WEBVTT - Hedge Funds, Eco, and AI 0:00:00.120 --> 0:00:04.360 Bloomberg is now on your dashboard with Apple CarPlay and 0:00:04.360 --> 0:00:08.160 Android Auto. It gives you access to every Bloomberg podcast, 0:00:08.280 --> 0:00:11.560 live audio feeds from Bloomberg Radio, print stories from Bloomberg 0:00:11.640 --> 0:00:14.920 News in audio form, and the latest headlines of the 0:00:14.920 --> 0:00:18.600 click of a button with Bloomberg News. Now it's free 0:00:18.680 --> 0:00:21.439 with the latest version of the Bloomberg Business App. That's 0:00:21.680 --> 0:00:24.400 the Bloomberg Business App. Get it on your phone in 0:00:24.440 --> 0:00:27.760 the Apple App Store or on Google Play. Just download 0:00:27.800 --> 0:00:30.560 the app, connect your phone to your car and get started. 0:00:30.960 --> 0:00:34.400 And it's all presented by our sponsor, Interactive Brokers. 0:00:35.400 --> 0:00:38.600 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney. Alongside 0:00:38.640 --> 0:00:39.800 my co host Matt Miller. 0:00:40.200 --> 0:00:44.279 Every business day we bring you interviews from CEOs, market pros, 0:00:44.320 --> 0:00:48.160 and Bloomberg experts, along with essential market moven News. 0:00:48.720 --> 0:00:51.839 Find the Bloomberg Markets Podcast called Apple Podcasts or wherever 0:00:51.960 --> 0:00:54.560 you listen to podcasts, and at Bloomberg dot Com slash 0:00:54.600 --> 0:00:57.560 podcast catch funds. You know them, you love them? How 0:00:57.680 --> 0:01:00.000 is performance in twenty twenty three? What to look for 0:01:00.120 --> 0:01:02.960 in twenty twenty four? Elana Weinstein Joints and she's the 0:01:02.960 --> 0:01:07.440 founder and CEO of the IDW Group and Bloomberg. Shanali Basset, 0:01:07.480 --> 0:01:09.679 who covers all of Wall Street, joins, is how cool 0:01:09.760 --> 0:01:12.160 is that Shanale that talks in hedge funds. 0:01:12.200 --> 0:01:14.560 I've been waiting to have this conversation all week because 0:01:14.640 --> 0:01:17.360 what a weird year, Paul in hedge funds, and Alana 0:01:17.440 --> 0:01:21.200 is so plugged into this universe. Let's talk about performance first, though, 0:01:21.280 --> 0:01:23.880 because what's stunning is you've seen this massive melt up 0:01:23.880 --> 0:01:27.080 in markets, and the hedge funds, by and large across 0:01:27.120 --> 0:01:29.920 the industry really have not kept up. Bloomberg's All Hedge 0:01:30.040 --> 0:01:32.880 Index is only up about four point eight percent through 0:01:32.920 --> 0:01:35.800 the year so far, and the multi strategies are supposed 0:01:35.800 --> 0:01:38.120 to be the kings of the castle here are only 0:01:38.240 --> 0:01:41.400 up less than three percent on the year. Alana, what's 0:01:41.440 --> 0:01:41.840 going on? 0:01:42.319 --> 0:01:46.200 Okay, So let me unpack those numbers. First off, the 0:01:46.200 --> 0:01:48.280 hedge fund index, I think, is a blend of everything, 0:01:48.440 --> 0:01:50.880 So we need to kind of go strategy by strategy 0:01:50.920 --> 0:01:54.320 to really pull out what the themes are. Long short equities, 0:01:54.520 --> 0:01:58.000 which had a really tough twenty one and twenty two. Finally, 0:01:58.040 --> 0:02:01.160 Shanali had performance. I am please to sit here and 0:02:01.160 --> 0:02:03.520 say something positive, which I have not been able to do. 0:02:03.600 --> 0:02:06.280 For the last couple of years, those funds, which are 0:02:06.320 --> 0:02:09.200 a big percentage of the hedge fund universe, the directional 0:02:09.360 --> 0:02:13.600 concentrated Tiger cubs and similar are up as much as 0:02:13.840 --> 0:02:18.120 twenty percent, thirty percent, even forty percent. The issue there, 0:02:18.560 --> 0:02:21.840 which is really important is even though they're up that much, 0:02:22.000 --> 0:02:24.840 they still have for the most part, an enormous high 0:02:24.919 --> 0:02:27.840 watermark to have to get out of. And let's just 0:02:27.880 --> 0:02:31.080 say it's a fund that's up thirty five percent this year. Okay, 0:02:31.919 --> 0:02:34.359 you may think, and they were down about fifty percent 0:02:34.440 --> 0:02:37.720 between twenty one and twenty two. You may think, okay, 0:02:37.960 --> 0:02:40.760 ye'ar one this year, up thirty five they can get 0:02:40.760 --> 0:02:43.360 out of that remaining fifteen or twenty next year and 0:02:43.400 --> 0:02:47.840 then it's smooth sailing. But the reality is their AUM 0:02:48.000 --> 0:02:50.840 maybe was thirteen billion at the beginning of twenty one, 0:02:51.040 --> 0:02:53.680 it's six and a half billion now, So that thirty 0:02:53.720 --> 0:02:56.840 five percent is on a much smaller base of capital, 0:02:57.120 --> 0:02:59.679 and it's actually as a result, so there may very 0:02:59.760 --> 0:03:03.639 much fewer dollars made than it would have been had 0:03:03.680 --> 0:03:06.440 they made that money back up before they had the losses, 0:03:06.520 --> 0:03:09.120 And as a result, there's really another sixty five percent 0:03:09.200 --> 0:03:16.000 to go, So that's a huge headwind for that strategy. 0:03:16.160 --> 0:03:20.040 How much more excitement is there around the industry, especially 0:03:20.080 --> 0:03:23.919 because many of them have not met the market performance still, 0:03:24.240 --> 0:03:26.079 and so even if they're up, they have two issues 0:03:26.080 --> 0:03:27.920 here to your point the high water mark and the 0:03:28.000 --> 0:03:30.480 issue is you could just invest in the S and 0:03:30.520 --> 0:03:32.720 B or the Nasdaq or even the socks up sixty 0:03:32.760 --> 0:03:35.400 five percent this year, how does that set them up 0:03:35.440 --> 0:03:39.680 into appetite investor appetite for new hedge fund allocations next year. 0:03:39.800 --> 0:03:42.440 Let me also touch on the multi managers which you cited. 0:03:42.720 --> 0:03:45.480 It is true that blended it's not a great result, 0:03:45.760 --> 0:03:49.640 but unpacking that, there's a lot of dispersion in that result. 0:03:49.800 --> 0:03:54.480 If you look at the more established multi managers that 0:03:54.560 --> 0:03:56.920 have been around a while and have built a mouse 0:03:56.960 --> 0:04:00.440 trap that is very difficult to compete with. Fun like 0:04:00.680 --> 0:04:04.400 Citadel leading the pack up fifteen percent, which is a 0:04:04.480 --> 0:04:07.920 very different number than what you cited, or Millennium point 0:04:08.000 --> 0:04:12.080 seventy two up double digits, and then the rest are struggling, 0:04:12.240 --> 0:04:14.040 and that has a lot to do. So when we 0:04:14.200 --> 0:04:17.960 to answer your question LP appetite, you know, the reality 0:04:18.120 --> 0:04:21.400 is the reason the other multi managers grew so quickly 0:04:21.720 --> 0:04:25.400 is because the more established players were either closed or 0:04:26.120 --> 0:04:29.960 very deliberate about how they grew. And if you can't 0:04:30.000 --> 0:04:32.359 allocate to the more established guys, or at least not 0:04:32.440 --> 0:04:34.840 at the level you'd like, then you end up pouring 0:04:34.880 --> 0:04:38.000 money into all these other funds that grew in the 0:04:38.080 --> 0:04:41.560 last two years hand over fist. And when I say quickly, 0:04:41.800 --> 0:04:45.840 I mean between three and eight x. Think about that 0:04:46.279 --> 0:04:49.200 over a twenty four to thirty six month period. It 0:04:49.320 --> 0:04:53.800 is very difficult to deploy that kind of capital growth 0:04:54.200 --> 0:04:58.240 and hire a winning team. In order to do that, 0:04:58.720 --> 0:05:02.000 talent is really fugual to hire and attract. No one 0:05:02.040 --> 0:05:05.480 knows that better than myself and my team, and so 0:05:06.720 --> 0:05:09.560 you can't get from one billion to eight billion, hire 0:05:09.600 --> 0:05:13.560 one hundred and fifty pms and expect a great result. 0:05:13.760 --> 0:05:15.400 There's a lot more that goes into this. 0:05:15.720 --> 0:05:18.240 Okay, well, let's talk about talent, because I feel like 0:05:18.320 --> 0:05:20.440 it was, you know, pandemic era where all we were 0:05:20.480 --> 0:05:23.960 talking about was the competition to talent and compensation wars 0:05:24.000 --> 0:05:27.120 who can offer the best starting salaries and the biggest bonuses. 0:05:27.200 --> 0:05:29.400 We know that it has been a more difficult year 0:05:29.440 --> 0:05:33.440 in terms of actually people getting paid, and we're probably 0:05:33.520 --> 0:05:35.880 finding that out here at the tail end of the year. 0:05:35.960 --> 0:05:39.400 So what is your view here on compensation and how 0:05:39.560 --> 0:05:42.080 these firms are making themselves attractive. 0:05:42.600 --> 0:05:46.200 I think compensation kind of falls into one of two buckets. 0:05:46.279 --> 0:05:49.520 It's either formulaic and for example, if you're at a 0:05:49.560 --> 0:05:52.080 multi manager with a pass through, you know exactly what 0:05:52.160 --> 0:05:55.560 you're getting paid. There's no mystery there. Or you're at 0:05:55.560 --> 0:06:00.200 a fund which is like a single manager, where if 0:06:00.200 --> 0:06:02.560 you're a senior person, you have points in the fund 0:06:02.920 --> 0:06:05.599 and then there's maybe a jump ball with respect to 0:06:05.800 --> 0:06:08.000 being able to reward you on top of that, but 0:06:08.080 --> 0:06:10.840 to the extent it's a fund that has a high 0:06:10.920 --> 0:06:14.400 high water mark. No, there hasn't been a performance fee, 0:06:14.440 --> 0:06:17.320 for example, the long short equity managers in twenty one 0:06:17.480 --> 0:06:19.839 for the most part, there wasn't one in twenty two, 0:06:20.279 --> 0:06:23.760 and even though they put up this incredible performance in 0:06:23.960 --> 0:06:27.320 twenty three, they don't have a performance fee with which 0:06:27.360 --> 0:06:30.440 to pay those people. And so to answer your question, 0:06:30.640 --> 0:06:34.520 I think there's going to be a lot more frustration 0:06:35.000 --> 0:06:37.520 this year than there even has been the last couple 0:06:37.560 --> 0:06:40.359 of years. Those people are going to get paid more 0:06:40.440 --> 0:06:43.359 because the manager is going the founder is going to 0:06:43.440 --> 0:06:46.120 feel he or she needs to reach more deeply into 0:06:46.120 --> 0:06:48.560 the management fee to pay them. But when you're someone 0:06:48.600 --> 0:06:51.599 who's put up hundreds of millions of dollars, even billions 0:06:51.640 --> 0:06:54.839 of dollars, the dispersion between what you're actually going to 0:06:54.839 --> 0:06:57.000 get paid this year and what you've produced is going 0:06:57.040 --> 0:07:00.400 to be very frustrating versus in previous Here is where 0:07:00.760 --> 0:07:03.120 there wasn't performance for the fund. I didn't put up 0:07:03.160 --> 0:07:06.280 performance as an individual, So whatever I get paid, I'm 0:07:06.320 --> 0:07:08.880 kind of okay with because that's the ethos of this industry. 0:07:08.920 --> 0:07:12.520 It's paid for performance. Now I've put up tremendous performance, 0:07:12.880 --> 0:07:15.800 and my founder isn't really paying me something that feels 0:07:15.840 --> 0:07:18.920 in any way proportionate to what I should get paid. 0:07:18.960 --> 0:07:21.480 And I want to also highlight as much as some 0:07:21.520 --> 0:07:24.520 of these funds lost a significant amount of AUM, we're 0:07:24.560 --> 0:07:27.920 still talking about falls from Grace of thirty billion to 0:07:27.960 --> 0:07:31.320 twenty billion, or in the case of Tiger Global, one 0:07:31.400 --> 0:07:34.520 hundred billion to fifty five billion. But think about the 0:07:34.600 --> 0:07:37.560 management fee. On fifty five billion, that's still a billion 0:07:37.920 --> 0:07:41.480 of fees, or on twenty billion, that's four hundred million 0:07:41.480 --> 0:07:45.000 of fees. So and these teams are relatively lean, particularly 0:07:45.080 --> 0:07:49.400 at senior levels, and everyone knows that. So it's it's early, 0:07:49.480 --> 0:07:52.200 still a visa vcamp. But what we're hearing, even though 0:07:52.240 --> 0:07:55.280 the number is better, is an increased level of frustration, 0:07:55.440 --> 0:07:57.960 and I think there's going to be more vulnerability at 0:07:58.000 --> 0:07:59.720 these funds as a result. 0:08:00.040 --> 0:08:01.720 When I left the street in the mid two thousands, 0:08:01.720 --> 0:08:03.960 I studied long and hard about whether to transition to 0:08:03.960 --> 0:08:06.760 the hedge fund business. And what I concluded then was 0:08:06.800 --> 0:08:11.320 that long short equity, no alpha left done game had 0:08:11.360 --> 0:08:13.160 been played out, so I can go Bloomberg. 0:08:13.520 --> 0:08:16.200 So my question is how lucky we are? 0:08:16.400 --> 0:08:18.600 And I was absolutely correct that the numbers bear that out. 0:08:19.080 --> 0:08:21.400 My question is if I'm a really good trader, I 0:08:21.440 --> 0:08:24.560 don't know, bonds, currency, something at Morgan, Stanle There, Goldman, Sachs. 0:08:24.880 --> 0:08:26.680 Back in the day, I could just leave and go 0:08:26.760 --> 0:08:28.720 raise a couple of billion dollars and then boom. That 0:08:28.880 --> 0:08:31.760 was my path. Does that still exist or does a 0:08:31.760 --> 0:08:33.960 lot of the new money coming into hedge funds go 0:08:34.000 --> 0:08:36.240 to the point seventy two's and the citadels. 0:08:37.000 --> 0:08:37.200 Well. 0:08:37.200 --> 0:08:40.280 As I said earlier, some of those established managers are 0:08:40.280 --> 0:08:44.240 closed or very carefully accepting new capital. I believe me, 0:08:44.280 --> 0:08:46.440 there's a line around the block to allocate to those. 0:08:46.840 --> 0:08:50.000 But two things. One the days of leaving the cell 0:08:50.080 --> 0:08:51.920 side to go start a hedge fund, I think you'd 0:08:51.920 --> 0:08:54.160 have to be completely nuts to try to attempt to 0:08:54.160 --> 0:08:56.160 do that. Good luck getting a job at a hedge 0:08:56.160 --> 0:08:58.400 fund period, because you've spent all this time on the 0:08:58.400 --> 0:09:01.600 cell side and back in the day. Sorry not to 0:09:01.640 --> 0:09:04.880 age you, but we got there. You could take risks, 0:09:04.960 --> 0:09:07.160 sure right, you could take risk. You can't do that 0:09:07.200 --> 0:09:10.200 post the financial crisis. So if you're still sitting on 0:09:10.280 --> 0:09:12.520 the cell side, the reality is you're in more of 0:09:12.520 --> 0:09:14.719 a managerial role than you are a risk taking role. 0:09:14.760 --> 0:09:18.040 At a senior level, I think it's candidly become more 0:09:18.080 --> 0:09:22.560 difficult to even launch coming from most hedge funds. Now, 0:09:22.559 --> 0:09:26.040 coming from a top flight hedge fund which has a 0:09:26.080 --> 0:09:30.000 great established track record and is doing well today, that's 0:09:30.040 --> 0:09:32.680 exciting to LPs, but that group of funds has become 0:09:32.800 --> 0:09:35.520 fewer and fewer. And yes, coming out of a fund 0:09:35.960 --> 0:09:38.520 like a Citadel or a point seventy two sets you 0:09:38.640 --> 0:09:41.440 up in good stead to be able to launch successfully, 0:09:41.760 --> 0:09:45.080 But think about coming out of some of the tiger 0:09:45.120 --> 0:09:47.840 cubs are related now that are still well below their 0:09:47.880 --> 0:09:51.199 high water mark. That's not exactly an exciting value proposition 0:09:51.280 --> 0:09:53.200 to Lpece to say, oh, I'm going to be different, 0:09:53.320 --> 0:09:56.520 you know, and don't worry about the last twenty one 0:09:56.559 --> 0:10:00.080 and twenty two. You know, we're doing better now and 0:10:01.840 --> 0:10:06.800 my approach to risk management and managing volatility is better 0:10:06.840 --> 0:10:07.840 than what you've experienced. 0:10:07.960 --> 0:10:10.240 Also em bettered in Paul's question here is there's a 0:10:10.440 --> 0:10:14.360 long short equation has been doing better, but macro has 0:10:14.440 --> 0:10:17.840 been such an exciting prospect. Currencies, fixed income, the interest 0:10:17.920 --> 0:10:21.360 rate environment so drastically changing. When you're looking at the 0:10:21.520 --> 0:10:25.680 types of managers. How much is the macro story part 0:10:25.679 --> 0:10:27.760 of twenty twenty four and what does that mean for 0:10:27.800 --> 0:10:28.680 the talent story. 0:10:28.800 --> 0:10:31.960 That's a good question, Shanali, because every year I feel 0:10:31.960 --> 0:10:34.800 like it's a different story in macro. Twenty two is great, 0:10:35.720 --> 0:10:38.720 twenty three has not been so great, So we'll see 0:10:38.760 --> 0:10:42.760 what twenty four holds. It's a strategy which embodies as 0:10:42.760 --> 0:10:47.160 we've seen a lot of volatility, so I think it's 0:10:47.200 --> 0:10:53.679 TBD in terms of how they will perform. And you know, 0:10:53.760 --> 0:11:00.199 talent follows where there is an ecosystem which can navigate 0:11:00.280 --> 0:11:01.920 that volatility best. 0:11:02.559 --> 0:11:05.080 We're now in an environment, an entry environment that haven't 0:11:05.080 --> 0:11:07.000 been in a long time where rates went up so 0:11:07.120 --> 0:11:09.080 much now they're going to be coming down. Is there 0:11:09.120 --> 0:11:11.800 a feeling within the hedge fund community that certain strategies 0:11:11.840 --> 0:11:14.240 are going to work better in twenty four than maybe 0:11:14.240 --> 0:11:15.280 the past couple of years. 0:11:15.960 --> 0:11:21.719 Well, I think the reality is the uh, you know, 0:11:22.360 --> 0:11:27.079 the bar has gone up in terms of not just 0:11:27.080 --> 0:11:30.559 just the market environment, but also what LPs expect for 0:11:30.640 --> 0:11:33.600 what they're paying. And it's really the focus is of 0:11:33.640 --> 0:11:38.400 course on alpha and running in a way which neutralizes 0:11:38.559 --> 0:11:41.640 a lot of the market risk inherent right, that has 0:11:41.679 --> 0:11:46.000 whip sawed a lot of the return for funds. Factor 0:11:46.080 --> 0:11:52.000 rotations really has obscured great fundamental stock picking and so 0:11:52.160 --> 0:12:01.360 being somewhere which can isolate what is value, growth, momentum, 0:12:02.400 --> 0:12:05.839 macro cross currents and hedge those things out so that 0:12:05.920 --> 0:12:10.720 great idiosyncratic alpha driven stock picking can shine through. That 0:12:10.720 --> 0:12:13.000 that's the most important thing, because then it doesn't matter 0:12:13.000 --> 0:12:14.040 what the market's doing. 0:12:14.120 --> 0:12:14.280 You know. 0:12:14.559 --> 0:12:17.240 Interestingly, I want to comment on something you had talked 0:12:17.280 --> 0:12:19.280 about a little earlier. We were talking about the success of 0:12:19.440 --> 0:12:21.840 sit it out in multi strat but it's also worth 0:12:21.880 --> 0:12:25.120 talking about the undertone of the other side of that story. 0:12:25.160 --> 0:12:28.959 You had mentioned that some firms grew so fast, so quickly, 0:12:29.360 --> 0:12:31.880 and the poster child of that this year was really 0:12:31.920 --> 0:12:34.680 Sean Feld. This idea that a lot of money was pulled, 0:12:34.720 --> 0:12:37.480 billions of dollars was pulled from the firm. You know, 0:12:37.520 --> 0:12:40.000 they really had to look to raise capital to really 0:12:40.080 --> 0:12:43.920 fill that whole. They even considered merging with another large 0:12:44.040 --> 0:12:49.120 multi strategy firm. Is Seanfeld alone? Is there other struggles 0:12:49.200 --> 0:12:51.320 that we're seeing in firms like Schonfeld and how does 0:12:51.320 --> 0:12:52.400 that play out into next year? 0:12:52.440 --> 0:12:52.840 Totally? 0:12:53.240 --> 0:12:56.079 You know, all these funds that grew so quickly, whether 0:12:56.960 --> 0:12:59.920 I mean, I'm just not to just to talk about 0:13:00.040 --> 0:13:04.480 who's grown hand over fist. These funds are multiples aum 0:13:04.559 --> 0:13:08.079 wise where they were even two years ago. Lmr Hudson 0:13:08.120 --> 0:13:13.120 Bay sinctive Schoenfeld, as you mentioned, fruition, and you can't 0:13:13.120 --> 0:13:15.920 do that. You have to be far more deliberate with 0:13:16.000 --> 0:13:18.600 respect to thinking about what is the end state, how 0:13:18.600 --> 0:13:22.359 many pms do I want so that I can maximize 0:13:22.360 --> 0:13:27.679 idea generation and minimize crowding risk and then execute against 0:13:27.679 --> 0:13:31.560 that and only grow as you've been able to attract talent, 0:13:31.720 --> 0:13:34.560 and I don't mean bodies, I mean talent, and talent 0:13:34.720 --> 0:13:39.360 always has options, right if you're that good. The reality is, 0:13:40.440 --> 0:13:44.160 as one of those multimanagers that grew very quickly, you're 0:13:44.280 --> 0:13:47.760 up against the Citadels, the point seventy two's, the Ballyasns 0:13:47.800 --> 0:13:50.520 of this world, the millenniums competing for those people. So 0:13:50.640 --> 0:13:54.640 what are you offering that's really a differentiated value proposition? 0:13:54.960 --> 0:13:56.840 And when I hear of a fund and this is 0:13:56.880 --> 0:14:00.000 an actual fund that grew eight x in that period 0:14:00.240 --> 0:14:02.840 and hired and is now has one hundred and fifty 0:14:02.880 --> 0:14:06.480 pms with no real team underneath any of those pms 0:14:06.960 --> 0:14:10.120 and the pms they attracted or really science experiments. Most 0:14:10.160 --> 0:14:12.760 of them have not been pms before, don't know how 0:14:12.760 --> 0:14:15.720 to run risk in a market neutral model, and there's 0:14:15.760 --> 0:14:18.160 no real resources at the firm to make them better. 0:14:18.520 --> 0:14:21.760 That's a recipe for disaster. And what we've learned is 0:14:22.160 --> 0:14:26.560 being a successful multi manager is not as simple as capital, 0:14:26.760 --> 0:14:29.920 a pass through and PMS. It is far more nuanced 0:14:29.960 --> 0:14:30.320 than that. 0:14:31.240 --> 0:14:33.240 All right, really great to have you join us today, 0:14:33.240 --> 0:14:35.920 Alana and Shanali Basik as well. Thank you so much. 0:14:35.960 --> 0:14:44.200 We really appreciated. Alana Einstein there from IWDIDW group. It's 0:14:44.200 --> 0:14:46.200 the holiday week, guys, We're almost through it. We're like 0:14:46.240 --> 0:14:48.560 almost at the end of the year. Thank you very much. 0:14:50.120 --> 0:14:53.960 You're listening to the Team Can't Live program Bloomberg Markets 0:14:54.000 --> 0:14:57.080 weekdays at ten am Eastern on Bloomberg dot Com, the 0:14:57.160 --> 0:15:01.160 iHeartRadio app, and the Bloomberg Business app non demand wherever 0:15:01.200 --> 0:15:02.360 you get your podcasts. 0:15:04.120 --> 0:15:07.880 I want to pivot to Cam Harvey. He's professor finance 0:15:07.960 --> 0:15:11.360 at the Fuqua School of Business at Duke University, my 0:15:11.480 --> 0:15:14.520 alma mater. I took a couple classes from Professor Harvey. 0:15:14.560 --> 0:15:17.760 I survived. I'm proud to say I can't claim any 0:15:17.920 --> 0:15:21.480 more success than survival, but some good stuff there. Hey, Cam, 0:15:21.560 --> 0:15:23.600 I look at the ten year treasury. I mean, I'm 0:15:23.600 --> 0:15:25.440 not a bond guy, but I mean, just a couple 0:15:25.480 --> 0:15:27.800 of coffee ago, the ten year treasury was at five percent. 0:15:27.840 --> 0:15:30.840 Now we're at three point eighty two percent. What's going 0:15:30.880 --> 0:15:31.440 on out there? 0:15:32.880 --> 0:15:36.240 Yeah, So it overall is very good news that that 0:15:36.320 --> 0:15:41.520 rate has gone down, and I think that that investors 0:15:41.560 --> 0:15:46.960 and consumers have revised their expectations of inflation and this 0:15:47.000 --> 0:15:49.960 is good news. So it means that the Fed has 0:15:50.000 --> 0:15:53.760 stopped and is now talking about decreasing rates, and that 0:15:53.920 --> 0:15:58.200 pressure on the long term rates seems to abate it. 0:15:59.040 --> 0:16:03.800 So I mean the market's pricing in multiple rate cuts 0:16:04.120 --> 0:16:07.000 for twenty twenty forty. I think the market's maybe a 0:16:07.000 --> 0:16:09.080 little over at skis here or is that something that 0:16:09.120 --> 0:16:10.360 the Fed should be considering? 0:16:12.400 --> 0:16:12.680 Well? 0:16:13.920 --> 0:16:16.160 Last time, Ozon I was making the case that the 0:16:16.600 --> 0:16:21.440 cuts should have begun in twenty twenty three. So the 0:16:21.520 --> 0:16:25.440 Fed overshot by pushing the short rates up so high. 0:16:26.200 --> 0:16:30.400 And the sooner that they take down some of these cuts, 0:16:30.480 --> 0:16:34.240 the better, because it does cause a lot of stress 0:16:34.320 --> 0:16:39.280 in our economy, and that stress is unnecessary given that inflation, 0:16:39.720 --> 0:16:43.360 according to my calculations, is running well below two percent. 0:16:43.600 --> 0:16:46.720 And professor, let's dig into those calculations because they're fascinating. 0:16:46.760 --> 0:16:49.080 I love reading your work, whether it's across LinkedIn or 0:16:49.160 --> 0:16:52.360 more broadly, and for you, it's housing, right, This is 0:16:52.400 --> 0:16:54.560 where the misinterpretation is coming in. 0:16:56.040 --> 0:16:56.560 Exactly. 0:16:56.720 --> 0:17:01.160 So housing is operating with the lag, so it's not 0:17:01.280 --> 0:17:05.600 like current rents or current housing prices. We change the 0:17:05.640 --> 0:17:09.080 way that inflation is calculated back in nineteen eighty two, 0:17:09.760 --> 0:17:13.920 so before eighty two, it was real time inflation and housing, 0:17:14.440 --> 0:17:18.520 but now it operates with the LAG. So the housing 0:17:18.600 --> 0:17:23.959 inflation that's reported in the CPI is inflation that happened 0:17:24.000 --> 0:17:28.679 a year ago, and that component of inflation is thirty 0:17:28.720 --> 0:17:32.920 five percent of the overall inflation. And the reason inflation 0:17:33.000 --> 0:17:36.840 has been high is that the shelter component has been 0:17:36.960 --> 0:17:40.960 running at seven percent. That's what goes into the CPI, 0:17:41.280 --> 0:17:43.720 but we know that's not the case. If you look 0:17:43.760 --> 0:17:48.639 in real time rental inflation or house price inflation is 0:17:48.760 --> 0:17:53.159 near zero or one percent, And if you recalculate the 0:17:53.240 --> 0:17:59.280 CPI with real time shelter costs, then what you see 0:17:59.760 --> 0:18:04.640 is a real time inflation rate below two percent. And 0:18:04.960 --> 0:18:11.439 this has been very frustrating because this shelter component caused 0:18:11.440 --> 0:18:14.800 the FED to make a mistake early on in declaring 0:18:14.920 --> 0:18:20.400 that housing was no big deal and inflation was transitory, 0:18:20.640 --> 0:18:23.920 and it caused them not to move to keep rates 0:18:23.920 --> 0:18:27.479 so low for so long, and then the same mistake 0:18:27.640 --> 0:18:31.760 was made in twenty twenty three. It was obvious that 0:18:32.040 --> 0:18:36.399 the only reason inflation was high was because of the 0:18:36.400 --> 0:18:40.800 shelter inflation that had happened in the past. Policy needs 0:18:40.840 --> 0:18:45.520 to be executed based upon real time data, not on 0:18:45.680 --> 0:18:48.200 data that happened like a year ago. 0:18:48.640 --> 0:18:50.840 In the world I cover more which is AI we 0:18:50.960 --> 0:18:54.000 say a lot garbage in, garbage out. So how are 0:18:54.000 --> 0:18:57.120 you having conversations as a professor of course over there? 0:18:57.400 --> 0:19:00.520 Do you trying to get this message across to use 0:19:00.640 --> 0:19:04.520 hearing that it's falling on death is or more is 0:19:04.560 --> 0:19:06.359 that are willing to listen to some of the data 0:19:06.359 --> 0:19:07.960 that should be taken into account when it comes to 0:19:07.960 --> 0:19:09.120 in flrastory pressures. 0:19:10.119 --> 0:19:13.560 So this has been a more than a year long 0:19:13.640 --> 0:19:16.639 campaign for me, and again I'm very pleased that the 0:19:16.640 --> 0:19:20.280 FED has changed the conversation. And the sooner they move 0:19:20.800 --> 0:19:24.200 the better. There is still a lot of risk out there. 0:19:24.560 --> 0:19:27.840 So like I know, people are patting the FED on 0:19:27.840 --> 0:19:33.639 the back, congratulations, mission accomplished. No, it's way way too early. 0:19:34.560 --> 0:19:38.439 My inverted Yell curved indicator which is eight out of 0:19:38.440 --> 0:19:43.479 eight in predicting recessions, that's the nineteen sixties. We are 0:19:43.560 --> 0:19:47.360 at the average lead time to a recession. So if 0:19:47.359 --> 0:19:50.040 you look at the last four recessions, the Yell curve 0:19:50.080 --> 0:19:55.280 inverted on average thirteen months before a recession, and we 0:19:55.320 --> 0:19:58.960 are at month thirteen breakdown. We're at the average, So 0:19:59.040 --> 0:20:04.160 again it's too early. There are significant headwinds. The FED 0:20:04.200 --> 0:20:08.879 can help things by reducing the FED funds rate as 0:20:08.920 --> 0:20:09.760 soon as possible. 0:20:10.119 --> 0:20:12.000 Hey, Kim, I know you also do a lot of 0:20:12.000 --> 0:20:16.320 work on blockchain, crypto fintech. You teach a course down 0:20:16.359 --> 0:20:19.600 there at DO Innovation and Crypto Ventures. What's the theme 0:20:19.800 --> 0:20:22.040 that you think we should be on the lookout for 0:20:22.040 --> 0:20:23.439 for twenty twenty four in this space. 0:20:24.880 --> 0:20:29.480 So it's interesting that we've got the two simultaneous disruptions happening. 0:20:29.960 --> 0:20:34.240 So one is then decentralized finance to change our payment 0:20:34.320 --> 0:20:39.920 system and to allow for functionality that we've never had before, 0:20:40.359 --> 0:20:43.159 and we've got AI going on at the same time. 0:20:43.760 --> 0:20:46.719 So I look at this in kind of the big picture, 0:20:47.280 --> 0:20:50.080 and the big picture the thing that worries me a 0:20:50.119 --> 0:20:55.640 lot is just the size of the US debt. So 0:20:55.840 --> 0:20:59.639 the service on that debt is about seven hundred billion 0:20:59.680 --> 0:21:03.760 dollars a year, and that service will increase in twenty 0:21:03.800 --> 0:21:07.359 twenty four to be the second largest spending category for 0:21:07.440 --> 0:21:11.320 the government. So the way to get out of this 0:21:11.480 --> 0:21:16.720 problem is, well, there's three different ways. One way is 0:21:16.760 --> 0:21:20.320 to increase taxes, and that just kills growth and nobody 0:21:20.359 --> 0:21:25.000 wants increased taxes. The second way is to print money 0:21:25.080 --> 0:21:27.480 and to inflate our way out. So you print the 0:21:27.480 --> 0:21:29.919 money to pay off the debt, and that is just 0:21:30.000 --> 0:21:33.720 like a tax also, so nobody really wants that. Nobody 0:21:33.760 --> 0:21:37.080 wants to go back to that inflation. The third way 0:21:37.800 --> 0:21:42.080 is with growth. So if we increase our growth rate, 0:21:42.320 --> 0:21:46.239 then it naturally increases the tax revenue and allows us 0:21:46.240 --> 0:21:49.120 to pay down some of that debt. So we are 0:21:49.160 --> 0:21:52.520 at a cusp of a pivot point, in my opinion, 0:21:52.800 --> 0:21:57.000 in the economy with these two disruptions going on, and 0:21:57.400 --> 0:22:01.880 they potentially allow us to get on a different growth path. 0:22:02.200 --> 0:22:05.600 And it's really important that we do not fumble these 0:22:05.720 --> 0:22:12.920 opportunities by overregulating either decentralized finance or AI. We need 0:22:12.960 --> 0:22:17.320 to embrace these disruptions and to look at the benefits, 0:22:17.400 --> 0:22:20.320 not just the costs. And I'm not saying this is 0:22:20.359 --> 0:22:24.919 without risk. There is risk, but the key thing is 0:22:24.960 --> 0:22:27.679 to get on a higher growth path. I don't think 0:22:27.720 --> 0:22:30.240 it's unreasonable, all. 0:22:30.240 --> 0:22:33.600 Right, Kim, that's great stuff. As always, Campbell Harvey, Professor 0:22:33.640 --> 0:22:38.520 of Finance at the Fuqual School of Business at Duke University, 0:22:39.560 --> 0:22:41.359 Great great Place, highly recommend it. 0:22:41.600 --> 0:22:44.680