Random Thoughts From Some of the World's Brightest Minds
I attended the Buttonwood Gathering in New York, hosted by The Economist -- a fantastic meeting of the minds, with talks given by David Einhorn, Larry Summers, Robert Rubin, Mohamed El-Erian, and many others.
Here's a collection of quotes from my notes, all edited and condensed for clarity.
Roger Altman, former Deputy Treasury Secretary:
Long term the U.S. will surprise on the upside. There's prospects for a new housing boom, and the rise in oil and gas production is breathtaking. There will be some progress on manufacturing. The debt problems will be fixed, and the chances of 4% GDP growth two or three years from now are pretty good. We'd all like it sooner, but that's not likely.
Larry Summers, former Treasury Secretary:
At the end of the day, central banks will do what is necessary. At the end of the day, any time there's a choice between the euro falling apart and something else, something else will be selected, even if it has inflationary consequences that would have been surprising two or three years ago.
[Europe's debt mess] didn't have to happen. It's a tragedy. It's affecting hundreds of millions of people. There are lots of reasons it did happen, but a very powerful reason is that people believed in the triumph of politics over economics. There was a judgment that if there was enough political will, the laws of economics would be repealed.
David McCormick, Bridgewater:
History will look back on central bankers as necessary and heroic. The financial crisis would have been much different if they hadn't done what they did.
Roger Altman, former Deputy Treasury Secretary:
The Tax Reform Act of 1986 was introduced in 1982. The most skilled politicians in the world could barely get it done in four years. The odds that we can fix our tax code in two or three months [before the fiscal cliff] isn't feasible.
Marc Lipschultz, Global Head of Energy and Infrastructure, KKR:
"Revolution" is the right term with what we're seeing with energy. In North America, we've gone from a place where we thought natural gas was scarce to a place where it's abundant. The implications are significant, and it has the ability to create millions of jobs, transform our dependence on foreign oil, and change the trade deficit -- it's really dramatic across the spectrum.
James Tisch, Loews Corp. (NYS: L) CEO:
Two winners of the energy boom. One will be petrochemicals, plastics, industries that use natural gas liquids, as propane and ethane prices have come down dramatically.
The other big industry to benefit big is transportation. It will start with 18-wheel trucks converting from diesel to LNG. That could mean a savings per truck each year of $25,000 in operating costs. Today, it costs about $75,000 to make that transition per truck, so it's a three-year payback. We will see a wholesale shift over next decade of how trucks are powered. And that's 15% to 20% of all the oil consumed in the U.S.
Our reliance on the Middle East will decline significantly. Over the next 10 to 20 years we can see a dramatic geopolitical shift in terms of the focus of U.S. foreign policy resulting from our becoming more energy independent.
The U.S. has an enormous competitive advantage because our natural gas is so much cheaper than natural gas in other places. We are not going to export that advantage, because it's very expensive to transport natural gas -- $3 to $4 in shipping costs per mcf, so if we sold it to China, the price would effectively double.
David Cote, Honeywell (NYS: HON) CEO:
There could be a huge recovery if businesspeople think there's progress in a budget deal to solve the fiscal cliff.
Peter Orszag, former White House budget director:
I can't tell you how many times I felt like Charlie Brown. I'd meet with a senator who said they wanted to lower tax rates and broaden the tax base. They'd start by telling me how much they wanted to cut tax rates. Then I'd ask them what deductions they wanted to cut. Mortgage interest deduction? "Nope, can't touch that, son." Health insurance, interest, retirement savings? No, no, no.
Robert Rubin, former Treasury Secretary(on how he would solve the debt problem):
Raise the top marginal tax rate back to 39.6%, where it was in the 1990s. That brings in $1 trillion over a decade. Then reduce tax deductions to raise another $1 trillion. Then cut spending by $2 trillion.
The average American family spends $100 on a tax accountant to receive $1,000 in tax deductions. So it's really only $900 in deductions.
Income inequality also extends to life expectancy. The difference in life expectancy between a high school grad and a college grad is now five years. Twenty years ago it was only one year.
The public is just as politically polarized as the politicians are.
Stephen Freidheim, chief investment officer,Cyrus Capital Partners:
In Europe, some form of debt writedown is necessary unless you want decades of no growth.
Charles Roxburgh, Director, McKinsey Global Institute:
It's crazy that after a debt crisis we're still subsidizing debt [with the ability to deduct interest] over equity. And we need to reset our expectations. We've become accustomed to 2% trend growth, so people think 1.5% is a disaster. We need to think 1.5% is a good thing.
Vincent Reinhart, chief U.S. economist, Morgan Stanley (NYS: MS) :
If U.S. households expect too much from the government, they undersave and overleverage.
Hugh Hendry,Eclectica Asset Management:
Don't tell me China's Treasuries are an asset. An asset is something you can sell. If China sells Treasuries, the renminbi goes higher and higher and higher, and its little exporting companies go bust.
There is no rationale for owning a gold mining equity. It's as close to it gets to insanity. The risk premium of owning the gold miners goes up when gold price goes up, because countries are more interested in gold mines when gold is $3,000 an ounce than at $300 an ounce, and there's nothing to protect you against confiscation.
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