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September 15, 2006 4:34 pm

Interview: A smart take on dumb money

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Peter Thiel, a prominent figure in the dotcom boom who was best known as a venture capitalist, raised a few eyebrows when he announced four years ago that he was starting a hedge fund.

More than one hedge veteran expected the youthful entrepreneur to fail. Running a hedge fund is very different from seeding start-ups, or from running Paypal, the online payment company Thiel headed for a while before taking it public.

But Thiel, still only 38, has enjoyed success so far. His Clarium fund, now with about $2.1bn under management, returned 57 per cent last year. It is a macro fund, which involves taking big-picture bets on trends across the world. Like most such funds, it is volatile – its returns are only about 2 per cent for the year to date – but has a comparatively low risk profile.

Thiel’s views encompass sometimes abstract theories on global trends. He is happy to air his views and dispense advice to fellow investors.

To sum up, he believes the best buys now are 30-year US Treasury bonds and energy and oil stocks.

“The increase in the price of oil is equivalent to a $1,000bn global tax inc-rease,” he said. “Where is that $1,000bn going, how is it being spent? . . . It is going to wealthy people and governments in Saudi Arabia and Russia. From there the money goes to Geneva and London and is invested in the financial markets, in high-risk things, extended out as credit.

“We think this effect may have been extraordinarily large and may be as large or larger in impact than the oil price hike itself,” he said, explaining Clarium’s view on how to play the oil price jump.

“We think of it as dumb money. A lot of it is probably going into investments that aren’t good . . . It’s going into housing, the euro and the pound,” said Thiel, who believes that sterling may be the most overvalued currency in the world.

“The UK has probably been the single biggest beneficiary of this petrodollar flow,” he said. “The end of the housing boom for a normal economy would have been catastrophic but it hasn’t been in the UK. The reason is this relentless amount of money being pumped into London.

“The day the oil [price] finally comes down, the pound will weaken dramatically. I will make that prediction. The petrodollars are systematically distorting things. You don’t want to be long the pound, long the euro or long housing, or emerging markets bonds right now,” said Thiel who believes these are all being propped up by the oil price.

However, he said that paradoxically energy stocks were cheap. Speaking just before the sharp downturn in the oil price during the past few weeks, he said: “The price of oil is $75 a barrel and the forward price of oil is $70 a barrel. But the Canadian oil companies are priced as if oil is $50 a barrel.

“Every other high-risk investment we look at is fully priced – emerging market equities, technology equities, housing, it is all fully priced. You have a trillion dollars in extra money that is going into all these high-risk investments.

“But if you look at the oil services companies they have earnings multiples of 10, 12, 14 – not that high but the earnings are growing at an incredible clip,” he said.

He admits he called the housing bubble too early but still believes it is about to pop in the US – a belief that has become more widespread as the data of the past few weeks paints a gloomy picture for the sector. Putting his money where his mouth is, he recently sold his house in San Francisco and is renting. “Housing is more overvalued than ever. Marginal buyers who would not have done so previously are getting in now. If the credit were not extended the housing boom would not have gone nearly as far as it has.

“The excessive focus on nominal interest rate levels is a mistake. If people think house prices are going to go up 10 per cent a year it doesn’t matter if they think interest rates are 3 per cent or 5 per cent, they will buy.”

However, he said his fund had taken no direct position in housing, because it was “a crowded trade”. Most professional investors have be-lieved for some time that it is a bubble.

The other main investing idea Thiel has is one he described as “boring and conventional” but also contrarian. “I think one of the best low-risk investments in the world right now is 30-year US government bonds. When the housing boom ends, you are going to have a major deflationary shock. You can expect all sorts of crazy things to happen but one thing that will happen is that long-dated government debt will rally,” he said, pointing out that this was what happened during the past two housing crashes, in 1979 and 1989. “Nobody likes the 30-year bonds . . . everybody is short the long end,” he said.

He also thinks people in the US will start saving, and saving rates – now at zero – will climb quickly in a way that could even diminish financial returns.

“If everyone starts saving like crazy, the returns are going to go down. We are seeing this in China and Japan, the savings glut is driving down returns on assets, with too much capital floating around.

“The savings rate in the US will start going up very dramatically. My prediction is we will start seeing that in the next year.”

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