Earlier this year, star investor Bill Ackman told us the big risk for markets was inflation. Now he reveals the scale of his hedge on inflation and the massive profit it could make. He also shares his view on interest rates and other concerns that could hit global markets.
Lee Wild, head of equity strategy, interactive investor: Hello, with me today I have star investor Bill Ackman, CEO of FTSE 100 company Pershing Square Holdings (LSE:PSH). Hi, Bill, thanks for joining me today.
Bill Ackman, founder and chief executive Pershing Square Holdings: Good to see you.
Lee Wild: Bill, last time we spoke, you highlighted inflation as a potential black-swan-type risk and you’d put on a very large bet that would pay out if inflation, or the inflation spike came to pass. Well, inflation is indeed rising quickly, how’s that bet looking?
Bill Ackman: Sure. So it was a very large – it was actually one of our smallest bets in that it was about 1.5% of capital, or at the time we made the investment, maybe less, 1.25% of capital. But it’s structured in a very asymmetric way. We purchased an option, a so-called swaption where we bet that rates would rise for a whole bunch of reasons, among them the expectation of inflation. And it’s playing out the way we expected and that investment today is worth about approaching three times the price we paid for it. But it gets really, really valuable if there’s a meaningful move in rates over the next, you know, call it a year or so. And we think that’s going to happen and that’s partly why we issued a bunch of debt recently, but it’s also why we have that investment.
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So we like these sort of asymmetric, you know, it was really a hedge and if you have a hedge that can also pay off when you’re underlying investments do well, that’s the ideal world. So we built the notional size of the positions quite large; it’s in the tens of billions. So that kind of speaks to the potential for profit but it’s north of $100 billion notional investment. And if rates move, the value of the underlying instrument moves a few per cent, we can make a few billion dollars, that’s how I think about it.
Lee Wild: What’s your outlook on rates? I mean, this is clearly a bet you say you’re going to run, what’s the outlook for rates?
Bill Ackman: We think rates are going higher. I think the only thing keeping US rates at what seem like absurdly low levels today is a technical factor, which is the Federal Reserve’s very aggressive purchases, $120 billion a month of bonds, which is going to change. And it’s a bit like buying stocks when there’s a huge tailwind of the issuer buying back a big percentage of its shares every day, you know, it’s hard for a stock to go down in that environment. The same thing is true for bonds. Now, it’s a very different environment when, you know, imagine a company that’s issuing stock every day, right? That’s effectively, you know, as the Fed begins to taper, we do think rates are going to move higher. The fact that they’ve been able to move a lot in the last month without the taper having started yet, I think is sort of indicative of what could happen with the Federal Reserve.
And every day there’s announcement about foreign governments, central bank, raising rates, thinking about raising rates or a bad inflation number. BoE, you know, is being discussed. It’s a worldwide phenomenon. It’s a risk to every business and that’s one of the reasons why we like to own these businesses that have pricing power.
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One of the beautiful things about Universal (EURONEXT:UMG) is music is actually too cheap today and the artists are legitimately upset about it. But Spotify is kind of giving away the music service, along with Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). People spend less today – you know, you get 50, 60 million songs on your iPhone and you’re paying a few dollars a month. In the US, people are spending about 55% less than what they did 20 years ago on music, on a real-dollar basis. And so there’s a lot of head room opportunity to increase price and the same thing is true for most of the businesses here, so we think we can keep pace with inflation.
Lee Wild: So clearly, I mean, inflation, a much sharper rise in the cost of living is on the cards, I mean, is that your primary concern as an investor now or is something else worrying you, you know, bubbling away in the background?
Bill Ackman: Sure, I would say that’s the principal financial concern I have. I think the other concern all of us have is just general geopolitical and political unrest, divisiveness, the dysfunction. The debt limit, you know, we’re going to have another debt limit in December. Imagine if we had a government and a Congress and a Senate that functioned commercially and more people worked together to get the best outcome. That would be really, really bullish. We’re at the opposite side of that now, unfortunately.
Lee Wild: Great. Bill Ackman, CEO of Pershing Square Holdings, thank you very much for joining me today.
Bill Ackman: Sure, thank you, Lee, appreciate it.
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