The following is a transcript of the October 12, 2010 Bloomberg interview with Doug Kass, Managing Partner, Seabreeze Partners [Hedge Fund].
DOUG KASS, GENERAL PARTNER AT SEABREEZE PARTNERS, talks about equity markets on Bloomberg Surveillance.
OCTOBER 12, 2010
SPEAKERS: DOUG KASS, GENERAL PARTNER, SEABREEZE PARTNERS
TOM KEENE, EDITOR-AT-LARGE, BLOOMBERG NEWS
KEN PREWITT, HOST, BLOOMBERG NEWS
7:07
TOM KEENE, EDITOR-AT-LARGE, BLOOMBERG NEWS: Let's bring in Doug Kass of Seabreeze Partners, Florida. Doug, good morning.
DOUG KASS, GENERAL PARTNER, SEABREEZE PARTNERS: Hi, Ken and Tom. How are you - time, long time.
KEENE: Yes, way too long.
KASS: What a great week, huh? Yankees win a sweep, JETS, Jets, Jets, Jets and futures are down.
KEENE: Well, the Jets were fine. Can we have him on as a guest again if he mentions the Yankees? I guess so. You mentioned Bill King here, the King report. I like it. Quantitative wheezing. This is like the Detroit Lion fans cheering for losses so they can get another high draft pick. That's brilliant. Why is quantitative easing a challenging proposition?
KASS: Well, you know - Tom, you can call me from Missouri, but the Fed is the same group that missed the tech bubble, the real estate bubble, the debt bubble. But it thinks it now can fine tune interest rates, fine tune job growth and economic activity by printing massive gobs of money. If you go back two years ago, we got QE1, shock and awe, A-W-E. I think today we'd get shucks and aww, A-W-W. And I think it's going to be very hard for this quantitative wheezing, what I call it in early November to meaningfully move the needle of domestic economic growth. And it's only going to have a limited impact upon the jobs market, which is plagued by structural unemployment, on housing which is haunted by this large shadow inventory and obviously -
KEENE: Is it -
KASS: I'm sorry -
KEENE: Doug, if this indicates inflation, which clearly we're seeing different markets show right now, does that benefit equities or not?
KASS: I don't think it does. I think you know we used to have stagflation 25 years ago. I think we're getting screw-flation. Grain prices are rising -
KEENE: Can we say that?
KASS: Yes, sure you can.
KEENE: Okay.
KASS: Insurance premiums rising. My son's tuition at Northwestern is rising. Corn is up 65 percent since the beginning of summer. Cotton's up 50 percent. Gasoline's up $0.15 in the last two weeks. This is killing the middle class. And quantitative easing is alluring to the benefits of the largest corporations in the world, which are already flush with cash enabled because of this cheapened and hospitable debt market, public debt market to refinance. So you know, I think it's not going to change confidence when mired in such uncertainty regarding regulatory and tax policy and it's undermined by high unemployment. And as I said before, housing is haunted by a large shadow inventory and certainly low interest rates have done little to improve that situation and this mortgage gate situation at best spending two hours with Mark Hanson of Real Estate Fame on a conference call yesterday did moratorium on foreclosures is going to impede economic growth. You know you look back two years ago, interest rates were already low. Now look where interest rates are. So what is the marginal benefit?
KEN PREWITT, HOST, BLOOMBERG NEWS: Well, you know -
KASS: Two years ago - two years ago, Ken, we had global cooperation, everyone was all-in. Now we have austerity in Europe and everyone's going different directions.
PREWITT: We're talking about this yesterday, you know with gasoline up, rice up, corn up, meat up. Social Security checks not up for the second year in a row. I mean that's 58 million people.
KASS: Yes. And that's - therein lies the problem, real disposable incomes [during] the last decade of - have gone down. Large corporations have flourished, they've cut jobs and this schism that created the Democratic tsunami in 2008 led to the Tea Party in 2009 and 2010 and now we have an election coming up. And we've never had such disdain toward the wealthy and the large corporations in this country. As a consequence, you get this populist policy and in the market we have this tension between the cyclical tailwinds of monetary and fiscal stimulation, low interest rates against all these secular headwinds, all these non-traditional forces; structural unemployment, populist policy, marginally higher tax rates, costly regulatory burdens and of course these unprecedented fiscal imbalances at the local, state and federal levels. And this is the tension that's created, that's basically created and likely to continue to call for arranged market. Great for traders, but not great for investors.
PREWITT: Speaking of kind of quantitative easing, or wheezing, as you put it. Jan Hatzius at Goldman Sachs, put a number on it. He says about $500 billion of treasury purchases through about the middle of next year and an indication they're ready to buy more. Are you pretty much in line with that?
KASS: I suspect so. He's a lot smarter than I am. Look, this economy is very fragile. It's still characterized by excess industrial capacity, a surplus of labor. If this is was a sound and non-jeopardized economy, the Fed wouldn't be having QE2 discussions and the Administration wouldn't be seeking these extreme fiscal solutions. So, in my view we're in a contained recession and while containment efforts continue the efficacy of those efforts appear to waning.
KEENE: With us from Seabreeze Partners, Douglas Kass coming to us today from Florida. This, folks, with futures negative 7. Doug, how do you play this? In terms of investments, you were climbing the wall of worry. You were one of the lonely bulls out there for much of what we've seen in this rally to 11,000. I get the sense your research notes have not become negative, but certainly more cautious. How are you positioned right now?
