What Makes a Great Macro Fund Manager? With Scott Bessent of Key Square Capital Management

if you were a key player on the George Soros team that in 1992 helped the quantum fund make a billion dollars shorting the pound ahead of the UK's withdrawal from the ERM are acknowledged as a significant thinker a highly respected macro hedge fund manager have taught Financial history as an Adjunct professor Yale and a recognized philanthropist you might know that our guest today is Scott bessent Scott's firm key square has as his firm's Mantra we study history we observe the present and try to imagine the future and that's what I hope we will do today

so Scott you're over from the US we're recording here in London and I have a list of macro Market topics I'm itching to ask and our listeners will be reaching to hear so welcome to the money M podcast good thanks Simon and I think our compliance department wants to say this is all my opinion not investment advice for the uh your listen viewing listening audience so I'm looking forward to this great well there's been a lot of press around Elon musk's father's influence on his career and you told me that your father had one of

the largest collections of science fiction books in your part of the us and used to sit and discuss them when you were a child so much so you said that you could point out the alpha centuri constellation before you knew where Chicago was now how did that make you perceive the world yeah it was incredible it so the largest science fiction collection in South Carolina not a high bar but but my my Dad loved to talk about it and you know we would sit look at the stars try to imagine things are there people on

other planets they if you could believe it one of our a neighbors they had a proper Observatory telescope so you know it's just this imagination that there could be something different you know is and it could be on a different planet or it could be you know in macro investing it's kind of reg regime change which is I think why I gravitated to it you know you you need a good imagination we're going to talk about some of those skills required for your specific part of the business but you also said your father was a

boom bust real estate investor and his roller coaster fortunes made you focused on risk management watching Furniture being carried out of a house that your family has owned for 200 years will focus one's mind on not blowing up now of course some folks would bet that against such a Mercurial backdrop you would be a risk averse um academic or you would avoid Investments but of course that hasn't been the case and we're GNA un unpick that but how did you earn your first dollar well I I ear my first dollar putting out the chairs the

on the beach for lifeguards and hoping one day to be a lifeguard uh but you know I I I would say you know I I think I mentioned to you I'm a competitive back gam player so in back gamon there's the with the doubling dice there's something called Pratt the Pat and it stands for positioning racing the and threat so do you double if you have two out of the three you double so I tend to be more focused on the threat right and that is absolutely what we're going to talk about a a little

bit in detail but you choose Yale I'm always intrigued we've had lots of people from lots of different backgrounds why y I think I wanted to get out of the South uh it was a medium-sized city in New hav uh you near New York but not New York and a great reputation Yale Yale had a the host of distinguished alumni from South Carolina you in the before the Civil War Charleston had the second or third most students at Yale so there's a big South Carolina tradition and I didn't know what I wanted to do I

I was do I want to be a journalist do I want to be a computer scientist and keep in mind this was 19 1980 that the computer science department had just switched over from cards which I think probably the uh 80% of of the people being part of this they can't imagine and to the main frames so you know I I was back and forth between quantitative and qualitative and and Y was a good mix right now I understand that you actually did get your first job as a as a Securities analyst for the investment

firm of a Saudi Arabian family right so the my my first job was actually with George s's old partner Jim Rogers it was it was summer internship he had you know when I look back at it I'm not even sure you could put this on a bulletin board now but it was analyst wanted uh do spreadsheets make lunch and you can sleep on the sofa if you don't have a place to live and I didn't have a place to live so you can imagine 107th and Broadway in 1980 two in New York City was quite

spicy right but it it was incredible experience Jim is one of the great researchers uh just research research and I I could see how he and George Soros were this incredible pair with Jim's res research and then George's Market instincts you know it was the incredible combination so you go and work as a security analyst after that yes so I I did did a training program at Brown brothers and then I went to work for this Saudi family and again counterintuitive but South Carolina and Saudi Arabia had a long history governor of South Carolina had

been US ambassador to Saudi Arabia so and you this family is incredible they're they one of the most prominent families still uh the father uh came I think to the US in the early 60s saw New York and used you know unlike for for most saes of his day he didn't want to meet movie stars he didn't want to do this he wanted to meet CEOs and he was generating this incredible cash flow from servicing all the aramco employees and he just kept reinvesting it into US companies and he got right in at the bottom

1975 and you know had the right of a lifetime and you know they are the most understated the hardworking Middle Eastern family uh you know I'm still very close to them and and the next generation's taking over and it's in it's incredible to watch the work eth think so you end up running when you go back to work with George sorus you go you run the London office for eight years you work with Stan dren Miller and we'll talk a little bit about mentors later on and you obviously had some very high-profile successes um and

then you set up your own firm key square and that's when we're going to start talking about the markets but just a bit of reference for um you know for our listener Community some will be very familiar with global macros some less but if you were to describe Global macro at its very essence how would you describe it you are observing the world you're observing markets you're observing what you think should happen and you're observing what is happening and it is it's good and bad that you can look around the world and and you're looking

for mispricings uh you are looking for policy errors you're looking for um political changes so basically you were looking for change on the margin and you want to see what the market is giving you uh what what is the market giving you what's the opportunity set because you you might think you have a great idea you might think you split an atom and then it turns out everyone else believes it but you know look the interesting like a good example would be October 2016 I didn't think Donald Trump was going to win but I thought

he could win no one else thought he could win is is I I actually had a big bet with one of my neighbors in the Bahamas who's a quite a prominent currency Speculator on that got it so you launched key Square um it was one of the largest hedge fund launches ever I think George sorus was a$2 billion anchor investor and I think you had sort of four and a half billion you know within within six months key Square I have learned as I have done my research is from a chess sequence I'm not a

chess player I'm not a back G player um but you say that it doesn't take long for a beginner of Chess to learn that the end game is the most difficult and complicated part of the game despite there being less pieces on the board so help the non-chess players in the audience here understand you know you would have given a lot of thought to that name why sure so a lot of what we do when back to your question on what is global macro that you know you can have these big trends and you can

either be part of the trend you can ride the r the momentum you know GE George soros's theory of reflexivity is really a momentum strategy if it's going up by it if it's really going up by more and they you know at the turn is when you can really make a lot of money so um with key Square it's when they're just two kings several pawns and there is one square you can move to and you win so you know with you know if you think about the financial markets many times there is one investment

you can do and you win whether John pulson with the CDO CDs the uh in 2008 whether was Stan renow shorting the pound the uh you know it's kind of again and again you know you you see these things and it's you know we we try to keep things very simple you know is we have few positions and um you know where are we going to and what is the key Square so you're continually looking for that position that will enable you to win with the least risk we have information overload how do you separate

noise from signal so I actually don't have a Bloomberg the mayor the former mayor doesn't like for me to say this in interviews that you know have an incredible trading desk is for me watching there's no information value and watching things turn yellow or red constantly um we have a lot of respect for the markets I look at 270 charts every night you know we're not a thing tank uh but you know you you're you're just looking for either things that are changing anomalies or what what you think's clearly a mistake you or that something

that's maybe unsustainable and then you identify why now the you know is is that unsustainability going to break so as we think about and the industry industry likes to talk about my and and macro um you have written we don't have an edge in predicting non-farm payrolls but you can learn a lot from what corporates are saying about wages hiring and capex and the the cynic would say well so can everyone so what is it that you think you do or use with that information that gives you an advantage so I I think what's different

is you know if if I look the the good one of the few things one of the few good things about being 61 is I have a lot of data so I've been doing this a long time and if I look back in terms of asset classes foreign exchange has been our biggest dollar winner since I started doing macro the n92 follow by equities and I think that when we're talking to a company we aren't necessarily trying to get an edge on the company we're trying to get an edge on the economy so that you

know every everyone's trying to predict the Microsoft earnings or you know everyone's trying to figure out the FedEx earnings I'm trying to figure out what what is what is the FedEx wage round or what is the UPS wage round if it bleeds into a FedEx wage round then tell me about you know a wage price spiral in the US so you know it's the same information we just have a different use case so this comes back to your earlier point about macro invest almost need to have a flexible imagination sure it is you know is

um you know we're on a podcast but is it these didn't exist three or three to five years ago you know when you when you think about the uh you know how many jobs there are that didn't exist we we were just talking about what will our sons do is job Proby doesn't exist but you just got to train them well for how it does exist I remember a great macro thinker David roach Morgan standy strategist coming in after the Berlin Wall had fallen and the consensus was all rates for rise this is awful and

he was unequivocal you just go and buy German equities it was that you know he saw the unification beyond the rising cost of capital and of course it was a for a while a absolute home run trade we might talk about Germany's in a more troubled situation later on let's talk about uh we did you want to oh no no no no you know and again things are counterintuitive right like you know you you just said it was a home run trade and then it was a terrible trade right because that there was the impetus

the or or the shock the demand shock from you know rebuilding the East and the the usark and the Demar coming at parody which no one could believe so that's a shock probably a policy mistake that led to a great deal of inflation and then the bundis bank pulled back the liquidity right a and then you know that set off a chain reaction collapse in European equities which is actually how I ended up in in the Soros London office the that the bundus bank actually put me here uh okay explain that get just just a

little V the then manager had a very large position in what you would call a a reunification play which worked well for a bit then when the bundus bank decided know where the bundus Bank we don't like inflation and they they started hiking rates aggressively the shares collapsed so there there was a u management change in London so um you know so it it's always very sequencing is very important in macro sequencing is um you know right now and maybe we'll talk about it later is there is clearly a slow motion dll going on but

could the initial stages be a dollar rally because companies countries are paying back their dollar debt so there's a dollar thirst before there's a dollar boycott well you you can't see my sheet of questions but as we move to investment themes number one is dollarization so have you already jumped in there so how do you think about taking that idea which I guess many people would say isn't controversial IAL that the dollar loses if not it's he its relative status how do you think about the journey ahead and how do you think about in as

an investor when is the right time to build your positions again you know we' look for stress in the system is we we just did a three-day offsite here in London and you know I came away thinking if we had these kind of meta long Arc ideas and the real the challenge here is as you just said the we're to implement them as actionable Market ideas you see things happening on the margin this Shanghai Gold Exchange very interesting uh we see uh India and China being able to pay for oil which is the ultimate dollar

the commodity and the rupes and R&B so you've now move the us out of the way so and you know I'll tell you is the the real wakeup call for me was last December and we we were doing a call with one of our Consultants the uh much older fellow great thinker and French and he said you know like I was used to okay the US has sanctioned Venezuela the US has sanctioned Russia us has sanctioned Iran and he's said you know it is untenable that the US can extend its foreign policy to the French

government via the dollar and and just this huge multi-billion dollar fine on BNP is going to make a US Ally want to think of a new way of of doing business so you know like you have you know this new term the global South the one out of the dollar system very interesting if French Republic on side of the dollar system yes and the seizing Russia's reserves has probably only accelerated that they they haven't been seized I'm told they're frozen right but my inclination is that they you know they will disappear so all of this

debt swirling around the system one is as an investor should be thinking about the preservation of purchasing power almost above all and therefore current is has always been you know a relative game and I sometimes get some criticism from my partner will camping about the fact that you know I'm a long-term believer in gold and a distrust of the central banks you have written about gold and have painted a scenario gold is a um not a fiat currency there's a limited amount it is recognized as a store of value and you know you are seeing

that you can keep gold in your Vault and you can move it back that you know the and you know I I am adamantly anti-russian but the mistake the Russians made was the Russians got onto War footing in terms of their foreign exchange reserves but they moved out of dollars into euros and they never believed that the Europeans would have the wherewithal the inclination to follow the Americans if the Russians had moved entirely into gold price would be higher but they would have all their reserves in Moscow so I you know I think a lot

of the you know who who knows whether China's moving on to war footing Visa taiwwan the Chinese pboc is the largest buyer of gold now so you know could we imagine you know again back to imagination could we imagine some kind of a R&B that is exchangeable into gold maybe at a premium so I don't disagree with you know any of that which is probably why I find myself constantly sort of you know rolling my eyes when people mention Bitcoin gold can be a risk off and a risk on asset Bitcoin is a risk on

asset so plot that shot of Bitcoin against Tesla up until recently it had a correlation that was almost perfectly one yeah yeah yeah and you know is um as someone who spends a lot of time in the Bahamas they one is skeptical about some aspects of crypto and getting it back and enough said let us talk about Japan you have had um I think Rich pickings there in the past you've been writing about it again I'm going to just quote you when you say the bank of Japan will be the final Central Bank to exit

from Ultra loose monetary policy and the global global ramifications will be profound now uh as I follow these currencies I did run the charart the other day I think that Japan's purchasing power parity is at the most extreme ever witnessed um so that's either the elastic has been stretched or or it's the first of these collapsing currencies courtesy of its debt how are you thinking about Japan number one and how are you planning and playing the three legs of that store which is the FX the bond market and the equity market right so um you

know little little history I I went to Japan first time in 1990 91 uh spent 90 days at the UR Hotel it was the then incredible price of $500 a night the okur hotel uh they just remodeled it but it's still about $500 a night you know we're sitting here in London I I'm not sure you know I can I can get a uh a shed for $500 a night so um Japan if we rewind to 2011 and we had this terrible it's it's easy to remember uh 31111 the the terrible Fukushima incident and you

Japan looked completely helpless uh the the Yen they strengthened um you know they've been through a series of prime ministers and they had this gigantic current account because after the collapse of the bubble you know you know I'll go back is you 9091 the Nik peaked and then just kept the you know dribbling down for 20 years and um we were we were just the opposite then so the the Yen was 78 to 82 and it was on PPP which we we use as a gauge trading currencies of P P you lose all your money

because the uh you know it it currencies can stay cheap or expensive longer than you can stay solvent um but it was the most expensive currency in the world and um you know we come back around summer 2012 uh China was starting to Rattle the saber over the Saku Islands uh you know the Japanese were feeling set set upon the Obama administration had basically shown up and said you know not so much the you know you're not relevant anymore and the Japanese panicked um one of our Consultants called and said oh there's this fellow named

AB he used to be the Prime Minister he's going to come back he's got this program at the time it was called 3 three and three uh then he changed it 2 two and two 2% inflation two years 2% inflation 2% growth and and you know back to imagination no one believed he could do it but you know so we had a theory and then it turned out that there were all these seats opening up on the bank of Japan including the chairmanship and um you know so you had a cheap currency and the potential

political will to change that and you know off the bottom in October the the the Yen was trading 78 to 82 um you know by the spring of 2013 you know what we call abenomics had taken place uh new chairman of the bank of Japan or new governor of the bank of Japan Governor Cota put in the big boom uh went to ultra ose monetary policy and I um I remember George Soros and I went up to Yale and visited a uh one of the architects of obing comics and we we had lunch with him

and on the way back George said do you think this is going to work and I said I have no idea but it's going to be the market ride of a lifetime and it has been it's been incredible so we gone to 78 the uh on the end I think when I walked in this morning it was approximately 14820 um I think it peaked at 15270 and now they have the officite problem they were in deflation now no one could imagine that Japan could have an inflationary spiral and you know over since 1991 Japan has

actually you you call it the malaise but Japan has actually done an incredible smoothing operation and they've just added more debt and they they they've actually had you know terms of statistically measured recession they've only had very few down quarters because they just spent so much government money so you know had a huge amount of real estate debt the government then took it on and now you know they monetized the debt and um now they're seeing real inflation both imported globally and for the first time wage inflation so um I think that they are running

a high pressure economy and to get back to your question on the three asset classes is my guess is that the Nik and the topics are going to break through the the all-time high um that there part of abenomics you know there's also loose monetary policy but there's this incredible sea change in Japanese corporate Behavior so that's back to observing the uh you know companies used to keep a lot of cash on the balance sheet and um you know my friend Jim Grant actually had a Japan fund that was based on the old Ben Graham

net cash cash position and I well you know Jim it's a good idea but in a way the most dangerous thing is a Japanese company with a lot of cash because they'll do something crazy with it right you they have this incredible manufacturing ability and they they are less good in financial transactions so now now we're seeing the excellent return on Capital um the a Administration put in U you know minimum returns or you get delisted from Tokyo Stock Exchange so um I think over the next few years that probably Tokyo will do the best

of any major market and the other thing that's happen too is you're seeing this reshoring in Japan is where the semiconductor industry I was talking to someone is there is a university down um toward okanawa and Taiwan Simi is hiring every graduate this year and they're doubling their salaries so you know again Japan in terms of kind of offshoring um the US changing Supply chains Japan's a key component on the currency there's a new governor governor AA uh I've met with him many times I I think he's incredible thinker uh he for an academic he

loves markets you know when I was at his office at University of Tokyo there's a Bloomberg the unint my office uh the uh pulsing in the background and I I think he's realized that they've been successful in getting them out of deflation and I I think we've got to have a lot of imagination in um so Japan is in nerp right now negative interest rate policy if you have this huge pile of savings and savers who have got nothing on them if you need to raise rates to 1% to or if you do raise rates

to 1% to stop inflation strengthen the currency could you really end up with something that they uh picks up a lot of strength because Japanese are huge Sabers so now you're handing them extra cash it's almost like a helicopter drop into their bank accounts and I I think no one's imagining what that could look like the uh in six or nine months and you know one one of the things we think about a lot is policy makers are people is Jerome Powell reads what the New York Times writes about him uh you know Ben Bernan

you uh you know wrote a book sound like sounded like he was the head of SEAL Team Six like the courage to act or something um and you know I think Governor waa will understand that the uh you know prime minister AB was assassinated the legacy of ABI namics they don't want it to end up with a financial bust either in Japan or globally so I think they will move to quell inflation early so I'm I remember working with Barton bigs and one of my most successful PA trades was was buying the dollar against the

M when the you know when the M was so strong and so I've been sort of itching to itching to put that trade on but right now the market has just played the advantage of the higher us interest rates and short of the Yen um what will be the trigger for you to get really long the Yen yeah so it'll be twofold is one you know I I would say that there there is a position because I there's been a change in monetary Pol so we've had a change in personnel with Governor AA um we

he has started hinting that there is going to be a policy change and you know we are observing from Japanese corporates a pattern of price increases that you know if you hadn't raised prices for 20 years you start out at 2 or 3% now they're raising prices 8 to 12% and I it'll be a onew combination because it it'll be a combination of um Japan is coming out on this side and then you know with the US uh we yesterday we just took out two interest rate cuts for for next year uh clarified a hike

for this year so you know my guess is you see some kind of back back to currencies being relative you see a big relative change in expectations that the FED uh has maybe finally slowed the economy which is difficult given the amount of government government spending uh but the that the bank of Japan is just beginning a cycle so the FED um you know we'll see have they gone a step too far but you know they are closer to the end than the beginning and the bank of Japan is just the beginning of the cycle

so we want to see both legs to have a full position but you know again you the Market's giving you a lot here it is very few people are interested in owning the in and if you look at the CTA the commitment to short y quite quite large let's just pause and look at China and and what are their fiscal and monetary options and you said that we're seeing the end of a multi-decade leverage cycle you know in China how are you thinking out China as an investor yeah so not Chinese New Year 2023 but

20122 I was invited to a very very nice dinner in New York and everyone had followed China for a long time so you can imagine the early 22 uh people still very constructive on China and I had had a long-term secular down View based both on um economics gravity because somehow everyone thought well China's so big they have this closed Capital account you know if it were any other country it already would have exploded um but you know the view that gravity would win and then I also had the view that when party chairman X

came in he's a different kind of cat and uh you know this very unusual capitalist communist blend that had taken China out of the Dark Ages and into the modern world was over so um now we've seen they've gone to more of command and control economy but you know so at this dinner I I told everyone at the table I said you can have China I will take India and Japan let's reconvene in five years so uh you know you know I I think it's this leninist model versus you know the Japanese democracy Democratic model

and then the Indian very loud Democratic model but you know I think you you can for the U avoid China and look I I think that they can have a cyclical bounce here wi within the secular down they have some very difficult policy decisions to make they've uh starved the consumer starved households and favor manufacturing and you know doing the rebalancing is very painful you you have a lot of uh vested interest and you know especially at the the state and local level and you've got to move it over to the households and you know

like the these um municipalities states are not going to sell off assets they willingly but you know it it's it's got to be done um and then you know then you have the whole the Taiwan question is you know I I would say that is um we we we try not to play Fort and predict these things but um you know I think we have to imagine uh you know our our mutual friend Neil Ferguson wrote a very good piece last week and it had two two parts to it one was are the US and

China in mutually assured Financial destruction so you know in Game Theory tip an escalating tip forat is is one of the worst patterns so you know the the US the uh um neaps Chinese Tech growth by a semiconductor high-end semiconductor ban and then Chinese government starts getting a little squishy about Apple maybe government officials can't have them the maybe there's been a security breach so you know if we see that Financial Tit for Tat that's a market event I think you know some kind we we'll see uh Taiwan has elections in January uh the uh

leading separatist candidate is is doing quite well he's pretty aggressive uh we'll see what US policy is um and uh I think we have until the election to see but we'll we'll see how president shei responds that you know I you know we're concerned China has they have been sucking in oil imports so like if you were going to go on war footing the you would need energy you'd need food and then you would probably sell your treasuries so before we leave China I had this micro macro question which is if you're a bottomup investor

you'd look at Alibaba or 10 cent you'd say worldclass companies operating with you know great Prof profitabilities and trajectories I'm sort of drawn to them does the macro investor go I don't care because the geopolitical risk and uncertainty is too profound you know I think there are two things here is one the are you a tactical investor and these things could be very interesting or are you an endowment long-term investor and you know at that point you know is what everyone always ask me what is risk and I said probability and severity so you know

if you think about those positions what is the probability that you are going to have 100% loss it is not zero that you walk in one day and you have just had a Russia into Ukraine event and the stocks went to zero or you're not allowed to own them anymore so but I I I see your point that we are getting to you know if I just look at a chart because I was looking at the chart of the kweb which is the China internet index it looks like you could go down 10% and maybe

up 50 but there's probably a 20% chance you can go down 100% so you know when when you think about it in terms of outcomes um so for tactical investors very interesting for an endowment a pension fund a sovereign wealth fund probably less interesting very well put now as we talked about military conflict here we have this Ukraine situation it was General Pates who was on the show in January who said all wars end in a conversation and one can imagine that that has to be you know a high probability that there is a conversation

and with it then or the next step becomes a rebuild of Ukraine potentially of a scale that we haven't seen exactly how are you focusing thinking about exploring that theme right so the for for us framing a problem is is the most important thing can we you and if we're losing money I usually think our framing is incorrect so um in terms of framing the scenario you you just outlined I think I don't have to worry about that yet because I I don't know what Pro I would say there's an 80% probability Donald Trump is

a republican candidate is there a 40% probability that he wins the general election if you were Vladimir Putin and former president Trump has said I am going to end the war in 24 hours you're not settling so you know there November 5th 2024 is when the talking probably starts right it is Trump wins comes in January 20th there's a conversation Biden or the Democratic candidate wins again then maybe Putin I'm I'm not in this for 24 more month you know this is a meat grinder I'm going to run out of prisoners from vad of alstock

um you know so you know when when you when you g game out the potential pass um I think no conversation starts until no November 5th you know like we we always focus on sign on signpost you know again I I think that like you don't have to have a conversation you can have lots of observations but I don't have to have a conversation on on what China might do in Taiwan until I'm cuffing it but I think the Taiwanese election is January 17th is um DPP which is the anti- unification party winds um then

you got to start thinking you know could this turn kinetic you my my guess is it's more of a blockade right um so but yeah look the this UK Ukraine tragedy uh there there will be an incredible rebuild it it'll be something you know back to the fall the Berlin wall and I think what You' said is as I look back at my own investing uh career uh spanning since starting in the mid 80s and if if there's been a persistent mistake it's trying to be too early and and what you're saying is that you

need maybe a convergence of the fundamentals and also the technicals I always tell everyone who works with we we're not a tank we're a money management firm and the you know the technicals Bruce Co kovner has this great saying is the an investor who doesn't look at technicals is like a doctor without a stethoscope you know yeah and you know I I think even you know like Barton love technicals so you know like the the mind of the market you I I don't think I'm smarter than the market or and I certainly don't think I

have more liquidity than the market but you it it it's there are a lot of signals which of course leads us well it may not of course it's going to lead me to talk about AI now you've written about how AI can impact productivity you've also talked about how regulation could help or hinder countries I'm thinking of the US just theose with Europe you know in that regard how are you thinking about what AI does and how is it or do you think it will influence your positioning yeah so I my my guess is it

is business out two or three years that but we we're all Al already starting to see it that I I was on a zoom with a one one of the most prominent the tech overlords and he said he he kind of for for those of us on the zoom he did a trip around the world and he said China will never let AI meaningfully into the private sector because they will be convinced that it maybe Jack ma with AI could take down the CCP so you will not get this private sector productivity enhancement in China

uh he was of the view that Europe was already starting to regulate it away and unfortunately the UK seems to be following European model and the the us as we t to do in the US uh he said was the Wild Wild West and it could be incredible productivity gains for the us if we don't blow ourselves up but but is you're you're starting to see uh the use case for this my guess is the big Winners just like with with the internet um you no one knew Google's founded in '98 appeared in the early

20 ,000 so three or five year lag um Facebook um Amazon so like those companies don't exist yet my my guess is the super scalers who were trying to get on this Microsoft Google Amazon um Oracle meta um are going to be spending a lot of capex they may or may not be the big Winners and the big Winners could actually be us corporates who are able to the get these big productivity gains so you know you you could imagine uh two or three years out this big cut employment in maybe White Collar employment uh

back office so in short would you say that AI has extraordinary possibilities but huge dispersion in how governments respond around the world and as an investor you're watching closely that's a fantastic summary and if I think about what is today's business with AI I would think these hyperscalers are the most castr comp and we we could come back to the sucking liquidity out of the system the hyperscalers are the most cashr companies in the US and you know I think Apple would probably be the biggest Sovereign wealth fund after Norway so you know I I

think I left them off the hyperscaler list the hyperscalers are probably going to spend between 500 billion and a trillion dollars on the data centers for AI I mean this is an arms race and what happens when they start spending the cash rather than accumulating it what happens when Apple is selling IG credit to have you know bricks mortars and Nvidia chips they near power facility in Nebraska right so like this is just another model change in terms of the savings glut actually getting pushed into the real economy which of course brings us to this

question I have in front of me which was sort of summarizing today's today's climate and you've written a lot about this savings glut we all know about these cumulative levels of debt we all read the history books and know that you know inflating your way out is you know is one of the roots but summarizing today it's a it's a it's a paradigm shift it's a new it's a change the order is that fair yeah look we we we've had 40 Years of deflation or disinflation and now we're we're going the other way we've so

I started University in 1980 uh starting the investment business in 1984 for my entire adult life Capital has gotten treated better to the detriment of Labor you know is Thatcher came in in 79 Reagan came in in 80 and then you know life just kept getting better for owners of capital uh NAFTA WTO um and you know we we come back to this AI because I would say for the US or for the developed world my hope would be that if there is an AI employment displacement that we would handle handle it better than we

did the uh you know with the manufacturing displacement you know that we that we don't end up the you know with you know kind of a leite revolution um but it is a model change um so I believe you said you were born in ' 63 I was born in ' 62 the baby boom bulge is about 54 to 56 so in the US very good things happen to you when you turn 65 in terms of government benefits Social Security the uh uh federal health care and um you know my team thinks that one of

the things that happened on the under the cover of Co and everyone's blaming it on Co and I think it did accelerate like Co did everything but I think under the co cover of Co the the baby boom bulge turned 65 so they were always going to leave and you know that got accelerated during the pandemic and you know so we we've got this incredible labor shortage I think that you know some someone in my office told me this week there are thousand Pilots at United Airlines who are going to make over a million dollars

this year is I I was actually getting a UPS the package when the UPS labor strike was settled and I congratulated the fellow and he said oh yeah my you know my wife is already the like spin it um and you know you're you're seeing that I I think that you're you're seeing this UAW strike on autos and my sense is that the American people are behind the strikers which is first time in my working career that you the the public is with them so anyway that was a long way of saying we're going to

see a very natural uh shift back from an overshoot in the amount of the profits going to Capital and it's got to come back to labor and a reaction to executive hyperpay and some and some bad behavior terrible terrible behavior and you know is like this uh this leader of the UAW quite charismatic but he's making the point we only want the same increase that the CEO of Ford got look we just want what you get why did you get it but you know again on the other hand is what what's the future for those

workers so when we think about the portfolio that you run and we'll talk a little bit about your Fund in you know in a minute you've obviously got the sourcing of ideas and then the positioning and Jim Rogers said about risk you got to look down before you look up yep and Michael mbisa who I'm interviewing this afternoon at the London quality growth conference had this number I don't know if he's right that you know when you were all at Soros the success rate was only around 30% but your position sizing must have been outstanding

because you made such great returns how do you think is that true and how do you think about the positions in and the managing of that risk right so um I I'm glad you mentioned Michael cuz he was chairman for many years this this incredible organization called the Santa Fe Institute and the way they think about systems and you know so Simon back back to you know when you said what is macro maccro is thinking about systems and can the system accelerate could the system break down and um I I think the 30% is low

uh that might have been a number that George Soros said about himself one time and to for American baseball the most probably the most famous player in history is Babe Ruth home run King strikeout King so in macro it's how much do you make when you're right how much do you lose when you're wrong and you know kind of back to either you know I I think I told you that the even though our firm name is based on a chess move I actually think investing is much more like cards or back gaming you don't

know what the dealer is going to give you and or you don't know what the dice are going to give you you know chess everything's on the board is does your opponent make a mistake um so uh I remember being at the Santa Fe Institute conference and one one of the speakers was talking about can you what competence ratio do you need to get to to increase your position so in theory if you can get to 51% then you should get keep getting bigger and bigger and bigger so um you know I I would say

that you know My Philosophy certainly Stan driller's philosophy you know he's incredible in thinking about asymmetry is um you know what's the market giving me what's my upside downside and how should I size that you know I I think uh that's what most people missed on the um Sterling exit from the armm was we could keep pushing the bank of England up against the band they would only push us back to the other side of the band and there was a chance that maybe the band would break if I think about in 2012 with the

Yen the Yen was as you said the um most over valued currency in the world and the bank of Japan was doing the worst kept the secret of stealth intervention at about 78 so if I was shorting the end at 80 I mean I'd lose two big figures but my imagination was right I could make 20 or 30 right so it is um and and then you know it's adding when you get information adding the when things break down now this may not be true but I was told that when you and Stan Miller presented

the case for shorting the pound to George Soros his initial reaction was one what of what appeared to be dismay but it was only because you weren't suggesting doing enough you have to remember so 70s especially the 70s even into the 80s markets trended much more so it is if you read the Alchemy Finance uh Plaza cord happens the currencies has moov 7% but Georgia is adding a 300% position because they're going to keep going so you know his um you know if you have a great idea can never be big enough and you I

I found I I think this quote is it's like shooting fish in a barrel I think there's a change in Market structure and either the fish can shoot back or the the metal um ties holding the bar Barrel together have gotten bigger and the bullet can bounce back and hit you so uh you you've got to be much more you've got to be much more Adept and much more attentive to the other players let's just talk about key Square your fund you're I believe you had a very good year last year I think you're up

30% last year you obviously have these high conviction macro viws you express you're open to new investors who are the sort of partners that you most like to welcome we like having a very iterative relationship so I do think for whatever reason you tend to get these Paradigm shifts uh investment changes every 10 years and they center around the decade and you know I think we're in the midst of one now and I I don't know what the dominant theme's going to be for the the rest of the 2020s but I know it's was not

going to be what it was in the teens it's also very helpful to you know hear people's incos what they're thinking um you what they're leaning towards mentors along the way who have been extremely important just so happens that we know we were talking about David D who was important to me at Morgan Stanley and David roach in fact from a distance you know Barton bigs but what was it that Stan Rooker Miller most that you most valued there's something called Superstar syndrome that Michael Jordan probably couldn't teach us how to play basketball Roger Federer

is probably not the greatest tennis coach but being able to sit I'm not sure if Stan could explain why he always does what he does but being able to sit next to him and watch him and they you know have the dialogue the with him but he's just incredible like there's a great traitor you know I I said earlier the the combination of George Soros and Jim Rogers was incredible because of Jim's analytics and then George's trading instincts stands that in one person and um you know his risk management I mean it's incredible he's never

had a down year it's humbling like you know I that the you know the bad part about sitting next to him is you think like what I'm not good enough yeah I'm not good enough but you know it's it's also that you know I I go back I'm a basketball fan I go back and look and if I look at the Chicago Bulls that they uh they were all better Scotti Pippen Horus Grant they were all better for playing with Michael Jordan so Scott my gosh we could have gone on I think I'm going to

be asking you to have a reappearance next year because there is so much that uh is to be covered and the world is moving rapidly and some of these big themes I think might unfold in front of us and trouble investors who have been used to a should we say a more comfortable Paradigm and I'm going to take away two specific observations you've made today one is you define risk as I haven't heard it defined before which is it is assessing both probability and severity and what it is that makes a good or better macro

investor is focusing on those signposts but understanding when and how they are evolving and coming along before they influence the position sizing um and so I just want to say Scott fantastic for being here today thank you very much indeed good thanks Simon