This blog post originally appeared on RealMoney Silver on June 8 at 7:56 a.m. EDT.
Yesterday afternoon, I had a fun time on
"Fast Money" halftime report.
After the show, I
to Jim "El Capitan" Cramer and the "Fast Moolah" crew.
'Fast Money' Challenge
06/07/2010 1:14 PM EDTI was just on "Fast Money's" halftime segment on CNBC, and I was comforted by the unanimity toward an unfavorable market view. That appearance further confirms my views that an exaggerated lift in risk premia is the source of the month-long decline in share prices, not a material change in fundamentals. Accordingly, I would love the "Fast Moolah" group (and Jim "El Capitan" Cramer) to respond to the following observations: What sayest all of you?
- Despite the hyperbole (and fear of lower stock prices), there remains no evidence of stress in funding or in liquidity in European banks over the last week.
- Nor are credit spreads, while up from a month ago when equities were much higher, at levels that show stress either.
- What has happened is that stocks have fallen because of a combination of hyperbole and the frightening void (and loss of confidence) exploited by high-frequency trading strategies (in the face of hedge funds' "de-risking" and in the absence of retail domestic equity inflows).
- In support of my view, Barclays, ISI and Morgan Stanley raised their forward U.S. GDP forecasts.
Both Jim and Brian Kelly provided thoughtful responses to that challenge. I really appreciate the time they put in to respond!
. (I will respond to Jim's column later this week.)
And here is Brian Kelly's detailed response to my "Fast Money" challenge and my point-by-point responses back to him:
After the "Fast Money" halftime report on Monday, Doug Kass offered a challenge to the "Fast Money" crew -- he posted four observations supporting his view that the recent sell-off was/is exaggerated and that the weakness represents a buying opportunity. For full disclosure, I believe that we are experiencing the failure of the greatest Keynesian experiment since the Great Depression. I am short U.S. and global equities via ETFs and options positions ... now back to the challenge.1. No evidence of stress in funding or liquidity?Really?Below is a chart of deposits at the ECB, which have reached an all-time high!Banks receive 0.25% for depositing money at the ECB as compared to 0.32% in the money market -- the implication is that European banks would rather earn less than lend to each other. (This is completely contrary to any profit maximizing assumption used by economists.)
Brian, I am aware of this -- it helps to explain the recent rise in Libor. European banks remain scarred by 2008's experience and are reluctant to lend to each other based on the perception of growing sovereign credit risk. Normally this would be expected under the present circumstances, but the ECB is now a buyer of debt and the E.U./IMF is providing liquidity for at least the next two years. So, I view this as temporary, and I expect this spread to settle back lower.
2. Credit spreads are not at levels that show stress.Credit spreads are not significantly lower either! As I have repeatedly stated, the markets are in the "eye of the storm" -- that is to say a period of quiet before the downtrend continues. This is not a time to look for bargains; it is a time to preserve capital. Markets do not trade in a straight line; there are ebbs and flows.
Brian, As I have
, one of the most important rates, Libor, has risen somewhat but remains substantially below 2008 levels.
3. Stocks have fallen on a combination of hyperbole and loss of confidence. I could not disagree more.What has happened is the largest Keynesian experiment since the Great Depression has failed and the markets are beginning to wake up to this new reality.De-risking, de-leveraging and deflation are what lay ahead. This is not a generational buying opportunity; on the contrary, a series of sovereign defaults in developed nations may set up the greatest shorting opportunity any of us have seen in our careers!
Brian, the generational buying opportunity I referred to was March 2009, not June 2010. As I said on "Fast Moolah," I see some rays of sunshine, but I wear my raincoat to work every day!
Tactically, I am expanding my modest net long invested positions slowly as prices drop ever lower, conscious of UCLA Coach John Wooden's wisdom: "
is a more comprehensive picture of my view.
Finally, I don't share your view on sovereign defaults as I believe worldwide economic growth, though shallower than was expected six months ago, will be steady, allowing the more vulnerable countries to grow out of their problems in a setting of reasonable cooperation. The reference to the Keynesian experiment is hyperbolic! It's too early to make that conclusion. Already countries such as Hungary have instituted austerity measures mandated by the IMF. Others will likely follow suit.
4. Investment banks raise their GDP forecasts?These are the same banks that did not foresee the largest housing bubble in U.S. history and needed to be bailed out. Do we still have confidence in their forecasts? I would ask, When have economic forecasts been correct? Economic forecasts are notoriously late in identifying turning points.Further, I would challenge Doug to answer this question: The entire bailout and recovery is based on Government ability to finance debt, which is based on GDP growth -- what do we do if (gasp!) economic forecasts for GDP growth are wrong?
Brian, no one has been more skeptical of Wall Street research than I have over the last 10 to 15 years. That said, I have high respect for the economic departments at Barclays, ISI and JPMorgan, all of which raised their second-half GDP forecasts. In terms of the government's ability to finance debt, I would make the point that the term structure of interest rates is at a level well below government forecasts, ergo, the interest rate component of refinancing is currently cheaper than estimated!
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds were long JPMorgan Chase, although holdings can change at any time.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.