John Burbank, Passport Capital: Notes from UTIMCO 20th Anniversary Event

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Notes from UTIMCO 20th Anniversary Event
March 3, 2016


John Burbank, Passport Capital:
? [~Minute 9] Markets’ ability to discounting future overrated. Markets do a bad job of seeing
recessions until they’re obvious. Last two years have seen liquidity deteriorate in advance of that
? Views: macro, bottom-up and quant/risk (regression to mean and flows)
? Quant is the most active trading strategy in the markets now, creating lots of changes in
? Quant: basically reversion to the mean in levered market neutral way
? Lot of quant blow-ups going on right now
? Sophisticated quants, like Renaissance, will produce alpha in ways that they don’t tell you about
? Smart beta has legitimized a lot of leverage
? Commodity equities: ratings, earnings estimates are bad and stale. They are the fundamental
input into a lot of quantitative strategies (ie. P/E, P/B). In reality companies could be close to
? Quant is making this market a lot more volatile and tactical
? “This is a bear market”
? Future 3-5 years from now will be unrecognizable from today
? Globalization, lack of liquidity, amount of information, levels of debt, demographics: world will be
unrecognizable/unanticipated consequences
? Focus now: lack of liquidity
? Need to change how you invest now (not from a fundamental point of view): do you have enough
liquidity for set of circumstances which may be complete opposite to what you think
? Has nothing to do with fundamentals
? Liquidity sets the multiple of a security
? 2013 was best year in QE regime – most liquidity
? Unless policy makers provide liquidity, will see much lower multiple – even if growth/earnings are
? Don’t think earnings will be okay because rising dollar, end of QE. Six years of QE held dollar
down, world borrowed in dollars
? Dollar will keep going up, tightening of global liquidity. Happened in 1980s, 1990s. Broke Latin
America in the 1980s – Plaza Accord avoided crisis. Broke EM in 1990s
? Big parts of the market that you can’t sell: HY, EM credit, EM equities barely
? Only differentiator in the future: human capital. Clustered in very few places, select cities
? Was long EM and commodities 10 years, until 2011
? Only real long: scaling and formation of human capital
? Don’t believe in world growth: we have too much debt and are too old. Policy makers won’t get
this one right
? Negative rates: tried in Japan. Market screamed, banks traded down
? Obvious solution: fiscal stimulus. Won’t happen in US this year
? Global market won’t be good unless the dollar comes down

? [Minute 24:30] On using quantitative, factor-based risk management
? Like having three advisors at the table. When two agree it’s more powerful. Sometimes only one
can be the reason not to do something
? Took a long time, most equity people not trained in risk
? Like speaking a different language
? Look at portfolio: ie. how much exposure to momentum factor
? Measuring and monitoring quant investment universe: like watching a professional sports league
? Knowing the flow is significant as it presents tail/headwinds and helps distinguish noise and
? 80% of trading is HFT
? Since 2007: move into ETFs has been staggering. Market is getting stupider
? Sell-side has less incentive and interest in good estimates
? Trading being done by people who don’t do work
? “Fundamental guys are like the head of the snake. Sometimes the head carves the path for the
body, sometimes the body is making the head go all over the place, which is basically right now”
? [Minute 28:] QE that was done was a mean reversion trade. Now seeing disaggregation/unfolding
of that mean reversion trade into the liquidation trade. Do things get liquidated or do policy
makers change course from negative rates, which is an even dumber idea, towards liquidity and
? Right now markets rallying into ECB, China, Fed in hope for better ideas
? Learned a lot about monetary theory, pretty simple: I give you cash, I take your best collateral,
done. That’s what they did, that was their best idea [QE]
? Next best idea: negative rates. Rejected by the market
? Will they come up with something else? US needs tremendous infrastructure spending. Don’t see
how it will happen this year. In between will go up and down on the hopes for liquidity

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