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.

Great Quote on the Fed

From ZeroHedge:


Now if one studies history one finds out that the Federal Reserve was formed to prevent speculative panics, to maintain the value of the dollar, to preserve the purchasing power of the consumer, and to responsibly manage the nations money supply. Has an organization ever strayed as far from accomplishing its goals as the Fed?

-- Walter Zimmerman                 

What comes next?

Tech Bubble --> Market Crash --> Low Rates --> Credit Bubble --> Market Crash --> Low Rates/QE --> ???

The Quote of the Year

From David Stockman:

"I think the Fed is injecting high grade monetary heroin into the financial system of the world and one of these days it's going to kill the patient"

President Obama on Jon Stewart's Daily Show, October 27, 2010

Loved this exchange on the Daily Show Tonight:

Stewart: "I remember very clearly you said, you know, we can't expect different results with the same people. And I remember when you hired Larry Summers, ah, [pause; audience laughs], I remember thinking that seems like the exact same person..." [audience cheers and laughs]

Obama: "... and, in fairness, Larry Summers did a heckuva job trying to figure out how to ..."

Stewart interrupts: "You don't want to use that phrase, dude." [Stewart brings the house down]

Is a housing bubble brewing in South Delhi?

After looking at several residential flats (apartments/condos) in the posh South Delhi area, I am tempted to conclude yes.

First some observations: A new 300 yard (2200 square feet) 4 bed 3 bath flat bought directly from a builder in South Delhi's Greater Kailash (GK) neighborhood is currently quoted at $850,000 (Rs. 4 crore) for a price per square foot of $386. This place will rent for $1500 to $2000 per month. An older flat in the same neighborhood is going for about $691,000 (Rs. 3.25 crore) and rents for $1100 to $1600 per month.

Here's why I think there's trouble brewing:

1. Rent vs. Buy: The price to rent ratio for the new apartment in GK is over 35! At these prices, the rental yield is less than half the 7 to 8% you can currently get on a one year fixed deposit (CD) so the only reason to buy is if you believe that prices will continue to escalate i.e. The Greater Fool Theory. As we have seen with the Tech and Real Estate bubbles in the U.S., when prices are divorced from economic fundamentals i.e. the cash flows of the underlying asset, they eventually return back to earth.

2. Incomes: There's no getting around the fact that real estate prices are absurdly high compared to household income. Household income statistics in Delhi are very difficult to come by (please contact me if you have access to this data), but even today, a $50,000 annual salary is considered very good and a $150,000 to $200,000 annual salary is a king's ransom in Delhi. According to this slightly dated presentation (page 41) from the respected Times Group, only 5085 households in Delhi made over $200,000! Even at that salary the house I described above would be difficult to afford for two reasons. One, at the prevailing home loan rate of 8%+, this income would not qualify someone for a $700,000 loan. Second, the buyer may need to fork over 50% of the purchase price up front in cash (see the next bullet for details) which is a prohibitive amount. Indeed, I'd estimate that less than 2% of Delhiites can afford to buy a $850,000 flat in South Delhi.

Note: Furthermore, the price per square foot is high when you consider the fact that these prices are similiar to prices in Chicago or Los Angeles but the per capita income in Delhi at approximately $2000 per year (yes you read that right) is a tiny fraction of the per capita income of the afore-mentioned cities.

3. The 2010 Common Wealth Games: This is my favorite theory. The 2010 Common Wealth Games will be held in Delhi in October 2010. The total expenditure on the games by the Government of India is $17.5 billion. Assuming that 75% of that amount is spent in Delhi and assuming 30% "leakage" i.e. bribes (which many people assure me is a conservative estimate) we get a ton of money hitting the local economy through both legit and illegitimate channels. Sadly, $4 billion in "black" money will be transferred from tax payers to corrupt developers, engineers, and all the way down the food chain. Real Estate is a very popular (but not the only) channel for laundering this kind of money because a house that sells for $850,000 will probably be recorded on the books at $300,000 to $400,000 with the remaining amount paid in cash. If my theory is correct, we should see the rate of price appreciation slow down after the games end.

Note: The circle rate is the minimum government-set rate for valuation of land for residential use. These rates are typically much lower than the actual transaction rates in the housing market but properties are usually officially recorded at close to the circle rate in India to minimize taxes and registration fees, and to launder money.

4. Rapid Price Appreciation: According to the Makaan.com IQ property index, prices in the Delhi area are up 41.7% year-on-year. I could not find a South Delhi property index, but it's safe to assume that prices rose by at least that percentage in this area as well. For obvious reasons, this rate of annual growth is unusual and not sustainable, especially when prices in South Delhi dipped by less than 15% in 2008-09, if at all. If you believe this rate of appreciation is sustainable, please contact me because I have some properties to sell you.

5. What you actually get for that money: Finally, as nice as South Delhi is, it's no Beverly Hills.There is massive traffic congestion, inadequate parking, almost no sidewalks for pedestrians, as well as an erratic water and electricity supply. Furthermore, the recent monsoon rains have led to street flooding all over the place! Sure, these new direct-from-the-builder apartments have excellent fixtures and quality finishing, but not enough in my mind to be worth anywhere close to the current asking price.

In a future post: Why the $%#% are prices so high?

Thank you, Alan Greenspan

This ad for a 5 year 0.80% "High" Yield CD popped up when I logged into my Bank of America account recently. At this incredibly generous yield (applying the rule of 72) it'll take me a mere 90 years to double my money in nominal terms. Alas, by then I would have lost 99% of the purchasing power of this amount to inflation, and I would also have to pay taxes on the income.

Hmmm is it really any surprise that the equity and fixed income markets, as overvalued as they are, are showing such strength?