October 25, 2013
By Steve Blumenthal
Can you feel it? I feel it and I feel fine. Investor Optimism is rising once again and there is a clear sense of confidence.
So it is with an eye towards risk that I share two great discussions on how interwoven the global markets are to one another. The system is so much bigger and far more complicated than the academic models our leaders rely on (note the dialog in the Greenspan Interviews linked below).
We are living in highly manipulated and interesting times. I believe that risk is most present when we feel it least and least present when we feel it most. “Oh, and I feel fine”!
This week, I share the following:
- Grant Williams – Things That Make You Go Hmmm
- Alan Greenspan Interviews: Bloomberg’s Charlie Rose and Tom Keene
- Trade Signals – Investor Sentiment and Cyclical Trend charts continue to remain favorable though sentiment is once again nearing extreme optimism. Stick to a risk management game plan.
Grant Williams – Things That Make You Go Hmmm
Grant writes an outstanding letter and with permission from my good friend, John Mauldin, I share this most recent letter with you.
There are things we see, things we know, things we think we know, and of course many things we do not know. A business coach once said to me, “you just don’t know what we don’t know“ but I’ll help you. It took me some time to understand what he was teaching me. I still don’t know what I don’t know. My coach has me thinking. Lights are on and I’m looking. So what are we missing with the calm within the storm?
We all watched the walk to the edge of the fiscal cliff; we looked over the side and concluded: no big deal. Except maybe it is a big deal.
Grant adds, “with each successfully navigated new crisis, the reaction of the market the next time a crisis flares up becomes more muted. We’ve seen the spectre of a Lehman-style collapse dealt with, and now the phrase “… could bring the global financial system to its knees…” is shrugged off with alacrity.
We’ve seen the spectre of a European fracture, a Grexit, a Spexit, and the end of the euro taken off the table by determined governments and central bankers; and now, each fresh outbreak of the European crisis is greeted with apathy and ennui. (I wonder if the French have a word for that.)
And now we’ve seen the extent of the reaction to the US debt-ceiling debacle the second time around. I would describe it as “quizzical interest” at best. Why? Because the Nannycrats are continually telling us that everything will be OK, that we shouldn’t worry about things and ought instead to just Keep Calm and Carry On.
How bad has it gotten? Well, amidst the “hoo-ha on the Hill” recently, we saw one of the most bizarre things I’ve witnessed during the mayhem of recent years: Barack Obama’s telling Wall Street that they SHOULD worry:
(Huffington Post): A self-described “exasperated” President Barack Obama told Wall Street CEOs on Wednesday that they should not take for granted that the Republican-led House of Representatives will raise the nation’s debt ceiling by Oct. 17.
“I think this time is different,” the president said, when asked by CNBC’s John Harwood whether the financial markets were right to assume that the upcoming conflict would ultimately get resolved in time. “I think they should be concerned.
The reason Wall Street WASN’T worrying is that you and Bernanke and Geithner and Paulson (not you, John — Hank) and Yellen and the rest of the Crazy Crew have gone out of your way for five years to make absolutely certain that nothing bad ever happens again. Ever.
Why the hell WOULD they worry? It’s YOUR fault that they’re not. You just can’t have it both ways. That’s what moral hazard looks like, I’m afraid…”
Yet there is the very real fact that the academics at the Fed really don’t know what they don’t know and perhaps they are adding to the fragility of the system.
A whitty and important read. “We’ve got plenty, including the Shiller P/E, the burgeoning student loan problem, and Japan’s massive monetary experiment. There are interviews with Larry Summers (relax, it’s short)”, Grant exclaims.
Click here for the full letter. If you are interested learning more, go to www.mauldineconomics.com to subscribe. I too am a subscriber.
Greenspan Interviews
Continuing on the “We don’t know what we don’t know” theme, this excerpt from an Alan Greenspan Bloomberg interview: “How in the world did I and all the forecasters of note fail to catch the specific time when the break would occur?”
He goes on to say that he now accepts the behavior patterns of investors (animal spirits to self preserve) and has incorporated it in a model approach.
I’ve written quite critically of Greenspan over the years and simply shake my head as to what he found so new that many of us forecasted and profited from as a result of the crisis. This was never factored into his thinking? Are you kidding me? There are years of research on this topic. All he needed to do is call you and me and ask about some of our experiences in regard to client investment behavior.
At the seven minute mark, pay close attention to his comments on the international arbitrage that exists in the world and how that reality cannot be measured and controlled by Central Bank policy. Quoting my friend, James Rickards, “the Fed thinks it is adjusting a thermostat but they are playing with a nuclear control switch”.
This is what has me most concerned about the markets today. The Fed is not the only developed global central bank adjusting its switch. As you read Grant’s piece and listen to the Bloomberg interviews, I just want to highlight that we don’t know what we don’t know and when we flood systems with liquidity it has consequences, when we spend beyond our means it has consequences, when we get too deeply in debt, there are consequences.
At the 12:30 minute market, he is asked “Does a very large central bank balance sheet always and everywhere mean inflation is ahead?” Greenspan responds, “At the moment the reason we have no inflation is that the vast majority of the increases are merely a bookkeeping transaction from the central bank to the depository institution. A large New York bank can have no capital charges, no reserve requirements and it gets 25 bps for a bookkeeping entry. If large enough, that bank can make a lot of money. Until the bank lends that money out, there is limited pressure on inflation.”
The Fed is helping the markets for now. Be mindful of the developing risk. Like the skier looking at three feet of fresh, soft powder below, while it looks peaceful, just one more snowflake or a turn of force might be what causes the next avalanche. There are many diverse players with their own animal interests, money moves globally and it will move instantly to where it is treated best.
I wonder what Bernanke’s book will be about in five years or so from now.
Here is the podcast link: http://media.bloomberg.com/bb/avfile/News/Surveillance/vqSBmOvoGO6c.mp3
Can the Fed and the large global central banks pull it off? What don’t they know today, much like Greenspan didn’t know?
Just the mere whiff of Taper and the ultra leveraged fixed income traders run to the exit. How about the U.S. carry trade (leverage up and borrow U.S. dollars at near 0% interest rates)? Like a fast game of musical chairs and all participants thinking they’ll win the game, Bernanke squeaks Taper and the race to find the open seat begins – very large leveraged trades unwind. Bonds get crushed, the carry trade that fueled and burdened Emerging Markets unwinds and money comes home. I’m sorry – no Taper today and the trades reset.
A bank’s structured product desk trader makes a fortune risking none of his own capital. His boss encourages this behavior as he too benefits in a year-end bonus. Regulations allow banks to prop trade allowing less incentive to make actual loans. Animal spirits indeed. We don’t know what we don’t know.
I believe we should get the derivatives off the banks’ books and trade them on an exchange and raise the capital requirements. Until then, be careful who you are banking with and proactively risk protect your investment portfolios. I’ll have more on the subject of banks in next week’s Blumenthal Viewpoint.
Ok, depressing enough. Just keep in mind that there is risk and it is unlikely that a Superman or Superwoman resides inside of the Fed. They just might be a major part of the problem.
The book road show is on. Here is a link to Alan Greenspan’s interview by Charlie Rose. I just love Charlie Rose interviews. At the four minute mark, Greenspan is asked about Dodd-Frank. While there is much about the bill he doesn’t like, he shares what he does like and believes it imperative to increase the capital requirements at our banks. Amen brother.
Trade Signals – Investor Sentiment and Cyclical Trend Charts Continue to Remain Favorable Though Sentiment is Once Again Nearing Extreme Optimism. Stick to a risk management game plan.
Click here for this week’s sentiment charts and short commentary.
Some concluding comments:
It’s been a good week for me and I hope you as well. I’m thrilled with the liquidity fueled markets; we are benefiting and I’m starting to feel pretty good. I noted in this week’s “Trade Signals” that investor sentiment is nearing Extreme Optimism. It is that good feeling that is starting to concern me.
Please feel free to share this piece with your clients if you find it appropriate. They can also go to www.cmgwealth.com and put their email address in at the bottom of the home page to sign up.
Wishing you the very best.
Have a great weekend!
With kind regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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