And to take us through the possibilities of investing in the Gulf.
We welcome now someone who has spent his career there.
He is Tom Barrack, the founder of Colony Capital.
Tom, great to have you here. Thank you so much for being on Wall
Street week. Great to be with you, David.
As I say, you really spent your career in and around the Gulf.
Give us an investors perspective right now in the Gulf.
Where are there opportunities? But also were there perils?
So it's always been a misunderstood era, right?
Because it's tribes and flags when we talk about the Gulf.
There's 54 countries really that make up kind of the the consortium of Gulf
countries, four big ones. But if you think about it, the the
resource curse. So from 1960 on, the discovery of oil
and gas in these small populations led them and really a 70 year period to
dominate the investable world. So from producing oil and gas, being the
beneficiary of receiving those dollars up until now to reinvest in them and
saying we've got to diversify, we have growing populations, we're now becoming
more astute and aligned in the international economy.
How do we diversify? What do we diversify into?
And remember, the constituency is it's not a pension fund.
So their investable universe, the big sovereign wealth funds, which by the
way, are the largest investors in the world today, India mubadala PIF KKR are
multi-thousand investment groups investing in all asset classes around
the world. So the goal at the moment is for them to
diversify outside investments and at the same time start moving their own
economies and their own young populations to a non resource based
economy. And that's the that's the biggest
challenge in most of these countries. The royal family directs the politics,
and the politics is also driving the business decisions.
So you have the same individuals in various positions that are looking at
these big themes over long periods of time.
And the constituency is the legacy. It's not for the retirement of
individuals. So it's booming.
Whenever one invests cross-border, there's political risk involved.
How does one assess the political risk in that region?
Certainly we've seen it flare up in Saudi Arabia in various ways.
How does one assess that and make sure that you're protected from that,
possibly affecting your investment slowly and carefully?
I'm a great example of that. So
I think for all for all business men, soft diplomacy is
is part of the goal that you're trying to reach long line relationships,
understanding the geopolitical risks of where you are, the rule of law, the
cultural orientation. We've always talked about
this cultural sixth sense, but foreign policy has so much to do with it,
especially in this region. It's a dangerous place.
Why is it dangerous? Because all of these countries have been
our allies. Really from
the beginning of World War One. They as a group are the largest buyers
of U.S. military equipment.
Saudi Arabia, Qatar, Abu Dhabi are our largest foreign buyers of U.S.
military. And we have military
agreements with all of them. But foreign policy ebbs and flows and
that part of the region. And as we've seen now with sanctions,
for instance, and Russia and the threat of sanctions elsewhere, the rule of law
sometimes is confusing to them as to the difference between foreign policy and
military policy, business practice, business diplomacy.
As the United States returns to kind of a globalization mode, which we can talk
to more, which is what's happening. I'm not in favor of that, by the way,
but it is certainly happening. You know, this idea of let's make
America great, I was always an enthusiast who saying, why don't we
let's make America great in the world better.
We're just missing one piece of that. So the geopolitical aspect is so
important for the U.S. now not to give up on that and not to
just be there to take money, because if we don't help, if we're not there to
hand in glove, fix the rest of the things they need,
China will be there, Russia will be there.
They'll fill that void. The the the dollar.
Inconceivable to think that you would be in a petro business and use dollars.
But we're really at the verge of that about to happen with the renminbi going
to a digital currency. You know any of these things could
happen if there's just a mismatch between foreign policy thought, military
execution and business soft diplomacy. So I think it's it's it's a moving
target. And we all need to be cautious and we
all need to participate. And participating in business is the
easiest way to solve some of those cross-cultural issues.
Tom, you referred to your personal experience and being exposed to some of
the risks in what you call soft power with investing.
You obviously were indicted on nine counts.
You had a seven week, eight week trial in the Eastern District of New York.
You were acquitted on all charges, I must say.
What did you learn from that experience that would be helpful to others in 2016?
Bob Mueller started investigating President Trump for Russia.
And. By the way, I have nothing but respect
for Mueller and his team. They did the job they were supposed to
do, and they did it elegantly and in the manner of which it was supposed to be
done. And during that time, I had.
He had asked me to testify voluntarily, which which I did.
And this was about Russia. But in that process, the Gulf states
were starting to. Two surface to surface for interest.
Never. Never for any evil purpose.
Never for any attendant purpose. Just saying in this campaign, we don't
know who Donald Trump is. Who is Donald Trump?
I thought this for me at the time was an incredible opportunity.
I mean, you and I have talked before. I was never really political.
Donald had been a friend of mine forever.
I thought, this is a great opportunity to start shipping at the system from
somebody outside of the system. So what got confused with me was my
interaction, which was always business. As I said, the rulers of all these
countries also are the ones making all the business decisions.
So the sovereign wealth funds ultimately are governed and ruled by a monarchy.
These are monarchies never inappropriate.
The big funds idea Mubadala is run by some of the brightest young
professionals ever, as is QE, as is never an ounce of of impropriety.
And on the heels of the Mueller investigation, some of the prosecutors
when they left, go back into their own regimes.
Let me just start with saying people are always
asking me, is that at the prosecutors corrupt, are they evil?
Did this come from Merrick Garland or is he targeting you?
And my answer is absolutely not. Quite apart from your long term
relations in the Gulf, you've been a long term real estate investor.
Commercial real estate is very much in the news these days.
A lot of troubles in some parts of the commercial real estate business, and
it's affected some banks, including First Republic Bank, that you at one
point owned, as I recall. And we're on the was on the board of.
What did we learn from First Republic Bank.
How concerned should we be about broader problems?
What happened to those banks was not a credit problem, not a capital problem.
It was a confidence problem. It had never happened before in history
with a click on a phone. You could have $18 billion of
withdrawals in an afternoon liquidity for those deposits.
Just a simple way, I think for for all of us to look at it is that banking
makes no sense. If you take short term deposits and you
match it with long term loans,
what you're putting on the balance sheet along with the requirement, the
government saying you need to buy long term bonds at fixed rates.
It has the lowest capital charge, but those are held to maturity.
You don't have to market those to market and then you have assets for sale and
you and you have loans, but your main source of funding is deposits.
So during the zero interest rates, huge companies were not concerned with
putting their deposits and getting yield because there was no yield.
So they did four services. So a bank like First Republic Bank
supplied extraordinary service along with zero credit risk that banks credit
loss ratio was 0.003 over 30 years. So it wasn't it wasn't a credit crisis.
What's your assessment of the US economy overall?
Right now we've had a problem with inflation that seems to be stubborn
going away. It seems to be coming down a bit.
The Fed has raised rates faster than maybe they've ever done before.
Where do you think we are on the economy?
And particularly it was with the question of growth.
I'm not an economist, but I kind of believe the Roubini method of of
stagflation that I mean, we had
we went from 0 to 5 in 11 months. That's.
That's a harsh reality on a system that had gigantic stimulus from both
President Trump and President Biden after COVID.
Quantitative easing of 4050 billion a month.
Buying back mortgage securities.
So much liquidity in the system, it was mind boggling.
And changing that which was was always looked at raising rates in the
manufacturing sector. So you can slow inflation by raising
rates pretty quickly in the manufacturing sector.
You can't do it so quickly in the service sector.
And that's what I think we're we're finding as this this lag of so much
liquidity in the system, along with some negative supply chain shocks.
So China, we didn't anticipate at the time this was going on that we were
going to engage in a new Cold War with China,
which I also think is a gigantic issue that we need to focus
on and maybe a different way the Ukraine war with Russia,
the the imperilling effect that it has on Europe,
that it has on supply chains everywhere, even in food and agriculture.
We didn't anticipate either. So when you look across the realm and
you say, what else is happening? Everything is stopped.
Globalization has slowed. The blockchains are much more
complicated. Immigration now is a gigantic issue.
You look at what's happening in Europe. You look at what's happening with us.
But everybody has negative population
growth. I mean, we're very close to having
negative population growth. So when you look and say what is going
to grow? How do we grow?
If they really want inflation to be at 2%.
The dilemma is they need to bump interest rates, but nobody has the
stomach to do that, thinking that we're going to push ourselves into a very hard
landing. And what's the consequence of that when
central banks across the world are out of bullets?
So, Tom, as you look at this uncertain world that you describe and a changing
world really going through some fundamental changes.
How much difference does it make who is sitting in the White House?
I mean, as we look right now at 2024, we don't know.
But it looks like it's quite possible it'll be a choice between President
Biden and President Trump. You said President Trump's your friend.
You did advise him. But as I understand, you don't
necessarily want to endorse anybody. Compare and contrast those two
approaches to the economy. Does it make a difference to you as an
investor? I mean, this may seem like a bizarre
answer, but. Of course, it makes a difference who the
leader is. I think both of them, by the way,
had the most difficult job in the world. And President Biden is a class act.
He takes the brunt of what whatever, whatever happens that's bad.
He's going to carry President Trump. Did a fantastic job.
He's his own worst enemy sometimes and and his vociferous ness.
But that's his that's his political angle.
You have 435. Representatives who are making decisions
and a super complicated arena in which nobody has a GPS.
The central bank is supposed to be independent from politics.
We've kind of lost that a bit. Right.
Because price stability is not the only thing they're worried about.
So to me, we'll get through who whoever the president is, if we change, if we if
all of us change our attitude and said what we're going to do is we're going to
support the president of the right, whoever the president of the United
States is great. We're going to vote with our feet or
they argue we're going to have political dialogue, but we're going to do it in a
calm, supportive way to the rest of the world.
And we're going to be the leader of the world and whoever that man or woman is
as president is going to be our leader.
And the fighting these political parties, Congress and Senate, the deep
state, just gets stronger. So from my limited perspective, it's not
really by the time somebody becomes president, United States.
That person is given a mantle and a sword that we should
follow. The deep state underneath is as it as it
feels a weakness as we continue to attack after an election.
It only hurts us because that bureaucracy, the bureaucracy is rightly
saying we have to protect ourselves because all these political people are
crazy. So that bureaucracy becomes bigger and
bigger and bigger. If called upon, will you advise Donald
Trump as candidate again the way you did last time?
No. I, I have great respect for him as a
friend always. I have great respect for the United
States. It's a dangerous game.
I'm a businessman. I have a point of view.
I'm a Lebanese immigrant and I'm thankful to Almighty God for whatever
benefit that I was able to have. As the American dream, I tried to
contribute. It's too confusing of a world for
business people to get involved in politics.
Finally, Tom, you mentioned you're a Lebanese immigrant.
You always identify as Lebanese. I've always wondered.
Deep down inside, do you identify as a Lebanese or a Phoenician?
You're so good as I think as a Phoenician, because
the modern Lebanese is, you know, it's gotten so confused.
I always look just because I had. Such amazing parents.
My mom, my dad was just a hard working immigrant grocer.
But I always said that whatever modicum of tiny success I've had is as a result
of that Phoenician DNA, of kindness, of selflessness, of tolerance, of
compassion, of understanding, married with the unbelievable, unique brilliance
of America, who said, if you want it and you put your mind to it, you can do
anything. Tom, thank you so much for being on Wall
Street. We really appreciate it.
That's Tom Barrett. He's the founder of Colony Capital.