Posts Tagged ‘Alan Greenspan’
Bonner’s New “Trade of the Decade”
Tuesday, January 5th, 2010
This post is a guest contribution by Bill Bonner, author of two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Bill is also the driving force behind The Daily Reckoning.
Well, that was it for 2009. Whew!
Another great year for gold. But it wasn’t a bad year for stocks either. The NASDAQ rose 45%. The Dow went up about 20%.
As we guessed back at the beginning of the year, stocks bounced. What we didn’t guess was that they would bounce so much for so long. All over the world, stocks went up…and continued to go up. A bounce is inevitable, following a stock market drop. And it’s impossible to say how big a bounce it will be…or how long it will go on.
But a kiss is still a kiss…and a bounce is still a bounce. No kiss lasts forever. Neither does a bounce. Looking ahead, we have to anticipate that it will come to an end…probably in 2010.
If you’ve profited from the 2009 run up in stocks…bravo! Now, sell them… Yes, the bounce could continue. But it’s not worth the risk.
And how ’bout the gold market! Gold has risen every year of the decade. It was the surest, safest place for you money - by far.
Does that mean gold will go up in 2010? Does that mean we will stick with our ‘Trade of the Decade’ for another ten years? Not to brag, but our trade was a big success. Even we were surprised by how well it did.
As long-suffering Daily Reckoning readers will recall, we announced our ‘Trade of the Decade’ in 2000: Sell Stocks; buy gold.
“It turned out to be a good plan,” observes colleague, Merryn Sommerset, in a recent Financial Times story. “In 2000, you could buy an ounce of gold for $280 (the average price over the year). Now, it will cost you about $1,100. At the time, Bonner saw what most others did not. He saw the US not as an economy carefully and cleverly managed by then Federal Reserve chairman Alan Greenspan and his passion for low interest rates, but as a massive credit bubble waiting to burst.
“He also saw the massive and growing national debt, the trade and budget deficits, and fast growth in the money supply as factors that would naturally debase the dollar over the long term. He also saw the credit bubble as global rather than peculiar to America. So it made sense to him to hold the only non-paper currency there is - gold.”
So what’s next? What’s the trade of the coming decade? Well, your editor has decided not to double-down on the identical trade. Gold will remain in our core holdings, but not in our Trade of the Decade for the next 10 years. Why? Because we think the US economy is going the way of Japan.
Japan went into a slump in 1990. It has come out…and gone back in…and come out again…and gone back in again. In terms of the amount of wealth destroyed - at least, on paper - it was the worst disaster in human history. The value of real estate went down 87% in some cities. Stocks fell from a high of 39,000 on the Nikkei Dow down to the 7,000 range in 2009…their lowest point in 27 years.
Why such a bad performance? As we keep saying, if you really want to make a mess of things you need taxpayer support. The Japanese put more taxpayer money into the effort to prevent the correction than any nation theretofore ever had. The result: the correction was stalled, delayed, and stretched out over more than two decades.
And now, US economists are looking at Japan…not with alarm, but with admiration. They are beginning to believe that the Japanese model is the way to go…because it prevented widespread unemployment and a deeper slump.
Here’s our best guess:
Now that the US economy is caught in the same sort of de-leveraging process that gripped Japan, the same sort of “remedies” will inevitably be employed…leading to the same results, more or less.
We’ll skip the details for this morning. You’ll hear plenty of them in the days, weeks, and months ahead - promise!
Instead, this morning, we’ll turn to our Trade of the Decade for the next 10 years. There are, of course, two sides to this trade…the long side and the short side. We had no trouble finding things to put on the short side. In a de-leveraging period almost everything goes down. We could have stuck with US stocks, for example. They’ll probably continue to come down…just as they did in Japan.
But who knows? US stocks just had their worst decade since the ’30s. What are the odds that they’ll have another bad decade? We don’t know. But what we look for in our Trade of the Decade, for the sell side, is something that has just had its best decade ever…something that has been going up for so long people think it will go up forever…something that everyone wants.
What does that describe? Well, the thing that comes closest is US Treasury debt. Yields have been going down (meaning, the price of debt is going up) since 1983. And now, despite a supply that seems to be going off the charts, demand for Treasury bonds, notes and bills has never been stronger. What’s more…if our analysis of the US economy is correct…the supply of Treasury debt is going to continue to rocket upward for many years. Deficits of $1 trillion to $2 trillion per year are going to become commonplace.
How long will it be before the market in Treasury debt crashes? How long will it be before hyperinflation…or a debt default…sends investors running for cover? We don’t know…but it seems a likely bet that it will happen sometime in the next 10 years.
So, on our sell side…we’ll put US Treasury debt.
How about the buy side? Ah…that is something we’ve struggled with. While there are many things that seem likely to go down, there aren’t many that seem destined to go up. Let’s see, what has been beaten down, dissed, battered, and abused for the last 20 years or more? What is it that people don’t want? What is it that they expect to go down…possibly forever?
Of course…Japanese stocks!
So there is our Trade of the Decade:
Sell US Treasury debt/Buy Japanese stocks.
Crazy, right?
Maybe not. Treasury debt has been going up for the last 27 years. Japanese stocks have been going down for the last 20 years.
[PduP: I have added a monthly chart below of the 30-year US Treasury Bond versus the Japanese Nikkei 225 Index, illustrating the massive outperformance of US Treasuries over the past 20 years.]
Source: StockCharts.com
Does this mean we’re giving up on gold? Not at all. We’re sticking with gold. Aurus eternis, or something like that. The yellow metal is what you buy when you think the financial authorities are making a mess of things. We have little doubt about it. So we’ll continue to buy and hold gold…until the financial system blows up.
But gold at $1,100 an ounce is fully priced. It is not cheap. It’s been going up for the last 10 years! At this level, it is insurance against a monetary catastrophe and a speculation on when and how the blow-up will finally come. It is definitely worth having. And holding. And using to protect your wealth.
But the trade of the decade is a way of making money…by buying/selling two opposing assets that are at extraordinary valuations. It is not a speculation on what MIGHT happen. It is merely a bet on the phenomenon known as “regression to the mean.” Things that are out-of-whack tend to go back into whack…
If we’re right, over the next 10 years, the most popular investment of 2009 - Treasury debt - will go out of fashion. The least popular investment of 2009, on the other hand - Japanese stocks - will surprise everyone by finally showing signs of life.
In any event, the trade is fairly low risk. What are the odds that US Treasury debt will go up? What are the odds that Japanese stocks will go down? Of course, we don’t know…things that are out-of-whack can get farther out-of-whack. But we count on time to sort it out. And hope we live long enough to be able to say, “we told you so.”
Source: Bill Bonner, The Daily Reckoning, January 4, 2009.
Tags: Alan Greenspan, Best Selling Books, Bill Bonner, Chairman Alan Greenspan, Credit Bubble, Daily Reckoning, Empire Of Debt, Federal Reserve Chairman, Federal Reserve Chairman Alan Greenspan, Financial Reckoning Day, Financial Times, Gold, Gold Market, Low Interest Rates, New York Times Best Selling Books, Ounce Of Gold, Sell Stocks, Sommerset, Stock Market Drop, World Stocks, Worth The Risk
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Eliot Spitzer’s New Crusade Against Obamanomics
Friday, November 20th, 2009
Are Obama’s economic policies actually working? Eliot Spitzer says No!
Spitzer is taking aim at the [Obama} administration’s approach, accusing it of shying away from the kind of comprehensive reform that the financial system needs. The Obama administration is not so different from the Bush administration, at least so far as their approach to the banking crisis goes, he claimed:
“The fundamental error of this administration is that it is continuity. They have embraced the Bush Administration view that if you solve the problem of big banks everything else flows from that. They are wrong. Too big to fail is too big. They don’t get it. The only two people I know who don’t appreciate that are Tim Geithner and Larry Summers. Paul Volcker, Alan Greenspan, Henry Kaufman, Mervyn King — every major academic has said, We must get rid of too big to fail.”
Watch Spitzer make his case against Obama’s effectiveness as manager of the financial crisis below:
Eliot Spitzer arguing against Obamanomics from Intelligence Squared US on Vimeo.
Tags: Alan Greenspan, Banking Crisis, Banks, Bush Administration, Case Manager, Continuity, Economic Policies, Eliot Spitzer, Financial Crisis, Fundamental Error, Henry Kaufman, Intelligence, Larry Summers, Mervyn King, New Crusade, Paul Volcker, Taking Aim, Tim Geithner, Watch Case
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Frontline: The Warning (Complete Episode)
Thursday, October 22nd, 2009
Synopsis: In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation’s worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.
“I didn’t know Brooksley Born,” says former SEC Chairman Arthur Levitt, a member of President Clinton’s powerful Working Group on Financial Markets. “I was told that she was irascible, difficult, stubborn, unreasonable.” Levitt explains how the other principals of the Working Group — former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin — convinced him that Born’s attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was “clearly a mistake.”
Born’s battle behind closed doors was epic, Kirk finds. The members of the President’s Working Group vehemently opposed regulation — especially when proposed by a Washington outsider like Born.
“I walk into Brooksley’s office one day; the blood has drained from her face,” says Michael Greenberger, a former top official at the CFTC who worked closely with Born. “She’s hanging up the telephone; she says to me: ‘That was [former Assistant Treasury Secretary] Larry Summers. He says, “You’re going to cause the worst financial crisis since the end of World War II.”… [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.’”
Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. “Born faced a formidable struggle pushing for regulation at a time when the stock market was booming,” Kirk says. “Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves.”
Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.
“It’ll happen again if we don’t take the appropriate steps,” Born warns. “There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.”
Source: PBS.org
Tags: Alan Greenspan, Arthur Levitt, Cftc, Chairman Alan Greenspan, Chairman Arthur Levitt, Closed Doors, Derivatives Market, Dollar Derivatives, Episode Synopsis, Financial Collapse, Financial Turmoil, Great Depression, Greenberger, Hidden History, Larry Summers, oil, Sec Chairman Arthur, Secretary Larry, Secretary Robert Rubin, Treasury Secretary, World War Ii
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Greenspan vs. Strauss-Kahn
Friday, October 2nd, 2009
This post features a discussion at the Yalta Annual Meeting/Yalta European Strategy between Alan Greenspan, former chairman of the US Federal Reserve, and Dominique Strauss-Kahn, the managing director of the International Monetary Fund (IMF). The moderator of the three-part discussion is Chrystia Freeland, US managing editor of the Financial Times.
Part 1: The financial crisis
Click here or on the image below to view the video.
Part 2: Global financial regulation
Click here or on the image below to view the video.
Part 3: Crisis exit strategies
Click here or on the image below to view the video.
Source: Chrystia Freeland, Financial Times (here, here and here), September 29, 2009.
Tags: Alan Greenspan, Annual Meeting, Dominique Strauss Kahn, Exit Strategies, Federal Reserve, Financial Crisis, Financial Times, Global Financial Regulation, International Monetary Fund, International Monetary Fund Imf, Managing Director, Managing Editor, September 29, Us Federal Reserve, Video Source, Yalta
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Increase in the Fed’s balance sheet – let’s be objective
Tuesday, July 7th, 2009
This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.
In recent weeks two prominent economic commentators - Arthur Laffer and Alan Greenspan - have warned about the inflationary potential emanating from the unprecedented increase in the Fed’s balance sheet. Yes, as shown in Chart 1, reserves created by the Fed have increased by a staggering $858 billion in the 12 months ended May. But excess reserves on the books of depository institutions have increased by almost as much, $842 billion (see Chart 2). So, in the 12 months ended May, 98% of the increase in reserves created by the Fed has simply ended up as idle reserves on the books of depository institutions.
Yes, the bulk of the reserves the Fed has created are sitting idly on the books of depository institutions for now, but what if these institutions begin to lend them out in the future? Will this not result in an explosion of bank credit and the money supply, the raw ingredients of accelerating inflation - some might say the very definition of accelerating inflation? Why, yes, if the Fed were stand idly by.
If, however, the Fed wished to “neutralize” these excess reserves, it has the means to do so. The Fed now pays interest on reserves. If it observed an undesired “activation” of these hundreds of billions of dollars of excess reserves, it could hike the interest rate paid on excess reserves. Why would depository institutions lend more at the same loan rate when the risk-free rate they could earn from the Fed on excess reserves had risen?
They would not. So, the increase in the rate paid by the Fed on excess reserves would induce depository institutions to hike the interest rates charged on loans. All else the same, the quantity of credit demanded by the public would decrease and, therefore, bank credit and the money supply would not increase.
But what about the federal government? Its demand for credit is not sensitive to the level of interest rates. Yes, but the Fed could continue to raise the rate it pays on reserves until the quantity of credit demanded by the private sector falls sufficiently to offset the increased demand for credit by the federal government. But might this imply a substantial increase in interest rates? Yes, it might, depending on the sensitivity of private-sector credit demand and the amount of borrowing by the federal government.
Would not this “crowding out” of private sector borrowing by federal government borrowing be a negative for future productivity and economic growth? Yes. But that’s a different issue. The point I am attempting to make in this commentary is that the increase in the Fed’s balance sheet in the past year is not currently inflationary and need not lead to higher future inflation. Whether the Fed has the will or the skill to prevent the current increase in its balance sheet from manifesting itself in future higher inflation also is a different issue.
Source: Paul Kasriel, Northern Trust - Daily Global Commentary, June 29, 2009.
*Paul Kasriel is Senior Vice President and Director of Economic Research at The Northern Trust Company. The accuracy of the Economic Research Department’s forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul’s 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst.
Tags: 12 Months, Alan Greenspan, Arthur Laffer, Balance Sheet, Billions Of Dollars, Depository Institutions, Economic Commentators, Excess Reserves, Explosion, Federal Government, inflation, Interest Rate, interest rates, Loan Rate, Loans, Money Supply, Northern Trust Company, Paul Kasriel, Raw Ingredients, Unprecedented Increase
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Green Shoots or Smoking Weed?
Monday, June 1st, 2009
This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.
Asset bubbles are strange animals. Ideally, you would like to punch the air out of them early before they become a real danger but, in practice, it is not quite so simple. Ben Bernanke and Alan Greenspan have actually both argued that asset bubbles cannot be detected and monetary policy should therefore not in any way be used to offset suspected bubbles.
I am not sure I agree with the two gentlemen, but that is less relevant for now. What is important to understand is what happens once the asset bubble bursts. In my experience, almost all post-bursting bubbles share two characteristics:
1) At the very least, asset prices revert to the mean, although many actually overshoot on the downside.
2) A long (and often painful) period ensues, where asset prices gradually claw back lost value. History suggests that this period is measured in years and sometimes in decades; never have asset prices recovered from a deflated bubble in just a matter of months.
The recent collapse of residential property prices - at this point still more advanced in the US than in Europe - is a classic asset bubble which is now deflating. The reason I have decided to write about it this month is because the “green shoot” campaigners are missing a hugely important point about the effect that falling US property prices are going to have - not just on the US but also on the global economy.
Recovery will prove temporary
Make no mistake. I always expected and continue to expect an economic revival later this year, which unfortunately will prove temporary. There are many good reasons to expect such a short-term recovery, as I discussed in detail in the April issue of this letter. However, it is what happens afterwards that I worry about. The economic uplift is likely to last no more than one or two quarters after which we will have to face more gloom and doom.
There are at least two reasons property prices are so important to the overall economy. The first reason has to do with leverage. There has been a lot of talk about de-leveraging in recent months, and the consensus seems to be that most of it is now behind us. Perhaps, in the narrowest possible sense, that is correct.
But leverage is not confined to hedge funds and banks. Many private households run heavily levered balance sheets as a result of their home ownership and it is this leverage that is rapidly growing at the moment. Why is that? Because leverage is a function of both the numerator and the denominator and, as American home owners are about to find out for the first time, falling property prices can have a devastating effect on your balance sheet.
Secondly, property wealth has become an important part of many people’s lives. In both the US and the UK (and in numerous other countries as well) many people have directed their savings towards property in recent years, and no small part of the profits have been recycled into the economy through equity withdrawal schemes. This has created a level of consumption which cannot be sustained if property prices do not continue to rise.
Click here for the full report.
* Niels Jensen has 24 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.
Tags: Absolute Return, Alan Greenspan, Asset Prices, Ben Bernanke, Bubble Bursts, Bursting Bubbles, Campaigners, Economic Revival, Economic Uplift, Executive Partner, Global Economy, Gloom And Doom, Important Point, Many Good Reasons, Niels Jensen, Painful Period, Smoking Weed, Strange Animals, Two Gentlemen, Value History
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Gloomy economic reports rein in investors’ optimism
Friday, May 15th, 2009
A batch of gloomy economic reports during the past few days suggested that recent optimism about a global recovery might have been premature. This caused Doug Kass to warn that “stock prices have moved ahead of fundamentals” and Kenneth Langone to caution that “investors seem to be getting ahead of themselves”, although he maintained that the long-term outlook on the market was positive.
Big banks across the US announced large common stock offerings and plans to repay the government, and the US administration attempted to bring transparency to the credit derivatives markets and also crack down on the credit card industry.
In addition to Kass and Langone, commentators featured on camera in this post include Elizabeth Warren, Meredith Whitney, Alan Greenspan, Peter Boockvar, Giles Keating, Jim Rogers, Barry Ritholtz, Dennis Gartman, Abby Cohen, Peter Eliades and Laszlo Birinyi.
The selection kicks off with a discussion on why the bubble burst, and concludes with a clip on Jacob Zuma being sworn in as South Africa’s (my home country) new president.
John Authers (Financial Times): Why the bubble burst
“Why did the bubble burst last year? Was it due to overconfidence, too much reliance on the efficient markets model, or an explosive mixture of human nature and the free market? Or all of the above? John Authers, FT investment editor, summarizes the views of leading market experts he spoke to at a conference in Orlando, Florida, including Michael Mauboussin of Legg Mason, Richard Thaler of Chicago University and Russell Napier, author of Anatomy of the bear.”
Source: John Authers, Financial Times, May 8, 2009.
Charlie Rose: A conversation with Elizabeth Warren
“A conversation with Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the US banking bailout.”
Source: Charlie Rose, May 11, 2009.
CNN Video: Bailout - banks had no choice
“CNN business correspondent Christine Romans reports on the pressure the Treasury Department put on the banks.”
Source: CNN Video, May 14, 2009.
CNBC: Whitney’s wisdom
“CNBC’s Maria Bartiromo discusses big banks’ plans to sell common shares in order to repay TARP funds, with Meredith Whitney, Meredith Whitney Advisory Group founder & CEO.”
Source: CNBC, May 11, 2009.
Bloomberg: Ken Lewis says he’s focused on bank, not job security
“Kenneth Lewis, chief executive officer of Bank of America Corp., talks with Bloomberg’s Margaret Popper about his focus on the bank’s operations after US regulators demanded the lender raise more capital after it failed a bank stress test.
“Regulators told Bank of America that it needs to raise $33.9 billion in order to survive a prolonged recession. Lewis, who was stripped of his chairman’s role after last month’s annual shareholders meeting, also discusses the results of the stress test, capital needs and the bank’s acquisition of Merrill Lynch & Co. They speak from Bank of America’s headquarters in Charlotte, North Carolina.”
Source: Bloomberg, May 8, 2009.
The Wall Street Journal: Pay dirt - the rogues gallery
“A look back at some of the biggest and most egregious pay packages.”
Source: The Wall Street Journal, May 12, 2009.
CNBC: Regulating derivatives
“Insight on the new derivatives rules, with Bart Chilton, CFTC commissioner and CNBC’s Larry Kudlow.”
Source: CNBC, May 14, 2009.
CNBC: Credit card crackdown
“President Obama wants to sign the Credit Card Bill of Rights into law by Memorial Day, and Jared Bernstein, chief economist for Vice President Biden, discusses the legislation.”
Source: CNBC, May 14, 2009.
Bloomberg: Roubini says bank stress tests “not stressful enough”
“Nouriel Roubini, the New York University economics professor who predicted the current financial crisis, and Joseph McAlinden, a fund manager at Catalpa Capital, talk with Bloomberg’s Pimm Fox about the government’s stress tests of the 19 largest US banks. Roubini and McAlinden also discuss their expectations for the US economy, government regulation of banks and the outlook for the European and Chinese economies.”
Source: Bloomberg, May 12, 2009.
MSNBC: Show me the stimulus money
“Since President Barack Obama signed the stimulus bill three months ago, only $46 billion of the $787 billion has been given out. Jared Bernstein, chief economist for Vice President Joe Biden, discusses.”
Source: MSNBC, May 13, 2009.
McAlvany: An interview with economics professor Walter Block - The 1930’s Depression versus today
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Source: McAlvany, May 13, 2009.
Clip Sindicate: Green shoots of inflation?
“Analysis and Discussion with Peter Boockvar of Miller Tabak.”
Source: Clip Syndicate, May 14, 2009.
Giles Keating (Credit Suisse): Top 10 investment themes for 2009
“Most countries were in recession at the beginning of 2009. Analysts foresee that the slowdown will continue for at least another year. Giles Keating, head of the Credit Suisse Global Economics and Strategy Group, lists the top 10 investment themes that offer opportunities during the course of the year.”
Click here for the article
Source: Giles Keating, Credit Suisse, May 12, 2009.
Bloomberg: Jim Rogers - dollar rally will end; may short stocks
Click here for the article.
Source: Chen Shiyin and Haslinda Amin, Bloomberg, May 12 2009.
John Authers (Financial Times): Stock valuations do nor represent a bargain
Click here for the article.
Source: John Authers, Financial Times, May 14, 2009.
Yahoo Finance, Tech Ticker: Barry Ritholtz - rally “guilty until proven innocent”
Click here for the article.
Source: Yahoo Finance, Tech Ticker, May 14, 2009.
CNBC: Bull market or B.S.?
“Insight on the markets, with Dennis Gartman, author of The Gartman Letter, and the Fast Money crew.”
Source: CNBC, May 14, 2009.
CNBC: Stocks are ahead of fundamentals
“Hedge fund manager Doug Kass of Seabreeze Partners Management (the man who called a generational low in the stock market back on March 10) says stock prices have moved ahead of fundamentals. Kass calls it the ‘Miley Cyrus’ stock market recovery where a premium is being paid for less-than-stellar value.”
Source: CNBC, May 13, 2009.
CNBC: Cohen on the current market bounce
“Discussing concerns over whether the bulls will be caught in a sucker’s rally, with Abby Joseph Cohen, Goldman Sachs senior investment strategist.”
Source: CNBC, May 12, 2009.
MarketWatch: Dow 4,000 still in the cards
“Peter Eliades of Stockmarket Cycles says the Dow still could retreat to 4,000. He tells MarketWatch’s Stacey Delo that the current range at the 8,400 level is an important benchmark to watch.”
Source: MarketWatch, May 11, 2009.
Bloomberg: Birinyi on the outlook for stocks
“Laszlo Birinyi, president of Birinyi Associates Inc., talks with Bloomberg’s Betty Liu and Julie Hyman about equity investment strategy. Birinyi, speaking from Westport, Connecticut, also discusses the outlook for the US stock market, the banking industry and corporate earnings.”
Source: Bloomberg, May 12, 2009.
CNBC: Kenneth Langone - investors getting ahead of themselves
“Investors seem to be getting ahead of themselves right now but the long term outlook on the market is positive, says Kenneth Langone, Invemed Associates chairman/president & Home Depot founder.”
Source: CNBC, May 12, 2009.
Financial Times: Intel fined €1 billion
“If the example of Microsoft is anything to go by, the record €1 billion fine slapped on Intel will not have much of an impact on the company, says FT’s Dan McCrum.”
Source: Financial Times, May 13, 2009.
The Wall Street Journal: The cream of the hedge fund crop
“Barron’s David Schutt and Jack Willoughby speak about the release of this year’s best 100 Hedge Funds.”
Source: The Wall Street Journal, May 9, 2009.
CNBC: China’s dual economy
“China is unlikely to grow 8% in 2009 as Jan Friederich, senior economist for global forecasting at the Economist Intelligence Unit has noted two different economies operating there. He shares his observations with CNBC’s Martin Soong.”
Source: CNBC, May 11, 2009.
CNBC: Jim Rogers - teach your kids Mandarin
“Commodities king and Quantum Fund co-founder Jim Rogers explains to CNBC’s Larry Kudlow why he remains bullish on Asia and commodities, his skepticism about the recent stock market rally, and why he left the United States to raise his daughters abroad.”
Source: CNBC, May 11, 2009.
CNBC: RICS - UK housing slump easing
“According to a recent survey, the UK housing price slump softened in April, and new buyer enquiries rose at their fastest pace in a decade. Simon Rubinsohn from RICS has more.”
Source: CNBC, May 12, 2009.
Financial Times: Zuma sworn in as SA president
“Nelson Mandela, a symbol of the country’s anti-apartheid struggle, and thousands of supporters and heads of state came to watch South Africa’s fourth democratic leader being sworn in.”
Source: Financial Times, May 10, 2009.
Tags: Abby Cohen, Alan Greenspan, Barry Ritholtz, Bubble Burst, Cnn Business, Congressional Oversight, Credit Derivatives, Dennis Gartman, Derivatives Markets, Doug Kass, Explosive Mixture, Jacob Zuma, Laszlo Birinyi, Mason Richard, Meredith Whitney, Michael Mauboussin, Oversight Panel, Peter Eliades, Richard Thaler, Stock Offerings
Posted in Commodities, Credit Markets, Economy, Emerging Markets, Gold, Markets, Oil and Gas, Outlook | No Comments »
Webcast: Commodities – reasons to be a bull when everyone’s a bear
Saturday, May 2nd, 2009
More than a decade ago, Alan Greenspan coined the term “irrational exuberance” to warn of stock prices which had risen too high during the tech bubble. Today, according to US Global Investors, a similar hysteria of “irrational pessimism” is holding commodity prices hostage. “While there are a number of headwinds negatively affecting near-term prices, there are also several reasons to remain bullish,” said the company.
US Global Investors has just produced a very informative webcast, featuring CEO Frank Holmes and members of the company’s natural resources team.
The discussion covers:
• The impact of a global slowdown on resource investments.
• Inflation or deflation? Which will it be and how will it impact commodities?
• What can we expect from China and other BRIC nations?
Click here to view the presentation.
Source: US Global Investors, April 21, 2009.
Tags: Alan Greenspan, BRIC, Ceo, China, Commodities, Commodity Prices, Decade, Deflation, Frank Holmes, Global Investors, Global Slowdown, Headwinds, Hostage, Hysteria, inflation, Investments, Irrational Exuberance, Natural Resources, Pessimism, Presentation Source, Stock Prices
Posted in Commodities, Markets | No Comments »
Europe on the Ropes
Thursday, March 5th, 2009
This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.
Many of today’s policy proposals start from the view that “greed” and “incompetence” and “poor risk assessment” are the ultimate source of what went wrong. In fact, they were not the true cause at all. Moreover, even if they had been, it is fatuous to think that we will now create a post-crash generation of bankers and traders who are not greedy, much less a new generation of quants who will be able to assess and manage risks much better than “the idiots” who have brought us to the current abyss. Greed cannot be exorcised. Nor can the inherent inability of any quants to determine the “true” probability distributions of all-important events whose true probabilities of occurrence can never be assessed in the first place.”
Woody Brock, SED Profile, December 2008
Policy mistakes “en masse”
The last few weeks have had a profound effect on my view of politicians (as if it wasn’t already dented). All this talk about capping salaries for senior bank executives is quite frankly ridiculous. It is Neanderthal politics performed by populist leaders. That Gordon Brown has fallen for it is hardly surprising but I am disappointed to see that Barack Obama couldn’t resist the temptation. The mob wants blood and our leaders are delivering in spades. The stark reality is that we are all guilty of the mess we are now in. For a while we were allowed to live out our dreams and who was there to stop us? Policy mistakes - very grave mistakes - permitted the situation to spin out of control. From the U.S. Federal Reserve Bank under the stewardship of Alan Greenspan being far too generous on interest rates to the British Chancellor of the Exchequer - who now happens to be our Prime Minister - advocating ‘Regulation Light’.
Policing must improve
If you really want to prevent a banking crisis of this magnitude from ever happening again, the focus should be on the way banks operate and not on how much they pay their staff. And, within that context, any discussion must start and end with how much leverage should be permitted. The French have actually caught onto that, but their narrow-mindedness has driven them to focus on hedge funds’ use of leverage which is only a tiny part of the problem. It is the gung ho strategy of banks which brought us down and which must be better policed. And guess what; if banks were better policed - and leverage restricted - then profits, even at the best of times, would be much smaller and there would be no need to regulate bankers’ compensation packages.
It is pathetic to watch our prime minister attacking the bonus arrangements of our banks when the UK Treasury, on his watch, spent £27 million pounds on bonuses last year as reward for delivering a public spending deficit of 4.5% of GDP at the peak of the economic cycle. Even my old mother understands that governments must deliver budget surpluses in good times, allowing them more flexibility to stimulate when the economy hits the wall. What Gordon Brown has done to UK public finances in recent years is nothing short of criminal.
So, with that in mind, let’s take a closer look at the European banking industry. The following is not pretty reading. I have rarely, if ever, felt this apprehensive about the outlook. So, if the crisis has made you depressed already, don’t read any further. What is about to come, will make your heart sink.
More leverage in Europe
Let’s begin our journey by pointing out a regulatory ‘anomaly’ which has allowed European banks to take on much more leverage than their American colleagues and which now makes them far more vulnerable. In Europe, unlike in the US, it is only risk-weighted assets which matter to the regulators, not the total leverage ratio. European banks can therefore apply a lot more leverage than their US counterparties, provided they load their balance sheets with higher rated assets, and that is precisely what they have been doing.
That is fine as long as you buy what it says on the tin. But AAA is not always AAA as we have learned over the past 18 months. Asset securitisations such as CLOs proved very popular amongst European banks, partly because they offered very attractive returns and partly because Standard & Poors and Moodys were kind enough to rate many of them AAA despite the questionable quality of the underlying assets.
Now, as long as the economy chugs along, everything is dandy and the AAA-rated assets turn out to be precisely that. But we are not in dandy territory. Many asset securitisation programmes are in horse manure to their necks, so don’t be at all surprised if European banks have to swallow further losses once the full effect of the recession is felt across Europe. The two largest sources of asset securitisation programmes are corporate loans and credit cards. Senior secured loans are still marked at or close to par on many balance sheets despite the fact they trade around 70 in the markets. The credit card cycle is only beginning to turn now with significant losses expected later this year and in 2010-11.
Not much of a cushion left
Citibank has calculated that it would only take a cumulative increase in bad debts of 3.8% in 2009-10 to take the core equity tier 1 ratio of the European banking industry down to the bare minimum of 4.5%. By comparison, bad debts rose by a cumulative 7% in Japan in 1997-98. One can only conclude that European banks are very poorly equipped to withstand a severe recession. Seeing the writing on the wall, they are left with no option but to shrink their balance sheets. Despite talking the talk, banks will use every trick at their disposal to reduce the loan book. No prize for guessing what that will do to economic activity.
The wheels are coming off
But that is not the whole story. It is not even the most worrying part of the story. For the true horror to emerge, we need to turn to Eastern Europe for a minute or two. Nowhere has the credit boom been more pronounced than in Eastern Europe. And nowhere is the pain felt more now that credit has all but dried up. One measure of the credit fuelled bonanza is the deterioration of the current account across the region. Credit Suisse has calculated that in four short years, from 2004 to 2008, Eastern Europe’s current account went from +6% to -6% of GDP. That is a frightening development and is likely to cause all sorts of problems over the next few years.
Meanwhile Western European banks, eager to milk the opportunities in the East after the iron curtain came down, have acquired many of the region’s banks (see chart 1). Now, with many Eastern European countries in free fall, ownership could prove disastrous for an already weakened banking industry in the West.
Chart 1: Western European Ownership of Eastern European Banks
Source: FT.com
The problem is widespread
To make matters worse, the problems in the East are beginning to look systemic. Credit Suisse has produced an interesting scorecard where they rank a number of countries around the world on factors usually taken into consideration when assessing the credit quality of sovereign debt (see chart 2). At the top of the tree (i.e. the worst credit score) you find Iceland - hardly surprising considering their current predicament. More importantly though, of the next 14 countries on the list, 8 are Eastern European - not what you want to hear if you are an already undercapitalised European bank with huge exposure to Eastern Europe.
Swedish banks are already reeling from their exposure to the Baltic countries. Austrian banks are in even worse shape, having been the most acquisitive of any European banks. Some Italian banks could be dragged under by their Eastern European exposure and even the conservative banking sector in Switzerland doesn’t look like it can escape the mayhem.
Worst of all, the problems in the East are just about to unfold at a point in time where the European banking industry is bleeding heavily from massive losses already incurred in other areas. With no access to private funding, banks find it virtually impossible to re-build their capital base with anything but tax payers’ money.
US banks are in less of a pickle. Unlike the subprime debacle which hit both the US and the European banks hard, US banks have little exposure to Eastern Europe. To prove my point, according to the IMF, European banks have 75% as much exposure to US toxic debt as American banks, but 90% of all cross border loans to Eastern Europe originate from Western European banks. And, to add insult to injury, European banks have been much slower than US banks in terms of recognising their losses. Write-offs now total about $750 billion in the US and only about $325 billion in Europe.
Chart 2: Country Vulnerability Scorecard
Click here for a larger image.
The great mortgage show
The problems in Eastern Europe begin and end with their large external debts. In recent years, ordinary people all over the region have converted their traditional mortgages to EUR- or CHF-denominated mortgages. Some have even switched to JPY mortgages. Who can possibly resist 3% mortgages? Didn’t anyone inform them of the risk? As currencies across the region have fallen out of bed in recent months, these mortgages have suddenly become 30-50% more expensive. No wonder the local economy is suddenly tanking.
Chart 3: Eastern Europe’s Net Foreign Liabilities as % of GDP
Credit Suisse has calculated that net foreign liabilities (as a % of GDP) have risen from 47% to 65% in recent months as a direct result of the loss of local currency values (see chart 3 - and don’t ask me why Credit Suisse has included South Africa in Eastern Europe!).
Chart 4: Eastern European versus Asian Crisis
Source: Wall Street Journal
Back in 1997-98 Asia went through a similar currency crisis. However, as you can see from chart 4, Asian current account deficits were much smaller than Eastern European deficits are now. So were debt levels. Despite that, the Asian crisis did enormous damage to the local economy. Eventually Asia came good, primarily because the devalued currencies allowed the Asian countries to export more. Eastern Europe does not share this luxury. With over 90% of the world’s GDP in recession, who are they going to export to anytime soon?
Austria is in greatest trouble
According to the latest estimates from BIS, Eastern European countries currently borrow $1,656 billion from abroad, three times more than in 2005 and mostly denominated in foreign currencies (ouch!). 90% of that can be traced to Western European banks. About $350 billion must be repaid or rolled over this year. Not an easy task in these markets. Austrian banks alone have lent about $300 billion to the region, equivalent to 68% of its GDP according to the Financial Times. A default rate of 10% on its Eastern European loans is considered enough to wipe out the entire Austrian banking system. EBRD has gone on record stating that defaults in Eastern Europe could end up as high as 20%.
An extra $250 billion to the IMF
Hungary, Latvia and Ukraine have already received emergency loans from the IMF and both Serbia and Romania are reportedly considering asking for help. Meanwhile the IMF’s coffers are draining quickly and it has asked leading industrial nations for new funding. At their summit a week ago, EU leaders coughed up an extra $250 billion but nobody said where the money is going to come from. Even if they find the money, it is likely to prove hopelessly inadequate. Our leaders must grow up. Measuring everything in billions is so yesterday. Trillions are the new billions, like it or not.
Conspiracy or…?
On the 11th February the Daily Telegraph’s Brussels correspondent Bruno Waterfield wrote an article under the header: “European banks may need £16.3 trillion bail out, EC document warns.” In the article, the reporter revealed that he has seen a secret document produced by the EU Commission which briefed the union’s finance ministers on the true extent of the banking crisis. Less than 24 hours later, the article’s header was changed to “European bank bail-out could push EU into crisis” and two paragraphs had mysteriously disappeared. Here they are:
“European Commission officials have estimated that “impaired assets” may amount to 44pc of EU bank balance sheets. The Commission estimates that so-called financial instruments in the ‘trading book’ total £12.3 trillion (13.7 trillion euros), equivalent to about 33pc of EU bank balance sheets.
In addition, so-called ‘available for sale instruments’ worth £4trillion (4.5 trillion euros), or 11pc of balance sheets, are also added by the Commission to arrive at the headline figure of £16.3 trillion.”
Do yourself a favour - read those two paragraphs again. Newspaper editors do not change content light-heartedly. Did the Telegraph editor receive a call from Downing Street? Or Brussels? Did he have second thoughts about the avalanche that he could possibly instigate? I don’t know and I probably never will. But one thing is certain. If the EU Commission’s estimate of £16.3 trillion of impaired assets is correct, then the crisis is far worse than any of us could ever imagine. Not only would we have to get used to the prospects of a systemic meltdown of our banking system, but entire nations may go down as well.
Public debt to rise and rise
Even if actual losses prove to be much, much smaller (and I sincerely hope so), the banking sector cannot, in the current environment at least, raise sufficient capital to stay afloat, so more, possibly a lot more, tax payers’ money will have to be put forward. This can only mean one thing. Public debt will rise and rise. The official estimate for the UK for next year is already approaching 10% of GDP, an estimate which will almost certainly rise further. We probably have to get used to running 10-15% deficits for a few years, a fact which seriously undermines the notion of government bonds being next to risk-free.
BCA Research has calculated the effect on public debt in a number of countries, as a result of further bank losses being underwritten by tax payers. Obviously, those countries with the largest banking industries (as a % of GDP) will be hit the hardest (see charts 5a and 5b).
Chart 5a & 5b: Eastern Europe’s Net Foreign Liabilities as % of GDP
For that very reason, and as pointed out in last month’s Absolute Return Letter, there is a real risk that investors will demand much higher risk premiums on government debt. Only a few days ago, Ireland issued 3-year bonds at almost 250 basis points over corresponding Bunds. As more and more debt is transferred to sovereign balance sheets, we will likely see the spreads between good and bad paper rise further but we will also witness increasingly desperate measures being applied by the men in power. If they could prohibit short-selling of banks on the stock exchange (which didn’t work), why wouldn’t they consider prohibiting short-selling of government bonds? Not that it would necessarily work any better, but desperate people do desperate things.
Can Germany rescue us?
Most investors remain convinced that Germany will come to the rescue - in my opinion not as simple a solution as widely perceived given the enormity of the crisis. One possible solution which has been mentioned frequently in recent weeks is for all the eurozone nations to get together and start issuing joint bonds. This would undoubtedly help the weaker nations, but the idea was shot down by the German Finance Minister only a few days ago when he said that closer economic harmony across the eurozone would be needed before Germany would be prepared to entertain such an idea.
The most obvious trick left in the book, therefore, is to inflate us out of this mess. With the enormous amounts of public debt being created at the moment, years of deflation a la Japan would be catastrophic. You will never get a central banker to admit to it, but a healthy dose of inflation is probably our best prospect of surviving this crisis. Given this outlook, do you really want to be long euros?
* Niels Jensen has 24 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.
Tags: Absolute Return, Alan Greenspan, Bank Executives, Banking Crisis, Barack Obama, British Chancellor, Chancellor Of The Exchequer, Executive Partner, Federal Reserve Bank, Gordon Brown, Grave Mistakes, Niels Jensen, Policy Proposals, Poor Risk Assessment, Probability Distributions, Profound Effect, Quants, Stark Reality, True Cause, True Probability
Posted in Bonds, Credit Markets, Economy, Markets, Outlook | No Comments »
Stock market performance round-up: Nowhere to hide
Tuesday, March 3rd, 2009
A great deal has been said in the media (and on this blog site) about the performance of stock markets during February. In the face of unrelentingly dismal economic reports, this posts serves to put market movements around the globe in perspective.
After the worst January (-8.8%) on record, the Dow Jones Industrial Average closed February (-11.7%) in the third worst position, after 1933 (-15.6%) and 1920 (-12.5%). Also, the Dow’s decline marked its sixth consecutive month in the red. Bespoke pointed out that losses during this period (-38.8%) were much larger than in any of the other seven losing streaks of six months or longer.
Factoring in yesterday’s declines, the S&P 500 and Dow have now fallen to 10.9% and 7.7% below their respective 2002 lows, floundering around levels last seen in 1996. December 5, 1996 also marked Alan Greenspan’s well-known Irrational Exuberance speech. The level of the S&P 500 on that day was 43 points higher than yesterday’s closing index of 701! (Hat tip: Barry Ritholtz.)
Even more chilling is the fact that the Dow has wiped out more than half of its entire gain from the July 1932 low of 41 to the October 2009 peak of 14,164
Let’s follow the unfolding drama by means of charts for the S&P 500 Index, the MSCI EAFF Index (representing Europe, Australasia and the Far East - the main benchmark for non-US stocks) and the MSCI Emerging Markets Index.
Source: StockCharts.com
Source: StockCharts.com
Source: StockCharts.com
Zeroing in on the numbers, the performances in the table below are given in local currency terms for different measurement terms ended February 28.
Click on the image for a larger table.
From the highs of October 2007 to the end of February the MSCI World Index and the MSCI Emerging Markets Index lost 55.4% and 62.7% of their respective values. The worst performer was Ireland (-79.2%), with Venezuela (-28.2%) occupying the second last position.
Considering the year to date, the Shanghai Composite Index (+14.4%) is in the lead, but was pipped into second position by Venezuela for the month of February (+5.1% versus +4.6%).
The gains/declines mentioned above are all in local currency terms. However, converting the movements to US dollar shows a somewhat different picture for the non-dollar countries (see table below). In general, most indices show worse returns in US dollar terms as a result of the greenback’s strength. The Nikkei 225 serves as a specific example where a dollar-based investor suffered as a result of the significant weakening of the Japanese yen against the dollar. Until recently, the Russian market endured a similar fate on the back of the plunging ruble.
Click on the image for a larger table.
Where to now? As pointed out before, stock markets are still in the clutches of the bear. The chart below shows the long-term trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (ROC) indicator (red line) and the RSI oscillator (brown line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the levels of both the ROC and RSI are massively oversold.
Source: StockCharts.com
At this juncture, short-term movements are almost impossible to predict, although the sell-off over the past few days - a capitulation in some respects - could nourish the long-awaited tradeable rally. Also, Lowry’s 90% down-days, like we experienced yesterday, are often followed by two- to seven-day bounces. But we are not yet at the point where we leave the corpse of the bear behind, although each downward move brings us closer to the eventual bottom.
Tags: Alan Greenspan, Australasia, Benchmark, Currency Terms, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Reports, Hat Tip, Irrational Exuberance, Losing Streaks, Lows, Measurement Terms, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Nowhere To Hide, Stock Market Performance, Stock Markets
Posted in Emerging Markets, Markets, US Stocks | No Comments »
Bill Gross: In Depth Outlook - Bought Mortgages and Sold US Debt (Video and Transcript)
Friday, February 13th, 2009
Bill Gross is interviewed in depth by Kathleen Hays, Bloomberg - 17:09 mins, February 10, 2009.
This is a must-see, or must read below interview. Bill Gross gets a lot of air time these days but its rarely this in-depth and this forthcoming, from another of the quiet geniuses of the financial world.
GreenLightAdvisor.com has produced this transcript below for your review:
Kathleen and Bill sit in PIMCO’s War Room, where PIMCO hammers out their investment strategy four times a year with the 100 people or so from around the world who play an instrumental role in the running of the world’s biggest bond fund company.
Its the room and that’s the seat there where, for example, Alan Greenspan, among others, sits and contributes his own particular ideas, and all of that comes together in terms of what they buy and what they sell at PIMCO.
In the end 8 people, who form the investment committee at PIMCO ultimately decide the firm`s direction.
Kathleen Hays: I want to talk about TARP; Chris Dodd stridently called for new management, they want guarantees bank are going to lend, and curbs on executive compensation. Is that the problem now , is that where the government`s focus should be?
Bill Gross: It is a problem, there’s no doubt that he’s on to something there and that’s the reason we have a new administration, I would assume. And so, we will have, not necessarily a new direction, but a reinforced vitality in terms of making sure that the banks are recapitalized and are lending money, so I think that’s very much of a positive. As I mentioned in my latest investment outlook this particular month, the banks are only part of the puzzle. Only part of the total equation, because the securitized market, the securitized lending market, the part that includes mortgages, and asset backed securities, credit card receivables, and so on, are really bigger than the banks, so we have to address what Paul McCulley once called the ’shadow’ banking system as well.
Kathleen Hays: Paul McCulley runs the short term bond funds, hes a managing director, your man Friday, I Guess. You guys are the dynamic duo. At this point you’re saying the government needs to buy assets, the government needs to stabilize asset prices, so explain that:
Bill Gross: The growth of the economy, the growth of the global economy over the past 10,15, 20 years has been based substantially, not entirely, but substantially on asset prices. I mean you can catch the example best in the form of housing prices to the extent that Americans a few years ago could borrow on their homes because their homes had gone up in price, and then spend money, and increase consumption. That basically happened in the US in many different forms, and globally as well. It was based upon a rising level of securities prices; in some cases obviously, too extreme of a rise, and so now that prices are coming down dramatically, its incumbent upon policymakers to make sure that this decline is cushioned, as opposed to falling through a trap door.
KH: Now you have three specific assets you would have the government buy.
BG: Well, in addition to what they’re already doing; you know we’re already buying commercial paper for the Fed, we’re buying mortgages, which Scott Simon just talked about during your last half hour. There are additional asset classes that deserve and need support. Those would be Municipal Bonds, Commercial Mortgage-Backed Securities (CMBS); we’re talking about real estate, shopping centres, etc. in terms of support for real estate, and they would also include student loans and credit card receivables as a bunch, so those three categories are important to keep prices up and rates down.
KH: What the critics who say that would potentially distort the market? That you’ve got to let the markets work and you’ve got to let the prices settle out.
BG: Well if you did, and you can; you know, that was advocated by a secretary of the treasury back in the 1930s. His name was Andrew Mellon. He said liquidate, liquidate land, liquidate stocks, liquidate everything and then start over. The problem is that when you liquidate everything, and you let prices of everything settle to their ‘natural’ level so to speak, which in this case, would be very un-natural. If you let them settle, the willingness of the capitalist to move forward, to lend in the future, which is what capitalism depends upon, is destroyed. You have to be very careful in terms of letting prices fall to their natural level.
KH: PIMCO is now the home of the largest mutual fund, not just the largest bond fund. So now you’re wearing a new crown.
BG: Well we don’t like to talk in those terms, but we’re glad to have the assets and the support.
KH: …and keep them growing and making money, which in a time like this is all the more important. I want to ask you about the economy; again it was the February outlook: You referred to what you call a ‘mini depression,’ and I want to ask you about that, because compared to past recessions, the decline in GDP isn’t as large as some, the percentage of jobs lost not that large, and you yourself are saying that it could reach 9%; is there another reason for you to say that, or is your point that this is going to get a lot, lot, lot worse?
BG: Well, I think it is going to get worse. But there is a reason for that. Its either a big R or a tiny D, that’s why I said ‘potentially’ mini depression. And you’re correct in terms of prior cycles; the 1981-1982 cycle experienced some 7% and 8% declines quarterly declines in GDP, so we haven’t matched that yet. But the important thing is not real GDP, but Nominal GDP, because its from nominal GDP, growth plus prices, that debt is serviced. Back in ‘81-’82 nominal GDP was positive almost all the way along; there was one quarter where there was a slight negative. Now however in this last quarter, we’ve had negative nominal GDP, and we’ll have it again in this quarter. And the point being, that What we’re experiencing now is a debt deflation, and debt is serviced with nominal GDP, prices plus real growth, and to the extent that prices are not going up, but going down, corporations can’t extract money to service their debt.
KH: So, Stimulus, Washington, big debate. And then a debate about the stimulus. Is is really a stimulus or not? Is it too much spending in the future? Some people say, more tax cuts, right now? What is your view of the stimulus package and what its going to do to end that cycle that you’re just talking about?
BG: I don’t think its enough. You know there’s a debate back and forth, and $700-800billion sounds like a lot of money. The problem is that there has been trillions and trillions of dollars of credit, bank capital, and spending power, extracted from this economy over the past 6-12 months. You can look at it from the standpoint of wealth effect, you can look at it from the standpoint of lending and banks, the shadow system, all of that in combination, but the fact is that this economy requires support from the government, a cheque from the government in some form or fashion, in the trillions, as opposed to the hundreds of billions, and I think President Obama was right. There’s a potential catastrophe if Washington continues to focus on a hundred or two hundred billion dollars. We need something in the trillions.
KH:In the trillion-ze? Trillion-ze. And you’re counting the not just the bailout, but the banking aspects?
BG: That’s true.
KH: Well this is also going to mean a lot of treasuries being issued, and we’re already seeing that hitting the bond market, and in some sense, I think its amazing how low yields have stayed without real big supply. In fact, until recently, it looked like even the Chinese and other foreign central banks have continued to buy. What’s the attraction? Is it safety? You’re not getting much return on those.
BG: It is safety. I think foreign buyers are very concerned about safety, and they’re refusing at the moment to invest in corporate bonds, and even the mortgage debt as you suggest. So that’s one consideration. The other of course is, they’re trying to support their own currencies in terms of keeping them down. The Chinese don’t want an appreciating Yuan or RMB and so they, almost by necessity, have to buy treasuries in order to keep the dollar up and their currencies down. Its the combination of the two that allow them to buy treasuries at what appears to be low yields.
There’s an additional kicker, because in the last few statements, the Fed, Ben Bernanke, has said that could come a time in which the Fed will buy longer dated treasuries.
KH: Is that a good idea, if they do that?
BG: I think they must do that, to the extent they’re issuing over a trillion of securities. Next week, they’re issuing $67-billion
of 5s, 10s, and 30s, and then again
, and again, and again. To the extent that the Chinese and others don’t have the necessary funds, then someone has to buy them. PIMCO is not going to buy them, and so its incumbent upon the Fed to step in. When they do however, and if they do. Let’s not suppose that they necessarily go the full way, but if they do, that will be a significant day, in the bond markets, the credit markets.
KH: All you’re themes lately have been, ‘go with the government,’ If the Fed’s buying treasuries, you’re not going to buy them too?
BG:Well, we wouldn;t buy treasuries, but we would buy bonds that are correlated and related to treasurie with a higher yield.
KH: If even if the Fed starts this program of buying treasuries, which you said, hey, good idea, do it, you wouldn’t buy treasuries, but you’d buy bonds correlated to them with higher yields. Let’s
talk about
corporate bond issuance which has really exploded recently. Why is that, and I know you have been recommending certain kinds of corporate bonds, holding them. Where do stand on that now?
BG: Sure, we’re recommending the higher tranche, the higher echelon of investment grade bonds, not necessarily Baa bonds, but single A, AA, and, in fact the bonds of the banks. Our motto is to shake hands with Uncle Sam. To the extent that the banks are supported, bank debt’s supported, those yields are in the 6-7-8% category, relative to 2-3% treasuries.
KH: I think you make a very good point. Right now, buy the corporate bonds, they’re safe, you get the yield, stay away from the equity, right? When does this stuff start working though? Wouldn’t that be a point when an investor could say, at some point when stocks bottom, you usually do get a bounce, a pretty good bounce that can carry you up high. How do you gauge that, I know you’re a bond fund, but nevertheless, then do you wish at times that you had a few equities? Will there be a point like that, when they’ll outperform?
BG: Sure, and out equity equivalents are high-yield bonds, you know, previously known as junk bonds, and other lower rated securities that yield now in the double digits. And so, yes, if this remedy takes hold over the next 6-12 months, then those high-yield bonds, and lower rated debt will do very well in price. They’ll go up by 10-20 points.
KH: The investment grade corporates will have the nice yield all the way along. So what corporate bonds do you like right now?
BG: Well, we have stuck to the financials. We bought bonds of American Express. Sallie Mae; now there’ a shake hands with the government corporation, they’re heavily involved, the biggest student loan lender, and to the extent the government wants to support student loans through the T.A.L.F., which is the governments new program which will come on in March, where they lend money, and finance student loans and auto-backed receivables, a company like Sallie Mae, going to do very well.
KH: What about the mortgage markets? Is there a value there and where, and what about…do you have any interest in non-US mortgage-backed securities
?
BG: The mortgage market comes down to a value based on their carry. You know the government is buying about $500-billion of them over the next 4 or 5 months. We’ve already bought perhaps $50-billion, so you have some support there in terms of the price. We think what they’re trying to do is drive the yield down to 4.5%-4% to make it more affordable to homeowners. That supports the price of mortgages and allows a holder like PIMCO to gain a carry of 4-4.5%. That’s not a big deal. Its not something where you’re going to get rich, but on the other hand its a very safe and well supported security based upon what the treasury department, and the Fed has announced they’re going to do.
KH: What about credit derivatives? Where do you stand on those now Bill? What part did they play in the mess we got in, and what needs to be done now?
BG:Oh, they did play a big part, and the weapons of mass destruction, financial destruction, you know Warren Buffett was very right, and very early, and correct all the way. What we think is that they simply reflected an over-levered financial complex, an over-levered economy and yes, were CDS and swaps part of that complex, and part of that extension, they certainly were. Now the entire system, the entire shadow banking is pulling back, and so if behooves every investor to become more conservative in the form of the derivatives that they hold.
KH:ARe you still more worried about deflation right now than inflation, because there are whiffs of that, you get the sense that people are starting to get worried about the eventual inflation because of the big deficit, and everything that has been done, the pumping up of liquidity and money. Where is the balance of risk in Bill Gross’ eyes right now?
BG: Its still in the deflationary camp right now, and from the standpoint of deflation, its the deflation of asset prices, not necessarily the deflation of prices. Everybody welcomes a lower price at the gas pump or the grocery store. I think the problem is that as asset prices deflate, you have destruction in terms of the financial system. You have an inability for corporations to maintain solvency in terms of their debt and you have default.
KH: Bank nationalization of some form; is that eventually what we’re going to head for? Some of these banks that are in such bad shape? Some of the big ones?
BG:We’ve seen partial nationalization, and partial meaning, at least 60-70%. In some cases, we estimate that the entire financial system from the standpoint of not only, buying stocks and obtaining warrants, preferreds, TARP, as well as the FDIC guarantees, and other guarantees that have been extended, basically now apply to about 65% of all bank liabilities. And so, that’s not nationalization, but its a lot closer to it than we were 6-12 months ago. We don’t welcome that, we simply recognize the necessity for it and we intend for our clients try and take advantage of it.
KH: Alright then Bill Gross, thanks for allowing us to take advantage of your time today. Really appreciate joining you here in PIMCO, in the war room.
Tags: Air Time, Alan Greenspan, Asset Backed Securities, Banking System, Bill Gross, Bond Fund, Chris Dodd, Credit Card Receivables, Curbs, Executive Compensation, Geniuses, Instrumental Role, Investment Committee, Investment Outlook, Investment Strategy, Lending Money, New Administration, New Management, No Doubt, S War Room, Securities Credit
Posted in Bonds, Credit Markets, Economy, Markets, Outlook | No Comments »
Paul Krugman: Lest We Forget
Monday, December 1st, 2008
Paul Krugman opines that financial reform and regulation of the shadow banking system cannot wait:
Paul Robin Krugman (pronounced /ˈkɹuːɡmən/; born February 28, 1953) is an American economist, columnist, author and intellectual.[2] He is a professor of economics and international affairs at Princeton University, and a columnist for The New York Times. In 2008, Krugman won the Nobel Memorial Prize in Economic Sciences “for his analysis of trade patterns and location of economic activity”. Krugman is well-known in academia for his work in international economics, including trade theory, economic geography, and international finance.
Lest We Forget, by Paul Krugman, Commentary, NY Times: A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”There was, of course, only one thing to say…: “What do you mean ‘we,’ white man?”
Seriously, though, the official had a point. Some people say that the current crisis is unprecedented, but … there were plenty of precedents… Yet these precedents were ignored. And the story of how “we” failed to see this coming has a clear policy implication — namely, that financial market reform … shouldn’t wait until the crisis is resolved. …
Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories?
Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world?
Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?
One answer … is that nobody likes a party pooper. While the housing bubble was still inflating, lenders[, investment banks, and money managers] were making lots of money… Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?
There’s also another reason the economic policy establishment failed to see the current crisis coming. … [T]he crisis of 1997-98… showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.
Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World”… who “prevented a global meltdown.” In effect, everyone declared … victory…, while forgetting to ask how we got so close to the brink in the first place.
In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears,… investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed … prudential regulation of the financial system.
Now we’re in the midst of another crisis, the worst since the 1930s. For the moment, all eyes are on the immediate response to that crisis. … And because we’re all so worried about the current crisis, it’s hard to focus on the longer-term issues — on reining in our out-of-control financial system, so as to prevent or at least limit the next crisis. Yet the experience of the last decade suggests that we should be … regulating the “shadow banking system” at the heart of the current mess, sooner rather than later.
For once the economy is on the road to recovery, the wheeler-dealers will be making easy money again — and will lobby hard against anyone who tries to limit their bottom lines. Moreover, the success of recovery efforts will come to seem preordained, even though it wasn’t, and the urgency of action will be lost.
So here’s my plea: even though the incoming administration’s agenda is already very full, it should not put off financial reform. The time to start preventing the next crisis is now.
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