Posts Tagged ‘Geniuses’
Thursday, May 10th, 2012
The quote of the day goes to Marc Faber, publisher of the Gloom, Boom & Doom report. Faber says “I do not have a high opinion of the U.S. government, but the bureaucrats in Brussels make the government in the U.S. look like an organization consisting of geniuses.”
Marc Faber spoke with Bloomberg TV’s Betty Liu also stated “The market will have difficulties to move up strongly unless we have a massive QE3 and if it moves and makes the high above 1422, the second half of the year could witness a crash, like in 1987.”
Link if video does not play: Marc Faber on U.S. Equities, Economy, Euro Zone
Faber on whether he still thinks that profit margins will shrink and record profits seen will be no more for U.S. corporations:
“Yes, if you look at the statements by corporations, it is very clear. Earlier on, you had a commentator who said the exports to Europe from the U.S. are irrelevant. I agree with that. What is relevant are the businesses of American corporations in Europe and the earnings they derive from these businesses. That is definitely slowing down. The revenue growth is slowing down and, in my view, you will have more and more corporations that report earnings that are actually good but they do not exceed expectations…The bottom line is I think the market will have difficulty moving up strongly on less we have a massive QE3 and if it moves here and makes the high above 1422, the second half of the year could witness a crash.”
“A crash, like in 1987…because the market would become technically very weak. I would expect the market making a new high. If it happens, it would be a new high with very few stocks pushing up and the majority of stocks have already rolled over. The earnings outlook is not particularly good because most economies in the world are slowing down. People focus on Greece but Greece is completely irrelevant. What is relevant are two countries — China and India — 2.5 billion people combined. They are a huge market for goods and these economies are slowing down massively at the present time.”
On whether more Fed stimulus will put a floor on the S&P 500 this year:
“Yes, I think we had a rally that began March 2009 at 666 on the S&P. We made an orthodox pop a year ago on May 2, 2011 at 1370. Then we made a new high on April 2 of this year. The new high was not confirmed by the majority of shares and many shares are already down 20% or so and every day, there are shares that are breaking down or they no longer go on good news which is a bad sign. I think maybe we have seen the high from the year unless you get a huge QE3. That may not be forthcoming.”
On whether the Fed will issue QE3:
“I think that QE3 will come, but it depends on asset markets. If the S&P dropped here another 100-150 points, I think that QE3 will occur. But if the S&P bounces back and we are above 1400, I think the Fed will essentially be waiting to see how the economy develops. The economy in the U.S. consists of different economies, some of it is very strong. I was in southern California and there the economy is doing fine. In other places, it is not doing fine. It is not universally bad. Compared to other countries, it is actually doing relatively well.”
On whether Greece will exit the euro:
“There is a very good chance they will exit the euro and it would have been desirable if the euro countries had kicked out Greece three years ago. It would have saved a lot of agony. As a result of the bailout, the problem has become bigger and bigger and bigger.”
On whether policymakers can manage the exit properly:
“I think it would be much better for Greece and the entire euro area if Greece were kicked out. Spain kicked out. Italy out and even France should be out. At the end you just have Germany with the euro. The other countries can have their own currencies and still trade and use the euro as an international currency.”
“The bureaucrats in Brussels and the media are brainwashing everybody that if Greece exited the euro, it would be a disaster. My view is the best would be to dissolve the whole euro zone and that the countries would go back to their own currencies and still use the euro as an international currency the way you travel through Latin America and with a dollar you can pay anywhere you with. In my view, that would be the best. These countries that have financial difficulties, you will have to write off their debts and make it difficult for them to access the capital market in the future. Just to keep bailing them out will increase the problem. It will not solve the problem.”
On how economic catastrophe can be avoided if the euro is dissolved:
“Explain to me why there would be an economic catastrophe. Many countries have pegged currencies have given up the peg to another currency and it was not a catastrophe. The public has been brainwashed that the breakup of the euro would be a complete disaster when in fact, it may be the solution.”
On whether there will be a race to the bottom among various countries to devalue their own currencies if the euro is dissolved:
“I do not have a high opinion of the U.S. government, but the bureaucrats in Brussels make the government in the U.S. look like an organization consisting of geniuses. The bureaucrats in Brussels are completely useless functionaries and they want to maintain their power. They always talk about austerity being bad but if you look at the government expenditures of the EU, in 2000, it was 44% of GDP. Since then, it has grown by 76% under the influence of the Keynesian clowns and now it is 49% of GDP. That is the problem of Europe — too much government spending and lack of fiscal discipline.”
On whether it’s a mistake to short the euro:
“I want to make this very clear — the investment markets may move in different directions than the economic reality because if you print money. That’s why in the Bloomberg poll, Mr. Bernanke is viewed so favorably because fund managers and analysts and strategists, they are only interested in having stocks up so their earnings increase and their bonus pool increases. But in reality, the economy can go downhill and stocks can go up just because of money printing and in Europe, the ECB has proven now that they are very good money printers.”
On where to invest in Europe:
“Actually, usually when socialists come in or there is a crisis such as we have in Greece, it occurs usually near market lows. If someone really wanted to take speculative positions, he should look at quality non- financial stocks in countries like Spain, Italy, France, and Greece. I think rebound is coming. The market on a short-term basis is oversold. But if you look at the market action — first of all, we made a low on the S&P last October at 1074. We went to 1422. The market is down from 1422 to less than 1360. The whole world is screaming we’re in a bear market. This is a minor correction. I think it may become a more serious correction as the technical picture of the market has deteriorated very badly and as the S&P made a new high this year on April 2nd, all the European markets are lower than they were a year ago.”
Tags: American Corporations, Bloomberg Tv, Boom, Bottom Line, Brussels, Bureaucrats, Commentator, Crash, Doom, Euro Zone, Geniuses, Gloom, Liu, Marc Faber, Profit Margins, Qe3, Quote Of The Day, Report Earnings, S Corporations, Second Half
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Thursday, February 16th, 2012
Lately, everybody’s been talking about Jeremy Siegel’s latest bullish call on stocks.
On Saturday, Barron’s cover story highlighted Siegel’s call for Dow 15,000 within the next two years.
Yesterday, Bloomberg’s Trish Regan had the Wharton Professor on to further explain his call.
But Seabreeze Partners’ Doug Kass isn’t having any of it.
Kass, who famously called the March 2009 stock market bottom and nailed the 2011 S&P 500 close, aims to bring down the Jeremy Siegel bulls.
He groups Siegel with the likes of Meredith Whitney and Nouriel Roubini who made names for themselves with spectacularly successful calls, only to be followed by some pretty bad calls.
“[Q]uite frankly, the streets of Wall Street are paved with geniuses who have made one great call in a row,” writes Kass.
In his latest column on Real Money Pro, he expands:
Dr. Siegel comes off as a very nice person, but he is an academic who has been bullish at some very wrong times. Importantly, his theories regarding equities for the long term have been wildly off, as bonds have outperformed stocks for one, five, 10, 30 and 40 years, which, according to his investment thesis, is impossible.
His view on the fixed-income market also has been manifestly incorrect over the last two years. Dr. Siegel’s Wall Street Journal op-ed, “The Great American Bond Bubble” was wrong in its conclusion back in August 2010.
Kass also reminds us that back in July 2009, the Wall Street Journal’s Jason Zweig poked some holes in the data Siegel used in his research.
Earlier this year, Doug Kass wrote that that S&P 500 could “eclipse the 2000 high of 1527.46 during the second half of the year.” However, he recently changed his tone when be found out that Nouriel Roubini, Dr. Doom himself, turned bullish on stocks.
Copyright © Business Insider
Tags: Barron, Bulls, Business Insider, Doug Kass, Dr Doom, Fixed Income Market, Geniuses, Investment Thesis, Jason Zweig, Jeremy Siegel, Market Bottom, Meredith Whitney, Nouriel Roubini, Real Money, Seabreeze Partners, Stock Market, Trish Regan, Uite, Wall Street, Wall Street Journal, Wharton
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Friday, July 22nd, 2011
In a must read Op Ed, Bloomberg’s Jon Weil takes another long hard look at the balance sheet of the most undercapitalized bank in America (thank would be Bank of America) courtesy of the worst M&A transaction in history, namely its purchase of Countrywide, observes what everyone, even John Paulson now knows, that due to trading at half its book value nobody in the market gives even remote credit to the bank’s asset “marks”, and concludes that this organization, courtesy of an extremely lax regulatory and audit structure, which continues to allow it to mark any assets at whatever price it desires, could well be the next AIG: “There’s more at stake here, however, than whether Bank of America’s shares are a “buy” or a “sell.” The main thing the rest of us care about is the continuing menace this company and others like it pose to the financial system, knowing we never should have let ourselves be put in the position where a collapse in confidence at a single bank could wreak havoc on the world’s economy. Here we are again, though. Curse the geniuses who brought us this madness.” Indeed: once again, right before our eyes, day after day we allow various higher status quo-embedded individuals to take advantage of the gullible public by misrepresenting the massive risk that the left side of BAC’s balance sheet represents, which can have only one conclusion: the same epic implosion that brought down AIG once the market reality caught up the with book myth. Yet in the case of AIG unbridled risk-taking and book mismarking we can at least put the blame on one person: the man at the heart of AIG FP, Joe Cassano, whose reckless bets nearly brought down capitalism. So our question is: is there someone at or affiliated with Bank of America that could soon double as a Joe Cassano for the 2010s? We have one suggestion (although certainly not exhaustive): Brian Lin of RRMS Advisors.
Who is Brian Lin?
Let’s step back and look at some of the recent developments regarding Bank of America. As most know by now, the biggest wildcard regarding Brian Moynahan’s bank, and the biggest wildcard as pertains to the “known unknown” that is the bank’s massive undercapitalization, is that it has hundreds of billions in legacy non-performing Countrywide loans. The same loans which the bank recently scrambled to settle with a group of litigants for the paltry sum of $8.5 billion. This is also the Rep and Warranty reserve that Bank of America took out this quarter after repeatedly promising that it was well over reserved for any future such litigation. Incidentally Zero Hedge has said repeatedly that this amount will be far higher when realistic assumptions are used, whether for modelling purposes, or when the full reality of the deterioration of the loan quality is uncovered.
Sure enough, in a filing today at the Supreme Court in New York, the Federal Home Loan Banks which are pursuing more information from the bank in an attempt to generate greater recoveries, have suggested that the the entity conducting the recovery assumptions that generated the $8.5 billion settlement was potentially incompetent (and arguably criminally negligent – our assumption not theirs), and that a “reasonable settlement” would nearly triple the amount of money that Bank of America would have to charge off: a range of $22 billion to $27.5 billion. Of course, should BAC do this, its Tier 1 Capital would plunge, it would immediately be forced to access the equity capital markets, and confidence in the bank’s books would evaporate instantaneously, with all the nightmarish AIG-esque consequences envisioned by Jon Weil materializing immediately.
So who is the person largely responsible for the “overoptimistic” analyses that have so far spared Bank of America from a death spiral?
The abovementioned Brian Lin of RRMS advisors…. And formerly of Bank of America!
Let’s take a look at the FHLB’s filing:
BNYM notes that it has now released on a website “all of the expert reports submitted to the Trustee in connection with the Settlement” and implies that those reports may provide all the additional information that the FHLBs need to decide whether to object to the proposed settlement. Unfortunately, however, the expert reports raise more questions than they answer. By way of example, BNYM published a report from Mr. Brian Lin of RRMS Advisors about the reasonableness of the $8.5 billion that BNYM agreed to accept as part of the proposed settlement. Mr. Lin concluded that “a settlement figure somewhere between $8.8 and $11 billion is reasonable.” But to reach that conclusion, Mr. Lin made certain assumptions, the bases for which are not fully disclosed in his report.
Mr. Lin started with the full remaining principal balance of the loans in the 530 trusts that would be covered by the proposed settlement, plus the amount that the trusts have lost on loans that have already been liquidated. Together, Mr. Lin calculates that to be $208.9 billion. Mr. Lin then assumed that (1) only a certain percentage of those loans would go into default and (2) even for those loans that went into default, the trusts would recover between 45% and 60% of the principal balance through foreclosure. Both of these assumptions are quite controversial, and the FHLBs need to understand Mr. Lin’s basis for them. Using those assumptions, Mr. Lin concludes that the potential shortfall to the trusts, and therefore the amount that the trusts could potentially recover from Countrywide and Bank of America, is reduced from $208.9 billion to $61.3 billion.
To get from $61.3 billion to a “reasonable” settlement range of $8.8 to $11 billion, Mr. Lin made two more assumptions. He assumed that only 36% of loans that go into default will have breached Countrywide’s representations and warranties about the quality of its underwriting. That assumption is difficult to understand. Mr. Lin did not do any independent analysis of this assumption. Instead, he simply adopted Bank of America’s estimates of this percentage, which in turn appear to have been based on a completely different portfolio of loans that were subject to the underwriting standards imposed by Fannie Mae and Freddie Mac. Moreover, Mr. Lin’s assumption is inconsistent with widely publicized reports by professional loan auditors that even Countrywide loans that are merely delinquent (that is, behind on payments but not yet in default) have a “breach rate” of well over 60% and often as high as 90%. Finally, Mr. Lin assumed that only 40% of loans that both go into default and have breached Countrywide’s representations and warranties could be successfully put back to Countrywide and Bank of America. This assumption similarly demands investigation. It is hard to imagine why a court would not require Countrywide and Bank of America to repurchase all loans, not just 40% of loans, that are both in default and have breached a representation or warranty.
Each of these assumptions has a great effect on Mr. Lin’s estimate of the amount of a reasonable settlement. As an example, even if just the last assumption were changed from Countrywide and Bank of America having to repurchase all, rather than just 40%, of loans that were both in default and breached Countrywide’s representations and warranties, then Mr. Lin’s estimate of a reasonable settlement would rise from a range of $8.8 to $11 billion to a range of $22 to $27.5 billion. Modifying any of his other three assumptions would cause that range to rise much more.
Similarly, BNYM also published a report by Prof. Robert Daines about Bank of America’s liability as a successor to Countrywide. But Prof. Daines’s report leaves unanswered several critical legal and factual questions. Indeed, Prof. Daines admits that his opinion is “limited by the available factual record and certain assumptions that I make,” and he concedes in several parts of his report that he relied on unverified information provided by Bank of America
A closer look at Mr. Lin’s biography indicates that he may have just a little conflict of interest when conducting his analysis, which most likely ended up being used in the bank’s own application of settlement calculations, and reciprocally used as well by the counterparties, which we are more than certain are doing all they can to merely shut the case, instead of actually seek equitable damages. After all, as a reminder the adversaries to BAC in the case are the who’s who of comparable borderline illegal marking pratices: Maiden Lane III, LLC; Metropolitan Life Insurance Company; Trust Company of the West; Neuberger Berman; Pacific Investment Management Company LLC; Goldman Sachs Asset Management; Thrivent Financial; Landesbank BadenWuerttemberg; LBBW Asset Management plc, Dublin; ING Bank and so forth. To say that these parties are not comparably guilty of similar practices would be beyond naive.
Anyway, back to Mr. Lin, and specifically his LinkedIn Profile where we learn that before RRMS he worked at… Merrill Lynch, and not just anywhere, but in the bank’s Non Agency Trading. To wit:
Surely while developing a skillset about evaluating security impairments at Bank of America, Mr. Lin also developed numerous relationships. One may only wonder to what extent these relationships were “utilized” in assisting him in forming his opinion on what the proposed trust shortfall, and thus settlement, and thus potential material undercapitalization of Bank of America, should be.
But why pick only on Brian: let’s take a look at the pristine organization that is RRMS. For that we turn to Crain’s New York where we read that…
At RRMS Advisors’ offices in an aging building on East 40th Street, Vincent Spoto and his four partners share space with a small headhunting outfit, and they hold meetings in a windowless conference room the size of a large closet…
Mr. Spoto, who was laid off more than a year ago from his position as a mortgage specialist at Credit Suisse, is grateful that he has a job. He has reinvented himself as a consultant to investors who hold toxic mortgage investments…
“There’s a stigma out there, no doubt, because I was part of Wall Street,” …along with a dash of guilt—he is among the band of survivors of Wall Street’s collapsed mortgage machine who are getting the chance to assist in sorting out the financial mess they helped create. In fact, some of them are in high demand because they are among the few who understand complex instruments such as mortgage-backed securities, collateralized debt obligations and other products whose imploded values can only be guessed at…
“These are the people who can fit the key in the lock,”…“The problem for a lot of these Wall Street guys is that they don’t know much about real estate,” says Robert Baron, president of American Real Estate Executive Search Co. in Manhattan. “All they know is a lot about slicing and dicing mortgages and selling them.”…
Over his 20-year career, Mr. Spoto worked mostly with mortgage servicing companies to ensure they were collecting on the mountains of loans that investment bankers packaged into securities and sold…Brian Lin, a veteran mortgage trader who was formerly with Merrill Lynch and other companies…
The firm also has Robert Pardes, who was chief lending officer at New Jersey-based OceanFirst Financial Corp. until May 2007. He was ousted after the bank disclosed that employees were hiding losses in the subprime lending division, which it had acquired from Mr. Pardes seven years earlier”
The plot thickens: not only do we have a person who may have a conflict of interest courtesy of prior professional relationships with Bank of America Merrill Lynch, but the firm he currently works boasts such individuals who were terminated for knowingly misrepresenting and hiding losses in RMBS books.
Does one now see why perhaps Mr. Lin may not have been the best choice to evaluated the trust shortfall, and the “settlement” process. Perhaps somebody slightly more objective would figure out that instead of $8.5 billion, Bank of America is actually on the hook for an amount that is at least 3 times greater if one uses proper impaired security valuation protocols?
However, as noted above, the question becomes “what then?” Should the true extent of deterioration of Bank of America’s books be revealed, then its market cap would be not $100 billion but some modest fraction thereof. In fact, even John Paulson, formerly the biggest believer in BAC has now washed his hands. And he doesn’t give up (read: look foolish to the investment community) easily. Our advice is to have a chat with Jon Weil: after all he is the man who said to “Curse the geniuses who brought us this madness.”
In the meantime, and in the absence of Mark to Market, we are confident that the legal process will prevail and that the presiding judge on this case, and if not him then certainly the New York District Attorney, will step up and demand a thorough reevaluation of the settlement process. Because if law itself is held hostage by a bank’s massive undercapitalization, then one may as well admit that America has devolved into complete fascism.
As for our question if Mr. Lin is the second coming of Joe Cassano, the answer is likely no. It is everyone that behaves just like Lin, in allowing what is blatant disregard for fair and equitable process, to continue… in exchange for give or take 30 pieces of silver (physical, not paper).
Unfortunately in our rapidly devolving society we have gotten to a point where the next epic collapse will have not one but an army of Joe Cassano’s behind it.
Tags: Aig, Balance Sheet, Bank Of America, Bets, Bloomberg, capitalism, Collapse, Fp, Geniuses, Gullible Public, Havoc, Implosion, Joe Cassano, John Paulson, Madness, Market Reality, Myth, Risk Taking, Rrms, Stake
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Thursday, December 3rd, 2009
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.
“Dubai sends markets into turmoil,” begins The Financial Times. Dubai is a financial center, built on sand.
Probably a good thing US markets were closed for Thanksgiving when this news came out. In Europe, the Dubai affair caused the biggest drop in 7 months. European banks have lent $40 billion to Dubai.
Jim Chanos, a famous short seller, thinks Dubai is merely the camel’s nose in the tent, so to speak. “China is Dubai times 1,000…if not a million.”
“People are panicking: this whole process counters everything that the rulers have been saying and the way it has been communicated before the holidays is confusing,” said one hedge fund manager.
The ‘rulers’ are the fellows who run “Dubai World,” and incidentally Dubai itself. Whether they are fools, knaves or sly geniuses was what everyone wanted to know. Dubai officials announced that they had raised $5 billion on Tuesday. Two hours later they said they weren’t paying interest on it or on any of the rest of the $80 billion in borrowings. What’s going on? Are they really broke? Or are they playing for some kind of advantage?
“Dubai gambles with its financial reputation,” says one headline at the FT.
Then, on the facing page, the editors think they know how the gamble will turn out:
“A breath-taking blunder in Dubai…Dubai is looking more like Argentina than Singapore – but a lot less predictable,” says the FT editorial.
No on is sure what is going on. Most people take from this story what we knew all along: lending to shady characters in sunny places is not an easy way to make money. Especially when the shady characters own the country.
Trouble is, shady characters run near all the world’s countries. If an investor cannot trust the ruling family of Dubai, how can he trust the commies who run China? Or the hacks who run the United States of America?
To err is human. For a central banker, it is practically a professional requirement. Count on a major ‘error’ to trigger a sell-off in the world’s bond market.
But Dubai’s mistake did not infect all other sovereign debt. German bond yields went down, not up. Investors sought safety from Dubai debt in Deutschland debt.
But what is the real meaning of what is going on in Dubai? It’s the story of the collapse of the financial industry. Dubai has no oil…no natural resources…and no real industry. The rulers tried to turn it into a financial center. Entirely financed by debt. And now finance itself is falling apart.
“The camel put his nose in the tent,” says colleague Simone Wapler. “He saw that there was nothing there.”
What will he think when he gets a closer look at Britain’s finances? Britain, too, relies heavily on the financial industry. And Britain, too, is heavily dependent on debt. Its public finances are among the worst in the world. Japan’s public debt, to add another example, is already 200% of GDP. It’s expected to reach 300% in a few years. And yet, Japan – like the US and Britain – just keeps borrowing. How long can this go on? When will Britain, the US, and Japan announce their own moratoria on debt service payments?
This bubbly bounce must not have much time left. And it is surrounded by 10,000 pins.
On Friday, US markets reacted to the Dubai news. The Dow lost 154 points. Gold lost $14. Oil slipped to $76.
Our crash flag is still flying. But that was not a crash. Just a bad day. And today’s news tells us that other Gulf States are rallying around Dubai, ready to extend a helping hand and lend a buck or two. Oil is rallying on the news.
Does that mean this bubbly trend is stronger than we thought? Is this a bubble made of Kevlar? Will it resist other pins?
We wouldn’t count on it. When China pops, we’ll see US stocks down a lot more than 154 points. In fact, we expect to see the Dow in 5,000-ish territory when this bounce is over. And when that happens, emerging markets will probably be hit even harder.
Dubai was a “wake up call,” for investors in emerging markets, says The New York Times today.
But the pin that pricks recovery hopes won’t necessarily be imported. There are plenty of sharp objects in the homeland too. There is, for example, the growing realization that the recovery is a fraud.
“Half a recovery,” says a New York Times columnist, may be all we get.
Today, the press will concentrate on analyzing Black Friday sales results. Already, The Wall Street Journal has rendered its verdict: more shoppers; fewer sales.
If the initial reports are correct, the traffic wasn’t bad on Friday. But retail outlets were only able to snag sales by offering discounts. It’s a deflationary world, after all. Shoppers want lower prices to make up for the fact that they have less money to spend. And they’ll get lower prices too. Because this is a de-leveraging cycle. The world has too much debt, too many factories and too many workers…at least for the real, available purchasing power. Prices will go down naturally until excesses are absorbed…dismantled…or converted to other uses.
But wait…there are also unnatural forces at work. Governments are bailing out bungled companies. They’re supplying zombie industries with fresh blood from the taxpayers. They’re standing in the way of the de-leveraging progress. They’re creating “money” out of thin air.
It’s this last point that is most explosive. As long as government is just stalling the correction, it doesn’t cause too much distortion or volatility. But when it fiddles with the money…oh la la; that’s where it gets interesting.
Traditionally, people buy gold when they think the monetary authorities are up to something. Throughout the world, investors are getting edgy…they’re wondering how it is possible to add so much cash and credit to the economy without sending prices to the moon.
We’ll tell you how it’s possible: there’s a depression. In a depression, the flow of cash and credit coagulates. Even if you increase the cash in bank vaults, it doesn’t circulate into the real economy. Banks don’t lend. People don’t borrow. Consumers don’t consume.
It just sits there…waiting for the end of the depression…like a teenager waiting for Friday…
Source: Bill Bonner, Daily Reckoning, November 30, 2009.
Tags: 7 Months, Best Selling Books, Bill Bonner, Blunder, Borrowings, China, Commodities, Daily Reckoning, Driving Force, Easy Way To Make Money, Emerging Markets, Empire Of Debt, energy, European Banks, Financial Reckoning Day, Financial Times, Gambles, Geniuses, Gold, Hedge Fund Manager, Knaves, Natural Resources, New York Times, New York Times Best Selling Books, oil, Shady Characters, Sunny Places
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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
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
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Thursday, January 29th, 2009
Whoa! Jeremy Grantham gives a riveting, in-depth, specific and eloquent must-see interview. It is a clear and enlightening discussion with one of the finest and quiet geniuses in the investment world.
Subsequent to publication of Jeremy Grantham’s quarterly newsletter a few days ago, Steve Forbes conducted this interview with the chairman of Boston-based GMO. The video clip and transcript are published below.
Click here or on the image to view the video.
Click here for the transcript of the interview.
Here are the topical headings from the interview:
- Steve: China’s Long Tale
- Grantham’s Big Call
- A Whole New Bubble
- Time To Buy
- Cheapest in 20 Years
- Japan A Blue Chip?
- Emerging Markets
- Buy Big US Stocks
- Our Leaders Failed
- Dysfunctional Markets
- China Bubble
Here are a few paragraphs:
Steve Forbes: Well thank you, Jeremy, for joining us today. First, since you have bragging rights in this situation, what made you a bear, [a] great skeptic? Between 1999 until about a couple of months ago, you were saying, “Stay out.”
Jeremy Grantham: Well, really very simple. Not rocket science. We take a long-term view, which makes life, in our opinion, much easier.
Steve Forbes: Well everyone says it, but you certainly practiced it.
Jeremy Grantham: We actually do it. Well, we tried the short-term stuff and it was so hard; we thought we’d better do the long-term. We just assume that at the end, in those days, of 10 years, profit margins will be normal and price-earnings ratios will be normal. And that will create a normal, fair price. And more recently, we’ve moved to seven years, because we’ve found in our research that financial series tend to mean revert a little bit faster than 10 years–actually about six-and-a-half years. So we rounded to seven.
And that’s how we do it. And it just happened from October ’98 to October of ’08, the 10-year forecast was right. Because for one second in its flight path, the U.S. market and other markets flashed through normal price. Normal price is about 950 on the S&P; it’s a little bit below that today.
And on my birthday, October the 6th, the U.S. market, 10 years and four trading days later, hit exactly our 10-year forecast of October ’98, which is worth talking about if only to enjoy spectacular luck. The P/E was a little bit lower than average and the profit margins were a little bit higher, so they beautifully offset. And given our methodology, that would mean that on October the 6th, the market should have been fairly priced on our current approach. And indeed it was–that was even more remarkable–950, plus or minus a couple of percent.
Steve Forbes: And what did you see during that 10-year period that made you feel–other than your own models–that this was something highly abnormal, that this couldn’t last?
Jeremy Grantham: Well, first of all, the magnitude of the overrun in 2000 was legendary. As historians, you know we’ve massaged the past until it begs for mercy. And we saw that it was 21 times earnings in 1929, 21 times earnings in 1965 and 35 times current earnings in 2000. And 35 is bigger than 21 by enough that you’d expect everyone would see it. Indeed, it looks like a Himalayan peak coming out of the plain.
And it begs the question, “Why didn’t everybody see it?” And I think the answer to that is, “Everybody did see it.” But agency risk or career risk is so profound, that even if you think the market is gloriously overpriced, you still have to get up and dance. Because if you sit down too quickly–
Steve Forbes: Famous words of Mr. Prince.
Click here for the transcript of the interview.
Source: Forbes, January 23, 2009.
Download the Forbes: Jeremy Grantham Briefing Book here.
Tags: Blue Chip, Boston, Bragging Rights, chairman, China, Dysfunctional, Emerging Markets, Few Days, Flight Path, Geniuses, Gmo, Half Years, Himalayan, Interview Source, Investment World, Japan, Jeremy Grantham, Paragraphs, Price Earnings Ratios, Prince, Profit Margins, Quarterly Newsletter, Rivetting, Rocket Science, S Market, Seven Years, Skeptic, Steve Forbes, Steven Forbes, Stimulus, Stocks, Topical Headings, United States, Video Clip
Posted in Emerging Markets, Markets | Comments Off