9:05 AM - In Conversation With Dawn Fitzpatrick
· Dawn Fitzpatrick, CEO and Chief Investment Officer, Soros Fund Management, LLC
· Moderator: Erik Schatzker, Editor-at-Large, Bloomberg
Good morning here in New York City. I am Eric S editor at large with Bloomberg, television, and delighted to present to you here at Bloomberg invest Global Dawn Fitzpatrick. She is the chief executive officer and the chief investment officer at Soros fund management. The first person to hold, both of those titles at Soros.
Is what on Earth to do about China, there's been this dramatic shift in domestic policy and regulation right for the private sector with seemingly, huge implications for investors who have made so much money on the backs of billionaires like Jack ma for example, and then mean time, the United States is trying to squeeze, you know, the Chinese by cutting off, supplies of critical semiconductors in software.
is China, a buy or sell.
China is incredibly interesting at this moment, at this moment in time. So if you think about where they are, they had residential investment depending on if you count, just first order, first, and second and third, order, something around ten to twenty nine, percent of GDP, but they have a shrinking population. So that is definitively unsustainable growth.
So if you think about what xi is trying to do, he's trying to rebalance his economy. And by the way, in a way that I don't think you, or I would argue is not smart. ... he's tried to do some of the same things that people here would like to do, but you'd find incredibly difficult because it's so politically divisive.
But I think that, what It's caught, kind of Western investors by. Surprise is kind of a step function fashion. He's doing it in and and the economic damage. He's willing to tolerate to get from here to there and you know as an investor, I think one of one of the things is, you know, based on what's happened. The past couple of months. It's pretty clear, you know, every Chinese company is viewed to be a state-owned Enterprise to one degree or another. Other thing I think from an investment perspective, that's really interesting. And that's gotten a lot of attention from chairman Gensler and others is the vi e or shell company structure of Chinese companies that are listed here.And, you know, I think that those companies will largely have to delist. And by the way, for a lot of them, there's a mechanism for them to just port to Hong Kong.
But you know, for 20 years. Chinese tech companies, having Western capital and a western vested interest in their success very much suited China's goals.
They don't need that anymore. So they can take their seven hundred billion dollars and and take it back on Shore and to Hong Kong and I think that's what they're going to do. So when it comes to the u.s. Chinese listens listings, if I were investors, I'd be really careful here. What about earlier stage Investments Chinese? capital, for example, So again, I think it's going to be a while before those have an Avenue to go public. There's some really big names that might go public near-term in Hong Kong to make a point, but I think overall that path from private to public in China is just going to take longer and valuations. I think are, you know, permanently at lower multiples because of, you know, because of We estate tax and and, and state utility. That sounds to me, Don like, potentially a big problem for firms, like, Sequoia, for example, or tiger Global that have done so well investing in early-stage Chinese Enterprises and then, you know, riding their evolution to the public markets.
Well right now, but, you know, my guess is there's a lot of debates going on and they're boardrooms about how aggressively to invest going forward. The other thing I would say about the asset management industry overall, is that they're a little bit economically. Compromised China has invested a lot of money in Western asset managers. So it's hard for them to take to hardest dance. When it comes to forward Investments. Are you allocating to China, or away from China.
I would say we are not putting money into China, right now. Now, I mentioned Sequoia and tiger Global. Those firms are emblematic, in a way of the shift of money that we've seen out of public markets and into private markets from liquids into a liquids. Now, Soros fund management plays both sides of that equation.
Given the extraordinary returns. We've seen endowments, right? Endowments are not know. For producing 50 60 and 70 percent annual returns. And yet, that's what we've seen, because of the allocation. They have to some of these fast-growing private Market Investments. Are the implications of that. So, I think, I think this is, this is an incredible moment in time to your point. We 2013, there were 39 unicorns today. We have eight hundred and forty some odd unicorns.
You've seen obviously companies stay private longer coming into this year and then all of a sudden you had the fed, you know, go extraordinarily low with rates and what happens then is effectively your high growth stocks. The discount rate is close to zero. Valuations, go through the roof.
So you had this enormous pool of private companies that now have decided to come public at an opportune moment in time.
And to your point. It's driven just He's extraordinary returns, but it's also going to create an asset. Allocation problem to a degree for these big endowments. First of all, you saw kind of public market funds start to go into private markets, you know, last couple years now all the sudden because of this IPO activity private fund allocations, have a large amount of capital that's effectively in public markets.
And what happens then is they're going to crowd out. Is like, squeezing a balloon, if the typical endowment, they say, they're 60/40, but they're actually probably 75, you know, 25 or something like that in reality, but now, given these markups that has gone even further. So, you know, call it 90/10 and maybe it's 9030 because their degree of Leverage in there.
What's going to happen is they're going to have to redeem from their traditional public managers that have netted. Closure, so your long only' and your hedge funds with 60, 40s are going to be under pressure. Because when those asset allocator sit around a table, the private Equity guys a the returns look better, both on an absolute and kind of value, add perspective.
And if you if you don't allocate to the next fund, you lose your spot in line and everyone lives in fear of that right now, given given the returns they produce. So I think there's going to be some really interesting. Resting conversations around those investment committee, tables of those endowments and net-net.
I think, active managers in public markets, will get squeezed.
The people who won't get squeezed, are the big multi strategies that run low net. So I know you interviewed Ken Griffin yesterday. He'll do just fine. He actually might be a winner out of this. What are you doing? Are you have a choice to make you unlike an endowment? You know, don't feel the same. On a pressure to chase those beautiful historic returns, right? You can be more dynamic in your allocations.
Are you putting more money into private markets to feel comfortable with your public market exposure? And what vehicles, you know, do you prefer direct drive hedge fund? Private Equity Venture Capital? What appeals to you? Yeah. So we've been running more and more money internally in public markets, you know, we feel like there are some advantages we can play too and when we look at private markets, one of the things we've been doing. Doing more and more is trying to have Partnerships with those corporates where we can be solution across our Capital stack.
So we're not just providing Equity. We might provide a warehouse, we might provide a line of credit or straight and I think being able to provide kind of that spectrum of Solutions in aggregate.
You get better access and you become kind of a more valued partner now, You're going to face the decision at some point in the not-too-distant future because one of your probably best I'd have to imagine private Investments is the stake that Soros fund management has been driven by the EV maker or EV pickup truck maker or truck. Make a let's say back by Amazon also backed. By you that's going to go public perhaps an evaluation of 80 billion dollars.
Are you a long-term holder? You're going to crystallize some of those gains. Can we did I think my compliance people might yell at me for for talking about this, but you know where we think that is a great company and you know candidly we hope they come public at a little bit cheaper than that because we want, you know, there to be a long term, you know, the value play there. You want other people to fall in love with her being. Yeah.
You know, and one thing I haven't asked, again just emphasizing sort of the freedom and the dynamism that you can put to work at Soros, is whether the recent, you know, we're approaching correction territory for US Stocks whether that has, whether you felt inclined looking at where valuations were the dial up, your cash allocation, or whether that's something that feels more appropriate now, so we have been building back up our cash, allocation, you know.
Last time you and I talked, you know, we back in March of 2020, we quickly put about five billion dollars to work and over the past 18 months. We've been building back up that cash buffer. So where we sit today, you know, if we had next Crisis, we could put another five billion to work pretty in pretty short order pretty large. That's close to 20%, right? Yeah, we use leverage. So again, because we own a lot of The public Securities directly. We have the ability to borrow against those Securities.
So we have, we have degrees of freedom. I think the typical endowment and Foundation doesn't have. And again, that's we try to use that to our advantage. Every chance we get, you know, in terms of where we are in the cycle. We are definitively late cycle, but one of the best trades this year, has been selling Vol and it's Because money there's not a lot of places to go in regime like we're in now where, as I mentioned, rates are very negative in real terms, corporate spreads are really tight.
So, you know, I think you still want to own equities. I think you can take a little, a little profits off the table. And as I said, build up liquidity, so you know, that that if we do get kind of a misstep, you have room to lean. I also think it matters where you are. So if you look at the Hang Seng on the industry on the year, it's down, you know, thirteen percent, while the S&P is up 14%, So dispersion across countries and across sectors is enormous.
Dawn we have about 30 seconds to go. I'll take this opportunity to ask you for one or two of your highest conviction bets. So I think recovery stocks are still too cheap really and they should be bought here. Why?
How's that possible? Given the given, what we've seen transpire the last 18 months. So if you look at and this goes back in part to the productivity issue, these companies have learned to do things better. And I think when you look at the US consumer, they are flush with cash and they want experience, not Goods.
It's always great to have you here, Dawn. Good morning. Good morning. Thanks for having me, Eric. Don. I'd like to start our conversation by talking about inflation. Europe is having a proper energy crisis. And so is China. For those who haven't noticed oil is at a seven-year High us natural, gas prices have more than doubled. Year-to-date Industrial Metals are ripping at the fastest rate in more than a decade. Is this really a transitory phenomenon.?
Dawn- So first of all, I think on the energy side, it's largely a political phenomenon, I think Russia had a vested interest in natural gas prices being high in the context of Nord stream approval and in the context of China.
I think their decision around Australian coal, what they choose to say, not to buy any more not to buy any more to put them in the Penalty Box. You know, what they fail to realize there is even though the majority of their coal is domestically produced things turn on the margin. So So while both of those, I think are Geo political causes.
I think the interesting thing is when you look forward, High Energy prices are high fossil fuel prices it is not necessarily a bug of ESG, but it's a fun story.
it's by design that you will promote transition to cleaner energy with higher fossil fuel fuel prices. So while not the cause here, I think when we look forward this is going to be the new Norm where you see spike in Energy prices and it's something. I think we have to get used to
your question on on inflation...You know, I think we've all been surprised at kind of how long this feels. Like it's going to last now and the other. The other interesting thing is, you know, a lot of this is supply-side inflation.
And it's not clear that monetary tools, really You'll well with supply-side inflation, and I think the risks are that this can become self reinforcing. And, and, and again, that's something that we're relatively focused on. So, to the degree, that you try to predict in the positions, that you take, what the FED is or isn't going to do, if we are talking about supply-side inflation and monetary tools as many Central Bankers, including most recently, Andrew Bailey of the bank of England
. They just they're built for the demand side of the equation.
What do you think the FED will do? So I think the FED is lucky because the US consumer is in a good place and employment feels like it's really heading in the right direction.So, you know, I do think we'll get the tapering announcement at the next meeting and I think what was interesting is the speed of tapering obviously it was it caught the market a little bit by surprise and that they said they'd be done potentially with tapering and First half of the year.
So I think the FED I think the market like that the FED is maybe going to be less far behind but and and by the way, if you watched gold in the September, it was down 5%.So I think, you know, the fear of the debasing of the US dollar has receded to to a degree.
Also, by the way, the IMF just came out with kind of Reserve currency balances. And the US dollar has stopped losing ground yet Bitcoins at 50,000. Yep, big boys at 50,000. So I think that's the really interesting thing is that you know, I'm not sure if Bitcoin is only viewed as an inflation hedge here. I think it's you know, it's cross the chasm to mainstream.
It's you know, cryptocurrencies now have a market cap of over two trillion dollars.
There's 200 million million users around the world. I'm sorry. I think this has gone mainstream from our perspective. Again more than the we own some coins, but more than the not a lot and the coins themselves are less interesting than the use cases defy and things like that. Let's go back to inflation for a moment to the degree that you think it's going to last longer than people initially expected, what sides of that trade are you playing? Are you playing sort of the classic, you know, treasury side of the trade?
Oddities or commodity volatility or stocks? You know that that potentially face margin pressure. So we've been long, some Commodities and we are short government bonds. Not just in the u.s. Again, real rates are really negative right here. And and I think it's a reasonably safe bet that rates are going to go higher. I think the one counter to that and something that's worth watching and I think checked the rate move. Last time is Bank deposits.
Going higher and there is just an enormous level. So the amount of bonds Banks need to buy on the other side of those deposits is enormous and that will be a little bit counter check, you know, any material move, higher and rates and it's something that's worth watching and you might want to trade trade, the ranges here.
What if we're heading into A stagflation, every period. I'd it's a word that people in the market are using more and more and more and not for me to say whether we are or whether we aren't. But is there a stagflation are E-Trade?
Yeah, so so again, I would hope that we're not heading into stagflation area in from a human interest standpoint. But to your point, it's definitely. It's gone from like not being a word that that's common in our industry to being front and center. I think the one counter to that though is coming into covid.
One of the things that we were really struggling with was productivity and while right now, you see, kind of Age growth Trend, clearly kind of firmly in place and I think wages are going to continue to have upward pressure. The offset to that is potentially productivity where you're really starting to see some sustained gains.
And I think that is ultimately going to be the counterbalance and really, really important to avoid stagflation. The other thing people keep talking about in addition to inflation and stagflation, of course.