The 96-year-old magazine, known for its revered writers and sophisticated audience, is being consumed by a labor dispute.
Writers for The New Yorker have been known to refer to the editor, David Remnick, as “Dad,” so there was something a little illicit about their decision to gather without him back in 2018 at a Windsor Terrace apartment.
Some 20 of the writers, many of them marquee names, were getting together to decide how to react to the surprise announcement that their less heralded colleagues — fact checkers, copy editors, web producers, social media editors — were forming a union and demanding raises.
The writers discussed whether they should follow their junior colleagues into the NewsGuild, and whether the magazine treated writers fairly.
George Packer broke with the magazine’s tight-lipped traditions by sharing details of his own deal with Condé Nast. He told his colleagues that after years of reporting from Iraq, he had requested and received health insurance before the birth of his first child. Other writers were shocked, according to several people who were there. Under The New Yorker’s structure, even some of the best-known writers are considered “contractors,” and their bosses had given them the impression that health insurance was not a possibility.
An organizer for the NewsGuild who was present, Nastaran Mohit, told the writers she had avoided involving them in the original organizing drive because she knew how close many of them were to management, and she was worried they’d snitch.
But she also said the NewsGuild believed the writers were misclassified as contractors, when they were really akin to full-time employees, and she laid out a path for them to join the union. She told them, two people in the room said, that the guild could protect them from being fired and could even defend them against misguided editorial choices, if, for example, an editor — she cited Arianna Huffington — suddenly wanted everyone to write about sleep.
What happened next was not exactly a scene out of “Norma Rae.” Emily Nussbaum, a television critic, said she would expect to be fired if she wasn’t doing a good job, according to two people there. Nobody was interested in a union rep coming between them and Mr. Remnick on editorial decisions.
Then Ben Taub, an investigative reporter, asked her why Ms. Mohit had told their unionizing colleagues that the NewsGuild was also organizing the writers. When she denied it, he theatrically produced a printed-out screenshot of a WhatsApp message that Ms. Mohit had sent to some 80 of the unionizing employees. In the message, a copy of which I obtained, Ms. Mohit said the union was “in communication” with the writers but could not “be open and public with the fact that we are organizing the staff writers.”
The writers in the room had been invited merely to a meeting to understand what the existing union drive meant for them, Mr. Taub said, and had no sense that they were secretly being organized. He said it was misleading.
“Bluntly, re: NewsGuild, what it comes down to for me is that I would never hire an agent who had lied to or about me,” Mr. Taub wrote to a WhatsApp group for staff writers after the incident. (The NewsGuild’s president, Susan DeCarava, said in response to questions about the exchange that it “does not comment on confidential organizing conversations.”)
The meeting’s host, Adam Davidson, had already been among the writers talking to Mr. Remnick about setting up a health care plan for writers. He summarized what he saw as the “consensus view” in another WhatsApp message to colleagues. (The contents of the writers’ group messages were shared with me on the condition I only quote people by name with their permission. Some of the material in this article is also drawn from reporting on this topic by my colleagues Noam Scheiber and Marc Tracy.)
“None of us want to do anything that could jeopardize the magazine we love. We don’t want so strong a union that mediocrity reigns and it’s impossible to get rid of poor performers. We actually kind of like the feeling that we need to continue to earn our place,” wrote Mr. Davidson, who is no longer a staff writer but still contributes to The New Yorker. “BUT, most of us would like to be able to get health insurance.”
The unionization effort has created an uncomfortable moment for the writers at The New Yorker, who have the kind of jobs and influence every journalist wants but few attain. It has set off reflections on their status and revealed the rare bond and unusual deference many of them feel toward Mr. Remnick.
About a month after the meeting at Mr. Davidson’s apartment, about 40 of the writers met in the community room at a West Village apartment building. The gathering was, many noted, probably the first time that so many of the magazine’s scattered staff members had ever been in one room, and someone invited the Magnum photographer Peter van Agtmael to document it. Jane Mayer came from Washington, and Lawrence Wright flew in from Austin, Texas. They sat in a big circle and, like the millennials only a few of them are, shared details of their own compensation arrangements.
The conversation made clear how inconsistent benefits and pay were among writers, and many left angry at Condé Nast over the opaque and uneven system. But they were also suspicious of the NewsGuild, and began a parallel set of meetings with its rival, the Writers Guild of America, East.
Neither effort has gained traction.
Many of the writers, it seemed, valued their independent contractor status. Some, led by Tad Friend and Jia Tolentino, used the threat of a union — and the suggestion that Condé Nast had illegally classified many of them as contractors, which the company disputes — to set up a process by which some writers could become employees with health benefits. A deal was finalized late last month.
And that has left the most prominent writers mainly watching from the sidelines in recent weeks as a bitter labor dispute has consumed their beloved magazine. The New Yorker is now working out the final details of a contract, and people on both sides appeared optimistic they would reach an agreement this week. They’ve agreed on a $55,000 starting salary and are hashing out issues like caps on potential health care cost increases, people familiar with the talks said — even as the Guild threatens a strike.
Many writers have tweeted in support. But no writers turned up at a protest outside Condé Nast headquarters on May Day, and none appeared to be present at a march outside the home of Condé Nast’s global chief content officer, Anna Wintour, on June 8.
The conflict has seized the attention of the industry not just because of the employees’ glee at holding the brand hostage in public, but also because it highlights big questions facing contemporary media. How much power can employers exercise over their employees? Are junior employees apprentices or a permanent creative underclass? And as the labor movement seeks to level the playing field, will the stars go along?
It’s all particularly personal at The New Yorker, where the campaign has pitted a culture built on personal relationships and deep trust against a group of employees who reject the idea that they should be subject to the whims of any boss, no matter how benign.
The easiest-to-understand element of the dispute involves the wages of the production employees, the group that includes everyone from fact checkers to social media editors. Some salaries start as low as $42,000 a year, and remain under $60,000 after 20 years on the job.
But other tensions revolve around the sense that the junior jobs only rarely offer promotions into the ranks of writers, and no clear career path.
Neither of these issues is new. In 1976, a group of employees got fed up with flat wages and, among other things, a 50 percent cut to the magazine’s annual psychiatric benefit, and brought in the union (then the Newspaper Guild) to set things right. The editor, William Shawn, responded with pained, elegant letters, warning that collective bargaining would undermine the “friendly, gentle, free, informal, democratic atmosphere” that made The New Yorker special. The employees ultimately backed down, rejecting the notion of unionism for what seemed in part to be cultural reasons.
An editor there, Daniel Menaker, wrote years later that he was “embarrassed about the ineffectuality and yes, ordinariness of the Guild people we’d come in contact with,” but also that Mr. Shawn’s conduct had been revealing — a classic case of liberals “turning to the right when the capitalist chips were down — just as I had been told, from my childhood on, liberals usually do.”
The New Yorker writer Janet Malcolm was asked during a libel case how compensation was set. “By the whim of the editor,” she replied.
These days, however, the NewsGuild has the cultural wind at its back. A labor movement revival began when Gawker employees joined the W.G.A. in 2015 and has continued apace. There’s been nothing like it since the 1930s. (I’ve had a front-row seat to that and continue to at The New York Times, and wrote about the trend last year.)
And unlike organizers in the 1930s, the NewsGuild has social media. It never rains on a Twitter picket line. Writers who are skeptical of the union’s tactics — some told me they object to its confrontational social media style — have bitten their tongues or deleted critical tweets. In one recent Zoom call, writers even complained to Mr. Remnick of their fears of being bullied on Twitter if they diverge from union talking points.
And underlying much of the 2021 labor tensions are political tensions. The younger generation of employees is to the left of its elders on issues of substance. The New Yorker’s union, for instance, tweeted and then deleted its “solidarity with Palestinians from the river to the sea,” a phrase that some interpret as threatening violence.
Virtually all of The New Yorker writers I spoke to said they supported the union’s core economic goals, and believed the junior staff members deserve pay increases. The union includes 120 people and there are about the same number of staff and contributing writers. Many, including Ms. Nussbaum and Ms. Mayer, have spoken out in favor of the union’s current posture. But some also shun its blunt and adversarial language.
Some of the writers are also worried about the impact of a strike. On one recent Zoom call with union leaders, Mr. Wright, a former Teamster and longtime W.G.A. member, warned that a strike could last months and do immense damage.
But many writers also see what The New Yorker offers as a good deal: a prestigious place to publish that allows them to retain the rights to their work. It’s also a gateway into the real money — books, movies, speaking gigs or other opportunities in the broadening economic landscape for brand-name writers. Those opportunities now also include newsletter platforms like Substack, and a new start-up called Puck, a digital magazine in which star writers get a cut of the subscription business and a share of the company.
That dynamic poses a threat to both traditional, top-down media institutions and organized labor.
While the union won headlines by marching to Ms. Wintour’s house, which was guarded, disappointingly, by two low-key men in shapeless cotton shirts, Ms. Wintour has no real involvement in The New Yorker. Mr. Remnick reports directly to Condé Nast’s chief executive. He’s in a strong position. The magazine was once a charity case among flush glossies, but its subscription business, which boomed in the Trump years, has given its editor unique leverage: The New Yorker avoided companywide layoffs last year, and has also been left out of the rest of Condé Nast’s painful drive toward centralization.
Mr. Remnick declined to be interviewed, but said in an email that his two goals were “that we achieve our highest editorial ambitions and that we work together with fairness,” adding, “I’ll be glad to see us sign a foundational contract that memorializes our commitment to both.”
Many of the writers I spoke to said they saw Mr. Remnick as caught between an uncompromising union and an ailing parent company. Union activists tend to be less charitable, and feel he’s trying to have it both ways. Gili Ostfield, a production employee and union member, pointedly told HuffPost last week that if The New Yorker tries to print a diminished magazine without striking employees, it will be “a stain on David Remnick’s reputation.”
But the support Mr. Remnick retains among the signature writers is deep. Many talk of him as an adored, slightly feared and somewhat distant father whose approval they always seek. They also have deep confidence in his ability to make their work better.
The moment, of course, seems all the stranger, in that much of the conflict is playing out virtually, while everyone is working remotely.
Mr. Remnick has told some writers that he is simply eager for the conflict to be resolved. The editor, who is 62, has also said he doesn’t plan to follow the example of William Shawn, who ran the magazine until he was nearly 80 and the institution had become a kind of museum of itself.
He has tried to be reassuring, even as the prospect of putting out the print magazine without editorial staff members looms. No matter what happens, Mr. Remnick told writers on one recent Zoom call, he would not ask them to cross virtual picket lines.
Thomas Frank rejoins the show to talk about the past, present, and future of the Democratic party. Hosts Matt Taibbi and Katie Halper look into the Trump rallies planned for this weekend.
Will you finally let your workers unionize?
As this was unfolding, most of Big Tech, including Amazon, sent white-collar workers home to “flatten the curve” and fight the pandemic. Tim saw company leadership go to great lengths to make sure this new system was working and actively seek feedback from the remote workers. Christy heard from a warehouse employee who said productivity targets made it difficult for workers to take a break even for hand washing without a mark on their record. Pay for warehouse workers starts at $15 an hour with minimal access to time off; in May Amazon ended the unpaid leave policy that for a few weeks allowed them to stay home if they had Covid-19 symptoms.The contrast in the treatment of knowledge and warehouse workers couldn’t be starker. Equally clear is the cause: One group has power, the other doesn’t.
Amazon’s decision to fire the activists was easy to make in the United States, where Amazon workers have no union and are left to fend for themselves. With no right to paid sick leave or protection from unfair dismissal, American workers are among the most vulnerable in the world to pressure from any employer, not just Amazon.
Union-represented Amazon workers in Spain, Italy, France and Germany initially failed to resolve their concerns through negotiation, but with court action, regulatory intervention and strikes, they got their needs addressed.
Let’s look at France: Unions there brought a civil case arguing that Amazon had taken inadequate steps to protect workers from infection risk and that it had sidestepped the unions’ statutory role. The court ordered Amazon to limit its sales to only “essential” items, or face harsh penalties until it could reach a safety agreement with the unions. Rather than negotiate, Amazon closed its French operations and appealed. But the appellate court also sided with the workers, who ultimately negotiated a settlement including mandatory union consultation over safety measures, union hiring of external experts to assess the measures’ effectiveness and a continued increase in workers’ hourly pay. The news from Europe shows that Amazon can work with unions and get good results.
Both of us want Amazon to share the wealth with workers and stop putting the relentless pursuit of revenue growth ahead of all other concerns. One way or another, this requires putting more power in the hands of workers. Regulation and legislation are part of the solution. But there’s no need to wait; power can be taken, not just given. That’s what unions are for.
Amazon is a data-driven company. It should recognize the evidence showing that countries with more collective bargaining have a stronger social fabric and better growth, and are more able to weather economic ups and downs. Businesses with collective bargaining relationships, including Auchan Retail and Carrefour, navigated the Covid-19 crisis with less disruption to their businesses and emerged with their reputations intact and even enhanced.
For its own future and the future of the global economy, Amazon should become more responsive to the women and men who’ve enriched shareholders and be willing to recognize and bargain with their representatives. When it comes to the rights of its workers, it should be a leader, not a laggard.
It’s not just Amazon: The need for more unionization is urgent across Big Tech. Amazon stands out because it combines the extraordinary profit margins of these companies with employing hundreds of thousands of front-line workers. There are fewer of these workers at the other iconic tech companies, but nevertheless their employees also deserve a voice over the issues that matter to them.
The question for Mr. Bezos and the billionaires of the world is: Are they ready to rise to the occasion? Will Big Tech listen to and work with its employees to help the world overcome the worst economic and social crisis in recent history?
Sir James Michael “Jimmy” Goldsmith (26 February 1933 18 July 1997) was an Anglo-French financier. Towards the end of his life, he became a magazine publisher and a politician. In 1994, he was elected to represent France as a Member of the European Parliament and he subsequently founded the short-lived eurosceptic Referendum Party in Britain.
In this interview, Sir Goldsmith discusses the ramifications of free-trade agreements that were about to take place in 1994 (GATT), as you can retrospectively see, he correctly predicted many of the things that happened after that.
19:07Where will the Bs meet the Cs?They will end up in the same place and it could be violently, it could be suddenly.To me, that really is the point about corporate profits.If corporate profits remain negative on a year over year basis, labor continues higheras it always does at the end of the cycle and companies continue to push out, guidingdown because of a proposed Chinese bean deal.Yeah, that could be your eye opener, is not that getting the T-minus three to six monthsfrom now, this thing should look a lot different than where it looks today without the yearto date dynamics of people chasing the spreads.RAOUL PAL: Yes, there’s a couple of things observations on that.CCCs, there’s obviously this shenanigans going on in the funding markets right now.There’s basically a lack of domestic liquidity in the funding market, because the massivenew issuance is coming the out of the Treasury, but that illiquidity, the Fed started printingmore money again to do it to try and alleviate some of that strain.At the far end of the strain curve is the CCCs and they’re going, no, no, no, there’sa problem here.They’re not getting the funding they need so they’re blowing out.The BBBs, because they’re supported still by the pension funds sector, are not feelingit.Meanwhile, there’s the corporate profit slowdown.What’s in that bunch of BBBs?Ford, GM, AT&T;, General Electric, and Dell.Those five are enormous part of that market.Any one of those and Ford one got downgraded, one of the agencies downgraded to junk butone of those who actually falls becomes the fallen angel and falls into the CCC category.The whole thing’s over.Because the markets will seize up because they can’t– the junk bond market doesn’thave enough buyers already and it’s widening.If one, God forbid, if one of these come through and get downgraded, the whole thing’s goingto seize up.KEITH MCCULLOUGH: What is the discussion in the boardroom to avoid that?For all of them, it’s to fire people.RAOUL PAL: Or usually, General Electric, the other one is equally as bad, restructure thepensions.KEITH MCCULLOUGH: Yes.Somebody has to take a markdown.RAOUL PAL: Someone’s going to get screwed.It’s always the little guy, it won’t be the CEO.It’ll be everybody else, those who get fired will lose the benefits.KEITH MCCULLOUGH: Well, it’s interesting like GM.If you look at GM, the last time they had their strike was in ’07.Again, the dynamics are the same.After you hit the peak in profitability, the people say, I want a piece.Now, they’re going to get their piece.If you get more and more of this into the election, the dynamics are real and labor’scoming off basically a 15-year low relative to corporate profits, this is a period thatno money manager, certainly the ones that are illiquid and levered which would includeall of private equity, have had to deal with.Again, every other cycle, labor has been high and rising.That’s what always perpetuates a recession because the Fed can’t cut people’s wages,and they certainly can’t fire people.That’s what labor is going to do, but it was always high and rising.1980s, 1990s, that’s why people like or at least they can, or at least a macro personshould like the 1980s and 1990s, irrespective of your political party affiliation, becausewe had very good relatively low cost of living, we had really economic growth and labor washigh and rising.Now, it’s been blasted to 15-year lows, again, put off paying the people, corporate profitswere big, fat and happy and labor’s rising from the ashes.This is probably the most important secular turn in labor that certainly anybody our ageor older has seen.You’ve never seen it before.What could possibly go wrong?Anyone who’s levered long assets that have people facing businesses are going to haveto face the reality of having to pay their people more and/or just getting lower qualityhigher and seeing reduced corporate profit margins and reduced corporate profit margins,negative year over year corporate profits is the catalyst to what you just year markedas a ring of fire, if you will, of companies that really aren’t “secular growers”, I cango off on that, but these are cyclical companies that have bloated cost structures to beginwith.RAOUL PAL: Yeah, exactly right.Also interesting in the margin is you see delinquencies in cars.They come to new highs.You’ve got– yeah, on 60 days, 60 days or more, delinquencies are at new all-time highs.It’s like, okay, that’s something, that’s an interesting data point, the consumer’snot quite as happy as people think they are.You look at the credit card borrowings, and then you look at the rates credit cards arecharging, which is the highest all-time rates, considering interest rates, and that’s thedata that goes back to 1990 or something and credit card rates are high not at 17% thanthey were back then when interest rates are 8%.It’s like, okay, there’s something going on here for people– the only reason they cando that is demand is high enough that people need the credit.It’s the only source of credit they can get because they can’t get any other credit.There’s something telling you, there’s bits creaking at the seams here, so how do youthink it plays out– and again, neither of us are interested in the politics of it butthe election side of it, it sounds like you don’t think that the administration can keepthe economy floated into the election.I’ve got different view that I don’t think they want to, I think they’d rather have arecession.I don’t think it’s as a shoo and that they really necessarily need to keep it in theway that it is.Because I thought today, Trump was very clearly again, blaming the Federal Reserve, it’s nothingto do with me, look how they screwed you.How do you think from a nonpolitical standpoint, how you’re seeing it play out?24:47KEITH MCCULLOUGH: My political lens is always explicitly affected by my quad outlook.24:52We are right on the screws.24:55I’m not a believer that any politician central planner or otherwise can part the heavens25:00and give us a new path underneath the seas of economic gravity.25:06The economy is going to continue to slow and if it continues to slow into what we call25:09Quad 4 which is the most damning of market conditions by Q2 of 2020, that’s the worst25:15place for Trump to be for a period of time.25:19Because that’s when Elizabeth Warren’s chances or Bloomberg or whoever’s are going to start25:23to rise and again, it’s more about the probabilities change.25:26There are very few money managers on Wall Street who actually, even if they hate the25:31guy like the Bourbonic Plague, they still believe in some way, shape or form, that Trump25:35has a good chance to be reelected.25:36RAOUL PAL: Almost everybody.25:37KEITH MCCULLOUGH: Yeah, if you don’t– like I have raging Democrats telling me that I25:40live in the state of Connecticut, I have plenty of exposure to them in non-money market, like25:44nonmarket people won’t have that view but if you’re running a portfolio today, you can’t25:48tell me that you expect the tax rates and the truncation of tax reform, which is the25:53biggest thing for corporate profits that the modern era has ever seen.25:57Like you can’t possibly say that that’s in the market.25:59I think that that is a big shift, too.26:02You get your zero percent handle on GDP in late January, the economy continues to deteriorate.26:07We take a look at Quad 4, the last two times the market’s taken a peek at Quad 4, not good26:11for Trump, not good for the stock market, which is one and the same thing.26:16It’s almost like I think that– and I think now Ferguson said this, if the market starts26:21to go down for real for once, God forbid, actually, it’s done it multiple times, but26:26again, if it goes down for real, her chances go up.26:28It’s the Soros reflectivity view, which is, again, the faster you go down, the higher26:34her chances, and you could wake up one day where people are right scared of that, and26:38Trump gets reelected just for that reason.26:39Then you get the mother of all rallies from a much lower point again.26:43Again, that’s way out there but I’m using my quads to instruct what the political and26:50reflexive human response would be to just negative economic conditions.26:54RAOUL PAL: Now, my view is somewhat different.26:57I think economically, we have the same view, but my view is on the Trump side, if you can27:01anger the American, the middle American, because they can’t be screwed over and if you can27:08blame it on the Federal Reserve and the Chinese and the Europeans, then if you are going to27:13a recession, first, you say I will save you with some MMC John Spinning package and secondly,27:18it gets them mobilized because they hate everybody else.27:22That’s a typical thing and Elizabeth Warren will use the same tactics, will say well,27:26it’s all his fault and blah blah blah.27:29It’s going to be a very interesting election and I never trade markets on elections but27:35it’s just interesting.27:36Talking about elections, what do you see in the UK?27:39KEITH MCCULLOUGH: Well, we see Quad 4 in the UK.27:42That’s where we started and again, seeing the UK through the lens of the quads and what27:47are the prevailing conditions of growth and inflation has been absolutely the way to trade27:52the UK from a gilt perspective, long gilts Quad 4.27:56RAOUL PAL: Yeah, you just ignore all of the noise and just look at the economics.27:58KEITH MCCULLOUGH: Yes, exactly.28:00Short the pound, Quad 4.28:02Now, the pound is actually trying to have a breakout here relative to the dollar, which28:06is interesting.28:07However, it’s based on a catalyst which is this expectation which I have zero edge on.28:12Plenty of things I had zero edge on but one of the big ones I’m certain of is the political28:17outcome in the UK and when this Brexit catalyst actually can be finalized, it’s just not what28:21I do, but the market is saying there’s a chance, like there’s– as long as there’s a catalyst,28:27it’s closer.28:28That catalyst is also aligned in terms of the quad timing that I have for the US economy28:32to slow at a faster pace, then that would be bearish for the dollar and bullish for28:35the pound anyway.28:37That’s an interesting one, because I’ve not been long the pound for a long time.28:39I’m long Canadian dollars against the US dollar for the first time in a while, but I’ve been28:43willing to go there in the UK but broadly, UK data is Quad 4.28:48RAOUL PAL: Talking about fiduciary responsibility.28:49You’ve got a situation in the UK where the economics is relatively clear it’s Quad 4,28:55but you’ve got this huge overhang of something else, which of which you have no edge, is29:01the right answer to the [indiscernible], just keep out of it?29:04KEITH MCCULLOUGH: I just stay away.29:06Yeah.29:07RAOUL PAL: It makes no sense otherwise.29:08KEITH MCCULLOUGH: Yes.29:09I think that this is a point that you made earlier that’s critical to understand.29:11Wall Street isn’t like the person that’s watching this.29:15They aren’t like you and I.29:16We, until somebody removes it from us, maybe the CCP governs us and we can no longer have29:22any legal right to make our own decisions on our own free will, we can decide to buy29:27whatever we want, whenever we damn well please.29:30Wall Street is siloed into these are the people that trade the pound, these are the people29:34that do the UK, these are the people that do the US consumer.29:37These are the people to do US healthcare.29:40They have to have a view.29:42All of the time, think about how hard that must be.29:46In fact, it’s rendered itself useless.29:48There’s an oversupply of money managers, and you’ve basically made everybody a silo expert29:54of nothing.29:55What I intend to do is I’ll wait and watch.29:59I wouldn’t been able to tell you a year ago that I’m going to be long cattle and cocoa30:02today.30:03Are you kidding me?30:05We’ve seen negative supply dynamics, I see the volatility of the volatility of volatility,30:09the signal changing within the commodity space.30:12I see two dynamic situations that wow, this is perfect.30:15The crowd’s definitely not there and that’s when I go.30:18As opposed to feeling like I have to have a view that the crowd is having fumble on,30:22or tweeting about, or God forbid, reading CNBC view of every day.30:26RAOUL PAL: Spinning a bit more around the world and then we’ll come back, we’re going30:30to come to the dollar later.30:32There’s two markets that we’ve all looked at and thought at some point, they’re going30:36to enter trouble; Canada and Australia.30:40Where are we with those?30:41Is everything in the same sink right now?30:42Is everything in that Quad 3, moved into Quad 3?30:44KEITH MCCULLOUGH: No.30:46Well, in Canada, in particular, we have back to back Quad 2s coming.30:51If there is a country that looks like inflation accelerating, it’s Canada, and they are the30:56recipient of it, like within the Toronto Stock Exchange Composite Index, the heavyweights31:00are Quad 2 exposures, which include energy companies and the banks.31:05Canada for the first time, if only for six months, and the Canadian currency for that31:09matter, that’s why I’m long it, because it’s hard to find.31:12First of all, Canada only has twos because they’re comparing against borderline recessionary31:17Quad 4s that they’re coming out of.31:18That’s why you have that, but you also have the dynamics that they are hooked to headline31:23US inflation’s acceleration and the broader breakout in commodities.31:27Canada to me, it looks like we’ve been long it since the beginning of October.31:31It’s a relatively new position, but it’s the same position that I have across the board.31:35I bought TIPS instead of being as long as I was of duration.31:38I flipped the Dalio move and flipped into some of that.31:41It’s a cheater.31:42He knows it, that’s why he created it.31:45If you want to outperform people that are permanently long duration, let’s have a different31:50thing to be long while they’re still long duration and inflation accelerates.31:54TIPS.31:55It’s like the old adage, just you don’t have to outrun the bear, you just have to outrun31:58your friend.31:59Again, I’m just trying to isolate that view of inflation accelerating particularly North32:04American inflation accelerating, so it’s long energy, which is I think the most concerned32:08position that we have in equities, long Canadian energy, long Canadian equities, broadly long32:13the Canadian currency, and like I said, long the proteins, long lumber, which is another32:17way to double up on our– RAOUL PAL: You’ve got the full on reflation trade on?32:21KEITH MCCULLOUGH: Yeah.32:22Yeah.32:23Well, there’s no mincing words about that.32:25I’m short the consumption curves and software, which are, it’s a very– I have a higher beta32:31setup than I’ve had for a year.32:34Because I’m long things that are classically what I call phase transition coming out of32:38bearish trend, Quad 4, do not buy energy, do not buy commodities, short both to buying32:43what I was short, which can be somewhat unnerving, but exciting.32:48On the same token, consumer staples, which was a long, we’re shorting though.32:52RAOUL PAL: There’s a psychology that’s difficult here.32:55Your prevalent view is that we’re in the downside of the cycle, but what we’ve got is not faced33:02within a down cycle.33:06You have to trade against your view, which I don’t ever do.33:09It’ll either the out or outsize it so I could just sit with the longer term view, just different33:15way, different time horizon.33:16I find it particularly difficult to trade against my own view, that personal view.33:21If I know there’s some confusion, I just bail it, but you’re doing it.33:26How do you do that?33:27How do you find your plan still with that?33:29KEITH MCCULLOUGH: Well, my model, the way that my model is set up is not A or B, there33:33are four different economic outcomes.33:35It’s an explicit bet on what we call Quad 3.33:37RAOUL PAL: No, I understand that.33:38KEITH MCCULLOUGH: Yeah.33:39That is a six -month view.33:42That’s not against my view.33:43That’s my view for six months.33:45The hardest part will be to get back to the– RAOUL PAL: You are in the down cycle of which,33:51that goes on longer than that.33:52It’s based on your view and it’s all about time horizon.33:56KEITH MCCULLOUGH: Yeah.33:57If I only go back and look at how could I have traded ’08 better?34:03Crushed it in ’08 by just staying with the view that we’re in the down cycle.34:06How could I have done better?34:09Well, I would have bought commodities in the early parts of Bernanke going dovish, and34:13stayed long– RAOUL PAL: That whole correction that we had, the reflation correction we had34:17in the middle of 2008.34:18It was brutal.34:19KEITH MCCULLOUGH: It helped my consumer shorts, which is where I made all my money in ’08.34:23I just kept shorting every bounce in every story stock, every loved, broadly held story34:27stock, consumption oriented shorts.34:30That’s where my, I guess, my formal training came as a hedge fund analyst and then a PM34:35in the consumer space.34:36If I could do it all over again, I would have been long crude futures on top of that, that34:41the alpha is manifest when you have the cost curve piece on for that six-month period of34:48time.34:49It is an explicit view of stagflation.34:51Every time– like, again, for me, and God willing, I get to live through a couple more34:55cycles.34:56I might be 90 years old at this point if they keep [indiscernible], but it is classic late35:01cycle, where labor and you get that final push of inflation.35:04You can make money on the long side of that while you maintain your bearish view on the35:09consumption curve or the proper, as you said, the down cycle.35:12RAOUL PAL: From my perspective, I’m not so short as long term correction.35:17I’ve looked at the history of, of these moves in the down cycle and there’s two which makes35:22it somewhat complicated.35:24There’s one and I look at it through the lens of Eurodollars you and I’ve talked about.35:28That’s been a big thing for me at the moment because for me, I find it’s the best way of35:32trading the down cycle as well as– the up cycle tends to be equities and commodities35:36better.35:37The down cycle tends to be rates, which is why you’re not short rates right now particularly,35:42but you are long commodities because you’re in the reflation.35:44Anyway, so I look at this and both 2001 and 2007, both had 70 basis point pullbacks in35:55Eurodollars, which were the gut check reflation trade.36:00They didn’t last that long, they lasted three months, which is where we are now.36:08Then in 2008, and 2001, late 2001 going into 2002, before the 9/11 were these huge pullback36:17in rates, which was the Fed have done enough, the cycle’s over, oh no, it’s not phase.36:24I don’t know which one of those we’re in.36:26I feel like it’s too early for the bigger one, which will be the sixmonth, nine-month36:30trade but I hear what you’re saying and also can see that okay, maybe it’s a hybrid.36:37I don’t know.36:38It’s very interesting for me but I’m staying in the short end and just hiding out there36:41waiting because I was in a long time ago, and something we talked about before is if36:46you’re not doing monthly mark to market or even annual, then it doesn’t really matter,36:51you’d look at what price do I buy it, at what price do I sell it?36:54KEITH MCCULLOUGH: 100%.36:55RAOUL PAL: The entire world’s gone mad because they don’t even think about it.36:58When I was running a hedge fund, literally, it didn’t matter what price I bought anything37:01or I sold it at.37:02It was how much money I made that month.37:04If I was going to lose money that month, had to change, get rid of the position even though37:08I’ve made for x in it.37:09It’s crazy.37:10KEITH MCCULLOUGH: Yeah, well, great example and you absolutely nailed that was obviously37:14the Eurodollar trade, by the way, everybody a year later agrees with you because the net37:18long position there is like one and a half million contracts.37:21Net interest [indiscernible] just epic.37:23RAOUL PAL: But all the other problems are short.37:25That’s a part of it.37:26KEITH MCCULLOUGH: On that piece, that’s actually the point I was going to make, which is on37:29the short end of the curve, which is I like to think of, okay, we got into short term37:35treasuries on October the 17th of 2018.37:40That’s good.37:41We like that cost basis, but when do I go big again?37:44When do I grow set position up again?37:47That clock because I’m making a T-minus six months call on inflation accelerating, I’m37:51not willing to run the clock up six months, because the GDP number is T-minus four months.37:57That’s the January number.37:59I think that that’s the beginning of the Fed, because again, the short end of the curve38:02is what the Fed does, the long under the curve is what the market thinks the cycle’s doing.38:07If the Fed actually sees that and goes to where Fed Fund Futures are, their dot plot38:13is as wide as it’s ever been going back 12 years since the inception of the dots, and38:18again, a highly inaccurate dots of process or whatever you want to call that forecasting38:22process to do that, but they will have to acknowledge at some point that their dot’s38:26going up this way in terms of economic expectations have to come down.38:31That’s where I think I cannot, you cannot be big enough on the short end of the curve38:36into that.38:37RAOUL PAL: No, when that happens, it becomes the crisis trade.38:40KEITH MCCULLOUGH: Because you can take the 2-Year Yield down 100 basis points from where38:43it is today, which is a monster move relative to the long end of the curve.38:45RAOUL PAL: Yeah, and the leverage you can take in something like that is enormous, too.38:48KEITH MCCULLOUGH: Yes.38:49I’ve spent a lot of time with clients, and we can talk about it later but clients are38:53all asking, okay, what is it?38:54Should I use swaptions?38:55Should I do use this?38:56Should I use that?38:57Eurodollars, they do see it as having been a little bit more crowded than they would39:02like, that’s the discussion within this discussion but it’s pretty simple.39:06If we’re right on the economic projections the Fed is going to have to at some point39:10in early 2020, look like they are actually completely politicized relative to the Trumpia.39:16RAOUL PAL: I just think that the yield curve is telling us something.39:21Now, the yield curve goes negative into recession, we’ve seen.39:25The swaps curve got to zero, which is the same as it did every single, actually went39:30negative which was actually rare for the swaps curve 2s, 10s, and it seemed to steepen.39:34The prerequisite for a recession is steepening curve.39:38Everyone thinks it’s the negative curve.39:40It’s not, it’s the steepening curve.39:41KEITH MCCULLOUGH: Post the inversion?39:42RAOUL PAL: Post the inversion.39:43Yes.39:44Which it’s now doing, which plays into, as we’re both saying, somewhere within Q1, Q2,39:51it’s going to start getting ugly again.39:52KEITH MCCULLOUGH: Yeah.39:53Well, that steepening is just based on the Fed catching up to our view.39:56They’re the last one to figure it out.39:59Once they do, they steepen the curve by cutting the short end out and I think that if they40:05don’t do that, then they perpetuate having to do more when they finally do do that.40:10They are the catalysts for their own panic if they don’t acknowledge it soon enough.40:15That’s why I do think that that GDP number if we’re right on the headline, in conjunction40:20with profits slowing and jobless claims rising, there is no case to be made for jobless claims40:24rising for the first time in a decade for the Fed to not go incrementally dovish, and40:28probably aggressively so if I’m right on that.40:31Again, that would just be washing through Q4’s earnings season into the Q1 of 2020 outlook,40:37where the street is way outsized on earnings expectations.40:40They’re actually looking for earnings to be up 5%, 6%, 7% in the first quarter of 2020,40:44which I think is mathematically impossible.40:46RAOUL PAL: Yeah.40:48They’re just looking at, they just want a hockey stick up every time.40:51They just don’t want to believe the fact that things can trend lower.40:57Where are you most excited about in the world?40:59Is there anything you see different that’s not in the same cycle?41:03Because that’s the key thing.41:04Because most of the world, give or take is in the same cycle, some leads, some lags.41:08Is there any way you would say a great thing about this is just entirely different.41:13It’s a breath of fresh air.41:14KEITH MCCULLOUGH: Well, on the short side, yeah.41:17I’m feeling it’s not– I shouldn’t say feeling, if I ever say that again to you, Raoul, just41:21take me off Real Vision.41:22RAOUL PAL: Basically, there’s nothing in it.41:24KEITH MCCULLOUGH: There’s no feelings, there are cycles.41:29I think this software bubble that built within the cycle is potentially like this thing that41:34can almost make you giggle, or things trade at 15 to 20 times revenues with these TAMS41:40as far as the eye could see.41:43They’re seeing rate of change slowdowns in revenue growth, and massive, bloated cost41:48structures.41:49That’s like, in short selling space, that is easily bee– by the way, the software stocks41:55are down depending on what day you’re looking at them, they’re down 8% to 10% already since42:00July.42:01I like it when the movie already starts and the index doesn’t agree with that setup.42:06Actually, consumer discretionary, broadly, is the other one that’s down since the July42:11highs.42:12You have this concept of secular growers which has never happened before.42:16It’s only something Wall Street could make up, a secular grower is something that’s never42:23seen a cyclical slowdown.42:24Great.42:25To me, that like from a short seller’s perspective, because let’s be clear, you’ll find them at42:30Real Vision, but the art of short selling has been shot for dead.42:34That, to me, is the most exciting thing.42:36Having an independent research team with 40 different analysts.42:39We’re finding some really interesting shorts and very low short interests, which reflects42:45the broad interest that people have in story stocks, or in these TAMS, these total addressable42:50market stories.42:51It’s all about stories, and again, as they become cyclical, I think that that’s probably42:55the most exciting thing in terms of opening the envelope to the downside because we’re42:59already seeing that actually in this earning season in particular.43:02RAOUL PAL: Just a side story to that, it does worry me, because obviously a bunch of hedge43:08funds are more than skilled at short selling, but there’s the short sellers, people like43:14Marc Cohodes and stuff that we all know and love, are very skilled at this but it’s a43:18very, very skilled business, particularly if you’re fraud hunting, as opposed to trading43:24a directional view based economic views or whatever it is.43:28We saw that the amount of tourists, short selling tourists, I think more than Macro43:32Tourist, they all flooded into Tesla.43:36Then people have lost fortunes in stuff like this.43:39There’s a whole bunch of these stocks that they were like, they’re definitely going to43:42zero, they’re definitely going to zero.43:44It’s all a fraud, because they became market vigilantes.43:49A lot of them came out of the gold crowd, the same vigilante stuff.43:53It really concerns me that people have been pushed into stuff like that, because they43:56don’t really understand that short selling as you know is not easy.43:59KEITH MCCULLOUGH: If you don’t have, and I know that this is going to ruffle feathers,44:04and maybe the first time I’ve ever done so, but if you don’t have a macro process to overlay44:10when the cycle is in your favor as a short seller, I think you need to really rethink44:14that.44:15If you think about– RAOUL PAL: Well, unless you’re an expert short seller who writes a44:18whole thesis on the thing and everything else, because it’s so difficult.44:22KEITH MCCULLOUGH: Even that, when the cycles not on your side, and I don’t need to name44:26names, but they lost their hedge fund.44:29Since the financial crisis in ’09, I think 50% of hedge funds that launched on the Goldman44:36system are gone, because people start with shorting valuation.44:43Valuation is not a catalyst.44:45The cycle slowing is the catalyst and expensive stocks within a slowing cycle is the ultimate44:52short seller’s dream.44:53It made many short sellers famous, those that have ignored the economic cycle.44:582017 is a great example.45:00I was born a short seller.45:01The first thing I learned how to do is short a stock because my first job on the buy side45:04was in 2001.45:06I come to my boss, John Dawson, I said, well, they’re going to miss again.45:10They’re going to what?45:11They’re going to miss again.45:12I just listened to what they said at the conference.45:13I put it in the spreadsheet.45:14Their margins are going to be down.45:16The revenues are going to slow.45:18He’s like, short it.45:19Like, okay, this is cool.45:20Short it.45:21I thought it was just like buying something.45:22I thought that’s what you did.45:23Because it’s when I was born into the business that mattered.45:27Anyone who’s done something well over time can tell you that.45:30There is a significant amount of luck in terms of when you were put in that seat to do a45:34certain thing.45:35RAOUL PAL: You have a boss.45:36KEITH MCCULLOUGH: Yes.45:37Okay.45:38Then the rate of change went bullish in 2002 of all the shorts, I come back to John and45:41I say, well, they’re going to beat it for the first time since I’ve worked for you.45:44They’re going to what?45:46Cover that short, we’re going to buy that stock and lo and behold, growth was accelerating45:50from obviously late ’02 all the way until 2007.45:54I think most people that got blown up in the story socks high multiple.45:58Again, there’s some epic things that have gone on, we weren’t fully loaded Tesla’s Elon46:03storytelling, but people were shorting them into the 2017 tax reform acceleration and46:08top line growth that perpetuated these multiples.46:11Software growth, software CapEx, for example accelerated all the way into the end of last46:17year, into the end of– and into actually the first quarter of this year, of 2019.46:22There was no backdrop to short sell software stocks in rate of change terms until this46:26year.46:27RAOUL PAL: How did you guys get on with Tesla, because you guys were Tesla shorts in that46:31period as well?46:32KEITH MCCULLOUGH: Yeah.46:33Well, we came into it literally, Jay Van Sciver came into it rate as it was topping.46:36He was looking– and I’ve taught all my analysts, if you can’t show me the rate of change slowdown46:41in their business within three to six months, this is not going to have a hedge on name46:45on it.46:47You can argue till you’re blue in the face but the batting averages are very low.46:51If you tell me you found a fraud, like our analysts, Kevin Kaiser did with multiple MLPs46:57and by the way, those frauds weren’t revealed until oil blew up.47:00RAOUL PAL: Yeah, same reason, micro, macro changes.47:03KEITH MCCULLOUGH: That’s when it was easier to get loud on deflation Quad 4 type theme.47:09I have an analyst who’s super buried up on a bunch of frauds in the MLP space.47:14Go.47:15I think that timing part, I’d humbly submit that that’s a part when I say the art of short47:18selling has been shot for dead.47:20It’s because you haven’t had the macro meets micro.47:24The rate of change now, your timing’s good.47:26Now, your batting averages are going to go up.47:28If you show me a software company, we found one that basically filed an S1 with two years47:33lookback in terms of revenues when the revenues have only gone this way up.47:37Post tax reform, through tax reform.47:39It’s a 20-year old IT services company.47:41It’s like hello, McFly, you slowed every single time we had a cycle but you’re not showing47:46the lookback.47:47These are the kinds of things that Wall Street underwrote.47:49This is why you know short selling now in a lot of these high multiple stocks is a much47:54more appropriate time, high multiple stock prevailing condition is slowing as opposed47:58to accelerating.47:59RAOUL PAL: Right.48:00You just been out seeing clients that’s why you were in a suit and tie.48:04KEITH MCCULLOUGH: It’s the only time I wear it.48:06RAOUL PAL: What are you hearing?48:09What are people doing?48:11What are they thinking?48:12Where are the pain points?48:13Where are they– I don’t think it’s been a straightforward year for many.48:16KEITH MCCULLOUGH: No, but if you’re having a good year, the happiness factor is back.48:21I do have clients that are macro aware.48:23They’ve been on the right side of the cycle.48:26Generally speaking, I’d say that the clients that if they’re paying us, they’re aware of48:30the view that we’ve had, certainly the Quad 4 views, their batting averages on the short48:34side have gone up tremendously if they are of that ilk.48:37If they’re long only they’ve been leaning on proxy, which they’re quite happy about,48:41but I’d say that, like, in particular, this last couple weeks of meeting, there’s the48:45markets punch to new highs throughout earnings season.48:49There’s an uneasiness to it.48:52It’s like– RAOUL PAL: That’s my opening question, uneasiness or uneasiness.48:55KEITH MCCULLOUGH: Uneasiness.48:56RAOUL PAL: Yeah, hence my opening question to you when we started this is nobody really49:00knows quite what’s going on.49:01KEITH MCCULLOUGH: Happiness becomes uneasiness when you start to underperform the bench.49:07That’s what’s happening.49:08Peak happiness was coming out of the October lows in the S&P; 500 or August and October,49:13our clients would be doing fine because the things that they’re long were going up and49:17their shorts are going down.49:18Now, everything’s going up.49:19In fact, the things that have gone down a lot are going up more., so you’ll have that49:22uneasiness.49:23There’s an absolute consensus to not be able to fade Trump’s tweets.49:29Therefore the value or the resurgence of these PMIs and ISMs a bottom trade.49:36They’ll wait to see the data point until they believe that the cycle is properly continuing49:40to slow.49:42There’s an uneasiness about that.49:44There’s always an uneasiness about your compensation.49:47A lot of people– RAOUL PAL: It’s always a difficult time of year because you’ve got49:52six weeks to make a decision.49:53Do I do anything else or do I not do anything else?49:55KEITH MCCULLOUGH: Yes.49:56There are plenty of money managers long only and long short that have set their yearend50:01in September, October, November, those months for that reason because they didn’t want to50:08be beholden to chasing the ace into yearend markups.50:12It’s an interesting one, but again, don’t forget that the S&P; 500 stock going up in50:15November of ’07, it didn’t wait till the end of December.50:19There’s an uneasiness associated with that as well.50:21The more macro where you are, the more ’07 questions I’m starting to get, which doesn’t50:26have to mean we’re going to have an ’08 but that’ll certainly– if it doesn’t make you50:29feel uneasy to some degree, I think it absolutely should.50:32RAOUL PAL: The hedge funds themselves, what is the appetite for risk now?50:37Are they gun shy?50:38Because they’ve had, yeah, it’s been a flip flop year.50:41It’s been one of those years where they came in short of equities, equities rallied, okay.50:46Anybody who got the bond trade got it sorted out, then it flips again later in the year.50:50It’s been a complex year for many people.50:52How are they feeling in this?50:54KEITH MCCULLOUGH: The better the research teams and most specifically on the short side,51:00the better they are doing right now.51:02Don’t forget, just like the high yield index or where high yield spreads are is not where51:06the rest of the market is.51:08You have multiple blow ups going on.51:11Think of some epic story stocks imploding and for the valuation oriented short seller51:17that got the timing right, I think that the batting average is going up their– or building51:23a confidence that wow, I have the benchmark index SPYs at the all-time high and I can51:28make money on my shorts at the same time with the president trying to trump up the bench.51:33Like it’s almost like licking the chops times for this– somebody who’s had a successful51:38career short selling across cycles, not somebody who’s just getting lucky.51:43RAOUL PAL: Final question, the dollar.51:47You’re, I think, majorly negative the dollar right now, do you think the dollar cycle is51:52turned for good, or is this part of the reflation in Quad 3 theme?51:59Where do you stand on the whole dollar view?52:01It is crucial to a lot of things.52:03KEITH MCCULLOUGH: Yep.52:04If you take the trade weight of dollars at a 20-year high, again, back in 2001, same52:09point, what could possibly go wrong?52:12Sustainably strong dollar is also one of the many negatives to corporate earnings growth52:17for the fourth quarter and the first quarter, so it’s the same sixmonth outlook.52:21No longer buying dollars– RAOUL PAL: Okay.52:22It’s off the same– it’s not a separate construct for the dollar.52:26KEITH MCCULLOUGH: No.52:27Quad 4 is where the dollar goes up, so the next time I’ll buy the dollar is when I think52:30the market’s setting up the price in another Quad 4, so I have a six-month window, might52:34be four.52:35RAOUL PAL: When do they start– when did the clock starts here?52:38KEITH MCCULLOUGH: October.52:39That’s when dollar– RAOUL PAL: End of December, January, February, March.52:41KEITH MCCULLOUGH: Yeah, our call was it’s pretty straightforward, it’s hashtag peak52:45dollar.52:46I don’t mince words.52:47The dollars peak, but again, the dollar– RAOUL PAL: The peak dollar sounds to me secular,52:51but you’re saying cyclical?52:52KEITH MCCULLOUGH: Yeah, it’s just my six-month pivot.52:56Again, I want to cancel– RAOUL PAL: That’s what I wanted to ask you about it.53:00My thinking, I’m a much longer term person so I was thinking okay, if you’re saying that53:04you think the entire dollar construct has now changed for the world, okay, that’s very53:09different than the view I have which is like okay, and this has been trading accordingly53:14to your view, it may had broken down or broken up but it’s– KEITH MCCULLOUGH: It made it–53:18it’s been like literally right on the screws played out in our playbook and this doesn’t53:22happen all the time obviously.53:24When it does, you like to know just like a good golfer makes a birdie putt, you expect53:28to make the putt, you hit three good shots on a par four, well done.53:32That’s what the process say.53:34When Quad 4 is you’re in the thralls of Quad 4, the dollar should rally to new highs, which53:38it did, Quad 4 ended in Q3.53:40Now, we’re not in Quad 4, the dollar should start to make lower highs for six months.53:47That’s pretty much it.53:48I don’t think that it’s like some big bang call.53:50I still do think that there’s some asymmetry to the Fed waking up to that GDP number in53:54February, and then cutting their dots.53:57I think that that’ll probably be wherever the dollar corrects to, that’d be the beginning54:02of the end of the negative dollar view.54:05Then I go back to being long the dollar in start of second quarter.54:08RAOUL PAL: Final, final question, when you’re looking at the rate of change to assess where54:13you are in in your framework within the quads, you’re looking at the rate of change, are54:17you looking at the rate of change of asset prices, rate of change the economic data or54:20a bunch of both?54:21KEITH MCCULLOUGH: Both, and that’s what I call my AB test.54:25A is various in the research team constantly measuring and mapping the rate of change data54:29across 50 different countries.54:32RAOUL PAL: Economic data.54:33KEITH MCCULLOUGH: Economic data, and then there’s me, that is measuring and mapping54:36the rate of change of price, volume and volatility, the relationship of all three, especially54:41the volatility of volatility is what I really care on, and something like that.54:45Like we just saw what I call phase transition in oil volatility for example.54:48Oil volatility or the vol of vol has now gone from bullish volatility, very negative for54:53the price to now bearish volatility, which is very short term bullish for the price.54:58We’re starting to see that too.55:00It’s classic.55:01I think, Bridgewater, Dalio to a degree, assets flow towards falling volatility, assets low55:08the rising volatility, and that’s why I spend so much time on that.55:11It’s the most humbling of experiences as it was for Mandelbrot when you had Big Blue,55:16the machine measuring and mapping cotton prices in all historical prices, because you have55:22to wait for a moment where that signal becomes real, because there’s lots of Brownian motion.55:27If you’re looking at it like I do, and measuring and mapping the volatility of volatility daily,55:33Brownian motion 101, there is nothing to do until there’s something to do, because volatility55:38will cluster and then become a new trend.55:42That’s what I’m essentially on the lookout.55:44RAOUL PAL: Because it’s interesting.55:45We’ve just interviewed John Bollinger.55:47I haven’t seen the interview yet, but Bollinger Bands, the technical analysis.55:50It’s basically based around the same concept.55:53KEITH MCCULLOUGH: Really?55:54RAOUL PAL: Yeah.55:55It looks like it basically looks at the volatility of an asset and if the volatility is increasing,56:00the band’s increasing, if it’s decreasing and usually when it decreases after a while56:04and you get a breakout, you’ve got to change your volatility regime.56:07KEITH MCCULLOUGH: Well, that’s right.56:08Bollinger Band would be a Gaussian standard deviation and when the volatility changes,56:15the standard deviation of vol comps change.56:17RAOUL PAL: Essentially, yes.56:18KEITH MCCULLOUGH: Actually, that’s a good example of what I call our risk range process.56:22I published daily risk ranges and people are like, wow, I can’t survive without it and56:26I’m like, no shit.56:27I couldn’t do– I couldn’t trade without it.56:30Again, when I see the volatility of volatility rising, what happens is my probable range56:35widens.56:36RAOUL PAL: Of course.56:37KEITH MCCULLOUGH: Similarly, when the range is starting to tighten, what that means is56:40that the volatility is starting to go away, or potentially undergo phase transition, plenty56:45of head fakes.56:47Again, when I take the AB test, this is critical.56:50The signal is always raw, front running the quad, the market signal’s going to get it56:55before the quad does.56:57If my quad outlook reflects what the market sees, and it’s a change of face- – RAOUL PAL:57:02The problem is that the market also does a lot of false signals, just keeps reading for57:06something different, and it gets it wrong, and it reverts.57:08KEITH MCCULLOUGH: 100%.57:09RAOUL PAL: That’s endlessly testing the narrative, the markets or indices, so yes, it’s the test57:15between the two is dead right.57:16You can’t do it without the other.57:17KEITH MCCULLOUGH: Which is why my hair is grayer and I’m getting fatter because I have57:20to do this.57:21That’s what I signed up for, like Hedgeye, I don’t get to have days off from Brownian57:27motion.57:28I have to deal with that damn thing every day.57:30Moreover, I have to try to explain it, which is unexplainable some days, but it certainly57:35makes– it’s made the experience of what I do, and trying to teach what I do, if only57:41I’m teaching myself actually, I’m sure people have realized that, wow, this guy’s not as57:46dumb as he used to be.57:48It’s a rate of change.57:49If you have to teach yourself through your mistakes publicly, every day, you will get57:53less dumb.57:54God forbid, you get a little bit better at it and better and better at it, but you’re57:57quite right.57:58The amount of head fakes, they’re just manifest.58:01RAOUL PAL: Yeah, that’s a lot of filtering.58:03Keith, super interesting.58:05I think it’s been– you’ve had a great year so well done.58:08Hands down to you.58:09KEITH MCCULLOUGH: Thank you.58:10RAOUL PAL: Let’s see what next year brings because it’s going to be another really interesting58:14macro and the great thing for us, for both of us is it’s a macro world and macro world58:19is the most interesting of all, because that’s what I find the big returns lie.58:23This whole period of time, we have low volatility, choosy, well, the grinding high prices and58:28that’s never the easiest to make money.58:30Well, you can’t easily make money if it’s never exciting.58:33Let’s see how it pans out.58:34Thank you ever so much for coming and do this.58:36KEITH MCCULLOUGH: Yes and congrats to you, you had a great year as well.58:38I appreciate you having me on.58:39RAOUL PAL: Yeah, and it’s all good.
Among the hoops that candidates for plum consulting jobs at McKinsey & Company had to jump through in late 2006 was a bit of play acting: They were given a scenario involving a hypothetical client, “a business under siege,” and told they would be meeting with its chief executive the next day. How would they structure the conversation?
One contender stood out that year: a 24-year-old Rhodes scholar named Pete Buttigieg.
“He was the only one who put all the pieces together,” recalled Jeff Helbling, a McKinsey partner at the time who was involved in recruiting. Mr. Buttigieg soon won the other candidates over to his approach.
“He was very good at taking this ambiguous thing that he literally had no background on and making sense of it,” Mr. Helbling said. “That is rare for anyone at any level.”
The preternatural poise that got Mr. Buttigieg hired at McKinsey has helped him rise from obscurity to the top tier of the 2020 Democratic primary presidential contest.
On the way there, he ticked all the boxes. Harvard. Rhodes scholar. War veteran. Elected mayor of a midsize city before age 30.
Mr. Buttigieg sells his candidacy, in large part, on his mayoralty of South Bend, Ind., and a civic revitalization there rooted in the kind of data-driven techniques espoused by McKinsey. His nearly three years at “the firm” set him apart from many of his campaign rivals, underpinning his position as a more centrist alternative to progressive front-runners like Senators Bernie Sanders and Elizabeth Warren.
Yet Mr. Buttigieg’s time at the world’s most prestigious management-consulting company is one piece of his meticulously programmed biography that he mentions barely, if at all, on the campaign trail.
As Mr. Buttigieg explains it, that is not a matter of choice. For all of his efforts to run an open, accessible campaign — marked by frequent on-the-record conversations with reporters on his blue-and-yellow barnstorming bus — McKinsey is a famously secretive employer, and Mr. Buttigieg says he signed a nondisclosure agreement that keeps him from going into detail about his work there.
But as he gains ground in polls, his reticence about McKinsey is being tested, including by his rivals for the Democratic presidential nomination. Senator Warren, responding last month to needling by Mr. Buttigieg that she release more than the 11 years of tax returns she already had to account for her private-sector work, retorted, “There are some candidates who want to distract from the fact that they have not released the names of their clients and have not released the names of their bundlers.”
Beyond Mr. Buttigieg’s agreement with McKinsey, this is something of an awkward moment to be associated with the consultancy, especially if you happen to be a Democratic politician in an election year shadowed by questions of corporate power and growing wealth inequality. The firm has long advocated business strategies like
- raising executive compensation,
- moving labor offshore and
- laying off workers to cut costs.
And over the last couple of years, reporting in The New York Times and other publications has revealed episodes tarnishing McKinsey’s once-sterling reputation: its work advising Purdue Pharma on how to “turbocharge” opioid sales, its consulting for authoritarian governments in places like China and Saudi Arabia, and its role in a wide-ranging corruption scandal in South Africa. (All of these came after Mr. Buttigieg left the firm.)
Just this week, ProPublica, copublishing with The Times, revealed that McKinsey consultants had recommended in 2017 that Immigration and Customs Enforcement cut its spending on food for migrants and medical care for detainees.
After a campaign event on Wednesday in Birmingham, Ala., Mr. Buttigieg remarked on the latest revelations. “The decision to do what was reported yesterday in The Times is disgusting,” he said. “And as somebody who left the firm a decade ago, seeing what certain people in that firm have decided to do is extremely frustrating and extremely disappointing.”
The Buttigieg campaign says he has asked to be let out of his nondisclosure agreement so he can be more forthcoming about that formative time in his life. A McKinsey spokesman said Mr. Buttigieg “worked with several different clients” during his time with the firm, but “beyond that, we have no comment on specific client work.”
But interviews with six people who were involved in projects that Mr. Buttigieg worked on at McKinsey, along with gleanings from his autobiography, fill in some of the blanks.
Mr. Buttigieg was recruited by McKinsey at Oxford. The company seeks out Rhodes scholars like him, banking that their intellects will make up for their lack of M.B.A.s from traditional recruiting grounds like Harvard Business School.
Yet even during the recruitment process, Mr. Helbling recalled, Mr. Buttigieg made it known that, like many applicants, he saw the business experience on offer at McKinsey as a good job “in the near term,” in his case an asset on the way to a career in public service.
The work he did in his first year and a half at the firm — nearly a 10th of his adult life — is effectively a blank slate, though tax records give some hints. In 2007, his first year with the company, he filed tax returns in Illinois, where he worked out of the Chicago office, as well as in his home state of Indiana. But he also filed in Michigan, and in the city of Detroit, where he worked on a McKinsey project. In 2008, he filed a return in Connecticut (McKinsey has an office in Stamford). The next year, he filed in Connecticut and in California.
In early 2009 Mr. Buttigieg was spending his days, and many nights, in a glass-walled conference room in suburban Toronto. He was analyzing Canadian grocery prices, plugging the numbers into a database running on a souped-up laptop his colleagues nicknamed “Bertha.” PowerPoint slides and spreadsheets crept into his dreams.
He knew this wasn’t his calling.
“And so it may have been inevitable that one afternoon, as I set Bertha to sleep mode to go out to the hallway for a cup of coffee, I realized with overwhelming clarity the reason this could not be a career for very long: I didn’t care,” Mr. Buttigieg wrote in his autobiography, “Shortest Way Home.”
It was the only experience at McKinsey that Mr. Buttigieg wrote about in any detail. His next act at the firm didn’t merit a single complete sentence in the book. But it was a radically different, and for him far more interesting, public-spirited project: More than four years before he would be deployed as a Navy Reserve officer, he was heading to Iraq and Afghanistan.
McKinsey’s focus in Iraq during the latter part of George W. Bush’s presidency and the early years of Barack Obama’s was to help the defense department identify Iraqi state-owned enterprises that could be revived. The idea was to provide employment for men who might otherwise join the insurgency against the American-led occupation.
The McKinsey consultants on the ground in 2006 and 2007 were almost exclusively military veterans like Alan Armstrong, who flew fighters for the Navy and had an M.B.A. from the Wharton School at the University of Pennsylvania. Mr. Armstrong, in an interview, said that while the reasoning behind the program was sound, the ongoing insurgency and a crippled infrastructure — electricity, for example, was spotty or nonexistent — made execution very difficult.
But the program was popular among the top brass at the Pentagon. In 2006, the defense secretary, Donald H. Rumsfeld, met with the team in Iraq and asked about the “whiz kids” from McKinsey, which struck Mr. Armstrong as an obvious parallel to the Vietnam War era, when whiz kids of an earlier generation had worked for another defense secretary: Robert S. McNamara.
“McKinsey was more than willing to play along — they were being paid extraordinary rates to keep playing,” Mr. Armstrong said.
Another former McKinsey consultant who worked in Iraq recalled a surreal moment preparing a PowerPoint presentation while on a convoy to a shuttered food-processing factory, under the watchful eye of a burly private security guard. “It felt like we were completely half-assing everything — it wasn’t particularly effective,” he said.
Other former McKinsey consultants who worked on the Iraq project, Task Force for Business and Stability Operations, have a more positive recollection of the firm’s work.
“Over all I’m very proud of it,” said one consultant, who had met Mr. Buttigieg in Washington, where most of the McKinsey consultants assigned to the project worked when not visiting Iraq. Four of the six former McKinsey employees spoke on the condition that their names not be used, citing confidentiality agreements or the press policies of their current employers.
By 2009, the security situation in Baghdad was stable enough that McKinsey allowed in some nonveterans like Mr. Buttigieg, who had studied Arabic at Harvard. He went to Iraq aware of the stark similarities between the American experiences there and in Vietnam decades earlier.
At Harvard, his senior thesis had drawn parallels between the United States’ seeking to “save” Vietnam from “godless Communism,” and the 17th-century Puritan ministers who had come to America to civilize “savage lands.” In his autobiography and in an interview that has drawn charges of out-of-touch elitism from some quarters, he reflected on that history by quoting a passage from “The Quiet American” by Graham Greene: “Innocence is like a dumb leper who has lost his bell, wandering the world, meaning no harm.”
“I had protested the Iraq war,” Mr. Buttigieg said in an interview with The Times. “But I also believed that it was important to try to do my part to help have good outcomes there.” He found echoes, he said, of “the stories I had studied about well-intentioned Americans sometimes causing as many problems as they addressed.”
Mr. Buttigieg recalled spending only two nights in Baghdad, where McKinsey consultants were quartered in a building near the Tigris River, and “going to a ministry.” He never left the city during his time there, he said.
“Remember I’m like the junior guy, kind of new,” Mr. Buttigieg said. “It’s not like I was the one whose expertise was needed to sort out what was going on in the provinces.
“Eventually I knew what I was doing a little more and was more useful by the time I got to the Afghan side.”
Mission in Afghanistan
Mr. Buttigieg spent more time in Afghanistan. While Iraq had a fairly well-educated populace, a modern road system and large oil revenues, Afghanistan was far less developed. But the mission was similar: identify small and medium-size businesses to nurture so that they could employ Afghans, providing an attractive alternative to joining the Taliban while fueling economic growth.
Citing his nondisclosure agreement, Mr. Buttigieg declined to specify in the interview what he had worked on, though he mentioned having looked at opportunities in the agricultural industry — onions, tomatoes, olive oil — as well as paint manufacturing.
“They had some things to work with,” he said, “but would have benefited from support on things like business planning, more resources on how to plug in and eventually connections to markets too.”
In the years after Mr. Buttigieg left McKinsey, that program came under criticism from the Special Inspector General for Afghanistan Reconstruction. McKinsey had been awarded $18.6 million for the project, but the watchdog wrote in an April 2018 report that it had been able to find just one piece of related work product: a 50-page report on the economic potential of the city of Herat.
A former McKinsey consultant who worked in Afghanistan described a more extensive McKinsey presence there, involving work in the mining industry and a government transparency project, along with the Herat study.
“One of those sounds just exactly like what I was doing,” Mr. Buttigieg said. When asked which one, he said, “I can’t think of a way to answer that without getting in trouble with the N.D.A.”
Mr. Buttigieg’s work on the Afghanistan project ended in late 2009, close to the time he was commissioned as an officer in the Navy Reserve. And that October, when he was still several months from leaving McKinsey, he set in motion the next phase of his life: He registered as a candidate for office with the State of Indiana.
The next year, he lost a bid for state treasurer, after emphasizing his McKinsey experience during the campaign. (He recounted at one campaign event that after his Rhodes scholarship, “I came back and went into business, and I worked for a company where my job was to do math. I’m a card-carrying nerd.”) In 2011, at age 29, he was elected mayor of South Bend.
The full range of Mr. Buttigieg’s work at McKinsey isn’t clear, though in his autobiography he says that he worked on other projects, including “energy efficiency research” to help curb greenhouse-gas emissions for a client he didn’t name. He also found time in the summer of 2008 to travel to Somaliland, the autonomous region in the Horn of Africa. He went as a tourist, but while there talked to local officials and wrote an account of his experience for The International Herald Tribune.
Mr. Buttigieg has been asked on the presidential campaign trail about his time at McKinsey and, in several interviews this year, has sought to reconcile the company’s recent troubles with his own work there.
For Mr. Buttigieg, the solution to McKinsey’s ethical pitfalls may come in a rethinking of the rules that business abides by. Maximizing shareholder value, the North Star of modern American capitalism, has a downside when the rules of the game leave many people worse off, he said.
“The challenge is that’s not good enough at a time when we are seeing how the economy continues to become more and more unequal, and we are seeing the ways in which a lot of corporate behavior that is technically legal is also not acceptable in terms of its impact,” he said. “There has got to be a higher standard.”
This lecture is part of the McMaster Department of Philosophy’s Summer School in Capitalism, democratic solidarity, and Institutional design https://www.solidaritydesign2019.comThis lecture sets out a brief history of two versions of capitalist software. The first drove the capitalist hardware during the period known as the Great Compression—1945 to 1980. The second did the same for the period many refer to as the era of neoliberalism—1980 to 2008. This lecture describes the bug in the system that crashed the first version of the capitalist software and the subsequent design of the neoliberal software. It also describes the bug that led to the 2008 Great Recession, landing us in the current transitional period that we might describe as the era of neonationalism or Global Trumpism. A key idea is that the emergence of contemporary populist politics, both left-wing and right-wing Trumpist variants, are attempts to rewrite the software of capitalism once again.