Ken Langone: 'Who the hell in their right frame of mind would be buying bonds now?'

Julia La Roche
·Former Correspondent

Billionaire investor and philanthropist Ken Langone, the founder of The Home Depot (HD) and chairman of Invemed Associates, argued that there’s some “big time” structural problems in the market right now.

“If rates only go up 2%, you add half a trillion dollars a year to the interest bill — that’s another matter. Seventy-one percent of our federal budget is entitlements. That means it’s guaranteed. You can’t touch that. So how do you get out of 29% what you need to get back to some semblance of order?” Langone said at the SkyBridge Summit on Monday.

He said he understood the Fed’s decision to keep rates low following the 2008 financial crisis, noting that it adverted a calamity, though it was “still a calamity for a lot of people.”

“But if you look at these state pension funds, they’re a mess,” Langone said, adding, “These bills have got to be paid.”

“The US government last year on average paid $1.5bn each day in interest payments, and this is rising toward $2bn per day over the coming years,” Deutsche Bank’s Torsten Slok observed. (Image: Deutsche Bank)
“The US government last year on average paid $1.5bn each day in interest payments, and this is rising toward $2bn per day over the coming years,” Deutsche Bank’s Torsten Slok observed. (Image: Deutsche Bank)

The challenge, according to Langone, is that a lot of the pensions have a spend rate that’s “tied to some reasonable expectation of a rate of return.” He added that “good rate of return today of 2.5% to 3.5% doesn’t do the job.'” According to Langone, his experience with charitable organizations is that they have a spend rate of at least 4.5%.

“A big fear to me is who the hell in their right frame of mind would be buying bonds now? Because if we are on a trajectory of raising rates that means, and if it keeps going that way and I don’t know how high it will go, and it keeps going that way then all the sudden the guy who bought those bonds is going to be looking at a fairly decent loss,” Langone said.

Despite that, Langone is bullish on the U.S.

“But all that said, out of chaos comes order, eventually. I’m very optimistic. In fact, I’m beyond that —America owns the next 25 years,” Langone said, adding, “Churchill said ‘Except for every other form of government, democracy is the worst.’ Except for every other economy in the world, we’re the worst.”

Langone predicted that the U.S. “owns” the next 25 years “in spite of the nonsense that goes on in Washington.”

“We are where it will be for the next 25 years. I don’t want to invest five cents anyplace in the world except for here,” he said, adding, “So, I’m unabashedly, passionate about the next 25 years. Now, will there be periods of time where you have dips and severe dips? Yes.”

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Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter. Send tips to laroche@oath.com.