Bill Ackman has been lecturing the Fed on inflation since last fall — and he isn’t stopping now.
“There is a fire raging, and we think the Federal Reserve has not been aggressive enough in putting out that fire,” the Pershing Square Capital CEO said Monday in a quarterly call with investors.
“The entire neighborhood is on fire, and instead of putting out the flames, the Fed is still spreading gasoline,” Ackman said, referring to a Federal Funds rate below 100 basis points.
Ackman, who is on the New York Fed’s investor advisory committee on financial markets, called for the Fed to start raising rates last fall, but the central bank held off doing so until this year. Fed Chair Jerome Powell has since said that the Fed was perhaps too slow to act.
“We think there is a meaningful chance the Fed has gotten it wrong,” Ackman said on the call, which means that the Federal Reserve finds itself in a “frightening scenario where it has to raise rates much more aggressively.”
If it does so, Ackman believes “stocks would stabilize and may start to rise.”
The hedge fund manager also brought up the possibility of an economy in recession with high inflation — a condition known as stagflation.
“Are we going to find ourselves in a late 70s, early 80s period and have to have a Paul Volcker response?” he asked.
Volcker, who came in as Fed chairman in 1979, was the last U.S. central bank head who had to raise rates dramatically to tackle the runaway inflation of the 1970s, even as the economy was weakening.
Ever since Volker’s draconian rate hikes killed inflation — albeit also sending the U.S. into recession — interest rates have been trending down.
Ackman laid out his continued case for rate hikes in an April powerpoint presentation to the New York Fed, saying “inflation expectations [are] at risk of becoming unanchored,” with rising housing costs and services continuing to drive inflation higher. In addition to food and energy price hikes, he mentioned structural changes like the desire for energy independence, deglobalization and on-shoring supply chains, adoption of ESG standards and decarbonization, and rising unionization and “stakeholder capitalism” as having impacts that are not yet reflected in the statistics.
He concluded that “more aggressive action, including multiple 50 basis point rate hikes, a higher neutral rate, and a faster pace of balance sheet reduction, will likely be required to combat inflation and mitigate the risk of a wage-price spiral.”
Ackman has been hedging against a rise in interest rates since late 2020, and he took off some of the hedge early this year, for a realized gain of $1.4 billion.
But even now, the hedge accounts for between 8.5 percent and 11 percent of Pershing Square’s hedge fund portfolio, depending on the fund.
Pershing Square Holdings, his publicly traded vehicle, is now down about 20 percent for the year. Without the hedge, performance would be down by another 8 to 10 percentage points, Ackman said on the call.
“Our goal is not to maximize the value of the interest rate hedge,” he said. “If we thought it made sense to sell the hedge, we would do so.”
Ackman also addressed the issues that have bedeviled his special purpose acquisition company, Pershing Square Tontine Holdings. Since the Securities and Exchange Commission nixed the SPAC’s plan to take a stake in Universal Music Group, Tontine has faced additional hurdles.
One is “the demise of the SPAC industry generally,” Ackman said. “The word SPAC became a dirty word.”
Pershing Square surveyed all the SPAC merger deals that have closed since the beginning of 2021 and found that more than 95 percent trade below the net asset value of the SPAC, with a median decline of 50 percent.
Ackman, who had designed his SPAC to avoid some of the structural issues that have sunk SPACs, said he would only do a “great deal” with Tontine.
“If we can’t get a deal done we are going to send people their money back,” he said.
The 24-month time period for Tontine to reach an agreement with a merger partner ends in late July.