The Real Housewives of Wall Street

“The Real Housewives of Wall Street” – by Matt Taibbi in Rolling Stone magazine (article recommended to readers of Jeremy Gratham’s latest quarterly letter, both below).

Below are articles/reports I have found interesting over the last week:

1. Oaktree founder Howard Marks discussed interest rate rises in a recent CNBC interview.

2. “Part 2: Time To Be Serious (and probably too early) Once Again”: Jeremy Grantham’s Q2 Investor Letter, May 11: “"I do not feel the same degree of confidence that I did, which was considerable, that the Fed could carry all before it until October 1 of this year. A third round of quantitative easing would very probably keep the speculative game going. But without a QE3, there seem to be too many unexpected (indeed unexpectable) special factors weighing against risk-taking in these overpriced times. I had recommended taking a little more risk than was justified by value alone in honor of Year 3, QE2, and the Fed in general. Risk now should be more reflective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and fixed income, manipulated by the Fed, also badly overpriced. Although the taking of some “extra” risk by riding the Fed’s coattails has been profitable for six months, I admit to being a bit disappointed: I really felt the market had the Fed’s wind in its sails and would move up deep into the 1400 to 1600 range by October 1, where it would be, once again, over a 2-sigma 1-in-44-year event, or, officially, a bubble. (At least in a world where GMO is the official.) At such a level, I was ready to be a real hero and absolutely batten down the hatches, become extremely conservative, and be prepared to tough out any further market advance (which, with my record, would be highly likely!). The market may still get to, say, 1500 before October, but I doubt it, especially without a QE3, although the chance of going up a little more by October 1 is probably still better than even. And whether it will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table." This week’s must read.

3. Here is the “The Real Housewives of Wall Street” article Grantham recommends reading by Matt Taibbi in Rolling Stone magazine.

4. “QE2 has transformed commodity markets into liquidity-driven markets”- recent report by Richard Koo: He makes the point that the relationship between monetary indicators breaks down during balance sheet recession i.e. velocity is in declining trend.

5. “How to Make Ireland Solvent” – by Daniel Gros. Here is Daniel Gros speaking at the IIEA on “Ireland and the Euro Crisis - Is There Light at the End of the Tunnel?". He thinks the external adjustment is key for solvency, and Ireland has adjusted from that perspective but he believes Ireland’s biggest opportunity lies in finding private sector-owned foreign assets to de-lever i.e. contrary to current EU directives, forcing the pension funds (who are the main holders of large foreign assets) to buy Irish government bonds. My understanding is that as a country we have a small net foreign debt, comprising large net foreign debt of the government and slightly less large net foreign assets of the private sector. These assets are held by pension funds and insurance companies. If the government can direct these (quite low yielding) assets to government debt (much higher yielding), we can avoid default. I am not convinced our new coalition government will be able to pull of what The Fidesz has managed to do already this year. [thanks AC]

6. “The Full Brady” – by Barry Eichengreen writing for Project Syndicate.

7. Profile of Ray Dalio, founder of the world’s largest hedge fund Bridgewater Associates, who in 2010, made more profit (c.$15bn) than Google, Amazon, Yahoo, and eBay combined.

8. “Extreme Conditions and Typical Outcomes” – latest market valuation piece from Hussman Funds.

9. “Will Aussie housing go bust?” - “Eventually people are going to realise that taking a 2 per cent pre-tax yield from renting a house that isn’t going up in value doesn’t make any sense, if you’re paying 7 or 8 per cent for the associated loan”, Mark Joiner, CFO of National Australia Bank.

10. Russell Napier interview with John Authers of the FT. As he pointed out in his recent note which I included in Macro Musings a few weeks ago, "whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." He further explained: "A risk to reflation would send equities sharply lower. The failure of QEII will undermine investor faith in a monetary solution. With equities near bubble valuations, based on cyclically adjusted PE, a failure to reflate risks major downside. The Fed will try again with a new package, but investors would do best by waiting to see how it plays out." His outlook is that first we will see another major deflationary shock, following which the Fed, already boxed in a corner, will have two choices: let major financial institutions fail, or proceed to monetize outright. Regardless of which outcome is picked, Napier's target for the S&P, which just happens to coincide with that of Albert Edwards is 400 (or somewhere in that vicinity).