proper functioning of the Treasury market. America can run only because investors, free investors trust the Treasury market. And no one trusts a dysfunctional market.
Our greatest fear is that the constant intervention by the Fed in the Treasury market, the repeated attempts to change its dynamics will eventually end up in making America’s bond markets both dysfunctional and untrustworthy. That would be catastrophic for America and that would be the end of the Federal Reserve.
If that happens, then history would definitely answer “Ben Bernanke” to the question posed by BMO’s Andy Busch on Friday:
- I don’t know who is crazier , Peter Schiff* or Ben Bernanke?
* Peter Schiff being the guy who has been shouting about the end of the Dollar and glory of China for ever. Bernanke could make him sound correct but no one can make him sound un-crazy about China.
6. China
Speaking of China, we heard a case that astonished us. We have heard Gordon Chang forecast zero% growth in China, we have heard Jim Rickards explain how China can print any GDP number it chooses simply by building more stuff they don’t need, we have heard of Chinese money flooding out of China to safer destinations. But we had not heard the case that China may be facing a shortage of cash. That case was made by Andrew Mowat, the respected analyst from JP Morgan, in clip 3 below.
In contrast, Jeffrey Gundlach recommends the Long China – Short S&P trade. And Marc Faber says asset allocators could move some money into Chinese market and create a 10-20% rally.
And then, you have the increasing gravity of the China-Japan dispute about islands in the South China Sea. Japan bought these islands from Japanese owners and in protest China has moved maritime ships in those disputed waters. We think this is a far more serious issue for markets than the violent anti-American protests in the Mideast.
7. U.S. Stock market
The stock market rallied ecstatically on Thursday and risk assets went up on Friday as well. S&P is now up 4% for the month. CNBC’s Robert Hum points out that “when SPX rises in 1st half of September, it has also ended Sept with a gain 88% of the time since 1980.” Does that mean, we should not be that concerned about the @Bespokeinvest tweet after Thursday’s rally?
- “The S&P 500 is now 2.2 standard deviations above its 50-day moving average. Last time this overbought was 10/27/2011.”
What about Lawrence McMillan of Option Strategist who has been consistently right since early June, 2012? He says:
- In summary, we remain bullish, but the odds of a correction are
increasing dramatically with overbought conditions and just plain too
much of a buying spree.
We can’t shake off a disconcerting thought. If Bernanke is so worried about the US Economy, so desperate to add stimulus before the economy loses any more momentum, then should the market react with such jubilation? Is it total and utter faith in Bernanke or is it just a run to the year-end?
8. U.S. Treasuries – Gross & Gundlach vs. Rosenberg & Shilling
The most interesting post-Fed action on Thursday afternoon was in the Treasury market. Longer maturities sold off hard after the QE3-forever announcement. The yield on the 30-year touched 3% and then backed off. The 2-10 year part of the Treasury curve closed in the green on Thursday and the 30-Year bond closed with a small loss.
But Treasuries suffered a vicious sell off on Friday with the 30-Year bond falling by over 3 points. The 30-Year bond was already down 1 point by 8:15 am. It rallied a bit after the CPI number but then sold off all day without any bounce at all. The 30-Year yield, the 10-Year yield and TLT broke through their 200-day moving averages. It felt like positions were liquidated. Was it a late recognition or what is something else?
We are inclined to believe the latter, specifically the “incredible downside in the 30-Year Treasury Bond” comment of Jeffrey Gundlach, one of two reigning Bond kings. Gundlach sounded incredibly bearish on Treasuries (see clip 1 below) in his conversation with BTV’s Tom Keene on Thursday evening. That we think was the catalyst for the ugly sell-off in the 30-Year bond.
This reminds us of June 2007. Bill Gross turned publicly negative on Treasuries in the afternoon of June 7, 2007. Treasuries had been selling off since April 2007 and the Gross call created a selling climax over the next two weeks. That was a great buying opportunity. The Treasury market began rallying on Friday, June 22, 2007, a rally that took the 30-Year yield from 5.5% in June 2007 to 2.55% in December 2008.
Will the Gundlach call end up creating another buying opportunity? The chorus on CNBC was deafeningly loud and along the lines of the comment by Scott Minerd of Guggenheim Partners:
- Exceptionally negative about Treasuries; that’s the best short out there!
But Tom McClellan, the creator of the McClellan oscillator and the technician who called for a big stock rally from June 4, 2012 until the November election, says otherwise. We remind readers that on August 10, 2012, Tom McClellan warned about a sell-off in T-bond prices.
With his track record, we urge all to run, not walk to his article T-Bond String Of Down Days Creates Oversold Condition. His 9-day chart suggests an oversold condition but the 14-day and 20-day charts don’t show that yet. So his message is:
- “The message of these two charts for the current moment is that T-Bond prices have gotten extended to the downside in the short term, and thus expecting a further continuation downward may not be justified. But the run that the bears have put together is not yet to an obvious longer term bottom indication.”
Getting back to the fundamentals, we have an interesting battle of titans. On one hand, you have the two bond kings, Gross & Gundlach who advocate selling the 30-Year T-Bond and on the other hand, you have the two best forecasters of the past 5-6 years, David Rosenberg and Gary Shilling. On Monday, Gary Shilling reiterated his target of 2% for the 30-Year Treasury yield. On Friday, David Rosenberg suggested another fundamental reason for the 30-Year bond with his comment “The recession in Europe is starting to be felt more forcefully with regards to global trade flows.”
You read what Bill Gross said on our clip 2 of last week. The comments of Gundlach, Rosenberg and Shilling are below in clips 1, 4 & 5 resp.
Featured Videoclips:
- Jeffrey Gundlach on Bloomberg 50 Summit on Thursday, September 13
- Kevin Warsh on CNBC Squawk Box on Friday, September 14
- Andrew Mowat on CNBC SOTS on Monday September 10
- David Rosenberg on BTV Surveillance on Tuesday, September 11
- Gary Shilling on BTV Lunch Money on Monday, September 10
- Marc Faber on BTV In the Loop on Friday, September 14
1. ‘Incredible Downside in 30-Year Treasuries; But China – Short S&P‘ – Jeffrey Gundlach with BTV’s Tom Keene – Thursday, September 13
This was a 25 minute detailed conversation between Jeffrey Gundlach and BTV’s Tom Keene. We urge readers to listen to this entire discussion. We shall try to provide a succinct synopsis below:
Trading Facebook for 4% gain
Gundlach told Tom Keene that he had traded FB four times for a 4% gain. The 1st time, he held it for 14 minutes; the 2nd time, he held it for an hour. The 3rd time he held it overnight and made 10%. The last time, he bought it below $20 and had to hold it for awhile. He sold it on Thursday.
Gundlach compared his 4% return in Facebook to the returns available in the 5-year Treasury. At 60 basis point yield, if you hold the 5-year Treasury until maturity, you get a total return of 3%. He compared this to trading FB to get a 4% return in a day or in a few days. Then he added “I only play in Facebook to prove it is more rewarding than playing Treasuries“.
Treasuries
The above quote says it all about his interest in Treasuries. He also scoffed ” If you are so thrilled at 10-year Treasuries going from 1.9% to 1.5% again…” Gundlach added:
- ” the market really didn’t like what the Fed said at the long end of the Treasury market. The 30-Year yield kissed 3% briefly and then backed off. But the 30-year Treasury closed down.”
- There is an incredible downside on the 30-Year Treasury today. If it went back to just last year’s high yield, it would be a loss of 37%. “
Gundlach then contrasted the sentiment and the opportunity that was in the long Treasury market in 1984 vs. now.
Tom Keene asked him “what maturity would you buy in Bonds?” Gundlach replied:
- “if you are asking about Treasury Bonds, I like the Zero-maturity T-Bond; I mean the Dollar bill, the $100 Dollar bill. At least I have that in my pocket.”
Gundlach’s bearishness about T
reasuries is not due to his fear of inflation. Because he said:,
- “inflation is very hard to come by in the world today with the tremendous shrinkage from the all the overhanging debt”.
Fiscal Cliff
Gundlach said that he was not a predictor of the future. He described himself as “a very quick reflex reactor“. He then explained that the fiscal cliff is an unknown. His base case is a pretty bad outcome. But he said “it is not a prudent thing to be predictive and betting in a one-way direction“.
His Short Apple – Long Natural Gas trade
During the summer, Gundlach had surprised many by recommending buying natural gas and hedging it by shorting Apple. Natural Gas had a huge rally while Apple had smaller rally. Gundlach’s trade was up 50%, but he didn’t close it then. Now it is only a 30% winner.
Buy China – Short S&P
Gundlach said “ I am a simple person. I look for investments that are cheap“. That is why Gundlach is not interested in buying S&P stocks after the run they have had. He also says that stocks in European countries like Spain should be sold. But he likes China because of the steep fall in Chinese stocks and recommends a Long Chinese Stocks – Short S&P trade.
Watch this entire interview over this weekend.
2. ‘iPhone5 will do more for the economy than QE3’ – Kevin Warsh on CNBC Squawk Box – Friday, September 14
This was simply the best interview with any Fed-head in our memory. We are struck by the plain-speaking outspoken, insightful and pragmatic comments of Mr. Warsh. His comments are in the following clips:
We urge readers to watch these clips, at least the first two above. We provide a synopsis below:
Why the Fed acted so aggressively?
- “…the Fed revealed they are really worried about the state of the economy. They revealed a concern that markets are unsure and they decided to go big….He thinks – better step in before economy loses any more momentum…
- … I suspect they concluded that the economy is at stall speed or worse. The global economy is weakening, the developments out of Europe, they might be dealing with some of the tail risks. Europe is in the early innings of a serious recession. Even if they were to solve Spain, Italy overnight, the pullback in credit has to be concerning the Federal Reserve, weaknesses in Asia must be too. And my sense, the chair and his colleague said they shouldn’t wait any longer before going big.
- …it’s because they are worried about what they see. If they believe the economy and prospects were moving even slowly to a higher path, I don’t think they would have decided to be nearly as aggressive…
- secondly, I would say that framework that the chair tried to lay out yesterday is a framework where instead of an on/off switch, like QE1, QE2, I’m turning it on, you’ll see when the light switch is going off. I would describe it as a dimmer switch. What he said is a dimmer light and what he described, he can be reactive to the environment. as the environment changes, so will the dimmer.
- What I thought I heard from him in his press conference, that dimmer switch is almost assuredly going in one direction. we start with a base of purchases, $85 billion, the rest of the year. But if we breach the fiscal cliff, he says I’ve got your back. I won’t be able to protect the economy entirely, but there is something I can do there.
Efficacy of Fed’s QE3
- I think the iPhone 4 is going to do more to the real economy than QE3. So I worry a lot about the efficacy…They might be over-promising and under-delivering….the benefits are infinitesimal…I don’t like the bang for the buck…
There is a lot more to his comments about the need for growth-oriented policies, the crazy selling of Treasuries by the Treasury and buying by the Fed…of the need to look at the long term. So watch the entire set of clips.
3. China facing a shortage of cash – Andrew Mowat on CNBC SOTS – Monday, September 10
This
is an excellent interview and an extremely important one. If Mr. Mowat
is correct and China is actually running of money, or liquidity
options, then we all are in trouble. He was interviewed by CNBC’s Melissa Lee and Simon Hobbs.
- Mowat
– we’re hearing a lot of projects being approved in China. But the
problem is where is the money going to come from? We had the MDRC
announcing projects equivalent to 2% of GDP. If you look at the
projects, they were approved a while ago. So it isn’t a new, new story.
And then we had lots of projects being announced by local government.
But they’re looking for private capital to help with these projects. The
image that we’re getting of China now is one in which there might actually be a shortage of cash.
You can see that to some extent in the decline of industrial profits,
state and enterprise profits down more than 16% year to date. and
revenue is still growing but at a slower pace. So I think the issue with
stimulus in China is simply, where’s the money for the stimulus? - Lee
– So, Adrian, let me get this right. The government can announce all
the stimulus it wants. But you have questions as to where it’s going to
get the funding for that stimulus. Of the stimulus that has been
announced, including last week’s infrastructure build stimulus, on which
so many stocks around the world rallied, what has the money and what
does not have the money at this point? how much of a gap is there in
funding, in your view? - Mowat
– At the moment, there’s absolutely no detail on which of these
projects have funding. they’ve essentially got approval to go ahead
without the project size being sorted out. This isn’t unusual in China.
What we saw in the 2008-2009 stimulus was it wasn’t really a typical stimulus. It was more of a monetary stimulus with the banks providing the capital.
The problem this time around is that the banks provide a lot of capital
in 2008 and ’09 and they’re rolling over that debt at the moment. And
they’re somewhat reluctant to add to local government funding desks and
other infrastructure projects. It’s not clear where the money is coming
from. - Hobbs
– but, Adrian, this is a very important time, as you know better than
I, because you’re in Hong Kong, for China, when you have this once in a
decade change in leadership over the next year and a stock market
crushed with huge social change under way. So they have to get this
right. can want they just print money like anybody else or alternatively
can’t they use those trillions of dollars of foreign exchange — we
don’t associate china with being short of money. - Mowat
– you can print money, but, remember, there are inflationary
implications of printing money. China is an economy that is expanding.
It doesn’t have a huge output gap, unlike the developed economies that
are in processes of quantitative easing. So when you’ve still got
inflation concerns, you can’t get away with printing money or you just
compound your inflation issues. I think with regards to leadership
change, it is important to highlight some of the good data points that
we had over the last 72 hours. the retail sales are still around 13%
over a year earlier. and we’ve had auto sales expanding at 8%. so the
consumption data is okay. The problem is the 47% of GDP which is fixed-capital formation. that’s where we’re seeing the slowdown.
That’s where we’re forecasting absolutely no growth in steel
production….perhaps it’s more indicative of what’s happening in heavy
industry while the consumer is still okay. and I suppose from the
perspective of Beijing, if the consumer is okay, the population is
feeling okay, they’re not too worried. - Lee
– so, Adrian, let’s bottom-line this for our viewers here. I think
there’s a sort of belief in the marketplace by investors that things get
bad enough for China and the government will step in. And now that
notion you’re turning on its head. When you see stocks in shanghai hit
the highest level in almost a month or so and you see iron ore stocks,
you see machinery stocks in the united states and other parts of the
world rally off the back of this notion of China stimulus, are all those
things built on false expectations? - Mowat
– we need to look at those charts. and most of those charts have fallen
very sharply in the last two months. so what we experience through our
trading book on Friday with short coverings, we didn’t see long-only investors coming in and buying stocks this morning.
What I do think is different and you’ve highlighted that A-shares have
recovered — talking about a recovery of about 4.5% from their lows–
the local investors seem to be more excited by this new story than we’ve
seen for some period of time. I was particularly noting that cement
stocks rallied quite hard today in Shanghai. so that is interesting that
the local investors are somewhat more enthused about this story than
we’ve seen for months.
4. Less GDP per unit of credit growth – David Rosenberg on BTV Surveillance – Tuesday, September 11
David Rosenberg has been somewhat absent from Financial TV lately. This 15-minute clip makes up for some of the absence. The stock market is in the midst of a strong rally and so his views may be timely.
Deleveraging Cycle
- we are in a period of a new frugality among our banks because we are in the midst of a post credit collapse deleveraging cycle and the banks right now are facing an abyss in terms of a new financial regulatory regime….that says to me that unlike the last 30 years, we will see less GDP created per unit of credit growth which means below potential economic acceleration…we are putting up 8 stop signs every corner after the crash we had for the past several quarters…we are swinging the pendulum the other way…it is going to create more stability, that is true, its also going to be creating less economic growth…..
- there is going to be less credit growth to support every unit of GDP..which means the growth rate is going to be much slower…. you are now talking about a potential of 2-2.5%…. but the reason I still have this deflationary view, even though you have potential GDP growth of 2-2.5%, where is demand growing Tom, 1-1.5%…the problem is we have insufficient aggregate demand…and you have the 4th year of the supposed economic expansion…and the output gap is almost 6% of GDP and you are still playing catch up … whether you like the CPI or you don’t..it creates a deflationary outcome in the overall economy….
The Stock Market rally
- We came of the March 2009 lows, we had the government and the fed bail us out and we had the mother of all short covering rallies..we had green shoots and the earning recovery.. the bottom line is 95% of this rally ended in April 2011… I would say 5-10% of the rally since that time is just the bulls fighting over the crumbs…with the support of central banks…you get QE, an intervention and you get a rally; when the intervention dissipates, you get the markets rolling over…you have the market doing nothing for the last 16 months…..there is 20-30%of the stock market I like, dividend, dividend growth…
Treasury Bonds
- what I find interesting is that you get commentators only talk about the stock market and how many commentators talk about the bond market?..the best performing asset class in the past 12 months is the 30-Year Strip. The 30-Year Zero Coupon Bond. has returned almost 50% in the past 12 months…
- [in response to a statement from Tom Keene about the vast bulk of analysts saying the bond rally being done] … they were saying that a year ago, Tom. They were saying that 2 years ago, 3 years ago.
‘New Frugality’
the financial repression means that interest rates are zero, savers are getting penalized, you are going to penalize people who don’t really spend any money in the economy but you are going to favor borrowers…that’s what the Fed is grappling with right now…they are trying to get the marginal propensity to spend up in the economy…
Mr. Rosenberg also spoke about the need to have is a tax system that promotes sustainable growth and the need for fiscal certainty. .
5. 30-Year yield to fall to 2% – Gary Shilling on BTV Lunch Money – Monday, September 10
Much of what Gary Shilling said in this interview he has said before. So we shall only highlight the most important comments.
The Shilling quartet
The quartet he described is a pure risk-off trade – Short Stocks, Long Treasuries, Long Dollar and Short Commodities. Actually it is the purest anti-Bernanke trade possible.
Treasuries
Shilling reiterated his target of 2% for the 30-year bond and 1% for the 10-year note. That would deliver 15% return to holders of the 30-Year Treasury bond (with 2 coupons) and a 20% return to the holders of zero-coupon 30-Year Treasury Strip. His reasons – Global Recession. Safe Haven status and Deflation concerns
ECB & the German Bund
Shilling is watching the 10-Year German Bund which moves closely with the 10-Year Treasury. But he says:
But I am concerned about that because if you look at all the ECB financing, how is it backed? It is backed by the German balance sheet..and if that gets so big that investors say Germany is getting overloaded, you could get a selloff in the German debt…that”s why I watch the German bund..if the yields go up there, that could be an indication that ECB is reaching a limit..
Junk Bonds & EM Debt
- the zeal for yield has taken people way way out on the risk curve..when you see institutions in junk bonds and emerging market debt and in commodities and treat those as asset classes, they are really stretching for yield…because they have those kinds of income requirements…I don’t think many investors, institutional as well as individual, don’t realize how far they are on the risk curve.
But Shilling thinks investment grade bonds make sense with some Munis.
Euro
He still thinks the Euro can get to parity with the Dollar
6. QE3 good for Mayfair economy only & asset allocators into China – Marc Faber on BTV’s In the Loop – Friday, September 14
Marc Faber as always is an interesting listen. In this clip, he is even more animated than usual. The detailed summary below is courtesy of Bloomberg Television PR.
Faber on more Federal Reserve stimulus:
- “It is difficult to tell what will happen. I happen to believe that eventually we will have a systemic crisis and everything will collapse. But the question is really between here and then. Will everything collapse with Dow Jones 20,000 or 50,000 or 10 million? Mr. Bernanke is a money printer and, believe me, if Mr. Romney wins the election the next Fed chairman will also be a money printer. And so it will go on. The Europeans will print money. The Chinese will print money. Everybody will print money and the purchasing power of paper money will go down. And I don’t like bonds. I don’t particularly like equities, but I think equities are a better space to be in than bonds.”
On what he will do with his portfolio in reaction to yesterday’s move:
- “I own corporate bonds and I recently, as I wrote, I pulled some bonds from Kazakhstan because Kazakhstan economically is a much sounder country than the United States or any European country. Bu
t it is in small doses. I wouldn’t put all of my money in corporate bonds. They have an equity character. I also own equities still in Asia and as I pointed out already four months ago for the first time in my life I bought equities in Portugal, Spain, Italy and France because they were unbelievably distressed. I think what people overlook today is they look at markets but they don’t look at what happens within the market. In the last 12 to 18 months the U.S. has massively outperformed European markets, Asian markets with a few exceptions and now some markets are relatively depressed. I could argue the Chinese stock market is now relatively depressed. So the asset allocators may move some money in Chinese stocks and then they can rally 10% to 20%.”
- “The fallacy of monetary policy in the U.S. is to believe this money will go to the man on the street. It won’t. It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols…Very happy. Very good for the Fed. Congratulations, Mr. Bernanke. I’m happy. My asset values go up but as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world.”
On whether there’s any credibility in the Federal Reserve trying to bring down the unemployment rate and improve the housing market:
- “I think there is a huge misconception and fallacy that money printing can actually improve the rate of employment because the money flows down into the system. It goes first into the banking system and into financial institutions, into the pockets of well-to-do people. If you drop money into my pockets and you have at the same time increased government involvement in the economy and we have the government growing with its regulation and legislation that stifles economic development. I don’t want to build a new business. But what I may do is look around the world, where are the distressed assets. So I will go and buy existing assets, takeovers. But takeovers don’t add to employment. They destroy employment. Secondly, I would just like to mention one thing. This money printing business, they have been saying that for the last 15 years that bailing out LTCM were necessary. Then they say the NASDAQ collapsed after March of 2000. We need to create another bubble, print money. They created a gigantic credit bubble and the misery that we have today.”
On where gold prices are headed:
- “I think that the trend for gold prices will be steady, but the trend for the dollar and other currencies will be down. In other words, in dollar terms the price of gold will trend higher. How high it will go, you have to call Mr. Bernanke and at the Fed, there are other people actually that make Mr. Bernanke look like a hawk. So they are going to print money. And they have done it for ages already and where has it led? To record high unemployment essentially since the Great Depression and structural unemployment. Unemployment goes among low paying jobs, not high paying jobs. So, you ought to own some gold, but don’t store it in the U.S. because the Fed will take it away from you one day.”
On whether he would buy property in the United States:
- “Yes. Property prices in the south of the U.S. are very inexpensive compared to property prices around the world. The tragedy is that the people that were evicted from these homes have no access to credit. They have no money. They can’t buy them. So, with easy money by the Fed well-to-do people can buy these properties and then rent them out to the people that were kicked out of these homes. What a great achievement of the Fed. First they create the property bubble and destroy the wealth of poor people, then the poor people have to rent and the rents have been up over the last 12 months. What a great achievement. Thank you, Mr. Bernanke.”
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