tv Bloomberg Best The Milken Institute Global Conference Bloomberg May 6, 2017 10:00am-10:31am EDT
♪ erik: welcome to a special edition of "bloomberg best." i am erik schatzker. 2017 marking anniversary for the milken institute global conference in beverly hills. michael milken started the conference with the goal of getting the best minds from around the globe tackling the biggest challenges. techyear, policymakers, titans come wall street's biggest power players. i had a chance to sit down with hedge fund legend ken griffin,
the ceo and founder of citadel. we talked about the shakeout in the industry. mr. griffin: it is a shakeout for active management. money the rise of passive in etf's, index products. we are seeing money come out of active management to passive structures. , the money iss not pursuing alpha in the same way. that should make markets less efficient, creating a larger pool for those who remain. passive will be bigger, active smaller, and the firm's best assemble, analyze, and incorporate information in their ment decisions will earn outsized returns. is theow large opportunity and billions of dollars for citadel? mr. griffin: in terms of how much cap we can manage?
erik: yes. mr. griffin: can we manage $25 billion? we do manage $25 billion. $35 billion is probably outside our reach right now. there is both an analytical element and the psychological element that comes into play as you grow. imagine you are a portfolio manager in a hedge fund and you are accustomed today's were you make $3 million, lose $2 million, or make for me in dollars. times as you three much money, your worst today's are three times as worse. lose 10 main dollars or $20 million in a day, psychologically a lot of people have a hard time with that. when we think about growing our business, it is growing our capabilities and competitive advantages and helping people deal with the psychological impact of taking more risk, and
when you are wrong, being wrong in a meaningful way. that is hard for people to deal with. erik: what is next for citadel as affirmed beyond what you do now as a hedge fund manager on the investment side, and a liquidity provider on the entirelyside, two different businesses, but both started by you and both with the citadel name? i am curious to know what else might you do? mr. griffin: right now the focus is on what we do and doing it better. who is the fifth largest provider of downloaded music? erik: i couldn't tell you. mr. griffin: and you couldn't care. more and more, the market leaders do enjoy very strong positions, and we want to be that market leader in the hedge fund space and in the market making space. welch, the approach to being number one or number
two, then why are you there. counterparties come to a firm that looks like that. we are able to make things happen from that position of strength. erik: so you are not thinking about or interested into expanding into other businesses? mr. griffin: distinctive different from our current lines? no, we are not. strengthen, strengthen, strengthen. the quantitative strategies have been remarkably successful for other hedge funds , more than a couple. the two that come to mind are renaissance and key signal. with that become a bigger part of your business? mr. griffin: it has been a big part of our business for a long time. both those firms are extraordinarily good at what they do, and the ability to synthesize fast amounts of data to create predictive forecasts of securities crisis is important to our entire business. ♪ erik: that was ken griffin, ceo
of citadel. attempt coke, assets have stabilized at $1.5 trillion after the outflows that followed exit.gross's big the new ceo says it is important look forward and not backward. in an interview with john micklethwait, he made the case havective manager still the advantage over passive funds. , turnover 10 times with the s&p 500 turns over. you have non-economic agents. just think of the ecb and fed as people who buy funds. have -- who are accounting driven to think insurance companies or pension
funds. the opportunity for outperformance is much larger in fixed income. is one possibility like the government can come in and , trying toems there push things towards passive because they think it is cheaper. mr. roman: of course there could be legislation which would push to the lowest possible price, 1.25% alpha, and when you compounded over the lifetime of retirement accounts, the difference is significant. rates are at 2.3% in the u.s., the amount of outperformance is quite substantial. fixedyou have focused on income. you have not gone towards other things. explain that as well. is that because that is the area where you think you can excel?
mr. roman: it is the reason we want to do something well. we want to have a focus strategy , and we want to be the best at what we do. we don't think we can be the biggest. we can't be all things to all people. we can be good at managing complex fixed income portfolios. the resources of the firm to be focused on simply this. when you look at the dna of pimco, we have a process, investment committee, cios who come from the fixed income background. this is our 40, our dna, what we know how to do, hence our focus and strategy. john: when you focus on performance, what is the main thing you put in front of people? mr. roman: our track record, process, explain how we make
money, talk about portfolio construction, solutions. we talk about what the issues are. we try to be good -- of the this whichle in charge of the is commensurate with the value we had. john: will pimco be as american as it is now in five years or a more global firm? an urge forhere is globalization across all businesses in america. exciting, but are to size -- john: is it difficult for a firm like yours to get in at the moment? but it mayit is, change it we think there is growth in emerging markets, saudi arabia and latin america will be exciting places to invest. we have more resource outside the u.s. going forward. erik: up next, treasury secretary steven mnuchin is
thinking outside the box when it comes to financing infrastructure. studyingin: we are altra-long bonds. that is something we are considering at treasury. erik: an wilbur ross shares his thoughts on what needs to happen with nafta. >> nafta is an old agreement, and obsolete agreement. it does not reflect the current of either the mexican economy or the american or the canadian. ♪
health care, and the tax code as part of his vision for america's future. john micklethwait spoke with treasury secretary steven mnuchin about the administration's plans to spur growth and enact reform. mr. mnuchin: i think there are a lot of things we need to do to create economic growth. the tax plan is one of them. plan,nk reform of the tax middle income tax cut, making businesses more competitive. we also need regulatory relief. too many businesses are held back from making investments because of excess regulation. we also need fair trade. on the deductions, you have done a lot about sttting rid of mo deductions. markets, pushes money towards property. why didn't you choose to target that? key things wehe
talked about keeping our charitable deductions and the other is the mortgage interested action. -- deduction. the big part of the american dream is to own a home. john: it is not necessarily political? mr. mnuchin: it is not necessarily political. housing finance is an important part of creating growth. john: we talked about regulations and getting rid of them. which ones? you talk about dodd-frank being too narrow. how would you describe that? what is the broader aim, particularly with finance? mr. mnuchin: in financial services, we are not just looking at dodd-frank. we are looking at every single thing impacting, and we have had hundreds of people come in. we have reached out to big banks, small banks, finance companies, all different types of areas of the economy that
impact credit. we are determined to make sure we have proper regulations of that we don't put taxpayers at risk, but we also don't have overlapping regulation. we have clarity so banks and insurance companies know what they can do. which you think of a more sweeping law that dealt with all of this? perhaps starting again in some ways? mr. mnuchin: when we come out with a report, and the first part will be in june, there will be certain recommendations we are making that commit done at the regulatory agencies. there are certain things that can be done by executive order, and there are certain things that will require legislation come up but there is a lot we without rewriting legislation, and that's one of the things we are focused on. john: infrastructure, we talked about that, huge plans, the enormous idea you will spend $1 trillion. you talked about being creative
on financing, partnerships. whetherr big issue is you might have some very long , 50, very long bonds to support long-term investment. is that one of the areas you might look at? er. mnuchin: we ar studying ultralong bonds per at we have a working group looking at it. we think it is something that can make sense for us at but on the infrastructure side, the president as determined we make a major investment. thee is a huge part of infrastructure that needs to be rebuilt, and we will do that privatepublic and partnership so we don't believe in the budget by one tree and dollars. john: you think governments look at infrastructure in the wrong way? if you are running a company, which you have done several times, long-term investment, that would be counted differently than short-term cash flow.
is that one of the restrictions you face? mr. mnuchin: absolutely. as you know when you are running a business, you have an income statement and balance sheet, and if you are making an investment with a 20 year or 30 year payback, you don't expense all in day one olook at it as a complete expense. the government budget treats everything is cached, so it makes it more difficult. bring themu had to into finance infrastructure, what is the main -- you would make, pricing, long-term? mr. mnuchin: we have seen lots of interest from our counterparts investing in the united states, infrastructure or other opportunities, so i think this is something we will be able to get done. john: the long-term plan to boost growth, does that come back to what ronald reagan did? you cut taxes, get rid of
regulations, and that will push growth by itself? mr. mnuchin: that is a big part of it. we need regulatory relief and trade reform, but simplifying taxes and making businesses competitive are a big part of that. we have trillions of dollars left off sure that we expect will come back and will be reinvested in this country. ♪ of president trump campaign promises was to withdraw from nafta. since taking office, he suggested the u.s. would be open to modifying the agreement, but official negotiations have yet to start. jason kelly asked wilbur ross about his current thinking on nafta. nafta is an old agreement, and obsolete agreement. the currentreflect status of either the mexican economy or the american or the canadian. so at a minimum, a needs updating. second, it has a particular problem with the rules -- namely
how much raw material can be brought in from outside nafta and yet get the tariff benefits of nafta. an automotive, for example, they of it part by part, and some those parts aren't used in cars anymore because technology has changed, so the changes like that are needed. a lot of things that weren't even thought about, digital economy not really dealt with, services economy not really dealt with very much. some of the liberalization mexico has made through its natural resources, so there is a lot of stuff to do, but at the end of the day the objective will be twofold come increased total trade and reduce our trade deficit with mexico and to a lesser degree canada. jason: help us understand the timeline. spoke with the
president of mexico and canada last week. what is the next step? what you do next with each of those countries? mr. ross: what we are waiting on authorize thes to trade promotion authority, the so-called fast-track. what is required is to have two more consultations, then for them to accept the formal letter, a stylized letter setting out our negotiating objectives. clock, sos the 90 day that is the key ingredient, and it is the only reason why negotiations have not begun. mexico is ready. canada is ready. it has been the u.s. congress that has been the drag. jason: what are you hearing from the hill about the timeline and how soon will they act? mr. ross: we think it will be soon. some are tying it to the he wasation of -- reported out of committee at the end of last week there is no
reason he couldn't be voted on quickly, and while i think it is just an excuse, if he did get confirmed quickly, that should take care of that. jason: there was obviously a lot of talk last week about pulling out of nafta altogether, ditching it all together versus renegotiating. the is your sense of possibility of really just getting rid of the whole thing right now? mr. ross: what is unfortunate is -- what hadaks begun as a sensible discussion of alternatives into something beyond what it really was. it is very bad all the leaks that have been occurring, but they seem to be a fact of life in washington. people have told me there is no such thing as an off the record conversation, but the fact remains the president has made the decision to try to negotiate nafta all over again. he has also made clear that if we can't do that come his
inclination would be to withdraw. ♪ best,"head on "bloomberg some of the biggest names weigh in on markets and the economy, including where they see risks. >> what you start to see when liquidity dries up its all of a sudden people start going down, companies have problems. this is the beginning of the chinese credit crisis. >> i think it is time to start taking some money off the table. ♪
risks and how they responded. the upside is somewhat limited. for stocks, we still have some good momentum and earnings. you said you expect a significant correction and stocks summer or early fall and to sell in may. is that your read now? >> i think so. we probably have a little more upside for stocks, and the rally could go through late summer, like august. that is a typical pattern in the market, but we know september and october are difficult times for equities. again, if we don't see good progress in the tax plan, that could be a bad indicator for the stock market, but having said all this, scarlet, i am always baroned by the line of
fun rock child, when asked the secret of his wealth, he said i sold early, so maybe it is time to take some money off the table. scarlet: is that what you are doing now? >> we have not taken all our money out, but as we reach new highs and stocks like facebook, it is an opportunity like now and take some cash off. month ago,tly as a there was the risk of 2-3 rate credit risks seem benign because you have a low default scenario of 2% projected for this year. >> and now? >> now everybody is studying economic indicators and away we didn't use to, looking at gdp growth or disappointing gdp growth, employment numbers, slack in employment numbers, and whether tax legislation will be effective, and so it appears at the moment if you look at how
the treasuries have been trading , although the treasury markets have backed up a little bit, it looks like interest rate risks or increases are less likely, and that even more so forces people to focus on the chance to take credit risks because it looks like we will have a continuation of the economic -- to see whenstart liquidity dries up is all of a sudden people start going down, companies have problems. this is the beginning of the chinese credit crisis. >> you believe we are seeing it now? >> sure. been talking about the inflation of the bubble, but the timing is hard. this is 10 years in the making, and i'm not good enough and ver few people are ade enough to decide exactly when it happens, but if one were to say the system is running out of money,
what would you see happened? well, one of the charges i gave you is the charge on the interbank courrridor. in march, you saw a rate spike over 9%. is 3.45%, so what happens when you have maxed levered system with interbank funding and your interbank rate spikes from 3.5% to 9% and settle at 5%? if you are lever 3-4 times, it blows you up, so we are seeing spikes through the corridor, and that is the evidence liquidity is this declare it with certainty, but it feels to you -- i am just trying to get this -- that we are beginning to see the bursting of the credit bubble? >> yes. i don't know how long it takes. erik: thank you for watching "bloomberg best: the milken institute global conference." you can find many more
>> welcome to zhengzhou, home of four of the great ancient capitals, and this year post of -- host of the china green company summit. china's economic growth has been nothing short of remarkable, but how it can sustain that growth may be the big story yet of modern china. ♪ >> china's march to becoming the world's second-biggest economy is at a crossroads, with a growth rate of 6.5%, the lowest in 25 years. beijing needs globalization, but the geopolitical map is changing, led by the protectionist policies of donald trump.