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David Winters Transcript 10-05-12 #915

October 5, 2012


 #915- 10/5/12


CONSUELO MACK:  This week on WEALTHTRACK, five star fund manager David Winters takes on the investment crowd and parries and thrusts his way through the stock bears and inflation deniers. Wintergreen Fund’s Great Investor David Winters is next on Consuelo Mack WEALTHTRACK.


Hello and welcome to this edition of WEALTHTRACK. I’m Consuelo Mack. Central bankers are clearly worried about global growth. From the U.S., to Europe, to Asia, we have seen unprecedented levels of easing in recent weeks. By independent research firm ISI Group’s count, there have been more than 250 stimulative policy initiatives announced over the past 13 months. The firm also points out that we are less than 100 days from the famous fiscal cliff in the U.S., when numerous Bush era tax cuts expire and automatic spending cuts take effect if Congress and the White House can’t reach a budget compromise. If they don’t, estimates are that GDP growth could be reduced by as much as 3.5%, sending the economy into recession.


Meanwhile, stocks have rallied strongly this year largely because of all of those central bank actions, which have given some investors confidence that the world will continue to muddle through the challenges of a widespread economic slowdown. Individuals, however, are still not participating in large numbers. Retail investors continue to favor bonds over stocks- a winning move for them until this year, and a trend we’ve been tracking for months.


This week’s guest disagrees with such bearishness and believes investors are missing several attractive opportunities around the world. He is Great Investor David Winters, portfolio manager of the five-star rated Wintergreen Fund, which he has been managing since he launched it in 2005. The go anywhere, invest in anything value-oriented fund has outperformed its category and the markets since its inception. Wintergreen is a sponsor of WEALTHTRACK but David is clearly here on his own merit. I began the interview by asking David about what he considers a major investor misconception, phrased by great bond investor Bill Gross at PIMCO as “the cult of equity is dying.”


DAVID WINTERS:  I think it’s wrong. I think the notion that stocks are never going to go up again creates an enormous opportunity for the few of us left who are working on equities and actually do the work, and I think it’s a misconception that’s forced the public even further from the equity market and institutions, and the reality is there’s this enormous disconnect between price and value which creates future opportunities.


CONSUELO MACK:  So there is a shift on both the institutional level and the individual level away from stocks and, as you know, the new term for stocks is that it’s the risk asset, and Treasuries are the risk-free asset, another perception which you strongly disagree with.


DAVID WINTERS:  Well, you know, people think it’s been such a bad period for 10 years that this is going to be forever like this, and so in that timeframe, Consuelo, rates have come down, and the only way to have made money was, except certain well-selected securities, has been to own bonds. So people now have their money in 20 basis points and 18 basis points securities, you know, Treasury securities. People lose purchasing power on a daily basis. I think inflation is very real. You have food prices going up, fuel prices going up. You need to get your hair done. Prices go up, and if you have your money not growing over time, you get crushed. So here you’ve got the public believing and institutions believing equities are dead. They believe that putting all your money in bonds when rates go up and you have the impact of inflation. We think what’s perceived as a risk-free asset is actually an incredibly risky asset.


CONSUELO MACK:  So cash, in fact, and cash equivalents you told me is one of the riskiest assets now. Let me ask you, because if you were to talk to Federal Reserve chairman, Ben Bernanke, he would basically say that inflation is very mild. It’s benign, and it’s under our target rate, and yet, again, another misperception.


DAVID WINTERS:  For most individuals, their cost of living is going up, and this circles back to this ‘equities are dead’ fallacy, because if you own the right businesses with a global footprint that grows free cash flow, has a nice yield, those businesses become more valuable over time, and they have the ability not only to raise prices but to sell more units, and so the well-selected equities, which is what we do at Wintergreen Fund to the best of our ability, it protects you from inflation, the erosion of principal which is really, I think, the biggest risk out there.


CONSUELO MACK:  So it’s interesting, because you just mentioned that we had come through a decade which is called the lost decade, and so when people look at the market indices, and they’re saying, you know, the S&P and the Dow are below what they were at their height, their peaks from 2007, whatever it was, but when I look at Wintergreen’s results, and you look at individual securities, in fact, that many people haven’t lost money. They’ve made money. So this kind of disconnect again, between the market and individual securities, historically, I mean, how big is the gap as far as you’re concerned?


DAVID WINTERS:  I’ve never seen anything like this and, you know, part of it is you have so many people who’ve had a bad experience, and there is relatively few of us who’ve had a good experience so that we remain optimistic, constructive, and believe that you take advantage of this disconnect. There’s companies out there which trade at massive discounts to their asset value that are well run with good management.


CONSUELO MACK:  Give us some examples of investing in Wintergreen.


DAVID WINTERS:  Well, you know, one that I’m talking about it Canadian Natural Resources.


CONSUELO MACK:  A long-time holding of the Wintergreen Fund.


DAVID WINTERS:  Right, and in this environment it’s certainly gotten beaten up, but if you look at what recent transactions for oil assets have been and what CNQ trades for, it trades at one third of those recent trades, and the oil’s in Canada. It’s a great country, rule of law, and so there are a number of examples where we can take advantage on behalf of the Wintergreen investors that they can own these assets at a really low price with bright future. That’s the other thing, is that people extrapolate what’s happened, that things will never get better, and we know from our own lives that the country is so much better than it was 20, 30, 40 years ago, and I think the future’s bright. And the other big misconception is that people have repatriated their money home, whether the U.S., to Canada, to Japan, but really the big opportunities are international.


CONSUELO MACK:  That’s a very interesting point, because certainly if you talk to a number of other value investors, the theme has been that the U.S., the big brand name U.S. companies are the best value in the globe and, therefore, invest with the big name U.S. companies.


DAVID WINTERS:  Well, we think there’s… you know, we’ve actually bought more in the U.S. in the last year or so because the market is in the state it’s in, but there are so many great companies all over the world, whether they’re in Monterrey, Mexico or Zurich or Kuala Lumpur, and I think most investors don’t have the flexibility of thought to be willing to look everywhere, and today we think that, you know, I feel like a kid in a candy store with $100 in my pocket, and my parents aren’t watching.


CONSUELO MACK:  That is a great image. I can you see you as a little kid. I have to admit, ever since I started interviewing on WEALTHTRACK, you have had this same kind of optimism about the kind of companies that you’re finding, and one of the things that you always say you’re looking for a trifecta, and that bears… it’s really important for our viewers to understand, you know, what do you mean by a trifecta? What do you look for in the companies that you invest in?


DAVID WINTERS:  Well, I’m a value investor, global value investor, and I’m fortunate to know how to do all kinds of things, you know, liquidations, bankruptcies, activism, but what we’ve really learned as time has evolved, that you need three things. One, you need a company with good underlying economics, and hopefully economics that are improving and that again takes the risk out.


CONSUELO MACK:  So a good growing business.


DAVID WINTERS:  Yes, and then you got to have management who’s focused on all shareholders, not just themselves and that who wants to create value, and the third thing is a low price, and today there’s lots of low prices, and so I think that this is a great time. And I don’t know what the market’s going to do in the short term or securities prices, but if you use the trifecta as a filter and you really get in and do the work, I think you take out the risk, and you create a lot of upside.


CONSUELO MACK:  But why are there more opportunities today? I understand the price equation of it, but I mean, looking over your 20 some odd years of investing, you know, why are there more opportunities today, aside from the fact that the market has been down over the last 10 years or whatever? Is there something else going on?


DAVID WINTERS:  I think there’s a number of things going on. As we started the conversation, you have the death of equities. People really believe market’s never coming back, that business is never going to grow, that if you plant another crop as a farmer, it’s never going to, you know, and it’s just not true.


CONSUELO MACK:  Right, eternal drought.


DAVID WINTERS:  It’s just not true, and the reality is most of the companies in the Wintergreen portfolio are doing really well, and you just have less competition.


CONSUELO MACK:  So that’s an important point, is the notion that there’s less competition. So in fact, as we see people not only withdrawing from equities but also switching to passive indexes instead of in a way from active managers, has there been a real marked decline in the number of people doing stock analysis? I mean, is that another part of this change in the markets?


DAVID WINTERS:  Yeah, I think basically there are fewer people doing the work, and people’s timeframes have been compressed, and they don’t want any price fluctuation, and if you go back to the essentials, you go back to what Benjamin Graham wrote in “The Intelligent Investor” in 1949, it was Mr. Market. Today we say Mr. or Ms. Market, and you take advantage of the fluctuations, but what’s happened, because it’s been so difficult, is people have just fled and so it’s like being a fisherman with lots of hungry fish, and there’s no more fisherman around.


CONSUELO MACK:  David, let me ask you about the macro environment, because we are looking at a lot of uncertainty. You know, it just seems like there’s a crisis du jour, whether it’s political or economic, and so how, as a portfolio manager, do you deal with those macro uncertainties?


DAVID WINTERS:  Well, you’ve got to I think select what’s really important and also what you can control, and most of it as individuals, we can’t control, but what we can control is how we react, and if we react by saying, “What can I do to find an opportunity in this mess?” that’s, I think, been the key way that we’ve thought about it, and there are a lot of problems in the world, but there’s a lot of good things in the world, and so what we focused on is what’s good and how can we make money for the Wintergreen investors by focusing on these opportunities.


CONSUELO MACK:  The companies that you’re investing in, they’re multinational companies. They do business all over the world. I mean, what’s the sense from the managers that you talk to about what their feeling is about the prospects for business globally?


DAVID WINTERS:  Well, I think there are certain examples where things are slowing down, yet the well-run companies continue to invest for the future and figure out what they’re going to do when the sun comes up tomorrow morning, and I think a well-run company doesn’t give up or worry about this quarter. They build for tomorrow, and so we’ve tried to find those types of managers who are focused. I give you a little example. The Schindler elevator and escalator company announced that they built their first foreign company, elevator company, building a factory in India. So the Schindler company, they haven’t stopped. They’re getting more orders. They’re busy, and I think ultimately not only are they doing well now, but when things do improve, they will have laid the groundwork to sell more elevators and escalators and more maintenance. So that’s where we’re focused.


CONSUELO MACK:  You are so optimistic again, and you seem to be focused where the growth is occurring. One of the major areas, again, that’s in the headlines is China, and China, they’re saying that its growth is slowing. It’s had a housing bubble. What’s your view of China and the opportunities that are still there for companies?


DAVID WINTERS:  You know, people worry about China, and many people have never been there. And I was there for a month earlier in the year, and I can’t tell you I know exactly what’s going to happen, but I do know that you’ve got a lot of people, and they all want to look good. It’s just a basic human emotion, and the Chinese are just like everybody else. So you know, that’s why we like Richemont that owns Cartier. You know, we like Swatch that sells low, medium and high-end watches. You know, our largest position is Jardine Matheson, and it’s a Bermuda-based company, but they’re in Hong Kong, and they have great businesses, and they experience that things are slowing down a bit, but they keep investing for the future.


Nestlé. Nestlé just bought or is in the process of buying Pfizer’s infant milk formula business. You know, in China it’s the one child policy. People love their children. They will do anything for their babies, and if they need infant milk formula, Nestlé will sell it to them, and so I think that there’s so much we can’t know and we don’t know, but what we do know and what we focus on at Wintergreen is what’s the knowable, and how can we make money off of it, and we know that as the Chinese get richer, there are certain things that they’re going to do, and so I don’t know about this quarter. I don’t know about the politics, but I do know they want to eat better, and they want to have a good time, and they want to look good.


CONSUELO MACK:  So there are some markets that you’re not investing in right now. I mean, you’ve basically avoided Euro zone companies, and you’ve avoided Japanese-based companies. So talk to us about where Wintergreen isn’t right now and why.


DAVID WINTERS:  Europe’s in a big mess, and I think that ultimately however this plays out, they’re going to print money just like we have, and you’ve got this construct which ties everybody together at least for now, and it’s going to be like a giant tax on the corporations and the people. So we’ve looked, and we’ve owned a lot of European companies in the past, and we’ll probably own them in the future, but right now we just don’t need to be in the middle of the storm.


And Japan, you know, I love Japan, but they have such issues that they haven’t been able to grapple with, that it’s a tough place to invest and produce returns. So again, the day will probably come when we’ll back in Europe and back in Japan, but right now, there’s other places to invest where the weather is better, and we think there’s more money to be made.


CONSUELO MACK:  Let’s talk about some of the places that you are investing, and one of the kind of hallmarks of the Wintergreen Fund’s portfolio is that you are invested, have large positions in a number of tobacco companies, so BAT and Altria and Philip Morris. So tell us about…


DAVID WINTERS:  Well, you know, we don’t advocate smoking, but the cigarette companies are huge free cash flow generators, and especially the international ones, BAT and Philip Morris. Philip Morris raised its dividend 10% yesterday. It yields 3.8%. So you get paid to wait and also governments get a lot of tax dollars from these companies, and then there are certain companies like Altria, which is a U.S. company, that’s a complete special situation, because they own 27% of SAB. They have a little wine business. They have a liquidating finance business. Yields five percent, and something eventually is going to happen these excess assets. So we like companies where there’s very little risk, and there’s a lot of upside. And another example would be Berkshire Hathaway, and everybody talks…


CONSUELO MACK:  Right, not tobacco, but railroads which you’re a major fan of railroads, right?


DAVID WINTERS:  Absolutely, and Berkshire put in a buyback 110% of book, and we added to the position at I think 112% of book, so we have two percent down side really and a lot of upside, and so that’s why, again, we get so excited about the market today. The market, investments, individually well-selected investments, because the risk/reward, because of what’s happened, and the way that people perceive it- equities are dead, bonds are riskless, never invest internationally again- they’re the wrong lessons. So for us at Wintergreen, it’s like, okay, come on.


CONSUELO MACK:  The last time I talked to you, we talked about Google. What’s your view on Google right now?


DAVID WINTERS:  We still own it and, you know, it’s really a media company, and everybody uses it basically, and they’ve got lots of cash and free cash flow. You know, we don’t love what they did with the high vote- low vote stock, but it’s not an expensive company.


CONSUELO MACK:  Not expensive.


DAVID WINTERS:  Not expensive, and they have this fabulous business that it doesn’t appear that anybody can ever catch that, and that may change, but for now, as somebody used to invest in newspapers, television, et cetera, I think Google’s the best media company out there.


CONSUELO MACK:  Apple. Do you have a view? And I look at Apple, and I see what a huge impact it’s had on the S&P500 index and the NASDAQ and what a spectacular performer it’s been. What’s your view on Apple?


DAVID WINTERS:  It’s a great company and, you know, they went from being almost broke to being this huge success, and they make fabulous products, and they have lots of cash, and you can do the analysis.


CONSUELO MACK:  A hundred billion dollars in cash.


DAVID WINTERS:  And you can strip out the cash and see what you’re paying for it. The problem with an Apple or most of the technology companies, is the product cycle is so short, and I can’t tell you whether the next product is going to be widely received. So if we don’t know, we don’t participate.


CONSUELO MACK:  So what’s the best idea in your portfolio now? Do you have one?


DAVID WINTERS:  I don’t know if it’s the best, but it’s one that I think is- it’s newer, and I think it really fits us- is MasterCard, and why we like MasterCard is every time the card is swiped, they get a little fee, and there’s an enormous amount of transactions every day. Seventy percent of the business is global, and I think it’s 85% of the world still does every transaction in cash.


CONSUELO MACK:  Which amazed me when you told me that statistic.


DAVID WINTERS:  And even if it’s higher or lower and small transactions in out-of-the-way places, over time people are going to use plastic. It’s just more convenient.


CONSUELO MACK:  Cash, what role cash plays in the Wintergreen portfolio? It’s always played an important role. So what are the cash positions now and why are you keeping them wherever they are?


DAVID WINTERS:  Cash has come down actually, because we’ve been a buyer. We found a lot to do because of what’s going on.


CONSUELO MACK:  And it’s come down since when?


DAVID WINTERS:  Oh, I don’t know. This year. We probably are 12% in cash, and we’ll probably continue to move things around a little bit, buy and sell. We always want to have cash, because it gives us the ability if something awful happens or if something great becomes available even without anything awful happening, that we can be a buyer, and we don’t have to liquidate something else. We run the money as if it were- and it is- you know, I have essentially all my own money up. My niece has all her own money up and so on, and you know, and my best friends. So we really try to be very, very careful, and you want to be in a position to be a buyer when others are sellers, and there are so many sellers.


CONSUELO MACK:  So around 12% now, so in kind of the historical scheme of things, is that midpoint to what you normally are or…?


DAVID WINTERS:  Probably mid, yeah, and it could drift lower. I mean, it depends on prices really, and what opportunities those three great misconceptions give us, because there are very few people doing security analysis, thinking long term and investing long term, so we’re in the minority now, which is good.


CONSUELO MACK:  Good to be in the minority. So David Winters, thank you so much for joining us from Wintergreen Fund. We really appreciate your being here.


DAVID WINTERS:  Great to be here.


CONSUELO MACK:  At the end of every WEALTHTRACK, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is: think like a contrarian and selectively invest against the crowd. David Winters just mentioned that he is in a minority by doing individual security analysis, and thinking and investing long term. Current investor sentiment is anti-stock and anti-active management so maybe it’s time to re-consider some long-term oriented, actively managed global stock mutual funds for your portfolio. Among Morningstar’s favorites are the ones run by this week’s guest David Winters and recent guest, Matthew McLennan; they are the Wintergreen Fund and First Eagle Global Fund. Both have earned five star ratings for their performance and management.


I hope you can join us next week, our guest will be another Great Investor, but one who has generated his share of controversy by making huge bets in financial stocks and other unloved securities in recent years. A rare interview with Morningstar’s fund manager of the last decade, Fairholme Fund’s Bruce Berkowitz, is in your future. If you would like to watch this program again, please go to our website wealthtrack.com. It will be available as streaming video or as a podcast. You can also see additional interviews with WEALTHTRACK guests in our new and improved WEALTHTRACK Extra feature. And that concludes this edition of WEALTHTRACK. Thank you for watching. Have a great Columbus Day weekend and make the week ahead a profitable and a productive one.

David Winters:The Optimist Portfolio Manager

October 5, 2012

Central bankers are clearly worried about global growth. From the U.S., to Europe, to Asia, we have seen unprecedented levels of easing in recent weeks. By independent research firm ISI Group’s count, there have been more than 250 stimulative policy initiatives announced over the past 13 months. The firm also points out that we are less than 100 days from the famous fiscal cliff in the U.S., when numerous Bush era tax cuts expire and automatic spending cuts take effect if Congress and the White House can’t reach a budget compromise. If they don’t, estimates are that GDP growth could be reduced by as much as 3.5%, sending the economy into recession. Continue Reading »

James Grant Transcript 09-28-12 #914

September 28, 2012


#914- 9/28/12


CONSUELO MACK:  This week on WEALTHTRACK, financial historian and thought leader, James Grant, attacks the Fed’s policies of zero interest rates and massive purchases of treasury and mortgage bonds as dangerous to the economy and damaging to savers. Grant’s Interest Rate Observer’s James Grant is next on Consuelo Mack WEALTHTRACK.


Hello and welcome to this edition of WEALTHTRACK. I’m Consuelo Mack. Federal Reserve Chairman Ben Bernanke has been widely credited with playing a key role in saving the global financial system from spiraling into a deeper recession. As a recent Financial Times headline read, “Central Bank Action Lifts Gloom”; “Bold Fed and ECB Moves Cheer Investors- Confidence Increases in U.S. and Europe.” There is no question that the Fed and to a lesser degree the ECB, the European Central Bank, are pulling out all stops to boost economic growth, investor confidence, and stock returns, going far beyond what their critics maintain is their proper role. As this week’s guest, financial journalist and historian James Grant told me, “Central bankers have morphed into central planners.”


The Fed, unlike other central banks around the world, has a dual mandate. Starting in 1977, Congress stipulated that, similar to other banks, it is supposed to ensure price stability, i.e. keep inflation in check. More recently, the Fed has focused on preventing deflation and has said its targeted inflation rate is 2%. Its second and unique mandate is to “promote effectively the goals of maximum employment.” With unemployment at more than 8% and long term unemployment near 15%, the Fed is a long way from meeting that goal; which is why the Fed recently pledged to keep short term interest rates near zero until mid-2015, an unprecedented seven year stretch, continue buying U.S. treasury bonds to keep interest rates low, and purchase $40 billion dollars a month of mortgage backed securities until the labor market “improves substantially”; in other words, it’s an open ended commitment.


Perhaps the most stunning statement by the Federal Reserve Chairman came in a recent speech in Jackson Hole, Wyoming. We will have the full text on our website, wealthtrack.com. In describing all the unusual policy actions taken he said: “Central bankers in the United States, and those in other advanced economies facing similar problems, have been in the process of learning by doing.”


This week’s guest is appalled by the Fed’s expansionist policies and worried about its known and unknown consequences. He is Financial Thought Leader James Grant, editor of Grant’s Interest Rate Observer, a twice monthly, self-described “independent, value oriented and contrary minded journal of the financial markets.” It also happens to be a must read among top professional investors. Jim is also an historian and author. His most recent book is Mr. Speaker! The Life and Times of Thomas B. Reed. I began the interview by asking Jim if the Fed wasn’t just doing its job: promoting maximum employment and price stability.


JIM GRANT: That is a good legal question. I think the subsequent financial question is whether there is any reason, either in theory or in common sense, to suppose that suppression of interest rates- and really let us call a spade a spade- price control is going to improve the prospects for working Americans. It seems to me that everything argues against that. The Fed, again to use plain talk, is suppressing interest rates. It is muscling around the structure of interest rates known in the trade as the yield curve. It is virtually allocating credit with its exertions, and it’s in the business of price control. Now, that has never worked. Chairman Ben Bernanke in remarks at Jackson Hole, Wyoming now a week or two weeks ago said that… he said, “We are learning by doing.” Learning by doing. Now, we have thousands…


CONSUELO MACK:  And he’s a financial historian as well.


JIM GRANT: No, he’s not.


CONSUELO MACK:  Well, that’s what he supposedly he is. Supposedly, he’s a student of the Great Depression.


JIM GRANT: He’s the kind of financial historian, if I may say so, who neither reads history nor writes much of it. That’s the kind of financial historian he is.


CONSUELO MACK:  All right.


JIM GRANT: There is a record of monetary history going back thousands of years, yet he says we are learning by doing. This, to me, is not the utterance of an historian.


CONSUELO MACK:  So when you said what we’re having in this interest rate suppression, which means that basically by buying Treasury securities and mortgage-backed securities, they are sopping up supply and, therefore, they’re keeping interest rates low.


JIM GRANT: And they are planting an idea in the mind of the market that interest rates will remain low and, that if they do move up, the Fed will be there to tamp them down again. So they kind of bring the marketplace into partnership. People are happy to play along with the Fed. It’s an easy way to make some money.


CONSUELO MACK:  People being Wall Street, institutional investors.


JIM GRANT: Yes, professional investors. Right, and today the chairman of the Federal Reserve Board talked about how the stock market’s going to go up which is nice for those who deal in common stocks or who own them, but for those about whom he’s supposedly is most worried, namely the victims of this most miserable and protracted of labor market slumps- not most miserable, certainly among the more protracted labor market slumps- to these people, rising stock prices…




JIM GRANT: Yeah, savers and people looking for work.


CONSUELO MACK:  But it’s interesting in that when you look at what the Federal Reserve has done, is that we have had a very positive response in the stock market to the expectations and the actuality of the Fed’s actions.


JIM GRANT: Sure, it’s free money. It’s free money, and it’s no competition from the bond market. I don’t mean to say that every single company listed on the New York Stock Exchange or NASDAQ is unworthy as an investment. On the contrary, there are, I think, some things to do in the stock market- there perhaps always are some things to do in the stock market- but the Fed has got it into its head that if it succeeds in levitating the average level of stock prices, that good things happen from that. Now, shouldn’t it be that the stock market goes up because good things are happening to the companies that issue the common stocks? I mean, in his rhetoric, in his language of technical eco terms, in these bouquets of calculus and algebra that fill the footnotes and the technical sections of these papers, they seem not to focus on two and two.


CONSUELO MACK:  So let’s talk about the law of intended or unintended consequences in this point. So what are you seeing? I mean, what kind of distortions are you seeing?


JIM GRANT: Well, the distortions are all around us and in his speech in Wyoming, Chairman Bernanke enumerated four there the tritest and perhaps the least interesting and meaningful to Americans of the many that are possible. For example, he neglected to mention the fact that if you save… there must six or eight people in America who do save. Right? Many of them watch you.




JIM GRANT: He neglected to mention … he might have said,” Sorry the absence of interest rates is starving you, but we don’t mean that to happen.” He didn’t even mention that. He might have mentioned that zero percent interest rates makes hash and nonsense out of credit analysis. The money markets are full of instruments like commercial paper, certificates of deposit that yield just about nothing before tax, after tax even worse, worse than nothing, and people spend time still analyzing the credit worthiness of these claims. But why? If they yield nothing, why bother? So the suppression, the manipulation of interest rates distorts and makes a mockery of credit analysis and, furthermore…


CONSUELO MACK:  Well, you know, most of us don’t care about credit analysis. You do.


JIM GRANT:  Oh, yes you do.




JIM GRANT:  We cared about it in 2008 when we discovered no one was doing it, and another thing, Consuelo…


CONSUELO MACK:  Put me in my place.


JIM GRANT:  No, no. Another thing that the Fed has not thought about apparently is that all of us who invest, either part time or full time, are kind of doing it in this hall of mirrors. Right? We don’t know exactly what values are, because values to a degree derive their value from some calculated stream of discounted future income; but if interest rates are zero, how do you do the arithmetic? Right? So investment values are distorted, and they’re distorted furthermore because they go up because the Fed says they should, not because companies are doing better. The whole thing is kind of nuts when you think about it.


CONSUELO MACK:  So isn’t there some method to Ben Bernanke’s madness? If he’s keeping interest low, that means that the people who are loaning us, I should say, who are loaning us money, the Chinese and the Russians, for instance, and the Japanese, then in fact the value of their Treasury holdings will be stable at least.


JIM GRANT:  Well, if I were a creditor to this government and running affairs in China or Russia or some place or Japan, I would like some interest income just to make me feel as if they cared. I think that by suppressing interest rates and by creating hundreds of billions of dollars, new dollars a year, the chairman is not, after all, reassuring our creditors, but he ought to be alarming them. He ought to be alarming our thoughtful creditors. Now, some of our creditors don’t care so much about the market value of their obligations, of American obligations. What they care about is manipulating or suppressing or managing their own exchange rate so they can export more to this country. So they’re not so concerned with interest income as they are with keeping the factory’s chimney smoking.


CONSUELO MACK:  Well, just one more point, I mean, along these lines is the fact that the Fed has been pretty consistent since 2008 in that they have pulled out all stops. They have done whatever they can do. I mean, they’ve done it kind of incrementally, but now…


JIM GRANT:  Yeah, but from time to time you never knew exactly what was going to happen next.


CONSUELO MACK:  True. You didn’t know who was going to be bailed out, who was going to be financed, right.


JIM GRANT:  And so, again, what this amounts to, Consuelo, in my opinion, is a full-scale federal war on Adam Smith’s invisible hand. This is a campaign against what the economists call the price mechanism. It’s this miraculous human contrivance that allows Wal-Mart to stock its shelves because at a price merchandise moves or it doesn’t move. That’s the way a complex economy is coordinated. It’s so simple, we scarcely pay attention to it, but this miraculous contrivance is exactly what the Federales are trying to stamp out. They put their thumb on the scale. They don’t want prices to be cleared in the marketplace. They want to dictate them in the interest of macro-economic stability. How the heck do they know what’s going to be stable?


You know, there was an episode in our not-so-distant past. There was a depression in 1920, ’21. It’s the depression Chairman Bernanke never mentions. It lasted 18 months peak to trough, and to meet this cataclysm, this disaster… you know, wholesale prices were down 40%. Unemployment went from three percent to twelve percent.


CONSUELO MACK:  That’s a depression.


JIM GRANT:  Real activity declined by nine or ten percent. To meet this, the Feds: A, balanced the federal budget and, B, raised interest rates. And guess what? The thing ended. Markets cleared. Assets got cheap. People bought them because they were bargains, and it was off to the races. That was a kind of free market depression. What they’re doing in the past five years or whatever it’s been, one loses track, is everything except that; and the consequences in no small part are the 23-year-olds at home in their bedrooms of their childhood wondering when somebody’s going to respond to their e-mail looking for work. In the interest or with the best of motives of making a capitalist system more humane, they have made it hugely inhumane. Let markets work.


CONSUELO MACK:  So Jim, one of the things that you do in Grant’s Interest Rate Observer aside from analyzing this kind of behavior and telling us in plain language what’s going on, is that you also give investment advice as well, and so how do we invest in a period like this?


JIM GRANT:  Well, with an eye always to a margin of safety, but it seems to me that from time to time Mr. Market does present one with what seems like a bargain. For example, we have recently waxed bullish on, of all companies, General Motors. I spent the last two hours…


CONSUELO MACK:  Right. I almost fell off my chair when you told me that.


JIM GRANT:  …sermonizing against federal intrusion into our commercial and financial affairs. Government Motors has emerged from bankruptcy with the cleanest of balance sheets, with a new and, I think, rather energized management structure. It means to do better. The American odometer has put on a lot of miles. We have the oldest, I think, oldest car fleet on the road right now.


CONSUELO MACK:  So there will be demand for new cars.


JIM GRANT:  Yeah, people are going to want that new car smell. GM, I think, is in a good way. Now, no good value story is complete without the object of one’s affections having a lot of hair on it. Right? Something has to be wrong with it to put people off. In the case of GM, it’s the government’s important equity holding. So the bearish case on GM is, why buy this thing? It might be cheap, but it is cheap like six times the estimate for next year of earnings. But why buy it if the government’s going to come out and dump its stock? Well, GM, we think, may very well be the buyer of that stock itself. It has the balance sheet to do it. So for all those reasons, for operational reasons, for financial reasons and for strategic reasons, perhaps we think that GM is a bargain.


CONSUELO MACK:  So let me ask you.


JIM GRANT:  And we add this. And because it’s well-financed, because the balance sheet is clean, the chances of permanent impairment of one’s capital, which is always a consideration, we think are low. So that’s our story on GM.


CONSUELO MACK:  As far as the investment environment and what’s going to do well in the market and what’s not going to do well, given the backdrop of what the Fed has been doing, so what do you… what are the opportunities that are being created? What are the biggest risks that are being created?


JIM GRANT:  I think that the biggest risk… and I’ve been so wrong about this. I preface it with my own assurances that my judgment is just as infallible as the chairman’s, although what I don’t do is impose it on others, but in my opinion, the so-called safe assets are the unsafe assets, and the so-called risky assets paradoxically will turn out to be the remunerative assets. Today we live in this land of risk on and risk off. This is what you hear on cable television with Wall Street, this kind of yak-yak you hear on Wall Street, and conveniently the brokers define these categories for us. We have to think safe or risk off… let’s see, risk off. Right. Safe assets.


CONSUELO MACK:  Right, treasuries.


JIM GRANT:  Right, sovereign. Yes, U.S. Treasuries and, of course, let us not forget European sovereign credit yielding less than zero, so-called, the dramatic on northern European …


CONSUELO MACK:  Swiss bonds.


JIM GRANT:  Yeah, Swiss and Danish and German yielding less than zero. So you pay them to keep your money. Doesn’t that sound wonderful? Safe, safe. Well, as we learned in the ‘60s, ‘70s and early ‘80s, and have learned subsequently in different settings, safety is a defined term. Bonds are not intrinsically safe, nor are stocks intrinsically risky. There ain’t no intrinsic in investing; it’s all a matter of price and value. If bonds yield nothing, are they really intrinsically anything except risky? No, to answer my question. They are risky. So in my opinion, the years to come will see a great shifting in our perceptions of risk.


So if you have a good company, and there are many good companies that have the capacity to adapt, that can deal with inflation when it comes, that can deal with deflation, that can adapt their products to a changing marketplace and that are priced at, say, 13 or 14 times earnings that are yielding two and a half percent, to me those are, relatively speaking, pretty good investments over time compared to Treasuries and other sovereign emissions yielding zip. So if I had to pick, and I do, between stocks and bonds, I pick stocks, and if I had to pick between risk on, so-called, and risk off, give me risk on. I want what they regard as risky, and I would sell what they regard as safe.


CONSUELO MACK:  And as far as the stocks are concerned, are there some stocks that represent the best, again, you know, best investments as far as price, value, yield?


JIM GRANT:  I mean, Google, for example, we wrote about. It was a little bit lower, but we wrote about it this summer, and it had a market multiple. It was like 13 or 14 times the estimate, and this is one of the great collections of American and, indeed, of world intellects, and they sit around all day thinking stuff up, and they have a good profitable business, a fabulous balance sheet. They seem to have the future in sight. They have demonstrated that they know something about technology beyond the fax machine.


And I’m thinking that, as compared with a Treasury that yields little or a Treasury inflation-protected security that yields less than nothing, that Google in a market multiple is a pretty good warrant or option on human progress.


CONSUELO MACK:  So where do we go for yield?


JIM GRANT:  Well, there ain’t none. There is very little natural yield. However, there are what used to be called business man’s risks. We now call them business people’s risks on Wall Street that will deliver you some yield at a reasonable risk. One of these opportunities is called prime rate or floating rate funds, and they are funds of bank loans. Now, the loans are to leveraged or indebted companies, but you as a lender to them in the bank level get a senior claim, and the senior claim is, I think, a safe claim, and these leveraged loan funds as they’re called, or prime rate funds, deliver interest income that will go up if interest rates go up, and over the past 12 months or so, they’ve delivered seven or eight percent over that time in interest income, and I think they will likely continue to do that. They have been much less popular than speculative grade or junk bond funds. Junk bond funds have had huge inflows. These prime rate funds have had very little in way of investment inflow. So we like those. They’re a decent business person’s risk for interest income.


CONSUELO MACK:  So are there any particular prime rate funds that… ?


JIM GRANT:  Well, Eaton Vance has one that we have spoken well of, for example. All the big mutual fund companies have them. Another set of interest spinning entities in this world of no-interest income are the mortgage real estate investment trusts. Annaly, NLY, is one. American Capital Agency, AGNC, is one. Hatteras, HTS, is another. MFA, same ticker, MFA, is a fourth. We’ve written about them. We followed them for years and years. They are leveraged, meaning they do business with borrowed money. They borrow short and lend long. There are risks, and there are risks that, for example, that the Fed might succeed so well that it crushes all interest spread in our world of mortgages, but these things yield 12 and 13%. They are trading at book value or slightly above or slightly below it. Each of the four I mentioned has some particular merit and, in some cases, some characteristic frailty, but taken as a portfolio, these four, it seems to me, again, in the context of taking some reasonable risk for income, these are not a bad way to proceed.


CONSUELO MACK:  And I know that Annaly has been a past one investment recommendation of yours, and we’ve had the CEO, Mike Farrell, on WEALTHTRACK a couple of times in the past. As far as, you know, we’ve got an election coming up, so what do you think the impact of the election is going to be on the markets? Is it going to make a big difference?


JIM GRANT:  Well, we can talk about religion next, now that we’re talking about politics, and this is– I’m not sure what my political views are worth, but I’ll give you them. It seems to me that this issue that the election is really about from the financial point of view, the election is about the price mechanism. It’s about the invisible hand. It’s about supply and demand. Do we prefer that to the government? That’s the question. I mean, everything else is being discussed, but the essential financial issue in this, to me, is shall we give, at long last, shall we restore capitalism to Wall Street? Shall we restore the price mechanism to its proper place in our money and capital markets? Shall we get out of the business of suppression and manipulation?


Now, Mitt Romney is a most imperfect champion of these ideas, but he is infinitely better than our incumbent in my opinion. Therefore, I mean, Grant’s Interest Rate Observer has only endorsed one political candidate in all of 30 years in business, and that was Grover Cleveland, and he was dead and we endorsed him. And I’m not going to endorse Mitt Romney, but I am going to vote for him.


CONSUELO MACK:  That is great. Jim Grant from Grant’s Interest Rate Observer, thank you so much for joining us on WEALTHTRACK.


JIM GRANT:  Well Consuelo, it has been my pleasure. I thank you.


CONSUELO MACK:  At the end of every WEALTHTRACK, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week we are taking the lead from our guest, Jim Grant, who mentioned a portfolio of mortgage backed REITs as one way to feed our widespread yield starvation. This week’s Action Point is: consider investing in REITs through a traditional real estate investment trust index fund. Morningstar’s favorite is the Vanguard REIT ETF, symbol VNQ, the largest in the category with low fees and less volatility than the competition. Incidentally, Morningstar recommends holding REITs in a tax-deferred account, such as a 401k, because their dividends are taxed as regular income.


I hope you can join us next week. We are going to interview Great Investor David Winters of the five-star rated Wintergreen Fund who is going to challenge three big investor misconceptions. Don’t forget, if you are interested in seeing this week’s program again, you can go to our website wealthtrack.com. It will be available as a podcast or streaming video. And while you are there, you can also see additional interviews with WEALTHTRACK guests answering some unusual questions in our new and improved WEALTHTRACK Extra feature. 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.

James Grant: The Federal Reserve’s Most Outspoken Critic

September 28, 2012

Federal Reserve Chairman Ben Bernanke has been widely credited with playing a key role in saving the global financial system from spiraling into a deeper recession. As a recent Financial Times headline read, “Central Bank Action Lifts Gloom”; “Bold Fed and ECB Moves Cheer Investors- Confidence Increases in U.S. and Europe.” There is no question that the Fed and to a lesser degree the ECB, the European Central Bank, are pulling out all stops to boost economic growth, investor confidence, and stock returns, going far beyond what their critics maintain is their proper role. As this week’s guest, financial journalist and historian James Grant told me, “Central bankers have morphed into central planners.” Continue Reading »

Mary Jane McQuillen & Bill Paul

June 29, 2012

Aligning Financial Goals With Personal Values

We are kicking off a new season of WEALTHTRACK with the first of a two part series devoted to what’s being called “impact investing,” the practice of aligning financial goals with personal values. Impact investing goes beyond what used to be called socially responsible investing, which was designed to avoid certain businesses such as gambling, alcohol and tobacco. It is now pro-active as well, investing in companies that are making a positive impact in a wide range of areas including environmental, societal and governance (ESG).
Continue Reading »

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