Michael Novogratz, principal of Fortress Investment Group, spoke with Bloomberg Television anchor Stephanie Ruhle from the Sohn Investment Conference in New York today.
Novogratz talked about Bitcoin, saying,
“Intellectually it’s a fascinating story to me, and I think it’s real. If you look at the total market cap of Bitcoin, it’s probably somewhere between $4.5 billion, $5 billion. There are in best estimates somewhere 30,000 individual programmers working on Bitcoin. My college roommate lives down in Barbados. He was the smartest guy that we went to school with. He full time works on derivatives of Bitcoin. So there’s this open source community where there’s huge brain power, let alone all the VC money that’s going in. And so from Marc Andreessen and his company to Benchmark…there’s lots of smart money going in. I’ve never seen a small project with more human capital going into it, and so I kind of want to bet just on that alone.”
He also commented on the state of the banking industry, saying,
“Banks are going to slowly look more and more like utilities…Banks are going to be in less sexy businesses…The money-management business, and certainly the alternative money-management business, is about talent, and we’re always looking to pick up talent.”
STEPHANIE RUHLE, BLOOMBERG TELEVISION: I am here with the one, the only, Novo. Michael, we’re get into your trade idea, Brazil, so bad it’s good. Let’s talk macro. If you were a macro investor right now following trends, how are you surviving?
MICHAEL NOVOGRATZ, PRINCIPAL AND DIRECTOR, FORTRESS INVESTMENT GROUP: It’s been a frustrating year. Each time it looks like you’re going to get a break out, markets just kind of resume into the ranges they’ve been in. And so partly it’s you reset your – your mindset to let’s trade the next five to six week data series and let’s trade the ranges. Unfortunately, the ranges have gotten tighter and tighter and tighter, and so most macro funds seem to be chopping themselves up and losing small amounts of money.
RUHLE: If volatility stays low, what do you do though?
NOVOGRATZ: Well when volatility stays low and you can predict it to stay low for a while, trades like carry trades work. So emerging market carry works. Global equity markets should rally. What’s worrisome is volatility is low but we know it’s at an all-time low. And there’s a consensus around why it’s low, and so that just makes me nervous.
RUHLE: When you say equity markets should rally, when you look at your overall business, do you think, I want to put more resources in equities, I want to hire equity teams. Is that how you chase the market?
NOVOGRATZ: I think overall business, yeah. There’s going to continue to be a shift from bonds to stocks at one point. And so I think the equity markets are vibrant. There’s been a tremendous amount of rotation in the equity markets this year. And so not everyone’s done well in them, but there’s been certainly opportunity – sector opportunity in the equity space.
RUHLE: But how hard is it? If you don’t have the good fortune to simply be a long-term investor if you’re got to be an active trader, how do you survive here? Look at the equity markets. It hasn’t been the easiest time.
NOVOGRATZ: No, it’s been tough. Listen, it’s not – if this job was easy we’d all be rich. It’s not supposed to be an easy job and there are periods where it’s tougher than others. Wisdom hopefully is (ph) when it’s tough to bet less and to bring the – take some chips off the table and waiting until markets start trending.
RUHLE: Well you’re avoiding the big trends and you’re going big. You’re wearing the shirt. I have to love that shirt. Brazil, so bad it’s good. Just a few years ago you and I were at the Ira Sohn conference where Eike Batista stood on that stage talking about what an incredible country it is, but it hasn’t had a good run.
NOVOGRATZ: Brazil’s had a bad run and things are kind of going from bad to worse. Inflation has remained sticky. Potential GDP continues to kind of ratchet down. The unemployment rate stays low, which is keeping the pressure on inflation yet growth is slowing. And so it’s just not a good mix. My bet is that it is so bad that you’re going to see regime change come the October elections. And because pessimism is at an all-time high, when you go down and visit Brazil every local you speak to is wildly depressed.
And broadly in markets, when everyone’s bullish you want to at times think about taking the other side, and when everyone’s pessimistic and there’s a possible catalyst for change and the catalyst will be either the pressure forcing President Dilma to a reform agenda or more likely her going further populist and losing the election.
RUHLE: But are there any signals that make you believe they are going to turn the corner? Because everything you’re pointing out, whether it’s the worst preparation for Olympics ever, inflation, general sentiment, it’s all bad. So from where I sit, it feels like it’s only going to get worse.
NOVOGRATZ: So from a trade perspective, the most promising thing is Dilma’s poll numbers continue to plummet. And if you had asked a Brazilian – if you had told a Brazilian two months ago, three months ago there was a shot that Dilma would lose the election, they would have said it was a five in 100 chance. And right now it’s probably a 30 percent chance in their mind (ph). And our view is she’ll probably lose the election.
RUHLE: What’s the timing on when to put this type of trade on though? Because if we’re doing it now, you may have to go through a really rough year, and people don’t necessarily have that time horizon.
NOVOGRATZ: I actually think the timing is now and into the election when people realize there’s a very good chance she’s going to lose. Brazil’s going to host the World Cup. They will have a temporary spike in inflation. It’s tough to be a president in a – in a developing country like Brazil who’s got a history of hyper inflation when you can’t get inflation under control. And so the spike in inflation I think will make her popularity even go lower. She’s praying for the soccer team like all the Brazilians to maybe give the country a lift and her to get some – some momentum from it, but – but our real sense – our serious sense is that she’s on a one-way ticket lower in polls. And as those polls tick lower, Brazilian assets will tick higher.
RUHLE: All right. Well what happens if the World Cup doesn’t go so well? What happens if the Olympics is a whiff? What does that do to this trad?
NOVOGRATZ: Listen, I think the – the bet is whoever comes next is going to have a reform agenda. And Brazil’s going to have some tough medicine to take. 2015 will be a tough medicine year, but we see in markets, markets discount good policy. And so listen, if Nevez, the opposition candidate comes in, he’s already made it clear through back channels he’s going to try to get Arminio Fraga as finance minister. Markets would respond spectacularly well for a while. Listen, does the trade last? It only lasts if those reforms actually happen. But you don’t need to have them happen for the market to at least want to anticipate them.
RUHLE: Well when you’re talking about this trade a long-term win, it makes me think about smaller hedge funds, new guys that don’t necessarily have the opportunity to make the big investments you do, make the long-term investments. And the market has been really difficult this year. So is your overall opinion of the hedge fund space, are they going to have a tough time performing this year, especially for those who have less than a billion?
NOVOGRATZ: Yeah. Listen, it’s – I think for both big and small hedge funds it’s been a tough start to the year. And when you have a tough start it makes it a tougher year, right? Fighting out of a hole is harder than starting when you’ve got 5 to 6, 10 percent of the – of the – the house’s money on your – on your table. And so it’s going to be a tougher year.
RUHLE: Let’s talk about Bitcoin for a moment. You have been one of the big supporters of Bitcoin, something that has been criticized by the masses. Why you buying into the BC, brother?
NOVOGRATZ: First of all, to be clear, I made a personal investment and our firm has made some small investments in Bitcoin.
RUHLE: But your own money says more than the firm’s money.
NOVOGRATZ: Intellectually it’s a fascinating story to me, and I think it’s real. If you look at the total market cap of Bitcoin, it’s probably somewhere between $4.5 billion, $5 billion. There are in best estimates somewhere 30,000 individual programmers working on Bitcoin. My college roommate lives down in Barbados. He was the smartest guy that we went to school with. He full time works on derivatives of Bitcoin.
So there’s this open source community where there’s huge brain power, let alone all the VC money that’s going in. And so from Marc Andreessen and his company to Benchmark to…there’s lots of smart money going in. I’ve never seen a small project with more human capital going into it, and so I kind of want to bet just on that alone.
RUHLE: But are you concerned at all that this could be Netscape? It’s a great idea in terms of being a disrupter, changing the way global payment takes place, but Bitcoin itself will be a failure. It’s only the first chapter.
NOVOGRATZ: I think it’s got first mover advantage, but certainly there are risks. There will be a revolution in payment systems. And quite frankly there’ll be a democratization of finance at one point.
RUHLE: What do you mean?
NOVOGRATZ: I think you’re going to see things like peer-to-peer lending. The banks are – their biggest I think threat is the same thing that’s happened in so many other industries now happening to the finance industry, right? The Internet disintermediates large players and I think Bitcoin is just one of the threats that the finance industry the way we know it has coming against it.
RUHLE: Bitcoin, the buy side and regulation, all those things are hurting banks. You’re someone – you came from Goldman Sachs. You interact with banks every day of the week. What’s the plight for banks? What’s the plight for bankers right now?
NOVOGRATZ: I think banks are going to slowly look more and more like utilities and they’re going to be a nice place to work, but the regulators certainly don’t want them to grow. You’ve seen it now both Citibank wanting to – to return capital and not being able to. And so I think banks are going to be in less sexy businesses and they are going to run more – more regulated with higher risk. Banks are like fortresses right now. The one thing that has worked is the Volcker rule has worked. I think there’s very, very little risk in any of our banks right now. They run far, far less risks to equity than they did five, six years ago.
RUHLE: Then in terms of human capital or business lines, are there any areas where you’re looking to increase your business today where banks or their people are getting out?
NOVOGRATZ: Listen, the money management business, and certainly the alternative money management business, is about talent. And we’re always looking to pick up talent. I think you’d rather bet on the talent than on the specific niche that someone is in. And lots of talent are leaving the banks because of the compensation structure and the regulation. And so yes, we’re looking at picking up lots of talent in all kinds of positions
RUHLE: All right. Michael, thank you so much for joining us. Michael Novogratz. He’s the co-founder and president of Fortress Investments.