2016 Spring Grant’s Conference
On April 13, we attended the spring Grant’s Conference, hosted by Jim Grant and his newsletter Grant’s Interest Rate Observer. We find particular value in this event in that it is not hosted by an individual manager, but rather offers access to the views of multiple managers—and other informed market observers—in a setting aimed at an unusually sophisticated audience. The crowd, in fact, is composed in large part of other investment managers, many of them prominent.
If there was an overarching theme this year, it was the continuing, and increasingly deleterious, impact of the Fed’s fiscal repression, which has kept interest rates artificially low for far longer than originally anticipated. Specific presentations touched upon oil prices, potential opportunity in Latin American stocks, and Puerto Rico’s debt crisis. As always, the views expressed are those of the presenters, not necessarily those of Hamilton & Company, and, to the extent that their comments may advocate particular strategies or investments in which they have an interest, they should be viewed through the appropriate lens. A brief summary of select presentations follows:
- David D’Alessandro, founder of CMDTY Capital Management, which operates a commodities fund seeded by the Ziff family in 2013, made a case that oil prices have likely “reached the bottom of the barrel.” His argument, in classic economic fashion, was based around supply—which he said was set to shrink (thanks to cuts in North American production, various challenges within OPEC and logistical problems in non-OPEC nations)—and demand, which he predicted would increase (driven by weather considerations, as well as rising appetites for oil in countries such as India and South Korea). At the time he spoke, OPEC was scheduled to meet to discuss possible production cuts. The eventual meeting, of course, ended, contrary to the expectations of many, without a deal to reduce production—largely due to Saudi Arabia’s intransigence and longstanding suspicion of Iran. Further evidence of the difficulty of predicting future commodity prices.
- Jim Grant interviewed JPMorganChase head Jamie Dimon, just hours, as it turned out, after the bank’s “living will” had been deemed insufficient by regulators. Indeed, much of the discussion centered around the increasing—and ever-changing—regulatory challenges faced by banks. Dimon averred that whatever requirements came, his bank would do whatever it had to do to meet them, though his vaguely defensive tone projected the impression of a man who felt notably put-upon. Beyond regulation, Dimon discussed:
- JPM’s energy lending exposure: “We think most of these loans will be money good, even at these oil prices.”
- The prospect of another Fed rate hike, which he deemed a positive: “Paul Volcker raised rates 200 basis points on a Sunday night and 25 basis points is supposed to be some earth-shattering thing?”
- Treasury bonds: “I wouldn’t touch a Treasury. I think the chance of making money on Treasuries over the next 10 years is nil.”
- China: “I don’t know what’s going to happen in China [short-term], but 20, 30 years from now, it will be a fully developed market. That’s what I’m building for.”
- A bit of optimism on the United States: “If we had a [JP Morgan] Risk Committee meeting about the U.S. in 1865, you wouldn’t have invested here. ‘Civil war? President assassinated? And what is this Democracy thing, anyway?’”
- Stanford University Economics Fellow and former Fed Governor Kevin Warsh drew a sharp distinction between “crisis measures” necessary to stabilize an uncertain situation in 2008 and the ongoing fiscal repression in the form of continued quantitative easing that, he argued, has evolved into a “dangerous Pavlovian relationship between the central banks and the financial markets.” “The Fed does whatever the markets want, to diminishing effect,” Warsh said. “The Fed needs to stop worrying about the markets to the exclusion of the economy generally.” Fiscal repression has hurt economic growth, Warsh said, in part by favoring financial assets at the expense of investment in the sorts of real assets needed to grow GDP, such as property, plants, and equipment. Overall, he believes the Fed has lost its way, becoming a “multi-purpose agency” with a mandate far outstripping its original purpose due to “a failure of political leadership.” It is incumbent upon Congress, not the Fed, to fuel economic growth, by passing pro-growth legislation as part of a coherent economic policy, Warsh argued, citing tax and immigration reform as two areas in need of urgent attention. “Economic policy does not have to be perfect,” he said. “It just needs to be less destructive.”
- Rockefeller University CIO Amy Falls, who is tasked with overseeing her institution’s $2 billion endowment, gave a presentation titled “Voices of the Repressed,” in which she, too, criticized the current regime of fiscal repression. Falls noted that fiscal repression erodes returns for savers (and investors) and increases risk in markets by, among other things, promoting excessive leverage, increasing the price of diversification (long-duration Treasuries, for instance, become prohibitively expensive), and potentially masking structural problems in equity markets by artificially propping them up. Like Warsh, she believes “The Fed is trying to do too much.”