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Presenting John Paulson's Complete Les Echos Interview In Which He Is Bearish On Housing, Bullish On Gold

Tyler Durden's picture




 

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.

 

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Wed, 04/13/2011 - 17:51 | 1166908 yabyum
yabyum's picture

Been a lot of angst about gold/silver and the commodities in the last 72 hours, hell even goldmansucks sez so. I look at the prices and Iam not seeing any collapse.

Wed, 04/13/2011 - 18:17 | 1166965 DosZap
DosZap's picture

GS take on Commodities did not include Gold.

They are still Bullish on it.

Ready for the D_I_P?

 

Wed, 04/13/2011 - 21:52 | 1167594 Thomas
Thomas's picture

He notes, "We created a class of shares for our other strategies denominated in gold". What the hell does that mean?

Thu, 04/14/2011 - 09:04 | 1168352 Mises
Mises's picture

Rather than the base currency be USD, its gold.....If a client sells is stocks, his cash account is a gold account, not USD

Wed, 04/13/2011 - 17:52 | 1166912 NOTW777
NOTW777's picture

isnt this the guy that gets special GS deals - so is he fading the GS anti-commodity call

Wed, 04/13/2011 - 20:33 | 1167353 cowdiddly
cowdiddly's picture

Just an asshole pumping his book of 3+ mill GLD shares. Same scumbag he always was.

Wed, 04/13/2011 - 17:54 | 1166917 tek77blu
tek77blu's picture

great commentary on depressed bargain uranium stocks post-japan crisis: http://www.youtube.com/watch?v=f-EkkhJi9VY

Wed, 04/13/2011 - 18:00 | 1166929 ghostfaceinvestah
ghostfaceinvestah's picture

This guy is such a bullshitter:

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.

Actually, dope, you were just dead WRONG about your call for an 8 - 10% rebound in property prices.  Anyone with half a brain knew that house prices would continue, and will continue, to fall for years.

But now you blame the fact that house prices have declined for the past several months (based on indices that are lagged by several months) on a bill which has only been clarified a few weeks ago (regarding regulatory risk retention and QRM)?

As for banks halting lending, the banks aren't doing any mortgage lending, and haven't been since 2008: the government is backing 98% of all new home loans.  So Dodd-Frank has had zero impact on that.

Pure fucking bullshit.  Why anyone gives this guy money is beyond me.  Just invest in gold yourself and save the 2/20.

 

Wed, 04/13/2011 - 18:02 | 1166932 redpill
redpill's picture

Agreed, and at the least it would be a finger pointed at the fraudclosure scandal that would have caused the large mortgage companies to pause, not Frank-Dodd regulation, half of which they probably wrote themselves anyway.

 

Wed, 04/13/2011 - 18:32 | 1166994 destiny
destiny's picture

The BS of the guy is up to the BS of this review...no official, conventional review, newspaper in France speaks the truth on the financial situation.  The echos is not the worst, but it certainly isn't the kind of paper gold bugs will read...

Wed, 04/13/2011 - 18:56 | 1167062 kito
kito's picture

absolutely, he was long and wrong on real estate the past few years, and dodd-frank has nothing to do with the malaise.

Thu, 04/14/2011 - 10:10 | 1168562 Tater Salad
Tater Salad's picture

Ghost says.."Pure fucking bullshit.  Why anyone gives this guy money is beyond me.  Just invest in gold yourself and save the 2/20."

 

I say numbers speak louder than [angry] words:

Statistics [April 2004 - March 2011]   Unit Class* HFRI ED HFRX ED S&P 500 Monthly Return -3.23% 0.61% 0.18% 0.04%    1 Yr. CAR 6.77% 10.89% 2.10% 15.65%    3 Yr. CAR 11.49% 5.52% -0.67% 2.35%    5 Yr. CAR 26.76% 5.45% 1.00% 2.62%    Since Inception CAR (Apr-04) 21.06% 7.44% 2.55% 4.46% Maximum Drawdown -11.23% -24.79% -25.80% -50.95% Standard Deviation 13.94% 7.07% 6.64% 15.57% Sharpe (30d T-Bill) 1.29    0.75    0.09    0.22    Sortino (30d T-Bill) 4.70    1.10    0.11    0.30    Largest Month Gain 23.86% 4.74% 3.15% 9.57% Largest Month Loss -4.89% -8.19% -7.53% -16.79% % Positive Months 70.24% 67.86% 60.71% 66.67% % Negative Months 29.76% 32.14% 39.29% 33.33%

 

Wed, 04/13/2011 - 18:08 | 1166943 redpill
redpill's picture

Housing Sucks, and Gold is good.  In other news, Captain Obvious of the USS Noshit notes that the sky is blue, and Greek bonds are garbage.

Wed, 04/13/2011 - 20:18 | 1167298 Saxxon
Saxxon's picture

This is the kind of article you should take the trouble to read in order to know what the others are reading and thinking; and/or to know what Paulson wants you to think he thinks.

Paulson manages 36 billion; that's a very large whale.  We are all krill here (I am, anyway) so its good to think about the direction in which that beast may be turning.

Wed, 04/13/2011 - 18:12 | 1166947 I think I need ...
I think I need to buy a gun's picture

lets think outside the box he said to buy up to 3 houses that means everyone is getting free houses. The prices are coming down yeah and will reset the whole system once everyone is grandfathered in on principle only or to save the dollar no loans at all.

Wed, 04/13/2011 - 18:21 | 1166968 DosZap
DosZap's picture

I think,

Yes, by all means by 3 houses on the cheap.

And have them foreclosed on,because the taxes will be out of worldly highs.

Same for land, great investment (depending on locale), but how much are the taxes going to cost?.

More than you can afford to pay?, and you lose that also.

We have SO MANY viable investment choices do we not??

Wed, 04/13/2011 - 18:17 | 1166956 ghostfaceinvestah
ghostfaceinvestah's picture

This is another gem:

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.

So more overbuilding in housing will solve all our problems, even though we have record levels of shadow inventory?

How about we just recreate the DotCom bubble instead?  That will create a lot of jobs.

Fucking brilliant, this guy.

Wed, 04/13/2011 - 18:29 | 1166985 narnia
narnia's picture

He just flat out called real estate wrong.  Dodd-Frank is stupid,  but it's a small rat shitting in the corner.  The 600 lb. gorilla is the market's inability to price these assets.  The banks are scared shitless to release real supply (I believe some of this crisis is manipulated).  Plus, a cloud of inflation hangs over interest rates, which paralizes this asset class more than any.  This is a jobless recovery, so no one out there can afford them.  This is just not something that is going to recover with government transfer payments & easy money.  Maybe foreigners will start to come in if the $ falls low enough.

 

We don't make anything in the US anymore.  We grow stuff, blow things up, chase drug "terrorists" around, peddle chemicals, think about stuff, finance stuff, server each other, educate foreigners & maintain massive government bureaucracies.  Where is all this excess capacity- in the social security administration, the armed forces or a trading desk at goldman sachs?  We're going to see prices increase whether we see one "real" movement in employment because most of what we consume was made elsewhere or relies on energy from elsewhere and the super $ looks like it has a two ton krytonite rock hanging from its neck.  We are going to see real inflation when something happens to put the $ velocity in play.   

Wed, 04/13/2011 - 18:36 | 1167000 bob_dabolina
bob_dabolina's picture

"But growth will resume in Japan next year already because of the reconstruction"

wrong.

There will be reconstruction like there was in Pripyat.

Wed, 04/13/2011 - 18:48 | 1167039 Long-John-Silver
Long-John-Silver's picture

The Overlord's have succeeded in their goal of turning land investment into a stupid move. They can take any land at any time using eminent domain, Elimination of tax exemptions, and property taxes so high they exceed the value of the property. A prime example of this is Detroit. It makes no sense to purchase property and improve it or attempt to use it as farm land as a non-corporate "small farmer". The American dream has become a nightmare.

Wed, 04/13/2011 - 18:53 | 1167059 DoctoRx
DoctoRx's picture

The most surprising thing about this interview was that he appears to think that inflation is a few years off.  WTF?

Wed, 04/13/2011 - 19:01 | 1167077 High Plains Drifter
High Plains Drifter's picture

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.....

wait a minute. maybe paulson should check in with spaulding before he tells these contamacious lies

Wed, 04/13/2011 - 19:13 | 1167115 Dan The Man
Dan The Man's picture

...banks have virtually halted lending for home financing because of the lack of clarification on the rules

 

   I think its more like 'stark raving terror'

Wed, 04/13/2011 - 19:57 | 1167139 PulauHantu29
PulauHantu29's picture

Buy gold, silver and oil (USO) and you will sleep alot better at night as the dollar loses purchasing power.....Middle East crumbles....and Japan melts away.

As for houses..anyone who buys a house now is an idiot...totally clueless.....house prices will continue dropping for years to come and the average american moves every five yars...so you will take yet ANOTHER 10% hit from selling costs.

Thu, 04/14/2011 - 09:04 | 1168360 Mises
Mises's picture

USO sucks.....buy OIL, or if you have the guts, FOL

Wed, 04/13/2011 - 19:37 | 1167178 AldousHuxley
AldousHuxley's picture

This proves that hedge fund managers are not worth 2/20.

I know many investors who shorted housing. They now hold gold. So what.

 

Here are my answers:

  • What is the main threat to the strength of U.S. recovery?

Banks getting in the way of asset price discovery of the free market. Government saying "let's save home owners" but they are just helping banks lie through market-to-whatever pricing. Middle class are spending so much money in mortgage debt that they have no money to buy other goods like cars.

  • Have you lowered your expectation of a rebound by 8% to 10% in property prices in 2011?

Property prices will stagnate against inflation for next 15 years, unless we have a facebook dotcom boom 2.0 which government is trying to hard to make it happen.

  • Can we say, however, that Wall Street banks have changed their practices by learning from the crisis?

Nobody has gone to jail. Instead they got rewarded with record high bonuses. Why would anyone change a thing? Bill Clinton married his daughter off to a banker with Goldman Sachs. Clintons and Obamas are actually defending the banks.

  • Do you think the gold price has still not reached a plateau?

Silver has outperformed gold. Energy commodities have outperformed gold.

  • How do you respond to critics on the excessive size of hedge funds?

Critics are not concerned about the size. Just the way the fund managers are taxed at capital gainst of 15% when productive workers are taxed at income of 25-38%.

Wed, 04/13/2011 - 20:59 | 1167435 Bicycle Repairman
Bicycle Repairman's picture

I'd say that cuts through a lot of BS.

Thu, 04/14/2011 - 05:12 | 1168068 Urban Redneck
Urban Redneck's picture

"This proves that hedge fund managers are not worth 2/20."

What portion of his ten-figure paycheck was from salary & FI equity (which comes from the 2/20) and what portion was gains on his own FRNs invested in the funds?

Wed, 04/13/2011 - 19:57 | 1167246 Silver Surfer 1985
Silver Surfer 1985's picture

Thanks Hux, good stuff! Silver backwardation bitchezzzzz............

Wed, 04/13/2011 - 20:12 | 1167284 velobabe
velobabe's picture

listen, this guy is as swallow as they come. he bought into aspen, a McMansion on mcclains flats, woody creek colorado. superficial fuck. i think he is right down the road from botox bitch pelosi. these people are bull crap what to B's. (awannabee)

Wed, 04/13/2011 - 20:47 | 1167388 ViewfromUnderth...
ViewfromUndertheBridge's picture

well that J Paulson is one all around helluva good guy...he has helped companies emerge from bankruptcy and they are stronger now...his buddies on Wall St are ok too, they have learnt to be responsible citizens...his fund is not the biggest so it is not too big...and we were not even at that lunch where we discussed that thing...

the money quote on Obama "with a little hope, there will be changes"...

I am so surprised this interview went under the radar.

Thu, 04/14/2011 - 00:33 | 1167915 TruthInSunshine
TruthInSunshine's picture

Paulson is never going to tell anyone what he's really doing.

Thinking so is beyond naive.

It wouldn't surprise me if he's completely counter-positioned to every statement of position made in this article.

Does anyone here think it would have been wise to have listened to him peddling Abacus as a 'good investment?' (That's a rhetorical question, by the way).

My .02

Thu, 04/14/2011 - 00:40 | 1167922 bruiserND
bruiserND's picture

Just curious Mr Paulson; if gold is reflecting a debasement of the dollar and inflation then when does replacement cost per square foot ever become relevant in any realestate market?

 

Are the 30 somethings going to live with roommates and parents forever?

 

PS Alan Greenspan went on Paulsons payroll in January of 2008 just 8 months before Paulsons CDS's kicked in on cherry picked customized CDO's.

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