The Manual of Ideas'  Instablog

John Burbank, founder of Passport Capital, recently concluded his speech at the Value Investing Congress. The following are our notes from the presentation, entitled China and the U.S. Dollar: "Should We See Other People?"

Key Themes and Conclusions

• Fiat money is questionable
• Gold is on the rise
• Tailwinds for scarce natural resources and emerging market currencies are in place.
• China’s growth should become increasingly independent (they have the cash and knowledge).

Investment Ideas

• Current Passport Capital holdings -- fertilizers: Mosaic (MOS), Potash (POT). Crude oil: Petrobank (PBG CN) and EFG Hermes (HRHO EY).
• Burbank believes in being long financial services in the Middle East. 
• Gold (see below)

On China and the Big Picture

• China is “the world’s marginal provider of liquidity.” (See recent Economist publication on China).
• You cannot only take a bottom up approach; you must understand the top down (macro picture).
• If you look at GPD to private debt, in China these two metrics have risen at about the same rate. In the US, total debt and private debt have risen much quicker than GDP.  He believes this will serve China well in the future. The US is currently printing money ($2.2 trillion in new government debt from TARP and other spending). Asks the question: Which would you rather own?
• China currently holds 24% of Treasuries, Japan about 21%, Eurozone 8%, Middle East 6%, Brazil-Russia-UK = 4%.
• China’s options for investment in the future: 1) Maintain status quo (consequences: continue purchasing treasury securities and have the US government be your primary capital allocator) 2) diversification, 3) invest in yourself, 4) invest in things you will need.
• Things China will buy for itself: Education, Entertainment, Leisure, Financial Services. Passport only buys companies trading in Hong Kong, Singapore or the United States.
• What China needs most: Iron ore, potash, crude oil, copper, soy beans. China is a net importer of these commodities and Burbank believes this should shape portfolio decisions with respect to commodities.

On Gold

• Gold has an annualized appreciation rate of 13.2% over the past decade. China will be a very large buyer of gold in the future. Burbank believes that, from a game theory perspective, there is no reason for China not to purchase gold in the future.
• Lebanon has the highest gold/GDP percentage in the world at 28.8%. US and China Gold/GDP are 1.7% and 0.8%, respectively.
• How Passport owns gold: 1) Equities: challenging, as gold miners tend to make value-destroying acquisitions. Passport leverages team of analysts and geologists to identify earlier-stage assets. Detour Gold (DRGDF.PK) is a company they own. Passport also owns gold ETFs (proxy for physical gold) (GLD)

About John Burbank

Burbank is the founder and Chief Investment Officer of Passport Capital, LLC, a San Francisco global hedge fund. The firm manages over $2 billion. Passport employs macro-economic and sector analysis to identify opportunities from the long term expansion of leading emerging economies, select natural resource scarcity, and network business models common to the technology and service sectors. Investments primarily emphasize public equity securities. Passport also makes highly targeted investments in equity derivatives, select private companies, and swap contracts. Mr. Burbank has over a decade of experience investing in global equity markets. Prior to founding the firm in 2000, he was a consultant to JMG Triton Offshore, Ltd. and before that was the director of research at ValueVest Management. He earned a B.A. from Duke and an M.B.A. from Stanford.

Disclosure: Long gold futures, no positions in other securities mentioned in this article.