Robert Kessler


September 6, 2013

It is now accepted wisdom on Wall Street that the great bond rally of the past 30 years is over and that we have entered a new era of higher interest rates.  Not so fast says this week’s  Great Investor guest,  Robert Kessler.  He points out we have had many false alarms about economic growth and central bank tightening over the last 6 years only to see interest rates retreat again. Kessler has correctly defended the value of U.S. Treasuries in particular against Wall Street naysayers for more than a decade. So before you follow the stampede out of bonds you might want to listen to his defense of bonds. Continue Reading »


August 3, 2012

Watch this Episode

Robert Kessler Transcript 8/03/12 #906

August 3, 2012

WEALTHTRACK Transcript #906- 8/03/12

CONSUELO MACK: This week on WEALTHTRACK, why rock climbing government bond investor Robert Kessler says we still haven’t seen the peak of the generational bull market rise in U.S. treasury bonds and why other investment routes are much more dangerous to your financial health! Great Investor Robert Kessler is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK. I’m Consuelo Mack. Three years into an economic recovery, it sure doesn’t feel like one. We are even beginning to hear the dreaded “R” for recession word here in the U.S.  A recent headline in the Financial Times read: “Blue-Chips Raise Recession Fears.” The FT reported that “estimates of revenue growth for the largest us companies are being scaled back sharply by Wall Street analysts, signaling a mounting risk that the world’s largest economy may enter recession later this year.”

It is a development we have talked about with many WEALTHTRACK guests. Sales and earnings estimates are being scaled back by analysts and companies alike as the global outlook becomes murkier. Recession is already happening in Europe.  The so-called peripherals- Greece, Spain and Italy- are there. Even mighty Germany is feeling the pressure from its weaker neighbors. Germany’s central bank recently estimated its economy had grown “moderately” in the second quarter. According to The Wall Street Journal, that’s “shorthand for growth between zero and five tenths of a percent.” Not exactly reassuring for Europe’s largest economy, which its finance minister rightly describes as the “Eurozone’s anchor of stability.”

So if global economies and company sales and earnings are slowing, what does it mean for the markets? That is a source of heated debate and both sides are being reflected in the stock and bond markets. On the one hand, investors have been buying dividend paying blue chip stocks for their dividend income and their financial strength. The S&P Dividend Aristocrats Index, which is made up of 30 companies that have consistently raised dividends for at least 25 years, has traded around record highs recently. How well will their prices and dividends hold up in a global slowdown?

On the other hand, yields on U.S. treasury bonds have extended their multi-decade long decline over the last year, lifting the prices of the underlying bonds, as global investors sought their safety and liquidity. It has also helped that Federal Reserve Chairman Ben Bernanke has clearly spelled out the Fed’s intentions to keep interest rates low. And he has reiterated time and again that the Fed is “prepared to take further action as appropriate to promote a stronger economic recovery.” As PIMCO bond guru Bill Gross put it, in explaining why he is holding 35% treasuries in his PIMCO Total Return Fund: “don’t underweight Uncle Sam in a debt crisis.”

This week’s WEALTHTRACK guest has been overweighting Uncle Sam in his portfolios for the ten years plus that I have been interviewing him. It’s been an extremely profitable run and he is sticking with it. He is Robert Kessler, founder and CEO of Kessler Investment Advisors, a manager of fixed income portfolios for institutions and high net worth individuals with a concentration in U.S. treasury debt. I began the interview by asking him about his long standing and contrarian investments in treasuries. What is he seeing that Wall Street is not?

ROBERT KESSLER:  I think Wall Street is seeing all the same things I’m seeing. We’re just really interpreting those things a little bit differently. I look at the interest rate environment that we’re in right now, and most people think that this is created by Ben Bernanke, the Central Bank, and zero is some artificial number. The fact of the matter is, zero is a number that exists all over Europe now, and, in fact, that number is negative in five, or six, or seven countries in Europe.

CONSUELO MACK:  So this is zero interest rates or negative interest rates on government debt, short-term government debt.

ROBERT KESSLER:  Short-term government. Actually, even longer term. In Switzerland, it’s minus .25.  So people who have a lot of money, and they want to park it someplace, they actually have to pay the government to put it there. Now, we haven’t seen that before. If you look at the way Wall Street’s interpretation of that is, they’ll say that that’s totally artificial. That’s not reality. And the reality really is that big money right now doesn’t want to go anyplace with it. It doesn’t matter if it’s corporate money, where they’re sitting with trillions of dollars, or individuals. What they want to do with it is make sure it’s totally safe. And money has a real value. Most people don’t look at money properly.

Money is a commodity.  Just like gold, or like grain, or corn, or anything else. To store it someplace, it costs you some money. So if you want to store it in Switzerland, they’re going to charge you a quarter of one percent. When we look at zero in the United States, to make this really interesting, and people say, “Well, where do you think interest rates really are going?” And now I really look at everyone and say, “I don’t know. But they certainly could go negative,” meaning that the whole treasury curve, which is two-year, five-year, ten-year, all of that curve could all go down to zero. And everyone thinks there’s so much out there to buy. Look at all those treasuries. Come on. We have so much debt. Someone has to support it. What actually is there is, if I don’t want to sell my treasuries and you don’t want to sell your treasuries, there aren’t that many treasuries. And that’s why rates really can go quite a bit lower.

CONSUELO MACK:   I know that you hear from other people on Wall Street. And if someone on the other side were looking at you and saying, Robert, okay, so interest rates are at zero. Short-term interest rates are at zero. Investors have other choices. Zero is not a good rate. That’s what they’re saying. It’s not a good return. Therefore, even Ben Bernanke, who is keeping short-term interest rates at zero, which is a reality, and is saying that, I’m going to keep interest rates at zero probably through 2015, if not beyond; even he is saying the reason that I’m keeping interest rates so low, one of the reasons is I want people to invest in risk assets. I want people to go and buy stocks and, you know, finance the economy, where they get a higher return. I’m going to make investing in treasuries so unattractive that I want them to buy something else, and, therefore, help the economy.

ROBERT KESSLER:  In the environment we’re in, which is a deleveraging, deflating environment, a real return on money may actually be negative, meaning that if inflation actually goes negative, one percent is a pretty good return. And the only reason all of this is happening is because there’s no demand in the marketplace. And as much as Japan tried to do something, you can’t create that demand. And that’s exactly what Ben Bernanke’s talking about. He’s saying, “If I get these rates low enough” … there was a Swedish experiment, which is interesting, when Sweden had a very difficult time, the Central banker said, “You know, we ought to think about going negative.” Imagine that. The rate overnight won’t be zero. It will be minus 50.

CONSUELO MACK:   Right.  So I pay you for the privilege of owning  a Swedish government bond.

ROBERT KESSLER:  A half of one percent. That will certainly induce everyone to go buy something else. And the answer is, when there’s no demand from the private sector, I don’t care how much money you produce, I don’t care how much you print- if the private sector doesn’t want to borrow it, you have no marketplace. We have what we call no velocity. No movement of money. So that’s the environment we’re in. And as to what an investor needs to look at, is not what the real return is on a treasury against inflation from last year, but where will it be next year. And next year looks like we’re going to be looking at, if not deflation, certainly lower prices.

CONSUELO MACK:   Let’s talk about kind of, there are different things that you’re looking at. So one of the things that Wall Street would say is that, you know, number one, inflation isn’t going to continue to go down, because, like, it never does for any length of time, and, therefore, at least in our recent experience, and all our models are predicated on the fact that we’re going to get some inflation, and with all the stimuluses the Fed is doing, central banks around the world are doing, we will get inflation. You’re saying, no, the reality is we’re in a deflationary environment, and, in fact, you know, we’re not going to get inflation for a long time. Why?

ROBERT KESSLER:  Let me give you the Japan example. The Japan example is a very good example, because we claim in this country that we would never do what Japan did.

CONSUELO MACK:   Right.  No one wants to be a Japan. That’s the blanket statement everyone makes.

ROBERT KESSLER:  We are doing exactly what Japan did. And interestingly enough, in 1997, that’s seven years after the deep recession/depression hit Japan, an administration came in, 1997, and said, we’ve got to contract the economy. We’ve got too much stimulus out here. We’ve got to tighten things up. That will make things better. The rates on the ten-year in Japan at that point were around two percent. Within a year or two they dropped to .8, and the deficit went straight up, even though everyone wanted to bring it down.

And the reason was, you can tighten everything up, but again, if there’s no demand and people perceive that prices are coming down, cash looks very good. And now we’re talking money. And money is really important, because money takes on a tremendous value in a deflating economy. If you’re a gold bug, the argument is inflate, inflate, because that’s a terrific thing to happen. All of this stimulus is going to cause inflation. And, in fact, in this kind of an economy, it doesn’t matter what stimulus you put in, because stimulus only works if someone wants to spend the money. And the fiscal side of it, which is the government side of it, right now, looks like, as we get into the fiscal cliff that people love to talk about, the fact is that will be very contractionary on the economy. So I would argue that if we get into that position, you will see rates go even further down.

CONSUELO MACK:   One of the realities that you’ve identified at Kessler Investment Advisors as well is that zero interest rates can stay zero for a long time, or go lower for a long time.

ROBERT KESSLER:  I think in this particular case, there are so many people who keep saying we’ve never seen this before. We’ve never seen this exact same thing, but we’ve seen this before. And I suspect that interest rates will stay extraordinarily low until we get out of this balance sheet problem of individuals getting rid of some of the debt. It’s 25% of homeowners are underwater. You have this huge unemployment problem, and the number that came out today, the Philadelphia Fed Index, actually had an employment number that would suggest, in this month coming up on the employment news, that employment could go negative again. Now, if you stop and think about that, the argument has been quantitative…

CONSUELO MACK:   You mean job growth could go negative.

ROBERT KESSLER:  Job growth will go negative. If you stop and think about how serious that is, we’ve had quantitative easing one, quantitative easing two, and probably something more. None of that has helped. And it’s simply because money is going no place. And the people who have it are buying whatever sovereign they feel safest in.

CONSUELO MACK:   So Robert, another reality that you have identified at Kessler Investment Advisors is that instead of what Wall Street is telling you- I’m going to make you money, and that the traditional investments that make money, like stocks, that have over the last, you know, 40 years, whatever it is, in the post-World War II period- that, in fact, that investors are saying, “No. No. No. You don’t understand. My first principle is I don’t want to lose money.”

ROBERT KESSLER:  We have an enormous number of investors leaving the stock market now and going into fixed income.  Obviously, they feel that that’s too volatile, and that slow transition is probably going to continue for some time. But the concept of an investor saying, “I don’t want to lose money,” it usually means I want to make a lot of money, but I don’t want to lose any money. And you have to be able to explain to make a lot of money you’re going to be at risk to lose a lot of money. I would suggest the big problem we all seem to have is we can’t distinguish between a savings account, your pension account, your IRA, and an investment account.

CONSUELO MACK:   And you’re saying it’s very important to differentiate between your investing and your savings. What’s the difference?

ROBERT KESSLER:  The purpose of a savings account, as we all grew up, and we saved something, is to know it will be there. So, obviously, the return isn’t important. It’s the return of the money. And so I look at a savings account or a pension account, you cannot lose there. And that’s why I’ve suggested for years that you buy a zero coupon U.S. Treasury, meaning that the treasury will pay off in a certain period of time, because you have to have that money. That’s a savings account. An investment account is, have a good time.

The odds are, these days, for the last ten years, no one has made any money in the stock market unless you happen to buy at the right time, sell at the right time, and buy… and none of us do that. We’re all random buyers, so we all make mistakes. So the average person really doesn’t distinguish between those two pockets of money, and I would suggest that’s becoming very relevant now, because suddenly, if you look at the average homeowner, let’s take the homeowner, you have a decrease of $7 trillion in the value of what they had over the last two, three, four years. $7 trillion. An enormous amount of money. And if you look at their median net worth of that same homeowner, it’s gone from $126,000, that’s the average person, down to 77.  That means they lost 39% of their money, of what they really thought they had. So all of these questions become extremely relevant if we talk reality, and I think that’s what we should be talking.

CONSUELO MACK:   The fact that rates are coming down all over the world gives fuel to the argument on the other side, and that is, I can’t tell you how many people have told me that somewhere around 60% of the companies in the S&P 500 now are offering dividend yields that are greater than the yields on the ten-year Treasury note, and this is a once-in-a-lifetime opportunity.

ROBERT KESSLER:  And they should. And they should, because everyone has done terrible with all of these companies. So they should give you some of your money back. But the best argument I can use is that these are the same companies that don’t know what to do with the cash they have, and they’re not out there buying any other companies. There are mergers going on, but they’re not spending the money. So if they’re not spending the money, what are you spending the money for? And then at the same time, there are no big dividend payers. There are no big cap stocks that are not going to be affected by a global deterioration in the economies that we’re looking at. They all will be. And if the stock market comes down, which I suspect it probably will, they’ll come down, too. What do you care if you’re getting 4% if it drops 40%? That is the risk you take. So you think, well, this is a terrific deal, because in the long term, four percent looks good. It doesn’t look that good if you go back to 2008.  You had an AT&T that was paying a very nice dividend, and it dropped 47%. I don’t think that’s what you want. And so I suspect that if you didn’t want any of the other stocks, you probably don’t want those stocks either.

And, again, I’m back to the subject, you do not want to lose money, because in an economy where prices are coming down, there’s tremendous opportunity. Everyone thinks that I’m being pessimistic about this. If you have money, and the price keeps coming down, the money gets more and more valuable. That’s why people are parking it where they think they can get it back, which ends up being in sovereign debt or good sovereign debt.

CONSUELO MACK:   So Wall Street would say this is an example of extreme pessimism, and the times of extreme pessimism are when you make the most money by buying the securities that everyone else is shunning.

ROBERT KESSLER:  But that has to be the excuse that we use, otherwise you wouldn’t buy anything from Wall Street. It’s a silly argument. We’re faced with a real serious problem in this country, as it is in Europe, but in this country, especially right now, because we have a disorganized kind of Congress, we have a situation where no one can get together on what to do, and I suspect there really is a reason for that. No one knows what to do. You can take this side, or you can take this side. It really doesn’t matter. The net result is, there are no simple solutions, and we’re certainly not going to get one, from what I can see.

And so this thing is going to linger, and the question is, do you need a crisis to begin to really try to solve this? Maybe that’s what happens. Maybe you do get a crisis. But this is not being pessimistic. I’m just telling you what’s happening. And the only reason we can make money in this market is because we really don’t care about what anyone else says. The key to this market right now is to follow whatever your own instinct is. If you don’t understand it, and it doesn’t make sense, and you can’t sell your house, and all the terrible things that we all know are happening, happen, well then, why do you want to go out and buy stocks? I mean I’m not doing this just because I want to hit the stock market. But this is a very serious period of time, and I don’t think people are treating it as serious as they should.

CONSUELO MACK:   So most investors, most individuals, in their retirement savings, have gone the traditional route, and they certainly do not own a lot of treasury securities. So what are you advocating? That they basically, you know, liquidate, pay the taxes, everything, and put them into treasuries? I mean, you know, what are our options?

ROBERT KESSLER:  I’m going to do the same thing I did last time you were kind enough to have me on the show, I think, at the end last year, and I said, go out and buy long-term 20-year, that’s a good thing to do, zero coupon U.S. Treasuries. They will yield about 280, 2.8 percent. Nothing terrible about that. In the last six months, since I’ve said that, they have returned 11%.

CONSUELO MACK:   In six months.

ROBERT KESSLER:  In six months. Better than the stock market and everything else. I will make the assumption that 280, 275 is not a terrible return. If you have this opportunity that I’m talking about, that rates actually come down, because if rates come down, a lot of people feel that 30-year, 20-year treasury will come down a point; if they come down a point, then you make 25% return. Worst-case scenario? You’re making 280. Not so terrible. That’s your retirement fund. That’s your serious money.

As far as the other money goes, I would be in this wait-and-see attitude. I’m really not trying to be pessimistic, and I know it sounds pessimistic, when I’m saying negative things, but those negative things are happening regardless of what I tell you. They’re happening in Europe. And this doesn’t even count the fact that we could have an oil disruption. We could have all the usual things that seem to be on our plate all the time. So sure, I think for a retirement fund, right now I’d be out buying all the treasuries I could get my hands on. I mean, but I think when you talk about the investment money, the money that you have to invest, I think you want to stay very, very cautious.

CONSUELO MACK:  All right. Very cautious at this point. So the One Investment for long-term diversified portfolio is?

ROBERT KESSLER:  I would say zero coupon treasury, if it’s a retirement fund. If it’s in a retirement fund, there’s absolutely– there’s no issue about time. You’re keeping it for a long period of time. But the other money that you have is money that really has to be put to use now, and you don’t want to waste it. It’s not going to be there necessarily 20 years from now. It’s money you’re going to invest in. Well, I can’t find anything to invest in. So keep it in cash. I know I’m kind of escaping by saying that, but I don’t think there’s anything wrong with cash.

CONSUELO MACK:  So, you know, you said earlier in the interview that you’re really not a pessimist, that you’re actually an optimist. So what are you optimistic about?

ROBERT KESSLER:  I think that people needed to go through this change in attitude towards how they spend money, what they think of money, and that change is taking place. There’s a realism coming into the marketplace. I think that makes for a better country, and that makes for a better people in the end. It doesn’t mean it’s easy, and it doesn’t mean this is going to be a very comfortable change. But it will probably be, as it usually is, for the better. What we don’t want to see is some serious kind of crisis that makes it worse. I think the problems in the United States are solvable, if we can get a Congress to probably do something together. There are things to do here. But you can’t have 20 million people without a job, 45 million people on food stamps, and a bunch of people without healthcare, and then say, “Well, we don’t really have any problems here, and I think we should buy some stocks.” I think that attitude is exactly the wrong attitude. I think the problem becomes you have to pick up demand, and there is no demand in our system right now, and with good reason. People are pessimistic.

CONSUELO MACK:  So what is it going to take to turn around demand?

ROBERT KESSLER:  I don’t know. I don’t know. It’s a process. And the process is this horrible deleveraging, this pay down the debt, and people have to consciously understand when you pay down the debt, you’re increasing the value, in this case, of the currency. Because remember, the currency can buy everything cheaper. The U.S. dollar is the place to be. I’m very optimistic about the dollar. I think that’s a great place. I think the treasury market looks terrific here. That is the country. In between, there are problems that have to be solved.

CONSUELO MACK:  Well said. Robert Kessler, thank you so much for joining us from Kessler Investment Advisors. And we will have you on again, you know, in a year, and see how you’ve done, as you have done extremely well over the last seven years on Wealth Track. So thanks for joining us again.

ROBERT KESSLER:  Thank you. Thank you for having me.

CONSUELO MACK:  At the conclusion of every WEALTHTRACK, we try to leave you with one suggestion to help you build and protect your wealth over the long term. As we did last week, we are recommending a book for summer reading. This one is the choice of guest Robert Kessler. It’s called The Great Depression: A Diary. It’s by Benjamin Roth and it was published by his son in 2010, many years after his death. Roth’s diary is a compelling and eye opening account of the Depression seen through the eyes of an ordinary middle -class American. You will recognize the policy debates about inflation, skepticism towards big government, and worries about too much stimulus, that as Kessler says were “prevalent, recurring, and in the end, all wrong.” You can make up your own mind.

I hope you can join us next week for a shocking discussion about the cost of investment fees. According to our two guests- legendary financial consultant Charles Ellis, who is exclusive to WEALTHTRACK, and top financial advisor Mark Cortazzo- fees are much higher than you think. They’ll tell us how to fight back. If you would like to watch this program again, please go to our website, It will be available as a podcast or streaming video no later than Sunday evening. And that concludes this edition of WEALTHTRACK. Thank you for watching. Have a great weekend and make the week ahead a profitable and a productive one.


July 8, 2011

On this week’s Consuelo Mack WealthTrack, “Financial Thought Leader,” John Brynjolfsson, creator of the first “real return” mutual funds and “Great Investor” Robert Kessler, U.S. Treasury bond guru discuss managing the inflation and interest rate challenges ahead.

CONSUELO MACK: This week on WealthTrack, who will win the tug of war between the forces of stimulus and austerity, and inflation and deflation? Financial Thought Leader John Brynjolfsson and Great Investor Robert Kessler take sides on one of the great financial battles of our time, next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. One of the great financial debates of our time is between the forces of inflation and deflation. Is the U.S. entering a Japan-like period of painfully slow growth and falling prices, or simply recovering in spurts from a devastating financial crisis? This is not just an academic exercise. The outcome of whether prices are rising, stagnating, or falling will determine everything from interest rate policy by the Federal Reserve to the value of our homes and salaries, to social security and Medicare payments, to our investment strategy. It is the last that we are focusing on in this week’s WealthTrack.

No one, including the Fed, disputes the fact that inflation is rising. As this chart from Strategas Research Partners shows, both the CPI, or consumer price index in blue, and the red core CPI, which excludes the more volatile food and energy prices, are accelerating. And core inflation is in the upper end of what the Federal Reserve deems acceptable. On the other hand the forces of disinflation and even deflation are exerting their own pull. In an economy dependent upon consumer spending for 70% plus of its growth, unemployment is still uncomfortably high. For those who are working, wages and salaries are flat and not even keeping up with modest inflation, and companies, both large and small remain reluctant to hire.

What should you plan for in the months ahead? Do you tailor your investment strategy for inflation, disinflation or even deflation? Joining us are two investment pros with strong opinions and strategies to go with them. John Brynjolfsson is founder and chief investment officer of Armored Wolf, a global macro hedge fund seeking to “profit from imbalances created by global inflation and deflation.” He is a pioneer in “real return” investing, designed to outperform inflation and preserve purchasing power. He launched the first “real return” mutual funds at PIMCO. Robert Kessler is the CEO of Kessler Investment Advisors, a global manager of portfolios of U.S. Treasury securities and other government debt for institutions and governments. Fortune magazine has called Kessler “one of America’s top investors.” I began the interview by asking them where they stood on the inflation debate.

JOHN BRYNJOLFSSON: Right now, inflation is pretty contained because you’ve got housing under pressure and relatively contained. You’ve got food and energy prices essentially off the charts, but the average of the two with housing being 40% of CPI, inflation is contained. But more importantly, the Fed realizes that. The Fed is trying to get the core CPI up towards 2%. And my suspicion is that they’ll be overshooting that target and in the meantime creating more and more inflation in the energy, commodity, and global markets.

CONSUELO MACK: So the pressures are building, but short-term inflation is contained in the U.S.?

JOHN BRYNJOLFSSON: Very short-term inflation is below target. That’s really the danger signal because the liquidity that’s being produced by the Fed right now is historic in nature. There’s more liquidity being produced right now than there was during the depths of crisis in 2008.

CONSUELO MACK: That will lead to inflation. They are printing money in other words?


CONSUELO MACK: Robert Kessler, so inflation- where do you come out in the disinflation, deflation debate?

ROBERT KESSLER: I think I take a longer viewpoint on inflation right now because wages are not increasing and the basis to inflation really are wages. And when you have 20 million some-odd people either underemployed or unemployed in this country and probably the problems taking place in Europe and China in terms of excess capacity, it’s very difficult to end up with inflation. So bottom line here is probably the Fed is right. They don’t see any foreseeable future. It probably would be presumptuous of me to actually name a date- oh, in three years or four years or five years, I think we’ll see inflation- I think it’s going to be years and years and years before we really see any inflation at all.

CONSUELO MACK: So what about the argument that John just made, the fact that we’ve had so much stimulus from the federal government, deficit spending, that in fact that traditionally has been inflationary?

ROBERT KESSLER: What is intriguing about this period of time is that the government spending is going on to the credit side, the debit side, that is you and I. We’re the ones in debt. In bailing out the banks, all of this excess money, the 600 billion that we just created, is sitting in kind of reserves. It’s sitting in the banks. It’s not going into the economy. So it doesn’t go into the economy and we don’t have what we call velocity, we don’t have movement of the money. It doesn’t go to me and we don’t get jobs and we’re on food stamps in the same way we were; then the leveraging process, this paying down debt is just going to take an awful long time, especially coming into June/July as we are with a Congress that is going to be rather austere as opposed to coming in with stimulus. So it’s a difficult period of time.

CONSUELO MACK: So John, how do you figure that in? Isn’t this time different in that we’ve had this unprecedented credit bubble 30 years in the making? And now we have this deleveraging, we’ve just had it unwinding for three years. So I mean, couldn’t this time be in different and in fact what we’re you’re seeing the Fed do and the government do and the deficit spending as well, that this is not going to turn out be as inflationary as it would have under normal circumstances?

JOHN BRYNJOLFSSON: So there’s a couple different things going on here. One is growth and healthy real productivity is different from inflation. There’s no doubt that there’s a lot of dead wood out there in the economy, foreclosures sitting on the housing market, unemployed sitting on the services and wage markets. About two years ago, we were at a point where you had this pushing on a string concept which others talked about, where close to a zero bound on interest rate, meaning you couldn’t lower interest rates below zero; and if we were deflating, Bernanke was afraid that that would be a spiral like we had in the 30s. Bernanke was very aggressive with QE1. QE2 was an insurance policy. We’re now running at a 3.6% headline inflation rate, 1.6% core rate of inflation. Those rates actually give you a high cushion above the 0% Fed funds rate. We’re running at a negative real interest rate. Negative 2%, negative 3%, maybe negative 3.6% based off of headlines. That is an extremely low– it’s a negative real interest rate, which is almost unprecedented.

So while there were some concerns 24 months ago about pushing on a string, we now have inflationary dynamics that it started. And as long as the Fed stays at zero, this inflationary dynamic will accelerate and we see it in the food and energy markets, in the emerging markets. The U.S. is not isolated so we can have weak U.S. housing and weak U.S. employment at the same time that the dollar in depreciating and inflation is percolating throughout the economy.

CONSUELO MACK: And the fact that the purchasing power of the dollar is decreasing, which is inflationary considering how much we import goods and services into this country. I want to talk to you each about the imbalances you are seeing and how you are managing them. And John, at Armored Wolf you seek to profit from macro imbalances created by global inflation and deflation. So what kind of imbalances are you seeing in the economy and how are you seeking to profit from them?

JOHN BRYNJOLFSSON: We try to be nimble. We certainly allow for the possibility of deflation and on a macro basis that was certainly the case two or three years ago.


JOHN BRYNJOLFSSON: Right now we look at the deflationary side of that equation much more narrowly in certain sectors, like the housing sector. The balance on the inflationary side is much stronger. We see emerging market countries sucking in capital from the printing presses that the Fed, the ECB, the Bank of Japan and other major developed countries’ central banks are printing. And people are looking for an alternative reserve currency other than the dollar. The euro obviously is not a candidate. The yen is not a candidate. And you end up with either merging market currencies like the RMB or gold and other precious metal as a metric of fundamental value as opposed to something as flimsy as a paper dollar bill.

CONSUELO MACK: Let’s talk about that. Because this is where, you know, Robert Kessler is a contrarian in this particular area. For as long as I’ve known you, which has been about six or seven years, you’ve been a proponent of the fact that treasuries are still, that the dollar is still the reserve currency and there ain’t no substitute readily available and number, two, is that U.S. treasuries are still a store of value, safety and liquidity. Let’s talk about the imbalances that John was talking about and how that affects your view of treasuries and the dollar.

ROBERT KESSLER: Let me bring up an article that was in the newspaper today so I can talk about something current. There’s an article about China, and since I spend a lot of time in China; this is about a city called Wujian in China. The discussion really is: how much money is spent in that city and in every city on infrastructure? And in fact, infrastructure spending in China has reached almost 70% of their GDP. 70%. To put that into some kind of perspective, when Japan kind of had its bubble burst, they had 35% of their money put into infrastructure. You have this tremendous amount of excess built into China, that’s what we call an output gap over here, excess capacity, excess factories. In fact, they say there it will take eight years to fill up the space and they are building as fast as they were building before. So you have a world now in China, and in the peripheral countries in Europe with all of this excess. And that output that we talk about is going to be with us in a deleveraging process for many, many years. So when we talk about where are things going to go? Let me bring up one point —

CONSUELO MACK: That’s a huge imbalance, is what you are saying?

ROBERT KESSLER: Tremendous imbalance. If I could talk about something having to do with the treasury market, which is interesting. Most people like to say treasuries have averaged something like 7% and they are cheap at the moment, or expensive being 3% roughly. The fact of the matter is they always compare this to the last 40 years. What we should do is look at the prior 40 years.

CONSUELO MACK: You are talking about the yield.

ROBERT KESSLER: In the yield on treasuries. From the 1930’s to the 1970’s, a 40-year period of time, the average was 3%. That was because we were coming out of an imbalanced, credit bubble, whatever you want to call it, the Depression, but very similar to what we have today. It took years and years and years to finally get through that deleveraging process. And in fact, as we mentioned when we were talking together, the treasury hit its low 15 years after the Depression started, which was 1.5%. So if we’re going to make a comparison, we should look at balance sheet recessions like Japan, which has taken 20 years and our own balance sheet recession, which has taken 15 years. We’re in our third year. So we have some time to look at this process. And it’s not a very pleasant period of time.

CONSUELO MACK: So as a result, you are saying that treasury yields not only could stay where they are for an extended period of time, sorry to use the Fed speak, but you are talking years, an indefinite period of time, but in fact they could go lower as this deleveraging occurs? It sounds like a rolling deleveraging scenario happening here now and could be happening in China in five or ten years?

ROBERT KESSLER: The average in these balance sheet recessions that we look at, average recession period of time isn’t five or seven years, it’s 2.5 or three years. So you could have a recession in 2012- that wouldn’t be out of the question in the way we’re slowing down now and with an austere Congress, and Europe just raised their rates. Actually raised their rates, which is something we were doing in terms of austerity in 1936. So I’m not making these comparisons lightly. What I’m trying to say is there’s a very serious market out there in terms of being conservative. Conservative means that you don’t take risks. John specializes in areas that he understands in terms of where to take risk.

CONSUELO MACK: Alternative investments.

ROBERT KESSLER: And they are very, very good areas. From my personal viewpoint, I end up looking at cash or treasuries because I have a long history to say “this is what they are going to do. This is what they’ve done in past.”

CONSUELO MACK: John, the argument is, and you know that just about every professional on Wall Street thinks that treasuries are worthless, you are going to lose money, and that they are actually a high risk and that the dollar is going to continue to depreciate and go south. That’s the consensus, which always should make you very nervous, that everyone feels that way. So what is your feeling about treasuries and the role that they should play in investors’ portfolios and also dollar denominated assets?

JOHN BRYNJOLFSSON: I think it’s instructive to look at the Depression in the 1930’s; to look at Japan and ask about what the monetary policy was during those periods. I don’t know that we’ve learned a lot in, whatever, 1,000 years since paper money was invented in China, but generally what happens with paper currencies is eventually they devalue and become worthless. In the case of the 30s we had high real interest rates. We had deflation and the Fed actually tightened interest rates. So you had a deflationary dynamic. Ultimately World War II pulled us out of that, things changed. In Japan, you have a relatively tight monetary policy. The yen is very strong. It used to be 160 to 170 to the dollar, then it went to 100. Now it’s at 80 to the dollar. It’s a very strong yen. You have a deflationary type of monetary policy run in Japan where the interest rates on cash in Japan is higher than the inflation rate at the same time that they’re trying to face these demographic head winds.

In the U.S. we don’t have that situation. We have Ben Bernanke, who is a student of these episodes who believes he can target inflation at 2%. I have no doubt that he has the tools to do that- he has said so himself. He has a printing press in the basement of the Fed and as long as he has paper and ink in the press he can print as much money as he wants. That’s a fact. The real question is: will he achieve his target on the bull’s eye or will he overshoot it? With unemployment at 9%, the tendency is that he’s going to have political pressure to overshoot. As long as both inflation is below its target and unemployment is above the target, they’ll prescribe more money printing, and that’s what he’s doing. We have the lowest real interest rates that I’ve seen in 50 years. I’ve rarely seen real interest rates below 0. Even a year ago, they were only minus two. Now it’s minus 3.6.

CONSUELO MACK: And the significance of that is, for the lay person, why should that be shocking to me? Or what are the implications of that, from an investment point of view?

JOHN BRYNJOLFSSON: What it means is more and more liquidity is pumping into the system. And Bernanke’s reaction function is largely going to be based on homeowners equivalent rent and actual rents because that’s 40% of the CPI. We’re now seeing actual rent prices starting to accelerate.

CONSUELO MACK: We’re seeing rent inflation in fact, right.

JOHN BRYNJOLFSSON: We have the weakest component of the CPI now starting to creep upwards. I don’t know if I want to say that I hope he tightens when we get to 2% because that could be painful, especially for big risk takers in the markets. I don’t think of a 30 year treasury as a low risk way to lock in purchasing power. I think of that as a low risk way of locking in paper currency. We don’t know what that paper currency will buy 30 years from now. So in fact it’s extremely risky.

ROBERT KESSLER: One of difficulties about this whole process that we’re in is this concept of printing money. It’s something I don’t understand and I’ve never understood. Ben Bernanke is going to drop it from helicopters and we’re going to pick up this money and spend it. I myself have not seen any of this money. Money coming from the banks or the banking system, believe me, it’s not out in there. I happen to come from Denver and I don’t know what is going on in New York but believe me, there’s no money out there. All of this idea that 0% interest rates have any meaning whatsoever to the average person is silly.

The average person has to go to the bank and say, can I have money or can I get a mortgage? And what we have to do different than the banks is really interesting. Us as homeowners have go out and get what we call an appraisal. And that’s something we call mark to market. You have to get the market price. The banks don’t exactly have to do that. They actually, because of some shenanigans, they ended up able to get kind of 100 cents on the dollar. If we were allowed to do book value on our houses, we could probably have a moratorium and get all the mortgages we want at 2%. But we don’t get 2%. And I’m not sure exactly when we say that 3% from a treasury is a bad deal. It’s a hell of a lot better than losing 30% in the stock market and the stock market since 1999, 1998 hasn’t gone any place.

CONSUELO MACK: At least the S&P 500 hasn’t?

ROBERT KESSLER: I’m not smart enough to always know what the right place is. And from what I can see, the correlation in a lot of hedge funds and a lot of other places is they don’t either. It’s a tough market to play in. An interesting thing about treasuries: treasuries generally, when we talk about a 30- year treasury at 3% or 4% or 4.5%, we think of it as 30 years. It’s no different than a stock. A stock has a perpetual life to it. A stock is forever. A treasury at least tells you it’s five years, ten years or 30 years. So you don’t have to hold it for 30 years and you don’t have to hold it for five. If you believe me that treasuries are going to down to 1.5%.

CONSUELO MACK: The ten year, you’re talking about?

ROBERT KESSLER: Ten year treasury. Then some place in the near future, assuming it’s not 10 years, you either have gotten 3% plus on your money while you waited, or you’ll be making 9%, 10%, 11%. That’s not a bad deal considering we haven’t done so well in the other choices.

CONSUELO MACK: So consider as an investor- rather than think “I’m buying a 30 year treasury and I’ve got to hold it for 30 years and the value is going to depreciate,” think of it as you would a stock that “gee, I might trade it and go into yet another treasury security.” But the fact is it will be liquid. You will get money for it. And —

ROBERT KESSLER: Let me make a very quick point.


ROBERT KESSLER: Treasuries in the last three years, five years, 10 years and 20 years have outperformed commodities and the S&P index.

CONSUELO MACK: Which is something that actually should disturb you, Robert Kessler, because there’s something called reversion to the mean. But aside from that, points well taken about treasuries and how we should view them more as a trading vehicle as opposed to just a buy and hold possibly. But let me ask Brynjo, I want to — it’s possible that we too can meet in the middle, because as far as stores of value that are not that liquid. We can’t go to the store with our commodities basket. We can’t barter yet. So what should we do with, what kind of commodities do you think that we all should own some of in our portfolios? What are going to hold their stores of value?

JOHN BRYNJOLFSSON: Obviously, mutual funds are a big part of the retail and institutional marketplace.

CONSUELO MACK: What kind of mutual funds? I’m talking about hard assets, for instance?

JOHN BRYNJOLFSSON: So the mutual funds that I’ve created- I created a big one at PIMCO–

CONSUELO MACK: Right, the Real Return Funds.

JOHN BRYNJOLFSSON: What they do is they look at an index of commodities that are all transparently priced that have futures contracts. They create indexes essentially on a market cap basis by saying how much volume of each commodity gets produced and what is the price of that commodity and let’s put that weight into the index. They don’t want to do every single commodity in the world. There’s 300 different commodities. But there are 19 highly liquid global commodities. You have your crude oil, gasoline, your heating oil, your grains, your metals. And the 19 largest blocks of commodities in the world are published as an index by Dow Jones UBS.

CONSUELO MACK: So you could buy a mutual fund, a broadly diversified mutual fund. That is invested in commodities, that is one way we could invest.

JOHN BRYNJOLFSSON : That’s the way to do it because by investing in a commodity index, you are getting broad exposure to all commodities- you are not making calls on individual commodities- and you’re keeping your cash in a highly liquid form. You can put it in TIPS, which is what they do at the PIMCO fund, by and large. You can put it into alternative strategies, which is what we do, with Eaton Vance. But that’s, I think, a great way to get exposure to the commodity markets.

CONSUELO MACK: We believe in broadly diversified portfolios here. And I know there’s a place for treasuries in our portfolios and there certainly is a place for commodities as well. And we’re going to have to leave it there. Robert Kessler from Kessler Investment Advisors, thank you so much for joining us. And John Brynjolfsson, formerly of PIMCO but now at your own hedge fund, Armored Wolf. Thank you very much for joining us on WealthTrack.


CONSUELO MACK: And that is a wrap for this edition of WealthTrack. I hope you can join us next week. I am going to sit down with two top global strategists. Fort Washington Advisors’ Nick Sargen will tell us why he thinks global markets are at a crossroads and New York Life’s John Kim will discuss how he is changing the way New York Life manages investment risk. Until then to watch this program again, please go to our website,, to see it as a podcast or streaming video. Thank you for taking the time to visit with us. Have a great weekend and make the week ahead a profitable and productive one.

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