Logging work life

Someone from Dallas F&P (LP) reached out to Latz yesterday to help with few funds managed by a couple of managers. Poor returns, and struggling with tail ends. We did some research and sent an intro doc out this morning ahead of a 5pm call. Other than that, week is generally quiet with small stuff to do. Like assess strategy for CMGP and divestment, so we can get our head around fund debt and liquidity to closing. Or look at fund filters and start calling LPs.

The CAIA has been in my mind, in addition to potentially an MBA so i can eventually transition into a general buy-side role if i wanted. And to help me build a truly local, and real network - personally and professionally. Here, i can start my own EMEA and Asia EM focused shop doing distressed fund advisory. 

If i dont do that, i've been thinking about going back into banking. Money is good, i know what i'm doing, i can just network, and focus on other aspects of life and say this is the best i can do career-wise.

Consideration is that MBA opens up opportunities which can be exciting but that comes at a large cost (cash and time). Banking is good money, and i can retire in 5 years, if i wanted, but doesn't give me comprehensive benefits of longer-term career.

Status quo doesnt sound stimulating enough.

I gotta decide what i truly want from my career, apart from 'growth'. Growth has been a key-word for me for years now but i dont know what that means anymore. Growth for the sake of growth? How do i connect dots? I'm all over the place.

Maybe i'm crazy and I'm focusing too much on my career and job because i have nothing going on personally, really. If i had a full life outside, perhaps i wouldnt be wasting time thinking about all this.

I need to figure shit out. Is this SPIRALING??? I dont know anything anymore. 

July 16, 2018

I woke up at 7.50 but got out of bed at 8.15. Reached office at like 9.40, later than i would have liked but there hasn't been much going on.

Spent the morning reading, and just generally working on Platinum and BD. Drafted an NDA, got on a call with buyers of secondaries, looked at valuation, liquidity CF for CMGP, and then met a couple of LPs from R&I Japan today, which was interesting. I need to learn more about Japan's state sponsored pension plan management. Apparently it is complex.

The hedge funds strats class was great, again, and i learnt a couple of things. Zach harped on how alpha comes solely from discount rate, vs anything else. We had a healthy debate, and i felt good speaking up in class. I need that right now.

He's given us a list of books to read. In addition, Dalio's Principles lists some books on page 104 which i will add here, to my reading list.

I feel like this is it - reading more on history of money and finance, learning about macro/markets, and just generally being a good investor is all i want.

The time to focus is here. 

Investing - raring to go

I think i'll still be with the firm for a couple of months and i don't want to invest and risk being investigated by SEC - i know how tightly they monitor. That means all my current research kinda becomes in-actionable immediately. However, it will help me lay the groundwork for when i can transact. Maybe i'll turn the pace down a notch - let's see.

In thinking through the overall strategy of value investing vs trading, i prefer value and that makes sense to me. Find a good, reasonably priced asset, and hold - even in the worst of times.

I also think, though, that there are some obvious short term trades (<1 year) which can provide significant value, at least in the current state of the market. If there is a massive crash, that may go down the drain. And you have to take that loss. These are mainly commodity driven - so steel prices are low now and on the way up - find a good steelco. Or event or earnings driven, like Match - upside from cuffing season and FIFA this year. Simple, short term stuff.

At current level of accessible capital, investing will have to remain a secondary exercise if i live in the US - i need to get a job. If i move to India, i think i can afford a couple of years to get invested. 

China debt - is it a problem?

From 2001-03, US lowered Fed rate so drastically that over the next few years credit flowed freely, more freely than it should. This led to the sub prime crisis in 2007/08. Broad strokes.

In the US, the TARP ($700b, of which ~$400b was actually used) was used mainly for capital purchase (buying book from banks/other investors) via reverse auction, and for injections into banks/FIs and auto companies. The other ARRA $790b was measured as tax cuts, extension of unemployment/edu/HC benefits, and job creation through fed grants, contracts, and loans. Effectively, all of this was channeled through fiscal spending. Yes, QE and low interest rates also followed - and rates are still at super low levels.

Keen to see what such consistent low rates mean for the US - are we in a longer term rally? Or does this implode somehow? Post 2001-era didn't end well. Probably my next post.

Anyway, during 2008 crisis, exports fell significantly and manufacturing stalled in China - like others, China introduced a stimulus package. But they did this out of lending the ~$600bn to local banks which in turn lent proceeds to businesses and individuals. Local govt's couldn't borrow from banks directly so they set up funding vehicles (LGFV) which did the borrowing. 

Chinese debt went from 150% to 250% of GDP from 2007 to now. Similar to US/EU level but far lower than Japan (350%ish). Most of this stems from corporate and household debt - not govt debt - which went from 110% to 225%.

NPAs at Chinese banks are currently ~$225b - two thirds of this debt is at state-owned banks, and lent to state-owned entities. With limited foreign debt (~15% of GDP and ~5-6% of all debt).
China currently sits on $3t of foreign reserves, and its savings rate is 40-45% of GDP.

Overall, given this debt seems manageable by the government, i don't see this as a concern.

However, China's LT bond yield is at 4% (higher than in a ~decade) and is expected to remain at these levels. To curb lending (which has fueled growth) - authorities have mentioned this is the intent - there may be a tighter monetary policy in place. Which means lower growth. 2016 showed us that. 

Low growth may mean lower than now, but still healthy and sustainable EM figure. Unless we see large impact on growth, flight of capital, very low yuan (leading/pre-event indicator, as opposed to growth from exports which becomes lagging/post hoc), there is no alarm here.

What happens if this chain of events occurs is a subject of another discussion. 

Quick ref

• FOMC sets Fed target rate for overnight interbank lending - primarily for banks to maintain reserves 
• Do this by buying govt securities which infuses cash and lowers rate, or selling govt securities which tightens supply 
• Could also do this by changing reserve rate but is drastic measure 
• LIBOR tracks very closely to Fed rate 
• In US, banks have prime lending as spread to Fed of about 300bps - other debt is sub prime 
• In RoW, it's usually quoted as spread to LIBOR
• If Fed decreases rate, economy is stimulated, consumer spending increases, so growth increases. Interest rates are low, too, so investors usually prefer equity markets 
• Conversely, when rates are increased substantially, credit tightens and investors may choose bond markets in general 

Will be interesting to see chart with fed rate and equity performance 

Duration of bond measures risk and sensitivity to prices based on change in interest rate - is essentially measuring wt avg CF of bond by year to maturity. Higher duration, higher vol. Zero coupon usually most sensitive 

Rule of 70 - divide by int rate to see how many years to double investment 

Various sector reports

I asked BRC for some 101/primer reports today, and went through the key ones on tech - semiconductors, software, IDM, and social media among others. Want to spend more time on RE, commodities, and fintech/banks soon.

I'm warming up to learning more about tech and believe that investing here can be a good solution to keeping USD assets, and can provide significant growth compared to India which has fewer investible stocks. I also don't have to worry about fx translation losses/gains.

Had a quick look at Match Group which people seem to be short on, but makes sense to be for the longer haul. My thesis is Diller exits this, and IAC at some point, for cash.

Long Facebook and Amazon also seem like good initial ideas but i havent dug at all. I guess that's like holding Coke in today's world. 

China-US debt loop

In theory, current and capital accounts on BOP balance each other out, since foreign reserves are effectively a plug. Where there's a minor imbalance, its usually a statistical discrepancy. So if the US - for example - runs a current account deficit (CAD), it will likely run a capital account surplus. 

The US has also been running large fiscal deficits since more than a decade which has led to increased issuance of USTs and internal borrowing from Social Security Funds which should be used to fund baby boomers' retirement. When SS payments come due, will US be able to fund w/o depreciating the dollar? 

The US is now using world savings to meet its local investment and consumption needs ie net debtor to rest of world - total debt is $20tn at this point. A third is owed to intra-governmental agencies (SS funds mainly) and two thirds to the public. 

In the longer term, the US can be expected to be severely indebted - and debt/GDP is beyond 100% already. That has happened because USD is still the global standard (can just print). China has been calling for a replacement for a while now - yuan did become a reference reserve currency and joined the USD, GBP, EUR and Yen club in 2014/2015.

Since China pegs the yuan (+/- 2-5% of 6.25/USD), and has to print yuan to buy dollars to maintain this peg (to avoid yuan appreciation), it builds a pile of dollars which it will eventually lend to US by investing in UST. This is effectively China funding US to buy Chinese products and continue to run CAD. Same with Japan.

If China lets yuan float after having built up these reserves of USD, yuan appreciates which causes the value of held USD reserves to decline. China will also stop buying, or even sell, UST which might lead to increase in LT interest rates which means lower consumption / low growth. Hard to get out of this situation for either country.

Below is an interesting table i found the UST website. Total is c.$4tn in UST.

Will go into China's current debt situation soon.