May 9, 2024 • 47 mins
Hugh Hendry says the world is brimming with risks right now, from Chinese deflation, to the strength of the US dollar, to unrealized losses in US Treasuries held by the bank. In the new episode of the podcast, we speak with the former manager of the Eclectica hedge fund, who now writes and operates under the Acid Capitalist branding. Hendry, who now resides in St. Bart's, says that the most important story in the world, and for as long as he's been in markets, has been the rise of China, which he sees as inflating asset values all around the world. Specifically, he sees a broken model, in which the country's GDP grows rapidly, but domestic investments and household income don't keep up. He warns of a risk of a yuan devaluation, as the country seeks to maintain its export drive which, he warns would create "Mad Max" deflation. He also talks about the "terrifying" drop in the Japanese yen, and the unusual situation by which the US is one of the world's growth leaders.
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Speaker 1 (00:03):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the Odd Lats podcast.
Speaker 3 (00:24):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 4 (00:27):
Racy, you know, it's.
Speaker 2 (00:28):
Sort of giving me a little bit of anxiety these days.
Speaker 3 (00:31):
Just I feel like that's a dangerous question to ask
your coworker.
Speaker 4 (00:35):
But go on, I mean, it does seem right, It
could be anything. It's not personal.
Speaker 2 (00:40):
It does seem like across many industries evs, etc. Like
Chinese firms either because they're doing very well organizationally, technologically
or whatever, or cost competitively or like really killing it
in a lot of industries. And it is an American who,
you know, on to the thriving US economy watching say,
(01:03):
like on the same day, like the day after Boeing
is experiencing some new investigation, and then the next day
seeing some headline about the COMAC is like expanding its factories.
Speaker 4 (01:12):
It's like, like, what's been on here?
Speaker 3 (01:14):
Yeah, I know what you mean. I feel like evs
are sort of a microcosm for I guess a lot
of anxiety over the Chinese economy. So first of all,
the idea that China is sort of going to leap
frog America in one way or another in terms of technology,
renewable technology as we've sort of seen in solar panels,
but also the idea that to some extent, China has
a lot of policy levers to pullah in a way
(01:37):
that the US sometimes struggles with. So President Chichiping can
go out and say we want China to make massive
investments in things like evs or in things like semiconductors,
and to some extent the entire economy sort of turns
that way and starts doing it.
Speaker 2 (01:55):
And just to be clear, like, I think it's good
that more countries around the world world are getting richer
and more competitive and.
Speaker 4 (02:02):
Able to like.
Speaker 2 (02:03):
So I don't see the world as some sort of
zero sum type thing. But if the US is embarking
on this sort of renewed industrialization push, if we think
it's valuable, if we think it's important that certain types
of batteries and cars, etc. Are manufactured here, which we
seem to have prioritized, also chips, then the question is like, well,
(02:24):
will any of this be competitive globally cost competitive effective
similar technology technology to what competitors overseas are doing.
Speaker 3 (02:33):
But also just to ease your anxiety a little bit,
because that's what I'm here for. There are a lot
of question marks around the direction of the Chinese economy
at the moment. There's speculation over a un devaluation. Interest
rates are already pretty low, You're struggling to boost economic growth.
So you have these sort of twenty things happening at
the same time.
Speaker 2 (02:52):
No, I, China unambiguously has its host of issues. That
being said, you know, I do think that for as
long as I been paying attention to markets, economic stuff
like that, one of the overriding questions is like, well,
when is the crash? When is the financial core? And
it hasn't really happened. Like, There's been some issues now
and obviously they sort of on purpose to some extent
(03:12):
prick to the real estate bubble, but by and large
some sort of like big Chinese disaster the likes of
which many people have been expecting for a long time
of not materialized.
Speaker 3 (03:21):
I think this goes back to the command economy policy
lever idea, and if you have those types of levers,
you can kind of pull them and buy yourself time.
And that's what we've seen over and over again. You
do have these disasters that happen in the Chinese economy,
like the three red lines proposition for real estate that
led to a housing crash. But on the other hand,
(03:41):
you have sort of measures that can offset some of that,
and I guess extend and pretend for a.
Speaker 4 (03:47):
While totally well.
Speaker 2 (03:48):
I am really excited about our guests. We've had him
on the show once and before, although now he's in
studio with us, which is always a lot more fun.
Someone who has been covering this story for years. I
first discovered him probably in two thousand and eight or
two thousand and nine, watching his YouTube videos where he
was in China looking at these gigantic I think the
term at the time was called ghost cities, where there
(04:09):
are tons of skyscrapers and apartments and at the time
no one was ever living in them, and had sort
of raised all these questions about misallocation, all these questures. Anyway,
we are speaking to the acid capitalist himself, former hedge
fund manager, now all around cool guy who lives in
Saint Barts, but he graced us with his presence here
in New York City. Hugh Hendry, thank you so much
(04:29):
for coming back on odd Laws.
Speaker 5 (04:31):
It is an absolute pleasure and you know, for the
folks at home, if you want to see the future,
you got to get high.
Speaker 4 (04:37):
Yeah, why is that? Why?
Speaker 3 (04:40):
Let's just leave it there.
Speaker 4 (04:41):
Let's not leave it there. Why do you need to
get high to see the future?
Speaker 5 (04:44):
What I mean, I like me. So what that means is,
so I'm on a mission to try and give the
indication that the science of finance should be left alone
and we should actually embrace the arts of the future. Yeah,
that is a creative flow, and you're not going to
get there just by clocking up hours, wearing a suit
(05:05):
and staring at a spreadsheet. Yeah, you've got to get
a little bit kind of creative with it. And so
I'm kind of trying to put out my career. I've
got my book coming out later this summer, and it's
it's a different path. There are many paths. Yeah, we
only get presented the path with the guy. You know,
they're always guys, Whereas there are all those guys, you know,
and they got the ties and they don't see the future,
(05:27):
but they get a lot of air time.
Speaker 3 (05:29):
For listeners who can't see you. Right now, I can
confirm that he is not, in fact wearing a tie.
But Hugh here's something I want to ask. I feel
like you might have the answer to this. Have you
ever stared and EXCEL spreadsheet while on acid? What happens?
Speaker 5 (05:46):
You certainly don't stare at spreadge. I've stared at walls.
I mean at Saturday night, there was a wall that
really came alive. So I'll give it back to you
on that try that.
Speaker 3 (05:57):
You should try it like new patterns or like when
you do you realize something.
Speaker 2 (06:01):
The next time you go back and look at that spreadsheet,
you see something there that wasn't there before.
Speaker 5 (06:05):
I just don't look at the spreadshe some has to
have someone else look. Someone has to look at the spreadsheets.
So actually what I did was, I mean the wonderful
Bloomberg and the graphics package. There was a function for
game I can't remember the name now, but I would
load like the S and P five hundred and I'd
have my designated kind of the images in terms of
the moving averages and what have you, and i'd sign
(06:27):
maybe ten seconds stage tart because it's like five hundred,
and I'd watch and I'd see patterns, and for me,
I was becoming like a paranoid schizophrenic because the charts
would create voices in my head, and with those voices
and the pattern recognition, and they were spread and concentrated
on particular industries.
Speaker 2 (06:44):
Did you ever see the movie Pi? Yeah, that's one
of my Have you seen that trace?
Speaker 5 (06:48):
And I haven't.
Speaker 4 (06:48):
I've always wanted to.
Speaker 2 (06:49):
Do an episode on that, which is basically like they're
an old like Darren Aronovski movie, or this guy like
is convinced he kind of has like a psychic breakdown,
but he's sort of convinced that he sees the entire
hire pattern of the stock market and can predicted second
to second through like numerology and kablo and Jewish mysticism
and all this stuff.
Speaker 4 (07:08):
It's a great movie.
Speaker 3 (07:09):
When I have mental breakdowns, I just eat ice cream
and can't get out of bed in the morning. But
other people unlock the secrets of financial markets much more productive.
Speaker 5 (07:19):
Well, I got paranoid because I was risking other people's
precious capital using these voices in my head. But the
paranoid is a good thing, and that's when I had
to call for the spreadsheets. So don't get me wrong.
I listened to music and I was kind of separate
from my team, but there was a fusion where I had,
like the CIA, I had an intelligence operation, and I said,
(07:40):
I'm crazy, challenge me. Let's see if we can find
a synthesis. So I take a position. I take a
small risk position. But when we got or if we
could get confirmation, then we would build and we'd lean
into it. So you know, I don't mean just to
be a circus free. You know there's more too.
Speaker 3 (07:55):
So speaking of challenging yourself, one of the things you're
doing right now on your sub stack is you are
publishing all the old letters from your hedge fund Eclectica,
And I'm curious, what was What's the goal of doing that?
Is it sort of self reflection? Is it seeing how
your investment vcs have stacked up, you know, two decades
(08:18):
or whatever it is later?
Speaker 5 (08:19):
Yeah, I mean it is the diary of a long
period of my life. And for I guess, you know,
I take a different step perhaps from the rest of
the community, and I gave everything. I mean, it became
like a mouse trap. Like people liked it because it
was a little bit zany. And then the challenges each
month You've got to redesign the mouse trap. So I
(08:40):
was always late. I had to be the very last
day before I could actually get the thing written. But
there's a lot happened over that period. We're talking about
the period from October two thousand and two to October
twenty seventeen. And you know, at leisure it comes at
you know, my or my sub stock, and you get
to see it and it resonates that I'm playing with
language and you can then it's nice. It's like a
(09:02):
game where you can actually I'm predicting. I'm trying to
predict the future, and you can actually determine with your
coffee if I got it right what my hit ratio
is so and it becomes kind of fun. I hope.
Speaker 4 (09:13):
What have you learned about yourself?
Speaker 2 (09:14):
I mean when you go back and read those two
thousand and two some of the over twenty years now,
are there things that you look back at your own
thinking you're like, oh, this was these ideas weren't fully formed,
or things that you later changed your mind about or
had new perspectives, Like what have you learned rereading your
old hedge fund letters?
Speaker 5 (09:33):
Heavens? Yeah, what did I learn? I mean, the I
tell you what I'm most proud about. It was a
form of deduction which I had write at the beginning,
because right at the beginning, this is before the Zukenbergs
and you know, the Amazons, where you have a platform,
it goes global and like you're the richest person on there,
(09:55):
like Elon, etc. And back then, the highest return intellectual
capital was to be a hedge fund manager, you know,
like two and twenty if not more. And so by
logical deduction, you got to think you're up against the
smartest minds on the planet. And of course when you
meet some of these guys and girls, maybe not, but
(10:15):
you know, but it kind of stands up. Yeah, And
I kind of concluded that it actually didn't make any
sense to twine out smart the smartest people. Yeah, like
you're going to fail, Okay, And so I reverse engineered
and I said, why is it in this like musical
chair game that we call the markets, why is it
that it's not enough to be super super smart, Because
(10:37):
let's face it, everyone out there and listening to this,
everyone's got like a really high threshold level of intelligence.
And so that's why, you know, we come back into
my acid capitalist. Yeah brand, it sounds like cute and stuff,
it actually had a function, you know, and you know
when people would throw up their arms, So who were
to fast forward into horror story of late two thousand
(10:57):
and eight and Liman goes by and crabs and we've
all seen the movie, you know, the Big Short. I
mean I knew all those guys. I was the London
operation of that. But yeah, when the suit guys throwing
their hands up and they're saying, who would have guessed that? Well,
littleal me. You know, I made fifty percent in the
month of the two.
Speaker 3 (11:30):
So one thing we wanted to talk to you about
is obviously China. And I feel like going back and
reading over some of your own your old notes. Uh, directionally,
you got the China call right, but timing has sort
of been an issue here and maybe it goes back
to those policy levers that we were talking about in
the intro. But walk us through the China thesis in
(11:52):
sort of the early mid two thousands and how it
panned out.
Speaker 5 (11:56):
Yeah, I mean, I am the pig on the Chinese
column and China. China has been has been the formative
energy and force for my career and the career of
all speculators, and really over the last forty years, the
rise and rise of China has actually, I think been
responsible for the what is now the preposterous rise and
(12:19):
rise in asset prices. Not trying to explain that, but
you know, back at the beginning, when I was listening
to the she I was seeing the sheet music on
my Bloomberg terminal, I was seeing the chart formations. What
was I seeing? I was seeing the most ugly old
industrial businesses that no one had wanted to own for
twenty years. Everyone was in services and drugstocks, et cetera.
(12:43):
I was seeing the worst businesses and they were coming alive.
I trapped you.
Speaker 2 (12:49):
Through what's example that when you say that one of
the worst businesses and they're coming.
Speaker 5 (12:52):
Up, Oh, they would be like smelters, Yeah, you know,
like I mean, just insanely ugly business is. Yeah, they
had not earned an appropriate return on capital for the
longest time, and they were coming alive. And so I
used a lot of like you know, like people on
Twitter and stuff in Bloomberg they throw around charts and
(13:13):
they look at a three month charm me one is
a three month chart. I want ingredient show me everything.
So I'm looking at forty years and I'm seeing things
which stop falling and then One of the other key
determinerts that I was using was things go right, stocks
and risk positions. They go right relative to their peer
group before they actually go right in absolute terms, and
(13:34):
so you've got to lean in there. So I was
beginning to say this immense relative performance. I mean, let
me give you an example with regard so like another
like really dumb thing, which is gold. I know that
inflames people, but you know gold had had what twenty
five horrid years. It peaked at eight hundred and ten
bucks in nineteen eighty and it was like two hundred
and seventy bucks by the time the British Treasury got
(13:57):
through selling it at the very very bottom in two
thousand in two thousand and two, who are they selling
it to? I was buying it my first I got
fifteen years of this blessed thing we call speculation, because
my first calendar year I made fifty percent. I'm not glory.
What I'm meaning by that is the failure rate in
hedge funds. It's like a restaurant. Most restaurants fail, yeah,
(14:18):
and the return to the survivor is really high. And
I got happen as there was times, so I didn't
think I was gonna make it, but I was absurdly
long gold. And again, if you're like a wanna be
new hedge fund manager, like I got it, tariously, you
ain't gonna make it in your first year if you're
not making money, and you ain't gonna make it if
you're like making six or seven percent and trying to
(14:40):
tell people your sharp ratio is really good. You're gonna
make it if you find like and you concentrate and
you take leverage in a rising asset class and it's volatile,
and you you chase the dragon. And that was gold
back then. And I'd got gold because gold did nothing, okay,
but we'd had the NASDA crash stop markets had collapsed.
(15:01):
Gold had done nothing, And so when you look at
the relative performance of the two, Gold was saying, baby,
I'm coming by, and you know that, and that was good.
Why why was all this happening was happening because back then,
China was the size today of the Turkish economy. Yeah,
today is the size of the European economy. And the
(15:22):
markets and my prices were telling me that this long
journey was beginning to pick up base and their desire,
you know, like they laid down more concrete, They used
more steal, et cetera in like ten years than the
US economy did in the twentieth century. You know, it
was big, and that's what I was seeing, and I
was long in.
Speaker 2 (15:42):
I understand, Like, Okay, you can point to specific commodities
like obviously copper and some of these old industry you
mentioned the smelters coming alive with the industrialization and rise
of the Chinese economy. Zoom at a little bit further,
because what you said is that China has been the
biggest story in asset markets period and that the incredible
rise and valuations and boom and ascid prices, it all,
(16:03):
in your views sort of come back to China.
Speaker 4 (16:06):
How does that work?
Speaker 5 (16:07):
Because it's a cheap charter. Sorry to say it, but
so you know, there's this thing that triff and dilemma. Yeah,
you know, they don't have an independent munchro policy. They've
kind of cut onto the coattails of the mighty US dollar, right,
they have a dirty float, they have a close capital account. Now,
so economics, which is a dire dollars subject, but economics
(16:27):
at its heart is really the investigation and the study
of how something in chaos kind of tries to return
and find equilibrium and clear. Yeah and so, and it
can be the opposite. It is an equilibrium and it's
going to pull apart, you know. And that's like what
people like me were kind of watching that and the rise.
They've done amazing things. Yeah, they've industrialized. Yeah, and the
(16:52):
reward in economics is you get richer for doing so
the benefits. And they've not done that. They've not now
and it's kind of like the frog, like boiling the frog.
And like we've warmed up the Chinese citizens, we brought
them into these conurbations. We've given them amazing factories. The
rise in productivity from taking someone off a field and
(17:14):
putting them in a semiconductive fab is insane. Yeah. And
so they're getting paid like ten x what their grandparents
got paid. They're like, hey, you know, this feels good.
The thing is they should be getting paid more. And
really where it should be represented is in the exchange rate.
The remember, forgive me, I call it the red cabbage.
You almost need a red cabbage. So the back when
(17:36):
we had the NAFTA agreement with Mexico and Canada, they
devalued their currency to six point three, and where's the
currency today versus the dollar? So you needed six point
three red cabbage and today you need like seven point three,
which is to say you need more red cabbage. So
they've got poorer now that that doesn't make sense, right,
And then you were talking about your anxiety. I'm here,
(17:59):
I've got a bill, I've had a chill pill for you. Okay,
because again, right, so we what we're seeing in ev right,
we saw it initially at the turn of this century.
Again back to my like my letters and stuff. Biggest
company in the world for a moment was Nokia. I
mean those kids like listening saying Nokia was Nokia? Right?
Nokia used to make televisions, and then they pivoted into
(18:19):
mobile phones, right. And then Apple of course came ba
at the turn of the century, biggest company on earth,
and you had ericson and these guys control you, your G,
your network, your five G, et cetera. Chinese came in
and said, wow, that's kind of dope. We want that, okay,
and now they own it and that's why you had
all that.
Speaker 2 (18:35):
Yeah, how do you pronounce it's coming?
Speaker 5 (18:39):
It's coming, it's coming, right, Okay? And if you look
at Ericson and Nochia today, those prices fell ninety five
percent and just they've stayed in the graveyard. Okay. Then
the Chinese came in, they said the same thing with solar,
and now they've come in and they've said the same
thing with ev What are they doing. They're saying, we
don't need to make money like we allocate in America
(19:01):
in the free world with the sharp jagged knife of
you got to make it if you want to. We
want to stay in the game. China doesn't. That's one
of the implicit subsidies. Now, so where where do we
see that? Where do we get that? I mean, maybe
that's just cute, okay, But what China does, it's very
good at creating GDP, but not wealth. So look at
(19:23):
the stock market, right the stock market's flat flat for
twenty five years, and the currencies is weakening. And that's
the problem. And so what happens is with our savings model,
all of it, all of it, and again, to maintain
those advantages, they have to push all of their capital
into risk free US treasuries. Okay, And unfortunately, only until
(19:43):
the last two three years the US we were fiscally conservative,
we should have been running huge deficits, but I was like,
oh no, you can't do that. We should have been
running huge deficits, and the Chinese would have funded the
role out of the best like fast trains, the best education,
the best healthcare, the best cities, you know, ships that
don't crash into bridges and bring it all tumbling down.
(20:06):
And instead, whenever we did something, we did a stupid
tax cut. And right at the very end of this process,
you're the Great Inflation Reduction Act, which is, hey, listen,
we're going to pay you money to bring great technology
and make it in the United States. That's working, and
so what's happening today, the fascination and the drama of
(20:26):
today is the fiscal policy is working and the US
has been transformed into the economic locomotive for the rest
of the world. Now, this dollar standard, the mighty dollar.
It was not conceived on the basis that the US
would be the chief. It wasn't conceived that the US
would be at five and a half percent, And the
(20:48):
ramifications of that are coming through the Japanese yet incredibly
has lost forty percent.
Speaker 3 (20:54):
This is exactly what I wanted to ask you about,
which is just to add to Joe's anxiety, but be
panicking about a currency crisis right now?
Speaker 5 (21:03):
Yeah, absolutely so, Like again, heaven is, We've got to
go back to nineteen ninety seven ninety eight, and we
had the Asian Sovereign Tiger crisis. Countries like Thailand they
had too many debts denominated in dollars and they had
to they had to default. I mean, they're currency fell
forty percent. Like the end, I mean, why no one's
talking about the move in the end is terrifying. And
(21:25):
through this period, the really what I wanted, like what
you're to concentrate on is at the end, it was
like an eighteen month period and at the end Taiwan
right now, Taiwan had no dollar borrowings really tightly like Singapore,
really well managed economy, and right at the end Taiwan devalued.
And everyone's like what what are you doing? And it's
(21:48):
the esorpient fable of the scorpion on the frog, like
he gets the frog's like I ain't taken. It's like no, no, no,
you're you're cool, You're cool. And they get halfway over
and the scorpion like zaps and it's like whoa what
year we talking about here, we're talking about nineteen ninety eight, okay,
in Taiwan, right, And so the point is that why
did Taiwan.
Speaker 3 (22:07):
Devalue in its nature?
Speaker 5 (22:09):
That's what they do. They weren't gonna leave a legacy
of their neighbors having devoured by forty percent. So the
big elephant in the room, and you touched upon it
in your intro, is what if the Chinese come around
and go boom and they devour you? Right, that would
be profe I would call that mad max deflation. Now,
(22:30):
one of the incentives for them to do it is
the quantitative easy in the United States. I actually think
it was sabotage for the Chinese because the very polite
request was listen, you gotta revowl. Your currency should be rising.
And why is that a good thing? Because one point
for bailing Chinese people will be richer visa via the
(22:50):
rest of the world, and they'll buy our things. You might,
I mean, the dreamliners may have some problems just now,
but they'll buy more, you know, and we'll work it out.
And the Chinese stubbornly used to do that. And so
if you can't revalue the external price, I think I
actually quantitative easing coming out of the States and elsewhere,
revaluate the acid prices domestically in China. And so now
(23:12):
did they prick the bubble. They've got the biggest dun
bubble of all time, sixty trillion dollar valuation, and what
do you do with that? It's a lot easier if
you devalue in dollars as opposed to the local currencies
that all the people feel like they're still the frogs
and the jacuzzi.
Speaker 3 (23:27):
Joe, I remember this from do you remember Dick Beauvay. Oh, yeah,
the banking analyst. But he used to write about Qi
as a currency war. It's like an underappreciated currency war.
And this would have been in like twenty ten, twenty eleven.
I still remember that.
Speaker 2 (23:42):
So let's take it to today, and I guess there
is still this anxiety out there of a Chinese devaluation.
We have seen them basically purposefully prick their own real
estate bubble, and there's been a lot less speculation that
seems like it's done. They're trying to The bet is
that they can sort of make up for that with
(24:04):
a lot of exports in advanced technologies, vehicles being the
one we talk a lot about these days, but that
basically it can be an industrial exporting powerhouse. And of
course you know people always talk have talked about Chinese exports,
but I think you know, the real growth driver was
domestic investment.
Speaker 4 (24:21):
Now it feels like selling to the rest of the world.
What happens here? Can it work?
Speaker 2 (24:25):
Can they make this pivot from a sort of inward investment,
real estate focused economy to one where exports really lift
everyone up.
Speaker 5 (24:34):
No? No, And it's back to your anxiety. Right. The
biggest industry in Europe is automobiles. Yeah, yeah, And I
mean listen to ELI. It's like the Chinese where they are,
they wipe you out. You're gone, okay, right, So like
you think Europ's going to sit there and go, hey,
we're open, we're friendly. Common wipe is out right. That
avenue is over the proportion of exports to the Chinese economy,
(24:57):
the proportion of exports to the global g We're at
levels where it's intolerable for the rest of the world
to accept it. The bigger issue is, so here we are.
I mean, I've been invested for like thirty five years
and I'm saying to you, China going from the size
of Turkey to Europe, and the avalanche of money and
liquidity is why every asset price in America is high.
(25:20):
And I think we're now at the I call it
the o bay Yashi Maroo moment. If you remember from
Star Trek, when it's a no when it's a no
win scenario, there's no win because we got five and
a half percent rates in the US, We've got a
currency which is rising, and the rest of the world
is like, I'm out of here, I'm checking out. And
(25:40):
so the flow that is coming more and more into
the US. Now the FED sitting there and it's listening
to It's like the Bank of England in nineteen twenty
seven when they were like over vowed on the gold
standing like we're at four and I'm like, we're going
to be overthrown by the Communist unless we can bring
interest rates down. And so we went to the Fed
and he said, the only way we can bring down
is if you cut. Remember Benjamin Strong the cooped whiskey
(26:03):
and he takes a cut. And what happened. The US
stock market like went to the moon. It bred instability.
So the big drama this year is the Koreans, the Japanese,
and I think the Chinese are saying, you got to
you actually got to subjugate the domestic strength of the
US economy and you got to bail us out. Now
if the FED, that's a no win. If the FED
(26:25):
does that, like buy ten thousand call strikes on the SMB,
it's not gonna be there in two months. But that's
where it's going ahead really rapidly, because that's what happened
by I get back again to nineteen nineteen ninety eight. Yeah,
remember LTCM, So we had sovereign crisis. The US economy
in the third quarter of twenty nineteen ninety eight grew
(26:46):
at five point six percent, and what did the FED do?
They cut rays and people are like, you guys are clowns. Okay,
I'm buying stocks, and stocks again went to the moon.
We're at a point where if the FED, so I
think the FED actually Fed only ever cuts when something breaks,
and the rest of us saying, we're kind of at
that point. Okay, So if the if something breaks, the
(27:10):
Fed's cutting is going to subjugate the strength of the
United States economy like the interests of it and asset
prices will become intoxicatingly like at levels. We've got to remember,
trees grow tall, but they don't grow to the sky,
and we're getting close to the sky.
Speaker 3 (27:27):
Why doesn't China try to boost domestic consumption if the
rest of the world is like closed off to it,
Why is it still so focused it seems on manufacturing,
even though it's moving from you know, manufacturing TVs or
whatever to semiconductors.
Speaker 5 (27:41):
Yeah, I mean, you know, I wish to remain polite,
but it's it's not a democracy, you know, the civil
liberties are I mean, you know, I don't think as
a contentious thing. You don't really have much in the
way of civil liberties. Again the quid pro cause, look
at your life. You're so much richer than your grandparents,
and we just asked for a bit of talmerance. Like
(28:04):
so you were saying again your anxiety about the Chinese
and they're going to overtake us. They took the wrong bet. Yeah,
because I was talking to someone like but what about
the Chinese? Thousands upon thousands of PhDs, I'm like, yeah, Like,
I'm sorry again, forgive me, but if you just completed
a PhD, my god, you just chose the wrong moment
in history. Why because we got AI, we got the
(28:28):
AI and the PhD thing, by laws is the left
hemisphere of your brain. If you're listening to this now
the future, and if you want to be rewarded again,
you've got to be kind of like an acid capitalist
is right hand side of the brain. All that PhD
thing has been made redundant.
Speaker 4 (28:43):
But they had hurt.
Speaker 2 (28:44):
The AI companies all have to hire PhDs, so some
of them get jobs.
Speaker 5 (28:47):
Now now they just they invest in more. AI has
become circular like PhDs.
Speaker 2 (28:52):
I talked to a founder this week, basically Tracy by
the way, who says that all code will be written
by a let's talk more about this idea. Okay, the
(29:17):
FED is not going to cut until something breaks. You
think the thing that will break will not be like
a domestic thing, but will be like on the international front,
walgust through like where we're at risk.
Speaker 3 (29:28):
Because a year ago the thing that was.
Speaker 5 (29:32):
I mean, it ain't gone away. Yeah, extend and pretend
and all that thing. So I mean, you know, not
wishing to name and chane, but an organization like Bank
of America you know, has and like like a peer
group has an enormous treasury portfolio, which it doesn't mark
to market, and that is an inducement by the US
(29:52):
Treasury to ensure that people are there to buy the treasuries. Okay,
and so they've got they've got unmarked losses right which
are this are the same magnitude as their equity. Okay, now,
and where we are just now is that we started
this year and we were going to get four, five,
six interest rate cuts. And when you get that, the
(30:13):
bonds normally kind of come off their ass and kind
of rise and value and like their viability gets better. Okay,
that ain't happened. If anything, you're the domestic consying, we
need higher interest rates. Where's where's the tenure today? Like
it was four and a half, we were heading close
to to five before the weaker GDP statistics comes out,
So that's still there. There's fragility there four point four two.
(30:36):
And look when we get backhuntings. I mean, if we've
got any banking analysts listened to this, can you do
your job like rather than it's blowing smoke up the CEO,
can you say, hey, listen, can you tell me what
is the size of your unmarked treasury portfolio. What is
the loss of it? What are you doing if you
shifted the duration? Can you just talk to the street
about it? No one asks, no one Like bad news
(30:59):
comes out you really really, it comes out really really slow,
and then it stings you. Let's let's ask the questions.
So that's there, that's out there.
Speaker 3 (31:06):
But okay, just on the bank, So what when when
we say that, Okay, if you marked the bonds to market,
it would just blow a massive hole in banks equity.
That is terrifying on the one hand, But on the
other hand, part of me is like I find it
hard to believe that the banking system is going to
be ruined by investing into many US treasuries.
Speaker 5 (31:31):
Okay, I mean what is that? Just is a blind faith?
I mean the numbers are like really big.
Speaker 3 (31:36):
I guess it's blind relativism. It's like US treasuries are
the safest asset out there then until they're not.
Speaker 5 (31:45):
This is true, So I tell you, So what we're
doing is we're flying high without a safety net. Okay,
so we've we've been there. We had the again, I
can't believe this is happening. The entire global bank king
universe went bankrupt. In two thousand and eight, they were
gone gone, right, but the US Treasury was it like
(32:09):
sixty percent debt to GDP and these they stood in
and like, you know what, we got it all right,
We're gonna we've got these fun tokens. We're gonna issue
lots of these fun tokens, and you're gonna come back. Okay,
what happens? And that was your safety net. Where's the
safety net now? Like if they tried that that maneuver again,
people like me, people like get out of here. We're
(32:30):
we're getting out of like we're not owning these silly
securities because you're tapped out. Like so the US Treasury
now is not the safety net. If there is folly
and if there was an incident in the financial sector,
it's top tout. It doesn't have the resource. So we're
on our on That's scary. And so again that's why
(32:51):
the next move for people is to consider, well, what
if they what if they cut and they have to
I actually think it could get so bad that we
will go back to the notion of zero interest rates.
And I think that treasuries, I mean, I've been so
hideously bad. I've been owning leaps on the TLT. The
long duration now leaps options. Like if I got a
(33:13):
million dollar portfolio, I've been spending like fifty thousand dollars
and then topping it up as I lose money on them,
and just keeping a lot of time on it. So
I've probably spent a tenth of my portfolio. You know,
I'm underwater, but I own that because I think we're
at the end of the most incredible bill market and treasuries,
which again absolutely coincided with China and who came in
(33:37):
to preserve their currency and believe it undervoured. They had
to put money into risk grey US treasuries and they
bid it higher. Okay, but the booll market and treasuries,
it was a double bottom in price terms between nineteen
eighty two and nineteen eighty four. If we put it
into yield perspectives, the ten year peaked at sixteen percent.
But in nineteen eighty four, as the economy came back,
(33:58):
I found vigor. You went you you know the notion
recency biases bisis. So the recency biases was strong economy,
inflation and people sold the bones again. So in nineteen
eighty four years peaked at fourteen and then that was it,
you know, and of course they went to where they
went to, like forty basis points during the COVID. I
think the end of this boom market is in the
(34:20):
next eighteen months, and I think the treasuries, I don't
think they'll yield forty basis points, but I think they
could get down to like one point two one point
five years and that and then that's like and then
sell them and get out, because we'll have to redraw
and we'll have to examine and try and create a
new monetary order.
Speaker 4 (34:39):
Exciting.
Speaker 2 (34:39):
I'm sure we'll have plenty of good episodes about that
redrawing of the monetary order.
Speaker 4 (34:43):
Back to China. Didn't all those.
Speaker 2 (34:45):
Ghost cities that you toured and showed on YouTube end
up getting filled? Because I feel like now there's one
hundred what they call Tier two and Tier three cities
that none of us know the names of that have
like ten million people and with glstening subway systems and
whatever else, like in your view, what happened to those
what happened to those cities?
Speaker 5 (35:03):
Thank you for that? Because I was dead wrong okay, wrong, wrong, right?
But can I tell you why? So? I like you
get value investors, growth investors. I'm a time investor, would
you believe? Okay? And I it was only really very
recently I came to understand the Chinese like what do
(35:24):
you call it? Like your horoscope and like the pursuit
and the investigation of heavenly bodies around the sun, right,
you like like Pisces and all that kind of stuff
we use. We use the rotation of the ass rotation
around the sun. Ya. Yeah, and I believe that takes
a year.
Speaker 4 (35:41):
Twelve years. There you go, that's a very I hadn't heard.
That's a very good like men.
Speaker 3 (35:45):
You have heard that before because we talked about this
exactly the last.
Speaker 4 (35:50):
Yeah, but no, that's a good one.
Speaker 5 (35:51):
It is. And then like so when I was peak
peak bearish, I was twelve years out literally it was
twenty eleven. I launched a credit for I'd have made
a billion box, a billion box if I had been
twelve years in the future. You know, So I was wrong,
But I want to tell you my time piece was
(36:13):
twelve years out. Okay, and the time is now.
Speaker 3 (36:16):
When was the last time you were in China?
Speaker 5 (36:18):
I ain't rushing to go back to China.
Speaker 3 (36:20):
Yeah, well, I was kind of curious if you've been
back recently seen some of the changes, or.
Speaker 5 (36:24):
I've been invited by some funky people to go to
Mongolia and August. I would go August, but I think
I'd rather be an Ibitha. But you know, yeah, so
my last I tell you in terms of again formative
and with the investment letters mark not the last time.
But March two thousand and eight, I took a slow
(36:44):
train from Wuhang to Beijing. It was quite grim.
Speaker 3 (36:50):
Not the high speed trend, No, it was.
Speaker 5 (36:51):
Really quite I liked struggling slow. It was really grim.
I should have been buying the S and P. The
S and P had fallen sixty five percent in March
two thousand and nine, and instead I was and you know,
and Wuhan, where was I am Muhan. I was in
the wet market where the whole COVID thing. I should
have been buying the SVP.
Speaker 2 (37:12):
Just in general, I mean, I am struck by this
fact that like we hear all these different people and
it's like diversification and international stocks and all this stuff
and exotic things.
Speaker 4 (37:24):
In the end, we should have just all been buying
the S and P had like gone and lived our lives.
Speaker 5 (37:28):
Right, absolutely, and like they're still peddling emerging Marcus, Like,
how many? How many years does it work?
Speaker 4 (37:35):
I am curious because there's been a ton of growth
over since. And this is always the thing. It's like,
there's a lot of growth everywhere.
Speaker 2 (37:41):
What has been the fatal flaw of the international diversification
slash em thesis that has been very popular and people
are always repackaging and reselling.
Speaker 5 (37:50):
Again, I think it's my accent. You know you're not
hearing me. They are not They are magnificent. These countries
are magnificent at creating GDP growth, hm, right, incredible, right,
But it's GDP growth at the expense of wealth, right,
So let me get So, Let's say we've got a bridge.
It's going to cost us a billion dollars. We're going
to link to communities. And let's say it's in America
(38:12):
and there's like and it's in the Bay Area, and
the average per capital income of the two cities is
one hundred and fifty thousand dollars, right, and so and
you're going to cut like fifteen twenty minutes in the
daily commute of all those people, people with that level
of wealth cutting time is good, it's productive, it's going
to add utility to their lives. Okay, And it's got
a it's an NPV positive, it has net present value. Okay.
(38:36):
So the value of the billion that you spend maybe
it's maybe it's two billion. Okay. Now, if you join
up two Chinese communities and the average per capital consumption
is eight thousand dollars, if you're on eight thousand dollars,
you ain't in a hurry. You ain't in a hurry, right,
But you spend a billion, and what happens is you've
not created wealth. So the if you were, if you
(38:57):
actually had, if you were a corporation, you'd have to
market because let's say you're taking a you're taking a token,
it's a toll bridge, okay, And you do the DCF,
you're going to quickly work out that your MPV is
like half a billion, so you're in a half a
billion deficit. That the half a billion deficit doesn't get
measured in GDP. You measure the billion. And so this
(39:17):
is why the strategy doesn't work because sure you get GDP,
but where's the stock market? Right? And where's the stock
market in America? Because what do we do. We actually
go hey re'ch on on capital pause the MPV. We're
in it to win it, right, and so we get
less GDP, but we get the best stocks and the
best stock market. That's the fundamental flaw.
Speaker 3 (39:40):
So one of the reasons we enjoy talking to you
is because we get to live vicariously and pretend that
we're talking Macro on a beach in Saint Bart's instead
of talking Macro in an office in midtown. And you've
been in St. Bart's for many, many years now, and
I'm curious what changes have you seen over the years.
And one of the reasons I ask is because I
went to this, say Shells, which is on the other
(40:02):
side of the world, but I guess it is a beach.
And I went to the Seychelles last year. I was
kind of surprised by like the number of Russians that
I saw there, Just so much Russian money and coming
from the US economy at a time when you know,
it was all about sanctions, all about European energy crisis,
things like that. It was kind of surprising to me
to see that level of wealth externally.
Speaker 5 (40:23):
Well, I mean, you know that Paul McCartney wings is
banned on the run. I mean it's the Russians on
the run. Yeah, I mean they're fleeing go to Dubai.
And it's the same thing. You know. I tell from
the beginning when I was writing those letters, like you
want to solve Russia because that's the time of the
emerages of the Oligarks, I was like, you want to
solve Russia, you want to bring freedom. I mean, it's
not for us to solve Russias, for them to solve it, right,
(40:45):
but if we want to stop them and pinging and
being annoying, being noisy neighbors, the number one thing you
do is you say, all the rich oligarchs, no visus.
You can't come to same Bars. You can't go to Seychelles,
you can't go skiing in the Swiss Alps. Were in America, enjoy,
enjoy the motherland. Okay, talk to the boss. I mean
you sort it out. You know what, We'll look at
(41:05):
your visit again. And that's so they do. They can't
come to they can't come I'm gonna say they can't
come to same Boss. But actually I'm thinking my my
Christmas client actually is Russian. So some of them can
get in, but Abramovich he came in and he laid
down eighty million dollars in two in February two thousand
and eight, and didn't put the same boss on the map.
But you know that was like a huge investment, and
(41:29):
property prices are absord you know, really absurd. I just
got divorced and I had to do evaluation on the
on the Portfolium. I mean, it's just it's insane. Same
bars is kind of like Bobby Digital. I just forgive me.
I call bitcoin Bobby Digital. It's goots, not a Bobby
brother or something.
Speaker 2 (41:45):
What is you know, One of the things and we've
talked about it a little bit on the show, is
like the extreme concentration of ultra wealth in places like Dubai, Miami,
et cetera.
Speaker 4 (41:56):
Like what is driving is it?
Speaker 2 (41:59):
I mean I sort of get it from the Russian perspective,
wanting to get money out of the country being on
the run. As you put in, what do you think,
like what is the source of anxiety among the ultra
wealthy that they're you know that they congregate in cities
like Dubai or elsewhere to sort of get away from
messi countries, Whether it's Messi democratic countries or Messi autocratic countries.
Speaker 5 (42:18):
Yeah, I mean that the Miami thing is is the
same things. It's South America, you know, it's it's taking
all of your all of your wealth and and really
they're kind of robber barrons. It's the confiscation of other
of the good folks money and getting it out of
places like Venezuela and it resides might that's Miami. I'm
an La person because I was gonna say La is
(42:39):
a real place, which is kind of as you know,
but I mean it's real in the sense that you've
not got capital on the run, You've not got robber
barrons like they're the Dubai and the Seychelles. It only
exists because the US Treasury and the administration are looking
the other way. I don't know why they look the
other way. I really they don't because it's against the rue.
(43:01):
It's like, look, you know, there's there's a war. We're like,
we're kind of funding the Ukrainians against it, and we
should be really tight and should be no slippish, and
yet we let them, you know, we let them slip
into Turkey, into into Dubai and into the status I
would like again, you're staying, you're staying in Russia, call
me when you're you're more polite to your neighbors.
Speaker 2 (43:20):
Hugh Hendry always great to catch up. Live vicariously a
life that's much more colorful, perhaps than ours here in
the Midtown office.
Speaker 4 (43:28):
But thank you so much for coming back on oline.
Speaker 5 (43:30):
Have been absolute pleasure. Let's do.
Speaker 4 (43:46):
That was a lot of fun tracing.
Speaker 3 (43:47):
It's always fun talking to Hugh. One thing I was thinking,
I kind of do you think Bloomberg would let us
expense the twenty five thousand dollars that it costs for
like a VIP package to the Acid Capitalist summer camp Part.
Speaker 4 (44:00):
Yeah, for sure, for sure, I think so there's no culie.
I think it's worth Yeah, let's go.
Speaker 2 (44:04):
I don't necessarily feel chilled or relaxed. I mean the
idea that like something is going to happen at the
treasury market, yields are going to go back down to
one two percent doesn't make me relax.
Speaker 5 (44:13):
No.
Speaker 3 (44:13):
Also, the time to panic about the currency war line
isn't exactly reassuring. The other thing I was thinking, I
think the thing that will stand out to me is
the idea about a lot of emerging markets being good
at generating GDP growth but not wealth. I feel like
that encapsulates, certainly a lot of the story around China
right now, and the question over why not boost domestic
(44:35):
consumption versus manufacturing and sort of repeating the same thing
you've been doing for decades now?
Speaker 4 (44:41):
No, I mean I think that is it just true?
Speaker 2 (44:43):
Right, Like there's been incredible growth of some of these companies.
I mean even if you look like I was looking
at the chart of like BYD the other day, which
is like everyone knows now, is like this like global behemoth,
you know, arguably by some measures, bigger than Tesla. Like
that Stuck is the same that was where it was
in twenty twenty. But if you actually if you go
(45:04):
back to even like twenty ten, or if you go
back to like two thousand and nine, it's only up
like threefold since it's peak.
Speaker 4 (45:11):
In two thousand nine.
Speaker 2 (45:11):
I mean, this is a company that was literally nothing
and now at the forefront of like probably one of
the biggest industries in the world.
Speaker 4 (45:17):
Like it's not amazing. You don't get paid very much
to own.
Speaker 3 (45:19):
The less than Domino's Pizza, I suppose, yeah, exactly, But
this is the other thing I was thinking about. So
there are pros and cons to the command economy model, right,
and the idea that you can pull all these policy
levers because on the one hand, like yes, China can
direct huge amounts of capital to whatever project it deems
strategically important at any one period of time. But on
(45:42):
the other hand, you get misallocation of capital, and then
you get the uncertainty that's sort of hanging over investors
where they can't predict what China is going to care
about next. So going back to you know, the real
estate crash, the three Red Lines program, and then the
crackdown on consumer internet companies, like those are real expressions
(46:03):
of the uncertainty of that particular aspect of the economy.
Shall we leave it there?
Speaker 4 (46:07):
Let's leave it there, all right.
Speaker 3 (46:08):
This has been another episode of the Authoughts podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (46:14):
I'm Joe Wisenthal. Follow me at The Stalwart. Follow Hugh Henry.
He's on Twitter at Henry Hugh. Follow him on Instagram.
Be very jealous of his life, check out his substack
in his book and all that again, make you very
jealous follow our producers Carmen Rodriguez at Kerman Ermann, Dashel
Bennett at dashbot and kel Brooks at kel Brooks. Thank
you to our producer Moses Onam. For more Oddlots content,
(46:36):
go to Bloomberg dot com slash odd Lots for your
transcript of blog in the newsletter and chat about all
of these topics twenty four to seven in the discord
Discord dot gg slash outline.
Speaker 3 (46:46):
And if you enjoy all thoughts, if you want us
to go to the Acid Capitalist Camp in St. Barts,
then please leave us a positive review on your favorite
podcast platform. And remember, if you are a Bloomberg subscriber,
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All you need to do is connect your Bloomberg account
with Apple Podcasts. Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:20):
Hello and welcome to another episode of the Odd Lats podcast.
Speaker 3 (00:24):
I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 4 (00:27):
Racy, you know, it's.
Speaker 2 (00:28):
Sort of giving me a little bit of anxiety these days.
Speaker 3 (00:31):
Just I feel like that's a dangerous question to ask
your coworker.
Speaker 4 (00:35):
But go on, I mean, it does seem right, It
could be anything. It's not personal.
Speaker 2 (00:40):
It does seem like across many industries evs, etc. Like
Chinese firms either because they're doing very well organizationally, technologically
or whatever, or cost competitively or like really killing it
in a lot of industries. And it is an American who,
you know, on to the thriving US economy watching say,
(01:03):
like on the same day, like the day after Boeing
is experiencing some new investigation, and then the next day
seeing some headline about the COMAC is like expanding its factories.
Speaker 4 (01:12):
It's like, like, what's been on here?
Speaker 3 (01:14):
Yeah, I know what you mean. I feel like evs
are sort of a microcosm for I guess a lot
of anxiety over the Chinese economy. So first of all,
the idea that China is sort of going to leap
frog America in one way or another in terms of technology,
renewable technology as we've sort of seen in solar panels,
but also the idea that to some extent, China has
a lot of policy levers to pullah in a way
(01:37):
that the US sometimes struggles with. So President Chichiping can
go out and say we want China to make massive
investments in things like evs or in things like semiconductors,
and to some extent the entire economy sort of turns
that way and starts doing it.
Speaker 2 (01:55):
And just to be clear, like, I think it's good
that more countries around the world world are getting richer
and more competitive and.
Speaker 4 (02:02):
Able to like.
Speaker 2 (02:03):
So I don't see the world as some sort of
zero sum type thing. But if the US is embarking
on this sort of renewed industrialization push, if we think
it's valuable, if we think it's important that certain types
of batteries and cars, etc. Are manufactured here, which we
seem to have prioritized, also chips, then the question is like, well,
(02:24):
will any of this be competitive globally cost competitive effective
similar technology technology to what competitors overseas are doing.
Speaker 3 (02:33):
But also just to ease your anxiety a little bit,
because that's what I'm here for. There are a lot
of question marks around the direction of the Chinese economy
at the moment. There's speculation over a un devaluation. Interest
rates are already pretty low, You're struggling to boost economic growth.
So you have these sort of twenty things happening at
the same time.
Speaker 2 (02:52):
No, I, China unambiguously has its host of issues. That
being said, you know, I do think that for as
long as I been paying attention to markets, economic stuff
like that, one of the overriding questions is like, well,
when is the crash? When is the financial core? And
it hasn't really happened. Like, There's been some issues now
and obviously they sort of on purpose to some extent
(03:12):
prick to the real estate bubble, but by and large
some sort of like big Chinese disaster the likes of
which many people have been expecting for a long time
of not materialized.
Speaker 3 (03:21):
I think this goes back to the command economy policy
lever idea, and if you have those types of levers,
you can kind of pull them and buy yourself time.
And that's what we've seen over and over again. You
do have these disasters that happen in the Chinese economy,
like the three red lines proposition for real estate that
led to a housing crash. But on the other hand,
(03:41):
you have sort of measures that can offset some of that,
and I guess extend and pretend for a.
Speaker 4 (03:47):
While totally well.
Speaker 2 (03:48):
I am really excited about our guests. We've had him
on the show once and before, although now he's in
studio with us, which is always a lot more fun.
Someone who has been covering this story for years. I
first discovered him probably in two thousand and eight or
two thousand and nine, watching his YouTube videos where he
was in China looking at these gigantic I think the
term at the time was called ghost cities, where there
(04:09):
are tons of skyscrapers and apartments and at the time
no one was ever living in them, and had sort
of raised all these questions about misallocation, all these questures. Anyway,
we are speaking to the acid capitalist himself, former hedge
fund manager, now all around cool guy who lives in
Saint Barts, but he graced us with his presence here
in New York City. Hugh Hendry, thank you so much
(04:29):
for coming back on odd Laws.
Speaker 5 (04:31):
It is an absolute pleasure and you know, for the
folks at home, if you want to see the future,
you got to get high.
Speaker 4 (04:37):
Yeah, why is that? Why?
Speaker 3 (04:40):
Let's just leave it there.
Speaker 4 (04:41):
Let's not leave it there. Why do you need to
get high to see the future?
Speaker 5 (04:44):
What I mean, I like me. So what that means is,
so I'm on a mission to try and give the
indication that the science of finance should be left alone
and we should actually embrace the arts of the future. Yeah,
that is a creative flow, and you're not going to
get there just by clocking up hours, wearing a suit
(05:05):
and staring at a spreadsheet. Yeah, you've got to get
a little bit kind of creative with it. And so
I'm kind of trying to put out my career. I've
got my book coming out later this summer, and it's
it's a different path. There are many paths. Yeah, we
only get presented the path with the guy. You know,
they're always guys, Whereas there are all those guys, you know,
and they got the ties and they don't see the future,
(05:27):
but they get a lot of air time.
Speaker 3 (05:29):
For listeners who can't see you. Right now, I can
confirm that he is not, in fact wearing a tie.
But Hugh here's something I want to ask. I feel
like you might have the answer to this. Have you
ever stared and EXCEL spreadsheet while on acid? What happens?
Speaker 5 (05:46):
You certainly don't stare at spreadge. I've stared at walls.
I mean at Saturday night, there was a wall that
really came alive. So I'll give it back to you
on that try that.
Speaker 3 (05:57):
You should try it like new patterns or like when
you do you realize something.
Speaker 2 (06:01):
The next time you go back and look at that spreadsheet,
you see something there that wasn't there before.
Speaker 5 (06:05):
I just don't look at the spreadshe some has to
have someone else look. Someone has to look at the spreadsheets.
So actually what I did was, I mean the wonderful
Bloomberg and the graphics package. There was a function for
game I can't remember the name now, but I would
load like the S and P five hundred and I'd
have my designated kind of the images in terms of
the moving averages and what have you, and i'd sign
(06:27):
maybe ten seconds stage tart because it's like five hundred,
and I'd watch and I'd see patterns, and for me,
I was becoming like a paranoid schizophrenic because the charts
would create voices in my head, and with those voices
and the pattern recognition, and they were spread and concentrated
on particular industries.
Speaker 2 (06:44):
Did you ever see the movie Pi? Yeah, that's one
of my Have you seen that trace?
Speaker 5 (06:48):
And I haven't.
Speaker 4 (06:48):
I've always wanted to.
Speaker 2 (06:49):
Do an episode on that, which is basically like they're
an old like Darren Aronovski movie, or this guy like
is convinced he kind of has like a psychic breakdown,
but he's sort of convinced that he sees the entire
hire pattern of the stock market and can predicted second
to second through like numerology and kablo and Jewish mysticism
and all this stuff.
Speaker 4 (07:08):
It's a great movie.
Speaker 3 (07:09):
When I have mental breakdowns, I just eat ice cream
and can't get out of bed in the morning. But
other people unlock the secrets of financial markets much more productive.
Speaker 5 (07:19):
Well, I got paranoid because I was risking other people's
precious capital using these voices in my head. But the
paranoid is a good thing, and that's when I had
to call for the spreadsheets. So don't get me wrong.
I listened to music and I was kind of separate
from my team, but there was a fusion where I had,
like the CIA, I had an intelligence operation, and I said,
(07:40):
I'm crazy, challenge me. Let's see if we can find
a synthesis. So I take a position. I take a
small risk position. But when we got or if we
could get confirmation, then we would build and we'd lean
into it. So you know, I don't mean just to
be a circus free. You know there's more too.
Speaker 3 (07:55):
So speaking of challenging yourself, one of the things you're
doing right now on your sub stack is you are
publishing all the old letters from your hedge fund Eclectica,
And I'm curious, what was What's the goal of doing that?
Is it sort of self reflection? Is it seeing how
your investment vcs have stacked up, you know, two decades
(08:18):
or whatever it is later?
Speaker 5 (08:19):
Yeah, I mean it is the diary of a long
period of my life. And for I guess, you know,
I take a different step perhaps from the rest of
the community, and I gave everything. I mean, it became
like a mouse trap. Like people liked it because it
was a little bit zany. And then the challenges each
month You've got to redesign the mouse trap. So I
(08:40):
was always late. I had to be the very last
day before I could actually get the thing written. But
there's a lot happened over that period. We're talking about
the period from October two thousand and two to October
twenty seventeen. And you know, at leisure it comes at
you know, my or my sub stock, and you get
to see it and it resonates that I'm playing with
language and you can then it's nice. It's like a
(09:02):
game where you can actually I'm predicting. I'm trying to
predict the future, and you can actually determine with your
coffee if I got it right what my hit ratio
is so and it becomes kind of fun. I hope.
Speaker 4 (09:13):
What have you learned about yourself?
Speaker 2 (09:14):
I mean when you go back and read those two
thousand and two some of the over twenty years now,
are there things that you look back at your own
thinking you're like, oh, this was these ideas weren't fully formed,
or things that you later changed your mind about or
had new perspectives, Like what have you learned rereading your
old hedge fund letters?
Speaker 5 (09:33):
Heavens? Yeah, what did I learn? I mean, the I
tell you what I'm most proud about. It was a
form of deduction which I had write at the beginning,
because right at the beginning, this is before the Zukenbergs
and you know, the Amazons, where you have a platform,
it goes global and like you're the richest person on there,
(09:55):
like Elon, etc. And back then, the highest return intellectual
capital was to be a hedge fund manager, you know,
like two and twenty if not more. And so by
logical deduction, you got to think you're up against the
smartest minds on the planet. And of course when you
meet some of these guys and girls, maybe not, but
(10:15):
you know, but it kind of stands up. Yeah, And
I kind of concluded that it actually didn't make any
sense to twine out smart the smartest people. Yeah, like
you're going to fail, Okay, And so I reverse engineered
and I said, why is it in this like musical
chair game that we call the markets, why is it
that it's not enough to be super super smart, Because
(10:37):
let's face it, everyone out there and listening to this,
everyone's got like a really high threshold level of intelligence.
And so that's why, you know, we come back into
my acid capitalist. Yeah brand, it sounds like cute and stuff,
it actually had a function, you know, and you know
when people would throw up their arms, So who were
to fast forward into horror story of late two thousand
(10:57):
and eight and Liman goes by and crabs and we've
all seen the movie, you know, the Big Short. I
mean I knew all those guys. I was the London
operation of that. But yeah, when the suit guys throwing
their hands up and they're saying, who would have guessed that? Well,
littleal me. You know, I made fifty percent in the
month of the two.
Speaker 3 (11:30):
So one thing we wanted to talk to you about
is obviously China. And I feel like going back and
reading over some of your own your old notes. Uh, directionally,
you got the China call right, but timing has sort
of been an issue here and maybe it goes back
to those policy levers that we were talking about in
the intro. But walk us through the China thesis in
(11:52):
sort of the early mid two thousands and how it
panned out.
Speaker 5 (11:56):
Yeah, I mean, I am the pig on the Chinese
column and China. China has been has been the formative
energy and force for my career and the career of
all speculators, and really over the last forty years, the
rise and rise of China has actually, I think been
responsible for the what is now the preposterous rise and
(12:19):
rise in asset prices. Not trying to explain that, but
you know, back at the beginning, when I was listening
to the she I was seeing the sheet music on
my Bloomberg terminal, I was seeing the chart formations. What
was I seeing? I was seeing the most ugly old
industrial businesses that no one had wanted to own for
twenty years. Everyone was in services and drugstocks, et cetera.
(12:43):
I was seeing the worst businesses and they were coming alive.
I trapped you.
Speaker 2 (12:49):
Through what's example that when you say that one of
the worst businesses and they're coming.
Speaker 5 (12:52):
Up, Oh, they would be like smelters, Yeah, you know,
like I mean, just insanely ugly business is. Yeah, they
had not earned an appropriate return on capital for the
longest time, and they were coming alive. And so I
used a lot of like you know, like people on
Twitter and stuff in Bloomberg they throw around charts and
(13:13):
they look at a three month charm me one is
a three month chart. I want ingredient show me everything.
So I'm looking at forty years and I'm seeing things
which stop falling and then One of the other key
determinerts that I was using was things go right, stocks
and risk positions. They go right relative to their peer
group before they actually go right in absolute terms, and
(13:34):
so you've got to lean in there. So I was
beginning to say this immense relative performance. I mean, let
me give you an example with regard so like another
like really dumb thing, which is gold. I know that
inflames people, but you know gold had had what twenty
five horrid years. It peaked at eight hundred and ten
bucks in nineteen eighty and it was like two hundred
and seventy bucks by the time the British Treasury got
(13:57):
through selling it at the very very bottom in two
thousand in two thousand and two, who are they selling
it to? I was buying it my first I got
fifteen years of this blessed thing we call speculation, because
my first calendar year I made fifty percent. I'm not glory.
What I'm meaning by that is the failure rate in
hedge funds. It's like a restaurant. Most restaurants fail, yeah,
(14:18):
and the return to the survivor is really high. And
I got happen as there was times, so I didn't
think I was gonna make it, but I was absurdly
long gold. And again, if you're like a wanna be
new hedge fund manager, like I got it, tariously, you
ain't gonna make it in your first year if you're
not making money, and you ain't gonna make it if
you're like making six or seven percent and trying to
(14:40):
tell people your sharp ratio is really good. You're gonna
make it if you find like and you concentrate and
you take leverage in a rising asset class and it's volatile,
and you you chase the dragon. And that was gold
back then. And I'd got gold because gold did nothing, okay,
but we'd had the NASDA crash stop markets had collapsed.
(15:01):
Gold had done nothing, And so when you look at
the relative performance of the two, Gold was saying, baby,
I'm coming by, and you know that, and that was good.
Why why was all this happening was happening because back then,
China was the size today of the Turkish economy. Yeah,
today is the size of the European economy. And the
(15:22):
markets and my prices were telling me that this long
journey was beginning to pick up base and their desire,
you know, like they laid down more concrete, They used
more steal, et cetera in like ten years than the
US economy did in the twentieth century. You know, it
was big, and that's what I was seeing, and I
was long in.
Speaker 2 (15:42):
I understand, Like, Okay, you can point to specific commodities
like obviously copper and some of these old industry you
mentioned the smelters coming alive with the industrialization and rise
of the Chinese economy. Zoom at a little bit further,
because what you said is that China has been the
biggest story in asset markets period and that the incredible
rise and valuations and boom and ascid prices, it all,
(16:03):
in your views sort of come back to China.
Speaker 4 (16:06):
How does that work?
Speaker 5 (16:07):
Because it's a cheap charter. Sorry to say it, but
so you know, there's this thing that triff and dilemma. Yeah,
you know, they don't have an independent munchro policy. They've
kind of cut onto the coattails of the mighty US dollar, right,
they have a dirty float, they have a close capital account. Now,
so economics, which is a dire dollars subject, but economics
(16:27):
at its heart is really the investigation and the study
of how something in chaos kind of tries to return
and find equilibrium and clear. Yeah and so, and it
can be the opposite. It is an equilibrium and it's
going to pull apart, you know. And that's like what
people like me were kind of watching that and the rise.
They've done amazing things. Yeah, they've industrialized. Yeah, and the
(16:52):
reward in economics is you get richer for doing so
the benefits. And they've not done that. They've not now
and it's kind of like the frog, like boiling the frog.
And like we've warmed up the Chinese citizens, we brought
them into these conurbations. We've given them amazing factories. The
rise in productivity from taking someone off a field and
(17:14):
putting them in a semiconductive fab is insane. Yeah. And
so they're getting paid like ten x what their grandparents
got paid. They're like, hey, you know, this feels good.
The thing is they should be getting paid more. And
really where it should be represented is in the exchange rate.
The remember, forgive me, I call it the red cabbage.
You almost need a red cabbage. So the back when
(17:36):
we had the NAFTA agreement with Mexico and Canada, they
devalued their currency to six point three, and where's the
currency today versus the dollar? So you needed six point
three red cabbage and today you need like seven point three,
which is to say you need more red cabbage. So
they've got poorer now that that doesn't make sense, right,
And then you were talking about your anxiety. I'm here,
(17:59):
I've got a bill, I've had a chill pill for you. Okay,
because again, right, so we what we're seeing in ev right,
we saw it initially at the turn of this century.
Again back to my like my letters and stuff. Biggest
company in the world for a moment was Nokia. I
mean those kids like listening saying Nokia was Nokia? Right?
Nokia used to make televisions, and then they pivoted into
(18:19):
mobile phones, right. And then Apple of course came ba
at the turn of the century, biggest company on earth,
and you had ericson and these guys control you, your G,
your network, your five G, et cetera. Chinese came in
and said, wow, that's kind of dope. We want that, okay,
and now they own it and that's why you had
all that.
Speaker 2 (18:35):
Yeah, how do you pronounce it's coming?
Speaker 5 (18:39):
It's coming, it's coming, right, Okay? And if you look
at Ericson and Nochia today, those prices fell ninety five
percent and just they've stayed in the graveyard. Okay. Then
the Chinese came in, they said the same thing with solar,
and now they've come in and they've said the same
thing with ev What are they doing. They're saying, we
don't need to make money like we allocate in America
(19:01):
in the free world with the sharp jagged knife of
you got to make it if you want to. We
want to stay in the game. China doesn't. That's one
of the implicit subsidies. Now, so where where do we
see that? Where do we get that? I mean, maybe
that's just cute, okay, But what China does, it's very
good at creating GDP, but not wealth. So look at
(19:23):
the stock market, right the stock market's flat flat for
twenty five years, and the currencies is weakening. And that's
the problem. And so what happens is with our savings model,
all of it, all of it, and again, to maintain
those advantages, they have to push all of their capital
into risk free US treasuries. Okay, And unfortunately, only until
(19:43):
the last two three years the US we were fiscally conservative,
we should have been running huge deficits, but I was like,
oh no, you can't do that. We should have been
running huge deficits, and the Chinese would have funded the
role out of the best like fast trains, the best education,
the best healthcare, the best cities, you know, ships that
don't crash into bridges and bring it all tumbling down.
(20:06):
And instead, whenever we did something, we did a stupid
tax cut. And right at the very end of this process,
you're the Great Inflation Reduction Act, which is, hey, listen,
we're going to pay you money to bring great technology
and make it in the United States. That's working, and
so what's happening today, the fascination and the drama of
(20:26):
today is the fiscal policy is working and the US
has been transformed into the economic locomotive for the rest
of the world. Now, this dollar standard, the mighty dollar.
It was not conceived on the basis that the US
would be the chief. It wasn't conceived that the US
would be at five and a half percent, And the
(20:48):
ramifications of that are coming through the Japanese yet incredibly
has lost forty percent.
Speaker 3 (20:54):
This is exactly what I wanted to ask you about,
which is just to add to Joe's anxiety, but be
panicking about a currency crisis right now?
Speaker 5 (21:03):
Yeah, absolutely so, Like again, heaven is, We've got to
go back to nineteen ninety seven ninety eight, and we
had the Asian Sovereign Tiger crisis. Countries like Thailand they
had too many debts denominated in dollars and they had
to they had to default. I mean, they're currency fell
forty percent. Like the end, I mean, why no one's
talking about the move in the end is terrifying. And
(21:25):
through this period, the really what I wanted, like what
you're to concentrate on is at the end, it was
like an eighteen month period and at the end Taiwan
right now, Taiwan had no dollar borrowings really tightly like Singapore,
really well managed economy, and right at the end Taiwan devalued.
And everyone's like what what are you doing? And it's
(21:48):
the esorpient fable of the scorpion on the frog, like
he gets the frog's like I ain't taken. It's like no, no, no,
you're you're cool, You're cool. And they get halfway over
and the scorpion like zaps and it's like whoa what
year we talking about here, we're talking about nineteen ninety eight, okay,
in Taiwan, right, And so the point is that why
did Taiwan.
Speaker 3 (22:07):
Devalue in its nature?
Speaker 5 (22:09):
That's what they do. They weren't gonna leave a legacy
of their neighbors having devoured by forty percent. So the
big elephant in the room, and you touched upon it
in your intro, is what if the Chinese come around
and go boom and they devour you? Right, that would
be profe I would call that mad max deflation. Now,
(22:30):
one of the incentives for them to do it is
the quantitative easy in the United States. I actually think
it was sabotage for the Chinese because the very polite
request was listen, you gotta revowl. Your currency should be rising.
And why is that a good thing? Because one point
for bailing Chinese people will be richer visa via the
(22:50):
rest of the world, and they'll buy our things. You might,
I mean, the dreamliners may have some problems just now,
but they'll buy more, you know, and we'll work it out.
And the Chinese stubbornly used to do that. And so
if you can't revalue the external price, I think I
actually quantitative easing coming out of the States and elsewhere,
revaluate the acid prices domestically in China. And so now
(23:12):
did they prick the bubble. They've got the biggest dun
bubble of all time, sixty trillion dollar valuation, and what
do you do with that? It's a lot easier if
you devalue in dollars as opposed to the local currencies
that all the people feel like they're still the frogs
and the jacuzzi.
Speaker 3 (23:27):
Joe, I remember this from do you remember Dick Beauvay. Oh, yeah,
the banking analyst. But he used to write about Qi
as a currency war. It's like an underappreciated currency war.
And this would have been in like twenty ten, twenty eleven.
I still remember that.
Speaker 2 (23:42):
So let's take it to today, and I guess there
is still this anxiety out there of a Chinese devaluation.
We have seen them basically purposefully prick their own real
estate bubble, and there's been a lot less speculation that
seems like it's done. They're trying to The bet is
that they can sort of make up for that with
(24:04):
a lot of exports in advanced technologies, vehicles being the
one we talk a lot about these days, but that
basically it can be an industrial exporting powerhouse. And of
course you know people always talk have talked about Chinese exports,
but I think you know, the real growth driver was
domestic investment.
Speaker 4 (24:21):
Now it feels like selling to the rest of the world.
What happens here? Can it work?
Speaker 2 (24:25):
Can they make this pivot from a sort of inward investment,
real estate focused economy to one where exports really lift
everyone up.
Speaker 5 (24:34):
No? No, And it's back to your anxiety. Right. The
biggest industry in Europe is automobiles. Yeah, yeah, And I
mean listen to ELI. It's like the Chinese where they are,
they wipe you out. You're gone, okay, right, So like
you think Europ's going to sit there and go, hey,
we're open, we're friendly. Common wipe is out right. That
avenue is over the proportion of exports to the Chinese economy,
(24:57):
the proportion of exports to the global g We're at
levels where it's intolerable for the rest of the world
to accept it. The bigger issue is, so here we are.
I mean, I've been invested for like thirty five years
and I'm saying to you, China going from the size
of Turkey to Europe, and the avalanche of money and
liquidity is why every asset price in America is high.
(25:20):
And I think we're now at the I call it
the o bay Yashi Maroo moment. If you remember from
Star Trek, when it's a no when it's a no
win scenario, there's no win because we got five and
a half percent rates in the US, We've got a
currency which is rising, and the rest of the world
is like, I'm out of here, I'm checking out. And
(25:40):
so the flow that is coming more and more into
the US. Now the FED sitting there and it's listening
to It's like the Bank of England in nineteen twenty
seven when they were like over vowed on the gold
standing like we're at four and I'm like, we're going
to be overthrown by the Communist unless we can bring
interest rates down. And so we went to the Fed
and he said, the only way we can bring down
is if you cut. Remember Benjamin Strong the cooped whiskey
(26:03):
and he takes a cut. And what happened. The US
stock market like went to the moon. It bred instability.
So the big drama this year is the Koreans, the Japanese,
and I think the Chinese are saying, you got to
you actually got to subjugate the domestic strength of the
US economy and you got to bail us out. Now
if the FED, that's a no win. If the FED
(26:25):
does that, like buy ten thousand call strikes on the SMB,
it's not gonna be there in two months. But that's
where it's going ahead really rapidly, because that's what happened
by I get back again to nineteen nineteen ninety eight. Yeah,
remember LTCM, So we had sovereign crisis. The US economy
in the third quarter of twenty nineteen ninety eight grew
(26:46):
at five point six percent, and what did the FED do?
They cut rays and people are like, you guys are clowns. Okay,
I'm buying stocks, and stocks again went to the moon.
We're at a point where if the FED, so I
think the FED actually Fed only ever cuts when something breaks,
and the rest of us saying, we're kind of at
that point. Okay, So if the if something breaks, the
(27:10):
Fed's cutting is going to subjugate the strength of the
United States economy like the interests of it and asset
prices will become intoxicatingly like at levels. We've got to remember,
trees grow tall, but they don't grow to the sky,
and we're getting close to the sky.
Speaker 3 (27:27):
Why doesn't China try to boost domestic consumption if the
rest of the world is like closed off to it,
Why is it still so focused it seems on manufacturing,
even though it's moving from you know, manufacturing TVs or
whatever to semiconductors.
Speaker 5 (27:41):
Yeah, I mean, you know, I wish to remain polite,
but it's it's not a democracy, you know, the civil
liberties are I mean, you know, I don't think as
a contentious thing. You don't really have much in the
way of civil liberties. Again the quid pro cause, look
at your life. You're so much richer than your grandparents,
and we just asked for a bit of talmerance. Like
(28:04):
so you were saying again your anxiety about the Chinese
and they're going to overtake us. They took the wrong bet. Yeah,
because I was talking to someone like but what about
the Chinese? Thousands upon thousands of PhDs, I'm like, yeah, Like,
I'm sorry again, forgive me, but if you just completed
a PhD, my god, you just chose the wrong moment
in history. Why because we got AI, we got the
(28:28):
AI and the PhD thing, by laws is the left
hemisphere of your brain. If you're listening to this now
the future, and if you want to be rewarded again,
you've got to be kind of like an acid capitalist
is right hand side of the brain. All that PhD
thing has been made redundant.
Speaker 4 (28:43):
But they had hurt.
Speaker 2 (28:44):
The AI companies all have to hire PhDs, so some
of them get jobs.
Speaker 5 (28:47):
Now now they just they invest in more. AI has
become circular like PhDs.
Speaker 2 (28:52):
I talked to a founder this week, basically Tracy by
the way, who says that all code will be written
by a let's talk more about this idea. Okay, the
(29:17):
FED is not going to cut until something breaks. You
think the thing that will break will not be like
a domestic thing, but will be like on the international front,
walgust through like where we're at risk.
Speaker 3 (29:28):
Because a year ago the thing that was.
Speaker 5 (29:32):
I mean, it ain't gone away. Yeah, extend and pretend
and all that thing. So I mean, you know, not
wishing to name and chane, but an organization like Bank
of America you know, has and like like a peer
group has an enormous treasury portfolio, which it doesn't mark
to market, and that is an inducement by the US
(29:52):
Treasury to ensure that people are there to buy the treasuries. Okay,
and so they've got they've got unmarked losses right which
are this are the same magnitude as their equity. Okay, now,
and where we are just now is that we started
this year and we were going to get four, five,
six interest rate cuts. And when you get that, the
(30:13):
bonds normally kind of come off their ass and kind
of rise and value and like their viability gets better. Okay,
that ain't happened. If anything, you're the domestic consying, we
need higher interest rates. Where's where's the tenure today? Like
it was four and a half, we were heading close
to to five before the weaker GDP statistics comes out,
So that's still there. There's fragility there four point four two.
(30:36):
And look when we get backhuntings. I mean, if we've
got any banking analysts listened to this, can you do
your job like rather than it's blowing smoke up the CEO,
can you say, hey, listen, can you tell me what
is the size of your unmarked treasury portfolio. What is
the loss of it? What are you doing if you
shifted the duration? Can you just talk to the street
about it? No one asks, no one Like bad news
(30:59):
comes out you really really, it comes out really really slow,
and then it stings you. Let's let's ask the questions.
So that's there, that's out there.
Speaker 3 (31:06):
But okay, just on the bank, So what when when
we say that, Okay, if you marked the bonds to market,
it would just blow a massive hole in banks equity.
That is terrifying on the one hand, But on the
other hand, part of me is like I find it
hard to believe that the banking system is going to
be ruined by investing into many US treasuries.
Speaker 5 (31:31):
Okay, I mean what is that? Just is a blind faith?
I mean the numbers are like really big.
Speaker 3 (31:36):
I guess it's blind relativism. It's like US treasuries are
the safest asset out there then until they're not.
Speaker 5 (31:45):
This is true, So I tell you, So what we're
doing is we're flying high without a safety net. Okay,
so we've we've been there. We had the again, I
can't believe this is happening. The entire global bank king
universe went bankrupt. In two thousand and eight, they were
gone gone, right, but the US Treasury was it like
(32:09):
sixty percent debt to GDP and these they stood in
and like, you know what, we got it all right,
We're gonna we've got these fun tokens. We're gonna issue
lots of these fun tokens, and you're gonna come back. Okay,
what happens? And that was your safety net. Where's the
safety net now? Like if they tried that that maneuver again,
people like me, people like get out of here. We're
(32:30):
we're getting out of like we're not owning these silly
securities because you're tapped out. Like so the US Treasury
now is not the safety net. If there is folly
and if there was an incident in the financial sector,
it's top tout. It doesn't have the resource. So we're
on our on That's scary. And so again that's why
(32:51):
the next move for people is to consider, well, what
if they what if they cut and they have to
I actually think it could get so bad that we
will go back to the notion of zero interest rates.
And I think that treasuries, I mean, I've been so
hideously bad. I've been owning leaps on the TLT. The
long duration now leaps options. Like if I got a
(33:13):
million dollar portfolio, I've been spending like fifty thousand dollars
and then topping it up as I lose money on them,
and just keeping a lot of time on it. So
I've probably spent a tenth of my portfolio. You know,
I'm underwater, but I own that because I think we're
at the end of the most incredible bill market and treasuries,
which again absolutely coincided with China and who came in
(33:37):
to preserve their currency and believe it undervoured. They had
to put money into risk grey US treasuries and they
bid it higher. Okay, but the booll market and treasuries,
it was a double bottom in price terms between nineteen
eighty two and nineteen eighty four. If we put it
into yield perspectives, the ten year peaked at sixteen percent.
But in nineteen eighty four, as the economy came back,
(33:58):
I found vigor. You went you you know the notion
recency biases bisis. So the recency biases was strong economy,
inflation and people sold the bones again. So in nineteen
eighty four years peaked at fourteen and then that was it,
you know, and of course they went to where they
went to, like forty basis points during the COVID. I
think the end of this boom market is in the
(34:20):
next eighteen months, and I think the treasuries, I don't
think they'll yield forty basis points, but I think they
could get down to like one point two one point
five years and that and then that's like and then
sell them and get out, because we'll have to redraw
and we'll have to examine and try and create a
new monetary order.
Speaker 4 (34:39):
Exciting.
Speaker 2 (34:39):
I'm sure we'll have plenty of good episodes about that
redrawing of the monetary order.
Speaker 4 (34:43):
Back to China. Didn't all those.
Speaker 2 (34:45):
Ghost cities that you toured and showed on YouTube end
up getting filled? Because I feel like now there's one
hundred what they call Tier two and Tier three cities
that none of us know the names of that have
like ten million people and with glstening subway systems and
whatever else, like in your view, what happened to those
what happened to those cities?
Speaker 5 (35:03):
Thank you for that? Because I was dead wrong okay, wrong, wrong, right?
But can I tell you why? So? I like you
get value investors, growth investors. I'm a time investor, would
you believe? Okay? And I it was only really very
recently I came to understand the Chinese like what do
(35:24):
you call it? Like your horoscope and like the pursuit
and the investigation of heavenly bodies around the sun, right,
you like like Pisces and all that kind of stuff
we use. We use the rotation of the ass rotation
around the sun. Ya. Yeah, and I believe that takes
a year.
Speaker 4 (35:41):
Twelve years. There you go, that's a very I hadn't heard.
That's a very good like men.
Speaker 3 (35:45):
You have heard that before because we talked about this
exactly the last.
Speaker 4 (35:50):
Yeah, but no, that's a good one.
Speaker 5 (35:51):
It is. And then like so when I was peak
peak bearish, I was twelve years out literally it was
twenty eleven. I launched a credit for I'd have made
a billion box, a billion box if I had been
twelve years in the future. You know, So I was wrong,
But I want to tell you my time piece was
(36:13):
twelve years out. Okay, and the time is now.
Speaker 3 (36:16):
When was the last time you were in China?
Speaker 5 (36:18):
I ain't rushing to go back to China.
Speaker 3 (36:20):
Yeah, well, I was kind of curious if you've been
back recently seen some of the changes, or.
Speaker 5 (36:24):
I've been invited by some funky people to go to
Mongolia and August. I would go August, but I think
I'd rather be an Ibitha. But you know, yeah, so
my last I tell you in terms of again formative
and with the investment letters mark not the last time.
But March two thousand and eight, I took a slow
(36:44):
train from Wuhang to Beijing. It was quite grim.
Speaker 3 (36:50):
Not the high speed trend, No, it was.
Speaker 5 (36:51):
Really quite I liked struggling slow. It was really grim.
I should have been buying the S and P. The
S and P had fallen sixty five percent in March
two thousand and nine, and instead I was and you know,
and Wuhan, where was I am Muhan. I was in
the wet market where the whole COVID thing. I should
have been buying the SVP.
Speaker 2 (37:12):
Just in general, I mean, I am struck by this
fact that like we hear all these different people and
it's like diversification and international stocks and all this stuff
and exotic things.
Speaker 4 (37:24):
In the end, we should have just all been buying
the S and P had like gone and lived our lives.
Speaker 5 (37:28):
Right, absolutely, and like they're still peddling emerging Marcus, Like,
how many? How many years does it work?
Speaker 4 (37:35):
I am curious because there's been a ton of growth
over since. And this is always the thing. It's like,
there's a lot of growth everywhere.
Speaker 2 (37:41):
What has been the fatal flaw of the international diversification
slash em thesis that has been very popular and people
are always repackaging and reselling.
Speaker 5 (37:50):
Again, I think it's my accent. You know you're not
hearing me. They are not They are magnificent. These countries
are magnificent at creating GDP growth, hm, right, incredible, right,
But it's GDP growth at the expense of wealth, right,
So let me get So, Let's say we've got a bridge.
It's going to cost us a billion dollars. We're going
to link to communities. And let's say it's in America
(38:12):
and there's like and it's in the Bay Area, and
the average per capital income of the two cities is
one hundred and fifty thousand dollars, right, and so and
you're going to cut like fifteen twenty minutes in the
daily commute of all those people, people with that level
of wealth cutting time is good, it's productive, it's going
to add utility to their lives. Okay, And it's got
a it's an NPV positive, it has net present value. Okay.
(38:36):
So the value of the billion that you spend maybe
it's maybe it's two billion. Okay. Now, if you join
up two Chinese communities and the average per capital consumption
is eight thousand dollars, if you're on eight thousand dollars,
you ain't in a hurry. You ain't in a hurry, right,
But you spend a billion, and what happens is you've
not created wealth. So the if you were, if you
(38:57):
actually had, if you were a corporation, you'd have to
market because let's say you're taking a you're taking a token,
it's a toll bridge, okay, And you do the DCF,
you're going to quickly work out that your MPV is
like half a billion, so you're in a half a
billion deficit. That the half a billion deficit doesn't get
measured in GDP. You measure the billion. And so this
(39:17):
is why the strategy doesn't work because sure you get GDP,
but where's the stock market? Right? And where's the stock
market in America? Because what do we do. We actually
go hey re'ch on on capital pause the MPV. We're
in it to win it, right, and so we get
less GDP, but we get the best stocks and the
best stock market. That's the fundamental flaw.
Speaker 3 (39:40):
So one of the reasons we enjoy talking to you
is because we get to live vicariously and pretend that
we're talking Macro on a beach in Saint Bart's instead
of talking Macro in an office in midtown. And you've
been in St. Bart's for many, many years now, and
I'm curious what changes have you seen over the years.
And one of the reasons I ask is because I
went to this, say Shells, which is on the other
(40:02):
side of the world, but I guess it is a beach.
And I went to the Seychelles last year. I was
kind of surprised by like the number of Russians that
I saw there, Just so much Russian money and coming
from the US economy at a time when you know,
it was all about sanctions, all about European energy crisis,
things like that. It was kind of surprising to me
to see that level of wealth externally.
Speaker 5 (40:23):
Well, I mean, you know that Paul McCartney wings is
banned on the run. I mean it's the Russians on
the run. Yeah, I mean they're fleeing go to Dubai.
And it's the same thing. You know. I tell from
the beginning when I was writing those letters, like you
want to solve Russia because that's the time of the
emerages of the Oligarks, I was like, you want to
solve Russia, you want to bring freedom. I mean, it's
not for us to solve Russias, for them to solve it, right,
(40:45):
but if we want to stop them and pinging and
being annoying, being noisy neighbors, the number one thing you
do is you say, all the rich oligarchs, no visus.
You can't come to same Bars. You can't go to Seychelles,
you can't go skiing in the Swiss Alps. Were in America, enjoy,
enjoy the motherland. Okay, talk to the boss. I mean
you sort it out. You know what, We'll look at
(41:05):
your visit again. And that's so they do. They can't
come to they can't come I'm gonna say they can't
come to same Boss. But actually I'm thinking my my
Christmas client actually is Russian. So some of them can
get in, but Abramovich he came in and he laid
down eighty million dollars in two in February two thousand
and eight, and didn't put the same boss on the map.
But you know that was like a huge investment, and
(41:29):
property prices are absord you know, really absurd. I just
got divorced and I had to do evaluation on the
on the Portfolium. I mean, it's just it's insane. Same
bars is kind of like Bobby Digital. I just forgive me.
I call bitcoin Bobby Digital. It's goots, not a Bobby
brother or something.
Speaker 2 (41:45):
What is you know, One of the things and we've
talked about it a little bit on the show, is
like the extreme concentration of ultra wealth in places like Dubai, Miami,
et cetera.
Speaker 4 (41:56):
Like what is driving is it?
Speaker 2 (41:59):
I mean I sort of get it from the Russian perspective,
wanting to get money out of the country being on
the run. As you put in, what do you think,
like what is the source of anxiety among the ultra
wealthy that they're you know that they congregate in cities
like Dubai or elsewhere to sort of get away from
messi countries, Whether it's Messi democratic countries or Messi autocratic countries.
Speaker 5 (42:18):
Yeah, I mean that the Miami thing is is the
same things. It's South America, you know, it's it's taking
all of your all of your wealth and and really
they're kind of robber barrons. It's the confiscation of other
of the good folks money and getting it out of
places like Venezuela and it resides might that's Miami. I'm
an La person because I was gonna say La is
(42:39):
a real place, which is kind of as you know,
but I mean it's real in the sense that you've
not got capital on the run, You've not got robber
barrons like they're the Dubai and the Seychelles. It only
exists because the US Treasury and the administration are looking
the other way. I don't know why they look the
other way. I really they don't because it's against the rue.
(43:01):
It's like, look, you know, there's there's a war. We're like,
we're kind of funding the Ukrainians against it, and we
should be really tight and should be no slippish, and
yet we let them, you know, we let them slip
into Turkey, into into Dubai and into the status I
would like again, you're staying, you're staying in Russia, call
me when you're you're more polite to your neighbors.
Speaker 2 (43:20):
Hugh Hendry always great to catch up. Live vicariously a
life that's much more colorful, perhaps than ours here in
the Midtown office.
Speaker 4 (43:28):
But thank you so much for coming back on oline.
Speaker 5 (43:30):
Have been absolute pleasure. Let's do.
Speaker 4 (43:46):
That was a lot of fun tracing.
Speaker 3 (43:47):
It's always fun talking to Hugh. One thing I was thinking,
I kind of do you think Bloomberg would let us
expense the twenty five thousand dollars that it costs for
like a VIP package to the Acid Capitalist summer camp Part.
Speaker 4 (44:00):
Yeah, for sure, for sure, I think so there's no culie.
I think it's worth Yeah, let's go.
Speaker 2 (44:04):
I don't necessarily feel chilled or relaxed. I mean the
idea that like something is going to happen at the
treasury market, yields are going to go back down to
one two percent doesn't make me relax.
Speaker 5 (44:13):
No.
Speaker 3 (44:13):
Also, the time to panic about the currency war line
isn't exactly reassuring. The other thing I was thinking, I
think the thing that will stand out to me is
the idea about a lot of emerging markets being good
at generating GDP growth but not wealth. I feel like
that encapsulates, certainly a lot of the story around China
right now, and the question over why not boost domestic
(44:35):
consumption versus manufacturing and sort of repeating the same thing
you've been doing for decades now?
Speaker 4 (44:41):
No, I mean I think that is it just true?
Speaker 2 (44:43):
Right, Like there's been incredible growth of some of these companies.
I mean even if you look like I was looking
at the chart of like BYD the other day, which
is like everyone knows now, is like this like global behemoth,
you know, arguably by some measures, bigger than Tesla. Like
that Stuck is the same that was where it was
in twenty twenty. But if you actually if you go
(45:04):
back to even like twenty ten, or if you go
back to like two thousand and nine, it's only up
like threefold since it's peak.
Speaker 4 (45:11):
In two thousand nine.
Speaker 2 (45:11):
I mean, this is a company that was literally nothing
and now at the forefront of like probably one of
the biggest industries in the world.
Speaker 4 (45:17):
Like it's not amazing. You don't get paid very much
to own.
Speaker 3 (45:19):
The less than Domino's Pizza, I suppose, yeah, exactly, But
this is the other thing I was thinking about. So
there are pros and cons to the command economy model, right,
and the idea that you can pull all these policy
levers because on the one hand, like yes, China can
direct huge amounts of capital to whatever project it deems
strategically important at any one period of time. But on
(45:42):
the other hand, you get misallocation of capital, and then
you get the uncertainty that's sort of hanging over investors
where they can't predict what China is going to care
about next. So going back to you know, the real
estate crash, the three Red Lines program, and then the
crackdown on consumer internet companies, like those are real expressions
(46:03):
of the uncertainty of that particular aspect of the economy.
Shall we leave it there?
Speaker 4 (46:07):
Let's leave it there, all right.
Speaker 3 (46:08):
This has been another episode of the Authoughts podcast. I'm
Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (46:14):
I'm Joe Wisenthal. Follow me at The Stalwart. Follow Hugh Henry.
He's on Twitter at Henry Hugh. Follow him on Instagram.
Be very jealous of his life, check out his substack
in his book and all that again, make you very
jealous follow our producers Carmen Rodriguez at Kerman Ermann, Dashel
Bennett at dashbot and kel Brooks at kel Brooks. Thank
you to our producer Moses Onam. For more Oddlots content,
(46:36):
go to Bloomberg dot com slash odd Lots for your
transcript of blog in the newsletter and chat about all
of these topics twenty four to seven in the discord
Discord dot gg slash outline.
Speaker 3 (46:46):
And if you enjoy all thoughts, if you want us
to go to the Acid Capitalist Camp in St. Barts,
then please leave us a positive review on your favorite
podcast platform. And remember, if you are a Bloomberg subscriber,
you can listen to all of our episodes absolutely add free.
All you need to do is connect your Bloomberg account
with Apple Podcasts. Thanks for listening.
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