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Thank you all so much for joining for this conversation. Ken, Thank you so much for sitting down with me this evening.
It is it is great to be here today, and it is such a pleasure to be in your particularly during this time of year.
Should we start with that, because perhaps everyone will have noticed it's two Americans speaking in Europe. Ken, it feels like recently there's been a lot of American barbs, let's say, thrown at Europe. President Trump warning about end of civilization because of Europe's overreliance on America, Jamie diamond saying it's a region that's anti business, that has a lack of innovation. Are those most dire of forecasts for Europe? Are they correct?
What a cheery way to start today. And I feel like I was just handing the hot potato quest.
Yes, I'm sorry, Ken, you were indeed. So.
First of all, you know, President Trump is a bit prone to heaperballe and having said that, there's no doubt that the Western world needs Europe to be more successful. We need to see higher economic growth in Europe, we need to see more innovation, we need to see more consumer demand, for goods and services, because the Western world will only be strong and prosperous if we have a strong and prosperous Europe.
What does the road ahead to get that strong and prosperous Europe look like?
How do we get there? Look, I think Mario Dragi did a fantastic job putting forth a playbook for how to revitalize Europe. And I would say that, you know, I'll agree with eighty or ninety percent of what he wrote, but rather than regurgitate what he wrote, and he wrote really thoughtfully. I think the sailing points are Europe needs
to create a culture of entrepreneurism. Far too much the world's innovation takes place in the United States, in China, and Europe, having such an incredibly well educated population, should have far more entrepreneurial success stories than it does. So that's a really big issue that Europe needs to address. It's a cultural issue. And the second is that Europe's
capital markets simply aren't deep and robust enough. The venture capital community of the United States, the depth of the private equity markets, the depth of the growth equity markets, the depth of the public markets makes it much easier to organize to secure capital and to grow a business than it is here in Europe.
Let's talk about leadership in the US because it's also been a moment of questions in the early elections, local electionsment governor elections. The trend has been very clear. When Democrats run on affordability, they had been winning. Twenty twenty six is a midterm year. Do the Republicans risk losing the American public?
So, you know, it's really it's quite ironic to see how the tables have turned because just twelve months ago President Trump and the Republicans swept into office on the issue of inflation, and the Democrats have rebranded the problem of inflation as the issue of affordability, and they are now well poised to return to control of the House, and there's even discussion of them retaking the Senate on the back of how the affordability issue strikes accord with
the American public. And the big picture is the American consumer is tired of the persistent and sticky inflation. They feel like they can't get ahead in a world where their savings and their wages are constantly deprecated by the impact of inflation.
Why aren't Republicans speaking to that is it an issue of not having the policies, of not communicating the policies correctly.
So I think it's actually fairly complicated. I think that the Republicans struggle with the reality that many of their policies which they ran on, for example, ending illegal immigration into the United States, are actually pro inflationary. Right when you end illegal immigration, you reduce the size the available workforce. That's proneflation. And so the Republicans are grappling with tariffs another case study. You impose a tariff, it's a regressive
tax on consumers. It's proneflation. So some of the very policies that the Republicans have put forth and have been successful in implementing, are actually the very policies that tend to be proneflation. Some of the other policies, for example, deregulation, are just going to take longer to play out. And ultimately, ultimately deregulation, which should unleash productivity gains, will create will create a reduction inflation, a very healthy reduction. But we need to get to that point in time.
It's a timing issue. And President Trump said something similar, not exactly what you're saying, Ken, but he had spoken to the Wall Street Journal just this week saying that the reason the American public hasn't realized his policies are working is just because they take time to take effect, and what Americans are experiencing now is democrat led inflation. It seems like you would maybe take issue with the latter that maybe it's current policies leading to some of the stickiness.
Look, I think there's no doubt that the President inherited an environment that was still struggling with inflation. But the easiest parts of his agenda to implement were, unfortunately, when it comes to the issue before to build through the issue of inflation, were those policy choices that actually most fuel inflation. Right, the curtailing of the labor markets, the
clear cut inflationary pressure of tariffs. Those were easy things for the President to implement, and unfortunately they have continued to lead to this inflationary environment that we live in.
Well, you have seen the White House try to backtrack on some of it, be it tariffs on Brazil because of the impact on agricultural goods and the bills that Americans face in the groceries. We're looking at tariffs now making their way through the Supreme Court. Is it too late, though.
So I think it's gonna be hard to roll back tariffs writ large unless the Supreme Court makes a pretty bold decision. And I only say that because the Supreme Court is going to face the challenge doesn't want to take on the President with respect to one of his single most important policy wins from the perspective of the White House, Right, does the Supreme Court really want to take that issue on as a matter of law. I hope they do, and I hope they take it on
with a very thoughtful and reasoned opinion. But that's going to be a tough call for the Supreme Court to make now. Having said that, we have seen the rollback of tariffs, in particular in products that consumers put in their grocery cart. The President's getting the message from the front lines, from the Congress people that serve our people that the voters are angry about inflation and they're looking for ways, they're looking for ways to help to address
the issues of affordability. You know, it was very interesting. I was with a group of business executives and the President. He was very much listening for ideas on how to address the issues of affordability in America. He cares about this issue.
Maybe it's too late for some of the local elections though, in getting to the American public. New York a big change for the city with a Democratic socialist Miami too, your hometown Ken where you have the first Democrat in three decades. You've praised the leadership of Florida many times. Does that change your outlook at all? To have the local election in Florida also shift in terms of who's leading it.
Well, Miami Dade County has had a Democratic mayor actually for quite a bit of time now, and Miami just recently elected a Democrat to be the mayor of the City of Miami. And I think there's a stark contrast between the Democratic leader elect of Miami and the leader elect of New York City. The elect of New York City ran on a set of policies that will either be impossible to implement or that will come with a draconian long term cost to the City of New York.
You know, for example, if you want to address the issue of housing affordability, you need to build more homes. And when you're talking about rent control, all you're doing is telling developers and big neon lights don't build in New York City. Now, contrast that with the incoming mayor of Miami. She has a long history of being pragmatic with respect to policy choices that will improve the lives
of the people who live in Miami. She very much wants to accelerate the permitting process for builders to create more housing stock. She wants to help release lands into the private market to help and create available housing. She wants to address the issue of housing affordability with thoughtful, time tested, and proven policies rather than the fantasy that's being espoused by mayor elect for New York City.
Are you confident that Americans will continue to elect in people of positions of power like you're describing with common sense policy or do you look at New York as a red flag for twenty twenty six?
Look? I think that New York City is a red flag because people put aside good sense and common sense to lect somebody who is incredibly charismatic, who ran a really powerful campaign on social media, but who ultimately doesn't have the ability to deliver on the promises that he set forth. In contrast, I think the mayor elect of Miami, she ran on a much less powerful set of campaign messages. But do you know what she'll deliver on the promises that she made to the voters of Miami.
You still have a good chunk of your business in New York. Would you reath think just how much exposure you have to the city at the moment.
Look, I think every business executive is thinking through the magnitude of exposure they have to New York. And there's a very common talking point on this we survived to Blasio, is.
That enough comfort?
Well that's the talking point, and unfortunately you know that. I think there's some truth to that. New York took a big set back during the Deblasio days, and I hope that Mandamie starts to think about how to pivot to a more thoughtful set of policies that will allow New York City to maintain its position. Not only is one of the greatest cities in America, but one of the greatest cities in the world.
I'm struck that it's not just the American populist that's thinking about affordability or inflation, it's markets too. Since the FED started its cutting cycle, cutting seventy five basis points so far this year, thirty year boniarlds are up eighty basis points. Ten year boniolds are up thirty basis points of fifty. Rather, it's not the move that you would expect. Is there signal in that?
Well, Unfortunately, the bond markets are expressing their anxiety about inflation. And when you look at the ten year yell point to the thirty year yell point, what you're really observing is how much risk premium, How much like insurance premium does the market demand for higher inflation? Because remember, you're lending the money to the US government for ten or
thirty years at a time at a fixed rate. So you want to think very long and hard about what rate do you lend money to the US government which is running a staggering deficit, that is now running very very easy monetary policy relative to the inflationary pressures that we're facing. What risk premium do you demand to do so? So, although the FED has brought short term interest rates down, what is really done. It is unnerved a bond market community that invests or commits capital for ten years or
thirty years at a time. And why is that matter? Because capital formation building a new factory is funded with ten and thirty year debt. So the hope that will we will stimulate the economy, that we will encourage the investments that we need in America that are all funded with long term debt are actually being undermined by the easy monetary policy at the Fed. Today.
Markets are incredibly sanguine on this idea that we're going to run it hot, we're going to cut, we're going to get stimulus. Are you essentially saying that markets are underpricing a clear risk.
Well, there's two markets. There's the fixed income market, which is anxious about this journey, and there's the equity market. The equity market loves an easy money story. So what we're seeing is a tale of two very different worlds from the perspective of two very different investor groups. Your fixed income investor doesn't participate directly in the easy money policies. In fact, they're adverse to that. They're anxious about that how much will inflation erode the value the dollar that
I lend to the government today. The equity market thrives on this.
It's going to be right.
Well, Unfortunately, I think that the fixed income markets probably has its head screw done better here that we do have an issue with stickiness and inflation, goods deflation. The story of our adult life fuel by globalization is over. It's over for now. Maybe in ten years, as robotics continue to accelerate, we'll have another big wave of goods deflation. But the goods deflation that we've enjoyed from globalization is over. Supply chains are being re architected, Manufacturing has been moved
into higher cost jurisdictions. That's going to end the goods deflation that's been the theme of our lifetime. With that, you have more pressure on services, inflation and the cost of housing flowing through the inflationary picture that American households face.
So just to kind of paint the picture of what this actually looks like on the ground, If you get a FED that continues to cut, maybe supported by a candidate that President Trump puts in place who is loyal to him, the FED continues to cut, you get this real pressure where bond yields go up. What does that look like? Does it look like risk markets crashing? Does the business environment which America has enjoyed, does it get curtailed? Just how dramatic of an impact or reachalking.
I don't think we're actually looking at a scenario like that, all right, I think you're looking at higher bondials as a possibility. But remember the easy money will fuel the stock market boom. Right, There's two different investor communities here, and the stock market investors when they see lower interest rates bid up for stocks. That's just the propensity of that community is easy money means higher prices.
I mentioned the FED maybe playing a role in here. In About three months ago, you wrote an op ed in the Wall Street Journal. I'd love to read a line from it because it was really important and timely. You wrote that pressuring the Central Bank to adopt a more permissive stance toward inflation carries deep costs. Can Since then, we've seen a NEC director Kevin Hassett, emerge as the front runner from the FED. There's reporting overnight that there's
been some pushback in Trump's inner circle. Is that pushback warranted? Would you support a Kevin Hassett as leading the FED, someone who's seen as very loyal to the president?
Look, I think the most important move the President and the incoming FED chairman can make or chairwoman is the case maybe is to separate, is to create distance between the White House and the FED because the most difficult job the FED has is the job of raising rates to combat inflation, which can result in higher unemployment. It's
a politically unpopular decision to have to make. The White House having distance from the FED gives the FED more latitude to make the tough calls you need to make to protect the long term stability of the dollar and to protect the long term interests of the economy. And sometimes the long term interest the economy involves short term pain and misery. Vulgar experienced this back when he was
FED chairman. This is a real issue. And when the White House usurps control the FED, even if they don't actually have it as a practical matter, if they're perceived to control the FED, then if inflation rears its ugly head, the President can't blame the chair of the FED. The buck stops on his desk. So I don't know why President Trump wants to take that risk in an environment where the outlook for inflation is so difficult to forecast
or predict. And there is again a lot of pro inflationary pressures that have been created by the change labor markets, the high fiscal deficits, that is, fiscal stimulus, and of course right now, the relatively easy monetary policy.
Well, I mean you started this with mentioning you'd been in Washington, DC with some of their business leaders with the Trump administration looking at solutions for affordability. Did you get a word in and who your pick would be for FED chair?
You said, who you.
Perhaps the characteristics of who you don't want it to be, who would make sense for this job.
I think the President has a number of really good people to choose from for the role. I don't think throwing my sort of choice into the mix helps to add anything to the argument or decision at hand. I think the President will hopefully make a decision from the perspective of who will give the global markets and the American investing public and the American consumer the greatest peace of mind that we will manage inflation in.
America, and someone not from the White House ideally is what you're saying.
I actually don't think that that's as important as the ability of that candidate to make it clear to the House of Representatives or the Senate in this case, and the American people that they will make the decisions that need to be made to protect the long term interest to the US economy.
So ken, if reducing rates is one thing that's excited risk markets, we'd be remiss if we didn't talk about the other thing that's been talked about all day today, and that is an AI. In twenty twenty three, you said that there was a lot of hype, maybe too much hype in AI. In the past two and a half years, we have seen advancements, better jobs at producing images, better voice recognition, and a whole slew of businesses at
least they say that they're adopting AI. Have you reassessed in the past two and a half years or do you still think there's too much hype?
No? I think actually we've been pretty spot on with that forecast so far. Now, what has happened over the last two years is, actually, though a very important and powerful story in the C suite of corporate America, is a greater focus on how do you use technology to increase productivity. It may not be generative AI, but there's a reawakening to the importance of using technology to empower
business outcomes. I was with a group of international business executives about a year and change ago, and everybody who was excited around the dinner table talking about AI, and I thought, you know what, let's all share a story as to how we're using AI to make our businesses better. And I heard five or six really interesting stories of how corporations were transforming their businesses through the use of technology, but not one story involved generative AI.
If you are one of these players, then that exists. In this eco system where Hyperscalers has spent two hundred and thirty billion dollars just in twenty twenty five, with projections to go somewhere near three trillion over the next decade. That seems a little bit worrying ken that people aren't finding uses for AI, that they're instead just finding uses for other technology and maybe wrapping it in an AI bo.
Well, I mean, first of all, like I said, these corporate executives shared really great stories, like how they increased their ability to put fifteen percent more cargo onto a train onto a shipping vessel. I mean, that's just money right to the bottom line, less environmental impact, higher margins, that's good business. So the upshot of this is that
Corporate America is securing gains from the use of technology. Again, I think they're just securing a greater share of those gains from the uses of more traditional technologies optimization technology, long standing machine learning technology. Most of their gains are
coming from generative AI. Now, having said that, with the enormity of the investment that's being made in the field of artificial intelligence, I think there is some chance that we will see meaningful progress in this field that will change the calculation that I'm or calculus that I'm setting forth. There are so many bright people in their twenties and thirties trying to unlock trying to unlock true intelligence that this does create the environment in which a breakthrough may happen.
But I think that generative AI as we know today will have a very pointed, but relatively limited impact on the broader economy. Call centers are being completely re architected by jenerative AI, translation of documents between languages completely re architected by generative AI, but most of the white collar work, for example, that we do at Citadel very modest impacts
so far. In fact, Harvard Business Review did a great piece on this, and it was called AI WORKSLOP, which basically you find that the younger generation tends to use AI to create work product that more seasoned professionals look at and go, that's just wrong, and the net perctivity gain is therefore deminimous because you go back and have
to redo the work with more senior people. I was with one of my partners and we were going through an interesting problem and he handed me a report and the first few sentences were very insightful, and then the rest was just gibberish. And I said, so, how did this come to be chat GPT? And that was frightening because if I know, if I did not have the domain expertise that I had, I probably would have accepted
the totality the product right. Like I said, the first few sentences were really insightful, and then it just evolved into gibberish that the average person in the field would not necessarily have known or appreciated.
And it feels like there's this really tension between the promise of AI being priced into markets spending, like the promise of AI is coming in the actual reality. Does that end with pain for someone the people have been overspending, the focus firms that have been investing in.
This look the Internet bubble. Just to go back to a time in our life that we all know well saw some enormous misallocations of capital and also a number of really important transformative changes for the economy. And again, I believe that this current revisiting technology by corporate America is creating some incredible lasting value in our economy. It's just what will be the role of generative AI in
that story. You know, one of the large firms, I'll leave them nameless, in their advertising campaign for AI, laid out three key principles for the successful implementation of generative AI in the workplace, and the very first point was, in essence, used this moment to rethink and re architect your business processes. That's timeless advice. Every business has to episodically go back and re underwrite how it does what it does to do things better.
We've seen a lot of that though, of companies saying they're laying off people and have specifically cited AI. Are you saying that's more of an excuse at the stage, then, look.
I think the AI driven layoffs, if one may use that choice of words, Number one is when businesses do go back and re architect their processes, they realize often they can do things with fewer people, whether or not they use gender AI. We've made a huge push in using technology, it's stated all over the last several years, to streamline and automated processes. Now we haven't had to lay people off because of that. We're rapidly growing, so those people are put into other new areas of work
for us. But we've taken a lot of labor onto what we do each and every day in our business. America is doing this everywhere. The second dynamic that's happening right now is some of the labor hoarding of the pandemic era is ending. And it's much easier to tell your employees because of AI, we're reducing headcount than to say, because we've maintained a fair number of people on our team that we really didn't have good work for, we're
reducing our workforce. Right One depersonalizes a decision. It's a technological transformation that's out of my control and I'm sorry this is happening, whereas admitting that you hoarded labor for years is just a very different message one that people don't want to make state or hear.
There have been plenty of surveys that younger people coming out of college feel a lot of anxiety, and maybe it's because the headlines that are driven by executives saying this ken, What advice would you give to someone who's newly graduating and considering pursuing a field in finance somewhere? Do they need to drastically rethink of what they study, how they enter the field, and what their jobs exactly will be because of changes in technology or because of the state of a labor market.
Look, I think the most important advice I can give is not the person who just graduated. It's the person who's just starting college. Pursue a course of study where you will learn to be a good problem solver. Pursue a course of study in which you will have the toolkit, the mathematical skills, the statistics background to really be highly employable in this global economy we live in today. There's still a huge deficit in the Western world of individuals
with backgrounds and STEM degrees. It's really important that you think about your college years as doing two things. It creates for you the foundation to be a lifetime learner, because whether you just graduate from college or you're just starting college, you're going to have to learn for the rest of your life. Because what you learn in college or just learned in college, will soon be antiquated. And if you're not a lifetime learner, you've got a really
rough road ahead of you. And then number two is the world will always value people who can solve problems. If you can put your hand up and say I will take that challenge on, you will always have a job in the Western economy.
Can we talk about a young Ken, entrepreneurial Ken in college coming out of college in nineteen eighty seven, when you started your first fund at nineteen years of age and you made an absolute killing because you were short the market going into Black Monday? Should you be in that scenario now? Do you think that there's something you could bet against in this market currently that you could create the magic of what happened in that year?
It would be the good luck, Hey, good.
Luck anything you think would give you a little bit of skill in achieving that good luck.
So you know, it's funny. I look back at the crash of eighty seven and I was long a portfolio cordal bonds, and the uncertainty and how that portfolio would behave in a bear market was high, So for choice, I was short a bit more stock than I should have been. Risk management's about trying to deal with the unknown when things go wrong, and because of that, I was a bit more short than one might mathematically have said would be optimal. So that was the good fortune
of nineteen eighty seven. Look, I think that we really spend our time at Citadel playing offense where will value be created? And then of course we take the time to think about how do we risk manage the portfolio that we're building. But the story, the success story of America is a success story written by optimists. And I think that in building a business or in building your career, it's really important that you bring optimist first and foremost each and every day to what you do in life.
So we're always looking for how do you create value? And then, having said that, survival is about having their realistic paranoia that the world will go through difficult times and how do you create the risk management to get through those difficult times. But we come to work as optimists first, paranoid pessimists making sure we can survive difficult times. Second, can I just.
Quickly ask, because we're almost out of time, A lot of folks have expressed paranoia and that shift and a lot of risk from public markets has shifted into private markets. Does that hit the list of your paranoia at all?
Look, I think there's a lot of virtues to the rise and depth of the private markets in the United States. You have a tremendous number of mid sized companies or even large companies owned by privacy firms, and you have very tight agency between the owner of the business and the management business. That's been very instrumental in increasing American productivity. I think that's the great strength of the private equity
system that we have in the United States. The downside in private markets, one of the downsides is you don't have good price discovery, and price discovery is one of the ways that you, as a management team have an appreciation for how the world values what you're doing, and that investors are able to use as a metric or milestone in measuring their own skills as an investor. You know, one of my concerns with private credit, for example, the
vast majority of companies will never default. You invest your money today in a company's credit, you won't know for five or seven years if you made a good investment, which means that a substantial portion of your career will have slipped through your fingers before you learn whether or not you made a good underwriting decision. And as we go back to the start of the story, one of the distinguishing factors of the American success story is the
depth and efficiency of our capital markets. And as we move more into the private realm, we take away some of the learning experiences that have driven the vitality and success of the American capital markets.