We recently featured Julian Robertson's CNBC interview, in which Robertson outlines the consequences of a scenario where China stops financing the US Treasury. The ongoing debate that is playing out between the deflationists and inflationists is reaching a fever pitch. Last week we discussed Bill Gross' deflationist decision to exchange his high grade corporate bond holdings in favour of long-dated treasuries. Robertson's scenario is a variation of other inflationist outlooks that includes the more extreme 'what if' chance that China could opt to stop buying Treasuries.
He explodes the less-than-well-known idea that China cannot abandon its symbiotic marriage to the US. This is where Robertson's perspective is controversial. At the very least, it is a political play on Robertson's part, in that it may be his attempt to induce a more serious attitude in government to focus on fixing what is truly wrong with the financial system rather than flushing the system with liquidity. Robertson's IF, THEN, ELSE doomsday scenario is correct IF China stops buying treasuries, THEN the dollar will crash without support, resulting in hyperinflation that would be destructive - ELSE the government adopts economic policy that are real fixes that address the real systemic problems of America's overindebtedness.
Bill Gross' latest investment outlook " Doo-Doo Economics," addresses the ELSE agenda as well. Both Robertson and Gross seem to share the same concerns, but differ on what the semantics and treatments need to be, now that the US economy is out of the ER and in the ICU. The debate between the inflationists and deflationists seems to rest on how and what will happen next - Falling prices or falling dollar?
TIGER MANAGEMENT CHAIRMAN JULIAN ROBERTSON ON BLOOMBERG, OCTOBER 2, 2009
SPEAKERS: JULIAN ROBERTSON, CHAIRMAN, TIGER MANAGEMENT
MATT MILLER, BLOOMBERG NEWS ANCHOR
TOM KEENE, BLOOMBERG NEWS ANCHOR
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
15:07
MATT MILLER, BLOOMBERG NEWS ANCHOR: He is known as one of the most successful fund managers of all time. Julian Robertson started Tiger Management in the early ’80s with $8 million and built it to over $22 billion at its peak in 1998. Now though, all eyes are on Tiger Management 2.0., a unique structure he created housing dozens of independently run hedge funds that Julian financed in his offices at 101 Park Avenue. Julian has been described as the greatest identifier, backer, encourager, and developer of talent that the hedge fund business has ever seen. He joins me now onset along with Tom Keene, the host of “BLOOMBERG SURVEILLANCE.”
Julian, thanks so much for coming on.
I find that the new structure that you have developed very interesting. And I’m wondering, you don’t just find them at the Ivy Leagues, you get a lot of your talent at the University of Virginia and UNC. And you do not just go with the tried and true, you’ve given, apparently, money to guys as young as 26. What is it that you see in a young manager that proves to you, that shows you that he’s going to be talented and make money?
JULIAN ROBERTSON, CHAIRMAN, TIGER MANAGEMENT: Well, we look very hard at being sure that everyone will partner with are thoroughly honest. We want them to be intelligent. And we have found through the tests that we give that very competitive people are very good in this business.
Oftentimes, people who are excellent athletes of some sort make great fund managers.
I think also, there is a very good probability, although we have not measured this in tests, that there is a great change by the best hedge fund managers, a strong feeling that they should change the world. And I think that shows up on the people on Wall Street.
TOM KEENE, BLOOMBERG NEWS ANCHOR: That means Matt’s going to be a great hedge fund manager, because he walks in here every day ready to change the world.
(LAUGHTER)
But it’s an asymmetric view. When you go to, say, UNC, you’re beloved UNC, or that evil empire down the street at Duke University, and you’re looking for someone, there’s asymmetric challenge here. You’re looking for someone that can protect capital in challenging times much more than you are that they can make money, right?
ROBERTSON: That’s right.
KEENE: When you do that and you recent time, and you haven’t been actively investing, but how do you grade the young Turks given the financial crisis we’ve had, the economic contraction, that upsilon off the end of the equations, the systemic risk that is out there? Have they done a good job?
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ROBERTSON: They have done a superb job, particularly through the break. We have not performed as well as I would like once the break is over. But I think that’s one of the things you can see in the tests, is the man risk averse. And then, almost by definition, in the bad times, he will outperform the markets.
MILLER: It’s interesting that your leadership approach has kind of changed. During the first Tiger Management, until 2000, you basically were the man. You made all of the stock picks, you made all of the rules, everyone did what you said. And now, you preside over a biweekly meeting, you give advice, you listen as well, but they can make, your managers, all their own decisions, they hire and fire on their own. Why the change in management?
ROBERTSON: Well, it’s not — it’s even more clear than that actually.
They own their own companies and I am an investor, but it is their company.
I mean I had a man come today, one of our funds, and one of the employees came in and said what is 9x up? And I said, you know, that is not something that I can answer. That is something you have to get from the man who owns your partnership.
MILLER: But you’ve become a lot more bullish on hedge funds. I mean, you started out with four guys in the beginning of the decade, slowly seeded them. By 2004, you had it 10 hedge funds that you were investing in. And this year, it has exploded. You have added 10 funds, eight in one month. Why are you so contrarian here and investing so heavily in hedge funds?
ROBERTSON: Well, in the past, if you work for Soros and Stan Druckenmiller, you could send up a shingle and it said, worked for 10 years for George Soros thorough, waiting for $2 billion and then I’m closing.
You can’t do that now. You need some sponsorship. And we have given that.
We are finding tremendous talent right now and that’s why we have been so expansive this year.
MILLER: All right, hang on one second, Julian. We are going to take a quick break. We’ll come back and talk more with you about Tiger, more about the kind of investors you choose and the kind of investments you’re looking at.
Stay with us, more with Julian Robertson and Tom Keene in two minutes.
15:12
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15:14
MILLER: All right, we are back with Julian Robertson, chairman and CEO of Tiger Management.
Julian, I want to ask you, you know, a year ago, a lot of people, including Jeremy Grantham, we’re saying maybe half of hedge funds would shut down. We look back now and the industry contracted by only about 10 percent. What do you think hedge funds have done? Have they evolved?
Have they adapted better ways to succeed, to survive through this crisis?
ROBERTSON: I think hedge funds have always had the huge advantage that they are the best way of paying the best money managers. And so the best money managers have matriculated to hedge funds. And I think that’s why they are doing better than the rest of the crowd and I think that’s why they’ll continue to.
KEENE: Well, Bill Donaldson said this once, I believe when he was at the SEC. I remember, I was at the meeting and he said, look, it’s a brain drain on Wall Street. Are hedge funds still a brain drain on Wall Street?
It pulls the elite talent away from the rest of institutional investment?
Essentially, is the institutional Street dumber than it was 20 years ago cause you took all of the talent?
ROBERTSON: Well, I did not take it all, but a lot has left. And I think that has happened to great extent. I know that we would far rather compete with a investment bank or a commercial bank than another hedge fund.
KEENE: Let’s talk about that, your days with Kidder years ago. You see this discussion of a utility bank versus non-bank, et cetera. Can we really make a bifurcation between some form of dream from the 1960s, a conservative institutions versus shadow banking? Are you optimistic that the government can get it right?
ROBERTSON: No, I’m not optimistic about the government getting anything right. And I think that they are very much responsible for the situation which we are in and which, to me, the most damning part of it is the dependence on the Chinese and Japanese lenders for our very existence.
And I think it is a tragedy that that is happened to the United States.
And I think that has been done by a group of politicians over long period of time, you know, 30 years. And they’ve encouraged leverage. They thought it was a good idea for everybody to own a great home.
KEENE: How do you manage leverage within a hedge fund complex? We see so often it gets people into trouble. Is it a day-to-day management?
Is it a contractual management? Or is it just about leadership?
ROBERTSON: I think it is a great deal about leadership. And I think that exposure is so much more important to monitor than leverage. For instance, I think I could make a very good argument that a portfolio that was 150 percent invested, where it was 100 percent long and 50 percent short, is far more conservative than another portfolio which would be 90 percent long and 10 percent invested.
MILLER: Let me ask you about leadership. I mean, you’ve always stressed, according to Lee Ainslie, the importance of integrity in your personal conduct and how you represent the firm in evaluating management teams — that’s a direct quote from him there. How can you reconcile that with that with the sort of gun-slinging, entrepreneurial, hedge-fund culture that we have today?
ROBERTSON: I think that that gun-slinging approach.
MILLER: The competitiveness that even you have.
ROBERTSON: Well, that’s right, but I do not think that necessarily leads to a gun-slinging approach. I think that if you really look at how to do a good record over the years, it’s not to make the huge amounts of money. It’s to avoid big losses. That’s the way to really make money over the years. And I think that’s really what hedge funds do. I think that, for instance, our funds far outperform the markets in bad times. And we’ve had trouble. We haven’t kept up since the market changed.
MILLER: What are doing now to protect yourself? I mean I know you’re fairly concerned about the economy as it is, especially considering the fact that you’re concerned about the Chinese stop buying our debt. What are you doing to protect yourself against the repercussions of that?
ROBERTSON: Well, if they do, all these people who are worried about inflation or not, they can just not worry about it anymore because it’s a matter of supply and demand. I mean, who will buy those bonds and what will the bonds have to yield in order to attract people to buy them? And I think they’re going to have to — if those buyers are gone, I think they’re going to really have to pump the rates up to get them sold.
MILLER: All right, hang on a second. We’re going to take a quick break. I want to come back, though, and ask you what you’re actually doing to protect your money in the case that Armageddon actually happens, as you said could possibly happen.
More on where to invest your money when we continue our conversation with Tiger Management’s Julian Robertson.
15:20
(COMMERCIAL BREAK)
15:23
MILLER: All right we are back with Julian Robertson, the legendary founder of Tiger Management, and Tom Keene, Bloomberg editor at large.
Julian, let me ask you, we were talking about what happens if the Chinese and Japanese stop buying U.S. debt; we see interest rates soar, we see inflation soar, it’s complete Armageddon. What are you in financially to protect yourself against that?
ROBERTSON: Well we have bought some very long options called curve caps. And essentially, they are puts on long-term bonds and the leverage is probably more than what you can get in a put on this thing.
Now, you buy them as an insurance policy. One, you know what you can lose. If you go short, the bonds, as you know, the risk is unlimited. But if you buy puts, the risk is limited to the price of the puts. But we have bought a lot of those and I think that would insure us in the event of a massive rate increase
KEENE: I want to get in one question here on your beloved New Zealand. We’ve got a lot of first-order effects we could sort of sort through. What dollar dynamics would be, or interest dynamics would be.
Too often, we in the media, we are in a cocoon here. We don’t worry about what the rest of the world’s second-order effects will be.
How is New Zealand for that matter or China going to respond to the deficit we have, to the dynamics of slow growth, to the job report that we saw this morning? How do you perceive a nation like New Zealand or a larger player is going to respond to all this?
ROBERTSON: Well, let me say first, New Zealand they’re even more profligate than we are. They really spend more than they earn.
KEENE: Well, when you move down there, you moved to the GDP, didn’t you?
(LAUGHTER)
I mean, you tilted the needle on the GDP, right?
ROBERTSON: We just brought love, that was all.
But it’s amazing to have picked the two most profligate countries in the world to live in.
KEENE: How’s a guy from North Carolina do that? I don’t know how that happens.
ROBERTSON: I don’t know how it happened either.
MILLER: How do you take your message down there? How do you present your message here in the U.S.? I mean, you are concerned about the trade deficits that Tom was talking about. You are concerned about the economic implications of what we’re going through here. How do we work off this debt? What should we do? What should the administration do?
ROBERTSON: Well I think we really have to almost be Margaret Thatcheresque about it. When she took over Great Britain, she told the press they would have a long time before things got good again. And our government is trying to do quick fixes, stimulus packages, this, that and the other. And basically, what we’re going to have to do, we’ve spent too much as a nation. We’ve spent too much as a people. And like anybody else who gets over indebted, we’ve got to cut back until we get back in shape again.
MILLER: All right, Julian. Thanks so much for spending time with us.
KEENE: He’s got to get that voice better. He’s sounds way too much like me.
MILLER: I’m going to give him some of my special herbal tea here.
Julian, thanks. Julian Robertson.
ROBERTSON: Sure.
MILLER: Tom Keene, appreciate you joining us as well.
15:27
***END OF TRANSCRIPT***
