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. Thus Sprach Bernanke
Forgive us for this poor and perhaps misguided reference to Zarathustra by Nietzsche. But the concept of ‘eternal recurrence of the same‘ does seem apt for the various Avatars of QE. We have seen the first two and it seems we are about to see the 3rd soon. Perhaps we should have gone Greek instead of Avestan and referred to Jackson Hole as the new Delphi. Because there seem to be quite a few interpretations of Oracle Bernanke’s comments.
The first came from the fastest tweet-gun in Bondland
- “Gross: Bernanke to go out with his guns blazing. QE3 is near a certainty. It will be open-ended but increasingly impotent.”
Gold and Silver delivered the same message by rallying 2.3% and 4.45% on Friday. Oil rallied, the Euro rallied, the Dollar fell and the stock market maintained its morning rally.
When the above tweet from Bill Gross was heard, guests on BTV Money Makers reacted. They were Sarah Quinlan of QAM and Richard Yamarone of Bloomberg:
- Quinlan – “Does that mean Pimco has bought mortgages today or something? I mean honestly it really seems like he is leading his book. I actually thought his [Bernanke’s] comments were negative for the mortgage market; may be Bill is trying to push it the other way. …That’s too me is where that tweet is coming from.”
- Yamarone – “Bill, I will bet you a gentleman’s bet that the Fed does not go this year in a QE3. They are going to wait until the fiscal cliff gets resolved or not; they are going to wait for Europe to blow up or they are going to wait for China.”
- Quinlan – “I just don’t think
that they are going to do something before the election. I don’t think
the data warrants it… The reality is the data isn’t great but it is
not horrific and I think the data has to get significantly worse for him
to actually sit there and say boom, here it is.”
What if next Friday’s payroll number comes in very weak? Would that change Ms. Quinlan’s mind? Sadly, BTV’s Erik Schatzker didn’t ask this basic question. Any way, whom do we seek out when we are in doubt about the Fed? The acting chairman of the Fed, as Steve Roach called him. He is a modest man, content to call himself Jon Hilsenrath in his CNBC appearances:
- “Bernanke laid out an in depth and very substantive case why he thinks the Fed’s easy money policy including bond buying works… I read it as his closing argument on new stimulus…After making the arguments he made, I don’t see how he sits in the room with doves on his committee like Janet Yellen and Bill Dudley and explain to them why he doesn’t do anything right now…the costs of inaction are very high…”
But Mr. Hilsenrath chickened out when asked whether the Fed would do QE before the election.
2. More Ado about the Gross Tweet
We are intrigued by the above tweet by Bill Gross and his use of “go out” for Chairman Bernanke:
- When is Bernanke going out? His term runs out in 2014. Is Bill Gross saying that Romney will win? Because that is the only scenario in which Bernanke could go out
in the next few months. In using the term “impotent”, Mr. Gross explicitly
disagreed with Bernanke’s claims of success of QEs 1 & 2. Bill Gross
has never been one to distance himself from a sitting Fed Chairman. So
again, is Mr. Gross beginning to curry favor with the Romney regime?
We
could, of course, be reading too much into his tweet but Mr. Gross is so
very much smarter than us and his words are usually described by TV pandits as talking his book. So we wonder!
We wish CNBC’s Brian Sullivan (@SullyCNBC) had as active an imagination
as we do. Because he had Bill Gross on his show on Friday afternoon and
he allowed Mr. Gross to essentially repeat the above tweet for several
minutes. Come on, Sully! If your favorite Hokies put pressure like you did on Bill Gross, the opposing
quarterbacks will have record passing yardage this coming season.
Statistics as damn lies! That is how the Obama campaign would describe the figure CNN’s Erin Burnett rolled out on Friday. She calculated
the total Fed stimulus at $2.3 trillion, she took Mr. Bernanke’s
assertion of creating 2 million jobs and came up with the cost of each
Bernanke-created job – $1.15 million. Will the Romney campaign pay attention?
3. US Treasuries
Nothing makes fun of pandits like long duration Treasuries. The rally on Friday afternoon was so vicious that Tim Collins (@Tangletrade) of RealMoney tweeted:
- $TLT clubbing shorts like they were baby seals. Wow.
By the way, Mr.
Collins thinks TLT could rise to 131-132. He was right in his call on August 14 for a rally in the Euro to 1.25.
The 10-year and 30-Year continue to laugh at Pimco’s Mohamed El-Erian who keeps advising viewers to keep “looking at the short end of the Treasury curve“. On August 9, Dr. El-Erian reportedly warned “The long end is exposed to a lot more risk“. On that day, the 10-Year yield closed at 1.69%. On Friday, the 10-Year yield closed at 1.55%, a drop of 14 basis points since Dr. El-Erian’s warning.
A couple of weeks ago, we made fun of BTV’s Sara Eisen for mocking Gary Shilling for “hiding out in the 30-Year Bond“. The action in the 30-Year Bond during the past 4 weeks demonstrates that hiding out in the 30-Year bond is liking hiding out under the French guillotine. Witness the action in the past 4 weeks:
- On July 24, the 10-Year yield touched 1.38% in the after-market. Then it rose up in a straight line to 1.86% intra-day on Tuesday August 21. Then it began falling again in a straight line to close at 1.55% on Friday. The corresponding trip of TLT was a fall from 131.8 to 121 and a rally to 127.74. EDV, the Zero-Copon ETF, was much more volatile, falling from 138 to 120 and then rallying to 131.25 on Friday – a fall of 13% followed by a rally of 9%.
Only Rip Van Winkle can hide out in such turmoil, don’t you agree Ms. Eisen?
4. U.S. Stock Market
The rally on Friday made up much of the decline of the first four days. Was the rally a response to Bernanke, a month-end markup or an oversold bounce? What do the gurus say about the near future?
Back in June 2012, Savita Subramaniam of BAC-Merrill Lynch forecast S&P reaching 1,450 by year-end. She proved to be right. This week she appeared on CNBC Fast Money to advise buying downside protection:
- “The S&P is
actually approaching our year-end target of 1450. We are almost there.
At this point, we actually think it makes sense for investors to buy
some downside protection. Sounds a little odd and I am optimistic on
equities but the near-term risks are a little bit larger than what’s
currently priced into the market. If you look at where the VIX is right
now, that suggests there is a lot of complacency about the next few
months…”
Lawrence McMillan of Option Strategist remains bullish:
- “In summary, there are some cautionary signs appearing: the breadth oscillator sell signals, the potential sell signals in the equity- only put-call ratios, and the rising $VIX. We will monitor these potential bearish problems closely, but the bottom line is this: as long as $SPX remains above 1370, it is still within the bullish channel, and we will remain bullish.”
We urge readers to visit Option Strategist and view Mr. McMillan’s charts. We also urge readers to read Friday’s article by Tom McClellan titled Friday Is A Better Indicator Than Monday. He stresses that his leading indicator is calling for a big top just after the election in November. The recent action reminds him of the string of 13 up Fridays ahead of the top in October 2007. His bottom line:
- “if Fridays are down too much, that’s a bottoming indication. If Fridays are up a lot like they have been lately, it is a sign that it may be time for the wise trader to start worrying, because other people are not.”
5. China
The Dallas Fed came up with a report titled China’s Slowdown May Be Worse Than Official Data Suggest. Below are excerpts from the concluding section:
- “Several factors contributed to China’s slowdown. Demand for China’s exports in Europe and the U.S. has weakened amid the deepening European sovereign debt crisis and sluggish U.S. economic activity.”
- “Additionally, China’s policy response following the global financial crisis is having unintended effects on its economy. China loosened monetary policy and undertook a massive fiscal stimulus program in response to 2008–09 developments. These policies, which cushioned the economy from the impact of falling demand for exports, had the unintended consequence of generating higher inflation and rising asset prices, particularly in the real estate sector. These developments forced China to reverse course and institute tighter monetary policy last year, creating another round of effects on the economy that continue this year.”
- “China’s abrupt policy changes during the past two years are not historically unusual and have been criticized as a source of the country’s big economic swings, which hurt long-run growth.”
The most bearish comments came from Patrick Wolff of Grandmaster Capital, a hedge fund that is up 18% ytd with a 4-part Warren Buffet and 1-part Peter Thiel model:
- “If you look at asset classes, equities look a lot better than most other asset classes in terms of yield and frankly in terms of prospects so long as you avoid some of the macro headwinds in the world. Basically my view would be pretty simply expressed as Fortress America view. Europe has all the obvious problems which we talk about endlessly. And China we are very bearish on; the whole China – emerging markets complex, in our view, is a very dangerous place to be exposed to.”
An article in the Financial Times adds evidence to the “dangerous place” opinion of Patrick Wolffe:
- “It used to be the case that if you ran a bank, everyone in China bowed to you. But, these days, that is no longer true. Demand for money is drying up in China”.
- “Inflation is disappearing, causing worries over the economy to veer from overheating to deflation with breathtaking speed.”
Deflation in China with breathtaking speed! Will its impact be similar to that of Japan’s deflation over the past 20 years? If so, the secular bull market in Treasuries may have a far longer life than anyone believes.
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