Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. Our Web Software does not permit embedding of the clips into our articles. So we shall have to be content to include the links to the actual videoclips. We are very happy with the tremendous response from readers to this series of articles. We thank them sincerely and profusely.
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.
The First Realized Surprise of 2010
What is the one concept that could win the award for the “most crowded” concept in America? It is not the belief in China or Commodities. It is not the certainty of future hyperinflation or the conviction that Treasury yields were going to spike to high levels.
In our opinion, it the utter conviction that Big Ten is the worst major football conference; that Big Ten teams are overrated; they cannot match up with other powerhouse conferences; that Big Ten football teams are much slower and less talented.. and the list goes on.
That is why they play the game as Chris Berman says. During the first week of 2010, the three top Big Ten Teams, all underdogs, convincingly defeated their opponents. Ohio State beat the favored PAC-10 Champion Oregon, Iowa beat the heralded ACC champion Georgia Tech and Penn State defeated the much admired LSU of the vaunted SEC.
In the investment space, the most crowded concepts have been the continued underperformance of the US Equity Market, the continuing weakness of the US Dollar and the near certainty of a Treasury Market rout in 2010.
Will these US Assets surprise the way the Big Ten teams did last week? The evidence so far is to the contrary.
In clips 4-6 below, we feature the predictions, surprises and risks presented by Robert Doll of BlackRock, Byron Wien of Blackstone and Ian Bremmer of Eurasia.
The Non-Farm Payroll Report
The December Payroll report was bad. The reaction of the market was similar to the action following the terrible reports of September & October of last year – Dollar went down, Gold went up, Euro, Australian Dollar went up, Commodity stocks and Emerging market stocks outperformed the US Stock market and the Yield Curve steepened.
The reason again was the same. Fears of the Fed raising rates or engaging in other tightening measures evaporated after the NonFarm Payrolls report and markets celebrated the continued injection of the sugar-high of free liquidity from the US Federal Reserve.
The December report was really bad. The expectations had been as high as an increase of over 100,000 jobs. The components of the report were even worse. Accounting for a large decrease in the labor force, the real unemployment number might be as high as 10.4%.
But this was deemed irrelevant except for its impact on the US Fed. The conviction of the markets is increased growth in US & the Emerging Markets and a consequent rise in inflation or at least inflation expectations. In other words, the dominant trend of the past 9 months continues.
Bernanke already turning into Greenspan?
On Thursday, the Federal Reserve took the unusual step of issuing an advisory to Banks stating that by buying long-term assets funded with short-term liabilities Banks are endangering those earnings and their capital if interest rates rise.
The financial markets yawned. After the release of the awful jobs report on Friday, this “advisory” by the Fed was compared to the ineffectual and erroneous “irrational exuberance” statement of Greenspan in 1996. It is a sign that the financial markets, or more specifically the large macro traders, are openly dissing Ben Bernanke. But that is what these traders have done since 2006.
Helicopter Ben vs. Large Macro Traders
This fight has been the story of the Bernanke’s tenure as Fed Chairman. The large macro traders are convinced that Bernanke, at heart and in brain, is “Helicopter Ben“, a man who would reign liquidity as a solution to every problem.
This is why in 2006 & 2007, the commodity & emerging markets rally gathered full steam. In 2006, 2007 and 2008, Bernanke took decisions based on his judgment and training. These decisions were dovish and favored injection of liquidity. These decisions eventually proved to be correct. But the markets did not believe in what he saw of the underlying economy.
So at every step, Bernanke’s decisions were treated as that of a liquidity addict by the macro traders and they rallied commodities and sold off the US Dollar. They did so until Bernanke was forced to get tough. Unfortunately be waiting so long, Bernanke had to get far more tough than he ever wanted to be to kill the overarching inflation expectations. As a result, Bernanke’s actions ended up damaging the economy.
This history seems to be repeating in 2009-2010. The reaction of the markets to the Fed “advisory” and laughable reverse repo experiments shows that words of Bernanke are considered irrelevant. In other words, large macro traders know that Bernanke is not going to raise rates given the state of US unemployment.
The real damage of this Bernanke paralysis might be an inexorable rise of inflation expectations to a level where these expectations become engrained. Bernanke understands it. But, in our opinion, Bernanke is betting on the data getting weaker and core inflation falling to get his Fed out of this mess. We fervently hope he wins this bet.
Because, if the data refuse to cooperate and the leading indicators keep rising, by mid-year the Bernanke Fed could face a crisis of confidence. At that time, Bernanke might be forced to tighten excessively just as Greenspan was forced to do so in 2000 with terrible consequences for the US economy.
The risks in 2010 may be far greater than in 2000. The Federal Reserve has “never managed such a huge amount of liquidity and stimulus before” and “there is significant risk about how they go ahead and unwind“. These are the words of Susan Bies , a former Fed Governor during her appearance on CNBC StreetSigns on Wednesday, January 6 (at minute 3:30).
Ms. Bies is talking about risks in unwinding in an orderly way at a time of Fed’s own choosing. But what about the risks of a chaotic unwinding that is forced on the Bernanke Fed due to a spiking of inflation expectations? We tremble at the very thought.
In our opinion, Ben Bernanke needs to pay attention to the challenge of the large macro traders. He should do that know with a firm announcement in the January 2010 Fed meeting. If he leaves the timing to large macro speculators, then he could be risking the US economy as well as his personal reputation. That scenario, of course, be par for the course for winners of the Time Award.
A Transfer of Wealth from Middle America to Large Banks, Large Speculators & Wealthy Investors?
Is this real story of the Obama-Bernanke medicine in 2009? Look at who benefited from their medicine.
The Bernanke Fed provided enormous amounts of liquidity to the Large Banks. The Banks kept this money to improve their capital positions and invested it in yield-curve carry trades. The Large Speculators took this virtually free liquidity and made wonderful returns by moving this free liquidity to their favorite commodities & emerging market trades. This is why 2009 has been the highest return year in history for hedge funds. As a result, wealthy investors saw a substantial increase in their financial net worth.
In stark contrast, the American middle class invests in shorter term securities. Income is the greatest need of the American middle class today. This group is getting hurt very badly by the Bernanke medicine. By starving them of critical income, the Bernanke Fed is enriching the Large Banks, Speculators and the Wealthy.
Small business owners are getting caught in the Obama-Bernanke squeeze play. The expected hike in personal taxes, added expenses from health care “reform“, the drop in incomes from savings and the almost total freeze in credit from Banks – how does Small Business survive let alone create jobs?
If thi
s were not enough, the fiscal deficit is now above 10% of GDP. How much of this will Middle America tolerate?
This week, we read and heard Bill Gross, the Bond King, sound like Glenn Back (see clip 1 below) in his CNBC interviews. The Glenn Beckization of Bill Gross? Today’s truth and far, far stranger than the wildest fiction.
Is Reagan-Volcker a Model for Obama-Bernanke?
The Reagan-Volcker solution was radically different than the Obama-Bernanke medicine. President Reagan delivered tax cuts and fiscal stimulus while Paul Volcker raised rates. We realize that 2010 is very very different than 1982. But we can’t help wondering whether following Reagan-Volcker might still work for Obama-Bernanke.
If Bernanke were to raise short term rates, it would stabilize the dollar and actually lower long term Treasury yields. The commodity markets would fall sharply and oil-gas prices could come down by $15-20 (as Rex Tillerson of Exxon said a few weeks ago). This, in itself, would be a tax cut for the American economy. Capital would flow back to the USA from Emerging Markets. The combination of payroll tax cuts and rise in savings income would increase incomes for American workers.
Is this feasible given the sorry state of America’s deficit? We don’t know. But we do know that the current plan is on a slippery slope (see comments of Martin Feldstein and Simon Johnson in clips 3 & 7 below).
Are Steel stocks today’s Telecom stocks?
We don’t know but this week’s action in stocks like Schnitzer Steel and US Steel was amazing. US Steel went up from 57 to 66 this week, the last 4 points coming on Friday because of yet another analyst raising estimates. Is this action real or is it simply a case of too much un-invested money chasing beta to avoid falling behind the averages?
All week, we felt that high beta money was being put to work, perhaps the same money that left in late October to harvest 2009 returns. Already we see a performance anxiety in this money. We see that in the headlong buying of technology stocks in the first couple of days that reversed after the Google announcement of their Nexus phone. Then we saw a rotation of money from commodity stocks into financials on Thursday after China’s decision to hike their bill rates. Then again on Friday, we saw a rotation from financials back to commodities and technology after the terrible payroll report.
US Steel has gone from $35 in October 2009 to $66 this week. To us, this action is reminiscent of the 4th quarter of 1999 in technology stocks. After all, today’s belief in secular growth of China-led commodity stocks is reminiscent of the 1999 belief in secular growth of telecom stocks. Another sign that Bernanke is turning into Greenspan?
Has Meredith Whitney made another winning call?
Analysts generally upgrade stocks and raise numbers in the first week of a new year. Not Meredith Whitney. In an unexpected move, she reduced earnings for Goldman Sachs on Tuesday, January 5. This mid-day call stopped the rally in GS in its tracks. But the stock rallied at the end of the day. On Thursday, GS rallied almost 4 points leading our friends at CNBC Fast Money to do a segment on whether Meredith Whitney has lost her mojo?
We recall that in October 2009, Meredith Whitney downgraded Goldman around $186-187 and the stock rallied after her downgrade to around $192. The stock began its descent after the earnings of Goldman and Ms. Whitney’s call was validated.
Will this history repeat? We will know very soon. We now have somewhat of a stake in this call because of our award to Ms. Whitney. We do not wish to suffer the fate of other media awards like Time & BusinessWeek (are you listening, Squawk Box, Maria Bartiromo & Steve Liesman?).
On Friday, Meredith Whitney got company. The Citi analyst lowered estimates on Goldman and others. The Goldman stock closed down over 3 points to $174.31.
This week, we feature the following clips:
- The Glenn Beckization of Bill Gross? – Bill Gross on CNBC on Wednesday, January 6 & Friday, January 8
- Tony Crescenzi of Pimco on Bloomberg on Friday, January 8
- Martin Feldstein of Harvard on CNBC on Thursday, January 7
- BlackRock’s 10 Predictions for 2010 – Robert Doll on CNBC on Wednesday, January 6
- 10 Surprises for the New Year – Byron Wien on CNBC on Tuesday, January 5
- Top Risks for 2010 – Ian Bremmer of Eurasia Group on CNBC on Monday, January 4
- Crisis Just Beginning – Simon Johnson of MIT on Thursday, January 7
- The Real Crisis Culprit – John Taylor of The Taylor Rule & Stanford on CNBC – Wednesday, January 6
1. The Glenn Beckization of Bill Gross? – Bill Gross on CNBC – Wednesday,January 6 & Friday, January 8
Read the words of Bill Gross on Pimco’s website and decide for yourself whether Bill Gross is turning into a financial alter ego of Glenn Beck, America’s 2009 phenomenon:
- What has become of the American nation? Conceived with the vision of liberty and justice for all, we have descended in the clutches of corporate and other special interests to a second world state defined by K Street instead of Independence Square.
- Our government doesn’t work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people. You don’t have to be Don Quixote to believe that legislators – and Presidents – often do not work for the benefit of their constituents:
- What most politicians apparently are working for is to perpetuate their power – first via district gerrymandering, and then second by around-the-clock campaigning financed by special interest groups.
- The fact is that American citizens have never been as divorced from their representatives – and if that description fits the Democratic Congress now in control – then it applies to Republicans as well – past and present.
You go, Mr. Gross! Move over, Glenn Beck. We applaud these sentiments. We ourselves have lamented that our friendly CNBC Anchors do not work for the benefit of their viewers. But then, we have neither the eloquence nor the platform of Bill Gross.
So what does Mr. Gross think as an investor? He writes “most “carry” trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their “sugar daddy.”
His exhortation – “Investors Go to Germany”. Why? As he tells Bloomberg news, Germany is “the most fiscally conservative, has half the deficit of the United States, potentially has a low inflation rate, and they yield about the same,”
Bill Gross makes the same points during his interview with Erin Burnett on Wednesday, January 6 and in his interview with Joe Kernen & Carl Quintannia on Friday, January 8.
He tells Erin Burnett that his logic in cutting US Treasuries is a comparative logic vs. German Bunds based on their analysis of QE (Quantitative Easing) by the two countries – In Germany, QE has been 3-4% of GDP while in USA & UK it has been 10-11% of GDP. He also says that yields on the 10-year Treasury should rise by 30-40 basis points in a slow manner but that core inflation is headed downwards. He tells Erin Burnett, that according to the Taylor Rule, the Fed should be at a (minus 2-3%) funds rate at this time, which is impossible. He thinks there is some attraction in US corporate bonds and he recommends investors go to Germany. This is a good interview by Erin Burnett and should be watched (minute 06:55 onwards).
Joe Kernen of CNBC interviewed Bill Gross on Friday, December 8, after the release of the NonFarm Payroll report (from minute 09:26 of the clip). This is a more feisty interview in which Bill Gross makes his Beckian case for Government to “stop misusing” the stimulus funds and to “focus on Main street rather than Wall Street“.
Carl Quintannia did not let this go unchallenged. He asked “Bill, people will now say, of course, now that Pimco has trimmed their Treasury holdings, let’s spend like sailors right“. Carl’s facial expression is skeptical and you can hear Joe Kernen laughing in the background. You can see Bill Gross get momentarily angry, then sort of smile and say he has advocated his views for the last 12-18 months and that it has nothing to do with Pimco’s position.
We could not believe our ears. This is the first time ever that we have heard a CNBC Anchor be so direct with Bill Gross. Usually, CNBC Anchors are in a hero-worship mode when speaking with the Bond King. Keep it up, Squawk Box. You owe it to us.
Carl then asked the best question, an investor’s question “Bill, you are not a fan of cash, you are not a huge fan of Treasuries any longer, you like some sovereign debt around the world, you say that you are running out of options, running out of ideas?“. We are wrestling with the same question. Unfortunately, Mr. Gross did not have an answer except a sort of c’est le new normal.
But, to our chagrin, none of these 3 CNBC anchors (with 6 hours of daily TV airtime) asked Bill Gross the obvious question about his investments in German Bunds – Is Bill Gross hedging the Euro or not? If the US Dollar rallies by 4-5% against the Euro, then the entire benefit of owning German Bunds over Treasuries could disappear. Every investor who is interested in following the advice of Bill Gross would face this currency question before buying German Bunds.
Yet, Erin Burnett, Joe Kernen, Carl Quintannia (in last name alphabetically correct order) could not think of this important and most obvious question. And they get upset when we write about Journalistic Anchors!
We have another question of Bill Gross. Many analysts believe that Germany faces a deep banking crisis that might require German Banks to take $60-90 Billion Euros in writeoffs. What would this do to German fiscal discipline and would that be positive for German Bunds as the US Banking crisis was for US Treasuries? Also would the writeoffs cause the Euro to fall and require hedging the Euro exposure against the US Dollar?
For the record, we must point out that we did try to seek an interview with Mr. Gross for our Blog a couple of weeks ago, but our requests went unheeded. So we have no choice but to request our friendly CNBC anchors to ask more questions of Mr. Gross.
2. Tony Crescenzi of Pimco on Bloomberg TV – Friday, January 8
Tony Crescenzi of Pimco is one of our favorite analysts. Tony is a colleague of Bill Gross, the Co-CEO of Pimco. The contrast between these two gurus is interesting. We find Tony to be more of a longer term thinker. He speaks simply and succinctly. We can usually understand what Tony says. Bill Gross, in our opinion, is a superb tactical trader as well as a long term thinker. He is a very bright chooser of his words and expressions. In our opinion, he is a master of the Talleyrand art of “speech was given to us to conceal our thoughts“. This is a compliment in our books but one that makes to say Caveat Viewer.
Betty Liu of Bloomberg asked Tony a simple direct question “..a stalled labor market; what does that mean for Treasuries which have basically underperformed for the last several months?”
Tony Crescenzi gives a simple, direct reply. He said the payroll data shows that the cyclical rebound is facing structural headwinds and so any yield rise might be tempered. He says that the unwinding of the inventory replenishment kicker and fiscal stimulus could become a drag by the second half of 2010. He says “Markets will continue to romance the idea of normal style of recovery,” and that “People’s attitudes will not change until the data reflects it.”
Read the summary of Crescenzi’s remarks at Fed Won’t Raise Until After Jobless Rate Peaks, Crescenzi Says. But this summary does not mention Crescenzi’s reiteration of Pimco’s belief that core inflation would continue to decline until some time in 2011.
3. Feldstein on the Economy – Martin Feldstein of Harvard with CNBC’s Erin Burnett – Thursday, January 7
When Professor Feldstein speaks, most people listen. He was the former Chief Economic Advisor to Ronald Reagan and is the President Emeritus of the National Bureau of Economic Research.
He talks about job creation and says that we have 15 million unemployed people, another 9 million people who are on involuntary furlough and another 6 mill
ion people who are not even looking for work. He describes this as a very bleak situation. It could be years until we regained the jobs we have lost.
He discusses why he thinks there is a risk that the economy could run out of steam in 2010 and we could see a contraction in the economy. But, he does not support another stimulus because the rising deficits could frighten markets and markets.
Then Prof. Feldstein gives his views about inflation expectations and their impact on Fed policy and interest rates. Erin Burnett does a good job of asking real questions and letting Professor Feldstein provide succinct answers.
4. BlackRock’s 10 Predictions for 2010 – Robert Doll on CNBC The Call – Wednesday, January 6
Robert Doll, Vice Chairman of BlackRock, reveals his 10 predictions for 2010. These are:
- The US economy grows above 3% in 2010 and outpaces the G-7.
- Job growth turns positive in the United States early in 2010, but the unemployment rate remains stubbornly high.
- Earnings rise significantly despite mediocre economic growth.
- Inflation remains a non-issue in the developed world.
- Interest rates rise at all points on the Treasury curve, including fed funds.
- US stocks outperform cash and Treasuries, and most developed markets.
- Emerging markets outperform as emerging economies grow significantly faster than developed regions.
- Healthcare, information technology and telecommunications outperform financials, utilities and materials.
- Strong free cash flow and slow growth lead to an increase in M&A activity.
- Republicans make noticeable gains in the House and Senate, but Democrats remain firmly in control of Congress.
Read a detailed explanation of Mr. Doll’s predictions at Predictions for 2010 — and the Next Decade — by BlackRock’s Bob Doll on cnbc.com.
5. 10 Surprises For The New Year – Byron Wien on CNBC Closing Bell – Tuesday, January 5
Byron Wien, Chairman of Blackstone Advisory Services and ex-Strategist of Morgan Stanley, is noted for publishing his annual 10 Surprises for the New Year. These are:
- U.S. Grows at a stronger-than-expected 5 percent; unemployment drops below 9 percent.
- Fed begins hiking rates, reaching 2 percent by year-end.
- 10-year Treasury yield moves above 5.5 percent.
- S&P 500 Rallies to 1,300 before losing steam.
- Dollar rallies against the yen and the euro.
- Japan in the best-performing major industrialized market.
- President Obama endorses legislation favorable to nuclear power.
- Rebounding economy energizes the Obama administration.
- Financial regulation proves to be softer than originally feared.
- Civil unrest in Iran reaches a crescendo; Pakistan remains a regional hotspot
For a detailed discussion of these surprises, read the article GDP of 5%? Byron Wien’s Surprise Predictions for 2010 on cnbc.com.
6. Top Risks for 2010 – Ian Bremmer, Eurasia Group President on CNBC Closing Bell – Monday, January 4
Ian Bremmer discusses the top 10 geopolitical risks for 2010 in this clip. This is an interesting clip. The 10 risks are:
- US-China Relations
- Iran
- European fiscal divergence
- US financial regulation
- Japan
- Climate Change
- Brazil
- India-Pakistan
- Eastern Europe, elections & unemployment
- Turkey
Read the entire report at Top Risks of 2010 on the Eurasia group website.
7. Crisis Just Beginning – Simon Johnson of MIT om CNBC Squawk On The Street – Thursday, January 7
Prof. Johnson is an economist at MIT Sloan School of Management. His views are starkly different from the consensus. This clip is a must watch in our opinion.
He says that Emerging Markets are the next frontier for the crisis. He says that the conventional wisdom is that you can’t have back to back crisis but we are going to push that. The next 12 months could really be exciting. It could be positive but we are setting ourselves up for an enormous catastrophe. When you have free money, you will go to where you are sure things will go up. That is China, that is Emerging Markets. He admits that China is very hard to read, so may mirrors behind mirrors. It might be more of a Japan type of scenario. It could have a massive banking crisis and you could have a dismal performance for the real economy and all kinds of exchange rate dynamics that could impact the world.
8. The Real Crisis Culprit – John Taylor with Larry Kudlow – Wednesday, January 6
John Taylor is the creator of the Taylor Rule, the rule that has governed Fed analysis since its creation. We discussed the Taylor Rule in March 2009 our article What Is “Taylor Rule”? What Does It Say Now? Was It A Factor In Bernanke’s Decision?
In this clip, Professor Taylor refutes the assertion by Fed Chairman Ben Bernanke that the Fed’s monetary policy was not responsible for the bubble.
If you like monetary policy, you should not miss this clip. Thanks to Larry Kudlow for bringing on Professor Taylor to discuss the calculus behind monetary policy.
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