This presentation from star hedge fund manager, Daniel Arbess, a native of Canada, and managing partner of Perella Weinberg Partners, is a detailed view of his thoughts, a must read, and makes for an interesting read.
"Investing as the Foundation Shifts"
This presentation is by Daniel Arbess, Perella Weinberg Partners (originally presented to the Ira Sohn Conference, 2010)
The very foundation of the global economy and monetary system is shifting under our feet. People are internalizing that the spectacular rebound in risk assets has been synthetic—fabricated by governments who can’t afford it. Sovereigns are the new flavor of credit stress, but even fiscal imbalances are only a symptom. The underlying diagnosis is an un-sustainable model of global growth that marries the West’s insatiable appetite for consuming cheap Eastern product on credit, with the East’s continued over-dependence on selling and lending to the West. The debt crisis will persist until the habits driving it are changed. The world economy must transition to a more balanced model of global consumption and leverage, with more consumption in the East and less borrowing in the West. This is much bigger than the ’08 financial crisis; it implicates the entire postwar global economic model. There’s no quick fix here, no more big government-spend-us-back-to-status-quo band-aids. Unprecedented policy accomplishment and dramatic changes in consumer behavior are going to be required globally. Markets may still not yet be connecting all the dots, but the clouds overhead anticipate peoples’ anxieties of the enormity of the situation, and outright fear that we and our politicians may not be up to the task.
Expect the course to be wrenching and unpredictable. The implication for all of us is that the days of investing in stocks and bonds against a placid macroeconomic backdrop are over. Picking securities within a narrow investment strategy that’s blissfully indifferent to the top-down picture won’t work any more. Episodes of indiscriminate selling across asset classes and geographies that we’ve been experiencing since ’07, will be more frequent. These macro squalls can lay waste in a flash to a well-selected, but un-protected, portfolio of corporate investments. Investing success now demands that we be positioned on the right side of global themes, and hedged against their dark side. We need to be flexible in our use of corporate capital structure. And, for hedging, we must be proficient with a wide array of asset classes beyond debt and equity, including currencies, commodities and rates.
Here are some big investment themes that we at Xerion like in the transitional framework: We like Shaking Hands With China, meaning positioning to benefit from China’s government investment program, and buying what rising emerging markets consumers need. We want to Sell What Emerging Markets Make Better, as in short overleveraged Western producers. And, we must protect against the unfolding sovereign train wreck, by shorting the weakest currencies and government bonds, and Hedging Monetary Debasement with exposure to precious metals and miners.
