MUST SEE INTERVIEW – JULIAN ROBERTSON: “WE’RE GOING TO PAY THE PIPER”
24 September 2009 by TPC
6 Comments
Julian Robertson of Tiger Management called the recession and the following rally. But he’s turning more cautious and now believes we could see a huge spike in interest rates and a potential double dip recession.
Part 1 on our macro problems:
Part 2 on some of Robertson’s investment ideas:
I guess I don’t understand the fundamentals of economics. I certainly understand how the lack of foreign demand for US goverment debt would result in a spike in interest rates – both short and long-term rates. Lower demand for bonds and interest rates must go up.
BUT I don’t understand why that would lead to inflation. My understanding of economics is that high interest rates ultimately lead to to lower inflation or deflation. Investors may demand higher interest rates if they fear future inflation, but they can also demand higher interest rates for other reasons, primarily default risk or currency risk.
Why does the US need foreign buyers of US government debt anyway? There is plenty of money which US investors and institutions are holding on the “sidelines”. Why wouldn’t that may flow into goverment debt if interest rates rise due to lack of foreign demand?
Currently the return on US goverment debt is so tiny that you really have to fear all other asset classes to buy US debt or have no other options. What would be the problem with 10-year Treasuries at 7% or 8% and inflation at 2% (better yet with deflation). That would be a real yield of 5% to 6% and would make US debt an attractive investment. It might put the brakes on the US economy (and world economy for that matter) but how would that drive up inflation?
I am sure Julian Robertson is a very smart guy, but I don’t follow his logic. I understand how inflation fears drive up interest rates, but not how lack of demand for US debt which would drive up interest rates, would in turn drive up inflation.
Can someone please clue me in?
I believe it would likely be via the continued profligate spending and therefore the continued trashing of the dollar. A lower dollar directly impacts any imported items price for US consumers.
Just my guess, though.
thanks TPC.
i was just searching the web and i found this story about an interview JR allegedly gave in 2005.
here´s the short story:
Funds Manager Predicts Global Economic Collapse
by AL MARTIN
There was an interview on CNBC of the renowned funds manager Julian Robertson. He is one of the greatest of the old-timers. 53 years on the Street. He manages the Robertson group of funds. They used to call him, still do call him `Never Been Wrong` Robertson. He has predicted every economic cycle, every debacle, every bull market, and every bear market.
Of course, he`s a very old man now. But his reputation on the Street is like nothing you could imagine. When the segment of his interview was through, his comments alone took the Dow Jones down 50 points. Just on his comments alone. That`s how powerful this man`s reputation is.
Robertson was actually a teary-eyed, an old man. When Ron Insana asked him about his predictions, he said that he`s worried about the speculative bubble in housing and the fact that more than 1/4 of all consumer spending is now sustained by that bubble, plus the fact that 20 million citizens could lose their homes in a collapse of the speculative bubble in housing, and that the Fed and, indeed, central banks worldwide would act in concert out of desperation to reinflate the global economy in the process, creating an inflationary spiral unheralded in the economic history of the planet.
Insana then asks, “Where does it end?” And he said, “Utter global collapse.” Not simply economic collapse; complete disintegration of all infrastructure and of all public structures of governments. Utter, utter collapse. That the end is collapse of simply epic proportion.
In 10 years time, he said, whoever is still alive on the planet will be effectively starting again.
and here the even darker, very depressing long version (“detention compunds”): http://mises.org/Community/forums/p/1355/18561.aspx
can anybody verify the truth of these articles. did JR really say this on cnbc tv to Ron Insana?
google is only linking to gold bug/conspiracy sites who themselves are referring to an article written by Al Martin.
Michael Mross, a german journalist (working for CNBC) wrote about it too in october 2008.
the article includes a thumbnail showing JR on streetsigns (dow indicates 2005).
but wsj obviously deleted the video.
if true the MSM should have a collective interest to hide this interview.
Just to clarify….. my question regarding cause and effect. I understand the arguement for inflation and how that would lead to higher interest rates. But I don’t understand how higher interest rates due to lower foreign demand for US debt would lead to higher inflation which is what Julian Robertson says in the interview.
Rob, I think it would go like this: debt buying from China/Japan goes down -> demand for USD goes down and interest rates go up -> USD depreciates vs. other currencies -> price of imports in the US goes up -> inflation (actually more likely stagflation)
This is happening on a small scale in Hungary with difference that Hungary can’t issue debt in it’s own currency to outside investors.
I am still not following the logic. If interest rates go up (due to lack of Chinese/Japanese demand for US debt) before inflation occurs, then that would increase the attractiveness of US debt (lower prices, higher yield) for other investors. (They would buy once the price/yield became attractive). Higher USD denominated interest rates would act to reduce the USD carry trade which one would think would act to strengthen the USD. (Investors would reduce their borrowing in USD to invest in other currencies and in stocks). Stock prices would fall which would increase demand for bonds. Higher demand for US debt from other investors would maintain demand for the USD.
Rising real interest rates have deflationary rather than inflationary effect. High interest rates may be a result of inflation as investors demand compensation for higher future prices, but I don’t see how rising interest rates would lead to inflation.
If no foreigners want to buy US debt, what happens? Americans must buy all the debt. Since Americans will be buying US debt instead of US products, foreign products and foreign assets (bonds, stocks, etc), there will be less demand for US and foreign goods and services and less demand for foreign currencies. Same as there would be less demand for the USD if foreigners stopped buying US debt. Where does the pricing pressure come from? Why would net demand for the USD necessarily fall?
A currency crisis from excess debt issuance comes when a country is issuing debt in another currency. (e.g. Argentina or Mexico borrowing in USD, Hungary in EUR)
There is little doubt that less Chinese and Japanese demand for US debt would lead to higher interest rates unless the Fed steps up buying of Treasuries againr (and that is where the potential problem lies). If the Fed and big banks continue to step in to buy US debt and monetize it, then the money supply will increase and a higher level price inflation or less deflation would occur, but if the Fed only increases its balance sheet by the amount that private credit is being destroyed (deflation of the credit bubble), then the overall money supply might remain quite stable.
If the big (mostly insolvent) banks which have been buying up Treasuries (and equities) with the excess liquidity (borrowing at 0% and earning 0.1% to 2%) start selling due to rising interest rates (i.e. bond prices would fall and they don’t want to loose money), won’t that act reduce the money supply? The Fed is the wild card. If the Fed steps up its buying of Treasuries to keep interest rates from rising, then we have a complete disaster on our hands, but if the Fed lets the markets work then equalibrium will be reached.
I don’t see the problem with decreased foreign demand for US debt. The US should be able to finance itself with domestic savings. I see the primary problem as being the Feds decision to buy US debt to effectively print money. Theoretically, the Fed has a mandate to maintain price stability. If prices rise above target they would need to stop buying or start selling Treasuries. The real risk is that we can’t count on the Fed. Everyone is worried that Helicopter Ben will just keep on printing, but maybe he is really just trying to stop a deflationary spiral. Maybe he knows more than he is letting on.
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