Letter #237: Scott Bessent and Kieran Cavanna (2024)
Soros Fund Management CIO & Key Square Capital Management Founder and Soros Fund Management Head of External Manager Selection & Founder of Old Farm Partners | A Global Macro Veteran on the Path Ahead
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Scott Bessent is the CEO and CIO of Key Square Capital Management. Before founding Key Square, Scott was CIO of Soros Fund Management (SFM). Scott started his investment career at Brown Brothers Harriman in 1984, before moving onto the Olayan Group and Jim Chanos’ Kynikos Associates between 1985-1991. In 1991, he joined SFM (for the first time), where he ran the firm’s London office for eight years and served as the firm’s head of global research and co-head of external manager selection. During this time, he worked closely with Stan Druckenmiller, including during the period of the British Pound devaluation. He left SFM in 2000 to found Bessent Capital, then joined Protege Partners as a Senior Partner and Director of Research and Strategy from 2007-2010, before rejoining SFM—this time as CIO. He spent four years there before leaving in 2015 to start Key Square—with a $2bn allocation from Soros.
Kieran Cavanna is the Co-Founder and CIO of Old Farm Partners, a hedge fund allocation firm focusing on small and mid-sized hedge funds, as well as co-investment opportunities with $600m under management. Prior to Old Farm, Kieran worked with Scott at Soros Fund Management, where he served as the Head of the External Manager Selection team. Prior to Soros, Kieran was a Partner and the Head of Research at Titan Advisors, a $5b fund-of-hedge funds. Kieran started his financial career at KPMG Consulting as Senior Analyst.
Today’s letter is the transcript of a conversation between Scott and Kieran. In this conversation, Scott and Kieran discuss working together, Scott’s journey from investigative journalism roots to a financial analyst at Brown Brothers Harriman to a Middle Eastern family office to CIO of Soros Funds Management, and general macro thoughts on Japan, China, Europe, and the United States. This conversation spans how a job posting led him to reboot his career focus after being on the fence as a computer scientist or journalist, transferring to SFM’s London office and his role in shorting the British Pound, his view of data analytics and how his investment style is a mix of liberal arts, math, and Excel formulas, his thoughts around the abuse of “exorbitant privilege” in the United States and what that means for national security and the future debt trajectory, his run-in with Sam Bankman-Fried, thoughts on artificial intelligence and whether it’s inflationary or deflationary and how hyperscalers who are investing trillions in new data center projects may be working us towards an electricity shortage, how the lead-up to the 2024 election is impacting financial markets and what sort of outcomes could occur if a Republican or Democrat becomes President, and much more!
I hope you enjoy this conversation as much as I did! This was a particularly fun conversation not just because both are practitioners, but also because it is clear they have known each other and worked together for years.
[Transcript and any errors are mine.]
Related Resources
Soros Fund Management
Macro
Transcript
Kieran Cavanna: Welcome to the Thematic Investors Podcast. I'm Kieran Cavanna of Old Farm Partners. Our goal is to bring you great investors with themes they're working on, and some are under the radar, and we think they're all experts in their disciplines. This podcast series is sponsored by Vidrio Financial. It is my pleasure that this episode we have Scott Bessent of Key Square Capital Management, a global macro hedge fund. They are based in Charleston, South Carolina, with offices in London and Greenwich, Connecticut. Scott has an amazing career, which we'll get into it a bit where--but on Wall Street mostly, also academia. He's one--in my view--one of the great macro thinkers in the world, and I had the pleasure working for him when he was the CIO of Soros Fund Management. Scott, welcome.
Scott Bessent: Good, Kieran--and I would say we were partners, and it was a fantastic partnership.
Kieran Cavanna: That's kind of you to say, but you were definitely my boss. You made that clear sometimes--but I really enjoyed it as well. So thank you. We could take this a number of directions, because Scott, I always think of as a big thinker who has a lot of great ideas, but I also, I think just a little bit, if you don't mind, I know you've done a million things in your career, but just, I'd love--what brought you to this spot right now where you're sitting and you're trading, I know you're just trading bonds and equities and currencies at the moment, and what, if you could, just give a little bit of background on your career to set the table.
Scott Bessent: Sure, so I'll just start with my career and not my life background is--but I think it's important--I'd start when I was in university. So I entered Yale, and I didn't know whether I wanted to be a computer scientist or a journalist. At that time, being editor of the Yale Daily News, oldest college daily, was a big deal, and it was a straight ticket to Time Magazine, Washington Post, Boston Globe--most of which are now pamphlets. Junior year, in October, I was not elected editor of the Yale Daily News. And so for kind of the next two months, I locked myself in my room, went to class, did meals, and came back next semester and decided I better reboot, kind of put on my big boy pants, and think what I'm going to do with the rest of my life. And at Yale career advisory, there was a notice from Jim Rogers, who many of you may know was George Soros' Partner, for many years, at Quantum Fund, one of the founders, and he had left Quantum, was managing his own money, and he had a notice on the board: Analyst wanted to do spreadsheets, make lunch, clean the toilet--and the key thing was: sofa bed available in office. So "sofa bed available in office" changed my life. I did an internship for Jim, and I thought it was a great combination of the investigative side of journalism. You spend your time on is an investment worthy of spending time on, as opposed to, is there a story here? Is there a story in the market? Is there a story in the industry? Is there a story at the company? And then you got to think about the world. And then I also got to use my quantitative skills. After that, I went and worked in a bank, an investment training program at Brown Brothers Harriman, a very old line firm in New York. And at the time, it was one of the few places that would let you do investment research right out of undergrad. Most other places wanted an MBA. And from there, I went and worked for a Middle Eastern family, which was an incredible experience. They're wonderful family and a very large investment portfolio, small team, and there were five of us--we did the research, traded the portfolio, managed the portfolio. And I did that for three years, and got to meet a lot of the people who I'd eventually have relationships with, like Byron Wien, like Lee Cooperman. From there, I went and worked with Jim Chanos, famous short seller. And Jim and I had gotten to know each other--there used to be a lot of analyst breakfast with companies. Jim and I got to know each other at those--he thought I was asking good questions. So I went and became his first analyst. And as it would happen, Soros Fund Management was our largest client. And part of our deal with SFM was that we would sit in their office and cross pollinate ideas. And we had a very good run from 1988 until beginning of 1991. It was a very interesting time back then. Drexel Burnham went under. There's a savings and loan crisis. Saddam Hussein in the year 1990 rolled into Kuwait, so oil prices were up. So there was this great confluence of events for being a short seller. In early 91, I went to Jim and said, I think we've got too many shorts, and I don't think we should be short. And he said, Well, that's what we do. And I said, Well, I think I'd like to do something else. And we continue to have a great relationship to this day. And Stan Druckenmiller, who was the Managing Partner at Soros Fund Management, asked me to join at SFM. And Stan is my real mentor in the business. And it's humbling being his mentee, because, Kieran, as you note, he has never had a down year. Never a down year since--I can't remember whether it's '78, '80. And it was just some eye popping returns during that period. And so I joined as an analyst in '91, and November of '91, the management--George and Stan realized that I'd had a lot of experience with the Middle Eastern family on European stocks. They asked me to go to our London office just for three to six months--the performance wasn't good there--and just figure out what the fly in the ointment was with the London office. I got there, George couldn't take it anymore, and fired the Managing Director and the whole team. So I was told, Don't touch anything. We're going to find a high powered European fund manager. Just monitored the investments, and the portfolio manager had half the assets of the European portfolio in one stock, so I thought it'd be a good idea to research that stock. And the more work I did on it, the more I thought that there were some serious problems. And I started selling the stock, and--it was big position for Quantum Fund--it was probably 10% of the assets of the whole fund. And my selling was pushing down the stock. And George was kind of chewing on Stan. Well, he's not supposed to be doing anything. And great thing about Stan, when it works, is, he's from the Enough Rope school of management. He will give you enough rope to do well, you will get enough rope to hang yourself. And so we sell the stock--stock immediately popped back up. And then a week or 10 days later, they reported earnings, it went down 50%, and George went, Maybe he should stay. There I was. I decided it'd be a good idea to get an apartment at that point, maybe come back to New York and get the rest of my things. And it was a great time to be in Europe. The Wall had come down, and then, famously, in September of '92, UK left the ERM, the European Exchange Rate Mechanism, and Soros Fund had a very large position. We had a very good day, that day, called White Wednesday. I stayed at SFM, managed European portfolio full time until '97. '97 I started managing more of a global portfolio. And if I backtrack for a minute, in '92, after the pound devaluation--this gets back to Stan's Enough Rope theory--I was in New York, and I went in the office, and I said, there's these--in Europe, there were like 17 or 22 different currencies, and the stocks in Finland go up and down based on what the market is doing, or based on what the Dutch guilder's doing, and it'd be helpful to be able to trade currencies. So Stan said, you want to trade currencies? And I said, Yeah. And he said, Well, why don't you go ahead and trade bonds and commodities while you're at it? Like, great. And that's really when I started trading macro. And I--Kieran, I don't know if you want to talk about it here or now, in terms of the style and the Soros and Duquesne micro to macro--
Kieran Cavanna: Sure that'd be great. Yeah.
Scott Bessent: So the Soros and the Duquesne/Druckenmiller style of macro is very different than some of the more pure macro shops, or the relying on macro data. My current view, and even our view back then--George, Stan, myself, had all started first doing stocks, and we understood companies, we talked to a lot of corporate management. And our view was we didn't really have an edge in predicting non-farm payrolls, but if you were talking to a broad swath of companies and they were telling you that they were hiring, the economy is good, then you really didn't have to try to predict payrolls, you didn't have to try to figure out what the inflation number, the PCE is to a couple of tenths if the companies are telling you that they're getting 5, 7, 8% via price increases and passing it on to the consumer. So that's a lot of the basis for that model, and it's a lot of the basis for what my team and I continue to do today.
Kieran Cavanna: That's great If it's a good segue, I'd hate to give short shrift to the last 25 years of career, I will tell you though, when you CIO at Soros, when I was there, you were very successful, you had a great run--and a lot of that due to Japan, I felt, both up and down. That's fair. And I wouldn't mind if we could go back to some of your career--I mean, you've definitely had some really great high points. I'd love to get into sort of today, if you don't mind, because I mean, it's quite an interesting time. Excessive debt, lots of things going--so just maybe just tell me what you guys are thinking and how are you trading these days. What sort of themes are appealing to you?
Scott Bessent: Yeah, so for what we do is either policy mistakes by government officials, central banks, corporates, are very important, and--or divergences. So in general, for my style of macro, is when everything is going well, when vol is low, when the consensus is always correct, that's less interesting for us, except maybe vol is low, and we can create some asymmetric payoffs if we have a big disagreement. Why don't we go around the world? And since you mentioned Japan, we'll start there. So I've been going to Japan since 1990. So I got there right before the peak of the bubble. And for those of you who weren't around in the '80s is, Japan was taking over the world. And at one point, the Imperial Palace in Tokyo was valued more than the entire state of California. There was a fear that--there's a Japanese management method, there's a Japanese--and like so many things, there was--the Japanese manufacturing sector was, and still is, incredible, and the Japanese financial sector was a disaster. So you had this manufacturing juggernaut that would then put it into financial assets, and the bubble blew up. And the Nikkei peaked end of 1991, and then fast forward--it really took until 2012 for it to start to recover. It was one of the biggest bubbles in history--or asset bubbles in history. And it was 20 years to work off the hangover. And so fast forward to 2012, I had been thinking about Japan, obviously, coming back for a long time. What was the catalyst? And somewhat, one of our consultants said, Oh, there's this fellow named Shinzo Abe, and he used to be Prime Minister, his grandfather was prime minister. He's going to come back, and he wants to bring Japan out of deflation, and you should come see him. And I was convinced that he was serious. I didn't know if he could do it, but I also knew that there was a very good appointment calendar for the Bank of Japan. He was going to get to appoint the Chairman, he was going to get to appoint a lot of board members. So he mailed it, the Bank of Japan, with the government, and Abenomics was born. There was a massive easing, a big devaluation of the Yen, and the equity market took off. So that was the monetary and fiscal part. The real part was the corporate governance change, and that's what we're seeing today in Japan. And I think that Japan is probably the only stock market in the world that it is in a secular bull market. And by that, I mean that it could go--we're back to the old highs, and I think there's no reason we couldn't be 50,000-60,000 the by the end of the decade. And this corporate governance change is real. I remember going to Japan the first time and being sort of a brash young analyst and having Corporate CEOs say, Mr. Bessent, you're a shareholder, and we have four other constituents who come ahead of you. We have our employees, we have our banks, we have our customers, we have our communities. Oh, and then there's the shareholders. And now, there's a real emphasis in the on shareholders, shareholder value, and I think that's going to continue.
Kieran Cavanna: Before we go around the world further, I mean, I do think one of the more appealing things to me about the style of investing that you engage in is that it's sort of a mix of Liberal Arts, Math, Excel, synthesizing a lot of primary data. You did a speech recently, talking to young people, saying, get out there, talk to people, learn everything you can, but only you can synthesize it. Do you think that really is still valuable in a day and age with--data is everywhere.
Scott Bessent: Yeah, look, I think two things--I like the Dostoevsky quote, Know something about everything, and everything about something. So that's what we try to do. And more and more, Kieran, as you correctly point out, everyone has the same data. It's how do you interpret it? Because for us, the most important thing for us is framing. And everyone can--it's kind of like the Sigmund Freud test is, What do you see? So do you see glass half empty? Do you see the glass half full? Do you see this is high risk? Do you see this is low risk? Very good example of that would be is, I remember, going into the presidential election in 2016--I didn't think Donald Trump was necessarily going to win, but I put a much higher probability that he could win. And it was very cheap to create options that he could win. Then the night--when I think John King on CNN was about to start crying, and he said, Hillary Clinton has no path to the presidency--the market immediately crashed, and the futures locked down in the middle of the night. And I just had a very different view. I thought, like, this is going to be the most pro-business president for many years--that we've seen in many years, and it would be shockingly bullish for the stock market. So it's--that was a long answer your question, but it's: you have the data--how do you process it, and how do you turn that into a trade?
Kieran Cavanna: Yeah, I mean, I've just started to bring in my own view, but I think I've--in macro land, we've talked about the birth rate in Japan being such a huge headwind for so long, and that has not played out whatsoever--yet--or it might, but who knows?
Scott Bessent: Well, it hasn't played out whatsoever, but what everyone's missing is that per capita GDP keeps going up. So the other thing too is, I think I said it the other night at the Citadel--there is a chance that Japan first and foremost, but globally, the industrialized countries get bailed out by AI and robotics, because if you think, okay, what is GDP? It's population growth, working population growth, plus productivity. If you're having a decline in working age population or engaged working population, but you had this incredible productivity fill up, Japan may actually have the last laugh.
Kieran Cavanna: Right. Very interesting. I would love to shift--since we're going around the world, because I think China is such a huge focus, could we talk about China? And I mean, it's quite a run the last five years, and I'd love to hear what you think now.
Scott Bessent: I think that there was a chance China could have worked. And I think Xi Jinping has made the decision that he knows more than the market. There was an interesting symbiotic relationship between the state and the free enterprise system from, say, 2000/2002 to 2012, there was this capitalism with Chinese characteristics. And I was never sure it was going to work, but there's a possibility it could work. And in 2013 when Xi Jinping came in, I became very concerned about his telos or ethos, and that we would end up in a much more autocratic place--and we have. The other thing too is, because China is such a big country, such a big economy, so populist, so populated, that we tend to think that the rules of gravity and economics don't apply to China. And that's just wrong. Is like the debt profile, the amount of debt, the unproductive debt--it's all coming home to roost now. I think it just took longer because they had a lot of unfair trade practices, they kept a very big current account surplus. And you can do a lot of silly things when you have a big current account surplus. And they've just run up this gigantic unproductive debt. And I think we will see, in the next year or two, whether the Chinese economy, as we believe it exists, actually exists.
Kieran Cavanna: Wow. Well, yeah, we certainly are mired in a--it's going to be interesting to see if the breakdown occurs with the factory floor of the world. But we'll see.
Scott Bessent: But the other thing too, and this is--you mentioned earlier that I'm quasi-academic--I've studied the history of economics and financial markets. And it's always interesting to see how things are marketed, or the dominant perception. So from, say, from 2002 to 2012 to 2015, all the Asia Funds became Asia ex Japan. Asia was booming. Asia was growing. A lot of the Northern Asia countries were doing very well, obviously, India was doing well, and Japan couldn't get out of their own way. Now we are starting to see indices being formed Asia ex China. And Japan is back in, and China is on the outs. And these things tend to run for a while.
Kieran Cavanna: Could we shift to the US on this? Because you said something about unproductive debt, and I know you've been concerned with the US debt. And it's a big year for elections, obviously, and you've been pretty politically active in the last year. So I'd love to get your thinking on the debt. I mean, the stock the US debt is enormous. Our current account deficit's enormous, and going to stay this way for a while. So what do we do?
Scott Bessent: Well, we need to at least signal that we're going to be serious about getting it under control. The number I would throw out is 100 days. Every 100 days, the US adds $1tn of new debt. Just in February, the US debt financing cost went over $1tn per year, just in interest payments. Put it in perspective, the defense budget is about $970bn. So now we're now spending more on interest cost than our entire yearly defense budget, and because of what's happened with our debt profile, Secretary Yellen is financing at the front end of the curve, and as a result, every 100 days, we add $150bn to the deficit, just mechanically. That's not with more spending, that's not with worse--the income tax collection, that's just mechanical from the old, cheaper debt rolling off and the new 5% debt appearing. So yeah, we've gotta do something, because at a point, there will be a problem. And it's always very difficult predicting where it is. And Rogoff and Reinhart, in a seminal work that came out around the great financial crisis called It's different this time--they looked at debt crises. And in a huge portion of the crises, there were no indicators six months before the crisis happened. So the US is the reserve currency of the world, and I think that it's--having the reserve currency is called the exorbitant privilege. And I think we have abused the exorbitant privilege.
Kieran Cavanna: I saw you in a speech talk about how this is a--it's an issue, fiscally and monetarily, but it's actually turning into a national security issue.
Scott Bessent: Sure. When the debt service is higher than your defense budget, and then when you think the second largest foreign owner of your debt is probably, if you get into a kinetic conflict, probably one of the two countries you get into the kinetic conflict with, China or Iran, China is the second largest holder of the debt. So that is not a good equilibrium.
Kieran Cavanna: No. Right. And I've seen some really great speculative investors, like Stan, talk about publicly that we should have termed our debt out a long time ago. Do you hold that view too?
Scott Bessent: Completely. And it's not 20/20 hindsight. The American households termed out their debt. What we're seeing now is monetary policy is not affecting the--our monetary policy is affecting the housing market in a perverse way now, because so many Americans went out and got 3%, 3.5%, 4% mortgages during the COVID years, when rates were low, and now their mortgage is an asset, and they can't move. So you're ending up with this kind of inverted logic where high rates are constricting supply, and then additionally, corporate America termed out its debt. The largest borrower, and the most aggressive borrower, US government, is the only--when you think of household, corporates, and government, it was only the US government that didn't term out the debt. And over the past year, we've actually shortened the profile, which strikes me as very fiscally irresponsible.
Kieran Cavanna: At a time when some other countries had 100 year bonds. I mean, we looked at one--Switzerland.
Scott Bessent: Yeah. Well, Austria, yeah. But I think Mexico has a 50 year bond. Corporates, Disney has a 50 or 100 year bond. I bet the US is going to be here more than I bet the Magic Kingdom is going to be here in 100 years.
Kieran Cavanna: As a quick another aside, if you don't mind, because I know you teach a class, or you taught a class at Yale, on a mix of finance and history. And I'd love to just quickly hear what sort of things you looked at in the past, and then look through what the big themes are today, which are somewhat geopolitical we talked about, but maybe AI, which I know you've said in the past, or just recently, is one of the biggest things happened in your career.
Scott Bessent: When you think, Could AI be the equivalent of the industrial revolution, in terms of a tech revolution--is the late 1880, 1890, up until 1900, the US had this incredible disinflationary growth boom, and huge amount of productivity. We also had population growth, so perhaps AI could be like that. Studying history is fun because I had an encounter with Sam Bankman-Fried about 9, 10 months before FTX went under, and he and I got into a heated discussion, and I ended it with, Well, I'm sorry buddy, you look like a US Bank in 1907 when there was a bank run before the Federal Reserve existed, and I think one day you're going to need a lender of last resort and not have it. So it's good to be able to frame something in--
Kieran Cavanna: I guess that equates as a zinger from a guy from Yale, I guess.
Scott Bessent: It is--when you're talking to a guy from MIT, yes. He had a few more F-bombs in there for me.
Kieran Cavanna: But how could this play out from your perspective on macro?
Scott Bessent: Well, I think it's too soon to know that there could be a big productivity boom. Could there--is it initially inflationary? Because one of the things we tend to have some--what I call meta, macro thoughts, and too much debt is one of them. But then you can take some of the themes down to a more granular level, and one of those would be okay, that we're probably going to see, I don't know, $1tn of spending by the hyperscalers, who would be OpenAI, Microsoft, Amazon, Google, Oracle, and the Musk companies on data centers. And data centers use a huge amount of electricity. And we're probably working ourselves into an electricity shortage, maybe by this time next year. In a world where the average citizen is being told you're naughty for eating meat because your cows are contributing to global warming. Maybe these data centers are going to be bigger contributors, but no one's going to tell them not to do it. But you could end up--is a long way of saying it could be inflationary before it's deflationary. You've gotta build the physical assets, and that is now competing with US industrial policy on chips and green energy. And now you add this data center component, and electricity prices are going to go up, construction costs are going up. So it could be deflationary at first, and then deflationary. It's what one of my mentors, and I think Kieran you knew him, was great Morgan Stanley strategist Barton Biggs. And one of his most famous essays was called Fire Then Ice. My general view is maybe we could have fire then ice.
Kieran Cavanna: Right. I mean, you saw that, along the lines of what you're saying, I mean, Amazon just bought a huge data center in Pennsylvania next to a nuclear power plant. And they're paid pretty high premium of current power prices for 10 years. That may turn out to be a good deal.
Scott Bessent: I think it's going to be a great deal. I think it's going to be--well, it's going to be a great deal for Amazon. I don't know what kind of deal it's going to be for the people who live in that neighborhood.
Kieran Cavanna: Right. Fair enough. I would love to shift back--what about Europe, too? Do you have any strong thoughts on Europe you want to go through? Because I could rip through a whole bunch of other questions on other geographies, if you like.
Scott Bessent: Yeah, nothing too strong in Europe is, I think, Europe is always--is kind of the Good, the Bad, and the Ugly. The good companies are always well priced. I've seen an index of family-owned companies that has probably outpaced some of the Magnificent Seven here in the US on a 10 or 15 year view. There's some fantastic companies, and the managements are used to doing business in kind of adverse regulatory environments. One of the things I would say is, I would expect that no matter who wins in November, that the Ukraine, Russia conflict will be over, or we will be approaching a settlement, which I think is probably very good for the risk premium in Europe. So I think for a long time, people were saying Europe's uninvestable, it's this, it's that. And I would expect, too, that we would see $500bn or $750bn of rebuild funds going into Ukraine. I would also think a large portion of that would be toward resiliency for the Eastern-most NATO countries. So I wouldn't be surprised if you don't see some kind of a mini boomlet in Europe over the next 12 months.
Kieran Cavanna: Yeah, rearming everything. Well, there are a lot of things. I would love to walk through macro investing too. It's kind of gotten a bad--it's had a, I feel like, a 10-year, a bit of a headwind, and the S&P has just been a rocket. So why do you need to diversify? And I think sometimes--one of the reasons we engage in macro investing is you can get such asymmetry. You can, if you're right, you can get such a big return. I was just looking at a guy that we like quite a bit, mutually, Discovery Capital is having a great run here in the last 18 months, after five years of tough run. What do you think? What do you think about macro now on a go forward, and maybe why it hasn't thrived in the last 10?
Scott Bessent: There were things to do, but they were mostly up beta trades for a long time. You could have gotten Japan right, you--I know some macro funds did invest in tech, and did very well. When you and I were at SFM, we did. But in general, the best times for macro are not when there's a lot of equanimity in markets. And if the central banks are kind of doing--able to do a smoothing function, which they have been, or which they were able to, then there's not much volatility, they're not many surprises. I would say that one of the things that macro people are good at--we have good imaginations. We've seen a lot. We're looking at what markets give us in terms of asymmetry. We're looking at options markets. We're looking at futures curves. And that when things don't go as planned, or when there's surprises, when there are jolts, then that's when we tend to do better.
Kieran Cavanna: Yeah, I mean, a quick aside on the imagination front, I found it fascinating--[Will] and I learned a bit about your background, and other macro investors. They really do have a strong liberal arts background. Honestly, some of the best guys out there, and historically, Caxton, Tudor, and others. You got to be able to do the math, but boy, you can't trade imagination in this space.
Scott Bessent: Yeah. Look, Stan Druckenmiller was an English and an Econ major. George Soros I think was a philosophy major.
Kieran Cavanna: Yeah. Thank God he wasn't a great philosopher, or else he wouldn't have been a great risk taker. Could you talk about the US election coming up? From a investing standpoint. I know you've been very active politically, so--but I--just from a--because you've talked about the debt. And there are many things going on in the US. But it does feel like the stakes are extremely high in this election. And could you talk about that a little bit?
Scott Bessent: I can talk about it from a financial point of view, and, if you'd like, from a political point of view. But from a financial point of view, I think if we step back and frame it, since 1952, you've never had a down year, never had a down year when an incumbent is running for president. Why is that? Because thus far, his political apparatus and economic apparatus is pumping in a lot of fiscal spending, a lot of liquidity into--via the banking system, via the fed--into markets. And they're quite buoyant. So I would expect that we would see the same thing this year. And indeed, Jerome Powell has been very surprisingly accommodative, and Janet Yellen has been brutally political, and turning the dials and the knobs as quickly as she can to try to influence the election. And my guess is that the more we see Donald Trump ahead in the polls, the more she will be doing that. And then on the other side, in general, I think markets are more drawn to Trump's policies. So Trump tax cuts expire in 2025. I would expect that if he wins, they will be extended or made permanent. We would see much lighter touch regulation, and a little less of the off the wall regulatory edicts that we see issued--just generally more market friendly. I think we see lower energy costs, and much more drilling in America. And my differentiated view is that I think we would also see President Trump try to tackle the debt, which is very at odds with the market view that he would be a profligate spender.
Kieran Cavanna: Sounds like there's some politics in there, but would you add anything on your own politics side?
Scott Bessent: Yeah, look, I think there's a decision now. And Lael Brainard, former Vice Chair of the Fed, the only senior member of the Fed ever to make a political donation, which he made to Hillary Clinton in 2016, is now in the right place. She runs Joe Biden's economic team in the West Wing. She is Chair of the National Economic Council. And she delivered a speech at the Economic Club of New York last summer where she said, Look, we're going to keep spending. We're going to let most of the Trump tax cuts expire. And we are going to raise taxes in 2025. And that is one way to do it. That is a different view, and that is a view that I'm not sure the market--the stock market--will love. I think that there is still the opportunity, if an administration, preferably Republican, were to freeze spending--you don't have to cut spending, you need to freeze it. I think if we do that, then interest rates would start coming down, and the market would start being attracted by this idea, the deficits--maybe the deficit could be cut in half over four years. But that, Kieran, that was a long way of saying, that no matter who ends in November, 2025 is going to be a mess. There is a debt ceiling in January, so I can't remember--seems like it's January 25. Inauguration's on the 20th. So there's going to be a lot of toing and froing going into that. And I'm also open to the idea that just as the market sold off and then recovered when Trump won in 2016, that maybe we--it just gets very ahead of itself going into the election, and maybe there's some kind of crescendo on election night, and the lame duck session for two months is very choppy.
Kieran Cavanna: Well, shifted back to risk taking, if you don't mind, just for a minute, because you've assembled a really great team of people I've gotten to know over the years. But you're not a big screen person yourself, right? I don't think you have a Bloomberg on your desk.
Scott Bessent: Yeah, I have bloomberg.com, which I think is $40 a month, and you have to activate it. It doesn't take all the time. For me, for some people, there's information value in watching prices go from green to red to yellow during the day. And for me, I find it's just a distraction. And that goes back to what I told the cadets and the audience at the Citadel the other day. You just really got to find what you're good at. And there's some people who can sit and trade every day. Paul Jones, Stan Druckenmiller, are incredible at that. There are other people, and I'll put myself in this, who kind of have a view, we're going on a trip from A to B, and I just need to manage the volatility in between, and I can't add very much value in my trading. I can add value in my structuring, is if I can structure things to keep me in the trade.
Kieran Cavanna: Yeah, I think it took me a couple years to understand, I think you said something like, Let's remember that the main thing is the main thing.
Scott Bessent: Yeah, that's from basketball coaching legend, Pat Riley. Keep the main thing the main thing. And if I think the Nikkei is going to go from 40,000 to 60,000, there's going to be some squiggles in between. The same thing. If I think there's a chance that we could, at a point, go parabolic in gold, then a little less worried about small pullbacks.
Kieran Cavanna: The last thing I want to end on was that one thing I've noticed is, you've been doing this for quite a while, you've seen a lot of different interesting markets, but you seem to really enjoy it. You really do. You seem to have a passion for it. You like it. It's the intellectual pursuit. I mean, is that the kind of thing that drives good firms? Do you think?
Scott Bessent: Yes. It is--I think I mentioned to you before, my sister always tells me she's jealous because what I love doing pays a lot. And I'm very fortunate in that. But I was just talking to someone at a big firm who had just joined a few years ago, and he said, What's interesting here is no one has any hobbies. They're just interested in the work. And look, I think it's great to have hobbies, and I have hobbies, but when I'm interviewing, I think that the greatest employees I've ever had are the ones who dream about the game. Do you wake up in the middle of the night--and Kieran, I know you do, because I've gotten emails from you early in the morning, late at night on weekends--and it's, Aha! I've been--this jumble has been going around in my head, and it just clicked and locked and loaded, and this is the answer. And you really have to have that commitment. It's a grueling business. Stan Druckenmiller was great because--is great--because he would always say, When you're at your peak, watch out. You're probably cruising for a bruising. And then when you were down, he's like, Smart people don't get stupid overnight. I still got a lot of confidence in you. So you really have to enjoy it. If you're in it for the money, then there are a lot of other things you make money.
Kieran Cavanna: Although--and it's interesting. I think you've hired some good people over the years. I've noticed that what's changed a bit is you love to find these younger people who are quantitative, smart, hungry, but maybe didn't go to the best reputation school, but they have just as much ability. I mean, you seem to have.
Scott Bessent: Yeah. It is, I think it's ability, and it's hard work. There's no level of entitlement. And I don't think I mentioned this to you, but one of my former students at Yale became an analyst, and now works at an asset allocator firm, shared with me that the--I did a presentation for them--and she shared the introductory memo. And I thought it was one of the greatest compliments I'd ever seen, because she said, I'd just been in China with Scott, we got on the plane to come back from Hong Kong, and I knew he was very smart, but I looked over and he was typing up all his notes, and I realized I could never outwork him.
Kieran Cavanna: Amen to that. That's great. Well Scott, I'm gonna, I'm gonna leave it there. I think you've provided some really interesting insights right there. And, yeah, it's gonna be a great 12 months, I bet, for macro. So good luck here.
Scott Bessent: Thanks. There's always luck too.
Kieran Cavanna: Yes. All right, thanks, Scott.
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Excellent post and great timing for me to learn about Scott Bessent. 👏🏼 I am a Stan Druckenmiller fan.