Tuesday, August 17, 2010

Market Rallies/Kyle Bass CNBC Appearance

The market finally rallied today as Home Depot and Wal-Mart reported better than expected earnings.  

However, when you read between the lines, neither company had many good things to say about the shrinking consumer:

"For two major retailers reporting quarterly results on Tuesday, consumers appeared to be holding back.

Steeper price-slashing did not lure customers into spending more at Wal-Mart, while shoppers at Home Depot spent less and put off big home improvement projects or big-ticket items like appliances.

Both Wal-Mart Stores and Home Depot posted second-quarter profits on Tuesday that beat analyst estimates, and both slightly raised their full-year earnings guidance for the year. Yet their results suggested that American consumers were not spending as much as had been expected."

As you can see above.  Both companies produced larger profits via corporate initiatives versus seeing a surge in the strength of the consumer.  Huge discounts at both failed to lure in customers.

I wouldn't put to much stock into today's bounce.  We were very oversold and long overdue for a green day.  I am hoping to see a little more to the upside because it's going to create a great opportunity to get into some short positions.

Kyle Bass

I wanted to put up some must watch videos from Kyle Bass who is the managing director of the hedge fund Hayman Advisors.  Kyle accurately called the housing bust, and became one of the youngest Senior Managing Partners at Bear Stearns at the age of only 28.

Kyle was featured on David Faber's Strategy Sessions today.  He painted an extremely gloomy global outlook for equities and especially Japan. 

Edit:  It appears video 1 was taken down.  I will check and see if they repost it.   Part 2 below is still up.

Take a look and I will have a some comments below:

My Take:

Kyle's best line was when he was asked if he was as concerned about where we are today versus where we were back then(2008).

His response:  "Let me asnwer you with a question.  How many of your problems have you kicked down the road have eventually gotten better?".  The response from the CNBC boys was :  "Good point".


Kyle pretty much shredded the European stress tests and is extremely bearish about Japan as well as global equities.  Mr. Bass predicts that Japan is very close to a restructuring which is a nice way of saying "economic reset". 

Kyle also brilliantly focused on the increasing risks investors have been forced to take as a result of the Fed's zero interest rate policy.

A quote from Mr. Bass on this topic:  "The Fed's policy is forcing people to make the wrong decisions" when it comes to investing.  I spoke a lot about this yesterday. 

He also talked about how Ponzi schemes can last a long time as long as you find more suckers to keep the game going.   Right now the USA's suckers are the ones that keep buying our treasury debt.  We all know that this isn't sustainable.  China was a net seller of treasuries for the second month in a row in June. 

Why wouldn't they be as treasuries soar to new highs?

The Bottom Line

Our Ponzi financial scheme will fail just like all the others.  The system is being kept together right now with a few band aids and zero interest rates from the Fed which has allowed our zombie banking system to stay afloat.

As long as this policy is the status quo our economy will not recover.  This place will look very much like Japan has the last 20 years. 

The debate moving forward will start to hone in on this zero rates policy in my opinion. 

The debate will center around these two themes:

A)  Do we take our medicine now and and suffer through a horrible short term depression as we restructure in order to create a viable recovery that has a strong fiscal foundation?


B)  Do we zombify ourselves like Japan has and suffer through a 20 year funk where we lose a generation of prosperity but do not immediately collapse?

I would choose option A any day of the week.  Who on earth wants to suffer for a couple decades?  Ripping the Band Aid off quickly is much preferable than a slow painful peeling!

If you listened to Kyle above, the Japanese response ends up with a restructuring anyway.  If this is the case then what's the point?

Unfortunately there are no easy answers to our problems.  The one thing I know is I want this thing over with as soon as possible.   History has shown us that short severe depressions can lead to quick recoveries.

A great example of this s the depression of 1920-1921.  You can read about it here.  Prices dropped 36% as severe deflation crippled the economy.  The government slashed spending in order to control our deficits.  This prudent rapid response then set the stage for one of the greatest periods of prosperity this nation has ever seen.

Wasting the hopes and dreams of a generation as we pull a Japan Part 2 would be a very sad thing to witness.  Hopefully our government will find the will to do the right thing and take the hit today rather than 20 years from now.

Disclosure:  No new positions taken at the time of publication.


Partisan said...

"A) Do we take our medicine now and and suffer through a horrible short term depression as we restructure in order to create a viable recovery that has a strong fiscal foundation?


B) Do we zombify ourselves like Japan has and suffer through a 20 year funk where we lose a generation of prosperity but do not immediately collapse?"

I used to think A, but now I am increasingly thinking B.

CPI in October 1929 was at 17.3. After the epic collapse, (and meteoric rise) it did not get back above 17.3 until April 1943. So basically, after we "ripped the band aid off" it took us 13 years to get back to where we were when we started. Thats a lost decade +3 years.

By contrast, what if the govt propped things up for that 13 year period, keeping CPI at around 17.3 the entire time?

Either way, you end up in the exact same place 13 years later. The only difference is you get all to avoid alot of the suffering that you would see in option A.

Not saying this is the right thing to do, but if you could be certain that you end up in the same place either way, im not so sure that A is so much inherently better than B.

Jeff said...


Yeah I hear ya.

Both options are really painful.

I am exhausted after 3 years of this economic slump. I can't imagine another 17 years of this!

Interesting data on the CPI. Thanks for sharing.

Herb said...

Its gotta be option "B".

The last time there was a real Depression, Patton led a cavalry charge in Washington DC to drive out destitute families.

I think people are better armed now a days and the Posse Comitatus Act still doesn't apply in Washington DC.

A repeat would spawn a hundred McVieghs.

Besides, a little zombification never killed anyone!

Jeff said...


Yeah, unfortunately people are also much better armed these days!

Hmmm...CNBC has now pulled both Kyle Bass videos. Just checked Zero Hedge to confirm because I knew they had them up too.

Conspiracy anyone? lol

Perhaps the plunge protection team decideed that was too much bear porn for the masses?? lol