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[Archives] Notes To James Grant's Spring Conference 2007





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[Archives] Notes To James Grants

Spring Conference 2007

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Posted date: May 24, 2015 10:15:35 AM
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Notes To James Grants Spring Conference 2007 by Redfield, Blonsky &

Co. (
Very often I write these notes as a future reminder to me for what I found


interesting, or perhaps items I would like to save for future reference.

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These notes could be error filled, and I apologize for any inadvertent
I. Grants Spring Investment Conference April 24, 2007




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I have been a subscriber to Grants Interest Rate Observer since around year 2000. I


find James Grants work to be thought provoking, honest and often hilarious. I enjoy

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his sense of humor as much as I enjoy his financial Insight. I was thrilled to have him


autograph my book of his on the financial life of Bernard Baruch. Here is a link to his



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A. The first speaker was David A. Rosenberg, Chief North American Economist
from Merrill Lynch. I have read his works for years, and really enjoy his writings
and thought process. His presentation was titled, Soft Now, Hard Later. His
first words were, I just wanted to get things out of the way. I did not steal this
title from our Pfizer analyst. I enjoyed how James Grant introduced David,


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David is from Canada, hence he must be a nice guy. He wouldnt comment on

the mark to market of commercial paper and potential aggressiveness, as he cited
his compliance department present, and didnt feel comfortable answering. His
body language, to me, expressed an affirmative to the question.


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[Archives] Notes To James Grant's Spring Conference 2007

1. I have a note to myself to monitor the following ratio, which David thought was
quite important. GDP Growth / Population Growth. That is a natural ratio, and
material long term deviations from such, could prove interesting. I think David
mentioned that future population growth in USA is expected to be 1.0%. I am not
certain of that, and I do not know what the past population growth was.
2. Claims that Inventory / Sales ratio is at a 4 year high. The remainder of this
paragraph are my thoughts and not mentioned by David. I have been a fan of this
ratio for a long time. Here is what I wrote in regards to Peter Lynch
( mentioning the ratio


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( . Inventories: Are
inventories piling up? This is a particularly important figure for cyclicals. Lynch
notes that, for manufacturers or retailers, an inventory buildup is a bad sign, and a
red flag is waving when inventories grow faster than sales. On the other hand, if a
company is depressed, the first evidence of a turnaround is when inventories start
to be depleted. The importance of this ratio is that when goods are produced, a
company expects to sell their inventory. As inventory grows, earnings will grow
as well, via Cost of Sales being reduced by ending inventory. If that inventory
does not follow with a sale, then future profits will fall or cause potential stress.

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This stress could be lower profits, inventory impairments and cash flow concerns.
Hence, one of my favorite indicators.
3. David claims that USA mortgage and home equity withdrawal, has a lag of 4 6
quarters on the consumer. He said to watch employment, as it follows capital
spending with a lag. I had a question mark next to my notes, and just didnt follow

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the theory, or I wrote it down wrong.

4. He showed 2 graphs. David claims that the Index of Leading Economic
Indicators, is the most important indicator. He said the reason it is his favorite, is
because it works really well, watch this forever. He claims that the current
reading of The index of Coincident Economic Indicators is a lagging indicator and


shouldnt be focused on. He claims that the Coincident indicator has always shown

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the economy being okay, even when the economy was going into a recession. He
cited the years of 1990/1991 and 2001 in contrast to the leading indicator for the
same years. As of March 2007, the coincident indicator is at a level of 2, whereas
the leading indicator is at a level of 0, and has been dropping since 2004.
5. He claims, When the fed tightens.bad things tend to happen. He cited
various incidences since 1972 and how the stock market lagged after these
incidences. Examples were bank failures in 1974 and 1981, and New Century
Financial in 2007.
6. He cited the mortgage delinquency rates of Prime mortgages to be at a 3 year
high and Sub-prime a 5 year high. He insinuated that if you had a pulse you would
qualify for a mortgage.
7. The next set of graphs he presented was very interesting. He claims that
employment growth at collection agencies are at a 4 year high, and growth at
credit bureaus an 11 year high. He calls this counter cyclical charts. It makes



[Archives] Notes To James Grant's Spring Conference 2007

sense, if things were so dandy, why would collection agencies be having strong
employment levels?
8. Claims that residential mortgage credit was a huge stimulus to GDP. From 1980
through 2000, the average ratio of 5 year change in residential mortgage
liabilities relative to nominal GDP has been on average a touch less than 0.6. The
current average is 1.6. He feels that this has added 1% to GDP growth.
9. He feels that housing inventory situation is rapidly deteriorating. He feels
that sub-prime situation will aggravate 14% or more of all mortgages.
10. He cited Alan Greenspans mention of froth in the housing market form July
20, 2005. I looked it up and found it here
.Whether home prices on average for the nation as a whole are overvalued relative
to underlying determinants is difficult to ascertain, but there do appear to be, at a
minimum, signs of froth in some local markets where home prices seem to have risen
to unsustainable levels. Among other indicators, the significant rise in purchases of
homes for investment since 2001 seems to have charged some regional markets with
speculative fervor.
The apparent froth in housing markets appears to have interacted with evolving
practices in mortgage markets. The increase in the prevalence of interest-only loans
and the introduction of more-exotic forms of adjustable-rate mortgages are
developments of particular concern. To be sure, these financing vehicles have their
appropriate uses. But some households may be employing these instruments to
purchase homes that would otherwise be unaffordable, and consequently their use
could be adding to pressures in the housing market.
He discussed that Greenspan didnt label the housing market as a bubble, but used the
word frothy. He mentioned, and I looked up froth in
( Here is what they cite the definition as, an aggregation
of bubbles,.. David laughed as he said something like, Greenspan didnt see a
housing bubble, he saw a series of bubbles.
If you are further interested in reading about potential housing bubbles, you could look
at some of the following links.
a. ( monitor
b. ( a
page I havent updated in a long time
( an
interesting article on the 10% rule.



[Archives] Notes To James Grant's Spring Conference 2007

11. He claims the US Debt-to-Income Ratio Rose as much in the past 5 years as
it did in the previous 39 years. In 1962 the ratio of Household Debt / Income
was 63%, it stayed under 100% until 2001, and now stands at 137%. His
argument is, that it sure appears that increased debt has led the consumer
spending surge of the last 20 years. As I thought more about this, I related it to
my own situation. I bought my house in 1991 for under $230K, well if I was to buy
the same house today, at a good price, it would be somewhere between $650K and
$900K. Hence, my household debt / income levels would increase dramatically.
Nevertheless, something to ponder.
12. He claims that mortgage standards are the tightest in 16 years (1991).
He ran out of time to talk, as he was allotted an entire half hour ;-), but here are
some notes of the handout.
13. Claims we are barely halfway through the housing recession.
14. Housing completion always converge upon housing starts..nine-months
B. The second speaker was introduced as a nice guy as well, as he is from Canada.
Bruce Flatt from Brookfield Asset Management (BAM)(57.06).
I really dont have much to say on this. I have seen him speak once before, and just
wasnt swayed to investing in his company. Granted the last time I saw his
presentation was at some point in the Spring of 2005, and the price has risen almost
200% since then. BAM is loved by many a value investor. Last year, Adam Weiss
from Scout Capital spoke at Grants conference. Scout Capital has a large position in
BAM. They apparently love the company. I really have nothing to add on BAM
C. The third speaker was introduced. James Grant said something like this, The
next speaker is from Russia, yet he is probably a nice guy, Simon Mikahailovich,
front and center. Simon started with an explanation that there is an old Russian
saying, In Russia they say, nice guys is not a profession. Simon, like David was
so informative and presented in a flawless, exceptional manner. His presentation
was titled, Collateralized Debt Obligations: A coup of financial engineering or a
triumph of hope over experience?
1. I made a note to myself to search the speaker in depth. What a wealth of knowledge
and half an hour is not enough time for me to comprehend this difficult area.
2. He feels much of the economy is being held up by a source of abundances from
CDOs. He feels this will soon stop, and perhaps has stopped already. He
mentioned that defaults and downgrades will start the action.
3. He mentioned a subject I just dont understand. He said that synthetic protection is
cheap. He suggested buying a put on credit side. I just dont know how to do that,
especially in my situation, and my broker dealer.
4. He was hilarious when he presented a slide of 4 very complicated formulas. He said
something like, okay, I can review these formulas of diversity score, expected loss,
adjusted diversity score and Gaussian Copula, but we only have a half hour, so let
me show you this slide instead. He then showed us a slide with a 5 lb. Purdue
chicken versus 5 lbs. cut up and packaged. He explained that the cut up and
packaged chicken, still totals 5 lbs, but because of buy what you want, you pay a
premium price. That is a traditional repackaging value proposition. He then
showed us a repackaging value proposition Structured Credit Version. This he



[Archives] Notes To James Grant's Spring Conference 2007

compared to the CDO market. You thought you had 500 lbs of chicken, but now you
have 515 ++ lbs of chicken and various other rated poultry derivative products.

5. He then showed the definition and structure of CDOs, very complicated he said
with a sarcastic Russian accent. What followed was a series of complicated
descriptions and so forth, and I still need to study it, and dont ever expect to write
about it. Yet, he pointed out that CDO growth since 2004 appears exponential. A
common theme of Rosenberg and Simon, would be the pain of liquidity being
6. He claims that current credit analysts have not lived through difficult periods, they
have only modeled them. He hinted that inexperience has caused pricing errors.
He mentioned that inexperience will turn into experience, the hard way. He said
that historical loss experience is not priced into the lower tranches of CDOs.
7. He claims that downgrades will come of CDOs and that margin calls from Basel II
will come. Under Basel II, he claims risk weights for High Yield Structured Securities
will rise sharply. He mentioned there will be new Ratings Based Approaches (RBA)
under Basel II.
8. He calls many second lien loans and LBOs to be covenant-lite loans.
9. He quoted Grants June 2006, financial engineering is the science of structuring
cash flows; credit analysis is the art of getting paid.

D. I skipped a bunch of speakers, just not my gig. David Swensen, Yales Chief
Investment Officer spoke on, The Folly of Active Management. I dont have a
lot to write here.
1. He said that asset allocation is investors most important tool. Sometimes I lose
sight of that, and for that comment alone, I am thrilled he reminded me of such.
2. A question was asked about Charlie Munger. David said, I dont like Charlie, for
some reason he compared me to a serial killer. I searched this and found this link
( Some foundations, following
the lead of institutions like Yale, have tried to become much better versions of
Bernie Cornfelds fund of Funds. This is an amazing development. Few would have
predicted that, long after Cornfelds fall into disgrace, leading universities would be
leading foundations into Cornfelds system. In regards to Munger and Swensen, I
also found this,
( Coincidentally, the issue of
investing discipline was an indirect theme of a speech about institutional
investment management given a few years ago by another old pal of Buffett,
Berkshire Hathaway Inc.(NYSE:BRK.A (
stock_symbol=NYSE:BRK.A)) (NYSE:BRK.B (
stock_symbol=NYSE:BRK.B)) (NYSE: BRK.A) vice-chairman Charlie Munger. In it,
Munger singled out Yales investment philosophy as an example
of what institutional
managers should avoid doing, taking particular exception to the complexity that has
moved the universitys endowment toward becoming an institutional version of the
so-called fund of funds investment model. As I searched Bernie Cornfeld, I
found that Cornfeld was perhaps a thief, but not a serial killer. I wonder if Charlie
ever called Swensen demented as he did Wharton professor Jeremy Siegel.
( At the 2006 Berkshire Hathaway
annual meeting, one of the firms executives, Charlie Munger, called Jeremy Siegel
demented for comparing apples to elephants in making future predictions.

E. What follows is a haphazard lousy attempt to describe what awesome speaker

William Ackman had to say. He had to speak quickly, and he had so much to say.
He had no handout, hence everything moved along so quickly. After the program,
I asked him for a copy of his presentation. He explained he wasnt ready to
distribute it, and in time, he might send it to James Grant to distribute to
subscribers. I hope so, as his discussion was incredible. William is founder of
Pershing Square ( Capital Management. His speech was titled, Whos holding the



[Archives] Notes To James Grant's Spring Conference 2007

1. In regards to securitization industry, CDOs, borrowers, lenders, etc, he said, There

will be a wholesale downgrade of the entire industry. This could make the process
of downgrading slow. He mentioned that ratings agencies have so much on their
plate, that they might hold off on downgrades until they can batch them all together.
2. He thinks defaults will be higher than predicted. There will be a lack of new CDOs.
Banks will start pulling warehouse lines. Ratings will adjust (see 1. above) and there
will be tighter lending standards. Additional credit enhancement will be required.
3. He said the companies holding the bag will be MBIA Inc.(NYSE:MBI
( and Ambac, as well
as reinsurers who reinsure MBIA. Who else?, the major securitizers. He
mentioned shorting MBIA (MBI 67) and Goldman Sachs Group Inc(NYSE:GS
( (GS 220)

He presented a very quick short thesis on MBIA. He claimed they are over leveraged,
aggressive and have had mass management departures. He went so quick, I lost so
much, and really have little to write on it. As I write this, I realize my notes seem to
lend a serious injustice to such an excellent thesis.
F. The last speaker was our host, James Grant. His speech can be found here
( I wont
repeat the speech, since you can read it for yourself. Here are some notes I took,
during the discussion.
1. Gulf equities are in a bear market. He claims the plunge has been in price and not
earnings. There has not been an earnings contraction. Earnings and outlook
appears robust. He would look at Saudi Arabia, Kuwait and the Gulf Cooperation
Council. (
2. He mentioned Orascom Telecom
( and Orascom Construction
( . He didnt think either could be
bought from USA broker. Maybe, I will research.
3. He is not calling a bottom in residential mortgage finance.
4. Downgrades are just beginning. He claims that recent downgrades seem to be
occurring on Fridays at 6:03pm, when everyone has gone home.
5. He feels high grade bonds will be down graded to junk or near junk.

Thank you for reading this. I apologize for sloppiness, and perhaps
misrepresentations. If there are any or many errors, they were all unintentional.
Respectfully Submitted,
Ronald R. Redfield CPA, PFS.
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[Archives] Notes To James Grant's Spring Conference 2007

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