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