The Compound and Friends - Here Comes the Digital Dollar!

Episode Date: December 4, 2020

On today's episode of The Compound Show, Josh talks with Representative Patrick McHenry (R- NC), the Republican leader on the House Financial Services Committee about the current stimulus talks, the future of capital formation and the inevitability of a digital version of the US dollar. Then, Marc Rubinstein of the substack letter Net Interest joins the show to discuss China's experiment with digital currency, the issues surrounding censorship of money, rogue traders, financial startups, hedge funds and much more. If you like the show, tell the world by leaving us a rating and review! Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Okay, today I'm going to need everybody to be on their best behavior. I'm on my best behavior. I'm wearing a sweater vest, so you know it's real. Today we have on the Compound Show Congressman Representative Patrick McHenry, and Patrick McHenry is the ranking member. He represents the 10th District of North Carolina, but he is the Republican leader of the House Financial Services Committee. And I've asked Rep. McHenry to come on and talk about the stimulus bill that we could see something any day now. It looks like they're very close in the Senate. There's a lot of important stuff going on right now related to the economy, related to markets. now related to the economy, related to markets. Representative McHenry has been at the forefront of items like crowdfunding and entrepreneurialism and capital formation. And he's one of the more forward-thinking, forward-looking members of Congress dealing with the issues that we talk about in the markets every day. And so I'm really excited to bring you that interview. that we talk about in the markets every day. And so I'm really excited to bring you that interview.

Not one F-bomb from me. So you guys will be proud of me for that. But it's a great conversation. And we get into everything from the new PPP program that should be specifically targeted to the hardest hit industries in the country, specifically hospitality, restaurants, etc. We talk a little bit about capital formation, funding hospitality, restaurants, etc. We talk a little bit about capital formation, funding businesses, building new businesses, becoming an entrepreneur. And we talk about some of the biggest issues revolving around the digital dollar, which is the theme of today's episode. And if you are not up to speed on the debate over a digital dollar, I'm going to tell you right now, this is going to be one of the most important issues of 2021 in terms of the monetary system, financial markets. We're in a situation right now where Bitcoin has come to the fore as far as let's call it a medium of storage, not quite a medium of transaction, but wealth storage, a place to put

money that's not gold and not the dollar. And that is gaining momentum with every passing day. You're seeing institutions, you're seeing wealthy families, you're seeing people who even three years ago during the initial Bitcoin boom were highly skeptical and those dominoes are now falling. And more and more, it's looking likely that our, let's call it technological revolution in finance is going to be full speed ahead. And the pandemic has rapidly accelerated what the progression of that would have ordinarily been. So what is the digital dollar? Well, when you spend $200 in cash, nobody really knows where you spent it. There's no way to track it. And having a digital version of the dollar changes the equation. So it is a way for governments to wrest control of the digital

future as far as money and its uses to wrest control of that away from something like Bitcoin and have an increased level of control of what's clearly going to happen one way or the other. So China is already experimenting with a digital yuan and the European authorities are looking at it and so is the Fed and we're going to talk to Rep McHenry. And I've got another guest who has written a lot extensively on this topic. His name is Mark Rubenstein. Now, Mark writes the net interest letter on Substack, and it is fantastic. Every week, he's telling these extraordinary stories about what's happening in modern financial services. He's giving us the historical context for why what we're living through is so epic. And it really is a technological revolution. And Mark would say that we're barely scratching the surface of even understanding the scale and the magnitude of the changes that we're living

through right now. And Mark writes about everything from IPOs to financial services startups like Root and Lemonade. And he writes about the politics of money and talks about digital central bank currencies. We're going to talk about hedge funds. We're going to talk about the economics of fund management. We're also going to talk about rogue traders. Mark wrote a recent Substack letter, Where Have All the Rogue Traders Gone? And his thesis is that the technology has made it really difficult to hide $100 million

and billion dollar losses from all of the systems that banks and brokerage firms and hedge funds are now using. So it's a really wide ranging discussion. And Mark is so smart. You are going to get smarter just listening to him talk. So we're going to do the disclaimer really quickly. I don't want to waste any more time on me droning on. We're going to get right into the discussion with Congressman Patrick McHenry.

And then we're going to talk to Mark Rubenstein. You guys are going to love this episode. And if you do, that will make me so happy. So without any further delay, Duncan, hit the music. Let's go for it. Welcome to the Compound Show with downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions

in the securities discussed in this podcast. Okay. Hey, guys. I am here with the ranking member, Patrick McHenry. Patrick McHenry is the congressman, the representative of the 10th District in North Carolina. And Patrick, first of all, welcome to The Compound Show. Really appreciate your time today. Thanks. Great to be with downtown Josh Brown, always. All right. And just for people who are not aware, you serve on the House Financial Services Committee. You're the Republican leader of that committee. And you've been on that committee since you were elected to Congress. And that's been how long now?

16 years. 16 years. Okay. And your district. So Duncan, actually, my producer, is from North Carolina. You guys, you cover a lot of territory. You're the suburbs of Charlotte and Asheville and the Blue Ridge Mountains. That's a pretty big district, right? It is. And it's a bunch of, it's basically suburbs

and small towns, you know, small towns that traditionally did textiles and furniture. A lot of, you know, what people would call blue collar towns, but, you know, just great people that I grew up with. That's excellent. So I have so much that I want to get to, but I think the first thing we have to touch on just because, well, first of all, we're recording this Thursday afternoon and anything can happen. And you know more than I do as far as how quickly these things can come into place. But it does appear that in the Senate, there's going to be a bipartisan attempt at a stimulus bill. And we would just love to hear your thoughts on what the priorities

there should be and whether or not you think something can happen relatively soon. So we've got three things that are in motion right now in Congress. One is reauthorizing our defense programs through the National Defense Authorization Act. This has been done annually every year for the last 59 years. And if we don't get this right in the next three weeks, this will be the first failure basically since the start of the Cold War. We're close on that. And we have a deal in process there. We have a government funding resolution that we commonly call the Omni, the Omnibus, which is funding the government through the end of the fiscal year, which is through September 30th next year. Those two things are moving at pace and those deals are coming

together. The third thing that is really important given the nature of the virus and the economic calamity that that's put put on different segments of our society is is this covid relief package we're close on the covid relief package but we've been close since june if pelosi would come down from her number and at my fellow republicans if we were able to give a little bit more than we won, there's an easy way to reconcile this thing. It's not a fundamental difference January, going into the new administration. And the contours are there. It's not that complicated set of policy because these are not new government programs are standing up. It's getting the PPP program targeted to the folks in the restaurant industry and gyms that are still shut down across America. It is sort of modest changes so that we can support really a grab bag of things that need to happen in rural America and urban America.

These things are not that hard, frankly. So I wanted to ask you about that targeting aspect. So the original PPP program, I think we would all agree, is one of the most popular programs ever as far as helping businesses in an emergency time. And it's only one of several things that Congress did. But I think Congress deserves a lot of credit and Treasury and the Fed working hand in hand and really acting quickly. But in the early stages of the pandemic, it was unclear which businesses would be relatively okay and which businesses were really going to be in for. I mean, I think we all looked at airlines and said, okay, airlines, concerts, all right, we understand this, hotels. But now it's very clear that restaurants and hospitality businesses and in-person entertainment venues should almost get their own program because of how the specificity of the issue relative to what they need for their

business. So now that we know that, shouldn't it be easier for everyone to come together and say, restaurants are not Democratic or Republican. Everyone has to eat and everybody has to work in a facility like that. Will that help us be able to target this more appropriately to where it's really acutely needed? Yes. And this is a tale of two recoveries. It really is. So we know the targeted industries. So if you have a gym, for instance, you may have had a hell of a profitable business back in February. You might've had the best month of your career in February. And then since then you can't do anything. And so you have these segments within our economy, like you said, with restaurants, hospitality, that need additional support to make it through the next

couple of months. It's just bridge at this point. But let's rewind. And I'm glad you brought up PPP. When we started back in March, I was the first person that raised COVID with the Federal Reserve. We had a hearing in February, and I asked a couple of questions to make sure that they're planning and ready and everything else. And Powell's done a fantastic job with that. But we thought that we had a problem to get into the summer, right? And in January, we thought, well, we have different mechanisms, unemployment, and we have, oh, well, we have gig workers now. And they're employed, but they're not in unemployment.

They wouldn't be eligible for unemployment. We need to change that. Right. And we did. I think that was a really smart thing to recognize it. And they're not on anyone's payroll. They're 1099 employees. And so we actually got the unemployment piece right for gig workers.

That was a substantial change. We got that right. For PPP, we said, look, we don't know how bad this is going to be. We don't know how bad this is going to be. We know it's going to be bad. It's going to be tough. But what we need to do is use the mechanism of businesses and small businesses in particular to take government money, take it on onto their balance sheet, distribute it to their employees, and maintain the connection between the employee and the employer. And so we use businesses to do the work of governmental policy. So the intention there

was for it to be broad-based and for every small business in America to take this money, to keep their employees, and bridge to the summer when we thought things are going to normalize, we're going to have a regular economy again. That was a plan back in March. So the idea with PPP was that every small business should take that money. And it wasn't pick and choose or maybe not. It's too important for us to get it wrong on the downside. The downside risk was so bad that we need to get the money out. And it's a small price to pay, even though it's hundreds of billions of dollars, small price to pay. So you don't have something that could be a five to 10 year build out of. And so now that we know more about the delivery of PPP, we're very close on an

agreement there between Cardin and Rubio in the Senate. They're leading on the second package, and we're very, very close there. And so I think we can actually get agreements that very quickly. Now, when you look at how they handled it in Europe, it was slightly different. They had the same idea. They wanted people to remain attached to their employer rather than have people have to start all over and look for a new job. But the Europeans basically said, we're actually just going to do the payroll for you. You're essentially going to keep your workers, but we are now paying them directly. And I'm not saying one is better than the other, workers, but we are now paying them directly. And I'm not saying one is better than the other, but we did our version in a distinctly American entrepreneurial way where we said, we want the business ultimately to maintain responsibility for paying,

but we want to help the business make those payroll checks so that we don't have 40 million unemployed. So look, I think on balance, what was done was done well. I guess what I'd be curious to hear from you is what letter grade would you give? Let's start with traditional banks and I'm going to ask you the same thing for fintech startups because both were involved in distributing that money to their customers. What letter grade would you give the banks? JP Morgan, Bank of America, on down to the regionals?

A. You would? Okay. I would give an A. I would give the fintechs a B. Okay. And I recognize there's an A plus, A minus, and all this stuff. So I'm giving an A and a B for fintechs. Now, fintechs, I think, did you have a couple of it that knocked it out of the park were best in class.

In terms of acting quickly and comprehensively. Quickly, comprehensively to the letter of the law, the spirit of the law, and did right by their customers or small businesses. And so you have the best performers, individual performers were fintechs, right? Are you able to say any names or would you prefer not to? Well, you know, there's a fintech that actually has a bank charter and it's called Live Oak Bank in Wilmington, North Carolina. They were the best in class for banks, fintechs, for the 5,600 folks that participated in the delivery of PPP. And it's because they were technology forward. They knew the regulatory framework. They adhered deeply to the regulatory framework for banking,

old school, boring banking, and the cool, innovative stuff that I think is really the future of finance, which is using technology to enable things quickly. Right. Getting applications filled out and sorted online so that this did not have to be a face-to-face with a teller because it couldn't be. It could not be. So I also think this was a good chance for traditional banks to show off some of their own fintech, which we saw certainly. So, okay. So we all agree. And PPP actually, the original version still has money left in it that can be rolled over into the new. So it was never, it looked like it was going to, I don't think sell out is the right word,

but be oversubscribed, the demand. But it ended up not being, which means there was ample funding. And if there's a new version – Well, not initially. Not initially. Look, I mean Congress, when we negotiated this package, I tried to push for more money in PPP. And I said, well, this is a lot of money. We've never done this before. I said, well, if, if it's, if a dollar goes out, we're going to run

out of this first tranche of money. And we did. Um, and then it took us a couple more weeks to fill it back up. Um, and by then, um, you know, the, sort of the, the, the issues on the ground had shifted. Right. And people realize that they could go get a bank loan, um, or that they had already laid off their workers so that the, you know, the PPP wouldn't work for, uh, so there's, there's still money available and, and we can reposition that and target for a new plan. Right. So now, all right. So now you have a situation where we know where the money really needs to go by industry group. And, you know, now that the first wave of uncertainty is

gone, we see a lot of businesses operating as normal, as normally as possible, getting by with a lot of technology. So that's arguably a good thing. It's been pointed out that some of the industries that really need this new tranche of PPP money, payroll is not the issue. It's been pointed out that some of the industries that really need this new tranche of PPP money, payroll is not the issue. It's rent. You're talking about a restaurant. It's not that they don't want to take care of their employees. It's that their real issue is that like 70% of the money they take in goes to a landlord. And we know that there's also deferral of rent and a lot of other programs, but what do you do about that if payroll itself is not really the issue and it's something else like food costs or rent costs?

Well, the food costs we're not going to be able to fix, but the rent costs we can. The reality here is that PPP was for payroll and rent or your mortgage payment, mortgage interest, actually, more specifically. So the PPP program can be repositioned so that they can keep the lights on and get through the bridge here. The additional challenge here, though, is you think of people that are – I hate the disdain that the political sphere has for what they call blue-collar work or folks that are in the restaurant industry. looking down their noses at people. Well, if you're a successful waiter or a waitress, you can provide, without an advanced degree, you can provide a middle-class life for your family. In fact, millions are, and it's extremely important.

And those are the folks that I worry about in this. You have folks that were doing quite well by the advancement of they had a house, they have a car, they're providing for their children, and they're working their butt off waiting tables, but they're making good money. It's hard to get that right and get some replacement so that they can survive over the next three, four months until we can get back to table service, right? Carryout doesn't do that for those types of incomes. Right. And then we've got this whole other group where it's vaccine or nothing. So I'm in New York, Broadway is a $1.6 billion business annually with no tourists and no ability to do – you can't do takeout Broadway, right? And then think of all the local businesses supported by people going to the

theater. So then you've got – that's not going to be a PPP solution. That's really going to be a deferral of rent and expanded unemployment, which certainly would apply for industries like that. The structure of this is you have to have testing, treatment, therapeutics, vaccine, right? So testing, we should have at this moment, if you want to get tested, you can go get tested immediately. You can do it in your home. You can use technology or whatever else. We're close on that. Treatment, that means that you show up to the mechanic and the mechanic says, I've seen this before. I know how to fix the muffler. Right. It's not, it's not reassuring when you show up and your mechanic, much less your doctor is like, I don't know what the hell this thing is. And we

think this might be okay. It's not really reassuring. We're there on that. We've come a long way on that front. Yeah, yeah. Huge, huge. Therapeutics. All this sort of cocktail of innovation brought the president to a fast recovery was not a vaccine. It was a therapeutic. And so those therapeutics are going to come online and that's going to be, I think for a lot of people, better than the vaccine. But the vaccine is also important. And I think it's reassuring to see three former presidents say, I'm going to do it. I'll do it on camera. I'm going to get a vaccine. This's not. And it's American innovation. It's Western innovation that has can't even imagine the rapid advancements in medicine in general that are going to be offshoots of this effort to do in 10 months what historically has taken 10 years, the amount of other technologies and tools that will be side effects of this rapid, I mean, could be an extraordinary leap forward for medicine in general. So not that we root for these things to happen, but it does appear that there will be a lasting

ripple effect that's positive. At least that's what I hope. Yeah, and I agree with you. I agree with you. So I want to pivot and talk a little bit about some of the things that I think are dear to your heart. You've become known as someone who's been a big proponent for a lot of the ways in which capital formation happens now.

Crowdfunding, you were a big proponent of the JOBS Act, which was about making it easier for entrepreneurs to raise money. And of course, these things are always a yin and a yang. The easier you make it to raise money and start new course, these things are always a yin and a yang. The easier you make it to raise money and start new companies, also you're making it easier for bad actors. And let's say it's 5%. It's small. But you've been a champion nonetheless of just pushing entrepreneurialism and crowdfunding. And I think a lot of wonderful things have come of that. Can you talk a little bit about why that's so important to you and, and how you feel about that going forward?

Well, look, I think, I think that balance between capital formation and investor protection is really important to get right. And if you go too far on one, if you want to protect everyone, then you can't raise a single dollar. Then we're a riskless society. That's Europe. Yeah. I mean, which is stagnant, right? And it's not the animal spirits that the American economy is known for, this set of smart risk-taking. And if you fail, you get up again, you go again, right? And you rebuild. That's what my dad did. My dad started a couple of different small businesses, finally found one that stuck. He started a lawn service in my backyard. That's an American dream. And so I think of my dad and his business partner. I'm the youngest

five kids. My dad's buddy had five kids. So they were always looking for a sideline business to go do well with. And he got a guy who wanted to sell him a lawnmower, riding lawnmower. And my dad didn't have the money for it. He said, look, let me use this a couple of times until I get paid for my first job and I'll buy the lawnmower. So the first thing he did was get a sales guy who wanted the sale. That's how he started his business. The second thing he did, he went out and got a master charge, right? New innovation. They'll give you this card and you got consumer credit. And he otherwise wouldn't have been able to, and he bought a truck with that master charge. Those are the first two things, the first two pieces of equipment. Put five kids through college. And it's bootstrapped.

Right. You get one small loan or one small investment from someone. You make that into something. The banks can't do it now because the regulations are such they can't really do private equity style investing alongside of somebody and walk along as a risk taker builds a business. So we have to have other forms of capital formation through really securities law to make sure that those folks can still get access to money. It's happening in Silicon Valley. Austin, Boston, and Silicon Valley are still killing it with venture capital. The rest of the country is starved for capital. And it's urban areas and rural areas. It's blue-collar innovation. It's also folks that just didn't have financial connections. Those are the people I want to enable access to money through technology. With technology, it connections. Those are the people I want to enable access to money

through technology. With technology, it takes a lot of the people decision-making out. It reduces the cost structure of it. If we do it finely and well, you can get proper investor protection while also allowing money to flow. And so I think that's really the gift of technology is being able to take down the cost structure so you can have credit and capital more available to more people that have fewer connections to deep pocketed people. That's what I'm trying to enable broadly. And that's what I think is desperately needed for the American economy. Okay. So, right. So you were moving the gatekeeper to like, if Andreessen Horowitz is not funding small businesses in Asheville, well, maybe the internet is interested.

And so you've seen, so I think you've seen a revolution in that regard. And there were tons of stories of crowdfunded businesses. And now we're getting into this next realm, though, where we're crowdfunding what it means to even be money. And so this is the last thing I want to ask you. And I so appreciate your time today. And I know it's a pretty critical time in Congress right now. So I appreciate it. I want to ask you about digital currencies. I know the Fed is interested in exploring them. China has actually created one. Basically, this is taking the dollar or the yuan or maybe someday the euro and turning it into code and have it be backed by the faith and credit of sovereign government. However, give it this added layer of the government being able to track what it's doing in real time. Who has it? Where is it going? Do you have a very strong opinion yet on the idea of digitizing currency, removing cash from the equation, and having the government have a version of Bitcoin all their own? Like,

what is your, what is your view on how things are developing so far? Well, I'm broadly supportive of cryptocurrency and, and the opportunities that they represent. So, you know, I think, you know, Satoshi had a brilliant concept here on Bitcoin in particular. And I think Bitcoin is sort of the granddaddy of them all in cryptocurrencies and is effectively the cryptocurrency's gold standard. And I think that's real and that's here to stay. The question now is a question is central bank digital currencies. If you're in a surveillance society without any right to privacy, like communist China and the regime of the communist Chinese, then digitizing your dollar and having the tracking mechanism,

just look what happened to Jack Ma when he raised his voice about the regime and the lack of openness in the financial sphere. Bad idea right before the largest IPO in history. Not a great idea. And the fact that the regime didn't give a damn and cut it off was bold. So that's a different set of questions that they don't need to worry about. For us, it's the right to privacy, right? Now, when we onboard off board money, there is a set of tracking. It's mainly around terrorism financing, illicit finance. AML. Yeah, AML.

KYC. Sure, sure. So those things are important. We've done some modifications that are going to be done here at the end of the year around modernizing the Money Laundering Bank Secrecy Act, know your customer provisions, and beneficial ownership questions. Complicated stuff, but I have an agreement and we have a bipartisan deal. So that's going to happen at the end of the year. The question now for our central bank is how do you maintain people's right to privacy with a USD central bank currency? We have to figure that out in order for the Federal Reserve

to do this. I am inclined more than I'm disinclined to USD digital currency. I think this will enable us to maintain this huge valued proposition that we have as the monetary standard of the world. And if we get this right quickly within the next year or two on USD digital currency, then I think we'll maintain our enhanced position with the flows of credit internationally. So you see this as essential for the dollar to maintain its position as the world's reserve currency? Absolutely. And so then if the world is moving online to a digital currency, we have to be there in some way, shape or form in a leadership role? Have to. And otherwise you're outsourcing it

to international flows of credit and you're giving it away to first the Chinese, more likely for the third world and Europe for a set of trading relationships. But we can be there and we can enhance our relationship with our trading partners in our hemisphere first, and then globally with the second world and third worlds. And I think it's essential that we get this right for those international flows of credit. Representative McHenry, I want to say thank you so much for your time today. This has been so much fun for me. And I hope you'll come back. And I'm following all of your exploits in the House.

And you're doing a great job for America. And I appreciate all your work on the finance committee. So thank you so much. Hey, Josh, thank you. I look forward to reading your book. I haven't read it yet. And one and two, thanks for what you're doing with raising money for the food bank. That is really encouraging that you're putting your efforts behind what is so important, especially this holiday season. So thanks for your leadership and real leadership of not just talk, but actual real action. Really do appreciate Josh. I'm blushing right now, which the audience is a podcast. They won't say, but I so appreciate

that recognition and we'll talk to you again soon. Thanks again. Thanks, Josh. again soon. Thanks again. Thanks, Josh. Okay. I'm here with Mark Rubenstein. Mark, how are you? Is it Rubenstein or Rubenstein, by the way? That's a good question. It's Rubenstein. It's Rubenstein. Okay. How do we even make those decisions? I feel like it could go either way. Well, actually, the interesting story is that I spell it with an I, R-U-B-I-N, David Rubenstein, obviously a lot more well-known than myself, spells it with an E. I had a meeting with him once and he told me that his great-grandfather used to spell his with an I, my great-grandfather used to spell mine with an E and they kind of obviously got interchanged along the way.

Absolutely. So my last name actually at Ellis Island was Braun, which is German for brown. So we'll leave it as brown and we won't confuse anyone. Okay. So first of all, you've been writing this net interest letter at Substack since May. And I've told you already, but I want to say it now publicly. I think it's some of the best stuff that I read every week about the technological revolution happening in finance. I really don't think anyone's doing it better than you right now. You should have like a million subscribers. So we're going to try to do our part on today's podcast and make sure that people see how brilliant you are. And we'll try to make sure people subscribe and we'll send everyone over there at the end. But what gave you the idea to start writing at Net Interest? What was the inspiration originally? Well, very kind words, Josh. So I've been in and around financial services for 25 years. I started my career on the sell side, working for a number of firms, including Credit Suisse. I then went over to the buy side and I was working

at a hedge fund for 10 years, focusing exclusively on financial stocks globally. We were long short financial stocks globally, kind of before, during, and after the great financial crisis. You were researching all of the public companies in finance and probably thinking a lot about how could these companies go wrong? What could disrupt them? Correct. Exactly. And then in 2016, we wound the fund down, uh, demand for, you know, I guess when we had its peak financials was 20% of the market. And by the time we wound it down, it was kind of 8% of the market. And it's now less than that. Certainly in Europe, demand for a financials product had diminished and there was a lot of interest in financials increasingly

from the macro guys who were kind of treating it as a macro play on rates and so forth. So the prospect to generate kind of non-correlated returns within financials diminished and we wound up the fund. And so I looked around for a number of other things to do. And I launched Net Interest, as you say, in May of this services to a degree that most people buying and selling stocks probably haven't. come along today, you have these really helpful analogs for the way in which these new things might act as disruptors to these old things that you understand really well. Am I kind of capturing what you would say is like the organizing principle of how you're

writing about financial services? Yeah, I think so. I think it's interesting. I think obviously sell-side research is very, very good at short-term trends, looking at current quarter earnings, momentum and channel checking and all the rest of it. Academic research is obviously very, very well. But I kind of figured there's a gap for something that kind of bends towards having a financial interest, but I've got the luxury, not having a portfolio to manage or a sales force to feed, to be able to take a kind of a longer look sweep at history and bake that in. And there's nothing new under the sun, cycles come and they go. And it's a useful perspective to remember that.

So now we're at this really interesting place where the largest financial services companies in America are not even in the financial sector. PayPal is, I think, $300 billion market cap. It's a tech stock, according to Standard & Poor's. Square is now a $100 billion company. I think it's bigger than Goldman Sachs, also not considered to be financial. MasterCard and Visa have exploded in market value. Neither of them are considered to be financial stocks. They're in the technology basket as well.

What would you do if you were running the index committee, looking at all of the disruption coming from technology and software into the financial services sector, what would you do to try to capture that and try to make it so that investors trying to get exposure to financial services can? It's, you make an excellent point. It's, just it's not just the ones you mentioned for example if the recent deal between s&p and market in financial data in bloomberg's clearly a private company but if it was a public company it would be a pretty sizable company as well so whether it's financial data or basically financial infrastructure there's huge value and a lot of value has been created post-financial crisis in financial infrastructure. And a large

part of that is due to regulation, I think. One of the big trends we've seen over the past 10 years has been via the regulators, a shift in value away from the incumbent banks towards some of these payments companies, financial infrastructure providers, and so on. You've written about many of them and you've written about, for example, Market Access. Yeah. Here's a company that I think the stock's up thousands and thousands of percentage points. I think it's one of the best performing stocks. It's the best performing stock in the S&P 500.

Over how long? Over 10 years. So over the last 10 years, Market Access is the best performing S&P 500 stock. I bet you if I found 100 investors on the sidewalk outside of my office, not one of them would have even heard of it. And then of people that have heard of it, most of them don't even understand that this company, really all they're doing is showing transparent bond prices between one trader and another. This is not as though they've invented a COVID vaccine, but it trades like that.

What is going on? Yeah, it's a very good point. It's a very good point. So historically, financial services has been a very labor intensive business. The brokerage model was a people oriented model, and there's still clearly an element of that. But as much of it has electronified, that goes right across the value chain. So whether it's the front end, the back end, it's all electrifying. And in credit specifically, market access has been a beneficiary of that. Beneficiaries elsewhere, I mean, passive and the impact BlackRock has had, Vanguard have had on the asset management industry is another manifestation of that. You look at the margins that they're able

to extract and compare them to what your traditional active asset manager was able to extract. And they're just clearly a lot higher. Right. So now you have all of this money going into rules-based or index-based asset management firms. The goal for them is to trade at the least possible cost they can. They're trading with each other now rather than just trading through brokerage firms. So you could have BlackRock and Dimensional Funds trading all day with each other and market access software in the middle

and pulling out a huge amount of the costs that used to be associated with opaque kind of, you know, bond products. So that's the essence of the story there is technology removing people making phone calls. Yeah. And market access, that's right. And market access got its drive in its latest iteration of its product is from via a partnership with BlackRock. And actually, if you look, you know, I was thinking just today, fire a partnership with BlackRock. And actually, if you look, I was thinking just today, following news about S&P acquisition of markets, a market was set up initially with seed capital from several banks, as was Bloomberg. It's original capital.

Market is an index provider, just like S&P. Exactly. Instead of buying a competitor. Exactly right. Exactly right. Bloomberg was seeded by the banks. Visa was seeded by the banks. Visa was seeded by the banks. All of the companies, PayPal wasn't, but all of the companies you mentioned earlier, it's extraordinary, actually.

The banks arguably have created more value outside of themselves through capital allocation to ICE, Intercontinental Exchange is another example. It was seeded by Goldman Sachs and Morgan Stanley, huge value creation. A lot of this value can be traced back to the banks, but it's occurred outside of the sector and not within it. Yeah. So it would be wrong to look at the share prices of Goldman Sachs, JP Morgan, Citi, Wells Fargo, Bank of America, and conclude that there's nothing happening in financial services.

There's a lot happening. It's just not happening in the share prices of these companies, even though they're investors in a lot of these next generation disruptive technologies. Yeah, I mean, actually, Morgan Stanley is a great example. MSCI came out of Morgan Stanley. Discover came out of Morgan Stanley. Right. You look at the combined, you look at

the value created by those three entities, and clearly it's greater than what's reflected in the Morgan Stanley share price. Okay. So I want to get into the main reason I reached out to you originally. You'd written this thing a couple of weeks ago about the coming of what you're calling central bank digital currencies. And there are experiments underway in China and probably very soon Europe and maybe someday here in the US. But I want to explain to people what these things are, and I'm going to use your words and then I'll have you react. But this was your introduction to the concept.

You said, quote, so what is a central bank digital currency? It's electronic. It exists as a digital object and it's backed by a central bank. So it's like cash, except it's electronic. And it's like Bitcoin, except it's central bank backed. If it sounds a bit abstract, that's because it is. Central bank digital currencies

aren't yet in wide circulation, but in China, they've started testing them. Earlier this month, 50,000 residents in the city of Shenzhen were given Renminbi 200 in digital currency in a kind of helicopter money lottery. Two million people applied to take part, and the successful few were credited the money in an app-based digital wallet with scope to spend it in over 3,000 local retail outlets. This follows pilot schemes in what amounts to four cities across the country. So you're basically saying since the outbreak of COVID, there's been more of a willingness

to experiment for central banks to take actual currency, digitize it, put it on the internet, and let's see what happens. And that is what's now underway in China. And you point to the fact that central banks and different entities have been floating their own currencies forever to varying degrees of success. Explain to us why this is important and what's really happening. So, and I want to basically begin by differentiating it from Bitcoin. So clearly, clearly there's a lot of noise around Bitcoin, particularly right now, given its price. This is not what that is. This is, it might be using some of the same underlying technology, but this is central banks regaining control of the narrative to a degree. So it could be that not so much Bitcoin, but Libra,

which is the Facebook funded stable coin project that looks like it's due to launch next year in a slightly different way than was originally the intention. Could be that it was triggered by that, but the central banks decided they needed to regain control of the narrative. was triggered, it was triggered by that. But the central banks decided they needed to regain control of the narrative. And given that technology is moving away from cash and towards digital wallets. So if you go, so the Ant Group IPO was recently pulled. But the fact remains that Ant in China and Tencent run very, very large digital wallet projects. And if you want to buy anything in China, you're typically going to use a digital wallet rather than cash or rather than any other form of payment. So the central banks elsewhere in the world, so China's been ahead of this.

And the reason why they've been ahead of this is because they were able to use technology to kind of leapfrog payment systems that were prevalent in Europe and the US. But central banks have realized that in order to regain the narrative that they have scope to install that same technology behind their own currencies, their existing currencies. So this is not a new currency. This would be the digital version of the dollar. Exactly right. So rather than spending a dollar bill, you would spend digitally via some kind of digital wallet. The bits would shift in the way they shift electronically anyway. And cash could be phased out under this kind of new era of digital currencies. So this is not about let's save the money that we usually spend cutting down trees and printing on

them. This is a lot more profound than that. So why is recapturing the narrative important? And why would something like Facebook's Libra project goad them into wanting to come up with their own version of a digital currency? Well, so clearly they want to retain clearly their whole – I kind of often look at institutions, whether they're public sector or private sector, they have a motive for self-preservation. And clearly central banks have a motive of self-preservation, and that means retaining control of their currency, inevitably. The advantages over cash are it gives central banks and through them, are, it gives central banks and through them, authorities generally, more legibility over the way economies are working. They can see in real time without cash, which they've got no

kind of understanding of where it's being passed and where it's changing hands. They will have a complete bird's eye view of how the economy is working. They will be able to see transactions in real time as they occur. You know, you can imagine some kind of, you know, kind of Star Trek control center somewhere. A big brain. Exactly, exactly. Being able to map the economy in real time. That has huge advantages.

Well, we think like American Express can probably do that, but this would be a way that the central banks can do it with their own dollars. Yeah, they can. And it gives a bigger sample size. So you're absolutely right. You know, we get, you know, as investors, we get a lot of interesting information regularly out of Visa and MasterCard on credit card spending more than than ever before, through COVID, we've had kind of real-time analysis on the performance of the economy. But the sample size is limited, and this gives a much bigger sample size. In particular, by eliminating cash, it can eliminate the black economy, and it can increase cash can do this. But what the alternatives to cash, like debit cards and credit cards, can't do is they can't really improve financial inclusion. The advantage of cash is anyone can use it. And what this does is it expands the benefits of electronic currencies and electronic payment systems to everybody, including those that aren't financially included right now, the underbanked. Okay. Right. Because if you make something a credit card only store,

you're eliminating participation from people whose only access to money is cash. Correct. So this would address that problem because everyone's money would be digital. Correct. Like starting line. Okay. So that's interesting. And then like so from your perspective, is Bitcoin a bigger threat to the central banks or is that backwards? Is actually the rise of central bank-backed digital currencies actually a really big threat to Bitcoin because it takes what Bitcoin lets you do and just makes it that much simpler. How would you think about that looming competition? Well, so Bitcoin has another proposition, which clearly has many proponents, which is that it acts as an alternative to the

dollar. It acts as an alternative to fiat currency. So there will be proponents of that who like that argument and value Bitcoin for those features. I would argue right now that's, I mean, clearly you can see it in the numbers. That's a marginal point of view. It's a very vocal point of view, but it's a marginal point of view. Particularly if it is in China, people might be given less choice about whether they adopt this compared with in some other economies, which is why China is further ahead in this process than other economies. But governments can incent broader adoption. So a lot of the excitement in Bitcoin recently is because of Square first and now PayPal wanting to bring Bitcoin transactability into the app for their hundreds of millions of users. And there are a lot of stories being written about how they're out in the market buying Bitcoins in order to be able to facilitate this stuff. And they think that this is finally the holy grail of mass adoption of digital currency. But to your point, if there's a US currency option that's

also digital and also included on the PayPal platform, on the Square platform, I guess my question is what would make a person, not a crypto libertarian bro, but what would make like my wife and her friends choose to buy and sell in Bitcoin rather than in digital dollars. I can't think of a reason why they would. Can you? Right, right. No, exactly. So that's a good point. Exactly right. And now the difference is the authorities devising the central bank schemes are cognizant of all of the risks. So we've talked about some of the positives, some of the advantages, but there are risks as well. And the biggest risk is that it could ultimately damage the banking system. And the reason why it could damage the banking system is because the banking system currently works

by taking deposits and without going into all of the minutiae, deposits are the lifeblood of the way banks work. Lending, everything that happens on one side of the balance sheet is a function of what happens on the other through the balance sheet is a function of what happens on the other through their ability to raise deposits. Now, if you've got digital currency sitting in a wallet, the argument goes that you might feed that by bleeding it off from bank deposits. That may happen naturally. If you were to think about, if you were to kind of rerun 2008, inevitably, the run on banks would have been such that why leave your money in a Citigroup deposit account when you can leave it at the Fed in a

digital currency? You eliminate the need for a bank to even exist if people can be in digital dollars backed by the central bank. That's the risk. Now, this is what- Well, that sounds like a pretty big f***ing risk. Now, this is what- Well, that sounds like a pretty big f***ing risk. And what's interesting to me is that it is a big risk. And it's the reason why a lot of policymakers are going quite slow. It's the reason why there's a lot of structure being built around these things about not allowing individuals to have an account directly with the Federal Reserve

in the case of the US and differentiating between retail and wholesale and whatnot. Interestingly, the chief economist of the Bank of England came out recently and said, actually, does it really matter? Does the banking system need to run the way it currently runs? And what he was kind of envisaging is this split in the banking system, whereby on the one hand, you've got all these digital currencies, like Ant Group in China, digital wallets. And then on the other hand, you've got all these digital currencies like Ant Group in China, digital wallets. And then on the other hand, you've got lending businesses which operate, they borrow in the wholesale markets. And clearly right now with interest-

Right. Why do the lenders need deposits? Right. Why can't they just say we have X dollars demand worth of loans and the federal bank gives them the money to make those loans. And then they owe the federal government the money back as those loans mature or come due. And then the deposit side is whatever we want it to be. Right. The path from A to B is a very volatile path,

and that's something that has to be managed. But from a blank sheet of paper, B could be, and this was the view of the chief economist at the Bank of England, B could be conducive to less financial instability than is the current case. Okay. So it's only this way because it's always been this way. So the Medici's took deposits and then made loans. And this is just the way banking has been. Right. And there's value. And when it works, it works very well because deposits tend to be sticky. They tend to be stable.

I mean, clearly everything we've discussed maybe introduces some instability and some unstickiness into it, but they tend to be stable. They tend to be sticky. You know, and again, we learned this through the financial crisis. Those institutions that were deposit funded typically were able to weather that storm to a greater degree. So- Right. The ones that were the largest deposit funded institutions on the other side of the

crisis are even bigger. They're the largest we have now. So, all right. So if you're the CEO at a large bank in London or New York, and you hear about central banks starting to dabble with the idea of creating digital versions of their currencies, what's your perspective if you're in that seat? Do you view this as an opportunity, a threat, maybe a little bit of both? Yeah. I think they're a bit nervous. My understanding is they're a bit nervous. They're lobbying. They're a bit nervous. I mean, they've had huge swathes of their core business stripped away from them, be it through market access, which has taken away from traditional kind of voice trading, uh, that, that banks on trading floors used to do between each other, whether it's, whether it's from PayPal and Square, which are taking away on the payment side. Transfers, right. Exactly. So the banks are being whittled down anyway from their core business perspective, and this is just yet one more risk.

Right. So do you think the multiples of the bank and brokerage stocks are reflecting that fear? I mean, they typically are trading somewhere between nine and 11 times earnings, one times book value or less. they're being given almost no credit, even for consistently beating earnings expectations. Is it because the investor class just looks at these businesses and says, I don't know if it's PayPal or if it's digital currencies or if it's Bitcoin or if it's market access, but the combination of all of these things basically is ripping away all of your profit centers. Is that the way people are looking at these stocks? And to add an extra one, you've got low interest rates as well.

Yeah, no net interest margin, right, on top of it all. Yeah. So you've got low interest rates cyclically, and the concern there is obviously low interest rates remain forever. And then you've is obviously low interest rates remain forever. And then you've got those structural concerns as well that you highlighted. So from a profitability perspective, now along the way, they can be highly cash generative. So value can be through capital returns. The only problem here is that, and that was the case last year, the buybacks and the dividends were substantive. The risk is that at the whiff of any kind of structural event, such as a pandemic, the regulators can come in and turn those off. All right. So do you think that central banks elsewhere are watching China's experiment

and will be sufficiently motivated to want to take action and take their own projects further anytime in the near future? Or is just like a very obscure thing that's being mentioned at the margins of large central banks like the Fed, but they're not really looking to press ahead with this? What's your take as far as how likely is it to become part of reality in the next five or 10 years? It's definitely building momentum. The more and more central bank speeches have some element of discussion about it within them. They are watching China. Many of them have given themselves a deadline to do research and consult and to come back

2021, 2022. Right. But they understand that technology and financial regulators as well are nervous that they've lost a little bit of the control that they used to have over the financial system to the tech companies. And they don't regulate the tech companies. Right. They'd like to, but they don't fully. Right.

Certainly don't regulate Facebook. Yeah, that's right. It's a concern. So actually the Brazilian, so WhatsApp launched a payments functionality in Brazil earlier this year and then the central bank after the fact came in and basically said, no, we need to consult more detail on this.

So they're very nervous about what's going on, I think broadly, particularly outside of their traditional remit. So yeah, for sure. I think it's difficult. And Libra, meanwhile, through Facebook, is about to launch in 2021. And that just creates added urgency for the central banks. Do you think the launch of Libra is going to be one of the biggest stories of next year

for the financial sector? Is that something that everyone should be reading about and thinking more about than they are right now? I think yes. I think yes. Okay. As both a source of opportunity, but also a source of consternation. It'll be both. Exactly right. Exactly right. That's the beauty about being an investor, isn't it? Every time there's an opportunity. No doubt. The reason there's an opportunity, two sides to every trade. Absolutely. Couldn't agree with that more. And 2020 offers perhaps the greatest example of all

time of that concept. I want to ask you about some of the other stuff that you've been doing. So I read about Zuckerman's curse and the economics of fund management in your letter, I guess, a week ago. And I chuckled because we've had Greg Zuckerman here. But I want to read what you said about this concept because you're not really writing about Greg Zuckerman. But Greg Zuckerman, for those who don't know, published a book called The Man Who Solved the Market, and it's about a year ago. And it's about Jim – this is you. Quote, it tells the story of Jim Simons and his quest to build one of the largest and most successful hedge fund firms in the world.

It's an industry Zuckerman knows something about. Ten years earlier, he wrote his first book, The Greatest Trade Ever, about John Paulson and how he made $20 billion return in his hedge fund during the financial crisis. So you basically make the point that Zuckerman is top-ticking these people. He wrote about fracking in 2013 at the top of that. The Paulson book was – I don't think the book was a kiss of death, but I think he went on to destroy more capital than he ever made in its wake and then wind down the hedge fund. And then Simons hasn't had a great year this year, very publicly, not having gotten the pandemic markets right. But I think what you're saying here is not that Greg Zuckerman comes along, profiles these people, and then they forget how to make money. I think you're talking about the fact that size is the enemy of performance,

which is something that Buffett has always talked about. And by the time Zuckerman gets a book contract to write about someone, odds are they've gotten as big as they could possibly get and still do the quality of – the caliber of returns has to suffer because they're too big to do what they used to do. Talk more about that because I found this letter to be really good. I think that's right. I think you've nailed it. And Zuckerman, I don't know the man.

He's a great writer. I've read all of his books. And you characterized it exactly right. That size is the enemy of performance. And there's been a number of academic papers which have shown this going all the way back to 2009. They've analysed hedge funds and they've concluded that, and hedge funds are a good proxy for this, but it's true broadly within active asset management, that size is the enemy of performance. And there's not enough alpha to go around. And, and therefore, and the bet, therefore the bigger you get, the more of it you're, you're required to absorb in order to

share performance. And it's just not available to you anymore. So the problem though, is that let's say I'm a wealth management client at, I don't know, I'm, I'm, I'm just making up a firm, Morgan Stanley or bank of America, and I have $10 million invested with them. So I'm fairly big for wealth management, but not that big for the bank. But they want to give me a million dollars worth of alternatives exposure. Well, what are they giving me? They're not giving me an emerging hedge fund manager that's running $20 million and about to put up the best numbers of his life. They're giving me a hedge fund that's probably been around for 20 years, like Highbridge or something, and it's already enormous.

And there's no possible way whatever track record got it to its current size, it can continue to replicate now that it's already there. But that's what they're going to give me because it's safe. It's seamless. That giant hedge fund has the systems in place to absorb all this wealth management money from a bank. So like that's, that's like part of the problem with the asset class. Would you agree? Yeah, I would. So the way I phrase it and think about it is that there's a big, there's a conflict, there's an inherent conflict between the business of investment management and the act of investment management. You've expressed it exactly right. The downside from a business perspective,

the risk reward of investing with an emerging manager is very, very different from the investment risk reward of investing with that manager. An understanding of that, I think, informs a lot of the way the asset management industry behaves. And thinking about it as a business can be quite informative from that perspective, thinking about what their incentives are. Yeah. So you were quoting Buffett and Buffett says, quote, if I was running a million dollars

today or 10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could.

I guarantee that. When did he say that? In the 90s? Yeah, it was in the 90s. It was in the 90s. I'd like to see if we're able to reiterate that today, see how he would have done this year. So whatever problems he had in the 90s with size, you could multiply that by 10. So now he's sitting with $130 billion he can't find something to do with.

And he's got about $200 billion worth of securities at Berkshire already. All right. So now you think about this industry, and of securities at Berkshire already. All right. So now you think about this industry, and you were in the hedge fund industry, but you think about asset management, money management. For whatever reason, the problem of size and scale haven't affected the ETF giants, the index giants. Will they ever? Where do you fall in that debate of they're now too big and it's going to be harder and harder to earn a return just owning the index because of those issues of size and scale? Do those not apply to rules-based strategies?

The one advantage I would say over the market and rules-based strategies is that they are around for, they're going to be around forever. Now, and I know you're a big proponent of this is that they're going to be around forever. And I know you're a big proponent of this, is that timing the market is very, very difficult. And the advantage the market has is that you don't know if it's going to be down tomorrow, you don't know if it's going to be up tomorrow, but you know it's going to be open tomorrow. A hedge fund doesn't provide you with that understanding. A hedge fund may not be open tomorrow.

And if they close on you and redeem on you, fine, you're getting your money back, but you've lost that opportunity to either make back losses, which you may have been sitting on, or to compound any gains, albeit with a fee. Or is it more likely to get redeemed when a hedge fund is down versus up? That's what the data suggests. Right. Okay. So do you think though that the popularity of index funds ever gets them to the point where they market performance itself becomes hindered just because of the sheer amount of people mimicking the market itself? Or is that

the kind of thing that we're misguided in concerning ourselves with? I don't know. What's interesting is going back many, many years, there was always a view that there would be a point of saturation, that maybe when indices represented 50% of the market as investment vehicles, that there would be an equilibrium would have to reassert itself on the other side. We've gone through 50% and it doesn't seem to have had an impact. And not only has it not seemed to have had an impact, but this year we have this whole new countervailing force in the form of Robin hood traders and,

and people taking shots on individual stocks and stocks like Tesla that aren't even in the index going up 500%. Zoom, not even in the index, goes up 600%. So it's almost like, what are we even worried about? Because look at all this enthusiasm that there is for non-index investing. And it came out of the blue, and it was hard to have foreseen coming, but it seems like the people that said, no, don't worry about it. There will always be people willing to bet that they can do better than the market. That ended up turning out right. And it didn't take long. For now. For now. Okay. You think we'll get bored eventually?

Again, I mean, you're a student of financial history. There's an inevitability to that. Sure. Okay. And speaking of inevitability, your column from, I guess, this weekend, maybe Friday, or your letter from Friday, you talk about this dearth of rogue traders. We don't seem to have any anymore. We used to have, you said, one a year. You mentioned, I think you were

quoting John Gapper. I know John, but you were paraphrasing something that he had said, which is that rogue trading is like an inevitable part of the capital markets. You almost can't get along without them. But we don't have any. Why wasn't there a huge rogue trader scandal unveiled this year with the market falling 30% and then rising 40%? What are we missing? Exactly. So it's interesting. So I mean, clearly systems have been improved over the course of the past 10 years or so that the term rogue trader was coined by governor of the bank of England. He was talking about Nick Leeson who brought down bearings bank great movie right yep and so i i introduced that newsletter with my own reminiscences of applying to work at bearings bank kind of nine months before

nick leeson brought it down but he yeah he so he coined he coined that and subsequent to that there was as you pointed out kind of one road trading scandal pretty much every year. Even though they'd learned the lessons of Nick Leeson, they clearly hadn't applied those lessons subsequently at other banks. So what's happening? Are we just very good at detecting these things before they get too big? It kind of feels, I'm not sure what changed in 2012, that we were better at detecting them than we were after Leeson in 95. So I don't know if that is the case. at detecting them than we were after leasing in 95. So I don't know if that is the case. So the one hypothesis that I've arrived at is that what these guys were exploiting

is this massive information gap between what they were doing in the markets and what their management understood them to be doing. That markets, that financial innovation was occurring at such a rapid clip that no one could keep up with what was going on. I mean, you know, and we saw that even outside of rogue trading with some of the structures around subprime in the financial crisis. That financial markets were getting increasingly complex and fewer and fewer people understood actually what was going on there. And that information gap was being exploited by these rogue traders. Well,

I think the cost is so the cost is so high too. So, so that the incentive is to get better at catching them, even if it's a new generation and you weren't affected by, you still hear about the London whale. You still hear about Jerome Curville. Like you're, you're always going to be, if you're in a position,

you're always going to be wanting to be vigilant because the costs are still incredibly high when one of these things does escape. Huge numbers. And actually, the numbers multiply because then the regulator comes and saddles you with fines as well on top of the actual loss. So huge numbers. But the hypothesis is that the markets aren't getting any more complex. They're simplifying. More stuff. You talked about ETFs. More stuff's going to exchanges. More stuff is going through clearing houses. Regulation has imposed the brakes on financial complexity. And that information gap is still wide, clearly, but it's not getting any wider. And therefore, the ability to exploit it is somewhat diminished. So you were saying the largest rogue trader ever is not Nick Leeson, it's Jerome Curville. It is.

Now, he will contest that. He will argue that Sok Jen, they threw a lot of other shit into his numbers. Okay. So the six point, he would argue that he- Oh, they gave him credit for some other trades that they didn't want to be associated with. Exactly. Exactly. That's pretty funny. But let's take it at face value. So he joined the bank in 05, right? So he was doing things, you say, basically from day one, he was roguish and he was exploiting things that now when you read about, you say what kind of a bank wouldn't be able to detect this?

Like putting in a trade before an email and then when the email comes out, canceling that trade. Like you couldn't do that now. But that's because to your point, maybe technology gets sufficiently advanced where you can't actually rogue trade this is true now the risk though is is that the technology itself becomes a rogue trader so the great and again i'm going back a few years but the great story here was night capital which where where yeah where there were eight there were eight computer servers. Software was installed in seven of them, wasn't installed in the eighth, and a rogue line of code was left in that eighth server, and it brought down the entity.

It brought down Knight Capital. Is Knight Capital the only large firm that you can think of that's ever been killed by its own technology? It could be it, right? Great question. I don't know. It's a great question. They were market-making on the New York Stock Exchange, mostly for ETFs, I think, right? Redemption, creation. And then they installed this code and I think they were

running a test, but they were running a test with live money. And I think it ended Knight Capital. So that's the risk that the next rogue trader isn't even trying to be a rogue trader. It's a rogue line of an algorithm that has access to too much money. Yeah. Okay. Well, now we'll all sleep well

and get very excited for digital currencies. Yeah, exactly. All right. Well, listen, here's what I want to do with the last minute of you and I being together. I want to tell everyone who's listening that they absolutely should go sign up for net interest at Substack. So you're doing, I know you're doing these deep dives every Friday, but tell us about how people can read your stuff and what they get as a result

of subscribing or registering. How does it all work? So they can get a sub stack or they can go to my landing page, which is netinterest.email and sign up there. And basically once a week on a Friday, I'll put out a deep dive on something of interest in the financial industry broadly. And then also some other nuggets about what's going on that week. And again, it's global, it's financial services, and it touches actually quite heavily on technology as well. Yeah. And the breadth of this, like just in the last few weeks, I pulled this up, you've written about rogue traders, but then you've also written about the bank behind the fintechs, like a firm and all these

companies that are coming public now, who's lending to them? You've written about deglobalization, Fannie and Freddie, banking disruption, Goldman Sachs, Japanese bank consolidation, Ant going public and then not going public. The oldest bank in the world, the Visa-Plaid merger, which I think is off now. But like you're – the breadth of what you're doing, digital I think is off now. But like you're the breadth of what you're doing, digital wealth management, it goes on and on. The breadth of what you're doing, I think is just amazing. I could tell that you're spending a lot of your time reading and thinking, and I'm just getting so much from it. So I hope people subscribe to Net Interest, and I hope your letter gets much bigger. And we'll have you back on in a couple of

months. And we'll talk about all the newest stuff that you've written about. And really appreciate having you on today, Mark. Thank you so much. Thank you, Josh. It's been a pleasure. Absolutely. Keep up the great work. TheCompoundRWM.com for daily investing and market insights. You can watch all of our videos at YouTube.com slash The Compound RWM. Talk to you next week.