Posts Tagged ‘Robert Kessler’

Robert Kessler: Yields on U.S. Bonds Really Can Go Quite a Bit Lower

Saturday, August 11th, 2012

 

Complete Transcript:

CONSUELO MACK: This week on WealthTrack, why rock climbing government bond investor Robert Kessler says we still haven’t seen the peak of the generational bull market rise in U.S. treasury bonds and why other investment routes are much more dangerous to your financial health! Great Investor Robert Kessler is next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Three years into an economic recovery, it sure doesn’t feel like one. We are even beginning to hear the dreaded “R” for recession word here in the U.S. A recent headline in the Financial Times read: “Blue-Chips Raise Recession Fears.” The FT reported that “estimates of revenue growth for the largest us companies are being scaled back sharply by Wall Street analysts, signaling a mounting risk that the world’s largest economy may enter recession later this year.”

It is a development we have talked about with many WealthTrack guests. Sales and earnings estimates are being scaled back by analysts and companies alike as the global outlook becomes murkier. Recession is already happening in Europe. The so-called peripherals- Greece, Spain and Italy- are there. Even mighty Germany is feeling the pressure from its weaker neighbors. Germany’s central bank recently estimated its economy had grown “moderately” in the second quarter. According to The Wall Street Journal, that’s “shorthand for growth between zero and five tenths of a percent.” Not exactly reassuring for Europe’s largest economy, which its finance minister rightly describes as the “Eurozone’s anchor of stability.”

So if global economies and company sales and earnings are slowing, what does it mean for the markets? That is a source of heated debate and both sides are being reflected in the stock and bond markets. On the one hand, investors have been buying dividend paying blue chip stocks for their dividend income and their financial strength. The S&P Dividend Aristocrats Index, which is made up of 30 companies that have consistently raised dividends for at least 25 years, has traded around record highs recently. How well will their prices and dividends hold up in a global slowdown?

On the other hand, yields on U.S. treasury bonds have extended their multi-decade long decline over the last year, lifting the prices of the underlying bonds, as global investors sought their safety and liquidity. It has also helped that Federal Reserve Chairman Ben Bernanke has clearly spelled out the Fed’s intentions to keep interest rates low. And he has reiterated time and again that the Fed is “prepared to take further action as appropriate to promote a stronger economic recovery.” As PIMCO bond guru Bill Gross put it, in explaining why he is holding 35% treasuries in his PIMCO Total Return Fund: “don’t underweight Uncle Sam in a debt crisis.”

This week’s WealthTrack guest has been overweighting Uncle Sam in his portfolios for the ten years plus that I have been interviewing him. It’s been an extremely profitable run and he is sticking with it. He is Robert Kessler, founder and CEO of Kessler Investment Advisors, a manager of fixed income portfolios for institutions and high net worth individuals with a concentration in U.S. treasury debt. I began the interview by asking him about his long standing and contrarian investments in treasuries. What is he seeing that Wall Street is not?

ROBERT KESSLER: I think Wall Street is seeing all the same things I’m seeing. We’re just really interpreting those things a little bit differently. I look at the interest rate environment that we’re in right now, and most people think that this is created by Ben Bernanke, the Central Bank, and zero is some artificial number. The fact of the matter is, zero is a number that exists all over Europe now, and, in fact, that number is negative in five, or six, or seven countries in Europe.

CONSUELO MACK: So this is zero interest rates or negative interest rates on government debt, short-term government debt.

ROBERT KESSLER: Short-term government. Actually, even longer term. In Switzerland, it’s minus .25. So people who have a lot of money, and they want to park it someplace, they actually have to pay the government to put it there. Now, we haven’t seen that before. If you look at the way Wall Street’s interpretation of that is, they’ll say that that’s totally artificial. That’s not reality. And the reality really is that big money right now doesn’t want to go anyplace with it. It doesn’t matter if it’s corporate money, where they’re sitting with trillions of dollars, or individuals. What they want to do with it is make sure it’s totally safe. And money has a real value. Most people don’t look at money properly.

Money is a commodity. Just like gold, or like grain, or corn, or anything else. To store it someplace, it costs you some money. So if you want to store it in Switzerland, they’re going to charge you a quarter of one percent. When we look at zero in the United States, to make this really interesting, and people say, “Well, where do you think interest rates really are going?” And now I really look at everyone and say, “I don’t know. But they certainly could go negative,” meaning that the whole treasury curve, which is two-year, five-year, ten-year, thirty-year, all of that curve could all go down to zero. And everyone thinks there’s so much out there to buy. Look at all those treasuries. Come on. We have so much debt. Someone has to support it. What actually is there is, if I don’t want to sell my treasuries and you don’t want to sell your treasuries, there aren’t that many treasuries. And that’s why rates really can go quite a bit lower.

CONSUELO MACK: I know that you hear from other people on Wall Street. And if someone on the other side were looking at you and saying, Robert, okay, so interest rates are at zero. Short-term interest rates are at zero. Investors have other choices. Zero is not a good rate. That’s what they’re saying. It’s not a good return. Therefore, even Ben Bernanke, who is keeping short-term interest rates at zero, which is a reality, and is saying that, I’m going to keep interest rates at zero probably through 2015, if not beyond; even he is saying the reason that I’m keeping interest rates so low, one of the reasons is I want people to invest in risk assets. I want people to go and buy stocks and, you know, finance the economy, where they get a higher return. I’m going to make investing in treasuries so unattractive that I want them to buy something else, and, therefore, help the economy.

ROBERT KESSLER: In the environment we’re in, which is a deleveraging, deflating environment, a real return on money may actually be negative, meaning that if inflation actually goes negative, one percent is a pretty good return. And the only reason all of this is happening is because there’s no demand in the marketplace. And as much as Japan tried to do something, you can’t create that demand. And that’s exactly what Ben Bernanke’s talking about. He’s saying, “If I get these rates low enough” … there was a Swedish experiment, which is interesting, when Sweden had a very difficult time, the Central banker said, “You know, we ought to think about going negative.” Imagine that. The rate overnight won’t be zero. It will be minus 50.

CONSUELO MACK: Right. So I pay you for the privilege of owning a Swedish government bond.

ROBERT KESSLER: A half of one percent. That will certainly induce everyone to go buy something else. And the answer is, when there’s no demand from the private sector, I don’t care how much money you produce, I don’t care how much you print- if the private sector doesn’t want to borrow it, you have no marketplace. We have what we call no velocity. No movement of money. So that’s the environment we’re in. And as to what an investor needs to look at, is not what the real return is on a treasury against inflation from last year, but where will it be next year. And next year looks like we’re going to be looking at, if not deflation, certainly lower prices.

CONSUELO MACK: Let’s talk about kind of, there are different things that you’re looking at. So one of the things that Wall Street would say is that, you know, number one, inflation isn’t going to continue to go down, because, like, it never does for any length of time, and, therefore, at least in our recent experience, and all our models are predicated on the fact that we’re going to get some inflation, and with all the stimuluses the Fed is doing, central banks around the world are doing, we will get inflation. You’re saying, no, the reality is we’re in a deflationary environment, and, in fact, you know, we’re not going to get inflation for a long time. Why?

ROBERT KESSLER: Let me give you the Japan example. The Japan example is a very good example, because we claim in this country that we would never do what Japan did.

CONSUELO MACK: Right. No one wants to be a Japan. That’s the blanket statement everyone makes.

ROBERT KESSLER: We are doing exactly what Japan did. And interestingly enough, in 1997, that’s seven years after the deep recession/depression hit Japan, an administration came in, 1997, and said, we’ve got to contract the economy. We’ve got too much stimulus out here. We’ve got to tighten things up. That will make things better. The rates on the ten-year in Japan at that point were around two percent. Within a year or two they dropped to .8, and the deficit went straight up, even though everyone wanted to bring it down.

And the reason was, you can tighten everything up, but again, if there’s no demand and people perceive that prices are coming down, cash looks very good. And now we’re talking money. And money is really important, because money takes on a tremendous value in a deflating economy. If you’re a gold bug, the argument is inflate, inflate, because that’s a terrific thing to happen. All of this stimulus is going to cause inflation. And, in fact, in this kind of an economy, it doesn’t matter what stimulus you put in, because stimulus only works if someone wants to spend the money. And the fiscal side of it, which is the government side of it, right now, looks like, as we get into the fiscal cliff that people love to talk about, the fact is that will be very contractionary on the economy. So I would argue that if we get into that position, you will see rates go even further down.

CONSUELO MACK: One of the realities that you’ve identified at Kessler Investment Advisors as well is that zero interest rates can stay zero for a long time, or go lower for a long time.

ROBERT KESSLER: I think in this particular case, there are so many people who keep saying we’ve never seen this before. We’ve never seen this exact same thing, but we’ve seen this before. And I suspect that interest rates will stay extraordinarily low until we get out of this balance sheet problem of individuals getting rid of some of the debt. It’s 25% of homeowners are underwater. You have this huge unemployment problem, and the number that came out today, the Philadelphia Fed Index, actually had an employment number that would suggest, in this month coming up on the employment news, that employment could go negative again. Now, if you stop and think about that, the argument has been quantitative…

CONSUELO MACK: You mean job growth could go negative.

ROBERT KESSLER: Job growth will go negative. If you stop and think about how serious that is, we’ve had quantitative easing one, quantitative easing two, and probably something more. None of that has helped. And it’s simply because money is going no place. And the people who have it are buying whatever sovereign they feel safest in.

CONSUELO MACK: So Robert, another reality that you have identified at Kessler Investment Advisors is that instead of what Wall Street is telling you- I’m going to make you money, and that the traditional investments that make money, like stocks, that have over the last, you know, 40 years, whatever it is, in the post-World War II period- that, in fact, that investors are saying, “No. No. No. You don’t understand. My first principle is I don’t want to lose money.”

ROBERT KESSLER: We have an enormous number of investors leaving the stock market now and going into fixed income. Obviously, they feel that that’s too volatile, and that slow transition is probably going to continue for some time. But the concept of an investor saying, “I don’t want to lose money,” it usually means I want to make a lot of money, but I don’t want to lose any money. And you have to be able to explain to make a lot of money you’re going to be at risk to lose a lot of money. I would suggest the big problem we all seem to have is we can’t distinguish between a savings account, your pension account, your IRA, and an investment account.

CONSUELO MACK: And you’re saying it’s very important to differentiate between your investing and your savings. What’s the difference?

ROBERT KESSLER: The purpose of a savings account, as we all grew up, and we saved something, is to know it will be there. So, obviously, the return isn’t important. It’s the return of the money. And so I look at a savings account or a pension account, you cannot lose there. And that’s why I’ve suggested for years that you buy a zero coupon U.S. Treasury, meaning that the treasury will pay off in a certain period of time, because you have to have that money. That’s a savings account. An investment account is, have a good time.

The odds are, these days, for the last ten years, no one has made any money in the stock market unless you happen to buy at the right time, sell at the right time, and buy… and none of us do that. We’re all random buyers, so we all make mistakes. So the average person really doesn’t distinguish between those two pockets of money, and I would suggest that’s becoming very relevant now, because suddenly, if you look at the average homeowner, let’s take the homeowner, you have a decrease of $7 trillion in the value of what they had over the last two, three, four years. $7 trillion. An enormous amount of money. And if you look at their median net worth of that same homeowner, it’s gone from $126,000, that’s the average person, down to 77. That means they lost 39% of their money, of what they really thought they had. So all of these questions become extremely relevant if we talk reality, and I think that’s what we should be talking.

CONSUELO MACK: The fact that rates are coming down all over the world gives fuel to the argument on the other side, and that is, I can’t tell you how many people have told me that somewhere around 60% of the companies in the S&P 500 now are offering dividend yields that are greater than the yields on the ten-year Treasury note, and this is a once-in-a-lifetime opportunity.

ROBERT KESSLER: And they should. And they should, because everyone has done terrible with all of these companies. So they should give you some of your money back. But the best argument I can use is that these are the same companies that don’t know what to do with the cash they have, and they’re not out there buying any other companies. There are mergers going on, but they’re not spending the money. So if they’re not spending the money, what are you spending the money for? And then at the same time, there are no big dividend payers. There are no big cap stocks that are not going to be affected by a global deterioration in the economies that we’re looking at. They all will be. And if the stock market comes down, which I suspect it probably will, they’ll come down, too.

What do you care if you’re getting 4% if it drops 40%? That is the risk you take. So you think, well, this is a terrific deal, because in the long term, four percent looks good. It doesn’t look that good if you go back to 2008. You had an AT&T that was paying a very nice dividend, and it dropped 47%. I don’t think that’s what you want. And so I suspect that if you didn’t want any of the other stocks, you probably don’t want those stocks either.

And, again, I’m back to the subject, you do not want to lose money, because in an economy where prices are coming down, there’s tremendous opportunity. Everyone thinks that I’m being pessimistic about this. If you have money, and the price keeps coming down, the money gets more and more valuable. That’s why people are parking it where they think they can get it back, which ends up being in sovereign debt or good sovereign debt.

CONSUELO MACK: So Wall Street would say this is an example of extreme pessimism, and the times of extreme pessimism are when you make the most money by buying the securities that everyone else is shunning.

ROBERT KESSLER: But that has to be the excuse that we use, otherwise you wouldn’t buy anything from Wall Street. It’s a silly argument. We’re faced with a real serious problem in this country, as it is in Europe, but in this country, especially right now, because we have a disorganized kind of Congress, we have a situation where no one can get together on what to do, and I suspect there really is a reason for that. No one knows what to do. You can take this side, or you can take this side. It really doesn’t matter. The net result is, there are no simple solutions, and we’re certainly not going to get one, from what I can see.

And so this thing is going to linger, and the question is, do you need a crisis to begin to really try to solve this? Maybe that’s what happens. Maybe you do get a crisis. But this is not being pessimistic. I’m just telling you what’s happening. And the only reason we can make money in this market is because we really don’t care about what anyone else says. The key to this market right now is to follow whatever your own instinct is. If you don’t understand it, and it doesn’t make sense, and you can’t sell your house, and all the terrible things that we all know are happening, happen, well then, why do you want to go out and buy stocks? I mean I’m not doing this just because I want to hit the stock market. But this is a very serious period of time, and I don’t think people are treating it as serious as they should.

CONSUELO MACK: So most investors, most individuals, in their retirement savings, have gone the traditional route, and they certainly do not own a lot of treasury securities. So what are you advocating? That they basically, you know, liquidate, pay the taxes, everything, and put them into treasuries? I mean, you know, what are our options?

ROBERT KESSLER: I’m going to do the same thing I did last time you were kind enough to have me on the show, I think, at the end last year, and I said, go out and buy long-term 20-year, that’s a good thing to do, zero coupon U.S. Treasuries. They will yield about 280, 2.8 percent. Nothing terrible about that. In the last six months, since I’ve said that, they have returned 11%.

CONSUELO MACK: In six months.

ROBERT KESSLER: In six months. Better than the stock market and everything else. I will make the assumption that 280, 275 is not a terrible return. If you have this opportunity that I’m talking about, that rates actually come down, because if rates come down, a lot of people feel that 30-year, 20-year treasury will come down a point; if they come down a point, then you make 25% return. Worst-case scenario? You’re making 280. Not so terrible. That’s your retirement fund. That’s your serious money.

As far as the other money goes, I would be in this wait-and-see attitude. I’m really not trying to be pessimistic, and I know it sounds pessimistic, when I’m saying negative things, but those negative things are happening regardless of what I tell you. They’re happening in Europe. And this doesn’t even count the fact that we could have an oil disruption. We could have all the usual things that seem to be on our plate all the time. So sure, I think for a retirement fund, right now I’d be out buying all the treasuries I could get my hands on. I mean, but I think when you talk about the investment money, the money that you have to invest, I think you want to stay very, very cautious.

CONSUELO MACK: All right. Very cautious at this point. So the One Investment for long-term diversified portfolio is?

ROBERT KESSLER: I would say zero coupon treasury, if it’s a retirement fund. If it’s in a retirement fund, there’s absolutely– there’s no issue about time. You’re keeping it for a long period of time. But the other money that you have is money that really has to be put to use now, and you don’t want to waste it. It’s not going to be there necessarily 20 years from now. It’s money you’re going to invest in. Well, I can’t find anything to invest in. So keep it in cash. I know I’m kind of escaping by saying that, but I don’t think there’s anything wrong with cash.

CONSUELO MACK: So, you know, you said earlier in the interview that you’re really not a pessimist, that you’re actually an optimist. So what are you optimistic about?

ROBERT KESSLER: I think that people needed to go through this change in attitude towards how they spend money, what they think of money, and that change is taking place. There’s a realism coming into the marketplace. I think that makes for a better country, and that makes for a better people in the end. It doesn’t mean it’s easy, and it doesn’t mean this is going to be a very comfortable change. But it will probably be, as it usually is, for the better. What we don’t want to see is some serious kind of crisis that makes it worse.

I think the problems in the United States are solvable, if we can get a Congress to probably do something together. There are things to do here. But you can’t have 20 million people without a job, 45 million people on food stamps, and a bunch of people without healthcare, and then say, “Well, we don’t really have any problems here, and I think we should buy some stocks.” I think that attitude is exactly the wrong attitude. I think the problem becomes you have to pick up demand, and there is no demand in our system right now, and with good reason. People are pessimistic.

CONSUELO MACK: So what is it going to take to turn around demand?

ROBERT KESSLER: I don’t know. I don’t know. It’s a process. And the process is this horrible deleveraging, this pay down the debt, and people have to consciously understand when you pay down the debt, you’re increasing the value, in this case, of the currency. Because remember, the currency can buy everything cheaper. The U.S. dollar is the place to be. I’m very optimistic about the dollar. I think that’s a great place. I think the treasury market looks terrific here. That is the country. In between, there are problems that have to be solved.

CONSUELO MACK: Well said. Robert Kessler, thank you so much for joining us from Kessler Investment Advisors. And we will have you on again, you know, in a year, and see how you’ve done, as you have done extremely well over the last seven years on Wealth Track. So thanks for joining us again.

ROBERT KESSLER: Thank you. Thank you for having me.

CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. As we did last week, we are recommending a book for summer reading. This one is the choice of guest Robert Kessler. It’s called The Great Depression: A Diary . It’s by Benjamin Roth and it was published by his son in 2010, many years after his death. Roth’s diary is a compelling and eye opening account of the Depression seen through the eyes of an ordinary middle -class American. You will recognize the policy debates about inflation, skepticism towards big government, and worries about too much stimulus, that as Kessler says were “prevalent, recurring, and in the end, all wrong.” You can make up your own mind.

I hope you can join us next week for a shocking discussion about the cost of investment fees. According to our two guests- legendary financial consultant Charles Ellis, who is exclusive to WealthTrack, and top financial advisor Mark Cortazzo- fees are much higher than you think. They’ll tell us how to fight back. If you would like to watch this program again, please go to our website, wealthtrack.com. It will be available as a podcast or streaming video no later than Sunday evening. And that concludes this edition of WealthTrack. Thank you for watching. Have a great weekend and make the week ahead a profitable and a productive one.

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Robert Kessler: US Treasury Bonds are Best Contrarian Safe Haven

Tuesday, March 13th, 2012

A contrarian who has been proven right over the last decade. Great Investor Robert Kessler explains why, after 40 years of out performing the stock market, much vilified U.S. Treasury bonds will continue to be the safe haven investment for the foreseeable future.

Source: Wealthtrack.com

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Robert Kessler: Treasury Bonds Still Make Sense (In Depth)

Tuesday, January 3rd, 2012

Robert Kessler makes an appearance for an in depth discussion, on this week’s WealthTrack, Consuelo Mack. A contrarian who has been proven right over the last decade, he explains why, after 40 years of outperforming the stock market, much vilified U.S. Treasury bonds will continue to be the safe haven investment for the foreseeable future.

Source: Wealthtrack, December 30, 2011.

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David Darst – Robert Kessler – Interview Transcript (Feb. 19)

Sunday, February 28th, 2010

Connie Mack recently interviewed David Darst, chief investment strategist for Morgan Stanley Smith Barney, and Robert Kessler, head of Kessler Investment Advisors, which runs portfolios for institutional investors and governments around the world. This is a MUST view/read interview. The complete transcript follows.

CM: David Darst is known as a master of the art of asset allocation. He is the chief investment strategist for Morgan Stanley Smith Barney. David is also a teacher and prolific author, and his latest book is The Little Book that Saves Your Assets . And it’s great to have you both here. Thanks so much for joining us on WealthTrack.
Robert Kessler, U.S. Treasuries, you make your living in investing and managing portfolios of U.S. Treasuries, and as long as I’ve known you, they have been denigrated by most of the competition except in this most recent period when everyone rushed to Treasuries, but now the naysayers are back again. So why are they wrong again about Treasuries?

ROBERT KESSLER: It’s not a question of being wrong or right. A Treasury is really a benchmark to almost every other asset class. So as a benchmark, you can’t be wrong or right about a benchmark. It’s just simply matter of spread between what other asset classes are selling at. So in the Treasury market, we’re lucky enough to be able to have a choice of overnight Treasuries, which is cash, or longer-term Treasuries. And longer term Treasuries are really based on whether you believe inflation is going to be an issue or whether disinflation will be an issue.
So right now we’re in what we call a credit crisis. We’re in a credit recession. And during credit periods of time, you don’t want to own risk assets, and if you don’t want to own risk assets, you want to go to something that has very little risk, which is a Treasury. Now the question becomes: do you own Treasuries as bills overnight or do you really believe that rates are going to come down because there’s very little inflation in the world? So since we believe rates will come down because there is very little inflation, then Treasuries become very attractive.

CONSUELO MACK: All right. So let me stop you there and we’re going to follow up on that in a couple of minutes. David Darst, as a global strategist first and as an asset allocator second, how do you view this?

DAVID DARST: It’s a great point because really, inflation is a monetary phenomenon. We have a big war going on between this monetary phenomenon called inflation potential down the road.

CONSUELO MACK: Right.

DAVID DARST: And deflation is a credit phenomenon. And right now credit is contracting. The latest month figure for December showed it contracted, consumer credit, Consuelo, by $2.5 billion. That’s 11 months in a row the government has been keeping these numbers since 1943. It’s never contracted for 11 months in a row. So right now we have this epic, titanic struggle between the deflation phenomenon, credit contracting and the inflation phenomenon, which is the government attempting to pump up the money supply, add liquidity to the system, which people, makes them worry about inflation down the road. So we feel that maybe Treasury bonds, Treasury securities, you can have them in the portfolio right now, you need to have a little offense as well as a little defense. Treasury securities are a defensive investment in our opinion. Last two years ago they were up 20%. They were up 20% in 2008 when the stock market went down 37%. Last year, ten-year Treasuries lost 9.9% on a total return basis.
I’m very receptive. For a person basically to say stay away from Treasuries means they think interest rates are going to rise. That means the consumer is going to come back. That means that credit is going to stop contracting and we’re going to worry about inflation. But over the next 12 months, I’m not so sure those things are going to be an issue, Consuelo.

CONSUELO MACK: So short term at any rate, next 12 months, Treasuries are probably a good place to be defensive.

DAVID DARST: I think you can have some in the portfolio. We are underweight. We are underweight. Normal is 16%. We’re 7%. That’s our largest single underweight. We are very underweight because we’re worried about the health of sovereign credit finance about the condition of the U.S., the U.K., the European community and so forth, the condition of these finances. So much money has been issued.

CONSUELO MACK: Okay. How do you answer that argument because, in fact, as you know, that most people who are looking at U.S. Treasuries are saying, we’ve got a record deficit; we have to finance that record deficit. If we are basically having to sell a lot of Treasury bonds, that is going to mean that the value of the dollar of our securities is going to go down. And then, in fact, that means that it’s going to be inflationary for the U.S. So how do you respond to that argument? Why aren’t you worried about the size of the deficit and what we have to finance being inflationary?

ROBERT KESSLER: Let me answer two questions. The first question is this concept of the deficit. There is this constant talk of deficits lead to inflation. We don’t really have any indication that that’s true. In the Depression in the United States, we had huge deficits, of course, and we had no inflation. We had deflation. Japan has gone through 20 years now of deficits that are far, far higher than ours, and they have deflation. So we don’t know anything about the inflation side of it. What’s really important is that if people can’t raise prices and there’s an awful lot of excess capacity in the world and wages are going down and unemployment keeps staying kind of sticky at these very, very high levels, it’s very difficult to have inflation.
And so there is no inflation. That’s not our issue. The real issue is– television was interesting today because not only are we dealing with Greece, Greece is very interesting because we’re bailing out Greece and bailing out perhaps Portugal next, but we’re probably going to bail out New Jersey after that. Because New Jersey just announced today that they’re running into a huge deficit, too.

CONSUELO MACK: As are a lot of states.

ROBERT KESSLER: As are a lot of states. So we have states having problems, lowering wages, firing people; very, very difficult to raise prices and consequently, very difficult to have inflation.

CONSUELO MACK: All right. So you think we’re deflationary. You think the credit contraction you think which is extraordinary is actually, we’re in the beginning stages of it. You’re not thinking a year down the road, you’re thinking for inflation, you’re thinking, what three, four, five…

ROBERT KESSLER: It sounds like I’m being very pessimistic.

CONSUELO MACK: You’re a bond person.

ROBERT KESSLER: No, no but I don’t want to be pessimistic. We just got back from the Middle East. I have to tell you, not only is everything for rent in the Middle East, not only are buildings completely unoccupied, but banks, since we deal with banks, banks right now are doing one trade. They’re doing what we call a carry trade, meaning they’re buying their sovereign debt, either U.S. sovereign debt or their sovereign debt short term and they’re carrying it at very low cost.

CONSUELO MACK: Because they can borrow it at very low cost.

ROBERT KESSLER: Because they can borrow at very low cost, as is JP Morgan in the United States and as is Morgan Stanley and everyone else. So the fact of the matter is when people say we’re in a bear market in Treasuries, it’s ridiculous. Last year, even though David is correct, the ten-year Treasury was down 9%. The fact of the matter is we made more money last year in two-year Treasuries than any year I can think of because everyone was carrying a two-year Treasury at zero and getting a point. Now, in bank talk…

CONSUELO MACK: So they were borrowing at lower than 2% and then they were buying the two years… So they made?

ROBERT KESSLER: They do it at a very high leverage level because they don’t need to do very much with a capital question. So the fact of the matter is you have this bull market going on and yet everyone is saying, anything but Treasuries. Tell that to JP Morgan.

CONSUELO MACK: Right. So David, not to completely focus on Treasuries, but as far as asset allocation, you said that your biggest underweight is U.S. Treasuries right now.

DAVID DARST: It’s sovereign credit, Consuelo.

CONSUELO MACK: Across the board.

DAVID DARST: It would include U.K., it would include Canada, it would include Europe.

CONSUELO MACK: And the reason for that is what?

DAVID DARST: Well, the sovereign… we believe there’s so much issuance of sovereign debt; we do believe that the balance sheet of the Fed has ballooned from $900 billion to $2.2 trillion. We do see the deficits as being quite large on out into the future. And we do believe that these trillion dollar and trillion and a half dollar deficits are going to have to be bought and to entice people, which will cause higher interest rates. So that’s why Morgan Stanley’s economists have a big out-of-consensus call, which Robert is very familiar with. And by the way, the word Robert means bright fame. His name means bright fame. Now Robert is familiar with this- Morgan Stanley is expecting 5.5%. And every conversation I get into, I have to argue we think that inflation fears will be higher towards the end of 2011. We see all this slack. But there’s concern. Supply, which you mentioned, that is the excess issuance by the Treasury, and also the Fed, and I know there’s a lot of disagreement over this, we expect them to begin their exit strategy later this year, second half of this year.

CONSUELO MACK: And exit strategy could mean raising the federal funds rate?

DAVID DARST: Higher short-term interest rates, and that means we think higher long-term interest rates. We take a little bit of respectful issue with Robert Kessler’s brilliance over here. But we believe the essence of our underweight versus sovereign debt is because of enormous supply and people’s concern. Inflation is the biggest… The biggest inflations of all times have all come from fighting deflation. In the 1946 to 1949 period in Germany, in communist China, in the 1920s and 1923 period of Weimar Germany, the biggest inflations have all come from fighting deflation.

CONSUELO MACK: So what’s interesting is the common ground is here. Right now we are fighting deflation, which is actually positive at least for the next 12 months, possibly for…

DAVID DARST: Steroids, financial steroids. Mark McGuire has admitted to it and the Fed is taking financial steroids.

ROBERT KESSLER: Let me be a little contrary for a second.

CONSUELO MACK: For a second?

ROBERT KESSLER: All right, for 30 seconds. The fact of the matter is we talk about this exit strategy all the time about the Fed. I’m into the entrance strategy. I am trying to figure out how we’re going to help out 8.5 million people who don’t have jobs. It’s probably closer to 17 million because that’s really a more correct figure.

CONSUELO MACK: The ones who have been discouraged and not looking for jobs anymore.

ROBERT KESSLER: Why we’re talking about exit strategies is very, very disconcerting to me.

CONSUELO MACK: Because the Fed is actually. Bernanke is talking about it, right.

ROBERT KESSLER: What we’re talking about again is Wall Street and the banking industry. When you get to, excuse me, the middle of the United States, at least where I live.

DAVID DARST: Right, you live in Denver.

ROBERT KESSLER: In Denver. People don’t have a clue to what JP Morgan is doing or Morgan Stanley is doing. What they’re looking for is their job, and when someone says, excuse me, I think it will be a good idea to raise interest rates, they can’t even borrow money; not only can’t they borrow money, no one will lend them any money. So they’re really…

CONSUELO MACK: Like the credit contraction you were talking about.

ROBERT KESSLER: So the issue is why are we talking about exiting the strategy?

DAVID DARST: The reason we’re talking about exit strategy is psychological. It’s the use of Shakespearean language and words to try to divert people from worrying about the debasement of the currency, internally and externally. And that’s why he’s saying it. And I agree with you. I don’t see rates jacking way up very quickly. This is going to be gradual, but we went from $900 billion Fed balance sheet to $2.2 trillion. And it is very, very important.
Sarkozy, during the last four weeks– opening speech at the World Economic Forum said that in 2011 France is going to be head of the G7 and the G20 and he says his number-one agenda item is to create a new world monetary system, a new system without the United States dollar as the primary reserve currency. The reason they talk about exit strategy, Robert, is to keep people from going to this new currency.

CONSUELO MACK: So how concerned are you about the fact that the dollar could be replaced as the reserve currency?

ROBERT KESSLER: First of all, for a second I’m going to represent Main Street as opposed to Wall Street, and Main Street doesn’t have a clue to what we’re talking about.

CONSUELO MACK: Right.

ROBERT KESSLER: Believe me. This all gets very, very complicated to talk about.

CONSUELO MACK: And our viewers are investors.

ROBERT KESSLER: They’re investors, so my answer to all of this is the United States will continue to be the reserve currency. There’s nothing wrong with the dollar. Everyone will put money into the dollar, as we’re doing today. Today is a very, very good example. We had a 30-year auction today. What was exciting about it, even though it didn’t go over very big as an auction, didn’t go well, but what was exciting about it is 23% of the auction was bought by Americans. What we call direct investors.

CONSUELO MACK: We’ve seen a trend here where the direct investors, Americans are buying more and more of their Treasury securities.

ROBERT KESSLER: And so when you look at the American dollar, as you can look at the Japanese yen- the reason the yen has stayed strong for so long is because the Japanese support their own country.

DAVID DARST: Internal savings, financing.

ROBERT KESSLER: And in the United States, we are beginning to do the same thing. And so even though we have a deficit, if we’re willing to pay for it, then frankly there’s nothing so terrible about the deficit.

DAVID DARST: Your legion of viewers in the aggregate have 25% stocks, 25% their home and 7% bonds. That’s why, as you’ve pointed out on the show, Consuelo, over the nine months from March through December, they, we all put $315 billion net into bond funds and ETFs, $35 billion into non-U.S. stocks and minus $24 billion into U.S. stocks. So there has been this trend. 1982, the average baby boomer, the median age was 25 years old. Today it’s the reverse of the digits- 52 years old. People have been killed by the dot com meltdown, the housing price meltdown and the financial stock meltdown and that want to set aside some money. So your point is an excellent point, Robert. They want to put this money and maybe some of the buyers will be U.S. households.

ROBERT KESSLER: Let me add one more statistic.

CONSUELO MACK: Very quickly because we have to get to the One Investment.

ROBERT KESSLER: The statistic being, that if Americans begin to invest in Treasuries the way they have in the past, then there would be no deficit. There would be simply no deficit.

DAVID DARST: We’re sitting on $8 trillion of cash right now. And they need only $1.5 trillion, but we need higher rates, Robert, to entice us to take it out of the cookie jar and the mattress and put it in Treasuries.

CONSUELO MACK: So one quick question for you, David Darst, and this is put your asset allocation hat on again. What are you overweighting, in a minute or less?

DAVID DARST: We’re overweighting corporate credit to summarize quickly. That would be high yield bonds, and high grade bonds.

CONSUELO MACK: Because of the yield.

DAVID DARST: The yield is more attractive. We are overweight in real estate investment trust, which have a nice yield to them.

CONSUELO MACK: Right.

DAVID DARST: We’re overweight in emerging market stocks and Canadian stocks, Australian stocks, and in small cap stocks. They have basically taken a little gas in the first part of this year. We think that’s a pause, a healthy, needed correction that we will believe as the economies grow around the world- we just jacked up our China forecast to above 10% for this year- and we think probably world growth will surprise to the up side. Maybe that’s why yields will surprise to the up side, too. Interest rates.

CONSUELO MACK: Very interesting. And so let’s go to the One Investment for our investor viewers out there, and Robert Kessler, guess what you’re recommending.

ROBERT KESSLER: A quick comment.

CONSUELO MACK: Yes.

ROBERT KESSLER: A quick comment. I am so weary of people who wear white suits and recommend emerging markets. Now, David’s not.

DAVID DARST: White suits?

ROBERT KESSLER: White suits.

DAVID DARST: Tom Wolf.

ROBERT KESSLER: Right.

CONSUELO MACK: I don’t understand that.

ROBERT KESSLER: Consequently, what I’m saying is I think you want to be in everything that is risk-averse. And therefore I would suggest that a Treasury, whether it’s overnight money or it’s ten or a 30-year Treasury, I think the ten year will probably outperform everything this year, and that’s a way-out kind of a call, but I do think that rates are going to substantially come down, and they do usually the second or third year after a recession, and since we’re only a year into this, we have a long ways to go, and I think you’ll see the ten-year Treasury probably back at 2% range or lower. And that’s a big move.

CONSUELO MACK: Wow. And David Darst, you’re thinking defensive action, too.

DAVID DARST: I am, Consuelo. Procter & Gamble (PG), which I’ve recommended on the show before- they have 23 products with over $1 billion in annual sales, and they have 20 products in addition with over $500 million in annual sales. They just changed leaders. Robert McDonald takes over from A.G. Lafley. McDonald has been with them for 29 years. He sold Folgers Coffee. He’s selling off the pharma area to focus on personal care, on household products and human well-being, okay. We see three billion people every day out of six billion in the world that are touched by a Procter & Gamble product.

CONSUELO MACK: Wow.

DAVID DARST: He wants it to go up to four billion. Only 30% of their revenues are outside the U.S. and Europe. Stock sales are 14 times last year’s earnings. It yields 2.9%. They’ve not been buying stocks in a year and a half. They’ve just begun to buy stocks, and the last thing is it was only up 1% last year with its lag to market. It went down less than the market. It went down 14 in ‘08 when it went 37 down, up 1% last year. We think this is a company that’s been a defensive stock about to go on the offense.

CONSUELO MACK: So we have a diversified portfolio right here between the two of you. Robert Kessler from Kessler Investment Advisors, thank you so much for coming in from Denver and from New York, it’s great to have you regardless, David Darst from Morgan Stanley Smith Barney, thanks so much for joining us.
At the conclusion of every WealthTrack, we tried to leave you with one action to take to build and protect your wealth over the long-term, as well. This week we’re revisiting a retirement income theme that we and many of our guests have emphasized over the years. This week’s Action Point is: lock in some retirement income for life.
How do you do that? The Obama administration recently came out in support of annuities as a tool to deliver a form of “guaranteed lifetime income.” Specifically, President Obama has called for a change in federal rules to allow adding annuities to 401(k) retirement plans.
Until that becomes a reality, one way to assure a stable flow of income that you can count on for life is to buy the simplest, plain vanilla version, an immediate fixed annuity, also known as a single premium immediate annuity. You turn over a one-time payment to an insurance company, and it in turn will provide you with a predictable and guaranteed monthly income as long as you live. To make sure it’s there, that it is as long as you live, only work with life insurance companies that have the highest credit ratings, and don’t put all your eggs in one basket.
The financial advisors we have talked to recommend investing only a portion, no more than one-third of your retirement assets, in annuity products, and also recommend consider staggering the amount you put in over a number of years, so you can adjust your income stream as you need it. To get an idea of what kind of monthly income a given amount will return, go to immediateannuities.com for a quote.
Now what troubles many people about these immediate fixed annuities is that you might die before you have recovered your investment, your heirs don’t get any benefit, and inflation can eat away at the value of the income stream. So the insurance industry, in its infinite wisdom, has responded with variations on immediate annuities that address these concerns. The tradeoff is the adjustments reduce the monthly income. Annuities are not right for everyone, but as a vehicle to create your own guaranteed pension plan for life, an immediate fixed annuity is definitely worth considering.
That concludes this edition of WealthTrack. Join us for one of our Great Investors series next week. I’ll sit down with Steven Romick, portfolio manager of the FPA Crescent Fund, a finalist for Morningstar’s Domestic Equity Fund Manager of the Decade award. In the meantime, to watch this program again, please go to our website, wealthtrack.com. Starting Monday, you can see it as streaming video or a podcast. Thank you for visiting with us. And make the week ahead a profitable and a productive one.

Source: Consuelo Mack, WealthTrack, February 19, 2010
http://www.wealthtrack.com/transcript_02-19-2010.php

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Wealthtrack: The Outlook for U.S. Treasuries

Monday, February 22nd, 2010

Investment guru Marc Faber calls Treasuries junk bonds. Best-selling Black Swan author Nassim Taleb says, “It’s a no brainer, every single human should short US Treasury bonds.”  And there is a new expression among traders on Wall Street these days, “anything but Treasury bonds” or ABT for short. Is the conventional wisdom right?

This week on Wealthtrack, Consuelo Mack poses the question: What place do US Treasuries, bonds in general, stocks and alternative investments have in an investment portfolio in today’s markets? The guests are Robert Kessler, head of Kessler Investment Advisers and one of Fortune Magazine’s “Top American Investors” and David Darst, Morgan Stanley’s chief investment strategist and author of The little book that saves your assets.

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: Wealthtrack, February 18, 2010.

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