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. Economists Don’t Understand Bond Markets?
We think Bernanke screwed up big in his press conference on Wednesday. How do we know? Because Jon Hilsenrath & Steve Liesman surfaced on Friday arguing that the bond market overlooked or misunderstood what the Fed’s Oracle meant on Wednesday.
Bill Gross said on BTV Street Smart after the press conference, “I think he might be driving in a fog. I think the Fed itself may be driving in a fog” (see clip 3 below).
How badly has Bernanke fallen? Jim Cramer, his most ardent admirer, turned on Bernanke on Friday on Mad Money:
- “… Ben Bernanke should have pulled the magic money carpet out from under us months ago and that he did it too late. …”
We take this mistake by Bernanke as confirmation that he simply doesn’t understand bond markets. How seriously do we take it? Read our adjacent article titled Next Chairman of the US Fed – A Bond Trader Instead of an Economist?
What can save Bernanke, really save Bernanke? An ugly jobs number on July 5.
2. China & US Treasuries
We are neither as smart nor as connected as Rick Santelli. He provided a clue to Friday’s ugly, ugly action in Treasuries in the last hour of trading:
- seriously, the more I get into this, … the more I’m hearing that it’s a 60/40 equation. 40% being the Fed and all the issues since the 22nd of May, and the current statement. But the bigger elephant in the room the last several days, I do believe, may be China. Now, as you look at the seven-day Shanghai Interbank Offered rate, affectionately called on the floor lately the shaboom chart, yesterday was close to 12%. Today, it dipped down to below 9. There’s talk of some quiet injection of capital. But in the end, here’s the one thing we walk away with. The PBOC wants to slow down the relationship of what is perceived to be 100-to-1 leverage in some of the regional banks, and this is going to be an issue that’s big. If it’s fungible in one direction, it will be with the other, no matter what part of the globe you’re in. we need to be cognizant of that as well.
This complex sounding comment simply means, as we understand it, that if there is such a massive liquidity squeeze in China, then they may have to sell some of their Treasuries & take that money back to China. And China owns about 1 trillion dollars of Treasuries. If this idea of China selling Treasuries takes hold, then who knows where interest rates will go in the short term.
That would be Bernanke’s worst nightmare at least for the few days it lasts.
3. Interest rates are more important than Stocks – Cramer said that?
On June 1, we applied John Madden’s Speed Kills dictum to the rise in interest rates. This Friday, stalwart passionate bulls who have devoutly wished for rise in interest rates adopted John Madden’s wisdom. We mean Jim Cramer and his colleague Stephanie Link who said on Friday:
- …if bonds can stabilize, I think the market can stabilize. But it all depends on how quickly, how much higher do short-term yields go? … If that’s gradual, i think the market can handle that. that would suggest that the economy’s doing better. If we continue to escalate a lot higher, like we have been – I mean, we’re up 87 bps on the 10-year in a month and a halftime. If we continue with that pace, that’s what will cause the volatility,
Well, if the bond market continues its decline at that pace, we wouldn’t call what happens to the stock market as volatility, we would call it a crash!
Then the man himself told his viewers on Mad Money on Friday:
- “we are in a market where interest rates are controlling…welcome to the new normal where interest rates are more important than stocks themselves”
And Cramer asked his viewers to put TNX (symbol for the 10-year treasury yield) at the top of their stock quotes screen.
This is not to make fun of Jim Cramer whose market acumen we respect. But to wonder whether this is a local top in bond market volatility in any way. That might happen if Shibor (China’s interbank rate – see 2 above) stabilizes. We think China’s financial leadership hates instability even more Abe-Kuroda of Japan. If Kuroda could stabilize the huge JGB market, China could quickly stabilize the Shibor rate. After all, the market adage says when central bankers panic, investors should stop panicking.
The reality of steep bond selloffs is that they always create a stock selloff and then stocks don’t bottom until bonds bottom. Both in 2006 & 2007, stocks bottomed in July after bonds bottomed in June. In 2006, they went on to rally for the rest of the year. In 2007, they rallied into October and then, you know!
By the way, serious bottoms in interest rates tend to change leadership in the stock market. In the mother of all bond selloffs in the first half of 1994, bonds bottomed in late June or early July. And June 1994 turned out to be a multi-year bottom in brand name staples like Proctor & Gamble and tech stocks like Cisco. These brand name staples, including Drug stocks, became the new large cap leadership of the stock market from July 1994 until the Long Term Capital crisis in 1998.
Bernanke all but gave away his flexibility to the future progression of economic data. Regardless of the damage control by his whisperers, markets now will only listen to economic data. The trajectory of the U.S. economy over the next 2-3 months will be the absolute determinant of all financial markets.
Does the explosive rise in interest rates end up slowing down the leading but interest rate sensitive sectors of the U.S. economy as Jeff Gundlach, Bill Gross, John Brynjolfsson & Marc Faber argue (see clips 1, 2, 4, 5 below) ? Or does the strong momentum continue to overcome the drag from these higher interest rates? The rest of the world is slowing down visibly. Will the U.S. economy be be affected by that slowdown or has the U.S. decoupled at least as far as the leading sectors are concerned?
Lakshman Achuthan of ECRI continues to sound a “recessionary” warning. On Friday, ECRI wrote:
- “Despite multiple rounds of quantitative easing (QE), the U.S. inflation
rate has been plunging, with growth in the headline PCE deflator having
dropped to a reading never seen outside a recessionary context. It is
now at just 0.7%, well below the Fed’s official 2% target announced in
January 2012. Earlier, the Fed’s unofficial focus was on core PCE
inflation, which has now dropped to the lowest reading on record.”
- “Weekly Leading Index fell to its lowest level in over a month at 130.3
in the week ended June 14 from 131.2 the previous week. That was
originally reported as 131.3. The index’s annualized growth rate slipped
to 6.2 percent from 6.5 percent a week earlier. It was the lowest level
since early January.”
Will ECRI be proved correct this time or will it be wrong as it has been for the past two years (too early = wrong in markets, right Lakshman?)
We still believe that the stock market will be subject to the Reverse Tepper Corollary in the coming months – meaning strong data will be negative because it will lead to early taper & weak economic data will be negative because it damages the foundation of the rally.
When the U.S. economy finally & clearly demonstrates its trajectory or “when the dust settles“, as David Tepper put it on Friday, the markets will reveal their decision. That may be why Ralph Acampora predicts a volatile summer (see section 7 below).
5. U.S Treasuries
The action in US Treasuries has been utterly ugly, even uglier than the famed Scaramouche. But attractiveness is in the eyes of the beholders. So almost every bond investor we respect came out this week and described what they saw in the Treasury market – a dashing buying opportunity for making handsome capital gains, much like the dashing handsome Andre Moreau underneath.
We might be punch drunk after absorbing this week’s blows to think of such a lame analogy but the famed investors below don’t get fazed so easily. Unfortunately, their predictions have already proved way too early given the carnage in the Treasury markets in the past three days.
Yields on 30-year & 10-year Treasuries rose from 3.35% & 2.19% resp. on Tuesday to 3.58% & 2.53% resp on Friday. The belly of the curve, the 5-year treasury was simply gutted with its yield rising by 36 bps in just last 3 days. No wonder Jeff Gundlach called this a liquidation phase on Friday afternoon. Next week’s outflow numbers for bond funds should be interesting.
So what do our favorite gurus predict?
5.1 Jeff Gundlach on CNBC FM 1/2 before the Fed decision & Bernanke Conference on Wednesday, June 19 (see clip 1 below)
- the one place
that you’re likely to make money in the next several weeks, maybe couple
of months, is actually, believe it or not, the most hated asset class
on the planet, long-term U.S. government bonds
- what we’re looking at is a bond market rally that’s going to start fairly quickly
5.2 Jon Najarian on CNBC FM 1/2 before the Fed decision & Bernanke Conference on Wednesday, June 19 (see clip 1 below)
- I do think that you’re going to see bonds perhaps test down to a 1.70% yield.
5.3 Bill Gross on CNBC Street Signs after the Fed decision & before Bernanke Conference on Wednesday, June 19 (see clip 4 below)
- I think at 2% or lower [yield on 10-year treasury at year-end]. I think ultimately, you know, the tapering is delayed. I think we’re at a value zone in terms of Treasuries and in terms of high grade corporate bonds and mortgages, and, you know, we’re a buyer here this afternoon as opposed to a seller.
- it’s a time to buy government bonds, it’s a time to buy high quality bonds for, … short-term capital appreciation
5.4 John Brynjolfsson on CNBC Fast Money after Bernanke Conference on Wednesday, June 19 (see clip 2 below)
- I am bullish on bonds because the economy is slowing, the global economy is slowing;
5.5 Marc Faber on BTV Street Smart on Friday, June 21 (see clip 5 below)
- “In bonds and gold,
sentiment is by historical standards incredibly negative. As a
contrarian, I would rather buy bonds and gold than equities“
- I am tempted to
buy a 10 year treasury at a yield of 2.5%. I think we will rebound in
the treasury market. Yields will go down first, and if they go up
further, it will kill the economy including the housing market.
6. Stupidity, Seth Klarman & Munis
During the past 3 weeks, we put forth a distinct possibility, based on past several years, that Treasuries usually bottom out on the day of the 10-year auction in June. Last week, we were stupid & arrogant to wonder whether that actually came true. Well, Bernanke & bond markets splashed eggs all our proverbial face.
Carnage in all spread products has been murderous from high quality corporate bonds to emerging markets debt. Muni closed end funds were brutalized despite their relatively safe credit quality. Look at the May-June charts of three such NY funds, funds from esteemed managers like BlackRock, Nuveen & Pimco.
That’s called a vicious bear mauling. These funds are now trading at triple tax exempt yields of 6% (pre-tax equivalent of 10%+) and at discount to NAV of 5% or more. These should be gobbled up right?
Wrong according to Mrs. Market, or at least her mood of the moment. Because these are leveraged funds that benefit from a flattening curve and lower rates. They get killed during bear curve steepening. It has been hell even for investors who normally like to buy bonds as prices fall, a method called scaling in. Now these investors know what fish think of the term scaling.
Their pain might be lessened a bit if they reflect on the wisdom of Seth Klarman who said recently, (per a Zero Hedge post) :
- Our willingness to invest amidst failing markets is the best way we know to build positions at great prices, but this strategy, too, can cause short-term underperformance. Buying as prices are falling can look stupid until sellers are exhausted and buyers who held back cannot effectively deploy capital except at much higher prices.
But this requires total conviction about your investment thesis and the ability to take vicious mauling with equanimity. That is why investing folklore terms this approach as catching a falling knife.
7. U.S. Equities
According to Marc Faber, the sentiment on equities is still rather positive (see clip 5 below). You see that in the comments of Ralph Acampora below.
7.1 Ralph Acampora on CNBC Closing Bell on Friday, June 21
- … we did enough damage this week, technical damage, to suggest that this correction is not over. But I am by no means bearish longer term. In fact, I am welcoming this decline. But I just want to caution everyone, I think we’re going to have a pretty volatile summer
- … the 50-day moving averages, … had held the market to about a 5% correction. Well, most of short-term moving averages were broken this week, and the likely target on the downside is the 200-day. And if you take it from top to bottom, you’re talking about at least a 10% correction. I combine that with the fact that … the Dow Transports did very, very poorly even today, it broke down. So there’s real reason to see more consolidation — more consolidation and volatility for a while
- while you’re in
the decline, you really can’t tell where the leadership and the laggards
will be. But so far, it’s been the interest-sensitive stocks that have
came under the biggest pressure. I think the ones that will do well are
the ones that are holding up relatively well. Again, it’s financials. I
like Technology. I like Industrials. I think that’s where we’re going to see the new emerging leadership, as we go through this corrective phase and remember one thing,
Maria, in the secular bull market, you need shakeouts like this to get
the shift in leaderships. I think long term this is very, very healthy
7.2 Carter Worth on CNBC Fast Money on Thursday, June 20
- once you are down more than five percent, history shows you don’t stop there. … back to 1927 there have been 205, 5% plus corrections. The median decline is about 8.3%. The mean is 12.2%. So we’re down now 6.2% so the presumption is more .
- what’s important is each time you dip you come back to median tops (of the channel in the graph). if we come back to this high, you’re talking about 1475 on the S&P and that would be 12% from high to low. It would be the exact mean decline of 5%+ corrections .
7.3 Lawrence McMillan of Option Strategist on Friday, June 21
- If the decline continues, it should find support at 1560-1570 and then major support at 1540. In summary, all the indicators are bearish right now, but there are some severe oversold conditions that have quickly developed. Aggressive short-term traders can play oversold rallies when indicators set up, but the intermediate-term picture is for lower prices.
7.4 Tom McClellan in SP500 Following In 1998’s Footsteps on Thursday, June 20
- “If the 1998 price pattern analog is correct, there is more damage yet to come for the stock market in 2013. … Back in 1998, the stock market went through one of the quickest 20% declines in history. It took just over a month to get all wrapped up, plus another 6 weeks to put in a retest low. The initial selling in July 1998 was thought at the time to be just some “summer doldrums” type of action, but in the background there were liquidity problems developing in overseas markets which started to degrade liquidity in the U.S. stock market. There had also been a big A-D Line divergence from earlier that year.”
- We don’t have a big A-D Line divergence in 2013, but we do have signs of illiquidity nonetheless. Bond CEFs were telling us about liquidity problems back in April, well ahead of the May 21, 2013 closing high. And more recently, emerging markets stocks have been showing a lot of weakness. These groups are among the most liquidity sensitive market issues, acting like the canaries in the coal mine which would keel over from bad gases before the big burly coal miners were affected.
- The implication is that if this pattern similarity continues into the future, then we are not done yet with the whole process of taking the market lower. The whole pause in the decline as we waited for some sort of new magical announcement from the FOMC on June 19 was the equivalent of the halfway measuring flag structure that the SP500 built in the summer of 1998. Soon we’ll see the rest of the downward thrust, ultimately culminating in a bottom in August 2013, if the 1998 pattern is correct. My own expectation, based on a current analysis of the eurodollar COT leading indication, is that the final bottom should be more like September 2013 than August.
Then Tom McClellan adds a really important note.
- “These comparisons should never be trusted completely, but that’s true for any tool or indicator… Still, they are really fun to see when they do appear.”
- Jeff Gundlach on CNBC Fast Money Half Time on Wednesday, June 19
- John Brynjolfsson on CNBC Fast Money on Wednesday, June 19
- Bill Gross on BTC Street Smart on Wednesday, June 19
- Bill Gross on CNBC Street Signs on Wednesday, June 19
- Marc Faber on BTV Street Smart on Wednesday, June 19
1. Long Term Treasuries are one place to make money – Jeff Gundlach on CNBC FM & 1/2 – before the Fed decisions – Wednesday, June 19
- I think that the Fed is going to reduce their bond purchases later this year because, as you know, my theory has been that what’s really going on is the Fed is financing the budget deficit, and the budget deficit is smaller than it was a year ago, and, therefore, the need for financing is less, and so bond purchases should be less. So they’ll probably be some language about a wind down, reduction of bond purchases later this year and I think the market expects that to happen.
- so really what’s happened in the markets is interesting in the past month because nobody is making any money sort of anywhere anymore. when we were talking at my strategy team about a month ago, we were saying what should we buy? what should we invest in? I made the comment I can’t find anything that I think is going to be a moneymaker, and when we look around the world, that’s been the case.
- there’s really nobody making any money in anything in the past month. Stocks are down, not much in the U.S., but they’re down hard in a lot of emerging markets and in Japan. Gold looks like it’s going to break down to a new low. Bonds are going sideways. No one is making any money anywhere, and I think that’s because people think that the conviction of central banks to continue the amount of monetary stimulus through bond purchases is less. that’s going to happen today again.
Wapner – so let me ask you this. we see yields continuing to rise. we’re above 2.20% today. why are rates going up? is it a recognition the economy might be better than we think? are we starting to work in the taper? why are rates going up?
- Gundlach – rates aren’t going up, Scott. they are sideways. they went up earlier and they went up to about 2.30% on the ten-year which we talked about a few weeks ago and since then they’re just bouncing around. rates really aren’t rising. they’re going sideways, and I think actually rates are going to start falling. I think the place, the one place that you’re likely to make money in the next several weeks, maybe couple of months, is actually, believe it
or not, the most hated asset class on the planet, long-term U.S. government bonds.
- Gundlach – that’s what I think is going to be the most successful investment, and looking at to the reach that conclusion is the fact that there is no inflation anywhere. there’s no sign of inflation. when you look at the commodity market in particular, it really looks bad. I mean, look at where copper is. look at where gold is. Look at where Gold is in foreign currencies. I mean, it’s hitting new lows in terms of the Japanese yen. It’s hitting new lows in terms of the euro. It looks like it’s about to hit new lows even in terms of the dollar, which has been a weak currency. So gold should be going up in dollar terms. i think that what we’re looking at is a bond market rally that’s going to start fairly quickly.
- I think that the Fed is fundamentally dovish, and with Ben Bernanke now pretty clearly signaling he’s not going to be the Fed chairman in six months’ time, you’re going to get yet more dovish Fed chairman. I think or chairwoman is what’s likely to be, and so I think tapering, I think it should just be called reducing. there’s something about the word tapering that bothers me. It implies some sort omniscience and some sort of ability to do things perfectly which is really what’s making me nervous about kind of the world today is this idea that the Fed is omniscient and can do things perfectly and the reason I agree with you about dovish is recently Ben Bernanke said, yes, we may reduce bond purchases, but after that we may increase bond purchases. we’re going to sculpt this bond purchase program in such a way that we’re going to make the economy perfect. when economic data is a little soft, we’ll increase bond purchases. that’s dovish for sure. when economic data is strong, we’re going to reduce bond purchases, and we’re going to make the world a perfect place of stability and comfort, and I just don’t think that’s the way the world works. It bothers me a lot that we have central planning in the true bubble of what’s in the world today of bubbles is central planning and central banking, and what we have is this idea that we can get away from these extraordinary and experimental policies with, as Ben Bernanke put it on the 60 minutes program some time ago, 100% perfection.
- Gundlach – That really bothers me coming from human beings which we all know all of us are far from perfect and there’s no way that this is going to be able to be accomplished. so this is, i think, why we’re starting to see non-progress in financial markets is there’s sort of a stepping back from the idea, I think the belief, that all this is going to happen to perfectly. Yes, I think tapering bond purchases is going to happen. It’s going to happen because the budget deficit is smaller and then when economic data gets weaker, which it probably will at some point, then they’re going to talk about increasing bond purchases. So this program is not going away. It’s just being sculpted in a way that has far too much confidence, in my opinion, in terms of its success and efficacy.
At this point, CNBC Fast Money trader Jon Najarian was asked for his opinion.
- Jon Najarian – I agree with Jeff. I believe that’s going to be the case. I think that what we’ve had here, folks, is a situation where people were trying to get ahead of this Fed and the taper if, indeed, that’s what’s going to be part of the statement today. so I do think that you’re going to see bonds perhaps test down to a 1.70% yield or thereabouts Scott.
Scott Wapner stepped in to ask “Jeff, Can you have stocks and bonds going up at the same time?” Gundlach answered:
- yes, you can have stocks and bonds going up at the same time. you know, it’s been the case that for now quite a few years that bonds and stocks have been negatively correlated, but more recently, and i mean very recently, that’s changed a little bit. you will notice that when bond yields rise say to 2.20% or higher, it seems that stocks really get indigestion. It seems that everything gets indigestion when bond yields rise above 2.20%. that’s why I have been saying that I think bond yields aren’t going to rise much, if at all, above 2.30% or 2.35% which they basically kissed 2.30% last week. So initially I think if bond yields fall, I think it’s positive for stocks. initially. which means say they move down to 2% or so on bonds, I don’t think stocks have a problem with that. I think stocks like that.
Don’t Make these mistakes – Gundlach
- well, the basic viewpoint is that the financial markets, and certainly bond alternatives, are all basically balancing somewhat precariously on a very narrow base, which is 0% rate policy. everybody is trying to find ways of getting yield and find ways of avoiding what they think is a lousy asset class, and they’re wrong. bonds are not a lousy asset class as we talked about in the last segment.
- but what people are doing is fleeing from bonds so far in the last several weeks into other asset classes like, you know, dividend-paying stocks earlier this year, into mortgage reits, into master limited partnerships. And as we talked about over a month ago when I joined you from the salt conference when I was at the new york stock exchange, this is going from the fire pan into the fire. it’s a fundamental mistake investors are making. The basic premise they’re operating under is, hey, I don’t want to own bonds because Ii think the yields are too low, and I think that that means they must rise soon, and I’m going to lose money in bonds. what they’re doing is fleeing into other asset classes like dividend-paying stocks, mortgage reits and Master Limited Partnerships & the like.
- if you look at the bloodless verdict of the market, which is the price action of the past month or so or two months or so, while bonds have had zero or modestly negative returns, many of the so-called bond alternatives have had horrible returns. look at mortgage reits. these are done some of them 20%. look at dividend paying stocks which are under performing. look at MLPs. the problem is all of these things are balanced precariously on the low interest rate premise and if the low interest rate premise is incorrect, these things are going to fall more than bonds, which has been the tale of the tape over the past month or two. so don’t think that fleeing from bonds into these yield alternatives is some sort of low volatility, no risk proposition should you think that bond yields might rise. so that’s the issue. bonds have fallen less than most asset classes with the interest rate rise. that’s what i mean by out of the frying pan and into the fire.
- and the reason they fall so much, Scott, is that people buy them naively. They think that they’re somehow not going to suffer from negative price action should there be a modest yield rise, and yet when they start to fall, they say, oh, my good
ness, I actually bought something that has downside potential. When it starts to fall, they panic and start to get out. that’s why these kind of peripheral bond surrogates end up being the worst possible investment if the premise that you’re using to buy them is actually right, that interest rates might rise modestly. investors have to be sensible about what exactly are the fundamentals underneath these so-called bond alternatives, and the truth of the matter is they’re actually more risky than the thing that they feel like they’re fleeing from.
- so that’s the point I have been trying to make for really all year and now people are feeling it in their pocketbook with these negative returns in so many of the asset classes that they thought would be some way of protecting themselves from what turned out to be a modest decline in bond prices.
2. Bullish on Bonds – John Brynjolfsson on CNBC Fast Money – Wednesday, June 19
John Brynjolfsson is the CIO & Founder of Armored Wolf.
- I am bullish on bonds because the economy is slowing, the global economy is slowing; we see weakness in China; we are gonna watch the HSBC PMI come out tomorrow morning; emerging markets are slowing; Europe is imploding & frankly there are a lot of headwinds in the US
- seems like Bernanke has got some kind of agenda; he is certainly a lot more hawkish than I would expected; I think what he is also doing though is keeping his options open because every time he mentions tapering he also mentions it is driven by the economic data .. & the economic data is pretty weak & inflation is very weak.. we got rising taxes, rising interest rates, we got a number of headwinds that make it very very hard for the Fed to taper this year
- some of the fine tuning of their economic forecast seems to suggest that they think things would be weaker… all the economic surprise indices , all of the stats coming out of agencies and the economic reporting organizations have surprised economists on the downside; so the backup in the bond markets is a little bit odd; not only that you have the higher yields, the higher mortgage rates becoming another headwind on the economy..
- the economy has basically been flat-lining at 2% real GDP growth for about 2 years & that’s now gonna be put in jeopardy by these higher rates..So it is as if the market has done the tapering which Bernanke was planning…
- you have to
think in terms of 2 separate things .. 1) volatility of the markets & 2) economy – So the economy
has been slow, earnings have been zero growth year/year and that’s what
is really going on. The markets they are trying to be forward looking;
in recent days with the huge backup in bond yields which is as if the
market is pricing in a recovery that’s just not there.. if the economy
doesn’t confirm those market impressions the market will be in for a big
- In Japan, its probably the only country in the world that has seen some surprises to the upside over the past weeks; the Japanese economy has surprised on the upside, we have seen some strengthening in the Yen which is a headwind for the Japanese but so far the jury have to be out on Abenomics.. and ultimately we are all betting that it is gonna work because that’s what the globe needs; if Abenomics doesn’t work we are in a handbasket of trouble.
3. “Fed is driving in a fog” – Bill Gross on BTV Street Smarts – after the Bernanke Conference – Wednesday, June 19
This interview by Bill Gross is very very different from the interview he gave to CNBC Street Signs just about 60 minutes prior. Why the difference? This BTV interview was after Bernanke’s press conference while the CNBC interview (see clip 4 below) was just before Bernanke’s press conference began.
The excellent summary below is courtesy of Bloomberg TV PR.
Gross on today’s statement by Bernanke:
- “It was a pro-growth type of statement and a suggestion that some additional definitions in terms of when tapering might begin and when it might end. Obviously according to a 7% unemployment number that speaks in his mind and perhaps my mind to early 2014. But I might also say in terms of questions and answers, and that is critical I think, that he did speak to the conditional influence of inflation. That even if unemployment came down to 7% and inflation did not go up to 2%, they would look around and readjust their decision. This is a combined growth, unemployment and inflation type of combination that has to be delicately managed and I think the market has misinterpreted the growth and the unemployment targets while leaving out the inflation targets going forward.”
On what he means by market misinterpretation:
- “I think they are missing the influence on inflation that obviously the chairman has considered and perhaps the committee as well. There was a question and Q&A that basically said, Mr. Chairman, if we are down at 1% inflation and it doesn’t rise, then real interest rates are in a quandary to which you have limited flexibility, and he said, I agree completely with the premise of your question. I would think the markets are looking at the 7% unemployment rate and suggesting the tapering will end at that point. I would suggest that yes, he did say 7% in terms of an unemployment target where tapering would end, presumably in 2014, but he also qualified significantly a number of times that inflation has to go back up towards that 2% target and at the moment we are not there. Those who are selling treasuries in anticipation that the Fed will ease out of the market might be disappointed unless we have inflation close to 2%.”
On how the Fed will respond if we don’t get to 2%:
- “I think the Chairman is almost deathly afraid and we have witnessed in speeches going back five or 10 years on the part of the Chairman in terms of the helicopter speech and the reference not only to the depression but to the lost decades in Japan. I think he is deathly afraid of deflation. As we meander back and forth around the 1% level, I would suggest that the chairman to the extent that he perhaps has a limited time left in terms of being the Chairman, that he would guide the committee towards not only an unemployment rate which has been emphasized in terms of the Q&A but also towards a higher inflation target, which is really a target. It’s not something in terms of a cap, but the inflation target of 2% and for the next year or two, 2.5% has been specifically delineated in terms of that. It’s a target. Those who think it is a cap and we are 1% below the cap and therefore the Fed doesn’t care about it, I think the Chairman told us the Fed does care about it and the closer we get to 2%, the better as far as he’s concerned.”
On Janet Yellin:
- “I think she is a Siamese twin in terms of policy. She is very much a dove and has chaired the communication effort on the part of the Fed for the last few years which has emphasized and will continue to be emphasized. PIMCO does not want to be in a position of endorsing anyone. We would simply endorse a chairman or chairwoman who perhaps would emphasize Main Street as well as Wall Street which has been the emphasis for the past three or four years.”
On when he thinks the Fed will start to taper QE and when investors need to start trading on that:
- “Based on what he said, based upon what the Fed estimates have given us in the last hour it suggests that yes, towards the end of the year, as we hit 7.25%, and if inflation rises as opposed to stays at 1% that the Fed would begin to taper and that ultimately they would end tapering in perhaps the first quarter of 2014. Is that a realistic possibility? At PIMCO, we don’t think that really is. We think the chairman and the Fed are taking a very much of a cyclical type of view. He blames lower growth on fiscal austerity and expects towards the end of the year once that is gone, all of the sudden the economy will be growing at 3%. He blames housing prices moving up on homeowners that simply like higher home prices as opposed to emphasizing the mortgage rate, which is really what has provided the lift in the first place. To certain extent his driving analogy, which he talked about pulling back on the accelerator, I think he might be driving in a fog. I think the Fed itself may be driving in a fog. To think that is a cyclical as opposed to a structural problem in terms of our economy. I simply think and PIMCO thinks that real growth to lower unemployment below 7% is a long shot over the next 6, 12, 18 months.”
4. “Tapering has been deferred” – Bill Gross on CNBC Street Signs before the Bernanke Press Conference – Wednesday, June 19
Kudos to CNBC’s Amanda Drury & Brian Sullivan* for asking specific & smart questions that forced the usually evasive Bill Gross to be explicit.
* this anchor order is chosen to be alphabetically correct & should not be construed as gender bias that Ms. Drury practices on CNBC Street Signs by insisting women first. We abhor such gender bias, being avowed feminists.
- Drury – we went into this meeting and decision thinking this was going to have a lot of significance and weight, perhaps the most weighty meeting in quite some time. do you think we got what we expected or was it a surprise to you, Bill?
- Gross – No, I think it was what we expected, … we are gonna learn more in ten
minutes, of course. But the tapering fear was always a result of Ben Bernanke’s language in the last press conference where he, you know, spoke to the next few meetings perhaps if there was a substantial improvement in the labor market. Ten minutes ago Steve talked about what that level might be. is it 7.25%, which is the forecast of the Fed, you know, at year end? you know, perhaps it is, but, you know, I think what the headline should be at this, you know, particular announcement is that tapering has been deferred. Certainly, you know, it’s not the next few meetings. We’re already one meeting into that, you know, type of playing out so, you know, perhaps by the end of the year, but certainly not in the next few meetings in mid-summer.
- Gross – I think so. you know, we’ve had some disagreement with some of the negative aspects of quantitative easing, by think what the Fed has tried to do with these hints, you know, that it can’t go on forever is basically to suggest that there have been some speculative influence of — influences of quantitative easing on asset markets. We’ve seen that in the high-need market. we’ve seen it in other risks markets. Jeremy Stein, you know, one of the governors has written about it, so, you know, the Fed has had a delicate task of trying to reduce speculation, but at the same time maintain, you know, a low rate of volatility, very difficult to do, almost like juggling, you know, the very heavyweights, you know, in one hand or know, and so, you know, they have got a delicate task ahead, but I think that tapering is at year end, and I think importantly, you know, that they spoke to the policy rate, you know, being maintained at, you know, a substantially low level, meaning 25basis points. you know, until the tapering ends, until the asset ends and from that point forward a substantial period of time, so we’re not looking in terms of the Fed funds level until 2015 or beyond in terms of raising it, and that to me is the critical element for bond prices.
- Sullivan – who am I to disagree with Bill Gross? But I’m going to right now, Bill, so listen up. all right. I’m going to push back what you said about the taper being deferred because the Fed did change some language. here’s what they said “the committee sees the downside risk to the outlook for the economy and labor markets as having diminished since the fall”. They changed a couple of words in that Bill. Doesn’t that signal to you that they have become a little more positive on the economy, and, therefore, might be dropping that sort of hint in the way they do, that tapering will begin?
As it turned out, Brian Sullivan turned out to be right based on what Bernanke said in his press conference and based on the reaction of the stock market. Kudos Sully.
- Gross – well, I think they have. You know, the economy has done all right at 2% growth, plus or minus, and i think the Fed has to acknowledge — have acknowledged that in terms of their forecast for 2014. you know, the critical element here, again, at what level of the unemployment rate, which is the — you know, the number really that the Fed is focusing in on terms of tapering, as what level do they begin either that announcement or the actual tapering of purchases going forward? you know, I think it’s somewhere around 7% to 7.25%. can we get there in the next month or two, decidedly not? probably in the fall, if things go well at 2% to 3%. if things don’t go well, if we have problems in Europe, if we have problems in Japan or China, then all of a sudden we’re back into the other camp of perhaps even, you know, increasing the purchases which I’m sure Bernanke will emphasize at the press conference.
In short, No according to Mr. Gross.
- Sully – We got a chart on the wall here, Bill, that I spent the afternoon painting up for you and you may not have a monitor, and I’m sure you know what this looks like. this is a shot of the ten-year bond yield which is in orange and it notes when QE1, QE2 or QE3 began. since QE1 was announced the S&P 500 is up 77% and the ten-year yield is down 44% and the divergence between the two has accelerated over the last 12 months.
- Sully contd – So my question is this. once interest rates begin to rise or QE is pulled back or both, if QE is pulled back, doesn’t the stock market have to fall since it clearly rose in large part on it?
Another excellent question from Sullivan who was clearly playing much better in this segment than his Hokies did last year. The answer from Bill Gross is really clear – Yes even though Gross is too political to say that so succinctly.
- Gross – well, that’s our opinion, Brian, and to Rick Santelli’s point of a few minutes ago. We’re in a highly levered economy, and it’s not just the leverage or the interest expense of the government or the Treasury. It’s really the expense of the household sector and corporations, and to the extent that interest rates rises, let’s just look at the mortgage market, to the extent that a 30-year mortgage rises from 3.5% to 4% which is basically what it’s done, then housing certainly has to be affected. In a highly levered economy, where households basically can’t afford to pay much more in terms of interest expense, then, you know, there are critical levels, and, you know, those levels are very tightly bound. It’s not the same type of environment, as 5, 10, 20 years ago where you could raise rates and you could expect slowing. If you raised very suddenly or tapered completely and raise that had ten-year up to perhaps 2.5%, then the leverage becomes a problem.
- Drury – very, very quickly. where does the ten-year yield end up at the end of this year?
- Gross – I think at 2% or lower. I think ultimately, you know, the tapering is delayed. I think we’re at a value zone in terms of Treasuries and in terms of high grade corporate bonds and mortgages, and, you know, we’re a buyer here this afternoon as opposed to a seller.
- Drury – Did you hear the comments by Jeff Gundlach earlier today on Fast Money Halftime? He said it’s most likely to make money in the long term, U.S. Government bonds.
- Gross – that would be our view, too. You know, we’ve had a bad May. The bond market has had a bad May and all bond managers had a bad May and we’ve moved from a level on the ten-year from 1.60% to now 2.25% or higher. You know, those types of yields are beginning to be attractive, and importantly beginning to suggest that the price declines that we experience in May, you know, probably are going to be limited in a potential for capital gains all of a sudden, you know, have increased, and, so, yes, it’s a time to buy government bonds. it’s a time to buy high quality bonds for, you know, short-term capital appreciation ….
- Drury – because you did say back in May that the bull market in bonds was over, so you’ve changed your view on that?
Wow. What an unusually direct question from Ms. Drury? Wonder what Drury & Sully had for lunch on Wednesday? Something spicy, we suspect.
- Gross – I think that’s true. I suggested at the end of April that basically, you know, the bond market had bottomed in terms of yield and that included not only treasuries but high-yield bonds and corporate bonds and that’s been true. The end of a bull market doesn’t necessarily mean the beginning of a significant bear market, and that’s our point, that, you know, you can maintain these levels and get a 3% yield on the total return fund, for instance, with relative safety in terms of principal as opposed to, you know, the debacle that’s being predicted in various news dailies on an almost daily basis, so, you know, the bond market at the moment doesn’t look great on a minute-to-minute basis after this announcement , but like I said, we’re a buyer as opposed to a seller.
Bill Gross means CNBC & you, Drury & Sully.
- Sully – Bill, I wonder if we’re forgetting something huge which is the growing protests and rioting all over the developing world including millions take together streets of brazil. Does that not maybe eliminate the Fed from the picture in the short term as people rush into the haven of treasuries?
Good question, again but Sully the crowd in Brazil is not in millions, only in hundred thousand lots.
- Gross – well, I think so, and the global situation has to be considered, even by, you know, respective central banks around the world, ou know, to the extent that there are emerging market de-leverings, to the extent that currency ups and downs are on the move and very volatile, as evidenced by the Japanese yen or instigated by the decline in the Japanese yen, then, yes. Global markets are levered, let’s face it, and is that a good thing? Probably not, but they are levered, and so central banks have to be very careful in terms of their tapering or in terms of their policy rate increases going forward
Gross proved to be wrong on this as well in a few minutes because Bernanke spoke in his press conference as if he didn’t give a hoot about emerging markets.
- Drury – you don’t see any danger of a massive leveraging unwind like we saw back in, for example, you know, 2008, happening across the world? there’s no danger of that happening in the next 12 months?… as a significant global repurcussion wide global deleveraging?
- Gross – No, I don’t think so unless central banks as a whole, you know, begin to ease back on the throttle substantially; the point has been made and we agree that the bank of japan and the fed in combination are buying about 1.8 trillion worth of securities a year out of an available supply of 2.2 trillion. they are buying almost all of it, so as long as they continue to buy it, you know, then markets should be supported, and the de-levering should be very gradual if at all.
Wrong again was Bill Gross. Because Ms. Drury’s cherished Aussie dollar closed down 2% on Wednesday and EM etfs were down 2-3% with Brazil down 4.5%. This is why we say again that Bernanke is all about USA and doesn’t care one iota about EM.
5. Buy Bonds & Gold rather than stocks – Marc Faber on BTV Street Smart – Friday, June 21
The excellent summary below is courtesy of Bloomberg Television PR.
Faber on whether problems will continue for the equity markets:
- “Well, right now equities, bonds and gold are very oversold. They can easily rally on the S&P. We could rally 43, 50 points, but I don’t expect a new high. Just in case a new high would be achieved in the next two months or so, it would not be confirmed by the majority of shares. In other words, very few stocks would lead the advance. In terms of bonds, they are also incredibly oversold. Where the sentiment about equities is actually still rather positive and all of these super bulls still predicting the market to continue to rise into 2014, 2015. In bonds and gold, sentiment is by historical standards incredibly negative. As a contrarian, I would rather buy bonds and gold than equities.”
On whether yields will be higher if Bernanke meant what he said on starting to taper sooner rather than later:
- “If you say that if he means what he says, then you believe in Father Christmas. He said if the economy does not meet the expectations of the fed in one years’ time, they will consider additional measures. In other words, if the economy has not fully recovered by mid-2014, more QE will be forthcoming. As I said already three years ago, we are going to go with the Fed to QE99.”
On whether he’s investing with a backdrop of no inflation:
- “Well, I think investors have a misconception about what inflation is because it is essentially an increase in the quantity of money and credit. We have wage deflation in the world in real terms, for sure. In other words, real wages are going down and the cost of living everywhere are going up. That is why you have social unrest in North Africa, in the Middle East, in Turkey, in Brazil, and it will spread because the average person on the street hasn’t participated in the huge asset inflation that has been going on in high-end properties, Mayfair properties, Fifth Avenue, Madison Avenue, the Hamptons and in equities and until recently in bonds and commodities.”
On Laszlo Birinyi saying that gold is his biggest short:
- “To that I respond there are many people out there, they never owned an ounce of gold in their lives. They were bearish about gold at $300, bearish about gold at $700, bearish about the stock market in 2009 when the S&P was at 666. Now, they are bullish about stocks and they are still bearish about gold. The commercial hedgers – these are professional miners, mining companies and people involved in gold trading. They have the lowest short exposure, since 2001 when gold was at $300. Similarly, in the silver market, the commercial hedgers, again, the professionals have the lowest short exposure since 2001. I would rather bet on the commercial miners, the commercial hedgers than on some forecaster who knows about the future of prices as little as I know. The only thing that I know is that I want to own some physical gold because I don’t want all of my assets in financial assets.”
- “First of all, I believe that today we are talking about the global economy. The U.S. stock market has just about outperformed any other market around the world in the last 6 to 12 months. We have big trouble coming into emerging economies. The emerging economies are not performing well, There is no
growth at the present time. The Chinese economy, maximum is growing at four percent per annum. We have multinationals in the S&P. Their growth and global growth came from the last four years from the recovery in the emerging world. If the emerging world does not grow, the global economy will not perform well and corporate profits, as we just saw today from Oracle, will disappoint and stocks won’t be the best investment in the world…Will not be a very good investment. I think the market is on the high side, corporate profits are inflated and we could easily, from the recent high, May 22 at 1687 on the S&P, drop by 20% to 30%, easily.”
On where gold is heading by year end:
- “Well, I think we will be higher by year end but I am not worried where we are. I have said that I buy gold regularly. I just bought today at $1300 and I will buy more at $1200 and I will buy more at $1100.”
On whether gold will go down before going back up:
- “I don’t know, I am not a prophet, I don’t know exactly where the price will be on a month by month basis, but I want to have some wealth, some of my assets in physical gold. I can see a lot of problems coming into the world including expropriation through taxation or through regulation or even through revolution and social strife.”
On where 10 year yield is going:
- “I am tempted to buy a 10 year treasury at a yield of 2.5%. I think we will rebound in the treasury market. Yields will go down first, and if they go up further, it will kill the economy including the housing market.“
Send your feedback to [email protected] Or @Macro Viewpoints on Twitter