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
·
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.
Zervos
- 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.
Grant
- 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
Zervos
- 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
interdependencies.
- 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.
