“I’ve learned many things from [George Soros], but perhaps the most significant is that it’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”
Stanley Druckenmiller, 1994
* * *
In 1992, George Soros brought the Bank of England to its knees. In the process, he pocketed over a billion dollars. Making a billion dollars is by all accounts pretty cool. But demolishing the monetary system of Great Britain in a single day with an elegantly constructed bet against its currency? That’s the stuff of legends.
Though it occurred just two decades ago, Soros made his nation-shaking bet in a very different time. Back then, hedge funds hadn’t yet entered the public consciousness, restrictions on capital flowing from one country to another were just lifted, and the era of the 24-hour news cycle had just begun.
To appreciate how Soros made a fortune betting against the British pound requires some knowledge of how exchange rates between countries work, the macroeconomic tools governments use to stimulate economies, and how hedge funds make money. Our readers are invited to correct us if we stumble in explaining any of these concepts.
And so onwards with the story of how George Soros led a group of traders to break the entire foreign currency system of Great Britain—and profit handsomely at the expense of British taxpayers and others who were on the wrong side of the greatest financial bet of the 20th century.
Picking Up the Pieces in Europe
Let’s start by laying out the historical backdrop for Soros’ gambit. After Word War II, European countries wanted to integrate their economies more tightly with each other. The hope was that tighter relations would prevent catastrophic wars from breaking out every few decades and create a Pan-European market that could compete with the United States. This culminated in the European Union (EU), which didn’t assume its current form with a single currency until 1999.
A precursor to the EU was the European Exchange Rate mechanism (ERM), which was created in 1979. Countries weren’t ready to give up their national currencies, but they agreed to fix their exchange rates with each other instead of “floating” their currency and letting capital markets set the rates. Since Germany had the strongest economy in Europe, each country set their currency’s value in Deutschmarks. They agreed to maintain the exchange rate between their currency and the Deutschmark within an acceptable band of plus or minus 6% of the agreed upon rate.
With fixed exchange rates, countries can’t just “set it and forget it.” People trade currency every day, exchanging their currency to buy imports or sell exports, and the market applies pressure based on what it thinks the actual rate should be based on supply and demand for a currency. To keep the exchange rate fixed, governments need to participate in the market and nudge it in the agreed upon direction.
Governments can manage their currency in two main ways. First, they can take their reserves of foreign currency and buy up their own currency on the open market. That causes the currency to appreciate. Doing the opposite devalues the currency.
Alternatively, governments can influence exchange rates by setting interest rates. Want your currency to appreciate? Raise rates to entice people to buy your currency and lend that money at higher interest rates. Want your currency to depreciate? Cut interest rates so capital needs to go elsewhere in search of juicy profits.
Messing around with interest rates is a big deal, however, because interest rates affect the whole economy. Along with government spending, interest rates are the main lever governments can use to adjust the economy. If the country is experiencing a recession, the government might cut interest rates to spur investment and spending. If inflation is high, the government might raise rates to shrink the supply of money.
So, all this is to say that there are consequences to maintaining a fixed exchange rate. It’s an external forcing function that ties governments’ hands on monetary policy, which may limit or even contradict what they need to do to keep the domestic economy healthy.
Britain Enters the ERM
John Major, leading proponent of ERM while serving under Prime Minister Margaret Thatcher. Major was Prime Minister when the chickens came home to roost, so to speak.
In 1990, Britain was a country that arguably could use an external forcing function to tie its hands on monetary policy. Inflation was high, productivity was low, exports were uncompetitive, and no one really believed the government was capable of fixing the issues.
The Prime Minister at the time, Margaret Thatcher, had long opposed entering the ERM, insisting that the price of the pound be set by the markets. By 1990, however, Thatcher lacked the political power to oppose other members of her Conservative party who wanted to fix their exchange rates with the rest of Europe.
The decision to join the ERM was championed by John Major, who was the Chancellor of the Exchequer in Thatcher’s cabinet. In October 1990, Britain finally enter the ERM at an exchange rate of 2.95 Deutschmark (DM) for each British pound (GBP). The British government was obligated to keep the exchange rate within 2.78 DM to 3.13 DM.
Shortly thereafter, Major replaced Thatcher as the Prime Minister. The fixed exchange rate system was to be the centerpiece of his economic plan. Major thought that the ERM would serve as a sort of “autopilot” that kept the British monetary policy on proper course. The government couldn’t play with the money supply willy-nilly because its hands were tied by the exchange rate agreement.
And to a certain extent, the policy worked. Between 1990 and 1992, inflation decreased, interest rates eased, and unemployment was low by historical standards. In 1992, however, England felt the impact of a massive global recession, and unemployment spiked to 12.7% from just 7.7% two years prior.
And so we come to 1992. Ordinarily, Britain could spur investment and spending by cutting interest rates during an employment crisis. But in this case, doing so would push the pound’s value below the agreed upon amount. So while the people of Great Britain dealt with a recession, the government’s hands were tied; they’d just have to ride it out.
Meanwhile in New York City
In 1992, George Soros was 62 years old and led the Quantum Fund, a hedge fund he founded in 1970 that bet on macroeconomic trends. Soros was already a very rich guy, but he wasn’t iconically rich, or the public figure he is today.
If hedge funds have an air of mystery about them today, this was especially true in 1992—it wasn’t until then that the term even entered the popular vernacular.
Mention of the words “Hedge Fund” by Year According to Google Books
What is a hedge fund exactly? Well, the word “hedge” provides a clue to their original purpose: investing capital to make a specific bet that something will happen. Hedge funds also use financial instruments to “hedge” against other risks in order to more clearly isolate the bet that they want to make.
Here’s an example. Say you’re a hedge fund that thinks AT&T’s cell phone network stinks and you want to bet against it. You could “short” the stock (make money when the stock goes down), but the whole cell phone market is going gangbusters, so AT&T might get new customers even though it stinks. If that happens, AT&T’s stock price could go up, and you’d lose a lot of money. To “hedge” against this risk, you buy some Verizon stock as well, because more precisely, you think that AT&T is crappy relative to Verizon.
Now, if cell phone carrier stocks increase in value, you still make money in the event that Verizon goes up more than AT&T does. Conversely, if cell phone stocks go down, you still make money if AT&T’s stock goes down faster than Verizon’s does. By creating a position like this, you’ve “hedged” a lot of the more general market and industry risks away and made a very specific bet: that AT&T stinks compared to Verizon.
Another thing hedge funds do (if they’re pretty sure about their wager) is borrow funds to put even more money behind the bet. On the AT&T-Verizon trade, they might make a little bit of money on each share. But if they use mostly borrowed money, they can buy a lot of shares without fronting much capital. So if you’re really sure a bet is right, you might borrow a lot of money to enhance your payday.
A final thing to note about hedge funds is how their managers get paid. The managers are typically investing other people’s money (rich people, endowments, etc), and they receive management fees to cover the fund’s expenses; this includes a salary. The standard is about 2% of the funds under management. So if you manage a very large hedge fund in terms of the amount of money being invested, you can earn some decent income regardless of how the fund performs. But not enough to make you a billionaire.
Hedge fund managers become billionaires by placing really successful bets. Managers earn around 20% of the returns that the fund creates (assuming the fund meets some minimum benchmark). So if your fund makes a bet that produces a billion dollar return, you and your partners make at least $200 million of that. Do that for a few years, especially if you place larger and larger bets, and voila! You’re a billionaire.
So in short, hedge funds try to make isolated bets using financial instruments. They borrow money to make the potential rewards even sweeter, and hedge fund managers can make boatloads of money when they bet right. And that’s exactly what Soros and his partners were about to do.
A Mis-priced Currency Means Big Opportunity
Photo by deg.io
By the spring of 1992, just a year and a half after Britain joined the ERM, the fixed exchange rate posed a serious problem. While putting on a cheery public face, internally the Exchequer (England’s Treasury department) realized that the currency was mispriced relative to the Deutschemark. Jonathan Portes, an economist who was at the time a junior staff member there, wrote:
“In May 1992, the immediate problem was obvious. From a domestic point of view, the appropriate level of interest rates, given weak demand, was much lower than that necessary to maintain [the] sterling’s position in the ERM.
Moreover, it was becoming increasingly clear that sterling was overvalued; even in the depths of a recession, we still had a large current account deficit [the country was importing more than it exported].
We argued that the fundamental problem was that we’d joined the ERM at the wrong rate; sterling was overvalued, meaning that we were stuck with a structural current account deficit.”
The sterling was priced too high. The British government knew it, and the market knew it too as the pound was trading at the lower end of the agreed upon band with the Deutschemark.
What kept the pound from plummeting in value was the British government’s guarantee that it would keep the value propped up, and the market believed that it would. As long as everyone believed that England would stay indefinitely committed to buying pounds for around 2.95 Deutschemarks, the status quo was maintained.
“Markets can influence the events that they anticipate.”
Throughout the summer of 1992, the British pound held its position. That is, until Germany threw Britain under the bus and all hell broke loose.
For some time that year, German central bank officials made comments on and off the record that undermined the sterling’s strength. The British paper The Independent documents the slights:
“On 25 August, for example, Reimut Jochimsen, a Bundesbank council member, issued a speech saying that there was potential for realignment within the ERM. Sterling weakened. On 10 September, an unnamed Bundesbank official was quoted as saying that a devaluation of sterling was inevitable. The pound fell.”
The event that ultimately led to the undoing of the British pound’s fixed exchange rate was an interview with the President of the German Bundesbank, Helmut Schlesinger. Schlesinger gave the interview to the Wall Street Journal and a German newspaper. He had one condition: If they wanted to directly quote him, they had to let him review the quotes. If they only indirectly paraphrased him, no such permission was necessary.
President of the German Bundesbank, Helmut Schlesinger
That night on September 16th, 1992, the following report paraphrasing Schlesinger’s words went out over the newswires:
“The President of the Bundesbank, Professor Helmut Schlesinger, does not rule out the possibility that, even after the realignment and the cut in German interest rates, one or two currencies could come under pressure before the referendum in France. He conceded in an interview that the problems are of course not solved completely by the measures taken.”
By the morning, the report landed on George Soros’ desk. Soros and the entire financial market took this to believe that the pound sterling was one of those currencies that could “come under pressure” and be devalued.
In just one day, this seemingly innocuous, paraphrased quote would bring devastation to the Bank of England and net George Soros over a billion dollars in profit. The market ceased to believe that England would be able to maintain its current exchange rate—and that belief was all that was keeping the pound from falling.
The Trade of the Century
“There is no point in being confident and having a small position.”
Since August, Soros and his Quantum Fund had been building a $1.5 billion position to bet that the price of Sterling would fall. Since the British government’s full faith and credit was stating that it would not fall, this wasn’t necessarily something that was going to happen. But Stanley Druckenmiller, a senior member of the fund, saw the report from Schlesinger and immediately realized its importance.
Sebastian Mallaby’s book More Money Than God recounts the day’s events. According to Mallaby, Druckenmiller noted that their $1.5 billion bet against the pound was about to pay off and that they should consider adding to the position.
Soros retorted with a different strategy: “Go for the jugular.”
If Schlesinger’s quote could be used as the catalyst for the pound to devalue, why shouldn’t today be the day it happened? Instead of slowly building up a short position against the sterling, the Quantum Fund could short sell sterling on an unprecedented scale today. Doing so would not only help hasten the tumble of the sterling, but also increase the fund’s profit.
It was this decision to “go for the jugular” that netted Soros’s firm over a billion dollars, toppled the Bank of England’s currency regime, and ultimately led to the disgrace of the Prime Minister. It also cost the British taxpayers billions.
The man himself, George Soros. Picture from “Charlie Rose”; modified by Priceonomics.
Let’s walk through Soros’s trade to understand why it was so elegant. As we stated earlier, the trade was for the Quantum Fund to “short” the British pound, meaning they would make money if the currency’s value went down.
Now, what exactly does it mean to “short” a currency, or anything for that matter? Let’s say it’s January 2009 and you think Apple’s iPhone is over the hill and that the company’s stock price (of $90) will decline. How do you benefit from this insight?
Well, you or your broker can go to someone that owns some Apple stock and ask to borrow a single Apple stock from them. You’ll give them back the share later and of course pay them interest for the loan. But for now, you sell that stock for $90 in cash. Two days later, the stock price is $88, so you buy one share with your $90 in cash. That leaves you with $2 in profit! (Well almost two dollars—you have to pay the person who loaned you the stock two days of interest.)
But what if you didn’t sell your Apple stock when it hit $88 and instead decided to hold onto it until the stock plummeted further? Well, you’d be screwed because the stock went up from $90 to around $600; you would lose $510 on a the trade, plus interest!
If you buy a stock, the worst you can do is lose all your money. If you short a stock, your downside is limitless because the stock can always keep going up. You can possibly lose more than all your money, and that’s a very bad thing. So if you take a short position, you want to make sure your downside risk is hedged.
And what if you want to short a currency like the British pound? In this case, you’d go to a British person or company and ask to borrow money from them. They say, “Sure, here’s 100 British pounds. Just give me back the pounds in a few days with some interest, and we’ll have some tea and crumpets.” Now, you take those 100 British pounds, and you convert them into 295 Deutschemarks at the agreed upon exchange rate.
At this point, you would really like the British pound to lose value relative to the Deutschmark. Why? Because if the British pound depreciates 10%, when you convert the 295 DM back to pounds to repay the loan, you’ll have 110 pounds. You can pay back the 100 pounds and a little bit of interest, and you’ll still clear about 10 pounds in profit.
So you make money if the pound devalues. But what if the pound appreciates? You’ll lose your shirt. Therein lies the brilliance of Soros’s bet: if the pound tanked, they would make billions on their short. And if the pound increased in value? Well, that scenario was impossible because everyone knew the sterling was over priced. It already traded at the bottom of its trading band, and the only thing that kept it propped up was government intervention. There was no scenario in which the pound would appreciate.
So, either the pound would stay about the same in value (in which case Soros’s fund wouldn’t make any money, but wouldn’t lose that much money), or the pound would be devalued and the firm would make an obscene amount of money. There was no massive downside—only a massive upside.
As The Handbook of Hedge Funds puts it:
“If speculators were to break the ERM, being short the pound could turn out to be a very profitable position. Even if the devaluation did not occur, the chances of seeing the pound strengthen were small — it was more likely to stay at the bottom of its fluctuation band. The only downside for speculators was transaction costs.”
And so that morning, Soros and his fund increased their short position against the British pound from $1.5 to $10 billion. It was the perfect bet with a mitigated downside and a limitless upside. It was like betting on a coin flip, were if the coin lands on heads (the pound devalues), they make a lot of money. If the coin lands on tails (the exchange rates remained fixed), they only lose a small amount of money on loan interest. That’s the kind of bet Soros would pour money into all the day, even if he had to borrow billions.
Fighting off the Speculators
“Our total position by Black Wednesday had to be worth almost $10 billion. We planned to sell more than that. In fact, when Norman Lamont [the British finance minister] said just before the devaluation that he would borrow nearly $15 billion to defend sterling, we were amused because that was about how much we wanted to sell.”
– George Soros, 1992
As Europe slept, Soros borrowed and sold pounds from anyone that he could. The Quantum Fund’s position exceeded $10 billion shorting the pound. Other hedge funds got wind of the trade (and the report from the Bundesbank) and started following suit, also borrowing and selling pounds.
By the time London markets opened for business and British treasury officials started their day, tens of billions of pounds had been sold. The pound was dangerously close to trading below the levels mandated by the ERM.
The Bank of England was about to have a very shitty day.
British officials first responded by buying one billion pounds at 8:40 AM. The purchase had no effect on the price of the pound. The whole world was selling, and the British government didn’t have the buying power to fight it all off. It’s estimated that the British government spent £27 billion of its reserves buying up pounds to no avail.
By 9AM, finance minister Norman Lamont contacted Prime Minister John Major and told him they couldn’t possibly buy up enough pounds to keep the currency propped up. The only option left for the British government to keep their currency trading at the right level would be to increase interest rates dramatically and attract people to buy pounds. Major refused. Britain was in the midst of a recession, and increasing rates would further shrink the economy. It would be political suicide.
Blood was in the water. Global capital continued to bet against the pound. An hour and a half later, Lamont called the Prime Minister to re-plead his case. The Prime Minister relented. At 11AM, the British government announced they would increase interest rates 200 basis points, from 10% to 12%.
How did the value of the pound react to this enormous increase in interest rates? Nothing happened. The pound continued to plummet. Lamont headed to the Prime Minister’s residence to figure out how to salvage the situation, which led them to announce an interest rate increase of another 300 basis points, from 12% to 15%.
What was the effect of this rate increase on the sterling? Again, nothing. As Mallaby later documents in his book, Soros and the gang of speculators knew victory was near:
“At their desks on the other side of the Atlantic, Druckenmiller and Soros saw the rate hikes as an act of desperation by a dying man. They were a signal that the end was nigh–and that it was time for one last push to sell the life out of the British currency.”
The market expected that Britain would have to devalue its currency and that no amount of interest rate hikes or currency purchasing would change that. At this point, the sentiment that Britain would exit the ERM and devalue its currency was a self-fulfilling prophecy; if the speculators believed it enough to put their money behind it, it would eventually come true.
At 7:30 PM that night, Lamont held a news conference to announce that Britain would be exiting the ERM and floating its currency on the market. Soros and the speculators won.
The Aftermath of Black Wednesday
British financial history now refers to September 17, 1992, as “Black Wednesday;” George Soros, however, probably calls it something like “Awesome Wednesday.” Once Great Britain floated its currency, the pound fell 15% versus the Deutschmark and 25% versus the US Dollar.
If you’ll remember, Soros’s Quantum Fund had approximately $15 billion betting that the pound would fall versus other currencies. They had borrowed billions to make this trade, and they were right. Here’s what happened to the value of their fund versus the price of the pound:
Source: The Handbook of Hedge Funds
The value of the fund increased almost instantly from $15BN to $19BN when the pound floated; a few months later, the fund was worth almost $22 BN. Remember, this is a hedge fund, so Soros and his partners made at least 20% of that $7 billion upside, which is at least $1.4BN. And that, my friends, is how you become a billionaire.
The nature of Wall Street trading is that if you win big, someone else must lose big. In this case, there was an enormous wealth transfer from the British taxpayers to Soros and other hedge fund managers. The Guardian recounts:
“Jim Trott, former chief dealer for the Bank of England, described the day as “stunningly expensive”. He said that behind the scenes he bought more sterling in four hours that day than anybody had before or since. All of his purchases lost value during the day – and went down even more when the government pulled out.”
In the run up to the devaluation, the British Treasury kept spending its foreign currency on British pounds that become much less valuable after the Treasury floated the exchange rate. To maintain the fiction that the pound was properly priced, it essentially paid a dollar for something everyone knew was going to be worth three quarters. The cost to British taxpayers was estimated at roughly £3.3 billion.
Losing billions of dollars of taxpayer money is so routine for politicians that they may not lose any sleep over the matter. They do, however, care about the political implications of publicly looking like a bunch of incompetents. You can’t make multiple announcements in a single day that you’re massively hiking interest rates in the middle of a recession or completely changing how foreign currency works without giving everyone the impression that you have no idea what you’re doing.
John Major had made entering the ERM the centerpiece of his monetary policy and his plan to bring austerity to England. The events destroyed his credibility. Voters booted Major and his party from power in the next election. As it turns out, Margaret Thatcher was right: the UK had no business trying to artificially prop up its currency in an era when a handful of hedge funds could assemble more capital in a few hours than the Bank of England had at its disposal.
If you’re looking for a take away from this story, that’s one of them. The amount of money sloshing around global markets is so enormous that it can bring even the British government to its knees in one day. Another takeaway is that regulations like this can create unexpected loopholes, and someone more clever than the politicians will eventually spot it.
But perhaps most importantly, this story shows the power of the one-sided bet. In 1992, the bet was a well-designed macroeconomic trade against fixed exchange rates, executed by George Soros and his team. If they were wrong, the downside was almost zero. But they were right, and the upside was unfathomably high.
Bets like that almost never come along, but when they do, enormous transfers of wealth take place from the sheep to the wolves.
Stanley Druckenmiller on Economy, Stocks, Bonds, Trump, Fed: Full Interview
Billionaire investor Stanley Druckenmiller discusses the outlook for the U.S. economy, his investment strategy for stocks and bonds, President Donald Trump’s attempts to sway Federal Reserve policy and the prospects for a solution to the U.S.-China trade dispute. He talks with Bloomberg’s Erik Schatzker. (This interview was from December 17, 2018)
Druckenmiller on 2020 Outlook, Monetary Policy, U.S. Election
00:00Stan how do you feel going into 202000:03about demarco yeah my health at the00:06markets the economy we could talk about00:07your help too if you like what’s not00:11well you have very low unemployment here00:15you have fiscal stimulus in Japan you00:19have fiscal stimulus and a lot of00:21confidence coming to Britain we’re00:23running a trillion dollar deficit for00:25employment apparently we’re gonna have00:27some sort of green stimulus in Europe00:30and we have negative real rates00:32everywhere and negative absolute rates a00:35lot of places so with that kind of00:39unprecedented monetary stimulus relative00:42to the circumstances it’s hard to have00:46anything of a constructive view on the00:48markets risk and the economy00:50intermediate-term so that’s what I have00:52because everywhere you turn you’re being00:57encouraged to take more I don’t need to01:01take more I have enough but I just I’ve01:06always believed that expansions and01:11usually would type monetary policy or01:14credit problems and I think what we’re01:17doing is definitely borrowing from the01:20future and we’ll probably end badly as01:23the ou7 period did but you know that01:29could be years I’m 66 I might be dead by01:32the time what happens so the01:33intermediate term technicals are good01:36yet breathitt an all-time high economy’s01:40fine and if anything our biggest our01:43biggest problem going in once once the01:49Fed shifted away from their cutie and01:51tightening program our biggest problem01:54was obviously global trade and whereas01:55over global trade01:58and I’m not saying everything is all01:59peaches and roses now but certainly on a02:03rate of change basis I don’t see that02:06being if anything there’s a02:08de-escalation not an escalation there so02:11for now all systems go so your02:14constructive all systems go how you’re02:15expressing that in your portfolio well02:19I’m long equities I’m long some02:23commodities I’m short fixed income and02:30I’m long commodity currencies short the02:35end so all sort of for now betting on a02:45a benign economic outlook and a benign02:48market outlook but as you know Eric I02:50tend to change my mind so that’s for02:52today hopefully all last at least a02:55couple weeks let’s be a little more02:57specific if we can short the end02:59commodity currencies I’m assuming03:01Canadian dollar Australian dollar that’s03:03very good03:04anything else I’m missing there I have03:07some New Zealand lying around I even03:10have some Mexico lying around they’re03:11not they’re not big massive positions03:16but they’re enough to matter in my03:18non-competing world I might have more if03:20I’d still had clients commodities have03:22been unloved for an awfully long time03:24what do you own I own copper believe it03:30or not basically I think on the margin03:34as I just described particular with03:36fiscal stimulus and monetary easing at03:38the same time and a D munition of trade03:40worries global economy is going to be03:43better than the IMF thinks and copper03:48has a little extra kicker relative to03:51the other ones we think that V’s03:53probably add 0.5 percent a year in03:57demand and the supply it looks03:59challenged it become more challenged if04:01the Chile situation doesn’t clear up but04:04that’s not why we own it we don’t own04:07energy probably should but I just I just04:14think the demand outlook is so04:15challenged long-term04:19just not that interested if you like the04:21commodities short-term it kind of makes04:24the equities challenged because they’re04:25a long dated asset and hopefully we’ll04:28go greener and greener I’m on the board04:31and Environmental Defense Fund so I’m04:33perfectly happy if oil doesn’t go04:35anywhere and in the stock market04:38anything particular you like it’s04:41interesting when we met a year ago my04:44portfolio was heavily growth oriented04:46particularly the cloud it was serviced04:49now remember my oft yeah the the theory04:52being there’s like a ten-year runway and04:55these companies would grow very well in04:58a low nominal growth world I still own05:02that stuff but my mix has changed05:05dramatically to stuff that will do well05:08in a higher nominal growth world so I05:10have bank’s financials I own Japanese so05:17I wouldn’t call it a mix evaluated I05:21wouldn’t call it a mix dominated by05:22value but it it looks more like a normal05:26mix now it’s not just concentrated in05:28two companies that would do well in a05:30low nominal growth world and short fixed05:33income which I interpret is short the05:35Treasury market what a difference a year05:37makes yeah last year the Fed was on this05:44well about around this time they were05:47about to do a hike and Jerome Powell05:51also followed that up by saying05:53quantitative tightening shrinking the05:56balance sheet was all about pilot and I05:58think they’re dots called for for hikes06:01I think that you know how to here to us06:03right06:05I thought that those were inappropriate06:09and I think I looked at the transcript06:12from last show I think we were along06:14quite a few Treasuries so it’s it’s06:16almost the exact opposite view for the06:18exact opposite reason I don’t think06:21Jerome Powell will have the courage to06:25raise rates next year it’s a lot easier06:28to change your mind from a tightening to06:30an easing mode but I definitely don’t06:32think I don’t think they’ll be easing06:35it’s kind of absurd when you look at06:40where a nominal growth and real growth06:42in this country are and you look at06:45unemployment and you look at all the06:48other circumstances to have rates at one06:52and a half percent if I came down from06:55Mars and you showed me the broad06:58landscape and asked him where Fed Funds06:59would be I probably would guess three07:01and a half somewhere in there so if you07:04don’t think you’ll have the courage to07:05raise rates next year should I imply07:09that your short position is a little07:11further out on the curve yeah we’re07:14we’re short the long end because I just07:17think these rates for these economic07:19circumstances are inappropriate I07:22thought they were inappropriately high07:23last year or particularly that07:26quantitative tightening and I think07:27they’re an appropriately easy this year07:30it’s actually quite remarkable because07:34the Fed has continued to talk about this07:37mid to late 90s period where they were07:40doing insurance cuts I remember running07:43quantum at Soros and in 98 credit07:47completely dried up with Russia and it07:52looked like the financial the Asian07:55financial crisis could spill over in07:57America Greenspan cut three times twice08:00in October on what’s in November stock08:03market went to a new high took off08:07and since he was insuring against the08:10Asian financial crisis he took back the08:13insurance by the way he had cut rates08:17three times from five and a half to four08:19seventy-five and then he started hiking08:21so the most fascinating thing about the08:25recent press conference and the one08:28before it was some reporter I don’t08:30think it was a Bloomberg reporter but08:32some reporter cited this period and them08:35using the insurance cuts as a model and08:37said Chair Powell what happens if the08:42trade war d escalates and it’s no longer08:46that big of a worry and what if breaks08:48it is solved would you raise rates and08:51he said absolutely not and the guy said08:55well why you that’s why you cut them he08:58said that was insuring against this and09:00he said well because the inflation rate09:03is much lower now and we didn’t have the09:07risk of deflation back then and Eric09:10that didn’t sound right to me because I09:12remembered distinctly that period09:15Greenspan running the the great09:16experiment with a blooming economy with09:19no inflation I look back and the core09:21PCE was one-and-a-half in 98 and 99 when09:27Greenspan started raising rates again09:28from 475 it’s currently 1:7 and he’s got09:34them at one and a half I mean honestly I09:37don’t get these guys last year when we09:40meant no credit had been issued for a09:43month the stock market was down ten09:46percent economic conditions were a09:49meltdown and they hiked and they leave09:51cutey automatic pilot09:53now credit conditions are booming we09:56have a new IPO every day the stock09:59market’s an all-time high employments at10:01three and a half percent confidence is10:03picking up and we just did three cuts so10:07it’s like these guys are pretty hard to10:10figure10:11I want to ask you some more questions10:13about the Fed but before I do we haven’t10:16talked about your favorite currency we10:19along the pound heading into the British10:21election I was it is my favorite10:25currency and I just you know I’m very10:30good friends with johanna Rupert and he10:33had told me he calls her Mrs T and10:36that’s Margaret Thatcher and he said you10:40know when I met with mrs. tea she said10:42never underestimate the common sense of10:45the British people and I just I just10:49felt that they were not going to go for10:52socialism and frankly when I look at10:56what’s going on in Europe and then I10:59look at what’s going on in Britain11:02I was always sort of a brexit ear11:05because they did perfectly find for 50011:08years without that union of countries11:11down there who seemed all hate each11:13other and they can’t make a decision on11:15anything so I think this is going to be11:18actually very good for the British11:20economy I separate myself from most on11:23that I think Boris Johnson is sort of a11:27smarter version of Trump without some of11:31the the antics to go along with it and I11:35would expect investments to fly into11:38that country and I think they’ll do it I11:42think they’ll do very well there so you11:44know it’s funny if you look at it what11:47if I were to tell you there was a11:49Republican president but a better11:51version and you had two-thirds11:55Republican majorities in both houses of11:58Congress and you had a deficit to GDP of12:04two not four and a half and you had a12:07debt to GDP lower than the United States12:10and twelve times earnings in a four12:12percent yield it sounds like a decent12:15place to invest to me so we not only had12:17the pound and still do we had the12:20British financials the banks we have12:23some Barclays Lloyds that kind of stuff12:26flying around which just lying around12:29well I don’t take big positions anywhere12:32I’ve become a coward since I stopped12:35competing but uh enough that it gave me12:37a smile on Friday let’s go back to the12:40Fed you’re a frequent critic of the Fed12:42have been over time for reasons you’ve12:45articulated well you see you can’t12:48figure these guys out but do you feel12:50Stan any more confident about the12:53direction of monetary policy today than12:54you did a year ago12:56no I feel much worse first of all if you13:01remember a lot of the bait a year ago13:03was about quantitative tightening and13:05despite the fact that at least the seven13:09or eight previous times we had done QE13:13bonds had gone down and stocks had gone13:16up John Williams and some others there13:19said that QE QT had no impact on markets13:24and frankly we switched from cutie to QE13:29and what happened bonds are going down13:31in price and equities are are going up13:35but you know it was just lucky eight out13:37of eight13:38but I just first of all the editorial13:45cabinet I wrote we said don’t raise13:47rates for now this was back in December13:50of yes our interview was the day before13:52the hike we wouldn’t raise rates for now13:55we weren’t saying to cut them and one of13:57the things we’ve said in our interview13:58is if you hike now you may get really14:04scared and have to start cutting and do14:05something drastic the next year which of14:09course they’ve done I’m not sure why but14:13you know I think it’s it’s always easy14:15to be easing and things are great and14:19you just feel like you’re the cat’s meow14:22you’ll remember Bernanke claiming14:25victory and o4 with the Great Moderation14:27and Greenspan was a maestro but I will14:31go to my grave believing that that14:33financial crisis happened because the14:36bubbles created by easy money and I just14:39don’t understand why we need interest14:43rates where they are now we normalize14:45we’re trying to normalize okay things14:47got too tight you should back off but14:51you don’t need to go the other way to14:52the extent we’ve had and then this crazy14:55president saying we need negative rates14:57to compete with negative rates in14:59countries where they clearly aren’t15:01working they’re not growing as well as I15:02do it’s the most anti-capitalist idea I15:05could ever dream up and he’s pushing15:07Palin you know I didn’t want to believe15:10this but it’s pretty clear now that he’s15:12had an effect on pal and of course the15:14media is gone all he’s really standing15:16up to him well with verbage not an15:18action in action he’s been cutting and15:20doing the president is bidding he hasn’t15:22gone negative god help us some people15:26say he deserve high marks whether it’s15:28the media or others deserve high marks15:31for resisting some of that pressure from15:33the White House kind of grade would you15:35give Jay palace Fed Chairman not a good15:40one I don’t think he’s resisted anything15:43he just well rate him against Yellen15:46Bernanke Greenspan15:53he’s a weaker version of Yellen without15:57the monetary framework Bernanke and I16:01philosophically disagree about easy16:04money and helicopter money but the man16:07had conviction and he controlled the16:09room which i think is really important16:13in a Fed chair and I don’t see that here16:16and of course let’s not compare him with16:20my true hero Paul Volcker who the late16:24great Paul Volcker yes who he cited as16:28hers and I couldn’t agree more and it’s16:30too bad we don’t have some of that kind16:32of courage at the Fed today you brought16:35up your friend Kevin wash with whom you16:36wrote the op-ed arguing for the Fed to16:40pause and not raise rates as it16:42subsequently did that is raised rates in16:44December of 2018 Kevin is considered a16:47candidate for the job of governor the16:50Bank of England you think he’ll get it I16:52don’t know whether he’ll get it and I16:54don’t know whether he wants it I don’t16:56know anything about this but I hope for16:59my sake it’s not true because he’s been17:01a trusted advisor Claude who knows not17:06me Stan tell me what you think of17:09Christine Lagarde is the new ECB17:10president it’s early days yet she’s a17:14lawyer I think it’s way too early to17:19judge her I’m a little taken aback by17:23linking climate change with monetary17:26policy I am on the board of a montemagno17:30fence so I’m a greeny but you know I17:34think there’s other buckets to execute17:37climate change through and it shouldn’t17:38have anything to do with monetary policy17:40but who knows how strongly she feels17:42about that but it’s early days and I17:44think we should give her the benefit out17:46and asked me in a year if we’re still17:48here17:49central bankers whether it’s policy17:53makers at the ECB or for that matter17:57members of the FOMC seemed determined at18:00whatever cost to bring inflation back to18:03two percent in Europe it’s met negative18:06rates here they’re now beginning to talk18:08about inflation averaging would be a18:12catch-up period if it hasn’t met the 2%18:15target for a period of time my question18:18to you is in whether negative rates18:20necessarily work or whether averaging18:22inflation is necessarily a good idea18:23you’re free to answer both but first I18:27want to know whether you think inflation18:28matters anymore18:30well first of all there’s 14 recognized18:34measures of inflation twelve of them are18:37above two percent their preferred18:39measure the core PCE E is at 1.7 percent18:44the risks they are taking with regard to18:49miss allocation of resources18:51bubbles all that stuff because something18:54is at 1.7 as opposed to two and now18:58they’re talking about a make up period18:59first of all monetary policy is supposed19:02to look forward not backward so why are19:04we looking backward and if there’s a19:06make up period after inflation was 10%19:09in the 70s why didn’t we have a target19:12of minus 10 a year in the 80s and we’re19:16talking about decimal points here about19:18something Eric that you can’t even19:21really measure so and I’d like to remind19:25everyone because now they’ve turned it19:27into a mandate there is no mandate for19:302% the mandates states very clearly19:32price stability and full employment in19:35this country yes well I live in this19:38country and so does the Fed and I don’t19:41know how 1.7 percent is not like the19:44greatest success ever if we’re talking19:47about price stability so this thing19:50about it’s the greatest challenge of our19:51time to get out from 1.72 to when we19:55don’t even know whether it’s 1 or 3 it’s19:57just you know the measurements are so19:59random19:59I just find it astonishing20:02we’re living in a time of technological20:05advancement all kinds of new innovations20:08that are creating deflationary pressures20:10surely reflected in that one-point-seven20:13whether you think it’s adequately or20:15accurately measured where does that fit20:19into your thinking about the importance20:22of inflation at all I’m glad you asked20:24because you know when the last big20:29technological revolution was it was the20:31late 1800s and we had three percent20:34deflation and eight percent real growth20:36for ten years so I remember talking to a20:39central banker so medical is 19% of GDP20:46here what have you found a way either20:51through co-payments or whatever to get20:53the consumer to respond to price and20:56then you used our technological20:58wunderkind so let’s just call it for no21:01better term what if we Amazon the whole21:04medical system and you drove the costs21:07of medicine not medicine of healthcare21:09down as countries from say 19 to 13 it’s21:1211 in most other countries would the Fed21:15then panic because it sends the CPI21:17under zero is this some horrible thing21:20that we’re gonna it’s going to be the21:21greatest crisis for our time and have a21:23huge response to know and I would say21:27the same thing about all this stuff for21:29at large you have these magnificent21:31productivity increases going on right21:34now at the corporate level because of21:35cloud content and so forth21:37there’s nothing pernicious about21:40inflation if it’s driven deflation if21:43it’s driven from the supply side I don’t21:46see people walking around oh my god I’m21:48not gonna buy a car this month because21:50it might be cheaper in three months and21:51by the way we haven’t even had deflation21:53it’s just sort of this imaginary thing21:55that it’s not up to there two percent21:58arbitrary target for the time being22:00anyway this obsession if we can call it22:03that with inflation has driven these22:05insurance cuts and helped once again to22:08reflate financial assets 2019 was an22:11extraordinary year for investors how did22:14you do22:14not as well as I like I just got into22:17double digits22:18last week I wasn’t even able to say that22:21I’m just too conservative on my old age22:23I was I was well-positioned but very22:27timidly I’ll leave it at that22:30why are you timid we got nothing to lose22:35I have a lot to lose that’s that’s what22:38other he doesn’t timid I don’t know when22:40I was competing and managing other22:43people’s money22:44I just I’m a very competitive person and22:47I felt the compulsion to take risks I’m22:50still a competitive person but it’s22:53either that or something about my age I22:56don’t trust myself or the last year in22:59particular I’ve just never trusted this23:06administration not to do something that23:11would preclude me from taking positions23:15that I just felt were safe and secure23:17and all in risk and I think23:19unfortunately a lot of people probably23:21felt the same way as you know people23:23have actually sold equities and put them23:25into bonds this year I didn’t do that I23:27was just timid about what I did do but23:30this administration with wondering about23:34where the hell the next bomb is coming23:37from just doesn’t allow me to take some23:40of the positions I’ve taken historically23:42where I just thought it was a one-way23:43bet to me this was always binary in a23:46two-way bet it’s not just policy23:51uncertainty it’s something how would you23:54describe you call it policy uncertainty23:57is a great term24:01one of the reasons I’m pretty sanguine24:04right now is I think we’re close enough24:07to the election at least we can breathe24:09for a few months that I think I don’t24:13expect any dramatic policy that can24:16overwhelm the favorable backdrop of24:18monetary stimulus in a decent economy24:21you describe yourself as being timid24:24maybe we’ll use the word cautious in24:28part because you’re no longer competing24:30there are still lots of people who are24:32competing and yet many of the greatest24:35fund managers we’ve seen in our24:37lifetimes are struggling to generate24:39good returns why well if you’re talking24:45about the macro community where the24:46biggest problem has been they’re just24:50not the opportunities that were in the24:521890s because with central bank’s24:54suppressing interest rates there has not24:59been sort of the one way high risk25:01reward bet there were I you know I25:05remember when the Japanese when me a25:09know inappropriately tightened after a25:11big bubble I bought Japanese bonds at 7%25:15okay and I mean a lot of them when I was25:18at Soros okay are you gonna go plow into25:22the 10-year at 190 or whatever it is no25:26but you might think rates are going down25:27so you just take lesser of a position I25:30also think a lot of them seem to be led25:33around by the nose with the by the Fed25:35and the Fed you know they talk about the25:39dots and they obsess over this I always25:42made my money when I felt differently25:45the Fed and I went in the other25:46direction because once the Fed changes25:49you make money and the feds have been25:51very wrong on the economy and on the25:55markets and on policy and I think those25:58that followed them that’s a problem the26:00other thing has happened obviously is26:01you’ve suppressed currencies but there26:04are plenty of great young money managers26:06who are killing it now26:09they’re mainly in technology stocks they26:11were long the disrupter and short the26:12disrupted we’ll see what happens now if26:15the world is changing the way I think it26:17is but off yeah I think that’s those are26:21some reasons who impresses you among the26:23current generation of young inventor not26:27say because someone asked me that seven26:31years ago and I think I cursed the26:34people I answered so but let me say this26:38I think one of the reasons I had the26:42record I did I was the only person in my26:45class in 75 who went to the securities26:49business at Bowdoin and there were of26:52the higher schools in Bowdoin I don’t26:56think anybody at the end of a seven or26:58eight year bear market was going to Wall27:00Street so the level of competence I was27:04competing against in the 80s and early27:0790s made me look quite good once once27:13you’ve been through 20 years of bear27:15market these kids that all come in the27:17industry in late 90s and 2000 not to27:20mention the quants like Jim Simons and27:22all those guys they’ve all got like 5027:24IQ points on me so you know I just think27:28one of the reasons it’s tougher is a lot27:31of really really talented human capital27:34has been brought in and with the27:36internet a lot of the old trade secrets27:38that I had that were in my head about27:42what leads and lags markets now that27:44Davis is sending like five emails a day27:46telling if this happens and that happens27:48you just don’t I think a lot of these27:50investors don’t have the edge we had27:54back then I was extremely fortunate to27:57come into the business particularly the28:00macro business when I did from both an28:03opportunity set and who I was competing28:06against well you’ve told me before28:08quants have changed the game for28:10fundamental investors and people like28:12you need to adapt yes we do so how are28:15you adapting28:17well I think we talked about this last28:20year but one of my big things and you28:24got beat up for it a little bit that’s28:26okay28:27one of my big things in investing was28:31price action versus news and gathering28:34price signals from the market and I28:37think those price signals versus news28:40were very effective for 20 or 30 years28:45now with the quants who respond to a28:48different set of variables and then we28:52used to back then I used to want to buy28:54a stock maybe and what I would call the28:56second inning when something’s gone that29:00much their models may have figure out29:02that it’s gonna go back to the first29:03inning before proceeds on its merry way29:06what I’ve tried to adapt to is having a29:09fundamental belief and if they’re29:13creating volatility in the markets using29:15the volatility rather than getting29:17abused by the volatility but Eric I’m29:20not that secure in my fundamental29:21beliefs I liked it better when I could29:24just use price signals but you know I’ve29:27tried to adapt it you know I’m doing all29:29right29:29I’m gonna hold you accountable to29:31something else you told me a year ago29:32you said at the time you thought we’d29:34been in a global bear market for a year29:36yeah not a correction in a secular bull29:39market yes and was gonna be hard to29:41escape was that the wrong diagnosis or29:44are we still in a global bow market29:46absolutely the wrong diagnosis for it29:49weren’t new highs 12 months later I’m29:53proud of the fact that I pivoted before29:55the force mattered but I couldn’t have29:58been more wrong but I would say until30:00the last month or so the US was about30:05the only one that continued in this kind30:08of markets but uh no question that was30:11wrong the question is how long is this30:12going to last the answer is I don’t know30:16nobody long enough that I’m maybe Jim30:20Simons knows I’m not sure Jim Simons30:23knows but I bet his machine they’d had30:25created knows where he can sleep at30:26night and the thing makes money for him30:28God talk about their bono so it’s30:32awfully hard of course to predict when30:34the next downturn is going to come do30:36you have any idea Stan particularly as30:39someone who’s made more money in bear30:40markets than in bull markets what will30:42trigger it yeah if if there’s a30:48political event change of leadership in30:51the White House that goes to some of the30:56anti capitalists I would think that30:59would definitely trigger a bear market31:02whether it would permanently end the31:05bull market I don’t know but that would31:06trigger it the other thing that would31:08obviously trigger it is if by the end of31:11this year we started to get enough31:14inflation that the feds start tightening31:17and then of course the other thing is if31:19we had a credit event and if you look at31:23the credit markets it’s very obvious31:27that you’ve got a really lot of bad31:29apples out there that are not being31:32exposed because the interest costs are31:34so low by the way one of them being the31:36US government we’re running a trillion31:40dollar deficit why because we can affect31:43a lot of these new professor geniuses31:45think this is just a free lunch but I31:49would think it’s one of those three31:51events a political be change in Fed31:57policy because you know who knows when32:02inflation turns you can come up with a32:04theory why it would turn I kind of32:06believe the secular forces will hold it32:07down but I’ve been wrong before and I’ll32:09be wrong and in the future and then the32:11third one is and this is more what32:14happened in oh seven oh eight32:16the the bubble just collapses on itself32:20because things have just gotten so32:23ridiculous I don’t think we’re anywhere32:25near there but I’ve been wrong before32:29and you know these things seem to happen32:33after elections in fact when I first32:36came in the business my first boss told32:38me just by two years after the election32:41and then sell the election and then that32:44worked like every four year period it32:47worked until Bush tried to extend the32:50cycle and for the whole four years and32:53we blew up is that what you’re going to32:56try heading into this election what’s32:59not is that what you’re going to try33:00heading into this election what so I33:04don’t know what I’m gonna do I’m only33:07gonna sell when I start to see the signs33:10to say good so I can have all these33:12great long term to pontificating but as33:16a practitioner you know I can’t really33:20think about the long long term but I33:21need to be aware of it so that I can33:24pull the trigger to go that way let me33:26go back to your point about anti33:28capitalists would an Elizabeth Warren33:29presidency really be that bad in your33:31view in what respect33:34well are we talking about markets are we33:37talking about the United States what are33:38we talking about mm well let’s start33:40with the markets because that’s how we33:43got on to the point and then you can33:44expand well with regard to the markets33:48let me just put it this way every33:52consultant that ever studied Duquesne33:54said I have a negative correlation of33:57the SP and I do very well in bear33:59markets I think a Warren presidency34:02would be very good for my business but34:04not necessarily good for America34:07is there a Warren hedge well let’s see34:14if it happens first but yeah you just34:17sell it you could just short stocks is34:19not real complicated and you probably34:21sell the dollar I mean there’s all kinds34:23of stuff but I’m kind of on the other34:27side and this is not just one of all34:31this rhetoric out there including the34:34business community about failed34:36capitalism and we need to improve34:38capitalism and capitalism as a failed34:41experiment so you’re on the other side34:44meaning what I think capitalism34:48I’m a dyed-in-the-wool capitalist who34:51believes in free markets and believes in34:54creative destruction and leaves us so I34:56just I’m a little offended by the35:02narrative in the media not that it’s35:04anti-capitalist everyone’s entitled to35:07their own opinion I don’t have amonopoly on the truth but on the factsso I don’t think most people are awarelet’s just take poverty in the UnitedStates it was 26 percent a few decadesago it was 16 percent in the financialcrisis and it’s 13 percent now it’s atan all-time lowit’s 13 percent of poverty right lowenough absolutely not and it’s somethingwe have to work on but do you think 99percent of Americans would guess toohigh or too low on what had happened tothe change in the poverty rate the last15 or 20 years much less the last fiveyears or let’s look at globallyyou’ve got since 1999when you had a billion seven people inthe world and extreme poverty numbertoday is 700 million so 1 billion peoplehave been lifted out of extreme povertyin the last 20 yearswhy because obviously India and Chinaadopted a free-market model and withregard to all this other talk aboutbillionaires and so forth so during thatsame period you’ve created 2,500billionaires but you’ve brought abillion people out of poverty so thatmeans for every billionaire you’vecreated 400 thousand to 1 have limitedhave exited extreme poverty ok now youcan be for capitalism or you not be forcapitalism but I object to the fact thatout there which are simply incorrect Igave you another one and as you know I’mnot a great fan of the president but thefact of the matter is this incomeinequality talk it really doesn’t standup to the facts the middle class and thepoor are doing very well in fact they’redoing better and then they’ve done inquite some time are they doing wellenough Noare they doing as good as Jeff Bezos nobut on an absolute basis they’redefinitely improving relative to wherethey were five or ten years ago andyou’ll probably be astonished to knowthat if you take income after governmenttransfer payments and negative taxeswhich I think we all agree it should betotal competition the top quintile hashad the same percentage increase as abottom quintile now I’m not going tophony facts appear for you the 1% havedone better because they all own stocksbut in terms of the lower middle classfor the first timethey’re actually improving relative tothe upper quintile here’s how I wouldput it to you in terms of political riskat the end of the day Stan does itmatterof course the data do matter but does itmatter to those people who feel screwed38:23or feel like they’re getting screwed38:25what the data show to them all that38:28matters is how they feel and how they38:31feel why do things what they’re gonna38:32track they feel that the votes at the38:34ballot box why do they feel that way one38:36of the reasons because your profession38:38goes out and validates that feeling with38:41a Mis statement of facts on a dailybasis how many times have you heard howthe poor and the middle class aregetting screwed of course they’regetting screwed relative to just JeffBezos but you know what againto me that’s capitalism and I’d ratherhave a rising tide where one group isnot rising as fast as another group thenI would have them all sinking I would39:12also posit that it’s not a binary choice39:15between capitalism and raising taxes on39:19billionaires which is clearly what some39:22people running for the Democratic39:23nomination want to do well since most39:27billionaires own stocks and assets it’s39:34hard to believe they didn’t okay I’m all39:37for raising taxes on billionaires39:40because as you know for years including39:44when I ran hedge funds I’ve said I39:48wanted to normalize capital gains that39:51we should be paying just as high rate as39:53a plumber is paying I’ve been against39:55carried interest then against39:57pass-throughs all that stuff to me40:00inside the tax code now that’s not well40:04I guess it is officially raising capital40:05gains but that’s not officially raising40:07taxes but what it will do it40:10we’ll raise taxes on the wealthy I would40:13also say there’s another false narrative40:15how they’ve cut taxes on all the writ40:17for the rich with with the Trump tax40:20plan I don’t know you live in New York I40:23don’t know about you my tax is one up40:24they didn’t go down I got a tiny cut in40:27my rate and I can’t deduct state and40:29local so my taxes went up I’m not40:31complaining again I’m just stating facts40:34here I don’t object to the other side’s40:39argument I disagree with it but I don’t40:41object to it again I don’t have monopoly40:42on the truth but I really object to a40:45Mis statement of facts out there do you40:48think cat and I think it’s feeding this40:51feeling you’re talking about getting40:52screwed that may very well be true40:54but at this point heading in to November40:59of 2020 do you genuinely believe that41:03capitalism as we know it is is in41:06question or at risk or is it just an41:09argument around the edges of I think the41:12system we have I think we need morecapitalism less to me when you have apresident as states who put hundreds ofbillions in tariffs and then goes andpicks and chooses individual economicactors who pay those tariffs and whodon’t depending on leaders and losersexactly it might as well be thePolitburo when you have monetary policyaround the world with negative rates andyou cannot have capitalism you don’thave a hurdle rate for investment so we41:47don’t really have the markets at41:49allocating capital the way they would41:51under a capitalist model that that’s41:55another version of it you know it’s41:57funny because Trumpif if things if Trump gets reelected andthings implode in the second termcapitalism will get a very bad name inmy opinion and we’ll probably have a bigpolitical response but it will be undersomeone who’s sort of the antithesis of42:23capitalism then you’ve got the other42:29side who want to villainize billionaires42:34which is okay but their view is if I42:39take money away from this billionaire42:41that means the lower the lower income42:47levels are going to rise Eric that’s not42:50the way it works42:51that’s like Trump’s trade thing with a42:53zero-sum game if China loses we win no42:57you can both lose it’s the same thing of43:00the economy43:00if you screw Jeff besos and he decides43:04to take his his entrepreneurship and go43:07home okay this man has created 65743:10thousand jobs if you take out the whole43:12foods acquisition all right and you know43:16all this innovation all this stuff going43:18on and you reverse the economic will we43:21can both lose yeah you can punish Jeff43:23Bezos but how do you really hurt the43:26poor in the middle class bad economic43:28policy that’s how you hurt them one of43:32the things you’ve been doing for years43:34already in an effort to maybe counter43:37bad economic policy is give your money43:39away what have you been doing with your43:41money lately stand and do you think43:43DeLand through P has as bright a future43:46in this country as its as it’s had the43:49past several years well first of all I43:52want to be clear I don’t give my money43:54away because43:58a bad economic policy I give my money44:00away because I can it it’s hard to44:03explain but I was unbelievably lucky to44:08be born in this country I think the odds44:11were twenty three to one the day I was44:14born then whether I would being born in44:15America and I can talk to myself about44:18how I’d pulled up my bootstraps or this44:20or that but I could have been born in44:21North Korea or Iran or one I’m kind of44:25guessing I wouldn’t have had the44:26economic success I’ve had then the other44:29thing I would say in our in our system I44:32have a skill set my mother-in-law says44:34I’m an idiot savant I was not in the top44:3710% of my high school class but I’m very44:39good at compounding money and I just get44:42a real pleasure both emotional of just44:50trying to make sure other individuals44:52have the same shot I had I was in a bad44:56school district my father moved me you44:59know I had an opportunity how’d he not45:01moved me I don’t think I’d be sitting45:03here today and I see so it’s not a bad45:07economic policy it’s a lot of help45:10people who haven’t been as lucky as you45:12I’m helping myself too I love giving45:14money away it gives me pleasure and to45:17me it’s a privilege I think a lot of45:18people would do it if they had the kind45:20of resources I have it gives me a thrill45:23to be at Memorial Sloan Kettering and45:25see them moving the needle on on cancer45:28it really gives me a thrill to see that45:31we’re providing kids in Harlem and45:32others the same shot or at least a45:35better shot at the American dream so we45:39you know one of the things we emphasize45:41and we like to give to is economic45:43mobility there’s a lot of very cool45:46stuff going on45:48I’d say my latest45:51and most passion of his experience is45:53with blue Meridian when during my Harlem45:59Children’s Zone well I’m still those46:01days are continuing but when we founded46:04Harlem Children’s Zone Jeff and I there46:07was a woman at mo McConnell Clark named46:09Nancy Roop and they helped us set up our46:12original business plan and she did the46:16due diligence on us for 20 years and46:18believe me when you’re on the other side46:20of strong due diligence you get to learn46:23how Telenet someone is so when Nancy46:25told me that the Clark foundation wanted46:30to liquidate and she wanted to set up46:32this thing to satisfy the MIT’s match46:35between all the wealth that’s been46:38created today and then there’s this46:41whole incredible group of young on46:44social entrepreneurs out there who want46:46to deal with the problem but the money’s46:48kind of stuck here and the supply of46:52talent is here and her concept was to46:55transfer the money in there you’ve got46:58stuff going on like The Giving Pledge47:00and all this stuff that shows an intent47:04unfortunately there’s not a there’s not47:08a lot of movement yet but I’m pretty47:11optimistic given the tent and also given47:15the talent that’s out there on the47:16social entrepreneurs sector what were I47:18talked about talent being drawn in the47:21financial sector47:22it’s amazing the talents been drawn into47:25this social entrepreneur sector I think47:26it’s a sign of our times and everything47:28we’re talking about47:30so I’m hopeful enthusiastic excited that47:35a platform like blue Meridian that47:39brings these funders together with these47:42practitioners is going to work and deal47:44with some of the problems what problems47:47in particular economic mobility I think47:49is the biggest one so live already and47:52is funding47:54place-based strategies like Harlem47:56Children’s Zone funding47:58nurse family partnerships which is you48:03know48:03early life because obviously kids if not48:08properly attuned to their first two or48:11three years don’t have the vocabulary48:13and the chance but you know just help48:15helping mothers single mothers give the48:18same kind of attention to their baby48:20that our children might but there48:24there’s a number of organizations across48:26the board but the idea is if you take48:31great leaders and you identify them I48:34was lucky enough to meet Jeff Canada and48:38you invite us aim investment principles48:41I’ve used in my lifetime and investing48:45which is find a winner back them scale48:49them up don’t sell them ride the winner48:51keep investing with them as long as48:53they’re innovating and that’s the48:55concept here so we’re we’re making big48:59big bets putting the dream out there of49:02a hundred to two hundred million dollars49:03of funding for organizations that we49:05think can be scaled up that will solve49:07the economic mobility problem or and not49:09solve it but put a big dent in it and49:11give others a chance of the American49:13dream so perhaps little timid with49:17investing but not so timid in your49:18philanthropy definitely not timid in the49:21philanthropy and hugely excited about49:25what might what might lie ahead in this49:28in this country for it and you know I49:31don’t mean to be honest Oh box about49:33this thing but I know there’s been some49:35commentary about billionaires and their49:38pets I can just say that I think using49:43the private sector49:46to encourage innovation with these49:50social entrepreneurs and then if the49:51model work then plowing the money in49:54there that’s a lot more exciting to me49:57than giving the money to Mitch McConnell49:58or Nancy Pelosi50:00I’d much rather give it to Jeff Canada50:03or some of these other organizations50:04these entrepreneurs