CNBC’s David Faber talks with John Burbank, Passport Capital managing member & CIO about ways of restoring an economic recovery in the U.S.
i am here in larue, texas, joined by a very thoughtful and successful hedge fund manager, john burbank, who runs passport capital. perhaps not the easiest time to be an investor, john, particularly when you believe there is a lack of growth that is not yet reflected in equity prices. i’m looking at your second quarter letter in which you simply say despite an equity market which in our view is ignoring the facts of the world, you’re still holding a short position, perhaps not as great as it was in the second quarter. when is that going to change? yeah, so markets sold off for about six weeks in april and all of may. and then bounced — bounced for four months in a row. meanwhile, growth continues to plummet around the world and in the united states. and ecri which we subscribe to and believe it is in our session right now. which they have been for a while, to be fair. they have. they have a good record on that. do you think we’re in a recession? i do. i don’t think all parts of the united states are. but i think we’re incredibly close to that. i think the numbers are not actually accurate that the government projects there. but the last four months was remarkable because usually equities and growth, you know, merge together. sometimes equities anticipates it. sometimes it lags. but growth numbers keep falling. and yet the equity market keeps rising. i think the s&p is now — should be thought of as a different sort of class of instrument used by investors around the world. i think now that the yield of the ten-year or of corporate credit, i think it hasn’t been this tight since the ’50s. and i think therefore if you look at it on a yield basis and if you believe that multinationals, leading multinational companies will have enough growth to have growth, and i think that’s actually true, because global growth, from a consumer standpoint and spending is going to be positive, then in a way these equities are mispriced relative to, you know, the ten-year. so you’re talking about the idea which we’ve seen in force, buying these larger stocks that have significant dividend yields, you think that’s creating a new dynamic, though? yes, yes, i do. i think we’ve seen that the fed and the ecb are willing to go beyond the mandates that we associated with them. and the independents of the fed and now there are full attention to unemployment which, in my opinion, they will be unable to target or meet means they can deploy much greater tools of liquidity than they have which would have a direct impact on all asset prices. basically driving everything up higher. so what do you do, then? sitting there as a hedge fund manager, who has a viewpoint not particularly positive, even here in the united states you think we may be in a recession. do you go out and short? right. so my view is that after ’08, all that government spending and central bank liquidity tried to push things back together and push everything up higher. and for ’09 and 2010 and the first half of ’11, everything traded in line together. germany traded like spain. and then i think the second time around for europe, last year things started separating. the most dividend-paying stocks, the s&p, i think, were up 1,000 basis points over the least dividend paying stocks. i think you’re seeing a separation now and a recognition that we’re not going to have the growth that we thought. so i actually think — i call it the great separation. i think what’s happening is that the really high-quality, well-managed, well-governed, dividend-paying companies are going to be treated as an asset class that’s priced off of these other available yield instruments while speculative companies, things that, you know, really need the economy to do well, things that aren’t that well managed, that don’t pay dividends, et cetera, are going to stay poor. so i think — so basically would be long high quality, leading companies which generally in the united states and then short speculative companies which obviously rise into fed announcements and, you know, in
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