Monday, November 29, 2010

David Einhorn on Consuelo WealthTrack

David Einhorn was on Conseulo WealthTrack. Very good interview as one would suspect from Einhorn. I encourage reading or listening to the entire thing. Below are some highlights.

On what has changed (this is my big thing, the market can go up every day until it doesn't but absolutely nothing has changed fundamentally that caused this whole mess. It is worse)

CONSUELO MACK: Has anything changed? Are any of the watch dogs doing their job better?

DAVID EINHORN: Well, the truth actually is, what we’ve seen is, even in the bigger financial crisis, the same watch dogs have just repeated the same behavior, just in a much bigger way. So what we’ve seen, the same kind of sort of forbearance towards Allied Capital has been granted to the big banks, the big investment banks, and so forth.


CONSUELO MACK: So even with what we’ve seen, with the banks being more prescribed in what they are able to do, I mean, using much less leverage, being more scrutinized, you don’t think that that’s enough?

DAVID EINHORN: It’s just not enough. If you look at the big banks, they’ve gone from maybe 25 or 30 times leverage to 15 or 16 times leverage, or something like that. That’s still a lot of leverage. And it doesn’t count the derivatives books. And you have these huge notional derivatives books that, they’re just sort of tail risks that are sort of out there, and nobody really knows what’s in them, and nobody knows what risk they pose, and you certainly know that if any of the big four or five books that have the massive derivatives books was going to be on the cusp of failing; you would need to bail them out, the same way, in the future, that you would in the past. Notwithstanding whatever the new rules supposedly say.

on gold

CONUSLEO MACK: Now, one of the things you just mentioned is inflation. And we are seeing inflation in hard assets. And one of the hard assets that you own at Greenlight Capital is gold. It’s your largest position. So what does gold represent to you, in your portfolio?

DAVID EINHORN: To me, gold represents money. And there’s different types of money. Some people think gold is a commodity, and they want to think about jewelry demand, and how many weddings there are in India, and so forth. And how much is coming out of the ground. I think of gold as money. And you can have dollars, or you can have Yen, or you can Euros, or you can have Pounds, or you can have gold. And there’s other currencies in other countries, but those are the sort of the major currencies as I see it, and I think that the merit of gold is, given our current monetary policy and our fiscal policy, as well as the problems in the other major currencies, gold is the money, I think, of choice, that we would like to have a meaningful amount of our assets denominated in.


CONSUELO MACK: For individual investors, who don’t have the kind of flexibility that you do to trade and, nor the sophistication, I mean, how should we view gold, as individuals? I mean, should it be in all of our portfolios? And should we, too, view it as a substitute for paper currency?

DAVID EINHORN: I think so. I think it makes sense as a diversifier, and to have this sort of money, particularly because this is the kind of money that Chairman Bernanke can’t print more of.

On owning banks

CONSUELO MACK: So as an investor listening to you, would you touch a bank with a ten foot pole? At this point, would you invest in one of the major money center banks?

DAVID EINHORN: No. We wouldn’t invest in the major money center banks.

Wednesday, November 17, 2010

QE Explained - Cartoon Style

Below is a video that has been featured on many blogs and has gone viral (over 1.3 million hits). It was so good decided to post it here also. Don't endorse all of what is said but it isn't to far off.

Catch Up

Wow it has been a long time. I have been traveling some and been busy with other things. It also gets tiring writing about the same story. If you look at the headlines over the last two years, little has changed. Why the market decides to care now or care 6 months ago and not care a month ago is beyond me. We have been here 3 or 4 times over the last two years. Are we on the precipice of this thing falling apart or does the governments still have some wiggle room to keep this going? Europe is again falling apart, U.S. muni bonds are blowing out like they haven't been since 2008, an anti move against the ponzi perpetrator - the Fed - is growing in momentum, obvious spending cuts going into next year, China pulling back- are we done or is this another false break and there is yet another move up? If we are done going up why now versus last August? Logic need not apply.

The chart below was on zero hedge. It is the most amazing chart you will ever see. It shows domestic equity outflows. It has been 28 weeks in a row with domestic mutual equity fund outflows. All time record. That is over 80 billion dollars. Somehow the market goes up. Who is buying? I don't know. The government? Investment banks? I don't know.

There are three really interesting things going on right now. China seems to be slowing, Europe is cracking, and U.S. muni bonds have sold off hard. All three are very dangerous going forward. I just don't know if there is another push higher or not. Europe is more dangerous than Wall St. gives it credit for. The bickering among European leaders is what will topple the Euro.

The NY fed manufacturing index was horrid. Worst drop since 2001 I think. Components that make up the number were also really bad. Tomorrow is Philly Fed. I think that number has more importance than normal. Will be interesting if it diverges or confirms NY.

Friday, November 5, 2010

QE Impact on Japan's Stock Market in 2001

I had been wondering about this. From David Rosenburg:

Let’s learn from the Japanese lesson with its QE experiment. The day the Bank of Japan launched the program on March 19, 2001, the Nikkei surged 7.5%, from 12,190 to 13,103. It went on to make a fresh high on May 7, at 14,529 (just under two months after the announcement) — rallying another 11%. Fully three-quarters of the post-QE rally to the May highs occurred in the first four days. And that is all she wrote.

Three months later, as it became painfully obvious that the real economy was not responding well to the shock therapy, the Nikkei index slid 16% to just over 12,000. Moreover, the day before 9/11 it had already tumbled all the way down to 10,500 (down 27% from the nearby post-announcement high and 14% lower than the day of the announcement itself!).

That is a huge move higher in a short amount of time on the QE announcement. My follow up question would be how much the QE was telegraphed. In otherwords did the market know QE was coming for sure like it was in the U.S. How much was the rally priced in here and how much do we still have to go?

Thursday, November 4, 2010

Ron Paul Is About to Totally Revolutionize the House Monetary Policy Panel


Odds are you haven’t heard of the monetary policy subcommittee. Officially known as the House Subcommittee for Domestic Monetary Policy and Technology, it’s a subdivision of the House Financial Services Committee that has mostly occupied itself with pressing questions of issuing commemorative coins and whether or not to eliminate the penny.

That’s about to change. Ron Paul, the Republican Congressman from Texas, is the ranking member of the monetary policy subcommittee, and when the next Congress takes over he’ll likely be the chairman of the subcommittee.

And Congressman Paul has some big plans.

“I will approach that committee like no one has ever approached it because we’re living in times like no one has ever seen,” Paul said in an interview with NetNet Thursday.

Paul said his first priority will be to open up the books of the Federal Reserve to the American people.

Time will tell how much power he will really have and how much he can really do. I have a feeling at some point this will be a big 2011 story.

Say Hello to Your Market God - Ben Bernanke

Well if there was any doubt left over how much the Fed really monopolizes everything, it should have ended today. EVERYTHING was up and UP BIG.

I thought Art Cashin said it best today when he said:

It is becoming far more evident that the true purpose of QE2 is not to hold down interest rates. It is, instead, to raise asset prices, especially stock prices.....QE2 is beginning to look like an open-air multi-month version of the PPT.

Bernanke has taken over the throne of market god and he believes he has the wisdom to know what asset prices should be. Let's not believe in the market and what prices the market sets but we need a czar to decide where stocks should goes.

What this means is the markets are firmly in control by the Fed and the markets will not go down until an event occurs that the Fed can't control. What would that look like? Europe fracturing at the seams. Or Japan. Or Ron Paul gets some power over the Fed.

It is absolutely amazing to me that the Euro continues to climb. Look at these bond spreads. European stocks are making new yearly highs also. This should be yelling danger.

The problem with this of course is the Fed is the market. This is no different than the upteen manipulations throughout history. Look at the chart below. It is a manipulated market and the manipulator eventually lost control. Can you tell which market it is?

This is of course the silver market and the manipulator was the Hunt brothers. So pretend you know it is a rigged market. You know it is going to crash but pretend that is all you could invest in. At what point do you invest? Do you go long and try to get out somewhere near the top? Do you short and if so where? 10, 20, 30? How long is it going to last? Because the graph covers such a large time frame you lose the sense of time. That was really a 3 to 5 year event before it all played out.

The market is bigger than any manipulator. Eventually the manipulator loses but it could take a long long time. Bernanke will lose this and it will leave a trail of tears but in the interim I have no idea how you or I or anyone elses successfully plays it without it just being a gamble.

Economic data hasn't been bad this week. I find it interesting that the market surged on the worst data of the week. Jobless claims were way above expecatations. A few more Americans lost their jobs. Perfect - the stock market can surge.

Tuesday, November 2, 2010

The Elections and the Coming of Spring

Most of Wall St. is focused on the Fed decision tomorrow. I think the election today has far more ramifications for the market than more QE which will distort asset prices but do little for the economy. Since February I have said, and written several times in various blog posts, that a huge Republican tea party led win would be extremely bearish for the markets and the economy. It seems we will get a chance to see if my thesis is indeed true. The economy at this point is a sham. The only thing propping it up is government spending and government transfers to the private sector. This is completely unsustainable but to keep the economy propped up and growing, not only do you need to maintain it but you need to grow it!!! Using play numbers but if the economy is $20 and the government spent $2 dollars the government is 10% of the economy. Next year the government spends $4 (a 100% increase) and assuming the rest of the economy stays the same causes the economy to grow 10%. (2 increase / 20) Of course that growth is very low quality growth and now the government is 18% of the economy. Well the next year all things equal (again assuming no private sector growth) the government has to spend $4 dollars just to maintain what it did previously. To have the same percentage impact as the year before the government needs to spend $6.20. (economy was $22, the government made up $4 and to get the same 10% increase needs to spend $2.20 on top of the $4 so needs to spend $6.20) Now of course that isn't all true as some of the spending may increase productivity or generate its own future growth (though most of government spending is waste) but the point is mathematically without strong productive private sector growth it becomes mathematically difficult for the government to continue to have the same impact. Add now a massive Republican win and the feel for a need of a balance budget, resisting stimulus measures, state and local budget cuts, and you are potentially looking at a massive black hole economically.

The markets are used to gridlock being good for the markets. It hasn't been gridlock that saved the economy or the market over the last several years. In fact it has been cohesion that Keynesianism is the right way to go. Think back to the fall of 2008 with the huge TARP senate bill that failed to get past. It was on all the tv networks and as soon as it failed the market plummeted. It was right before the election and many senators, especially Republicans, quickly switched their votes a couple of days later. That was gridlock and that started a collapse that was reversed. This time I don't think there would be any switch of votes to save banks and the more Tea partiers that win would ensure that. What has caused this massive market rally and extremely tepid economic recovery is massive government spending that was possible because and only because you had cohesive government to jam whatever had to be jammed through. Create gridlock and there is no more that can be jammed through.

There is an entire other aspect to this that Wall St. isn't looking at. Oversight of the Fed. Currently Ron Paul is the ranking minority member of the Domestic Monetary Policy and Technology subcommittee in Congress. What does that mean? Well he is line to take over the subcommittee chair. So what? Well that subcommittee is directly in charge of overseeing the Fed!!! So the individual who would like the Fed abolished will be overseeing it? Sounds like a friendly subcommittee. Of course Ron Paul won't be able to have the type of power to abolish the Fed but he will have the power to push certain legislation. His audit the Fed bill got gutted at the subcommittee level. Wall St. isn't talking about this at all but it seems to me to be HUGE!!!! It isn't a lock that Ron Paul will get that position. It used to be that the heads of subcommittees went directly based on seniority. Today that is still normally the case but you need to be favored by party leadership. That historically hasn't been the case for Ron Paul as he was looked as an individual with crazy views but Ron Paul's status has climbed in the last several years as he is associated with the tea party movement and is now seen as right on many topics he was previously ostracized for. This was John Taylor's take on the situation in his latest letter (Taylor is head of FX concepts - one of the largest currency trading shops in the world).

...After the Republican victory things will change. The Fed will be hamstrung, as Ron Paul, a conservative standard-bearer and harsh critic of the Fed, will head the sub-committee overseeing its actions. Liquidity expansion or new programs will probably drop sharply under his watch. Paul would argue that the Fed’s unfettered ability to “debase” the currency is about to come to an end.

This is potentially a landmark shift.

How will all this affect the markets. Well right now the markets are celebrating the idea of a split government. I don't think the markets realize how things will change. It is the absolute inverse of November 2008. Remember then the markets made a new low in March of 2009 after the elections as the markets (and me) failed to realize the implications of Obama and the democrats taking charge and the willingness to do whatever it took to get asset prices up. Even if it meant ponzism. The Democrats partnered with the Fed in an evil alliance to push asset prices and the economy up no matter what the long term costs. As a result of this faulty idea that gridlock is now good, the markets may have another day or several months of moving up on a Republican win (I personally think it will be a very short rally) but I think it will not take terribly long for the markets to realize that gridlock and a competing sheriff in town is not economic or ponzi friendly. In fact it is downright unfriendly. To keep growth going the government is going to have to continue to increase its overall spending. Right now that is not the way 2011 is materializing as state and local budget cuts take hold before the Republicans take over. Maybe the Republicans will again not act like Republicans after this election and take the free spending way of former President Bush but the influx of the tea partiers and the feel of 1994 when a Newt Gingrich conservatism swept the halls of Washington will probably keep the resistance up to the way it has been done.

This is also extremely dollar bullish as the Republicans will not be most likely making an alliance with the Fed who is hell bent on destroying the dollar. Ron Paul is as passionate about hard money as anyone around and his influence will grow as well as being joined by people who think like him.

A major shift is upon the markets. The Republicans will try to do the right thing. Unfortunately, I think currently the situation is unfixable. There were multiple chances to fixes over the last 10 years but the opportunity passed as the idea to hide it through banning short selling or changing mark to market accounting played into the current sham. On the outside chance it is fixable it means massive pain in the interim. The best analogy I can think of is some major disease. The doctor tells you that you need surgery but your chances of surviving surgery is about 10%. (If you would have surgery 3 years ago there was a 80% chance of surviving) If you don't have surgery you will live two years. That is all the time if you have left. If you do have surgery you will live for 30 more years. The democrats and the Fed are taking the route of living the year. The Republicans seem like they would prefer to take the chance of the surgery.

As John Burbank of Passport Capital said at the Value Investing Congress a few weeks ago, the United States now has to be looked at as an emerging market. No longer are the economic prospects as important as the political landscape. Washington matters much more than Wall St.

This election may just awaken the bears from a winter hibernation. For the bears, a Republican landslide may just be their spring as they stumble out of their dens from a long winter more grumpy than ever.

This has been my thesis for almost a year and it will be interesting to see if it plays out. One thing is certain. If I am right it proves yet one more time that the market really isn't a discounting mechanism at all. Just a drunk sailor where prices really carry no informational value. A far cry from what capitalism in the United States used to be.