From Andrew Horowitz of the (The Disciplined Investor:
Last week I attended the Bloomberg Markets 50 Summit in New York. The setting for the event was the transformed Great Hall of the Community House at St. Bartholomew’s Church. The room was full of “jackets and ties” from all of the major brokerages, hedge funds and others involved in the fine art of investing.
The Bloomberg Staff were more than accommodating, friendly and informed. Everything was on a tight schedule as the event was being televised, so timing was to the second for the start at 9:55am. First a few words from Dan Doctoroff, president and CEO of Bloomberg to start off the morning and then he introduced the moderator and first panel of speakers.
The even was structured as a panel discussion, where the various speakers were comfortably seated on a lush white couches. Each panel had a topic and the moderators would ask for their insights on a specific topic. Overall the day was full of excellent and topical commentary and opinion focused on items that ranged from the European Crisis to Hedge Funds.
I was able to get some one-on-one time with Carson Block of Muddy Waters to discuss some of his recent findings in China. Nassim Taleb, famed author of Black Swans was not so kind and only could spend a minute or two. Stephen Roach, who just about tells you that he is always right, spared some time to talk with me about the rampant food inflation in Asia. I congratulated the John Chambers, the Managing Director and Chairman of Standard & Poor’s Global Sovereign Rating Committee for the work they are now doing in keeping the world’s government’s honest. We spoke about the continuing problems and specifically addressed the outlook for France. I asked about the recent AAA rating and what is the outlook. Of course he could not provide specifics, but mentioned that everything is up for review and nothing is permanent. I got the feeling that there is more to this story…
After the formal discussion/panel with Gary Gensler, Chairman of the Commodity Futures Trading Commission, I was able to have a few moments to ask him about the oversight of the CME. In particular, I questioned him about the recent plunge in Gold and Silver prices for no apparent reason, when later that same day a margin hike was announced. Was this leaked and is the CFTC looking at these? He replied that he was unfamiliar with the specific situation that I was referring to (was he kidding I thought?) but that they are “more interested” with leaks of government data prior to the official release. Take a listen to the actual recording of that conversation – HERE.
As for an overview of the day, it was interesting to see that there was a high level of disapproval of what the White House and Congress has been up to. That makes sense as this was a group of business and investment pros and they are in the cross-hairs of the government’s ambitious business-unfriendly programs.There was also a rather palpable negativity about the U.S. equity markets due to the current financial crisis unfolding in Europe. While there were a few panelists that had some upbeat comments, overall there was a lack of bullishness that I had expected from this group.
What follow are the notes that I took during the day. These are in no way a complete transcript of the panel discussions, but provide highlights of what I believed were the important points.
9:00am – 9:40am -Bernanke’s Balancing Act
Bernanke may not have much that he can do and that getting the committee to move will be a process. The next meeting with surely give us TWIST and then SHOUT, which is a more vocal communication. The FED is on the move it has a lot of problems in the economy it is dealing with. Expect more, not less in the future
The economy is clear. What should be done… Fed needs to be accommodative, but perhaps temporize too much, The big problem is that the transmission mechanism, is dysfunctional. That is typical after this kind of banking crisis. Better to get something that gets under the car and fixed the transmission The most evident is the need to get the banks lending. Region banks have not been as easy going as they would like to be. Maybe the foot soldiers should be listening to the Generals more closely. Somehow we need to get the banks to lend
Glen Hubbard: Fiscal or? Bernanke policies are limited. It is a fiscal need at this point. Investment has been slowed down due to regulations, no housing boom and the markets. there is a clear need to have a fiscal policy that allows for the benefit to
When asked; Is Fed trying to boost stocks? Mr. Doll replied that Fed is trying to install confidence. We need to get out of this confidence bear that we are in That is why in Jackson Hole he tried to extend the confidence by putting in a long term interest rate assumption so that some of the questions are cleared up.
General discussion about whether it is fiscal or monetary policy, generally all see that that there is a combined effort and that interest rates have low enough at this point. We are in a time that there is a slippery slope if we hope that Congress comes in and does what they have to. Communications tools need to be used and can me quite powerful as Congress and the Administration is impotent. All appear to agree that we are in need of stimulus and help.
Perhaps the biggest issue is the lack of leadership and the inability for them to lead. The most concerning is that there is also a crisis of confidence that started and is continuing. It is the combination of the lack of leadership as well as the concern that the FED is not doing all it can (?really). The things that are being down are not helping. There is a general agreement that the plans and other stimulus measures have not done anything and are not going to do much in its current forms. If nothing is done on the fiscal side, there will be a drag of about 2% of GDP.
Demand is weak as there is no confidence but also because there is not enough stimulus on a short term basis. There are things that can be done, but are not. The overall political situation at this time is at best, un-encouraging.
9:40am – 10:20am – Euro Breakup or The United States of Europe
Discussion about the the coordinated action and that is the coordinated action is the news This is perhaps why Juergen Stark resigned last week. This is a really big deal. It also calls into question of depth of the problem. In other words, is the situation so deep that there needed to be a coordinated action. This is clearly a liquidity problem.
Austerity is supported by governments but the evidence is that Austerity has failed as confidence is collapsed, growth has failed and there is discontent. Riots and a great deal of increased unemployment has shows that there has been the wrong path followed.
Is there a way to have an orderly default of a sovereign nation? If Greece can leave the Euro quickly is unlikely. There are basis problems as little as the inability for Greece to transact. There will be major lawsuits etc. Leaving the Euro will be unlikely for Greece in the short term. Default is more likely and that may need to be done.
When you have banks that are unable to get funds and in particular US dollars that is a problem. Banks have been seeing a liquidity problem and the amount f swap lines between the US and Europe and therefore it is already available. For right now, this was a necessary liquidity problem, though it is not a final solution. The action today was a short term fix to somewhat recapitalize the banks, for a period. Perhaps months. There needs to be another mechanism to bring these banks up to the Basel standards.
What needs to happen next? Has the ECB overstepped it bounds.
The ECB is going to have to do something and the move today was helping the markets short term, and in the end they may look to put together treaties. In the near future they need to cut rates to help confidence. In the next few months the ECB etc will need to buy Spanish bonds as well as other over the next couple of years. The Euro is under pressure but no one can afford a breakup of the Euro. Any country that will leave would be hurt terribly. Asia could not afford to have a breakup of the Euro or the EuroZone. This is a long-term project to save the area and this will take years.
There is no growth in EuroZone and the fiscal austerity needs to be done in individual countries an then the stimulus for area can
John R. Taylor
This does not get at any of the major problems underlying the situation. Just yesterday there was a few of the banks that could not get funding. So the was more a requirement.
With the recent coordinated action in Europe, what to do? STAY AWAY. This is a horrifically poisonous environment. If your strategies have to be in Europe, it is difficult as we really have not grappled with the true solution. They cannot create growth if there is austerity and no growth. The Swiss will be able to do well with the caveat that the Swiss believe that Europe will solve their problems, but that is unlikely.
10:20am – 10:40am – A Conversion with Ray Dalio
If it was not unexpected that we saw this last crisis, what is next? The biggest problems is that we are not having a conversation at the highest level that discusses the machine. Even though that the we make decisions, we need to know how the economic machine works. We need to have a quality conversation about how the economic and political machines work and then we can create better decisions.
Even though there will be choices made, even after choices are made, they may not be the best for everyone. For example lets imagine that you earn $100,000 per year and have no debt. You can go to a bank and get $10,000 loan. That is okay and you can spend and then if you do it over and over again and then there will be a time that you can no longer pay the debt service. Then you can lower interest rates and when there is no more room there… problems.
Credit can be created in countries and the same cycle as above will persist. How much of the money that is being spent by ECB to do a restructuring and other measures to fix things. One of the most important things now is to understand what is going on and make some important plans, rather than waking up every day to a new surprise.
On printing money: It is quite a handy thing to have. If you are a creditor with a linked policy then you have problems in that there are extremes that are created. For example Greece is a creditor and they cannot adjust and they are their economy is going to crash, if on the other hand you have those that are linked and needs to print then you have a bubble like China.
What is working for Bridgewater? Dalio says the he writes the daily so that he knows that he knows what he is doing wrong. If you diversify and don’t rely on only one things to make your year, but many ideas go into the Ray Dalio code and his template for the economy is available to download HERE. (pdf).
10:40am – 11:15am – The Next Hot Hedge Fund Strategy
There have been quite a high degree of rotation and changes in the area of trading. This year has been the fastest change from asset classes and rotation than ever seen. Had to develop and adapt to keep up with the fast moving. They needed to bring on more team members (50+) in the last year to help with development and tweaking.
The whole world is changing rapidly and the volatility and the long-only is an old tired idea.. The best way to diversify is active management, hedge funds.
Has a very dire view of the world. Since the end of the 2nd world war, things have shifted from one extent to another. We do not make things, we buy them. We are intervening in a way that is negative and if you look at things going on: Currency debasement, soverign risk, devloped markets not rish and powerful, we do not manufacture, Japan’s demographic is troubling, fractious Congress, housing prices still falling, FED flooded money and money did not get into the wrong place. This thesis has pushed him to buy some gold, but still diversified.
Best trade idea this year: Currencies (not dollar) trade. Put spreads, since we are in a bear market, playing the short side as a bias.
It has been a rough year for long-short and in particular for T2Partners. He said it is one of the most difficult times (2011 in particular) years for his style and he has been told by others that do the same things as they do. He is looking for companies with good fundamentals that have dividends. The high degree of correlation of stocks and markets it is causing problems for stock pickers.
Tilson looks to go against the crowd and this year he has been early, way too early. It is crazy to be buying treasuries for 2 to 3 percent when high quality stocks can yield close to the same thing.
Best investment over the past year: NONE. Not much working this year. Last year, four positions/trades drove 15-20% of returns. Biggest holding now is Berkshire Hathaway.
11:15am – 11:35 am – A Conversation with Gary Gensler
When are regulations going to be written? 3 years since the crisis, 15 months from the Dodd-Frank act. This summer they finished proposals and received 25,000 comments from the public, buy about a dozen of the regulations have been finalized. They are not trying to do any of this against a clock, but they understand that they need to bring up transparency in markets and make the SWAP markets more transparent.
Regarding the Dodd-Frank law too cumbersome? Gensler, says that he believes that related to derivatives, is working. The rule writing process is open, we are a big country and we are a democracy. Therefore CFTC is listening and the tradeoff is is the time that it is taking longer. By and large this marketplace is unregulated.
Gensler has had about 1,000 meetings and they are posted on site. Large investors have an active desire to get to discuss issues with CFTC. It is a good part of the process to get all thoughts out in the open in order to put together a good package of regulation.
The new rules will shift from big firms to investors and from sell-side to buy-side?
1:50pm – 2:40pm – Austerity and Other Growth Obstacles
There is a structural problem right now. The hard slog of economic activity, fiscal problems that are not sustainable. Backstop rules, commissions that cn put on policy that Congress can overrule as well as stabilizes.
We are in for a period of years for a hard slough as it was a big slowdown. If we are in a wold that has an “L” shape recovery , there needs to be a ball thrown long at housing and ignoring the housing situation should be done at own peril. While the idea of increasing taxes on the hogher earners, the problem is so large that a rise in taxes may be needed across the board.
In terms of austerity, it is not wise to discuss austerity without employment and visa-versa.
Here is an idea: Any deficit cutting measure should take 50% vote and maybe deficit increase would require 70% vote.
There may be something to privatizing some of the government agencies, as an example the FAA. They are terrible at decision making and moving to outside of government will allow for a better process etc.
In order to save the banks in EuroZone, the need for a much bigger form of TARP is what is needed. Perhaps a 3X the EFSF is needed. This would have Germany putting in a disproportional amount of money and France would need to do so, which would lead to a potential downgrade of France.
Top Priority: Direct jobs perhaps something that was done during the depression as I am very concerned that tere is a new generation that may not have jobs and that are discouraged as there is not much for them in the future.
Somehow there is a problem as government is working against business and has been creating an environment against some. If we continue on this way, there could be a social warfare. The idea of subsidizing borrowers is really a bad idea. There should be affordability.
While it is nice to talk about deficit cutting, it has been done in the past and look where we are again. There needs to be a more permanent solution.
Ireland is one area that he believes may have some of the solutions as they are cutting and keeping some growth. He is invested in the Bank of Ireland.
People in Washington don’t think more than 10 minutes ahead. With regard to the debt ceiling debate, there was a difficult time and there was some good that came out of it as the politicians may have had a wake up call.
Top Priority: Fix budget, accept the fact that there is going to be a recession, fix the deficit. Instead of renovating schools, we should work on what is being taught. The dumbing down of the American population is one of the biggest issues as we will not have people that can do work and will have to bring in outside employees from other countries.
Our country needs to consider getting more globally competitive. More money should be spent on R&D and educations not on transfer payments. Whatever is done , we need to keep our eye on the debt and other structural problems. With a high unemployment rate there is a tremendous impetus for the politicians to do something. Obviously.
The laws that have been put in place after those companies that put together those bad loans, have made it very difficult .
There is a real lack of clarity about the current economic situation and adding that to confidence we see why there is hesitancy for lenders and people – both who are pulling back from risk right now, creating a dampening affect on growth.
We need stimulus or at least some form of economic support right now, There is a general morass and lack of any confidence in any of the measures and government approaches.
The timing was bad for the GOP to take up its hard line during the debt ceiling debate.
3:00pm – 3:40pm – Can China Hurt You?
My own experience of China is that the idea of the Chinese consumer is overblown. Many large and high end retailers show good sales, but we are seeing this form a narrow amount of people in the upper class.
Micro analysis of macro issues Several years ago, came to realize that many economists are being used and China uses government statistics. Collection and dissemination is difficult to gather at best. Like the sub-prime, when some of the guys that got this right met and learned about all of the sub-prime business and being in China and the region might well be something that is a beneficial.
Sino-Forest is the 5th fraud that we have exposed. There is systemic problems all around, and that is due to the basic structure of the game. Essentially the China markets are our capital markets on steroids.
Muddy Waters came to be known due to the internet. Five years from now we will have much better research and that would be outside the investment banks, The internet is enabling the opportunity to get more info etc…
One thing that is under-appreciated is that the real threat to social stability is the farmers. The governments real concern is the well educated an the financially secure as they have knowledge of how the system works.
The trends in China are not perfect, but taking info that are derived from a a fundamental view on a few stocks(Block) and trying to extrapolate to economic is not worthwhile. But China is very focused on the infrastructure.
Integrity of data, for those of that do macro, to be able to triangulate to check it against other areas. When you look at China, Korea, Taiwan and around Asia, you can easily see that China has become the major trading partner versus the U.S. over the past few years. China is not a fiction that was created by a bunch of imaginary writer, they are not perfect, but they have created a very powerful economic models that is a fluid and organic process.
Roach asks Carson about the potential scope of the problem. Is it at the level of what was going on with the likes of Enron etc? Carson answered that the situation is different in that it is a developing country and there is a different view of money and wealth. Somehow the developed countries have been enabling as we are desirous of investing in China as it is “China”.
Wage inflation is occurring in China is from a very low base. The average level of manufacturing wages today is about 5-6% of what is being paid today in the U.S. For the most part it has the same extreme as compared to other developing nations.
The fear in the eyes of China is the fear of the Treasury and how they are going to cut the U.S. dollar in half over the next few years. The nominal value of China’s money that are held in U.S. bonds is essentially eventually going to be a $1.5 trillion transfer of money from China to the U.S.
Been very critical of the China real estate market, there are discussions that there are 20% down on homes and that it is properly lent, but the facts seem to be much different. Money that is being lent is actually from the shadow banking system and there re many houses that are owned are vacant. There are definitive problems in the area. (Steven Roach disagreed and said that it is micro analysis that does not make the clear macro story. Carson agreed with James)
The one child per rule has a odd skew on the population. Due to this there is some social problems that have been created and some of these are due to adverse selection. The adverse selection leads to bad behavior and worse outcomes. The Government has some good controls on social measures such as firing squads and other types that will may be able to corral the social behaviors.
4:20pm – 5:00pm – Investing in the Arab Spring
There was a major desire to get back basic social request. Just after the end of the revolt, there was a reluctance for anyone to take bribes, but soon after there was the same old thing again.
It has become horribly clear that there is something uncompetitive of the economies of Tunisia and Egypt. Most of the young people did not have th ability to get anywhere. You have to wonder in Egypt if the military will ever give up control. But, even so there is nothing tat I say that means that there will not be investment opportunities, but….
We are going to see that these NEMA countries are going to have to go to the international countries to help with build out and expansion, Therefore there will be little worry that there will be contracts that will be ripped up or just cancelled.
When we get to Egypt, the first point is that you have to rebuild investor confidence. That means that contracts have to be respected. Elections have to do well so that tourism will be restarted. There will probably be a weak coalition government that will e backed by the military, but that all needs to happen as there is a major amount of investor fear. This needs to get improved over the next few months.
It was significant that the interim government turned down the $20 billion from international agencies to build infrastructure. It is the feeling that the past money borrowed were not good investments. There was a great deal of pain in paying bak the money in the past.
There needs to be more than just infrastructure. It needs to be small firms in tech or otherwise that makes the growth possible.
5:00pm – 5:40pm – The Next Black Swans
The system has consumer between $2-3 trillion of compensation over the past 5 years. The great bank robbery. There are rules that we had for centuries, the problem is that the modern version of capitalism that we have (of which Adam Smith did not like) does not have consequences.
We are not made for information, we are not made for randomness, we are not cut for this world. 2 options, heuristics and try to play with them or 2) change the world. Either the world will self-correct or destroy itself. All we need is common law (heuristic). If we want to simplify the system, look at what Swede did in 1991, they cleaned house in 90 days. Then reset the system.
Thinking requires effort and a high expenditure of energy. Heuristics – we don’t know that we are using heuristics and have the illusion that we are thinking when we are not thinking.
Greatest concern is the systemic risk in the market. It is getting worse. Money flows was used for a long time and there were predictable in that you could see how the situation was evolving. But, now with all of the newer trading etc, has obscured all.
We filter out extreme stories. The press has not done a good job of providing the news and there are so many sites where info is available.
Thinking fast and slow (new book) We think that we do things for reason, what is happening is profoundly counter-intuitive. We continually underestimate the extremes. People believe they can predict the future as they have seen some pattern in the past. Comments like we are blind to our blindness (we perceive the world in a much more simpler sense than it really is)
Source: My Notes From the Bloomberg Markets 50 Summit (Dalio, Ross, Block, Gensler, Tilson…) (The Disciplined Investor)