Billionaire investor Carl Icahn may have said no to being Donald Trump’s Treasury secretary, but he isn’t ready to give up the national stage yet.
In a rare move — even for an investor so accustomed to the public spotlight — the founder and chairman of $8.5 billion Icahn Enterprises has produced a video warning of ‘danger ahead’ for the U.S. economy.
Carl: I am concerned about the high yield market. I think that’s in a major bubble, but I wouldn’t say to short it tomorrow. This market keeps going up and up with zero interest rates, and that’s what’s really pushing it.
Interviewer: It sounds like you’re saying this could be the beginning of something problematic.
Carl: I think it’s not a, “Will it happen?” It’s, “When it will happen.”
Woman: There’s one investor out there that a lot of CEOs just have to take the phone call from, because when you get a call from this guy, Carl Icahn, he probably wants to shake things up a little bit.
Man 1: Icahn, giving his thoughts on stocks broadly. I believe the market is extremely overheated. Also, if more respected investors had warned about the market in ’07, we might have avoided the crisis in ’08.
Man 2: Overall the U.S. equity market; do you think it’s in store for a dramatic pull-back?
Carl: I’ve been worried for the last five, six months about the market and the economy, and in the dangerous spot that we’re in. I did speak four or five times warning about the problems we have. I want to speak out now because I know this may sound corny, but I grew up on the streets of Queens. I love this country, and I feel so strongly about the dysfunction that is going on both in Washington and the board rooms of corporate America. Over the years, at the risk of being immodest, I probably have one of the best records on Wall Street, working on broken companies, or companies with great potential that just have problems, many times in management, or what management’s doing. And our country is in that position right now.
Man 3: Congress currently in a nail biting, three-way tie for least popular branch of government.
Carl: And just look at our record. Thirty years, no tax reform. Thirty years, no immigration. As a result, you have this movement toward a guy like Donald Trump, because you want somebody that’s not beholden to an establishment. So we need a president that can move Congress. And I think Donald Trump could do it. I disagree with him on certain issues, and certainly would talk to him more, but this is what this country needs, somebody to wake it up. One obvious problem the government should have fixed a long time ago is the carried interest tax loophole. People on Wall Street, they’re good friends of mine. I like them, but not having to pay full taxes on money that you’re earning is an absurdity.
Donald: I would take current interest out, and I would let people that are making hundreds of millions of dollars a year pay some tax, because right now, they’re paying very little tax, and I think it’s outrageous.
Interviewer: So you’d like to raise taxes on yourself?
Donald: That’s right.
Carl: Teddy Roosevelt was great. He stood up to J.P. Morgan. But where do we get a guy like that again? Donald, of all of them, maybe he’s brash, but he’s willing to say what he believes, and he’s willing to say, “Hey, this is complete bullshit.” The middle class guy who’s making the 50,000 a year realizes, “Hey, I’m being taken advantage of.” He can read. He can understand. In tsarist Russia, they had to have a revolution, and the czar would bring out the machine guns and mow them down. All these guys have to do is vote. So we need government to get out of this gridlock, to get out of this dysfunction. A quintessential example is repatriation, which to translate means that there’s 2.2 trillion dollars in profits that American companies have earned in Asia, South America, and Europe. Companies that are domiciled in this country, but make goods in another country, produce them, and sell them there, nothing to do with the United States. That money is sitting there, and the companies would bring it back, but it is completely, totally unfair the companies say, and rightly so, that they have to pay a double tax. They make the widgets over there. They sell them over there. Why should they have to pay a double tax where no other country demands it from their companies, except the United States? Our country is shooting itself in the foot, because these companies are saying, “Well, we’re not going to bring it back then.” So who are they punishing? They’re punishing the little guy again, because if that money came back, it would make for jobs. That money doesn’t go into the mattress. That money is given to somebody, who then will invest it somewhere else in this country, and help to create more jobs. As opposed to taking the money over in Europe, and invest it in Ireland or somewhere like that. It’s absurd not to make a deal. And these companies are willing to pay a tax. And everybody agrees that it should be done. It’s just having a food fight over…it’s almost funny, if it wasn’t so sad. Who’s going to get the credit for it? Is it going to be the Republicans that are going to put their foot down and say, “We’re not going to charge any tax to take it back,” or the Democrats that want 15% to take that money back. So the whole thing’s absurd, and worse than that, through inversions, which I call inversions, meaning a lot of companies are saying, “Hey, you know what? We’re going to get out of this country completely. We don’t need to be here.” They make most of their equipment, they make the widgets, they make the phones or whatever they do in another country. Why should they be here at all? And the same type of short-term thinking that’s happening with the government is happening in corporate America today. The irony of lower interest rates is that companies today, instead of taking the money that they can borrow, and really investing it in a lot of capital: New machinery, new equipment, in their workers, to make them more productive. What they do with the money is almost perverse. They just go in and buy another company to show the analysts on Wall Street their earnings are going up, so their stock will go up. And it’s financial engineering at its height. The earnings that are being put out today, I think they’re very suspect. The guidance you’re giving doesn’t talk about stock compensation. They ignore restructuring costs. They don’t amortize intangible assets. They ignore the costs of taking over another company. We say, “Oh, there’s synergy.” And yeah, it’s like taking a drug, borrowing money very cheaply, taking over another company. You feel good. It’s like steroids. The athlete’s jumping pretty high. And so those companies, they can show a huge number that we all know is not going to be there is two or three years. Look, I know this stuff. I’ve taken over companies. I understand the way of it. So these earnings are fallacious, and another reason they’re fallacious is a lot of companies that are doing buybacks shouldn’t be doing them. When you start doing those buybacks, what it does is a short-term fix, but it weakens the balance sheet. Now, I have been a proponent for buybacks in companies like Apple, where they’re sitting with 200 billion in cash, but not a lot of debt. They should do buybacks, and especially at Apple, where its stock is nine times earnings. But when you have companies today, because these are companies I short, selling at 30 times earnings, 28 times earnings and have no net worth because they keep buying back stock. And yet, analysts look at it quarter to quarter. If your earnings went up for the quarter, your stock goes jumping up, and now a lot of CEOs are just wanting to see quarter to quarter earnings up, see the stock up. And yet, if you really do GAAP, which is a tougher metric, you haven’t really increased earnings for three years. GAAP earnings, they’ve stayed at about $100 a share now for three years. And even GAAP earnings are suspect, which means we’re paying a huge multiple. But what is going to happen to that market? Who is going to buy your stocks, when those earnings start coming down? And that’s with low interest rates, which I think is another scary issue.
Man 4: The Federal Reserve leaves interest rates unchanged. No rate hike from the Federal Reserve leaves the funds rates unchanged at a range of zero to a quarter percent. It also cites global economic weakness.
Carl: Yesterday, the Fed again decided not to raise interest rates. The question is why should they raise rates? And it’s almost a rhetorical question. There’s so many reasons they should raise rates, because low rates are like almost definition building bubbles. Building real estate bubbles, building bubbles, even in the art market, because the Fed balance sheet has mushroomed from less than a trillion dollars to over 4.5 trillion, which is a huge, almost unbelievable move. And all that money crowds out the little guy. The middle class investor has nowhere to go with their money, but into the market, or even more concerning, high yield bonds that are very risky. And they’re being sold en masse to the the public, just as the mortgage-backed securities. So the companies issue these high yield bonds, and buy other companies. And in fact, the M&A business, just doing mergers and acquisitions, has doubled from four, five years ago up to two trillion dollars. The irony of lower interest rates is that while you think it’s going to help create jobs, and make the workers more productive, it’s not happening. If you look at our companies today, the growth and productivity is at an all-time low. Property plant and equipment is older than it’s ever been. So we are not taking care of these companies. We are making earnings with financial engineering, like taking over other companies, by low interest rates. And what I say is at what price? If low interest rates were just that simple of a panacea, we would never have recessions. And we would never have these crises, we would never have these panics. And look, I’m not here to criticize the Fed, because the Fed did save us, in a way. But then again, you could argue, the Fed got us into it to begin with, in ’02 and ’03 with very low interest rates. It’s like giving somebody medicine, and this medicine is being given and given and given, and we don’t know what’s going to happen. You don’t know how bad the end of this is going to be. You do know, though, that when you did it a few years ago, it caused a catastrophe, it caused ’08. Where do you draw the line here? And I’ll just say what I mean. I’m too old not to say what I mean. Black Rock is an extremely dangerous company, okay? And I know, and I mean this, not that Larry’s dangerous. I know I said in my debate with Larry Fink, that I think Black Rock is a dangerous company. I don’t mean that in a bad way. I don’t mean it to insult Black Rock. Black Rock is there to make money. That’s what Larry does, does a great job at it. Here is the major problem in it, okay? Mr. Jones calls him, or even an insurance company saying, “Look, we can’t make any income. We need income.” So the Wells management guy looks and says, “Well, you can buy high yield.” They don’t even know what you mean, “High yield, what’s that mean? What are the risks?” “Well, Black Rock had a great name, and we can buy one of their ETFs.” “Okay, well that sounds good. Why not?” They don’t know the price. They don’t understand what the price is. They don’t understand what the risk is. And high yields really stands for junk bonds. People are buying these, not really understanding what they’re buying, and yet if you just look at the numbers, they’re amazingly risky. You have 2.2 trillion of junk bonds up five years ago, up a trillion dollars. I mean, that’s a hell of a lot, when you think about the whole S&P is only 19 trillion, but Wall Street does what Wall Street does best. It sells securities. I used to laugh with some of these guys that sell these bonds that…I used to say, “You know the Mafia has a better code of ethics than you guys. You know you’re selling this crap, and you keep selling it, and in fact, you’re shorting some of this.” And that is really what’s going on, and it’s just déjà vu. Black Rock is sort of a name on there, and this is one of the problems you had in ’07, when you had brand names on a lot of these housing things. And the wealth management guys believe there is liquidity here. But if and when there is a real problem in the economy, there’s going to be a rush for the exits, like in a movie theater. And people want to sell those bonds and think they can sell them. There is no market for them. We’re going to a cliff. You get this party-mobile, and they’re all on this party, they’re all having a drink and having fun. And you know who’s pushing that thing? It’s Larry Fink and Janet Yellen pushing that, and they’re pushing the goddamn thing.
Larry: I don’t think that’s fair.
Carl: Well, but can I finish my cartoon? And then you can yell at me. Al, they’re pushing, they’re pushing this thing, because, fair or not, somebody should have said this in ’07, and I’m telling you, in ’07 I talked like this, but I never really came out, and we should say it. Every once in a while, Janet wants to put the brakes on it, and Larry says, “Nah, let it go.” And the people in the party are yelling, “No, No! Don’t touch those brakes. Don’t touch. This is fun.” And they’re moving toward this cliff, see. And this thing is going to go over this cliff, and you know what’s going to destroy it? They’re going to hit a black rock. That’s right. That’s what I’m saying. And I said it laughingly, but I will tell you this. I’ve seen this before a number of times. I’ve been around a long time, and I saw it in ’69, ’74, ’79. I could tell you ’87, and then 2000 wasn’t pretty. And I think a time is coming that might make some of those times look pretty good. I look back, and I love this country, but I sure as hell don’t love a lot of the politicians in it, or the CEOs. I think they’ve taken advantage of the system, and it’s just déjà vu. The public, they got screwed in ’08. They’re going to get screwed again. I think it was Santayana that said, “Those who do not learn from history are doomed to repeat it.” And I am afraid we’re going down that road.