WHEN: Today, Wednesday, September 28
WHERE: CNBC Delivering Alpha conference
Following is the unofficial transcript of a CNBC interview with Citadel Founder & CEO Ken Griffin and CNBC’s “Fast Money Halftime Report” and “Closing Bell: Overtime” Host Scott Wapner live during the CNBC Delivering Alpha conference today, Wednesday, September 28th.
Mandatory credit: CNBC Delivering Alpha conference.
SCOTT WAPNER: Welcome. Great to have you here.
KEN GRIFFIN: It’s great to be here.
SCOTT WAPNER: I can’t think of a better time to speak with you, either. These are such unsettled times, uncertain. I have a lot to get to and I’d like to start by sort of getting your view of kind of where we are from a market standpoint. What do you see?
KEN GRIFFIN: So you opened with the right choice of words. It’s a very uncertain time. We are grappling with the threat of nuclear war in the Ukraine, we’re grappling with unprecedented Central Bank interventions, we’re grappling with record high inflation in the United States in our lifetimes. We’re in a very uncertain time for investors. Fortunately, the U.S. equity market, although down quite a bit for the year, is showing a level of resiliency. And the U.S. economy, most importantly, is still strong for people who are going to work every day. In fact, I think we’re looking at real wage growth in Q4 this year. We’re probably looking at peak inflation having just occurred or just about to occur. So the forward trajectory on a number of key fronts looks somewhat better domestically, again, assuming nothing goes totally off the rails abroad.
SCOTT WAPNER: I’m kind of surprised to hear you answer the question that way. I was expecting maybe more gloom and doom. You don’t really sound that way, like Stan Druckenmiller did, who was on the stage earlier today who was talking about, at minimum, a hard landing sometime in 2023, if not worse.
KEN GRIFFIN: Well, everybody likes to forecast recessions, and there will be one, it’s just a question of when and, frankly, how hard. And is it possible that end of ’23 we have a hard landing? Absolutely. The Fed is grappling with a level of inflation we haven’t seen in a long time. They have a very limited toolkit. They can raise interest rates. That has very adverse consequences for home builders, adverse consequences for auto manufacturers. It will slow down new office construction, for example. But it’s a pretty awkward tool to actually cool the economy in a services-led economy. Your decision and my decision to go to a restaurant tonight isn’t really impacted by overnight interest rates. Now, we’ll get some knock-down effects from wealth deterioration, right? Stock market is lower. People are a bit anxious to spend some of their savings because their savings have come down. But with employment numbers as good as they are, with wages going up nominally, quite a bit, in real terms, back in an upward trajectory, I think the consumer is going to spend money.
SCOTT WAPNER: You talk about a resilient stock market, that’s the word you used. Do you think that can continue, or is that going to end?
KEN GRIFFIN: If we look at multiples, they are high by historical standards, and they are still high by historical standards even given the onslaught of bad news that we’ve seen, right? Like you said, it’s been a year of some really tough headlines. There’s a war in Europe, there is record inflation. The market is — of course, it’s down, I don’t want to sugarcoat that, but it’s not down as much as you probably would have thought if you looked at the news headlines. I think that, again, reflects people have job security, they feel safe in their jobs. Because they’re safe in their jobs, they’re willing to put money at risk in the stock market. I think if people started to hear their neighbors losing their jobs, we’d see a rotation out of equities and into fixed income. But right now, the American consumer is feeling pretty good about where things stand on an absolute basis. Again, as a country, we all like to find a list of things to complain about, inflation high on the list. But in an 8% inflation environment, do you want your money in 2% short-term bills? Do you want your money in a bank account yielding next to nothing? Stock market was looking pretty good on a relative basis.
SCOTT WAPNER: You speak to the competition that now exists, that didn’t exist for the better part of at least a decade, if not longer. I know you’ve heard the debate whether stocks are better than bonds at the current time. Some suggest it’s not even close right now, that bonds are the better bet.
KEN GRIFFIN: I’ve got to tell you, with the 10-year at 4% this morning, that was pretty compelling. If you walk through the story we went through, inflation peaking here, heading to a — you know, let’s call it 3- or 2-headline number sometime early to mid next year, core will be higher. That’s the challenge the Fed’s going to have to deal with, is bringing core down. But you’ve got a 4% nominal yield. You could be looking at a pretty good real rate of return with bonds at 4%.
SCOTT WAPNER: This whole conversation obviously hinges on what the Fed continues to do, and what the impact is of what they’re already done. That debate has percolated maybe over the pot of late, with some suggesting that the Fed has gone way too far. I don’t know if you’ve heard some of the debate on our own network about that. Where do you come down on that? Has the Fed oversteered, as some suggest?
KEN GRIFFIN: You know, I think that you have one of the most difficult jobs you could ever imagine, right? You’re trying to figure out what would be the trajectory of inflation against a backdrop of a labor market that we’ve never seen before. We don’t know the impact of productivity from people working from home, for example. We just don’t know. We also don’t know what the next move out of Washington is going to be. There’s been a lot of regulatory increase out of Washington which, of course, is tough on the economy. There’s been a tremendous amount of spending that we, as a country, just shouldn’t be incurring that, again, is pro-cyclical, pro-inflation. So the Fed’s had a really difficult job to try to use a very blunt tool, interest rates, to address an overheating economy where Washington keeps making moves on the chess board that turned the oven hotter. So it’s a tough job. The Fed came out pretty aggressively and then lost some credibility this summer as the financial conditions started to relax. And the most recent moves by the Fed are about reasserting credibility. They want to be very clear-cut, we’re going to put inflation back in the box, we’re going to take care of this issue. But they lost some credibility this summer when the market started to think the Fed was going to come off of a steep trajectory.
SCOTT WAPNER: To pivot.
KEN GRIFFIN: To pivot, right? And that was exactly what the Fed didn’t need. Now, let’s look at counterpoints. The Bank of England right now is facing many of the same challenges, right? The U.K. is going to offer a massive subsidy to homeowners to deal with the cost of energy. That’s the price that Europe is paying for, frankly, really poorly thought-out energy policies borne to a significant degree by U.K. consumers who, to their credit, that country’s built much more infrastructure and has much more infrastructure to grapple with the crisis created by the dynamics in Ukraine and Russia. But the Bank of England’s got to deal with policies that are, again, huge subsidies to homeowners for energy bills, $100 billion-plus, in all likelihood, and then a tax cut against an economy already struggling with inflation. And there, where you see the credibility being brought into question the last couple of days, you’ve seen just a dramatic fall in the value of the pound, you’ve seen a dramatic increase in U.K. rates. You can understand why central banks are so focused on maintaining confidence when you see it go awry.
SCOTT WAPNER: You run a global firm, obviously, with exposure all over the world. The fallout from what — since you went there, the U.K — the BOE has done, I mean, monetary and fiscal policymakers there, are you worried about contagion as a result of what they’ve done or what kind of exposure might you have given your big macro-presence in Europe?
KEN GRIFFIN: So am I worried about contagion? No. But I’m worried about what the loss of confidence in the U.K. represents. It represents the first time we’ve seen a major developed market, in a very long time, lose confidence from investors. And it represents the challenges that a country faces when policymakers have created a poor foundation. The U.K, because it had high inflation, cannot resort to tax cuts in the same ready fashion to spur growth as we could have in the United States during the Trump administration, for example. When you have your fiscal house in order, when you have inflation under control, you have far more degrees of freedom from both a fiscal and monetary perspective to deal with moments of adversity. The U.K. has lost some of those degrees of freedom, and you see that in the market’s reaction to policies that would have been acceptable under a different regime. I worry about that from the context of being an American, where our deficit continues to explode in size, where our government continues to expand in size, and we’re losing some of our competitive advantage on a global stage because of the weight of our government and our policy decisions.
SCOTT WAPNER: When you see the dramatic moves that have taken place in the currency in the U.K, in bonds, I mean, given your job, do you think about the exposure that you have at that given moment and what the ramifications are? How are you thinking about that question?
KEN GRIFFIN: I mean, of course we’re always thinking about every exposure we have around the world. We trade a substantial portfolio of foreign exchange positions of fixed-income assets around the world, in addition to equities, and part of our job as a management team is to understand the risks and rewards inherent in those assets, in those positions. The U.K. has been a bit of a minefield the last couple weeks, because today, for example, Central Bank stepped in and bought 10-year gilts in the U.K. to try to create stability in the market, in a country that has enormous amount of debt to be issued. So how do you interpret that? How do you think about these forms of market intervention by central banks? Bank of Japan, just a week ago, intervened in the FX market in a very profound way. And so when you’re trading a large macro portfolio, part of your job is to understand how governments will intervene. But watching governments intervene is always a frightening place to be.
SCOTT WAPNER: Sometimes the — I guess you think about the “how,” you never can predict the “when,” and that is maybe the most unknown variable there is that brings you back to our conversation about our Federal Reserve. Do you think that they have done enough to this point in time that they should stop and wait? It speaks to the “when” and the “how much” of another rate cut — a rate hike, and if and when that happens. Have they done enough? Should they let it go through the system like some suggest they should?
KEN GRIFFIN: So, from my vantage point, absolutely not. We should continue on the path that we’re on to ensure that we re-anchor inflation expectations. There’s a psychological component to inflation that we need to make sure that our country doesn’t start to assume that we should expect 5 or 6 or 7% inflation, because once you expect it broadly enough, it becomes reality, it becomes the table stakes in wage negotiations, for example. So it’s important that we don’t let inflation expectations become unanchored. But I will tell you, I think the Fed has another challenge, which is if Stan Druckenmiller is right — let’s just stipulate he is — and we go into a deep recession late next year, then we’re going to have had millions of Americans unemployed back to back twice in a three-and-change-year period. And from the perspective of our nation, the loss of human capital that that implies is devastating. To be unemployed twice in such a short period of time, the diminution of job skills, career experience, derailment to future aspirations, a belief that the American dream is not achievable, those cultural and tangible impacts are really devastating. So, for choice, if I am the Fed, I want to try to bring inflation expectations down, but I don’t want to create a hard landing because of the cost in human capital.
SCOTT WAPNER: You think that they can actually control that?
KEN GRIFFIN: No. I think that’s the really difficult dance they’re trying to do right now. But, you know, you’re dealing with very lagged effects. You raise rates today, it impacts very small sectors of the economy very sharply. The follow-on knock-on effects will take 6-12 months to play out. It’s a really difficult job they have.
SCOTT WAPNER: Stan, you know, aside from suggesting that there was going to be a hard landing at some point next year, suggested you could have something much worse than that. Do you think we could?
KEN GRIFFIN: I mean, it’s possible. It’s always — here is the problem with economics. I spent three years of my life pulling my hair out at Harvard studying economics. There is no answer. There’s just distributions. There’s just what may happen. And, of course, there’s some distribution that says we’re going to go into a significant recession or depression. I can give you that story. I can give you that really bearish story. I’m not sure it serves much purpose. One should always think about that in terms of their portfolio allocation. Can I endure the losses in my portfolio that would go with a severe recession or depression? I should be aware of that possibility. But you want to think about managing your portfolio over your life and over your ability to sustain your risk positions over the journey of your life. In other words, you don’t want to own so many equities that when the inevitable recession happens, you’re forced to sell at the bottom. That’s a much more important concept for investors to understand and to focus on than trying to prognosticate as to when the next recession is going to happen, if that makes any sense.
SCOTT WAPNER: Is the 60/40 portfolio dead?
KEN GRIFFIN: No. Actually, the 60/40 portfolio looks much better today than at any point in recent times.
SCOTT WAPNER: Why so?
KEN GRIFFIN: We’ve got 10-year bonds at 4%, right? When 10-year bonds are at 75 basis points, or 1%, there’s no real upside to the bond in a moment of a recession that’s often characterized with inflation. But now with the 10-year bond at 4%, if you go into a downturn and inflation heads back towards a 1 handle, all of a sudden those bonds are worth a fair amount more than they are today. That’s a win in your portfolio; that’s in the green, when your equity portfolio is likely to be in the red.
SCOTT WAPNER: Just to be clear, we’re talking about 60/40 stocks/bonds, right? The 60/40 portfolio being the best there; we’re not saying 60 bonds/40 stocks?
KEN GRIFFIN: No. We’re saying — just to case it back, look at the traditional 60/40 advice that investment advisors have given people for the last 40 years of our lives, okay? What I’m saying is, right here, right now, that’s a much more compelling value proposition than it was back when the 10-year bond had a 1% yield.
SCOTT WAPNER: But you’re not — are you positioning for an eventual hard landing or not?
KEN GRIFFIN: So, you know, we’re very focused on the possibility of a recession. That’s part of risk management. But our central case, unemployment claims at effectively all-time lows, labor force participation rates for prime in life, close to all-time highs. The labor market is healthy. You’re going to have real wage growth in Q4. The consumer, lower gasoline prices, lower energy prices, is putting that savings right into consumption. They’re putting it into airline tickets, hotels, electronics. They’re spending the money that they’re saving that they were spending on gasoline just six months ago on other forms of consumption. So that creates a really powerful tailwind to the overall economy. Remember, this, in America, is a consumer consumption-led economy. For better, for worse, that’s what drives the American economy. What’s the consumer doing? And right here, right now, for the consumer, things look better than they did six months ago. In the future, if you have a bit of a crystal ball, it looks even better over the next 3-6 months.
SCOTT WAPNER: Interesting. So we talk a little bit about your positioning. I mentioned at the beginning you have had an ability to navigate these unsettled and uncertain markets better than most. Tyler alluded to that as well. Citadel is having a great year. What’s been the key to that? What’s been the positioning for you that has led you to do better than most?
KEN GRIFFIN: So what you have to keep in mind is, is when you’re running a large alternative asset management firm, and particularly one with a very sharp trading stance — so we’re very actively trading dollar/yen and pound/dollar and the 10-year bond and —
SCOTT WAPNER: And commodities.
KEN GRIFFIN: — and commodities, the fluidity with how you change that portfolio is very fast. You can come in to work one day, find that you’re long on a bunch of 10-year bonds; two weeks later, you’re short a bunch of 10-year bonds. So the tactics of how we’re positioning our capital from a trading perspective means that the portfolio really reflects a summation of making a significant number of very on-point short-term calls over the course of the last nine months. Now, I will tell you, one of our key competitive advantages is my entire team is back at work. And the communication collaboration that goes with an in-office workforce is a really powerful competitive advantage when a lot of our competitors are still working remotely. So I think we’re in a better position to assimilate quickly macroeconomic news, company earning reports, and move our feet in response to that information and capture value for the people that entrust us with their capital.
SCOTT WAPNER: You mentioned your presence in commodities is large, you’re one of the largest commodities traders in the world. What is your outlook for that space, specifically energy, which is still, I think, the best-performing sector of this year?
KEN GRIFFIN: Energy has been just an unbelievable upward trajectory for most of 2022. And this reflects the fact that Europe — Europe was willing to trust Russia as its fundamental provider of energy. In fact, when it came to Nord Stream, the whole point that President Trump had about “no” to Nord Stream was trying to reduce European dependency upon the Russians for energy. And guess what? The President was right. In fact, this winter in Germany, the question will be what part of the manufacturing base may need to shut down to secure enough natural gas to heat people’s homes. I mean, this is really hard for Americans to relate to, this idea that GM and Ford and Toyota would shut down their manufacturing lines here in America so we would have enough natural gas to keep people’s homes warm during the winter. That’s how precarious things are in Europe. And the price of natural gas in Europe is several times, several times higher than the price in the United States. So Europe, unlike the United States, because of this enormous energy tax, both inflationary — and, bluntly, you’re writing a check to the Russians — well, you were until recently; they stopped sending gas to the Europeans. That is putting their economy in a much weaker position on a relative basis than ours. Europe is probably already in a recession because of the high cost and scarcity of energy, and that’s a really sad commentary on a substantial portion of the world’s consumer or population base.
SCOTT WAPNER: You mentioned President Trump — former President Trump. I want to pivot, if I may, to politics for a minute, because the reports are that you are a big supporter of Governor DeSantis in your new home base of Florida. You were ear-to-ear smile before we came in here, telling me how much you love being down in Miami. Are reports of your backing of DeSantis true?
KEN GRIFFIN: Well, I’ve been a supporter of DeSantis for years. There’s nothing newsworthy, and I’m a big supporter of DeSantis. And living in Florida, you see the impact of his policies. It is a state that is prospering. Children in school are being educated and not indoctrinated, which is really great to see as a father of three children. The focus from the Mayor of Miami on managing crime, I mean, we just didn’t have that in Chicago. And Chicago, one of our great northern cities right now, frankly, engulfed in almost anarchy. Crime is just out of control in the streets. My friends in New York complain about crime. Nothing compared to Chicago. So, if you look at the quality of life that people have in Florida right now, good schools, safe streets, incredibly prosperous business community, incredible influx of people from across the country moving to Florida, they’re like intra-American immigrants. These are people that want to build businesses, they want to create careers. They’re moving to states like Florida, where it’s just easier to do. And it’s really fun to be in an environment where people are forward and they embrace the future. They’re hopeful about tomorrow. In contrast, in Chicago, dinner with friends would open for the first 20 minutes with crime and how bad crime is, and this person was murdered here, and what are they going to do about it. That’s just not the conversation in Miami. The conversation in Miami is about building a future.
SCOTT WAPNER: What did you think of the Governor’s policy on migrants?
KEN GRIFFIN: I don’t agree with what he did.
SCOTT WAPNER: Did you tell him that?
KEN GRIFFIN: I’m certain that my team’s communicated that to him. The point that he’s trying to make, I agree with, but the immigrants — the illegal immigrants are coming over the border in Texas. Texas is bearing the brunt of this. And Governor Abbott, in Texas, I think is justified in what he’s been doing because, frankly, the rest of the United States has left him with the bill, while cities like Chicago declared themselves to be sanctuary cities. So he’s making a very powerful point to the rest of the country as the state that’s bearing the cost of open borders. I think DeSantis reiterated that point but, frankly, I think the Governor of Texas had made it. I don’t think Governor DeSantis had to get in the middle of this.
SCOTT WAPNER: What about his fight with Disney?
KEN GRIFFIN: That’s a complicated fight with Disney. First of all, I think Disney put themselves in a position to be punched back. I think the Governor of Florida is completely appropriate in punching back in words. I always get anxious when government does things that look retaliatory. So when the State of Florida revoked Disney’s special tax status, that to me could be interpreted as retaliation. And I think it’s incredibly important that the U.S. government, at the state level and federal level, stays above anything that looks like politically-based retaliation at all times.
SCOTT WAPNER: And you thought that was?
KEN GRIFFIN: Look, you could interpret it as such. So whether or not it was, it doesn’t matter. The timing was such that one could conclude or believe it was retaliation.
SCOTT WAPNER: To the reports that you would consider a cabinet position should he win in ’24, perhaps as Treasury Secretary, is that true?
KEN GRIFFIN: Well, the question was posed to me, if there was a moment where — Let me just rephrase this. If we had an economic crisis and I was asked to be Secretary of Treasury, of course I would offer my services. I would be honored to be asked under those circumstances. But right here, right now, I love running Citadel. I’m not interested in being Secretary of Treasury. If we ever had a crisis, of course I’m interested in serving my nation.
SCOTT WAPNER: But it would take a crisis to get you to seriously think about it?
KEN GRIFFIN: It probably would.
SCOTT WAPNER: Interesting. Lastly, before we go, I guess it was 18 months ago or so when you and Citadel were thrust into the whole issue of payment for order flow with Robinhood, which you, I believe, came on with my colleague, Andrew Ross Sorkin, to sort of defend the practice and Citadel’s role in it. There was news last week that seemed to suggest that that policy was not going to be outlawed by the SEC. You said at the time that if it was, you would adapt. I think that was the word you used, was “adapt.” Are you surprised? Did you think it might be outlawed?
KEN GRIFFIN: So, you know, is there a chance, was there a significant chance the SEC was going to end up somewhere banning payment for order flow? Of course. And, frankly, I don’t think we’ve done enough to help consumers understand the nature of payment for order flow. If you’re a client of any of the major E-brokerage firms, whether it’s a Fidelity, a Schwab, Ameritrade, a Robinhood, an E-Trade, you route your order flow to firms like Citadel Securities, or V2 or Jane Street. And we share our trading acumen at the time of execution of that order. We can very precisely price equities, manage the risk of doing so, and we can share our trading acumen in the form of price improvement and payment for order flow. And this has driven this spectacularly high-execution quality that retail investors have enjoyed and, at the same time, payment for order flow has allowed the major E-brokerage firms to offer zero dollar commissions. We can end payment for order flow, perhaps that trading acumen is shared by more price improvement in that world, but it probably also results in higher commissions. And I think that’s just a policy decision that Gensler and the E-brokerage community need to make.
SCOTT WAPNER: How will we look back on this whole period, do you think? We’ve had some runway now away from the meme stock mania, but if you consider that and NFTs and SPACs and some of the other — you know, what some would call froth or frothy activity in the market, how will you look back at this period of the last couple of years with the sort of keen market sense that you have?
KEN GRIFFIN: Wait. Some would call froth?
SCOTT WAPNER: Okay. I was trying to be —
KEN GRIFFIN: No. I mean, we went through a period of time where there was massive fiscal stimulus to the American household, much of that early in the pandemic, completely justified. I mean, I was in the White House in March of 2020, and we were talking about the fact that literally millions of Americans were about to lose their jobs. I was pounding the table pretty hard that we had to put checks in the hands of American households, because otherwise people were going to go without food. You and I both know the numbers in the average savings account in our country. People have not saved enough money for a rainy day. And I give great credit to the administration for moving aggressively to get those early stimulus checks out to make sure that nobody in this country went hungry at the start of that pandemic. But we just kept sending checks under one program after another program, last administration, this administration. That deluge of money handed to households, which we borrowed from our great-grandchildren, the surge in the federal deficit has just been — it’s been equivalent to winning World War II. It’s been incomprehensible. That surge of borrowing and money delivered to households cycled back into speculative assets in many cases, into NFTs, into crypto, into meme stocks. Now that we’re past that moment in time and people are starting to spend those savings down to travel, go out to eat, enjoy other items in life that they want to have, we’re seeing that speculative bubble really recede. And this is healthy for the economy. Money misallocated in speculative assets doesn’t create jobs in the long run, doesn’t help to create the long-term prosperity that makes America the country that it is.
SCOTT WAPNER: And you see the direct cause and effect?
KEN GRIFFIN: Oh, absolutely. I mean, billions of dollars going into companies that are effectively going to go broke, tens of billions, is money that doesn’t go to how do we treat Alzheimer’s or how do we treat Parkinson’s or how do we educate our children. Our capital markets, when they’re awash in speculation, miss the point of why they exist. They exist to allocate capital to the best and highest use. And America’s capital markets historically are an incredible engine of job creation, innovation, and improvement in our quality of life. I mean, the stories of the great tech companies, they’re almost all U.S. stories, whether it’s Apple or Intel or Microsoft. And these are companies that were funded with the American capital markets to create that incredible change in our lives that you and I have enjoyed growing up over the course of the last few decades.
SCOTT WAPNER: You included crypto in the areas of “froth” that you just said. Does that mean you’re a nonbeliever in crypto?
KEN GRIFFIN: Oh, this is — you know, all the 20-year-olds that work for me now want to kill me, thank you very much, because there’s a bit of an intergenerational fight here. I see my younger colleagues much more crypto-centric than my older colleagues, and for good reasons, including, ironically, sort of a Libertarian view of the world. You know, as our government gets bigger and bigger, a certain number of people sort of feel like, you know what, I want the privacy and I want to be — I want to pull away from government.
SCOTT WAPNER: Decentralization.
KEN GRIFFIN: Decentralization, right? So what’s interesting is we see people pulling away from big government when they look at assets like cryptocurrency, which is a real irony given how people view government can solve so many other problems.
SCOTT WAPNER: I enjoyed our conversation. Thank you so much for being so generous with your time. That’s Ken Griffin.
KEN GRIFFIN: Great to be here.
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