Scott Bessent - Macro Maven (EP.415)

[Music] hello I'm Ted sides and this is capital allocators this show is an open exploration of the people and process behind Capital allocation through conversations with leaders in the money game we learn how these holders of the keys to the kingdom allocate their time and their Capital you can join our mailing list and access premium content at Capital allocators all opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms this podcast is for informational purposes only and should not be relied upon

as a basis for investment decisions clients of capital allocators or podcast guests May maintain positions and securities discussed on this podcast my guest on today's show is Scott bessent the CEO and chief investment officer of key Square group and a renowned Global macro investor Scott's 40-year investment career has included two stints at Soros fund management the first for a decade under Stan drucken Miller and the second for five as CIO in between he launched a hedge fund retired and joined me at Protege Partners when he learned that retirement wasn't for him following his second tour

at Soros Scott started key square with $4.5 billion making it one of the largest hedge fund launches in history he's been profiled in two bestselling investment books Steve dr's inside the house of money and Sebastian Mal's more money than God our conversation covers Scott's and destined path learning research from Jim Rogers Short Selling from Jim chos Global macro investing from George Soros and Stan duck Miller and twice hanging his own shingle we discuss High conviction ideas asymmetric asset selection position sizing risk management a hub in spoke approach and core challenges of the global macro hedge

fund business I once told Scott that he could read the newspaper 6 months ahead of time because I'd never encountered someone with his ability to connect dots and imagine Investments others hadn't considered his interest in improving the country's economic picture has led him to shed his publicity sigh nature his interest in improving the country's economic picture has led him to shed his publicity shy nature and I'm grateful for the opportunity to share his story hey it's Hank before we get going now that we're in November we're here to remind you that it's giftgiving season the

Red Cups at Starbucks are my usual reminder to start my holiday shopping but this year we've got you covered this week we've got the investor relations Professionals in mind if you're a PM that's dodged Prospect meetings all year or an allocator that's ghosted your fair share of bis deev reps here's how you write the wrong tell them about Capital allocators University for investor relations professionals this 2-day cohort takes place in New York City on December 3rd and 4th and shares best practices for understanding allocators developing relationships and building a brand through workshops and peer discussions

you'll be sure to end up on the nice list for even suggesting they participate and who knows maybe you'll hear from them just a little bit less in the New Year learn more from capital allocators University thanks so much for spreading the word about Capital allocators University for investor relations professionals please enjoy my conversation with Scott bessent Scott great to be with you Ted good to see you too why don't you take me back to your early experience as a kid that led you to thinking about Finance well you in Little River South Carolina the

only thing you knew about Wall Street was something bad happened in 1929 on my dad had a lot of financial ups and downs he's a real estate investor a boom bust mentality and he went bust twice so that makes me think a lot about risk management allocation leverage the other interesting thing about my dad was he had the largest science fiction collection in South Carolina probably not a high bar but as a kid I could point to Alphas Cur on a map before I could point to Chicago cuz he'd sit and read these books to

me would go outside and look at the stars and one of our neighbors had an observatory and it was all about imagination how did that lead to your interest in investing I don't know if it led to my interest in investing but it led to my methodology and investing Bruce CER has this great saying I had the ability to imagine a different state of the world and believe it could happen the ability when you and I were together for the subprime train to imagine that what had never happened before a national recession in US housing

could happened that this mortgage rut had permeated the system and that there was this newi issh form of instrument that could capture these asymmetric returns that took imagination we had a very distinguished mortgage manager coming into the office I think he'd actually written the Wy book on mortgages and tell us what a great buy mortgages were halfway through the crisis and I think his fund went down 100% he couldn't imagine that this could happen or that these tranches in the cdos could be wiped out so you're looking at the stars imagining what the world could

happen how did you get started in your career investing I have found in my life some of the best things happen after the worst things this was not a cataclysmic event in my life but I'd worked on the Yale Daily News when I was at school and back then Yale Daily News was an instant ticket to the New York Times Washington Post Time Magazine I didn't know whether I want to be a journalist or going to computer science which when I arrived at Yale it was the year that they switched from Punch Cards to screens

to put in perspective I ran for edit of the Yale Daily News I didn't get it I proceeded to lock myself in my room come out for classes and meals wo was me that was end of October I came back in January and thought I should reboot you know complete Serendipity I went to the career advisory office and there was a notice from a yell alumnist Jim Rogers analyst wanted do spreadsheets make lunch clean the toilet sofa available to sleep on please apply and I applied for that it was kind of everything I liked it

was very much like being a journalist you were creating a narrative you did some research also appealed to the quantitative side so I learned how to do spreadsheets it was a great experience so for perspective who is Jimmy Rogers for those who don't know so Jim Rogers was George soros's original partner at Quantum fund they'd been at BL schroer in first Eagle together George was more the PM Jim was the research analyst I think they split up in 1981 and Jim was managing his own money so this was just in his family office what was

his approach to investing research research research he always said that he was looking for major secular change it was dig dig dig can you prove it what was very helpful with Jim like he had come out of the 60s and the 70s so the 60s were the go- go stock years the story stocks the 70s the nifty50 and shorting it was this ability to really dig down and do the numbers match the story how much time did you spend with them it was just couple months we stayed in touch for a while he taught an

investment management class at Columbia business school I commuted in my senior year from New Haven and took the class so as you came out of school where did you take that 1984 Investment Banking had just taken off I didn't really want to do one of the two-year analyst programs because by this time I was hooked on the stock market there was a service called value line that used to mail out these gigantic books on earnings you get a trial subscription for $25 so over the years I had a trial subscription then one of my roommates

had a trial subscription having know nothing about stocks and markets and currencies I was hooked on markets and I really wanted to do investment management 1984 really only two firms Brown Brothers Herman and Fred Alger would let you do investment management right out of school so I went to Brown Brothers what was that initial experience like that was eye openening for me because it was the first time I ever saw relative performance I was a neoy at this but with Jim and then like the Soros tradition it was high performance how much can you make

and this the big decision for the month are we going to buy Ford versus GM City Bank versus JP Morgan it was some good analytics but it really wasn't my thing and then the next step I went to work for this Saudi family called the oans they were fantastic the father had come from nothing in Saudi and built an incredible industrial Empire in Saudi Arabia based on supplying the oil industry at that time a lot of middle easterners had a bad reputation for movie stars and models they were just opposite they were interested in meeting

Finance people and business people and learning about business it was a fantastic opportunity I work for the daughter of the family who I'm still great friends with we were small team but we would File 13 DS on companies which meant we owned over 5% there were five of us I'm 23 24 25 and I'm sitting across the table from Arman Hammer I'm sitting across the table from leis Preston who was at JP Morgan I'm sitting across the table from all these CEOs and getting all this great exposure and also getting great exposure people like Leon

cooperman Byron Wayne Ray doio used to come in and sell us his newsletter so you start with this sort of broad internship with Jim Rogers and then you have the relative value and now you're seeing all kinds of stuff how did you assimilate all the different things you might be able to do into what the investment approach and what your responsibilities were with the oons what was good there was we got to do everything thing so we were doing the research we're managing the portfolio two of us were doing the trading and we had a

big options book two I went back and took a lot of option pricing Theory classes on weekends and started trading options and Futures too so it just made you realize there are a lot of different ways to come at the investment business because they were very concentrated they wanted to know the management well they were great and still to this day are great long ter investors but you could Goose the returns with leverage with options so it was fantastic experience what was it that led you to leave the mid the Lish 80s there was kind

of this tradition of management breakfast that Goldman Sachs Morgan Stanley would host a management breakfast for a company and over those years I've gotten to be friendly with Jim chos noted short seller also so he and I I don't believe ever overlapped at Yale but like with Jim Rogers we had the Yale connection and I just found that we were very sympatico in our questions I would say the difference is that Jim is a pessimist I am a cautious Optimist it was kind of back to the Jim Rogers mold of just Deep dive research and

does the story work I concluded that I thought Short Selling could become an asset management category and I thought Jim could be the white shoe brand in it because a lot of the short sellers were these shadowy figures and planning stories and just generally had a bad name and I thought that Jim could become an Institutional brand and I was the first analyst the third employee what year was that when you joined Jim it was after the crash of 87 so I joined in September of 88 what was shorting like back then there was a

lot more opportunity in terms of dispersion there wasn't the basket trading there wasn't the concentration in the indices but it was a lot spicier before the Crackdown by the FCC on frauds and things like that it was a Target Rich environment and there have been a lot of changes there was the big the Reagan tax changes the Texas oil bust was in the middle of happening there was this asset appreciation cycle that was led by Mike milen and all the Drexel companies leveraging up it was a great time for stock picking I joined him in

88 and then the Drexel financed bid for United Airlines fell through I think we made 10% in a month and then the Savings and Loan real estate bubble started unraveling so 89 and 90 were fantastic years to be short financials so it was the end of this financial engineering through Savings and Loans Drexel Burnham went under the cherry on the mash of that day was Saddam Hussein rolled into Kuwait so you had the Iraq Kuwait Invasion I'm cuffing the numbers but maybe City Corp went from 30 2 to 4 and one thing that really stuck

with me was a lot of times when there is a bad reaction you get an equal and opposite misguided reaction on the other side so the Savings and Loans had gone under in 89 and were really 90 and had to be bailed out the bank regulator the controler of the currency fellow named Clark panicked in 1990 and did this supervisory tightening and told the banks even if your borrowers are current if it's a see-through building you got to write it down to zero that was really my first go with seeing how bad policy creates good

investment opportunities what was the difference between Alpha and beta so it turned out you joined Jim right at a time where there was some more pain to come in the markets and then things turned as you look at that period of time Target rich opportunities but also things kind of falling off a cliff how did you think about the value added the value added was could you be in something that could go to zero because there were plenty of these situations that went to zero maybe in 1990 the S&P was down High Teens 20 and

we were up 50 if you think about the opportunities set there's the market beta there's the industry group and then we had plenty of stocks that went toward zero did you look back after that period of selloff say starting in '92 993 you have this big bull market how did you think about being a dedicated short seller as that was turning oh I didn't have to I left the 91 that was excellent Market timing so things were going really well what led you to leave I believe it was January of 91 I think Saddam Hussein

finally rolled into Kuwait and the market took off and things got done super cheap and we' also taken in a ton of assets as you know AUM chases performance so everyone wanted to be short I think when I got there we had $37 million 38 13 in the partnership 25 managed to count from Soros and then when I left we hadit 500 million at a point I went in to Jim and I said Jim I can't find anything to short he said well that's what we do said well then I think I'd rather do something

else what was that next pivot the next pivot was we were actually sitting in the Soros offices I had developed a relationship with the Soros people so Stan deren mower asked me to join Soros in 92 Soros was always known as this great macr manager how do you define what that means we back up for a minute the Soros Stan Dore duain tradition everybody started out as a stock picker George was a stock picker he was at Arnold bler and he had a list of 10 stocks his research process was talking to his clients about

his stocks somebody convinced him that something was a bad idea he take it off and add something else and then he expanded into macro same thing with Stan Stan was very young but he was a head of the research department at PNC Bank in Pittsburgh and decided kind of like my brown brother's asset allocation he he just threw away the asset allocation Matrix and put 40% in oil stocks or something in the 70s he was also a stock picker I think macro permeates everything and my style still the Duane style is that the micro drives

the macro so we can get a huge amount of information from what companies are telling us we can't predict the pce deflator better than anybody we can't have a better model for Lei but if trucking companies are telling you the business is taking off then that's very interesting if Home Depot is telling you that they're having trouble keeping products very interesting if you are hearing from Bank CEOs that credit cards are getting sour you can make a lot of good macro judgments with that so there's a lot you can do if you're following equities and

then have the world as your Royster in terms of instruments and implementation how did George and Stan think about how they were going to run money where can you get the most bang for the buck so if you think oil's going up if drilling stocks are really beaten down then maybe it's stuck if the forward curve is predicting that oil is going to drop over the next 3 years than it could be through the Futures curve what's the options Market giving you how do you think about that in the context of a portfolio I think

you could think about it in terms of a discret set of opportunities how do the opportunities interact with one another when you and I work together you and I used to always talk about alternate beta someone would say I've got this great idea in Australia and then the risk manager would do a correlation and it had a 98% r squared with the S&P what else is it giving you or what's your confidence level like Mike bosan talks about getting above the 50th percentile in the confidence level you know getting more and more confident and making

your position bigger and bigger George Soros has this famous saying I just need enough information to make a decision he does not have analysis paralysis how do you think about this tradeoff of say diversification concentration and conviction if you want conviction and you want to be concentrated there are times when you might not have a big portfolio you could end up in cash that can happen with stock Pickers like Seth Corman you and I shared at one time the Ted Williams book on hitting for people who don't know who he is the greatest baseball hitter

of all time hit 400 fellow from Sports Illustrated went down to see Ted Williams and finally the guy said to him well how did you do it he said I only swing at strikes in your time at Soros there was a legendary roster of talent like people know about Stan there Nick ridi and and others that maybe less welln I'm curious what you learned from all the different people you worked with the feeling that you are with people who are the best at what they're doing and also the collegiality and the conviviality that they have

your back we had Armenia Fraga who became a legendary Central Banker down in Brazil and when Armenia would tell you this is what's happening in Brazil and if you were investing say in a food company that had a big business down in Brazil or if you had a position in iron or then to be able to have absolute confidence in that person and not have to fact check their work incredible benefit if you're Michael Jordan you probably want the shot but if you're going to pass to Scotti Pippen that's fine too and how did Soros

amass all this Talent he didn't stand it it's a real management lesson George really looks at the world in a different way and is a Market's animal I think the greatest investment he ever made was Finding Stan because in 1988 he turned over the portfolio but was still kind of actively involved from the sidelines then the following year when the Berlin Wall came down he was able to spend more of his time on philanthropy and rebuilding Eastern Europe Stan really built the team I got so spoiled working for him I think the Duane employment contract

is one page and it said all compensation is at the discretion of Stanley up dmore and I only know one person in 40 years who's ever complained about being underpaid so what was it about Stan's ability to find and determine who he want have on the team I call it the enough rope principle so there's this famous sculpture by a French sculpture named manray and it's kind of a hangman's news and the title is enough rope and Stan just was willing to give people more and more rope sometimes it worked sometimes it didn't and you

knew very quickly I started out as a stock picker in Europe and then was helpful on the British pound evaluation my contribution was just an observation that the British housing market that mortgages there floated with the base rate which is their overnight rate and if the bank of England raised rates on Wednesday mortgages went up on Friday if they were trying to protect the pound strengthen it by raising rates the higher they took rates they would be bankrupting the voting public so I had some success with that and I think I maybe came back to

Stan two or three months later and said like I'm in charge of this portfolio it' be a lot easier if I could hedge with Futures do you mind if I hedge yeah go ahead hedge with Futures then it came back a couple months later and this is before the euro I said you know there were 19 currencies and a lot of these little markets move up and down with currencies so could I trade currencies too and he thought for a minute then he looked at me he said yeah do you want to trade bonds and

commodities I said yeah I'll do that I'm 28 or 29 and he said great we'll see if you're still here in a couple months so all of this led to what was maybe the first very famous large macro trade when Tauros had pushed against the British pound I know you're on the ground then I'd love to hear how that all played out May 1992 John Major called an election it was thought he was going to lose he has a surprise Victory and I love the British system if you lose you got to be at a

Downing streak 24 hours so everything was packed but he won John Major was toring everyone thought labor was going to come in maybe less Market friendly the market took off the pound strengthened but the British pound through this agreement called the exchange rate mechanism was tied to the Deutsch Mark and this was all the precursor for the Euro so it strengthened then but then over the summer the British economy started to weaken I could see the housing market was weakening it became clear that the British economy and the German economy interest rate profiles were very

different that they weren't compatible in the same interest rate regime because of the exchange rate mechanism the bank of England or the British government had to buy an unlimited number of pounds to keep the pound in a quarter so if it was an asymmetric bet we could push them up against the wall and the most they could push us back was 2 and a half% and if the corridor broke we can make whatever in a day and we did so it was really we think we have the facts on our side and not unlike the

CDs in the pulson trade it was an asymmetric risk reward in terms of the downside George had had in the 80s these huge currency gains and for anyone who wants to follow up one of the books that changed my investing career published a book called The Alchemy of Finance I think it was 1986 there's one chapter called the realtime experiment he kept a trading journal in a year when he was up over 140% and these currency the realignments the plaza Accord the Lou Accord happened the things move 6% in a night and he would add

a 300% position because things really used to Trend a lot more so alongside all of this Trading in search for asymmetric activity sorus back then was also known as one of the most successful backers of early Talent of investment managers what did that look like under the Soros umbrella that was great because it's really affected my strategy in terms of the kind of organizations that I like we were able to have a small tight-nit high performance team but we could leverage our knowledge by giving money out to other managers so it could be someone who's

fantastic at grow stocks it could be a media person it could be someone in Japan could be someone in Asia and when I eventually took over at Soros My Philosophy would that a very good manager is someone you're proud to be invested with they have good returns and you never have to worry about the phone call that things have gone pear-shaped so that's a very good manager for an outside manager great manager would be someone who one two three times a year maybe only every other year would come say this is a big trade idea

you should have it in your Center book or let me do an SPV for you so at the end of your first run at Soros there was a lot of change stand left and you go and launch what I think was the largest hedge fund at the time a billion dollars at Best in capital what was your initial thoughts of your investment style after all of that experience I think one of the mistakes that I made and over time caused a big philosophical change is never do what the investors tell you to do do what

you're good at so when I started in 2000 I was able to raise a billion dollars because I told investors I wouldn't do macro macro had become a bad word long-term capital had blown up in 1998 and that wasn't really macros more rfv G to Muk and then I think some macro positions had hurt tiger that Soros had had a big draw down it was just long short equities how did you feel that that inhibited you from being able to express investing the way You' learn I think it was just the loss of asymmetry if

I had a bullish view on oil okay I'd probably be better off owning crude because I remember at a point I did have a bullish view on oil and the oil stocks didn't move because they were looking more at the mid curve or analysts were waiting for a price whereas the oil price was going up so what happened was I went back to the investors and said look we're going to do macro if you want I'll take the lock off and you can have your money back we had a good run after that but at

that point I've been working since I was 9 years old I was 42 I had been financially successful and I was just tired there two components to a head fund there's managing the portfolio running the business I thought I had an A Team on the portfolio side I didn't have an A Team on the business side so there's always this anxiety so I thought I wanted to retire I might have been a professor right out of Yale if I hadn't had a lot of student loans and I wanted to go back and teach I remember

having dinner with Stan and his wife and he said f you you'll be back in a year you can't not do this and he was right that was my to come and work with you at Protege I thought I could be halfway back in with the fun of funds model with the best ideas model because for me a lot of it it's a competition of making money but also what we do keeps you stimulated a lot of people do crosswords a lot of people play bridge I find this just so stimulating one of my mentors

but Byron Wayne said I'm going to work until I die and Byron kept working till 10 days before he died so after that run I know you were going to go launch a fund again and then George calls to take the big seat by that time Soros had gotten big and I'm curious how you thought differently about a large scale asset pool I went back and I really wanted to see if rather than size being the enemy of performance whether you could turn size free form Capital so no mandate and the ability to make quick

decisions into an asset and I think we were able to how'd you go about doing that brought in a good team revamped the outside manager portfolio made it known that we were open for business that you bring us an idea we will not Bigfoot you and go around you I can give you an answer in 3 days whereas Blackstone or somebody might have to take it to an investment committee with five memos in three weeks and build it and they came we had a good internal team and then the Hub and spoke system for the

external managers was very successful how did you spend your time when you had so much more Capital so many different teams George hovering as he was known to do you I arrived September 2011 and the bond market in general just melted down European Bond markets especially the Italian Bonds were still in melt mode the idea was for me to reacquaint myself with the firm it was 320 people to manage 120 investment professionals and many of them not happy to see me there so I was supposed to have 90 days to get in the seat get

to know people The Firm I ended up doing I think 5 days in the biggest trade I'd ever done was John corzine's firm got liquidated out of their Italian Bond position and it was a three and a half billion dollar trade I still had the index card that I worked it out on JP Morgan called us and I was able to say we'll take the whole trade with the repo right now when you're in a seat like that that's as big it gets in the financial world how do you decide when it's time to move

on a couple of things you have to think what's the level of administration you're doing is that impacting your returns my Telos in my career has been I want to do things I'm interested in I want to keep learning and I don't want to be bogged down I don't want my day to be things that I don't like every day is not a good day every week's not a good week but you want to have good months and years so if you're on the wrong trajectory there's that then I think that I had some differentiated

views that maybe one other person of the firm didn't have it's a real challenge as we get older to not become more negative all the time so you go to start key Square what does key square mean key square is a chess move so it's at the end of the game where there are two kings couple of Pawns and there is one square that the king can go to and I think about that in investing a lot there is one thing you can do it's a simple move it could be at the beginning of the

game it could be at the end of the game the funny thing I'm fine at chess I'm not great I don't love it and I don't think the chess is the liquid markets game the liquid markets game or cards and back gamon it is luck and how are you going to manage the hand your dealt you don't know what's going to happen in Israel you don't know when the Chinese Navy is circling Taiwan is that a drill or is that the real thing you don't you know what you're going to be handed every day you

can have good luck you can have bad luck but you've got to manage these things that have been thrown at you whereas private Equity is much more chess all the moves are on the board what is the move you're going to do it was quite humbling we had the highest ranked female player in the world come in and I think she played 12 or 13 of us at once and I was very happy I was a penultimate person still standing she fortunately didn't do it blindfolded but afterwards she did this tutorial and she was showing

us famous chess moves like she knows chess moves from 19 193 from a Cuban grandmas you could probably go back and look at some of the things JP Morgan had done or the some of the great industrialists if you're looking at melon or fips or Rockefeller they're doing the same things in a lot of ways that the private Equity people are doing and that's chess in this card's back gam and analogy and you're investing now you're taking on the full macro strategy from everything you've been through everything you've learned how did you set out of

what you were trying to do at Key Square on the investment side we just wanted to have a couple big positions manage them well and pick out the big themes try to keep the noise out we had a small tight-knit team and then we had 30 Consultants around that those were people some I'd worked with since the mid 80s we probably had three new ones three out every year the idea would be okay we don't need a Latin American specialist in the office we have a great consultant in Latin America we don't need a Tokyo

office we have a great Tokyo specialist the other thing having been on the allocator side was to be an asset to the partners so a lot of times we would have a major endowment come to us and say we're going in on this private Equity deal in Brazil what do you think we should do with the currency I'd love to walk through how you just s your investment process you're looking for a couple of Big Ideas where do you find them I think it goes back to my dad in the science fiction what could you

imagine could happen you I remember one of our Consultants telling me there's this guy in Tokyo used to be prime minister his name's AB he gonna run for office and break Japan out of disinflation since the Fukushima tragedy which it's e to remember unfortunately it's 31111 the Japanese Yen had strengthened significantly there's a series of prime ministers you I started going there I think in 1989 or 1990 during the bubble and it really been more of a trading chop Malay with a general downward Trend the Yen had become the most expensive purchasing power parody currency

in the world and you know when this fellow saidwell AB is going to break the deflation cycle and here's how he's going to do it the three Arrow program and it's 222 2% inflation 2% growth in two years I went and met him and I believed he could probably do it it was also a great setup back to your question of conviction the bank of Japan the way the board runoff was working he was going to be able to reconstitute the Bank of Japan without the Prime Minister being able to appoint new Governors he would

not have been able to get the reflationary mindset so he was able to reconstitute the board in His image so there's a lot of connecting dots to make a big move like that you can imagine that it could change but you also had bonds the Widowmaker traded people shorting the jgbs for years that's a great segue I had no interest in being short JJ BS when I thought about the the macro penopoly of potential instruments okay what are stocks going to do what's the currency going to do and everybody because they had so much Scar

Tissue on jgbs goes what doesn't this mean jgbs are finally going to go I said I don't know it might mean jgb yields go lower before they go higher but it was very clear to me that the Yen was the ultimate expression and that equities would be a good derivative of that what's the research process to all these dots to get to the point where you can have that kind of conviction in a macro trade just like with a stock trade we set up the fundamental picture so this is what could happen to the current

account this is how cheap the currency is if it just got back to the historical level so you actually have a framework and reference points for where it could go and then you there technicals involved which you know can be very different than stocks you what would happen if the yend started weakening could there be a Cascade effect because exporters have a certain position when you get one of these big major changes a lot of times there's been a lot of position buildup over time I think it's Nim Tob who says that lack of volatility

leads to volatility so you're also trying to figure out okay where's the market market and not unlike with the subprime trade we had started putting on a short Yen position one of the Brokers had seen us doing it and called and said oh well we have this Vault fund that will sell you all the Yen puts you want great and I think this VA fund thought they were picking us off because the end had been very stable so ball was low maybe the V on the screen was four and they thought well these guys would

pay six we'll sell them as much as they want so I think they thought we were crazy to buy these things at a six ball like with the stock the end was bouncing around between 78 and 82 I thought maybe it could go to 95 and then when this thing got in motion maybe it could go to 105 maybe it go to 115 I remember George and I went up to New Haven this was a proprietary piece of research that I thought we had had one of the architects of abenomics was a Japanese professor edus

in the Y econ Department who had been a student of Tobin complete kesian and I think Professor Hamada he was old when I was there he was in his 80s now and we went up and had lunch with him and he just mapped the whole thing out and at one point George asked me do you think this is going to work and said I have no idea whether it's going to work but it's going to be the market right of the lifetime that's the thing the polic decision doesn't have to work but it can cause

a lot of price gation how do you think about position sizing and trading around something like that I tend to trade in thirds and a lot of the position sizing is what's the market giving you in terms of this ball fund wanted to sell us these digital options they move very quickly is there asymmetry in the ball Market what is the market giving you and where your p&l on the year then a lot of times we'll keep adding if the p&l is good so that's a very different notion than a lot of people think about

say fundamental investing which is that the size of your p&l in a given year will determine your position talk me through how that portfolio management methodology works one of the world's greatest stock picker Warren Buffett rule number one don't lose money rule number two don't forget rule number one it's really this idea you earn the right to take a risk whether it's back gamon or you're at a poker table or playing bridge how's your chip stack if you walk in and say all right I'm bringing $10,000 to the poker table and that's it then you're

going to bet differently if you've got 20,000 you're going to bet differently then it's 30,000 it's really Annie Duke thinking in bets curious about the relationship between between the duration of the trades and that betting chip stack you mentioned if you're up on the year what does that imply about the types of positions you'd take on so that you'd say okay it's January 1 we're starting it we're resetting our chip Stacks I do that as a discipline reset the chip stack and when I'm doing it in December especially currencies you be making a lot of

money in December you're like really whipping them and driving them and whether it's the trader at the wrist team or other people say well you know it's December 15th we got to start taking this down I like God boy this could really go in January when I look back almost every time that I've taken it down it's been the right thing to do because there's always a counter Trend how do you think about just the process of risk management so that if you're wrong on a big position it doesn't blow you up that's exactly it

I don't know because of my dad's poor risk management whether I'd have a lot more money because I'd be less risk adverse or I've gotten to where I am because of the risk management like the wolf's always at the door but I I'm a big believer in Nim tb's definition of risk probability and severity when we think about investing in China now what's the probability that you're going to lose all your money one day that you were going to have a Russia Ukraine kind of day which seemed unimaginable that Russian equities would go down 95%

in a day so it's always probability sity how are you measuring liquidity because correlations go to zero when you may think you're hedged one of my risk management techniques have been you can be one thing but not many you can't be concentrated illiquid and leveraged I prefer to be liquid and then to use leverage I try to stick with a set of rules I want to be able to get out within 24 72 hours on part of the portfolio one of the most fascinating things I've always found about your career is you launched two of

what were the largest hedge fund launches at the time best in capital at a billion and then key Square four or five and that macro hedge funds in particular are notoriously difficult to sustain as of business I'm curious why that's the case Ted that's a great observation so it really goes back to the Ted Williams and the Babe Ruth comparison Ted Williams 400 batting average and he could see the scenes on the ball season after great season Babe Ruth was a home run hitter but very low batting average but the Home Run came for I

think five or six decades the Sultan of swamp and a lot of macro tends to be more Babe Ruth than Ted Williams and the investors grow impatient they pull out you have a big year big two years the money comes back in rents and repeat I think that we have created a business model that works well for us we have the general hedge fund which is family friends long-term investors those who judges more on a three-year average there was a very good study from the common fund it said one of the most successful strategies for

allocators that when you believe in the manager and I always tried to do this when I was it Soros or any investment committee that I'm on when a manager has one two three blow it out of the park years you pull in some Capital pull it back and when they are in a slump you add and I've found that over the years the best results that I've given to investors are those who add when we're down the other thing that we've done in our business is we have a relationship with a lot of larger funds

where we will go to them with episodic once a year maybe once every three years Big Ideas we create an SPV and can leverage up into the situation and then when that opportun passes we give the money back one of the things I've always appreciated about our conversations that I like to tell people is more than anyone I've ever known it strikes me you know how to read the newspaper six months ahead of time and I'd love to hear what you're thinking now about what could happen 6 12 months from now well I will also

compliment you because back to having great colleagues you were very good and I got my nose out of joint a couple of times it's like you're getting it exactly right what's going to happen in six months you don't have the positions and that was super helpful and the other thing too is I often think that if IID had the real newspaper would it have been obvious what the trade is if you would said okay there's going to be this war in Israel it is going to go on for a year but oil prices are going

to be lower that's not obvious if you were going to say that we were going to have a 7 % budget deficit that rates would go way up but there'd be a MAG seven that there'd be a tech bubble so thinking about what's going to be in the newspaper and then the right investment vehicles I think the big challenges for the next couple of months are going to be very path dependent on the election if Republicans which I'm pulling for it get the trifecta I think there could be a growth shock and animal Spirits are

back and maybe the fed's jumbo rate cut was a mistake I hope that they don't have to reverse and start hiking which I think would be a big loss of credibility for the FED then on the other side if vice president Harris were to win likely you're going to have divided government Republicans will probably have the Senate and we're going to have to figure out what happens here with a 7% budget deficit that's likely continuing to go up my strong feeling is that Chinese have moved tactically to stabilize the economy but that Xi Jinping is

a different kind of cat that what we saw in the a up until 2012 or 2013 with capitalism with Chinese characteristics or communism with capitalist characteristics he's a leninist so he's not going to allow a clearing function in the market that would allow for a sustainable Chinese economy then I think we are in a long-term bull market in Gold I think we're seeing Reserve accumulation by central banks I follow it closely it's my biggest position and even I was surprised the other day when the Central Bank of Poland came out and said that they want

to take their gold reserves to 20% and you know Ted over my career some of my best investments have then when a policy when a government when a management is driving 90 M an hour at a brick wall you assume that they are going to hit the brakes so that's how you get the big policy changes couple times I've been in the car when they've hit the wall that's less fun but I think that many of my best investments have been detecting when you're going to get the policy change and as I said with President

she one thing in the Reagan White House used to say policy is personnel and Personnel is policy so you always look at whether it's the management or the policy makers at the end of the day they're human they want to be judged some of them are elected they want to think about how history is going to remember them so they are very susceptible to external pressure and many times if you have an ongoing dialogue with them if You observe them for a long time it's easy to detect when they are going to slam on the

brakes which is also a very good risk control metric because many times something has gone so far out of equilibrium you get a very good entry point are there anywhere else in the world that you're keeping a close eye on Japan I believe that this could be a secular bull market one of the few in the world AB had great policies but he also had great stability and the he was assassinated unfortunately he was out of office when he was assassinated I believe he would have come back so now the Japanese are maybe back into

this game of musical chairs with prime ministers and then I think Europe is a big question mark in terms of policy and de-industrialization and especially politics I would predict that in the next 18 or 24 months Marine Le Pen the B Noir of European politics is going to be president of France and she's going to be president of France because the alternative on the left is worse than she is so these populist politics that are a backlash to trade and immigration and also it's just some very bad choices that have been made by the Europeans

German industrial policy we're going to sell into China we're going to use Russian energy to fuel us we're going to keep a cheap currency because the southern European states which are now doing much better than Germany we're going to turn off our nukes and make ourselves more Reliance on German energy I'm very interested to see what the German Mighty industrial export machine does over the coming years I know for many many years you've been a very private person and recently you've been named as potential roles should Trump win I'm curious to first ask how do

you distinguish your political views from your financial views and responsibilities that's a great question for the fund I always do that there shouldn't be zots in the market and a lot of what I'm doing now is just a continuation of what I've done for 35 years it's the geopolitical analysis its macroeconomic analysis it's following Trends and decided to come out from behind my desk because I do believe this election there's a big choice and we are going to decide whether we are going to grow our way out of this debt burden and I think we

can through deregulation energy Independence and dominance in the US and a growth mindset we can get back to growth I feel very strongly that this is the last chance to grow our way out of this I also felt very strongly that we're in the midst of a great realignment and of a Britain Woods realignments coming in terms of global policy global trade there's a lot of what I taught at Yale I've been studying my whole life I'd like to be part of it either on the inside or the out and then three I think that

this new Republican party that's been reconstituted with these new constituencies is the party of the future it's a melding of working class and business class people I'm determined that these new constituencies get treated well I started out our family was very affluent my dad saw to it that we weren't and now that I made it back so I've known economic anxiety and I want to see for these constituencies and for working people that things go well so one two things that's going to happen when this comes out I guess most likely one of these two

parties is going to win if Donald Trump wins regains the presidency where do you think that brings you I'm just working to make sure he wins there's nothing Beyond November fifth if he loses Scott I want to make sure I get a chance to ask you a couple fun closing questions what is your favorite hobby or activity outside of working family that's been modified as I got older I remember when we worked together I was doing triathlons I will tell everyone if you have a middle-age crisis don't do triathlons cuz I have two new hips

I am rebooting my favorite outside of work so trying to do more lifetime Sports whether it's hiking and walking or golf what's one fact that most people don't know about you I might have gone into politics or the military 20 years ago I just think I was gay 20 years too early how have you felt that being gay has influenced your life and career it had a big influence I had an appointment to the Naval Academy that I decided not to take in 1980 and we were broke and so it was free but Yale was

very good to me I worked three jobs in summers and things worked out and I think maybe subconsciously one of the reasons I was attracted to Money Management the numbers are the numbers it's not a sales job you don't live next to clients in Greenwich and they're going to give you commissions because you're at the country club together I always thought your p&l protected you and if I could add one more thing I am probably the most quantitative person will ever meet who's also very religious and very superstitious I don't think they're mutually exclusive but

a lot of people do I pray and have a rabbit's foot that my Quant analysis is right what's your biggest pet peef entitlement I think plenty of people are privileged but anyone who acts entitled really bothers me which two people have had the biggest impact on your professional life Stan ramar probably the greatest investor of all time it's humbling never a down year but also wonderful Mentor human Family Man the Charities and then Byron Wayne Byron never had children and as a result he had a group of us who you know he doed on he

counseled he criticized it was incredible because his mental flexibility was he never got rigid I remember after the 2016 election 10 days later when Trump won he and I were having lunch I said so Byron what do you think he said Scott just to know you know where I am on politics I cried when Trump won I think the Market's going straight up like who can do that what's the best advice you've ever received you have to believe that anything can happen you never know how things are going to change you got to be ready

when they change and you have to be prepared to get lucky so if you've done a lot of prep and the big event comes along you're prepared for it and then the other thing is I've never done anything for short-term money I always try to think over the longterm is it going to keep me engaged and there's probably a bigger pot of gold further out all right Scott last one what life lesson have you learned that you wish you knew a lot earlier in life long-term relationships are the most important one of my college roommates

we've been friends since we were 17 we've been there for divorces marriages children's births and it's just these relationships over your life that are so important when you talked about what was it like going back to Soros I was the most popular person in the 212 even when I retired in 05 there great people like Ed Heyman at isi you know it's SC just going to leave you on the mailing list because smart people never go away and I still speaking to stand drore every day still speaking to nicaro every day so all of a

sudden when I'm the most popular person on 57 Street it doesn't really mean a lot when somebody disappeared these long-term friends are the same people who pick you up when you're down and Rain you in when you're getting to your foric you did a good job of it when we work together I hope I did the same for you and that's really the key is to stay balanced and have people who keep you in a good equilibrium absolutely well Scott thanks so much for sharing your insights and good luck with wherever this thing brings you

great thanks Ted thanks for listening to the show to learn more hop on our website at Capital allocators tocom where you can join our mailing list access past shows learn about our gatherings and sign up for premium content including podcast transcripts my Investment Portfolio and a lot more have a good one and see you next time