WEBVTT NOTE Current Market Conditions: 8 Oct. 2008 1 00:00:00.000 --> 00:00:15.600 I'm here with Kevin Duffy, who is on his way for international travels and only has a few 2 00:00:15.600 --> 00:00:18.760 minutes, but it's a pleasure to have him here. 3 00:00:18.760 --> 00:00:24.160 He's the president of Bering Capital Management and also... 4 00:00:24.160 --> 00:00:31.040 I'm actually not the president, I'm one of the founders and one of the two principals. 5 00:00:31.040 --> 00:00:34.600 My partner is Bill Wagner. 6 00:00:34.600 --> 00:00:39.560 You're also known in the industry as one of the biggest bears around and I suppose you've 7 00:00:39.560 --> 00:00:44.240 sent some sense of indication, not that it helps anything, I suppose. 8 00:00:44.240 --> 00:00:47.320 Yeah, we've been bears for a long time. 9 00:00:47.320 --> 00:00:54.920 We actually started a hedge fund about six and a half years ago, and we started, we were 10 00:00:54.920 --> 00:01:01.460 actually a little bit early, we've been net short the entire time, and we actually 11 00:01:01.460 --> 00:01:06.160 shorted Fannie Mae and Freddie Mac right out of the gate. 12 00:01:06.160 --> 00:01:11.920 So we were early, but eventually, I guess ultimately, we've been vindicated. 13 00:01:11.920 --> 00:01:17.840 You must have some sense of that it's rather silly that so many people seem to be taken 14 00:01:17.840 --> 00:01:19.880 aback and surprised by all this. 15 00:01:19.880 --> 00:01:27.440 Yeah, I mean we've been, anybody who's been on Mises.org or LewRockwell.com, I mean they're 16 00:01:27.440 --> 00:01:36.040 not surprised in the least by any of this and so it's pretty surreal to watch this all 17 00:01:36.040 --> 00:01:37.040 unfold. 18 00:01:37.040 --> 00:01:47.040 What was your reaction to the massive bailout? What were your expectations concerning its effect on the market? 19 00:01:47.040 --> 00:02:02.040 It was really fascinating to watch it kind of unfold. I mean, it was originally sold that the market would absolutely crater if it weren't for this bailout. 20 00:02:02.040 --> 00:02:13.040 and we had the Monday about a week and a half ago, the market sold off over 700 points on 21 00:02:13.040 --> 00:02:14.040 the house vote. 22 00:02:14.040 --> 00:02:18.840 And actually the market had been down about 300 points and it just tacked on another 400. 23 00:02:18.840 --> 00:02:27.440 And then later in the week as it was becoming clear that the house was going to cave in, 24 00:02:27.440 --> 00:02:34.800 The Market, it tried to rally but it really never was able to get back where it was the 25 00:02:34.800 --> 00:02:37.080 Friday before that vote. 26 00:02:37.080 --> 00:02:42.480 And I think Friday was just a fascinating day because the market, it rallied into that 27 00:02:42.480 --> 00:02:49.160 news and then as it became obvious that the bailout was going through, the market turned 28 00:02:49.160 --> 00:02:54.200 around and it closed on the lows of the week and of course this week we've just had sheer 29 00:02:54.200 --> 00:02:55.200 pandemonium. 30 00:02:55.200 --> 00:03:03.520 So it's kind of fitting that this was supposed to stabilize the market and it's done anything 31 00:03:03.520 --> 00:03:05.120 but stabilize the market. 32 00:03:05.120 --> 00:03:09.760 Yeah, the conventional wisdom seems to be that the bailout didn't have any effect. 33 00:03:09.760 --> 00:03:17.720 Is it something like trying to dye the ocean green with food coloring or something? 34 00:03:17.720 --> 00:03:22.440 What is the effect relative to the size of international capital flows of a bailout of 35 00:03:22.440 --> 00:03:24.080 this size? 36 00:03:24.080 --> 00:03:31.520 really I guess it's a good point Jeff it's kind of a drop in the ocean but it still is 37 00:03:31.520 --> 00:03:38.840 pretty significant I mean just watching the Fed's balance sheet expand from from what 38 00:03:38.840 --> 00:03:48.820 900 billion to 1.4 trillion in the two weeks before this even was passed is pretty amazing 39 00:03:48.820 --> 00:03:55.980 but I mean you're still looking at investment banks with trillion dollar balance sheets. 40 00:03:55.980 --> 00:04:04.060 I mean it's a significant number but of course the effect is going to be just attempting to 41 00:04:04.060 --> 00:04:09.460 transfer wealth and they will succeed to a certain extent transferring from the responsible 42 00:04:09.460 --> 00:04:14.740 to the reckless and not even really the reckless but just the politically connected reckless. 43 00:04:14.740 --> 00:04:18.740 Yeah, you've done some work tracing out where the dollars are headed. 44 00:04:18.740 --> 00:04:21.740 Do you want to mention any specifics about that? 45 00:04:21.740 --> 00:04:29.740 We did a little bit of work, actually just sent an article, hopefully it'll be on lewrockwell.com tomorrow, 46 00:04:29.740 --> 00:04:31.740 but it's called Looting the Responsible. 47 00:04:31.740 --> 00:04:35.740 And I'm in the airport right now, so I don't have the numbers in front of me, 48 00:04:35.740 --> 00:04:41.740 but what we found was the initial effect once this was announced, 49 00:04:41.740 --> 00:04:45.780 announced because you have to go back a couple of weeks ago and the market was selling off 50 00:04:45.780 --> 00:04:53.060 and Goldman Sachs, we call it the chosen ones, five companies, Goldman, Morgan Stanley, Citigroup, 51 00:04:53.060 --> 00:05:00.460 Bank of America and JP Morgan, which I suspect have a pretty good stake in ownership in the 52 00:05:00.460 --> 00:05:03.100 Federal Reserve. 53 00:05:03.100 --> 00:05:08.220 But the stocks actually rallied on the news. 54 00:05:08.220 --> 00:05:09.460 This was on a Thursday. 55 00:05:09.460 --> 00:05:14.180 The market was down quite a bit, had pulled off the previous day, and then at the end 56 00:05:14.180 --> 00:05:19.300 of the day, that night, the package was announced. 57 00:05:19.300 --> 00:05:30.340 Over the initial week or so, the chosen ones, those five companies added 50% in market capitalization. 58 00:05:30.340 --> 00:05:37.740 I think they were at $360 billion and they added about $180 billion in market cap. 59 00:05:37.740 --> 00:05:41.900 And of course, where did this money come from, or at least the perception, the discounting 60 00:05:41.900 --> 00:05:47.340 that the market was, was that the real economy, this was the political economy that was getting 61 00:05:47.340 --> 00:05:52.940 a boost, and it was the real economy that was paying for it. 62 00:05:52.940 --> 00:06:01.940 So the $180 billion in gain to the five chosen ones translated into a roughly $600 billion 63 00:06:01.940 --> 00:06:04.740 loss in market capitalization to the rest of the market. 64 00:06:04.740 --> 00:06:10.900 Tell me, what has been the effect of the ban on short selling on you and on the markets generally? 65 00:06:12.660 --> 00:06:20.660 Well, good question. I mean, for us, absolutely no effect whatsoever. We shorted financial stocks 66 00:06:21.700 --> 00:06:28.500 years ago and nobody came to our door, put a gun to our head and said, you have to cover your shorts. 67 00:06:28.500 --> 00:06:33.780 We just couldn't initiate any shorts in those 800 or so companies. 68 00:06:33.780 --> 00:06:38.180 But I think it's sort of the law of unintended consequences. 69 00:06:38.180 --> 00:06:46.420 And what we saw was after the credit bubble had peaked and it started to unwind, to us 70 00:06:46.420 --> 00:06:48.900 that was the canary in the coal mine. 71 00:06:48.900 --> 00:06:53.740 And that really started back in March of last year. 72 00:06:53.740 --> 00:07:00.420 And once that happened, it was almost like you had the compulsive gamblers out there refuse 73 00:07:00.420 --> 00:07:01.660 to leave the casino. 74 00:07:01.660 --> 00:07:07.620 So you had the speculation in the credit-related area. 75 00:07:07.620 --> 00:07:09.580 That craps table kind of shut down. 76 00:07:09.580 --> 00:07:10.980 Nobody wanted to go there. 77 00:07:10.980 --> 00:07:16.580 But they saw this commodities table and, of course, with the initial interventions by 78 00:07:16.580 --> 00:07:22.220 the Fed, which people assumed would be inflationary, it really ignited. 79 00:07:22.220 --> 00:07:28.900 It took a six-year, seven-year bull market in commodities and really lit a fire under 80 00:07:28.900 --> 00:07:29.900 it. 81 00:07:29.900 --> 00:07:34.500 So there was a tremendous amount of speculation that the gamblers, the compulsive gamblers 82 00:07:34.500 --> 00:07:39.420 all went over to the craps table for commodities. 83 00:07:39.420 --> 00:07:45.420 Getting back to the unintended consequences, I think the commodities bubble was in the 84 00:07:45.420 --> 00:07:53.900 and the process of bursting and this just exacerbated it because instead of being able 85 00:07:53.900 --> 00:07:59.820 to short the financials, people just went and probably shorted the commodity area and 86 00:07:59.820 --> 00:08:04.460 we've just seen wholesale panic in commodities. 87 00:08:04.460 --> 00:08:12.420 Hedge fund redemptions, fertilizer companies going down 40% in one day, that sort of thing. 88 00:08:12.420 --> 00:08:18.580 I saw you on one of these television shows claiming that the collapse in fertilizer stocks 89 00:08:18.580 --> 00:08:22.260 was an indication that we're all going to starve. 90 00:08:22.260 --> 00:08:24.980 Did you see that guy? 91 00:08:24.980 --> 00:08:26.940 I didn't see that. 92 00:08:26.940 --> 00:08:30.660 So you don't think that that's true? 93 00:08:30.660 --> 00:08:32.740 No, no. 94 00:08:32.740 --> 00:08:39.060 The funny thing was in our fund, obviously we have the ability to sell short and we defend 95 00:08:39.060 --> 00:08:42.020 the practice. 96 00:08:42.020 --> 00:08:48.260 We were short a company called Mosaic, and the stock peaked at $160. 97 00:08:48.260 --> 00:08:55.660 Now we didn't short it at $160, I think we shorted it at about $120, and the stock, 98 00:08:55.660 --> 00:08:59.460 we covered some at $70, the rest at $50. 99 00:08:59.460 --> 00:09:05.380 The stock actually yesterday went as low as about $33 a share from a high of $160. 100 00:09:05.380 --> 00:09:10.100 Yeah, well that's really exciting in some ways, I mean it's a beautiful thing actually 101 00:09:10.100 --> 00:09:13.060 to see the market working in this way, isn't it? 102 00:09:13.060 --> 00:09:24.060 It really is and it's amazing how the interventionists are trying to arrest the, the market is desperately 103 00:09:24.060 --> 00:09:33.540 trying to heal itself, heal the economy, liquidate the people that were reckless and irresponsible 104 00:09:33.540 --> 00:09:40.820 and it is there's a certain justice to see that you know you go back to 1998 with long-term 105 00:09:40.820 --> 00:09:47.180 capital and it was as if there really wasn't any justice because the interventionists won 106 00:09:47.180 --> 00:09:53.980 or at least they temporarily won and then in 2001 to 2005 the interventionists tried 107 00:09:53.980 --> 00:09:59.420 to contain the tech bubble and they're able to blow up an even bigger bubble and what 108 00:09:59.420 --> 00:10:07.740 What is so fitting about this bubble is the tech bubble was not the political class for 109 00:10:07.740 --> 00:10:08.980 the most part. 110 00:10:08.980 --> 00:10:16.700 This bubble really got the political class levered to the gills and they're the ones 111 00:10:16.700 --> 00:10:19.060 that are in deep trouble. 112 00:10:19.060 --> 00:10:27.620 And at least with the technology bubble, people were to a large extent not using bar of money. 113 00:10:27.620 --> 00:10:38.620 In this cycle, they're using a tremendous amount of bob money, and there's a certain amount of joy watching the political class just come completely unglued. 114 00:10:38.620 --> 00:10:50.620 So you expect that these bailouts are going to have a temporary effect in rescuing specific firms, but long-term, I mean, the assets have to be repriced, and history has to move forward, right? 115 00:10:50.620 --> 00:10:55.260 Right. It's funny, a friend of mine who's got his money at Merrill Lynch, he just asked 116 00:10:55.260 --> 00:11:00.340 me to take a look at the balance sheet and of course he had no idea what was going on 117 00:11:00.340 --> 00:11:10.340 and I just brought it up for the June quarter, $966 billion in total assets on top of $21 118 00:11:10.340 --> 00:11:15.460 billion in shareholders' equity. And that's the shareholders' equity that the accountants 119 00:11:15.460 --> 00:11:24.060 are telling us which we know is a complete fabrication. So it shows you that the investment 120 00:11:24.060 --> 00:11:29.420 banks, especially the politically connected ones, the chosen ones, are just incredibly 121 00:11:29.420 --> 00:11:33.220 insolvent. And look at all the money that they've been able to raise from sovereign 122 00:11:33.220 --> 00:11:38.700 wealth funds and these people. And again, it is sort of fitting that they're part 123 00:11:38.700 --> 00:11:43.980 of the political class. They came to the rescue right away and now they look like they just 124 00:11:43.980 --> 00:11:49.540 are complete bag holders and even those people now are shying away, they realize that they've 125 00:11:49.540 --> 00:11:50.540 been duped. 126 00:11:50.540 --> 00:11:54.740 So in a free market, you know, people imagine what would happen absent the intervention. 127 00:11:54.740 --> 00:12:01.700 I mean, you would see the big firms go belly up and then the smaller and medium-sized firms 128 00:12:01.700 --> 00:12:11.900 that are more liquid, more sound, would come to replace them and you'd see a turnover in 129 00:12:11.900 --> 00:12:15.180 Industrial Makeup of the Financial Sector, right? 130 00:12:15.180 --> 00:12:24.660 Absolutely, and apparently the CEO of BB&T was complaining about this and he was saying, 131 00:12:24.660 --> 00:12:29.740 look, we were responsible, we weren't as leveraged as everybody else and we should 132 00:12:29.740 --> 00:12:31.300 now be in a position. 133 00:12:31.300 --> 00:12:37.100 We did the right thing and here you are trying to bail out our competitors and keep them 134 00:12:37.100 --> 00:12:38.100 around. 135 00:12:38.100 --> 00:13:08.100 It's remarkable, isn't it? I mean, one of the biggest complaints about the market, you get it from left, right, every side, one of the first things people say, it's a terrible thing that the rich get richer or the biggest stay on top, the monopolists take over and dominate the market, and here you have an event that's, you know, you have the market attempting to clean the system up and create something of a, you know, a micro revolution and you have the political class trying to stop it. 136 00:13:08.100 --> 00:13:15.140 It's amazing, the elites, I mean, I've talked to journalists and it's amazing to me how 137 00:13:15.140 --> 00:13:16.780 they can't see what's going on. 138 00:13:16.780 --> 00:13:22.340 I think they're a part of this elite class and they've been sort of corrupted by this 139 00:13:22.340 --> 00:13:23.340 political class. 140 00:13:23.340 --> 00:13:25.500 I think they're a part of it. 141 00:13:25.500 --> 00:13:35.500 And yet people like my sister in Harrisburg, Pennsylvania, who was just unbelievably conservative 142 00:13:35.500 --> 00:13:44.060 and Prudent the entire time. She sees what's going on. She sees it as just a blatant rip-off. 143 00:13:44.060 --> 00:13:46.340 And people like that, they're starting to wake up. 144 00:13:46.340 --> 00:13:50.300 Yeah, doesn't it seem, do you detect a lot of anger? I mean, I certainly do. Everywhere 145 00:13:50.300 --> 00:13:54.540 I go, everywhere I talk to, it seems to be just, I mean, left, right, no matter what 146 00:13:54.540 --> 00:13:58.580 your ideology, people really seem to be very upset about this. 147 00:13:58.580 --> 00:14:07.460 Absolutely. In fact, my father walked his precinct, and just to digress a little bit, 148 00:14:07.460 --> 00:14:13.900 he lives in Pennsylvania, west of Philadelphia, and during the primary, the Pennsylvania primary, 149 00:14:13.900 --> 00:14:22.340 when it was already a walk for McCain, my dad walked his precinct, and his precinct had 150 00:14:22.340 --> 00:14:28.780 the best, the highest turnover for Ron Paul during that primary. 151 00:14:28.780 --> 00:14:35.300 What my dad did this time, he was absolutely livid about the bailout, printed out a one-pager, 152 00:14:35.300 --> 00:14:38.580 walked his precinct, talked to about 300 people. 153 00:14:38.580 --> 00:14:44.780 He said that just about unanimously people were opposed to the bailout and they were 154 00:14:44.780 --> 00:14:51.260 even, he said there were older people who had money in 401Ks and they said, you know 155 00:14:51.260 --> 00:14:57.860 This is just not right. Even if it means my 401k is going to go down, it's still wrong. 156 00:14:57.860 --> 00:15:08.860 Yeah. It's a basic principle of justice that if you're going to take risks, you have to be prepared for the downside. 157 00:15:08.860 --> 00:15:10.860 I think most people understand that. 158 00:15:10.860 --> 00:15:18.860 Right. I think what's also fascinating, and it's a little bit sickening, is to see that, which is so encouraging, 159 00:15:18.860 --> 00:15:29.700 and then to watch business media, CNBC and just the blatant attempts to spin all this. 160 00:15:29.700 --> 00:15:37.460 I remember John Harwood who covers Washington DC and this is when we are right in the thick 161 00:15:37.460 --> 00:15:45.160 of all the bailout news and he said, he reported that one third of the population was opposed, 162 00:15:45.160 --> 00:15:52.800 One third was in favor and one third was undecided, which is a bald-faced lie. 163 00:15:52.800 --> 00:15:57.600 I did notice that at the height of the bailout controversy that there was a sort of a dearth 164 00:15:57.600 --> 00:16:02.680 of polling information, or that which you got online in any case seemed implausible 165 00:16:02.680 --> 00:16:04.440 to me in any case. 166 00:16:04.440 --> 00:16:10.040 I've never seen a reaction like this, I mean it's so intense right now, but you know when 167 00:16:10.040 --> 00:16:13.920 the history of all this is written, maybe this will be a case that advocates of the 168 00:16:13.920 --> 00:16:24.920 If the rich do stay rich and the fat cats do stay on top, it's only because the state helped them to do so. 169 00:16:24.920 --> 00:16:29.920 Looking at this, we were actually a little bit relieved. 170 00:16:29.920 --> 00:16:38.920 There was certainly this feeling of when the first House vote came out that this was a big victory for liberty. 171 00:16:38.920 --> 00:16:48.200 for Liberty, and we lost the next round, but we were actually somewhat relieved about the 172 00:16:48.200 --> 00:16:55.380 final vote, because what the political class really did was they told everybody that they 173 00:16:55.380 --> 00:17:02.720 know better, that yes, we're taking this under consideration, but we're going to do what 174 00:17:02.720 --> 00:17:10.440 we think is best, and this is to stabilize the markets, this is to save the economy. 175 00:17:10.440 --> 00:17:17.440 They sold it as not a bailout for Wall Street, but this was to help the little guy, and now 176 00:17:17.440 --> 00:17:19.480 this is all on them. 177 00:17:19.480 --> 00:17:27.120 My concern was that had this been voted down, we've already baked the cake, the markets 178 00:17:27.120 --> 00:17:32.100 would go down, there would be a collapse, and that the free market would somehow be 179 00:17:32.100 --> 00:17:38.080 would be blamed or inaction would be blamed, and so I think maybe they did us a favor by 180 00:17:38.080 --> 00:17:41.500 actually sticking their necks out even further on this vote. 181 00:17:41.500 --> 00:17:47.380 Well, it could have some far-reaching implications in the future politically. 182 00:17:47.380 --> 00:17:51.940 Most people I know who understand the market or understand politics are more optimistic 183 00:17:51.940 --> 00:17:57.260 even than I am that, look, we have the means nowadays to communicate what's going on. 184 00:17:57.260 --> 00:18:00.820 This is not like the Great Depression where lots of people were in the dark on what the 185 00:18:00.820 --> 00:18:29.820 Well, I definitely share the optimism and I've just seen it since I got involved in this movement, which is really very fortuitous watching Lew Rockwell on, oh, what was, I forget the name of the program now, it escapes me, but he was debating Exxon Valdez. 186 00:18:29.820 --> 00:18:39.820 in favor of Exxon and so it's been just tremendous watching this movement grow and that's what encourages me. 187 00:18:39.820 --> 00:18:51.820 On the other side of that is the fact that we have this massive bubble and looking back at 1929 and the situation that we have today, 188 00:18:51.820 --> 00:18:59.820 Today. 29 was really, and the depression, I think, was probably the first failure of 189 00:18:59.820 --> 00:19:11.020 this bankrupt monetary system that was foisted on the American public in 1913. And hopefully, 190 00:19:11.020 --> 00:19:14.620 what we're experiencing today is the end of that system. 191 00:19:14.620 --> 00:19:18.980 We've printed up a shirt that says on the front, Stabilization is Chaos, and on the 192 00:19:18.980 --> 00:19:21.980 In the back it has a quotation from Hayek. 193 00:19:21.980 --> 00:19:28.980 So, thank you for agreeing to take time out on your way to your international travels. 194 00:19:28.980 --> 00:19:30.980 I'm going to send one to you. 195 00:19:30.980 --> 00:19:32.980 Okay, I enjoyed it. 196 00:19:32.980 --> 00:19:33.980 Thank you so much, Kevin. 197 00:19:33.980 --> 00:19:34.980 Okay.