I wanted to discuss a series of videos that I had a chance to watch today that featured Kyle Bass, of Hayman Capital, and Alan Fournier, of Pennant Capital Management.
Both of these hedge fund managers called the 2008 credit crisis and are very smart cookies. I believe Kyle Bass made a 600% return by shorting tranches of mortgage debt.
Take a close look below because there is some incredibly good insights by two extremely bright people about where we are headed economically.
I will have a few comments at the end:
As you can see above, even the smartest guys in the room don't have a good grasp as to where we head from here.
Alan was the first to admit that he is very "hedged". This is a nice way of saying I'm really not sure. You can see why the stock volumes are so anemic on Wall St when you listen to these two guys.
I thought Kyle's take on the markets were very interesting and he made a great point about Zimbabwe's stock market which has the best performing market in the world over the last 10 years.
What you have to ask yourself is are you really getting anywhere on a relative basis when the market goes up if the currency it is priced in keeps dropping.
The answer of course is no. This goes for any other assets priced in dollars as well.
A great example of this is seen here when you look at what gold has done in the US versus Europe as our currency continues to drop versus the Euro:
As you can see above, the fall of the dollar has decreased our purchasing power. The cost of gold keeps rising in US dollars. We are seeing the opposite effect across the pond as their currency strengthens.
You could look at a chart of any commodity and I sure it would look the same. Oil soared once again today.
The Bottom Line
The debasing of our currency is having a dramatically negative effect on our relative wealth versus the world.
If the Fed continues down this path of destroying the dollar then it will eventually bring down our standard of living because everything that's needed in order to survive rises in price.
As a result of this insanity, many people will be forced to live without many luxuries in this new world. Others may not be able to afford to live at all.
This is where the risk of social chaos kicks in. If a guy can't afford to feed his family he will take from someone who CAN in order to survive.
The recent surge in equities was explained nicely above. Fund managers are once again using old outdated financial models that are telling them to buy stocks.
Stocks are "supposed" to be a buy when the yields on stocks are higher than treasury yields. The problem is treasury yields are now close to zero.
Usually, corporate yields rise after stocks get pummeled in order to attract buyers.
The problem today is we haven't seen the sell off in stocks that usually triggers this "rising corporate yield" phenomenon which is usually is a signal to buy equities.
In other words: Treasury yields have dropped instead of stocks. This has triggered a false buying signal.
Corporate yields are basically the same because the market is holding up rather well.
IMO, as a result, I think the market has it wrong.
As I said yesterday, once oil gets over $100 a barrel the economy is going to be stopped dead in it's tracks. This will then hit earnings and we'll head right back down the crapper again just like we were in 2008 when the last commodity bubble hit.
The difference from 2008's bubble in commodities and today is the 2010 commodity bubble is a direct result of the Fed's reckless zero interest rate/cheap dollar policies. The 2008 bubble was fueled more by speculators as commodities turned into a Wall St. feeding frenzy.
The Fed is going to have a real tough decision to make in the near future. The way I see it they have two choices:
Risk hyperinflation and push the QEII button which then destroys our currency in a last ditch effort to stimulate the economy(which won't work).
Stop the QEII/bailouts and save the currency as they let the credit bubble burst which then triggers a deflationary collapse.
Tough choice. Glad my last name isn't Bernanke