Bill Ackman: How to Get RICH During Inflation (RARE New Interview)

Again, my view is inflation, or kind of the house view, is inflation is going to be persistently higher. That can happen in the very short term, like literally weeks. I think the structural forces have changed. Billionaire investor Bill Amman just issued a warning about the future of inflation. But don't worry, it's not all bad news, and you'll see why during this video. For background, Amman recently gave a rare full-length sit-down interview. While this interview touched on a wide range of topics, it was Amman's comments around that really caught my attention. You're going to want to hear what he had to say.

So, in this video, we're going to cover Amman's thoughts on the economy, why inflation is here to stay, and most importantly, how you can protect your money from the devastating impacts of high inflation. Let's get into it.

"Are you still figuring that rates at the long end, the 30-year, for example, or however on the long end are still going to go higher?"

“Yes, I think there are even in the relative short term. There are a number of reasons why rates can move a lot. Among them, right, we have a government shutdown; we're going into what looks like a highly probable government shutdown. We're going to have a data shutdown, right? All these little government agencies that put out data that the Federal Reserve relies on to decide whether to, you know, adjust interest rates; they're going to lose access to that data. So, kind of this sort of dark period. We have probably the worst technical environment in our lifetimes for supply of bonds versus buyer bonds, right? We have China selling, we have Russia, to the extent they own U.S. securities, and more selling, we have Saudi Arabia selling. And, you know, we have an economy that is still strong and inflation, you know, three and a half, four percent; persistent. But, you know, our view is basically you're not being paid enough to enter into a 30-year contract with the U.S. government at a fixed price, you know, 4.7 or wherever it is now. It doesn't make sense in a world where we think structural inflation is north of three percent for the very long term.”

“We went through this very unusual period with extremely low interest rates, you know where everything just got cheaper. You know, since the financial crisis, you know, the effort of the Federal Reserve was to make sure we didn't have deflation. You know, the aspirational goal is to get to two percent inflation, and then the pandemic and, you know, trillions of fiscal stimulus, you know, the psychological stimulus of being free to roam after being locked up, you know, all of these factors coming at once kind of lit inflation.”

“We still have this massive deficit spending; we still have infrastructure spending, and the government's selling literally hundreds of billions of dollars of securities, you know, bills and at some point they're going to have to sell more and more of the longer instruments. And if you look at the balance sheet of the Federal Reserve, it's an imprudent balance sheet. You know, if you think about the United States, right, if you were... if this were like a business, you wouldn't have so much short-term, you wouldn't have, you know, a third or more of your debt repricing within the next year; you know, so it's not been managed.”

“I think actually Steven did a good job as treasury secretary; the one thing he missed is he should have issued a lot of 30-year, 50-year, 100-year paper at crazy low interest rates, and that's going to be a burden hearing a lot from investors these days. Ken Griffin was on our network within the last week or so. I just had a conversation with Rick Reer of BlackRock; those who are talking about the possibility of much higher real rates for much longer than people think for the very reasons that you're talking about. The issuance is so massive, and where are the buyers going to come from? The result of that is going to be higher.”

“Yeah, I don’t know about much higher real rates. I think we're... I think, you know, again my view is inflation, or kind of the house view, is inflation is going to be persistently higher.”

“Well, you are the house."

"I guess I control the door on the way in and out, I guess. But, you know, our view is really that we're in a different world. The world sort of changes gradually. You have a generation of people are used to rates, you know, four sounding like a high interest rate. And, you know, on a historical basis, it's an extremely low rate of interest. So, I would not be shocked to see, you know, 30-year rates well, you know, well into the, you know, through the five barrier. You could see the 10-year approach five, Jamie. And that can happen in the very short term, like literally weeks. A huge move in the last number of weeks.”

“And I think a lot of that is investors kind of rethinking. You know, what's interesting about the 30-year treasury is people reflexively buy it whenever they, you know, because they've made money doing it in advance of a recession, but it's really not an instrument you should use to speculate on the short-term economy. It's a fixed-price contract with the U.S. government for 30 years and reflects really structural forces. I think the structural forces have changed over the past couple of years.”

Inflation has been at levels not seen in generations. In June 2022, inflation had a peak of 9.1%. You have to go back roughly 40 years to the early 1980s to find a period of time in which inflation was this high. It had been decades since inflation was a legitimate concern for the U.S. economy. It's crazy to think about it now, but just a few years ago, economists were worried about inflation being too low. Take a look at this chart showing inflation in the U.S. over the past 20 years. Focus particular attention on the time period from 2009 to 2020. During much of this time period, inflation hovered awfully close to 0%. In fact, inflation was negative or nearly 0% multiple times during the decade.

This dynamic had governments, businesses, and people worried not about inflation but instead deflation. Deflation is a decrease in the general price level of goods and services. Or, put another way, deflation is negative inflation. At first, this may sound like a great idea. However, deflation does come with its own set of nasty challenges. In order to prevent the U.S. from slipping into deflation, the U.S. Federal Reserve established a target annual inflation rate of 2% in the year 2012. For much of the next eight years, the Fed struggled to get inflation up to that 2% target. As a result, many economists believed that inflation would never again be a problem in the U.S. Oh boy, how things can change, and they definitely did in a major way in 2020.

To understand why Amman thinks inflation is here to stay, you have to understand why inflation occurs. In simple terms, inflation happens when the demand for goods or services outstrips supply. While that may sound like a complicated concept, trust me, it's actually very simple. Here we have a supply and demand graph. This line here represents the demand for a particular good or service. In this example, let's say we're talking about used cars.

The demand line represents the number of people looking to purchase a used car, and importantly, how much those buyers are willing and able to pay. And here we have the supply line. This supply line represents the number of used cars available to be purchased at any given time. The point at which our two lines cross represents the price for that good or service.

So, in our example, the average price of a used vehicle for 2020 and 2021, the U.S. government and Fed took drastic steps to prevent widespread economic collapse, which involved sending cash directly to households, boosting unemployment benefits, and pausing required payments on certain types of debt. At the same time that all of this cash was getting pumped into the economy, the Fed slashed interest rates to historically low levels. These lower interest rates made it less expensive for people and businesses to borrow money to make purchases.

Going back to our example with used cars, these actions resulted in an increase in demand for used cars. People had more money in their bank accounts to be able to spend to make the purchase. Additionally, the lower rates made it less expensive to purchase a car using a loan. All of these factors led to an increase in demand, illustrated by our demand line here getting pushed to the right.

At the same time, automotive manufacturers were suffering through supply chain issues, which limited their ability to produce new cars. Since there were less new cars available, people held on to their current car longer, resulting in less supply of used vehicles available for sale. Less supply means our supply line gets pushed to the left. Notice now that the two lines cross at a much higher price point.

As we can see in this graph here, these shifting supply and demand dynamics caused prices for used vehicles to skyrocket, essentially doubling in a period of just 12 or so months. This, of course, is a simplified explanation of how inflation works, but it does convey the important message: inflation happens when there is too much demand for a good or service relative to the supply available in the market.

While many people are making the argument that this inflation is only temporary, Amman disagrees. He thinks we're in for a new normal of consistently higher inflation. Here's what he had to say on Twitter: "The world is a structurally different place than it was. The peace dividend is no more. The long-term deflationary effects of outsourcing production to China are no more. Workers' and employees' bargaining power continues to rise; strikes abound with more likely to come as successful walkouts achieve substantial wage gains. The green energy transition is and will remain incalculably expensive, and higher gas prices will raise inflationary expectations. Just ask your average American; they see the prices at the pump and in the grocery store and don't believe inflation is moderating."

To make matters worse, high inflation also likely means even higher interest rates. In an attempt to get inflation under control, the Fed has had to raise interest rates at the fastest clip in generations. As we can see in this chart here, these actions had been successful in bringing inflation down from its peak of over 9%. However, if Amman is right, and inflation proves to be sticky, interest rates would have to go even higher. These higher rates would dramatically weigh on stock prices.

However, Amman is not worried, and here is why. "You must be negative the equity market. How could you have a positive view of stocks if you think that's the outcome for bond yields? Because if you own high-quality, the key is owning businesses that have pricing power. Businesses that can do well in a world of—and by the way, many businesses can do well in a world of 3% inflation. The key is it's hard to manage a business in a world where inflation is volatile or inflation is 8% or, you know, the kind of crazy numbers. But many, many businesses can do very well in a world of a 3% inflation."

"And the kind of companies we own, they're very much like royalties. You know, so we own Universal Music, which is a royalty on listening to music. If there's PL music playing out there, Universal is getting a fraction of a penny for every song, you know, that's being streamed. Google’s a royalty, if you will, on people advertising, you know, on the web or on YouTube. Restaurant Brands is a royalty on people eating at Burger King or any of their various concepts. Hilton is a continuing royalty on people staying in hotels and eating, drinking, and going to events. The beauty of these kinds of businesses is, you know, actually inflation is ultimately their friend, right? As long as they can keep their costs, as long as their costs don't inflate as quickly as their revenues."

"And I think the nature of those... so I feel comfortable owning those kinds of businesses even if inflation remains high. And also, again, historically, if you think about, you know, what is the value of a business... the present value is about the cash you can take out of it over its life discounted back at an appropriate interest rate. We were not discounting businesses back using 2% as an appropriate rate of interest. So, we've historically, you know, our discount rate we've used, you know, just rough measures more like 10%, 9%, you know, numbers which discount the uncertainty inherent in investing in equities."

Take a look at the list of stocks Amman owns. Believe it or not, his $1 billion fund consists of just seven companies. Note it is eight stocks, but he owns two different share classes of Alphabet. These companies include the restaurant Chipotle, Restaurant Brands International, parent company of Burger King, Tim Horton, Popeyes, and Firehouse Subs. He also owns the hotel chain Hilton, home improvement retailer Lowe's, real estate company Howard Hughes, railroad Canadian Pacific Kansas City, and Alphabet, parent company of Google and YouTube.

After spending hours deeply studying these businesses in Amman's portfolio, there are just two main traits that help these companies not just survive during inflation but thrive. As crazy as it sounds, for many of the stocks Amman owns, these companies would actually do better with higher inflation.

The first trait that helps companies weather inflation is what is referred to as pricing power. Pricing power is how much a company can raise prices without negatively impacting customer demand. To demonstrate the concept of price power, let's use Canadian Pacific Kansas City, a stock Amman owns. CPKC is a railroad with a super simple business model. Companies that want to ship their products long distances pay CPKC a fee for that service.

This here is a map of CPKC’s network. If you're a company looking to ship your product from Vancouver, Canada, to Loro, Mexico, you really only have two choices. You can pay to have that product shipped there by truck, which would be incredibly inefficient and expensive, or you can pay CPKC to do it for much less. This dynamic gives railroads a significant amount of pricing power. They can raise prices because often they're the only choice shippers have.

Another example of pricing power in Amman's portfolio is the restaurant Chipotle. Over the years, Chipotle has developed a loyal customer base. The company is consistently ranked one of the country's favorite fast-casual restaurant chains because Chipotle has incredibly high pricing power, especially for a restaurant. In fact, when inflation was at its peak in 2022, Chipotle was able to raise prices to offset the higher costs. Even with these higher prices, the CEO of Chipotle commented that customers were still picking their favorite meals and continuing to purchase premium offerings.

The pricing power that companies like CPKC and Chipotle have stands in stark contrast to the average business. As Warren Buffett puts it, "If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you've got a terrible business. I've been in both and I know the difference."

The second important characteristic you would want to look for in a business is so-called asset-light. An asset-light business doesn't require a large amount of expensive physical assets to operate. Probably the best way to explain asset-light companies is to give you an example of an industry that is not asset-light. So you can see the difference. The airline industry is an example of an extremely capital-intensive industry. In order to operate an airline, you obviously need a ton of airplanes. Those things, sure, are not cheap. Airlines spend tens of billions of dollars purchasing these planes. Additionally, these airplanes don't last forever; they get old and have to be replaced with newer, more expensive planes.

I went through the financial statements of the company American Airlines and saw that they had nearly $40 billion worth of aircraft at the end of 2022. Even more crazy is the fact that American Airlines has a market cap of only $8 billion. This means that the aircraft required for American Airlines to run its business are worth five times more than the value of the entire company. Crazy to think about.

Asset-heavy companies suffer during inflation as they are constantly having to spend larger and larger amounts of money replacing the vast amount of physical assets needed to run their business. Compare that to one of the stocks Amman owns in his portfolio, Restaurant Brands International, owner of Burger King, Tim Hortons, Popeyes, and Firehouse Subs.

Restaurant Brands International, or RBI for short, operates a franchise business model. This means that RBI doesn't own each individual location. Instead, locations are owned and operated by local entrepreneurs. These local entrepreneurs are called franchisees. These franchises put up the money to acquire the real estate, renovate the location, purchase the equipment and inventory, and pay the staff. The franchisor, or in our case, RBI, provides the franchisee with its products, branding, and knowledge in exchange for a fee. This fee is usually a percentage of the sales at that location.

The franchise business model has a huge benefit for RBI. RBI does not have to spend the money that is required to open and operate the location, a figure that can range from hundreds of thousands of dollars to upwards of multiple millions depending on the brand and the size of the location. This makes RBI an incredibly asset-light business. They don't have to own the real estate, the equipment in the restaurant, or any of the inventory. Not only does this dynamic help RBI be less impacted by inflation, but inflation can actually be a good thing for them.

Let's say RBI gets a 10% cut of the sales of each location. This means for every $10 order, RBI will get $1. If over a few years inflation causes that $10 order to now cost $15, RBI is now taking its 10% cut of a larger number. Instead of making $1 from that purchase, RBI is now making $1.50—a 50% increase. This is what Amman meant when he said you want to look to buy stocks that are, quote, "royalties on an industry."

Only time will tell if Amman's prediction about inflation and interest rates come to pass. After all, it's fair to say that Amman is, let's just say, a polarizing individual. One thing is for certain: he does know a thing or two about investing. So there we have it. Make sure to subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. [Music]