CFA Society Chicago Welcomes New Members and Recognizes Volunteers!


On Thursday January 28, 2015, the CFA Society Chicago held its annual New Member and Volunteer Recognition Party at the Chicago Athletic Association Hotel. The night was especially festive as attendees filled the room, networking with new faces and catching-up with returning volunteers; as the room dined on hors d’oeuvres and enjoyed a drink or two.

The purpose of the night was to welcome new members to the society and recognize the outstanding contributions made by current volunteers, as well as the Executive Committee, the Board of Directors, and Staff members of the CFA Society Chicago.

The highlight of the night began with the awards and recognition portion led by the CFA Society Chicago Chairman, Kerry Jordan, CFA. Kerry gave a wonderful overview of the event’s purpose and encouraged new members and current volunteers alike to continue to seek out the numerous volunteer opportunities within the CFA Society Chicago Advisory Groups.

  • Annual Dinner Advisory GroupDSC_2382
  • Communications Advisory Group
  • Distinguished Speaker Series Advisory Group
  • Education Advisory Group
  • Membership Engagement Advisory Group
  • Professional Development Advisory Group
  • Social Events Advisory Group

After the introduction and overview, the DSC_2371following volunteers were recognized for their outstanding contributions within their respective advisory group:

  • Bob Cohen, CFA – Communications Advisory Group;
  • Cosmin Lucaci-Oprea, CFA – Distinguished Speaker Series Advisory Group;
  • Thomas Gerald Hillman, CFA – Education Advisory Group;
  • Deborah L. Koch, CFA – MembershipDSC_2383 Engagement Advisory Group;
  • Larry Alan Lonis, CFA – Membership Engagement Advisory Group;
  • Michael Sullivan, CFA – Professional Development Advisory Group; and
  • Mark Cichra, CFA – Social Events Advisory Group.

Next-up was the recognition of the Advisory Group Co-Chairs. The co-chairs were recognized for their time, effort, and hard work while volunteering for within the advisory groups. In addition to applauding their contributions, each co-chair received an additional complimentary event ticket that can be used for admission to an upcoming CFA Society Chicago Event.

Things wrapped up with the awarding of numerous raffle prizes to the night’s attendees. Prizes included Starbucks giftcards, numerous restaurant gift certificates, and even an overnight stay at the Sheraton Chicago Hotel & Towers with a diner for two at Shula’s Steakhouse. In the end, the night finished just as it started, as a celebration with fun had by all.DSC_2385



Distinguished Speakers Series: Kyle Bass

China has been in the news lately, and for all the wrong reasons.

“A hard landing [in China] is practically unavoidable,” legendary hedge fund investor George Soros told Bloomberg while attending the annual World Economic Forum meeting in Davos. “I’m not expecting it, I’m observing it,” he said.

The Chinese government, facing malaise from many angles, issued a swift rebuttal to the investor responsible for “breaking” the Bank of England in 1992, saying that “Soros’ challenge against the renminbi and Hong Kong dollar is unlikely to succeed, there is no doubt about that.” The People’s Daily, China’s Communist Party’s official newsletter, went a step further with the anti-speculative rhetoric and ran an article titled “Declaring war on China’s currency? Ha ha.”

You can add hedge fund manager Kyle Bass to the growing anti-renminbi chorus. Linking the current trouble in China’s stock market to origins in its banking system, Bass gave a sweeping overview of China’s banking system, its growing book of non-performing loans and the potential impact of a Chinese currency devaluation on the global economic system.

Kyle Bass, founder of Hayman Capital, came to the financial world’s attention in 2007 as one of the first financiers to make a fortune on shorting low quality pools of mortgages. The short subprime bet earned him a massive 212% return that year. Further public recognition came from Michael Lewis’ 2011 book Boomerang which examined how cheap financing around the world led to the global financial crisis. It featured Bass prominently as an investor who confidently understood what was going on, and was able to capitalize on it. One anecdote in the book described how Bass bought a million dollars’ worth of nickels from the Federal Reserve, with the belief that the meltdown value of the metal was actually worth $1.36 million. How did he explain the strange, enormous purchase of nickels to the Fed?

“I just like nickels,” he allegedly told them.

Before his speech, Bass quizzed luncheon attendees at the VIP table with the seemingly innocuous question: “Who knows how big the Chinese banking system is?” As we sat there stumped, he laughed and said “Come on, you’re CFAs, you should know this!”

Kyle Bass 1

Kyle Bass, Hayman Capital, speaks to local financial professionals at The Standard Club on January 26, 2016.

After a brief lament about the lunacy of visiting Chicago in January, Bass quickly cut to the chase with his thesis: China will go through a non-performing loan cycle, and the People’s Bank of China will be forced to devalue their currency. Hardly anyone knows how big the Chinese banking system is, Bass said, and understanding its size and the volume of non-performing assets relative to GDP is key to understanding the direction of the Chinese currency.

Just how big is the Chinese banking system? According to Bass, there are $30 trillion in bank assets on the books, and another $5 trillion in assets off the books, for a total bank asset to GDP ratio of 350%. This is roughly double the level of US banking assets to GDP before the financial crisis. If non-performing loans reach 10% at Chinese banks (that level was as high as 30% in 2001), that would represent a loss of $3 trillion, which is roughly the total level of China’s foreign exchange reserves held at the People’s Bank as of January 2016. China’s currency reserves continue to shrink as capital flows out of the country, and its central bank recorded the largest ever drop in reserves ($107.9 billion) in December 2015. If only 4% of Chinese citizens were to withdrawal the maximum $50,000 allowed, that would vaporize the entire pile of China’s $3.3 trillion in FX reserves. Many elite Chinese are already taking capital out of the country as quickly as possible and are looking to buy real assets with cash flows such as movie theaters, hotels and properties in Vancouver.

The capital flight out of China takes place at a time when China is experiencing its lowest year-over-year growth since 1999, and may actually be as low as 3.6% (Hayman Capital’s estimate). Bass sees six distinct crises currently taking place within China:

  1. A stock market crash
  2. State-owned enterprise transformation
  3. An export-led industrial economy facing a shaky transition to a service-based economy
  4. Declining excess reserves
  5. Property problems
  6. Lack of confidence in the government’s ability to solve the above problems

If non-performing assets rise, that will require a recapitalization of China’s banks, which will stymie new loan creation and push the central bank closer to a large Chinese Yuan devaluation. The devaluation may exceed 15%, and Bass believes that it will likely take place overnight, as a last resort by the bank once its back is up against the wall.

What does that mean for the American investor? A hard landing in China could sap as much as 100-150 basis points from GDP from the US, according to Bass. Although US stocks may decline, Bass doesn’t forecast a huge crash, but there certainly will be deflationary pressure coming from China as a result of the devaluation. The best way to play a potential currency devaluation is by shorting Chinese renminbi, but this is a difficult exposure for an American retail investor to achieve. The best available proxy to individuals may be Hong Kong assets, which are more liquid and tradeable.

Regarding commodities, Bass believes that we are close to a bottom. He drew a line in the sand for oil and said that “a drill bit doesn’t hit the ground at $25”. Bass thinks that the CRB Index may bottom within a few months, but it would not be a good idea to go long oil ahead of any Chinese currency devaluation. The aftermath of that event could represent an attractive opportunity to add to commodity longs. The supply side will resolve an imbalance on its own as lower price levels make it unprofitable to mine and drill, but the demand picture is harder to assess. Bass is unsure how commodity demand in China, a top consumer, would be affected by a large currency devaluation. He thinks bonds still look relatively attractive despite their low yields.

Bass finished his speech with a story about a meeting between former Chinese president Hu Jintao and George W. Bush. It was difficult for the two leaders to get time completely alone. In the moment they had together, Hu Jintao privately confided to Bush that his biggest fear was “creating 20 million jobs a year”. This may prove problematic for China’s current administration as it faces its biggest test yet.

Distinguished Speakers Series: Jason DeSena Trennert


Jason Trennert – Strategas Research Partners LLC

Jason DeSena Trennert provided his thoughts, observations, and market predictions for 2016 to a sold out audience at the Standard Club on January 13th.

Trennert first addressed the drop in the market that coincided with the start of the year. He noted that historically the first weeks of January are generally a poor predictor of total year performance. He then addressed recent market commentary suggesting the United States is headed for a recession. There are three things that can create or cause a recession:

  • Inflation
  • Policy errors (think of the Japanese government raising taxes in 1988)
  • Exogenous events (oil embargo)

While not agreeing with current fiscal/monetary policy, Trennert did not consider the current policies so bad that they would push the country into recession, and with a current inflation rate around 5%, he found no reasonable catalyst for a 2016 recession. Trennert asked rhetorically why do people feel lousy and think the outlook in the near term is for a recession when we have; a continuing fall in unemployment, wage growth acceleration, and lower oil prices? The short answer is the 24 hour news cycle that focuses on the negative and unlikely (such as 2016 recession) instead of the longer-term view of expected growth.

Expanding his point of view on monetary and fiscal policy, Trennert pointed out an inefficient policy mix. Over the past eight years the Fed has used an easy monetary policy, while fiscal policy has been that of tight regulation brought on in large part by Dodd/Frank legislation. This combination has favored financial risk taking over economic risk taking or capital investment. In this period companies have received more credit for uses of cash that were more accretive (share repurchases and M&A) than they have for long-term investments like capex. Frequently changing government policies make long-term planning difficult.

Trennert 1Trennert also provided his thoughts on why the stock market will likely go up in the next few years. The number of companies listed on U.S exchanges has fallen from over 8,800 in 1997 to 5,300 in 2015. Simple supply and demand could provide the continuation of the rally of high-quality stocks. Today there are simply fewer stocks being chased by more dollars. Why aren’t more companies going public? Regulatory costs of being a public company along with the growth of the private equity industry could account for the relatively small number of companies deciding to go public.

The audience was given the opportunity to ask several, wide-ranging questions including; what is the best catalyst for continued growth? Trennert – Tax reform (an overall reduction in the tax code) would provide the biggest, most effective impact to growth in the economy. Tax code simplification would provide companies certainty with regard to long term investments which would help spur economic growth.

CFA Society Chicago Book Club:

The Entrepreneurial State: Debunking Public Vs. Private Sector Myths by Mariana Mazzucato

The Entrepreneurial StateAround the time we read this book, a major global growth scare was negatively impacting the financial markets.  Examples were the China slowdown which weakened emerging market exports, Japan’s ability to stimulate demand after two lost decades, and the low inflation and growth coming out of Europe.  Growth is known to be export or investment led, but a traditional catalyst has historically been technological led innovation.  Looking at Europe over the past decade, there has been a lingering question as to why Europe has not been a major innovator.  Why has the US been a major leader in technological innovation producing companies like Google or Apple?  Where are the Silicon Valley’s of Europe?  Is it possible that government led European austerity could be a major contributor to stagnant growth?  The author thinks yes.

Austerity programs in Europe have led to reduced government spending and an expectation that the private sector is going to lead the way in innovation.  Looking at the US, and despite popular opinion, the high risk and innovative catalysts for growth have not come from venture capitalists or the private sector.  It has been the State.  Against popular myth, the State doesn’t just invest in infrastructure, correct market failures, take part in countercyclical Keynesian fiscal policies, or create the right economic conditions for the private sector.  The State has actually been extremely entrepreneurial and has led the way in nanotechnology, the internet, GPS, touch screen display, SIRI, green technologies, and biotech among other things.  The State is not at the back end of innovation but at the forefront.  The issue with the private sector is that they are quite focused on short-term profits and an eventual exit strategy which has put downward pressure on the time horizon resulting in shorter term 3-5yr projects rather than the high risk and highly uncertain 15 year projects which have produced the major growth catalysts such as the internet.  While 9 out of 10 high risk investments will fail, it takes just the 1 to more than offset the other 9 failures.  While that 1 positive outlier has handsomely rewarded and offset the unprofitable investments for venture capitalists, the reward to the State has come in the form of indirect taxation revenue which has been only a fraction of the total high risk investment return and has certainly not compensated for the high risk of these uncertain long term investments.  For more State run innovation led growth to continue, we need to find a way for the high risks to be rewarded without only the fractional indirect return of taxation.

The bottom line is that high levels of government austerity can significantly curb long term innovation and growth.  Especially considering that economies can’t rely on the private sector to invest in the high risk and uncertain areas that can be the major turning points or catalysts for growth.  If the State could have a much greater combined direct and indirect return on their investments, then perhaps the State would have a much greater pool of assets to invest towards high risk investments which could accelerate long term growth.


Upcoming Schedule:

February 16, 2016: The Age of Cryptocurrency: How Bitcoin and Digital Money are Challenging the Global Economic Order by Paul Vigna and Michael J. Casey

March 15, 2016: My Side of the Street: Why Wolves, Flash Boys, Quants, and Masters of the Universe Don’t Represent the Real Wall Street by Jason DeSena Trennert

April 19, 2016: While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis by Roger Lowenstein

To sign up for a future book club event, please click here: