Ever since John Paulson bet against the U.S. housing market more than a decade ago, people keep asking him about his next big trade.
The billionaire hasn’t found anything to rival his massive short, but it’s hard to top the $20 billion that Paulson made for himself and investors when subprime mortgage bonds collapsed and ignited the worst financial crisis since the Great Depression.
Now though, more than 14 years after CDOs and credit-default swaps dominated everyone’s attention, Paulson is again seeing signs of excessive speculation.
Paulson, 65, is increasingly concerned about rising prices, he said in an episode of “Bloomberg Wealth with David Rubenstein.” The rapidly expanding money supply could push inflation rates well above current expectations, he said, and gold, which he’s backed for years, is primed for its moment.
His harshest words are for the hottest investments of this era. SPACs, on average, will be a losing proposition, while cryptocurrencies are a bubble that will “eventually prove to be worthless.”
“Paulson’s dismissal is sure to attract critics after digital assets vastly outperformed gold in recent years. His record since the “greatest trade” has also been mixed. He turned his hedge fund firm into a family office last year after assets dropped to about $9 billion in 2019 from a peak of $38 billion in 2011 and he found himself managing mostly his own money.
Paulson said he much prefers to focus these days on investing and doesn’t miss the stress of running a business. “I was never fond of raising money or going to meet investors,” Paulson said.
Investing is what he largely wanted to do since attending a course at New York University taught by former Goldman Sachs Chairman Gustave Levy. After Harvard Business School, Paulson’s first job was with Boston Consulting Group, but he soon switched to work for Odyssey Partners then mergers and acquisitions for Bear Stearns & Co. He opened Paulson & Co. in 1994 and the New York-based firm was best known for risk arbitrage until that moment when he realized the U.S. housing market could be a house of cards.
Paulson also spoke about his upbringing in New York, how he constructs his trades, where he’d put $100,000 today and the best investment advice he ever received. The interview has been edited and condensed.
For more insights from the biggest names in investing, watch “Bloomberg Wealth With David Rubenstein.” Paulson’s interview airs Tuesday, Aug. 31 at 9 p.m. ET.
The subprime trade was more than 10 years ago. Have you or anybody else come up with something quite as good as that?
I haven’t found anything that’s as asymmetrical as that particular trade. Asymmetrical meaning you could lose a little bit on the downside, but make essentially 100 times on the upside. Most trades are symmetrical. You could make a lot, but you risk a lot. And if you’re wrong, it hurts.
But the area that’s most mispriced today is credit. You have current inflation that’s well in excess of long-term yields and there’s a perception in the market that this is transitory. I think they bought the federal line that it’s just temporary, due to the restart of the economy and that it’s eventually going to subside. However, if it doesn’t subside, or it subsides at a level that’s above the 2% that the Fed is targeting, then ultimately interest rates will catch up and bonds will fall. In that scenario, there are various option strategies related to bonds and interest rates that could offer very high returns.
