Corporate America has never sat on so much cash. The problem is multi-national corporations have been deploying this cash in ways that create jobs abroad, said hedge fund titan Ken Griffin in rare public comments at the Milken Institute Global Conference being held in Los Angeles this week.  The CEO of Citadel, a fund he founded that is now a leader in the of the world of quantitative investing and high frequency trading, touched on inside hedge fund topics not often discussed in public. Ken Griffin, a veracious critic of the US Federal Reserve behind the scenes and not so closet Republican partisan, addressed what many quantitative traders have been predicting to be a major problem: US debt and an economic breakdown.

Ken Griffin waited until the end of his speech to tackle a difficult topic that has been discussed in dulcet tones in underground hedge fund conversations that, to my knowledge, has been active since 2010.  Increasingly the conversation is being made public by major hedge fund players, which has been published in ValueWalk.

Warning: this is an adult conversation

Before we proceed, a warning: what you are about to read is not for the timid and could be unsettling to small children.

“We’re in this false sense of security that the US budget is doing better,” Ken Griffin said at a panel discussion with conference founder Michael Milken and The Blackstone Group L.P. (NYSE:BX)’s Steve Schwarzman, who generally shied away from this radioactive topic. “People are saying that ‘Obama raised taxes on the rich and look where the deficit is and this is all working out really well.’ It’s going to work out really well until about 2025… or 2023 when the bills really start coming due for Social Security, Medicare, Medicaid and Obamacare.”

Ken Griffin makes the point that people aren’t investing in the US because they recognize the budget uncertainty.  While the issue has been obfuscated from view of the general public, certain hedge fund insiders and by extension those who consult multi-national corporations on investment domains are becoming increasingly aware. In other words, elites hiding the issue may work with the general population, but you can’t hide it from knowledgeable insiders – the math is reasonably clear.

There are hedge fund executives who have developed a formula to predict the economic implosion point, which is not entirely scientific due to the nature of politics and the potential for new economic discovery.

One school of thought takes the government numbers on debt and the economy at their word.  This group, which Ken Griffin populates, estimates that an economic implosion could happen starting in 2023 or 2025, dates Ken Griffin threw out in his discussion.  This is the point where the math shows compounding interest on the debt and medical entitlements, promises to pay in the future commonly used in generally accepted accounting principles, will literally swamp the US budget to the point of no return. Some inside the derivatives industry have connected the dots with the potential implosion of $600 trillion in the OTC derivatives created by the large banks.  Warnings have been given to the Chicago Federal Reserve and discussions have taken place at the commissioner level at the Commodity Futures Trading Commission on the topic.

Two schools of thought on implosion date

One school of thought predicts the 2023-25 number for issues to occur, but another school has the under.  They say the implosion point is closer in, perhaps within five years, due to a number of reasons.  This school of thought, most notably vocalized by Boston University’s Laurence Kotlikoff and large hedge fund manager Paul Singer, says the numbers used by the government are wrong and represent and under-estimate of the problem. (We reported on this last week in Singer’s letter to investors.) Because the government does not utilize commonly generally accepted accounting principles by not applying known liabilities to the balance sheet, the target date could be within five years.  The formula is complex and has several inconsistent variables, including the US losing the world reserve currency of choice, which is a political topic and predicting that date is impossible to accurately calculate along with how the investing public will react once the topic is generally understood.

Solutions must be considered

Providing people a real understanding to diagnose an important issue is very different from the solutions required to solve the problem.  While Ken Griffin lets his Republican partisanship slip out, he provides insight.  Among his solutions are the economic wildcards and addressing the problem before it becomes un-addressable.

Ken Griffin says the energy production jobs that could be created in the US from Canadian oil sands and the Keystone Pipeline could reshape the economy.  He says 25,000 high paying jobs are at play here and the oil sands are going to be developed with or without US assistance. “I understand the environmentalists who want to reduce global warming,” he said.  “But Canada is going to produce that oil regardless. It’s just a question of where it goes and how it gets there. I’d rather have that oil in our country and on our continent than abroad.”

Another solution Ken Griffin proposes, one less politically sensitive, is transparency.  He says the US needs to show the world it is addressing the debt problem insiders see. “When you’re building a plant, people are skittish about where the US will be in 2025 when the bills come due.”

Keeping the problem from view of the masses shows insiders the problem is not being dealt with honestly and they have a diminished view of US investment. Regardless of your politics, not recognizing a problem is surely one way for it to manifest.

A Conversation with Ken Griffin and Steve Schwarzman