2017 Annual Forecast Dinner - Keynote Speaker

thank you all I'm flattered that 50% of the population of Ottawa's come to see me today good huh good so I'm going to talk about why the financial crisis happened what's happened since and I'll have give some predictions for the future the financial services sector in the United States and then when I'm done I'll take questions till you're all exhausted how's that so before I start I'll answer the question that I always get which is how involved was I with the movie now with respect to the book of course I was very involved Michael Lewis interviewed me about a dozen times but with respect to the moveme movie I really had no involvement whatsoever in fact my contribution can literally be confined to one word and the origin of that word is my family and I were invited to watch a scene being filmed in New York and the scene is Steve Carell is walking on the streets of Manhattan and he's talking to on his cell phone to his wife my wife Marisa Tomei that never gets old it never gets old and he's talking he's talking and he's talking and he's talking and finally it's about to hang up and he held a cab and I have a cab pull up and one of the extras runs past him to steal the cab and the way the script was originally written Steve Carell turns to this extra and says quote hey that's my cab cut and then Steve Carell goes over to talk to Adam McKay who's the author of the script and also the director and me being me I mosey on over and I say you know not this ever actually happened but if it were me I think I would have said schmuck and Schmucks in the movie the coded of the story which is sort of amusing is after watching the scene being filmed about the scene being films about 30 times my wife turned to me and said you know it's not even bothering me about the scene all day and I said really what's that she said there's no way you would ever speak to me for that long on the phone and it's true I do terrible phone terrible so why the financial crisis happen well you need three things for financial crisis number one you need too much leverage number two you need a very big asset class that blows up and number three you need important large companies banks to actually own the asset class you need all three unfortunately for planet Earth we had all three in 2007 and 2008 so how did we get there well let's start with the leverage so between 1997 and 2007 leverage in the financial system more than tripled to put some numbers around it with respect to one company Citigroup which we could all call the poster child for the financial crisis in 2002 Citigroup's assets reached a trillion dollars and on that day the company was levered 22 to 1 it had taken Citigroup almost hundred years to get to 1 trillion in assets and five years later in June of 2007 just before the crisis started one trillion had grown to 2 trillion and 22 to 1 had become 35 to 1 in a mere five years so why was leveraged up so much well there are really two reasons you know one is as is with the role to risk weighted assets you know the financial system developed a methodology to measure both capital and risk by creating what's called the risk weighting system where every asset on the balance sheet gets a risk weighting was a flawed system remains a flawed system nothing is perfect it was horribly abused it relied on rating agencies with respect to anything rated triple-a gets a low risk weighting it relied on the models of the bank's themselves to grade themselves it was also very backward looking because it looked at historical loss rates and if something had a very low loss rate historically we'd get a low risk weighting and it never took into account the idea that underwriting standards can change and that something historically that had a low level of losses if the underwriting goes crazy could have a very high level of losses and something that has a low risk weighting really should have had a much higher risk weighting and these are all the things that happened the result was that you know banks all over the world always viewed their capital on a risk weighted basis not on an absolute basis so that by the time the crisis happened leverage had gone up three to four times but the way the banks look at their capital ratios on a risk weighted basis over the same period their leverage ratios were flat so the people who ran these institutions literally thought that they were no more levered than they had been 10 years before whereas in fact they were levered three to four times more that's one reason the other reason which you'll never read in any economic textbook is psychological and that has to do with the fact that the people who grew up in the 90s and the 2000s who ran these companies had a very very odd experience they made money more money every single year it's a very heady sort of thing to happen to anybody now the reason why they were making more money every single year is that their firms were making more money every single year but their firms were making more money every single year because their firms will be becoming more levered at single year and really what was happening was they mistook leverage for genius write that down I wrote that it's freaking awesome so they mistook leverage for jeans and if you had gone to the CEO of any one of these companies in 2006 let's say and set them listen the entire basis the entire paradigm on which your career is based on is wrong their response would have been listen I made fifty million dollars a year would you make literally because that's what they said to me so leverage in the financial system was up three to four times and really almost nobody noticed except like people like me code you know nobody consulted me so it was it was like toiling in obscurity so let's talk about subprime mortgages as an asset class that people almost don't even remember anymore what it was all about let me describe to you what the loan was because most people don't even remember so the typical subprime mortgage was what was then nicknamed a 2:28 or a 327 which meant that the customer was given a teaser rate for either two years or three years and then was repriced upward for the next 27 or 28 years but to make the math very simple between 2002 and the summer of 2007 most subprime mortgages that were originated in the United States had a teaser rate of roughly 3% and then would reprice at nine so three percent nine percent this is what goes on south-of-the-border you people don't know this you're Canadians you'd all nice and polite it gets me very nervous talking to you people so the industry I'm going to use a very technical term here the industry under wrote the law owns to the teaser rate so what does that mean well before I explain what that means let me teach you a little lesson about the consumer finance industry in the United States consumer finance industry in the United States is very good at creating slogans and euphemisms to disguise the fact that I'm about to rip your face off so for example hence the wonderful slogan free checking you know when I was growing up and went to the bank for the first time I had to pay to have a checking account in my bank then of company in Minneapolis called TCS financial which is a bank created the free checking model and it swept the industry by storm so what is free checking really mean free checking means you your checks are free there's no cost to you on the front end but on the back end if you make any mistakes if you're late on your payment if you go over your limit you get your face ripped off so so why do you call it free checking well imagine the advertising problem let's imagine two different advertising campaigns number one come to Bank X where you get free checking versus come to Bank X we're going to rip your face off where would you Bank you Bank with free checking and they call it free checking so what does it mean to underwrite to the teaser rate it means that the underwriters the lenders all of whom were specially finance companies who don't exist anymore knew when they underwrote the loan that the customer could only afford to pay 3% that customer could not afford to pay 9% now why would you make a loan that has a teaser rate of 3% for two to three years when you know your customer can't afford to pay the rate that he or she is going to have to pay in two or three years well here's where one of the lessons of the crisis is that incentives Trump ethics every time the people who originated the loans were paid three to four points upfront to originate it and as the customer got closer to his or her reset date they would start to panic because they knew they couldn't afford to pay nine percent they would go back to the originator and refinance their mortgage pay a note of three to four points upfront to keep the 3% and do it all over again so from the originators perspective this was a gravy train because I'm reading the same customer every three to four years from a Wall Street perspective these they've bought the loans from the originators packaged them securitized them sold the loans to investors everybody on Wall Street who was part of his process got paid on volume and because the customers I had to refi securitizations would basically disappear after two to three years and when they got to do this all over again every two to three years so everybody in the chain was making money from a societal perspective however this is a calamity or was a calamity because the customers the consumer is never paying off his mortgage every two to three years he or she is refinancing and getting charged three to four points and never paying off their principal so from a societal perspective this is really a disaster but from a profitability perspective it was wonderful but if you took a step back and you said to yourself you know if anything were to happen that would have caused this refinancing story to end everybody would get repriced up to nine everybody would default and that would be horrendous so that's what I was looking for so you know people always say oh you're so smart just figured this out you know everybody it's not really the case I'm confessing everybody's a product of their own history and the 90s I was a sell side analysts at Oppenheimer and I covered the one of the things that I did cover was the first generation of subprime mortgage companies and for various reasons is we don't have to go into in 1998 ninety percent of the industry went bankrupt now this is very odd experience because down the hole for me was Henry Blodgett and he was covering Amazon and Henry was going on every day talking about how Amazon is going to four hundred and I got ten companies that just went bankrupt you don't forget that so in 2002 when the second generation of subprime mortgage companies went public I noticed something very interesting the CEOs of the second generation with the same CEOs of the first generation they just changed the name and I realized what I was witnessing was the same play I knew how it ended the first time in tragedy that this was going to Cle play in three acts and it was only a question of when Zach three so I there were two things that told me that it was the beginning of Act three the first was on May 8th 2006 at 7:10 in the morning anybody won't know what that is on that day Golden West sold to Wachovia now Golden West was the largest California thrift it was run by a married couple herb and Marian Sandler my father's best friend had been herb Sandler's older brother so the Sam was kind of do me in diapers so I kind of paid attention to what they did they were the best mortgage underwriters in the United States and I'm a a they sold the company and I knew there's no way to stand lose a sell in that company I was something's really seriously wrong and then the second thing that happened was that by the time of the summer of 2006 it was very clear that there was something seriously wrong along with underwriting and subprime and let me explain why that's so you know when the underwriters don't think like normal human beings an underwriter writes loans to a risk adjusted yield which is the yield minus the expected losses and two thousand and two three and four the delinquencies and expected losses on subprime mortgages came in much much lower than expected which meant that the losses were going to come in much much lower than expected now the underwriters didn't pat themselves on the back and say good job but they said to themselves was I'm too tight because I was estimating losses of something like seven percent and they're coming in at three so if I loosen my underwriting standards I could double or triple my volume achieve the expected losses that I was anticipating to begin with and make a lot more money now what they didn't realize at the time was the reason why the delinquencies were coming in so low is that the industry had brought into the housing market millions of people who couldn't afford homes before and so housing prices started to skyrocket people don't go delinquent on their mortgages when their housing prices are skyrocketing but the underwriters and think of it that way they thought oh that I'm too tight and so every year in the united states underwriting standards deteriorated and deteriorated and deteriorated until by early 2006 the underwriting standards in the united states had become can you breathe because if you can breathe we will give you a mortgage I am not exaggerating breathe give you a mortgage so by the summer of 2006 what had happened was we had maximum deterioration under running standards at maximum that we act maximum high housing prices it's a recipe for disaster I remember you know meeting with the head of securitization research at one of the big Wall Street farms talking about what was going on and he said he's not worried about this and I said why and he said because housing prices have never gone down on the national basis in the United States since World War two and I said to him is that like a love physics or I used smoking dope the meeting was sort of all read that so by the summer of 2006 the loans that had been originated in early 2006 and I'm securitized by this by the spring of 2006 began to show very high levels of early-stage delinquencies now if we lived in a just and rational world we don't by the way but if we did then what would have happened was Wall Street would have said you know what there's something wrong with the asset class we have to time some underwriting standards that originated less and go from there but the problem is and here again this is where incentives Trump ethics everybody in the business was paid on volume and nobody wants to make less than they made the year before so they instead of originating less they originated more I began shorting subprime mortgages in the late fall of 2006 and I kept shorting them through really the summer of 2007 by the by August of 2007 it was very clear to anybody with no brain that there was something seriously wrong with the asset class and you could see a panic begin to emerge in the mortgage market and I saw this and soda amusing way in August my family and I we used to go to Nantucket for two weeks every summer and in the second week my wife and I are walking in town and she turns to me and she says where all the men go and I said they went home to watch the end so what happened was because the data was getting so bad the end user the investors stopped buying the paper and if the investors stopped buying the paper Wall Street can't sell it to them and if Wall Street can't sell it to them they're not going to buy from the originators and if they're not going to buy from the originators the originators aren't gonna originate it and if the originators aren't going to originate it then they're not going to refi people if they're not going to refi people everybody's going to get any price twenty percent to nine percent and what was really bad credit quality became horrendous credit quality and that end of the subprime that began the subprime crisis um you know it's very interesting that our regulators didn't see any of this coming we can thank alan greenspan for that who will allow the shadow banking system to grow without any supervision whatsoever which was why everything happened in the crisis seemed to be a surprise to the regulators in the United States I remember in 2007 and early 2008 on several occasions Chairman Bernanke and secretary Paulson made speeches where they both said that we'd be watching this on TV and they would say the subprime crisis is contained to which I would turn to one of my partners and say yeah it's contained it's contained to planet earth so and now we come to the third part of the story which is Wall Street held the paper so the obvious question is if the guys who are on Wall Street are the smartest supposedly the smartest people in the room why were they left holding the bag which is not an obvious answer to that question in the sense that it also goes against their business model because the business model is to is to buy it and sell it not buy and keep it so why do they buy and keep it well there are two answers to that question so the first answer is and here's a dirty little secret about Wall Street which you people in Canada because you're so polite don't know is that not everybody who runs a Wall Street firm is smart shocking now I actually learned this in sort of amusing way I remember it was 2006 I was at a luncheon the sell-side analysts was hosting the chairman of one of the largest institutions in the United States I used to name it but my chief compliance officer my wife won't let me do that anymore and I'm sitting listening to the chairman of this firm and I'm eating lunch and all of a sudden the light bulb goes off of my head I have an epiphany and I say to myself oh my god he's dumb and this incredible insight served me very well because in early in 2008 this idiot bought a company that was the equivalent of buying bubonic plague and I remember friend of mine who ran a different hedge fund that's also specialized in financials called me up and said you and he was short so it didn't bother him that this happened but he thought maybe this guy knows something I don't know but he was he was so crazy he was stuttering if it states do you see sees is crazy that's crazy why would he do that and I said he's dumb and he said that's a very interesting insight you could be right and then six months later this bought something else that was like buying the bubonic plague part duh and my friend called me up he said God Dan you were right he really is an idiot so that's one reason the second reason and here again we get to incentives Trump ethics every time you know as as the years rolled on it did become somewhat more difficult to find investors to buy this paper especially as the credit started to get worse so now again if we live in a rational world you would just create less of it but again everybody in this chain is paid on volume so the people who ran the securitization desks convinced their own firms to hold the paper after all it was rated triple-a how bad could it be and that's why when the losses started to mount Wall Street was holding the paper and you know I realized I thought that maybe we could we would escape this because in early 2008 I thought you know maybe we still have time I remember I had a meeting with the head of risk management of one of the big Wall Street firms again I won't name any names but it wouldn't matter what the name is because I could have had this meeting with any header of us manage many firm we've had the same result and we had the following conversation I said to him it's always a him that um there's a lesson there somewhere we could talk about that later but it's always a him and I said to him dude you got a deal ever the balance sheet because Armageddon is coming exactly what I said and he looks at me and he says yeah I hear you but you now hear it you know our firm we got a pretty liquid balance sheet we could be much more levered than a bank I think his firm was livid about 30721 at that point and now back then there was a regional bank in Detroit called mad city which had a lot of subprime mortgages on his balance sheet for various reasons and in February away you know people were talking about and I said to him you know you know what happens if net city goes down and he says no what happens I said nothing the regulator's come in they take over the bank they make the depositors whole they sell off the bank government takes a loss and the story you know what happens if your firm goes down planet earth burns who should be more levered and he looked at me like I was talking an ancient Greek I what I was talking about was so outside his paradigm he couldn't even understand what I was saying and I realized then one month before their Bear Stearns we're going down the rabbit hole because he wasn't going to say what I'm talking about so and that's where we went down the rabbit hole and the question I get all the time is that we really have to bail them out and the answer to that is as distasteful as it was and it really was distasteful the answer is yes I think the answer is yes because let me describe to you what I think would have happened if the answer had been no so of course Lehman went down but then AIG would have gone down and AIG was ground zero so derivatives they would have taken a whole hundred bunch of firms down with them like Morgan Stanley Bank of America and Goldman Sachs etc GE would have had to file for bankruptcy because it was really a financial services company and the industrial company like caterpillar which had a large commercial paper presence would have also probably have filed for bankruptcy and the Great Recession would have become the Great Depression and ten percent unemployment would have become 30 percent unemployment and it would have been a disaster so as distasteful as it was you know and I think the regulators finally did the right thing so what's happened since actually quite a lot pre-crisis the regulators in the united states had two jobs job one was to protect the safety and soundness of the banking system and job two was to protect consumers from bad actors in the financial services sector with respect to job one safety and soundness our regulators did about as bad a job as anybody's ever did in history of mankind with respect to job to say protection of the consumer they didn't even care so dodd-frank split the responsibilities they got rid of the alphabet soup of regulators that we had and essentially gave the job of safety and soundness to the Fed and consumer protection is in the hands of the Consumer Financial Protection Bureau the CFPB now I think the CFPB is a great addition to our regulatory apparatus I think it's not a pretty good job not perfect but a pretty good job I wouldn't change a thing that's obviously not agreed with with the current administration and is a pretty minority position on Wall Street but then again I've been there before with respect to safety and soundness I can say the Fed has actually done a very very good job leverage has been crushed risk has been reduced enormously getting back to Citigroup which used to be levered thirty five to one it's now levered ten to one credit quality used to be disaster now its pristine so I could say really for the first time in my career the bank regulators in the United States has actually done something very very good so let me finish up by just discussing what I think is going to happen under this new administration I hear a lot of rhetoric about changing dodd-frank eliminating dodd-frank obliterating dodd-frank made it bring back glass-steagall or modern-day version of glass-steagall it's already recommended what's going to happen you need 60 votes a United States Senate to get any of that done I don't think there's 40 votes the United States I think any of that done so rhetoric aside that's not where the game is going to be played the game is going to be played on the regulatory basis the dodd-frank created a position in the Fed called vice chairman in charge of banks supervision President Obama never appointed anyone to the post but the job was held to facto for the last six years by Governor Daniel Tarullo who in my view has done an incredible job and what he was supposed to do he resigned and his last day was April 7th the president is on the verge of appointing someone new and I can guarantee two things to you about that person number one his name is not Daniel Tarullo and number two his name is not Steve Eisen what's going to happen is the Fed regulates the banks through the annual stress tests think of it as the hardest test you ever took when you were in college the hardest curve you ever had to operate under that's the stress test starting in 2018 we're getting an easier test and so as a result you're going to see banks start to buy back more stock they'll start to real ever we're never going back to 35 to 1 but we can go back to 14 to 1 the vocal rule is my favorite word will be reinterpreted so it's not as strict as it is and the profitability industry will start to go up that's what we're going like a bunch of years to get there hopefully we know we don't get anywhere close to where we were but we're solely going to be moving under this administration rightly or wrongly in that direction so I've taken a lot of your time and I thank you for hosting me and I'd be happy to take as many questions as time is allotted thank you questions can I make some money when yes I did make some money yes oh sorry yeah yeah testing one double yeah just a question about so you said there's three things that are needed for our crisis right and the third one was that Wall Street needs to be holding the bag when it actually happens but what do you think of the potential private debt bubble that has been created since 2008 with the interest earned reserves and banks refusing to basically end to the small and medium-sized enterprises what if there is a bubble that potentially could pop where it doesn't just have Wall Street holding the bag but it actually makes Wall Street profit from it right if the smaller private debt lenders go down it's potentially a good thing for the bigger lenders so do you think that could be an area of concern in the next five to ten years No thank you let me go into that just a little so here's something you hear about dodd-frank Olek on which is a criticism that's lodged against it here that dodd-frank is evil because it's preventing banks from lending and therefore we have to get rid of dodd-frank that's repeated in the press every other day it's a great theory there's only one problem with it it's a crock of but the technical term of my word mode so let me explain why it is definitely true that it is hard to get a mortgage loan in the United States than it was years ago of course that's not a dodd-frank issue that's a fact that JP Morgan got fine twenty five billion dollars issue and doesn't want to get fined again so mortgage underwriting is tight and will probably stay tight for years it's also true that it's hard to get a small business loan in the United States but there's a reason for that thanks for not venture capitalist so when a small business owner goes to a bank for a loan the first question the bank asks is what's your collateral and pre-crisis pre-crisis the answer to that question was my house most small business lending the United States was really hidden home equity London so it is hard to get a mortgage it's hard to get a small business loan that's not a dodd-frank issue that's a mortgage issue with respect to everything else I don't think the banks are not lending because credit spreads are tight everywhere you go so how is it possible that the supply of the product has been reduced and the price has gone down so I think this whole thing about how yeah there's more lending by non banks so what there's still not that big I don't see it as a problem thank you next question question over here yeah yeah you do you think it'd be a Kabbalistic rating agency structure and the incentives that those guys have paired with the reliance of financial markets on those agencies creates the stage for another crisis maybe with a different product well I think the rating agencies were obviously very much at fault for what happened you know they were they were paid three to five times more for securitized products and they work for straight debt so they had an incentive to keep that product going even though the product was very bad you know I don't think anything has purchased really changed structurally with respect to the rating agencies but the various reason there's just so much less securitized product being created that I don't that the opportunities for mendacity have been reduced enormously so I but I don't see anything on the horizon that I'm particularly worried about with respect to the rating agencies at least not yet yeah yeah thanks a lot for coming dotto I appreciate the opportunity here you here can you talk a little bit about with you now in your day job and whether or not you might see that we are now in act 1 or 2 and therefore see value in financial stocks sure so I closed my last hedge fund in 2014 I used to just do financials I decided that was no longer a viable strategy and I wanted to do all sectors so I came to Neuberger Berman this is a wonderful company and I've been basically studying the three years all other sectors and I've created at the end of the year a new product which is kind of like a hedge fund but not exactly so it's a separately managed account managed like a hedge fund long short but it's all sector but because it is separately managed account there's 100% transparency there's daily liquidity and the fee is only one point two five percent flat no carry it's the best game in town you should all invest with me I actually had this great tagline that I've been trying to get new brokers legal department to allow me to put in my presentation but for some reason they won't let me and the tagline is the tangling is world-class product at less than a quarter of the price you'd be a schmuck not to invest and for some reason the legal department me love well let me put that on the presentation is really very upsetting could you repeat this last part of your question thanks a lot for the product pitch but I was really looking for where do you see value now the value I see value ironically I mean there's a lot of value in different places but in the sector that I think has the most value is actually the financial sector for you know given what I said in the speech what I think sobs give you some very simple math so today Citigroup's this is just an example I mean you could name a different company I would give you different math and we'd end up in the sort of the same place so today Citigroup's return on assets is around 80 basis points and it's levered ten to one so ro e equals ROA times leverage so 80 basis points times 10 is in our way of 8% so what I think is going to happen is you know make rates go up some more the Fed will definitely raise rates we interpret the Volcker rule maybe change the tax code and in a year or so or two years the ROA will go from let's say 80 basis points to 100 basis points and over the next four years the leverage will go from 10 times maybe to 14 times so they are we will go from 8% to 14% that's a big jump you know I don't think there's any sector in the S&P that has the potential for that kind of jump in of return and so you know where I think the sector for the next several years has the most potential for return is in the financial sector like I said you should not invest with me and I'll beginning our cards to the end evening anything else I'm happy to do I see it happening in Canada too no way then no way now I mean your banks are oligopolies they're already quite profitable I don't see them getting more profitable so no you don't have that potential do you have any view on Fannie Mae and Freddie Mac and do I have any of you yes I do have you're like on on the recap and release or any opportunity and I do so for those of you who don't know the whole story I'll tell the story is kind of very interesting story so secretary Paulson decided that Fannie and Freddie were done and he took them over he did not put them into receivership he puts them into what's called conservatorship which his technical legal term which means basically conserved the capital the original deal that was struck was that the government gave Fannie and Freddie some goddamn God knows how much money and Fannie and Freddie was supposed to pay a 10% dividend on that money so between the time this happened in 2008 and 2012 Fannie Mae lost money every single quarter so they couldn't pay the 10% dividend so every quarter we went to the charade of Treasury would send Fannie Mae more money and then Fannie Mae would send it back and now bhai pays a dividend this was kind of ridiculous Treasury said and so in 2012 Treasury said you know we're changing the deal and they unilaterally change the deal they say you know I figured about 10 percent dividend will we'll just wait God willing one day you'll make money and whatever you make just send it to us and then that wins the deal and would you know it two quarters later and he may make money and so they've been cutting checks to the government every quarter since some of the shareholders thought this was not so kosher and they sued the government and there is a thought out there that there was a meeting between the CFO of Fannie Mae and the Treasury Department just before this deal was changed when the CFO supposedly told the government that Fannie Mae is about to go profitable and government said great let's change this deal and so that may come out upon discovery very soon in these lawsuits you know I think under the new administration there will be an attempt to recapitalize Fannie and Freddie I don't know if it's going to be successful or not my thought as to what will push this forward is if there is real tax reform in the United States you know Fannie Freddie have enormous deferred tax assets and if the tax rate is lowered significantly that will mean that Fannie and Freddie will have to take a big write-off and when there's a big write-off instead of the government getting a check from Fannie and Freddie they may have to write a check for 20 billion dollars to both of them and on that day of the government will say you know what maybe we should restructure this deal and so that's what I think will eventually happen yeah it's just wondering if you see any similarities between what happened in the States and potentially what's happened in Canada Canadian housing market obviously thank Hoover in Toronto redhot showing up really high whenever you have any perspective there so I had a bet with myself $50 but that would be the first question I get lost I get the $50 to myself and I'll keep the money thank you so I predicted the demise of the housing market in Canada in 2013 that didn't work out so well for me there's some significant differences of what's going on here than in the United States I don't you know I don't think you've really had a subprime market I mean I think you're underwriting sins that's certainly gotten weaker but they haven't been devastated so I mean I do believe you have a bubble but that bubble I think is a lot more tied to what's going to go on in your economy then what happened in the US where the underwriting got so bad that the housing market just imploded upon itself so I think you saw some signs of that about a year and a half ago when oil got to 26 and your banks reported you could see for the first time that we're going to be credit problems and then of course all I want to write back up when your economy came back and the credit problems went away so if there's going to be a bursting of the bubble in Canada it's going to be tied to when your economy whenever it rolls over I mean one day Canada's economy we're all over like any economy but not any better predicting that anybody else I was humbled yes anything else yeah has any senior member of a new administration called me no how would I characterize the risk of this new administration I'll be very careful in answering that someone could be listening I mean look the obviously health care didn't reform them go so well I think this entire administration is now resting or whether there's going to be tax reform if they get tax reform I think you'll see it pick up a new US economy and people will start to say maybe they're doing a good job if there's no tax reform I don't know what they're going to do so I think that's the biggest risk is whether they get tax reform done or not yep Jackie Bowyer and what you see is a positive outlook on the financial what would you see is the best investment from the short side retail what's the best in the short side well if you're an investor I would really share that with you um well you know I was sure Granger that was down 11 and a half percent today so I was good yeah I I think there are some issues emerging in subprime auto excuse me I don't think it's a calamity but you know there are a few companies that are involved in subprime mode which I think are interesting shorts and we can have a conversation later about more yes mean like in the United States government no let me elaborate see I have sometimes these weren't one-word answers don't go to all so well I'll focus on the u.s. just first so I'm not a deficit fetishist I made up that word it's a pretty good slogan debt to GD the government debt to GDP in the United States is about 105 percent in Japan it's 240 so now my view of people who say the deficit example is a problem in the United States is that they've been making that argument for 30 years and all that's happened is rates have gone down so maybe they're right you know but when you make it same argument of 30 years and hasn't happened yet I think the onus is on you to come with the new reason as to why it's a problem now so it's not something I particularly focus rightly or wrongly question is when I say that these low interest rates have caused major investment dislocations in the u.s. yes now I'll elaborate so you know when you think about what we do for a living really it's we allocate capital and when you think about how do you allocate capital lease in principle you know you're supposed to do with DCF on every company or industry and come up with a value and compare that to the current value and that should decide whether you invest or not so the problem is that when you're doing a DCF at least in principle today and rate to zero what's your terminal value there is the one so in zero rate world it becomes extremely difficult to figure out how to allocate capital and so I do believe that largely because of that there are dislocations and the other thing I believe is that the feds qe2 and qe3 has been a failure that it has absolutely no impact on the real economy that all it is really done is give companies money to buy back their stock but they haven't actually invested in the real economy now maybe if we go into a world where we'd start to go up that will change but in some ways counter-intuitively very low rates and counterproductive for the real economy you know I call I took all qe2 and qe3 monetary policy for rich people there's kind of funny little laughed at that but that's as I stuck that one in yeah am I worried I mean I always ask me about that you know I did that I did the big short I'm not in any rush to do it again I'm really not I you know I do think their dislocations but I'm not worried because leverage in the financial system at least in u.s. is just so much lower that doesn't mean it can't be problems just not systemic so where I want to worry about that word I sleep fine my bullish on any specific country I'm kind of bullish on the US right now you know I'll talk to you about Europe after the French elections call me in a week or Monday anyone else I'm here I'm yours no good well good all right thank you very much [Applause]

Channel: CFA Society Ottawa

Views: 75,498

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Id: N329a7ZLL7A

Length: 51min 10sec (3070 seconds)

Published: Sun Jun 18 2017