Soros Fund CEO Fitzpatrick on Market Outlook

good morning here in new york city i am eric shaskar editor-at-large with bloomberg television and delighted to present to you here at bloomberg invest global don fitzpatrick she is the chief executive officer and the chief investment officer at soros fund management the first person to hold both of those titles at soros it's always great to have you here don good morning good morning thanks for having me eric don i'd like to start our conversation by talking about inflation europe is having a proper energy crisis and so is china for those who haven't noticed oil is at a seven year high u.s natural gas prices have more than doubled year-to-date industrial metals are ripping at the fastest rate in more than a decade is this really a transitory phenomenon so first of all i think on the energy side it's largely a political phenomenon i think russia had a vested interest in natural gas prices being high in the context of nordstrom 2 approval and in the context of china i think their decision around australian coal um which is to say not to buy any more not to buy anymore to put them in the penalty box um you know what they failed to realize there is even though the majority of their coal is domestically produced things turn on the margin um so so while both of those i think are geopolitical causes i think the interesting thing is when you look forward high energy prices or high fossil fuel prices um is is is not necessarily a bug of esg but it's it's a function it's an a yeah and it's it's by design that you will promote transition to cleaner energy with higher fossil fuel fuel prices so while not the cause here i think when we look forward this is going to be the new norm where you see spike in energy prices um and it's something i think we have to get used to um to your question on on inflation you know i think we've all been surprised at kind of how long this feels like it's going to last now and the the other interesting thing is um you know a lot of this is supply side inflation and it's not clear that monetary tools really deal well with supply side inflation and i think the risks are that this can become self-reinforcing um and and and again that's something that we're we're relatively focused on so to the degree that you try to predict in the positions that you take what the fed is or isn't going to do if we are talking about supply side inflation and monetary tools as many central bankers including most recently andrew bailey of the bank of england have explained right they just they're they're built for the demand side of the equation what do you think the fed will do so i think the fed is lucky because the u.s consumer is in a good place and employment feels like it's really heading in the right direction so you know i do think we'll get the tapering announcement at the next meeting and i think what was interesting is the speed of tapering obviously it was it caught the market a little bit by surprise in that they they said they'd be done potentially with tapering in the first half of the year um so so i think the fed i think the market liked that the fed is maybe going to be less far behind um but and and by the way if you watched gold in september it was down five percent so i think um you know the fear of the debasing of the us dollar has receded to to to a degree um also by the way um the imf just came out with kind of reserve currency balances and the us dollar has stopped losing ground yet bitcoins at 50 000. yep bitcoins at 50 000. so i think that's the really interesting thing is that um you know i'm not sure bitcoin is only viewed as an inflation hedge here i think it's you know it's crossed the chasm to mainstream it's you know cryptocurrencies now have a market cap of over two trillion dollars um there's 200 million million users around the world um so i think this has gone mainstream from our perspective again more than the we we own some coins but more than not a lot and the coins themselves are less interesting than the use use cases of d5 and things like that let's go back to inflation for a moment to the degree that you think it's going to last longer than people initially expected what sides of that trade are you playing are you playing sort of the classic you know treasury uh side of the trade commodities or commodity volatility or stocks you know that that potentially face margin pressure so we've we've been long some commodities and we are short government bonds not just in the u.s um again real rates are really negative right here um and and i think it's a reasonably safe bet that rates are going to go higher i think the the one counter to that and something that's worth watching and i think checked the rate move last time is bank deposits keep going higher and they're just at enormous level so the amount of bonds banks need to buy on the other side of those deposits is enormous and that will a little bit counter-check you know any material move higher in rates and it's something that's worth watching and you might want to trade trade the ranges here uh what if we're heading into um a stagflationary period right it's a word that um people in the market are using more and more and more and not for me to say whether we are or whether we aren't but is there a stagflationary trade yeah so so um again i i would hope that we're not heading into a stagflation in our area from a human interest standpoint but but to your point it's definitely it's gone from like not being a word that that's common in our industry to to being front and center i think the one counter to that though is coming into covid one of the things that we were really struggling with was productivity and while right now you see kind of wage growth trend clearly kind of firmly in place and i think wages are going to continue to have upward pressure the offset to that is potentially productivity where you're really starting to see some sustained gains and i think that is is ultimately going to be the counterbalance and really really important to avoid stagflation the other thing people keep talking about in addition to inflation and stagflation of course is what on earth to do about china there's been this dramatic shift in domestic policy and regulation right for the private sector with seemingly huge implications for investors who have made so much money on the backs of billionaires like jack ma for example and then meantime the united states is trying to squeeze you know the chinese by cutting off supplies of critical semiconductors in software is china a buy or a cell so china by the way china is incredibly interesting at this point at this moment in time so if you think about where where they are they had residential investment um depending on if you count just first order or first and second and third order something around 10 to 29 percent of gdp but they have a shrinking population so that is definitively unsustainable growth um so if you think about what g is trying to do he's trying to rebalance his economy and by the way in a way that i don't think you or i would argue is not smart but but the way he's in fact he's trying to do some of the same things that people here would like to do but just find incredibly difficult because they're so you know politically divisive uh well by the way a hundred percent i i have no doubt that there's politicians around the world that are jealous about the degrees of freedom that she has but i think that what's caught kind of western investors by surprise is kind of the step function fashion he's doing it in and and the economic damage he's willing to tolerate to get from here to there and you know as an investor i think one of one of the things is you know based on what's happened the past couple of months it's pretty clear um you know every chinese company is viewed to be a state-owned enterprise to one degree or another the other thing i think from an investment perspective that's really interesting and that's gotten a lot of attention from chairman gensler and others is the vie or shell company structure of chinese companies that are listed here and um you know i think that those companies will largely have to d-list and and by the way for a lot of them there's a mechanism for them to just port to hong kong but you know for 20 years chinese tech companies having western capital and a western vested interest in their success very much suited china's goals they don't need that anymore so they can take their 700 billion dollars and and take it back onshore into hong kong and i think that's what they're going to do so when it comes to the u.s chinese listings listings if i were investors i'd be really careful here what about earlier stage investments chinese venture capital for example so again i think um it's going to be a while before those have an avenue to go public there's some really big names that might go public near term in hong kong to make a point but i think overall that path from private to public in china is just going to take longer and valuations i think are you know permanently at lower multiples because of you know because of effectively the state tax and and and state utility that sounds to me don like potentially a big problem for firms like sequoia for example or tiger global that have done so well investing in early-stage chinese enterprises and then you know riding their evolution to the public markets so nobody's going to cry for a sequoia or type of global and i think they have plenty of dollars outside of china that are doing extraordinarily well right now um but you know my guess is there's a lot of debates going on in their boardrooms about how aggressively to invest going forward the other thing i would say about the asset management industry overall um is that they're a little bit economically compromised china has invested a lot of money in western asset managers so it's hard for them to take too hard a stance um when it comes to forward investments are you allocating toward china or away from china um i would say we are not putting money into china right now now i mentioned sequoia and tiger global those firms are emblematic in a way of the shift of money that we've seen out of public markets and into private markets from liquids into a liquids now soros fund management plays both sides of that equation um given the extraordinary returns we've seen endowments right endowments are not known for producing 50 60 and 70 annual returns and yet that's what we've seen because of the allocation they have to some of these fast-growing uh private market investments what are the implications of that so i i think i think this is this is an incredible moment in time to your point we um 2013 there were 39 unicorns today we have 840 some odd unicorns um you've seen um obviously companies stay private longer coming into this year and then all of a sudden you had the fed you know go extraordinarily low with rates and what happens then is effectively your high growth stocks the discount rate is close to zero valuations go through the roof so you have this enormous pool of private companies that now have decided to come public at an opportune moment in time and to your point it's driven just these extraordinary returns but it's also going to create an asset allocation problem to to a degree for these big endowments first of all you saw kind of public market funds start to go into private markets you know last couple years now all of a sudden because of this ipo activity private fund allocations have a large amount of capital that's effectively in public markets and what happens then is they're going to crowd out it's like squeezing a balloon if the typical endowment they say they're 60 40 but they're actually probably 75 you know 25 or something like that in reality but now given these markups that has gone even further so you know call it 90 10 and maybe it's 90 30 because there's a degree of leverage in there what's going to happen is they're going to have to redeem from their traditional public managers that have net exposure so your long onlys and your hedge funds with 60 40s are going to be under pressure because when those acid allocators sit around a table the private equity guys a their returns look better both on an absolute and kind of value-add perspective and if you if you don't allocate to the next fund you lose your spot in line and everyone lives in fear of that right now given given the returns they produced so i think there's going to be some really interesting conversations around those investment committee tables of those endowments and net net i think active managers in public markets will get squeezed the people who won't get squeezed are the big multi-strategies that run low nets so i know you you interviewed ken griffin yesterday um he'll do just fine he actually might be a winner out of this uh what are you doing right you have a choice to make you you unlike an endowment you know don't feel the same kind of pressure to chase those beautiful historic returns right you can be more dynamic in your allocations are you putting more money into private markets do you feel comfortable with your public market exposure and what vehicles you know do you prefer direct drive hedge fund private equity venture capital what appeals to you so we've been running more and more money internally in public markets you know we feel like there are some advantages we can play to and when we look at private markets one of the things we've been doing more and more is trying to have partnerships with those corporates where we can be solution across their capital stack so we're not just providing equity we might might provide a warehouse we might provide a line of credit um or or straight debt and i think being able to to provide kind of that spectrum of solutions in aggregate you get better access um and you become kind of a more valued partner now you're going gonna face the decision at some point in the not-too-distant future because uh one of your probably best i'd have to imagine private investments is the stake that soros fund management has in rivian right the eevee maker or evie pickup truck maker or truck maker let's say backed by amazon also backed by you that's going to go public perhaps at a valuation of 80 billion dollars um are you a long term holder are you going to crystallize some of those gains i think my compliance people might might yell at me for uh for talking about this but you know we're we we think that is a great company and um you know candidly we hope they come public at a little bit cheaper than that um because we want you know there to be a long-term you know value play there you want other people to fall in love with vivian yeah um you know and one thing i haven't asked again just emphasizing sort of the freedom and and the dynamism that you can put to work at soros is whether the recent you know we're approaching correction territory for u.s stocks whether that has whether you felt inclined looking at where valuations were to dial up your cash allocation or whether that's something that feels more appropriate now so we have been building back up our cash allocation um you know last time you and i talked you know we back in march of 2020 we we quickly put about five billion dollars to work and um over the past 18 months we've been building back up that cash buffer so right where we sit today um you know if if we had next crisis we could put another 5 billion to work pretty in pretty short order um that's pretty large that's close to 20 right yeah we use leverage so again because we own a lot of the public securities directly we have the ability to to borrow against those securities um so so we have degrees of freedom i think the typical endowment and foundation doesn't have and again that's we try to use that to our advantage every chance we get um you know in terms of where we are in the cycle we are definitively late cycle um but one of the best trades this year has been selling val um and it's because money there's not a lot of places to go in a regime like we're in now where as i mentioned rates are are very negative in real terms corporate spreads are really tight um so you know i think you still want to own equities i think you can take a little little profits off the table and as i said build up liquidity so you know that that if we do get a kind of a misstep you have room to lean in i also think it matters where you are so if you look at the hang seng on the indus on the year it's down you know 13 while the s p is up 14 so dispersion across countries and across sectors is enormous don we have about 30 seconds to go i'll take this opportunity to ask you for one or two of your highest conviction bets so i think recovery stocks are still too cheap really and um they should be bought here why how's that possible given the i mean given what we've seen transpire the last 18 months so so if you look and this goes back in part to the productivity issue these companies have learned to do things better and i think when you look at the u.s consumer they are flush with cash and they want experience not goods

Channel: Bloomberg Live

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Id: d8XVT6-0apw

Length: 19min 59sec (1199 seconds)

Published: Tue Oct 05 2021