Monday, November 08, 2004

Big Bucks from Bubble Fears

Manager Peter Thiel sees a correction ahead -- and that has helped him clean up

By Justin Hibbard

Business Week

The finance industry has been very good to Peter A. Thiel. The 37-year-old president of $270 million hedge fund Clarium Capital Management LLC started as a derivatives trader at Credit Suisse Group (CSR ) in 1993. He made enough money to head west in 1996 and launch a venture-capital fund that backed an Internet payment system called PayPal (EBAY ). When eBay Inc. (EBAY ) bought PayPal in 2002, he walked away with $46 million in stock. Now, Thiel is getting richer by betting against a finance industry that made him rich. "It may be ironic, but that doesn't mean it's wrong," he says.

The way Thiel sees it, the tech bubble of the 1990s never completely popped. It simply mutated into a finance bubble. "Half the profits in the Standard & Poor's 500 come from financial services today," he says. "That's clearly unsustainable." For three years, consumer spending has propped up the U.S. economy, thanks to low interest rates and ever more creative forms of borrowing, he says. He believes that the trend reached an absurd apex with the recent rise of credit cards linked to home-equity lines of credit. Now, with outsize consumer debt and a housing market that's a bubble, he thinks a major market correction is at hand.

Thiel's strategy is simple: He's shorting some indexes that are heavily weighted with financial-services stocks. Thiel also dislikes General Electric Co. (GE ), with its huge finance arm, and Wal-Mart Stores Inc. (WMT). Both rely on debt-fueled consumer spending, he argues, yet the risk isn't reflected in their price-earnings ratios, which are far higher than most of their peers. "They're the bubble stocks of today," he says.

That's not all. Once the housing bubble bursts, he argues, consumer spending will plunge, leading to deflation. That will affect investments beyond financial stocks. So Thiel has been shorting the U.S. dollar while betting oil will stay high.

Think what you will about his bleak scenario, Thiel is cleaning up. Since its inception in October, 2002, San Francisco-based Clarium's hedge fund is up 146%, far outpacing the 16.6% gain in the Van Global Macro Hedge Fund Index, which tracks similar funds.


Not everyone accepts Thiel's views. Tobin Smith, founder and chairman of ChangeWave Research, an investment research firm in Rockville, Md., says that in a bubble, people purchase homes just to rent them out. That isn't happening now. "Until you have an area where there's more than 20% buy-to-let, I don't buy [that there's a bubble]," he says.

Last winter, Thiel almost plunged into one of the nation's hottest housing markets. He was negotiating to buy Martha Stewart's Manhattan duplex condo, priced at around $7 million. In the end, he backed out. "I'm constantly talking about a real estate bubble. I shouldn't be buying a place," he says. In San Francisco, Thiel, who is single, owns a downtown penthouse where he regularly hosts salons featuring such guests as Nobel economist Milton Friedman.

Thiel has never shied from controversy. After graduating from Stanford Law School in 1992, he co-authored The Diversity Myth, a book that blasted multiculturalism at Stanford University. His views drew a sharp rebuttal from then-Stanford Provost Condoleezza Rice. A libertarian, Thiel advises several free-market think tanks, including the Pacific Research Institute in San Francisco. "He believes in open markets and that self-interest can be harnessed in useful and productive ways," says Sonia Arrison, the institute's director of technology studies.

So far, self-interest has paid off for Clarium. Thiel and his staff collect a 25% management fee tied to the fund's performance. As long as the financial sector loses, they'll win.


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