Kyle Bass Not The Only One At SALT To Say China Bigger Problem Than Subprime

May 13, 2016
By Steve Blumenthal

“Invest in good companies, don’t use leverage, invest in liquid investments, don’t do private deals and light a candle and pray for a positive outcome.”

-Leon Cooperman, Omega

“Debt drains away vital resources from economic growth. Fighting a debt crisis with more debt is doomed to failure, yet that is not only what global central banks did during the crisis but long after markets stabilized (though the crisis never truly ended, just slowed). This was an epic policy failure that continues today.”

Michael Lewitt, The Credit Strategist

Speaker Boehner stepped to the stage for a one-on-one discussion with Democratic activist Steven Rattner.  Rattner didn’t hold back.  Private equity great David Rubenstein sat with Robert Rubin and Larry Summers.  “What are the most significant risks you see?”

I arrived home late last evening from the SALT Conference in Las Vegas.  A quick in and out to listen to Michael Bloomberg, Leon Cooperman, Paul Brewer, Kyle Bass, T. Boone Pickens, Sam Zell and Ken Griffin, to name just a few, share their thinking on fiscal policy, central banks and investment implications.

Promising you a summary of my notes, let’s waste no time and jump in.  I hope to story this for you in a way that has some flow but hey, it was Vegas and that plane ride home was a bit longer and choppier than hoped – this morning’s coffee may not kick in in time to clear the few extra cobwebs.

You’ll find a consistent negative investment theme on China, thoughts on Fed policy and market illiquidity.  Additionally, a few investment ideas were shared.  Ok, here we go:

Private equity great, David Rubenstein (Co-Founder & Co-CEO of The Carlyle Group) interviewed former Treasury Secretaries Robert Rubin and Larry Summers. My notes in bullet point form:

  • Rubenstein: Low growth for a while, low inflation for a while
  • Summers: Not likely to see economic growth accelerate. Risk of recession by the end of 2017 is 1 in 3.  We are seven years into recovery – not a time when you are likely to see the economy accelerate.
  • Summers: The right things to do are tax reform and education reform.
  • Rubin: There are a lot of risks out there. If the political system would begin to function with a well-structured fiscal policy, then I’d have a better view.  The facts on the ground – unlikely/not going to get it.
  • Rubin: Advice to Hillary… Engage with Congress. The whole key is the willingness to engage in the types of compromises that gets our system to work.  She’ll try.  Unlikely to be received.
  • Summers: need a pro-investment mindset. It is insane that we don’t take advantage of low rates and low raw material prices.  This will get growth starting then advancing. (SB here: seven years in to recovery… this will get growth starting?  We’ve taken trillions of bonds off the banks’ balance sheets and parked them in the Fed’s parking lot to “run off” over time. The “this will” statement, at least to me, speaks volumes)
  • Rubin: On infrastructure, big mandates make a difference. We need it and the financial conditions are right (ultra-low interest rates); however, we are unlikely going to get it. (SB again: this is the hand-off from the Fed’s monetary policy to Government fiscal policy we’ve been writing about.  El-Erian’s “T-Junction” where the central bank road we’ve been traveling on is coming to a stop sign.  We have come to a T in the road. One turn is the road in which our fiscal authorities implement tax reform, infrastructure projects and education reform, etc.  The turn we can take is on the road to which they do nothing.)
  • Rubin: We need fiscal reform. (SB: Rubin is saying that road appears “unlikely”.)
  • Rubin on Glass Steagall: The repeal of Glass Steagall had nothing to do with the crisis. It was, in practice, repealed long before the final legal strike of the pen put it into law. (SB: I found that statement interesting as it speaks to the power of large banks’ influence.)
  • Summers: Canada came through the crisis best. Why? Because substantially diversified financial institutions are much safer than not. (SB: amen that, in my view.  I found it an interesting comment that immediately followed Rubin’s Glass Steagall remarks.)
  • Rubenstein asked, “What advice would you give to Yellen on interest rates?”
  • Summers: Data dependence is the right course and the most important data is the state of inflation and the state of inflation expectations. The goal of the policy is to react and stabilize.  We can’t predict the economy – Fed Reserve reacts and stabilizes.  The most important thing I would advise her is to do what you feel is the right thing to do at the time.
  • Summers: There is less evidence that the Fed is politically influenced.
  • Rubin: I’d advise Yellen that there is a vast over-focus on the Fed. She should have raised rates sooner. The Fed is only one piece of the equation and a relatively small piece.  (SB: tell that one to the markets… “All About That Fed”)
  • Rubin: The economy is more likely to soften than not. It is ok if she raises a little.  Our elected bodies are much more important.
  • Rubenstein asked, “What is your most significant economic worry outside of the U.S.?”
  • Rubin:
    • When you talk to Chinese economists off to the side, there is more worry. This is a big risk we should be cognizant of.
    • Geopolitical risks. The markets are not thinking about such risks.
  • Summers:
    • China – something substantial is happening there.
    • Political risk driving huge economic risk. (SB: What he sees rising up outside of the U.S., especially in EMs, is a risk that is rising inside the U.S. – Something he never thought would happen.)

The discussion around China was a big theme at the conference.  And rightfully so.  Debt remains the most significant global issue.  And that debt continues to grow.

Speaker Boehner was fairly candid in his responses.  Asked about his opinion of Trump’s views on banning Muslim entry into the U.S., building a wall along the U.S. border with Mexico and raising tariffs—and whether he agreed with them. Boehner’s responded, “No, No, No.”

But let’s move on.  Here are a few comments that I believe may help us assess the probabilities as to which turn we take at the T-junction:

  • Steven Rattner asks Boehner, “Over the next two years, do you see Congress making substantial entitlement or tax reform?” Boehner responds:
    • Don’t hold your breath on entitlement reform. No one is going to touch it.
    • Taxes are teed up well for reform, with a lot of effort put in by both sides of the aisle. [America] has the most complicated tax system in the world. Not even the IRS understands it.  (SB again: Good news… fingers crossed)

I can’t say I felt any better about the probabilities for taking the correct turn at the T-junction.  In my view, we have pulled up to the stop sign.  I put the odds of needed structural fiscal reform, absent a crisis, at

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