Interesting Videoclips of the Week (October 1 – October 5, 2012)

The obvious political event of the week was the first presidential debate. So much has been said and written about it that we simply suggest you watch O Bama, Where Art Thou?  by Jon Stewart. The outrage of Stewart, the barracuda of the left, would make it a sweet watch for any one who prefers Romney. In part 2, Stewart actually calls Chris Mathews a potato head.

To his credit, Larry Kudow, a card carrying Republican, took exception and defended the people at BLS. His defense was not about the President or the Obama campaign. He argued that once you call into question the process, its credibility would be damaged for ever. This was the same patriotic, the same fervor for the country’s long term good that Chief Justice Roberts showed on a much bigger stage. Kudos to Larry Kudlow.

2. The Payroll Number & the Economy

The actual number of 114,000 jobs beat expectations and the stock market let out a sigh of relief. The best comment came from David Rosenberg on BTV Market Makers who described the economy as “soft but not deteriorating and not in a recession“. He added that the “Fed has managed to establish a very firm floor under the stock market“.

We wonder what Bernanke thinks about the action in stocks since his announcement. The markets have gone nowhere from the close on the QE-4ever-Thursday. SPX remains at 1460; Dow is up 70 points, NDX is down 20 pts and RUT is down 13 pts. Gold is trivially up. The 30-year and 10-year yields are virtually unchanged. So the impact of QE4ever lasted one afternoon.

So what does Bernanke do at the October FOMC meeting? Raise the stakes or pronounce himself happy? And what the stock market do if he stays at the September levels of MBS-Twist purchases?


3. The US Stock Market & US Treasury Market

Friday morning’s rally in US stocks faded in the afternoon. Almost all risk assets closed down – SPX, NDX, RUT, Gold, Silver, Oil. The only asset class that stayed near its early morning level was long maturity Treasuries.

This week, long duration Treasuries sold off while stocks rallied. The week before last, stocks had fallen and Treasuries had rallied. But both remain at their September 14 QE4ever Thursday levels with SPX stochastically overbought and Treasuries oversold.

5. Fiscal Cliff

David Kostin of Goldman Sachs released a bold forecast on Friday. He stuck to his S&P 1250 target for year-end 2012 because of Fiscal Cliff concerns but established a S&P 1575 target for year end 2013. Wouldn’t be be great if it worked out exactly that way? We could all buy S&P at 1250 this December and sleep through a 25%+ ride in 2013.

Larry Fink of BlackRock makes a similar case in clip 1 below. If the fiscal cliff is not addressed by Jan-Feb 2012, then he sees a recession and a negative GDP print in Q1 2013. Any such decline in the stock market should be bought in his opinion.

6. Housing

Given the tremendous unemployment in the construction sector, housing may end up having a large impact on jobs and income. Several investors believe that the American economy may be at a upward turning point in housing. Larry Fink doesn’t indulge in “maybe” like others. His vision is clear (see clip 1 below):

• We’re about a year away from a full rebound in American housing…In a year from now, I expect us to go back to that million new home level, and that’s going to create new jobs.

Kyle Bass partially agrees with Larry Fink (see clip 4 below):

• I think housing is going to flatten out…we don’t think housing is going to go up at any point in time in the near future. …it’s not going to go down anymore.…

Robert Shiller is probably the most respected housing analyst in the country and he is not willing to make such  a forecast. He said the following on BTV Surveillance on Friday morning:

• most likely nothing is going to happen; we may go up may be at the rate of inflation or it might continue to go down…
• people know what is going on right now in the housing markets and they can predict for the next year…
  
• The 10-year expectation of prices, that’s more of a driving force and it is gradually eroding.

On the other hand, Gary Shilling remains an unrepentant bear on housing and thinks we still have a “potential 20% decline in housing prices” (see clip 1 of Videoclips of August 20 – August 24, 2012).

7. CNBC “Neocons” about Iran

This week CNBC fast money traders, reporters and anchors turned into neocons with wild discussions about an imminent regime change in Iran. They used Wednesday’s 4% decline in Oil to speculate about such an outcome. They were nuts we felt and we told them so.

What is clear however, that Israel was moved to reconsider its contempt of the economic sanctions against Iran. The Wall Street Journal reported on Thursday, October 4 that “the unrest that erupted in Tehran on Wednesday – which subsided on Thursday – is causing Israeli officials to reconsider”. The article further reported

• “Everything has changed” since the outbreak of the demonstrations on Wednesday, an Israeli official said. “You can’t say now that the sanctions are having no effect…”

Stratfor, we believe, has forgotten more about Iran that CNBC guys will ever know. And Stratfor brought up an interesting angle this week. Iran has been successful in creating scenarios to convey the impressions they want to American and Israeli observers. So Stratfor wondered whether this public display of a near-riot in the bazaar was used to convey the impression of an Iran hurting so much under sanctions that the regime might be weakened. If this is what Iran desired, then they achieved their objective based on the Israeli reactions reported above by the Wall Street Journal.

We urge all to hear the words of Hillary Mann Leverett, Stratega CEO, about the Iranian regime in clip 5 below. Below is a brief summary of her main points:

• “probability of a regime change in Iran is near Zero.
• “What we see happening in Iran is a necessary devaluation of currency …[which if done correctly], will end up seeing Iran’s economy…could come out stronger”
• “[the sanctions regime is forcing] Iran, to be more self-sufficient in its economy, to boost its exports, boost its scientific and technological base and reign in its imports & its consumer culture. That in the end could end up being a boon for Iran’s economy.”

8. Turkey, Syria and Iran

In any case, the Turkey-Syria escalation is the most serious issue on our radar screen. Given this and section 7 above, a position in Oil calls seems wise.

Featured Videoclips:

1. Larry Fink on CNBC Closing Bell – Thursday, October 4
2. John Burbank on CNBC SOTS on Thursday, October 4
3. Nouriel Roubini & Ian Bremmer on BTV Surveillance on Wednesday October 3
4. Kyle Bass on CNBC SOTS on Wednesday, October 3
5. Hillary Mann Leverett on CNBC Money in Motion on Friday, October 5

a. His Call to be in equities:

• I SHOULD BE CLEAR, YOU’RE NOT LOSING MONEY IF YOU’RE IN FIXED INCOME THAT HAS HIGHER YIELDS. IF YOU’RE SITTING IN A FIVE YEAR TREASURE EARNING 60 BASIS POINTS AFTER INFLATION AND YOU’RE LOSING MONEY. SO WHAT WE BELIEVE PEOPLE HAVE TO START FOCUSING ON, AND I BELIEVE IT’S A CRISIS, THAT IF YOU DON’T START PUTTING MONEY AWAY THAT’S EARNING MORE THAN 60 BASIS POINTS BUT EARNING CLOSER TO 5, 6%, YOU’RE GOING TO HAVE A HARD TIME MEETING YOUR NEEDS WHEN YOU RETIRE.
• YOU NEED TO BE IN THE MARKET. YOU NEED TO HAVE INVESTMENTS THAT CAN SURVIVE OVER MANY YEARS. FROM MY VIEW, AS I SAID TO YOU LAST YEAR IN OCTOBER ON YOUR SHOW, I WOULD BE 100% IN EQUITIES. OBVIOUSLY IF YOU WERE 100% EQUITIES, YOU WOULD HAVE MADE 23%. NOW, MOST PEOPLE CAN’T DO THAT, BUT WHAT I’M TRYING TO INSPIRE PEOPLE TO START FOCUSING ON THE NEED FOR RETIREMENT, THE NEED FOR HIGHER YIELDING RETURNS.

b. Foundation for a Stronger America

b.1 Housing

• THE FUNDAMENTALS FOR THE U.S. ECONOMY ARE QUITE STRONG. WE’RE ABOUT A YEAR AWAY FROM A FULL REBOUND IN AMERICAN HOUSING. WE STARTED OFF IN 2007 WITH 8 MILLION UNSOLD HOMES. WE NEED ABOUT 1 MILLION TO 1.5 MILLION NEW HOMES EVERY YEAR BECA– USE OF FAMILY FORMATION, BECA– USE OF REPLACEMENTS AND FOR IMMIGRATION. OVER THE LAST FIVE YEARS, WE HAVE NOW BROUGHT DOWN THAT INVENTORY TO A MORE MANAGEABLE LEVEL. IN STATES LIKE TEXAS, YOU’RE STARTING TO SEE RISING HOUSING PRICES. EVEN IN COUNTIES IN CALIFORNIA WHERE YOU HAD A HUGE GLUT OF HOUSING AND IN SOME OF THE COUNTIES YOU HAVE SHORTAGES AND HOUSING PRICES ARE GOING UP. SO HOUSING IS BECOMING A BETTER ECONOMIC ENGINE. PRESENTLY, WE’RE ONLY BUILDING ABOUT 500,000 NEW HOMES. IN A YEAR FROM NOW, I EXPECT US TO GO BACK TO THAT MILLION NEW HOME LEVEL, AND THAT’S GOING TO CREATE NEW JOBS.

b.2. Banks

• SECOND OF ALL, OUR BANKS ARE IN GREAT SHAPE. THEY’RE IN MUCH BETTER SHAPE THAN THE EUROPEAN BANKS, MUCH BETTER SHAPE THAN THE ASIAN BANKS. I BELIEVE THEY HAVE A CAPACITY TO LEND MORE WHEN THERE’S SUFFICIENT DEMAND.

b.3. Energy

• THREE, YOU KNOW, WE HAVE BEEN BLESSED WITH INCREDIBLE AMOUNTS OF ENERGY. WE’RE THE THIRD LARGEST PRODUCER OF OIL IN THE WORLD TODAY. OIL PRODUCTION IN THE UNITED STATES IS UP 8%. WE HAVE ALL THE NATURAL GAS. SO THIS IS GOING TO BE A HUGE JOB CREATOR. A FEW WEEKS AGO I WAS IN GERMANY AND SAW ONE OF THE CEOs OF THE LARGEST GERMAN COMPANIES WHO SAID THEY’RE GOING TO CLOSE A FACTORY IN ONE OF THEIR CITIES AND OPENING A FACTORY IN CHARLOTTE. THE REASON WHY, OUR NATURAL GAS IS NOW ABOUT $3.40 BTU. IN EUROPE, IT’S OVER $11. IN ASIA, IT’S OVER $18. BECA– USE OUR NATURAL GAS PRICES ARE SO MUCH CHEAPER HERE, THIS FACTORY IS GOING TO BE BUILT USING THE NATURAL GAS TO BUILD PLASTICS. THIS CEO, THIS WAS A BIG MULTICAP, LARGE MULTINATIONAL GERMAN COMPANY WHO SAID THERE’S GOING TO BE A RENAISSANCE IN U.S. MANUFACTURING BECA– USE OF OUR ENERGY SITUATION.

b.4. 2014

• WHOEVER IS PRESIDENT IN 2014, BECA– USE MY VIEWS OF HOUSING, MY VIEWS IN ENERGY AND MY VIEWS ON THE BANKING SYSTEM, I THINK WE’RE GOING TO HAVE A RISING ECONOMY. SO I DON’T BELIEVE — I THINK IT’S GOING TO BE — WE’RE GOING TO HAVE THIS SUCCESS IN OUR ECONOMY SUBJECT TO WORKING OUT OUR FISCAL CLIFF, WHICH WE COULD SPEND A LOT OF TIME TALKING ON. BUT I DO BELIEVE THE FOUNDATION FOR A STRONGER AMERICA IS ALREADY HERE.

c. Fiscal Cliff

• THE FISCAL CLIFF IS PROBABLY THE BIGGEST PROBLEM FACING US. WE ARE ALREADY SEEING A SLOW DOWN IN THE U.S. ECONOMY. I KNOW MANY CEOs WHO ARE SITTING WITH LARGE SUMS OF CASH, PROBABLY COULD INVEST IN A NEW FACTORY OR ANOTHER STORE. MOST CERTAINLY THEY COULD BE MAKING MORE HIRES, YET THEY’RE REFUSING, THEY’RE HOLDING BACK. MANY SMALL BUSINESSES ARE SITTING ON ENORMOUS SUMS OF CASH, AND THEY ARE NOT INVESTING BECA– USE THEY’RE FRIGHTENED OF WHAT DOES THIS ALL MEAN.
  
• SO THIS OUTCOME, OUR FISCAL CLIFF, HOW IT’S GOING TO BE DESIGNED, IS GOING TO BE ENORMOUS. IF THEY DO A GREAT JOB, NO DIFFERENT THA
  N WHAT PRESIDENT DRAGHI DID AT THE ECB WHEN HE ANNOUNCED HIS PROGRAM THAT REALLY CA– USED A RELIEF RALLY IN EUROPE.
  
• IF WE SEE OUR GOVERNMENT DOING THE SAME THING, HAVING A VERY COMPREHENSIVE RESPONSE TO THE FISCAL CLIFF, SOMETHING LIKE SIMPSON-BOWLES, 4-PLUS, $5 TRILLION OVER A PERIOD OF TIME, IF THAT IS DONE IN A SENSIBLE WAY YOU’LL SEE A HUGE RALLY CA– USE ALL THAT MONEY IS SITTING ON THE SIDE.
  
• ON THE OTHER HAND, IF WE SEE THIS DRAGGING OUT, IF THEY HAVE TO HAVE IT DELAYED, IT DOESN’T HAPPEN AFTER THE LAME DUCK SESSION, AFTER THE ELECTION, IT DRAGS ON TO FEBRUARY, DRAGS ON TO MARCH. WE WILL HAVE A RECESSION IN THE FIRST QUARTER. WE’LL HAVE NEGATIVE GDP IN THE FIRST QUARTER. DESPITE MY BULLISHNESS OUT A YEAR, WE COULD HAVE SOME REAL VOLATILITY. I WOULD SUGGEST IF WE HAVE THAT REAL VOLATILITY, IT’S A GREAT BUYING OPPORTUNITY FOR EVERYBODY OUT THERE.
  

d. Europe

• EUROPE IS A SEVEN-YEAR FIX. WE HAVE A GREAT PLAN THAT THE ECB HAS CREATED, BUT WE ALSO NEED POLITICIANS TO AGREE ON IT. WE NEED PRIME MINISTER RAJOY ASKING FOR HELP

We featured a BTV interview with John Burbank in our Videoclips of June 25 – June 29, 2012 article (clip 1). At that time, Burbank described the landscape as a Secularly Deflating World. Clearly Bernanke agrees to some degree. That fear is what drove Bernanke to launch QE4ever.  The strategy Burbank laid out on June 29 remains his strategy today. But now his favorite longs take on the label of an asset class.

• Burbank – yeah, so markets sold off for about six weeks in April and all of May. And then bounced for four months in a row. Meanwhile, growth continues to plummet around the world and in the United States. And ECRI, …believes US is in a recession right now.
• Faber – Do you think we’re in a recession?
• Burbank – I do. I don’t think all parts of the United States are. But I think we’re incredibly close to that. I think the numbers are not actually accurate that the government projects there. But the last four months was remarkable because usually equities and growth, you know, merge together. Sometimes equities anticipates it. sometimes it lags. but growth numbers keep falling. and yet the equity market keeps rising.
• Burbank – I think the S&P is now should be thought of as a different sort of class of instrument used by investors around the world. I think now that the yield of the ten-year or of corporate credit, I think it hasn’t been this tight since the ’50s. And I think therefore if you look at it on a yield basis and if you believe that multinationals, leading multinational companies will have enough growth to have growth, and I think that’s actually true, because global growth, from a consumer standpoint and spending is going to be positive, then in a way these equities are mispriced relative to,…the ten-year at 1.60%.
• Faber – so you’re talking about the idea which we’ve seen in force, buying these larger stocks that have significant dividend yields, you think that’s creating a new dynamic, though?
• Burbank – yes, yes, I do. I think we’ve seen that the Fed and the ECB are willing to go beyond the mandates that we associate with them…they can deploy much greater tools of liquidity than they have which would have a direct impact on all asset prices, basically driving everything up higher.
• Faber – so what do you do, then? sitting there as a hedge fund manager, who has a viewpoint not particularly positive, even here in the United States you think we may be in a recession. Do you go out and short everything?
• Burbank – right. so my view is that after ’08, all that government spending and central bank liquidity tried to push things back together and push everything up higher. And for ’09 and 2010 and the first half of ’11, everything traded in line together – Germany traded like Spain. and then I think the second time around for Europe, last year things started separating.
• Burbank – The most dividend-paying stocks…were up 1,000 basis points over the least dividend paying stocks. I think you’re seeing a separation now and a recognition that we’re not going to have the growth that we thought. I call it the great separation.
• Burbank – I think what’s happening is that the really high-quality, well-managed, well-governed, dividend-paying companies are going to be treated as an asset class that’s priced off of these other available yield instruments while speculative companies, things that, you know, really need the economy to do well, things that aren’t that well managed, that don’t pay dividends, etc., are going to stay poor. So I think — so basically would be long high quality, leading companies which generally in the United States and then short speculative companies which obviously rise into fed announcements and rise when the ma
  rket is up and then fall away. So its a good time to be long & short certain things but you have to get it right.

Nouriel Roubini is of course Nouriel Roubini and Ian Bremmer is president of Eurasia group. The excellent summary below is courtesy of Bloomberg TV PR.

Roubini on why the Federal Reserve keeps issuing quantitative easing:

• “We’re in the process of very painful deleveraging in advanced economies. We started the crisis with too much private debt and now we have too much public debt and deficits. Research suggests that usually a deleveraging cycle can last up to a decade. The crisis in 2007, now we are in 2012 and therefore the process of deleveraging in the United States, in the euro zone, in the U.K. and Japan is barely mid-stream. In the U.S. we postponed the deleveraging of the public sector and the housing sector, and therefore, economic growth will is anemic. Therefore, the only thing we can do, given we don’t have the fiscal tool, is use the monetary policy.”

Bremmer on what is needed in Washington to get something done:

• “You don’t get there until after the elections and you shouldn’t, because whether or not Obama is able to take this, the actual outcome, the way that you have Senate and House laid out, that actually matters in terms of the ultimate deal you get. So if you’re a Democrat or Republican right now, you have zero incentive to tip your hand on what you really want to do until you know where we’re going to go. As soon as we get past those election, a deal is going to happen.”

Roubini on whether Bernanke is an asset or liability for President Obama:

• “At the margin, he’s an asset in a sense of what the Fed has been doing is reduce the tail risk of another double dip recession. QE, QE2, Operation Twist and now QE 3. It is not going to have a huge effect on the economy, but it already has an effect on stock prices. There has been a rally of 15% since December in part because of lower tail risk in the euro zone and in part because of QE3. The margin is beneficial, but only marginally.”

Bremmer on November’s election:

• “If Obama wins, and it is looking very much like he is going to, it’s not primarily because Romney is a horrible candidate. It is primarily because of three people. It’s John Roberts and the fact that he got healthcare approved. It’s Angela Merkel and the fact of the chancellor has been able to keep the euro zone afloat…And number 3, Ben Bernanke. You would not expect these three people President Obama would win with.”

Roubini on the banking system in the U.S.:

• “It is worse than before, because there has been massive consolidation of the banking system in the United States, JPMorgan took over Bear Stearns. Bank of America took over Countrywide and Merrill Lynch. We had banks that were too big to fail before the crisis and now they are even bigger to fail than before. There has been mass consolidation. The problem has not gone away. The only solution is to break up too big to fail banks. There is no other alternative. We have to go back to Glass-Steagall.”

Roubini on what would be the catalyst to break up the banks:

• “I would have thought after the worst global financial crisis the decision would have been made. Maybe we need another big financial crisis. For the time being, the politics will not lead us there.”

Bremmer on where the leadership will come from to get to a better financial system:

• “It will not come soon. What you’re really talking about when you talk about too big to fail is the United States. We are too big to fail that has only become more true since 2008. It is the reason why people continue to put more money in our equities and our treasuries.”

Roubini on the economic outlook of Germany:

• “There was a divergence between economic growth of the core and the peripheral of the euro zone. Germany used to do better, but the latest data suggests a slowdown in German economic growth. It is still positive, but there are two shocks. There are two main markets for exports, China and Asia, are slowing down. Secondly, the recession of the periphery of the euro zone is taking a toll because after all, most of the exports of Germany go to the rest of the euro zone. There is a significant slowdown of growth, even in Germany.”

4. Own apartments, oil wells, gas wells, productive real assets – Kyle Bass with CNBC’s David Faber – Wednesday, October 3

The trouble with profound macro predictions is that they may come true way after every one has forgotten about them. That may the story for Kyle Bass who warnings about Japan’s Debt just keep getting pushed into the futurist future.

• Faber – … deleveraging has been taking place around the world. in fact, you hear about it, the deleveraging the economy. that’s not the case, right?
• Bass – we try to look at the world in its totality and in the last 10 years, the global debt balances, when you look at on-balance sheet corporate debt, they’ve grown from $80 trillion to $200 trillion, 11% growth rate when you have a population growth of 1.2%, real GDP growth of 3.8% and debt growth of about 11%, you have central bank balance sheet growth of 16%. You can’t just do this for very long. What you’re seeing is infinite leveraging on the government side. You’re seeing central banks in various constituencies that are starting to do open-ended money printing. 
• Faber – You and I have been having this conversation for years and it doesn’t appear that things have gone off the rails yet. Even Europe is somehow staying together.
• Bass – I guess it’s perceived to be saying together. If you own Greek bonds, you have already lost 90% of your money and now you have the Troika owning the balance of the Greek debt. That’s going to have to get wiped out as well. You will still see the European dominoes fall. I think there is no way around it. I don’t think Germany will ever go joint and several with the rest of Europe.
• Faber – You don’t think at the end of the day, Merkel can’t get the support to do what they need to do because certainly German economy benefits from Europe.
• Bass – Imagine 17 nations that have basically been fighting for the last 200 years all of a sudden agreeing to seed their sovereignty to Germany or a higher power.…in my opinion, it can’t happen. When you look at global debt balances, the world sits in a place that historically has never happened. The largest peacetime accumulation of debt in world history. When you get to 250% credit market debt to GDP, historically two sides of deficit spending are going to a war and winner goes the spoils and losers go to defeat and default. That’s how the world works. The reason it’s so difficult for us to understand what the playbook looks like going forward is that we have never been here before.
• Bass – We’re starting to see debt inflation. think about it, we had a hyper-levered economy and world going into the financial crisis. We lost trillions and trillions of dollars because of that leverage. The first several trillion dollars that were printed were replacing what was lost. It had no effect on the ..and the subsequent printing we have is where we are today. Think about the CPI prints we’re seeing in southern Europe, much higher than expected and GDP prints much lower than expected so you’re seeing this cost push type of inflation push-up. You are seeing debasement.