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‘We have to expect a recession in 2023,’ North Island chairman says

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North Island Chairman Glenn Hutchins sits down with Yahoo Finance at the 2022 World Economic Forum (WEF) in Davos to discuss recession risks amid inflation and the Fed's tightening cycle, humanitarian aid for Ukraine, crypto market volatility, and the Boston Celtics.

Video Transcript

DAVE BRIGGS: Despite a fantastic finish to the week, the NASDAQ is still down more than 20% this year. What's ahead for the tech sector, and can it keep the economy from falling into a recession? Our coverage from Davos continues now with the chairman of North Island and co-founder of Silver Lake, Glenn Hutchins, who was also an economic advisor back for President Clinton and sits on the Boston Celtics Executive Committee. Glenn spoke with our Andy Serwer.

GLENN HUTCHINS: My working assumption is, I think we have to expect a recession in '23. Not projecting that's going to happen, but I think we have to plan for that. And I think that's because the inflation that we're experiencing now, 6% to 8%, is roughly half structural or persistent. So I feel like we have a real economy of about 3% to 4% inflation, a point or two above the Fed's target.

That means the Fed's tightening will have to go on longer and be more durable in order to get that under control. Most of the causes of inflation are not within the-- are not things that the Fed's tools can really address. And so, it feels to me like that-- and secondly, monetary policy is a blunt tool, not a surgical instrument. So I think we have to plan for recession. And that has enormous consequences for corporate earnings, which we can come back to, if you'd like.

ANDY SERWER: So, how does one position oneself, then? Or what are you thinking? Or what are you doing?

GLENN HUTCHINS: Well, it depends. So, first of all, if you're a company I think you have to make plans for slowing consumer spending and your exposure to that. Also for a continuing increase in cost of what you do, whether it's labor or raw materials. And so-- and by the way, that's the kind of behavior that the Fed wants to induce. In other words, they want economic activity to slow down in order to bring inflation down.

If you're an investor, I think-- I mean, I talked about this at year end. But I think in anticipation of this, what I've told people is to get out of the frothiest parts of the market, but the market's done that for them. If you're investor right now, I would expect that if we do end up recession, that there will be a-- we've been through a PE tightening already. And when earnings adjust, when the E goes down, I expect a second leg. So I'd be very, very concerned about it, less about valuation sensitive companies now, and more about earnings sensitive companies.

ANDY SERWER: Shifting gears, we're here at Davos, of course, and you're the chairman of CARE, that NGO. And you were in Poland on the Ukraine border. Quickly, what did you see there? And what was that like?

GLENN HUTCHINS: Well, I spent, in addition to observing our work there, I spent a day volunteering at the border.

ANDY SERWER: Right.

GLENN HUTCHINS: And greeted buses from Kharkiv and Mariupol, in particular, and welcomed the refugees into Poland. I met a young woman named Svetlana, who, as far as we could tell, all she had left in her life was the backpack on her back and a big dog at her side. And she said to me, why won't you stop him? And--

ANDY SERWER: Him being Vladimir Putin, of course.

GLENN HUTCHINS: And a principal lecture on geopolitical realities didn't seem merited. I met another man, 85 years old. He said, in 1941, I fled to Russia to get away from the Germans. Today, I'm going to Germany to get away from the Russians. Those were the bookends of his life.

ANDY SERWER: Yeah. It's really shocking. Shifting gears again, a big topic here, besides deglobalization, is crypto. And--

GLENN HUTCHINS: What's that?

ANDY SERWER: Yeah, well, you're a big crypto investor.

GLENN HUTCHINS: Yes, I am, yes.

ANDY SERWER: And I want to know what your take is on that.

GLENN HUTCHINS: So, look, I think that crypto is a long-term, hugely important innovation. People think about it as-- either as about [INAUDIBLE] coins or about blockchains. I think it's best understood as a new mode of commerce and a new paradigm of computing, Point number one.

Point number two, any new technology like that will go through cycles, ups and downs. There will be good companies and bad. The bad companies will go away. The good companies will thrive. Just like the internet crisis of 1999, pets.com and Webvan went away, and Amazon powered on to a greater success. So the point here is not to-- it is not to diminish crypto, but try to understand what the best companies are and invest in those.

ANDY SERWER: You are a minority owner of the Boston Celtics. They're playing Mike Claudio's Miami Heat over here. And just wondering how sanguine you are about their prospects going forward.

GLENN HUTCHINS: It's a great team, plays enormous team defense. It's a-- they've got a coach that has done-- worked wonders with them. I've got an emerging young star named Jayson Tatum, the best defensive player in the league, defensive player of the year, Marcus Smart. But it's a team, and I am very optimistic.

SEANA SMITH: That was North Island chairman Glenn Hutchins, speaking with Yahoo Finance's Andy Serwer at the World Economic Forum in Davos, Switzerland.