Notes from the 2016 Ira Sohn Conference, Part II


Gray skies outside, and nothing the brilliance inside the building. 

See Part I if you missed it, includes Stanley Druckenmiller and Eli Manning!


Jeffrey Gundlach, Chief Executive Officer, DoubleLine Capital LP

Jeff’s mentor (and biggest financial backer) Howard Marks of Oaktree Capital comes out to introduce him. Oaktree invested $20 million in DoubleLine to help Jeff get it started. That stake is now worth $1 billion!

Jeff wants to talk about negative interest rates. He’s not a fan.

He shows that negative rates are not working – each currency of the country adopting them ends up running higher against the dollar, not lower as intended.

Growth is also not improving in the countries that do it.

“negative interest rates are the definition of deflation. trying to fight deflation with deflation is like trying to put out a burning house by pouring gasoline on it.”

Slide comes up full of helicopters, crowd cracks up – reference to helicopter money.

On US economy – GDP weakening, and the Fed talks about raising interest rates. The FOMC’s own forecast says GDP will be lower next year than this year. Gundlach thinks CPI ex-this and that is a joke too.

Gundlach: Sell the utility stocks (which everyone thinks are safe) and go long mortgage REITs with leverage. The two things have been correlated up until 2013. Now there’s a huge spread of performance, with utilities having done 30% better.

He points to a huge valuation disparity between Utes ETF and MBS REITs ETF.

Jeff goes off on the new flavor of the month Low Volatility Equity ETFs – “you want to talk about oxymorons…”

On Jeb! “Logo should have been WTF?” Crowd LOLs.

He goes after Rubio for stupidly going at Trump, shows Ted Cruz as Grandpa Munster in a slide. Brutal.

On Trump: He’s not a conservative, he is a reactionary. He thinks Trump will be the next president.

On Hillary: Shows the “What difference does it make” quote of hers in the context of people dying in Benghazi.

He says US debt is going higher. “Let’s face it, Donald Trump is extremely comfortable with debt.” Huge laugh line. Love this fucking guy.

Zachary Schreiber, Chairman, Chief Executive Officer and Chief Investment Officer, PointState Capital LP

Now you need to remember that at Sohn 2014, Schreiber – a little known protégé of Stan Druckenmiller’s – made a massive contrarian call. With crude oil trading around $100 a barrel that spring, he said it was about to get crushed, taking the whole industry with it. Within 20 months, crude oil would plunge down to $25 or so. No one else was this prescient and for the right reasons. Schreiber absolutely nailed it – see my original 2014 writeup here and bow down.

Anyway, he’s back in action at the show today.

They play the clip of him making the call from two years ago. Holy cow. He comes out with two strippers on each arm. Just kidding.

“Today I’d like to talk to you about the end of the bull market in unsustainable equilibria.” His pick is a short call on Saudi currency, the riyal.

Government is on a collision course with a demographic explosion that renders its social programs untenable, while the budget has a hole blown in it by lavish spending and lower oil prices. Upward pressure on military budget in “the most dangerous region in the world” makes it worse.

Saudi riyal is the only petro currency that hasn’t adjusted downward, because of its peg. “It is priced as though nothing has happened. A lot has happened.”

Schreiber says no reason why oil prices will emerge above $50 a barrel anytime soon.

Massive social upheaval in the region, five governments overthrown. Saudi is the somewhat stable place in the region for now, but they’re paying a lot for that via social programs. The Saudi employs 3/4 of the population directly.

Defense is a third of the budget. Saudi is involved in multiple conflicts around the region. US willingness to be the guarantor to Saudi stability is on the wane. Obama referred to them as “free-riders” and the 9/11 report that shows Saudi culpability lead the regime to the realization that they are on their own from now on.

$587 billion in FX reserves at Prince Salman’s disposal, but they’re burning $80 to $100 billion of it each year, with current oil prices.

And then there’s another $340 billion of liabilities against these FX reserves. The true equity of the system is only $260 billion. Saudi’s fiscal deposits are “OPP – other people’s property.” They’re paying themselves salaries out of a pot that doesn’t belong to them.

No wonder they’re issuing tons of debt and turning to the international community to fund their bullshit.

They can’t cut production, because it would cede market share to their enemies in Iran.

The “transformation” proposals of steering the economy away from oil will not work. They fray the social contract on which the kingdom was founded. Interestingly, Saudi Arabia is the most penetrated market of Twitter users in the world. Twitter users will kill the gov’s attempts to impose austerity or raise taxes.

Schreiber says the country is insolvent within 2 years. If they sell Aramco, the “golden goose”, they can’t fund anything.

“Persistent capital flight” – wealthy Saudis are pulling $60 to $70 billion of their own money OUT of the country each year, meanwhile they need the opposite to occur. They need $4 trillion to come IN to the country’s system.

The trade being short riyal and hedged with a long peso or ruble position, could be 10x to 50x your money. But there is a lot of risk of course. Capital controls are the risk, as is timing your short. Saudi’s best option is to reset the peg lower, which would help them survive. If they do it, there’s a big gain for those short the currency.

Leaves us with a Rudiger Dornbusch quote: “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”

Sohn Idea Contest Winner

Michael Price, lead judge, intros the kid who won. He’s a kid named Marc Grow from Columbia B School and he’s pitching a short on Dexcom (DXCM).

The company makes a monitoring system for Type 1 diabetes.

I gotta be honest, I spaced a little on this one. Something about increasing competition for their lead product, insider selling etc. I’m eating a granola bar like some kind of a weirdo on a greyhound bus, just trying to keep my energy up for Chanos and Einhorn later.

Adam Fisher, Co-Founder and Chief Investment Officer, Commonwealth Opportunity Capital GP LLC

This is Adam’s first presentation at Sohn but the introducer says he’s been a baller for a minute.

He wants to short Japanese rates (he’s like “I know it’s been a widowmaker trade for thirty years) and go long European rates (shorting these will be the new widowmaker). This is going to be a very macro-oriented slideshow. I’m going to the bathroom.



Come back for Part III, featuring Dan Ariely, David Einhorn, and James Chanos ! 

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