Invest Like the Best with Patrick O'Shaughnessy
· Paul Tudor Jones, Patrick O'Shaughnessy
[00:00:00] S1: There's a couple of metaphors that come to mind. Let's start with boxing, because you have an opponent – in this case, it's the market. You know, you're going into the ring with this opponent who's after you the whole time. And I'm thinking more of a classic one as opposed to a Mike Tyson one. But you're kind of parrying, jabbing, feeling each other out, looking for an opening. And then every now and then you'll have a great opening, and you take a big shot. And you may land one. If I think about big shots – Bitcoin 2020, a knockout. Two year rates in 2022, knockout. You have these incredible opportunities at times if you just sit and wait. The whole time in the interim, some of it you're just gathering information, looking for those openings. You're always trying to make progress, you're always trying to win the round, but there'll be those few opportunities where you can do something really material. [00:00:00] S0: I love the boxing analogy. In the examples you gave – Bitcoin, two-year rates, precious metals – so many things you've been through. What is going on in one of those? Like maybe pick one and I'm literally curious what you are doing in the moments – what you're looking at, what you're studying, what supply-demand imbalances you see. What is the literal nature of one of these windows that opens every so often?
· Paul Tudor Jones
[00:00:00] S1: If you think about all the really big moves, it's probably because the market has gotten too carried away, or there's been some imbalance that's gone on for too long, or a central bank does something that they shouldn't be doing, or a government does something they shouldn't be doing. So that's, I think, the genesis of most of the big moves. Typically, it's gonna be inspired by a central bank or central government. A good one right now in the making – it's gonna be interesting, I think – is dollar-yen. The yen's grossly undervalued and it has been for some time. What's the catalytic moment? That's really the point you've gotta ask. And the catalytic moment was just a new Prime Minister that was just elected. And she has all the characteristics of a Ronald Reagan or a Margaret Thatcher, or Donald Trump when he got elected the second time. And if you look at what those local currencies did, they all appreciated pretty quickly, 10% off the bat. I wanna say Japan has four and a half trillion dollars, a four and a half trillion dollar net international investment position to the good with the rest of the world. Probably 60% of that's in the US, and most of that is unhedged. So they just have this massive dollar liability, and all of a sudden we've now got the most dynamic leader in certainly a half a century in Japan, who's Japan first, is gonna have a very entrepreneurial way that she is going to remake that economy. So you're looking for something that's under-owned, undervalued, way out of whack. People have gotten complacent on it and you're looking for that catalytic moment. In the case of the two-year rates in '22, we had way too much fiscal stimulus. And then Powell, he overstayed being easy way too long because he wanted Biden to reappoint him. So as soon as Biden reappointed him, it was go-time to get short two-year notes, because you knew the Fed was gonna normalize. And then in 2020, when you saw, again, all the interventions both by the Central Bank and the Treasury, you just knew that the inflation trades were gonna take off. Of all of them, what was the best one? At that point in time, it was Bitcoin. Bitcoin is unequivocally the best inflation hedge that there is. More than gold. Because Bitcoin is finite, there's only so much Bitcoin that can be mined.
· Paul Tudor Jones, Patrick O'Shaughnessy
The problem with it as an inflation hedge, is if you got into kinetic exchange, there's clearly gonna be cyber warfare. Anything that you have to deal with electronically is going down, including Bitcoin. So strike one. And then secondly, quantum computing. Who knows if and when, with AI advancing as fast as it is, that we may actually have quantum computing. Now with quantum computing, someone can come in and can hack any bank and hack anything they want to. So in terms of it being a great inflation hedge, gold is increasing supply every year by a couple of percent. Bitcoin has a finite amount that can be mined. It's decentralized. And so in that sense, it has the greatest scarcity value of anything. [00:00:00] S0: If you think about the big ones that you've lived through. '87, the global financial crisis, COVID, et cetera. Various bubbles, asset bubbles through history. Maybe say a little bit about those general experiences. You're very famous for what happened in 1987, of course. I'm curious about those ones because I'm curious what you think about today's environment. “Are we in a bubble” is a very popular question. Mostly that's answered by investors, less so by traders. And so I would love your perspective on the big ones that you've experienced historically and how those lessons apply to today.
· Patrick O'Shaughnessy, Paul Tudor Jones
[00:00:00] S0: If you think about the big ones that you've lived through. '87, the global financial crisis, COVID, et cetera. Various bubbles, asset bubbles through history. Maybe say a little bit about those general experiences. You're very famous for what happened in 1987, of course. I'm curious about those ones because I'm curious what you think about today's environment. “Are we in a bubble” is a very popular question. Mostly that's answered by investors, less so by traders. And so I would love your perspective on the big ones that you've experienced historically and how those lessons apply to today. [00:00:00] S1: If I think of some really, really big accidents, most of them have the same underlying reason, the same underlying foundation, which is some too much leverage somewhere. Most of the leverage, most of the time – if I think of the big ones – were derivatives inspired. Either futures or options. 1987, that crash was 100% portfolio insurance. A hundred percent. Had they had limits, which they didn't, it would've been 10%, maybe 15% max. But that was a hundred percent derivatives. If I think about 1998, Long-Term Capital, big derivatives. They had a huge balance sheet with a lot of derivatives they were offsides on. 2000 was a little different. 2000 was the easiest bear market I've ever seen in my whole life. It's got so many similarities to right now, in the sense that the bear market of 2001 and 2002 were a consequence of all the IPOs in ’99 and 2000. And then as they unlocked, you just had this never-ending… [00:00:00] S0: Cascade of selling.
· Patrick O'Shaughnessy, Paul Tudor Jones
[00:00:00] S0: Cascade of selling. [00:00:00] S1: Cascade of selling, that's a great way of putting it. And we're getting ready – I want to say that the contemplated IPOs for next year are going to be five or six percent of market cap. So why are we where we are right now? Because we've been retiring two or three percent of market cap, probably a little less than 2% of market cap, every year without fail for the past 10 years. [00:00:00] S0: Through buybacks and things like this. [00:00:00] S1: Through buybacks. [00:00:00] S0: Yeah.
· Paul Tudor Jones
[00:00:00] S1: And so now all of a sudden, you're gonna completely reverse that math. And so, I don't think it necessarily happens instantaneously with the IPOs, but then there'll be the unlocks. So you can see a situation where, okay, maybe we go through some kind of rolling top. And then 18 months from now – six months, we’ll have to look at the unlock schedule. But you're going to want to watch those because that'll just be adding equity supply. And you've already gonna be diminishing the buybacks because of all the commitment to capex from the hyper-scalers. They're already gonna be eating into their cash flow. So I think that's why tech has dogged it and why it will continue to dog it, because all the funding – much of the funding for these IPOs is going to come out of existing tech stocks. When you say, “Are we in a bubble?” I don't know if we're necessarily in a bubble. We're clearly so leveraged in equities in this country. We’re so dependent upon firm equity prices at this point in time. And when I say leveraged, we're 252% of stock market cap to GDP. So 1929 we were, I think at the top we were 65%. And then in '87 we got to about 85 or 90%. In 2000 we got to 170%. And now we're at 252. So you can just imagine, if you think about the periodicity of significant bear markets. Since 1970, we get kind of a mean reversion about, on average, every 10 years. When I say mean reversion, let's say mean revert to the past 25 or 30-year PE. So if we did that here, that would be – and again, these are elevated PEs, way elevated beyond the 20th century. That would be, say, a 30, 35% decline. Well, 35% on 250% of GDP is 80, 90% of GDP. The reverse wealth effect, oh my gosh. 10% of our tax revenues are capital gains, they go to zero. So you can see the budget deficit blowing up. You can see the bond market getting smoked. You can see this kind of negative self-reinforcing effect. And so it's troubling, it's troubling. So are we in a bubble? We're clearly in a sovereign debt bubble. In the stock market, we're over-equitized as a country. We have the highest individual equity weightings in the history of the country. And then the real problem is that we're also – if you look at private equity in 2007, 2008, that was about 7% of institutional portfolios. Now it's about 16% of the institutional portfolios. Real estate's gone up. Infrastructure bets have gone up.