Next up in our series of notes from the Alpha Hedge West Conference is the panel featuring a macro discussion between John Burbank of Passport Capital and Kyle Bass of Hayman Capital. They touched on China, Argentina, Japan, and many other topics. Below is their dialogue and JB = Burbank's comments and KB = Bass' comments.
John Burbank & Kyle Bass' Macro Discussion: Alpha Hedge West
JB> Does not think Fed policy changes unemployment. Labor in China first, now technology have a great impact on unemployment. Firms don't want to hire. Structural unemployment issues will persist most of our lifetimes. JB is shifting into equities. Likes equities with good governance and high quality business. Not bullish on GDP or global economy or US economy. Credit got crowded last year. Equity just getting started. Companies have gotten very lean and efficient. Emerging Markets (EM) have been struggling. That was due. Development Markets (DM) will outperform EM. Not that US economy is great, just that US is quality. As EM people grow, they will want more DM goods, not EM goods.
KB> Not investing in China now. "Univestible" due to banks and shadow banking systems. Staying away from India too. Branded luxury and quality did well post crisis. China has not adjusted from command and control. Appears Chinal will work, but he think it won't (success is illusory at this point). Sees restructuring.
JB> His portfolio has turned on its head since 2000 with the exception of internet companies. Everything in China is rising. EM and most commodities went up on the industrialization of China. Won't happen again. Short the mining companies. Those businesses have bad economics except when times are really good. Chinese internet companies are winning over US internet companies in China because the Chinese government won't let the Chinese companies lose to US ones. Internet companies in China at new highs are the ones you probably want to own. Short EM and Mining.
Why does Bass like Argentina?
KB> People don't understand what is happening there. Lots of things there are fixable. Leadership in control has "issues" :). Energy has been an issue, but recently there have been major energy findings that will change that. , he thinks there will be a new President in October 2015 and pro business people will be running things to take advantage of vast prairies of nature resources. Argentina's problems can be fixed in 2 years. Now is the time to start investing. Sees 50% upside in the sovereign debt.
JB> Would not play Argentina's equities. Tough betting on turnarounds. Does not believe in value. Believes in mispriced growth. Kyle might be right about Argentina.
KB> "When I'm Right."
Burbank: Long Saudi / Short Russia
KB> US Recapped. EU is 3.5x more leveraged than the US. At some point, debt will matter. Has always eventually mattered the last 2000 years. When debts are 24 times revenues you are finished, it is just a matter of when. Hopes he is wrong. More he looks, the more he thinks it will happen. Sees it happening the next few years. Avoid Europe. US is 4.5x debts to revs. Japan is 24.
JB> Dollar is better than Yen or Euro. Better chance for dollar to rally than market is pricing in. Chart of S&P to EM tracks closely to dollar chart. Similar to US in late 90s. Not because of strength, but due to quanlity and governance in US compared to elsewhere. Likes Quality in US then betting on low quality of EM. Believes in multi-year trends until something reaches consensus. Then you have reversion to mean.
How should mutual funds feel about Macro risks?
KB> If I were long only, I would not be able to sleep at night. A Japan crisi could not be contained. It would have huge impacts.
Be sure to check out the rest of our summary of the Alpha Hedge West Conference.