Bill Ackman: How to Get RICH During Inflation (RARE New Interview)

again my view is inflation or kind of the house view is inflation is going to be persistently higher and that can to happen in the very short term like like literally weeks and I think the structural forces have changed billionaire investor Bill Amman just issued a warning about the future of inflation but don't worry it's not all bad news and you'll see why during this video for background Amman recently gave a rare full length sit down interview while this interview touched on a wide range of topics it was amman's comments around that really caught my attention you're going to want to hear what he had to say so in this video we're going to cover amman's thoughts on the economy why inflation is here to stay and most importantly how you can protect your money from the devastating impacts of high inflation let's get into it are you are you still figuring that rates at the long end the 30-y year for example or however on the long end are still going to go higher yes I I look I think there's even in the relative short term there are a number of reasons why rates can move a lot among them right we have a government shutdown we're going into what looks like a highly probable government shutdown we're going to have a data shutdown right all these little government agencies that put out data that the Federal Reserve relies on to decide whether to you know adjust interest rates they're going to lose access to that data so kind the sort of like kind of dark period uh we have probably the worst technical environment in our lifetimes for supply of bonds versus buyer bonds right we have China selling we have Russia to the extent they own us Securities and more selling we have Saudi Arabia selling um and uh you know we have an economy that is still strong and inflation you know three and a half 4% uh persistent but you know my our view is basically you're not being paid enough to enter into a 30-year contract with the US government at a fixed price you know 4.7 or wherever it is now um doesn't make sense in a world where we think structural inflation is north of 3% for for the for the very long term and we went through this very unusual period with extremely low interest rates um you know where everything just got cheaper and you know you know since the financial crisis you know the effort of the Federal Reserve was to make sure we didn't have deflation you know let's the aspirational goal is to get to 2% inflation and then the pandemic and you know trillions of fiscal stimulus you know the psychological stimulus of being free to to roam after being locked up you know all of these factors coming at once kind of lit inflation and we still have this massive deficit spending we still have infrastructure uh spending and the government's selling literally hundreds of billions of dollars of Securities you know uh um bills and and and at some point they're going to have to sell more and more of the longer instruments and if you look at the balance sheet of the Federal Reserve it's it's it's an imprudent balance sheet uh you know if you think about the United States right if you were If This Were Like a business you wouldn't have so much short-term you wouldn't have you know a third or more of your debt repr pricing within the next year you know so it's not been managed I think actually steveen did a good job as treasury secretary the one thing he missed is he should have issued a lot of 30y year 50y year 100 Year paper at at at crazy low interest rates and and that's going to be a burden hearing a hearing a lot from investors these days Ken Griffin was on our Network within the last week or so I just had a conversation with Rick reer of black rock those who are talking about the possibility of much higher real rates for much longer than people think for the very reasons that you're talking about the issuance is so massive and where are the buyers going to come from and the result of that is going to be higher yeah I don't about much higher real rates uh I think we're I think you know again my view is inflation or kind of the house view is inflation is going to be persistently higher well you are the house I I guess I control the door on the way in and out I guess but um you know our our view is really that uh we're in a different world and you know the world sort of changes gradually uh and you have a generation of people are used to rates you know four sounding like a high interest rate and and it's you know on a historical basis it's extremely low rate of interest so I would not be shocked to see you know 30-year rates well you know well into the you know through the five barrier uh and you could see 10 the 10-e approach approach five Jamie and that and that can happen in the very short term like like literally weeks a huge move in the last number of weeks and I think a lot of that is investors kind of rethinking you know what's interesting about the 30-year treasury is people reflexively uh buy it whenever they you know because they've made money doing it in advance of a of recession but it's really not an instrument you should use to speculate on the short-term economy it's it's a fixed price contract with the US government for 30 years and reflects really structural forces and I think the structural forces have changed over the past couple of years inflation has been at levels not seen in Generations in June 2022 inflation had a peak of 99.1% you have to go back roughly 40 years to the early 1980s to find a period of time in which inflation was this High it had been decades since inflation was a legitimate concern for the US economy and it's crazy to think about it now but just a few years ago economists were worried about inflation being too low take a look at this chart showing inflation in the US over the past 20 years Focus particular attention on the time period from 2009 to 2020 during much of this time period inflation hovered awfully close to 0% in fact inflation was negative or nearly 0% multiple times during the decade this Dynamic had governments businesses and people worried not about inflation but instead deflation deflation is a decrease in the general price level of goods and services or put another way deflation is negative inflation at first this may sound like a great idea however defl does come with its own set of nasty challenges in order to prevent the US from slipping into deflation the US Federal Reserve established a Target annual inflation rate of 2% in the year 2012 for much of the next 8 years the FED struggled to get inflation up to that 2% Target as a result many economists believe that inflation would never again be a problem in the US oh boy how things can change and they definitely did in a major way in 2020 to understand why Amman thinks inflation is here to stay you have to understand why inflation occurs in simple terms inflation happens when the demand for goods or services outstrips Supply while that may sound like a complicated concept trust me it's actually very simple here we have a supply and demand graph this line here represents the demand for a particular good or service in this example let's say we're talking about used car cars the demand line represents the number of people looking to purchase a used car and importantly how much those buyers are willing and able to pay and here we have the supply line This supply line represents the number of used cars available to be purchased at any given time the point at which our two lines cross represents the price for that good or service so in our example the average price of a used vehicle for 2020 and 2021 the US government and fed took drastic steps to prevent widespread economic collapse which involved sending cash directly to households boosting unemployment benefits and pausing required payments on certain types of debt at the same time that all of this cash was getting pumped into the economy the FED slashed interest rates to historically low levels these lower interest rates made it less expensive for people and businesses to borrow money to make purchases going back to our example with used cars these actions resulted in an increase in demand for used cars people had more money in their bank accounts to be able to spend to make the purchase Additionally the lower rates made it less expensive to purchase a car using a loan all of these factors led to an increase in demand illustrated by our demand line here getting pushed to the right at the same time Automotive manufacturers were suffering through supply chain issues that limited their ability to produce new cars since there are less new cars available people held on to their current car longer resulting in less supply of used vehicles available for sale less Supply means our supply line gets pushed to the left notice now that the two lines cross at a much higher price point as we can see in this graph here these shifting supply and demand Dynamics caused Prices for used vehicles to Skyrocket essentially doubling in a period of just 12 or so months this of course is a simplified explanation of how inflation works but it does convey the important message inflation happens with when there is too much demand for a good or service relative to the supply available in the market while many people are making the argument that this inflation is only temporary ecan disagrees he thinks we're in for a new normal of consistently higher inflation here's what he had to say on Twitter the world is a structurally different place than it was the Peace dividend is no more the long-term deflationary effects of Outsourcing production to China are no more workers and I's bargaining power continues to rise strikes abound with more likely to come as successful walkouts achieve substantial wage gains the green energy transition is and will remain incalculably expensive and higher gas prices will raise inflationary expectations just ask your average American they see the prices at the pump and in the grocery store and don't believe inflation is moderating to make matters worse High inflation also likely means even higher interest rates in an attempt to get inflation under control the FED has had to raise interest rates at the fastest clip in Generations as we can see in this chart here these actions had been successful in bringing inflation down from its peak of over 9% however if Aman is right and inflation proves to be sticky interest rates would have to go even higher these higher rates would dramatically weigh on stock prices however Amman is not worried and here is why you must be negative the equity Market how could you have a positive view of stocks if you think that that's the outcome for bonds yields because if you own high quality uh key is owning businesses that have pricing power businesses that can do well in a world of and by the way many businesses can do well in a world of 3% inflation the key is it's hard to manage a business in a world where inflation is volatile or or inflation is 8% or you know the kind of crazy numbers um but many many businesses can do very well in a world of a 3% inflation and the kind of companies we own they're very much like royalties you know so we own Universal Music which is a royalty on listening to music if there's PL music playing out there Universal is getting a fraction of a penny for every song uh you know that's being streamed um you Google Google's a royalty if you will on people advertising you know on the web right or on YouTube uh restaurant Brands is a royalty on people eating at Burger King or any of their various Concepts Hilton is a continue you know royalty on people staying in hotels and and and uh eating and drinking and going to events the beauty of these kinds of businesses is you know actually inflation is ultimately their friend right as long as they can keep their cost as long as their costs don't inflate as quickly as their as the revenues and I think the nature of those so so I I feel comfortable owning those kinds of uh businesses even if inflation remains high and and also again I historically you if you think about you know what is the value of a business the president doesn't value the cash you can take out of it over its life discounted back at an appropriate interest rate we were not discounting businesses back using 2% as an appropriate rate of interest so we' historically you know our discount rate we've used you know just rough measures more like 10% uh 9% you know numbers which discount the uncertainty inherent of investing in equities take a look at the list of stocks Amman owns believe it or not his $1 billion fund consists of just seven companies note it is eight stocks but he owns two different share classes of alphabet these companies include the restaurant Chipotle restaurant Brands International parent company of Burger King Tim Horton popey's and Firehouse Subs he also owns the hotel chain Hilton Home Improvement retailer Lowe's real estate company Howard Hughes railroad Canadian Pacific Kansas City and alphabet parent company of Google and YouTube after spending hours deeply studying these business businesses in amman's portfolio there are just two main traits that help these companies not just survive during inflation but Thrive as crazy as it sounds for many of the stocks ammin owns these companies would actually do better with higher inflation the first trait that helps companies weather inflation is what is referred to as pricing power pricing power is how much a company can raise prices without negatively impacting customer demand to demonstrate the concept of price power let's use Canadian Pacific Kansas City a stock acman owns cpkc is a railroad with a super simple business model companies that want to ship their products long distance pay cpkc a fee for that service this here is a map of cpc's network if you're a company looking to ship your product from Vancouver Canada to Loro Mexico you really only have two choices you can pay to have that product shipped there by truck which would be incredibly inefficient and expensive or you can pay cpkc to do it for much less this Dynamic gives railroads a significant amount of pricing power they can raise prices because often they're the only choice shippers have another example of pricing power in amman's portfolio is the restaurant Chipotle over the years Chipotle has developed a loyal customer base the company is consistently ranked one of the country's favorite fast casual restaurant chains because of the Chipotle has incredibly High pricing power especially for a restaurant in fact when inflation was at its peak in 2022 Chipotle was able to raise prices to offset the higher costs even with these higher prices the CEO of Chipotle commented that customers were still picking their favorite meals and continuing to purchase premium offerings the pricing power that companies like cpkc and chipotle have stands in Star contrast to the average business as Warren Buffett puts it if you've got the power to raise prices without losing business to a competitor you've got a very good business and if you have to have a prayer session before raising the price by a tenth of a cent then you've got a terrible business I've been in both and I know the difference the second important characteristic you would want to look for in a business is so-called asset light an asset light business doesn't require a large amount of expensive physical assets to operate probably the best way to explain asset like companies is to give you an example of an industry that is not asset like so you can see the difference the airline industry is an example of an extremely Capital intensive industry in order to operate an airline you obviously need a ton of airplanes those things sure are not cheap airlines spend tens of billions of dollars purchasing these planes additionally these airplanes don't last forever they get old and have to be replaced with newer more expensive expensive planes I went through the financial statements of the company American Airlines and saw that they had nearly $40 billion worth of aircrafts at the end of 2022 even more crazy is the fact that American Airlines has a market cap of only $8 billion this means that the aircrafts required for American Airlines to run its business are worth five times more than the value of the entire company crazy to think about asset heavy companies suffer during inflation as they are constantly having to spend larger and larger amounts of money replacing the vast amount of physical assets needed to run their business compare that to one of the stocks Amman owns in his portfolio restaurant Brands International owner of Burger King Tim Hortons Popeyes and Firehouse Subs restaurant Brands International or RBI for short operates a franchise business model this means that RBI doesn't own each individual location instead locations are owned owned and operated by local entrepreneurs these local entrepreneurs are called franchisees these franchises put up the money to acquire the real estate renovate the location purchase the equipment and inventory and pay the staff the franchise or or in our case RBI provides the franchisee with its products branding and knowledge in exchange for a fee this fee is usually a percentage of the sales at that location the franchise business model has a huge benefit for RBI RBI does not have to spend the money that is required to open and operate the location a figure that can range from hundreds of thousands of dollars to upwards of multiple Millions depending on the brand and the size of the location this makes RBI an incredibly asset like business they don't have to own the real estate the equipment in the restaurant or any of the inventory not only does this Dynamic help RBI be less impacted by inflation inflation can actually be a good thing for them let's say RBI gets a 10% cut of the sales of each location this means for every $10 order RBI will get $1 if over a few years inflation causes that $10 order to now cost $15 RBI is now taking its 10% cut of a larger number instead of making $1 from that purchase RBI is now making $150 a 50% increase this is what Amman meant when he said you want to look to buy stocks that are quote royalties on an industry only time will tell if amman's prediction about inflation and interest rates come to pass after all it's fair to say that Amman is let's just say a polarizing individual one thing is for certain he does know a thing or 3.6 billion about investing so there we have it make sure to subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors [Music]

Channel: Investor Center

Views: 300,149

Keywords: Bill Ackman how to get rich in inflation, Bill Ackman inflation, Bill Ackman interest rates, Bill Ackman cnbc, Bill Ackman cnbc interview, Bill Ackman interview, Bill Ackman, Bill Ackman portfolio, Bill Ackman stock portfolio, Bill Ackman speech, Bill Ackman interview cnbc, Investing, Stock market, Stocks, Swedish investor, New money, Investor center

Id: IOSDInl3jVI

Length: 19min 5sec (1145 seconds)

Published: Mon Oct 16 2023