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. 2007 All Over Again!
As we wrote last week, Greenspan’s comments to Maria Bartiromo suggested that we might be in 2007 redux this year. This has been discussed by many given the huge rally in credit, the emergence of covenant-lite issues and a sense of forth in markets.
But the real question is where are we in the 2007 analogy? Are we near the October 2007 stage with a collapse looming ahead of us Or are we in early 2007 on the road to that bubble peak. We got two answers this week. The first was given in an exchange between CNBC’s Joe Kernen and Bill Gross:
- Kernen – Bill, you know, you hear about those toggles and ticks and all this stuff overheating again. On a scale of one to ten, …., where are we?
- Gross – we’re not at a nine or a ten, perhaps not even an eight, I’d probably label it as a six.
Howard Marks of Oaktree Capital essentially said the same thing to BTV Market Makers “rush is not on full bore… not in an advanced inning.”
So the next question is – if the rush is not on full bore yet, where exactly could the markets take us in this cycle?
2. David Tepper & Nouriel Roubini
We like simplicity because we can actually understand simple things that are simply stated. That is why we like to listen to David Tepper. He essentially said on December 17, 2012 on CNBC Squawk Box that markets will go much higher before we get a problem from a Fed exit. Regarding the stock market he said:
- “if you have interest rates start to move, you’re going to have a problem. So the question is when do our interest rates start to move? The interest rates won’t start to move until you have the stock market goes up a lot. are the real economy that really improves.”
And if the economy really improves, that’s good for the stock market. On January 22, 2012, Tepper told BTV’s Stephanie Ruhle:
- “I think you will get tighter. You will go very full to extreme value in credit… but [credit] is by far inferior to the equity markets. Not even close .”
We were reminded of Tepper’s comments when we heard Nouriel Roubini on Yahoo Finance on Friday. His comments were also simple and simply stated (see clip 1 below). Roubini explained why the financial excess from the Fed will neither create inflation nor lead to a bond market rout. Then he argued that Bernanke’s exit will be like Greenspan’s exit from 2004-2006 and so:
- “outcome of it could be a credit bubble that is bigger than the one we had in 2006.”
So both Tepper and Roubini think that the markets could get much crazier than anything we are seeing now.
3. Bill Gross & James Bullard
A new bubble is exactly what Bill Gross was alluding to when he admonished St. Louis Fed President James Bullard (kudos to Joe Kernen for goading Gross) on CNBC Squawk Box on Friday:
- “I don’t think the Fed is vigilant in terms of the negative aspect of zero down interest rates I don’t think they’re vigilant in terms of other central banks and their quantitative easing policies, and I don’t think they’re vigilant in terms of asset prices.”
To which Bullard replied lamely:
- “… systems are a lot better than they were five years ago. And we are trying to have better market intelligence.”
So what will they do? Bullard was worse than lame:
- “Is still a very live issue for us and for all central banks.”
So the real question is who were the experts who worried about the Fed slowing down QE any time soon? Don’t they know their Bernanke? If they didn’t, then they heard it from Bullard, Bernanke’s herald as we once called him:
- “Fed policy is very easy and it’s going stay easy for a long time.”
- “I think policy is much easier than it was last year because the outright purchases are more potent tool than the ‘Twist’ program was … I don’t think markets have fully absorbed that switch.”
4. U.S. Stock Market
Despite the simplicity of the above, too many people seemed to believe that the Fed would stop or slow down QE, especially our friendly Financial TV anchors. We don’t think ill of them for that. You see, they think Fed stopping QE is a sure sign of a normal market, one that will make individual investors put more money into the stock market and watch their shows.
Believable or not, the stock market behaved for 24 hours (Wednesday 3pmish – Thursday 3pmish) as it behaved in 2012 & 2011 when QE programs ended – Treasuries rallied, Yield Curve flattened, stock markets fell, financial stocks cratered, commodities fell hard….
There is no question in our mind that the stock market rests on the foundation of QE4ever. But that doesn’t mean it won’t be volatile in the next few weeks as we go through events in Washington DC and Europe. So what do the allocators and technicians say?
Marc Faber on CNBC Fast Money on Thursday (see clip 2 below):
- “I think we have made an intermediate top and it could be a longer term top. I don’t think the market is as overbought as it was in ’87, so, I don’t expect a crash. but I think, for the time being, the market has peaked out.”
- “either we have a correction now and then we go up further or we go straight up into high in July/August from where we could crash.”
Lawrence McMillan of Option Strategist on Friday:
- “We have been saying that we didn’t want to short this market before
confirmed sell signals arrived, because it was too powerful. But now we
have a confirmed sell signal from market breadth, and $VIX has closed
above 15. If $SPX falls below 1495, that would be an even more important
negative sign.”
Nobody tells us what Tom DeMark is thinking. So we rely on Friday’s tweet by fellow DeMarkian Mark Newton (@MarkNewtonCMT) of Greywolf:
- “Grinding rally over next couple Trad days to 1517-SPX & close next
Fri over 1513.17 would satisfy both Daily, Weekly SPX Demark
requirements.”
Dennis Gartman made a splash on Thursday when he said on CNBC Fast Money-1/2 when he said:
- “Cash is not a bad thing to be hold. I think this could be a very serious correction, at least 7 percent, and I’m not one to sit for 7 percent corrections.”
Bernanke speaks to the Congress this week and he is the most important technician/strategist of all, isn’t he?
5. U.S. Treasuries
Treasuries rallied for 3 consecutive days, with 30-yr yield & 10-year yields falling from 3.21% & 2.03% on Tuesday to 3.15% & 1.96% on Friday. This is consistent with their post-QE behavior in 2011 & 2012. But what about now in QE4ever 2013?
Marc Faber, the man who called Treasuries a bubble just a few weeks ago now calls for a rebound in extremely oversold Treasuries (see clip 1 below). Holly Liss of ABN Amro told BTV Lunch Money:
- “If stocks move
higher, potential to test 2.4% 12 high…or if stocks fall and yields move
lower because sequestration impacts us then yields go to 1.80% very
quickly…1st support level…you could clearly go much lower if you see sequestration really hit hard”
Treasuries can sell off for sure but remember our friends Tepper & Roubini believe that inflation is not likely in America without wages & employment. So if inflation is not an issue and if Fed remains anchored, there is a limit to how far yields can rise on the 30-year.
We remind readers
that Treasuries mounted fierce rallies from oversold conditions even in
the bubble year of 2007 and in the rally year of 2009. Treasuries also
rallied big on European fears in 2011 & 2012. Whether such a rally is feasible from today’s levels or from lower levels, we don’t know. But Jeff Gundlach did say he likes 10-year Treasury at 2%. By the way, the 3-month downtrend line on the 30-year Treasury Bond was broken from below this week.
And speaking of Europe, European GDP forecast was downshifted on Friday and Britain was downgraded by Moody’s from AAA to AA1. This weekend, we have the wonderful opera called the Italian Election.
So we should see some interesting action from currencies and precious metals next week. The sell off in Gold has prompted Tom McClellan to change his rating on Gold. Read the comment from his Gold’s Triangle Objectives Met article:
- “I had been officially bearish for my “current opinion” on gold as published in our Daily Edition, but now with the downside objective reached and an obvious oversold condition evident, I exited to a “neutral” stance. I don’t think it is time to catch the falling knife and bet on a big gold rebound,
Featured Videoclips:
- Nouriel Roubini on Yahoo Finance on Friday, February 22
- Marc Faber on CNBC Fast Money on Thursday, February 21
- Bill Gross on BTV Street Smarts on Thursday, February 21
1. A bigger credit bubble than the 2006 bubble – Nouriel Roubini on Yahoo Finance – Friday, February 22
This is really a very good interview. Roubini’s comments are below.
Risk of Currency War
- it is a risk in the following sense, we have slow domestic demand in most of the advanced economies, growth because of painful deleveraging both of the private sector and public sector. Therefore growth is low, below trend and unemployment is higher; So how can you achieve stronger economic growth?
- In every economy the only way to achieve growth is improved external demand and increase in net export trade balance. How do you achieve that? Through a weaker currency. How do you achieve that? Through more QE. So there is a QE war, a proxy war for currency war. Whether you ease for domestic reasons or for the indirect effect of that easing on your currency, the effective result is going to be a weaker currency.
- Currencies now depend on relative money supply. QE increases the balance sheet, increases the money supply and weakens the currency. So you can achieve quite a significant move in your currency even if you don’t talk about it…
Gold
Gold is falling for two reasons:
- we have reduced the tail risk of a collapse of the euro; of another global financial meltdown, and one of the situation gold does best when there is huge tail risk…
- the other extreme situation in which gold does very well is a massive risk of inflation.
But in spite of all these QEs, money has doubled, tripled, soon quadrupled, that does not create inflation for two reasons:
- velocity has collapsed, most of the money is hoarded by the banks as excess reserves and there is no credit growth
- there is a huge slack in the labor market; wages are growing less than productivity, labor costs are falling, there is excess capacity, there is no pricing power,
So the combination of slack in goods and labor markets means inflation is the least of the concerns for the Fed, the ECB, the BoJ, Boe and so on. And therefore there is no reason of inflation for going to gold.
That is why Gold is going down and actually as global economy recovers, people are gonna say there are better assets, may be stocks, commodities, that gives me greater return than gold.
Risk of the QE End Game
Actually the risk of the end game of QE is not goods inflation, there is enough slack in goods and labor markets. That’s not going to be the outcome. It is not gonna be that we are going to get a rout in the bond market because the Fed knows when they exit they have to exit slowly.
So if you are not going to have goods inflation and you are not going to exit fast enough, then the risk is like during the cycle of 2003-2006, we were exiting very slowly at measured pace 25bps every 6 weeks and we got an asset bubble, a credit bubble, a housing bubble. What Jeremy Stein at the Fed says is we are at the beginning of the creation of another credit bubble.
Because we are gonna exit so slow that the financial excess are not gonna go into goods inflation, we are not gonna to bond market rout.. economy is going to be weak enough to justify exiting slow…in addition to the weak economy, we have too much debt and so you don’t want to raise interest rates fast enough and outcome of it could be a credit bubble that is bigger than the one we had in 2006..of course bigger
2. Intermediate term top in stocks & rebound in Bonds – Marc Faber on CNBC Fast Money – Thursday, February 21
- I don’t think that’s [1987 like crash] yet there. But I think we have made an intermediate top and it could be a longer term top. I don’t think the market is as overbought as it was in ’87, so, I don’t expect a crash. but I think, for the time being, the market has peaked out.
- And I think that in the meantime, bonds, which are extremely oversold, could rebound.
- What I maintain, in earlier interviews, is that:
- either we have a correction now and then we go up further or
- we go straight up into high in July/August from where we could crash,
- So, I welcome a correction here. The question will be, after this correction, we have to watch the markets rebound, where they can make a new high or not. maybe this high, may be this high which has had that 1530 on the S&P – will prove to be a longer term high
. - The market has now become quite overbought and that is very significant or overextended bullish sentiment – everybody says sell bonds buy stocks and when everybody thinks alike, one has to be careful.
His current allocation is – 25% in gold, 25% in equities, 25% in corporate bonds & cash., 25% in real estate..
3. Bill Gross on BTV Street Smart – Thursday, February 22
This was a detailed conversation between Bill Gross & Trish Regan/Adam Johnson on BTV. The excellent summary below is courtesy of Bloomberg TV PR.
Gross on whether this is the end of quantitative easing as we know it:
- “Not yet. As my tweet indicated, I think it’s growth dependent and what type of growth would be necessary to and quantitative easing? Probably something like 3 to 3.5% for a number of quarters and probably something approaching 7%, given the 6.5% unemployment rate. We don’t think we are there yet. Obviously yesterday the minutes raised the possibility. There is dissension amongst the participants, the governors, so to speak, but the three primary musketeers, the three musketeers, we call them — Bernanke, Yellen and Dudley — are in firm command and we don’t think anything is going to happen for at least 10 months.”
On whether 3.5% growth will happen in the near future:
- “It would feel like it is coming if we did not have fiscal austerity and the pullback in terms of government spending or the potential pullback. Housing and other house related industries are pulling the economy forward, but only probably only at a 2% pace. The Fed has indicated–not for the purposes of quantitative easing specifically–but in terms of their policy rate, raising that 25 basis point policy rate, that they would need at least 6.5% unemployment and perhaps 2.5% or higher inflation for one to two years. We’re close to those so quantitative easing, in terms of a trillion dollar package, $85 billion monthly package of treasuries and mortgages, we think it continues until at least the end of the year.”
On how to get out of the quantitative easing scenario that we’ve been in for so long:
- “That’s very difficult, not just for the Fed, but other for other central banks. at the moment, the bank of Japan is about to enter the pool, so to speak, the deep end. The Bank of England as well, perhaps, with Carney indicating as much. Is it easy to get out of the deep end once you get into it? It gets difficult, because the market begins expects a constant infusion of liquidity–$85 billion a month into the bond market, which extends out into high-yield and equity credit as we move forward. Once you cut off the check writing and the purse strings, it becomes a problematic question in terms of valuation and the ability of markets, stocks, and bonds to continue on.”
On his tweet on 2/20 saying that bond vigilantes are no more and central bankers are the masters of the universe:
- “They are trying to let us know that they are vigilant. We saw the minutes yesterday and they were extensive and they meet every other month or more frequently. Are they vigilant? They are in terms of their objectives. what the Fed is trying to do is reflate the economy, that means not only produce 2 to 3 to 4% real growth, but a modicum of inflation in combination such so we have a nominal 5% of GDP environment. Are they vigilant in terms of moving towards that goal? Yes. Will they be vigilant in terms of having reached it then pulling back and not disrupting markets? Perhaps not. We’ll have to see going forward.”
On whether central bankers have been irresponsible:
- “I would say this and Bernanke said it as well, that there are negative aspects to these policies. The negative aspects come in various forms, potentially with narrow credit spreads and higher risk in terms of asset prices. They come in terms of market making and liquidity aspects of the market itself, they come, as I have indicated and PIMCO has tried to advance in terms of an argument that low interest rates are a negative influence in terms of savings and therefore eventual investments. There are ultimately and presently negatives to these policies. The chairman recognizes that but what he does recognize going forward is if he can reflate the economy successfully, most of those troubles will go away. We remain able bit skeptical,, but we’re just going to have to see.”
On writing that each additional dollar of credit seems to create less and less heat:
- “Credit has been expanding for a long time, certainly since 1971 when Nixon abandoned the gold standard. During that period of time, credit, which includes corporate bonds and household debt, etc., has expanded from $3 trillion to $56 trillion over that period of time. Less and less bang for that $56 trillion? Certainly, because during that process credit spreads have narrowed and interest rates have come down. The process of real growth generation from credit expansion is almost necessarily come down as well. It is the same thing as saying that corporations are less willing to invest in a real economy that returns lower and lower rates of return than they were back in the 70’s, in which credit was less available. As spreads compress and interest rates come down, you almost necessarily have a credit market that is less effective.”
On whether we should be concerned about this:
- “I think we should. At some point, the ability of capitalism to expand on the basis of credit expansion is limited. Certainly capitalism is correlated specifically to productivity and growth in the labor force. That combination depends upon credit and successful productivity of credit itself in terms of its expansion and ability to fertilize in terms of real growth. Going forward, we should be concerned about that. Robert Gordon and others suggesting that all of the low hanging fruit has been picked–in this case in terms of credit. Much of the gain from credit expansion has already been realized. We have got to look for other avenues in terms of real growth going forward.”
On the so-called currency wars:
- “We don’t necessarily think it is a war in terms of firing bullets across borders. Each country is operating for its own benefit. It happened in the 1930s in terms of competitive devaluations. They did not call it currency wars back then. These days, the currency wars are basically fought with quantitative easing and check writing and lower and lower policy rates. Is it a war? Perhaps there is competition between countries in terms of this race to the bottom, this willingness or proclivity to lower their currency so that their exports and real growth will be higher than other particular countries. There is
nothing wrong with that. The question you ask, is a dangerous? It is, relative to inflation. Each country–the Bank of Japan, the UK, the US–to the extent that they are all writing checks, basically what they’re doing is inflating and trying to reflate their economies. That is a danger for the bond market to the extent that inflation moves from 2% to 3% over the next few years. It’s a danger of fixed income investments relative to real assets to gold and depreciation of the currency itself.”
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