I’m live from the Bloomberg Markets 50 Summit at the New York Historical society’s gorgeous headquarters on Central Park West. Bloomberg has brought together fifty of the most important, market-moving people on earth for today’s event and I’m taking notes during each of the panels and presentations.
Below are my notes from this afternoon’s seven segments. Like a jazz musician, my composition below will be free-flowing and improvisational, where you see quotation marks around something it is a direct quote – otherwise I’m paraphrasing as best I can.
A CONVERSATION WITH PREET BHARARA
Preet Bharara, U.S. Attorney for the Southern District of New York, U.S. Department of Justice
Stephanie Ruhle, Co-Host, “Market Makers”, Bloomberg Television
Stephanie goes right at it: Let’s kiss the elephant in the room right on the lips, tell us about SAC.
Preet goes, “No.”
Budgets and resources are always a problem in terms of being able to go up against large, well-funded firms like SAC. “If I’m not able to replace talented prosecutors I lose to private practice, the level of holding people accountable is going to go down.”
“We being fines and money back to investors of 40 to 50 times our annual budget.”
How do you keep the flame burning, going against SAC and JPMorgan for years without getting them? “For starters, my people are not motivated by money.” He harps on the fact that he’s on a hiring freeze for two years, he loses 15 or 20 prosecutors each year and is not allowed to replace them.
You don’t have financial engineers, so don’t you want the markets to be simplified? “Our job is to be a blunt instrument, prosecute those who break the rules.” Life would be better if things were simpler, Preet says, but too bad.
Why did we go after Fabrice instead of going after Goldman? “It’s not an either / or proposition. Sometimes it’s appropriate to go after individuals, sometimes institutions, sometimes both.” He explains that sometimes the pendulum swings too far, citing Arthur Andersen’s being shuttered in the wake of the Enron fraud.
“Prosecutors are not piling onto institutions, they are going where the smoke is.”
“I am not anti-bank. Banks put me through college, I have a mortgage with a bank.” But sometimes perverted incentives are created and this can contribute to moral hazard and corruption.
He is puzzled by how corporate managers have zero tolerance for division heads who don’t perform – but not the same standard for compliance. Sometimes at these great institutions there is zero tolerance for failure on the sales side, but much more lax policies about compliance and regulatory adherence. Why does management have zero tolerance for sales and product quality but not transgressions of the law? How can the CEOs tell us they had a great compliance department and great policies if they keep failing? No other division within a company would get this much latitude within the corporation.
“We’re not just moneychangers, if we’re assessing a fine, we want to make sure it’s based on principle.” He says lots of entities come into him willing to pay an extra million or ten million just to make it go away. This would miss the point, to just take cash and let companies make economically-sound decisions around wrongdoing.
Announcements and suits being announced have a deterrent effect, as do admissions.
“I like investigative journalism.” He’s critical about reporters spreading rumors rather than them ferreting out the truth at other hedge funds or outing new fraudulent activity. “We’re already on it,” he says, referring to SAC, go write about something new.
Anecdotally, he believes firms have been tightening themselves up and things have gotten cleaner thanks to recent suits and prosecutions. He says he sees and hears signs of it everywhere.
THE GRAND UNBARGAIN
David Malpass, President & Founder, Encima Global; Former Deputy Assistant Treasury Secretary, U.S. Department of Treasury
Peter Orszag, Columnist, Bloomberg View; Vice Chairman, Global Banking, Citigroup; Former Director, Office of Management & Budget; Former Director, Congressional Budget Office
Michael McKee, Economics Editor, Bloomberg Television & Bloomberg Radio; Co-Host, “Bloomberg on the Economy,” Bloomberg Radio
Okay, I gotta be honest, I skipped this one. Went outside for a snack. I can’t listen to anymore fiscal policy / debt ceiling bullshit and I’m sure you can’t either. Sorry, panelists, I’m sure you were great. It’s not you, it’s me.
REAL ESTATE REALITY CHECK
Richard LeFrak, Chairman, President & CEO, LeFrak Organization
Steven Witkoff, Chairman & CEO, Witkoff Group
Douglas Yearley, CEO & Director, Toll Brothers
Larry Edelman, Managing Editor, Investing, Real Estate and Personal Finance, Bloomberg News
(josh’s note: LeFrak is a monster, if you’ve ever driven through Queens you know this, the man’s name is on every other building.)
Are investors addicted to stimulus? LeFrak says interest rates have barely risen yet. “If we saw rates normalize, a lot transactions that have happened in the last 24 months would be trashed.” He says the leverage isn’t coming from the banks, it’s coming from the hedge funds. Banks are doing very conservative underwriting.
Steven Witkoff agrees, people in RE are being very conservative. Cheap capital is making life tenable for owners and operators, but what happens when it goes away.
Doug Yearley of Toll Brothers is talking mortgage rates – rates at 4 and change for a mortgage are still incredibly cheap, but the market is still adjusting to it. He’s saying that while new home builds are flat this summer, they’re up against comps from 2012 where builds were up 75% over 2011. He thinks the demographics are in place for continued gains in housing. “This rate is fine, we’re not hearing it from the client.” Our buyers are the higher end, they’re more worried about their jobs than watching mortgage rates tick-by-tick. 20% of our buyers are all-cash.
Witkoff says he’s been selling out high-end Manhattan apartment developments at a record pace.
LeFrak says people are now leaving multi-family homes from his portfolio and the reason they keep citing is that they’re leaving to buy a home. Which is a positive. He then cites the fact that two of the most iconic office buildings in midtown Manhattan have just been converted to residential condos. “People are highly optimistic about the future of high-end condominiums.” (josh’s comment: the death of office space? secular trend? or will office demand resume with employment?)
Doug wants to expand multi-family building from Boston to DC, “It’s our home market. allows us to leverage the strength of the company.” Toll is “slowly” doing apartment towers but for-sale homebuilding is still what they’re about.
LeFrak on Miami: “It’s sizzling, it’s a red-hot market. After New York, it is the single biggest place for foreign capital in the United States. The place is on fire right now.”
LeFrak on the hottest NY markets: “If you live on the upper east side, there’s something wrong with you, it means you’re not cool. If you don’t come from Brooklyn, you’re not cool.” LOL, he’s like 80 years old.
“Fannie and Freddie performed really well for this country for decades.” says Doug Yearley. He would be shocked if they went away, he notes they’ve had a much better record recently. “They had a couple of really bad years,” he says with a straight face.
The traditional office as we knew it is changing, the typical worker is becoming portable. Nobody really has their own files, they need different types of space to work collaboratively. The average occupancy rate has shrunk to 150 square feet per employee. The new space will be open-plan and a few columns. LeFrak views this a must-adapt situation for building owners – otherwise, it’s a nightmare for them as their office floor plans become obsolete.
Why isn’t this a bubble? Doug says we’re not at the normalized level of new homes being built. Also, people aren’t able to get the loans for hardcore speculation. Steven says the reason Miami feels so hot is that “it’s happening off of such a low.” He notes that the Miami deals are happening with cash and without banks going nuts. LeFrak says supply is still choked off, underwriting standards and loan terms are tougher.
The banks are still being very conservative, even with low-volatility projects like multi-family homes. ANything speculative is being financed by wealthy family offices or hedge funds, “people who can afford to take a beating,” says LeFrak.
CHINA SHIFTING GEARS
James Chanos, President & Founder, Kynikos Associates
Jim O’Neill, Former Chairman, Goldman Sachs Asset Management
Tom Keene, Editor-at-Large, Bloomberg News; Co-Host, “Bloomberg Surveillance”, Bloomberg TV & Radio
Jim O’Neill is the optimist on China, Jim Chanos is the vocal bear.
O’Neill: I get being bearish on “the only China.” But what they’re going to grow at this year is equivalent to the US growing at 4% a year. And that’s even with China having already slowed.
Chanos: “My caution relates to the model itself and its credit-driven nature.” Chanos doesn’t dispute what the headline number for Chinese growth will be, just how the number comes about. “If you’re going to grow net new credit by 30 to 40% annually in China’s $8 trillion economy, you ought to be able to grow at 7%.”
O’Neill: “Why not just look at money supply?” He disputes the math Chanos has laid out.
Chanos: “The least profitable piece of information you could have hd about China over the last couple of years is nominal GDP. If you’re a bear on the China Macro picture, wait til you see the China Micro” – he’s referring to individual companies that he is shorting.
O’Neill: “There are some Chinese internet companies that are going to be bigger than Wal-Mart.” He thinks people don’t understand the scale and scope of Chinese development.
Chanos brings up Petrobras as a short play on China. Anybody that’s in the business of mining iron ore right now is in trouble.
O’Neill says the Chinese authorities are deliberately slowing credit and they’re about to open a zone specifically to allow westerners to begin banking locally as an experiment. He’s showing that they understand they need to change their model in different ways or at least try to.
Chanos doesn’t believe that they can shift into this new consumer-driven China without credit-driven issues. He notes that 50% of the economy is still government investment in infrastructure. “Are people going to the cities and creating economic growth – or are people going to the cities to follow economic growth? It’s not really clear now.”
Where will China be in five years? (josh’s note: I’d say Asia).
O’Neill says they’ll have doubled the average net worth and consumption will be higher as well.
Chanos doesn’t think China’s economy will grow nearly as fast and he thinks within the next five years there will have been a big “credit event.” He says the new leadership group is not interested in reforms, they’re interested in score-settling.
They agree to disagree. Jim O is an economist and looks at things differently than Chanos, who is a market participant and investor.
(josh’s note: Chanos heads out through the side door after the panel, he’s the man. O’Neill stays to hang out, grab coffee and chat, really nice guy it seems and humble for someone who actually coined the term BRICs ten years ago)
MARKET RISKS: CYBER SECURITY, CLIMATE CHANGE AND GEOPOLITICS
Skipping this one too, I’m sure it was great, I needed a soda. And Linette Lopez is distracting me by being hilarious.
THE CHALLENGES OF MEETING PENSION OBLIGATIONS
Clifford S. Asness, Ph.D., Managing and Founding Principal, AQR Capital Management
Lawrence M. Schloss, Chief Investment Officer, City of New York
Erik Schatzker, Host, “Market Makers”, Bloomberg Television
(josh’s note: just got to meet quant hero Cliff Asness outside before his segment, explained to a reporter that he’s the guy young quants have posters of hanging on their dorm room walls. Other than my friend Meb’s stuff, I’ve probably learned more from reading AQR’s research than from any other quantitative shop)
Larry Schloss runs $145 billion of pension assets for the New York City – 680,000 people rely on their NYC pensions at the moment. “I don’t deal with the liability, I deal with the assets. The issue is we don’t have fully-funded liabilities.”
Once a pension gets behind, like Chicago, it’s a humongous problem, says Larry.
Schatzker says 75% of municipal pensions are under-funded around the United States. He asks Cliff “what is a reasonable rate of return for these pensions to assume.”
Cliff says expected return expectations have been coming down, but “glacially.” Nobody wants that expected return number to come down because it means that more money has to go into the fund. Cliff thinks that the traditional 60/40 portfolio, in real terms, will only return 2% over inflation from these valuations. Historically, it was more like 5%.
Some investors are willing to take more risk to make up for this lack of expected returns by doing even more with what’s already expensive. For the next ten years, Cliff believes that 7% is aggressive to hope for out of a 60/40 portfolio – although over 50 years it could be more realistic.
Cliff gets nervous when things have been good and excited when the recent past has been bad. That’s how he invests. Larry points out that the last ten years have been better than advertised, he’s recorded an 8% return over that time annualized for the pension.
Cliff: In the short-term, markets are impossible to forecast. Animal spirits and Bernanke can move things. But over a ten year stretch, forecasting can actually get more accurate as asset classes revert toward longer-term trends.
Larry: Hedge funds are the nimblest but the most expensive. Opportunistic fixed income managers have been superior to hedge funds for his fund.
Cliff on active vs passive: True alpha is worthwhile still. The middle ground of known strategies in the hedge fund and active strategy world.
Some discussion about which kind of strategies are worth paying 2-and-20 for. Cliff says the old school, classic strategies like merger arb, long-short, etc are still going to work, they just won’t be as profitable as they used to be. Thus, they are worth a lower fee.
Larry says “What if I just want beta? What if all I want is the stock market? I can pay 3 bips for it (basis points) and that’s that.”
Cliff says sure, you could do that.
Larry says, “look, at the end of the day, fees matter. But I only care about the net. That’s it. If you give me seven percent, why do I care if it was ten percent and you took your fee. You gave me seven.”
Cliff says “But what if you could have had eight?”
Larry: “Well then I negotiated a bad deal” Audience cracks up.
A CONVERSATION WITH THE U.S. TREASURY SECRETARY
Jacob J. Lew, Secretary, U.S. Department of Treasury
Albert R. Hunt, Columnist, Bloomberg View; Executive Editor, Bloomberg News; Host, Political Capital
Jack Lew: “No Treasury Secretary in history has ever had to face this question about whether or not we should pay our bills.
2011 was the first time that there was a threat of default. “I hear people point to all kinds of dates,” but nothing like this has ever really happened – this threat of default. We didn’t have a debt limit until 1917, the ceiling came about as a limit so we could fight WWI without congress having to approve expenditures one-by-one. (josh’s note: the debt ceiling itself began life as a reform, interesting history…)
He is emphatic that the President will not negotiate the debt ceiling. “I am trying to be as unequivocal as possible.”
“There are a lot of things in the American economy that are growing strongly.” He thinks fiscal drag has been absorbed and next year should start off better. “No more self-inflicted wounds” should be the strategy going forward.
re: Congress – “We should be spending our time on growing people’s incomes and growing the economy,” not debating whether or not we should pay our existing bills.
Asked about Too Big To Fail – “We’ve accomplished a lot, we still have more to do.” LOLOLOLOL.
I hope these notes have been helpful, the recording of this stuff allows me to better learn as I attend events like these, so I appreciate your being interested in the content.
Check in later for the afternoon session notes! – Josh