Ken Griffin On Bitcoin “Elements Of The Tulip Bulb Mania’

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Citadel’s Ken Griffin said Monday that bitcoin may be in a bubble.

“Bitcoin right now has many of the elements of the tulip bulb mania we saw back hundreds of years ago in Holland,” said the billionaire hedge fund manager in an exclusive interview with CNBC’s Leslie Picker. See video and full transcript below

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Ken Griffin: Bitcoin Has 'Elements Of The Tulip Bulb Mania'

Citadel's Ken Griffin: Worried about how bitcoin bubble might end from CNBC.

 

Following is the unofficial transcript of an CNBC EXCLUSIVE interview with Citadel Founder & CEO Ken Griffin and CNBC’s Leslie Picker on CNBC’s “Squawk Alley” (M-F 11AM-12PM) today, Monday, November 27th Following are links to video from the interview on CNBC.com: https://www.cnbc.com/video/2017/11/27/hedge-fund-competition-looks-to-seek-out-exception-talent-with-great-problem-skills.html, https://www.cnbc.com/video/2017/11/27/citadels-ken-griffin-no-doubt-that-valuations-are-somewhat-stretched.html, & https://www.cnbc.com/video/2017/11/27/citadels-ken-griffin-worried-about-how-bitcoin-bubble-might-end.html.

MELISSA LEE: ALL RIGHT, THANK YOU VERY MUCH, RICK SANTELLI. CITADEL HOSTING A DATATHON, A COMPETITION FOR POTENTIAL HEDGE FUND TALENT, HERE AT THE NYSE. SO LET’S SEND IT OVER TO THE FLOOR WITH OUR LESLIE PICKER AND CITADEL CEO KEN GRIFFIN. LESLIE.

LESLIE PICKER: HEY MELISSA. THAT’S RIGHT. KEN, THANK YOU SO MUCH FOR JOINING US. THIS – THE DATA OPEN, IN MANY WAYS IT’S A METAPHOR FOR THE COMPETITION HEDGE FUNDS FACE IN TERMS OF RECRUITING TALENT. CAN YOU GIVE US A SENSE OF WHY YOU DO THIS COMPETITION AND THE COMPETITION FOR TALENT THAT YOU’RE EXPERIENCING TODAY IN THE HEDGE FUND INDUSTRY?

KEN GRIFFIN: SO THIS COMPETITION IS ABOUT FINDING INDIVIDUALS WHO HAVE REALLY GREAT PROBLEM SOLVING SKILLS, AND PROBLEM SOLVING SKILLS WHEN IT COMES TO THE USE OF BIG DATA, WHICH IS A TOPIC VERY NEAR AND DEAR TO OUR HEARTS AND FINANCIAL MARKETS TODAY, WHICH IS HOW DO WE USE ALL THE DATA THAT’S COMING INTO EXISTENCE AT AN EVER ACCELERATING RATE TO BETTER UNDERSTAND THE COMPANIES THAT WE INVEST IN. AND THEN FOR THE WAR FOR TALENT AMONGST HEDGE FUNDS, FINDING GREAT INVESTORS HAS ALWAYS BEEN A CHALLENGE OF ALL US IN FINANCE. GREAT INVESTORS ARE LIKE GREAT BASKETBALL PLAYERS, THEY’RE HARD TO COME BY. THEY HAVE ALMOST A GIFT, THE ABILITY TO ASSIMILATE INFORMATION, DRAW CONCLUSIONS, AND TO ACT ON THEIR BELIEFS. IT’S A REALLY UNIQUE AND HARD SKILL TO FIND.

PICKER: AND IT SEEMS LIKE THESE DAYS INVESTORS NEED THE TECH SKILLS, AS WELL, BECAUSE QUANTS BECOMING MORE IMPORTANT, ARTIFICIAL INTELLIGENCE IS BECOMING MORE IMPORTANT. AND YOU’RE COMPETING WITH COMPANIES LIKE MICROSOFT AND GOOGLE TO ACQUIRE THAT TALENT. DO YOU EVER THINK THAT THERE IS A RISK OF A CULTURE CLASH BETWEEN SILICON VALLEY AND THE HEDGE FUND INDUSTRY AS YOU KIND OF RESHAPE THE RECRUITING BACKDROP?

GRIFFIN: WELL, WE’VE USED TECHNOLOGY AT CITADEL FOR ALMOST 30 YEARS. IF YOU GO BACK TO THE ORDINANCE OF THE FIRM, IT WAS ABOUT APPLYING QUANTITATIVE ANALYTICS TECHNOLOGY TO FINANCIAL MARKETS. NOW WE’VE MOVED WELL PAST THAT STARTING POINT, TODAY, MUCH OF OUR CAPITAL’S DEPLOY USING FUNDAMENTAL ANALYSIS. IT’S GOOD OLD FASHIONED STOCK PICKING. SO I DON’T THINK THERE HAS TO BE A CULTURE CLASH TO MAKE THIS WORK. WE CLEARLY COMPETE WITH FACEBOOK AND GOOGLE AND AMAZON FOR GIFTED INDIVIDUALS. WE’VE ALWAYS COMPETED ACROSS A VARIETY OF INDUSTRIES FOR GIFTED INDIVIDUALS. THERE’S NOTHING NEW THERE. WHAT IS NEW IS THAT MANY OF OUR GREAT PORTFOLIO MANAGERS TODAY, THEY’RE GREAT AT GETTING THROUGH 10 Ks, G THEY’RE GREAT AT REAT AT UNDERSTANDING A MANAGEMENT TEAMS PRESENTATION, THEY’RE GREAT AT GREAT AT UNDERSTANDING A BUSINESS MISSION OBJECTIVE, HOW THEY CREATE VALUE FOR THEIR CUSTOMERS, BUT THEY’RE ALSO GREAT AT KNOWING HOW TO INTERACT WITH DATA SCIENTISTS AND ANALYSTS WHO CAN HELP THEM UNDERSTAND HOW IS A BUSINESS PERFORMING IN REAL TIME. SO THE MIX OF SKILLS REQUIRED FOR SUCCESS IS CHANGING, AND OUR GREAT PORTFOLIO MANAGERS ARE ABLE TO EMBRACE THAT CHANGE IN HOW THEY PRACTICE THEIR ART.

PICKER: AND ONE OF THE BIGGEST BENEFICIARIES OF THE RECENT SHAKE UP THAT WE’VE SEEN IN THE HEDGE FUND INDUSTRY IS QUANT. I KNOW CITADEL DOES BOTH. HOW DO YOU LOOK AT RECRUITMENT FOR QUANT VERSUS FUNDAMENTAL THESE DAYS AND THE APPLICATION OF MORE TECHNOLOGY IN YOUR TRADING?

GRIFFIN: WELL, THERE’S BEEN A RISE OF QUANTITATIVE TRADING STRATEGIES OVER THE LAST 30 YEARS, AND TODAY WE’RE AT PROBABLY A PEAK IN CAPITAL DEPLOYED WITH THESE STRATEGIES. THIS IS PART OF THE MARCH OF PROGRESS FORWARD. THERE’S AN UNDERSTANDING THAT MANY DYNAMICS OF HOW HUMANS BEHAVE CAN BE, IN A SENSE, TAKEN ADVANTAGE OF BY TECHNOLOGY. IF WE KNOW HOW HUMANS BEHAVE THEN WE CAN PREDICT THAT, WE CAN USE THAT TO BETTER POSITION OUR PORTFOLIOS. AND A NUMBER OF QUANTITATIVE STRATEGIES RELY UPON HUMAN BIASES AND BEHAVIOR TO BE SUCCESSFUL. SO AS WE UNDERSTAND THIS, LOOK AT THE RECENT NOBEL PRIZE IN BEHAVIORAL ECONOMICS. AS WE UNDERSTAND THIS, WE WILL USE COMPUTERS IN NEW AND INNOVATIVE WAYS TO BETTER DRIVE THE PRICING OF ASSETS IN FINANCIAL MARKETS.

PICKER: NOW I WANT TO TALK TO YOU A LITTLE BIT ABOUT YOUR OUTPERFORMANCE THIS YEAR. I’VE HEARD FROM A SOURCE THAT THE WELLINGTON FUND GAVE 2% FOR THE MONTH OF OCTOBER AND 11.4% IN THE YEAR THROUGH OCTOBER. WHAT WAS THE KEY TO SOME OF THE OUTPERFORMANCE AND THE ALPHA THAT YOU’RE EXPERIENCING THIS YEAR SPECIFICALLY?

GRIFFIN: WE’RE HAVING A SOLID YEAR, AND LIKE MOST OF OUR YEARS, IT’S DRIVEN BY GOOD OLD FASHIONED STOCK PICKING. WE HAVE SEVERAL HUNDRED PEOPLE AT CITADEL WHO UNDERSTAND THE BUSINESSES THAT ARE REPRESENTED HERE ON THE FLOOR OF THE NEW YORK STOCK EXCHANGE, WHETHER IT’S DISNEY – A NUMBER OF BUSINESSES HERE ON THE NEW YORK STOCK EXCHANGE, IT’S UNDERSTANDING THESE BUSINESSES, THEIR BUSINESS MODELS, HOW THEY CREATE VALUE FOR THEIR CUSTOMERS AND WHETHER OR NOT THEY ARE OUTPERFORMING OR UNDERPERFORMING EXPECTATIONS. THAT’S THE HEART OF OUR BUSINESS, IS REALLY UNDERSTANDING WHICH BUSINESSES ARE OUTPERFORMING EXPECTATIONS, WHICH ARE UNDERPERFORMING EXPECTATIONS AND POSITIONING ACCORDINGLY. THAT’S WHAT WE DO DAY IN AND DAY OUT.

PICKER: YOU’VE SPOKEN IN THE PAST ABOUT HOW THE MARKET HAS INCREASINGLY BECOME MORE EFFICIENT OVER TIME. WHAT DOES THAT MEAN FOR THE HEDGE FUND INDUSTRY SPECIFICALLY, AND IF THERE IS THIS MOVE TOWARDS EFFICIENCY IN THE MARKETPLACE THAT MAKES IT HARDER TO GENERATE ALPHA, WHY SHOULD ANYONE WOULD MONEY INTO A HEDGE FUND IN THE FIRST PLACE?

GRIFFIN: WELL MARKETS – WE WANT OUR MARKETS TO BE EFFICIENT BECAUSE THAT’S HOW WE ALLOCATE CAPITAL AS A SOCIETY. WE WANT COMPANIES THAT HAVE GREAT PROSPECTS TO BE THE COMPANIES THAT ARE ABLE TO HAVE THE LOWEST COST TO CAPITAL, SO THEY CAN HAVE THE FUNDS AND RESOURCES TO REACH THEIR VISION. SO OUR CAPITAL MARKETS, THE GOAL OF OUR CAPITAL MARKETS IS THE EFFICIENT ALLOCATION OF CAPITAL, ONE OF OUR SCARCEST RESOURCES IN SOCIETY. NOW, AS WE MARCH FORWARD, AS WE BECOME BETTER INVESTORS, THEN MARKETS WILL BE MORE EFFICIENT AND CAPITAL WILL BE MORE EFFICIENTLY DEPLOYED. FOR HEDGE FUND MANAGERS I’TS A CONSTANT CHALLENGE: HOW DO YOU NEED TO REINVENT YOURSELF, SUCH THAT YOU HAVE THE SKILLS THAT ARE APPLICABLE AT THIS MOMENT IN TIME TO UNDERSTAND WHICH BUSINESSES ARE GOING TO FLOURISH AND WHICH ONES ARE NOT? AND THAT’S AN ALWAYS CHANGING SET OF SKILLS. WHEN I STARTED, AND I’M NOT THAT OLD, QUOTRON WAS STATE OF THE ART, THAT WAS REAL TIME NEWS WAS A QUOTRON, AND YOU COULD GET A SINGLE STOCK PRICE AT A SINGLE TIME. TODAY THAT’S IN THE HANDS OF MILLIONS OF RETAIL INVESTORS WITH MUCH BETTER ACCESS TO NEWS AND INFORMATION THAN WE EVER HAD 30 YEARS AGO. SO YOU CAN IMAGINE HOW THE SKILLS REQUIRED TO BE A GREAT INVESTOR HAVE CHANGED OVER JUST THE COURSE OF MY LIFETIME OR YOUR LIFETIME.

PICKER: IN TERMS OF JUST THE CONTOURS OF THE MARKET RIGHT NOW, WE’VE SEEN FOR A WHILE RISING VALUATIONS IN THE STOCK MARKET, LOW VOLATILITY, A LOT OF PEOPLE HAVE BEEN PONTIFICATING ON WHEN EXACTLY THAT’S GOING TO TURN. WHAT DO YOU SAY WHEN YOU LOOK AT THE STOCK MARKET TODAY AND WHAT IT SAYS ABOUT THE CYCLE?

GRIFFIN: SO, WE’RE CLEARLY AT VALUATIONS THAT ARE MORE STRETCH THAN TYPICAL, BUT WE’RE ALSO IN A VERY, VERY CONSTRUCTIVE ENVIRONMENT FOR STOCK PRICES. WE HAVE EXTREMELY LOW INFLATION, THANKFULLY, AND WE HAVE VERY LOW INTEREST RATES, AND THOSE TWO COMBINED CREATE A STRONG UNDERPINNING FOR VALUATIONS. THERE’S NO DOUBT THAT VALUATIONS ARE SOMEWHAT STRETCHED, BUT REMEMBER THE BACKDROP. LOW RATES, LOW INFLATION, REASONABLE GROWTH IN REVENUES, THE ABILITY TO BRING PROFITS TO THE BOTTOM LINE. THESE ARE SUPPORTIVE DYNAMICS FOR STOCK PRICES.

PICKER: AND YET, YOU KNOW, HERE WE ARE LOOKING AT THE POTENTIAL FOR TAX REFORM, WHICH A LOT OF PEOPLE SAY MAY NOT EVEN BE FULLY PRICED INTO THE MARKETS AT THIS POINT. DO YOU BELIEVE IT’S THE RIGHT TIME IN THE BUSINESS CYCLE TO BE DOING TAX REFORM?

GRIFFIN: SO WE’RE LATE IN THE BUSINESS CYCLE AND TO THE EXTENT THIS IS A MOVE THAT WOULD BE STIMULATIVE IN NATURE, YOU WOULD USUALLY RESERVE TAX REFORM OF THIS NATURE FOR RIGHT IN THE MIDST OF A RECESSION. SO TO THE EXTENT THIS REPRESENTS FISCAL STIMULUS, THIS IS A LATENT BUSINESS CYCLE MOVE. IT WOULD BE CONTRARY TO WHAT YOU WOULD TRADITIONALLY DO FROM AN ECONOMICS PERSPECTIVE.

PICKER: SHOULD WE NOT DO TAX REFORM AT ALL? SAVE THAT SHIP?

GRIFFIN: THERE’S A COUPLE THINGS TO THINK ABOUT HERE. NUMBER ONE IS THE TAX REFORM FOR INDIVIDUALS IS WELL THOUGHT OUT. ELIMINATED THE ALTERNATIVE MINIMUM TAX, FOR EXAMPLE, IS REALLY HELPFUL FOR MILLIONS OF AMERICANS IN TERMS OF THE BURDEN OF OUR TAX PAPERWORK IN OUR COUNTRY. BRINGING IN OUR CORPORATE RATE DOWN TO A LEVEL MORE COMPETITIVE WITH THE OECD IS GOOD FOR CORPORATE, CAPITAL FORMATION HERE IN AMERICA. DO WE NEED TO CUT TAXES AS MUCH AS WE ARE? PROBABLY NOT. DO WE NEED TO REFORM TAXES, SIMPLIFY TAXES, AND KEEP AMERICA COMPETITIVE? ABSOLUTELY.

PICKER: SO ARE YOU SAYING CORPORATIONS DON’T REALLY NEED THE 20% RATE THAT THEY ARE TALKING ABOUT TODAY?

GRIFFIN: IF WE LOOK AT THE OECD MEANS, WHICH ARE IN THE MID 20s, I DON’T UNDERSTAND WHY WE’RE NOT CLOSER TO THAT NUMBER. I WOULD HAVE THOUGHT WE WOULD HAVE LANDED AT SOMEWHERE AROUND 25% FOR OUR CORPORATE RATE, NOT 20, BUT PROBABLY NOT WORTH SPLITTING HAIRS OVER.

PICKER: I WANT TO TALK TO YOU ABOUT BITCOIN, BECAUSE OVER THE WEEKEND IT SURPASSED $9,000. BITCOIN. THIS IS SOMETHING THAT A LOT OF PEOPLE IN THE MODERN DAY HAVEN’T SEEN ANYTHING LIKE THAT BEFORE. YOU KNOW, WHAT’S YOUR TAKE ON BITCOIN? IS IT A FRAUD AS JAMIE DIMON SAYS, OR IS IT THE FUTURE OF CURRENCY AS WE KNOW IT?

GRIFFIN: IT’S NOT THE FUTURE OF CURRENCY, AND I WOULDN’T CALL IT A FRAUD EITHER. AND I THINK WHAT IS HAPPENING IS PEOPLE CONFUSE BITCOIN WITH BLOCK CHAIN. BLOCK CHAIN’S A VERY INTERESTING TECHNOLOGY THAT WILL HAVE SOME VERY PROFOUND APPLICATIONS VERY SOCIETY OVER THE YEARS TO COME. BITCOIN IS A CRYPTO CURRENCY THAT RELIES UPON BLOCK CHAIN FOR HOW IT’S TRANSFERRED BETWEEN PARTIES. BITCOIN RIGHT NOW HAS MANY OF THE ELEMENTS OF THE TULIPOMANIA THAT WE SAW HUNDREDS OF YEARS AGO IN HOLLAND. AND I GET VERY WORRIED THAT PEOPLE WHO ARE BUYING BITCOINS DON’T REALLY UNDERSTAND WHAT THEY ARE PARTICIPATING IN, OTHER THAN THE HEADLINE STORIES OF IT KEEPS GOING HIGHER, AND I WANT TO MAKE SURE I DON’T MISS THIS OPPORTUNITY TO MAKE SOME MONEY. SO IT IS A FRAUD? NO. BUT THESE BUBBLES TEND TO END IN TEARS, AND I WORRY ABOUT HOW THIS BUBBLE MIGHT END.

PICKER: AND I MEAN, THAT’S ONE OF THE BUBBLE SIGNS PEOPLE TEND TO POINT TO. OTHER PEOPLE ARE LOOKING AT THE HIGH YIELD MARKET AND SAYING CRACKS ARE SHOWING THERE. ARE YOU LOOKING AT THAT MARKET AS A SIGNAL FOR WHAT IT MEANS FOR EQUITY PRICES AND—?

GRIFFIN: SO THE HIGH YIELD MARKET HAS BEEN VERY, VERY ROBUST OVER THE LAST SEVERAL YEARS. TREMENDOUS AMOUNT OF ISSUANCE, TREMENDOUS AMOUNT OF CAPITAL RAISED. TREMENDOUS AMOUNT OF CAPITAL RAISED IN PARTICULAR IN THE ENERGY SPACE, WHERE WE’VE HAD QUITE A BIT OF TURMOIL OVER THE LAST THREE YEARS IN THE BACK OF -- LOWER OIL PRICES. THE GREAT UPSIDE OF FRACKING AND THE SHALE REVOLUTION HERE IN THE UNITED STATES HAS BEEN A DRAMATIC DECREASE OF THE PRICE OF NATURAL GAS AND OIL FOR ALL AMERICANS. PROFOUND DECREASE, ONE THAT WAS NOT FORESEEN BY MOST OF US JUST THREE OR FOUR YEARS AGO. THE PROBLEM WITH THIS IS THAT FOR THE COMPANIES IN THE ENERGY SPACE, THESE LOWER PRICES HAVE MADE THEIR BUSINESS MODELS MUCH MORE CHALLENGED AND HAS CREATED QUITE A BIT OF TURMOIL IN THAT SEGMENT OF THE HIGH YIELD MARKET. SO I WOULD NOT EXTRAPOLATE SOME OF THE TRIALS AND TRIBULATIONS OF THE ENERGY SPACE ACROSS THE BROADER HIGH YIELD MARKET. AND REMEMBER, LOWER ENERGY PRICES ARE GOOD FOR AMERICA, SO ALTHOUGH THIS HAS BEEN TOUGH FOR THE AMERICAN BUSINESSES IN THAT SPACE, FOR THE AMERICAN CONSUMER, WE’RE LOOKING AT OIL PRICES AND NATURAL GAS PRICES THAT WE JUST HAVEN’T SEEN IN DECADES.

PICKER: AS YOU LOOK AT THE EQUITY MARKET AS A WHOLE, DO YOU BELIEVE IT’S UNDERVALUED OR OVERVALUED?

GRIFFIN: I THINK WE’RE IN THE SEVENTH INNING OF THIS MARKET RALLY. WE’RE— AS I SAID EARLIER, VALUATIONS ARE STRETCHED. WE’RE NOT AT THE – WE’RE NOT IN THE SORT OF CLASSIC MANIA THAT YOU GET AT THE VERY END OF A BULL MARKET. SOMEWHAT LIKE THE MANIA THAT WE SEE IN BITCOIN TODAY.

PICKER: SEVENTH INNING FROM A CHICAGOAN OVER HERE, KEN GRIFFIN. THANK YOU SO MUCH FOR JOINING US. BACK OVER TO YOU, CARL.

CARL QUINTANILLA: LESLIE, WONDERFUL STUFF. THANK YOU SO MUCH. OUR LESLIE PICKER HERE AT THE NYSE WITH KEN GRIFFIN.

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