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The Morning Brief: At SALT— Heat, Light and a Few Ideas

The first full day of the SALT Conference at the Bellagio Hotel in Las Vegas was certainly eventful. It included controversial assertions and predictions, fiery exchanges and even a sprinkling of investment ideas. Before the afternoon sessions got underway, one audience member from an investment firm turned to me and said: “Not many ideas but it sure was exciting this morning.”

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In one of the high-profile panels, Omega Advisors’ Leon Cooperman conceded that hedge fund fees need to come down. The founder of New York-based Omega Advisors told the audience that the low returns currently being posted by many hedge fund managers, and expected future returns, don’t justify the current level of fees, which average slightly less than 2 percent of assets under management and slightly less than 20 percent of performance. He pointed out that the industry enjoyed a golden age from 2000 through 2007 when a large number of managers outperformed the markets, resulting in a surge in industry-wide assets. And although the average fund posted an 8 percent loss in 2008, which he said was half the market average, this was followed by a very difficult era. The seven-year bull market caused long-short managers to lag since they did poorly with their shorts. As investors see their funds trail market averages, a growing number are redeeming their money and putting it into passive strategies, he said. “They can’t generate returns to justify their fees,” Cooperman conceded.

The 73-year-old one-time Goldman Sachs partner added that really only two types of managers are performing these days—quants, those algorithmic-driven managers, and people like Warren Buffett, who essentially buy and hold for a lifetime and don’t need to worry about quarterly redemptions. “Hedge funds need to rethink what their business model should be about,” added Paul Brewer, chief executive officer and founding partner of London-based Rubicon Fund Management, who sat on the same panel. Kenneth Tropin, founder of Norwalk, Conneticut-based Graham Capital Management, who runs both discretionary and computer-driven funds, added that investors have become more sophisticated and more demanding. “Every manager has to make the effort to become much more transparent and more communicative,” he said.

Meanwhile, Cooperman and others conceded that with interest rates so low for a sustained period, new performance expectations may be needed on the part of managers and investors. Kyle Bass, chief investment officer of Dallas-based Hayman Capital Management, suggested that over the next 20 years investors may have to get used to returns closer to 5 percent per year. “So fees got to come down,” he warned.

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One of the many factors experts have cited for contributing to the 2008 financial crisis was the repeal during the Clinton administration of the Depression era Glass-Steagall Act, which barred deposit-taking banks from operating under the same roof as a risk-taking investment bank. Two individuals who played a major role in that repeal were interviewed on the first panel of the day: Robert Rubin and Lawrence Summers, both of whom served as Treasury secretaries under Bill Clinton; the latter had also served as Rubin’s deputy secretary. They were interviewed by David Rubenstein, a co-founder and co-chief executive officer of Washington-based alternative-asset giant The Carlyle Group.

For his part, Rubin argued that Glass-Steagall had been essentially repealed by interpretations of the Federal Reserve, which had steadily removed restrictions on banks except for insurance underwriting. “Glass-Steagall had nothing to do with crisis,” Rubin insisted.

“I agree,” said Summers. “There was no transaction of consequence between 1998 and 2008 that would have been illegal before Glass Steagall.” He pointed to the merger between Citigroup and Salomon in 1998, and shotgun mergers during the financial crisis between Bear Stearns and JPMorgan and between Merrill Lynch and Bank of America. If those latter two deals could not have been completed, he argued, there may have been even more dire consequences in 2008.

Interestingly, the pair was not asked about their adamant resistance to a proposal to regulate certain derivatives trading practices, which many believe played a role leading to the financial crisis.

Meanwhile Summers tried to bring up the controversial issue of carried interest and its favorable tax treatment favored by many hedge fund managers. Rubenstein brushed him off, promising to come back to the issue later. “There is the first amendment, second amendment and then carried interest,” Summers quipped, chiding the moderator. Alas, Rubensteion never did return to the topic. “Sorry we ran out of time on carried interest,” he said, concluding the panel. Smooth.

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One of the more controversial presentations involved legendary corporate raider and oil and gas executive T. Boone Pickens, who recently expressed support for presidential candidate Donald Trump. He endorsed the real estate developer’s promise to ban Muslims from coming into the U.S. under certain circumstances. “We need to cut off Muslims coming in ‘til we vet them,” he told the audience, which murmured in response.

Pickens also made a case for the U.S. taking an isolationist approach to the Middle East. He stressed that we only import about 1.2 million barrels of oil per day, down from 7.8 million at the 1970 peak. Pickens said he would remove the Fifth Fleet from the Persian Gulf, which aligns with Trump’s isolationist approach to foreign policy.

Pickens’ only reason for keeping a presence in the Mideast, he added, was to protect Israel.

Real estate legend Sam Zell, who appeared on the panel with Pickens, disagreed. “You can’t look at the world through the prism of oil,” he stressed. “If we pulled out, we would have chaos in the world. If you pulled the Fifth Fleet, how long would it take for Iran to take over Saudi Arabia and the Mideast?”

Interestingly, Zell said that instead he would create an energy alliance among the Nafta countries—the U.S., Canada, and yes, Mexico. He insisted the trio of countries could collectively drill and produce enough oil to preclude the need for Mideast oil.

He also thought lower oil prices could help Trump convince multinational companies to move low-wage overseas operations back to the U.S. “Cheap energy can bring it back now,” he told reporters at a small press gathering afterward. “Cheap energy can trump cheap labor.”

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By far the boldest investment prediction of the day was made by Chuck Yates, managing partner at Kayne Anderson Capital Partners. On a panel discussing gold and oil, he predicted that the price of gold would roughly double to $1,825 by year-end, from a current price of about $1270. He sees this partly as a play on our current debt situation. “The ferris wheel has to stop due to debt,” he told the audience. “The Fed has blown up the balance sheet by trillions and trillions.” If he is right, one person who will be very happy is David Einhorn of Greenlight Capital, who has maintained a big bet on the metal for some time.

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One of the most fiery exchanges took place in the morning between Milton Berg, founder and CEO of MB Advisors, a macro research firm, and Don Brownstein, chief executive officer and chief investment officer of Structured Portfolio Management. Berg made the case that equity markets will underperform for the next 30 years, with opportunities to make maybe 1 percent, 2 percent or 3 percent from shrewd trading. He also hammered at the need to think short-term and be a quick trader, giving a handful of examples of the greatest trading gains over the past few decades.

Brownstein took exception to these assertions. “That’s great if you had a time machine,” he snapped back. He then asked Berg if he ever conducted a study and tried to compile data for successful timing trades and unsuccessful timing trades to see if this strategy actually works. Berg responded by pointing out that just 60 percent of stocks participate in a given bull market.

The irony here: The exchange took place in a Las Vegas casino where gamblers boast about their big wins but rarely tell you about their losses. That was the point Brownstein was trying to make.

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Not surprisingly, China was frequently a topic of conversation, and should be again on Thursday. It comes down to this: It is hard to find a China bull. The speakers differ by their degree of concern or fear. “It’s a communist government,” said Berg. “You want to put your capitalist dollars in a communist government? Then vote for Bernie Sanders.”

Austan Goolsbee, who headed the Council of Economic Advisers for President Obama, predicted China’s banks may need to be bailed out eventually. But Kyle Bass of Hayman Capital, remains very bullish on trading on China’s woes. “After studying its credit markets and banks, one of big macro imbalances is the Chinese credit system,” he told the audience, calling a short on China “one of the great opportunities.” However, he was not pressed on what exactly he was shorting and how other investors can play its troubles. However, Larry Summers told the audience that if something happens in the markets over the next three years that people remember in 40 years as a major event, it will be in China. “The scale of its economy has global ramifications,” he said.

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SALT and pepper: Omaga’s Cooperman said he has 20 percent of his fund’s assets invested in structured credit…He also made the case for First Data, a huge KKR private equity deal, which went public…Ayla Brown kicked off the conference by singing the National Anthem. She is the daughter of former Massachusetts senator Scott Brown, a big Trump supporter and a former American Idol finalist…Former New York Mayor Michael Bloomberg said he won’t endorse anyone in the presidential election. But later he noted that the only candidates “who can run the railroad” were John Kasich, Jeb Bush and Hillary Clinton. Hmm. Was that an endorsement?...Former L.A. Lakers great Kobe Bryant was the luncheon speaker. Not one of the more scintillating discussions. Felt like the final two minutes of a blowout game…T. Boone Pickens said the thing he is most proud of is the fact he has given away $1 billion to charity…Summers made the case for removing $100 bills and higher from circulation. He asserted that most people use them to facilitate the drug trade, support money laundering and evade taxes.

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