Bill Ackman: my latest view on inflation and recessions

Star investor Bill Ackman gazes into his crystal ball and makes some predictions about inflation, interest rates and Federal Reserve policy. The manager of FTSE 100 investment trust Pershing Square Holdings (LSE:PSH) also talks to interactive investor's Lee Wild about his latest thinking on inflation and whether the global economy is facing recession in 2023.

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​​​​​​Lee Wild, head of equity strategy at interactive investor: Hello. With me today, I had star investor Bill Ackman, CEO of FTSE 100 company, Pershing Square Holdings. Hi, Bill. Thanks for joining me today. Great to talk again.

Bill Ackman, founder and CEO of Pershing Square Holdings: Sure. Good to see you.

Lee Wild: I'm going to ask you to look into your crystal ball and give a view on inflation and Fed rate policy. I know you'll have written about it at length. But for our viewers, who will want to know, are we nearing peak inflation, and where will the Fed funds rate peak and when? 

Bill Ackman: Sure. I think we are nearing peak inflation. I think this most recent number was a surprise to the upside, particularly on the goods side. And, you know what's interesting about, you know, managing interest rate policy, the job the Federal Reserve has to do, is that the data sort of seems to be always wrong, you know, and constantly being revised. And we were, I would say, surprised, certainly on the good side of the CPI number, goods inflation was higher than what sort of anecdotally we perceive as is happening in the world, and I would say it was maybe, you know, lower in a previous CPI print and maybe averaging the last two CPI prints probably gets you closer to what the actual monthly inflation is.

We do think inflation is moderating. Obviously, at least in the US, gas prices have come down quite meaningfully, and you're seeing some moderation in wage inflation and clearly in goods inflation, and, you know, transportation costs are kind of coming down, supply chain issues are in process of being resolved, and we think that leads to a tempering of inflation. And then, of course, the Federal Reserve is being aggressive. I mean, the really clear reinforcement of what the Federal Reserve was trying to say up until Mr Powell's August Jackson Hole remarks, I think the world kind of woke up that the Fed was serious. So I think now the market is pricing in even more aggressive interest rate increases in the short term than the Federal Reserve has suggested, and I think the market maybe actually, you know, the expectations were too low before and they may be too high now. I'm not convinced the Federal Reserve is going to raise rates to 4.25% by the end of the year. I think they may go more slowly than that. But I think, you know, the so-called terminal rate, you know, likely will be something with a four in front of it, and we'll probably get there by sometime in Q1. And I think you'll start to see a moderation in the CPI numbers over the next several months, or certainly we hope that's the case.

​​​​Watch the other videos that form part of the Bill Ackman interview here:

• Bill Ackman: sell your shares when this happens
• Bill Ackman talks cheap stocks and new hedge-type bets
• Bill Ackman: why now is the time to buy stocks

I think a more interesting question, and I would say more relevant to the value of companies is long-term inflation and long-term interest rates, and that's where I think the Federal Reserve's view that, you know, we're going to keep policy tight until we get back to 2%, I'm not sure we're getting back to 2%. I feel like it's different, we woke up in a different world in 2022 than the world that came before where it was hard to get to keep inflation at 2%, right. And I think, you know, the war in Ukraine, I think, you know, the China-Taiwan potential conflict, and supply chain problems that people are having, you know, all of these things point businesses to, you know what, I want to have more control. I don't want politics to interfere with my supply chain.

And so I think you're going to see a lot more manufacturing being brought closer to home. I think Mexico will be a big beneficiary, the US, I think, will be a beneficiary of that, but that's expensive. And I think, you know, the sort of ESG movement is also expensive in terms of the incremental cost to be a more carbon neutral world, the transition to alternative energy is going to be expensive, so I'm not confident the Federal Reserve's going to get inflation back to 2%, and I think they may have to at some point say, look, we're going to accept, you know, maybe 2.5% or 3% kind of longer-term inflation, so I think that's a story that has yet to be written, but that strikes me as sort of more interesting. I mean, a lot of focus, obviously, on the Fed in the short term, that's more for traders. We own, and it's relevant to us as we hedge some of those, you know, we use some of those instruments, but what really matters to the long-term owner of equities is what's the long-term, risk-free rate, right. Because, you know, Universal Music Group NV (EURONEXT:UMG) is a forever asset. So when you value it, you discount the cash flows back at a long-term interest rate, you know, discount rate, and so what the risk-free rate is, that's the base on which you add a risk premium. And if it's going to be 3%, you know, if inflation is going to be 3% instead of 2%, you know, that means something for long-term rates and long-term values.

Lee Wild: So companies with pricing power are going to be at a premium one would imagine.

Bill Ackman: Yeah, and I think we own them. You know, if you look at our businesses, we love businesses that have kind of royalty-like characteristics. Universal owns a royalty on music, so if Spotify raises prices, we get an immediate benefit. Restaurant Brands International Inc (NYSE:QSR) owns a royalty on, you know, Burger King hamburgers and a Coke and a fry or a Popeye's chicken sandwich, and if they raise prices, we get a royalty, an immediate benefit from that, and the same thing is true for Hilton, you know, as room rates go up, that's, you know, again, and hotel real estate is really the only real estate where you can reprice your rents every day, which is good in a world where you think hotel rents or room rates, our so-called red bar is going to go up over time. So I think we own, we've always been interested in owning assets and companies with pricing power, and the best businesses in the world have pricing power, and we always wanted to own businesses that were protected from inflation, but we never had inflation, and so, now we do and we're glad we own what we own.

Lee Wild: The recession is fairly likely. Do you see that as fairly long and severe or just a short, sharp technical recession?

Bill Ackman: Look, I don't think it's knowable whether or not we're going to have a recession. You know, it used to be we had economic cycles with recessions, it's been an awfully long time. But if, you know, the Federal Reserve got behind in raising rates and now they're going to have to be more aggressive. I mean, you look at what's going on in housing. You know, people got used to a 3% mortgage rate and now it's 6% plus, and that's causing the housing market to slow down fairly rapidly. Housing is a very important part of our economy, so if rate rises have that effect more broadly, then I think it's likely that you're going to have a recession. If the Fed raises rates pretty quickly, which was our kind of recommendation more than a year ago, and you can sort of cut off inflation and get it trending in the right direction, then they won't have to be as severe and don't have to, if you will, force us into a severe recession. But I think sometime in 2023, you know, it's absolutely within the realm of possibility that we're going to have a recession for sure.

Lee Wild: Bill Ackman, CEO of Pershing Square Holdings, thanks very much for joining me today.

Bill Ackman: Thank you very much, Lee.