Macro investing and financial market strategy

From: allin

Scott Bessent, former Treasury Secretary (in the context of this interview, likely a designate or advisor for a potential Trump administration) and a macro investor for 35 years, offers insights into macro investing and its application to national economic strategy 01:16. His background as a macro investor informs his current views on United States economic policy, particularly concerning the debt, deficits, tariffs, and overall fiscal and monetary policy 02:24.

Roots of Financial Passion

Bessent’s passion for risk management stems from observing his father, a real estate developer whose business experienced “boom bust” cycles 03:04. After attending Yale, he interned with Jim Rogers, George Soros’s first partner, who taught him the investment business 03:57. He later worked at Soros Fund Management under his mentor, Stan Druckenmiller, who had an unbroken streak of positive years over 40 years 04:42. Druckenmiller is known for his ability to change his mind quickly and for maxing out investments (“all in”) when convinced of his position 05:08.

What is Macro Investing?

Macro investing is described as a discipline that combines quantitative and qualitative analysis with real-time feedback 05:39. It involves having a long-term view while gauging short-term market movements 05:46. Practitioners trade across various asset classes, including currencies, bonds, commodities, equities, and credit 06:02. A key aspect is understanding global capital flows 06:39.

A principle from macro investor Bruce Kovner is the ability to “imagine a different future and believe it could happen,” then manage the associated risk 06:57. This involves anticipating the next moves in policy by meeting leaders around the world 06:11.

Case Study: Breaking the Bank of England (1992)

Bessent, Druckenmiller, and Soros famously challenged the Bank of England in September 1992.

• Roles: Bessent was the analyst on the ground in the UK; Druckenmiller was the portfolio manager; Soros was the risk manager 08:08.
• Conditions: The UK had experienced a housing boom, and mortgages were predominantly floating rate, meaning interest rate hikes directly impacted homeowners 08:30. The UK was part of the Exchange Rate Mechanism (ERM), requiring its currency to balance against the Deutschmark within a set band 08:49.
• Bessent’s Insight: Raising rates to defend the currency would bankrupt British homeowners, making the policy unsustainable 08:59.
• Druckenmiller’s Insight: The ERM bands created an asymmetric bet: pushing the currency to one side of the band meant a small, known loss if unsuccessful, but a potentially large gain if the central bank capitulated 09:14.
• Outcome: They “pushed them against the band” 10:05. The Bank of England’s attempt to buy pounds and raise interest rates was unsustainable, leading them to exit the ERM 10:09. This resulted in a roughly 20% profit in a single day, with an additional 20% gain from “the trade after the trade” during the rest of the year 10:55.

This event highlighted the dislocation between the real economy (“Main Street”) and the financial economy (“Wall Street”) 11:11.

Current United States Economic Strategy

Bessent expresses alarm over the Biden administration’s policies, particularly “endless stimulus, endless spending” at a time of economic stability, which he views as a cynical move to force tax increases and create a “European style social democracy” 12:12. This spending led to wage suppression and a decline in purchasing power, especially for those without assets, exacerbating the Wall Street vs. Main Street dichotomy 13:23.

For a potential Trump administration, the economic plan focuses on three key pillars:

1. Government Deleveraging:

   • Debt and Deficit Reduction: Aims to bring the deficit back to the long-term average of 3-3.5% of GDP by 2028 23:05. This will be achieved by cutting spending gradually to avoid recession 22:21. The US has a “spending problem,” not a “revenue problem,” as federal revenue averages around 18% of GDP 23:24.
   • Shedding Excess Government Labor: Reducing the federal workforce to increase efficiency and lower costs, with displaced workers expected to be absorbed by a more productive private sector 26:16. This is framed as improving government efficiency, not extinction 45:07.
   • Combating Waste, Fraud, and Abuse: Utilizing business leaders like Doug Burgum and Elon Musk to identify cost-saving opportunities in government, particularly concerning contractors and long-standing six-month contracts 42:13.

2. Private Sector Releveraging through Deregulation:

   • Unwinding the Regulatory Corset: Re-examining and slashing financial regulations (e.g., Basel agreements, capital requirements for small banks) that stifle economic activity and reduce lending velocity 33:08. The goal is to allow the private sector to expand credit and drive growth 34:39.
   • Federal Reserve’s Role: Bessent supports the Fed’s autonomy in monetary policy but believes its expansion into areas like climate and DEI (Diversity, Equity, and Inclusion) or non-standard monetary policies threatens its independence 36:24. He advocates for the Fed to be less harsh on smaller and medium-sized banks 37:21.

3. Reordering the International Trading System:

   • Tariffs and Onshoring: Using tariffs to incentivize other countries to align with US interests and to bring manufacturing jobs back to the US, aiming to reinvigorate the middle class 27:52.
   • Growth Drivers: Low and predictable taxes, substantial deregulation, and cheap energy are central to driving private investment and accelerating economic growth above the 1.8% trend line, aiming for 3% or higher 29:51. This growth is expected to increase government revenue overall, even with lower tax rates, when combined with reduced spending and deregulation 30:30.

Addressing Affordability and the American Dream

The administration aims to address the affordability crisis by getting prices down and real wages up 39:34. This involves:

• Targeting Inflation: While current inflation might seem “quiet,” the cost of living for average Americans has risen significantly (e.g., “everyman index” up 30-35% vs. CPI at 22%) due to increases in used cars, insurance, rent, and groceries 14:24.
• Housing Affordability: The concept of universal homeownership, where most middle-class net worth is tied to a single asset, has contributed to an unsustainable housing bubble 18:26. Solutions include addressing scarcity caused by tight zoning laws and exploring technological changes in house building (e.g., modular/prefab homes) to reduce costs and speed construction 18:56. Federal guidance and potentially state-level mandates (like Connecticut’s 10% vacant land for multifamily housing) could help 01:05:07.
• Cheap Energy: Considered a critical part of the program, as it lowers costs across the economy, enhances energy security, and is vital for manufacturing competitiveness and advancements like AI 01:09:09. The administration plans to appoint an “affordability czar” to identify quick fixes in supply chains 01:08:46.

Sovereign Wealth Fund

A significant long-term initiative is the creation of a US sovereign wealth fund, inspired by successful models in places like Singapore and North Dakota 53:52. The goal is to mobilize the “asset side of the balance sheet” 54:26, including federal land and stakes in entities like Fannie Mae and Freddie Mac 53:36. The fund would invest for the benefit of all Americans, providing a higher return than current treasury yields and allowing participation in the American economy, rather than retirement funds solely sitting as loans to the government 52:50. This marks a shift from solely a “safety net” to a “prosperity ramp” 56:55.

Challenges and Insights

• Data Reliability: Official government economic data (GDP, non-farm payrolls) are subject to significant revisions and are sometimes used to justify pre-determined actions rather than reflecting public sentiment 20:01.
• Political Will: Despite media narratives of disarray, Bessent observes Republicans becoming more disciplined under President Trump’s influence, successfully passing measures like reconciliation instructions and clean continuing resolutions 41:17.
• Vested Interests: The rapid pace of change is crucial to overcome “vested interests” and lobbyists who benefit from the existing system and resist reforms 43:19.
• Public Perception: Communicating that “cuts” are about government efficiency rather than eliminating services is a challenge 44:57. Transparency regarding waste and inefficiencies is seen as crucial for taxpayer understanding and support 46:40.
• IRS Reform: Treasury controls the IRS, and Bessent’s goals for it are revenue enhancement, privacy, and customer service 49:06. He emphasizes addressing politically motivated audits and leveraging technology, like AI models, to streamline tax filing and reduce waste 49:43.
• President Trump’s Leadership: Bessent describes President Trump as highly intelligent, with perfect recall, judicious in listening, and possessing incredible executive skills 01:11:47. He cares deeply about all Americans, regarding himself as the “mayor of America” 01:12:35.