When a country spends more on interest on its debt than on its defense spending, its global power generally declines, and that's what we're doing right now. Right now we have $40 trillion in debt.
Is there a way out of it?
The only way out, honestly, is to pay it back in devalued dollars. There's no other way out, unless you want to do something radical, like raise taxes dramatically or cut spending, which people don't want to do.
Have you ever lived through an economic situation comparable to the one we're living through right now?
People always like to say that this time is different, and those are the most dangerous words in the world of investing, because history repeats itself. In the end, nobody really knew which companies would make it and which ones wouldn't.
When do you think another bear market will happen?
Well, if I knew, I'd probably be shorting the market right now. This uncertainty and these wars are very costly, and I think they don't help the global economy.
You said that your biggest financial regrets were the investments you passed on, notably Meta and Amazon. What did those moments teach you?
I mean, in the case of Meta, he told me they were trying to raise $30,000, so I didn't put in the $30,000. It was one of Mark Zuckerberg's roommates who did it, and I think the $30,000 he put in is now worth about $50 billion, so I regret it. It reminds me of how lacking in judgment I am about certain things.
What did you learn about leadership at that time in sports that you probably carried over from your career in private equity?
If you can't stand losing, if you can't stand fans complaining about you, you shouldn't buy a sports team. Because the fans aren't going to praise you. If you want someone to praise you, buy a dog.
All right, guys, welcome. Special EYL episode, we have David Rubenstein. Thanks for joining us.
It's a pleasure to be here. Thanks for having me.
Co-founder of the Carlyle Group, one of the largest private investment firms, with $485 billion in assets under management.
Yes, and you're also the owner of the Baltimore Orioles.
That's what we're going to talk about today.
All right. Happy to talk about it.
Yes. He's going to become a New York Times bestselling author, because he's already a New York Times author.
He's already a bestselling author. And you received the Presidential Medal of Freedom.
The Presidential Medal of Freedom was given to me by President Biden, yes.
Well, it's nice to get it. I mean, it's the highest civilian honor you can theoretically get, but I'm happy to get it, but I'm sure there are other people who deserved it more than me and who haven't received it yet.
Yes. Right. So we're going to talk about you being the owner of the Orioles. We're going to talk about the book, but before that, let's give the audience some context.
You started at the White House under Carter.
That was 1977. Carter started on January 20, 1977. I was the deputy domestic policy advisor to the president. I was only 27 years old. I didn't know what I was doing, but somehow nobody else knew what they were doing either.
So, when you moved from government to founding the Carlyle Group, how did that transition happen? And what were the early days of the Carlyle Group like?
Okay. Well, I worked at the White House for 4 years for President Carter. We lost the election in a landslide to Ronald Reagan. So, people used to tell me how great and smart I was when they wanted something from me when I was at the White House. All of a sudden, they didn't want to call me back when I needed a job after our election defeat.
What was your position at the White House?
I was the deputy domestic policy advisor.
And what exactly did that mean?
Well, my boss was the domestic policy advisor, in charge of all domestic policy issues, not just foreign policy, and I was his deputy. We had a large team, and we advised Carter on everything, from agriculture to civil rights, to everything that wasn't foreign policy. When we lost the election, I had to go back to practicing law, which was the only skill I really had. I'm a lawyer by training. I wasn't that good a lawyer. If I were a good lawyer, I'd be practicing law, but I wasn't that good. My clients reminded me of that, and so I decided to start an investment firm in 1987, and it became one of the largest private equity firms in the world.
That's an interesting year. When did you start in 1987, because most people know 1987 as Black Monday in September?
How did we start about a month before? Let's talk about that to start.
Well, in October 1987, the stock market crashed significantly. At the time, it was the biggest crash since the Great Depression, and it really depressed the markets. I think the markets fell about 500 points, which was a lot at the time. You know, we told ourselves that we might have started at the wrong time. It wasn't a good thing, but we started and we got through it, and eventually the market came back. But it was a bit disconcerting when you've been in business for a month and all of a sudden you have the biggest stock market crash in 50 years.
Yes, I'm wondering if you look at the space now, going through the start of the tech boom of the 90s, then the setbacks in 2001 with 9/11 and the housing crisis. Now it's the AI revolution. Have you ever lived through an economic situation comparable to the one we're living through right now?
Well, people always like to say that this era is different, and those are the most dangerous words in the world of investing. When someone says this era is different, it's because history repeats itself. Right now, we're in a complicated situation where the United States is going through a transition in many ways, from a non-AI economy to an AI-based economy. AI is going to revolutionize the way we live, think, and do everything else. For now, we don't know what the full impact of AI will be. Some say it will end humanity as we know it. Others say it will improve everyone's life. Who knows? Nobody really knows. Just like when the internet arrived, nobody really knew what the impact would be, and some were right when they said it would change our lives, and it did. But in the end, nobody really knew which companies would succeed and which ones wouldn't. AI is in the same situation. AI will change our lives, but nobody really knows if it will improve or worsen them, or what impact it will have on us.
When founding the Carlyle Group, what was the hardest part? Was it getting clients? Was it navigating different investments to know the coming trends?
Well, the hardest part was that I was based in Washington, D.C., and most of the private equity firms were in New York. So we weren't taken seriously because we were in Washington. Secondly, I had no investment experience. I was a lawyer. So I had to convince people that I really knew what I was doing. And then, my partners and I had never worked together before. We sort of came together to create this company, but we had no track record. And in the world of investing, everyone wants to see a track record. And we had no track record, so we had to close deals one by one and gain a bit of credibility once the deals were closed, then we could raise more capital. It took time. Uh, the company now, you know, is almost 40 years old. It took a long time for it to become credible. We were one of the largest firms in the world of private equity for a long time and we're still one of the largest, managing about $500 billion.
Did you use your White House and government connections as your first clients?
Well, of course, Carter wasn't in the White House at the time, so my connections weren't that valuable, but I had contacts on Capitol Hill. I can't tell you about the contacts I made around the country when I was working at the White House, but they weren't really valuable. I had to start all over again. And when you start your career over, you just have to make new contacts. So if you've ever started your career over, you were in the finance world before and when you started, you had to start all over again. And sometimes our contacts are useful, sometimes they're not.
Do you think Jimmy Carter got a bad rap in history regarding how people remember his presidency?
Well, I do. Obviously, I'm biased. But Jimmy Carter won unexpectedly. Nobody really took him seriously when he started running for president. Nobody had ever heard of him. They called him Jimmy Who. And then he won and beat an incumbent president, Gerald Ford. But in 4 years, inflation became very high, the gas lines were very long, and we had the Iran hostage crisis. So Carter lost badly to Ronald Reagan, a huge defeat. And then he came back, rebuilt his life, and became a Nobel Peace Prize winner because of some of the things he did after the presidency. I think Jimmy Carter isn't considered a great president by historians, but I think many of the things he did after the presidency are very admired. And now, people see that some of the things he did as president were probably better than people gave him credit for.
You mentioned track record, which is essential. I mean, it's essential, especially in private equity. Everyone remembers the ones that changed the trajectory of the company. Can you remember the companies you invested in at the time that really changed and created a belief system around what you were building?
Well, what we were trying to do was to say that private equity investments can improve companies, and that was a new idea at the time. Today, most people would say that private equity firms have a significant impact. Now, some people still don't like private equity, but in the end, you have to admit that the American economy has been quite transformative over the past 20, 30, or 40 years. We're the envy of the world. We have the highest GDP in the world. We have the greatest productivity of the major economies. To some extent, I think that's due to the techniques that private equity firms used to make their companies more valuable. And many of those private equity techniques are now used by publicly traded companies. They see what private equity firms did to make companies more profitable. And they've used some of the same techniques, even if they're not involved in private equity. So I think private equity has a bad reputation in some respects. In the end, I think it's been very positive for the American economy.
Speaking of the American economy, what do you think about the national debt? And are you extremely concerned that it could hurt us in the future?
Right now, we have $40 trillion in debt. $40 trillion is about 125% of our GDP, which puts us at the same level as countries like Lebanon or Italy, which aren't necessarily models. But that's really modest compared to the real debt. The real debt is the unfunded liabilities of Medicare, Medicaid, and Social Security. If you took that into account, we'd have well over $40 trillion in debt. So it's a serious problem. If you look at history and you look at other countries that have had this kind of problem, generally they haven't survived as well as they would have liked. And especially when you're paying more interest on your debt than you're spending on your defense. When a country spends more on interest on its debt than on its defense spending, it generally loses ground in terms of global power, and that's what we're doing right now. Right now, we're spending more on interest on our debt than on our defense spending, and we have a big defense budget. So I think it's a serious problem, and it's not going to be solved anytime soon, because nobody wants to raise taxes, nobody wants to cut spending.
Is there a way out of it?
The only way out, honestly, is to pay it back in devalued dollars. Your grandchildren and great-grandchildren are going to pay back this debt in dollars that are worth less than the dollars we borrowed back when I'm alive. In other words, we're devaluing our currency, and that's how we're going to pay it back. There's no other solution, unless you want to do something radical, like raise taxes dramatically or cut spending, and people don't want to do that. 85% of the budget goes to defense, interest on the debt, and social benefits. Nobody wants to cut anything in those areas, so it's very difficult to do. And I don't think anything pleasant is going to happen anytime soon. But we can get through it, in the sense that we just live with it, and in the end, we devalue our currency and we pay back the debt in devalued dollars. That's essentially what we're doing now.
You said that history repeats itself.
I said that you said that history repeats itself.
It does, and we're doing it right now. For example, under President Obama, a commission was appointed to figure out how to deal with this, but it essentially concluded that we needed to cut Social Security, cut Medicare and Medicaid. It was so unpopular that President Obama didn't even want to be photographed with the commission's leaders. They were very popular people, Senator Simpson and Bowles, but President Trump or President Obama said, "I don't want to be photographed with them at that time." And you know, we haven't really implemented any of their recommendations. So, nobody has a solution to this problem. It's just that there is no solution and it's politically too difficult.
Yes, I was going to talk about where we are now, right? If you look historically at the performance of September, summer months, and the market during midterm years, it feels like something different is happening this year. Should we follow that trend or say, "Let's go based on history and the performance of these markets at this time to see where we're going?"
During a midterm election year, historically, the stock market, the S&P 500, has gone up about 5% on average. But the year after a midterm election, the markets have gone up about 14%. So, no matter what happens during the midterm elections, the markets are probably going to go up because there's less uncertainty. The markets don't like uncertainty. Right now, we don't know who's going to control Congress. And if we did, the markets would probably go up. Right now, the markets are uncertain about the future. And I can't tell you today whether the Democrats are going to control Congress or the Republicans. Nobody really knows, but what's going to happen is obviously going to be very important. I suspect that today the Republicans don't feel as good as they did maybe 6 months ago.
Yeah, I'm wondering what you think about the idea of circular financing. It's become a key term in recent years in private equity, companies like Anthropic, companies like OpenAI, still private, but continuing to raise funds, getting money from publicly traded companies that will benefit those publicly traded companies in the future. What do you think about that?
What I'm referring to is that Nvidia, for example, is very profitable.
And what it did intelligently is it funded a lot of its customers. In other words, it made sure that customers could buy Nvidia products. Nvidia invests in these companies. Time will tell if that's a good thing or not. Nobody really knows. As long as Nvidia is worth more than $5 trillion, they can probably afford it. I don't know if this can continue indefinitely. What's it called, circular financing? It hasn't generally worked very well in history, because sometimes those companies at the top who pay for everything end up seeing their value decline. If Nvidia's value were to drop by half from where it is today, it couldn't afford to do all this. But we don't know that yet.
I came into the industry in 2008, and that was obviously the Great Recession. But we haven't really had a bear market since then. It's been nearly 18 years. We had one during COVID, but it was very short-lived. One of the shortest. It was probably the shortest of all time. When do you think another bear market will happen?
Well, if I knew, I'd probably be shorting the market at that time. But I'll say this. You're right. Generally, in this country, we've had recessions every 7 years on average since the 20th and 21st centuries. We haven't had one, except for a technical recession during COVID. We haven't really had a recession in over 10 years. And I think there's a concern that history will eventually repeat itself and we'll have another recession. Nobody really knows when a recession is going to hit. People always like to say a recession is coming, then they're wrong and disappear. Uh, for now, nobody is predicting a recession in the near future. However, if you read the newspaper articles, President Trump fears that if we impose constraints on AI, which powers our economy, that could lead to a recession. Apparently, according to newspaper articles, he fears that if you regulate AI and the value of AI declines, people worry less about the AI bubble, which could lead to a recession. That's possible. You know, right now, what's happening in the Middle East could lead to a recession. Oil prices are hitting record levels. And at some point, that's going to feed through to the economy, and I think it's going to slow the economy. But nobody really knows if that's going to cause a recession, and I can't say yet that it will.
At this stage of your career, and I'm wondering if it was maybe the same back then, I know you're known for examining investments rationally. How do you examine the companies you're potentially going to invest in? What are the indicators you look at? What about a private equity investment or otherwise?
Yes. Well, in private equity, you tend to look for companies in areas where you have some expertise; you see if it's likely that by injecting capital into the company, whether it's a minority stake or control, you can improve the company's value to get the return you want. The investors who invest with us want returns, let's say, in the range of 15%, 16%, 17%. If you think you can improve a company and get that kind of return, then it seems like an interesting investment. Generally, at Carlyle and at other firms like ours, KKR and Blackstone, Apollo, we generally take 6 months or more to analyze a company before doing what's called due diligence. We analyze the company and we say, "Yes, can we put money in here and get the type of return our investors want?" Sometimes you're right, sometimes you're wrong. Sometimes you get deals much better than you thought. You didn't think they'd be so interesting. Sometimes deals don't work out. So I'd say you probably need 3 to 6 months to properly analyze a company in the private equity world before you know if you want to do it or not.
How concerned are you about the Middle East conflict? You mentioned it, but this war in Iran seems to be getting out of control. Saudi Arabia and Yemen now, it's... So, what do you see regarding the global markets?
Well, the global markets are waiting to see how these wars will evolve. There are three main things people are focusing on. First, Russia and Ukraine, when is this going to end? It's been going on for 5 years, longer than World War II in many ways. Uh, Iran is a war the market didn't expect. And now, we don't know how long it will last, but it's clear it won't be resolved anytime soon, from everything I can see. And then, there's the unknown of what will happen with China and Taiwan. The president of China is going to visit the president of the United States this week. People have long feared that China will invade Taiwan and start another war. I don't know if that will happen. It doesn't seem to be for tomorrow. But this uncertainty and these wars are very costly and, I think, don't help the global economy. Oil prices are peaking because of what's happening in Russia and Ukraine and what's happening in the Middle East. So, I don't know what will happen in the end, but I think the markets aren't happy with what they're seeing right now.
I'd like to get your perspective on a domestic issue. I mean, you can't spend money globally, that is, on energy, especially when talking about data centers and how we're going to power them, as well as the political effects that could have on thinking about this. How do you see data centers in terms of the global build-out of the future of AI?
Well, generally, people say, "I need more technology, more technology is good." Generally, some people aren't in favor of technological improvements. But data centers have become something people wanted in their backyard for a while. They thought they would create jobs. Now, people don't want them in their backyard anymore. And in fact, a recent survey revealed that more people were willing to have a nuclear power plant in their backyard than a data center. And as a result, many politicians now say, "I don't want data centers." But data centers have to be somewhere if you want all this AI computing power. So, at some point, we'll have to find a place where nobody lives and where we can build a data center. Because right now, people don't want them because they think it will be destructive to the environment, that it will be very expensive, and that in the end, it makes them nervous.
Uh, okay, let's talk about sports. So, you're the owner of the Baltimore Orioles.
I'm the majority owner, yes.
What does that mean, majority owner?
Well, uh, every sports team probably has more than one owner. Major League Baseball works like this: if you own a certain percentage, I believe it's more than 15%, uh, you're the control partner, which means if something goes wrong, you're held responsible. If something goes well, you might get the credit. But when you have Major League Baseball owners' meetings, you generally have control partners who attend the meetings as the responsible parties. But I have other partners that I bought, and if I were to die tomorrow, the team would be fine. They'll have other people who can replace me.
Okay, well, you're the control owner.
I'm the control owner, that's right.
Okay. So, $1.7 billion, that's what you...
That's right. That's right. We paid $1.7 billion. When the team first came to Baltimore in 1954, the purchase price was $2.2 million.
We paid $1.7 billion. And as you just saw, the New York Yankees are valued at $13, $14 billion. The Lakers sold for $10 billion. They were sold, then resold for $12.5 billion. Six months later. So, you know, it's gone up. Now, I don't know how long this will continue like this. Small cities don't have those kinds of price values. Uh, we're in Baltimore, Baltimore is a small city by baseball standards, and so, uh, you know, the $1.7 billion price for Baltimore is a high price. The team was sold several times before I bought it, once for, as I said, $2.2 million in 1954. Edward Bennett Williams sold it and bought it for $12 million in the early 80s, then later, his estate sold it for $75 million. Then it was sold in bankruptcy court to Peter Angelos for about $155 million. And so, I paid $1.7 billion with my partners. So, for those who held onto the initial investment, they did pretty well.
