John Burbank of Passport Capital delivered an ominous presentation to the 1st Annual Ira Sohn – West Investment Research Conference.
Mike O’Rourke of BTIG has notes of the event.
Burbank’s presentation was titled the “maths of Democracy.” Burbank noted the progressive blow-ups in the U.S. economy over the past decade. First, equities, then credit and potentially today politically. As a result of the increasing sovereign risk of the United States Burbank believes that from an investment perspective the U.S. should be viewed as an Emerging Market. In the current environment Washington D.C. has become a key area of research focus, with frequent visits to stay on top of developments. For Burbank, who describes himself as apolitical this has been a notable transition. He warns that we are caught investing in 2 year political cycles, very similar to the way one would study the political cycle and sovereign risk of an Emerging Market. Burbank noted that market prices do not tell you as much as investors believe them to, instead prices generally reflect the aspect and conditions of liquidity.
Not surprisingly, he’s particularly worried about our debt:
Burbank noted that in 2025 entitlements and spending in the U.S. budget are predicted to surpass revenues. He then asserted the market will not let it get to that point and the markets will react sooner, potentially in the next two years to prevent that occurrence. He then explained there are 6x as many lawyers in the House of Representatives than there are MBA’s and in the Senate there are 8x as many lawyers as MBA’s. His description was it appears Congress is filled with many arguers and policy people and not too many business people.
Burbank that offered that there is hope that the composure Washington D.C. can change, additionally there is also the potential for it to change quickly. He noted the public should be looking for good candidates with traits like business experience, financial acumen and courage. Burbank then described the $115,000 investment. He explained that $115,000 is the largest amount of political donations that an individual can make for an election cycle. Of that $42,700 can go to directly to candidates. Burbank then broke down the spending for the last congressional election. There was $1.238 Billion spent if that is divided by the maximum $42,700 a person can spend than 28,994 people could have funded the entire election if all gave the maximum contribution. Burbank stated this potential for small numbers of people to exert influence in past elections made him hopeful that as more Americans became disappointed they would become more active participants in the political process thus shifting the direction of the country.
So who does he like? The solvent developed countries:
As far as the future is concerned Burbank believes the U.S. is at an inflection point where we must choose to head in the direction of either Argentina or Germany. The developed world must now be broken down into two categories the Solvent and the Indebted. The solvent consist of New Zealand, Canada, Australia, Switzerland, Singapore and Hong Kong (NEW CASSH). Then there is “Big Debt” consisting of the U.S., Japan, U.K., Italy, France and Spain. There has been a decade long uptrend of the performance of being long New Cassh currencies versus being short Big Debt currencies. There was a correction in the ascension during a flight to quality bid during the crisis. The uptrend has since resumed hitting new highs and Burbank expects the trend to last another decade.