WHEN: Today, Wednesday, July 18th
WHERE: CNBC’s “Squawk on the Street”
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Ken Griffin, Citadel Founder and CEO, live from the CNBC Institutional Investor Delivering Alpha Conference in New York City on Wednesday, July 18th.
Following are links to the video of the interview on CNBC.com:https://www.cnbc.com/video/2018/07/18/citadels-ken-griffin-trump-unquestionably-has-the-right-mission-on-trade.html
Mandatory credit: CNBC Institutional Investor Delivering Alpha Conference.
ANDREW ROSS SORKIN: Thank you, everybody, and thank you for being here today.
KENNETH GRIFFIN: My pleasure.
ANDREW ROSS SORKIN: We have a lot to talk about, and I want to talk about the way you're thinking about the markets, I want to talk about the way you're thinking about policy and its relation to the markets, and I really want to talk to you about where you think the financial services business and world and Citadel is going. Just to give everybody an idea -- first of all, we should say, your performance this year has been spectacular in that it is probably the highest -- if not the highest, one of the highest performing hedge funds in the space. And Citadel Security now, if you can believe this, one out of every five stocks is trading through you every single day?
KENNETH GRIFFIN: Yes, that's right.
ANDREW ROSS SORKIN: It's a remarkable thing. Here's where I want to start the conversation. Given the conversations that we've had thus far this morning. These days, when you wake up in the morning and you see headlines about trade or you see headlines about President Trump in Helsinki talking about Putin, or you see headlines from Jerome Powell about interest rates, when you wake up and you get either on the phone with your team or you're sitting around in an office with them, what are you telling them? What are you thinking about first?
KENNETH GRIFFIN: I think it's really important to understand, and we have about 600 investment professionals at Citadel, we try to push decision-making down to the most junior person who can competently make a good decision. So the minute that headline hits the tape, somebody has already decided how they're going to react to the news, if it was anticipated; or they're going to respond immediately to what's playing out before we ever have a group call. I think it's really important to understand, it's how we develop talent, it's a big driver of our success. There's not a bureaucracy in our decision-making process. It's very quick, it's very reactive to incoming news, and it's good judgments made by really talented people that work for me. So what I'm working on with my senior leadership team are what are the big risks that we face as a firm. For example, there was a material setback in the European Union just a few weeks ago with the drama in Italy, right? And we've been very focused on what happens if the EU hits a major speed bump. And Italy leaving the EU would be much more than a speed bump; it would be catastrophic. So my senior leadership was focused on the big catastrophic risks that we face in the portfolio, how we manage those risks.
ANDREW ROSS SORKIN: Okay. So take Italy, take the EU right now. How do you handicap the situation you just laid out?
KENNETH GRIFFIN: So I think that the European Union is going to have a huge issue. Italy is heading towards a set of policies that will increase the deficit in direct contradiction to the EU's mandate of fiscal discipline. And it' s unclear to me, as Merkel's power wanes, how this is going to be dealt with. She has been such a tremendous leader of the EU vision that, with her having to deal with issues on immigration and using her political capital on immigration issues, her distraction or entanglement in those issues is going to take Germany away from the table to grapple with Italy's willingness to engage in a set of monetary and fiscal policies that are just irresponsible.
ANDREW ROSS SORKIN: So walk through the dominoes, then. What happens and, by the way, what are you doing about it?
KENNETH GRIFFIN: So for us, we very carefully control our exposures to Italy and to Southern Europe. That's what we think about, which is how much exposure do we have to Italy directly and the effects if there are material events in Europe? How do we maintain our positions in the most liquid assets, so we can navigate quickly in changing market conditions? How do we reduce the amount of open notional risk that we have? So we don't want a complex derivatives portfolio in an environment where you're just more unstable. So we're thinking about counter-party risk, about the complexity of portfolio, about reducing our exposures to southern peripheral Europe, maintaining those postures while these events unfold.
ANDREW ROSS SORKIN: So I imagine as your team is looking through these various risks, is there a surprise counter-party you picked up in the past couple weeks?
KENNETH GRIFFIN: No, there's not. Our Treasury team is extraordinarily good at being on top of counter-party risk management. The industry had a huge wake-up call back in '07, '08. The near failure of Bear Stearns, the fall of the Lehman Brothers, that was a huge wake-up call for the industry. People's collateral management processes are much better today. Their counter-party risk management is much better, and there's a huge sea change that took place in many products, which is the rise of central clearing. So today, for example, almost all interest rate swaps in the U.S. and Europe are cleared to clearing houses, and that has dramatically reduced counter-party risk.
ANDREW ROSS SORKIN: Let me walk through some of the other headlines. Ken Griffin on trade, right now, what do you make of the fight that's taking place? What do you make of some of the comments that Larry Kudlow just made on behalf of the administration?
KENNETH GRIFFIN: So, rather than comment on Larry's direct remarks, the President unquestionably has the right mission. The United States post-World War II embraced a series of trade deals, one, to help rebuild war-torn Europe. You need to remember, the United States got out of World War II economically intact as compared to the rest of the world. And we were willing to use a series of policies to help the world regain its footing. Those were absolutely the right moves for us to make as a nation. With respect to China and opening of trade to China, the view was that a strong trade relationship to China would bear fruit in a number of different dimensions. Some of that has clearly been true. But the big picture is, and the President is right, over the years we've generally left the table with a deal inferior to our trading counter-parties, and we need to address that. The current strategy, I don't understand, but I'm not party to the strategy itself. We've got an open battle with many of our allies on many fronts. To me it strikes me as an incredibly complicated set of negotiating tactics, to have so many open fronts simultaneously. And I do hope that the President's able to land a success with a Mexico, with Europe, with China, to help to set the marker for what the U.S. views as an equitable outcome that will drive closure with our other trading counter-parties.
ANDREW ROSS SORKIN: Do you think he's doing it right?
KENNETH GRIFFIN: I'm just not in a position to comment on that. You have to be in the room to know. It's like, you know, the Hamilton play. I'm not in the room, I'm not in a position to comment on it. I don't know what the relationships look like with Xi at a personal level with Trump, for example.
ANDREW ROSS SORKIN: Let me turn it around. When you think about companies that are doing business in some of these countries, have you changed your exposure to them in any way as a result of all this?
KENNETH GRIFFIN: Absolutely. This goes back to the portfolio managers have that very clear understanding of each of their companies they invest in and their sensitivities to U.S. trade policy. So they're reacting in realtime to incremental information and adjusting their positions fluidly. And if I look, for example, at our profitability decomposition, it very clearly appears that over the last couple months, our portfolio managers have successfully traded their position, given the unfolding trade battle that's taking place around the world. But let me be clear. We, as a world, want to get back to a set of more stability in trade policy. Tariffs are incredibly damning to consumers, to companies, to capital formation. They discourage investment, they reduce productivity. So the status quo, the U.S. can best absorb this as compared to our trading counter-parties. Our economy's so large, so strong. But this is not where we want to be for a prolonged period of time.
ANDREW ROSS SORKIN: We don't want to be with the tariffs, or we don't want to be where we are today?
KENNETH GRIFFIN: We don't want to be with the tariffs.
ANDREW ROSS SORKIN: Then you can't be happy about how it's all going.
KENNETH GRIFFIN: No. If the tariffs affect permanent change on the ability for U.S. companies to compete more successfully around the world -- I mean, remember, Apple couldn't sell iPhones in China just a few years ago.
ANDREW ROSS SORKIN: Right.
KENNETH GRIFFIN: Think about how crazy this is. Okay? They sell -- Apple sold hundreds of millions of iPhones all made in China, and we couldn't sell iPhones in China. Okay? So there's something inherently wrong with that, and that's what the President is addressing.
ANDREW ROSS SORKIN: Do you worry about the -- what the administration is doing, does it put Apple then at risk today?
KENNETH GRIFFIN: It makes it difficult to understand where you should build your next factory. It makes it difficult to understand how aggressively you should invest in your future, because a prolonged trade war will slow global growth.
ANDREW ROSS SORKIN: How much do you think our international relationships matter? And I'll give you, this morning the big headline was Google -- Alphabet, Google's parent, is being fined $5 billion. You're one of Google's largest shareholders. How much do you look at that, both in the context as an investor and as something as part of a larger geopolitical relationship?
KENNETH GRIFFIN: The Google case is extraordinarily complicated. The EU, ironically, has become almost more aggressive in trying to create competition than the U.S. The EU, for example, has a whole series of mandates designed to increase the competitive dynamics between the European banks by opening everyone's bank account to a series of Fintech providers. The U.S. banking system has become much more concentrated over the last couple of years, and such a revolution is not at our doorstep. So there's a bit of a difference here between the U.S. and Europe. The Europeans are actually trying to increase competition on their continent; whereas, the U.S. has become more laissez-faire in this respect.
ANDREW ROSS SORKIN: And which version do you like better?
KENNETH GRIFFIN: I love competition.
ANDREW ROSS SORKIN: By the way, talking about competition, you've talked about breaking up the banks before.
KENNETH GRIFFIN: Yes, I have.
ANDREW ROSS SORKIN: Are you still on the "Break up the banks" brigade?
KENNETH GRIFFIN: I mean, for choice, I think a larger number of banks creates more competition. Competition creates value for consumers. Remember, the function of our capitalist society is about creating value for consumers. And changes that we make to our economy that encourage innovation, which comes from competition, that encourages the consumers to get a better deal -- whether it's better health care, lower-cost products, new innovations on transportation -- those are what we should aspire to create when we think of architecting our economy.
ANDREW ROSS SORKIN: So if you're a fan of the free market, then, is Europe doing a better job in that regard?
KENNETH GRIFFIN: So in the competitive sense, Europe is perhaps doing a better job. But the Europeans fall short. They don't have the ecosystem the U.S. has of -- how do you say -- in the Silicon Valley, if your first venture fails, it's almost a mark of success. It means that you learned a set of valuable life experiences that when you have the next idea, you'll have the credibility of, look, I learned a lot; here are the setbacks we faced; here's how we do things differently. In Europe, the tolerance for failure is still radically lower. So one of the great parts of the United States, and this has been under attack for the last couple of years, has been a willingness of the country, whether it's with your credit card or with venture capital, to go out and start a new business. That has created the vast majority of jobs in our country over the last 30 years. It's opened doors to people who have broken resumes. It's been the economic powerhouse of America. Europe doesn't have that powerhouse.
ANDREW ROSS SORKIN: I want to go back to this break up the banks idea for just a moment, which is to say, do you think that the financial services space is not competitive enough right now?
KENNETH GRIFFIN: If you look at your traditional measures to concentration, financial services has become highly concentrated, and there's always room for more competition. There's very few businesses that are natural network effect businesses like eBay, or the more people who use it, the more valuable it becomes.
ANDREW ROSS SORKIN: Is your argument, though, around the competitive landscape today -- and, by the way, where would Citadel fit in that -- or is your argument around the idea of too big to fail and the risks that size represent?
KENNETH GRIFFIN: Oh, it's much more around competition. Too big to fail is an important concept and one where we made some progress post-financial crisis to deal with too big to fail. No institution should be viewed as too big to fail, period.
ANDREW ROSS SORKIN: Okay, I have a harder one for you. If one of every five stocks trades through Citadel, is that too big?
KENNETH GRIFFIN: No, because the market has the resiliency to absorb us not being in the market on a given day or week or month. There's enough excess capacity amongst our contemporaries that if we weren't there, the market would clearly function and function in a competitive manner.
ANDREW ROSS SORKIN: Different topic. The Fed. Jerome Powell spoke just yesterday. Ben Bernanke, which you say is one of your advisors, I had a chance to spend some time with him just two days ago. What is the conversation that you and Ben have around interest rates today?
KENNETH GRIFFIN: So Ben is in constant dialogue with my team on this topic, constant dialogue. And I think it's very clear. We have an incredible unemployment story in the United States. The unemployment's now in the three handle. It is as good as it gets. But here's what's interesting. We aren't seeing meaningful wage growth yet. And depending upon the metric you use for wage growth, it's somewhere between 2.75 and 3.25%. And that's just atypically low, given how low unemployment rates are. And so there's this very interesting question. There appears to be the continued flexibility for the Fed to maintain the accommodative monetary policy, even though unemployment is so stunningly low. And I think that we're going to see the Fed follow through on their two rate increases for this year, and then they're going to slow down, heading into next year, to see how much the tax cuts a huge one-time stimulus effect, so as that works its way through the system, where are we March of 2019 with unemployment, with inflation? And I think the Fed's going to be very considered in their decision to raise rates a third and fourth time.
ANDREW ROSS SORKIN: Where does Ken Griffin think we're going to be at that time?
KENNETH GRIFFIN: I got to tell you, I've been wrong. I would have expected more wage growth over the course of the last 24 months. So with all my portfolio managers, it's very clear. There's two things I always say: Unless you have a position, all you have is an opinion. And the cumulative profits of our opinions are zero. All right? So what's our position? Our position says we think there's going to be continued wage acceleration, but it's not as large as it was 18 months ago on a relative basis, so we've lost some conviction in that view.
ANDREW ROSS SORKIN: What's the yield curve tell you right now?
KENNETH GRIFFIN: I think there's a lot of discussion around the yield curve, the 2s10s becoming inverted and what's this mean. It's often a leading indicator of a recession. Remember, there's still a huge quantitative easing dynamic taking place that reduces to a term premium in the 10-year point. So I think there's less information in the 2s10s relationship today than there was 15, 20, 30 years ago. The other dynamic that's true is the world's capital markets, the world bond markets, have never been so integrated. Money flows fluidly from European nations to the U.S., to other economies in the bond market; and with the U.S. tenure being one of the higher yielding bonds in the world, relative to, for example, the German bonds, you're going to pull the 10-year point down in yield as money flows on-shore to the U.S. from abroad, trying to capture that return premium vis-a-vis --
ANDREW ROSS SORKIN: So are you buying the recession story or are you --
KENNETH GRIFFIN: The risks have become more asymmetrical to the downside today than 18 months ago. But having said that, the current prognosis next six to nine months is we're going to experience strong growth. So I think that in the short run, absent a material catastrophe on the trade front, I think we're looking at very strong growth the next six to nine months. I think we pulled forward through the tax cut, the stimulus that goes with that, some amount of demand, some amount of capex. We'll see that play out this year. It makes, for example, 2021, late 2020, much murkier because we pulled forward some demand for both capex and goods due to the tax cuts.
ANDREW ROSS SORKIN: I mean, investment perspective, what are the one, two, or three things that have worked the best for you in the past year, right now? The reason I ask is you look through your equity portfolio, and the FANG stocks look like they're working for you. Amazon is your largest holding, Facebook and Google and the like. But I'm not sure when I look through your holdings that that's actually where you have convictions since I -- I imagine that some of those positions are not decisions you have actually made.
KENNETH GRIFFIN: Well, our holdings are a bit tricky.
ANDREW ROSS SORKIN: Right.
KENNETH GRIFFIN: We're the largest market-maker in the United States in the options market. And, as such, we're facilitating millions of Americans, both institutional and retail investors who use options in the FANG stocks.
ANDREW ROSS SORKIN: Right.
KENNETH GRIFFIN: The FANG stocks are incredibly popular in the options market, and we have large equity positions that go with managing the open --
ANDREW ROSS SORKIN: So when people read your filings, they should not take too much away from that?
KENNETH GRIFFIN: You should just -- you should ask yourself, if this -- if this is a heavily traded option name, there's some material chance the position, if disproportionately large, is related to our options market making.
ANDREW ROSS SORKIN: Okay. So what's a position that has nothing to do with that but has been a position that Ken Griffin has said, We need to go all in on X?
KENNETH GRIFFIN: We don't do that. We don't do that. What we have found over the years is we have -- there's money managers who always believe they have skill in sizing, and very few portfolio managers are actually good at sizing their bets. In plain English: If it's good enough to be in my portfolio, I should have a sizable position. But I shouldn't have one trade be five times the size as my third favorite trade or my fifth favorite trade.
ANDREW ROSS SORKIN: When have you made what traditionally would be described as multi-strap firms that wouldn't necessarily, by the way, be taking major, like, huge positions in certain things or even activists because there's -- I'm thinking of firms like Nav, D.E. Shaw that have taken like -- have actually taken an activist position for the first time. Would you ever do something like that?
KENNETH GRIFFIN: We are -- we are very hesitant to find ourself in the activist role. It requires a commitment of capital for a duration and a set of ancillary knock-on effects that we question whether it's worth it to buy. So when you become an activist and you have that large position, unfortunately, you often become emotionally married to your choice. And when you're emotionally married to an investment, you lose the judgment rationality that defines successful investors. So I really want my portfolio managers -- I want no position to be so large in their portfolio that they're emotionally invested in the outcome. It's keeping that objective judgment is so important to our success.
ANDREW ROSS SORKIN: I'm curious, are there other funds out there that you look at today and you go, There's something going on there, that's interesting to me, we should pay attention to what they're doing over there right now?
KENNETH GRIFFIN: Let me be clear, there are at least 100 funds that we're looking at, and we're thinking about: What do they do? How do they do it? What's their competitive advantage? Is the market opportunity significant enough that we should marshal our resources to go and compete with them?
ANDREW ROSS SORKIN: Who's at the top of that list?
KENNETH GRIFFIN: For innovation?
ANDREW ROSS SORKIN: Yes.
KENNETH GRIFFIN: Innovation. Well, I mean, I will give you the throwaway answer. Obviously Rentech and Medallion represents a pinnacle of innovation in arbitrage. They're extraordinarily good at what they do, and we spend a fair amount of time thinking about how they must employ their capital. In the commodity space, we're thinking very long and hard about how BP faces the market as one of the world's biggest integrated providers of energy products. So when we're thinking about our competitors, it might be -- it's a Renaissance. In the commodities space, it's going to be a player like British Petroleum, who is extraordinarily good at managing the entire supply chain. And where in that supply chain could we create a competitive advantage? You might find this interesting. We're one of the largest shippers of natural gas to the West Coast of the United States. A significant source of competitive advantage for us, some of the pipeline infrastructure that we manage.
ANDREW ROSS SORKIN: Who do you compete for -- you're always talking about talent. Who do you feel like you compete most for talent?
KENNETH GRIFFIN: Depends on type of talent. So if you're 22 years old, you're graduating from MIT with a degree in computer science, it's going to be us versus Deepmind, which is part of Google. That's going to be the war for talent. And there we need to try to understand does the individual have an interest in the problems we face in finance.
ANDREW ROSS SORKIN: That's so interesting. So Deepmind, which is a -- which is owned by Google.
KENNETH GRIFFIN: Yes.
ANDREW ROSS SORKIN: Rather than a Bridgewater or a Goldman or what might have been a traditional finance --
KENNETH GRIFFIN: I think that we're much more aggressively seeking out that -- those top few minds in computer science in our four walls. So, you know, every firm today has a huge litany of software and hardware problems they're trying to solve, right? And we are very focused on some of the front leading-edge issues in software engineering, in deep learning, in machine learning. That requires a person that's going to think about Citadel versus a Deepmind, not Citadel versus a general software development role at another institution.
ANDREW ROSS SORKIN: How has that changed in the past 20 years, in terms of your hiring and the kind of person you're today looking for?
KENNETH GRIFFIN: I think that specialization in computer science has increased materially over the last 20 years. So 20 years ago, in a sense, most of your college graduates in computer science had a background in compiler design, in a handful of languages.Today you're going to have a whole series of different backgrounds, stretching from, again, your deep learning, data analytics. There's a much wider degree of variance of backgrounds in your computer science degree.
ANDREW ROSS SORKIN: Before we wrap up, I've got a couple quick ones. Bitcoin, crypto, where are you?
KENNETH GRIFFIN: I still scratch my head. My favorite argument is there's a finite number of them. There's a finite number of almost everything in the world.
ANDREW ROSS SORKIN: You used to call them "digital tulips," I believe.
KENNETH GRIFFIN: I didn't, but I'll own that anyways. I don't care.
ANDREW ROSS SORKIN: But is that the way you think about this today?
KENNETH GRIFFIN: No, I think --
ANDREW ROSS SORKIN: I assume you have people on PMs and others who are probably screaming in your ear, Ken, we should be buying this stuff. We should be doing crypto. We should be doing blockchain. Right?
KENNETH GRIFFIN: All right. Let me break down the two conversations. I don't have a single portfolio manager who has told me we should buy crypto. Not a single portfolio manager.And in our market-making business, we've debated whether or not to make markets in cryptocurrencies. And I have a hard time finding myself wanting to be in the position of being a liquidity provider for a product that I don't believe in. What people don't understand, with cryptocurrencies versus, for example, the U.S. dollar, you have to have U.S. dollars to pay your taxes at the end of the year. You don't have a choice. There's no need for cryptocurrencies. They're a solution in search of a problem, from my perspective. What's unfortunate is the amount of height and the number of early investors who have been caught up in this hype. I wish the 27-year-old wasn't buying Bitcoin. I wish they were investing in the companies that define the future of our country and pushing capital in a way that will create jobs, create innovation and will grow our economy.
ANDREW ROSS SORKIN: Okay. This is a fun one for you, because I see the headlines. You've bought a couple homes recently. What do you think about real estate right now in some of the big cities in America?
KENNETH GRIFFIN: I think that there's an interesting dynamic unfolding, which is under Trump's tax proposal, the elimination of state and local deductibility is going to put pressure on the Northern cities to either reduce taxes or they're going to face a reduction in population. So, for example, we look at Connecticut, some of your luxury homes in Connecticut are, unfortunately -- you know, in Greenwich, you can't give them away, practically, compared to five years ago. So I think it's very important that the Northern states, the traditional Blue states, think about how to ensure that they're competitive, versus the Southern states with much lower tax regimes. Real estate, you know, as a country, we're back to close to where we were pre-correction of '07, '08. I still believe that real estate should be -- obviously, it's your home. It's where you live. It should not be a disproportionate part of your net worth or your holding. One thing that I'd say to underpins real estate values, we still have population growth in America. People forget that in Japan, for example, we're going to lose about a third of the population over the next 50 to 60 years. There's no way you'll see home appreciation across much of Japan when you're going to lose a third of your population. In the U.S., as a whole, we still have a growing population. That's going to underpin home prices for years to come, and then in the next 5 to 10 years, we've got to deal with the pressures on the Blue states to be competitive with the Southern states to maintain strong workforce and strong employment bases in the northern half of our country.
ANDREW ROSS SORKIN: Ken Griffin, thank you for the conversation.
KENNETH GRIFFIN: It was a pleasure.
ANDREW ROSS SORKIN: Thank you.
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