Hedge fund manager John Burbank was on Bloomberg TV.Here’s a summary they put together. You can watch the video here.
Burbank if the U.S. needs QE3:
“There’s a need for QE2 to stop, as they said it was going to first, and then we’ll see how things react. I think risk assets will come off and then we’ll get a better picture of how the world really is, but we have to fund $2 trillion of deficits next year. So the question is: who is going to come up with the $800 billion that’s missing? It’s either going to be banks or it’s going to be the Fed.”
“The second quarter of last year, after mortgage-backed securities purchases ended, was pretty severe and it directly led to QE2, so it’s a hard thing to say. We’ll see what else happens. We’ll see where commodity prices are, which are certainly depressant to growth and profits. We’ll see what the government’s doing in terms of cutting spending or not. Obviously cutting spending is inflationary as is the end of QE2. They’re going to have to reevaluate, but I would never trust the Fed to talk about whether they are going to do QE3 or not now. First they have to get through the end of QE2.”
On where he thinks the U.S. is right now in the recovery:
“Not recovering. Housing prices are still falling so it’s hard to say. What we haven’t yet seen is treasury rates significantly rise. There’s a mortgage duration issue here, which is if you give a low coupon mortgage and therefore a good mortgage and you’re there for 15, 30 years and then rates rise, you’re not going to refinance out of that. The whole process kind of is stuck. So I anticipate a lot of people being stuck in their houses for a long time. Because what we haven’t yet seen is inflation. And a proper discounting of the ability from America to pay back its bills mean a higher treasury rate. So the Fed is stuck with owning a lot of mortgages. And the longer it goes the worse that investment’s going to be.”
On if he thinks it’s a mistake for the Fed to allow financial firms to issue dividends of buyback shares:
“Yes. I don’t know why the governments and the Feds are allowing equity investors in banks to benefit so much. The TARP bailed out the equity holders. There’s no reason equity holders in banks should have ended up with anything, let alone bond holders. But I think it was to make things seem like things were ok.”
On if he’s even short on financials:
“No. I have no opinion. But it’s definitely a regulatory issue, not a bottom-up financial corporate issue. But I say that letting them pay dividends when they’re not lending in the way you want doesn’t make any sense. Why would you let capital leave their balance sheets going to equity holders instead of being lent or buy treasuries? I don’t understand that. I think it’s just another way of pretending that things are stable and back to normal. So I don’t get it.”
Burbank his investments in Saudi Arabia:
“I believe in persistent resource scarcity, meaning that this is the way it’s going to be for a long time. Let’s just say the next 10 years. We’re the biggest [investor] because we started focusing on the Middle East in ’06-’07 after having spent a lot of time on the billion-plus economy of China, a billion-plus economy of India, and then I thought I better start paying attention to a billion Muslims in the world.”
“The GCC is not where all of them live, but because Saudi’s got 20% of the world’s oil and all of the swing capacity and because I think there is scarcity. I really need to understand the governance of that. I need to understand the reality of that surplus capacity. And then I need to understand what they are going to do with all that money. It’s not hard to imagine Aramco sometime in the future having trillions of dollars in revenues. If it’s potentially a trillion, I need to understand what’s going to happen with it. I think now when I speak to institutional investors, they are awakening to the relevance of Saudi. They have never really thought about it before. So I imagine as what’s happening in the Middle East has relevance, we’re going to understand it a lot better. It’s not just a place of oil, a place of Al-Qaeda, it’s actually a place of change. And with scarcity of oil, we’re really going to have to start answering what that all means.”
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