Daniel Silva: The Greatest American Spy Novelist | SALT Talks #26

“Americans should be concerned about the general level and openness of racism in the country right now.”

Daniel Silva is the award-winning, #1 New York Times best-selling author of The Unlikely Spy, The Mark of the Assassin, The Marching Season, The Kill Artist, The English Assassin, The Confessor and A Death in Vienna. Daniel’s books are critically-acclaimed best sellers around the world and have been translated into more than thirty languages.

Prior to his novelist career, Daniel became a journalist at the age of thirty-three, directing CNN’s political talks. There is a tremendous amount of historical content worked into all of his novels.

On racial tensions in the United States, Daniel reiterates his concern for minorities and warns against giving in to mob rule.

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SPEAKER

Daniel Silva.jpeg

Daniel Silva

#1 New York Times Best-Selling Author

The Unlikely Spy

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and geopolitics. SALT Talks are a series of digital interviews we've been doing during the work from home period in lieu of our global conference series. We're really trying to replicate that experience that people get at our Las Vegas event and at our international events. And what we really try to do is provide our audience a window into the minds of subject matter experts as well as provide a platform for big, world changing ideas.

John Darsie: (00:41)
And today we're very excited to bring you something a little bit different than a lot of the talks we've been doing on SALT Talks so far over the last few months, and that's bring your Dr. Daniel Silva. Daniel is the award-winning, number one New York Times best selling author of a long list of books, The Unlikely Spy, The Mark of the Assassin, The Marching Season, The Kill Artist, The English Assassin, The Confessor, A Death in Vienna, Prince of Fire, The Messenger, The Secret Servant, Moscow Rules, The Defector, The Rembrandt Affair, Portrait of a Spy, The Fallen Angel, The English Girl, The Heist, The English Spy, The Black Widow, House of Spies, The other Woman, and The New Girl. And I think he will soon be on that list for his lated book, which is The Order.

John Darsie: (01:25)
He's best known for his long running thriller series starring spy and art restorer, Gabrielle Allen. Silva's books are critically acclaimed best sellers around the world and have been translated into more than 30 languages. Daniel resides in Florida with his wife, a television journalist, Jamie Gangel, and their twins, Lily and Nicholas.

John Darsie: (01:45)
If you have any questions for Daniel during today's talk, a reminder, enter them in the Q&A box at the bottom of your video screen. And I'll have to say that we've been doing these SALT Talks for a few months. We've had several billionaires across finance, technology. We've had some people in the entertainment realm, but I've never seen our host today, Anthony Scaramucci, more excited for any SALT Talk than the one that we have today. Anthony, as most of you know, is the founder and managing partner of SkyBridge Capital. He's going to conduct today's interview, but I think it will be fascinating. Anthony, I think has read almost all of Daniel's books, including most of his latest book that came out about a week ago. So, I'll turn it over to Anthony Scaramucci for the interview.

Anthony Scaramucci: (02:26)
Hey, John. Great. Daniel, great to have you on. It's a true honor for all of us. And you'd be blown away at number of fans you have as they're populating the Zoom call, but also friends of mine that were excited that you were going to be on today. But I want to take you back. Tell us a little bit more about your personal background beyond what we would read at the back of a book. Where were you born? How'd you get started? Why did you go into journalism? And how did you flip over to becoming the great spy novelist that you are?

Daniel Silva: (02:58)
Well, contrary to what it says about me on Wikipedia, I was not born in Detroit, Michigan. I was actually born in Kalamazoo, Michigan, if you can believe that. I lived there until I was about seven years old. My parents are both school teachers. We headed west. I spent the rest of my childhood in Central California. And I attended college ... undergraduate work at California State University of Fresno, where I studied journalism with the great Roger Tatarian, one of the great wire service editors of all time, who was a great mentor of mine. I attended graduate school at San Francisco State University, a great conservative university in California. I'm being facetious, of course.

Daniel Silva: (03:49)
I studied international relations for my graduate work. One of my great regrets is I actually didn't finish my degree because I got the job I wanted. I was hired as a journalist for United Press International in San Francisco. Within a year, I was working on the foreign desk in Washington. And a year after that, I was living and working in the Middle East as a foreign correspondent at the age of 26 years old.

Daniel Silva: (04:24)
I met my wife in the Persian Gulf in 1987. We decided to marry. I came back here and worked at CNN for a few years as a television producer. And when I was about 32, 33, I confessed to her that I had become a journalist so that I could become a novelist, which is what I always wanted to be. And I told her that I needed to start working on my first novel. When she started laughing, or stopped laughing I should say, she said, "Go ahead. Have fun." And I went down, and I wrote my first manuscripts. It was The Unlikely Spy. And I left full-time journalism and became a novelist, I guess in nineteen about ninety-eight I left journalism, and I've been writing ever since, full-time ever since.

Anthony Scaramucci: (05:25)
Because you're a very creative human being, so you had these characters in your head. You had an idea of ... There was a storyboard in your head for how many years, Daniel?

Daniel Silva: (05:35)
For the first novel?

Anthony Scaramucci: (05:37)
Yeah.

Daniel Silva: (05:39)
I carried it around with me for a while. I loved World War II fiction. I loved World War II history and decided that was going to be my first book. The interesting thing about it is I wrote it while working. I mean, I had an enormous job at the time. I was the executive producer of all of CNN's political talk shows, so that included Crossfire every night, Capital Gain, Inside Politics, Reliable Sources, Evans and Novak, all of those programs. Jamie used to call them the shout shows. When I look at the landscape of television news today and all the opinion that comes through the screen all night long, I sort of feel at least partially responsible.

Daniel Silva: (06:31)
And so I would get up very early in the morning. I still do by the way. I don't really sleep much past about four o'clock. And I would write for a few hours. And then I would stop, would set it aside and resume my work day. I sent the book in ... I didn't have an agent, and I sent it in. We call it an unsolicited manuscript in the business. Inside the publishing houses, they call it the slush pile. And I actually got my first novel picked off the slush piles at a couple of houses. It was read. And as things are want to happen in New York Publishing, one person reads it, someone else reads it, someone else reads it. And within a very short period of time, I knew I had a book deal.

Anthony Scaramucci: (07:22)
I always find great insight in your books, historical insight, insight into the art world, the Vatican, obviously the Mossad. But tell us why you named the character Gabriel. Is it because he's the interpreter of Daniel? Is that why you named him that? Because you've left that in a few of your books, and I'm just wondering you're telling the readers something about yourself in the book.

Daniel Silva: (07:47)
Well, first of all, it's a beautiful name. I just love the name Gabriel. I love the translation of the name Gabriel, which is God is my strength. All of us with the I-E-L, that means God is in our name. So I'm Daniel, so my name translates as God is my judge. It's not a great name to have. Apparently people who are given this name have a sense that God is looking over their shoulder all the time, and I definitely feel that way. So I love the name. I love the fact that it is the name of an important archangel. He was the defender of Israel, the prince of [inaudible 00:08:33], the interpreter of Daniel's visions, and the messenger. That's his other great quality. So I thought that was a perfect name for him.

Daniel Silva: (08:44)
And then his last name, Allon, allon is just an oak tree in Israel. It's a very common name. I thought it was simple, that it was sort of in its own way a little bit anglicized to begin with. And I just liked what it meant, solid as an oak. And then also that he's a restorer who works on wood and panels and frames, it suited his character. So I did work hard on the name in service of a character who was supposed to be in one novel, by the way. He was not supposed to be a continuing character. He was supposed to appear in one novel and quite literally sail off into the sunset, and that obviously didn't happen, but that's the genesis of his name.

Anthony Scaramucci: (09:33)
Well, thank God it didn't happen because these stories are ... They're beautiful stories. They're very suspenseful, and it's always an exciting summer read. Tell us a little bit about the research that goes into this because you are precise. You blew up one of my friends restaurants, Café Milano. [inaudible 00:09:53] he loves showing me the spot where the bomb went off. You've got the restaurants down in Italy better than the Zagats community.

Anthony Scaramucci: (10:00)
And so tell us a little bit about your field research and tell us a little bit about your research in the potential intelligence community to the extent that you're able to talk about that. How do you get the ethos of these players so well?

Daniel Silva: (10:15)
Well, in terms of site research and trying to soak up as much of a place as possible, I do try to do that. I try to spend as much time in a place as possible that I'm writing about. We've obviously spent a tremendous amount of time in Italy. And one summer, we spent virtually the entire summer there. I used the house where we lived, this farm that we lived on in a couple of novels. I've spent a lot of time in the Vatican. This book has a conclave scene in it. I've been in the Sistine Chapel alone. I've opened the door of the [Nero 00:10:56], the little stove where they burn the ballots. I've been in the crying room.

Daniel Silva: (11:00)
So I do a lot of site research, as much as I can. And if possible, I like to go before I write, in that little bit of down period. For example, when I wrote Moscow Rules, we spent a couple of weeks traveling in Russia. That trip really influenced me. I could not have written that book without that time that I spent there. Sometimes I will go to a place in the middle of the process. For example, in House of Spies, I wanted to set the end of the book in Morocco, and so I dragged everyone to Morocco for their winter break and settled there, traveling the country. And literally the way that the chase at the end works in that book, I was in each place writing it on the spot.

Daniel Silva: (11:56)
A tremendous amount of book research. If you look at my acknowledgements in the book in front of you, you'll see the research that went into that book. Often times for a project like this, I mean, I am up until 1:00 in the morning with a book open doing my research. I obviously do a lot of research on security issues. I talk to as many people as I can in the business. Some of my best friends are spies, and some of my best friends actually work for the Mossad. It's not a relationship where I ask them, "How do you do this?" They wouldn't tell me anyway, and frankly I want the freedom to sort of use my imagination and make it up. What I do get from them is their view of the world, their incredible intelligence, their sense of humor, which I hope comes through in the book.

Daniel Silva: (13:00)
One of the things I discovered after creating Gabriel is that there are a number of really talented artists and musicians who happen to work for the Mossad. I don't know if it's a gene pool or the type of person that they look for, but Gabriel Allon is not the only painter that works for the office, as I call it.

Anthony Scaramucci: (13:21)
And you have great insight into the Catholic church, by the way. And in your novels, I'm always reflecting upon my catholicism and the evolution of catholicism. And I saw your interview on Morning Joe, and I just wanted to ask you an elaborative question related to the Catholic church. You suggested on Morning Joe that they are obviously under financial pressure, but there's something else going on. We see empty churches here in the United States. There's empty churches in Europe. Do you think that this is a temporary pause in this 2,000 year old institution, and there will be an eventual renewal, or do you think that this is a more ominous sign of what's going on for catholicism?

Daniel Silva: (14:07)
I think it's difficult to overstate the depths of the crisis facing the Catholic church right now. I'm sure that you talk about it with your Catholic friends. I certainly talk about it with my Catholic friends. The sexual abuse scandal, this systematic abuse and coverup for decades and decades and decades has just shaken the church to its core, and there's just no getting around that. I'm not sure it's an extinction level event, but it's going to take a long time to get over that. The immediate effect of that is I think we're up to 19 diocese and orders in the United States that have declared bankruptcy. I'm told that the Vatican is just really hanging by a thread, the Holy See I should say, in terms of its finances. That they're going to face a real financial crisis in the very near future.

Daniel Silva: (15:16)
And when I talk to my more doctrinaire Catholic friends, more to the traditional end of the spectrum, they talk very openly about a coming schism within catholicism. I would hope not. But friends of mine who are not necessarily Opus Dei but sort of that end of the spectrum foresee a small church that adheres to the traditional doctrines and sort of says goodbye to a portion of the church that wants to move on and ordain women and make other changes. So, we'll see, but it's definitely not out of the realm of possibility.

Anthony Scaramucci: (16:05)
It's fascinating. You always say it's the oldest organization. It seems to me when you think about it as an organization and its survival over two millenniums, this seems to be a very hard blow. And so we'll have to see what happens there, but it's a good segue into my next question, a question inspired by your wife actually, about the book, The Order. I'm going to hold it up here. Great advertising. Great cover by the way.

Daniel Silva: (16:31)
Thank you.

Anthony Scaramucci: (16:31)
But Jamie wanted me to ask you this. I think it's a perfect question. The book deals with fascism. It deals with neo-fascism. It deals with neo-Nazism. It deals with anti-Semitism, and it deals with radical orthodoxies, like an Opus Dei or the Saint Helen's Order, et cetera. And so why did you incorporate all that in this book, at this hour, in the current zeitgeist going on in the world?

Daniel Silva: (16:58)
I have watched for several years in Rome. Talking to people inside the church and in Italia politics, just that with certain fascination that the hatred that populous far right has for Pope Francis. And that extends to this country as well. American conservatives despise the guy. And then you couple that with an internal doctrinal war that's going on, it seemed to me to be sort of the perfect setting to explore the rise of the far right in an accessible entertaining way, and in a very real way.

Daniel Silva: (17:52)
I wanted to couple that and pair that with the accompanying rise of anti-Semitism in Europe, which has reached levels really not seen since the middle of the last century. It's on the rise here as well, by the way. And to explore in this novel the roots of anti-Semitism. I don't know about you, but when the Tree of Life Synagogue shooting happened in Pittsburgh, I was deeply alarmed by that. I mean, it was not only the worst single act of violence ever directed against Jews in this country, but the nature of the attack ... You had a guy who's sort of a white nationalist. I don't want to say his name. Sort of a white nationalist, white supremacist, immigration opponent, and his act of violence that he chose to carry out was not against immigrants, brown-skinned immigrants, but against Jews. I was incredibly alarmed by that.

Daniel Silva: (19:02)
And I wanted to explore, "What is going on in this guy's mind? Why would he have targeted Jews when he's really angry about Hispanic immigration to this country?" And so just combining numerous elements, it's the way I assemble a book, and the result of that is The Order.

Anthony Scaramucci: (19:23)
I don't want to give up any of that plot line, but I do have to ask this question because one of your characters, and I won't mention who, says to one of the protagonists, obviously he's an antagonist talking to the protagonist, says, "Well, the lifespan of Jews living in their second homeland, America, is about to expire." And I'm sure you remember writing that. And I was left reading that thinking to myself, "Is there something ominous there? Is that a warning that you're putting in the book?" And again, just for context for people listening that haven't read the book, you do mention that during the execution of Christ certain things are discussed that are put into the gospels about blood being on the children and the forebearers of Jewery or Judaism, and is a very controversial nine words, to use your expression. And so my question is, where do you feel things are? Is there a cautionary tale here in your great novel, your thriller?

Daniel Silva: (20:31)
Well, let me answer that this way. I'm a little concerned about where we're headed in this country in the next ... in the short term. I am deeply concerned that we are going to get a clean, conclusive election. I worry what's going to happen if and when Donald Trump loses, and if it's a tight race, if he doesn't ... He said again on Sunday that he might not accept the results of the election. He actually said it again. I am concerned about just the general level of racism that's just bandied our country right now. It's flowing to the internet like Niagara Falls. And just the openness about it ... Look, am I suggesting that Jews in the United States are in immanent danger? No. Am I concerned longterm here about sort of the direction of this country and what's happening in particular in western Europe and in Germany? Yes, I am concerned. I am very concerned.

Anthony Scaramucci: (22:03)
When I visited the Yad Vashem Holocaust memorial, the museum, and I went through the display, there was something that was left me, that is burnt into me. It was that Jews had lived peacefully in Germany for 500 years.

Daniel Silva: (22:19)
At least.

Anthony Scaramucci: (22:20)
At least. And this is the reason that 40% of them didn't really understand the danger, because they felt that they were Germans, and their bloodlines were German's, so therefore this sort of catastrophe, this fascist catastrophe couldn't happen to them. And so they stayed put while 60% fled. I guess the reason I'm bringing this up though is it ties back into your novels. You're fascinated with the Middle East, and you're fascinated with Europe. And so these seem to be your plot lines. It's the Middle East and Europe, and why? Give us a little bit of color on that. Is it because of this history between the two reasons?

Daniel Silva: (23:01)
Without question. I mean, my ... If you could see my wall back there, you'd see one section that have-

Anthony Scaramucci: (23:10)
I'm very envious of your wall. By the way, John Darsie was going to be asking some questions, Daniel. That's a fake wall behind him. I just want to assure everybody. So if he gets a room rating, it will be a fake news room rating, but you've got a genuine thing going on there.

Daniel Silva: (23:24)
And you would see an entire panel of that bookshelf, it contains every seminal work on the history of the Holocaust, the second World War, the history of Judaism. That corner over there is the history of Roman Catholicism. It's a subject that endlessly fascinates me, the Jerusalem to Rome axis, Western civilization, how we came to be. And Gabriel stands astride to that. And from the beginning of his career, Europe was his area of ... I guess he's gone to the Middle East a little bit, but mainly because he was a descendant of German-speaking Jews who came to Israel after the Holocaust, at least his mother. And because German was the first language he heard, it's still the language that he dreams in, it was just natural that his area, where he was going to operate, was Germany and Europe. He's picked up a couple of other European languages, Italian. He speaks decent French. And that's just where I choose to set the books.

Daniel Silva: (24:37)
So, yes, I've gone ... He's operated in Cairo. He's operated in Morocco. He's gone to the Persian Gulf, but I like European settings for my novels.

Anthony Scaramucci: (24:47)
I think one of the things that I'm always fascinated by about the origination of Judaism, and taking it right back to the Foundation Stone to where we are today, the seminal ideas are really about liberty. You can tie most of John Locke, and J.S. Mill and Jefferson, frankly, back to the Torah. Most Americans probably don't realize that, but that is the case. And one of the biggest things for me is the protection of minorities and the protection of not being ruled by the mob, but always having some minority protections in a situation. And so, for so many years, the Jewish community has represented that as a beacon of liberty. And here is your protagonist, he is a defender of that idea.

Daniel Silva: (25:32)
Without question. I mean, if he were an American kid in the 1960s, if he was that age, he would have definitely been in the South, fighting for voting rights and civil rights in the South. That's who he is.

Anthony Scaramucci: (25:47)
Yeah. No, he's the quintessential man of liberty and the quintessential man to protect individual rights and personal freedom. And so this is my question for you. It's not on the list, but I'm just very curious. We once had lunch together, and you said Israel, the country, is in a pretty good position. It's a very strong country now in terms of being able to take care of itself in that region of the world. Given everything that we just talked about and the rise of anti-Semitism, do you still believe that? Is it still on an upward trajectory, the state of Israel?

Daniel Silva: (26:25)
Without question. I mean, you're a businessman. You know the region and the economies-

Anthony Scaramucci: (26:30)
I knew the answer. I was leading you. I knew the answer, but I wanted you to state it.

Daniel Silva: (26:34)
Look at in terms of what they're doing with their technology, how they modernized their economy so quickly relatively speaking. They went from this sort of socialist economy early in the state to this thriving high tech economy. They got their water problem fixed. They got energy. And they've got one major problem. They've got a problem with the Palestinians, and I jut wish that we could come up with a formula to fix that in a way that can just have these two remarkable peoples living and working side by side because it would just be ... It would be the coolest country in the world.

Anthony Scaramucci: (27:27)
No question. I see it.

Daniel Silva: (27:30)
And if we could find some formula to bring true peace and get these two people who have been living side by side in this place for centuries and centuries and centuries and to work together because it's ... I don't know how much time you get to spend there, but it's a lot of fun. The food is great. The weather is great. The beaches are great, and we just can't get over that problem.

Anthony Scaramucci: (28:02)
I try to get there twice a year, and I find it to be one of my favorite countries. Before I turn it over to John, because we have a ton of questions in the queue, and I want to get to some of them, we all know that you're a voracious reader. Give us one book that you would suggest on the Holocaust and one book that you would suggest on the history of the Catholic church that's on your wall behind you.

Daniel Silva: (28:30)
Well, it depends on what kind of Holocaust book you wanted to read, but the Friedländers and ... Gilbert's one volume is a very, very good-

Anthony Scaramucci: (28:44)
Yeah, Martin Gilbert.

Daniel Silva: (28:45)
Martin Gilbert's one volume, he arranges it nicely so that you have a time, the of what's happening. And you can just sort of see the evolution of the Holocaust very clearly in that one book. And then there are numerous ... It depends on how deep you want to get, but in terms of specific things, like I read down to the various death camps and the personnel and how it all happened. I am deeply immersed in this stuff, and you can spend many years reading about it, studying it, if you choose to. But I love Martin Gilbert's book.

Anthony Scaramucci: (29:36)
Yeah. That's a great-

Daniel Silva: (29:36)
And I'm sorry. The second question was?

Anthony Scaramucci: (29:37)
Was on the Catholic church, the history of the Catholic church.

Daniel Silva: (29:40)
Oh boy, I don't-

Anthony Scaramucci: (29:41)
You've referenced James Carroll's book, Constantine's Sword- [crosstalk 00:29:45]

Daniel Silva: (29:44)
But that is not a history of the Catholic church per se. I think that the subtitle of that is the roots of anti-Semitism in the New Testament. I believe that's the subtitle, so that's very specific. But you will actually ... When you read Carroll from beginning to end, you will go on a journey. The way he arranges it, you'll start with John Paul and his important work that he did on this issue, incredibly important work, and you'll just go along for the ride. You'll go back to why the gospels were written the way they were, and the church fathers, Augustine, the Middle Ages. He will take you on a sweeping journey. I cannot recommend it higher than that.

Anthony Scaramucci: (30:39)
All right. Well, I'm going to turn it over to John for questions from our audience. They're all waiting here to ask you those questions, Daniel. It's a phenomenal book. I'll hold it up one more time for everybody so everybody can see that. And I'm on Chapter 56, and so I have to confess I couldn't quite finish it this morning because I got sidetracked by SkyBridge oriented business. What can I say, Daniel?

Daniel Silva: (31:02)
I'm sorry about that.

Anthony Scaramucci: (31:04)
But I'll have it done by this afternoon. Well, go ahead, John.

John Darsie: (31:06)
Yeah. Going back to the topic of the fact that you're a very voracious reader, what type of books did you read growing up, and how did it impact your writing? I know you've mentioned F. Scott Fitzgerald, George Orwell, and John Steinbeck as some of your early inspirations.

Daniel Silva: (31:24)
Yeah, they were. And I read them at an early age. I was lucky enough to sort of read at a high level as a young kid. But my mom was also ... is also a voracious reader. And I used to get into her stuff, including books like Sidney Sheldon and Harold Robbins and commercial fiction. And I still have that sensibility, I think. And my writing is a blend of literary and very, very commercial. And along with Steinbeck and Fitzgerald and Orwell and Graham Greene, I count Sidney Sheldon proudly as one of my most important influences.

John Darsie: (32:15)
So we have a question. It goes back to one of Anthony's earlier questions about the level of research you do. And sometimes in your books, you almost seem to not just talk about things in real time that are taking place in the Middle East or elsewhere but even predict events that happen. How are you able to do that? And are there any specific books that you wrote that you especially enjoyed preparing for and researching for?

Daniel Silva: (32:38)
Well, I mentioned Moscow Rules earlier. I loved doing the research for Moscow Rules. I studied Russian history and Soviet history in college. It was my first foray into using Russia as a villain. It was before the Russians were quite villains, so I was kind of ahead of the curve on that one. A book I did a few years ago called The Black Widow truly forecast and predicted that ISIS was going to be a problem in Europe, that these guys coming out Syria and settling back in Europe that it was only a matter of time I felt before Europe came under attack from ISIS.

Daniel Silva: (33:28)
I started The Black Widow before the attacks of November 2015. As I say in the forward of the book, I almost set it aside because it was just ... What I had written was so close to the way those attacks unfolded, including the fact that I had used Mol and Beck in Belgium as a setting and a place where the attacks were planned from. It was so eerily close that I just almost set it aside. I didn't want people to think that I had watched the attacks and then wrote a book about them, so I explained what happened in the forward and finished the book as planned.

John Darsie: (34:14)
We have a question, and obviously we don't want you to give away any future storylines of any future books, but someone asked how the current discussions in Israel about annexation of the West Bank might inform your storytelling and characterization potentially in the next Allon book? especially given the disparate emotions and opinions on the Barak team of agents that Gabriel works with.

Daniel Silva: (34:38)
Yeah. Who asked that question?

John Darsie: (34:41)
It was Suzan. And I'll protect her identity, but obviously a fan of yours.

Daniel Silva: (34:45)
That's a really great question. Look, I am ... I did something in The New Girl where Gabriel and KBM, as I called him, my Saudi crown prince, are actually driving through the West Bank. And KBM is annoyed at all the settlements that he's seen. And I had Gabriel say aloud for the first time that, "The two state solution was dead, and we have to come up with a new formula." And I believe that is a statement of fact, that it is dead. And I will say that annexation for me is going to be interesting to write about because I do not support annexation, and I'm not sure Gabriel does.

Daniel Silva: (35:45)
His mentor ... We used to wonder what they really thought. Was Gabriel a one-stater or a two-stater. And he was a two-stater at least for a while. He recognizes now that two states are not possible. But annexation is going to be difficult for me to deal with.

John Darsie: (36:07)
The next question, The Order sort of feels in many ways like a book of celebration of core Christian teachings. What are some of the lessons that you want the reader to take away from The Order?

Daniel Silva: (36:19)
Some of the lessons?

John Darsie: (36:20)
Yeah.

Daniel Silva: (36:22)
I think that he first lesson would be to understand the roots of anti-Semitism and to stress how important it is that we deal with this issue honestly and forthrightly, because I am concerned about the rise of anti-Semitism. I'm sorry. The second part of the question was?

John Darsie: (37:00)
Just in general, the book seems very thematic about Christian teachings and just lessons to draw. And you answered that pretty well. And we can move on, or you- [crosstalk 00:37:08]

Daniel Silva: (37:07)
No, no. But in terms of ... Look, in the end, it's a story of a remarkable friendship between a Jewish man of faith and a Christian man of faith. And that these two guys can work together to try to repair the damage of the past. In the end of this book, it's definitely a novel of hope.

John Darsie: (37:38)
We have a lot of questions about what's next. I think a lot of your fans have probably poured through The Order and are wondering to themselves what happens next in this story and what happens to some of your other characters. Have you thought about in terms of whether you're going to write another Gabriel Allon book, you're going to go back to Michael Osbourne? What's the future of Ari Shamron? and other things like that. What is next in your mind after this book?

Daniel Silva: (38:02)
One of the things I do in order to sort of heal from the process of finishing a book is I start the next book right away. And so this is the manuscript for the next novel. It's about 60 or 70 pages that I've got. It is a Gabriel Allon novel. It deals with Russia, and it will contain all of the characters that we've come to know and love and a couple of new ones.

John Darsie: (38:30)
We have a couple questions about Ari Shamron and whether he's being phased out of the books or whether we're going to see him again and again. I don't want you to give away anything in your storylines.

Daniel Silva: (38:41)
Ari is aging, obviously. And I simply cannot even wrap my head around the idea of his death. And so he will continue to occupy the place that he has previously, as Gabriel's father-like figure, his advisor, his mentor. Because of the structure of this novel, he actually doesn't appear in this one. It might be the first one he's never appeared in, but I have no plans to usher him off the stage any time soon.

John Darsie: (39:23)
Another question about your future writings. Would you ever consider writing a non-fiction historical analysis based on all the research you've done of these geopolitical and religious issues, or do you think you'll continue to write in the context of fiction thrillers?

Daniel Silva: (39:38)
Yeah, I will always write novels. I think at a certain point [inaudible 00:39:44] write a non-Gabriel book in the envy-able position that 20 books into the series that they're still on the way up. I sell more with each publication. So I guess it would be publishing malpractice for me to suspend the series any time soon, but at some point I really do want to write some standalone novels, and I'll get to them eventually.

John Darsie: (40:12)
Well, Sandra adores Christopher Keller and wonders if there's any chance that he might appear in a standalone book in the future.

Daniel Silva: (40:20)
Yes. Yeah, I actually have several sort of one sentence outlines, two sentence outlines for Christopher books. I think he's getting fuller and fuller with each outing. I think he's been ready for his own book for some time, but he's really ready for one now.

John Darsie: (40:41)
This is question relevant to us. We recently had our SALT Conference in Abu Dhabi, and we've become close with several prominent Emirati families and officials there about the rise of the UAE, and its warming, and its relationship with Israel, and its general disposition to try to foster collaboration in the region. Do you think Gabriel might spend some time in Dubai or Abu Dhabi in the future?

Daniel Silva: (41:04)
Definitely. I mean, it's not something that I actually write about, but he does spend time in Dubai and Abu Dhabi and Saudi. It's just the most interesting development ... important developments in the last five years, this growing closeness between Israel and to particularly the Gulf states. And that's one of the things that annexation is going to throw a spanner in the works. I mean, hopefully it won't collapse that new cooperation, but I think that if I were the director general of Mossad, and I've got great relations with the Gulf states that I've built up, good relations with the Saudis, I would worry about what annexation is going to mean for those. And then they've delivered blunt warnings about it, that there's going to be blow back if and when the Israelis do move forward with annexation.

John Darsie: (42:14)
So we'll ask you one more question. First I have a comment from Ana. She says, "It's not question, but thank you. My heart isn't ready for Ari to die." So thank you for that.

Daniel Silva: (42:24)
[crosstalk 00:42:24]

John Darsie: (42:24)
Last question. We have several about this that I'll combine into one, but is a movie series about Gabriel Allon forthcoming? Is there any update on those plans that you can provide?

Daniel Silva: (42:34)
Yeah. I sold the book about three years ago to MGM Television with a plan to turn it into a television series. My timing was not so great in that the little scandal known as Me Too blew up in Hollywood, and the rights reverted back to me. My wife is my business manager and handles all the negotiations on this front, and I think that she probably handles ... gets two or three calls a week at a time like this about potential entertainment packages. I had one of the best meetings I ever had last week with a group that wants to make it into a television series and just did the most beautiful outline of how they would do seasons one through five. So I guess I'm cautiously pessimistic that we can get this done.

Daniel Silva: (43:32)
And I'm the problem. I'm very picky. He's a special character. My readers have a relationship with him, and I am obligated to make sure that the character that ends up on the big screen or the small screen is like the one that I write about. I think I've been able to maintain a lot of control in these attempts. I've tried to make it into a series, and that will remain true, but I am hopeful that we can get this done.

John Darsie: (44:09)
Well, if Jamie's managing the process, then we're confident it will get done right, just like your background. So don't try to take credit for your beautiful room rater. It's definitely Jamie's work.

Daniel Silva: (44:19)
10 out of 10. What did Anthony get on his last one? I'm sorry.

Anthony Scaramucci: (44:23)
I got one over-

John Darsie: (44:24)
I think it was one out of 10, Daniel.

Anthony Scaramucci: (44:25)
No, I got one over a Scaramucci, which is one out of 11. It was very disappointing by the way.

Daniel Silva: (44:31)
I'm sorry about that.

Anthony Scaramucci: (44:32)
Which is why I have a HD television screen behind me right now, but I ... Look, I have a lot ... There's a lot of progress happening in my life, Daniel. We'll have to see what happens.

Daniel Silva: (44:40)
See, I got depth and flow, but I don't have that. You have a television set. And you look so beautifully lit and-

Anthony Scaramucci: (44:50)
See, that's a good dermatologist, trust me. But, Daniel, thank you so much for your time. One of the things I want to say to the young people out there. Here is a man that lived his dream. He had a great idea. He idealized his life, and then he did not want the mystery of whether or not he could do something. He actually went out and did it, and he's on 20 books, and he's a legend today. And so for the young people out there, you've got to start one foot ahead of the other and try and live your dreams. And so, with that, Mr. Silva, thank you again for an unbelievable read, and I look forward to seeing you soon.

Daniel Silva: (45:28)
Thank you, Mr. Scaramucci.

Ketan Patel: Author "The Master Strategist: Power, Purpose and Principle" | SALT Talks #25

“Inside America there were issues that would affect the whole world. Those issues, unfortunately, were not solved inside America and burst out onto the international scene.”

Ketan Patel is the CEO and the founder of Greater Pacific Capital, an investment firm focused on India and its links to international markets, and on technology, healthcare and financials and services. Greater Pacific Capital (“GPC”) has developed a distinctive platform that invests to support value creation in businesses through the application of strategy and ideas, thematic insights and capital. Patel is also author of The Master Strategist: Power, Purpose and Principle.

The United States stands alone as a unique world power in that it achieved its status without seeking to conquer other lands. It played decisive roles in two world wars, saved the world from communism, facilitated global trade, and created and safeguarded the world’s most vital multilateral institutions. The turn of the century, marked by the 9/11 terrorist attacks, saw a notable shift in America’s stance and role in the world. “It was personal for me because 9/11 was the first working day of my move to New York. And I saw the second plane go in from my office.”

Emanating from scarring events like 9/11 and the 2008 global financial crisis was a rise in populism and an antagonism towards many of the international institutions formed in the 20th century. We will see major shifts as China and India’s economies emerge as global economic powers and assert themselves further on the world stage.

LISTEN AND SUBSCRIBE

SPEAKER

Ketan Patel.jpeg

Ketan Patel

CEO

Greater Pacific Capital

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and geopolitics. These SALT Talks are a series of digital interviews we've been doing during the work from home period with leading investors, creators, and thinkers. And what we've really tried to do during SALT Talks is to replicate the experience that we provide at our global conference series, the SALT Conference, which has provided a window into the minds of subject matter experts, as well as provide a platform for big, important ideas that we think are changing the world. We're very excited today to welcome Ketan Patel to SALT Talks. Ketan might not be a household name, like some of the other investors that you've heard on SALT Talks, but I think he'll be among the most interesting and informational guest that we'll have on SALT Talks.

John Darsie: (01:02)
Ketan is the author of The Master Strategist and he's the former head of the strategic group at Goldman Sachs. He's worked extensively in the US, Europe, China, Japan, and India principally providing strategic counsel both to public entities as well as private companies. He founded and leads the investment firm Greater Pacific Capital and with his partners they invest in high growth enterprises, making an impact locally in India and internationally in a profitable and sustainable way. He leads the firm's influential research work, which focuses on ideas and policies to engender peace, prosperity, and freedom. That work includes writings about the rise and fall of civilizations, of great power, of the changing and evolving world order, and the shape of the world to come, including mass inclusion and the eradication of slums. Especially in India, which I know is a cause that's near and dear to Ketan's heart.

John Darsie: (01:59)
Ketan also works with the UN World Academy of Art and Science, global leadership initiative, where he leads their project on leadership and the future of finance. He's a member of the Future Capital Group and leads their project on the future of capital. Ketan is of Indian descent, but he grew up in London's east end, as well as spending some time in India during his upbringing. And he actually moved to New York on 9/11, which maybe he'll touch on during the introduction. His grandfather walked on the Salt March and his parents moved to London, which was the center of great power in their early days. He is an avid practicer and practitioner of meditation. It's part of his diet alongside running, art and history, and science fiction. I know that meditation is interwoven into his mindset and his philosophy.

John Darsie: (02:48)
If you do not already subscribe to his great newsletter, I would highly recommend that you do that. You can go to greaterpacificcapital.com, the newsletter is called Sign Of The Times. And, again, I would highly recommend it to get more of the type of perspectives that you're going to hear from Ketan today. If you have questions for Ketan during today's talk, a reminder to enter them in the Q&A box at the bottom of your video screen. And now I'm going to turn over the interview to Anthony Scaramucci, who's going to interview Ketan. Anthony, as you likely know, is the founder and managing partner of SkyBridge Capital, a global alternative investment firm, as well as the chairman of SALT. And with that, I'll kick it over to Anthony.

Anthony Scaramucci: (03:28)
Ketan, I thought I was doing bad on room raider until I saw your background there. And so now John Darsie unfortunately wins room raider again on SALT, but it's one of those rough things for both of us. I want to start with your family of origin because I think you have one of the more fascinating stories and it's such a great success story. So tell us a little about your parents, and your educational process, and how you got to where you are today, if you don't mind.

Ketan Patel: (03:56)
Yeah, sure, Anthony. Hey. Look, first for inviting me. Thanks, John, for that glowing introduction. I don't know how you put all that together, but that was really interesting. Anthony, so as you said, I'm of Indian origin. I'm British, you can tell by the accent. My grandfather would've been a very young man when the British were still running the world. So they looked to Britain as the great power of their day. My grandfather walked on the Salt March. Nothing to do with the SALT Conference, or the SALT Talks, but the great Salt March, which was the independence march led by Mahatma Gandhi. As I understood it, later he was quite severely beaten during that march at some point, too. My parents moved to London for opportunity and my father was an engineer. We were fairly poor and just came to appreciate the hard work that goes into building a family. And came to appreciate and completely love the UK.

Ketan Patel: (04:58)
I grew up in London's east end, which was rough in those days. I recognize some of the waste rights and complaints now. And happening all around the world in the protests, and all the counter protests, and so on is part of my growing up. I also grew up in [inaudible 00:05:13] which is where Gandhi came from and the Prime Minister of India came from. East London, I could admit, was a tough, difficult neighborhood, but I think we learned a lot from that neighborhood. So we did well, we were one of the few that went to college from that neighborhood. I have had careers in industry, and consulting, and in banking, was lastly Goldman Sachs running this group called the Strategic Group. It was fantastic, you travel the world, you meet world leaders and country leaders as well as business leaders. And you talk about the future of the world, and their strategies, and you find the opportunities for Goldman, which were many.

Ketan Patel: (05:57)
So it was a wonderful learning experience. It was also great to leave, though, and set up my own firm was a bunch of friends and more investors. We'll get onto 9/11 at some point, which was an awful time. It was my first day really moving to New York. It was my actual first day. It made me completely empathetic to America and really care about America, and its standing in the world, and really strive to understand what the world was about. And what American power was about and why things happened as they did all over the world.

Anthony Scaramucci: (06:32)
Well, let's go to 9/11, if you don't mind, because I think this is a fascinating part of your story and I think it ties back into context that you can provide about world leaders, Great Britain, its rise, and the eventual rise of the United States after the British empire. But take us back to 9/11, take us back to your first days in New York, and tie that thread from your father's upbringing and liberation of India to where we are now in terms of America on the world stage.

Ketan Patel: (07:06)
Sure. I'm a student of this and fascinated with this topic. So what I've seen as we do the analysis and we look at 30 empires or so in history, and we're about to publish something again on this, but you see that every empire has a curve, a rise and fall. And it's something mathematically you could compute and then you could look at America and say, "When is America no longer going to be a great power?" And I think 9/11 was one of those important turning points where America in my time was the greatest power of all time. It was as far as we could see looking at history, it was the great power. And it was a morally strong power because it had saved the world in two wars, put a man on the moon, it defeated communism, it built all the international institutions we rely on today with its allies of course. It safeguarded the world after the war to look after peace, establish human rights is such an important power for force in the world.

Ketan Patel: (08:09)
And uniquely, it was the first great power not to think it had to conquer people's lands using armies, but it did conquer the world. And it conquered it through investments, through trade, through growth, through its corporations, through investment banks, but it didn't have to kill people in large numbers to do so. So it was very unique and it was clearly something that we all looked at as what we thought was the right way to live, democracy, some form of capitalism, free trade. These were things that were the cornerstones of the building of America. And 9/11 seemed to shake that up a bit, but the 20th century America was the one of raw energy, invention. Anthony, everyone looked at it and said, "This is what we want to be." And it's what lead China I think to start its reforms, of course. I've spent a lot of time in China and looking at policy in China, a little business and investing in China.

Ketan Patel: (09:06)
The 21st century was so different from the 20th century America. You had 9/11, then the global financial crisis, then you had the rise of populism in America, but also [inaudible 00:09:19] in America first. Which to most of us felt like America alone. America trying to break up the EU by encouraging Britain to leave the EU and only offering the deal if they did the trade. America internally divided a horrible ratio denied, too, and now the performance on the pandemic. Now, you can't trace it all back to one event or any event, really. These are changes that sweep over time and they're part of probably the natural cycle of rise and fall of great powers. It was personal for me because 9/11 was the first working day of my move to New York. And I saw the second plane go in from my office. And so it's very poignant. Goldman just said to me you can move back to London or to anywhere else you like and I thought that was wrong.

Ketan Patel: (10:16)
And so I said, "No, I want to stay because we should decide how we live and not the people that did this." So it was an important moment.

Anthony Scaramucci: (10:28)
Well, in your writings you talk about, and I want to see if I get this right, a quadrennial leadership. Is that the right way to describe it, quadrilateral leadership?

Ketan Patel: (10:40)
Yeah, [crosstalk 00:10:40]

Anthony Scaramucci: (10:40)
Quadrilateral leadership. And so you're basically saying there are four powers right now that are tugging on the world in terms of the restatement of the world order. And I was wondering if you could describe that to our viewers and listeners.

Ketan Patel: (10:58)
Sure. So the world has changed and the pandemic has actually highlighted a lot of weaknesses of American system. And we should come back to that, but those lay the ground for so many changes, the change in the relationship between America and China is accelerated by that, the change in the relation between China and the rest of the world. The rise of India at this time is quite significant and especially in the context of the importance of Asia. Again, topics we can touch on, but the quadrilateral powers are fascinating because there are now really four power blocks that really determine where the trade is, where GDP is, where the populations are, where the consumption power is, and so on. So something like 50% to 60% of the world's population, really 70%, actually, of GDP, of [inaudible 00:11:59] land, of all consumption, and the world's industries lie between these four major power blocks.

Ketan Patel: (12:06)
And about 40% of world trade lies with these four, too. So if anyone's going to set the rules of engagement, it's going to be set by the interaction between these four powers. America's had a period where it's managed to call the rules of engagement, and been the one leading the way, and people have been happy to follow, but in the 21st century that changed. And I think it changed with 9/11, but also with more importantly probably with the global natural crisis. And the pandemic in particular has exposed so much of our American system that I think it could be one of the most important turning points in some ways, where people look at America and do not think that America was vulnerable in that way. And so it may be the moment at which the world began to really question the idea of America as the world leader.

Anthony Scaramucci: (13:02)
So let's address that because you've got two Americans on the call with you. We've grown up unfortunately or fortunately in an American centric world, at least from our perspective, but both of us have also traveled the world and we see the way the world sees America. And so take us through your thought process. How did the world see America after World War II? How did the world see America, say, in the 1990s when our old boss, Boss Ruben, was secretary of the treasury? How does the world see America today? And so take us through those time slices in your observation as a global citizen.

Ketan Patel: (13:48)
So as a global citizen, I'd say, firstly, just like both of you, having worked, lived in America, I find myself empathetic, compassionate to America. And as I look across, even before the world wars thinking what was the nature of world leadership, I think America's been a benevolent leader. It is shaken what people thought you had to do to run the world. Because of its innovation, and its enterprising nature, and the nature of its trade, and the relationship its built as this great emerging empire, I think World War II was a moment where it rose to help the world through two of the most important crises in the world. And then as the ideological baffle continued after that war with the Soviet Union, it demonstrated its economic, political, social system, if you like. It was the most powerful system in the world.

Ketan Patel: (14:45)
And it presided over, therefore, a long battle of wits, really. And much more, of course, but wits with the Soviet Union and won. And so all of us grew up I think on this phone call, certainly between the three of us on this panel, of people who saw America as the leader who showed the way. And I think China, all my time in China, I saw China looking at America, saying, "That's what we want to be." And the way to get there is to open up, embrace trade based on the comfort we have. Then open up more of our industries, open up to investment, begin even democracy experiments, which they did, and plot a path to becoming something more like America. And so that was the values of America were the values that the world embraced. Particularly I think at the end of the last century and the beginning of this. And I think that was the cornerstone of what everyone thought was America. At some point, it was clear, though, that that wasn't the only America and America was also in a transition.

Ketan Patel: (15:57)
And inside America there were issues that would effect the whole world. Those issues, unfortunately, were not solved inside America and burst out onto the international sitting. And people saw that America was strong enough to elect a Black president, President Obama, and in some ways put the rest of the world to shame, that no one else had managed to do something so profound as to say anybody could make it regardless of color, or creed, and so on. So we looked at that and thought, "Wow, it seems like that can happen in America." It's a long way away from the rest of us. And then how that then transpired, and where it led to, and the election of the current president for everyone to say, "Wow, that country's different from what we thought." And so if you look at the statistics and there is so much good research done, some of the best is actually done by Pure Research, which is American.

Ketan Patel: (16:54)
More than 50% of the world have favorable opinions still of America. It's very consistent through presidencies. I think it's 54%, but 62%, nearly 70% do not have confidence in the current president and disapprove of America's position on trade, on climate change, on building walls, and so on. So the values of America are beginning to be quite fundamentally questioned. And then you lay on top of that the pandemic and then people start to wonder whether America is actually capable of leading the world. And, again, stepping right back, if we said the world was posed a test, and it was posed to every single country, no matter how small, or how big you were, or how rich, or how poor, how educated or uneducated, whether you were in the north or the ... It didn't really matter, every country gets the same test. Every leader in every country with their leadership group and their system have to figure out how to pulse two parts of the test.

Ketan Patel: (17:59)
You've got to keep your economy going as much as you can and you've got to save lives. And when we do this call, America comes pretty much towards the bottom of the lead table. I mean, that's unheard of. America saved everybody in all these wars, in every crisis. How can America not save its own people economically and from dying? It's just not tenable to imagine that the world power could end up in that place. And I think this is the shock and the dismay of people around the world, that America is so internally divided, and is so populist, and reject some of the tenants of what is great leadership internally and externally. It has not managed to come top of the lead table, when everyone looked to America to lead. I think once you get used to not being led, though, things change. And I think things change potentially forever. And so this is I think the important challenge that America now faces, that in its last great crisis, this one we're in now still, America so far has not managed to lead.

John Darsie: (19:11)
Tone, I'm going to pivot to Asia for a moment and start with China. So you touched on China briefly and for all of our audience's sake, we talked about some of the work you've done internationally, but you have particularly strong relationships in China as well as in India. And obviously you're based in London and you are well schooled on Europe, as well, but when you talk about the power struggle between the US and China, is it a zero sum gain? Is it a winnable struggle for the United States, both from an economic and philosophical governance perspective? And if it is a winnable struggle, what does victory look like for the United States and how do they do that?

Ketan Patel: (19:51)
So it's a tough one now because America began to fight on the recognition that China was a threat to its leadership most probably during the George W. Bush, continued over the Obama era, continued and stepped up during the Trump era. But China has had a decade, decade and a half. And particularly one America was spending time on two wars in Afghanistan and Iraq. China almost had a free reign to go around the world and tie up natural resources, to book relationships to build ports, to freely do that while the superpower's occupied. So the rise of China has been relentless and tying up natural resources and relationships in the absence of real competition has been also relentless. And it's not done from the perspective necessarily of China wanting to run the world. I think it's because recognizes 1.3 billion people, that's a lot of mouths to fill.

Ketan Patel: (21:00)
To feed that many people, to keep stability, to continue their progress, they have to go around the world and take lots of resources and assets. And so if you look at China under communism, it would've had a GDP per capita of $1,000 and then there was a period between 2000 and 2006 where they were already opened up, had entered the WTO, were going through rapid growth, and America recognized pretty much probably as the British did when they were looking at America. They recognized that it was another country that you need to help. And you hop into the system, and you train them in the system, and how it works. And in that period, China doubled its GDP per capita. And then in the late period leading up to the end of the first decade of this century, it was hitting close to $5,000, $6,000 per capita. So it was already doing a really good job.

Ketan Patel: (21:58)
And then in the [inaudible 00:21:59] period, it's gone from $5,000 or $6,000 to nearly $10,000 per capita. Now, America's at $60,000 to $70,000 per capita on average, which masked a lot of people who are nowhere near that, but if that's the average, just as China's [inaudible 00:22:16] a lot, China's probably a hyper power at $25,000 because they're 1.3 billion people. So it's got four times the population of America. To have them on an average of $25,000 means that you're more than a superpower. You have a superbly crafted machine that can weight everything in its favor in terms of trade, economics, probably a good contender to replace the dollar. It's already begun an experiment with an electronic version of the R&B.

Ketan Patel: (22:52)
So this is a serious contender to run the world. And, again, looking back in history, in the wake of every major empire was another great power rising steadily under its wing, ready to take over. And America was that for the British and China potentially is that. Now, you asked a very important question. Can you slow that down? Can you stop it? Can you thwart it? America demonstrated it could do that to the USSR. Could it do it to China? I think it could do because there are clear fault lines in China's political system, its economic system, its over indebtedness. There's an internal divide between the haves and haves not. And of 1.3 billion people maybe only a third, less than that maybe, have actually experienced this great wave of China's rise. And during the pandemic, China's failed to build on the trust that it was slowly trying to build.

Ketan Patel: (23:48)
And so whether it's Europeans, Australia, India, people have spoken out and said we don't trust China. I actually don't think that's good for the world. One way to do this in terms of the way forward would be to find the win-win, where China slowed down a little bit, America was still the older brother helping China to figure out the system. Allow the value to align, which may take two or three decades. And at some point, you have a sharing of power. It seems unlikely that's going to happen. And so there's another way, which is the way that America has tried before, where you exploit the fault lines of a rival and you see if you can break up or divide that country. I think that's going to be very difficult, too.

Ketan Patel: (24:39)
So it's more likely that we end up at a sharing of power between America, China, India, which is rising, again, very rapidly, and Europe, and the EU, rather. So four big power blocks and America's a natural ally for the EU and a natural ally for India. And so in that quadrilateral system, there's three powers that are probably very aligned. Unfortunately not in the last four or five years on the basis of their values and so that needs some serious reselling.

John Darsie: (25:12)
You touched on India and that's a natural transition. Why is India's growth so important for the United States and for the world? And how does it fit in the context of the rise of Asia generally?

Ketan Patel: (25:26)
Sure. I'm going to start again with China on that because if you look at China's growth what you find is China under communism took 50 years almost to get to a trillion dollar economy and then seven years to get to $2 trillion, five years to get to $3 trillion. And all of us look at that and we say of course it's because it's communism, it's autocratic, it's top down. They were bound to do it. It's not in 15 years ago, it's really in the reforms that they did it of course. You look at 20 years ago and you look at India and you say of course they can't do that because of democracy, but here are the numbers. So India under post independence took 50 years while it was still a socialist country, to get to a trillion dollar economy. Same as China's 50 years through communism, seven years to get to $2 trillion. And this is the year where it's set to cross $3 trillion. The pandemic slowed that down a little bit, but [inaudible 00:26:25] turned into five years. So the same curve, so why is that?

Ketan Patel: (26:30)
And I think that's because India for different reasons has urbanization, has a population that's, again, very enterprising, a massive consumer base, massive financial inclusion, about 300 million people opened bank accounts just in the last four years, five years. And so India becomes another massive growth driver of the world. That makes it very important, but I think also importantly if it is a massive growth driver, it is an economic force, then there is another economic force in Asia next to China. Now, unfortunately what that also does is you saw the power of the world move, John, from Europe to America and we see it moving to Asia because you have two countries there that represent nearly three billion people by 2050. And already it's edging in that direction, but Asia is 50% of the world's population. In terms of global GDP, purchasing power, share of trade, world output energy consumption, it's already 40% to 50% of all those things.

Ketan Patel: (27:41)
And by 2050, the projections say 50% to 60%. And it's also by 2050 expected at 50% of therefore foreign investment, financial assets, and military spend. So the access is moving, the big question mark for America would be how do you ally now with the rising powers, given that you've been really the older brother of those rising powers. India's an easy and natural one and long standing relationships with India. Certainly we see so many Indians in America that are successful and you see so much trade between the two.

Anthony Scaramucci: (28:19)
Ketan, can you talk just a little bit about the mega trends that you're seeing in the context of that power structure? And what it means for business and what it means for geopolitics?

Ketan Patel: (28:32)
Sure. So, Anthony, I think we're at a very privileged and unusual time. We're in the transition of great powers. Now, if you take a big sweep of history, and I know that a number of your presidents in the past have spoken about the arch of history and where it's going, but if you really take that and say where are we today and why does it feel so uncomfortable, I think one of the reasons is we're in the transition of real civilizations, from industrial civilizations to an information age civilization. We all grew up with our parents working in factories and our children were working technology, and finance, and services. And so this is a massive transition of just employment, work ethic, knowledge basis. And no wonder it feels uncomfortable because when that happens of course the old power structure hangs on. The manufacturers, the political powers are allied to the land and to production hangs on to power and there's a conflict.

Ketan Patel: (29:31)
So one of the great forces of change is of course that. I think the second is that in the transition, the number of people have gone up. So around the second world war there would've been about two and a half billion people in the world. Today there's seven and a half billion. By 2050, nearly 10 billion. So we have a need to strip more and more resources from the planet. And without enough invention, reinvention for lack of those resources or an access to something else, we're asset stripping the planet. So of course this is an area where you go from it was 6.2 billion I think at the beginning of the century. By 2050, we add another 40% more people. So we're going to asset strip the planet unless we make massive breakthroughs in science.

Ketan Patel: (30:23)
A third big factor is the carbon age is doing everything it can in terms of our ability to create value. Now it needs something else and that isn't probably just solar. There's something else. And at every point of the chance in history of civilizations, there's a breakthrough in energy sources. So it may be something solar, it may be something nuclear that isn't uranium, but something more functional. Something that allows us to put a man or a civilization on another planet that isn't the moon. It's another planet, but it's something much more functional and that happens at every point when civilizations change. I think the fourth is the flow of mankind almost into one culture because the internet, for the first time, we're all connected. Completely connected realtime through the internet. People are watching this in any part of the world they choose to. We communicate with each other through social media, we get our news from social media.

Ketan Patel: (31:19)
We get so much value creation out of social media and on the internet. So we're moving to one culture whether we like it or not. And people will hold back and say, "No, I'm peculiarly not a global citizen, I'm just this." But you're that and a global citizen because of the internet. And then finally we're potentially in the transition of the US is the sole great power to the natural cycle of history of the US sharing the power. Or if it doesn't manage that well, another power taking over. And I've got to say, as somebody who's worked and lived, and has so many friends in the US, and is studying this for so long, there isn't a natural other country to take over. America has this system of enterprise, it has enough of the moral code that is shared by the majority of the world. So there isn't somebody naturally taking over. America will almost have to throw it away and I think populism does that. Populism is very nationalistically micro and it throws away power.

Ketan Patel: (32:18)
And so we're in that stage in history and these are some of the macro challenges. And I'll give you some of the business ones, too, in a moment, but please interject.

Anthony Scaramucci: (32:29)
No, but I just want to follow up on the populism thing because in 1963 Teddy White asked Jacqueline Kennedy what was on the President's bed stand the week that he died. What was he reading? And it turned out it was the Guns Of August by Barbara Tuckman and it rose to become a very big bestseller. And I read it in college and the Guns Of August talks about the systemic rise of nationalism in Europe, which led to the Guns Of August, the advent of the first world war. And the [inaudible 00:33:06] of rhetoric and the reasons why nationalism caught fire. Now, you and I study history, a lot of the things that are going on globally were happening, let's say, 1915 to 1935. And there seems to be a vacuum of leadership around the world, where leaders, instead of explaining what's happening from a historical context and moving populations away from this nonsense are acting like thermometers, Ketan. They're putting their finger up in the air, they're measuring the heat, and then they're reflecting back the heat to their populations.

Anthony Scaramucci: (33:47)
One, do you agree with that? Number two, is there a way to change that? Is there a way to dent history and prevent this rolling catastrophe from happening?

Ketan Patel: (33:59)
So, Anthony, I know you love reading history, so I get completely where you're coming from. I would say this, that despite the prosperity, the peace, and the freedoms created since the second world war, which as I said America's been an enormous part, the EU's been an enormous part, and Asia has followed that lead, we also credit enormous inequity. So there's a real gap between people in the world, between countries, but also within countries. Between those that are real beneficiaries of the fruits of progress and those that are not. So our financial and capital model is not delivered to enough people. Let me just throw out some numbers. So today we have seven and a half billion people. Two thirds of those people are not real participants in the banking system. So it's odd because here's also the numbers a little bit more. So about a billion of a seven and a half billion don't have any bank account whatsoever. Another billion only access credit using their credit cards. So there's some sort of participant.

Ketan Patel: (35:12)
They're paying the 24%, 26% APR interest. Two billion people have a bank account that they've never, ever borrowed from. 3.6 billion people have not gone or not used a bank account physical or any payment system from their mobile phone. So two thirds of the world are not participants or the endpoint beneficiaries of the industrial revolution, of formal employment, and of the financial system that all of us on this call are a beneficiary of. At some point they were going to say not good enough. Now the temptation is to imagine those are all in poor countries. And 85% to 90% of the two thirds are. Let's say you look at a population of a country, it does actually go like that, but 32% of Americans also fall in that category of don't have a bank account, have a bank account they've never used, have managed to get some credit at a usury rate.

Ketan Patel: (36:13)
So that's not right. You can't have a third of Americans not participating in a system. So they were ripe for three things that happened simultaneously. One is, as I said, the backdrop is we're transitioning civilizations or we're transitioning jobs. They're not going to have a high quality job. Number two, the social media connects us all. And number three, populism. So if you have a confusing scenario, you have a lot of people who are unhappy, and you have leaders who see the opportunity to be popular rather than be right, that the truth doesn't matter, but you only tell people what they want to hear. And that gets you enormous power. Then there's always going to be some people who are going to rise to that bait and all across the world people have, particularly in the west, but it is in lots of place. And social media allows you to spread confusion where opinion supersedes expertise. All the fruits of the industrial revolution, we were seeking a better explanation for how the world works to solve problems.

Ketan Patel: (37:24)
With social media, with populism, the truth is masked by opinion. Now, we'll get through that phase. I'm confident we will. And when we do, of course the scenario will get better. But in the transition, until we solve for it, we are where we are. And so today's peace, prosperity, and freedom is under threat from this way of governing.

John Darsie: (37:49)
Ketan, you talk about peace, prosperity, and freedom, and that's really what most of your policy work is centered around. And I want you, if you will, to draw upon your experience growing up in London's east end. We're obviously grappling with a lot of social issues and social divisions in this country, but it's not unique to the United States for certain. In London, there's a different mix of ethnicities and there's race issues, as well. Could you just talk about, again, your experience growing up in the east end of London and how you think socially the United States, London, and elsewhere we can start to create that more integrated global society, where we have fewer inequities, based on things like race and religion.

Ketan Patel: (38:30)
Sure. That's a tough one and a painful one in some ways. So I grew up at a time when Britain was in the aftermath of not being an empire and there was a feeling still of entitlement. We ran the world, feeling was still alive and well. And with the influx of immigration from across the old far flung places of the empire, it also fed, of course, some resentment and the rise of the far right. And there were politicians who were very capable of making sure they threw fire on that and causing problems, lots and lots of problems. And so I would say that the politicians that played on fear, that's what I saw was very dangerous, because there was a fear of the loss of your job. And you know this and I know this because we run businesses. You either grow the revenue line or you keep complaining about the cost. Complaining about the cost is all about the fear. It requires somebody of imagination to grow the pie so that all of us can participate.

Ketan Patel: (39:37)
And so what I saw was the fear was played on. When the politicians played on the fear and played on our differences, in a very practical sense the implication is unfortunately that immigrants are bad. And the consequence is children get beaten up in playgrounds. I would guess since you started to talk about your country or certain people in your country started to talk about Mexicans being bad people, Mexican children are getting beaten up in playgrounds. I mean, the consequences are real and they effect children. And they effect their parents on the streets and it causes hatred and violence, but it takes real leaders not to fall into that way of leading, but to embrace the system. And it's not to say that people shouldn't have borders that they control. Of course you do. You control your border for many, many reasons, but that way of politics was what I saw growing up. [inaudible 00:40:35] was broken, though, in the UK and it was broken because the UK joined the EU and there was influx of Europeans who weren't colored mostly.

Ketan Patel: (40:44)
So people stopped seeing immigrants as always being colored and they saw immigrants of all colors, but lots of white immigrants. And it changed the UK dramatically, but it changed I think the big cities even more. So there was a lot of prosperity. The UK was part of the great trading block just next door. It led to enormous diversity, but also it reversed lots and lots of the hatred and divisions that were there. Unfortunately it came back during the Brexit, where hate, again, became acceptable, politicians again used disparaging language towards minority groups, white and colored. And it's very sad to see, I'm afraid, John. And what I saw was every time you have a politician who thinks that their job is to just lead a faction rather than lead the whole, you have this problem. And the way ahead, I think in some ways, is ever so simple and yet seems ever so illusive right now. It's someone who represents the people, all the people, not just their faction.

Ketan Patel: (41:52)
Here we are today, where politicians are calculating which states am I going to win, what cities do I need to win, can I get a margin on 1% or 2%, just an extra few thousand votes, just in three centers or five. How awful is that, where we've sunk to that, when actually there was a time, and I think it still is the time, for people to say I lead everybody. And we're here to lead the whole population. That's what we need to see in America in the next election. You see somebody step up who says I'll lead you all regardless of whatever you believe, regardless your position, the old industries or the new, whether you're rich or poor. We're here for everybody. And I think the US's problem is you're not united. And the United Kingdom's problem is we're not united. Those are the things we need to solve, really.

John Darsie: (42:46)
Ketan, we're going to leave it with that inspiring message. Thanks so much for joining us. We could talk for two hours about all the different issues facing the world and how to address them. And I hope we'll have a chance to have you back not only at one of our in person SALT conferences, but maybe on a future SALT Talk as well to follow up on a lot of what we talked about. And maybe early next year in 2021 we'll be on a path to maybe leadership that's a little bit more unifying. That would be our hope, so thanks so much for joining us.

Ketan Patel: (43:16)
Look forward to it.

Anthony Scaramucci: (43:17)
It's great to have you on, Ketan. And we'll see you soon. I've got a ton of questions for you, but for some reason every time I leave a call with you I learn more, but I'm also optimistic. I think we can settle these things. I'm confident that we can find that bridge to build things. And thank you again for joining us and we'll see you soon.

Ketan Patel: (43:39)
Thank you very much for inviting me.

Eric Daimler: AI, Robotics & Consciousness | SALT Talks #24

“Just because Artificial Intelligence can solve problems doesn’t mean that every problem will be solved with algorithms.”

Dr. Eric Daimler is a leading authority in Robotics and Artificial Intelligence. Eric served under the Obama Administration as a Presidential Innovation Fellow for AI and Robotics in the Executive Office of the President, with the sole authority for driving the agenda for United States leadership in research, commercialization and public adoption of AI & Robotics.

“Don’t confuse a clear vision with a short time horizon.” Take the Jetsons, for example. We had a clear vision of a robot who would do all these things. Nowadays, we have a Roomba. AI will be most successful when deployed in very structured environments.

On AI and consciousness, “this will certainly not happen in the next 10-20 years, if ever. We don’t even understand our own consciousness.”

LISTEN AND SUBSCRIBE

SPEAKER

Dr. Eric Daimler.jpg

Eric Daimler

Founder & CEO

Conexus

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum, at the intersection of finance, technology, and geopolitics. SALT Talks are a series of digital interview we've been doing during the work from home period, in lieu of our global conference series.

John Darsie: (00:25)
Just like we do at our SALT conferences, our goal is twofold. It's to provide our audience a window into the minds of subject matter experts across those disciplines that we listed. As well as provide a platform for big, world changing idea. That is not embodied more than by our guest today, Dr Eric Daimler. An expert in artificial intelligence.

John Darsie: (00:48)
Dr Daimler is a leading authority in robotics and AI, with over 20 years of experience as an entrepreneur, investor, technologist, and policy maker. He served under the Obama administration, as the Presidential Innovation Fellow for AI and Robotics, in the executive office of the president. As the sole authority driving the agenda for US leadership in research, commercialization, and public adoption of AI and robotics. He serves on the boards of WelWaze, Petuum, the largest AI investment by Softbank's Vision Fund.

John Darsie: (01:19)
His newest venture, Conexus, is a groundbreaking solution for what is perhaps today's biggest information technology problem, which is data deluge. As a founder and CEO of Conexus, Eric is leading a leading CQL patent pending platform, founded upon category theory. A revolution in mathematics, to help companies manage the overwhelming challenge of data integration and migration.

John Darsie: (01:45)
He's served as the assistant professor and assistant dean at Carnegie Mellon's school of computer science, where he founded the university's entrepreneurial management program, and helped to launch Carnegie Mellon's Silicon Valley campus. He studied at the University of Washington Seattle, Stanford University, and Carnegie Mellon University, where he earned his PhD in computer science.

John Darsie: (02:06)
A reminder. If you have any questions for Dr Daimler during today's talk, enter them in the Q&A box at the bottom of your video screen. Now I'll turn it over to Anthony Scaramucci, who's the founder and managing partner of SkyBridge Capital, as well as the chairman of SALT, to conduct today's interview.

Anthony Scaramucci: (02:23)
Doctor, great to be with you. We had Kai-Fu Lee a month or two back, talking about AI. People in our industry, frankly some of them are just a little confused about it. There's a whole big bandwidth of AI. From, let's say, artificial intelligence, machine learning, and robotics. I was wondering how you sir, how do you personally define AI?

Eric Daimler: (02:49)
Yeah, well thank-you, Anthony, for having me. It's good to be here, as part of your terrific video series. Kai-Fu Lee is a friend of mine. We actually were in the same program at Carnegie Mellon University. I like him, I like his work. I like his book, AI Superpowers. I find that the way in which people think about AI in these contexts, can often resemble how I would think about it as an AI researcher.

Eric Daimler: (03:19)
I've been doing AI for 30 years in various capacities. But when I was an AI researcher day to day, I would think about AI as a learning system. A subset of which is machine learning. Many people have heard of that. Then a subset of machine learning is deep learning. Often popularized by the company, Deep Mind. Deep Mind and deep learning is a subset of machine learning, which is a subset of AI. There are non machine learning AIs, which is semantic AI. That level of being pedantic about AI isn't terribly helpful, I find, for the people that are not day to day AI researchers.

Eric Daimler: (04:00)
What I like to do, and probably what I'll be doing for the rest of my life, is trying to bring people into the conversation about AI. So they purchase, a way to grab onto the conversation, about what it is. How I do that is talking about AI as a system. As the totality of a deployment. From sensing, to planning, to acting. Then learning from that experience.

Eric Daimler: (04:24)
If we go to sensing, we would think that, "I'm going to collect data". This could be the billion points of an internet of things. This could be data, the LIDAR on top of my car. This could be the air quality in my room. I'm going to collect data. That then moves across a network, where it then goes into planning, processing, thinking. That's the traditional way people might think of AI.

Eric Daimler: (04:52)
If I look out in these images, and I say, "Well is that a crosswalk? Is that a kid at a crosswalk?", then it goes into planning. I make a determination, with what degree of confidence is that a kid at a crosswalk? How confident do I think of it?

Eric Daimler: (05:05)
Then I have acting, right? Sensing, planning, and then acting. I act on that experience to say, "Well, should I slow down the car? How abruptly? Or should I have a sharp left turn of the car? Or should I wait until I collect more information?". Then it loops back on the experience. Sense, plan, act, learn from the experience. That's how I think about the system of AI, as a useful definition for citizens and policy makers.

Anthony Scaramucci: (05:29)
It's very good. It's very helpful. You're the CEO of Conexus. You've got great signage right now. I just want to tell you, I'm very proud of you, sir. Because you're beating John Darsie in room rate. I'm obviously in a hostage situation. If I blink twice, call the FBI for me. Darsie has all those fake objects in his room there. But you're winning the room rater -

John Darsie: (05:51)
I'm trying my best. I'm trying my best.

Anthony Scaramucci: (05:53)
Conexus, what does Conexus do? You're the CEO of the company, and the founder. How would you describe it to our listeners and viewers?

Eric Daimler: (06:01)
Yeah, and first of all, thanks for the compliments of the room. I was alerted to this when, in the COVID crisis, a new Twitter handle came up. I think it's called something like Rate My Room. You'll see people like us going on that, and people will see -

Anthony Scaramucci: (06:13)
He gave me 1/10th of a Scaramucci for my current environment, which is one out of 11. It hurt my feelings, I have to tell you that. Because you'll figure out by the end of this, I'm very shy. I'm a little bit introverted, and I'm somewhat sensitive. I'm very thin skinned, so I was hurt. But go ahead.

Eric Daimler: (06:29)
That's your reputation, yeah. Well aware. Yeah.

Anthony Scaramucci: (06:32)
Yes, so go ahead sir. What is Conexus? What does it do?

Eric Daimler: (06:36)
What does Conexus do? Yeah, Conexus. What Conexus does is, we will guarantee data and models, in order to be making better decisions. That's what we do. That's obviously very important in these AI deployments. That's what we do. We're an MIT spin out. We like to think of ourselves as the cartography of the 21st century.

Eric Daimler: (06:57)
How maps were made, how they used to be made is, we would send a ship out. That ship may hit a rock, and then go to the bottom of the sea. Then we would send another ship out, and it wouldn't hit that rock, because we made a map of that rock. But it might hit another rock. This trial and error approach resulted in thousands of ships at the bottom of the sea.

Eric Daimler: (07:16)
That happens today, in our scientific process, and in the deployments of AI. Early on in Amazon's history, they would be trial and erroring their logistics systems. It happens today in other domains of AI. Today, when I get a dumbbell shipped from Amazon in 48 hours, I may not care about their trial and error approach to shipping or logistics. But in high consequence contexts, I really do care.

Eric Daimler: (07:45)
If I'm sending a commercial jetliner into the sky, if I'm managing a utility system, if I'm developing a COVID vaccine, these trial and error approaches can cost real lives. That's what Conexus does, is we work to guarantee the data and the models in the deployment of these systems.

Anthony Scaramucci: (08:04)
Well, it sounds very compelling. Who's your typical customer then? You don't have to give us a name of a customer. But who would call you up and say, "Okay. I would like this information"?

Eric Daimler: (08:15)
Yeah, well I can give you an example. Where we're working with a large logistics company, to find out where their personal protective equipment is. I didn't know how large some of these logistics companies could be. One was tens of thousands of employees, and their client was also tens of thousands of employees.

Eric Daimler: (08:35)
This client of our client had these ships around the world. Each one of these ships had tens of thousands of containers. The Conex box, the shipping containers. Inside of those were personal protective equipment, PPE. Where in the world the PPE is for our client, or our client's client, might seem like an easy question to answer, in the age where I could get a dumbbell shipped from Amazon in two days. But it's actually surprisingly hard, and it could take hours, if not days, to come up with this answer, of transferring data across these massive systems.

Eric Daimler: (09:09)
That's what we work to do right now, is make these systems more agile, more responsive. To address, "Where is my personal protective equipment? Should it go to Seoul, or Houston, or Rome?", much more quickly than how classic approaches would allow.

Anthony Scaramucci: (09:26)
Yeah, so you're making the economy more efficient. You're saving costs, saving energy. It's good for the environment. Conexus category theory. It's a game changer. Explain to people what that is, what it means, and why is it a game changer?

Eric Daimler: (09:45)
We are based on innovations to mathematics. This is just a fundamental basis for the foundation of the firm. We're not the only ones doing it. We're just the leaders in expressing this with enterprise software. We're often used to these innovations in physics. These reach the popular imagination, because they've kept the continuity of Moore's Law. These innovations in physics. We see them in faster chips.

Eric Daimler: (10:09)
But what we're less appreciative, is theses innovations in math. These discoveries in math, that have enabled transformations of our world. This is even more foundational than the nature of physics. The relational database system, upon which Amazon does its business, was funded, founded, powered by Oracle, who runs a big relational database management company. That would have not been able to be started in 1977, were it not for the discovery of relational algebra in 1970.

Eric Daimler: (10:42)
We have that new type of mathematics, categorical mathematics, category theory, that powers a new way of thinking for the digital age. This will sweep away everything you know, Anthony, about math, over the next 10 to 20 years. It's a math more appropriate to the digital environment. Calculus, trigonometry, geometry, that is a math of our ancestors. It's not inappropriate, it's just going to become less appropriate. A little bit like Latin. You know, you and I are speaking in English, not Latin. We won't really mention Latin, except when it comes time to our bonus, etc.

Eric Daimler: (11:19)
Those other maths will still exist. But they'll just become less important. The math of the future, the math of the digital age, the math that will sweep away everything else, is category theory.

Anthony Scaramucci: (11:30)
Okay, and so if I had to describe it to my 20 year old son, category theory is what exactly? How is it different from trigonometry, and ...

Eric Daimler: (11:39)
It's the math of equivalence. The math of our ancestors is the math of rigid equality. Rigid equality works really well when you're building a factory, and you have gears that need to interlace. When you're looking at a farm, and there's precise definitions of where a farm ends. It's much less appropriate in a digital environment.

Eric Daimler: (12:05)
The math of continuity is calculus, in waves. The math of a digital environment is in these relationships, where things are fungible. Where things are not exactly equal, but they could be related. Where you need to be transforming a view, from one view to another view.

Eric Daimler: (12:24)
I'll give you an example of this. We're working, one of the things Conexus does, my company, is we're working with some firms to come up with a COVID vaccine. If we looked at a COVID vaccine, we see many, many drug databases that need to be brought together for analysis. If we're bringing together more data for analysis, we find that they've been collected in different ways, because they've been collected at different times.

Eric Daimler: (12:48)
I might see one drug database that said, "Do you have high blood pressure?". Another drug study would say, "What is your high blood pressure? What's your number?". Another might say, "You have it. What's your medicine that you take? How much medicine do you take?". The classic ways of doing this bring together that data, and they just say, "Yes, high blood pressure". That's based on the math and the systems in the classic approaches.

Eric Daimler: (13:14)
We have to bring it together in a way that maintains the fidelity for better analysis, and better decisions. To come up with vaccines that are more effective, and faster to market.

Anthony Scaramucci: (13:27)
All right, that's a very good description. Where do you think AI is going? Do you have a personal philosophy, or an opinion on that? Obviously we have dystopian visions. Elon Musk has said this could end up like The Matrix. Kai-Fu Lee was on the opposite side of the spectrum. He didn't think it was ever going to advance to the point of full blown consciousness. Where are you on that spectrum? In terms of where the future is for AI.

Eric Daimler: (13:55)
I have many things to say about this. I spent my time working in the last administration, talking to congressmen about what AI is, and generally how scared they should be about AI. This is still a very useful conversation to be had. When we think about AI, and I remember, Kai-Fu Lee and I talked about this a couple of times. We both look at this dystopia, from The Terminator, to a utopia, like it'll save all of our lives. As a sort of lazy thinking.

Eric Daimler: (14:28)
Those extremes just aren't terribly helpful. Because there's a multitude of expressions in between, that we need to have a conversation about as a society. As I've said, I've been in AI for a long time, in a lot of different ways. One of which was a venture capitalist, on Sand Hill Road. In that capacity as a venture capitalist, we had an adage. Which is, "Don't confuse a clear vision with a short time horizon".

Eric Daimler: (14:57)
People do this all the time. Before I was born, way back in the '60s, there was this cartoon called The Jetsons. It's still entertaining. You can watch it today. In that cartoon, there was this robot that walked around and cleaned the house, did the dishes, vacuumed the floors, made the food. It was called Rosie the Robot. We had a clear vision back then, "This is what we want".

Eric Daimler: (15:17)
But 50, 60 years later? We have a Roomba. That's all we have, a Roomba. You had a clear vision, but you would not want to confuse that with a short time horizon. I think today, when people think of the fears, or even the hopes of AI, they can reflect on Google Glass. That was a disaster. "I know what I want. It's very clear how cool it could be. But it's a horrible disaster".

Eric Daimler: (15:40)
When I think of autonomous cars, we can think what we would like. "I would like a sofa to be going down the street while I watch Netflix". But that is not going to happen next year. Elon Musk has mentioned for the last several years that, "Next year, we'll have a fully autonomous car in every situation". But it's not going to happen next year.

Eric Daimler: (15:59)
Not to put you on the spot. But you can think, imagine in your head when you think fully autonomous cars first appeared on a public street in the United States. The answer is, back when Reagan and Thatcher were in power. In the early '80s. 1983, Carnegie Mellon University had vans. They were big vans, but vans nonetheless. Driving on public streets, stopping at stop signs. They were going five miles an hour. But it's just another indication of, having a clear vision doesn't at all indicate something's going to happen soon.

Eric Daimler: (16:29)
The idea about general intelligence, this idea about AI becoming conscious? I'll tell you, the consensus is, that isn't going to happen in the next 10 to 20 years. If it will ever happen, my personal view is it will never happen. Because we don't even understand our own consciousness. You can do a thought experiment, and I'll leave it at this. When you say, "Who's that thinking?", and then you notice in your head, you're saying, "Who's that thinking?". We don't have enough understanding of our own consciousness to be able to re-create that consciousness in another entity, in a machine.

Eric Daimler: (17:02)
That's my answer. These things actually move relatively slowly. What's distinct about this world, is that things don't just happen quickly. They happen abruptly. That's the distinction people should think about, with regard to artificial intelligence.

Anthony Scaramucci: (17:14)
When you mentioned 1983, doctor, I wanted to ask you, how does Madonna look exactly the same as she did in 1983? But since that's outside of your expertise, I'll ask Darsie about that later.

Eric Daimler: (17:25)
It is indeed.

Anthony Scaramucci: (17:28)
You did a great job of explaining the limitations. But let's talk about application, and talk about current application of what you're doing. What industries are going to be the ones that transform, as a result of Conexus, and a result of what you're working on right now?

Eric Daimler: (17:48)
Yeah, this is something that we can talk about for AI in general. I often am caught saying that every business is an AI business. Every business is an artificial intelligence business. That can shock people. But what I mean by that, is that physical manifestations of goods have become increasingly commoditized over the last 100 years or so. Five percent of us work on farms. A very small percentage of us work in factories. I can buy the gear to run a farm, or run a factory, in a way that I couldn't 100 years ago. We run more and more on data.

Eric Daimler: (18:27)
A friend of mine runs a company that does this sort of analysis for restaurants, or companies. I can give a context for that. When we think about where AI deployments happen right now. AI deployments happen in very structured environments. An easy one is a children's game, Tic Tac Toe. It's a very structured environment. AI can master Tic Tac Toe. Slightly more sophisticated is checkers, and then chess.

Eric Daimler: (18:54)
Then there's this other, more sophisticated board game called Go, many of us are familiar with. It's a Chinese board game, with stones on a big grid. For all intents and purposes, that game was solved about a decade ago, using that technique we talked about earlier. Deep learning. That problem, just because it solved that solution, doesn't mean that every problem now exists around algorithms. That we have these sort of decisions to make day to day.

Eric Daimler: (19:23)
Back to my friend. He goes into companies, looking for ways in which we can solve these ordinary problems. In a café, in this particular instance. The conclusion is, no one wants to buy the last croissant. It may seem counterintuitive to have this highfalutin technologist, with such a banal conclusion. But the idea is that, for whatever reason, people want to buy every croissant to the last one.

Eric Daimler: (19:50)
Even, you might think intuitively, that you want to run out of croissants when the store ends. Instead he said, "Well, we're going to not call that food waste. We're going to call that last croissant, 'Making every other customer comfortable, until that last croissant'". This is proprietary data now. It's proprietary data to that particular restaurant, that particular cupcake retailer or factory.

Eric Daimler: (20:11)
That acquisition of data, that processing of data, and that execution of data, is proprietary information to that cupcake factory. That has more in common with an AI business than may initially appear on its face.

Anthony Scaramucci: (20:27)
It's a great example, and it's a good segue into my next question. Steve Schwarzman, the CEO of Blackstone, is saying to people, or suggesting, that businesses should increase their inventory. In the event that there are future pandemics, and future supply chain disruptions. What do you think of that? Is that a good idea for businesses? Is that something that's going to weigh them down, and make them carry too much cost on their inventory and balance sheets? What's your opinion?

Eric Daimler: (21:00)
Yeah, this ... I remember his statement. That drives me nuts. Because it's, a problem about the COVID crisis, is that we couldn't have predicted it. How can you possibly have predicted something, or planned for something, that could not have been predicted? For people just to carry -

Anthony Scaramucci: (21:20)
Well, I've got a lot of my investors that are on this call. I want you to say that seven more times. Of course you couldn't predict it. That's why we're good fundamental investors. If you get caught, you've got to ride it out. You've got to be patient. But go ahead, I'm sorry to interrupt.

Eric Daimler: (21:34)
No, it's exactly right. How you'd respond isn't by having more bloated inventory, or having now 1000 alternatives. Because you actually don't know what the next problem is going to be. You're going to plan for the last war, is the criticism that we get in government, to the defense department. What's far, far more powerful, is to be a quick learner, and be adaptable. That's where my firm, Conexus, that's where we work with our companies.

Eric Daimler: (22:02)
The logistics company we worked with earlier, we can't plan for every possible eventuality. But what we can plan for is having better visibility. Better capital goods planning. Better labor planning. Then more supply or options, so that we can quickly respond to whatever problem may appear, in whatever timeframe. It's about responsiveness, it's about flexibility, and it's about adaptability.

Anthony Scaramucci: (22:29)
Okay. Well we're getting a ton of questions that are coming into our chat room. I'm going to turn it over to John, to have him ask you some of these questions. But I want to come back in a moment. But go ahead, John. I see the questions piling up.

John Darsie: (22:45)
Yeah. There's a question about, we mentioned that you worked as the Presidential Innovation Fellow for AI and Robotics, in the Obama White House. How did that position come about? What was it like day to day? What were you really working on there? Then how do you think, in general, we do as a government, driving research into AI and robotics? I know that places like China are much more aggressive in pushing into those areas. How are we doing? Talk a little bit about your work while you were in the White House.

Eric Daimler: (23:15)
Right. I will first say, it was a privilege. It was a privilege to be working in the Obama administration. It was actually just a privilege to be working in the federal government. I had an appreciation for the work that people do within the federal government. I was very impressed with the people with whom I had worked.

Eric Daimler: (23:34)
I mostly interacted with people in the defense department. I got a little challenge coin from the work I did with Ash Carter. I flew on a plane with Ray Mabus, and Air Force One is as cool as you think it is. The job and the people are fantastic. I had a great experience.

Anthony Scaramucci: (23:53)
See, Darsie's smiling right now, doc. Because I have flown on Air Force One. I see him laughing.

John Darsie: (23:58)
Anthony I think worked in the federal government for a couple weeks.

Anthony Scaramucci: (24:00)
I was only there for 11 days, doc. But I had three trips on Air Force One. I didn't mean to interrupt your stream and your thought there. But Darsie, you're lucky that we're not in the same room together. You'd get smacked right now. Okay, keep going, doc. I'm sorry about that.

Eric Daimler: (24:16)
It was as cool as you think it is, and the people were fantastic.

Anthony Scaramucci: (24:18)
Air Force One is as cool as you think it is, and Darsie, you haven't flown on Air Force One. I just wanted to point that out to everybody. Go ahead, doc.

John Darsie: (24:24)
I've got time.

Eric Daimler: (24:27)
The work we did, the work that I did, was in the coordination between what the president wanted to do, from the executive office, to the rest of the executive branches. Whether it was state, or defense, or treasury, or health and human services. They would all have their different uses for AI, and obviously the different uses for robotics.

Eric Daimler: (24:48)
We would come to try to conceptualize a framework, under which we could be going down the same path. This is both a Republican and a Democratic talking point, that shouldn't be politicized. I'm fortunate that this one area seems to not have been in the new administration. Because we were trying to make the allocation of our resources more effective for the American people, and maintain American leadership. That was my objective, and it was my day to day work. I hope I get the opportunity to do it again.

Eric Daimler: (25:19)
What I think about policy is, that number one, we need to engage in this conversation. It's not enough to sit back and react to whatever technology exists. We actually have to educate ourselves. As systems have become more complex over the past 50 years, we have become more educated than our parents, and certainly our grandparents, about the technologies in our world.

Eric Daimler: (25:45)
We need to do the same with AI. Because whether we like it or not, there are a million programmers out in the world, codifying our human values into software, in ways we may not like. We need to become educated, so we can be part of that conversation.

Eric Daimler: (26:00)
Another part of policy that I recommend is, that we have circuit breakers. These systems have become automated in ways that we may not appreciate. I may not want, that my Instagram account and my liking of a picture of a hamburger, to then somehow go through a sequence of algorithms, that then affects my life insurance policy. Because somebody thinks I'm now going to have high cholesterol, or what have you. That can happen. That sequence of behavior. So circuit breakers are important.

Eric Daimler: (26:28)
Related to that but distinct, we should have human auditors on AI, overlaying the black boxes that are there. There are tragic stories around black box criminal justice sentencing systems, as AI. I don't like that. I wouldn't want to be sentenced by a black box. I want to be talking to human beings. I want to make sure the decisions represent human values.

Eric Daimler: (26:50)
Those are the three ways I think we need to be involved in policy. Whether we are actually public officials, or whether we are citizens or business people.

John Darsie: (26:59)
Going to the pandemic for a moment, we have a question about, we actually had a very interesting panel a couple weeks ago on health tech. About how the massive amounts of data we have, and our new ability to process that data using AI and machine learning and things, is helping us in areas like radiology, oncology. As it relates to the pandemic, how can a firm like Conexus, leveraging AI tools and data, help speed up the race to find a vaccine, and generally help us confront pandemics going forward?

Eric Daimler: (27:33)
As I said earlier, we are working with companies to detect where personal protective equipment is in the world, and help bring effectiveness and agility to our logistics and shipping systems. This is a global problem, that will benefit our economy into the distant future. We're also working with companies to come up with a COVID vaccine.

Eric Daimler: (27:55)
The way we do that is, we work to guarantee data, and guarantee the integrity of the models. Since the COVID crisis, some 3000 scientific papers have been published. A couple hundred of these papers had to have been thrown out, because this one lab at Imperial College London, was found to have had a misinterpretation of their data. Some corrupted data, essentially.

Eric Daimler: (28:22)
The way we talked about normalizing data, and bringing data together, has found its way into our Centers for Disease Control. This feels almost criminal to me. That the Centers for Disease Control, these are the experts in the United States, to which we give a lot of resources, and give a lot of credibility. They conflated the idea of a positive test for a virus, versus a positive test for an antibody. They just merged them, and said, "Positive test".

Eric Daimler: (28:50)
This speaks to a lack of numeracy. Literacy in numbers, literacy in math. The point of taking math isn't to learn calculus, in the past, or to learn category theory today. It's the point to become literate with these numbers, so you don't have these sort of confusions. But even among the scientifically literate, you have to depend on the integrity of the models, and the data given to you. This is what failed this lab at Imperial College London.

Eric Daimler: (29:14)
Many, many different studies, hundreds in this particular case, had to have been thrown out. That may not seem terribly tragic, until you realize the consequences is a vaccine. It cost time, it cost money. In this case, since we're developing a vaccine, it literally cost lives. That's what my firm is willing to look into helping to shorten, and bring effectiveness to.

John Darsie: (29:34)
Going back to government policy for a moment, we have a question about, again, what the United States needs to do to ensure that AI research and development capabilities don't fall behind China. When you have a centrally planned government, they have an ability to make long term bets, and to drive investment into certain areas that they think are super important strategically, long term. We maybe have lost a little bit of sight of that in the United States, just given our political cycles.

John Darsie: (30:01)
What do we need to do? Should we be more focused on US government policy, regarding AI development? To ensure that we remain either ahead, or competitive with someone like China?

Eric Daimler: (30:12)
I think there's a lot to say here, and there's a lot to say here that doesn't just involve technology. It pained me to have been in, I remember back when I was in my PhD program. I would be around foreign nationals that wanted to stay in the United States, but we forced them back to their home countries. They wanted to be contributing to the research in the US. We paid to train them, but then we would force them back.

Eric Daimler: (30:42)
I would have been the person with whom they were competing for a job, and I'm fine with doing that. But we forced them back. I think that's tragic, because it impairs American leadership. I obviously think that we could multiply, by an order of magnitude, the funding of research overall into these domains.

Eric Daimler: (31:00)
I'll say two things that are very important for the listeners. That besides the funding, besides the immigration, is that we need to be engaged in the conversation, so that we know how to deploy the technology. My friend, Dr Kai-Fu Lee, will often talk about data, and China being the superpower of data. That's fine. But that only goes so far, because the winner will not just be in the accumulation of data. If that was true, where would that leave France, or Brazil, or Germany? As a second class citizen? No. It's in the implementation. It's in the use of AI that will have a lot of power.

Eric Daimler: (31:43)
We need to be looking at this, as I will say, as a system. The totality of an AI system. We have an advantage. As a free country, and as western democracies, to be collaborating with each other. On the acquisition of data, the processing of that data with guaranteed integrity. The analysis of the data, and the execution of that data. I would invite people to look at this as a totality of a system, in order to maintain American leadership. Both commercially, and militarily.

John Darsie: (32:13)
I want to move on to robotics for a moment. We talked a lot about AI. Robotics is very closely related to AI, but we haven't dived so much into it. A question came in from the audience, what are your thoughts about the increasing collaborative robot adoption, in reaction to an overdependence on human labor, post COVID?

John Darsie: (32:34)
The notion that if we're going to expect that there's going to be pandemics and disruptions like we've seen with COVID, are we in danger of companies moving towards a more robotics driven workforce, that has a little bit more flexibility, like an accordion? Depending on economic conditions?

Eric Daimler: (32:53)
You know, this came up in conversations when I was talking to people, representatives in congress. My answer always was, we don't automate what humans fundamentally want to do. We have machines that can do a lot of things. But if we still want to do them, we can still do them. But many of the repetitive tasks for which we have built robots, are not something that people, when they're a child, say, "Gosh. I want to do that repetitive project when I grow up".

Eric Daimler: (33:28)
I invite people, there's many different frameworks one might have about these technologies, including robots. But one is just as an automation tool. As an augmentation. This is how you can think about it. You are not going to be replaced by a robot. You're going to be replaced by a human using a robot. You need to work with these new automation tools. Automation's been coming the last hundreds of years. Learn how to work with these new tools, and how it can have you be better at the job, and then the larger job that needs to be done.

Eric Daimler: (33:59)
There are parts of this world that are fundamentally human. That is often the part where we're interacting with each other, like now. It's the part where we're expressing empathy with each other, like now. Those are the sort of skills that probably need to be nurtured, in order to have a longer term view of what your career is, or what your children's career is.

John Darsie: (34:22)
We have a question, and this might not be in your wheelhouse. So feel free to say so. But about social policy, that will need to be a result in a world where we have greater AI and robotics participation in our workforce. Maybe a stripping out of some of those types of jobs that you mentioned. Ones that maybe are very cumbersome for human beings, that get taken over by robots or machines.

John Darsie: (34:48)
In terms of things like universal basic income, or things of that nature. From a social perspective and a government perspective, what do we need to do in a world where technology replaces a lot of the human labor, that has existed for hundreds, thousands of years?

Eric Daimler: (35:03)
Yeah. You know, I think that it's useful to be contextualizing AI as something that happens abruptly, and not quickly. What's changed here isn't that we're going to have automation, and jobs are getting replaced. It's that those sort of changes used to happen over a generation, but in this world, when they happen, they'll happen abruptly.

Eric Daimler: (35:27)
Long haul trucking is often brought up as an example, because that's actually the largest job in most states, is long haul trucking. But if we look at that job, it's actually terrible. It's a terrible job. Many truckers don't even want to do that job, because they're taken away from their friends and from their family. That job is actually likely to get better, before it's replaced. I don't want to be encouraging my children to be going into long haul trucking. But it doesn't mean that that job is going away next year.

Eric Daimler: (35:53)
I'll tell you how that's going to go. This can give people a framework to think about AI, and social policy. They can invent their own answers. Right now, driving an automated semi down the road is the easiest of problems. But it's still a hard problem. How a company is solving this, Locomation in Pittsburgh, is they're going to have a peloton of trucks, three trucks.

Eric Daimler: (36:15)
The first truck is actually going to have a human driver. The second truck will have drivers, but they'll be asleep. Then that truck will rotate, and another trucker will take over. Then rotate, and then take over. Instead of that truck driving 11 hours, which is the current maximum, the truck can drive 24 hours. You can go out from Philadelphia to Kansas City, and then back, in a timeframe that allows you to keep the relationships with your friends and your family.

Eric Daimler: (36:42)
That's transformational, and those sort of transformations will be available with AI before it replaces jobs. I invite people to think a little more broadly about this. Kathleen Carley has invented a way of thinking about AI, that takes into account a cyber social system. Yesterday, Twitter got hacked. Banks get hacked all the time. Or they get attempted with hacking all the time. That's been happening for a while.

Eric Daimler: (37:11)
But what's now happening is, instead of people just attacking my bank, they're attacking me to attack my bank. "Is this thing fake? Is this thing real?". That gets manipulated now in my news feed, to continue my biases or what have you. But how will it now affect me, if I see videos that may be fake? It takes a whole new dimension to criminal justice, when eye witness accounts may not be eye witness accounts in the traditional sense. That's a new way of thinking about AI. We have a physical manifestation. A physical interaction with these technologies.

Eric Daimler: (37:42)
Then lastly, it is outside of my wheelhouse to be talking about universal basic income. But I will say, personally I'm not necessarily a fan. That came out of Silicon Valley, where a lot of people in my neighborhood think of these sort of easy answers to these complex public policy problems. I'd say that earned income tax credit is a much easier way, is a much more direct way to address folks that have job displacements.

Eric Daimler: (38:08)
I would say that early childhood education is another way to be addressing this. I do not want to have a simple solution, my personal view, of universal basic income, instead of addressing these more complex public policy answers, to that very hard problem.

John Darsie: (38:23)
We have one last question before we let you go. It was a good segue from what you just said, about early childhood education. That's a big part. We can put resources behind research and development. We also need to create a culture, where we incentivize young people to learn about AI, and coding, and robotics, and things of that nature.

John Darsie: (38:41)
I have three young kids. Anthony has young kids as well. What should we be doing, as a society, to teach our children about artificial intelligence? What type of resources should they be consuming? We obviously have a parent that's posed this question, and it's interesting to me as well. What should we be doing with our kids, to drive interest and engagement in the world of AI and robotics?

Eric Daimler: (39:04)
I don't know if I want to drive interest in robotics or AI. But I'd love for people to participate. There's an organization called First Robotics, of which I'm a really big fan. This nonprofit organization, and you can just use your favorite search engine, for First Robotics. I find it to be fascinating, because they allowed for this contest for children of various ages, to get involved in a project, that had a fundamentally technical outcome. But required people in different capacities.

Eric Daimler: (39:31)
What I loved about this particular competition that I saw in Florida a couple years back, was that women, girls in this case, girls were leading these teams of guys, kids, boys, in the development of robots, that they were given a challenge to develop. They were not only developing a technical acuity, but they were feeling comfortable that there was a place for them, that wasn't just the nerd in the basement. Which is how I started out.

Eric Daimler: (40:01)
Other people could say, "Well, I'm the marketer. I'm the fundraiser. I'm going to go find us money from our neighborhood, to help fund for our equipment". "Well I'm the leader. I'm the organizer, to make sure that we are not just experimenting, but we're developing the product towards the solution of winning the competition".

Eric Daimler: (40:17)
These little children were developing these sensibilities. I get goosebumps even just thinking about it right now, I was so moved. That real world interaction. Giving people a place to think about the breadth of opportunity for them, inside of these systems, that's not just nerds in the basement. I think it's critically important.

Eric Daimler: (40:38)
I think math is a big deal. You might say the more math, the better. But if I were to choose, I would say, let's put aside the geometry, the trigonometry, and really the calculus. Put it aside. It's going to become like Latin. Let's focus on probability, and categorical mathematics. Category theory. That's the math of the future. That's the math that we can use. That's the math you'll use in your day to day life.

John Darsie: (41:03)
Well that's fascinating. Dr Daimler, I want to thank you for joining us. You were able to attend our SALT conference in Abu Dhabi last December, where we had a great time. I hope that we can host you at one of our future SALT conferences in person. But for now, this will do. You talked about how you're in San Francisco. That's why you're wearing a sweater in the summer. For a nerd in the basement, you're very fashionable, and you have a very well decorated basement. Thanks again for joining us. We really appreciate the time.

Anthony Scaramucci: (41:30)
I mean, you're calling him a nerd at the end of the thing? I mean, that's like the pot calling the kettle black -

John Darsie: (41:34)
He called himself a nerd, give me a break.

Anthony Scaramucci: (41:35)
I mean, it's unbelievable. But doc, what I will say, is that in the middle of a pandemic, you're helping people see through to where the opportunity is. We're about to embark upon a massive technological transformation again, of our society. Which is going to lead to unbridled economic growth and prosperity. We just have to see ourselves to the other side of it.

Eric Daimler: (41:59)
Yes.

Anthony Scaramucci: (41:59)
But in the meantime, I'm going to be auctioning off the silverware and stuff behind John Darsie. But the truth of the matter is, it's likely not actually to be silver. It's probably just plastic. But that'll be for another SALT talk, Dr Daimler. Thank-you so much for joining us.

Eric Daimler: (42:16)
Good to be here. Thank-you, Anthony. Thank-you, John.

Anthony Scaramucci: (42:17)
All right. All the best.

Jason Mudrick: Event-Driven Investing | SALT Talks #23

“While all cycles differ, the sheer size of this cycle is what stands out.”

Jason Mudrick is the Founder & Chief Investment Officer of Mudrick Capital Management, an investment firm that specializes in long and short investments in distressed credit. Jason began his Wall Street career in 2000 as an associate at Merrill Lynch’s Mergers & Acquisitions Investment Banking group.

Jason’s focus on the middle market and taking advantage of smaller opportunities has differentiated Mudrick Capital Management from other shops. One notable position is with e-Cigarette company, N-Joy. With 70% of smokers wanting to quit, “you have a preventable problem if these people make the switch from traditional cigarettes.” The COVID-19 pandemic has only served as a catalyst for those looking to make the switch.

Gold is another commodity in which Jason has confidence, making a recent investment in Hycroft.

LISTEN AND SUBSCRIBE

SPEAKER

Jason Mudrick.jpeg

Jason Mudrick

Founder

Mudrick Capital Management

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global, thought leadership forum, and networking platform at the intersection of finance, technology, and geopolitics. And we've been doing these SALT Talks, which are a series of digital interviews in lieu of our physical conferences, during this work from home period. And what we've really tried to do is expose our audience, and let them into the minds of leading subject matter experts that are investors, creators, and thinkers.

John Darsie: (00:35)
And then what we also try to do is provide a platform for a big world changing ideas. And we're very excited today to welcome Jason Mudrick to SALT Talks. Jason is the founder and Chief Investment Officer at Mudrick Capital Management, which is an investment firm that specializes in long and short investments in distressed credit. So, this is obviously a very rich environment for his investment style. So, we're looking forward to that conversation. Mudrick Capital was founded in 2009 with just $5 million under management, but, as of this month, the firm has grown to manage approximately 2.4 billion, primarily, for institutional clients.

John Darsie: (01:11)
Jason began his career on Wall Street in 2000, advising on mergers and acquisitions as an associate in Merrill Lynch's M&A department, in their investment banking group. And in 2001, he joined Contrarian Capital Management where he began his focus on distressed investing. In October of 2002, Jason launched the Contrarian equity fund, which was an investment vehicle focused on purchasing distressed debt. And that would be restructured into equity, post-bankruptcy equities, and other event-driven, deep value, special situations.

John Darsie: (01:41)
Jason has served on multiple creditors committees, and served on the board of directors of numerous public and private companies. Jason also spent two years in graduate school, teaching economics classes to Harvard University undergrads. Jason has a BA in political science from the University of Chicago, and a JD from Harvard Law School. And he was also admitted to the New York State bar. And hosting today's interview is going to be Troy Gayeski, who is a co-Chief Investment Officer, and senior portfolio manager and partner at SkyBridge Capital, a global, alternative investment firm.

John Darsie: (02:12)
And just a reminder to everyone watching. If you have any questions for Jason during today's talk, you can enter them in the Q&A box at the bottom of your video screen. And with that, I'll turn it over to Troy for the interview.

Troy Gayeski: (02:23)
Yeah, thanks John. Thanks everybody for joining us. We have a real pleasure to have Jason on today. Jason and I go way back to 2002 in his Contrarian days. So, before we get in the meat and potatoes of the strategy, and the opportunity now, Jason, let's talk a little bit about your backgrounds, and what it was like to get involved at Contrarian back in '02, and '03, and run that successful, post-reorg equity opportunity fund. And how it makes you feel to be sandwiched not only between Josh Freeman, the legendary distressed investor at Canyon, but coming up tomorrow we have Dan Loeb as well. That must make you feel pretty good, right?

Jason Mudrick: (03:03)
Yeah. Troy, good to see you, and thanks for having me. And yeah, you guys get an incredible lineup of speakers. This is great. I've been watching some of the series, and it's been very informative. So, in terms of background, as John mentioned, I'm a lawyer. I never practiced law but went to law school, as a lot of people in this business did. Got my degree, joined Merrill Lynch in their M&A group as was mentioned. And then we went into recession. It was the dotcom bubble. It burst in the summer of 2000. We went into that recession. And then I met the team up at Contrarian, as you mentioned. Joined them in 2001, and it was off to the races.

Jason Mudrick: (03:47)
I started at Contrarian the day Enron filed for bankruptcy, which at the time was the largest bankruptcy ever. And I left two weeks after Lehman filed, which, currently, holds the title as the largest bankruptcy ever. So, great time to be in the business. The hedge fund industry was about 200 billion in '01, it got up to 2 trillion. So, I got to see the institutionalization of the industry. Got to see two great recessions leading up to this one, this one being the third. And then when the great financial crisis happened, left Contrarian to set Mudrick up. Brought a couple of guys with me. I hired a bunch of folks. And that was 11 and a half years ago.

Jason Mudrick: (04:32)
And as John mentioned, today, we manage about two and a half billion. We have 30 people here in New York, a couple of people that sit in London. And this will be the third cycle, and it's the biggest one that we've ever seen. And I'm sure we'll talk a lot about that today.

Troy Gayeski: (04:48)
Jason, that's great to hear more about your backgrounds. Look, given your rich history both in the 2001 to 2004 total distressed cycle, and really '07 through, even as a distant or as 2010, 2011, how that informs your view on the current cycle. And could you touch upon some of the similarities and differences between this cycle and the last two?

Jason Mudrick: (05:14)
Sure. Well, look, all of these cycles are different in their own ways. I think what stands out about this one is the sheer size of it. If you think about what led up to the cycle, we had the longest period of time between recessions, literally, since like the 1850s, right? You had 11 years between cycles. And that long period of time was characterized by reasonable growth, but probably most, importantly, it was characterized by very low interest rates. And when you have a long period of time of good economic growth, and low interest rates, companies borrow a lot.

Jason Mudrick: (05:54)
And what we saw was the levered credit market, which are the companies that are most likely to get distressed. These are high yield issuers, levered loan issuers. That market was about 1.2 trillion in a weight during that last cycle, which was a huge market, right? It was up six-fold from the 2000, 2001, 2002 recession, but today it's 2.8 trillion. So, it grew, 120% over the last 11 years. And then, we had this very steep downturn. So, while there's a ton of differences, what stands out to me as the most unique thing about this cycle is there's almost $3 trillion of high yield bonds and levered loans outstanding. And we now have a recessionary type economy with a whole bunch of industries that are going through rapid, secular change brought upon and accelerated by COVID. So, huge supply of distress.

Troy Gayeski: (06:50)
Yeah. And coming into this cycle, leverage levels were meaningfully higher than they were going into the financial crisis for corporate America. Correct, Jason?

Jason Mudrick: (06:58)
Yeah. So, over the last six years, average debt to EBITDA multiples of new issue were over five times. The last time we had an average debt to EBITDA, multiple, it started with a five, was 1998. And we had over five turns of debt to EBITDA, add new issue for six years leading into this. And by the way, as everyone knows, EBITDA is an adjusted EBITDA, right? Most of these are our LBOs, and there's various generous add backs to EBITDA. So, if you're thinking about EBITDA as a proxy to operating cashflow, and you take away the questionable add backs, those five, five and a half times debt to EBITDA was really like six, six and a half. And that was average.

Jason Mudrick: (07:44)
Those were multiples for companies that expected to continue to grow, and nobody expected this recession. So, not only do you have a lot of debt outstanding, but you have very high leverage multiples, which has exacerbated the supply of distressed credit.

Troy Gayeski: (08:00)
Great. So, stepping back from the current opportunity for a second, one of the things that you've stood out from the crowd in the last three to five years is despite the fact that there is fairly low supply of distressed debt to invest in, you still made very attractive returns. Whereas, unfortunately, most of your competitors struggled to make, mid, single digit returns. Can you talk about the style that led to that? Was it being smaller? Was it being more active? Was it being more opportunistic? What do you think drove those outstanding returns vis-a-vis your competitors the last three to five years?

Jason Mudrick: (08:35)
All three of those. One thing that we've seen since the great financial crisis is most of the investment firms that specialize in distressed credit are very large. Okay? So, a lot of the folks that you've had on your talks, you can think about Canyon, Aries. And I saw Mark, spoke a couple of weeks ago, so, Avenue, Anchorage, Davidson Kempner, Centerbridge. Go down your list, pick your top 20 firms known for distressed investing. And they manage, 10 billion, 20 billion. Oaktree is 80 or 100 billion, or however big they are. And so, by our estimates about 85% of the capital dedicated to distressed investing sits in $5 billion in larger firms. But if you look at the corporate credit market, that's not what it looks like.

Jason Mudrick: (09:28)
85% of the corporate credit market is not large cap. It's actually 60% of it is small cap, and mid cap. And we define mid cap as one to 5 billion of enterprise value. So, most of the market is less than 5 billion of enterprise value. Yet most of the players in the market sit in firms that manage more than 5 billion. So, that has a whole bunch of implications. A lot of those folks really need the Lehman Brothers, and Enrons, big situations, the Pacific Gas and Electrics, where they can go put hundreds of millions to work. And that's not where most of the opportunity set has been, one.

Jason Mudrick: (10:05)
Two, you get very overdiversified portfolios. I think it's very hard to concentrate when you're running multibillion dollar portfolios. It's hard to take five or 10% positions. And in a world where there's few great opportunities, I'm talking about pre-COVID, we're in a cycle now. But when we were in the late stages of the last cycle, there was very few differentiated positions. If you can't take big positions in them, it's just really hard to put up good numbers in this asset class. So, our focus on middle market, being able to do the smaller stuff has differentiated.

Jason Mudrick: (10:44)
You mentioned active involvement. We sit on 12 boards of directors today. And we're on five active creditors committee. It's been defining part of our strategy to be very involved in these situations. And particularly, in some of the small, and middle cap situations, you really can drive the boat. You really can change the trajectory. There's not a lot of other distress players in these situations. So, we found that that's helped differentiate as well.

Troy Gayeski: (11:06)
Yeah, that's really interesting. We had Jerry Pascucci on from UBS yesterday, and he talked at length about there is a trend towards larger managers, but there are still those like yourself that are demonstrating that smaller size works to your benefit. It can help you put a better risk adjusted return. So, assuming you would agree with Jerry's conclusion.

Jason Mudrick: (11:25)
Yeah, no, 100%. I mean, look, it's a double-edged sword. I mean, it is a very resource intense investment strategy. So, you can't do this with three people on a Bloomberg. So, there is an optimal size. Particularly, today, there's a lot of new money opportunities. It's very advantageous to get to 51% in a lot of these documents, which are very covenant lite. You've heard about, I assume, the situation at J.Crew, or at Travelport, which were very involved in. PetSmart where assets are being stripped out. It's hard to be small. It's hard to be very large. And I know I'm self-serving when I say that, but there is an optimal size where you have the resources, you can own enough of this stuff to drive the boat. You can have a seat at the table, yet, you're not so big that you're lethargic, and can only be involved in large cap situations.

Troy Gayeski: (12:21)
Great. So, before we get into some of the distressed opportunities you look at today that were created by the pandemic, you have a very large investment in e-cigarette company. And we know you think it's going to lead to tremendous upside, but before we get into the upside, can you talk about the societal impact, and the positives that these companies can bring in terms of lowering morbidity and mortality rates to smokers?

Jason Mudrick: (12:46)
Yeah. I'm glad you asked about that. I mean, the e-cigarette industry has gotten a bad rap, over the last couple of years, because of a couple of bad actors. The most notorious of which is Juul. There's been a rise in youth use, underage use of the products, but it is not across the entire category, and it's not across all products. It really is a Juul phenomenon. And that has made this category talked about in a very negative light, but if you put that aside, smoking-related illness is the number one preventable healthcare problem we have in society. I know that's difficult to talk about given that we're dealing with this COVID situation, but 500,000 people in the U.S. die every year from smoking-related illness, and 6 million people die every year, globally, from smoking. And 70% of smokers want to quit, right?

Jason Mudrick: (13:42)
So, you really have a preventable problem. If you could give smokers an alternative. Obviously, quitting would be the best alternative, but if they can't quit, and they've tried over and over and over again, which a lot of them have, to give them a reduced risk product to continue to consume nicotine could be more impactful to society than almost anything else that you can imagine. So, it has gotten a bad rap, and I get it with youth use, and that has to be arrested. But if you could figure out a way to switch smokers from combustible to vapor or heat not burn over the next 10 years, it's an incredibly socially responsible investment.

Troy Gayeski: (14:18)
Yeah. This is a global problem as well, obviously, right Jason? It's like 14% of U.S. smoke. Mainly a working class problem, but in terms of China, and Germany, and other countries is far more prevalent, no?

Jason Mudrick: (14:30)
Yeah, I mean, in emerging markets, smoking rates are as high as 50%. We have one of the lowest smoking rates in the world, at around 14%, but there's still almost 50 million Americans that smoke cigarettes. I mean, I think in the investment world, we don't see it as regularly because as you mentioned, it is primarily a blue collar ... It's very prevalent in our minority communities, and our military communities. It's not necessarily something that is as salient to us on Wall Street anymore. I mean, we all have grandparents that died of lung cancer. Certainly, I did. But it's out of sight, out of mind, but that's not right. I mean, if you look at the actual numbers, $300 billion was spent last year on healthcare-related costs associated with smoking illness. So, it is a massive problem still.

Troy Gayeski: (15:24)
Yeah. So, now, that you've touched upon how it can help society, how about some of the return potential? And if you could talk through realistic return versus risk profile.

Jason Mudrick: (15:34)
Yeah, sure. So, I mean, it's very unusual to have a market as large as this that's highly regulated, that's being disrupted, right? Usually, you need very high barriers to entry. The barrier to entry in this industry is regulatory-driven, right? These products, there's good products, and there's bad products, but the science behind them, the technology, is pretty commoditized. There's nothing that unique about these products. What's unique about it is it's very hard to get a license. And the way the U.S. regulatory machine is attempting to regulate this business is going to create very few players. It's going to create effectively an oligopoly.

Jason Mudrick: (16:16)
And that process is ongoing as we speak. And the total addressable market is just huge. I mean, there's $100 billion, just in the U.S., $100 billion spent every year on nicotine-related products. And 70% of smokers want to quit, or 80% of that 100 billion is still combustible cigarettes. So, 80 billion is spent every year. So, if you believe as I do that half the market will go the way of reduced risk products over the next 10 years, you're talking about $40 billion of revenue on top of the 10 billion or so that's already spent on vapor products. You're going to have a $50 billion market over the next 10 years.

Jason Mudrick: (16:56)
That's probably going to be accessible for four, five, six, seven type of players. I mean, literally, the regulatory environment is creating ... Like we just applied for our license. It's called a PMTA, a Premarket Tobacco Product Application, in March. And to complete our application, we had to spend over $20 million. And a lot of the data that we had to show the FDA, they're the regulatory body in charge of this, a lot of the data that we had to show the FDA was historical population-level data, survey work. And if you're not an incumbent, if you're not an existing player, you can't show that.

Jason Mudrick: (17:36)
So, even if we could round up the money from venture capital firms, or collectively, to come up with a new product and go try and get a license, we wouldn't be able to show any of that historical data. And the risk would be very skewed to the downside for a new launch. So, I think, unintentionally, but it's the reality, they're creating a market where only incumbent players are going to get licenses. And a lot of the smaller players aren't going to be able to afford to put together a comprehensive application.

Jason Mudrick: (18:07)
If you fast forward 12 months from now or 18 months now, and this regulatory approval process is through, I think you're going to have five to seven players in a market that, like I said, I think could be on the scale of 100 billion in size over the next 10 to 20 years.

Troy Gayeski: (18:24)
Has the pandemic slowed down the rate of crossover from those addicted to cigarettes to vaping?

Jason Mudrick: (18:32)
Interestingly, there's a lot of noise in the numbers, so it's difficult to make too many concrete differences, but we believe we've seen an acceleration of the switch. I think there's a lot of folks just given how COVID attacks the lungs in the most severe cases, I think we've seen an acceleration of people trying to get off of combustible, either quitting entirely, which is obviously the best option for them, or switching to a vapor product, which is a reduced risk product.

Troy Gayeski: (19:03)
We were talking about this before, but somewhat, surprisingly, the FDA hasn't slowed down its application processing during this pandemic, which I think you found to be a positive surprise. No?

Jason Mudrick: (19:14)
Yeah. So, all of the applications were due May 12th. We were fortunate ... I say we, the company is called NJOY. NJOY was fortunate, and then they got their applications in March, and then COVID happened. And Juul, in particular, went to the FDA and said, "Look, we need more time because we can't complete our application with all the labs closed, with all the population survey firms closed." And that deadline was extended until September 9th. So, the current deadline is September 9th, and we'll see if that gets extended again or not. But there was a concern amongst those that had gotten their applications in like NJOY that the FDA would go pencils down given that they have a lot of other areas they're focused on, and the realities of just a work from home environment.

Jason Mudrick: (20:01)
But what we've seen is that that's not the case, that they're plowing through applications. And my belief is that they want to get the applications that did get in before COVID shut everything down off their plate, because they realize that they're going to get a whole nother batch of applications September 9th. So, last week or the week before, but very recently, Philip Morris got what's called an MRTP for their IQOS product, which is a modified risk label. So, they can actually make statements like this product is not as harmful as cigarettes. And the fact that that was approved during this COVID time shows that the FDA is still plowing through these applications. And that's a good thing.

Troy Gayeski: (20:43)
Yeah. Thanks for that summary on your largest investment. And Jason, just to shift gears, when you look at the gold market today, there's obviously a lot of buzz based on QE infinity rates at zero for pretty much as far as the eye can see. And gold's finally starting to catch a bid. But one of the interesting positions you have is in the gold miner Highcroft, which was a classic post-reorg equity. So, you want to walk people through where we are in that life cycle, and how you think it's a better way to play a continued bull run in gold than just being long, buoyant, or the futures.

Jason Mudrick: (21:16)
Yeah. Look, Highcroft's an interesting one. We bought Highcroft about five years ago out of bankruptcy, us and a couple of other firms. We basically made the company a debtor and possession loan. So, it's a priming loan you can make in bankruptcy to help them get through their restructuring. And we added a convertibility future. So, we were secured by all the assets that the company had, which we thought covered the loan. But if gold were to move materially higher, and gold miners are about as levered away as possible to play gold price appreciation. We would participate in that upside through the convertibility feature.

Jason Mudrick: (21:55)
So, when I bought it I really looked at it as almost a contrast. I mean, contrast, that is the wrong description, but I really looked at it as a hedge, even though it was a long. It wasn't a short, but it was a long. But I thought, if things ever went south on the economy or something very bad happened, there's always a flight to safe havens. And gold is usually one of those. And because of the convertibility feature, and the DIP loan, we would benefit materially from that. So, this has sat on our books. And I know I've talked about it with you, and your team in the past, but it's basically been dead money for a long time, and then COVID happened.

Jason Mudrick: (22:33)
And now, what we were able to do earlier this year is get the company public. So, it's now listed on Nasdaq. So, we merged it into a SPAC to get it publicly-traded. The ticker is HYMC. So, it's now listed as of last month, and it is a very large gold deposit sitting in Nevada. So, we have almost 20 million proved and probable ounces of gold. The NAV five using $1,300 gold is over $2 billion. And if you plug in current spot prices, so we produce silver as a byproduct too, but with silver at $19, and gold at 1,800, I think the NAV is close to $5 billion.

Jason Mudrick: (23:17)
And what's, particularly, interesting about it today is we took it public through a SPAC. Investors in SPACs tend to not care about companies that are merging, not necessarily. They tend to be more doing the arbitrage around the SPAC, and also, mining assets are very unique assets. A lot of the people that invest in gold assets, don't know about Highcroft. So, as I think about the next six to 12 months, no comment on what gold is going to do. Gold's obviously been very well-bid. As we sit here today, it's out of pie of this cycle at 1,808. But no comment on gold.

Jason Mudrick: (23:58)
This stock is very illiquid. It's not covered by any sell-side research. It's not on any exchange. And what I expect to happen over the next 12 months is we'll see five to 10 sell-side research shops pick up coverage. More liquidity will come back to the name. And if it trades in line with where its competitors trade, there's meaningful upside, potentially, two to three times where it's trading today. So, we're pretty bullish on Highcroft.

Troy Gayeski: (24:24)
Yeah, that sounds like a great way to play marketing gold. But we're running out of time. So, I just want to segue back into the classic distress cycle that we're in. You mentioned before there's still two to 300 billion of distressed companies. Because what we hear from people quite often is, "Hey, liquid IG's rallied, liquid high yield's rallied. The opportunity is not going to be as big as people thought maybe at the end of March." But there's still ample supply to go after, and defaults are only going one way, which is higher. So, can you talk to us about the broader opportunity then we can get into some specific sectors you're focused on?

Jason Mudrick: (25:00)
Yeah, no, I mean, you're absolutely right. I mean, you just call any restructuring lawyer, or any restructuring financial advisor that you know, and ask if he or she is slowing down. I mean, we're in the first inning of the actual restructurings. What happened to the markets in March, and then, subsequently, in April and May as they rallied back is different than what we do. I mean, we focus on the de-leveraging events. So, the fact that some IG bonds traded from 105 to 95, and right back to 105, or some higher grade, high yield traded down 15 points and is right back to par. That's not really what we do. I mean, I think that was a great opportunity for those that do it. And I think guys made a lot of money, but that was the trade.

Jason Mudrick: (25:46)
It was the trade of the cycle. And we'll see how that plays out. What's going to drive to faults is economic activity. And we are in a slower economy, right? The world was priced for perfection, as we talked about earlier, in terms of debt to EBITDA, multiples being very high. And we are in a slower economy now. Now, some industries are doing fine, and some industries are going to come back a lot faster as everything reopens again, and we recover, but some industries are never going to come back. Think about department stores, they were probably going away over the long period of time, Lord & Taylor's is a store that I shopped at growing up, and that was going away over the next 10 years, but it went away in 10 days when COVID started. Right?

Jason Mudrick: (26:38)
So, COVID, has really been an accelerant of change. And think of business travel. We were talking about this before we went live just now. I mean, business travel, I don't know when it gets back to 2019 levels. I think people have just realized that video conference technology is pretty good. It's not the same as being in the same room as someone, but it's 90 or 95% there. So, I expect that there's going to be a long period of time. Even once there's a vaccine and COVID is a thing of the past, I don't think people are going to travel for business the way they used to.

Jason Mudrick: (27:17)
And that's a good segue into what industries we're looking at, but we are in a slower economy. There's massive disruption in industries, all at a point in time where there was maximum amount of corporate credit, and those two ingredients are a good recipe for having a lot to do. So, what I've told folks is I think this is a three to five year cycle. We're in the first inning of it, in terms of the actual defaults, not what's going on with the SP or the Nasdaq, or higher grade, high yield, the triple C stuff, the stuff that really needs to equitize. We're very early in this game.

Troy Gayeski: (27:53)
And which sectors in particular, Jason, are you looking for good company, bad balance sheet? Because it seems like there's more prevalence of that than just dying retail, for instance.

Jason Mudrick: (28:01)
Yeah. We're doing a lot in travel, not surprisingly. We own a company called cxLoyalty, which administers loyalty points for financial institutions. So, that's been impacted a lot by the shutdown in travel. We're involved in travel port. I can't really talk about that one because we're restricted in it, but that's an Elliot portfolio company. One of the three GDs globally. We're involved in some inflight connectivity companies, Gogo Global Eagle. So, there's a lot to do around travel. And we don't own airlines or cruise ships per se. But a lot of the companies that provide services to the industry are very distressed right now. But away from travel, very diversified across industries. I mean, the theme, if anything is LBOs.

Jason Mudrick: (28:49)
I mean, to your point about good business, bad balance sheet, most LBOs are reasonably good businesses that have predictable cashflows that can be levered, but they have a bad balance sheet because they financed the purchase price with a lot of debt. And there's a lot of first lien debt trading at 80 cents right now, some of which is going to go to 60 because the company is not going to make it. And some of which is going to go to par because the company is going to make it. As long as we have a ton of situations like that to look at with debt trading at 80, there's ways to make money.

Troy Gayeski: (29:26)
Well, Jason, it's a fantastic summary of the opportunity set as well as some of your key investments going forward. And we just want to thank you for being on today. I'm going to turn it over to my partner, John Darsie, who's going to ask you some questions from the audience. There are things people are eager to hear about how much money you're going to make the next two to three years, which is what it's all about after all, right, my friend?

Jason Mudrick: (29:45)
Thanks Troy. Good to see you.

Troy Gayeski: (29:46)
Good to see you too.

John Darsie: (29:48)
Jason, you mentioned Gogo, and we had an audience question about that. So, you talked about how you don't think business travel is maybe ever going to get back to 2019 levels, and is very challenging. So, what's your investment thesis on something like Gogo that likely relies a lot on revenue from business travelers?

Jason Mudrick: (30:05)
Well, look, I was specifically talking about business travel. The recovery in the business travel world, I think there's a secular change there. And that will take much longer. Vacation travel, so, personal travel, we're actually seeing some early green shoots that that's going to come back strong. There's a lot of pent up demand for travel. And I think as soon as people feel safe getting on airplanes, again, you're going to see a lot of pent up demand there. So, I think you have to think about the two categories differently. What's interesting about Gogo, in particular, is they effectively have a monopoly on private jets. So, the business aviation, that business alone, they're in 95% of inflight connectivity is Gogo.

Jason Mudrick: (30:58)
So, it's effectively a monopoly. And private jet travel, we've actually seen for July 4th week, and 5% year over year increases. So, you're already seeing that business come back. It is a safer way to travel, or at least perceived to be for a lot of folks that have the ability to access that luxury. And what's more interesting for us as financial analysts is most of those contracts are subscription-based, they're not usage-based. So, even when people weren't traveling, a lot of people were continuing to pay their monthly costs to have Gogo active. So, we actually think that the cashflows from the aviation side of the business, they'll be down year over year, but not down that much.

Jason Mudrick: (31:39)
If that business did 140 of EBITDA last year, we think it's going to do like 120 this year or something in that neighborhood. And that business alone is probably an eight to 10 times business, and covers the lion share of the senior debt. It actually covers all of the senior debt, and even some of the junior debt. So, our thesis is really about personal travel and business travel being different, but also business aviation being a much sturdier business model than commercial aviation.

John Darsie: (32:05)
All right. Thank you for that. The next question is around investment structures. So, you recently raised a longer lockup private equity style vehicle. Are these types of structures going to be necessary for distressed investing in a cycle?

Jason Mudrick: (32:19)
I think they are, for a couple of reasons. First of all, as I mentioned earlier, distressed credit focused investment firms have gotten so large relative to the last couple of cycles. It's very common to have a very concentrated ownership of companies when they emerge from bankruptcy. And what that means is that the post-reorg equity can be very illiquid. It's very common for five or six funds to own 80% of a company. And it's hard to just re-list that company, which is what we used to do in the '01, '08. You would take the company through bankruptcy, and just re-list it on the New York Stock Exchange. And liquidity would come back to the name, and you would exit. Today, the holding period is much longer. Usually, come out of bankruptcy as a private company, you continue to fix things, and then you go do an IPO.

Jason Mudrick: (33:06)
We merged Highcroft with a SPAC to get it public. You could merge with another public company that's not a blank check company, a strategic company. You could sell the company in an auction. But if the holding period used to be 18 months, it's now two to three years, sometimes longer. So, when you're dealing with longer hold periods, it's just more prudent to have longer lockup capital. So, we've been focused on private equity-like funds, so not tenure funds, but not quarterly liquidity, something in between, call them hybrid funds, where you have three or four year investment periods, and then you can harvest the investments.

Jason Mudrick: (33:40)
And the second thing is, as I mentioned earlier, we focus a lot on middle market situations. So, those are just going to be inherently less liquid. You get better value. They're less efficient. So, the value that we're looking for is there. The mispriced securities are there, but it's hard to do that with monthly or quarterly liquidity. You really need to know that you're going to be able to be around and see these things out. And that can take years.

John Darsie: (34:08)
So, we have a followup question about your NJOY investment, which is the e-cigarette company. Just talk through, again, your investment thesis, and then how you think the Smores IPO changes or doesn't change the return trajectory for your NJOY investment. And how do you size something like that?

Jason Mudrick: (34:25)
Yeah. Good question. So, for those of you that don't know who Smores is, Smores is the largest manufacturer of these products. So, Juul does their own manufacturing, but British American Tobacco's products, Altria's old product, they've taken it off the market when they made the investment in Juul. Our product, Japan Tobacco's product all produced by Smores, in Asia. They just IPO'd, and I haven't really followed it, but my understanding is it's done very well, and doubled. So, look, it's not the same business. They're producing the products that we're distributing them, and we own the product, and the brand, but, it's obviously a good thing. I mean, if you said, would you rather have Smores trade down 50% or trade up 100%? I would say I'd rather have it trade up 100% because it shows there's demand for this industry.

Jason Mudrick: (35:21)
What's really exciting about NJOY is because of the way the regulatory environment has been set up, there's very few players. And almost all of the players are owned by a big tobacco, right? So, Vuse is the number two product. Vuse and Alto, it's the same family of products, is owned by Reynolds/British American tobacco. They're the same today. Juul is effectively owned by Altria. They have a minority investment in them, and it's effectively owned by Altria. And the current CEO is a former Altria executive. Logic is owned by Japan Tobacco. Blue is owned by Imperial Tobacco, and then there's NJOY, which we control, and is owned by private investors.

Jason Mudrick: (36:09)
So, there's a real scarcity value if you think about the big five players. If you want to invest in the disruption of the combustible cigarette, there's no way to do it, right? If you want to invest in Vuse, you have to buy British American Tobacco stock, and you're getting 80% combustible, or 90% combustible, whatever it is. So, there's really no way to invest in the disruption of the combustible cigarette absent something like NJOY. So, I'm very bullish on, potentially, a public offering. I think it wouldn't be surprising to see one of the strategics acquire NJOY before it goes public. But if in theory, NJOY was a publicly-traded company, it would be the only publicly-traded way in the U.S. to play the disruption of the combustible cigarette.

Jason Mudrick: (36:56)
And I think the scarcity value of that alone, not to mention it's just the sheer size of the market. The [TAM 00:37:03] is $100 billion market. I think the fundamentals would support a very high valuation, but the scarcity value alone is really interesting. And the market's obviously valuing growth right now, and disruptions. I mean, look at Tesla. Look at the fact that the Nasdaq's up 16% year to date, and the Dow is down 8%. There's a real premium placed on growth and disruptions, and NJOY has both of those going for it. So, I'm bullish. I think [Smores 00:37:29] helps, for sure.

John Darsie: (37:33)
Would you use a SPAC to take NJOY public? We had Chamath Palihapitiya on an early SALT Talk, and he took Virgin Galactic public via SPAC. Is that something that you would look at in the case of NJOY?

Jason Mudrick: (37:46)
Yeah. I mean, look, SPACs are interesting because you can do them quickly. They've already gone through the IPO process. So, it's really a merger negotiation, and you can get the company public quicker. There's a little bit more appetite for situations that have hair around them. That being said, there are some negatives. And we were the sponsor of the SPACs. So, I'm intimately familiar with this, but there's a lot of dilution to the upside from the warrants that you need to issue to get a SPAC public. So, we'll consider anything when the time is right.

Jason Mudrick: (38:17)
I think that the size of the market is such that this is probably more likely a regular way IPO, if you had to ask me today, but the landscape is changing very quickly. A lot's changed just in the last 12 months, and I expect things will change over the next 12 months. So, I can't make predictions but NJOY is of the sizable e-cigarette producers that are sold at convenient stores, and gas stations throughout the country, so, nationwide distribution. NJOY is the only one that's independently-owned that has sizeable market share. And that I think is particularly interesting.

John Darsie: (38:55)
Before I get into a couple of the last questions, I want to give you an open forum to talk about any other individual investments that you think are interesting, and demonstrate your investment style. We've talked a little bit about NJOY, Gogo. Are there any others that we haven't covered that you think are interesting?

Jason Mudrick: (39:12)
No, look, we're not here really to talk about our books so much. And I'm glad you asked about, NJOY, and Highcroft, because I think they're unique situations. Look, both of them are actively controlled situations. So, we control the board of NJOY. We don't control the board, it's independent of Highcroft, but we are the chairman of the board, not me, but one of the guys that works here, David Kirsch. And they were both smaller, more off the run deals, and they were also pretty contrarian. Buying a gold mine on a bankruptcy, buying an e-cigarette manufacturer out of bankruptcy.

Jason Mudrick: (39:51)
I think they're interesting trades to talk about how we have differentiated ourselves. It's not Pacific Gas and Electric bonds, which we looked at but hard to really have an edge in a situation like that where every distressed guy on the planet is taking a hard look. Very few people looked at those two situations. And, Highcroft is actionable for those that are watching, that are looking for an interesting way to play gold. And you can't really invest in NJOY outside of our firm, because it's private. But now that we've listed Highcroft, if you're looking for a highly levered way to play gold with a lot of catalysts, mainly liquidity coming back to the name. People just understanding that it exists, it trades at around 0.2 times NAV, and comps trade between 0.6 and one time NAV. If we traded close to comps, it would be a 20 to $30 stock. So, I think that's a particularly interesting one since it was already brought up.

John Darsie: (40:52)
So, we have a question, if you're familiar, what are your thoughts on the recent ruling on Serta Simmons and Apollo?

Jason Mudrick: (41:00)
Yeah. Well, interesting that it happened to Apollo because they're usually the one, pardon my French, but doing the screwing. And tables-

John Darsie: (41:14)
We had Josh Harris on, I'll tell him you said that.

Jason Mudrick: (41:17)
... Tables were turned a bit. Look, since we're talking about Apollo, we were involved in a Canadian oil and gas situation, five or six years ago, where Apollo and GSO did an up tiering. They basically exchange their debt into senior debt, and primed us, and didn't let us participate. And we sued, and we lost, and we appealed, and we lost, and I think we appealed the appealing, and we lost again. And I think we're still suing for D&O insurance coverage. So, I've been on the other end with them, just to see it happen to them was somewhat ironic. But look, we're involved in these situations all the time now.

Jason Mudrick: (42:01)
The fact is, one of the things that we've seen through the cycle is a very loose covenants. And when you have loose covenants, you're going to get companies that are going to be creative, financial sponsors that are going to be creative. And at the end of the day, what's happening in these situations is companies have figured out a way to extend the optionality in their equity. And oftentimes, that involves treating one class of creditors differently than the others, in exchange for liquidity. Right now, liquidity is paramount. So, if you're willing to put money into a company, and the company can move you ahead of similarly situated creditors in exchange for getting that money, the company should do it. I think as an investor, you just need to understand that risk. You need to handicap that risk. And if not, you're going to wake up on the wrong side of a trade like that.

John Darsie: (42:57)
Well, Jason, thanks so much for joining us. I want to give Troy one last word, if he has any more comments or questions for you before we let you go.

Troy Gayeski: (43:05)
Yeah. Thanks, John. Thanks Jason for being on again. Once again, when you compare it to 2001 to 2004 cycle, '07 through let's call it 2010, 2011, do you think the return potential is equal or greater now? Or do you think it's more compressed because of fed policy intervention? How do you see it playing out?

Jason Mudrick: (43:28)
I think this is the mother of all cycles in terms of the size, right? I think, we're in effectively a zero interest rate environment. So, I think the tailwind for equity markets over the next five to 10 years is not going to be what it was coming out of the '01 cycle. But the market is 15 times larger, right? If you asked me, would you rather have a bull market or a lot to do? I would say I'd rather have a lot to do. So, I'm bullish on this cycle because there's $3 trillion of levered credit that not all of it's distressed, but a lot of it's distressed.

Troy Gayeski: (44:12)
Well, thank you so much, Jason. You're a real entrepreneur. Congratulations on all your success. And we look forward to many more years of success in the future.

Jason Mudrick: (44:20)
Thanks, Troy. Thanks, John. Appreciate it.

Jerry Pascucci: Building a Successful Investment Team | SALT Talks #22

“Leaders define cultures, cultures define organizations and culture is the best predictor of a company’s future.“

Jerry Pascucci is a Managing Director of UBS Financial Services. He also serves as Head of Global Alternative Investment Solutions, where he is responsible for research, sourcing, underwriting, strustructuringting, risk management, administration and distribution of all alternative investment products, as well as private equity, credit, real estate, infrastructure and impact offerings.

The hedge fund industry is doing well in the wake of the COVID-19 pandemic. As opposed to the 2008 financial crisis, there is more capital to work with. With time and operational capability, companies will persevere. Otherwise, there is ambiguity in what will happen when capital investors get into some friction.

On manager selection, “the first thing you have to do is have the license to get involved with that small manager.” A successful investment team has to be able to source and test their hypothesis. This has been made even more challenging without face-to-face meetings, meaning fewer managers are crossing the proverbial finish line with allocators.

LISTEN AND SUBSCRIBE

SPEAKER

Jerry Pascucci.jpeg

Jerry Pascucci

Head, Global Alternative Investment Solutions

UBS

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and geopolitics. We've been doing these SALT Talks, which is our series of digital interviews with leading investors, creators, and thinkers during the work from home period in lieu of our global conference series. Just like we like to do at our SALT conferences, the goal with these SALT Talks is to provide our audience a window into the minds of subject matter experts and provide a platform for big, important ideas that we think are shaping the future of the world.

John Darsie: (00:43)
Today, we're very excited to welcome Jerry Pascucci to SALT Talks. Jerry is the managing director of UBS Financial Services, and he serves as the head of alternative investments for UBS Wealth Management Americas, where he is responsible for research development, approval, and distribution of all alternative investment products, including hedge funds, managed futures, real estate, and private equity offerings. He's the president and a director of the firm's commodity pool operator, as well as other registered investment advisor entities. His responsibilities include the oversight of product origination, manager selection, investment and operational due diligence, portfolio construction, and distribution of all alternative offerings in the United States region.

John Darsie: (01:28)
Prior to joining UBS in 2010, Jerry served in various capacities at Citigroup Global Markets and related entities in various capacities since 1996. He began at Citigroup Global Markets as a senior credit risk officer focused primarily on marketing counterparty risks associated with hedge fund and commodity pool and clients. He rose to managing director of Citigroup Alternative Investments prior to joining UBS. Citigroup Alternative Investments is a division of Citigroup that administered its hedge fund, fund of hedge fund, and commodity pool businesses, of which the SkyBridge investment team was formerly a part. I know Jerry and Anthony are likely to get into that during the interview.

John Darsie: (02:09)
Just a reminder, if you have any interviews, any questions, excuse me, for Jerry during the conversation, you can enter them in the Q&A box at the bottom of your video screen, and I'm going to turn it over to Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital as well as the chairman of SALT, to conduct the interview with Jerry.

Anthony Scaramucci: (02:27)
John, thanks very much, and before I get over to Jerry, I just want to thank you for putting my grandfather up on the wall behind you. It was very appropriate for this because Jerry's grandfather, as he knows, looks very similar to my grandfather, so we both-

Jerry Pascucci: (02:40)
Almost the same.

Anthony Scaramucci: (02:41)
Yeah, yeah, we're both very happy that you put us up there.

John Darsie: (02:43)
For all of our recurring SALT Talk listeners, the constant ridicule has led me to continue to change up my background. Hopefully, one day I'll find a background that is suitable for Anthony.

Anthony Scaramucci: (02:53)
Well, I appreciate the lineage. Jerry and I certainly do. But, Jer, go back further than John's introduction. Where'd you grow up? I know you live out on Long Island here with me, so tell us a little bit about your upbringing if you don't mind.

Jerry Pascucci: (03:08)
Yeah, okay. And before I do, thanks for having me, Anthony. Great to be with everyone. I'm happy to be part of such a distinguished group of guests in terms of the folks that you've had here. The next five minutes probably won't suggest I'm in that category, but I'll try anyway.

Jerry Pascucci: (03:24)
I live pretty close to where I grew up. My parents were from the outer boroughs. I grew up in Long Island. My dad was a civil servant. My mom was a homemaker. I actually got picked up from an adoption agency stairs about a week before ... I think, in 1969, when I was born, if you got to 10 months, you went into the foster care program, and I got adopted by a middle class family at nine and a half. So when you think about life and how a couple of days or minutes could take a drastic turn, I doubt I'd be sitting here talking to you if that stint in the orphanage lasted an extra two weeks. You can always come back to that, right?

Anthony Scaramucci: (04:09)
Hey, well, amen. So how many brothers and sisters did you grow up with, Jer?

Jerry Pascucci: (04:14)
I have one younger brother.

Anthony Scaramucci: (04:18)
So your parents ended up adopting him as well, or they had him?

Jerry Pascucci: (04:21)
Yeah, actually, they did. I was a public method, and by the time my brother came along five years later, they were able to do it privately, so it was a different experience with my brother. He's blond-haired, blue-eyed, fair-skinned, and my dad used to like to say he was from the north.

Anthony Scaramucci: (04:39)
Hey, Darsie, stop smiling, okay? Look at Darsie over there. You see him in the Zoom smiling away? Look at him.

Jerry Pascucci: (04:44)
I do, I do.

Anthony Scaramucci: (04:45)
Yeah, you never-

John Darsie: (04:45)
I got hazel eyes.

Anthony Scaramucci: (04:47)
You never met people like Darsie, you and me growing up. We never met people like him. It took us to these investment banks, Jerry, okay? But let's talk about ... I want to go back to the first day I met you. Remember when I brought the Italian food into 59th Street?

Jerry Pascucci: (05:02)
I do, I remember. Yep.

Anthony Scaramucci: (05:02)
We were buying the Citibank Alternative Investment Management thing. You were staying at Citi temporarily. Take us through the decision to get over to UBS and how far you go back with Ray and Troy.

Jerry Pascucci: (05:15)
Yeah. The decision about going to UBS ... Well, let me back up. We shared a floor. It was an interesting time because after the Smith Barney merger with Morgan Stanley, we had people working at different firms sitting on the same floor, which was a weird thing. I was in the JV for nine months. I thought I'd be in the JV for nine minutes. But, at the time, Ray and I were partners. Ray was running the business. I was running the portfolios for both the macro and commodity pools that were legacy businesses and the fund of hedge funds that was a legacy business, which back in I guess it was '95 when you were starting to reboot ... I don't even know what decade it is anymore. But it was a long time ago. So we were running our businesses together. The fund of funds was going into the JV. I'm sorry. The commodity pool businesses and some of the other ancillary businesses were going into the JV. The fund of funds was not. So there was a period of time where everyone sat on the floor but had different business cards.

Jerry Pascucci: (06:22)
Leading up to that, the investment team had reported to me, and so I was very involved in what that book looked like on a day-to-day basis. Troy, at the time, was a new hire who I had interviewed. That's another story unto itself, but we've only got 45 minutes. That was interesting. But, clearly, I knew then that he had opinions and he had viewpoints and that he did his homework. His very large binder of very neatly-wrapped pages of analysis told me that right away. So he joined the team early on that I was managing, and off we went.

Jerry Pascucci: (07:03)
By design, I think, even back then ... And this was a long time ago. We were looking for concentrated portfolio. We were looking to have forward-looking views all the time. That was going to be the hallmark of what we did. We weren't trying to compete for what was at the time a business that tended to have 40, 50, 60 names in a portfolio. We just thought that kind of product was already commoditized in in some respects, and inside the type of distribution system we were in, it wasn't all that relevant or valuable. So we really set out to do something different. And Troy, his viewpoints obviously became one of the largest and ultimately the largest influencer into the shape that that would take. It was a differentiated business from go. It lived in between the single manager business and the multi-manager business, and that's exactly where we intended to situate it. I think it proved to be a very useful tool for families, way back then even.

Anthony Scaramucci: (08:07)
Well, and I appreciate that. I think it's a really good narrative for where we are right now because I think that was one of your remarks after March. You were like, okay, well, in the context of its performance, designed the way it was, it acted exactly the way you thought. I think that's a pretty good tie-in back to that narrative. So now you're over at UBS, you're meeting my good friend Brian Hull over there, you're working over there with him, and you're building this asset, this alternative asset management platform. So tell us a little bit about that. Tell us a little bit about the things you're looking for over there.

Jerry Pascucci: (08:48)
Look, we started from scratch there. When I got there, it was just after the crisis. We wanted to invest. It was past the point where people started to become a little bit braver. I didn't get there until 2010. That was good because they hadn't done a product in about 18 months and I didn't really have a lot of demo to do. So there was nothing to tear down, and you could start to build right away. That put you in a position to get going. My thought there, when I left the Morgan Stanley JV, I swore I would never even have a checking account again, nonetheless work for another bank. But I did have a tremendous opportunity going to work for some of the people you mentioned, Bon McCann, John Brown, who I was his first hire there, Brian Hull. That gave me a tremendous amount of optionality and distribution at a time when distribution was really, really important.

Jerry Pascucci: (09:38)
The other thing that that management team gave me, which is a license that I have to this day and which is probably the most valuable license anyone in my seat will ever have, is a no adverse selection license. What that means was there was no arbitrary constraints on what we were going to build, right? It would be just as easy for me to engage with a first-time fund who nobody in the world ever heard of in a nation strategy or something that was out of favor as it was for me to do the next Blackstone fund or the next Millennium product. Not that those things aren't extremely valuable on both sides of that ledger, but I had the ability to run the barbell, which meant things we knew about controlling classes of CMBS and related types of things, which wealth management channels, quite frankly, never saw in a discrete way, we were able to offer. It wasn't like, "Hey, 37 months is a long enough track record but 35 isn't," or, "You can be 29% of that fund but not 31%," or, "You can be in fund two but not in fund one."

Jerry Pascucci: (10:37)
We took that all out of the equation, and that was the contingency for me to sign up. You had to run an investment-driven process that was 100% outcomes oriented. There were other ways to do it, and Bob and Brian and I talked a lot about that and said, "Look, you can go another way. You can build. I'm just not in the business of giving away 7 to 10 years of hard work every five years, so I'm just not your guy if that's the way you want to go." We came to an agreement on what my latitude was going to be, and these people have been steadfast in their support of that.

Jerry Pascucci: (11:09)
So, when I got there, I had a regional remit in the Americas. There was seven or eight billion dollars laying around. There probably wasn't a product launched in 12 or 18 months. Today, my remit's global, and we're approaching a hundred billion in our office.

Anthony Scaramucci: (11:23)
Congratulations.

Jerry Pascucci: (11:24)
So we made some strides. Thank you. We made some strides.

Anthony Scaramucci: (11:27)
So, Jerry, I got to ask you this because you've been around a long time. This is my 32nd year now starting in the business. I grew up at Goldman Sachs, very client-driven at that time. The boss said, "We're long-term greedy. Build the relationships forever."

Jerry Pascucci: (11:45)
That's right.

Anthony Scaramucci: (11:45)
One of the things that's happened in COVID-19 for me is the awareness of how dramatically Wall Street has changed. It has become very transactional. So people you think you have 10, 20, 30-year relationships with, it turns out you actually don't. They start ghosting you if you don't do well. My question is how have you maintained that long-term? How has Brian Hull maintained that? How have other people at UBS maintained that hallmark of it still being a relationship business?

Jerry Pascucci: (12:15)
Yeah. Well, because that's all you got in the end, Anthony. You're going to have your reputation and your relationships, and that's all you're going to have when it's all done. I live every day like tomorrow's my last day, quite frankly, but-

Anthony Scaramucci: (12:27)
Right, well, me too. That's how I grew up. I get that.

Jerry Pascucci: (12:30)
The reality is those are the two things you're going to have. Brian always says, "Leaders define cultures, cultures define organizations, and culture's the best predictor of a company's future." That's a direct quote of Mr. Hull who you know I hold in the highest-

Anthony Scaramucci: (12:46)
Say it again slowly, Jer, because I think it's an awesome quote. I've heard him say it all the time.

Jerry Pascucci: (12:49)
Yeah, he says, "Leaders define cultures, cultures define organizations, and culture is the best predictor of a company's future." And he's right.

Anthony Scaramucci: (12:57)
No question.

Jerry Pascucci: (12:58)
I think if the world knows that you're playing the long game all the time, then they know, and that has to happen in actions, not in words. There's times when it matters, so if you can point to the times when a relationship mattered and you scored high there for the right reasons, then that becomes your legacy. That's what we want ours to be. Not ever-

Anthony Scaramucci: (13:23)
Well, amen.

Jerry Pascucci: (13:24)
Not ever to compromise a client, not ever to compromise a standard, not ever to compromise your reputation, your franchise, your firm. But there are just times when you got to make intelligent decisions at critical moments, and that's what's going to separate you, I think, when the last tally gets taken.

Anthony Scaramucci: (13:45)
Oh, listen, you've definitely demonstrated that over the course of your career, but particularly now. Frankly, SkyBridge has been the beneficiary of that long-term relationship, so I want to say thank you to that. Specific to the hedge fund industry, the industry did reasonably well after 2008. Then passive money took over as the fed started really washing the universe with capital. What do you think about today, the hedge fund industry post COVID-19? Is it going to do well, and what sectors will do better than others, in your opinion?

Jerry Pascucci: (14:23)
Well, look, I think we are by large as an industry doing well. I think when you're running a book, whether you're an allocator or you're a direct risk-taker, you want your big positions to be the ones working and your small positions to be the ones that aren't. Fortunately, on most of the platforms, not only our own here but on most, you tend to have bigger positions in things that have stayed the course and navigated this a little better, like MultiStrat. The places where we're challenged, obviously, in those external leverage dependent areas of the market where we had some problems, you tend to have smaller positions because the capacity for those things is oftentimes lower. So you come in okay.

Jerry Pascucci: (15:08)
I think there are areas where we're going to do very well, be they in downside protection or in dislocation. I think we're going to get into the strategies and the markets we think are favorable or unfavorable as this whole discussion goes on. But by and large, in those areas, I think we look promising. More importantly, I think I'm starting to hear a little bit less of the types of narratives that we heard over the last 10 years, like, "I can't make enough money after tax. What am I paying the fees for? Fees are X percentage of total expectancy. I don't understand the value proposition anymore." We were getting quite a bit of that out of the wealth community, and I would make a big distinction here. It wasn't necessarily clients. It was equally and as much their advice providers that had that position. Once you start to lose them, when you sit in an intermediary business like ours, that becomes problematic. You really have to be articulate through that.

Jerry Pascucci: (16:12)
I would say now the narrative's a little bit more constructive. March and April were quiet. May, June, and July are not. People are actionable and investing. People are revisiting things that they were looking to leave a long time ago, and performance has been okay, right? It's been okay in multiple disciplines and strategies. So it feels okay to me in places. Whether or not hedged equity is going to generate enough alpha, particularly on the short side, looks promising yet TBD. Same thing on macro, which the amount of the imbalance we've had in the world and all the things that we're dealing with that are hard to underwrite, macro should be doing a lot better than it generally tends to do. That's been something that's been prevalent for quite some time.

Jerry Pascucci: (17:04)
But it's a different world. I think it's a different world than it was 10 years ago. I know we're going to talk about that too, but I think it puts us in fairly good stead. I would expect to see some dispersion in those results, though.

Anthony Scaramucci: (17:18)
So let's talk about that. It is a different world. So what makes it different? It's interesting. I was just on with one of our investors, people we're invested in, Dan Loeb at Third Point. We were talking about the differences. He's going to be speaking next week on SALT Talk. We were talking about the differences between 2008 and March of 2020, where basically the entire global financial crisis happened in about seven to 15 trade days.

Jerry Pascucci: (17:45)
Right. It's obviously time that we condensed this whole thing in. I think last time you had far less capital, far more time, and therefore you had a tide that would raise all boats. If you were brave enough when the tide rose, it was hard to get it wrong or harder to get it wrong. I think this time it's very different because you're dealing with things you just can't underwrite from a financial perspective. You can't underwrite the healthcare problem. You can't really underwrite the election because no matter where you go there, there's a whole set of issues you got to contend with and you may be looking at a hard pivot from one posture to another. You've got the civil issues that we're all grappling with and reconciling. So you can't throw the financial modeling at that, right? You can't make a reasonable forecast, which means that it's just the tails are fatter and it's hard to be brave.

Jerry Pascucci: (18:37)
It was also less crowded last time. To me, it's an interesting juxtaposition because some of these opportunity sets have velocity associated with them. But at the same time, I think, and you might hear Dan talk about this a little bit, it's going to require some patience and picking through. So, on the one hand, you're saying, "Hey, hurry up, okay? There's been a lot of mean reversion in certain areas of the market already. What's really left, right?" On the other hand, you're saying, "Be patient. Be careful. It's crowded. It's going to be complex." Whether you're talking about mortgages or corporates, whole loan corporates versus structured, commercial versus resi and property, agency versus non, this onion just has a lot of layers, and there's a lot of capital chasing it. You got a lot of work to do to sift through where the real value's going to be. I think it's very different because there are factors there that we haven't had to contend with in the past, where it's been a financial problem.

Anthony Scaramucci: (19:41)
So go over the structured credit for a second. That was the epicenter of the crisis in March, certainly had a big impact on the SkyBridge portfolio. What's your view now of structured credit? Where are you guys?

Jerry Pascucci: (19:57)
Yeah. So, look, this is an interesting one too, and this is where investing gets difficult. You might have a partner that's got some legacy issues. But sometimes the challenges are the opportunities, as we know. How do you make the decision between chasing a fresh pool of capital with no legacy issues that you're going to pay 20% of the profits away to day one versus a portfolio that you couldn't replace at the price it's currently marked at but there may be some firm issues, enterprise risk issues, reputational issues, or other things, and you got to decide how are you going to deploy that capital? You also, as I just alluded to before, have a tremendous amount of relative value analysis to do, more so than you had to do last time, between all the different things that I mentioned and all the different degrees of freedom and subclasses that you have to go through.

Jerry Pascucci: (20:47)
So I think we come away where most people do. In real estate related structured credit, we think right now relative value is in the residential side. I think commercial real estate is going to be a lot trickier, beyond the obvious hospitality, retail, and development being challenged and industrial apartments and offices to some extent being better. We all know where the concentration of sector exposure is in the controlling classes and securitizations. That's just going to take some time, and the fundamentals there are still pretty tough. The housing market's different, right? The housing market's different. It can go under a lot of support. The consumer being what it is to GDP and housing being what it is to the consumer's going to mean that there's going to be a lot more thrust and figuring out a path forward on the resi side.

Jerry Pascucci: (21:41)
By and large, with corporates, similar type of thing, [inaudible 00:21:48] equity's a difficult thing to assess these days. We all see the filings. We all know what's potentially coming. But we don't understand recoveries, severities, defaults quite well enough yet. So the corporate side is interesting, and you have more support there. Absolute value-

Anthony Scaramucci: (22:08)
But you're getting paid, though, right, Jer?

Jerry Pascucci: (22:09)
Yeah, I think you get-

Anthony Scaramucci: (22:10)
If you look at the spreads, you're getting paid for some of this risk, yes?

Jerry Pascucci: (22:14)
I think you are, but when I alluded to velocity before, right, the best opportunity probably has the highest velocity and mean reversion right now, which is RMBS. The other reason I don't say that RMBS is clearly and by a distance where I would be positioned most favorably is because it has that velocity or decay-

Anthony Scaramucci: (22:37)
Yeah. Oh, we agree.

Jerry Pascucci: (22:37)
... if you want to look at it through the other lens, decay of opportunity set associated with it, that could increase in velocity versus decay in velocity. I think on the commercial side if you own it, right, you're going to have a tremendous opportunity. Most of the commercial real estate exposure we have, certainly on the debt side, is in the hands of people that have tremendous toolkits, own servicing, have tremendous workout capabilities, have no leverage, no external dependence, have 10-year locked capital, have return to multiple with capital already. So when you have that scenario, right, you have unlevered, unencumbered cash flows with time, that's a whole lot different than trying to pick a spot to enter a draw down or make a decision whether you're going to stay with someone or move into a fresh pool of capital and start paying away gains.

Jerry Pascucci: (23:24)
We were fortunate enough to have a very late cycle posture coming into this, so we had things we were already doing, not in anticipation of this, but a late cycle posture. So we have some pools that we think are structured right, we have the right amount of time associated with them, they're not foresellers, so they can play some offense, right? So I think-

Anthony Scaramucci: (23:44)
I know. We're in total agreement. That's one of the benefits of-

Jerry Pascucci: (23:46)
Yeah, commercial real estate, from that perspective, very interesting. Our platform, if we just move away from structured credit a little bit, just by and large, I'm offering first loss risk in the places that I think are more resilient sector-wise, right? So maybe that's healthcare or tech or CMT. There's no reason to take first loss risk in wobbly sectors like property and energy and retail because you have the credit markets, you can take the senior position, and, to your point, you can get paid fairly well for the risk you're taking. Why run at the first loss position there at this point? Later on, when it's time to rescue and refi and deal with [inaudible 00:24:28], non-performing, we'll get there. But that's a different kettle of fish, different skill set. That's why the hedge fund business is so relevant in this whole exercise right now, because it's still a top of the stack, securities-driven, foreseller type of opportunity set. The question is understanding whether or not you have to rush.

Anthony Scaramucci: (24:44)
Well, we totally agree, and I think that's one of the things that we've been benefiting from, why we had our best asset fundraising in the month of June, because you're feeding into funds that are not going to participate in forward profits for a period of time, and yet you've got very well-priced assets with high yields.

Jerry Pascucci: (25:04)
That's right. Yeah, it's amazing-

Anthony Scaramucci: (25:04)
I got to turn-

Jerry Pascucci: (25:05)
It's amazing the-

Anthony Scaramucci: (25:06)
Go ahead.

Jerry Pascucci: (25:06)
I'm sorry, I'll wrap up this one. But it's amazing how the market doesn't respect that enough, right? That's because it's an emotional time and people are dealing with a lot of stuff in their businesses and in the health of their families and in trying to work from home. Even in a normal market, investors don't tend to get that discipline right. In this world, where it's a real hard world, it's even harder.

Anthony Scaramucci: (25:28)
Well, I know, I appreciate it. I appreciate you guys seeing that and seeing that as an opportunity in us. I've got to turn it over to John Darsie because we have a tremendous amount of participation right now. We've got questions coming in to Mr. Darsie. So go ahead, John.

Jerry Pascucci: (25:44)
Okay.

John Darsie: (25:44)
Yeah, and just a reminder to everyone watching, if you have any questions for Jerry, you can enter them in the Q&A box at the bottom of your video screen. As long as they're in-bounds, we'll ask them, and you'll get your answer. The first question is about when you're evaluating hedge fund managers' personal characteristics and organizational characteristics, what are some things that you look for when you're evaluating hedge funds for your platform?

Jerry Pascucci: (26:09)
Look, everybody's got the obvious stuff around performance at critical moments and all that stuff. For me, it's culture number one, we talked about that. I got to recognize what your culture is, and you got to be playing the same long game that I'm playing. Character, obviously, and character can mean a lot of things. Transparency, I guess, I would put in that category. Lack of surprises. Talent, obviously, and intellectual capital. Your ability to attract and retain talent is going to give you the durability that I want you to have over the long run. First and foremost, as I said before, as an investor, it's outcomes. It's not, "Hey, you can gather a lot of assets, therefore you're a priority," never been my game. I'd rather generate a great outcome on a small amount of assets than a bad outcome on a large amount of assets.

Jerry Pascucci: (26:56)
So all the risk-taking stuff that you would expect comes into play here, but I think culturally, because of my background and because I spent the earlier part of my career doing two things, right? I was a minimum market lender, which interestingly enough has moved out of the conventional financial system into the alternative world that I now live in, and I was an allocator. Those are the two things that inform me. I think people don't understand how hard it is to liquidate collateral. People don't understand how hard it is to turn things off, even things that are systematic, right? You got to kick the plug out sometimes. Very, very hard decision.

Jerry Pascucci: (27:30)
So I think there are elements of risk-taking that we look for that come from having a career building an investment process as opposed to having a career structuring or selling, right, if you will. That's what's really going to inform what we're looking for a higher level going in. The reason is because people I compete with might do 70, 80 products in a given year for a wealth channel. I'll do 20, which means every mistake I make is glaring, every success I have is glaring. I like it that way, right, because the value that we generate becomes obvious and it distinguishes our business.

Jerry Pascucci: (28:12)
But unless you have an investment background, it's a tough way to live your life, and so we look for people ... Because we're going to have fewer partners and because we're going to apply selectivity to the exercise, I got to believe that we're going to be dancing for a very long time. So that has to factor in early. Even if we think you're great for the moment, if you can't be transparent, we're not going to communicate, I don't respect your culture, you're transactional, you're looking to give me a deal, you're looking to redline every word of every document I show you, you're not long-term outcomes oriented, I go away fast.

John Darsie: (28:55)
The conversation so far has revolved mainly around hedge funds and real estate backed structured credit, but you cover the entire alternative investment ecosystem.

Jerry Pascucci: (29:04)
I do, yep. Yeah.

John Darsie: (29:05)
So private equity was the hot dot for the last several years leading into the pandemic, and we've talked to several distressed credit investors and others on SALT Talks that have expressed some worries about once the federal reserve and government support runs out maybe in the fall, what the private equity space is going to look like. Could you talk a little bit about concerns and opportunities you see in the private equity space?

Jerry Pascucci: (29:31)
Yeah, look, I'm not a huge believer in there's going to be a distraction and good money's going to get thrown after bad and they're not going to be able to find the cheapness because they're working out this or that. Look, I think it's foolish to think if these businesses were run on a mark-to-market basis they wouldn't show some wear and some pressure and some stress in some places. I think that'd be foolish to think. But they don't. They have the benefit of the structural advantages that they carry. As we've seen in the past, on many, many marquee transactions, with time and real operational capability and some help from the system and stimulus and/or rescue or whatever you want to call it, you can turn situations that look pretty grim into situations that turn out pretty well. It's going to be a very interesting vintage.

Jerry Pascucci: (30:26)
We've been saying for years, right, before this came, we're either going to get a break in the world late in the investment cycle, its vintage, and we're going to have overpaid for a lot, but we're going to get a break early in the vintage and we're going to find some unbelievable cheapness. So it's not going to be an average vintage no matter how you cut it. I think that's probably still true. So TBD there. Again, I think you're going to start to see dispersion. It's not really an engineering game as much as it is a straight-up bottom left to top right bull market. Those who really have the operational capability that everyone claims to have are going to fare through this a lot better, even if they wind up having made some of the mistakes that others did going in. How you manage through this is going to be interesting.

Jerry Pascucci: (31:20)
And let's not forget, secondary market is a lot more developed than it was. The co-investment business is a lot more developed than it was. Sometimes I worry about, in private equity, everyone's kind of all over each other's cap stack, if you will. I sometimes wonder what happens when a bunch of really shrewd investors who are all over the capital stack of each other's companies get into some friction. I think we haven't seen that, and we're going to. I think that's going to be an interesting part of this cycle, for sure.

John Darsie: (31:55)
We have two questions-

Jerry Pascucci: (31:56)
I hope that answers your question.

John Darsie: (31:57)
Yeah, no, that's great. We have two questions that are somewhat similar in nature, and I'll combine them into one. We deal with this at SkyBridge as well on a philosophical basis. But how do you combat the IBM problem? It's safer for an analyst to put forward an established manager that has a big brand name versus looking for emerging managers with a new strategy that might be interesting but maybe take some time to establish itself or perform well.

Jerry Pascucci: (32:22)
Yeah. So two ways. What I said to you before, and this squarely falls into that category, if you're not constrained in terms of ... If you don't have the license to think, you can't avoid the problem you just described, right? So the first thing you had to do was have the license to engage in that smaller manager and decide what you were going to believe and whether or not you could articulate that belief. That's step number one. Unless you structurally possess the license, I don't care who you are. You just can't do what you want to do.

Jerry Pascucci: (32:51)
The second thing is it's just got to be in the DNA of the process you run, not once in a while, not only when the world breaks, but it's got to be in your DNA. Your investment team has to be able to source, it has to be able to test its hypotheses, it has to be able to make mistakes, right? If you can't do those things, you can't learn how to have the appropriate discipline to invest earlier or smaller, right? I think you're right. Why in the world in an environment like we're in today would you want to take on any, say, enterprise risk? Right? Those are tougher things to price when you have uncertainty everywhere else. But when you don't, right, you might pivot your tolerances a little bit.

Jerry Pascucci: (33:41)
One of the best relationships I have in my business today and one of the best investment entry points I ever had was in the CNBSP pieces in late 2010, early 2011 with a partner called Rialto. I notice that some of you on the call might know them. Others can check out who they are. But at the time we engaged in that partnership, there wasn't a person on earth outside of the actual commercial real estate business that knew who these people were because they never had an asset management entity, if you will, or a sponsor or anything, if you will. We've invested with that group over every point in the cycle, trough, recovery, peak, and now again. They've proven to have the type of skill set that's durable enough to take you through each time you take a bite.

Jerry Pascucci: (34:32)
But without that willingness to be in a first close in a first time fund at a time when everyone was still consumed by residential real estate problems and not even thinking about commercial with a sponsor no one ever heard of ... It was the second product I ever put on the UBS platform. I could tell you how many phone calls I got like, "Hey, dopey, you work at a bank, did anybody tell you that," or, "You work at a Swiss bank, in case you haven't noticed," or, "What are you thinking?" We just said to ourselves, "Look, we're here to handicap all these exposures and opportunity sets, ex-ante, forward looking," and this is something that I took from the SkyBridge, Citi, Solomon DNA that we built, right? That's our job. Handicap the opportunity set, get the best possible expression, be really communicable about the outcomes you think you can generate, all the possible outcomes, and never look back several years later not knowing why you did what you did when you did it and with whom you partnered.

Jerry Pascucci: (35:36)
So if you can instill that in your process, you can invest it in those areas. You can't do them for a living every day. You have to be balanced commercially. They're not even suitable for a good portion of our investor base. But to whom they are, we owe that to them.

Anthony Scaramucci: (35:53)
Well said. At the end of the day, you're serving the customer. All we've tried to do at SkyBridge is a be a fiduciary but also provide an investment opportunity that people would look at over a long period of time, not measured by a month. Jerry, I met you on July 1 of 2010. It's July 13th of 2020, 10 years later. Troy, Ray, and I had a good 120 months. I'm sorry, a good 119 months. We had one bad month. It's sort of nuts. But, anyway, I'm ventilating-

Jerry Pascucci: (36:29)
Look, you got to look at-

Anthony Scaramucci: (36:30)
Pascucci, you're cheaper than my therapist, so I'm ventilating to you, okay?

Jerry Pascucci: (36:33)
You got to look at the way ... Thank you. You got to look at the way that risk is assembled. If that risk was assembled in a sound fashion and you had a clientele that understood the risk they embarked on and were realistic about the lost possibilities and probabilities could be in something as extreme as we've seen, I think you owe that at least some consideration as opposed to a knee-jerk reaction as well.

Anthony Scaramucci: (37:01)
Yeah, so on our next episode of Jerry and Anthony, I'll ask you why some wirehouses sell at the bottom. But since that's not politically correct, we're going to turn it back over to John for more questions. Go ahead, John. Don't answer, Jer. Don't answer.

Jerry Pascucci: (37:14)
No, no, I won't answer that one.

Anthony Scaramucci: (37:15)
Go ahead, John.

John Darsie: (37:16)
So, Jerry, you talked a little bit about process, and we had a follow up question about your ability to judge a manager's character with face-to-face meetings. But in an environment where you're working from home and you have a global pandemic and you can't conduct due diligence in the same way that you typically would, how has that affected your process, not being able to be in the same room with perspective new managers and evaluating decisions on existing managers on your platform?

Jerry Pascucci: (37:42)
Yeah, I won't kid you. It is limiting. Like I said, we do less. So there are fewer people we're going to get to that point with anyway. But it is limiting. It's harder to understand body language. I got invited by someone in the industry to listen to Molly Bloom speak. I wasn't able to make it to that particular session, but it was one of these things like, "Hey, why don't you come to this session and think of a question for Molly?" What I would've said to Molly was, "Your game is a game of tells. How do you see tells virtually, right, when you've got someone from the neck up and you have no idea what they're looking down at?" I think the answer is it's really hard.

Jerry Pascucci: (38:29)
So I think what you have to do there is your referencing's got to get deeper and wider and more off the run. You got to spend more time digging through some of that stuff. If someone's in a room with you and makes you comfortable, it does put your guard down a little bit. Maybe you would've only done six references instead of eight or eight instead of 10. Maybe you would've said to yourself, "Yeah, those references are good enough." But I think in this environment, you need to risk mitigate the fact that you only have a person from the neck up and you have no idea who else is in the room. There's no real panacea for that. I think it's something we're all trying to contend with, and, therefore, this default to safer pairs of hands, low enterprise risk, longer contract records, that trend is going to be very intact for the reason you just brought up.

Jerry Pascucci: (39:25)
It borders on asking yourself whether you're asking responsibly if you decide to go forward with a partnership that you don't feel fully comfortable in vetting. So I do think it's limiting, and that's what's causing some of the ever more concentrating trends in the asset bases, for sure.

John Darsie: (39:44)
So I'll ask you one more question before we let you go, and it goes back to a question that Anthony asked earlier. But the hedge fund industry in general was reputationally somewhat down in the years leading up to the pandemic due to performance and due to the out-performance of equity markets, which have now rallied back to near all-time highs and in the case of some indexes, back to greater than previous all-time highs. But in the post-COVID environment, what do you see as the outlook for the hedge fund industry in general?

Jerry Pascucci: (40:17)
Look, I'm always uncomfortable when the first loss is telling you everything's fine and the last loss is telling you everything's not. I think life works better when it's happening the other way. It's more natural. I can't claim to understand why the stock market seems to predict that we don't really have any issues and the ones that we do have, we can understand, digest, and are all 100% transitory. As a career alternative investor, we tend to be perma-bearers, we tend to have value biases, it's a hard pill to swallow.

Jerry Pascucci: (40:55)
That being said, the fed's going to support risk assets, and there's all kinds of other structural factors that create a very bullish sentiment. And, of course, you do have the winners in this new economy. So I could tell you two things, right? In my mind, the uncertainty's higher, which means the tails are fatter, which means hedge funds have a better chance. Just like death and taxes for me, right? Because it's hard to come up with a null hypothesis that says the world is not riskier tomorrow than it was yesterday, at least for a while. However that winds up, okay, there's so many pathways that lead to so many things that could be so destructive to an economy and a society, be they inflationary or deflationary, that it should provide a pretty fertile environment for trading-oriented strategies. It should provide a good environment for alpha shorting. It should provide a good environment for both bottoms up and top down, hedging, all the things that we have in our toolkit as an investing community to put to work.

Jerry Pascucci: (42:10)
I know it's been a long time. It was a long grind up for the equity markets and a pretty long grind out of favor for the hedge fund community. But I think there are bright spots. I think our opportunity set has to be better as a function of all this, and the volatility when you have things that you can't underwrite financially, like we talked about before, has got to be prevalent. So I think structurally we have the environment that we need to have, dispersion, volatility, shorting, risk mitigation. Leverage will be important at the right times, dislocation, complexity, distress, regulatory evolution. There's nothing that we need that we don't have.

John Darsie: (42:55)
Well, we agree. And, Jerry, thanks so much for joining us. Anthony, I want to let you have the final word before we read the end of the segment here.

Anthony Scaramucci: (43:04)
No, I think Jerry captured it well. We've known each other a long time, and what I love about you, Jerry, is that you combine a total academic understanding of what's going on with a lot of commercial instincts. So hopefully we'll get this out to as many people as possible because there's a lot to be learned in terms of the long-term wisdom that you're sharing with everybody. So thank you, Jer. And, John-

John Darsie: (43:31)
Yeah, we have a-

Anthony Scaramucci: (43:33)
When the SALT Talk is over, Pascucci and I are going to have a conversation with you about the portrait behind you. I just want to make-

Jerry Pascucci: (43:39)
we're definitely going to do that.

John Darsie: (43:41)
I'll keep trying.

Anthony Scaramucci: (43:42)
Yeah, yeah, yeah. No question. I've already sent the-

John Darsie: (43:43)
I try to find a background that makes you happy but-

Anthony Scaramucci: (43:45)
I've already sent it to a lot of our SALT Talk fans who are just silent. There's just silence, John. But go ahead. You have the final word.

Jerry Pascucci: (43:56)
So let me-

Anthony Scaramucci: (43:56)
All right, go ahead, Jerry. Say what you want to say, Jer, because it's horrifying.

Jerry Pascucci: (44:00)
Yeah, well, we'll get to George in a minute. Like I said, I think it's a period of time when we got to celebrate what this nation's about. So I'll tolerate George for the moment or whoever that gray-haired guy is.

Anthony Scaramucci: (44:11)
Not George Washington. It's not George-

Jerry Pascucci: (44:13)
Yeah, or whoever that French guy is or English guy you got back there.

Anthony Scaramucci: (44:16)
No idea.

Jerry Pascucci: (44:18)
Look, I just want to say thanks. This was a great opportunity for us to share some of the features of our business that we find or think or hope to be distinguishing. I thank you, Anthony, for your partnership over the years. We have known each other for a long time. I'm flattered that you would include me in something like this. As I said before, I look at the screen at all these very distinguished people who have accomplished so much in their professions and in their lives, and it's humbling to have my very repulsive face in a box next to those people.

Anthony Scaramucci: (44:50)
Hey, man. Don't kid yourself. You're an industry expert at a time where the expertise is super valuable. At the end of the day, our conference is really hubbed around the main arteries of what you do for a living. So we're thrilled to have you on.

Jerry Pascucci: (45:04)
Well, thank you.

Anthony Scaramucci: (45:04)
Glad you accepted the invitation.

Jerry Pascucci: (45:04)
I'm very grateful. It was fun. I hope we get to do it again, and I hope some people find it useful. But it was terrific being with you.

Anthony Scaramucci: (45:10)
Same here.

Jerry Pascucci: (45:11)
But thanks, John. I like [inaudible 00:45:12].

John Darsie: (45:12)
Yeah, thanks, Jerry. Yeah, somebody in the chat in the Zoom webinar basically said I was inspired by watching Hamilton on Disney+, so we'll go with that.

Jerry Pascucci: (45:23)
Is that stag you got back there your Patronus? What's going on over there?

John Darsie: (45:26)
Exactly. I brought some science fiction into it too.

Anthony Scaramucci: (45:30)
Oh my god.

Venture Capitalists on the Importance of Data in HealthTech | SALT Talks #21

“I think healthcare should be a right whether you’re in the Middle East or India or anywhere in the world… why not also have a major impact on the ideas you invest in.”

Three leaders in the HealthTech space joined our roundtable to discuss their careers investing in healthcare, technology and wellness industries. Dr. Vishal Gulati is a partner at Draper Espirit, a leading European venture capital firm; Noor Sweid is founder of Global Ventures, a Dubai-based, growth-stage venture capital firm focusing on investing in emerging markets; and Vasudev Bailey, PhD, is a partner at ARTIS Ventures, a long-term venture partner.

The debate between investing in healthcare to make money vs. guaranteeing it as a right is a false choice. Bailey makes clear these two ideas can and should coexist. “I think healthcare should be a right whether you’re in the Middle East or India or anywhere in the world. I think healthcare is absolutely broken. It’s not to say you can’t make money in healthcare… why not also have a major impact on the ideas you invest in.”

Investments in cutting edge health technology has placed a premium on data which has become the currency in healthcare. The increased data points serve as key inputs in the application of artificial intelligence used to assist and transform existing medical practices.

LISTEN AND SUBSCRIBE

SPEAKERS

Dr. Vishal Gulati.jpg

Vishal Gulati

Partner

Draper Esprit

Vasudev Bailey, PhD.jpeg

Vasudev Bailey, PhD

Partner

ARTIS Ventures

Noor Sweid.jpeg

Noor Sweid

Partner

Global Ventures

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie, I'm the Managing Director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. These SALT Talks are a series of digital interviews we've been doing during the work from home period in lieu of our in-person conferences. What we really try to do with these SALT Talks is provide a platform for leading investors, creators, and thinkers and to provide our audience a window into the minds of those subject matter experts, as well as provide that platform for big world changing ideas that we think are shaping the future.

John Darsie: (00:43)
Today we're really excited to bring you a panel focused on health technology and healthcare investing featuring three esteemed panelists, Dr. Vishal Gulati, Noor Sweid, and Vas Bailey, who is a PhD. I'm going to read you brief bios on each one of the panelists and then I'll give them a little bit of time to explain more about their background and how they got into health tech investing.

John Darsie: (01:06)
Dr. Vishal Gulati is a venture partner at Draper Esprit and an advisor to Oxford Sciences Innovation. He's an investor and promoter of data-driven healthcare in Europe and has an active portfolio about 20 companies. These companies represent a wide range of technology platforms and applications ranging from digital therapeutics to machine learning and AI. Dr. Gulati is a trained physician and he spent time... that includes time at the St. Mary's Hospital Department of Medicine in London, where he was a Rhodes Scholar.

John Darsie: (01:38)
Our next panelist is Noor Sweid who's a general partner at Global Ventures, which is a Dubai-based venture capital fund working with globally minded growth stage companies in the Middle East and Africa region. Increasingly, Global Ventures is focused on health tech investing is that opportunity set has expanded. Now, previously Noor was the Chief Investment Officer at Dubai Future Foundation and was a founding partner at Leap Ventures, which was a growth stage VC based out of Dubai and Beirut. Noor is a very active angel investor. Prior to her angel investing in venture capital days, she actually founded and scaled Zen Yoga, which was the first yoga studio in the UAE that she later sold to a private equity firm in 2014.

John Darsie: (02:21)
She began her career as a biopharma strategy consultant at Accenture in Boston. Noor is a Director-in-Residence for the Corporate Governance Program at INSEAD and a Founding Board Member at Endeavor UAE. She has a bachelors' degree in Finance and Economics from Boston College and an MBA from MIT's Sloan School of Business.

John Darsie: (02:40)
Our last panelist, last but not least definitely is Vas Bailey, who is a PhD. He's a partner at ARTIS Ventures where he focuses on investing in novel and breakthrough health and life sciences companies. He currently sits on 10 boards and he serves as an advisor to several other startups. He's the founder of ARTIS Ventures' Healthcare Pioneers, which brings together some of the world's brightest minds to accelerate and incubate life-changing ideas in healthcare.

John Darsie: (03:05)
In his past role as venture partner at ARTIS, he helped portfolio companies with their business development and growth strategy. Prior to ARTIS, Vas co-founded and served as the general manager of the GLG Institute. He served as a consultant at McKinsey. He received a PhD in Biomedical Engineering, focused on the use of nanotechnology and epigenetics for personalized chemotherapy in early cancer detection from Johns Hopkins University school of medicine. He's been recognized as one of the world's leading biomedical engineers by the Siebel Foundation.

John Darsie: (03:36)
Thank you all for joining us. A reminder to all of our participants, if you have any questions for the panelists during today's talk, you can enter them into the Q&A box at the bottom of your video screen.

John Darsie: (03:46)
So the first question... I'm going to go around the horn, we'll start with, Dr. Gulati. I spent some time talking through your background and your resume, but could you please give us a little bit more about your personal background and your journey into health tech investing.

Dr. Vishal Gulati: (04:03)
Thank you very much, John. Very delighted to be here. I started my career as a practicing doctor and then I did research as a clinical researcher, believe it or not in virology, which was not a very exciting field in those days, but now, it has become very, very topical. Then, I started working at the Wellcome Trust after that and got involved in the human genome program. That opened my eyes in terms of data and how having large amounts of data can open our eyes to a different world in healthcare.

Dr. Vishal Gulati: (04:42)
Interestingly, at the same time, venture capitalists around the world were looking for people with those skills to help them, look for investment opportunities. So I got headhunted to work for a venture capital firm where I spent a number of years. Around 2012 or 2013, I started to look at how the ecosystem was evolving from a very different lens. Just the availability of internet and handheld devices had completely changed people's lives. It seemed quite logical that that would come to healthcare as well.

Dr. Vishal Gulati: (05:20)
Over the last few years, all that data that we generated also opened our eyes to new technologies, like machine learning and other ways of analyzing that data and making sense and inference out of that. That has capitalized a huge renascence, a generation of companies that have taken that data and applied it to hard medical problems. That is the interface at which I love to invest.

John Darsie: (05:49)
Thank you, Dr. Gulati. Noor how about you go next?

Noor Sweid: (05:54)
Thank you, John. For me, it's more of venture capital. So helping startups grow, supporting startups and emerging markets is what we're very passionate about. My journey started in biopharma, as you mentioned, moved into wellness, at the same time scaling an IPO and a company out of emerging markets. So really it's been a little bit of everywhere.

Noor Sweid: (06:15)
When this crisis hit, when COVID suddenly became a part of the global narrative, what we saw was very clear, which is the financial crisis 10 years ago drove the need for financial inclusion and lots of technology, leapfrogging to allow people who are not part of the financial network to come into the financial network, and we saw FinTech.

Noor Sweid: (06:39)
Now we have this health crisis, which will naturally then highlight the need for healthcare, which is in a past emerging markets. We sit in Dubai, we have the Middle East and Africa is a one and a half billion person population where health care access is lacking.

Noor Sweid: (06:54)
So once we started to see healthcare inclusion prioritize and a lot of the founders across the region try to address this need, and need more and more capital for growth, we decided to lean into that and use our background and our knowledge in the space, as well as our background and knowledge in technology and venture investing to support and enable these companies to provide health care access to the population.

John Darsie: (07:16)
Thank you, Noor. Vas, you round things out for us.

Vasudev Bailey: (07:20)
Great. I've been passionate about healthcare from as far back as I can remember. I started my first company when I was 17 years old and it was in the world of fitness monitoring check. Clearly, you can't tell fitness from this, and I understand, but it was something I started. I went onto the Hopkins School of Medicine, whereas you mentioned, I got my PhD, but I'm also on the board of the Johns Hopkins School of Medicine, BME Department, which has been the top program in biomedical engineering since they created it 40 years ago. What biomedical engineering is essentially is where I invest at ARTIS Ventures, which is the intersection of technology and medicine.

Vasudev Bailey: (07:58)
When I left that world of academia and joined McKinsey and company, I had the privilege there to meet Jeff Kindler, the CEO of Pfizer wherein it changed my world and my life because this was a person who did not have great networks in the world of pharma and tech, suddenly changed overnight because I started a business with Jeff Kindler, which was called GLG Institute under GLG. We built what is the world's largest network of CEOs, at 1,500 pharma CEOs working for me at that point and including collaborating with people like David Brennan from AstraZeneca and Shlomo Yanai from Teva.

Vasudev Bailey: (08:38)
The way we think about healthcare is... not say something controversial to start with because many of you will disagree-

John Darsie: (08:44)
We like controversy.

Vasudev Bailey: (08:45)
Yeah. I think healthcare should be a right that everyone has. You should not get better healthcare just because you're born close to Johns Hopkins or close to Stanford University. I think whether you're in the Middle East or in India or anywhere in the world, healthcare is absolutely broken because I think that people who have access to great healthcare tend to do better than people who don't.

Vasudev Bailey: (09:10)
That drives me every day. It's not to say that you can't make money in healthcare, right. Is the fact that we are focused as a venture fund on returns. It is not a nonprofit, we're razor focused on delivering returns to our investors.

Vasudev Bailey: (09:24)
That being said, why not also have a major impact in the ideas you invest in as well. That's what allows me to wake up every day and motivates me to do what we do. We believe that the clear edge you can give innovators in healthcare, which is such a complex web, is through people.

Vasudev Bailey: (09:45)
So my past life of having the CEO network translates into how we give our companies an unfair edge in trying to innovate and move forward.

John Darsie: (09:53)
Well, Dr. Gulati, you're based in London, so you don't have as many of the healthcare costs related issues from a population perspective that we have in the United States and Vas here based in San Francisco. So I want to ask, starting with you Dr. Gulati, a broad question about how technology is changing the healthcare field, helping address some of those concerns around healthcare costs. Particularly for you Dr. Gulati, you're very focused on data driven healthcare solutions.

John Darsie: (10:22)
So how has the collection of data and the harvesting of that data affected and improved health care solutions.

Dr. Vishal Gulati: (10:31)
I'll give you a number of concrete examples. I think that the way healthcare is now delivered is gradually becoming much more distributed. It is no longer centralized in hospitals or centers of excellence. It's still more centralized than I would like it to be, but it is gradually percolating outside. So just in my portfolio, the companies put together have helped more than 50 million people with their healthcare needs, which is not the scale I can imagine by starting a hospital or running a center. I just cannot imagine that level of impact.

Dr. Vishal Gulati: (11:12)
Then with that data comes additional benefits. So one of my portfolio companies, which is called Ieso Digital Health, it has several hundred thousand hours of therapy CBT for patients with depression and anxiety disorders, which they have now analyzed and now they are the best CBT provider in the world.

Dr. Vishal Gulati: (11:33)
In the UK, for example, we have national level data of effectiveness of CBT, and we ranked higher than all other providers because they use the data smartly and we are able to build something out of that. So to give you an example, if the leading drug for depression today was surpassed by another drug that was as much better as Ieso is from other CBT, that would be a multi billion dollar drug.

Dr. Vishal Gulati: (12:02)
So we can build value from data which can be then measured against outcomes. Another example is a company in my portfolio, Zoe founded by a close friend of mine, which launched an app very early when COVID-19 happened for people to just track their symptoms. They now have more than four million users around the world. They have published about a month ago in Nature Medicine, what the clinical symptoms doctors all over the world should be looking for in patients who suffer from COVID-19.

Dr. Vishal Gulati: (12:41)
So just being able to collect all data has given us the superpower, where we have been able to advance healthcare at a speed which would not be possible before.

John Darsie: (12:54)
Noor you focused on investing in emerging markets, mainly the Middle East and Africa region. There's unique challenges to healthcare access in those places. How is technology helping to distribute healthcare solutions in emerging markets?

Noor Sweid: (13:11)
So I think that these questions are always better answered the way that Dr. Gulati did it. So thanks, Vishal, it's through examples. So one of the companies we recently invested in March, and this was pre-COVID, this was a theory that we had starting in January and in March we transacted into a company called Helium Health, which is based in Lagos, in Nigeria. We were fortunate to have great co-investors in that that are enabling us as well, like Ten Cent, an AIC out of Japan.

Noor Sweid: (13:38)
What Helium does is effectively, it's an EMR for hospitals as well as regulators, but then it also had the patient side. So when a patient leaves the hospital or the doctor, they have a report of who they saw, what they said and what the recommended treatment is. Now, if the patient cannot afford the treatment within the platform, they can get a loan instantly.

Noor Sweid: (13:59)
So the different pain points for patients along the journey that got addressed in emerging markets are very unique and are very real. They also apply to a lot of developed markets. So in Europe, a lot of times it's a treatment that people worry about how they're going to afford that treatment, but there's no platform to say, "I want to tell them now." What Helium's done is really worked with the banks and the regulators, as well as the hospitals and providers saying, "It's a lot cheaper to treat the patient now, when they have the flu, the next month, when they have pneumonia."

Noor Sweid: (14:25)
The uniqueness of Helium is that it's online and offline. So you cannot depend on electricity and internet in most of Africa. The need for Helium is because in Africa, less than 30% of hospital visits are documented. So you have a massive problem in a really large population. You want the data, as Vishal was saying, so now they have millions of patient data information on their platform and they're also solving real problems.

Noor Sweid: (14:53)
They've leapfrogged in the sense that it's online offline. So it's like if you take Epic and the Salesforce API that enables a patient, add an app and put it all together, but it's one solution. It's a 20 year old company. It's my Combinator founder, But he's gone back and said, "Here's a real need for real people," and he's able to leap frog.

Noor Sweid: (15:11)
We'll see more and more of these companies. Again, I go back to the financial inclusion similarity. What's the MEPS of healthcare? MEPS came and it changed the way people thought about financial inclusion and what's possible for finance digitally. So what are the companies that are going to come out of emerging markets that are going to change the way we think about healthcare and access to physicians and really push the envelope and take us from inside our box thinking to outside the box thinking.

John Darsie: (15:40)
So Vas, turning to you, you've published over 30 scientific papers and you hold four provisional patents from your research in nanotechnology for the early detection of cancer. Cancer is an area where you've really done a lot of work and specialized. How does technology and data collection and data analysis really accelerating progress in the field of cancer research and cancer treatments?

Vasudev Bailey: (16:07)
I think we will all have agreement with Vishal, Noor, and I that data is the currency of what will transform healthcare. We're at that unique moment in time where we're at digitized biology. When any of you have taken your 23andMe test or Ancestry what have you done? You essentially digitized what would have always been analog, something which would have been tossed away. We're now have access to that digitally to understand what's going on.

Vasudev Bailey: (16:31)
The same thing has happened with your blood pressure or your EKG. In the world of oncology, we have benefited from that as well, real world data and outcomes of how patients have one, done on certain drugs, but also is there a relation between their epigenetic code, the genetic code, to the progression or incidents of disease?

Vasudev Bailey: (16:53)
We've made tremendous progress in the world of oncology using data over the past decade. So much so that the highlights over the last decade in where we have made advances in oncology include one, we've started to use our own immune system to fight cancers. So the idea of personalized cancer therapy is real. We've double up what is the new notion of cancer vaccines, which we'd never thought would have been possible. We have, in the world of diagnostics, where I'd spent my time in PhD, you see companies now that are coming to life like Guardant Health just went public as a $10 billion company. I've invested in a company called Freenome. Let me also give an example.

Vasudev Bailey: (17:35)
In the world of Freenome, what we are trying to do is replace what would normally be the method to detect colon cancer, which is a colonoscopy. For those of you who have had to go get one, it is very effective, however, it's very uncomfortable and the time and the effort needed to prep for a colonoscopy, sometimes deters people from wanting to go get it done.

Vasudev Bailey: (17:58)
So simple question we wanted to answer is, just what if we could have the same sensitivity and specificity of a colonoscopy that you could just get from a drop of blood or from a blood test, would that be possible, but not just from genomics? What if we were to able to combine genomics, mediconomics, proteomics, but bring these things as multianalyte detection, but use data and AI to help in increasing the accuracy of detection for colon cancer detection. That is Freenome. So we've seen massive strides there as well.

Vasudev Bailey: (18:37)
Rest assured, in the world of oncology, it is probably the area in healthcare that has received the most number of dollars. So we will see the next 10 years or so also harvest some of the efforts that have gone into innovation in oncology.

John Darsie: (18:54)
So for our audience, what do you think a realistic timeframe is? I know curing cancer is not really the outcome that you're looking for, but how do we get to a point where cancer is no longer a death sentence for most people into the point where we can really treat most forms of cancer?

Vasudev Bailey: (19:12)
Cancer is a complex disease. It's a multi pathway disease. I think it's really hard for anyone to say that we will forever put an end to all cancers. I think that we can tackle certain types of cancers and make great progress towards treating it.

Vasudev Bailey: (19:29)
We were the first institutional investors in a company called Stemcentrx. It use stem cell therapy to treat certain types of cancers. Fortunately, this company has been the biggest exit in healthcare venture capital. We're excited to have been the first institution to have backed this company.

Vasudev Bailey: (19:47)
I think you will see novel techniques like that, whether it's stem cell therapy, CARs, and CAR T, you will see the idea of in vivo medicine move oncology to ways in which certain things.

Vasudev Bailey: (20:00)
So for instance, if you had breast cancer in 1990s and 1980s, certain types, I think it would be very difficult... it was caught in stage two, three, didn't have a good prognosis. Many different types of cancers, even lung cancer, before the world of Keytruda and Divot, the outcomes were so much worse.

Vasudev Bailey: (20:18)
So I do think there's certain cancers where you can now be diagnosed early and live your life to the fullest and have your cancer managed. That I think is very promising. I'd be curious to hear from Vishal and Noor, but to me, I think it's challenging to say that we'll ever find like one Pinochet for cancer, where we'll be able to tackle all of cancers at one go.

John Darsie: (20:44)
Dr. Gulati, I want to ask you a two part question. One is a followup to everything Vas just said about oncology and cancer research and about AI. AI has a lot of different applications across healthcare, oncology, and this hits home for me because my brother is a radiologist. But how is AI doing things to improve radiology? Do we still need human doctors? Is it just a tool that is going to benefit them and increase the accuracy of their diagnosis? How is AI being applied across oncology and things like radiology to improve healthcare responses?

Dr. Vishal Gulati: (21:18)
Thanks, John. Just to pick up on what Vas was saying, I agree with him entirely that I don't think that we will have a world without cancer. We may have a world where cancer becomes that much less scary and becomes a chronic condition that we manage rather than something we treat radically, which is what we have done in the past. A lot of these advances will come from small gains here and there, all the way from detection, to management, to discovery.

Dr. Vishal Gulati: (21:51)
So it will be a multi pronged approach and we are going to win against this enemy in small battles rather than one big war to end all wars. So I don't think that that's how we will deal with this.

Dr. Vishal Gulati: (22:04)
Coming back to your other question, which is about radiology. Radiology has been one of the first branches of medicine, which has been affected by AI. So there's a lot of abuse of AI in our industry. I'm usually a little bit cautious about trying to, in an unguarded way, say that AI is going to transform or change anything. But specific applications or specific type of AI has had some dramatic improvements in the way the data flows, in the way we make diagnoses.

Dr. Vishal Gulati: (22:44)
So I have been asked this question before, is AI going to eat radiologists? My answer has always been that, we would, but we haven't found enough radiologists to eat because globally there is a massive shortage of radiologists. So I can tell you from the associations of radiologists in the United States or from the Royal College of Radiologists in the UK, wherever I have asked this question, they have all said to me that there are just not enough radiologists. So if you can do something to take some of the load off us, we'll be very, very grateful for that.

Dr. Vishal Gulati: (23:25)
One of my portfolio companies, Kheiron Medical has done just that. They are the first European regulated product for mammogram reading. So they are able to read a mammogram, as good as a human radiologist. What they are now finding in the world of COVID, we had to stop all mammograms in the UK because patients could not visit hospitals. Now we have a backlog of hundreds of thousands of women who are waiting for their scan, which should have happened several months ago. The only way we are being able to deal with this now is by deploying MIA, which is a product for mammograms, right at the front end, which is assisting radiologist as a second reader.

Dr. Vishal Gulati: (24:10)
That one end of the spectrum, if you like in cancer. Now, if you try and imagine how we go further, having better quality images from histopathology and from radiology and applying machine learning will help us characterize patients better. If we can characterize patients better, that is better for clinical trials, we can target drugs to the right patients who are more likely to respond in. Then if we have that data, then it is easier for us to identify patients what treatment they need. So I think that that is one end.

Dr. Vishal Gulati: (24:46)
Then on the discovery side, we will use all the data that's coming out of genomics and proteomics, which is high dimensional data that human brains cannot comprehend. That can be used using specific AI technologies. We can find relationships in there which are going to help us transform the way we treat them. So it's a multi pronged approach, I would say.

John Darsie: (25:08)
So my brother's still going to have a job in 10 years. That's good to hear it.

Dr. Vishal Gulati: (25:11)
Your brother is definitely going to have a job and his job will only get better because he will have a little machine radiologists sitting next to him, helping him get better at what he does every day.

John Darsie: (25:24)
So his wife and my sister-in-law's an emergency medicine doctor, and he gets to just sit there and have a machine given the diagnosis. It doesn't seem quite fair to me [crosstalk 00:25:33]-

Dr. Vishal Gulati: (25:33)
I 100% agree with you. I think your brother is in a much better place.

John Darsie: (25:39)
Noor, do you have anything to add to the conversation about AI and how it's transforming healthcare?

Noor Sweid: (25:44)
So from my perspective, I think the most interesting way that AI is transforming healthcare is that it's personalizing it. So given all the data that Vishal's talking about accumulating, and then layering that on top of the efficacy of different drugs, you're able to ultimately within the information about the genomics of Vas was alluding to get to a point where, as a patient, if you're sick, there's a certain level of expectation that you can have that the treatment recommended to you will actually work for you.

Noor Sweid: (26:13)
Again, like now what we see in medicine is, well, if you are sick, God forbid, you know it's, "Try this," and if this doesn't work, "Try that," and if that doesn't work, "Well, try this." Especially for chronic conditions, you get into this position where, "And there's a side effect and this might work and that hasn't worked."

Noor Sweid: (26:28)
So I think what AI will do is push everything towards, if you have this genomic based and you have tried this before, and that hasn't worked, we've seen the reaction of that on you, then we have a 99% certainty that this other method will work. That applies to medicine as well as to other more holistic treatments, as well as to prevention, as well as to early identification. Because if you have these symptoms for this particular condition, then statistically speaking, based on again, your DNA and your sequence, you might actually also be susceptible to this. So why don't we check that?

Noor Sweid: (27:04)
But I only comes from loads and loads of data that is then being absorbed and the layers and layers of AI on top of that, that gives you this information. I think we're just at the beginning of that. So that level of personalized medicine and more targeted medicine, is something that we all look forward to, because it takes away the uncertainty.

Noor Sweid: (27:27)
Then on the radiology side, we have so many companies in the region and across the world where in developing markets, you have a lot of contributions from well-wishers and people that say, "Here, take these machines." So now we've put these fantastic machines in these remote villages. Then, "You can take x-rays and you can do mammograms, and do all these things." But guess what, there's no one to read these.

Noor Sweid: (27:52)
So you have all those remote teleradiology, as we call it. So then how does AI integrate with teleradiology? Because the accuracy there is not where it needs to be. It doesn't matter how much you've compressed in order to send it over. Again, it's low bandwidth. It's not the internet that we have in some markets. Then somebody else is supposed to read it and send that back. The error rates are much higher than we would like them to be.

Noor Sweid: (28:16)
So if AI can come in and supplement that input and supplement on everything that's done in that space, then that is very much welcome. To Vishal's point, there aren't enough radiologists to eat. So it's definitely something we look forward to because it augments and it supplements, it doesn't substitute as where we come up.

John Darsie: (28:36)
A question from one of our listeners and maybe Dr. Gulati, you can take this or Vas, whoever feels most comfortable, but it's about privacy relating to data. So in a world where AI is eating everything and we're placing an emphasis on trying to gather as much data as possible, but you do have regulation in the United States and in Europe and elsewhere that prevents the oversharing of data, how do privacy concerns factor into the AIs, really infiltration of our entire healthcare system.

Dr. Vishal Gulati: (29:06)
It's a very important question, John, I think that there has been a fair amount of discussion around just collecting lots and lots of data. I think with data, as I always say to all my portfolio companies, is the data is not just an asset, it is also liability. Because it comes with a huge amount of responsibility that you have someone's data and how you're going to use that. So I would say, in addition to machine learning, the second most important job that my founders do is constantly evaluate their data policies and their understanding of what data that they need and how to use it.

Dr. Vishal Gulati: (29:48)
If we are not responsible in the way we are using data and how we are applying it, we could end up destroying this whole industry. This is a very, very important challenge. This is not a problem that just engineers or just doctors or just investors can solve. This is a much wider conversation with the whole world of, what are the trade offs that we are willing to accept in return for getting what we get. I think that this is a very live debate and very, very active in all my companies.

John Darsie: (30:28)
Vas, do you have anything to add to that?

Vasudev Bailey: (30:31)
I agree that it's important. I think that we tend to work with de-identified data whenever possible. So we have no sense of understanding or identifying what we're learning from. The other part, which you see happening in the Valley today is we're working on longitudinal data that is identical to that of a real person, they call it a digital twin and we're generating data to synthetic that you can actually use. Maybe FDA one day will accept that in substitution for real data. So I think it's important and we're all conscious of it, responsible, and it is absolutely a central principle before we move forward.

Vasudev Bailey: (31:08)
But after the world of AI, just really quickly. I agree with Vishal and Noor completely that we are at the start of what is something really special, but I will say sometimes the word AI gets overused, especially here in the Valley. Is it a simple Excel macro, is it AI? Let's actually really talk about that, it's not really AI, come on.

Vasudev Bailey: (31:31)
But if it is, I'll say, you find AI in a lot of strange places and unexpected places where you would not expect. I invested in a company called Eko, E-K-O, which is changing your humble stethoscope. For the past 200 years, a stethoscope hasn't changed. Think about that. Someone is manually listening to your heart and lungs to tell you something is wrong with you.

Vasudev Bailey: (31:56)
What if you could now have the largest database of human sounds, heart sounds, lung sounds, and EKG data, and you truly use machine learning and AI and the algorithms could do better than four out of five cardiologists in detecting and classifying murmurs. You could do an injection fraction, you could do in the world of COVID not be in contact with the patient and yet diagnosis is a crackle or what is going on with your lungs.

Vasudev Bailey: (32:24)
That, I think, is a great application of AI at work, not just here in San Francisco, but anyway. You could be in Nigeria, you could be in the Middle East, you could be anywhere in the world and you are actually scaling up the use of AI. This company has seven FDA approvals, five of which have been in the world of algorithms or AI. They've been able to leave that. We've seen in the world code that another accelerant to the adoption of AI in the world of medicine.

Vasudev Bailey: (32:52)
The last comment I'll have there is, just because you can create something with AI doesn't mean it'll get used by physicians across the world. The key question they should ask is, "Who's going to pay for it? Does it fit into the workflow of physician?" Important principles as you design AI. If anyone's looking to create the next AI solution, do think about that early, because otherwise, it's just cool technology that'll never get used by anyone.

John Darsie: (33:22)
That's fascinating. Let's turn to COVID for a few minutes. I'm sure that's a subject that's at the top of people's minds. So you guys are obviously in the healthcare investing space, the health tech space. We'll start with Dr. Gulati. What's the outlook and timeframe for developing effective therapies, which is obviously one piece that could help us reopen our economy's a little bit sooner? What's the outlook and potential efficacy of vaccines for the COVID-19 virus.

Dr. Vishal Gulati: (33:49)
Thanks, John. I think it is a very topical question and it's not just a million dollar question, it is not a billion dollar question, it's a hundreds of billion dollar question right now if you look at the economic impact of COVID. The human impact is incalculable.

Dr. Vishal Gulati: (34:06)
So in my mind, there are three stages of how we get out of this. The first stage was to try existing drugs to see if any of those work. We have had some things that worked, but by and large the effects are [crosstalk 00:34:25]-

John Darsie: (34:25)
What about President Trump's favorite drug, Dr. Gulati?

Dr. Vishal Gulati: (34:27)
Unfortunately, even though I was very optimistic early on, the data just does not support that hydroxychloroquine has any benefit. So I'm afraid, Mr. Trump will have just built millions of these tablets sitting somewhere in a storeroom in White house. I doubt if they will be of any benefit to anyone.

Dr. Vishal Gulati: (34:53)
So the first generation, if you like, the effect sizes have not been huge. Remdesivir, the effect size is not huge. It is something when we have nothing, then we have dexamethasone, which has a higher effect size than Remdesivir, but still not high enough, I would say.

Dr. Vishal Gulati: (35:14)
The second generation is the new products that we might develop now specifically, and where I'm very optimistic are a number of antibody treatments. This is passive immunization where people will get specific antibodies, which are Lilly's making one, Regeneron is making one, and they're heading some experience or from Ebola, for example, that such treatments could work.

Dr. Vishal Gulati: (35:39)
What I'm trying to look for as well as the therapeutic window, is it something you've given someone's exposed or do you give it at a later stage? So we will find out what that is.

Dr. Vishal Gulati: (35:49)
So coming to the vaccines, I am more optimistic about vaccines than not have been in the last few weeks or a month. I think that the data that we are seeing particularly from the Oxford group is actually very, very good. I looked at the data that came out from the animal experiments, and I think that they have been able to show pretty good antibody response and pretty good T-cell response. So I'm very hopeful.

Dr. Vishal Gulati: (36:20)
What we don't know and no one knows is when we will have sufficient number of COVID infections in the control group to be able to say that the treatment group works. So we don't know whether that will happen in September, October, November, when that will happen.

Dr. Vishal Gulati: (36:36)
Unfortunately, in many parts where they were doing clinical trials, the transmission rates have gone down. So actually, your control group is not getting any cases. So you can't really tell whether your vaccine works.

Dr. Vishal Gulati: (36:48)
So long story short, I'm optimistic about vaccines. I can't tell you how many or if any vaccines we will have in this year, but I'm very optimistic that in 2021, we will probably have more than one vaccine that will have sufficient level of efficacy that is, at least, being given to high risk patients.

John Darsie: (37:13)
So what you're telling me is SALT Abu Dhabi, our conference that we had last December, we're probably not having any in-person SALT conference in the UAE in 2020, and that no [crosstalk 00:37:23] conference last year-

Dr. Vishal Gulati: (37:25)
I'm afraid. I don't think I have good news for you.

Noor Sweid: (37:30)
But, [inaudible 00:37:31], John, you're going to have new one in Vegas next year, which you have to count on.

John Darsie: (37:34)
Hopefully. Inshallah, as they say. Noor, at Global Ventures, have you guys been working on things related to COVID?

Noor Sweid: (37:42)
I think that the UAE is a very special place and there's been multiple responses across the different Emirates for COVID. I think that the contact tracing is a lot more interesting in some of these markets right now than the therapeutic response, which we're leaving to the Lillys of the world.

John Darsie: (38:05)
Ross, how about you? Have you been helping us with the virus at all?

Vasudev Bailey: (38:08)
Yeah, so in February and March, when we started seeing leaders of certain countries go out and promote drugs, but before clinical trials, without naming people, it was important for us to step in and actually do something about it. So we built, at ARTIS Ventures, a comprehensive innovation tracker for the world of COVID.

Vasudev Bailey: (38:30)
So we have tracked every diagnostic, therapeutic, and vaccine that has been created in the world to fight the pandemic. I can tell you, as of today, there are 331 diagnostics that are received EUA or some regulatory approval. There are 145 therapies or treatments. Many of them repurposed, like Vishal mentioned, that are in human trials. There are 31 vaccine candidates that are in human trials as we speak today.

Vasudev Bailey: (39:00)
With that, I would say, we keep a close eye. There are two ways to think about innovation here. Noor is absolutely right. The first one is a public health response. What can you do? Whether it's better masks, better contact tracing stuff to help prevent things. So that's number one. That is sometimes easier to implement and it should happen.

Vasudev Bailey: (39:21)
The second is where we're focusing, investing more leverages in the therapeutics as well as diagnostics. It's the healthcare innovation, which can put an end to the pandemic, hopefully. Well, I would agree with Vishal that I started off a little more skeptical on the vaccine stuff, and I never thought that we'd be able to even get into phase three trials. But then a year it's promising to see that there are two phase three trials that are currently ongoing and we could get data read ups as early as September.

Vasudev Bailey: (39:49)
What is worth noting to everyone is even if we had really positive data for the vaccines this year, it's really hard to manufacture. You can't really manufacture for the mass markets and scale and the supply chain is not built for us to be able to distribute this to everyone.

Vasudev Bailey: (40:04)
But it gives me hope to say that with the vaccines that we made progress in the world of therapeutics, I'm not surprised because we're repurposing drugs to ever found something that would put an end to it. But I'm happy that we have identified things that can help alleviate certain, at least if you're put on a ventilator, it can be made a little bit better and hopefully you'll find other breakthroughs there as well in terms.

John Darsie: (40:30)
In terms of the global society and our approach to how to slow the spread of the virus and how to eventually, develop immunity to it and move past it, there's been some debate about what the right approach is. Sweden, as an example, in particular, that decided to adopt an approach where they weren't going to shut everything down. They were going to try to develop some level of herd immunity.

John Darsie: (40:49)
The virus is obviously something, it's novel. We don't know much about it, but the returns from Sweden have shown that it didn't really spare their economy and they haven't really developed the type of immunity that they were hoping for.

John Darsie: (41:00)
Dr. Gulati, did we make the right decision to shut things down and have these rolling quarantines, or we're going to have to quarantine again in places like Texas and Arizona that had these huge spikes in cases, or is a herd immunity type approach the right approach?

Dr. Vishal Gulati: (41:17)
John, I'm not in favor of the herd immunity approach. I think a lot of the data supports that now. A lot of the herd immunity debate is based around number of deaths. People are saying the fatality rate is X or Y so if we let everyone get infected. It misses two very important points.

Dr. Vishal Gulati: (41:41)
One is that, this disease does not affect everyone in the same way. There are huge variations in who gets this and who doesn't. People in certain jobs, which are generally lower paid jobs, there are a lot of immigrants work, those people are exposed more to this and the impact of this is going to be much, much greater. We should think about the ethical consequences of taking such decisions.

Dr. Vishal Gulati: (42:07)
The other thing which is often missed is that, just because you don't die of COVID-19 doesn't mean everything is okay. We now see the consequences of chronic lung disease, we're seeing neurological complications of COVID-19. So it's not just that, "Oh, it's okay. Just a bunch of old people are dead." It's a lot of old people are dead and you have a huge population of young people who have chronic lung and brain disease. I do not believe that that is the right way to go, but that is my view.

John Darsie: (42:42)
Vas, do you have anything to add to that?

Vasudev Bailey: (42:45)
100% I agree.

John Darsie: (42:47)
So I have a question. During this quarantine, like a lot of other people, I said, "You know what, I want to use this time at home to get healthy." So I started looking at the wearable device market and I said, "Okay, I don't have an Apple watch or a Fitbit. Let me look out there and see what's out there." It was actually a very interesting fact finding mission.

John Darsie: (43:04)
There's a couple of devices, the WHOOP, for example, that the PGA Tour or the Golf Tour in the United States, some players are wearing it. One player while wearing it was able to get readings into his app that basically indicated early signs of COVID. He tested positive for COVID. At the NBA Basketball, they're encouraging their players to wear the oura ring, which is another device that can provide early detection signs for COVID and other diseases.

John Darsie: (43:30)
What is the future of the wearables market and how does that contribute to this data driven future within healthcare? Vas, we'll start with you on that.

Vasudev Bailey: (43:41)
I say the wearables market is very tricky. There is an immense, like excitement and adoption from the hype cycle created for people to want to adopt it. Then past that, how many people... Well, I don't have to add the market research shows that people who had Fitbit stopped using it after six months. That is the case why Fitbit doesn't exist today as Fitbit, because you know what, it's hard to sustain as a company with these wearables over a long period of time.

Vasudev Bailey: (44:10)
I'm not saying variables as a category is a bad category. I don't know if people have found out like what psychologically makes people think that there's not the next device for you to try out. How is the action coming from these devices going to truly change and transform your life? I like ordering these things just because I'm fascinated by them. So I probably opened my closet. I have I think from Stanford, like a pebble, which measures your breathing rate. I have things called [Camigo 00:44:39], which does breathing exercises and meditation. I have things like the ring to measure things.

Vasudev Bailey: (44:44)
So I've tried all of them, but I probably use them for a couple of weeks. None of them are... or even for sleep apnea, you can have an app to try and listen to your breathing and snoring. I did not snore last night, if anyone was curious. So, which is really good, maybe it my caffeine or content. But I'm not sure or overall how useful it is to transform my life.

Vasudev Bailey: (45:07)
So the key thing I'd say is, if you're innovating in the space, always for people coming up with novel solutions, just answer the simple question, "How are you going to add prolonged value to the person using it beyond that first six months of fascination?" If you answered that you do truly do have a business that is worth it.

Vasudev Bailey: (45:28)
For the COVID world, the last part that I'll add, I think is useful. I do think connected devices and connected assistance. Because telehealth without sensors is just Skype and talking to a patient. So the idea of wearables or sensors, alarms are very useful and should be integrated into medical practice.

John Darsie: (45:50)
Skype might say some hypochondriacs, a few trips to the doctor though, don't discount the value of Zoom or Skype. Noor, are you guys looking at wearables at all? Or you have an opinion?

Noor Sweid: (46:01)
Both. Yes. So option D, all of the above. So wearables, in general at large, I think, to Vas' points, "What value do you bring to my life as a wearable beyond novelty." But I think more importantly that the accuracy of the data capture varies from one wearable to another. Until people are convinced that this is actually it'll be accurate, and based on this data, there is some angular outcome for me. It's always an interesting novelty outcome.

Noor Sweid: (46:32)
No one would have can't now that's actually really interesting, is in the FinTech space and it helps a woman and it's more like a wearable. So it's the undergarments, they are on the bras measuring different things that are important for women with breast cancer, for hearts.

Noor Sweid: (46:52)
Again, going back to the woman versus men. So you have to think on FinTech side, you'll have a lot happening and there's a lot in general medicine and healthcare where people have come forward and said, "I could move on these miles, and the moment they look very different, if we only one run man." And guess what? 95% on the one run man.

Noor Sweid: (47:10)
So now you're coming back to all of these wearables and all this data capture for females round the world, not just males to say, "How is this different? What data can we capture? How are women's hearts different to men's hearts?" However, the faster we capture that data, the better medicine we can provide for women around the world and the fastest way to capture that data is wearables at this point.

Noor Sweid: (47:33)
So it's really a data capture exercise that people are plugging into. So we're looking at a few. The one I mentioned is coming out of MIT, so you're seeing a lot, but they have to be very focused on, "Here's the value I'm adding, here is how long you need to do this for," either it's a treatment or it's prevention, but it has the beyond the novelty.

John Darsie: (47:54)
So we have a couple of audience questions before I let you guys go. Dr. Gulati, the first one's for you. What's the best approach for a clinical physician to get started in venture capital, if you don't have a business background? What was that transition like for you?

Dr. Vishal Gulati: (48:08)
Thanks for this question. I've been asked this question a few times and I find that most people I know who are in VC, none of their journeys are ever representative. In other words, there isn't like a cluster of things that they have done. So in this call, there are three investors. Noor, Vas, and I, all three have had very different journeys to get to doing exactly the same job in different parts of the world.

Dr. Vishal Gulati: (48:40)
So there isn't a highly representative way how a physician or a scientist can become a venture capitalist. What I find common in the colleagues that I work with and people in my industry is that, if you will come from a medical background, you generally have a research background with it. You're not just a physician who's a frontline physician. So you've had some encounter about developing new things and you have that excitement of making something new. I think that that helps you do that.

Dr. Vishal Gulati: (49:17)
Also, when you first leave medicine and go into venture capital, it is actually quite disconcerting because venture capital is... healthcare or a bigger doctor is very specialized. So you have a very, very niche specialty. So for example, my specialty was a certain type of immune cell, which is only found in the liver and it responds to only one type of virus. So that was my specialty.

Dr. Vishal Gulati: (49:43)
But when you go into venture capital, you can no longer afford to have a specialty which is that narrow. So you have to retrain yourself in order to learn new things really, really fast. If that is the attitude you have, and that is the life you want, then I think you should definitely consider venture capital.

John Darsie: (50:02)
Next question is for Vas. You're on the board of a project called the Trevor Project, which is a company that provides mental health counseling to young LGBTQ individuals. As we know, technology can be a double edged sword and the impact it has on young people's brains. Vishal, touched on this earlier, how can technology be leveraged in a positive way to positively affect our mental health? During the COVID-19 crisis, it's especially relevant as people sit and stir in their homes.

Vasudev Bailey: (50:35)
Yeah, I think mental health is still so taboo in so many markets and people wanting to seek help is... and having even grown up in India, I can tell you that the idea that depression is something, "Is it real or something is wrong with you?" It's just almost... even an educated families. That was partly what motivated me to be part of an organization.

Vasudev Bailey: (50:58)
Even as an investor, I look and seek for things, and I'll connect Vishal about what he's working on in the mental health space, as he said he is. But in terms of technology, being an enabler to help in preventing... like you'd look at the United States, it was fascinating for me to find that the number one cause of death for people under the age of 21. So for youth, one of the major causes is a suicide and it is absolutely preventable, is absolutely one where we can help and provide the tools and methods to help and even if you save one life, it is something we have done right.

Vasudev Bailey: (51:35)
Technology has been an important part. So with Trevor, the way in which they've done that is one, they started off as an organization by providing phone support. But now they moved into using technology by using chat-based support because that is where younger people are moving. But you see where technology is being used as they even have NLP, as a natural language processing, without identifying, with anonymous, but you could still pick up triggers and understand who has a higher propensity of taking their own life. So you know where and how you can intervene.

Vasudev Bailey: (52:09)
But not just that you have a clinical path of how to respond as well. When you learn from a machine time and time, humans may have a different way of responding to a certain question someone has asked, but a machine is very clinical about it and tells you exactly how you should respond for the best outcome.

Vasudev Bailey: (52:27)
So you can train mental health professionals to also respond in certain ways that gives you the best possible outcome.

John Darsie: (52:35)
Well, thank you all so much for joining us from different parts of the world, Dr. Gulati from London, Noor from Dubai, and Vas from San Francisco. That's the pleasure of just work from home environment is that we've been able to have a lot of these conversations that might not have happened if not for the circumstances. So thanks everybody for tuning in. Noor, Dr. Gulati, Vas, thanks again for joining us.

Dr. Vishal Gulati: (52:56)
Thanks John.

Noor Sweid: (52:57)
Thank you.

Josh Harris: Billionaire Investor on Identifying Opportunities Where Others Panic | SALT Talks #20

“Given the amount of deb issuance by the US government, there’s almost no choice but to keep interest rates very low for a very low time.”

Josh Harris is co-founder of Apollo Global Management, one of the world’s largest alternative investment firms. Harris is also principal owner and managing partner of the NHL’s New Jersey Devils and NBA’s Philadelphia 76ers, and also general partner in Crystal Palace of the English Premier League.

Harris learned early on his career, during the 1990 financial crisis, how to identify opportunities in moments where others panic. Some of those first examples involved buying big companies with bad balance sheets, deleveraging and ultimately saving the business all while generating great returns. Harris evaluates the current pandemic, its economic fallout and the civil unrest borne out of persistent systemic racism. “We've got a lot of income inequality, and obviously we have systemic racism in the country, and people are getting tired of it. The murder of George Floyd has created a lot of division amongst people. I think all of those things make it a really difficult time period.”

As a sports owner, Harris feels a strong sense of duty to leverage his teams’ influence in the community as a force for good. This is paired with the efforts of his own philanthropic organizations.

LISTEN AND SUBSCRIBE

SPEAKER

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Josh Harris

Co-Founder

Apollo Global Management

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone. And welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and geo-politics.

John Darsie: (00:19)
What we've been trying to do with these SALT Talks, is provide our audience a window into the minds of subject matter experts who are amongst the world's leading investors, creators, and thinkers. We're trying to replicate that experience that we provide at our in-person SALT Conferences, which unfortunately we were not able to do this year as a result of the pandemic.

John Darsie: (00:37)
But we're really excited today to welcome Josh Harris to SALT Talks. Josh is the Co-founder of Apollo Global Management. One of the world's largest alternative investment firms. He's also the Founder and Managing General Partner of Harris Blitzer Sports and Entertainment, an investment company that's focused on sports, entertainment and media. Within the vast HBSE portfolio, Josh is the Managing Partner of the Philadelphia 76ers in the NBA, and of the New Jersey Devils in the NHL, as well as the General Partner of Chrystal Palace Football Club in the English Premiere League.

John Darsie: (01:09)
In addition to all of that, he's a great philanthropist. He serves as the Founder and the Chairman of the Harris Family Charitable Foundation, which strives to improve lives, and strengthen communities, through the transformative power of sport, precision wellness, preventative medicine and leadership development. Josh earned his MBA from Harvard Business School, where he was named a Baker [inaudible 00:01:29] Scholar. And a BS in Economics from the University of Pennsylvania's Wharton School of Business, where he graduated summa cum laude. He and his wife reside in New York City with their five children.

John Darsie: (01:39)
And hosting today's interview, as most of you know, is Anthony Scaramucci, who's the Founder and Managing Partner of SkyBridge Capital, which is a leading global alternative investment firm. And I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (01:51)
I just want to thank everybody for wearing a blue shirt, pursuant to my memo that went out last night. You guys at least paid good attention to all that, so thank you.

Anthony Scaramucci: (02:00)
Josh, I always start these interviews out with a seminal question, because I know you. Many people know you from the media, because of your sports ownership, but not your background, how you got started? Where you grew up? And I love asking that question. So, can you tell us a little bit about that? Take us back to, prior to your arrival in college and business school.

Josh Harris: (02:25)
Great. Thanks Anthony. And it's awesome to be here. Thank you for having me. I grew up in Chevy Chase, Maryland. My dad, my path to finance, Apollo, and sports, was non-traditional. I grew up with my dad, who was an orthodontist. My mom and my dad, my family, had grown up in Philly. My mom was a teacher in Philly, went to Temple University. My dad went to Penn, so I decided to go to Penn. I'd never heard of Wharton when I joined Penn. But ultimately loved economics, and was, and joined the Wharton School after Freshmen year. And then ultimately worked at Drexel Burnham Lambert, where I met Leon Black and Marc Rowan.

Josh Harris: (03:14)
In 1988, I applied to one school, I applied to Harvard Business School. I said if I get in, I'll take a break. And I got in, and then in 1990, during one of the great financial crisis that have come about in my lifetime, and there have been five, Drexel went under. Ad Leon and Mark were starting Apollo, and they called me and said, "Can you join us after you get out of school?" And I did. That was my path.

Josh Harris: (03:48)
I was a high school and college wrestler. I always enjoyed sports, and it's lead me to be involved in sports going forward. That was my path.

Anthony Scaramucci: (04:03)
Talking about the crisis, you and I are, we're getting old, Josh, okay?

Josh Harris: (04:07)
We are.

Anthony Scaramucci: (04:07)
We've had five or six-

Josh Harris: (04:09)
You look good.

Anthony Scaramucci: (04:11)
... different crisis. I'm going to take you back to... Yeah, but that's Botox and hair dye. I can introduce you to my dermatologist if you need help.

Anthony Scaramucci: (04:17)
But, let's go back to 1990. It's February of 1990, this legendary investment bank, the greatest, arguably one of the greatest innovators in the modern capitalist era. The introduction of junk bonds, and all of the re-engineering that took place in corporate America as a result of Michael Milken's brilliant innovation, it's been shut down. And we don't have to go into why it was shut down, but I want to ask you this question.

Anthony Scaramucci: (04:45)
From your point of view, back then, you'd worked there, you went to school, it's now been shut down, and this is really for our younger viewers out there, because what happens to all of us, it's happened to you, it's happened to me. We're planning things, and God or the universe is laughing, and things start to go in a different direction than we expect. And so, tell me what you were thinking at that moment? And tell me some of the decisions you were making, to lead you to where you are today?

Josh Harris: (05:14)
Yes, so as a young man, I was driven to be involved with finance and getting, helping companies grow, and raising capital. Coming out of college, at that point Drexel was doing, I thought that the best and the brightest people were there, and they were doing a lot of attractive deals, so I joined. And then I was, I met great people there, and so in 1990 when the economy collapsed, I saw an opportunity to take what I thought was a... I always thought about my, and I always advise young people to think about their careers as an investment. What's the risk and what's the return?

Josh Harris: (06:03)
I felt that I was with great people who I knew. The way private equity alternatives works is, once you've raised the capital, you're in business. There's enough of fee string there, that you can pay the bills. It's like, I wasn't going to go broke or not be able to, trying to buy a, have an apartment or feed myself. And so I took the risk and joined up.

Josh Harris: (06:33)
Apollo's always been about innovation and agility, and volatile financial markets. And so we were, we innovated. And we, what everyone else had been doing bonds the traditional way, which was making equity investments, and then borrowing from banks. There was no capital available to do that, so we went into the market and we bought debt of very big companies with very bad balance sheets, and we created private equity transactions the opposite way. We deleveraged the companies, but we were able to save many quality businesses, as well as create great investment returns. And so, Apollo was born.

Josh Harris: (07:16)
What drove me was really the ability to be around great people, the ability to learn. And the ability to, I think, to innovate, and be part of what I saw was a new innovation in the financial markets, which was a win-win where we helped our investors, but we also helped the companies.

Anthony Scaramucci: (07:38)
You've seen many crisis, and it's a great story about how you guys thought about things. How do you see this crisis in comparison to some of the others.'90, '98, you got a quote there, 2001, the dot-com bubble. 2008. How do you see this differently, or not differently?

Josh Harris: (08:03)
I started in 1986. I was 21 years old. And I remember 1987, October 1987, being on the floor and just the market dropped 508 points, I'll never forget it. 25% drop. And someone was screaming out every 10 points. And then 1990, obviously where there was a savings and loan crisis. And a massive recession. And then obviously '01. '08, the financial crisis, which was very difficult. And then this crisis. I would say of all the crisis, this is by far the worst.

Josh Harris: (08:33)
Number one, it's a health crisis. People are dying. People have died. Secondly, it's a massive economic crisis. Just to put it in context, the trough unemployment for the country in the financial crisis, which is still over 10%. Obviously, we're down to 11% now, but we hit 15%. And if it hadn't been for massive government action, both from the federal reserve and from the treasury and fiscally, we would've probably hit 20 or 25%. We peaked the climb, peaked the trough to climb the GDP, which is supposed to be down at 6% this year as a country, that well exceeds what we were down in the financial crisis.

Josh Harris: (09:25)
I see this crisis somewhere between, when you look at it in context, I see this crisis somewhere between the financial crisis which was the worst previous thing that I had been involved with, and the great depression. Closer to the financial crisis. And so, when I try to put that in context more, it took about three years for the economy to get from, to recover from, to 2007 levels from where it dropped. And in the great depression it took the economy about seven years.

Josh Harris: (09:54)
I do believe that we're in a little bit of a longer economic negative climate, relative to 2019, than maybe the market would be predicting. Or others would be predicting. For example, the market thinks that earnings in 2021 will be above 2019. And I think everything that I see coming out of our portfolio, and the companies that we're involved with, and just the consumers that have been affected, and the businesses that have been affected, I don't really see that aggressive position that the market's stating. So I think that's a risk.

Josh Harris: (10:32)
To sort of answer your question directly, I think this is the worst one I've seen. And we also have like a social crisis. We've got a lot of income inequality, and obviously we have systemic racism in the country, and people are getting tired of it. The murder of George Floyd has created a lot of division amongst people. I think all of those things make it a really difficult time period.

Anthony Scaramucci: (10:57)
Let me address that with you. We'll talk about the racial thing in a second, because I'm interested in your opinion. I just want to go back to the comments you're making about the stock market. Let's say earnings are not better, the 2021 earnings are not better than 2019. Do you think the market will still be supported by liquidity, Josh? Or do you think that there's a threat that the market could roll? Because there just seems to be this massive amount of federal reserve liquidity, re-flating things, if you will, what's your thought on that? And I'm curious about your instincts there.

Josh Harris: (11:32)
Yeah. No. If you think about what the Fed has done so far, their [inaudible 00:11:37] has got about three trillion dollars, a little more than that, and during the entire 10 years around the financial crisis, that's about what the Fed balance sheet has grown, what it grew. They have another three trillion plus, they can spend. And when you aggregate all the global monetary authorities out there, they're buying more securities than every other private, and any other company, every agency is issuing. And so the markets today are being driven by technical factors. It's the old adage, don't fight the Fed.

Josh Harris: (12:14)
It's created a situation where technicals are ahead of fundamentals, and to explain a little bit more, for the benefit of giving your money to 10 years for the US treasury, you get to earn about 70 bips. But negative inflation, that's about negative one percent. The earnings yield on stocks, is about six or seven percent. There's an 800 base point spread between treasuries and stocks. And so what people do, is they move into stocks. Like all the government buying, and the low rates. Even though I think that our earnings are going to miss, and even though I think there are a lot of risks out there, whether it be the US election, whether it be US, China relations, whether it be earnings as I talked about, I still think that you may very well [inaudible 00:13:10]. If the Fed continues to be willing, and the other monetary authorities, continue to be willing to buy everything that is being issued and more, you may have this effect of the stock market remaining higher than it should be fundamentally.

Josh Harris: (13:27)
I think given the amount of debt issuance by the US government, there's almost no choice but to continue to keep rates very low, for a very long time. You're going to have these battles between technicals and fundamentals. I've even mentioned the fact that in 48 states, we now have rising cases again. And what is that going to do to consumer confidence? I do think that relative to the markets, the markets might ignore fundamentals for a while, as this massive technical push comes in.

Anthony Scaramucci: (14:01)
Right. I want to shift over to the racial issue for a second. You mentioned that there's systemic racism in our country, some people call is institutional racism. I firmly believe that there is, and I'm a data person. I'm assuming you're a data dependent person. I can prove it to people through data. And it's just an opinion question, why do you think people have a hard time saying that? You believe that, I believe that. But yet, you could ask a politician, and depending on what side of the isle they're on, they may say that it doesn't exist. But yet you can see it blatantly. What do you think about that?

Josh Harris: (14:38)
Look, it's everything from, there's systemic racism in this country. We have a great country, I love our country, but this is a dark part of our history, and we need to talk about it. We need to come to grips with it. And I happen to be involved with sports. 75% of NBA athletes are black. And I've been awake, or woken by some of their stories, and how they're afraid in many cases in their communities, even being famous athletes. And it's everything from educational opportunities, to employment opportunities, to training, to where people start in terms of economy capability.

Josh Harris: (15:30)
I don't know why people don't speak out about it. I think it's something that we need to speak out about, that we need to not only listen to people, we need to hear what they're saying, and actually try to redress it. I just feel like, as a business leader, and as a leader of sports teams, where sports is, you're a fiduciary for a city. It's time to not only speak out, but also to do stuff. To do real things, whether it be how you spend your money, what candidates you support, how you promote people? This is going to take an aggressive, we're going to have to all be very aggressive about using this moment where stuff has come to light, to change things.

Josh Harris: (16:17)
But as far as why people don't speak out about it, I don't know.

Anthony Scaramucci: (16:21)
Right. But I think it's interesting, and I just want to restate this for everybody listening. We've got a lot of viewers. You're working in sports, and so your angle and your appreciation, I think this is true for everybody, we're products of our environment. We grow up a certain way, we live a certain way. When we're exposed to different thing, then it would make sense that our opinions would change. Mine have changed over the years, as I'm sure yours has as well. I appreciate you saying those things.

Anthony Scaramucci: (16:47)
I want to ask you about the migration into sports. Your personal life story where, take us back, because I think it's an interesting thing. You're going to buy this Philadelphia 76ers. You grew up in Chevy Chase, Maryland. For many of us, that's sort of a boyhood dream. Take us through the iteration process of what you guys were thinking about, and how you took that leap.

Josh Harris: (17:13)
Yeah, first of all, all four of my... We came over, the Harrises as it were, came over to the country in the 1900s through [inaudible 00:17:21]. And all four of my great grandparents ended up in Philly somehow. My grandfather was a US postal worker in Philly. My mom was a teacher, and went to Temple. Dad went to Penn. They moved down and I grew up in Chevy Chase, but I went back to Penn. And in 1982, that was the era of Dr. J, and Moses Malone, and Maurice Cheeks, and Andrew Toney. And I was there for the-

Anthony Scaramucci: (17:47)
You guys broke my heart, because Dr. J was playing for the Nets at Nassau Coliseum in Long Island. You guys broke my-

Josh Harris: (17:54)
Right, the ABA. And I watched, I was there for the ticker tape parade and the last time the Sixers won the NBA Finals in 1982, 1983. And I experienced Philly sports. And Philly cares about sports. The fans are passionate. [inaudible 00:18:11], but I loved every minute of it. I was lucky enough to have success at Apollo, and I had heard that perhaps Comcast, who owned the Sixers at that time, might be willing to part with the Sixers. And I called them, and the next thing you know, I was able to, with a group of partners, acquire the club, the Sixers. And that was my entrance into sports, and I loved every minute of it. Like what you learn about sports [inaudible 00:18:46]. In 2013, I acquired the New Jersey Devils. And then in 2015, with a group, part of the same group of partners, and then Crystal Palace, we own with another group of partners in London.

Josh Harris: (19:01)
In terms of sports, what you realize is that no one, people care about, you're a fiduciary for a city. People care about the team. No one cares about Lyondell Chemical, which was a fantastic deal for Apollo, and no one cares about 50 billion dollar market equity company, but one cares about the price of polypropylene. But everyone cares about the Sixers starting line-up on any given day. And so you're a fiduciary, you bring communities together. There's a lot of media attention on it. And so, you have the ability when you're on sports teams, to really engage with the community, and to change a community, to help communities.

Josh Harris: (19:43)
And Philly and Newark, and South London, are all tough places. They need help. And so, that's one thing that I've really both enjoyed, but also had to learn about the scrutiny that occurs. But I've enjoyed doing that. And I've also enjoyed, a lot of us have been high school and college athletes, but being around the best players in the world at what they do, is an incredible high for me. I like to, and what I've learned about these gentlemen, generally they have been men, is that they're incredible individuals as well as being great athletes. It's been inspirational for me to watch. Joel Embiid, and Ben Simmons and Tobias Harris all like engage, P. K. Subban, all engage in helping these communities during COVID. Or in the case of the George Floyd murder, speak out against racism. And what you realize is that, these are some of the most powerful people in the world, because not only do they have money, but they've got massive social media platforms. And they have the ability to influence people, and they really stepped up as individuals and inspired me.

Josh Harris: (21:04)
And then lastly, we want to win championships. Like this is, the city's like, you've got to win. And there's pressure on you. That's been a journey. There's 30 other teams, or depending on your sport, 20 other teams in the Premier League. 31 other teams and like everyone's smart, and everyone's well financed. We're on a mission to win for the cities. And the city really cares whether you win or lose. If you win, the city's happy the next day. And if you lose, they're not. And for me, that's an avenue to compete at a very high level, and be part of something that's bigger than myself. That's all there is [inaudible 00:21:49].

Josh Harris: (21:49)
The other good news is that, what's happening in sports is that, content is globalizing. People now, more people in some cases, watch the Sixers in China, than do in Philly. And so, there's a massive tailwind behind sports content that is also helping economically. If you do all the right things, it can also be a good investment.

Anthony Scaramucci: (22:22)
Let me segue a second, because we're in the pandemic. It's had an impact on sports, and in some cases it's impaired some franchises, has impaired some leagues, frankly. And you're a kind of [inaudible 00:22:36] investor. What is the future of these sports... Are you bullish on them? Do you think this is a sea change moment for them? Or what's your opinion going forward, over the next three to five year as we look past the crisis?

Josh Harris: (22:52)
Sure. My opinion is, and what I've noticed is that there's a part of my life that's missing, not having-

Anthony Scaramucci: (23:00)
For me too.

Josh Harris: (23:00)
... basketball, and by not having hockey, and not having baseball, and not having football. And I think that people miss sports. I think that if anything, either absence is making the heart grow fonder, and I think that long run, the value and the inspiration of these clubs, that are the best in the world at what they do, and playing in the best leagues, I think that's going to come back. I think short run, it's really tough. The arenas are not open. There's no revenues, it's not, no one is crying for any sports owners, but it's a tough period of time when you've got to get through it.

Josh Harris: (23:47)
For the long run, I'm very bullish on the major sports, but they're all different. But I'm very bullish on people's desire to watch these sports and be a part of it.

Anthony Scaramucci: (24:00)
Well, I've got to tell you though, we love you, Josh. But we also love the Milwaukee Bucks. And why do we love the Milwaukee Bucks? Because our good friend Marc from Avenue Capital, is the owner of the Milwaukee Bucks. We're rooting for your two teams to be in the championship, and then I'll flip a coin. It's sort of the reverse of the Yankees and the Phillies in 2009 being in the world series. As a Net fan, I was ready to jump off the Brooklyn Bridge. You can't root for either for those two teams as a Nets fan.

Anthony Scaramucci: (24:32)
But, I hope you get there you've got a phenomenal success story in sports. And I love the way you're managing these teams, and so we're really wishing you a great success in what you're doing.

Josh Harris: (24:45)
Thank you.

Anthony Scaramucci: (24:46)
I want to switch to a question about your philanthropy, and then I'm going to turn it over to John Darsie who has questions from our audience, questions that have percolated in, since we said that we were going to do this with you.

Anthony Scaramucci: (24:59)
You are an amazingly charitable person. And mazel tov. God bless you for being that way. I just want you to tell us a little bit about the programs you look to give money to. Why you look to give those programs money? And what's your thought process in terms of improving society through that charitable giving?

Josh Harris: (25:21)
Yeah. I think first of all, all of us that have been privileged to be successful, have not only opportunity, but the obligation to give back. And to try to make the world a better place. It's my privilege to be able to do it. I really enjoy doing it. And I would say that for me, and for my family, we've started with sports, because we felt that it's like every other thing. You start off by saying, okay where do you move the needle the most?

Josh Harris: (25:53)
Sports has an incredible power to lift communities, and engage communities, particularly for kids. We're amongst the largest investor slash donors in after school sports programs that have been cut by high schools and middle schools all over the country. And it's everything from the After-School All-Stars, to Police Athletic League, to [inaudible 00:26:19], to many, many platforms.

Josh Harris: (26:22)
We're helping over 14,000 kids in the Philly area. Between 50 and a 100,000 kids nationwide to be part of sports programs. Once they come in, you feed them the lettuce. You make them study, you keep them safe. You try to create a situation where they have the tools, they're better equipped to move forward through life. Whether it be getting better grades, or doing their homework. And you emphasize, part of that if you want to play in the Sixers Youth League, you've got to also study and get good grades, and eat well, and teach them about that. That's kind of one major part of our philanthropy.

Josh Harris: (27:16)
I think secondly, is wellness and health, and getting people to, inspiring people to eat better, and to avoid kind of doing things. To exercise, to not smoke, to not take drugs, to not drink, to like try to inspire them to take care of themselves individually, and stay away from as much as possible from the hospital system. We've developed programs at Mount Sinai, and all over, in other areas, and all over the country to engage with people on this level.

Josh Harris: (28:01)
And then more recently, during COVID, we just kind of went, it's all about helping the communities of Camden, Newark, Philly and New York, the communities where we have real leverage to, everything from the hospital systems there, to maths, to laptops. We bought 10,000 laptops and gave them to kids in Philly so they can go to school on it. I have five kids, I feel like I was running a school here, and I couldn't imagine doing it without laptops. And then we heard that kids in Philly needed laptops. And then we bought hundreds of thousands of meals, and just made sure that people were healthy in Newark, in Camden, in Philly. And so, all of that is stuff that we've been working on.

Anthony Scaramucci: (29:00)
Awesome. And I love the mindset application about what you're doing. I'm going to turn it over to John. He's got a plethora of questions for you.

Anthony Scaramucci: (29:08)
And by the way, you're winning the Room Rater right now. I've got this weird wallpaper behind me. I have no idea what it is. Darcy's in sort of like a wasp closet, with all kinds of stuff there. You've actually got pictures of the kids, and the Bloomberg terminal for you. You won the SALT Talks-

Josh Harris: (29:26)
I didn't even know that I was in this contest.

Anthony Scaramucci: (29:26)
I just want to make sure you know, I am the judge, there's only one judge, and it's me. You have won the SALT Talk as a result of the Room Rater.

Anthony Scaramucci: (29:36)
But go ahead, Darcy.

Josh Harris: (29:38)
Darcy, that's a good start.

John Darsie: (29:40)
All right. We've got several questions from our audience leading into the talk. And I'll go into a couple of them, before we wrap up.

John Darsie: (29:47)
Are there any specific deals that you worked on, either at Apollo or prior to Apollo, that you're particularly fond of? And that demonstrate the way you think about things from and investment perspective?

Josh Harris: (29:58)
Yeah. The one I would talk about, would be Lyondell Chemical. Obviously it was one of, it's the most profitable deal ever for Apollo, and one of the most profitable in private equity history. But, what was really good about it, was that it was a fantastic, it was a massive chemical company, that had too much leverage going into the financial crisis. And it was in danger of, it had close to 50,000 employees, and it was in danger of really just going away and liquidating, because it was over-levered.

Josh Harris: (30:31)
We were able to go in during the financial crisis, and buy the debt. And our first buy was at 80, and our last, our trough buy was at 15 cents, to tell you. And at that point chemical companies were doing very poorly. They were losing money. And we had developed an industry group in chemicals, where we had owned a lot of companies, and we really believed we were watching the turn in the economy, and really believed that supply chain, we didn't believe that the demand that we were seeing was sustainable, based on consumer spending.

Josh Harris: (31:08)
And so we were taking the other side of people who are panicking, and were selling [inaudible 00:31:13] price. And then, so we acquired about 30% of the debt, and then we ultimately navigated a very complicated international bankruptcy with many, many countries, and many, many enemies. And we were able to restructure the company very quickly. And then deleverage the structure, take about $25 billion dollars debt down to less than $8 billion of debt. And then the company reemerged as.. And then also the management team in the middle of all this, kind of decided they didn't want to do this anymore, and we had to recruit a whole management team.

Josh Harris: (31:56)
The company which had done, went from four billion [inaudible 00:31:59] to negative one billion [inaudible 00:32:02], merged and kind of ultimately was doing five or six billion, by the time that we decided that it was time for us to sell out. And it's become this enormously successful corporate company, that today is really thriving and prospering. It's an example of where we used our creativity and our skill sets to really help a great international, but American company, survive a very difficult time period. And we were still able to make, create an attractive risk return opportunity for our investors. And investors obviously are the pension systems. They're teachers, they're firefighters, they're policemen. They're public employers all over the country, and all over the world. That would be the deal that I would talk about.

John Darsie: (32:49)
Great. It doesn't exactly fit some of the negative stereotypes that you see out there about the private equity industry. And how it doesn't add value.

Josh Harris: (32:58)
There are a lot of those. And there are eight million, I try to educate people, that right now there are eight million US workers that work for private equity companies. There are 25 million workers that supply, or are customers in private equity companies. Private equity is the US. There's 35,000 private companies. There's only 4,400 public companies. Private companies, I run a public company, Apollo is a public company. We've got to worry about quarterly earnings. And sometimes you can't always invest for the long-term and do the right things. And so, we need to do a better job.

Josh Harris: (33:37)
And obviously it's a very populous environment. And we're an easy target, and we need to do a better job of telling all the great things that we do. And this is definitely one of those stories.

John Darsie: (33:49)
All right. Well, that's part of why we do these SALT Talks. So, thanks for joining us and helping to dispel some of that nonsense.

Josh Harris: (33:54)
Thank you.

John Darsie: (33:56)
As you look out the landscape right now, Anthony touched on earlier, how you're a very contrarian opportunistic type of investor. As you look out over the private market landscape, we'll focus on private companies, as you mainly do, what are the sectors that you see the most short-term impairment, but the most long-term secular bullish opportunities? Where are you really licking your chops right now, as you look across private markets?

Josh Harris: (34:21)
Yeah, I think private markets are, the Fed action has compressed, or I'd going to compress interest rates going forward, but steadily as you move further outside the public markets, you're going to see better risk return opportunities, and that's what our cloud performance is built to do. And I would say that, the impacted sectors that we're seeing an opportunity in, are generally going to be sectors that have been hardest hit by COVID.

Josh Harris: (34:49)
In many cases, these are like travel related sectors, they're hotels, I think they're real estate, certain types of real estate. I'd say certainly venues and arenas, and entertainment based companies. And so the truth of the matter is, in the early part of the crisis, we were able to invest in these companies. And this is private equity, I'll take a walk through. We're mostly now, we're 400 billion of AUM pro forma for a deal that we just did, called Jackson. Of that, we're about 80 plus percent credit. Lending to companies and great American businesses, and we're only less than 20% what I would call opportunistic private equity, but that's still what we're known for.

Josh Harris: (35:46)
So in the opportunistic sectors, it's going to be those sectors that have been really hard hit, and where the evaluations reflect, to a large extent, some of the concern. That would be, and in private equity they were mostly buying debt. We're just starting to look at deals now. In mezzanine, which is taking a walk towards some of the safer stuff, so the middle part of the capital structure, we continue to do very large investments, many of them which are public. Everything from Expedia, to Cimpress, to Albertsons. Many, many deals where companies are looking for a little bit of capital, either to grow or get over the hump, in a short-term capital crunch situation, because their revenues have been impacted, but they long run, see a lot of value.

Josh Harris: (36:38)
And so, in all these investments, we're able to make investments that build in our view of the world, which is, it's going to be a three or five year timeframe, before they return back to where they were in '19. It gives us, you're really making a bet on terminal value. You have a lot of room, and you're really able to bid in quite a bit of losses in the short run, but you're looking at long run asset value creation.

Josh Harris: (37:06)
In the rest of our portfolio, a lot of what the Fed has done, has been AAA, or government securities, they have bought some high yield. But these are the big liquidity. And these are the big liquid issuances. Much of the small business lending, or other programs that they're trying to do, they're not reaching many of the structured credit vehicles that we, or the middle market businesses, that we actually invest in.

Josh Harris: (37:38)
In the middle market, you can continue to get very attractive returns, lending to businesses that have 20, 25, 50 million of [inaudible 00:37:49]. The bank market, notwithstanding the Fed action, is still pretty shut down. The high yield market is up. It's the only thing with a CUSIP. Anything that's publicly traded is open, but the bank markets are generally pretty closed right now. And so are the structured credit market. That impacts everything from real estate financing, to restaurants. To people, like aircraft leasing has been very impacted. We have [inaudible 00:38:17] our sale-and-leaseback around malls, and hotels. All of those structures, are away from the Fed money, and we're just providing liquidity to everyone from restaurants, to small businesses to hotel owners, allowing them to weather the crisis and getting paid probably arbitrages of one to 400 base points, depending on where they are in the credit stack.

John Darsie: (38:45)
Last question before we let you go. You've helped build Apollo into one of the world's largest and best performing investment firms. You mentioned about 400 billion in pro forma assets under management. Looking at both the way you've built Apollo, and the way you're running the sports franchises that you own, and you could talk about it through the lens of sports ownership. With the Philadelphia 67ers, you've taken, not that you're the General Manager, but you guys have taken players like Joel Embiid that you drafted, and developed into one of the best players in the league. You have Ben Simmons, who's a six foot nine player, playing the point guard position, you have Tobias Harris, who's a six foot ten shooting guard.

John Darsie: (39:24)
When you look at building teams, and building organizations, how do you align what you think about business at somewhere like Apollo, when you're looking at investments? And how you look at something like running a sports franchise? And how do you go about building those dynastic franchises the way someone like the New England Patriots, or the San Antonio Spurs have done, over the last 10, 15 years?

Josh Harris: (39:45)
Yeah. I think it starts with people. You've got to have, if you get the best and the brightest people, and you go, and you're able to not only recruit them, but also resource them, and provide them a vision for where you want to go. If you get the best people, and I think this is all just basic fundamentals. Being successful on the court, attracting the right players, you've got to be successful off the court first.

Josh Harris: (40:12)
And then it's about having a unique strategy, or some unique thought as to how you're going to do things little differently, so in case of sports, we're developing a lot of advanced [inaudible 00:40:27]. There are 30 smart owners, how do you get an edge? How do you select those players? How do you recruit those players? In basketball, it's about making sure they want to play with you, because ultimately they have a lot of choices. But then beyond that, having the right sport science, the right programs for them, to keep them healthy, to extend their careers. Analytics, so that you can select them. Everyone wants these players.

Josh Harris: (40:58)
It's no different at Apollo. We had a unique, it's about innovating. It's about innovating, it's about having the right people. And then it's about having a culture where they stay, and they've decided to work with you.

John Darsie: (41:12)
Well, that's all we have for you today. Josh, thanks again so much for joining us in the middle of the summer. Anthony, I don't know if you have any final words?

Anthony Scaramucci: (41:20)
I have one final request for Josh, and I'm sure he'll appreciate this. If anything should happen to you in the sports world, could you give me a call please? I want to be one of the first people-

Josh Harris: (41:31)
You've got it, man. You've got it.

Anthony Scaramucci: (41:32)
All right. I need [crosstalk 00:41:34] from you.

Josh Harris: (41:34)
I hear you have a lot of thoughts on this.

Anthony Scaramucci: (41:37)
All right. Well, we wish you the best, man. God bless. It's great to have you on SALT. And hopefully, Josh, we can get you to one of our live events as soon as we can get out of the COVID-19 situation.

Josh Harris: (41:48)
I can't wait. I can't wait, and I like the wall behind you. Don't sell yourself short. I might have to... I think you might have won.

Anthony Scaramucci: (41:54)
I'm trying to figure out if it's an insect or not. It's a rough Room Rater for me, Josh, if I do television. Let's just put it that way. I may have to come over to your house, and use that background.

Josh Harris: (42:05)
All right. You got it. Anytime.

Anthony Scaramucci: (42:06)
All right. Be well, man. Thank you for everything.

Josh Harris: (42:08)
Pleasure. Thank you.John Darsie: (00:07)
Hello everyone. And welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and geo-politics.

John Darsie: (00:19)
What we've been trying to do with these SALT Talks, is provide our audience a window into the minds of subject matter experts who are amongst the world's leading investors, creators, and thinkers. We're trying to replicate that experience that we provide at our in-person SALT Conferences, which unfortunately we were not able to do this year as a result of the pandemic.

John Darsie: (00:37)
But we're really excited today to welcome Josh Harris to SALT Talks. Josh is the Co-founder of Apollo Global Management. One of the world's largest alternative investment firms. He's also the Founder and Managing General Partner of Harris Blitzer Sports and Entertainment, an investment company that's focused on sports, entertainment and media. Within the vast HBSE portfolio, Josh is the Managing Partner of the Philadelphia 76ers in the NBA, and of the New Jersey Devils in the NHL, as well as the General Partner of Chrystal Palace Football Club in the English Premiere League.

John Darsie: (01:09)
In addition to all of that, he's a great philanthropist. He serves as the Founder and the Chairman of the Harris Family Charitable Foundation, which strives to improve lives, and strengthen communities, through the transformative power of sport, precision wellness, preventative medicine and leadership development. Josh earned his MBA from Harvard Business School, where he was named a Baker [inaudible 00:01:29] Scholar. And a BS in Economics from the University of Pennsylvania's Wharton School of Business, where he graduated summa cum laude. He and his wife reside in New York City with their five children.

John Darsie: (01:39)
And hosting today's interview, as most of you know, is Anthony Scaramucci, who's the Founder and Managing Partner of SkyBridge Capital, which is a leading global alternative investment firm. And I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (01:51)
I just want to thank everybody for wearing a blue shirt, pursuant to my memo that went out last night. You guys at least paid good attention to all that, so thank you.

Anthony Scaramucci: (02:00)
Josh, I always start these interviews out with a seminal question, because I know you. Many people know you from the media, because of your sports ownership, but not your background, how you got started? Where you grew up? And I love asking that question. So, can you tell us a little bit about that? Take us back to, prior to your arrival in college and business school.

Josh Harris: (02:25)
Great. Thanks Anthony. And it's awesome to be here. Thank you for having me. I grew up in Chevy Chase, Maryland. My dad, my path to finance, Apollo, and sports, was non-traditional. I grew up with my dad, who was an orthodontist. My mom and my dad, my family, had grown up in Philly. My mom was a teacher in Philly, went to Temple University. My dad went to Penn, so I decided to go to Penn. I'd never heard of Wharton when I joined Penn. But ultimately loved economics, and was, and joined the Wharton School after Freshmen year. And then ultimately worked at Drexel Burnham Lambert, where I met Leon Black and Marc Rowan.

Josh Harris: (03:14)
In 1988, I applied to one school, I applied to Harvard Business School. I said if I get in, I'll take a break. And I got in, and then in 1990, during one of the great financial crisis that have come about in my lifetime, and there have been five, Drexel went under. Ad Leon and Mark were starting Apollo, and they called me and said, "Can you join us after you get out of school?" And I did. That was my path.

Josh Harris: (03:48)
I was a high school and college wrestler. I always enjoyed sports, and it's lead me to be involved in sports going forward. That was my path.

Anthony Scaramucci: (04:03)
Talking about the crisis, you and I are, we're getting old, Josh, okay?

Josh Harris: (04:07)
We are.

Anthony Scaramucci: (04:07)
We've had five or six-

Josh Harris: (04:09)
You look good.

Anthony Scaramucci: (04:11)
... different crisis. I'm going to take you back to... Yeah, but that's Botox and hair dye. I can introduce you to my dermatologist if you need help.

Anthony Scaramucci: (04:17)
But, let's go back to 1990. It's February of 1990, this legendary investment bank, the greatest, arguably one of the greatest innovators in the modern capitalist era. The introduction of junk bonds, and all of the re-engineering that took place in corporate America as a result of Michael Milken's brilliant innovation, it's been shut down. And we don't have to go into why it was shut down, but I want to ask you this question.

Anthony Scaramucci: (04:45)
From your point of view, back then, you'd worked there, you went to school, it's now been shut down, and this is really for our younger viewers out there, because what happens to all of us, it's happened to you, it's happened to me. We're planning things, and God or the universe is laughing, and things start to go in a different direction than we expect. And so, tell me what you were thinking at that moment? And tell me some of the decisions you were making, to lead you to where you are today?

Josh Harris: (05:14)
Yes, so as a young man, I was driven to be involved with finance and getting, helping companies grow, and raising capital. Coming out of college, at that point Drexel was doing, I thought that the best and the brightest people were there, and they were doing a lot of attractive deals, so I joined. And then I was, I met great people there, and so in 1990 when the economy collapsed, I saw an opportunity to take what I thought was a... I always thought about my, and I always advise young people to think about their careers as an investment. What's the risk and what's the return?

Josh Harris: (06:03)
I felt that I was with great people who I knew. The way private equity alternatives works is, once you've raised the capital, you're in business. There's enough of fee string there, that you can pay the bills. It's like, I wasn't going to go broke or not be able to, trying to buy a, have an apartment or feed myself. And so I took the risk and joined up.

Josh Harris: (06:33)
Apollo's always been about innovation and agility, and volatile financial markets. And so we were, we innovated. And we, what everyone else had been doing bonds the traditional way, which was making equity investments, and then borrowing from banks. There was no capital available to do that, so we went into the market and we bought debt of very big companies with very bad balance sheets, and we created private equity transactions the opposite way. We deleveraged the companies, but we were able to save many quality businesses, as well as create great investment returns. And so, Apollo was born.

Josh Harris: (07:16)
What drove me was really the ability to be around great people, the ability to learn. And the ability to, I think, to innovate, and be part of what I saw was a new innovation in the financial markets, which was a win-win where we helped our investors, but we also helped the companies.

Anthony Scaramucci: (07:38)
You've seen many crisis, and it's a great story about how you guys thought about things. How do you see this crisis in comparison to some of the others.'90, '98, you got a quote there, 2001, the dot-com bubble. 2008. How do you see this differently, or not differently?

Josh Harris: (08:03)
I started in 1986. I was 21 years old. And I remember 1987, October 1987, being on the floor and just the market dropped 508 points, I'll never forget it. 25% drop. And someone was screaming out every 10 points. And then 1990, obviously where there was a savings and loan crisis. And a massive recession. And then obviously '01. '08, the financial crisis, which was very difficult. And then this crisis. I would say of all the crisis, this is by far the worst.

Josh Harris: (08:33)
Number one, it's a health crisis. People are dying. People have died. Secondly, it's a massive economic crisis. Just to put it in context, the trough unemployment for the country in the financial crisis, which is still over 10%. Obviously, we're down to 11% now, but we hit 15%. And if it hadn't been for massive government action, both from the federal reserve and from the treasury and fiscally, we would've probably hit 20 or 25%. We peaked the climb, peaked the trough to climb the GDP, which is supposed to be down at 6% this year as a country, that well exceeds what we were down in the financial crisis.

Josh Harris: (09:25)
I see this crisis somewhere between, when you look at it in context, I see this crisis somewhere between the financial crisis which was the worst previous thing that I had been involved with, and the great depression. Closer to the financial crisis. And so, when I try to put that in context more, it took about three years for the economy to get from, to recover from, to 2007 levels from where it dropped. And in the great depression it took the economy about seven years.

Josh Harris: (09:54)
I do believe that we're in a little bit of a longer economic negative climate, relative to 2019, than maybe the market would be predicting. Or others would be predicting. For example, the market thinks that earnings in 2021 will be above 2019. And I think everything that I see coming out of our portfolio, and the companies that we're involved with, and just the consumers that have been affected, and the businesses that have been affected, I don't really see that aggressive position that the market's stating. So I think that's a risk.

Josh Harris: (10:32)
To sort of answer your question directly, I think this is the worst one I've seen. And we also have like a social crisis. We've got a lot of income inequality, and obviously we have systemic racism in the country, and people are getting tired of it. The murder of George Floyd has created a lot of division amongst people. I think all of those things make it a really difficult time period.

Anthony Scaramucci: (10:57)
Let me address that with you. We'll talk about the racial thing in a second, because I'm interested in your opinion. I just want to go back to the comments you're making about the stock market. Let's say earnings are not better, the 2021 earnings are not better than 2019. Do you think the market will still be supported by liquidity, Josh? Or do you think that there's a threat that the market could roll? Because there just seems to be this massive amount of federal reserve liquidity, re-flating things, if you will, what's your thought on that? And I'm curious about your instincts there.

Josh Harris: (11:32)
Yeah. No. If you think about what the Fed has done so far, their [inaudible 00:11:37] has got about three trillion dollars, a little more than that, and during the entire 10 years around the financial crisis, that's about what the Fed balance sheet has grown, what it grew. They have another three trillion plus, they can spend. And when you aggregate all the global monetary authorities out there, they're buying more securities than every other private, and any other company, every agency is issuing. And so the markets today are being driven by technical factors. It's the old adage, don't fight the Fed.

Josh Harris: (12:14)
It's created a situation where technicals are ahead of fundamentals, and to explain a little bit more, for the benefit of giving your money to 10 years for the US treasury, you get to earn about 70 bips. But negative inflation, that's about negative one percent. The earnings yield on stocks, is about six or seven percent. There's an 800 base point spread between treasuries and stocks. And so what people do, is they move into stocks. Like all the government buying, and the low rates. Even though I think that our earnings are going to miss, and even though I think there are a lot of risks out there, whether it be the US election, whether it be US, China relations, whether it be earnings as I talked about, I still think that you may very well [inaudible 00:13:10]. If the Fed continues to be willing, and the other monetary authorities, continue to be willing to buy everything that is being issued and more, you may have this effect of the stock market remaining higher than it should be fundamentally.

Josh Harris: (13:27)
I think given the amount of debt issuance by the US government, there's almost no choice but to continue to keep rates very low, for a very long time. You're going to have these battles between technicals and fundamentals. I've even mentioned the fact that in 48 states, we now have rising cases again. And what is that going to do to consumer confidence? I do think that relative to the markets, the markets might ignore fundamentals for a while, as this massive technical push comes in.

Anthony Scaramucci: (14:01)
Right. I want to shift over to the racial issue for a second. You mentioned that there's systemic racism in our country, some people call is institutional racism. I firmly believe that there is, and I'm a data person. I'm assuming you're a data dependent person. I can prove it to people through data. And it's just an opinion question, why do you think people have a hard time saying that? You believe that, I believe that. But yet, you could ask a politician, and depending on what side of the isle they're on, they may say that it doesn't exist. But yet you can see it blatantly. What do you think about that?

Josh Harris: (14:38)
Look, it's everything from, there's systemic racism in this country. We have a great country, I love our country, but this is a dark part of our history, and we need to talk about it. We need to come to grips with it. And I happen to be involved with sports. 75% of NBA athletes are black. And I've been awake, or woken by some of their stories, and how they're afraid in many cases in their communities, even being famous athletes. And it's everything from educational opportunities, to employment opportunities, to training, to where people start in terms of economy capability.

Josh Harris: (15:30)
I don't know why people don't speak out about it. I think it's something that we need to speak out about, that we need to not only listen to people, we need to hear what they're saying, and actually try to redress it. I just feel like, as a business leader, and as a leader of sports teams, where sports is, you're a fiduciary for a city. It's time to not only speak out, but also to do stuff. To do real things, whether it be how you spend your money, what candidates you support, how you promote people? This is going to take an aggressive, we're going to have to all be very aggressive about using this moment where stuff has come to light, to change things.

Josh Harris: (16:17)
But as far as why people don't speak out about it, I don't know.

Anthony Scaramucci: (16:21)
Right. But I think it's interesting, and I just want to restate this for everybody listening. We've got a lot of viewers. You're working in sports, and so your angle and your appreciation, I think this is true for everybody, we're products of our environment. We grow up a certain way, we live a certain way. When we're exposed to different thing, then it would make sense that our opinions would change. Mine have changed over the years, as I'm sure yours has as well. I appreciate you saying those things.

Anthony Scaramucci: (16:47)
I want to ask you about the migration into sports. Your personal life story where, take us back, because I think it's an interesting thing. You're going to buy this Philadelphia 76ers. You grew up in Chevy Chase, Maryland. For many of us, that's sort of a boyhood dream. Take us through the iteration process of what you guys were thinking about, and how you took that leap.

Josh Harris: (17:13)
Yeah, first of all, all four of my... We came over, the Harrises as it were, came over to the country in the 1900s through [inaudible 00:17:21]. And all four of my great grandparents ended up in Philly somehow. My grandfather was a US postal worker in Philly. My mom was a teacher, and went to Temple. Dad went to Penn. They moved down and I grew up in Chevy Chase, but I went back to Penn. And in 1982, that was the era of Dr. J, and Moses Malone, and Maurice Cheeks, and Andrew Toney. And I was there for the-

Anthony Scaramucci: (17:47)
You guys broke my heart, because Dr. J was playing for the Nets at Nassau Coliseum in Long Island. You guys broke my-

Josh Harris: (17:54)
Right, the ABA. And I watched, I was there for the ticker tape parade and the last time the Sixers won the NBA Finals in 1982, 1983. And I experienced Philly sports. And Philly cares about sports. The fans are passionate. [inaudible 00:18:11], but I loved every minute of it. I was lucky enough to have success at Apollo, and I had heard that perhaps Comcast, who owned the Sixers at that time, might be willing to part with the Sixers. And I called them, and the next thing you know, I was able to, with a group of partners, acquire the club, the Sixers. And that was my entrance into sports, and I loved every minute of it. Like what you learn about sports [inaudible 00:18:46]. In 2013, I acquired the New Jersey Devils. And then in 2015, with a group, part of the same group of partners, and then Crystal Palace, we own with another group of partners in London.

Josh Harris: (19:01)
In terms of sports, what you realize is that no one, people care about, you're a fiduciary for a city. People care about the team. No one cares about Lyondell Chemical, which was a fantastic deal for Apollo, and no one cares about 50 billion dollar market equity company, but one cares about the price of polypropylene. But everyone cares about the Sixers starting line-up on any given day. And so you're a fiduciary, you bring communities together. There's a lot of media attention on it. And so, you have the ability when you're on sports teams, to really engage with the community, and to change a community, to help communities.

Josh Harris: (19:43)
And Philly and Newark, and South London, are all tough places. They need help. And so, that's one thing that I've really both enjoyed, but also had to learn about the scrutiny that occurs. But I've enjoyed doing that. And I've also enjoyed, a lot of us have been high school and college athletes, but being around the best players in the world at what they do, is an incredible high for me. I like to, and what I've learned about these gentlemen, generally they have been men, is that they're incredible individuals as well as being great athletes. It's been inspirational for me to watch. Joel Embiid, and Ben Simmons and Tobias Harris all like engage, P. K. Subban, all engage in helping these communities during COVID. Or in the case of the George Floyd murder, speak out against racism. And what you realize is that, these are some of the most powerful people in the world, because not only do they have money, but they've got massive social media platforms. And they have the ability to influence people, and they really stepped up as individuals and inspired me.

Josh Harris: (21:04)
And then lastly, we want to win championships. Like this is, the city's like, you've got to win. And there's pressure on you. That's been a journey. There's 30 other teams, or depending on your sport, 20 other teams in the Premier League. 31 other teams and like everyone's smart, and everyone's well financed. We're on a mission to win for the cities. And the city really cares whether you win or lose. If you win, the city's happy the next day. And if you lose, they're not. And for me, that's an avenue to compete at a very high level, and be part of something that's bigger than myself. That's all there is [inaudible 00:21:49].

Josh Harris: (21:49)
The other good news is that, what's happening in sports is that, content is globalizing. People now, more people in some cases, watch the Sixers in China, than do in Philly. And so, there's a massive tailwind behind sports content that is also helping economically. If you do all the right things, it can also be a good investment.

Anthony Scaramucci: (22:22)
Let me segue a second, because we're in the pandemic. It's had an impact on sports, and in some cases it's impaired some franchises, has impaired some leagues, frankly. And you're a kind of [inaudible 00:22:36] investor. What is the future of these sports... Are you bullish on them? Do you think this is a sea change moment for them? Or what's your opinion going forward, over the next three to five year as we look past the crisis?

Josh Harris: (22:52)
Sure. My opinion is, and what I've noticed is that there's a part of my life that's missing, not having-

Anthony Scaramucci: (23:00)
For me too.

Josh Harris: (23:00)
... basketball, and by not having hockey, and not having baseball, and not having football. And I think that people miss sports. I think that if anything, either absence is making the heart grow fonder, and I think that long run, the value and the inspiration of these clubs, that are the best in the world at what they do, and playing in the best leagues, I think that's going to come back. I think short run, it's really tough. The arenas are not open. There's no revenues, it's not, no one is crying for any sports owners, but it's a tough period of time when you've got to get through it.

Josh Harris: (23:47)
For the long run, I'm very bullish on the major sports, but they're all different. But I'm very bullish on people's desire to watch these sports and be a part of it.

Anthony Scaramucci: (24:00)
Well, I've got to tell you though, we love you, Josh. But we also love the Milwaukee Bucks. And why do we love the Milwaukee Bucks? Because our good friend Marc from Avenue Capital, is the owner of the Milwaukee Bucks. We're rooting for your two teams to be in the championship, and then I'll flip a coin. It's sort of the reverse of the Yankees and the Phillies in 2009 being in the world series. As a Net fan, I was ready to jump off the Brooklyn Bridge. You can't root for either for those two teams as a Nets fan.

Anthony Scaramucci: (24:32)
But, I hope you get there you've got a phenomenal success story in sports. And I love the way you're managing these teams, and so we're really wishing you a great success in what you're doing.

Josh Harris: (24:45)
Thank you.

Anthony Scaramucci: (24:46)
I want to switch to a question about your philanthropy, and then I'm going to turn it over to John Darsie who has questions from our audience, questions that have percolated in, since we said that we were going to do this with you.

Anthony Scaramucci: (24:59)
You are an amazingly charitable person. And mazel tov. God bless you for being that way. I just want you to tell us a little bit about the programs you look to give money to. Why you look to give those programs money? And what's your thought process in terms of improving society through that charitable giving?

Josh Harris: (25:21)
Yeah. I think first of all, all of us that have been privileged to be successful, have not only opportunity, but the obligation to give back. And to try to make the world a better place. It's my privilege to be able to do it. I really enjoy doing it. And I would say that for me, and for my family, we've started with sports, because we felt that it's like every other thing. You start off by saying, okay where do you move the needle the most?

Josh Harris: (25:53)
Sports has an incredible power to lift communities, and engage communities, particularly for kids. We're amongst the largest investor slash donors in after school sports programs that have been cut by high schools and middle schools all over the country. And it's everything from the After-School All-Stars, to Police Athletic League, to [inaudible 00:26:19], to many, many platforms.

Josh Harris: (26:22)
We're helping over 14,000 kids in the Philly area. Between 50 and a 100,000 kids nationwide to be part of sports programs. Once they come in, you feed them the lettuce. You make them study, you keep them safe. You try to create a situation where they have the tools, they're better equipped to move forward through life. Whether it be getting better grades, or doing their homework. And you emphasize, part of that if you want to play in the Sixers Youth League, you've got to also study and get good grades, and eat well, and teach them about that. That's kind of one major part of our philanthropy.

Josh Harris: (27:16)
I think secondly, is wellness and health, and getting people to, inspiring people to eat better, and to avoid kind of doing things. To exercise, to not smoke, to not take drugs, to not drink, to like try to inspire them to take care of themselves individually, and stay away from as much as possible from the hospital system. We've developed programs at Mount Sinai, and all over, in other areas, and all over the country to engage with people on this level.

Josh Harris: (28:01)
And then more recently, during COVID, we just kind of went, it's all about helping the communities of Camden, Newark, Philly and New York, the communities where we have real leverage to, everything from the hospital systems there, to maths, to laptops. We bought 10,000 laptops and gave them to kids in Philly so they can go to school on it. I have five kids, I feel like I was running a school here, and I couldn't imagine doing it without laptops. And then we heard that kids in Philly needed laptops. And then we bought hundreds of thousands of meals, and just made sure that people were healthy in Newark, in Camden, in Philly. And so, all of that is stuff that we've been working on.

Anthony Scaramucci: (29:00)
Awesome. And I love the mindset application about what you're doing. I'm going to turn it over to John. He's got a plethora of questions for you.

Anthony Scaramucci: (29:08)
And by the way, you're winning the Room Rater right now. I've got this weird wallpaper behind me. I have no idea what it is. Darcy's in sort of like a wasp closet, with all kinds of stuff there. You've actually got pictures of the kids, and the Bloomberg terminal for you. You won the SALT Talks-

Josh Harris: (29:26)
I didn't even know that I was in this contest.

Anthony Scaramucci: (29:26)
I just want to make sure you know, I am the judge, there's only one judge, and it's me. You have won the SALT Talk as a result of the Room Rater.

Anthony Scaramucci: (29:36)
But go ahead, Darcy.

Josh Harris: (29:38)
Darcy, that's a good start.

John Darsie: (29:40)
All right. We've got several questions from our audience leading into the talk. And I'll go into a couple of them, before we wrap up.

John Darsie: (29:47)
Are there any specific deals that you worked on, either at Apollo or prior to Apollo, that you're particularly fond of? And that demonstrate the way you think about things from and investment perspective?

Josh Harris: (29:58)
Yeah. The one I would talk about, would be Lyondell Chemical. Obviously it was one of, it's the most profitable deal ever for Apollo, and one of the most profitable in private equity history. But, what was really good about it, was that it was a fantastic, it was a massive chemical company, that had too much leverage going into the financial crisis. And it was in danger of, it had close to 50,000 employees, and it was in danger of really just going away and liquidating, because it was over-levered.

Josh Harris: (30:31)
We were able to go in during the financial crisis, and buy the debt. And our first buy was at 80, and our last, our trough buy was at 15 cents, to tell you. And at that point chemical companies were doing very poorly. They were losing money. And we had developed an industry group in chemicals, where we had owned a lot of companies, and we really believed we were watching the turn in the economy, and really believed that supply chain, we didn't believe that the demand that we were seeing was sustainable, based on consumer spending.

Josh Harris: (31:08)
And so we were taking the other side of people who are panicking, and were selling [inaudible 00:31:13] price. And then, so we acquired about 30% of the debt, and then we ultimately navigated a very complicated international bankruptcy with many, many countries, and many, many enemies. And we were able to restructure the company very quickly. And then deleverage the structure, take about $25 billion dollars debt down to less than $8 billion of debt. And then the company reemerged as.. And then also the management team in the middle of all this, kind of decided they didn't want to do this anymore, and we had to recruit a whole management team.

Josh Harris: (31:56)
The company which had done, went from four billion [inaudible 00:31:59] to negative one billion [inaudible 00:32:02], merged and kind of ultimately was doing five or six billion, by the time that we decided that it was time for us to sell out. And it's become this enormously successful corporate company, that today is really thriving and prospering. It's an example of where we used our creativity and our skill sets to really help a great international, but American company, survive a very difficult time period. And we were still able to make, create an attractive risk return opportunity for our investors. And investors obviously are the pension systems. They're teachers, they're firefighters, they're policemen. They're public employers all over the country, and all over the world. That would be the deal that I would talk about.

John Darsie: (32:49)
Great. It doesn't exactly fit some of the negative stereotypes that you see out there about the private equity industry. And how it doesn't add value.

Josh Harris: (32:58)
There are a lot of those. And there are eight million, I try to educate people, that right now there are eight million US workers that work for private equity companies. There are 25 million workers that supply, or are customers in private equity companies. Private equity is the US. There's 35,000 private companies. There's only 4,400 public companies. Private companies, I run a public company, Apollo is a public company. We've got to worry about quarterly earnings. And sometimes you can't always invest for the long-term and do the right things. And so, we need to do a better job.

Josh Harris: (33:37)
And obviously it's a very populous environment. And we're an easy target, and we need to do a better job of telling all the great things that we do. And this is definitely one of those stories.

John Darsie: (33:49)
All right. Well, that's part of why we do these SALT Talks. So, thanks for joining us and helping to dispel some of that nonsense.

Josh Harris: (33:54)
Thank you.

John Darsie: (33:56)
As you look out the landscape right now, Anthony touched on earlier, how you're a very contrarian opportunistic type of investor. As you look out over the private market landscape, we'll focus on private companies, as you mainly do, what are the sectors that you see the most short-term impairment, but the most long-term secular bullish opportunities? Where are you really licking your chops right now, as you look across private markets?

Josh Harris: (34:21)
Yeah, I think private markets are, the Fed action has compressed, or I'd going to compress interest rates going forward, but steadily as you move further outside the public markets, you're going to see better risk return opportunities, and that's what our cloud performance is built to do. And I would say that, the impacted sectors that we're seeing an opportunity in, are generally going to be sectors that have been hardest hit by COVID.

Josh Harris: (34:49)
In many cases, these are like travel related sectors, they're hotels, I think they're real estate, certain types of real estate. I'd say certainly venues and arenas, and entertainment based companies. And so the truth of the matter is, in the early part of the crisis, we were able to invest in these companies. And this is private equity, I'll take a walk through. We're mostly now, we're 400 billion of AUM pro forma for a deal that we just did, called Jackson. Of that, we're about 80 plus percent credit. Lending to companies and great American businesses, and we're only less than 20% what I would call opportunistic private equity, but that's still what we're known for.

Josh Harris: (35:46)
So in the opportunistic sectors, it's going to be those sectors that have been really hard hit, and where the evaluations reflect, to a large extent, some of the concern. That would be, and in private equity they were mostly buying debt. We're just starting to look at deals now. In mezzanine, which is taking a walk towards some of the safer stuff, so the middle part of the capital structure, we continue to do very large investments, many of them which are public. Everything from Expedia, to Cimpress, to Albertsons. Many, many deals where companies are looking for a little bit of capital, either to grow or get over the hump, in a short-term capital crunch situation, because their revenues have been impacted, but they long run, see a lot of value.

Josh Harris: (36:38)
And so, in all these investments, we're able to make investments that build in our view of the world, which is, it's going to be a three or five year timeframe, before they return back to where they were in '19. It gives us, you're really making a bet on terminal value. You have a lot of room, and you're really able to bid in quite a bit of losses in the short run, but you're looking at long run asset value creation.

Josh Harris: (37:06)
In the rest of our portfolio, a lot of what the Fed has done, has been AAA, or government securities, they have bought some high yield. But these are the big liquidity. And these are the big liquid issuances. Much of the small business lending, or other programs that they're trying to do, they're not reaching many of the structured credit vehicles that we, or the middle market businesses, that we actually invest in.

Josh Harris: (37:38)
In the middle market, you can continue to get very attractive returns, lending to businesses that have 20, 25, 50 million of [inaudible 00:37:49]. The bank market, notwithstanding the Fed action, is still pretty shut down. The high yield market is up. It's the only thing with a CUSIP. Anything that's publicly traded is open, but the bank markets are generally pretty closed right now. And so are the structured credit market. That impacts everything from real estate financing, to restaurants. To people, like aircraft leasing has been very impacted. We have [inaudible 00:38:17] our sale-and-leaseback around malls, and hotels. All of those structures, are away from the Fed money, and we're just providing liquidity to everyone from restaurants, to small businesses to hotel owners, allowing them to weather the crisis and getting paid probably arbitrages of one to 400 base points, depending on where they are in the credit stack.

John Darsie: (38:45)
Last question before we let you go. You've helped build Apollo into one of the world's largest and best performing investment firms. You mentioned about 400 billion in pro forma assets under management. Looking at both the way you've built Apollo, and the way you're running the sports franchises that you own, and you could talk about it through the lens of sports ownership. With the Philadelphia 67ers, you've taken, not that you're the General Manager, but you guys have taken players like Joel Embiid that you drafted, and developed into one of the best players in the league. You have Ben Simmons, who's a six foot nine player, playing the point guard position, you have Tobias Harris, who's a six foot ten shooting guard.

John Darsie: (39:24)
When you look at building teams, and building organizations, how do you align what you think about business at somewhere like Apollo, when you're looking at investments? And how you look at something like running a sports franchise? And how do you go about building those dynastic franchises the way someone like the New England Patriots, or the San Antonio Spurs have done, over the last 10, 15 years?

Josh Harris: (39:45)
Yeah. I think it starts with people. You've got to have, if you get the best and the brightest people, and you go, and you're able to not only recruit them, but also resource them, and provide them a vision for where you want to go. If you get the best people, and I think this is all just basic fundamentals. Being successful on the court, attracting the right players, you've got to be successful off the court first.

Josh Harris: (40:12)
And then it's about having a unique strategy, or some unique thought as to how you're going to do things little differently, so in case of sports, we're developing a lot of advanced [inaudible 00:40:27]. There are 30 smart owners, how do you get an edge? How do you select those players? How do you recruit those players? In basketball, it's about making sure they want to play with you, because ultimately they have a lot of choices. But then beyond that, having the right sport science, the right programs for them, to keep them healthy, to extend their careers. Analytics, so that you can select them. Everyone wants these players.

Josh Harris: (40:58)
It's no different at Apollo. We had a unique, it's about innovating. It's about innovating, it's about having the right people. And then it's about having a culture where they stay, and they've decided to work with you.

John Darsie: (41:12)
Well, that's all we have for you today. Josh, thanks again so much for joining us in the middle of the summer. Anthony, I don't know if you have any final words?

Anthony Scaramucci: (41:20)
I have one final request for Josh, and I'm sure he'll appreciate this. If anything should happen to you in the sports world, could you give me a call please? I want to be one of the first people-

Josh Harris: (41:31)
You've got it, man. You've got it.

Anthony Scaramucci: (41:32)
All right. I need [crosstalk 00:41:34] from you.

Josh Harris: (41:34)
I hear you have a lot of thoughts on this.

Anthony Scaramucci: (41:37)
All right. Well, we wish you the best, man. God bless. It's great to have you on SALT. And hopefully, Josh, we can get you to one of our live events as soon as we can get out of the COVID-19 situation.

Josh Harris: (41:48)
I can't wait. I can't wait, and I like the wall behind you. Don't sell yourself short. I might have to... I think you might have won.

Anthony Scaramucci: (41:54)
I'm trying to figure out if it's an insect or not. It's a rough Room Rater for me, Josh, if I do television. Let's just put it that way. I may have to come over to your house, and use that background.

Josh Harris: (42:05)
All right. You got it. Anytime.

Anthony Scaramucci: (42:06)
All right. Be well, man. Thank you for everything.

Josh Harris: (42:08)
Pleasure. Thank you.

Afsaneh Beschloss: Renewable Energy & ESG Investing | SALT Talks #19

“If you invest in companies that are looking at long-term value, you’re going to be better off.”

Afsaneh Mashayekhi Beschloss is founder and CEO of RockCreek, a women-founded leading investment firm investing globally with a focus on sustainability. Previously, she was a partner at the Carlyle Group, Treasurer and Chief Investment Officer of the World Bank, and worked at Shell International and J.P. Morgan. Ms. Beschloss has advised governments, central banks, and regulatory agencies on global public policy, energy and financial policy.

Beschloss’ globe-trotting career started with a childhood in her native Iran pre-revolution that went on to include multiple stints at the World Bank. An early interest in ESG investing, that has become increasingly the focus of investment portfolios, saw Beschloss as a pioneer in industries like renewable energy. This shift will have far-reaching positive effects. “I think actually renewable energy is going to be really good for the geopolitical risks that we have been facing the last 30 some years, maybe more, since we started using oil.”

Younger generations will seek to align their investments with their values, ensuring a company creates a positive impact. Her work seeks to address some of the most pressing issues in the world from lack of housing to growing economic inequality.

LISTEN AND SUBSCRIBE

SPEAKER

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Afsaneh Mashayekhi Beschloss

Founder & CEO

RockCreek

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, everyone. Welcome back to SALT talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance technology and geopolitics in lieu of our in person SALT conference, which many of you have attended, we've been hosting these SALT talks to provide our audience a window into the minds of subject matter experts and also to provide a platform for big, important ideas that we think are shaping the future. We're very excited today to welcome Afsaneh Beschloss to SALT talks. Afsaneh was doing, I like to say, was doing ESG before ESG was cool. She's the founder and CEO of the RockCreek Group, which is a leading global investment firm that applies data-driven technology and innovation to sustainable investing. RockCreek has about 14 billion in assets, under management in multi-asset class portfolios, including public private and early stage markets.

John Darsie: (01:02)
RockCreek is one of the largest women founded investment firms in the world with more than 80% of its senior management team being diverse. RockCreek advisory board is a star study group of people. It includes former fed chairman, Alan Greenspan, Laura Tyson, who's also on the board of CBRE and AT&T. Jessica Einhorn, who's also on the board of BlackRock. DeAnne Julius, Caroline Atkinson, and Liaquat Ahmed. Previously, Afsaneh was a managing director and a partner at Carlyle group. She was the treasurer and the chief investment officer at the World Bank, and she also worked at Shell International and JP Morgan. Afsaneh has advised governments, Central Banks, regulatory agencies, Sovereign Wealth Funds, and public and private companies on global public policy, financial policy, energy policy, and sustainable investing. She spent around 14 years, I believe, at the World Bank.

John Darsie: (01:56)
She worked on energy investments and policy work in the sustainable investing space including in climate related, renewable energy, power and infrastructure projects. And she was the founder of the World Bank's natural gas group, and she pioneered work using natural gas as a transitional fuel in order to reduce carbon emissions. Afsaneh is also on the board of the Institute for Advanced Study at Princeton. She's on the council for foreign relations. She's on the Gavi Vaccine Alliance, The World Resources Institute, and she's also the vice chair of PBS, public broadcasting. She's also the recipient of the Institutional [inaudible 00:02:35] Lifetime Achievement Award and the Robert F. Kennedy Ripple of Hope Award. She was recognized as one of American bankers, most powerful women in banking, and one of Barron's 100 Most Influential Women in Finance. She has a master's philosophy with honors in economics from the University of Oxford, where she taught international trade and economic development. She's the coauthor of the Economics of Natural Gas and the author of numerous journal articles on energy finance and sustainable investing.

John Darsie: (03:05)
If you have any questions for Afsaneh during the talk today, reminder type them into the Q&A box at the bottom of your video screen. And conducting the interview today will be Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. And he's also the chairman of SALT. So I'll turn it over to Anthony to conduct the interview.

Anthony Scaramucci: (03:23)
John, thank you. It's a real pleasure to be on. Afsaneh, great to see you. I wanted you to start out with your personal background because I think it's a fascinating background. Obviously John gave a lot of elements of your biography, but I think the early part of your story is fascinating for me, and I know other people would be interested as well.

Afsaneh Beschloss: (03:45)
Thank you, Anthony. And thank you, John, for the background introduction and congratulations, Anthony, on both what you're doing at SALT and also the great news at SkyBridge on all fronts.

Anthony Scaramucci: (03:58)
Well, we're coming back, but just when we're coming back, some of our girlfriends are leaving, but that's fine. That does happen to you when you're having a bad moment, but no problem, you know what I mean? I'm playing this song for all of our investors, should I stay or should I go? And my attitude, unfortunately, is if you want to leave, go ahead, but you're going to miss some great performance, but we can go into that at another time. Let's talk about you and your personal background, which I think is so fascinating.

Afsaneh Beschloss: (04:29)
Sure. I was born in Iran. A very different Iran, which was very fast moving. It was developing very rapidly in terms of its economy, but also in terms of education, health, everything was sort of becoming very close to first world versus third world. I grew up in a family that really, really valued education. My father was president of the university, he always taught in some form all his life. My mother decided to stay home. I'm one of three daughters. I think the pressure she put on us in terms of not letting us learn to cook, for example, at an early stage has affected my relationship with my family now, but on the positive side she really, she and my father said, whatever you decide to do, you have to do your absolute best. It doesn't matter what it is, but you do have to do your best. So there was that sense and there was always a sense of sort of public service also in our household, given that a lot of my family was in education.

Afsaneh Beschloss: (05:35)
So that's where I grew up. I came to the States the first time when I was 16 and there was a program still exists called the American Field Service. And I came as an exchange student and lived in Concord, Mass. Which is not your typical US City, but for me, it was my first experience and really a hugely exciting one. And I lived with a family where the father taught at MIT and the kids were kind of around my age group, went to school. And then basically, decided to get into economics. The interesting thing is when I was at Concord, our neighbor across the street was Robert Solo, who at the time I didn't know.

Anthony Scaramucci: (06:17)
Sure. MIT.

Afsaneh Beschloss: (06:20)
[inaudible 00:06:20]. I went on eventually to Oxford and did my masters degree in economics with the idea that I might go teach and do sort of economic development, but then there was something called the Iranian revolution and my plans got derailed. So that's how I ended up at JP Morgan. They have the most incredible training program.

Anthony Scaramucci: (06:45)
JP Morgan in London? Or where were you in?

Afsaneh Beschloss: (06:48)
So I was hired in JP Morgan London because that's where I was studying and teaching at Oxford working on my thesis. So that's where I got hired, but then I moved to New York and, literally, I think it might've been when the hostage crisis was also sort of going on. I couldn't have had a better experience at JP Morgan, at that time, it was very team oriented, the culture, the values, very different than banking today in general. I made some of my best friends then. Then it became evident that the plans of going back home to teach and to do economic development were not going to happen. I decided to go to the World Bank, which allows you to do economic development, help reduce poverty and use market tools to do those things. So that was that. And I had a great career first doing energy. And as John said, clean energy on the early side of the cycle and then moved to finance.

Afsaneh Beschloss: (08:00)
I was talking to a friend of mine at the World Bank and he said, "We have this great trading floor. You should come try it." And I said, I've never traded before. And he said, "Well, take it. Try it." So that's how I ended up to move to finance and the rest is history.

Anthony Scaramucci: (08:18)
So talk about the starting of RockCreek and where is RockCreek today? And I'm assuming it's named after the Rock Creek in Washington, right?

Afsaneh Beschloss: (08:27)
Absolutely. It is the park in Washington. It's a beautiful park and it has become even more busy since post-COVID where it's almost like the [inaudible 00:08:36], you can't run or walk a bike. There's so many people on it. In terms of RockCreek, had a great experience at the World Bank and moved to go to Carlyle as the 12 partner at the Carlyle. And then decided start RockCreek. And we started like you with alternatives and then evolved the firm to be more multi-asset task. We have two businesses, really one is sort of developing our own storefronts. And the other side is doing multi-asset class portfolios in a very customized way for fairly sophisticated, large institutions.

Anthony Scaramucci: (09:18)
But you're also involved in ESG investing. I mean, that's one of your big claims to fame. So tell us a little bit about that. Tell us what excited you about that and tell us where you think we are in that part of the cycle.

Afsaneh Beschloss: (09:32)
So I think ESG impact sustainable investing is sort of different terms and it's become very popular as we speak. I think what I learned when I was at the World Bank, the first thing I think I was a summer intern there once, and I did a paper on shadow pricing. And what I realized as an economist then, and very early on is that we do have prices for capital, for labor. We don't have prices for the environment. We don't have prices for the air we breathe, for the water we drink, for the agriculture land in the sense of the soil and the goodness versus the value of the land itself. So there was sort of interesting that we pulled those things externalities. So what we realized that the World Bank is that you have to somehow value this. And that was pretty early. That was really in the 1990s, early 2000, where you knew that you had to value this, that these were scarce commodities, that you could not just use them and not value them.

Afsaneh Beschloss: (10:35)
So that early shadow pricing, I think, study that I did, really, was very influential. Moving forward to RockCreek, what we see now is that if you actually invest in companies, if you invest to funds or directly in companies that are looking at longterm value, you're going to be better off. Just look at the last couple of months, post-COVID. The companies that have done well have often been at the intersection of technology, which is something new and innovation. Plus, let's say, telemedicine, let's say education, let's say affordable finance. So those are the things that actually have been growing because as we have realized in our society, you cannot just provide services to a small group, as you can provide these services to a bigger group, there will be more demand for it, and actually your company will do better.

Afsaneh Beschloss: (11:29)
Some of the ESG investments during this period have done so much better, Anthony. And it's not only because oil and gas were down. And so you see all these ESG funds that are even ETFs in Europe, in the US, doing better than the general market. So all you had to do was to invest in an ETF, you would've done better. But obviously, if you invest in ESG through direct companies, private or public, it has been some of the really most interesting times, I would say-

Anthony Scaramucci: (12:02)
It's going to continue though, in your opinion. So we're not peak cycle or anything like that or anything, we're just at the early stages of it, is that correct?

Afsaneh Beschloss: (12:11)
Absolutely. And I think if we look at your kids, if you look at my kids, if you look at the next generation, people in their twenties, people in their thirties, they're going to be looking more, if they decide to buy a car, it's going to be an electric car. They are not going to invest as they start investing their own money in companies that don't have their culture or their values. They're going to be much more Parkinson of that, I would say, than our generation has been. That trend is moving fast. We see it with renewable energy. If you look in the last part of this year, those are the only energy investments that have actually gone on as oil and gas investing has basically dried up the projects that got to slow down a little bit under renewable site have taken off again.

Anthony Scaramucci: (13:06)
Just a broad question on energy, because I know you established the National Gas Group at the World Bank and you know a lot about energy and you've seen our demand has been crushed by the COVID-19 pandemic and you've seen this increase in supply. What does that mean geopolitically in your mind. We're moving towards ESG and sustainable things, is that going to set off another potential geopolitical crisis in your mind?

Afsaneh Beschloss: (13:37)
I think actually renewable energy is going to be really good for the geopolitical risks that we have been facing the last 30 some years, maybe more, since we started using oil. A lot of oil comes from a lot of countries that have gone through political stripes or cost political stripe in the Middle East, but other parts of the world. The less we need to import oil, the better off we are. I think I prefer to use the more sort of cleaner forms of renewable energy, but frankly, natural gas is much cleaner than oil, certainly much cleaner than coal. And batteries are not quite where we would like them to be. Hopefully, there will be there soon, but in the meantime, you can't just live off of renewable energy. You do need to have some kind of backup. So natural gas, which just happens to be something I spent a lot of time on is growing quite fast, both in the US and in emerging markets.

Anthony Scaramucci: (14:40)
Let me say something contrary because I want to get your reaction to it. I totally understand that our less reliance. We can move our military, we can rethink our footprint. But what I'm wondering about is the stability of the region, meaning the oil consumption goes down, the economies of the region get depressed, or they have to change, will that cause more instability in that region of the world? What's your opinion of that?

Afsaneh Beschloss: (15:09)
What you're seeing is sort of what I started seeing during my childhood, growing up in Iran, where you saw Iran was trying to not be a one commodity economy. So if you look at the region, Russia is still very commodity-based. Most of its external revenues are from commodities. If you look in the Gulf countries, that's basically it. The majority, as you said, of their income and revenues come. And so all those social programs that they put in place, all the construction projects have been financed by this. What has been really interesting if you look at the investments they're making currently, two things. One is that they've been trying to diversify their economy, whether it's through tourism or whatever they can do, that's one area.

Afsaneh Beschloss: (15:59)
They've been also using this gigantic oil funds they have, to diversify, again, out of energy, into other areas. Last but not least, some of the biggest solar projects that are going on are in the middle East right now. So they're realizing that they themselves need to diversify. I have friends from the World Bank who are in Saudi all the time, right now, working on one of the biggest solar plants which just got [crosstalk 00:16:28].

Anthony Scaramucci: (16:28)
It's great news.

Afsaneh Beschloss: (16:29)
Yeah.

Anthony Scaramucci: (16:29)
So it just means that a lot of their commodity based industries and countries are turning more towards their intellectual capital. You and I both know there's always been a paradox of the oil. It comes out of the ground, you overly rely on it, and then you don't build these other industries that could make the country more sustainable and longterm successful. I want to go into a topic I know that has a lot of interest to you, and that is affordable housing. We were under inventoried in affordable housing. And what do you think is holding us back from that? And where do you think the compelling investment opportunities are there and why did you get so focused and interested in that?

Afsaneh Beschloss: (17:12)
I think affordable housing, specifically, what was interesting is we started looking at it a few years ago at RockCreek. We realized, number one, it happens to be an under invested area. Number two, it had actually really good returns, especially when it was done by people who do good while they're doing well. And there are a few groups that have been not [inaudible 00:17:39] people investing in affordable housing, but actually very thoughtful, very experienced people. And we partnered up with a group called Rose Affordable. And what has been really interesting is to see that the gap they fill is not just the housing, but it's everything else that's goes with housing. It's the community programs, it's providing doctors and medical assistants, and this was pre-COVID. It is making sure that the buildings have internet access.

Afsaneh Beschloss: (18:10)
And so all of those things meant that their population, in the last few months, has obviously suffered less. It also means if your population is more healthy, they will continue to work. If you do have broadband access and internet access, your kids can continue with their education. As we saw that became the big issue in many areas. Plus of course they also benefit from government programs. I think what we're seeing with affordable housing is that it falls into lots of different categories, but there's a huge shortage where a very large part of our population and the data is different, but it's almost 10 to 12 million families that are basically not being able to afford housing very well. They're spending more than half of their income on housing. So there's very little left for everything else.

Afsaneh Beschloss: (19:04)
And one of the reasons, when we keep on saying, why is the economy growing so slowly? This is again pre-COVID. When you have to spend so much of your income on housing, you can not spend it on other things. The other trend in the US has been that profit margins are much higher for luxury housing. So when builders have the ability, they will go into those areas versus affordable housing. Last but not least, something which is really important because we've all been trying to support our communities, particularly people on the front lines, teachers, firefighters, those populations that are middle income families, middle to middle lower families, they actually are completely not taken care of when it comes to housing. They have very little access to affordable because they don't fit into either the low income affordable, neither the luxury housing. So there is a big shortage of housing in our country.

Anthony Scaramucci: (20:02)
Well, and it's a good segue too. You've traveled the world. You're an economist, you're a money manager and we both analyze the world. And I think you potentially share this worry that I have, that there's an income gap widening. There's a wealth gap widening. Lower and middle income people feel like they're struggling. And as you and I have talked in the past, I grew up in a blue collar neighborhood with blue collar parents, but they had this aspirational idea about their children. And that idea is shifting now. And so I'm wondering if you've done any research into that, studied it. And what do you think we could do to solve some of those problems can come into the housing situation?

Afsaneh Beschloss: (20:47)
I think housing is part of it, but also wages and incomes are another part of it. And the inequality that all the numbers are pointing to what I learned, as you said, both at school studying economics and economic development, but then also working in emerging markets. What is really sad is that a lot of the issues that existed in emerging markets started getting slowly a little better, although we can come back to that because a lot of the development, let's say in Latin America, over the last 20 years, might have got erased just in the last few months, which is huge. But when you come to the US, we developed a great banking sector, but that banking sector is really for people who can afford it, it's for bigger corporations. Even in the good days, before COVID, or before the 2008 crisis, what we had is that a lot of low income people had to go to the payday lenders.

Afsaneh Beschloss: (21:49)
If you wanted to get a mortgage, you couldn't. In fact, a lot of startups we've invested in would look at credit scores in a very different way than traditional credit scores and do better in terms of having people who are borrowing from them who had a much better record as it turned out, than the typical banks giving mortgages. I think this is a really great time to think in two ways. One is, for example, the World Bank was created to help Japan get out of the war and reconstruct and Europe the same thing. And then this job became how do you provide longterm development to poor countries? We need that kind of institution in our country, in the US today. Institution that will have the interest of providing services to low income.

Anthony Scaramucci: (22:46)
It's fascinating. It's a good idea. It's almost like a USAID embedded in a World Bank for the United States.

Afsaneh Beschloss: (22:52)
Or separate. Separate from the World Bank. But a lot of those tools and for example in these countries, there are banking systems for low income.

Anthony Scaramucci: (23:04)
Let's say when John Darsie runs for president, he's going to be the chairman of that bank. That's actually a very, very good idea. I have to turn it over to him in a second. And we're going to talk about his stuffed animals and so forth, but before we go over there, because there's a ton of questions coming in. People are fascinated by you, as am I. I have to ask this question. Some of us remember the very famous Alan Greenspan briefcase. And if you recall, he would run across the street. If the briefcase was thick, we were getting a rate cut. If it wasn't thick, we weren't getting one. And so does he still have the briefcase? And it's important for me to know this? I just thought I would throw it out there.

Afsaneh Beschloss: (23:46)
Oh, absolutely. He has his briefcase in his office. And let me tell you, Alan is 94.

Anthony Scaramucci: (23:52)
That's awesome.

Afsaneh Beschloss: (23:52)
He, until COVID, he would come to the office every day and some nights on a Friday afternoon, if I'm trying to sneak out, Alan was still there. So I had to sneak around his office. And one of the sadness, for me, of COVID, has been that, whenever there was a problem, serious problem or issue or markets as we're going through some really, really high volatility I'd go to Allen and get his wise council. And his suitcase is there. And by the way, there's one other items you should be aware of that he keeps which is his G7 jacket. So it's a really nice piece that he wears when the room is too cold.

Anthony Scaramucci: (24:38)
It was like swag from G7.

Afsaneh Beschloss: (24:39)
It's so cool.

Anthony Scaramucci: (24:41)
John, you got to pay attention because we need better SALT swag once we get back out there.

Afsaneh Beschloss: (24:48)
I'll send you a picture.

Anthony Scaramucci: (24:50)
All right. So I want to see that. I have one more questions. Again, these are personal curiosity questions, forgive me. Liaquat Ahmed, who is at the Brookings Institute, he's on your board. He wrote a brilliant book Lords of Finance discussing the 1929-33 crisis and the policy implications and some mistakes that were made, et cetera, that could have exacerbated that crisis. Dr. Greenspan obviously spoken about that. So has Dr. Bernanke actually. We had Dr. Bernanke at SALT a few times, and he encouraged me to read that book, which I did. What do you think Liaquat Ahmed thinks about this crisis and what is your personal opinion about all the deficit spending? Is it okay to do it? Are we all modern monetary theorists now, or will there be some implications long term to the amount of deficit spending that we are involved in?

Afsaneh Beschloss: (25:43)
So the Liaquat is really an exceptional person. He was working on Korea and Asia in sort of the early days of his career. He's got a PhD in economics. We sat next to each other on the World Bank trading floor. He was doing non-US bonds, believe it or not. And I had just started on the trading desk on the US side. And then he went on to Fisher Francis. So he has an unbelievable interesting background as an economist and as somebody who understands markets. Which is why this book is so incredibly interesting and I hope you do invite him to your SALT conference-

Anthony Scaramucci: (26:24)
We would love to do that, of course.

Afsaneh Beschloss: (26:27)
And he's always interviewing all the Fetchers and has really good insight. And his book showed us what happens in the crisis, which is why when it came out, it was so interesting, around 2008. I think what we have learned is that, both then and now, is that this is not business as usual. You'll have a health crisis and a financial crisis and inequality and-

Anthony Scaramucci: (26:56)
And he got energy too. So it's health, equality, energy. There's a price shock in energy.

Afsaneh Beschloss: (27:02)
And energy sector, by the way. Interestingly about energy, is that it's a very impactful area because we all use energy. But in terms of its total size of the US economy, it has got much smaller as relative to communications or technology or other areas. But it still employs a lot of people, obviously. If you put all of that together, there is no choice. So we do need to increase the deficit. What I'm concerned about as we're looking at the numbers, is that what happened the last few months, markets went up, a small sliver of people who can invest, who have the ability to invest, who have the cash to invest, invested so they got better off. Really the majority of people who are laid off are probably not going to find the jobs they wanted coming out of COVID. A lot more dislocation than the markets expected.

Afsaneh Beschloss: (27:56)
And the money that got pushed through PPP or through the federal reserve went to all the biggest organizations. If it's the federal reserve, it went through BlackRock, obviously, to help solve the bond problem. Why not have used some of that money through smaller firms? All the PPP went, initially, to bigger businesses than smaller businesses. A lot of small businesses wouldn't even know how to fill those forms. They didn't have banking relationships. Coming out, we have incurred this huge, huge deficit, but what good is going to come out of it? I think that's my big question. And that's what I'm worried about.

Anthony Scaramucci: (28:43)
Makes sense. Well, I got to turn it over to John now because we have a whole bevy of questions for you from our viewers and listeners. Go ahead, John.

John Darsie: (28:52)
Yeah. We have great participation and engagement on the call. So thank you for everyone that's tuning in. I have a couple of questions about RockCreek that came in. You talk about how the firm focuses very heavily on leveraging data and technology to drive your investment decisions. You're also very focused on sustainable investing or ESG investing, which some people regard as a morphous still. People are trying to identify exactly what ESG investing is. How do you combine data and technology to drive investment decisions when you're investing in things that are sustainable and fit within the ESG framework?

Afsaneh Beschloss: (29:28)
So John, very early, when we started RockCreek, we invested a lot in technology. And what that allowed us to do is that with our data scientists and data researchers, we were able to get our data from whatever we invested in or whatever thousands of investment firms that we covered and companies. As we were looking through this huge amount of data, we realized that the same tools that we had developed for risk management, which allowed us to map different securities to different risks, could be used to, for example, look at different securities versus the SDGs that the UN has put out. So we started putting these things together and it was really interesting because what you start seeing is that, as you said, there are lots of different measures to look at ESG. If you look at our measure versus a Morgan Stanley measure, versus a Bloomberg measure versus others, you might end up in different places.

Afsaneh Beschloss: (30:30)
So what we decided to do with our technology was to create a tool where we can use our own ways of rating a company, but we also can use anybody else's so that we don't start becoming very rigid and depend on one set of ratings. You're absolutely right. There is no common way to rate things. I think what we do know, like we're talking about housing, is for example, more people of a certain income group now have housing that didn't have before. That is progress. And that is a positive thing. So just measuring those numbers is helpful. If you invest in this energy project versus this other one, this is the carbon impact, that is easier to measure. I think some of the things that are harder are more in the social area, but what we're trying to do is to the extent possible. And I wouldn't say it's perfect, as you said, there's a lot of issues with measurement, but still using the tools we have to come up with some sort of rating and measurement.

John Darsie: (31:41)
Yeah. It's fascinating. Another question about RockCreek. I said in the intro that RockCreek is one of the largest women founded investment firms. Your workforce is 80% diverse. So you guys live these governance principles that you look for in companies and funds that you invest in. Why do you think that's important and how does it help you as a firm to arrive at good investment decisions?

Afsaneh Beschloss: (32:05)
John, I think what is it allowed us to do is to cast a much wider net. So we invest in small companies, as well as large companies. We invest in large firms and smaller firms. So what happens is that you have, particularly at points of stress in the markets, less volatility in your total portfolio. We also find that smaller firms often are doing something which is relatively unique. So they have a higher possibility of generating alpha versus larger firms who might have more of an average return. So the idea for us also is that in terms of our own team, having people who come together from very, very different backgrounds it means that they come up with different themes. They come up with different ideas and we try to argue constructively sometimes. We disagree and sometimes we agree and we try to come together, but having that culture, which is respectful, but allows you to think differently has really helped us with our returns.

John Darsie: (33:17)
Great. The next question is about your time at the World Bank. You became an expert on the so called Global South, which is basically another term for developing our emerging economies or a less pejorative term than third world countries. So what is your view today on the Global South and investment opportunities in places like China, Asia, and other developing economies?

Afsaneh Beschloss: (33:41)
What has happened, John, over the last especially 15, 20 years, is that emerging markets went from a very different place when I started my career in development to a much better place in terms of education, in terms of health, in terms of job opportunities, productivity. And if you look at the growth rates in emerging markets or South versus developed economies, it has basically generally been about at least double the size. So if ours was two to 3%, emerging markets would be three to 6%. I think what has happened particularly in the last 15 years was China, as you said. So China has become a huge part of the market. China, when I first went to China, had zero market. There was no companies to invest in. And the World Bank had just started working with the Chinese and sort of sharing US and European and other emerging market ideas and ways of investing across their economy.

Afsaneh Beschloss: (34:49)
I worked a lot with CNO and their energy sector at an early age. And so early stage of when they opened and what happened is that China developed so much so that now today, if you look at MSEI, the largest share in MSEI is North Asia. And then if you throw in India, between China and North Asia and India, you have almost 80% of MSEI. So the emerging markets now mean something very different. As I was saying earlier to Anthony, my concern now is that China might be a big beneficiary coming out of COVID, as we can see. It might be the only country that might have a positive, just positive 1% plus or minus growth rate. Everybody else, in particular, if you look at Latin America, if look at Africa, huge loss of the last 20 years of development. And it's really, really important to see how we can do something and help to make sure that that does not go the way it seems to be going, particularly in Latin America.

Afsaneh Beschloss: (35:59)
So emerging markets has come to do to mean very different things. We are competing with the Chinese, as you well know on technology, on education, on telemedicine, they're developing so fast. In finance, they were able to push money, not just to people who had banking relationships, but to every individual. So they have been able to create financials infrastructure that is in some ways, much more flexible than ours.

John Darsie: (36:32)
Great. We'll get to a couple more questions and then we'll let you go. This has been fascinating. Thanks again for joining us. You do a lot of your investing at RockCreek through third party managers. So you have a direct business and you have fund to funds multi-manager type business. When you're evaluating managers, how do you evaluate talent and gain an edge through a multi manager approach? And why do you think a multi manager approach is often better than, if say, a family office or an institution were to try to go direct into certain products.

Afsaneh Beschloss: (37:04)
Doing multi-manager is we invest on behalf of some universities and pension funds and others where we put together a customized portfolio. And the advantage there is that there's so much talent out there. So many great firms. And what we do is to have these databases that we talked about a little earlier, but also database of new firms, new, what we call emerging managers. Emerging managers are firms that are starting their businesses, in fact, for example, when I was at the World Bank, the World Bank did the first 5 million investment in Bridgewater. So that was an emerging manager at the time, this was a while back. But we, at RockCreek, continue to invest in a lot of new managers. And that is because of this large database. And it allows you to create portfolios where you can generate very, very high alpha.

Afsaneh Beschloss: (38:03)
Secondly, you can change directions much faster. Thirdly, we were talking about emerging markets. We do a fair bit, let's say in Asia, in the rest of emerging markets, and it was really important to find talent on the ground. There's no way we can get a team here sitting in New York or Washington or London that is as good as a team that is sitting in the cities, in China, in India, in Brazil, in Mexico. They know much better about both the good and the bad. So we find that that way, you can generate much higher returns.

John Darsie: (38:40)
So my last question is about you, personally, as an entrepreneur. So you've repeatedly bet on yourself over the course of your career. You talked about how you started at Carlyle. You establish RockCreek through a management buyout of that business in 2003. Then you recently bought back the balance of the equity of the firm from Wells Fargo, and you're managing about $14 billion. What has made you successful as an entrepreneur?

Afsaneh Beschloss: (39:05)
John, I didn't really set up to become an entrepreneur. When I was at the bank, I was lucky to start leading groups and I was allowed to do that sort of within a very hierarchal structure, I created on hierarchical structure. So I really enjoyed being part of teams that were on hierarchical and people who are smarter than me coming together to create something good and fun to do. And that sort of started within a very big organization. And I think it was really, again, not my plan to start RockCreek or later on to do the last transaction. But as you know, my friends at Wells Fargo also agreed that they were in the news every day, it made sense that we part ways because while we had our separate management, we were the managing partner of that business. I think we realized that it was better at this point in history to separate or as we separated in 2018.

Afsaneh Beschloss: (40:07)
So in terms of sort of being entrepreneurial, I think what is fun for me, I actually have been very happy working within big organizations as I worked in Shell, JP Morgan, World Bank, smaller organizations like Carlyle that relative to the World Bank and then at RockCreek. And each has its own pros and cons. And what I find is that being an entrepreneur is heavily overrated is 24 by seven, just like all the other jobs that I have done. And at the same time, you can move faster. Let's say you can get your tech team and your investment team to work together to produce something much faster than in a big organization. That has been really much more fun and being able to proceed with speed is something that I do enjoy doing and definitely easier with a great team that I have been very fortunate to be part of at RockCreek.

John Darsie: (41:07)
Well, Afsaneh, we want to thank you again for joining us. You're a rock star. We always enjoy seeing you at different events. And we were looking forward to having you out at our SALT conference in Las Vegas in May, unfortunately, that had to be canceled, but we'll maybe look forward to having you and Liaquat Ahmed on a panel together at a future SALT conference. But in the meantime, the SALT talk we'll do this was fascinating. And thanks again for joining us. Anthony, you have any final words?

Anthony Scaramucci: (41:32)
No, it's just terrific to spend with you. I'm looking forward to getting it together soon. I usually, at this moment, Afsaneh, I start picking on John, but he went with a very plain background this time. He's had stuffed animals back there, he's monkeys. He is a very strange guy, John Darsie. But when he's president, I'm going to make sure that you're in charge of the World Bank of the United States for this kid. He's going to be of a lot of help, Afsaneh. I promise you that. God bless you and thank you and just stay safe. And hopefully, we'll see you soon.

Afsaneh Beschloss: (42:07)
Thank you for inviting me. And it was really fun to be with you and John, thank you.

Essential Cannabis with ETFMG | SALT Talks #18

“Governors are now desperate for revenues.”

Jason Wilson of SALT-partner ETFMG, home of MJ which is the world’s largest cannabis ETF, hosted a virtual roundtable on the future of cannabis and its investing opportunities. Joined by Wilson is three leaders in the cannabis space: David Culver of Canopy Growth, Patrick Martin of Cozen O’Connor and Eric Huey of Platinum Advisors.

The guests offer their perspectives as governmental cannabis regulation experts to discuss all the ways the rapidly growing cannabis industry will affect jobs, tax revenue and elections among many other impacted areas. Cannabis retail stores’ designation as essential business all over the country has highlighted the increased acceptance and product demand. With impending state budget shortfalls, cannabis legalization is likely to only quicken, especially in states like New York and Pennsylvania. “Governors are now desperate for revenues,”

Similar to prohibition in the United States during the 1920s and 30s before its repeal in the face of an economy in desperate need of a jumpstart, cannabis will be seen as major source of economic stimulus and tax revenue in states around the country.

LISTEN AND SUBSCRIBE

SPEAKERS

Martin%2C+Patrick.jpeg

Patrick Martin

Principal & Director

Cozen O’Connor

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Eric Huey

President

Platinum Advisors

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David Culver

Vice President

Canopy Growth Corporation

EPISODE TRANSCRIPT

Anthony Scaramucci: (00:10)
Hello everybody, welcome to SALT Talks. This is unfortunately in lieu of the SALT Conference. We're trying to have a few times a week, some very interesting discussions about what's going on in the world, and some real meaty topical investment topics as well. I am in lieu of John Darcy today. You can see there's no duck here, and the rumor is that John Darcy's mother-in-law threw that duck in the garbage. So you won't be seeing that duck any time soon.

Anthony Scaramucci: (00:38)
But this is Anthony Scaramucci and today's SALT Talk is about cannabis, and so the title is Essential Cannabis. It is a panel brought to you by one of our SALT Partners, ETFMG. The stock symbol is MJ. And we've been a big supporter of the cannabis space over the years. Given our libertarian philosophy, we feel like, particularly for medical uses and obviously recreational, but medical uses, this is going to be an explosively growing industry.

Anthony Scaramucci: (01:13)
I'm going to turn it over to these guys in a second. But ETFMG is the leading Thematic ETF issuer. It's known for innovative investment products like MJ, the world's largest cannabis ETF, and most recently, GERM or GERM, the first way to invest directly in vaccines, treatments, and testing in biotech. So hosting today's panel is ETFMG MJ's research and banking expert, Jason Wilson.

Anthony Scaramucci: (01:49)
Jason is a Toronto native. He's a Canadian Forces Veteran with over 15 years of asset management experience in finance, structured products, and he has a great track record in bringing hard-to-access asset classes to the market. He's been working in connection with the legal cannabis industry for the past decade and is a great host for what I think will be a phenomenal panel. So with that, I'm going to turn it over to Jason. Good luck to you guys and we're fascinated by the upcoming discussion.

Jason Wilson: (02:24)
Great, Anthony, thanks very much for the intro. Thanks for the opportunity to be part of SALT Talks. To our audience today, welcome to cannabis analysis, a discussion we're going to have on cannabis, which is, right now, the world's largest [inaudible 00:02:38]. We have three great guest speakers joining us today to discuss the growth of cannabis industry and the effect it will have on US jobs, tax revenue, the upcoming election.

Jason Wilson: (02:51)
Top of the lineup is David Culver. He currently serves as vice president of government stakeholder relations in cannabis growth. Dave has about 20 years of federal experience and currently manages all database, state, federal, agent [inaudible 00:03:03]. Very busy job on his part. Patrick Martin [inaudible 00:03:08] will also be joining us today. Patrick's a principal at [inaudible 00:03:13], where he directs the firm's government relations and public advocacy efforts in the Midwest.

Jason Wilson: (03:18)
He's also a key member the firm's government relations to Washington, D.C. Last, but definitely not least, we have Eric Huey. Eric is president of Platinum Advisors. He has over 25 years of experience as senior government relations and public affairs executive. He's repeatedly been on The Hill's list of top lobbyists in Washington, D.C. Thank you, speakers, for joining us. I think it's going to be a great conversation [inaudible 00:03:43].

Jason Wilson: (03:44)
So, I guess, to kick things off and get right into it, let's talk about cannabis and COVID. Now, when we look at what happened back in March, obviously numerous states started issuing stay at home orders and impaired cannabis-related businesses, along with most other consumer facing businesses were being forced to shut down. And we had a 180. Maybe it didn't take long where most of the states that legalized cannabis decided that they were essential businesses and allowed them to be open. Patrick, can you tell us a little bit... I know you work with a bunch of multi-state operators. Can you tell us what was happening behind the scenes that saw that reversal?

Patrick Martin: (04:24)
Sure, absolutely. And, Jason, thank you so much for having us. COVID really brought the cannabis industry front and center in terms of how states were both responding to the crisis, and also how states were making determinations about what businesses were essential and what businesses were not essential. And what we saw is, overwhelmingly, across the country, in almost 30 states, the cannabis programs both medical and adult use were deemed essential.

Patrick Martin: (04:54)
I'm speaking to you all from Illinois. We have a young but very successful adult use program here that was passed in historic fashion by our state legislature last year. And what we saw was the governor and his team and folks in our state legislature saying that we need this program to go forward, and that it needs to be treated just like grocery stores and liquor stores, and other forms of retail, that in the midst of an economic crisis are going to provide a real benefit to these communities.

Patrick Martin: (05:30)
Just in the month of May, the Illinois Department of Financial and Professional Regulation has told us that there was 77 million dollars in sales here in Illinois, combined for our medical program and our adult use program as well. So extraordinary economic benefits of the state. So you saw a lot of governors say very clearly to their states that this needs to be deemed essential. And I think it really showed progress for the industry and for how cannabis is being viewed across the country as an essential part of our economy.

Jason Wilson: (06:04)
Awesome. The majority of the US population [inaudible 00:06:14] states has not only legalized cannabis, but it says essential. And yet we have a handful of states that aren't quite there yet. Let's not even talk about the federal level yet. So what's going to happen later this year? I mean, do you see a number of states moving forward to legalize, maybe later this year, maybe early 2021? Patrick, Eric, you can both chip in on this.

Patrick Martin: (06:37)
Yeah, I think you're going to see states that don't have an adult use program but maybe have a medical program take a look and assess the political environment. And I think likewise, states that have neither are going to take a look at doing something maybe in the medical space for the first time. The other thing, in response to COVID that I didn't mention earlier, is the disconnect between the action that the states took in deeming cannabis an essential industry and the federal government providing no relief in any of the packages that were signed into law, particularly the Cares Act.

Patrick Martin: (07:14)
Cannabis businesses aren't able to benefit from any of those small business programs because of the federal illegality. And so once again, as we've seen through many issues over the course of our history, states are leading and the federal government just isn't quite there yet, but we think the momentum is certainly in our direction.

Eric Huey: (07:36)
Jason, first of all, thank you. Thanks to SALT Talk and ETFMG, and Anthony Scaramucci, and to you, Jason, for having us. There's this weird dichotomy where these are essential facilities but yet they're not legal in so many states. You've got 34 states where it's legal for medical. You have 11 states, plus the Washington D.C. where it's legal for recreational. It's going to be on the ballot in states like New Jersey and South Dakota. It could very well be on the ballot and four or five more all over the West and Upper Midwest.

Eric Huey: (08:12)
And governors are now desperate for revenues. And due to the COVID crisis, you're looking at the state of California has a 64 million dollar deficit. New York's going to have a 13 billion dollar deficit. It's going to need 61 billion in federal funds to make up for it, so you can see the pressure that's mounting on, say, Governor Cuomo in New York where legislatures have penned a letter saying, "We've got to do this. We've got to legalize."

Eric Huey: (08:38)
The governor of New Mexico, Lujan Grisham, said her biggest regret since she became governor is that she did not legalize prior to COVID, because they would have brought in 100 million in revenue, and that's critically needed at this time. So I think by the end of the year... Pennsylvania, of course, is looking at this. I think it could very well move in Pennsylvania because there's both Republican and Democratic agreement that this has to move for moral reasons, due to social justice, it has to move for budgetary and fiscal reasons, and has to move because that's where the will of the people are.

Eric Huey: (09:16)
66% of Americans believe that cannabis should be legal, and that's a majority of Republicans from Baby-Boomers on down to Millennials. And the Democrats are way off the charts, so the public is there. This is inevitable. It just sometimes takes a while for some state leaders, and for federal leaders to get there. But something has to be done and we're going to see movement on this. The momentum is just too great.

Jason Wilson: (09:48)
So David, switching over to you for a second because you actually are working at cannabis growth down in the US. And obviously it's [inaudible 00:09:57] for the industry. Looking at the numbers in the US, 250,000 jobs created in the legal cannabis industry. We've seen 15% and year over year growth in jobs. We're just talking about state revenues, obviously. Colorado alone has generated over a billion dollars in tax revenue since legalizing in 2014. And Eric was touching on it, but David, I'd love to hear your view too. What are municipalities going to do? Is this going to be the big drive really for legalizing? Is to fill all the holes the pandemic has created?

David Culver: (10:37)
Yeah, I think it's going to, and I think Patrick and Eric alluded quite nicely to this. Let me also, just speaking for the first time, express my thanks to you Jason and also to SALT Talks. I very much wish we were sitting in Las Vegas doing this like the rest of us, but hopefully we will be able to do that soon.

David Culver: (10:55)
So I think Patrick and Eric hit on a lot of the main points associated with your question. But what I want just mention that I think is also of importance, is the fact that we are going to start a recovery nationwide once we get this virus under control. And we are going to get it under control and the economy is going to recover. I think cannabis is going be an enormous shot in the arm as we begin that process.

David Culver: (11:24)
The last estimates that I saw really put the job numbers at about 1.5 million, if we were to legalize in the US. And I can't help but think about the end of prohibition, having spent so much time in the alcohol industry. Because the parallels that we are in now related to unemployment and also related to the need to jumpstart the economy at some point soon, or staggering.

David Culver: (11:49)
So opening the market is going to be really critical, I feel. I know that we are investing in that regard as a company, but it's also worth mentioning that we're going to have great products here in the United States. And if we legalize, it's going to really help other countries around the world to do so as well. We're going to be a leading force there and we can really add on to the export potential that we've got through cannabis I believe strongly in that.

David Culver: (12:16)
And then the third prong of it is innovation. I know lots of companies have exciting products coming to market. We have our Martha Stewart Line that we've talked about quite a bit that's coming out in the Fall. And we also have our drinks that will be coming into the US through the acreage channels later this year. And these are exciting innovative products. They have no impact on the liver, they have no calories and they have no hangover.

David Culver: (12:46)
And I think a lot of the country is interested in trying cannabis but they're not going to go the smoking route, and so innovative products like beverages can really drive that economic recovery in this space. So I'm excited about the future and I think that we can be a really important part of the recovery when the nation starts that process.

Jason Wilson: (13:09)
I completely agree. It's going to be fantastic to see how this all plays out. Obviously, it explains a lot of the investment in spaces happening right now. We've heard a lot about COVID and how it's effected the cannabis industry, and obviously the whole economy. We'll see how all that plays out. Hopefully, we get back to normal sooner rather than later.

Jason Wilson: (13:31)
But the other big issue that we've been grappling with, obviously it's been not addressed properly for generations and continues to, particularly during this pandemic, rear it's ugly head. And that's the amount of racism that's out there, the social injustice, the police brutality. And a lot of this ties in with the cannabis industry.

Jason Wilson: (13:54)
Patrick, you represent and work with a number of the cannabis owners in the US. What's your take on this? How are the multi-state operators, cannabis businesses in the US, how are they addressing the social justice issue [inaudible 00:14:09]?

Patrick Martin: (14:10)
Jason, it's a terrific question, and it's of the utmost importance to all of us here. I think what's happened in the last several weeks has caused all of us to really take a step back. And there's been conversations around social and reparative justice in the cannabis industry that have been taking place for a long time. But if you really think about everything that's happened in the last few weeks, Jason, Eric, David, and myself, none of us know what it's like to be arrested or pulled over or targeted because of the color of our skin, and to be arrested for possession of cannabis as a way to be unfairly targeted.

Patrick Martin: (14:59)
None of us know what that's like. And the protests that have taken place over the last several weeks I think have caused all of us to do a lot more listening about what the world is like for so many out there. And cannabis has a unique role to play in not only how do we right the wrongs of the past when we're talking about things like expunging records, when we're talking about things like making sure that cannabis is decriminalized.

Patrick Martin: (15:27)
But what are we doing in terms of looking forward? How are we giving people that have been unfairly targeted and unfairly arrested and prosecuted, how are we giving them opportunities in this new cannabis economy? I think that's what the companies that I work with spend a lot of time talking about. And you've seen states take a leadership role in this as well. I think you'll see large states that look to do adult use programs through their state legislatures look at the model that was set up here in Illinois, which was really the first state to address social equity and social justice in their cannabis law in a really direct way.

Patrick Martin: (16:06)
And it's things like giving people opportunity who are from areas of high unemployment and high poverty and areas that have high arrests and conviction rates on cannabis. In Illinois, we set up a social equity fund, which is financed by current license holders and will be financed by future license holders, and it's through things like loan repayments and license transfers.

Patrick Martin: (16:28)
And then it's companies looking at who they employ and who sits on their boards. And you're already seeing cannabis companies take a second look at who are we employing, and who do we have in the c-suite and in the board room, and does that reflect the diversity of this country? So I think it's a conversation that is going to continue to take place. I know that David and Eric and I talk about it all the time. But this moment in time, we've all been experiencing and living through, I think has really put a fine point on how important this issue is.

Jason Wilson: (17:04)
Yeah, no, absolutely, I think it is an incredibly important issue there. And it's great to hear that measures are being taken to address this. David, if I can, I'd like to put you in the hot seat a little bit. This is not just a US issue. I know obviously, the bulk of the protests have been happening in the United States, but up here in Canada, in Toronto we've seen it, in London, across the globe. Canopy is unique. They are a global entity. It operates in over a dozen different countries globally. How are you guys looking at this from a global perspective?

David Culver: (17:38)
It's a really important issue for our company, Jason, and I appreciate the question, and I also appreciate all the remarks that Patrick made. Because we do, as a small GR team, think about this all day, every day. I'll get to that a bit more in a minute. But specifically with Canopy, we put out a number of statements related to our position and standing with those demanding justice.

David Culver: (18:03)
So we are there, but we have decided that we need to take more time as a company to review what we're going to do. Because this isn't about press releases, it's about acting. And Patrick mentioned the boardroom and the c-suite, so we're taking a closer look internally with our leaders at our own diversity inclusion program, which we began working on last year when Hillary Black stepped into the role as head of our corporate social responsibility.

David Culver: (18:36)
This is something that we have a number of ongoing conversations over the next few weeks, and we're excited to be showing the results and that path forward at some point in the near future. So hopefully next time when we chat, we'll be able to provide some more specifics about what we're doing internally.

David Culver: (18:53)
But externally, it's going to be really important for us as a company and others in the Canopy space, to continue to partner with social justice organizations and programs across the US. Canopy's biggest... Well, around the world, Jason, Canopy's biggest thrust has been with National Expungement Week which we partnered last year there, and we will do so again this year.

David Culver: (19:17)
We're excited about that partnership. Also in Illinois, and also New York, we have a partnership there that we've just established with the Last Prisoner Project to help cannabis prisoners for nonviolent offenses get out of jail. So this is just tip of the iceberg of what we're doing, and again, I think when we chat in a month or two, we'll have a lot more discussion about what Canopy's up to, and we're excited about the project and to be a part of the movement.

Jason Wilson: (19:46)
That's great news, and incredibly interesting. I guess it really begs the question... This is an open question, all of you may want to hear from Eric a little bit, but is this something that really should be addressed through federal legalization? Instead of just going the decriminalization route, is this what we really need legislation for?

Eric Huey: (20:09)
Absolutely. We have to come to grips with the fact that our cannabis laws, our drug laws generally, particularly as it relates to cannabis, have a long history of racial bias and racial prejudice, going back to Harry Anslinger in the 1930s. The first Federal Bureau of Narcotics chief who was an unrepentant blatant racist. And the very use of the term marijuana with an H, they used that term rather than cannabis or other terminology so that they could make it sound more Mexican.

Eric Huey: (20:44)
The entire history of the laws set up to enforce marijuana were designed, in large part, to put black and brown man into cages. When you look at how they've been enforced over the past, through Nixon and Schedule One, all the way through recent attorneys general, black men are arrested at four times the rate than white men for cannabis despite the fact that they're only 12% of the population, African Americans.

Eric Huey: (21:10)
So that is not an accident. That is systemic and it's systematic, and if we're going to look at this whole notion, the probable cause is the color of your skin, well what is the pretext for an arrest? The statistics are staggering on this. We spend three and a half billion dollars a year on cannabis enforcement alone. We do 600,000 arrests a year for cannabis. In 2016, we did 600,000. That is more than all violent crime arrests in America combined for all violent crime. Our priorities are out of whack and you have to wonder, is this really about cannabis, right? Or is this about something deeper?

Eric Huey: (21:57)
Somebody's arrested every 37 seconds, and 88% of arrests are for possession. So we have to grapple with that. We have to grapple with it as part of a larger package. We absolutely... Decriminalization and legalization, the passage of the ability to access banking is a component, but the social justice component is going to be critical. For so many African-American men, their interaction with police happens because of a suspicion of cannabis use.

Eric Huey: (22:28)
You can smell it in the air. If they're nearby, they're going to arrest or at least question, the nearest African-American male. Until we grapple with that... The mayor of Kansas City was just saying this week, "We have got to decriminalize this for possession or else we're never really going to get at this." This is step one and it has to be part of a larger federal package.

Jason Wilson: (22:50)
It's absolutely mind-boggling, the numbers, the waste of time and resources, the effect on people's lives, you pointed out for generations. I mean, this is 100 year old plus problem, let alone all the other injustices you might have. That said, if you look globally at what is happneing with respect to cannabis, there's been a lot of progress. You have over 20 countries around the world that have legalized marijuana for medical use. Mexico's soon slated to join Canada in legalizing for adult use.

Jason Wilson: (23:25)
We have the WHO that's recommended that cannabis be rescheduled, and I believe the UN's voting on that shortly. And you should always follow the WHO's recommendations. Interesting to see what happens with that, because I know it will affect international treaties, which is a huge part of the problem.

Jason Wilson: (23:39)
In the US, even, we've had, at the federal level, some progress, obviously. And we've had [inaudible 00:23:46], we improved it. Have a plant-based cannabinoid pharmaceutical used to treat childhood epilepsy. That was a big step in 2019. Going forward, after the FDA rescheduled CBD, it went down to schedule 5. We're seeing progress. David, you guys, obviously, have a global company headquartered in Canada breaking into the US market. You obviously have a lot riding on what happens here at the federal level. What's your take? What's happening? What's the next steps in federal law from your perspective there?

David Culver: (24:25)
Good question, and a very good summary globally, Jason. I think, first of all, the WHO recommendations to the UN are critically important. They punted on the vote there are a couple times now, but it is rescheduled for this coming December. So we're engaged with our US government here. I know other companies are as well. The US position is going to be really important on this. It's going to help drive a lot of the other nation states. So that's something we're watching closely and trying to make sure that our position as a country is a good one.

David Culver: (25:01)
On Capitol Hill, I think that the efforts there, similarly, will also drive efforts around the world. And there's just a couple important notes. Eric and Patrick alluded earlier to COVID relief, and the primary point to make there is that we as an industry had not received any relief from COVID thus far. So if you think about the three prongs that I pressed for early on, the industry pressed for, it was the Safe Banking Act, it was access to small business loans, and it was standard business deductibility.

David Culver: (25:36)
So to date, we don't have any of that. Now, big thanks and hat tip to Speaker Pelosi and the Democrats for putting the Safe Banking Act into the Heroes package, which is now sitting in the Senate. We don't know the fate of it. We very much encourage Chairman Crapo and leader McConnell to adopt the Safe Banking Act, because this is, of course, about access to banks, but it's a public health issue now.

David Culver: (26:02)
We've got to stop dealing in cash. Especially that our sentries are deemed essential as we started with in this conversation. We've got to make sure that we're able to have access to the banks so we don't have to deal with cash day in and day out, because that's a problem.

David Culver: (26:17)
The second thing I'll say is that the COVID crisis, oddly enough, because we were all deemed essential, it's really created a great deal of momentum. And coupled with what Eric just said previously about criminal justice reform, we believe that cannabis legalization is going to be a part of that as well. So the momentum is strong at the moment, and I think the most talked-about piece of legislation is the MORE Act, which Chairman Nadler from New York has introduced.

David Culver: (26:46)
And the most important piece of that legislation in parallel to rescheduling, is the fact that it weaves the social justice that we were talking about earlier through the entire bill. No portion of that bill exists without social justice. If I'm doing my day job correctly, both in Washington, D.C. and also in state capitals, I'm making sure that, that component is weaved into any package that we're addressing. So there's been a lot of discussion about moving the MORE Act this year, and also preparing for what things will look like next year.

Jason Wilson: (27:23)
Can you talk a little bit more about the tax piece and the regulatory components of the MORE Act and how it should come into play?

David Culver: (27:32)
Yeah, sure. So I think there's a couple things that the industry has been thinking about since the MORE Act was introduced last year. And first is the tax piece, which they set a flat federal excise tax rate, which is fine because we're going to need to generate federal excise tax from the sale of this product just like they do with beverage alcohol. But we need to make sure that we are doing it in a way that allows for the illegal market to transition into the legal market without an unusual tax burden.

David Culver: (28:02)
So there's been a lot of ideas that have floated around out there but one of them is to start lower on the federal excise tax and then ramp it up to something that's comparable to alcohol once you get to the point where the elicit market has had the opportunity to transition.

Jason Wilson: (28:20)
Just quickly, what's happening at the industry level? Are we seeing collaboration? I know every company's focused on market share regionally, state wise, what have you, but I would have to think there needs to be a [inaudible 00:28:33] for everyone to get together and work as a united front. Have we started to see that in the cannabis industry?

David Culver: (28:39)
Yeah, we're getting a lot better. I'm a big fan of the Trade Association World, obviously spending a lot of time at one. I think they're very effective. If you looked at the beginning of COVID, you had the most sophisticated of the trade associations coming out right away with requests to Capitol Hill, to lawmakers, and also leaking them to the media for what exactly their industry needed to stay afloat both short term and long term, and they were very successful.

David Culver: (29:05)
So we don't have that one voice yet in the industry. But at a minimum, I think that we need to begin discussions to make sure that we're prepared for 2021. Because in my mind, this is no longer a three to five year discussion about legalizing cannabis. It's a one to three year, and we need to make sure we're prepared in a unified way to present a unified message to Capitol Hill and in state capitols. Because if we don't do so, we're not going to be successful.

David Culver: (29:33)
I've been at this way too long, I've seen way too many industries coming at this from different directions and not being able to get done what they ultimately wanted to. So that's really a big challenge for us as a group, is to unify.

Eric Huey: (29:47)
I'd like to build on that a little bit by saying what's going on in the industry, despite the stories about COVID driving a spike in demand, is there is a capital crisis. All of the exuberant money that came in early through the angel rounds and friends and family is out there. There cannot be an injection of institutional investment in a more meaningful way without access to banking.

Eric Huey: (30:12)
So until that happens, you've got a 56 billion dollar industry that is realizing 1/10 of it's US addressable market. What does 10X look like and how do we get there? You mentioned, Jason, the industry employs 250,000 people already. That's four times as many people as the coal industry. So this is an industry that is poised to explode, but they can't because they can't get access to the capital markets in a real meaningful way. They cannot hockey stick, and until we do...

Eric Huey: (30:44)
And this is not an industry that's looking for a handout. With just cause the airline industry got 50 billion out of the Cares Act, the restaurant industry, people are looking for industry specific changes. We're looking for the removal of obstacles. There are four or five obstacles that David just enumerated. The minute those are removed, all that capital comes in, and this industry explodes, not just in big cities, not just in the coasts, but in states and communities throughout the US rural, small towns. And that's going to be the exciting moment. But until we get there and absent of a comprehensive federal plan, we are going to be stuck at starting line.

Jason Wilson: (31:25)
Yeah, I agree. So, election coming up, obviously. Everyone's mind... Obviously, it's going to be interesting. We really have two 70 year old, baby boomer, white guys, neither of which seem to be horribly supportive of cannabis, I guess I'll put it that way. Patrick, is it going to matter who gets elected? What's your view on that?

Patrick Martin: (31:58)
Yeah, it's a great question. We often make the point that we work well with... We want to work well with both parties, and we think this issue's a winner for whoever takes the mantle and and wants to run with it. A political winner and a true public policy winner with the public. But the way you framed the question, I think is exactly right. You have two candidates for personal, political, and I'm sure a whole host of other reasons that are not quite there on the issue.

Patrick Martin: (32:32)
And I think you see that a lot with politicians of a certain generation. What I would say in terms of how the election results will impact the cannabis movement in the United States is that I think it will impact it to some degree on timing depending on who wins the election. But regardless of who wins the election, it will not slow down the forward progress and I'll provide an example of what I'm talking about.

Patrick Martin: (33:01)
The gay marriage movement saw in this country a lot of peaks and valleys, and then a tremendous steam ahead in a really period of time. And if president Trump is reelected, I could see something akin to the election of 2004 when president Bush was reelected. We had all these state ballot measures on defining marriages between a man and a woman. And after president Bush was reelected, I think there was real heartache within the LGBTQ community about what the prospects were for gay marriage going forward.

Patrick Martin: (33:33)
But it turned out that in the course of time, it was only in the next term of the next president that we ended up you know getting the historic Supreme Court ruling. So it didn't end up taking, I think, nearly as long as some people would have thought the day after the 2004 election. If vice president Biden's elected, I think the prospects for seeing a legalization at the federal level, it's going to be much faster.

Patrick Martin: (34:00)
I think there's still going to be an education and a phase-in period for sure, and I think there's going to need to be some patience at the very beginning. But I think you'll see it happen within a first term of a Biden presidency. And just to take the gay marriage analogy even further, what I think all of us would love to see is whoever vice president Biden picks as his running mate, I think that they should get right out in front of this issue the same way that vice president Biden did on gay marriage with president Obama.

Patrick Martin: (34:30)
And everyone remembers he famously came out and said he was for it, and then that forced the White House to have to respond, the president to have to respond,. And they were already moving that way anyway, but I would hope that whichever woman vice president Biden picks does the same thing. And this would be his running mate just by definition of who is considering, will be a woman who is more progressive on cannabis than he is, because every single woman he's considering supports legalization.

Patrick Martin: (34:58)
And if it's a woman of color, they'll have dealt first hand both in their personal and professional lives with issues of racial injustice. And so I think we're hoping as an industry that person can be a real supportive voice within a Biden administration if he wins.

Patrick Martin: (35:15)
The one area I would say that that example doesn't work, and it's a really important example, is that gay marriage was decided by a historic Supreme Court ruling. And all of us in the industry are not waiting for the US Supreme Court to decide the fate of legalization of cannabis in America. We want lawmakers to act. We want Congress and our president to work together to create an equitable law that sets up a fair system for how cannabis is regulated in the United States, and that addresses the social injustices that have taken place and provides opportunities for people within this industry.

Jason Wilson: (35:59)
It's going to be interesting to see...

Eric Huey: (36:00)
I would build on that as well. Patrick put it well. He said, "Let's talk about the impact of the election on the legalization of cannabis movement." But I think the reverse is also true. Let's look at the impact of the legalization of cannabis movement on the election and the impact that it could have. Because when you look at the key demographics like veterans, like Millennials, like boomers, who nobody remembers is the Woodstock generation.

Eric Huey: (36:24)
When you go right up and down Republicans and Democrats, these are folks who can impact and there are single issue voters out there. This is something that can move somebody's opinion of a candidate. And I think it's going to be incumbent upon the folks who are active in this movement, personally and at a corporate level to get involved with the campaigns. It's a perfect opportunity from either or both campaigns to pivot forward. And the one who does it first, David, I think is gonna be the one who gets the advantage.

Jason Wilson: (36:56)
Why don't we wrap it up with that last thought from David, and then probably move on because I think Joe is waiting. David, do you see this becoming an issue that moves the needle to a different voting box?

David Culver: (37:12)
Oh, yeah, for sure. I think Eric alluded to it already, but we're talking about progressives, we're talking about single issue cannabis voters, we're talking about minority voters. All three of those categories are really important to the vice president and to the president. They're watching each very closely. And I think that the electability argument that our industry is going to make to both campaigns is really going to set up jump ball that Patrick alluded to earlier. So you're going to have two almost [inaudible 00:37:44] trying to swat the cannabis ball. And whoever ends up with it, I think, is going to have a massive advantage in this election.

Jason Wilson: (37:55)
It's fantastic. I mean, the industry has been growing for a while, country by country, state by state. It's going to be really interesting. I know we have to deal with the pandemic. I know we have to deal arguably more importantly with the social justice issues, reform issues, but cannabis can be a large part of that. But I have to believe that as we go through the remainder of this year, we get to the election, we hear from the UN on whether they've rescheduled or not.

Jason Wilson: (38:23)
As we continue to see legalization across the globe, there's a lot of tailwind behind the cannabis movement. Every step of the way it just makes it bigger, bigger and bigger. There's a recreational component, there's a medical component. We're not even getting into the whole industrial aspect of it that could help deal with issues like global warming, what have you. It's going to be really fascinating to see how this industry grows, the job growth it brings, hopefully some of the reform it brings, and where we'll be a few years from now. It's pretty exciting to see. Joe, maybe we should turn it over to you to see if there's any Q&A that we can help out with?

John Darsie: (39:09)
Jason, thanks a lot, this is John Darsie, here, the managing director of SALT. Jumping in to handle the audience Q&A, which we've got a lot of engagement from the audience. We'll thank all the panelists for such an engaging discussion. So the first question is which specific states do you think are next to legalize or decriminalize cannabis, and what do you think the timeline is for that?

Jason Wilson: (39:32)
Patrick, you want to take a crack at that?

Patrick Martin: (39:35)
Yeah, absolutely. I think two states that we've been following extremely closely are Pennsylvania and New York State. And what I think we've seen across the country as states consider adult use programs is, there's some regional competition that takes place. And if one state sees a bordering state making a move, it is of the utmost importance that they act. I can speak to the situation in the Midwest.

Patrick Martin: (40:04)
There was tremendous pressure on the State of Illinois to act through the legislative process because we knew it was on the ballot in Michigan, and we knew that there was a strong likelihood that it was going to pass in Michigan. And you want to make sure that you are the regional leader. We've seen what that's done for the cannabis industry in a state like Massachusetts, what it's done in California.

Patrick Martin: (40:29)
And so I would look to Pennsylvania and New York. I think Pennsylvania is, David and Eric, and all of our partners talked about this all the time, that it is just really ripe for something to happen there. And then New York has gotten so close so many times that I think that the combination of COVID and the economic issues that states and localities are already facing, and the fact that you may have another regional player moving is going to create the strong likelihood that the New York State will do something.

Patrick Martin: (41:03)
I also think, to answer the question another way. I think states that have not had anything before are going to be looking at entering and doing a medical program, and I would look to a state like North Carolina and others to potentially look at addressing something like that as well, which is all positive movement for us and for our industry.

John Darsie: (41:24)
As a North Carolina native, that's good to hear. How do you think the black market, gray market issue in a place like California, for example, will be solved with federal legalization?

Jason Wilson: (41:37)
I'll talk to that a little bit to start, being up here in Canada. We have a federally legalized nation. And the problem... It's not a cure-all, necessarily. It has to be done in a thoughtful way. And, David, you can talk a lot more about this. Obviously, being at Canopy, you've seen what's happened up here. But, I mean, pricing has to be regulated, you have get broad based distribution, you can't have the red tape, you can't have hurdles.

Jason Wilson: (42:07)
Here in Ontario, the largest province in Canada, people have been talking generally in the market that we haven't seen the sales that we thought we would. About 15 million people, and there's only 22 to 23 dispensaries available in the first year of legalization. I mean, that's ridiculous. There was no access to it. We were able to go to an Ontario cannabis store and order online. The legalization happened in the middle of federal postal strike, so you could order it but you couldn't get it.

Jason Wilson: (42:39)
The laws have to be there, but the whole supply chain has to build out around it. And everyone has to really get behind it to make sure that there is a proper and effective role. David, do you want to touch on that a little bit?

David Culver: (42:54)
I actually think that you've hit all the high points. I was just jotting this down, transitioning the illegal market into the legal market. it's setting the tax rate correctly, both short and long term, and it's about the outlets. We hear about the outlets all the time. It's a huge problem.

David Culver: (43:11)
I'd also just want to add into the question previously about the timing on some of these states. 2021 could be a massive year for the state-by-state legalization effort. And let's also not forget that if a state that is a red state legalizes in any way shape or form, that state then has direct influence on their senators and makes it even more difficult for them to oppose the efforts on Capitol Hill. That's been the playbook all along, and I think an important point to add as we talk about the timing on states.

John Darsie: (43:44)
Great. Just to dive in more into presidential politics and the effect of the election potentially on marijuana legislation, cannabis legislation and regulation. We have a couple questions on that, that I'll group into... You touched on, if vice president Biden wins, the increasing likelihood that we might see reform early in his presidency. But what do you think would happen in the event that a Republican administration wins, that would be a second term with Donald Trump? And if Republicans remain in power, do you think there's a movement within the Republican Party even to start legalizing and decriminalizing cannabis? What do you think would happen in that scenario?

Eric Huey: (44:26)
I used to have a joke that Libertarians were just Republicans who smoke pot. I think that's changed and morphed a little bit. I think it's inevitable either way. However, I think it's going to happen more quickly if vice president Biden becomes president. My worry about a second Trump administration on this issue, is that you look at his choices for Attorneys General, first Jeff Sessions, who undid the Coal Memo, and then Bill Barr who has been vehemently opposed to legalization. If he were to continue as Attorney General, I just think with those folks whispering in the president's ear, and no then electoral upside to do anything about it. It might take a little more time.

Patrick Martin: (45:11)
Yeah, I agree completely with what Eric said. And I would add, I do not think it will slow the progress we see at the state level. And in fact, I think it could speed it up. I think if president Trump's re-elected and his administration decides they just don't want to do anything federally on cannabis legalization, I think you'll see states continue to act and probably speed up their action.

Patrick Martin: (45:35)
Because the public's there, and we've all talked about it for a variety of reasons. But the most important reason, and I think you see this with all social and economic change over the course of time. People who experience it in their day-to-day lives understand the benefits, and there's been a real education for a lot of people on what cannabis is and what it can provide to communities.

John Darsie: (46:01)
So speaking, you touched briefly earlier on the vice presidential pick and what effect that could have on cannabis regulation, and you mentioned some of the African-American women who are under consideration for that VP slot. Is there one candidate in particular that has a record and is on the record regarding cannabis regulation and legislation that you think would be the most favorable for early action in a Biden administration?

David Culver: (46:29)
I think that senator Kamala Harris is still top of my list in terms of the president's VP shortlist. She has a very strong position on legalization. She was an author of the MORE Act companion, so she's already there. She understands the social justice pieces that I referenced earlier. And I really think that she could lead on this issue if the president chooses not to. And again, we're gonna make the electability case to former vice president Biden's campaign. I don't know whether they will side with it or not, but I do think it's something that senator Harris could lead on if she was the pick. We've done an analysis of everybody that's on that short list and they almost all, without exception, have positions that they've already taken that are pro-legalization.

John Darsie: (47:26)
Anybody want to add to that?

Patrick Martin: (47:28)
No, I think David hit it right on the head. And I would just say, if all of the candidates on the short list support legalization, which they do, the question then becomes about who is going to want to lead on the issue? And who is going to take that position that will in some ways to run a little bit contrary to the position that vice president Biden has laid out? And who is going to be willing to build political support within the White House, in Congress, and using the personal relationship that they're going to have with the president, to move him on that issue?

Patrick Martin: (48:03)
That's really what I'm looking for. I think David said it just right with senator Harris. She's already shown in her presidential campaign that she's willing to come out and show separation between her and the vice president on an issue that was important to her. And I think she's shown just this week in this debate on criminal justice reform, that she's willing to make a strong assertive case on something that she's passionate and believes in. I'm sure all the women on the short list would.

Patrick Martin: (48:33)
But I think we've had a chance to, all of us, work with her in her time in the senate and in California, and I think she'd be a tremendous advocate. But we would really view this for any of the women who are under consideration, if they're chosen, as a huge opportunity to lead on an issue. When you're vice president, that job doesn't have a huge job description. The people who really become successful as vice president, like vice president Biden was, take on certain issues and lead on them. And this would be I think a really important one for whichever woman has chosen to do.

Eric Huey: (49:09)
Imagine two scenarios, a conversation about legalization with vice president Kamala Harris or a conversation about legalization with vice president Mike Pence, and how divergent those might be. You can never underestimate the power of the cabinet. People like Eric Garcetti, people like... All the people who ran for president, a number of those are going to be in the Biden administration as cabinet secretaries, and they're going to have a role to play, and a voice on this. And there's going to be a chorus of yes voices for legalization.

John Darsie: (49:38)
Great points. Going back to Attorney General Barr, we have a question about whether you think his alleged targeting of cannabis companies for antitrust review has affected M&A in the industry? There was a whistleblower that said today that 10 deals were targeted just because Barr doesn't like cannabis and doesn't like the industry. And has that put a damper on deals and deal making at a time when the person who's asking the question believes that consolidation in the industry is needed, and what effect has that had on stock prices in the space?

Jason Wilson: (50:11)
You're always going to have an issue with stock prices in the space until we get a full proper federal regime, and even a global regime. The US is a catalyst. Just think of the international tax treaties, drug treaties, every aspect of how to do global commerce. Until we get the world's largest economy on board, it's going to be really hard to scale this entire industry.

Jason Wilson: (50:38)
Right now, it's really fragmented and broken up. Even with everything being perfect, it's going to take time. With all the supply chains, obviously, to from [inaudible 00:50:51] to pure execution, there's no question about that. But when you have the world's largest economy sitting there, really taking a fragmented approach to it, not knowing what's right.

Jason Wilson: (51:00)
We can look at hemp. CBD dried hemp. Technically, federally legal. But we don't even have FDA guidance on how we can sell it, right? If you look at what's happening in Kentucky right now, and they clearly wanted legalization to support their economy. They have businesses going bankrupt all the time because we can't get a coherent framework that allows anyone to succeed. So I feel that we're going to continue to see a lot of volatility in the market until we start to see movement at a global scale, particularly in the US, but also on a global scale.

Jason Wilson: (51:35)
I'm hoping that the UN votes to reschedule, post-election, we start to see state-by-state [inaudible 00:51:44] a lot of states going on. But most importantly, federal legalization begins. It's going to fill a lot of holes. I think we've heard that consistently, but [inaudible 00:51:52]. Once that starts to happen, I think we'll see this involvement as a profitable industry. Until then, it's going to be [inaudible 00:52:01], it's going be volatile.

John Darsie: (52:03)
So we have two more questions, then we'll wrap up. Thanks for all the audience engagement, to all the viewers. Do you think a single buyer, one buyer system is the way to go to make sure that retailers can't compete with illicit dealers?

David Culver: (52:17)
I don't know. I'd have to ponder that question. It's actually not something that we've been really thinking about in terms of the federal regulatory structure that I referenced earlier, but certainly something that I'd happily take back to the drawing board with my other industry partners and those on the hill. Patrick, Eric, any thoughts from the two of you?

Eric Huey: (52:43)
I think that government-mandated market control is never a good idea. I think the free market, with budget for enforcement, and with a logical tax scheme, which lowers the price of legitimate cannabis to the point or lower than that in the black and gray market, that's how you get there. If the goal is, right, driving down or driving out black market competition, I think you could do that through other measures without these overarching market controls. I start to worry when you have a single entity controlling any distribution point.

John Darsie: (53:22)
All right. So last question is, how long do you think it'll be, and what do you think the impetus will be, for pension fund trustees and institutional investors in general, to regard investment in the cannabis industry as a normal course of business?

Jason Wilson: (53:39)
My opinion on that, and I'll pass it onto the rest. When we're out speaking with, originally, raising capital a couple years ago when we started in the states, all the big pension funds, insurance companies, larger asset managers, your typical go-to institutions for raising capital just didn't want to get involved in the space. Because they didn't... Yes, there is a fear of the illegality.

Jason Wilson: (54:05)
I think they all fear to move beyond that, but the catalyst they were really waiting for is that proper regulatory framework so that they could properly evaluate the companies' investments, and actually know that they could execute them. I mean, right now, it's really hard to put together a business plan when you don't know how to roll out, when you don't know what the tax consequences are going to be, when you have employee safety issues, what have you. If you can't get, for example, COVID relief. [inaudible 00:54:42] I haven't in certain examples.

Jason Wilson: (54:44)
So I think until we see a proper framework, or at least a lot of positive movement towards that, where you know it's going to happen, I think that's when you're going to start seeing large institutional investments come in, where they can properly evaluate a business plan, look at the competitive landscape and understand how it's all coming together. Until then, it's a little bit too ad hoc to make a proper investment analysis for them.

John Darsie: (55:09)
Thank you all. Thank you Eric, thank you Patrick, thank you Jason, thank you David, for joining us today. This is a fascinating discussion on an industry that's very fast growing, and I think only has the potential to accelerate further once we get a little bit more clarity, maybe starting in November, about regulation in the space. This episode is going to be posted on Demand afterwards.

John Darsie: (55:32)
So if you tuned in live and you want to go back and listen to some of the clips, we'll post it on the SALT YouTube channel. And pass it around to your friends who might be interested in the space because I think increasing awareness about what's going on in the cannabis space is very important for a variety of reasons, including social reasons. We're seeing a lot of, obviously, activism today, and I think addressing some of these issues related to cannabis regulation will help solve some of those issues, especially as it relates to criminal justice reform.

Michèle Flournoy: Isolationism & Smarter Engagement | SALT Talks #17

“How do we expand the community of free market democracies around the world?”

Michèle Flournoy is the Co-Founder & Managing Partner of WestExec Advisors. She was also the United States Undersecretary of Defense for Policy from 2009-2012 under President Obama, where she served as a principal advisor to Secretaries of Defense Robert Gates and Leon Panetta. At the time of her confirmation, Michèle was the highest-ranking female official in the Pentagon.

“We can’t afford to divorce ourselves from the world.” While isolationism has its merits, we should be using our presence to shape the direction of the world, instead of enacting large-scale regime change. We need a core set of principles as it relates to countries like Russia and China. Smart or smarter engagement is the way forward, not lack of engagement.

What region worries Michèle the most? The Asia Pacific and Indo Pacific. This area will have the greatest impact on our economy, as our prominence as their primary security partner clashes with China’s position as the primary trading partner.

LISTEN AND SUBSCRIBE

SPEAKER

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Michèle Flournoy

U.S. Undersecretary of Defense for Policy

(2009-2012)

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:08)
Welcome back, everyone, to SALT Talks. My name is John Darsie. I'm the managing director of SALT. When we do SALT Talks we try to bring you access to leading thinkers, innovators across technology, finance, entrepreneurship, and geopolitics. Today we're very excited to bring a speaker from the geopolitical realm. Our guest today is Michèle Flournoy. If you're not familiar with Michèle, you very soon will be, I think. She's one of the leading national security voices in the United States. She was the undersecretary for defense for policy in the Obama administration. She served under secretaries of defenses Robert Gates and Leon Panetta.

John Darsie: (00:53)
Today she is the founder and managing partner of WestExec Advisors, which is a strategic advisory firm that advises US and international companies and financial institutions on geopolitical factors and how that might affect their investment landscape. Michèle, at the time of her confirmation, was the highest ranking female in the history of the Pentagon, so we're very excited to have her on. It's not the first time Anthony has interviewed Michèle. I'll let them talk a little bit more about that, but I'll kick the interview over now to Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, and the chairman of SALT, to interview Michèle Flournoy.

Anthony Scaramucci: (01:34)
Okay. You guys can hear me okay? And Michèle, great to have you with us today. Thank you so much for joining us. I thought for people's... I think your background is fascinating. I was just wondering if you could spend a little bit of time telling our listeners and viewers about your background, and then we can talk a little bit about directionally where the nation needs to be going.

Michèle Flournoy: (01:57)
Sure. Well, great to be with you, Anthony, and glad to see the SALT Talks continuing online. So, I came of age kind of coming out of grad school where I focused on international relations at the height of the Cold War. So, in the mid-1980s the issue of the day was the nuclear saber-rattling between the United States and the Soviet Union, Reagan and Gorbachev, and it seemed like that was the issue of the day. If we didn't solve that one, we wouldn't be around to solve anything else. So, I cut my teeth in the field starting out working on nuclear weapons issues, nuclear arms control, and so forth, and that really continued for the first decade working under different think tanks and academic institutions until I had my first chance at government service in the Clinton administration and was asked to come in and recreate a defense strategy office in the Pentagon. Now, if you think about that, it's a little scary that there was a time when there wasn't a strategy office in the Pentagon, but my job was to help reestablish that, and that's really when I broadened to defense more broadly.

Anthony Scaramucci: (03:09)
But take us back for a second, because I think this is very important. So, this is sort of the mid-'90s. You're coming into the Pentagon, and there are people on this call, frankly, that haven't been to the Pentagon. I've had the opportunity through the Business Executives for National Security to tour the Pentagon, meet with various defense secretaries, and we've had several of the secretaries of defense at SALT. But for somebody that is not aware of the expanse of the Pentagon and the nature of the Pentagon, take us back to your first few days there and sort of what you were thinking about, and the tenets of that core strategy.

Michèle Flournoy: (03:49)
Well, I think that for a civilian coming in, it's a daunting experience because it is a unique place, a unique culture. For some political appointees it can feel like landing on a different planet. I was fortunate that my dad had served in World War II, my husband served 26 years in the Navy. I was very familiar with military culture, I was part of the broader family, so I had that advantage in terms of coming in to the environment. But even still, I think as a young political appointee it takes some time to sort of show your value, to find your place, to understand how the place works, how to get things done and make things happen.

Michèle Flournoy: (04:33)
But I think the thing that I really focused on initially was trying to figure out how to design a strategy after the end of the Cold War. Really, the key paradigm we'd worked with for decades was suddenly gone. Now what was it about? I think the early attempts at that was trying to look at how do we expand the community of free market democracies, and that was really kind of the core idea of that first strategy. Ironically, now, at a time when we're seeing the return of so much authoritarianism with China, with Russia, other dictatorships, that question's actually very relevant again. How do we strengthen the group of free market democracies around the world and really leverage these incredible allies that we have?

Anthony Scaramucci: (05:28)
So, when you got there, we had this 40-ish, 50-ish-year idea of containment, and the goal was to contain the Soviet Union and to reject communism around the world, and obviously, this was in the aftermath of the Reagan Doctrine. President Clinton was coming up with his own doctrine. He wanted to secure the peace around Iraq, and the no-fly zone restrictions, and all of those things, and now today, do we need a new doctrine? I know you authored a white paper in 2007. Do we need a new doctrine, and if we do need a new doctrine, what should that doctrine look like to create peace and prosperity over the next 25 to 50 years?

Michèle Flournoy: (06:14)
Because we can't really afford to focus just on a singular threat like the Soviet Union, I'm not sure that a doctrine is as helpful as a set of core tenets or principles, and I do think that we need to kind of go back to first principles in this very different landscape that we're in. We have fundamental shifts in the balance of power with the rise of China, a resurgent Russia, other rogue states not disappearing, Iran, North Korea, and so forth. We still have to manage the counterterrorism problem. We also have a period of profound technological disruption, which means that if the US military just stands still and doesn't figure out how to integrate some of those new technologies, we will actually lose our military edge and our ability to deter and defeat adversaries. So, it's a very dynamic landscape, and I think that any one doctrine might straight jacket us, so I think it's better to think about core principles at this moment.

Anthony Scaramucci: (07:22)
Okay, so what would some of those principles be?

Michèle Flournoy: (07:24)
Well, first and foremost, we have to recognize that we are very integrated into a global economy and set of international relationships, and so we can't really afford to divorce ourselves from the world. The security of Americans at home, the prosperity of Americans at home depend on us shaping and trying to manage and influence what's happening overseas. For goodness sake, we've just been the victim of a pandemic that came out of China, is now a global phenomenon. We can't just pretend that we can protect ourselves by being Fortress America. So, the first thing is we have to stay engaged in order to protect ourselves at home.

Anthony Scaramucci: (08:12)
So, what would you say to one of my cranky relatives, Michèle, who believes in that whole isolationist strategy and believes that we should disentangle ourselves from the rest of the world? What would your rebuttal to that be?

Michèle Flournoy: (08:28)
I'd want to draw them out on what is driving that, because I think where there's a seed of wisdom there is that we shouldn't be doing large scale military interventions around the world to change regimes and try to impose democracies. I think we've seen that doesn't work so well. But saying we don't want to do that is not the same thing as saying we should just pull back from the world writ large. We should be using our economic strength, our technological innovation, our diplomatic abilities to try to shape the environment in ways that are favorable to our interest, because I think the key argument is if we don't do that, we risk having small threats become very large threats and be quite costly by the time they reach our shores.

Michèle Flournoy: (09:23)
Plus, we have a unique asset in our alliances. There's no other country in the world who can bring together coalitions of the willing, like-minded states who have shared interests, to take on problems together, and therefore share the burden. So, in my book, isolationism... There might be a core worry that we really have to attend to, but I don't... I think when you really get into what's the strategy that's going to best protect us as Americans, it almost certainly involves some degree of smart or smarter engagement.

Anthony Scaramucci: (09:59)
It's interesting because in the 1940 election with Franklin Roosevelt when he was running against Wendell Willkie, there was a lot of isolationism, Charles Lindbergh making those speeches, and Roosevelt said something that rings true even today: if we don't engage every hour every day of our failed engagement, it means we have to catch up at some point in the future. Of course, that caught up to us after December of 1941. John mentioned the fact that you and I have met before, and just for the viewing audience, General Mattis asked me to have a meeting with you, and so we met, and I don't think I ever told you this, but then General Mattis called me and said, "So, how did the meeting go with Michèle?"

Anthony Scaramucci: (10:42)
I said, "Well, I think she's the smartest person I've ever met," and what I said about you, Michèle, is that if you could take a drinking straw and you could drop it down on the earth in any location on the earth in any of the seven continents, you knew more about that situation, more about that location than anybody that I've met. So, with that, I want you to talk about one or two locations on the earth that you're worried about as an American that is concerned about our prosperity and our national security. Drop that straw for me and tell me, "Okay, here are two places that if you were in a briefing with me and we were talking about our national security interests, these are places that are concerning to me." What are they?

Michèle Flournoy: (11:30)
So, the first one would be the Asia-Pacific or Indo-Pacific, because if you look at what is the region that is going to have the biggest impact on our economy and our security in the next 50 years, it is Asia-Pacific, and the balance of power is shifting there. For most of the countries in the region, they prefer us as their primary security partner, and they count on us, but their primary trading partner is China. As this competition between the US and China heats up, they feel very trapped in the middle, and they don't want to be forced to make choices that they'd have a hard time making.

Michèle Flournoy: (12:20)
I think the biggest challenge for us going forward is how are we going to manage the competition with a rising China in a way that allows us to be the most innovative, competitive economy on the planet, even as China's grows, that deters any sort of direct conflict, military conflict, with another nuclear power, and that continues to sort of strengthen the rules of the road that will constrain China's course of power or manage that in the future. So, the first place I would focus on is the Asia-Pacific and a more nuanced and strategic approach to our relationship with China.

Anthony Scaramucci: (13:11)
When you think about history and... Graham Allison wrote a great book called Destined for War, which I know you're familiar with, and it's the notion of Thucydides's trap, where a rising superpower is threatening the existing power structure. Dean Allison, the dean of the Kennedy School, he referenced probably 16 different episodic events over the last 2,000 years, 12 of which ended up in a war, and one of the things is if you have different systems, different religious systems, different cultures, it usually raises those tensions. So, I'm wondering if you could remark on that, and what would you suggest to the American policy-makers and American politicians to defuse that?

Michèle Flournoy: (13:59)
I thought Graham's book had a lot of great insights that we should heed. I don't think it's inevitable that we ultimately find ourselves in conflict with China. I think there are a few things we need to focus on. Number one, the most important thing in this competition is to invest in the drivers of our own competitiveness here at home, be it science and technology, research and development, our innovation ecosystem, smart immigration policy that attracts the best talent from around the world, and then keeps it here. Look at Silicon Valley. Half the founders are either immigrants or first-generation Americans. Investment in 21st century infrastructure. There's no reason why we shouldn't be the world's leader in 5G. So, invest here at home to really drive our own competitiveness.

Michèle Flournoy: (14:48)
Number two, on the security front, invest in deterrence. This is something we really figured out, the art and science of deterrence in the Cold War. There's deterrence by denial, meaning you keep an adversary from being able to achieve an objective. There's deterrence by cost and position. You threaten such great costs if they go ahead that they choose not to go there. We need to refine that art vis-à-vis influencing Beijing, and that will require some investment in technology in our military and other instruments of power. And then the third piece is go to old diplomacy and dialogue, first and foremost with our allies, getting on the same sheet of music with them about how we push back on bad Chinese behavior together. We share the same trade concerns, the same intellectual property concerns, the same security concerns. We should be pushing that collectively.

Michèle Flournoy: (15:43)
And then, dialogue with China. We want to try... We need a strategic dialogue with China that makes it very clear where our interests are, where our red lines are, what they can expect if they cross those red lines, and also areas where we have to cooperate. You can't solve climate change without the Chinese. You can't solve proliferation without the Chinese. For God's sake, you can't... We're seeing that we can't deal with a pandemic very effectively without figuring out how to work together with the Chinese, as bad as their behavior was at the beginning. So, we just need a much more sophisticated, comprehensive strategy for dealing with China.

Anthony Scaramucci: (16:31)
But I think you're saying something very nuanced. You're saying listen, it's not black and white.

Michèle Flournoy: (16:35)
It's not black and white.

Anthony Scaramucci: (16:36)
They don't have a perfect system. Obviously, there's aspects of their system we don't like. Certainly, there's aspects of our system that they don't like, but yet we need a very strong bilateral relationship, and we need to find ways to reduce tension. So, I accept all that, I guess, but the question I would ask you is... Because you know a lot about cyber warfare, and you know a lot about the theft of our intellectual property and the theft of our designs on our military systems and so forth. How do you handle that with China? At some point we have to say enough is enough-

Michèle Flournoy: (17:15)
Absolutely.

Anthony Scaramucci: (17:15)
... and at another point we need the bilateral relationship. So, how do you handle those things? How do you square that circle?

Michèle Flournoy: (17:22)
I think we have to be very clear-eyed about bad behavior in cyberspace, theft of intellectual property, espionage at companies and universities, coercion in the eastern South China Sea, and we need to push back on that, but I think part of deterrence is communicating clearly your interests and your resolve, and we have to have dialogue not just to pretend that everything's fine, but to really go after and solve some of these issues. Again, I just think that the... I think the administration, the current administration has disadvantaged itself by defining things very narrowly in terms of trade, and primarily tariffs, and by approaching this just bilaterally, because again, so many of our European friends, our Asian friends and others, they have the same issues with China. We'd be much stronger approaching them as a coalition to push back.

Anthony Scaramucci: (18:25)
Do you think the Trans-Pacific Partnership, the TPP, was a step in that direction?

Michèle Flournoy: (18:32)
Absolutely. I think the TPP was a high standards-

Anthony Scaramucci: (18:36)
Okay, see, I actually thought it was [crosstalk 00:18:37].

Michèle Flournoy: (18:37)
It was a high standards trade deal.

Anthony Scaramucci: (18:39)
100%. I actually had a lot of pushback with President Trump, then candidate Trump about that, and then Secretary Clinton obviously came around to his point of view, and he was basically making the point to me on the campaign that it was an emotional thing, and he was playing emotions as opposed to the long-term strategic issues. You were going to say something, go ahead.

Michèle Flournoy: (19:00)
I think these high standards trade deals, whether it's TPP or the Transatlantic one that has been considered, or even the renegotiated North American deal, you have to accompany them with investment in the US labor force and US competitiveness, because there is dislocation happening in the economy. It's not necessarily because of the trade deals, but it is maybe accelerated by some of those. It's mainly automation. It's now obviously the aftermath of the pandemic.

Anthony Scaramucci: (19:36)
Totally.

Michèle Flournoy: (19:37)
But we've got to couple our trade initiatives with some serious and targeted investment in the rescaling of the US workforce to regain our competitive edge.

Anthony Scaramucci: (19:49)
I totally agree. I want to take you back to 2012. It's the last presidential debate. It's Governor Mitt Romney with President Barack Obama, and Mitt Romney intimated that he felt that Russia was going to be one of our greater adversaries going forward from 2012, and President Obama had a reasonably to very good rebuttal; that's sort of a Cold War line of thinking. But Russia has, in some ways, been an adversary for us, and I was wondering if you could describe for our audience your feelings about our relationship with Russia, some of the adversarial things that they've been doing to us over the last half-decade, and where do you think that that's going?

Michèle Flournoy: (20:35)
Yeah. You know, I think at the time, Russia did not... Russia was sort of playing by the reset. Medvedev, I think, was still in. Putin had not reemerged in the way he has now. So, it seems like the Russia threat was on the back burner. I think Senator Romney... He was right in looking at the longer term. Russia has reemerged under Putin's leadership as a revisionist power. He would like to reestablish a sphere of influence for Russia in and around Europe. He'd love to see the undermining and breaking apart of NATO. He would love to compete with us for influence in the Middle East and other regions, and he's willing to use the sort of gray zone, the sort of hybrid toolbox of propaganda, disinformation, cyber warfare, support to political parties, and shadow NGO, front organizations. I mean, he has taken the KGB playbook that he knew so well from his time in intelligence and put it on steroids as an instrument of the state, and that's what we're dealing with, and that has included intervention, as we've seen in our own election cycle, through use of social media, so...

Anthony Scaramucci: (21:58)
So, let's-

Michèle Flournoy: (21:58)
Very real threat now that we have to deal with.

Anthony Scaramucci: (21:58)
Let's look at it from the other side, because I'm fascinated by this. I'd like to get your reaction. President Putin has a GDP roughly the size of Italy. It's a relatively small economy. It's less than a tenth of the size of the GDP of the United States, yet he is really punching over his weight. So, how is he doing that? Is it just the disinformation playbook? Is it tremendous resources spent on the military? What is he doing that is allowing him to expand his influence so successfully?

Michèle Flournoy: (22:36)
Well, he has made a disproportionate investment in parts of his military, so they really do have some serious capability. They need to be taken seriously, particularly in the nuclear domain.

Anthony Scaramucci: (22:49)
And the hypersonic missiles, right? I mean, he's got...

Michèle Flournoy: (22:52)
Hypersonics.

Anthony Scaramucci: (22:52)
Hypersonic. He's got advanced rocket technology that a lot of people don't talk about in our media. Is that fair to say?

Michèle Flournoy: (22:59)
That is fair to say. Cyber. He has broken all of the international norms in terms of his willingness to use cyber for offensive purposes, his willingness to use social media for offensive political purposes. I think he has been very tactically skilled at exploiting vacuums that we create. When we don't lean forward in Syria, or we pull out of certain relationships, Putin has been able to step in. When the US does not provide a key defensive technology to an ally, often Russia or China will try to step in. So, he's very skilled at finding the vacuums and stepping into them. I don't think he's 10-foot tall. I don't think we should overestimate Russia as a great power, but I do think we shouldn't underestimate his capacity to make mischief and just create headache after headache after headache for us.

Anthony Scaramucci: (24:18)
Okay, so I want to open it up a little bit, Michèle. John Darsie is indicating to me that he has a few questions from the audience, so I want to turn one over to John. But I really appreciate this. Thank you so much.

Michèle Flournoy: (24:32)
Sure.

Anthony Scaramucci: (24:33)
Go ahead, John.

John Darsie: (24:34)
A big piece of news today is that the United States is no longer considering Hong Kong autonomous from China. What do you think the future impact of this change is, and what's your view on the geopolitical risk in the APAC region and whether the US and China are sort of headed towards a Cold War type scenario?

Michèle Flournoy: (24:53)
Well, I do think that the passage of the national security law with regard to Hong Kong by the Communist Party as they're meeting for their big congress in Beijing right now... It's a real shot across the bow. I think the administration is right to say, going up to the hill, "We cannot certify the autonomy or the autonomous governance of Hong Kong." What is not understood is if... That does not trigger any immediate sanctions. The legislation they were responding to in terms of making that determination does not have anything automatic about it, but it does open the policy debate and discussion both within the administration and on the hill as to how to respond to China's overreach in this instance.

Michèle Flournoy: (25:49)
I think there's a very strong... It's one of those rare areas of bipartisan support that we care very much about holding China to its commitment of one country, two systems. The two systems part is very important. I think the biggest thing here that China will have to consider is not just sanctions, but if the financial community does not believe that they can count on the rule of law as they've known it prevailing in Hong Kong, Hong Kong will experience tremendous flight of capital and tremendous flight of a number of financial institutions, which is not something China wants to handle. So, I think the next step is we need to make that very clear to Beijing, that they are playing with fire here, and the Hong Kong that they've enjoyed the benefits of the economy there, it's not going to survive if they press this issue any further.

Anthony Scaramucci: (26:59)
Michèle, again, I interject for a second, because I'm interested in your reaction to this. How does that relate to Taiwan, and how does that relate to our interests in Taiwan in terms of how we've been positioned over the last 60 or so, 70 years now of our defense perimeter there?

Michèle Flournoy: (27:16)
Yeah. No, I think it's very similar in that China's made a... China sees Taiwan as part of China, but it's also been clear that they have not pursued reunification by force, and I think, again, we need to be very clear in our policy that reunification by force would meet with a very substantial response and have very dire consequences for China writ large. I think it's very important for the US to be clear on that and for the international community to speak with one voice on that. But you're right in thinking the waters that they test and the techniques that they use in Hong Kong could show up down the road in Taiwan. It's obviously a different situation, but there are some parallels that are worth paying attention to.

Anthony Scaramucci: (28:17)
When you stop and think of the American military and you look at the expanse of the budget, I think it's $750 billion, something like that, not including the black ops and the other stuff. My question is, is it enough? Is it being spent appropriately, and what are things that we could do to make it more efficient and more productive and more modern?

Michèle Flournoy: (28:48)
Yeah. So, I do think that [crosstalk 00:28:50].

Anthony Scaramucci: (28:49)
The first question, though, is it enough? Are we spending enough?

Michèle Flournoy: (28:52)
Well, I think that the levels of spending that we have now are sufficient to the strategy that I think that I would certainly like to see us pursue. I think, though, that we have to be realistic; that the pandemic and its aftermath is going to put a lot of pressure on the defense budget, whether it's a second Trump term or a Biden administration. You now have other things like pandemic preparedness competing for national security dollars. You have tremendous investment that needs to happen domestically, and with the defense to budget 50% of discretionary spending, if you're not going to touch the [crosstalk 00:29:43] welfare kind of programs, defense has always got a bullseye on its back. The problem is we're in this era where if we don't invest for a very different kind of warfare in the future with different technologies, we will lose the very military technological edge that we need to prevent those wars in the first place. So, this is a period where we can't just walk away from investing in modernizing the force, and I hope we don't do what we did in the last decade, which was, after the...

Anthony Scaramucci: (30:25)
Sequester and the whole thing with-

Michèle Flournoy: (30:28)
Yeah, the Budget Control Act, the sequester. This is really driven by the Republicans in Congress with some support on the Democratic side, but it became... It was a terribly blunt instrument. It caused profound pain in the military in terms of really hurting readiness in a way that we are still recovering from. It's like taking a sledgehammer to an operation when you need a scalpel. So, I hope that we're much more careful going forward if there are understandable pressures on defense spending going forward.

Anthony Scaramucci: (31:07)
Michèle, there's been some discussion in Washington about pandemic preparedness, and after 9/11 there was a cabinet-level agency created the Department of Homeland Security. Do you think something like that could potentially happen in a Trump second term or a Biden administration, where they create a Department of Global Pandemic Defense? You think it'll escalate to that level?

Michèle Flournoy: (31:32)
You know, I hope that we do a careful lessons learned once we're past the worst of this, because too often when we have a problem we reorganize the deck chairs and we create a new organization with a new acronym and we think we've solved the problem. I don't think this was an organizational problem. I think there were leadership challenges. I think there were certainly under-resourcing of key accounts, whether it was CDC, NIH. You didn't have a single person in the White House who was empowered and held accountable for dealing with pandemics; that was a problem. So, there were a lot of weaknesses, but I'm not sure the answer is creating a new federal department or a new bureaucracy. I think there are other issues that will probably give us better preparedness in the future if we address those.

Anthony Scaramucci: (32:31)
Okay. I'm going to kick it back to John. He has a followup question for you. Go ahead, John.

John Darsie: (32:36)
Hey, Michèle. This question revolves around NATO. So, President Trump has obviously been very vocal about pressing our allies to meet their funding commitments for NATO, and he's generally undermined that treaty. There's a few different questions relating to NATO that have come in. One, how does NATO need to evolve? Some people acknowledge that while President Trump might have gone too far in his adversarial tone to some of our allies that the treaty does need to evolve. Was expanding NATO right on to the Russian border a step too far, and sort of a provocation that Russia would never really accept?

Michèle Flournoy: (33:17)
So, I do think this topic of burden-sharing with NATO has been one that has transcended administrations. I mean, one of the first speeches I helped Secretary Gates with in the Obama administration was going to NATO and really being very tough and saying, "We need you to do more," but I think making that the sole focus of the issue kind of misses the point. The truth is, NATO has fought and died alongside us in Afghanistan. They've shown up in the Balkans, they've shown up in Afghanistan. They are currently showing up in northern Europe as a deterrent in the Baltic regions in the frontline states to make sure that Russia knows that NATO is present and would not accept any kind of Russian conventional military mischief.

Michèle Flournoy: (34:12)
So, NATO, I think, still has some very important purposes. I do think it needs to adapt for the future back to integrating new technologies, maintaining interoperability, and sort of rethinking some of its strategic concepts going forward. But NATO is an unprecedented alliance. It's a huge strategic advantage for us. It is where we look first for partners when we have a challenge that we need allies to come alongside us. So, I would not throw it away. I would give a lot more care and feeding to strengthening and adapting the alliance for the future. In terms of NATO enlargement, I think the vision was really trying to pursue the opportunity of Europe whole, free and at peace, and I do think that was a valuable and important vision.

Michèle Flournoy: (35:08)
I think the two places where we probably could have done better, should have done better are A, managing the relationship with Russia. There was an opportunity to bring Russia into a more integrated relationship with Europe very early on. I'm talking an immediate two, three years after the fall of the wall and the end of the Soviet Union. But that did not... I think valiant efforts were made. It was not successful. That's the first missed opportunity. The second is if you're going to expand NATO in 26, 27, 28, larger and larger numbers of allies, I think you have to reexamine some of the decision-making inside the alliance. Right now, just about everything is based on total unity, or we don't act. That, I don't think, is a terribly viable solution for every single situation that NATO is going to have to deal with. So, I do think some of the ways that the alliance work need to also be maybe updated in light of its much larger number.

Anthony Scaramucci: (36:31)
Michèle, 72 years ago President Truman, at the protest station of then Secretary of State Marshall, agreed to the concept and the formation of the State of Israel. I'm a pro-Zionist, even though I'm not Jewish, and that state and the Middle East has been an issue of concern for the United States for the last 80 or so years. Every administration has tried something to try to see if they could create some semblance of peace and some semblance of cooperation. Are we any closer to that? Is it even possible? And if it is possible, what are some of the things that we would need to do to make that happen?

Michèle Flournoy: (37:19)
I personally believe that we're farther away from Israeli-Palestinian peace at this moment. I do think that the US's real relationship is a strategic one. It has deep historic roots. You have strong... You traditionally had strong support on both sides of the aisle. This has been a bipartisan issue, not a partisan one. I think that what worries me is I think... Prime Minister Netanyahu and the Likud Party and others around him have become so frustrated with the lack of progress in the peace process. Some of it is they should own as being... They haven't done everything they could have done, but a lot of it is they have a divided Palestinian authority.

Michèle Flournoy: (38:13)
You have PLA and the Hamas. It's hard to negotiate with a divided partner, and I would fear that out of that frustration they're about to go down a unilateral path where they will take steps to annex territory, make decisions that will basically, in effect, preclude a two-state solution. If you preclude a two-state solution and negotiate a two-state solution, you're setting up either an indefinite and worsening conflict and terrorism for Israel in the future, or you're heading towards a unitary state where Israel will have to decide whether it values being democratic more, or having a Jewish identity more, which, again, you never want to be in that position. So, I hope that, to the extent that Israel feels it must take unilateral steps to show up its own security, it does so with an eye to keeping the door open to a future negotiated solution with the Palestinians, because I think that's the only way you get a lasting piece at the end of the day for Israel and for the region.

Anthony Scaramucci: (39:33)
I think it's well-said, and I certainly hope it happens. I traveled throughout the region, and certainly would like that to happen. Before we let you go, we promise, usually, a hard out on these talks at 45 minutes, but this has been very fascinating. So, I have to ask you this question. You've been all over the world, you've seen the perspectives of the American perspective, the Russian perspective, the Iraqi perspective, the Afghani perspective. I want you to imagine the average American, if there's such a thing, and there's something about your life and something that you've learned about the world and America's role in it that you could share that you would want them to know, what would that be?

Michèle Flournoy: (40:17)
I think universally, even in countries where we might consider them competitors or adversaries, many people see the American experiment, our democracy, government for the people, by the people, et cetera as the ultimate ideal. I mean, they really do have that image of America as the shining light and the example. It's why so many people want to immigrate here. It's why so many people want to send their children to be educated here. But I think that if we're not careful and we become too divided and too acrimonious in our own politics, and we fail to show up in the world and lead by example, we will lose that position, and that soft power, that power of example, is stronger than just about anything, and we should not give that up. We should fight to be better than that, to be our better selves, and to be that example again.

Anthony Scaramucci: (41:31)
Well, we greatly value your time. We greatly appreciate the opportunity to be with you today. John Darsie is texting me that he wants to get invited to your inaugural as the first female secretary of defense. My only request is that you include me on that invitation, Michèle. With that, I want to say thank you very, very much for your contribution to our great country and all the great work that you've done on behalf of the American people, and I hope I can get you to our conference once we can go live and be in person. I think you'll really enjoy that, and I look forward to having you there as soon as we can get out of our current situation.

Michèle Flournoy: (42:09)
Great.

Anthony Scaramucci: (42:09)
But thank you again.

Michèle Flournoy: (42:10)
Yeah, thank you, and thanks to everybody who joined.

Sam Zell: Billionaire Explains How COVID-19 Impacted the Real Estate Market | SALT Talks #16

“Right now, there is now reason to leave the United States. As an investor, there is nothing more secure than the rule of law.”

Sam Zell is the Founder & Chairman of Equity Group Investments, a private investment firm that invests in real estate markets. He is also the Chairman of four NYSE-listed companies: Equity Residential, Equity Lifestyle Properties, Equity Commonwealth and Covanta Holding Corporation.

“Things are looking better than they did three months ago, but not good enough to be optimistic.” Sam anticipates a U-shaped recovery, at least until a vaccine arrives, while noting that the pandemic has acted as an accelerant to the themes that have begun changing the economy. That said, fossil fuels are likely not going away.

Working from home may become far more common, with workers going into the office three to four times per week. However, “businesses need to create contact between people to be successful; that’s what office space provides.”

LISTEN AND SUBSCRIBE

SPEAKER

Sam Zell.jpg

Sam Zell

Chairman

Equity Group Investments

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie.: (00:08)
Hello, everyone and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. We've been doing these SALT Talks in lieu of our in person conferences in order to replicate the experience that you get at those conferences. We really try to provide a window into the minds of subject matter experts and also provide a platform for big important world changing ideas.

John Darsie.: (00:37)
Today, we're very excited to welcome Sam Zell to SALT Talks. Sam is a global industry agnostic entrepreneur and investor. He has a long track record of turning around troubled companies and assets, leading industry consolidations and bringing companies to the public markets. His current investments are focused in energy, logistics, manufacturing, communications, healthcare and real estate. Sam is the chairman of equity group investments. The private investment firm he founded more than 45 years ago.

John Darsie.: (01:07)
He also chairs for companies listed on the New York Stock Exchange. Those are equity residential, leading apartment REIT, Equity Lifestyle Properties, a manufactured home community and resort REIT, Equity Commonwealth and office REIT and Covanta Holding Corporation. An international owner and operator of energy from waste and power generation facilities. He just recently sold Anixter International Incorporated, a company he chaired for 35 years for four and a half billion dollars.

John Darsie.: (01:37)
Sam is best known for his role in founding the modern real estate industry. He founded and chaired Equity Office Properties Trust, the largest office REIT until 2007, which he sold for 39 billion in the largest leveraged buyout at the time. In addition, he introduced the first Brazilian and Mexican real estate companies respectively, to the New York Stock Exchange through Equity International. A second private investment firm he founded to focus on real estate related businesses in emerging markets.

John Darsie.: (02:05)
Sam is an active philanthropist with a focus on entrepreneurial education and sponsors three leading Programs at the University of Michigan's Ross School of Business, Northwestern University's Kellogg School of Business and Management and the Interdisciplinary Center Herzliya IDC in Israel. The Zeal Global Entrepreneur Network, ZGEN, unites the students and alumni of these programs and actively provides them with connections, opportunities, mentorship and support. Sam also sponsors the Sam Zell, Robert Lurie Real Estate Center at the University of Pennsylvania's Wharton Real Estate Center.

John Darsie.: (02:41)
He holds a JD degree and a BA from the University of Michigan. So it's fair to say he's a Michigan man. Sam represents the REIT industry on the New York Stock Exchange wall of innovators. He was recognized in 2017 by Forbes as one of the hundred greatest living business minds. In 2017 Sam debuted his book, Am I Being Too Subtle?, which was published by Penguin Random House, in which he shares fundamentals and philosophies that made him a self made billionaire.

John Darsie.: (03:10)
Interviewing Sam today is going to be Anthony Scaramucci. It's not the first time Anthony and Sam have had a conversation with SALT. Sam has been to several of our SAlT conferences. So we thank him for joining us for this digital version. Anthony is the Founder and Managing Partner of SkyBridge Capital, which is a global alternative investment firm, as well as the chairman of SALT. And just a reminder, if you have any questions today for Sam, type them in the Q&A box in the chat window at the bottom of your video screen. And with that, I'll turn it over to Anthony.

Anthony Scaramucci: (03:41)
Great. John, thank you. Sam, thanks so much for being on with us today. I just want to point out, there was no sarcasm in the title of the book, Am I Being Too Subtle? Sam could never be subtle enough as everyone knows about Sam Zell. But if you have not read that book, I encourage you to read that book. I have send that book out Sam to hundreds of people. I made my oldest son who I think you met, we had breakfast with him one morning, just graduated from Stanford Business School. He loved the book, gave it out to about another hundred of his fellow students.

Anthony Scaramucci: (04:15)
So please read that book, Am I Being Too Subtle? And since you are never subtle Sam, that is the absolute truth. Let's get right into it. How do you view the economy, the economic landscape, in the shadow of the pandemic, where are we going? What do we need to be worried about sir?

Sam Zell: (04:35)
Well, first of all, Anthony if I knew the answer to that I'd be rich.

Anthony Scaramucci: (04:40)
Richer, richer.

Sam Zell: (04:41)
All I can have is an opinion. I think that most people have overcome the idea that we're going to have a V kind of recovery. And I think that's probably a valid assumption. I think that the way things look today, I think they're better than they looked three months ago, but, not any reason for object optimism. I think probably, something like a U shaped recovery. I think we'll see some significant recovery between now and the end of the year. I wouldn't be surprised if unemployment at the end of the year where 10% or lower. Now normally you'd say 10% is a recession, maybe, maybe not.

Sam Zell: (05:49)
I do think however that, once we get past this pandemic, I think our ability to recover will be significant. I think it's important in line with that thinking, at least from my perspective, when I look at the pandemic, and everybody is talking about a vaccine, which I'm hopeful we'll have a vaccine. But, it's hard for me to imagine that we can have a vaccine anytime in the next year and a half or two years, that was in my opinion, probably be the shortest time, where that could be determined. But I don't think we need a vaccine in order for our country and the world to go back to business.

Sam Zell: (06:45)
I think we need to eliminate the concept of death as one of the results of this virus. You mentioned that, before when we were talking about Mike Milken and I, talked to Michael recently and he's been working on a drug that was used in prostate cancer, which suppresses testosterone, which seems to suppress the connection to the lung of this pandemic. Maybe that's a solution. Maybe the guys in Oxford will come up with something. Maybe there'll be a cocktail, but once we "get death out of the equation" and it becomes a flu, maybe a more stringent flu than what we've been expected. I think go see our country quickly begin to recover.

Anthony Scaramucci: (07:48)
You think the capital markets, Sam, or price right for that recovery, or are they ahead of themselves? What parts of the capital markets may be behind where things are? When you look at the landscape of the credit and equity capital markets, what's your opinion there?

Sam Zell: (08:06)
Well, my view before the pandemic was that the capital markets were very expensive. My view when it took its dive, was that we were having a correction. When it recovered as much as it did, I thought that the capital markets were getting over heated again. At the moment, in a general term, I think the capital markets are too willing to assume, what I call good news or too desperate for good news. And therefore, I think that the capital markets generally are probably too optimistic. Certainly the debt markets have been wide open and we've finance the staggering amount of stuff in the last three or four months.

Sam Zell: (09:09)
Obviously the FED has in his facilitated that. But I think it's still a little too optimistic. On the equity side, we still have a bifurcation between value and grow. And I thought before the pandemic that, that bifurcation was too great and nothing has changed in my opinion.

Anthony Scaramucci: (09:33)
When you look at the, what some people are calling residual permanency. So meaning we've had lost economic output. And now there may be some permanency, meaning that local restaurant on your local main street is now closed. It can't reopen, or that store is closed, or J. C. Penney is in bankruptcy and we'll have to see what happens. But Pier 1 Imports went into bankruptcy and they've vacated their store. So when you see that residual permanency piece, does that make you worry, sir? Does that make it harder for us to recover or do you think that the economy is so adaptive that those resources and labor and all the different things that went into those businesses will recirculate in to other places quickly?

Sam Zell: (10:21)
Well, I think that I hardly could be surprised at what has actually happened. I mean, if I interviewed a bunch of people last December and asked them about what their view of J. C. Penney was, maybe they wouldn't have predicted a bankruptcy as quickly as there was one. But there weren't any optimists in the room for J. C. Penney. Probably similarly to Neiman Marcus. We have been overly retailed up for many years. We've been in the process of adjusting to it. I think the pandemic acted as an accelerant to the strategy or to the themes that were already in process.

Sam Zell: (11:18)
Even your example of the restaurants. You look at the statistics, the number of restaurants created in the last four or five years, sets an all time record for new openings. And my own view was then as it is today that, there just isn't enough demand to support that many facilities and obviously the pandemic and the closing subsequent has brought that to the forefront.

Sam Zell: (11:50)
I think there's a lot of retail establishment that will not open. But I would also tell you that America is a great place and it's full of people who have ideas. And maybe they won't be willing to rent the stores at the same rates as previously, but they're going to want to rent the stores. They're going to want to try out their ideas. And I don't think entrepreneurship is that.

Anthony Scaramucci: (12:23)
That's a good transition to my next question related to the consumer. So you've got some of those vacancies and you and I agree entrepreneurs will eventually fill those vacancies. In some ways the economy would become even more dynamic, but the consumer seems to be impaired right now. If you look at the savings rate that was tallied a few weeks ago, [inaudible 00:12:42] was at 33% historic high and people are concerned and people have either lost jobs or lost some pay. Are you worried about that impairment to the economy in terms of it causing a more meaningful longer lasting contraction? Or do you think that will stop once we start stop fearing the health scare?

Sam Zell: (13:05)
Yeah, I think that at the early stages of that health scare, people were using the term depression. I don't think that that was relevant then, and I don't think that's relevant today. Are we going to have a recession? I think we already have a recession going on. Although I don't think it's going to be anywhere as deep as a lot of the [inaudible 00:13:37] have suggested. I think that, just what you've seen in the last few weeks has been some partial opening, various places around the country. The results have been, people have been willing to spend. And in fact, seem to be very excited about the opportunity to get back into the commerce side of the world.

Anthony Scaramucci: (14:03)
Just a few more questions there on the macro economy. So your analysis of the stimulus, both the fiscal stimulus and what's being put into the capital markets by the federal reserve, what is your reaction to that? Is it a mama bear stimulus? Is it too much? Is it too little? What's your bit?

Sam Zell: (14:22)
Well, I think the best way to answer your question, Anthony is to compare it to the stimulus of 08. The famous Nancy Pelosi stimulus bill. Which I think was basically focused stuff on adding time climbing, adding to existing programs without really focusing on what the objective was. This stimulus, I think, Mr [Minuchi 00:14:53] deserves the credit. That it was focused. It was basically bridge financing to get us over the 90 to 120 day period that we were anticipating. We were going to see the country closed or partially closed.

Sam Zell: (15:13)
And I think they succeeded in doing that. I think that, a lot of people are probably relatively surprised at how well we're doing today, considering what we've been through. Obviously, Mr. Powell deserves similar accolades for very actively and aggressively making sure that the existing economy was not destroyed by the "shutdown."

Anthony Scaramucci: (15:49)
Okay. So I want to ask you about investing. I'm going to switch gears a little bit. You seem to have backed the truck up in energy, at a time where supply is up and demand is down. And so you are a great contrary and investor by nature. What are you seeing in that space that other people are not seeing?

Sam Zell: (16:09)
Well, first of all, you got to ask me that question five years from now. And maybe five years from now, we can both either cry or laugh together. It's way too early to reach any conclusions. I've always been fascinated by arenas where capital becomes very scarce. Despite the fact that there's nobody disputing the fact that there's more capital floating around the world today. And then at any time, anybody can remember. If you're in the oil patch today, there ain't no capital floating around. And so, I was intrigued and attracted by the fact that the kinds of yields that were available and the kinds of situations that were available would have been very rare by historic standards.

Sam Zell: (17:12)
Our involvement in energy has been hardly bet the truck up, but certainly we've been more aggressive than most people. We had a hiccup when the price of oil fell through the elevator shaft. But that was really a short term scenario that was unlikely to be repeated going forward. And we've seen a pretty significant recovery since then and pretty much stable in that arena. Natural gas today, except for 11%, it seems like it had been beaten down well beyond any rational scenario. And so, fossil fuels are not going away. The pricing of fossil fuels are not going to be prohibitive going forward. And I think it's likely that the investments we've made during this period, should produce significant returns.

Anthony Scaramucci: (18:23)
So it's sort of a related contrarian play. So I'm just interested in your reaction, given your real estate expertise. There's a lot of bears in the commercial mortgage backed security space, very similar to the energy. To your point about capital leaving certain areas of the market. Are you a contrary in there as well, and think that there's representative of good value there? Or do you think that the consensus is correct in commercial mortgage back real estate?

Sam Zell: (18:54)
Well, I think that referring to it as commercial backed real estate is probably [crosstalk 00:19:02].

Anthony Scaramucci: (19:02)
Well, CMBS, Commercial mortgage-backed security.

Sam Zell: (19:04)
No, I know. But in other words, but if you look at where the real focus of CMBS has been, it's been in retail. There's much more retail in CMBS than there is residential or anything else.

Anthony Scaramucci: (19:19)
Yep. Or commercial office buildings for that matter.

Sam Zell: (19:22)
Yeah. There's office, but it's primarily retail. Which by the way, as far as I'm concerned is still very much of a falling knife. And when you package things together, as CMBS does, you end up with, you might have a good mall and four bad ones, and that just drags down the whole scenario. And in a sense capital fleeing, and that's basically what's happened. And I wouldn't be very confident that those people who have stepped up and taken advantage of the CMBS market are likely to end up with a very high positive results.

Anthony Scaramucci: (20:10)
Okay. Makes sense. So, so let's switch over to office space then. What's your opinion of office space in both the suburban markets and the 24/7 cities?

Sam Zell: (20:24)
There's been a lot of discussion about the 24/7 cities. People have talked about it as though as a passing phase. I totally disagree with that. I think the 24/7 cities will suffer somewhat, but they're not going away. People are not going to move to [inaudible 00:20:47] Iowa from New York city just because they can remotely connect to their job. We're social animals. We want to work together. Nobody's figured out a way to motivate by modem. We've done very well by operating office space and businesses remotely.

Sam Zell: (21:13)
But it's very important to remember that we've done so. Because we're operating with a bunch of people that we know that we trust and that we have expectations. If it were five years from now and there had been a 25% turnover in people working, we would be sitting here trying to do a remote problem, not really knowing or trusting the people at the other end of the phone or at the end of the Zoom.

Sam Zell: (21:44)
And so, when it's all said and done, we may end up with a scenario of four days a week. We may end up with a scenario of a lack of concern about working from home for a day. But when it's all said and done, if you want to run a business and you want to be successful, you need to create contact between the people. And that's what office space provides. Now, having said all of that, even before the virus, I believe that we had a significant oversupply of office space in America. We didn't see it because we had assets. Like we work, taking up space like there was no tomorrow because they didn't intend on paying tomorrow.

Sam Zell: (22:38)
But they took up a lot of space and in effect, created an environment where people didn't understand that we're building a lot of stuff. Lot of new buildings, Hudson yards. And it's Hudson yards is 14 million square feet. There's another 5 million adjacent to it. And Steve Rob has got a giant project above Penn Central Station. That's a lot of space. We have a similar situation in Chicago, where we've had four or five new office buildings, they've emptied out, the old buildings. And we don't have tenants for those old buildings. So I think the office space business is likely to suffer from over supply. But in an oversupply similar to previous periods of over supply, as opposed to something dramatic, like everybody working from home,

Anthony Scaramucci: (23:41)
Let's switch gears for a second. I'm going to let John ask a question in a second, but I want to ask you about hospitality before we go to the outside questions, Sam. What are your thoughts there and its potential recovery?

Sam Zell: (23:55)
Well, I don't own any hotels. Thank God. If I did, I would be slitting my wrist because in effect, [crosstalk 00:24:07].

Anthony Scaramucci: (24:07)
It's very subtle. It's very subtle, Sam. It's a very subtle [crosstalk 00:24:11].

Sam Zell: (24:10)
Yeah. To go from 70% occupancy to zero gets your attention. And the answer is, the hotels are going to slowly open, occupancy is slowly going to increase. But it belies one of the big issues that I have been focused on since the pandemic began and the shutdowns began. And that is, everybody's talking about the cost of having your building closed down. Nobody's talking about the cost of reopening. And those are very significant. And even in the best hotels across the United States, they're going to open at 5% and then they're going to go to 10 and they're going to go to 12 and they're going to go to 15 when meanwhile losing their ass.

Sam Zell: (25:07)
So I think it's gonna be a tough environment. I don't believe that this is going to end the "convention business" or the use of hotels to make deals. I think with, and I've heard a lot of people say, "God, with the experience we're having right now. I don't know why we ever put anybody on the road." Well, I would expect that as it starts, there will be reticence of people to go on the road. And they'll say, "Well, just zoom it out." And that's what will happen until some young aggressive guy gets on a plane, goes and gets the deal done while you're sitting on Zoom selling an idea.

Sam Zell: (25:54)
So I don't think we have any significant change. We had, again, just like office space, we had an oversupply in the hotel business already in place before the pandemic. And the result is, this going to be a significant number of hotels that are not going to reopen. But I would bet that they would have not reopened except maybe a year or two later than what's going to happen now. So I think the hospitality business is not going anywhere. I think people like Marriott, Hyatt and Hilton are going to get home to be more dominant and stronger, as the world reopens.

Anthony Scaramucci: (26:43)
All right. Terrific commentary as usual, Sam. I'm going to turn it over to John for some outside questions and then I'll feather some more back in.

John Darsie.: (26:52)
Thank you. We have great participation on the call and a lot of audience engagement. So, thank you everyone who's listening for that. Now the first question is about one of your REITs. EQC has been sitting on about 4 billion in cash for several years in anticipation of a downturn, which is what we're now seeing. What will you target in terms of sectors, geographies, and where in the capital stack are you going to be looking to take advantage of some of that distress?

Sam Zell: (27:18)
Well, first of all, the answer is, it's got about 3.4 billion in cash. We took it over five years ago and we've sold 150 assets during that period of time and assembled the $3.4 billion. I might add that, it's very unusual. We sold 150 assets and we don't have one regret, so far. We don't buy markets, we buy deals. And I think that the capital is going to be used to respond to specific situations. I can tell you, it's unlikely that we'll get involved in retail.

Sam Zell: (28:11)
Aside from that, I think we will be involved and we will start to expend that capital. And by the way, I don't expect anything to happen for another three or four months. But I expect we will begin to spend the capital, as we deal with other landlords and other owners of real estate, who in one form or another survive this far. Maybe through pretend and extend. But, the game is ending.

Sam Zell: (28:47)
And I think the lending community, whereas in 08, or 09 was afraid to do anything and therefore did a pretending to extend, I think the lending community this time around, very much wants to "clean the books." And I think there are going to be a lot of foreclosures and opportunities.

John Darsie.: (29:14)
Thank you for that Sam. You mentioned on CNBC a little while back that you were buying gold for the first time. What attracted you finally to gold? Are you still buying it? What's your outlook for gold and silver?

Sam Zell: (29:27)
The only thing I bought is gold. And I continue to buy gold, not in staggering proportions, but making it a part of my diversification. And it's very much a response to the debasing of currencies on a worldwide basis. It's not just the United States that's had QE2 and 3 and 4. But it's everywhere in the world. And, so far, we haven't had any inflation because everybody is doing it at the same time. But there's little doubt in my mind that this is not going to be like that forever. And I think that a prudent investor would have some proportion of his assets in the metal gold.

John Darsie.: (30:33)
Outside of real estate and gold, as you just mentioned, are there any other industries or specific types of deals that you're looking at that you think present tremendous opportunity in this distress cycle?

Sam Zell: (30:45)
Well, we've spent a lot of our time in the distribution end of the world. And they've done very well through the pandemic, which is really interesting. And consequently, and distribution is another way of talking about it as the asset light. And I think that, we're intrigued and interested in business opportunities that are asset light as opposed to other times, when our whole orientation has been just the opposite.

John Darsie.: (31:30)
Fantastic. So there's a question relating to, you mentioned the troublesome environment for office buildings in general, and there are some questions about how those office buildings can potentially be repurposed. So could old office buildings needing major improvements in large cities with large homeless populations. Could we eliminate laws that mandate or eliminate a single room occupancy from allowable use, should those laws be revived and maybe including provisions for jobs and other social assistance programs for those office spaces?

Sam Zell: (32:07)
Well, it's hard for me to imagine that you're going to turn an office building on third Avenue into an SRL. In the same manner, as it's hard to imagine that you're going to turn an office building on LaSalle street into an SRL. I also think that you're talking about rather globally, but the economic cost of trying to do what you're talking about doing is pretty staggering. So although it sounds good and I'm all for [inaudible 00:32:51], the answer is that I doubt. And, yes, there will be some office buildings somewhere that are created and used to solve the homeless problem, but you ain't going to say solve the homeless problem without building housing. Or converting some assets to housing. But converting an old office building to housing is a staggeringly expensive scenario.

Sam Zell: (33:21)
I've been to the movie and I know. So, I just think that when it's all said and done, what they've been trying to do in California for the last three or four years, which is increased density. In particularly in transit corridors, that's what's got to be done across the country in order to generate the kind of housing we need to solve what is a significant problem. Obviously it's been held back in California and everywhere else in the country by the NIMBY scenario or not my backyard. I think that, as a population and as a country, we're going to have to come to grips with the fact that we can't allow NIMBY to determine the future of our country. And have the kind of impact that it's had today.

John Darsie.: (34:21)
We have several questions about your process of an investor and how it applies in this scenario. So I'm going to merge them into one. You made a lot of money after the savings and loan crisis. You basically predicted the 2008 crisis. You sold, had a record sale of your business prior to the 2008 crisis. What is the indicator in your mind that tells you when to take risk off and what's the indicator or indicators that tell you it's time to put capital to work. And then how do you compare the opportunity set in this current crisis as it relates to the savings and loan crisis in the 2008 crisis?

Sam Zell: (35:01)
Well, I think that it starts with the fact that today, we just don't know where we are. The number of transactions that have occurred are minuscule, price discovery is miniscule. In the past, it's been very easy. In the post-saving zone crisis arena, making investments was, in my opinion as simple as it's ever been. It basically revolved around replacement cost. I was buying office buildings all across the United States in 91 and 90 and 92 and 93 and buying apartments. And all of those assets were basically sold to me at significantly less than it costs to replace them. That meant that longterm, I was protected from competition by virtue of the price at which I had bought. At this moment, we have a tremendous disparity between the bid and the ask.

Sam Zell: (36:16)
I think that the current owners of real estate basically think or take the position that nothing has really changed. There's been a three or a six month gap while everybody sits back. And as soon as it's over, we're going to go back to 3% yields on office buildings and apartments [inaudible 00:36:42] et cetera. The other end of the coin, are buyers who are sitting there saying, "Wait a minute, we've had a major, major event that has occurred, that has changed everything forever." And it's got to change cap rates, it's got to change risk, it's got to change everything. And therefore, what I was willing to pay six months ago, I'm not even willing to pay a take a cap rate double, and maybe it should be even more than that.

Sam Zell: (37:18)
This kind of disparity, frankly, is not unusual. And that's why we have something called price discovery. And price discovery in effect comes about as a result of multiple transactions. We are a long way from having any multiple transactions. And that's why I think we won't really know till the third and fourth quarter or this year, what the impact on real estate is going to be.

John Darsie.: (37:47)
Thank you for that. In terms of looking geographically a little bit, you talked about how you don't buy markets, you buy individual deals. But as you look around the world, the economic pain, there's been some dispersions between the economic pain in various countries. What's your view, generally on international markets, specifically emerging market?

Sam Zell: (38:07)
There have been times when emerging markets have been very attractive. And at the moment, I believe that there's no reason to leave the United States. And that when it's all said and done, as an investor, there is nothing more secure than the rule of law. So I think the United States represents the strongest and the best marker in the world to take advantage of the post-pandemic period.

John Darsie.: (38:46)
Within the United States, are you focused on any particular types of markets? The question is relating to whether you think States with no state income taxes and more business friendly environments are set to continue to grow a lot more quickly than say at places like New York, San Francisco with a high tax frameworks.

Sam Zell: (39:07)
Again, I think you got to be really careful not to make too broad, a series of assumptions. Before the pandemic, two most expensive markets in the country were New York and San Francisco, both of which did not seem to suffer very much from being very expensive. In the same manner, Florida is everybody's favorite place to retire to. And the problem is that retirees don't rent a lot of office space and they don't create new businesses. So Florida may be a great place to retire to. I'm not sure it's ever proven to be a great investment horizon other than, if you're providing housing, or if you're providing entertainment.

Anthony Scaramucci: (40:07)
So Sam and I want to know, John, what the monkey behind you is reading. Okay. Now I don't know if Sam can actually see the monkey behind you, but we're not washed. So we're looking at that thing saying, "What is that exactly." So what is the monkey reading Darsie?

John Darsie.: (40:26)
Maybe I'll save it for the ultra premium SALT Talks that we have. Maybe I'll share it on the next call.

Anthony Scaramucci: (40:35)
It's unbelievable Mr. Zell that he would actually put that in the [raider 00:40:39] shop. But it's fine. Sam, you don't set out those musical boxes anymore, but one of your friends is texting me and they're asking, what would the song be this year? If you were sending out those musical boxes?

Sam Zell: (40:56)
I don't know. Probably something about the fact that it ain't over yet.

Anthony Scaramucci: (41:07)
Yeah. See, I'm a Sinatra fan. So I would say the best is yet to come.

Sam Zell: (41:12)
Right.

Anthony Scaramucci: (41:13)
Well, you've been absolutely terrific as usual. We're very, very blessed to have you as a friend. And, you had asked me a question about the live SALT conferences. And so, yes, we're hoping to get that back up and running as soon as we think it's safe to do. And hopefully we can blend in these virtual conferences. Mr. Darsie, do you have any final remarks before we let Sam go?

John Darsie.: (41:35)
No, what I'll say is, thanks a lot to the audience for your engagement on this. I know we didn't get to every question. Sam, you're a popular guy and people want to know what you're thinking because of your [inaudible 00:41:44] around every other crisis that we've seen in your lifetime. So thanks so much for joining us. Maybe we'll have to have you on again as a followup to this conversation. And of course, we look forward to having you at our next live SALT conferences as Anthony said.

Sam Zell: (41:58)
My pleasure. Thank you. And be safe.

Anthony Scaramucci: (42:02)
All the best. Thanks Sam.

John Darsie.: (42:05)
And again, thanks for joining today's call with Sam Zell. We'll see you later in the week.

Marc Lasry: Pandemic Investment Opportunities | SALT Talks #15

“The difference between this recession and 2008 is that it is a liqudity issue. If companies have the liquidity to last until people come back, they will be fine.”

Marc Lasry is the Chairman, Chief Executive Officer & Co-Founder of Avenue Capital Group, as well as the Co-Owner of the Milwaukee Bucks. Marc expressed confidence and optimism in the post-pandemic future. “Companies are talking about hiring back over 50% of employees. With two-thirds of GDP being consumer spending, it will be much more difficult for the economy to recover with high unemployment.”

Today’s biggest opportunities can be found in companies entering bankruptcy or those looking to restructure. Turning to Hertz as a prime example, “Four months ago they were investment grade. They then filed for bankruptcy due to liquidity issues. Once filed, their stock went from $1 to $5. They can now last for a year or two, which is the amount of time until demand comes back.”

On the NBA, Marc reiterated health and safety as paramount to the success of the season.

LISTEN AND SUBSCRIBE

SPEAKER

Lasry,+Marc+-+Cropped.jpeg

Marc Lasry

Co-Founder & CEO

Avenue Capital Group

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie (00:08):

Hi, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance technology and geopolitics. What we're trying to do with these SALT Talks is the same way we do at our global conferences is provide a platform for big, important ideas and provide our audience a window into the minds of subject matter experts across investing, business, entrepreneurship, and politics.

John Darsie (00:38):

Today, we're very excited to welcome Marc Lasry to SALT Talks. Marc has been to several of our in-person conferences, and we thank him for joining us today. Marc is the co-founder, chairman and CEO of Avenue Capital, which is a global alternative investment manager, focused on distressed and undervalued debt and equity opportunities across the U.S., Europe and Asia. In 1995, Marc formed Avenue with his sister, Sonia Gardner, with less than $10 million in capital from friends and family. And today Avenue is one of the largest distress debt investors globally, managing around $9.7 billion as of May 31st, with headquarters in New York City, three offices across Europe, five offices throughout Asia, and an office in Silicon Valley. Marc is known as a pioneer in distressed investing, which has been the focus of his professional career for 35 years and will be the focus of our conversation today.

John Darsie (01:33):

Marc is currently a member of the Council on Foreign Relations and serves on various boards as an advisor and director for both for-profit and non-for-profit enterprises. He's also a co-owner of the Milwaukee Bucks, which currently own the best record in the NBA, as the season gets ready to resume. They also have one of the best players in the NBA, the Greek Freak, Giannis Antetokounmpo. If you have any questions for Marc during our talk today, please enter them into the Q&A box at the bottom of your screen.

John Darsie (02:01):

Marc, thanks again for joining us. Conducting the interview today is going to be Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. Anthony, I'll kick it over to you for the interview.

Anthony S. (02:16):

All right, well, I'm going to give you a big shout out Darsie, for being able to pronounce that player's name. I know you practice it all evening and it was very well done. It was well executed. So Marc, first of all, congratulations on the season. And I just found out that your beautiful daughter is expecting twins shortly. So mazel tov is off on that. Wish you great success always, and you're a terrific friend. But a lot of people that are joining us, and they're joining from all over the world Marc, they don't totally know your background. I think you have one of the more fascinating backgrounds in the hedge fund industries. I just wondered if you could talk to us a little bit about your background first and then we'll get into the markets discussion.

Marc Lasry (02:55):

Sure. I was born in Morocco. We came to United States when I was seven, and I grew up in Hartford. Went to college on a scholarship, went to law school. Practiced law a little bit. Then I went to work for the Bass Brothers, then I ran money for them. Then I went off on my own, ended up doing that for awhile. And then we started Avenue in '95, mainly with my money and that of the Bass family. The firm grew pretty big. We got to be as big, I think in five years, we were a billion dollars. And five years later we were $22 billion.

Marc Lasry (03:45):

After the crisis hit, I think we were down $25 in '08. Then between '09 to '11, we doubled the money back. And then I gave back about half the capital, big chunk of the money that we run is mine right now. And really what we try to do is find special situations. Got lucky in that about five years ago, I was able to buy the Bucks. That's actually been a blast. We got very lucky and Giannis ended up blossoming into one of the best players in the NBA. And then starting in three weeks, no six weeks, we start up in three weeks in Orlando. And in six weeks to seven weeks, the season restarts. So hopefully we'll win an NBA championship.

Anthony S. (04:37):

Well, good for you. We're certainly rooting for you guys. And I have a lot of my friends are limited partners of yours in the Bucks and so-

Marc Lasry (04:44):

Yep.

Anthony S. (04:44):

... And you guys built a brand new, beautiful arena a few years ago. And so God bless you guys on that. Let's shift gears and talk about the markets. And let me take you back to 2008, you're down $25. The world's a different place 12 years ago, of course, but this was a financially-focused banking crisis that spilled over into the rest of the world. Take us through your thought process there, then I want to do a comparative analysis to where we are today.

Marc Lasry (05:18):

Sure. Look, you were there. The biggest worry in '08 was, were we going to be around? And what I mean by that is, was the financial system going to be there? And that, when you invested, you just didn't know. And that was the big fear was, were the banks going to be there? And if the banks were there, that was great, then you'd have issues, but it wouldn't be that big of issues. But if the banks weren't there, then you were going to go into a huge depression. So you just didn't know. That's the big difference between today, to be blunt. The biggest difference between today and then is that today, we all know everything will be fine in two years. People will be back out. There'll be a vaccine, so on and so forth. But, the question is how long does it take to get back to normal?

Anthony S. (06:14):

Is 2020 worse than 2008? Similar? Different? How so? What's your opinion?

Marc Lasry (06:23):

I feel more comfortable investing today than I did in '08. In '08, I was petrified as to whether or not we'd still be in business. Today, you know you will. It's just a question of timing. Today is really a liquidity issue. Does a company have enough capital to last until people come back? So, what you want to do is you want to invest in companies that have that liquidity, because if they don't, they're just going to have issues.

Anthony S. (06:53):

I know your principle focus is in the bond market, in distress debt, but usually the credit analysts, the best credit analysts, make very good equity analysts as well. What are your thoughts on the equity markets right now? Their recent run-up, the current valuation and your one to two-year time horizon on equities?

Marc Lasry (07:15):

Look, I think at the end of the day, the equity market is telling you that everything is going to be fine. And part of that is if you look at the Fortune, the companies that are in the market. They've got the liquidity to last. So they're actually gaining market share. And the reason they're doing that is they've cut costs by a huge amount. So, I get all that, but the problem is cutting costs means that you fired a ton of people. And so, I would ask you, you talk to people and I talk to people, how many people are getting rehired? Like there's 40 million Americans that are unemployed. How many do you think companies rehire? They rehire half of them? Three quarters? What I'm hearing is, they'll hire 50 to 75%. Well, if you think about that, 25% of Americans are unemployed. That's 10 million, two thirds of GDP is consumer spending. There's no way that in essence, people are going to be spending money the way they did when they're unemployed. So I think the market is ahead of itself. I understand it, because it's telling you everything's going to be fine in two years. But I think between now and the next two years, you're going to have a huge amount of issues.

Anthony S. (08:31):

So you worry about the markets then? The valuation of equities then is probably fully priced. Would that be fair to say?

Marc Lasry (08:39):

Yeah. Would you want to be an equity owner today? It's moved ... I wouldn't.

Anthony S. (08:44):

Me personally, like you, I spent my life in the bond market, but unfortunately we've been in structured credit, and so you know that was like the ground zero target [crosstalk 00:08:55] for pandemic.

Marc Lasry (08:56):

Yep.

Anthony S. (08:56):

So people will say to me, "Well, why can't I just own Tesla and the FANG stocks, why do I need to own structured credit? Obviously it's been a good part of my day explaining that, which I think is a great long-term, conservative investment. But, my worry about the equity markets, it's just very thin. You've got 12 to 15 stocks driving that market. You take those stocks out of equities, the equity market is down. Yes, there's been some rotation recently, but it's not clear how durable that is. But you look-

Marc Lasry (09:29):

[crosstalk 00:09:29] I agree with you. I don't think it's durable. It doesn't really make sense with all the issues, but I think it's all going to become clear in the next couple of months. In the next couple months, we're going to see this reopening of the country, and how much are people going to be spending. And that'll tell you how quickly we're going to get back to normal. I think it's just going to take time. And as soon as the market realizes that, I think you're going to see that the market's going to come back in.

Anthony S. (09:59):

... Well, and you've spent your life in the distress credit markets. Somebody said to me yesterday, and I'm curious to your reaction, that this is a great time for distress because you've got non-performing companies, but you have huge governmental stimulus going on. And where those companies are really a victim to the pandemic, more too then they're bad decision making. And so they're getting some available capital and access from the government for help. What are your thoughts on that? Where do you see this distress cycle versus other past distress cycles that you've trafficked in?

Marc Lasry (10:40):

I think there's a huge difference between today and the past. The biggest opportunity today is really investing in companies that are in bankruptcy, or that you're going to get involved in restructuring. I'll just give you the most recent example. Think of Hertz. Hertz, four months ago, was investment grade. The bonds traded 25 basis points above U.S. Treasuries. That was the premium you were getting for investing in Hertz. Hertz then ends up filing for bankruptcy because they couldn't get any liquidity. They didn't have excess collateral. So nobody was willing to lend them more money. All their collateral was in those bonds. So the banks and the bond holders were like, "Don't care. We've got our collateral. We don't care what's going to happen."

Marc Lasry (11:33):

Company filed. All right. Do you know where the stock ... because now that the company has liquidity and they can last, the stock has gone from a dollar to five. The unsecured bonds have gone from 5 cents to 25 cents. So for us, what we do is we get involved when the company files, because at that point they've got the liquidity to do what you just said, which is to last for another year or two until people started coming back. So today is a far, far better time, because I could invest every time today at a liquidation value. Normally you can't. And I'm getting paid a premium if things turn out, I'll do exceptionally well. I can make two, three times my money. If the company has to liquidate, that's okay, then we'll end up making our money on that liquidation.

Anthony S. (12:24):

Well, yeah, I think that's brilliant and specific to Hertz, but let's talk more broadly about opportunities you see. Are they mostly in the U.S., Marc? Or are you looking internationally as well?

Marc Lasry (12:37):

They're everywhere. I think for us it's, what you're finding is, you've got a huge opportunities in Europe. Same thing in Asia. The biggest difference is a ton of money is being raised here in the United States. So you don't have as much money being raised in Europe or in Asia for the same thing. So you're finding that the returns you can generate there are, Asia I would say it's sort of 25 to 30. Europe is 20 to 25. And U.S., I would tell you is 15 to 20. But U.S., just in the last couple of months, almost every retailer you know, JCPenney, J.Crew, Neiman Marcus has filed. You've got a telecommunications company Intelsat has filed. Frontier has filed. You've just got over and over again, anybody who's had issues ... people are actually taking advantage of this. They're saying, "Now's a great time for me to go into bankruptcy, clean up my balance sheet, and come out a lot stronger." So at least us, I think you're going to have anywhere between $500 billion to a trillion dollars of opportunities, worldwide.

Anthony S. (13:51):

So that in some ways then, it's better than the 2008 crisis, right?

Marc Lasry (13:56):

Yeah, [crosstalk 00:13:55].

Anthony S. (13:56):

Because the banks are firm. The Fed has already started the process way earlier. They're hitting it with way more capital, way more stimulus, coming from the Congress. So what's the worry then when you're sitting around saying to yourself, "Okay, I see the opportunity, but what are the risks associated with that opportunity?"

Marc Lasry (14:20):

Look, I think ultimately at the end of the day, what's actually been shocking, and I think for you as well, I was surprised at what the Fed did. I hadn't envisioned that they could do that. And you're seeing that there's bipartisan support to end up getting money to Americans through unemployment and through the [inaudible 00:14:41]. I think ultimately at the end of the day, the risk really to the system is that you've got these zero interest rates, and there's just so much capital that's being put in there. But, that's not a problem for today. It's going to be a problem five years from now. I think for us today, we could take advantage of that and we can do really well. So I'm not really worried about the risk today. I think you're going to have some fundamental problems five years from now.

Anthony S. (15:13):

Okay. So let's elaborate on that. What are those fundamental problems? And inflation is obviously a huge potential issue. What are some of the other issues?

Marc Lasry (15:22):

Look, I think what you're going to have is, the Fed's just going to have too big a balance sheet. And then as you try to unwind that, you're going to be in an area where you've got unemployment, you've got lower receipts. The biggest risk that we run is one simple thing. It's where are interest rates? Rates right now are at zero, and yet our deficit keeps growing and growing, I'm sorry ... where we're owing money. So when you think about that, if rates just moved up to 1, 2, 3%, the amount of money the United States is going to be spending on interest is going to be huge, so you're going to have less for social services and for everything else.

Marc Lasry (16:06):

So I think we're creating a problem 5, 10 years from now. But look for today, with rates at zero, I mean, I think people have no choice but to invest in the market. If you're going to go out and buy a corporate bond ... when you were talking about structured credit, on the structure credit side today, you could make 20% plus. So what's your choice? Are you going to make 20% plus, or you going to leave it in a U.S. Treasury to make a half a percent?

Anthony S. (16:37):

Let's focus on that for one second, as I want you to explain to our viewers and listeners how you make 20% plus in structured credit and what that real opportunity is. And then I want to ask you about our deficit. But, back to structured credit for a sec.

Marc Lasry (16:51):

Look-

Anthony S. (16:51):

Which is near and dear to my heart, Marc.

Marc Lasry (16:54):

... Look, a lot of it is, what's the price that you can buy that at today? So, the problem that you ended up having on the structured credit side is people were being forced to sell and you had leverage. So if you think about it, even if you were two times leveraged, or three times leveraged, and all of a sudden something drops by 10 points, that means you're down 20 or 30%. So, that's just taking a little bit longer to come back, but in an environment today where you can go buy that debt anywhere between 50 to 80 cents on the dollar, you've got your interest component that you're going to make. And then you're going to make your capital appreciation. I think on the structure credit side, I was being nice in saying you're going to 20. I think you're going to make substantially more than 20%.

Anthony S. (17:52):

We think so. We had a 60% move over three years, 2009, '10 and '11. Our portfolio right now, it's yielding over 11% if you took a snapshot of the whole asset. But, you're making an important point about five years from now. You and I see the same sort of thing. Fed is flooding money into the marketplace that cures the temporary ills of the market, dislocations of prices and so forth. I have stipulated, and I've gotten a reaction to this, that unfortunately, monetary policy being a blunt instrument, it helps people that own the assets.

Marc Lasry (18:32):

Yeah.

Anthony S. (18:32):

And so if we own assets, the assets go up. But the people that don't have the assets, if you really analyze their wages, they never really catch up. And so, it's a bit of an irony, but the Fed sort of created Donald Trump and Bernie Sanders. The rise of populism and that whole nationalist movement is coming from that separation. And so what I'm worried about is, we're doing it again, but we're doing it on steroids. This is like QE infinity. It'll certainly impact asset prices, help large-scale corporations, but there's been a transfer of wealth from small businesses to places like Amazon, frankly, that have the scale and the durability and their survivability in a crisis like this. What's your reaction to that?

Marc Lasry (19:19):

I totally agree with you. I don't see the benefit that is going down to the middle class or lower middle class. Because if you don't own a home. If you don't have these hard assets. If you didn't own stock, which people aren't owning, it's not. So, I think everybody sees that things are getting better, yet they're not participating in that. So I think you're dead right. I think that's what creates all these issues that we're ultimately having.

Anthony S. (19:55):

Let's address the deficit for a second, because I know you're politically-minded as am I. We're looking out. We're going to print the three plus trillion dollar deficit now. The CBO is talking about $3.7 trillion for this year. You're obviously going to be printing a deficit in the next couple of years to that magnitude, if not slightly smaller. Is this sustainable? There's a modern monetary theory, as we both know. Stephanie Kelton, we're going to be interviewing her next week on her new book, The Deficit Myth. We just had Zach Carter on yesterday talking about the Life of John Maynard Keynes. And the notion from those intellectuals are that you can get away with this, sort of forever. Do you think that that's the case? Or do you think it comes home to roost?

Marc Lasry (20:46):

Look, can you get away with it forever? Sure, if rates are at zero. It's not really that complicated. If you're paying 25 bips to go borrow money, it's actually pretty easy to keep on borrowing money.

Anthony S. (21:01):

Well what would cause rates to go up? Inflation would be one factor. Demand for the money would be another factor. Do you think demographically Marc, we're in the specter of deflation due to the upside down nature of the way the world is aging?

Marc Lasry (21:17):

I don't know. I'm not an economist, so I don't know. But when I look at it, what I find is that, there comes a moment in time when people believe you can't pay your bills. So if you think of what happened with Greece, and if you look at other countries, what always ends up happening is when you borrow money, nobody ever thinks you can default. The only reason somebody's lending you money is because they believe you're going to pay it back. It's only when that perception changes. So all of a sudden Greece went from borrowing money at 2-3%, to borrowing money at 20%, and you had European crisis. So today, the demand for safety is so great, that I think at the end of the day, this could last five or 10 years where you're able to borrow money at ... in Europe today, you're paying negative rates. Somebody's paying you. So, I think that in of itself, if that'll continue for five or 10 years, yeah, your deficit can keep on growing.

Marc Lasry (22:26):

So I could see it lasting for awhile, but I just don't understand intellectually, and maybe part of it is because you and I grew up with rates at 20%.

Anthony S. (22:37):

Sure. Yeah. Mm-hmm (affirmative).

Marc Lasry (22:39):

So, it's kind of hard for us to fathom that something can only go down, that it can't go back up. So, maybe we're wrong.

Anthony S. (22:48):

This is why you and I are in the same camp on a lot of things. But the MMT people, what they would say, "Well, Greece is a different situation because they ceded the drachma to the Euro and they ceded the control of that currency to that sort of central [inaudible 00:00:23:03].

Marc Lasry (23:05):

Yep.

Anthony S. (23:05):

The United States has its own currency. And I'll give you a quote from Stephanie Kelton, "One stroke of a computer key, we could create $23 trillion and wipe out our deficit." So we're going to get into that with her next week in terms of what that would mean to society and what that would mean to confidence in fiat currency. But, let's take it around the horn before I open it up to questions to our listeners and viewers. Equities, decidedly neutral, fully-priced there. What's your opinion, equities?

Marc Lasry (23:38):

Not a buyer.

Anthony S. (23:39):

Not a buyer. Distress debt, huge opportunity?

Marc Lasry (23:43):

Today, I think on the debt side, massive opportunities. Yep.

Anthony S. (23:47):

What about investment grade, Marc?

Marc Lasry (23:50):

I think it's fine. I don't know if you're getting paid enough of a premium for it, but, you're making what, 3 to 5%? 2 to 4%, whatever that number is? So I think that's okay, but I don't think there's a lot to do there.

Anthony S. (24:07):

High yield?

Marc Lasry (24:09):

High yield I think it's, you'll be doing okay. I think there's still a little bit of room to go on that, but I think in today's environment, trying to make 5 to 8% on that, I think makes sense.

Anthony S. (24:23):

All right. We've already discussed structured credit. You and I are both obviously very favorable and bullish on that. What about digital currencies? You ever look at those? Have an opinion there? Think anything of them?

Marc Lasry (24:36):

I did. I used to own a few. I think I made a little money on it and then I got out. I think today, look, I get it if people want to do it, I just, I think-

Anthony S. (24:54):

Well, why'd you get out? Tell our people why you got out. Why'd you get out?

Marc Lasry (24:57):

... Oh. I bought it mainly because I thought it would be good hedge for what I was doing, and I wanted to see if I could make some money on it. When it doubled, I realized I still didn't understand why it doubled. So that's the reason I got out. I try to only invest in things I understand. And I realized, look, I fully didn't comprehend everything that was happening on the digital side. So since I didn't, I was just going to sell.

Anthony S. (25:32):

Okay. So, let's give that one an incomplete or, you and I are still trying to figure that out. It could be a sign of our age, that we don't know what the hell is going on in that. Before I turn it over, a quick political question, because you've been involved in politics a very long period of time. This is going to be a very interesting theatrical event come November. Are you raising money for Joe Biden or are you involved there? What's going on?

Marc Lasry (26:03):

Yeah. Raising money for Joe. I've been pretty involved in it. We've done a bunch of fundraisers. So, so far so good. I think the election, and you get it, the election is going to be pretty simple. Are you happy with the way things are? If you are, you're voting for Donald Trump. If you're not, you're voting for Biden. I think Americans, when everything is going well, Americans they weren't [inaudible 00:26:38] to the noise in Washington, and they were focused on what was happening with them. So I think Trump had advantage there. Now that things aren't going well, the question is, do I think he is the person who's going to help me? I think most Americans are coming to the conclusion, I can't deal with all this noise. You've worked for him. You know what it is. He loves more noise. And the more noise there is, the better it is accepted. Seems like in this environment, that's just not working.

Anthony S. (27:10):

Well, he's losing, and I want to be objective on a call like this. He's got a very ardent base of support, sort of that hard to believe 35 to 39%. But the numbers, if I was still involved with him or involved in the campaign, the numbers on women over the age of 50, Marc, and I'm talking about the national numbers, the swing state numbers, he's put himself almost in an irreparable position there. Anything's possible with him. I was with him on the October 7th Access Hollywood debacle. And we did flash polling that weekend into the next week prior to the second debate, down 13-14%. And he came back and won the election. So anything's possible. I wouldn't rule anything out. But those are very big numbers [crosstalk 00:27:58].

Marc Lasry (27:59):

To come back from. Yeah.

Anthony S. (28:01):

Yeah. Very hard to come back from those numbers. But again, it's Donald Trump, so we'll have to see what happens. I'm going to turn it over to John Darsie. I know we have some questions from our audience out there. So go ahead, John, what do you have for Marc?

John Darsie (28:19):

Yeah, we're going to start with the NBA. Marc, you mentioned that you had a mini training camp that's starting in three weeks and the season's going to resume in six weeks. As an owner, what was the process like of figuring out how the NBA was going to come back and how do you think this pandemic is going to affect the league going forward?

Marc Lasry (28:39):

Well, I think the biggest question was the health and safety of the players. So, how could you do that? And the way we ended up doing it was to do everything in Orlando so that ultimately you could have this safe environment. We ended up deciding to have 22 teams to try and have about eight regular season games. And the reason for that was to get the players in shape for the playoffs. So that they would get into game shape by the time the playoffs started.

Marc Lasry (29:12):

The real question, is a little bit of what you said. What happens next season? You can't have a season without fans. You really can't. For most teams, they can't survive that way because a lot of their revenue comes from ticket sales. So, I think that's why the league has pushed back the start of next season. And we've pushed it back to December or January. And the hope is that by doing that, that people will be able to come into stadiums and, whether there's a vaccine or, there'll be more information regarding this. And maybe people just come into the stadiums now. You're seeing it in all the marches and the protests that are going around the country. Everybody's walking around with a mask. I think for the vast, vast majority of us, the idea of wearing a mask a year ago was unthinkable, and today you're seeing everybody wearing one. So that may be the way that people start coming into stadiums.

John Darsie (30:19):

Thanks Marc. The next question revolves around, you talked about how you've been very successful internationally, including in Asia. How do you see the current international climate, which is shaped by distrust, lack of international controls and cohesion, bringing the economy to a more nationalistic versus globalistic framework going forward? And how do you think it affects general investment opportunities in Asia given U.S.-China tensions in particular?

Marc Lasry (30:48):

Well, really what it's doing is it's creating more opportunities for you. And the simple reason for that is, when things are more global, there's just more capital coming in, so that everybody wants to invest in a region. When things are more nationalistic, all of a sudden, capital's moving out because people are nervous. So for us, that's actually why we try to invest in countries that follow English law. So you'll invest in Singapore, you'll invest in Hong Kong, you'll invest in Australia, you'll invest in India. You'll invest in regions, South Korea, where the capital, that if there's a problem, you've got a legal system that's going to help. So I think for us right now, I would say to you a year ago, there was a lot of capital, there was more competition that we were seeing in Asia and in Europe. Today, we're seeing much less competition.

John Darsie (31:49):

So within the distress space, obviously energy has gone through a major dislocation due to a variety of different factors. What do you see as the opportunity from a distress perspective within energy?

Marc Lasry (32:03):

Energy has been a bloodbath. I think you're absolutely correct. The opportunity today is you're coming into companies that have had huge issues, mainly because of where the price of oil is. And can you invest today based on, saying that oil is going to stay at $30? And if you can do that, you're going to make a fortune of money if oil moves back. Even if it stays where it is, you're going to have companies that are going to be able to survive. So you've got to pick those survivors. But it's gotten lot harder. I think on the energy side, you've got a lot of opportunities, but you could still have a huge amount of problems.

John Darsie (32:48):

Looking at the distressed space in particular, if you could pick one financial instrument or one sector or one specific trade that you think is the most compelling right now, what would it be?

Marc Lasry (32:57):

I think you want to be in the secure debt of a lot of these companies, because that's become the fulcrum security. So in the past, you were trying to figure out what was the fulcrum security. And today, because of what's happened with the virus, and companies needing capital, that senior secured debt has become that fulcrum security. And you're either going to get paid off, or you're going to create the equity of that company at a pretty cheap price. So, that's been the big fundamental difference today.

John Darsie (33:32):

You recently launched the Avenue Dislocation Fund. You talked about the size of the opportunity set that you see in distressed right now and moving forward over the next couple years. Just talk a little bit more about that. Do you think the Fed's actions to help support the junk bond market, for example, has trimmed that opportunity set, or do you think there's going to be a large volume of opportunities in distressed?

Marc Lasry (33:57):

I don't think the Fed, to be blunt, has really done much for the distressed market. It's done a lot to provide liquidity for investment grade companies. So when Anthony and I were talking about that earlier, that's why you're not seeing as much opportunity on the investment grade side. If you think, the same thing, structured credit if you think on the mortgage side. The Fed didn't come in and help those markets. So in those markets, you still have huge opportunities. That's the reason why we're raising a new fund, is that we're seeing that at least today, you're going to have anywhere close to half a trillion to a trillion dollars of opportunities over the course of the next year. So for us, we want to take advantage on the small cap, mid cap, and large cap. That's going to be a once in a lifetime opportunity.

John Darsie (34:48):

Going back to politics for just a moment, Barack Obama came out and said that if he were running on a platform based on today's societal conditions, economic conditions, that he would run on a different platform and he would govern in a different way than he did during his tenure in office. How do you think knowing the Biden camp, and knowing other people within the democratic party, what do you think a Biden administration would look like from a policy perspective?

Marc Lasry (35:15):

I think at the end of the day, what Biden's going to do, he's going to move a little left, and you'll see that. Because it seems like the country that I think was center, is moving a little bit further to the left. So I think you'll start seeing that. And I think that's what Obama meant. It seems like the country is moving, but you would've thought it was moving more into the middle. I think it's moving, if you think the middle is 50, the country seems to be closer to 40 than it was at 50 before. So I think that's what he's talking about.

John Darsie (35:56):

All right. And one final question about the NBA. We have a question about, what's your sales pitch going to be to keep the Greek Freak, Giannis? And I'll say his last name again for Anthony, Antetokounmpo, in Milwaukee? He's going to be a free agent. I don't know if it's next off-season, but-

Marc Lasry (36:12):

Next off-season.

John Darsie (36:12):

... what's your sales pitch to him?

Marc Lasry (36:16):

Well, it's actually pretty simple. I think one, he loves Milwaukee. I think he loves the team, loves the coach, loves his teammates. But at the end of the day, we're going to be able to offer him, I think it ends up being about $70 million more than any other team. So, $70 million is a lot of money, and especially for players. Because their lifespan, if you think about it, ends up being about, to play in the NBA, is about 10 years. 10 to 15 years. So, the goal is to try to make as much money as you can. So I think at the end of the day, in any tie, I think he's going to give it to us. And then when you add the financial aspect, I think it's kind of hard for him to turn it down.

John Darsie (37:11):

All right. Well Marc, thanks again for joining us today. Anthony, I don't know if you have any parting thoughts?

Anthony S. (37:16):

I want to go on a stretching machine so I can make $70 million from Marc Lasry. That's my parting thought.

Marc Lasry (37:22):

I know.

Anthony S. (37:23):

But Marc, thank you. You're brilliant investor. You're a great friend. And you're a patriotic American and I hope you'll come back to SALT Talks as we get geared up for the election season. You and I have always had some spirited discussions in that realm. So, we wish you the best at Avenue and the family, and God bless Sophie, and hopefully we'll see you soon.

Marc Lasry (37:47):

Take care my friend.

Anthony S. (37:48):

All right. God bless. [crosstalk 00:37:48].

Marc Lasry (37:49):

Bye. Bye.

Mayors Steve Benjamin & Michael Tubbs: The History of Institutional Racism | SALT Talks #14

“The silver lining of all the things we’re going through is that it’s activated so many folks to realize their individual responsibility.”

Stephen K. Benjamin has been mayor of Columbia, SC since 2010 after getting his political start at age 29 in Governor Jim Hodges cabinet. Michael D. Tubbs is the mayor of Stockton, CA and was the city’s youngest ever to hold the office at 26. Benjamin and Tubbs each represent their city’s first ever African-American mayor.

Both mayors offer their thoughts on some of the most pressing issues around racial inequity and civil unrest. They share their unique perspectives on the history of institutional racism and how it manifests today. “The conversation we're having about, not just police brutality, but really about equality under the law, has been a 400-year conversation in this country.”

Benjamin and Tubbs also discuss some of their ground-breaking policy initiatives from police reform to opportunity zone investments designed to break the cycles of inequality and poverty.

LISTEN AND SUBSCRIBE

SPEAKERS

Stephen.jpeg

Stephen K. Benjamin

Mayor

Columbia, South Carolina

Michael D. Tubbs.jpeg

Michael D. Tubbs

Mayor

Stockton, California

EPISODE TRANSCRIPT

John Darsie (00:07):

Hello everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. These SALT Talks are a series of digital interviews we've been doing, during the work from home period, to replicate what we do at our SALT conference. Which, I know one of our guests today was at our SALT conference in 2019.

John Darsie (00:30):

What we really try to do is provide a window for our audience, into the minds of subject matter experts. As well as provide a platform for big, important ideas, that we think are shaping the future of the world. We're very excited today, to bring a very relevant and topical discussion to you today, with two of the great American mayors, and two African American mayors, who have been pioneers in their communities, and have definitely been leaders in tackling some of the issues of racial inequality and social activism that we're facing today.

John Darsie (01:00):

Those two guests that we're very thrilled to be welcoming today are Mayor Stephen K Benjamin of Columbia, South Carolina, and Mayor Michael D Tubbs of Stockton, California. I'll introduce you to the bios of these two great mayors, before Anthony allows them to dive deeper into their backgrounds.

John Darsie (01:17):

Mayor Benjamin has been the mayor of Columbia, South Carolina, since July of 2010. He's the first African American mayor of that city, in the city's history. Before serving as mayor, he worked in the Columbia area as an attorney, and served on various charitable organizations. Mayor Benjamin previously served as the 76th president of the US Conference of Mayors. He's a leader within the mayoral community in the United States.

John Darsie (01:42):

Mayor Benjamin's, I would say better half, but as Anthony would say, better 9/10ths, his wife is the honorable DeAndrea Gist Benjamin. A judge in South Carolina's 5th judicial district. Together they have two beautiful daughters. He graduated with a BA and a JD from the University of South Carolina, where he served as the undergraduate student body president during his time as an undergraduate, and as the student Bar Association president during his time at the USC law school. We're very thrilled to be welcoming Mayor Benjamin today to SALT talks.

John Darsie (02:15):

Our second guest is Mayor Michael D Tubbs, who is the mayor of Stockton, California. Michael is 29 years old. He's the youngest mayor in the United States. Upon taking office in January of 2017, he both became Stockton's youngest mayor, and the city's first African American mayor, so he was a pioneer in multiple ways.

John Darsie (02:34):

Michael was also the youngest mayor, as I mentioned, in the history of the country, representing a city with a population of over 100,000 residents. Before becoming mayor, Michael served as Stockton's district six city council member, where he was elected at the age of 22 in 2013. He became one of the youngest city council members in the country at that time.

John Darsie (02:57):

He was included in Fortune Magazine's 2018 Top 40 Under 40, and Forbes Magazine's 2018 list of 30 Under 30. He graduated in 2012 from Stanford University, with a Bachelor's and Master's degree, with honors. He's been a college course instructor for the Aspire public schools, and a fellow at the Stanford Institute of Design, and the Emerson Collective. He's a Stockton native, and a proud product of the Stockton public school system.

John Darsie (03:25):

We want to thank Mayor Michael Tubbs, and Mayor Stephen Benjamin, for joining us on the talk today. Conducting the interview will be Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. As well as the chairman of SALT, which you all know, because you're here today.

John Darsie (03:43):

I'm going to turn it over to Anthony for the interview. A reminder, if you have any questions for Mayor Tubbs or Mayor Benjamin, please type them into the Q&A box at the bottom of your video screen. With that, I'll turn it over to Anthony.

Anthony Scaramucci (03:54):

All right, John. Thank-you very much, both of you, mayors. Thank-you so much for being on with us. A couple of weeks ago, I saw a cartoon in the New Yorker, and I thought it summed up our times. It was a picture of an anchor person at a desk, and they basically said, "Well we just heard the weather from the Democratic weatherman. Now let's get the weather from the Republican one". The point being, is that we're now arguing over the facts.

Anthony Scaramucci (04:22):

Our civil debate has gone awry, because we can't even stipulate what the facts are in our society anymore. I thought it was a very interesting point, as we start this segment. You can see it in relative civil strife that's going on in the country. My first question, and I'll start with you, Mayor Benjamin. Then maybe Mayor Tubbs can answer it afterwards. Then we can just have a free flowing conversation.

Anthony Scaramucci (04:47):

My question is, what are the facts right now? Where do you see the facts, in terms of our society? Where do you think the society needs to go to heal itself?

Stephen K Benjamin (04:59):

Wow. That's a great question. Thank-you, Anthony, and thank-you, Darsie, for reading my intro just like I wrote it. I always appreciate that.

Anthony Scaramucci (05:07):

Your mother wrote that, Mayor. Who's kidding who? I mean, that was unbelievable.

Stephen K Benjamin (05:10):

It would be 20 pages longer if my mom wrote it. You know, the facts are, we are dealing with the greatest public health crisis, pandemic, since 1918. That we are dealing with an incredibly inconsistent economy. The first quarter, we saw probably the greatest economic disruption since 1932. Right now, on the streets of America, we're hearing incredible amounts of pain and passion, unlike anything we've seen nationally since 1968. All wrapped up into a couple months.

Stephen K Benjamin (05:45):

At the top of the food chain, at the head of this $23 trillion GDP, that this past quarter we saw the national debt go up significantly. We watched GDP drop five percent or so. We have political dissension, disruption. We're in an amazingly challenging place. I believe it's time for us to have leaders who realize that, at least as it relates to those of us who are proud Americans, who recognize the challenges we've face in this country for hundreds of years. Working to become that more perfect union.

Stephen K Benjamin (06:25):

That there is no red way or blue way. That at the very least, let's try to focus on a red, white, and blue approach to building that more perfect union. The reality is, each and every one of us, and I will tell you, that's probably, and I'll talk more about it later. That's probably the silver lining of all the things that we're going through. That it has activated so many folks, to realize their individual responsibility.

Stephen K Benjamin (06:48):

That the government shouldn't solve, that it can't solve all your problems. Public health professionals can't. The business community can't. That philanthropy can't do it all. That really, we all have an individual role, to step up and create this world in which we want to live. We want to make sure our parents get their due. But even more importantly, making sure we're creating a world where people like my daughters, and Michael's beautiful young son, can really have an opportunity to live up to their God given potential.

Stephen K Benjamin (07:15):

I think it's a time for leaders. It's certainly, easily the most challenging time I've faced in my many years in government, and public service, at different levels. But we're up to the task. I feel strongly that America's mayors are leading from the front, and will continue to do so.

Anthony Scaramucci (07:34):

Mayor Tubbs.

Michael D Tubbs (07:36):

First let me say, it's always good to be on with Mayor Benjamin, who started his term as mayor when I was still a college student. I'm thankful you're still in this -

Anthony Scaramucci (07:44):

Rubbing it in, man. Rubbing it in, mayor. Go ahead.

Stephen K Benjamin (07:47):

Hey, change.

Anthony Scaramucci (07:50):

All right. I'm bringing out the brine. You're rubbing it in. That's going to be one of my questions for you, Mayor Tubbs. How did you accomplish so much? If you added my lifetime with Steve's lifetime, and you divide it by two, we're barely you. We're just trying to figure out how you got to where you are. But sorry, keep going.

Michael D Tubbs (08:06):

Sorry, I have to do it.

Anthony Scaramucci (08:06):

Keep going. Keep going, Mayor.

Michael D Tubbs (08:08):

But to answer the question, I think in terms of what's true, what's been the silver lining for me is understanding this moment we're in. With the greatest global health crisis, as the mayor mentioned. But also the conversation we're having about, not just police brutality, but really about equality under the law, has been a 400 year conversation in this country.

Michael D Tubbs (08:29):

Also, I think the fact is, we've had this conversation before. I think it's given, the cascading impacts of COVID-19, and now the civil unrest, that it's time for us to re-solve these issues. The facts are, regardless as to how we feel, where we consume news, or what we'd like the world to be, there's institutionalized racism in our country.

Michael D Tubbs (08:50):

If you look at everything from who gets loans, to how toddlers are treated in pre-school, to how discipline is dolled out in elementary school. In every institution, not just policing, there's racial bias. I think what I've been most heartened about is, I'm hearing people who are Republican and Democrats, coming to the point, "This is not made up. This is true. Let's figure out how we get towards a solution".

Michael D Tubbs (09:16):

I think the fact also is, that now is a time for real patriots, as Mayor Benjamin said. For people who really believe in what we wrote in our constitution. That we want to form a union, where all people are created equal, are entitled and able to pursue life, liberty, and the pursuit of happiness. That we believe in equality under the law, for everybody in our country.

Michael D Tubbs (09:39):

It's great rhetoric. We've seen over the past 400 years, it's hard to put it in practice. But I think this moment demands that we push further, and push, farther, to get there.

Anthony Scaramucci (09:50):

Well, I 100 percent believe that there's institutional racism. Just a quick story. I'm at Harvard Law School, my first semester. There are three African American students, male students, in my section. They are walking on Massachusetts Avenue, to a convenience store after 11:00 at night. They're arrested by the Cambridge police. Literally, all they were doing was going to get a cup of coffee. They, blah blah blah, ensued.

Anthony Scaramucci (10:17):

30 years later, there was another incident just like that in Cambridge. I remember, president Obama got involved in it. I remember thinking, about tying those two things together. I said, "My god, there is absolutely institutional racism". It's a question for both of you. What do you say to those people who say that there isn't institutional racism? How do you ... This is my point about facts. How do you debate somebody, "Well sir, do you think there's institutional racism?". "No, I don't think there is". How do you go about it? How do you debate it?

Stephen K Benjamin (10:51):

I would encourage folks, those who care about their country, who often profess it in different ways. Often politically. To really take these opportunities to listen. My grandma would say that God gave you two ears and one mouth for a reason. You should listen twice as much as you talk. Right now, I would tell you that the most edifying and powerful conversations I've had, with people young enough to be my son, like Mayor Tubbs, and others. I went out, and I'd sit. I would say, I spend a lot of time backed by law enforcement, so I spend a lot of time with our officers.

Stephen K Benjamin (11:30):

But I also get out into the streets, and sit down with the protesters. Social distance, wearing a mask, the whole nine yards. But I don't get there and tell them about all the things we're doing, all the things their government's doing to make their world better. I just sat there and asked them, "Tell me your stories. I want to hear your stories".

Stephen K Benjamin (11:46):

If you listen to what's happening in the world right now, so those classmates of yours from 30 years ago, and seeing the same things happen 30 years later. I assure you, 30 years before that, it was actually the law of the land, and 30 years before that. The fact that structural racism, differential access to goods and services, is real in America. That we know personally, mediated racism. Unconscious bias acted on, by those of us in power, is also real.

Stephen K Benjamin (12:15):

There's also internalized racism. The challenges that we may face as individuals. You know, it is very difficult. We were chatting a little bit earlier. It's tough when you have to debate facts with people now. At least back in the day, you could at least rely on data. Data would maybe solve an argument. Or maybe you could get people to focus on commerce and economy. "Let's at least make sure we prosper together".

Stephen K Benjamin (12:43):

It seems like right now, the conversation is just awry. That's why it's so important for leaders on the national level, state level, local level, those we're talking about, inter-sectoral leadership. Not just the public sector. Really find ways to bring people together, so at least we're listening to each other. But it is, it may be the challenge of our times.

Michael D Tubbs (13:09):

As the mayor said, I'm at the the point now where, if it was really about data, I'm driving actions and decision making. We're just living in a fundamentally different world. I just read something yesterday that said, the median wealth of a black family with a college degree is only 70 percent of the median wealth of a white family with just a high school diploma.

Michael D Tubbs (13:33):

Stats like that, to me, just really illustrate, it's not about just the actions people are taking. It's not about people not having education. It's not about people not working hard. It's something that's systematic. It's insidious. But it's also literally in every institution. If I had time, we could talk, we could go through every institution. From the banking system, to the school system, to the prison system.

Michael D Tubbs (13:55):

That if the outcomes are the same, then the discussion has to be, do we really think there's something inferior about black people that lead to these outcomes? Or is there something that's being done? I think that's the conversation we have to have. What I've found, like Mayor Benjamin, in talking with people, that sometimes the data has to be connected with a story. A story of someone, if people don't know, that they see, touch, feel.

Michael D Tubbs (14:21):

I know when I talk about how, even as mayor, when I go take a run at the local university half a mile from my house, each and every time I'm greeted with campus security who are circling. Because they don't realize I'm the mayor. When they do, they wave and drive off. While my friends who aren't black, when they go around to campus, they never see campus security.

Michael D Tubbs (14:41):

I know just in sharing those stories, I think it's allowing people to realize that, "Wow". We had one conversation with some folks in the community. I said, "No, I get it. The institutions have worked for you and your family. You've seen it work. You guys have made something. I get that. But those same institutions don't work in that way for my family". When I said it like that, I saw something click. Like, "Oh, wow".

Michael D Tubbs (15:08):

I think part of it is allowing people to understand that, your experience in America, your experience with police, your experience with schools, your experience with banks, your experience with love, is not a universal experience. That there's other experiences. That doesn't make your experience less. But your experience is not the only truth.

Michael D Tubbs (15:26):

I think that's part of it. I think it's also having tough conversations like this, that are frank and that are honest, and are done in a way that has multiple races talking. I was telling people in Stockton last week, if it was up to black people to solve racism, institutional racism, it would have been solved. We've been saying for 400 years, "This ain't right. We've got to do something about it". It's going to take allyship, and just good people, who are saying, "You know what? We want everyone to have universal human dignity".

Michael D Tubbs (15:56):

It's not easy. That doesn't mean it's easy. But it's something that I would argue is very necessary.

Anthony Scaramucci (16:02):

Mayor Tubbs, do you think something has changed? I'll ask Mayor Benjamin the same question. But the proliferation of the iPhone, or the smart phone. Where now we're on top of each other, and unfortunately we witness the horrific eight minute and 46 seconds, or other situations. The one in Atlanta. Do you think something has changed now? Where now it is so frontal, and it's in everybody's faces, that it's going to cause a spiritual awakening, and that could cause an even bigger evolution? Or do you think we're just going to get more of the same?

Michael D Tubbs (16:38):

I would say, we can't do more of the same. It feels different. The protests feel different. The civil unrest feels different. Even the actions from people who I wouldn't think would even see the need to change, at least locally, have been different. I think part of it is the iPhone. But I think part of it's what you and Mayor Benjamin mentioned when we started.

Michael D Tubbs (17:01):

It's the fact that COVID-19 really has everyone shook, and everyone anxious, and everyone insecure. In almost a shared sense of suffering.

Anthony Scaramucci (17:10):

Mm-hmm (affirmative), there's no racial bias in COVID-19. Although we have learned that certain communities have more proliferation of it. But all of us have the same DNA, right?

Michael D Tubbs (17:19):

Yeah, well -

Anthony Scaramucci (17:20):

We're all at risk. We're all at risk.

Michael D Tubbs (17:21):

I think what's been fascinating about that, we're seeing this disease, which is not racist, it's a disease. A virus. But we see how, because of racist systems, that's attacked, some people have worse outcomes. I think that's started the conversation.

Anthony Scaramucci (17:34):

Yeah, I accept that. Yeah.

Michael D Tubbs (17:35):

People are economically anxious. People are stressed. People are tuned in. People are really deeply engaged in what's happening. I think seeing that, where it's just the straw that broke the camel's back. I think it's a mixture of the iPhone. But we saw Michael Brown on the iPhone. We saw Sandra Bland be pulled over on the iPhone. Hell, Emmett Till had an open casket funeral. It's not the first time we've seen suffering in this way. But I think it's the time, in terms of a time of great transition and anxiety in this county. Where people are saying, "What's next? What's better?".

Michael D Tubbs (18:13):

You have the election coming up in November. I think all these things have created the conditions upon which this really sparked a real movement, and a real reckoning.

Anthony Scaramucci (18:25):

Is it different, Mayor Benjamin?

Stephen K Benjamin (18:27):

No, I couldn't agree more. I do believe, honestly. I think the last time I was at SALT with you, Anthony, we were talking about just how rapidly technology's changing the world. Michael and I have done conversations on AI and automation, and advanced machine learning, and how it was changing the future of work. How that would disparately impact these various communities, that also happen now to be the same essential workers that can't socially distance, that can't remote work. That don't have access to PPE.

Stephen K Benjamin (18:58):

Certainly as we adjust to the new normal, as we work our way through the pandemic, everyone's, like Michael said, at home. Watching TV, and it was, I'm not giving much to hyperbole. But it was the very first time that millions of Americans, and billions across the world, were forced to watch an eight minute and 46 second public execution. A state sponsored pubic execution.

Stephen K Benjamin (19:25):

I think it fundamentally broke people's hearts. It fundamentally changed the way that people saw the reality. It humanized that data that Michael was talking about earlier. It put a story, a real narrative on everyone's mind, that said, "No". I've heard the stories. I didn't really believe all the facts behind Trayvon, the imagery in the Rodney King thing. You know, "I'm not sure about that". Michael Brown, "I don't know his history. I don't know what happened". This story, or that story, and the millions of stories.

Stephen K Benjamin (19:59):

Particularly Millennials, Michael's generation, and the Zoomers now, have really been sharing. But everyone was forced to watch a man rendered helpless. Die before our eyes. I think it broke America's heart, and it spurred this energy. That now, I think our job as leaders in our different spheres, is again, how do you get that pain and that passion, and turn it into progress? How do you utilize our democratic institutions, which were not all government, and channel it in a way that you can get real, immediate change, going in the right direction?

Stephen K Benjamin (20:37):

That gets us past bumper sticker responses. If it's, "Defund the police", whoever happens to answer. What does that really mean to people? Are we talking about finding different ways to invest in actually creating just communities? That's where the leaders step in. You bottle up all that, everybody having this moment, and really turn it into a real movement that moves a country.

Anthony Scaramucci (21:00):

I'm going to kick it over to John Darsie. He's got a few questions from our audience, Mayor. But I do agree with you. Hopefully this is a seminal moment for all of us, where we'll start more healing. But John, go ahead. I know you have a question for both mayors.

John Darsie (21:13):

Yeah. I know, Mayor Tubbs, you alluded to the fact that black people have been talking about these issues for 400 years. Certainly, a lot of people are now talking about police reform, and changing policing tactics, as a result of the social unrest that we've seen. I want to direct this question at Mayor Benjamin.

John Darsie (21:31):

In 2014, you introduced an initiative called Justice For All. Which implemented new training, competitive pay, diverse representation, and different elements of community engagement. To strengthen the relationship between law enforcement, and the communities in which they serve. I think in general, policing is just one element of institutional racism, for sure.

John Darsie (21:54):

But also, within policing, it's not just the idea that we shouldn't be violently confronting situations that don't need to be violently confronted. But it's just about the relationship between the police, and the communities in which they serve. How do we need to rethink, in general, policing in this country? Racism is one element of it. But just in terms of how they engage with their constituents?

Stephen K Benjamin (22:19):

Thank-you. As a city, and as a police department, we have a fantastic chief of police. We gravitated rapidly towards president Obama's leadership on 21st century policing. Recognizing that these generational challenges have existed between law enforcement, the men and women who run towards danger when we're running the other direction, and the communities that they serve. Particularly communities of color.

Stephen K Benjamin (22:41):

We formulated justice for all, using a number of the principles of his 21st century policing initiative, and decided that we would build a department that focused on, first, transparency. Because that's always been an issue. On accountability, and work and build trust. We had to completely revamp the way in which we recruited and trained our officers.

Stephen K Benjamin (23:02):

We put the president of our Columbia Urban League on our hiring board. Two years later, 68 percent of our new hires were African American, Latino, Asian, and female. Trying to get a force that looked more like the city. We put in incentives for officers, to advance in their education, in the things that we value. Obviously we put bonuses in place, for them to meet those measurements.

Stephen K Benjamin (23:27):

We also put a hiring bonus, and also a residency bonus in place. An officer who wants to move into a home in our city, because it's important that there be some type of emotional connection between those officers and the communities they serve. That an officer can move into a home. No down payment. Low interest rate. 30 year. It's a really creative program, we modify to meet our officers.

Stephen K Benjamin (23:49):

But we also went 100 percent body cam. We started recording video and audio recording of any of those charged with violent crimes. Then using data. Trying to humanize that data. To share information, and use of force. How, if there's a police involved shooting, how it's independently investigated. All again to try and change the framework, in a way that's systemic. That, whether Mayor Benjamin was there, or Chief [Holbrook 00:24:15] was there, these gains would be sustained over a period of time.

Stephen K Benjamin (24:18):

I say all that to say, John, that even those things that we did in the wake of Michael Brown's death in Ferguson, still not enough right now. Right now we're at a moment, where we're not talking only about reinventing policing as we know it. But even re-imagining. Re-imagining how you provide for safer communities.

Stephen K Benjamin (24:41):

Michael, quoting Mahatma Gandhi, talks about poverty being a form of violence. Other was in which you can rebuild communities. Maybe even, yes, we have cops right now, guys, overworked and underpaid. Because they're doing everything. We're asking them to be mental health counselors. Ask to be social workers. We're asking them to be all these things that go beyond being a guardian or a warrior, that they ought not be doing.

Stephen K Benjamin (25:10):

We'll train them, to make sure that they're well rounded and have a skillset. But that's not their job. We've got to find ways to create safer communities, so that when you have an issue that's a humble, or note a real public safety threat, you don't need strangers with guns showing up. Regardless of how altruistic they are.

Stephen K Benjamin (25:29):

We made some strides then, in 2014. But right now, we're at a point where we're even re-imagining the role of our law enforcers, and our role in helping create healthier, stronger, more vibrant and equitable communities.

John Darsie (25:43):

Thank-you, Mayor Benjamin. I want to direct a followup to Mayor Tubbs. You touched a little bit on incentivizing educational growth within the police force. Mayor Tubbs, I know you've done a lot of things, in terms of trying to promote education within Stockton. Obviously you prioritize education from a young age. You're a graduate of Stanford University, with honors. You secured over $20 million in philanthropic capital for Stockton Scholars, which is a program that, you aim to triple the number of Stockton students graduating from college.

John Darsie (26:15):

How do we level the playing field, in terms of public education in the United States?

Michael D Tubbs (26:24):

Yeah, that's a great question. I appreciate you asking that, because this moment, I think the policing conversation that we're having nationally is symptomatic of a wider conversation, that includes things like education.

Michael D Tubbs (26:35):

I think to level the education playing field, all the research says, it really starts at zero to three. Like Mayor Benjamin said, poverty is a great indicator of educational attainment. Doing everything we can to prevent families from being in poverty, or helping families who are in poverty leave poverty.

Michael D Tubbs (26:54):

All the research tells us the between zero and three, children do word acquisition, and acquire language. That has a big impact. Also, in terms of adverse childhood experiences, I think using, again data, about how adverse childhood experiences or childhood trauma impact brain development. Or impact academic success. Doing what we can, in terms of interventions.

Michael D Tubbs (27:15):

What they have in Providence, Rhode Island, where they have social workers and other people work with families, to make sure kids are reading, and hearing enough words. It means policy, like paid family leave and things of that sort, so parents can actually be home with their children. To be their first educators. It means things like universal pre-school.

Michael D Tubbs (27:36):

But I think also, if you look at the data, the data tells us that kids of color are more likely to go to schools with the least qualified teachers, and the least funding. Which seems just, it seems like it should be the opposite. Particularly if we're talking about parity. I think it's also looking at, in terms of how you make sure that every child and every school has a qualified teacher in the classroom, who's well trained and well resourced.

Michael D Tubbs (28:01):

How you make sure that they have curriculum, and education. I think part of it starts with, again, at a national level, the supreme court edict around making education a fundamental right. Because in this country, based off the Seattle ... Not Seattle. San Antonio case in 1973. Education's not even a right for American citizens. I think it starts from there.

Michael D Tubbs (28:25):

Once it becomes codified as a right, then we can have the conversation about, how do you make sure that that ZIP code doesn't correlate with destiny? That schools aren't funded solely based off property taxes? That the least qualified, the least experienced, the non-credentialed teachers are teaching the kids who are starting out a little bit more behind. How do we reverse that?

Michael D Tubbs (28:46):

Again, big issue. But there are data driven solutions. They aren't necessarily easy, but are necessarily for truly serious about using education as a lever, to help equal the playing field.

John Darsie (28:59):

Yeah. You touched on the fact that education and policing are somewhat intertwined. I think all these issues relating to institutional racism are somewhat intertwined. I want to direct this question at Mayor Benjamin. At 29 years old, it was 1999. Governor Jim Hodges appointed you as to the cabinet as director of the state's second largest law enforcement agency. It was the department of probation, parole, and pardon services.

John Darsie (29:25):

As it relates to criminal justice reform, going beyond policing, what effect does it have in African American communities and minority communities, when we're putting people in jail for non-violent crimes? When children in the African American community are growing up without fathers in the home sometimes? How do we change that system, to break this cycle of poverty, and this cycle, as it relates to poor education circumstances within the African American community?

Stephen K Benjamin (29:53):

Well I think obviously, just the fact that you're asking the question is a wonderful step forward. So many folks have refused to connect the dots, of what the effect of longterm policy decisions. The fact that we spend $200 billion a year on police, and prosecutors, and prisons. We've been able to profit, because of a number of these industries.

Stephen K Benjamin (30:22):

I literally just took a call from governor Hodges, who 20 years later, he still thinks I work for him. Some of you may know him. He's my dear friend, and been a great mentor. But he gave me an opportunity as a very young individual, to step into a place. I'd been prepared as a political science major, as a young lawyer. Very altruistic, and had all these ideas about these theories I'd learned.

Stephen K Benjamin (30:45):

To actually put them into action, running the state's second largest law enforcement agency. Be able to show people that you can actually create safe communities. We were unrepentant about making sure that people were held accountable. Particularly those that had been engaged in violent crimes. But the very same time, we had to make sure people were able to reintegrate into society, and give them a chance to live up to their God given potential

Stephen K Benjamin (31:11):

We worked with the NAACP and others, to get people re-registered to vote. We required and worked with, we established some program that actually brought people back into the economic mainstream. Gave them jobs. It was a wonderful opportunity to do so. But I think the basis of your question is also the answer to your question. Recognizing that each of these things are inextricably linked, and that we are all connected. Relationships are interdependent.

Stephen K Benjamin (31:45):

So that in order to deal with these things, it's going to take investment. It's going to take thoughtful policy. That policy's going to have to be humanized and compassionate. But very intentional. I think, and realize that some of these solutions are not going to happen overnight. That it took us literally several centuries to get here. It's going to take us time to turn the corner.

Stephen K Benjamin (32:11):

But there are some things that we can do today, right now, to start building on those communities. I would tell you, just as you know, I've spent a lot of my time in elementary schools. Even since my children left elementary school, I've been in over 300 different classrooms since I started my term as mayor. I love being around children, I love being around senior citizens. Everybody in between, I can take or give on any given day.

Stephen K Benjamin (32:38):

But when you around these children, particularly as Michael said, when they're very young, you can see the hope, and aspiration, and the promise, and the gifts. When the little boys aren't too old, they still want to hug you, and grab you, and tell you how awesome you are, and how proud they are of you. They look at the face of this African American man, and they're still trying to figure out, "How in the world did you become the mayor of our city?".

Stephen K Benjamin (33:05):

It's a special time. Then we allow them to lose that. Because they're dealing with issues that I didn't have to deal with as a child. I never had to worry about safety or security, or shelter. We lived in a rough neighborhood. But a very stable household, with a daddy welcoming the morning early. Did leave the house, giving me a kiss, and came home late at night, after his third job sometimes. Had hugs. We'd stay up late at night, and watch The Honeymooners together.

Stephen K Benjamin (33:36):

The mother, who complimented him, and made him a much better man, they're still together after 54 years. He still bossed me around too. But every child didn't have that.

Stephen K Benjamin (33:47):

Then you have to step up and say, "So what's the role of a civilized society? What's the role of a loving and compassionate community?". To stand in the gap, and put as best as we can, the structures in place, to make sure this kid gets the same shot he has. These children nowadays, I will tell you, are much more talented. Much more intelligent, digital native, than Steve Benjamin ever was. So it's my job to give them a shot, and that's what I'm going to do.

John Darsie (34:11):

Next question, before I let Anthony get back in here. I'm having too much fun, engaging with you guys on this. But you guys have both been very focused on job creation, and economic empowerment, as tools to help lift your constituents out of poverty, and create more equal outcomes. Mayor Benjamin, in your first term alone, you cut the unemployment rate in half, in your metropolitan area.

John Darsie (34:34):

What are examples of programs, either that we're doing today that you think we should ramp up, and increasingly focus on? One example being opportunity zones, which I know you guys have both been involved with. But what are other types of programs, and as an example for Mayor Tubbs, you've been involved at the municipal level in one of the first pilot programs for a version of universal basic income. In Stockton it's called SEED.

John Darsie (34:57):

I'll let Mayor Tubbs, you start with this, what are specific economic programs that we need to focus on, and need to ramp up, in order to create a domestic Marshall plan, to help create more equal outcomes?

Michael D Tubbs (35:10):

Great question. Number one, I think in terms of opportunity zones, part of the issue is, in California, is not yet tax conforming. With state and federal taxes. It's been hard to marshal interest. I think also, just having a version 2.0, that's actually more tailored to real underserved communities, I think would be a big benefit. In terms of using capital and free enterprise as a way to lift boats.

Michael D Tubbs (35:35):

In terms of the basic income demonstrations, one of the things I've been most surprised about is how money is a function of time. What we've seen is, with dollars, we just allows people to have more agency over their time. There's folks like, a gentleman named [Tomas 00:35:53], who talks about how the first $500 a month is enough for him to interview for a job.

Michael D Tubbs (35:59):

I asked him, "What does that mean?". He said, "Well, I work retail. Because I work retail, I'm not able to have a set schedule. I don't have paid time off. I have two kids, so I can't take a risk and bet on myself, and be entrepreneurial. Because doing so may mean the rent's not paid for this month. I don't have a rich dad. I don't have a real safety net to fall ... I am safety net".

Michael D Tubbs (36:21):

He said the $500 is enough for him to take two days of work to interview, and he ended up getting a better job, with more pay, benefits, unionized, etc. For me, that story's telling. Because when i think about a basic income, or an income floor, I think about our society being an angel investor in all of us. Saying, "Hey, you can't control who your parents are. We can't control the circumstances of your birth. But what we can do, is make sure you have a shot".

Michael D Tubbs (36:50):

That you have some sort of under-pinning. You have some sort of foundation, that then you could put your feet down, and buy boots and buy shoe strings, to pull yourself up by your bootstraps. I definitely think part of this conversation has to have some sort of an income floor for everyone. Particularly when we consider the unequal places where people start.

Michael D Tubbs (37:12):

Another program, or programs I'd like to see ramped up, are really just pausing discussions. We know that minimum wage has not kept up with the cost of living. We know that, in 99 percent of counties in this country, you can not afford housing with the current minimum wage. Which means we have to lift the floor. We have to increase wages. So that when people are actually working, who are actually working, and able to provide and pay, it makes no sense for people working two ore three jobs, and still not be able to pay for basic necessities.

Michael D Tubbs (37:43):

Then I think that the third thing, particularly around conversations about job guarantees. Which I think make a lot of sense. But also, we have to have, if you look at what Mayor Bloomberg is proposing, his campaign with the Green initiative". Just real targeted, specific, loan programs. Capacity programs for entrepreneurs.

Michael D Tubbs (38:04):

Going to Stanford, being in Silicon Valley, is a caricature of what entrepreneur is. But the most entrepreneurial people I've ever met are the people in my neighborhood in Stockton. Who are selling tamales, or selling things that are now legal, that once were illegal. But who have shown a business acumen in mind, who just don't have access to capital, don't have access to the teaching. But have that same grit, resilience, creativity, ingenuity, that my classmates at Stanford had.

Michael D Tubbs (38:35):

I do think target investments, for investing in, supporting entrepreneurs, in communities that have been particularly impacted by police violence, and other forms of violence, like poverty, would also make a big difference.

John Darsie (38:47):

Mayor Benjamin, do you have anything to add to that?

Stephen K Benjamin (38:50):

Just very quickly, I know we're running short on time. We try to lead from the front, and lead from example. Our city's a unique place. State government, largest army training base in the world. Universities and colleges. A significant amount of our property's done in tax rolls. We're always working with a certain limited amount of resources.

Stephen K Benjamin (39:08):

It was important to me, as commercial interests carry a significant share of the tax burden, to run just a tight ship. We've finished eight of the last 10 years with a budget surplus. Never raised taxes. We've actually cut taxes by $12 mils. We've been creating an environment where private sector capital feels welcome. It hits the ground, and you treat it well. We've been able to welcome billions of dollars of capital investment into our city.

Stephen K Benjamin (39:32):

We invest in our city. $750 million in water, sewage, and storm water investments. The work that Michael was talking about, collective leadership on opportunity zones. We try to make sure that when we make those investments, that we ask of our partners, and we dig deep into the community. To make sure these jobs are available to folks who live, and make the community special.

Stephen K Benjamin (39:58):

There are a number of great efforts out there, around UBI, that Michael's been leading on. Been doing some work with the Aspen Institute around income volatility, and ways in which we can just help people stabilize. We developed a wonderful program a few years ago called Work It Up. In which you go to one side of town, and folks, employers say they can't find employees. You go to the other side of town, people can't find jobs.

Stephen K Benjamin (40:19):

It's your job to be an ambassador, and try and connect those dots. Making sure people have the skillset, but employers understand they're not going to get perfect individuals. Who, in my faith traditionally, only one perfect person's ever walked the face of the Earth, and he's not here right now. He's here, but he's not here.

Stephen K Benjamin (40:37):

Working to connect those dots, to again have everyone participate in the largess of America. I'm also a huge proponent of public private partnerships. I think smart P3s, particularly in the economic environment in which we're operating right now. Where state and local government's going to see one tree on a short pole over the next year.

Stephen K Benjamin (40:57):

Giving a thoughtful, they have to be public private. Sometimes public private philanthropic partnerships, are giving cities and states and local governments, local subdivisions, the opportunity to unlock the capital they have locked up in some of these assets, is a huge opportunity. That six months ago, when folks weren't thinking that UBI, other than Michael and his crew, was real. But now, post CARES Act, people think, "Maybe there's something really serious here. We should be thinking about ...".

Stephen K Benjamin (41:25):

People thought that universal healthcare, I'm with Mike, we were on the same team, for the presidential election. I'm not a Bernie guy at all. But the discussions around universal healthcare being unaffordable, unsustainable, you put a $1 trillion price tag on it. Well I'll tell you, guys. We're about $3 trillion to $4 trillion in hoc right now. As we go.

Stephen K Benjamin (41:49):

A budget, and the way in which we lead, is a reflection of the values and the things that we value. We're going to have to really start thinking very creatively. Or opportunity zones. Around UBI. Around ways in which we can all win. If we reimagine everything, we can do much better than we have been over the last several years.

John Darsie (42:09):

I know I said I was going to kick it back to Anthony. But I have one more question before we wrap up. I'll start it with Mayor Tubbs. Because it's a generational question, but it's also just a societal question. It's sort of going back to what we talked about at the beginning. I want to leave everybody on an optimistic tone.

John Darsie (42:24):

That it feels a little bit different now, the social activism that we've seen, and the commitment to change from various parties. I mean, you see something like NASCAR finally coming out and leading from the front on racial issues. I'm from North Carolina. Mayor Benjamin, you're in South Carolina. These issues are things we're familiar with.

John Darsie (42:45):

But Mayor Tubbs, I'll start with you. From a generational perspective, do you think that millennials, as a result of racial issues, and just the pandemic might have caused some of this as well. Do you think millennials are going to be more engaged in the social and political landscape going forward, as a result of some of the things we've seen recently? What impact do you think that's going to have on the country?

John Darsie (43:07):

Then Mayor Benjamin, I want you to follow up. Just to talk about whether you think this movement that we're feeling right now, you have people like LeBron James, other big athletes and celebrities. Those groups have always made a push to help with voter rights, and things like that. But it seems like there's a more cohesive and energized effort to address those things. We'll start with Mayor Tubbs.

Michael D Tubbs (43:29):

I sure hope so. The reason why I got involved with government is because I realized that, I'm going to be around to live with a lot of consequences today, the decisions made today, in my older years. I just want to be part of that. I'll be here to deal with the repercussions and the actions, so I hope millennials, and Zoomers, everyone realizes that, "No, we can't wait". That it's on us. We have to work with those who are older, but we have to be part of the decision making table.

Michael D Tubbs (44:00):

Because I just don't want to have to be fighting the same fights, in the same way, talking about these same issues 20, 30 years from now. I think a lot of people feel the same way. I think particularly, millennials, most of us were born, we were 10, 11 years old when 9/11 happened. We were entering into college, or entering into the labor market when the first Great Recession happened in '08.

Michael D Tubbs (44:28):

For many of us, the only two presidents we've known, that we've voted for, are Barack Obama and Donald Trump. We grew up in a time, where Oscar Grant, Sandra Bland, Breonna Taylor, George Floyd, every month a new hashtag. We grew up seeing Colin Kaepernick being blacklisted from the NFL for protesting. I think that those formative experiences have hopefully had the impact, of getting people involved in the political process, and the political system. Exerting rights to vote, and rights to run for office. To get us to where we need to be as a society.

Stephen K Benjamin (45:04):

John, I'm encouraged by millennial leadership, and the Zoomers as well. As you might be able to deduce from our conversation and banter, Michael and I talk, text, or email almost every day. Maybe every other day. He's representative of a group of friends and leaders, both men and women, particularly, obviously we engage with mayors. But amazing leaders. Who come from Birmingham, Jackson, I mean gosh, in Atlanta. Charlotte, and Shreveport. Just some really talented young leaders, who are seeing the world very differently. But also have the wisdom of being students of history.

Stephen K Benjamin (45:48):

We're benefiting from that in a very significant way. I am also excited, we engage with a number of different individuals, including some of the athletes that you mentioned, like LeBron James and others. I think what's coolest about that is, to recognize that, you guys, when you sit down with a group of athletes, particularly some African American athletes, you'll find independents. You'll find Democrats, you'll find Republicans.

Stephen K Benjamin (46:14):

To be able to respect the heterogeneity of the group is really cool. You'll find some who believe strongly in the capital markets, and some who may be at the other end of the spectrum. But they all seem really, at this moment, to be focused on human dignity. To be focused on inclusion. To be focused on economic prosperity, for communities that have been disenfranchised.

Stephen K Benjamin (46:38):

To really be focused on making sure that people have the right to the franchise, and are able to participate in American elections, as one of their constitutional and God given rights. That's an exciting time. I do believe that, with the leadership of folks in Michael's generation, I think America is going to be in a better place. I really do.

John Darsie (46:58):

Well thank-you again, both of you, so much for joining us. Anthony, do you have any final thoughts?

Anthony Scaramucci (47:04):

Well, I want the duck back now. Guys, this guy has a fake duck. He's been sitting behind him for the last seven SALT Talks. But when the duck was there, he wasn't talking. Now the duck's not there, and all he's doing is talking, so I sort of want the duck back. But -

John Darsie (47:21):

I had to make sure we asked all the right followup questions. It's too interesting and important a conversation.

Anthony Scaramucci (47:24):

Oh, I appreciate it. He thinks he has standing, because he's from the south. But listen, guys. You're doing an enormous service to our country. Your public service is exemplary. On behalf of everybody that listens to these SALT Talks, and all of our delegates, I just want to personally thank you. You're true patriots, and I know our country's headed for a better place because of men and women like you guys.

Philip Hammond: Brexit, Boris Johnson & Financial Regulation | SALT Talks #13

“It’s self-evident to anyone with a smattering of economics that the UK’s prosperity and economic success is very heavily tied to access to European markets.”

Philip Hammond was a UK Cabinet Minister and key member of the British Government for almost a decade. Leading four departments over nine years and rising to the second most powerful job in government, he is one of only three people to serve continuously in the UK cabinet from 2010 to 2019, serving under Prime Ministers David Cameron and Theresa May.

Hammond explains his decision to leave his cabinet role as Chancellor of the Exchequer when Boris Johnson became Prime Minister because of Johnson’s openness to a no-deal Brexit. Hammond explains the economic, cultural and political factors that combined to bring about Brexit, and its consequences. “There's been a lot of resentment in the U.K. at the creeping encroachment by Brussels over our everyday lives… And it was really a reaction to that, a feeling that people wanted to restore sovereignty to our own parliament, make our own decisions, and control our own borders.”

Like the United States, Britain was likely a week or two too slow in shutting down the economy out of fear of the economic impact from lost business. Hammond offers his thoughts on the pandemic fallout and the economic outlook for Britain and the world.

LISTEN AND SUBSCRIBE

SPEAKER

Hammond%2C+Philip.jpeg

Philip Hammond

Chancellor of the Exchequer

(2016-2019)

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie (00:07):

Hello everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and politics. As we've been doing during this entire work-from-home period, we've been bringing you these SALT Talks, which are digital conversations with leading investors, creators, and thinkers. What we try to do in these SALT Talks is provide you a window into the minds of subject matter experts, the same way we do at our in-person SALT conferences, as well as provide a platform for big, important ideas that we think are shaping the world.

John Darsie (00:39):

Today, we're very excited to welcome the right honorable Philip Hammond to SALT Talks. Mr. Hammond was the former chancellor of the Exchequer in the United Kingdom, a role that he's served in from 2016 to 2019 when he was a close political ally of Prime Minister Theresa May. Prior to that, he was a Member of Parliament for 13 years for Runnymede and Weybridge, from 1997 to 2019. He also served in the Shadow Cabinets of Michael Howard and David Cameron as the Shadow Chief Secretary to the Treasury, and the Shadow Secretary for the State of Work and Pensions.

John Darsie (01:15):

As chancellor, Mr. Hammond pushed for an end to austerity measures. And in 2019, he spoke of his intention to tender his resignation, should Boris Johnson, the current Prime Minister, be announced as Prime Minister, due to the fact that he couldn't support a no-deal Brexit. Today, he serves as an advisor to several businesses, including in the investment management and FinTech arenas.

John Darsie (01:36):

If you have any questions for Mr. Hammond during today's talk, please enter them in the Q&A box at the bottom of your video screen. And conducting today's interview will be Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. And he is also the chairman of SALT. So Anthony, I'm going turn it over to you for the interview.

Anthony Scaramucci (01:56):

Okay, terrific, John. I appreciate it. Of course, I have to let everybody know on the call that the duck that John used to have behind him was removed by his mother-in-law. So she came over to the house and said, "The duck is not working for him." I just had to bring it up before we get this thing started.

Anthony Scaramucci (02:10):

So Mr. Hammond, it's great to have you, sir. Philip, tell us a little bit about your background, for Americans that don't realize who you are and what you've done, and the great impact you've had on the British government in the Parliament.

Philip Hammond (02:28):

Well, I left Parliament last December at the general election, when I didn't stand for reelection following the takeover of the party by Boris Johnson. Prior to that, I was three years as Chancellor of the Exchequer, effectively equivalent of the U.S. Treasury Secretary. Before that, I was the Foreign Secretary, Secretary of State in U.S. terms. And before that, Defense Secretary for three years. So altogether, I was nine years at cabinet level government under David Cameron and Theresa May.

Philip Hammond (03:02):

Now I'm out, as John said, advising a number of businesses, but also still taking part in the ongoing public debate, of course, now about COVID and how we manage the effects of COVID on the economy. But also, right here in the U.K., we still have running the ongoing discussion about our future relationship with Europe, something that's kind of dropped onto the back burner over the last few months, but will come right back into prominence again, as we get towards the 31st of December, which is when, if no deal is made, the U.K. and the European Union will stop trading with each other at arms length, with tariffs and full border controls.

Anthony Scaramucci (03:48):

And so, I mean, take us back through the history of this. We're going to go back to June of 2016. Prime Minister Cameron decided to have a referendum related to the Brexit. And again, for our American friends on the call, why did Prime Minister Cameron do that? Did he need to do that? Was that part of your parliamentary system where it was necessary? Or is this a voluntary decision that he made alongside of his advisers?

Philip Hammond (04:18):

So it was a political decision. We need to go back a little bit earlier to the general election of 2015, when the Brexit party, which was UKIP, the United Kingdom Independence Party, was making huge gains in the polls. And it looked like Cameron's administration would be turned out at the general election. And David Cameron decided that the only way to try to win that election was to head off UKIP by offering... By basically saying to the people, "You do not need to make this election about whether or not to stay in the European union. If you reelect me, I will give you a referendum on that question."

Philip Hammond (05:03):

And he was confident. I was confident. Most of the ministers around the cabinet table were confident that the British people, if faced with that question, would vote to remain in the European Union for the very simple reason that it's self-evident, to anyone with a smattering of economics, that the U.K.'s prosperity and economic success is very heavily tied to access to European markets. We've been in a close relationship for 45 years, and for better or for worse, much of our industry, much of our financial services, infrastructure in London is built up around serving those European markets, 500 million rich consumers.

Anthony Scaramucci (05:49):

And so the British people vote, and it's an upset more or less? Because I think even people here in the United States, certainly people in the capital markets, thought that it was going to go through. I think we would also point out... I think it was another... Did Scotland have a referendum as well, a year prior or something like that? And that-

Philip Hammond (06:12):

That was previously.

Anthony Scaramucci (06:15):

And that went well, and so there was a little bit of momentum for unity, and so the political decision. But had he not made that decision... I'm going to get to these other questions first, because I think it's elemental to what's going on, on your side of the pond and our side of the pond. I'll tie it together in a second. But had he not made that decision, what do you think would have happened to UKIP? And what do you think... Where do you think we would be right now, in terms of that populist movement in the United Kingdom?

Philip Hammond (06:44):

Well, that's a very interesting question. I'm pretty sure that what would have happened, if David Cameron had not made the commitment to a referendum in the 2015 election, is that we would have lost that election, because UKIP would have split off enough conservative votes to allow the Labour Party to win. And that would have meant a Labour Party under Ed Miliband, brother of David Miliband, who's probably known to some of the people watching this, would have taken over as Prime Minister.

Philip Hammond (07:14):

Now, Ed Miliband is, by my standards and your standards, a left-winger. But he's nowhere near as much of a left-winger as Jeremy Corbyn, who led the Labour Party in the meantime, between 2015 and the end of last year. So we would have had a labour government. That would have undoubtedly been a difficult time for business and for the financial sector in the U.K., but it clearly would not have been fatal. I mean, this would have been a labour government that squeezed business and squeezed the city, but wasn't trying to snuff it out. And I suspect in those circumstances-

Anthony Scaramucci (07:54):

And he was for remain as well? Not to interrupt you, sir. He was for remain?

Philip Hammond (07:57):

Absolutely, absolutely. Yeah, there would have been no question of a referendum. We would have remained in the European union, and we would have... COVID allowing, we would have just had a general election last month, which I expect the Tory party would have been... Win back in power again. The Brexit referendum would never have happened. Jeremy Corbyn leading the Labour Party would never have happened. So it would have been a very different story to tell.

Anthony Scaramucci (08:25):

So why are we Brexiting? You know it's economically not the best thing for the citizens of the United Kingdom. Most citizens now, and correct me if I'm wrong, sort of realize that it's creating a lot of problems. I know there's an immigration issue, and there's a fear-based issue, one that's somewhat xenophobic. But why are we Brexiting? Why don't we have leadership in the United Kingdom? We're going to get to United States in a second, because I want your opinion. That just says, "Okay, look, this is not the right to do. And so as a leader, I'm going to try to move the population towards that decision, versus where they are now."

Philip Hammond (09:04):

The problem, Anthony, goes back some way. The U.K. joined what was then the European economic community in 1973, on the basis of economics, that it was joining a common market. And the British people have never really been signed up. Even those who are enthusiastic for our relationship with Europe have never really been signed up to the idea of political union. European countries are too different, in many people's opinion, for a political union to work. And there's been a lot of resentment in the U.K. at the creeping encroachment by Brussels over our everyday lives, the increasing political union that the E.U. has become. And it was really a reaction to that, a feeling that people wanted to restore sovereignty to our own parliament, make our own decisions, and control our own borders.

Philip Hammond (10:04):

But underlying that undoubtedly, there was also a broader economic malaise born out of the crisis in 2008, nine, where many people, looking back over the last decades, feel that the rich have gotten richer and the poor have stayed put. Many ordinary working people who are not poor, but ordinary working people, feel that they don't see a way forward for themselves. They don't see their prospects and the prospects for their kids in the way they used to, and that the world has become somehow more unfair and biased against them. And I think, both in the U.S. and the U.K., populism has ridden that wave of sentiment that... I guess it was the quantitative easing, the inflation of asset values that that led to, that has upset the traditional balance between the different stratas of society, and created this populist strength.

Anthony Scaramucci (11:07):

And it's very well said, and I just want one more question on the Brexit. And then we're gonna switch to the pandemic, and I'd love to talk to you about some of your views on the macroeconomic situation. I guess the question I have... If I were a middle income person in Great Britain or the United Kingdom, or lower middle income person, am I better off in a Brexit? Or am I better off tied somehow to the European economic union?

Philip Hammond (11:34):

So there is no doubt in my mind... Although this is disputed, but there's no doubt in my mind, having run the U.K. treasury for three years, that you will be better off if we remain closely linked to the European union, closely trade linked. The fact we have actually now already left the European Union, in political terms, doesn't mean that we couldn't continue to have a very close trade relationship, which will salvage most of that advantage. That would mean having to align a lot of our economic regulations, environmental labour market regulations, and so on with the European union. But it's clear that if we were prepared to do that, European Union would be willing to continue to have a free trade area in Europe, which would allow us, for example, to continue to serve as Europe's financial markets from London, in the way that we've done so successfully over the last couple of decades.

Anthony Scaramucci (12:38):

Okay. So at some point, your prediction is that it gets resolved with some kind of deal, and cooler heads prevail? Or Great Britain or United Kingdom will not be part of your... What's your prediction?

Philip Hammond (12:52):

So we're at a tipping point right now, because the U.K. government has made it clear it will not ask for an extension of the current transition period, which comes to an end on 31st December. So absent a deal done over the next six months, we will crash out of the trading arrangement we currently have, and stop trading on WTO terms. That is to say, full arms length with a hard border between the U.K. and the European Union. This, by the way, is particularly tough for Ireland, because nearly everything getting to Ireland, between Ireland and E.U., passes through the U.K., and a full set of tariffs.

Philip Hammond (13:37):

But there is still time to negotiate, probably, an interim agreement, with a fuller and more detailed agreement later. But there will have to be a significant political shift, because at the moment, the position of the U.K. government is that they would like a deal. But they will not concede anything on equivalence of regulation. They insist on retaining complete freedom to regulate how they wish, and they will make no commitment to align with the E.U. E.U.'s position is the exact opposite. Without alignment of regulation, the U.K. can have no preferential access to European markets. So unless somebody gives way there, isn't going to be a deal.

Anthony Scaramucci (14:22):

Okay. Well, I certainly hope there is a deal, Philip, because I think it'll be in the best interest of the of your people.

Anthony Scaramucci (14:30):

I want to shift gears and talk a little bit about the pandemic, and your opinion of your government's response to the pandemic. We both see the per capita incidents and the case risings. Where were we? What did they do right and wrong? And where are we now? And where do you think we're going?

Philip Hammond (14:51):

So there will be a postmortem in time on the way different governments responded to the challenge. I think that the general prevailing thought here is that when the government finally decided to lock down, it probably did it a week or two later than it should have done. And that has caused us some greater level of-

Anthony Scaramucci (15:22):

Why do you think that happened? Why did it take longer? It certainly took longer in the United States, as well. I'm just wondering, from the inside, what do you think was going on to cause the delay in that decision?

Philip Hammond (15:35):

I think there was a genuine concern about shutting... The economic impacts of locking down. We'd seen what had happened in... Italy, in particular, was the example we were all watching. And there was a desperate desire to try and avoid that. And also, a little bit of hubris, frankly. The British people are very used to being told that we have a great healthcare system in the U.K., state-run healthcare system. And frankly, the evidence is probably... That may have been true 60 years ago, when it was first invented, but it slipped behind many of its European comparators now. And there's still a bit of hubris here, people thinking somehow, we've got a better structure. We'll be able to manage this better. And on the evidence we see at the moment, it doesn't look like that was the case at all.

Philip Hammond (16:34):

One of the things that I take away from the differential handling in the U.K. and some of our European neighbors and in the United States is the degree of centralization. This, the U.K., is a very centralized country. Things are decided centrally in London, and they're run from London. Germany, for example, is a very decentralized country. And even in the United States, we saw the president making various announcements and statements. But in the real world, those were not his province. The governors of the States were able to make their own decisions, and some of them clearly made better decisions than others. But the over-centralization of the UK, I think, is going to come under very heavy scrutiny in the period after this epidemic.

Anthony Scaramucci (17:29):

But I think we recognize in a democracy, it was a problem. I also, frankly, think it was a cultural issue for the United Kingdom and the U.S., having not experienced a pandemic in 100 plus years. It seemed like the Asian nations were more prepared than we were culturally. You could just fly to Asia and see the number of people wearing masks prior to this pandemic to get that feeling.

Anthony Scaramucci (17:54):

I want to switch gears to your opinion on the economy. And so our economy's been hit. Your economy's been hit. The global economy is basically in recession as a result of the pandemic. Where do you think we are now? Where do you think the United Kingdom is? And what policies would you recommend to help dig us out of where we are?

Anthony Scaramucci (18:14):

And then the last question tied to all of that, of course, is, are the Europeans and the men and women of the U.K. doing the right thing from a policy perspective? And what about the U.S.? It's a long-winded question, Phillip, I'm sorry. But you get the gist of where I'm going. It's an economic macro question.

Philip Hammond (18:32):

Yeah. I think where we are, as the lockdown is easing across Europe and beyond, the economy is gradually coming back to life. And clearly, some of the demand suppression that has existed will disappear, and that demand will bounce back. But people can't go eat in restaurants and drink in bars if the bars and restaurants are closed. So for the moment, at least in the U.K., the services sector continues to struggle to maintain any reasonable level of output. And of course, all the while, structural damage is being done to the economy. Businesses are failing. Particularly, over-leveraged businesses are struggling with a lack of cash flows, or reduced cash flows over a relatively long period of time.

Philip Hammond (19:31):

So we have in place here, as you do in the U.S., all sorts of government sponsored arrangements to disguise unemployment, by paying people's wages to support businesses with liquidity problems, all of which will have to be unwound over the next six, nine months. And I think domestically, that is going to be a very, very difficult period for politicians in the U.S. I guess it won't happen until after the election is out of the way. Here, we've just had our election, December last year. So there's no obvious point to work to.

Philip Hammond (20:12):

But withdrawing that money, and recognizing that many people, who were told that they were furloughed and their wages were being paid, are actually now going to be redundant, and their wages will not be paid, is going to be a politically very difficult moment. But I think our experience from past recessions is that where structural adjustments are needed in the economy, trying to mask that need and delay the action only makes things worse and recessions deeper. We need to get on. We need to let the businesses that are going to fail, that have to fail, fail. We need to release the resources from them, the labour and the capital. We need to retrain and re-equip labour where necessary. And we need to get those people turned around and back into work as fast as possible. And that would be my recommendation to the U.K. government. Do not try to mask the scale of the problem. Do not try to delay the restructuring of the economy.

Philip Hammond (21:21):

I think the difficulty is that we're going to be doing this against, I suspect, a backdrop of stagnant or even shrinking world trade, which, for an economy like the U.K., which is very, very open to global trade, is going to be a very difficult backdrop.

Anthony Scaramucci (21:41):

I want you to weave into this, some of the racial tension and the racial anxiety, but that both of our nations are feeling. And so you have the combination of people dislocated from work and the issues around race. What are your feelings about that? And what kind of policy initiatives can be put in place to try to calm those things down?

Philip Hammond (22:08):

Yeah. Well, I think the trigger for this outbreak of racial demonstration has been things that happened in the U.S. And from where we sit over here, it does continue to astonish the degree of racial imbalance in policing techniques, and the aggression that is often shown. And not just shown, but captured on video. And that's an issue that I think is... I wouldn't say it's unique to the U.S., of course. But I don't think we have that problem in quite the same way here.

Philip Hammond (22:51):

But what it did, of course, the demonstrations in support, in solidarity with what was going on in the U.S., led to a sort of wider review of race relations here, and a general feeling that many years on from the last time we had this sort of soul searching and decided that we needed to do more, to become a more racially equal society, not enough progress has been made, and more progress needs to be made. And I sympathize with that. I understand that. I think it's the same strand of thinking that informed what I described earlier around the Brexit decision, that people feel that they don't have opportunity, that they can't see the ladder for them and their kids, in the way that perhaps they used to think it would be there. And we need to create that sense of opportunity for all. And there's a big review at institutional level going on here in academic institutions, in businesses, in charitable organizations and schools about the way they manage these things and how they can do better.

Anthony Scaramucci (24:08):

I think it's very well said. Before I turn it over to John and questions from our audience... Last week, we had a professor from Stony Brook University, Stephanie Kelton. She just wrote a bestselling book called The Deficit Myth, Phillip, and she is a modern monetary theorists. And she sort of believes that deficits do matter, but there's a lot of wide latitude that currency-issuing nations, like the United Kingdom and the U.S., have in terms of managing their budgets, and that ultimately, large deficits can be maintained and sustained by places like the United Kingdom and the U.S.

Anthony Scaramucci (24:53):

And what are your thoughts on that? Richard Nixon once said that we're all Keynesians now, Philip. He said that after he took us off the gold standard in 1971. Are we all Keynesians, or all modern monetary theorists, now?

Philip Hammond (25:07):

Well, I spent much of the last three years trying to reduce the size of the U.K. deficit. And we finally got to the point, just before I left office, where our debt was shrinking from a very high level, but shrinking as a share of GDP. And I'm very proud of that. Not because I believe that we should slavishly astrew deficits and reduce debt, but because I think that common sense tells you that in times when the economy is doing relatively well, you shouldn't be running very large deficits, so that in times when the economy runs into trouble, you have the capacity to respond.

Philip Hammond (25:48):

So what my successor has done... One level is disappointing for me. Having got the deficit here down to a mere 24 billion pounds a year, he's now taking it back up to more like 100 billion. But of course, I recognize that that's something he had no choice about. He had to do that in the circumstances, and precisely the reason we were trying to control the deficit was to create that space, should we ever need it. Nobody knew we were going to need it in 2020.

Philip Hammond (26:21):

But I would draw a distinction between the United States and other currency-issuing countries. I mean, the U.K. has the privilege of borrowing in its own currency. And of course, one is in a very different position if one borrows in one's own currency, than if one borrows in U.S. dollars, as a non-dollar area country. And the challenges that some of the emerging markets are facing around their dollar denominated debt is evidence of that.

Philip Hammond (26:54):

But the U.S. has the privilege of knowing that however irritated people, markets might be with U.S. government policies, or even monetary policies, the Fed's monetary policies, in the end, the dollar is the backbone of people's reserve holdings. And that gives the U.S. quite a large amount of leeway, which frankly we in the U.K. do not have. The pound sterling is a minor reserve currency now. The Euro, also a reserve currency, but not on the scale of the U.S. dollar. So I think these things are calibrated to the extent to which third parties are forced to hold your currency, whether they like what you're doing or not.

Anthony Scaramucci (27:47):

Well said. Listen, I read through her whole book. As a conservative and a lifelong Republican, there are issues that I have with the book. Probably, perhaps, you have the same issues. But the flip side is, she said something to me that was very compelling, is that, "Well, we're doing it anyway. The United States is going to issue three or $4 trillion of debt. So spare me the sanctimony about all of this conservatism." And so I thought her discussion and her intellectual gravitas was fascinating, so...

Philip Hammond (28:20):

Yeah, I still remember from the early days of the administration, when they were assuring everybody, including me, that all the stimulus programs were going to be self-financing and wouldn't lead to any increase in the U.S. public bear.

Anthony Scaramucci (28:38):

Right. Well, yeah. I mean, well, okay, well... Anyway, I have a bridge in Brooklyn I can sell you, Philip, if you can ever get back over here to this side of the pond.

Anthony Scaramucci (28:46):

Let's switch it over to John Darsie, John Duckless Darcy, without the little mallard duck behind him. Go ahead, John. I'm sure you've got some questions here-

John Darsie (28:58):

Well, speaking of the duck, I need to start with a comment that was submitted to the chat by Bill. He said, "For what it's worth, I liked the duck. But you should always agree with your mother-in-law." So I just want to have that on the record, that the duck might be making a return for our future SALT Talks.

John Darsie (29:12):

But the first question that we got from the audience is, "You touched a little bit on global trade, and how you think the pandemic is going to affect it, as it relates to the U.K. But generally, do you see any significant, longterm shifts in the way we look at supply chains and global trade as a result of the COVID-19 pandemic?"

Philip Hammond (29:30):

Yes, I'm sure that everybody will want to look at resilience of supply chains, and that's obviously a sensible thing to do. There's clearly attention between efficiency, getting the lowest cost, and resilience, having the greatest security. And I think there are a lot of people out there who will be thinking that we got the balance wrong, that we were driving efficiency at the expense of resilience too far, and that we need to build more resilience into supply chains in the recovery.

Philip Hammond (30:05):

But there are also a lot of people who are going to try and use that argument to make populist driven, protectionist solutions. And we have to resist those. This is not a moment to dismantle global supply chains. It's a moment to try and reinforce the resilience of them. There are many ways that can be done, and I think we should be engaged at an international level, perhaps through the G20, in discussing how we can beef up the resilience of supply chains without dismantling the globalization agenda, which has so increased living standards around the world.

John Darsie (30:47):

The next question is in regards to the U.K. government's response to the pandemic. "If you were still the chancellor of the Exchequer, what would you be doing differently than your successor, Rishi Sunak?"

Philip Hammond (31:02):

Okay. I don't want to criticize Rishi at all, because obviously he's facing some very, very difficult challenges. If I just tell you the areas where I am perhaps a little uncomfortable... I am nervous about having extended the government financed furloughing of employees through to the end of October. I personally think we should have tried to wean ourselves off that a little earlier. I think we are disguising some unemployment there, which we know is going to come through. And this is not necessarily good for the economy, to continue to disguise that.

Philip Hammond (31:43):

I think we have to take a sectoral approach. The British government, the Treasury rightly hates having to take a sectoral approach, but it's so obvious that this pandemic is affecting some sectors much more than others, that we inevitably will need to deal with aviation, hospitality in a different way, from the support we give to manufacturing, for example, often actual services. So I think over the next month or so, Rishi Sunak needs to start spelling out what the recovery path is going to look like, including the tough measures. So far, it's all been about additional support to the economy. But he needs to be explicit that these measures will have to be time limited, and we will have to face up to the real consequences of this crisis, in terms of higher unemployment, lower output.

John Darsie (32:43):

The next question has to do with the negotiations between the U.K. and the E.U. "What timeframe do you see a deal eventually occurring? And when that deal comes to fruition, do you see a devaluation of the British pound on the horizon?"

Philip Hammond (32:59):

Well, there are two scenarios here. Either we reach a deal by the end of this year... But if we do, I would expect that to be a very light touch framework deal, that probably won't be ideal from the point of view of either parties, but will be acceptable as a temporary arrangement, following which there will be a longer term negotiation of a more comprehensive agreement. Or we fail to reach deal during the course of 2020 because of the political challenges around that, in which case we would leave with no deal in December 2020. And there will be a period of time before the parties get back to the table, as I'm sure they eventually would, to negotiate a future deal.

Philip Hammond (33:50):

Now clearly, from where Sterling is at the moment, I guess quite a lot of the potential for no deal is already baked in there. So if a deal were announced, if a deal were done, I would expect that to be positive for Sterling. If it becomes clear later in the year that the deal won't be done, I would expect there is some element of no deal that isn't yet discounted in the price of Sterling. And so I would expect to see a negative movement, if that becomes the most likely outcome.

John Darsie (34:26):

"You've talked a lot about the need for a global digital services tax. Please explain what that means, and why you think it's something that the world really needs."

Philip Hammond (34:37):

So for many, many years, for the last 100 or so years, we've taxed international businesses on the basis of physical presence. So when Ford Motor Company came to the U.K., they built factories here. They built dealerships. They had a physical presence which could be taxed in the U.K. But increasingly, in the digital economy, the services that generate huge amounts of value do not require a physical presence in the marketplace country. And therefore, the taxing authorities in those countries have nothing that they can levy attacks on. And increasingly, they see digital business being done from tax-haven countries into their own jurisdictions, and the taxable earnings from that business leaking away.

Philip Hammond (35:33):

So for example, in the U.K., most of the big digital companies do deliver their business in the U.K. via the Republic of Ireland, which has a very favorable tax regime. They have no physical presence in the U.K. to support that business. That is clearly not a sustainable model for the future, as more and more business becomes dominated by digital content. And we have to find a better way of taxing international businesses that don't have a physical presence in the marketplace.

Philip Hammond (36:10):

And pretty much, the world is agreed on a solution, with the exception of the United States. And the United States takes the view that because, at the moment, many of these digital companies are U.S. companies, that this digital tax initiative is discriminatory against U.S. companies. And the U.S. is holding out. Personally, I think that's a rather shortsighted view. I suspect we're going to see, over the next decade or so, more and more of the key digital players being domiciled outside of the traditional developed countries, and more and more of them coming from Asia. And I think we do have to tackle this problem. And ultimately, it will be as much of a problem for the U.S. as it is for the Europeans now.

John Darsie (37:05):

"You touched on Asia a little bit. What is the relationship right now between the U.K. and China? And as tensions continue to rise between the United States and China, how does the U.K. fit into that? And what type of stance they take in relation to the U.S.-China relationship?"

Philip Hammond (37:21):

Very good question. So the U.S.-China relationship, and the difficulties with it, are a real challenge for the European countries in particular. Nobody in Europe wants to be stuck, forced to choose sides between the world's largest economy and the world's second largest economy. In the case of the U.K., we have a very open trading economy. We need to have good trading relationships with both the U.S. and China, although there will never be any doubt where our strategic partnership is. We've been strategic allies of the U.S. for... Well, certainly since the Second World War, and that isn't going to change. Nothing is going to change it. But in terms of trade, we have an important trade with China, as well as a very important trade with the U.S.

Philip Hammond (38:14):

So that tension between the U.S. and China is spilling over and challenging the Europeans, who are increasingly being asked by both the Chinese and the Americans to take sides, to choose whether they're for or against one or the other on a particular issue. And we've seen this most graphically in relation to Huawei.

Philip Hammond (38:39):

The U.K. relationship with China is further complicated by the U.K.'s particular position with regard to Hong Kong. And as the former colonial power in Hong Kong, we have certain obligations and certain rights under the agreement that we made with China back in 1994, which survive right away through until 2049. So we have a specialist interest in Hong Kong. We have millions of people with British passports living in Hong Kong, Hong Kong citizens. And therefore, the tension in Hong Kong is another source of friction between the U.K. and China. And in my time in government, we were very careful to try to balance our relationship with China, and to try to manage these difficulties and differences. The current administration under Boris Johnson is very keen to be close to the Trump administration, and to my mind, that has encouraged them to move decisively to the U.S. side of this argument, and to be prepared to take bigger risks in the U.K.-China relationship.

Philip Hammond (40:00):

That's where I think we are now. Quite a difficult period.

John Darsie (40:04):

Well, Chancellor Hammond, I want to thank you for all your very thoughtful answers, and for joining us today on SALT Talks. Anthony and I were in London in early February. We got to see you. The world's a little bit of a different place since we saw you in February, but we're hopeful that soon, we'll be able to get back to the U.K. and get to see you as the world opens up a bit.

John Darsie (40:23):

So Anthony, do you have any final thoughts before we let Chancellor Hammond go?

Anthony Scaramucci (40:26):

I wish you great health, sir. And I hope I can get you here to North America for one of our SALT conferences which, hopefully, John and I are looking forward to starting again. We'll have more information out about that once we can figure out and allay everybody's health concerns.

Anthony Scaramucci (40:42):

But Chancellor Hammond, thank you so much. And hopefully we'll see you soon.

Philip Hammond (40:47):

Thank you. Look forward to it.

Hedge Fund Managers on Structured Finance, Credit & Risk Management | SALT Talks #12

“This is an easy playbook in structured finance: buy mortgages. The Fed came in and said we are going to do whatever it takes to make sure we can transmit affordable financing to the largest borrowing base which is the residential market.”

SkyBridge co-Chief Investment Officer and Senior Portfolio Manager Troy Gayeski was joined by three leaders in the structured credit space, Clayton DeGiacinto of Axonic Capital, TJ Durkin of Angelo Gordon and Chris Hentemann of 400 Capital to discuss the state of structured credit following the COVID-19 pandemic.

After structured credit markets suffered a severe market dislocation as a result of the pandemic and its lockdown, the guests offer their view on how this current financial crisis compares to the last one and how that informs their investments. “This is an easy playbook in structured finance: buy mortgages. The Fed came in and said we are going to do whatever it takes to make sure we can transmit affordable financing to the largest borrowing base which is the residential market.”

Also discussed are broader philosophies around investing in structured credit markets. “Our ethos in our firm is let’s invest in cash flow and make sure we get the cash flows back and generate an agreeable return”

LISTEN AND SUBSCRIBE

SPEAKERS

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Clayton DeGiacinto

Founder & Managing Partner

Axonic Capital

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Chris Hentemann

Managing Partner & Chief Investment Officer

400 Capital Management

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TJ Durkin

Co-Head, Structured Credit

Angelo Gordon

EPISODE TRANSCRIPT

John Darsie (00:00:04):

Hi, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of Salt, the global [inaudible 00:00:13] at the intersection of finance, technology, and geopolitics.

John Darsie (00:00:17):

SALT Talks are a series of digital interviews that we've been hosting in lieu of our in-person conference, the SALT conference which takes place annually in Las Vegas and we've done several international conferences as well in Abu Dhabi, Tokyo, and Singapore. What we try to do at our conferences and what we're trying to do here with these SALT Talks is provide our audience a window into the minds of subject matter experts, as well as provide a platform for big, important ideas and discussions on what we think are very compelling investment opportunities out there in the marketplace.

John Darsie (00:00:46):

Today we're very excited to host a talk about structured credit markets, which are near and dear to our heart. Structured credit markets suffered a severe dislocation in March as a result of the pandemic and the ensuing economic shutdown. But they've started to recover.

John Darsie (00:01:01):

For today's talk, we're welcoming on three experts in the structured credit space to talk with SkyBridge co-chief investment officer and senior portfolio manager Troy Gayeski. I want to provide a brief introduction to our three panelists.

John Darsie (00:01:15):

Which are Clayton DeGiacinto of Axonic Capital. TJ Durkin of Angelo Gordon. And Chris Hentemann of 400 Capital. I'll go through a bio for each panelist before I turn it over to Troy.

John Darsie (00:01:28):

Clay DeGiacinto is the founder and managing partner of Axonic Capital, an investment management firm focused on structured credit and systematic fixed income opportunities. He serves as the chief investment officer for the firm's investment funds and commercial lending business.

John Darsie (00:01:43):

Prior to founding Axonic in 2010, Clay was responsible for building out the mortgage investment platform at Tower Research Capital and was the senior portfolio manager for Split Level, LLC, which is the predecessor fund to the Axonic credit opportunities fund.

John Darsie (00:01:59):

From 2002-2008, Clay was a vice president in a fixed income, currency, and commodities group at Goldman Sachs. Previously Clay served as an Army Ranger and a captain in the US Army, in the 25th infantry division from 1995-2000.

John Darsie (00:02:16):

He joined the Army after attending West Point, he's a graduate of West Point. He also holds an MBA from the Wharton School of Business at the University of Pennsylvania. He's on the board of directors for Team Rubicon, a great charity that we featured at the SALT conference before. We'd like to thank Clay for his service and for his ongoing philanthropy work supporting veterans and their families.

John Darsie (00:02:36):

TJ Durkin is the co-head of structured credit and the head of residential and consumer debt at Angelo Gordon, a privately held alternative investment firm founded in 1988, that manages approximately $35 billion across a broad range of credit and real estate strategies.

John Darsie (00:02:53):

TJ joined Angelo Gordon in 2008 and is a member of the firm's executive committee, as well as the co-head of the firm's structured credit platform. He's the co portfolio manager of the firm's residential mortgage and consumer debt securities portfolios, the CIO of Mitt, M-I-T-T, and Angelo Gordon, which is Angelo Gordon's publicly traded mortgagery. He serves as a board member of Arc Home, Angelo Gordon's affiliated mortgage originator, and GSE licensed servicer.

John Darsie (00:03:23):

TJ began his career at Bear Sterns where he was a managing director on the nonagency trading desk. He earned his bachelor's degree from Fordham University and currently serves as a member of the school's president council.

John Darsie (00:03:35):

He's also a board member of VE International, a not for profit focused on preparing high school students for college and careers through skills learned in an entrepreneurship based curriculum.

John Darsie (00:03:46):

Finally our third panelist today is Chris Hentemann, who is the founder, managing partner, and chief investment officer of 400 Capital, which is a structured credit asset management firm offering qualified investors access to a broad range of investment solutions across the structured credit space.

John Darsie (00:04:03):

Chris founded 400 Capital in October of 2008 and heads the firm investment and operating committees. Prior to 400 Capital, Chris was the head of global structured products at Bank of America Securities. Before that he spent time trading and investing in structured credit markets at Solomon Brothers and Credit Suisse First Boston.

John Darsie (00:04:23):

Chris is a graduate of the Carroll School of Management at Boston College, with a bachelor of science degree in finance.

John Darsie (00:04:31):

Hosting today's SALT Talk, as I mentioned, is Troy Gayeski, who is a partner, senior portfolio manager, and co-chief investment officer at SkyBridge Capital. Which is a global alternative investment firm that's focused on multi manager hedge fund solutions. Troy is a graduate of MIT.

John Darsie (00:04:49):

Just a reminder to everyone. If you have any questions for any of the panelists during today's talk, you can type them in the Q&A box at the bottom of your video screen. And with that, I want to turn it over to Troy Gayeski, who's going to conduct the interview.

Troy Gayeski (00:05:01):

Yeah. Thanks so much, John. And thanks, everybody, for joining us today. Before we get into the meat and potatoes of structured credit markets, we wanted to give each of the panelists a chance to talk a little bit about their background and their firm in more depth.

Troy Gayeski (00:05:14):

Particularly on the human side, how they made the journey for they grew up to where they are today. Clay, if you don't mind leading off in that we'd love to hear that story.

Clay DeGiacinto (00:05:25):

Sure, Troy. Thanks for having me today. I guess I have a little bit of an irregular background. I graduated West Point, I came from the Midwest, southern Illinois. And post my mechanical engineering degree from West Point, I served as a military officer in the United States Army, as a field artillery officer stationed out in Hawaii.

Clay DeGiacinto (00:05:47):

That was in the late '90s, it was a different Army back then. It was certainly pre-9/11. I'd always wanted to go to Wall Street and try my risk appetite through trading financial instruments, and I thought the perfect conduit to that was through business school. So I went to Wharton. I started on a mortgage trading desk at Goldman Sachs back in 2002.

Clay DeGiacinto (00:06:12):

They gave associates fresh out of business school a fairly low risk job to perform, which at that point in time in the mortgage department was the adjustable rate mortgage desk. Because it was relatively low duration. It was hard to lose a significant amount of money in relatively low duration assets.

Clay DeGiacinto (00:06:33):

But as luck would have it, the curve steepened out quite a bit in 2003 and that was really the advent of all the affordability products. Adjustable rate mortgages, 31s, 51s, 71s, 101s, even the negatively amortizing mortgages that we can all sort of chuckle about today was quite heady back in the early to mid 2000s time environment.

Clay DeGiacinto (00:06:58):

But managed to position anywhere between two almost $10 billion of both loans and securities, all parts of the capital structure including cash and synthetics. And both on the agency as well as nonagency side of the business.

Clay DeGiacinto (00:07:16):

Most people that remember the last global financial crisis that were in the mortgage business know that it happened really in 2007, not 2008. So post-2007 I thought what a great time to become an entrepreneur and take advantage of some of the dislocation during the last financial crisis.

Clay DeGiacinto (00:07:36):

That's when I went out on my own. Left Goldman and started my business. As it was introduced, I started at a firm called Tower Research Capital and launched Split Level, LLC. Which frankly is the predecessor fund to what we're running today.

Clay DeGiacinto (00:07:54):

Firm is about 55 people. We're based in midtown Manhattan. We invest in all parts of structured credit. RNBS, CNBS, CLOs, multitude of asset backed securities. Even some equities if they're balance sheet heavy, like [Reets 00:08:13] or BDCs. We manage a little over $3 billion in assets through public and private vehicles.

Troy Gayeski (00:08:23):

Great, Clay. That's a great summary of your background. Are there any skills in particular in the military you learned that you think are applicable today to you as you're managing Axonic? Particularly in times of stress.

Clay DeGiacinto (00:08:35):

Well listen. I think these businesses, risk management is probably the number one function that everybody on this panel thinks is their highest priority. That's also critical in the military as well.

Clay DeGiacinto (00:08:52):

I think that a lot of my friends and former classmates from West Point served careers. And frankly, a lot of them are still in. They've succeeded going up the ranks in the military. Some today are even a general or even very senior colonel. They've been great risk managers throughout their career, including in operating in combat.

Clay DeGiacinto (00:09:19):

I never had that opportunity. I left the military before 9/11, before we'd been engaged in years worth of wars. But I do think risk management is a skill that can transfer across from the military to finance. That's really thinking about and receiving and considering imperfect information in everything that we invest, and trying to make mission critical decisions around that. Which is exactly what happens in the military.

Clay DeGiacinto (00:09:50):

But more importantly, if you're wrong or if there's some bit of information that comes that makes you want to change your mind, you can act on that decisively and accordingly.

Troy Gayeski (00:10:01):

Got you, got you. Thanks for that summary, Clay. Really appreciate it. Chris, do you want to give us a little background? A little info on your background, as well as the firm?

Chris Hentemann (00:10:11):

Yeah. You're going to get a lot of similar crossover themes to Clay, so I'll try to keep it somewhat brief because Clay hit on a number of things that probably will carry over for all of us.

Chris Hentemann (00:10:22):

But to make it a little personal, I did actually almost 30 years to the day, I started in the business. I got out of school in May of 1990 and I started what was First Boston Credit Suisse in June of 1990. For better or for worse, I think it's for better, this is pretty much all I've been doing.

Chris Hentemann (00:10:42):

I landed on the mortgage trading desk at First Boston in the early '90s, a very interesting time because it was really the front end of a lot of mortgage securitization. Particularly I was working on a desk that was focused on derivatives. So it gave me really interesting introduction to the mortgage and securitized product universe.

Chris Hentemann (00:11:04):

I spent four years there. And then got an offer to go to Solomon Brothers, which was a really exciting place to work. Particularly to be in the bond trading business at Solomon Brothers in mid '90s. So I traded for a few years at Solomon Brothers and then left to go to what was Nations Bank in the mid '90s with one of my colleagues.

Chris Hentemann (00:11:25):

I helped develop the securitized capital market improvement for what is today Bank of America. I spent almost 12 years there.

Chris Hentemann (00:11:33):

Fascinating experience. It was in the last '90s and early 2000s when the banks were pretty much given a license as class [inaudible 00:11:40] was effectively repealed, and to expand into more investment banking related functions. We developed a business around it where we could use all the strengths of a bank and all the basically the skills that we had structuring and trading and understanding how securitized finance fit into the capital market of the banks based on the broader financial universe.

Chris Hentemann (00:12:06):

And helped develop the origination, the structuring, the trading, and even some of the proprietary lines of business across all the residential mortgage spaces. Commercial real estate, all the different aspect groups. And structured credit and credit derivatives such as CLOs, both in the US and in Europe.

Chris Hentemann (00:12:25):

I consider that really actually one of the really important foundations for what we do because similar to Clay, I think we both basically like ... we knew we had a differentiated skill. We liked to manage risk and had a pretty good knack for it.

Chris Hentemann (00:12:43):

And also realized that there's a lot of value in actually being in these markets, particularly through cycles, credit cycles and straight cycles. But also the evolution of the product as it became more institutionalized, particularly through a cycle like 2007-08.

Chris Hentemann (00:12:59):

As Clay had referred to, you really see some of the strengths and weaknesses of how a market develops and evolves. It was almost the perfect inflection point for me to do what I really aspired to do, was basically leverage all that experience and start a firm similar to what Clay had done.

Chris Hentemann (00:13:15):

So I launched 400 Capital in October of 2010. Sorry, 2012. We did it on a very modest amount of capital. Most people don't realize it was really challenging. But I think it was for the better in the long run. We started with a few million dollars of forensic family capital and developed the hard way off of track record and basically the knowledge base that we could deliver to client in that post-GFC environment.

Chris Hentemann (00:13:45):

We developed a firm today that's just under $4 billion and has a range of different products. Again, similarly we really have basically interact with clients as a conduit to the structured finance space, offering based on the ability on total return or more patient capital, through more patient capital vehicles. The ability to get access to very unique returns that hopefully we'll be able to articulate over this next hour, across RNBS, CNBS, and asset based and crossover forms of credit markets.

Chris Hentemann (00:14:23):

That's how I got here.

Troy Gayeski (00:14:25):

Yeah, that's great. Great to hear that, Chris. TJ, please keep it brief because we're already running out of time.

TJ Durkin (00:14:32):

Sure, sure. Never fun to go last. But yeah, really briefly. I ended up going to college here in New York City. That gave me the opportunity to have an internship at Bear Sterns on the mortgage trading desk. So similar to Chris, this is all I've ever really been doing.

TJ Durkin (00:14:49):

Rose up the ranks there to managing director on the mortgage trading desk. Stayed all the way till the end, until JP Morgan merger and had the opportunity to continue my career on the sell side there if I so chose. Or thought at that point it would be a really interesting opportunity to go to the buy side, try something new, and come to an existing platform such as Angelo Gordon, but that really was not exposed or had exposure in the mortgage or structured credit space in any material way.

TJ Durkin (00:15:24):

Fast forward 12 years here, we have a team of 25 people here that I lead. I'm the mortgage ABS consumer space, up and down the capital structure, whole loans, securities, etc. That's where we are today.

Troy Gayeski (00:15:41):

TJ, succinct as always. I got to love it, man. I got to love it. No offense, Clay and Chris. No offense.

Troy Gayeski (00:15:48):

Guys, prior to the COVID-19 pandemic and all the chaos in the markets that we've experienced here since the second and third week of March, can you guys take us back to January this year and explain to the audience why you were positioned the way you were? Long structured credit assets.

Troy Gayeski (00:16:06):

And I'm going to ask TJ to start out this time, since he went last time. If that's all right with you, TJ.

TJ Durkin (00:16:14):

Yeah, absolutely.

Troy Gayeski (00:16:15):

Talk about particularly consumer ABS and also RMBS of it as well, why you thought those assets were very attractive.

TJ Durkin (00:16:24):

Yeah. I think stating the obvious, obviously we came into March with historically low unemployment and we'd been grinding down towards that rate. What that had been doing in the background over the past probably 18-24 months had really helped support wages.

TJ Durkin (00:16:41):

As there was a need for more employees, employers had to effectively pay up to get them. We saw that trend really start I guess back in '17-'18 and continue through to where we got to, call it March 1st of this year. Really in particular we saw a lot of tailwinds in the lower and medium wage earners.

TJ Durkin (00:17:05):

Which is a large part of in particularly the consumer ABS market. The wealthies debts aren't really securitized. Their mortgages are held on bank balance sheets. American Express on the credit card is using their deposit. So that's really when you think about structured credit a lot of it is the middle class and working their way down.

TJ Durkin (00:17:26):

And so we saw quite healthy fundamentals there on the income side. On housing, just over the last 10-12 years we did not keep up with household formation. There's structurally a shortage of particularly affordable housing.

TJ Durkin (00:17:45):

When you think about the collateral supporting residential mortgage bonds, it's really what's the value of that house. It was very hard to construct a scenario where we thought there would be material downside in terms of that asset price over the coming two to five years.

TJ Durkin (00:18:02):

And so there was a lot of fairly obvious supports to owning this credit, coming into 2020.

Troy Gayeski (00:18:13):

Got you, TJ. Thanks for that summary. Chris, if you don't mind, could you talk more specifically about RMBS? Because that's obviously a very large sector exposure for your firm. And feel free to dive into LTVs, equity, FICO/Vantage scores, etc.

Chris Hentemann (00:18:32):

Yeah. It's going to connect well with what TJ just mentioned. I think a lot of the things that he had mentioned are really the foundation for how we have made the same decisions.

Chris Hentemann (00:18:42):

You had a very strong consumer, that's in jobs is actually very important to that, and actually it's even more critical today in terms of having a view. We'll talk about future. But this is a much different employment environment than we had at the beginning of the year.

Chris Hentemann (00:18:58):

A very strong foundation for employment, wages, etc. So obviously your credit to the consumer is strong. We picked up on a couple things. I will add to it that in the post-GFC environment, bank regulations, particularly around mortgage credit origination like qualified mortgage rules, really haven't retreated much. They had been well in place.

Chris Hentemann (00:19:23):

We have a good consumer with a good job base beginning of the year, relatively delivered or lightly, like on a historical basis, of very balanced balance sheet. We've been in a low interest rate environment for a long time, so consumers have access to great cost of funds. Debt service coverage actually also was very good at the consumer level.

Chris Hentemann (00:19:50):

You had very good features in the consumer. And then the origination of credit, particularly in the mortgage universe, around the way rules were constructed in the conventional market and the private label market. We had actually what we would consider well disciplined credit origination.

Chris Hentemann (00:20:07):

Actually in a lot of cases we thought it was too conservative and mispriced. The mispricing comes from not only basically looking at high FICO, low levered consumers in a great consumer friendly environment, you also had relatively low LTVs in appreciating housing environments with very good technicals. I'll add that too.

Chris Hentemann (00:20:32):

The US housing market still remains about 2 million units short in terms of housing supply versus demand. We think that's going to still exist and it's what's actuating a sustainable housing environment even through the COVID crisis.

Chris Hentemann (00:20:48):

Then you have rating agencies. You can't miss the rating agencies because they actually are an important function to credit origination. The rating agencies after the financial crisis nearly lost their license to rate structured finance deals, given basically since the poor performance in the financial crisis.

Chris Hentemann (00:21:03):

They have the classic sort of pendulum shift as well, like the banks did, in terms of conservative underwriting. And so we saw that a lot of the origination in terms of mortgage credit was very conservative from a ratings point of view.

Chris Hentemann (00:21:15):

You nest all that together and you actually have a really good, really attractive environment to invest in.

Troy Gayeski (00:21:25):

Got you, got you. Clay, one of the differences between you and Chris and TJ is you've had more of a focus on the agency CMBS multi family market. Can you talk about the fundamentals there coming into the year prior to COVID-19?

Clay DeGiacinto (00:21:42):

Yeah, sure. It seems like so long ago now. I would echo quickly what Chris and TJ mentioned.

Clay DeGiacinto (00:21:51):

Thematically, structured credit is currently and was, even before COVID, a structurally cheap asset class. Primarily due to the re-regulation of global banks and insurance companies. I think where we tend to invest and likely where others tend to invest that have private money, is at a part of the capital structure which is really punitive for most banks and insurance companies.

Clay DeGiacinto (00:22:20):

I call it the fulcrum part of the capital structure or the part of the capital structure that matters most to really being right about the credit. It's not the equity, but it's certainly a first loss of mezzanine part of the debt capital structure.

Clay DeGiacinto (00:22:35):

That is quite a yieldy asset class and we get to enjoy making decisions about risk relative to return. But generally global banks and insurance companies have to think about risk relative to return relative to regulatory capital. Frankly, nine out of ten times that regulatory capital tends to be the constraint.

Clay DeGiacinto (00:22:56):

I know we're going to talk about how cheap the market is now. Frankly, I think it's cheaper than it was post-COVID. But it was even a pretty interesting buying opportunity pre-COVID. We probably 50% of our investment are centered around CMBS and commercial real estate, with a significant bend to multi family.

Clay DeGiacinto (00:23:18):

We're experts in commercial real estate, equity, all the way through the debt tranches. We even have an origination business where we'll lend on the mezzanine part of the capital structure, often behind bank first lien mortgages. But what I think is interesting is, given the universe of CMBS, we've never invested in one conduit CMBS B piece. But we highly favor multi family B pieces.

Clay DeGiacinto (00:23:45):

In particular, agency multi family B pieces. We have a relationship with Freddie Mac on their small balance B piece program. This is a program that was originated back in 2014-2015. They originated about $8 billion a year.

Clay DeGiacinto (00:24:05):

In general, these are all of the loans are following the Freddie Mac guidelines, which are fairly stringent throughout the country. There's different underwriting guidelines depending on what pocket or specifically ... as we all know, real estate is hyper local, specifically what geography they're originating in. All cash flowing assets, no development, no brownfield, no greenfield. No transitional loans. With occupancies certainly greater than 90.

Clay DeGiacinto (00:24:35):

But what I think is most important, and really the reason why we were very attracted to this is the small balance multi family loans in particular, it's sort of the workforce housing. These are 20-50 unit garden style low rise apartments, geographically dispersed all throughout the country.

Clay DeGiacinto (00:24:53):

These loans are being made not from a lender that's really focused on driving profitability. This is a policy decision. Both Freddie and Fannie also have a regulator in the FHFA that has a dual report to Treasury and to Congress. Specifically housing affordability is their number one mandate.

Clay DeGiacinto (00:25:20):

That includes multi family lending. Let's make loans affordable so that housing becomes affordable for the multitude of renters. We specifically like the workforce because we thought it was pretty defensive from a macroeconomic viewpoint.

Clay DeGiacinto (00:25:40):

We've been in expansion now for 11 or 12 years. I would say that credit may feel a little bit toppy or heady. We think about the cashflow profile of the asset, we invest in discount dollar price assets that pay us back money over time. We want to make sure that every dollar we put out, we're going to get that money in an amortizing fashion over time and make sure that we get more back than a dollar.

Clay DeGiacinto (00:26:11):

Our ethos at our firm is [inaudible 00:26:13] invest in cash flows and make sure that we get the cash flows back and generate an agreeable return. It's not one where we're focused on spread. Meaning very few people at the firm, at least pre-COVID, would think about let's invest in an asset that we think can tighten because it's just cheap.

Clay DeGiacinto (00:26:31):

We really want to be comfortable with the cash flows. We know that we're going to buy the first loss piece on the debt in these multi family loans with Freddie origination standards. If you go back to the last crisis, and I think there's a lot of parallels from this crisis to the last one, we want to be safe around defaults and performing assets versus nonperforming assets.

Clay DeGiacinto (00:26:56):

Freddie originated multi family through the last crisis. [inaudible 00:27:03] defaults were less than 50 basis points. That's incredible when you think about conduit defaults, which were well north of 10% during the last crisis.

Clay DeGiacinto (00:27:13):

I think we're seeing the same thing this time. Just given the data over the past few months, which I'm sure you're going to ask me a little bit about later.

Troy Gayeski (00:27:21):

Perhaps we'll get into that. Succinctly, TJ, if you don't mind. Could you walk our viewers through some of the crazy price action that we saw? Particularly the last two weeks of March. And what you thought drove that. And then in turn, how much of that price action do you think as technically driven as opposed to fundamentally driven.

TJ Durkin (00:27:46):

Yeah sure. I mean I go back and forth with it now, 90 days later. But it felt like we hit the bottom March 23rd, March 24th, at least in our market. I can tell you I was sitting in the same seat, starting in 2008-2009, for the last version of this.

TJ Durkin (00:28:07):

It felt completely different in the sense of that was a slow moving train of deteriorating fundamentals. Chris brought up rating agencies were flawed, they were kind of playing catch up with downgrades. I would tell you most people were, I would say, on the buy side getting excited about buying assets during that time period.

TJ Durkin (00:28:31):

Versus this time around, you could tell it was ... I don't want to say completely technically driven, but 90% of the price volatility we saw was technically driven. It was mostly driven by the daily liquidity bond funds and mutual funds, the 40 Act funds, that were getting redemptions.

TJ Durkin (00:28:50):

I think it's pretty clear we've been living in a low interest rate environment. People don't really keep their assets in their savings account anymore. It's in these bond funds to get some more yield. The virus caused panic, it caused fear, and people wanted that liquidity. So they pulled assets from those bond funds.

TJ Durkin (00:29:13):

Those managers just needed to sell. It wasn't about making a decision of relative value. It was sell anything that you can get a bid on. We saw irrational prices being reported. Intraday, day over day. Obviously we're heading into a worse employment situation, economic situation.

TJ Durkin (00:29:37):

But where we saw what I call bomb proof bonds, AAA bonds, being for lack of a better term puked out, just because someone needed cash, really told you that it was way different than the last time around. And almost predominantly all technically driven.

Troy Gayeski (00:29:56):

So would it be fair to say we've basically got '08, an entire year of '08 price action, in two weeks?

TJ Durkin (00:30:03):

Yeah. Yeah. I think we got that in two to three weeks versus what probably took 15-18 months last time.

Troy Gayeski (00:30:10):

Mm-hmm (affirmative). Mm-hmm (affirmative). Got you. You think roughly 90% of that was technically driven?

TJ Durkin (00:30:16):

I go back and forth. If we were sitting there in March, 75%. The further we get away from it, it feels ore like 90, 95. I'll stick with my 90.

Troy Gayeski (00:30:26):

Got you, got you. Chris, since the dark days of late March, all of your portfolios have rebounded quite substantially. What do you think has driven the rebound? Is it principally technicals? Is it Fed policy? Is it the fundamentals haven't gotten as bad as people feared? Is it some of the fiscal stimulus in terms of the direct stimulus checks, as well as enhanced unemployment?

Troy Gayeski (00:30:54):

When you go through the factors that you evaluate a security with, what do you think's been the key driver of rebound so far?

Chris Hentemann (00:31:04):

If I had to give you one word it's information. What information comes into the market that allows you to basically invest prudently.

Chris Hentemann (00:31:13):

The first piece of information that came in in those, on March 23rd, was that the Fed was going to open up QE4. We've seen this before. This is an easy playbook in structured finance. Buy mortgages. Don't look back.

Chris Hentemann (00:31:30):

I mean mortgage bases moved three points. Three points in 48 hours. It's unprecedented. So the Fed came in and they said we are going to do whatever it takes, unlimited, to basically make sure that we actually can transmit affordable financing to the largest basically borrowing base. Which is residential market. Pretty significant.

Chris Hentemann (00:31:54):

It's kind of like the first driver of the rebound. Then things fall off of that. So then you have the policies that come off of that within probably a week or three weeks after that. Again, further information comes to the market.

Chris Hentemann (00:32:05):

Because the first piece of information we all pretty much didn't know was what TJ was just reflecting on, was how much is technical, how much is fundamental. We're all redialing all of our models to say how much impairment is really embedded in these markets.

Chris Hentemann (00:32:18):

And so while we're doing that, the Fed is feeding us new information. So within things that are very relevant, and there are very few of them that are relevant to the structured finance market unfortunately, were programs like [inaudible 00:32:31].

Chris Hentemann (00:32:32):

Even the CARES Act as it started to develop helped our market, because feeding cashflow into the consumer, or PPP, feeding cashflow into small businesses to put a floor under employment, ideally a few months down the road is helpful in a first or second order way for a lot of our credit decisions.

Chris Hentemann (00:32:54):

Corporates, high yield, municipals, had much more first order support form the Fed this time than the GFCs. Probably rightly so because industries are really really under duress, in a very very short period of time.

Chris Hentemann (00:33:08):

So all that came into the market, I would say, in the late March, early April. Again, feeding more information into the market and you can see basically, as TJ had mentioned, the higher part of the more liquid, the more bomb proof, using TJ's analogy, parts of our market recovered pretty quickly. The easier trades were after you got done buying government guaranteed mortgage-backed securities you go and buy the AAAs, you buy the AAs, you buy the As. And that's where you're going to get liquidity. It's where you're going to get your best trade, so to speak.

Chris Hentemann (00:33:40):

Thereafter then, ideally you're going to get enough information from the market in terms of what sense will we get. Will this be a V, will it be an L, will it be a V, will it be a U, will it be an L. What are the magnitude of employment, what's the magnitude of unemployment going to be. What is it going to do to housing and asset prices.

Chris Hentemann (00:34:02):

So I think we've got a lot of information in the last few months, and I think it's allowed a lot of us to actually really, with our expertise, dive into the mezzanine and lower parts of the capital structure and parse through what are exceptional opportunities. Because what's evolving is you're seeing that some of these things that we spoke about very early in terms of our beginning of the year forecasts, are still in place.

Chris Hentemann (00:34:28):

Like I mentioned, technicals and housing market, if anything they've probably tilted more in our favor. That's the cost of financing real estate assets has actually become very attractive. Cash flows are speaking through to the consumer that we're seeing that the actual data in terms of auto payments and other consumer receivable payments, even mortgage payments, are moderating.

Chris Hentemann (00:34:52):

So we're getting more information. Those are the drivers, to get really right to it, Troy, that are allowing us to basically start to feed capital in and make prudent decisions.

Chris Hentemann (00:35:04):

I think the hardest ones are going to be how our operating companies, or more operating related exposures, going to basically react. It's going to take a longer time to determine. So things like how is consumer behavior going to affect how hotels, people are going to travel, or retail. Those are the ... airlines.

Chris Hentemann (00:35:23):

Those are going to be the challenging, longer recovery cycle sub sectors, as I think most people [inaudible 00:35:32] would be able to figure out. But again, it's information as it's coming into the market. As soon as we can digest it, make a prudent decision, we can pick through things that are truly just technically repriced and make good investment decisions and take advantage of the rebounds.

Troy Gayeski (00:35:48):

Clay, you want to speak briefly about multi family? How much was technical versus fundamental? Obviously the level of rent payments has hung in there much better than people thought. You've had some spread tightening back from the wide. You want to give a little color around that?

Clay DeGiacinto (00:36:06):

Yeah, sure. You asked a very good question that I've been processing now for a few months. And that was the selloff technical or was it fundamental.

Clay DeGiacinto (00:36:18):

I think TJ did a great job of explaining to it, but the last two weeks in March was one of the strangest trading environments I've ever incurred in my career. If I were to-

Troy Gayeski (00:36:30):

One of? One of, Clay?

Clay DeGiacinto (00:36:31):

One of. One of.

Troy Gayeski (00:36:31):

Okay.

Clay DeGiacinto (00:36:33):

If I were really to try to set the stage, or frame what was happening, mid March the entire Wall Street was work from home. Nobody was prepared for that. Every single bank on Wall Street has massive disaster recovery centers with fancy computers and multiple screens. Nobody's used to work from home on their cell phone and on iPads, which they can't really ... the salespeople aren't interacting with the traders who aren't interacting with other salespeople, and really feeling the pulse of the trading environment.

Clay DeGiacinto (00:37:05):

You couple that with being at the end of the quarter, there's a stress for cash. Most banks that had credit lines outstanding, they were being called upon. So these contingent liabilities that were being called upon. Everybody was in cash preservation mode.

Clay DeGiacinto (00:37:21):

I think a lot of the price action, not only was there daily demand of mutual funds that were selling, in fact some of them sold on a Sunday bid list, which was also the first time.

Troy Gayeski (00:37:34):

First time ever. Right, Clay?

Clay DeGiacinto (00:37:34):

First time I've seen it in my career. But also it was a liability driven issue, where repo or margin lenders who also levered firm balance sheets to try to make a spread on what their cost of capital was versus where they could lend on assets, there was a real margin constraint.

Clay DeGiacinto (00:38:01):

I think when you look at returns today, or if you were to try to look at returns over the past few months, you'll see that I think the differentiated returns streams is really a function of how people were levered. Those that were most levered probably did the worst.

Clay DeGiacinto (00:38:18):

I think it's important to think about was the loss a function of mark to market, or was it a function of crystallized losses. Because people had to sell and raise cash to pay off margin lenders or redemptions if it's a mutual fund, etc.

Clay DeGiacinto (00:38:36):

I think that March performance, or the March prices, was 90% liquidity, probably 10% fundamental. I think we've flip flopped that today where liquidity is back in the market, repo lenders are back in the market. I think a lot of people have changed their borrowing book and either reduced it significantly or extended out from a term in maturity perspective. Paying up to lock in term repo.

Clay DeGiacinto (00:39:04):

But I also think that the environment that's presented in front of us is significantly different than the last global financial crisis. Where coming out of that crisis assets were priced yield to worst, that's quite true today. There's many assets priced yield to worst.

Clay DeGiacinto (00:39:22):

But what's different is last time I think you could almost buy anything, and you saw this recovery through both spread tightening as well as fundamentals improving. When I look at the landscape today, certainly on all parts of the structured credit market, although liquidity is back and you're going to see some spread tightening at the top part of the capital structure, I think there is and will continue to be real fundamental stress through the system.

Clay DeGiacinto (00:39:50):

Like Chris said, we effectively get new data once a month. That's data that tells us how people paid or what the transitional role rate matrix of defaults was during the last month. We can infer from that and try to have predictability around the future cashflow profile.

Clay DeGiacinto (00:40:08):

But there's you've probably seen people, there's been tens of billions of dollars raised for their sector right now. Which I think is quite interesting, but the investment philosophy cannot be one where it's just buy it because this is a replay of the last crisis.

Clay DeGiacinto (00:40:26):

I think it's really important to know and understand. I know the three of us on the panel, I feel comfortable saying this because I know that we all have systems. We've been in business 10 years, we have default and prepayment models that are pretty dialed in at this point in time. And that's going to help us make decisions for the future, for the future cashflow profile of some of these assets.

Clay DeGiacinto (00:40:50):

The buying opportunity is as good as we've ever seen it. Lots of assets are traded at 50 cents on the dollar. That's not traded at 50 cents on the dollar because there's a general consensus that the principal balance will lose 50%. I think it's trading at 50 cents on the dollar because people are really uncertain what's going to happen. You know?

Clay DeGiacinto (00:41:13):

Half can pay off at par and half are going to go to zero. That's a tremendous opportunity for folks with models, with analytics, that have invested in this asset class for a long time, certainly coming out of the last financial crisis.

Clay DeGiacinto (00:41:29):

You talked about multi family, if you give me a few more seconds. The idea that we can now buy assets at a yield to worst mentality, and that means that we can ramp up expected defaults, we can slow down expected prepayments, and still buy assets with a mid to high single digits yield, I think is pretty significant.

Clay DeGiacinto (00:41:52):

We haven't seen this buying opportunity for a long time. When you couple that, I always use this concept called yield to worst. So it means that in structured credit, spread or price is the last thing that we think about. We first have to be right about our forecasted defaults and recoveries and prepayments.

Clay DeGiacinto (00:42:12):

When you make all of your assumptions fairly onerous and you're still able to earn mid to high single digits unlevered return, the upside is quite significant. We're investing in these type of assets, multi family like I mentioned before, I think is relatively defensive.

Clay DeGiacinto (00:42:32):

Most of the assets that are backed by the loans that we own are trading below replacement value. Cap rates are in the 5, 6, 7 percents. The DSCR assets are well covered. I think that these forbearance programs are really working.

Clay DeGiacinto (00:42:53):

The CARES Act, which goes through the end of July, is interesting because specifically in workforce housing, where we think the average income is around $24,000 a year in that asset class, in class C multi family, the CARES Act is allowing these folks to earn about 170% of their prior weekly employed cashflow.

Clay DeGiacinto (00:43:21):

So there's a lot of excess dollars in the system and they're paying their rent. That then is leading the owners to be able to pay their mortgage. We're seeing that throughout.

Clay DeGiacinto (00:43:32):

So I think there's been some fiscal stimulus that's been good for the consumer, it's been good for a lot of the asset classes that we're investing in.

Troy Gayeski (00:43:42):

Yeah, that's great. I'm always going to TJ for succinct. He's my man, you know? But well said, well said.

Troy Gayeski (00:43:51):

Just give us a few data points, TJ, if you don't mind. Key word a few, on how fundamentals look today. Particularly the last two to three weeks versus where market assumptions were or expectations were as recently as four to six weeks ago.

TJ Durkin (00:44:09):

Yeah. I actually don't think that the market's expectations on fundamentals have been grossly wrong, or grossly conservative. As Chris pointed out, our business is driven off of data. So the more we get, I think the more comfortable we get with the tail scenario of what's the downside that Clay just walked through.

TJ Durkin (00:44:30):

There's been a lot of talk about mortgage forbearance so maybe I'll skip that. We've been investing with non-prime credit card companies. A non-bank, they're looking at lower FICO borrowers, mid 600s, smaller credit lines. They've been in business since 2003, so they lived through the last cycle, if you will.

TJ Durkin (00:44:53):

What we saw ties exactly out to what Clay just mentioned. In the months of April and May, and it's continuing on, the credit card companies getting their highest payment amounts in per month. So if someone has an outstanding balance, their borrowers are paying it down at a higher propensity than in their now 17 year history.

TJ Durkin (00:45:20):

And so it's a function of there's not a lot to do, everything's closed. So people are not spending money, per se, and people want the utility of having a credit card. So for what would be considered a non-prime borrower, we're seeing delinquency rates that do not tie out to a double digit unemployment rate.

TJ Durkin (00:45:46):

That is a function of the CARES Act and that's a function of people generally came into this with decent balance sheets, as I think Chris mentioned. So I'll leave it there. We can certainly talk about mortgage forbearance rates, etc., but that's certainly getting a lot more press than some of the other consumer products out there.

Troy Gayeski (00:46:04):

Yeah. I'll let Chris talk about forbearance requests really quick, because that is an important topic obviously for the housing market. Chris, could you briefly describe where markets expected forbearance a request to go and where they've actually hit a ceiling and have started to decline the last three weeks?

Chris Hentemann (00:46:22):

Yeah. It's an incredibly complex topic, quite frankly. I think everybody is in the spirit of giving the consumer firm ground to recover from such an unprecedented crisis.

Chris Hentemann (00:46:40):

The spirit of getting consumers back on their feet, I think we all have to unanimously support. So forbearance is really key to that, and so is giving people the room to manage their payments in the short term. Then how those plans reverse and how many people, what we always call roll rates, how many roll into a true delinquency and how many recover is really the inflection point of what we have to monitor and pay attention to.

Chris Hentemann (00:47:14):

You've seen, and as you alluded to, the data, it's still you got to look at a series. But in the short term, we've seen a slow recovery in terms of overall mortgage forbearance rates. They've peaked in the overall mortgage market in the mid eight. So about literally roughly about call it 8.5% of US mortgages were in some form of forbearance.

Chris Hentemann (00:47:41):

And then the stratification of that 8% falls into different buckets depending on what type of borrower you are. We've seen what we call the conventional or the typical Fannie Freddie borrower with roughly around a 7% forbearance rate. And then you get Ginnie borrowers which tend to have lower FICO scores, higher loan to values, less equity in the homes, may actually have less savings and these lower FICOs and they struggle to make payments. Those have been in the 12% range.

Chris Hentemann (00:48:22):

So you've seen different results in terms of forbearance uptake over the last couple months. And then in the non, what we call the GCS world of the private label mortgage world, you've seen a slightly better experience. Roughly around 6%, which you have prime borrowers that are roughly around 3%, which is still shockingly high for a very prime borrower. Then you have alternatives, which depending on the type of loan product, could be high single digits to high double digits.

Chris Hentemann (00:48:54):

So there's a lot of basically different results in terms of the uptake of forbearance plans. What we have seen is people that even take up forbearance plans have been paying to a certain degree. So I think some people are looking for the room, just like the corporates have been doing. The corporates have been hitting the primary market for liquidity because they realize they have to create reserves for their business models because they don't know how long it's going to take to get airplanes back up in the sky, to get hotels back online.

Chris Hentemann (00:49:21):

So just like what corporates are doing, the consumer's doing as well. And so they're looking for these plans to try to build some [inaudible 00:49:27] liquidity.

Chris Hentemann (00:49:28):

The last couple weeks we've seen some of that actually recede. We're seeing people get a little bit more confident about their situations and we're seeing some of that actually start to plateau. Which is a really good sign. We optimistically think that that actually could improve quite a bit.

Chris Hentemann (00:49:45):

I think we [inaudible 00:49:48] view that in this interest rate environment, particularly where you can get a mortgage, a conventional mortgage with a 2% handle to it, you'll see a lot of people basically want to keep their optionality to refinance mortgage debt. So you would likely see some of that start to recede as people take advantage of the refinancing environment as well.

Troy Gayeski (00:50:10):

Great, Chris. That's a great summary of the improvement, or at least the lack of deterioration in the data, followed by some improvements so far.

Troy Gayeski (00:50:18):

All right, guys. We've talked about how most of the sell off is technical. We talked about how fundamentals never got as bad as people feared. We've talked about, more briefly than I would've liked, about how fundamentals have improved from less bad levels.

Troy Gayeski (00:50:35):

Could we talk now briefly about the path to recovery? Again, it's hard to put numbers around it but I'm sure our viewers are very interested in hearing what do you think is a realistic return stream. What do you think the upsize surprise would be, what types of compounded returns and absolute returns can you guys put up over the next six, 12, 18 months.

Clay DeGiacinto (00:51:00):

Troy, we think we own the bonds in our main funds that you're invested in, right around a mid to low teens type yield. Something like 13 or 14%.

Troy Gayeski (00:51:15):

Was that higher than risk free, Clay? Is that higher than risk free?

Clay DeGiacinto (00:51:20):

A little bit. Right? I'm sort of myopic within structured credit and trying to think about the micro sectors that are interesting within structured credit. Listen, there's allocators all over the world that have a much tougher job, that have to think about structured credit relative to other assets.

Clay DeGiacinto (00:51:36):

When I think about an aircraft ABS or a legacy resibond or some of the stuff that we're seeing commercial right now, compared to equities. It's an equities market where Hertz can go from 75 cents to 5.50 or $6 in a matter of a few weeks. I sort of just scratch my head and I think structured credit is perhaps the most fundamentally cheap sector in the investible universe right now.

Clay DeGiacinto (00:52:05):

We own our book at mid teens type yield. That's not assuming spread tightening. That's just a function of cash flows that will come from the assets that we own. Both interest and principal. This is a great market. We get paid down every single month, right? We can do nothing.

Clay DeGiacinto (00:52:24):

In fact, tomorrow is remittance day, the 25th of every month is when we find out how the predictability, or what we assumed would've happened, what actually happened during the month of May. So we get excited about that. We call it pay day.

Troy Gayeski (00:52:39):

I want to [crosstalk 00:52:40].

Clay DeGiacinto (00:52:40):

But listen. With spread tightening, Troy, I think a very high teens or low 20s type number is completely achievable. I wouldn't say just over the next 12 months. I think that's sort of like a compounded 18 month or two year type opportunity.

Clay DeGiacinto (00:53:00):

The path to get there is a little bit more difficult. But I know that staying the course and receiving these cash flows month in, month out, is a pretty good way to get back our money.

Troy Gayeski (00:53:14):

Great. Great, Clay. TJ, my man.

TJ Durkin (00:53:17):

Yeah. We probably have a slightly different book than Clay. But we see our unlevered assets in the high single digit yields. We probably a little bit more higher in the capital structure and we do use some leverage in the book.

TJ Durkin (00:53:33):

And so if you go back to March, some of those assets were getting marked down, given that forced selling that we saw. Luckily we were not forced seller and we were able to hold on to almost all of our assets and we're now seeing that recovery back.

TJ Durkin (00:53:50):

We see a cash on cash yield over the next 12 months in the low double digits. We're running about a four and a half year spread duration. So if you look at corporates, just as [crosstalk 00:54:02].

Troy Gayeski (00:54:01):

Four and a half year unlevered, right, TJ?

TJ Durkin (00:54:03):

Unlevered. Unlevered. And so if you look at corporates, just as a natural competing product for yield buyers, if you impound a 100 base points of spread tightening, that's about nine points of total return to call it 12-13% cash yield.

TJ Durkin (00:54:20):

Again, you can pretty easily see a 20% gross return in a 12 month period. And you're not getting anywhere near the spread levels, a 100 tighter, that you saw coming in to Feb. So there's a lot of room in the middle between where we are today and saying that you have to get all the way back to February.

TJ Durkin (00:54:39):

We don't see that as a necessary event to generate those type of returns. There's a lot of room in the middle.

Troy Gayeski (00:54:47):

Chris, how about you?

Chris Hentemann (00:54:50):

I can only support what they said. I think this sector is as attractive as it's been since the last financial crisis. And largely driven from everything we just talked about, there's no better environment to invest in than when technicals overwhelm the market, overwhelm the fundamentals.

Chris Hentemann (00:55:06):

So obviously the desperate reach for liquidity in March forced prices so low they went below fundamental value. What we always see is that this sector's complicated and it takes expertise to invest in it. You just can't buy the ETF off the shelf and basically expect it to bounce back.

Chris Hentemann (00:55:29):

And so what's fantastic about it, it's frustrating for certain investors. You have to have some patience to it. Everybody asks oh, am I going to get the balance back in April. Well, the good thing is, is that if you have the patience, you're going to get ... the market got repriced due to heavy technicals, as we've all discussed.

Chris Hentemann (00:55:47):

The bounce back doesn't necessarily come back in April because, like I said, data and other information has to come out. But as it's coming out, you're starting to see this positive trajectory higher. And so we did make adjustments for what we think our new fundamental work has, we all did it.

Chris Hentemann (00:56:04):

I think I concur with the group here, is that even making provisions for what is going to be a more challenging recovery environment and the breadth of outcomes, because I don't think there's one clear, easy path to predict. I do think it's a mid to upper teen return.

Chris Hentemann (00:56:20):

What I might amplify is actually I think that those are unlevered. I think that's key, is that a lot of our strategies, as you've heard here, is I think we respect the fact that putting leverage on top of illiquid or relatively illiquid assets is kind of a dangerous combination.

Chris Hentemann (00:56:38):

I think what we're describing here is that there's ... this is an asset class trading below fundamental value. There's data coming out that supports basically the recovery trends. It will take some time. It's generally going to produce really attractive returns on an unlevered basis.

Troy Gayeski (00:56:58):

Great, Chris. Well, guys, I have to hop on a client meeting or a client call. Viewers, we appreciate you tuning in. And want to thank Clay, TJ, and Chris for joining us.

Troy Gayeski (00:57:09):

Now I'm going to turn it over to my colleague, John Darsie, who's going to give Q&A that came in from the audience during our session. Thank you so much, everyone. Have a great day.

John Darsie (00:57:19):

Yeah. We have several audience questions. I want to thank the audience for your participation. The first one is about mortgage rates and interest rates. Do you see interest rates going negative? And if so, what impact do you think that would have on the mortgage market and the real estate market?

Clay DeGiacinto (00:57:35):

That's a hard one. I don't see rates going negative. I think there's plenty of unintended consequences with negative rates. Frankly, I think that zero should be the floor.

Clay DeGiacinto (00:57:48):

What's interesting about mortgage rates, and they're at all time lows, I think certainly they're at all time lows in the agency mortgage market. They're at all time lows in the nonagency mortgage market. I think for your audience today, if you can come across or if you can take with you one thing that you should go forward after today, is to try to refinance. I think rates are exceptionally low right now.

Clay DeGiacinto (00:58:18):

But what's interesting about that refinance and the space that we invest in is the dollar price that we own our assets. And I just looked at this. Pre-COVID the average dollar price of our book was around 87 cents on the dollar. Still at a discount.

Clay DeGiacinto (00:58:35):

But post-COVID, the average price of our book right now is 70 cents on the dollar. So every refinance that comes through the system is quite beneficial for the forward cashflow profile of what we own. And so perversely, low rates is a really interesting contributor to positive P&L for discount pools of mortgage credit.

Clay DeGiacinto (00:59:01):

I think that the Fed will keep mortgage rates low, relative to the risk free rate. And frankly, I think a lot of banks and insurance companies that are trying to match their assets to their liabilities, love the mortgage asset because it can still have lot of duration even at these levels.

John Darsie (00:59:22):

All right, I'll hop to a different question that I'll direct at Chris. There's a few questions about the CMBS market that I'll sort of aggregate into one.

John Darsie (00:59:30):

What do you think ... CMBS last month had a record default rate of around 8%. What are the implications of that? And then longterm as people look at how they operate their businesses, do you think there'll be any longterm disruptions to [inaudible 00:59:46] within office buildings?

Chris Hentemann (00:59:50):

I think the answer's simply yes. I think you're seeing it play out as we speak. People are going to think about how office is used, and it's going to be used differently in the short term.

Chris Hentemann (01:00:04):

Right now it's not getting used at all, for the most part, in a lot of the major MSAs. How people reenter the office environment is going to be to be determined. Right now in New York City, you can only occupy 50%.

Chris Hentemann (01:00:20):

And then everybody's gotten so good at using basically the work from home environment. This panel actually speaks to it. I mean used to have this huge production out in Las Vegas and look at you're putting us all into the same environment very comfortably, from our own homes. It's fantastic. We've all learned to adapt.

Chris Hentemann (01:00:42):

So it's going to direct how office is used. I think the WeWork model, I don't want to call it long gone, but it's pretty much out of sight for a while. So that form of it's going to be gone, and there's probably going to be excess capacity. That's what's going to drive some of these default rates, particularly in office.

Chris Hentemann (01:01:02):

I mentioned hotel. Hotels kind of a soft spot. How people travel, how people use hotels is going to be really challenging. It's going to be another part where you can see default rates rather high.

Chris Hentemann (01:01:13):

Retail, again, the same thing. There's going to be retail has been under duress for a long time. Likely to continue to basically support the default rates.

Chris Hentemann (01:01:24):

I was mentioning the shorting of housing, and household formation is positive. People basically are going to need places to live. If the unemployment environment remains high, people are going to look for affordability products like what Clay was speaking. We have the same view. Multi family is going to be probably one of the oases in the real estate market.

Chris Hentemann (01:01:48):

It's probably one of the most mixed pictures in terms of how different forms of real estate are going to be used going forward. It's going to drive all of our decisions in terms of what we decide to invest in.

Chris Hentemann (01:02:00):

I think hopefully I gave you some leading indications in terms of where we're going to be biased.

John Darsie (01:02:07):

Yeah, that's great. We're going to wrap it up with one more question here for TJ, before we let you guys go. And thanks for doing a little overtime with us.

John Darsie (01:02:14):

I know distressed credit is not necessarily exactly where you fit in, TJ. But we have a question about the distressed credit cycle and traded credit and whether the speed of the selloff that was liquidity driven, as we've talked about, and the subsequent recovery. Has the opportunities in the distressed credit space disappeared? Or do private distressed opportunities make a little bit more sense in this environment?

TJ Durkin (01:02:39):

No. We have a very large distressed business here and I can tell that's why you asked me that question. But if you go back to before COVID, the fundamental building blocks of how I think we were investing was the consumer's in good shape, housing's in good shape.

TJ Durkin (01:02:57):

And everyone was focused on the quality of leveraged loans, the lack of covenants, the leverage going into the corporate space, and it was blinking yellow to say the least. And so this is only, I think, pulled forward a lot of the balance sheet issues.

TJ Durkin (01:03:17):

Just like Chris talked about retail, retail was a problem before COVID. Obviously it's been exasperated by it. So I think you're seeing the sound investment grade companies that had those sharp technical selloffs, those opportunities are gone for March.

TJ Durkin (01:03:33):

But you're going to continue, I think, to see a very healthy pipeline of restructurings that I think, again, we're in the model for maybe 2020, maybe 2021. But people were setting up for it, it just got pulled forward a lot.

TJ Durkin (01:03:50):

The Fed isn't looking to take credit risk. They've made that very clear. They're looking to support the markets. I think there'll be plenty to do in distressed.

John Darsie (01:04:00):

All right. Thank you for that, TJ. Again, Clay, Chris, TJ, thank you for joining us.

Zachary D. Carter: Author "The Price of Peace" | SALT Talks #11

“The strength of the economy should be thought of in the actual resources you have, not in terms of monetary numbers and government spending.”

Zach Carter is a Senior Reporter for HuffPost and the Author of The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes. After reading Keynes’ The Economic Consequences of Peace, Zach realized there was more to the economy than dollars, deficits and numbers. Keynes presented social theory and the idea that a national economy could enable a broader social vision.

Keynes was a philosopher first and an economist second. On the difference between Republicans and Democrats, Zach says it’s what they decide to spend money on. Both sides now agree that governments must help fuel spending.

Do deficits matter? “Deficits can matter. But there will be a certain point where all resources in society are mobilized.” Faith in the future is essentia to democracy, regardless of your political position.

LISTEN AND SUBSCRIBE

SPEAKER

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Zachary D. Carter

Senior Reporter

HuffPost

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie (00:07):

Welcome, everyone back to the SALT Talks. My name is John Darsie. I'm the managing director of SALT, which, as many of you know, is a global thought leadership forum and networking platform at the intersection of finance, technology and geopolitics. SALT Talks are a series of digital interviews that we've been doing during this work from home period, to provide our audience a window into the minds of subject matter experts and to provide a platform for big important ideas the same way we do at our global SALT Conferences, which some of you have attended in Las Vegas, Abu Dhabi and Singapore.

John Darsie (00:39):

Today, we're very excited to welcome Zach Carter to SALT Talks. And Zach is a senior reporter at HuffPost. But most topically today and the impetus for him coming on the SALT Talk today is that he's the author of a fantastic new book called, The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes. In addition to being the author of that book, he's a frequent guest on television, and radio and his work has appeared in The Washington Post, The New Republic, The Nation and The American Prospect among other outlets. He began his career at SNL Financial, which is now a division of S&P Global. He was a banking reporter there during the 2008 financial crisis and he had a feature story called Swiped: Banks, Merchants And Why Washington Doesn't Work For You which was included in the Columbia Journalism reviews compilation of best financial or business writing for 2012.

John Darsie (01:35):

Anthony got a hold of Zach's book and read it a couple of weeks ago and reached out to Zach who graciously agreed to join us. And I think we're in for a fascinating intellectual discussion today about John Maynard Keynes, the ideas that he espoused and how his life affects our lives today. So Zach, thanks so much for joining us. I'm going to turn it over to you and Anthony for the interview.

Anthony Scaramucci (01:58):

All right. Well, Zach, I appreciate you being on with us. I mean, the great irony of this talk is, it was preceded by a great endorsement of your book by Jerome Pal. He didn't exactly say it was your book, but he's basically espousing Keynesian economics for the last hour and a half on CNBC. And so I want to hold the book up, because I know you've got it behind you, Zach. But this is the book, Money, Democracy, and the Life of John Maynard Keynes, The Price of Peace. Zach, it's a fascinating book. I guess for our listeners and viewers, I'd like you to tell us a little bit about your background. You told me it took you four and a half years to write the book, why did you want to write the book, and then we'll talk a little bit about professor Keynes and how we are still living with his legacy.

Zach Carter (02:46):

So as John mentioned there, I used to be a banking reporter at a trade publication called SNL Financial that is now part of S&P Global, and I was there, frankly, I was not terribly excited to have this job in 2006. I thought the idea of being a journalist covering banking from a place in Central Virginia was not the most exciting job you could have. But I learned an awful lot about how the financial system works over the course of that enterprise. And of course, in 2008, the financial system essentially collapsed.

Zach Carter (03:21):

And in that moment, everything that I had been told about how markets were supposed to work, about how supply and demand was supposed to reach an equilibrium seemed to fall apart. And people who had been telling me that supply and demand would always reach a prosperous equilibrium, started reaching for the government for very large infusions of cash to save the financial system. And frankly, to be clear, I think if you had not saved the financial system in 2008, we would not be living in the United States of America today. The collapse would have been absolutely catastrophic.

Zach Carter (03:55):

But it was very clear to me that there was an intellectual sea change that was underway at that moment, and people started talking about John Maynard Keynes, just sources that I would talk to on the phone. And these people did not talk about John Maynard Keynes a year, 18 months prior to the crash. And so I went and started reading John Maynard Keynes. As an undergraduate I studied philosophy, I studied politics, I did not study economics. So I learned economics on the job, as a banking reporter from people in the financial system.

Zach Carter (04:27):

And frankly, I think that's a good way to learn economics. Because the financial practitioners, the people who are actually doing it, every day, economists are one step removed from what's actually going on in the world, and that can be a valuable perspective, but particularly in the crash, watching the way people changed their minds about something. I mean, in politics, I've been covering politics for several years since, people almost never change their minds. But in the financial crisis, you could see people in the markets change their minds about the way they believed the world work.

Zach Carter (04:57):

And so I started reading John Maynard Keynes. And first the first book I tried to read was The General Theory of Employment, Interest and Money, which is a terrible, terrible book to read. It is just written like... It's like a pretzel covered in thorns. It's awful. And so I got a couple of chapters in and I just said, "I'm going to try something else." And I tried The Economic Consequences of the Peace. And that book, it's like reading a big stick of butter. It's just beautiful. It's a wonderful, wonderful read. It's much more consistent with Keynes's broader body of work and his writing style than The General Theory is.

Zach Carter (05:32):

And I realized, reading that book, there's a lot more going on here than just dollars and deficits and money and numbers. There's a whole social theory, there's a whole idea, not only of what a national economy is supposed to look like, but what international cooperation is supposed to look like. And economic policy wasn't this technical mathematical thing. It was the thing that was supposed to embolden and enable this broader social vision. And so I became totally obsessed with Keynes and the book is the byproduct of that.

Anthony Scaramucci (06:05):

Okay. So let's take people back for a second, and I don't want to cut you off because I really want you to elaborate on this. But I want to give all of our viewers who may not be as familiar with John Maynard Keynes, a brief synopsis. So he was a legendary economist. And he wrote about the Versailles Treaty, which you elaborate in the book, and he wrote that the wartime reparations that were being imposed upon the Germans were not sustainable, unlikely to be paid back and would cause social and political unrest in Germany.

Anthony Scaramucci (06:40):

And so that was a big hullabaloo in the West because they were trying to extract damages from the aggressor Germany in the First World War. But Keynes was really trying to point out that if you do that, you're going to set them up for nationalism, you're going to set them up for a specter of dissociation from that alliance that you're talking about. Of course that happened, but in the ensuing years, we were touched with the Great Depression. And you go into that, you can explain why that happened.

Anthony Scaramucci (07:11):

A combination of bad monetary policy, a lot of what Liaquat Ahamed said in the Lords of Finance, but there was John Maynard Keynes standing for the principle that the government needed to prime the pump. And the government needed to replace aggregate demand and deficits, frankly, were not going to be that big of a deal. As you, Stephanie Kelton and others pointed out, they have been sustainable for generations. They've been sustainable for thousands of years in our civilization. And so now I want to bring it back to you. It's John Maynard Keynes. He's living in the early 1930s, espousing these theories, which we're using today, but go ahead.

Zach Carter (07:51):

Well, just remember, he eventually comes to support deficit spending. But in 1919, when he's seeing the Treaty of Versailles and been horrified by it, he's still a very conventional 19th century economist. He thinks that they need to do widespread debt relief in order to allow markets to work their magic. That supply and demand will come into equilibrium and there will be a prosperous natural outgrowth of the post war world, but only if these terrible war debts and the reparations that are assigned to Germany, at the end of the war are limited. He thinks these things, they're just unpayable.

Zach Carter (08:33):

So he's not this revolutionary economic thinker at the beginning of his career. And he makes his career in large part pursuing this particular social vision. He thinks there is this world of international harmony and cooperation. I think it's largely a naive view of the way the late 19th and early 20th century international economies functioned, but it's a beautiful vision. I mean, he was talking about people exchanging ideas and culture across different national boundaries and that trade and finances is a vehicle for cooperation, growth and social harmony. It's a way to eliminate war in particular.

Zach Carter (09:15):

And so he loses that key political battle in 1919. He does not succeed in eliminating war debts or reparations from the Treaty of Versailles. And he basically loses every single political battle that he fights, particularly in Britain, from 1919 until about 1941. But he becomes, around 1929 enamored with this idea of deficit spending. He says, "Look, we have huge debts everywhere," because the war debts aren't going away. Everybody's still in debt from the war in 1929. But there are all of these problems that need to be solved.

Zach Carter (09:51):

And so before he has this very sophisticated economic theory that he develops in The General Theory in 1936, he just recognizes there's a political necessity for rebuilding to occur. Governments just have to start doing things because the private market is not doing anything. And if nobody does anything, the economy is not happening. It's not functioning. We've talked about the Great Depression in the United States, like something that got kicked off in 1929, sometime after the stock market crash. But in Britain, they were in a double digit unemployment situation from 1919, all the way through to the Second World War.

Zach Carter (10:27):

So for Keynes, this is just an astronomical political crisis. And they have these enormous strikes that are happening in the streets. In 1926 there's a general strike, where basically all of the labor unions just unite and say, "We're not going to work anymore." And that is devastating to Keynes. He's very politically conservative in that he's afraid of change. But a lot of his policy ideas, I think, end up being quite radical in that they're new ideas designed to facilitate the conservative political goal that he has in mind, that goal of social stability. So eventually we get to the '30s and he starts talking about deficits, by necessity. Everybody is in debt, and we've got to do something. So let's go for it.

Anthony Scaramucci (11:11):

So let's talk a little bit about that conservatism that you're mentioning, because as you point out in the book, a lot of the conservative economists were ridiculing him. You mentioned Ludwig von Mises an economic, I believe it was a publication just lighting him up about these non classical theories of economics. And there are many conservatives that tune into these podcasts and are listening and they have this feeling, this Adam Smith, laissez faire feeling except it's a little bit like Mike Tyson zag, "Everybody has a plan until they get punched in the face," and then everybody goes hard left and starts massive deficit spending. So I want you to put at ease the conservatives that are listening in on this and explain to them why their theories are wrong and why John Maynard Keynes is right.

Zach Carter (12:05):

Well, both von Mises and Hayek had a much deeper understanding of economic history than John Maynard Keynes did. He did not study economics as a young man, he studied mathematics. Cambridge didn't have an economics program until 1903, I believe, and he graduated in 1902. So there were economics courses, but you couldn't major in economics there. And so Hayek and von Mises have this much deeper and longer knowledge about the economics profession. And I think, to some extent, this ends up hamstringing them when they get to the depression because the rules that are supposed to apply suddenly don't apply anymore.

Zach Carter (12:48):

However you look at the Great Depression in the 1920s and 1930s, at some point, markets should have been able to clear whatever dumb decisions governments were making. Rational individuals maximizing their own economic potential should have figured out a way for supply to reach equilibrium with demand and lead to an equilibrium in which there was sustained high employment. And that just did not happen in Britain.

Zach Carter (13:15):

And so, the thing about Keynes is he looks at economics from a more philosophical perspective than I think Hayek and von Mises did. He was fundamentally a philosopher, first, a social thinker first, and then an economist second. He's always using economics to try to pursue these other social goals. So I want to say to the conservatives here, if you are upset with John Maynard Keynes, because you think that he's pursuing social goals that you don't agree with, you are correct, that is, in fact, something that he was doing.

Zach Carter (13:48):

But it is also the case that essentially every single government since the Great Depression has pursued the ideas of John Maynard Keynes in some variety or other. Everyone runs big deficits when we get into a crisis, it always happens. Even Ronald Reagan after the big monetarist recession under Paul Volcker, in the early 1980s, started ramping up government spending for the military in order to try to win reelection in 1984. He eventually sacked Paul Volcker in favor of Alan Greenspan, in order to get some more help from the Fed, frankly, in a very traditionally Keynesian way.

Zach Carter (14:28):

The difference between the Republicans and the Democrats on this and I think even the difference between Democrats and Keynes is what they decide to spend the money on. We have always spent enormous sums of money when we get into crises and we've also spent much larger sums of money since the Great Depression just as a standard baseline of how the government functions. Before the Great Depression the government spent two or 3% of GDP on its operations. Since 1960s we've been hovering around 20%. You move a couple of percent up, a couple of percent down, that is a significant change. I think Keynes would have wanted more of that.

Zach Carter (15:06):

But the fact is Keynesian thought in the sense of using the government to supplement aggregate demand, it is not a controversial theory in government, between Republicans and Democrats, when they're actually governing. It's just how the world works. So if you're worried about adopting Keynesian ideas, because you think that it's going to cause some crisis or move the economy out of kilter, you have to grapple with the last 80 years.

Anthony Scaramucci (15:33):

Well, I think that's well said, and I want to take you back to the original gold standard, which we lifted in 1933. And then John Maynard Keynes himself worked on the Bretton Woods treaty in 1944. But then there's August 15th, 1971, where Richard Nixon pulls the pin on gold. And there's this theory, and so I want you to address that and then the second part of the question is, let's go from 1971 to today because conservatives would say, "Well, we took ourselves off the gold standard, we had that rapid inflation in the '70s that needed to be tamed by Volcker and that these strategies are incredibly inflationary and that deficit spending actually harms the middle class and the lower middle class, because if you're devaluing the dollar, their wages can't catch up. So it's a two parts. So let's go to '33, '44, '71. And then that last piece there.

Zach Carter (16:33):

So Keynes's issue with the gold standard by 1933 is not anything about gold in particular. He just thinks that the economic order of his day is forcing countries into a deflationary crouch. If you are losing gold under the gold standard, if it's flowing out of your country because people are losing confidence in either your financial situation or your economy is just not doing well, then you have to do something to retain gold. So typically it was raising interest rates, that was how central banks dealt with that, and the gold would flow back. But by raising interest rates, you caused high unemployment.

Zach Carter (17:14):

And there was this famous quote from Keynes in 1923, where he says, "In the long run, we're all dead." And this has been interpreted in various ways by different people throughout time. But the basic point is that if you have a social revolution, in the meantime, while you're waiting for the scales of the Adam Smith economy to balance eventually, that doesn't help you any. You still have a social revolution, and that is a problem. So Keynes says that we have to do something. We have to find some way of managing the economy to prevent these really terrible social outcomes in the short term, while we're waiting for the economy to balance. And the long run could be a long time. It could be 90 years, it could be nine years, but however long it is if we have a revolution in the meantime, that's going to be a problem for somebody like Keynes.

Zach Carter (18:04):

So in the 1930s, he sees the gold standard, this real transmission mechanism for austerity and for social revolution. As one country has a run on its currency, it backs down and gets into this crouch. And it never really works. The deflationary positions never actually... The strategies don't actually prevent the financial crises from going full bore and from wrecking these currencies. So country after country keeps going off the gold standard, but they do that, as one country has a problem. And then investors look to other countries say, "Well, who's the next weakest thing?" I think people who lived through 2008 and saw people looking from bank to bank from Lehman, to Morgan Stanley, that sort of thing understand that kind of thinking that happens among investors.

Zach Carter (18:52):

So when you go off gold in 1933, there's a new world and it's very chaotic, and it's not particularly prosperous. I mean, we have the Great Depression. And in 1944, this is the Bretton Woods Conference, is the attempt to create a new system among different countries to cooperate on economic policy, on finance and trade. And to create a new system that is not going to force countries into these deflationary crouches whenever they get into trouble. It works, it doesn't, but in 1971, the United States blows it up.

Zach Carter (19:31):

And look, the inflation era of the 1960s and 1970s, there's a reason why people are critical of Keynesian economics at this point in time. There's a lot of spending that's happening among governments. Keynesians don't have a particularly good explanation for why the inflation is taking off. There's the oil price increases, which happens because of a lot of foreign policy decisions in the Middle East. So that's part of it, but inflation really is taking off. And it totally discredits Keynesian thinking in the 1970s.

Zach Carter (20:06):

I don't have a great explanation for why the 1970s inflation happens. I don't have a great explanation for why we don't have any inflation right now, even though people have been calling for hyperinflation since 2006, I think. I think the certainty that the economics profession develops every three or four years as news theories take hold is often quite illusory. But with Keynes, you have this very flexible mind, somebody who is attached not only to deficit spending, he liked deficit spending, because he saw it as a political necessity. But he never wanted to be remembered as a deficit therapist. He wanted to be remembered as this guy who was trying to prevent war and deprivation. Who was trying to promote prosperity and international harmony.

Zach Carter (20:59):

And the tactics that he was willing to use, the improvisational attitude that he had towards economics, I think is an unusual spirit within the profession. He didn't claim to have this deep knowledge about the way the world works on some deep down in the ether of reality. He was someone who was willing to change his mind when circumstances changed.

Anthony Scaramucci (21:23):

Well, there's an extension of Keynesianism now called Modern Monetary Theory. Your friend, Stephanie Kelton, will be doing a SALT Talk with us next week on her book, The Deficit Myth. I know you're going to be with her tomorrow. We should publicize that, it'll be tomorrow, the bookstore Politics and Prose, one of my favorite bookstores is hosting a podcast with the two of you. And what time is that going to be Zach?

Zach Carter (21:49):

7:00 PM Eastern Time.

Anthony Scaramucci (21:51):

7:00 PM, Politics and Prose. So find them on a bookstore in Washington DC. But in Stephanie's book, which I read in preparation for this, and for my SALT Talk with her next week, she really believes that this is the Galileo Moment. She really believes. I mean, she really says that Modern Monetary Theory is like a [panicist 00:22:12] discovering that the earth is actually rotating around the sun as opposed to being flat and the center of the universe according to some of the religious experts. And so she really believes that this massive deficit spending is a great equalizer and is almost a tonic to help the lower and middle class. And so I'm just wondering what your thoughts are on that, you now being the Keynesian expert?

Zach Carter (22:41):

Sure. I have a great deal of respect for Stephanie, and that's why we're doing an event together tomorrow. But the big shift that she's talking about is the focus on real resources, the actual productive capacity in the economy. How many people you have who can be put to work, what they are skills are, how many resources you have, how many farmers you have, how many miners you have, how many tons of coal you have in the ground. Probably not great for The Green New Deal kind of stuff, but the actual resources you have in your economy. That's how you should think about economic policy. You should not think about it in terms of the monetary numbers that we attach to government spending.

Zach Carter (23:27):

So the numbers that we talk about when we talk about debt and deficits and whether or not we can afford things, her point is just that, I mean, I don't think I'm putting words into her mouth here. Because I've talked to her many times. But her point is that if we have the stuff, if we can actually do it, then we can afford it. The amounts that we have on our ledgers and on our accounting books, those may not be irrelevant, but they're not important to the question of whether or not we can afford to do something.

Zach Carter (23:59):

And I think that's an important point. And frankly, I think it goes all the way back to Keynes. He has this very important essay that comes out in 1941, I believe maybe 1940, called How to Pay for the War. And it's about how the British government is going to deal with these massive, massive expenses that are going to be required by World War II. And he basically says, "Look, this is about mobilizing our resources. Every other question that we have is about what society we want to live in after those resources are mobilized. Do we want to sell debt so that the investor class makes a lot of money and becomes wealthy and gets interest payments hereafter? Or do we want to raise taxes on the investor class so that they have less money in here now?"

Zach Carter (24:44):

The point is that these questions end up being about distribution ultimately. That scarcity of resources, which is the basic underlying premise of economics, certainly in the Austrian tradition, but really throughout much of the Anglo Saxon tradition as well, is maybe not the real problem. The real problem maybe about distribution. And I think Stephanie has really keyed into something important there. And I think that's really... Honestly, when the MMT people start talking about sophisticated Federal Reserve operations and the relationship between the Fed and Treasury, there are moments when they lose me. I get lost. It's very technical and complicated. But I think the basic point that scarcity is not the key factor and that the monetary numbers about deficits are not what matters, it's real resources in the economy, that strikes me as correct. And it seems to me to flow directly out of John Maynard Keynes.

Anthony Scaramucci (25:40):

Well, she certainly makes that case in her book and we'll address that next week, and I appreciate you bringing it up. I guess, what often happens to me, Zach, with clients, I'm out making a presentation, somebody raises their hand and says, "Hey, are you worried about the deficits? Are you worried about the long term accumulation of deficits?" And again, conservatives, von Mises others, what would they say? They would say, "Well, the deficits have a tendency to crowd out. You have interest payments on the budget that are going towards those. And then governments have to monetize that debt in some way."

Anthony Scaramucci (26:16):

Let's look at our own government for a second, in 1971 $35 an ounce for gold, today it's $1700 an ounce for gold. A conservative economist would make the case that our money was devalued by 98% over that two generational period of time, totally fine for people that have assets because the assets denominated in dollars, they go up in value. That $1 million beach house is now 10 million. But again, for people that have wages, and I saw this in the 2016 campaign, when I was campaigning with then candidate Trump, we had people really struggling.

Anthony Scaramucci (26:52):

And I remember being on the campaign plan, I did an analysis of what my dad, my dad was a blue collar worker. He was a crane operator, he was an hourly worker in a union. And I did the calculation for then Mr. Trump, I looked over to see if my dad in 1976, if he was doing the same job, same union 2016, his wages are down 26 and a half percent. So it's a broad question. But do deficits matter? Are they going to come back to haunt us? Are they impairing the ability for middle class people to get ahead? Is it hurting their wages? And what do you say about their grandchild?

Zach Carter (27:31):

Well, I think deficits can matter. Certainly, if you believe Stephanie, there's a certain point in which all of the resources in society are mobilized, and there's just nothing more to produce. And so at that point, you start seeing inflation. And when you start seeing inflation, that can be a social problem, not only for the investor class, but for working people. I don't think we're there.

Zach Carter (28:03):

When I think about the question about the grandchildren, though, your grandchildren want you to have a job, so that you can have a fulfilling life and pass good things down to them, whether it's money, or learning, or culture, they want you to be able to have a full life. They're not thinking, "My goodness, it's my grandparents who are stealing from me every day." They're thinking, I mean, I have a 10 month old daughter now. So I think about this all the time.

Anthony Scaramucci (28:34):

Congratulations.

Zach Carter (28:34):

Yeah, thank you very much. What she wants is for daddy to be employed so that daddy can have a job and afford to buy her toys and books and teach her things. She wants to have all the ingredients of a good life. This is essential to Keynesian thought.

Anthony Scaramucci (28:48):

Let me push back.

Zach Carter (28:49):

Go ahead.

Anthony Scaramucci (28:49):

Let me push-

Zach Carter (28:50):

Sure.

Anthony Scaramucci (28:50):

... back for a second though, are we mortgaging her future? Because that's a big issue. That's a big statement that people make, "Well, we're mortgaging our children's future to pay for our goods and services today."

Zach Carter (29:02):

What happens to my daughter if I lose my job? What happens to her if I don't have any money? If I can't pay the bills? The idea that we're mortgaging her future to make sure that her parents are employed, I think is very silly. Her future gets much, much worse if her parents are in a terrible financial situation.

Anthony Scaramucci (29:19):

Okay. So now you sound like John Maynard Keynes. And you do make the point in this amazing book. What you're basically saying is that we have to solve for today, and that if we can create the right economy today, we get an amazing amount of innovation, an unleashing of growth. And people that think the way I am positing right now are thinking too linearly. In fact, we have this exponential opportunity if we can set the economy up right today. And so that the future for your daughter or my children, is going to be so much different. And I would point out to people just think about where we were in the '80s with peak oil theory. I was sitting in a classroom Zach, in the middle '80s where people told me, "Well, we're running out of oil. By 2010 there'll be no oil." And they left out the exponential, technological growth that took place under heavy deficit spending to lead to this abundance of oil now.

Anthony Scaramucci (30:16):

We could question a bit that impacts on the environment. But the point being, I think the point that Keynes would make, you would make, it's a very interesting intellectual comment is if you fix today, we won't have to worry about tomorrow because we'll unleash unbelievable amounts of growth in the process, and make people's lives in the future way better than ours today.

Zach Carter (30:38):

Keynes had a very different framework for understanding economics than I think most economists who have followed him have adopted. His view is that it's not scarcity of resources that dominates our condition as human beings, it's uncertainty about the future. And if you can find a way to deal with uncertainty... Ultimately, there's no way to cure uncertainty. But if you can give people a reason to believe that tomorrow will be better than today, each step of the way, you have a much better chance of securing the type of social harmony that he always wanted to see.

Zach Carter (31:15):

And so his economic policy is designed to make people believe that tomorrow will be better than today. And look, that is a difficult thing to secure when things are bad. I know that right now we've got the pandemic, we've got unrest in pretty much every single American city. But Keynes lived through this too. He lived through the First World War, the Great Depression, and the Second World War, those were catastrophic things. And he never lost that faith in the future.

Zach Carter (31:42):

And I think that's a pretty essential belief that you have to maintain if you're going to live in a democracy, regardless of what your economic position is. And so whether you're an Austrian or a Keynesian, that faith in the ability for people to solve problems collectively, I think is a pretty essential way of understanding the world.

Anthony Scaramucci (32:01):

I think it's very well said. Before I turn it over to John Darsie, I have one more question. And when I read this in your book, I was like, "Okay, this is fascinating. I'd like you to explain this to our viewers and listeners." Keynes really felt that it wasn't normal for human beings to be on a trajectory of peace and prosperity. He felt that they needed a political system to help guide that and we needed, as a culture and sociologically mechanisms in the political system to further that. I was wondering if you could elaborate on that, and explain that to our viewers.

Zach Carter (32:37):

Sure. One of the lessons of The General Theory is it's not just about deficits and debt as we've been discussing this entire event. He thinks that society is, if you don't have political leadership, it tend towards, not only you can call it an equilibrium, but it's a socially dysfunctional equilibrium where you have high unemployment. And if you take a step back from the economic language, what he means is there's a lot of social unrest. That you have social breakdown. So you need some political leadership in order to sustain the idea of harmony in politics.

Zach Carter (33:13):

And he gets this from being a political philosopher, frankly. He's not just a guy who wakes up one day and reads Adam Smith and thinks, "Okay, let me start moving some equations around." He's very, very steeped in enlightenment liberalism and in these basic ideas of what makes people function, what makes society healthy. And one of the guys he likes a lot is Edmund Burke. And he thinks Edmund Burke's ideas about social stability are really important. He disagrees with Burke on whether or not democracy is fuel for social instability. He thinks that Burke, maybe there's something there, but so far, he says democracy has not embarrassed itself on its trial.

Zach Carter (33:55):

So he believes that people can come together to solve problems. But he does believe that somebody has to do the solving of the problems. And that is political leadership. And without political leadership, you not only have all the social unrest, you can't have things like markets. They need some political foundation to exist at all. So people can disagree and dispute what rules we want to have when we create these markets, but they are fundamentally a product of the state itself. And the state he has... I mean, there's a lot to discuss here. But he has a fairly benign view of the state. He sees it as an expression of the democratic will much like the philosopher Jean-Jacques Rousseau did.

Zach Carter (34:38):

So he believes that this is the only way for people to come together and express their beliefs about how they want to be governed, is through the government. And he believes that markets and all the economic underpinnings of society that we take for granted are actually byproducts of the state itself. So that means ultimately, that governance and that intervention in the markets is inevitable. And the question is what kind of interventions we want to have. And people have been disputing that ever since.

Anthony Scaramucci (35:06):

Listen is fascinating. And I think it's just a reminder to people, I'll take them back to their eighth grade social studies, Solon who invented democracy in Athens, he basically went to the other aristocrats, and said, "Hey, if we're not careful here, there's going to be a rebellion and an uprising. We need to figure out a way to include all people of economic strata." It was men at that time. Now it's all people in this great, wonderful diversity. We have to include everybody. And so we have to try to make the system is fair as possible. Otherwise, there'll be just haves and have nots, Zach, and we don't want that. And I think that's one of the reasons why we're faced with issues of populism and nationalism now. But you wrote an amazing book.

Anthony Scaramucci (35:50):

I want to turn it over to John for some questions from the audience if you have a couple of more minutes for us, but I want to hold the book up again, it's amazing, available on Amazon and other places. I like buying my books from a local bookstore. I just try to help out the community. But this is a great book, Zach. John, do you have questions for Zach Carter?

John Darsie (36:09):

Yeah, we have several audience questions. And Zach, thanks again for joining us. The first one pertains to politics in the United States. The Republican Party has become known as the party that's concerned about deficit spending more so than the Democratic Party. We talk about increases in deficit spending, being a left leaning policy, but if you really look historically, at conservative presidents like Nixon, Reagan and Bush. They have been the ones that have ballooned US deficits, while Clinton was the one who balanced the budget. And President Obama, now in hindsight, it appears that his lack of spending post the 2008 crisis constrained the acceleration of the recovery. Could you elaborate on that observation and share your view of whether you think a Biden administration, I know the Sanders team has Stephanie Kelton as a economic counselor. But do you think the Biden administration understands that issue and has the appetite to spend aggressively if he wins in this election?

Zach Carter (37:11):

Well, let me start with the Biden question. I mean, frankly, Biden is a total black box to me. I think he sometimes comes out and talks about how he wants to do something like an FDR New Deal style program, and then other times he sounds like he's an Austrian. I think Biden's is just trying to get through this election, and we're going to learn a lot about what the direction of the Biden administration will be when he names his vice president. That is going to be a sign to people about what kind of administration he really wants to run. I think he's been talking out of both sides of his mouth for much of the campaign since he basically secured the nomination, trying not to lose a lot of those Sanders supporters, but also trying not to alienate the suburban moderates who he feels like are part of his base.

Zach Carter (38:03):

And I don't think he knows what he wants to do. I think he's going to figure it out. He's a guy who's capable of changing his mind. He voted for all of this bank deregulation stuff in the 1990s, as part of the Clinton administration. He was very enthusiastic about it. But in 2016, when he was looking back on his career in politics, he said to, I believe, it was Jake Tapper that he thought his vote for the repeal of Glass-Steagall was the worst vote he ever made. So he's capable of changing his mind. I just don't know which way he's going to change it going forward. And I think predicting the future is an extremely difficult thing to do in politics at this juncture. This is a very, very uncertain time.

Zach Carter (38:43):

About Republicans and Democrats and deficits. I mean, what you said is basically right, everybody, with the exception of Bill Clinton, since 1932, has been running up larger and larger deficits. It's just a fact of life. Whether or not those deficits are good for America, the thing about economic disputes is you can always find statistics to fit your particular worldview. The empirical questions, they're very difficult to decipher. So some people could say, "Look, the deficits caused inflation in the 1970s, they caused a recession in 1992." Other people... I tend not to find that stuff terribly persuasive. But I can point to a different set of data that says deficits don't really make that big of a difference for the United States, particularly since the age of gold is over.

Zach Carter (39:38):

I do think it's the case that the Democratic Party is more committed to what we would traditionally call fiscal responsibility than the Republican Party is. They seem to think that it's a point of honor to reduce the deficit in ways that the Republicans don't when they're in power. I think Nancy Pelosi has been very clear about this. I'm not particularly excited about that as somebody who's traditionally been affiliated with the Democratic Party. I wish they weren't so committed to deficit reduction. I think it ultimately ends up hurting the people who they want to help. But we will see what happens in the Biden administration. I think it's a very uncertain time. And I think ideologically, everything is scrambled right now. The Republican Party, there are voices in the Republican Party right now who are talking about running big deficits to help working families. That was not happening a few years ago. And we'll just see what happens.

John Darsie (40:33):

The next question came from the chat. It's about whether there seems to be a resurgent interest in the ideas of people like Keynes and Karl Polanyi. Is that a sign that our ideas about free markets and how they work is fundamentally changing?

Zach Carter (40:49):

I do think so. I mean, think 2008 was a really big moment intellectually in the history of ideas for not only the United States, but the Western world more broadly. This idea that markets were self-correcting things, that supply was going to balance with demand and reach a prosperous equilibrium, I mean, you got to account for what happened in 2008. It was a total disaster. And I think the criticisms of the Obama administration that followed, that they were not aggressive enough in responding to that suggests that the government needs to be involved in the management of the economy, whatever you do.

Zach Carter (41:30):

So the idea of the free market is something that's separate from the government, rather than something that is managed by the government and interacts with the government in some way. I think that is changing. We do not really accept the Milton Friedman idea that there's a free market that exists out there in the state of nature and the government moves in after the fact and intervenes across it. I think that has changed. But it doesn't necessarily... Just accepting that difference doesn't actually help you decide what the policies are that need to be made in that reality.

Zach Carter (42:08):

So people like me who were deeply concerned about economic inequality are going to advise a different set of policies than people who are concerned about other factors. But that gets us to a basic political struggle. You can't just say, "Look, the equations add up this way. This is what the numbers say," you have to actually start talking about values and beliefs. And that is what democracy is for.

John Darsie (42:34):

And one final thought as I plug your book one more time. Zach's book is The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes. I had a chance to read it as well. It's fantastic. What's your next book going to be about, Zach?

Zach Carter (42:46):

I have got to keep that under wraps. I am talking with my publisher right now. And we have exciting things on the way but that's all I can say.

Anthony Scaramucci (42:58):

Well, we caused you to blush on our SALT Talk webinar. You could be the first blusher Zach, I caught the redness in your face there.

Zach Carter (43:06):

I blush easily Anthony.

Anthony Scaramucci (43:08):

All right. Well, that's good for me to know. Because I'm not the type to ever embarrass people. So I'll keep that on the down low, Zach. But in any event, I appreciate. Any parting thoughts of wisdom that you would like to share with us before we sign off?

Zach Carter (43:22):

Sure. Look, I think Keynes was deeply naive in a lot of ways. I think he made a lot of bad mistakes politically, he was a goofball throughout his life. But I think his faith, in our ability to solve our problems together as a society, I think is a faith that we cannot afford to lose. That is an essential belief, whatever your political perspective is, whether you call yourself a conservative, or a left-wing socialist or whatever, you have to believe that we can deal with the problems that are facing us. Because if you stop believing in that you end up with a future that's far worse than it needs to be. And I think that was a very wise and difficult thing for Keynes to maintain throughout his life, but I think it's very admirable.

Anthony Scaramucci (44:08):

Well, don't knock being a political goofball or being naive Zach. Some of us may be that. Some of us even on this SALT Talk may be political goofballs. But in any event, we appreciate your time. It was a phenomenal book, I really recommend everybody. I do believe, as we were talking about before we opened up the line to others, the Lords of Finance written by Liaquat Ahamed, 10 or 11 years ago had great influence on people like Dr. Bernanke and it became the, to use the metaphor, because it's appropriate the gold standard, contemporary book for that moment, I do believe your book is going to be that one for today. So congratulations, Zach, wish you the best with the book and hopefully we'll get you to our SALT Conference when we get it back up and running. But thank you again.

Zach Carter (44:56):

Looking forward to it.

Kai-Fu Lee: The Potential for AI in Healthcare | SALT Talks #10

“Artificial Intelligence is very powerful, but also very limited. With good data, AI can do far better than people. But it will never have the capability to think, to be self-aware or to have the creativity humans have.”

Dr. Kai-Fu Lee is the Chairman & Chief Executive Officer of Sinovation Ventures, a leading venture capital firm. Before this, Dr. Lee held various leadership roles at Microsoft, SGI, Apple and most recently Google, where he was the president of their China business.

Artificial Intelligence has tremendous power to help humans do their jobs better. Yes, some “routine” jobs can and may be replaced by AI, but most will be supplemented by its presence. AI can handle System 1 tasks (repetitive, routine), whereas humans beings will handle System 2 tasks (thinking, analysis).

The next big opportunity for AI is in health care. Here in the United States, it can synthesize health records and analyze bodily function far more accurately than physicians. In third world countries, AI can bring doctors to places that may never have had them before.

LISTEN AND SUBSCRIBE

SPEAKER

KF+portrait+%28black%29.jpeg

Kai-Fu Lee

Chairman & CEO

Sinovation Ventures

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie (00:08):

Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum that encompasses finance, technology, and geopolitics. With the SALT Talks, we try to do what we do at our in person SALT conferences, which is to provide a platform for big exciting ideas, as well as to provide our audience a window into the minds of subject matter experts. Today, we are pleased to welcome Dr. Kai-Fu Lee to SALT Talks. Dr. Lee spoke at SALT 2019 about artificial intelligence and machine learning.

John Darsie (00:47):

It was a fascinating talk that was led actually by Anthony's son, AJ. Kai Fu is the chairman and chief executive officer of Sinovation Ventures, which is a leading venture capital firm with about two billion in AUM, and it focuses on the development of the next generation of China's high-tech companies. Prior to founding Sinovation in 2009, Kai-Fu was the president of Google China, as well as a senior executive at Microsoft, SGI, and Apple.

John Darsie (01:18):

He's the co-chair of the Artificial Intelligence Council for the World Economic Forum and is the author of a New York Times bestselling book, which I highly recommend you read. It's called AI Superpowers. It was published in the fall of 2008, and Dr. Lee tells us that his next book is coming out in about a year and a half. And we look forward to reading that one as well. Kai Fu will be interviewed today by Anthony Scaramucci, the founder and managing founder of SkyBridge Capital, as well as the chairman of SALT.

John Darsie (01:46):

And I'll turn it over to Anthony and Kai-Fu now to begin the interview.

Anthony Scaramucci (01:51):

John, thank you very much. I think Kai-Fu's book was 2018, the fall of 2018, not 2008. So it was a way more current book, but it was a fascinating discussion about artificial intelligence. And I want to start with your origin, Dr. Lee, if you don't mind, because I think it's always fascinating for people. You mentioned at the SALT Conference that you sort of got interested in AI in your sophomore year in college. And so just take us through the steps of what you were thinking about then and how it led to where you are now.

Dr. Kai-Fu Lee (02:26):

Sure. Anthony, thank you, and John, for giving me the chance to talk to this great audience. Yeah, I got fascinated back in about 1980, my sophomore year, while I went to Columbia. And I was given an introduction to artificial intelligence, and I thought this would be the last technology for humanity. That we will figure out our brain and then we would build these amazing robots and life would be wonderful. Didn't quite work out that way. I think there are people who have those either dystopian or utopian beliefs about AI.

Dr. Kai-Fu Lee (03:06):

But what really happened in the last five years is all these AI-based machine learning technology started to work, and they started doing amazing job one task at a time. But these are amazing tools for us to use, but we are actually nowhere close to building that artificial general intelligence, something that's equal to our brain.

Anthony Scaramucci (03:35):

Obviously I've sat it on things at Singularity University and listened to Elon Musk. We hear about artificial intelligence, and you and I are old enough to remember the computer from 2001 Space Odyssey. What is realistic for us? What is realistic for people living on the planet today in terms of where artificial intelligence can go? And what will our grandchildren and our great-grandchildren see from the world of artificial intelligence in terms of the exponential development?

Dr. Kai-Fu Lee (04:11):

Right. AI is actually very powerful, but also very limited. It's powerful in the sense that if you have one single domain in which you have a lot of data and you throw that data at AI and tell it to learn something, something objective, something meaningful, and it will do that task better than people. The first wave of such applications was the internet. That's why Google, Facebook, Amazon are so good at targeting us individually based on what we've done in our history about things that we might want to read or we want to buy.

Dr. Kai-Fu Lee (04:49):

Then came the financial institutions. So automated loans and investment, quantitative investment, and insurance, they're coming up next. And then data in businesses. We're using Zoom now. We're creating data. That data can be mined. Smart things can be built from that for education, work, business, and pretty much any tradition industry. This is all happening right now. This is not for our grandchildren. This is happening now. Then AI will start to see and hear, but not just with eyes and ears.

Dr. Kai-Fu Lee (05:30):

AI can already recognize objects at higher accuracy than people and understand and recognize speech at higher accuracy than people. But what's more is now there are all these new sensors being plugged to AI, so AI can make decisions by aggregating all these sensors. The sensors can, for example, see things that people cannot see. They can sense temperature, humidity. They can do 3D reconstruction. So pretty much AI perception will definitely outdo human perception. Then finally, AI will move.

Dr. Kai-Fu Lee (06:08):

Of course, we already have our beloved Roomba, but AI will do much better than that. Beyond that, AI will be in the factory, warehouse, buses, highway, and then eventually cars, autonomous vehicles, so that it can move with a similar capability as people. You have these four waves adding up together building a lot of very valuable tools and applications to help us. But none of it has the capability of thinking, self-awareness, true understanding, compassion, creativity. All of that is missing.

Dr. Kai-Fu Lee (06:49):

It is simply taking one task, lots of data, with human telling it what to optimize, and then optimizing it so well that for that task it beats people.

Anthony Scaramucci (07:00):

Let's talk about that other wave though. Is it possible, Dr. Lee? I've obviously read your book, but I want you to explain it to others about the consciousness, about the empathy, the ability to change conversation, picking up emotional cues or body language from somebody. Is that something in the future for AI?

Dr. Kai-Fu Lee (07:22):

Okay. So we need to segment that into a few things. The true feeling, the way we feel, the consciousness, the self-awareness that we have, we currently have no idea how to build that for AI. So that could be 20 years, 30 years or longer away. We don't know. But it's probably not soon because we have no idea how to build that at all. However, can AI guess our emotion? Probably, because we give a lot of cues and AI can notice these small cues better than people.

Dr. Kai-Fu Lee (07:58):

So if you want to build a tool that has you and me talking to each other and have AI guess at any given period of time whether I was anxious, happy, sad, angry, suspicious, it can probably make a more accurate guess than people. Then can AI can pretend to be angry and happy? Well, of course, it can. If you have AI create a digital human that looks like us... You've all seen Deepfake. That's AI. We can build a Deepfake on Anthony and make that Deepfake speak like Anthony and appear angry or appear happy. So that is also possible.

Anthony Scaramucci (08:45):

I want you to make me happy, Dr. Lee. Okay? We'll focus on the whole Buddhist element of that.

Dr. Kai-Fu Lee (08:52):

Right. Right. We'll make sure we do that. I think this is really amazing that... The surprising thing about AI is for something that has absolutely no self-awareness, no human brain, and no feeling, it can exhibit feeling and perceive feeling. So that's the strangeness of AI. Similarly, you think AI machine translation works so well better than us. However, it doesn't really understand a word you say. It is merely mapping words to other words, having been trained on trillions of other words.

Dr. Kai-Fu Lee (09:32):

This is all data driven mechanism that exhibit somewhat intelligent behavior, but has no real understanding. It is just matching symbols and giving you other symbols.

Anthony Scaramucci (09:46):

But over the last 40 years while you've been studying and working on AI, you've obviously learned a lot about the human brain. Is the brain a computer, Dr. Lee? How would you describe the brain to somebody? If an alien landed here and you would say, "Okay, the human brain is," what based on your observation?

Dr. Kai-Fu Lee (10:10):

Well, it's still really unfathomable from a computer standpoint. We don't know how to simulate the brain. People are working on it. But if we think about what it is that makes us humans valuable, meaningful entities, what makes our lives full, it certainly isn't doing what AI already does very well. Daniel Kahneman wrote a very famous book, Thinking, Fast and Slow, in which he talked about System 1 and System 2 thinking. And in some sense, AI is doing the System 1 thinking, which is I see, I recognize, I heard, I heard something, and I recognize this word.

Dr. Kai-Fu Lee (10:58):

It's almost reflexive and almost perhaps muscle reflex. It's thing that we do without perception and without deep thinking. But what is interesting about the brain, as Dr. Kahneman said, is that we're able to think deeply, think strategically, think holistically, plan things in a very large space of possibilities, but we just know that if we do A, they'll respond by B, then we do C. So there's this very clear focus and awareness in making our decisions, and also with that, the ability to be creative, and also, of course, emotions and compassion.

Dr. Kai-Fu Lee (11:49):

So to answer your question, I think it's the System 2 stuff that makes us really unique. And that's why people can be brilliant like Einstein or Steve Jobs and that's why people can be compassionate like Mother Teresa. And these are special people and these are the special qualities that we have and that AI cannot do and possibly can never do.

Anthony Scaramucci (12:20):

That's my question. Could it ever be replicated based on your observations?

Dr. Kai-Fu Lee (12:26):

Well, there are many, many views on that because no one knows the answer. I think it maybe impossible to do, because we currently don't know how to do it. And also, I'd like to think that these technologies happen for a positive constructive reason, not because we want to build machines to replicate us. There's got to be something innate about us that makes us human, that makes this life meaningful. So I think we have to hold onto that belief that AI can't...

Anthony Scaramucci (13:01):

And the positive stuff about AI, our mutual friend, Peter Diamandis, has written a lot about the future and what he calls the abundance, and that there is a world ahead of us where through machine learning and AI and lots of other things that are going on in the world that we can end things like poverty, we can end sort of the income divide. So talk a little bit about how AI could be a part of that over the next generation. What do you envision?

Dr. Kai-Fu Lee (13:35):

Well, on the constructive side, clearly AI can make better decisions within limited tasks. AI can take over routine tasks that we have to do. If you think about all the System 1 stuff, those are more the routine tasks, right? If you think about the job of a receptionist, some of that job maybe very interesting, the human element, the warmth, the breathing, the compassion, the branding image on your customers, but a lot of that work is very boring. Show me your face. Show me your ID. Print you an ID. Who are you seeing?

Dr. Kai-Fu Lee (14:12):

Call the person. Well, the boring part can be done by AI, and you can extrapolate that to the job of an accountant, a lawyer, even a doctor. And these jobs, interestingly, AI will take care of the repetitive, routine, and quantitative. Things that we're not very good at. And then we get to focus on what we're good at, which is the System 2 thinking, the analytical, the creative, the compassionate, the human to human connection.

Dr. Kai-Fu Lee (14:48):

I think Peter and I share this belief that AI is here to take away the routine work so we can be liberated from it, and we can spend our time, all of it, on things that makes us uniquely human. That would be the most positive direction.

Anthony Scaramucci (15:09):

Can you talk a little bit about healthcare because I know that you have a belief that AI is going to certainly help us in diagnostic healthcare, research data? Enlighten us about where you think that's going using artificial intelligence.

Dr. Kai-Fu Lee (15:23):

Yeah. So healthcare is an area where AI really hasn't yet made a huge dent yet, but it is so perfectly designed for AI, because AI would work well in domains where you have large amount of data and very clear outcomes and labels and longitudinal data over years and decades. And that's exactly what the healthcare records have. And also, AI can basically deliver very targeted personalized determination. The reason we really get addicted to Facebook is it personalizes and shows us what it knows we want to see.

Dr. Kai-Fu Lee (16:12):

The reason we buy so much on Amazon is because Amazon shows us things that it knows that we as individuals want to see. Yet if you think about medicine, for each disease, we're largely all treated using a single prescription, or maybe for complex things like cancer, there maybe multiple types depending on each person's various background. But each person is unique and human doctors and human teaching of medicine just cannot possibly teach each doctor to treat each person uniquely according to that person's background and the DNA and genome sequencing and family history and so on.

Dr. Kai-Fu Lee (17:07):

But yet, when we have all the data from the patients from one country, that can be trained so that it can specifically target each individual with a treatment that is just right for that person. So that personalized medicine and training and diagnosis is something we can look forward to. Of course, it will have to overcome privacy laws, maybe anonymize the data, maybe use some technology to protect people losing their privacy, but I think that can be done.

Dr. Kai-Fu Lee (17:42):

And once that is done, what will happen to the future of treatment and healthcare is that for people who can afford it, which is basically most Americans today, you will get a human doctor aided by an AI doctor. The AI doctor will suggest to human doctor, ask few questions, take the answers, look it up, suggest treatments. And the human doctor will tease out all about your background and condition and also care about you, show compassion, connect to you, visit you at home, giving you a higher chance of recovery or survival.

Dr. Kai-Fu Lee (18:21):

That's the symbiotic combination that uses people for what people do best and machines for what machines do best. But finally, what's interesting is in poor areas, in under developed countries that cannot afford this expensive doctor who has to go through medical school and charges a lot of money because of the high salary, one could imagine a pure AI doctor that essentially draws no salary, runs on nothing except electricity, give decent treatment, significantly bring up the fatality rate, improving the treatment even for the poor reaches of the world.

Dr. Kai-Fu Lee (19:01):

So I see a lot of opportunities there. Of course, there are also things like robots and improve the intuitive surgical using robots to do surgery, AI for drug discovery, and also connecting AI to insurance and healthcare. Once it knows about you and your family history and your finances, it can design a perfect insurance policy for you that's much more economical than what you can buy from insurance companies. So I think it's endless when you connect all that data together.

Anthony Scaramucci (19:38):

So that brings up the question of further automation. And as we both know, the pandemic, unfortunately, has raised unemployment in the US to 14.7% and that's closing in on depression-like levels. Certainly we hope this is a temporary thing, but do you think it's accelerating the trends? Will it accelerate the use of AI? And will people that had traditional jobs, like the ones you're describing, will they lose out AI, or is it too soon for that?

Dr. Kai-Fu Lee (20:11):

Okay. First, on the AI impact on jobs before and then we get into the pandemic. While I believe in the symbiotic nature for AI in many human jobs as I described earlier, AI will take away many jobs as well, because if it can do 30, 50, 70% of different types of jobs, jobs of receptionists, a security guard, and entry level accountant, assistants, paralegal, and factory workers, drivers. So you list all of this. In a small number of cases, the whole job goes away because AI takes it over.

Dr. Kai-Fu Lee (20:53):

But in most cases, AI takes over 30, 50, 70%, but that still leads to a reduction of employment, because in a pool of workers, AI will take some jobs that it can do, leaving the rest for a fewer number of humans to do. Undoubtedly, there will be significantly fewer people working on today's white collar routine job and blue collar routine job. There will be other jobs created, but we don't quite know what they are yet, and they will tend to be more complex in nature, more creative in nature, or more human to human connection in nature.

Dr. Kai-Fu Lee (21:32):

Because if AI can do the routine jobs, then the jobs available for people would have to be elevated. There is a training gap. So while I believe there will be many more jobs created and the problem of taking the people whose jobs are displaced and retraining them for the jobs that are being created is an upleveling problem, is a training problem that somehow people have to understand what jobs are safe and get trained for it. So that's before the pandemic. Now, the pandemic will do some problematic things and also some constructive things.

Dr. Kai-Fu Lee (22:16):

The constructive thing that pandemic will do for our four habits is that it pushes us to much more online and digitized behavior. I mean, the fact that we're having this session here on Zoom and the fact that people are able to work from home and the billing kids are taking classes at home are signs that we are increasingly going online and increasingly getting comfortable with a digitized style of working. The opportunity is once digitized, you've got data. Once you got data, AI can work. That's the great thing about creating value and improving efficiency.

Dr. Kai-Fu Lee (23:08):

The problem of that is once AI can work and also outsourcing can work, jobs will be challenged. Imagine in the past, if you had a job that required you to go to the office, meet people and talk to people, then it seems hard for AI and robot to take it over. But now you're doing that job online and remotely and by video conferencing and then it will become obvious to the managers of the company that an AI could do your job too. The decision process maybe relatively simple. It can be learned. There's a technology called RPA, robotic process automation.

Dr. Kai-Fu Lee (23:57):

It's rapidly taking away these various types of white collar routine jobs. I believe the pandemic will lead to more digitization, online, and outsourcing and also automation as one unfortunate outcome. The other unfortunate outcome is that companies will have tighter budgets. They'll have to do cost cutting. And before, they might not think about, well, let me spend $2 million to replace $2 million of salary, $2 million of software to replace $2 million of salary or for some period of time.

Dr. Kai-Fu Lee (24:38):

People might not do it or maybe the company is making money, they feel if they did that, it would look bad. But now, everybody's scrambling. Everybody's tight. Everyone's cost cutting. So companies are going to be more willing to look at cost cutting...

Anthony Scaramucci (24:54):

It makes sense. Before I turn it over to questions from our audience, I want to talk a little bit about the relationship between Chinese government and the American government and the competition with AI. There are people in the United States that feel China is ahead of the United States. Perhaps they are. I don't know. Are they? Secondary question is, you and I, of course, want there to be a very healthy and strong bilateral relationship between the Chinese government and the US government.

Anthony Scaramucci (25:31):

But I'd like you to talk about those tensions if you don't mind, how they relate to AI, and where do we stand vis-a-vis the progress being made in AI, China versus United States.

Dr. Kai-Fu Lee (25:43):

Sure. AI turns out to be a technology that is not such a rocket science. There are probably a few dozen important discoveries. If you study them, if you get the technology, the code, you can probably implement AI after months of training, not even years of training. That is an advantage for China. While the US has more of the brilliant researchers who write up the papers, China has a larger army of engineers who are building solutions in the industry. And China's other big benefit is that China is a large country.

Dr. Kai-Fu Lee (26:28):

There is a lot of data. AI works better with more data. So that China has more engineers, more data, fewer brilliant scientists. So in some sense, US and China can and perhaps should in an ideal world be partners in this, where US is doing more the deeper research, the more complex technologies like autonomous vehicles, where China can do more the low-hanging fruit, the implementation, the things that requires a lot of data.

Dr. Kai-Fu Lee (27:01):

And then on domains like healthcare where Americans are extremely concerned about privacy and there are laws like HIPAA preventing aggregation of data in the US, perhaps Chinese companies can build models using advanced American medical technologies and AI technologies. But on Chinese data, it's anonymized, but there's no equivalent of HIPAA in China, so that aggregation can happen. And then the outcome can be shared by both countries. So in an idealistic and maybe at this point naïve viewpoint, the two countries are highly complimentary.

Dr. Kai-Fu Lee (27:44):

There's not an AI war going on. China can build all the things without great dependencies on American products, and US can, of course, build things on its own. But the two countries have such different talents they ought to work together. But that maybe pretty hard now.

Anthony Scaramucci (28:04):

Yeah, no, I get the tension. John, let's kick it over to some of our guests that are inside our chat room here. Ask Dr. Lee a question for us.

John Darsie (28:16):

Yeah. The first question is about GANs, generative adversarial networks. You talked about Deepfakes and things like that. What are the real benefits of GANs in terms of creating positive change to society? And what potential do they have to create general AI, and also what are some potential dangers of advanced AI becoming prevalent in society?

Dr. Kai-Fu Lee (28:44):

Generative adversarial networks are very cool technology. Basically you're building two networks, one to do what you want done, the other to be a critic. And then the critic will tell it, "Hey, this is not right," then it fixes itself, and it continuously improves itself. There are many, many applications of GANs. The one that's probably most infamous, notorious is the Deepfakes. It is using that technology that it manages to turn a video from some other third party into you or a voice and be converted that way.

Dr. Kai-Fu Lee (29:26):

When applied constructively to building entertainment and games and movies with full licensing of the properties, it's amazingly fun. But when you take a famous politician or movie star and put their faces on doing acts that they don't want to be seen doing, then it's a problem. It's the kind of technology where the technology is used by the bad people to do something, then the good guys catch up and catch them, then the bad guys improve again.

Dr. Kai-Fu Lee (30:03):

And unfortunately, because of the nature of the technology, that you have a good guy and a bad guy, basically the two networks, the good guy network and the bad guy network. They continue to iterate. And the moment you think you got a way to catch the bad guys, they take it into their training as well. It's very hard to say whether if we purely competed on the good guy/bad guys. The good guy continue to try to catch the bad guys doing the Deepfakes.

Dr. Kai-Fu Lee (30:35):

The bad guys continue to come up with yet another way to do a Deepfake. It's not clear whether this will lead to a good outcome or a bad outcome. My belief is often we have to resort to other technologies that will guarantee the worst case scenario doesn't happen. With respect to Deepfake, probably we'll need to move to some sort of a future blockchain assisted capture device which guarantees that this photo, this video is authentic. And it can catch anything that's been made on editing it.

Dr. Kai-Fu Lee (31:13):

Some technology like that is probably needed to absolutely guarantee the problem with Deepfakes. Otherwise, I would warn the people watching that we should expect there to be more Deepfakes happening in the social networks. We've got fake news. Now we've got fake video and fake voice. It's very, very hard to catch, and it's going to be a while before we eliminate it. People have to be advised not to believe everything you see even if it looks real.

Anthony Scaramucci (31:50):

Any other questions, John?

John Darsie (31:52):

Yeah. There are several more questions. I'm going to combine two questions into one. We talked about US and China in terms of where they are in the AI race, if you will. We have two questions about emerging market economies, ex. China, as well as Europe. How well are those economies doing in terms of advancing with AI and machine learning? And what potential does AI have to sort of bring emerging economies into a higher quality of life and into a more modern era?

Dr. Kai-Fu Lee (32:23):

Okay. In the current status, I think US and China are ahead of the other countries in terms of AI in an aggregate score, that is research plus implementation plus monetization. Right. Europe I think is very strong in research, but the entrepreneurial ecosystem is currently nowhere close to US or China. And unless that gets fixed, Europe is likely to be considerably behind in AI technology. India is another possible country that could do very well because it has also a large number of people and data. We have not quite yet seen that, but I think the potential is there.

Dr. Kai-Fu Lee (33:11):

And then there's obviously Russia, which is very good in math. There is Southeast Asia which is a large group of people, but not one culture, one language, and then it goes down from there in terms of likelihood of being very strong in AI. But what can AI do for these countries? First, the problem is that AI will create these hundred billion dollar companies, and they're currently pretty much all American and Chinese. The wealth is going to these companies. And AI will decimate a lot of the jobs most of which are routine jobs.

Dr. Kai-Fu Lee (33:57):

AI as a wealth creation is giving that wealth to US and China. In terms of replacing jobs, it will take more jobs away from developing countries because developing countries have more routine jobs. That is the seriously problematic part of AI for the rest of the world. There are some good news about AI in the developing worlds. It will dramatically reduce the cost of education because there will be virtual teachers, which can do a pretty decent job of teaching certain subjects, especially entry level ones.

Dr. Kai-Fu Lee (34:40):

There will be reasonable quality virtual AI doctors that will also provide better healthcare. So some services I think will help the people who are in the most extremely serious extent of destitute. But as a whole economically, it is a problem and I think all the countries have to pay attention about the impact of AI and find a path that makes sense for the country.

John Darsie (35:14):

We have a couple more questions. In science fiction, a very popular topic in movies like Blade Runner and others is the idea of consciousness and whether AI and technology will create immorality for humans in a way. Going into the science fiction aspect of that, do you think that AI will eventually be able, as Anthony was talking about earlier, replicate some aspects of consciousness and provide immortality for humans?

Dr. Kai-Fu Lee (35:45):

There a lot of different opinions on this subject. There are people who think it's imminent. It's within a decade. There are people who think it's another two or three decades, and there are people who think it might be never. I think it's hard to say which thinking is right. But I would like to think that first, we have no idea how to build consciousness. Secondly, we don't really understand what consciousness is. And thirdly, we people must be believe that we have a reason to be on this earth.

Dr. Kai-Fu Lee (36:24):

So I think it makes sense to believe that consciousness is the thing that makes humans unique and that it may not be buildable by machines. I think that will give us the confidence to go on. And I think it also is a plausible outcome and we should let people work on it. But until we see significant breakthroughs, there's no reason to believe that the age of the robots are coming. I think we're still quite a ways from that.

John Darsie (37:01):

Another question relates to the ethics of AI and where AI needs to make decisions in real time, some of which could involve law enforcement or conflict or war type scenarios. How do you program ethics into artificial intelligence?

Dr. Kai-Fu Lee (37:20):

This is a very important aspect and I think we're in a very early phase right now. Right now most AI programmers are not even taught ethics nor do they think they play a role in ethics. And that's important for the AI tools to change. And I think the AI education, some schools like Stanford and MIT, are starting to make sure that AI students are aware that their profession can impact good and bad, right and wrong in society. Just like doctors have to make an oath that they will do no harm. I think AI engineers will increasingly need to do that.

Dr. Kai-Fu Lee (38:10):

It's important also to note that when we read all of these AI disasters in the newspaper, not all of which are a result of AI not understanding ethics. There's usually a different explanation. For example, there are cases where people talk about certain company trained their HR system on AI. They didn't have a lot of women, so it became prejudice. It interviewed more men and fewer and fewer women. It became a downward spiral.

Dr. Kai-Fu Lee (38:41):

That story is true, but that could have been avoided if the programmer or the person who runs the AI over them recognized that their training set, their training data was not fairly balanced between men and women. And if engineers don't notice it, our tools ought to notice it. These kind of ethical issues many of which maybe solvable. The other that's talked a lot about is the autonomous vehicle. Trolley problem. Certainly it's an issue when the car is faced with different outcomes.

Dr. Kai-Fu Lee (39:28):

People talk about if you have two choices, one is 100% going to kill one person, the other is 52% and they kill two people. Which do you do? It is, in fact, a hard choice. But in reality, we have to remind ourselves that there are very few cases that you really have two people killing decisions in an autonomous vehicle. Secondly, we have to remind ourselves humans don't even have this program in. If you talk to all of the people who have been in accidents, who have caused accidents, got in trouble as drivers, they can usually hardly explain why did what they did.

Dr. Kai-Fu Lee (40:12):

I believe the glass half full would tell us is that if we program ethics in some reasonable way for the decision-making and with the powerful sensors that AI can see and the deliberate decisions as opposed to people just getting drunk or tired or sleepy and make a mistake, AI won't do that. At the end of the day, AI will really save a lot of lives. And while we do need to focus on training the engineers, building the tools, I think at the end of the day, AI will save so many lives.

Dr. Kai-Fu Lee (40:56):

That yes, there will be ethical issues and decisions and mistakes made, but in the grand scheme of things, AI doctor will save so many lives more than the few ethical mistakes it may make, and AI autonomous driver will save so many lives more than the few ethical decisions that it will make a mistake on. We have to look at in the grand scheme of things, not just focus on the one case where it appears to be not working.

John Darsie (41:28):

Well, Kai-Fu, we really want to thank you for joining us today. We're going to wrap it up there. I know you're in Beijing right now beginning your quarantine. The Chinese government, as well as other governments in Asia have done a great job of stamping out the virus. I want to thank you for taking the time to join us. Anthony, I don't know if you have any closing remarks for Kai-Fu.

Anthony Scaramucci (41:53):

We're grateful to you. We hope that we can get you back to the SALT Conference physically, Kai-Fu. Otherwise, we're going to have to create an artificially intelligent Kai-Fu to entertain our guests and educate our guests. But in the meantime, we wish you great health and great personal safety, and we look forward to seeing you at one of our next events. Thank you again for joining us today.

Dr. Kai-Fu Lee (42:15):

Yeah, see you in SALT. Bye, bye.

Anthony Scaramucci (42:17):

Okay.

Alex Denner: Biotech Billionaire | SALT Talks #9

“Economic recovery is all about confidence.”

Alex Denner, Ph.D., is the Founder & Chief Investment Officer of Sarissa Capital Management, an activist firm investing in opportunities crated by the unique dynamics of the healthcare sector. Alex has a background in biomedical engineering.

“Vaccines are a hard business.” At the time of this interview, there were 160 companies working on vaccines, the most promising of which was a mRNA vaccine produced by Moderna. The production timeline is unprecedented and, while results are showing signs of early efficacy, there isn’t enough data to ward off concerns of side effects.

As it relates to the economy, the recovery will be less about the technical virus protection and more about confidence in not suffering from severe level of COVID-19 disease. One question is put to bed: COVID-19 is worse than the seasonal flu.

LISTEN AND SUBSCRIBE

SPEAKER

Headshot+-+Denner%2C+Alexander.jpeg

Alex Denner

Chief Investment Officer

Sarissa Capital Management

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie (00:07):

Hello everyone and welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and geopolitics. SALT Talks are a series of digital interviews we've been doing in lieu our in-person conference that do deep dives in the topics that we think are relevant to the investment management community and our global community.

John Darsie (00:31):

Today we're very excited to dive into a topic that's especially relevant given what's going on with the global pandemic with Alex Denner who is the ... that focuses, I'll read a little bit more about Alex's bio. He is a PhD, as well as the founder and CEO of Sarissa as I mentioned. He's been investing in healthcare companies for the past two decades. In 2013, he founded Sarissa to capitalize on the compelling opportunities for positive shareholder activism created by the unique dynamics of the healthcare sector.

John Darsie (01:05):

Dr. Denner has led Sarissa's involvement some of biopharma's most successful strategic transactions and activist campaigns. Prior to founding Sarissa, he was the healthcare portfolio manager for Icahn Capital and at Icahn he developed Icahn's activist strategy in the healthcare sector and was responsible for some of the firm's most successful investments. Prior to joining Icahn, he was a health care portfolio manager at Morgan Stanley, as well as at Viking Global. Today, Alex serves on the board of Biogen as a director, and he's the chairman of the Medicines Company. He received his bachelor's degree from MIT and his master's and PhD degrees from Yale University.

John Darsie (01:46):

If you have any questions for Dr. Denner on today's chat, please use the Q&A box at the bottom of your video screen, and I'm going to turn it over to host the interview to Anthony Scaramucci who is the Founder and Managing Partner of SkyBridge Capital, as well as the chairman of SALT. So Anthony, you go ahead and take it away.

Anthony Scaramucci (02:04):

I appreciate it John. Alex, it's great to be with you. You got a fascinating story. John's bio of you was great, but I want to hear more. Tell us more about your background, tell us how you got to where you are because I want people to understand the significance of your credentials before I start asking these questions.

Alex Denner (02:25):

Thank you Anthony. Thank you for having me speak with you. So yeah, my background basically I have a ... My academic background is in essentially biomedical engineering. And from there I went to Morgan Stanley, had always been interested in investing, and basically became also interested in activism. The idea that for many companies, they're not well managed. There are a lot of principal-agent issues and the companies are often run more for the management teams than the companies themselves. And it's a very interesting intersection there between healthcare and activism.

Alex Denner (03:07):

So having a background in biomedical engineering, I did a thesis on identifying people susceptible to certain types of ventricular arrhythmias, certain types of heart attacks. Basically we approached the situation with the philosophy that in healthcare companies are very ... because they have very high margins and very high barriers to entry, the opportunity for a company to sort of be under managed and still kind of get away with it, if you will, is higher.

Alex Denner (03:51):

I actually approached Carl Icahn with this kind of philosophy and sort of started doing investing in that. And I've been involved in a whole bunch of transactions and investments in the healthcare industry over time. And really what we do is we get in and we try to fix companies. So we've been involved in, as Jonathan said, Biogen, Medicines Company, ARIAD, ImClone, Genzyme, MedImmune. There's a whole bunch of companies that we've been involved with, and really try to make better and often through that process end up in an M&A situation.

Anthony Scaramucci (04:32):

But you know a lot about science and you know a lot about research into vaccines and you know a lot about this disease that the entire world is now struggling with. So I want to go right there, and tell us a little bit about your opinion of the various organizations that are working on a vaccine and working on therapies to help people that have COVID-19.

Alex Denner (04:59):

Yeah, sure. I think there are approximately 160 people out there working on vaccines, and countless, more than a thousand efforts that are on therapies. I think that at this point vaccines are a very hard business, and I think we should sort of take a step back in terms of thinking about it from a societal point of view. It's very hard to develop vaccines, and there are viruses for which we haven't, HIV being a classic example, that people have been working on for decades and we don't have vaccines that work. And there are also viruses, Dengue Fever being probably the most highest profile example where vaccines have been developed that can actually make an infection, a subsequent infection from the disease worse. So a person can be vaccinated, in certain circumstances get worse because they had been vaccinated when they get an infection of Dengue.

Alex Denner (06:09):

So the development is very complicated, and we have to sort of look at things in that light. I am optimistic that we're going to have a vaccine relatively soon. In fact, I think we'll have a number of them. There's a bunch of different technologies that people are working on. The ones that are sort of the highest profile and certainly in the US probably the mRNA vaccines where Moderna is kind of the leader there, Pfizer is also, has a bunch candidates, there's no ... That particular technology has never been successfully implemented in an approved vaccine.

Alex Denner (06:50):

On the other hand, the data that has come out so far has been very promising. And one of the most exciting parts about that approach is that it's relatively quick. You can design the molecule that could produce the immune response and test it quickly and also scale it quickly. So if one of these RNA or DNA vaccines works, it's pretty easy to make, relatively easy to make, hundreds of millions and billions of doses.

Alex Denner (07:25):

The sort of more traditional technologies of using vaccines where the virus has been, like the actual virus it's a killed version of the virus or a more sophisticated technology called live attenuated vaccine, we basically take the virus and don't kill it but damage it in a way that it can't cause a serious infection. Those types of vaccines generally have very good immune responses, like our bodies react well to them and create robust responses, but the timelines to develop them are much longer. So it's-

Anthony Scaramucci (08:07):

So Alex, what timeframe are we talking about though when you say relatively early? When do you think we'll see the vaccine?

Alex Denner (08:18):

A lot of people work on them, and I think that given the day that's come out heretofore, I think it is possible that we'll have multiple vaccines that are showing efficacy this year. Now, that doesn't mean that they're going ... I don't think there'll be a widely available vaccine this year. I think that it'll take some time to scale it up. Moderna has been highlighting that they think at the beginning of the year they may be able to scale to a large number of doses to treat a significant percentage of the US population, but they might be able to treat so high-risk people earlier than that.

Alex Denner (09:01):

There are many risks to that though, and I think that it's not ... I'm more hopeful than I was two or three months ago in terms of a vaccine being developed in the next few months. But I think it's important to note that we may not have a vaccine at all for the next couple of years. It is possible. We have to think about kind of how society will adapt if that is the case.

Anthony Scaramucci (09:27):

But you're optimistic. And just one more question on this because I think our audience is actually interested in this stuff. What can we learn from the prior pandemics? The Spanish flu pandemic is an example, no vaccine, yet the society did go on to progress and we created the roaring '20s shortly after that pandemic ended. So what can we learn from that?

Alex Denner (09:50):

Exactly. No, that's a very interesting area. Look, there have been many pandemics in history as you know Anthony. In the Bible, they mention the plagues and smallpox and cholera and the Black Death in Europe. And these things that have occurred many, many times. And there are many kind of historical lessons that we can learn. They generally, without mitigation kind of most viral pandemics last a few months and they have a few waves. So think of a few months long wave and there's usually maybe three waves. In this case we have ... This is the first time the whole world is really coordinated to do social distancing to slow down the vaccine. So it'll change the dynamics somewhat, but I think we can sort of look to history and say, "Well, this has happened many times before. We've got through that."

Alex Denner (10:53):

Almost all respiratory viruses have a seasonal component. So I think that's an important part here that although we're seeing like in Texas and Florida an increase in the number of cases, and that's very troubling. I think that's something that we should all be focused on, I do expect, I think the sort of the best guess is that there'll be a re-acceleration of viral infections in the fall that just most respiratory viruses behave that way. And that occurred with the Spanish influenza. That occurred with lots of influenza pandemics.

Alex Denner (11:33):

From a societal point of view, in the US, we're learning a lot about how to manage the disease medically. We just saw the recent news on dexamethasone being used and basically kind of in the later stages of the disease it helps, which is very important to know.

Anthony Scaramucci (11:49):

But let's explain how it helps. So what's happening is you're getting an overreaction from your immune system, right, and it's flooding your cells in a way that's causing a breakdown. So it's an immunosuppressant drug to knock that down. Is that a fair characterization?

Alex Denner (12:08):

That's exactly correct. This virus has an acute phase that typically kind of lasts say a week or two, and most people clear the virus. Some people don't, the ones who get more severe disease, and they tend to have an overreaction of their immune system. And steroids can be used to dampen that down also. Tocilizumab is also used in that regard.

Alex Denner (12:40):

It's important that we understand that steroids can actually reduce our body's ability to fight an infection. So you generally don't want to give them early in this stage of an infection. But when someone's in that state where their body is overreacting to the infection, the steroid is going to be very useful. And that's an example, is one of the things that we're learning kind of as the world gets experienced with this in terms of medical management, managing people who have severe disease. And I think even in the absence of a vaccine and in the absence of any new therapies, and I do think we'll have things beyond Remdesivir, in the absence of those, doctors will better understand how to manage patients and improve outcomes.

Alex Denner (13:32):

One of the things that's interesting is that the disease appears to be a disease of endothelial dysfunction. So it's a disease related to clotting of the blood. It's not just a lung infection. It's doing other things systemically. And I think that, the recognition of that is becoming sort of ... Most people would say that generally that's probably what the virus is, and that medical management of that, like reducing oxidative stress, that type of thing can help improve outcomes.

Anthony Scaramucci (14:09):

So I'm going to ask you three questions in rapid-fire succession and so you can give me a yes or no, your opinion of course. COVID-19, is it worse than the flu?

Alex Denner (14:22):

Yes.

Anthony Scaramucci (14:24):

The mortality rate is worse than the flu?

Alex Denner (14:26):

Yes.

Anthony Scaramucci (14:28):

At this stage in the pandemic, would you take your kids out to a restaurant?

Alex Denner (14:38):

I think probably a qualified yes to that, but I think you have to do that very carefully. I actually went to a restaurant today. It's the first time I've done that. It was a restaurant by the sea. We were 10 feet away from everyone else-

Anthony Scaramucci (14:56):

Alex, did you have a martini or something? Hopefully yeah. What did you drink at the restaurant? Don't tell me iced tea. I'm going to cut the internet.

Alex Denner (15:03):

Unfortunately that is what we had, is iced tea.

Anthony Scaramucci (15:03):

Yeah, iced tea, all right.

Alex Denner (15:07):

I think that during the daytime, when there's kind of a breeze, if you will, when people are not close together, I think it's very important who you're having, choosing to have a meal with, if you go to a restaurant, it's a very important thing if you're [crosstalk 00:15:25]

Anthony Scaramucci (15:26):

You were out. Let me just stipulate for everybody. You were outdoors. You were eating at fresco.

Alex Denner (15:31):

I was outdoors and 12 to ... It's 10 to 15 feet away from anyone else. Look, I think that was a calculated risk doing that. I don't think we should be doing that a lot. I do think that in ... Like I live in Connecticut. In this area, the virus was very bad a few months ago. It was horrible. It was really, really bad, and it's come down a lot. So I think it depends a lot of where you are geographically too. But during the summer I think it's important to kind of get out a little bit, not to ...

Anthony Scaramucci (16:10):

What about flying in an airplane Alex? Would you fly in an airplane?

Alex Denner (16:14):

No.

Anthony Scaramucci (16:15):

Okay. Tell us why not.

Alex Denner (16:17):

I think that the ... Look, obviously there's always a risk benefit analysis with that, and sometimes is you need to fly for some important reason I would do it I guess, but the whole process of commercial airline flight is very ... it has lots of opportunities for introducing infection. So the actual being on the plane, you're in an enclosed can, sitting next to people who you don't have any idea of sort of their viral status for an extended period of time. You're touching lots of things. You're interfacing with lots of people. You got to go through an airport to get to the plane. You got to go through security. You got to go to the gate. And when you get out of the plane, you got to go through an airport. You have to think about transportation to wherever you're going. Those types of things are, for me, I don't plan on going on a commercial flight for a vacation kind of purpose in the near term.

Anthony Scaramucci (17:21):

There are people that think if you've gotten the disease and you have the antibodies, you can still get the disease. So can you still get the disease after you've gotten the disease? And what's the difference between synthetic and natural antibodies?

Alex Denner (17:35):

So once the person has had the disease, it's very unlikely that they can get it again. I mean, almost, almost impossible. I don't want to say impossible because there can be ... It'll be very, very hard, for a period of time. I think the question that we don't really know is how long does immunity last for this particular infection.

Alex Denner (17:59):

When somebody gets the chickenpox, they get essentially lifelong immunity to that virus. In the case of corona viruses, the immunity that most people get lasts kind of months or a short number of years. So I think that, again, we don't know, but based on sort of an educated guess on similar viruses it's probably the case that a person can get reinfected in a year and a half but not two months later.

Alex Denner (18:33):

With respect to antibodies. Our bodies when a person gets infected, our immune system kind of kicks in and there's a whole bunch of things that happen. And one of the things that happen is that there's a part of the body that makes antibodies which are substances that go and find things that look like the virus and latch on to it and essentially kill it. Once we've had the infection and our body has created the antibodies, the virus usually goes away or almost all that goes away very quickly. You can take ...

Alex Denner (19:16):

So somebody that's had the virus and then recovered will have antibodies in their blood. So you can do so-called convalescent plasma where you take the blood out of a person who has recovered from the infection, isolate the antibodies, the plasma in the blood, and then inject that into a person who's suffering from an acute infection. That usually helps people. It's not 100% clear that that's efficacious, but it's very, very likely to be efficacious.

Alex Denner (19:50):

Then the next step is let's make those antibodies synthetically. So what I just described is taking an antibody from somebody that has an infection. It's obviously kind of hard to scale and it's a lot of complication with that. It'd be great if you can design the antibody and manufacture it at scale and give it to people so they would have ... It's kind of like a mini vaccine in a way.

Alex Denner (20:13):

That is a very exciting approach. I think the technical probably of that working is quite high. There's a bunch of companies working on that. I'm involved with a company that has a role in that. Probably the leader is Regeneron. They've been working really hard and have some very exciting ideas and they're pursuing that very quickly. That's not something that can be ...

Alex Denner (20:38):

Making the antibodies is a complex process. So it's not something that can be scaled to sort of giving them to everybody in the world. But when we have data that those, that synthetically created antibodies work, they probably would work prophylactically and therapeutically. So in other words, they would probably work to prevent an infection if you gave it to a person who is at high risk for an infection, as well as if you gave it to a person in the early stage of infection and it probably would make the disease go away more quickly.

Anthony Scaramucci (21:15):

In listening to you speak about this, and obviously we know a lot about you and your firm, you're cautiously, can I frame it this way, you're cautiously optimistic about a therapy and a vaccine, and let's call it over the next year, that those things will unfold.

Alex Denner (21:33):

Yes. Even more than ... Hopefully sooner than that even.

Anthony Scaramucci (21:38):

Okay. In your mind you've been an investor for your whole career. So what does that mean for the US economy? What does that mean for the stock market? And what does that mean for the industries and the sectors that you're involved?

Alex Denner (21:51):

Okay. In terms of the societal and the investing impacts, I mean I think, first of all, we have to think of all the different possibilities. So it is possible that we have no vaccine for five years. It's important for as an investor have that in the frame of possible outcomes.

Anthony Scaramucci (22:13):

If that happens Alex, I'm going to stick half of my SkyBridge employees in that beautiful office of yours, okay? We're going to be living rent-free in your house, okay?

Alex Denner (22:21):

There you go. [inaudible 00:22:24]

Anthony Scaramucci (22:24):

Keep going.

Alex Denner (22:29):

That said, I do think it's very likely we'll kind of have some therapies. Economic recovery is all about confidence. So I think it's less about the sort of the technical level of virus protection in the population and whether it's 69% or 73%, but it's people feeling confident that if they go out, they have a low chance of getting a serious disease from doing that. And that can come from a vaccine, that can come from sort of better treatment so that the disease much more rarely become serious.

Alex Denner (23:11):

I do think that that will occur sort of a relatively soon, certainly not this year but kind of probably the beginning of next year. And I think that that will allow us to get back to sort of a something quasi normal. There are industries like that are very ...restaurants and things will probably take longer to kind of get back to full normal, and there are industries that where work from home is working well that are unaffected now or relatively affected there.

Anthony Scaramucci (23:56):

You don't have to give specific stocks but just give us generically the sectors that you're the most bullish on. And if you want to give specific stocks or even are allowed to, I don't know what the regulations are around your firm, but where are you, what do you long, what do you like, what don't you like?

Alex Denner (24:15):

So invest in healthcare stocks. I think one of the most ... So one of the things that's going on here is that in healthcare appropriately everyone is focused on the coronavirus. The companies that are working on that are sort of at the highlight of everybody's thinking. In fact, when you look at the healthcare index performance, it's been largely driven by a few names that have benefited, that the stocks have gone up a lot because they offer promise to sort of have a vaccine or treatment for the coronavirus.

Alex Denner (25:00):

As a healthcare investor, I think that there are promising investments there and we're pursuing them, but I think the bigger opportunity is actually in the sort of non-coronavirus related healthcare therapeutic side. Those companies are being not ignored but they're getting less attention than they normally would. Cancer is still unfortunately just as serious of disease as it was six months ago. Heart disease is still unfortunately just as serious. There have been changes in the industry like the FDA has had to adapt very rapidly to the coronavirus and regulations that were well intentioned but were really kind of slowing the industry down have been bulldozed away.

Alex Denner (25:52):

Kind of one of the best examples of that is in the telehealth area where before, six months ago very few people talked to their physicians over the internet. It was done but it was a very small part of the healthcare ecosystem and the government didn't pay for it by and large and it was very difficult. That has changed completely now as everyone knows, and I think that that frankly is good for everyone, that society will be better off having that trend having accelerated.

Alex Denner (26:31):

There are many, many regulations in healthcare that have been disintermediated by this coronavirus, and basically that whether it's CMS or HHS or the FDA have issued emergency guidance, there's a technical matter is limited to the time during the coronavirus emergency, but I think would permanently changed how we do drug development and deliver healthcare-

Anthony Scaramucci (26:59):

But permanently changed but in your mind better, right? I mean, a little bit less [crosstalk 00:27:02]. We both know the thalidomide story from the '50s which really stunted the FDA. And for those, people that are so young that they don't know that story, they blocked that drug. It was a morning sickness drug. They blocked it in the US. They allowed it in Europe. The side effects of it was it caused limb deformities and so the FDA celebrated that, that they slowed it down, and that made it a lot harder to get drugs through as a result of things like thalidomide.

Anthony Scaramucci (27:31):

So you're saying they've opened this up a little bit. But we also know that they have more scientific data now than they did in the 1950s, and they're able to do broader testing. So that whole process makes those drugs safer. Would that be safe to say?

Alex Denner (27:48):

Yes. I think that ... Look, thalidomide is a great example to bring up. I mean, the FDA has a very important role to play in evaluating drugs, and they're going to demand and rightfully they're going to continue to demand safety data, especially in the tragedy of thalidomide where a drug, a morning sickness drug actually caused birth defects, right? That kind of thing will still be done and should be done. But allowing some ... Like using technology in clinical trials. Not all things have to be done in person. Just many of those sort of bureaucratic rules that have existed because there was no other way to do them when they were implemented have been swept away. And I think frankly it's going to accelerate drug development, it's going to accelerate the value that the healthcare system delivers.

Alex Denner (28:48):

We all know the healthcare system, I think the drug development system in the US is fantastic and works really. The healthcare delivery system doesn't. I don't think anyone thinks that that's kind of extremely well functioning. And I think we're going to come out of this with a better healthcare system. I think that many of the over-regulation and the Balkanization of the healthcare system, people have been forced to work together because the coronavirus, and it works better and we're going to end ... When we get past this, the healthcare delivery I think will be better for it.

Alex Denner (29:31):

I mean, the whole experience of going to a hospital will be easier for patients, will be better for the healthcare providers. Doctors will be better able to treat patients. I think it's really going to be ... There's a silver lining in all of this.

Anthony Scaramucci (29:46):

And I think that's an important segue Alex because in the crisis, a lot of opportunity gets born. In the 2008 crisis, we actually started the SALT conference as a response to that crisis. So I'm very optimistic as you are that things will change for the better. I want to turn it over to our viewers and listeners. John Darsie is going to ask you some questions that are coming in over the transom here, and we've got a ton of audience participation. So go ahead John.

John Darsie (30:18):

Yeah, the first question relates to your process as an activist in the healthcare space. When you're identifying potential targets for an activist campaign, how do you dive into that business and differentiate in terms of measuring why their performance suffered? How do you differentiate between a company that was mismanaged that actually has good drugs but was just fundamentally mismanaged and between companies that either have drugs that are flawed and aren't performing well because the quality of the drug?

Alex Denner (30:49):

Okay, so that's a good question. We do a lot of work on that. Basically it's just, it's gumshoe research. I think that we have a very ... We have a great team, MDs, PhDs, people that are really expert in healthcare. And we dig deep into the pipelines in the currently marketed products of each of the investments that we make.

Alex Denner (31:21):

What we look for, we basically, our process is basically, we look at companies and we sort of look at, we say, "Okay, we know the products, the pipeline, the technologies that they have," and then we ... Because we have a lot of experience in the space, we know the space very well, we can sort of put a cost structure around that. So we can sort of say, "Okay, if the company has three drugs in certain therapeutic areas, we know how much it will take to sell those drugs."

Alex Denner (31:50):

And to first order, we don't take account of what the company is, whether they have ... what their cost structure looks like. We just sort of build what it should be in our model, and we DCF that. And we look at that, that DCF compared to the market price. Was a huge difference like 2x, we sort of get interested, and then we say, "If there's a way that we can put a leverage on the company, can we push the company to change their strategy such that it's better run for investors, the owners, then we'll get involved." And we typically will take a position and typically seek to join the board and kind of often that involves a management change, although not always.

Alex Denner (32:36):

In doing that analysis, we really look for products because it's a long term strategy that we get involved in the company, we're investing, we plan to be investors for years that we look for things that are innovative, that truly add, that benefit patients, that ameliorate a disease in a real way. And those are the types of companies we get involved with. But less interested in a company that has a me-too thing, that's just sort of maybe slightly better than somebody else, because we need to have a very big difference between the value when the company's run properly and the current market price.

Alex Denner (33:28):

The other thing to note is that people ... In the sector we interface with a lot of investors and we get a lot of feedback. So a lot of institutional shareholders will call us and we may hear from five or six institutional shareholders over the course of whatever, some year or whatever, that they're unhappy with the way a particular company is being run. And that's usually not something that it's news to us, but it helps us understand the psychology, the shareholder base that they're ready to implement changes, they're ready to push the company to be run better.

John Darsie (34:12):

Thanks for that Alex. The next question is about the telehealth space. What's your general view on telehealth and do you have any favorite names in the space?

Alex Denner (34:24):

I like telehealth a lot as I mentioned earlier. I think that it's going to become a bigger part of healthcare. I don't have any particular favorite names. I think that one should think about telehealth as the specific part that, is the visible part where the patient interacts with the physician. But also there's a lot of things that can be done with even clinical trial work where you can do remote monitoring of patients, the types of things like we were talking earlier. The FDA's been very forward-thinking in many things, but it's been taking some time to get to kind of incorporate some of these technologies. And I think by necessity, if a company is developing a drug where they can't ... It's not easy to have a patient come in every month to the doctor. The solution maybe a tele solution. So I think it's very important for our healthcare now. It's going to become more important over time and it's going to make the system more efficient.

John Darsie (35:47):

Thank you for that Alex. The next question is you talked a little about a timeline for a vaccine. What would you put in terms of your degree of confidence in percentage terms of a vaccine coming out before the end of 2020?

Alex Denner (36:01):

First of all, let's define what this means. I think to have data that shows that one or more vaccines have some level of efficacy, let's say they reduce severity of the disease in a large fraction of patients or maybe they provide sterilizing immunity in 50% or 70% of patients. I would say that the probability of that occurring by the end of the year is more than 50%. I would have said less than ... I would have been a much lower number three months ago or two months ago, but I think we've seen some data that's been published that has been very exciting from a number of different groups.

Alex Denner (36:47):

Now, there's a different question though which is when is a vaccine going to be broadly available say to Americans or globally around the world? And I think that's something that's unlikely to occur for a broad availability of vaccines, unlikely to occur this calendar year. And if everything goes right, in the US we may have access to that, say, in the first quarter of next year. But that sort of requires everything kind of going right. So I would say there's, maybe to have a vaccine widely available, a 50% chance of it widely available probably would be by the first quarter of next year, at 50%. And I would say 75% by the end of next year.

John Darsie (37:42):

Thank you. In terms of geographically, do you focus on US-based companies or what do you view as the opportunity within healthcare in emerging markets like India and China?

Alex Denner (37:53):

We look at all companies around the world. We do everything in healthcare. That said, we sort of focus on therapeutics. And a lot of the innovation in therapeutics is happening in the US. So we tend to be sort of US focused. There's a lot of opportunity in the US for what we do. Healthcare companies, it's really hard to develop drugs, but when they do it, it's a very high barrier to entry, very high margin business generally, and it's easy for companies to sort of get lackadaisical with respect to capital allocations. So there's an opportunity for us to get involved. So if it's a US company, just most of the companies end up being US. But we look globally.

Alex Denner (38:41):

In China and India, look, I think one of the things that's coming from the coronavirus is India for instance has a fantastically sophisticated generic drug business. There's a bunch of companies that have brought a lot of innovation and brought pills, generic pills available at very low costs to a lot of the world.

Alex Denner (39:07):

But what I think a lot of people come to realize it's having to domestic capabilities, especially as a matter of national security for the US is very important. So I think that you're going to see grow, an increase in the amount of basic provider generic manufacturing, if you will, in the US, so-called API manufacturing, active pharmaceutical. I don't think that will come into the detriment of India and China, but it probably will reduce their growth rates compared to what was projected before the pandemic.

John Darsie (39:43):

Thank you. We have one final question, another one about your investment process as an activist in the healthcare space. A lot of times activism within healthcare is focused on going into mature companies and trying to identify ways to improve their financial performance. How do you look at activism in the therapeutic space for companies with pre-approval drugs or that are earlier on in the drug development process?

Alex Denner (40:09):

First of all, our type of activism is a little bit different than sort of the classical activism in that we look to fix the businesses. And that's a very hands-on thing where we get involved with the companies in terms of the way the operations are being run and sort of make capital allocation more efficient. We hopefully do allocate R&D better, that type of thing. And that can be done in the late stage and early stage the same way.

Alex Denner (40:52):

That said, we tend to be focused on later stage companies because we like companies where there's multiple drivers of cash flow. But there are many early stage companies that have frankly because the index, the market's been up a lot recently, there have been a lot of companies perceive their cost of capital to be essentially zero and they've been spending less judiciously than they should be. So that I think there's an opportunity for activism there. But that is not the sort of classic activism of the financial type thing which we tend not to do anyway.

John Darsie (41:37):

All right. Well, we want to thank Alex Denner for joining us today on SALT Talks. Anthony, I don't know if you have any additional final thoughts?

Anthony Scaramucci (41:44):

No, I mean, I think he wins Room Reader so far. I mean, I'm impressed with all the paneling behind you there Alex. God bless you. Wish you health and safety, and hopefully we'll get some real medical progress on this. But I think it was really terrific today Alex. You put it in historical context what we're all going through and how we're all going to come out of it and hopefully be just fine.

Anthony Scaramucci (42:11):

But in the meantime, I wish everybody great personal safety, health and happiness, and Alex, we'll hopefully see you soon. And I promise you, I'll be buying you martinis. You won't be drinking iced tea with me Alex, okay? That's my promise.

Alex Denner (42:23):

That sounds great Anthony. Thank you very much and thank you John and health and happiness to both you guys and stay safe and appreciate that you're there.

Stephanie Kelton: Modern Monetary Theory (MMT) | SALT Talks #8

“What I had been trained to understand was just not applicable with the monetary system that we have today.”

Stephanie Kelton is a Stony Brook University professor of economics and author of the NYT-Best-Selling book The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. Professor Kelton was also former chief economist on the U.S. Senate Budget Committee.

Professor Kelton discusses many of the misconceptions around the national debt vs. more normative thinking around financial management and fiscal responsibility. What does the national debt really signify and how can we rethink our approach to federal spending, especially as we work our way out of a pandemic-caused recession? “As I like to say, ‘every deficit is good for someone. The question is, for whom and for what are those deficits being run?’”

A leading voice in the Modern Monetary Theory movement, Professor Kelton offers a compelling case for a profound shift in our approach to the federal deficit and our ability to leverage it for good.

LISTEN AND SUBSCRIBE

SPEAKER

Headshot+-+Kelton,+Stephanie+-+Cropped.jpeg

Stephanie Kelton

Author

The Deficit Myth: Modern Monetary Theory

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie (00:07):

Hi, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance technology and politics. What we're trying to do with these digital SALT Talks is provide interviews with leading investors, creators and thinkers. Just like we do at our global SALT conferences, we're trying to provide a platform for big ideas and provide our audience a window into the minds of subject matter experts. And today we're very excited to welcome Stephanie Kelton to SALT Talks. It couldn't be more topical, her book couldn't be more topical. And we'll talk about that book in a second. But Stephanie is currently a professor at Stony Brook University. Earlier this month, she released a new book called The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy, which is already a New York Times bestseller. And congratulations to Stephanie on that.

John Darsie (00:59):

She is a leading authority on modern monetary theory, which is a new approach to economics that has gained increasing popularity in recent years. Her work is particularly relevant given the large deficits that have been run by the US government in the wake of the COVID-19 pandemic. So again, we're very excited to have her on given the timing. In addition to her many academic publications and the book that we mentioned, she has been a contributor at Bloomberg Opinion. She's written for the New York Times, she's written for the LA Times, US News and World Reports, contributed to CNN among many other outlets. She has worked both in academia and in politics. She served as the chief economist on the US Senate Budget Committee as a democratic staff in 2015, and as a senior advisor to the Bernie Sanders 2016 and 2020 presidential campaigns.

John Darsie (01:45):

Politico called her one of the 50 most influential thinkers in 2016 and Bloomberg listed her as one of the 50 people who defined 2019. Barron's named her one of the 100 most influential women in finance in 2020. So her work is gaining increasing visibility. She was previously the chair of the Department of Economics at the University of Missouri at Kansas city. If you have any questions for Stephanie during today's talk, please enter them in the Q&A box at the bottom of your video screen. Conducting today's interview is going to be Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of SALT, and I'm going to turn it over to Anthony for the interview.

Anthony Scaramucci (02:27):

John, thank you. Stephanie, congratulations on the book. I understand now it's a New York Times bestseller, and so fantastic on that. I read the book after I read Zack's book. So I think it's interesting. I would encourage everybody to go to the Politics and Prose Podcast where Zach Carter, who we had on last week, and Stephanie are together talking about John Maynard Keynes and deficits and why they do matter, but there are some myths related to deficits. But before we get in there, Stephanie, can you tell us a little bit more about your background? What got you so interested in this, and tell us a little bit about what you described to be a Copernican moment where you're having a Eureka about how economics is actually working?

Stephanie Kelton (03:13):

Sure. Well, first let me just start by saying thank you for the opportunity to come spend some time with you and your viewers today. I was studying economics, I did undergraduate degrees in both finance and economics. I picked up a couple of bachelor's degrees and then I really enjoy economics. So I went off to Cambridge University and started a graduate program there, and I was mostly learning the conventional approach to economics, just conventional macro stuff. I won a fellowship through Christ's College while I was at Cambridge. That sent me off to the Levy Economics Institute, which is a think tank in Upstate New York. That's where I first started to encounter really these ideas. They actually came to me through someone named Warren Mosler.

Stephanie Kelton (04:08):

Warren was a Wall Street guy, comes from the finance world. He had written a little book and he called it Soft Currency Economics. He called it that to distinguish it from hard currency, right from gold standard or fixed exchange rate frameworks, monetary systems. Warren wrote this little book and started circulating it. He really wanted to talk with economist at top universities. He was reaching out to people at Harvard and Stanford and Princeton and so forth. Nobody really wanted to engage with him. At some point, he stumbled on a group of economists in an online forum and started exchanging ideas. In 1997, I guess I got this little book and I read it and it flipped my worldview upside down. I couldn't wrap my head around it. It couldn't be right. I kept thinking it can't be right, it can't be right. Because it went so counter to everything that I had been trained to understand about government, finance and taxes and stuff.

Stephanie Kelton (05:13):

But here was this really smart guy and he had it all laid out. He had the accounting down, he had it all in balance sheet form. It's really hard to pull the wool over somebody's eyes when you're dotting the Is and crossing the Ts and writing it up the T accounts. So I kept looking at it and it just bothered me that I couldn't shake the idea. So I went searching to see if Warren might be right. I started reading treasury and fed manuals and talking to people at the debt management, trying to figure out all this stuff and whether it really worked the way Warren believed it did. I'm getting to the end of this story here. Basically, I convinced myself through a bunch of research that Warren's ideas were sound and that what I been trained to understand, some of the models about government budget constraints and that sort of stuff were just not applicable with the monetary system that we have today.

Anthony Scaramucci (06:10):

No, all right. I want you to keep going, Stephanie, where you feel you need to. This is an interview about you. You mentioned in the book, which I've also found fascinating, is that we see the government the way we see ourselves or our household or our business. But we're not originators of currency. We're actually users of currency, to use your words. So governments can effectively originate currency. Then you mentioned in the book, well, they give out our debt, it's 23 trillion. We could get rid of it with one electronic key stroke, but I don't think you 100% mean that either. So where should we be as it relates to deficits? You also write in the book that deficits do matter. So lay out for us what modern monetary theory is and put it into the context of people that got trained like me and people that got trained like you before you had this Eureka moment.

Stephanie Kelton (07:08):

Okay. So there's a lot there. Let me see if we can unpack it all in some bite sized pieces. The first bit you mentioned is really at the core of MMT, the idea that we have to recognize that the federal government's budget works differently from a household budget. The thing that distinguishes the federal government from everybody else is the fact that it's the issuer of our currency. In fact, it has the sole legal authority to create the US dollar. It's the issuer of our currency. I can't do it, you can't do it, private businesses can't do it, and state and local governments can't do it.

Anthony Scaramucci (07:44):

You're thinking, Stephanie, that some of my relatives have done that in the past, but I assure you that that's not true. Okay, keep going.

Stephanie Kelton (07:51):

Well, a lot of people try and you end up in an orange jumpsuit because it's illegal to counterfeit the currency. It would be nice if the rest of us could be currency issuers, you wouldn't have 50 governors running around imploring Congress to provide some aid right now. As their budgets are falling apart, if governors could take care of this themselves, because they could just issue the dollar, they'd be fine, but they can't. So we start with that recognition that the federal government is the issuer of the currency. Therefore, a number of things follow. One, it can never run out of money. President Obama, he comes into office, he's newly elected, and within a matter of months, he sits down for an interview. And you remember, the economy is falling apart, we're sliding into the great recession. He's asked, "At what point do we run out of money?" And his response was, "We're out of money now." Those were his words, "Were out of money now."

Stephanie Kelton (08:47):

Okay. The federal government can never run out of money. It can't have bills coming due that it can't afford to pay, unlike a household or a small business or a large business. It can't go broke. It can't be pushed into bankruptcy. What about the deficit? What are the implications for the deficit? Well, people get very anxious about the idea of the government running fiscal deficits. They believe that they're inherently irresponsible. It's evidence that you're mismanaging your finances. You should live within your means. Well, I hear that all the time. The deficit is just the difference between two numbers. One number is how many dollars the government spends into the economy. And the other number is how many dollars the government subtracts away from people in the economy. That's all it is.

Stephanie Kelton (09:36):

If the government is spending more dollars in than it is subtracting away, we label it a deficit. But what we forget, and this is something MMT helps to remind us, is that if they spend a hundred in and they only tax 90 away, somebody gets 10, that their deficits result in financial surpluses in some other part of the economy. That's a first and key point and it really comes from the work of Wynne Godley, who was a British economist who developed all this through sectorial balance framework and so forth. But their reading is our blacking. As I like to say, every deficit is good for someone. The question is, for whom and for what are those deficits being run?

Stephanie Kelton (10:21):

Then we get to the question of the debt because fiscal deficits result in the accumulation over time of what we call the national debt. And in the book, you just mentioned, I have a section where I say, "Look, we could pay it off overnight if we wanted to." We could talk about that section here in a minute. But I think it's really a misnomer. I don't think we should be calling it the national debt at all. I think of this thing as just a historical record of all of the past instances in our nation's history, where the government made a financial deposit to the economy. It ran a deficit, engaged in deficit spending, and it turned those dollars that it put in into treasuries. It turned them into interest bearing currency. And that's really all that is, it's an interest bearing for all of the US dollar.

Anthony Scaramucci (11:15):

Let me ask you this question, because I often get asked this question as an investor, if you go back to the gold standard, we unclipped ourselves on August 15th. Richard Nixon made that decision. He then quipped that we're all Keynesians now, meaning that he was going to allow the currency to float. It was going to become a Fiat currency. At that time, it was $35 an ounce. Today gold is trading at $1,700 an ounce. So strict monetarists would make the case while we devalued that currency by 98% in order to monetize and be able to pay our debt. One of the negative consequences potentially, and I'm interested in your opinion of this, is that it hurts middle-class people and lower middle-class people because assets are tied to the currency. The asset, if I'm in this home and it was worth a dollar in 1971, is now worth $10, but if I'm a wage earner with no assets, my wages, in fact, haven't caught up with that monetization, if you will. So what's your reaction to that?

Stephanie Kelton (12:21):

Well, I have a lot of concerns about the median income and average earnings and low wage earners and what has happened really to the pattern where wages used to keep pace more or less with productivity growth. Then something changed and productivity growth continued its upward trajectory and the real median wages just flattened out. I don't think that has to do with the fact that we untethered our currency from goal. I think it has to do with a lot of things, including overtime globalization, the decline of unionization rates and so forth. I don't see it as a by-product of abandoning the gold standard.

Anthony Scaramucci (13:12):

But we would make the case though, that there has been fairly dramatic inflationary periods in the United States. Some classical economic theory would suggest that that is related to things like Fiat currency. And it's related to things like not adhering to those classical principles that you and I both learned. And you would say, what about those periods of time?

Stephanie Kelton (13:39):

Well, we haven't actually had very many. It depends what kind of an arc of history you want to look at. When we were on the gold standard, what we confronted regularly was deflation. We had depression after depression, not recessions, but actual depressions. We had many of them, and those depressions occurred in an environment where prices would collapse. Deflation is a far more serious and was a regular threat under the gold standard. But we haven't had really periods of problematic inflation, post Bretton Woods, post Nixon [inaudible 00:14:17].

Anthony Scaramucci (14:17):

Let's go to the seventies for a second. We were running pretty high inflationary rates and we got the long-term bond up to 16% or 17%. So what would you say was the causality of that?

Stephanie Kelton (14:28):

Well, a lot of things. Oil price shocks, the Vietnam war, maybe [Volker 00:14:34]. Now, this might surprise you to hear me say this, but people assume that when the fed raises interest rates, that that is how you reduce inflationary pressures. MMT and I have a little bit about this in the book. I don't go into it in any detail, but I've written a paper on this as well. Raising interest rates raises borrowing costs. To the extent that firms are leveraged and they're able to pass on to end consumers, the increase in interest rates in the form of higher prices. It's possible that raising interest rates doesn't actually quell inflationary pressures, but it actually fuels an acceleration in prices. A lot of things could be happening there and some of them might be counterintuitive.

Anthony Scaramucci (15:25):

Let's fast forward right up to 2020, rates are low. We could argue they are at all time lows in some respects. Certainly measured by inflation and so forth. In some cases, the long bond is actually negative now even though Jerome Powell is saying he doesn't like negative rates. But is it even possible to raise rates at this point? And I'm talking about over the next five or 10 years, do you envision a scenario where we have rate hikes in the United States?

Stephanie Kelton (15:56):

My answer is I hope so. Because if we don't see interest rates go up, it's going to be because the economy is in such rotten condition for three or five years. That's the answer to the question. Could I see rates staying at zero or roughly zero for three to five years? Sure, I can. If we screw up the policy badly enough, that's exactly what the Central Bank's going to do.

Anthony Scaramucci (16:24):

So professor, let's say that you were economic czar and you could sit there and you could manage the budget, what would be the percentage that you would run of our GDP in a budget deficit? And then more importantly, how would you deploy that capital into the economy? What would you spend it on?

Stephanie Kelton (16:44):

Well, I think infrastructure has to be really high on the list. Now, that's a longer term. I would say recovery strategy, nearer term. I do believe Congress had the right idea with the small business association loans, the PPP, I think that was the right idea. Other countries do it and they execute well. We didn't have the infrastructure up to flip the switch and get that thing going and execute well immediately, but keeping workers on payroll and attached to their employers, I applaud that. I think it was the right move. I don't know how much more can be done now, clawing workers back or building on that program. I think getting money to state local governments immediately is absolutely critical. I would crank that up. I think the trillion that the house put in is a good number. I would do it.

Stephanie Kelton (17:37):

Looking longer term, yes, I think that a massive infrastructure project is the right way to go. We have deferred maintenance on our nation's infrastructure for probably a decade and the problem just grows bigger and bigger every year. There's so much work that needs to be done. That's usually a bipartisan thing. Both Republicans and Democrats understand that's a proper place for government to make investments. I would do lots of that. I can imagine a lot of other things. We've got now 30 million additional people who've lost health care. I think for me, I would tackle healthcare. Then you see what you're left with, and I think we're going to end up with situation where millions of people who have lost and have yet to lose jobs in this downturn are not going to find work again for years if ever. And for them, I think it makes sense to explore programs like FDR implemented in the new deal era. The Works Progress Administration, the CCC and National Youth. We can't have millions of young kids walking around unemployed in an environment where the tensions are high and people are desperate. You can't have that.

Anthony Scaramucci (18:52):

Well, I'm certainly in that camp. We certainly have to figure that out because just that inactivity, my grandmother would say that idle hands makes for the devil's work. Deficit spending, talking about percentages, so what would you spend? Would it be-

Stephanie Kelton (19:09):

I don't think anybody knows that because three years from now, it's just about the demand leakages, Anthony, for me. So how much space is opening up that needs to be closed off? And some of it will close itself as the government begins to spend through a multiplier effect, you'll get some bang for the buck, but then you just have to stand ready to keep in place enough fiscal support. Warren Mosler keeps talking with you. He'd probably say, you just count the bodies in the unemployment line, and then you'll know when to stop. When you get back to [inaudible 00:19:42].

Anthony Scaramucci (19:41):

Yeah, you do make that case, and I'm going to let you address that in a second. And John has some questions for you from the audience. So I'm going to let him interrupt, but I have one last question. I was on the phone with one of my clients who had worked in Brazil. And he said that he had experienced rapid inflation there as the government "printed money." We know that Argentina had rampant inflation and Greece has had rampant inflation. Do you think that your theories are tied to the US dollar because it's the reserve currency, or do you think your theory is applicable to any sovereign that can print currency? And if it is applicable to any sovereign, how do you explain those issues that places like Brazil and Argentina have had?

Stephanie Kelton (20:28):

Argentina and Brazil have a lot of external debt. They don't constrain their borrowing to their own currency. They borrow in foreign currency. You have countries that are very dependent upon a particular export, whether it's soybeans in Argentina, whether it's oil in Venezuela, you become really dependent upon revenues from one or two key export industries. Then all of a sudden, there's a collapse in the price of that thing and you're in real trouble because your budget is built around being able to finance spending based on that anticipated cashflow. When it starts to dry up, you're in trouble. You got countries like in Zimbabwe, for example, people often in Zimbabwe or Weimar Germany or something.

Stephanie Kelton (21:18):

Milton Friedman of course, famously quipped that inflation was always in everywhere a monetary phenomenon. People have said it's always because you got too much money chasing too few goods. But what usually happens in these hyper inflationary episodes is that you end up with a too few goods piece. Something happens on the supply side. There's a shock. In the case of Zimbabwe, Mugabe comes to power. He wants to reward the freedom fighters. He takes land away from white farmers, redistributes it to the blacks, the freedom fighters, and they don't know how to farm the land. So you end up initially with huge food shortages and an agricultural economy, and they're forced to import food to feed the population. Printing money to do that, and you get hyperinflation.

Stephanie Kelton (22:04):

So my answer is that, look to the supply side and look to countries that are borrowing in foreign currency. You don't have to look far to see Japan. Japan is not the US, Japan's got the largest debt to GDP ratio in the entire world. They still are battling deflationary pressures. They haven't been able to get inflation up to 2% in three decades or so.

Anthony Scaramucci (22:29):

Is that a demographic phenomenon exclusive to Japan or are there other factors there? Meaning that aging population and the upside down pyramid of that is causing that, or are there other things?

Stephanie Kelton (22:41):

Look, I think there are probably other things, but I think demographics matter a lot in terms of what's happening there. I think when you have an aging society, it makes sense that as people age and downsize, they consume less. So if you're trying to engineer rapid economic growth in a society where people are just trying to consume less as they age, it's not going to work out all that well. I also think that they may have the brake pedal and the gas pedal mixed up in terms of what they've done with interest rates and QE that a lot of what they think is monetary stimulus might actually be working the other way around. Then they get very anxious when the deficit increases. They keep hiking the consumption tax. So you get these fits and starts in Japan.

Anthony Scaramucci (23:30):

Okay, makes sense. John, do you have any questions?

John Darsie (23:33):

Yeah, we have several-

Anthony Scaramucci (23:35):

Before we end, I want to go to that employment thing, because I thought that was the more fascinating aspect of the book. I want to give professor Kelton an opportunity to talk about that, but go ahead. Fire her some questions from our audience.

John Darsie (23:45):

Yeah. We've talked a little about government spending, but we haven't talked about the other side of the ledger in terms of how to think about taxes within the MMT framework. In your book, you talk about if taxes are removed then demand for government currency will fall and people might stop working. Do we cut taxes in an MMT framework? Do we raise taxes on the wealthy? How do you think about how we should change tax policy in the United States?

Stephanie Kelton (24:11):

Well, it depends where we are in terms of the economic outlook. What would I do with taxes right now? I sure wouldn't be raising them. I think that certainly, I'm a Democrat, but I'm not allergic to tax cuts. I think tax cuts are perfectly reasonable fiscal policy provided that they are designed to aim that benefit on the other side, that the windfall goes to people who are going to turn around and spend that money back into the economy. So can you just eliminate all taxes and expect the economy to continue to function and government to be able to provision itself with resources? No. Yeah, you're right. In the book I talk about, if you want to start a currency from scratch historically, one of the ways that governments have done this is to impose a tax on a population of people. They say, you are now subject to this tax. What MMT points out is, the government can't collect the tax until it first spends that which is necessary to pay the taxes.

Stephanie Kelton (25:14):

You got to spend the currency first so that somebody can have it and turn around and use it to pay the tax. So taxes are important. They can help you start up a currency, maintain the value of the currency. They allow you to make adjustments to the tax code so you can impact distribution if you want to do that. They allow you to create incentives and disincentives. So lots of reasons, and they mitigate inflationary pressure, which is obviously an important one. If the government only spent its currency into existence, every time the government spends a dollar, it gives birth to a new dollar. And that dollar travels around the economy until it is removed by government. Only the government can take it back up. So you write your check to the IRS, that is the death sentence for the dollar. That is where the dollar goes to dot. It has a lifecycle and the government regulates inflationary pressure by avoiding spending too many of its dollars in and allowing them to travel around. So it subtracts some from our hands over time.

John Darsie (26:16):

Thank you. The next question, we have a couple of questions about universal basic income versus a federal jobs guarantee. You talk a lot about federal jobs guarantee as being a prescription for solving a lot of the ills that we have in our society. And you talk about how Warren Mosler believes that you should just continue to spend until you get that unemployment rate down to zero. In what scenarios do you think universal basic income is the most effective prescription? What scenarios do you think a federal jobs guarantee is effective? Right now, what would be your solution?

Stephanie Kelton (26:49):

Well, for me, it comes down to what problem are we trying to solve? I've engaged in a lot of conversations with people who are advocates of UBI. And very often they say the reason they like the UBI is because they want to fix poverty, they want to address poverty. I am an advocate of the job guarantee because I want to fix involuntary unemployment. I want to eliminate involuntary unemployment, but this is an environment where things have changed since 2019. Right now, we have millions and millions of people who need to pay their rent and eat some food and stay current on their bills, so they don't wreck their credit score and so forth. So what do we do for those people?

Stephanie Kelton (27:40):

There aren't jobs for them and we don't have a federal job guarantee in place. So am I supportive of providing disbursements, monthly income support? Absolutely, I am. But in more normal times, I think that some kind of a basic income, working alongside the job guarantee is the better way so that for people who want to work, but can't find a job anywhere else in the economy, let's create a job for them. There's plenty of work that needs to be done. For those who can't or shouldn't be working, let's provide the basic income support. That's how I look at it.

John Darsie (28:20):

Great. We have one more question then I'll kick it back over to Anthony. Can you envision a scenario in which inflation did become problematic? Let's say that we adopted a modern monetary theory framework and things went awry, what would that scenario look like?

Stephanie Kelton (28:36):

Well, let me tell you this, because I think it's so important for people to understand that. And I'm saying this as someone who worked as the chief economist on the United States Senate Budget Committee for a period of time. I listened to Republicans, I listened to Democrats. I saw a lot of legislation get introduced. I saw amendments proposed. Never once in my time in the Senate, did I hear a single staffer or a single member of the Senate raise concerns about inflation. Not once. It's not even an afterthought, it's just not a consideration at all. So what I'm saying is that MMT centers inflation risk. That is the relevant constraint. You have to identify and respect the economy's real productive capacity or you will run into a situation where you push things too far. What I'm proposing has to be an improvement on what we have today, because what we have today is nobody at all, connecting proposed new spending to concerns about inflation.

Stephanie Kelton (29:43):

The best way to fight inflation is before it happens. Not to start up an inflation problem. What I'd like to see is for Congress to change the federal budgeting process. Right now, somebody writes a bill and the legislation goes to the congressional budget office, and CBO scores that bill with one primary consideration. Does it add to the deficit? Yes or no? And if so, how much? That for me is the least important question we could ask CBO, the least important. Let's ask CBO and other agencies to help Congress figure out whether the proposed spending carries inflation risk. And if so, how can they mitigate that inflation risk? If they propose, let me give you one quick example, I know you probably have to wrap or somebody else wants in, but one quick example. Suppose that we were back in December of 2019, and we were looking at an economy that a lot of people would have said, this is basically a full employment economy.

Stephanie Kelton (30:43):

Unemployment's three and a half percent or so. Congress said, we want to do infrastructure. You remember that Trump met with Pelosi and Schumer. They went to the white house, sat down, they had a meeting of the minds on this two trillion dollars. Said, "Let's do two trillion dollars of infrastructure spending." Everybody said, "Great, let's do it." And then came to how are we going to pay for it stuff? But suppose, suppose that you ended up with Democrats in the house, in the Senate and in the white house, in the same economic environment. And somebody put an infrastructure built together for a couple of trillion dollars or more, and attached a wealth tax to it and said, this is our pay for, and it's going to raise all the revenue we need to cover the cost of the infrastructure. They send the bill to CBO, CBO looks at it. They say, it's beautiful, it's gorgeous bill. Doesn't add to the deficit. Wonderful, A plus. Send it back, now Congress can vote to pass that spending.

Stephanie Kelton (31:42):

What I'm saying is Kelton would go, Oh my God, are you crazy? Are you crazy? Because you've just authorized trillions of dollars of spending where your offset, your so-called pay for is a tax that falls exclusively on the tiniest sliver of people. What is it, like 78,000 people or whatever would be subject if it were Senator Warren's wealth tax? You're taking the dollars away from people, let's face it. They weren't going to spend them chasing real goods and services and the economy anyway. So you haven't mitigated the inflation risk with that particular offset. I think that we are more vulnerable to inflation risk under the current budgeting practice than we would be if we move to, as you say, an MMT model.

Anthony Scaramucci (32:37):

Talk a little bit more [crosstalk 00:32:39].

John Darsie (32:39):

[crosstalk 00:32:39] back over to you to continue your intellectual discussion.

Anthony Scaramucci (32:41):

I appreciate, John. I'm fascinated by this. Just talk a little bit more about the employment phenomenon. Let's go to the three and a half percent unemployment. Dr. Bernanke or chairman Powell would say that that's full employment. It felt like full employment to me. You would say what? That that's not quite full employment. We both are going to stipulate that there's going to be frictional activity in the economy that leads to some level of unemployment, but what's full for unemployment in your mind?

Stephanie Kelton (33:11):

Well, here's what I'll say. If we announced that the federal government was prepared to provide a job to anybody who wanted one but couldn't find one anywhere else in the economy, now frictional unemployment, somebody who's between jobs. They're not going to take that job. They know they're going to quickly find another private sector job. So they're not going to show up. But if you made the announcement, walk into your nearest American job center, the old unemployment offices, if you don't have a job and you want one, walk in, you can walk out with a job. If you make that announcement and nobody shows up, I will stipulate that we were at full employment. On the other hand, if 10 or 15 million people show up, then I think we have just revealed the true extent of the unemployment problem. In other words, you don't know unless you have an option in place.

Anthony Scaramucci (34:01):

But I think we also want... You're going to want to get a job that is paying you more than, say your unemployment benefits. Or you want to get a job that's paying you more than the worker's comp that you may be getting from some other job that you can no longer do. Would that be fair to say?

Stephanie Kelton (34:16):

Well, probably so. But your unemployment right now, unemployment insurance, I wouldn't eliminate that, by the way. Yeah, we let people who, you lose a job, you go on unemployment and you continue to look for work. Maybe you get lucky and you're reemployed in a short period of time. But when unemployment runs out and then people don't have another option, this would be an option for folks like that.

Anthony Scaramucci (34:42):

You brought up something that I think is brilliant. I want to reemphasize it because if I were essential banker, thank God I'm not, but if I were, that would be the number one thing I'm worried about is deflation. And I just want to remind everybody on the call, why are central bankers worried about deflation? They're worried because you can't pay the debt back with dollars that are worth more than the ones that you borrowed. You implode the society. That's clearly what happened in the 1930s. It wasn't until, and Liaquat Ahamed from the Lords of Finance book, I know you're familiar with, he points out. It was Franklin Roosevelt in his Common Sense in 1933 that unclipped us from that gold standard. And perhaps Benjamin Strong, if he didn't die, the first federal reserve chairman would have been able to figure that out.

Anthony Scaramucci (35:29):

Then the liquidity started entering the market and the unemployment numbers went down. Now it's 1933 to 2000s, or let's call that 87 years, we've had reasonably high to very high deficit spending. Since 1969, we've only had two surpluses. It was the 1969 surplus and the fiscal year 2000 surplus. And yet we've had unbelievable economic progress, professor Kelton. So I want you to tell the naysayers out there that are looking at this framework and saying, well, our grandchildren are going to pay for it, our great grandchildren are going to pay for it. It's all going to come home to roost, or it's a house of cards about the collapse on us. What would your response be to them?

Stephanie Kelton (36:18):

Well, my response is, just stop thinking of it as debt. That's the response. That's why I titled chapter three, the National Debt Parentheses That Isn't, because I think that's the problem. Once we start calling it debt and thinking of it in those terms, we personalize it. It's like corporate debt or it's like household debt or whatever. Eventually you have to pay it back. That's when things go awry. That's why I keep saying, just think of it as part of the net money supply of the US.

Anthony Scaramucci (36:51):

Not to interrupt, but let me just ask you this. We do the budget together, we come up with what we want to spend on, and we have infrastructure and we're taking in 3.7 to four trillion dollars of tax revenues, but we really need to spend six or seven trillion dollars hypothetically. Why wouldn't we just print that money and just pay it right there and then balance the budget every single year? What would be your economic policy answer to not doing that?

Stephanie Kelton (37:19):

There's only one way for the government to pay for anything already today. Every single payment that is made by government is carried out by the federal reserve changing numbers in the appropriate bank account. Congress authorizes the spending, and that effectively orders up new dollars from the federal reserve. And the fed fills the order by using the computer keyboard to make payments, to clear the payments on behalf of treasury. That's the way it works now. You're saying, I think, why do we bother messing around with the bond sale piece? Why not just let the fed mark the numbers up and be done with it? And then you could have deficit spending without an increase in the national debt. To which I say, good idea. Good question. The bond piece is optional. This is the thing people don't get. They don't understand-

Anthony Scaramucci (38:12):

Okay. But the people that are on this call that have to balance their checkbook every day and they're balancing their corporate checkbooks as well, you would say, well, because the federal government can issue the currency, they're able to do that. You don't issue currency, you use currency. So you're not able to do that. You don't think there would be inflationary consequences to us doing it?

Stephanie Kelton (38:31):

No. In fact, selling bonds is almost certainly more inflationary than not selling the bonds. Why? Because you're putting trillions of interest bearing dollars out there. Those are dollars that pay extra dollars on top of those dollars, versus just leaving the dollars in the system. We're multiplying them up by turning them into interest bearing dollars.

Anthony Scaramucci (38:57):

Okay. So you're basically saying that the national debt for a modern monetary theorist is a little bit of a Mirage, it does have that hangover effect of the interest bearing that you're suggesting. But if we just printed it and replaced it, sovereigns from around the world, people that invest in the US, they wouldn't lose confidence in us. They wouldn't lose confidence in the M1 or M2 production of our money supply. They'd be okay with that. They would say, okay, anytime the US government needs to spend money, they're just printing it. The rest of the world would be okay with that and still accept us as a reserve currency?

Stephanie Kelton (39:36):

Yeah, yeah. If they haven't figured out that that's how it works already, then they're being a little bit duped because we are already creating new digital dollars.

Anthony Scaramucci (39:46):

Well, that was the most fascinating part of your book. And that's the reason why I'm encouraging everybody on this call to read it, because we are in fact already doing that. It has worked and it's worked for the 87 years since Franklin Roosevelt began that more aggressive process of doing it. What do you say to the deficit Hawks out there? Which there are many on this call, trust me, because I'm getting text messages and all kinds of nonsense coming into my phone. So what do you say to those people?

Stephanie Kelton (40:17):

I just say, there is some iron clad logic behind this. And the iron clad logic is in the balance sheet entries. It is simply the case that on the other side of the government's deficit, lies somebody else's surplus. There are no two ways around that. We aren't going to debate that, or we can debate it, but whoever's taking the opposite position is going to lose because I'm right about this. Saying, I want the government to eliminate its deficit is exactly the same as saying, I want the government to eliminate the surplus in the non-government sector. They are identical statements. So you might believe that, you might be somebody who wants the government to siphon dollars out of the rest of the economy.

Stephanie Kelton (41:02):

A surplus works like a vacuum. It hoovers dollars off of balance sheets because the government's taxing more away from us than it's spending back in. If you believe that's a great idea, that's your prerogative. I would say the time in place for the government's budget to move to surplus is when the economy has reached its capacity constraint. You want to withdraw more than you spend back in. It's reasonable to see the government budget move into surplus at that point.

Anthony Scaramucci (41:31):

Stephanie, you have a couple of detractors. You know that and I know that. So Larry Summers, Paul Krugman, I don't even know what Calvin ball is by the way, but let me just describe it to you. It is changing your theory every time someone offers up tough questions, I guess that's Calvin ball. I've got to go look that up on my dictionary. But what do you say to your detractors that printing money isn't the answer, that it would cause some type of capital market destabilization? That we're in fact already doing it, so it's a duper. What is more a granular intellectual response to that?

Stephanie Kelton (42:07):

Look, again, I think that Larry understands this actually. The response is that MMT has nothing to do with printing money. It has never been about printing money. The way to hand wave or dismiss the work that we've done is to caricature it as something that it's not so that it looks and sounds silly so that you can wave it away and say, that's a silly proposal. We are not proposing that the federal government print money, we are explaining the monetary operations, which reveal how the government already spends today. And how the government already spends today is that, like I said, every piece of legislation, every spending bill orders up new dollars and the fed creates them when it carries out the payments.

Anthony Scaramucci (42:55):

Yeah. Assuming your theories are true, then there's great reason to be optimistic, I would think. We'll be able to solve the problem of the pandemic. We'll be able to figure out a way to produce infrastructure in the society, which will hopefully create more economic output and economic rent and potentially more fairness economically in the society. So there's great reasons to be optimistic basically. Right?

Stephanie Kelton (43:22):

I would hope so. Look, if we are facing problems, deep and serious problems in our economy and in our societies and we can't address them, then we're in real trouble. So I'm optimistic that we can address them. Sure. Look, if you say I got a bunch of idle resources lying around, I can see tens of millions of people who want to work but don't have any way to get a job. I can see businesses that have a lot of capacity. There's no construction boom going on. So I see all of these, it's heavy equipment. I see companies that can manufacture this stuff. I could do infrastructure. I could pay that company, and now they have some sales. So they have some revenue and some profit. I can hire these workers and they can go build infrastructure and fix things and I can pay them. The economy ends up with a bunch of people who are employed, who have income, who become spenders into the economy, who then support other jobs and we get a new bridge or better infrastructure or whatever. That sounds really [crosstalk 00:44:25].

Anthony Scaramucci (44:26):

That stuff makes sense. Let me ask you one more question and I'm going to kick it back to John because he's got just one or two more from our audience, and then hopefully you'll give me the chance to reconvene with you before the election, because I'm curious to see how this all lays itself out. But why not just have no taxes then? Why not just say, okay, listen, here's what we're going to do. This is what the government's going to spend in a year. We're going to put these entries computationally to a computer. The governor is going to go out and spend this money and we're just not going to have any taxes. By the way, I'll point out to everybody here because the government delayed the taxes in April, we haven't picked up that income for the government in the last three months.

Stephanie Kelton (45:09):

I don't think of taxes as income for the government. I don't think of it that way at all. Remember I said, when you send your check to the IRS, that's where the dollar goes to the graveyard. It's just done. It's subtracted away, it's gone. We put it to bed. New dollars are born when the government spends. The question is, how many times, how many dollars can the government safely spend in without killing off any of the dollars that it spends in, without taxing to take some of them away from us? The answer is, up to the point that the economy reaches full employment and then that's it. Right now, we watched Congress pass four bills. The biggest of course, is the CARE Act, 2.2 trillion, no offsets. That's pure spending, no paired with an increase in taxes. The house has passed a three trillion dollar bill.

Stephanie Kelton (45:57):

The HEROES Act, there are no offsets there. That's another three trillion that would enter, but over time, some of those dollars would come back because people earn a dollar, you pay tax. Some of that is going to get sent to the graveyard. The answer is that at some point, the economy, God-willing, recovers to the point that we are no longer able to spend without offsets. And at that point, Congress has to write bills and they have to pair that legislation, that proposed spending with some offset somewhere or we're going to get an inflation problem.

Anthony Scaramucci (46:32):

Okay. I think it's well said, Stephanie. You made your case brilliantly. I have to tell you, I loved your book. And I mentioned to you before this started that I grew up thinking more about [inaudible 00:46:43] economics and [inaudible 00:46:45] and obviously Milton Friedman. But the world around me was happening in a very Keynesian sort of way, which I find fascinating. Listen, you can't take away the economic progress that our society has had over the last 100 years, but we do have to figure out how to make that economic progress more fair, wider bandwidth for more and more people. John, do you have any more questions for professor before we sign off?

John Darsie (47:14):

Yeah, a couple more audience questions. I feel like we could go for another two hours, but I'll wrap it up just with a couple quick audience questions. What's your views on cryptocurrency and whether they have a place in modern society?

Stephanie Kelton (47:29):

Well, I think they have found a place in modern society. I don't spend a lot of time. I don't think I've ever written about crypto. I don't spend a lot of time agonizing over its existence or nonexistence or people want to invest in crypto. I have no problem. I don't see it as a threat to the existing monetary system. It's not going to replace the US dollar or anything like that.

John Darsie (47:58):

All right, last question. Do you think we could turn US States into quasi MMT sovereigns if we allow the fed to monetize the state issuance of US dollar denominated debt, which seems like what we're doing with the fed municipal lending facility?

Stephanie Kelton (48:14):

I think so in a sense. If I understand the question correctly, could we effectively free individual states from their limited capacity to spend by having the fed step up and effectively backstop them with currency issuing capacity? Yeah.

John Darsie (48:36):

All right. Well, that's all we have. Thanks for going a little overtime with us, Stephanie. Again, her book is The Deficit Myth. It's available at all major booksellers. As Anthony said, we would highly recommend that you buy it and read it. Even if you maybe have different preconceptions about economic theory, I think Stephanie's book, professor Kelton's book will open your mind to possibilities. As Anthony said, we hope that you're right and would allow us to spend more and solve a lot of problems in society. So professor Kelton, thanks so much for joining us and good luck. You're on the New York Times bestseller list now. We hope you continue to climb that list.

Stephanie Kelton (49:12):

Thank you both very much. Thanks for having me.

Anthony Scaramucci (49:14):

Congratulations, professor. We hope to see soon.

Stephanie Kelton (49:17):

Thanks, Anthony. Take care.

Valerie Jarrett: Advising President Obama, Social Unrest & Life After Office | SALT Talks #7

“Racial equity starts with equal education for every young child. Policies around inclusion are incredibly important in order to create opportunity in education and the workplace.”

Valerie Jarrett, Senior Advisor to The Obama Foundation and Director, Office of Public Engagement and Intergovernmental Affairs under the Obama Administration, joined us after the murder of George Floyd to discuss racial unrest in the United States.

“Every Black family has conversations and lessons with their sons about how to deal with police when they encounter them.” Interactions with the police serve as a microcosm for race relations in America, where Valerie thinks we’ve reached an inflection point in what we will and will not tolerate.

Turning to the 2020 election, Valerie voiced her support for the presumptive Democratic nominee. “No one understands Vice President Biden’s qualifications and capabilities better than President Obama.”

LISTEN AND SUBSCRIBE

SPEAKER

Headshot+-+Jarrett,+Valerie+-+Cropped.jpeg

Valerie Jarrett

Senior Advisor

The Obama Foundation

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie (00:07):

Welcome back to SALT Talks everyone. Thanks for joining us again today. We've got a great response to the first few SALT Talks. And we're really excited about the lineup that we have coming over the next month. And we're really excited about the guests we have today as well as tomorrow. SALT, as many of you know, is a thought leadership platform and networking forum. We have an annual conference that we do every year in Las Vegas, as well as international conferences that we've had in Abu Dhabi, Singapore and Tokyo. And we look forward to resuming those conferences in person, hopefully in 2021. But in the meantime, we're having a lot of fun doing these SALT Talks.

John Darsie (00:41):

SALT Talks are a series of digital interviews with leading thinkers and innovators across finance technology, and geopolitics. And today we're very excited to have a senior member of the Obama administration joining us, Valerie Jarrett. Valerie is a distinguished senior fellow at the University of Chicago Law School. She previously served as a senior advisor to President Obama and the Assistant to the President for public engagement and Intergovernmental Affairs during his entire tenure from 2009 to 2017. The office that she occupied was actually the position that Anthony was going to occupy in the White House prior to some shenanigans, which he and Valerie can get into during the talk.

John Darsie (01:23):

She also managed the Office of Urban Affairs and served as the co-chair of the Obama-Biden transition project. She's the author of a fantastic book that came out in April 2019 called Finding My Voice, and I've got to get the new tagline right here, Finding My Voice: When the Plan Crumbles, the Real Adventure Begins. And you can order the book online at valeriejarrettbook.com. And we highly recommend you do that, especially in this moment. There's so many relevant topics that she covers in that book. Valerie be interviewed today by Anthony Scaramucci, the founder and managing partner of SkyBridge Capital as well as the chairman of SALT. And if you have any questions during the talk, just post them to the Q&A section at the bottom of your screen, on the Zoom link, and we will get to those during the course of the interview. And I'll throw it over to Anthony and Valerie.

Anthony Scaramucci (02:17):

Well, first of all, John, thank you, Valerie, great to have you with us.

Valerie Jarrett (02:22):

Thank you.

Anthony Scaramucci (02:22):

I want to personally give a shout out and thank Robert Wolf for introducing us a few years ago. I had the great honor of visiting you in the White House when you were working with the Obama administration. And then you came to SALT a couple of years back while you were a White House official, which really was an amazing part of our story. And I appreciate you being a friend of SALT and so forth. But I want to start out with the book because I think you have a fascinating life story in terms of where you were born, where you were raised, how you developed your relationship with the president and the first lady. And unlike me who only lasted 11 days, you lasted the entire administration. And we both know that Washington is a rough town. So I want to talk a little bit about that. Let's start at the way beginning, if you don't mind. Tell us a little bit about yourself for people that don't know you Val.

Valerie Jarrett (03:17):

Sure. Well, as you mentioned, I was born in Shiraz, Iran, during the mid '50s, at a time when the United States and Iran had very strong diplomatic ties. My dad was born in Washington, my mom, Chicago, and they ended up in Iran, because when my father finished his service in the military, he was a physician, he could not find a job comparable to his white counterparts at major academic institutions around this country. And that's what he wanted to do, was research.

Valerie Jarrett (03:47):

And so they explored other alternatives and landed this job starting a new hospital and chairing the Department of Pathology, in Iran, the Nemazee Hospital. I was the second baby, Anthony, born in that hospital. They practiced on some other poor baby first. And then we lived there until I was five. From there we moved to London and from London, my father landed a job at the University of Chicago Medical Center in the neighborhood where my grandmother and extended family all lived.

Valerie Jarrett (04:15):

And growing up one of the important lessons he taught me is that sometimes the shortest distance to where you really want to go means you have to be prepared to take the long way around. And so his long way around took them halfway around the world, and it really was an important sense of being flexible, being willing to look at perspectives outside the envelope to see where your real possibilities might lie.

Valerie Jarrett (04:40):

And so I was fortunate to have Barbara and Jimmy Bowman as my parents and a huge extended family since I'm an only child gave me great love, unconditional love, more support than I could ever ask for, and set really high expectations of not what I would do, but who I would be. And the sense that to those who much is given, much as expected. And instilled in me this really strong work ethic, which has served me well.

Anthony Scaramucci (05:11):

So you meet Michelle Obama first. She's your first-

Valerie Jarrett (05:15):

Michelle Robinson. Michelle LaVaughn Robinson.

Anthony Scaramucci (05:17):

Michelle. I'm sorry. Excuse, I don't know... Michelle Robinson, I'm sorry, yeah. That's the first lady's maiden name. So tell us a little bit about that. So that's your-

Valerie Jarrett (05:28):

Yeah. We'll be 30 years next summer. So in the summer of 1991, I was mayor Daley's deputy chief of staff. I practiced law for 10 years. Six years in the private sector for the Corporation Council for the city. He had just promoted me to deputy chief of staff and I was trying to recruit people to come and join the office and a friend of mine who was the number two person in the law department sent me her resume, Susan Sherwood across the top, brilliant young lawyer. Please interview her I think you'll be impressed. She doesn't want to practice law at a big law firm anymore. And that was music to my ears, because I had hated the practice of law in a big law firm.

Valerie Jarrett (06:07):

And I still remember her walk into my office, Anthony, shook my hand, had her hair pulled back like I do, only mine is because I haven't been able to get a haircut and commanding presence for a... She was in her mid 20s. 27 year old, kid basically. And what I remember most is she told me her story. And we all now know it as a quintessential American story. Growing up on the south side, working class family, parents who didn't go to college but instilled in her and her brother, this similar value to my parents, that you got to get out there and work hard and do something purposeful with your life. And her dad, and her best friend, she shared with me, had died within the last year. Suddenly, both of them. Her father had been sick for a long time, but they weren't expecting his death, and her friend, who had been her roommate in college-

Anthony Scaramucci (06:57):

I remember that from her book. Yeah, she wrote that so great book.

Valerie Jarrett (07:00):

Yeah. And she said it was just a wake up call to, am I leading that purposeful life that I was raised to lead? And could I explore public service as a way of giving back to a city that I love? And so we clicked, I offered her job on the spot, she wisely said, "Let me think about it." Talked it over the fiance, he thought it was a bad idea. And so when I called to say, "What do you think?" She said, "Well, I got this problem." And I'm like, "Well, who's your fiance? And why do we care what he thinks? What do you want to do?" And so she laughed, and she said, "You got to meet this guy. Would you have dinner with us? And let's talk it through." And that's what we did. And the rest as you might say is history.

Anthony Scaramucci (07:40):

And so now your relationship is continuous. It goes on. Then, young, senator Obama, he becomes a senator in 2006. He wants to run for president. Talk a little bit about that because I think it's also an interesting part of the conversation about his decision to run for president and your advice to him.

Valerie Jarrett (08:04):

Well, I learned my lesson when he was considering running for the Senate. I thought it was not prudent. He'd just lost the congressional race. And I thought, "Well, if you can't win our district," we live a block apart in Chicago, and we know the neighborhood well. And I was like, "Well, you can't win here. How are you going to win statewide?" Illinois, is in a sense a microcosm of the country. You have Chicago is a big city, but you've got farmland and rural communities. And he's like, "Oh, I've been going down state since I was first elected. And whenever I go down, I get headlines because usually state senators from Chicago don't venture into farm country. And I understand their issues, and I care about them. And I think they know that." And Mrs. Obama said, "Let's have a brunch at your home and talk him out of this." Because she also had had about enough of politics.

Valerie Jarrett (08:51):

And by the end of the brunch, he'd convinced us not only should he do it, but I should chair his finance committee for his Senate race when we said, "Well, how are you going to raise any money?" And he's like, "You are." So when he decided to run for president, I think... Well, I actually think after the convention speech in 2004, I saw his ability to connect broadly around the country with this message of, no red states and blue states, it's just the United States. And I thought he had what it took.

Valerie Jarrett (09:19):

And now my parents didn't. My parents thought he'd lost his mind. And again, remember, they grew up during Jim Crow experience, racism and discrimination firsthand. Did not think in their lifetime that there would ever be a black man elected president. My father who grew up in DC, had never set foot in the White House, even on a tour until I worked there. So this was really the difference in generations, whereas my daughter was like, "Well, of course he could win. Why wouldn't he win?" So it just shows you in three generations what a difference it was.

Valerie Jarrett (09:51):

But I felt like they had raised me to believe, he worked hard and he had to go that anything is possible. And after he was elected, my mom, said, "How did you even know he could win?" Not that he would, but Anthony, even that he could win. And I reminded her of how she'd raised me. You know what she said? "Well, I never really believed that." And I realized, "Oh, my gosh," they raised me aspirationally not as reality that they knew, but for me to develop my own. And so-

Anthony Scaramucci (10:18):

Well, I had that identity. I can totally identify with that. My parents did that with us. My dad was a blue collar worker, you and I've talked about that.

Valerie Jarrett (10:26):

Sure.

Anthony Scaramucci (10:26):

And you had to sit at his dinner table at 5:15 in the afternoon, and you had to do your homework and you were going places. He used to drive us into the wealthy areas of the town. He said, "You're going to live in one of those houses someday." And we actually believed it. So if he could [crosstalk 00:10:41].

Valerie Jarrett (10:41):

Yeah. Well, he believed it or not you believed it.

Anthony Scaramucci (10:43):

Exactly. I bought into the whole thing but that was one of the things that... And we've talked about this because something has gone wrong. Because my father was in an aspirational blue collar family. I'm sure your parents, your dad was more educated, but they had these aspirations for their children. When I was campaigning for president Trump and going into certain areas, and I'm sure you experienced this during president Obama's campaign, you felt a sense of desperation. That the economic aspirations of a blue collar family were becoming economically desperation.

Anthony Scaramucci (11:19):

So it's a good juxtaposition to where we are right now. Because we have the race component overlaid on it. And I'm interested to get your reaction to this, this is my opinion. I want to get your reaction to this. It's always been there, Valerie, it's always been systemic in our society. But there's been a very large group of people, white people that have either not necessarily ignored it but have not taken it to full credence. It now seems that we're at a boiling point societally, where people are like, "Okay, we have to get ahold of this thing. We have to figure it out." You were addressing some of this, this morning on Morning Joe. And I was just wondering if you could take us there, what your thoughts are related to it.

Valerie Jarrett (12:07):

Sure. So I think you're right, Anthony, our country has a deep and painful history of racism and discrimination going back to slavery, where I talked about my parents growing up in the Jim Crow era where they couldn't go to certain restaurants, couldn't go to the movies, couldn't stay at certain hotels, had to worry about lynching, particularly in the south, obviously. Went through the Civil Rights movement, saw great strides in terms of protections that were put in place in the Voting Rights Act and the Civil Rights Act. And you began to feel that perhaps we were making some progress and we have. I mean, my goodness, I don't think we should say that we haven't made a great deal of progress. But I do believe that part of, as you described it boiling over, I am hoping it's more of an inflection point, and now a turning point is that all of the cumulative effect of that has had a painful, frustrating, exhausting impact in the black community.

Valerie Jarrett (13:10):

And I think for the rest of our country, those who do not feel that they are discriminatory or racist, have been free to ignore what as a black person you can't ignore. Every black family I know, and I'm not being hyperbolic, every black family I know, regardless of their income, or station in life, gives their black sons a lecture over and over and over again, about how to comport themselves with the police. And the police are a microcosm of a societal problem. The difference is that they take an oath of office and are given a badge and a gun.

Valerie Jarrett (13:46):

And it's also a microcosm of the challenge we have within our overall criminal justice system, which president Obama described after the death of Trayvon Martin. He said, "If I had a son, he'd look like me, and we have to do some soul searching to figure out what why that is so scary to people. Why every black boy and black girl can't have the same trajectory as everyone else." And so I think we have been on this continuum. Certainly during president Obama's time in office, we had Michael Brown, we had Eric Garner, Tamir Rice, Laquan McDonald in my own hometown. And so it has been building for a long time.

Valerie Jarrett (14:23):

And then you bring to this current climate and I do believe that the president, president Trump has as opposed to brought us together, or deescalated tensions, has actually polarized us. And then you overlay on top of that social media and everybody getting information on-demand. It makes it easy to retreat to your comfort zone and not have to talk to people who you might disagree with and try to find some common ground. Then you add a global pandemic, which has had such a disproportionate impact on communities of color, particularly the black community. Health disparities have been laid bare, income disparities, fragility in terms of benefits at work, whether people have insurance or paid sick days or paid leave.

Valerie Jarrett (15:08):

And then we all watch on television, a man die in slow motion, and his death, and I should pause to say his service today is in Minnesota and his family, my heart goes out to him. But then his six year old daughter yesterday said, "My daddy changed the world." And I sure hope she's right. Because the nonchalantness with which those officers killed him, is what's stunning. And they saw the cameras. They knew they were being videotaped. So where are we where police who are sworn to serve and protect can behave in that way in this great country in 2020?

Valerie Jarrett (15:48):

And I think all of that coming together, is what has caused demonstrations, the vast majority, are being peaceful in all 50 states and in fact around the world. Because people look to us as that beacon of hope. And at the same time you have president Trump sending in law enforcement to physically remove peaceful demonstrators using tear gas and rubber bullets. Why? Why? So that he can walk and stand in front of a church that he had not been inside of since Inauguration Day, and hold up a Bible and try to use the church and a Bible as a prop, which has received not only criticism from the church, but also now for the first time in my lifetime that I can remember, from the military leaders who always hold themselves above politics. So all that has come to a head. And the question is, where do we go from here?

Anthony Scaramucci (16:47):

So I want to ask you this question, it's a little bit of a pointed question, but I'm curious to get your reaction to it. There is a commentator on CNN by the name of Van Jones, we both know him personally. The evening of president Trump's election, he said it was a white lash. I don't know if you heard him say that.

Valerie Jarrett (17:10):

I remember. I remember it very well.

Anthony Scaramucci (17:11):

And I didn't get it at the time. I have to totally confess that obviously I was pro Trump at that time, I was trying to help the president, I saw that blue collar despair in those white communities, frankly, a community I grew up in. I mean, we had blacks and whites in our community, but it was a blue collar community. And I'm just wondering, is that over? Meaning, are we at that inflection point that you're describing? Assuming that Van Jones was correct in 2016, you could tell me if he was or he wasn't, but assuming that he was, are we at an inflection point now, where we can move this society to a post racial society meaning where your skin color, my skin color, is going to be irrelevant? Are we there or is the stereotype so hard in the society, that we're not there? And then if we're not there, what is it going to take to get there?

Valerie Jarrett (18:11):

Well, let me say a few things on there. First of all, I think that what we saw with the economic crisis in 2008, coupled with the advances that technology have brought to efficiency and needing fewer people in the workforce to do the same jobs, do different jobs with higher requirements of training, that you're right, for the first time, many white Americans wondered, would their children have a better opportunity than they had had? And that was a first for them. And in a sense, they were experiencing what the black community has worried about all along. And now that it was a crisis with them, the question is, well, whose fault is it and what do you do about it?

Valerie Jarrett (18:54):

But in terms of the backlash, I think we should also remember that our elections in our country have always been close. President Trump lost by three million in the popular vote. He lost in three states by fewer than 100,000 votes. So it was a very close election. And 100 million eligible voters did not vote. And that is really where I've been focusing my energies. Is what can we do to get people who have looked at Washington or even their local elections and decided, "This isn't relevant to my life."? Or, "They're all bums. I don't like any of them." Or, "What does one vote count?"

Valerie Jarrett (19:34):

And I hope that over the last three and a half years, we've had a real civics lesson. That elections at all levels really do have consequences. It's one of the reasons why Michelle Obama and I started an organization called When We All Vote. Michelle is a founding member of it, we've been able to bring in lots of coaches. It's non-partisan. And she wanted to do a non-partisan initiative about voting. It's called When We All Vote because we think our country is stronger when all Americans vote. And we've been working really hard over the last couple of years since it was launched in 2018, to focus on not just who's president of the United States, albeit important. It matters who's in your local. Who's your mayor? Who's on the city council electing or appointing police chiefs? Who are the prosecutors making decisions about who to bring cases about? Who are the judges sitting in judgment and affecting our lives? Who are in the state legislatures drawing districting lines and appropriating funds? And certainly who's the check of balance in Congress?

Valerie Jarrett (20:32):

And then if we can raise the awareness and make people see the nexus between their lives and voting, then we'll have a stronger democracy regardless of which party actually wins. And better accountability in our senate. Because what I've observed, and I'm curious, Anthony about what you think about this, is that president Trump seems to be really focusing his energies and his message on a relatively small part of our country, assuming if he can get them very excited, that that is energy will result in turnout. And that if everybody else is apathetic, then he wins. Without actually getting the majority of the American people to be supporters.

Anthony Scaramucci (21:10):

Well, there's no question about that. I mean, I'll add evidence to that. The last time I talked to the president was Easter Sunday of 2019. He was sore at me, because I had written an op-ed, that the press is not the enemy of the people. You can find it on hill.com, just expressing the understanding of the Constitution, the institution of it, and the need for the press, not only to hold people in power accountable, but the press does something else for our society, which you and I have talked about, if we can teach our second grade children to speak and think freely, they go on and become great economic innovators. They invent Facebook and Google and all these other great companies. If you don't teach them to speak freely, like in China, well then what happens is you're narrowing the band of their creativity.

Anthony Scaramucci (22:00):

And so he got very sore at me. I said to him, "Well, what about the independence and the moderates?" And he said something which was very telling. He says, "No, no, I'm worried about the base. Let me work on the base, everything else will take care of itself." And to your point is, he's making the bet that the vote will be down, and the base vote will be up. And it's also something that concerns him. Because he said it repeatedly and general Kelly and I, we're going to be with general Kelly tomorrow on a SALT Talk. General Kelly and I have talked about this, the president really believes rightly or wrongly, that if that base turns out in a magnificent way, to use one of his words, he'll win the presidency.

Valerie Jarrett (22:43):

Well, of course [crosstalk 00:22:43].

Anthony Scaramucci (22:44):

Irrespective of the popular vote or all that other stuff. So everything he's doing on Twitter, that walk across Lafayette Park, that is designed for the base. That photo op, I mean, holding the Bible. I mean, my wife said something funny, I probably shouldn't say it, but we're on live and she was like, it was almost like a soiled diaper the way he was holding it. I mean, he wasn't holding the Bible like somebody at any level of general familiarity with the Bible. So I mean, look, it is what it is. We're here now.

Anthony Scaramucci (23:16):

But I guess my question, though is, Robert Kennedy got it right. He said in 1968, that there would be an African American man as president. That he saw that inside of 40 years, there was a possibility that an African American man would be president. And Barack Obama was sworn in 40 years to the day from that statement. I guess what I'm asking is, can we move the society again? Can we move it where we can become from a policy and a stereotyping point of view post racial? And I'll say one thing too, that I know you'll get, my first year Harvard Law School two African American kids were picked up walking to the convenience store. They were in my class. 30 years later, professor Gates is with you and president Obama having a beer with the cops that did that 30 years late. So it's clear that it didn't happen in my adult lifetime. But can it happen in my children's lifetime?

Valerie Jarrett (24:16):

Yes. Now, post racial is a big word. Will we be able to eradicate all racism in our country in our lifetime?

Anthony Scaramucci (24:23):

No. Of course not. No, no, of course not.

Valerie Jarrett (24:25):

But can we develop this sense of empathy for one another? And in a sense, that's what this crisis point shows. When you have crowds all over the country that are not just black people marching, but they're white people and Latino people and Native American people, young people, old people, people of all walks of life, around our country have resoundingly expressed not just in their physical presence on the street, we're let's face it, in the middle of a pandemic. They're taking a chance with their life. And so they feel so strongly there, that they're willing to go out there and notwithstanding the fact that our experts tell us it's not safe.

Valerie Jarrett (25:07):

But we also, I think, when you add to that, which gives me some hope, is that we're seeing action on the ground. And so there are two issues here. One is racism. And that's within our own hearts. And we've got to work that through. And I think some of it is generational, and it's young people talking to their parents and talking to their grandparents. I had this conversation with my mother this morning. She said she was very influenced by my daughter. And that we shouldn't think that older people can't change, they can't learn and can't grow. So I think that that is happening.

Valerie Jarrett (25:40):

But the other thing that is so important, and this is a piece of what president Obama was talking about in his town hall yesterday, is that we have a right to expect that government's role is to ensure that there is justice and that it is using whatever levers it has at its disposal to try to make sure that even if people don't feel a certain way, that they behave a certain way.

Valerie Jarrett (26:05):

And so I can't tell you what's in your heart, but I can insist that you treat me with respect. And when we talk just about the police, for example, yesterday, president Obama asked mayors to make a pledge that they'll work with their communities within the next 60 to 90 days at the use of force. This is a hot button item for many people of color. And it was one of the recommendations in the task force report that he presented when he was in office. And gave to all of local law enforcement because we have something like 18,000 local law enforcement agencies in the country, and they're the ones that make the decisions about how the law is meted out.

Valerie Jarrett (26:46):

Well, I called a group of mayors yesterday whose texts numbers I had, just to see if before president Obama's remarks we could get some to commit. So I called the mayors of San Francisco, LA, Minneapolis, Chicago, DC, Atlanta and New York. All of them, literally just like that said, "Of course we'll do that." A few of them were already going through that exercise. Mayor of San Francisco, London Breed, is right in the midst of implementing the taskforce report. So I say this to say you expect the government to ensure that if we are about law and order, as president Trump said yesterday, that it has to be fairly meted out. That there has to be equal justice. That there has to be transparency and accountability.

Valerie Jarrett (27:27):

And so if the police departments around the country can start to take those necessary steps, then at least we can control the behavior. And I would also add that this Justice Department has been missing in action. When Michael Brown was murdered in Ferguson. And we had demonstrations as a result of that, president Obama sent Eric Holder to Ferguson to meet with the police department, with the advocates, with the family of Michael Brown, with the faith community and say, "What is going on here?" And it triggered a pattern and practice investigation which the Justice Department can do, which is an enormous stick to hold over local law enforcement agencies. It's the best stick that they have. And guess what they found in Ferguson? A pattern of practice.

Valerie Jarrett (28:15):

And so then they can get a judge involved and enter into a consent decree. And so all of this is to say, our government, even if our culture isn't there yet, we need to have a justice system that protects against the discrimination that comes from racism. And I think that this younger generation, just as we've seen with LGBTQ rights, where we've seen a revolution in thought over less than 10 years, I think that this has really been a wake up call. You saw yesterday, businesses announcing, we've got to look at our diversity and inclusion policies. We've got to see what is our role in being complicit in this. It's not enough to just be quiet. People have to speak up and they have to change their behavior. And I think by doing that, it will also change hearts.

Anthony Scaramucci (29:05):

Well, I certainly hope so. And I do appreciate the sentiment. Before we turn it over to outside questions, I want to talk a little bit about the campaign, November 2020. What do you see president Obama's role, first lady Obama, yourself? If you had to gauge the activity of the president and the first lady, where do you see it?

Valerie Jarrett (29:34):

Well, look, I think, as president Obama said, when he endorsed vice president Biden a few weeks ago, he's all in. He's going to do everything within his power, as am I to help vice president Biden. And look, nobody knows vice president Biden in terms of his qualifications for this than president Obama because he worked with him each and every day for eight years, as did I. So I think we both think he has the track record, experience, empathy. This is a man who grew up in a working class family, whose father had to move to get a job. They were in tough economic strain, and he's had more personal loss than any one human being should have to have. And rather than it making him bitter, and pulling back, it actually has made him incredibly empathetic.

Valerie Jarrett (30:20):

Just one little story about Joe is when my dad died, we were in the administration. And his assistant called up and said, "Vice president Biden's on his way to your office." And I said, "My office?" My office was on the second floor. I'm like, "I'll come down." She says, "No, no, he's coming to you." And he came in, he closed the door. He sat me down and he said, "Valerie, I promise you that when you think of your dad, that the tears that you have today will turn to smiles. Just give it time." And we hugged. I mean, I cried, he cried. We talked about his losses and mine.

Valerie Jarrett (30:52):

That empathy, and it turned out he was right. I now smile. I'm bursting in tears every time I think about my dad. And the empathy that I know he has, and that he's able to convey with complete authenticity, because he's been there, I think our country hungers for that right now. So the question will be, in this environment where you can't go and campaign, you can't knock on doors. You can't do the conventional things. We don't even know if we'll have conventions coming up this summer, what do you do? And I think we have to get creative.

Valerie Jarrett (31:21):

And we'll be using the internet and all kinds of things. So I think we're all in, we're going to do everything we can. I think he has a great message. I think it's terrific. He's going to have a woman as a running mate that sends an enormous signal to half our population, how important he thinks it is to break that barrier. But it will, as I said earlier, it's going to rest on turnout. It's going to rest on people, and part of why we're pushing early vote where there's no evidence whatsoever of vote fraud, part of why we're pushing early, not just early vote, but also vote by mail. Again, no evidence of vote fraud. And also vote by mail, no evidence that it leans into favor of either political party is to make it easier for people to vote when they shouldn't have to choose between their health, and exercising their-

Anthony Scaramucci (32:07):

No, well, I mean, look, it's very obvious to me, the president is saying all that stuff because he wants to suppress the vote. He's figured out exactly what you know, suppress the vote, turnout he's base, that's his pathway to reelection. But with that, I'm going to turn it over to John Darsie. He's got some questions from-

Valerie Jarrett (32:27):

Great.

Anthony Scaramucci (32:28):

... our audience. So one of our audience members texted me. He said, "Well, it was not tear gas. It was smoke canisters." And so he said, "This is what's going on in our society now." It really doesn't matter whether it was tear gas or smoke canisters, you're-

Valerie Jarrett (32:46):

Well, you know what? [crosstalk 00:32:46].

Anthony Scaramucci (32:48):

... clearing innocent people from Lafayette Park-

Valerie Jarrett (32:50):

Exactly.

Anthony Scaramucci (32:50):

... so that a guy can stand with a Bible in front of a church where the bishop inside the church actually doesn't want him there. And you're disrupting, what general Mattis said, the classic, most important right in our society to freely express our values and who we were. And you have foreign film, Australian film, British film, European film, where that park was very peaceful at 6:30 PM. So anyway, that's where we are now though. We're going to debate tear gas versus smoke canisters because we got a certain-

Valerie Jarrett (33:29):

Let me push back to say-

Anthony Scaramucci (33:30):

And by the way, when I get off this thing I'm calling him to yell at him. This is a young guy who I genuinely like. Okay. But let's turn it over to John Darsie.

Valerie Jarrett (33:40):

Well, as we're turning it over, let's just say, and I heard this yesterday, if you look up the definition of tear gas, it includes smoke canisters, and when you saw people out there, whose eyes were burning and who were throwing up in the streets and who had been exercising, as general Mattis said that constitutional right, the question is, is that what we should be doing? Is that what we should be expecting from leaders?

Anthony Scaramucci (34:03):

We had to allay the president's insecurities about being stuck in that bunker. And so that that was the big deal. So all right, let's turn it over to John Darsie.

Valerie Jarrett (34:12):

Hey, John.

John Darsie (34:13):

Yeah, when we talk about systemic racism, police brutality is only one piece of the puzzle. And there's been a lot of talk about economically how we empower young African Americans and people of color in the United States. What type of New Deal economically do you envision for black America? Robert Johnson, the founder of BET, recently came out calling for 14 trillion in reparations. What do we need to do from an education perspective, from an economic perspective, to just close the opportunity gap? The opportunity and equality that exists in America?

Valerie Jarrett (34:45):

Well, sure. Well, it starts with a equal education for every young child. Part of what president Obama's focusing on with his initiative, My Brother's Keeper, is what can we do to keep our young boys and men of color outside of the justice system to begin with? And that is to put their life on a better economic trajectory, which we all know begins with education. And affordable education. We all know that so many young people don't go to college because they can't afford the loans. And they know they'll never be able to repay them. And so how do we bring down the cost and increase the access to education?

Valerie Jarrett (35:18):

And then we have to work on the employment side. And look, there's so much that every business leader who's tuning in today can do to go out and recruit. And the good news here is that you're not doing it because it's a nice thing to do. You're doing it because the evidence now shows that diversity is a strength. It gives us a competitive advantage in a global marketplace. And that goes to people of color and it goes to women. And also the good news is that the majority of CEOs now understand that, but the question is, does it trickle down within the culture of the organization?

Valerie Jarrett (35:54):

And so you have to put in place both structural and cultural changes that make it easier for people to enter the workforce, have that upward mobility and stay there once they're hired. And that's when policies around inclusion becomes so important. Now, I always say to people, if you want to recruit black people, who are you sending out, and where are you sending them? Do you recruit at HBCUs? And when they come in, do they see anyone who looks like them? And I think there's a greater level of sensitivity to the importance of implicit bias training, for example, I'm on the board of Lyft. There isn't anyone at Lyft, to hires who hasn't first had to go through implicit bias training to try to level that playing field. Because we all have implicit biases.

Valerie Jarrett (36:38):

So I think that the beginning is the education and then it is increasing opportunity in the workplace. And it's making sure that people who are hired feel welcome and that could be everything from the affinity groups that I know a lot of companies have, to ensuring that they have mentors that help them move up the corporate ladder. And also helping businesses get started. Access to capital is a huge barrier. What are we doing to ensure that black owned businesses have that access to capital so that they can grow their own net worth, without having to depend on others? So there's so much that we could do. And the good news is that I think businesses are beginning to wake up and realize that.

John Darsie (37:24):

Thanks a lot, Valerie. We have another question about process and organizational management. So the Trump administration has become notorious for a revolving door personnel and a lack of organizational management and structure within the White House. What did an average day in the Obama administration White House look like from a process perspective? And what you can tell from the Trump administration, how did those two processes differ?

Valerie Jarrett (37:52):

We were big on process. Process was important. We wanted to make sure that recommendations that went to the president were soup as we called them. That we didn't take half baked, and mix my metaphor, ideas to him. And so we put a structure and a process in place. But before that, and I co-chaired his transition team, we spent a lot of time on recruitment. We spent a lot of time vetting folks, which is painful, as Anthony can tell you, it's a horrible process that you have to go through. You just have to lift up your skirt and tell everybody everything. But that's so important on the front end, not just in terms of making sure that folks who needed to get confirmed would be able to get confirmed. But of the people that you're hiring, share your values, your perspective, your determination to move the country forward. And then you have to work to build a team.

Valerie Jarrett (38:40):

But let's go back to the process for a minute. So the average day for us consisted with a senior staff meeting, with the chief of staff, a small one with the most senior advisors, then a larger one where our direct reports would come in. We'd focus both on the challenges of the day, but we always made time for what are the longer term projects that we're working on so that we can keep those in the back of our mind and prioritize? We'd meet with the president. We'd go over the recommendations that were coming from the staff.

Valerie Jarrett (39:08):

Our staff secretary had a hugely important job. It doesn't sound very sexy. But that person was responsible for making sure that the paper that went to the president had been fully analyzed by the necessary parties, whether it was the policy councils, the domestic policy, the economic policy, national security policy. Whether it was the cabinet agencies had weighed in. And then it came to the senior staff for us to weigh in. We would spend enormous effort on the paper. President Obama spent hours, hours every night after dinner, reading memos that we had sent him. Decision memos or our discussion memos, because the most important precious quality that the president has is his time. And we wanted to make sure that we were efficient with his time that it wasn't just the last person who walked in the room that was changing everything. And we stuck to that process. And I can say every chief of staff he had, was really good at trying to make sure the process was tight.

Valerie Jarrett (40:11):

And we worked on our culture. And I'll tell you, early on, some of the women were having a tough time. And I described in my book, president Obama who said, "Wait a minute, your voices are important. You're here because of your subject matter expertise, but also because you're going to present a different perspective." And how we had to work on that culture, which takes time and energy and determination and intentionalism. And that applies to any operation, any business, private or public. And by the end of the first term, he told a reporter, "In the beginning, I had the best team on the field. And by the end of the first term," the best players on the field. I blew the punch line. "By the end of the first time I had the best team."

Valerie Jarrett (40:50):

And I think that's also a message, how do you work with people so that they trust one another? So that if you have a crisis like one of our biggest self inflicted debacles was when our website for healthcare.gov crashed. And we had spent months trying to get it right. And the president had been so clear, "Is it going to work? Is it going to work?" "Yes, sir, it's going to work." And then it didn't work. And we didn't spend one minute blaming one another for it. Nor did he, I might add. It was like, "Get to work and get it fixed." And you can't do that, unless you are sure that you are a team and that you have each other's backs.

Valerie Jarrett (41:28):

And so I'm not in the current White House. But I will say, having a revolving door, having so much leaking to the press, having a message changed so many times in the course of the minute, let alone the day and the hour, and not having the discipline of ensuring that whatever the president says is accurate and evidence based. And I remember one of our press secretaries once said, when I was into a briefing before he went out to the briefing room back when there were briefings, if you're not sure, I can't say it. He said if I go out there and I say something that is not true that will reflect on president Obama. That doesn't mean we always got it right. But it shows the intentionality of the effort.

John Darsie (42:13):

Thank you, Valerie. One more question. And this relates to the 2020 election, you talked about the importance of voter turnout and how you and a lot of Obama administration alumni have been focused on the voter turnout piece. But if you're vice president Biden or his campaign manager, and you're trying to zero in on one, two or three core themes to hit on that are going to resonate with swing voters in swing states, there's obviously a lot of things that you could nitpick about, or not nitpick that you could criticize president Trump about in terms of character flaws and dividing the society. What are the core themes that you think he should really focus on, vice president Biden, in order to really pull those swing voters to his side?

Valerie Jarrett (42:55):

Well, I think the economy. Look, it's front and center. Millions and millions of Americans have lost their jobs. We have higher unemployment than anytime before the Great Depression. So for those who lost their jobs and who don't know whether by the election they'll have their jobs back, those whose jobs were changing anyway, as a result of technology, what are we going to do to rebuild the economy, not just back to where it was, with a very low unemployment rate, but with a lot of people underemployed, what are we going to do to make sure that we are building an economy that works for everybody? That people aren't slipping through the cracks. What are we going to do about our healthcare system to make sure that we move on the building blocks of the Affordable Care Act, as I said earlier, COVID-19 has laid bare the health disparities that exist.

Valerie Jarrett (43:41):

I think that people who are in swing states want to know that we are going to also re-enter the global dialogue as the leader of the free world again and not necessarily just go it alone our own way because the big challenges that we have as a world, really have to be solved through cooperation. The Paris Climate Accord that president Obama so successfully was able to get nearly 200 countries to sign require that effort because the United States can't combat climate change alone. The deal that we had to keep Iran from developing nuclear weapons required Russia, China, Great Britain, France, Germany, the European Union, all working together to put pressure on Iran. Big challenges require... Pandemics. The reason why Ebola never reached our shores was because president Obama got on the phone with other critical world leaders and said, "We have to work to contain it so that it doesn't bleed out and enter into our countries." The goodwill that you need in order to do that is something else that I think vice president Biden brings to the table.

Valerie Jarrett (44:47):

So the economy, health care, making sure people are treated equally. Being a world leader, again, participating and working with our allies, not chastising them and aligning ourselves with those who don't reflect our values. All of that's important. And then the final point, which is really the vice president's message is, he wants to really bring back the soul, restore the soul of our country. And I think that's the empathy. That's the sense that we are better when we are together. The [inaudible 00:45:17] of our message. I think that that is important as well. I think that will resonate not just with swing voters, but with many good Republicans and Democrats, too.

John Darsie (45:31):

Valerie. Thanks so much for joining us today on short notice. You were our first call when all the social unrest and the situation with George Floyd happened, to get your perspective on what's going on in the country and the path forward. I want to give another plug for your book. If you haven't read it, you go to valeriejarrettbook.com. Valerie, I think has one. I put the camera on her.

Anthony Scaramucci (45:50):

Well, let's get it up on the camera here. Valerie, hold it up. Let's take a look. All right you look-

Valerie Jarrett (45:57):

That's the paperback.

Anthony Scaramucci (45:58):

Let's face it, you look-

Valerie Jarrett (46:00):

Pardon me. Well, I was saying pushing the paper back because I added two new chapters, at the end. One of them presciently about my grandson, at the very end in the world. I hope that he has, he's black and I'm brown. And I talked about his parents having to give him that talk. And this was long before the current crisis. And so in a sense, I hope people will read it with the thought of my grandson in mind, and what can we do to make sure that his life and the lives of so many other people of color are better than they are today?

Anthony Scaramucci (46:33):

Well, I'm certainly looking forward to it. I read the one last year that you gave me and thank you for that. And I'll read those concurrent chapters. But go ahead, John, everyone's focused on the duck behind you. But go ahead, John, do your best here to finish it up.

John Darsie (46:48):

All right. Well, yeah, we want to thank Valerie again for joining us. Her and Anthony have struck up a great friendship. And when Anthony was set to serve in that OPL position in the Trump administration, Valerie was extremely gracious and kind and helping him make that transition. So just it's been great to watch that friendship blossom across the aisle.

Anthony Scaramucci (47:08):

She told me not to do it. I didn't listen to her, Valerie.

Valerie Jarrett (47:10):

I did tell him not to do it.

Anthony Scaramucci (47:10):

So from now on, I'm going to li... I mean, before I make big decisions like that, I'm going to call you. Okay? You'll tell me what to do.

Valerie Jarrett (47:17):

Please do. Please do. Thank you all. It's a pleasure to be with you.

Anthony Scaramucci (47:19):

All right, guys. Thank you.