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Once bullish, contrarian Jim Grant likes cash now


stahleyp
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He lost me when he said:

 

Ben Bernanke keeps saying that what we really need is a little inflation. He says we'll get 2 percent or a little bit more. You shouldn't even think that, let alone say it out loud. That's such bad luck to tempt fate by saying that you can calibrate things like that. You can't do that.

 

Did he want Bernanke to knock on wood?

 

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10% inflation means treasury rates of at least 10% which means bonds and most stocks get killed because their current earning power becomes less attractive compared to the risk free rate.  Inflation is already priced into most commodities, what asset class provides the same optionality as cash?

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As Grant frames it, ultimately the decision to continue quantitative easing will be a political question. Just how independent is the Federal Reserve? Whether inflation should manifest seems to hinge on whether you believe quantitative easing will continue.

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10% inflation means treasury rates of at least 10% which means bonds and most stocks get killed because their current earning power becomes less attractive compared to the risk free rate.  Inflation is already priced into most commodities, what asset class provides the same optionality as cash?

 

Bingo.  Well said.

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10% inflation means treasury rates of at least 10% which means bonds and most stocks get killed because their current earning power becomes less attractive compared to the risk free rate.  Inflation is already priced into most commodities, what asset class provides the same optionality as cash?

 

Bingo.  Well said.

 

Very well said, I am raising cash which is something most of you know I dont like to do. At 10% real rates, most Americans will be quite happy having money in the bank earning interest. Hell 6% real rates would be amazing right now. I think after rates rise and stock prices fall insurance will be quite interesting. I am not sure though if there will be inflation or deflation, I do know that outside of large cap tech and a few things here or there - there are few values which is why I am raising cash.

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10% treasury rate? What would be the mortgage rate? US will collapse with that. I don't see that coming at all. I see inflation coming but not to that magnitude. And inflation only really hurts if income don't increase or even decrease, right? If econ is growing again, US can stand a mild inflation without collapse.

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^ Yep, such scenario would result in overbearing interest cost for governments worldwide, not just the US! And given the expanded role governments have come to assume in powering the economy, government defaults would lead me to go stock up on canned tuna and bottled water! In other words, it's fun to talk about, but not so much to live through.

 

It's a sure way for Grant to get our attention though.  ;D

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10% inflation means treasury rates of at least 10% which means bonds and most stocks get killed because their current earning power becomes less attractive compared to the risk free rate.  Inflation is already priced into most commodities, what asset class provides the same optionality as cash?

 

Bingo.  Well said.

 

Very well said, I am raising cash which is something most of you know I dont like to do. At 10% real rates, most Americans will be quite happy having money in the bank earning interest. Hell 6% real rates would be amazing right now. I think after rates rise and stock prices fall insurance will be quite interesting. I am not sure though if there will be inflation or deflation, I do know that outside of large cap tech and a few things here or there - there are few values which is why I am raising cash.

 

I still prefer the 12% to 15% rates certain large caps bring me at current valuations.

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I still prefer the 12% to 15% rates certain large caps bring me at current valuations.

 

True. Im probably not the best guy to listen to. I went into the last crisis on margin after 2-3 good rookie years. I want to have excess capital on this next one. I dont know if something massive will happen, I just know there isnt much to get excited about. I would rather hold the cash, though I will likely pickup a few large cap leaps. There have been people who have been doom and gloom since 2008. They have been early or wrong (basically the same). I have ignored them because there were deals which suited me. Now its not much out there......

 

I will probably only get to 30% cash though.

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"At 10% real rates, most Americans will be quite happy having money in the bank earning interest. "

 

If inflation is 10% real rates will be 0%. Most Americans will be quite unhappy earning nothing in an inflationary world as they are now in a dis-inflationary world. No world promises a real return since even deflation is likely to produce a loss due to recession. To get a real return one must invest - under all possible scenarios. So given all the macrotalk, investing is still the right thing to do if you want more money.

 

 

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I still prefer the 12% to 15% rates certain large caps bring me at current valuations.

 

True. Im probably not the best guy to listen to. I went into the last crisis on margin after 2-3 good rookie years. I want to have excess capital on this next one. I dont know if something massive will happen, I just know there isnt much to get excited about. I would rather hold the cash, though I will likely pickup a few large cap leaps. There have been people who have been doom and gloom since 2008. They have been early or wrong (basically the same). I have ignored them because there were deals which suited me. Now its not much out there......

 

I will probably only get to 30% cash though.

 

A major bear market may come back (will come back) but it may take a few more years. My experience is that 2003 to 2008 was a period full of "it is going to crash again" and it took 5 years to get there. When it happened, I actually made money on CNQ while stuff was already crashing all around. And by being in BRK and some other undervalued large caps I could turn around at minimal cost and go for more undervalued without taking almost any mid-term loss. But I would tend to agree that if this catches us now, cash is #1!

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I don't see the 10% inflation except for a fleeting period where prices will decline if the economy cools off.  Really high inflation is caused when large inputs into the products and services we consume go up.  Most of the value of things we consume come from labor and other inputs whose prices are going down.  In third-world countries this different bacuse thier basket includes larger portions of commodities.  With cash though you would get a good return in either scenario so I can understand the recommendation.  I still think there are cheap niches and derviative (LEAP calls and puts) values out there.

 

Packer

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I like cash as well, I think he is wrong on the 10 percent interest rates tho. Look Europe right now is in worse shape as far as balance sheets are concerned than the US was when the run was started on the investment banks and then the rest of the banks. If Greece or Ireland goes there goes the European banks they pretty much all are dominoes at that stage, how the heck do you cobble togeteher a tarp program quantitative easing etc. which is all that stopped the US from the abyss, with the current form of European govt, the answer is you can not. They have no way to inflate their way out of this the amt of money that is destroyed if the Euro comes apart is too much for me to comprehend. I think you could see a situation where both gold and the US dollar spikes and everything else does the opposite. I also think it just might start next week. If I see unusual weakness in the Euro US cross when it starts trading in the far east on Sunday night my time be prepared for some fireworks. I also think that the ultimate source of all of our problems is the fact that exchange rates are fixed between the the worlds largest trading partners and the worlds largest creditor and debtor nations. For the capitalist sytem to work there has to be winners and losers we can not all be winners we can not all be above average. The US is going to survive this but get ready for higher taxes AND no medicare. Both sides of the political debate are going to have to give up what they cherish the most to dig out of the fiscal hole they have dug for themselves. Sorry for the rant and the negative tone but I think the world is about to get a whole lot more interesting again.

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I am facing exhaustion.  Last 10 years have been something else -- 50% drop in .com collapse, 50% drop in credit crisis.  Will the markets really go down 50% for the third time in 15 years?  Aside from including the Depression, there has been no other period like it in the past 100. 

 

It's like people are always talking about the next collapse around the corner, and then there is one!

 

Why does this have to keep happening to us?  At this pace there just may be 20 yr olds in the coming years ahead who will be able to say the market was higher back when they were born.

 

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Why does this have to keep happening to us?  At this pace there just may be 20 yr olds in the coming years ahead who will be able to say the market was higher back when they were born.

 

I think a number of things are causing this:

 

- Technology is playing a huge role.  The speed with information goes from one person to another...one investor to another...unprecedented.

- Huge pools of both investor and speculative capital, including dark pools of capital...includes P/E, hedge funds, HFT, offshore accounts, pension plans, massive endowments, etc.

- Expansive global entrepreneurship...perhaps a new era of sorts that could last a generation...BRICS, other Asian & South American countries, Eastern Europe, etc.

 

These factors, and I'm sure a number of others, are compressing timeframes.  When was the last time a company like Microsoft was displaced in less than a decade by a company like Google...then Google displaced by Apple...and Apple could soon be displaced by Facebook!  This compression leads to volatility that may actually benefit the value investor...so it's not all bad!  ;D  Cheers!

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I think a number of things are causing this:

 

- Technology is playing a huge role.  The speed with information goes from one person to another...one investor to another...unprecedented.

- Huge pools of both investor and speculative capital, including dark pools of capital...includes P/E, hedge funds, HFT, offshore accounts, pension plans, massive endowments, etc.

- Expansive global entrepreneurship...perhaps a new era of sorts that could last a generation...BRICS, other Asian & South American countries, Eastern Europe, etc.

 

What about the end of a credit cycle also (in the west)?

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I am facing exhaustion.  Last 10 years have been something else -- 50% drop in .com collapse, 50% drop in credit crisis.  Will the markets really go down 50% for the third time in 15 years?  Aside from including the Depression, there has been no other period like it in the past 100. 

 

It's like people are always talking about the next collapse around the corner, and then there is one!

 

Why does this have to keep happening to us?  At this pace there just may be 20 yr olds in the coming years ahead who will be able to say the market was higher back when they were born.

 

 

The problem is that sometimes they have to repeat it for years before it truly happens.

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Relevant to the topic at hand:

 

What happens when Greece defaults

 

What happens when Greece defaults. Here are a few things:

 

- Every bank in Greece will instantly go insolvent.

 

- The Greek government will nationalise every bank in Greece.

 

- The Greek government will forbid withdrawals from Greek banks.

 

- To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

 

- Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

 

- The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.

 

- The Irish will, within a few days, walk away from the debts of its banking system.

 

- The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.

 

- A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.

 

- The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.

 

- The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter.  On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)

 

- They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.

 

- There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.

 

- This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.

 

- Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.

 

- Attention will turn to the British banks. Then we shall see…

 

http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/

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The way I see it, right or wrong, is that there are a bunch of really great investors who are bearish along with Grant. I suppose one could make the argument that they are bearish because of Grant, too.

 

Klarman -

 

http://www.senseoncents.com/wp-content/uploads/2010/09/Seth-Klarmanm-Interview-Financial-Analyst-Journal.pdf

 

Romick from FPA -

 

 

http://www.fpafunds.com/news_05052011_valueinvesting.pdf

 

Watsa -

 

http://www.gurufocus.com/news/105553/prem-watsas-fairfax-financial-bets-174-million-on-deflation

 

Einhorn -

 

http://www.nytimes.com/2010/05/27/opinion/27einhorn.html?pagewanted=all

 

About the only one I can think of that is Bullish is Buffett. I wonder if he's looking more out over a 20 years period. Though he was wrong about the subprime crisis.

 

http://www.marketwatch.com/story/buffett-says-subprime-crisis-not-a-big-threat-to-us-economy

 

 

 

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About the only one I can think of that is Bullish is Buffett. I wonder if he's looking more out over a 20 years period.

 

Quoting from the 2010 annual letter:

 

In 2011, we will set a new record for capital spending – $8 billion – and spend all of the $2 billion increase in the United States.

 

A housing recovery will probably begin within a year or so.

 

Watsa also thinks his stocks like JNJ, WFC will increase significantly in value over the coming years (it says so right there in the annual reports).  He is just pessimistic about the market as a whole.

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