John Burbank: Asset Prices Down 10, 15, 20 Percent Will Bring QE3 Speculation

John Burbank, managing member and chief investment officer at hedge fund Passport Capital, spoke at the Committee for a Responsible Federal Budget Annual Conference yesterday (read Bernanke's keynote here) on the debt ceiling and end of QE2. I transcribed what he said below. He covered how he's investing around the Fed which I thought was important.
"There are so many variables. August seems like a long time away if you're in the market everyday. We should have a European default by then and we should understand the rate we're growing in the U.S. I think the 10 year (Treasury) is really telling you that there's low growth and a deflationary outlook, and that QE2 is ending. The markets have responded far more to what Bernanke is doing and likely to do than anything else I'd say because investing in inflation is exactly opposite to investing in deflation. Pretty much you have to turn your portfolio upside down and do the opposite. So, I think the investors and business people don't have clarity and there are so many different variables.

The question is, who's going to fix this? Is it Congress? Or is it Bernanke? Or is it the markets? Which is going to happen first. And the question is, is it going to be inflation or is it going to be deflation? Right? A lot of people compare investing to playing poker, and I say it's like we're watching the last table of the World Series of Poker because I don't know how to invest without watching what Fed does, Congress does, Beijing does. The biggest players who essentially set prices. That's the problem, we have no clarity. So the debt ceiling is just one of many different variables that we need to understand as investors"

"I think the biggest thing is QE2 is ending and many investors assume QE3's magically right around the corner. If it's not, asset prices are going to fall. They are going to fall 10, 15, 20% and then the market can start speculating on QE3."

[Question by Steve Liesman: Were you fumbling with your Blackberry hitting the sell button while Lindsey was talking?]

"Oh, Ive already been hitting the sell button most of this year so."

"The problem with the markets is people assume liquidity and the utility of the very near term is far more powerful than the certainty of the long term. So if Bernake is in the market buying Treasurys, the 10 year goes up to 4%. But then growth starts faltering and you start discounting the end (of QE2), and here the 10 year goes to 3%"

Full segment featuring John Burbank: http://www.c-spanvideo.org/program/BudgetAnnu/start/3294/stop/11530

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