The Pomp Podcast - #252: Mark Yusko on How we got to QE Infinity from the Fed

Episode Date: March 26, 2020

Mark Yusko is the Founder and CEO of Morgan Creek Capital Management. In this conversation, Mark and Anthony discuss what is driving the current market chaos, how we got to QE infinity from the Fed, where we are in the economic cycle, who the winners and losers are right now, how institutions are currently thinking about their portfolio, and what certain assets should do over the next 5-10 years. =============================== BLOCKFI-----BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. =============================== If you enjoyed this episode and want to stay updated on everything Bitcoin, blockchain, and crypto. Check out Off the Chain newsletter by visiting offthechain.substack.com and join 35,000+ other investors currently subscribed to my daily investor letter.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Mark Yusko is the founder, CEO, and CIO of Morgan Creek Capital Management and the co-founder and partner at Morgan Creek Digital. He previously spent a number of years running the University of North Carolina endowment as well. In this conversation, we discuss what is driving the current market chaos, how we got to QE infinity from the Fed, where we are in the economic cycle, who the winners and losers are right now, how institutions are currently thinking about their portfolio, and what certain assets should do over the next five to 10 years.

This conversation was incredibly enlightening, and I always enjoy talking to Mark. Before we get into the episode, though, I want to talk about this episode's sponsors. The first is BlockFi. As you guys know, I'm a proud investor and user. They've got three products, deposit crypto, receive a U.S. dollar loan, deposit crypto and earn interest in their interest-bearing accounts of up to 8.6% APY, or go and buy and sell crypto on their new crypto exchange. They'll be releasing a new Bitcoin rewards credit card later this year that allows you to use a credit card but receive your rewards in Bitcoin. It's going to be pretty cool. Go check out BlockFi.com slash Pomp.

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We're trying to grow subscribers there. Go subscribe. Check out all the video content. This interview, plus every other interview, has video, and it's being posted there on a daily basis. All right, now let's get into this episode with Mark. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

All right, guys. Bang, bang. I've got Mark here with me calling in from North Carolina. Thanks so much for doing this. Well, thanks for getting together. And I wish we could do it in person, but we're on lockdown, so we can't hang out together. Exactly. You have extensive experience across a number of different seats in the investing community.

And I think a lot of people really value kind of your insight, having both been on the allocator side as the CIO of a very large endowment, and then also as an investor. Help us understand kind of with your experience, what exactly is going on in the markets right now and what's driving this chaos? Yeah, look, it's the $64 trillion question. And that's a big number. I think the issue is, it's the end of a cycle. And people thought, well, this couldn't happen. The Fed put was always going to be there. And I think what people are realizing, again, it's not the first time, that 90 or 85 plus percent of options expire worthless. And every Fed put that we've ever had has expired worthless as well. You go back to 2000, 2001, you had the Greenspan put. Everybody thought the market could continue to go up. It would never go down. Tech bubble continues to inflate. I'll never forget the FAB4, CIMQ, Cisco, Intel, Microsoft, Qualcomm, in 2000, no-sell recommendations, all-buy recommendations, estimated to be the four top-performing stocks of the next decade, and collectively, they went down about 80%, 80%. And if you held that four-name portfolio to today, you're still underwater.

The only one that's up is Microsoft. The other three are still down. And so this idea that Greenspan had your back, it just didn't work because a recession came, the cycle ended, and then they tried to bail things out with stimulus in 2003 around the Iraq war. And it worked, right? It got people employed. It got oil prices to fall and stimulate the economy. And then we went on the next cycle. And then we built up the bubble again. And Bernanke took over and we had the Bernanke put. And real estate prices could never go down. There was no chance we'd have a recession. And then bang, the big short comes and the cycle ends again. The Bernanke put expires worthless. And the problem that second time was leverage. So everyone had levered up, primarily the banks, but also individuals. And so there was a lot of ownership of assets, particularly stocks and bonds, that were owned on margin. And margin calls are devastating, because they cause crashes to happen really fast. And so you saw that unwind. And then, you know, in March of 2009, the Fed created this, actually didn't create it, they stole the idea from the 1930s of QE. You know, people think QE is new. It's not. It was invented in the 30s when the United States was an emerging market run by a gang, right? The mafia was in charge and no one would buy our debt because we were over indebted. And so we had to buy our own debt. And so we plunged interest rates down to zero. we had this little thing called 1929 crash and then it was a series of policy mistakes in 1930 that caused a garden variety recession to become the great depression so fast forward to today for the last two years kind of like 27 to 29 uh people were saying oh this could never end

And, you know, the Fed has eradicated the business cycle. You know, back then it was called the Roaring Twenties. And here we had kind of this roaring environment where everybody was getting rich and text multiples got back to where they were in 2000 and even worse. And so everyone thought that the Yellen slash Powell put would save us. And now what we just found is that put expired worthless. And we've had a crash, the first part of what I think will be a bigger crash. We can talk more about that later. But that's a long answer to your question, Pomp, about, look, we've seen this movie before.

We know how it ends. All markets are cyclical. Trees don't grow to the sky. Valuation does matter. I would say Newton was right. You know, gravity rules. And if you go back to 1929, the great quote from Roger Babson, who was a big Newton aficionado, in fact, spent his whole life trying to invent an anti-gravity machine. But he said in September of 29, I repeat what I said last year and the year before.

So he said it in 27. He said it in 28. And here he was saying in 29 that a crash is coming and it could be terrific. And people didn't believe him the third time, because he was wrong early, euphemism for wrong. He was wrong in 28. He was wrong in 27. But he wasn't wrong in 29. And so just because you're wrong or early doesn't make the actual prediction wrong. So market did crash just like you said it would. And I think the same thing happened here is for the last two years, myself included and others have warned that valuations were reaching stupid levels, that there would be this end of cycle correction, and that when it occurred, the risk is that the policy decisions would compound the problem instead of making the problem better. And I think that's where we are right now. And so as we look at kind of what's transpired, obviously, there's the virus and people, I think, will blame a lot of kind of the economic issue on that. But that's not the full story.

So maybe kind of walk us through how have we gotten from that roaring period to now, you know, double digit losses in a matter of months, in really one month, in the stock markets, commodities falling and kind of this deflationary liquidity crisis? Yeah, look, it is, again, that giant question for all of us to think about. And it's why Congress is pulling out all the stops and pulling out the giant bazookas with a couple trillion. And I love how we throw the T word around, right? I mean, in the 30s, it was millions. And then in the 60s, 50s, 60s, it was billions. And then in the 2000s, it was hundreds of billions. And now we're talking trillions. and a trillion just one trillion forget two or six or whatever the number is but just one trillion is a dollar every second for 31 710 years i mean that's just a giant number and so congress is freaking out the fed is freaking out you know they put out four trillion and that's a headline number they've offered four trillion of support but no one's actually borrowing that money. I think the day they put out the trillion dollar repo line, only 17 billion got pulled

by the big hedge funds. And don't, let's be very clear and transparent about this. The Fed action was to backstop these quasi-financial institutions that while the banks don't need a bailout this time, because they've been restricted because of Dodd-Frank in how levered they could get, there are no such restrictions on the big hedge funds and prop trading desks off wall street so they have huge leverage you know arguably 10 15 20 times and some of them were gone right they were just done and i still think there's going to be some bodies that float to the surface here over the next couple weeks but yeah all that money is really interesting about the about the leverage i want to go a little bit deeper on that because

um two things here so one is we've seen a couple of firms who haven't been able to meet margin calls kind of raise their hand and have to alert people to that. But I don't think people really understand this whole repo market and kind of bailing out of the hedge funds. Maybe just explain that a little bit more as to kind of what's happening there and how the hell is it hedge funds on the other side of that. Yeah, look, it's a really interesting phenomenon, right? Which is leverage in and of itself is not a bad thing, right?

Many of us use leverage in our lives, although I guess it's getting less common as less people own homes, but anyone who owns a home uses a lot of leverage, right? They put 20% down or less, you know, some FHA loans are 3% down or 2% down. So you're using a lot of leverage to buy physical assets. And it's not different in the banking and finance world, like a bank takes a deposit, and they hold a portion of it, they lend out 90 some odd percent of it fractional reserve banking somebody else deposits that 90 cents then they keep another nine cents they lend out 81 cents and so you get this rehypothecation you get this building up of leverage in the system and all those loans that went to quasi financial

institutions or hedge funds a lot of them started doing trades around fixed income markets that historically they wouldn't have done because there was plenty to do in equity markets, but equity valuations got really high and they would normally do things like arbitrage, merger arbitrage, or convertible bond arbitrage. But in a ZERP world, in a zero interest rate world, arbitrage is really hard.

When you think about it, if you're a dollar long and a dollar short, your dollar sits in cash. In the old days, you made 6%, 7% just on your cash. then you made money on your long you made money on your short and you were levered so making double-digit returns as a hedge fund was child's play now you had to have some skill um but it really wasn't that hard in a zerp world uh you're not making any money on your cash you actually have to pay to borrow so you have no short interest rebate where you were making money

you're actually paying to borrow so you're in the hole alpha gets crammed down because there's so many firms competing for the same ideas. Because again, the old days of investing, it was about access to information. Not illegal information, but access to information. If you could get information faster, if you could get information that other people didn't have, then you had a huge advantage. Well, suddenly, with the advent of Bloomberg and other resources, information became ubiquitous. And once information is ubiquitous, access isn't really that valuable. Then it became about processing. Did you have computers that allowed you to process information faster or model faster or build, you know, ideas faster? And the problem is that everyone got fast computers.

So that went away. So then it became about synthesis, like who could synthesize and who could take all the disparate information and information became a commodity. Again, information became ubiquitous. Everyone had the same information. It was in real time. You had actually regulations, like Reg FD, as my friend in Boston calls it, Regulation Feckin' Disaster, that disallowed people from doing their job, which would be to build relationships with corporate CEOs and CFOs and be able to ask them really hard questions. And the answer has to be, no, I can't tell you that. I got to release the information to everybody.

So it all became about synthesis and understanding what's not important and what is important. So all this comes down to the fact that these funds started doing some of the things that the infamous long-term capital management did, things like basis trading or things like convergence trading. And let's just talk about a convergence trade for a second. If you take a 30-year bond, we know one thing with certainty. In 365 days, it will be a 29-year bond. Then four, it will no longer be what's called on the run, meaning the popular treasury for hedging and investment purposes. With absolute certainty, in 365 days, it's a 29-year bond, no longer a 30-year bond. Now, a 30-year bond trades more expensive than a 29-year bond, even though they're basically the same bond. But you can make five basis points. Well,

five basis points isn't a lot. But since it's a guaranteed event, there's no risk. Well, there's no risk if you can hold the trade for 365 days. But let's say you put on a five basis point trade and you put a hundred times leverage on it. And let's say there's some dislocation in the market and that five basis point spread goes to 10 basis points. You've now lost everything. You get a margin call and you're forced to liquidate, even though you know with absolute certainty, if you can just hold the trade. So that was one type of thing that started to blow up. But then there are these other bonds that people were buying in the hedge fund space where there's what's called mark-to-market risk, which is if you think about liquid tradable

senior debt, bank loans, senior secured loans, investment grade bonds, they should trade at par, right? You're going to get your money back. They shouldn't trade at a discount. Ah, but wait a second. If there's a liquidity crisis, if there's a period where people get afraid. And that's where COVID comes in. COVID becomes a stimulus, a prick to the bubble. It's not the bubble itself, but it's the pin to the bubble. And suddenly people are fighting for liquidity and they get a margin call on their equities. But when you get a margin call, you're not able to sell what you want to sell. You sell what you have to sell. And so some of these bonds that were very, very safe suddenly gapped down. So you had, you know, senior secured

bonds suddenly should trade at 99 or 100, suddenly trading at 90. Well, if you own those with cash, no big deal. Oh, but if I own them with 10 times leverage, I just lost all my equity. So these things start unwinding. And you saw, you know, LQD, for example, the ETF for investment grade bonds fell 7% in three days. It's never fallen 7% ever. It shouldn't fall 7% because it's investment grade bonds. And those bonds, most of them are going to be money good. Ah, unless, and we'll talk more about this later, unless the response to the virus in shutting down global economic activity leads to actual defaults in those investment grade bonds, because they borrowed too much money. They didn't spend enough on R&D. They didn't save for a rainy day

and they don't get enough bailout money. It's a long-winded way of saying funds were doing things that normally appeared to have low risk, but a black swan event, which wasn't necessarily the virus itself. The virus is a bad thing and we can argue how bad it is. If you look at the number of people who've passed away from influenza this year. It's 23,000 in the US and COVID has had 820 deaths. Which one is worse? I'd argue 23,000 is worse than 820, but maybe 820 is going to grow and so we can have that debate all day long. But the key is, it's not the virus, it's the response and the drop in economic activity, the drop of cash flows, and the threat of what seemed like a very, very safe thing suddenly becomes unsafe. Yeah. And so when we get into the bubble gets

pricked, the virus happens, the government essentially mandates economic shutdown. I keep saying the government literally told small businesses, you have to shut, which then forced them to fire their employees. And we get this cascading effect. Then all of a sudden, we start to see the Fed and politicians go to work, right? This is their time to shine. This is their Super Bowl. They're going to come in. They're going to save everyone.

What do you think so far about the Fed's response and then also about kind of the politicians and the stimulus response? Yeah, look, I don't like the Fed, full stop. Let's just be clear, right? They call it the creature from Jekyll Island for a reason. You know, I think the Fed has one job, and that's to enrich bankers. And that's always been the job, right? The Fed was created by, you know, John D. Rockefeller's father-in-law, who was the most powerful senator in the world back in 1910. And, you know, John D. Rockefeller, Titan, and JP Morgan were good buddies, and they didn't like the competition from these trust companies that were coming up in the banking system. And so they had this plan to create a lender of last resort to support the banks and make sure they'd never have a bank crisis again and runs on the bank.

Although I'm sure everybody saw the video of the head of the FDIC saying, please don't take your money out of the bank, else there'll be a bank run. Could you trigger a bank run any better way than saying that on live television? Crazy. And now it's gone viral on the Internet. It makes it even worse. But the Fed, their response is always predictable. The Fed has one job, and that's to enrich bankers. So they don't care about the little guy.

They don't care about corporations. They care about banks. And so if you think about it, Fed funds, who borrows at Fed funds? Do you borrow at Fed funds? Do I borrow at Fed funds? No. Banks borrow at Fed funds. And what do banks do?

They borrow at Fed funds. They buy treasuries because no one else will buy treasuries because who would buy bonds of an over-indebted country that's issuing trillions of dollars of deficit every year. No one. So there has to be someone to buy it. So the Fed has bought all they can through QE. So they lend money to the banks and the banks buy them. That's actually a riskless trade. JP Morgan last year had zero negative trading days. That's impossible if you're actually trading. No one's that good. But if you borrow and invest in a riskless trade, that's a pretty good deal and you lever it up 11 12 times you're good so the fed since 2009

reliquified the banks now despite reliquifying the banks the bank stocks are still falling why are they still falling well because people have realized in zero interest rate world or worse negative interest rate world the banking system breaks down and you look at japanese banks for the last 20 years they've gone down european banks for the last 16 years gone down u.s banks are going to keep going down. And there's lots of reasons why that's going to happen. So the Fed's doing their job. They're trying to protect the banks and non-bank financial institutions, Citadel, Millennium, Bridgewater, all these other non-bank financial institutions that are now too big to fail. So I'll say the Fed's doing what the Fed has to do.

Full stop, I don't like it. I don't think it's that effective. And I think the market last Monday was proof. The Fed says, we're going to lower interest rates all the way to zero. overnight Sunday emergency after the emergency 50 basis point rate cut the week before, and the market still went down 10% that morning or 9% that morning. So I think people realize that the Fed has lost credibility. I call it, you know, hashtag Fed in a box. They have no choice but to do what they're doing. And they're going to print as much money as necessary to keep the system liquid. But therein lies the problem. We don't have a liquidity crisis. We have a solvency crisis or potential solvency crisis. And just like in 2009, liquidity can't solve

a solvency crisis. And the problem is we need a raft of bankruptcies to occur and cleanse the bad companies. So that's where the fiscal comes in. So now, as of this afternoon, I guess, we're going to have this giant save bailout plan where we're going to hand money to malfeasant CEOs and corporations who have frittered away their competitive advantage by not investing in R&D, not investing in people, not investing in property plant equipment, not saving for a rainy day, levering up and buying back their stock because they needed to feed the beast of QE. Now, what do I mean by that? Well, the Fed is not allowed by law to buy stocks. Well, the only buyers of stocks over the last three or four years have been buybacks. Why? Well, because the boomers, myself and all my brethren and sistren, 10,000 of us turned 65 every day. I still got eight years to go. But every day, 10,000 of us turned 65. And another 10,000 of us turned 71 and a half. In a 71 and a half, you have to withdraw from your retirement. And so a trillion dollars has to come out over the next 17 years. Each year, that's 17 trillion with a T, has to come out of stocks, some bonds, but mostly stocks, out of 401k plans and retirement plans.

So that was a negative drag. It also turns out that 65 to 85-year-old people don't like stocks. They like bonds. And other than Mario Gabelli, who took the picture of him buying green bananas yesterday on Twitter, legend, by the way, Mario's awesome, most people don't really want to plan for the future. They want the now. They want to have money now. So there's demand for stocks went down other than buybacks. Well, why did buybacks go up? Well, the Fed, unlike the Bank of Japan or the Swiss National Bank, which are allowed to buy stocks, isn't allowed to buy stocks. So what they did is they cut a deal. They called all the corporate chieftains and Buffett. Anything that Buffett owned was now suddenly going to be given a massive tax cut.

In exchange, you can't do R&D. You can't buy new facilities. You can't hire more people. You have to buy back your stock. And so Apple, my favorite one to pick on, has the same profits as 2015, yet their earnings per share, quote unquote, air quotes, is up 20% because they retired a bunch of shares. Well, who bought Apple five years ago? Oh, Warren Buffett. But he said he hates tech stocks.

Well, they're not tech stock anymore. They're a mature business that is milking a cash cow and buying back their stock to fabricate artificial earnings growth. So you have that happening all over. I call it stealth QE. That now stops because prices are falling. So now you got the last buyer of stocks gone. Companies are flailing. And they're saying, well, now you got to help me government. So what does the government do? Whoever paid the most into lobbying is getting the biggest check. And I thought the great calculation someone put out there is if you just divided the total number by the total number of people in the U.S., excluded babies and just talked about adults, it's about $58,000 per household. We're getting checks for $1,200 each plus $500 for our kids, 3.14 people. That's about $2,900.

Where's that difference from $58,000 and $2,900 going? oh, Wall Street executives, hedge fund managers, and people like BlackRock who are going to get to manage these big funds that are created. Call me cynical, but I think that sucks. Yeah. One of the things that's really interesting as we go through these economic cycles is the people who are hurting the most. And I think where I have the biggest problem is the everyday American citizen and the small business. A lot of this economic cycle, they don't even have a fighting chance right if you think of what the government basically did is they said you have to shut down and so you know if i walk down the street in new york city

and we're talking 70 plus percent of the businesses are closed right and it's not because the economic cycle got so bad that they couldn't uh survive or it's not that oh we have a little bit less demand and we just mismanaged our cash it's that no the government mandated that i shut down and therefore i went from whatever revenue i had to zero overnight of course i have to fire my staff. I can't survive, et cetera. But what's hilarious to me is at the same time that the small businesses are getting shut down and not really getting nearly as much relief, the companies that are getting these huge bailouts, they're still operating. The airlines are still flying. Now there's less demand, right? There's all these issues, but the government didn't shut them down.

And so it just feels like there's a mismatch both in the treatment of who has to shut down and who doesn't. And then on top of that, who's getting what in these bailout packages or these relief packages? Look, you're tempting me to go down my rabbit hole on, and I even retweeted one of your tweets today with this, that if we assume that that's not the plan, then everything makes sense. Unfortunately, if we assume that the plan is, as I call it, hashtag dictator playbook, If the plan is to concentrate the assets in the few and impoverish the many and make them dependent on government, then everything's working just the way it's supposed to. And all these decisions make perfect sense if you view it from that perspective, as opposed to the perspective of we want to help as many people as possible. And people say, oh, that's ridiculous.

Why would they want to do that? So let's think about the series of events that's happened over the last three or four years. everything has gone to this plan right they gave the fat cats right the corporate executives and corporate companies the big tax cut middle class didn't get a big tax cut the you know the impoverished didn't get more help didn't get more resources we didn't increase lending for small business formation in fact we have the smallest rate of small business formation part that's related to housing not as many people can afford housing so there's not as much home equity which is a big source of financing new businesses uh so there's all these things that uh point to

wait a second if if i'm trying to consolidate wealth in my own family in my friends what we call crony capitalism in the biggest contributors to my campaign you know just to go completely down the rabbit hole for a second someone said you know it's weird that we haven't identified the companies that would provide the drug to combat COVID-19 and particularly ARDS, the advanced respiratory distress syndrome, which is, it's not the virus actually that's killing people, many of the people, it's actually the response, the immune response of the body to the virus itself, which actually can be controlled with this drug that Korea used to lower their death rate and other countries have used. And my cynical view was, well,

none of the drug companies were able to pay off the amount to be the sponsored drug back you know if you go back to 2003 it was very interesting remember the anthrax scare and you know we were all supposed to take tamiflu well it turns out the reason tamiflu was or no not not tamiflu um cipro cipro the reason cipro was stocked by the you know the uh the military and everybody was supposed to stock up on Cipro was Donald Rumsfeld was the chairman of that company. There are plenty of other companies that made similar type drugs, but Secretary of Defense was the chairman of the company. How does that work? So I think we're seeing many of the same problems today in that we have interested third parties, we have conflicted third parties,

we have people making decisions based on their own pocketbook. And I actually believe, unfortunately, that the plan is just like in the 30s to create as much disparity between the haves and the have nots so the greatest income inequality in history up until last year was in 1929 1930 right before the depression and it got worse during the depression same thing i think is happening now is we have this massive inequality and if you actually push the economy into depression and people say that's ridiculous that could never happen i don't know it's possible anything's possible but if that actually is the plan then what it does it creates an environment where the rich stay in power all the wealth flows up because they have to print money to devalue the

currency which inflates scarce assets like real estate fine art collectible cars and stocks Remember, 49% of people in America don't own stocks at all, right? Not only do they not own trading stocks, they don't own anything. They don't have a pension. They don't have a retirement account. You can't even come up with 400 bucks to pay an emergency bill. And now you've got restaurants who have 16 days of cash who have been forced to shut down.

And I'll give you the example. And I shouldn't pick on this guy, but it just made me so angry when I watched him. So the commissioner of basketball gets up saying he's canceling the season and he's looking so social justice warrior and I'm such a great guy. And I'm thinking to myself, yeah, that's great. But what about all those vendors with all their hot dogs and hamburgers and Coca-Colas and t-shirts they've paid for? They're not going to be able to sell. Who's going to pay their rent? Who's going to keep them from being homeless? Who's going to pay their healthcare premiums? so now they don't have coverage. What if they actually get the virus? I mean, you could spiral into some really, really dark times, all on the account of, oh, we want to slow the spread of this particular virus. But I'm like, wait a second. There are threats every single day. I said 23,000 people have died of influenza. A whole bunch of people, here's a number most people don't know, 1.2 million people this year will die from tuberculosis globally. Not very many people

in the US, but around the world, 1.2 million people. That's a lot of people. No one ever talks about shutting the economy down to stop the spread of tuberculosis. So I just think there's something else going on of why this is the thing that we chose to literally grind economic activity to a halt. And the problem with flywheels, right? Once the flywheel stops, it's really, really hard to get started again. And I think the economic damage is going to be really bad for a while. Yeah. One of the things that, and this is always a sensitive subject. So I caveat it with for people to listen to what I'm saying and kind of leave the emotion at the door. but um jason and i were talking about it it's just like when you have bad data whether you make a

good analysis or a bad analysis of that data you end up making bad decisions because the data was bad and what i mean by bad data here is we know with pretty high accuracy how many people have died right for the most part yes there are some questions about somebody could have died and it could have been labeled or you know mislabeled or whatever but for the most part we know the people who have died from the virus and kind of their immune response, etc. What we don't know, and pretty much everyone admits, is we have no clue how many people actually have the virus or have been infected. And the data points that just blow me away are, you know, they tested like two NBA teams, and nine people on the team, on the different teams had COVID-19. And they're out

there playing NBA games, you know, the night before, two days before, one out of the nine, I think, showed symptoms. And so you get into this thing where there's actually probably a lot of people who have, they're asymptomatic and they're kind of walking around and maybe they thought they had the flu or they don't show any symptoms ever. And so when you don't understand what the accuracy of the denominator is, we just can't make good decisions because we don't have the testing in place to actually understand how, you know, what is that mortality rate? How bad is this? And then we go and we make, you know, obviously very kind of bold decisions, whether they're good decisions or not. We just don't know because we don't have good data to look at.

No, it's such an important point. And look, we know the data's bad, right? There's no question the data's bad. We didn't have enough tests. We weren't even aware of the virus in its presence in the US for probably four or five weeks. It was probably here and we just didn't even think about it. So we know the data's bad. And to your point, the death data is absolutely easy to ascertain, right? There's a death certificate, there's a body. Now, what we are learning, it is possible in some cases where there's comorbidity, right? Someone has lung failure, heart failure, and then they get the virus while they're in the hospital. And if they code that as a coronavirus death, is it really? So that's one of the things that they're talking about in

Italy. Because if you look at Europe, Europe is really the epicenter of the virus in addition to to China. And if you look around Europe, one of these things doesn't look like the others, right? Germany, almost no deaths, like 194. Switzerland, one of the highest per capita infection rates, very low number of deaths. The Nordic countries, Sweden, Norway, and Denmark, very low number of deaths. So it's only Spain and Italy where you have this very high mortality rate or case fatality rate, that just seems odd. The data just seems inconsistent. So to your point, if you have bad data, you're going to react to things and you're going to make potentially bad decisions. It's kind of like we're talking about in investing, right? If you had access to good

information early, you could make a good decision. Well, what if you had access to bad information? What if somebody fed you bad information? You'd make a bad decision. Or what if you synthesize the data wrong. You miss something in your exclusion, you make a bad decision. Or what if your model had a mistake? There's the famous story of one of the most successful real estate investors in history, Barry Sternlich. He was kicked out of JMB Real Estate in Chicago because they blamed him because they said he took down the firm because he had a mistake in his spreadsheet because none of the other partners knew what a spreadsheet was back then. I'm that old, right? And the crazy thing was Barry might have had a mistake in the spreadsheet, but that's not why they went down.

They went down because they had too much leverage on real estate into the financial crisis in the 90s. So it wasn't Barry. And Barry turned out to be a really smart real estate investor and billionaire now. So he's done okay. But the other thing that's interesting to your point is some of the decisions we're making are decisions without knowledge. And I'll use just one example. So school closures. Sounds like a great idea. Oh, it's brilliant. Oh, let's think about this for a second. We know one thing about this virus. Its impact on aged population is much, much worse. Case fatality rate for over 70, much, much higher than under 70. And in fact, under 65, the recovery rate is like 99.9 something. So it's not 100, but it's pretty close. so and in the lower cases there's very few incidents under 10 almost no incidents is

under 10 very strange but that's what it is so if we left schools open those people who are young healthy and resistant to the virus could have kept the virus amongst themselves by closing schools particularly colleges and sending those people home to be with their parents who are my age in their late 50s or their grandparents, what if? And I'm not saying that necessarily happened, but it's a higher likelihood of spreading the infection to the vulnerable population. And when we think about actions, we have to think about reactions. And the closure of all activity seems like a really bad idea.

the protection of vulnerable populations like my parents are in their 80s i am really worried about them being exposed because this virus is very harmful and in fact to personalize it a little bit one of my very good friends his wife lost both parents in the last two days to covet 19 tragedy i mean absolute tragedy just can't even comprehend it um so i'm very worried about this. And I'm doing everything I can to protect that vulnerable population, even to the point of excluding my contact with them, my kids' contact with them, their grandchildren. We're just not going to let it happen. So I think thinking through the process rather than just reacting to the process probably makes a little more sense. Yeah. And I think as part of this, I want to talk

about kind of winners and losers, right? And there's kind of the macro view of winners and losers, which is, I really look at it as a trade-off decision between we can let the healthcare system kind of collapse or be inundated, or we can let the economy collapse, right? And it seems to be everyone is presenting this black and white choice. I think you and I probably are more, hey, it doesn't have to be a black and white solution, right? And what the details of that are will be debated forever. But I think just getting people thinking along that line is important. Let's go back to the investing world. And as we see this kind of market chaos and the fallout of the liquidity crisis, et cetera, who are the winners and the losers kind of coming out

of these situations? What are the types of investors or strategies that should be doing really well versus the investors that are probably just taking it right on the chin and losing a lot of money right now? Yeah, look, it's a really interesting dilemma for investors because in times of true crisis, and we have to say this is a crisis or a crash or whatever word you want to use, there's really only one place to really hide, and that's cash. Cash is king. It always has been. And people say, oh, but it gets devalued. Well, yeah, over the long term, devalued. Short term, particularly dollars, actually appreciate because flight to safety is the world reserve currency. So owning dollars has actually been a really good place to hide. The other thing that's

been a winner is bonds. And it's interesting that most people would say, well, bonds are an inferior investment to stocks. Well, yeah, over long periods of time. But actually, in the last 20 years, long duration bonds have beat stocks because interest rates have continued to compress. And look, we're going to have lower for longer and potentially even negative rates around the world because of bad demographics, too much debt, and deflation. So long-duration bonds are probably still a pretty good place to hide. And in fact, maybe one of the best places would be Chinese long bonds because they have the highest yields around the world, and they're going to zero too because they've got banking liabilities and bad debts from their shutdown that are going to ripple

through their economy. So there's going to be some significant need for them to lower interest rates. So beyond that, let's think about the losers. The losers are clearly over leveraged companies because they're not only going to have a liquidity crisis, but they're going to end up with a solvency crisis. And we got lots of examples of those. You have the highest level of corporate debt in American history. And everybody thought that was great as long as interest rates were low and the cost of carry of the debt was low, but no one anticipated a demand shock of epic proportions that would

cause this type of, you know, come to Jesus moment for these companies. So I think, unfortunately, as we talked about earlier, the most egregious offenders are the most well-connected and they're actually going to get helped, where the people who didn't do anything to cause this problem, They operated with prudent leverage, normal business activities, small, medium enterprises. They're going to get crushed because the money's not going to get there fast enough. It's not going to be big enough. And there's too much red tape to get those loans. Whereas the Fed gives loans to hedge funds directly.

So that doesn't make any sense to me. So the other thing- Mark, so you've obviously sat in the asset allocation seat and the investor seat. maybe help us understand how endowments, pensions, foundations, et cetera, how those investors are thinking about the market situation right now. Look, I think the big question for institutional investors is they make most of their returns on the big picture decisions from an asset allocation perspective. Should I be in stocks? Should I be in bonds? Should I be in currencies or commodities? Should I be real estate or private investments, venture capital? And so all those

big picture decisions are usually coded into strategic investment policies. They don't change that often. Hopefully, the institutions exercise discipline coming into year end with the big move in US markets, and they thought about rebalancing. And then there's the second order decisions for the big asset classes to within equities, do I want to be in US equities, Japanese equities, emerging market equities do i want to be in small caps or large caps or value or growth and then there's then there's other decisions on geographies and you know stage for example in venture capital i want to go early stage or seed or late stage or growth equity so all those decisions are are pretty hard-coded uh times like this it really comes down to the manager selection

So there's asset allocation, manager selection, portfolio construction, and security selection. I'll say 85% of the returns come from the first three, the big picture asset allocation, which managers you pick to manage those assets for you, and then how much you give to each manager. Let's say you pick 10 managers. Do you give them 10% each or you give 50% to one because they're awesome and you give 5% to the others? And then security selection kind of gets outsourced to the managers. In these crises or these fast-moving markets, those decisions, you know, should I buy United Airlines or American because which one's going to get bailed out, those decisions are out of your hands as an allocator.

So you have to trust that the managers you picked are well-suited to the environment. One of the challenges there is what if you had a whole bunch of growth managers coming into the end of the year? You didn't rebalance and all these guys were long the fangs and the fangs start getting crushed. And then the passive unwinding, as I call it, you know, hashtag passive aggressive starts happening where on the way up, it's a virtual cycle. All the growth names go up because the ETFs have to buy them and the low volatility ETFs have to buy them and then the momentum ETFs have

to buy them. Well, on the way down reflexively, back to Soros and reflexivity, that virtuous cycle turns vicious and everybody has to sell. And you don't care what the price is, you just have to sell and there's liquidations. And you kind of saw that happen at the end of the day in the markets today is everything looked great up until the last 15 minutes when the ETFs were forced to sell because they had a bunch of sellers. So they don't get to think, they don't get to say, I think Facebook is cheap here. They just have to sell. So I think it's really hard for institutions to be tactical at these crises time, particularly when they happen fast. If you go back to 2000, 2001 2002 we had two years to kind of get ready for the downturn and distress debt we could go

out and give howard mark some money and he could get bruce karsh together and they could go look for all these great companies that were going to default on their debt in 2002 and then it took six months to default and go through bankruptcy and we had the chance to buy in and and you know it was great. We made huge returns. You come to 2008, 2009, you had about 11 minutes at the bottom to try to allocate resources and find the managers and go buy the bonds. Because as soon as they announced the big QE, all those things bounced off the bottom. And I think the same thing is true today. I mean, look what could happen in the last two days, is they start talking about the deal in Congress on Sunday. They actually haven't passed anything. But in anticipation,

you had stocks like Boeing and the airlines bounce 50, 5-0 percent. Impossible for an institution to take advantage of that, by and large. I mean, there'll be some that trade around the edges, but you have to hope that your managers were well-suited. The challenge is, at what point does a growth manager vary into the value space and buy things that went on sale? or do they stick to their discipline and do what they're supposed to? And did people have enough foresight? I mean, we had some, I'll call it luck.

Maybe there's a little skill, but we had added a manager famous on Twitter, John Hempton from Bronte Capital. We added him in a big way at the end of last year and people kind of looked at us funny, like, what are you doing giving him money? He had a crappy year this year. Like, yeah, but his long-term track record is great.

You want to add those managers precisely at the time that they have a tough short-term period, because mean reversion says they're going to do well. And through Friday, they were up 8% with the market down almost 30%. So you make back a lot of underperformance in a hurry if you were willing to buy value when nobody else wanted to. Now, that's just one example. We've had plenty of other mistakes. But I think your question about how does an allocator, how does an investor think about these types of times? I think it all depends on speed. We've all been conditioned by social media, by what I call nowism. Everything's about right now. Nobody thinks long term. Everything's about what happened 15 minutes ago or 15 seconds ago. And nobody's taking time to step back and say, hmm, what is this response to the COVID threat going to do to economic activity? Okay, probably going to be negative. Well, what's that going to do to earnings? Probably going to be negative. How much of the stimulus money is going to help the solvency problem of a lot of these companies? The liquidity may help, but the solvency problem doesn't get solved. How are we going to restart demand? How are we going to fix the oil war between Russia, Saudi, and the US, the shale war? All these things, we should step back and think about them.

But because we're all conditioned to, oh my gosh, it's going to be a V-shaped bottom and I'll miss it. If I think it's like the famous scene from Top Gun, my favorite movie of all time, where they're sitting in the pre-flight room and they're reviewing Mavericks flying. And, you know, Charlie says, you know, Maverick, you know, you go to a split S. What were you thinking? And he says, you don't have time to think up there. If you think you're dead, like such a great line. And then the guy behind him says, gutsiest move I ever saw. So that's kind of where we are is people have been conditioned that you can't think, that you can't step back and think long term, that you've got to react because every bottom in a upward market is BTFD, buy the freaking dip. That, I think, broke down in February. And now I think it's STFR, sell the freaking rip.

And every time you get a big move up, I think you should be selling into it and accumulating cash to buy at the real bottom. And it was funny. Someone asked me the other day, so when should I buy? He told me to get out. I got out. I'm really thankful. I appreciate you helping me make money, but when do I buy? And I said, well, you know, one indicator, and I'm not actually a huge fan of Mr. Buffett, like some people are, but I do think he's a great buyer of bottoms. And when he buys, that's a good time to go in. He hasn't bought yet. Yeah. It's pretty interesting that he's sitting there on, what's it like $120 billion in cash. We've heard nothing from him yet. So I'm sure he's cooking up something there. I want to go

through, I don't even know if you know that this happens yet or not. Speaking of investors and kind of big bets, Bill Ackman today wrote a letter. And in the letter says that at the beginning of March, he put a $27 million short on to basically bet on the economy tanking and the market's going down. And it has produced $2.6 billion in profits. One, did you even know this? And two, what's your thoughts about this? Yeah, look, I knew about it and heard about it a little earlier. A couple things. Look, you know, Bill Ackman, he's very good at structure. So the decision, you know, to put on a position that you think that the market's overheated or overvalued and is going to go down, you know, you could, you could just get out, right. And go to cash. If the market

goes down 30%, you save 30%. And that's fine. And you look like a hero, but, but you only made 30%, or you only saved 30%, so to speak, or you could have actually shorted the market and actually made money as, as you shorted the market. Well, you could have bought put options and got some embedded leverage from those options and get a better return. But what he did is he bought credit default swaps. And credit default swaps are instruments that... And we learned all about credit default swaps in the big short during the subprime crisis. And we, at the time, way back then, we had 10% of client money in the big short trade with managers like Kyle Bass and John Burbank and John Paulson. And it was amazing. It all came down to one of our clients saying that

he deserved to live in these big expensive houses in Las Vegas. And the 35-year-olds next door to him with a job and kids didn't. And he said, find me a way to get short. So we found a way to get short. But credit default swaps are pretty amazing because they have monstrous embedded leverage. And so you can put a very small amount of premium down. And if it goes your way, you can make 100 times or more of your return on invested capital. So great for Bill for doing that. And we made a lot of money doing that in 2011. We bought credit default swaps on Europe when the European debt crisis happened and Greece exploded. We did a bunch of things like that. And credit default swaps are amazing. But here's the problem I have with Mr. Ackman. And he was on TV not many days ago, basically saying the world was ending and that one of his primary holdings, Hilton Hotels, was going to zero.

Now, as he was saying that, he was taking the proceeds of the credit default swaps and buying Hilton stock. as other people were selling watching him say it's going to zero i think that's abhorrent i i don't understand how the sec is not looking at that and saying what what the hell so look i i unfortunately um have i'm not friends with bill but i've made his acquaintance on a number of occasions and he's a very arrogant guy he thinks he's kind of above the law and uh and i'm just sore quite honestly because in in the global financial crisis we uh saw what was coming in real estate we were short real estate we were short subprime and we bought bonds in this company called general

growth and we bought it for about 50 cents on the dollar and general growth declared bankruptcy We're like, awesome. Okay, we're going to get all the assets, all the shopping malls. We're going to double our money on the bonds. We're going to own the equity and the restructuring. Well, in bankruptcy, equity is supposed to be extinguished. But Mr. Ackman somehow convinced Mr. Diamond at J.P. Morgan not to foreclose on the equity. Didn't enforce the covenants of the bonds.

So that equity then went up 39 times. It was best performing equity over the next 10 years, post-global financial crisis, and we got screwed. So maybe I have a personal little pet peeve on that. I did not know all of that, which makes it even better that I asked. You didn't know that. You did not know that. In fact, I've never told many people that story, and here I am telling the world on the podcast. So, oh well. So I want to end real quick with just throwing some assets out at you and kind of what you think the five to 10 year outlook is for those assets. Let's just start with domestic equities here in the United States. Yeah. And I love the fact that you're thinking five to 10 years, because that's

exactly the time horizon you want to have in situations like this. Five to 10 minutes, five to 10 hours, five to 10 months, no idea. But five to 10 years, I can give you a pretty good answer. So US equities, two months ago, were priced to produce about a negative 3%, negative 4% compound return for a decade. It was just, oh, that's impossible. Well, no, it's not impossible. In 2000 to 2010, you had a negative 2% return compounded per year for 10 years. And we were priced at that level. So today, at current valuations, we're probably close to 0% to 1%. So I think the index of U.S. equities is still a bad place to have a lot of capital. I think within that index, there's a lot of overpriced assets in the growth side. I think

the FAANGs are still wildly overvalued. And I think the value stocks finally are undervalued and it's time to be a value investor. Here's a great stat. So in 2000, Seth Klarman was running Baupost, still is running Baupost, and no one would give the guy money. Everybody said, look, you underperformed for 10 years. He had underperformed the S&P for the previous 10 years. He's still done fine. He still generated good returns, but he'd underperformed by multiple basis points per year. And everybody said, you stink, right? Value's dead. No one would ever buy a value stock again. Why would I invest in Baupost? And he couldn't raise any money. So for the next 10 years, the U.S. equity market was negative, and he compounded at 17.8%, compounded per year for 10 years.

It's a big-ass number, technical term. And so today he runs around $30 billion, and he just wrote that he's, for the first time in many years, looking to take in additional capital because he sees incredible opportunities. So I think the next decade is going to be awesome for value investors. So if you have good value investors, give them capital. I think that's the place to play in the U.S. markets. Got it. What about emerging markets or international stocks? I think they will absolutely outperform U.S. markets over the next decade.

Look, it's been a horrible 10 years, particularly for emerging markets relative to U.S. markets. And I think that's going to reverse. It always does. It mean reverts. And I think part of it is the dollar trade. The dollar has been very strong. I think you've had Brent on the podcast to talk about the dollar milkshake. And there's lots of stuff going on in the dollar.

8% of global trade occurs with the United States. 60% of global transactions are denominated in dollars. And that's because of the historical petrodollar system, which is under attack now by Saudi and Russia because of oil prices. But all of that, I think, is going to change. We're going to move to a new currency regime. And I think the dollar is going to be weaker over the next decade, which is going to be a tailwind for international assets and emerging markets.

And I think emerging markets is where all the growth is. And the interesting thing about emerging markets is you make the most money when things go from truly awful to merely bad. And we've had a truly awful period over the last few years, and I think it's about to go to merely bad, and you can make a lot of money. Got it. Oil? Look, oil is a tough one.

I never would have believed that Saudi would commit to flood the market with oil the way they have and push prices down. The math just doesn't work, right? If you're pumping 9.6 million barrels at $50 and you're going to try to get to 12 million barrels at $20, you lose money. That's a bad trade. And yeah, you're going to push a handful of companies in the U.S. into bankruptcy, but that's not going to help you long term because they can't produce more than 12 million barrels

from what I understand. And Russia is going to be a big beneficiary because they can continue to sell at these prices because they need lower prices to balance their budget at the government than Saudi does. So I just think this oil war is kind of foolish. I do think that the U.S. is a swing producer now and that they are going to have to take some pain. Historically, OPEC took all the pain and the U.S. shale companies just took all the excess capacity. Now, on top of that, you have a demand shock that is maybe unprecedented in history. I think it's going to end up being worse than the Great Depression. Think about it. We've ground

global activity to a complete halt. And it's not just the United States. I mean, we had a conference call with a client this morning, someone from France, someone from Switzerland, someone from Denmark, and they were all talking about how it's just ghost town. No one's moving, no one's transporting goods, services, and that's going to be maybe as much as five or six million barrels a day of offline demand that, look, if I was China, I'd be scooping up oil as fast as I can, and I'd be building oil tankers to build up my SPR and take advantage of these low prices. That would buffer some of the demand shock. They did it during SARS, and that's why oil prices didn't crash as much. I just don't think they have the capacity today because they're dealing with other things. So I think oil is going to be lower for longer.

I think Russia definitely is trying to put the screws to the shale business, as is Saudi. And the whole idea that we're still aligned with Saudi Arabia, we could do a whole podcast just on that. makes no sense to me. Bonds? I'm a big bond fan. I think interest rates are going to be lower for longer. I think owning long duration bonds is good. I think you got to be careful with credit. I think there's a lot of credit that is going to go bust. Energy credit, kind of interesting. 26%, 27% yields. Last time that happened, that was a pretty good buy. So I might go scoop up some energy bonds and maybe

some of those companies go bankrupt and you end up getting converted to equity and then you make even more money. So I might do a little bit of that, but long-term government bonds. And like I said earlier, Chinese bonds are kind of interesting because they have highest yields and those yields are going to zero too. And then we'll finish up with gold and Bitcoin. Ah, love it. So gold is money and everything else is credit. And gold has been money for 5,000 years. An ounce of gold buys a fine man's suit for 5,000 years. Go to Savo Road today. It's about 1,600 bucks, right around where gold is. So gold is a good asset. You should have a little bit in your portfolio. It's a great absolute hedge, but there's something better. And that's

Bitcoin. Bitcoin is digital gold. It's the perfect safe haven asset. I can't be a safe haven. It has too much volatility. It's a nascent asset. All nascent assets have high volatility. And volatility, again, I think you talked about this in a recent podcast. It's a feature, not a bug. And you want to embrace assets with high volatility if you have a long time horizon. I can guarantee everybody no volatility. Buy T-bills. You'll have no volatility, and you'll have a crappy investment performance for the rest of your life, because inflation will chew up all your returns. That's a bad strategy. So you want to seek volatility and you want to seek volatility in assets that are uncorrelated to other assets

to your portfolio. And the beautiful thing, bonds are 30% correlated to stocks. They're not zero, they're not negative. Bitcoin is 15% correlated. And that doesn't mean every day, every week, every month, but over the long term, it's 0.15 correlated. And that's because the return stream from Bitcoin comes from other things beyond GDP growth, profits growth, and interest rates. That's where traditional assets earn all their returns. Bitcoin grows because it's a network. It grows according to Metcalfe's law, one over the sum of the inverse of squares, or one over the sum of the squares.

And then you've got millennial adoption. I talked about this with somebody earlier today. Look, if you ask anyone over 35, who's your broker? Oh, Merrill Lynch. Well, how much money do you have in gold? Oh, 10%. How much Bitcoin do you have? Oh my God, are you kidding?

It's a Ponzi scheme. Ask anyone under 35, who's your broker? I don't have a broker. What are you talking about? How much money do you have in gold? Gold? Are you kidding? It's a relic.

No, I've never owned gold. How much Bitcoin do you have? I don't want to talk about it. What do you mean? I'm embarrassed because the percentage is so high of my net worth. So there's going to be $37 trillion. $37 trillion. Not from government assistance, but the boomers, as we age and eventually pass on,

we're going to bequest that money down to the millennials and they're going to inherit $37 trillion. It's not going into stocks, bonds, and gold. Some of it's going into Bitcoin and other crypto assets as we tokenize the world. And look, you know it, I know it, every stock, every bond, every currency, every commodity in the world is going to be tokenized. Bitcoin is the operating system or the base layer protocol on which the internet of money or the the internet of value or the trust net, as I like to call it, operates. And MoIP, money over internet protocol, is the biggest wealth creation opportunity you and I are going to see in our life. Well, you're going to have a longer life than me, but I'll probably see in my

lifetime. So that's a long answer for why I love Bitcoin, but it's a must-have in your portfolio and it's time to get off zero. I am one of those 35-year-olds with no broker, too much Bitcoin and no gold. So you're not wrong. Yeah, there you go. All right. Thanks so much for doing this. I appreciate it. I know people enjoy hearing from you. We'll have to do it again in the future. No, look, it's always great to sit down and connect and especially when we can't hang out together more often like we normally do. Stay safe up there and we'll do the same down here in NC and we'll talk to you soon. Thanks, Pomp. Hey, everyone. Pomp here. If you like this

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