Jim Puplava: Rick Santelli joins me from CNBC. And Rick on the day you and I are talking, the President is proposing a Home Refinancing Assistance bill which on the surface sounds pretty good but they’re making it sound like a free lunch. I mean they’re going to allow people that are upside down on their mortgages to refinance at going rates. On the surface that sounds like a good thing but you and I know Rick there’s no free lunch. Who is going to pay for this?
Rick Santelli: Well, right off the bat and believe me, I just finished reading it’s not only that plan—kind of what floor traders and I have dubbed the group refi plan—but there’s also the FHFA, the Federal Housing Finance Agency. They also put forth a plan today to try to get through some of the foreclosures by kind of a group—not sale as much—as a group offsetting of some of these properties in lieu of the purchasers renting them. So there’s a lot of things out there but there are no free lunches especially in the former, Jim. A cost of anywhere from four to eight billion dollars seems to be floated with that plan on the group refi and that would of course be predicated on taxing banks.
Now let me get this straight we’ve gone through this before. We feel bad for people that are upside down. We feel bad for people that are losing their homes. But in the end all of us who have ever gone through a closing know that there is a boatload of forms you sign. Most people do bring in an attorney for closing and it’s only a couple of hundred, three hundred dollars to do so. I don’t know, I had a sore hand the last time I went through a refi before the crisis the last time I bought a house.
So to me some of the rationales out there Jim, like, “Through no fault of their own.” I’m not buying that but I do have sympathy. But yet those billions that this program will cost will still flow to the taxpayers. So this isn’t as direct a taxpayer bailout but it’s indirect. Because we all know whether it’s banks or donut companies or car companies or banks with regard to debit swipes that when you push their costs up through taxation or plans or Dodd-Frank regulations the taxpayer is the next link in that daisy chain.
Jim Puplava: And speaking of where all this money is coming from, the President has just asked for an extension of the debt limit by another 1.2 trillion. So Rick, we’re going to be at $16 trillion at the end of the government’s fiscal year. Yet I’m looking at the bond markets and I’m looking at yields on treasuries at 1.8%—they’re about the same over in Germany. It seems that bond investors would demand a lot more but they aren’t, they’re demanding very little. Is this a question of, there’s just so much liquidity floating out there it’s looking for a place to land?
Rick Santelli: Yes, and I think that the Federal Reserve, our central bank, central banks around the world are basically making very much cheap easy money out there. And we all know that when you make something prolific in volume, usually you diminish the value of that. So that capital then starts moving into riskier financial assets, which is a buzz phrase really for stock market. The central banks really want some of these funds to go into the equity markets.
But the problem with all of this is, of course, that these low interest rates reflect another side of that liquidity where investors that may be more prone to risk because of this easy capital that’s being printed still like a bit of safe harbor. Many institutions believe that there’s one way to look at investment, what it yields you in return. But in many other ways keeping your powder dry and putting it in Treasuries or T-bills where you are actually giving the government in some instances with negative T-bill yields to not quite give you all your money back just so you know it’s safe. The enablers of this, of course, are low interest rates. It is something going on globally that isn’t a good thing. Think Congress here Jim, Congress, and I can’t remember who said it but let me think back. I do believe that one of the big economists and I can’t remember which one. Oh, I know who it was it was the ex Vice Chairman of the Federal Reserve, Alan Blinder. Wrote an op-ed about a week and a half ago and it was called “Debunking Some Myths.” And what he was debunking is, is that to worry about debt is useless when the world wants to give us so much of their money at such a low rate.
So let me get this straight okay? It doesn’t matter if you spend the money well. It doesn’t matter that we have a huge deficit. And that $1.2 trillion debt ceiling fly by night passage last Thursday cost every man, woman and child in this country about $3,800.00. That ultimately the only way to get Congress to stop and to spend the money more wisely is to hope interest rates go up. But yes, it’s a dynamic and it’s counter intuitive. In the old days Jim, we talk about the bond vigilantes, well the bond vigilante’s are, you know, like at the 19th hole drinking a couple of beverages wanting some of that easy capital just like everybody else.
Jim Puplava: Well you know I’m looking as we’re speaking Rick, I’m looking at the national debt clock, which just crossed $15,301 trillion, and I don’t think the average citizen understands that per citizen it’s about $180,000.00 per family. Here’s the one I love, per family, assuming a family of four, you’ll owe about $684,000.00. I mean, that’s a lot of money and I don’t think we have the money to pay for it. So it just tells me Ben is going to do QE five, six, seven and maybe we’ll be going to the year 2020 on zero interest rates.
Rick Santelli: Well Jim I bet you about four years ago there was somebody on Greek radio that was talking about the same game in the same alley doing the same things but yet that party ended abruptly. And I do think that when you are talking these huge numbers at families oh that is including underfunded liabilities with some of the entitlement programs; let’s keep it really straightforward. There’s about 312 million people in America, okay, there’s about just shy of 7 billion people in the world. Now if we just look at the hard numbers, not even going the underfunded promises that we’ve made for the future, as I said about $3,800.00 for every man, woman and child at $1.2 trillion.
If you recall, there was another $2.1 trillion that was done in August. The combined just for August and last Thursday in terms of the increase to the debt ceiling that accounts for $10,500.00 for every man, woman and child in the country. That’s just the last two increases. Now if you really want to go global, let’s look at the entire nest egg here where 312 million Americans, if you look at the entire $16.4 trillion debt ceiling that we will hit guess when, right after the election in November. That would equate to about $52,400.00 for every man, woman and child in America. And just to put a global spin on it with 7 billion people in the world that would mean every person in the world would have to write a check to the treasury for about $2,400.00 just to take care of that $16.4 trillion debt ceiling not including any of the other programs that are underfunded.
Jim Puplava: I want to turn my attention to where you cover and that’s the futures market, Rick. A lot of futures is driven by headline news. This happens here in the financial markets, a central banker does this or says that. How much of the futures market is driven by let’s say charts versus fundamentals versus news. I mean, something happens, the markets react. But how much of it is fundamental? How much of it is just guys watching charts?
Rick Santelli: You know, it’s very difficult to quantify that but I would say this. The kind of news that moves markets, as we on the floor affectionately call tape bombs, and tape bombs definitely are more frequent: think Europe, think China. Think some of the stories of the day like these mortgage programs where they are trying to fix things that are radically broken. They move markets they come out of left field and with Twitter and all of the different social media this news is flying around in nanoseconds.
Now the next step of how this gets affected in the markets, many of those high speed tape bomb players also trade what we call high frequency trading, HFT. Where much is done on equations that are programmed into computers to actually monitor the news and try to scalp very small amounts of money very quickly. These aren’t long lasting positions.
Next in line: charts; and believe me on one hand I’ll talk to an old trader who will make a statement like, “There’s thousands of ships below the level of the ocean sitting on the ocean floor and in each one of those ships there’s a chart room. So charts don’t mean anything.” I understand that mentality but being an ex trader I like charts. So I think technical analysis is about half the game as well. And remember it isn’t the kind of voodoo that people that don’t understand technicals and markets always claim. Just think about it this way, mankind, humans are biological in nature and they tend to have repetitive behavior.
So a lot of what’s in the charts is just kind of a picture so to speak of how investors behave under certain conditions. And the longer you look at the charts, what you realize Jim is they tend to be repetitive. So there is something to that. I would think it’s a third, a third, a third. But futures markets aren’t for everybody. So listeners, be very careful. If you are playing the futures markets, even when you go to the restroom, you almost have to have a phone to monitor where the market is.
Jim Puplava: I want to stay there for a minute and that is the issue of integrity. I saw you on the air today talking about they may have found this $1.2 billion with MF Global. Rick, over the last three or four years we’ve seen the issue of Refco. Even smart guys like Jimmy Rogers had money there, then MF Global. I recently interviewed James Koutoulas, who is fighting on behalf of investors. How important is it that investors get their money returned because to me market integrity is everything?
Rick Santelli: Well first of all, I’ve interviewed James Koutoulas several times as well. He’s a good guy he’s doing pro bono taking care of thousands of MF investors trying to get their money back. Having said that I think this whole thing is just deplorable. This should have been, in my opinion, a Chapter 7 bankruptcy regarding MF Global, Man Financial Global. And I think it would have been the right way to go considering that segregated accounts in the futures industry.
And what that means listeners is, if you put up a T-bill, if you put up a gold receipt, a warehouse receipt for corn, whatever it is you put up, cash at your clearing firm just like you put cash in your bank and they clear your check, you’re allowed to make trades in the futures markets. And literally unlike the mortgage mess through no fault of their own these traders, just leaving money sitting there so they can trade and do their trading business, that money was taken. And it was taken to satisfy other bills in this bankruptcy and I think this is a huge issue. And the forensics on MF seem to be complete. The most recent stories Jim say they now have a pretty good audit trail as to where all the money is. They’re just not telling us any more information supposedly because they may be trying to claw back and that would impede their progress. But at the end of the day I personally think MF will get much more than the investors, much more than the current 72% which means of course that they’re getting a bit of a hair cut, a 28% haircut. But I think they’ll get more back.
But I think this is an interesting litmus test because there has been plenty of other cases in financial futures where malfeasance, if malfeasance is going to be what’s found here, or just general wrong doing. No matter how that has turned out, they’ve always managed to keep investors segregated funds sacrosanct. And I think that this is a horrible blemish on the regulators. And I do think that this needs to be taken care of so that we can be more confident that the money we put into a clearing firm that clears our futures business is safe.
Jim Puplava: Two final questions, and they’re both kind of related. There’s a saying that there’s no bad bonds there’s just bad pricing and for a while it seems like we had bad pricing in Europe. Now we’re finding that out via Greece, Portugal, Spain. How long before we find there’s bad pricing in Japanese debt, which is almost at very low interest rates historically and likewise with the United States?
Rick Santelli: And don’t forget China, not so much their capital markets or their financial assets or paper but think housing, think building lots of buildings and bridges that aren’t lived in or aren’t traveled. And I think you start to get a better picture. My own feeling is listen, we can’t make the markets the Yucca Flats of toxic financial waste okay. But none the less, if somebody came from another planet, didn’t understand everything but was very intelligent, that’s certainly what it would appear to those beings. And it would also appear to them how ridiculous the notion is that you have a treasury that issues debt, then you have a federal reserve, a neighboring agency of the government that buys that debt. This daisy chain, it’s just very unusual.
So I think this game isn’t going to last for much longer. I think over the next couple of years you’re going to get to the heart of what ails much of the market place. But I think the downside to once you arrive at that intersection is two fold. The first is, I think we are robbing our future of some of the growth like Japan ended up doing. And I think the other part of this is that when we do have more clarity even though things aren’t fixed, markets like to then firm up a bit. So you might get many of the economic trading markets to do better once we get to that intersection. What do you think is going to happen Jim when there’s less anxiety, that we’re closer to understanding the problem? All of those investors that have artificially pushed interest rates low in Boons, Gilts in the UK, Treasuries in the US. Once they vacate that parking lot of safety, interest rates could move up quickly and servicing that debt could add tens and tens of billions of dollars to the federal government’s deficit balance sheet.
Jim Puplava: A day of reckoning in the future. Well Rick, I know you have to go back on the air. I want to thank you for joining us on the Financial Sense Newshour. Keep up the good work my friend.
Rick Santelli: Well thanks Jim. And if you ask me back I’d be more than happy to join you again.
Jim Puplava: Thank you so much.
Rick Santelli: Thank you.