Presenting John Paulson's Complete Les Echos Interview In Which He Is Bearish On Housing, Bullish On Gold
Two days ago John Paulson had an extended interview with Les Echos which however received little coverage in the US, supposedly since the interview was in French, and also because it was behind a paywall. Since the interview does provide some incremental perspectives by Paulson, it is useful to recreate it in its entirety. Specifically, Paulson is now far more bearish on US housing, blaming it on Frank-en-Dodd, and he continues to be as bullish as ever on gold. To wit: "Over time, the price of gold will rise in proportion to the creation of
paper dollars. In an inflationary environment where the demand for
protection increases, the price of gold can rise even further.
Historically, gold has always been a safe haven against inflation and a
safe haven in times of political instability. Today we face both risks." As for whether or not we will have QE3: Paulson is not the guy to ask. He is as confused as the Fed presidents.
From Les Echos interview with John Paulson
What do you think the impact of the Japanese crisis will be on the economic recovery and global financial markets?
From a human perspective, it is obviously a tragedy. Economically, I do not think the Japanese crisis will have a major impact on overall recovery. Japan accounts for 8% or 9% of the global economy. This disaster could slow the growth of Japan's GDP by 2% this year, according to most estimates. There will be a particularly sharp drop in growth in the first quarter. But growth will resume in Japan next year already because of the reconstruction. Ultimately, this could reduce the overall growth of a quarter point this year, 4.5% to 4%, if one refers to forecasting the International Monetary Fund (IMF). This is not a significant event on the scale of the global economy.
What is the main threat to the strength of U.S. recovery?
To me, the major risk for the U.S. recovery is stagnating housing market. According to the latest figures, house prices are slightly down. Lack of funding limits the scope for private home purchases in the United States. Currently, banks have handcuffs. They can not do anything against borrowers if they default on their loans. The private sector is frozen because of regulatory uncertainty on foreclosures. Banks do not want to grant mortgages because their rights are guaranteed. Today, housing starts are at their lowest level for fifty years! That is why we have a recovery with slow job creation. We are at a lower level than 300,000 new homes a year against a peak of 2 million in 2007 (which had helped create 8 million jobs). Without restarting the housing sector and a minimum of 1 to 1.2 million homes built annually, it's hard to have a real strong recovery.
Have you lowered your expectation of a rebound by 8% to 10% in property prices in 2011?
Yes. When I made this prediction last year was before the reform Dodd-Frank 2010. Since then, banks have virtually halted lending for home financing because of the lack of clarification on the rules. This will be difficult to have a rebound in property prices this year. But with any luck, if banks start to reconnect with mortgages, we could have a real estate recovery in 2012 and 2013.
Does that mean you consider the financial reform of Wall Street as a failure in this regard?
Yes. It could hinder the recovery. It is a text-heavy (2,000 pages!) And poorly thought to be very difficult to implement. This reform precipitated mainly driven by an emotional reaction. The result is that it creates numerous conflicts and uncertainties. As Alan Greenspan, I think it will create market distortions. The European approach based on Basel III is much better and more flexible. The temptation to over-regulate is counter-productive. The financial crisis was linked to the fact that banks had excessive leverage and too many risky assets. The solution is not to try to dictate to banks what they can do or not do, but to require them to strengthen their capital to absorb potential losses and hold less risky assets.
Can we say, however, that Wall Street banks have changed their practices by learning from the crisis?
Absolutely. They have drastically reduced their leverage and have a much more conservative leverage structure.
Do you think the Obama administration has changed its attitude vis-à-vis the business community since the last midterm elections?
Initially, the Obama administration attempted to increase taxes, the traditional Democratic approach. They are doing a step back today to further support the private sector to foster job creation. Barack Obama has changed its policy and granted aggressive tax incentives to boost investment and stimulate growth. The weak point remains the financial reform. With a little hope, there will be changes to eliminate the negative aspects of this reform.
What do you think of the criticisms of quantitative easing implemented by the Fed to stimulate the economy?
Do not forget that we have experienced the worst recession since the Great Depression. This necessitated the use of unconventional means to avoid economic collapse. In this sense, the monetary stimulus and fiscal stimulus provided by the government have been very useful to help get the economy get back on track. The problem is that the quantitative recovery is not without consequences and creates the potential for inflation. Currently we have no inflation because we still have overcapacity. But the risk exists. It is undeniable that this monetary expansion is equivalent to running the printing press. It remains to be seen whether the Fed will reduce the recovery before it becomes inflationary.
Who will refinance U.S. since China and Pimco now seem reluctant to buy Treasury bills?
There are serious uncertainties about the exit strategy of the Fed. I'd be very surprised if there was a third round of QE. While many economists believe that the U.S. debt remains at a manageable level, sooner or later it will reach a threshold that will be a problem. Today, our federal debt is still at a relatively reasonable (around 65% of GDP), but if we add the local debt of the States and local governments are approaching the level of 100% of GDP which begins to be close to that of Greece or Portugal. It is a very serious potential problem. The U.S. does not have the ability of unlimited borrowings.
Do you think the dollar could lose its status as the term "safe haven", even if it remains the dominant currency today?
It's a possibility. But we must look at the currencies in relative terms. The UK is committed in the same way that the United States in terms of monetary stimulus. The euro has its own problems. In these times of uncertainty for paper based currency, I feel more secure in holding gold. Given the risks of inflation in three to five years and the volatility of the euro, gold offers good protection against the paper currencies devaluation and even the possibility of generating a return on fixed investment. In addition to our investment funds in gold which represents only 3% of our assets under management, we created a class of shares for our other strategies denominated in gold. And about 40% of our investors have chosen this option. We were the first fund to launch this voluntary investment class one month after the launch of the first round of quantitative easing by the Fed in March 2009.
Do you think the gold price has still not reached a plateau?
Indeed. Over time, the price of gold will rise in proportion to the creation of paper dollars. In an inflationary environment where the demand for protection increases, the price of gold can rise even further. Historically, gold has always been a safe haven against inflation and a safe haven in times of political instability. Today we face both risks.
How do you explain the accusations of destabilization of the euro you been in the fall of 2009 when your fund has been cited in a survey by the Department of Justice?
It was a total misunderstanding. First, we were not present at the so-called "lunch ideas," where we discussed the euro. Above all, we're not a macro fund and we take no position on the currency. The European Directive on hedge funds has undoubtedly helped to clarify our strategy and our position through a better dialogue with European authorities. On the crisis of the euro, I think it is limited to Greece, Ireland and Portugal and I am quite optimistic about the stabilization plan implemented.
How do you respond to critics on the excessive size of hedge funds?
Actually, I see no reason to worry about our size or our excessive influence. Although we are the third largest hedge fund with $ 36 billion in assets, we are 100 times smaller than BlackRock, which manages $ 3,000 billion. We are very small in terms of asset management. Our specialty is to invest in the event arbitrage. In recent years, our main goal has been to help companies avoid bankruptcy or emerge from bankruptcy, or to help them repay their debts to recapitalize. In total, we invested over 20 billion dollars over the past two years to help companies restructure, both in Europe and the United States, and emerge stronger from the recession.