Value Investing

Notes From The First Eagle Investment Media Breakfast

Rough notes from the September 2018 First Eagle Investment Media Breakfast. This first appeared on ValueWalkPremium.

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First Eagle Investment

  • How to think about the decade ahead?
  • Debt imbalances
  • Geopolitical
  • Passive versus active

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Q2 hedge fund letters, conference, scoops etc

  • Business cycle – what the weather is in investment climate
  • When things feel good, it is risky, when things feel terrible, there is opportunity
  • During Lehman felt bad, but opportunity of lifetime
  • Unemployment below 2007, 3.9% unemployment, 2% growth in decade
  • Economy has already recovered, behind us in rearview
  • What is sustainable rate of growth in us economy?
  • Corporate profit growth in medium term
  • Wage inflation, close to 3%, decade high
  • Companies invested more, depreciation going up
  • Oil prices more than doubled since lows (tax on consumer discretionary)
  • Interest rates up, yield curve at 3%
  • Headwinds: asset prices reflect degree of complacency
  • Risk perception in asset markets is low
  • Price gold relative to S&P is at low level
  • Credit low, implied volatility is low
  • Highly abnormal, fiscal contraction at peak, ease at bottom à different dynamic today
  • 4% budget deficit range,
  • In 1990s, there was a budget surplus when unemployment is below 4%
  • Fiscal picture of US is weak, short term help corporate profit margins
  • Late cycle fiscal stimulus
  • It is behind us, risk factors looking forward
  • Fiscal consolidation, headwind for corporate margin
  • Corporate profits due to fiscal stimulus, late cycle confidence
  • Currency headwinds in second half
  • Fiscal tax cuts à not all companies will hold on to those tax cuts, monopoly and oligopoly will benefit
  • Others will compete them away, pass the prices to consumers
  • Observe in rear vision, things are above average
  • A lot of good stuff happened, be realistic with prospects
  • We perceived we went through great deleveraging but we did not
  • Sovereign sector debt is high
  • US government debt, high same with European and Japanese
  • Emerging market debt to gdp high
  • China very high
  • Range of economies who will find in difficult to move around debt, especially high debt
  • For those without financial flexibility, it will be hard to move with the debt
  • Debt levels bloated around the world
  • Hard to create nominal growth
  • We are in a window of leveraging economy, see nominal growth
  • Look at Japan in past 20 years
  • Growth in Geopolitcal risk
  • Exogenous forces
  • Rise of east, insecurities in west
  • Trump trade, when China’s currency is overvalued, wrong timing
  • Period of growth in China, expected converge on Western norms
  • Has not, remove presidents term, one of critical geopolitical moment
  • Automation of manufacturing à displaces traditional workforce in short term
  • Long term they will find their way back
  • Short term created disequilibrium in economies
  • Growth of east, contributed to displacement within nation, even though lessened displacement around the world
  • Forces playing out everywhere, similar around the world
  • Rise of populous movement
  • These trends applying across world
  • Political themes can influence business
  • All good stuff past, we have not deleverage, sovereign sector has not deleverage, layer of geopolitical complexity
  • Disequilibrium in existing systems
  • Where do you find opportunity?
  • High levels cash
  • Right character business, at prices reflecting modest expectation
  • Gold, as potential hedge
  • Price gold depressed relative to risk assets
  • Consumer-able commodities
  • Weakness of emerging markets à consumer staples, viable free cash flow yield
  • Active versus passive
  • Environment where assets gone up, beta risk has been ridden, underperforming active
  • Outlook can be very different going forward
  • Exposed to forest fires
  • Largest sectors experienced largest permanent capital impairments
  • Largest issuers are source of problems
  • Usually exposed to most expectations
  • Mitigating risk, do not try to predict short term
  • Passive is willful ignorance, low cost strategy presumes markets efficient
  • The more successful it is, the more it is exposed
  • Active is risk mitigation
  • Prepare yourself for a more difficult environment
  • 5% cash, a little less than high, cash has been countercyclical
  • 10 year average holding
  • Cash grows as residual discipline
  • Increase in sovereign and corporate debt, will fed provide liquidity to market
  • Typically excessive debt for sovereign, have low interest rates
  • But in corporate, credit spreads blow up
  • Private debt defaults, sovereign, amortize
  • Do interest rates keep going up? Are we at peak?
  • Sovereign debt can play different ways
  • How to implement currency hedge
  • Approach to currency is resonant
  • Hedge if currency is overvalued, and asset is cheap
  • Thoughts on growth versus value
  • Price we pay versus pacing of business development
  • Momentum, if you do not see good business development, but price going up, a lot of risk
  • Risk in growth is not identifying sustainability
  • Risk in value is fate may play
  • Lower discount rate on longer term
  • Some sectors have been structurally impaired during crisis
  • Emergence of tech platforms, global scale quickly, dis-intermediated many local business
  • Fate risk
  • Never shortage demand for common sense investing
  • What could you explain international corporate debt and implications? Do you seeing buying opportunities in emerging markets?
  • State owned in China, rise debt
  • Looking at potential defaults
  • Expect china to ease fiscal policy, corporate debt may transition to sovereign, sovereign perception risk factor, may transition to different risk bucket
  • Capital structure of banks, questionable
  • Financial sector in Europe dependent on central banks
  • Excesses in telecommunications space in Europe
  • Currency collapses in Argentina and turkey
  • Why is gold cheap relative to GDP?
  • Gold is inverse to price of risk in some ways, environment of risk seeking
  • Gold negatively correlated with strength of dollar
  • Real interest rates going up, bad for gold
  • Trumps easy fiscal policy negative for gold in short term
  • Business confidence has been headwind for gold
  • Supply growth for gold, way below money supply growth
  • Dollar growth is high