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Some lines just can't help but catch your eye. For example: "There will be global hyperinflation that peels the skin off your face."
The colorful language was penned by Lee Quaintance and Paul Brodsky, partners in QB Asset Management, in their monthly letter. It's even more intriguing, given that inflation, as measured by the consumer price index, was flat last month, and gold, while up 12% this year, is 15% below its August high.
But the QB duo is convinced that central bankers will start printing money to pay off public debts and keep the banking system solvent. They expect a managed global devaluation of all major currencies in six months to a year. It could be orchestrated through the International Monetary Fund, or the markets might require a gold-based solution, applied by the central banks.
QB's partners worry that the system's base money (bank reserves at the Federal Reserve and currency in circulation) is dwarfed by the claims on it. For every dollar of base money, there are $5.00 worth of bank deposits, including checking and savings accounts and time deposits. So, if everyone demanded the return of their deposits simultaneously, the bank could pay only about 20 cents on every dollar owed, Quaintance says.
Banks bet on the fact that everyone isn't going to come calling for their dollars all at once. But the QB partners argue that the system is at a tipping point. Leverage has grown exceedingly large. Making matters worse, banks have used the funds from deposits to make questionable loans.
The bad debt could be restructured so that creditors get cents on the dollar. The QB partners doubt this will happen because it would cause too much pain. The more likely outcome is that the central bankers print more base currency, reducing the buying power of the money already in circulation.
And voila! You have skin-peeling inflation. "A full deleveraging of the banking system could mean that the dollar and other currencies will lose 70% to 80% of their purchasing power," Quaintance says, arguing that all major banks in developed lands will suffer because markets are so interconnected.
How should investors prepare if they buy into this Grinch-y world view? Buy gold and unlevered assets, says Quaintance. The losers in this scenario: holders of cash and "risk-free" Treasuries. Of course, cash and Treasuries are what risk-adverse investors favor right now.
Time to check your faces, folks.
THURSDAY'S SURPRISE RESIGNATION, effective later this month, of Cablevision Systems' chief operating officer, Tom Rutledge, rocked the company's shares. Investors figure that his departure signals disarray at the cable-TV outfit, and that the controlling Dolan family won't sell Cablevision (ticker: CVC) or won't get a good price if it does.
Cablevision fell $1.18 Friday, to $12.75, leaving it down 46% on the year -- a much worse performance than rivals Time Warner Cable (TWC) and Comcast (CMCSA), off 6% and up 6%, respectively. The selloff seems like an overreaction, because Cablevision is in good shape financially, sports a 4.7% dividend yield and has significant strategic value, due to its nearly 3 million subscribers in New York City and its suburbs.
"My view hasn't changed. With the spinoffs of MSG [Madison Square Garden] and AMC, the Dolans are positioning Cablevision for a sale," says Mark Boyar of Mark Boyar & Co., a New York investment firm that holds the stock. Cablevision jettisoned MSG, owner of the New York Knicks and Rangers, in 2010, and AMC Networks, owner of AMC (home of Mad Men), this year. Boyar, who says Cablevision is worth at least $22, notes family patriarch Charles Dolan is 85.
The departure of Rutledge, perhaps the country's top cable executive, is a blow for Cablevision, whose CEO, Jim Dolan, seems more interested in the Knicks and MSG. Rutledge, fiercely competitive, once said: "We want the only satellite dish in our footprint to be on the abandoned house that the kids think is haunted."
Barron's wrote favorably about the company last month ("Don't Pull the Plug on Cablevision," Nov. 5) when the stock was at $15, arguing that the Dolans eventually would sell out for a nice premium. Cablevision is an ideal fit with Time Warner Cable. A merger would give Time Warner a dominant presence in the New York City/metro-northern New Jersey/Fairfield County, Conn., region.
Sanford C. Bernstein analyst Craig Moffett, who is cautious on Cablevision, argues that Time Warner Cable has become more price-sensitive about acquisitions, while Comcast is preoccupied with its integration of NBC Universal. Our bet, however, is that Cablevision isn't the average cable outfit and is too valuable to pass up. A private-equity group might pull off a deal.
Negatives includes slowing growth at Cablevision, and high debt of $10 billion. The debt, however, looks manageable, with the company able to sell bonds recently at a 6.75% yield. Cablevision generates about $800 million of free cash flow annually, which it's using for stock buybacks and the dividend. The company's market value is down to $3.6 billion. The Dolans might be a mercurial bunch, but they're not stupid. They've built one of the country's best -- and most valuable -- cable systems. A sale could be getting closer.
E-mail: jacqueline.doherty@barrons.com, andrew.bary@barrons.com
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