Some Slides From Grant's Fall 2008 Investment Conference
I don't have much access to Jim Grant (newsletter costs $800+; oriented towards professionals; etc) but one thing I like about him is the fact that he is a contrarian who isn't scared of going against the crowd. In fact, from what I can gather, he has been a contrarian for almost 30 years. One funny thing about Grant is that he is a value investor and hence says not to pay attention macro very much. Yet most of his writings are regarding macro items :)
Well, I have never been to any of his investment conferences but they also seem like an off-the-wall mix of views from various individuals. Some slides from the Fall 2008 conference are posted on his website. I haven't gone through all the slides from everyone but perhaps the two most interesting ones are from Jim Chanos of Kynikos Associates (perhaps the most successful short-seller on the Street) and Jim Grant.
Thoughts by Jim Grant
As he has mentioned in some of his recent interviews, Jim Grant is making a bullish case for select mortgage bonds while being bearish on bonds from retailers. In the presentation he points out that the yields on Lowe's, Target, Walgreen, and Costco unsecured bonds are around 5% to 8%, while select AAA-rated junior RMBS tranches are yielding 15% to maturity. Small investors and non-professionals don't have access to any of these, let alone try to value these things, but there is some important insight in this.
Something closer to home for me are the bond insurers. My thinking, as well as that of many others, is that the losses implied by the market are way too high. If a value investor, who was also very contrarian and bearish on housing for years, thinks that some mortgage bonds are worth risking capital on, it's good news to me. For all I know the bond insurers may have poor underwriting skills and ended up insuring the absolute worst, but barring that extreme scenario, it's reassuring to hear that Grant thinks that some of those AAA-rated tranches, which is the main thing bond insurers insured, are actually projecting unlikely scenarios. (However do note that the bond insurers have other serious problems, including collateral posting needs for their investment portfolio, and the fact they also have insured exposure to auto loans, student loans, and so forth.)
On another note, I'm sort of thinking of taking a position in Sears Roebuck Assurance Corp bonds (if my broker allows it; it's not easy for me without paying high commissions.) Grant clearly expects the situation to deteriorate--or at least doesn't think the 7% yield compensates for the risk. How bad will the situation get? Would a 15% yield be enough?
Similar to my thinking, Jim Grant also points out how GDP growth is nothing like the Great Depression yet people are throwing around that word. However, I do expect asset prices to do poorly even if the economy doesn't fall off a cliff.
Thoughts by Jim Chanos
The Jim Chanos presentation seems to recap some of Grant's past bearish calls. I think the interesting point are the last few slides where he outlines his bearish scenarios. I think a lot of commodity superbulls will completely disagree with him.
In general, Chanos is bearish on the infrastructure play. Jim Chanos thinks that Dubai is a bust waiting to happen. I share a similar view. You know it's a bubble when people build artificial ski slopes in the middle of a desert. Only too much wealth and exuberence would lead to something ridiculous like that.
He also thinks that China will falter and points out how most of the growth is in fixed infrastructure. He says that rebuilding previous poor construction is not really growth. I'm somewhat bearish on China for similar reasons but I do not think it's as bad as he says. Yes, a big chunk of the growth is due to fixed infrastructure spending. But I also see new industries, new technologies, and new tools being developed. They are also building some world-class companies. So I'm not as bearish as him.
My big concern is the political system. As far as I'm concerned, if you run capitalism along with a totalitarian state, you end up with fascism or what some call corporatism. Until I see some positive move on the political front, I would be very concerned. Things can fall apart any minute.
Jim Chanos makes the prediction that the collapse of paper assets will filter into so-called real assets. He thinks the commodity supercyle and emerging market decoupling are myths. I agree completely. I have never believed in the commodity super-cycle since valuations made little sense to me. The decoupling theory was just as dumb given that the emerging markets depend heavily on developed countries for their exports.
Overall, I am not as bearish as Jim Chanos when it comes to emerging markets. I actually think we are seeing once in a 300-year growth in some of these countries. So there is some real, sustainable, growth in some of those countries. The question is how these countries behave when the face an economic slowdown or recession, which are typical in a capitalist system.
Well, I have never been to any of his investment conferences but they also seem like an off-the-wall mix of views from various individuals. Some slides from the Fall 2008 conference are posted on his website. I haven't gone through all the slides from everyone but perhaps the two most interesting ones are from Jim Chanos of Kynikos Associates (perhaps the most successful short-seller on the Street) and Jim Grant.
Thoughts by Jim Grant
As he has mentioned in some of his recent interviews, Jim Grant is making a bullish case for select mortgage bonds while being bearish on bonds from retailers. In the presentation he points out that the yields on Lowe's, Target, Walgreen, and Costco unsecured bonds are around 5% to 8%, while select AAA-rated junior RMBS tranches are yielding 15% to maturity. Small investors and non-professionals don't have access to any of these, let alone try to value these things, but there is some important insight in this.
Something closer to home for me are the bond insurers. My thinking, as well as that of many others, is that the losses implied by the market are way too high. If a value investor, who was also very contrarian and bearish on housing for years, thinks that some mortgage bonds are worth risking capital on, it's good news to me. For all I know the bond insurers may have poor underwriting skills and ended up insuring the absolute worst, but barring that extreme scenario, it's reassuring to hear that Grant thinks that some of those AAA-rated tranches, which is the main thing bond insurers insured, are actually projecting unlikely scenarios. (However do note that the bond insurers have other serious problems, including collateral posting needs for their investment portfolio, and the fact they also have insured exposure to auto loans, student loans, and so forth.)
On another note, I'm sort of thinking of taking a position in Sears Roebuck Assurance Corp bonds (if my broker allows it; it's not easy for me without paying high commissions.) Grant clearly expects the situation to deteriorate--or at least doesn't think the 7% yield compensates for the risk. How bad will the situation get? Would a 15% yield be enough?
Similar to my thinking, Jim Grant also points out how GDP growth is nothing like the Great Depression yet people are throwing around that word. However, I do expect asset prices to do poorly even if the economy doesn't fall off a cliff.
Thoughts by Jim Chanos
The Jim Chanos presentation seems to recap some of Grant's past bearish calls. I think the interesting point are the last few slides where he outlines his bearish scenarios. I think a lot of commodity superbulls will completely disagree with him.
In general, Chanos is bearish on the infrastructure play. Jim Chanos thinks that Dubai is a bust waiting to happen. I share a similar view. You know it's a bubble when people build artificial ski slopes in the middle of a desert. Only too much wealth and exuberence would lead to something ridiculous like that.
He also thinks that China will falter and points out how most of the growth is in fixed infrastructure. He says that rebuilding previous poor construction is not really growth. I'm somewhat bearish on China for similar reasons but I do not think it's as bad as he says. Yes, a big chunk of the growth is due to fixed infrastructure spending. But I also see new industries, new technologies, and new tools being developed. They are also building some world-class companies. So I'm not as bearish as him.
My big concern is the political system. As far as I'm concerned, if you run capitalism along with a totalitarian state, you end up with fascism or what some call corporatism. Until I see some positive move on the political front, I would be very concerned. Things can fall apart any minute.
Jim Chanos makes the prediction that the collapse of paper assets will filter into so-called real assets. He thinks the commodity supercyle and emerging market decoupling are myths. I agree completely. I have never believed in the commodity super-cycle since valuations made little sense to me. The decoupling theory was just as dumb given that the emerging markets depend heavily on developed countries for their exports.
Overall, I am not as bearish as Jim Chanos when it comes to emerging markets. I actually think we are seeing once in a 300-year growth in some of these countries. So there is some real, sustainable, growth in some of those countries. The question is how these countries behave when the face an economic slowdown or recession, which are typical in a capitalist system.
"Small investors and non-professionals don't have access to any of these, let alone try to value these things, but there is some important insight in this."
ReplyDeleteThis is driving me crazy. We have ETFs for everything now - in the whole universe of funds, you'd think that someone would have packaged one of these mortgage securities up. I've been searching for a way to get into bonds and found some interesting hybrids (trust preferred securities) but found nothing on this. Whatever happened to the democratization of finance when you needed it...
TC, I agree with your sentiment but I wonder if an ETF would be very helpful in this case. You have to be very selective in these cases and an ETF would be way too passive and lump everything together.
ReplyDeleteIf there is any criticism of capital markets, it's the bond market in general. Bonds are not small investor friendly. Unless you consider buying popular bonds pushed by the salespeople at par which is probably the riskiest strategy.
So how do you short Dubai?
ReplyDelete"One funny thing about Grant is that he is a value investor and hence says not to pay attention macro very much. Yet most of his writings are regarding macro item."
ReplyDeleteI'm a value investor who likes to invest in individual companies, but paying attention to the macro can help enormously in regards to where a particular industry is going for a company I'm interested in.
I believe the resource/commodity boom is not over, but it is taking a long break. It will continue when inflation starts to creep into the picture. Show me any fiat currency that hasn't been devalued by inflation over a long period of time, and then I'll see the case for commodity prices (and precious metals in particular) to stay low or go lower on a long-term basis. I don't really care about short-term swings in either direction (a luxury I have since I'm young and not highly leveraged).
It may take a few years before inflation starts to become an issue, but I'm willing to bet it WILL be one. The entire investing world is saying the commodity boom is over (with the exception of the hard-care bulls) despite the fact that world population continues to surge forward and "3rd world" and "industrializing" countries continue to grow (or steal) market share of the world's economy (and resources) from the Western World. I agree, Dubai is due for a massive correction as are many of the booming markets. Speculators have driven the prices up too fast. I expect a drop in many of these countries because I don't think their economies grew as fast as many of the investments did. That said, long-term, the prospects for many of these other nations is good.
When these other nations start to see some capital investments they will continue to grow the demand on resources. If the US economy starts lagging - and it will (the US has been hiding it's problems of competitiveness with debt for a while... we can't compete with wage slaves in another country that also employs currency manipulation to have currency arbitrage in their favour as well. This isn't fair competition. ) - Also, we're planning on increasing corporate taxes too!?! Dumb move to increase corporate taxes, especially now at this point in the world, where other countries will be competing more than ever for resources, and investment dollars, and corporate headquarters.) Increasing the min. wage by over 40% should also help usher in some inflationary pressures.
Bush screwed the country up financially in many ways, but so did Clinton who legislated (forced) banks to give out sub-prime loans to increase home ownership and grow the economy under false pretences (with many all spending 30+ years of earnings in a short-period of time. Eventually they had to decrease sub-prime lending requirements to keep the economy growing, because it was false growth through debts which still need to be paid - and the loans were too expensive for many to begin with - hence much of the growth in the last few years was false with money being spent by people that can't afford to do so.)
Even precious Obama was suing CitiBank a few years ago to force them to issue more sub-prime loans to certain communities... So how do we fix the stupid policies? Not by making more stupid ones, that's for sure, and not by raising taxes or increasing the social programs dramatically. Obama's "spread the wealth" will quickly convince many of the rich businessmen to start investing heavily in other nations and get their assets off-shore. Taxes above 50% on ANYTHING and ANYONE is socialist... anytime the government owns more than 50% of the stuff that you "earned", it is crossing a line. The smart countries will try to lure American businessmen, corporate headquarters, and capital to their countries where these productive people can help out the local economy of a country that doesn't wage class warfare so brutally and realizes that the wealth the rich have gets circulated into the economy through investing in businesses, expanding businesses (which increases employment and often wages), and spending on luxury items. If America doesn't want it's rich people, corporate headquarters, or investment dollars, another country will. As it is, the rich pay more than 70% of the taxes in the US! Not to mention the bottom 40% of Americans pay NO FEDERAL taxes anyways. Yes, the rich SHOULD pay taxes (they know it), but they shouldn't be punished with 50%+ taxes for being successful, or they will be forced to go elsewhere... it's hard enough for American businesses to compete globally, we don't need even further hindrance to growth and competiveness... Most corporations use profits to GROW their companies, which is good for an economy. Now, more of those profits will be siphoned off to the government for it to efficiently "spread the wealth". Sorry, I just don't see it being positive. This will create a generation of Americans who think they are owed social programs, while living in a world full of people so eager to work hard and earn theirs...
The system isn't perfect, but waging class warfare in this manner isn't going to help. In many cases, rich Americans want to pay taxes (but not over 50%!), and they themselves often came from humble beginnings.
If investment dollars start going offshore in mass, the other economies may begin to grow and their large populations will slowly want more and more resources.
Okay, I've gone way way too far, connected dots that shouldn't be, and my arguments are stupid and false. Make fun of me, bash me, hurt me. But remember, the finite commodities on Earth are being bought by infinitely produced fiat currencies. That's a system which doesn't work well in the long-run.
Nabloid,
ReplyDeleteI disagree with most of what you are saying but don't take it the wrong. I appreciate your lengthy post.
COMMODITIES
There are risks with your commodity argument. The problem is that no one can know for sure right now. I can see your predictions becoming true but it's not written in stone.
For instance, even if your predictions about developing countries needing commodites turns out to be true, it is possible for that to be a very long drawn-out process. Instead of something going up quickly within a decade, it might take 3 decades. Your returns may not be as good as they seem.
On another note, what if these countries don't increase their demand for those commodities? A lot of commodity bulls seem to miss the fact that, although many of these countries would love to invest in infrastructure, they just don't have the money. Except for some rare cases of countries running big trade surpluses--most of which are commodity exporters or special cases like China--many countries really don't have the money to finance much of it. For example, many of these countries have been saying, with government planning for it, that they need power plants for decades.
Furthermore, a lot of people forget that the developed world is still the biggest user of commodities. The highest growth rate is elsewhere but the highest usage is still in USA, Europe, and Japan. If you are going to make a bullish case, you need to be sure that the growth elsewhere will offset any potential decline in developed countries. One of the reasons oil is off more than 40% is because countries like USA are consuming less of it (or at least less than market was expecting.)
INFLATION
I think I agree with your thinking behind inflation. If I had to make a bullish call, I would rather pick gold than commodities. I think it's almost certain that inflation will be higher in the future. But hte question is whether it will be somewhat high or not.
Gold (or even a general commodity bet) will only work if inflation is somewhat high. The existence of positive inflation is not necessarily bullish for commodities or gold. For example, we had positive inflation all throughout the 80's and 90's (say 3% per year,) with the US$ actually losing around 30%+ of its value. Yet gold fell and so did most commodities (including those that never hit any extreme levels in the 70's.)
MORTGAGES
I have to disagree with your blame of the mortgage problems. It's hard for many conservatives to accept but this is largely a private sector problem. Contrary to what you are implying, no one really forced anyone to sell mortgages. In fact, a big chunk of the investors aren't even regulated by American authorities (they are mostly European banks, foreign investors, or hedge funds.) It's the American banks that makes the news but foreign banks and hedge funds are taking losses just as big.
I think it's ridiculous to claim that the government somehow forced banks such as Citigroup to lend to subprime customers. If Citigroup was forced, how come Wells Fargo, Bank of America, HSBC, and countless others, somehow had little exposure?
Depending on how you count, the biggest losers out of all this seems to be Royal Bank of Scotland, UBS, and Citigroup. Are you telling me that they were all forced by American authorities to lend to subprime customers? How do you explain that the big losses are being posted in CDOs, which isn't regulated much by the government?
TAXES
I take a different econopolitical stance in life so I don't really agree with your tax suggestions.
I don't really want to see taxes go up but someone is going to have to pay for all these bailouts. I don't see anything wrong with increasing the taxes on the wealthy. Yes they pay most of hte income taxes but don't forget that it's the middle class and working class that pays most of the payroll tax, sales tax, and property tax.
I also think it's ludicrous for you to claim that taxes over 50% is socialist. If that's the case, USA was clearly socialist for several hundread years. As recently as the 1970's, the highest tax rate for hte wealthy was over 60%.
I agree with you that higher taxes will make individuals or businesses flee the country. But we get carried away, it should be kept in mind that USA has one of the lowest taxes anywhere on earth. Anyone who runs a business or lives a life to avoid taxes has already done so. They are not in USA or Canada or Europe or Japan or whatever. They or their business is in Bahamas or the Cayman Islands.
Just to be clear, I'm not in favour of increasing taxes for taxes sake. I'm nowhere near wealthy but even if I were, I would be ok with high taxes. Like I said, most wealthy Americans and Canadians had tax rates above 60% in the 50's and 60's yet lived a good life. My only concern with high taxes is that I don't want the government to expand. Government is generally inefficient and I don't want them to get bigger. Other than that, I'm cool with taxes.
Anyway, you are going to hate me but I'm thinking of writing an essay tying in all these things. Supply side economics is dead. Mark my words. The fall of Alan Greenspan seals its fate. Blindly cutting taxes and de-regulating over the last 20 years has ended up in a total disaster. In fact, if as some claim that the Bush tax cuts were recycled into housing, it may end up being one of the biggest policy disasters ever. You ended up weakening the balance sheet of the country in order to prop up some bogus houses.
@ Sivaram: Hey, I'm just glad to have discussions on the issue. Time will work out the details. We're just trying to forecast as best we can to make investment decisions we hope pay off. I wish everyone the best of luck and in the end we all have the same goals, so a healthy discussion is always a good one.
ReplyDelete"For instance, even if your predictions about developing countries needing commodities turns out to be true, it is possible for that to be a very long drawn-out process."
I hope it is drawn out. I don't have much money in the market because I'm very young. I want it to take a while... I have 40 or 50 years before I even think about retirement. Commodities WILL increase in my time horizon... I don't care if it happens in the next two decades or if it takes four or five! I'm almost 100% sure we will be using more commodities in 50 years than we use now. Our population seems to grow faster than our resource supply, which lags behind demand, and will do so for as long as the commodity price remains low. So the longer the price remains low, the more bullish I'll be FOR commodities in the long run. Remember, I hope commodities do badly for the next ten years... It will give me a great time to enter the market. I do think we have UP to ten years of poor commodity prices which just make for GREAT investing opportunities (I'm a contrarian!). Bad is good and good is bad! LOL.
In the next 40 to 50 years, many countries will become more industrialized... and even industrialized countries will be increasing immigration from the countries that do lag behind so they can attempt to keep their population numbers in check... We'll see how well this plays out though... There will be problems, even stagnation, but that doesn't mean we can't have inflation.
I also especially like gold/silver like you... but just remember, the Comex gold price is heavily manipulated by governments that don't want it to soar too high or they risk losing peoples confidence in fiat currency... Everyone looks to gold to see what the strength of the dollar is... which gives the government incentive to keep gold prices in check. In a paper market, it isn't hard to short something when you have the resources of the government.
"In fact, a big chunk of the investors aren't even regulated by American authorities (they are mostly European banks, foreign investors, or hedge funds.)"
If you go do some research you'll notice Obama did sue citibank to force them to adhere to the government regulations that forced them to continue giving out sub-prime loans. That is a mild problem, even a non-issue, as he was just doing his job as a lawyer and I only pointed that out so oyu could see even Obama makes mistakes. The big problem was that Fannie and Freddie guaranteed these sub-prime mortgages which took RISK away from the banks and private sector!! Think about that! No risk, but pure profit. Only the investors that bought and held these risky mortgages felt the pain. Many of the banks packaged the loans up and got rid of them as fast as possible! A few banks didn't sell them off quick enough and they got left holding a bag when Fannie and Freddie could no long guarantee them. If a particular bank didn't hold any of these sub-prime loans because they sold them off, they made a lot of money. As for the investors that are seeing losses, they were duped... Investors weren't guaranteed anything... and they are left holding the bag and must now pay the price. Now if only many of these mortgages weren't guaranteed by big corporations that have strong ties to the government, like Fannie and Freddie, and AIG, this entire situation might have been avoided. Government policies encouraged them to take steps so that home ownership rates would rise in America. The government IS linked into this situation with stupid home ownership policies when they should have been REGULATING the banks to have strict lending requirements to protect the entire financial industry. In essence, the government was regulating in the WRONG direction... it wanted MORE loans to help the economy and home ownership rates increase. If they would have been more like the Canadian Government and made regulations STRICTER, we wouldn't even be discussing this right now. My point is, even government regulations can fail us, and they have, by regulating in teh wrong direction.
Oh, and as for regulating investors, I hope they don't regulate us little investors anymore than they already do... it's hard enough to invest in private corporations when you aren't an accredited investor, despite your knowledge and risk tolerance.
"If Citigroup was forced, how come Wells Fargo, Bank of America, HSBC, and countless others, somehow had little exposure?"
Many of the banks DID NOT continue to hold the sub-prime loans, but instead sold them off to investors, who are left holding the bag.
Regardless, I think regulation is needed! A simple piece of legislation that strictly looks at your income... IF YOU CAN"T AFFORD IT, YOU DON"T GET IT. PERIOD. Now that is as conservative as it gets! That's why Canadian banks didn't get into this whole mess to begin with, although we still had some small losses because our banks BOUGHT a little bit of sub-prime loans from US banks. Regulation is needed, but don't act as if the government didn't mess up!!! That was my point... government screwed up too! Everyone was completely blaming industry and shouting that we need to regulate them without giving any blame to the government regulations which helped mess things up to begin with. Both screwed up, but too many people don't see that both sides screwed up... that was the only reason I was defending the private sector, which did screw up. I think it's important for someone to stand up and say something and show people that both sides can share the blame... I hope that better shows what I meant by my arguments.
"I also think it's ludicrous for you to claim that taxes over 50% is socialist. If that's the case, USA was clearly socialist for several hundread years. As recently as the 1970's, the highest tax rate for hte wealthy was over 60%."
It is socialism. It's not communism, it's socialism... This isn't a black or white scale... This is a scale, and we have socialized medicine in Canada... we are partly socialistic in many of our policies.
And for the record, I don't want tax decreases. I'd be happy if taxes stayed the same, and government began cutting spending by ending wars and spending money more efficiently. I do NOT want government to tax us more only to turn around and promise and spend more money!!! That is precisely what they have done.
I'm conservative in the regards that I think we need to first A)stop making promises and increasing government spending.
B)Balance the budget by cutting government spending
C)Leave taxes alone until the government debt is completely paid off,
D) ALL goverment surplusses, beyond inflation adjusted increases in government spending, should go to pay off the debt.
E) When the debt is completely gone, and the country is economically sound, then start decreasing taxes
The world is a much different place than it was many years ago, high taxes won't work. People, corporations, and CAPITAL can leave the country real fast and go elsewhere. The world has opened up and now governments must compete for people, corporations and investments. I would say leave the tax alone, cut spending and get economically healthy. Government spending should be only increased with the rate of inflation and not a penny more. Tax rates should be stabalized or we are in for a rocky road that doesn't help, and you know as well as I do that when governments get more money, they spend it.
nabloid, I'll try to respond when I get a chance...
ReplyDeleteWow, long posts.
ReplyDeleteAnd I thought I was the longwinded one...
Just one thought:
Nabloid, you imply that you are willing to wait a very long time, decades, for your commodity investments to pay off. I think you are disregarding, to your probable great cost, effective return of investment.
Basically, if commodity prices triple but take three or four decades to do so your returns are sorry enough to make treasuries a better option.
You also imply that you expect high inflation. If that is so, the real, instead of nominal, return becomes paramount. High inflation may push commodity prices higher in nominal terms but if this increase lags the general increase in prices real return on investment will be negative, possible by a lot.
Just look at the past 30 years. Commodity prices are up quite a bit in nominal terms but stagnant (and currently falling) in real terms. And that is in a period of quite pronounced inflation and strong demand for commodities.
Commodity prices have been declining in real terms for centuries by now. Don't fight Clio!
@ contrariandutch: I think you got me wrong. I'm not buying a commodity and sitting on it until it goes up in value. Commodity prices might not go up a lot anytime soon, but I expect the companies I invest in to generate some wealth too! Commodity prices could sit where they are and many mining companies will still make good money and have great returns. Mining companies can also continue to explore which adds value. I always prefer to invest in a cash flow positive company that is generating wealth, regardless of what industry it's in. I don't think I'll make any money, after inflation, on just holding commodities. But I do hope the commodities prove to do well through inflation and at least keep up with it. But above all, I still need the mining company I invest in to create wealth or I'll do poorly. The same can be said of any business. I thought it went without saying.
ReplyDeleteAbsolute returns on investment are extremely important in the end goal. I just want cheap prices for now because I have almost NOTHING invested (I'm just starting out in life). After I get some money into the market, then I won't mind stuff going up... A break in the prices sky rocketing right now is what I need though.
I could invest in physical gold/silver (and maybe I am...) but I think gold and silver in physical terms are more a store of wealth than a way to create wealth (and as a store of wealth, I hope they keep up with inflation, I don't expect them to beat it. A store of wealth can be useful, but IMHO, I'd rather invest in companies that create wealth as well. Mining companies create wealth by exploring (finding new deposits) and extracting minerals/metals from the ground so they can be used. That's why I prefer investing in real companies that create wealth over just buying a piece of metal or a general commodity and thinking it will make me a lot of money...
Sorry, so much was said in the past few comments that I need to clarify some points.