Washington, DC -- (ReleaseWire) -- 02/02/2015 --BENNETT: Michael Belkin is the publisher of the Belkin Report and a consultant to domestic and international hedge funds and institutional investors worldwide. Michael, welcome back to Financial Myth Busting.
BELKIN: Thanks for having me, Dawn.
BENNETT: Michael, the actions of central bankers around the globe have been driving the major industries higher. Do you believe this is a sign of control, or do you believe it is a sign of desperation?
BELKIN: Absolutely desperation. You really put your finger on it. So, having financial markets go up, it's sort of like the Roman Empire where you give bread to the masses and they don't riot. A stock bubble is kind of bread for the masses of the people who pull the levers and turn the dials. (Federal Reserve Chair) Janet Yellen comes from UC Berkeley, which is where I come from, the Business School. I sit through her presentations and she's not very impressive, to say at least. She puts everybody to sleep, in the alumni meetings, it's the Treasurer of Facebook and all these people from Silicon Valley, and everybody is kind of slowing by the time she speaks for ten minutes. But what's worse is, she is a boring speaker, but the substance of what she says indicates that she doesn't realize what leverage creates. The Fed just got done with its QE 3 quantitative easing program which was $85 billion of new credit creation a month It's not happening anymore, but the stocks have have continued to float up. But that leverage has gone into all kinds of crazy nooks and crannies, leveraged loans, this and that. I think that the oil price break represents the beginning of the end for bubble financial markets. So oil was going along swimmingly at 90 to a hundred bucks, and all of the sudden, it's down in the 60s. And that has all kinds of ramifications when there are a lot of derivatives outstanding on oil. And what's more, there are a lot of other things that, like crude oil, were up there floating along swimmingly, like emerging markets, and emerging markets currencies and things that are related to oil. So I think we are in the beginning of a deleveraging in global financial markets. I just returned from London, saw a lot of hedge fund clients, and it's a weird market out there because the indexes are at all-time peak—U.S. indexes not European ones—but we've got all kinds of stocks down by two digit percents. Twitter down 44 percent, from the recent peaks. Netflix is down 27 percent, Google—Google down 14 percent from its recent peak. Facebook down 5 percent, Amazon down 22 percent. I mean oil stocks down 30-40 percent, Yelp down 45 percent, LinkedIn down 14 percent, Caterpillar down 11 percent...
BENNETT: And yet the Dow keeps running. I don't think that Yellen understands the concept that liquidity does not create solvency.
BELKIN: Absolutely not. And one very astute client in London pointed out to me that they brought in Stanley Fischer to be the adult in the room, which is kind of scary. In other words, Stanley Fischer was the professor at MIT of Bernacke and all these people, he trained them in the Keynesian stuff. So he's been around a lot longer and he's more experienced, yes. His last job, his last gig was as head of the Israeli Central Bank, where they bloody bought stock index futures and Apple. The Bank of Israel buys Apple shares, so that's what we are facing with the people who are pulling the levers and turning the dials. They just won't stop.
BENNETT: The Austrian School of economics believes that great harm can result when a Central Bank holds interest rates at low levels for a long time, because it keeps cheap money coming into investments across the country. And eventually, it's going to prove uneconomical, and eventually it goes sour. I think that is happening here in the United States. Do you agree with that?
BELKIN: Absolutely. It's malinvestment. Here is the biggest implication of what you've just said. So the Fed drops interest rates to zero, and they print money like crazy and they deliberately force mom-and-pop U.S. investors into stock and junk bonds. Now, junk bonds are an accident waiting to happen. I said crude oil all of the sudden fell 30 percent from 100 to below 70, so the junk bond market is really an accident waiting to happen, and it's started to trade down. For instance, JNK is an ETF on the junk bond. It's down 6 percent from its top, it's down 3 percent year-to-date. If you start getting into a junk bond deleveraging, you are starting to look like 2008. So in the 2008 liquidation, it was mortgage bonds which led the decline, there was the housing bubble and there was all this weird stuff. This time, mortgages aren't really the epicenter of where the problems are. Junk bonds are the problem. When I go and see clients in Midtown Manhattan, I go up and down elevators in these 60-70 story buildings, and on every floor there are like ten hedge funds, in 30-40 buildings. So there are just hundreds and hundreds of hedge funds—and some of them are my clients. A lot of them are just doing weird, arcane strategies and leveraged loans. Basically, the credit that Yellen and the Fed created have gone into all these weird speculative strategies and when you get into a deleveraging, you get a margin call, you have to sell, and then that drives the price down and somebody else gets a margin call and it gets into this vortex of liquidation that we witnessed in 2008. I think we are facing that in the junk bond market.
BENNETT: Is the junk bond market telling us that there is only so much debt an economy can take on?
BELKIN: Absolutely. And another part is leveraged loans. So the leveraged loan market---and people don't really know that much about it—it's a big part of financing oil exploration and stuff. So to give you an idea, the Fed is now worried about leveraged loans, they are all of the sudden sending warning signs saying there are problems in the leveraged loan market. So the average bid in the leveraged loan market is now 92 cents on securities that were over a dollar earlier in the year. 40 percent of leveraged loans are trading down 10 to 20 percent. If you were an oil exploration company or a fracker in the Southeast, you are producing oil at $75 a barrel all-in cost, and the price is now $65. And you were counting on that oil income to pay your leveraged loan payments or your junk bond issues. That's what I am talking about, is the danger of deleveraging and defaults in the junk bond and leveraged loan markets.
BENNETT: Do you think those oil producers are still drilling? Or are they waiting for prices to rise before they get back to work?
BELKIN: Well, it just happened. We are few weeks into something and all of a sudden it's a shock. It takes a little bit of time for people to respond, for businesses to respond. That gets back to your question about phony prices, phony economic activity created by artificial credit creation. So a lot of this would probably never have happened, and the flip side of Austrian Economics malinvestment is, you get blow-back, Von Mise's credit bust after the boom. I think that's where we are headed. It's not the end of the world, you just get into liquidation, where things can go down a lot. If you are prepared to sit there, if you bought the market at the top, the prices go down by 30 or 40 percent easy. A lot of these are emerging markets. I am advising my clients to short markets like Mexico and Malaysia. Brazil is already down a lot, but some of these others, they're oil related, they depend on oil for government revenues where everything is kind of predicated on the price of oil being 90 to a hundred bucks. Another thing that is happening in emerging markets is that currencies are starting to weaken like crazy. So the Russian ruble is down something like 50 percent year to date. I think that's a little harbinger of what is going to happen in other oil related markets, the Brazil real, Mexican peso, Malaysian currencies. We have a kind of 1997 global thing, where the dominoes are lined up to fall out there, and it leads to liquidation. Again, it's not the end of the world, but you don't want to be left holding the bag on buying at the top.
BENNETT: How long do you think the Saudis will keep this going? Low oil prices hurt them too.
BELKIN: Correct, however it's not just oil. That's my point. We've been in this period, and it gets back to your point, you drop interest rates artificially and create too much credit, and then you get artificial economic activity. It's not confined to the oil market. For instance, base metals: iron ore producers like BHP, Rio Tinto, they have these new mines. We can't talk about this without talking about China. The Chinese boom is kaput. Financial Times actually just had a cover story saying $8 trillion of malinvestment has been wasted. $8 trillion.
BENNETT: But they have also started quantitative easing over there to help them.
BELKIN: Correct, but they are not going to be buying boatloads of cement and glass and iron. I mean, they build all these empty cities and bridges to nowhere, and highways with no cars and stuff out in the countryside. So in other words, there are a lot of other things where the prices could fall, like crude oil has fallen. For instance, copper, lead, tin, zinc, aluminum. Goldman Sachs has been building warehouses and hoarding this stuff. Just like the Hunts hoarded silver, Goldman Sachs has been hoarding base metals. So I think the bottom could fall out beneath the markets of base metals and things like that, where there has been over-production. So just like the Saudis are over-producing oil, base metal miners are over-producing iron ore and copper and all these kinds of things. When you get into a deleveraging at the end of a cycle all that stuff kind of surfaces and gets washed out of the market. That's the Austrian economics response to a phony credit boom.
BENNETT: The Federal Reserve and other, foreign, central banks have been buying futures contracts on S&P and the DOW. What would stop them from doing that with oil?
BELKIN: Good question. I don't know exactly how this all works. So I agree with you that it is happening. The Chicago Mercantile Exchange has a special incentive program for central banks...
BENNETT: We found that out three months ago. Isn't it crazy?
BELKIN: That's crazy, that's where we are living. So some central banks admit that they buy stock index futures or ETFs. For instance, the Swiss Central Bank, the Israeli Central Bank, the Hong Kong Central Bank, the Japanese Central Bank. But, can you rig a market to infinity? No. I think what they are trying to do is a big psychological mind control game. They are trying to control the minds of large portfolio managers who in aggregate are bigger than them. I got this sense seeing clients in London, big, huge portfolio managers there, where you get a psychological change where people say the economy is headed down. So we are not getting a huge blizzard of profit warnings or revenue warnings from companies yet. That's where we are headed. That's what I believe, based on all my work, this global downturn is going to result in lowered export sales. The dollar's up 10 percent on the year, that means U.S. corporate foreign earning are going to be down 10 percent on the year. And that's just not factored into the thinking. So companies are going to say, 'Oh, well, we are not going to hit that. Oops, it's not as good.' And then portfolio managers start selling and that drives prices down and the psychology really shapes changes and they go defensive. Here's an example: in Europe the telecom utilities and food and beverage sectors are up like 15 to 18 percent on the year, and the cyclical basic resources, oil and gas, retail, industrials, they are all down on the year. So beneath the surface of this supposedly grand stock market, people are going risk-off in a huge way, and it is already happening below the surface of the market. So there is this stealth bear market going on. If you are a portfolio manager, you are watching the NASDAQ and S&P hit new highs. Meanwhile, Google is going down, Caterpillar is going down, IBM is going down, Netflix is going down, and this is hurting a lot of prominent investors like Carl Icahn. I track his top holdings and...
BENNETT: He's negative, what, 30 percent so far this year?
BELKIN: Yeah, he's way below market and he's down 60 percent year to date, 22 percent relative to the index and it just goes on. That's what's going on beneath the surface of the market. There is this risk-off rotation into defensive assets by portfolio managers who the central banks want to remain bullish.
My personal experience with this subject is, back in the days when I had my start at Salomon Brothers, which was a top three investment bank in the '80s and '90s, I did witness central banks, global central banks come in and do weird things on the market when I was there on the trading floors. So I know it happens, it's not a conspiracy theory. But you can't get too much into it, because if you don't know exactly what they are doing, it does start to look like a conspiracy. You can blame unexpected movements in the markets on it. You can't go into it as Alice in Wonderland, you fall down a deep rabbit hole.
I don't believe that they are bigger than the market, just like J. P. Morgan tried to prevent the '29 crash and then he got taken out. You can make a market bounce but you can't... the aggregate of large portfolio managers, when you get start getting sustained mutual funds redemptions and ETF selling it's going to be bigger than central banks, that's what I know about that subject.
BENNETT: So let's talk about the area that I know the central banks won't support, gold. There just seems to be this continuing plunge in the GOFO (Gold Forward Offered Rate), and this huge shortage. I don't know if people realize it, but this is the worst gold shortage we have had in over a decade. Gold is basically at $1200 an ounce.
BELKIN: Yes. That was part of my presentation in London. I spoke at the Minds and Money Conference in London and it's base metals as well as gold. As I mentioned, I am bearish on base metals and things like that, but I am not bearish on gold. Here is the reason. If you overlaid a chart of the XAU gold stock index, which goes back to about the beginning of 1984, so 30 years ago, and with the gold price, the XAU is actually significantly below the level than it was 30 years ago, which is really amazing. What other asset do you know it is down from where it was 30 years ago? And yet the gold price as you said is around 1200 bucks. It started out at 60 dollars. So there has been a huge increase in gold prices, but the gold mining companies haven't really kept up with it. Of course, they've ratcheted up their cost base, it's a hard business, gold price goes up and they go for more expensive reserves. I think it's the one bargain out there and I keep telling people what I have seen over the years is that the most successful investors I know buy things that are down. They don't buy Apple, you know, you don't buy something that is up 800 percent or whatever Apple was up. You don't buy Google at the top, you don't buy stocks that are up 1000 percent, that's not the recipe for a long term compounding your wealth. You buy things that are down, and I've seen investors compound their wealth dramatically by buying things that are down. So, long story short, a lot of gold stocks are still down 80-90 percent. Some had a big rally, they came all the way back, some went lower. The best didn't, and I have a list and here is what I recommended that people buy at the conference in London. In the U.S. it's Pretium Resources (PVG), Silver Wheaton (SLW). I do an economic forecasting model and an asset forecasting model, and those are the ones that the model likes. They are not at new lows, they didn't hit any below December 2013 level. In London, Acacia Mining, that was African Barrick (ABG) and Ramgold, those are both African related, but they're listed in London. And Australian Newcrest. I continue to recommend accumulating a portfolio of depressed gold stocks and I think that will result in compounding a high rate and some these stocks can easily double or triple, looking ahead few years from their current very depressed level.
BENNETT: On Friday, December 5th, the headline was 30,000 new jobs in November. The White House said 'It's hard not get excited about today's job report.' What's your take on that?
BELKIN: I haven't torn it completely into parts yet, but it kind of made me laugh, you know. John Crudele is one who really has a handle on this in the New York Post, people should Google him, he's been on it for a long time. Whatever they are, they are phantom jobs, or if they are real jobs, part time jobs, or they're waiters in restaurants, or Uber taxi cab drivers, or something. Whatever that report was, it isn't going to last and painting the tape with phony data isn't going to last. Again, it's sort of like the bread for the masses, they are trying to make people feel good. It's the holiday season, you don't want to say anything bad. And Obama, God knows he needs something to take credit for, everything else is worse than Jimmy Carter in terms of everything seems to go wrong for him.
BENNETT: Michael Belkin is the editor of the Belkin Report. Thank you, Michael.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com. She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org