Thursday, June 8, 2017

Citadel's Ken Griffin Warns of Inflation?

Sam Forgione of Reuters reports, Citadel's Griffin says U.S. rally not over, inflation a worry:
Ken Griffin, founder and chief executive of hedge fund firm Citadel LLC, said on Wednesday that the run-up in the U.S. stock market was not over but that investors should be worried about rising inflation.

"I think this business cycle has further to go. I think the stock market is going to go with that, but what’s worrisome is, the firepower that we have to address the next downturn is somewhat constrained," Griffin told cable television network CNBC.

Griffin, who is also the founder of market-maker Citadel Securities, said he was particularly concerned given the high degree of easy monetary policy.

“If we look at history, we’re not yet at the end of this business cycle. What’s somewhat disturbing, though, is ... we’re getting closer to that moment in time with yet an enormous amount of accommodative monetary policy, which means that the degrees of freedom to navigate the next downturn are going to be constrained," he said.

Griffin said investors should be most concerned about rising inflation and cited the low U.S. unemployment rate and increases in U.S. minimum wages. The U.S. Labor Department reported last Friday that the unemployment rate fell to a 16-year low of 4.3 percent in May.

"We need to start to worry about inflation raising its head," Griffin said. "I’m not saying it’s going to happen, but the complacency about inflation is really I think the one area investors should be most worried about."

Griffin, who has said in the past that he supports breaking up the largest U.S. banks, said he was in favor of bringing back Glass-Steagall. The Depression-era Glass-Steagall Act separated commercial lending from investment banking.

U.S. President Donald Trump pledged during his campaign to restore Glass-Steagall, and Bloomberg Television reported last month that Trump said he was actively considering breaking up big banks.

Griffin also told CNBC that he worried about the cost of healthcare, saying, “we need to start to change the cost trajectory of healthcare."
Evelyn Cheng of CNBC also reports, Hedge fund billionaire Ken Griffin on the bull market: 'We're not yet at the end':
Citadel CEO Ken Griffin expects stocks to push further into record territory since he thinks the business cycle is not over.

"If we look at history we're not yet at the end of this business cycle. What's somewhat disturbing thought is we're getting closer to that moment in time. And we're getting closer to that moment in time with yet an enormous amount of accommodative monetary policy," Griffin said Wednesday on CNBC's "Power Lunch."

"I think this business cycle has further to go and I think the stock market's going to go with that," Griffin said. "But what's worrisome is the firepower that we have to address the next downturn is somewhat constrained. That should worry all of us."

U.S. stocks haven't fallen more than 20 percent from a recent high since March 2009, marking the second-longest bull market in history.

Griffin's hedge fund manages more than $26 billion for partners. Citadel's flagship funds underperformed the broader market last year, up 5.06 percent in their smallest gain in eight years, according to Institutional Investor's Alpha. The S&P 500 rose 9.5 percent in 2016.
I recently posted a comment on the world according to Ken Griffin where I stated the following:
When Ken Griffin talks, and he rarely does, investors listen. Griffin is arguably the new king of hedge funds and his multi-strategy fund, Citadel, is part of an elite group of multi-strategy hedge funds that have grown ever stronger after the crisis and now manage billions of assets for large institutional investors all over the world.

Citadel actually posted the Bloomberg interview on its website, saying how it is going on the "offense" which tells me the firm is preparing for a major downturn in markets and a huge shakeout in the hedge fund industry.

And Ken Griffin wants the best and brightest talent working at other rival hedge funds to know, no matter what happens, Citadel will remain open for business and stands ready to hire you in a flash crash millisecond!

I'm being serious here, why do you think Ken Griffin is all of a sudden talking to Bloomberg? He wants to convey a message, one far more important than breaking up big banks, deregulating markets and increasing transparency of markets. He wants the hedge fund world to know that Citadel is growing and always looking for the best and brightest talent and he found the perfect platform to convey that message.

Now, I want all of you to take the time to listen to the entire interview at least once (if not twice or three times!) and start jotting down a lot of notes because there is a lot of good stuff here, some self-serving, of course, but a lot of it provides you with great insights on hedge funds, active managers and markets.

Whether you love or hate him, listen to him speak, you'll realize Griffin is scary smart, extremely driven, very focused and highly competitive. He sees things most investors don't and has a great team to advise him on trends in markets that even the very top investment funds can only dream of.
I think very highly of Ken Griffin and if I was managing an institutional hedge fund portfolio, there's no question I would include Citadel as part of the funds I would invest in (along with Bridgewater, Millennium Management, and other hedge fund quants taking over the world. I would also invest in hedge funds I know and respect like Viking Global and a few other well-known hedge funds I track closely every quarter).

But as much as I respect Ken Griffin and marvel his accomplishments, I completely disagree with him that we need to start worrying about inflation. I'm in the other camp, the deflation camp, and while I agree with Griffin on some things, I'm convinced that the biggest threat to the global economy remains a prolonged bout of debt deflation, which is one reason central banks have been so actively interfering in markets.

First, I am on record stating the next economic shoe is dropping and we need to prepare for a US slowdown. I don't understand where inflationistas see inflation pressures. There most definitely is no wage inflation and recently, a data miss crushed US inflation expectations, which remain very muted, bolstering nominal Treasuries but hurting Treasury inflation-protected securities (TIPS).

For all you non-economists, it's important to remember inflation (CPI data) is a lagging indicator, employment is coincident indicator, and manufacturing activity and the stock market are leading indicators. I include inflation expectations as a leading, not lagging indicator, because it's based on market expectations of inflation trends.

In fact, have a look at the following chart of the five-year, five-year forward inflation expectation rate provided by the St-Louis Fed (click on image):


Clearly, the bond market isn't worried about inflation, which makes you wonder why are hedge fund gurus like Ken Griffin and Paul Singer so worried about inflation?

To be fair, Griffin isn't worried about inflation per se, but more about "inflation complacency". Still, I can and have argued that we should be far more worried about deflation and deflation complacency.

In my blog, I keep referring to six structural factors that lead me to believe we are headed for a prolonged period of debt deflation:
  1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
  2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
  3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
  4. Excessive private and public debt: Rising government debt levels and consumer debt levels are constraining public finances and consumer spending.
  5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
  6. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics,  and other technological shifts that lower prices and destroy more jobs than they create.
I want everyone reading this comment to really think about the six structural factors I've outlined above and tell me whether we need to worry more about inflation or deflation.

All this to say, I don't agree with Ken Griffin on the business cycle (we peaked) or inflation. I do agree with him that stocks will continue to rise as there is plenty of liquidity in the system and quant funds are ramping them up for now, but I am very selective in the sectors I am trading and went over my preferences here last Friday:
Given my views on the reflation trade and the US dollar, I would be taking profits and actively shorting emerging markets (EEM), Chinese (FXI), Industrials (XLI), Metal & Mining (XME), Energy (XLE)  and Financial (XLF) shares on any strength.

The only sector I trade now, and it's very volatile, is biotech (XBI) which continues to grind higher on the weekly chart (click on image):


There are tremendous opportunities in biotech. I track over 200 biotech stocks (a thorough but incomplete list can be found here) and can tell you many of them are the top performers this year (click here to see YTD data from barchart). And the scary thing is there are many more which are just beginning to break out in a meaningful way.

Of course, biotech is only a small part of the story driving the Nasdaq to record highs. Along with the rise of biotech, shares of Apple (APPL), Amazon (AMZN), Facebook (F), Google/ Alphabet (GOOG) and other tech companies are propelling technology (XLK) shares to record levels:


These are bullish charts but you should keep in mind that nothing goes up forever. I still maintain that if you want to sleep well, you need to protect your downside risks. This is why I continue to recommend buying US long bonds (TLT) on any pullback as I think we have yet to see the secular lows in bond yields.
That's all from me. I've given you plenty of food for thought and I remind all of you to please take the time to show your appreciation for my blog comments by kindly contributing via PayPal on the top right-hand side under my picture.

Below, CNBC's Bob Pisani talks to Ken Griffin, Chief Executive of Citadel LLC, about jobs and the labor market in America. Chronically underfunded pensions can only hope he's right as higher inflation means higher rates and lower future liabilities but I'm worried the opposite is going to happen as the pension storm cometh.

I also embedded a Bloomberg interview with Paul Singer, founder of Elliott Management, and the last hedge fund pitbull. Singer spoke with Carlyle Group co-founder and Co-CEO David Rubenstein, host of "The David Rubenstein Show: Peer-to-Peer Conversations," at the Bloomberg Invest New York summit.

I am on record disagreeing with Singer on the bond market when he voiced his concerns at last year's Delivering Alpha conference, but he's right, the system may be more leveraged now than in 2008.

Singer and other hedge fund gurus don't like the fact that central banks control these markets and have effectively killed volatility, but this too is part of the deflation paradox which I'll discuss in another comment.

I will leave you with some more food for thought. The main reason why top hedge funds and private equity funds are scared of deflation is because it will put pressure on them to lower fees as they won't be able to generate the returns to justify these outrageous fees. The next time some hedge fund guru warns of inflation, keep that in mind.

My advice to hedge funds is to follow my pension prescription and significantly cut fees. I know, it sounds crazy but if I'm right on deflation, you better be proactive and cut fees or risk having them cut.


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