Sam Zell Warns Recession Coming, Provides Opinions on 22 Topics Including Fed Tools, Equities, Real Estate, Energy, China, Brazil, Mexico, Climate Change

Courtesy of Mish.

Wednesday morning, Sam Zell, billionaire chairman at Equity Group Investments, spoke with Stephanie Ruhle and David Westin on Bloomberg’s “GO” TV.

Zell discussed a wide variety of topics from the Federal Reserve rate hike, the risk of a near-term recession, real estate, energy, and various foreign investment ideas. The interview was before the Fed announcement.

I put a spotlight on some interesting Zell ideas. Everything below is a selected quote except for two comments by me in braces[].

Twenty-Two Ideas

1. Economy: High probability that we’re looking at a recession in the next 12 months.
2. Rate Hike: Interest rate hike is probably 6 or 8 months too late. I think that the economy is closer to falling over than it is to going up.
3. US Dollar: Devalued currencies make it very difficult for the US to compete internationally.
4. World Trade:  World trade is slowing. Currencies continue to be manipulated. You’re looking at the beginnings of layoffs in multinational companies. Weakness is going to be pervasive.
5. Global Deflation: You can’t put aside China. You can’t put aside Europe. If China’s numbers turn out not to be as accurate as we think, China could go into a recession. That’s about as deflationary a scenario as you could possibly come up with. And one that would for sure impact growth and affect Janet Yellen’s decision.
6. Fed Tools: “Uh” …  [as in the Fed has none]
7. Asset Prices: Assets will get cheaper.
8. Cash: With zero interest rates the penalty for holding cash is not very significant.
9. Stock Market: Nothing cheap. A number of falling knives that have been obfuscated by Amazon and Facebook et cetera. If you take out those stocks, the stock market isn’t doing real well.
10. Mexico:  Mexico is terrific. I think there’s extraordinary opportunity there.
11. China: I don’t think China is growing as fast as it reports to be. And I think that the world has a significant deflationary risk coming from a slowdown in China which I think would impact the cost of goods all over the world.
12. Brazil: Brazil is obviously suffering significantly. On the other hand, as an investor I’m always looking at where nobody else is willing to go. We’re there already and under the right set of circumstances wouldn’t have any problem investing in Brazil today. I just think you can’t lose sight of the fact that this is a country with 180 million people. It’s still growing. It’s self-sufficient in water, oil, food. It’s an extraordinarily badly managed you know entity. But the extraordinary part hasn’t changed. I’m somewhat of an optimist and I think this whole process will be a cleansing process.
13. Oil: It’s not so much prices as it is specific opportunities. What makes the opportunity is the distress of the situation.
14. Natural Gas: I’m probably more focused on gas than oil. And it’s, you know, it’s a little bit like real estate. I mean we made a fortune because we bought real estate at a discount to replacement cost. Well we’re buying gas in the ground, gas that’s been drilled. People have spent $10 million a well, we’re buying wells at dramatically less than that. So it’s the same kind of creating a competitive advantage by virtue of your entry price.
15. Real Estate: It’s very hard not to be a seller. And so we’re in effect fulfilling in some respects our longer term strategy in AQR where we’re liquidating the remaining garden apartments we have.  I’m not a big fan of buying at these cap rates.
16. Blackstone: Blackstone is just buying brick and mortar. And they’ve been able to raise staggering amounts of money. And they’ve got to put that money to work. That’s something we’ve never wanted to be in a position of having so much capital that it affects our decision-making on an ongoing basis.
17. Currencies: I’m very concerned about what’s happening in currencies. I think that you know Bretton Woods in 1948 was the allies coming together and saying we can’t recover in the world without growing free trade. We can’t create growing free trade without stable currencies. So let’s make sure we have stable currencies. That worked for a long time. Now we have very unstable currencies. World trade is slowing.
18. Dodd-Frank: I’ve never known of a single situation in my life where reduction in liquidity was a plus. And effectively Dodd-Frank has dramatically reduced liquidity and that’s a big negative. And that’s something we haven’t dealt with yet.
19. Politics: The American people are extraordinarily angry. The American people are extraordinarily depressed. The last time we had anything like this in my opinion was 1979. [To a statement regarding Trump’s popularity Zell responded]:  It’s because you guys are sitting here in New York City and you’re not in Des Moines. And you’re not in Boulder and you’re not all over the country. And you’re not seeing the enormous disparity that has existed between you know the coasts and the rest of the country. We have a lot of very unhappy people and I think this election is reflecting it. And I think it will be very dangerous.
20. Flat Tax: I think if I were given a straight choice I would be in favor of a simple flat tax.
21. Government Bonds: I’m not a big lender of money to governments period.
22. Climate Change: The level of certainty of exactly what is happening has a lack of humility and arrogance to it that scares me. As far as I’m concerned, conventional wisdom is my greatest enemy. And this strikes me as an awful lot of conventional wisdom.

It was a fascinating 2-hour interview. I stripped off the intro, the rest appears below. It’s well worth a read.

Zell Transcript

RUHLE: We are 5 hours and 56 minutes away from the Fed announcement. And what is it? Clearly we are expecting them to have a rate hike. Sam let’s talk about the rate hike for a minute. Let’s assume we get it. Even if we do, we are moving inches. Given where interest rates are, even with the hike, how concerned are you about asset bubbles?

ZELL: Well, I think that the interest rate hike is maybe going to begin the process of reducing the asset bubbles. But look at the screen this morning. Futures are way up. Futures are way up because interest rates are going up. That’s indicative of the way the market has responded for the last six months.

RUHLE: Perversely.

ZELL: Yes, exactly. And I think that this interest rate hike is probably 6 or 8 months too late. I think that the economy is closer to falling over than it is to going up.

RUHLE: Hold on a second. If it’s 6 to 8 months too late and we’re closer to falling over, what exactly does that mean? How bad is it?…