The Breakdown - Joe Rogan for Fed Chair! Feat. Hugh Hendry

Episode Date: August 12, 2020

Today on the Brief: A public company has switched $250 million in cash reserves to bitcoin The latest in the vaccine rumor trade with Vladimir Putin’s propaganda play  Hong Kongers use the stock market to protest Our main conversation is with former hedge fund manager Hugh Hendry.  After a few years of focusing on a “volatility at the end of the world trade” in property development in St. Barth’s, the constant contrarian Hugh Hendry has returned to the macro world in a big way.  In this conversation, Hugh and NLW discuss: Why Hugh left macro, and why he came back How he lost three years being angry at the Fed How he came to be bullish on equities in 2012  How money managers become trapped by narratives  Why the Fed should actually be less, not more, conservative  Why we need someone like Joe Rogan as Fed chair    Find out guest online: Website: hughhendryofficial.com Twitter: @hendry_hugh  

I massively increased the spigot. I just pump dollars into my economy. And therefore, isn't the consequence of that would be that the price of a marginal dollar unit would fall? But the weird thing is that since you've been doing this, each marginal dollar that you produce is becoming more valuable. So your heart's not in it. I kind of reason that perhaps the Central Mike just were asking it to be really, really irresponsible. And these guys were not made to be irresponsible.

Put me in charge of like Joe Rogan, you know, a caricature. It's a game of psychology. If you can get in people's minds and make them think differently, you change history. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Crypto.com, BitStamp, and Nexo.io, and produced and distributed by coin desk. What's going on, guys? It is Tuesday, August 11th, and today we have an interview that I am so excited to share with you. Yesterday, I got to chat with hedge fund manager turned St. Bart's Villa Manager Hugh Hendry about just a huge variety of topics in business, finance, philosophy, and beyond.

There are some pretty surprising parts of that conversation, so I'm really excited for you guys to hear it. First, however, let's do the brief. First up on the brief, Micro Strategies' 250 million Bitcoin buy. So what happened? Micro Strategy is a NASDAQ listed business intelligence platform that was founded in 1989 and is worth more than $1.2 billion currently. In July, the company told shareholders that they would be buying back $250 million in stock and investing the same amount in gold and Bitcoin over the next 12 months. The goal was for these alternative investments, as they called them, to protect a dollar-heavy balance sheet against inflation.

The executive team behind macro strategy pointed out that there were so many factors pointing towards the possibility of inflation that they wanted to have a specific hedge. This is what they said about Bitcoin. We find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural, resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. So why does this matter? On the one hand, this is just one company. On the other, it does kind of set an at-scale template for people or companies who wish to switch their savings behavior, quote-unquote,

from cash to Bitcoin. And that's a powerful potential idea. In a world where the the job of fiat currency is not to preserve value, but in fact to be a tool of monetary policy, which is a discussion that you'll see I have with Hugh later on, maybe part of the point of something like Bitcoin is to replace that capacity of cash to store value in a safe but very liquid way. Next up on the brief today, a Russian vaccine is coming to market. President Putin has said that Russia has registered the world's first, COVID-19 vaccine, and in doing so, they used language hearkening back to the space race and the

glorious launch of Sputnik in 1957. The problem, and of course there are problems, is that this vaccine has had accelerated clinical evaluations and shortened test trial times. A local association of multinational pharma companies have called it dangerous and said, this is a political decision by Putin so he can claim that Russia was the first in the race to develop a COVID-19 vaccine. I can't understand. why Russia needs to build this Potemkin village. Why does this matter? Well, the vaccine trade is one of the most important in the world right now, right alongside the Fed trade and the what the hell happens with the U.S. and China trade. But just as it probably seems to you listening to this right now, that this

is a rushed and political decision first and foremost, so it seems to the market as well. The market is not exploding on excitement about this vaccine trial. They're basically kind of dismissing this as Putin doing Putin things and trying to kind of have a propaganda win. Ian Bremmer of the Eurasia group had this savage line. He tweeted, Russia's latest Sputnik moment, declaring victory by clearing an inadequately tested vaccine for public use, helps explain why the Soviet Union collapsed. Ouch.

Last up on the brief today, the Hong Kong protests are taking a new financial form. Yesterday we discussed the arrest of Apple Daily publisher Jimmy Lai, who, in addition to being one of the most outspoken pro-democracy advocates in Hong Kong, is also one of the area's biggest media tycoons. In the wake of the arrests, which targeted not only lie, but his two sons and other executives from his media company Next Digital, the stock of Next Digital has surged as retail investors have piled in. The Next Digital stock has seen an 1100% surge in two days,

hitting a seven-year high. This has been organized by online forums, and overall, the market value of Next Digital has increased more than $335 million. Importantly, this is almost all retail, and there's really no other cause other than this coordinated effort happening, as I said, on online forums. In addition to piling into the stock, people have been increasing their buying behavior around Apple Daily Papers, which have increased printing to 550,000 copies today from 70,000 to weeks ago. Now, of course, this could all just be symbolic. I mean, ultimately, what does it accomplish to drive up the price of the stock other than perhaps to give lie more resources to fight? But it wasn't exactly hurting on that front anyways. Instead, it seems like it's about the point of the symbolism, which has to do with the core value proposition of Hong Kong,

which is as its role as a neutral financial center. In many ways, the biggest thing these protests threaten is that idea. But of course, the whole point, is that what's really threatening that status is China's encroachment in general. These protesters are just a natural reaction to it. In that way, I think that this protest, which involves the stock market and which suggests that all of a sudden, the stock market itself in Hong Kong is, in fact, subject to political forces could be something that is very worrisome for many there.

With that, let's shift our focus to our main conversation with Hugh Hendry. Hugh Hendry ran a hedge fund called Ecclactica asset management from the early 2000s to 2017 and became known for first achieving a almost 32% positive return in 2008 as everything else was crashing, and second, of course, for his outspokenness. If you go check out his Wikipedia, there are two quotes on the top. One was this, he said, to my mind, the three most important principles when it comes to investing are Albert Camus principles of ethics. God is dead, life is absurd, and there are no rules. Another quote was that when asked what defined a great fund manager, he said,

quote, an ability to establish a contentious premise outside the existing belief system and have it go on and be adopted by the rest of the financial community. Those of you who have heard me talk about narratives as a battle of self-fulfilling prophecy might recognize something in that idea. After closing down his fund in 2017, Henry shift his focus to building out properties in St. Bart, which he has called his, quote, volatility at the end of the world trade. A few months ago, though, he reemerged on the macro scene in a big way. Now, I don't have too many chances to get philosophical around finance, so when I do, I take it. And I think what you'll see

through this interview is that Hugh does not think like a lot of the people out there. We talk about everything from why he closed his fund down to what he sees as the problems, the conventional wisdom now to a very different take on where income inequality is really coming from right now. So I'm interested to see what you all think of this interview. I'm sure it will give you much to both shake your head in agreement with, as well as to scream at the speakers in disagreement. So that's kind of what I'm excited for, and I hope you enjoy it. As with all our long podcast, this is edited only very briefly, but let's waste no more time and dive right in. All right. We are back with Hugh Hendry. Hugh, thanks so much for joining the show today. I'm really excited to chat with you.

Well, nice to be on. I'm sitting in the therapist chair and I'm ready to be diagnosed. Oh my God. Well, I don't know if we'll diagnose, but we'll certainly try to pull some things out of you, right? So I think where I wanted to start, there's so much to dig into, but as I was mentioned to you before, one of the things that's been really fascinating about your kind of whirlwind reemergence onto the scene of the macro brain set, or I don't know, whatever you want to call the place where we all discuss these things in public, is that I find that, you know, a lot of folks who are in this industry are there, their job, the way that they get paid is they're managing someone else's money. So they try to have their thesis fully formed before they get public, right? And by the time they get to you, they're

talking their book, whatever their book is, whether it's their investment or it's their, just their kind of their particular perspective. Whereas what I've noticed is you kind of really trying to absorb a huge amount of information, spit it back out and make sense of something. And I think it's coming off to a lot of folks is incredibly authentic because so many of us are also trying to absorb a lot of information and make sense of a world that feels like it's changing really quickly. But I think that, you know, for our listeners or our viewers, let's give the kind of the brief version of your history and how you got here from, you know, a hedge fund manager into sort of this very vocal figure that had a kind of public shift in your perspective to

a very different volatility at the end of the world trade, as you put it, to kind of back to where you are now. Okay, the, well, let's see if I can do this short, so we can get to the kind of juicy things, but I guess I came from

like in the American context that kind of housing project, you're really, really tough. And my family didn't belong because we were perceived to be kind of on the make in terms of wanting, wanting to get out, wanting to get very, very far away from that place. And I think,

I want to say I suffered some form of non-physical trauma during that period, which kind of really kind of shaped and formed the kind of anthropologistic person I became that I have always been somewhat detached. I've never really retained. I've had many deep, wonderful friends, but there have been episodes and chapters of the life and we've continued to evolve. I found that there was a, it would seem like there was an incredible fortuitous set of circumstances, which kind of was able to pluck me from that very difficult and challenging background, albeit one could say that the harder you work, the kind of more fortuitous you become. But, you know, definitely it felt like the, the, I don't really believe in God, God is dead to quote all work, almost, but it felt like definitely there was someone to extremes.

And so, yeah, I find myself with a prestigious, very proper company working in Edinburgh, very sort of academic and rigorous. Then I found myself in London with one of the original European long short hedge funds. And at all times, I was a troublemaker. I hear these dumb voices in my head. You know, it's like feeling the vibration on the rail track. And you know, there's a huge locomotive coming. And in the early part of my career,

I didn't really have the legitimacy for people to stand aside. And so the train would approach closer and closer, and I become more and more agitated. And kind of that's where the troublemaker part came, because I'd be shouting. I'd be trying to, you know, protect people. I had a very fortuitous meeting with, an astonishing mind in London, a chap called Chris Finotti.

And then he taught me some, like, he taught me to misbehave. And it's that kind of misbehavior which forms curiosity, which allows you to kind of try decode whatever is out there on the markets. And then from there, it's almost like, the pattern recognition became almost like the way a musician would look at a sheet of music, like a musical score. And so again, I worked on that. But anyway, I got my own hedge fund. And here I am, the boy from the housing project.

Now has a glorious lifestyle in the billionaire island, called St. Bartz, in the French Caribbean. And so you packed up that hedge fund a few years ago and started to focus on this really unique place. I actually want to come back to St. Bartz and talk about it a little bit because I think it's the way that you look at it is fascinating. But what was the genesis of, I guess, one, removing yourself from this world for a minute

that you had occupied for a while at that point? And then two, how did you find your way back? Well, I'm passionate. I mean, I'm passionate about anything, trees or whatever, but I vibrate. I drag my wife crazy, but I vibrate. I kind of need. builds to camp me down. It's like just get

a hundred-tipped and vibrate. But the business after 2000, at the end of 2012 I wrote a famous letter to my clients. And I was kind of borrowing a kind of iconic reference

from what was my favorite show entourage. Entourage, you know, kind of like the supposedly the kind of life of Marky, Marky B or whatever. But in Hollywood, but there's a great line from a kind of a director who had enjoyed great, great success, but many, many years ago.

And the lack of recent success, of course, always eats away at your legitimacy. And so there's a great line. He was famous for kind of saying to anyone that would listen, what if I was to tell you this movie will cost us $40 million to make, or when three Oscars were going to cross $600 million? Is that something you would be interested in? Of course. And so I, my conjecture was, what if I was to tell you I was turning bullish on equities, is that something that you would be interested in?

And I knew what the response would be. The response was a very emphatic no. And some newspapers and magazines of the time carried articles about the last bear turning bullish. And the thing about that is today, today people still argue and dispute. whether I was right. I'm turning rules at the end of 2012 on the S&P, and people still dispute whether I was right. And so that conflict,

and that having found myself boxed in in terms of this paramour bear, and then even rejecting and not being allowed to reject it, slowly but surely made my life joyless. And I found myself losing, clients and then the clients finally kind of just, I had not enough money to sustain the business, which was the end of 17. We had this enormous hurricane, the force of the hurricane Irma in the Caribbean. It passed direct. I mean, this, when I'm, I'm talking to you under like a 25

kilometer, it's a speck of dust in the ocean. And yet this hurricane, which was the size of France, France is a big country. 65, 17 million people. The eye of the dam. The eye of the dam thing passed right over, that this island was probably devastating. And in the same week, I lost a large client and the business came to an end. And so I spent, really, if you will, I entered confinement. When everyone was forced into confinement in March of this year with this blasted virus, I reemerged from my self-imposed confinement. So this is actually super interesting and actually a little bit different of where I thought I was going to go right away, but, you know, I've heard you talk before in similar ways about even having

having kind of the financial press take something that you had said about Bitcoin, right, and then turn it into a narrative position, right? That was that you were anchored to, that you were tethered to. How much do you think we maybe don't appreciate the way that the rise of social media and kind of the rapid transmission mechanism has forced people who are in finance into these slots, right? Like you're forced to be in one tribe or another represented by easy kind of Twitter soundbite-esque positions that don't allow people to have kind of the full,

a full reflection and changing opinions because that would kind of lose them audience that they had gained. Yeah, with respect to financial managers, they're people managing other people's money. And those other people being, if you will, institutional clients. There is so much kind of risk checking. So everyone needs a defined nature of who you are, what you represent.

And people, I want to say, they really enjoyed interviewing me, except at the end because they had no notes. They were, I could, I'm a talker, you know. And the great problem was the kids who have to write these things up to and get them approved by the investment policy board. They were like, I don't know. So, and I like, I used to joke that I used to dare people, you know, give you money to the guy who hears voices in his head, the paranoid schizophrenia.

Not a, not a viable marketing campaign, I would add. But, no, the need, the simplicity of a definition is something which can and probably does on all professions. and I very much kind of rejected I stood step fast against it but you get chiseled chisel chisel chisel down you make it you know but if you're not prepared

to define who you are then you are actually passing risk on to the person who has to make a decision and a judgment so it's kind of past the hot potato I was like hey listen you know my argument was always if you wanted to reduce car deaths

put a huge dagger from the steering wheel you'd be driving and you'd be looking this in normal. And if you made a mistake, you would be impaled. Okay, I promise you that would overnight you would reduce probably by 80, 90% fatalities from road accidents because people would drive down, down careful. And so people kind of,

I was the reverse of that. I was like, you take the, yeah, I was like putting, I was putting that, I wasn't the reverse, that's what I was in that, I was pruning the dagger very firmly in the steaming wheel and saying, I dare you invest, you know. Like, I dare you to do the homework. I dare you to take risk, you know. I like daring people, but people don't like being dared, especially when it's not when it's other people's money.

Yeah. Okay, so let's, I mean, let's take it up to this year, you know, so there's a personal cadence for you coming back in. But there's also, you know, it sounded like you were starting to try to figure things out that were just not making sense to you or at least the kind of conventional wisdom that was flying around was insufficient. I mean, is that the case? You know, you've started to produce a lot of content, both this sort of conversational content, but also written content. But, you know, as you started to hear voices again, right, in the context of this market, what? What were they talking about? What was the impetus specifically that you wanted to kind of have a stake in the conversation again?

Well, so I had an awakening. I think last Christmas, we always got a huge influx and very, very successful people onto the island of St. Boris. And I was beginning to think, I was hearing myself in introductions of what my story was. and there's just more and more young folk in finance. And, you know, most of them kind of heard of me and I was just thinking I was becoming irrelevant and my great ego would not allow that. And so the hardest thing was to challenge the inertia

which had grown up around me in the last two years and how I could kind of come back. I had absolutely no desire to manage other people's money. And so I kind of hit upon the idea of doing it. of my kind of cranky, eclectic letters over the course of the last 15, 20 years. But then I thought to me said that the better thing to do would be like this kind of podcast series with a very good transcript, which kind of would end up being the book in slow motion. And so I began analyzing my thought process back in 2002, 18 years ago.

And the thing is, like, who cares? Can you remember what the top song was in the char? It's like no one knows, no one cares. But the idea, the idea really was that I'm dealing with uncertainty and I'm dealing with uncertainty kind of in an eccentric, cavalier, interesting manner. And you either reading the transcript or watching or listening to the podcast, you kind of know what happens next, you know, and I'm saying, and so I press the red button, you're like, don't press, don't press the red button.

Anyways, I embark on that exercise, and I began to recognize that all of the voices, which is to see all of the kind of chart setups and the charts set-ups versus the narrative that people were sharing. Like, I suddenly had 2020 vision that 2020 just seemed to be the same set up as 2002, and that back then I had conceived of a narrative, which would have, a dramatic third and final chapter where the true explosive move in kind of precious metals would take place.

And so I suddenly thought, wow, you know, this was just meant, again, I said to you earlier on in my career, it felt like there's a fortuitous set of circumstances which was kind of leading and promoting me and taking care of me. Now, it took, I have to say, it took eight years of me being very, very miserable

before that benevolent hand intervened in my career, my lifestyle. But the benevolent hand, I want to say, reappeared in March, April of this year. And you hear me talk about, again, I like to have fun with words. And, you know, people are very cruel. And, you know, they're always thinking,

I'm a moron. And I'm always very quick to correct them that I'm an oxy-moron, you know. I'm a, for instance, I'm a contrarian, trend follower. And I say that because it's very apropos

the current situation. So I made money being a contrarian trend follower. What does that mean? First of all, I never feared the consequences of being wrong.

Secondly, I was looking for legitimacy. So anyone can have a narrative. But you're looking for a narrative which has legitimacy. of a supporting trend. And I find that it's actually the majority who act in a contrarian matter. So to put that in today's context,

yes, people kind of gain and enjoying the gold and the silver move and of course, Bitcoin and whatever else. But for all of them, there's many people who would say that we saw this move been in 2009, 2010, and then just it disappeared. And then there's all the people who would discuss why it's happening and would be very, very critical of the monetary authorities.

And he'll tell you that bonds are terrible and that the equity market is very expensive. But all they're doing is, you know, the trend in all of these assets is very, very positive. And they're imposing an intellectual narrative. And imagine reality, which is very much at all. with the reality of the trend. So my, I guess the best way of summation is, my imagined realities were always in keeping

with the reality of the trend. And that kind of, that kept me out of trouble. But remarkably, it kept me contentious. And so I'm finding myself contentious again and reaching out with Twitter. Hey, who knew,

it seems to be a shitty business, but as a platform, and you can just go, and just take someone out. It's just amazing fun. And so if someone writes BS and they append my Twitter handle to it, more likely than not, I am going to visit you and I'm going to correct the errors in your commentary. How much of the trend problems that you see are just about the wrong time scale, right, trying to zoom in too far and construct a narrative from that.

without kind of moving out with sufficient distance. Yeah. That's certainly one of the skillsets. More is better. The number of times when people send you a chart and it's three months or three months, or God forbid three weeks, you know, that's like seeing a portrait

of some fantastic battle scene and you can't kind of work out where you are. You've just been joined three weeks. I love lots of data and there are particular setups and the thing that got me excited was I love the ebb and flow of nature as it comes through

the kind of IR processing of noise of intelligent and otherwise people and so I like this notion of a bill market and then of course a bill market is just the expectation of something which is yet to happen and in some instances it doesn't happen And therefore you have these profound bear market crashes.

And so then the brutality of prices falling 80 or 90%. And when that happens, typically there is no future. But then you see, I love seeing redemption. I love seeing a kind of 10 years of the share price no longer making lows. It doesn't have to be a share. It can be gold. It can be a currency. And then creating a very, very narrow base, if you will.

And then out of the blue it makes a 10-year high, which is to say it's still 85% it's still 75% below its all-time high. But it's actually just quadrupled in price in the last six months. And that's when my voices get very, very agitated. You can find it's not guaranteed, of course, but I'm always fascinated by the process of redemption. and that actually the future that people thought was going to happen 10 years ago might actually be happening now and no one cares about it. Those were always my favorite setup. So my fascination for gold back in 2002 was that it had that profound bear market.

And if you put it, and I like relative price charts, you know, relative bear market. So a devastating bear market versus the S&P of the magnitude of 90%. And then no new lows, and in absolute terms, it does nothing, but of course, just the sheer devastation of the bear market that began in late 1999 meant the relative price of gold started to kind of register something. And by the end of 2002, you can start, you know, there was a lot of contention in my head from these shapes and patterns. and then my engagement with a smart group of young kids who would then question me.

So that's how my kind of mind begins to start a process of discovery. And then I've always had really smart young kids much smarter than me who go out and challenge my thesis. And that's the synthesis of that work is kind of what we've achieved over the years. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like

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The futures that people imagine that didn't come to pass, or perhaps the future that people are imagining now, that doesn't seem likely to come to pass? Well, the remarkable aspect of today is, it's kind of what's to stop. it. What's to stop? You know, like, as I say, I kind of wrote at the end of 2012, which is seven long years ago.

Why can't we have a repeat of the last seven years? I think the answer, I don't think there's anything economic, financial, in terms of the tenets of the laws of economics and finance. I don't think there's anything that would interfere or that would stop the next seven years being very similar to the last seven years. I think the most likely source and of course it's conjecture

is really whether society will permit it. And there are red flags in that, you know, the UK, in Britain, of course, I'm referring to the Brexit, the UK's judgment to leave

the continent. is a kind of red flag that's kind of people getting angry because the most logical thing would be to kind of stick with the status quo that the kind of transaction cost of breaking that thing just kind of doesn't, it's not obvious

that the upside is many times greater than the kind of transition costs. We will see the future will judge that. But people decided to kind of I don't care. You know what? You tell me about costs and you speak to me irrationally. I'm angry. I don't.

I don't care. This is going to happen. And it came to pass. There's clearly anger. There's a degree of anger, which has fueled Trump into his ascendancy. And I'm kind of,

you know, Trump has many things and it's for others to kind of to impose morality. But Trump represents a curious. I seem to be a great, lover of all things America. And maybe I overdo it. But a liberal democracy

pursuing curiosity and being playful is going to make mistakes. But the fact that it's reaching out to Trump is a reflection that the totality of American society recognizes that today doesn't feel

correct. That today needs you said redemption. That today needs leadership and it needs perhaps a different path and very much a different narrative. Now, it may be that liberal democracy in America got it wrong with Trump and it may get it wrong with Trump two, Trump three, but the fact that it's trying, I think is ultimately going to prove its salvation. It will ultimately find redemption via that curiosity. And I don't really see that curiosity elsewhere. So yeah, you had tweeted at one point, I think you'd reply to someone else, for as long as we

avoid the inevitable popular revolt, the status quo will deliver exponentially. And I think that's kind of what you're referring to. But the interesting thing is that we have, we have this strange moment now where I think that you have narratives for both what went wrong and what we should do to fix it. That's really what the U.S. political debate is about, right? in I think the 2016 Bernie versus Trump fight that so many people wanted, even though that's not ultimately what they got, it was two different stories about what went wrong and two different ideas about how to change it and what might go right. And now I think it's a little bit different this time around, but there's certainly a kind of left-leaning and a right-leaning narrative battle on what feels wrong the way that you put it, which I think is really right. Interestingly, however, both sides seem to be getting comfortable with somewhat similar economic

policies, at least as it relates to individual citizens, right? Which is the, you know, the debate, for example, right now between the Republicans and the Democrats is not, should there be stimulus or not, which it might have been 10, 20 years ago. It's, does the package look closer to 1 trillion or 3 trillion for this go around, right? Which is a remarkable shift. And so I guess, you know, bringing the financial side back. into this is, has actually that the ground upon which we stand in some ways shifted irrevocably, we just don't see it yet?

Well, it shifted, and I think it has shifted irrevocably in the world, and this is contentious to say, but in the world of central bank policymaking, which kind of ultimately, you know, can shape. I mean, they actually, by making them independent, they gave them the superpower that they could kind of do whatever they want.

And of course, I guess with the caveat that if they truly screw it up, they'll get weighed in and they'll be punished by losing their independence. I want to say that, again,

in terms of what is the check on the exponential nature of, I was going to call it prosperity, on the asset price speculation, kind of ascendancy. What is the break? Because the break used to be ideology. It used to be the ideology of the people who ran banks.

And that ideology kind of, it was still there and evident. It stays still there. You know, the Federal Reserve raising interest rates brought down the housing market and created an unalmighty. the Federal Reserve beginning to raise rates, I think, from when did they start raising rates? Like pre-empt, a little, just tiny. Don't they do something in 2014 or 17? I don't know in my mind.

Who cares? The desire to be seen to be doing things, right? You know, they can't really come out just now and endorse that the natural rate of interest is either zero or negative. Some of the local Fed presidents are kind of writing to that end. that can attract us now by the notion that they can't go like really negative with interest rates. And there's a huge consensus that negative interest rates do not work. But we've only tried negative interest rates. And they've been defined by basis points and not percentage points.

So I'm very curious about, I could see it's moving from basis points to percentage points. But I kind of want to say that at the end of the 1920s, it was a hard money ideology. kind of Andrew Merlin and purging the system of its rottenness and its complacency. Sounds noble. It is noble. And there are kind of strict kind of economic doctrines that could push you that way. But you are sacrificing ordinary people. And when you had Bernanke many, many decades later, when he was chairman of the Federal Reserve in the Nauties.

And when he stood up, I think, on the, was it the 90th birthday of Milton Friedman? and he apologised on behalf of the Fed for that decision, which created at least 10 years of depression and all the dramatic kind of awful emotional things that I did on families. That, I want to say, has gone. And that's not really being embraced. The people, the most desiderous critics of central banks today

are ideologues, and they want to raise it. interest strikes. They tell you that the Fed has manipulated everything. That is just, that is an imagined reality. I can't tell you if it's a true imagine reality. My suspicion is that is not a true reality. The price reflects this extraordinary world. Like, where should 10-year rates trade? Where is American GDP going to, where are they going to print for the year? It's going to be somewhere between minus 7 and minus 12 or at least minus 12. It's going to be an unprecedentedly grim number. And people tell you that the feds manipulated market rates.

I'm like, should they trade it 3%, 4%, 5%, what's wrong with 50 basis points? So you're exelots and they want to impose something which is not market-based. And if they impose, thankfully, the central bank's not listening. Because if they imposed it, it would incur, it would just destroy families. And life's, I don't care.

I mean, I don't care about ideology. Let's not destroy families. So this is really interesting. And this is another thing that I wanted to ask you about because there was a period after that, after 2008, right? Which is, you know, you had spent time watching this almost, it feels like you were watching it unfold in slow motion in some ways, where you had that anger, you had that frustration.

In fact, speaking of being pigeonholed for it, right? for a time you were. That's why it was so surprising to people when you kind of shifted your perspective in 2012. How did you start to, what shifted your perspective, I guess? And in particular, you know, one of the big questions right now is exactly to your point, the question about income inequality and kind of the growth in asset prices versus wages

and people's ability to participate. I mean, how does that fit into? I know it's something that you care deeply about. How does that fit into your understanding of the role of central banks? Yeah. So thanks for bringing that up because, you know, I had to deliver a mere cul-per. I had to say, forgive me. That ever since, you know, so I made a nice profit.

I made 50% in the month of October 2008. And so for the year, I think the figure was about 32% positive, you know. And I expected that we would get this. I was Andrew Mel and, hey, let's purchase the rotten. It's all these complacent people who got away. And so I think three years later, my mere culpable was, you know, I'm there to manage your money not to be your moral compass. And so what directly to your question, what changed?

What changed was still the discipline? I always sought legitimacy from the market itself, and I found that I was breaking my golden rule. I was going against the prevailing trend, which was absurd. Now, you're allowed to do that for brief little periods. It's very, like, we have red lights flashing whenever I do that, and it's like you've got a half-life of hours, you know, but this is unsustainable, this is unsustainable.

I give myself no more than three years. three years is it Jesus, there's a lifetime in terms of the world of managing a leveraged macro portfolio and so for three years I had very much extinguished all of the goodwill

that I'd achieved in 2008 and don't get me wrong I didn't lose money just didn't make money when it was so damn easy to make money and I was really really annoyed at myself and so the kind of three year

time window and the fact that someone takes you out I had someone that takes me out. And therefore I had to search for another way. You've seen that since 2015. A lot of macro people telling you the Chinese currency was going to collapse versus the dollar. It may eventually, but I could say back then,

and today I don't see any reason that would support that. There are people who have been arguing that case for five years. They're still launching products today. those products are very, very leveraged. They're very simple option products. And they say to people, just give me 1% of your wealth. Guaranteed to destroy 1% of your wealth. So narratives need to be disciplined by the passage of time.

And that time, sorry, that message, that kind of, what I want to say, grumpy kind of moralistic kind of carmuncheon, was timed out at the end of 2012. So that's part one of the question, I guess, but then part two has to do with the income inequality. Do you think that the folks who think that income inequality has been exacerbated by asset price growth?

Are they off? Are that missing the mark? I think there is greater, fear about upsetting sabers and like these really, really low rates that you get. And of course, people retiring and searching for an annuity and finding that the income that the annuity provides is not enough for life. I think there's kind of more policymaker angst about that subject rather than the disparity in incomes. And that bothers me. A lot of the disparity, I think, is emerging from, this seems to be a flaw in the capital system today, which is that

too many important actors. And this is kind of part of the Trump kind of trade policy, but, you know, let's call it, principally Germany representing Europe and China, have been using the US as the consumer of last resort, which is to say that those countries are just saving too much. And the consequences of that, that first came to our consciousness because they had so much savings and they were so determined to put it into America

that we had the kind of cheats and liar loans to ordinary households, like ordinary households were being enticed to take on loans, you know, with teaser rates, which would trap them, and then they would turn viciously, and then you'd go through all the trauma of losing houses, etc. It was coming from this mercantilist trade policy that we see in Europe and China. That has to change.

that has to change. They have to pay people more money in China. They've got to have a stronger currency in China. They've got to kind of let some of these state-owned enterprises disappear because ordinary folk are being suppressed, that the hue was crushing them to keep afloat these monolithic stupid companies. The U.S. is making mistakes as well. I mean, again, in my head, I'm kind of playing around.

I've got a trade in my head. But I don't think we've seen the last about this story about negative interest rates. And I think if I wish to be provoked in a look to the future, I think we will see negative interest rates globally. And I think they will have handles of one, two, three percentage points negative. and that will be punishment to that generation of savers. I think we were talking in the intro about how I can bookend, I can bookend a 50-year period from the 1970s to today

where we kind of we pivoted from chaos to order and the imposition of order into our economy was an immense boon to the creditor, part of the economy and where at the end of that thing is going to change and we've got to work out how it becomes

how the system works for the debtor the debtors and the debtors are the people with ideas that you know the Steve Job thinks about the square pecks around holes

were kind of scared of them they kind of smell they look a bit kind of fruity but they're the people that could change the world and they need your help and they need your money

and the problem with the exchange of ideas for money or money for ideas was that the creditors were being overpaid, overrewarded for that decision. That is slowly changing. I think it will accelerate. And I think, again, the notion of redemption may lie. It may lie in that, in that route. But that's, I mean, that's me sitting here kind of just with conjecture for the moment. All of us are sitting here with conjecture. It's just we all kind of play a different play a different role in how much we're willing to stand by that conjecture. But this is, I mean, this is part of why I wanted to have you on the show is that I know that a

lot of the folks who will be listening to this have a different take on where this income inequality came from. But what interests me is when people have a similar diagnosis of problems or a similar recognition of problems and different diagnosis of both cause and potential solution. Because all of a sudden, if you're debating that, you're in such better territory than just screaming at each other about what's, you know, what's, what's kind of wrong, and I think we miss that. So I just want to expand on this, just for a moment, it sounds like, and this kind of got, I think, also to the heart of your conversation with Luke Gromman on Real Vision, how much the real

culprit here is the structural imbalance between the U.S. and the rest of the world, and the kind of the how much got pinned on, basically the backs of the American work. or the average American family in structuring the system that it became. And when you talk about savings, you're not just talking about kind of the average family who wants to save some money for, you know, a vacation or, you know, rainy day fund.

You're talking about kind of globally the savings imbalance between the U.S. and everyone else. Is that correct? Yeah. Yeah, that's correct. Heaven is so much there. So you're correct. Let me see if I can take these back in order

when people do disagree. Like what I was saying is, would have many people shouting at their iPhone or what have you. Those people offer an alternative solution, which is that interest rates are too low. They should go up. You're going to get a huge amount of savings from that because people are going to lose their jobs

and they're going to be forced to save because they've got no money coming in. So if you're trying to solve income disparity, raising interest rates is a catastrophic idea, in my low opinion. I go on in my tweets about the benevolence of a global hegem called the United States. I dare the naysayers to rerun the last 100 years without the role of the US. Obviously, we've had global wars, etc., but I think it's never happened in history that you had a nation,

a sovereign nation that was willing to forego or to take on the hardship. of the displacement of people losing, of communities losing their job. You know, there was a huge displacement. There's a huge displacement that happens when you bring the other half of the world on stream online. They kind of conceivably are as deserving of a proper lifestyle as all of us,

but there are consequences as we bring them online. They enjoy comparative advantages to do things kind of not necessarily smarter, but more productively, then you could do perhaps in the US. And the US, I think, stands alone in having the foresight to recognize. It would be kind of better to take that pain today in the expectation of sharing that prosperity

and having very rich neighbors. And in the future, the pie is much, much bigger than the alternative path of denying that. Now, where we run into trouble is that that happened, You know, the 70s and, you know, Martin Scorsese movies, the deer hunting and stuff, just was showing you the raw edge of the displacement of steelworkers and what have you. And this is kind of payback period, you know, because the U.S. has the ambition, sorry, the Chinese had the ambition to be the size of not the greater size of the American economy.

But I still feel that they're kind of backsliding on the problems. It's like, guys, we took the hit. You know, families lost jobs. They lost homes. they lost education, they had to move. We took the head. And we took it to make you richer. And so now you should be investing because you're rich and you should be doing stuff.

Like your people should be a lot rich and they should be buying ourselves. And the Chinese, but the Chinese are behaving as if they've still got a country of peasants and they need more and more like the US to impose more and more hardship on us ordinary folk. And it's like, guys, we're done with that. you know, wake up and change your model, right? You know, you have got an amazing infrastructure, right? Done, right. But you've got lots of shitty companies.

Get rid of them, right? Let the currency rise and let the people get richer. So that's a debate that's going on there. The other debate, which is, let me criticize the US and other Western nations, is there seems to be that grotesque order of ideology, which seems to deny us a world-class infrastructure. It seems that you can raise money for, you don't even have to,

you don't even have to tell people what the project is. You call it, it's a secret, but I'm a kind of, I'm a moneymaker, and I need a billion dollars, done. But you stand up and you say, like the US has the shediest infrastructure in the world, and yet we're kind of the best nation on earth. These things don't kind of, they don't go together.

Give me, obviously don't get a billion dollars, give me, you know, we're talking trillions these days, give me, give me three trillion, give me five trillion, yeah. And yet, people deny it. That's not, not, it's not going to happen. Why? Why, I don't understand. There seems to be a deep, deep ideology

that is so suspicious. We've got to, like, like, the 50s. I don't care, like, rebuild the damn nose. Like, get fast, fast. You've got Tesla there in his tunnel thing. Let's get these things. move. Let's get internet really fast everywhere.

Let's spend money. People won't do that. That drives me crazy. Well, I think what's so fascinating about this and that where you're coming on, and I think that a lot of this is hinted at maybe in the dawn of chaos, which you wrote, but I think you could go even further with is that I wonder if actually by framing this big secular shift that we're living through strictly in the context of financial flows, rather than bringing in the geopolitical,

rather than marrying those two sides, we're actually missing something for either of them. So I've had Peter Zeyon, who wrote Disunited Nations on the show before. It's a great book about the kind of 30-year American withdrawal from the system. But the interesting thing is that what you add to his perspective and analysis is this idea that there is some natural evolution of what is supposed to happen next based on what the U.S. thought it was buying with its kind of bringing everyone into this world order. And if that isn't happening, that's a geopolitical issue as well, not just a financial issue

that's going to have consequences. And we might be looking at mostly the trees rather than the forest, right? Individual trade war with Trump. The fact that China is now, you know, 73% of Americans have an unfavorable view of China. It's the highest ever. It's popular on both sides to, These might be larger structural issues about a need to rebalance. And I think to your point, there is an at-home piece of this, which I think the virus has exposed, right? Even the conversation that we're having now, right, the $765 million loan debacle to Kodak. You know, I think that that's the leading indicator of a lot of things that are going to happen as we try to resure, you know, quote unquote or whatever term you want to use. but it feels like we're very much at the beginning of a new sort of Marshall Planey era for back home.

And in some ways, I wonder how much the question is, to what extent we view that strictly in terms of these kind of one-off programs, like, you know, another extension of stimulus support or debates about MMT and UBI versus a structural shift in how we think about the need to actually rebuild. kind of of America in a different context. Yeah. Thought more than a question, right? Of course. Yeah, indeed. I mean, there's just so much, there's so much in that.

But one of the points from the dawn of chaos was challenge, I guess, challenging is not the right market. Inflation is a monetary phenomenon. It's a fact. But it kind of, it ignores that it is actually that there are other phenomena

which kind of have to, you know, there's a kind of chain reaction and another phenomenon has to take place first. And that other phenomenon is in this kind of soft intangible world

of the psychology of you and I. And, you know, what I try to do is I try to, you know, the German economy suffered this catastrophic at the time catastrophic

hyperinflation. These events, remarkably rare in kind of grown up, civilized, developed economies and it happened. Germany was kind of like playing the role of China

to the UK being the US. You know, the UK had the industrial revolution probably over the course of 50, 60, 70 years. The Germans did it in 10 years as the baton has passed on. But with the

And so they were destroyed by this hyperinflation, but the hyperinflation really was a function of anger. The Allies having won the First World War insisted on basically gold was their foreign exchange reserves that you hold to protect the integrity of the nation, to make it trustworthy to foreign creditors. and the allies demanded the transfer of all of that gold bounty. And one by one, it just made a divided nation very, very angry. And they turned in on themselves. They started like shooting politicians. And the shooting thing happened in Japan. They were, would you believe they were killing the Bank of Japan?

And you wonder why the Bank of Japan is very, very nervous in doing anything. They're like looking behind themselves all of them. the time. So it's easy to see inflation as a monetary phenomenon. And at the end, it gets printed and it moves. You could carry a trillion dollars on your mobile phone, you know, digitally. You know, so, you know, the next transmission mechanism could really just, the ground is part and it could really go. The hard thing is getting to the point where people are so angry. But again, the US and the divisions, so there are divisions, everyone recognize, the division just seems to have accelerated in terms of the two tribes just now in the US.

Even the virus seems to expose two tribes. And there's something remarkable going on with little comment, which is that volatility, you know, this kind of the expectation of the daily ups and downs and the swings and fluctuations of risk asset prices has remained elevated. vis-a-vis the record of the last seven or eight years. So there's definitely a voice in my head saying watch that because that's really strange,

especially given this dramatic recovery in asset prices, volatility to remain as elevated as it is. The market's kind of yet to process. And what is, of course, it's volatility has been anchored around the election month of November. And so people, you know, the big fear is really more that if Trump loses, that's the huge volatility. Because the question is how he deals with it and how his tribe deals with it. I think his tribe is perhaps more, what is the term, noisy than liberal, you know, they're kind of liberal.

Liberals are just, you know, they'll write opinion pieces to the Washington Post, etc. but they'll kind of drink coffee and get on with it whereas it's the other guys that's the concern so there's, you know, Germany was a divided nation after the first world war the rest of the world kind of was very, very mean

and took it down a peg, humbled it and humbled it and kept humbling it and then society turned it on itself and so we just have to watch this tribal thing and the manifestation of that around the elections this year. I'm sure it'll be fine, but you know. They're respecting. So I've kept you for a while.

I could keep you here for like three hours, but I want to respect your time. And so maybe let's do this by way of wrapping up. Instead of trying to sort of explain in full the thesis that you have in the dawn of chaos about what could help us out of this, right? And what we need. Let's preview it, right? Let's preview what the sort of, you have this contrarian, a little bit perspective on what it would actually take to get the kind of engine up and running in a way that would

make sense. That's certainly not a return to the gold standard or something like that. So maybe let's preview that with a promise to the listeners that I'll try to have you back on soon and we can dive kind of deeper into some of the financial stuff from where we were today. Okay. So thank you very much, everyone, for your patience. And last thing, this loan, these things are. the challenge is to find

brevity and actually hit the points you wish to make. I think my parting shop would be that the system if fully operated, the monetary system are fully operated, could be the source of a lot of solutions, but of course also a lot of potential trapfalls in terms of it, you know,

We can find a solution, but we have to kind of make sure that that solution involves the many and not the few. I want to say that there has been an ideology and a conservatism in the way that central banks operate. It's almost we impose that upon them. It would make sense that we'd impose that upon them. I want to say that the central banks have been doing this thing called quantitative easing fee. And they've become a little bit brazen. you had Jeremy J-Pow on American TV and they never say this, but he's saying, yeah, we're printing money.

And we'll print a lot more money. I mean, that's not fed speak typically. But there does seem to be that the heart's not truly in it. And this QE process, the expansion of inert bank reserves, It fooled a lot of people at the beginning, but it's not fooling that many people. Now, Japan started this in 2001, and they're on the 27th version. How many times can you paint a duck, you know, and give it another name? It's still quacks.

You can call it what you want. This thing quacks. It doesn't work. And what I was hinting at, or the market is hinting at in the dawn of chaos, is So tell me again, I make dollars plentiful. Like I massively increase the spigot. You know, I just pump dollars into my economy. And therefore, isn't the consequence of that would be that the price of a marginal dollar unit would fall.

But the weird thing is that since you've been doing this, each marginal dollar that you produce is becoming more precious and more valuable. So you're just making this up. You're not doing it. Your heart's not in it. there's still an ideology that's holding you back. And so they've jettisoned a lot of ideology, but I kind of reason that perhaps the Central Bank

just we're asking an impossible thing. We're asking it to be very, very irresponsible, like really, really irresponsible. And these guys were not made to be irresponsible. Put me in charge or like as I put Joe Rogan, someone like a caricature. I'm not being tough on joy. The joke would be fun.

But it's a game of psychology. And you can really challenge it and create. If you can change behavior, you can change history. If you can get in people's minds and make them think differently, you change history. And that's the next step. Well, let's leave on that provocative note. I know people are going to be screaming at their earbuds from or to yell at me for not digging into Bitcoin with you

or at you for not explaining further. But that's what repeat invites are for. So Hugh, thanks so much for hanging out. It's really, really fun. And I think really important, big questions that we are discussing here today and I think we all need to be asking. Thank you very much, Nathaniel.

I fear that some of my responses I'm going to be rehearing them in my head later on going, oh my God, I'm such an idiot. So apologies to everyone, but thank you very much. Reflecting on that conversation, the thing that I keep marinating on and that I really want to explore more is this alternative take on what the core problem in the current system is. And at the risk of putting words in Hugh's mouth, and I tried to pull this out or tease this out a little bit during our conversation, I'm fascinated by this notion that the root problem may be too long spent by the American system to bring the rest of the world.

world up and into a global American-led order, as opposed to advocating for and designing for specifically American interests domestically. In other words, while it was a good idea to create a mechanism by which the whole world could be part of this larger American-led capitalist system, the net impact and long-term fallout may be over-calibrated away from American gain and to the gain of everyone else. That's sort of what Hugh was talking about with prioritizing savers around the world. He's not talking about savers in America and how we focus too much on savers here. He's talking about the global savings glut and what it actually means for Americans back home.

There's a lot more to explore in this idea, and it's something I want to come back to. But for now, I'm really interested in what you guys think. I imagine that there will be a lot of feedback on this episode, so hit me up, at NLW on Twitter. Let me know what you think. Tag Hugh in it. I'm sure he will respond and engage. And hopefully we'll have him back again to go deeper on some of these ideas. But for now, guys, I hope you enjoyed this. And until tomorrow, be safe and take care of each other. Peace.