Citadel’s Griffin Warns of Inflation Risk for Markets Benefiting from Retail Boom

the retail frenzy will hit a new crescendo in the coming weeks thanks to U.S. government stimulus checks, but the inflation that this support could trigger poses a threat to the bull run, according to Citadel’s Ken griffin.

The founder of one of the world’s largest hedge funds believes $ 1400 sent to millions of Americans this month is likely to fuel another retail spasm before activity returns to an even high level. Amateur trading would remain a powerful feature of US stocks, he said.

However, in a rare interview with the Financial Times, Griffin warned that huge amounts of central bank bond purchases and government spending could shake things up. American inflation emerging from its decades-long torpor and destabilizing financial markets as they attracted more retail.

“Given the incredible amount of stimulus that has been triggered, there is a possibility that we will see a real surge in inflation,” Griffin said. “The question is whether it is transient or becomes permanent and structural, and it is much more likely to take hold at any other time in the past 12 years.”

Overall, Griffin said he was optimistic about the outlook and praised the retail boom as a way for more Americans to profit from the US stock market. But he warned of a doomsday win-win scenario that accelerates inflation deepens the bond market sell-off, pushes down stocks and stokes unrest among retail investors.

Inflation fears are growing in the investment sector, with accelerating price gains and a bond market ‘slump’ highlighted as the biggest risks markets now face in Bank of America’s latest monthly survey of investors. The percentage of investors predicting faster inflation over the coming year in March is at its highest level since at least 1995, when the survey began.

Citadel is one of hedge fund industrythe biggest players, managing around $ 34 billion. Its flagship fund returned 24.4% last year despite turbulent markets, and this year it is up about 5.2% at the end of February, according to people familiar with the matter. Over the fund’s 30 years, it has recorded average annual gains of 19%, making Griffin one of the largest and most coherent interpreters.

Line graph of market share of overall U.S. equity trading volumes (%) showing retail now accounts for almost as much volume as mutual funds and hedge funds combined

However, the Citadel recently found itself embroiled in the controversy around GameStop, the video game retailer whose title has been whipped by hedge funds betting against it and a horde of bullish traders organized freely on the WallStreetBets forum on the social media site Reddit.

The fund intervened to replenish Melvin Capital, one of the biggest hedge funds betting against GameStop. When Robin Hood, a broker popular with new generation of retail traders, was later forced for regulatory reasons to cut back trading in GameStop, many Reddit users seized on a conspiracy theory that it was up to the Citadel request. Citadel Securities – a separate high-speed market maker also owned by Griffin – is one of Robinhood’s biggest sources of income, paying it the right to execute its clients’ trades.

The firestorm led to Griffin bear witness during the House of Representatives Financial Services Committee hearing on the GameStop saga last month. Although Robinhood drew the most anger and Griffin testified that The Citadel has nothing to do with Robinhood’s decision, he did not escape unscathed the reproach of certain representatives.

Griffin widely shrugs off the controversy as a social media storm is stirred by populist politicians. But he also argues that the saga foreshadows a larger, more thorny issue of what happens when retail traders and passive index funds begin to dominate the stock market more, with prices becoming more detached from reality.

Inflation bursts as investors' biggest fear

In U.S. equities, passive funds are now about as big as the actively managed investment universe after a decade of breakneck growth, while retail investors now account for almost as much as all mutual fund and fund trading. combined speculative.

Griffin pointed out how an oblique McDonald’s ice cream cone tweet and a frog emoji from Ryan Cohen, a major GameStop shareholder, appeared to cause the share price to double in one February afternoon.

“Whether the tweet from an ice cream cone can move the markets will be the subject of academic study for years to come,” Griffin said. “It represents a dynamic where certain stocks are now almost exclusively held by retail and passive funds. You’ve chosen active investors who focus on traditional metrics to value a stock. “

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