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
KB> First part of taper will be easy. Fiscal drag of moving Fed Funds from 0% to 3% will be large.
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.
China
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. 2 years from now, 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
JB> Likes Saudi...though their neighbors are a problem. He is one of the best informed US investors re: Saudi. 95% of investors in Saudi are local traders.
Moderator> Is there an opportunity for a paired trade with Saudi?
JB> Short Russia. Saudi has been crushed. Instead of easing, they tightened. They've lagged. No one wants to invest there. Aramco would be the largest company in the world by a factor of 10 if it were a public company. Saudi is like a 1990s EM story in a time capsule. Dollar rally would crush EM. Mining gets crushed without rise in commodities. In '03 and '04 most wouldn't invest in EM. Now they can't be talked out of investing in EM. San Francisco is the opposite of EM. EM has high volumes of low skilled labor. SF has relatively high concentrations of high skilled labor. Most people don't understand tech. Transformational tech requires less capital than ever. This means lower margins for others. EM not capable of embracing technology. SF is impervious to risks like weak GDP, interest rates, etc. Tech has been camoflauged by rising prices everywhere. New tech is where you want to be. Those are "safe" strangely enough. Investors don't even like to travel to SF. That will change in the next 3-5 years.
Moderator> Are early stage private companies better investments for tech?
JB>Want to own "Venture Debt". Low risk. Even low tech does well. Innovation premium starting to be revealed. Want to just be in top 5 or 6 venture funds. Look for services. Google is 300B market cap. Facebook & Twitter. Not that many tech hedge funds.
Japan
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.
JB> Joke: mutual fund managers happy as long as they beat the benchmark. This is an era where you want to own the best. In Silicon Valley it is like winner take all. Not enough premium on best of breed.
KB> During the Tequilla crisis, Mexican equities down 90%, even with 10x appreciation, you just break even.
Be sure to check out the rest of our summary of the Alpha Hedge West Conference.
