Published: Thursday, 22 Oct 2009 | 1:24 PM ET

Text Size

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

PG loading...

Quote  |  Chart  |  News  |  Profile

[PG  Loading...      ()   ], IBM

IBM loading...

Quote  |  Chart  |  News  |  Profile

[IBM  Loading...      ()   ], 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.

Print

Email

Text Size