A Conversation with Art Cashin, UBS
Art Cashin, head of floor operations at UBS, has seen a lot in his nearly 50 years in the markets, from the hyper-inflation of the '70s to the '87 Crash to Enron and the Street's most recent troubles. Recently, he sat down with CNBC's Bob Pisani at Bobby Van's Steakhouse (a favorite Cashin haunt), directly across the street from the NYSE, to offer his take on the last year's events and, fortunately, provide a little perspective.
PISANI: Hello everybody. Bob Pisani for CNBC.com. We're at Bobby Van's Steakhouse right across the street from the New York Stock Exchange. We're gonna be talking to Arthur Cashin from UBS, a regular on CNBC for many, many years and a legendary trader down on the floor of the New York Stock Exchange.
Now, Arthur, we wanna talk a little bit about what's happened in the last year and a little bit about what might be happening in the next year. Let me start by asking you, what surprised you most about what's happened this year, about how trading has occurred and maybe even how the economy has acted.
CASHIN: Well, it's a combination of the latter two. The biggest surprise so far is the extent and duration of the rally. Back before the rally began I said luckily on CNBC that it looked like we were shooting for the end of the world. And you never bet on the end of the world 'cause that only happens once and something that happens once in infinity is a long shot.
So I said before St. Patrick's Day, we're probably gonna get a very, very strong rally. And sure enough, around March ninth, it started. And then around July, I said, okay, we've taken the end of the world premium away. I think they should flatten out and maybe even pull back a little bit until we see what the economy does. The market had other ideas.
PISANI: Yeah. Now, what's interesting is you've been cautious, I would say even a little bit bearish since then, and I've know you for a long time. What is making you cautious at this point? Why are you feeling things might have gotten a little too…a little ahead of itself?
CASHIN: Well, I think we started with what Mohamed El-Erian calls the second derivative, the change in the rate of change. Things were still getting not so hot, but the selling was slowing down. The slowness in the economy was slowing down.
That's all been changed. But most of it's been changed with the help of the government. We've had Cash For Clunkers, we've had special tax incentives for first time [home] buyers. And that's been good. It's moved things around. Now the question is, can the patient sustain himself, that being the economy, when he comes off life support. And there is some doubt out there about that.
PISANI: You're a bit in the double dip camp. Now explain why you feel that way.
CASHIN: Well, first of all, I'm concerned about lending and the availability of credit. There's something called excess reserves. Now if you run a bank and I come in and I give you $1,000 in deposits, you have to reserve a certain portion of that according to the Federal Reserve's laws.
In ordinary times, you're in kind of a hurry to lend out the balance of that. So we'll call it 10 percent. I come in with $1,000. You've gotta keep $100 under the rules. But now you're ready to lend out $900. So what do we look like?
Well, excess reserves at banks at the end of September were $823 billion. You know what they were a year ago? $2.4 billion. And the year before that it was $1.4 billion. Now that tells me that either banks are so worried about lending that they've virtually stopped and they're holding on to all the money they can or that it's a combination of banks worried about risk and people saying, 'I'm worried about borrowing. I don't know if I wanna get in debt.' So without that liquidity, it's gonna be tough to get back to the old normal.
PISANI: Well the banks have already said that the rate of lending applications has been down noticeably. But that wouldn't seem to account for all this $823 billion you were talking about. Are banks hoarding their cash?
CASHIN: It would appear that they're doing that. And they're not getting a very high rate of return on it. So it's got to be the fear of risk. Now some of it could be new, higher lending standards. You know, everybody…oh, you guys weren't cautious enough.
But that number is so large that it defies all that. And the second part of the credit availability is that when we were on the top, when things were really going back in October of '07, more than 70 percent of credit availability came from securitized debt.
They would take credit card loans, package them up and sell them off as a package and then start all over again. They did the same thing with auto loans. And God knows we know they did the same thing with mortgages. That business has stopped. If 70 percent of available credit is not gonna be available very soon, it's tough to get back to the old normal.
PISANI: So where do we go here? The feds have flooded the markets with liquidity and yet, it seems to be pooling into areas like banks where it's not doing an awful lot of good for the moment. At some point, something's gotta happen though, right?
CASHIN: Yeah. But here's where it gets dangerous. The good news out of the bad news is because that money has no velocity, we have no inflation. And the Fed talks about taking away the punchbowl. Now once that money gets velocity, once it gets lent or spent, then you can have inflationary pressures build.
If I fly over Bob Pisani's house and I drop a trillion dollars in green pictures of dead presidents down on his lawn and he's so nervous he picks it up and puts it in his garage, that's no inflation. Nothing's really happened. But when he starts to spend it or if he starts to lend it, then money's got what they call velocity. And inflation could explode suddenly. No sign of it now, no sign of a great fear, although there's a new debate in the fed, but no sign of it now.
PISANI: But that would come with an increased economy? If the economy showed a little bit more of a pulse, then velocity would increase...
CASHIN: Exactly. So that's why you gotta get back to Goldilocks. It can't be too hot, you can't be too cold, it's gotta be just right. They need it to grow and begin to get just enough velocity to help the economy and not enough velocity to turn into sudden Weimar Republic inflation.
PISANI: Why has the stock market done so much better than you thought it would? I mean, everyone knows these issues. I was out with a bunch of hedge fund traders a couple weeks ago. A dozen of them, half of them were in the double dip camp, yet 100 percent were net low in the market. I had never seen so many people who had done so well in the markets who were so unhappy about it. Why is the market advancing so?
CASHIN: When you get phases like this…if you remember the dot com bubble, you had to be in. You went to cocktail party. We talk about fear and greed and supposedly the fear of losing money. Let me tell you, in doing this nearly 50 years, one of the most powerful fears and motivators of people in Wall Street is the fear of being thought stupid.
When you go to that cocktail party and they say, 'Hey Bob, you playin' this rally? You're really long?' [You think] 'No, I'm kind of skeptical about it' and you think you're gonna be the butt of jokes. People actually risk money not to be thought stupid.
The other thing is the declining dollar. The declining dollar makes Procter & Gamble , IBM , pick whatever stock you want, cheaper if you're a European. If your business is done in euros, we see the market going up in terms of dollars. They see it still basically cheap. So I believe -- I don't have any concrete evidence for it -- some of what we're seeing is people from off shore actually helping support the market.
I think you had an initial phase. If you look at the short position, it has virtually collapsed, to some degree. So there's a big short covering. And that was part of phase one. Then you had the mutual funds putting their money in. We're down to supposedly one percent cash and mutual funds. So that money's come in. And now we have the Europeans, the Asian interest and others with better currencies saying I'm gonna buy some in here.
PISANI: But when I look at fund flow distributions, I don't see a lot of money coming in to equity funds. Equity in-flows this year for stocks are basically flat. And bond funds are still pretty much through the roof. It seems like a lot of the retail investors are still not convinced they want to be in stocks anymore.
CASHIN: You're absolutely right. But as I said to you, the amount of cash in the mutual funds is going down. So they're driving the car and the gas gauge is going down. Nobody's adding gas to them. Nobody's coming up and saying, 'here's new cash.' So you're absolutely right. And that raises the question, how much more gas do they have to give to this rally. And that's another thing that makes me a little hesitant or skeptical here.
PISANI: One of the debates I always get into with average people on the street is on this dollar thing because they keep hearing the dollar's lower and the U.S. supports a strong dollar policy. So is it good or bad for America that we have a weak dollar? What should the average American want? Should it want a strong dollar or should it want a weak dollar?
CASHIN: Well, it's a very complicated topic in two ways. Ordinarily, if you looked at it as a stand-alone currency, you might say, 'really, I don't mind a weak dollar. I don't want it to be disorderly weak. If it's gonna drift down a little, let it drift down. That will make my products cheaper overseas.'
But the complicating factor here is we have the unseen elephant in the room. And that's China, because as cheap as the dollar gets, they're pegged to the dollar. So if you're Japan or if you're India or if you're Europe, you say, look, the dollar's killing us two ways. Number one, it's making American goods cheap. But it's making Chinese goods far more cheap. Therefore, they're very concerned. And this, I don't think, will continue in an orderly fashion, this benign neglect will not work.
PISANI: Well, let's talk about the global economy a little bit. One thing that's very striking is it looks from here like Asia is coming out of this recession already, or at least they're doing a heck of a lot better than the United States. Europe is kind of in the middle maybe. It's still a horse race between who's going to come out of it last here, us or the Europeans. Does this say anything about the new resiliency or the new dominance, perhaps, of the Asian economies?
CASHIN: Well, it does, but the jury's still out a little bit. You have to remember that the stimulus package here was not what we'd call a classic stimulus package. It wasn't the Works Progress Administration. We weren't building new highways. We weren't building and repairing bridges.
A lot of it went into capital transfer to states. A lot of it went into different programs that had been the darling of some of the people who had been in Washington for years. So that's why we didn't see the same kind of impact. Conversely, China opened up. They did a lot of construction. At the same time, they also opened up the banks and there is some fear that China, as strong as it looks, may be experiencing at least a minor bubble here in which we're seeing things like housing very reminiscent of what we had here, housing and other prices moving up. So the jury's still out. But clearly, it looks at least for now, in the short term, that the torch has been passed to the growing Asian group.
PISANI: You mentioned the bubble thing. I wanna bring that up. So it seems like we have lived through a lot of bubbles in the last 20 years, including the real estate bubble of 1990. Then there was the whole issue with the collapse of the Asian currencies in 1997, the Russians defaulting on their debt. That was another bubble that burst.
The dot com bubble bursting. Then we had the whole thing with Enron, which is a sort of a separate bubble bursting. And then we have, of course, the credit crisis here bursting. It seems like there's an awful lot of bubbles out there that come more and more frequently. And it seems like the increasing complexity of the world has increased the risk, not decreased the risk. I'm trying to find a general philosophical ground to stand on here.
PISANI: Doesn't this strike you as amazing?
CASHIN: Well, I think old-time TV watchers will know that even Lawrence Welk couldn't find as many bubbles as we've produced. And I think there are certain things going on. You're the fed, you have the best of intentions. And the Thai Baht blows up. Okay? And everybody -- I remember Mark Haines saying, 'What the heck is Thai Baht?' And we all found out within 24 hours as the currency market started to implode.
So the fed and the other central banks said, uh-oh, this is gonna be bad. Let's make sure there's enough liquidity in there. So they pump money into the system. And before they could fully take it out, Long Term Capital Management came along and the Russian Ruble came along, and then came maybe the ultimate twist on most of this, which was the Y2K [Year 2000] implication. And the fed was getting ready to pull stuff out. This is my perception. And everybody said, whoa, whoa, Y2K, computers are gonna fail. Your bank records will disappear. Elevators won't work.
PISANI: Yeah. We did a whole special on that.
CASHIN: Okay. And what did they do? They told everybody you gotta go buy a brand new computer, you gotta buy a brand new server. Meanwhile, back at the fed they say, oh my God, if people think the ATMs aren't gonna work and the records are gonna disappear, they're gonna start hoarding. We've gotta make sure there's enough money in the system. So they flood the system with money. Credit is readily available. You buy a new computer. I buy a new computer. He buys, she buys. Suddenly, people are spending money. And what's goin' on? Computers, the beginning of the dot com bubble.
And now the fed calls up right before Y2K turns in 2000 and says, how bad is the hoarding going. And the bank says, hoarding, what are you crazy? They're spending. They're buying these computer things and they're taking leftover money and they're putting it back in the bank. And the fed said, whoa, whoa, we'd better rein in some of that credit. And the dot com bubble burst instantly. Okay?
Next comes 9/11. The great fear in the United States was, obviously, of further terrorism, but maybe not on the scale that we saw when the towers fell. People were afraid they would go to five Wal-Marts in five states or ten McDonald's in ten states with backpack bombs, get in a line where a lot of young kids were standing at the cashier and blow things up. And if that had happened -- thank God it didn't -- if that had happened, no mother would have let her child out of the house. The economy would've imploded.
And I will tell you that that was as big a fear as anything else. If you remember, President Bush at the time was asked in a press conference, hey, look, in other wars we've made sacrifices, tires, we've had paper drives. What can the people do to help America here? And his response was go shopping. And that was because they were afraid the economy would implode. And that's what led the fed to keep rates so low for so long.
PISANI: And that was one of the causes, of course, of the current crisis. I mean, would you agree, there is no one cause of it, including credit card debt that was excessively high for 20 years. You mentioned Mark Haines -- he and I were doing stories in 1990 with people saying credit card debt was too high. But the income levels went up.
We also had, besides the fed keeping interest rates low, we had some, I think you'll agree, misguided attempts to increase home ownership. We also had some poor regulatory bodies that were out there and we also had, of course, very bad risk management on the part of a lot of Wall Street firms that were a particular part of this problem.
PISANI: Would you agree there were many sources of this crisis?
CASHIN: Oh, absolutely. And not the least of which was no defined responsibility in the securitization. If I put together a package and I sold it to you, that was your problem. So I didn't do the due diligence to make sure that this guy could pay for that mortgage or could pay for whatever. So that also was a key part.
But the Fed, not to give them a big enough excuse, but they, like all of us, have certain things they watch. And this time they got stuck with the dog that didn't bark. Greenspan was looking for signs of inflation. That's when he'd know when to rein things in. That's when he'd know to come off the very low interest rates that he had. But he didn't get it. And he kind of misread the signal. 'Gee, why am I not getting inflation here?'
It's productivity. People are producing much better. The point that he missed was inflation was overseas. We had people working for lower wages, no demand for higher wages. We exported the problem. The dog never barked because everything occurred so far away. And that's why they never raised rates. And that's why it left things wide open to the kind of bubble that we had.
PISANI: So are we misreading the situation again, creating another potential problem down the road? Are we keeping rates too low right now? Should we be raising rates? Should we be changing things right now?
CASHIN: Well, this is a damned if you do and damned if you don't routine. If they begin to raise rates too early, then the double dip is for sure and maybe the second dip is worse than the first.
Conversely, if they let it lag too long and money starts to get that velocity that we talked about earlier, inflation pops up. So Mr. Bernanke -- and we're beginning to see the debate within the Fed -- Mr. Bernanke is saying, 'I know what to watch for and I'll know when to pull the punch bowl away.' And they're gonna have to pull it out pretty fast. So this is a real game of economic Russian roulette here. And it's gonna be very, very tricky.
PISANI: I wanna go back to the bubbles issue you brought up because people keep asking me about investing in China and they say, well, how do we know how good the numbers are in China. And I say, I haven't a clue about what the numbers are in Chinese banks. We've got problems with American banks and knowing what their numbers are.
But if you're not invested in China, you're missing a very strong investment opportunity. If you overanalyze everything, you're gonna lose money. Is there a bubble developing in China? Is there a bubble developing in the bearish bet on the dollar? How do we know when those signs are there and when we might be able to get out or make a better investment decision?
CASHIN: Well, China is very perplexing because it's not just your debate about what do we know about the Chinese banking numbers. What do we know about the Chinese numbers as a whole? There is a great deal of cynicism about how valid some of these numbers are.
The feeling is in the regional districts, they don't want to look bad in front of the powers that be. So if they're supposed to come in with certain numbers, those numbers come in. This has the potential to be Enron-esque on a national level.
Is it so? I hope not. But I will tell you there are enough people around looking and saying this number doesn't actually add up with that. I mean, Japan is no slouch. But they're not showing exporting at anywhere near the level that China's showing. So there's an inconsistency in the region as to what's going on.
PISANI: In terms of how to trade, people who cling to fundamentals have missed this market, if you're bearish on that level. And yet, people who, for example, watch technicals have done very well on simple things: 10 at 50 day, 50 at 200 day. What should people be doing? We've had 12 years now. We're where the S&P 500 was 12 years ago. Buy and hold is really in rather ragged shape as an investment ideology. So when people come to me and say, 'Should I just buy stocks and hold them?' I say I wish I could tell you to do that but that's a risky way to look at things these days. How should people be investing? Should people be watching charts? Should they be doing anything at all outside of hiring professionals at this point to invest them with very tight stops?
CASHIN: Yeah, buy and hold is dead if you're talking about buy and hold autopilot. At the same time, people shouldn't be in churning. You don't want those day trading days that we saw with the dot com bubble. People who were wiring for cable companies were said to be trading stocks in the back of the truck when they had a little room to go.
What you wanna do is think of your portfolio somewhat like your car. It's not suddenly gonna flip in a day or a week. But you are gonna bring it in for check-up and service on a regular basis. So once you get a portfolio that suits you, you gotta go back to an advisor who you trust and say, okay, let's review where we stand. Is this still true about this industry? Is this so? And you have to work with that.
I've had this happen to me a couple of times before. But I've managed to last 50 years in the business. And I will tell you this, there is nothing more painful -- ideologically and psychologically -- than being at a banquet thinking that the food is tainted and watching everybody else have a grand old time. It can be a little tough. But if you have strong suspicions about the food, you may feel better than they do in a day or so.
PISANI: I just wanna finish up by going back a year and talking a little bit about Lehman Brothers. Was there ever a point at which you thought we might not make it through, that we were on the verge of going off the cliff? Was there any moment that ever happened there?
CASHIN: Absolutely. So much has happened. We tend to forget how desperate things became. Lehman goes under and shortly thereafter, there was this kind of anxious pause for a day or two. And probably known only to the Fed and to the Treasury, things were deteriorating rapidly.
But we didn't get to see all of that. And one of the oldest money market funds in the United States broke the buck, which is shorthand for saying, can't quite meet all your obligations right away. There were hundreds of trillions in money market funds.
Suddenly, it looked like there was gonna be a rush on money market funds. Now I'm watching all this. And I realize that the Fed and Treasury are panicked. And Ben Bernanke runs out and says, 'Whoa, whoa, whoa, don't take your money out of the money market fund, we guarantee all assets.' Now I'm watching one of the smartest economic minds in the United States guarantee every penny in money market funds when only $100,000 to $150,000 in each bank was guaranteed. Suddenly, money starts to run from the banks, to the money market funds to get the guarantee.
PISANI: Law of unintended consequences?
CASHIN: Absolutely. And that's when you start to say, wait a minute, who's really in charge here. Okay, the ship is in a terrible sea, in a bad storm. And you walk up and you peek in the wheelhouse and the captain and the crew are throwing punches at each other. And that's frightening.
PISANI: For me, it was that Wednesday or Thursday after the Lehman collapse during the meeting with House Speaker Nancy Pelosi when all the Congressional leaders and Bernanke came in and Paulson came in and met with them and they came out, those Congressmen, looking like they had seen dead people. They were that scared. They were white, all of them. And I think Mr. Bernanke and Mr. Paulson told them that we were in danger other than it collapsed. Shouldn't we have allowed Lehman Brothers to go under?
CASHIN: If I had my druthers, absolutely not. I think one of the things that they perhaps told... Dodd came out and said, 'That's the most sobering meeting I've ever been in.' And he'd been in politics for 30 years.
There were reports today that they were considering would they need martial law if banks failed and people took to the streets. So they were as terrified as everybody else. I think they never realized what Lehman would do, not only with the money market funds, but when the money market funds looked like they were freezing up and everybody got terrified, they stopped dealing in commercial paper.
Money markets are the major source of liquidity in commercial paper. Not to bore the viewers, but commercial paper is a very liquid, short-term borrowing thing that IBM uses, that Proctor and Gamble uses. I mean, we're not talking about financials here. We're talking about transferring from Wall Street to Main Street. These people are used to borrowing for two or three weeks. And suddenly, they were frozen out. There were no assets. And that, I think, is what terrified both Bernanke and Paulson. And they had to guarantee to try to re-liquefy.
PISANI: And the Fed, of course, maintains that there was no obvious way for them to actually take over, sell, dismember Lehman Brothers. Was there a way?
CASHIN: After you looked at the Bear Stearns deal, in which they filed a shotgun marriage at the last minute by guaranteeing an unknown amount of money, they might have done it. But given what happened after Lehman, Bob?with all due respect to the honor and credibility of the people in government -- I don't think anybody would come out and say, you know what, I took a gamble. I think I'd let them go. Of course you're gonna say, I had no way to save them.
PISANI: And of course, today, that wouldn't happen. They've already declared systemically important institutions that are out there?
PISANI: So in a sense, we know that the probability there will be another Lehman Brothers is extremely small, right?
CASHIN: Yeah. Well, they're all too big to fail. They've seen what happens when failure occurs. If they're gonna try and correct that, that's a decade-and-a-half-long basis. So that's longer than the frame we're talking about. Yeah.
PISANI: Art Cashin from UBS, always a pleasure to talk to you. Thank you for your comments and for your years of analysis and help to all the viewers at CNBC. Appreciate it very much.
CASHIN: Thank you, Bob.
PISANI: And of course, you can see Art Cashin every day on CNBC. Thanks very much for viewing.