I haven’t had a CNBC feed on at the office for a couple of years now. I used to watch it fairly regularly, but eventually I tired of their attempts to cause on air conflict rather than just reporting the news. Nowadays I watch Bloomberg TV and although it is not perfect, I find it much more professional, and more importantly – infinitely more watchable.
I therefore missed yesterday’s kerfuffle on CNBC between the Rick Santelli and Steve Liesman. But my twitter feed was filled with comments about the exchange, so I took a minute out of my life to watch the following clip:
Watching the shouting match reaffirmed my desire to never tune into CNBC again, but I did find the vehemence of the bulls quite enlightening. The in-house economist Steve Liesman’s confidence in which he dismissed Rick’s concerns about the long run implications of the current monetary policy was evident throughout the clip:
“Your call for inflation, the destruction of the dollar, the failure of the US economy to rebound – Rick it is impossible for you to be more wrong. The higher interest rates never came, the inability of US to sell bonds never happened, the dollar never crashed. Their isn’t a single prediction that has worked for you.”
I think this exchange can best be summed up by Tsachy Mishal’s terrific tweet:
I find most of them on CNBC annoying, and probably nobody more so than Rick Santelli. But I think that Tsachy’s observation that this sort of bear bashing does not happen at the beginning of bull markets is the important lesson.
This sort of bear bashing only happens when the bulls are feeling confident… over confident. If they weren’t so sure of themselves, they wouldn’t have the swagger to pound all Santelli’s doomsday calls over his head.
Although I will admit that at times I have been a little too much in Santelli’s camp in my worries about inflation, I am not sure that anybody should be taking victory laps about recent economic policies.
Greenspan’s easy monetary policy following the dotcom crash and the Bush tax cuts in the midst of two wars, delayed the disastrous economic consequences from the terrible policies of the early 2000s until 2007. I still remember Cheney saying in late 2002, “You know, Paul, Reagan proved deficits don’t matter.” This arrogance from Cheney set the tone for a series of policies that for the longest time seemed to fly in the face of the economic worry warts. But of course everyone with half a brain knew that deficits do matter, and that you cannot simply print and spend your way to prosperity.
Economic consequences take a long time to reveal themselves. Yes, you can fake it for a while, but eventually math is math, and the numbers don’t lie.
Let’s reflect about this recent exchange on CNBC. Try to think back to other times when you have seen a group of pundits so sure of themselves. Then think about how many times they have been right or wrong.
I know the Market Gods have more patience than I, and they do indeed watch CNBC. They were no doubt not pleased to see the smugness that Liesman attacked Santelli. My suspicion is that before this is all through we will be playing back that clip and laughing at the arrogance of the CNBC pundits in dismissing Santelli’s worries.
Moving my short over to Europe
A week or so ago I aggressively shorted equity futures, adding a S&P 500 and Nasdaq short to my existing long put position. My timing was looking good as I put the position on before the big gap down, but since then it has been a one way ticket higher.
The bid in the US equity market has been relentless. Although I am not getting less bearish by any means, I am going to play a little defence with my portfolio.
I might not agree with the US market’s resilience, but there is no reason arguing with it. There is a trading axiom that goes something like this – “a good trader would rather make money than be right.” Well, let’s hope this is a step in the direction of being a good trader and not simply flailing around making more of a mess of my position. Yesterday I covered the futures portion of my US stock market short (I left my long put position intact) and replaced it with a short European stock index short.
The US stock market refuses to show any signs of weakness, but across the Atlantic stocks are definitely weighing heavily.
S&P 500 (white line) vs EuroStoxx (yellow line)</a> </div>
I have long been a European stock market bear, and in fact I am already short. Why fight the constant rise in the S&P 500 when the European stocks are already showing that they want to go down?
Dennis Gartman has a line that he uses all the time in his newsletter about throwing bricks into the wettest paper bag. Although I find that Dennis too often chases markets and ends up buying false breakouts or selling holes, I agree in principle that you are better off being short the weakest market.
So I hope I am not pulling a “Gartman” and selling the hole of the recent European stock market weakness. I feel that the US stock market strength is simply too hard work being short and would rather move it over to the “easier” market. For those that are bearish on US stocks and have been waiting for the sign to add, my giving up on the short futures portion of my position might be the all clear sign. Go ahead and add to your short – when mopes like me are giving up fighting it, you know you are getting
close to the top.
Banco Espirito Santo Bond freefall
Although many market pundits are bullish on Europe, I think that the ECB is way too tight and that they are making the same mistakes as Japan did in the 2000s. At the core of my argument is the idea that changing the price of credit does very little to help the economy in a balance sheet recession.
And in case you don’t think that Europe is experiencing a balance sheet recession, have a look at the chart of the bonds for the Banco Espirito Santo:
BES Bonds due 2023 in free fall</a> </div>
The problems in the Portuguese banking system are symptomatic of Europe’s long term challenges. If BES is having trouble funding themselves in this environment, I hate to see what is going to happen when liquidity once again gets distributed by adults instead of drunk Central Bankers.
Yellen has no clue about the risks she is taking
During the last couple of months, the market has been erring on the side of expecting Yellen to ease up on her dovishness. Going into events like today’s Senate hearing, the market had in the past assumed that Yellen would use the recent tightening of the labour market to set the stage for an eventual move higher in rates. However the market has been consistently surprised at Yellen’s dovishness.
After being burned by her reluctance to even acknowledge the risks from her easy policies, the real question is how much the market has now discounted in terms of her testimony. I don’t think anyone is assuming that she will err on using this opportunity to set the table for higher rates.
At this point, I think the markets’ are fully aware of the full extent of Yellen irresponsible dovishness. In the recent New Yorker profile the money quote from Yellen was;
“And so even when the headwinds have diminished to the point where the economy is finally back on track and it’s where we want it to be, it’s still going to require an unusually accommodative monetary policy.”
There is no excuse for the market to make the same mistake this time. There is no way they can be expecting Yellen to be anything but extremely easy.
Therefore you need to ask yourself where today’s surprise will come from. I guess there is always a chance that Yellen back tracks from her stupidly easy attitude. That will definitely spook the market.
But there is also a chance that her continuation of refusing to acknowledge the risks to the upside actually backfires and worries investors.
I think we are hitting a point where the market might realize the true cluelessness of the Fed. Don’t forget David Einhorn’s $250,000 lunch with Bernanke where he was frightened by the lack of a plan from the former head of the Fed. Investors are mistakenly assuming that the Fed knows what they are doing. This massive expansion of their balance sheet is one huge giant science experiment that could easily go wrong. The lack of hubris from the head of the FOMC about this possibility is indeed frightening. At a certain point the refusal to acknowledge these risks will be market negative. We have seen small signs of this sort of reaction, but so far it has been muted. I expect “the Fed has no clue what they are doing” sell reaction to pick up in the coming months.