John Burbank is a big man who makes big bets. He'll let the 6,000 other hedge fund managers in the world take 3% positions in namby-pamby stocks like Kraft Foods (KFT, news, msgs) or the bonds of nations a fifth-grader can spell. Like an empire builder of the 19th century, he is out to build a fortune out of rocks, grit and guts, and will go to the ends of the earth to pursue his dream.
Not too well-known in this country, despite having built one of the most successful investment management firms on the West Coast in less than a decade, Burbank is perhaps better known in places such as Mozambique, where he's got a huge stake in a massive coal mine, and Kazakhstan, where he's bought a stake in a big phosphate mine.
Here in the States, he made his biggest coup in 2007 by wagering a fortune against residential real estate and earning more than 210% for his investors. But that only provided him with the capital to pursue his real ambition: cornering the market on stuff that China needs to pursue its own big dreams.
Burbank's aim is to anticipate what China wants and lock it up ahead of time. This isn't the freshest idea in the world, but it's the way the head of Passport Capital in San Francisco pursues it that stands out: not just with common stock and modest private equity pools but with control of real, undervalued assets. Or as Burbank puts it, "stuff that's hard to store," like the sort of high-energy metallurgical coal needed to fire steel furnaces, or the iron ore that is melted into steel, or the sort of potash necessary to turn arid fields into waving fields of grain.
Burbank thinks U.S. Steel (X, news, msgs) and many of its peers are wildly undervalued.
China drives steel spike
The thesis goes like this: Investors believe the Chinese government has determined that it over-stimulated its sprawling economy last year with cheap credit and direct outlays, and is now on a path to end the party by upping the amount of funds that banks must keep in reserve. Foreign investors -- believing that the process of tightening credit will diminish the country's industrial prospects or, at the very least, put a squeeze on expansion, consumer demand and corporate earnings -- have thwacked the Chinese stock market on this news.Burbank believes the opposite is true: Although Beijing is taking smart, decisive steps to prevent a real-estate bubble by squeezing out excess liquidity, plenty of financial liquidity remains to power the Chinese economy into growth that's every bit as robust as the past few years'.
"There was a huge de-stocking of steel, and now we see a big rebound ahead," he said this week. "There's a real chance of a spike here from China and other countries, including the United States, where companies took down their inventories and now have to rebuild them. These are structural deficits."
Burbank observes that China is purchasing as many assets as it can directly, which is to say not through intermediaries but through ownership. It cannot move, though, as quickly as it might want because of political sensitivities, and that opens up opportunities in both public and private assets both for hedge fund managers and individuals.
"We try to get to assets China wants ahead of them," Burbank said. "We deal directly with Chinese buyers and are able to see their determination to do something else with their money than continue to buy U.S. Treasurys.''