2015 Grant’s Conference
On Tuesday, April 7, 2015 we attended a day-long conference hosted by Jim Grant and Grant’s Interest Rate Observer held at the Plaza Hotel in New York. The conference was well attended and attracted a comparatively sophisticated audience. The event followed a typical format: a series of presentations and interviews with invited speakers. This year’s presenters included investors David Einhorn of Greenlight Capital; David Abrams of Abrams Capital (a $7.5 billion hedge fund based in Boston); Bill Gross (late of PIMCO, now at Janus), Paul Singer of the hedge fund Elliott Associates; and Mitch Cantor, an uncompromising value investor who runs a small hedge fund several Hamilton & Company clients employ.
Some highlights:
- By and large, the investors who spoke expressed concern. Einhorn, especially, but also Abrams, Singer and Gross, lamented the Fed’s ongoing “fiscal repression.”(Or “failed chemistry experiment” destined to blow up, as Einhorn put it.)
- Einhorn argued that stock market growth (as engineered by the Fed’s low-interest rate policy) does not necessarily help the economy, as the “gains” typically are not spent. Contrast this with interest payments, which would generally find their way back into the economy (via retirees, say) and would therefore add to growth. Moreover, in light of paltry yields, savers are actually saving more and spending less, Einhorn said. As for the equity market: “Many stocks are overvalued. Some are in a bubble.”
- Einhorn spoke of the potential appeal of owning “gold instead of green.” (Singer, too, was positive on gold and said he couldn’t understand why no institutional portfolios seemed to own any.)
- Abrams, for his part, runs a concentrated portfolio of both equity and debt. He is “25-35% cash” right now. On the equity side, he said the “opportunity set is not so great. Not the worst I’ve ever seen, but not so great.” He warned against holding long-dated developed-nation sovereign debt; a caution echoed and expanded upon later in the day by Singer, who called such bonds “The Bigger Short.”
- Bill Gross gave his usual “New Neutral” presentation, in which he reiterated his belief that rates will stay low for an extended period, which, among other ills, “keeps zombie companies alive,” provides “very little incentive to lend,” and “destroys business models” (e.g. insurance companies, pensions). He opined that the current state of affairs could eventually lead to either an “inflationary bust” or a “deflationary bust”—“we’re closer to deflation right now”– and he suggested “putting money into those two fat tails,” though he did not specify precisely how.
- Mitch Cantor introduced himself, spoke a bit about his value-and-quality-driven process, and noted that he was up to a whopping 63% cash in the portfolio at the moment—higher even than before the 2008 crash. Mitch, it should be noted, does not hold cash as a means of expressing an opinion about the direction of markets; rather, his cash position ebbs and flows based upon his ability to find stocks that meet his criteria. He is finding little to buy at present, and noted that the little fresh value he was identifying tended to be in stocks of ever-diminishing market cap (his portfolio’s median market cap at present is around $5 billion—also lower than it was in the period prior to the 2008 crisis).
- Paul Singer’s talk was entitled “The Bigger Short”— in this case not subprime mortgages, but rather “long-term claims on paper money,” i.e. bonds. To put it bluntly, he sees a coming shellacking for the bond market, especially the long-term sovereign debt of developed nations—i.e. U.S., Germany, etc. His argument in broad strokes:
o Due to entitlement commitments, the major developed nations are, in fact, insolvent.
o Governments, saddled with such levels of debt, have never been able to resist the temptation to inflate their way out of it—e.g.: Weimar Germany.
o Government leaders have ceded all authority for monetary policy to the central banks.
o The central banks are flailing around blindly, with no idea what risks they’re introducing or what the ultimate effects of their actions may be.
o Every developed-nation central bank is trying to nudge up inflation.
o Is there any reason to believe they will be able to create “just a little” inflation or to stop it at the point they wish? Singer thinks not.
o If inflation “surprises to the upside” or people even think it will, long-term bondholders will suffer mightily and those anticipating the move will profit handsomely.
Singer cautions, of course, that timing is everything and it could be years, etc., etc., but he seems pretty convinced that it will eventually come to pass. He, like Abrams, suggests ridding portfolios of long-dated treasuries, and also seems to like gold as a store of value.
Other presentations included a senior bankruptcy partner from Kirkland & Ellis, who talked about potential distressed opportunities in the oil/gas exploration and production sector (as one might surmise, there may be a bounty, there may not be so many—it will depend how low the price of oil stays and how long it stays there. Next year, much debt comes due and many hedges run off, so 2016 will be a critical time for these companies). Finally, an Englishman named Jon Thorn extolled the virtues of India’s new prime minister and, by extension, his rosy outlook for investment there.