Julian Robertson is the former head of Tiger Management Corp., one of the first hedge funds. He is best known for turning $8MM in seed capital into $22B at the peak of his company’s existence in 1998. Ironically, his refusal to buy into the tech bubble proved to be the cause of his downfall. He was of course, ultimately proven right. Today, he spends his billions in philanthropic efforts.
Robertson made waves in a late 2007 when he called for a “doozy of a recession”. At the time, it seemed like a rather shocking statement as the slow-down in the economy appeared to be relatively benign. We all know what happened next. Robertson had shorted CDS and sub-prime securities and made millions in the downturn. Robertson was unfazed by the downturn as he then turned bullish on certain equities and was a dip buyer in late 2008 and early 2009. He has proven prescient throughout his career and the last few years are nothing more than the cherry on top.
In a recent interview with the Financial Times he outlined his current outlook. Roberton’s overall macro theme is not unlike trades we highlighted in last week’s edition of the Guru Outlook which were largely based on massive money printing and an inflationary environment. Robertson believes the Fed’s money printing is likely to cause rampant inflation and could eventually force the Chinese and Japanese to stop purchasing long-dated treasuries. He thinks interest rates could skyrocket as high as 15-20%.
As of late last year Robertson had implemented a curve steepener trade to benefit from falling short-term rates and rising long-term rates, but has recently switched to a curve caps trade as short-term rates obviously can’t fall any further. Without getting into the gory details, Robertson is essentially buying puts on long bonds via swaps. Robertson details the transition:
“The curve steepener was a measurement of the differential between short and long term rates and we figured short term rates would go down and long term rates would go up. We didn’t do well on the long term part, but the short term part worked out so well that actually we made a little money on the trade. Short term rates are nothing, so they can’t really go below nothing. We’ve shifted the curve steepeners, which are basically long-term puts on long-term bonds… highly leveraged and they’re like puts in that you know what your risk is, it’s measured by what you paid for the put. I think (long term rates) can go to 15, 20%….
Although he is effectively betting on inflation, Robertson, curiously, does not like gold. He recently referred to gold bugs as “crazy” and likes the bond short better than the gold long. Of course, David Einhorn and John Paulson would take issue with his stance. Robertson is highly critical of the current monetary policy:
“I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved. I think what we’re doing now will either fail, or it will result in unbelievably high inflation – and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening.”
At this week’s Value Investing Congress Robertson highlighted some of his favorite positions. Robertson likes Mastercard (MA) and Visa (V) likely as a continued play on mounting U.S. private debt. He also likes certain tech names including Intel (INTC) and Google (GOOG) which he described as good value plays. He also detailed some other micro and macro positions in the FT interview (he does not necessarily own the following positions, however):
- Apple (AAPL)
- Gold Stocks
- Goldman Sachs
- Aussie Dollar
- $US Dollar
As for the macro outlook – Robertson believes we have simply kicked the can down the road. He sees some relief in the economy in the medium term, but still believes we are bogged down by all of the same problems that caused the financial crisis to begin with:
“I really do think the recession is at least temporarily over. But we haven’t addressed so many of our problems and we are borrowing so much money that we can’t possibly pay it back, unless the Chinese and Japanese buy our bonds.”
Despite his mild bullishness on certain sectors and names Roberton’s long-term outlook is none too uplifting :
“we’ve got to face this problem of the major purchaser of our bonds maybe not being around later, maybe not being around to bail us out, and I think that’s something we have to look at seriously. And because there is such a serious problem for us, that causes me to probably be missing out on a lot of the profitability that is inherent in today’s stock market.”