Note From The Spring 2016 Grant’s Conference by @ChesapeakeCap

Grant’s Conference – David D’Alessandro – 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 Abenomics

Grant’s Conference – Scott Bessent – 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.

Alibaba Group Holding Ltd (BABA) Grant's Conference

Grant’s Conference – Anne Stevenson-Yang – 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.

Grant’s Conference – Jamie Dimon

  • 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 of 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 ought 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 hurt in 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.

Gold

Grant’s Conference – Pierre Lassonde – 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

Grant’s Conference – Kevin Warsh – 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 -> prices 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.

Latin America

Grant’s Conference – John Haskell – 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 at 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 Chile 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

Grant’s Conference – Jim Millstein – Puerto Rico

  • 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

Grant’s Conference – 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.
    • >1yr – 12-14%
    • 1mo – 1yr – 11-13%
    • <1mo – 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 allocations, but the analytical rigor.
  • As nations grow as % of world GDP, their market caps tend to follow – Brazil, Mexico, and Argentina are all the most attractive here.

Grant’s Conference – Grant v Zervos debate on monetary policy

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.

Jim

  • 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.