Matt 1, Ken Heebner 0
Ken Heebner was on Kudlow last night extolling the virtues of banks. As I have been printing money by shorting the financials, I didn’t realize that Heebner was on the other end of my trades. Will I out-perform one of the greatest investors ever this month? If he’s lugging a lot of banks, I probably will.
Apparently, a lot of the “smart money” have been buying banks lately. This reminds me of the smart-money buying home-builders back in 2006. It’s the same massacre all over again! How can banks make money with no real-estate market? Who would think that banks could thrive while home-builders suffer?
And today the situation is far more clear than it was back in 2006. After all, back then the economy was actually growing at a strong clip. So, maybe you could be excused for expecting the home-builders to rebound. But today? Is there any shred of fundamental evidence that points to better profits for banks?
Wayne Angel, a former Fed Head, also cut into Heebner on Kudlow. I was shocked out how the usually mild-mannered Angel pounced on Heebner as Heebner blamed inflation on global growth. Things got very testy.
Heebner was just saying that a rapidly growing global economy had gobbled up resources driving their prices higher. While many people call that “price inflation” it really has nothing to do with “monetary inflation” where a central bank prints too much money. So, Angel attacked Heebner over a perfectly innocent statement. For example, the price of oil is probably high due to real world supply-and-demand, and a weak dollar.
The big-money trade recently has been to short financials and buy oil. A lot of traders are trying to do the reverse of that, calling for a top in oil and a bottom in financials, and getting killed in the process. Heebner has a different take: he says buy oil and financials. So, he has, no doubt, been doing a bit better than the short-oil-long-banks crowd.
Since recessions kill inflation and the price of oil, I think it is only a matter of time before oil kills itself by choking the global economy. Will Chinese airlines keep flying as American airlines shut down? Are they magically immune to the price of oil? Maybe they can withstand the shock better, but I think that they put their pants on one leg at time just like we do.
June 18th, 2008 at 11:12 pm
Exactly, check the oil price in terms of gold, euro and dollar and you can see monetary inflation at work. And the poor souls in OPEC, Arabia and Asia are running on a hyper-inflationary (inflationary ‘01-’06) dollar-peg.
Having said that I am shorting Australia, Canada and Norway. You are shorting USA Financials. So far you’ve done a lot better and probably will too short-term (150 USD anyone?). But let’s talk in 12 months and I think I have a winning hand. The profits of oil companies will move towards zero if price goes to 60 USD/barrel.
Asian Central Banks are tightening. Credit is tightening all over the place.
70% cash, as cash preservation and day-time job should be everyone’s priority these days.
Bernanke is not inflating the money supply now. Stocks will not be bull before long after he starts inflating. But before any inflating, the economy needs a rinse out. Interesting times indeed.
June 18th, 2008 at 11:28 pm
I see we disagree on the cause of oil price. That’s why I ask people to look at the price development of oil based in Gold, Euro or Dollar. It’s a mix of supply/demand and monetary inflation.
The Austrian School tells us this. The monetary inflation (low interest rates) causes the entrepreneur to misread future demand and he invests heavily in capital goods to meet future demand. However, the consumer has not signalled a demand for future goods. He uses the new money in circulation for fuel, food and consumer goods. So at the end of the monetary bubble, commodities will surge, while mal-investments in the capital good sector will show up. Housing, automobiles, flat-screen TV’s, Cabins, boats, RV’s and factories and equipment will collapse due to over-capacity. Then commodities will fall due to less industrial demand for commodities and finally the consumer will buckle and commodities too.
And then Bernanke will be able to inflate again - talk in 2010.
June 19th, 2008 at 8:08 am
Hi Larry,
I don’t disagree with you about the effects of monetary inflation, and I prefer the Austrian view myself. But look at Japan; they used to be a cheap-labor country like China. Are higher labor costs there due to monetary inflation? Or is cheap labor there now a scarce commodity because they have developed?
Matt
June 19th, 2008 at 10:39 am
Matt, I follow Heebner and watched the video. I don’t think Heebner is suggesting that his buying US Banks (com’l and IB) - Morningstar reports on 3/31/08 he held 3 brazilian banks (ITU, BBD, GBU) and was short one US bank (Washington Mutual). Kudlow was focused on US monetary policy and Heebner’s point on US banks follows from his view that the FED will not raise rates because it is trying to shore-up the US banking system (com’l and IB). We will see what the Q2 positions are for CGMFX, but I will bet you lunch Heebner is not long any US banks…
June 19th, 2008 at 1:26 pm
Hi Shawn,
Heebner was raving over Citigroup (if memory serves) on Kudlow. I would be surprised if he didn’t have a position, which he could have put on after the Morningstar report was published.
Matt
June 19th, 2008 at 9:03 pm
Matt, good point, but looking at the monetary inflation in Japan since 1980 up until today I would argue that the printing press should take some of the blame.
Anyway, this thread was on financials, sorry for the rambling.