Grant's Spring Conference Notes 2016 - Bessent, Dimon & More ~ market folly

Thursday, April 14, 2016

Grant's Spring Conference Notes 2016 - Bessent, Dimon & More

The Grant's Interest Rate Observer Spring 2016 conference just took place yesterday.  Here are some notes from all of the speakers at the event:

David D’Alessandro (CMDTY Capital) – Long Oil

·      Peak oversupply of 1.5-2m barrels/day; started 2016 with 600-700k which isn’t weather adjusted (El Nino).
·      3 buckets of supply
·      North America – modeling down 700-800k by ‘17
·      OPEC – Iraq, Iran, Saudi Arabia. Overall modeling up 600-700k
·      SA – look for them to freeze. Signs are on the table, they’re willing to attend meetings.

·      Iran – ramping to 500k growth yoy due to sanctions lifted. Difficult to export due to capex needs.
·      Iraq – At the limits of their export capacity; won’t raise production.
·      Non-OPEC – Most will be down, some flat. Models down 600-800k

·      Libya is the wild card on supply side – dire situation, but can do 1m/day export if political situation changes.
·      Just on supply, we are undersupplied. Counter: 900m inventory?
·      A third is unusable (essentially reserves that never are used).
·      Look at days of inventory – because demand is increasing, this is decreasing.
·      Demand was up 1.8m in 2015, assuming 1.5m for 2016, range of 1.0-1.8m increase.
·      Drivers: India, South Korea, US, China. - Variant perception
·      Supply is declining

·      Demand is accelerating

·      No sudden surge in US production at $50-55 like sell-side projects
·      Labor markets aren’t as loose
·      Bush-era EPA not around

·      Stricter capital
·      Dug but not completed wells are overstated.

Scott Bessent (Key Square Group) – Japan
·      China isn’t the biggest risk – Japan is.
·      Abenomics – underappreciated aspect is Abe’s leadership in 2006 as PM.
·      Tons of charts on various macro elements in Japan
·      3 arrows partially successful – but craters in the policy
·      JPY depreciation solely during inflation

·      Limited structural reforms outside of women labor participation and corporate governance
·      Services recovery will be needed to drum up CPI.

·      Sales tax increase will be cancelled
·      Good chance of surprise at April BOJ meeting
·      Debt write-off is eventually how we get out of this
·      Never count on immigration or privatization being a factor in Japan
·      If you’re investing, look to take off FX hedges in Japanese stocks, stay long JPY.

Anne Stevenson-Yang (J Capital Research) – L/S China 

·      China since 2006 has looked like Silicon Valley in 1999 – growth at the expense of profitability
·      Two sources of capital – both end with massive capital flight – best short ideas are the most loved names
·      State via household deposits
·      FDI / Portfolio / etc.
·      Short BABA
·      Look to put on when the capital flows change

·      Maxed out ecommerce platform – avg annual spend of $1075 vs AMZN $330 (faking?).
·      Poor capital allocation; using capital to generate growth

·      Misleading GMV

·      Dubious assets – Investment in equity investees, goodwill & intangibles
·      Long Tingyi
·      Largest maker of noodles – have scale, brands, operating leverage, 10b US revenues
·      Competes with UPC but UPC backing down / becoming more rational
·      Extensive distribution, partnerships with SBUX & PEP – upside from beverages segment
·      20x PE vs 30x historical, 10% op margin historical vs 3% now > expansion of both leads to 2-3x winner
·      Short RMB
·      Nothing has changed in the policy, but politicians say it has; don’t believe them
·      PBOC using forwards / swaps to hide capital outflows, delay booking in foreign reserve declines
·      9 months before reserves run down to perilous point

Jamie Dimon (JPMorgan Chase)
·      Auto is a little stretched, but overall consumer credit is pristine
·      Student loans are going to be a problem – growing too fast
·      Rate normalization is a good thing – strong economy. 25bps will have a de minimas impact
·      Grant: is the gov’t digging a moat for your biz in regulation? What would it take to replicate JPM?
·      Could give you $1t and you couldn’t remake this.  Employees, customers, goodwill, etc.
·      Banks will trade at 2.0x TBV when regulation, lawsuit overhangs go away.  Look at pace of change in regulation.
·      We’ll be there for energy customers in tough times – most loans are still money good.  We can’t run from the problems or sell stock – we’re not traders, we’re building a business
·      Grant: “The fed out to provide a living will for the central banks.”
·      The fed sets short rates, but market participants set the curve
·      More detail on credit: 10% debt servicing to mortgages; this is near lows, all good here.  Credit cards are pristine. Some may get hur tin auto, terms extending, but will be very small.  $1.3t in student loans, 30% delinquent. Went from 20% to 80% government underwritten.
·      I own stock – HD / YUM / JNJ / BA and the like.
·      Nil chance to make money in US treasuries over the next 10 years.
·      By 2030, China will house 30% of the Global 3000.
Pierre Lassonde (Franco-Nevada Corp) – Gold 

·      Demand rising, has outperformed everyone the last decade
·      Mine supply has not kept pace with demand because cost of production risen 4-5x over past 30yrs. 

·      Production next 6-7 years goes down. 

·      Takes 7-12 years to get production online from field discovery, discoveries have fallen since 80’s. 

·      China and India now over 50% of worldwide demand 

·      Shanghai will take over the London Exchange in 5-10 years. It becomes a casino and prices skyrocket. 

·      Central banks went from sellers to buyers in 2010 – now buying 400-600tonnes/year 

·      Retail investment has grown since 2008, Europe now largest market 

·      Negative interest rates spur demand – greater uncertainty, no opportunity cost, uncertainty in FX 

·      Recycling has grown to meet shortfall between supply and demand 

·      Gold: liquid, low volatility, low correlation to other asset classes 

·      80% of price is determined by USD, which will roll over again, driving gold higher (mean reversion). 

·      Trump would accelerate this devaluation
·      DJIA / Gold = financial assets / real assets. Expect normalization at 1:1 and a 3-7 year bull market 

Kevin Warsh (Hoover Institution) – Case of the missing growth 

·      Yellen gets done what she wants to get done; don’t make fed watching more complicated than that.
·      We all have bias to think our economic status is better than other countries 

·      Growth doesn’t just appear by being one step ahead on devaluation 

·      QE was initially to restore markets, drive liquidity, not to boost asset prices.
·      Difference between 2% and 3% GDP growth is not 1%, it’s 50%. And we’re not even getting 2% here, nor 3% internationally, and int’l trade is slowing; policymakers shouldn’t be doubling down. 

·      This is the most important year since 2008
·      The 8 Growth destructive policies
·      Conflated regimes
·      Politicians fail so fed turns to multipurpose agency
·      Fed has wrong dashboard – backward looking and heavily revised data
·      Short-term time horizon as if managing q/q not thinking like a long-term biz owner
·      QE is copied abroad – the wealth effect – works primarily to boost financial assets, not real assets
·      Regulatory structure is in purposeful limbo with respect to banks – “we’re only 60% done implementing so we can’t be blamed if something goes wrong again” but now tougher for banks to make money
·      Models are still from the 1970’s
·      Story of an aggregate demand shortfall with no acknowledgement of supply side
·      Central bank buying takes away the price signal – no clue about risk premium > price of assets. Asset prices shouldn’t worry the fed but they’re still managing around them, vocal about it.
·      Want growth? More people working and more productive workers.

John Haskell (Explorador Capital) – Long LATAM equities 

·      Forex, earnings, and the multiple in LATAM all down in 2015 – attractive grounds. 

·      INRETC1:PE
·      1/3 malls, 1/3 supermarkets, 1/3 pharmacies (think Walgreens)
·      Hold 22%, 36% and 53% share respectively
·      Accelerating private label from 33% to 40%; drives higher margins.
·      Accelerating store count
·      Reduced dollar exposure from 74% in 2014 to 23%
·      Trading at 13.8x 2018 EPS vs comps > 20x

·      GRAM:US
·      Largest engineering firm in Peru
·      End of commodity supercycle means depressed results in core E&C biz
·      Capital structure stressed due to cash cycle and business shift
·      2016 outlook is positive; inflection point
·      Up 52% since Monday morning, whoops
·      Trading 3.2x ’18 EBITDA – core E&C biz for 1.9x EBITDA

·      ENTEL:CL
·      36.9% mobile market share in Chile (the VZ there)
·      7.6% share in Peru vs Telefonica at 52% and Am Movil at 37%
·      Buy Chila biz for 4.3x ’16 EBITDA and get Peru biz for free
·      25% dilution – due to desire to participate in spectrum auction
·      Founder’s HoldCo owns 55%
·      MCO downgrade
·      Potential Liberty / Malone target

Jim Millstein (Millstein & Co) – Puerto Rico
·      60% of additional 50b in debt from 00-15 was to fund operating deficits.
·      Don’t blame gov’t completely; they’ve tried – raised taxes and cut employment / benefits
·      Framed as liquidity vs insolvency problem and now decidedly unsustainable / insolvent
·      Defaults on May 1 & July 1
·      Author’s note: admittedly didn’t follow much of this presentation

Amy Falls (Rockefeller University Endowment)
·      Low rates – lower returns for savers, increases risk – leverage, excess investment, erodes system’s capacity to absorb risk, increases inequality
·      Endowment provides one-third of budget, spend 5-5.5% of it each year.
·      HEPI outpaces CPI by 1% on avg since 90’s. 70% of HEPI is salary and benefits
·      Absolute rates matter more than credit spreads
·      Seeing shorter durations and less cash holdings in many endowments now
·      Declining implied vol masks increasing structural weaknesses
·      Typically run 2-5% cash, now 8%
·      Seek managers with wide mandates and the ability to exploit them
·      LATAM looks attractive to us, too.
·      You are actually comped for letting your managers hold longer. Longer lockups > higher returns w/lower Std. dev.
·      > 1 yr: 12 - 14%
·      1 mo – 1yr: 11 - 13%
·      < 1 mo : 6 - 9%
·      Don’t outsource your investment functions – intelligent institutions work both sides of the balance sheet
·      Yale model isn’t about the outputs or the allocations, but the analytical rigor.
·      As nations grow as a % of world GDP, their market caps tend to follow – Brazil, Mexico, and Argentina are all the most attractive here.
Jim Grant v David Zervos (Jefferies) debate on monetary policy
         -  Fed was fighting deflation at any cost. With high debt levels, worst thing to do is deflate. Make assets increase, 
liabilities decrease to repair broken balance sheets from 2008. 

         -  China is pegged to the US however, and we caused their bubble via our QE; we don’t just do monetary policy for 
ourselves anymore, must consider consequences. 


         -  If the USD is a commodity, it’s natural price will near the cost of production ... 

         -  700 PhD economists on fed payroll 

         -  Fed MO is to distort price mechanism 

         -  He said a lot of other good classic Jim Grant stuff in here that I didn’t write down... 

         -  Took a shot at Bernanke at PIMCO and whoever happens to live in Greenwich 


         -  US, China, Japan, Europe – 4 countries that matter for FX. 

         -  Tightening causes feedback – see August and the Chinese 3% devaluation; our stocks off 10%. 

         -  If we go, it’s got to be a turbocharged tightening 

         -  When Europe and Japan devalue, it’s against us but against China too; Draghi took the signal and looked to pump 
inflation without relative devaluation. 

         -  Japan can print and buy back its own equities. 

         -  This is a prisoner’s dilemma – won’t break down before the November election, but Yellen considering all these 

         -  S&P will form base here and go much higher, but real trade will be in EMs. Worst possible asset to hold is cash; it will 
be diluted by CBs. 

         -  Understanding CB reactions to data is the only way to get an edge. Everyone is terrible at forecasting data; I’d never 
give a trade rec on unemployment, GDP, or inflation. 

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