Niall Ferguson at the Peterson Institute

From May 13, 2010

Fiscal Crises and Imperial Collapses: Historical Perspective on Current Predicaments

It's David Tepper's World

Part I


Part II

It's David Tepper's world (continued)

The famous interview in September 2010 that kicked it all off...

"Everything will go up"

Nassim Taleb on Charlie Rose

The author of the Black Swan talks about his new book “The Bed of Procrustes: Philosophical and Practical Aphorisms”

http://www.charlierose.com/view/interview/11516

Favorite Aphorism

"The Prophet is not someone with special visions, just someone blind to what others see"

Ben Bernanke

Helicopter Ben was completely fooled. He didn’t understand the risks of the system and thought we were in a great moderation.  He couldn’t figure out why the crisis took place and what the solution should be.

The System

The world is so complex that we need more “reserves” (buffers/redundancy) against unpredictability which makes the world less forecastable. For robustness in the system we need a lot of redundancy and a low level of debt (this will result in significant belt tightening). In a society with less debt bankers can be supremely incompetent but can’t hurt the system as much.

Example: mother nature gave us two kidneys. The exact opposite is debt – instead of having two kidneys, we borrow one.

Obama Administration

When Obama came into power he appointed people who were part of the system who got us into these risks. He should have immediately tried to “cut the cancer” similar to what Cameron did in the UK. Instead they converted private debt to public debt. They punished savers and bailed out debtors.

Stimulus packages “fragilize” the system further.

Bailouts

Two moral problems with bailouts:

1.      Innocent pays for the mistakes of the wrong doers

2.      Transferred debt and risk to future generations

Europe

Europe has less debt than the U.S. and thus is more robust. They also understood problem of too much debt early on.

Globalization

Not against globalization, but we need to understand that globalization reduces predictability and results in more winner take all effects – overspecialization (leading to lower inventory and more volatility) and fragility. As a result, globalization can destabilizing. It is not a panacea.

Overall Metaphor

In Korea in October 2009: someone from the IMF showed economic projections for 2010 through 2015. Taleb challenged him to show his projections for 2007 and 2008 that were made in the early 2000s. His main point: You should be as wrong as you want without affecting other people” i.e. the “expert problems” shouldn’t be allowed to hurt society.

Dan Fuss on Bloomberg

Daniel Fuss Says U.S. Interest Rates `Artificially Low'

John Brynjolfsson on Bloomberg

 Armored Wolf's Brynjolfsson Says Fed to Hold Rates as Long as Possible.

Marc Faber on Bloomberg

Faber Says U.S. Stocks Will Outperform Emerging Markets.

Marc Faber Trifecta

Faber on CNBC (Part I)



Faber on CNBC (Part II)



Faber on CNN

Interview with Jeff Gundlach from Double Line

An interview with Barron's New Bond King, who discusses the high yield and muni markets.

High Yield Market (Appears at the 2 minute mark)

“Priced to perfection market” with high volatility that will experience defaults.

Currently yielding 6.75% and priced for low defaults (currently under 1%, no defaults in January). The average default rate is 4% per year. The loss adjusted yield looks more like long term treasuries at 4.50/4.75.

Volatility of HY is like a 20 year treasury with 12 standard deviation, so don't compare to basket of Treasuries with a std deviation of 5. That spread vs. 20 year treasuries is only 225 bps.

Would rather buy long duration Ginnie Maes where he can get 6% with government guarantee.

The market is not about to collapse. Will give a decent recent right now but won't outperform treasuries.  We may not see defaults till 2013. 2009 and 2010 issuance was not good quality and it will take 3-4 years for defaults. Why did issuers take out low yielding bank debt for higher yielding bonds? Because of rollover risk (bank debt is short term).

Starting to see garbage issuance again - cov-lite. Never buy PIKs. Head for the hills when PIK issuance takes off.

People hungry for high yield. Not a fan of dedicating money to HY portfolio. Manager is forced to keep investing in the asset class regardless of valuations when fund inflows are strong.

Economy

Economy will be on a low growth trend line for a long time

Muni Market

The market has “bad fundamentals” and is “badly owned” - people buy because of a technical benefit - tax benefit - but not fundamental analysis. Similar to subprime – a Triple A market that had never traded below par.

Muni market is headed lower but agnostic on whether it will crash. Expects at least a 15-20% drop in muni market.  When markets start to fall, muni bond holders will sell out of fear.

What he likes

Long term govvies. Rate rise is overblown against a weak economy.

Equity Market

If deflation wins, we will see the S&P go down to the 500 level.

Notes from Ray Dalio's interview on CNBC

An extremely rare interview with one of the savviest investors out there. Some notes from the interview:

Independent Thinking
Independent thinking and creativity are essential ingredients for making money in the markets. Ego reaction to making mistake is one of the biggest impediments to successful investing. Defends his company's culture.

The Dollar
The dollar is likely to lose its reserve currency status gradually over the next 10 years. The dollar accounts for 2/3 of world's reserves and will probably go to 50% of reserves.  He expects big currency adjustments over the next couple of years (see below).

Emerging Markets
The world is divided between the debtor developed world (US, Europe, Japan - 47% of world GDP) and the booming emerging world (53% of world GDP). They are tied via currency links which leads to inappropriate monetary policies (and bubbles) since interest rates are also linked. He expects a seismic shift (in 2012) since developing will not be able to tolerate accelerated inflation and will have to adjust their currencies upward.

Per Capita income in China is 1/10 of the United States, but that is not borne out by their actual productivity difference. He would diversify into Emerging Market currencies.

US Equities
Relatively cheap and should benefit from currency depreciation. Most currency devaluations are beneficial for equities.

On the other hand, portfolios are concentrated in developed market stock and bonds. Investors should diversify into other assets, such as gold.

Gold
Most sovereign wealth funds and investors are underweight gold. Gold was and is money and should be a part of people's portfolios. Gold is a good store of wealth

The role of the Fed
The Federal Reserve prevented a serious depression.

The Deleveraging Cycle
De-leveraging events are rare. Dalio describes how the process of accumulating debt (leveraging cycle) works and how it eventually results in a bubble (financial assets cannot service debt). Eventually need to sell asset and cut expenses. The government needs to run deficits to make up for this contraction in private spending. That was 2009. 2010 and 2011 are transition years. Slack in the economy allowed increases deficits without inflationary pressures. You need the ability to print money to work your way out of a deleveraging cycle.

Rate of growth going forward will be limited to real income growth of 2% a year since we can't use debt to fuel growth. This will be with us a long time.

Inflation
Dalio expects inflation pressures in 2012. Long-term, there is a serious debt problem and paying down debt with real dollars or restructuring can have extremely ugly social consequences. This is a self-reinforcing negative cycle.

Best path is an orderly spreading out of the problem (aka inflation) -- don't need a high inflation rate for this to happen. This is very likely to be orderly. There are historical precedents for government inflating their way out of debt.

2011 and beyond
Should be a good year for equities. Sweet spot of the cycle. Late 2012 should be more challenging because of currency adjustments and competition with countries with strong economies for commodities. 2013 expects greater tightness of monetary policy and more trade-off between inflation and growth.

States and Munis
He would not hold munis but is not an expert on the area. Not comfortable giving an opinion.

Paul Ryan grills Helicopter Ben

The incomparable Jim Grant on Bloomberg

Bill Ackman and Michael Porter on CNBC

Well, really?

We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.

-- Ben Bernanke, 2010, on 60 Minutes

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

-- Ben Bernanke, 2002, http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

Shiller and Siegel on CNBC

Eco-nerd war! Siegel is wearing rose-colored glasses as usual ("market is very very cheap. buy buy buy"). Shiller is a beacon of sanity and is worried about the market's long-term valuation.