Category: investors – wise men

Bears feeling the pressure

During manias, the pressure to conform becomes… well, unbearable.  Yesterday, CNBC reported that noted bear Doug Kass put an end to the scorn he constantly received on Twitter:

Doug Kass has had it with the haters and declared his intent Monday to leave Twitter and his 62,000 followers behind.

He has been consistently bearish during the current market rally and has taken substantial heat for his position that stocks are overvalued and headed for a fall.

But he said he’s tired of the constant procession of personal attacks and is packing it in.

This reminds us of the pressure to conform during the housing and credit bubbles from 2004-2007.  Prominent bear Fred Hickey wrote the following in the October 4, 2007 issue of his monthly newsletter, The High-Tech Strategist:

Fellow contrarians, it’s gut-check time.  As a standard bearer of the camp that believes that the Federal Reserve is not omnipotent, I can tell you that this moment is as difficult as any that we have had to endure in many years.  I speak to many of the most hard-core stock market bears (our circle is a small one) and it is clear that their confidence is on the ropes.  I’m not sure if I can characterize it as despondency, but it sure is close.  I can hear the depression over the phone.  Their tone is subdued and there’s an air of despondency.

I’d be lying if I said I wasn’t feeling the pressure.

Someone left me a message this week whining that with the housing market in a total collapse, the Fed will never allow the stock market to fall because the consequences would be so awful.  It was his conclusion, therefore, that stocks were destined to go higher.  Resistance was futile.

It is the notion that the Federal Reserve is in complete control of the markets that is propelling this latest bout of insanity.

History doesn’t always repeat, though it often rhymes.  The near extinction of the bears is perhaps the best sign that the investment winds are about to change as the Fed-induced economic storm clouds build.

Fred Hickey compares today’s central banks to 19th century patent medicine factories

Fred Hickey, editor of The High-Tech Strategist ($150/year,, grew up in Lowell, Massachusetts, known as the “Birthplace of the American Industrial Revolution.”  In his latest HTS he discusses the genesis of the patent medicine industry in his hometown during the mid-1800s:

For a time, Lowell became America’s largest industrial center…  In addition to the textile factories, other industries grew up in the city around the same time, including patent medicine factories – Father John’s Medicine and J.C. Ayer & Co. among them.

Dr. J.C. Ayer founded J.C. Ayer & Co. in Lowell and his factory became one of the largest of its kind in the world.  Advertising was the key to success…, with the company distributing millions of copies of its free “almanac” (propaganda) annually around the world – in eight languages, including Chinese.  A sample from the almanac:

“The skillful pilot steers his ship through all dangers and guides her safely to port.  So the skillful physician pilots his patient through the perils of sickness to perfect health.  In cases of General Debility, so common at present day, he recommends the use of Ayer’s Sarsaparilla, because of its superior efficacy in aiding the formation of pure and vigorous blood, thereby restoring the normal condition to every fibre, organ, nerve, and muscle of the body.  It cures others and will cure you.  This standard remedy is compounded of the best tonics and alternatives known to science, and its superior qualities as blood-purifier and invigorator have stood the test of nearly half a century.”

Ayer became fabulously wealthy, amassing a fortune of some $20 million – quite a sum for the time.

Though Dr. Ayer never practiced medicine, the cover of each J.C. Ayer almanac was decorated with classical engravings such as one showing the Greek physician Hippocrates standing atop the earth declaring: “Heal the sick.”  What was not to believe with such evidence coming from a great doctor?

Hickey goes on the draw the parallel to central banking:

 Today, we look back and laugh – how could these people be so gullible?  Yet, the world is currently under the spell of its own modern-day quacks – known as central bankers.  Central bankers are touted as having the cure for all of our financial problems.  Their tonic, with the scientifically-sounding name of “quantitative easing,” or QE for short, is guaranteed to restore our financial health, to cleanse us from all our ills.  Whether the cause is spending beyond our means (perennial trillion dollar deficits and gigantic debts), making entitlement promises we cannot keep, building a gigantic welfare state of dependents, having a dysfunctional (and sometimes corrupt) government, constructing a byzantine tax system, tying up our businesses in a web of regulations, enabling “too-big-to-fail” banks to grow monstrously bigger – all can be cured with the magical elixir called QE.

Our skillful physician pilots (brandishing their doctorates from Princeton and M.I.T.) have discovered a miracle cure to be sure – at least that’s what one hears all day long from the talking heads on CNBC…  The media dissects Bernanke’s every utterance for clues as to whether he will supply more of the miracle or not.  The cameras are always on – even when he’s just laying out lame jokes at a Princeton commencement ceremony.

The QE medicine is seductive and addictive…

The best part yet – the QE medicine that he and other central bankers around the world are ladling out tastes so good… With QE, stocks will never fall on Tuesdays (20 straight up Tuesdays in a row), stock markets will never again have a 5% “correction,” (nearing 200 days without a 5% decline), investors can lever up with margin debt to record levels ($384 billion and counting – exceeding the 2007 pre-crash level)…  Investors have become so addicted to the QE wonder drug than even the merest hint of a lower dosage (tapering) sends up cries of anguish from the financial world.  Stock prices wobble; interest rates soar and CNBC anchors throw hissy-fits.

Other than the hallucinogenic effects, is the drug working?

Despite an additional $6 trillion of deficit spending, 0% interest rates and trillions of dollars of newly-created high-powered monetary reserves by the Federal Reserve (QE) that has driven asset inflation sharply higher (stocks, bonds, farmland, art and gold); over the past 4+ years we have experienced the slowest economic recovery in post-war history…  Last month investors celebrated a pathetic 165,000 jobs created, when 278,000 of those jobs were part-time.  In other words, we lost another 113,000 full-time jobs.  The U-6 unemployment rate (including part-time workers unable to find full-time work) ticked UP to 13.9%… With jobs hard to get and real inflation-adjusted incomes falling, the average American consumer is under pressure.  Witness the fairly miserable first quarter sales results from America’s largest retailers reported last month.  Same-store sales fell year-over-year at Wal-Mart, Target, Kohl’s and Sears…  Yesterday we received the Institute for Supply Management’s (ISM) report for May which, at a reading of 49.0, showed the biggest contraction in American manufacturing activity in four years – since the “Great Recession” of 2009…  I’ve been going through scores of first quarter earnings reports and conference calls from the largest technology companies.  The numbers and commentary were consistently gloomy – it was the worst batch of results I’ve seen since the end of the Great Recession.

At this stage of recovery something is terribly wrong.  Let me clue you in on a little secret – money printing doesn’t work.

The Japanese chugged plenty of this medicine…

Japan was the first to try “QE” to resolve its problems (though it was certainly not the first to try money printing).  They’ve been attempting to lift their economy out of a decades-long recession for many years.  The Bank of Japan (BOJ) tripled its balance sheet but did nothing to address the real underlying causes of the disease.  They did not address their lifetime employment system that hobbles business flexibility.  They did little to correct the ridiculous rules and regulations that suffocate the agricultural, medical and retail industries.  They raised taxes.  They massively increased government spending, wasting trillions of dollars and causing a debt pileup (235% of GDP and still rising) – the likes of which the world has never seen from a developed country.  As one would expect, the attempt failed spectacularly.

Yet the American snake oil salesmen claimed they didn’t drink enough!

Dr. Bernanke, and other high priests of central planning (including Paul Krugman) lectured the Japanese that their problem was they weren’t swilling enough of the QE tonic fast enough.  For a decade the BOJ resisted, always citing concerns over inflation.  Finally, Shinzo Abe was swept into power on the campaign promise of more licorice for everyone! After eliminating the key inflation-phobes (Masaaki Shirakawa) from the BOJ and replacing them with Bernanke-like clones (Haruhiko Kuroda), the new era of “Abenomics” was on…  The BOJ announced a plan to double its monetary base (high-powered money) within two years.  In other words, they opted to chug the whole bottle of medicine at once.

After discussing the post-WWI German experiment in money printing gone awry (Weimar hyperinflation), Hickey sees the American experiment ending badly:

Despite this horrific central banker record, U.S. investors still want to believe that Father Ben’s QE medicine will eventually work.  But just because the crowd believes this fantasy, doesn’t mean I have to.  As long as the Fed continues to print tens of billions of dollars a month, stocks can continue to climb higher, but the gap between the economic reality (poor) and the stock valuations (euphoric) widens to ever more dangerous levels.  Another crash is coming and I intend to avoid it – once again.

In conclusion, Fred Hickey offers an antidote to the QE drug:

Throughout history, the antidote to money debasement has always been gold.

Yield-chasers line up to buy Bolivian bonds

Under the You-Can’t-Make-This-Up category of sovereign debt insanity, the May 17th Grant’s Interest Rate Observer files this report:

Many these days are picking the poison of foreign places – Bolivia, for instance.  Last fall, the scenic, private-property expropriating, contract-abrogating and formerly hyper-inflating South American nation issued its first international sovereign debt since 1920.  And the Bolivian 4 7/8s of 2022 this year have rallied by 57 basis points, “the most among sovereign bonds with BB-minus ratings tracked by Bloomberg.” [according to Grant’s analyst Evan Lorenz]

The Great Bond Bull Market began in September, 1981 (over 31 years ago) with U.S. T-bond yields over 15%.  Yields on the 10-year now stand just a shade below 2%.

Precisely 2 years ago, Jim Grant was quoted in an Associated Press interview:

I think it’s useful to imagine how things might look ten years hence.  What will one’s children, heirs or successors think about a purchase  today of ten-year Treasurys at 3.25 percent? They’ll look back and say,  “What were they thinking?”  The (federal deficit) was running at 10  percent of GDP, the Fed had pressed its interest rates to zero, it had  tripled the size of its balance sheet, and they bought bonds?  Treasurys  are hugely uninteresting, as is similar government debt the world over.

Today the Bolivian government can borrow for 9 years at 4 1/2%.  Have bond investors completely lost their minds?

Even the bears are afraid to short stocks

In past years, when I saw this kind of speculation building, I would begin building positions to take the other side (put options). But this time around, I’m more hesitant. As noted earlier, this Fed and U.S. Government are willing to do “whatever it takes” to reignite growth. In my opinion, the government doesn’t really care about deficits and the Fed would prefer to see inflation.

… The government will continue to push, but instead of job growth, they’re more likely to create asset price inflation (again). We may be seeing early signs of the next bubble(s). I worry that it will be even more difficult to take short positions against stocks than it was leading up to the market tops in 2000 and 2007 – as hard as that may be to believe.

I have not sworn off put options. But I’ll need really stupidly high tech stock prices and some sort of “trigger” catalysts in order for me to jump back in. Stock market sentiment will have to be higher than it is today. (emphasis mine)

~ Fred Hickey, editor, The High-Tech Strategist, August 3, 2009

Hmmm… stock market sentiment has to turn even more bullish? Consider:

  1. There were a record 33 secondary offerings this past week. The previous record was 32 on June 5th. Anything over 10 is high, 25 or over extremely rare.
  2. In early March the average discount of the funds in the Herzfeld Closed-End Average was at 20.2%. Today it is at 7.5%.
  3. The Investors Intelligence poll shows 28.1% more bulls than bears, the highest bullish reading since December, 2007 (with the S&P 500 at 1484).
  4. Weekly put option complacency was 56.5% of total unchanged options, up from 30.5% at the early March bottom. This is the most optimism since October, 2007 (with the S&P 500 at 1501).
  5. At Rydex, just 23.7% of timing assets are positioned for a downturn.
  6. The vast majority of talking heads on CNBC see “green shoots” and a mild correction at worst. Five months ago – before the S&P 500 vaulted 50% – these geniuses were convinced any upside was limited and repeated attempts at “stimulus” had failed.

We have been tracking investor sentiment for over 25 years, but do not recall such a dramatic change in mood from despair to elation in such a brief period. Perma-bears, such as Fred Hickey (who we highly respect), could be waiting a long time if they expect elevated levels of bullishness to go even higher. And the catalyst for lower stock prices? How about an economy that just swallowed a whole bottle of stimulants and is about to go into a coma.

Wizard of Oz moment…

The curtain has been officially pulled back on the financial establishment, laid bare by its desperate attempts to save itself. “Hanky Pank” Paulson’s bazooka is in the process of being revealed as a pea shooter. The coming collapse from these exalted levels (Dow up 900 points from yesterday’s lows) will be truly epic. Even the statist reporters on CNBC are astounded by our rapid descent into Wall Street fascism. Legendary short-seller Jim Chanos, now on the government’s 10 Most Wanted list, captured the essence of Paulson’s brand of free lunch economics:

“We seem to have capitalism on the upside and socialism on the downside. That’s a pretty heady brew for country that holds itself out as a free market paragon.”

~ Jim Chanos, “Short Sellers Under Fire in U.S., U.K. After Lehman, AIG Fall,” Bloomberg, September 19, 2008

More later…

The next bubble?

We nominate the debt of the U.S. government. The case against the long bond is clear:

  1. The U.S. government is taking on massive (possibly measured in the trillions of dollars) liabilities with the bailout of Wall Street, the banking system, and the GSEs for their role in helping foment a housing/consumption/credit/speculative bubble for the ages. (This in addition to the ticking time bombs of Medicare, Social Security, and the more recent prescription drug promise.)
  2. The U.S. government is broke. The U.S. taxpayer is crying “uncle” as the U.S. consumer is tapped out. This spells D-E-F-A-U-L-T, unless…
  3. … Fed chairman Bernanke fires up the printing press, in which case the hapless bondholder gets destroyed.
  4. Under this dire scenario – a lose-lose for Uncle Sam’s creditors – the 30-year Treasury bond is yielding all of 4.11%, its lowest level since the 1960s.

We’ll defer to our good friend, Tony Deden, who adroitly manages the Edelweiss Fund from his perch in Zurich:

I ask you, would you lend money to the world’s greatest debtor for a period of ten years at 3.7% – nearly 2% below the official (and understated) rate of price inflation? I would not. No sensible person would think of it. Yet this is the price of the U.S. government’s ten-year bonds. It earns our award of the mispriced asset of the new century. ~ Monthly Review, September 3, 2008

Of course, let’s not forget the 10-year Japanese government bond yielding all of 1.5%.

New Moody’s unit reveals official ratings are a joke

According to an article on Bloomberg today:

Moody’s Investors Service has created a new unit that surprises even its own director.

The team from Moody’s Analytics, which operates separately from Moody’s ratings division, uses credit-default swap prices as an alternative system of grading debt. These so-called implied ratings often differ significantly from Moody’s official grades.

The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody’s credit ratings signify. And here’s the kicker: The swaps traders are usually right.

In fact, by their own admission, the track record of Moody’s is downright abysmal:

[The new unit’s managing director, David] Munves says that over one year, the implied ratings have been a more accurate predictor of defaults than Moody’s ratings. The Moody’s unit reports that implied ratings for one year have a 91 percent accuracy ratio compared with an 82 percent ratio for Moody’s official ratings.

In other words, the failure rate of the Moody’s rating service (which generated $2.3 billion in revenue last year and justified the building of a new headquarters in lower Manhattan) was 18% vs. 9% for the market. As noted short seller Jim Chanos remarked last July:

It’s a great business model as long as you can get people to pay for it. If they have no predictive power over that which they’re rating, then why bother?

Of course, the credit ratings business is no product of the free market, but a government sanctioned and protected oligopoly. In fact the valuable “NRSRO” status (Nationally Recognized Statistical Rating Organization) is conferred by none other than the SEC, another worthless gatekeeper and brainchild of the state.

As Chanos noted in a WSJ op-ed exactly two years ago, these lessons could have been learned by anyone paying close attention to the Enron implosion:

Time and again, when confronted with negative financial “surprises” by corporate issuers during the last decade, the “independent” ratings agencies fell down on the job. This kept slow-on-the-uptake investors dancing on the decks of numerous financial Titanics, while those heeding other signals (such as the burgeoning market for credit-default derivatives) prepared to man the lifeboats.

Whether it was the hubris of not wanting to precipitate a run on the bank (as if it wasn’t happening already!), or the incompetence of one ratings agency analyst admitting to not having read the company’s SEC filings, the shortcomings of an analyst-based ratings agency system became apparent in the Enron fiasco. Market-based price-discovery agents, such as short sellers in the equity market and purchasers of credit-default insurance in the bond/derivative markets, supplanted the Big Three ratings agencies as accurate predictors of Enron’s financial distress.

As philosopher George Santayana famously wrote in 1905, “Those who cannot remember the past are condemned to repeat it.”

Dr. Doom on Easy Al and Helicopter Ben

Why did the dollar collapse against the price of gold? You call up Mr. Greenspan and Mr. Bernanke and you ask them about it. Of course they will never give an answer. Each time Ron Paul asks them a sensible question, they just evade the question and they move on to something else. Because, as I explained, they’re a bunch of liars. And actually, if there was a court for honest money, both Mr. Greenspan and Mr. Bernanke should be hanged. ~ Marc Faber, Financial Sense Newshour interview with Jim Puplava, January 12, 2008

My comment: The investment mob cheered them all the way.

Credit contraction for the ages

Several weeks ago we listened to Jan Hatzius, economist at Goldman Sachs, make a case for the total credit losses within the US banking system and related credit contraction. Further work was introduced by Rob Parentau over at Dresdner Bank where his firm called for $500-750 billion in credit losses and approximately $4 trillion in total credit contraction. Finally, we have a few figures from Stephanie Pomboy over at MacroMavens who quantifies her work from the most recent contraction post dot com bust.

After the dot com bust banks were forced to add $12 billion to their loan loss reserves over the following 18 months. Small as it seemed at the time, resultant lending activity declined by over $450 billion-a multiplier of 40X! Today some of the experts, including the individuals above, foresee a total of $300-500 billion in losses so using a conservative 10X multiplier total credit contraction may approach $3-5 trillion!

Putting this in perspective was the latest from Doug Noland who after parsing the Feds Flow of Funds data indicates $600 billion in nominal GDP last year after increasing credit by $2 trillion. Needless to say the US economy is much more dependent on credit stimulation today vs past several decades.

Not to mention the banks exposure to real estate today, roughly 62%, vs a third back in 2000-2001. Finally, loan loss reserves are near 31 year lows at a paltry $87 billion so how do the banks address this tsunami?

Assuming the banking system can spread the pain over 5 years, plugging the $213-413 billion hole would require setting aside $42-82 billion per year. Using the conservative 10X multiplier gives us $420-820 billion in lost annual lending. Doesn’t this all but guarantee a long overdue consumer recession?

My Comments: In a world completely dependent on sequential credit expansion the ramifications from today’s present unwind will be one for the record books. Maybe Abby Cohen should spend less time on CNBC while reading more from her employer’s top economist.

John Templeton on the value of bear markets

For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity. — Sir John Templeton

My comment: How many are prepared for the mother of all bear markets?

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