In Conversation with Ken Griffin - Bloomberg New Economy Forum 2022 (w/ Erik Schatzker)

Ken, great to have you here in Singapore.

Eric, it is a pleasure. Thank you for coming.

Folks, one of the many reasons I was excited to have Ken Griffin here at the New Economy Forum is because he's really good at finding the signal in the noise. And there's an awful lot of noise right now. Ken, you run, at Citadel, a $30-odd billion hedge fund. And you also operate the world's largest market maker. And that gives you access to unique sets of data and analytical insights. So I want to know, what is your intel and what is your gut telling you about the state of the world right now?

That's a great question. So the state of the world right now, there's been two big debates. Are we heading into recession? And what's the trajectory of inflation? And of course, the two are intertwined. I think we've been a little bit out of consensus. We have felt that we would not have a recession this year in 2022. And in North America, that's borne out to be true. We are highly confident we're going to finish this year on a modest growth note. Now, the issue, of course, is 2023 when the lagged effects of the Fed having increased rates will really start to grind on the economy. My team, for choice, thinks 2023 we avoid a recession. I'm a little more skeptical about that. I think that for the Fed to truly conquer inflation here, we're going to put unemployment somewhere with a mid-four handle.

And I find it hard to believe we're not going to have a recession at that point in time, sometime in the middle to back half of 2023. So a little bit of internal debate, and frankly what makes Citadel so special is we have these debates endlessly, and it pushes all of us to think more critically about our perspectives, our views, and of course ultimately the investment decisions that we make. On inflation, we think we've seen peak inflation. Now, owner's equivalent rent, which is a big driver of inflation, because of the way it's calculated and estimated, we'll see that continue to show inflationary pressure for the next few months. But spot rental rates appear to have peaked in many metropolitan areas a few weeks ago.

So we think that one of the biggest drivers of consumer prices, which is rent, has reached near-term peak. And then energy prices are likely to roll over in 2023 as compared to their 12-month prior. So two of your really big drivers of inflation, energy, rent, we think we've seen a peak in. And then across goods, we think this is going to be a really good holiday season for consumers because American companies have built up such a substantial inventory of goods that they're going to need to sell here heading into the holidays. So we think we're going to see pretty good pricing for consumers as goods become very attractively priced to move them out of warehouses. Now, why is that? Obviously, in the pandemic, you couldn't enjoy services.

You couldn't take a vacation. You weren't getting a massage. You weren't going to dinner with friends. So you bought a lot of goods. I mean, I can't imagine how many flat-screen TVs were sold to Americans in the pandemic that are, frankly, not used nearly as much today as they were a year ago. So this shift from a goods-based economy to a service-based economy is going to create this depreciation in pricing of goods, which of course will help bring inflation down. So we think the inflationary path has peaked. We think by the end of 2023, our central view is inflation will be back to roughly a low- to mid-twos range, which is a dramatic change from where we are today.

Some Fed officials—and of course, it's so important to talk about the Federal Reserve. It sets the risk-free rate for the rest of the world and, of course, has created unbelievable complications with the strength of the dollar for emerging markets—some Fed officials, Ken, say the time has already come to back off. I could cite Charles Evans. I could cite Lael Brainard, who didn't say it's time now, but it will be time soon. Are we there yet?

It's sort of like saying you go to your doctor, you've got a bacterial infection, and he gives you 10 pills to take, and you stop taking them after pill number seven, and then you relapse a few days later. Like, it's not yet time for us to change course on our monetary policy. We want to see that we put the inflation genie back in the bottle. We've endured a ton of pain in getting to this point. The housing market is definitely under duress. Durable goods sales are under duress. High-ticket items are just out of reach of consumers today, but we haven't gotten the job done. And to take the foot off the brake right now and not finish the job, I think, is the absolute worst mistake the Fed could possibly make.

Why? What happens if they, again, back off too early? If you take only seven pills instead of 10, what are the consequences for the U.S. economy and for the global economy furthermore?

So the biggest concern is you unanchor inflation expectations. So right now, the American public believes—and not as much as we'd like, but the American public believes—the Fed's going to get the job done. If we take the foot off the brake, we don't finish the course of antibiotics, and inflation starts to flare back up, the Fed will have lost credibility. If the Fed loses credibility and inflation expectations unanchor, then the amount by which we'll need to raise rates and deter economic growth will be a much bigger bill to pay. And we shouldn't put ourselves in a position to pay that bill. We should get the job done now.

In our conversations, Ken, over the course of 2021 and over the course of 2022, you have flagged for me a number of risks to growth and prosperity, and among them were—and I think to a degree it still persists—the shortage of labor and rising wages, the possibility of an escalating war in Ukraine, escalating beyond where it is right now. In fact, if anything, the situation looks more positive than it did when we last discussed that—the European energy situation, the ongoing pandemic, of course, and the rising tension level between the United States and China. What would you flag as the biggest risks right now?

Well, there's, there's tail risks, and then there's risks that are, that are like definitively in play. So a tail risk would be—we've seen the virus COVID-19 continually mutate into a strain that is more transmissible and less deadly, but there's nothing that says that those two go hand in hand. So an example of a tail risk would be a mutation in COVID-19 that represents this level of transmittability but a more lethal virus. So that would be just a horrible tail risk. In terms of risks that we think about a lot in our portfolio, right here, right now, obviously the war in Ukraine is front and center, because the war in Ukraine is driving an energy crisis in Europe that is almost incomprehensible.

We're going to see—and this winter, fortunately, we're going to see—just limited rationing of energy. But if this war doesn't resolve by next summer, by the spring, next winter could be a much more difficult journey for Europe to get through in terms of gas supplies. So I think the duration of the war in Ukraine is an existential issue for Europe, for Germany in particular. And will the Germans maintain their willingness to support the Ukrainians as the cost to their economy continues to grow? And in particular, if winter '23-'24 could involve a full-on energy crisis, what happens to the German psyche in supporting their neighbor in Europe? So that's a, that's a really big issue right here, right now.

Structurally, the trade war with China is a huge loss for humanity. There's no other word for it. By bifurcating the technology stack between our two great nations, we are creating a world where, one, the Chinese have a huge incentive to engage in their Manhattan Project of semiconductor production. And the Chinese graduate about four times as many STEM graduates as the US does a year. I think we're pretty naive to believe that we will have a permanent dominance given the strength of their engineering capabilities. And then if you march forward three years, five years, seven years, as the Chinese tighten the gap between the US and the West's capability and technology and their capability, I think you have the risk of a global fracturing of the tech stack, where you'll see the Wintel stack—Windows, Intel, of course, Intel today is Intel, AMD—will be the dominant solution for Western firms.

But the Chinese will provide the solution used by South America, used by Africa, potentially used by India. And that will really fracture Western domination in technology, which has been such an incredible source of high-paid jobs in America and American prosperity. I mean, for the state of California, the tech sector is just a huge part of the revenue tax base.

Wouldn't you agree, though, that the Biden administration is in a tough position? On the one hand, there's intelligence or at least informed speculation that China is using advanced American semiconductor technology in next-generation weapon systems. There's also bipartisan support for a tough stance on access to American technology by the Chinese government and Chinese companies. These things, if the former is true, and we know the latter is the case, shouldn't it warrant at the very least some concern, if not action, by Washington?

So first of all, there has been action that's important. The CHIPS Bill is a really important piece of legislation. The United States has no ability to produce anywhere near the number of semiconductors it needs to run its economy. We are utterly and totally dependent upon the Taiwanese for modern semiconductors in America. Now, you could argue that by depriving the Chinese of access to semiconductors, we actually up the ante of the risk that they see as Taiwan. So it's not necessarily clear that we get the outcome that we want by depriving the Chinese of this technology. They could resort to other methods to secure this needed technology for their economy if they so choose. We're playing with fire here.

Let's be very clear. Semiconductors, if we lose access to the Chinese or the Taiwanese semiconductors, hit to US GDP is probably order of magnitude 5% to 10%. It's an immediate Great Depression. Those are big numbers. Those are big numbers. So the CHIPS Act, really important, encouraging STEM degrees in America, really important. But what worries me is this sense in the halls of Washington that the West has a God-given right to be superior in its technological progress when the facts would argue to the contrary. And we need to be very thoughtful about how our economy functions, what creates jobs in America, what creates prosperity for our country. And by forcing the Chinese to accelerate their R&D programs, I think we're buying very little in the way of strategic advantage at substantial long-term cost to our economy and our way of life.

Let's talk about what's going on in those corridors of power in Washington. You've become one of the largest individual donors to political candidates in the United States, and as a result, your voice carries an increasing amount of weight inside the Republican Party. A week ago, Ken, as everyone here knows, America held a midterm election, and the outcome was something of a surprise. There was no, call it, Red Wave, and many Republicans endorsed by former President Trump were beaten by Democrats. What conclusions have you drawn from those results?

So the red ripple, that moment in American history, it was a great moment. American voters came out in droves in the midterm. That engagement by the American voter, that's priceless. This is a triumph of democracy that we watched play out just a few days ago. And in particular, not only did voters come out in substantial quantities, they voted split tickets. They would vote for Democrats where they thought the Democrat had the better perspective and policies, and they'd vote for Republicans where they thought the Republicans had delivered better policies and better perspectives on the future. That level of engagement by the American voter in a very healthy middle coming out to vote, that's a triumph of democracy.

So I'm really actually quite happy about the midterms. And seeing that people on both fringes not win an election tells you that candidate quality matters. And that's really important in terms of both parties now having to advance better candidates in 2024. Because let's be clear, what we want in our country is we want better leaders in Washington. We want less partisanship. We want more cooperation. We want more thoughtfulness. And this election was a statement by voters that we've had enough. So I actually feel pretty good about the '22 midterms.

You've told me, Ken, and you told others that it was and presumably still is time for America to move on from Trump. Tonight in Florida, the former president is expected to announce his campaign to retake the White House in 2024. And as we all know, I think everyone in this room probably knows because it's hard to take your eyes off of the U.S. political puzzle. One of his likely challengers for that Republican nomination is Florida Governor Ron DeSantis, who just cruised to reelection victory in last week's vote. And I should point out that Ken has been a political and financial supporter of Governor DeSantis. How do you think that rivalry plays out, Ken, Trump versus DeSantis?

Well, let's take a huge step back and go right to the very start of the question. So President Trump, very likely to announce he's going to run for president. And I must tell you, having worked with him directly during the onset of the pandemic, he cares deeply about America, and the team he put around him to help us navigate the pandemic. Let's be clear, Operation Warp Speed is an American success story. We led the world in bringing that vaccine to market, which saved millions of lives around the world. So a lot of good things happened in that administration under his leadership. Now, conversely, very divisive moment in American politics. And it ended in a really ugly way through the election and January 6th.

And I think for just a litany of reasons, it's time the country moves forward. We should thank the president for his leadership over the pandemic, but the president of the United States is not just about policies. It's about the procedure of the office. It's about bringing our country together. It's about unifying the American psyche. We fell short on that as a country in his administration. Let's compare and contrast that with Ron DeSantis. Ron DeSantis, as governor of Florida, just won a landslide victory. He won by 20 points in a state that was viewed as purple just five years ago. Why did Governor DeSantis and, frankly, Republicans up and down the state do so well? Why did Florida become so red, the only blue is the ocean around it?

It's because the policies of his administration were winning policies for the citizens of Florida. The ability to keep the economy open during the pandemic while protecting the lives of the elderly was a huge win. Keeping schools open has been a huge win for children. The loss of learning that was mitigated by that is just tremendous. The state has been incredibly well run from a perspective of fiscal discipline, a $21 billion surplus last year, a state that cut taxes that has no income tax to start with. So DeSantis won by a landslide because on the merits of his leadership, the state of Florida has delivered for its citizens. So now you talk about the battle for the White House. DeSantis is going to run on a record of just unbelievable accomplishment.

And a record of having brought the people of Florida together in a way that they're incredibly proud of the state that they live in.

The question the Republican Party is wrestling with is, should it unify, unite, if you will, behind DeSantis now, or should it let the Trump-DeSantis rivalry play out, possibly in a battle for the soul of the party that potentially puts it at a disadvantage relative to the Democrats two years from now?

So we all have this sort of fantasy that these decisions are made by people in these back rooms. I haven't found that room, and I don't know those people. So in the United States, in both parties, the people that are running for the office of the president, they're on a mission on their own, and they're going to do what they're going to do. The process has to play out. The process has to play out. Now, I really do hope that President Trump sees the writing on the wall. He lost in 2020. We lost Georgia because of his behavior in the Senate race in 2020. That's a second loss. And then this year, the Republicans lost the Senate because the Trump-backed candidates in the Senate races were rejected by American voters.

That's a three-time loser. And I'd like to think that the Republican Party is ready to move on from somebody who's been, for this party, a three-time loser.

The process will play out. But you can influence the process. You've demonstrated most recently in Illinois, a state from which you just moved, that you're prepared to spend tens of millions of dollars on candidates in whom you believe. You clearly believe in Governor DeSantis. Would you say now, right here, how much you're prepared to spend to put Governor DeSantis in the White House?

Well, so it's not that easy in America either to do that. You can't buy a political seat. You can buy a voice for politicians to run with. They can have the ability to express their ideas and engage with voters. But you can't buy an elected seat. And in Illinois, I supported Richard Irvin with a $50 million contribution because, frankly, as the mayor of Aurora, he was an incredible success story. As an African-American who grew up in the projects and went on to be a lawyer, a prosecutor, to serve as mayor, an incredible life journey. And J.B. Pritzker spent $35 million to back Trump-supported candidates. So I actually think that Illinois was once again the cesspool of American politics, where the Democrat spent $35 million to support an ultra-right Republican candidate and to help that person through the primary.

I find it to be despicable. It's part of the reason I have no regrets leaving the state of Illinois. I don't miss our governor and I don't miss the politics in Lincoln's land of former opportunity. So the big picture is DeSantis is going to need a lot of support from a lot of people, but ultimately he's going to win this election based upon what he's delivered as governor for the state of Florida, and about the vision he can sell for America. And if he chooses to run, and that's not a foregone conclusion, but if he chooses to run, I think he will have a compelling vision for our country. He appreciates the importance of education, of the environment, of public safety, of strong national defense.

I think his message will resonate with American voters.

Ken, I don't have much time left, but I have to go to one other place, and I can't believe it's taken this long. We've gone this far into the program and nobody's talked about crypto. You and I have had a long-running conversation about cryptocurrencies, and every time you were critical of crypto—remember the time you described it as a jihadist call against the dollar? You were pilloried, pilloried by the crypto faithful. And of course, when Citadel started a crypto trading business, they celebrated your supposed capitulation. So that's the scene setter for the question, folks. What I want to know from you, Ken, is what do you make of the spectacular collapse of Sam Bankman-Fried's FTX?

Well, okay. So, big picture, the crypto market cap today is a fraction of what it was when we first started talking about it. So crypto is not—it was three trillion, and now it's well under a trillion. It's like 800 billion, of which a big part of that is stablecoins. So you've really moved back into a world of Bitcoin and Ethereum as the two dominant cryptocurrencies, both of which actually happen to be CFTC-regulated. Look, FTX is one of these absolute travesties in the history of financial markets.

People will lose billions of dollars collectively.

People are going to lose billions of dollars. And that undermines trust in all financial markets.

But was the fundamental problem that it was a business built on cryptocurrency to begin with, or that it was a business that wasn't adequately regulated, or that it was a business that the venture capital and other investors who put money into FTX didn't adequately diligence? What's the fundamental problem?

Well, I think the fundamental issue— Or was it just fraud? So first of all, that's a really big choice of words to use, and I can't go there at this point in time. What we do know is the balance sheet shows a giant black hole. And there's no doubt that customer assets were used to make investment decisions in favor of FTX's shareholders, which didn't work, at the expense of the customers. That's not permitted in American broker-dealers. You can't just use your customer assets to go engage in proprietary trading. That's a huge no-no.

It's a no-no in most parts of the world. In most parts of the world.

And that's a good no-no, to be clear, too. So FTX, billions of dollars have been lost here. The confidence, though, of a generation in financial markets has also been shaken. And that's really awful, because the 20-some-year-olds to 40-year-olds who are so engaged in crypto... they've got to save for their retirement, and if they don't believe or trust in financial markets, this is a huge problem. They need to own stocks. They need to own corporate debt. They need to partake in our global capital markets. Now, with—with FTX, there are—there are a few points here that we should talk about. The turf war by American regulators has got to end. It's just preposterous that, without naming the agencies, they all danced around who owns what.

And the bottom line is American investors have really gotten hurt here to the tune of hundreds of billions of dollars in decline in market cap in crypto over the last two years. I mean, that really strikes at the entire core or essence of what's investor protection all about. The second is that FTX crosses into a zone that all of us are worried about. On the balance sheet of FTX is a line called "Trump Lose." And Sam was the second-biggest donor to Democratic candidates.

I'm going to leave it to everybody else to draw their own conclusions about what you're saying here.

Those are really, really ugly facts when you see a fraud of this magnitude having played out and you find no regulators were there to prevent it. That's a really, really tough story.

We could talk for quite a while about FTX. Sadly, we don't have it, so I have to finish with this. The Miami Heat, the basketball team that plays in your new home of Miami, is terminating its relationship with FTX. No surprise, of course. And also no surprise, it's looking for a new corporate partner. If you drive down Biscayne Boulevard, at least until last week, you saw the three letters FTX on that arena. Will we see Citadel take their place?

So it turns out that it appears that having your name on a stadium is really bad karma. So I think you're going to see that several hundred million dollars invested in our new corporate headquarters in Miami, which we do think will be an icon in Miami. And it's a testament to our commitment to the great city of Miami and the state of Florida, which is the headquarters of Citadel. And we are so proud to be part of the community and to call Miami home.

Ken, on that note, I want to thank you very much for being here in Singapore and joining us at the New Economy Forum. Ladies and gentlemen, Ken Griffin.