Speaker 1: All right, let's go now to Soros fun CEO and
Speaker 1: CEO Don Fitzpatrick, speaking with Bloomberg's Eric Shatsker down.
Speaker 2: Did you ever imagine that we'd be here six weeks
Speaker 2: into the Trump two point zero era and the Dow
Speaker 2: is flirting with negative, The S and P five hundred
Speaker 2: is down two and a half percent, the Nasdaq is
Speaker 2: down six plus?
Speaker 3: Did you.
Speaker 4: So?
Speaker 1: I would have thought that the markets would have held
Speaker 1: up better, but I would I would also not have
Speaker 1: thought that we would have had the level of frenetic activity.
Speaker 4: Out of Washington.
Speaker 1: And when we look at the headlines over the past
Speaker 1: twenty four hours, they've they've been kind of breathtaking in
Speaker 1: speed and scale.
Speaker 2: I'd like to point out, because some of you here
Speaker 2: may not know, or perhaps you've forgotten, that the Treasury
Speaker 2: Secretary Scott Bessant once had Don's job as chief Investment Officer.
Speaker 2: He worked at Soros in the nineteen nineties under Georgia
Speaker 2: course and also understand Druckenmeller, and he returned as the
Speaker 2: CIO in twenty eleven. You arrived in twenty seventeen, a
Speaker 2: couple of years after he left, right.
Speaker 4: I arrived about a year after he left.
Speaker 2: I bring this up not just to establish a distinguished lineage,
Speaker 2: but because it serves as a useful reminder that Scott
Speaker 2: Besant has to be right the most market literate and
Speaker 2: market savvy treasury secretary since at least Bob Rubin and
Speaker 2: perhaps in American history. Now we have a president whom
Speaker 2: we know thinks of the stock market as a daily
Speaker 2: report card, and a treasury secretary who's laser focused on
Speaker 2: macro indicators.
Speaker 3: Why is that important?
Speaker 4: So a couple of things.
Speaker 1: Scott is incredibly smart, He's capable, and I think he
Speaker 1: is the more most market savvy treasury Treasury secretary we've
Speaker 1: ever had. I think it matters, matters because when he
Speaker 1: says something, you should you should take him literally. So
Speaker 1: he has said he and Trump care about the level
Speaker 1: of ten year treasuries, and and I think he will
Speaker 1: pay very close attention in.
Speaker 4: A kind of perverse way.
Speaker 1: Right after the election, we had the Trump bump, and
Speaker 1: as Eric pointed out, we've we've had something different in
Speaker 1: the past week or so. And you've seen that ten
Speaker 1: year treasury go from four eighty in the middle of
Speaker 1: January where they were getting nervous and if you remember
Speaker 1: they kind of backed off some of some of the
Speaker 1: tariff timing at that moment in time. Now you have
Speaker 1: a ten year treasury that's going, that's down at before
Speaker 1: twelve level, and I think they should be getting a
Speaker 1: little nervous. I think the one thing that market participants
Speaker 1: maybe have underestimated in the first term, we all said
Speaker 1: Trump is very SPX sensitive, and that was invariably the truth.
Speaker 1: I think with Scott, I think their pain tolerance is different,
Speaker 1: and I think they're more sensitive to a broader set
Speaker 1: of asset classes, and I think they might believe that
Speaker 1: ultimately they have they have more levers to pull when
Speaker 1: and where they need it. That said, when you think
Speaker 1: about tariff's we can all look at a textbook and
Speaker 1: we can and we can say, and I think the
Speaker 1: Treasury Secretary said today manufacturers will absorb the price pressure,
Speaker 1: and then you can also argue that it's a one
Speaker 1: time price shift. But I think what you can't control
Speaker 1: is consumer confidence and corporate confidence, and I think that
Speaker 1: is what is falling off a cliff right now.
Speaker 2: Do you think don that the market is correct to
Speaker 2: as of now pricing in three rate cuts in twenty twenty.
Speaker 1: Five, So I would take the other side of that bet,
Speaker 1: because again I think ultimately they will.
Speaker 4: Bear more pain.
Speaker 1: Than I think market participants originally thought, but there will
Speaker 1: be a limit, and I think they will make deals.
Speaker 2: There's a view in the market that Scott's preoccupation with
Speaker 2: keeping the tenure yield low foreshadows a coming.
Speaker 3: Change and bank regulation.
Speaker 2: You know, if the administration wants to juice demand for treasuries,
Speaker 2: it could exempt treasuries from the supplementary leverage ratio, one
Speaker 2: of the capital penalties that the big US banks have
Speaker 2: to pay.
Speaker 3: Do you think they'll go there? So?
Speaker 1: I definitively think that is going to happen. So when
Speaker 1: you look at kind of the net issuance of treasuries
Speaker 1: post COVID, it's almost all been bought by the levered
Speaker 1: hedge fund community, and I don't think, first of all,
Speaker 1: that's not a sustainable kind of marginal buyer, and it
Speaker 1: also probably isn't isn't good for market structure and market stability.
Speaker 1: And when you look at what came out of Congress
Speaker 1: last week, you know, the deficit is not going lower
Speaker 1: in any any material way. So what I think they're
Speaker 1: going to do is they they will change bank regulation
Speaker 1: and the supplemental leverage ratio allowing banks to buy treasuries
Speaker 1: in ways that that won't be regulatorially punitive. And the
Speaker 1: next step is they will try to take some leverage
Speaker 1: out of out of kind of that that basis trade
Speaker 1: and the leverage leverage levered market. And again I think
Speaker 1: this is where Scott understands and moving parts in ways
Speaker 1: that I think will ultimately.
Speaker 4: Be really helpful.
Speaker 2: You've given us a couple of clues about how you
Speaker 2: might be trading the bond market. You take the other
Speaker 2: side of three rate cuts this year, but at the
Speaker 2: same time you think that the administration will be inclined
Speaker 2: to help lift demand for treasuries. How are you trading treasuries?
Speaker 2: Like what would you buy and where? And are you
Speaker 2: a holder or your seller at any point?
Speaker 1: So, we are a reasonably large holder of US government bonds,
Speaker 1: but we're below our benchmark weight by a little bit.
Speaker 1: And what we've been doing is we've been using volatility
Speaker 1: as our friend. So in January when the tenure rates spiked,
Speaker 1: we were buyers of bonds at that time. And then
Speaker 1: now as you've seen kind of rates go lower, bonds
Speaker 1: rally a lot we're not taking profits, and you'll see
Speaker 1: us continue to build a position into that volatility, and
Speaker 1: I think you're going to see continued volatility again this
Speaker 1: moment in time. Rates are going lower, but I don't
Speaker 1: think that's going to be true for the.
Speaker 4: Next four years.
Speaker 2: Volatility can be your friend. Is that is that?
Speaker 3: I guess I better put it this way.
Speaker 2: What is the what's the best thing and what's the
Speaker 2: worst thing about trying to put money to work in
Speaker 2: this market?
Speaker 1: Yeah, So so we're we're technically we're an endowment, but
Speaker 1: we use the best of the endowment model and the
Speaker 1: hedge fund model, so we can react.
Speaker 4: Very quickly, and I think we're very good.
Speaker 1: I would argue probably one of the best in the
Speaker 1: world at connecting the dots across asset classes. And from
Speaker 1: our perspective right now, the volatility is great.
Speaker 4: I think market.
Speaker 1: Structure is still challenged in that liquidity at moments in
Speaker 1: time when there's a lot of volatility is challenging. So
Speaker 1: you can see a great trade, but sometimes buying as
Speaker 1: much of it as you want is easier said than done.
Speaker 3: Do you have a favorite trade right now?
Speaker 4: That's a good question.
Speaker 1: So we are tactically at the end of last year,
Speaker 1: we bought call spreads on Hong Kong equity indexes and
Speaker 1: I continue to like that trade. So we're holding that position.
Speaker 1: And again, when you see kind of the micro and
Speaker 1: macro economic data coming out of the US.
Speaker 4: And you see the data in China, I think.
Speaker 1: You will see a tactical deal out of economic necessity
Speaker 1: between China and the US. And I think when you
Speaker 1: look at investors, generally they've left China for dead, So
Speaker 1: I think there's going to be money forced into that market.
Speaker 4: Again for US, that's.
Speaker 1: More a short term tactical trade than a longer term position.
Speaker 2: I feel like I have to ask you the requisite
Speaker 2: MAG seven question. Those talks are down about thirteen percent
Speaker 2: or so from the peak in December. That was as
Speaker 2: of yesterday I didn't check this morning, Probably down by more.
Speaker 2: Tesla's off what forty Nvidia has lost twenty four percent
Speaker 2: of those buying opportunities.
Speaker 1: Yeah, so I think the MAG seven are I mean,
Speaker 1: those are extraordinary companies with real earnings power, and the
Speaker 1: onwind here has been pretty pretty violent, So I would
Speaker 1: take the other.
Speaker 4: Side of that trade.
Speaker 2: And of course, we are witnessing some historic shifts in
Speaker 2: US foreign policy, it would appear that the United States
Speaker 2: is to a degree abandoning Europe perhaps embracing Russia. And
Speaker 2: Vladimir Putin has that translated? Will it translate into great
Speaker 2: macro trades?
Speaker 4: Yeah?
Speaker 1: So, you know, Russia is not that relevant from a
Speaker 1: trading perspective when when they invaded Ukraine it didn't really
Speaker 1: reverberate through markets. And I think the context of what's
Speaker 1: going on now, the only thing that's worth watching, in
Speaker 1: my opinion, the context of trading markets is oil and
Speaker 1: whether ultimately, and this is a big if, if Trump
Speaker 1: can negotiate a piece between Russia and Ukraine, whether part
Speaker 1: of that deal is Trump needs more oil, right, part
Speaker 1: of what he's been promising the US consumer is lower prices,
Speaker 1: and particularly lower prices when it comes to the gas pump.
Speaker 1: The US really can't drill more. It's not in Saudi
Speaker 1: Arabia's best interests to produce a lot more. They need
Speaker 1: about ninety dollars a barrel to balance their budget. So
Speaker 1: the lever he can really pull there is Russia. And
Speaker 1: one kind of wild card would be Russia dropping out
Speaker 1: of OPEC, and that would have a real impact on
Speaker 1: oil price in the cots of moving it lower.
Speaker 2: What about America ripping the security blanket away from Europe?
Speaker 3: You know, I could imagine that.
Speaker 2: We've already seen, right, the Germans move toward spending. In fact,
Speaker 2: I think they found some flexibility this morning, right, two
Speaker 2: hundred billion euros on additional two hundred billion on defense,
Speaker 2: and we hear the same noises out of France that
Speaker 2: surely that has to result in at least some some
Speaker 2: bond issuance.
Speaker 4: Yeah.
Speaker 1: So if you you know, if you look at Europe
Speaker 1: and if they they end up spending the two and
Speaker 1: a half, you know, three percent of GDP on defense,
Speaker 1: that's one hundred and seventy five billion dollars a year.
Speaker 1: And when you think about the fiscal space they need,
Speaker 1: just generally, the amount of bond issuance out of the
Speaker 1: EU and European sovereigns is going very materially higher at
Speaker 1: the same time when US net issuance is also going higher.
Speaker 1: So I think one of the things that we might see,
Speaker 1: and this isn't going to happen tomorrow, but I think
Speaker 1: it could happen in the next twelve to twenty four months,
Speaker 1: is a failed auction.
Speaker 4: Out of Europe.
Speaker 1: I just think at some point sourcing that marginal buyer
Speaker 1: is going to become extremely difficult.
Speaker 2: Do you feel confident enough to predict which country will
Speaker 2: failed to sell enough bonds?
Speaker 1: The two most vulnerable countries are the UK and France
Speaker 1: in my opinion, don.
Speaker 2: There's a lot of Western money, including some of yours,
Speaker 2: trapped in bets on Chinese private companies. Bite Downs of
Speaker 2: course tops the list, but there are lots of others.
Speaker 2: Could that logjam maybe start to break if Presidents Trump
Speaker 2: and She negotiate some kind of a deal, whether it
Speaker 2: concerns trade or whether it goes even beyond trade.
Speaker 4: So I think there's a lot of people hoping for that.
Speaker 1: And as Eric said, US included, where we have private
Speaker 1: capital in China and we've been you know, everyone thought
Speaker 1: these companies would come private, I mean public years ago,
Speaker 1: and the markets just didn't allow for that, and if
Speaker 1: you remember, the Chinese government kind of closed that door
Speaker 1: at the eighteenth hour. So if there is a tactical
Speaker 1: deal between the US and China, I think there's a
Speaker 1: lot of market participants US included, that will hope that
Speaker 1: the private to public market's unfreeze and we can get
Speaker 1: some money out I think if you get money out
Speaker 1: of privates, it's only going to be in that very
Speaker 1: very tight.
Speaker 4: Top tier like a Bye Dance.
Speaker 1: And to be clear, Bye Dance is probably the most
Speaker 1: largely held private company by real asset investors in the world,
Speaker 1: So there's a lot of people with that hope trade on.
Speaker 2: This feels like a good time for us to wade
Speaker 2: into the public private debate for a moment because for
Speaker 2: years right foundations like yours and endowments and pension funds
Speaker 2: and sovereigns have been plowing money into private equity.
Speaker 3: Of course, they've had some trouble.
Speaker 2: Getting that money out of private equity over the past
Speaker 2: couple of years, and now private credit is the rage,
Speaker 2: and more and more capital as a result is flowing
Speaker 2: into liquid vehicles. Why do you believe in liquidity when
Speaker 2: everyone else, right from Apolla to Blackrock, is extolling the
Speaker 2: virtues and the benefits of private markets.
Speaker 4: Yeah.
Speaker 1: So, over the last again, we typically are benchmark against
Speaker 1: the typical largest US endowments, but over the last six
Speaker 1: years we actually let our private equity positions roll off.
Speaker 1: We still allocated to the best managers.
Speaker 4: But with a really hot high.
Speaker 1: Bar, so we lost about one thousand basis points of
Speaker 1: exposure there, which, to be clear, has has served us
Speaker 1: really well. And at the same time we pivoted to
Speaker 1: public markets. And it's interesting, I think think a lot
Speaker 1: of both high net worth and institutional investors pivoted to
Speaker 1: private markets in part because you didn't get a scorecard
Speaker 1: every day and your sharp ratio and the returns looked
Speaker 1: artificially good. And by doing that, first of all, I
Speaker 1: think those investors are in a world of hurt right now,
Speaker 1: both in context of liquidity and in the context of
Speaker 1: they've massively lagged a equity market that has until the
Speaker 1: last couple of weeks been on fire. But the other
Speaker 1: thing is if your Soros fund management and you have
Speaker 1: a long term perspective in public markets, you have a
Speaker 1: lot less competition because it's it's most of the active
Speaker 1: money is large multi strat investors. So the for us,
Speaker 1: the capital allocated to public markets above our bench. We've
Speaker 1: annualized six hundred and fifty basis points of excess return
Speaker 1: over the last five years, and I think it's because
Speaker 1: we play our own game.
Speaker 2: What does that mean in actual numbers, six hundred and
Speaker 2: fifty over what last year? Six hundred and fifty over
Speaker 2: what in twenty twenty, So.
Speaker 1: It's always we our beta benchmark is MSCI AQUI and
Speaker 1: then we have the risk free rates, so we don't
Speaker 1: give ourselves any credit for what you can get, you know,
Speaker 1: by by in money markets or what you can get
Speaker 1: by buying buying beta, and we assume we're at our
Speaker 1: benchmark weight in those so add those together and then
Speaker 1: add six hundred and fifty basis points by the way
Speaker 1: the other. But the thing that's pretty interesting is when
Speaker 1: you look at the last two years, your private equity
Speaker 1: has lagged by more than that, so you needed that
Speaker 1: active return in public markets to make up for the.
Speaker 4: Sins in private equity. But we think our.
Speaker 1: Peer endownment and foundations haven't had that offset.
Speaker 2: So you're thinking more along the lines of a hedge fund.
Speaker 2: Is tell us what you returned in twenty four what
Speaker 2: are you here to date? And and when you look
Speaker 2: at those numbers, do you think of your competition as
Speaker 2: a citadel or do you think.
Speaker 3: Of your competition as the Ford Foundation.
Speaker 5: So so we think of both like we want it
Speaker 5: to be clear, we want to take the best from
Speaker 5: from both of those those operators.
Speaker 4: And but We don't play Sitadel's games.
Speaker 1: There is no one Citadel plays there like the multi
Speaker 1: strack game, and nobody plays it better than them, And
Speaker 1: I think the distance between Citadel and their competition has
Speaker 1: has only grown and again, relative to other foundations and endowments.
Speaker 1: There's some things they do really well, and we like
Speaker 1: to take those pieces. But but uh, you know again,
Speaker 1: play our own game and play a game that we
Speaker 1: think no one else in the world old can can
Speaker 1: do quite the way we do it.