Whitney Tilson Q3 2016 Letter – partial excerpt


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Whitney Tilson

My Macro Views

Like everyone else, I read the newspapers and closely follow world events. There is never any shortage of economic, political and military turmoil, nor of gloom-and-doom prognosticators who remind me of Buffett’s famous maxim: “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” I also recall what Bill Miller once said: “If it’s in the headlines, it’s in the stock price.”

[drizzle]Thus, nearly all of the time, I ignore macro events and focus on being a good bottoms-up stock picker, with only occasional exceptions in obvious, extreme cases such as the internet and housing bubbles.

I don’t think we’re in such a situation now, but my general view is that there is a disconnect between the complacency in the markets and the risks in the world, which I would summarize as follows:

Here in the U.S., economic growth is anemic, corporate profit margins are under pressure, and there’s a 21-31% chance (depending on which odds/polling site you believe) that Donald Trump could be elected President five weeks from today (but who’s counting?) – a possibility that I’m quite sure isn’t being factored in by the markets. I don’t want to politicize my investor letter, but I know that markets hate uncertainty – and Trump prides himself on his unpredictability and willingness to go with his gut and shoot from the hip. In short, his promise to shake things up is the core of his appeal.

The problem is, nobody – not even Trump himself – has any idea what shaking things up might look like. Would he tear up trade agreements? Launch a trade war with China and/or Mexico? Attempt to strategically default on our national debt, as he’s done so many times with his companies? Bully companies doing things he doesn’t like? Dramatically increase the deficit by slashing taxes without commensurate spending cuts?

If Trump wins, I will hope for the best. But if he runs the U.S. like he’s run his businesses – a subject I’ve studied extensively – I think it’s likely that the stock market will do very poorly in the short-, intermediate- and long-run.

All of this said, I’m cautiously optimistic about the U.S. economy and markets (barring a President Trump, in which case, all bets are off) – but much less so as I look around the world. Europe is a mess, with its stagnant economies, high unemployment, refugee crisis, terrorist attacks, rising nationalism, tremendous uncertainty about how (or even whether) Brexit will play out, and weak banks (nearly a decade after the financial crisis, Europe still hasn’t cleaned up its banking system, as evidenced most vividly by Deutsche Bank’s recent woes).

I’m even more bearish on the rest of the world: the Middle East, Russia, Japan and Brazil are even bigger messes, and China is a total wild card. I think the Chinese are among the hardest working, most capitalistic people on earth and what that country has achieved economically in the past few decades is unprecedented in human history. But it’s also an enormously corrupt kleptocracy with little rule of law, largely falsified/manipulated government and corporate statistics, significant imbalances, and numerous apparent bubbles (e.g., infrastructure and housing). I can’t confidently predict how things will play out in China, but I can’t rule out significant turmoil in the world’s second-largest economy, which would no doubt impact economies and markets worldwide.

In summary, I repeat: I see a meaningful disconnect between the complacency in the markets and the risks in the world.