A Conversation with Citadel CEO Ken Griffin - Milken Institute Global Conference 2024

Please welcome to the stage, CEO of Citadel, Ken Griffin, in conversation with CNBC anchor, Sarah Eisen.

Hello, everybody. It's great to be at the Milken Institute. Great to have this conversation with Ken. We've done a few of these, but I think this is our biggest crowd, so... You filled the room. You filled the room. And not only is Ken one of the most successful investors on the planet, he's also one of the most open, so you're all in for a treat. So maybe I'll just start with one of the topics du jour, which is where we are right now. We're in this interesting place where there's been a lack of progress on the inflation front, questions about how much the Fed will cut this year, if the Fed will cut this year. How does the environment look to you right now from a macro perspective?

I missed the word. There's been a lot of progress on the inflation front, or there's been a lack of progress on the inflation front?

There was a lot of progress and now there's a lack of progress.

It's a bit of a story of two different important series of economic data. When it comes to goods—to goods—inflation has certainly decelerated. And that's due to the fact that the supply chain crises that gripped the world both during and post-pandemic have been materially resolved. So the goods shock has largely faded. Services is a whole different story. What we're seeing is a roughly 4% inflation rate in services, which are, of course, a material portion of the entire US economy. That inflation is more concerning because it's stickier—very strong feedback loops back into wage growth, much more likely to persist. And that's a big part of the reason as to why the Fed is having apprehension about lowering rates too quickly.

And I give the Fed real credit. It is better to be patient than to cut rates and have to pivot and change course. If they went the second route, it would be devastating to the credibility of the Fed. So the Fed's current mindset of "let us be patient" is a much better position. Now, I wish they married that with a choice of words, to not talk about how they're going to cut at the first possible moment, because that just continues to fuel some of the inflationary pressure. It's a little bit self-defeating. But big picture, they're making the right call by being more hesitant to cut rates.

So do you think we'll see a rate cut in 2024?

What's interesting is the likely timing is right in front of an election. And that would be—that would be sort of out of character. The Fed's largely viewed as being politically agnostic. And I think a Fed rate cut right in front of this election, particularly given how politically charged this year is going to be and has been, I—they might. I just wish they wouldn't.

You wish they would not?

No, I don't.

You don't want to have them be seen as political?

I do not want the Fed to be seen as political because they say they're not political, right? And you're also hearing President Trump talk about how the Fed should have more—should be more directed by the White House.

Yes, there was that report that some of his allies would like to see that. So it sounds like you think that's a bad idea.

Well, I mean, for choice, I'd like to think the Fed acts independently of the White House and Congress and does the best it can do to hit the dual mandate of managing both inflation and unemployment. Now, part of that is premised on the fact that you'd expect the White House and Congress to be fiscally responsible.

Which they're not, right?

We haven't seen much of that in recent—in a long time now, actually. And so what you've got now is the Fed has a very tough job, right? You know, Powell's trying to control inflation while we're at full employment, while we're several years into a really strong period of economic growth, and yet the federal government's running a deficit of roughly 6%. So the lack of discipline on the spending side, which both creates inflation, makes the Fed's job much harder.

So, okay, so you don't think they're going to cut in September, at least you wouldn't like to see that. What about December?

So if they haven't cut in September, they're likely to cut in December. Again, there's still a question of: will inflation actually decelerate enough by then?

Will it?

That's the question. Wage growth sticky, core inflation sticky, deglobalization.

Happening.

Happening. That takes away from the constant deflationary trend that has helped the pricing of goods for, frankly, most of our adult lifetime.

On the other side, there's AI. That's deflationary, isn't it?

So AI should be deflationary. Should be. The question will be how fast does that really start to hit, let's call it, the real economy. I mean, clearly huge data center spend, huge investment in chips, but AI's impact on business is still small. Having said that, the most powerful part of the AI story thus far is the Chief Technology Officer, Chief Information Officer, depending upon who that person's called in a firm, has now has a very important seat at the table. They've got the attention of the CEO. How can we use technology again to really drive productivity? And being in a room with corporate leaders and debating AI is really fun. I'll ask the question, "So tell me how you use AI at your firm today."

And you get these big smiles, and you get these really enthusiastic answers that have almost nothing to do with AI.

But they're really powerful stories of how to use machine learning and how to use technology to increase productivity. And that's a really powerful and important fact, that the rise of AI is once again really opening the eyes and the mind of the C-suite to more thoughtful uses of technology.

Do you think that will continue to support the market, the S&P 500?

So there's no doubt that the focus on driving productivity through the use of technology is, again, in ascension. And there's no doubt that that's helping to drive the bottom line of Corporate America. This is a good outcome for our country.

So you mentioned the deficit and the debt, and I wanted to follow up on that because you've been warning about that now for a while. What's the fix? Because you don't want to see higher taxes, right?

So, big picture, we're going to have to be adults in the room about this. If we're going to go ahead and have a Social Security program that provides even a modest standard of living for people in retirement—and that's a stretch with today's system—we're going to have to think about how to fund that system. And that's gonna require everybody to put something on the table, whether it's changing retirement ages, tax increases, and otherwise. We're gonna think long and hard about how to make our Social Security system work for the American people. And it's gonna involve a legislative branch and a president willing to make some pretty tough choices, but choices that we need to make to protect the retirements of those who are currently retired and those who are going to retire in the decades to come.

Tax increases, longer before being able to receive Social Security, and here's the political third rail: even means-testing Social Security. But we're gonna have to have a mature conversation about the weights on those three different decisions we need to make to bring the Social Security system into sustainability.

It's not really happening.

No, it's not. That conversation, right? We don't do tough conversations on American fiscal policy. We haven't for 15 or 20 years.

Because everybody likes lower taxes and higher spending.

You know, it always feels good to pay less and get more.

But it hasn't been a problem in the bond market. I mean, every time there's a little bit of worry about auctions, then, you know, we see the demand. We haven't seen a failed auction. I know there's a lot of borrowing. China's doing less of it. But so far it's been okay, hasn't it?

So far, so good. But the problem with markets is when they change their mind, they tend to change them in a very profound way very quickly. And having the financial flexibility of a more sustainable rate of spending and a smaller deficit gives us much more in the way of degrees of freedom to deal with the next global crisis, to deal with the next economic setback. And we're losing that degree of freedom by having the profligate spending right here, right now. I mean, here, simply put, how do you do counter-cyclical spending in a recession when you're already running a deficit of 6% near peak growth?

It's going to be hard. It's going to be tough on the Fed again.

Right. And then at that moment in time, we're in America's in a recession. You're going to have headlines about has America lost its global standing? Right. The headlines get worse when we're in economic trouble right now for the whole world. One country stands above all others as a destination for capital. It's here. It's here. But when our economy never really hits a speed bump, that narrative changes.

When are we going to hit a speed bump? Are we even going to have one this cycle?

There is a cycle. We just don't know when it ends. But we have not ended the business cycle.

You see a downturn, a distressed default cycle, all that? All those things that used to happen?

It's going to happen again. I don't have to see it. It just will be. We have not suspended the reality of the business cycle.

And that's when you think the fiscal issues come to the fore.

Front and center. Front and center. And some of the early signs of global anxiety about the US federal spending—China's positions in Treasuries are down roughly 50% from their peak. China has been a net buyer of gold for 17 months running.

Does that make you want to buy gold?

Are they going to buy it for another 17 months?

Sounds like it's a trend.

It's certainly a trend.

Should people be buying gold if you're worried about the U.S. fiscal position and standing?

The answer is one should be anxious about how to manage a depreciation of the dollar or a level of higher sustained inflation. I have a hard time being a gold bug. Gold doesn't add to our economy. I'd rather have Americans think about what stocks to buy, which companies will do well in that environment, to plow our resources back into growing our economy rather than putting gold under our mattresses.

So we should just be anxious and buy good companies?

No, we should actually make sure that we start to tell our people in office, you need to start to make some tougher decisions.

And tougher conversations.

And tougher adult conversations.

You mentioned the dollar, and we've talked about this before, the weaponization of the dollar, which is, I think, a word you use for it. How concerned about this should we be? Because people have been warning about the dollar's demise for a while, and the truth is there aren't really that many alternatives.

So there are not clear alternatives to the dollar as a reserve currency. But imagine a world in which reserve currencies don't give you a sense of having reserves. You hold dollars because that's the asset people want to own in trying times. That's why the dollar is so special. But if it's viewed that America will be part of the problem when times are tough, owning dollars does little for you.

And that's where you think we're going?

We need to manage against that downside.

How do the geopolitics fit into this? Sanctions, countries, alliances against the United States like China and Russia?

Well, so the issue with sanctions is they're an immediate feel-good moment. We just did something to push back against somebody whose position's adversarial to the United States. But when we freeze their dollar assets or foreclose them from using dollars, we tell all countries, "Think about how many dollars you want to have as part of your balance sheet, because if you cross America, you can't use them."

Are you specifically referring to, I guess in the new aid bill, there's a provision that we freeze Russian assets in the US and can help contribute that money to Ukraine?

Right, but "can help contribute that money to the Ukraine" can be changed as "and can take that money, seize that money, and give it to the Ukrainians."

And you think that's dangerous?

I think that's—I think that's a really terrifying choice of direction for us to go in.

Why?

Because which other countries—and, you know, the world's a very complicated place right now. If you're in Africa and your military equipment is provided by the Chinese, do you worry the United States might exact retribution on you by freezing your assets?

We can, right? Isn't that the beauty of the reserve currency?

Okay, so if you're that African country, how much do you want to depend upon the dollar?

Right, so you want to do more trade in RMB.

You want to do more trade. You want to do more of your economy in currencies other than the dollar.

And this is the big worry. So what, you don't like sanctions?

No, I don't care for sanctions. I think they're a cop-out choice.

What should be done instead?

What should be done instead? I mean, fortunately, we just did support the Ukrainians with real money and real arms in their battle against Russia. That's a move in the right direction. That's taking a principled position and standing behind it with real resources. That sends a much stronger message to the world about what we stand for and how we're prepared to defend countries who share values and interests aligned with us.

There are questions about whether that funding continues, especially if President Trump gets elected again.

There is. There's actually questions about whether or not the U.S. will continue to fund Russia no matter who's elected this November. Ukraine, yeah. Yes. Sorry, Ukraine.

Yeah. And you think that's a problem?

I do. Yeah.

For America's standing.

Look, I think that both the United States and Europe have a very, very profound interest in not letting Ukraine fall into Russia's hands. If Ukraine falls into Russia's hands, the next border is a NATO country.

Right. But it's not clear that that's going to continue. So what happens? How do you prepare for a world of that uncertainty, of that magnitude?

So this is an important concept that we need to wrap our heads around. If you're always reacting in the moment of crisis from a position of weakness, it is a catastrophic scenario that you have to contemplate. Good policy is about what you do to make sure you never face that possibility. That's what real leadership's about. It's about what do you do to foreclose having to make the existential decision. If we hold the Russians in the Ukraine and keep them pinned down there, I don't need to worry about my son being drafted to protect NATO. It's an easy decision to make as a father and as an American to support the Ukrainians and hold the line in the Ukraine. If I want to have a country that has access to global capital that flows into my country to support a level of research and development that is unprecedented in the world, no country comes close to American R&D.

Then I want a currency that's a reserve currency. I want to protect my fiscal standing in the world. I want America to be that destination for capital. If I want people who work their entire life to retire in dignity, I need to have my fiscal house in order to protect Social Security benefits. These are decisions you make as a leader. You make before the crisis becomes a possibility so that the crisis can never become a possibility.

You need to run for president, Ken. Do you see that leadership anywhere?

It's been in short supply.

Would you ever run for office? Look how many people would support you.

Sarah, you like to torture me with this question. The problem with running for office is you actually have to run.

You have the money. All right, so should we move on beyond the economy?

No, but seriously, we have an election coming up in a few months. I don't think you've said who you're supporting, and it sounds like you're not thrilled with the options.

So I've said before, I'm very active in House and Senate races. For the White House, it's a much more difficult set of decisions that each of us will have to make come November. The good news on the Trump side is the names being thrown about for his Cabinet are really good people. So I feel much better about the narrative that Trump will have a hard time attracting good people. I've seen a list of people that are interested in the various roles. These are really good people. So I feel much better on that front. On the Biden front, we've got challenges with the perceived strength of the American presidency. This is heartbreaking because it's the disconnect between policy and the perception that America will stand behind its policies.

For example, China has crossed one of Biden's red lines. Now, what are we going to do?

With funding Russia militarily.

What do you think this administration is going to do?

Nothing?

You said it, not me.

I don't know.

No, I... Well, no, you know what they're gonna do? They're gonna do sanctions. The first answer's the right answer. And that, again, draws into the area of what is the American credibility with our allies, with the world, and standing behind what we say. And that's been a consistent issue for the last, again, for a very long period of time that erodes the reserve currency status, that erodes the sense that America is a consistent and reasonable force for good in the world. So both sides have their issues and challenges. Here's all I hope for. I hope in 2028 we have two great candidates on two sides.

Yes. I think we can all agree. You said you're funding state elections, more local elections. Where do you see the best leadership right now? What excites you about, hopefully, 2028?

Well, actually, I know you were in Miami this weekend.

I was. F1. Who wasn't there? Flew in late last night. That was a great race, wasn't it? You were there.

It was a spectacular race, and then there were great parties in Miami, but let me tell you a little bit about Miami. Pitbull gets up and puts on a phenomenal performance.

So glad I was there, yes.

And 20 minutes before the end of the concert, he stops. Do you know what he stops to talk about?

I remember him thanking you on stage, actually.

Well, he thanked a number of times. He thanked everyone in the room for investing in Miami to start with. Yeah. Now think about this, you're at a performance by a musician which opens with, "I want to thank everybody here for investing in Miami." There's a reason Miami is in a state of doing so well. It's the support of the business community, the civic community, and government working together. Number two is, he stops two-thirds of the way through the concert to talk about a school he supports that serves inner-city children. Like, Taylor Swift, take note.

Wow.

No, take note.

I think she's doing just fine.

She is. But he didn't make that stop in his performance about himself. He made it about the importance of education in America.

That's something that you've been very big in terms of your philanthropy, your views on changing things. Look, I think we do have to talk about education in America, Ken, and we have to talk about this moment we're in on college campuses because you've been a huge backer, one of the biggest ever at Harvard, and it's a disaster. What's happening there? How do you feel about all this?

Well, so I'm going to go back to my last point for a second, though. It's important that American celebrities start to take up the fight on education and help to bring the American voters forward because the failed education system is what you are seeing play out on the campuses of the Ivy League schools today. The only thing I can say about Harvard is right now we look much better given what we see at Columbia.

Which is not saying a whole lot.

But you got to take what you get.

Why are the—why is the leadership not stepping up on this?

So this is—I just—I scratch my head. I do. I scratch my head. I mean, and the audacity, the students seize one of the halls, commit acts of vandalism. And I love this. And then try to negotiate for humanitarian aid.

It's a parody.

I mean, I mean, if this could be Saturday Night Live—actually, has a bit of Saturday Night Live.

Yeah.

SNL, note to self: this Saturday, the entire performance could be skits on American campuses, except the state of Florida. And I love it when Ben Sasse says, 'We don't provide daycare for our college students.' I mean, that's leadership, and we need more of that in America.

Is there anything you can do as a donor? Speak out. I mean, is there—is there any—any way that—these are our future leaders, right, at all the best colleges in America? Hiring decisions, maybe? And what should the business community do? What should investors do? Should donors do—so, you know, donors—

And this is important. Everybody in this room has a really big voice in local policies, whether it's with the universities they're affiliated with, whether it's their local government. We need to use that voice to drive needed change. As a donor at Harvard, I've made it really clear: I am going to curtail my charitable giving until Harvard recommits itself to meritocracy in a very public and profound way.

What did they say back?

What did they say back?

Did they respond to you?

Not in a way that makes me satisfied. I mean, this should not be complicated. Harvard has a moment to say, 'We are going to recommit to educating the next generation of leaders who will serve the interests of the American people. Whether it's in government, whether it's in business, whether it's in the philanthropic realm, we're here to educate that next generation of leaders in America. And we're going to root people in an education and cultural experience that exemplifies the best of Western values.' I do not understand where this shame has come from in the history of our country. No country has done for humanity what America has done. This doesn't mean that every chapter of our history is our finest moment, but there's no country in the world—

—none that has done as much as this country has done to elevate the concepts and the reality of freedom. And we need to be proud of that history. We need to teach that history. We were the country that saved the world in World War II. We saved the world. And that's, like, lost on these students. They are brought up in this strange world that America is not intrinsically a force for good. That's who we have been. That's who we need to be. That's what our colleges need to prepare our students to be—is to be leaders of the free world.

And in the meantime, just go to Florida.

So I'll make it simple. I'd like to think Florida will be an example for the rest of the country about what freedom represents. You know, I was with Mayor Suarez, uh, a few weeks ago, and, you know, we talked about—I may be off by one or two—oh, we have 682 people in the streets of Miami who are homeless. His goal: zero. Zero. We will be the first major American city that ends homelessness.

Harder to do in San Francisco or New York City.

Well, that's just a cultural difference now, isn't that? Because New York's three times the size of Miami, so maybe you should have 1,800 people. What's gone wrong in New York leadership that you have such a mess? I mean, Miami, we have 33 murders. Do you know how the mayor feels about that? That's 33 lives that should never have been lost. And we're gonna make that zero. And it's the lowest number of murders in Miami since we started keeping records in the 1940s. Why have we allowed murder and homelessness to become accepted in American cities? It's absurd. It's the most successful, most powerful country in the world. We should have safe streets. We should end homelessness in America.

No disagreement there. So, Ken, I mean, we've talked about a lot of things here that you've painted actually kind of a dark picture, the fiscal situation, the dollar. All of this is kind of scary.

What's dark about ending homelessness? Ending homelessness is good. What's dark about ending murders?

Because it's not happening countrywide.

Right. So perhaps the rest of America needs to start to open its eyes and look at the success stories that we have across our different states and our different universities. And we need to start to rise to the occasion to emulate what are the best practices from across our great country. We need to be less parochial, more both global around the world, but also our eyes wide open about what's happening across our country. There's enough wins. In New York City, you and I were at Success Academies.

Yes.

How do you not smile when you're in that school and seeing what those kids accomplish?

This is the largest charter school network in New York that you have been very supportive of. Yes.

It would be one of the largest school districts in New York. It is also the single most successful, and with a demographic that would imply it should be one of the single most challenged. Eva Moskowitz almost does God's work with those kids. She'll put those kids into college. She'll put those kids on track for really successful and rich lives. It's happening in America. We just need to fight to make it happen everywhere.

What I was going to ask is beyond education, is there something you're most philanthropically, in the markets, most excited about right now in terms of an investment opportunity and also a force for good?

So I do believe that the machine learning, AI revolution, which is tied into the greater revolution of the use of technology, will continue to increase productivity. And we need that to happen in our country. What will be interesting is what are we going to be able to do to increase learning in the classroom with technology. Obviously, when it comes to healthcare, we're on the precipice of very personalized individual healthcare. We can sequence now when you have cancer exactly what mutations you have, what drugs, what radiation treatment is most effective to defeat that cancer. There's a lot of really incredible things happening that are on the leading edge of what's taking place with technology today.

I'm really excited about that. I mean, people lose sight of the fact of how far we've come in 20 years. I handed my iPhone to my colleague before we came on stage so it wouldn't ring. That iPhone has the computational power of a Sun E10K, this 10,000 system that we had 20 years ago. That cost us a million dollars a box 20 years ago. It's now my $1,000 phone. The computational revolution that we're seeing in our lifetime is truly, truly one of the most transformative moments in the history of humanity.

So buy Apple shares?

Well, don't we wish we did?

What's the next one?

I wish I knew the next one. I wish I knew the next one. But the great thing is the next one's being created right here, right now. Whether it's in L.A., whether it's in San Francisco, whether it's in Miami, New York, or Chicago, that next Apple's being created right here, right now in someone's proverbial garage.

It's a perfect, optimistic place to end the conversation, which—I know you're not a pessimist, so thank you. I was happy we didn't even get to Gary Gensler. The good news is Ken will be on CNBC in just a few minutes, so more to come. Thank you.