Transcript
0:00 Well, we did it right. It actually starts right before our investor conference that we hold every fall. And this year, we had 40 participants. We raised about $400,000 that went, three quarters of which went to Robinhood. It was fantastic. The winner was Bill Ackman in Pershing Square. He was long Fannie Mae and C number two was a guy named Mark Gilbert who actually used to work for me. And three was Stan Druckenmiller. No surprise he's going to always be placing. They came in I think if you took the top three or four and you had made their bets, you would have made seven times your money in six months. So it's a great competition.
0:44 I really hope this year we can expand it so it'll be a much bigger group. It's $10,000. It's a six month competition. One long, one short. And yeah, it's a lot of fun, actually. Shout out also to Anna Nicole Yassky you got up there on the board with She is our only female entrant. I hope we get a lot more ladies that will participate this time so they have another chance coming up this fall. So I thought since we have you here, you could help us.
1:13 Give us a tip. What's the what's the one long you would hit for the next contest in. Hmm. I would say probably probably the yield curve. It just depends on where. I think it'll be higher at that point in time. Mine would be very esoteric, so let me think. Well, it would definitely. I would definitely be betting on substantially lower front end rates will have a we'll have a new Fed chair within six months at that point in time.
1:42 And I think Trump's going to pick someone who's going to be uber dovish. Well, let's talk a little bit more about the yield curve. Matt and I were actually emailing at like four in the morning about the yield curve because it's broken a lot of hearts that steepen or BET. And the way you lay it out short on rates coming down, you have concerns about the deficit potentially boosting the long end. It seems like a no brainer, but it feels like it just hasn't worked.
2:06 So what's different this time? Well, it's working. It's just, you know, it's vol adjusted. It's just a slow moving train. But I think in the long run it has to work. We are fiscally constrained and we're going to have budget deficits of 6% plus as far as the eye can see. So one of the major offsets, if I was the president, would be to lower my interest rate cost by appointing a Fed chair who was as dovish as could possibly be.
2:37 That's kind of the playbook. When you're 100% debt to GDP and you're fiscally constrained. You can see it happening in Japan right now. He's wait is reluctant to raise rates more than beyond 50 basis points, even though they have inflation pick a number somewhere between two and 3%. I think they fudged the numbers down all the time. You got wage growth at three and a half percent there. So that's, you know, historically, the way that you get out of a debt trap is you run the lowest real rates possible, You lower your interest burdens. And I'm sure that's what we'll see beginning when the next Fed Fed chair comes.
3:14 Well, we definitely want to talk about who the next Fed chair might be and who you would like to see. But let's talk first a little bit more about the deficit, because it feels like you take a look at the bond market over the past few weeks, the past few months. You can see those fears being expressed. But concerns about a higher deficit feels like one of those evergreen issues out there. So give us first your feel how you're feeling about the deficit production projections that we've been getting and also how you might invest around that. Well, the big beautiful bill is is really interesting. It's first of all, it's a genius in branding the name of it's a genius in branding.
3:54 But I think what you've got to do is you kind of got to got to you have to go to first principles. What would the actual budget look like if we were trying to balance the budget, if we were actually trying to balance the budget? What's what is the the counterfactual to the big, beautiful bill? So if you actually had to balance the budget, it probably would be the big beastly bill. Hmm. And at some point down the road, who knows when that's going to be? Maybe it's next year, maybe it's the next administration. Maybe it's ten years down the road.
4:31 At some point, probably the bond markets are going to call B.S. on governments around the world playing chicken with them. Right. So to give you an idea, if we were to balance the budget today, let's assume first thing I would do if I was president, I was trying now to appoint the most dovish central banker I could to lower interest costs. So let's assume that I could make a pact with my with my chairman of the Fed that I'm going to go through an austerity package.
5:07 I'm going to I'm going to balance it. But I need you to really drop rates to, let's say, two and a half percent. So if you drop rates to two and a half percent and you get a 50 basis point reduction or let's say even a 100 basis point reduction in ten year rates, that saves you 175 billion, the starting gap is 900 billion. So that saves you 175. Now I'm down to 725 billion that I've got to find through tax hikes and spending cuts. So let's assume that we're going to do this fairly. We're going to do 50% tax hikes and the rich because they benefited the most in the last 30, 40 years, 50% spending cuts. What does that look like on the spending cuts as a side? I would just do just to make it simple, let's just call it a blanket 6% reduction in everything, Social Security, Medicaid, defense spending, you name it.
6:10 I'm just going to cut everything 6% across the board. That's what it would take to get you 360 billion, half of that stuff to do with Congress. You got to work. I'm just saying there'll be a point where the markets are going to demand it. I don't know when it'll be. Maybe it'll be in my lifetime. Who knows when it'll be? By the way, how do you invest around that? Because you famously made a lot of money shorting the and and Japanese assets into the last decade, which was another situation where you saw a country just boost its fiscal debt and deficits. I will get to that.
6:43 But let me just finish the tax hike side. Yeah. So to get 363 billion in tax hikes, you're going to have to raise the top income rate to 49. You're going to have to have a 1% wealth tax annually and you're going to have to raise the capital gains rate to 40. Huh. So if we're just going to if all we're going to do is stabilize debt to GDP. That's the big Beazley bill that somewhere down the road.
7:15 And again, who knows what it's going to be. Remember you have Italy, France and Japan, who on the current projections will be in worse fiscal shape than we are. And they seem to be doing okay. And that's why we keep that's why we keep we keep going with the the kayfabe in wrestling, the suspended reality where we like to watch the show, but we know it's not real. So we know that these 6% budget deficits are not sustainable in the long run.
7:44 But it's okay because it's okay now. It's okay In the short run, it feels good and it's not hard. It's actually really easy. Remember, in the first Trump administration, he normalized 4% budget deficits, and that's what we had pre-COVID. And now in this administration, he's normalizing 6% budget deficits. So and I'm not judging. I'm just calling balls and strikes. That's that's where we are. So with that in mind, knowing that we have a whole pricing structure that's created on something that's not sustainable, it's really, really hard to invest for the long run because the day that it'll probably be the bond market first, or maybe it's the dollar, who knows the day that we're called the carpet on that and the day that you actually went through that exercise that I just described. And you know that multiples on stocks will not be where they are right now. Right.
8:46 But are you short the dollar? I mean, you mentioned you're into yields. I would say that the easiest long term trades are, you know, the yield curve is going to steepen probably to historic wise. You know, we're going to cut short term rates dramatically in the next year. And, you know, the dollar will probably be lower because of that. A lot lower because of that. How much lower? 10% from our high right now. Yes, I would say that that that's I think that's a year from today.
9:21 That's probably a realistic assumption. I want to go to one point that you made in that blueprint that you laid out. And that comes to a point in the most dovish Fed chair possible, Jerome Powell Stern ends in May 2026. We've heard from the president recently that he's going to announce some contenders sometime soon. Bloomberg News has reported in the past 24 hours that Scott Bessant has emerged as a pick. Kevin Warsh is under consideration. I mean, if you had your pick, who do you think is best suited for the chair? Those are two great names.
9:56 Those are two fabulous names. Again if I was president, if I just think about President Trump, he's just a he's a growth guy. Right? He's a he's a loyalty and growth guy. You're going to be my pick. If you're loyal to me, you're going to be my pick. If you're our growth guy and I pick a growth guy and probably Scott would be more in line with that than Kevin would. They will have had a really close working relationship at that point. I also think, again, the playbooks pretty clear historically and right now where we are fiscally constrained, we're in a debt trap. You're going to have to run negative real rates to get out of it. That's what we did in the fifties.
10:50 We had if you'll remember, we had a variety of prices fixed by the Treasury while we had five and 6% inflation for a period of time. We're going to have negative real rates. And that's that's why you have to think about what is facing our policymakers in this debt trap as you construct your portfolio. So what would an ideal portfolio be in something like that? Well, what has worked so far what has worked so far has been some combination of stocks, which won't do great works, would do terribly if we ever actually had it.
11:27 If they called us out and the bond market actually gave us an accident that then spilled over. But it would be some combination of probably gold vol adjusted Bitcoin gold stocks. That's probably your best portfolio to fight inflation vol adjusted because the vol of Bitcoin is obviously five times that of gold. So you're going to you're going to do it in different ways. You said at one point you would allocate one or 2% of your portfolio to Bitcoin.
11:58 Is it still. Yeah, I mean I think you just particularly now that the road map is clear, then I mean that. Again, if I'm a policymaker, I'm going to run really low real rates. I'm going to have inflation running hot and I'm going to tax the American consumer to get out of my debt trap. And that's exactly what Japan, who is the most fiscally constrained in the world, doing. And it works until until the population throws you out because you let inflation get too hot.
12:35 So maybe you're in a world with three, three and a half percent inflation and two and a half percent overnight rate, and you're kind of trying to run hot and grow your way out of it. Mm hmm. Well, let's talk a little bit more about equities. Know, you mentioned in that scenario that you laid out. Equities obviously would do terrible. But where we stand right now, I mean, we're back to 6000 ish on the S&P 500. We're slightly positive for the year.
13:01 It feels like after the big performance that we saw in May, though, that people are not sure where to go from here. So assuming we continue along this path or inflation is under control, it seems like the labor market is under control and trade negotiations continue to progress. I mean, what's your base case on equities? Well, again, so a year ago I never thought the bond market would tolerate the big, beautiful bill. I just didn't think it would. I thought, Wow.
13:36 I thought there'd be a revolt. I thought bond vigilantes actually had some stuff, but they've come back out. But they clearly they clearly haven't surfaced and we haven't seen inflation. And we will. There's a couple of things going on. One, we know 12 months from now, rates are going to drop precipitously with a new Fed chair. If you. I mean, was it last week when Donald Trump saw afterwards and I forget, was it a steep drop rates, 100 basis points? Yes.
14:08 So we know where his head is. We know who he's going to appoint. Well, just now, the vice president, J.D. Vance, said this is monetary malpractice in a tweet reply to our Joe Weisenthal. So they really want the Fed to cut rates. So that also is a tailwind for the bond market, right? Because, you know, short rates right now aren't going to be there a year from today. So that's a tailwind. And again, I think the biggest threat to the stock market has been the has been our fiscal profligacy, something like the big beautiful bill, because that was always going to be a threat to.
14:50 The safety and security of the bond market, whether investors would tolerate what's going on. And right now it seems like both globally and domestically, that the world's okay with kayfabe kicking the can down the road. We're going to suspend reality. It's okay. Mm hmm. So and in that scenario, again, if I'm if I have to make a decision on stocks and I think that rates are going to be 3% in 12 months. Yeah, I'm probably long by the way, you keep mentioned Cafe and we're all kind of watching this, knowing it's fake but don't really care right now.
15:24 Is that because we're not invested? Because Brad Gerstner has this idea and Ted Cruz was on Bloomberg talking about it yesterday. I think it's invest America where you give every child born $1,000 and then allow parents or relatives to invest 5000 a year. Then by the time they're 18, the stock market continues to appreciate they have a serious nut, but they're also they've got skin in the game. Yeah, I think it's. See here. I'm here. I I'm.
15:54 I'm the I'm the budget. I'm the budget hawk. And you are on the budget hawk spending 4 billion in the end and the cranky guy. But that's the best $4 billion that would ever spend in history. Because the idea of making kids stakeholders from an early age in capitalism is so important. Oh, my gosh. And then allowing employers or relatives or whatever to build that account so that in an early age they understand the idea of entrepreneurial share of free markets, of self individual excitement about understanding how productivity actually works, how we build things through our own share initiative. I think it's just spectacular ideas, the best 4 billion this government could ever spend.
16:50 So there's a good way to add to the deficit and there's a bad way that would be the best 4 billion. I'm very conscious of the clock. We only have about 8 minutes left. So so let's talk a little bit about AI. You've expressed concerns about AI in the past, and may I believe you said that. I mean, it could be pretty disastrous if you think about if you really put your thinking cap on. But I'm curious from the investment perspective, when you wear your investor hat, how do you view it then? I mean, you there's plenty of things to get concerned about, but we were having a great conversation with Cliff Aston of AQR last week. He's had a real change of heart when it comes to AI. He's embraced it.
17:30 Are you embracing it? Well, for sure I'm embracing it. We tested two models last week. Internally, we have a variety of quant teams at Tutor. We tested two models, commercially available models. Where has gone in the last four months, in the last four months is so incredible. These models will do democratize quant modeling for the markets like. I can just say I've been a I've been an investment in quant modeling for the last 30 years, internally, externally, variety of ways. And what these new models do is what, you know, there's a huge barrier to entry.
18:20 If you think about quant modeling, which is I need to have dozens. If you look at the big ones, whether it's two sigma or jump or whom they have hundreds or thousands of employees at the edge, that's that's Cliff's edge, right? With these new models. Wow. They lose the edge. It's incredible what these new models do. And the reason that I bring that up, of course, you have to embrace it. In our business, there's larger issues regarding the I think, if you don't mind, I can't tell you because I don't really trade individual stocks that much. We I'm actually using the models from a quant standpoint, so I can't tell you which companies to buy.
19:02 It's pretty clear that this is obviously the most disruptive technology in the history of mankind. If I can just give you the here's the way I think of you're too young for this. But there was a great Twilight Zone OC great Twilight Zone episode where aliens came down to earth and they had this and they had this book. It says to serve Man. And everyone goes, Hurray, They're going to they're going to save humanity. It's humanitarian guide, and it turns out to be a cookbook.
19:37 I was ready to push that. But it's it's a cookbook I haven't seen yet. So anyway, we just had Robin Hood a poverty summit on Monday, which I was there. Oh, my Lord. The things that are going to do for education there, there is no excuse for a low income kid not to have the greatest education. If his if his parents or caregiver is taking care of them, my gosh, they're going to have an individual tutor to walk them through everything. So it's really spectacular.
20:14 The downside of a high is that we've been served right when I say we've been served. You had in February, Elon Musk. You can think what you think of him with regard to his moral compass, but he's the Thomas Jefferson of Thomas Edison of our time, said A has the 20% possibility of wiping out humanity. There's the safety side that should. Set off alarm bells throughout the world, particularly in this country, particularly with this administration. And then just last week, you had Dario Anthropic Amador. I mean, I forget pronouncing that correctly. I anthropic is good enough.
20:58 So anyway, he said that in 1 to 5 years we can have 10 to 20% employment because of the displacement of white collar jobs by by air. So now we have 20% unemployment, unemployment in this country and one in five years. So now you have this massive stability issue. You've got a safety issue and stability issue. And within the big, beautiful bill is a moratorium, a moratorium on regulation. So no guardrails.
21:34 Oh, my gosh. That is when you've just been searched and no one will see. The interesting is no one in the air community pushes back on this. Right. Because they want anyone that understands it and sees how it's progressing. These models are increasing 1 to 500% and their efficiency every four months. Understand, these are real possibilities. So, Paul, how do we get to guardrails? Because in the case of the debt bomb, right, as Gary Schilling would call it, you've got bond vigilantes to push back.
22:08 In the case of the air bomb, which we fear, there's no government that's going to that's going to regulate this because they'll lose out to another government. Right. So I've come to this realization in the last two years that actually I think libertarianism is as much of a threat to our society as socialism. It's the other it's the other end of it. Right. And you've really got this libertarian bent that's taking hold in this administration. So many of the biggest backers.
22:41 But oh, my gosh, our country is built on I mean, we're built on a system of laws and regulations, not private property rights, laws against assault, robbery, etc.. So what we have to figure out in a thoughtful way, which is why you have to sit down and begin a discussion, How do we have a for good? How do we prevent the R for bad both on a safety standpoint and security standpoint? One thing that we really need to do is, again, what is the government's responsibility?
23:18 What are companies responsibility? We're going to have this productivity boom, right? Capitalism is so spectacular at maximizing productivity, but it's actually really bad. Really bad in its in its in the tales. In the tales, I'll say. It's really bad about distributing income in a society and a socially beneficial fashion. Best example can be if we look at, say, since 19. The mid eighties.
23:52 Mm hmm. If you look and see how the productivity gains in the United States have been distributed, it's about 15% to the bottom 90 and 85% to the top ten. And so what happens when you do that? Well, you get the incredible divisiveness that we have right now. We have a crisis of trust in this country. We no one knows who to trust. We had a faction of the Republican Party storm the Capitol in 2020 because they lost an election.
24:28 So we're at a really socially fragile time because of wealth disparity. And now we have a that unless we think about think about how we distribute those productivity gains in a way. So is it Dario mentioned we're going to have a token on every time a model is used. Bill Gates said We're going to suggest and I think six or seven years ago, maybe we tax robotics. There has to be a we need to sit down and thoughtfully think through how we distribute the coming productivity gains so that people are happy and not unhappy.