Santelli & Bianco Crush Conventional Wisdom

Tyler Durden's picture

With Dow at 14,000 and rates rising, those that need to take commissions and get their ratings up are seeing the 'conventional wisdom' seemingly proved right. However, Rick Santelli does not see it quite as clearly. Bianco Research's James Bianco joins Santelli for what they call 'mythbusting' as the two skeptics rightfully expose the unreality of the 'fiscal cliff' fears, the untruth that is the 'Great Rotation' due to tax concerns ahead of the fiscal cliff, and dismal performance of the Fed's failed forecast ranges. As extreme monetary policy continues (crisis-mode) - seemingly in absolute opposition to what the talking heads will say about jobs and the economy - Santelli and Bianco conclude that "right now the market is not bothered by [the Fed setting rates], but at some point it might be, Trust Capitalism" as they reiterate the need for Market Forces to be allowed to act. 3 minutes well spent.

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fightthepower's picture

Fuck you Bernanke!

knukles's picture

Great rotation, the newest propaganda meme for the masses.
Great Rotation, my ass.

I have polled a humongoloid number of friends acquaintances, fellows, bums, my dogs and inert objects as to whether they are seeing any Private (Ma and Pa Kettle form Albuquerque) or Institutional "significant" rotation out of bonds to stocks.
Lotta tax drive stuff...
Lotta fear and confusion, lotta people sitting really tight....
Uniformly the answer is no, most often expressed as a "Are you kidding me?"  "What are you smoking" or... or.... ready?.....their clients remain more interested in maintaining a high level of income...

Not taking on stocks....
Last time they did that....

"Stocks and stones will break my bones but income never hurt me."

fonzannoon's picture

Holy shit CNBS hammer home those stocks! Trillions on the sidelines.!!!!Record Profits!!! Get in you retail fuckin sheep get in!!!!! Dow 14k!!!! Don't wait these deals won't last! We can get you into a brand new Hyundai today! These prices are INSANE!!!!!!

 (pssst...Ben told us  the purpose of QE3 was to lower interest rates)

Whiteshadowmovement's picture

You know the one thing that really proved to me this was all a giant behavioral finance experiment?

It was whenever we had a "bear market" like back in 2011, and then the ramping started, every fucking putz on bloomberg and cnbc would come and say: "people are tired of the doom and gloom"

The sad thing is they are absolutely right, the boredom of anxiety just wears people out, people just arent psychologically ready to face the crash head on.

At the end of the day, they just want to hear its just fine, this is 87 all over again, just a small blip on and endless rally.

So the Bernank has to hold their hand (or put a gun to their head as the case may be) and show them that they have no option its stocks or nothing. Either your brains or signature go on this paper

nmewn's picture

Same thing I've been hearing.

The ones who gutted it out are glad to be back to where they were five years ago.

I don't even bother telling them they're actually not because of fiat devaluation and of course the lost "investment time" in getting back to where they were, will never be recouped.  

fonzannoon's picture

knukles where are they getting high levels of income from, if not from div stocks?

knukles's picture

Myself and some of the folks I've worked with, established longer term portfolios about 5 to 7 years ago.  The cream de l ceme credits, primarily treasuries and munis... and at the bottom of the crash, for the truly brave (as in not many including me) high yield and high grade.  But almost all long intermediate to long term
The portfolios have obviously rolled down with the "model" if you will having a remaining 6 or 6.5 or so years average life.  When the muni stuff was bought it was basically par bonds, 5 to 5 1/2% coupons.  Nice tax free level of current income.  As you indicate, the problem is maintaining it as yields particularly over the last 18 or so months have collapsed.

It takes some balls/guts to buy new money into bonds right now.  And this'll get me a buncha red arrows, but I've been saying this for some time and been right as rain for my risk preferences.... I am seriously of the opinion that we're in a Liquidity Trap bounded, enshrouded in a Credibility Trap... and until significant fiscal, tax and money influence reforms are enacted, it's gonna stay this way...
meaning we're in the Japanese model.
Which thus suggests that some longer term quality credits yielding 2 1/2 or 3% just might prove to be producers of real positive returns as prices possibly deflate relative to the "false" indices.  But if income is needed.... no where else.

Except traditional dividend stocks... the standard sectors/names.
The reason I'm leaning to bond land is that expecting the higher probability of reality being another negative shock rather than wonderful everything's OK, dividends can be cut.  So I'm going for the contractual coupons.
Plus, a few places still offer some reasonable coupons, like Ozzieland.... 4x risk, but....
So there're some out there, none really a jump up and down massively compelling at this juncture.

But, that's my own preference (and the bonds must in my mind be bar-belled against inflation hedges, for who knows when V will rebound and all hell break loose) like PM's, commodities (hard) or even TIPS.

The Bernak and crew are killing the recovery with ZIRP.  Billions upon billions of dollars are not flowing into the hands of retirees, etc., who'd normally be living off of income (or a portion thereof) but instead invading principal. 
Killing those people. 
And damping the economy big time.

As long as we're in the Liquidity Trap, it makes no difference from a economic activity level if short rates are 0 or 4%.....
That's what the Liquidity Trap means/does...

Terrible environment we have Fonz... absolutely terrible.

BandGap's picture

Thought this all along, ZIRP IS DESIGNED TO WRING OUT RETIREES. No way people make it on what the returns are now AND WHAT THEY PLANNED THEIR RETIREMENTS AROUND. Lots of retired people heading back into the work force - also by design. I also BELIEVE the raiding of pension funds (or the non-payment or reduction) is by design. Hell, I readjusted retirement plans due to all the bullshit.

The point is, we have a 20something generation enslaved by debt and being employed at <50% after graduation, an aging populace now reconsidering retiring and a middle class getting their asses kicked by a "share the wealth" president. And we all dance around knowing full well at some point we will be consumed by the wave.

Great Plan

fonzannoon's picture

U got ballz my friend. I missed the 08/09 bondfest because I thought we were done. Me and my partner started grabbing BBB corporates in 2010. Even then you could get some great stuff. In 2011 I started grabbing below investment grade stuff. Today the shelves are empty. I have some stuff locked in out to 2020 but some stuff starts coming due as early as this month. I have a hard ass time committing new/matured money to the div payers here (for income clients) and I can't find shit in fixed income. My bond desk told me guys were recently buying CCC- debt well over par. If that ain't a bubble I don't know what is. But I believe this could go on for a long long time. Nowhere else to run but stocks. But like you said those dividends are not immune. Bad bad scene we have.

Whiteshadowmovement's picture

You know ive steered clear ofmfixed income almost totally. The only bonds ive ever bought were ghanas 8.5% eurobonds, which briefly went to 9% in 2009. They are well under under 5% now. I also bought some Zambian bonds when they debuted at 5.6% last year and their a bit lower than that.

Raer than buy credit, I just decided for going long MBS in the form of mortgage originator stocks. Many of the ones I bought in 2010 have quadrupled (OCN, WAC etc) and although I have to admit I solld out too early in 2012, I bought back after QE3 and and several of these are off the charts

Just my $0.02 but I try to avoid most bonds completely and try for other ways to balance risk by simulating bonds

fonzannoon's picture

That is pretty cool. I don't  get to play in your inventory. I grabbed some Spanish corporates last year way below par and they have done great but that is about as far as I am allowed in the risk playground in fixed income.

I agree about using other ways to simulate bonds. Completely.

Whiteshadowmovement's picture

Im actually really interested in hearing that because I always wonder what the penetration is to access markets outside of the major countries.

Out of curiosity, what kind of access do you have to off-the-radar sort of markets. Can you buy equities in places like Bulgaria, Malysia etc.

Thats essentially the whole premise of what I do within my fund, I try to generate alpha by going direct to the source in a lot of difficult tomaccess markets. It takes soooo much work though to set up operations to transact in some of these places. On the plus side though there are huge returns sometimes. Again, I know, I know I shouldnt blurt things out here but check the agricultural land REITS in Bulgaria, their currency, the leva is pegged to the euro:

So i get a huge percentage of my alpha from unusual markets. It also afford me the freedom to spend as much time in Africa as I see fit and my principals understands that I do lots of on the ground research here and that this feeds returns so they dont give me a hard time about coming in to Zurich just a few times per year and to meet with clients etc.

Id be really interested to hear if in your case you have either the possibility or the leeway (from an investment standpoint) to access markets like that?

fonzannoon's picture

I have moderately more access personally than I do professionally. Professionally I have very little leeway and we lose a little more each year. The regs are completely out of control. I truly believe we are heading towards an obamacare market takeover at some point. If not that then each client will be mandated to have at least 25% of their account in treasuries and 25% in the SPY for "client protection". You would laugh your ass off if you had to comply with the parameters I have to. Then when you were done laughing you would cry.

But if we wanted to sell a non traded reit that has no transparency and is completely illiquid but pays high probem. Go get em.

Whiteshadowmovement's picture

Fonz that is some heavy shit man, I ask this question to a lot of people I meet in the biz and its astonishing to me that despite how often you hear words like "frontier market" as buzzwords on bloomberg but you wont believe the amount of even major banks whose position is simpky "it cant be done"

I guess its not all bad though, at least it will keep the algos at bay for a few more months/years but I am just amazed how little actual follow up there is by anybody after so much talk.

But really, this is one of the most interesting posts Ive read from you to date man, its quite eye opening when you put it like that (25% SPY, 25% treasuries) wow man that is a flash of the very-near future If Ive ever experienced one.

How terribly sad that the more you need alpha the more the structure forces you to beta.

I really think I should go into the ETF business sometimes (ie producing em from frontier market holdings)

Bro dont even get me started on the kind of steaming dog shit ive seen people in this biz try to pimp. Some of those fucking brochures and packets crack me right up man

fonzannoon's picture

It sounds like you will be allowed to swim in the deep end longer than me. They are already making me wear swimmies and splash around in the shallow end.

Honestly, think about your typical asset allocation portfolio's. I can totally see them making 4 of them (kind of like the healthcare exchanges) for consumers.

Conservative: 65% (domestic) fixed income 35% (domestic) equity.

Conservative plus: 50% fixed income, 50% equity

etc. etc. etc.

For the aggressive portfolio's they will allow 5% to commodities and 5% to global fixed income to spice it up! They will let the fund companies eat each other alive to get their funds in these allocations.

I run into variable annuities a lot here. Most of them are starting to mandate that certain precentages be held in domestic bond fund (Bill Gross must have thrown some serious coin at these guys).

It's scary dude.

(one of my buddies is a pretty big trader for a big european bank. He has an account with me. He will call me up sometimes and leave a message saying we should look at xyz. I will leave him a message back that consists of me chewing on dorito's. He is starting to get the point.)

Whiteshadowmovement's picture

Wow man, this is fucking deep! Seriously I feel like your post has shown me the future! I often get asked for advice by friends of clients or people I know socially so often times I am happy to toss out a recommendation where I know theres an easy profit to be made. A few weeks/months later ill bring it up and ask if they bought and if theyre aware of how well it did blah blah. I get the same answer 9/10 times- my bankers explained to me that its beyond risk parameters etc. and that the only tips I can really act on is if you recommend a fund (their portfolio manager at Julius Baer or whatever has them 100% in funds right now). They think small/mid cap stock picks are tantamount to the tvix. I once in a while follow up on this with the explanation that they are high net worth clients and can do anything they please which they find out soon enough and ive actually gained a handful of clients this way after they find out their risk parameters are total bullshit if they never beat the godamned market anyway!

fonzannoon's picture

In the US it all comes back to interest rates. That is the only reason that I fight your bull thesis a bit. The bottom line is interest rates here are not allowed to go up. It just ain't gonna happen. It is really funny, you said earlier that Ben is going to hold people at gunpoint to buy stocks. I agree. But not at the expense of selling bonds. Ben has two guns. One for bonds and one for stocks. He needs you to own both.That is why I think they great rotation is bullshit. They would rather the public be broke and the market stay rangebound forever as long as they keep their beautiful zirp in place. If a huge bull run actually causes people to empty their bond funds and rates climb we run into a serious debt funding and currency issue. That is why I say they are trying to thread a seriously small needle when you really think about it. It's why we will constantly need "economic setbacks" to make sure everyone sits tight with a good chunk in their bond fund.

Not sure if you read this last year, great read.

"If the Fed's hope is to drive investors into equities, propping up the bond market is counter-productive. While there are many parts of the cycle where higher bond prices fuel higher stock prices, at this point in the cycle the relationship has reversed. In recent months, stocks and bonds have developed a strong negative correlation -- what is bad for bonds, is good for stocks. The Fed does not understand investor psychology: If you want to get people to sell bonds and buy stocks, the best way to do that is to show them that bond prices can, and do, fall. "

Whiteshadowmovement's picture

Yeah sure the famous Jelly Donut article, naturally. But i thi k the absolute best line there was what Einhorn said about the Bernanke Put, its not where people think it is, its in bonds, not stocks

It doesnt matter to the Bernank if every last bond is sold by retail as they go into stocks. He will buy every single one and make sure the rates never rise above above 4% (thats my estimte but I think im close to that being the threshold)

Thats sort of the central tenet to my thesis of the Fed truly being in control of all prices due to the success of their behavioral finance experiment., the Feds going digital (black hole implosion) means they decide for low bonds for ever and ever and ever. They wont let them rise meaningfully.

So lets just assume we have the following outcome by Bernakes exit from the Fed chairmanship, lets call it his going away present:

S&P: 1700
Brent: $110
Gold: $1500
10yr: 2.2%

Think about it for a moment, doesnt that sound great to a central planner?

PS- What cajn you buy in terms of international equities etc. Can you buy lets say india or south africa without going the etf route?

fonzannoon's picture

I think you may have his going away present right on the nose. He better throw Yellen in there next because his going away could spark the selloff he made sure never would happen.

I can basically buy ADR's. That is pretty much it outside of the etf route. I own some stuff in Canada, Brazil etc. I do not own any S. Africa because I don't know it, much less what I can buy. I hit it nice with a few macau casino's. I am limited in the amounts I can buy.

Whiteshadowmovement's picture

They could always go with Abe Joseph after Stolpers done massaging his feet...

You know what really sort of galls me about the limitations you descrine and that kiddie pool effect? Its the fact that the term "risk management" is perhaps the single dumbest oxymoron ever invented.

fonzannoon's picture

You know what really galls me? It's that eventually I am unnecessary, and i busted my ass to make sure I knew more than the next guy. I made this my passion in life. Instead, Sayonara. Some dumb Fidelity rep who does not know his elbow from his asshole will sit there making 40k a year to process your simple transaction. It's what keeps me and Doc up at night. Every night.

Go long Carls JR

More_sellers_than_buyers's picture

without a doubt the best summation of the situation I have read.  What I have benn wanting to put into words myself.  Cheers knukles

Go Tribe's picture

All of which makes silver look shinier. My LCS is loving this government contraption.

max2205's picture

He's starting to fit the Dick Bove model

IridiumRebel's picture

"Trust Capitalism!"......yeah, that will surely happen.

azzhatter's picture

"Crony" capitalism if you are one of the boys

tbone654's picture

um... I bot 5 houses on October 15th 2007...  Headline Dow crosses 14,000 for first time since October 17th 2007...

News - it didn't work out so good the last time we got above 14,000, at least not for me...

tbone654's picture

still digging out of that one...

Village Smithy's picture

Can I be the first to say "This time it's different!".

tbone654's picture

market is back to where it was...  And everyone has 33% less real value... print baby print...

Harbanger's picture

I got stuck with one piece of raw land in Florida I bought with a friend in 2007.  I knew the market was already overpriced, but I gambled anyway, he was a RE broker and I thought we would flip it in a few months for a profit.  We had offers but I let him talk me into holding it for a year for tax purposes.  Bad idea.  A year later it was worth less than 1/2 the price.

Whiteshadowmovement's picture

Hows it doing now? Have you considered becoming a bank in which case you can just mark-to-market it...problem solved

Harbanger's picture

Fortunately, I've also been funding my personal central bank since 2007.   I'm thinking of buying him out at mark-to-market value. It's still better than holding cash, I think the RE market in Florida for raw land is pretty well bottomed out.

azzhatter's picture

Lonely voices in the night

fonzannoon's picture

Schiff took the cake today. "The last time the dow was at 14,000 gold was $700".

knukles's picture

Lemme see.... I think the numbers I generated the other day were something like this...  Close enough for Gubamint work, good enuf here, as they say...

5 years.
Stocks    0% total return
Gold   110% total return
Bonds    7% total return

Or something like that.... magnitude and relative direction good enuf.

Now, I cannot tell a lie.  If one had bought the absolute bottom in stocks and held diligently to year end 2012, then they'd be up.... about 100%.   Whoopie Shits!

Don't know about you all, but I'd rather the ease of returns in the sense of not having bad nights sleep (which is my new definition of risk) with bonds (for income if necessary) and GOLD than with stocks.

(Bad things gonna happen again, Knuks, says Knuks little voices in his head....)

Harbanger's picture

When bad ecconomic news makes the Stock Markets rise,  I think the only logical reason is because they are anticipating more Fed intervention.  I'm convinced the dollar purposely is being klled, commodities are going to blow thru the roof when this over.

chubbyjjfong's picture

"Everyone got money in December"  Oh thats why.. well strap me to an ant hill and cover me with honey.  Gosh.. tsk

knukles's picture

Hey, notice all that money people knew they was gettin' in the fourth quarter they rushed right out and spent like drunken sailors, goosing GDP right through the fucking roof.... consumer spending, I say. 


Where are my Ferraris, bitchez?

chubbyjjfong's picture

I reckon.. Ironically, my FIAT Uno blew up today (no pun intended, seriously).  So Fix It Again Tony!  this time I'm really screwed.  Yes a Ferrari would be pretty nice right about now.  Now where did I put that credit card application form? 

Tango in the Blight's picture

A Fiat car may be the only thing which is worse than Fiat money.

chubbyjjfong's picture

FIAT by name (money or vehicle), FIAT by nature.  It will inevitably shit itself. 

sitenine's picture

Market forces will never again be allowed to reign under the current regime. The SEC is actually backing a plan to start an exchange for rich fucks only - no shit, check this out:

Meanwhile, the POTUS says we all have to play by the same rules every fucking chance he gets. Centralization, fear, and promises of MOAR are the new tools of the power grab. Welcome to a brave new FASCISM,  Bitchezz!

mayhem's picture

I smelt desperation. Need more inflows. buy buy BUY!!!

SheepDog-One's picture

'Crisis mode', and yet equity and bond markets are pegged at all-time record highs....unfuckinreal.

Everybodys All American's picture

I never thought you could herd enough stupid people in one direction. I am wrong.