Ken Griffin Talks Crypto, Digital Currency and the Future of the Economy

Welcome back. My next guest is Ken Griffin, the founder and CEO of Citadel. Today, the hedge fund manages more than $40 billion of capital. Earlier this year, Citadel's market maker, Citadel Securities, became a key character in what became the GameStop saga. Citadel Securities handles more than a quarter of the trading volume in the United States stock market. He joins me now to discuss what he's seeing in the changing market landscape, the economy, and so much more. Ken, thank you for being here. And thank you for being here again, because you were with us nearly 10 years ago on this, I would say, stage, but we're here virtually at this time. It's great to be here. It's great to see you. I think we're all trying to make sense of what's happening in the economy right now and what's happening in the markets.

Importantly, this morning, we saw that inflation rose 6.2% in October versus a year ago. It's the biggest jump in 31 years.

And I just wanted to get your sense, your feel for what's happening right now. So, with inflation running at 6.2, which is, like you said, the highest in 31 years, the theory that this is transitory is starting to get long in the tooth. And markets are starting to wonder: how fast will the supply chain dynamics rectify themselves so as to bring inflationary pressures back under control, and how fast does this increase in inflation translate into higher wages that will become a more structural problem for the economy in terms of persisting inflation longer? So, we're at a more precarious crossroad today than I think any of us anticipated just nine or 12 months ago. The Fed's hand is going to get pushed pretty hard here by this print today, and they're going to have to make some pretty tough decisions around both the pace of taper and the speed with which they raise rates in 2022.

Are you surprised the equity markets are as high as they are, given what you just said?

The equity markets, let's be clear, it has been a one-way street since the start of the pandemic—straight up. We had the incredible correction, which was breathtaking in both the breadth and magnitude, and then from the bottom of that correction, it's been one way for equities. And so, in any dynamic where every time you're rewarded for just taking risk and betting bigger, in a sense, the market has great momentum because of that. Why wouldn't you buy more stocks today given the positive reinforcement you've seen for the last year and change?

Is that rational to you, though? I mean, when you sit around with your guys at the office, do you say, "This makes a lot of sense"? You say, "This does not make any sense at all." I think it's really frothy.

And we saw that in the price correction of Tesla over the last two days. We're seeing a market that is showing signs of real frothiness, where you've got some pretty significant stock price moves on relatively small events. So, I worry about that. As we move away from fundamental values, as multiples become incredibly high, any form of either policy error or a company having a bad spell is going to result in a pretty dramatic repricing of equities.

You mentioned Tesla. I just have to ask, what did you think when you saw Elon Musk polling the Twitterati for whether he should sell 10% of the company? What does that say?

Well, so first of all, it was 10% of a stake, if memory serves me right. 10% of a stake, I apologize. And I mean, like, look, we live in a whole different world. I've known Elon for a long time. I never thought we'd let our ownership stakes be dictated by a poll on Twitter. But I think it was a move by him to highlight some of the issues at play with respect to Biden's tax policy. We don't want tax policy to drive great entrepreneurs like Elon out of their seats. I mean, if you think about it, it's a relatively small number of American entrepreneurs have radically changed our society over the last 20 years, much for the better, some for the worse. But these individuals, like Elon Musk, like Jeff Bezos, have transformed life.

And we want to keep them in control of their companies as long as they've got the energy and the ambition to keep moving the business forward. So you don't want him selling? I personally don't want to see him selling. Now, he has his own reasons for selling. That's up to him. But I like to see our great companies controlled by the founders that had so much vision.

I was going to get into a conversation with you about taxes later. But since we're here, let me ask. There is a view and a question about great wealth in America—you have great wealth in America—and whether you should be taxed at a higher rate than you're currently paying.

What do you think? So it's fascinating. If we look at the United States in contrast to Europe, Europe had much higher taxes 30 years ago. Now, think about the last 30 years. Name the great success stories in the world. How many occurred here in America? Microsoft, Amazon, Tesla, SpaceX, Apple—the list goes on and on and on. Zoom—we're in a virtual world courtesy of Zoom. This just doesn't happen in Europe in the same way. And part of what has made America the great, great source of innovation is the fact that our entrepreneurs are well rewarded for what they create.

So you think that people would actually leave if there was a higher tax or a wealth tax in the United States? Oh, no, I'm not worried about that.

I'm worried about a cultural shift. I'm worried that people no longer say it's worth going all in on a dream. What about this? And that's an important shift. In the United States, entrepreneurs will go at it time and time again. They'll risk it all. I mean, out of college, I started Citadel. I could have gone to an investment bank. I could have taken a safe path. I started a hedge fund with a dream. Elon Musk—I mean, I was there in the early days of SpaceX. I mean, this man funded this idea that a private company could launch rockets better than NASA. You might say he's crazy, but if he didn't have the sense that he could be rewarded for doing so, would that story have been written? And these stories are written in America.

They're not written in Europe. So I want to make sure that we think about tax policies that maximize revenues to pay for the substantial costs that we have in our country—Social Security, education, national defense, public safety—and at the same time, that we think about policies that encourage entrepreneurs. Okay, but so one of the big issues, though, with Elon in particular,

and people of great wealth—I think Jeff Bezos in certain circumstances and others—is that they are able to take out loans against their assets. And they can effectively, in certain cases, live on them forever. And the question is whether there should be a policy, as almost from a sense potentially of fairness—I know fairness is a tough word, or at least a controversial word—where people say, 'This doesn't make sense. I'm paying in, and they're not.'

So first of all, I think fairness is actually a really important word. And the idea that you can create dynastic wealth and never pay taxes would be incredibly problematic to both of us and to virtually everyone in this country. And that's part of the reason the United States has an estate tax and a relatively high estate tax that comes into play when people do pass. I think it's important that we understand that, first, most of the great wealth in this country was created by people who are alive today.

But, you know, nobody pays. As Gary Cohn famously said, no smart person's paying the estate tax at this type of level. I mean, they've figured out lots of different ways to use trusts and other things to pass some of it.

I love Gary, but Gary's pretty witty and pretty quick with his words. There's a tremendous amount paid in estate tax by a relatively small number of people. More importantly, by giving people a charitable exemption, far more money goes to charity at times that people pass. Keep that in mind. And I think that's an interesting policy debate, which is: what should be the amount that you're given, that you're allowed to give to charity versus paying taxes on your—on your passing if you haven't paid taxes over the course of your life? So there are some real issues here. I think they're, frankly, deeper and longer than we're going to have today on our time together. But I think we want to be very careful to think about the fact it may feel really good to soak the rich.

I think you'd rather have your iPhone.

And you think it's an either-or? I think it's either-or. You're convinced it's an either-or. Let me go back to the markets for a second, because there's a question about inflation, what the Fed's going to do. And there's a question about who the chairman of the Fed is going to be come next year. Do you like this Fed chair? I think he has done a terrific job over the course of his tenure.

Is that a polite way of saying that you would not have him again? No, absolutely not. I think he's done a terrific job. He's been under—you know, he served under the Trump administration. Right. That's a tough spot to be in. And he right now is doing his damnedest to execute on the Fed's mandate. The Fed has a dual mandate: price stability and full employment. That's the dual mandate. Do you think he's doing it right? I think he's doing the best he can do given the policies that come out of Washington. I think we have forgotten the Fed is not all-powerful. The Fed lives in a world where policies that come out of Washington are far more impactful on full employment than changes in monetary policy. You know, we're still at three million Americans fewer employed today than pre-pandemic. There's three million Americans

fewer in jobs today than pre-pandemic, and there are 10 million open jobs. Okay? Why is this? Washington has been far too generous in their stimulus, in their household transfers, and so on over the last few months of the pandemic. They have not been targeted enough in how we generate relief for American families that are struggling. And I was in the White House in March of 2020—I think you remember when Trump was advocating for a Social Security payroll holiday, right? I'm like, "Mr. President, that is not the problem we face right now. The problem we face is the waitress who's just lost her job. It's the person who teaches who just lost their paycheck. We need to address the Americans who have just been forced out of the workforce."

They can't find a job tomorrow, and they don't have the savings to pay for dinner. We've got to protect those people. But we've taken this too far. We now need to have policies that encourage Americans to go back to work, to get back to full employment. That's the job of Washington. Powell can only do so much against the challenges that are created by policy missteps in D.C.

It sounds like you're suggesting this infrastructure bill is going to actually increase inflation?

The infrastructure bill, and there's two bills, right? There's the infrastructure bill and there's the spending bill. And there's no doubt the infrastructure bill is going to increase inflation. It's also going to address some critical concerns of our country. So you're supportive of it? Look, every piece of legislation, there's pros and cons. This was a good piece of legislation. Ports, airports, closing the digital divide. These are really important undertakings that we need to address as a country to invest in our future. The spending bill is just a pork fest. That's us borrowing money from our children, our grandchildren, our great-grandchildren to pay for a set of agenda items that are not going to increase employment right here, right now.

And it's going to put incredible inflationary pressure into play. I'm worried about that.

What do you say to the politicians, including President Biden, who says that the infrastructure plan and this spending bill will actually help those issues because it's gonna allow more people to get into the workforce because there's gonna be paid leave and other things that you might put into the social spending basket?

So again, if you look at the spending bill, of course, there's programs in the spending bill that you and I are going to find attractive or interesting. But we don't have the fiscal freedom to spend the amount of money that we're about to spend in that bill, particularly with the obligations and commitments that we've made to American retirees. The baby boomers are leaving the workforce. We have promised them a retirement, and frankly, a modest one at that. We have to deliver on that promise. And I worry about the intersection of driving up spending, driving up inflation, driving down incentives to work, and then paying for this by a set of soak-the-rich tax policies when the real bill for the commitment that we've made to American retirees has yet to come due.

And we had better damn honor that obligation.

One of the things President Biden said today is that he blamed part of this inflation story on the price of energy. You play in the energy markets in a very big way. And I'm curious what you're seeing. And to the degree that there's a debate happening, on one side, you're hearing people say, look, ESG, this whole idea of ESG is actually causing this. And then there's other people who say, no, this is actually just a cyclical situation.

What do you think it is? This is a complicated situation. I can't pick either of the two as the path. What I can tell you is the following. We are discouraging the production of fossil fuels in North America. And we're discouraging that production at a moment in time where we have yet to transfer to a green economy. Solar, wind, and if you want to be green, you're going to talk about nuclear. This is going to be a 20- or 30-year journey to get to where we want to get to. In the meantime, natural gas is the bridge to the cleanest possible future. And I think the president's spot on. Right? Managing methane emissions, for example, is an important way to reduce the impact that we have on global climate.

Right. But discouraging domestic energy production and making America beholden to the Middle East is mind-blowing to me. I cannot believe that we are in a predicament where we are once again asking Saudi Arabia to provide us with energy. I find it outrageous.

One of the things when it comes to inflation and when you think about the markets, you invariably get to a topic of cryptocurrencies. We talked to Tim Cook, who was with us yesterday, and he said that he's been now playing with Bitcoin and Ethereum himself. He's not prepared to put that on the balance sheet of Apple just yet. But where do you stand on cryptocurrencies and Bitcoin, especially as people think about that as now a hedge against, frankly, inflation? That's the argument.

So we have a moment in time where we have a variety of asset classes where the ascertaining of value is very difficult. If you and I think about a bank, we might say it should trade at 12 times earnings. We could debate, should it be 13 or 14? But when you have to value cryptocurrencies, what is the basis that you use for valuation? And it really comes down to, do I think somebody will pay me more for it tomorrow? In this world of incredibly lax monetary policy, where we have pushed a tremendous amount of money into the hands of households, both with direct government transfers and a reduction in the ability to spend money—we couldn't go out to dinner a year ago. We couldn't go to the movies a year ago.

We couldn't go on a trip a year ago. So we've created a whole new class of savers because we couldn't spend the money a year ago. Some of this money has moved into assets like the meme stocks, like cryptocurrency, and created spectacular mark-to-market wealth. But the question is, is what underpins that wealth? I don't know the answer to that. The theories that I hear, the most attractive one is that one of these cryptocurrencies will replace the current payment rails. Visa and Mastercard will be displaced by a crypto solution that will be a lower cost of making payments happen between businesses and consumers. I don't fully buy that. I don't buy it for a lot of reasons. First of all, who deals with fraud risk?

You have your wallet, you leave it in the room back there, you walk out and somebody takes it. Are you worried about your Visa card being used by somebody else? No. That's exactly right. You know the bank will make right by you. But if that wallet was your crypto wallet and somebody spent all the Bitcoins in your account, who's gonna make you whole for that? So there's a number of issues that haven't been addressed by crypto in the theory around how payments will be made more efficient. And for that matter, the early generation cryptocurrencies, Bitcoin, for example—Bitcoin's incredibly expensive to manage payments on. You've seen the energy footprint of Bitcoin—huge contributor to global warming, if you think about it.

Like, Bitcoin is a bigger contributor to global warming than any form of payments that we use around the world today in aggregate. It's unbelievable. So if we take a step back, people are very focused in a world of new ideas and new creations. I love that part of America. I worry that some of this passion is misplaced when it comes to cryptocurrencies.

So I'm sure you have a lot of young employees at Citadel who are either doing this on their own or calling you and saying, "Hey, man, we should be doing this."

There was a 21-year-old intern that flew to Chicago from our New York office a couple of years ago to tell me why I was missing the big picture in Bitcoin. I wish I had bought the Bitcoins he recommended that I bought, but I didn't. Now, what we talked about was blockchain and the power of blockchain. And I said to him years ago, I said, "I still don't see many solid commercial use cases." And to this day, we don't see many solid commercial use cases. Really interesting technology, powerful way to maintain a decentralized ledger around the world. But for most problems, it's really not the solution that we need.

You know, I think we're going to see Bitcoin be replaced conceptually by the Ethereums, replaced conceptually by the next-generation cryptocurrencies that will have the benefits of higher transaction speeds, lower cost per transaction. Perhaps people will start to think about how to deal with security and fraud prevention better. So you're not worried you missed it?

No.

You're not worried you missed the train? I'm not worried about that. You think the train is actually going to go the opposite way? I think the train is, in some sense, still in the station. I think we're still trying to understand if we want to head to this world of decentralized finance and we want a payment system that's low cost and effective, is it going to be solved by the crypto community or is it going to be solved, for example, by a digital dollar? The Chinese are making a bet all in on a digital renminbi. That's their bet. They've banned cryptocurrencies in their country. They're going with the digital currency. So I think this is very much in the early innings still.

There's a connection, and you mentioned it, between crypto and meme stocks. And boy, do you know about meme stocks? Because you have been on the other end of a meme barrage, if you will, on Twitter and elsewhere over what happened with GameStop and what happened with AMC and whatnot. And I was hoping—I was curious if you've ever talked to a young person who has a view that you're in the middle of this. There's this issue of payment for order flow, which people have lots of debates about whether they're getting, quote, best execution or whether you are either front running them or getting a—they're not getting the best execution because you're skimming a penny off and you're giving that penny to Robinhood.

What do you—what do you say to them?

Well, I mean, I must live in a pretty interesting echo chamber because most of the 20-year-olds that I know are really grateful for the current market structure in America. I mean, they make a point that when I go to trade, I can trade far cheaper on Robinhood or on Schwab's platform or Fidelity or E-Trade than I can trade at the New York Stock Exchange. I mean, they love this. I mean, let's be clear. I go out to dinner with a friend, and he's like, look, there were 100 shares offered, and I bought 5,000, and now I get a price better than the offer. I got price improvement. You don't get that in an exchange-based world. You get that in today's wholesale market that the SEC structured roughly 25 years ago with the introduction of Regulation NMS.

So most of the people that I deal with love the fact that as a retail investor, you basically trade instantaneously, and you get a better price than you get on exchange. They love that. Now, the whole GameStop conspiracy theory, I mean, that's come and gone. It was fascinating to be in the middle of that conspiracy.

For you? This is like a bad comedy joke. I mean, it's like a Saturday Night Live skit, but in real time. Do you have a Twitter account? Do you follow this? I do not have a Twitter account. Does somebody send you this stuff? How does it work in your office? I mean, people come down and just tell me what's going on. But it persists to this day. I mean, it resurged a few weeks ago and then died back off.

What do you think Gary Gensler, the head of the SEC, is going to do when it comes to payment for order flow?

I don't know. I don't know. Here's what I do know. The United States has the most efficient equity market in the world. And the SEC unleashed competition with Rule NMS. And that has been a huge windfall for all investors. Pension plans, endowments, people saving for their retirement, retail investors, day trading. Everybody won on the back of the SEC introducing competition with Reg NMS. Everybody won. Are we going to go back to regulating the markets and taking back the competition that has allowed—it's a tragedy. If he's looking to fine-tune our system, there's, of course, ways to improve our equity market today. We've gone to the SEC with concrete proposals. There's no reason that stocks trade at a one-cent spread in highly liquid names.

We should make that half a cent. We should cut bid-ask spreads in half. We're 100% in favor of this. What would that do to your own margins? I mean, of course, it would compress them dramatically. That's okay. We'll get an increase in volume. We'll get an increase in participation. We'll do fine. I'm not worried about it. And our hedge fund is one of the largest traders of stocks in the United States. For all of the endowments and foundations that invest in our hedge fund, lower transaction costs put more money on the bottom line for people that trust us with their money. So yes, I'm going to advocate for tighter spreads. I think that's better for the markets.

I got two more questions for you. One is related to ESG. There's a huge amount of money that's moving into ESG-oriented funds. And I wonder whether you think that 10 years from now, on a performance basis, those funds will outperform.

I think the better question will be, will those companies outperform? The flow of funds, if that flow of funds continues, those stocks will outperform just because people will be paying a higher and higher multiple. Because it becomes a self-fulfilling prophecy. Correct. The question is, do we get better corporate governance? Do we get a better world to live in? Do those things happen? That's the real question. And then the other question is, is this the right way to achieve policy goals? So, for example, if we look at global warming, you and I would both agree we should try to reduce the carbon output of the world. There's no point rolling the dice when the United States, I'll be clear on this, have you ever, ever gone to sleep at night and worried about having food?

We're lucky enough not to. And that's because America is the breadbasket for the world. So we have a lot to lose in a world that's a warmer world compared to much of the rest of the world. We should protect that as a natural resource. But we should think about the cost that we pay for that insurance versus other options that we have for the same capital, whether it's early childhood education, whether it's work in R&D in pharmaceuticals. I mean, for example, America's success in pharma, Moderna, I mean, these are unbelievable stories. So it's a set of trade-offs. I worry about the indirect nature by which ESG policies work versus, for example, a carbon tax. A carbon tax will get us to where we want to get to much more cost-effectively than the hidden tax

of mandates. Finally, I wanted to ask you, you made some critical comments just a couple of weeks ago about what's happening in Chicago when it comes to safety. And Citadel is based there. You have offices around the country as well and around the world. Are you really thinking of moving?

ABSOLUTELY. I MEAN, SINCE I SPOKE AT THE ECONOMIC CLUB OF CHICAGO JUST A FEW WEEKS AGO, ONE OF MY PARTNERS WALKING ON HIS DOOR, 630 IN THE MORNING ON A SATURDAY, MAN COMES UP, PUTS A GUN RIGHT TO HIS HEAD. He's in the office on Monday. I don't know if I've worked my whole life to live like this. And that's the good story. The not-so-good story is the 24-year-old who was shot just a few days ago a few blocks from where my kids go to school. Now, I brought this issue up in Chicago. And do you know what the response of my governor was? He called me a liar. That's what my governor did. He didn't say, I'm going to take this problem on. I'm going to make our streets safe again. I'm going to make sure that every child in Chicago, whether they're white, black, or brown, is going to be safe.

He took the moment to call me a liar. It's all about politics for him. It's not about our people. So what are you going to do? I'm going to make sure that if he runs again, that I am all in to support the candidate who will beat him. He doesn't deserve to be the governor of our state. But are you planning to stay? That comes down to whether or not we're willing to embrace the policies in Chicago that we need for people to be safe and secure. Ken Griffin, thank you so much for being here. It's good to be here. Appreciate it.

Thank you. We're going to be back.