Rachel Bitecofer: What Political Polarization Means for the 2020 Election | SALT Talks #46

“Public opinion is almost completely inelastic in the United States, and that is a sign of a very sick body politic.“

Rachel Bitecofer is the Senior Fellow for Elections at The Niskanen Center, a nonpartisan think tank that works to promote an open society. Her innovative election forecasting model predicted the 2018 midterms five months before Election Day, far ahead of other forecasting methods.

“If Donald Trump had handled the pandemic well, it probably would have benefited him in the 2020 election.” However, we see that the pandemic response does not have the power to move people away from the President because of political polarization. Trump enjoys a high floor, but also suffers from a low ceiling, consistently polling in the low 40s.

Fear is a major factor in election turnout, something Democrats are not good at stoking in their base. Nativism will be electorally costly for Republicans in this environment, and Democrats are far less likely to coast into the 2020 election as they did in 2016.

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SPEAKER

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Rachel Bitecofer

Senior Fellow, Elections

The Niskanen Center

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

Anthony Scaramucci: (00:08)
The first thing I want to say is, we met on the set of Bill Maher, and I had known your business and known your career, and you have correctly assessed the midterm elections, many other elections, but you were spot on, on the midterms. But I'm going to read your bio very quickly. Rachel Bitecofer's a nationally recognized election forecaster, and a senior fellow at the Niskanen Center in Washington DC where in addition to her groundbreaking election analysis, and election forecasting research on the presidential and congressional elections, she conducts pro democracy research. Rachel's work appears in a variety of the nation's leading media outlets, including the New York Times, The Washington Post, Politico, Market Watch, The Guardian, the BBC, MSNBC, Sky News, CBC, and my favorite, Real Time with Bill Maher. By the way, unlike you, Rachel, he happens to love you and he loved you from day one, he was making fun of me on the show when I was a Trump supporter.

Anthony Scaramucci: (01:13)
She is the host of The Election Whisperer, which is a database politics and election show that Rachel says, is the electioner Disneyland for wanks with a good sense of humor. And you certainly have that. You're a senior advisor on The Lincoln Project. I did Lincoln Project TV last night, I really enjoyed that. So, Rachel, first of all, you've had a fabulous career, you've been spot on on so many things, but I love asking people this in the beginning, how did you get to be where you are and what drove you to go in the direction that you've taken your life?

Rachel Bitecofer: (01:47)
That's a really great question, and actually, it's good, because my career has really been very short, and that's because I delayed growing up like Peter Pan. That's because I was really interested in hanging out and partying when I was a teenager, and I didn't have parents that went to college, so college ... And this was like ... I'm a Gen X, in between Gen X and front end millennial, so everyone didn't go to college. And so, my parents didn't really focus on sending people to college, and so, I didn't go to college, and instead I went to Grateful Dead concert, it's like lots of them, in the early '90s, and that's what I was really focused on doing, and I learned-

Anthony Scaramucci: (02:36)
Where did you grow up? What town did you grow up in?

Rachel Bitecofer: (02:38)
In the Mid-Atlantic. My dad had been in the Navy, and he retired, and I was the youngest, so I didn't get as much Navy moving, but, because of that, we lived in Virginia ... Spain, Virginia, and then moved to Maryland. So, it's North of DC, in a place called Walkersville, which is a little bit outside of Frederick.

Anthony Scaramucci: (02:57)
Yes, yes, I know where that is.

Rachel Bitecofer: (02:58)
And all I cared about was getting the hell out of there.

Anthony Scaramucci: (03:02)
All right, all right. So, you're at the Grateful Dead concert, you're not going to college, but you end up as this brilliant pollster. Take us through that.

Rachel Bitecofer: (03:12)
And I don't do it at all until I'm 20. I go and do other things, and I get a job as a HR manager in a polling firm, out West in Oregon, and I'm 24, I'm a single mom, and I don't want to be broke forever. And also realizing I'm actually unusually smart, it was just that I had better things to do in school before, which was, a.k.a, not go to school and party. So, I go to college, and I go to a community college, because that's where you go when you're working class and don't have connections. And I realized pretty quick, I might have a huge passion for politics, and current events, and I'm not sure if I wanted to do law, or ... I find out how to become a professor is a really hard path, but I'm interested in doing it. I really wanted to be doing this. I would watch TV analysts, and I was like, "I think I can do that," but I didn't think that was too likely to occur, but I thought being a professor would be a nice second more achievable version of life.

Rachel Bitecofer: (04:24)
And so, I did. I went and did community college, working full-time the whole day, raising the kid on my own, young child, and then moved out to Georgia to do my PhD, because that's the place that accepted me with funding. And I only finished in 2015, and then my first year teaching was the 2016 cycle. So I always tell people, I'm an accidental election forecaster, what I was studying was political polarization. And then, I come out of that 2016 election having had all these observations about elections, and the way they're being analyzed, and what people were talking about them, realizing that people were looking at squares where I was seeing triangles, predominantly, because of all of this expertise about polarization. And that's when I stumbled into the path that you now have found me on.

Anthony Scaramucci: (05:21)
Okay. But you seem to be like ... I'm saying this as a compliment, some people say that word savant, and it's not a compliment, but you are a savant on this stuff. You have a knack for this stuff, and it's something that Simon Cowell would call the X Factor, where you're actually seeing something that other people don't see. And so, I'm going to get right to the 2020 presidential election, and I'd like you to lay out for people your narrative of what you think is going on in the body politic, and how do you think things will shape up? And we know it's a moving target, so, where are we today? Where do you think we'll be November 3rd, and how do we get to where we are?

Rachel Bitecofer: (05:59)
Right, right. And really, I mean, that's a big part of my research, but it's not a moving target like it used to be, and that's because of hyper partisanship and polarization, and even with a massive event, and something that is, even if it had been decently managed, and it certainly wasn't, the pandemic is a massive political event. It is also accompanied with a second massive political event, which is this economic event that goes along with it, and everywhere around the world, the public that goes in a country, you can see the effect of the event on public opinion, because it registers either positively or negatively, pretty significant changes in public opinion. There's only one country in which that's an exception, of course. I mean, I'm talking about countries with free and fair information systems. There's only one place in which that's different, and that's the United States of America.

Rachel Bitecofer: (06:55)
Public opinion is almost completely inelastic here, and that is a sign of a very sick body politic, but it does actually make forecasting election analysis, things like that, much easier, when things are going to be set in stone or pretty fundamentally, concrete for months on end, and nothing can, even a pandemic could move somebody away from an incompetent president, no matter how poorly managed it is, it does make it easier to guess where things will be. And so, what I said in March, as I wrote my March update, I said, "I won't update this forecast again until September." So it's coming out in a couple of weeks, but my expectation is A, this pandemic will not be managed well by Donald Trump, because he has incompetencies that made him always unqualified throughout the job of the presidency, which doesn't have a hiring process that's elite driven, it's mass driven, so [inaudible 00:07:56] he could get hired anyway, but he's probably not going to handle this ideally.

Rachel Bitecofer: (08:01)
And so, my assumption is, though, that that won't matter the way it did in 1980, when Carter faced an inflation crisis, Iran-Contras crisis, didn't handle those things well, and then got shellacked. We're not going to see that kind of movement, we will see some penalty, and we have. We've seen some additional erosion in peer independence, and some right leaning independence. I'll be really showing voters that, or people that in the September update, but by and large, Trump's still like 42, 43%, 41%. I mean, it's almost inelastic and it's amazing. It's amazing, because it's unique in the world to see a political event of this magnitude, have almost no effect on public opinions, assessments, and it's a ... We can talk about why and how it functions, but it's something that I [crosstalk 00:08:59]-

Anthony Scaramucci: (09:00)
Yes. If you don't mind, I would love to know your theory on it. I mean, I've heard you say this, "He has a high floor, but he also seems to have a low ceiling." I think that was your comment. It's a bandwidth that's very tight, and nothing seems to move it. To use the President's own words, "I can shoot people on Fifth Avenue, no one is really breaking support from me," but the flip side is, a good two thirds of the country seems to disagree with the way he handles the pandemic. That's a polling that I've seen. So, why do you think it is this way? Why do you think there's that level of rigidity in the polling?

Rachel Bitecofer: (09:37)
So, in particular, broadly speaking, it is, [inaudible 00:09:42] people hear in the media, and probably their own conversations these days, that you hear the words, polarization, maybe you hear the less common term, hyper partisan, but polarization certainly. Those are not just buzzwords, these are quantifiable, empirical characteristics that political scientists, like myself, have studied and documented, starting, really, with some very impressive quantification out of the US Congress, but it's been quantified in the courts, in the executive branch, and it took longer to quantify or find evidence to support in quantified terms, empirical terms in the public, but eventually, really, Bill Maher, what we call mass polarization, really starts to emerge in a big way, 2008, 2009 when two major events happened simultaneously; the economy collapses, and Barack Obama gets elected. So it's really difficult to disentangle how much of each thing impacts that movement, but we do know ... I mean, at that point on my dissertation, which is pushing back at a big book that's claimed to disprove mass polarization. In other words, like by Pew Center's public polling data, really starts to show definitively, no, no, no, polarization is not just something in the elites, it's not just a product of having to choose between parties that are polarized. This is something that's affecting regular rank and file voters.

Rachel Bitecofer: (11:23)
And, of course, that's what my forecasting work is about. It's about arguing with the election forecasting status quo, "Hey, you can't have mass polarization and hyper partisanship, and then keep analyzing elections and expecting election behavior to not be severely impacted, particularly in so far as a persuasion elements of a lecture of elections."

Anthony Scaramucci: (11:51)
What do you think's going to happen?

Rachel Bitecofer: (11:53)
Oh, so, for months, my forecast for the presidential election officially dropped 13 months ago, and it anticipated, based on my forecasting work, which talks about how Democrats have a numbers advantage. And this is a decision that was made by the Republican Party against its own advice in 2013. It issued a report, it's known as the RNC autopsy, and Reince Priebus, who was the chair of the Republican National Committee at the time, commissioned this report, post Romney's loss, to argue, "Look, the demographic realities of America, especially when we look at the millennial and Gen Z generations, are such that, nativism, especially, a language that is a hostile to racial minorities, is going to be electorally costly, and we should definitely moderate on the issue of immigration, and also probably stop fighting cultural war issues around issues like gay marriage, in particular, because public opinion has changed dramatically," and when we think about public opinion on gay marriage, it's one of the most astounding reversals that we've ever seen in a short 10, 15 year period.

Rachel Bitecofer: (13:09)
And, they commissioned this report, they put it hell in the part, and in ... This is part of what the republican civil war is about, half the party, your, is like, "No, that's not going to happen. Instead, we're going to go the other way. We're going to primary challenge, basically, the autopsy and scribers, and remove them from office." And so we see this big office purging of Republican establishment members, Eric Cantor, others, and then of course, the fight for the soul of the party in that 2016 nomination fight, and they take over of the Republican Party by Trump, which is a new version of the Republican Party. That's why the party did not put out a new convention plank, the plank is Donald Trump, basically. So, we have seen the ... And this is, if you look through the 245 years of America, and plus the pre-American history time period, you have already evolution. The democrats went through something very similar in the 1960s when it lost its whole Southern wing of the party collapsed. So, parties are amorphous, they change over time, and the Republican Party has had an amorphous experience that we're living through, it's impacting our national politics.

Rachel Bitecofer: (14:29)
So, I predicted Democrats were going to have a massive reaction to the election of Donald Trump, and we're not just talking about Democrats, and when we say Democrats, a lot of people say base. Even if you do talk about the democratic base, you're not talking about progressives, you're talking about progressives, you're talking about African Americans, you're talking about college educated women, talking about pretty big group, but my research really is careful in its language, and it talks about coalition of Democrats, because that encompasses, too, a pretty fair chunk of independents, because many independents are closet partisans, they lean left, they lean right. So when I talk about my work, I really like to use a coalitional term, because this is important on the other side as well. There's a big coalitional factor for Republicans with right leaning independents. That's especially important right now with so many X padded Republicans floating out there who are not calling themselves Republicans right now. But in any case, because group of Democrats were floating through 2016 in a complacent mood, and then got a big shock on election night, they are much less likely to go into 2020 with that level of complacency.

Rachel Bitecofer: (15:41)
That would be one major issue, but on top of that, there's this concept in polarization called negative partisanship. And negative partisanship refers to feelings that you have about the opposition party, which are grounded in your own partisanship, and people like to think about it as hate, like, "I hate the other party," but it's also fear. And that's fear ... When you think about Republicans when Obama was in office, and Obamacare was passed, or whatever Obama would do, Republicans would feel fearful of it. We're watching the RNC this week, really, a palpable fear of what would happen if Democrats end up in charge of America. So, fear is a major factor for turnout, and Democrats don't do fear artificially. Republicans do great artificial fear, but Democrats don't. So, we're going to see a huge turnout surge that I anticipated in 2018, four months before election, and that's what made my house forecast unique. Wasn't the accuracy of the end, which everyone was pretty much accurate at the end, the art of the forecast is done at the end anyway.

Rachel Bitecofer: (16:51)
It was the for forward accuracy, it was the fact that it was four or five months away, saying, "Hey, it's going to be more like 42 seats, and not 20, 30 seats fighting for the flip." And so, it predicted a Democratic win anyway. And then this pandemic happened, and that you said Donald Trump couldn't really do something. He had this feeling, and that's true, because, when we were on Bill Maher, it was literally the last few days before the country shutdown. It was the last couple of days, and still couldn't really conceptualize a world with this pandemic, and how it would exist, but the fact is, actually, that if Donald Trump had handled the pandemic well, let's say he had just made the same policy choices that all the other Western democracy leaders did, like Trudeau, or Morrison in Australia, Johnson, eventually, the more he screwed it up at the beginning that he copied Trump, and then was, like, "Oh, maybe I shouldn't do it this way." So let's say that he had done a national shutdown, all states at the same time for that first month, and then the defense production act, massive production of testing and PPE, and just did a slow reopen where things were getting ...

Rachel Bitecofer: (18:14)
Australia's very strict; when there's a flare up, everything gets shut back down. Let's say he had done that, and America did not have this raging out of control pandemic, and economic activity loss was able to resume, because it ultimately holding back economic activity, is people like you and me that have money, and we're too smart to go out and kill ourselves. We're not going to go to a restaurant, we're not going to go to a movie theater. You can open them all you want, we're not going to them. So, it's demand driven. So, you have to contain the virus if you want to reinstate demand. And as economic people, I'm sure you guys understand what I'm arguing here. So, containment was such a critical component to economic relief, so he didn't do that. But if he had done that, if he'd managed this well ... I actually disagree, it is true, in the normal course of things, he couldn't have improved his feeling, but with something this spectacular, something this disruptive to people's lives and businesses, if he had managed it well, he actually ... Democrats are more or less polarized, and this is just a qualifiable fact, and it's because the Democratic coalition is less ideological than the Republican coalition.

Rachel Bitecofer: (19:37)
It doesn't live in an alternative media system that's pretty intense on Fox News, it probably would have benefited him, and I think he honestly would have been fairly competitive, more competitive than my initial modeling would have had him, but of course, he did not, because he-

Anthony Scaramucci: (19:58)
But Rachel, I've been watching the Republican convention, and they say that he's handled it brilliantly, and they say that without him, more people would have died, and he shut down China, the travel ban with China. So, are you saying that the American people are not buying that narrative?

Rachel Bitecofer: (20:18)
So, it's a fine narrative for everywhere that you have full control of people's information diet, and that's not an insignificant portion of the public, because ... I'm a social political scientist, I'm sure other social scientists as well, have documented this in the study, after study, after study, and it has gone profoundly worse since Donald Trump came into the political stage and started telling people, overtly, especially from a position of legitimacy, as the president, [inaudible 00:20:49] that's a extremely powerful position that the rest of the media system is fake and what have you, but Republican identifiers in survey after survey, tell pollsters, "I only trust Fox News. I only watch Fox News." And that's a very different construct, because, remember, we're not talking about 5% of the public, we're talking about all around 30% of all Americans only get information from one source, and that is Fox News.

Rachel Bitecofer: (21:21)
And Fox News, when pandemic, and all of that stuff is a major story, that's not what they're talking about. They're really focused on this federal courthouse story in Portland or other things. Now, if you happen to be not consuming that, it's like the impeachment process or the house trial in Ukraine. I monitor right wing media very extensively, and I try to get people on, not in that environment, to understand, "Look, if it doesn't break through over there, it doesn't happen." So, during that house hearing for Ukraine, the right wing media was telling its audience that there was no evidence of misconduct produced from the house investigation, there was only evidence that implicated Hunter Biden in wrongdoing that Trump was exonerated in the process of ... And, in other, the rest of the world, headline after headline of just really compelling evidence in that house hearing from the Ukraine investigation. So, it's a very unique process too, because in conservative audiences across the globe, who don't have that media ecosystem, their perceptions of Trump's handling of the pandemic are very different, they're much more critical of it, obviously.

Rachel Bitecofer: (22:54)
So, if you don't have that context, though, how can you criticize something if you think it's going well, and you don't have any other information?

Anthony Scaramucci: (23:07)
Okay. So, Trump's gonna lose?

Rachel Bitecofer: (23:10)
If the election was held today, there's absolutely no way that he could win an election which everybody is voting either by mail, or whatever they're doing. And there's only so much disconnect you can have from polling data and reality. So people are, "Oh, well, the polls were all wrong in 2016, and he won." Well, there was actually quite clear, and I really would point people to read this MarketWatch article that I put out a couple of weeks ago, that walks through specifically what happened in 2016 with polling data, because actually, the polling data was very, very clear, and again, I wasn't an analyst, and I say in the article, I don't know if I would have noticed this if I was an analyst. I hope so. I like to think I would have, but I can't say that I would have. I know I noticed it right away when I wrote my post book, but hindsight is 20/20 definitely. But in my analysis of 2016, when I went to write my book on the election, it was like a blaring fire alarm signal in the polling data, that a very large number of voters in every poll, national polls, state polls, were saying that they were undecided. And that is weird for presidential elections.

Rachel Bitecofer: (24:28)
Usually ... We have this big theory in political science called minimal effects theory, and it's one of the most stable things if you're ready to go get a PhD in policide, and study American politics, every PhD American politics seminar is going to cover this research, and it's called the minimal effects theory, and it talks about how campaigns, because of polarization and the strength of partisanship, and how powerful partisanship is, that before there are candidates, before there are campaigns, most people have already made up their mind who they're going to vote for, and therefore campaigns have minimal effects. And so, when you look at polling data in any other cycle, when you get close to election day, you should not be seeing undecideds above 10% certainly, and the more normal a map for the polarized era, especially, is six, 7%. In 2016, in poll after poll, it's 15%, 12%, 20%.

Anthony Scaramucci: (25:31)
Where is that now, Rachel? Where are the undecideds now?

Rachel Bitecofer: (25:37)
It's at 6%. A lot of the poll ... I have this huge spreadsheet that I'm tracking of all these different indicators. It's like Bitecofer's secret tracking sheet. I mean, not all of the parts of it are secret, and this is definitely one of the things that isn't. I'm tracking the number of undecideds, you have to wait a little bit to track a couple of things, one of them is, how much ... Or when you have one party has a primary, and the other one doesn't, you have to wait a little while to see, will people coalesced around the candidate that had a primary? Because, otherwise you're measuring primary animosity affects more than anything else. I had to wait a long time to be able to see, "Are Democrats going to rally behind Biden, or are they going to have similar issues that they did with Clinton, where they never quite ..." I mean, it was atypical, so that was another thing I talk about in this article, was that third party defection where you see a state like Wisconsin, was 7% of the electorate doing third party or right invaliding in a state that went for Trump by point seven, less than a point.

Rachel Bitecofer: (26:45)
I mean, these are massive, massive impacts on the 2016 election, and these noises in the data are not there in 2020, a third party validing is much, much, much, lower already, undecideds are much, much lower, but when I'm looking at, "I want to figure out, will democrats consolidate around Biden's because you've got this progressive base?" They have twice now been thwarted in their efforts for their socialist revolution. And, free tip, I mean, nominate somebody who's progressive, but not an actual socialist, and you might have actually succeeded. Anyway, I wanted to see, this is a major weakness that can be exploited and would be, is. I mean, that's what the Death Star is all about, exploiting these disaffected Bernie people, trying to get to re-defect, because Donald Trump is not ... He's got the ceiling and he can't get above 50% in Ohio, in Wisconsin, in Michigan, in Pennsylvania, so, if your job is to reelect this dude, your job is to actually pull down the winning vote share below a majority. Has to be a plurality race like it was in 2016, or straight up, you cannot election him.

Rachel Bitecofer: (28:02)
So, like always, if you're running the Trump campaign, it's always been like, "How can I recreate that scenario in 2016 where there was a lot of third party defection," and you really wanted Bernie Sanders from on a competitive race, Bernie Sanders to lose, and people to be pissed off about it. So I wanted to see-

Anthony Scaramucci: (28:23)
Well, we don't have that now, though, right?

Rachel Bitecofer: (28:25)
No, we don't.

Anthony Scaramucci: (28:26)
The Bernie boys or whoever they call them, the Bernie band is with Joe Biden.

Rachel Bitecofer: (28:32)
They have totally consolidated around him already.

Anthony Scaramucci: (28:35)
Let's talk about women for a second, the female voter. Is the female vote going to be the determinate of the election?

Rachel Bitecofer: (28:43)
Yes. I mean, one-

Anthony Scaramucci: (28:43)
Tell us why.

Rachel Bitecofer: (28:45)
I think people ... Are we allowed to use salty language on the Salt talk?

Anthony Scaramucci: (28:49)
Yes, you are allowed to use salty language. Yes, you are.

Rachel Bitecofer: (28:51)
Good, just letting you know. I get bored-

Anthony Scaramucci: (28:53)
Although I've never used salty language in my life.

Rachel Bitecofer: (28:56)
Never.

Anthony Scaramucci: (28:56)
Yes, I'm a very strange-

Rachel Bitecofer: (28:58)
Not when you call reporters at home, right?

Anthony Scaramucci: (29:00)
I'm a very straight laced person. I mean, come on, I mean, let's just talk about that jerk off for a second. I mean, the kid was from Long Island, an Italian kid from Long Island, could you believe he did that to me?

Rachel Bitecofer: (29:10)
He did you a favor.

Anthony Scaramucci: (29:11)
That's another topic.

Rachel Bitecofer: (29:12)
You know what? Not too bad that they're nice and quick, right?

Anthony Scaramucci: (29:15)
I'm happy that I got ejected like an Austin Powers villain at this point in my life, but the thing I'm most happy about, Rachel, is I got Steve Bannon out of there with me. Okay? Because, trust me, those two lunatics together, forget about it, but let's go to this, the salty language and the female voter.

Rachel Bitecofer: (29:34)
Oh, yes, that's what I was going to say. People are going to ship their pants when they see what happens in suburban America, because, where's my mind kind of, because they've got a preview now. I thought the first time, I'll catch everyone by surprise. I mean, obviously, after arguing all through the summer, and the fall with the election quitter bros about how much suburban America was going to change, not just because the group of 100 swing voters that voted for Trump are now going to vote for Democrats, which is definitely a factor, but also because there's going to be, not just 100 new voters that didn't vote before, but maybe 300 of them, and that's going to have a major impact on the vote share. I thought, "I'll catch him by surprise in '18, but for the 20/20 narrative, I won't have that whole space to myself," because everyone will fill the space, and dah, dah, dah, but, really, I'm still out there in my ... Because it's not going to look like 2016 at the suburbs at all.

Rachel Bitecofer: (30:40)
It's going to be a whole different banana.

Anthony Scaramucci: (30:44)
Okay. So, he's gonna lose, Trump's going to lose. That's your prediction.

Rachel Bitecofer: (30:47)
Yes, I mean, as long as, A, as long as the polling and things are as they are today, we've got two massive fundamentals working against Donald Trump; negative partisanship, which is but my forecast stuff is about, and now we have this pandemic effect, which is exasperating that, and together, it's about a eight point advantage for Democrats, and that takes them a pretty deep senate map, by the way, takes them to that majority that they need, the four seats that they need to get that majority. I mean, if everyone can vote. And that's why Donald Trump is like, "Well, I'm losing, so I just have to try to make it ..." I mean, how am I now democratic?" Small d democratic. "I can't wait on the numbers, I'll just try to make sure people can't vote."

Anthony Scaramucci: (31:40)
Right, right. Try to suppress the vote. I got to turn it over to John. We've got 10 minutes to go in the Salt Talk, and he's got questions, which are lining up in our little chat box there. Go ahead, Mr. Darsie.

John Darsie: (31:51)
So, with all the analysis you provided, what is the impact going to be on Senate and House races? How do you expect those to turn out, and what do you expect the effect to be from the national races on those state level, both in the short term and the longer term?

Rachel Bitecofer: (32:07)
So, to shadow Tim Russert who I still miss daily, Texas, Texas, Texas. 2019, I put out an analysis, I said, "My model is really focused on demographics, college educated population, and percent non-white." Where is there still a lot of that that's untapped? And that is Texas, Texas, Texas, that is Dallas, and Houston suburbs, in particular. Of course, there's a couple of districts that they didn't pick up in 2018, tucking into this Austin gerrymanders, and so, I think people are going to be really shocked to see just how much is going to happen in that Texas area, because it's never been competed in. So, there's just a lot of potential growth. The state house, it picked up 12 seats in 2018, there's another nine between them and the state house, and I think they have a real strong potential because of the addition to the pandemic effect, to pick it up. So it's going to be, I think, on ... Everyone's been talking Texas.

Rachel Bitecofer: (33:11)
And then, at the Senate, Colorado ... In order, Colorado, Arizona, and then Maine. I mean, Colorado and Arizona, there's just no way to imagine the GOP could come out ahead on those two Senate seats, and then in Maine, I mean, in order for Susan Collins to survive in Maine, you have to believe that there's going to be a significant amount of Maine voters who are in this environment, in which ballots are now naturalized, and that means the down ticket candidate is connected to the president on that back in the days of Obama, that meant the Democratic senator was ... Their fate was tied to Obama, and now it means the Republican is tied to Trump, and that's ultimately why in Arizona and Colorado where the demographics are just so strongly in favor of Democrats, they just don't have a hope in hell, but in Maine, it's a different scenario, because it's not a demographic realignment situation, it is a independence scenario, but Maine is 100% going to the Democrats or Electoral College for Biden.

Rachel Bitecofer: (34:22)
So you have to believe that a significant chunk of those people are going to vote for Susan Collins, and I just don't see it. I do not see a whole bunch of people splitting their ballot and voting for Joe Biden, and seeing Susan Collins in her old maverick way, as this independent check against Trump, when she has literally failed in that, and there's things like The Lincoln project making sure voters know it.

John Darsie: (34:52)
Well, in terms of Trump's strategies for winning, you talked about voter suppression, the other element that's taking place is Kanye West. So, they're trying to get him on the ballot in several states including most of the swing states, in hopes that he acts as the spoiler that steals votes from Biden. Do you think he has the potential to make enough of a difference in those states to move the needle?

Rachel Bitecofer: (35:14)
Again, I mean, that strategy, and really, most of these suppressive efforts are things that can matter in very close elections. I really urge people ... I mean, and I hate urging people to buy my book, because it's looks really boring. It's not, I promise, I don't do anything that's boring, but it looks boring as hell. And it's titled something really boring. It's called The Unprecedented 2016 Presidential Election, but it really does walk you through the role that third party balloting played in those post Midwestern clips, because it's not a story of the Midwest having a political revolution. It's a story of who didn't show up and how many protest a motive, how much of that occurred naturally. Not all of it was naturally, I didn't know at the time that the Russians were working those two audiences pretty hard with propaganda, and the Trump campaign is replicating that strategy. That's what the Death Star is about. So, for two years, I've been trying to get people to understand, it's a subtraction campaign, it's not an addition campaign. You can't run a persuasion campaign around Donald Trump, because he would undermine it every single moment of every single day anyway.

Rachel Bitecofer: (36:21)
So, to be fair to the Trump campaign, you have to work with the clay that you have. And he is the first candidate at either a senate competitive level, or the president, who forces the campaign into a purely mobilization strategy, and so they have to do things that are ethically disgusting, like look like, "Well, we need someone to siphon off votes from the Democrats. How do we do it? We hope that Bernie Sanders has a really divisive primary, and can hyper target progressives on those YouTube shows that are on Sirius radio, and tell them not to vote, or tell them to vote third party," and that they're going to spend millions of dollars on that stuff. And then, the other way to do it is to get black voters to do the same, "We're going to tell black voters that Joe Biden has this complicated history with race and the crime bill, and try to get them to vote against their own self interest." And yes, it can matter if the election gets really close in Michigan, and 10,000 people write in, you don't need a candidate on the ballot when they're famous and everyone knows their name.

Rachel Bitecofer: (37:33)
So, it can still be of effective tool at rein in. It's certainly not, I think, the GOP's first choice. I think they would have preferred something a little bit more, like a libertarian that was attractive, like Gary Johnson. I mean, that dude stole a lot of votes on the left just by being pro pot. I mean, everyone's like, "Oh, he's the dude that smokes pot." It is not ethically ... But hey, you just watched the convention that broke balls and many ethics. I mean, we are living in strange times.

John Darsie: (38:12)
We'll leave you with one last question before we let you go, Rachel, if you are the DNC, and you only had a finite amount of resources to spend over the next 70 days, or whatever it is, until the election, would you focus on trying to swing those 5% of actual swing voters, or would you focus on trying to push turnout among the coalition of Democratic voters that you talked about before?

Rachel Bitecofer: (38:35)
Well, it should never be an either/or. You should be doing both at all times, but if I was running the DNC, a lot of things would be different. I mean, number one, I would have spent the last four years building, basically, a war machine, and it wouldn't be dead. Let me make that clear, dead, to the GOP's ambitions to ever control the presidency or Congress again, but I don't, and in the triage format, what I would do is, I would make my persuasion campaign a sniper strategy and not a shotgun, which is shooting in tons of different messages, and that sniper campaign would be, "Donald Trump screwed up the pandemic response. Here's specifically what he did compared to how other people dealt with it. This is why we have a raging pandemic, and a permanently inferior economy, and on top of that, the GOP and Trump will not give you any aid." And that's what I would focus that on. I would really be painting the Republican Party as a party of extremist, and winning middle America on that message. And then the rest of my money would be spent on making sure, at the end of the day, if you want to win Wisconsin or a house district, it doesn't matter what it is, if you want to win it, if 70% of Republicans in that district turnout, you damn well better have 70% democrats turnout too.

Rachel Bitecofer: (40:10)
So you want to make sure you're spending a lot of money on turning out that voter file, and that's where that resource should be focused.

John Darsie: (40:21)
Well, thanks so much for joining us, Rachel. Anthony, do you have any final word for Rachel?

Anthony Scaramucci: (40:24)
No, but we got to be tracking you, Rachel. I just wrote down the book. Give us the title of the book again. I don't have a copy of it in front of me, but I've got to order it on Amazon when this is over. What's the title of the book?

Rachel Bitecofer: (40:36)
It's called The Unprecedented 2016 Presidential Election, and it is a academic book. So it looks really boring, but it isn't boring, I promise, and it actually is the only book, in my opinion, that actually will tell you what really happened in 2016.

Anthony Scaramucci: (40:54)
All right. Well, you're terrific, want to see what happens over the next 60 or so days. I try to make these things less partisan, if you will, so I didn't go to off on my own personal opinions, Rachel. So, we'll save that for the next time. You and I are on the Bill Maher show together.

Rachel Bitecofer: (41:12)
There you go. We'll turn this now non-partisan in the Trump era though, buddy.

Anthony Scaramucci: (41:16)
No, that's very true. I was just trying to keep it neutral, like salt itself. Everybody likes salt, Rachel, everybody.

Rachel Bitecofer: (41:24)
Who doesn't?

Anthony Scaramucci: (41:25)
I have a high sodium diet myself, but anyway, God bless. Thank you, and I look forward to seeing you. Maybe we can have you back closer to the election, and then, or perhaps after the election, so that we can get your analysis of what actually happened.

Rachel Bitecofer: (41:39)
Yes, I'm happy to do either or both, and I'm happy to talk to your audience. I hope and assume it's a audience that has a lot of potential to impact America for good, and I have a lot of stuff that I'm doing related to that. So, I would love to talk about some of that stuff.

Anthony Scaramucci: (41:55)
No question about it. God bless. Sending you lots of love. Be well.

Rachel Bitecofer: (41:58)
All right. Thanks.

Michael Vranos: One of the Best Bond Traders on Wall Street? | SALT Talks #45

“I believe investors should take a slightly more charitable view to the hedge fund structure.“

Michael Vranos is the Founder & Chief Executive Officer of Ellington Management Group, a firm founded in December of 1994 to capitalize on distressed conditions in the MBS derivatives market. Michael’s Wall Street career began in 1983 at a time when the Federal Reserve was opaque in its actions and long-term plans.

“Keep more cash on hand to anticipate the panic of others.” Michael has taken this learning from the Crisis of 1998, coupled with best practices from the economic downturn in 2008, to prevent losses during the COVID-19 pandemic. As a result, the firm was able to put $3 billion to work when others experienced sell-offs.

Where are today’s opportunities? Simply put: fundamental value investments and relative value trades. Mortgages were not the source of the 2020 economic crisis, and selling them isn’t going to solve anything. With the Federal Reserve now owning $2 trillion worth of mortgages, they will have tremendous impact on that market going forward.

LISTEN AND SUBSCRIBE

SPEAKER

Michael Vranos.jpeg

Michael Vranos

Founder & Chief Executive Officer

Ellington Management Group

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 public policy. SALT Talks are a digital interview series we started during this work from home period. Where we're interviewing leading investors, creators and thinkers. And what we're really trying to do during the SALT Talk series, is to provide our audience a window into the minds of subject matter experts as well as provide a platform for what we think are ideas that are shaping the future, as well as interesting investment opportunities. And today, we're very excited to welcome Michael Vranos to SALT Talks. Mike founded Ellington Management in December of 1994, to capitalize on distressed conditions in the mortgage backed securities derivatives market, and he was involved in that market even before it was considered sort of a hedge fund asset class.

John Darsie: (01:00)
Until December of 1994, Mike was the Senior Managing Director of Kidder Peabody, in charge of the RMBS trading division. When Mike was the head trader and the senior manager at Kidder Peabody, the mortgage backed securities' department became a leader on Wall Street in CML underwriting for each of the three years between 1991 and 1993. Mike began his wall street career in 1983. After graduating magna cum laude, Phi Beta Kappa with a Bachelor of Arts in Mathematics from Harvard University. He currently serves on the board of directors of the Boys and Girls Club, Hedge Fund Cares or now called Help For Children, as well as the Waterside School and he's an emeritus member of the board of the Stanford Shelter For The Homeless. So he's very involved in the charitable side of the hedge fund industry as well.

John Darsie: (01:50)
A reminder to our audience today. If you have any questions for Mike during today's talk, you can enter them in the Q&A box at the bottom of your video screen and conducting today's interview is Troy Gayeski who is the co-Chief Investment Officer and Senior Portfolio Manager at SkyBridge Capital, which is a global alternative investment firm. And Troy is also a contributor to salt. So Troy, thank you for joining us today. And I'll turn it over to you for the interview.

Troy Gayeski: (02:14)
Yes, thanks John. And Mike, it's really great to have you on here. And obviously, before we dive into market opportunities, which I know you're chomping at the bit to discuss. Just wanted to get a little more color on your background. I mean it's a fascinating story, how you came from relatively humble roots. Like many of us that have been on the screen, to running one of the longest, or successfully running a hedge fund that's been in business just about as long as any. And so we can take us through where you're born, how your schooling progressed, and then how you made your way to Wall Street, it'd be fantastic.

Micheal Vranos: (02:49)
Oh, thanks. Okay, thank you Troy. Sure, so I was born in Worcester Mass, and when I was young, our family moved to a town called Ellington, Connecticut. Hence, the eponymously named firm. And Ellington was and still to some extent still is a farm town. They grow shade tobacco there, which is tobacco that wraps cigars, corn, and there was a lot of dairy back then too dairy farming. My father was an engineer, and my mother was a nurse. And when I was young, I just spent a lot of time outside. And I played a lot of sports, I was a decent athlete, and I got involved in bodybuilding in my late teen years.

Micheal Vranos: (03:32)
When I got into Harvard, I was okay in math, and I spent a lot of time even at Harvard, in the gym at school. And this is important because it had some bearing on my decision to go into business because I kind of like being around people. And studying and being isolated was not exactly that. So I had written an undergraduate thesis and was given a grant by the NSF to go to graduate school in math, in Stanford. And at the very last minute, which is last minute meaning, let's say April of my senior year before graduation. I decided that it would be better to quote unquote, go into business. But I didn't know what go into business meant. I used to train with a fellow from the gym, from Harvard Business School. And he told me if I applied to jobs at Kidder Peabody, it would be great because the lunches were free, and they were very good. And if I was in sales and trading, I could be out by five o'clock and I could get to the gym. That sounded-

Troy Gayeski: (04:33)
Mike did they have protein shakes back then? And all the things they have today?

Micheal Vranos: (04:38)
Yeah, it was down at 10 Hanover square. And you could order out at the various places and things like that. It was good 80s food back then. So I decided to do it. And I was offered two jobs at Kidder Peabody, the two openings. And one was in sales and trading, and the other one was in project and lease finance. But the latter was one where I'd have to work more hours, but it was 24,000 instead of 22,000 a year. So I went for the lower salary job because I could get out at five. This was my brilliant logic back then. Anyway, so I started at the Chicago Board of Trade, and I ended up in New York by the fall of 1983.

Micheal Vranos: (05:17)
And I was supposed to be doing research in mortgages, but the traders stopped showing up to work. And they just kind of threw me in the seat. There I am 22 years old, having to figure out everything myself. There was no research group, it was pre-OAS. So the ideas of coupon compression and negative convexity, one had to sort of infer from the markets. Now, it's also important to realize back then, that rates were very, very high extraordinarily high. The current coupon mortgage rates had just dropped from 15% to 13 and a half percent, and rates have been more or less dropping for the last 40 years. And Kidder Peabody wasn't exactly Salomon Brothers, they ran the market back then. But we built our group up slowly over time. And as John mentioned, by the early 90s we became the largest CMO issuer on Wall Street and our group became the firm's profit leaders.

Micheal Vranos: (06:20)
We also produced back that a tremendous amount of mortgage backed derivatives. And in the early 90s, we developed agent based prepayment models that we still use today at Ellington to help us value these securities and these models. They consider each borrower as an individual agent who makes an economic decision to prepay or default based on certain factors, economic factors, and these agents comprise a distribution that we track over time, and that's the basis for the model. Anyway, so leaving Wall Street at the end of 94. And I'll get to the crisis of 94 later.

Micheal Vranos: (07:00)
It was a very good time, because the Fed had been raising rates precipitously, and mortgage backed securities, especially derivatives were highly undervalued. So as John mentioned, we formed Ellington in the last days of 1994. Although, it's important to say that the seeds of the partnership were planted almost 50 years ago. Larry Penn, who's our vice chairman and chief operating officer was a fellow that as a freshman I met at Harvard. And John Geanakoplos our head of research. The well known mathematical economist, and James Tobin, professor of economics at Yale is my cousin. The five of the six regional partners of Ellington... I'm sorry, of the six original partners of Ellington five are still with us today 25 years later.

Micheal Vranos: (07:51)
So we're now a firm of 155 people. We manage about 11 billion dollars across hedge funds, private debt, some long only, and permanent capital vehicles in the forms of REITs that traded in the New York Stock Exchange EFC and earn are the tickers. We write and use our own interest rate prepayment in default models for RMBS, CMBS. And corporates and as I mentioned, develop these models over decades. So that's, a little bit of my background. I can talk a little bit about some of the crises I saw back then, and how it applies to what we're seeing now if you're interested.

Troy Gayeski: (08:38)
Yeah, of course Mike. But before we get into that the question everyone's dying to ask is, how much can you bench press back in the day?

Micheal Vranos: (08:45)
Oh, that's an interesting question. You know-

Troy Gayeski: (08:47)
Don't take too long answer, though [inaudible 00:08:50] my man.

Micheal Vranos: (08:51)
Okay, I'm going to be very honest with you. 395.

Troy Gayeski: (08:55)
Not bad-

Micheal Vranos: (08:56)
It was okay.

Troy Gayeski: (08:56)
It's not bad for a man of your stature. I'll give you credit.

Micheal Vranos: (08:59)
I never got the 400 it was one of my worst lifts by the way the bench press it wasn't-

Troy Gayeski: (09:05)
Yeah, what was your best one the squat and the deadlift.

Micheal Vranos: (09:09)
Probably the squat, yeah.

Troy Gayeski: (09:10)
Squat, yeah. Same here man. That was always my most powerful movement. So, good for you.

Micheal Vranos: (09:16)
I don't know that it's done me a lot of good now at this point. But thanks for asking anyway. So-

Troy Gayeski: (09:24)
But segwaying back to business, because I know you've obviously been a huge lifter your whole life. In terms of the crises you went through, you've touched upon the 94 crisis with asking which is rate driven. You've obviously managed to long term capital, manage to the financial crisis. Just touch upon a few highlights and lessons learned or some of the keys that allowed you to survive. And then once we get through that I want to touch upon the longevity of your firm, because that's something that we feel people don't appreciate enough how difficult it is just to stay in business over time.

Micheal Vranos: (09:59)
Yeah.

Troy Gayeski: (10:00)
So shoot on the crises lessons and some of the experiences there. And then we'll get into some of your keys to longevity.

Micheal Vranos: (10:07)
Okay yeah, sure. So with all these crises, we've tried every possible way to get out of business, and it hasn't happened yet. But there's plenty of mistakes made, and there's a lot to learn. And I think the first real stark sort of learning experience and example, was the crisis of 94. To which you alluded, which is the precipitous rise in rates starting in the early spring of 94, and it's really important to realize back then. The Fed was secretive about their plans. They prided themselves in being sort of opaque with their plans, and they tightened and raised rates seven times, pushing libor from three to 6% over the course of the year in less than a year.

Micheal Vranos: (10:48)
And this was a total disaster for MBS derivatives, which were these highly leveraged securities that carry durations of at least 20 years, sometimes 30 years with negative convexity as well. So a lot of real money accounts lost money back then like mutual funds and things like that. But there was one hedge fund in particular, and there weren't many back then by the name of Asking Capital that had these securities levered as well. And that was my first experience in seeing the deadly effects of the combination of leverage and miscalculation of risk. And the two sort of work together they conspired to create a disaster. And also sort of the rapaciousness of lenders at the time, where there was not a big idea of forbearance back then. And I think, in the COVID crisis now, I can see anecdotally, I thought lenders acted more nobly than they had back then in the 90s. That's been my observation.

Micheal Vranos: (11:50)
Anyway, and then there was as you alluded to the crisis of 1998 the LTCM crisis. And that was also very interesting. And that was a crisis of leverage. And that was rather specific to hedge funds unlike the great financial crisis. And if I recall correctly, and someone in the audience might know better than I, and can check my memory. But they sent out long term capital sent out a letter on July 31 of 1998 stating that they were down 51%, and I think that was the number. So I found that to be incredibly odd, because it being down 50% given that kind of leverage, was akin to saying, "Okay, I've got the edge of his dime, and I'm going to put it on the edge of this razor blade, and it's going to balance."

Micheal Vranos: (12:45)
And that's just not an equilibrium point for a leveraged fund. And so something was going to have to... Either you're going to recover or blow up. And we know what happened, but the aftermath of that was an unnamed prime broker was making very aggressive margin calls to Ellington, and other hedge funds at the time trying to break term financing even before maturity. And we had a lot of term financing out. And I think they just made the calculation they'd rather take legal risk than market risk. And they were just looking for margin just to blow out all their borrowers.

Micheal Vranos: (13:25)
So from that, I learned three important lessons. One is not to trust anybody, two is to keep more cash on hand than you otherwise would think to anticipate the panic of others. And three is don't let your prime broker hold your money. A prime broker can hold up your trades and cause fails to others. So you can use prime brokers and we use prime brokers, but they shouldn't control your money. You should be your own prime broker. And that's not easy. That's why at Ellington we have so much infrastructure, because you need to develop great systems in risk management to hold your cash. But I think it's crucial.

Troy Gayeski: (14:10)
Yeah. And it would also be fair to say having low leverage, right? That was a lesson from both 94, and 98 correct?

Micheal Vranos: (14:15)
Absolutely, but that becomes sort of a follow on from your work backwards from there. You have to figure out how much cash you need in these scenarios, and that governs your leverage. So it's a sort of that's the flow of logic.

Troy Gayeski: (14:33)
And obviously, many of those lessons help you survive the financial crisis, and then also help mitigate losses in March as well, so-

Micheal Vranos: (14:41)
Yeah.

Troy Gayeski: (14:41)
... there's been much discussion on the financial crisis. I thought you touching upon LTCM in 94, which seems like eons ago was very informative. Why don't we segue to March and how you're able to mitigate losses compared to many of your peers.

Micheal Vranos: (15:00)
Okay, so March was interesting. So that, was a time where there was obviously a crisis of leveraging cash as well. And it has to do with managing, again left tail risk. So what we've done internally as we had, and have a lot of what if scenarios? For example, what if high yield goes down 10%? What if high yield goes down 15%? What happens to RMBS, CMBS in corporates. Particularly mezzanine tranches that carry a little extra interest rate, but whose delta will expand tremendously. So negative credit convexity, if you will, in scenarios that I've described to you. And then on top of that, what happens when that happens to haircuts?

Micheal Vranos: (15:55)
And those are the sort of what if's and scenarios that we had run. Starting actually since 2008. And even before that helped us sort of survive and actually put money to work after the March crisis of this year. I also think it's you can't underestimate the importance of having the right kind of investors so that when you call them, they come alongside. Because, the amount of money that you might husband for this sort of situation isn't nearly as impactful, as if you have investors that are willing to come along with you. And so if you could indulge me for a second, I need to get on my soapbox about this one issue with investors because although we had Ellington managed both hedge fund ENP style capital. I believe investors should perhaps take a slightly more charitable view toward the hedge fund structure. We should all keep in mind that hedge fund investors own a put. They can take the cash and put the securities back to the manager at any time oftentimes in inopportune times.

Micheal Vranos: (17:11)
And they can do this because they may have their own liquidity needs, or see better opportunities elsewhere. So as a hedge fund manager, you need to manage that put as well. And that's a drag on returns, quite frankly. Alternatively private equity, they have a call on cash, that's a drag on investor returns, and that accrues positively to them. So we are actually here at Ellington in active discussions with some pension allocators. You know that we sort of like, "Who owns that put, and what's the value of that worth PE versus, versus hedge fund." And I think it's an interesting, separate topic of discussion. But anyway, I'm digressing a bit but the point is that if you have clients that you can call even if you're a hedge fund in a crisis you can ameliorate this problem. And that's one of the ways that we put about three billion to work in April in May once the crisis hit.

Micheal Vranos: (18:13)
But again you're forced to be really fastidious about managing this left tail risk, and the liquidity so that you can buy and not sell in a crisis. And that includes not just putting aside capital, but effectively credit hedging, effectively having robust models that will tell you more or less where you think your assets will be in a big move. I mean keep in mind, the high of the index move 20% in a very short amount of time. So even in our risk scenarios, we needed to extrapolate a bit where we had down 10 and down 15 to some degree. So-

Troy Gayeski: (18:50)
Mike before we get into the key opportunities today. I think you touched upon two key points that have led to your longevity one is obviously a culture of risk management. Two is having a client base that knows when there's a buying opportunity, and isn't selling bottoms repeatedly, which is a recipe for disaster in any strategy. So those are two keys that I think that have led to your success. Are there several others that you'd like to mention that it led to just the longevity?

Micheal Vranos: (19:21)
Well, I do think modeling risk is very important. I can't emphasize that enough, because you really have to fly the plan. You're going to at times, it's like you're a pilot on instrument reading at times, because we've seen times where certain mezzanine CLO tranches for example, that we thought had the risk of let's say, of a high yield index, when it was at 108. Going to have maybe four times the risk of the high yield index, when the high yield index was 15 points lower. I don't even know that the PM believed it, but it was true. And so you need to, because modeling is really, really important to get the risks right at various times, not just now. Because, it's one thing to model risks, local risks, it's another thing to model risks for big moves. And it's not so easy, especially with moves that you haven't seen before. There's no way to know that you're going to be exactly right.

Micheal Vranos: (20:26)
Another thing I think, is it's obviously no small feat to get investors to come along with you. Investors have their own stresses at these times A. And B I think, even when an investor is looking to invest with you. And we've been around for 25 years and we're easy to check out and all that. Sometimes it takes months or even years and then the opportunity's gone. I think it's almost a little crazy sometimes. I understand how we got to that point in this industry, but I think it can hamstring investors at times too. That's a separate issue. Anyway, so-

Troy Gayeski: (21:04)
So definitely a culture of strong risk management, having clients that will stick with you in draw downs and actually add capital are very key. And it's very interesting you bring up the point of doing your in house modeling, right, which I think is a key to all success for investors is that they're not relying upon third parties to provide them with information sources, they're taking the raw data, and actually compiling outputs that make rational sense for informed decision making. You'd agree with that right, Mike?

Micheal Vranos: (21:30)
I do agree with that. I also think there's some great independent research that goes on out there. And you don't want to have the hubris to think you have all the answers and things. But in the end, you need to control your own data set, you need to know what's going into the cooking, if you will. So I think it's very important. It's expensive to do that by the way, of our 155 people roughly a third, or so or more. Are so how investment professionals have a high order, right? So the way we do things Ellington, it's a very collaborative environment. So we have the PM, and the assistant PM, and the desk analyst, and the researcher all sitting together. They're all part of a team. But any breaking that chain can be tough, if you're looking at some point, if you're just relying on an outside vendor, maybe that particular chain might not be necessary. But that's just not the way that we've chosen to do things.

Troy Gayeski: (22:35)
So Mike, let's segue into today's opportunities. Obviously, there's still areas of dislocation and structured credit. There's a lot of discussion on where pre-payments means are going to be on a go forward basis. So touch upon some of the favorite areas that you see for opportunities the next 6, 12, 18 months.

Micheal Vranos: (22:54)
Okay, sure yeah. So basically, there's two general sets of opportunities. And this is a very, almost a dumb statement. But there are the fundamental value investments. And then there's relative value trades, let's say. And the Fed has really engineered a broad tightening of almost all assets, right? So I think going blindly long is probably not the best prescription right now. And it is harder to find fundamental value investments, but they do exist. And I think one is in non agency mortgages still. And I can go into a little bit of detail about that if you'd like. But if you look and see, so what was the provenance and the opportunity. Was again, this massive selling of these assets on Sunday, basically on March 22nd by REITS.

Micheal Vranos: (23:54)
Leading up to that you would seen a lot of same day selling from really well known, long only managers leading up to that week, looking to raise cash. So this was a cash grab. And the selling by the time that week ended was rather indiscriminate. It was a selling of all structured products, but mostly legacy non agency mortgages, and later on NPL and RPL mortgages, but unlike 2008, like I said, mortgages were not the cause of this problem, and then selling them was not going to be the solution. I believe that was a big technical move, and that there's a lot of value. So what's happened since then? And why do I think that?

Micheal Vranos: (24:38)
Well, there's technical and fundamental reasons why I think that, first of all, is in response to what happened. And maybe everyone knows this, but it's really important to say nonetheless, that the Fed has had tremendous impact on the mortgage market and structured products. They've increased their holdings, net of pay downs, and you mentioned prepayments Troy, so net of pay downs, that's not a small step fee of 600 billion. And so they'll they own two trillion of mortgages, which is like 30% of the $6.7 trillion pasture market. Okay, and to think that-

Troy Gayeski: (25:12)
Yeah, all agency pastures right, Mike?

Micheal Vranos: (25:14)
Yeah.

Troy Gayeski: (25:14)
I [inaudible 00:25:15] to specify for people.

Micheal Vranos: (25:16)
Yeah, agency pastures exactly. And their balance sheet has increased 2.7 trillion since March. So it's the rising tide, is that lifting almost all boats at this point. And this is a substantially faster increase in balance sheet than other of the QE programs. So there's a lot of technical support, let's say for this market. And so what's going on right now, in non agency RMBS. So first of all, from a fundamental standpoint the housing market right now is incredibly strong, which is a positive for the securities. There's very little downside, I believe in legacy nine agency securities right now because of the low LTV. So the legacy RMBS house price appreciation, adjusted LTV is right now, are 50% or less. Meaning that for a typical borrower the outstanding loan value is only about half the value of the house itself.

Micheal Vranos: (26:22)
And these loans on average have been in existence for 15 years, and they were being paid through during the great financial crisis or have been rehabilitated and such. And we can still source that product outside of 250 basis points. Sometimes it's wide as 300, also sort of as a cousin to those securities, we saw some interesting bonds recently that have been subordinate trenches off of re-performing deals at 500 basis points to libor. In each of these types of securities are really insensitive to delinquency. And I think you'll see that the delinquencies in that market are quite high, they're probably like 18% or something like that. But even if you were to double those delinquencies and take into account what the existing defaults would be. CDR is almost at 20, and such like that, you'd still get your capital back. And you'd probably get a decent spread to libor, what we calculate in many cases 200 to libor.

Micheal Vranos: (27:24)
So it's a great risk reward. And that's with the backdrop of the Fed, and the backdrop of the strong housing. And I mean housing's just really been incredibly strong Troy. You've got house prices went up a lot in July, I think it's 25% month over month in July, and they're up eight and a half percent on-

Troy Gayeski: (27:46)
Annualized, annualized.

Micheal Vranos: (27:50)
Annualized.

Troy Gayeski: (27:50)
Yeah, that's quite a move.

Micheal Vranos: (27:51)
Right. But eight and a half percent since January, I believe.

Troy Gayeski: (27:56)
Oh, it's incredible yeah.

Micheal Vranos: (27:58)
Yeah, big jump in July. And supply is very tight also, right now we have the lowest July supply if you measure by month of inventory in housing, since it's been measured in 1982, going back to 1982. So these are really great fundamental and technical support for non agency mortgages.

Troy Gayeski: (28:29)
And so Mike, that's a great summary of opportunity and legacy RMBS, you want to talk briefly about the non QM market, because that's another area of opportunity you're saying?

Micheal Vranos: (28:36)
Sure. So the non QM market and this ties into REITs because I think the non QM it is an investible market. It's not as nearly as big as these other markets. But I do believe there's an indirect way to get exposure to these markets also through REITs. But nonetheless, let me talk about non QM and then tell you about different ways to access that market. Because, a lot of the value in non QM goes through the securitization from origination through the securitization chain. But the non QM market consists of borrowers who have over 700, FICO that are making healthy down payment. So these are 75 LTV borrowers who are paying coupons close to 6% right now, which is double that of an agency mortgage, and more than 500 basis points over the 10 year treasury. So, you can imagine that there's an incredible value in that chain.

Troy Gayeski: (29:41)
In amortizing securities too, right Mike.

Micheal Vranos: (29:43)
Yeah, amortizing 30 year secure... So it's almost a little crazy. So anyway, and what's interesting to me is that if you look at REITs in particular REITs, that house originators. They seem to be the ones to me that seems to be the most undervalued. So they're owning that supply chain and those securitization profits, and they're being valued in many cases at 60% price to book. And I think if you look at the REIT market in general, and that's why I think it's an indirect exposure, if you will. But I still think it's something to talk about because the backdrop is what just happened with Rocket and you'll ever know where did Rocket come in, 20 times earnings or something like that. And most REITs are owning their own originators about one time margin. And I understand these originators aren't Rocket, but there's a big chasm there, if you will.

Micheal Vranos: (30:40)
So if you look at the $1 billion REIT ETF REM right now that's down 40%, almost year to date, but almost like 62% of the constituents of that REIT are RMBS type hybrid RMBS REITS. So you've got these REITS that have mostly exposure to residential mortgages that are comprising this index that's down a lot on the year. Okay, so you can say should it be or shouldn't be. But the average price to book that we find of the 10 hybrid REITs that we follow is around 70%. So I believe you can buy today's assets at last month's prices or two months ago's prices, by getting into some of these REITs. And again, with the REITs with the originator arms, the price to book is even lower. And you want to look for these REITs that are functioning now like Ellington financial, for example that are taking advantage of this origination and refinancing boom that's going on right now.

Troy Gayeski: (31:49)
And then Mike, really quick before we turn over to John, for questions from the audience. Sort of get your thoughts really quick on CMBS, as well as CLOs because that's another area-

Micheal Vranos: (31:56)
Yeah.

Troy Gayeski: (31:57)
Both of those sectors, you're very active in.

Micheal Vranos: (31:59)
Sure. So that's actually dovetails with what I think is the second set of opportunities, which is more relative value. Because there are some headwinds in the corporate and CMBS market, that's obvious. But there's also some very good news, like in CMBS for example. Troy it's important to realize that that markets blessed with great hedging indices. There's substantial relative value opportunities with CMBS hedges that exist right now. And there's some pretty wide bases just between cash and the index itself. Sometimes as wide as 250 basis points, also a lot of the marginal dollars left that market, a lot of hedge funds can't participate anymore.

Micheal Vranos: (32:43)
And so we recently committed to buying a first class B strip at a very attractive levels were 300 basis points wider than pre-COVID. And we were also able to shape the collateral pool which is really important, and that brought it that strip to us it meaningfully wide spreads outside of 17% no loss, those are generally zero to eight or zero to seven and a half scripts. So it was we see opportunity there in the basis, in-

Troy Gayeski: (33:14)
Mike what do you think that is loss adjusted with the cleaner collateral 12, 15?

Micheal Vranos: (33:19)
So that's, a complicated question because generally, it's not a question of... I don't know, ultimately what the losses will be. It's the timing of the losses that matter most, we generally look to sell off the mezzanine tranches and own equity in those particular cases. And so knowing that we don't value the principal part of the equity very high, but that we value the interest payments rather high because we feel that there'll be an attenuation of losses, but ultimately it's very possible to have these high single digit losses. I do think it's possible without a doubt. But that's why again, I espouse more of a relative value approach to these markets. The same thing in CLOs for example. Do you have any other questions about CMBS?

Troy Gayeski: (34:14)
No, I think it's great if we jump to CLOs.

Micheal Vranos: (34:17)
Yeah, so for CLOs again, it's the same idea. The Legacy CLO market right now is all over the place. Tier one managers with on the run bonds are really enjoying some pretty good execution on their collateral but for other managers, especially where you've got shorter to maturity de-leveraged structures out of the reinvestment period. Sometimes the price discovery is horrible and there's a lot of negative price pressure there, I think. Some for selling and we're able to buy de-levering post reinvestment CLOs like 20, attach 40 detached at 750 to libor unlevered and these things have 115% NVOC. So they're covered for now, it would take an extreme stress for the high yield index for that tranche to take loss, tranche like that.

Micheal Vranos: (35:08)
So hedging with the high index on a sort of a collection of those types of securities. We think that's a great relative value trade.

Troy Gayeski: (35:17)
Yeah. So that's a great way to end our segment and turn over to John. I got a new nickname for you, though Mike. It's 395 Mike, you like the sound of that? I like that.

Micheal Vranos: (35:27)
400 sounds better, but-

Troy Gayeski: (35:29)
It's sort of come on, man. I like how you kept it real and kept it honest-

Micheal Vranos: (35:36)
Yeah, I'm going to be honest-

Troy Gayeski: (35:36)
Didn't squeeze in that extra five pounds.

Micheal Vranos: (35:36)
Not going to round up, no.

Troy Gayeski: (35:37)
Good man. John, why don't you take it away with questions from the audience? Okay.

John Darsie: (35:41)
All right. We have a few in the queue here. If you have additional questions, please submit them in the Q&A box at the bottom of your screen and we'll try to get them in before we let Mike go. The first question is just about technicals in the mortgage backed securities market, and whether you think there will continue to be a recovery through the end of the year, or what risk factors you're looking at are for a potential pause in the recovery in those markets?

Micheal Vranos: (36:03)
So the latter part of the question is the best part, and there are things that one needs to be concerned about, as you see this slow recovery in residential non agency. I assumed the questions about non agency. With agency, you've had a massive recovery because the Feds bought everything right.

John Darsie: (36:24)
Yeah.

Micheal Vranos: (36:25)
So, you know that the Cares Act, which is providing for this enhanced income. Sorry, I'm moving around has really basically expired on July 31st. And only a few states I think have adopted taking up these payments. So you will see, I think rising delinquencies, which will cause people to stop. Investors to pause and we're sort of counterintuitive but lower balance loans have a better pay stream track record over since the COVID crisis than higher balance precisely because of the enhanced income benefits from the government. And when that goes away, you're going to see that reversal and our extrapolation is that you will see much higher delinquencies. Nonetheless, it shouldn't affect the ultimate prepayment of principal to the securities.

Micheal Vranos: (37:25)
But that will cause applause, no doubt. The other thing is that there hasn't been a real back filling of collateral to the marginal dollar like say, in hedge funds that normally buy these. And I'm thinking that real and long only managers real money and long only managers will pick up the slack a bit, but that that could take time and it might not happen, might not happen at all or right away.

John Darsie: (37:53)
Thank you for that. The next question is given your experience firsthand with the CLO, CTO and CMO dislocation in 94 and 98, as you explained earlier. What lessons are you taking from the first quarter and second quarter of this year in 2020, of how certain large credit shops, ran their models ran their leverage or ran their business platforms.

Micheal Vranos: (38:18)
History just tends to repeat itself when it comes to leverage, it's just amazing. And I do believe that what led up to it was... I mean I wouldn't say excusable, but somewhat understandable. What happened is that there was just such a fight for yield for so many years. And credit had almost monotonically gotten better, since 08 and there have been some hiccups without a doubt 2018 and late 2015. But every time that that happened, those hiccups happened. You were rewarded, to take more risk and it's just added to it. And then you saw volatility go down, as people started to look for yield that way by selling covered calls and all that. And when you sell volatility to somebody who has nothing to do with it, you actually make volatility go down more.

Micheal Vranos: (39:13)
And so the market kept grinding into this pick up pennies in front of the steamroller thing. And it was just bound to happen at some point who knew would be this something else. So you just really do need to keep that cash aside. I guess that's it. It's a sort of a repeat of what I said.

John Darsie: (39:30)
Yeah. What are your thoughts on inflation on the RMBS market? And are you modeling any inflation risk into your models?

Micheal Vranos: (39:38)
We don't right now model anything other than what would be I would say is rather benign inflation. I do understand that things have changed recently. I haven't reviewed any models recently. In terms of what the Fed has mentioned, I haven't really reviewed any models would take into account any significant difference from what we've had recently. I mean inflation in general does tend to help a lot of these assets that we're talking about.

John Darsie: (40:11)
Do you see an opportunity in a hotel CMBS and similar types of asset classes?

Micheal Vranos: (40:17)
I don't know. I'd have to talk to my PM. I don't have a strong opinion about that. I will say one thing, that a lot of people... The market is tends to be somewhat backward looking and even someone in your audience asked a question about what could cause a pause or a problem. I think all of us here need to acknowledge that the more subtle in one drawn out disaster scenario is that real returns go negative. And you're sort of alluding to that in your question, and that when the Fed has bought so much paper, and with inflation on the other end, outpacing the yield of the securities that it could be a slow death. And it's tough, especially for pensions and others. And that's a big concern.

John Darsie: (41:05)
I want to finish with a question about your philanthropic work, which I know is near and dear to your heart. You're one of the most active philanthropists on Wall Street you help lead the Help For Children Organization used to be called Hedge Fund Cares. Could you talk about a few other causes that are most important to you and the most satisfying part of all that philanthropy that you do?

Micheal Vranos: (41:24)
Sure, so there's a there's an intersection of philanthropy and science that for me, that's very interesting. I believe that we're going through a sort of a renaissance in the life sciences right now akin to what we went through in tech many years ago. And that you're seeing this happening now with different forms of stem cell research for example, I'm a big supporter of different kinds of stem cell research initiatives. Also, certain neurological diseases that may or may not have to do with stem cell research, the effect of the gut microbiome on diseases too. What we eat, things like that I think are really important. And it's more important to me personally than whether my phone works better or 5G or something like that. It's how are we going to live healthy for the rest of our lives? And I think it's very important. And I think we're going to see great strides, probably after I die, of course, but like I see great strides in that area. I'm very excited about that.

John Darsie: (42:34)
Well, you look great. You said your girlfriend gave you your haircut, but she did a fantastic job. So thanks so much for joining us, Mike. It was great to have sort of this long form format to be able to talk to you about all your experience, which I think is fascinating. Troy, do you have a final word for Mike?

Troy Gayeski: (42:50)
No, Mike it was great to have you on and again, I think compliments to just the breadth and depth of experience. And again, I keep saying the word longevity, but having invested in hedge funds for close to 20 years now, it's hard to stay in business over a long period of time and some of the most well known managers as recently as five years ago are no longer in business so compliments to you and your team for doing that for so long.

Micheal Vranos: (43:14)
Thank you, Troy. And thanks for the opportunity to speak today.

Panayiotis Lambropoulos: Risk Mitigation, Portfolio Construction & Seeking Alpha | SALT Talks #44

“Hedge Funds are at the forefront of innovation and flexibility.“

Panayiotis Lambropoulos, CFA, CAIA, FRM is a Portfolio Manager at the Employees Retirement System of Texas, a $28 billion retirement plan located in Austin, Texas. His responsibilities include sourcing, analyzing and evaluating potential third party managers deploying all types of alternative investment strategies.

“There is a lot of diversification and dispersion going on beneath the surface of the S&P 500.” This should benefit active managers and active hedge funds. Although passive management is getting attention, the recent rebound in the S&P is due to 4-5 stocks, which account for a quarter of the rally. More than 50% of the S&P is trading below its all-time highs.

Panayiotis finds Hedge Funds attractive because they provide risk diversification and downside protection. They are able to generate different sources of returns as a result of their adaptability with low beta.

LISTEN AND SUBSCRIBE

SPEAKER

Panayiotis Lambropoulos, CFA, CAIA, FRM.png

Panayiotis Lambropoulos

Portfolio Manager

Employees Retirement System of Texas (ERS)

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 public policy. SALT Talks are a series of digital interviews that we launched during this work from home period that provide conversations with leading investors, creators and thinkers.

John Darsie: (00:28)
What we're really trying to do during these SALT Talks is replicate the experience that we provide at our SALT Conference series. What we're doing there is really providing a window into the minds of subject matter experts and providing a platform to what we think are interesting and world changing ideas.

John Darsie: (00:43)
And today, we're very excited to welcome Panayiotis Lambropoulos to SALT Talks. Panayiotis is the Portfolio Manager for Hedge Funds at the Employees' Retirement System of Texas which is a $26 billion retirement plan located in Austin, Texas, the capital. His responsibilities including sourcing, analyzing and evaluating potential hedge fund managers, process and performance assessment, interviewing various fund employees and third party service providers and maintaining the due diligence efforts.

John Darsie: (01:12)
Panayiotis started in the alternative investment industry as a research analyst at Grosvenor Capital Management in Chicago. He later joined MCP Alternative Asset Management, a $6 billion Tokyo headquartered fund of funds and while he was working for that fund, he was actually still based in Chicago.

John Darsie: (01:29)
Panayiotis holds a BS in Business Administration with a concentration in finance and marketing from Boston College and an MBA in General Management from North Western University's Kellogg School of Management. So, as you can see, despite now living in Austin, Texas, he's very steeped in Chicago culture.

John Darsie: (01:46)
Panayiotis has earned his Chartered Alternate Investment Analyst designation, CAIA; Financial Risk Manager designation as well as the Chartered Financial Analyst Designation, the CFA.

John Darsie: (01:58)
And just a reminder for our audience during today's talk, if you have a question for Panayiotis, you can enter it in the Q and A box at the bottom of your video screen. And hosting today's interview is Anthony Scaramucci, the founding and Managing Partner of Skybridge Capital, a global alternative investment firm. And Anthony is also the Chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:17)
John, thank you. And I'm sure, Panayiotis, you'll love the way he pronounces your name. He's been working on that for the last month. So congratulations to you Darsie. That was well done.

John Darsie: (02:28)
Thanks.

Anthony Scaramucci: (02:28)
But I want to go to your personal background. How did you, we all have our different odysseys, to use a Greek expression. How did you get to Texas ERS? What got you thinking that that was the direction you wanted to take the career in?

Panayiotis Lambropoulos: (02:49)
Well first of all, thank you for inviting me in being part of this talk series and, given the pandemic and the times that we live in, I hope everybody's well on your side. Yeah, my arrival here is part life, part luck, part choices as is anything else with life. My personal background actually starts, if you want to start at the beginning of the odyssey, starts in Greece. I was born and raised in Greece. I was there until I was 13 years old.

Anthony Scaramucci: (03:18)
In Athens? Which area-

Panayiotis Lambropoulos: (03:20)
In Athens.

Anthony Scaramucci: (03:20)
In Athens, okay.

Panayiotis Lambropoulos: (03:21)
I was in Athens.

Anthony Scaramucci: (03:22)
Beautiful city.

Panayiotis Lambropoulos: (03:23)
Yeah, five minutes outside of downtown. And life kind of came at me unexpectedly. I lost my father when I was 13 years old. A family decision was to move to America. My mother's family was in Massachusets, hence my connection to Massachusets and Boston College. But I've always wanted to be in finance and investments and-

Anthony Scaramucci: (03:45)
Where did you move to, if you don't mind me asking? What part-

Panayiotis Lambropoulos: (03:47)
Central Massachusets, just north of Western Mass.

Anthony Scaramucci: (03:51)
Okay. Sure.

Panayiotis Lambropoulos: (03:51)
60 miles west of Boston.

Anthony Scaramucci: (03:53)
Yep.

Panayiotis Lambropoulos: (03:54)
Finished high school there as John alluded to. I did my undergrad at Boston College. Did a couple of years of accounting. Wasn't really my long term interest. Investments always was my real interest and passion and that interest actually was born from my grandmother who turned 100 last year-

Anthony Scaramucci: (04:15)
Wow. Congratulations.

Panayiotis Lambropoulos: (04:16)
Still with us. And she obviously, as you can guess, based on her age, she has seen a few things in her life. And the first thing she taught me was the power of compounding and saving. And when I arrived in the States, it was the advent period of mutual funds and markets were changing, so that's when my curiosity for investment really began. And through a friend, I ended up in Chicago, Grosvenor Capital Management was my foray into the alternative investment world back in 2000. That's where I got my start in this nuanced and new vehicle called hedge funds. I had no idea what it was but sounded interesting and different.

Panayiotis Lambropoulos: (04:58)
And to date myself, prior to my first interview, I ran down to a Borders, picked up whatever few books were available back then about hedge funds, just to prep myself a little bit for the interview. Luckily, they believed that the lights were on and somebody was home upstairs and I could pick up stuff quickly.

Panayiotis Lambropoulos: (05:17)
From there, as they say, the rest is somewhat history. Stayed in Chicago for 15 years. The big change from my time in Chicago was the financial crisis and the tsunami in Japan actually affected my life. MCP's business model is that to cater only to Japanese financial institutions and, in combination with the financial crisis and exposure to the tsunami that happened in Japan, there was a retrenchment in the company, there was a retrenchment in the industry. But I wanted to stay in the industry. I love this industry. I'm very passionate about it. And I ran across this growth here in Austin and the growth in the public sector. And my idea was that I could take my experience, hit the ground running, contribute to small teams right away; at the same time to learn and build on my investment acumen, my personal growth. And that's what kind of brought me here to Austin as they were building a new program.

Anthony Scaramucci: (06:19)
Your foray into hedge funds. Let me, because I'm face with this dilemma every single day. Why hedge funds? Active management, passive management, yea, why hedge funds Panayiotis?

Panayiotis Lambropoulos: (06:35)
The value-

Anthony Scaramucci: (06:37)
Make the case for me and then obviously John as he's making the case, please record it two times and so this way we can give it to our sales force. Go ahead, make the case.

Panayiotis Lambropoulos: (06:46)
Well, in terms of hedge funds themselves, the overall how we view hedge funds here at ERS, we believe that it can be utilized to protect and preserve investment capital, provide risk diversification and provide that downside protection that everybody talks about; downside protection that became valuable this past February and March. And hedge funds overall, we think of as businesses as investment conduits, not as strategies. And so we're talking about individuals that are able to take advantage of massive dislocations and the accompanied volatility and uncertainty that comes up with those massive dislocations.

Panayiotis Lambropoulos: (07:29)
The other thing I would say about hedge funds is that, and [inaudible 00:07:34] enough do about this, is they're always in the forefront of innovation and flexibility. Markets change, investment opportunities change and hedge funds offer that opportunity to generate a different source of returns by having that flexibility and innovation on their side.

Panayiotis Lambropoulos: (07:51)
At the end of the day, what we really focus on, for example, is a clear purpose, an expectation of what hedge funds are intended to do within our portfolio. That sends to the foundation of whether or not we are successful or not, how we measure success. If you enter into a hedge fund saying, well, I just want high returns or I want a hedge fund that always beats the S&P, more often than not, investors will be disappointed.

Panayiotis Lambropoulos: (08:19)
First of all, the word hedge is in hedge funds. Unless you're 100% at long, you're not going to keep up with those returns. So for us, we set a purpose and expectation of what is it we want this tool, in our overall toolbox, to do for us and do we succeed. For example, in our absolute return portfolio, one measure of success is whether or not it truly provides diversification to the rest of the trust. We have quantified that success by targeting a beta of 0.4 or less for our portfolio to the rest of the trust. Inception to date, which is almost eight years now, we have succeeded. Why? Because our data is less than 0.4. Are we targeting returns? Yes. Just like everybody else. And we have met those returns. But the primary purpose has been met. And that's how we measure success. And anecdotally, that success was met in March. So that's one way to measure success; what is the success, what is the purpose, what is it that you want to do.

Panayiotis Lambropoulos: (09:26)
In terms of active versus passive, obviously the last 10 years have been unusual and since the great financial crisis, I think that you have to figure out what is it that's been present in his worK or not for his active or passive [inaudible 00:09:43]. So, for example, since the financial crisis we have definitely seen managers being challenged by the fight that we've had a higher concentration of opportunities. Less number of opportunities, higher capital changing the same number of opportunities. At first glance, you may say that the recent rebound in the S&P from the March lows is probably the same issue. We are driven by five or six stocks, at most two sectors, and anecdotally we can see other data that lead us to believe that this is a very thinly traded breadth type of recovery.

Panayiotis Lambropoulos: (10:23)
But, there's a lot going on below the surface. The five or six stocks are only the tip of the iceberg. If you look below the surface and under the water. For example, we see that almost a fifth of the S&P companies are now trading more than 50% below their all time highs. The average stock in the S&P index is about 30% below its peak. Three out of the 11 sectors in S&P are in the green; the rest are in the red. And as I mentioned, about five of the largest stocks that are driving this recovery account for a quarter of the rally since the March lows. And those five stocks, in aggregate, have close to a $7 trillion market cap, which is larger than the Japanese TOPIX index. So there's a lot of diversification dispersion going below the surface which should benefit active management and active hedge funds. We saw high pairwise correlation since the financial crisis that seems to be reverting itself. Again, a lot going on below the surface if you're just looking at equities.

Panayiotis Lambropoulos: (11:31)
The same story could probably be said about the credit market as well. So, overall, and the last thing I'd probably mention is momentum. We've seen growth factor outperform value for the better part of the last 10 years. Now we've seen a reversal and whether you believe we're coming out of the current recession or eventually we're going to grow out of it, or perhaps fall in a double dip recession, value factor, which tends to be a contrarian play, should outperform growth.

Panayiotis Lambropoulos: (11:58)
So there's a lot going on here in terms of dispersion, in volatility and uncertainty that should benefit hedge fund strategies.

Anthony Scaramucci: (12:07)
So, listen, that's music to my ears. And I totally agree with you, particularly with the concentration level. We've both been doing this a long time. What do you think happens to those five stocks, even if the fundamentals of something that's trading at 170 times earnings are strong, isn't it possible that you could see multiple compression and have a stock trade to 80 times earnings and still be growing at 15 to 30% but lose half your money?

Panayiotis Lambropoulos: (12:36)
Before I address that question, to tie the knot about the active versus passive argument. At alpha and beta, because that's what, at the end of the day, what we're really talking about, in my opinion, they're often spoken, or too often spoken in absolute terms. It's either one or the other. First, I think there's room for both and you can allocate to both types of factors, but more importantly I think, I think of alpha and beta as bookends. I don't think of them as absolute terms. And what I mean is, if you have beta on one end and alpha on the other, you have a spectrum of other strategies that could benefit. It's not easy to quantify alpha in main point.

Panayiotis Lambropoulos: (13:15)
So, given where we are right now in the cycle, for example, we might anticipate that distressed investing should do well a year or two or three years from now. Distressed investing, I think, is a form of alpha. You need a good team to source, a good team to work out these opportunities. It's not easy to generate the alpha. But it is a form of alpha that should be accounted for in your portfolio.

Panayiotis Lambropoulos: (13:41)
So that's another argument for active and alpha [crosstalk 00:13:44].

Anthony Scaramucci: (13:45)
It's well said. And we know, the passive for the cycle, we know that that trade is very, very crowded. It's the S&P five. And as you're pointing out, it's the S&P 495. And so what do you think happens there?

Panayiotis Lambropoulos: (14:02)
So I think at the moment, in conjunction with that, there's a lot of conversation about valuations and there is definitely bifurcation between the financial market and economic reality. Whether it's the stock market and the real economy. There's definitely a bifurcation between the two. And right now, what I would probably do is to separate first and foremost the market between technicals and fundamentals. At the time, I think at the moment, technicals are definitely outwinning fundamentals, in serving as heavy tailwinds for the current market. And part of the technicals I would allude to or point out to are first of all, M2. Money supply provided by the Fed. If you overlay the current Fed M2 Saint Louis Central and Bay graph with the S&P, it's a one for one relationship. The other favorite acronym, TINA. There's an alternative. We have lower rates and investors need yield, they need returns, by default, they're looking for a more return seeking assets, like stocks.

Anthony Scaramucci: (15:16)
Sure.

Panayiotis Lambropoulos: (15:16)
We have FOMO. Right now, we have at the lowest percentage of shares outstanding being short in the last 20 years. Even the most bearish of skeptical investors have to turn bullish so they're not being overrun in their short book.

Panayiotis Lambropoulos: (15:33)
And so, the technicals, I think are definitely overwhelming. On the fundamental side, price seems to definitely have run up ahead of earnings. The question is, at this moment in time, how much have been priced in, looking ahead, and what type of key assumptions are anybody on a fundamental case is making about COVID, about earnings growth, about unemployment rates, about GDP growth. It seems like a perfect storm of normalizations has to come in play in order for everything to work out and justify the current fundamentals and valuations.

Panayiotis Lambropoulos: (16:16)
What I would say though is, two things. One, the valuations that we're alluded to again is concentrated to one part of the market. It's close to $5 trillion of cash, sitting on the side. We could see a rotation once we get more validity of some type of recovery and stability in the market, so that cash could find its way in other parts of the market, again perhaps cheaper parts of the market, sectors that haven't participated in this recovery or rally.

Panayiotis Lambropoulos: (16:45)
The other point I want to make is, although we're making the argument that the market is perhaps frothy or expensive; we have been in` a new regime of rates in the last 10 years and we're most likely going to remain in the same regime for the next 10 years. Unless we have unexpected, unforeseen spike in inflation. So if we're looking at a valuation matrix of any choice, compared to a historical mean, I could argue that, given the new regime and lower discount rates, that mean eventually will have to come up. And so whatever absolute valuation you're looking at, to the new mean that should come up, the market is probably not as expensive as you may think. If participants think that the market is 15/20% overvalued based on a valuation matrix, I could argue it's probably far less, maybe five to 10 range. So it may be not be as extreme as we thought.

Anthony Scaramucci: (17:41)
It all makes sense. John is chomping at the bit here to ask questions. We're getting a lot of audience participation and so I'm going to turn it over to John in a second. And everything you're saying makes great sense. But I want to go to an area of the market that was an epicenter of the March sell-off, which was the structured credit area of the market which has been a little bit of a recovery. Do you have an opinion on structured credit, one way or the other?

Panayiotis Lambropoulos: (18:10)
We have an internal team that focuses on structured credit, internal credit. We were quick to put some capital to work. As you alluded to, we saw the big sell-off in March. Within structured credit, we haven't seen a rebound but there has only been a rebound in the AA, AA. The lower credit rating hasn't recovered as fast, so there might be still opportunity there. The problem has been the Fed. The Fed has acted as a backstop to a lot of the credit migration that we thought we were going to see and the CCC buckets were most likely going to violate a lot of their interest coverage or OC coverage and that's what we were expecting. But for the time being, the Fed has acted as a backstop. The only thing the Fed had to do was announce its intention of getting involved in the market and we saw a rebound. It hasn't even put to use all of the capital it announced for various programs.

Panayiotis Lambropoulos: (19:08)
And so, I think there still needs to play out. We're keeping an eye on it. Other than the early buying opportunity that we saw in March, we haven't put yet additional capital to work. We've seen some rebound but we're in the wait and see mode.

Anthony Scaramucci: (19:25)
And why do you think the Fed hasn't really, they obviously focused or at least directed attention to high yield and they did direct some attention to investment grade, but why do you think they've laid off of most of structured credit except for the new issue market that's AAA rated?

Panayiotis Lambropoulos: (19:43)
It's hard to say. I think, overall, the Fed's intention was to stabilize the market, provide liquidity, take advantage of the lessons learned from OA and make sure we didn't have a liquidity problem that turned into a solvency problem. And so I think they wanted to bookend the market to provide some comfort that at least the market would function, companies would have access to capital, and at the very least, again, not that I completely agree, but by that technical backstop, at least for investors not to start tricking out paper simply because they had to keep up with indices or they were violating any credit rating allocations that they had in their portfolio. And so, in a way, we migrated from you're too big to fail to nobody's allowed to fail. That's I think the big difference that we've seen in the last 10 years.

Anthony Scaramucci: (20:35)
Yeah, it'd make sense. We're in very different territory than the market that you and I grew up in where the Fed had a light touch and they did some monetary policy lightly and they did some currency intervention but now we seem to have a very big macro-trader in the market, known as the Federal Reserve, frankly the global central banking system.

Anthony Scaramucci: (21:00)
But John, I know wants to ask some questions, so please interject John. I know you've got some-

John Darsie: (21:05)
Anthony, just because Panayiotis has a very distinguished beard during the work from home period doesn't mean he's as old as you. He just doesn't use the same type of hair dye.

Anthony Scaramucci: (21:17)
First of all, it's not quite hair dye. It's shoe polish. And I can send you a case of it any time you want. And I would recommend when you get to be our age, you don't want to have a lot of snow on the roof, okay. And right now, you look like you've got a lot of snow in the basement there. We can talk [crosstalk 00:21:35] when this is over. See, he always comes in and tries to give me a karate chop to the Adams apple. See that?

John Darsie: (21:41)
Have to keep him honest. So we talked about structured credit Panayiotis, but I want to talk about more broadly the hedge fund space. Obviously there's a lot of technical dislocations in March in response to the pandemic and the economic fallout from the pandemic. What asset classes to you became most attractive during that period? What asset classes within the hedge fund space still look attractive? And what are others that you think'll be more challenging in the near term as we try to rebound from all the effects of the pandemic.

Panayiotis Lambropoulos: (22:12)
So, really quickly, on the liquid space, one area that we might begin looking at and it may sound a bit contrarian, might be the equity long short space. The one argument is the one I've just made in terms of increased dispersion despite the massive run up in the markets. The other argument is that whether you believe we're headed into a double dip recession or that we might eventually be part of the next economic cycle. Either way, again, we'll either see dispersion or we may see a rotation in the market. We may see value overtaking growth. There should be a lot of activity within the equity long short space.

John Darsie: (22:52)
The latest letter that they're describing the recovery with is a K shape recovery. So that sort of fits with your theme of dispersions. There's going to be winners and there's going to be losers. You just have to find talented managers that are able to pick those out?

Panayiotis Lambropoulos: (23:05)
Correct. And obviously there's a big challenge again on that side will be the short side. But we believe eventually that we may be able to find those managers that have that long history, sustainable history and persistent history. Given the anticipated choppiness of the market, I know it's been mono-directional essentially since the March lows, but we do anticipate choppiness and increased volatility. I think we're seeing signs of it now. We have seen the massive V shape bounds, albeit of extreme lows, you would expect that. But we're starting to see a sideways movement in the market as unemployment benefits are now on the wayside as more uncertainty continues with whether or not there'll be more hotspots, how long it's going to take for some type of medical solution for COVID.

Panayiotis Lambropoulos: (23:57)
Again, that should increase uncertainty and volatility so relative value strategies and global macro-strategies should benefit from that type of environment, especially our discretionary lower macro. But again, the Fed is the big elephant in the room. And our discretionary global macro has been fighting that headwind for 10 years and that will be, again, the big challenge.

Panayiotis Lambropoulos: (24:19)
On a less liquid side, we have an opportunistic credit portfolio and we are taking a look there within longer term, we're going to look at the stress. But we're also looking at some niche opportunities like bank risk sharing and bank regulatory capital sharing. Compared to OA, financials are not the epicenter of the problems that we have today. Conversely, banks will be expected to be liquidity providers and help in the economic recovery. The market itself, the BRS market has grown. The latest 2019 figures show that it's up to $100 billion or so.

Panayiotis Lambropoulos: (24:59)
And so we believe that that will be an interesting strategy. It's a strategy that we've had some exposure to. We're looking to perhaps increase that exposure in terms of a strategy. And we are looking, potentially at distress down the road. In the immediate future, the one area that I believe might offer an interesting opportunity is direct lending, but not in a good way. Following the financial crisis, we saw, partly because of the [inaudible 00:25:27] rule, partly because of the economy, a new market being created, a new vacuum coming in to provide that credit which was direct lending.

Panayiotis Lambropoulos: (25:34)
And we've seen unprecedented growth in the last 10 years for that market. The problem is, it's a market that hadn't been really tested. And one thing that we saw, there's obviously a lot of money being put to work, raised and put to work right away. And I think this type of a market environment is going to show the true underwriting skills, the true ability for our teams that should be in the direct lending market, those that shouldn't have been in the direct lending market. And one area of concern is that we're not seeing in docs right now, one area that a lot of our managers pointed out, is the lack of maintenance coverage within the underwriting standards.

Panayiotis Lambropoulos: (26:15)
And so it's a bit of reap or rhyme if you will with the subprime trade of 06/07. It maybe take a different turn this time around. But we may have a secondary distress to direct lending market to take a look at. And I thought that would always be something interesting to look at.

John Darsie: (26:36)
If you wait long enough, everything becomes an opportunity, right.

John Darsie: (26:40)
So you spent almost your entire career in the hedge fund space evaluating other managers in a multi-manager type of format. When you're evaluating potential investments in hedge funds or other alternative funds, what type of organizational characteristics do you look for and personal characteristics do you look for in the investment team?

Panayiotis Lambropoulos: (26:58)
First and foremost, it starts whether it's our absolute return program or merger manager program that we revamped a couple of years ago. It starts with the philosophy that we're looking at businesses and not funds. You always want to think of it that way, whether they're managing a portfolio or building a widget. Doesn't matter. You think of it as a business first. Given who we are, who we serve, the amount of capital we're putting to work. We need to partner with institutional caliber type firms.

Panayiotis Lambropoulos: (27:27)
Obviously from an investment or operational due diligence point of view, we look at qualitative and quantitative factors just like everybody else. On the quantitative side, we'll look at various sources of return, key periods of performance, both good or bad. It's not simply about the quantity of returns but we want to assess the quality of returns as well. And we overlay that performance with key investment or risk management decisions and opportunity sets.

Panayiotis Lambropoulos: (27:54)
On the quality side, obviously we want to look at the quality of experience of team members, honesty, that's obviously much more important post-Madoff. We want to get an inside look in a roadmap of the thought and the process. It's not always about the answers you get. But it's also about how somebody gets to those answers. And that's something I really pay attention to.

Panayiotis Lambropoulos: (28:17)
And obviously culture and opportunity. The goal of our process is to try and tie performance or statistics back to the stated strategy, the risk constraints and the opportunity set. At the end of the day, are they doing what they said they were going to do.

Panayiotis Lambropoulos: (28:35)
At a high level, that translates to probably two words that come to mind. Consistency and adaptability or flexibility. We want to see consistency in thought process, the investment decision making process, risk management and the team itself. We want to examine the throughput, not just the output. And in terms of flexibility, I'm not talking about strategy drift, but somebody that's able to adapt to new market conditions, opportunities, new tools that become available to them.

Panayiotis Lambropoulos: (29:06)
At the below level, at the PM or team level, some characteristics that I think make investment hedge fund managers or investors are rather simple. The desire to succeed or build something that matters to them and their team or their legacy. The ability to communicate, both internally and externally to key stakeholders. The drive to be better and do better every day, driven by strong analytical skills.

Panayiotis Lambropoulos: (29:32)
High emotional IQ. You need to have no fear in making decisions, making investment decisions, taking those risks. The ability to listen and put together a lot of information from various sources and come together with some type of outlook. And the self-awareness, to be aware of your strengths and exploit those strengths, but also mitigate your weaknesses or work on your blind spots.

Panayiotis Lambropoulos: (29:58)
At the end of the day, what is due diligence? We want to make sure that the foundations that made a successful hedge fund in the past are present today to give us and them the ability or higher probability than not, to be successful in the future.

John Darsie: (30:15)
Yeah. I think at Skybridge, that's something that we certainly concentrate on as well. I think the post-2008/9 period there were a lot of investment managers, to use a Greek word that were apotheosized, where people were assigned genius to them because of bets they made as a result of the crisis, but haven't necessarily performed in the 11 years after that. It's very important to continue to drill down on consistency of process and adaptability to different market conditions like you mentioned.

John Darsie: (30:42)
In your emerging manager program like you mentioned, why is it important to you guys to have an emerging manager program? What do you look for in emerging managers and what advice would you give to managers that are starting out that are looking to distinguish themselves and bring that institutional quality process to their investment team?

Panayiotis Lambropoulos: (31:02)
So the thesis to start or revamp our investment emerging manager program was actually twofold. One, as Anthony alluded to, we've been doing this for a while. We've seen a lot of names come and go. We know who the names are. But I thought that we were reaching an inflection point of what I call a generational gap. We start seeing a lot of the successful managers of yesterday either shutting down, retiring, turning their businesses into family offices. So there had to be a transition, a passing of the baton if you will of that next generation. I thought it was becoming increasing in terms of its infrequency. So we wanted to take advantage of the fact that we wanted to find the future manager that is going to be successful, earlier and today.

Panayiotis Lambropoulos: (31:51)
The second part of this thesis was, and this was pre-pandemic, capital raising environment was extremely challenging. And so if we were in a position to provide that capital and be that liquidity provider, we could come from a position of strength and leverage in terms of what type of terms and conditions we could ask for, what type of inside look we could get from the manager themselves.

Panayiotis Lambropoulos: (32:16)
Third, given the amount of capital we're going to put to work, we thought that if we could establish a relationship very early on, then we could get an inside look of what their strengths and weaknesses are, we can then, down the road, perhaps form or put together some type of solution based product that builds upon that strength to either take advantage of that to solve a problem for us, the trust, or offer them the market in general.

Panayiotis Lambropoulos: (32:45)
So that was kind of the general thesis about three or four years ago when we kind of started this process. And we announced the partnership with PAAMCO Prisma in June of '18. We also wanted to offer the market a unique structure that was a little bit different from other seeders. We believe we have achieved that in the form of the fact that ERS is willing to invest in the co-mingle structure in order to build a new or upon existing track record. By agreement and by definition of the business model, PAAMCO Prisma will invest side by side with ERS, will match minimum dollar for dollar what we're willing to put into work and it will do so through the SMA. We get the transparency of that account, because PAAMCO shares that transparency. We negotiate our own terms and conditions but we also offer and ask for operational and financially focused parachutes, if you will, to protect ourselves, which collapse to those of PAAMCO.

Panayiotis Lambropoulos: (33:46)
So in a way, for ERS, we've created, if you will, a synthetic SMA, without having to open SMA. We get the benefits of SMA without having to open and SMA. So that was the idea. That was the execution. And at the end of the day, what we're trying to do is create a farm system for ERS. We're looking at each individual strategy on a standalone basis; we're looking at each manager on a standalone basis. And the idea and the hope is that if this manager is successful, we will put them either in our absolute return portfolio or find a home for them somewhere else within the trust, as long as they're bringing some type of skillset, some type of exposure that we can't replicate in-house and that will be their value proposition to the trust.

John Darsie: (34:32)
That's fascinating. Again, I have some echos to the way we tried to build a farm system at Skybridge as well, because you never know when you're going to need to call on certain strategies or funds with certain profiles to exploit an opportunity set that presents itself in the case of a surprise pandemic.

Anthony Scaramucci: (34:47)
Let me interrupt for a second because I'm very curious as to how these guys think about the pandemic and the impact that it's having on their investment strategy and the long term prospects for the US economy. What are your thoughts there with your economic team?

Panayiotis Lambropoulos: (35:02)
In terms of the pandemic?

Anthony Scaramucci: (35:03)
Yeah.

Panayiotis Lambropoulos: (35:05)
We don't have necessarily economists in house. Obviously each team has its own view. We talk, obviously to a lot of managers and [inaudible 00:35:17] to gauge what the general consensus is. Obviously there's still a lot of uncertainty. I think the markets, by the hour, by the day, sway between hope that a new vaccine is on the horizon, that a new vaccine was announced in terms of what stage it's in, or a new technique to deal with a lot of the symptoms. And then will we trace back to some type of uncertain despair if that hope turns to be untrue or misguided or misrepresented.

Panayiotis Lambropoulos: (35:47)
At the end of the day, the big unknown is when some type of medical safety net is going to be provided. That's what we're all waiting for. And assuming we get there within six, 12, 18 months from now, I think the bigger question is well, what paradigm shift have we all witnessed at once and which paradigm shift becomes temporary and which becomes permanent. And the big question is the consumer. How will they change their behavior? How will their spending change? Is it going to normalize? It is going to take some time to go back to normal? Airlines could open all they want, but if you and I don't feel safe getting on the plane, it doesn't matter.

Panayiotis Lambropoulos: (36:28)
And so, that's how we're taking it very cautiously that there is a lot of noise, the signal noise ratio is high and we're taking it very slowly. We're trying to adjust our due diligence process just like everybody else and thinking about the long term. But the economic uncertainty is still there. But at the end of the day, we are long term investors. That's why we have an IPS in place. We're sticking to it. We're not trying to panic. And we're taking it week by week, month to month, as the new information becomes available. But as long as we stick to the IPS, I think you should be fine.

Anthony Scaramucci: (37:06)
Absolutely great advice.

John Darsie: (37:08)
And in terms of the pandemic, before we let you go, you haven't lived through quite as many financial crises as Anthony, but how do you think the aftermath of this crisis plays out over the next five to 10 years in the hedge fund industry. You've commented on that a little bit earlier in the context of your response regarding active and passive management, but if we look out five to 10 years, what do you think the landscape is in terms of the hedge fund industry is in the wake of this pandemic?

Anthony Scaramucci: (37:32)
Before you answer that, come on, that was an ageist shot at me from a Millennial. So, the two of you are going to take me in basketball when this is over. Okay, we'll see how that goes.

Panayiotis Lambropoulos: (37:44)
[crosstalk 00:37:44] his boss. Most unheard of.

Anthony Scaramucci: (37:48)
Oh my God. All right. Go ahead. Answer the question.

Panayiotis Lambropoulos: (37:53)
If it had to vision about the industry, first of all, I think the AUM we're roughly $3 trillion and that's been stalling and has plateaued in the last couple of years. I think assets under management I think are actually going to increase. I think that alternatives in hedge funds are going to be able to offer a different source and a different type of return, again, most likely would be lower yielding environment and a lot of liability driven or liability based portfolios are going to struggle to meet those targeted returns that are still somewhere in the area of 6.5/7%. Unless, we either concentrate a portfolio or you lever up. The math is very simple.

Panayiotis Lambropoulos: (38:37)
And so I think alternatives will, again, prove their value and assets will increase. I think the number of hedge funds that are out there will shrink as I think they should. I don't think there're truly eight, nine, 10,000 hedge funds out there. I think if we were to take an honest look at what makes a hedge fund, we're probably in the area of 1,000. And if we really filter in terms of quality, we're probably far less than that.

Panayiotis Lambropoulos: (39:01)
And so I think the number of hedge funds will probably decrease as it should and we might see actually more consolidation in the industry of hedge funds and firms coming down within a greater umbrella, for greater economies of scale, greater opportunity to offer variety of solution based products. I think technology's going to play a bigger role in the hedge fund industry. Technology has pulled forward a number of theses that we thought it might play on the next five or 10 years, and fast forward them to today. Perfect example, look at how we're communicating between the three of us today with such ease. But I think technology will become a bigger part of hedge funds. And I'm not talking about AI and machine learning. I'm talking about greater efficiency in use of risk management, greater use in terms of operational efficiency, back office to front office.

Panayiotis Lambropoulos: (39:56)
I think technology will become a bigger part and should be embraced. It'd be used greater in due diligence. I can see more data rooms being opened. A lot of virtual visits becoming the norm and part of the due diligence process. I call it the humanizing of due diligence. I can see us binge watching a bunch of IDD videos as opposed to binge watching Netflix and we just hear what the manager's doing and saying, as opposed to reading the typical email DDQ.

Panayiotis Lambropoulos: (40:26)
In terms of strategies, I think ESG, impact investing is here to stay. And I think it will be a bigger part, of not just the general market, but I think portfolio investing and portfolio consideration.

Panayiotis Lambropoulos: (40:41)
And lastly, I think because alternatives are already a bigger part of portfolio construction, I think the modernization of risk of portfolio construction will probably improve. And what I mean by that, for example, right now we're still kind of stuck in your typical two moment portfolio mean variance optimization. Expect a return in standard deviation. We might have to add other moments in that portfolio construction, for example, a [inaudible 00:41:10] ratio, to consider a more optimal portfolio construction as we account for alternatives. So I think that's a few things that might change in the future.

John Darsie: (41:21)
Well Panayiotis, I think that's a great tour de force on the hedge fund industry. It's been a lot of fun getting to know you a little bit better over the last few months and comparing notes and hopefully we can get you to one of our live events once that becomes the norm. But for now, we'll settle with some fun Zoom conversations.

John Darsie: (41:37)
Anthony, you have the final word?

Anthony Scaramucci: (41:38)
No, that was a brilliant exposition of what is going on in the industry and I think you made a very compelling case to have that solid diversified asset allocation plan and what we're learning about markets, they're moving so fast, we're not going to have time to change our plan. And so I tried to tell the retail investors, some of which are on this Zoom call with us, everybody has a long term investment plan until they have short term losses. And then once they have short term losses, they start setting their hair on fire, running around in a circle.

Anthony Scaramucci: (42:12)
You made an amazing case for people just to stay disciplined and then the different buckets and I really appreciate you doing that and let's get you back at one of our live events soon.

Anthony Scaramucci: (42:23)
Thank you again.

Panayiotis Lambropoulos: (42:24)
Thank you and I appreciate the invite and hopefully the first event might be Dubai, I've never been.

John Darsie: (42:29)
Hey, [crosstalk 00:42:30].

Anthony Scaramucci: (42:30)
We're going to get you out there. We did a great even in Abu Dhabi last year, so, that's a deal. You're on.

Panayiotis Lambropoulos: (42:36)
Well, thank you again for the invite. Appreciate being part of the talk series.

David Dayen: Author "Monopolized: Life in the Age of Corporate Power" | SALT Talks #43

“I’m hopeful that we can see this as beyond left and right and as a problem that affects all of us.“

David Dayen is the Executive Editor of The American Prospect magazine and the Author of Monopolized: Life in the Age of Corporate Power. He writes about the effects of power consolidation across technology, manufacturing and more.

“We have a problem when smaller collections of bigger companies control our economy.” The breaking up of monopolies has traditionally been a conservative idea, but more recently we’ve seen liberal ideology lay claim to its principles. This considered, it still remains a largely bipartisan initiative, albeit for separate reasons.

One company has no incentive to provide an exceptional product. Having one company responsible for large amounts of people and products creates severe supply chain risks and results in city abandonment. With regard to companies like Amazon, “You cannot control a platform and compete on the same platform.”

LISTEN AND SUBSCRIBE

SPEAKER

David Dayen.jpeg

David Dayen

Executive Editor

The American Prospect

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 public policy. Assault talks or a digital interview series that we started during this work from home period are going to continue indefinitely even after hopefully we get back to normal here sometime soon. And what they are? Their interviews and conversations with leading investors, creators, and thinkers. And what we're really trying to do with the SALT Talk series is to provide our audience a window into the minds of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And today we're very excited to welcome David Dayen to SALT Talks. David is the executive editor of The American Prospect, which is a daily online and quarterly print, American political and public policy magazine dedicated primarily to American liberalism and progressivism.

John Darsie: (01:02)
He's also an acclaimed author, and his most recent book being a Monopolized: Life in the Age of Corporate Power, which was released in July. Monopolized is a riveting account of what it means to live in this new age of monopoly and how we might resist this corporate hegemony. David's work has appeared in The Intercept, The New Republic, HuffPost, The Washington Post, The LA Times, and many more outlets. His first book called Chain of Title: How Three Ordinary Americans Uncovered Wall Street's Great Foreclosure Fraud was the winner of The Studs and Ida Terkel Prize, and it was released by the new press in 2016. If you have any questions for David during today's talk, a reminder please post them in the Q&A box at the bottom of your video screen. And conducting today's interview will be Anthony Scaramucci, who I know read David's book and was fascinated by it. Anthony is the founder and managing partner of SkyBridge Capital, a global alternative investment firm, and he's also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:02)
Hey John, thank you. And David, thank you so much for agreeing to our invitation. I thought the book was fascinating. We'll get into the book in a second. I'm old enough to remember Studs Terkel and his living history stuff, so that's an amazing award for you, God bless. Before we get into the book though, tell us how you got to where you are. Why did you become a writer? When did the light bulb go off in your brain that you were going to have this sort of career?

David Dayen: (02:32)
Yeah, I kind of came in through the side door. I was working in television, doing a lot of shows up on the top of the digital tier of those networks. And I learned about a thing called political blogging. This was back in 2002, 2003. If you gotten involved in that you were part of a pretty small group and you could advance pretty quickly. And so I started a blog in 2004 I believe, and sort of advanced on the liberal side of the spectrum. And that gave me more opportunities, more opportunities. And I was still working in television, but sort of doing this on the side. And then I was sort of doing this and working in television on the side. And eventually it became clear to me that this is what I wanted to pursue. And I was really fortunate in my career to be able to write these books and become the executive editor of the Prospect. And it served me well.

Anthony Scaramucci: (03:40)
Essentially you say the liberal side. And so what I find fascinating about the busting of monopolies is that it used to be a conservative idea. I think we both know that. It generated out of the idea that there was too much power at the top and you needed to create more of a free enterprise system by shaking the power of the top and unleashing all of that innovation. So take us through why it's no longer a conservative idea. What do you think happened David?

David Dayen: (04:10)
I don't know that it's not at the ground level. I talked to people in this book who are libertarians, I talked to people who were Trump Republicans, who see this problem of concentrated corporate power very directly. I talked to one woman who is a big Trump supporter, and she was in a home that was purchased by Blackstone and I said, "Well you know, that Stephen Schwarzman is also a big Trump supporter. You're saying that Blackstone is the source of your problems. She said, "Yeah, I know. I'm trying to write to him, and I'm trying to figure that out." But I explained to her that Teddy Roosevelt was really the initial trust Buster and she said, "Well, I guess I'm a Roosevelt Republican then."

David Dayen: (04:50)
So I think there is a consensus left, right, center, whatever. If you talk to people about their daily lives, that's something is wrong, that the economy is rigged in some way, that these large interests are having a major effect on their lives in ways that maybe they can't talk about it as monopolies or antitrust. But they know that there's this level of corporate power that is influencing what they do, what they say and what they are able to do in major ways.

David Dayen: (05:24)
At the top, that's an interesting question. Why monopoly has moved sort of and shifted from the left to the right in the political sphere, in the halls of power. There still is a little bit of residual bipartisanship there. We had a hearing in the house antitrust subcommittee with CEOs of Amazon and Google and Apple and Facebook, and there were piercing questions from both sides of the aisle on the level of power that these large tech companies have. So I'm hopeful and it's one of the reasons I wrote the book and that we can see this beyond left and right. And we can see this as a problem that affects all of us.

Anthony Scaramucci: (06:08)
So explain to the lay people, and some of the younger people that listened to these SALT Talks, why it would be important the concept from an economic perspective of breaking up a large corporation, what are the benefits to that? And why would we do that? And there are some people out there that would say, "Well, the person was able to get the corporation to where it is. Isn't it unfair that we're breaking it up?" How do you respond to those?

David Dayen: (06:34)
Well, I mean, we've had laws on the books for over a hundred years that say that competition is something we want out of the U.S. economy. And if we don't have it, we get a lot of residual problems. So my view and what I write about in the book is that it goes beyond just sort of, "Oh, I only have one cable company. And so they charge me more." It goes well beyond that. Concentration is equality problem because if you have nowhere else but one service provider, they have no incentive to give you a quality product.

David Dayen: (07:13)
Concentration creates hidden risk in the economy where disruptions in supply chain for example magnify when there's only one supplier, we've seen this during the pandemic with respect to supplies for medical use like PPE. Concentration creates not only personal inequality, but regional inequality, where you see these regions that have been left behind, and these winner-take-all cities that have popped up and really created this abandonment of parts of middle America. And the wealth that was in these communities has been sucked out and is moving to these large corporations rather than staying within with small businesses and small enterprises. So on a variety of levels, I feel like we have a problem when we have smaller and smaller collections of smaller and smaller or bigger and bigger companies controlling too much of our economy. And innovations is another one, we see this in the tech sector where they have what is called a kill zone. Where if you get too prominent, that your product is either copied by the big guys, or you're bought out by the big guys, and then they take your innovation and they throw it away.

David Dayen: (08:35)
So that has a direct effect on the economy more generally. We've seen startup business formation cut in half since the 1970s. So I think it goes beyond just sort of the consumer welfare concept that largely is talked about in terms of price, which is way that we sort of judge mergers today. It really goes into more and more larger issues around the economy that we're seeing right now. And then in the book, I bring up a whole bunch of other issues that this touches on.

Anthony Scaramucci: (09:11)
So one of the great ironies which you point out which I love is the breakup of AT&T, unfortunately I'm old enough David, you don't look old enough, but I'm old enough to remember that breakup. I was 20 years old and we busted AT&T which is hard to believe now controlled all of the wire, telecommunications and was at the early onset of cellular communications. And it controlled everything. We broke it up into seven companies. It unleashed this massive amount of innovation in the society and allowed for international cable to be run and satellites to be launched. And lo and behold, the companies that we're about to talk about are really the product of the breakup of that very big monopoly, AT&T. Where now you have Google and Apple and Microsoft, and all of these people have benefited from that innovation. So these large corporations are now dominating daily life. What would be your prescription? If you were the monopolists in the United States, what would be your prescription to make things better? And what do you think would happen from an innovation perspective if we followed your prescription?

David Dayen: (10:21)
Well, I think it's absolutely true as you mentioned, and it wasn't just the breakup of AT&T, but the [inaudible 00:10:27] consent decree with AT&T which said everything from Bell Labs needed to be compulsory licensed out to electronics firms that paid a fair rate. And that created the electronics industry in the United States, which has created so much wealth for this country. And you see this recur over and over-

Anthony Scaramucci: (10:47)
Let me just stop you for one second, because you pointed ... What was happening is Bell Labs was creating and patenting all this great technology and they were sitting on it.

David Dayen: (10:55)
And doing nothing with it.

Anthony Scaramucci: (10:56)
Yes. Because they were collecting very high economic rent from their let's call it the copper wire business. So the forcing of that treasure trove of technology to be brought to the universe led to great advancement. Would that be fair to say? I mean, that's more or less correct.

David Dayen: (11:12)
Correct. Correct. Yeah. Bell Labs was one of the top R&D facilities in the United States at that point. And allowing those innovations to actually be used was great for the country and great for the economy. We see this recur over and over again. IBM forced interoperability and splitting their software from their hardware led to a software industry. The Microsoft trial, even though the remedy ended up being not completely fully set out, the trial itself forced Microsoft back from using the same tactics they used to kill the [inaudible 00:11:50] browser to kill things like Google. And that led to Google being more and more prominent. So we see the sort of eternal recurrence in tech where the government steps in to ensure that there isn't one company or a handful of companies that are too dominant, too controlling and having too many deleterious effects on the rest of the country and the economy.

David Dayen: (12:16)
And we can do that again. Now it doesn't have to be something as interventionists as a breakup. There's a distinction to be made between antitrust and anti-monopoly policy. So antitrust policy is really about mergers and breakups. Maybe you'd say there's a moratorium on mergers from Apple, which buys a company almost every week or Facebook or Amazon or something like that. Or maybe you break up those companies into component parts, maybe Amazon Web Services gets cleaved off from amazon.com or maybe Google's ad tech service gets cleaved off from Google search engine. But that's antitrust policy. You don't have to go there to necessarily come up with things that would be beneficial. So anti-monopoly policy could include things like structural separation where you say, "Okay, if you're a business, we're not going to tell you how to do this, but you cannot control a platform and also be competing with everybody else on that platform."

David Dayen: (13:19)
So Amazon controls the amazon.com marketplace, but also has its own brands that competes with companies on that marketplace and then takes all those company's data and uses it to formulate its own business model. So you can say we need to separate that structure. We can have a common carrier service and interoperability where we say, "Okay, Facebook you have to allow people in a competing service to contact their friends that might only be on Facebook. And make that interoperable, as we did with instant messaging where you can in any phone, you could do an instant message to somebody, it wasn't just AOL instant messenger you had to use. And there are more privacy laws and other regulations that you could do, there are a whole host of them, and I think this antitrust subcommittee report that's going to be coming out in the Fall is going to list a lot of these options that you could do to really create a situation where competition was allowed to flourish.

Anthony Scaramucci: (14:21)
You mentioned ... Let me not put it in your words, let me let you say it. But you talk about the middle class despair and the sawed-off ladders of processors. And so how do growing monopolies create that anxiety in our country?

David Dayen: (14:41)
Yeah, absolutely. I mean, there are several chapters I think that speak to that. And one of the biggest one is the agriculture chapter. So you have family farmers that are really struggling to survive, they're put into open competition with concentrated animal feeding operations or CAFOs which are these giant feedlots that have much more scale, tremendous scale than small family farmers. Family farmers can not find high prices for their products at processors who also own the feedlots that are competing against them. They are forced into circumstances by these middlemen, these processing companies, big packers, to grow and raise livestock to exacting specifications that might end up not panning out.

David Dayen: (15:36)
They only have one or two options for equipment. All the inputs have been costing more, all of their outputs have been paying less. And you have this tremendous amount of bankruptcies and closing up shop of family farms all over the country. And that has an effect on the communities that built up around those farms. So the hardware store and the grocery store in town that used to be a vibrant main street is no more because the farms are now all these sort of absentee operations where in places like Iowa, which I went to and talked to a lot of farmers. These towns are basically dead. And what do you do if that's where you come from? That's where your family is. That's where your community is. And suddenly it's dried up. And what does that create in a society? Well another set of monopolies, the pharmaceutical monopolies said, "Here's the sad for that. Why don't you take some Oxycontin and relieve your pain." And that created a whole other set of problems and challenges for those societies.

David Dayen: (16:48)
So the concept of regional inequality, this idea that as corporate America abandoned these communities, as the value and money that is used and circulated in these communities goes to monopolous rather than local businesses, that creates this trouble and despair all of its own. And its political problem too, because you end up having different parts of the country responding to different parts of politics, it creates a lot of divisions that we see.

Anthony Scaramucci: (17:28)
And you also mentioned that the farmers have twice the suicide rate of the veterans, and we know that we're losing almost 20 veterans a day. It's a very painful thing.

David Dayen: (17:37)
Dairy farmers, dairy companies are now putting in with their checks to dairy farmers information about suicide hotlines and things like that. That stark in-

Anthony Scaramucci: (17:47)
It's super devastating. Before I turn it over to John Darsie, who's dying to ask you some questions and we've got great audience participation. The chapter that struck me the hardest, it's literally like a boulder hitting me in the head was chapter seven, where you talk about our weapons systems, the defense industry, the fact that we can't do anything in our defense industry without the help of China because of the rare-earth minerals. But you also bring up General Eisenhower and then President Eisenhower, who was super concerned about the way we set up the military industrial complex. And I was wondering if you could offer some commentary on this and where do you think we're going from here? And what could the United States do if anything to improve this process of defense procurement?

David Dayen: (18:35)
Yeah, absolutely. There are two sort of separate issues going on there. Eisenhower warned against having this concentrated sector that was tied directly to the military. And in the next 20, 30 years, we proved him right by creating even more consolidation. This was largely done under the Clinton administration where they had this very famous event called The Last Supper where the heads of a lot of the major defense manufacturers were brought into a room and told that they had to team up because there's just not going to be enough money after the cold war has ended for these various manufacturers to get the money that they needed. So you saw the winnowing down to about five major defense companies that are the prime companies that service the United States.

David Dayen: (19:33)
And then of course, 9/11 happens and now these five companies control this massive amount of a budget. The peace dividend did not pan out. So there's that problem. The other problem is the fact that these companies motivated by Wall Street investors, in many ways, have sought a virtue in outsourcing their supply chains abroad. And so the manufacturing and particularly the manufacturing key elements of ... There's a lot of defense manufacturing in the United States, but the key elements like rare-earth minerals and other chemicals, a lot of them are only obtainable in China at the moment. That's not destiny. We have the ability, there's a rare-earth mine in California that has been shuttered, that's been there for years. But it's the way that this has gone.

David Dayen: (20:29)
And so now we're in a position and the defense department knows about this. They've written reports. They know that certain weapon systems and products could only be done with the assistance of China. And of course this is an economic power and we hope it doesn't become a military adversary to us as well. But if it does, this is a situation that's analogous to the Confederates and the Union. The Union was making all of the materials and at a certain point in the war when these materials were not flowing down to the Confederacy, they had the upper hand. And that's what you would see in a potential cold, or God forbid, hot war between the U.S. and China. And it's very dangerous. And the military is aware of this, but the way in which the very concentrated defense industry operates makes it hard to change that.

Anthony Scaramucci: (21:26)
I think one of the things that was fascinating about that chapter as well was I think it was John Deutch who brought the defense contractors to the Pentagon and said, "Hey, just to give you a heads up, I don't know who's winning or losing in here, but you guys are merging. We just don't have enough money to go around to feed all of you." And then it caused that flurry of mergers. So we've got a lot of interesting things going on at the same time. I'm going to turn it over to John Darsie. But before I go David, I thought the book was fascinating. This is an all-party book. This is a bipartisan book. This is really about what you need to do to reframe growth and opportunity in a society.

Anthony Scaramucci: (22:06)
And you do point out, you lead the book with I think from the ancient world, let me go back to the front of the book. I guess it was Emperor Zeno, 483 AD that was breaking up monopoly. So let me hold the book up for everybody before we turn it over to John. But I have to tell you, I was fascinated by the book, you're on the right path here. And I do hope that more of our policymakers pick up the book and learn from it. And we have some work to do here in terms of re-energizing and reengineering our society. But John Darsie, go ahead. I know you're dying to ask questions John.

John Darsie: (22:39)
Always, always.

Anthony Scaramucci: (22:41)
And by the way, he has a better portrait of his ancestry. See, he has Col'tre behind him, you've got George Washington. I just want you to know, I like David's ancestors a lot better than your ancestors Darsie. I just thought I would point that out.

John Darsie: (22:53)
All right. As normal, I'm going to no comment Anthony's critics of my background. David, how has the pandemic affected these monopolies and the monopolistic nature of our economy and the small businesses that are trying to compete with those monopolies?

David Dayen: (23:09)
Well, it's accelerated it and I want to thank Anthony for his kind words about the book. And I really was attempting to bring something together that wasn't left or right. That was really talking about people and how this issue affects their daily lives. So thank you for that. But it's absolutely accelerated it. So on a combination of factors, number one obviously, we have a lot of bankruptcies that are coming up because of the pandemic. And it's simply axiomatic that bigger companies have more reserves to hold out for a longer period of time than smaller companies do. And we're seeing that play out over the last couple of months. The second thing is the way in which Congress rescued the economy. They gave a large amount of money to bolster the Federal Reserves, sort of whatever it takes policy, including the purchase of corporate bonds which are really only in the market if you're a large company.

David Dayen: (24:09)
Whereas the PPP, which was a small business lending fund was time limited. It was eight weeks of payroll and that has run out by now, long run out by now. And it was not enough to save a lot of those businesses. So just the nature of congressional rescue favors big companies over smaller companies. And then the changing sort of personal tastes and dynamics that are sort of caused by the pandemic, online shopping, working from home, things like we're doing right now, all moved towards in particular a certain tech incumbents that were already big at the time, things like Amazon, Google Tools, Microsoft Tools, things like that that helps them increase their market share. I believe now the tech sector, sort of the five biggest firms, there's something like 20% of the S&P 500 in terms of value, which is an incredible amount. We've never seen anything like that before. So yes, there is an absolute acceleration of monopoly. And this is of course part of a 40 year trend, but it's now increasing much, much more as a result of the pandemic.

John Darsie: (25:26)
So you talked about the CARES Act. This doesn't necessarily have as much to do with monopolies as it does with general government oversight, but you've been critical. I've seen you on social media and in the media writing about the lack of oversight in the CARES Act and some of the corporate loans that have been given out. What is most concerning to you about that process and the precedent that it sets?

David Dayen: (25:48)
Well, the fact that we are 151 days since we signed the CARES Act, and we still don't have a chair of the main oversight committee that Congress put together to monitor the Federal Reserve portions of the legislation. I mean this is astonishing. In a similar situation after the financial crisis, there was also a congressional oversight panel that Elizabeth Warren ended up sharing. And days after that legislation passed, Elizabeth Warren was installed as the chair of that panel. We are months, five months away from the passage of that legislation. And we still don't have a chair of the panel that has a perception effect where the things ... Even though the panel with it's remaining four members has issued reports and they did one hearing, but the fact that they don't have a chair, keeps it sort of onto the sidelines, it keeps it sort of off the pages, the front pages.

David Dayen: (26:57)
And it's incredible to me, that we would not ... We're talking about trillions and trillions of dollars potentially on the table in these large corporate bailouts. And there are a variety of them, corporate debt, the airlines are getting specific grants, there's a municipal liquidity facility that could ... Right now, it hasn't been used very much, but it could be used to support state local government. And all of this is sort of being moved, billions of dollars right now could be tens of billions, could be hundreds of billions could be trillions in the future, and we're not really paying attention to how it's going. And there are ways in which we know from the first few reports that the fed is preferencing certain industries over others, certain size industries over others. And we need to get a handle on that. So yeah, it's a terrible precedent to do this. And remember, this was the Democrats, this was their big get they said in the CARES Act. They said, "We are going to do extreme oversight. We're going to figure out where this money is going. Don't you worry about it." And five months later, we still don't have a chair of the main committee.

John Darsie: (28:17)
Right. There's an opportunity certainly within the legislation for lawmakers to pick winners and losers, you talked about the municipal lending facility. I think one of the reasons it hasn't been used is because they're still sorting through how do you make those loans in a way that's not preferential to certain States or certain local groups. You want to elaborate on that?

David Dayen: (28:39)
Well, I mean just by the very nature of the initial Federal Reserve rules on the MLF, it left out I think 97% of the states and cities that were able to be eligible for the loans. In large part it hasn't been used because it's actually more expensive than it would be to use the regular market. And that makes it a nonfunctional kind of system. Obviously it would be better to use fiscal policy to support state local governments who would have this tremendous revenue shortfall. However, if fiscal policies is left wanting, and we still don't have any certainty about whether they will step-in to backstop states and cities, the Fed has options to come up with ways, creative ways to support these businesses, so we don't get in situation like we did after 2008, when the austerity at the state and local level offset the spending at the federal level and put us right back to square one. That's the scenario, we know it happened, it happened last time and we're headed right down that road again.

John Darsie: (29:51)
So this is sort of a macro question. We have all these forces like globalization, like technology that are depressing wage growth in the United States, and this is a 30, 40 year problem, as you talked about. And at the same time, you have these monopolies that are destroying jobs and destroying small businesses. How much of this would be solved by breaking up monopolies and creating sort of free market competition? And how much do we need sort of energetic government enterprise to fill the gaps in places like the healthcare industry to make things more affordable for Americans at the same time that wages are falling or wage growth is falling at least, you have healthcare costs increasing, access to education more uneven, so how much do we need an energetic government to step in and fill some of the gaps here?

David Dayen: (30:33)
I think this is a big enough problem that it's an all hands on deck moment. I don't think you can say that there's a silver bullet here or there. It's not one thing that's going to help us through. Obviously, I think stronger merger policy is incumbent upon us to get to a situation where companies just don't get bigger and bigger, and bigger, and bigger. So that's a piece of the puzzle. A stronger fiscal intervention is certainly going to be needed in the short-term. I think the nature of our healthcare system robs our competitiveness. It makes businesses responsible, what's the story that a Ford Motor company spends more on healthcare than steel. This is a global competitive in this problem, as much as it is anything else. And some would say it's a moral problem to have your wellbeing and your health tied to your job, or whether you have a stored personal wealth.

David Dayen: (31:36)
So I think you need to work on a number of different fronts, but Congress needs to get involved again in these issues. I mean, we had a long period of sort of letting the markets sort of dictate what the outcomes would be. And it's led us to the place that we're in now. And I think the pandemic was an eyeopening moment for that. I mean, we saw that the free market wasn't available to take care of a situation when we had massive needs and the supply chains were all the way over in China, and we couldn't make a piece of cloth with two strings tied around it right away. This has been a moment that has exposed some of the fault lines in the way that the economy runs right now, both through monopoly and through other factors. And I think that now that we have seen the effects of this, it's incumbent upon us to do something about it.

John Darsie: (32:36)
So we have a business contact, his name is Winston Ma. He used to work for the China Investment Corporation, which is the large sovereign wealth fund in China. And he wrote a great book a few years ago about the mobile economy in China, how they've invested heavily in building out this mobile-first economy. And in a communist regime, they're able to then harvest all that data that's driven from a mobile-first society to make advancements and things like AI and other industries. And part of the reason they've been able to do that is because they've subsidized heavily some of the tech giants in their country, like Tencent who developed WeeChat, which is probably the most powerful app in the world. It's sort of come on the radar of American, normal Americans because of Trump's recent actions to try to ban it in the United States. But how do we compete in the United States against someone like China who is actively engaging, I guess you could call it fiscal policy or heavy handedness in terms of driving innovation in areas that are important, and what advantages does the American system present versus the Chinese system? And how do we compete over the next 10, 20 years with China in that regard?

David Dayen: (33:42)
Well it's mercantilism. I mean, that's what China's engaged in. And in the tech sphere, it's actually very dangerous. It's a surveillance society. Not that we don't have one here, it's just being done by private interests rather than by the government itself. I think to take your question in maybe a different direction, one thing you're talking about is the preparation of an industrial policy and an infrastructure policy. So I have a chapter in the book about broadband, Chattanooga Tennessee has the fastest broadband in the United States and maybe the fastest in the world. And it's done through a public utility that brings fiber optic directly to the home, to Tennessee Valley Authority, public utility in Chattanooga.

David Dayen: (34:31)
And it's created this tremendous amount of opportunity. Not only is it super fast internet, 10 gig per second, but it's created an industry around 3D printing in Chattanooga. It's created incubators for more tech policy and tech businesses. It's created new options for telehealth, even before the pandemic. It's created education options and things like that. And if you go three minutes outside of Chattanooga Tennessee, you have [inaudible 00:35:04] and you have kids who are sent to Starbucks parking lots to catch wifi to do their homework every night. And the reason that that dichotomy is there is because the monopolist, telecommunications companies, AT&T and Comcast got their buddies in the legislature in Tennessee to pass a law that says public utilities can only do this kind of municipal broadband through the edge of their service area. So even if cities outside Chattanooga want the service, they are not allowed to get it by law. That is absolutely backwards. We have the opportunity and we obviously have the technology and the ability to create something like Chattanooga in practically every city in America, but we don't do it because investor-owned utility and large telecommunication firms don't want it to happen.

David Dayen: (36:03)
A forward thinking country would see the example of Chattanooga and say, "This is something that we can do." And it wouldn't really cost that much because it's brought back more for the Chattanooga public utility than it has been in paying out. We can do this across the country. We can build sort of a national network that is completely wired. And that's the kind of thinking that we do not do in the United States and maybe future administrations will figure it out. But I think that's a perfect example of the kind of thing you're talking about, which is really a forward thinking way of looking at this issue.

John Darsie: (36:43)
Yeah. You might've taken it in a little bit of a different direction, but it's a big theme in Winston's book that I mentioned is China's investment in that broadband infrastructure that continues with 5G and all of the ancillary benefits of that within the society, their ability to build out their AI systems, gather data and incubate technology companies. So you talked earlier about the fact that you tried to write this book, not as a left or a right book, but it's something that you hope to unite people in terms of building more equitable legislation around monopolies and understanding the impact on small businesses or some of these forces that have been in place for 30 years. How optimistic are you that that process is going to take place? How much of it is driven, the lack of action is driven by special interests and money and politics? And what do you think the path is to really meaningful action in terms of regulating some of these monopolies and creating more competition in our economy?

David Dayen: (37:38)
Well, a lot of it is driven by money and politics. Economic power converts into political power. And we see this across the board, whether it's through campaign donations or lobbying or the revolving door of people coming from industry into the government. So am I optimistic? I think what makes me hopeful in doing this book is I was able to travel around back when we could do that and go to talk to people all over the country, Iowa, Tennessee, California, New York, Ohio, North Carolina, where have you. And I did see a lot of commonality of experience, as I said, they couldn't say what percentage market share a certain airline had or things like that. But they all had a sense that there was this problem with the economy, this problem with companies taking up more and more space in their lives and affecting their lives in larger and larger ways.

David Dayen: (38:43)
And they all sort of got it in that sense. And when you have sort of an understanding, a commonality of understanding, which is rare in our sort of tribalized, polarized political and social environments, when you have that, you have the basis for something that can lead to action. And so the thing that we don't have is political will, and I think political will can be brought along by movements. So one of the things in the last chapter of the book that I talk about is the situation in Israel. Israel was even more concentrated than the United States, they have these tycoons and interlocking directorates that controlled large segments of the Israeli society. There was a social movement, it actually started through a journalistic enterprise. It led to mass action on the streets, well beyond anything we've seen in the United States.

David Dayen: (39:44)
And it led to the dismantling of these large concentrated industries, such that for example cell phones were extremely concentrated in Israel. And after the anti-concentration law that was passed by the Knesset, you now have prices for cell phones that are 90% below what they were originally. So I think it takes a movement. There was a famous paper written by Richard Hofstadter called What Ever Happened to the Antitrust Movement. This was written in the 1950s, 1960s, where it talked about how first there was the movement and no policy, and now there was policy and no movement, everyone got comfortable. They thought that the antitrust enforcers were doing a good job and they can sort of be left to their own devices. Within 20 years, those laws were changed sort of without changing a word of the law, they were just reinterpreted, and we had no movement and no policy. And so I think the way to get that back is through grassroots mobilization and getting people interested in this topic and forcing the political system to act.

John Darsie: (40:59)
Well the grassroots movement triggered by a journalistic outlet educating people on the problem. That sounds-

David Dayen: (41:06)
Imagine that.

John Darsie: (41:06)
It's something you might be at the middle of hopefully over the next several years. I'm going to leave it to Anthony for one final word. It's fascinating, the book, I would recommend it to everybody, Monopolized. Anthony, you have a final word for David?

Anthony Scaramucci: (41:20)
David, thank you for coming on. And we hope we can catch up with you after the election to talk about potentiality or policy that could come out of a great book like this. But I do agree with what John said, it is a post-partisan book. It's actually regaling back to an earlier time in the American society where our public politicians were trying to make things fairer and evening up the playing field. And so to me, as somewhat of a libertarian, I think it's a bipartisan book. It should be read by everybody. Thank you so much for joining.

Jim McKelvey: Co-Founder of Square & Author of "The Innovation Stack" | SALT Talks #42

“Entrepreneurs are in the business of solving problems that have never been solved before.”

Jim McKelvey is the Co-Founder of Square and Author of The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time. Jim had the idea to start Square when he couldn’t take a customer’s credit card at his glassblowing studio. Square would go on to survive a major challenge from Amazon due to its Innovation Stack.

“If you put yourself in a situation where the only solution is to create something new, then you need to understand that the process of innovation is different.” An Innovation Stack is a series of interlocking inventions. While individual elements cannot be viewed individually, the entire Stack fails if one block is missing. We are surrounded by hundreds of examples, but we don’t consider them innovative because they serve as the basis for entire industries.

Jim co-founded the non-profit LaunchCode to provide people with nontraditional backgrounds free education and job placement opportunities in tech.

LISTEN AND SUBSCRIBE

SPEAKER

Jim McKelvey.jpeg

Jim McKelvey

Co-Founder

Square

MODERATOR

anthony_scaramucci.jpeg

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

John Darsie: (00:09)
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, and interestingly our guest today is going to be able to cover pretty much all of those three pillars of SALT. The SALT Talks are a series of digital interviews that we started during this work from home period and are going to continue even after hopefully we kick this virus that provides our audience a window into the minds of subject matter experts who are leading investors, creators, and thinkers. What we're also trying to do during these SALT Talks is provide a platform for what we think are big ideas that are changing the future.

John Darsie: (00:49)
Today we're very excited to welcome Jim McKelvey to SALT Talks. Jim is a serial entrepreneur, an inventor, a philanthropist, an artist, an author, and a glassblower as well, which I'm sure we'll get to during the talk, and he's the author of a book called The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time, which I would highly recommend for those that are entrepreneurs or looking to build a business. Jim is the co-founder of Square, and he also served as the chairman of the board until 2010, and he still serves on the board of directors. Square has been one of the big success stories in the tech industry over the last decade. In 2011, Jim's iconic card reader design was included in the Museum of Modern Art. Jim founded Invisibly, which is an ambitious product to rewire the economics of online content in 2016, and he's also the deputy chair of the St. Louis Federal Reserve.

John Darsie: (01:44)
If you have any questions for Jim during today's SALT Talk, a reminder, you can enter them in the Q&A box at the bottom of your video screen. Conducting today's interview will be Anthony Scaramucci who's the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony's also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:03)
Well, Jim, it's great to have you. I've got to hold up your book. I love the cover. The Innovation Stack, just holding that up for everybody, Building an Unbeatable Business One Crazy Idea at a Time. You probably think John Darsie's sane and I'm crazy, but I just assure you, when this is over, you'll realize it's the exact opposite. Okay? He's the one that's nuts, not me.

Anthony Scaramucci: (02:26)
But I want to go to you. The book is great. We're recommending it to everybody. I'm holding it up. Right after college, you graduated from Washington University, amazing school in St. Louis. You had a degree in economics and computer science, and you had authored two computer programming textbooks. How do we get there to glassblowing artist? Tell me what happened here. Tell me the evolution of Jim McKelvey.

Jim McKelvey: (02:52)
It can be explained by basically bad planning, or in my case no planning. I graduated with these two degrees, took a job with a startup run by a crook. I was too clueless to realize that the guy was a crook. Right? Sometimes you work for a guy-

Anthony Scaramucci: (03:07)
Sometimes that happens. You can work for a crook, and you can be clueless about it. That does happen to people. I have empathy.

Jim McKelvey: (03:15)
Sometimes it happens.

Anthony Scaramucci: (03:17)
And, Darsie, don't be looking at me. Okay? I'm talking about other people, Darsie. Okay? Go ahead, James.

John Darsie: (03:22)
Of course. You would never make a bad decision like that.

Anthony Scaramucci: (03:26)
I've made my series of bad decisions. Sometimes I'm a little bit too gullible, Jim. But go ahead. I'm sorry.

Jim McKelvey: (03:32)
So, I ended up in this situation, and I realized what was happening one day, and so I went and I quit. I was like, "Oh, this guy's screwing everybody he deals with." My number's going to come up next. So, I went in, and I just quit. I didn't have another gig lined up. I didn't have another job. So, I woke up the next morning. I was like, "Oh crap, how am I going to pay the rent?" and the answer was I thought, well, maybe I could sell my glass work, because I was doing glass ... I had just taken one year at college, but I was TA for the college, and I had access to the studio. So, I went in, and I thought I could make some work and sell it, and it just turns out that I couldn't, because my work sucked.

Jim McKelvey: (04:14)
But it's amazing how good you can get at something if you say, "This is what I've got to do." Right? So, within six months I was making a really good income, and I've just stuck with it ever since. As a matter of fact, I'm heading to the studio this afternoon. I've been a glass blower for 30 years. Well, it was a great business, and now it's a great hobby.

Anthony Scaramucci: (04:40)
All right. Well, before that you co-founded Square with Jack Dorsey who's also the founder of Twitter. So, tell us a little bit about that. You lost $2,000 on the sale at your studio apparently, and I want to hear that origin story. How did it all come together? How did Jack find you, you find him, and how did you get this amazing business started?

Jim McKelvey: (05:07)
Right after I became a glass blower, this was 1989, I started another company, which I still have today. As a matter of fact, that's when I met Jack. I hired Jack when he was a 15-year-old kid. His mother was our I wouldn't say drug dealer, but she would sell us-

Anthony Scaramucci: (05:27)
You could say drug dealer. It's okay. [crosstalk 00:05:29]

Jim McKelvey: (05:28)
So, we bought from Marsha Dorsey chocolate-covered espresso beans which, before ritalin was readily available ... They're basically putting it into the water supply now. But back in the early '90s, if you wanted to stay awake, you munched on coffee beans, covered in chocolate. We bought piles of this stuff from Marsha. We found out her son liked computers. We worked with computers. So, this 15-year-old kid shows up, and that was Jack. He's an amazing guy. He did a great amount of work for us. We became friends.

Jim McKelvey: (06:02)
And sort of 20 years later, I guess it was 15 years later, he had started Twitter, gotten kicked out of Twitter, and was back in St. Louis for Christmas. We started talking, and Jack said, "Hey, why don't you come out and start a new company with me?" I was like, "Great. What do you want to do?" And he said, "Well, I don't know. What do you want to do?" So, we went back and forth. Neither one of us had an idea. But then I was in my studio-

Anthony Scaramucci: (06:27)
Next time you guys are going to start a company, can you invite John and I to the lunch table? We would be interested. I'm just letting you know. That would be great.

Jim McKelvey: (06:33)
It wasn't a very posh thing. We were having this conversation in my studio. I mean, Jack was a nobody. I was basically an artist. So, it wasn't this big thing. But I was there, trying to sell a piece of glass, and the truth of the matter was it was this piece of glass that I hated. It was ugly as ... Just terrible. And this lady was going to pay me like two grand for this thing, and I lost the sale because I couldn't take an Amex card, and I was pissed.

Jim McKelvey: (07:03)
It was a phone sale, and I was talking to her on one of these things, and I looked at this thing. My attitude towards this device is it turns into anything I want. Right? It becomes a phone, a TV. It becomes a map. It becomes anything. This thing should turn into whatever I want, but it wouldn't turn into a credit card machine, which was what I wanted to turn it into. So, I called Jack up in California, and I was like, "Hey. We should turn iPhones into credit card machines." That was the idea behind Square. Didn't know if it was going to work, but turns out it was a pretty good idea.

Anthony Scaramucci: (07:41)
Well, not a good idea; it was an amazing idea, because you had a seam in the marketplace where credit card companies ... I don't want to use the word gouging, but let's use the word gouging. Okay? They were really taking a vig off of these small businesses. So, you interceded and you closed the gap for them. That was a huge benefit to small businesses. Is that fair to say?

Jim McKelvey: (08:04)
Oh, a ton. A ton. What I discovered in starting Square was that the lower part of the market paid most of the fees. The little guys got screwed way bigger. I actually ran the math, and it was ... If you calculate the profit that you make on a transaction at Walmart versus the profit that you make on a transaction at a small company, it's 45 times higher. So, the little firms are paying almost 50 times as much as the big ones are, which is unconscionable.

Anthony Scaramucci: (08:37)
Just for all of our viewers and listeners, that is a huge competitive disadvantage. We're going to have the author of Monopolize on. I believe that's next week. Is that not right, John Darsie?

John Darsie: (08:47)
Yeah. It's on Monday, David Dayen, the author of Monopolize, talking about big tech monopolies.

Anthony Scaramucci: (08:52)
Yeah. So, what happens is if you're Walmart, you can squeeze down the credit card company, but if you're mom and pop in St. Louis on a local main street, you cannot. See, you guys came in and helped them split the seam, which is a great, great thing for the country.

Jim McKelvey: (09:08)
Yeah, yeah. It turned out to be a really great thing, and then interestingly enough, and this is actually the reason that I wrote the book, was three years later we got attacked by Amazon, one of the big monopoly companies. I try not to knock Amazon too much when I'm trying to sell a book, but, look, the fact is, when Amazon attacks a startup, the startup dies. And Amazon copied our product, undercut our price by 30%, and everyone expected Square to just get wiped out. Amazingly-

Anthony Scaramucci: (09:42)
So, how did you survive? How did you survive that?

Jim McKelvey: (09:46)
Well, that's the funny thing. We didn't do anything differently. We looked at all the stuff that we were doing, and we were doing everything for a good reason. So, we didn't change anything. We didn't even lower our price. Then we sort of fought Amazon for about a year, and then Amazon gave up. When they gave up, they mailed one of these little Square readers to all their former customers. So, I've got to say, out of respect for Amazon, when they quit, they quit in a sort of admirable way. They were sort of gracious in defeat. But I couldn't explain what happened. The amazing thing to me was why did we beat Amazon, because if you look at the history of companies, this doesn't happen. Startups don't survive this. And somehow we did.

Jim McKelvey: (10:37)
So, I was happy we won, but I couldn't figure out an explanation. I basically started researching, because I get obsessed with problems. I started looking for other companies that this had happened to, and it turns out, if you look back in time, there are literally hundreds of examples of the same thing having happened throughout time. So, when I saw this pattern, I was like, "Oh my god. This is really interesting." But the problem with doing historical research is you can really delude yourself into thinking you're right, because you can cherry-pick your examples, and then you're like, "Oh, I've proven that the sky is always red." Well, no, it's not, but you're just taking your photos at the sunset after dust's in the air or something.

Jim McKelvey: (11:25)
So, I took all my research ... It was funny, because I'd done all this historical research, so basically I was studying dead people, and I needed to find somebody who was alive. So, I called Herb Kelleher who's the founder of Southwest Airlines. I called up Herb, and I-

Anthony Scaramucci: (11:40)
Legendary entrepreneur.

Jim McKelvey: (11:42)
He's phenomenal. Dearly miss the guy. But I flew down to Dallas, I took all my research to Herb, and I said, "Herb, I think what happened at Square is another example of what happened at Southwest. What do you think?" Then I just shut up and let the man talk. And he got really excited, and he told me a bunch of stuff that was exactly the same things that happened to us. And I said, "Okay, here are 15 other companies where I've seen the same pattern," and he's like, "This is exactly right." He says, "I've never heard it explained this way." He's like, "You need to go write this. You need to go write a book." So, Herb Kelleher was the one that basically convinced me to write a book, but I didn't want to write a normal book, because I hate business books. I mean, I see your bookshelf back there. Man, I almost feel sorry for you, because a lot of these things are just disastrous, boring tomes.

Anthony Scaramucci: (12:39)
You mean the books behind me you feel sorry about? Is that what you're saying?

Jim McKelvey: (12:42)
If you've read all of them. I'm looking at a few of them, and I won't sort of out some of the authors-

Anthony Scaramucci: (12:46)
Pick out one that you dislike, go ahead, that you feel sorry about me. Okay? There's the beautiful wife though. Right? You like that. Those aren't bad, right? But which book on the shelf you don't like? Go ahead.

Jim McKelvey: (12:59)
Edison.

Anthony Scaramucci: (13:00)
Edison. I couldn't get through that book, by the way. Okay? [crosstalk 00:13:04]

Jim McKelvey: (13:05)
I got that as a gift.

Anthony Scaramucci: (13:06)
Yeah, couldn't get through it. And by the way, since Edmund Morris wrote the Reagan book, Dutch, he's gone downhill in my mind. But somebody sent me that book. Somebody sent me this book though. This book is pretty terrific.

Jim McKelvey: (13:21)
So, what they should have sent you was this. My original book was a graphic novel.

Anthony Scaramucci: (13:27)
Oh, okay.

Jim McKelvey: (13:27)
The whole thing was cartoons.

Anthony Scaramucci: (13:30)
Yeah. I need that. I need that. [crosstalk 00:13:32]

Jim McKelvey: (13:31)
I'm surprised they didn't send it. I'm sorry, man. I'll send you one.

Anthony Scaramucci: (13:34)
All right. I need one of those. But let's talk about this though, because this is an ingenious revelation. And if somebody can actually read this and understand this, their business is going to get a lot better. So, tell the people that are queued in here right now what this is about. What's the central thesis of The Innovation Stack?

Jim McKelvey: (13:58)
The central thesis is that there is a difference between doing something that's never been done and copying. And that sounds pretty obvious, but it wasn't obvious to me over 20 years, because I was always going to business conferences and reading books and talking to experts whose problems never seemed to be like the problems I was having. And the problems I was having were typically the problems you have when you're doing something that's never been done before, and that's different from doing a business where there's a trade show and they're experts and they're consultants, and they're things that are known to work.

Jim McKelvey: (14:32)
The reason I think I was ignorant for all these years was because the word entrepreneur today means business person. So, if you start a company, if you start a coffee shop, we call you an entrepreneur. If you start a dentist office, well, if you open it, you're the entrepreneur. You start an accounting firm. Anything that you do to start a business, we say entrepreneur. But that's not why the word was originally used.

Jim McKelvey: (15:00)
The original use of the word, and I had to go back into linguistic history to figure this out ... The original use of the word meant somebody who was crazy doing something that has never been done and might not work. So, the Wright brothers trying to fly for the first time. They were entrepreneurs, because if you look at the history of aviation, at least from the early days, there was a lot of death and burning and mangled flesh. So, if you were one of those guys who was trying to fly when humans had not figured it out, you were an entrepreneur.

Jim McKelvey: (15:33)
It's a totally different set of rules if you're not copying, and copying, I'm not knocking copying. I try to copy everything. I try to never do anything original unless I have to. It's sort of the last resort. But if you're trying to solve a problem that's never been solved before, then you've got to think differently, and the process of thinking differently is one that we don't even discuss, because literally, Anthony, the English language doesn't have a word for it. And when I realized this, I was like, "Oh my god. It explains all these problems I was having." So, that was the genesis of the book.

Jim McKelvey: (16:12)
Then I wrote it as a graphic novel. It was supposed to be a cartoon. I showed it to Herb. Herb hated the idea of being portrayed as a cartoon character, so he said ... I was really surprised at this, because Herb had a great sense of humor, but he basically said, "Look, if you're going to make this as a cartoon, leave me out." So, I rewrote the book basically as text out of respect for this man.

Jim McKelvey: (16:35)
But the fundamental idea in The Innovation Stack is that, if you put yourself in a situation where the only solution is to create something new, then you better understand that the process of invention is different, that it's not usually one or two single things. It's probably 12 or 14 or 20 different things that you're going to have to do differently. Those things themselves are going to influence each other, which causes this giant mess. And this becomes what I call an innovation stack.

Jim McKelvey: (17:09)
If you look at the history of companies who've dominated their industries, at the beginning of every industry, there's one of these innovation stacks. Now, it doesn't happen that often, because most businesses are copies of other businesses, but when it does happen, things get really interesting and really different, and that's what I wrote about.

Anthony Scaramucci: (17:29)
Well, but I also think that there's a lot in here about how you have to adapt to your environment. Right? So, your plans for Square, they didn't go perfectly.

Jim McKelvey: (17:42)
No.

Anthony Scaramucci: (17:42)
You had to make changes. You had [inaudible 00:17:44] So, give us a few examples of your plans making contact with the enemy and competition and what you had to do to innovate and switch up that stack.

Jim McKelvey: (17:57)
Great example. So, we decided to connect our little Square reader through the headphone jack. So, it was going to plug in through ... I've got one of the last phones with a headphone jack. I've got a little Samsung here. But this is how we decided it'd connect, which Apple didn't want you to do. Apple wanted you to connect through their dock connector, which at the time was like this inch-long thing. We were sort of violating the iPhone by plugging in through the headphone jack, which nobody had done before, and we were sure it was going to piss off Apple. So, our great strategy was to get Steve Jobs to cover us. Right? So, Jack got in touch with Steve. That was not easy, because Steve was very ill. But Steve agreed to meet with us. Now, this was 2009, 2010. Steve, he was pretty sick, but-

Anthony Scaramucci: (18:57)
Well, he died in 2011, so, yeah, he was having a hard time. He had just probably gotten his liver transplant, right?

Jim McKelvey: (19:01)
He had just gotten his liver transplant. He wasn't seeing too many people, but we got an audience with Steve. I was terrified, because I was the guy that built all the hardware. So, Jack was writing the software; I was the guy that physically had to build this thing. Okay? If you know anything about Steve Jobs, you know that he was a design zealot. I mean, he didn't have any furniture in his house, because he couldn't find anything that was good enough.

Anthony Scaramucci: (19:26)
Right. He drove Laurene crazy. I mean, Walter Isaacson writes about it in the book. He couldn't buy a couch, the poor guy.

Jim McKelvey: (19:34)
No, no. If it wasn't perfect, Steven wouldn't touch it. Right? You would hand Steve a pen [inaudible 00:19:39] Yeah. So, I'm the hardware guy, and I've got to put a piece of hardware in front of Steve Jobs. I'm freaking out. I'm just freaking out. So, I'm a good copier. I'm like, "Okay. I need to steal Steve's own idea." I go to the Apple store, and I look at the Macintoshes. The Macs were all these sort of brushed aluminum, just sort of pill shaped.

Anthony Scaramucci: (20:06)
I'm looking at one right now. I'm touching it.

Jim McKelvey: (20:08)
Yeah. There you go. Oh yeah, the Mac. Right? So, I was like, "Okay, Steve likes aluminum." So, I go, I get a block of aluminum, and I'm milling the first Square reader out a block of solid aluminum, shove all the electronics in there, test the thing out. I'd been awake for two days. It works. I get it to work. Fly out to see Jack, hand it to my ... Because Jack's the one who's actually going to do the meeting. I hand it to Jack. It doesn't work.

Anthony Scaramucci: (20:45)
Oh god.

Jim McKelvey: (20:45)
He hands it back to me. I'm like, "No, no, no, man. Look, it works, it works, it works." Then [inaudible 00:20:51] And I've got to show you with a credit card what's going on here. I've got a credit card here. I'll try not to show my credit card number to the whole world. But what was happening was, as Jack was swiping it, he was holding it like this to keep it from rotating, because the thing spins. Right? So, Jack would swipe like that, and it would never work. When I swipe, I go like this. So, I don't touch the thing. Well, aluminum is an electrical conductor, and on an iPhone this is not the grounding plug, this is the grounding plug. So, I was basically making an open circuit. It was effectively a heart monitor-

Anthony Scaramucci: (21:37)
Got it.

Jim McKelvey: (21:37)
... because when Jack touched it, the thing shorted out, picked up his heartbeat, and totally ruined the signal. Okay. This before a demo with Steve Jobs. I've totally made something that looks cool and doesn't function.

Anthony Scaramucci: (21:51)
Got it.

Jim McKelvey: (21:52)
The good news is ... Well, there were sort of good and bad news. I think we were lucky. The meeting got canceled, because Steve got sick again. So, we didn't actually have to do the meeting. And I've built them out of plastic ever since. But, look, that's just ... I mean, I could tell you-

Anthony Scaramucci: (22:11)
But when you eventually got to the meeting, he probably loved the design, right? Because it looks like the old iPod, the small iPod, the mini iPod.

Jim McKelvey: (22:19)
Steve never saw it.

Anthony Scaramucci: (22:20)
Oh, he never saw it? Okay.

Jim McKelvey: (22:21)
Steve never saw it. He got ill. He canceled the meeting. We actually showed that first prototype to Mike Bloomberg, because we had another meeting with him, but ... Actually, I think we may have been saved by the fact that we didn't meet with Steve, because the funny thing was we were expecting Apple's lawyers to just tear us apart. What was funny was that Steve was such a powerful force at Apple that I believe the fact that we even had a meeting with him was enough protection that the lawyers weren't going to attack us. So, just getting on his calendar was probably what saved us, but, again, I don't know.

Anthony Scaramucci: (23:04)
So, mission accomplished. I have to turn it over to John Darsie, because we have tremendous audience engagement. But before I do, I want to ask you one more question related to where you are going, because I think you are a polymath and you are a genius, and I want to hear about another contribution that you are going to make to our civilization. What is it going to be? And it could be glassblowing. That's totally fine. But I see something else in your future, and I want you to tell us what it is.

Jim McKelvey: (23:41)
So, I've got three things I'm working on right now. One is actually in the studio. I'm going in today. I'm making another set of ... I'm trying to make a cool rocks glass. I've been spending a lot of time drinking lately. You know, pandemic. And I just realized that I didn't like the glasses I was drinking out of. So, I'm going to go and try to make an object. I haven't made a consumer object in 15 years, so I'm going to go in and see if that'll work. Don't get your hopes up for that one.

Anthony Scaramucci: (24:13)
All right. Well, that's number one. You said there's three. So, what are the other two?

Jim McKelvey: (24:17)
The second is a project called Invisibly. Basically the economics of content are broken, and I think that's fixable if we can get micropayments working. That's a bunch of gobbledygook that nobody should understand. Here's the basic problem that every human has. You are not allowed right now to pay more for good stuff and less for bad stuff online, because most online content is either subscription or advertising supported. There's no way to pay more for good and less for bad. The problem with that is it's not all free. Right? Content isn't free. You pay for content essentially with your attention. But because your attention doesn't have this signal built in whether or not you like the stuff, crap gets the same price as quality. And unfortunately, that's-

Anthony Scaramucci: (25:09)
Makes sense.

Jim McKelvey: (25:10)
Yeah. That doesn't work. So, what I'd like to do when I go out is signal to the world that, if I spend 20 bucks on a hamburger this afternoon, I'm basically telling the world to kill more cows and build more slaughterhouses. If I go out and spend five bucks on a Beyond Burger, that's going to be a different vote, and that's how the economy works. But it doesn't work online, and it doesn't work for a bunch of reasons.

Jim McKelvey: (25:40)
So, anyway, I sat down with a bunch of economists at the Fed. We figured out how to fix this. The problem is it requires micropayments to work, and, if you know anything about the history of micropayments, they've never worked. Everyone's had the idea. Nobody's ever gotten it working. So, I'm working on that. That one, that's a long shot, but if Invisibly works, it's going to meaningfully improve people's control over their eyeballs, which I think is a good thing for the world.

Jim McKelvey: (26:07)
The other thing that I'm doing right now is a project called LaunchCode, and LaunchCode is something we started about seven years ago. It's a free class in programming. So, the deal with LaunchCode is you show up, we don't charge you anything, we give you free education, and then you get a job, and we get you a market rate job. And we've been training thousands of people. That's sort of a ... It's a nonprofit, but it's solving the talent gap in programming. So, those are sort of my three big focuses.

Anthony Scaramucci: (26:38)
Awesome. Well, go ahead, Mr. Darsie. We've got a ton of questions for you.

Jim McKelvey: (26:42)
Cool.

Anthony Scaramucci: (26:43)
I'm holding up the book one more time, The Innovation Stack. Everybody should be reading this book. By the way, I'm getting texts from Jack Oliver. He says hi, by the way, so I'll just throw that out there.

Jim McKelvey: (26:55)
Oh. I talked to Jack last week. All right. Jack, Jack, Jack.

Anthony Scaramucci: (26:59)
He says you're a genius, but we sort of already know that. But go ahead, Darsie.

John Darsie: (27:02)
Yeah. I have a followup question about Invisibly. How much of this idea was born in the last several years? There's been a lot written about how a lot of these journalistic outlets have gone behind paywalls, and we want to make sure that journalists get paid for their work. That seems to be the most sustainable business model for a newspaper outlet that's publishing online, for example. But then you have a lot of disinformation that's out there, and it's free. So, what's happening is a lot of people who don't have the means to have subscriptions to The Washington Post, The New York Times, The Wall Street Journal, The Financial Times, they're instead consuming ... I'm not going to name these disinformation outlets and give them that platform, but a lot of people are consuming stuff on Facebook and social networks that's out there for free. How much of that idea is born out of the desire to make sure that people are consuming the right information rather than disinformation?

Jim McKelvey: (27:52)
There's sort of two questions there. I'm going to take them both. The first is you named three of the five subscription models that work in the English language: Financial Times, Washington Post, Wall Street Journal, New York Times, and The Economist. If it's not one of those five paywalls, it's ad supported or losing a ton of money. Okay? Although those a five great information sources, I as a consumer want to be able to read stuff from all sorts of different sources. Right now, none of those sources are making money. So, subscription is not going to save everybody, because you just as a consumer are not going to have 40 subscriptions, but over the course of a year I'm probably going to want information from 40 different places. So, we really need to figure out a way to ... It would be like me saying, "Okay, pick five chain restaurants you're going to eat at for the rest of your life." You kind of go, "Well-"

John Darsie: (28:45)
Right. Does this apply to streaming outlets as well? Not to interrupt your missive, but I feel like the same thing is developing with these streaming outlets is that now everyone's unplugging from cable, but there's 15 streaming companies out there and you have to subscribe to all of them to get the content you want. Could a micropayment system work for digital video content as well?

Jim McKelvey: (29:05)
It works in theory, John, but it's really hard to set up, and we haven't figured out how to turn that corner yet. I've burned $30 million so far, and I have got nothing significant to show for it. The only thing I've got to show for it, which actually is significant, is I've got a survey to ... Part of our tech ... We just started playing with politics. I can call elections now. I can literally survey and get within a point of the final vote total. It's amazing. Actually, that's one of the reasons I was talking to Jack Oliver last week. But the politicians are all over us, because we've got this tech now. But that's not what the company's about. It's just this weird quirk. But if you need to call an election, let me know. And I'm sorry. I forgot the other part of your question.

John Darsie: (29:58)
It was about how much of this idea was born out of this disinformation, the amount of free disinformation that exists out there on the internet today.

Jim McKelvey: (30:06)
Oh, yeah. Yeah, yeah, yeah. Disinformation. So, it was not born out of that, but I will give you a really interesting piece of insider information that only the ad tech people know, and that is, if you take one of those readers from one of those five expensive publications you've mentioned ... Okay. So, this is somebody who's got enough money to spend 100 bucks a year subscribing to some content source. Okay. Now, let's take the value of that person's eyeballs as an advertisee versus somebody who reads something that is laughably fake news. Okay? Whose eyeballs are worth more per second? You want to take a guess?

John Darsie: (30:52)
I would think the person who's willing to pay for the subscriptions.

Jim McKelvey: (30:55)
Yeah. Most people make that conclusion. You're not only wrong; you're wrong by a factor of 10.

Anthony Scaramucci: (31:00)
Oh, I love the way he's sticking it to you, Darsie. Keep going, Jim. I'm going to turn my camera off. Hold on. You guys can just talk together. All right. I'm down. My camera's down, Darsie. Go ahead, McKelvey.

Jim McKelvey: (31:14)
There you go. No, no, no. I mean, it's the same conclusion I'd make, which is why I think this is so ... So, it turns out that, if you are so gullible that you believe the fake news sites, your value as a sucker for whatever product they're advertising is 10X. I can prove this. I've seen the numbers. You get more money if your audience is the sort of person who believes unquestionably or unquestioningly the content. The critical thinkers, the people who ask the questions, we're not worth that much as a set of eyeballs. But if you're gullible enough to think you should shove your IRA into gold or ... I don't know what they're advertising now. I don't see a lot of that stuff. But I've seen the data. It's chilling.

John Darsie: (32:09)
There's a case study in that today. There was an indictment in New York City about a crowdfunding campaign to build the wall on the southern border where they preyed on zealots to crowdfund the building of the wall, because the government was stalling on building the wall. And you have four individuals, one of which is very familiar to Anthony, who have been now indicted, because they were preying on the exact people that you were talking about.

Jim McKelvey: (32:38)
It's so sad. I have to say, preying on the trust of others is abhorrent. And I wish I had a solution for that. I will tell you that Invisibly does not. The only thing we're able to do, if our system works, and it doesn't work yet, is to give consumers the ability to pay more for good stuff and less for bad stuff and to control how their eyeballs are being bought and sold, because right now your eyeballs are being bought and sold a thousand times a day without your knowledge or consent. So, we're going to give you that control.

Jim McKelvey: (33:15)
What we can't do is make you exercise that in a thoughtful way. So, let me use an analogy with food, because people understand food. What I want to do is change the model, which is currently ... Here's the model that your intellectual food is being created under. We're never going to make much money for it, so we're going to pay the absolute least amount for our ingredients and sell it to you at a fixed price. So, that's the equivalent of saying every lunch in New York City costs 10 bucks. And you say, "Oh, great. 10 bucks. I'll eat a fancy restaurant." No, you won't, because the fancy restaurant just closed, because they can't put the food on the table for 10 bucks a plate. So, all you're going to be is fed the cheapest crap that they can get their 10 bucks from, and that's the model that we're living in with content.

Jim McKelvey: (34:12)
So, in our system, it's like the economy today. You'll have cheap options, you'll have expensive options. If you choose the expensive options, that's great. But if you choose the cheap options, that's also great. The interesting thing though is that we want to have the consumers exercising this choice in a way that's responsible, but we're not going to tell them what to eat. So, the analogy here is, look, you can go out and have a healthy meal. You can go out and have a meal that cumulatively will kill you. That's your choice. So, I'm not going to tell you what content's good, what content's bad, what's fake news, what's real news. We're not going to get into any of that. We're just going to reflect the value that the consumers see back in the price, but it's [crosstalk 00:35:01]

John Darsie: (35:01)
We could talk about Invisibly all day, I think. I want to pivot a little bit back to innovation stacks for a minute.

Jim McKelvey: (35:06)
Cool.

John Darsie: (35:06)
You talk about how Square ultimately prevailing against Amazon in this space is an example of an innovation stack. Are there any other prominent examples in today's business world of innovation stacks? I can think of one potentially with Tesla, now the market cap of Tesla having encompassed the entire automotive industry. But are there any others that provide an example for people of what innovation stacks are?

Jim McKelvey: (35:30)
Well, there are dozens, but let's take your example. Tesla's a great example, because Tesla didn't copy all the other car companies. Right? All the other companies were doing basically internal combustion engines, and when they did try to build electric, they build these sort of glorified golf carts. I don't know if you've ever seen an EV1, but the GM ... I mean, GM built Tesla to market with an electric vehicle by a decade, and yet it was such a ... I mean, they just got it wrong. I think it was because, in the world of General Motors, working on the electric car is like punishment. Like, if you're a bad engineer, they make you ... Like, "Oh, we're going to send you to the Russian Front or make you work on the EV1s. You can make a golf cart that slows down when you go up a hill."

Jim McKelvey: (36:24)
But Tesla, what they did was not just one, two, three things. They've probably got an innovation stack that's 40 or 50 things long. Now, I don't work at Tesla. I've met Elon Musk a sum total of five minutes in my life. So, it wasn't like he and I got deep on anything. But even from the outside, you could look at the way they're packing the batteries, the way they're putting capacitors in front of the batteries, the software, the way the car drives, the way it unlocks, the way they deliver the car, the way they sell the car, the Tesla dealership network. Oh, wait a second. You're not buying this from Scaramucci Auto.

John Darsie: (37:07)
No, it makes sense. I think it's happening a lot in the financial industry as well.

Anthony Scaramucci: (37:09)
That would be a hot car, McKelvey. That could be our next business, you and me. Okay?

Jim McKelvey: (37:12)
I'd do it.

John Darsie: (37:12)
You would have a lot of-

Anthony Scaramucci: (37:14)
It would have an '80s feel, and there would be a lot of ostentation to that car. Okay? I just want to make sure you guys know that.

Jim McKelvey: (37:22)
I think David Lee Roth is available.

John Darsie: (37:26)
Well, it's happening a lot in the financial industry as well, where you're seeing people from the tech world come and attack problems that are traditionally financial industry problems, and they're thinking about them in a different way. It's allowing them to re-engineer these systems without preconceived notions of the conventions that have existed in the past.

Jim McKelvey: (37:45)
Look, here's the whole point of the book. I'll save you from having to buy it now. And that is innovation is this thing we all talk about, but it's really hard and really unpleasant and probably should be the last resort. I'm not preaching innovation. I'm not sitting here going, "Look, this is what you should do." I'm a big believer in copying solutions, except that it doesn't always work. When people find themselves in a situation where there's an unsolved problem that they can't copy solution that, almost everybody stops. And I still feel that urge to quit as well.

Jim McKelvey: (38:22)
But when I was writing the book, I had this person in mind, and I always think about her, because she's super competent. She's intelligent, hardworking. She's got all those qualities for somebody you would say, "Oh boy. This person could be doing great things." And she does do great things, but she only does great things when she has permission to do it, i.e. a degree or a credential or somebody saying, "Oh, you're qualified to now work on this project." And when she encounters a problem that has not been solved before, she says, "Oh, I can't do this," and I'm like, "Wait a second. No, no, no. You can." And we had this conversation. She's like, "Well, I'm not qualified to do that." I was like, "Look, nobody's ever done this. You can be qualified."

Jim McKelvey: (39:02)
So, today, all right, I'm going to fly a plane today. I'm going to get in a plane. I've literally got a freaking book here that I've got to sit here and read on the Garmin G1000, because they just put a new ... Everyone's going to hate me now. But I've got to read this stupid book, okay? And then I've got to go take all these tests, because today if you want to get in a plane and fly a plane, you'd better be qualified. Great. That's the way it should be. Orville Wright who gets in the Wright Flyer-

Anthony Scaramucci: (39:36)
I've got to interrupt you there, because you're talking to capitalists, fellow capitalists. I love the fact that you have your own plane, okay? I want everybody to have their own plane. I want them to read The Innovation Stack so they can figure out how to buy their own plane. Okay? All right. But keep going, okay? This is great.

Jim McKelvey: (39:52)
So, the point is if you want to get in and pilot a plane today, you get qualified, you get trained, you get certificated, you pee in a cup. You're good to go. The Wright brothers could not be qualified to fly the first plane. Nobody is qualified the first time. You build the first anything in the world, I don't care what it is, you're not qualified.

Anthony Scaramucci: (40:15)
Well said.

Jim McKelvey: (40:16)
Nobody's qualified. You don't get credentials and permission and diplomas and little badges until it's become something that humanity has already solved. So, if you want to spend your whole life limited to the world of already solved problems, then you're going to have a great life. Nobody's going to give you any shit. Nobody's going to sit there and tease you or tell you you're stupid or call you crazy. But unfortunately, the world's never going to move forward unless some of us sort of step off the edge and usually fall, but sometimes we end up pushing the frontier of what humans can do a little bit further, and that's innovation. It's unpleasant, and it's something we don't talk about because we don't even have the words, but it's something that I think is desperately necessary.

Jim McKelvey: (41:08)
I mean, the reason I wrote a book, which by the way is hell ... Writing a book for three years is ... Well, it's rewriting the book. You write the book, and then you rewrite it and rewrite it and rewrite it, rewrite it until it becomes readable. But the reason I put myself through this is it's the only way I could possibly think of to get more people off the bench. So, the reason I want people to read the thing ... I don't necessarily want them to buy it. You can steal it. I'm sure there's a Tor copy of my book out there. But if you get the idea that at some point in your life you may encounter something where all of your training, all of your credentials stop being relevant, and you don't necessarily have to stop moving at that point. If we can get a few more people moving [crosstalk 00:41:54]

Anthony Scaramucci: (41:53)
I think it's brilliant. I just want to ... As a public service announcement for Penguin Publishing, buy the book. It's worth every bit of the $22 that you've got to spend on it.

John Darsie: (42:06)
I want to leave you with one last question, Jim, and it's a followup to what you're saying about how we need to get people off the bench. So, we had a great conversation at our SALT Conference in 2019 between Mark Cuban and Steve Case on the idea that entrepreneurial success can be found outside of Silicon Valley. There's this bubbling up of entrepreneurial zest that exists in the American heartland. You live in St. Louis. Other areas of the country, other areas of the world, frankly. Mark Cuban has invested a lot outside of Silicon Valley. Steve has a fund called the Rise of the Rest fund, dedicated to funding entrepreneurs outside of Silicon Valley. You launched LaunchCode, which is a nonprofit to try to get people from nontraditional backgrounds free education and job placement opportunities in tech. So, how do we tap into that entrepreneurial spirit that exists in parts of the country but they might not have access to capital or expertise or the confidence they need to go out and truly innovate?

Jim McKelvey: (43:03)
I might get in a lot of trouble for saying this. I've never seen a problem with access to capital. Okay? So, I've got a VC fund. I get pitched all the time, which is by the way a horrible business, because you just ... People lie to you professionally. Your job is basically to have these people lie to you all day long. It's gruesome. But I hear people talk about "Oh, I don't have any capital." It's like, well, maybe your idea is a little messed up, or maybe you didn't do enough work. The investments that we make, we're fighting off other investors. These elbows are sharp for a reason. So, I don't see that.

Jim McKelvey: (43:44)
But what I do see is a sort of clubbiness to tech entrepreneurship, which has historically persisted in the Bay Area and to a lesser extent New York and a few other cities around the world. And the cool thing about a pandemic is that it is all now coming apart, this club that the rich belong to, which is the club of New York or the club of San Francisco. And, by the way, if you don't think you have to be rich to live in San Francisco and have a normal life, go check rents there. I've got engineers earning well into six figures that have five roommates. That's how expensive San Francisco has become.

Jim McKelvey: (44:29)
If you're a normal person and you have the skills but you don't have the financial ability to move to a coast ... Maybe you've got a parent you've got to take care of or maybe you've got some other that prevent you from just upping and moving. Well, we're breaking these clubs up. I mean, right now we're ... I mean, I guess we should all be sitting in a room together, but we're not. We're Zooming. And there's some lag over the video and a few other problems like that, but we've basically pulled it off. Right? And I don't know where you are, and I don't know where Anthony is. Actually, I'm assuming it's a bunker somewhere.

Anthony Scaramucci: (45:09)
I'm in a heavily fortified bunker with shitty books behind me, but it's so far so good-

Jim McKelvey: (45:14)
That Edison book is going to save his life.

Anthony Scaramucci: (45:15)
... because my wife is still allowing to stay here. I mean, once in a while she throws food in through the door, but I'm fine. I'm fine.

Jim McKelvey: (45:23)
The sheer density of the writing is going to be the thing that protects your head from the blast. In this twist of irony, you will be saved. I'll have to eat all my words. God, I hope that wasn't published by Penguin.

Jim McKelvey: (45:36)
But, anyway, the point is it doesn't matter as much. So, cities like St. Louis where it's pretty pleasant to live and we've got great health care and great schools, and houses are really nice and cheap. I mean, hell, we'll give you a house in certain parts of town. It's opening up talent to more opportunity, and I think that's what we need. So, I love what Steve is doing. The Rise of the Rest is fantastic. His bus came through here. I was on it and spoke at the events. I love what Steve is doing.

Jim McKelvey: (46:13)
I think we're just going to see that, not because it's a good thing to do or we're being nice to Ohio or anything like that. It's just because, look, greed is a good thing to harness, and greed is smiling on lower cost, higher quality of life cities. As long the town is here and it can move remotely, maybe live in St. Louis. It's a great city. Or whatever you think is a great city. Pick what you like and move there.

Anthony Scaramucci: (46:50)
You should know, because people are texting. We're getting questions and answers. Jim, you're a phenomenal guy, and you've left an amazing impression on our delegates. So, I would love to get you back.

Jim McKelvey: (47:04)
Anytime. This has been super fun. I love it.

Anthony Scaramucci: (47:05)
You've got to do me a favor though. You've got to be careful flying the plan, man, because you're holding up the operational manual there. And I'm not saying I wouldn't get in the plan with you. I would definitely put Darsie in the plane with you first though. I'd just like to try it out with Darsie before I take a ride with you. But I want you back on our show so we can talk about where the future is going. You're going to be a big part of it. I have no doubt about that. So, we've very grateful to have you on.

Jim McKelvey: (47:30)
Anytime. This has been super fun. You guys ask great questions. This is fun. Yeah. Thank you.

Anthony Scaramucci: (47:37)
All right. Well, God bless. We're going to turn it back to John Darsie. He usually does the happy recap. Go ahead, Mr. Darsie.

John Darsie: (47:44)
Well, I'm very excited to see your progress with Invisibly.

Anthony Scaramucci: (47:46)
We didn't make one comment about George Washington. McKelvey, look at what this guy thinks of himself with the George Washington portraits. I mean, I know I have shitty books, but look at this this guy. Look at this [crosstalk 00:47:53]

John Darsie: (47:53)
I try to create a background that lives up to Anthony's bookshelf.

Anthony Scaramucci: (47:56)
Darsie, at night, he walks around with that wig on. Okay? I've heard that from his wife, by the way. Go ahead, John.

Jim McKelvey: (48:01)
I need a wig. That's a good idea.

John Darsie: (48:04)
Well, Jim, thanks so much for joining us. Thanks everybody for tuning in. I highly recommend Jim's book. It will hopefully either help you take that leap into entrepreneurship or decide that that journey's a little bit too painful for you, and I think Jim provides both of those perspectives in a great way in The Innovation Stack.

Ellie Rubenstein: What is Sustainable Food & Why Does it Matter? | SALT Talks #41

“How can you bring people to the ethical and humane way of bringing people edible, traceable food?“

Gabrielle “Ellie” Rubenstein is the Co-Founder & Chief Executive Officer of Manna Tree Partners, a private equity company focused on growth equity investments in companies that will revolutionize the food supply chain.

Food has changed dramatically over the past 50 years, but big food isn’t entirely to blame. The disconnect was between the farmers growing the food and the doctors who could advise the best way to raise or collect it. “How do you get healthy, cheap, faster food in the hands of people? Big food can play a part in that.”

In the COVID era, health and wellness can save your life. Only 12% of the United States population is metabolically healthy, and the Middle East has the highest rates of diabetes globally. “I don’t think we fully understood the linkages between human health and a poor diet until the last five years.”

LISTEN AND SUBSCRIBE

SPEAKER

Gabrielle “Ellie” Rubenstein.jpeg

Ellie Rubenstein

Co-Founder & CEO

Manna Tree Partners

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 public policy. SALT talks are a series of digital interviews that we've been doing that originated during this work from home period. But given the success and the fun that we've had with it, it is going to continue indefinitely. They are a series of interviews we've been doing with leading investors, creators, and thinkers.

John Darsie: (00:33)
What we really try to do with this SALT Talk series is replicate the experience that we provide at our SALT Conference series that we've done annually in Las Vegas since 2009, as well as in Abu Dhabi, Singapore and Tokyo. Our goal there is really to provide our audience a window into the mind of subject matter experts, as well as provide a forum and a platform for what we think are big important ideas that are shaping the future.

John Darsie: (00:57)
Today, we're very excited to welcome Ellie Rubenstein to SALT Talks. Ellie is the Co-Founder and the CEO of Manna Tree Partners, which is a Vail, Colorado-based investment firm that invests in companies focused on human health and well-being. Ellie has over 10 years of experience in the asset management industry, including as a partner with a well-known, high net worth family office in Los Angeles as the Co-Founder of PT Holdings, which is an Arctic asset manager headquartered in Anchorage, Alaska, which is where Ellie is coming to us right now. As well as a Founding Investor of the Alaska Angel Investment Network. As a member of a prominent family of asset managers, Ellie has been involved and mentored in the industry since a young age.

John Darsie: (01:39)
Ellie holds a Master's and an MBA in food and agribusiness management. It's a very interesting dual degree program that awards a Master's in agricultural economics from Purdue University and an MBA from Indiana University's Kelley School of Business. While studying at Indiana, she was honored to be accepted into the Tobias Leadership Fellows program. Ellie attended her undergrad at Harvard University, where she received a BA in sociology with an honors thesis on philanthropy. She was also a varsity ski racer at Harvard. Having experienced the healing power of food and the outdoors in her own life, she also earned a graduate certificate in Mind-Body wellness from UCLA Center for East-West Medicine and the Semel Institute for Neuroscience and Human Behavior.

John Darsie: (02:26)
Ellie's role as CEO of Manna Tree includes driving a strong culture towards the firm's billion-dollar vision to revolutionize the food supply chain. She leads the firm's fundraising efforts and as a member of the Investment Committee for expertise of global food systems. Our international network creates meaningful value for mandatory partners fund investors.

John Darsie: (02:46)
Ellie is also an active philanthropist. She was awarded the Presidential Volunteerism medal and currently serves on the American Red Cross as a lead volunteer advisor for service to armed forces at its national headquarters and as a Board Member of the Mission and Outreach Committee at the American Red Cross of Alaska. Ellie also serves on various local boards and initiatives focused mainly on military, public policy, health and education type of initiatives.

John Darsie: (03:12)
Ellie is an avid hunter. She's out in Alaska for hunting season right now, as I'm sure we'll talk about on the talk, and a fisher woman. She spends much of her free time on the shores or in the woods pursuing different protein sources. She's a self-described foodie and enjoys nothing more than sharing the nutritious food that she has harvested with her family and friends.

John Darsie: (03:31)
A reminder if you have any questions for Ellie during today's SALT Talk, you can enter them in the Q&A box at the bottom of your screen. With that, I'm going to turn it over to Anthony Scaramucci, who's the Founder and Managing Partner of SkyBridge Capital, a global alternative investment firm, as well as the Chairman of SALT to conduct the interview. Anthony, take it away.

Anthony Scaramucci: (03:49)
So, Darsie, you and I are the underachievers on this call, okay? I mean, you could have gone on for another two hours on Ellie's exceptional resume. But thank you so much for joining us, Ellie. But forget about your resume for a second and all the other stuff. Let's focus on that seminal moment when you decided you wanted to be a hunter. How old were you? What were you doing? How did it become a lifelong hobby of yours?

Ellie Rubenstein: (04:19)
Well, first of all, thank you for having me. I don't think in my entire life I've ever heard somebody read my resume, so cathartic experience. It felt like I was just attending my funeral, made me realize maybe I should sleep and not do so much. But anyways, thank you. Yeah, that is a really interesting question as I sit here in Alaska.

Anthony Scaramucci: (04:40)
Darcy is available for eulogies, by the way. I mean, he's [inaudible 00:04:43].

Ellie Rubenstein: (04:43)
I think you'd make my parents proud if you read that in my funeral.

Anthony Scaramucci: (04:47)
We want to wait to your 150 before we eulogize you, okay? Him and I will be long gone before you leave planet. Alright, but go ahead, keep going.

Ellie Rubenstein: (04:55)
So, it's an interesting way to grow up. I don't know that many people know this, but my father's company, they actually started with their first deal in Alaska. My mother was pregnant with me at the time. I guess when they close the first deal, which was the net operating losses on Alaska Native corps, they said, "We'll bring your family up and we'll celebrate. You go to the hunting and fishing lodges." Now my mother did grow up as an avid outdoorsman. So, if you tell a woman that they can go to Alaska, you might not get her to leave. So, that's what ended up happening. So, I grew up with my mom, mostly in Alaska.

Anthony Scaramucci: (05:31)
Where did your mom grow up, Ellie?

Ellie Rubenstein: (05:35)
Actually, it was interesting. She's from Nutley, New Jersey, but they moved overseas because my grandfather... He was career navy. When he retired, they lived in Paris. He was an IT in France, and he actually has 19 patents to his name. He was one of the inventors of GPS technology. So, he was an avid fisherman that believed his three daughters should be outsourcing their own food. My mom's aunt lived in Norway. So, she spent summers in Norway hunting and fishing. So, she grew up with a very subsistence lifestyle and her mother was a chef. So, if you were sick in the family, that meant homemade chicken soup where somebody had to go get the chicken and you roasted it down for three days.

Ellie Rubenstein: (06:16)
So, in our family, I'm not sure that my father liked that way of raising us, because it was always about what's the cost per blueberry, what it takes to keep the garden of blueberries. But everything in our family, for our meals, for Thanksgiving was sourced. That was just really the way we grew up. So, I think it was less about hunting and more about my earliest memories were being two years old and mom throwing us in the car, driving down to St. Michael's Maryland, where my grandfather became a blue crab man in retirement. We were pulling crab lines.

Ellie Rubenstein: (06:47)
So, my brother and I love the excitement of pulling crab lines. We're always finding ways that we could get up earlier and go dig mussels or dig clams or help make clams casino for Thanksgiving, with the clams we would dig. Those were our memories.

Ellie Rubenstein: (07:02)
So, I think for my father who doesn't actually eat meat, my mother was the one who was the hunter, but it was always a proud moment where she would be gone moose hunting for 10 days. When you're a young kid and need homework help and your mom is out moose hunting, you're kind of tough out a lot. So, it was really cool when she would send pictures home of her moose. I was like, "That is awesome. My mom is out moose hunting." So, I guess the long-winded answer to that is I actually learned how to shoot at summer camp, and I was eight years old. I wasn't a great athlete. So, everyone was playing soccer tennis, and they had a rifle re-option.

Ellie Rubenstein: (07:41)
So, I learned how to shoot a 22. I like getting all the ribbons and I came home with the ribbons. And then when we were in Europe during the summer with my dad fundraising, my dad would leave us at the carnival every day. You're allowed to have also kids to shoot 22. So, I was shooting the 22s for hours and dad would come pick us up. I'd wind all these big stuffed animals. So, I started to learn like, "Okay, maybe I'm good at this thing." I do think that women are better and better shooters.

Ellie Rubenstein: (08:07)
So, to this day, every big game animal that I've killed, which again, I'm a meat eater, not a trophy eater. I've killed in one shot. So, I'm very proud of that. I really, really love sourcing my own food, which is why Manna came about. One last story I'll share with you, I actually just ended a long-term relationship. I always think back to the pivotal moment of a question he asked me when we-

Anthony Scaramucci: (08:30)
Did you shoot him, Ellie, or you let him go? Did you shoot him or no? No, you didn't shoot him?

Ellie Rubenstein: (08:34)
I think he wanted me to hunt and fish more than I do, which is hard to imagine. I probably misinterpreted the statement I'm about to say. We were out hunting. We were up in the upper Noatak, which is up in the Arctic. We were sitting on a caribou on the hills, caring for caribou, and I will never forget it. He looked at me and he said, "What does Ellie want?" I said, "Well, I just want to hunt and fish and able to make money doing something similar to this, because I'm really happy out here."

Ellie Rubenstein: (09:04)
So, I guess I might have misinterpreted that and built a global investment firm, but I do think that it always comes back to the root. So, how can you bring people to the ethical and humane way of bringing people edible traceable food. Hunting and fishing is something that most of our LP base really relates to. It's just the easiest way to source food that you can trace.

Anthony Scaramucci: (09:24)
Well, my dad is from Northeastern Pennsylvania and so he's been hunting and fishing his entire life. So, I learned how to shoot at age 10. I'm-

Ellie Rubenstein: (09:34)
Wow.

Anthony Scaramucci: (09:35)
... New Yorker now, but I have a Winchester semi-automatic and I have a 12-gauge shotgun, which you would know about me. I don't really advertise that. But every Friday, after Thanksgiving, we were in the woods somewhere tracking deer.

John Darsie: (09:51)
Anthony's idea of camping is the four seasons. Let's not kid ourselves here.

Anthony Scaramucci: (09:54)
That's totally true. I'm not in love with shooting Bambi to be honest, but that's fine. Everybody's got different views of this stuff, but I am a big Second Amendment person because I did grow up with guns. Let's switch gears because I want to talk about obesity and diabetes. I want to talk about plate sizes. So, Michael Milken has a great slide. He shows a diner plate in 1960. It's about this big, Ellie. And then he shows an Olive Garden plate in 2020, and it's about this big, Ellie. We are eating more. We're consuming more. We're putting antibiotics in our meat. Is this contributing to our high incidence, almost epidemic levels of diabetes? If it is, what would you say we need to do about it to curb it?

Ellie Rubenstein: (10:41)
Yeah, there's no doubt about it. In the last 50 years, our food has changed. But if you go back into history and look at what happened, I don't think pointing fingers at Big Food is to blame or Big Ag, because what they were trying to do back then was feed a growing population in a more efficient way. So, in many ways, having the technology to get more food was great. You had shelf stable food. It could be reached, and it was also cheaper. But I also think that where people sometimes get wrong is we need to work with Big Food and Ag, because those companies have processes that are at scale. Nobody wants to harm a human being's health. I think that's a misnomer. I don't think a farmer wants to make food that's going to make somebody unhealthy.

Ellie Rubenstein: (11:24)
The missing link here is that farmers don't work enough with doctors, nor are they in tune together. So, one of the things that we've really enjoyed with is working with Tufts University and Dr. Dariush Mozaffarian was a really big mentor to us. What he says is today in the US, only 12% of the US population is metabolically healthy. So, in the era of COVID, we should be more focused on how do you lower the obesity and diabetes and pre-existing conditions that might exasperate a COVID condition than just talking about hand sanitizers and masks. They seem like short term fix.

Ellie Rubenstein: (11:58)
I'm not trying to get into the mask game here, but what we need to do is figure out how do you get healthy, cheap, faster food into the hands of people that need it the most. So, our firm is not trying to kind of make the wealthier healthier. They know how to do that. We're really focused on the people that can reach it affordable. So, honestly, Big Food plays a part in that. We need to clean up the ingredients in the accessible, cheaper food for the average person.

Ellie Rubenstein: (12:26)
One more thing on that, it's not just the US. The Middle East actually has some of the highest rates of diabetes. I sometimes point blame on my father's company, because in the heydays of private equity, they were exporting a lot of our fast food chain. Fast food wasn't ever made to be healthy, but it wasn't about harming human health. I don't think we actually clearly understood the linkages between human health and poor diet until the last five years.

Ellie Rubenstein: (12:53)
As Mike Milken says, who both you and I obviously really well respect... When we were starting, he said, "Food is where the internet is 15 years ago." That's how fast the transformation of the food and ag supply chain is happening and it's global, because food is a global supply system. So, where the ingredients are, where the production is, and where the end consumer is, we need global trade in order to make it healthier.

Anthony Scaramucci: (13:19)
So, what does it look like? Let's paint the picture of 2030 for food. What does it look like? What would you like it to look like? What is it going to look like? What do we need to do to make it look more like the way you would like to see it?

Ellie Rubenstein: (13:34)
The simple statement is this. It's harder to achieve. But what we would like to see is in the US, 7 out of the 10 causes of death are linked to lifestyle. The number one of that is poor diet and nutrition. So, the only way we can start to reduce the causes of death being away from it's not just cancer or heart attacks. We are focused on the links of poor health. So, how can we make sure that the human health outcomes can be linked to diet and nutrition.

Ellie Rubenstein: (14:03)
Frankly, people can be incentivized to be healthy. I would love to see a system where it's not just a carbon tax, but where's the reward for being healthy? We all pay health insurance premium, but you're being paid to go to the doctor. So, why can't there be something a reward for purchasing healthy food, which might cost a little bit more, or getting your steps in?

Ellie Rubenstein: (14:22)
So, we think that large insurance companies are actually playing a part of this. The fact that John Hancock has a vitality product now, which incentivize you to live healthy, not incentivizes you to die. We have to change the whole incentive system. Changing the behavior, Anthony, is the hardest thing. You can't just all of a sudden tell somebody for seven years of bad eating that they're going to eat healthier. My father is a classic example. He grew up on vending machine food. He's not overnight going to crave healthier food. But if you change the incentives as well as change ways to get to them and target healthy lifestyles, that's what we have to preach.

Ellie Rubenstein: (14:55)
So, it's a trifold model we'd love to see happen. We'd love to see more informed capital come into the space with better investment metrics linking ESG and health outcome. We'd love to see policy changes. We'd also love to see an education around nutrition. The average person doesn't really know what a nutrition label is and what they should be eating.

Anthony Scaramucci: (15:15)
Well, I have sympathy for your dad because I grew up on Howard Johnson's fried clams on Wednesday nights. It was an all you can eat buffet. So, I get it. Your first two investments, the Vital Farms and Verde Farms focused on sustainable farm products and animal proteins to consumers. So, what is the future of plant-based foods? How do we scale that to meet the needs of this growing population?

Ellie Rubenstein: (15:43)
One of the interesting things, so we have four companies in our portfolio today. Two are plant-based and two are other proteins, the eggs and beef. In the plant-based space, I think what people have to understand is where the plant-based movement is, is actually using these ingredients for meat analogues. Which means that people still want to eat meat, but they want more plants in it. So, I think what MycoTechnology has done well is it built out a plant at scale that uses fermentation. So, this is food science at its best. How can we get mushrooms, ferment them down so that they're usable ingredients to make big brands healthier?

Ellie Rubenstein: (16:20)
Our chickpea company is the same thing. It's using chickpeas, and it's really in the better for you snack product. But I think that what Vital and Verde have done is they've given a model for farmers. It's pure conscious capitalism in a multi-stakeholder approach. So, it's a win for farmers, because they actually are now paid the highest per capita of any farmers. They feel aligned with a brand and company that matches their ethics.

Ellie Rubenstein: (16:46)
So, in today's world, Anthony, 77% of consumers are making purchases that they think are going to attribute to their personal health, but it doesn't stop with the halo health effect. 62% of them want ethical companies and then 55% of them want animal welfare. So, animal welfare doesn't necessarily mean being vegetarian. It means being humane, because it's clear now that the ESG linkages, if you treat the environment and the animal well, you will get healthier food. So, I think that's what we've been trying to say.

Ellie Rubenstein: (17:16)
It doesn't matter if it's eggs or beef or even seafood. If the farmers, ranchers or fishermen are paid well, if the land is actually utilized well in a circular economy way, you are going to get a higher brand and a traceable product that consumers will purchase.

Anthony Scaramucci: (17:31)
So, a book your dad actually recommended to me was called Spillover by David Quammen. I don't know if you had a chance to read that book. But in the book, I'm just interested in your comment on this of thesis of the book is a human population of one billion, we're sort of okay with the ecosystem. As we get to seven, seven and a half billion, we're starting to now spill over into the animal kingdom. So, we're deforesting. We're doing some aggressive things to the environment, obviously, carbon dioxide emissions, et cetera.

Anthony Scaramucci: (18:06)
One of the things that's happening is you're getting these new tropic transfers of viruses from the animal kingdom to us as mammals. So, the question I want you to react to that is that impacting the way we're food sourcing is the abundance of success that human beings have had on planet Earth. As we head towards 9 or 10 billion people in terms of population, what kind of pressure is that putting on the planet?

Ellie Rubenstein: (18:35)
This statement might be controversial, but I think back to my first day at Purdue and the MS-MBA program-

Anthony Scaramucci: (18:40)
I'm controversial, so I would appreciate you not making controversial statements on our SALT Talk is that I don't like controversy at all. I just wanted to point that out to you.

Ellie Rubenstein: (18:52)
You are an amazing human being. You've taught me to stand up for my beliefs.

Anthony Scaramucci: (18:56)
Alright. The more controversial, the better, Ellie. Let's go here.

Ellie Rubenstein: (19:03)
When you're at Harvard, right, you're taking economics classes. It's a different viewpoint of the professor's in economics versus Purdue. I love Harvard, my cousin is a professor of economics there. But when you're in a Master's program of Agriculture Economics and day one of your world trade class, the professor says, "Well, here's the report on how do you feed the world by 2050." But you need to go into the data and actually look at what the report says. So, when they train you as research to go in and look at the data, you say, "Wait a second, are we really running out of food?" It's very clear that that report was somewhat biased. So, the mismatch is where the food is produced versus where it's needed. So, it's a supply and demand mismatch.

Ellie Rubenstein: (19:48)
So, that's why most people in agriculture are very much fans of the global trade economy, because I don't know if you noticed, Anthony, but most of the beef consumed in this country is not actually from the US. We import these. So, we export our high-quality beef. We import shitty beef, and that's what we're eating. So, when you start looking at the trade flows of food, you say, "Well, that's interesting." So, our beef company is a great example of that. It's actually sourced in Uruguay. The reason being is that you get four times the amount of production down there, because the sunlight is year-round. It's open pastures and open grazing. They don't even call it pasture-raised or grass-fed beef, it's just beef. That's what the environment is.

Ellie Rubenstein: (20:30)
So, what we've tried to do is go around the world and say, "Well, where are the best growing practices and environmental conditions?" Honestly, we don't really focus on the negativity. We look at the models that are working. So, when COVID hit and 80% of the US beef processors shut down, we were focused on the 20%, which are the small producers that didn't have to shut down because they had great worker condition. The facilities were never jam packed to start with. So, it really starts with the culture. In Vital Farms' case, they're 12-year-old company, they've never had an issue of salmonella. They say it's due to strict quality controls.

Ellie Rubenstein: (21:07)
So, that's where I think it's the culture of these firms that we're really looking at of "How do you make sure that it's ethical worker condition?" Because we know that you can focus on deforestation. You can focus on overfishing, but I'm sitting here in Alaska today. I can tell you I have had more fish to be able to feed our investors, feed my family in my entire lifetime. I have never seen so much fish but yet all the headlines say, "There's no fish in Alaska. It's warming. Where are the fish? Wildfires." Well, it wasn't a warm summer here. It's been 55 and raining almost the whole summer and I've never seen so many fish.

Ellie Rubenstein: (21:42)
So, I think if you look back in the Bible, our name is Manna Tree, food from heaven. For years, there's always been cyclical storms, but animals are the most adaptable human beings. So, our beef company CEO is in Alaska right now. He's family vacation. I took him to ground zero of salmon spawning grounds. I wanted him to see where the salmon are produced, right? It's very controversial right now. It's in Bristol Bay with the Pebble Mine. He said, "Have you ever seen of spawning salmon? It's a phenomenon my father has never seen. He always talks about salmon have the greatest sex lives. They go upriver, they spawn. They're very happy." It's actually a pretty cool thing to see, red salmon spawning. He said, "But take a look at the bear over there. We share the salmon with the bears."

Ellie Rubenstein: (22:27)
I think by studying the animals is a better way to do it. The biologists now are saying they're seeing bears in places they've never seen. The fish are here. They came in late, but that's because we had the coldest winter on record in Alaska. So, everything was shifted by a couple of weeks. So, animals are very, very adaptable. But I'm not going to say last summer, it wasn't sad when we had the warmest summer and I saw 25 dead fish in the river. Salmon, it's all about water temperatures and they will have heart attack. So, I don't know. I try to focus on the positives of what we see and the systems that work and the fishermen and farmers that have such strong beliefs in making it right than the negatives in the world.

Anthony Scaramucci: (23:08)
All right, well, I'm going to give John Darsie a chance to get off that salmon porn website that he's looking at. May I ask one more question? And then I'll open it up to audience participation. So, my one last question is about understanding Eastern medicine. Does it help us be healthier in the Western world? Give us some your thoughts and perspectives on that before we go to John.

Ellie Rubenstein: (23:31)
I grown up in a very privileged life with parents that were willing to pay whatever it costs for medical issues. I was born with a genetic hearing loss. I'm actually 37% deaf, and that hearing loss that turned out to my nervous system. I went back and counted. I made 40-

Anthony Scaramucci: (23:45)
Both ear, Ellie, or just on one side?

Ellie Rubenstein: (23:47)
Both.

Anthony Scaramucci: (23:47)
Both ears.

Ellie Rubenstein: (23:48)
Both and it's genetic. I think that's why my taste buds got amplified. So, I love food. I don't know what happened. Yeah, it's genetic, but it's also in my nervous system. So, what that meant is my sensitivities are much higher. My 100%Ashkenazi Jewish heritage, I really had allergies like you've never seen. I've had now two life or death attacks, one being a traumatic brain injury and one being a food allergy. I don't think you're given much more time to live. But as somebody who's been to 40 doctors and had to relearn how to walk and talk with a traumatic brain injury and I've had multiple concussions, multiple ski racing injuries, the doctors and the best names in the hospitals weren't solving my problems.

Ellie Rubenstein: (24:31)
So, my father recently was visiting, and he said, "I think your mother did a good thing for you by getting you to move to Alaska," because it got me off all medicines, all green stuff. I'll credit my ex-partner here. But if you put me in a plane and stare at glaciers, my anxiety will go away. If you put me on medicine, all you've done is made me obsessed about "Am I taking the medicine?", and so much focused on a pharma type of world.

Ellie Rubenstein: (24:55)
So, the culture we built at our firm, wilderness, wellness and well-fed has really been around a lifestyle that I've seen has worked for myself and really focus on a bottoms-up approach about how do we share that with other people. It's transformative to build a work culture where you have 10 healthy employees. We pay for team workouts. It feels more like a business athlete environment, but you watch everybody else be transformed when they take a weekend off. They go hunt with their grandfather in Kansas. It's so much a part of who we are that being in the wilderness and living in a place where we're not just the healthiest county per capita, but it is who we are. So, we preach and live the lifestyle that the farmers and ranchers and fishermen live.

Ellie Rubenstein: (25:35)
So, part of going back to UCLA was actually conquering a brain injury. I was sick of being the patient. When you have a traumatic brain injury, it's the most selfish thing you can do of just every day focusing on yourself. It was really a horrible mental experience. So, I wanted to go back and conquer that. Instead of being the patient of neuropsych, be his student. So, it was more of a personal thing. I also credit my mother who really healed me with nutrition. I really couldn't eat. My digestive system didn't work.

Ellie Rubenstein: (26:08)
So, you're either on feeding tubes or unhealthy food in hospitals. She just said, "Have a bite of my homemade mousse bone broth," or in my case, I got really depressed and homemade salmon eggs. It's not caviar. It's basically an Omega 3 pill. So, I've lived the food as medicine lifestyle. In our family, every time something goes wrong, it's usually you need to go see mom in Alaska. She'll put you on the moose diet for two weeks and you feel better. So, it's very much core to who we are.

Anthony Scaramucci: (26:36)
I'm coming to see mom. I could use a moose diet in my life, but you look amazing. You're doing amazing work. I have to turn it over to John Darsie, okay? He's champing at the bit here for questions.

Ellie Rubenstein: (26:47)
Sure.

Anthony Scaramucci: (26:47)
But I think you have an amazing life story. I think you're making an amazing contribution to everybody. I got to point out there. I'm a very proud investor in Manna Tree Partner. So, thank you for including me.

Ellie Rubenstein: (26:59)
Thank you.

Anthony Scaramucci: (27:00)
Go ahead, Mr. Darsie.

John Darsie: (27:01)
Thank you. You know I get irritable when you leave me out of the conversation. So, I'm excited to jump in. Ellie, I can relate somewhat to what you're talking about. I haven't experienced any major health issues. But during the pandemic, for example, it was becoming a lot. I have three young kids. We were cooped up here in the house in New York, and we escaped out to my wife's family's ranch in Colorado. It was definitely a great experience and just helps with your mental health to live out in wilderness a little bit.

John Darsie: (27:28)
So, I want to go back to the idea of conscious capitalism that you alluded to earlier. It's an idea that is sort of pervading all of finance right now. There's so many mandates that come from institutions and families and high net worth individuals looking to tailor their investments to ESG or sustainability. This idea of conscious capitalism is something that interests me. Could you talk a little bit more about what that means and why investors are so drawn to that idea?

Ellie Rubenstein: (27:56)
When we started, people wanted to label us as an impact fund. My father was and many mentors were really saying, "Don't do it. Because what you need to do is show people you can get the same level of returns with the aspects of the deals that you're looking at." So, we've never labeled our firm one way or another. We don't say ESG. If anything, we're trying to label our firm as a health firm, proving out the linkages of nutrition and health. I think that conscious capitalism is rising. I'm also going to give a shout out to Anthony's son.

Ellie Rubenstein: (28:28)
In our investor base, 30% are women, 20% are next gen that wrote their first ever check into a fund. But out of 130 investors, I will point out 55 of our family offices or institutions we work with, there's a next generation family member that's active. They think that what we tried to do is say to the next generation where conscious capitalism are already part of their daily life. We try to give them a tangible way that they can show their parents this is a real asset class. So, in our dream world, a portfolio would have energy and healthcare within a private equity allocation, which on average is usually about 20%.

Ellie Rubenstein: (29:07)
But how that gets broken up, we would love to see food as an asset class. It really does touch almost every part of the ecosystem, whether that's healthcare, energy or consumer. It has returns. I think that our whole thing has been... We're focused on growth stage. We'd like to be the last capital in. We're actually trying to shorten the time horizons of exits, because the demand is there, and we see the capital. So, that's why we're writing larger checks. I think that's a big part of proving out conscious capitalism is it's not just the venture ecosystem, which has been extremely well funded.

Ellie Rubenstein: (29:40)
The AgFunder report just came out I think last night for the mid-year report. So, far, $2.9 billion invested in this year alone, which will outpace last year. That's great. But I think what we look for is the firms like SUGs of the world. What Lucas Walden has done is incredible, putting that much money into the space, but we're trying to write the $30- to $50-million check. Because what we know is that the buyers actually need profitable companies, they don't want to pay to acquire customers.

Ellie Rubenstein: (30:06)
So, in order to be profitable on that scale, it takes private equity level checks that can get it to that last stage. So, I can't talk too much about Vital Farms, we're still in our silent period. But I think it was a very good indicator that the public markets value what we would say ethical and edible companies. That is the heart of conscious capitalism.

John Darsie: (30:27)
So what level of investment ultimately is going to take to transform the food system globally and get it to the point where we are treating the environment well and able to cater to those who are looking for healthier food options.'

Ellie Rubenstein: (30:44)
For people that are listening and want to invest in food, jump in. This is a trillion-dollar problem that we have to solve. It's not just feeding the world. It's feeding them faster, better and cheaper. So, as we always say in our investment thesis, we look at four areas. We look at the primary resource, meaning the land itself. We look at the processing of it. We look at the distribution, which is the logistics. We look at the consumer brand. In food, if you look at e-commerce over the last five years, all e-commerce not including food was 20% and you know how fast e-commerce has changed our shopping and buying behaviors. But today, food is only 3% of e-commerce. So, things like Amazon acquiring Whole Foods, that is what is needed to transform this.

Ellie Rubenstein: (31:28)
So, the direct-to-consumer buying behaviors that we're seeing right now, in COVID. I mean, the supply chains just don't exist if you say, "Well, how can I get you healthy salmon from Alaska to your doorstep in Long Island?" That fish would be touched nine times before it reached your plate. It should be three, but that's how many middlemen there are. So, we're having to redo the entire loop markets.

Ellie Rubenstein: (31:49)
Well, in seafood, 80% of the market were usually going to food service. That's not just restaurants. That's schools. That's hospitals. That's hotels. You can't just get that product in the grocery store today. You have to redo packaging. You have to redo supply chain. So, anyone's background is needed in this phase. It's pivoting manufacturing processes that can produce more direct-to-consumer type packaging.

Ellie Rubenstein: (32:11)
So, for somebody who's young, I'm 30, this is a 30-year problem that we can stay as a niche asset manager, laser focused on solving this problem. We need everybody's help in collaboration like Anthony and investors that are willing to open up distribution channels and relationships to help scale these food companies.

John Darsie: (32:32)
Yeah, that's fantastic. We were talking before we went live about we have a lot of young families in places like the Middle East who recognize that it's an issue in those societies as well and are committing a significant amount of capital towards addressing these issues.

Ellie Rubenstein: (32:46)
One comment on that is first time I went to Middle East, I was on a Milkean MENA panel. It was fascinating. The other panelist, she's the Minister of Food Security. They don't call it a Minister of Ag there, because food security is the problem. They import 90% of their food to that region. That's not sustainable. So, I think the Middle East has been one of our most beloved LP groups, because the next generation sees that they need to transform their own food. It's not just that it's unhealthy, they need to produce food.

John Darsie: (33:19)
Right. So, we have a question from a member of the audience, who I think might be based in the Middle East. He's asking about your feelings about the clean meat market or lab grown meat. I know two of the early companies you've invested in are involved in sort of sustainable agriculture. Two of them are our plant-based, healthier eating options. Can you talk a little about that clean meat market and lab grown meat?

Ellie Rubenstein: (33:44)
Yeah, we're not an expert in it. It's still earlier stage. So, I think many of the Food and Ag venture firms are the ones writing those checks. We certainly eye it and we look at it. But from our standpoint, it doesn't meet our investment criteria today, which tends to usually be a company that's profitable, has $10 billion in revenue, positive EBIT, margin, and can scale. On that same panel in the Middle East, I think it was the founder of JUST. I think the cost per chicken nugget at the time was about $1,000. So, it's kind of where the first computers or iPhones were when they were really expensive, but we need more capital to be able to get the cost of production down.

Ellie Rubenstein: (34:23)
So, they'll get there. I would say give it a few more years until the costs come down. Bill Gates and others have done a great service to the food economy by willing to invest from a science standpoint, not just from a return standpoint. So, it really is true in venture capital. But we also know that meat companies willing to invest in disruptive technology, we're grateful for them in the food system. Because in a few years, it really is at scale and it will help feed developing worlds where, frankly, there's not enough protein right now. So, the science is the most fascinating. I think seeing people that want to be food scientists and pivot careers and enter this is really, to me, the most noble calling. It's not just a farmer. I's how do you feed the world using your science background?

John Darsie: (35:09)
Right. Just going back, I know you commented on MycoTechnology a little bit in the conversation about sustainable agriculture. Two of the companies you invested in, MycoTechnology, Nutriati, they're using plant-based sciences to create healthier consumer products. Could you talk a little bit more about what each of those companies is doing and what you think sort of the future holds for plant-based foods?

Ellie Rubenstein: (35:32)
Yeah, MycoTech is near and dear to my heart. It existed before Manna Tree. When I was writing my capstone at Purdue on plant-based proteins and investing in food, we looked at a couple hundred companies. I was trying to prove this out to my own family saying, "I just want a small allocation who invest in food deals. This is my interest area." It was the only one that really, I felt like could meet our criteria. So, we transferred it at cost for my family office. It was one of our first deals, proof of concept. I think it's allowed us to learn and to see what the Big Food wants. Most of the investors are Big Foods. You have General Mills. You have Ajinomoto who's using it as an MSG replacement. You have Kellogg's. They're both investors and customers. It really gave us an eye into what we were seeing.

Ellie Rubenstein: (36:18)
So, what it does is basically, it's using craft beer technology or fermentation. So, anybody ever wants to go right next to the Denver Airport, you can go and see. You can observe what this looks like. It's fermentation tanks to ferment the mushrooms. When we started, I think they were only using three different types of mushrooms. There's upwards of 57 they can do. So, COVID allowed them to pivot a little bit in a good way, because mushrooms are known for immunity and so they're able to get this more international supplement. So, their products today are B2B. So, one of them is PureTaste. The other one's ClearTaste.

Ellie Rubenstein: (36:51)
So, mushroom's naturally lower sugar. So, it's both a dual product and that it's a plant-based product protein and lower sugar. So, it really is good in that the texture is there, the health components are there. It's actually pretty cheap, because it's mushrooms. They're fungus. So, we're really excited about Myco. It really showed us that for us, where we want to play in the plant-base phase is the ingredients phase. Because right now, there's only really one to four ingredients being used in most of these plant-based products, and there could be upwards of 40. So, we're focused on the innovation of that and the technology of the processing, but not changing the actual ingredient.

Ellie Rubenstein: (37:28)
On Nutriati, it's pretty similar, but it's just using chickpeas. What we found is that it can also be in the better for you snack category. I'd say another main differentiator is it's branded. So, when you buy a Biena Chickpea Puff, it does say, "Using Artesa flour," but we're very enthusiastic about that. That's why there's two of these companies in our portfolio. They don't really compete. They have different customer bases. I'd say we are always eyeing the next best superfood as an ingredient.

John Darsie: (37:57)
Alright, so it sounds like we're just sort of scratching the surface of what plant-based foods is ultimately going to look like 10, 20 years from now. Before we let you go, Ellie, and we could talk for hours about this stuff, because you're so passionate and knowledgeable about it. But I want to talk a little bit about your philanthropy work. So, as I mentioned in the open, you had a long list of different philanthropic causes that you support. What are the causes that are most important to you and that you're the most passionate about? Why is philanthropy been such an important thing to you in your life?

Ellie Rubenstein: (38:29)
I was raised with two really philanthropic parents, not in the way of rich people writing checks. I think my grandmother was the original philanthropist. Every mail that comes to her, she would write a $5-check. She was so worried that she might not go to heaven if she didn't write that check. So, when she died, we had like 450 causes. We had to cancel this $5- to $20-checks. So, that's how my dad grew up and my mother is no different. She's like the Mother Teresa. So, I can go hunting with her around any native village in Alaska. They're so grateful for her, for always buying the artwork and showing up with groceries or computers.

Ellie Rubenstein: (39:03)
So, service is really a big part of our mentality. We don't view it as philanthropy. We view it as volunteerism. I think both of my parents always tried to show us that we've had everything. But when your parents every day asked you not what did you just learn in school today, but who did you help, that's really core to us. So, I've kind of really been able to strengthen my philanthropy. I don't really need anything to live. So, I'm focused on Maslow's Hierarchy of Needs of food, water and shelter. So, that allows me to put most of my other remaining time and efforts into helping other people. I view it is a bottoms-up approach. If we can invest more in the people that are producing our food, that brings me great pleasure.

Ellie Rubenstein: (39:44)
So, I have a Donor Advised Fund. We are also, I will tell you, getting ready to launch a research arm within our own firm, and we've had some early success. I think that the three co-founding partners, we really view this now as the more you make, the more you get to give. So, I think it's a different mindset. I am religious. I do believe in that principle, the more you give, the more you get. I think it just opens up whole new doors. Well, I have a Donor Advised Fund. It's called Mission: Ingredients. It's been traditionally for the last 10 years really more so focused on Red Cross and military just for my own personal life.

Ellie Rubenstein: (40:18)
But now, what I've been able to do is expand that into supporting different research efforts and combine that with data so that we can actually get better industry knowledge. So, more to come on that. And then I really would say that it's venture philanthropy. I tried to study some of the best models out there of next generation. I would say billionaires that are really struggling with the same issues. How do I make a family legacy that's unique to mine? I think the venture philanthropy model works, doesn't matter if it's jammed together. If you look at the Arnold, venture philanthropy works, because sometimes it's for-profit and sometimes it's nonprofit.

Ellie Rubenstein: (40:51)
I'll give you example, the average fisherman, it costs $250,000 to be able to buy a boat and have a commercial permit. That's a lot of money for a 23-year-old. So, if you can find ways to help them by their quota or support them in other ways, it's more of a venture philanthropy aspect, open new market. So, I'm really focused on the population of farmers, ranchers, fishermen, and the military, and those that we can be able to link the health halo effects with livelihoods.

Ellie Rubenstein: (41:20)
So, as I kind of rebrand my plan for the next 10 years, it's research and data. It's population health, as well as livelihood. Those are the three things that mean a lot to me. I would encourage people to get out there. Volunteer, spend time with people you don't know, because you would be amazed what skill sets it brings back to your own firm for creativity and ideas. When you fundraise for a living, you can almost feel inauthentic when you're just selling food.

Ellie Rubenstein: (41:49)
So, if you can bring stories about how you relate to the people that you're trying to work with, it's not just more authentic, it's credible, it's realistic. So, philanthropy really gives you the tools to actually move your for-profit world forward. That's the one thing I could make everybody realize, get involved, give back. It will give more to you than probably just you are giving to them.

John Darsie: (42:12)
Well, it's fascinating stuff. It's amazing what you've accomplished in 30 young years and the way you've interwoven all of your philanthropic causes with what you're now doing with Manna Tree. So, congratulations on all your success. I'll leave it to Anthony if he has a final word. Anthony, you still there?

Ellie Rubenstein: (42:32)
He's on mute.

Anthony Scaramucci: (42:34)
I'm muted, because I was eating high protein eggs. I want you guys-

Ellie Rubenstein: (42:39)
Do you really? Hold on, is the yolk orange? I might get in trouble for doing this.

John Darsie: (42:42)
You got to get that orange yolk. That's how you know it's real.

Anthony Scaramucci: (42:46)
So, but in any event, I just want to say thank you, Ellie, and continue your great success. Hopefully, as I say to everybody, we can get you to one of our live events. We had you at SALT Abu Dhabi, where you were fantastic. Hopefully, we'll get you to an event in North America before too long once the pandemic ends. Wish you great-

Ellie Rubenstein: (43:06)
Can I visit you in Long Island and we can go hunting again? It's time for you to get that rifle out.

Anthony Scaramucci: (43:11)
You can't really hunt you're on Long Island, but I can tell you.

John Darsie: (43:13)
You got to go the other direction.

Anthony Scaramucci: (43:14)
I could take you to-

John Darsie: (43:15)
We got to come out to Alaska.

Ellie Rubenstein: (43:17)
There you go.

Anthony Scaramucci: (43:17)
You can make it in Northeastern Pennsylvania.

Ellie Rubenstein: (43:20)
Perfect.

Anthony Scaramucci: (43:21)
It's an hour upstate New York by Wyndham where I have a house. You would love it there.

Ellie Rubenstein: (43:24)
That sounds amazing. That sounds amazing. I will make sure to send you some fresh meat and fish as a thank you.

Anthony Scaramucci: (43:29)
If we bring Darsie's grandmother-in-law, okay, she's probably the best shot in the nation. Okay, when I run for president, she's going to be my vice president. She's already committed because she's so hard right. I'm going to need to galvanize the hard right, okay? So, I'm going to need her help. She's somebody I've known since I was the age of 13. Okay, so we'll bring her along with us. How's that?

Ellie Rubenstein: (43:50)
I'm on the Anthony for president ticket too. Really, I mean that.

Anthony Scaramucci: (43:54)
Yeah, of course.

Ellie Rubenstein: (43:54)
What you've done with SALT, getting people together and taking chances on young entrepreneurs like myself, and really giving us a microphone is I'm forever loyal to you. It's incredible. Thank you. I really mean that.

Anthony Scaramucci: (44:07)
The only presidency I'm running for is to be president of your fan club, Ellie. So, thank you for everything. Good luck up there. Enjoy the rest of this time.

Ellie Rubenstein: (44:16)
Thank you, same to you.

Daniel Okrent: Author "The Guarded Gate" | SALT Talks #40

“There’s this sudden fear that the next guy coming up the ladder is going to ruin it for everyone else who has made it.“

Daniel Okrent is the prize-winning author of six books, most recently The Guarded Gate: Bigotry, Eugenics, and the Law That Kept Two Generations of Jews, Italians, and Other European Immigrants Out of America. He was also the corporate Editor-at-Large at Time Inc., and was the first public editor of The New York Times.

His career began at seven years old, when he wrote a letter to the editor that was surprisingly published. Daniel was a baseball writer at first, later publishing a book on the history of Rockefeller Center.

Daniel’s latest book covers the false science of eugenics, a set of practices aimed to “improve” the genetic quality of the human population. “It seems to me that we as a species need somebody to look down on. I don’t know why that’s the case.” Daniel also discusses the blanket term “whiteness” and how its expansion seems to be based on familiarity with a race or culture.

LISTEN AND SUBSCRIBE

SPEAKER

Daniel Okrent.jpeg

Daniel Okrent

Author

The Guarded Gate

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 public policy. Salt Talks, as you know, if you've tuned into them previously, are a series of digital interviews we've been doing during this work-from-home period with some of the world's foremost investors, creators, and thinkers.

John Darsie: (00:30)
And what we're really trying to do during these Salt Talks is replicate the experience that we provide at our global conference series, The Salt Conference, in which we aim to provide our audience a window into the mind of subject matter experts as well as provide a platform for what we think are ideas that are shaping the future, as well as interesting stories.

John Darsie: (00:47)
And we're very excited today to welcome Daniel Okrent today to Salt Talks. Daniel is the prize-winning author of six fantastic books on a very diverse set of topics. In fact, Publishers Weekly called him one of our most interesting and eclectic writers of nonfiction over the last 25 years. His most recent book, which was published in May of 2019 is called The Guarded Gate, and it's a story about bigotry, eugenics, and the law that kept two generations of Jews, Italians, and, and other European immigrants out of America. It started about eugenics and morphed into a book more broadly about immigration. I know Anthony and Daniel will talk at length about that book as well as some of his previous books.

John Darsie: (01:30)
And prior to The Guarded Gate, Daniel published the Last Call: The Rise and Fall of Prohibition in 2011, which was cited by the American Historical Association as the year's best book on American History. Prior to that, he wrote the Great Fortune, which is the epic of Rockefeller Center, talking about all the inner workings of how Rockefeller Center got built. That book was a finalist for the 2004 Pulitzer Prize in History.

John Darsie: (01:57)
Among his many jobs in publishing, Daniel was the corporate editor at large of Time Inc. He was also the first public editor of the New York Times. Daniel served on the board of Smithsonian's National Portrait Gallery for 12 years, including a four-year term from 2003 to 2007 as the chairman, and he remains a board member of The Skyscraper Museum and the Authors Guild.

John Darsie: (02:18)
Daniel is a native of Detroit and a graduate of the University of Michigan. Go Blue! He now lives half the year in New York on the Upper West Side and the other half on Cape Cod with his wife, where he's currently residing right now. They have two children that are grown, and his wife is also a well-known poet.

John Darsie: (02:36)
A reminder to our audience that if you have any questions for Daniel during today's Salt Talk, you can post them in the Q&A box at the bottom of your video screen. And with that, I'll turn it over to Anthony Scaramucci, who's the founder and managing partner of Skybridge Capital, a global alternative investment firm, to conduct today's interview.

Anthony Scaramucci: (02:54)
Daniel, it's great to have you on. The first thing I have to do is I have to give a shout out to Sol Gittleman, the course professor from Tufts who watches these Salt Talks, so Sol, we're waving to you. I got your book from Sol. I went up to see him. He's living up in, I guess it's the Winchester area in an assisted living place with his wife, Robin. And he mentioned your book to me about a year ago. Maybe eight, nine months ago, I read the book, and obviously, then reached out to you.

Anthony Scaramucci: (03:23)
I thought it was one of the more fascinating books that I've read about that genre of time in American history, 1915 to 1935. I learned a lot about that book. My Italian grandparents were immigrating. My two grandmothers and one of my grandfathers, 1921 and 1923, respectfully. And then my dad's father was actually born here in the United States in 1895, so they had a little bit different experience in the immigration.

Anthony Scaramucci: (03:55)
But before we go into that book and your other books, I would love you to tell our listeners and viewers how you became a writer. What was it about your personal background that guided you in that direction from your time in college?

Daniel Okrent: (04:12)
Well, to tell the truth, I can take it back before my time in college. But first, thank you, Anthony, for inviting me to do this. It's a pleasure to be here. And hi, Sol. How are you? When I was seven years old, my father's oldest friend, who was involved in politics and to some degree journalism, he was a godfather to me. And he urged me to write a letter to the editor to the Detroit News, our local newspaper. And he said, "If you want to get it published, be sure to begin with, I am seven years old, but I have this opinion."

Daniel Okrent: (04:46)
SO I wrote this, signed it, and it appeared in the paper three days later. And I saw my name there, and it said underneath it, Danny because I was called Danny Okrent. And I said, "My God, my name's in the paper. I'm going to be a writer." It really goes back as far as that. But I got serious about it when I was in college doing journalism. Then I worked in the book publishing business.

Daniel Okrent: (05:08)
When you're an editor in the book publishing business, what you really want to do sometimes is be on the other side of the desk. And after nine years in book publishing, I switched, and I decided I'll try to be a writer, which meant four or five years of barely making mortgage payments, but then it worked out.

Anthony Scaramucci: (05:25)
Well, and then you went on to become an author. I mean, you're a phenomenal nonfiction author. And so you converted from journalism, which is a tough enough job, into actually writing books, which I know is a super tough job. When did you make that transition?

Daniel Okrent: (05:42)
When I began writing, I took the advice of a friend who said, "If you want to make it as a freelance writer, you'd better have a subject that you're really good at so people will come to you to write about that subject." And the thing that I knew better than anything else was baseball, so I became a baseball writer, and I did pretty well. I was published a lot, Esquire Magazine and Sports Illustrated. And I did a couple of books about baseball.

Daniel Okrent: (06:04)
But again, following that friend's advice, once you've established yourself on your subject, you can then switch to any subject you wish because you've shown that you can make it as a writer. So around 1990, '95, when I was in my 40s, I was working as a magazine editor, but thinking about leaving, making that change, and to turning full-time to writing, which I finally did in 1998.

Anthony Scaramucci: (06:27)
Daniel, what is your team? Which is it, Detroit Tigers or-

Daniel Okrent: (06:30)
No, the Chicago Cubs.

Anthony Scaramucci: (06:32)
Chicago Cubs, alright. There you go. Well, congratulations. You finally got one. It's awesome.

Daniel Okrent: (06:35)
Finally, yeah.

Anthony Scaramucci: (06:37)
You were also the George Washington of the modern rotisserie scoring system for fantasy baseball. See, a lot of people don't know that about you as well, which is equally fascinating. I interrupted. I didn't mean to, but I just wanted to hear. I'm a huge baseball fanatic.

Daniel Okrent: (06:50)
No, no, no, not at all. I just found that when our kids were graduating from high school, the opportunity to have the freedom to live where we want and to make my own schedule really played into my long-term wish to write for a living. So I left the magazine business in 2001, but I had begun working on the Rockefeller Center book, Great Fortune, about in 1997, I think. So I date my career-

Anthony Scaramucci: (07:16)
Why that, though, Daniel? Why did you pick that subject?

Daniel Okrent: (07:20)
Well, again, I don't have a good reason. I have a silly reason. It was somebody else's idea. I was called by a publisher I knew slightly. We had lunch. It was a very nice lunch. It was back in the days when I'd actually have a drink at lunch, and a beautiful afternoon in an outdoor garden behind a restaurant in the village. And I said to her, "I'm really not looking for a book to write. I've got this job and others."

Daniel Okrent: (07:45)
She said, "Well, I want you to write a history of the Rockefeller Center." And I said, "It's a deal." My agent, who was sitting at the table, said, "You never should do such a thing."

Daniel Okrent: (07:53)
When I was the editor of Life Magazine, and when I was corporate editor at large, my office looked at Rockefeller Center. I was in the Time and Life building at 6th Avenue and 50th Street on the West Side, and I saw that place and walked through it every day, and I lived it for a variety of reasons. So the opportunity to learn more about it and have somebody pay me to do that was something I couldn't pass up.

Anthony Scaramucci: (08:16)
And, boy, I thought that was a phenomenal book. I read your books in reverse order. Well, I read The Guarded Gate, then The Last Call, and then I found ... Somebody had mentioned to me that you had written the book on Rockefeller Center. I thought that book was amazing. Let's touch on Rockefeller Center for a second because it almost didn't happen, as we both know, based on your book. And yet, this was a phenomenal experiment by John D. Rockefeller Jr. Tell us a little bit about the idea behind Rockefeller Center and what it means to the city of New York.

Daniel Okrent: (08:49)
Well, it was an accident. John D. Rockefeller Jr., who had never done anything resembling property development, but was an extremely generous philanthropist even beyond his father, really his entire career was philanthropy. He acquired a ground lease to the land that is now Rockefeller Center from Columbia University so that the Metropolitan Opera Company could build an opera house there. And then the opera company, as they're preparing to build an opera house, suddenly the market crashes in 1929. And they go to Rockefeller and say, "Well, we can't really afford it," even though these were some of the richest people in New York, "So would you build the opera house as well?"

Daniel Okrent: (09:28)
And he said, "It was at that moment I decided I could either work for them or I could work for myself. And I decided to do it alone." And he had this 99-year lease on three blocks of Midtown Manhattan that absolutely had become worth almost nothing, but he was committed to it. And he had deep enough pockets that he could stick with it.

Anthony Scaramucci: (09:48)
It's an amazing story. So he built this beautiful complex, and he put a lot of people to work in that complex. And obviously, as we both know, it's the real heartbeat of Midtown Manhattan.

Daniel Okrent: (10:00)
Right.

Anthony Scaramucci: (10:02)
And tell us-

Daniel Okrent: (10:03)
Go ahead.

Anthony Scaramucci: (10:03)
No, no, I was just tying it back to the book for one second and get your insight here. But it didn't look like it was going to be successful in the beginning. Right? I mean, it looked like he had-

Daniel Okrent: (10:14)
It was a calamity. It was the Depression, it was the Depression. And the only way they could get people to move into it, they were the primary means of acquiring tenants, first, everything that the Rockefellers were involved in. Standard Oil of New Jersey moved into it. Rockefeller Foundation moved into it. Everything that had the name Rockefeller connected moved in. So that occupied about 1% of the space.

Daniel Okrent: (10:38)
And then they made deals with anybody who wanted to get the contract to build the place had to commit to a lease as well. "So I'm trying to decide between Westinghouse and Otis for the elevators. Which one is going to take up the most space in my building?" Westinghouse said, "We'll do it." Then he signs up Westinghouse.

Daniel Okrent: (10:55)
I should say it's not John D, Rockefeller Jr. Himself, as you know, but a man named John R. Todd, Christie Todd Whitman's grandfather, who really was the genius who did the work. He was the real developer.

Anthony Scaramucci: (11:07)
It's an amazing story. And also David Sarnoff, the legendary David Sarnoff takes 30 Rock for the Radio Corporation of America, which goes on to become NBC. And if you walk those storied halls, which I have because I've done television there, you can hear the voices of Howdy Doody, and Captain Kangaroo, and Johnny Carson, and Jack Paar. Well, that's an amazing book. I want to recommend it to the people that are listening. But I want to transition back to your latest book, which I think is very timely given the election coming up. And it's called The Guarded Gate, and it is about immigration.

Anthony Scaramucci: (11:43)
And, boy, I thought we were having a tough time with immigration in 2015 to 2020 until I read your book, Daniel, and recognized that it was probably worse 1915 to 1935, considerably worse. So let's talk about eugenics and that false science of eugenics. And let's talk about where the zeitgeist of America was at the time of They Guarded Gate.

Daniel Okrent: (12:09)
Well, the movement to keep out immigrants from eastern and southern Europe begins in 1896. And a piece of legislation is passed that would require a literacy test for people coming into the country. And it was clear to the people who wrote that, in fact, they listed the countries, that people from these countries were less likely to be literate, and we could keep them out that way.

Daniel Okrent: (12:31)
But that was vetoed, that bill, in 1897 by Grover Cleveland. It was passed again under William Howard Taft, vetoed again. Passed again early in Wilson's tenure, vetoed again. And then finally in 1917, there were enough votes to override another Wilson veto because the anti-immigrants had changed the story. After being accused of racial and religious ethnic prejudice, they came upon this nonsense science called eugenics.

Daniel Okrent: (13:00)
Eugenics begins in the United Kingdom in the aftermath of Darwin. It's a distortion of Darwin, but even then, the idea of matching up the best women and the best men to marry each other, they might produce better babies as the term was used throughout this period for contests at state fairs. But what the anti-immigrationists did was they decided to apply it to ethnic groups.

Daniel Okrent: (13:29)
The lead publicist for this movement was a New Yorker named Madison Grant, who wrote a book published in 1915 called The Passing of the Great Race. And he posited that there were three European races, and they were a hierarchy. And at the very top were the Nordics who were bold, and strong, and confident, and smart, and they should run the world. And they're the people from Scandinavia and from the British Isles.

Daniel Okrent: (13:55)
Then there are the Alpines from France and Austria. They're artisans, and we need them in our culture. And at the very bottom are the Mediterraneans, the Italians, and the Greeks, and the Turks. And he actually writes at one point in the book, and he said, "As we now know from the science of eugenics," which wasn't science, "any intermarriage between any of these two groups, the offspring will revert to the lower form. Therefore, if a Nordic marries an Alpine, their children will be Alpines. If an Alpine marries a Mediterranean, their children will be Mediterraneans. And if any of the three European groups marries a Jew, their children will be Jews." This is a horrifying thought published by our leading publishing companies and embraced by two generations of American politicians.

Anthony Scaramucci: (14:45)
Let's go to the culture. What were they fearing?

Daniel Okrent: (14:48)
Well, to take a term from today, displacement. They were fearing displacement. I think the first fear is just the fear of the unknown. But this goes back, Anthony, as far as before the Republic is born. In the 1750s, there was a newspaper editor in Philadelphia who was writing screeds about keeping the Germans out of Pennsylvania because they're going to destroy our culture and our language. That was Benjamin Franklin who wrote that.

Daniel Okrent: (15:17)
So it really, really goes back. It comes up every couple of generations in America that there's this sudden fear that the next guy coming up the ladder is going to ruin things for those of us who have already made it.

Anthony Scaramucci: (15:30)
So in your opinion, the anti-immigrant sentiment today, is it worse? How is it different? Is it under there's a displacement issue? Clearly, that's why I brought that up. How would you describe today versus 85, 90 years ago, or 100 years ago?

Daniel Okrent: (15:48)
Well, I think there's a very strong similarity, which is to say that we are not deciding whom to allow into the country based on that person's quality as an individual. We're doing it on the basis of where they come from, what ethnic group they belong to. So it just says Italians, Greeks, Romanians, Poles, Jews. They were the ones who were ... They used the expression of a well-known politician in America from the shithole countries of the day.

Daniel Okrent: (16:16)
Now, the same thing is being applied to people Arab nations and from Central America and Mexico. If you're deciding to keep somebody out because they're from Honduras, that's like keeping somebody out because they're from Italy rather than do I want this person in the country. And that sounds very, very similar.

Anthony Scaramucci: (16:38)
No, I thought that was a fascinating part of the book, and I'm interested in your reaction because Teddy Roosevelt wrote legislation saying that Italians, for immigration purposes, were to be treated as non-Caucasian. I remember my grandfather being sore about that. Jews and Italians were considered, back then, nonwhite. I think we've gotten whiter over the last hundred years if that makes any sense to you. And so I guess, can you talk a little bit about that evolution of the expanding definition of whiteness in the United States?

Daniel Okrent: (17:16)
Well, it's a matter of familiarity, and it's a shame that we have to use a color to define it. But, in fact, you're right, that's how it was determined at the time. The notion that somebody is beneath you on the ladder begins to fall apart when that person climbs up the ladder and is succeeding.

Daniel Okrent: (17:37)
So as we saw, Italians, and Greeks, and the Eastern European Jews make it in American society. The question is, are they pulling up the ladder so that nobody else can come behind them, or are they extending the ladder because they're glad that they've made it? And they made it in the eyes of the people who would rather keep them out because they've gotten educated, and they've worked hard, and they've become good American citizens. It's really not any more complicated than that.

Anthony Scaramucci: (18:04)
There's an American History book called These Truths by Lepore.

Daniel Okrent: (18:09)
Jill Lepore, mm-hmm (affirmative).

Anthony Scaramucci: (18:10)
Jill Lepore. And she was also a Tufts grad. It's another book that Sol recommended me. Did you read that book or not?

Daniel Okrent: (18:16)
Yes, I did. I know Jill quite well. Yeah.

Anthony Scaramucci: (18:17)
Okay. So I want to emphasize these books and ask you an opinion now because I'm going to intersect the two books because her book is really about the truth of what happened in America. We get a story in social studies about America's greatness, and obviously, we both love America. I can tell from your writing that you love America as much as I do. But we also know that there's an underbelly of America. There's a seething in America. There's this discontent in America.

Anthony Scaramucci: (18:45)
And so my question to you, has that always been the case in America? Is it worse now? Is it better now? Or how can we make it better?

Daniel Okrent: (18:56)
I don't know that it's any worse now than it has been in the past because the same principles are operative, in which one is to come up with excuses not just to demean the lower group, but in the process, to exalt the group you belong to. It seems that we, as a species, Anthony, need to have somebody to look down on. I don't know why that is the case.

Daniel Okrent: (19:24)
I think it's probably more toxic today because of the communications culture that we have so that we can see in an instant the nature of the hatred that exists. Some people say, "Has this president, has he made this country that has more haters in it, more anti-Catholics, more anti-Semites, anti-black?" I said, "No, I don't think he has. He's just given the opportunity to come out of the closet. And in a world of Facebook and Twitter, it's very easy for vile and poison to pour into the culture at large.

Anthony Scaramucci: (19:59)
Well, we took the village idiot, and we turned him into a global idiot through the use of the social media. They can sit in their basement, and they have this huge microphone now to speak to the rest of us. I mean, not to go into politics, I try to stay away from politics on these talks. But one of the reasons why I disavowed my relationship with the president, and no longer gave him my support, had to do with this story because he told four congresswomen, also known as the squad, to go back to the countries that they originally came from, three of which were born here in the United States. One was a naturalized citizen, all four democratically elected to our Congress.

Anthony Scaramucci: (20:41)
And so they told my grandparents that. They said, "Go back to the country you came from." You write about it. You write about the NINA movement for the Irish and the Italians. No Italians or Irish need apply in these storefronts. My grandmother was subjected to that. And so I want to ask you this question. We're still subjecting people to this. Is there a panacea? Is there something that we ... Your book is clearly something for intellectuals to read and become more aware of this and become more psychologically minded of it. I'm just talking about from the social construction, Daniel, based on your life experience, is there anything that we can do to make this better? Or is this a permanent syndrome for us?

Daniel Okrent: (21:24)
There comes a time, I think, in every bad moment in American history where there's a swing in the other direction. The 1924 Immigration Law, which is the one that effectively kept Southern and Eastern European immigrants out of America for 40 years, it falls apart in 1965 at the same time that the Civil Rights Movement was happening.

Daniel Okrent: (21:46)
Coming out of World War II and beginning to understand the country better, and the black quest for rights becoming visible, that informed a larger expression of that same moment. In 1965, the passage of the Hart-Celler Act, which revoked the 1924 law, opened the gates to an incredible immigration that we have benefited from enormously.

Daniel Okrent: (22:13)
Now, I'm not suggesting that anybody who wants to come should be allowed in. I think that what we had for many years was not a quota, but a quotient, a limit to the number of people. And it was a lottery. Anybody could come. Anybody could try, and I think that we're going to get back to that. We're going to get back to that when this president is no longer president, let's not talk about politics.

Anthony Scaramucci: (22:39)
I didn't mean to bring up the politics. I just wanted to explain how you-

Daniel Okrent: (22:42)
No, I'm trying to go with you on it.

Anthony Scaramucci: (22:44)
Yeah, yeah. Yeah. I was trying to explain how your book moved me. We're going to let John Darsie, who you can see. He was an early immigrant of the United States because he wears that gray-haired wig of his great-grandfather. See the picture behind him? He's one of those ... Anyway, we can talk about that later. We'll talk about that offline.

Anthony Scaramucci: (23:03)
But I want to get to prohibition for one second, and then I'm going to open up to John Darsie and questions from our audience. The prohibition book was also phenomenal. And when I finished the book, the only thing I could think of was hypocrisy. That's the only thing I could think of. I closed the book. I said, "Wow! We are sanctimonious and righteous, but yet, on a Saturday night, we're all living it up." It was very hypocritical.

Anthony Scaramucci: (23:32)
So number one, what's your favorite drink? You mentioned you were having a drink at the restaurant there before you wrote the Rockefeller Center book. But what's your favorite drink?

Daniel Okrent: (23:41)
I'm a brown goods, I'm a bourbon drinker in the winter, and I'm a gin drinker in the summer. And I can drink my gin in any number of different combinations.

Anthony Scaramucci: (23:49)
Okay, there you go. Okay, so I like a good Negroni. I like a gin and tonic. I'm a gin drinker myself, but I've also discovered Tito's Vodka as I've gotten older, which is a good one with lemonade. But here we are, a country that was so Christian ideologically based that we literally got a Constitutional Amendment passed to ban drinking, yet we were all drinking, so go ahead. I mean, on that before I turn it over to Darsie.

Daniel Okrent: (24:18)
Yeah. Think of it this way ... Just to that, Anthony, there are only two things in the Constitution that limit the rights of individuals. The Constitution limits the powers of government, the two things that limit it. And the 13th Amendment says you can't own slaves, and the 18th Amendment says you ant have a glass of beer. The notion of equating these two things alone shows you how insane it was.

Anthony Scaramucci: (24:42)
Well, how did it get reversed? Roosevelt, right, Franklin Roosevelt, basically, right?

Daniel Okrent: (24:47)
Well, it got reversed because there was a sudden need for tax revenue. In 1929, the crash comes in. Income tax collections drop by 30%. There are no capital gains collections at all between 1929 and 1932. Somebody says, "Where can we get the money to run the government?" Well, Geez. You remember that alcohol tax? And like so many things in American life, money turned it around.

Anthony Scaramucci: (25:11)
I just want to comment, in the age of global warming, it would have been very hard to drive those trucks over the Great Lakes from Canada to bring all that booze into the United States.

Daniel Okrent: (25:19)
Exactly.

Anthony Scaramucci: (25:21)
It would have been on motorboats this time. I got to turn it over to John. We have great audience participation here, lots of questions, Daniel. I could talk to you for hours, but I got to turn it over to George Washington. So go ahead, George.

John Darsie: (25:34)
Alright. Don't hold it against me.

Daniel Okrent: (25:36)
Well, before we hear, don't hold it against you, John, I mean, if you do go back that far, it's worth pointing out that the term that people whose families have been here since the 18th century used to describe themselves during this period was Native Americans.

John Darsie: (25:50)
Well, there you go. I actually don't go back that far.

Anthony Scaramucci: (25:53)
I'm using that on our next Salt Talk, Okrent. Thank you for bringing that up. Thank you.

John Darsie: (25:56)
It's all just part of Anthony's shtick. My family emigrated from Scotland in the 1800s, actually to New York, but I was raised in North Carolina, so I'm really just a redneck that Anthony likes to call a wasp.

John Darsie: (26:10)
Anyways, getting back on topic, you talk in the book a little bit, and I've seen some interviews that you did about The Guarded Gate where you talk about science and about how science was used as a pretense for creating these immigration quotas. Science was a pretense for the Holocaust and things of that nature. But today, we use science as an argument for addressing things like climate change or related to the pandemic and public health issues.

John Darsie: (26:38)
Fundamentally, how do we make sure that science doesn't get politicized and protect the sanctity of science in our society?

Daniel Okrent: (26:47)
I don't know how to do that. If we knew how to do that, we wouldn't be in this terrible dilemma right now with 170,000 Americans needlessly dead. The ability to denigrate science, it shocks me. I mean, certainly, for the last 50 years, this country has respected science, and I think it goes back further than that.

Daniel Okrent: (27:10)
Now, in connection to what I'm writing about in my book, sometimes science turns out not to be science. And this was a very difficult thing for me to conjure with. Science only knows what it knows today. It doesn't know what's going to happen tomorrow. It can imagine and project, but it doesn't know for sure. And until things can be disproven, then sometimes people aren't going to accept them as real. Nothing I can do about it.

John Darsie: (27:36)
Right. So it's a fundamental challenge that we have to be rigorous about addressing the truth behind science and not allow it to be distorted.

Daniel Okrent: (27:44)
Yeah, exactly.

John Darsie: (27:44)
We have a question from one of our viewers talking about The Guarded Gate refers to immigration from the outside, but there's also internal barriers that act as guarded gates within our society to immigrants, restrictive zoning policies, nimbyism, in general, by both liberal and conservative politicians. How do we address those types of internal guarded gates with our society, or do you have a prescription for it? Or how do you observe those phenomenons that have existed ranging back from the beginning of the 20th century through today?

Daniel Okrent: (28:17)
What I can do is recommend two books that address this directly. The first by Richard Rothstein, and it's called The Color of Law. It was published several years ago, and it describes how, by law, by acts of Congress, and by presidential action, black Americans were kept ghettoized by policy. And they are continuing to be victimized by what happened to their parents and their grandparents. It's required reading, I think.

Daniel Okrent: (28:47)
Equally, a brand new book about to come out called One Billion Americans by the exceptionally astute political commentator, Matthew Yglesias, points out how we can get past this. And one of his ways of getting past it is to expand the society. We need more Americans. We need more Americans mixing with other Americans. And then he goes into a very persuasive argument about why that would be very powerful in improving the lives of all Americans, both those here today, and those we're going to create soon.

John Darsie: (29:19)
What's the next wave of people that we look down on? So we talked about the evolution of whiteness. It didn't use to include Jews and Italians. And now we look down on the Central American immigrants that are becoming so ingrained in our society. They'll eventually be such an important part of the electorate that they can't be ignored. What's the next evolution of that whiteness and how we discriminate against people?

Daniel Okrent: (29:46)
My fear is that it'll be directed toward Africa, both Saharan and sub-Saharan Africa. There was quite a substantial immigration from Africa after the law was changed in 1965. And we see the scientists, and the football players, and the politicians who came out of that and have really added to American life, but it wasn't attended to much by the haters during that period.

Daniel Okrent: (30:13)
And I think if we can get past this period, we hope we can get past that one too, but that would be the obvious ... Those would be the people who would obviously be the next targets, I think.

John Darsie: (30:23)
Right. I want to pivot a little bit to your time in journalism. So you served as the first public editor of the New York Times, a role in which you were asked to, without guidance from the paper itself, or without a few or a favor, critique the paper's work. It's a role that we're familiar with now, but you were a pioneer in that space. How did you critique the New York Times' performance during that period as a public editor, and how would you critique the modern media in the way it's covered the Trump presidency?

Daniel Okrent: (30:52)
Well, you got a few hours? Then I could go into great detail on it. I learned an important thing, John, when I was the public editor during the 2004 election. I got a call one day from a reader. I guess it was an email from a reader who said, "It's clear to me," the reader said, "that the Times is in the pocket for George Bush because there's a picture of George Bush in color page one, three columns, above the fold, looking happy, and strong, and confident. And that's clearly you're favoring that candidate."

Daniel Okrent: (31:23)
And I asked the reader, "Who was on the front page of yesterday's paper?" And he said, "I don't know." And I said, "Well, it was John Kerry in an equally happy and positive context."

Daniel Okrent: (31:37)
This has only gotten worse. Too many of us are seeking out the news that conforms to our view of the world. If it conforms to the view of our world, it's true. If it does not, it's either fake news, or it's biased in some other fashion. And this has only gotten worse. It's gotten worse in every aspect of the media as we get fractionated.

Daniel Okrent: (32:01)
Liberals watch MSNBC. Conservatives watch Fox. Who reads the Times? Who reads the Journal? We don't have a common set of information. We aren't hearing the same things. And how you can build a society when we don't have that in common is hard to imagine.

Anthony Scaramucci: (32:21)
But we're arguing about the facts now, right? So we can't even have a proper debate because we're getting different facts from different channels.

Daniel Okrent: (32:29)
Yeah, and so-called facts. There was a time when-

John Darsie: (32:32)
It's like eugenics. It's like the point you made about eugenics.

Daniel Okrent: (32:36)
There was a time that if Walter Kronkite said something, America thought, "Oh, yeah. That's probably true." There were three national sources of news, the three network news shows. Now, let me find the news that pleases me the most, and that's not news. That's propaganda.

John Darsie: (32:54)
How does the New York Times, for example ... And they've been criticized in certain corners of the media for covering some of Trump's shenanigans ad nauseum and giving the attention to him that he seeks by some of the behavior that he engages in. He pardoned Susan B. Anthony to distract from things that are going on at the Democratic National Convention or to distract from the release of the Senate Intelligence Committee Report. How do you balance the reporting on the president, he's the president of the United States, things that he does and says probably deserves some level of attention, but how do you make sure that the right stories get covered?

Daniel Okrent: (33:33)
There's no way of making certain that the right stories are getting covered. But as you said, John, you have to cover what the president does, or even what the leading candidate of one of our two major political parties does.

Daniel Okrent: (33:43)
Back in the 2016 campaign, Trump was saying outrageous things, and he was saying it to these huge crowds, and people were complaining. Why are you giving him so much television time? Well, he's a candidate for president. We can't help that. He's making the agenda.

Daniel Okrent: (33:58)
Now, it's incumbent on the new media to call him on falsehoods and to show that there's another side to the story. But I do think that we could all get carried away in one direction or the other.

John Darsie: (34:12)
I want to switch gears once again. Like I talked about in the intro, you're a man of eclectic taste. You started out as a baseball writer before writing these fascinating books about a variety of different topics. But you, as Anthony mentioned, were the father of the rotisserie scoring system for fantasy baseball. How did you develop that love of the game, and how did you come up with that rotisserie style of scoring for fantasy baseball?

John Darsie: (34:37)
I asked you about your fantasy team before we went live, and you said you quit that about 10 years ago, about 10 years after you quit smoking. So what's the genesis of your fantasy baseball fascination? How'd you come up with all of that?

Daniel Okrent: (34:50)
Well, at times, I thought fantasy baseball was more dangerous to my health than smoking was, certainly it was to my pocketbook. I was terrible at it. The idea came to me in 1980, and it was really the first real fantasy sport at all. This shows how stupid we were, rotisserie was our trademarked name. People would always call it rotisserie, or if they didn't, they'd have to pay us a royalty for whatever they produced under that name. And then, of course, somebody came up with the generic name, fantasy, and we disappeared, but that's fine.

Daniel Okrent: (35:19)
It just came to me because it was the winter of 1979, 1980, and I was missing baseball. I was simply bereft of baseball, and I started thinking about getting engaged in the game, missing the back scores. And boom, then my colleagues and I, we were in the Times, and we were on the Today Show. We were on CBS Morning News. Word got out, and this is why I'm a fabulously wealthy man today because everybody who plays the game pays me for the privilege.

Anthony Scaramucci: (35:51)
Do you remember Strat-O-Matic Baseball?

Daniel Okrent: (35:53)
I played it endlessly as a kid.

Anthony Scaramucci: (35:56)
Yeah, so the legendary Hal Richman is a native of the town I grew up in. And so at the age of seven, I learned Strat-O-Matic Baseball. And in 2008, I bought a piece of the company. It was obviously the precursor to-

Daniel Okrent: (36:13)
Absolutely.

Anthony Scaramucci: (36:14)
I'm a big baseball aficionado, so I own a piece of the Mets. I own a piece of Strat-O-Matic Baseball. You remember-

Daniel Okrent: (36:19)
Well, the piece of Strat-O-Matic Baseball is more valuable than a piece of the Mets.

Anthony Scaramucci: (36:24)
Actually, no. I mean, think about it. There's a couple of hedge fund managers that are bidding for the Mets, not Strat-O-Matic Baseball.

Daniel Okrent: (36:30)
I know, I know. You know what I'm saying.

Anthony Scaramucci: (36:32)
I do. I do. In terms of the literary significance of Strat-O-Matic Baseball, I tell children, "Learn Strat-O-Matic Baseball, you can manage money because there's a lot of statistical insight in that game."

Anthony Scaramucci: (36:46)
I don't mean to interrupt you, John, but I have to ask this question. Baseball has a future, Daniel?

Daniel Okrent: (36:54)
I sure hope so. It's so hard watching now. I can't watch because seeing the empty seats, it's not right. It's just off. I can listen on the radio and even accept the fake fan noise because it is a familiar thing that's coming to me over the airwaves. The sound with the ball and the bat, and the crown noise, the announcer, if you connect to baseball, you want this in your life forever. And I'm just hopeful that future generations will feel the way that you and I do.

Anthony Scaramucci: (37:28)
Are we going to seven innings?

Daniel Okrent: (37:30)
Oh, I hope not. I mean, there are some things in this, clearly. One of the things that is sneaking into baseball under the guise of COVID protection is the end of pitchers batting in the National League. This is how they're getting rid of the DH. They're also getting rid of extra inning baseball as we know it with this new man on second when the inning starts.

Daniel Okrent: (37:56)
There are going to be a lot of changes. Whenever you have a crisis, and this is true, I'm sure, in your world, in finance, in politics. Whenever there's a crisis, other things change because attention is elsewhere. And that's going to happen with baseball.

Anthony Scaramucci: (38:08)
Yeah. Well, we had the crisis that led to us being able to drink alcohol again.

Daniel Okrent: (38:13)
There you go. Exactly.

Anthony Scaramucci: (38:14)
John, I didn't mean to interrupt you. Go ahead. I'm sorry.

John Darsie: (38:16)
Stealing my thunder here, Anthony. Come on.

Anthony Scaramucci: (38:18)
I'm sorry about that. Go ahead.

John Darsie: (38:19)
We have one more question from the audience, and then we'll let you go, Daniel, back to your hammock there in beautiful Cape Cod. How come there's been no mention of your hit play, Old Jews Telling Jokes? And is there some value to the connection to humor when dealing with ideas around the acceptance of immigrants and the problems in our society?

Daniel Okrent: (38:39)
My colleague Peter Gethers, with whom I wrote Old Jews Telling Jokes, Peter and I learned by working on this show, which was a hit. This is the way that everybody deals the tragedy and sorrow. Make fun of it. It's the only way of making it tolerable. And so very quickly, one quick old Jew joke about Mr. Grossman goes to the doctor. He's a very old man. He said, "Doctor, doctor, I can't pee. "And he said, "Well, how old are you, Mr. Grossman?" He said, "I'm 94." He says, "Ah, you've peed enough." That's how he dealt with it.

John Darsie: (39:19)
Alright. Well, it was a pleasure having you on, Daniel. Anthony is a big fan of your books. I need to read all of them, still, but I started in preparation for this talk, but it's been fascinating to hear your perspectives. And Anthony, if you have any final word for Daniel before we let him go.

Anthony Scaramucci: (39:36)
Well, listen, I just think that you're identifying a strand as is Lepore in her book, Jill in her book, about America that we need to all understand. And we have to face that reality and work towards progressing and improving America. And so, very, very grateful for you writing those books. Before we do let you go, though, are you writing something now that you can discuss, Daniel, or not?

Daniel Okrent: (40:03)
I'm thinking about something. It's a story of old New York, about the family that was the second-largest landowning family in New York after the Asters. And nobody has ever heard of them. And it's a story of who they were, and why they disappeared. It's pretty interesting stuff.

Anthony Scaramucci: (40:20)
Alright, well, I'll look forward to reading that as well.

Daniel Okrent: (40:23)
Stay tuned.

Anthony Scaramucci: (40:24)
And I wish you a great rest of the summer. And let's stay in touch, please. And hopefully, when we get back to our live events, Daniel, we can have you come to one of our live events. I think you would enjoy it.

Daniel Okrent: (40:34)
Thank you very much, Anthony. This was a pleasure. And thank you, John, too.

John Darsie: (40:37)
Thank you, Daniel.

Shelley Zalis: The Fight for Gender Equality | SALT Talks #39

“When you add more women to any equation, there’s a return on equality.“

Shelley Zalis is the Chief Executive Officer of The Female Quotient, a female-owned business committed to advancing equality. At the current rate of progress, it will take over 200 years to close the global gender pay gap and over 100 years to close the overall gender gap. Since 2013, Shelley has been working full-time to catalyze equality.

“The rules were written by men, for men over one hundred years ago.” Engaging men in the conversation, rather than looking to scapegoat or ridicule, produces tangible results in the workplace. During the COVID-19 pandemic, Shelley says that equality is being pushed backwards. The United States fell to 53 in the world according to the World Economic Forum’s 2020 Global Gender Gap Index.

How do we enact meaningful change? “We need to rewrite policies with better parental leave policies, healthcare policies and mobility policies.” Pledges are great and well-meaning, but action is needed like that of Salesforce.

LISTEN AND SUBSCRIBE

SPEAKER

Shelley Zalis.jpeg

Shelley Zalis

CEO

The Female Quotient

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 public policy. These SALT Talks are a series of digital interviews we've been doing during this work from home period with leading investors, creators, and thinkers. And what we really try to do during these SALT Talks is replicate the experience that we bring at our global SALT conference series, which our guest today has participated in for the last couple of years and what our goal really is to provide a window into the minds of subject matter experts for our audience, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome Shelley's Zalis to SALT Talks. Shelley is the CEO of The Female Quotient, which is a female-owned business committed to advancing equality.

John Darsie: (00:59)
She's an internationally renowned thought leader for advancing equality in the workplace. As the first female CEO ranked in the research industries top 25, she changed the game, helped elevate feminine values in the workplace and has devoted herself to becoming a mentor and a role model to women and leaders in her industry. And I know she even during her corporate career was very devoted to women's causes and she decided to jump in head first to make that her full time career with the Female Quotient. As she, as I mentioned, had considerable experience working in the traditional marketing and advertising research industries, where she held senior positions at ASI Market Research, which is now Ipsos ASI and Nielsen Entertainment. In 2000, Shelley founded OTX, which grew to become a top global research agency and the pioneer of several innovative online research products, including the multi-source and blended sample approach.

John Darsie: (01:52)
In 2010 OTX was acquired by Ipsos, and today the Female Quotient, which Shelley started is advancing gender equality and advancing those causes across many industries and career levels with their Equality Lounge, which I mentioned previously, Shelley brought the Equality Lounge to the SALT conference last year, and we had a tremendous time having her participation at that event. The Equality Lounge is a popup experience that takes place at conferences across the globe, such as the world Economic Forum, Cannes Lions, the Consumer Electronics Show, and even FII in Saudi Arabia as well as SALT. And she also does the Equality Lounge experience within companies as well. She's leading tons of other leading female initiatives and equality initiatives within corporations by activating solutions for change with the Female Quotient equality boot camps. She's also the co-founder of the hashtag See Her movement, which is a movement led by the association of national advertisers to increase the percentage of accurate portrayals of women and girls in advertising and media.

John Darsie: (02:57)
She's also on the board of director for makers. And reminder, if you have any questions for Shelley during today's interview, you can enter them in the Q and A box at the bottom of your video screen. And with that, 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 a conduct today's interview.

Anthony Scaramucci: (03:16)
All right, John, thank you. Shelley, welcome. Thank you so much for joining us. I always ask this question, so I got to ask it to you as well. What do we need to know about you that we can find in John's eloquent introduction or your Wikipedia page, or your website? What do we need to know? You don't have to go into your first romance or anything like that, but we need something.

Shelley Zalis: (03:42)
[inaudible 00:03:42] First of all, I always love when we get to hang together, because our conversations are always unplugged. They're very, very candid. Anything goes, and we get to truth. And they're really all about authenticity, unplugging the good, bad, and the ugly, where we are, where we want to go and how we get there. I don't think it's a secret. I am well known as the chief troublemaker. I break all the rules and rewrite them because they really don't make sense. They were written so long ago. At some point we need to evolve and make sure that we attract and retain our best talent inside of the workplace. So I think that's probably number one. Number two, I am a solar eclipse chaser. So I traveled the globe chasing eclipses, which is miraculous. And every single time I see one, they're always different. The beauty is you can't take a picture for Instagram, because you got to wear your protective glasses, but it's a feeling that you get that life has this rhythm. And it's just[crosstalk 00:04:48]

Anthony Scaramucci: (04:47)
When was the first solar eclipse that you saw of that you can remember?

Shelley Zalis: (04:53)
The first one I saw was in Galapagos Island, we had to take a little boat. If you get seasick, don't do these adventures. Because I was also in Turkey on the Black Sea for another one. You need to be in pitch darkness to experience the magic and the beauty of an eclipse, but being on the water in the Galapagos, it's remarkable because you go from a sun, you go from day to night, within a minute for a total eclipse. And that's when you see the diamond ring effect, but what happens is the birds, they have no idea what's happening. So when the eclipse goes to total darkness, you see the birds darting and diving into the water because they're so confused. So I think it was Galapagos.

Anthony Scaramucci: (05:39)
All right. So it's a good segue. Men, have they been eclipsing women for three or 4,000 years, 5,000 years?

Shelley Zalis: (05:49)
Well, the truth is, and we're about to celebrate the 100 year anniversary of women's right to vote even though the date is different for white and for black women. I don't think they've been eclipsing. They've just been dominating. They have been the majority. Women have not been in the workplace for as long as men have. So I would say the rules were written by men for men over a hundred years ago because women just weren't in the workplace. And so we've still been playing catch up and we've been conforming to the rules that have been written that we are now inheriting. And so this is why it's a crucial moment to close the gaps all around parody. We know the wage gap, 80 cents on the dollar for women in general, we just celebrated black women's equal pay day, 64 cents on the dollar Latinas, 53 cents on the dollar, we need to close the gap. We need to close the pipeline gap. We start 50/50, finance technology, a little less. We ended less than 17%. We fall off in the middle management because caregiving is still predominantly a female issue.

Shelley Zalis: (06:51)
And then when we look at the policies, we need to rewrite the policies with better parental leave policies and healthcare policies and mobility policies, if we truly want to see more equality in the workplace and also more diversity of thought and mindset.

Anthony Scaramucci: (07:09)
So if you had to rewrite the rules, let's say that you could embolden those tablets. You could inscribe those tablets. What are some of the core tenants of rule rewriting that you would want?

Shelley Zalis: (07:22)
Well, I think number one, hire for passion. We often hire for experience. And if you think about retrofitting a salary, when you come and you go for a job interview, the first question is, well, what did you make in your last job? Which by the way, in a lot of states is illegal now and you say, "Oh, I made $50,000." And they would say, "Well, today's your lucky day. You get a 20% increase." Well, if a guy comes in and they get asked the same question, what did you make? And they say 70,000. Today's your lucky day, you're going to get a 20% increase. So we're already starting with an inequity at the table, number one.

Shelley Zalis: (08:01)
I think number two, from the job descriptions of what we're looking for, historically, the masculine, we're looking for a decisive, aggressive, analytic, linear, serious leader that can deliver a did that in your honor, a great bottom line versus, we're looking for an empathetic, compassionate, nurturing, collaborative, visionary leader that can deliver a great bottom line.

Shelley Zalis: (08:27)
We have that imposter syndrome, that voice in our head, both men and women, men just ignore it. Women let it get louder and louder and we don't feel we're qualified. And even in COVID days, if you look at the countries that have reacted first proactively, they were countries run by women because inherently we have those soft skills. We're nurturers, plenty of men have them, plenty of women have the masculine, but these are the kinds of things we need to look for. And then of course not just fill the pipeline, but create the pathway to success so that we see a higher retention to leadership level. So a few things that we need to-

Anthony Scaramucci: (09:07)
[inaudible 00:09:07] It's very well said. I'm always intrigued by the way you're coming at this. I want to talk a little bit about the Female Quotient, something you started at the 2012 Consumer Electronics Show. Tell us what the Female Quotient means. And tell us a little bit about your events and tell us about the progress you feel that women are making, and you've been a big catalyst, a big contributor to that.

Shelley Zalis: (09:30)
Thank you.

Anthony Scaramucci: (09:31)
It's a big question. A medic question there, Shelley.

Shelley Zalis: (09:35)
That's what you're all about.

Anthony Scaramucci: (09:37)
It's a serious medic question.

Shelley Zalis: (09:38)
There you go. Okay. Well, the Female Quotient, the name was pretty simple at six years old. We all hear a lot about IQ, the intelligence quotient. So first came IQ, the intelligence quotient then came EQ, the emotional quotient now comes, FQ the Female Quotient. When you add more women to any equation, there's a return on equality. We talk a lot about return on investment, how about return on equality, which is one of those invisible metrics that we need to make more visible. So we're all about advancing women across race, religion, age, intersectionality, LGBTQ, mobility, ability, all of those things, it's advancing women to advance equality, flipping the script, flipping the balance.

Shelley Zalis: (10:23)
And we do that in different ways. We do that through pop-up experiences at big industry conferences, across every equation, marketing, media, advertising, research, sports, music, finance, every equation needs more of everything, if we truly want diversity of thought. The reflection, we need representation and reflection for people to bring their best selves, their whole selves to the table. And at pre-COVID, we were doing upwards of 70 pop-ups a year, from as you said, CES for technology to the World Economic Forum and everything in between like the NBA All-Stars, as well as Dreamforce, et cetera.

Shelley Zalis: (11:04)
And then, we are launching a dinner series to unite the world to the power of women around the globe in over a 100 countries, bringing together communities of women all in business that can share and support one another to find our voices, stand in our power, own our ambition, not conform, but transform and really create the invisible and make that quite visible. And then we go into companies and do the hard work. It's great to have uncomfortable conversations together, power by collaboration, but then we need to create the action steps, the solutions for change and the measurement for accountability. We do that through a boot camps, helping companies become a quality fit and to change the equation.

Shelley Zalis: (11:48)
And so that's basically, what we do in a very non-textbooky way, because it really is about conscious mindset. Equality is a choice. Unconscious bias is an excuse. If you use the word unconscious, you're conscious. Once aware, what are you going to do? Something or nothing. And you use the word progress. As long as we keep making progress. When we look at the data, Anthony, you and I both go to the World Economic Forum, they publish reports that say, it'll take over 257 years to close the pay gap, and over 99.5 years to realize gender parody in the C-suite, that's not acceptable for you or for me. And so, as long as we are taking steps forward, that's progress, and I can't wait to enter 57 years. So I'd like to get this done within 10.

Anthony Scaramucci: (12:40)
Okay, great. How far have we gotten in the last 25? Have we made progress?

Shelley Zalis: (12:45)
We've gone backwards.

Anthony Scaramucci: (12:47)
Yeah, tell me why. I actually think we've gone backwards. That's why I'm asking the question. So tell me why, Shelley.

Shelley Zalis: (12:52)
Yeah. We've gone backwards. A, I think we keep talking about the problems and I always say signing pledges and petitions is a surrogate for doing nothing. You can hide behind the, "Oh, I'm making a pledge." A pledge is not an action. There are companies that have made progress. Marc Benioff for Salesforce made a conscious decision to close the gap within his organization. We all have control. We all have power and we all have responsibility to make a difference within our organization. We can't fix the world, but with what we can regulate and what we can control, we have the power and the responsibility to do that. When you look at the United States, according to the World Economic Forum, they measure 144 countries on gender equality. United States three years ago was number 28 out of 144. Last year, we bounced to 41, 42, 43 that's backwards.

Shelley Zalis: (13:46)
So I think that we are now in with COVID, the BLM, we are seeing a disproportionate impact. The gap is widening for women and for black women in particular. So if we truly want to get on track to move forward faster, A, we need to do it together. B, we need to be conscious about the choices that we make and C, we need to hold ourselves accountable with measurement. Let's look at where we are, where we want to go and then decide how we're going to get there. And we're going to have to make some tough choices.

Anthony Scaramucci: (14:23)
Well, I think everything you're saying is spot on. The underlying question is we're going backwards for a reason, right? There's inertia, there's lip service. But what else do you think it is? Do you think that there's a cultural thing that we haven't been able to overcome? Whether it's intentional, subconscious, cultural stereotypes, what is it that's causing the recession?

Shelley Zalis: (14:50)
Well, I think that if we keep following status quo, we won't ever close the gaps. The only way to close the gaps is to close the door and open a new one equal pay for equal work, number one, that's parody. And then policy caregiving. Caregiving is still predominantly a female issue. Leadership is still predominantly by default a male issue. And so we need policies that will allow people to bring their best selves and their whole selves to the table. I think that, that is really important, because caregiving is where women fall off in middle management or what we call the messy middle. And I think also culture. Creating a culture where everyone feels like they are seen, they are heard and they belong. And that requires representation at every level. I think there's at least a minimum of 30% threshold before we'll see a transformation of culture and reflection. I want to see me. I don't want to be the only one at the table. So more of everything, creates this natural evolutionary culture shift.

Anthony Scaramucci: (16:03)
Do you think men fear women in the workplace?

Shelley Zalis: (16:08)
I don't think so. I think that gender equality is not a female issue. It's a social and economic issue. I think yes, there is a scarcity of jobs at the top. But I just... And I think men are great partners, which is why lexicon, I never say we need male allies, because it's not... Women didn't create the problem. We need leadership allies, and by default it's men. And so I think there are more men and so we have more ability to activate change, but even when there's women running companies, we haven't seen tremendous progress.

Shelley Zalis: (16:43)
It really needs to be conscious steps forward and making those decisions of not just filling the pipeline because we're filling the pipeline with diversity. It's, we need to ensure step two, that we have a diverse hiring team and that we hire for the team, not for the job, because if you hire for the job, you're maybe self-selecting. If you make a commitment and accountability that you are going to hire for the team to have diversity, it's a different mindset. So I think we just need some mindset shifting and some courage and some bravery to step out of our comfort zone.

Anthony Scaramucci: (17:23)
And I need to ask you this question, because I've heard you articulate it before, and I want you to articulate it here, why is it so valuable for companies to have women in senior management?

Shelley Zalis: (17:34)
Well, I think when you have more of the soft powers, and that is the empathy. I think that to me, the greatest leaders today are empathetic leaders, are leaders that inspire, are leaders that have that compassion and passion, and also the experience, especially if they have family. I think that, that comes into play of a lot of the policies that you also will allocate and reallocate to make sure that you are creating the right culture. I think culture is so important for business success, especially if you want to attract the next generation, which our future leaders, which I call our now generation, you need to have an empathetic lens, but also a collaborative one where it is about safety and security and making sure that you are creating the right environment to have the best talent and not just the available talent.

Anthony Scaramucci: (18:37)
Yeah. So it's emotional diversity as well as competence and core competence and values and everything like that. I think it's very well said. Let's go to the Me Too movement for a moment. Because I've also heard you talk about this and I think you have some brilliant insights there. Has the Me Too movement been productive in terms of bringing equality to the workplace?

Shelley Zalis: (19:02)
I think The Me too movement, and I really applaud the Me Too movement. The Me Too movement has done a really great job of opening up the conversation in a collaborative way because when your alone voice, and I've been that lone wolf most of my career. To create a new ecosystem for change, you need to have the pack. We call it the FQ pack. A company alone is power collectively, we have impact. The woman alone is power collectively we have impact. It's an impact moment. And so I think it's done an amazing job to break the silence and to start using that megaphone for change. I think that what we need to see more of now is the proactive positive solutions for change versus just putting people on the defense. Not everyone is a predator. There are bad apples. But most humans are good to the core. Most humans are good to the core and each of[crosstalk 00:20:06]

Anthony Scaramucci: (20:05)
I approve that as well.

Shelley Zalis: (20:07)
... And sometimes we just need a little ding, to point something out, make someone aware that what they are doing or saying, and there's a degree of sexual harassment from sexual harassment to sexual assault, of course. And so I think that sometimes it's also saying you're making me uncomfortable. This is where the platinum rule, we talked about the golden rule, do unto others as you'd want done unto yourself, the platinum rule, do unto others as they'd want done unto themselves, because what might be okay for me might not be okay for you. And so there are degrees. So once aware, then they need education and then we need action steps. But then there's also the bad apples. I have zero tolerance. I don't care how talented you are and how smart you are, if you are not an inclusive leader and you are not making everyone on your team feel comfortable and safe and secure, get rid of them, they do not belong. And so I've zero tolerance for that and of course-

Anthony Scaramucci: (21:11)
Yeah, I agree with you, but I think it also begs the question. John is chomping at the bit here to get some audience questions. We're going to go there in a second. And then he'll try to steal the show from both of us, Shelley. But you and I are going to do our best to prevent that.

Shelley Zalis: (21:25)
We share.

Anthony Scaramucci: (21:25)
But it begs the question about the cancel culture, I've heard you talked about this as well. And so are we missing an educational opportunity by trying to remove people from the conversation or do certain people deserve to be canceled? I don't know Allen's being canceled now. I don't know. Maybe she deserves to be. I don't know the facts set, so I'm not sitting here judgmentally about any of these people, but I'm just wondering if do we really built a people or we canceling them? If you go to jail, you get 10 years and then you come out, you get rehabilitated or just certain people should be permanently canceled from our society. What's your take on that?

Shelley Zalis: (22:06)
Listen, I don't think that any leader and I think leadership is not about age or title. It's about action. I don't think that anyone belongs in a corporate environment where they are creating culture and inspiring team and trying to get the best team at the table should be there if they are not qualified and qualified for me is not just delivering bottom line numbers. To me, it's about being accountable and responsible for a culture of care and a culture of belonging. So if they are not that person, they do not belong because, we have to walk the talk.

Anthony Scaramucci: (22:51)
Can they'd be reformed though, I guess, is the question.

Shelley Zalis: (22:54)
Well, not on my watch. I'd send them away, somewhere else and put them back in a role if they're talented and reformed, but not to manage people and create this culture within. I don't want those kinds of people creating a culture. And so I believe in reform and I'm completely supportive of that, but not on the job while they're making other people feel uncomfortable. Why should I want to come to work and not feel safe? And so we are starting to see a lot of new tools come out, because also reporting, HR needs to be not just pushing paper and that's why we're moving to chief diversity officer, chief inclusion officer, chief belonging officer, chief people officer. It needs to be an active process where we don't shut our eyes and push it under the table because that is going to keep getting bigger and bigger and bigger until it bursts.

Shelley Zalis: (23:53)
And I would never want to create that kind of environment. And I might not do it intentionally. And that's why I said, at the beginning, it's pointing out some things and there's microaggression all the way to assault. Assault is zero tolerance. Bye-bye, you are not in this... I don't want you in my home period. And I don't want you to be around other people. So I think-

Anthony Scaramucci: (24:15)
I think it's important for you to emphasize... Listen, I think it's important to emphasize this because through that educational process, hopefully you're going to get some people to wake up and recognize, hey, that's a binary thing. It's one versus zero. You're here. If you can hold yourself in the right way, you're not here and your career is more or less going to get may laid, if you're going to do things that are inappropriate or making other people feel uncomfortable. So I do think there has to be a zero tolerance in that way. I'm just wondering out loud about the rehabilitation process. And I get the feeling that, okay, wait a minute. Maybe some people can never be rehabilitated, but the flip side is, because I guess I grew up, I don't know, should I grew up as a Catholic? You're always seeking some level of redemption for people, but I hear you, I think it's important because you're...

Anthony Scaramucci: (25:05)
What I love about your movement is you're talking about a cultural seismic change in how we're doing things, which ironically is going to unleash a lot more empowerment, a lot more innovation, a lot more... In the diversity, there is so much strength because you're getting so much creativity from that process. So I hear you, I got to turn it over to John Darsie, because you've got lots of people on here that are looking as ask you questions, Shelley.

Shelley Zalis: (25:33)
Anthony, wait. John, sorry. I just want to jump into, and especially with BLM, it's not just about having conversations about racism, it's becoming an anti-racist. That is an action. That is not just textbook[crosstalk 00:25:48] learning an education. That is about a feeling and a becoming. And it's not a to-do list. It's a to be. Who do you want to be? And that is about education through immersion.

Anthony Scaramucci: (26:05)
I agree with that. Well, let me ask you before we get to John, let me ask you this.

Shelley Zalis: (26:06)
[inaudible 00:26:06] Go on before John.

Anthony Scaramucci: (26:06)
The George Floyd incident, I'm going to guess give my editorial opinion here. I think for many people, it was a transformative thing, in meaning like, okay, wait a minute, nobody should be tolerating this level. I don't even know what the personal relationship is between the two people, but nobody should be tolerating an eight minute and 46 second murder on a street. Nobody should be tolerating that. So, it was very eyeopening and I think it did shift the bell curve of the culture. I do believe that. For a lot of people, it was a wake up experience. Do you believe that? Or again, that's my opinion. Do you feel that way?

Shelley Zalis: (26:43)
We've all known. We've all heard, but it was that wake up call we all saw and we all felt, and once you feel there is no turning back, and that is why this is-

Anthony Scaramucci: (26:58)
Is there a moment in the women's movement that is George Floyd like in your mind or no?

Shelley Zalis: (27:05)
Oh, wow. So many moments. Even now all the work I'm doing on the 19th amendment and 100 year anniversary of women's right to vote and then realizing it wasn't the same date for black women's rights to vote. All of these moments bubble up. For me, it was personal of realizing why was the way I lead not the right way. And now 50,000 women in the workplace are all unlocking the value vault of strengths that have historically been invisible. So I think when we look at the diversity numbers, we look at the pay gap. So now with social media and with digital, we can see all of that. I'm probably owed a lot of money. I've probably been underpaid my entire career. I should go back and look at how much I'm owed. Now all of it is front and center. We see the data, we see that women in leadership are more innovative, more creative, more nurturing, more empathetic, all of these things.

Shelley Zalis: (28:12)
Now that we know all these things, there is no excuse for not fixing where we've been to where we want to go and it's not retrofitting. It can't rewrite history. It's learning from where we've been-

Anthony Scaramucci: (28:25)
Going forward.

Shelley Zalis: (28:26)
... And getting strength to go forward with positivity and proactivity,

Anthony Scaramucci: (28:28)
Well said. Go ahead, Mr. Darsie.

John Darsie: (28:32)
Of course, I just want to say Anthony and I are both-

Anthony Scaramucci: (28:35)
And yes, Shelley does notice that George Washington poster behind you, she's trying to figure out if you're trying to tie that to your relatives and your family tree. You go ahead.

John Darsie: (28:44)
A lot of our viewers were sending me private messages that they were very eager for the return of George Washington. So I'm glad to have brought it back for them. But first, I just want to say, thank you, Shelley for all you're doing, Anthony and I both have daughters. Mine a little bit younger than Anthony's, but you're paving the way for hopefully a future where there'll be able to achieve and-

Anthony Scaramucci: (29:04)
No question.

John Darsie: (29:05)
... Gain greater equality in the workplace. So we're very grateful for-

Shelley Zalis: (29:07)
It's important for our daughters and our sons, by the way. This is as much for our daughters as well as far as sons, because equality starts in the home and with shared responsibility. And so thank you for saying that, but I do want to say this is for our boys and for our girls.

John Darsie: (29:23)
Well, my daughter definitely rules our home. So if that's any indication, that's the way it's going to go. She has two younger brothers. But I want to talk about... So we talked about the Equality Lounge, which is an activation that you bring to all of basically the most important events around the world. You talked about the World Economic Forum, you're at Cannes lions. You're at, of course the world famous SALT conference. How important is it for you to have that visible conspicuous representation at these events? And what does that symbolism do for the women that are in your community?

Shelley Zalis: (29:54)
Well, I think World Economic Forum, we are now the destination for equality at the World Economic Forum, that we will be going on our sixth year and it's for men and for women, it's for leadership to have uncomfortable conversations and unscripted. It's where we talk about the good, bad, and the ugly, share the case studies for what's working. So, as Anthony and I talked about, how do we not have to... We've all been doing the same thing separately, which is one of the reasons we've also been going backwards, how do we share what works so that we don't have to keep making the same mistakes consistently over and over. And that's how progress happens. We bring 50 women with us, 50 power women to Davos, at the World Economic Forum, there's less than 17% women leaders represented there.

Shelley Zalis: (30:41)
We bring 50 and all of a sudden, we changed the equation. Permission, no permission, we just showed up, no apology. And now on the street up and down, you see women all over the place. And so, I think that representation is really important, especially because with representation comes reflection, with reflection comes change and with change comes impact.

Shelley Zalis: (31:05)
And so I think that we are impacting tremendous change, not by waiting and watching, but by doing, and being, and that really created a big shift. And when you look at women in history, back to the Anthony's question, women have historically been invisible and written out of history. We're not going to be written out of history. We are going to show up, front and center, stand in our power, owner ambition and bring our strengths to the table. Why? Because they're needed, we make the table better not to fill a quota. And so I think this is why it matters. And most importantly, bringing leadership, men and women, conscious leadership to put their foot down, walk the talk, take those steps forward. We all need to do that together.

John Darsie: (31:51)
Yeah. We were talking a little bit before we went live about the importance of unity in these types of movements. You've even done work in places like Pakistan, Saudi Arabia, the UAE where you're taking these groups of women who traditionally haven't had the same level of rights as women have had in the Western world. And you've brought them together. You had an interesting anecdote from your time in Saudi Arabia. Just talk about how important that unity is and that some of the things you're working on in places where women are, even more disenfranchised than they are in the Western world.

Shelley Zalis: (32:22)
First of all, the women in Saudi Arabia, I don't know... Well, because it's the most I can say this. Women in Saudi Arabia are bad ass. I got to say they are badass and with-

Anthony Scaramucci: (32:31)
You can say a lot worse than that. I've been fired for worse than that.

Shelley Zalis: (32:37)
We need another hour for this conversation, but they are so impressive. I took 50 women to dinner and it was incredible. They said, "Shelley, there has been so much progression for women in the past couple of years in Saudi Arabia, we just get locked in time and assume what we knew is what really is, and that is not true." Perception is not reality. And that's why Getty is doing so much work with Getty Images. Really when you Google a Saudi women in business, you're going to see really remarkable women doing incredible things. And so, so much progression. And Princess Reema, is a very dear friend. She's the princess that gave women the right to drive. And yes, there's still some progress that needs to happen, but they have made remarkable progress.

Shelley Zalis: (33:24)
And at FII, there were women on the stage there, and I didn't have to go where a hijab, even though I didn't mind. I'm culturally respectful, but a lot has changed. And one of the things they said to me, which was surprising was they said their children, especially their daughters, when they got to a certain age historically wanted to leave Saudi Arabia and go to America for their education, they're all coming back now because they want to be part of the legacy changes and the progression that is happening there.

John Darsie: (33:57)
Yeah, that's great. And we've experienced a lot of the same with our conference we did last year in Abu Dhabi. There's a significant movement on the ground there that's being supported by male leaders in the country towards greater equality. And they have certain quotas of women they're trying to hire into government, minister positions and senior management. So it's exciting to see that type of change taking place in that part of the world. We ask every guest this based on their area of expertise, but how is technology affecting this idea of equality in the workplace for women minorities and others? Is it accelerating it, is it a hindrance to a greater equality and progress in that area? How is sort of the pandemic and the result and effects of that as it relates to technology affecting your work?

Shelley Zalis: (34:43)
It's been quite remarkable. Technology's an enabler. And especially during COVID times, when we talk about being socially distance, I say we're physically distanced, but more socially connected than ever before. For us at the Female Quotient while we were doing 7 day live physical popups pre-COVID, we've done over 300 plus plus conversations with over 1200 speakers in the last five months. So from a representation of speakers, from global access. When we do them at conferences, it's the privilege that are at that conference, even though it's inclusive for all that's at the conference. Now, the reach is wider. And when you look at technology, especially for mobility and a lot of women being able to be at home on their screens. And one of the biggest challenges that is creating stress, mental health issues are primary caregivers.

Shelley Zalis: (35:47)
Women that have full time jobs that are on Zoom all day and always had the responsibility, the predominant responsibility for their homes, now also have to take on the educator responsibility, that is not easy. And if you haven't experienced it, you really don't understand the impact. How can I be in this room Zooming all day, working with my little children banging on the door? What's for breakfast, what's for lunch, what's for dinner? I don't want to get on my Zoom for school, who's watching them? And so it is adding a tremendous, extra double, triple, quadruple level of intensity and stress and micromanagement for women.

Anthony Scaramucci: (36:29)
Totally, I agree.

John Darsie: (36:30)
[inaudible 00:36:30] we have a viewer who's a single father of a 10-year-old boy. He lives in Mexico, which has a specific male culture and a male-dominated culture. And he's asking what messaging works best with male children to avoid sort of that negative male dominance, toxic masculinity type of behavior.

Anthony Scaramucci: (36:51)
First of all, [foreign languange 00:36:54] and it's a very good question because, and that's why I used the word caregiving, and I say caregiving is still predominantly a female issue, but it impacts men when they are primary caregivers in the same way, hard to work long hours, hard to travel all the time, the same issues kick into place. The same opportunities also where technology is an enabler. I think the most important thing to talk to your boys about is you are already a role model. You are already showing your voice what being an empathetic human is. And we talk about work life balance issues. There is no such thing as balance. Life is not 50/50. Life is messy. You have one life with many dimensions, your work, your family, your community, your friends, and the fifth is yourself.

Anthony Scaramucci: (37:47)
So by being a walking living role model for them to show them that you have to do it all and take care of everything is the best lesson you could be teaching your children, by them seeing who you are and what you do. So that's the first thing I want to say. The second is to talk about the most important qualities as a human. And it doesn't matter if you're a boy or you're a girl, those qualities are empathy and compassion and resilience and figuring out how to multitask on steroids. That is for sure. So I think that talking about that and educating your boys to not believe they are better, we are different. And is what I share with girls all the time. We have different strengths, don't hide them and don't conform and don't make them invisible, make them visible. Your differences are your greatest strengths.

Anthony Scaramucci: (38:42)
And so talking about the differences that unite us. Oscar Wilde says, if we were all the same, we would be unnecessary, be yourself because everyone else is taken. I think that is really important as well. And the last piece is confidence. Believe in you, don't just follow others, follow your heart. And if you follow your heart, you will lead with authenticity and strength.

John Darsie: (39:11)
So we'll wrap it up with one last question from a member of our audience. And it's very relevant to SALT. SALT is primarily a financial services-driven conference and community, we also have technology and public policy integrated into our curriculum as well. But what industries in particular do you think need the most work? And what do you think are the obstacles to having more women in a money management type of positions? There's a lot of studies out there that show that women, certain qualities they bring to the table actually make better money managers. They're less emotional. Some people might think that's ironic, but they're less emotional with their decision making and things like that. What industries do you think need the most work and what are some misconceptions around what women bring to the C-suite?

Anthony Scaramucci: (39:55)
Well, first of all, financial literacy is really important. And, in general women sometimes don't ask for it and we're afraid that we might not... If we don't know the answers, we hold back. We all can learn a lot with financial literacy and even during COVID, the adaptation of investing and that investment lens is so important. When you give women more money. When we get paid, what we are worth, what we deserve, what we should earn, which is equal, we put more money into education. Education is just so incredibly important. Areas that we need more women, technology. We need more women in technology.

Anthony Scaramucci: (40:38)
When you look at AI, artificial intelligence, you look at STEM or now we call it STEAM. Or my girlfriend, Joanna calls it, STEAMEd, adding the design to science, technology, engineering, arts, and math. What goes in, goes out. Bias in, bias out. And so, the algorithms are all messed up when you don't have both sides of the brain, the right, and the left, the emotive and the cognitive side, and look at inventions. And these sounds so silly. We never talk about them, but the airbag in a car, there's more fatality when the airbag opens with women than for men. Why? Because it was designed by men on the male dummies, not men are dummies. The male circle, male dummy. Our wrists are small. Our bones are small, all of those things.

Anthony Scaramucci: (41:24)
So in a crash seatbelt, add seatbelt, you guys are guys. Women, they're not comfortable. They do not fit as well anatomically. Or even when you think about your high heels on an escalator, escalators were definitely made by men. My heel gets stuck in that little escalator all the time. I have to pull my foot out or else it's going to get stuck in there. So when you look at algorithms, if we don't have the right and left brain inside of building and creating, what goes in, comes out and that's where we'll have skewed algorithms. So, I think technology, we talked about the importance of technology. We need more women at every level in tech, number one. In finance, we need more women at the top in finance, especially in how we are really running financial literacy programs and education. And looking at all of those pieces. So there are some fields that are by far underrepresented that we need more of everything, back to the Female Quotient, changing the equation.

Anthony Scaramucci: (42:32)
I want to thank you, Shelley. Because what you're doing is amazing. And as John said, I have a daughter, I have a wife, I have a mom, a lots of nieces in my life, and frankly, lots of women colleagues at SkyBridge. So we're trying to get it right. And your guidance is usually influential and very beneficial. So thank you. And we got to get you back to one of our live events so we can spark up the stage a little bit. For wreak havoc is, where you and I are both used to doing and very comfortable doing. Okay. So with that, I'll turn it back over to John. Shelley, thank you. We really grateful for you coming on today.

Shelley Zalis: (43:07)
Thank you for having me in social distance in LA. We're waiting for you.

Anthony Scaramucci: (43:11)
All right. Amen.

Peter Mallouk: How to Accelerate Your Journey to Financial Freedom | SALT Talks #38

“High net worth individuals deserve the expertise without paying the price of conflict.“

Peter Mallouk is the President of Creative Planning, which provides comprehensive wealth management services to its clients. Peter is a pioneer of the Independent RIA model, with clients in all 50 U.S. states and abroad.

"Why is it that a company is selling a client its own product and charging a fee to do so?” With Peter’s background in tax and law, he’s able to offer clients a comprehensive overview of their wealth management picture while adhering to a conflict-free philosophy. However, he warns, “Yield without risk does not exist.”

Turning to active vs. passive management, he notes that the latter has indeed outperformed the former since 1980. “Large tech companies make up almost a fourth of the S&P 500,” he explains. Should their performance change, it will have a profound effect on passive management’s appeal, and there may be a move away from yield-oriented assets to alternative assets.

LISTEN AND SUBSCRIBE

SPEAKER

Peter A. Mallouk, JD, MBA, CFP.jpeg

Peter Mallouk

President

Creative Planning

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 public policy. We've been doing these SALT talks, which are a series of digital interviews during the work from home period in lieu of our global conference series. What we really try to do is replicate the type of thought leadership that we provide at those conferences, which is providing our audience a window into the minds of subject matter experts as well as providing a platform for what we think are big, world changing ideas, and today, we're very pleased to welcome Peter Mallouk to SALT talks.

John Darsie: (00:45)
Peter is the president of Creative Planning Incorporated, and its affiliated companies. Creative planning provides comprehensive wealth management services to clients, including investment management, financial planning, charitable planning, retirement plan consulting, tax service and estate planning services. Investment management is at the core of the services of Creative Planning, and they have almost 50 billion in assets under management as of July 30.

John Darsie: (01:13)
Creative Planning is customized tailored portfolio solutions for clients in all 50 states and I know some international clients as well. Peter's leadership in the industry has not gone unnoticed. He was one of the pioneers of the independent RIA model. He's the only person to have ranked number one on Barron's Top 100 independent financial advisors in America list for three straight years in 2013 through 2015. He's also appeared on the cover of Worth magazine's 2017 and 2018 issues of the Power 100, which is a list of the most powerful men and women in global finance.

John Darsie: (01:47)
In 2017, New York Times wrote that, "Creative Planning is at the vanguard of a profound shift in finance." I know we had Stephanie Link from Hightower on last week if you caught that episode of SALT talks. Peter is one of the pioneers of that independent RIA model that Hightower is another player in that space. Peter and his wife, Veronica are passionate about giving back to their local community in the Kansas City area. They're involved in many local and national efforts mainly focus on providing help for the less fortunate.

John Darsie: (02:16)
They've been honored for their tireless work with many causes. Peter graduated from the University of Kansas, so he's a homegrown star there in the Kansas City area, in 1993 with four majors, including degrees in Business Administration and economics. He went on to earn a law degree and an MBA in 1996, also from the University of Kansas. He's also earned his Certified Financial Planner practitioner designation. So in addition to being a business executive, he's also a CFP.

John Darsie: (02:46)
Peter and his wife Veronica reside in Leawood, Kansas with their three children, Michael, JP and Gabby. A reminder if you have any questions for Peter during today's talk, please post them in the Q&A box at the bottom of your video screen and hosting today's interview is Anthony Scaramucci, the Founder and Managing Partner of SkyBridge Capital, a global alternative investment firm, as well as the chairman of SALT. With that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (03:11)
John, thank you, Peter. It's great to have you on even though I'm still sore at you for the 2015 World Series situation. You guys just ripped through and destroyed my Mets. So I just want you to know that that feeling is still with me, Peter. It's still with me. The pain is still with me. I want you to take it back. My colleagues often say to me, don't ask people about their backgrounds, because you can find it on Wikipedia but I find that to be the most interesting part of people's stories. You tell us something we're not going to find on Wikipedia about you, your family, how you grew up, how you got to where you are. By the way, congratulations on your great success, but tell us something that we wouldn't learn from Wikipedia about you.

Peter Mallouk: (04:01)
I think probably what you wouldn't learn and I think this is not really my story, but the people I'm most impressed with are immigrants, like people that come to the United States and have a lot of success. If you really look at that group of people, they're off the charts in terms of what they accomplish. Because if you can leave India or Southeast Asia or Africa and find your way through all of that and come to the United States, it's kind of a cakewalk when you get here because someone else has done a lot of the hard work and then you've taken that leap.

Peter Mallouk: (04:35)
So I'm fortunate that two people did all of that for me, my parents. So you've got the kind of the best case scenario I think, as an American is to not have had to be the person that had to have the guts to do all of that and I really question, I think I would have never done that. I grew up 10 miles from where my church, my school, my office, 40 minutes from I went to college. Wherever I was born I was going to be, but that wasn't my parents attitude.

Peter Mallouk: (05:05)
That's the story of millions of Americans. So when they came to the States, it really became the kind of the best case scenario because you got to see people that really appreciated all the things that the United States has to offer that really understood how tough it could be in other parts of the world and has sacrificed everything. Like all our friends, all their family. They were the only ones to come here.

Peter Mallouk: (05:30)
So it really gave me a different mindset growing up. That mindset to me, if there was one thing if you took it out of me I wouldn't be where I was, it would just be that, was just that good fortune and that to me is the difference and I'm forever grateful for that and every year that goes by, I appreciate it more. It's also given me incredible insight into our clients.

Peter Mallouk: (05:54)
So many of our clients that have reached the top of their professional United States in business or medicine or whatever, they're immigrants. It's interesting to watch what they invest in, versus just third or fourth generation Americans. They will pay every penny of education all the time, from whatever they need to do all the way through if the kid needs help, or it's advanced tutors, tutors, when they're in college will pay for all of it. Four years, eight years, six, whatever. It's just the things that they value and invest in, I can understand it better as well. So it's helped professionally too.

Anthony Scaramucci: (06:30)
Well, I mean, you are also the pioneer in many ways of this independent RIA model. Your firm is one of the fastest growing in the space, but the RIA model in general is a very fast growing concept. You were an early pioneer. So tell us about your early vision, what came to maturation for you, and where are things going now for RIAs and for your firm.

Peter Mallouk: (07:01)
So there were some very delayed aha moments for me. So I was an advisor to other advisors for the first six to eight years of my career. I would do legal work for them, give tax advice if someone was selling a business, and I really was doing that for other advisors. So I'd go to an insurance company, a brokerage house or an independent firm, and I would do that for them. After six years of that, eight years of that, depending on how much you count of my first years, I realized that hey, sometimes products are being sold that don't make sense.

Peter Mallouk: (07:34)
Why is it that this one company is selling their clients their own products? Just really got a first hand seat at the conflict, like in a really big way. I saw it, I had probably worked with over 50 to 100 firms and I really thought, this is an interesting space. There's just embedded conflict. Somebody comes in, pays an advisor a fee, and then gets sold their product or then also buys a product on commission or winds up with an annuity.

Peter Mallouk: (08:01)
It just seemed strange and I didn't have a vision of I'm going to fix the space, I just said, I don't want to be a participant in that space anymore. So I'd like to have a firm that's independent and doesn't have their own products and doesn't work on commission and so on. I also knew that it would be nice to be able to look at a client's entire wealth picture. So if you've got somebody who's worth a few million dollars, or 10 or 100 million dollars, it's nice if you can earn 1% more for them or 2% more for them, but if you can save them, hundreds of thousands or tens of millions and estate taxes or capital gains taxes, that's where you're really moving the needle and that was really my background was that tax and law component of things.

Peter Mallouk: (08:42)
So the idea was to have a firm that really did everything it could to grow and protect and transfer the wealth of our clients and also manage the money in as conflict free away as possible. That's how we got going here and really didn't have our sights set on being the leader in the industry. As time went on, it became clear that we had an opportunity to do that.

Anthony Scaramucci: (09:10)
Let's talk about that independence and that lack of conflict and how it balances up against others that you're competing against. So, go ahead, pitch me. I'm your client, I'm coming in with 100 million dollars and go ahead, Peter, why am I using you guys?

Peter Mallouk: (09:26)
All right. 100 million dollars. You're probably looking at, you've got two choices-

Anthony Scaramucci: (09:30)
If I was John Darsie, I'd be coming with 300 million but since I'm only me-

Peter Mallouk: (09:34)
I'll take you and your 100 million. That'll work great.

Anthony Scaramucci: (09:37)
Go ahead. Go ahead, Peter.

Peter Mallouk: (09:38)
All right. You just saw the Mets, right? We could have some big cash coming in, and we're going to have a conversation later.

Anthony Scaramucci: (09:44)
Amen.

Peter Mallouk: (09:46)
All right, what we do is you basically got two choices. You got the brokers world and the independent world. The brokerage world is the JP Morgan's And the Goldman Sachs and great companies and they've got some great products. You're going to go pay them a fee to manage your money, and you're probably going to wind up with their products. That's just what's going to happen, or in the products of people that pay revenue sharing. Or you might go to the independent world and say, hey, I want a fiduciary. I'm going to go hire an independent wealth manager, and 95, 99% of those firms don't even manage as much money as you have.

Peter Mallouk: (10:19)
So there's not scale or breadth and depth. So here, you've got Creative Planning, that had 50 billion in assets under management, clients in all 50 states, 100 people that come to work every day that work just in our legal and tax teams. We are going to be able to give you that breadth and depth that somebody like you requires but we're not going to be selling your own products. We have access to all what we consider the top investments in alternative investment space and other spaces, if they're applicable to you.

Peter Mallouk: (10:47)
So the key here is to a high net worth investor, really any investor deserves to get the expertise without paying the price of conflict and that's where I think we sit today.

Anthony Scaramucci: (11:00)
You're doing a lot more private equity as well.

Peter Mallouk: (11:03)
I just pitched you. Are you closed or are you going to sign on now?

Anthony Scaramucci: (11:07)
I'm going to call you afterwards. By the way, I think your pitch is very compelling. I'm just teasing you. My problem is because I deal with every single person in the universe, and all my money is stuck in my fund.

Peter Mallouk: (11:24)
I was just joking.

Anthony Scaramucci: (11:27)
I appreciate what you're saying, a lot. I want to go to another question. Darsie's itching to get in here. So before he steals all of my thunder, Peter, I got to ask a few more questions. You're doing a lot more in private equity, and private equity is flowing through RIAs and through Creative Planning. What's your thought there? Why are we doing more there?

Peter Mallouk: (11:53)
Well, I think that first when we started, we couldn't go get our clients top shelf private equity. We couldn't call a private equity firm and say we managed 5 billion dollars, we want access to your fund. That's a conversation where we had to be at 25, 35, 40 billion to be able to say, hey, we have enough very high net worth clients to have access. We really couldn't offer a best in class until recently and that's a part of it. We don't want to offer anything unless we think we can really offer best in class.

Peter Mallouk: (12:17)
Now, I think in terms of the space, what's happening is people are scared of the stock market, but they feel better in alternatives and private equity is considered an alternative. Now, I don't buy into that on its face. They're all equities. Some are public equities, and some are private equities and this idea that you're safer if you go from public equities to private equities is on its face ridiculous, but for whatever reason, pensions and universities and so on, don't think so.

Peter Mallouk: (12:44)
I do think private equity adds value. I do think that their managers matter a lot, and if you get a good history, a good management team, you've got a pretty good chance of doing better than the public alternatives. So I like having private equity if you have access to very, very tough funds and top managers. You see more demand from that from especially more affluent, at least we do for more affluent clients.

Peter Mallouk: (13:10)
Now there's 8,300 private equity funds. That was a statistic from a few months ago. So today, there's probably 9,300 because they're just sprouting up everywhere because of the demand. I think we're going to see a bloodbath across the space, at some point, with all of the leverage that's taking place and all the money that's chasing deals is driving up valuations. I think people need to be really selective about who they're partnering with in that space if they don't want to be part of that.

Anthony Scaramucci: (13:36)
Well, we agree. In your firm, do you sometimes do special purpose vehicles for your clients as well if opportunities come up?

Peter Mallouk: (13:50)
We don't package deals ourselves, for our clients. So we're always looking for a third party and that way we are never married to a manager. If we don't like one place, we just remove them and go somewhere else.

Anthony Scaramucci: (14:04)
That goes to your conflict free philosophy. Okay, so that totally makes sense. When you're looking at the fixed income space now, the yields are obviously very, very depressed and you have older clients that need income off of their corpus. What do you say to these people?

Peter Mallouk: (14:23)
I just tweeted this morning that yield without risk does not exist. I just keep getting this question from clients now. Hey, how do I get more yield without taking additional risk? How do I get more yield without taking additional risk? It simply does not exist. Everywhere people think it exists, they are someday going to pay a price. So I think the premise for this is you have to start by accepting, you're not going to get more yield without taking more risk. So now all of a sudden, I'm moving closer to equity like risk than I am bond risk and regardless of what the packaging of the product is.

Peter Mallouk: (15:00)
If you except that, you start to wonder why you're just not in equities or alternatives to begin with, because you're going to take the risk, you may as well pay capital gains instead of income, you may as well participate in all of the upside instead of part of it. I think that's the real story is that we're going to see a move away from yield oriented investments that are perceived as low risk towards riskier asset classes.

Anthony Scaramucci: (15:21)
Well, how do you feel about a package of higher yielding stocks, dividend yielding stocks?

Peter Mallouk: (15:26)
I owned those before I owned high yield bonds, because I'm going to get the upside and I'm going to get the upside in a much more significant way and either way, I'm going to get the downside. I think you have interest rate sensitivity. So if you believe we're eventually going to have higher inflation, you can suffer there, and you tend to be more value oriented. As we know, there can be very long periods of time where value can underperform.

Peter Mallouk: (15:52)
So there can be some unintended consequences in terms of correlation with the market and everything else but for someone who wants income, they're very, very focused on income, if that's your overriding factor, then I like them.

Anthony Scaramucci: (16:06)
Makes sense to me. Active management, underperforming passive management, I ask everybody this question because I'm trying to figure it out myself. I don't honestly have the answer, but man, over the last 10, 12 years passive management has by far beaten active management. Is that a permanent thing now or is that going to be re litigated post COVID-19? What's your view?

Peter Mallouk: (16:31)
I think since, 1980, passive has beaten active most of the time for longer periods of time, but usually by a narrow margin. What I think is an anomaly that's happened in the last five to 10 years is these five or 10 very large, big tech companies that are in the S&P 500, the Microsoft, Google, Facebook, Amazon, we know what they are. They make up almost a fourth of the S&P 500. So that's 500 a day is about 505 companies, five of them are a fourth of it, the other 500 are three fourths of it.

Peter Mallouk: (17:07)
Those five have outperformed dramatically all the other stocks, lifting up the index. So passive management looks like it's not beating active. It looks like it's destroying active, but it's really not. If you take those few stocks out, it's just beating it by a little bit like it always does. So to me where you're going to see the story change and I think active will be oversold is whenever these five stocks underperform for whatever reason.

Peter Mallouk: (17:34)
They just simply can't become, instead of one and a half trillion dollar companies, let's say they can't become $10 trillion companies, they can't continue to grow at 35% a year. Eventually something will happen whether it's regulatory or market forces or whatever. When those stall or slow down or God forbid, go down, everyone's going to celebrate active and not only will they celebrate active, the passive people that own small caps will go back to celebrating small caps.

Peter Mallouk: (17:59)
Foreign investors will go back to celebrating foreign. This discrepancy between the international and US, large and small, active and passive, it's not really what it is. It's really a discrepancy between these five stocks and everything else and until those turn, then we'll see the narrative change.

Anthony Scaramucci: (18:15)
So let's talk about that perspective client again, because I think you have a fascinating read on all this. This prospective client walks in and says, okay, Peter, I get that there's a low yields. I get that there are five stocks driving the market, but I'm super worried about deficit spending. I'm super worried about the Federal Reserve's inducing markets the way it is. Should I be worried about all that? Should I be worried about $25 trillion of deficit spending at the US level? Likely a $3 trillion deficit next year as well. Is this stuff I need to be worried about or do deficits not matter and life just goes on for me and my family. What do you say?

Peter Mallouk: (19:00)
So what's interesting, I read a quote when I was a teenager and I was fascinated by it. I had written it down in a notepad I had at school. I can't even Google my way to who said this, but it was someone in Russia and it was in the 1900s. They said, we're not going to have to fire a bullet to take over the world because Great Britain is going to expand itself out of existence. Germany is going to militarize itself out of existence, and the United States is going to spend itself out of existence.

Peter Mallouk: (19:27)
What an amazing, two of those three things have happened now. It's not Russia that's there ready to take everything over. It's a much, I think, more worrisome, communist regime in China, but I think deficit spending is a real problem. Now, I think the Fed has gotten away with it and whoever the president has been has gotten away with it. They've gotten away with it first, because we had explosive growth because of the tech revolution that allowed us to carry this huge debt because just incredible innovation and growth.

Peter Mallouk: (19:57)
Now, we have these incredibly low rates. So yeah, the mortgage on the million dollar house has gone from 500,000 to a million but the mortgage on the house has gone from 6% to 0.6%. So that's a little easier to carry, but we're running out of bullets here, there's no way you can dance around it. The problem with our system is a democracy doesn't lend itself to fixing a problem like this. Because it's going to have to be fixed, really not by the Fed, but by president and Congress, all of whom don't want to control certain expenditures, because they would be voted out if they did it.

Peter Mallouk: (20:33)
So the way we solve things in democracy is we wait till there's a absolute crisis, then we do something because then all of the senators and congressmen and president can go back to their constituents and say, well, it's better than what the alternative was. Here it's too complex, it's too big to do something like that. I think this is a solvable problem. It's going to take some modicum of political courage that combines some common sense tax rates with social security reform and spending across the board that really makes both parties mad.

Peter Mallouk: (21:04)
All the way from Social Security to defense spending. It's actually remarkably doable. If you look at how easy it is to fix your Social Security, for example, it's almost crazy how easy it is to fix. You push up the retirement date a few years. When Social Security started, the expected date of death was the age Social Security started. Now when you get Social Security, you're expected to live 10, 20, 30 years longer. So just moving that data up a little bit, having it be taxed a little more on people like you and me, having the contribution rate go up just 2%. That's all you need to solve all social security.

Peter Mallouk: (21:40)
So we can solve all these problems. It's just going to take some combination of political courage. Neither party has that, or has shown that they can do that and even when you have one party want to raise taxes, they immediately allocate those dollars to new spending. You can look at Biden, he's saying if he wins, he wants to raise taxes a little bit, but he wants to allocate it to new spending. So no statement on the politics of that, but the money part of that, we're not solving any of that deficit problem.

Anthony Scaramucci: (22:08)
I'm very apolitical. I don't have a political opinion. I don't share my views with anybody. I appreciate you sending a statement of politics on that. Go ahead, John Darsie, go ahead.

John Darsie: (22:20)
I've been itching to get in here. I want to go back to Creative Planning for a little bit and operationally, what do you think has really driven your success and I want to use the pandemic as an example. I know that you've been somewhat outspoken about not taking PPP loans from the government and making pledges to your employees and sticking with your staff in a time of volatility. How do you think the way you operate your business translates to level of fiduciary care for your clients and how have you guys approached the pandemic, both internally from an operational perspective, and in terms of how you've communicated to clients? We talked a little bit before we went live about how your role as an advisor is sort of half psychologist, half money manager.

Peter Mallouk: (23:03)
I think in terms of like, if you look at a professional team or I went to KU, so let's say the Kansas Jayhawks basketball team. The way a team wins the game is most of it is recruiting. With sports, we acknowledge that. When the KU basketball team gets on the field to play Pitt State, the game is over before the tip. No one expects a different, it's not always over but it pretty much is. By having the most talented people.

Peter Mallouk: (23:30)
There's something about financial services in our space, where people just don't believe that. They feel like people are commodities, and you can swap people in and out. I don't believe that at all. To my core, I don't believe that. I think that's the big differentiator. So I feel like when our team is sitting with a client versus other firms' team, if we lose, we screwed something up, because we've got the better people in my mind. We've done everything we can to get those people.

Peter Mallouk: (23:55)
If you believe you have the better people, you want to do everything you can to keep them happy. So it was interesting in our space, when the coronavirus started, I didn't really think much of it. I just said, look, everyone's got their job. I don't care if this goes on for three years, we're not cutting pay for anybody, all the salaries are guaranteed. It was almost like, of course, this is what we're going to do.

Peter Mallouk: (24:19)
They're coming in, doing the right thing for the clients of the firm every day and I'm going to do the right thing for them. What it also does is it allows them to focus on the clients. They're not having to worry about other stuff. It allows them to focus on their clients. Now what wound up being nice is, to my knowledge, no other independent firm in the country, certainly of scale, made any kind of commitment to their clients like that.

Peter Mallouk: (24:41)
So I think it also gave me a chance to prove to our team, look, it's one thing for me to say to you, that I believe in you and I think you're great and I want to keep you here. It's a whole other thing for me to have an opportunity to prove it. I do the same thing with the clients going through the pandemic. When you go through things like this, and '08, '09 was another one of them. It's really an opportunity to show your clients, hey, I told you this is what we're going to do with your portfolio when the market's down and we're doing it.

Peter Mallouk: (25:09)
We told you that if there were financial opportunities available to you, we have a lot of restaurant owners as clients, a lot of people in the medical field, we help them figure out the CARES Act, we help them figure out the PPP loans, we did everything we could to be there for our clients. So I really viewed it as an opportunity to do those things. So for us from the very beginning to today, it's been offense, offense, offense, instead of just trying to hold the place together.

John Darsie: (25:35)
You started Creative Planning, obviously, as a businessman, you wanted to grow a business, but you started it really because it was the right thing to do and you were a pioneer in the space, as we mentioned in the open, but as of late, there's been a lot of investment capital that's flowed into the independent RIA world. There are some secular forces that are driving the flow of that capital. What about the independent RIA model do you think is so attractive? What are those forces driving the really rapid growth in the space?

Peter Mallouk: (26:03)
I think you have a couple different things, and again, in the private equity space, to your point, there's other forces happening that just make private equity a very strong space. More people are trying to access it, more institutions are moving money to it. They buy companies, they borrow money. So they benefit from lower interest rates. So you have a bunch of money going into private equity, it is easy for them to borrow very large amounts of money at low rates, which amplifies returns.

Peter Mallouk: (26:27)
So you have that in the background. So then they're going to buy businesses that are private, they want them to be of a decent size and they like to be where money is moving, where business is moving and money is moving from the brokerage world to the independent world. People are getting more sophisticated and they're going you know what, why am I going to pay this advisor to sell me a mutual fund or sell me an annuity or put me in their funds.

Peter Mallouk: (26:49)
So we're seeing market share move over to the independent world every year. We're also seeing it in the ultra fluid space happened now more than ever, where you have people worth 10 million, 25 million, 100 million, 500 million going to RIAs. Why were they not doing that five, 10 years ago? Because there weren't any big RIAs. Now there are a couple like Creative Planning that manage 50 billion and they feel comfortable coming over and going, look, I get that independence and I can get it with breadth and depth of services.

Peter Mallouk: (27:17)
So private equity is looking at this space and saying, well, we've got the market moving in that direction. So the market force is moving in that direction and there's no signs it's going otherwise. It seems like there's five choices. It's the broker's world or the independent world, and the money's moving to the independent world. So they love to be in a growth oriented space, they intuitively understand wealth management.

Peter Mallouk: (27:39)
So I think that that combination of things has attracted people. The other thing I'd say that's happening that's going to change is there really hasn't been a spectacular failure in this space. So most private equity in this space is buyout equity, meaning they come buy the whole company or almost all of the company, and they really started doing this after the '08, '09 crisis. Well, the market's nothing but go up for the last 12 years.

Peter Mallouk: (28:01)
So everybody at every private equity firm that bought an RIA, an independent firm, they're just high fiving each other within the five years, like that's something amazing. The reality is I think if this coronavirus crisis had stayed at March levels for nine months, we would have seen several spectacular blow ups in the RIA space from over leveraged larger RIAs, 10 billion and up, and I think the math of the space might have changed and the attractiveness of it might have changed but of course with the Fed coming in and the coronavirus, the mortality rate not being 3% instead being 0.5 or lower, really changed the math on all of that and then the private equity is stronger than ever here.

John Darsie: (28:43)
So we talked about how equity markets are pretty fully value. They've rebounded very quickly from that March sell off. So as you look at portfolio construction for clients, has the pandemic changed the way you think about the long term portfolio construction and also what do you view as the role of alternative investments? We talked about the rotation that happens cyclically between passive and active management. As you're building client portfolios, how do you look at alternatives like hedge funds, and other active products to diversify a portfolio?

Peter Mallouk: (29:14)
So in the public markets, we definitely favor passive investments. In the bond markets, a lot of our clients are individual bonds. Summer funds, summer ETFs. We are very big advocates of alternative investments. We lean very heavily towards private equity, private lending, private real estate. I think 60-40, we had sent an email out to our firm and had a call around that being dead over five years ago, when rates had dropped and now we're talking about 70-30 is dead. You just can't get the return a lot of people are trying to get when bond yields are between 0.6 and two and a half percent and where you're taking some serious risk to go beyond that.

Peter Mallouk: (29:51)
So I think what we're seeing at Creative Planning is we're seeing a strong commitment to the passive space, even though I think it's dramatically skewed by the Big Five, big tech companies. We continue to stay global, there will be a rotation back to international. We continue to stay invested in large and small, there's 100% of the time been a rotation back to small. I think that will eventually happen. I certainly don't know when and wish I did.

Peter Mallouk: (30:14)
Those things we're still committed to. We still believe in bonds. If you have to have money in the next five years, the reality is, if you have to have the money the next five years, we don't want to be reaching for yield, but we're more committed to alternatives than ever as we try to fill that gap in the portfolio to not have everything be so correlated, try to get returns from different places.

John Darsie: (30:32)
We have an audience follow up question regarding your earlier comments about private equity, how you have an expectation there will be some level of a washout in primary private equity. Do you think that, are you opportunistic in a way that you would try to find value in a secondary PE type of strategy?

Peter Mallouk: (30:49)
No. So I think for us, we've got a six to 10 key relationships with kind of the names everybody's heard of. We're committed to just working with them, reviewing there's, and I think we try not to get too spread out in terms of what we're looking for, although I do think that that viewer is onto something, that we're going to see more of a secondary market emerge and a lot more activity happening there. It's going to be interesting when this illiquid investment becomes more and more illiquid as that market emerges. I think that's an inevitability.

John Darsie: (31:22)
At SkyBridge, we've looked at a few opportunities. There's some funds out there that are sort of funds of closed end funds. You have a lot of closed end funds that are trading at significant discounts, given the turmoil in markets, and there's an opportunity to invest in that mismatch of underlying assets to market value. So why don't we talk about the fiduciary rule for a little while.

John Darsie: (31:44)
Again, you started Creative Planning and removed those conflicts of interest because you thought it was the right thing to do and you thought the business model was the best way to align the interests of the client and with the firm. There was a fiduciary rule under the Obama administration that ended up petering out and there's been no move to resurrected in the Trump administration.

John Darsie: (32:04)
In a Biden administration, if he wins the election in November, do you expect to see a revival of that conversation around standards of care and how do you think that would affect the industry and the acceleration of trends toward independence that we're already seeing?

Peter Mallouk: (32:19)
I do think it will come back if there's a Biden administration, but I also think, unless we just get a very clear global standard, it really won't do anything to change the industry. All these little changes do is confuse people. Everyone's got to be a fiduciary on an IRA, but not on another investment or on the certain products, but not other products. Sometimes you can be a fiduciary and sometimes you can't. The rules in this country are so unbelievably stupid that how is the consumer supposed to navigate it?

Peter Mallouk: (32:50)
I mean, our highest net worth clients don't understand it, because nobody can understand how stupid the rules are. So unless they change the rule and say every financial advisor is a fiduciary with investments all the time, it's not going to do anything to clear up the space.

John Darsie: (33:06)
Do you have an expectation of that might happen in the next five to 10 years or you're not holding your breath and you're just worried about what you're doing over there in-

Peter Mallouk: (33:16)
I'm not holding my breath. I think the financial services industry is an extremely powerful industry and you just imagine if these big private banks, these big brokerage houses, if everyone that went to work at their office had to act in the best interest of their client every day, 80% of the funds would be gone. They just wouldn't be able to sell them anymore. So no, I don't think it's going away anytime soon.

John Darsie: (33:39)
In terms of the makeup of the wealth management industry, you talked about the benefit of scale and the depth of expertise that exists at a large RIA like a Creative Planning. The industry was a little bit separated and there's been some consolidation among independent RIAs to create entities like Creative Planning where you have that at scale and expertise. Do you expect to see as you see a continued exodus from the wirehouse world, do you expect to see sort of new wirehouse type models emerge that just have fewer conflicts or how do you expect that evolution to take place in the wealth management world over the next five to 10 years?

Peter Mallouk: (34:18)
I think we're in the very early stages here. So you hear me talk about Creative Planning being large. At 50 billion, we're large in the independent space but compare it to custodians. Fidelity is 8 trillion and Schwab is 5 trillion, or compare it to the private banks. JP Morgan is five plus to 10 trillion in assets or the brokerage houses like Morgan and Merrill, trillions and trillions of dollars. When we say Creative is a rounding error, it actually is a rounding error.

Peter Mallouk: (34:45)
It's totally negligible in the wealth management space. The market share is probably one 1,000th of 1%. In the independent world we're big. To your point, the independent world. What you're seeing is you're seeing these firms, larger constructed by PE investors, where you have a firm that had 5 billion or maybe 2 billion, and then they bought 10 billion of other firms. So I call these firms Franken firms, where they might share a brand but it's not one culture.

Peter Mallouk: (35:15)
It's not one offering and it's just Morgan Stanley all over again. You go to the Chicago office and the guy's trading options, you go to the Dallas office, and maybe he's a passive guy and in New Jersey, they're the active guys. It's not one voice. It's not one philosophy. It's really just financial engineering, putting a bunch of firms together, buying them at a multiple of earnings, putting debt on it, putting it together and saying I've got a $30 billion firm and selling it to the next person.

Peter Mallouk: (35:42)
Private equity will play that game and keep selling it to the next one and the next, the next one till somebody gets caught with the whole thing falling apart. That's what's going to happen, I believe, in the independent wealth management space. There are very, very few independent firms that are actually a firm, where they've got a philosophy an approach of doing things. I think they're going to survive that washout, but I think that's where this side of the space is heading.

John Darsie: (36:09)
The last question I want to ask you before I turn it back over to Anthony, and I'm hogging the spotlight as usual. So Anthony, I'm sure will give me a mean phone call after the SALT talk but about your philanthropic work. I know you do a ton of philanthropic work. Like I mentioned, you went to University of Kansas or Kansas University, not just for undergrad. You got your MBA and other graduate degrees there. You and your wife, Veronica are very active in the community. Talk about some of your philanthropic work and why that's so important to you.

Peter Mallouk: (36:37)
I think that basically, obviously, you can't take it with you and I've gotten to see my client, kind of the book ends of seeing my parents come from a very poor country and then also seeing our clients. What happens is they save, save, save pile up, pile up, pile up, and then they die. So the clients that I've learned a lot from are the ones that they enjoy giving while they're alive. If they want their kids to have something, they give it to them so they can see them enjoy it. If they are passionate about a charitable cause, they do the giving themselves so that they can enjoy it.

Peter Mallouk: (37:11)
It's interesting, because you see people pile up their money, and then they might put it in a foundation for their kids to give away and their kids either don't want to deal with it, or they have causes that are the opposite of what the parents had. So essentially, the parents spent their whole life saving up all this money to see the money spent on things that aren't tied to them.

Peter Mallouk: (37:28)
So for me, Veronica and I look at it like 99% of whatever we wind up with is just going right out to causes that we believe in and from the beginning, I think at Creative Planning and both Veronica and I personally have been focused on those less fortunate. So I believe in the capitalist system, I'm a very proud American. Democracy is better than all the alternatives. I think Churchill said, it's a terrible option until you compare it to all other options. I'm sure I butchered that quote.

Peter Mallouk: (38:01)
Look, everything's not fair. We were born on third when we were born into the households we were born in and we're not oblivious to that. At Creative Planning, we work with a lot of people that are very successful, some of whom got there completely on their own, some with a little help, some with a lot of help. So at creative planning, we've spent our time giving to the part of the people that are never probably going to be our clients.

Peter Mallouk: (38:25)
So I'm proud of the fact that a very large percentage of our workforce is involved in mentoring kids that we provide full ride four year scholarships to, mentoring them sometimes from grade school all the way through college, covering them for all four years. All of the annual events we've had at Creative going all the way back to the inception have been focused on the inner city from 2004 to today, whether it's delivering 1,000 Thanksgiving meals every year or building a place to distribute basic goods and services to kids and people that need them that aren't covered by food stamps.

Peter Mallouk: (39:01)
Things like soap and shampoo that is unbelievably not covered by food stamps. We've just been involved in causes like that at Creative Planning from the beginning, and that's never going to change. Obviously, the events of this year, I think, have highlighted to a lot of people a lot of these things, but we're just going to keep doing what we're doing and trying to make a difference when we can.

John Darsie: (39:24)
Well, congratulations on all your great philanthropic work and your success, building Creative Planning, and that really cohesive culture that you've created. I'm going to let Anthony hop back in if he has any final words before we let you go.

Anthony Scaramucci: (39:36)
We're going to wrap up in a sec but Peter, I have one last question for you and it's really about the psychology of money. Because we have brilliant people that lose all their money and then we have janitors that are able to save and they die with $8 million in the bank that they give out to charities and their family. So if you were going to give somebody some advice about the psychology of money, what would you say?

Peter Mallouk: (40:02)
I think very, very few people have a healthy relationship with money and there's a lot of research that shows that how we all deal with money has to do with how we grew up in our households. So some people feel like they're not worth something and they spend the money on things that make them feel like they've got a sense of worth. Some people grew up in households where there was a sense of scarcity. So when they get money, they want to leave it in cash and they want to hoard it and they want to protect it and they live in fear of losing it.

Peter Mallouk: (40:35)
Some people, it becomes this narcissistic scorekeeping type of measure. So I really think that most of us have a problem with money. So having somebody who's capable of earning it and investing it without screwing it up, making a mistake like going to cash in March, which a lot of people that were invested, according to Fidelity study did in March, having people who can invest it well, who can then leave something to charities or their kids or are comfortable giving money away, and also able to enjoy it themselves.

Peter Mallouk: (41:09)
A lot of people just can't spend money on themselves. That person's very rare, and that person is a very happy person. So to the extent, we can help at all impact our clients, save better not make an investing mistake, enjoy their money for themselves and others, that's the most rewarding part of the job is helping people take the money to match the goal. That's what Creative Planning is all about.

Peter Mallouk: (41:32)
Most money managers, they're trying to get alpha all the time and obviously, we want to perform for our clients but for us, the primary goal of performance is, you want X to happen, and we're going to do these things to make it happen. So anytime you can help somebody realize that, is a beautiful thing but to me money it's like alcohol. Whatever you were before you took the five drinks, it just became amplified. So, to the extent that you can know thyself, and make better decisions, you'd be a happier investor and a happier human being.

Anthony Scaramucci: (42:06)
Amen. All right. Well, Peter, fantastic to have you on SALT talks. We got to get you to one of our live events and congratulations on what you build and what you're about to build. I think that for Creative Planning, frankly, the best days for you guys are ahead because you're right at the intersection of everything that clients want. So we wish you great success and I hope to see you at a live event.

Peter Mallouk: (42:31)
I look forward to that.

Anthony Scaramucci: (42:32)
I'm enjoying the picture of your kids way more than the fake George Washington poster behind John Darsie.

John Darsie: (42:39)
You had to get the dig in before-

Anthony Scaramucci: (42:41)
I had to get that in there before we left. Well, God bless you, Peter.

Peter Mallouk: (42:43)
All right. Thank you, Anthony.

Anthony Scaramucci: (42:44)
Give it back to John.

John Darsie: (42:45)
Don't let him convince you it's fake. Come on. Peter, thanks so much for joining us and thank you everybody who tuned in to today's SALT talk with Peter Mallouk of Creative Planning.

Jim Mccann: The Universal Need for Social Connections & Interactions | SALT Talks #37

“We help people express themselves and connect with the most important people in their lives.“

Jim McCann is the Founder & Executive Chairman of 1-800-Flowers.com, Inc., which he grew into one of the world’s leading floral and gourmet gifting companies. The company’s namesake was the result of a well-timed purchase during the 800-number craze.

Jim ran St. John’s Home for Boys, a group home for teenage boys, for fourteen years. He also worked multiple side jobs: covering odd shifts at a clothing store, flipping houses and bartending. Jim had the opportunity to buy his first flower shop for $10,000 just after he had sold a building in Brooklyn for $10,000, a serendipitous event he couldn’t say no to.

“There is a universal need for social connections and interactions.” Jim would go on to acquire companies that satisfied this basic need as a way to expand his portfolio: Cheryl’s Cookies, Harry & David and The Popcorn Factory.

LISTEN AND SUBSCRIBE

SPEAKER

Jim McCann.jpeg

Jim McCann

Founder & Executive Chairman

1-800-Flowers.com, Inc.

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 public policy. SALT Talks are a digital interview series we've been doing during the work from home period, featuring leading investors, creators, and thinkers. And what we really try to do during these SALT Talks, is replicate the experience that we provide at our SALT conference series that we do in Las Vegas every year, and then internationally as well. And our goal at those events and on these SALT Talks is to provide our audience a window into the minds of subject matter experts and provide a platform for what we think are ideas that are shaping the future of business and policy. And today we're very excited to welcome Jim McCann to SALT Talks.

John Darsie: (00:53)
Jim McCann, if you don't know him as a very successful entrepreneur, business leader, author and philanthropist, whose passion is helping deliver people smiles. Jim's belief in the universal need for social connection and interaction led him to found 1-800-Flowers.com, which has grown into one of the world's leading floral and gourmet gifting companies. Jim's strategy for growth has included an effective combination of birthing and acquiring new businesses and brands that resonate with customers for their gifting and celebratory occasions. Jim is also deeply involved in philanthropy, and especially devoted to helping individuals with developmental disabilities, which includes his continued work as founder and chairman of Smile Farms, which is a 501(c)(3) organization established in 2015.

John Darsie: (01:41)
Smile Farms provides meaningful jobs in agricultural settings to young adults and adults with developmental disabilities, allowing them to master new skills, experienced teamwork, contribute to their community, and importantly, take home a paycheck, and the dignity that comes along with that. In 2018, Jim established Clarim Holdings, which is a private holding company, that expands market opportunities for clients by providing capital along with an extensive network of high tier support partners. Jim also serves as the director for a Amyris and International Game Technology PLC, as well as a variety of private and not for profit board seats that he sits on.

John Darsie: (02:21)
Just a reminder to all of our audience today, that if you have any questions for Jim during today's SALT Talk, you can post them in the Q&A box at the bottom of your video screen. And hosting today's SALT talk again is Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:42)
Hey John, thank you. And Jim, thanks so much for joining us. You're Long Island strong, which I love about you. Unfortunately for you and I, I think this is the longest I've spent on Long Island since elementary school, Jim. But before we get started on the business side of this stuff, tell us a little bit about the personal side. I think he just have this fascinating story about growing up in Queens, what the family was like and how you found your way into the flower business, or the floral business.

Jim McCann: (03:16)
Sure. John, thanks for those kind remarks, even if they were too many. My story is a simple one, not terribly different from yours, Anthony. We grew up in South Queens. My dad was a small businessman. He was a painting contractor. I'm the oldest of five children. And in my neighborhood, the kinds of role models we had, were public service workers. So policemen, firemen. We had a shopping area, main street called Liberty Avenue, where we had a lot of retail shops. And of course we had some other characters who were in another business, a family business too, only, they were five families in that business. And that was not a path we wanted to follow. So growing up, I thought, I'd either work my dad did in a small business, or my dream was to become a policeman.

Jim McCann: (04:10)
Along the way, you make life's decisions and it changes your optionality quite a bit. Mary and I married very young. We started our family very young. I've only had two really career kind of jobs. I worked for my dad as a kid, I worked in retail. Working for my dad, I learned how to do that stuff. So as a young man I'd buy a house and fix it up and sell it, or I'd buy a little commercial building and fix it up and rent it out. But both of my real career, so first was as a social worker, and then the second was as a florist. My old came from bartending, which is a genetic requirement. If you're an Irish Catholic from South Queens, that you make your way as a bartender. And working as a bartender in Queens, a good friend of mine was a customer.

Jim McCann: (05:01)
He worked in this home for boys. He ran a group home. Every time he'd come in, I'd ask him all about it. So at one time he called my bluff and said, why don't you come have dinner with me and the guys, in the group home. It's in a very, very tough neighborhood, 10 teenage boys, 14 to 20 years old living in a house. And lo and behold, he challenged me and said, well, if you think you'd to give this a try after dinner, you're on duty tonight and he flipped me the keys. Well, that was the start of a 14 year career at St. John's home for boys, which frankly I loved. And it was terrific for me. I wasn't good at the job at first, but I learned to get along. But the things I learned about myself and people and what makes people tick, are the things that I try and exercise today.

Jim McCann: (05:48)
It was putting small groups together and rooting for them and setting boundaries and trying to get them to see that they could accomplish things that they didn't expect or appreciate that they could on their own. And then rooting for them along the away, setting goals, making it fun, and letting them know that they were cared for and in fact loved. So I had that great career, but the challenge in being a social worker, is that, not-for-profit world, you don't make very much money at all. A lot of good people doing the genuine good work. Lo and behold, now at 24 years old, the administrator of the home, so it wasn't 24/7 job like it was when I lived in and ran the group homes for a few years. And I found myself attending Barney up, recite Manhattan on Friday and Saturday nights to supplement my income.

Jim McCann: (06:40)
One of those bottle flipper guys, and I had a customer, regular, would be in there every Friday, Saturday night and stay late. And he owned the flower shop across street, told me he was going to be selling it. And I thought, geez, flower shop, where I grew up there was a guy had a big flower shop on the corner, seemed to be quite successful. It was retail, you're working with people. So I asked him if I could work there a couple of Saturday afternoons before I went to the bar. And he said, sure, but why? I said, well, maybe I'm a buyer. So I did that a couple of Saturday afternoons and liked it. I liked how you were working with people in celebratory moments in their life. I asked him how much he was asking for the business, and he told me $10,000.

Jim McCann: (07:19)
Well, I had just sold a building in Brooklyn that I had a $10,000 profit on. So I thought it was serendipitous. And I bought that flower shop. Now, I bought a flower shop, Anthony, not just to be a florist, which of course I became, but also to build a business. So I didn't give up my full time job at St. John's right away, I kept that for a few more years, so that everything I had in the flower business, I could reapply and open up more shops. So I'd open another shop every six months. And then every quarter, until I had to leave St. John's, I'd accumulated a chain of shops and realized that there was no economies of scale in owning multiple shops. And I said myself, I got to find a better way to grow this business.

Anthony Scaramucci: (08:06)
Your vision at that time though, was to have small flower shops potentially, or your vision at that time was the mega scale of what you ultimately became an international brand. Explain your vision and the incrementalism of your entrepreneurship.

Jim McCann: (08:23)
I didn't get a good business education. I told you, I thought I'd become a policeman. So I went to John Jay college, which was a wonderful place to go to school, but as a psychology major, it didn't exactly train me for business. But I just thought if I built it big enough, it would get to be valuable. So I had 40 or so shops by that time. And I realized, no economy of scale here. I was playing with small shops and then big shops, what made the difference. It was ancient history, Anthony, but back then on TV, everyone was trying to get you to remember their 800 number, and they'd spend a fortune. I remember Sheridan hotels had a campaign where they'd have singers and dancers and kick lines, getting you to remember, 800-325-3535.

Jim McCann: (09:17)
So one person remembered the number, but I thought, geez, if you could only spell out the number, you don't have to do that much to get people to remember your number. And I found a company that had in it, that assigned ID number. And being a street kid from Queens, the company was in dire financial straits. They were broke, there was nothing left of it. And it was based in Dallas, Texas at that time. And I figured, why waste all that money with lawyers and accountants and bankers and do this diligence thing. So this wise guy skipped all of that, wound up doing due negligence, right? Bought the company to get the 800 number. There was nothing else left in there. And then discovered, because of my naivete, I accumulated $2 million so that I could put my hands on, to buy this company, which I did.

Jim McCann: (10:15)
And then I found out I had another $7 million in debt that I had just signed for personally, that I didn't have any idea about. So I had great motivation to get up in the morning and try and build the business. But I did have this 800 number now, and it changed how we operate the business. So that was our primary access modality. I changed the name of the store, to 1-800-Flowers. Didn't have capital, everything I could accumulate or borrow, I just put into this company, and now I have to market it and pay off this debt. So I started selling the stores or to franchisees who are better suited to be operated to these stores, because fitness is a family business. The economics of it suggest it should be a family business. So I took the capital from selling the stores off, to build up the brand and then had some good fortune and some wonderful accidents that happened along the way, so that we became a brand.

Jim McCann: (11:07)
We became the brand in this small flower business. And we changed the way the industry works. And 10 years, 11, 12 years into the business at that point my younger brother, Chris just graduated. So he's the youngest of the five of us. I'm 10 years, his senior, he just joined the business after he graduated from school, and so I gave him some old bandwidth and we decided to grow it out. But because we had just changed the flower business, with no money, just an idea, and then novel way of approaching the business. We were paranoid that, hey, what's the next technology that's going to come along, that could knock us out of the box. So I think that became part of our DNA. And in particular, Chris being interested in the technology side of things, we're always looking for what's next.

Jim McCann: (12:00)
So in the early 90s, we had our website, and it didn't much matter, because no one could find you. We were the first online florist in AOL. So we became to be, part of our culture is to be early on technology, early adopters, and to try a lot of new things. And that's served us as a culture now for 30 years.

Anthony Scaramucci: (12:31)
I've heard you speak about it, but I'd like you to speak here about it. The flower business, the celebratory business, there's a pretty steady Eddy nature to it. And you and I both know, because we live in this area, whether it's falconers or Manhasset florist. These places I've been here since I was a little kid, Jim, they're not going anywhere. And they have this 30 stability to it. Just describe that to our listeners for a second, the remarkable nature of the business.

Jim McCann: (13:05)
And those are people who are all partners. So we partner with the best florist in each community around the country, in fact, around the world. And so we're their front door, how people can access them, and they can come to us, we still have stores. We have obviously 800 number, but 95% of our business is e-commerce, through the online world. So the way we think of it, Anthony is, we've been through five waves. First, retail stores, then the 800 number, then the internet, when Netscape came along in 1995, and organize the world, those websites we had, really started to matter. And then it was everything about mobile and social. So even back during the recession of 08, 09, and 10, I don't know if you remember that, but there was this little recession thing happened.

Anthony Scaramucci: (13:57)
It was a dress rehearsal for today, Jim. We're going to get into that in a second.

Jim McCann: (14:00)
I think you're right. We remained profitable throughout, but we went backwards in sales, two years, a little bit. And so we had to cut back on a lot of the developmental things we'd been doing, but we didn't cut back on our technology spend and we didn't cut back on our social media spend, or on our efforts in and around mobile. And thank goodness, because when we emerged from the recession, having spent a lot of money and a lot of energy on those developmental efforts, they gave us that fourth wave. So everything social, everything mobile. But right now I think that we're going through the fifth wave, which I think is the most exciting. My brother, Chris turned to conversational commerce about five or six years ago. He's the first person I heard use that term.

Jim McCann: (14:46)
And now we think it's morphing to be more about engagement commerce. So what is it we do? We're a flower and gift company. We help our customers express themselves and connect to the important people in their lives. We do that with gifts and sometimes no transactions. We've been following our customer's pattern. So when you say we've acquired companies and birthed companies, we do that with the idea of following the customer's purchase pattern. If we're there to help them express and connect to the important people in their lives. Flowers are not always the perfect way to do that. When it is fine, we're there. And we have these wonderful partners around the country, around the world, who we've worked with, and we're tied to.

Jim McCann: (15:34)
But sometimes our customers would go to a company like Harry & David to buy a wonderful food gift, fruit peaches or pears. And when that company came available to us, we said, wow, they're already our customers, let's acquire that. And it had been a company that was in decline for 15 years. And when we bought it, we were fortunate. Now we've had it for five years and it's had five years of accelerating growth. And we did that with chocolate businesses and cookie companies.

Anthony Scaramucci: (16:01)
You made some changes to the company though, Jim, tell us a little bit. You bought Harry & David and it was in decline, but you made some changes. What were some of the changes that you made? Because the thing is a major growth engine now.

Jim McCann: (16:13)
Well, we focused on what we know how to do, and where the trend lines were taking us. And that was e-commerce. So instead of expanding their store footprint, we put all our efforts into building a relationship with your customers, expanding your product line along the lines that they tell us they'd like us to, and investing in the technologies to be convenient to them, to improve our delivery capacities. The product was and is terrific. We're vertically integrated there. We're selling our peaches now. We have a peach sets, our own trademark Oregon, because we grow them in Oregon and they're out of this world. So the product was good. It's just as good today may be getting better all the time because our ag, people are doing some terrific things, but we have 5,000 acres of production, we grow the food.

Jim McCann: (17:03)
So we're not afraid to be vertically integrated where appropriate. And so for us, it's all about e-commerce, knowing the customer, engaging with the customer. When we talk about all this technology, Anthony, it's ironic, back when we had one shop on the upper East side, and we had 40 years ago, single shop, upper East side, we had 40 customers who really made that business go. But those 40 customers just didn't come in to buy flowers from us. They came in to have a cup of coffee. They came into ask of a restaurant recommendations, they went in to hang their dry cleaning up in our place, while they ran around the neighborhood on this side. We had a relationship with them. And now the irony is, that we use technology today, because now we have 40 million customers. How do we effectively build a relationship with them?

Jim McCann: (17:58)
Our commitment has changed. Look, you're a business leader. You're a leader beyond business. And you know, and you've taught me, frankly, that vocabulary matters. It matters how people think about what their job is, what their mission is, what they do. And it just clicked for us earlier this calendar year, we were listening to all the people in our shop talk about, how much it cost us to acquire a customer and how we get them to place another order. And it was bothering me that we were losing sight of the relationship. When I was chatting with Meredith, a young lady who's my chief of staff. And we were on the phone. It was back in January. She was home in rainy New York. I'm in Florida with family over new years. And we're having this conversation.

Jim McCann: (18:47)
So she says, "So Jim, what you're saying i, you don't want to acquire customers. You want to acquire or earn relationships." And just when she said it, it changed how we think about things. And Chris now, using that vocabulary to change how we behave. I'll give you an example-

Anthony Scaramucci: (19:06)
That's very smart.

Jim McCann: (19:07)
... market differently, Anthony. As a florist, the sympathy category is important to us.

Anthony Scaramucci: (19:13)
Sure.

Jim McCann: (19:15)
And sympathy has been a declining category for us florists for 20, 25 years. But it's still an important category.

Anthony Scaramucci: (19:22)
Why is that Jim? Because it's charitable contributions. Why is it? Because ever since in lieu of flowers, is that why?

Jim McCann: (19:29)
All of the above, Anthony, plus cremations. Now 50% of the deaths in this country result in a cremation. So, an event, as often as they used to be, so cultural changes, religious changes, geography changes in lieu of all of those things, are making the declining category. So we put our heads together and said, look, how do we market simply, well you say, when you have a death, we have really good flowers. You can't do that. It makes no sense. So we went to a friend of ours, another guy from long Island, John Tesh. John has a radio show, 350 markets. He's married to a wonderful lady. An actress named actress named Connie Sellecca.

Anthony Scaramucci: (20:08)
He used John anchorman here, right Jim?

Jim McCann: (20:10)
That's right.

Anthony Scaramucci: (20:11)
Am I talking about the right John Tesh, CBS?

Jim McCann: (20:12)
CBS. Yeah. Host of entertainment tonight, and a very, very accomplished touring musician. And so no, John, like John, I love that he has his radio show that it's all about making people's lives a little bit better every day. So I went to him and I said, John, here's our issue on sympathy. And we'd to mark it on your show, but I don't want to buy any ads. He said, "What?" I said, sympathies is an important category for us. And what we would to do, is use you in the relationship you have with your audience to initiate a dialogue, with our community, around the subjects that are hard to talk about. So people you would know, I gave him this example, another friend of mine also named John. I called him one night, said, hey, if you guys are getting together at dinner tonight, are you going? I said, yes, it was a Wednesday night.

Jim McCann: (21:00)
I said, but John, I'll be a little late because a family lost their dad in our neighborhood, and I was going to stop at the Fair Child's chapel on the way home, pay my respects. He said, "I was thinking about that. I knew them too, but I didn't think I knew them well enough to go." And I said, John, let me ask you to pause there. I said, my sisters and brothers and I have been in front of the room too many times, and I can assure you, John, that we never once said, geez, that person didn't really know us well enough to come here to pay their respects. They said on the contrary, we'd always say and think, how nice of them to come and pay their respects. It makes us feel so much better.

Anthony Scaramucci: (21:41)
Amen. Very well said.

Jim McCann: (21:43)
10 minutes later. He calls me back and said, "Thinking about what you said, I'll meet you there. I'll tell them we'll both be a little late." And I told that story to John Tesh. And I said, so let's have a conversation with your audience about how do you handle expressions of sympathy when Nadine in the workplace, his dad passes away, he's returning to India for the services. How do we as a group express ourselves? What's appropriate? What's culturally appropriate? So we've been building this conversational massive information and serving it up to our customers on our website. So we never say buy flowers. We just have this conversation. John tells us that in a two and a half years, that we've been doing this together, his audience has never been more engaged on a single topic. So I think the lesson for us was, it's about engagement and about serving your audience.

Jim McCann: (22:38)
If you serve them, if you're doing something with no ill intent or no commercial goal in mind, but doing it in a service kind of environment, you'll earn the due consideration when a purchase is appropriate. And so that's how we've been changing all the ways that we interact with our customers. And in fact, we're kicking off a big new research program, because frankly COVID changes everything. Especially seeing, now, how many people have you known in the last five months, where there's been a loss and you guys would have gone to the service, but now they're telling you, we're having a private family ceremony. And we'll let you know when we're going to do something else. So all the rules are changing here. And so we're going to pull in all the experts and the public and our community and say, what are the new rules? What's the new appropriate ways to express and connect, especially at a sad moment, like a loss? So it changes how we think about quote unquote, marketing.

Anthony Scaramucci: (23:41)
Well, listen, I think it's a brilliant insight. I'm glad you're sharing it with everybody. Because at the end of the day the less transactional we are, the more relationship driven we are, the more we're comfortable expressing our vulnerability to each other, the tighter the relationships get, and then you can ride it out with each other in these periods of difficulty. So, I think it's a brilliant insight. Let's stick on the COVID-19 thing for a second, Jim, because you and I have had conversations, not live like this, but in your backyard, where we've talked about the impact of COVID-19, the impact on the airlines, the impact on New York city, the city we love, our neighborhood here. Tell us a little bit about your thoughts, about how we pull things back together. And what do you think happens over the next six, 12 and 18 months?

Jim McCann: (24:31)
Well, I think everything gets turned upside down here. Let's look at the big macro trends, what's going on. I had a conversation back in March with one of my friends and hero, a guy, well, Henry Kravis. We were chatting on a Sunday afternoon about what's this going to mean? When you get the chat with really smart, thoughtful, nice people like that, you hang on their every word. Now, what we agreed to, we were trying to get to what happens. And we agreed that the three big macro trends that we're going to at least hit the pause button, are globalization, urbanization and the sharing economy. And we see that with WeWork and Uber and Lyft, they're having their struggles. Well-run companies, they'll make it through, but they have to rethink how they do things.

Jim McCann: (25:20)
But those three big trends are put on pause. And then on the other side, what are the other big trends that you've spoken about in this program many times? I've learned a lot from those conversations. So real estate is changing dramatically. That pause on urbanization has closed the suburban, rural flight. I remember in the beginning of this, Adam Hamm, who's one of my board members said, "Second, third and fourth ring suburban around big cities will benefit." I said, you said second, not first? Because we live in the first spring, Anthony. You said, first spring is already too expensive. And the taxes are too high. So the guy who would to live on Long Island, let's say Dix Hills, just into Suffolk County, the reason he doesn't, well, he would to be there, because the houses are bigger. there's more land and the taxes are lower, and the school systems are still really good.

Jim McCann: (26:17)
But he's got this hellish commute. If he or she has to go to Manhattan, it's just a forever commute. So he's forced to go in closer, but now it's not so troubling to commute anymore. If he only has to do it one or two days a week.

Anthony Scaramucci: (26:34)
Or doing it in this period of time, Jim. I'm getting into the city 25 minutes from our town, which is only 17 miles away. So thing things have changed. Is it-

Jim McCann: (26:47)
But now the other trends emerging, nesting, cocooning and faith popcorn, crafted that term back in the 90s. But some of the mental health professionals are talking about it now as being a negative thing.

Anthony Scaramucci: (26:59)
Mary Lou still likes you Jim, or is she just tolerating you at this point?

Jim McCann: (27:02)
We learned that, that we actually like one another. Every once in a while, she speaks to me. We had an anniversary last week.

Anthony Scaramucci: (27:12)
How many years you married, Jim?

Jim McCann: (27:15)
47.

Anthony Scaramucci: (27:15)
God bless you.

Jim McCann: (27:16)
I told you we married young.

Anthony Scaramucci: (27:18)
That's amazing.

Jim McCann: (27:19)
And she's still speaking. I don't get it. And more than that, we have three grown kids, who you know.

Anthony Scaramucci: (27:23)
She lets me in the house. So I take that as a good sign. She's still-

Jim McCann: (27:26)
She did make you take the shoes off.

Anthony Scaramucci: (27:28)
Yeah, that's true. And she did stick me out in the backyard by the bird feeder, but that's fine.

Jim McCann: (27:33)
We got to be careful in this environment.

Anthony Scaramucci: (27:35)
So your future of bricks and mortar retail, Jim. What do you think?

Jim McCann: (27:43)
You and I had that conversation back in the backyard there, we talked about the great acceleration of COVID. We said then, everything that was going to happen in the next five years in terms of e-commerce and place-based commerce, retail was going to accelerate five years and five months. Here we are five months and we weren't great Sears, but it's exactly what's happened. So retail is going to continue to struggle and get crushed. Interesting stories in the last few days about Amazon talking to, about some Sears stores and some JCPenney stores, that they might want to use as distribution warehouse facilities. So you're going to see this ugly gyration of retail being repurposed. So I think stores are going to continue to struggle. I think we're in a situation like we're in now, for probably another year.

Jim McCann: (28:38)
I'm hopeful. I've seen you're reporting on what's happening in treatments and with vaccines. And I'm on the board of one of the big health systems in New York. And so I stay very plugged into it. I think some great things might come from this. We're spending hundreds of billions of dollars to find a vaccine. The first time man will have ever had a vaccine for COVID disease. So I wonder if after that, after we get three or four or five vaccines that we're using, that we're comfortable with, that they test out properly and knock this thing down, that's going to take another year. And we have 45% of us, nudniks, running around here in the United States saying, well, neither are going to take a vaccine. So it's going to take that time to work its way through.

Jim McCann: (29:23)
But in the mean time, the restaurant industry is decimated, hospitality, airlines and retail in general are going to continue to have a very, very tough time. And look, we're about entering this very important season for us. The holiday season, we were just, the team meeting in the last few days at flowers, about Halloween is going to be very different. Back to school is already crazy. Grandparents days in September 13th. All the grandparents like us, I get the weight to my grandkids, but the biggest threat I have now to my grandkids, when they get to see them in person is, hey, you don't watch out I'll hug you. I wonder what the long term effects on kids and relationships are there.

Anthony Scaramucci: (30:09)
No, it's true. In the young words, this is long periods of time, five months for a six year old or a 10 year old, long periods of time. I'm going to turn it over to John Darsie in a second, Jim, but I want you to address this before I do. We just celebrated the 30th anniversary of the Disability Act that was signed by president George Herbert Walker Bush. And you have been an unbelievable champion to helping people with disabilities. And I want you to talk a little bit about that charitable effort of yours and how it's being impacted by the pandemic, and where are things going for you and in that realm of your life.

Jim McCann: (30:51)
I think you're right, Anthony. I think it's having an enormous impact on the disabled community, but even before you think about how hard it is on the people, the disabled community. One of the things that has me concerned as a husband, as a father, as a grandfather, as a business person, is this terrible epidemic that I first became aware of in December of 2018. And it's this loneliness epidemic. And there are a couple of terrific young editors in Wall Street Journal wrote a piece back then, in December of 18. And the story in front page, lower center of the front page was, baby boomers, my generation, the loneliest generation, and then the continued for two big pages inside. I read every word of it and I've read it a dozen times, and had a chance to correspond with them to great thinkers.

Jim McCann: (31:42)
And the journal has been on this theme now for a while. And certainly the big healthcare companies, I think of United Healthcare in particular, Cigna, all realized that this loneliness epidemic has a real consequence in terms of healthcare, healthcare outcomes, and disease. Cigna and United Health will postulate that someone who is suffering from loneliness or most serious one, depression, is 50% more likely to have very serious health consequences, not just mental health. So they have a vested interest in working on this. And I think it's also, their good citizenship that has them investing so much time and research here. So these two editors in the journal said that, boomers were the first generation to have divorce in any great numbers, but to move away from where their family systems were for a better place, to be estranged from their children perhaps because of divorce. We were first-generation that really embraced diabetes.

Jim McCann: (32:44)
You put all these things together and we're living longer in spite of the disease. And so we're running out of money. We didn't save enough, we didn't have pensions. So you put all of those things together and you have people in poor health, without means, living by themselves, the tax from the family. 27% of baby boomers are women, 27% women never married or don't have a spouse or a child. And so the social networks are strained, but not to be out done, the millennials and generation X and generation Z are claiming... So generation Z, the youngest kids, 22 and below, who grew up digitally, Anthony. These are people who are so comfortable with devices and all the social media networks. 79% of them say, they're lonely, don't have any significant relationships in their life. 20% of them say they never had a single friend.

Jim McCann: (33:40)
So as much as we think we're connected, we're not. And I'm concerned because it has consequences for us as family people, as business people. And then if you add on top of that, people with disabilities, so you are fortunate enough to live in a nice community. And we're right near a friend and a hero of mine. He runs a place called the Viscardi Center. His name is John Kemp. And I think of him, when you mentioned the Americans with Disabilities Act, because he worked very closely with Senator Kennedy on drafting that legislation, 30 years ago, which has made an enormous impact in people's lives. But he was telling me just recently, he cares for kids in a vocational training and educational environment. So he has about 120, 140 young people. 99% are in wheelchairs.

Jim McCann: (34:31)
Many of them have to use the breathing to activate the wheelchairs, but he had me emotional about their consequence during this time. School is a lot more than a place to go to learn for them. It's a raise on the edge tray. It's why they get up in the morning. It's their whole, their socialization, so many of them. And he's extremely concerned about their mental health, being in that apartment by themselves now, for five months. Talk about being afraid of not having enough food or healthcare or medicine, nevermind the social interactivity. So I think it's having a devastating impact on people with disabilities. And I think we have to be mindful of that and be overt about doing things to reach out and connect. And I think these holidays are going to be so different. Thanksgiving is going to be so different this year, but if we just say, darn, it's going to be horrible.

Jim McCann: (35:30)
I loved when the family would get together and all the people around, the kids and it's just going to be miserable. All right, I give you a minute or two to have that feeling. But then we have a responsibility to ourselves, to our family members, to our coworkers, to pick ourselves up, dust ourselves off and say, it's going to be different, but it doesn't have to be bad. We can make it good. We have responsibility for those around us. And so, maybe we were constrained by how many people we could get around the Thanksgiving table, by how much you could cook, or how much room you had. Well, we're not going to be so constrained this year.

Jim McCann: (36:02)
So who else should we be inviting to participate in the Zoom carving, in the zoom preparations, to make them realize that you want them to be part of your community. I think we have an opportunity. I think we have a responsibility to think outside of ourselves and how annoyed we are that it's not perfect, and think about how do we make it good, and how do we make it good for people beyond just us.

Anthony Scaramucci: (36:28)
Just listening to you speak, Jim, it is so obvious why you're so successful in the flower connection, gratitude, sympathy, business. You're doing an amazing job. I'm going to turn it over to Darsie. He's now got big photos with his young stardom, Jim. So just look out okay. But he's coming in strong now with some questions from our viewers.

Jim McCann: (36:53)
It's not bad enough he's young, he also has too much hair.

Anthony Scaramucci: (36:55)
I'm okay on the hair side. Certainly regardless of you. Let's put it that way.

John Darsie: (36:59)
Anthony has invested a lot in that meme.

Jim McCann: (36:59)
So what is it about, $2,500 a month on hair care products that are here?

Anthony Scaramucci: (37:08)
Well, that would probably be at the low end, Jim. All of my hairstylists and dermatologist have signed confidentiality agreements. Let's just be clear.

Jim McCann: (37:17)
Did that happen during those famous 11 days?

Anthony Scaramucci: (37:20)
Well, I was losing hair. That was one of the reasons why I had to go so quickly. Okay. John.

John Darsie: (37:26)
You talked about school and how school is such an important time for young people to socialize. And that socialization is part of their education. For businesses, it also feels like work in the collaborative environments that exist. And a lot of businesses or are part of not just socialization that's good for people's mental health, but also creativity. There was an article. I can't remember what outlet it was in, about how the work from home has allowed people to maybe achieve a little bit more work life balance in some cases, but it affects people's creativity. What do you think the future of work is? Do you think that the migration to the suburbs, the second, third and fourth wave suburbs is a permanent phenomenon, and how do we create a framework for work, that allows people to have that balance, but also factors in elements like creativity, teamwork, and things like that?

Jim McCann: (38:17)
John, I think the essence of your question is absolutely spot. This changes everything. Take me, I'm an old fur here. I never thought I could work from home, but five months in, I get up in the morning, I start working, I stop working, I go to bed. So I've figured out how do it, I do have to figure out how to be more productive and how to spend the time on the right thing. So there's things I have to learn, but I'm never going to be jumping on airplanes like I used. Thank God this technology was here, but how about the third of New York city school kids? One third who don't have access to technology? Are we all kidding themselves saying, the spring was fine, they did remote, pat ourselves on the back. When a third of the kids who live in public housing don't have access to the internet, we're kidding ourselves to say these kids are getting educated.

Jim McCann: (39:07)
And nevermind the socialization part of it. It's extraordinarily painful to see what's happening. I think over the next month or two, you're going to have fits and starts. You have to have a very high tolerance for ambiguity. And as employers it impacts us too, because the girl, who's a digital marketing guru, who has two kids at home, live suburban, and now one kid's school is starting, the other one's going to be remote. This one's doing two days a week. So we have to be a lot more flexible and a lot more creative. And I heard my brother working with the management team on this just yesterday. How do we build constructs that allow people, some people dying to come back to the office. Well, we've reopened, but it's very light in terms of attendance.

Jim McCann: (39:48)
So it changes everything. I will never jump on airplanes like I used to. I won't be going out to dinner five nights a week like I used to for work. I'll eat at home a lot more. So nesting is very much, it has to impact what products we have, what products we sell. Our Harry & David gourmet foods business is exploding with demand. Well, the whole business is, but in particular, the prepared meals. Because by the way, I love having David chicken pot pie, because it really easy to pop. You pop them in. They're delicious. They're not calorie-free, but they're delicious. So it changes everything. How we eat, how we dress. Anthony, when was the last time you bought one of those famous, beautiful suits of yours?

Anthony Scaramucci: (40:29)
Well, I don't even know if could fit into them anymore, Jim, because I've been eating all the Cheryl's cookies that you send me. So I don't know what's going to happen.

Jim McCann: (40:36)
But it changes-

Anthony Scaramucci: (40:37)
My tailor thanks you, because he's expanding my waistline.

Jim McCann: (40:39)
Look, what's happened to the champagne industry, without international travel, weddings, all these celebratory events. Wine business is booming, the booze business is booming, but champagne is considered to be much more celebratory. There's a hundred million bottles of champagne, just in champagne France, in storage that won't be sold this year. So Anthony, if you can do your bit in order a couple of cases, just to help them out there.

Anthony Scaramucci: (41:04)
Well, I'm going to order a couple of cases for you, when the meds get sold, Jim.

Jim McCann: (41:07)
Thank you.

Anthony Scaramucci: (41:08)
We're going to be back at your house, in the back yard when that happens.

Jim McCann: (41:11)
Pick a scab, why don't you. John, I think you're right. It has consequences in every way. So our job as family people, as business people, as community involve people, is to try and get at those changes. Cities, look, old people like me, kids move out, you get an apartment in the city wide. We love pubs, restaurants, live theater, live entertainment, retail, all of which are on their butt right now. So the cities will come back. It'll take a while. It's going to take the fall before they come back. It's going to take some inspired municipal leadership. And I see that around the country. I see it in Providence, Rhode Island. I see it in Cleveland. I see it in Savannah, Georgia. I'm not seeing a lot here in New York, which as Anthony mentioned, is extremely important to us.

Jim McCann: (42:01)
So technology is going to play, and cities will get younger, because the cost will come down. That'll create a lot more residential units out of old retail or repurposed office space off. But I'm worried about an aftershock here. So I said, you got to look to the future. The shocks are coming. And what I mean by aftershocks is, I've spoken in the last month to six or seven CEO friends of mine, who run big companies. And they all telling me the same thing. They have way too much space all around the globe, physical, real estate, and we have way too many people. So I'm concerned. I saw just yesterday that they have been 130,000 IT professionals laid off in the last 30 or 45 days. I'm afraid a lot of people said, I work for this big company, we got this huge balance sheet, I'm in IT, nothing to worry about.

Jim McCann: (42:53)
And all of a sudden in January, they find out that the department is being reorganized to be more efficient, because their company has been challenged on the revenue side of things. And they had to figure out a way to be more efficient. And this guy or girl, is sitting out there going, Oh my God, I thought I was safe, and I'm not. So I think there's a second wave of shocks coming there. We have to figure out a different way to finance the transit system. Sarah Feinberg, who's running the MTA. She's the interim chief of the MTA. Very smart, very sophisticated. But I asked her, I said, Sarah, if half the work is in Manhattan, not New York city, but just Manhattan, our servers work. So they have to come in. And the other half have now found out they can work from home, at least some of the time.

Jim McCann: (43:41)
What happens if they come in one day, a week less, and her concern was, not only is it a multibillion dollar hit for the transit revenue, but what about the shoe shine guy? What about the guy who works on the deli counter? What about the barista in Starbucks? If you have 10%, fewer workers every day in Manhattan, and I think that's unbelievably optimistic that it would only be 10%. So it's going to have tremendous consequences and we need powerful, engaged, incredibly brave leadership now. And I hope we see it emerge

John Darsie: (44:21)
Well, Jim, thanks so much for joining us. You're another one that we could have on for three hours and we would still not get to cover every topic that we wanted to cover. So we'll have you back on, hopefully in a few months and the coming years to see how these aftershocks play out and the next waves of innovation that you drive at 1-800-Flowers, which is sort of the way you drive your worldview and the success of your business. I feel you could be successful in so many other areas. And I know you're investing in some other areas as well, which hopefully we can talk about next time you're on.

Jim McCann: (44:49)
Great John. It was good to be with you. I'll pay attention, because I need ideas from you and the guests that you've been having on to try and guess at where the future will go so that we can adapt.

John Darsie: (45:01)
Absolutely. And that's what we're trying to do. We weren't able to do our in person SALT conferences, which I believe you've been to in the past. And it's been sort of a blessing in disguise that we've started doing these SALT Talks and it's allowed us to expand our audience beyond the number of people that we could gather in an auditorium in Las Vegas or in Abu Dhabi or in Singapore. We've been able to broaden our scope, have a lot more interaction. So it's been a lot of fun.

Jim McCann: (45:24)
I've heard Anthony say this, about this timeout, this pause. It's caused you to think about your group, your attendees, much more as a community now, that you have this more regular contact. And I think that's a positive that's going to come out of this for all of us.

Anthony Scaramucci: (45:41)
No question. I think it's interesting what you said about engagement at your business. We're going to steal some ideas from you as well, Jim. Thanks so much and hope to see you soon. We're going to get you at one of our live events. We got to get you on that stage again.

Jim McCann: (45:56)
Keep that in my backyard.

Anthony Scaramucci: (45:58)
All right. And if you're not nice, man, I'm going to come over to your house and hug you.

Jim McCann: (46:03)
There's a threat.

Anthony Scaramucci: (46:04)
Scare you and Mary Lou. Okay. You be well, sir. Okay. God bless.

Jim McCann: (46:07)
Thank you pal.

Anthony Scaramucci: (46:08)
All right. Bye. Bye.

Jim Sciutto: Author "The Madman Theory: Trump Takes On the World" | SALT Talks #36

“Trump's got his own brand of the Madman Theory…he uses it not only against adversaries, but also against allies.”

After more than two decades as a foreign correspondent stationed in Asia, Europe, and the Middle East, Jim Sciutto returned to Washington where he is now CNN’s chief national security correspondent and CNN Newsroom anchor. In his latest book, The Madman Theory: Trump Takes On the World, Sciutto looks at how a provocative approach to foreign relations, made famous by Richard Nixon, is today employed by President Trump on the world stage.

Trump’s mindset around America's relationship with other nations is understood in one word: transactional. “Trump's view of the world with adversaries and allies is ‘What are you doing for me? What are you doing for us?’” This has often led to extremely narrow points of view on issues where President Trump doesn’t see the big picture as it relates to broader alliances.

We see this playing out with China. Tensions have escalated sharply under the Trump administration with a trade war and attacks on industries like Huawei and TikTok. Some of the biggest challenges of our time will play out over the coming decades as conflicts around Taiwan, Hong Kong, and national security intensify, and China marches towards their stated goal of overtaking the United States as part of their 100-year plan.

LISTEN AND SUBSCRIBE

SPEAKER

Jim Sciutto.jpeg

Jim Sciutto

Chief National Security Correspondent & Anchor

CNN

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 public policy. 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, the Salt Conference and really our goal with these digital interviews is to provide a window into the minds of subject matter experts and to provide a platform for what we think our big world changing ideas and we're very excited today to welcome Jim Sciutto to SALT Talks.

John Darsie: (00:43)
Jim is CNN's Chief National Security correspondent and the anchor of CNN newsroom. After more than two decades as a foreign correspondent stationed in Asia, Europe and the Middle East. He returned to Washington to cover the Defense Department, the State Department and the Intelligence agencies for CNN. His work has earned him many awards including multiple Emmy Awards, the George Polk Award, the Edward R. Murrow Award and the Merriman Smith Memorial Award for Excellence in Presidential Coverage. Jim is a graduate of Yale University and a Fulbright fellow. Today, he lives in Washington D.C. with his wife and better half Gloria Riviera, who is a crisis communications professional and journalist for ABC News as well as their three children.

John Darsie: (01:30)
And conducting today's interview will be Anthony Scaramucci, the Founder and Managing Partner of Skybridge Capital, a global alternative investment firm. Anthony is also the Chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (01:43)
Well, Jim, thanks for coming on. I'm just going to hold up the book here. I thought it was a fascinating book and when I finished reading it, and I think we just talked about this before we went live, I would say that this is the best book and the most objective book on the last three and half years related to the President's foreign policy. So, whether you like the President or dislike the President, you pick up this book. It's a seminal study in what is going on and what he is thinking, but before we get to him and your book, I want you to tell us a little bit more about your background, because it's fun to read people's Wikipedia, but it's way better to hear some. Tell us something about your background that we wouldn't learn from Wikipedia, Jim.

Jim Sciutto: (02:26)
Well, first of all, thank you, Anthony, for inviting me it really is a privilege. Thank you, John, for the nice introduction. Thanks to all of you for taking the time. I'm always grateful when people take time to hear the story of the book and how I came to write it.

Jim Sciutto: (02:35)
Okay, a little bit about me. I'm a New Yorker. Probably my biggest claim to fame is going to the same high school as Dr. Anthony Fauci. What could be better than all-boys Catholic school in Manhattan. I went to college and studied China, because it was just interesting to me and it was something different and the only thing I knew I wanted to do after college was to go overseas and travel and learn and study and work. And I did that I spent my first 10 years as a reporter pretty much in China. And then after 9/11, switched gears and spent a good chunk of my life covering the Middle East and Iraq and Afghanistan and all the conflicts around that.

Jim Sciutto: (03:20)
And it's been sort of, as I'd like to say to folks, it's a paid traveling education about the world and I've enjoyed that as a career. What I've tried to do in this book and others is sort of connect the dots for people where I can on some of these big picture issues. And like you said, I mean, my goal on this, and by the way, for this book, I only spoke to people who worked for Donald Trump, current and former. My goal here was to take a look without prejudice at what he changed and where we are four years after he came in.

Anthony Scaramucci: (03:55)
So, I want to talk about the title you named it the Madman Theory. It's interesting because we go back to Richard Nixon's assessment of Nikita Khrushchev. He told his staff that he thought Khrushchev was brilliant and making people think he was "a madman," a result of which it made the rest of the world cautious. Of course, Richard Nixon had less success convincing people he was a madman as it related to the North Vietnam situation, but here we are with the President. Why did you name it the Madman Theory? Some of it's about the President, frankly, some of it is not, so why did you come up with that title?

Jim Sciutto: (04:32)
So, it started a bit with something that the President and his supporters have said about him from the beginning, right? This is someone who was going to shake it up and the nature of the way he did business, and the way he would do government is by keeping everybody off balance, right? Some of this is in the heart of the deal. I'll be unpredictable. I'll surprise. I will disrupt and then bring that all together by the seat of my pants and we'll get to a better result.

Jim Sciutto: (05:00)
Now, as I heard that and then saw it play out as a reporter with him in charge. It seemed familiar to me because as you said, Richard Nixon tried to harness this same dynamic and he owned it. He called it the Madman Theory. He had Henry Kissinger communicate in no uncertain terms with the North Vietnamese and the worst part of that war that he was just crazy enough to nuke them. There are White House conversations on tape, where he even dictates the language to use. Kissinger communicated that to the North Vietnamese. It didn't work, as you know. Those negotiations got no better. The war did not end well for Nixon or for the U.S.

Jim Sciutto: (05:42)
So, 50 years later, Trump comes into office. He's got his own brand of Madman Theory, but it's different, right? One, in that he uses it not only against adversaries, but also against allies, keeping NATO allies, Canada, Mexico on edge, off balanced arguably as much as China, Russia, Iran, et cetera. But even and this the more disturbing dynamic, his own advisors and senior officials. I chronicled a whole host of situations during his presidency, when he caught the entire National Security community off guard. His two withdrawals from Syria, for instance, where the decision-making, the policymaking rather follows the decision. It's not preamble to it. He comes up with something and then they got to figure out how to deal with it. So, Trump's madman theory is definitely unique to him.

Anthony Scaramucci: (06:40)
And you do point that out in the book that there was a 10-month lapse between him trying to make that decision and the actual execution of the decision because many people frankly disagreed with him on that decision, including Secretary Mattis, who more or less said he resigned over that policy decision. I want to go back a step though. I want to take you right back to you finished the book, you've done all this research, the book closes, and someone comes to you and says, "Okay, so give me Trump's foreign policy. Give me his strategic worldview." What is it, Jim?

Jim Sciutto: (07:14)
I asked everyone I interviewed for the book that very question. "Crystallize it for me, put it on a bumper sticker, or a campaign slogan," and the common refrain is transactional. The Trump's view of the world with, again, adversaries and allies is "What are you doing for me? What are you doing for us? Do I perceive that to be equal and balanced, right?" Now, that can serve your interest, right? Because you can arguably find a way to make a deal, for instance with China. Someone who is competing with you and wants to unseat you as the world power.

Jim Sciutto: (07:53)
And you saw some of that, slices of it in the phase one trade deal, although even and I tell this story to his own advisors involved in that, consider that a capitulation. The trouble is with allies as well he has a very similar view of it. We've seen this play out with trade disputes with Canada, for instance, reignited just last week or dealings with NATO allies over the budget or right now, with South Korea over quintupling how much South Korea pays to support deployment of U.S. troops there The trouble with that transactional worldview and again, don't listen to me, listen to the folks who work with him at the highest levels, is that it's so narrow-minded, that you miss all the other things that go into that relationship, right?

Jim Sciutto: (08:41)
I mean, HR McMaster talks in the book about how much trouble he had convincing the President that alliances have ancillary benefits, right? That can't be boiled down to a bottom line. Things like intelligence sharing or backing you when you go to war, say post 9/11 when NATO invoked the Article III, mutual defense, beyond that, shared values, goals, support for rule of law, et cetera. So transactional, but a very narrow view and by the way, sort of an end of any sort of American exceptionalism, right? The Trump has a very, what's the word, sterile view of America's position in the world, it's-

Anthony Scaramucci: (09:26)
I don't want to give the whole book away, but you do point that out and it's in conversations with Putin and the realization in his mind that America doesn't need to be "exceptional" or do exceptional things for the world, it can just be another player on the world stage. So, I want to thread this question and get your reaction to it. If you go back to Dean Acheson and the book Present at the Creation and the understanding of the infrastructure that was put in place after World War II and you tie it to Brent Scowcroft, the legendary National Security Advisor that just passed this past week. There was a continuous threat whether you were a Democrat or a Republican, there was an idea until the Berlin wall fell down of a policy of containment. There was an idea that we were going to be constructively engaged around the world helping our allies and we were going to disavow our enemies, but we were going to do it in a way that hopefully didn't lead to conflict, we would use soft power, some hard power, but you got the point.

Anthony Scaramucci: (10:27)
That continuum from 1947 to let's say 2017, January ended. It seems like the cord got caught on that and we're into something new now, which you referenced in the book. Are we permanently into something new now, are we going back to something old or do we now have to reengineer everything, Jim?

Jim Sciutto: (10:51)
It's an open question. I think what's the most immediate question is does it last another four years or just another three months, right? I mean, that's an open question.

Anthony Scaramucci: (10:58)
Well, you tell me. Does it last another four years or does it end it in another three months?

Jim Sciutto: (11:03)
I know no better than probably anybody else on this call. I mean, we look at the polls, but listen a lot can change in a short period of time. I mean, the thing is and this is again a point repeated by many of the folks I spoke to, confidence is easily lost, far more difficult to gain, right? Confidence in an alliance. For instance, the NATO Alliance, how quickly can you turn that around? And by the way, folks I spoke to for the book share John Bolton's concern that in a second term steps like leaving the NATO Alliance are possible or reducing or eliminating U.S. troops on the south, on the Korean peninsula or removing all troops from Afghanistan, right? These things that we sort of-

Anthony Scaramucci: (11:50)
Or repositioning the Seventh Fleet in the Pacific, you got all of those different things.

Jim Sciutto: (11:56)
No question and a lot of things that happen in half measures in the first term, you might go whole hog in the second term, and therefore, the results of those things become far more lasting. I'll tell you one thing, the alliances. Alliances are, they're about how you feel about them in a way, right? Beyond what's on the paper. Do you believe them? Do your fellow allies believe in them, and more importantly, do your adversaries believe in them? So, when you look at like a NATO alliance, yes, we're still in, but Russia senses the fissures, right? And they listen when the President questions, for instance, the obligation to abide by the mutual defense, clauses of that.

Jim Sciutto: (12:40)
So, once those questions are raised, how quickly can you tamp those down? That's an open question. It's an open question for this country, regardless of who's in the White House on January of 2021 and the genuine concern of folks who worked at the highest levels with this President about how lasting those changes are.

Anthony Scaramucci: (13:02)
Okay. So, let's switch to China for a second. You studied Chinese history. You were based in Hong Kong, as you referenced. One of my friends who's in the foreign policy establishment said that the decision to go after China as aggressively as the President is, I want your reaction to this, is tantamount to the decision of Germany attacking Russia in 1941. It will have the same sort of consequences. And I want to give you a specific example. Let's go to WeChat. We're going to ban WeChat. There will be retaliatory measures on Apple Computer and other great companies, multinational companies in China. So, what's your reaction to that statement about how the President's handling China? Again, I don't want to give the book away, but then secondarily, you see that potential retaliatory situation that could set itself up, which will lead to further bellicosity and more conflict. What's your reaction to all that?

Jim Sciutto: (14:01)
So, where we are right now with China's very dangerous moment and before I go further on that, just for the sake of the folks listening here, I spent a good 20 years covering or working in China and I spent a couple years in government there as Chief of Staff to the Ambassador. I have watched up close Chinese malign activities against their own people. I've spoken to dissidents who were tortured, but also I've spoken to companies and maybe some of you who are on the call here right now who've had your IP flat out stolen. I've spoken to folks in the Pentagon, who've watched U.S. National Security secrets go out the door to China. So, I have a real granular experience of China's bad behavior here.

Jim Sciutto: (14:47)
And by the way, in the book, I make the case for pushing back hard against China, right? Giving credit where the credit is due to this President and just my own experience of watching the U.S. be so deferential to China through the years for no good reason. So, you know where I'm coming from in terms of personal experience here. So, Trump comes in and says, "I'm not going to stand for that anymore." And we've seen that and we've seen some benefit from that. Where we are this year is different though because he is clearly ratcheting up the tension, misstatements from Pompeo, et cetera, the real moves and ones that really hit China in the gut on some of its most valued national industries here, Huawei, TikTok, et cetera.

Jim Sciutto: (15:40)
And Trump officials, Trump himself, Peter Navarro, too, he talks about in the book, they speak openly about wanting to damage China here. They want to move the supply chain out of China, so people in Beijing are like, "You want to screw our economy," right? I mean, they take that seriously. So, the question then becomes, and this is something with all of Trump's National Security priorities is okay, you got every right to push back against them and I can understand each of these moves you're doing now, individually. Tell me how it ties together? What is the end game here? Where does this take us? Is there a negotiation point you're trying to come towards? Is there a phase two trade deal that solves some of these issues? Is this a case where there is a quid pro quo, where there's a transactional point where you can reach some sort of agreement because Steve Bannon speaks very openly in this book about the possibility of war with China within five years? Is that eventuality that the President is prepared for? Does he have an off ramp before there? Those questions aren't answered, so that's the question of where we are.

Anthony Scaramucci: (16:45)
You do point out in the book, if it's okay, I don't want to give up the book. I thought the book is amazing. It's why keep holding it up. I think it should be a bestseller. Jim, God bless you for writing it, but it would be very tough to have a land war with China. It would be very tough to have a naval war with China. We've also overextended ourselves over the last 20 years in other wars. And so this sort of nonsense, I mean, I consider my only contribution to American history is knocking Steve Bannon out of the White House alongside of me. I think that that probably saved more people's lives than people fully understand, but we can go into that at another point. But that nonsense and that ideological nonsense that can flip the switch and end up into a violent war, how likely do you think that that is, Jim?

Jim Sciutto: (17:32)
I asked everybody for this book and I constantly am asking my contacts in the Pentagon. I'll tell you one thing I watch very closely is Taiwan, right? And I think, as the U.S. has sailed ships more frequently through the straits there and advertise that in a way we haven't done in the past. And as China take steps, like if you've seen just in the last few days, flying warplanes over Taiwan. I mean, the nature of how these things escalate it follows was a pattern here.

Anthony Scaramucci: (18:01)
It's like the guns of war. It's like Barbara Tuchman referenced about the beginning of the First World War. What do you think of the National Security Law that was just implemented in Hong Kong?

Jim Sciutto: (18:09)
Well, it's-

Anthony Scaramucci: (18:10)
How does that tie into Taiwan?

Jim Sciutto: (18:13)
It is sad. I lived in Hong Kong for five years. I still got a lot of friends there and that was a special place, right? Right on the side of China. They're ending Hong Kong. Hong Kong, as we know it, is over. Hong Kong is effectively now part of China with all the bad reasons you can imagine. I think from the U.S. perspective it is a measure of U.S. policy that if getting tough on China was going to deter them from doing things you don't want them to do. It didn't work there, right? China has said, "You know what? We're going to do it. All the threats you have, you can sanction us, whatever, we're taking it over." It's a loss, right? I mean, they could have done it to any President or any administration, but it's a loss for the world, it's a lost for Hong Kong and it's a loss for the U.S.

Jim Sciutto: (19:06)
And it does show something that folks have been writing about for some time and it's in the public commentary, too, that listen. There are two players in this game here, right? It's not just Trump. I mean, Xi Jinping is no slouch and he has a very cocky, ambitious view of the world and view of the U.S. and actually somewhat a dismissive one because it's interesting. China talks about the U.S. in increasingly dismissive terms. They see us in an accelerating decline in terms of our economy, our political system, and even in their public commentary, they move up their aspirational date for taking over the U.S. from 2049, 100 years after the founding. They start to talk about it in the 2030s. They're ambitious and Xi is an aggressive SOB.

Anthony Scaramucci: (19:56)
Yeah. And they've got population and they've got obviously 5-, 10-, 15-, 20-year plans. You're mentioning 2049. I would recommend you people on this call to go look at that plan, because it's a very detailed plan for the 100th Anniversary of China. And United States and our political leadership has no plan and so, this is something people should really consider.

Anthony Scaramucci: (20:21)
Let's switch to your day job, which you write in the book in your Acknowledgement Section of the book is your dream job, which is being an American journalist and having your television show, but you have an American President that says things like the fake news media, and he does say that the press is the enemy of the people, which you know as his former communications director, I had to write an op-ed denouncing that sort of rhetoric, someone who believes obviously in the First Amendment and our Constitution. So, what do you say to that? Has your job become more challenging or the ratings are certainly up because the guy's obviously an attention grabber, so you like where we are right now? Is it good for you? Bad for you?

Jim Sciutto: (21:05)
Well, let's talk about the country first. I don't think it's good for our country, right? I think that listen, Donald Trump's not the first President to attract the press. It's happened before, but he's done it in a different and far more aggressive and insidious way. And remember, Trump is often very transparent and when he did that interview with Lesley Stahl, I'm sure you remember right after the election, December 2016, and said, "I do this, so that if you write critical stuff about me, folks won't believe you," right? I mean, that's essentially the plan here, right? It's just that we've seen it writ large as someone who has been a Commander-In-Chief.

Jim Sciutto: (21:42)
Forge about, you know. We all get attacked every day. You get attacked. I'm sure people on this phone, you get attacked. Social media empowers people to say what they want often behind the veil of any sort of distance, et cetera. I don't care about that I do care about there being a generally accepted view of reality, because that's necessary for the functioning of democracy. And in the midst of a pandemic, where you would think at least science would tramp politics, right? At least, the wisdom of taking a step like wearing a mask would tramp politics. At least, accepting the number of deaths is real and not "Well, maybe exaggerated by the left to damage my presidency," but no, even that's politicized.

Jim Sciutto: (22:33)
And I'll often, I'll ask my friends who were in business who will defend the President on moves like this, and I'll say, "Could you make good business decisions without hard data that's acceptable? Could you do this?" They'll say, "Well, no." And it's like, "Well, this is what the President's basically asking us to do because he's attacking facts that are inconvenient to him." And that's the most damaging thing. For me personally, my approach is just keep doing my job as best I can and try to follow professional standards, talk to both sides. And that's what I tried to do on this book, the best you can do, but for the country, I'm genuinely worried.

Anthony Scaramucci: (23:10)
I'm going to turn it over to John Darsie in a second, because we've got a ton of questions. We got great audience attendance on this, which is fantastic, Jim, but one of the people that you interviewed, I can't give up his name, but I now just gave up the gender, so it has put me in a little bit of a box. But one of the people you interviewed is huge fan of yours wanted me to ask you the following question and see what your take would be, the President, this is his observation, likes going against his staff. Meaning someone offers him an idea and it's an informed idea and in order to prove them wrong, they'll counter intuitively do the exact opposite as a way to make them lose face. Did you see that? What's your opinion of that? Is that true based on your analysis and in this book?

Jim Sciutto: (24:02)
Based on firsthand accounts multiple, that's a consistent thing. The President has an almost reflexive desire to play the other stock, right? Say, "Well, you say that, but what about this." [crosstalk 00:24:13]

Anthony Scaramucci: (24:12)
That would speak bad who it was then, right? Because that's the word he's always using, the word reflects it. Well, we'll talk about who it is after the call is over, but-

Jim Sciutto: (24:20)
But I wouldn't say, but I will add the differences, so it's one thing, Susan Gordon, who I spoke to in the book and who has briefed the President repeatedly as the second highest ranking U.S. Intelligence official before she was forced out by the President said she'll never question a President's ability or right to question her analysis or opinion or advice, but she said that the worrisome part becomes where he questions things we know, we know, not sort of questionable intelligence, but we know.

Jim Sciutto: (24:52)
"Here are the pictures of these bad guys doing bad things," right? Or we know this where when the President either because he refuses to see it or it doesn't fit his worldview or it doesn't fit his current position. When he denies a clear reality that that, that's the most worrisome thing and we've seen it right. I mean, U.S. Intel reports that North Korea is expanding its nuclear program, not shrinking it, right? Just as one example or Russian interference in the election. When what you know and he still won't move them, that's what really worries them.

Anthony Scaramucci: (25:28)
So, I have to follow up, John, then I'll turn it over to you because another person that you interviewed for this book came to see me and said that the President's worldview is because he's not intellectually defining it, but when it comes through his telescope, into his sniper range he starts firing at it because he really wants to bring the United States back to the 1890s. He wants to wall off the United States literally and figuratively from the rest of the world and he wants to produce everything in the United States. So, if this plastic cup is a half a cent in China, $24 in the U.S. doesn't matter, you'd like to produce it here in the U.S., disengage the United States from the rest of the world and turn it back to the prior to World War I. And every time it comes into his wheelhouse from your transactional description, he starts firing at that. Do you believe that that's the case?

Jim Sciutto: (26:27)
He does have a mercantilist view of the world, right? I mean, it's old school, both in terms of trade, make it all here, damn the rest of the world but also, of course, national security, right?

Anthony Scaramucci: (26:40)
Do you think that's the right thing for the U.S.? I know you're a journalist, you want to be objective, but give me an editorial comment here. Is that the right thing for the U.S. at this moment in world history, in U.S. history?

Jim Sciutto: (26:50)
Well, two answers to that, personally. One, it doesn't fit the reality of today's world. It's far too interconnected, right? But we're not sailing around on wooden ships anymore, right? I mean, a heck of a lot harder to do what he's talking about, but also, I don't personally believe based on my own experience that that serves our interests best. I think that the U.S. has profited benefit just speaking from our own view of the world, but we've benefited a lot from an interconnected world, a world where there's not war in Europe, right? And that allows for a healthy partner there and a healthy customer.

Jim Sciutto: (27:24)
Two, where the trade routes are open in Asia, where rule of law matters, where there's more, not less democracy, because it's a fact, democracies are less likely to go to war with each other. So it'd be nice to stick our heads in the sand, I guess, I find that a much more boring world, but it doesn't, in my view, serve our interests.

Anthony Scaramucci: (27:43)
All right, John. I'm going to turn it over to you. Jim, look out. He's going to ask mean, tough, intimidating questions. Okay?

Jim Sciutto: (27:50)
I'm ready.

Anthony Scaramucci: (27:51)
[crosstalk 00:27:51] interviewer than me, Jim.

John Darsie: (27:53)
All right. Well, we've covered your most recent book, I want to rewind a little bit to your first two books for a couple of questions. So, the second book you wrote was called The Shadow of War, talks about primarily how Russia and China are waging a war that the average American might not realize is being waged, but the United States might be losing. The intelligence community concluded that Russia interfered in the 2016 election to elect Trump and the intelligence community is saying again, that Russia and others, including the Chinese are interfering in U.S. politics again, what does that interference look like based on your sourcing? What are we doing to stop it and what scares you most about the President being set by the level of foreign interference in recent elections?

Jim Sciutto: (28:41)
Where we are today after 2016 is just jaw dropping, right? I mean, in 2016, and this is not an issue of politics except frankly for the President because it was bipartisan agreement. Russia interfered to help Trump and you saw it in the record. You saw it in the theft of DNC emails and the drip by drip exposure of them. You saw them in the theft of John Podesta's emails and the convenient release of those emails 22 minutes after the Access Hollywood tape dropped. I mean, this was interference with intent. And yes, Russia and other countries had interfered in elections before, but the degree, the brashness, the aggressiveness was different.

Jim Sciutto: (29:22)
So, here we are four years later and it's happening again, right? I mean, you have a Russian backed politician in Ukraine feeding information to Republicans on Joe Biden. I mean, it's so obvious and it's happening in the public. It's not even happening secretly. What's different is one, you have Americans participating in it, right? I don't know. Listen, you can make the argument that it's worth investigating everybody, but you got to know your source, right? If it's coming from Russia and if your Intel agencies are assessing that they're interfering again and want to advantage the President, it seems to me you should take that information with a grain of salt, but in addition to that, we have a President who just has repeatedly refused to say, "No, don't do it."

Jim Sciutto: (30:11)
Now the concern is does Russia and for that matter China, North Korea, and Iran, who were also messing around, do they take a step they did not take in 2016, which is to mess with actual voting systems, vote counting, registration, because the concern expressed to me for The Shadow of War about 2016, which didn't happen, but they were concerned about it, is that the probing attacks that they've done sort of sneaking their way into these systems that they activate that stuff.

Jim Sciutto: (30:39)
And just and think of this, on election day, you would not need to blow up voter registration databases in 5,000 voting districts, you could do in three in Florida or one, just imagine the upset and the questions and the fear that that would cause. They're already interfering In the informational side of this election, do they go into the systems? It's an open question. And let's be frank, they haven't been warned off it, not by this President. So how do they read that signal? Do they say, "Can we get away with this?" You could imagine them saying that.

John Darsie: (31:19)
Right. If Biden were to win and you did see that level of interference and he overcame it to win the election, what type of response do you think you'd see from a future administration regarding election interference?

Jim Sciutto: (31:32)
Well, I don't know. I mean, I think here's the thing, it wouldn't take much, right? I mean, the response that you need is not rocket science. It's a definitive statement that we won't stand. Now, again, credit where credit is due. I do it in this latest book, The Madman Theory, in terms of Trump standing up to China, and I did it in The Shadow of War talking about the Trump administration has enabled Cyber Command to be more aggressive in terms of responding to cyber-attacks that the Obama administration did.

Jim Sciutto: (32:04)
Some of this is, a lot of this is classified, but some of it's sort of snuck its way out, implanting U.S. weapons, tools, whatever you want to call them and they're crucial systems, kind of letting them know about it, so that if they go too far here, we could say, "Hey, we could turn our weapon on, too." So, so the U.S. has taken a more aggressive posture. The thing is, the President has not indicated in his public comments that interference in the election is a red line for him, right? He hasn't made that clear and a lot of this is about messages delivered.

John Darsie: (32:38)
So, you talked about how Trump's general foreign policy actions are defined by a transactional approach to foreign policy. So, you talked about a couple of the big headlines that have generated a lot of controversy regarding Trump's foreign policy. One, intelligence he has reported that Russia put bounties on the heads of U.S. troops, which in some cases they believe might have led to some deaths of U.S. troops. He pulled U.S. troops out of Northern Syria and basically left the Kurds for dead allowing Erdogan to come in and have his way in that part of the world. What do you think the transaction is that's taking place? Is it something extremely cynical, like blackmail or financial inducement or do you think it's part of that reflexive contrarianism that Trump likes to engage in with his staff?

Jim Sciutto: (33:24)
I think it's different. I asked everybody for this book, "How can you explain the President's deference to Vladimir Putin?" And their most consistent answer is this one: That the President admires him. He's got an admiration for Vladimir Putin for his power and some of this again, is in his public comments, right? "He's a strong leader." You remember him saying that a couple years ago. His power, the power he has in-

Anthony Scaramucci: (33:48)
Can I interrupt you for a second though, because some journalists have suggested something more nefarious than that. Do you think that there is anything nefarious or you just think it's that he admires his power? You've done the homework.

Jim Sciutto: (34:00)
Well, here's the thing. And again, I asked everybody about that, everybody I interviewed for this book and I delve into that question in this book. Without proof that there's a kompromat or something, I don't think it's a substantive conversation.

Anthony Scaramucci: (34:19)
Did you read Bolton's though? Chapter Eight was like the orange jumpsuit chapter. You know what I mean? It was like ridiculous, so you don't think any of that is true?

Jim Sciutto: (34:26)
Well, the melding of, the idea that the President has business interest in Russia, I think is I mean, but again, that's in the public record, so that's very believable. The idea that he has debts to Russian investors is also credible. I don't have proof of that and the people that I spoke to for this book, don't have proof of that. They have their suspicions. But I didn't want this book to be about printing suspicions. I wanted it to be about things that people had personal experience of. So, the consistent thing and this could live right alongside what Bolton has alleged and others have alleged, but the most consistent thing they had personal experience of and witness was that the President expresses and shows admiration for Vladimir Putin for his power, but also that he shares Putin's nihilistic worldview, that it is a zero sum game, that no one's really better than anybody else on the world stage.

Jim Sciutto: (35:24)
And you saw that, go back to the Bill O'Reilly interview, right? 2017, Putin's a killer. Well, aren't we all? Anybody else? Any of us really that good? But even more recently, after the bounties story and when the President was reminded that well, it's not just the bounties, Russia armed the Taliban to kill U.S. soldiers in 2018. And the President's answer is, "Well, we are in the Taliban in the '80s. It's all the same." And that, why does that matter? First of all, do any of us here, is that our view of our country, right? It's not my view of my country, certainly not what I want it to be. But in addition to that, what Intel officials, who I interviewed for this book told me is that Putin knows that Trump admires him and he seeks to take advantage of that. In fact, they say that some of Trump's worldview is influenced by Vladimir Putin, for instance, that a number one source of the President's hostility to Western European leaders, our allies, is Putin, that they have an affinity on that.

Jim Sciutto: (36:22)
It's like, "Yeah, that Merkel, what a pain the ass," right? And that has consequences. We just pulled troops out of Germany. So, one Intel official I spoke to, used this term that Putin is Trump's honey trap, right? That's a remarkable thing to hear from someone who served him at the highest levels and the Intel agencies, again, I write about this a lot about this in the book, feared that Putin was in effect carrying out an influence operation on the President, right? To influence and shape his views and therefore shape the policy. And if you look at the public, so even if you don't have a P tape or a giant Russian debt load, that enough is a fairly disturbing thing to hear about your President and the proof is in the pudding. It's in a lot of the decisions and moves the President has made and hasn't made.

John Darsie: (37:10)
So, going back even further to your first book, which was published in 2008, it's called Against Us, it covers sort of the forces behind Islamic radicalization and you argue sort of as the crux of the book about the need to rebuild more constructive relations with the Arab World. Twelve years on from that book, has anything changed? Have conditions improved? And are we any closer to solving the quagmire that is the Middle East?

Jim Sciutto: (37:36)
Officially, I wrote that book, one of the thesis was about the appeal of Islamic extremism in the Western world among Muslims in the West. It came out in 2008 and then you saw what happened. I'm not sort of claiming credit for it, right? But we saw that bear out with ISIS and these homegrown terrorists and all that, lone wolves, et cetera, the appeal of ISIS, all these folks who went to Syria from Europe, et cetera. So, the question was "How to address it" is I think the security response to this kind of terrorism, it's certainly advanced, right?

Jim Sciutto: (38:14)
I mean, and again, in this book as well, I give credit to Trump for accelerating the dissolution, not the dissolution, but the defeat of ISIS in Syria, they're still around, accelerated after the Obama administration. So from a security perspective, probably better off although things haven't gone away. In terms of the relationships, no, not really, and in fact, I mean, where U.S. policy is going regarding Israel, the Middle East, some of those relationships, it's taking it in a different direction.

John Darsie: (38:52)
So, I want to ask you one last question. We ask this question of every guest who sort of covers National Security as a national security expert, what types threats and maybe ones that Americans, the everyday Americans aren't as aware of, what type of threats and future methods of warfare are the ones that really keep you up at night and make you worry about where the world is headed?

Jim Sciutto: (39:13)
Well, cyber and space, right? Cyber space and space-space. The degree, I think people are generally aware that cyber is a problem and if you work for any company in this country, you've been attacked, right? And you're probably getting attacked right now, you might have faced a ransomware issue. All of us on this call, I've been hit. It's interesting. The four biggest cyber thefts in the last like five years I've been hit by all four of them. One, because I went for the government OPM. They got all me and everything you want to know about me and my family. They got that. Anthem, Blue Cross/Blue Shield, so they got all my health information for my family. Married Hotel so they know where I've traveled and all of that kind of stuff. And what's the other? Oh yeah, Equifax, so they know all my final financial position. I'm like, and all of that, lots of that goes back to China, so they must have a really thick file on me.

John Darsie: (40:09)
You got nothing to worry about now. Everything's out there. You're like an open book.

Jim Sciutto: (40:12)
I'm not. I'm just going to throw it all out there. There's that. So that's like on the business side, but as it relates to how all the stuff, the lights, they could turn the lights off in Washington, D.C. based on penetration of critical infrastructure systems. Our very election systems are even more worrisomely under attack, our political discourse, so that's the cyber side. And then connect the dots on that and it's a real threat to everything we rely on. The space part, I think, is one that folks didn't know a lot about. They're getting to know more about with the space force and even some movies and TV shows and so on, but there are weapons in space.

Jim Sciutto: (40:51)
And every couple of months, I'll read about Russia or China launching another space weapon. You'll see it. Just keep your eyes open for it. It's up there. There are lasers in space. There are Kamikaze satellites. China wrote about it in The Shadow of War as a satellite that moon-raker style could steal other satellites out of orbit. And we depend on that technology, both for our security but also for business communications, et cetera. I think that's the front of this war that folks haven't really gotten their heads around yet.

John Darsie: (41:20)
Just one follow-up on the space piece. How do you regulate, space warfare, and how do you counter threats in space in a super national type of way to prevent just all out mayhem from breaking out in terms of the space race and space weapons?

Jim Sciutto: (41:35)
We need it. We don't have it. We don't have a SALT Treaty for cyber, right? And we don't have it for space, rules of the road where red lines, all the things that we established for nuclear weapons and help keep the peace, right? We don't have that for cyber or for space yet. I mean, you have some communication probably more at the state level about what each side considers a redline attack in the cyber sphere, but you need treaties if you want to avoid the prospect or not avoid, minimize the prospect of war.

Jim Sciutto: (42:13)
But if you talk to folks in Space Command, and they're like, it's in my book, and you'll hear it elsewhere, I mean, there's a like Star Wars is not far away. The nature of the way human beings is with war is that war moves to the next available front and we're already there and it's going to be more threatening over time, not less.

John Darsie: (42:36)
All right. Well, Anthony, do you have a final word?

Anthony Scaramucci: (42:38)
I got one last question.

John Darsie: (42:39)
Yep.

Anthony Scaramucci: (42:40)
And then we'll let you go, Jim. We try to keep these things tight. Madman Theory, loving the book. The book was awesome. Are we safer as a result of Donald Trump's madman theory or less safe, Jim?

Jim Sciutto: (42:55)
In most spheres less safe. The final chapter of the book is Before and After and just, I do it very academically. Here's where we were with North Korea, they had X number of nuclear weapons. This advanced the ballistic missile program, they have more now. Iran is closer, not further from a nuclear weapon, right? Russia is more not less aggressive in the world sphere. Now, we've stood up to China, but the fact is, China hasn't backed off in any of the places we've challenged them, actually they've gotten more aggressive. Now, will that change over time? But the sad fact is, we're less safe and if you don't believe me, just do me a favor and read that chapter folks and tell me if you disagree and I will accept all criticism.

Anthony Scaramucci: (43:40)
I wanted to ask you that because you do, you end the book with it, but the last thing I will say it's a phenomenal book, but it's also a cautionary tale on going against the grain of discernible thought and opinion that's been bipartisan and established for 80 years. Maybe they established it, it wasn't really that wrong after all. Who knows? We'll have to see what happens here, Jim, come November. But I want to thank you for writing the book, I want to thank you for being on SALT Talks. John Darsie downgraded his room. He had like George Washington pictures and all kinds of stuff like that, so you and I could stay competitive with them. But we'll let you go and hopefully, we can get you back before the election if you don't mind. We'd love to have you come back before the election. Talk a little bit where you see things prior to Election Day.

Jim Sciutto: (44:31)
Anytime. Deep gratitude to you, to John and everybody who took the time here. You do me a great honor if you had a look at the book and I wish you all the best as we get through all this.

Anthony Scaramucci: (44:40)
It was a great read. Thank you, Jim, for writing it. See you soon.

Alan Patricof: Longevity & the Future of Aging | SALT Talks #35

“You don't see many 60-year-olds walking in from financings into a venture capital firm. It just doesn't happen… I actually read three studies, which said that 60 year old entrepreneurs were twice as successful in starting up businesses as those who are 30.”

With a 50-plus year career in venture capital, Alan Patricof has been instrumental in growing the venture capital field from a base of high net-worth individuals to its position today with broad institutional backing, as well as playing a key role in the essential legislative initiatives that have guided its evolution. Alan founded Apax Partners, leading global private equity advisory firm, and co-founded Greycroft, venture capital firm focusing on investments in the internet and mobile markets.

When investing venture capital, there are often not a lot of numbers to go off of. This often requires evaluating the people running the business, their past work and the team they bring on as the surest indicator of a company’s success. With the responsibility of investing in companies with other people’s money, an emphasis on bottom line should be maintained instead of simply focus on revenue growth. “At some point a company has to have a bottom line, and a lot of companies have lost sight of that today.”

Having lived alongside a loved one in need of extensive at-home medical care and recognizing the massive need to address chronic diseases that older Americans face, Prime Time Partners was formed. Venture capital will be targeted towards entrepreneurs over 60 in order to support start-ups addressing the later-in-life costs, an age group and industry relatively neglected up to this point.

LISTEN AND SUBSCRIBE

SPEAKER

Alan Patricof.jpeg

Alan Patricof

Co-Founder

Greycroft

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 public policy. SALT Talks are a digital interview series we've been doing during the work from home period, to provide our audience a window into the minds of subject matter experts who are leading investors, creators, and thinkers. Our goal with these talks is also to provide a platform for what we think are big, exciting, world-changing ideas as well as great investment opportunities. And we're extremely excited today to welcome Alan Patricof to SALT Talks. With a 50 plus year career in venture capital, Alan Patricof has been instrumental in growing the venture capital field from a base of high net worth individuals to its position today, which has broad institutional backing, as well as playing a key role in the essential legislative initiatives that have guided its evolution.

John Darsie: (01:04)
Alan founded APAX Partners, a leading global private equity advisory firm, and then he co-founded Greycroft later on, which is a venture capital firm focusing on investments in the internet and mobile markets. His latest venture, as he's calling his third act, is a company called Primetime Partners, which is a seed and early stage venture capital fund, investing in companies transforming the underserved and trillion dollar global sector of the aging population. He's helped build and foster the growth of numerous major global companies, including among others American Online, we had Steve Case in an earlier SALT Talk, Office Depot, Cadence Systems, Cellular Communications Incorporated, Apple Computer, which you may have heard of, Four Systems, NTL, Interlinks, Audible, Axios, and Wondery. We're very excited to learn more about his next chapter with Primetime Partners, as we mentioned, in what Alan refers to as the silver tsunami.

John Darsie: (02:02)
A reminder to our audience today, if you have any questions for the great Alan Patricof, enter them in the Q and A box at the bottom of your video screen. 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. Anthony is also the chairman of SALT. With that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:24)
Alan, it's great to have you on. We really appreciate the time you're taking today. People get mad at me, my son in particular, when I ask these background questions, but I actually don't care because I find them fascinating. What is something we could learn about your background that's not on Wikipedia, it's not something that's been written about you, maybe it's something about your parents, maybe it's something about the way you grew up, maybe it was the realization that you made that you were going to go into this story career of entrepreneurship?

Alan Patricof: (02:57)
What do people not know about me? I don't know. I guess from a very young age, I really was entrepreneurial in my own way. I mean, I was brought up in a middle class background on the West Side of New York. I'd say lower middle class. We didn't have servants, we traveled by bus and subway. I didn't know what a taxi was until I was out of college. Family trips were all by car, not by planes. I sold the Saturday Evening Post standing by the 103rd street subway stop, with one of those bags around my shoulder at age six or seven. And during the war I sold war bonds, I collected scrap and newspapers for the war effort. So I would say those were probably good indications that I was a hustler from very, very early on.

Alan Patricof: (03:54)
And when I went to school, I went to Ohio State, not because I really intended to go to Ohio State. I got there by accident. I almost went to Brandeis, but I panicked when Brandeis was in its second or third year. And I went to one of those preliminary college interviews. And when I walked in, everybody had black hats and long beards and long black coats. And I said this wasn't right for me. Of course, Brandeis is a totally different place today, but in those days, it was very, very ethnic. And I just came home, put a label on my trunk. In those days you had a trunk, you didn't have a suitcase. It was Railway Express, Railroad Express which became American Express. But in those days, it was the way you shipped everything around was not in the Amazon cartons, but in trunks.

Alan Patricof: (04:55)
And I sent my trunk out to Columbus, Ohio. Next day, got in the car and went out to Columbus. And even while I was at Columbus, I sold ties. I sold favors. I wrote for the Columbus Citizen. I did a market research for the Brown Shoe Company. So I guess you'd say I started at a very early age trying, like many of us, probably like you. You had to do something to supplement your family's income, which was limited. I'll finish with the background. When I tell you when I came to New York, I had no job. There was no recruitment effort at Ohio State. If there was one, it was at Harvard, Yale, and Princeton, it certainly wasn't at Ohio State for undergraduate. So my alternatives were going to Caterpillar Tractor in Des Plains, Illinois, as I recall, or the National Bank of Detroit, or to go work for AID down in Brazil.

Alan Patricof: (06:01)
And at the last second I said, "I gotta go home." And I don't think I would have made it at Caterpillar. And I went to New York and the way I got a job was I walked Wall Street. Because I knew I wanted to be on Wall Street, and I walked the street literally. And those days you would get into the building, which you couldn't do today. It's a joke. And I would go into an elevator, to the top floor, go to the secretary, open the door and say, "Any jobs available?" That's honestly how I did it. And I'd go from the top floor down to the bottom floor. I started at 110 Wall Street, and fortunately I got a job on the 35th floor of 63 Wall Street with a great firm. So that's how it all started. From there, it's been one great success after another, I have to say,

Anthony Scaramucci: (06:56)
Well, it's an amazing story. I think it's one of the reasons why we like each other so much. I had a paper route, was making $35 a week at age 11. I was giving 20 to my mom and I was keeping 15 for myself. And my first job coming out of Tufts was at One Wall Street. So I had the same idea you did.

Alan Patricof: (07:15)
The other end of the street.

Anthony Scaramucci: (07:17)
I went to the Irving Trust building. I rode up to the 28th floor and there was a law firm there called Hughes, Hubbard and Reed. It was named after Charles Evans Hughes. And I asked them for a job that summer, and they put me in the paralegal area. So we have a lot in common that way.

Alan Patricof: (07:33)
And what was my first salary, because believe it or not, people don't realize, you can go to Social Security and ask for a printout of every year and what you contributed to Social Security. So my first year was 1955. I made $55 a week. So that was $2,700 a year or whatever.

Anthony Scaramucci: (07:54)
Well I was more fancy pants than you. The guy offered me $8 an hour, Alan. Being who I am, I said, "Could you make it 10?" He goes, "What are you, crazy?" I said, "Yeah, please. I need the money."

Alan Patricof: (08:06)
That was good money.

Anthony Scaramucci: (08:06)
I had to pay off all that school debt. What's that? That was good money in 1986. You know, I worked on the Continental Airlines merger with People's Express. I spent the whole summer of 1986 in that office working on that merger. But I want to go to your-

Alan Patricof: (08:23)
Was Freddie Laker around then?

Anthony Scaramucci: (08:24)
Yes, absolutely. Yeah.

Alan Patricof: (08:27)
I remember meeting with Freddie Laker, going out to his hangar out in New Jersey, big cavernous hanger. For those who remember, Freddie Laker was like the guy who really started cheap travel.

Anthony Scaramucci: (08:38)
He really started the whole concept of mass transit in the air. And Frank Lorenzo, you may remember Frank, he's living up in Nantucket now, he was running Continental Airlines at the time, and he bought People's Express, which is the reason why United airlines has all those hubs over in Newark. [crosstalk 00:08:56]

Alan Patricof: (08:56)
So I remember my famous story with Freddie Laker, was I went to meet him at his corner office. And I said something, somehow we got into the idea of board meetings and he said, "Well, I have board meetings." He said, "I'll show you how I have a board meeting." He goes out into the hallway, a long... Remember it was a hangar. And he calls out whatever his partners one, and I won't do it, he screams out, "Hey, Hey, Jimmy," and Jimmy comes out the other end of the hall. He said, "Let's have a board meeting." I always remembered that. That was Laker airlines board meetings were in the hallway [crosstalk 00:09:33]

Anthony Scaramucci: (09:33)
There you go. The true symbol of entrepreneurship. Right? It's an amazing story. So you're one of the pioneers. I mean, you've had this amazing life and you've always been able to see around a corner. So take us back to the early part of your career, venture capital, private equity. What were you thinking in those early days about directionally where you were going in your career and that industry specific?

Alan Patricof: (09:59)
Well, my father had once said, when my father was a stockbroker in his later career, the only real guidance he gave me, he says, "Always be a buyer, not a seller of investments." In other words, not be a stock broker was really what he was saying. So my career has always pretty much been on the buy side. I mean, I worked for a development capital firm. I worked for an investment counseling firm, as they were called then, like Scutter Stevenson Clark or Fidelity is today much bigger than private management. And then I went and ran a family's money. And then I worked for a guy, Ben Hidaman and Mickey Newman. Mickey Newman was the son of Jerry Newman. Jerry Newman was the partner of Ray Newman, who was the great professor at Columbia who wrote the famous book that everybody in Wall Street, if they haven't read, should read. And I'm shocked at the number of people today who haven't read it. He worked for one of the firms I have which is called Security Analysis by Graham and Dodd, I think a first edition is worth, you have to pay $3,000 to $5,000 to get the first edition, but the firm was Graham Newman. And I was involved with that.

Alan Patricof: (11:16)
And I had a lot of experience with families and I saw that families manage their big portfolios of stocks. You know, we talked about the Whitney's and the Rockefeller's and the Phipps is, and many, many other families that you wouldn't have heard of, including the family I worked for, which was the Godeson family who made their fortune in the paper business. And they would do private investments, but they didn't know what they were doing. Someone, Andre Maeir, who was head of Lazard, or Gus Levy, who was head of Goldman Sachs, or John Lowe from Lowe Rhoads would call up and say, "I'm putting you in for $500,000 in this, or I'm putting you in for a million in this or 200 of that." It was an old boys kind of club, and family offices were putting up money for that. And we did our share and I was the one, because I loved that, that became the person who ran that file drawer with all these private investments.

Alan Patricof: (12:12)
And it was while I was there that we made an investment in New York Magazine and we made an investment in another company called Datascope Corporation. New York Magazine, I had the tender age of 30 something, became president arbiter from Low Rhoads was chairman. Clay Felker was the key guy who built the built New York Magazine. And we started a company and I got the taste of really what it was like to be on the frontline of running a business. And in the case of Datascope, it was a medical electronics company, which we started with $50,000 on a kitchen table, with a very clever technology for cardiac monitoring. And I said, "This is much more interesting than buying IBM and General Motors and The National Paper Stock." And having it go up or down two or three or five points in a day, and no one could really tell you except some psychological event that happened. Some extraneous events someplace in the world would affect that price. I also went that time into a firm called Lynn Broadcasting, on behalf of Central National. So I said, "There's really a business out there to manage high net worth families private investments who aren't like the Phipps, or the Whitneys, or the Rockefeller's who had their own private investment activities.

Alan Patricof: (13:44)
And so I started a business in 1970 called Alan Patricof Associates, which became APAX many years later, we changed the name to Alan Patricof Associates International, because we were in 12 countries at that point. And started managing investments for private families, of their non-public securities on a very modest basis. I forget, I think I was at a retainer at $25,000 a year and the carry was 10%, not 20. And that gradually grew and got bigger. And eventually we started taking institutions, and got bigger and bigger. Our first one was two and a half million. And when I left APAX, there's no exact date, because I was in APEX's office until about 2008 or '09 physically, but I decided around 2002 after the bubble, that we had become too much of a private equity firm, we'd gotten so big. Our last one had been, I think, 10 billion. From two and a half million to 10 billion. We weren't doing the same kind of investments. So I spent three years helping the World Bank pro bono and the IFC, and looking at small and medium sized enterprise development around the world, primarily in Africa.

Alan Patricof: (15:15)
So I probably traveled to a lot of countries. And around 2006, I said, "This is not satisfying enough for me." I was 71 or 72. I said, "I want to go back in the venture capital business, pure venture capital." And I started Grey Croft, which is a pure venture capital firm. We are not a private equity firm. So far. The temptation is enormous to get bigger and bigger, Grey Croft is now in it's... I started out with a small fund, 75 million, which was small. And our most recent fund, we really kept ourselves constricted. So it will be under 300 million, which may sound large, but it's really small for the way funds have grown. We could be a lot, lot, lot larger. We've had six funds and three growth funds, which takes the second phase after the early stage A and B rounds. But I've been consistent and sticking with private investing companies that were early stages in their development, whether they were startups or growth rounds. Been an exciting career, I have to say.

Anthony Scaramucci: (16:29)
Yeah. Amen. And I think your career is just getting started. We're going to go to the silver tsunami here in a second, but I want to ask this question before I go in that direction. You have this wonderful knack. It's one thing to read a PowerPoint presentation or a business idea, but it's another thing to understand that you have a management team that can intersect with that idea and execute the idea. So we have a lot of young people on this SALT Talk listening. What are some of those qualitative and quantitative factors and gut instinct that you bring to the table, to see that opportunity at such an early stage in the business process?

Alan Patricof: (17:10)
Well, in all fairness, in the venture, that pure venture are and the startup area, you really don't have a lot of numbers to go from. There's a little bit of this. I mean, you can't avoid it. So it has to be based less on numbers and more on the people. And we've learned consistently that people who start businesses, who have been in previous businesses that are similar and that have left them to do something similar, and more importantly, have attracted people from that previous activity to join them, is a very high indicator of success. Because those are the people, they know more about this leadership than we could possibly know. And they're betting with their careers, as we're investing with our money, which is fungible to a great extent, except for what we have invested in our own funds, is other people's money.

Alan Patricof: (18:11)
And while it hurts and we are fiduciaries, somehow that's a very high predictability of success. And the second is someone who really understands the economics of the business that they're going into, even though they can't prove it at that point, but they understand that they have to make a profit. At some point a company has to have a bottom line, and a lot of companies have lost sight of that today, but if you just start out with a theory that all you have to do is build revenues and they will come, I don't think that makes sense. I think people have to understand the factors that go into making a bottom line profit, and how long that will take, and how much capital that would take, I think is a critical aspect.

Alan Patricof: (19:04)
I think understanding the market they're going into, not what we call, they use the word Tam, the total address market, but they think of the total address market as being that big, instead of thinking of it as this big, which is the real market they're going after. I think someone who really understands the size of the market they're going into themselves. So if you take those combinations of people, product, market, and are you investing on a risk reward rate of relationship that justifies taking the risk? And I say all of this, because it's very important at the beginning, and the beginning, you don't have as many answers or proof points in that point that I brought up, but most critically, when you go to the follow-on rounds, this is where it really becomes important, I think it's very, very important to have the discipline to say, "Did the people develop as I expected? Did the product make progress at the timeframe that they said it was going to make? Is the market that I thought was there, is it really there? Or has it been taken away by someone else who beat us to the punch? And is the round we're going into, does it justify a potential reward based on comparables, the risk we're taking and making that financial investment?"

Alan Patricof: (20:49)
And I think, in my opinion, that unfortunately today we have too many companies out there, and I'm not going to name them, because everybody knows them, that have gone along through multiple, multiple rounds of financing, and are not yet near profitability. And yet can continue to generate ,raise new capital, that do not exercise that discipline of understanding that at some point, shareholder capital cannot totally finance a company forever. At some point it's where are the emperor's clothes?

Anthony Scaramucci: (21:32)
Right. Well, I think it's well said. I want to switch over to Prime Time Partners, which is your new venture capital firm. And obviously it's targeting older Americans, early stage startups. You're calling it the silver tsunami, which I guess no one's getting their hair dyed like me, obviously, because why would you call it the silver tsunami if you had hair dye involved. But what is the investment thesis of Prime Time? And why are you doing this now?

Alan Patricof: (22:03)
Don't tell me you normally have my color hair.

Anthony Scaramucci: (22:06)
My hair's whiter than your hair actually.

Alan Patricof: (22:08)
Oh my god.

Anthony Scaramucci: (22:09)
But it looks terrible on television. I told Sean... Look at Sean Hannity. Now he's got so much snow on the roof. I told him, "Come on." But I mean, you look very distinguished with that hair. I still have that baby face.

Alan Patricof: (22:21)
My barber once, about 15, 20 years ago, tried to talk me into lightening it. I said, "Once you start, you can't stop. I mean, it's impossible. It's only going to go one way." So I gave up.

Anthony Scaramucci: (22:33)
I'm going the way of Joan Rivers. Let's just put it that way, but I want to go back to silver tsunami.

Alan Patricof: (22:38)
I want to go more than you do. Let me say, I have never, in my 50 years in this business have been more excited about anything I have done. I came to this, honestly, because my wife has Alzheimer's and she's had it for 11 years. And the last three years have been pretty brutal in a sense of 24 hour caregivers. And she's lost all the functions that people have. She's still at home. She'll be at home until the end.

Anthony Scaramucci: (23:06)
I'm sorry about that.

Alan Patricof: (23:08)
Yeah. But during that process, I have gotten to know what problems are for people with chronic diseases. I've gotten to meet a lot of doctors, how to modalities and looked at a lot of technologies and looked at all the support structures you need from the standpoint of caregiving, the standpoint of feeding, standpoint of changing your house around, all those things.

Alan Patricof: (23:33)
And they're not just for people with chronic diseases, although God knows there are plenty of those around, not just with Alzheimer's, with all other kinds of diseases, whether it's hip replacements, having repair, or you see the people around with walkers and wheelchairs, they're not just Alzheimer's victims. But people in general getting older and what maybe some of your 211 people on this call don't realize it, the fastest growing segment of the population today are the people over 60. In this country, in China, in Japan and in Europe, not in the Middle East. And these people all need different things than they did when they were part of the millennial generation.

Alan Patricof: (24:23)
And there's been, ironically, while it's the fastest, and I think it's like 24% of the population, but they're the fastest growing part. I don't want to be [inaudible 00:24:36] but I believe less than 10% of the marketing dollars is spent against this segment of the population, which actually has the most money to spend on products and services and everything else you can think of. And they've been neglected honestly. By the same token, venture capitalists, we're all terrific people, but you don't see many 60 year olds walking in from financings into a venture capital firm. It just doesn't happen. As I looked at this market and I also read more than one study. I actually read three studies, which said that 60 year old entrepreneurs were twice as successful in starting up businesses as those who are 30. And that really shook me. These were not just statements. These were full academic studies, and you can refute it or not, but they exist and you can get ahold of them yourself.

Alan Patricof: (25:30)
And the reason was, someone at 60 has a lot bigger Rolodex. He has more battle scars, or she, has more battle scars. They know more about the industries, they have more contacts, and in my opinion, if they want to start a company that's in the similar business and they have the energy that I have, and they want to do it again, they are a darn good bet at putting money behind them, because they know where to find the people to work for them. They know where to find the customers. They have the relationship with the customers. The probability of their success... And it's logical, but people have not thought that way. They'd rather back, including me and Gray Croft and APAX. We'd rather back the 22 year old, who has no Rolodex, who has no experience of the business, but has lots of fire in their eyes and excitement and attracts a lot of other young people, and a lot of them are successful. But the fact is that older people are successful.

Alan Patricof: (26:34)
So I had been thinking about this, and my son came to me in November. And he said, "You know dad, Abby Levy," who was the founding president of Thrive Global, which was Arianna Huffington is her latest company after the Huffington post, which I was an investor in it. And I was an investor in Thrive Global. Abby was there for two years and she left. I was very, very disappointed. She went to Soul Cycle, and I didn't keep in touch with her except to see her. She stayed on the board and I see her at board meetings, but we never talked about anything. And my son came to me. He said, "You know Dad, Abby has been spending the last year focusing on this wellness and aging population. She's got all this, what you're doing, but she's going to do something about it."

Alan Patricof: (27:27)
So we got together two days later and together with a firm on the New York Stock Exchange called Welltower, which owns 1600 senior living facilities. They became the strategic partner, which all it meant was they would try out ideas that we might find, in one of their homes where, because they were looking for innovation and they became in effect our partner with no economics, just purely interested in what might come out of it for a fund like ours. And we said, "Let's go for it." And we were all ready to raise money in January and COVID hit. And we sat around and in May we said, "Let's go for it now, whether or not there's COVID." And in 45 days we raised, we filed with over 30 million.

Alan Patricof: (28:21)
And in the course of the last couple of weeks, we've had a bunch more investors who proactively have contacted us and we've tapped it out. It's going to be a small fund, but I will tell you, we have a pipeline now of 80 companies, we've invested in four, and people don't realize this. And I'm hoping to be more venture firms started up in this area, because there are a lot of people around who got lots of good ideas, whether it's a nutrition. Now we're not investing in pharmaceuticals or drugs or senior housing, but all the products and services, you just don't think of the things that change as people get older. And if Anthony is going to live, I'm going to live to 114. Anyone on this program who knows me, knows that I've been saying this for 10 years.

Anthony Scaramucci: (29:10)
I had that as the under for you Patricof.

Alan Patricof: (29:10)
People say 150? I said, "No, you made a mistake. It's 114. I'm not changing." It was based on a speech I'd heard it at Mount Sinai about 10 or 15 years ago, about the probability that age gets offset by all the things that happen during life. And I just heard recently that they are now saying that you could live to 120, but I'm not changing. 114. Well, if you're going to live to 114 or 100, read the obituaries every day, notice all the people who were over a hundred, who are living. Those people are going to need the lots. There are going to be lots more of them, who are going to need lots of different things. And they are going to need new companies to create, to service them. I mean, a company just got sold yesterday called Rebundo, which got sold for $17 billion to Teladoc or tele... One of the tele-medicine companies.

Alan Patricof: (30:13)
Which is in the food area of feeding older people. You see on television every day, A Place For Mom. I don't know how big it is, but it's big. There are all kinds of ideas happening and I am totally excited. Abby and I are having a great time. We're recruiting. If anyone has healthcare or venture experience, we're looking for someone right now with a principal or senior associate role. It's a wide open field. I mean, we have been able to find two or three other small venture firms. We want to be the leader in this field. And by doing the way we did it, announcing the fund on an embargoed basis on July, whatever it was, two weeks ago, we ended up with coverage in every media major stories.

Alan Patricof: (31:10)
We intended to do that. And I intended to do just what I'm doing now, to get on a soap box and say, I'm 85. If I could start my third business at 85, I started my second business at 72. There's no reason why other people can't. So we're hoping we're going to invest in product services, technology. And in parallel, if we can find some older entrepreneurs, older, meaning they want to start a second career, 55, 60, 65. We'd like to find a few of those that don't have to be servicing the older community, but they want to do the same thing again. And they have the energy and brains to do it.

Anthony Scaramucci: (31:54)
Well, we know it's going to be successful. We wish you a great success. I want to turn it over to my colleague, John Darsie. We've got a ton of questions that are populating. And so go ahead, John. Let's take some questions from the audience.

John Darsie: (32:08)
Thank you, Anthony. And maybe you have a business idea, Anthony. I know you're in the senior citizen category, so maybe you have a couple of new business ideas you might want to launch.

Anthony Scaramucci: (32:16)
Well, mine are all going to be in beauty and Botox, John, okay? Go ahead.

Alan Patricof: (32:21)
Well, it can be done, Anthony. Don't think those aren't categories.

Anthony Scaramucci: (32:25)
Trust me. I'm a big consumer, Mr. Patricof. I'm a big consumer.

John Darsie: (32:31)
Well, Alan. Thanks again for joining us. We had a couple of questions about, you've had some commentary recently regarding the big tech giants and how they're sort of utilities that are in need of some form of regulation. There's a great book out recently by David Day, and who's actually speaking on SALT talks next week, called Monopolize that covers this exact subject. Can you talk further about these recent congressional hearings that we've seen and also your views on big tech and how we allow them to grow and innovate, but we don't allow them to be destructive in a way that some monopolies have been throughout the course of American history?

Alan Patricof: (33:04)
Well, I'm glad I have this opportunity. I have spoken out the past year on this subject and I'm sure you've read the book Zucked, which was by someone venture business who had been at Facebook and invested in Facebook and profited from it, but told the reality. Let's face the reality, the four companies under attack if you will, Facebook, Google, Amazon, and Apple is thrown in there, have accumulated an enormous amount of data. And every time they make an acquisition, they get more data. And that data is very, very valuable. It knows that all of us are right now on the SALT conference light on Zoom. It knows when you're going to be buying something, when you're selling something, what you're reading, what sites you're going up to. And they have been able to use that in a, I hate the word use the word monopolistic, but in a fashion that has given them a substantial advantage over anyone who wants to compete with them.

Alan Patricof: (34:25)
And we've all heard the argument from particularly Google, but Facebook as well of saying... And Amazon where you can put your product, they're handling third party sellers, but the fact is they've come out with their own products that compete with these sellers. They have the ability to give priority listing to it. They have the ability to control the ad market now. I mean, I don't know. Those on this line have had companies where overnight Google will change the algorithm. And all of a sudden your traffic go down by 10 or 20%.

Alan Patricof: (35:05)
When I grew up, I grew up with a basis that if someone had control over something, where you could not avoid it, that's called a utility. I mean, that's why utilities are regulated. That's why the railroads are regulated. That's why the phone companies were regulated. That's why we had monopoly laws in the late 1800's and the early 1900's. And I'm not antiquated, but those laws applied to people who are combining oils, steel frames to raise prices. And they monopolized industries. Today, we have a different kind of monopoly, it's data. And there has to be found a way to make this data available on a ubiquitous basis, in my opinion, so that everybody has access to it. And if it's accumulated by someone, they're entitled to make money from that data but making it available and create a more level playing field. If not their data accumulation builds up by the nanosecond.

Alan Patricof: (36:15)
And it's inevitable that these companies have to get stronger and stronger and stronger as they stay alive. And they can use every argument in the book. I think that, I'm encouraged by the congressional hearings now that, I never can pronounce his name Seciligo who's a Congressman I think from Rhode Island, who has led the fight, and done very well at it, by the way. He had the four Kings in a couple of weeks ago for a hearing. I mean, it's ridiculous to have a five-hour hearing for this subject, but that's what was allocated. There's a lot of work that's been done in the background. There are committees that have informed their non-profits, the Open Market Institute which was originally run by Sarah Miller and now has spun off into another activity, and her successor is doing a great job of preparing position papers.

Alan Patricof: (37:22)
I think it is appropriate that the government is looking into this. There's no other way we're going to come out with answers. I am not speaking out in favor of breaking off the companies. I honestly, I think it's a very tough job at this point. But every day, you know, we saw yesterday Fitbit's being bought, more data. I saw Facebook bought a company called Brainwaves, now they're going to have control of the brain. We don't have enough elements of our eyes and touch and everything else. So I want to make one disclaimer, I do not think that any of these people that we're referring to, so [inaudible 00:38:13] or Mark Zuckerberg, or certainly not Steve Jobs when he was there had any thought about being monopolous, about controlling, power. It's an inexorable growth where they're allowed to buy 50, 60 companies and combine the benefits of some of these companies. And it all gets down to data.

Alan Patricof: (38:39)
Take away the data from them, put it in a data repository and let everybody bid on it. And it'll be a different business, I think. And it's hard to make this argument, because everybody likes to get faster, cheaper. And you know, when you have an Amazon package in front of your door every day, who doesn't like to get it that way. And if we have a discussion here before we got on the phone, Anthony asked me about someone, whether he was alive or dead and I couldn't quite get to it. But what do I do? I go to Google. I mean, that's where it is. I mean, they've got 92% of the search traffic. So when you have that dependence on one thing, that is, in my opinion, a utility, and if you're a utility, you should be regulated.

Anthony Scaramucci: (39:28)
So I want to follow up on that comment you made about Amazon, and we've had a couple of our tech speakers, Steve Case, Chamath Palihapitiya talk about how technology is improving the world, but it's also creating a deflationary supercycle, whereby goods and services are cheaper, but it's also cannibalizing jobs for low and middle income Americans. Could you talk about that a little bit? Do you agree with them and what do you think the long term impact is?

Alan Patricof: (39:52)
Absolutely. Absolutely. I mean, why do you think all these retail stores are going out of business? I mean, they can't compete. It's impossible, they can't compete with the pricing, and as Amazon proved, they didn't have to make money for a long time because shareholders kept beating them with money, and they fed them to the point where they were able to put a lot of other people out of business with their low prices. And prices are not quite as low as they used to be, and they've got their formulas of knowing how to price merchandise. Those are tough people to compete against, both for selling hands and selling merchandise, and for delivery.

Anthony Scaramucci: (40:36)
We have a few questions about what-

Alan Patricof: (40:38)
Like for Apple, it's a tollbooth for an app.

Anthony Scaramucci: (40:41)
Yep.

Alan Patricof: (40:42)
You want to go through the tollbooth, that's it.

Anthony Scaramucci: (40:45)
An increasing percentage of their profits are coming from their services sector and they're trying to keep people captive in that ecosystem.

Alan Patricof: (40:52)
Right, and of course Amazon was able to start AWS. I mean, just another nail in the coffin.

Anthony Scaramucci: (41:02)
So we have several questions from members of our Asian audience about whether you look at that market at all, silver e-shoppers, especially in the Asian markets are very strong. And are you seeing commerce solutions that are tailored to that market? And part of that question that I'm combining into one, is Japan has an older population, China has things like a mandated retirement ages, where very successful executives who are then going to have extra time and money on their hands. Are you looking at the Asian markets at all? Or is this more of a US based play?

Alan Patricof: (41:34)
We're the new guy on the block, we're trying to build a position for ourselves in the industry. I will say that one of the companies we looked at, which was early on, has been in the sensing area, which is a key area, remote sensing for conditions that exist in senior living facilities or at home. And this particular company was a US company, but was selling in Japan because the healthcare reimbursement for this type of activity was so much greater, because the demands were so much greater in Japan than here. We would be certainly open to any other country investment that fit our criteria, although we are both in New York, both in our homes on Zoom. We're more likely to have a portfolio that has a preponderance of US companies. But I definitely would not leave out the possibility of having a European investment or a Japanese investment. Even possibly a Chinese investment. But we would certainly only do that with a partner, we would not do that on our own.

Anthony Scaramucci: (42:49)
Alan, we're going to leave you with one last question. It is a political one if you don't mind. I know you've been very active in the Democratic party. What are your thoughts on a Biden presidency? Again, I don't want to make it overly political, but I'm just curious. Because of your wisdom and your life experience, a Biden president, is he good for the market? Is he good for venture capital?

Alan Patricof: (43:16)
You know Anthony, you and I have had a very nice relationship since we met at the Florida convention, I don't know, 20 years ago now, I can't even count the years. And I have been a strong Democratic supporter. I have got to believe that Joe Biden is going to be good for the economy. I've got to believe he's going to be good for the country. I believe, I can't avoid being political, I believe that things that have been done to our Democratic system in these last several years have been so devastating. We're at an accelerated pace, I am deathly concerned with the November to January period this year of what further damage can be done. I believe that Joe Biden is solid. I know him. I've known him for a long time.

Anthony Scaramucci: (44:21)
You think Joe Biden will win this?

Alan Patricof: (44:25)
You're not allowed to be overly confident, but I'm convinced that the country in general, based on everything I read and see, is getting to the position that I am, that we can't continue with a Trump presidency for another four years or we're going to decimate all the institutions we've got. Let me give you an example. When a new administration takes over, you have normally 4,000 positions to fill that are political positions, from cabinet level down to Schedule C employees. People don't realize that. I don't know the facts, but my sense is that no more than half or two thirds of those positions had ever been filled.

Anthony Scaramucci: (45:18)
It's about two thirds, yep.

Alan Patricof: (45:20)
By the Trump... [inaudible 00:45:22] is not wrong. And of those two third, how many of them have been changed multiple times due to resignations or firings? A new administration coming in has an enormous challenge to, in effect, fill those positions, and fill them with adequate people and for those who haven't been in government before, to get trained with a [inaudible 00:45:49] who really perhaps is in a position to train other people. It's going to be an amazing challenge, but I want to finish this political thing with one thing.

Alan Patricof: (46:01)
The market doesn't like surprises. I have been shocked by the market we've had in the last three or four years under Donald Trump, because it has been a good market, good stock market, in the face of daily surprises, and that confounds me. Because investors like to plan, they like to be able to project, they want consistency. I believe in a Biden presidency, we're not going to have an irascible person who you just don't know what's going to happen when you open up the papers or listen to the [inaudible 00:46:43] overnight, and I think that stability of he and the kind of people he'll have around him. I know the big concern on Wall Street is tax rates. I read the op-ed this past week about the specific, concern about the income rate going up to the levels that they're talking about. I believe that's why we have a Congress, I think everything will be moderated, I think the people who have made extraordinary amounts of money recognize that they probably have got tax benefits that were excessive in view of the world where it's at today, and income inequality and all the other issues in the world.

Alan Patricof: (47:33)
Most people I know who have been successful financially have a sense of responsibility, are not totally selfish and believe there's got to be fairness in the system. If fairness also brings a more equanimity to the populace, if we have people who feel that things are fair, there's an equal playing field, I think that will permeate itself down to every level. And I think there will be more concern for care giving. One of the things about Joe's program is his Cares Act, which he wants people having to care for their elderly parents, having to care for their children, all the issues that are really front and center, and I don't mean to bring it back to Primetime, but certainly going to, I'd hope, benefit Primetime in a way. It has nothing to do with it, but I think it [inaudible 00:48:35] well for people being concerned about their parents. I mean you're concerned about your parents today, everybody on this line is. The ones who are older are concerned about themselves.

Anthony Scaramucci: (48:47)
Amen. Listen, we got to look after each other. Alan you had an amazing career, you're a great friend, you're a great American, we didn't get a chance to go into all of your charitable giving, which has also been amazing, and it's a great honor for me to have you in my life and thank you for sharing your time. You have to accept my invitation to come back, because I understand that you have written a book which is about, somewhat of a memoir, but also somewhat of an emotion about what you see in the country and our lives today, and so you have to promise me you'll come back so we can talk about that book when it's done.

Alan Patricof: (49:25)
As soon as the publisher agrees to publishes it.

Anthony Scaramucci: (49:27)
Agreed. All right. Well, amen. Okay, well that's a deal, and stay safe and healthy, and I look forward to watching your third [inaudible 00:49:36] success unfold.

Alan Patricof: (49:37)
And meeting up in person at your favorite club.

Anthony Scaramucci: (49:40)
Yeah, amen. Exactly. Got to get back into the city you and me.

Benjamin Huneke: Mutual Funds, ETFs & Hedge Funds | SALT Talks #34

“The power of diversification is real… things are going to outperform in various market cycles.”

Ben Huneke is a Managing Director and Head of the Investments Solutions Group of Morgan Stanley Wealth Management. His responsibilities include product development, marketing and distribution of investment products. These include annuities and insurance, mutual funds, ETFs, hedge funds, private debt, equity and real estate funds, as well as individual equities, fixed income, and structured products.

The significant growth of JP Morgan’s wealth management business offers customers access to a wide range of investment solutions. It’s important for financial advisors to understand and leverage the full suite of tools available as part of the product platform within today’s markets.

“I just believe the more tools you can bring to that problem, the better solution you're going to get.”

Clients are advised on both the short and medium-term consequences in the market, but also the broader societal issues, like social justice and wealth inequality, and how they will play out in the long-term. A quick recovery out of this pandemic-caused recession is expected, but it is yet to be seen how the economy reacts to issues addressed in the form of taxes or reduced benefits (Medicare, Social Security etc.), so investment must account for those potential eventualities.

LISTEN AND SUBSCRIBE

SPEAKER

Benjamin Huneke.jpeg

Ben Huneke

Managing Director & Head, Investments Solutions Group

Morgan Stanley Wealth Management

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 public policy. 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, The Salt Conference to provide our audience a window into the minds of subject matter experts who are leading investors, creators, and thinkers, and also to provide a platform for what we think are big world changing ideas and also great investment opportunities. And we're very excited today to welcome Ben Heineken to Salt Talks.

John Darsie: (00:42)
Ben is a Managing Director at Morgan Stanley Wealth Management and the Head of the Investment Solutions Group. His responsibilities include product development, marketing, and distribution of investment products, including annuities, insurance, mutual funds, ETFs, hedge funds, private debt, equity, and real estate funds as well as individual equities, fixed income and structured products.

John Darsie: (01:05)
During his career at Morgan Stanley, Ben has held several previous alternative investments as the chief operating officer of investment products and services and the head of strategy and business management. He sits on the Morgan Stanley securities operating committee, as well as the firm's management committee. And he also sits on the board of several charitable organizations, including Invest in Others and the Expect Miracles Foundation.

John Darsie: (01:29)
Ben holds an AB from Princeton University and an MBA from Columbia University. And hosting today's interview will be Anthony Scaramucci, who's the Founder and Managing Partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of Salt. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (01:46)
Hey Ben, it's a great honor to have you on. And you got a very impressive resume, not quite as impressive as John Darsie's ancestor, George Washington, but I think it is very impressive. So tell us something though about how you gravitated into the investment world though, Ben. With your resume and your acumen, you could have done anything, why did you come into our business?

Benjamin Huneke: (02:14)
Well, thank you [inaudible 00:02:15] and for having me. I'm excited about this virtual Salt Talk. I've been at Morgan Stanley for 14 years. I was a consultant at McKinsey before that for five years, I try not to reveal that too often. But I was a consultant Mackenzie. I have an MBA [inaudible 00:02:35] Columbia investment banking analysts for a firm called DLJ which is long gone at this point.

Benjamin Huneke: (02:41)
But in my time at McKinsey I did spend a lot of time in the financial services practice. I spent a lot of time in the asset management and brokerage wealth management space. And so just keep getting really intrigued by the industry, really like the proximity it has to the market and a lot of the interests there, but also the personal component of helping people and individuals take care of their financial goals. I love the fact that you get to be near the markets every day and that's an exciting thing to learn about every morning.

Benjamin Huneke: (03:16)
But then also you have this mission driven part of it, which is to help people deliver, help our advisors deliver for our clients in terms of delivering on their financial goals. So it's got a good balance for me in terms of both interest and mission.

Anthony Scaramucci: (03:32)
Go back a deal Jay for a second. What year did you start at DLJ? Some of us are old enough to remember DLJ Ben.

Benjamin Huneke: (03:38)
Yeah. I started in '96 and finished there in '99. So I was there three years in the investment banking group, in the high end group.

Anthony Scaramucci: (03:51)
How'd you make the transition from investment banking, high yield into where you are now on the asset management side?

Benjamin Huneke: (03:59)
It's actually at the time DLJ had a merchant bank or what you call private equity at this point, and it was actually attached to the investment bank. So I don't think he could ever get away with that now, but back then the merchant bank was actually part of the investment bank. And one of the last assignments I worked on at DLJ was for a company that DLJ actually bought.

Benjamin Huneke: (04:18)
And then the company was in trouble and we spent a lot of time down in Texas working with this management team trying to help save this company. And I really actually enjoyed that part of my investment bank and for the most, which was really less about financing companies and more about running companies. So when I got out of business school, I went to McKinsey to help see how different management teams manage businesses and just give you my background in financial services. And some of the stuff I did, I ended up working in wealth and asset management, and I would usually have steady now I'm assuming 14 years helping to run the wealth management division.

Anthony Scaramucci: (04:57)
Ben, in the 14 years, you've seen explosive growth, right? Morgan Stanley now 15,000 plus financial advisors, $2.7 trillion in financial assets. And you are obviously at the intersection of Smith Barney merging with Morgan Stanley. What are the keys to Morgan Stanley success in that space? Arguably, the best, or if not the best among the top two or three in wealth management?

Benjamin Huneke: (05:28)
Yeah. Look, I mean, [inaudible 00:05:29] you one big component of his commitment of senior management to the business. Obviously our CEO, James Foreman comes from wealth management business and knows and likes the business a lot. Obviously Morgan Stanley had its challenges through the financial crisis, but one of the best, if not the best thing that happened certainly to Morgan Stanley coming out of that was the ability to structure a joint venture with Citibank and eventually merged with Smith Barney.

Benjamin Huneke: (05:57)
And what that gave us, I mean, effectively more than double the size of the wealth management business, it takes when you add wealth and asset management together for Morgan Stanley, it's basically almost half the business, both on a revenue and profit basis. So the business is critical to this success of Morgan Stanley and it gives us a scale. On some level, these are big, complicated businesses that require lots and lots of investment. And the ability to invest across a bigger platform just allows us to build better technology, deliver better products. And scale is just so critical in terms of being able to do that efficiently and the scale that we've gotten through the Smith Barney merger, certainly in the advisor, led channel has done, got us to that scale. Then now we've made a couple of subsequent acquisitions, which maybe we'll talk about that have gotten us to scale in some other parts of the wealth management business, which we're super excited about.

Anthony Scaramucci: (06:57)
When you sit at the head of product platform at Morgan Stanley and you've got the pick of the litter. You can go in any direction that you want to go, as it relates to hedge funds and private equity alternatives and the whole bees wax, what do you tell your FAs about your world, the world that you're sitting in? Why should their clients have exposure to Ben Huneke's world?

Benjamin Huneke: (07:24)
Well, look, I think one of the things I probably endlessly... FAs are sick of hearing me talk about it, but I think I just believe that if you have a client problem, the more tools that you can bring to help solve that problem better. Too many of our advisors use narrow portions of our product platform, and aren't familiar with, or have a background in using the full breadth of the product suite.

Benjamin Huneke: (07:49)
So my mantra with my management team is like, we need to partner to help our advisors understand how to use, bring these tools to bear whether you're talking about a structured product, or a hedge fund, or private equity fund, the exchange fund, insurance, our clients have a myriad of different financial issues that need to get resolved. And I just believe the more tools you can bring to that problem, the better solution you're going to get. And yeah, it's critical, especially with where the market is today. You really have to be flexible and look broadly and invest in options because the public equity and public credit market, it's challenging right now.

Anthony Scaramucci: (08:32)
All right. So let me push back because Ben, as you know I deal with FAs every single day, and I know that you're wondering why my hair is not gray as a result of that experience. And that's a whole other topic for the E Channel, but we're going to focus on this. It's only pushed back. Let me be the typical FA, if you don't mind. Well, why do I need you? I mean, I can just buy those five grade technology stacks and I can own them in an ETF. And so give me the rationale to do anything other than that, Ben.

Benjamin Huneke: (09:05)
Well, look, I think one... I mean, if you listen to our global investment committee, I think they would say, especially now owning those five technology stocks is probably the exact wrong thing to be doing given just how concentrated the equity markets have become in those big technology names. So I think one, there's a lot of risk embedded in that investment strategy. And I think most of our clients need a mixture of fixed income and equity income. They need capital appreciation. They need some level of protection from an insurance perspective.

Benjamin Huneke: (09:41)
We're trying to solve to make sure that our clients have the best chance of delivering on what they need this money to do. And it's really hard to just put all the chips on the table and buy the technology ETF and hope everything goes up, [inaudible 00:09:53] it goes up, it might happen, but it's not just a sound investment strategy for retail clients to take that risk for their financial future. And the power of diversification is real. So things are going to outperform in various market cycles. I know it's hard to say that because these stocks that you mentioned have been so incredible in terms of performance over time, but you got to prepare for all different circumstances and having all your chips in one basket, I think is a poor investment strategy in the longterm.

Anthony Scaramucci: (10:26)
Well, I mean listen to four or five of those stacks are representing 25% of the market capitalization of the SMP. And so having done this for 32 years, that always ends in tears. It's not a question if it's going to end in tears, it's really when-

Benjamin Huneke: (10:42)
You always get nervous, which this time is different, right? Like the dotcom bubble, and it was those of us who weren't investing in those companies and we didn't get it somehow what was going on. And I think these are better, bigger, different companies than were in the.com bubble to a certain extent, but the same is true. I was getting nervous when people say this time is different.

Anthony Scaramucci: (11:01)
Yeah. Well, there's some of those names, 160 times earnings. So you could even just get slight multiple compression split, have good fundamentals and see a lot of evaporation of value.

Benjamin Huneke: (11:13)
One thing that you focused on with those companies because those issues are so broadly held and the appreciation is so significant in a lot of those positions. I mean, one of the big focuses we have is around how to hedge those positions because you have huge tax little gains, now that those companies have brought up so much. So helping our clients diverse lives, not necessarily by just selling, but also figuring out ways to estimate those.

Anthony Scaramucci: (11:37)
Well, listen, but the flip side is some of those companies are legendary heirloom like companies, as well as I'm not really necessarily just picking all the companies. I'm just pointing out that we need broader asset diversification. You clearly are at the forefront of doing that. Let's go around the horn for a second, equities have rallied back the NASDAQ's up 20%. What areas of the world do you like on an absolute, fundamental and relative value basis to what you see in the landscape right now?

Benjamin Huneke: (12:12)
Look, I mean, I'm not a markets person per se, but I mean, I do believe our global investment committees out with a pro stance towards active management. I think they are, you mentioned some of these stocks that have become as the market has run off, the market has become narrower and narrower in terms of where that appreciation exists. And I think that has made everybody increasingly nervous. That said, people tend to turn on CNBC and look at the SMP and think that's the whole market. There are pockets of the market that are not trading very well at all. And I think our view would be that active management and being able to pick those parts of the market that are potentially undervalued. This is a period in the market where that should be valued and it should pay off over the short to medium term versus just buying the index at this point.

Anthony Scaramucci: (13:05)
So let's talk about the global investment committee for a second. So what is their view of hedge funds right now? What hedge fund sectors do they like or dislike and obviously hedge funds, I mean, let's just face it, they've lost the argument over a decade between active and passive management. And so are they about to win that argument or is that our even permanently lost? What are your people on your global investment management committee said?

Benjamin Huneke: (13:33)
Well, I mean, we try to talk about... We believe that there's always a place in a portfolio for both active and passive. One side is not going to win versus the other in any fundamental way. I think what you've seen over the past 10 years, 20 years is just the introduction of this algorithmic computer based training, which is what an ETF is effectively. It's a computer buying based on a market cap weighted, or some other algorithm and the efficiency that that can bring to investing and how cheap it can be, I think that is something that's here to stay and it's going to be an important part of our client's portfolios.

Benjamin Huneke: (14:09)
However, I look at it as again, with the benefit of diversification, there are parts of the market that are less efficient whether that's geography, maybe outside the US or whether style box as you get down in the style boxes to small cap means, maybe there's less efficiency and more willingness to go active. I think there's not just market segments, but time in the market when it pays to go active.

Benjamin Huneke: (14:37)
I think our perspective is this, is one of those times where owning the index, given the concentration you talked about, it's you're owning the SMP just long. A, you're very concentrated. B, it's volatile. So a lot of our clients, it's not to have a new team for all equity portfolio. So hedge funds can do a great job of delivering absolute returns. They can do a great job of weathering certain market cycles. So I think both timing in the market, which we think is now a good time to be looking at active and also parts of the market.

Benjamin Huneke: (15:07)
So if you're outside the US, if you're in small taps, maybe better to be more active than passive. And certainly we haven't talked about fixed income, but I mean, it's certainly in the fixed income markets, I think active continues to win share over passive.

Anthony Scaramucci: (15:24)
Ben, you're doing this a long time, you've seen a number of different ups and downs in the markets. I thought that 2008 crisis was bad. I think it's a dress rehearsal for 2020 in terms of what's going on vis-a-vis the overall markets. What is your opinion of the current crisis? How is it differ from 2008, other crises that you've experienced in your career? And what do you think the aftermath is of the crisis?

Benjamin Huneke: (15:51)
I mean, look, I was working in New York city during 9/11 which I thought would be unprecedented. I certainly, I was working at Morgan Stanley during the global financial crisis, which clearly the epicenter of that crisis was right there in times square with leaving brothers[inaudible 00:16:08] right across the street from Morgan Stanley. I thought those two periods of my career would be the most unprecedented. And clearly this has superseded that by factor one, just the fact that it's global, and two it's because it's hitting every aspect of the economy at the same time globally. So look, I think the thing I would say is the severity of it upfront. So how quickly the world drove off into a ditch and how quickly unemployment went up and how quickly the world economic picture changed is unprecedented.

Benjamin Huneke: (16:41)
Certainly the global financial crisis was quick, but not like this. And then the other thing I'd say on the back end is the reaction of the government globally and how quickly the government stepped in and the scale with which they stepped in is completely unprecedented. When they did $800 billion of tarp in the global financial crisis, everyone thought that was just an extraordinary, we are most multiples of that already. And we're only five months into this.

Benjamin Huneke: (17:12)
So in Europe, jogging didn't say whatever it takes until 2012, so that was three years after the crisis had broke. So I think the severity of it to the downside, but then the extraordinary fiscal stimulus that's come into, and market support that's coming in from the governments globally, I think is why you probably see the markets trading where their trading, right.

Anthony Scaramucci: (17:38)
Yeah. And certainly Mike Wilson from Morgan Stanley, I think he's been spot on in terms of his dissertations on the market.

Benjamin Huneke: (17:49)
Don't tell him that.

Anthony Scaramucci: (17:50)
Don't tell him that. Okay. I won't tell him. We'll probably have to get him on here. I don't know if maybe we won't be able to fit his head in the Zoom screen, because I follow him pretty closely. I think he's-

Benjamin Huneke: (17:59)
No, he's been very [awful 00:18:03] at this, through this whole crisis. It's been great to have him and just call at least shallot out, talking to our clients about their views [inaudible 00:18:11].

Anthony Scaramucci: (18:11)
Well, and Lisa as well. No, I think the team has really been spot on in terms of identifying what is going on and why it's going on. But let me ask you an editorial question. You're watching this level of stimulus, this level of deficit spending. I'm sure clients call you or FX call you and say, okay, should I be worried? And am I worried about the right things? Should I be worried about the deficit? Should I be worried about the aftermath of the crisis and what seems to be a further divide in terms of the wealth gap in the United States?

Benjamin Huneke: (18:47)
Well, look, I think that's, I mean-

Anthony Scaramucci: (18:48)
the clients.

Benjamin Huneke: (18:51)
... Look, I think a couple of things. One we've been constructive on the markets this year because of the size, the physical stimulus and the reactions. That's a short to medium term call. I think there is concern obviously about how this unwinds. Clearly the United States as a society and you've seen this with the black lives matter movement, and the strength that that's taken on in the middle of this crisis, clearly are reaction to lots of the elements of social justice in our society, one being wealth disparity. So I think the United States has some real issues to address around that topic that we need to address. So what form does that take as we try to address that taxes benefits. So for our clients, over the short term it's instructive because we think we are going to work our way out of this recession in fairly quick order.

Benjamin Huneke: (19:54)
I don't know whether it's a V or a U or a shape of the letter, but I mean, by the fourth quarter of next year, we envision us being back to where we were for this whole thing started, but that doesn't fix the overarching longer term structural issues. You've mentioned wealth inequality, but also just deficit spending. And how does that eventually come back through? maybe we forgotten, we talk a lot about inflation, but inflation has not been an issue in a long time and the painful repercussions of that. So I think whether it's inflation or whether it's higher taxes, or reduced benefits to Medicare, social security, I mean longer term, we're talking to our clients about preparing for those eventualities. And as we try to work our way over the longer term out of what has been an extraordinary amount of spending that you've done in this country to help us get out of this mess we're in.

Anthony Scaramucci: (20:46)
Yeah, essentially we had a debt selling author. She's a university professor at Stony Brook University, Ben. Her name is Stephanie Kelton. She came on Salt Talks about a month and a half ago to talk about her new book called the Deficit Myth. And she's basically saying, she thinks that you can continue to create this deficit activity because there's a big hole in our economic output. And so it's not going to cause the inflation that people are fearful of and it's not going to be a tremendous drag on longterm investment spending. If she was here right now, what would you say to her?

Benjamin Huneke: (21:24)
Absolutely not. I mean, I'm not a marketing person, I'm certainly not an economist. So look, I mean, you read about modern monetary theory. I think there's a lot of debate about how [inaudible 00:21:34] wants. I mean, I don't think any economists don't understand when you pump this much money into the economy, why is there no inflation? All the equations that they've learned over the years around inflation have become untrue in the current environment. So I think there's a lot of uncertainty about this level of indebtedness globally and how that affects, and how that unwinds over time. But it has to at some point, but I think even economists who are highly more qualified than I am, don't really understand why the economy is reacting the way it is.

Anthony Scaramucci: (22:11)
No, listen, it's an interesting phenomenon that's taking place, is that we're trying to get our arms around it as well. I mean, we watched gold rise in value 2009 into 2000 late, 2011, then it collapsed. We're watching it rise again. Now it may or may not lead to or auger for inflation. We'll have to see, but go ahead, John. I know you have a couple of questions from our audience. Why don't you jump in here and start firing some questions at Ben?

John Darsie: (22:39)
Yeah. As the head of the investment solutions group and you're in charge of overseeing a lot of the products that are on the platform, how during a crisis like this, when things are moving very quickly, you have a meteor strike that no one saw coming? How do you balance long term risk management decisions on behalf of your advisors and your clients, and also the desire to be opportunistic and to try to buy things that might be on sale? How do you balance those two factors when you're looking at products during a crisis like this?

Benjamin Huneke: (23:09)
I mean, look, I think it's a great question. I mean, to me it is the reason why we believe in human advice and the importance of an advisor is that each client's situation is different in terms of addressing a situation like this. So even if the risk tolerance is the same, even if the net worth is the same, the way a client thinks about risk, where they are in their life, what's coming up in terms of expenditure, you have to react differently for each client. So what we try to do is provide opportunities for advisors [inaudible 00:23:42] protection and conservatism as well as opportunistic opportunity.

Benjamin Huneke: (23:48)
So it's all designed to help clients take advantage of this dislocation. That's not going to be suitable for all of our clients, but we definitely wanted to have the ability for advisors who did have clients who could step in to do that. And we saw that in alternatives and some of these private equities, special situation, distressed funds that we've launched. We also saw in the fixed income markets, like when the muni market really dislocated in March and all of the mutual funds were redeeming uni bonds, our RFAs were able to step in and buy some of those bonds that really attracted valuation. Mutual fund managers had outflows they had to meet, the market was very dislocated, retail was able to step in and get some really good bargains in that dislocation.

Benjamin Huneke: (24:36)
So I think it's hard to make a generic comment because it's so specialized to an individual client, but we certainly had a lot of advisors who were I think more open to stepping into this dislocation than they were maybe in 2008. And also, I think they learned a lesson in 2008 that they had been pressing enough to buy into the market in March, 2009 they would have looked pretty good. And so I think we had more appetite earlier on in this crisis than we did in '08.

John Darsie: (25:10)
Are there any specific areas of the market, you mentioned a few special purpose vehicle type of things that Morgan Stanley has done. Are there any particular areas of the market that your advisors have gravitated to and as an organization, you guys have spotted, what you think is tremendous opportunity as a result of dislocations coming from the pandemic?

Benjamin Huneke: (25:27)
Well, I think the credit market. I mean, honestly, the credit markets, I think look, the current rate environment is so challenging for our client base. We have on average, older client base, the capital base that they're managing, a lot of advisors need that capital base to generate income. We've had now 13, 12 years of low rates and now going even lower, it's been really challenging for savers to generate the income that they need off of their assets. So one big theme that has been true and it's continued to be true and probably even more true is the idea of being creative in ways to generate income. All that could be in real assets, infrastructure, private credit, structured products, like 80% of the structured products we sell today, have an income component attached to them.

Benjamin Huneke: (26:18)
So if there's one thing I would say is income. And the second thing that I think has become even more increasingly important is taxes. I mean, people have become much more aware of after tax return versus freebies attached. So being tax efficient in the way in which you invest is critical. And I think we talked about how this unwinds itself, I mean, I think everybody would expect higher taxes in this country. And so that's going to become even more critical in how efficient you are in owning assets from a tax perspective.

John Darsie: (26:52)
You talked about the need to replicate the yield that investors, especially older investors and Morgan Stanley, having a client base that's aging needs to replicate the yield that you would traditionally get from traditional fixed income. Are there areas that Morgan Stanley has emphasized in terms of trying to replicate that yield and more creative way?

Benjamin Huneke: (27:12)
Yeah, I think, look, one, I mean I mentioned structure, that's certainly become an income source for a lot of advisors and I think the other one is alternatives. You definitely have a big focus on income oriented real estate and other real assets. And I think in the fixed income markets, you can make money by taking credit risk. You can make money by taking duration risk, or you can give up some liquidity. I think it's tough to take on duration risk now with how flat the curve is. The credit situation, especially now that we're in the midst of this dislocation, I'm not sure that our client base is really well prepared to make calls on individual credits at this point. I mean, it's very murky, what's going to happen to some of these companies as we work our way through this unprecedented economic turmoil.

Benjamin Huneke: (28:05)
And so liquidity is one where you can give up some liquidity, you can hand the money to a professional manager who potentially has more insight into what's happening in the credits spectrum. So we've had a lot of interest in income oriented alternatives. And then you have to look, there's also just the annuity products. The math would say that including annuities in retirement portfolio for many of our clients, not all of our clients, but for some of ours clients deferred income annuity as a pretty vanilla way to provide some level of guaranteed income in retirement. And so that's another place people are looking to drive income away from just buying individual bonds.

John Darsie: (28:51)
So you're a strategy guy at heart. Having spent a lot of time at McKinsey, earlier this year, Morgan Stanley announced the acquisition of E-Trade to further bolster its industry, leading wealth management offerings. From what I understand from public filings that acquisition is moving forward with some regulatory approvals and E-Trade shareholders recently approved the acquisition. Why is that addition so exciting for the firm? Why did Morgan Stanley go out and make that acquisition? And where do you see the industry heading in five to 10 years in the context of why you made that acquisition?

Benjamin Huneke: (29:24)
So a couple of things. And then we talk, Anthony and I talked at the beginning about the party and how important it was for us to be able to get to scale in the adviser led channel. And so we were able to do that through the spiff Bonnie joint venture. I think when we talk about the next leg of our growth strategy, we bought a company last year called Solium, which was a stock plan administration company. We had had an existing stock plan administration business as part of the JV. So combining those two, and then acquiring E-Trade.

Benjamin Huneke: (30:01)
E-Trade [inaudible 00:30:01] was very we're very excited about E-Trade. They made a couple of things that are really exciting to us. One is they have a direct to consumer brand. So Morgan Stanley does not have a direct to consumer brand. I mean people know who Morgan Stanley is, but we do not advertise directly to consumers. We have always gone through advisors and their relationships to build our business in wealth management. So this gives us a separate brand, that's well-established brand in the direct to consumer space.

Benjamin Huneke: (30:28)
It also gives us a stock plan administration business that we can add to our existing Stock plan business. And so as we think about an avenue for growth, for us going to the workplace through the stock plan business, leveraging corporate relationships that we have both at the Morgan Stanley level, through our investment bank and corporations that we have relationships with on the private client side, there are huge opportunities for us to deliver wealth management services to the workplace and stock. The Stock plan administration is a way to get into that business.

Benjamin Huneke: (31:06)
But then once we have that participant as part of our stock plan business, we can offer a pretty broad range of financial services to that individual in financial wellness. And we can handle clients of any spectrum so they can choose what they want from us when they need that stock plan. They can say, you know what, I just like to trade my own equities and options. You will have a direct to consumer E-Trade account that will be best in breed in app. We have a global advisor that has all the insight from Morgan Stanley built into it, so if you say, I don't need an advisor, but I don't want to trade myself. I want a package packaged investment solution [inaudible 00:31:46].

Benjamin Huneke: (31:45)
We have a virtual advisor group that can service a client remotely through a phone based salary plus bonus advisor team. And then we have our 15,000 advisors. So from the most sophisticated wealthiest clients coming out of those stock plans to the ones who want to be the most self directed, we can offer a full spectrum of options. And so that will [inaudible 00:32:10] acquisition for us as money comes out of both the stock plan and 401k businesses in the workplace.

Benjamin Huneke: (32:16)
And as we thought about this strategy going direct to consumer, obviously you mentioned a Wealthfront betterment, some of the global advisors that are more new to the business. We looked at that landscape and thought it was going to be very difficult for us to compete with Vanguard, Fidelity, Schwab, E-Trade, Ameritrade. These are big, well established brands in the marketplace. They spend hundreds of millions of dollars marketing. They have 401k businesses in the case of Schwab and Fidelity. They have stock plan businesses. And so they have an inborn ear of clients. So it was really hard to think about how to get direct to consumer in a startup fashion for us, Morgan Stanley, so buying E-Trade, checks a lot of boxes for us in terms of filling out the spectrum of wealth services that we're able to offer as well as by giving us a view into the direct to consumer businesses, which we really haven't had before.

Benjamin Huneke: (33:20)
And a lot of our clients, they have accounts at one of the direct to consumer brokerages. So they have a Corpus of their money with their advisor, but they trade their own stocks with a Schwab or an E-Trade or an Ameritrade. So this is a chance for us to say, bring those accounts to unpack at Morgan Stanley company. We can aggregate them together. We can do a financial plan on the whole asset base et cetera. So lots of benefits in consolidating assets.

John Darsie: (33:49)
Yeah. You largely answered my follow up question and that's a great answer on the E-Trade acquisition and more in depth than I've been able to read in the public channels and it makes a whole lot of sense. In terms of technology you touched on it briefly, but obviously you've had insurgents from those lobo-advisors, like you mentioned. In terms of technology, where do you see the industry going? Do you see those robo-advisors taking a larger slice of the market share, or you think we just all arrive at the same place where it's robo-advisor like technology assisted by human advisors, the way that Morgan Stanley has scaled it in a variety of different solutions?

Benjamin Huneke: (34:27)
I mean, look, I think it's very client specific. I think there are a group of clients who want to trade stock themselves and don't want to pay for advice and we want to be able to serve those clients. There are clients that want advice in a robo fashion and don't want to deal with an advisor, and we want to have a solution there. And then there are a whole lot of special clients around what type of advice they want. My belief is, and I think you'll see this in the development on a lot of these platforms is that we think the winning combination is human advice and market insight that Morgan Stanley has with technology.

Benjamin Huneke: (35:06)
So technology enable our advisors deal with our clients every day in the solutions they are able to deliver. And it's very hard to imagine a computer or an algorithm or a five questionnaire, risk profile, being able to deliver the same type of results that our advisors are able to, or maybe if they just feel like it's not worth it to deal with an advisor, but we believe that there's tremendous value in having human advice and make huge investments in the technology to help our advisors.

Anthony Scaramucci: (35:40)
Well, we agree with you Ben on that. And I think it begs the question that I often get asked. I'd love to hear you respond to a question that's often asked of me, of FAs and potential clients and prospects of Morgan Stanley. How do I prepare myself and my family for the end of my business career? Meaning I've just sold my business. I'm coming into this liquid set of assets. I'm going to turn it over to Morgan Stanley. And how do I know you guys are going to make it bulletproof for me? Because frankly, as an entrepreneur, I'm giving up all of that control that I had in my business. And I'm now handing it over to you guys. What comfort do you give these guys? How do you set that framework for your potential prospects?

Benjamin Huneke: (36:31)
Look, it's hard. I mean, often it's hard because for those entrepreneurs in particular you mentioned, a lot of the source of their wealth to the extent they've been successful has come through concentration and ownership. So they had a lot of their network tied up in a company that was then sold and often extolling the virtues of a diversified portfolio cuts against everything that they've done in their career today, because it's exactly the lack of diversification and their success in that that has created the wealth to begin with. So I think there's an education of when you move to that next phase, it's more about staying wealthy than about getting wealthy again. And so that's sometimes a difficult discussion.

Benjamin Huneke: (37:18)
And I think the other thing that often is, far more when I go to meet with bug clients and prospects, I come often as the product guy, which I've been talking about, like all the products that are on our platform and some interesting private equity funds that we've been doing, et cetera. And oftentimes you'll see the client's eyes glaze over when you start discussing those products because they don't realize, a lot of folks don't really care that much. Where I see clients really get engaged is when I'm coming in at the tail end or the person coming in after me starts to talk about more the goals and aspirations for what you want this money to do. And I think that's where our best advisors are spending the most time with their clients in terms of helping them deal with multi-generational wealth.

Benjamin Huneke: (38:05)
Most parents, one of their biggest fears is if they've been very successful, is it somehow that success is going to mess up their children? And how do you handle passing wealth on a responsible way? How do you feel about charity? How do you feel about your children and how to pass that wealth on? So I find it interesting that a lot of clients... We in the industry think that clients are just really interested in what we've been showing to them over the years, which is your mid cap, US growth manager beat its benchmark by 80 basis points.

Benjamin Huneke: (38:36)
I actually have that different experience, which is a lot of clients that I've interacted with are much more interested in the personal side. They're much more idiosyncratic side of their wealth and how their family is handling it. And that's why our best advisors are so successful, is they have been able to be successful and use the platform from an investment perspective, but really to engage with clients on what's most important of it. And that's often not the investment side of the equation.

Anthony Scaramucci: (39:07)
Well, listen, you're making a great case for that holistic approach that Morgan Stanley provides. And I will say this I've been on calls with Morgan Stanley FAs, that even though I'm representing SkyBridge we're coming at the call from a very holistic approach, which I think the prospects do appreciate. Before we let you go Ben, one other question often comes up, I'm just curious how you would react to this. Well, the media or strike that has hit planet earth in March. I hear it all the time, it's a 10,000 year flood, but the problem on wall street is at the 10,000 year flood seems to happen every five years, Ben, and you know that. And so, what do you say to clients?

Anthony Scaramucci: (40:01)
What is the... Okay. Yeah, it's 100 year pandemic, the much performance certainly in certain funds, our fund, other funds, was a rough turn, but how do you condition clients for the long pool? How do you condition clients to recognize that the markets and asset prices from a fundamental perspective, they lurch upward despite the creakiness and psychological uncertainties and vagaries in the world. What is your message there?

Benjamin Huneke: (40:33)
Yeah, look, I mean, I think this one's an interesting one. It's almost like we spend the time after a crisis solving the last crisis, but not solving the next one. And so I think obviously the financial system itself, the GCP banks and the large banks in this country, whether the storm on COVID pretty [inaudible 00:40:57], and I think that's a testament to the fact that we've been working with regulators for the last 11 years trying to ulster the global financial adequacy and all of that. I think it worked quite well versus in the GFC where it clearly did not.

Benjamin Huneke: (41:19)
So I think we should give ourselves some credit as a society for addressing some of the issues that existed before, but clearly this one raised a whole another set of issues. I think a couple of things, one is the market disfunction what's tough. Certain parts of the credit markets really did not function very well during this crisis. And I think there will be a lot of scrutiny put on how these markets function and what we can do that help bolster them and make them more resilient. I think it is not good when the government has to step in and buy IO bonds, step in to save ultra short duration funds. That's not a great factor. And so there will be on the back of this. I made some posts for them around, how do we think about in particular the credit markets and how they function during the crisis?

Benjamin Huneke: (42:10)
But from a client perspective, we try very hard. It's difficult, obviously when you're watching CNN and you're watching the tone board on the right with all the people getting sick and dying from this horrible disease. I think we're trying very hard to get our clients to look past temporary interruptions in the market and become overly fixated on whether the SMP is red or green in a given day, and really talk to them about how they're doing longer term. And then to try to make sense it's feasible, is to try to convince people that this is exactly the time when you need this. You need to definitely stick to your guns from an asset allocation perspective.

Benjamin Huneke: (42:57)
The worst thing, and everybody is there's so many stats about this, the worst thing that happens is people sell and don't get back in and miss in the marketing. But at the very least stay invested and stay competent in the plan that we developed, that this is a temporary hiccup in a much longer term picture. And if you zoom out far enough, the market tide goes onto the bright pretty uninterruptedly. But also, maybe there's a chance to take advantage of this, and maybe we can upgrade some of our new portfolios. Some of these really good companies have been really garnished here over the short term, but maybe we this is a good entry point.

Benjamin Huneke: (43:37)
I think our best advisors were looking for opportunities early. And also very much cautioning clients. The worst thing you can do is go to cash right now. And that is something that I think, historically has been a slaw of retail, which is the market goes down and retail sells. And I think that's something really, really [inaudible 00:43:59].

Anthony Scaramucci: (43:58)
I think is great messaging. I think we should end it there because I think your message is the perfect one. You have to stay invested, not get kicked out by short term interference. And the people that are able to do that, and I'll just go back to Amazon before we finish. I mean, since its inception, its IPO in 1997, that stock has gone down 50%, six times Ben. If you got juked out of that stock at any one of those moments in your fear base, as your fear is taking over, you missed arguably one of the best stocks that have ever been created or better companies in USA.

Benjamin Huneke: (44:39)
They're amazing stats. If you missed the best a hundred days in the market in any given year, the value of staying invested and sticking to an asset allocation is difficult. So that's the overarching mantra we have with our clients.

Anthony Scaramucci: (44:52)
We'd love to get you back as we get to the end of the year. Certainly after November, the third Ben, there will be a new president or a new administration. It's one or the other, and we'd love to get Morgan Stanley and your take on what 2021 looks like post-election. So hopefully you'll come back on-

Benjamin Huneke: (45:11)
It seems far away, it just plain with everything going on, but I would love to come back. Thank you for having me.

Anthony Scaramucci: (45:16)
It does seem far away. There's no question about that, but it's only 90 days. And just remember, 90 days ago, it takes you back to May 8th. I mean, my God just think about how quick that flew by.

Benjamin Huneke: (45:31)
All right.

Anthony Scaramucci: (45:31)
Well, Ben, thank you.

Benjamin Huneke: (45:32)
[inaudible 00:45:32].

Anthony Scaramucci: (45:33)
Thanks for coming on. It's great to see you and we'll get you back on Salt Talks before too long.

Douglas Monticciolo: Financing a Post-Coronavirus ‘Reboot’ of the Economy | SALT Talks #33

“With an abundance of capital, you need to differentiate yourself by more than just money and a few relationships. “

Douglas Monticciolo is the Chief Executive Officer, Chief Investment Officer & Co-Founder of Brevet Capital Management, a leader in helping government agencies to solve complex problems. Doug has now been leading Brevet for over 20 years.

“Our strategy isn’t the most aggressive, but it’s very constructive.” Brevet has a government-focused business model where they source deals on a government’s behalf. This ranges from rural community development to partnering with research arms of universities.

The COVID-19 pandemic has provided a significant opportunity for Brevet’s finance-as-a-service model. As a result of the CARES Act, Doug is partnering with research and development companies to manufacture potentially game-changing point-of-care tests.

LISTEN AND SUBSCRIBE

SPEAKER

Douglas Monticciolo.jpeg

Douglas Monticciolo

Founder & CEO

Brevet 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 at the intersection of finance, technology, and public policy. SALT Talks are a series of digital interviews we've been doing during the work-from-home period in leu of our global conference series, The SALT Conference, to provide our audience a window into the mind of subject matter experts and provide a platform of what we think are big world changing ideas and tremendous investment opportunities as well.

John Darsie: (00:37)
We're very excited today to welcome Doug Monticciolio to SALT Talks. Doug is the co-founder, the co-CEO, and the co-chief investment officer of Brevet Capital Management. He's an entrepreneur and an investment manager with deep data analytics and technology experience developed over three decades while providing credit financing and advisory services. And I think if Doug didn't found Brevet Capital and go into financial services, he might have been helping Elon Musk with SpaceX. We'll get into that a little bit later.

John Darsie: (01:06)
Doug founded Brevet Capital Management in 1998 and has established the firm as a leader in helping government agencies solve complex problems and drive positive social impact by creating innovative financing products and services. And I know Brevet's been very busy during this time of really high government spending in response to the COVID pandemic. Another item that we'll touch on during today's talk. This finance as a service approach provides direct lending and other financing to private middle market companies that enables them to effectively serve the government sector as contractors, and it creates a very low credit risk strategy when you have the Department of Justice as your enforcer of payments in this type of business model, and it has a highly competitive barriers to entry that Brevet has been able to crack.

John Darsie: (01:53)
Doug's years of experience working in startup environments as a software entrepreneur and with an asset back securities fixed income in investment banking helped him identify a gap in the market where traditional lenders failed to provide the innovative financing and forward looking advisory services needed for private government contractors to rely on and deliver services. Doug has a passion for technology and approaches investing and credit financing with a problem solving mindset. He began his career at Goldman Sachs in the financial institution's industry resource group where he specialized in investment banking and principle finance trading, and he helped create numerous service marked products and services to address the unmet needs of clients. He later spent time at Lehman Brothers and Deutsche Bank where he was the head of the proprietary fixed income group in the merchant banking and principle finance group.

John Darsie: (02:45)
Doug's a turn from academics to finance when he was studying at Columbia University and working at Fischer Black, which was the creator of the Black Skulls model on complex mathematical formulas. He was encouraged to apply his skills to financial problem solving instead of academia, and he decided to put aside his pursuit of a PhD to join Goldman Sachs. But Doug did receive a masters of engineering sciences degree in applied mathematics from Colombia University, and he graduated from the state university of New York at Stony Brook with an MS in applied mathematics and a BS in applied mathematics in computer science.

John Darsie: (03:21)
Doug is also a level three certified member of the National Association of Rocketry, and a member of the Randonneurs USA, which is a long distance road biking organization. We were talking before we went live about how we're riding our bikes to stay in shape during the COVID pandemic, so that's another interesting thing Doug is involved in. He also coaches robotics and innovation and has led teams to numerous regional awards in that field. He led one of his teams to a worldwide second place finish in the FLL Global Innovation Award Season sponsored by Edison Nation and the XPRIZE Foundation, which was in cooperation with the U.S. Patent and Trademark Office. He also currently serves on the board of directors of Hope for New York, and is a board member of the Young Presidents Organization, Gotham Chapter.

John Darsie: (04:07)
Reminder, if you have any questions for Doug during today's talk, you can enter them in the Q&A box at the bottom of your video screen. And conducting today's interview is going to be Anthony Scaramucci, who's 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 turn it over to Anthony for today's interview.

Anthony Scaramucci: (04:28)
Well, John, thank you. Doug, it is always an honor to be with you, and we go back a long ways. And I got to ask you questions I could only ask a fellow Italian. Have you been successful or were you ever successful at explaining what you do to your parents?

Doug Monticciolo: (04:47)
Good question. No. Fortunately, my dad was a butcher, my mom was an Avon lady. They did understand entrepreneurial business, but finance probably wasn't the core.

Anthony Scaramucci: (04:59)
Yeah, so I'm still trying to figure that out, that I cannot explain to my parents what I do. But I just thought I would throw that in there. More than 20 years you've been at Brevet, amazing success story. Why did you name it Brevet? That's one of my questions. And then what was the idea for the business model, where did the spark come from?

Doug Monticciolo: (05:24)
Sure. Brevet, everybody notes that it's not Brevet, but it is Brevet because ... You heard John talk about Randonneurs, which is a very old French long distance cycling organization, it precedes the Tour De France, and in order to be a member of Randonneurs, you need to take these qualifying tests. They're self driven benchmarks that are challenges that you have to pass very long distance rides without any support, and they're called brevets. And so, Brevet as a business was exactly that, it's our challenge to self-achieve, to push ourselves further than you normally would, and given that some of these rides are 1,200 kilometers, I think that's a good reflection of Brevet.

Doug Monticciolo: (06:13)
And our business, we're an all credit fund, and everybody asks what does that mean? That means we're a credit fund, that means predominantly we are collateralized, not just generally but very specifically, and we're [inaudible 00:06:26] in almost all cases. And what drove me to do this was I had the opportunity, right, to be very young and was at a startup right out of high school doing well in the software industry, and I got to Goldman and learned these great skills. And I wanted to create a business that was, I felt at least, a little more responsible in its investing than just providing financial products or out of the box solutions. And I believed that by doing that I could generate higher returns.

Doug Monticciolo: (06:52)
And so, we as a firm are very well known for not being super aggressive, but more importantly, being very constructive. And so, we take all these skills that I've learned over my career and my team, and we bring valuated solutions to create a better outcome. I as at Deutsche and I basically had the benefit of the [inaudible 00:07:13] which is why JP Morgan created was we wanted to bring more than just the money to bear. And so, our finance as a service, as you heard John say, really is our benchmark, right? We're not just bringing money, we're bringing a solution and our skills, and we're government focused. And that's maybe a place where you need the most help could be brought. They're not very commercial, they're definitely not very efficient.

Doug Monticciolo: (07:36)
And so, if I was to sort of be true to my responsible investing ethos, the government's a great place to do it. The flip side of it is that fact that if you help the government do things, you're helping citizens, not just in the U.S., we do this around the world, and the outcomes are great. Good returns, good outcomes was a recipe I couldn't pass up. Harder work, but the outcomes are worth it.

Anthony Scaramucci: (08:00)
Let's dive into that, because I think it's important to give a specific example so that it totally crystallizes for people what your business exactly is. If I need money from you, what am I typically doing? I have a contract with the government, the government's going to pay me, but I go to you to get a lending facility in waiting for that payment? Is that more or less your business strategy?

Doug Monticciolo: (08:27)
Our business ... And that's the traditional credit approach, which is borrow goes to lender, we actually turn the model around. Our clients are the government, and so, we go to the government and say, "What's not working?" Obviously, we're a very trusted party and around 20 years been able to do this, but they tell us, "We're having problems getting this program that we hold this money for to create jobs saying we're all in America" or "We're having problems inducing certain types of research and development" or "We're trying to get money out to the right businesses in a pandemic."

Doug Monticciolo: (09:01)
And so, we sit with them and say, "Well, here's our capabilities. We got a lot of resources, we got a lot of skills, we got a lot of relationships, give us a feeling for where you want it to go." And we'll then work with them to say, "You just make sure that as this plays out, we're going to do the following, you the government pay us back or we'll go and make sure that the money gets to where it needs to go." And so, if you're a borrower and we knock on your door, it likely means you're going to get something that you didn't think that you're going to get, which is typically free or low cost government opportunity that you didn't really think was going to come your way, or you couldn't figure out exactly how to get it. And so, we do that finance as a service. Yeah, it's finance, but the service is both to government and to the company, and we get paid for that. And that's basically how we do what we do.

Anthony Scaramucci: (09:49)
How as the business changed, Doug, during the COVID-19 environment? Seems like there's a proliferation of governmental financing out there and funding. Has that helped you guys or hurt you guys or indifferent?

Doug Monticciolo: (10:01)
Well, that's a good question, right, because COVID, the pandemic, is not something we could have predicted. We don't chase crises, but in this case, it's a clear demonstration of why the model works, which is in what other industry in this economic environment is somebody trying to put out $2 trillion dollars, and where are major other sovereigns trying to do the same thing? Where we focus on this and what the opportunity for us is, we were called in March right at the pandemic was breaking, because they were calling entrusted parties to try to help solve problems.

Doug Monticciolo: (10:38)
In short, yes, it's been tremendously helpful to our business, not just in the big volume increase, which we see every time there's a new program, but more in the trusting of the relationship and the reiterating ... Regardless of the administration now, it's sort of proving out that they call us when they need help and we're there with our money and our ideas. And for just our ideas, it's free, but most of the time we're bringing a solution. Been quite a bit and we haven't slept much in the last couple of months, but it's been there trying to hopefully bridge some of the gaps, which is a lot of what we do.

Anthony Scaramucci: (11:15)
I just want to get a little more definition here, because I'm getting a couple of text messages that "Let Doug elaborate on an example of capital." Government come to you says, "We're trying to push this out," you go to somebody and say, "Okay, listen, I can lend you money, you'll get the money from the government," and a result of which you're getting a return off on that connection. Is that fair to say?

Doug Monticciolo: (11:39)
It's similar to that. Let's take one of the programs, economic development program, where particularly now they're trying to ... Governments are trying to get capital out to companies doing research and development in various areas that could potentially be additive to solving the COVID crisis, detection, early warning, other types of things. And so, governments are good, but they really don't know how to find those companies, and believe it or not, most of the times, they give that money through the IRS or through treasury, which is not necessarily a very friendly place.

Doug Monticciolo: (12:13)
What we do is we understand, work with the government to make sure we know exactly what they want, and then we turn around and say, "Okay, we'll go and find those companies for you." We'll actually help them apply, we'll work through the entire process, and we'll go give them money in two days knowing that we've already confirmed with the government that the process we're going to pursue is going to get the repayment or the government to pay for that, and in these cases they actually pay us. We'll help a company be able to get the government money, in this case ... In one case, actually, it's helping R&D on a product that can help early detection for COVID, and they needed the capital, were afraid to apply, we simplified it, made it easy for them, gave them the money backed by the fact that we knew the government was going to pay us. We turn the transaction around, we lend to the borrowers and get paid by governments. Not your traditional model, but great credit risk and great opportunity.

Anthony Scaramucci: (13:08)
That's an excellent description of what you're doing, and it fits so nicely into the world of alternatives because it's a niche that can't be replicated in ETF, it can't be bought on an exchange, it can't be ... It's got to be esoterically designed by you guys in source, and that's where all the value that Brevet is adding to the clients.

Anthony Scaramucci: (13:31)
If you step back over the 22 years of Brevet and your interaction with the government ... And I'm going to editorialize her a little bit, Doug, the government has a bad rap of just being totally candid, a lot of people are not in love with the government, the cumbersomeness of it, the bureaucracy, what do you say about the government? Do you still have faith in it, especially given this period of turbulence that we're all experiencing?

Doug Monticciolo: (13:56)
Well, it's a good question. Having faith. I think we all know the answer to that, right, everybody knows there's two things in certainty, death and taxes. If you believe that that's true, you just basically bought the business model of the federal government, which is you live there, you bought their product, you pay your taxes. The hard part and where the frustration comes from is two things, what your expectations are. If your expectation is, "I'm going to build a bridge building company, and I'm going to hope that the government gives me contracts," and you're going to potentially wind up in disappointment because government parties may change.

Doug Monticciolo: (14:30)
But if you're in a business like ours where you listen to where the government would like you to go and you basically sit on their side of the table, you don't get that disappointment. Matter of fact, the biggest challenge we face is we're disappointing them because they're ask sometimes is so great, solving problems that we're not exactly sure we can solve, but a lot of times ... Like those R&D companies, you really think some part of the government, commerce or somebody, in any country, by the way, to go out and find incubating companies backed by big companies or not, and figure out how to convince them that they should go take this government money, and that they should accelerate their research.

Doug Monticciolo: (15:06)
And so, I still have a lot of faith in the government. Obviously, there's going to be challenges, we don't rally go down to the municipal or state level. We'll do some things at state, normally backed by the federal government with the Cares Act, is putting in a tremendous amount of money, very specific. We always look to something simple here, which is we're looking at how we're going to get repaid, right? Going to the government and saying, "If you're good for this, then let's confirm that and I'll go get it for you. You just got to repay me."

Doug Monticciolo: (15:35)
I have faith in it, I expect volatility. I do expect a bunch of challenges, but I think right now, if anything, there's still taxes, maybe a little distorted, but prioritization has changed. And I think that's the advantage because it's much clearer as to where the government wants to put its money, and so, there's $2 trillion dollars sitting out there as an opportunity, and there's going to be more, being in front of that and helping them do it is a great opportunity.

Anthony Scaramucci: (16:01)
Well, the other thing, when you hear the word government in the context of your business, there's an implied level of safety there, so let's talk to perspective investors of Brevet Capital. What are the risks of investing in Brevet Capital? What are the opportunities? Have you balanced that over the 22 years?

Doug Monticciolo: (16:21)
Sure. There's always risk investing even if it's government even if we were great, there's always things that happen and we're not immune to them in general. In investing, there's structure, product structure, risk, we have an open end fund with liquidity, we have closed end fund that's permanent and closed, there's always those structure risks. But when you think about where the challenges come from in governments is if you do just one thing. One of the things that Brevet has achieved, and this took a long time and a lot of money, was to be not focused on one thing.

Doug Monticciolo: (16:56)
We're in five different countries. Why are we in five different countries? People say, "Don't spread yourself too thin," The flip side of that is I know that if someone changes their mind in some agency in the federal government in the U.S., that same person doesn't change their mind in Canada or Ottawa. It's a completely different unrelated basis. It gives me diversity, it gives me protection. Is it perfect? No, there's things that can change always working with governments, you have to stay light on your feet, but our business is based on providing solutions, right?

Doug Monticciolo: (17:26)
Finance as a service means service is the way we get our returns, and service is the way we get our opportunities. As long as I build this suite of services, I could apply them to the opportunity du jour, you might say, but in reality, I'm applying them consistently across areas, education, infrastructure, healthcare, rural communities and rural community development. A lot of what we do is just jobs and job retention is a very big part of the programs that we're involved in, simply because there's so many of them I the federal government, largest part of the GDP. Yeah, there's pros and cons of the federal government, but I think you'd always find the pro as long as you're willing to look for it.

Anthony Scaramucci: (18:08)
Well, your shop is a little smaller relative to say an Apollo or a Carlisle, and the business depends on accessing a lot of this expertise and knowledge, so tell us about your methodology and how do you provide such a deep bench given your size and nimbleness.

Doug Monticciolo: (18:29)
That's a good question, because we're just 100 people, five countries. How do you we staff that and how do we manage it, and more importantly, how do we actually provide the solution, the service, when it's got to take a ton of people to just be operational in all these countries? And the answer is we started this way back in the beginning of the firm, 20-plus years ago, where we started venturing and partnering with universities, and we started working with research organizations. We work with AI and big data institutions, firms, not for profits, and the reason we do that is because we need to not just be on the leading edge, but we need to be aware of what the tools are to solve problems and to be better at getting some of this done.

Doug Monticciolo: (19:13)
While we may be just 100 people, I can pretty much assure you, we're the only credit group that actually has an R&D shop, our own research and development team that's purely creating and innovating, and always introspecting on our own transactions to make sure they're better. And that's part of the way that we actually provide ... We've had a 9% net long term return on our fund, and we're on levered through all these cycles, and a lot of it is the fact that we're constantly trying to stay ahead of what's going on and what is available to governments, because we're getting paid for bringing in value proposition.

Doug Monticciolo: (19:50)
This is like me being a child on the Long Island where I was told we need to make some money so we could have better family vacations. I had a paper route, I would cut wood with a bow saw and an ax and my brother and I would start these businesses and be very entrepreneurial. And we'd pour truckloads and sell them at church on Sundays. And the reason we did that is entrepreneurial skills is about value proposition, and so, with an abundance of capital, the things you have to do is differentiate yourself by something more than just money and maybe a few relationships.

Doug Monticciolo: (20:25)
We leverage our team by world renowned parties. I was on the phone this morning with the CEO of one of the leading AI firms, and the reason being is we're using it to solve a problem for a sovereign. And so, that's a lot of how we do it, long develop and actually ... As you can tell, I have a lot of energy, excitement about this because we're solving problems that people haven't solved before. It's quite exciting.

John Darsie: (20:47)
Doug, you talked a little bit in the open about how Brevet uses a lot of data, and I suspect that one of the answers to that question os how you replicate the expertise of these massive shops, like a Carlisle, with a smaller bench is that you do a lot of data analytics. And you talked about how you work with AI companies to solve problems with sovereigns, but you also do a lot of data analytics internally. Talk about that process and how your background helps Brevet use data analytics in a way that maybe some other alternative investment shops don't.

Doug Monticciolo: (21:19)
Sure. We do use data quite a bit. We use it in different ways, right, we use it to make sure that the basic premises of the solutions that we're providing make sense. And so, what does that mean? In order to get that transaction I mentioned, which is the government's going to make a payment for some research and development, they want to give them a grant, but the company is too challenged to try to figure out how to fill out this massive document that the government has asked them to fill out. It's like your taxes squared.

Doug Monticciolo: (21:52)
Well, the answers are pretty easy. What did H&R Block do? H&R Block partnered with IBM's Watson, right, AI, big data system. We essentially did the same thing. We used the data of our own information along with industry information, and put it into systems that help make that process of how do you fill that form out better? And we do it in a way where it's not just easier for the borrower, but we also now can report back to the government and say, "Hey, by the way, we're going to give you a perspective on this industry that's broader. It's our perspective of experience, but it's also all this research brought into a common platform, and we're going to be able to show you where we're looking, how we're doing it, and how the money you just put out relates to that." And that does two things. One is it gets them a lot of comfort that they can trust us and they know where it's going, but two is they turn to us at times and say, "What else should we be doing or how else should we be doing it?"

Doug Monticciolo: (22:48)
The big data which, by the way, these systems in AI, if you got your head around the numbers, we're working with a system which is read and translated every patent filed around the world, okay, just one of the datasets. Why is that important? Because it really helps with is that truly R&D or not? Those things are important for a government to know. And so, with our access to things like that, it helps us to fill our value proposition. On the one hand we've got a client, it's the government, which we have to be absolute integrity with, and the other hand we got a company who's counting on us to bring that money to them. And to investors, obviously, are benefiting from this whole process on the fact that we're putting out that money and knowing that we're getting repaid by the government.

Doug Monticciolo: (23:31)
And so, it's all intertwined. My background, getting my PhD at Colombia in applied math and, obviously, my systems backgrounds in databases and technology really helps quite a bit in being able to see this, but my team is also extremely happy in these areas.

John Darsie: (23:48)
One of the first things I asked you when we first spoke about your investment strategies, I said this sounds really attractive, it's almost completely uncorrelated, you almost have no losing trades in terms of the transactions that you make, maybe you can touch on that as well in this answer, but I said, "Why aren't more people doing this?" And you explained why there's a lot of barriers to entry into what you do. Could you talk about that a little bit and why what you do at Brevet is so unique?

Doug Monticciolo: (24:15)
Sure. First, I always give credit to Goldman Sachs on this, which coming right out of being a tech, math person, I thought that 22 cash on cash percent return annually was the natural benchmark, so I've always had that as the mantra of if I'm not doing 22, then I must not be doing well. Kudos to them and for showing me hoe to do it, right? And I think that is a big part of the value proposition. But what we are doing is we do approach investing not as a bunch of trades that we give investors to pick and choose from, but a strategy that is holistic. Like I said, I'm diversifying the portfolio.

Doug Monticciolo: (24:51)
I could easily just take one of these transaction, with Canada, per se, and offer a fund just for that, but my personal belief is I'm truly going to be a responsible manager, I think that's irresponsible to do that for an investor because I'm not giving them the ability to have a more diversified trade. I can show them that same trade across several sovereigns and I could give that same opportunity in a more risk reduced fashion. What do I give up? I give up the ability to deliver a 40% cash on cash return, right? Some of my stuff [inaudible 00:25:21] always been up in those ranges. Well, by diversifying, I'm spending a lot more time and money in developing each of these opportunities simultaneously.

Doug Monticciolo: (25:30)
And if anybody wonders what does it take? It costs a lot more money for the very first assets that we do in any of these spaces. We don't really rush into anything. You got to be willing to invest in your business ... And keep in mind, I didn't do this because I came from a trading desk and said, "I'm going to take my strategy and move it into a fund and just repeat it," I came from a business building perspective. Brevet is a long term win for sure, because its invested the money, the time, the resources into people, into infrastructure, technology costs are substantially higher than anybody else in the industry, and that's because they're built to do tens of billions not a couple hundred million, they're built to be global, they're built to have things like AI interfaces, and a lot of this in credit is if you don't put it in upfront and you don't make sure that you're actually tested to make sure that you did it right, then all you're doing is taking the risk that you were wrong.

Doug Monticciolo: (26:25)
And my view is I'm a money manager, and I got to keep the money in order to managing it, right? Our investors are public pensions, they're firemen, they're teachers, they're state employees, I think we take that responsibility very seriously, and I believe it is the right strategy to do. It's a big barrier to entry in terms of relationships, investment, and patience.

John Darsie: (26:46)
Anthony asked you earlier about whether you still have faith in government, and I want to ask you a little bit different question as it relates to government. Obviously, Brevet provides a very important resource for the government, you help the government operate more efficiently. How do we construct more public/private partnerships that helps us do more of that without growing the size of government in a tremendous way? How do we leverage the wherewithal and the efficiency of the private sector to help drive more efficient government and make improvements in society as a result?

Doug Monticciolo: (27:20)
It's a good question. The challenge is, actually, it has to come from the manager and it has to come from the manager's perspective, right? I have one advantage that I did extremely well right out of high school. My drive and motivation is not to ... With the biggest bank account, which is obviously a great thing to do because you can do great things with that, but it's to do the best things and actually have the best outcomes, and sometimes that means that the manager will make less. And that being said, you have to be willing to sit down with a governor or the head of an agency, and this is what we do, is show them everything.

Doug Monticciolo: (27:57)
We have opened up that we will have actually all the way down to my personal financial statements and tax returns to show that we can form a partnership where there's an integrity and an honesty, and I think that's important because ... And by the way, I think it's coming because of the challenges in the market, is that everybody's got to reprioritize, infrastructure needs to be fixed, pension funds need to be resolved and get better returns. And so, there's this balance that needs to be done that I think a challenge like the pandemic may actually bring people back to slightly different priorities of realizing that maybe their mission in life may change a little, we don't mind investing our money in what we believe, and maybe deferring some benefits or profits down the road if we're going to do the right thing.

Doug Monticciolo: (28:47)
And out of my business, one of the things we have to do is a large part of our business is pro bono, because we can't be sure whether or not when we're working with the government something we do is going to involve our capital. And so, we have to be willing to do that. That makes running the business a little more sophisticated, but I think in the end, public/private partnerships need to have the same basis where we got to get people sitting on the same side of the table together, right? Another thing I learned on the street, right, which was the most successful business opportunities are the ones where you sit on the same side as your client and help them solve their problems, right? And I think everybody's sort of moving in that direction, hopefully, we could be a little bit of an example of that. I think there is a bit of, now, pressure on everything, particularly economics, that maybe forces people to have to maybe compromise a little and sit on the same side of the table together.

Anthony Scaramucci: (29:39)
Doug, can you talk a little bit about your macro view in the context of your business, but also your general life experience as a fixed income investor, and the psychology tied to money. We sit here today, and I'll make this stipulation, the world is probably not configured the way we thought it was going to be 25 years ago, and so, tell us a little bit about that. Tell us about your insight there and tell us what you say to investors.

Doug Monticciolo: (30:10)
Sure. Well, the first thing I would say is I'm a mathematician, not an economist, so sometimes I get in trouble for being predictive base don what we see. Remember, I was also trained by Fischer Black, which is can't forget the basics of options, which is the past is a very bad predictor of the future. But I am a big believer in behavior and sort of rational outcomes, and when I look forward and I look in this market, I see a couple things. I see it's going to put a lot more pressure on economics. Economics is a basic level of where do you spend your money, where do companies spend their money, it will ferret out weakness models from strong business models, it will create stronger business models or new models. I'm very optimistic long term from that perspective, because I am a big believer, I did study chaos theory, that you do need a reset every now and then to sort of strip things down and rebuild them. Like a forest fire, sometimes that's necessary to build it back stronger, so I think that is necessary.

Doug Monticciolo: (31:13)
I think we're in interesting times. The world and the world economies had challenges with each other, there are challenges with the pandemic and now they're challenged on top of that with trade and other issues. From my view, what I see is that as long as the next six months plays out and there's a vaccine, and maybe it takes 12 months, and we come to some point this time next year everybody figures out how to get back to work and figures out what those new models are, I'm actually pretty optimistic two or three years out, because it si going to change priorities.

Doug Monticciolo: (31:46)
I think governments will change priorities, and if they are, right, they're cutting some programs that maybe were a little fluff and focusing we need better hospitals, we need better roads, and maybe they're also changing some of their perspectives on what investing means and where they're putting their money, and maybe not concentrating it so much and just following the overall trend, but maybe putting money behind things that actually help them move their goals forward. And we're actually hearing that and seeing that from the sovereigns and say pensions, etc. I'm very optimistic. In the short term, unfortunately, very pessimistic because I don't think we're done. Hopefully, this is a relatively quick path out, just a vaccine, and we get through that, I think we're going to come out as a global economy stronger and better.

Anthony Scaramucci: (32:32)
Do you worry about deficits, Doug?

Doug Monticciolo: (32:36)
You have to be right? If you look at states where you got pretty big holes in pensions, we already have pretty big needs in infrastructure, it's clear that moneys can be spent in better ways in just running some activities. And so, yeah, deficits are a problem. There's two solutions. One is getting more efficient with whatever you have, and you have to figure out what can you do to sort of offset that long term negative effect of maybe an out of control spending situation. Right now, it's always hard to say whether or not putting $2 or $3 trillion dollars on a pandemic is a good thing or a bad thing, but it's what you do afterwards.

Doug Monticciolo: (33:25)
We have a mantra at Brevet which is we never follow the rescue, we only follow the recovery. Which is the rescue is always where the uncertainty, right, so human behavior response of doing what you got to do to solve a problem. But where we believe the most important effort needs to be made is in the recovery of what do you do next? We're doing that with the government now. It's kind of exciting that they actually did call us and we're pretty heavily involved, because I do think the long term recovery is what we're focusing on, cutting those deficits and getting ourselves back in a strong place, but I think if we let a little bit of the knife fall where it's going to fall, it might actually bring us back stronger like it did in the late to mid-90s.

John Darsie: (34:09)
Doug, we have a few audience questions that I want to get into in our last sort of 8 to 10 minutes of the talk. How do you deal with sort of counterparty risk and the risk of government deciding not to pay you back? I know it seems like a low risk thing but we have a couple audience members who are curious about how you grapple with this.

Doug Monticciolo: (34:27)
Sure. In our history, there are two types of transactions you have to worry about with the government, those types of transactions where it's purely discretionary and those types of transactions where it is purely good or service provided for you. And as you mentioned, TOJ so you can check, there are press releases about Brevet partnering with the Department of Justice. That's true, we do do it, and the federal attorney general's office knows of our activities. And we are very clear that we have to be careful about the law. And so, there are places where the government is not going to pay you back, you're going to fight. We've had lawsuits to clarify things etc., but the cases where the government's just not going to pay you at will, they have to realize that in the places where that happens, it's something that wasn't a critical need. It's probably something that maybe the manager or the money behind it was maybe getting outside its returns.

Doug Monticciolo: (35:20)
I will say, we have never had it happen. We've had a situation where they disputed the payments to one of our counterparties, that type of transaction we actually don't do anymore, but we'll win that as well. And as a matter of fact, it will come out a win for the state and for us. Because one of the things about Brevet's that's interesting is we try to be constructive, not aggressive or destructive, and so, when those cases occur, we turn to remind them that whether we help them by some inner city clinic to help serve some homeless people, we provide the money for that 100% within their preapproval and their guidance, we remind them that we're not here just to do that one, we're here to do the other 50. We've been larger than some states, entire programs of the state, providing these type of services.

Doug Monticciolo: (36:07)
And normally what happens is if you truly are bringing your value proposition, our experience shows us it doesn't happen, it doesn't mean that you don't have paths that you didn't expect to follow, but it doesn't mean that you're actually wind up in a situation where they actually don't pay you. It is just a communication process that you have to do or it's expensive, but that's the process.

John Darsie: (36:22)
Yeah, it goes back to barriers to entry. The answer to my question about barriers to entry is building that trust and relationship with all your counterparties in government to be able to do these transactions in a repeatable way.

Doug Monticciolo: (36:39)
Yeah. And one of the things that we do is ... Remember, we start with the government, we don't start by saying ... We see this program then we go find a company that's doing it, because by then you're almost always an adversary of the government. We start by working with the government. And some people say, "Well, that may be crazy, because that could take three to five years," and we could say, "Absolutely. We've been involved in changing some laws, helping them find some programs, giving some language for things that we're planning to do."

Doug Monticciolo: (37:06)
And that's important because we're only doing it if our true intentions are to make the government's program better, and we have to be willing to open the kimono, you might say, and prove that you are. And sometimes I got to take Brevet's Capital's [inaudible 00:37:19] companies money and prove to them that we actually are doing something that's in their best interest. And when you do that, regardless of administration changes or not, you become the guys that get the phone call in March that says, "We need some help, and we're going to need you to step up," and we got each other's backs. And that's kind of how the conversation goes. But in that case, it was a matter of life or death, it was also a matter of necessity.

Doug Monticciolo: (37:44)
And so, you have to be in the right place, right time. One thing Brevet does not do is ever be a contractor or counterparty signer to the government, because if that ever has a dispute, we would never want to be seen as the adversary, so we're always on their side of the table. And that's by design and that is a conscious decision, which is almost the opposite of what most managed funds do, there's almost always on the receiving side.

John Darsie: (38:08)
That's a good segue to the next question from audiences. Do you have concerns about the current political climate, partially as it relates to how you run your business? I know we've had conversations in the past where I asked you about do you have concerns if someone like an Elizabeth Warren, who's viewed as an adversarial type of person to Wall Street, became the Secretary of Treasury, would that impact your ability to do business? I think I know the answer to that question, but the question from the audience is do you worry about the political climate and sort of the deaminization of Wall Street that exists out there?

Doug Monticciolo: (38:42)
The answer is yes. You have to be aware of the market that you're operating in, right? If you're in the tech space and suddenly everybody says they don't like Apple, you're going to have problems, right? One of the nice things is we're in five countries, we easily can do as much volume in these other countries as we can here. We're in there, we're established, we're domiciled in those places, so we're not just being a passport player on it. They are real, they're real businesses. And I do that just because I can't predict the future, and so, it's very hard for new administrations ... You'll see Brevet does very little business in the first six months of a new administration, because there's this trust transfer that takes quite a while. And so, there always has to be that time period for them to understand who can we trust and who can't, and you have to respect the fact that they have to be nervous, they have to be concerned as to who they're working with, because it is a pretty tumultuous environment in politics, particularly in the United States these days. You can't blame them. Whether it be a governor or it be someone in Washington, right, that always happens.

Doug Monticciolo: (39:49)
Our view is you just got to be wary, you got to keep your eyes open, and I think the one thing that we always do is we put our best foot forward, and we will take the step ... I will put my firm at a bit of risk to say, "I wouldn't do this if it wasn't for trust," right? And we will take that step. And that's what you have to do. People say, "Why aren't they in the space?" I'm not sure every manager really wants to go and do that. I think some do, but do they really do it? It's a hard step because it means that you'll make less, or you may make less, right? Or you're going to put yourself out there, but I believe it's the right thing to do. I got all these great skills, I got this great team, we've got great opportunities, we believe this is the way they should be used, and I think that penetrates. We just realize that it's not quite instantaneous. We've been doing this 20 years, right, no matte what it is, I can't expect a new governor or head of an agency or even elected official to turn around and say, "We love you just because someone else did."

John Darsie: (40:53)
Right.

Doug Monticciolo: (40:53)
And that's part of the business.

John Darsie: (40:55)
I got one more question, it's for both Anthony and Doug. And we have a question from our audience about ... There's a young man named Bob Castrignano, aka "The Coach," who has mentored thousands of young men and women who have come through the Goldman Sachs training program, he also post-9/11 helped revive Sandler O'Neill, was recently merged with Piper Jaffray and a great success story post-9/11. But what has the coach meant to you? We'll start with you, Doug, and then to Anthony, the fact that he mentored you both and the differences in your personality is sort of astounding to me, but I'll start with you, Doug, what has the coach meant to you as a mentor?

Doug Monticciolo: (41:36)
Coach is a living example of what we try to be, right? 9/11 happened, I was a fig person, Sandler O'Neills, in banking, I thought about should I stop what we were doing, and we were starting this business, should I walk in and help out Sandler? I knew the well, respected them tremendously, but should I drop everything and take a seat on that desk? And I hesitated and I sort of put my priorities first. Coach didn't, coach stepped up and went there and basically said, "I'm here to help."

Doug Monticciolo: (42:07)
That's a role model I think all of us should look to follow, which is to do the right thing. Plus, he said ... I think he's seen the Pope or met with the Pope several times, I can't even get one meeting, so I think he's got me there as well. But he follows a lot of what we like to follow at Brevet which is ... Our motto is "We do what we say we do." And being true and having integrity, it's the backbone of our business, right, and it's why we're able to do what we do, and so, I think coach has given us lots of support and guidance and confirmation that you got to do the right thing, because in the end, I do think you win.

Anthony Scaramucci: (42:46)
First of all, Doug, Darsie was putting out a little bit of fake news, as you know, because Castrignano is old enough to be your grandfather and my great grandfather. Okay, so I just want everybody to know that he's not a young guy, we're talking about an ancient fossil, okay, who ... You're laughing because you know it's true. No, but in all seriousness-

Doug Monticciolo: (43:08)
I'll never admit it.

Anthony Scaramucci: (43:10)
In all seriousness about Bob, because now that we're bringing him up, I feel like Bob is the Kevin Bacon of all Goldman Sachs entrepreneurs, we are all one, two, three, four, in some cases six degrees separated from Bob, and Bob is also the decoder ring. To me, if someone's friends with Bob or knows Bob, it's like definitionally they're a good guy, whether it's you or [inaudible 00:43:38] or Dr. [inaudible 00:43:39], I could think of hundreds of people I've met along the way through Bobby, who I know happens to be a terrific guy. But he's a terrible dresser ... I mean, let's just get it all out on the table while we're here, okay? He's an absolutely terrible dresser, okay, he does not have a face for radio or television, but he has a face for morse code. That's how bad it is. And the last thing is I know he's tried to buy your hairpiece from you. Do not sell him your hairpiece, because I think my hairpiece is more valuable than your hairpiece and I'm looking for him to buy mine. I just want to leave it there, okay, but we all love Castrignano and he is one of the real saints in our business, he's a true legend in many different ways.

Doug Monticciolo: (44:25)
Yeah, I completely agree with you on that.

John Darsie: (44:27)
All right. Well, we'll leave it there with some great words on the coach.

Anthony Scaramucci: (44:30)
See that, Darsie, I was picking on Bobby Cas, I didn't get a chance to throw a few shots at you and-

John Darsie: (44:34)
I know, that's why I did it. That's why I did it.

Anthony Scaramucci: (44:34)
-the fake George Washington portrait and the faux books and all this other stuff.

John Darsie: (44:41)
I like Bob because he's nice to me.

Anthony Scaramucci: (44:43)
Hey, Doug, if your mother or your Nana saw this set up from Darsie, I mean please, pass the barf bag, okay? She'd hit him with a wooden spoon, Dougie. Go ahead, Darsie.

John Darsie: (44:53)
All right. Well, I want to let everybody go. And thank you, Doug, for joining us, you have a fascinating investment strategy, and the constructive way that you work with the government, I think people maybe never heard of Brevet Capital or haven't heard of you, but you provide tremendous value to the U.S. government, U.S. society, and the American people in general with what you do, so thank you for that.

Stephanie Link: Wealth & Portfolio Management | SALT Talks #32

“In a slow growth world, growth is going to outperform value.”

Stephanie Link is chief investment strategist and portfolio manager at Hightower, a national wealth management firm that provides investment, financial and retirement planning services to individuals, foundations and family offices, as well as 401(k) consulting and cash management services to corporations.

Tech stocks take up a very large percentage of the S&P market capitalization which only grew as part of the pandemic. Despite the likelihood of reducing this concentration as the economy recovers, the dominant tech companies have huge opportunities ahead of them for continued growth. “The internet of things is going to be a trillion dollar market by the end of this decade.”

The economic fallout from a pandemic is uniquely different from previous crises like the 2008 recession where financial institutions were responsible for much of the disaster. Lessons learned from Federal Reserve are being put to use this time around. Chairman Jerome Powell has proven comfortable providing aggressive quantitative easing to support a pandemic-ravaged economy.

LISTEN AND SUBSCRIBE

SPEAKER

David-Rubenstein.jpeg

Stephanie Link

Chief Investment Strategist & Portfolio Manager

Hightower

MODERATOR

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. SALT Talks are a series of digital interviews we've been doing during the work from home period with leading investors, creators, and thinkers. What we're really trying to do is replicate the experience that we provided our global conference series, the SALT Conference, which is providing our audience a window into the minds of subject matter experts and providing a platform for what we think are big, important world changing ideas.

John Darsie: (00:41)
We're very excited to welcome Stephanie Link today to SALT Talks. Stephanie is the chief investment strategist and portfolio manager at Hightower, which is a national wealth management firm that provides investment, financial and retirement planning services to individuals, foundations, and family offices, as well as 401k consulting and cash management services to corporations.

John Darsie: (01:03)
Prior to joining Hightower, Stephanie was the senior managing director and the head of global equities research at Nuveen, where she co managed the CREF stock variable annuity portfolio with $170 billion in assets. She also managed her own US core portfolio with 3.7 billion in assets and oversaw 33 investment professionals who collectively managed about $40 billion. Prior to joining Nuveen, Stephanie spent seven years at TheStreet as the chief investment officer and co portfolio manager of Jim Cramer's charitable trust. And before that, she served for 10 years at Prudential Equity Group as managing director of institutional sales and director of research. She began her career at Dean Witter Reynolds in the institutional sales department.

John Darsie: (01:50)
Stephanie earned a bachelor's degree in finance from Boston college, and she currently serves as the chairperson for the investment advisory council at the Basking Ridge Presbyterian church in Basking Ridge, New Jersey. She's an investment professional with over 20 years of experience managing money, and her professional insights are frequently sought out for industry events and media. And you've likely seen her on CNBC where she's a contributor.

John Darsie: (02:15)
Stephanie, we're very excited to have you today. A reminder to our audience, if you have any questions for Stephanie during today's talk, you can enter them in the Q&A box at the bottom of your video screen. Hosting today's interview is Anthony Scaramucci, a founder and managing partner of SkyBridge Capital, a global alternative investment firm and the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:37)
Stephanie, it's great to see you again. As we were talking before we went live, thank you for big footing John Darsie on the room rater, the room looks absolutely fantastic. My son, he just graduated from Stanford, basically he's like, "Dad, why do you ask people about their backgrounds? You can find them on Wikipedia." And I say, "Well, I ask people about their backgrounds because maybe they'll tell us something that's not on Wikipedia." So, Stephanie, what's not on Wikipedia? What could you tell us about your path to money management and that odyssey that you were making as you were trying to figure out your career, what triggered you to go in this direction?

Stephanie Link: (03:17)
Yeah, and it's so great to be here, Anthony and John, thank you guys so much for the invitation. I have to say after being in the business 27 years, 16 years on the sell side, and then 16 years on the buy side, it really has been a remarkable learning experience. The sell side as you know, is under secular pressure, right? And I have been for a long time. Quite frankly, I'm surprised that a lot of sell side institutions still actually exists because a lot of people don't want to pay for research and trying to get paid for that has always been a challenge.

Stephanie Link: (03:51)
And so, I left the sell side and I wanted to run money because I enjoyed picking stocks. I enjoyed marketing or analysts, which is what I was doing on the sell side. So Jim Cramer and I had a mutual friend and he was looking for someone to fund his charitable trust and small amount of money, but a lot of subscribers that are attached to that product. And Jim, he's so visible. And so we met for 30 minutes, we had tea and he hired me on the spot, and I thought, well, this is going to be a really great learning experience. I'll be here for a couple of years and then I'll figure out something else to do.

Stephanie Link: (04:28)
And so, six and a half years later, I'm his longest standing employee. And I'll tell you, we had had some battles before, but he taught me a remarkable amount in terms of actually running a portfolio. Because it's much different, Anthony, you know this, it's much different than being a sell side person, marketing ideas, coming up with strategies and that sort of thing. It's putting your money where your mouth is. And I think that that was such a great experience.

Stephanie Link: (04:55)
And then of course, when I was working for him, I became a CNBC contributor, but it wasn't him that introduced me actually to the CNBC folks. It was, my COO got a phone call from CNBC and said, you know what? I know Stephanie and her dream job was to be Chris McKendry on ESPN. So this is not in Wikipedia. So, he said, well, let's give her a shot. Maybe she'll be okay on TV talking about stock. So, that began my career.

Stephanie Link: (05:25)
And then, TIAA which is now called Nuveen, they were a client of mine. So I had known them for many, many years, and they were looking for someone to be the face of the firm and then also to run money. So I stayed there for five years, but the company continued to see outflows and the buy side is continuing to see outflows. It doesn't matter about the performance. And so, those challenges were frustrating. I think for 27 years I had to cut costs. I had to right size businesses and I was tired of that.

Stephanie Link: (05:56)
So I stepped back and I said, where in the investment world, where is their growth? And I literally LinkedIn to Bob Oros at Hightower, the CEO, and he LinkedIn back to me and we exchanged ideas and he thought, I don't have a job for you, but let's create one. Let's try to figure out how we can build our brand because it is in growth mode. A company that's going to hire someone during this environment in the COVID world, I think speaks volumes. And I'm really looking forward to working with the advisors and helping them grow assets. I'm going to run my own portfolio as well.

Stephanie Link: (06:32)
And then, I'm in charge of the OCIO division, which is just an outsourcing mechanism for the advisors if they like to invest in the products that we manage. So I'm really excited about it, it's different. Growth has a different feel to it for sure.

Anthony Scaramucci: (06:50)
Well, it's great, but it also speaks to your courage that you're willing to venture out in this environment where unfortunately we're all stuck at home. Before I get to the next question, I just got to tell you this quick Jim Cramer story. So I'm 23, I'm at the Harvard Law School. Cramer is a God to guys like me because I wanted to always get into money management. He had worked at Goldman and he was recruiting people, and then he had just left to start his hedge fund. He had started a hedge fund with a guy named Larry Levy. And these guys were in cash during the '87 crisis. And Jim writes about this in Confessions of a Street Addict.

Anthony Scaramucci: (07:24)
So, I got his phone number from somebody, I cold called him. He picks up the phone in that barking squeal voice of his and he says, "What do you want?" I said, I really want to come meet you or to get a job on Wall Street, something like that. For about four minutes, he lit into me, do you read the Wall Street Journal? Of course, I said, no. Do you read the New York Times? Of course, I said, no. He went down a list of publications. He says, "Listen, man, you are not ready for this job. You need to read every single one of these papers and you need to start following the markets," slams down the phone on me.

Anthony Scaramucci: (07:58)
And so, I can never thank him enough for that four minute experience because I went and did all that, Stephanie. I went and read all those things. So, and it prepared me for those job interviews. So, he's a legend and we both obviously have a tremendous amount of respect for him. So let's talk about what we do for a living. Okay, the S&P is now flat on the year. After being down 30, the NASDAQ is up 20 year to date. At SkyBridge, look, I'll compare, we're in structured credit, so we're still down on the year. We're probably down 16 now, although we're getting an 8% yield on our portfolio. I think the stat is very cheap, but this stuff has snapped back. And the composition of the S&P is totally different today than it was in January in terms of where the value is. So, is this justified? What's your opinion of all of this?

Stephanie Link: (08:52)
Yeah, I think it is justified, especially on the equity side, because you've had a massive amount of liquidity. You really have. I mean, the fiscal liquidity and we're going to get more, probably a trillion or another two trillion in fiscal, monetary policy has just been remarkable. Now, if you combine the two, fiscal and monetary policies that are put in place, it's 44% of our US GDP. Just to put it in a context, you know this Anthony. Back in 2008, that percentage of fiscal and monetary policy in that crisis was only 4% of US GDP.

Stephanie Link: (09:28)
So, this is enormous, enormous liquidity. This is a very big tailwind. And while, I'm a little less certain about where the recovery trajectory is going to go, because we've had now reopens and then partial closures, we have up until this month, we have seen pretty good economic data, the snapback. And so you've got this combination and what I said, it's like a debate or a push call between the V-shape recovery in May and June, and then all of a sudden, July reopens, partial closures, what is this going to do to the recovery?

Stephanie Link: (10:06)
And we're already starting to see it. We had two weeks in a row of initial claims being very disappointing. I mean, look at the four week average of initial claims, we'll watch that and we can get into that if you like, but if it continues to go up, that's something that is worrisome to me. But nevertheless, I do think that we are seeing a recovery. And as a result, we are seeing a profit recovery. And in fact, 83% of the companies in the S&P 500 have beat earnings. 65% have beaten on revenues so far this quarter.

Stephanie Link: (10:37)
So we are seeing a little bit better in terms of economic activity and also on earnings. I expect 2021 is going to be a year where we have to normalize earnings to get comfortable about valuations. But I do think you are going to continue to see progress. As I've mentioned, initial claims, a little bothersome, restaurant openings and reservations is flattening out. TSA travel is actually rolling, but on the flip side, you have housing that is extremely strong.

Stephanie Link: (11:08)
I mean, every single company that has had housing in their revenue mix, they've actually beaten on expectations in earnings and they've had some really remarkable things to say. We can get into some of those details if you like too. We also have really a nice recovery in auto. I mean, look at AutoNation. I mean, the CEO of AutoNation said it was the best quarter in their history. So, you listen to these comments-

Anthony Scaramucci: (11:36)
Home sales, home sales.

Stephanie Link: (11:37)
Home sales are off the charts. So I feel like there's the push pole, there's a mix going on in the economy, but that's one of the ... And the reason that we're going to get more fiscal policy is because it is uneven, right? Nothing is perfect, but the market is sniffing out the recovery, next year and the normalization of profits.

Anthony Scaramucci: (11:57)
So, let's talk about the tech sector for a second though, because it's raging and again, there's four or five stocks that are making up a very large percentage now of the market capitalization of the S&P. So it's like the S&P five and then the S&P 495, what are your thoughts on that, Stephanie?

Stephanie Link: (12:16)
Yeah, no, I mean, it's not something I want to see and you bring up a great stat. So if you look at FAANG plus Microsoft, it's 20% of the S&P 500 and they accounted for 80% of the returns in July. So to your point exactly, it is super concentrated. And you mentioned early on again, DX is up 20% on a year, which is also amazing. I would love to see a more broad picture, I really would. And I think you are starting to see pockets as I mentioned, we did get, it's housing, it's auto sales, it's retail sales, it's e-commerce.

Stephanie Link: (12:52)
I mean, I feel like we are starting to broaden just a little bit, but it is still very, very focused for now. But then again, these companies have total addressable markets that are enormous. The internet of things is going to be a trillion dollar market by the end of this decade, wearables is going to be a $55 billion market in the next two years. Cloud is going to be, their total addressable market in the next three years is $600 billion, and SAS cloud, which is a component of cloud is going to be a trillion dollar total addressable market by the end of the decade.

Stephanie Link: (13:26)
So I feel like, and these numbers are probably underestimated given now that we're working from home and all the things that we're doing. And so, I feel like in a way it is justified that they should be doing so well. That said, I mean, on the margin, I've been taking profits because I think you have to. That's one thing Jim Cramer always said, never apologize for taking a profit. And so, I'm very mindful of the expectations and the setups for tech.

Stephanie Link: (13:55)
And we'll see tonight, we get a whole bunch of really, really high profile companies that report tonight. Maybe we'll see a pullback, maybe they'll stall out. But, in a slow growth world, growth is going to outperform value, even though I have a value bias myself as you know, which makes me sad to say, but that's the reality. So you have to have a barbell.

Anthony Scaramucci: (14:17)
Yes. And I've always seen you talking about the fundamentals and that whole Graham and Dodd analysis. So that brings up a very good question, is value over? Is the debate over value over? Has growth won the debate? And is there really not going to be a time where you see value eclipse growth going forward, given the magnitude of the transformation of the future economy?

Stephanie Link: (14:41)
I mean, I think growth has a very hard time if you don't have-

Anthony Scaramucci: (14:43)
I can see sadness in your eyes, Stephanie, as I'm asking you this question.

Stephanie Link: (14:45)
I know. I know, I know. And by the way, I do own some of these tech names, you have to, because my bench is the S&P 500 and they represent a whole of 26% of the market cap. So anyway, I think it's hard in a slow growth environment for value to outperform. And I really think you need better GDP, better growth, and a little bit of inflation. And while inflation break evens are actually on the rise, which is interesting to me and the dollar has pulled back, and that should lead to a value risk on trade, if you will. It's hard when you have such again, total addressable market opportunities for these companies.

Stephanie Link: (15:31)
And so, I think it's a combination, Anthony, I think you can own a little bit of both, but it's not been the right call to be in the value sectors. It really hasn't, even though that they've recovered nicely from the March lows.

Anthony Scaramucci: (15:47)
No, I understand. Listen, I've been vexed with this for the last 10 years since, actually 12 years as the last crisis. What about the traditional 60, 40 portfolio model still viable in your mind?

Stephanie Link: (15:57)
I mean, I think so, and every person is different, right? And depending on your age and your risk tolerance and that sort of thing, I just don't ... I mean, it's so hard to find value in the fixed income market. That's the whole problem, right? And so, that's why I think the equity markets, another reason why the equity markets have done so well is because there is no alternative. And if you can find companies that have a dividend yield of two or 3%, that's way better than what you're getting from a 10 year. So I lean a little bit more on the equity side, diversification, of course, global exposure, a little bit of EM, and then also you have some fixed income, but then you have some alternatives too in your world.

Anthony Scaramucci: (16:45)
Our world is getting beat up, Steph.

Stephanie Link: (16:48)
I know, I know, yeah.

Anthony Scaramucci: (16:49)
Which is a sign, usually that we're on the road of recovery. We got hurt hard in 2008, and then we had our best performance over the next four years. So let's see what happens. John Darsie, go ahead.

John Darsie: (17:00)
Yeah. You talked a little bit about the push pull between value and tech, and there's another push pull going on between passive management and active management. Obviously in the last six to seven years, following the crisis, passive management has massively outperformed, things like hedge funds have been a little bit out of favor. Do you think, given the environment we're in and given the rich valuations on equities right now that a more active management type of approach might go through a period of outperformance for the next three to five years?

Stephanie Link: (17:30)
I mean, I hope so, because that's what I do for a living. That's what you guys do for a living, right? But it hasn't been the case. And in fact, this is one of the reasons why I've mentioned that the buy side is under such secular pressure because there's so much competition, the performance has been okay, in some instances, very good and other instances, not so good. You hope that your clients are longer term and they can ride through the storms if you will.

Stephanie Link: (17:55)
But I really believe this trend, I'm not sure what it's going to take quite frankly, because if performance doesn't really matter, I mean, we were at TIAA, we had great numbers and we still saw outflows every single day. So, I just think that maybe we set up for a reversion, I hope so, but I don't know if there's really concrete evidence that we're even starting that at this point.

John Darsie: (18:20)
Right. And you touched briefly on earnings in your opening, but I want to talk a little bit more about earning season. I follow you on Twitter and I love keeping up with your analysis on different earnings reports that come out. What have we learned so far from earning season and our investors just giving 2020 earnings a pass and focusing on the future? What can we glean so far from what we've seen during this earning season?

Stephanie Link: (18:44)
Yeah, it is interesting that the analysts were so wrong, right? I mean that 83% beat rate is crazy to me, right? I mean, that's very high relative to historical levels. So, people, we came into the earnings period and we were flying blind, we really were. We had no idea. And I've been surprised by two things, one, companies are already starting to talk about currency and the dollar weakness and how it's going to be less of a headwind, took me by surprise a bit.

Stephanie Link: (19:14)
And in fact, Pfizer said just the other day that they're going to see a $300 million benefit, so less bad in terms of getting pressure from the currency side of things, so that's interesting. And then that bodes well for certain industries, multinationals, right? So you would think that maybe if you're going to see any rotation, maybe it is really more global multinationals, if you will. I've been very surprised at how strong, I'll mention it again, housing is. And we know existing home sales are up 20%.

Stephanie Link: (19:43)
But any company, it's Stanley Black & Decker, it's Pulte Homes, it's Lennar, it's Toll Brothers, it's D. R. Horton, they're all saying that housing is absolutely on fire. And by the way, these stocks are still super cheap. So you're going to see again, more of a rotation, I think, into housing. And we'll see about auto. So auto the global data that I get, it suggests that the light vehicle sales around the globe are at 73 million SAR. And that's up from 43 million SAR in April.

Stephanie Link: (20:20)
And so, China is back to last year's levels in auto. North Korea saw last month up 41% jump. So you are seeing this, and I think this is a very controversial topic. I don't think people believe that we are seeing an improvement in auto. And I think that's why you're seeing some of these semiconductor companies do well, right? With the end market exposure to auto, because you're starting to see production back online.

Stephanie Link: (20:43)
So overall, I mean, I think it's still early. I think the companies have really managed well. I think they continue to under promise and try to over deliver. That's what CEOs really truly get paid to do. And so, I'm interested to see the back half, and especially tonight with the FAANG reporting.

John Darsie: (21:03)
Anthony, I'll let you ask the next question. I know you don't like when I dominate the conversation.

Anthony Scaramucci: (21:07)
No, no, no, I do. He's actually very good at it. He said, we know you're a rising star, John, we know. We know, that I'll be soon, you'll be long gone. I'll be on the Pepper Talks when this is over, Stephanie, okay? If this keeps up, okay? Forget about SALT. But, I want you to talk a little bit about the private markets and sorting through the rubble inside the private. How do you look at the private markets after the pandemic? What's your thought there?

Stephanie Link: (21:34)
Well, I mean the private, so what I do is I actually talk about, or I look through from an equity point of view, I look at the Blackstones of the world and I look at the Apollos of the world and I've invested in some of those companies as well, but you're the expert on this field, you'll know better than I. I think there is a place in every portfolio for diversification. And I will tell you just back on the ALTS comment that I've made before, that's the number one item that everyone that I'm meeting, the advisors, that's the number one thing they want help with because they don't know as well. It's not as liquid. It's something that they really do want to have because some of their clients want that exposure, but they know nothing about it. So, it's interesting to me.

Anthony Scaramucci: (22:28)
Yeah, I just think there's going to be room there because of the regulation, things like space. There's still a tremendous amount of midsize to very large companies like SpaceX that we can take advantage of in the private market side, which if you look at the relative valuations, it's attractive. But, I want to ask you about your views about the country, the crisis, the past crises you and I have seen in our careers. Is this different? Does it feel different?

Anthony Scaramucci: (23:04)
You and I could tick off 10 or 12 crises that we've lived through since we got started in our careers. And so we know that we're going to always face them, and I always joke with my team, the thousand year flood happens every four or five years on Wall Street, so it's like one of these things we can't avoid, but is this different? And I hate saying it that way, because I know everyone says, well, well this time is different, it's not different, but it does feel different to me. And I'm just wondering if it feels different to you and if it does, why does it feel different?

Stephanie Link: (23:33)
Yeah, no, I think it's definitely different, I think. If you just go back to the last crisis in eight and '09, and that was a financial meltdown. That was a huge issue with the financial services companies being the ones that really created it and nearly took our country down. I mean, we lost banks. We lost companies, huge companies last crisis. Not that we're not going to lose companies this go round, but this was an intentional shutdown by the government because it's a health crisis.

Stephanie Link: (24:06)
And we maybe weren't as well informed about COVID-19, who knows? I don't know, but we weren't prepared for it like we should have been, we had to take aggressive action. We had to close. We're seeing now what's happening in these partial closers again, as you're seen some of these reopenings. We're all wearing masks now, we weren't wearing masks in March. I mean, there's so much going on, but when you close a country down, we're losing $25 billion a day in the country. I mean, that's just huge.

Stephanie Link: (24:40)
So now that you have partial openings, I do not think partial openings and partial closings, I don't think we're going to close the country down entirely again. I really don't. And I do take a lot of solace in the fact that these companies that are working on a vaccine are really making tremendous progress. I mean, listen to J&J, they just increased their trials, their human trials by two months, they've just, they accelerated it. And so, that's a really good thing.

Stephanie Link: (25:07)
Look at Moderna, look at Gilead, I mean, they're all these companies that are working so hard at trying to get us a vaccine that I'm encouraged that hopefully it's by the end of the fourth quarter, and maybe we can get it mass distribution in 2021. So, I don't know how long this is going to last. I do think though, that we are starting to see a recovery because we are opening, but it's a lot different than what it was in 2008.

Anthony Scaramucci: (25:34)
Yeah. It's just the combination of the financial issues, plus the health scare is something I think is unique, and we had the oil shock going on in April as well. So it just, it was a trifecta that I don't think we've seen all of those colliding together at the same time. We've got a question out here. Let me ask this question then I'll let John ask something, coming in on the fixed income side, what do you think of substituting for Feds or bonds? What's your thought there?

Stephanie Link: (26:01)
I think that that's a great idea because obviously you get more yields for certain. I think you have to be very selective though. It's like picking a stock, you have to have confidence in the fundamentals of the company and the balance sheet and that sort of thing, but absolutely that is a great combination. You can certainly mix in that, along with ... Because you're not getting yield and [inaudible 00:26:21], you're not really getting that much.

John Darsie: (26:26)
So Stephanie, you talked about the Fed earlier and about how much the liquidity they've dumped into the market has impacted asset prices, particularly in the equity market. The Fed is now starting to trim its balance sheet. Is this a completely Fed driven market whereby some of the volatility we're seeing today in markets is driven by concerns that maybe the fiscal stimulus isn't going to be as large or as quick as people would like? I know some of the unemployment benefits are expiring and then you have the Fed trimming its balance sheet a little bit. Is the market completely driven by news flow on policy or are fundamentals playing any role in volatility that we're seeing?

Stephanie Link: (27:05)
Well, I mean, the Fed is really, I mean, they really came out with the bazooka, right? I mean, I thought unlimited QE was one thing and then all of a sudden they're buying junk bonds on the other side. So it's like, wow, I've never seen such extreme action. And, it's very substantial.

Anthony Scaramucci: (27:22)
Could you get them to buy some structure credit for me, Steph. I mean, if you ever get in touch with any of these guys, just, you could mention that for me.

Stephanie Link: (27:27)
Absolutely.

Anthony Scaramucci: (27:28)
Go ahead. I'm sorry, I didn't mean to interrupt. I thought maybe I'd just ... I ask everybody I come in contact with.

Stephanie Link: (27:32)
So funny. I will, I will, absolutely.

Anthony Scaramucci: (27:34)
All right, thank you. Thank you, I appreciate that.

Stephanie Link: (27:38)
I would just simply say though with regards to the liquidity, I mean, did you hear ... I mean, I thought Powell sounded even more dovish this week than he did even a month ago, right? And a couple of weeks ago you had a number of Fed governors, also sounding much more dovish like there's more we can do. We're still keeping an eye on everything. I was just surprised that they were still so dovish. And so, I think, I mean, the Fed funds future market actually doesn't have the Fed raising rates until the end of 2022.

Anthony Scaramucci: (28:09)
Yeah. Well, the president has called in privately the most improved player on his team. When I heard that from one of the guys that I still talk to inside the administration, I was laughing at that. I thought that was typical of the president. I mean, if you notice he doesn't tweet about him anymore.

Stephanie Link: (28:26)
No, he doesn't.

Anthony Scaramucci: (28:27)
So, chairman Powell has done a great job. Obviously he's a very cautious guy, but he recognizes what we all recognized last time and if you read the book Firefighting, which was written by Geithner and Bernanke and Paulson, they said do more, be more aggressive. And I think this Fed has decided to do that. I think he's been very helpful to the overall economy.

Stephanie Link: (28:48)
Absolutely, I mean.

John Darsie: (28:49)
At least the expectations, that's half the battle is if investors feel like if anything goes wrong, the Fed will be there with an even bigger bazooka than they had last time, then it encourages risk-taking, which we're seeing in markets today.

Stephanie Link: (29:02)
Absolutely. No, absolutely.

Anthony Scaramucci: (29:03)
You worried about inflation, Stephanie?

Stephanie Link: (29:08)
That's why I mentioned the inflation break evens. Have you seen that chart? If you haven't, you should look at it on Bloomberg because it is an interesting chart. It really has rebounded and it gives me pause for sure. I don't think you're going to see inflation in the near term, maybe in the next three to six months, but I do think you're going to see something. What do you think gold is ... I think gold is telling us that for sure.

Stephanie Link: (29:29)
I am watching the dollar too, because that is also going to be instrumental in the pile on if we do get some inflation, but I think it's probably more like a 12 to 18 months time horizon that we see it. But I have to say, my entire team that I work with right now, they're fairly young. They've never seen inflation in their whole lives. So, there are PMs out there. There are people running money that have never seen inflation, which when it comes, it's going to come pretty fast, I think.

Anthony Scaramucci: (30:01)
Yeah. Well, listen, I'm worried about it as you have to be worried about it and obviously gold prices. But I remember going back to 2010 and '11, where gold was on a little bit of a run, but the Fed was telling you there wasn't going to be inflation. And then what you realized that they were replacing a lot of lost economic output, that's why you didn't get the inflation. However, you got the asset inflation.

Anthony Scaramucci: (30:24)
I think that's where the anxiety comes into the system from a political perspective, because, if you're lowering rates, rates work great on assets. If you own assets, the asset prices go up, but your wages do not necessarily go up. And even though everything has changed, I can still remember 35 years ago in an economics class, a very brilliant economics professor said to me, you're not going to get lots of inflation in the United States without wage growth, but you study wages, and you study wage growth, you don't really have a lot of mobility and wages right now, given the magnitude of people that are looking for work or are currently unemployed due to the work stoppages.

Anthony Scaramucci: (31:04)
So, I just think it's going to be hard to get the inflation, even though the expectation is there. We'll have to see, but I think it's going to look a lot like 2009 and '10. It's going to surprise me. Go ahead, John.

Stephanie Link: (31:17)
That'll be good for stocks.

Anthony Scaramucci: (31:18)
Yeah, no question. No question.

John Darsie: (31:20)
So the pandemic in a lot of ways was like a meteor strike that came completely out of left field. A lot of people were unprepared for it, and we've talked to some hedge fund managers and others who are changing the way they think about risk management as a result of the pandemic. We haven't had a pandemic like this in 100 years, so a lot of people were very unprepared for all the different implications of it. How, if at all, has the pandemic changed the way you think about portfolio construction for clients and about risk management in general?

Stephanie Link: (31:49)
So I would say that I always want to be diversified for sure. And I actually lean towards high quality companies and blue chip companies. My mantra is if I can get the number one or number two company in an industry with a great balance sheet, strong management team, market share growth, they're investing appropriately and properly to continue to see growth in the future, what I call compounders, if you will, those are the kinds of companies that I think will weather the storm better.

Stephanie Link: (32:22)
And they're also the companies that they're not going to not go down in a market. They're going to go down, but they're going to be the first ones to actually recover. So what I called them back in March, these kinds of companies, I called them accidentally high yielders, so that they went down, their yields went up, they had the liquidity, and that was why I actually added in March and April. And it was hard, trust me. I mean, you guys know it, it really, really was hard to buy anything back then.

Stephanie Link: (32:52)
I mean, we had so many very prominent figures in the industry really be very negative and very cautious. And quite frankly, it was alarming. I actually told everyone, just turn the TV off. You can't listen to these kinds of people and you just got to focus on fundamentals. And so for me, that's what drives me. And I don't know if it's necessarily the pandemic has changed that, it's just intensified that, it's just reminded me that I think my process makes sense. And while I might lag on these rip rallies, because it's always that secondary, third groupings that do well and outperform, and the way down you don't get hurt nearly as much. And again, if you're diversified and you do have, is it 60 40, is it 70 30, is it 80 20, you have a balance. I think that will serve you well over the long term.

John Darsie: (33:39)
I'm going to finish with a question about Hightower, which you started there, I think three and a half weeks ago. And it's a very fast growing firm, the independent RIA model is on fire in the marketplace because of how it eliminates conflict of interest between the advisor and their clients. Talk a little bit about your experience so far and why you were so attracted to that independent RIA model and what it's been like dealing with clients in a different way than you were when you were on the buy side?

Stephanie Link: (34:07)
Sure.

Anthony Scaramucci: (34:08)
And full disclosure, Stephanie, John worked at Hightower.

John Darsie: (34:11)
And I'm still invested-

Anthony Scaramucci: (34:13)
And worked very close to a lot of the Hightower [crosstalk 00:34:17].

John Darsie: (34:16)
Invested in the success of the business, so I'm a cheerleader from afar.

Stephanie Link: (34:21)
I will prove you proud. I will make you proud.

John Darsie: (34:22)
All right. Yeah, I'm excited that you joined it. It was a exciting press release to read, so I'm pumped about that.

Anthony Scaramucci: (34:29)
They were about to change the name of the company to Lowtower and then John left. And they said it was okay to stay at Hightower. But go ahead, Stephanie, I'm sorry, I have to rip him a little bit, because look at him, how can I not rip him? But go ahead, Steph, I'm sorry.

Stephanie Link: (34:44)
George Washington in the background.

Anthony Scaramucci: (34:46)
Yeah. Well, he's related to George Washington. I mean, how am I not going rip him? I'm an Italian kid from Long Island with my [inaudible 00:34:53] cup, see.

Stephanie Link: (34:54)
That's awesome.

Anthony Scaramucci: (34:55)
Today is going to be an amazing day. See that, they keep losing, but it's fine.

Stephanie Link: (35:00)
The power of positive thinking, right?

Anthony Scaramucci: (35:02)
So tell us about Hightower.

Stephanie Link: (35:04)
Yeah, I know and it's been a really great experience so far. So, as I mentioned earlier, I wanted to try to find a place that was growing in the business. I had gotten tired of cost cutting and restructuring and reorganizing and laying off. And it just wasn't fun and that was on the sales side and the buy side. And it was a surprise to me. But when I really did a lot of homework on the industry, I think the demographics are very favorable, number one. And number two, the piece that I'm going to be involved in is investing in products, in equities, in multi-asset, in fixed income, in ALTS.

Stephanie Link: (35:38)
I have a great team that's there and we're going to hopefully be able also to get the advisors to outsource to our products. And then, I'm also running my own product. So I'm still running money because I think, well, that's my passion quite frankly. And I obviously, I think to be on TV and to be in the media and to talk about stocks and to talk about the market, I think you have to have skin in the game and to have credibility. And so, that's why we decided I will still have a product, I'll have this other OCIO group too. I'll be working with the advisors, whether they put money with us or not, I'll be happy to talk to their clients as well and to give them advice, if I can.

Stephanie Link: (36:17)
Obviously I'm more equity focused versus fixed income and ALTS, but that's the piece that was also very interesting to me that I could learn. At this point in my career, there's a chance that I could still learn because I learn in the stock market, it's very humbling. Things change every day. But I wanted to know this is the way I think this is where the industry is going and in total. And so, I wanted to be part of that.

Stephanie Link: (36:39)
And then as I've met people, advisors as well as corporate and everyone is so, well, they're kind, and they were very welcoming, but they're also so focused on growth. Every single person, how are we growing? What can we do? Where can we expand? Where is it not working and we can reallocate the resources. I mean, they're being very creative.

Stephanie Link: (37:00)
As I mentioned, Bob Oros, the CEO created this position and we talked about what would be the perfect job for me. And it's a lot, it's like a fire hose, but it's very exciting. And so, I'm thrilled to be part of it. As I mentioned before, to hire in this environment speaks volumes. And I think I made the right choice, so I'm excited.

Anthony Scaramucci: (37:23)
Well, we love the company. And we agree, we love the company. We have a tremendous amount of RIAs over there in your distribution network, and we do a lot of business with them and they do a great job servicing their clients. And I always maintain that you're just not going to sit in ETFs all your ... If you are a high net worth individual, or you're an endowment, you're going to want to speak to people because flying the plane robotically has worked, but it may not always work. And I think it's very important to have those touch points, so they've got to be thrilled to have you, Stephanie.

Anthony Scaramucci: (37:59)
John is very thrilled because I think he owns a small little piece he's indicating. So, he's recognizing that you're already adding value to his life. We are very grateful to have you on. I hope we can get you back as we get closer to the election, because I think the economy is going to look a little different as we get out into the fourth quarter. We'd love to have you back to hear your insights there as well. John, do you have anything else you want to add?

John Darsie: (38:25)
That's it. We appreciate you taking the time, Stephanie. I know you're busy in your new role, but we appreciate you taking time out to join us, and we'll look forward to watching you on CNBC in the coming weeks and months.

Stephanie Link: (38:39)
Thank you so much for the invitation. It was a lot of fun.

Anthony Scaramucci: (38:39)
And congratulations, Stephanie, wishing you the best. Thank you.

Stephanie Link: (38:41)
Thank you. Stay safe.

Erika Nardini: Building Barstool Sports into a Digital Media Juggernaut | SALT Talks #31

“The reason people love live sports is they don't know what's going to happen. The reason they like Barstool Sports is it's really the same thing.”

In July 2016, Erika joined Barstool Sports as the company's CEO. Known for its original takes and unfiltered view, Barstool Sports is a driving force in comedy, sports, entertainment and culture. Under Erika’s leadership, Barstool Sports has experienced explosive brand and business growth as one of the fastest growing companies on the internet. It is the 6th largest podcast platform in the world with the number one sports podcast and female podcast, and the 10th largest distributed media company in the US. Barstool Sports drives 1.6 billion social views and 26 million video views monthly and 11.9 million listeners across its platforms, owning the 18-34 year old demographic.

Coming from an era just before the social media boom, Barstool generated a massively loyal following. Now, in a fragmented media market with individual personalities taking over much of the Internet, Barstool stands alone as company that effectively leverages its team of unique personalities known for unfiltered views. This unvarnished approach to media stands apart from traditional sports outlets that prioritize production value and uncontroversial opinions. “What I saw was something that could never be replicated and a brand that understood how to live and thrive on the internet which is something I believe in.”

For much of its existence, Barstool was a much trafficked website with a passionate following, but lacked many professional elements like company email or P&L statements. This created an opportunity for huge growth with a community of consumers whose trust of Barstool employees extends to the products and brands they advertise.

LISTEN AND SUBSCRIBE

SPEAKER

Erika Nardini.jpeg

Erika Nardini

CEO

Barstool Sports

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, politics, and entertainment. What we've tried to do with these SALT Talks during the work-from-home period is to provide a digital forum similar to the SALT Conference Series that we host every year in Las Vegas and internationally. What we're really trying to do is provide a window into the minds of subject matter experts as well as a platform for big world-changing ideas, and we're very excited about another unique SALT Talk today. We're excited to welcome Erika Nardini who is the CEO of Barstool Sports to SALT Talks today. Welcome, Erika.

John Darsie: (00:48)
Erika, like I mentioned, is the CEO of Barstool Sports which is a very fast growing media company focused on sports, comedy, and entertainment as well as culture. It's known for its unfiltered views and having a very rabid following among young consumers. In July of 2016, Erika joined Barstool Sports as the company's CEO and under her leadership, Barstool has experienced explosive brand and business growth as one of the fastest growing companies on the internet. It's the fourth-largest podcast platform now in the world with the number one sports podcast and female podcast, and it's the tenth-largest distributed media company in the United States. Barstool drives 1.6 billion social views and 26 million video views monthly and 11.9 million listeners across all of its platforms, and it pretty much owns that 18 to 34-year-old demographic in the United States.

John Darsie: (01:41)
In under three and a half years, Erika has grown the employee base at Barstool from 15 to over 200 with its revenue approaching $100 million. She's launched over 35 brands including the breakout franchises in entertainment, sports, and sports betting. Erika was named one of Fast Company's most creative people and one of the most powerful women in sports by Adweek and Forbes Magazine. Prior to Barstool Sports, she had several notable positions at top internet companies including as the chief marketing officer at AOL and as an executive at Demand Media, Yahoo, and Microsoft.

John Darsie: (02:16)
A reminder if you have any questions for Erika during today's talk, you can enter them in the Q&A box at the bottom of your video screen. Hosting today's talk will be Anthony Scaramucci who once upon a time appeared on a Barstool podcast, Pardon My Take, which is the number one sports podcast in the world. Anthony is the founder and managing partner of SkyBridge Capital, a global alternative investment firm, and the chairman of SALT. With that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:40)
Well thank you, John and Erika, I also got to sing Bohemian Rhapsody with your staff with my White House sunglasses on. So since I can't hold a tune, it didn't go very far, but it was very pleasurable for me. Great to have you on. I always ask people their backgrounds and I would just love to ... Because it's a fascinating story of your life to where you are right now and how you've intersected with Barstool. What attracted you there? How did you grow up? Where did you go to school? What did you do for sports?

Erika Nardini: (03:12)
Yeah. Thanks so much for having me. It's great to be here. I grew up in New Hampshire. I grew up in a very small town. We basically had a couple choices. We had one television and my brother and I had an hour of television a week. So we could fight over that which we did. You could stack wood, read books, or play sports which is pretty much what I did for my childhood. I was a big field hockey player. I skied. I ran track. I went to Colby College in Maine. So I went to a liberal arts college. Played field hockey and lacrosse there which I picked up in college. I then moved to Boston. I thought that I wanted to be ... I had an internship at Fidelity Investments. I thought I wanted to be in banking or to be a lawyer, and I got a job in the legal department after I graduated and realized that was a disaster. I was just never going to be a lawyer and I was certainly not corporate.

Erika Nardini: (04:10)
I mostly went out all the time and then would spend ... I'd get my work done in like an hour and then I would just write stories about what we all did the night before. Thankfully, this was pre-social media. I then went and worked at a bunch of ad agencies. I worked on the creative and marketing side and then later on in the media side, and I got my first big break really at Fidelity when the internet was really coming to be and no one really cared about the internet. I got an opportunity to work in and to really help define what Fidelity's internet strategy would be, and then I went on ... Once I engaged with the internet, I never left.

Erika Nardini: (04:52)
So I've been working in and around the internet since probably 1999. I've worked at Microsoft. I worked abroad for a long time. I helped take a company called Demand Media public. I launched a couple startups in between. I was the CMO of AOL, worked at Yahoo. I had an interesting opportunity to see all three portals during the portal era which was AOL, Yahoo, and Microsoft. I worked very closely with Google during Google's era. I launched a startup in music which was really based on social media and the idea of maximizing what was happening with Facebook and Twitter.

Erika Nardini: (05:36)
All along, I read this little blog called Barstool Sports. I lived in Boston when Dave Portnoy, the founder, started it. I read it pretty religiously. Every guy I knew read it. I had a lot of the tee-shirts. Dave Portnoy was kind of this Don Quixote type of character. I loved the Patriots so I loved what he had to say. I modeled a lot about my company in music after Barstool Sports. I had gone to raise money from the Chernin Group, from Peter Chernin and his group and they said, "Hey, we've just invested in this company, you're a woman, you've probably never heard of called Barstool Sports." I pulled out the app. I was like, "This is everything right about this company. Here's everything wrong with this company. The technology's janky and they don't know what they're doing with this, this, and this."

Erika Nardini: (06:26)
I left very jealous. I thought that they would find someone ... They were looking for a CEO and I thought that they would find a guy with a business degree who came out of sports or sports media. I met Dave through a mutual friend probably six months later, and to be honest, I never looked back since. That was, I don't know, four and a half years ago.

Anthony Scaramucci: (06:48)
Well I'm going to read a quote because we're not that politically correct either, and we're going to talk about cancel culture in a second.

Erika Nardini: (06:54)
Okay.

Anthony Scaramucci: (06:55)
David, the founder, said in hiring you, typical irreverency of Barstool, "We needed someone with big balls dragging on the ground, alpha male. We have found out CEO, our boss, a masculine boy." Why were you so excited to lead Barstool and what do you say about that in the context of all this nonsense in our cancel culture and the need for all these people to be offended by all these microaggressions?

Erika Nardini: (07:22)
Yeah. Look, I thought Barstool was a diamond in the rough. There will never ever ever be another Barstool Sports. The reason there won't ever be another Barstool Sports is that Barstool Sports was born in a different time when media wasn't so fragmented, when social media really didn't exist. So the way that the brand was built, the loyalty that the brand garnered and has endured and nurtured and enjoyed for almost 16 years, brands that are being born today are personalities and they have to compete with so much that there is never going to be the type of audience, the type of loyalty, the type of love that this brand has enjoyed. I felt that very few people saw that.

Erika Nardini: (08:12)
There were 74 people that interviewed for this job. They were all men. I was the only one ... 75, I guess, if you include me and I was the only one that didn't say that Barstool needed to be changed. All other 74 said, "What are you going to change? You got to get a little bit more PC. This isn't appropriate." I really didn't believe in that. I actually believed that what Barstool had had propelled it to a place that was very interesting and if we were going to take this thing to the moon, we would need to evolve it, but that we shouldn't change the DNA of it and who was I, I didn't work there, to say what they should or shouldn't be doing.

Erika Nardini: (08:54)
So what I saw was something that could never be replicated and a brand that understood how to live and thrive on the internet which is something I believe in. I think the internet is all that matters. It's been incredible. I mean we've really skyrocketed this thing in four years, and I think to your question on cancel culture, look, part of the reason people like Barstool Sports is it's disarming, it's real, it's ... Authentic is a word that's greatly overused. I think a lot of big companies have big conference room meetings with words like, "How do we be more authentic?" If you're in a conference room talking about being authentic, you're not authentic. What's great about Barstool is we kind of shoot from the hip, we call it like we see it, it's personality based, it's opinion based, we're trying to give people an escape from their day-to-day cube life or their college life or their professional life or their personal life, and we do it in a way that's been a journey.

Erika Nardini: (09:58)
The camera has been on, the blog has been open, the microphones have been on every minute of every day really pretty much for the last 15 years and certainly in a very dramatic way for the last five years. I think that's what is compelling to people. It's real. You don't know what's going to happen. It's not always right. I think that is what keeps us so relevant and makes us so captivating.

Anthony Scaramucci: (10:27)
Well I mean one-third of your audience is women. So I mean you're doing an amazing job in that demographic as well. So why do you think it's so powerful? I mean you're referencing authenticity and it's very distinctive, Erika. We've sanitized our language. We have to sanitize our language in the workplace. We sanitize our language on social media. They're censoring now a lot of different bellicosity of rhetoric. So how are you getting the women here? What's the sauce, the formula that you've created that these other people cannot capture?

Erika Nardini: (11:07)
Yeah. Look, I think when you look at traditional media, you see, typically you see three guys and a very pretty woman at a desk. They're wearing suits. They have a producer and a producer behind that person and then another producer behind that. Their media is built with a tremendous amount of infrastructure, and the distance between the consumer and the person behind the desk has become very, very far. When you look at today's 20-year-old, they don't give a shit what somebody behind the desk thinks. You don't find real people in those positions. You don't find other humans who think like you and talk like you. There's nothing that embodies your group of friends or what you believe in.

Anthony Scaramucci: (11:57)
Like you don't think I should have been fired over my reference to Steve Bannon's anatomy? Shouldn't have been fired?

Erika Nardini: (12:04)
Look, I think different places have different values. Our value is that-

Anthony Scaramucci: (12:10)
You guys voted me to comeback player of the year the minute I came ... No, I was in love with you guys.

Erika Nardini: (12:16)
Yeah. Look, we like people who have the guts and the balls to call it like it is. What's great about Barstool, to your question about what's the secret sauce, is the reason people love live sports is they don't know what's going to happen. The reason they like Barstool Sports is it's really the same thing. You don't know what Dave's going to do next. You don't know what Big Cat is going to do next. You don't know what's going to be on the next episode of Pardon My Take. We are a constant conversation whether it's about entertainment or the internet or sports or people and personalities or celebrity. The unexpectedness coupled with the authenticity coupled with I would guarantee most people have someone inside of this company who reminds them of a friend of theirs and you're just like so-and-so and you love them one day and you hate them the next day, that keeps people very interested in us.

Anthony Scaramucci: (13:16)
Well said.

John Darsie: (13:17)
Erika, I'm in that target demographic. Anthony's aged out slightly from that demographic that Barstool dominates. I've followed Barstool for a long time. I saw what you were describing earlier.

Anthony Scaramucci: (13:28)
Erika, I'm not going to let him get away with that.

Erika Nardini: (13:30)
I was going to say.

Anthony Scaramucci: (13:31)
I'm going to club him over the head a few times today.

Erika Nardini: (13:33)
You guys want a podcast?

Anthony Scaramucci: (13:34)
I'm not quite the Big Cat with my comebacks, but he's going to get karate chopped-

Erika Nardini: (13:40)
Oh, he is? Okay.

Anthony Scaramucci: (13:40)
... in his Adam's apple as soon as I see him which will probably be in two years. I'm going to take him out at the Adam's apple. He won't even remember why.

Erika Nardini: (13:45)
Okay.

John Darsie: (13:46)
Continuing on with my question-

Erika Nardini: (13:47)
Yes.

John Darsie: (13:48)
... before Anthony rudely interrupted me, you took what was sort of a ball of clay of great content, content that people loved, there was a ton of brand loyalty there, but to your point, the website didn't work that well, they didn't do a great job with targeting advertisers and things like that. You came from an advertising background and so I imagine you were salivating at the possibility of turning Barstool from a great content engine into a business behemoth which is what you've done which we'll talk a little bit more about the latest funding that you guys got, but what's so powerful from an advertising perspective about that 18 to 34-year-old demographic of which Barstool reaches one-third of men and women in that demographic which, by the way, is more than Vice and Business Insider, these ... Vice is an example of one that's gotten a billion-plus dollar valuation, but what's so powerful about that demographic? When you came to Barstool, what was your plan for taking that great ball of content and molding it into a business behemoth?

Erika Nardini: (14:41)
Yeah. Look, when I got to Barstool, there wasn't a P&L. They didn't have email. They texted one another and they knew to blog every 30 minutes, but they had built a brand that stood for something that was very different. That was the single hardest thing to do. Most startups get funding, they build all the infrastructure, you make a great product, you figure out your distribution strategy, and then you worry about the content and the brand. Look at Quibi, right? Quibi raised however much Quibi raised. $2 billion and they built big lobbies and big production teams and then nobody came. We had people that were coming, but it really, truly wasn't a company per se and it was single format. It was a blog.

Erika Nardini: (15:34)
There was, when I joined, I think Pardon My Take was in it's ... I want to say it had maybe six episodes. Pardon My Take was new, new, new. What I really did was to turn the gasoline on, build some infrastructure, create a P&L, create a business, prop up a company, and to take what was happening ... A blog is really what you're thinking and you're typing it into a CMS. A podcast is the same thing. You're just saying it. What our team was really good at it was creating conversation around every single piece of content that existed. We've always been good at that. I don't think anybody does social media better than we do.

Erika Nardini: (16:20)
But the advertising piece was important. The distribution piece was important. When I got to Barstool, I couldn't get anyone to come work here. I couldn't get anyone to give a meeting with us. I think we had four advertisers, but those four advertisers loved Barstool Sports for one reason. It worked. Barstool Sports converts. The same reason you're wearing a Waterdog shirt from PLL, you're telling me it's because of Big Cat and PFT. People care what we do. When Big Cat says, "I'm for the Waterdogs," you're for the Waterdogs. When Dave Portnoy says, "I'm going to drink High Noon," you're going to drink High Noon.

Erika Nardini: (16:58)
So we've just built people who are very influential and it works very well for brands because when you look at an ad dollar, you take an ad dollar, you put it on Vice, you put it on Buzzfeed, you put it on Barstool Sports, you put it on NBC, CBS, Turner, Bleacher Report, you name it, the dollar on Barstool Sports is going to work 100 times harder than any of those dollars because you actually care what our people think and what they're doing and you feel like you know them. You feel a personal connection to Dave Portnoy, to Dan Katz, to Kayce Smith, to Alex Cooper, to Wallo and Gillie, to Ria and Fran. There's a personal connection and as a result, our performance whether it's for platform, whether it's for a brand or a commerce partner is just dramatically and remarkably different.

John Darsie: (17:56)
One of the interesting things that you've done since you took over the company is helped grow it in a very broad type of way using different types of platforms. So you didn't come in and you didn't say, "Let's blog instead of every 30 minutes, let's blog every 10 minutes." You said, "You know what? Let's do social media very well. Let's do podcasting very well." I want to talk about the podcasting thing for a little bit. Barstool is the number four podcast publisher by monthly unique audience in the United States ahead of traditional heavyweights including people like ESPN and even people outside of the sports realm. Why has Barstool been so successful in that podcast medium and why have you emphasized it so much?

Erika Nardini: (18:35)
Yeah. Look, I love podcasting. When we first started really getting into podcasting and investing podcasting, people were still saying that podcasting would never be a real business. It wouldn't be a real industry. There was never going to be enough ad dollars or enough ears to make it worthwhile. Now flash forward, you look at what Spotify is doing, you look at what Apple is about to do, you look at what Sirius XM and Liberty are doing, podcasting is real and it's here to stay. We were just very early. I like podcasting because podcasting is ultimately based on personality and opinion. We do that very well. We also have built ...

Erika Nardini: (19:19)
What we have done traditional media hasn't done is when Barstool had never ... Had a small office in Massachusetts, but really hadn't had studios until we got to New York in 2016. There also wasn't real company infrastructure until 2016. So when you look at most media companies, they're trying to break down legacy infrastructure and to build new infrastructure that will be socially distributed. We started with that infrastructure and we're on the cutting edge of that. So when we think about a podcast, it's not just a podcast. It's video. It's franchises. It's segments. It's characters. It's personalities. It's tee-shirts. It's live events. So I think about it as it's just another way for us to grow personality and opinion and another way for us to connect with fans in a medium that has a low barrier of entry and a low cost to produce.

John Darsie: (20:22)
Yeah, and just to follow up on that, and you referenced it earlier, but I'm wearing a tee-shirt for the Waterdogs which is a Premier Lacrosse League team that is owned by one of your podcast Pardon My Take. I'm a listener of Pardon My Take and I also am a big fan of Paul Rabil who started the PLL. So when I listen to that podcast, I said, "You know what? I want to support the cause and buy a tee-shirt." It's back to your point about people not just subliminally wanting to buy products that Barstool has advertisers for, but me actively wanting to support that community. But I'll pass it over to Anthony for the next question.

Anthony Scaramucci: (20:57)
I'm taking off my sports coat now that I've been embarrassed by your Barstool fashion statements and everything else that's been said here. Let's go to Penn National Gaming.

Erika Nardini: (21:09)
Yeah.

Anthony Scaramucci: (21:09)
They bought 36% of Barstool, valued the company at a beautiful valuation, and it's a bet that Barstool can drive some of the rabid fan base over to the sponsor gaming business. What are your thoughts on that and how do you feel about legalized gaming? What are Barstool and Penn National's plans to attack that market?

Erika Nardini: (21:29)
Yeah. Look, we're really excited about Penn National. We have been talking ... We crossed paths with them probably about a year ago today, a year ago at this point. I'm a big believer in sports betting. Dave Portnoy is a big believer in sports betting. Same with Dan Katz. These guys have been betting for years and I think one of the things that is going to be very interesting about the legalization of sports betting in the US is that there's going to become a first generation of betters. I think that Barstool Sports and the Barstool Sports Book can become the leading brand in that. Our intention is to become a top-three player in every state that we operate in.

Erika Nardini: (22:17)
We really liked Penn for a couple reasons. They have a great management team. Jay Snowden is their CEO. He's fantastic, but they had a lot of things that we didn't have and we had things that they ... It was very complementary. They had physical casinos. They're the largest retail casino operator in the US. What they didn't have is a brand. What they don't have is expertise in digital and in media. I think when you look ahead at sports betting, when you look at how the casino operators or the daily [inaudible 00:22:51] who've turned into sports betting companies, they're going to be spending their money on marketing. That is where the majority of their [inaudible 00:22:57] will go.

Erika Nardini: (22:59)
When you look at a partnership with Barstool Sports, what they bought into is a brand that's beloved, that's been around for 15 years, and they're going to see a way of engaging consumers to bet, to be loyal, to be deeply engaged, and also to be funny, to think about sports betting in a way that can be conversational, in a way that can be social, and a way that can be funny and irreverent. I think that's really what we'll bring to the table for Penn. I think it's going to be an enormous business. I think when you look at young people and the way that they consume sports and engage with sports, betting is going to be a very natural part of that.

Anthony Scaramucci: (23:48)
I think it's an amazing part of your story that more people need to know about. In the context of your market, like let's say we have someone asking us a question about marketing on Barstool, how do they get in touch with you guys?

Erika Nardini: (24:07)
So they can ... Obviously my DMs are open. You can DM me. You can ... We have a fantastic partner team. Shout out [Greth 00:24:16] Lester who's listening to this. So we have a ... Deirdre Lester is our CRO. We work with all types of companies whether it's in the sports betting space and thinking about what we're doing in and around sports content, whether it's from an advertising perspective, a licensing perspective. So you can email us at advertising@barstoolsports.com or partnership@barstoolsports.com or you can DM me.

Anthony Scaramucci: (24:42)
Okay. Okay. Great. Do you know who's going to own the Mets, Erika? I'm dying to know that.

Erika Nardini: (24:47)
I'm hoping it's Alex Rodriguez.

Anthony Scaramucci: (24:49)
Okay. Okay. Tell me why. Why do you want A-Rod?

Erika Nardini: (24:53)
Well I love A-Rod. I'm an A-Rod girl. Look, a couple things. I think Alex-

Anthony Scaramucci: (24:59)
I'm a huge A-Rod fan as well. I had dinner with A-Rod a year ago.

Erika Nardini: (25:02)
Okay.

Anthony Scaramucci: (25:02)
I'm a little more partial to Steve Cohen only because-

Erika Nardini: (25:05)
Yeah.

Anthony Scaramucci: (25:05)
... we're best friends and I have a lot of money-

Erika Nardini: (25:07)
I think Steve Cohen's going to get it.

Anthony Scaramucci: (25:09)
Okay. You think it's going to be Steve Cohen? Okay.

Erika Nardini: (25:12)
I do.

Anthony Scaramucci: (25:12)
I'm sort of not allowed to talk about it 100%-

Erika Nardini: (25:14)
I bet.

Anthony Scaramucci: (25:15)
... because-

Erika Nardini: (25:15)
I'm probably not ... Shouldn't get into this either, but-

Anthony Scaramucci: (25:17)
Okay. Let's go to A-Rod for a second. You said you love A-Rod. Why do you love A-Rod? Because I think A-Rod has had a huge comeback and I think he is the man on broadcast announcing and I think he knows a tremendous amount of baseball. If he ends up owning a team, he'll add huge value to a baseball team. Let's go to-

Erika Nardini: (25:35)
Yeah, I agree. I think he has a bigger vision for baseball. He and I have talked about it a lot. I think, look, what's interesting about Alex and Jennifer is they understand sports and entertainment. Sports is becoming entertainment and entertainment is becoming sports. That's just a reality. Everything is blending together. I think he has ... He's someone who has been on journey. He's exceedingly curious. He is the only person who sits at Barstool Sports, Fox, and ESPN. In and of itself, that's quite a feat. You don't see that happen ever. He's interested in ... He obviously loves the game of baseball. He obviously understands media. I think he has a lot of ideas of how to bring new viewers and younger viewers in particular to the game. So that's why I like Alex. I think he's parleyed an incredibly stratospheric baseball career into a media and broadcast career into an investment career and hopefully one day into an ownership, into an ownership career.

John Darsie: (26:47)
Erika, I want to talk a little bit about working at Barstool. It was somewhat or it still is somewhat of a controversial website that people label with that misogyny tag. So when you were named CEO, it was sort of a middle finger from Dave to everyone saying, "Listen, we are one of the only media companies out there with a female CEO." You're the only sports media company today to have an all-female C-suite. Why do you think Barstool is so controversial and what have you learned about dealing with that criticism while working there?

Erika Nardini: (27:17)
I don't think we're that controversial. I think that we ... Look, I think we're a well-run company. I don't think our growth from $5 million in revenue, neighborhood of $5 million to nearly $120 million in revenue in four years is an accident. It wasn't happenstance that that happened. We're a well-run company. We have a good way of doing business. We have a very strong management team. We're the only company not just in sports, but in entertainment media, with the profile of an exec team that resembles ours. It's diverse. It's female-led. You just don't see that right now. I think the reason people think Barstool Sports is controversial is we're, in general, at the cross hairs and we're becoming increasingly at the cross hairs of exactly what you guys are investing in and talking about: news, sports, entertainment, the internet, politics, local events, celebrity.

Erika Nardini: (28:25)
We are talking about whatever it is people are talking about, looking at, or listening to and we are doing it with very strong opinion from very influential personalities. As a result, when we have an opinion, there's naturally an equal and opposite opinion to that. I think that that's one reason people think Barstool Sports is controversial. I don't think Barstool Sports is controversial by design. I think it's opinionated and vocal by design.

Erika Nardini: (28:55)
I think the other reason we are very interesting and talked about is that we're a company that has a history and we're a company where these guys have called it, they've been making jokes, they've been in the comedy space for 16 years at this point. Most of that content still lives on the internet, and when you look at most companies and most brands, the stuff that they were doing five years ago, three years ago, 10 years ago, 15 years ago is gone because the things that were considered appropriate, the things that were considered funny, the type of dialogue, the type of humor that was permissible has changed. We still have that history out there and I think that, personally, that's what makes, is in part what makes Barstool Sports compelling because it's very real. Anyone who is enjoying our content for the most part was alive 16 years ago. They were making their own content. They were saying their own things. We're different in that the cameras have been on and we're different in that we recognize that this is a reality show as much as it is anything else. A lot of that content and a lot of that opinion and a lot of those jokes still are out there.

John Darsie: (30:17)
It's almost one of those things where people have in their mind that you're controversial because they watched some program that convinced them you were controversial, but if they were to point to any individual instances, they would probably struggle to find something that was particularly controversial. But I want to talk a little bit about Barstool's ability to dominate sort of the pop culture zeitgeist. So the COVID pandemic is a perfect example. You have Big Cat who's one of your personalities for people who aren't familiar with Barstool. He started playing an old video game that he had in his living room, NCAA Football 2014. He turned that into he became the largest streaming Twitch personality sort of on that platform. He had something like 200,000 people watching him at one time, watching him play that video game.

John Darsie: (31:06)
Then you have Dave Portnoy, the founder of Barstool, has become Davey Day Trader Global where on CNBC, it's hard to watch CNBC for a day without them talking about Dave Portnoy and what he's done to create this legion of sort of retail traders that are trading while they can't bet on sports during the pandemic. So what do you think it is about Dave and about Big Cat and the team and the personalities you have there that are so good at drawing on those little things and becoming sort of those on-the-fly phenomena?

Erika Nardini: (31:38)
Yeah, I just think they're insanely talented. Dave Portnoy's dream when we opened up our office in New York was that if you were funny, instead of applying to Saturday Night Live, you would send your resume to Barstool Sports. I think we're there. I think if you are funny and you want to build a brand for yourself and you want to be part of something very creative, we're as good as it gets. I also think Dan, Dave are two phenomenal examples of just incredibly captivating personalities who made a lot of content in a time when there was no resource. So when you look at big media and you look at the pandemic, those personalities were kind of stuck. The studios weren't open. You couldn't liaise with your producer. You didn't have your set. There was no infrastructure. We're a company that has very little production infrastructure. We have a very unlayered approach to production, and so as a result when our office closed, these guys had what they always had from the beginning. You have the internet.

Erika Nardini: (33:05)
You also have complete creative freedom to do what is interesting to you and for Dave, Dave was missing betting so he took after the stock market. You truly cannot watch CNBC for a day or read anything about trading and not see Dave mentioned. This is something he picked up in March of this year. He was like, "I'm going to figure out day trading." Dan took a different approach and said, "Hey, I'm going to play NCAA '14 and I'm going to invent this big fat coach named Coach Duggs," and you have 160,000 people watching him live every night. As big as multiple stadiums are watching an NCAA video game football game on Twitch with Dan. So I think partly it's the ingenuity of the people who are here. Partly, it's the freedom to create for the most part whatever they want. I think the third part of it is a very complete comfort in making content with very little resource and very little production and very little infrastructure.

Anthony Scaramucci: (34:15)
Well I've got to compliment Dave Portnoy because I watched that entire interview with President Trump and I don't know David, but I do know the president and I thought he captured a lot of what the president is about. I always say to people if you like the president or you dislike the president, don't demonize him because he's another human being like everybody else. Then you just have to look at him qualitatively and objectively to assess if you want him in that role, but I thought Dave captured his personality. So kudos to him. It's an interesting thing to do coming from Barstool Sports because you've got the White House as the largest fish tank or aquarium in the world and here comes Barstool and the great maverick Dave Portnoy and he's all of a sudden opening up a sleeve into something that other people would not have seen without him. So give you a lot of credit on that.

Anthony Scaramucci: (35:07)
But I want to ask a meta question if that's okay, and I know John has a couple more questions for you before we break. This is about ... It's sort of the five-year question. Now, we all got the five-year question wrong. If I asked you in 2015 what were you going to be doing late July 2020, it is not sitting in your house with a mask on walking outside. I don't think you would have gotten that right, Erika. Nobody that I know has gotten that question right, but the five-year question going forward for Barstool, where is it? What happens to token CEO? What happens to your programming? You're a visionary. What does it look like in 2025?

Erika Nardini: (35:47)
Yeah, that's hard. I think you will see a couple things. In 2025, my hope is we are an extremely dominant player in sports betting. I think you're going to see that from us, that we have not only created the playing field, but we have really built something very durable and very robust and high-performing and valuable. So I think you're going to see us be a powerhouse in sports betting. I think in five years, the way people watch sports is going to be dramatically different than it is now. I think all the rights deals will change. I think who is broadcasting what will change. I think who you listen to when you're watching live sports is going to change. I would bet that some of the voices you're going to want to listen to are from Barstool Sports and we will be in that game is the second place I think you'll see us be.

Anthony Scaramucci: (36:53)
[crosstalk 00:36:53]. You had that moment with ESPN. You almost had a full Scaramucci with ESPN. I mean a full Scaramucci is-

Erika Nardini: (36:59)
We had a one-night stand with ESPN.

Anthony Scaramucci: (37:01)
Yeah, a full Scaramucci is 11 days. I think you got to-

Erika Nardini: (37:04)
Yeah, we didn't even make that.

Anthony Scaramucci: (37:05)
... 10 out of a Scaramucci.

Erika Nardini: (37:06)
Yeah. Yeah.

Anthony Scaramucci: (37:08)
Any chance to reset that ever, ever going back? No?

Erika Nardini: (37:12)
Not in that way because it's not in our interest to be totally frank with you. If you look at ... It was great to have the chance to do a show on ESPN. I loved that. That was great for us. Same with we did ... We had one of the highest rated Super Bowl shows on Comedy Central the year before. So it was great for us to play with television. Television is in decline and when you look at a show at 1:00 AM on a secondary network, I'm not sure I would do that today because we're bigger than that show-

Anthony Scaramucci: (37:49)
Right.

Erika Nardini: (37:49)
... just by turning on the lights in the video game. So I think our world has changed from where we were in 2017 and I think network and cable television has changed from where it was in 2016 and 2017 which is why I think in five years when you look at the leagues, they want to be in a place where they're going to get the biggest amount of eyeballs. Those-

Anthony Scaramucci: (38:18)
Those sports franchises are worth more in five years?

Erika Nardini: (38:21)
Yes.

Anthony Scaramucci: (38:22)
Tell me why.

Erika Nardini: (38:23)
Because I think live sports is the single most valuable thing on television bar none because it's-

Anthony Scaramucci: (38:34)
[crosstalk 00:38:34] platforms, right? It's valuable on streaming. It's valuable on the internet. It's valuable on-

Erika Nardini: (38:37)
It doesn't matter where you put it. People will come watch it.

Anthony Scaramucci: (38:40)
So it's almost like the Swiss Army knife of programming-

Erika Nardini: (38:43)
Completely. I mean I'm a Patriots fan. I don't give a shit what network the Patriots are playing on, not to be crass.

Anthony Scaramucci: (38:49)
[crosstalk 00:38:49] Patriots fan. How could you not tell me she was a Patriots fan?

Erika Nardini: (38:52)
Who are you a fan of?

Anthony Scaramucci: (38:53)
I knew you were a Patriots fan. I knew you grew up in New Hampshire. I'm a suffering Met, Jet, Knick, and Ranger fan. Okay. I hate going to Logan Airport for the ... You know the reasons why I hate going to Logan Airport. You guys do that at the shuttle for us New Yorkers-

Erika Nardini: (39:09)
Yeah.

Anthony Scaramucci: (39:09)
... okay?

Erika Nardini: (39:09)
We do.

Anthony Scaramucci: (39:10)
It causes tremendous pain seeing 26 championships up there-

Erika Nardini: (39:15)
Just a little kiss for when you come into town.

Anthony Scaramucci: (39:17)
Yeah, when you're leaving too. I mean it's a TSA nightmare for me in Boston.

Erika Nardini: (39:22)
It is true, but anyways, it doesn't matter. If you're watching your Jets lose, you don't care where you're going to watch them. I mean you'd like to see them win, but what you're going to be able to do in five years' time is you want to listen to the game in Spanish, you want to listen to Big Cat, you want to listen to Chris Collingsworth. You're going to get your choice, and I think that's where the world gets very interesting. Look at John's wearing PLL Waterdogs shirt. The PLL was-

Anthony Scaramucci: (39:52)
With George Washington behind him, but he's wearing the Waterdogs shirt. You know he's a very complex guy.

Erika Nardini: (39:57)
Yes, yes.

John Darsie: (39:58)
That's America.

Anthony Scaramucci: (39:58)
You know there's a lot of psychiatrists-

Erika Nardini: (40:00)
There's a lot going on there.

Anthony Scaramucci: (40:03)
A lot of psychiatrists would like to get in there and figure out what's going on. Trust me.

Erika Nardini: (40:05)
Completely, but that's a league that was created two years ago. It's brand new. So I think in five years, the way we watch sports, the way we engage with sports, who's commenting on sports, who has the rights to sports will change and you will see us be a part of that. I think you'll also see us get physical and you will see ... If you look at One Bite, we have the largest database of pizza in the world. We have an app where people review pizza hundreds and hundreds of times a day. Why don't we have a pizza restaurant? Should we have a pizza restaurant? Should we be making pizza? So I think those are the places you're going to see us be in five years.

Anthony Scaramucci: (40:50)
All right.

John Darsie: (40:51)
We're going to leave it there. We could do this for a couple hours, I think. I'm fascinated by the growth of Barstool. You grew it from a scrappy little blog and a leaflet that Dave Portnoy handed out on mass transit in Boston to a $450 million media empire. I think you're still just scratching the surface. I think people, when they saw that number, they said, "Oh, my goodness. What's going on," but I think the value that you create inside of Penn National and what you can do to become sort of the leading player in the online gambling space is unlimited. The potential is unlimited especially in an environment where states are trying to generate revenue and are probably going to accelerate that timeline in terms of legalized gambling.

Erika Nardini: (41:29)
Yeah.

John Darsie: (41:29)
Thank you so much for joining us, Erika. Maybe we'll have to do this again in the near future, maybe after Anthony goes back on Pardon My Take. I know he's been itching to get back on.

Anthony Scaramucci: (41:40)
[crosstalk 00:41:40]. I was the man of the moment for that moment, but make sure you tell Dan, the Big Cat, that that was a lot of fun for me in a lot of ways. Every time I walk in the airport, there's a 20-year-old, they say, "Oh, my god. You were on Pardon My Take."

Erika Nardini: (41:55)
That's great.

Anthony Scaramucci: (41:57)
How powerful your messaging and your medium is and congratulations to all of you guys. You built a-

Erika Nardini: (42:04)
Thank you.

Anthony Scaramucci: (42:05)
... fantastic business. Even though I'm outside of the demographic as John has pointed out seven times since we started, I am one of your big time customers.

Erika Nardini: (42:15)
Awesome.

John Darsie: (42:15)
Just by a couple years. Just by a couple years.

Erika Nardini: (42:18)
We'll take him. We'll take him.

Anthony Scaramucci: (42:21)
We'll see what happens to him when he gets to my age. Okay? By the way, since I'll be controlling all the Botox supply in America by then, you're going to look like S-H-I-T. Okay? Let's just put it that way. Erika, you can have as much Botox as you want, but you probably-

Erika Nardini: (42:34)
Thank you.

Anthony Scaramucci: (42:34)
... won't need it.

Erika Nardini: (42:35)
I do. I enjoy it.

Anthony Scaramucci: (42:36)
God bless you, Erika. Let's stay in touch, okay?

Erika Nardini: (42:38)
Okay.

Anthony Scaramucci: (42:38)
Hopefully, we can get you to the SALT conference one year.

Erika Nardini: (42:41)
I would love that.

Anthony Scaramucci: (42:43)
I think you guys would enjoy that. We do get a lot of cross-section of athletes. We had Kobe a few years ago who gave an amazing speech, and we obviously miss him a great deal. Thank you, Erika, and we wish you the best. Stay safe and healthy.

Erika Nardini: (42:57)
Great. Thank you guys.

Chris Fenton: Author "Feeding the Dragon" | SALT Talks #30

“I think that the belief was is that over 50 years China would become more like the west so that when they did take over Hong Kong, Hong Kong would be the same as that it always had been.”

For seventeen years, Chris Fenton served as president of DMG Entertainment Motion Picture Group and GM of DMG North America, internationally orchestrating the creative and business activities of DMG—a multi-billion dollar global media company headquartered in Beijing. He has produced or supervised twenty-one films, grossing $2 billion in worldwide box-office. As an author, Fenton chronicled much of that work in Feeding the Dragon: Inside the Trillion Dollar Dilemma Facing Hollywood, the NBA, & American Business.

20 years working in the US-China arena around ideas of culture and commerce gave Fenton a high level of applied expertise that he used to assist individual and companies. In the fast pace environment of rapid globalization and business between the US and China, it was difficult to step back and survey the big picture. A tweet from the Houston Rockets general manager in support of Hong Kong independence set off a firestorm between China, the US, the NBA, and its fans that caused Fenton to step back and fully recognize the fraught nature of US-China relationship. “What I didn't see, and I didn't even think of, was how the American public was going to perceive that situation as something that woke them up to the pandering that our capitalistic endeavors were doing in regards to getting access to that market.”

Fenton identified what he termed, “Fenton’s five forces of diplomacy” in describing key elements of the US-China relationship: national security interests, politics, human rights, commerce, and culture. Commerce and culture currently represent the two areas where US and China are able to align easily.

LISTEN AND SUBSCRIBE

SPEAKER

Chris Fenton.jpeg

Chris Fenton

President (2002-2018)

DMG Entertainment Motion Picture Group

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, politics and increasingly we've had some interesting guests in the field of entertainment. And the guest that we have today crosses a lot of those different lines, it's going to be a very interesting talk. 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, the SALT Conference. And really what we're trying to do is provide our audience a window into the minds of subject matter experts who are leading investors, creators, and thinkers. We're also trying to provide a platform for big, important ideas that we think are shaping the future and changing the world.

John Darsie: (00:48)
Today we're very excited to welcome Chris Fenton to SALT talks. For 17 years Chris was the president of DMG Entertainment Motion Picture Group orchestrating the creative and the international business activities of DMG which is a multi-billion dollar global media company headquartered in Beijing. And he's produced or supervised 21 films grossing $2 billion in worldwide global box office revenue. As an author Fenton chronicled much of that work in his new book which is out today. Congratulations to Chris on the release of his book. The book is called Feeding the Dragon Inside the Trillion Dollar Dilemma Facing Hollywood the NBA and American Business. You can learn more about the book at feedingthedragonbook.com. We highly recommend it.

John Darsie: (01:37)
As you'll learn during the talk Chris has a very practical real world experience on dealing with China and he offers really practical insights into the path forward for U.S. China relations. At present he speaks regularly as a China expert and serves as the CEO of Media Capital Technologies having concluded a successful term as senior advisor to IDW Media Holdings focused on streamlining operations, expanding international business and restructuring investments.

John Darsie: (02:08)
Chris also hosts U.S congressional member delegations on diplomatic missions to China focused on trade, media and investment. He's a trustee of the U.S. Asia Institute and serves on several company boards. Chris is a contributor to Real Clear Politics, the Federalist and the Rap, and he regularly appears as a U.S. China commentator on Bloomberg, Fox News, Fox Business, BBC and CNBC among many others. Chris holds a bachelor's degree in engineering from Cornell University and he resides with his wife and his two children in Manhattan Beach, California.

John Darsie: (02:45)
So, hosting today's interview as usual will be Anthony Scaramucci the founder and managing partner of SkyBridge Capital a global alternative investment firm. Anthony is also the chairman of SALT. And just a reminder, if you have any questions for Chris during today's interview you can enter them in the Q and A box at the bottom of your video screen. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (03:05)
Well John, thanks so much. Chris, I'm very excited to have you on. This is incredibly timely. Some of your issues were on the front page of your local newspaper and the LA Times today which I appreciate you sending me this morning. But I want to start where I always start in a SALT talk is I think we have a lot of young people on as well and we would love to get your background, your backstory. I know it has something to do with Olive Garden. I keep hearing that it's central to your backstory and it's had some impact on your life. So, why don't we start there Chris?

Chris Fenton: (03:39)
Yeah, there's not a lot of uniqueness to it. I think there's similarities to a lot of middle class, upper middle class upbringing. So I was born and raised in South Florida. My father was an engineer for United Technologies. I had one sibling, a younger brother, two years who's actually with United Technologies now and my mom. Thank God they're both still around. And we moved to Connecticut when I was in high school, went to Glastonbury High School, public school there, and graduated and shot off to Cornell University, got an engineering degree.

Chris Fenton: (04:18)
In 1993 when I graduated school we were in a bit of a poor economic environment. I didn't have a lot of opportunities. I was not the best student in the world, I think I was a C plus B minus at best. So I hopped in my car, stayed in a bunch of fraternity houses across the country and just tried to find a city I wanted to live in and set roots. It took me about six or seven months to do so and a buddy of mine who was a hotelee at Cornell was working as the beverage director of that Pretty Woman hotel at the foot of Rodeo Drive in Beverly Hills and he talked me into visiting for a couple of days and I never left.

Chris Fenton: (05:01)
I was flat broke at the time so I wanted to get a bartending job like I had up at Cornell and I looked around and realized oh my God every beautiful actor and actress works their way up through the bartending hierarchy of every nice restaurant over the course of a decade. So I realized that wasn't going to get a good job that way so I got the first job I could get in order to pay my rent which was as a waiter at the Olive Garden and that's where the journey into Hollywood started.

Anthony Scaramucci: (05:35)
And how many breadsticks did you have at the Olive Garden before we get into the more serious stuff?

Chris Fenton: (05:41)
I wasn't a breadstick consumer. I was eventually fired because I was addicted to tiramisu and I would sneak into the freezer every night and eat a bunch of them and then smooth the plates around so that no one noticed they were missing.

Anthony Scaramucci: (05:57)
That's a good thing to do pre pandemic but. John and I live in the same hometown, there's an Olive Garden on Old Country Road that I had to stop going to in 1995 because I was, unlimited breadsticks not a good look for me. I want to dive right into the book. You're pretty much talking about your career, China, U.S., China relationship this book is coming out in a very timely way it's right before the election. There's a lot of stress in that relationship right now. We were talking before we went live to our SALT attendees about you can't go back to where we were, we have to go forward. What happens here Chris? Lay it out for us, what do you think happens here?

Chris Fenton: (06:47)
Well, it's funny after spending almost 20 years in the U.S. China space and the exchange of culture and commerce I became a bit of a practical applied expert in that space. I'm not a [inaudible 00:07:03] think tank expert with a PhD in China studies. I didn't live in China full time ever during that time. I spent a lot of time on planes going back and forth. But just over that amount of time I gathered a lot of information and intel and experience and expertise. And quite frankly, I felt like a lot of people could have just fallen into the same position and done the same thing. But it was a very colorful journey.

Chris Fenton: (07:29)
So, one of the things I really wanted to do at some point was to write those memoirs out and I had a bunch of opportunities from publishers that were interested and they approached me more on like a, "Hey, give us the 10 best business practices to abide by when dealing with China or some sort of expertise type of book." And I said, "No." I always looked up to Michael Lewis and the way he wrote it and I always loved Liar's Poker which I'd read 100 different times and just thought it was a really, really entertaining, engaging look at something that could be very off putting for most readers because maybe they don't want to know much about the intricacies of Wal Street. But he wrote it in a way that engaged almost anyone and that's what I wanted to do with this.

Chris Fenton: (08:14)
And part of that was to engage readers in 15 years of what we had been doing under this mission of rampant globalism and how that rampant globalism was great for capitalism but on top of it, it was great for Americans. And to open the market of China any way possible, any way you could, was in the best interest of everybody. So, we always were stuck in the fog of war during those colorful years of trying anything we could obviously within the rules of law in order to open that market more and more and we succeeded more and more. But what happened as I started thinking about the proposal for the book was all of that colorful journey was going to add up into, "Hey, and we've got to continue doing this. This is great for us."

Chris Fenton: (09:09)
But then something happened when I got back from the last congressional delegation trip I had in September. I Took three members of Congress over there. We met with Carrie Lam and the protesters. President Trump was in the middle of a lot of tweeting and really heavy handed rhetoric towards the Chinese during that time. We went up to Beijing, we met all with the officials up there and we got back and a month later the Daryl Morey tweet, the Houston Rockets GM who I didn't even know who he was I just knew Houston Rockets, biggest brand in NBA when it comes to China because of Yao Ming. I knew the moment that tweet came out and I saw it I was like, "That's going to be a terrible situation for the NBA," and I was right.

Chris Fenton: (09:54)
But what I didn't see and I didn't even think of was how the American public was going to perceive that situation as something that woke them up to the pandering that our capitalistic endeavors were doing in regards to getting access to that market. And that was the moment that made me go, "I'm going to tell this journey. I'm going to explain how we all got here to this date but I'm also going to put out there that we need to change things." This turned out not to be the best experiment out there. It hasn't worked out the way we wanted it to and we need to come together as a country to address it.

John Darsie: (10:35)
Chris, there's a part of your book where you talk about something called Fenton's Five Forces of Diplomacy. You talk about all the different areas where countries can find common ground and build some level of consensus. But obviously in the United States, in China, we have very different political systems and a lot of different value systems. But you talk in the book a lot about how the exchange of culture and commerce is so important if we're going to find some common ground and avoid a cold war between the two world superpowers. Can you talk a little bit more about those five forces and why you think on a practical level that exchange of culture commerce is so important?

Chris Fenton: (11:14)
Yeah well, a lot of times in regards to dealing with North American companies in China during my tenure of doing this I've found that the more in the weeds you got with China the harder it was to get something done. So, China's a lot like an onion and if you keep peeling away there's just more and more peels. And on top of it, with the depth of my experience in China there was only so much I was going to learn before I got over my skis in explaining things about that country. So, one of the things I did was try to comprehend and then also be able to explain the super power relationship.

Chris Fenton: (11:54)
And I had a meeting once with Andy Campion who's the CFO of Nike and I was talking about how I feel like there's five different bars of service that work between the two superpowers. And he said, "Well, that's like Porter's five forces in business. Why don't you call them Fenton's five forces, a diplomacy?" And I said, "Hey, that's a great idea." So, that's where the name came from. So let's talk about what the five forces are.

Chris Fenton: (12:19)
Assume that China and the U.S. Are cell phone and cell tower. To have a perfect communication between the two of them you want five bars of service. Those five bars of service in my view are national security interests, politics, human rights, commerce, and culture. Unfortunately, we have learned that in politics they're not coming any closer to the way we run a democracy. They're very happy or at least the CCP is very happy running that country as a communist country. Human rights, we have definitely seen some huge differences there. National security, we're starting to see them as a dragon spreading its wings whether it's the South China sea or issues and other parts of the world with the belt and road initiative, et cetera.

Chris Fenton: (13:05)
We're starting to realize that there's three forces that we need to agree to disagree on. So that leaves us with two left, commerce and culture. One thing I know from 20 years is that they love the culture from the West. It's aspirational, it has freedoms that they don't have, it has really interesting things that they are excited about and they engage in. And that is the same as some of the movie posters behind me or wearing a really cool Nike pair of shoes. The second thing is there's a lot of commerce going on between the two countries. We are very entangled in that web so this idea of de-coupling is very difficult. So we have two bars of service that seem to be working pretty well. And quite frankly, even through all this crazy rhetoric and a lot of the barking between both sides that commerce and cultural exchange is still happening. So my feeling is if we continue it under a fully rebooted bilateral relationship which we need to address we can avoid a cold war or even worse something that escalates to war.

John Darsie: (14:11)
So you've been advising a few House members on Congress's China task force. You're also working with the Senate side as well. You talked about the idea of a larger reset. What do you think it's going to require to too put that reset in motion and to baby step into a more healthy relationship between the United States and China?

Chris Fenton: (14:31)
Yeah I mean, well one thing about China is that a lot of times when somebody goes over there and sees the opportunity with that market they get overwhelmed with how big the potential is and oh my God the world's our oyster and they can never get anywhere because they're thinking too big and they're not thinking about intermediary steps. And you bring up the idea of baby steps in this reset and I agree there's got to be baby steps that we can accomplish that continue to build towards a true resetting of the relationship. So, in some of the conversations I've had with congressional members, and by the way I'm not the smartest guy in the room I'm just offering suggestions and I hope everybody comes together and offers voices from different points of view to get this done.

Chris Fenton: (15:18)
But some easy ones, I mean are as basic as, I mean, one thing they're fighting is the WTO designation of China as a developing nation. I think we should get the WTO to actually call them a developed nation at this point. That's something that even we had the fight early in our industrial revolution with the United States until Europe said, "Hey, you've caught up to us now in fact you stole a lot of our stuff and all that kind of thing so you're going to be on the same footing as us." We need to do the same thing with China. We need to also do this and as you guys know in the financial services...

Anthony Scaramucci: (15:55)
Well Chris, let me stop you for one second. Why do you think we haven't done that thus far? It's been almost 20 years as the WTO introduction.

Chris Fenton: (16:03)
Honestly I don't know the answer to that question. I'm assuming there's a very strong lobbying effort to keep it the way that it is and that's keeping us from being able to get that done plus the WTO involves other countries too that are involved with that designation. But it's something that seems very obvious to me. On the China side I know because I've been in the meetings with our congressional members when they pitched the idea of, "Well, we're still developing. Have you been to a third tier city? Have you been to a fourth tier city? Have you been to our suburbs? They look like any developing nation. Our per capita income is way below yours and at the level of developing nations." I mean, they have every argument in the book you can imagine. So, there's obviously a lot of forces fighting on it but it seems like a pretty basic principle to come to an agreement on at least if you're not China.

Chris Fenton: (16:55)
The other thing too is and this is the same situation where the accounting practices by companies over there, particularly the SOEs that have state secret laws that they're hiding behind they haven't had to partake in the same accounting practices that other companies do when they're accessing capital markets here in the United States. That's obviously something that we're seeing a push for and that's something that should get done.

Anthony Scaramucci: (17:24)
What do you think of the new national security law that was invoked in Hong Kong? What kind of problems do you think that presents for China with the West?

Chris Fenton: (17:35)
Well the biggest, I mean one problem when you work with China for a long time is you start to understand their point of view a little more. When I was there with three members of Congress it was obvious that you started to absorb the idea that Hong Kong was always China's so China did have a deal to take it back with [inaudible 00:17:58] And I think that the belief was is that over 50 years China would become more like the west so that when they did take over Hong Kong, Hong Kong would be the same as that it always had been. Unfortunately, we have learned that China doesn't seem to be coming more to the West and on top of it that 50 year agreement ended after 23 years just a couple months ago.

Chris Fenton: (18:23)
The national security law is obviously something that's really it's happened as we are looking the other way and it's creating a lot of issues. I mean, in one particular instance and it falls in line with some of the issues that I have with Hollywood's business in China is cross border censorship. So you have cross border censorship of movies where a movie studio is told to change certain things in a movie not just for the China market but for the world to see. And we're seeing the same thing through the national security law where the voice of anybody outside of the border of Hong Kong or China could be punishable under this new form of law because China's calling it in the jurisdiction of the world partly under their domain.

John Darsie: (19:17)
So Chris, I want to go back to the Hollywood piece. So, that's the crux of your experience in China is bringing large Hollywood productions to the Chinese market and obviously it's a great cashflow stream for a lot of these studios but it involves a lot of cross border censorship. As you mentioned, there's a couple of example case studies that we've spoken about in the past one of them is Looper, another one is Iron Man Three. Could you talk through those case studies and explain to our audience exactly the process that takes place with these studios in bringing movies to the Chinese market? This was the subject of the article in the LA Times this morning about whether Hollywood is cowtowing to the Chinese excessively. And just explain the challenges of that from a business perspective. And then obviously you talked about the general public's reaction to the NBA's decision to go soft on the China thing. Could you just talk us through that process?

Chris Fenton: (20:09)
Yeah, for sure. Well, one thing in regards to the baby step approach of changing things so that we add up to changing a lot of things in the microcosm of Hollywood there's a lot of simple changes that I think we should push for too. For instance, we only get 25 cents of every dollar that a movie makes in that market whereas the global average is between 45 and 50% so we need to change that. On top of it they have severe regulations over how many of our movies, our international movies get into that market so that's another issue that we need to address which is this quota situation that most other markets don't have.

Chris Fenton: (20:50)
Moving into the censorship world one of the things that I'm okay with because Hollywood has been okay with it with other countries like Japan, Korea, middle East, et cetera, is that there is a censorship of the content within the borders of China. So they might see something that they feel is offensive or maybe there's drug use or maybe there's criminal activity in the movie scene that they want to remove from the film. And we comply by doing that the same way we would do if we were showing something in the UAE or in Korea based on what are the standards for their censorship practices.

Chris Fenton: (21:32)
Where I have a big issue is what I call cross border censorship and that's when as Senator Ted Cruz said in regards to this latest Tom cruise movie the flight jacket that Tom cruise wears had the Taiwanese flag on it. Obviously the CCP in China don't recognize Taiwan as a separate country nor having their own flag so they asked to have it removed from the movie. But they didn't ask to have it just removed from the movie that's shown in their territory they asked for it to be removed from the content that's shown around the world and for me that's a big problem that we need to address.

Chris Fenton: (22:11)
One issue that's super offensive about it is the fact that you could argue that the biggest goal of the CCP is to keep 1.4 billion people just happy enough that they don't revolt so that there's another Tiananmen Square incident. And you could argue if they see certain things like the Taiwanese flag which might, and for independence from the PRC at one point or whatever, and that might instill discontent towards the government that the government wants to have that off of the flight jacket in their territory to keep the populace happy.

Chris Fenton: (22:47)
The issue is for me that's super offensive is they have a firewall in China. So if that flight jacket with the flag on it is shown in Peoria, Illinois they have a way of keeping the majority of their population from seeing that flag. Yet, they still want us to remove the flag not because they care about their own populous but they want the rest of the world not to recognize Taiwan as a separate country or they will censor LeBron James or Daryl Morey outside of their country even though they could firewall them inside. Because they don't want anybody on the outside of their country talking about Hong Kong protesters and their fight for freedom and the support for that, that's a big issue.

Chris Fenton: (23:32)
And we saw that when we did certain things like Looper. Looper, we actually took a movie that was supposed to take place in the future. It was a movie that starred Joseph Gordon Levitt and Bruce Willis and Emily Blunt. Bruce Willis played Joseph Gordon Levitt 40 years in the future. In the future in that movie it was supposed to take place in France. But over time we were able to convince the filmmaker Ryan Johnson who now is directing the Star Wars movies to take a flyer and say, "Hey, let's move the future to China because China's probably going to be a big part of the future in the world today and 40 years from now."

Chris Fenton: (24:10)
He agreed, we moved it and we actually put Shanghai as the center location of the future. And we worked with the Shanghai municipal government to design their skyline the way they saw making their future 40 years to be. And keep in mind, time travel is censored in China. They do not like any content with time travel because they want to control the narrative of the past and they definitely want to control the narrative of where things are going. But we convinced them they could control the narrative of where the movie goes by working with us with the plot and with the locations to make it look like the city of the future.

Chris Fenton: (24:53)
Now, the one thing that they did do that we almost lost all our money on is they came to us and said, "Hey, we want seven minutes of that Shanghai footage in the film." The problem is only about three to four minutes of it really worked. So we cut out the extra three minutes and they said, "You know what? If you do that, we're not releasing the movie in China." Then we actually had to take that seven minutes and put it into the Chinese version of the film so they at least had it there. And then they fought with us to get it into the global cut because they wanted the globe, the sea, all of that footage. It was a big war between us and China Film Group and the state of administration or radio and film and television that we ultimately won over with various other concessions. But it was a perfect example of how they're not just trying to control a narrative in country they're trying to control a narrative outside of their borders. And that's a real problem we need to address as a nation.

Anthony Scaramucci: (26:00)
You're on top of a lot of different things commercially and you're seeing the world in this real politic sort of way. So, envision for us what a good future would look with China in terms of the health of the bilateral relationship, respect for the two systems and not brow beating each other too much but also not stealing intellectual property and so forth what do you say?

Chris Fenton: (26:27)
It's a great question. So, the book partially because it tells a colorful journey it brings in a lot of characters like myself and you realize we weren't evil doers or greedy capitalists we were actually on this mission under the guise of globalism is good for everyone. And you learn that and you see the collaborative effect between the two countries working together in various different case studies that I walk through in the book in an entertaining way. And you see the comradery that's built between the two superpowers, how it's covered in the press and how it's seen by the leadership.

Chris Fenton: (27:04)
So, we know that it is to our benefit if we can do something like this in the future not just decouple fully. But what we need to do, obviously in order to feel good about that type of cultural and commercial exchange moving forward as we need to address a bunch of things that have come to light recently. I mean for instance, repatriating manufacturing particularly in the areas of national security interests we have to do. We either have to bring them back here or we need to bring it to Western allies.

Chris Fenton: (27:36)
Number two is we're realizing and [inaudible 00:27:40] was on I guess a month ago with you guys talking about this theory of the fourth turning which is something that I find an interesting theory also. But if you're looking at how globalism and particular relationship with China has caused an effect, a negative effect on probably 90% of Americans you realize that a rebalancing or a resetting or a fourth turning needs to occur to address the system so that 90% of the country is feeling benefits of what we do moving forward. And part of that is rebuilding our middle class, rebuilding a labor class, rebuilding skillset jobs that come back here and are repatriated.

Chris Fenton: (28:21)
So, when we repatriate manufacturing obviously national security issues are a big issue, but also ones that create jobs here are another big one. On top of that we want to make sure that we, and we talked about this earlier, we rebalance the trade that is going on between the two countries, the tariffs, the quotas, the technology transfers, the IP theft, the forced joint ventures. For instance, Disney owns just 43% of their theme park in Shanghai, China owns the other 57%. In order to sell cars like GM in China they have to give a JV ownership to China of 51% in order to get access to that market. We need to change that.

Chris Fenton: (29:09)
I mean, there's a laundry list of different things that we need to do. They're all very tangible and a great sort of, "Hey, check that box, check that box, check that box." There's going to be compromise on a lot of that stuff but the important thing is, is we can get it done. There is a road to victory in that kind of situation that we can follow on a baby step approach and then create a better bilateral relationship on the back side of it.

Anthony Scaramucci: (29:36)
I think it's very smart. I just want to follow up and then John ask some questions from the audience. So, as a capitalist you're doing the right things, pragmatism, you're trying to intersect with a system that's different from our system and be respectful. There are some things going on inside of China. I don't know a lot about them but there's concentration camps, potentially. They deny some of that. Western investigative journalists say that there are concentration camps where there is Muslims that are being held in certain situations in China. As a capitalist how do you feel about that and how do you feel about aiding a system that is doing that? Is that something that we should be doing, not be doing? Should we be ignoring that as capitalists? What's your recommendation there?

Chris Fenton: (30:27)
Well, I think as a human being you don't want to support it and a capitalist is a human being. And there's no capitalist I know that supports that kind of treatment of other human beings.

Anthony Scaramucci: (30:38)
No, but hear me out. If you're over there doing commerce in China and it's supporting their markets and it's supporting the government and that government is doing that how do you reconcile?

Chris Fenton: (30:48)
So the reconciliation is as a unified front. If Bob Iger at Disney says, "We don't stand for the way you're treating the Hong Kong citizens or the [inaudible 00:31:03] and we want that to change ASAP." There's shareholders and investors that obviously are inspired and passionate about creating revenues from China and they'll simply replace Bob or whoever takes his spot with the person that does comply, it becomes a whack-a-mole situation. If LeBron James comes out in support of the Hong Kong protestors which is the right thing to do he'll get all his endorsements replaced by some other basketball player. In fact, if we don't even unify with our Western allies on this but we get all of Hollywood backing the idea we might find [inaudible 00:31:43] out of Germany or Studio Canal out of France or Bollywood taking the spots of some of our studios.

Chris Fenton: (31:49)
So, I talked about it earlier but one thing we need to do is obviously keep this from being a third rail issue. Joe Tsai the Brooklyn Nets called it a third rail issue when the human rights issue was talked about in terms of the Hong Kong protesters. We need to air it out. I mean, this is not, the amount of compliments I've gotten about how I'm being a squeaky wheel here from friends in Hollywood is really flattering, it's amazing, it's nice. But the fact that they end every email with, "I can't say this stuff publicly but I'm glad you are," that's the problem. We need to talk about this stuff we shouldn't be ashamed of it.

Chris Fenton: (32:28)
I mean, we were under this mission of globalism is great and look the other way with certain things but now we're woke to it or whatever the word is we want to use. So let's talk about it and create rules for the road. What are we okay with and what aren't we okay with and everybody has to abide by it. I mean, the accounting practices thing which is not even a human rights issue well have Goldman Sachs comes out and says, "We're going to stand for the way it should be." Well, JP Morgan comes in and takes that business. But if everybody's on the same playing field suddenly we have a way to address this stuff and we might actually be able to create change.

Anthony Scaramucci: (33:10)
It makes sense it's just it's a big issue for people. We're all trying to reconcile. Listen, I'm pro the diplomatic bilateral strengthening of that relationship. We can't live in each other's systems and we can't police people internally any more than other countries can police us internally. So, but it's hard, it's a very hard issue for a lot of people.

Chris Fenton: (33:33)
Well, I'll tell you I was [crosstalk 00:33:34].

John Darsie: (33:35)
As Chris writes in the book there was one person who called him out on some of the obsequiousness and [inaudible 00:33:41] that he practiced toward the Chinese and that was his wife so it's a lesson to all of us always listen to your wife.

Chris Fenton: (33:48)
Yeah. I'm ready for The Mooch and the Mrs. to come back. That was one of my favorite podcasts when working out.

Anthony Scaramucci: (33:54)
Yeah. We're going to bring it back after labor day actually but we put it on hold because of everything that's going on. But yeah, no, she takes a cheese grater to the side of my head for about 45 minutes. And Fenton let me tell you something, it's a lot cheaper than therapy. So trust me that is definitely coming back.

Chris Fenton: (34:12)
By the way, you're a 100% right. It is like rainbows and unicorns to think this is easy but what we definitely need to do is at least start talking about it. There's so much ostrich in the sand going on right now and we all know it's there, it's that elephant in the room. I mean, I even suggested to one senator's chief of staff the other day, "Why don't you call up one of those C suite guys and just get together in Omaha or something? Don't tell anyone and actually say hey what are the pressures? What are the things that are causing you not to be able to talk about this and address it? And I as a Senator I'm going to tell you the pressures that I have that are making me talk about it." And how do we find a Venn diagram that intersects at some point, so we can actually deal with this thing and quite frankly move on. We need to figure this out but it's crazy and it's bifurcating the country in a terrible way.

John Darsie: (35:09)
So, just to further dive in to the complexity of this issue so you've been critical of the hypocrisy of the NBA silence on Hong Kong but you've defended people like LeBron and Disney executives for example for their silence and for the approach they've taken towards China. Could you square those two points of view for us?

Chris Fenton: (35:34)
Well I'm not, it goes to the whack-a-mole thing. I mean, if we don't have a rules of engagement that everybody's abiding by what's the use of somebody standing up and saying something because they're just becoming a sacrificial lamb? I mean, it drove me crazy, I got called onto a lot of shows right after the Daryl Morey tweet and in fact it was a Bloomberg interview that I did where they asked me about LeBron. And they asked about Senator Marco Rubio who was telling him, "You've got to say something." What's crazy is that the personal sacrifice that LeBron makes by saying something that we all want him to say is huge whereas a senator telling him to do it there's nothing that really affects that senator personally, there's no sacrifice. It's just a good soapbox stance to take and it's something we all want to say but we can't.

Chris Fenton: (36:31)
What we need to do is set up a situation where everybody's following the same way. If we're cool with what's going on with the [inaudible 00:36:39] and the Hong Kong takeover and all that stuff then no one should have to talk about it publicly. Because we're saying, "Hey, we're good with that as a nation so LeBron we're not going to put you on the spot about it." But if we're not good with it as a nation then we've got to say what we are good with as a nation and if somebody does speak up about it we've got to back them.

Chris Fenton: (37:00)
And Disney is the same way, Disney has a really difficult situation with Mulan. That's a movie which by the way is not coming out when it's supposed to which I think is a blessing in disguise because I don't think United States citizens are going to be super excited about watching a two hour tentpole movie with a lot of Chinese faces, Chinese locations and Chinese mythology right now. But on top of it, Disney has a problem where the two biggest stars of that movie have spoken up on behalf of the CCP supporting them and the takeover of Hong Kong against the Hong Kong people.

Chris Fenton: (37:36)
So in a perfect world, Disney would come up and say, "We don't agree with that. We support the rights of the Hong Kong people and the fact that they have another 27 years before the turnover." But Disney can't do that they have so much money at stake in that market. And if they do it, you know what Universal's theme park that opens up in Beijing will just take all the business away from Disney's theme park in Shanghai. It just becomes a sacrificial lamb whack-a-mole situation so we just need to be unified on it.

John Darsie: (38:07)
Chris, we're going to leave it there. I know you have a lot of media hits today on the release day of your book so congratulations again. Hold the book up for our audience so they can go find it. It's feedingthedragonbook.com. You can find out more about the book. Chris talks about his career in Hollywood, a lot of the issues that we spoke about and he writes about them at much more length. So go check out his book. it'll be worth your time.

Anthony Scaramucci: (38:28)
Chris, it's a fascinating discussion. I hope that we can get you back before the election if that's okay because I'd love interview you as we're heading into middle October.

Chris Fenton: (38:38)
I would love to be on. I'm completely honored and humbled to be on this to begin with. I mean, your guests are unbelievable. The stuff that I've learned from listening to them has been incredible. So thank you for having me on and...

Anthony Scaramucci: (38:51)
We feel the same way about you, your pragmatism and realism in dealing with this issue is something that we're going to need no matter what direction we go from a political perspective. So thank you Chris, I greatly appreciate you being on.

Chris Fenton: (39:04)
Thank you guys. Take care and be well.

Anthony Scaramucci: (39:07)
Okay. Thank you.

Brad Thor: Author "Near Dark: A Thriller" | SALT Talks #29

“I want you to keep flipping those pages. Probably one of the nicest introductions I get when I do media stuff is, "Ladies and gentlemen, it's because of our next guest that I didn't get any sleep last night. I wanted to read a little bit of this Thor book and before I knew it, it was 4am.”

Brad Thor is the #1 New York Times bestselling author of twenty thrillers, including: Near Dark, Backlash (One of Suspense Magazine‘s Best Books of the Year), Spymaster (“One of the all-time best thriller novels” – The Washington Times), The Last Patriot (nominated Best Thriller of the Year by the International Thriller Writers Association), Blowback (One of the “Top 100 Killer Thrillers of All Time” – NPR), and The Lions of Lucerne (“One of the best political thrillers ever” – Barnes & Noble).

As a prolific writer, it is essential to write the kind of stories you, yourself want to read. That passion requires a PHD-level of knowledge and understanding in order to truly succeed in a genre, especially in a climate saturated by entertainment options. “I know I compete with Netflix, I compete with the internet, all that kind of stuff, so my chapters have to be short, crisp, cinematic, each one has to end with a cliffhanger, so that people want to go to the next one. That's the definition of a page-turner.”

A style of writing termed “faction” creates fictional storylines that draw closely from real world people, places and events so as to make the storytelling and its stakes all the more compelling. Scot Horvath serves as the long-running protagonist in many of Thor’s books, where he serves as an American special operator who faces big moral questions around rules of engagement in pursuit of enemies around the world.

LISTEN AND SUBSCRIBE

SPEAKER

Brad Thor.jpeg

Brad Thor

#1 New York Times Best-Selling Author

Near Dark

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 politics.

John Darsie: (00:19)
SALT Talks are a series of visual interviews we've been doing during this work from home period in lieu of our global conference series, the SALT Conference, to provide our audience a window into the minds of subject matter experts who are leading investors, creators and thinkers. What we also try to do with SALT Talks is provide a platform for big, important, world-changing ideas that we think are relevant to our audience.

John Darsie: (00:42)
We're very excited today to welcome Brad Thor to SALT Talks. Brad is a novelist, and he's a number one New York Times bestselling author of 20 thrillers, including his most recent book, Near Dark. Some of his other books include Backlash, which was named one of Suspense Magazine's best books of the year, Spymaster, which was quote, "One of the all time best thriller novels," as written by The Washington Times... There's The Last Patriot, which was nominated as Best Thriller of the Year by the International Thriller Writers association, Blowback, which was named one of the Top 100 Killer Thrillers of All Time by NPR, and the first book in the Scot Harvath series, The Lions of Lucerne, which was quote, "One of the best political thrillers ever," according to Barnes & Noble.

John Darsie: (01:29)
Brad is not only a novelist, but he's also appeared on several major media outlets, including ABC, CBS, NBC, PBS, Fox and CNN, among many others. He discusses terrorism as well as how closely his novels of international intrigue actually follow real threats that are facing the world today. Brad has also served as a member of the department of homeland security's analytic Red Cell unit. He's also lectured law enforcement organizations on on the horizon and future threats that are facing the country and the world. He's been a keynote speaker at the National Tactical Officers Association annual conference.

John Darsie: (02:10)
In 2008, Brad shadowed a black ops team in Afghanistan in preparation for researching one of his thrillers, The Apostle. Brad graduated cum laude from the University of Southern California, where he studied creative writing, film and television production. Prior to becoming a novelist, he was the award-winning creator, producer and writer and host of the critically acclaimed national public television series, Traveling Lite.

John Darsie: (02:35)
As a reminder to everyone watching today, if you have any questions for Brad during today's SALT Talk, you can enter them at the Q and A box at the bottom of your video screen. Hosting today's interview is Anthony Scaramucci, who I know is very excited about this interview. Brad is one of his favorite authors and I know that he has either almost finished or he's picked up Brad's new book, Near Dark. Anthony is the founder and managing partner of Skybridge Capital, a global alternative investment firm, as well as the chairman of SALT.

John Darsie: (03:02)
And with that, I'll turn it over Anthony for the interview.

Anthony Scaramucci: (03:05)
Hey John, and thank you Brad. Thanks for being here. I'm going to hold up the book. Phenomenal book, and I actually did finish this. I got in trouble last week, I had Daniel Silva on and I hadn't finished the last four chapters, so I had to make sure I finished it this weekend. Phenomenal book, and once again you are right on it in terms of what's going on in our society. It's a fascinating book. I recommend it to everybody.

Anthony Scaramucci: (03:29)
But I want to go to the back story behind that amazing biography of yours, so give us a little more color on your personal. Where did you grow up? What did your parents do? How did you make the transition into being the brilliant novelist that you are?

Brad Thor: (03:45)
Thanks, and thanks for having me Anthony. I appreciate being here and you sharing me with the SALT audience today. I grew up in Chicago. My dad was a Marine, and my mom was a flight attendant for TWA in the glamor days, the 60s, when travel really was elegant.

Brad Thor: (04:00)
My dad was in the Marine Corps for a while, and used the G.I. Bill to go to college. The Marines were his ticket out of the south side of Chicago. He graduated, went to work in real estate for a big developer named Arthur Rubloff in Chicago. Arthur developed a ton of stuff in Chicago. My dad basically carried Arthur's briefcase, and learned everything from Rubloff. And then my dad started a firm, he's still got it, he's still going, called Code and Construction Consultants, and he goes in and works for owners, works for [inaudible 00:04:33], all kinds of stuff. You may be developing an office building, a hotel, or renovating an office building or hotel, and he truly represents the owner in making sure that they are getting the best materials, the best labor, at the best prices. He puts out RFPs and 20 subs will come in. 20 electrical contractors will come in. Goes through everything.

Brad Thor: (04:53)
When I was 16 my dad wanted me to see what the family business was and took me on a job meeting out in San Francisco, and I remember they were negotiating down to how much door hinges cost, and could they [inaudible 00:05:04] stock, certain things on the site, so that they could guarantee the price would not go up for the developer and all this stuff. So I learned a lot about negotiating from my dad.

Brad Thor: (05:12)
My mom was an entrepreneur as well. She became an executive recruiter. So I learned a lot growing up, to never rest on your laurels, always treat every day in your office as if it's the first day on the job and it could be your last if you don't give it everything, and never take your customers for granted. And probably the biggest thing that I take from all that is, I say this in all my book events Anthony, which is I don't work for the publisher. I work for the readers. Those are my bosses. And when they leave reviews or give a colleague a book at work or a family member one of my books, that's my annual performance review, so I always want those five stars or somebody saying, "Try this Thor book." And that I get from my upbringing in the Midwest.

Anthony Scaramucci: (05:53)
That's great. You have a writing style that's been dubbed faction. When I read your books I feel like I'm reading a presidential daily briefing, and so let's talk a little bit about that. How did you develop that knack? Is it from your travels? Is it from your relationships in Washington, intelligence services... How did you develop that knack?

Brad Thor: (06:14)
It's a little bit of everything. I'm in the entertainment business. My job is to give you escape. I want you to keep flipping those pages. Probably one of the nicest introductions I get when I do media stuff is, "Ladies and gentlemen, it's because of our next guest that I didn't get any sleep last night. I wanted to read a little bit of this Thor book and before I knew it it was 4:00 AM, my eyes were bleeding, I couldn't believe that I shut it. Great book."

Brad Thor: (06:38)
So my style has developed and improved over the years. Being a Midwesterner, I always want to do better than the last time. There was a great book called The Content Trap a couple of years ago and it said, "One of the biggest mistakes entrepreneurs make when they're trying to grow their client base is to improve the product. And you may do little tweaks with the screwdriver that the client never sees, the customer never sees, but that's not where increasing the customer base lies." I thought that was very interesting, because I'm a perfectionist at heart. I want to get better. I'm 20 novels in, and as you and I have talked about before, my thrillers are like the James Bond movies. You don't have to have ever read a Brad Thor book before to jump into the latest one. But I'm always trying to go a little bit further outside my comfort zone, get better as an author, so that means I'm reading books, I'm writing all year long.

Brad Thor: (07:34)
I think Stephen King had one of the best pieces of advice, which is to write the kinds of books you love to read, because that's where your passion is. And for me, I add on to that that you probably have a mini PHD in that genre if you've been reading them for a long time. You know what books you like, what books you don't like and all that kind of stuff. I know I compete with Netflix, I compete with the internet, all that kind of stuff, so my chapters have to be short, crisp, cinematic, each one has to end with a cliffhanger, so that people want to go to the next one. That's the definition of a page-turner.

Brad Thor: (08:10)
So over the years I've realized that attention spans have probably gotten a little bit shorter. We've taught people not to wait a week for the next episode of the series. You can binge everything right now. So it's just kind of my business acumen that I got from my parents, is how do I compete? It's not only how do I compete, how do I win? And I win by being more entertaining than anything else I'm competing with. Because it takes a lot of discipline to sit down, start a book and finish it, so I want to make that process as easy as possible.

Anthony Scaramucci: (08:39)
Well it's no question. I was going to say every time I get to the end of something I'm like, "Oh man," and I've got to go again, so you're very, very good at that. But you've also captured something which I think is very unique. This Scot Harvath, I'd like you in your words to describe him to people that have never met him before. I've met him 16 out of the 19 times. I've got 3 more I've got to read, but I want you to describe him for us. And then secondarily, how many Scot Harvath are there in the United States, working for the United States right now?

Brad Thor: (09:16)
So Scot Harvath is my protagonist. Harvath grew up in Southern California. His dad was a SEAL. And he was very rebellious. He got into skiing like a lot of my Southern California friends do. Crazy, you wouldn't think of kids growing up in LA and San Diego skiing, but they do ski, whether they go to Big Bear or whatever.

Brad Thor: (09:34)
And Harvath ends up deciding he doesn't want to go to college, and he's got a shot with the US Ski team. His old man hates that. His dad ends up dying in a training accident as a SEAL instructor, and Harvath decides, "I no longer have the will to compete in professional sports. There's a greater calling for me." He decides to go finish his college degree, gets into the navy, becomes a SEAL himself.

Brad Thor: (09:57)
Ends up distinguishing himself, he works his way up to SEAL Team Six, distinguishes himself on a presidential detail where the president was appearing by water. Comes into the White House, and the then president in my book says, "This guy is too good to have on defense just trying to bolster our counter terrorism expertise. We need to let this guy off the chain and go after the bad guys."

Brad Thor: (10:17)
And one of the questions or kind of the debates, Anthony as you've seen in my books over the years, is we have these things called the Geneva and Hague Conventions, and basically they set out the Marquess of Queensbury Rules for warfare, that if you are going to be a lawful combatant, you at least have to show up on the battlefield with an armband. You can't hide behind women and children, put bombs in cars so that when soldiers go by you can clack off and kill them.

Brad Thor: (10:43)
So there's been this debate about what does it mean for the United States to abide by rules when certain enemies won't. And I think one of the reasons that Jack Bauer and Kiefer Sutherland in 24 were so successful is we all want to have some heavies on the side of the United States. We believe we're the heroes in our own story. I believe that too. I think this is the greatest nation in the history of the world. We're very fortunate to live here. What are we willing to do to protect American lives?

Brad Thor: (11:11)
So if you are willing to suspend the rules or to kind of turn a blind eye to rules being broken if it means the bad guys can be caught and dealt with, well then you have to ask, "What kind of person do you send out? Who do you trust to break the rules?" Because it can't be someone that breaks the rules only because they're a sadist. It's got to be somebody that if they bend or break the rules, it's for a greater good. And I don't take a side on that, actually.

Brad Thor: (11:35)
It's very interesting, because you'll have different politicians or different spies or special operations people talking about it. This is a big thing for Marcus Luttrell in Lone Survivor. I had the great honor of becoming friends with Marcus. And this was the big debate if you read the book or saw the movie, When the goat herder stumbled across that four man SEAL team. What do we do with these guys? If we kill them, we're going to go to Leavenworth. If we tie them up to a tree overnight, well the wolves are going to eat them, and that's just as bad as killing them. If we let them go, we may die. And in fact three of them died, and Marcus barely made it out.

Brad Thor: (12:06)
So this question about what we should be allowed to do [vis-a-vis 00:12:10] what our enemies... If they don't have a rule book, should we have one? How many pages can we peel out of our rule book if we really want to be effective against these people? So that's a continuing theme, but that's who Harvath is, is really this guy that is trusted to go out there and make the right calls and maybe we don't want to know what he does, as long as he gets the job done, sort of a thing.

Anthony Scaramucci: (12:32)
So how many people are like that in our intelligence community?

Brad Thor: (12:36)
Not enough. We have some incredibly brave men and women. The majority of people at the CIA, DIA, we have amazing people. We have some kind of messed up structures within there. We're not policing, particularly on the intel side. People like Chelsea Manning, Edward Snowden, Reality Winner... We're getting these young 20 somethings in there that are willing to expose some of the most sensitive secrets in the United States because they've got this woke kind of social justice attitude which is completely incompatible with the job they're being asked to do. We don't want to know what their personal feelings are about what the government is doing. If you really think something is bad, I've always said you could go to Rand Paul in a heartbeat and say, "Senator Paul, I discovered this and this bad thing is happening," and let Rand Paul help you work it out.

Anthony Scaramucci: (13:28)
So more of a process of following the whistleblower rules as opposed to becoming a rogue operator, is what you're saying.

Brad Thor: (13:36)
Yeah. And you know what, I probably shouldn't even put Snowden into that category, because everybody right now that's listening and watching this knows what Snowden looks like. There's no way he was dating a stripper in Hawaii. I'm telling you. I have all these feelings about Snowden and then he runs over to the Chinese and the Chinese are like, "Oh okay, well we'll give him to the Russians." A lot of that just doesn't feel right to me, but this idea of vomiting up intelligence because you don't like what the United States is doing, I agree it's not a good thing. It's not safe.

Brad Thor: (14:10)
I didn't like the Chelsea Manning sentence. The rest of the sentence got commuted and all this stuff. We have not made a strong enough example of one of these people so that it doesn't happen again. And when it comes to secrets, that's one of... It takes so long to develop the intelligence that we have. That it can be given away like that, we need to make sure that doesn't happen.

Anthony Scaramucci: (14:30)
Well I mean, just giving my feedback not that it's worth anything, but when I was in the White House, albeit for that very short period of time, you learn very quickly how complex these issues. You learn very quickly that if it's in the White House, it's a very hard decision, because 5,000 other people, Brad, would have made the decision, so now it's filtering up to the president. And then you find out that there's so much complexity, and frankly, you've got your ideals and then you've got American lives at stake and you've got this whole soup that you have to live in.

Brad Thor: (14:59)
And no certainty. It's 80% certainty, 90, if you even get that high. It's rarely 100.

Anthony Scaramucci: (15:07)
Yeah, well that was the bin Laden raid. It was very uncertain, the bin Laden raid.

Brad Thor: (15:09)
And the Russian bounties on American troupes, most recently. They made it into the PDB and the certainty level was high enough that we shared it with the Brits, so it's very rare you get a 100%. But the bin Laden raid, if you watch Zero Dark Thirty, that whole debate back and forth, what level of certainty do we have, that's right on the money.

Anthony Scaramucci: (15:27)
Yeah. So this makes things very complicated. You do a very good job of sifting through that. Again, I feel like I'm reading an intelligence briefing when I'm going through your stuff. Lets talk about that. You do extensive research on global terrorism, what are the greatest threats right now facing the United States? I don't want to give away your plot here, but just talk existentially and talk generally.

Brad Thor: (15:50)
Right. The worst actors are the ones you always hear. It's Russia, China, and Iran with North Korea in fourth place. I pivoted a while ago off of Islamic terrorism, because I kind of got the feeling that there were other things that were bubbling up that were of concern. One of the biggest obviously being the annexation of Crimea by Russia, which got the Russians tossed out of the G8, brought it down to the G7.

Brad Thor: (16:15)
But one of the biggest thing people don't think about, why we tossed the Russians and why that was such a big deal, is because when the Soviet Union broke apart, about a third of their nuke arsenal was in Ukraine, and we guaranteed as the United States to the Ukrainians, that if you get decommissioned, if you let us help you get rid of those nukes, we will guarantee the integrity of your sovereign territory. We'll make sure that you don't get invaded, it doesn't get gobbled off. And the Ukrainians said to us, "Sounds good. Can you get the Russians to sign that piece of paper too?" And we're like, "Okay, for what it's worth, yeah. We'll get the Russians to sign it."

Brad Thor: (16:48)
And then what happened, Putin invaded under the Obama administration and they rightfully got thrown out of the G8, but that was kind of it. So we didn't live up to it. It was almost like that little slice of Czechoslovakia, little slice, it's a substantial slice of Czechoslovakia, being given away to Hitler when Hitler said, "Oh, I just want to protect ethnic Germans." The Sudetenland.

Brad Thor: (17:06)
There's that famous quote, I think it was [inaudible 00:17:11] that said that, "History doesn't repeat, but it does rhyme." And so I started looking at, "What does a revanchist Russia look like?" Now we've been in Afghanistan, we've been in Iraq for a long time, and Putin wants to gobble back up all of old Soviet Russia, so if Putin chose to...

Brad Thor: (17:29)
The RAND Corporation for instance did a study, if Putin moved on Latvia, Lithuania or Estonia, the three Baltic members of NATO, how quick could he do it? Could we get it back? Would it succeed? They ran the simulation something like a thousand times, and switched generals, top US generals from red team to blue team, Putin won every single time. And it's amazing, because if they take Gotland, the island off of Sweden, and they put their air defense batteries on Gotland, we will not be able to get ships into the Baltic. We won't be able to fly planes there because of Russian air superiority on that side of the Baltic, and the biggest quirky thing that I learned from my novel Spymaster, Anthony, was that if we want to move men or material from Germany or Poland up into that area, the railroad gauge changes. You actually have to remove the equipment from one train, put it on another, and the Russians have all of those transit points marked for sabotage.

Brad Thor: (18:25)
So it's basically impossible to win, and as you know the NATO charter, Article 5 says, "An attack on one is an attack on all," so we would have to go and defend those members. But there's a lot of Americans that are tired of war, couldn't find one of those Baltic places on a map if their life depended on it, and probably wouldn't want to send their sons or daughters there.

Brad Thor: (18:44)
So as I look at this as a thriller writer, I say, "Okay, this is fertile ground, because what in my fictional world would a president do to ever even get called into war in that part of the world? What might he allow my fictional character and my teammates to do?" That's been some of the fun that I've been having in the novels lately.

Anthony Scaramucci: (19:02)
Yeah. No look, it's a nonstop thriller read and it's very insightful. Again, I don't want to give away the plot, but I want to ask you this about NATO, because I think it's very important for the Americans, and certainly you've thought about this. The global alliance, the post World War Two order was setup to be offensive and defensive, and its primary responsibility in Europe was to contain Communism. You could say it was a global responsibility if you factor in the Korean and Vietnam war.

Anthony Scaramucci: (19:31)
We're here now in a post communist era, if you will, because these countries are not really operating in pure communism anymore. Is NATO obsolete? Does NATO need to be refreshed? And if it needs to be refreshed, do we need to protect those nations? Is that important? Is that in our global and national interest? I'm not an isolationist I might add. There's reasons why, but no one wants to hear my opinion. They want to hear yours, so what do you think?

Brad Thor: (20:00)
I think NATO is critical, and I absolutely think NATO should continue to go on. By any measure, NATO has been a huge success. We have not had another global war since World War Two, and that's thanks in large part to NATO. Communism or no communism, I think it's really important. Because regardless of what the ideological subscription is of Russia, they took the Crimean Peninsula. They would take more if they could, so I think it's very important.

Anthony Scaramucci: (20:26)
So why aren't they taking those Baltic States? If a thousand times out of a thousand they could take them, why wouldn't they just take them?

Brad Thor: (20:37)
I think while the military option is very difficult for us, I think there's a lot of financial... There's a lot of different things we could do to the Russians if they did make that move. I think there's a lot of damage we could cause and it doesn't necessarily have to be with dropping bombs on them, so I think that's number one.

Brad Thor: (20:54)
This issue of the NATO members not living up to their 2% of GDP to be invested in their own military, I think is a big issue. I think if you have nations that are not contributing what they said they're going to contribute, that's a problem. I don't like the public fights over that stuff. I'm not a fan of that. I think behind the scenes there's more we should be doing to get them to meet that standard, but I still think NATO is absolutely one of the top, if not the top military alliance ever created in history. I think it's very important and should stay.

Brad Thor: (21:26)
And by the way, that Article 5, "An attack on one is an attack on all," that lever has only been pulled once, and it was by us, the United States, after 9/11 when we went into Afghanistan.

Anthony Scaramucci: (21:42)
One thing I want to bring up and I want to get your reaction to, because I think it's interesting. George Marshall, there was a biography written about him. Obviously with [inaudible 00:21:51] and the father of the Marshall Plan. He was a Truman Secretary of State after being the chief of staff for Roosevelt of the army.

Anthony Scaramucci: (21:56)
When NATO was slipping in terms of their percentages, he said to his fellow team mates if you will, "Let it happen. We want to be the military superior nation on this planet for as long as possible." It was his belief that we're a benevolent democracy, and the less military out there the less potentiality of use of military, even if it was among our allies who during the Second World War frankly were our enemies.

Anthony Scaramucci: (22:26)
It's an interesting concept about where we sit in the global spectrum. But I do agree with you, there's a lot of things the United States could do to Russia. Although with Russia having the GDP of Italy, to be this much of a force, tells you that we're doing something wrong in terms of containing them in a more appropriate way.

Anthony Scaramucci: (22:46)
But lets go to my next question, then I got to turn it over to John Darsie, who once again has been bested in the room rating, because he has all this fake interior designing going on. You've never seen a more room rating overbite than John Darsie. I don't know what there is. You've got all that natural stuff going on behind you, so once again John, in a SALT Talk you've been trumped by one of our guests.

Anthony Scaramucci: (23:11)
But I want to ask this last question, then I'll turn it over to John. Do you have a favorite among the books that you've written? Something that you really say, "Wow." You closed the manuscript, you shipped it off to the publisher and said, "That's my opus."

Brad Thor: (23:25)
You know what, every one is different. Every one was a challenge. Every one has been harder. You think doing 20 books it would get easier. It doesn't. That's just part of my nature. I consider myself a small business person. I'm only as good as the last thing I've written, because that's the highest the bar has ever been for me personally. I always say my favorite book is next year's book because that's the one I'm writing right now. That's the one I'm super passionate about.

Anthony Scaramucci: (23:48)
Have you started next year's book Brad?

Brad Thor: (23:50)
Yeah. I have. And by the way Anthony, for the benefit of those who are watching, the one thing I can tell you is the current book Near Dark, if it was a movie poster, the logline would be, "A hundred million dollar bounty has just been put on the head of America's top spy." That's really what Near Dark is about. My guy, hundred million dollar bounty on his head, can't trust anyone, reluctantly he has to trust one person, and it bounces all around the world.

Anthony Scaramucci: (24:17)
It's fascinating. The ending is even more fascinating than the beginning. So I'm holding it up again. I'm going to turn it over to John, Brad. He's got questions. You've got a lot of fans out there that are coming in, asking questions, so go ahead Mr Darsie.

John Darsie: (24:34)
Yeah, we have a lot of questions. A lot of engagement on today's talk. Brad, thanks again for joining us. So as I mentioned in the open, you embedded yourself in Afghanistan in 2008 with a black ops team, and authenticity is obviously very important to your work. Some of our viewers want to know, "Why is that authenticity so important, and what was that experience like in Afghanistan?"

Brad Thor: (24:56)
So first of all, I think that the details are the bedrock of a good thriller, and you've got to get those right. My wife, if she picks up a book, she'll finish the book no matter what. You get maybe two strikes with me. If you put a safety on a Glock, that's a big strike against you. You've only got one more after that, and I will put a book down and not pick it back up. There's no reason not to do your homework. You have the internet for God's sake.

Brad Thor: (25:20)
Poor Clancy, I don't know how he got the details he got for Hunt for Red October, the libraries and places he must have haunted forever to write that novel without the benefit of the internet the way we have it today. So details are really important.

Brad Thor: (25:34)
The Afghanistan trip was amazing. I got told three things. Make sure all your life insurance is paid up, get in good shape, and grow the biggest beard you can. Got to Kabul and one of guys said, "Do you have any sunglasses?" I'm like, "Yeah, I've got my sunnies with me." He's like, "Let me see those." He takes them, puts them in his pocket. He goes, "You get those back at the end of the trip." I'm like, "What do you mean?" He goes, "Nothing marks a westerner from a distance like a pair of sunglasses."

Brad Thor: (25:57)
It was really these little things, and John, that's what I was interested in. They were going out and building human networks, gathering intelligence... So the best fried chicken I ever had was in Jalalabad. Best ever. And the other thing that was really interesting, was learning... I spoke about with Anthony, Marcus Luttrell and Lone Survivor, and how those Afghans protected Marcus. Well that's based on something called Pashtunwali, which is their code of honor. And every village I went with this team to, we already had permission of the village elders to be there as their guest, because what happens is if you're their guest, they will fight to the last man and boy in that village to keep you alive.

Brad Thor: (26:40)
I always joke, "Try to find somebody to help you change a tire on the way to the airport in the rain when you're off to the side of the road. It doesn't happen." So here's this incredible code of honor there. The people were fantastic. It was great. But just even little things, like it would be on and off [inaudible 00:26:54] and they'd have pallets of water. You grab a case of water and throw it in the back of the truck. Just the little color details that you had to be there to pick up. It was a once in a lifetime opportunity, and that all went into my thriller The Apostle.

John Darsie: (27:09)
Next question is about, "What type of books and authors do you read, and have any in particular inspired your style as a writer?"

Brad Thor: (27:18)
I grew up grabbing whatever book my parents had just finished and set down. I would mark, I would watch my dad or my mom, and they read Le Carre, Ludlum, Freddy Forsyth, Clancy, and no sooner had that book hit the coffee table or nightstand, then I'd come and swipe it and I'd read those books myself. So those were really good, those great cold war books, because they dealt not only with the turmoil and private lives of the spies themselves, but the overarching global politics and why these things matter. Why the successful accomplishment of a mission was critical to the future of the west and things like this.

Brad Thor: (27:56)
I've always loved the tension between spies and government, or war fighters and government, because as long as we have gathered together in tribes and picked up rocks and sharpened sticks to go get our women back or take back the crops that the other tribes stole from us, there's been politics involved. So that intersection for me is fascinating, and it creates a real dynamic tension that can lend itself to the excitement in a thriller.

John Darsie: (28:22)
We have a couple questions that all sort of aggregate into one about your own writing process. You talked about how you don't really create a universal arc for your character Scot Harvath, and you don't have a destination in mind for him. You're really talking current events, weaving them into different stories that you're writing about that character. What is your individual writing process like? How do you write? Where do you write? What's that challenge like in terms of crafting a new narrative, like a Bond movie as you mentioned, with each book that you write?

Brad Thor: (28:57)
Great question. So like I said, I've done 20 novels. It does not get any easier. I'm not an outliner. Dan Brown who wrote Da Vinci Code is a buddy of mine, and Dan at one point shared with me the outline for Da Vinci Code, which was really cool, because Dan is like a mega outliner and I got to see all the things that didn't make it into the final novel. Which is kind of neat, to see like a highlight reel or something, everything that ended up on the cutting room floor. It was very cool. He had some cool stuff he was planning for that.

Brad Thor: (29:22)
So I'm not an outliner. I really believe in the quote from Robert Frost that says, "No joy in the writer, no joy in the reader. No surprise in the writer, no surprise in the reader." I want to have the same experience writing the novel that you do reading it. I want my palms to sweat. I want my heart to pound. I specialize in absolutely sticking it to myself. I paint myself in the corners all the time. I'll go home at night and my wife can tell by the expression on my face if it's a red wine night or a Bourbon night, how badly I've put myself in a corner, and she always says, "Don't worry. You'll figure it out tomorrow."

Brad Thor: (29:58)
That's what makes my job hard, John. That's what makes it challenging, but that's also what makes it so rewarding, because if my job was easy, it would be boring. And I don't have the kind of brain and personality that deals well with boredom. I constantly have to have stuff going on, so I've got kids that get up in the morning, in the before time we get them off to school, breakfast and everything. I'm a big health nut, so I'm working out six days a week and then I'm in the office early, and I treat it 8:00 to 6:00 because I have a family. I want to be home for dinner with my kids and that kind of a thing.

Brad Thor: (30:29)
But listen, this business is seat of pants to seat of chair. And Jack London was famous for saying, "You can't wait for inspiration. You have to go after it with a club," particularly if you're putting out a novel a year like I am. So it really is about mental toughness and discipline and paying attention to the details.

Brad Thor: (30:48)
The old thing, watch the pennies and the pounds watch themselves. Any business where you're going to be successful, you have to be a detailed person, because if you're not watching the details, you're not going to build a successful product. You're not going to build a successful company. So the same things you see in the world of finance, wherever it might be, whether you're a hedge fund manager, whether you're just doing [MNAs 00:31:07] constantly, it really is attention to detail and self-discipline. It's the key to success no matter what your business is.

John Darsie: (31:14)
So 19 of your 20 novels cover the character we've been speaking about, Scot Harvath. You have one that covers a band of female intelligence officers and special operation forces. We have a question about other minor characters that show up in your books that people seem to be infatuated with. Scott Coleman, Nicholas being another. Do you see yourself branching out of that Scot Harvath series?

John Darsie: (31:38)
We had Daniel Silva on last week, and he sort of fell into the Gabriel Allon series because it was so popular, sort of what you talked about with Scot Harvath. You didn't intend to make it a serialized stories about that character specifically. But what do you see as your future as a novelist in terms of the characters that you write about?

Brad Thor: (31:58)
Well it's such a great question. I've got about 60% male readership, 40% female readership, and that female readership is going up. So we came at this book with, and I probably have the mirror image up, the way Anthony did it looked a lot better, but we have this really cool foil cover that catches the light, and it's got [inaudible 00:32:17] on the cover which is one of my favorite destinations. I've always wanted to put it in a novel. I finally got to do it with this one because it was just the right story for that location in France.

Brad Thor: (32:27)
So what I challenged myself to do with this book was I wanted to create a female character to go with Scot Harvath that was just as good, maybe better than Harvath. So she works for the Norwegian Intelligence Service. She's a spy for lack of a better term, for Norway. In real life, the Norwegians have an all female special forces team that's called Jaeger. When they were being created it was called Tundra. That was the code name for them.

Brad Thor: (32:54)
I created her, she gets in there, she joins up, they turn her down, turn her down, turn her down, she works harder and harder and harder, gets in, gets onto the special forces team and there's not enough action for her. They were putting her in Afghanistan to go talk to the wives of Taliban guys and all this kind of stuff and she's like, "No, I signed up for what the men get. I want to kick in doors and shoot bad guys in the face." And she ends up leaving and joins the Norwegian Intelligence Service, there happens to be a kind of [inaudible 00:33:20] who's there to get her right at the right moment.

Brad Thor: (33:23)
So I've done almost this reboot of the franchise, where maybe Harvath is not going to go back to what he's doing. He may run off with this woman and they may do operations together, which is kind of fun. But yeah, Nicholas is a great person. God bless whoever asked about Scott Coleman. That's a Mitch Rapp, Vince Flynn character, okay. I'm a big fan of the Mitch Rapp books, by the way. And it's funny because Vince Flynn, God rest his soul, gave me one of my first blurbs. And Kyle Mills is writing the Mitch Rapp books for Vince Flynn's estate, and I knew Kyle before I was even an author. His dad was in the FBI and my dad's best friend who is like a godfather to us was in the FBI.

Brad Thor: (34:11)
So spinning off characters, absolutely. Nicholas is one. A lot of people want to see me bring The Athena Project back, which is the all female Delta force team. So be careful what you wish for John, because I always said I needed more time, and now we're on lockdown. Guess what? I've got nothing but time.

John Darsie: (34:29)
All right, so we need two books a year now, Brad.

Brad Thor: (34:32)
Well if I don't come out of this with two books, shame on me, because I get to look back on this time in the pandemic and I can become a better husband, better father, and I can crank out a second book. If I don't, if I fail on any of those, I've let myself down. So I think it's probably a safe bet that you're going to get a second book out of me from this.

John Darsie: (34:48)
All right. Fantastic. We talked about this a little bit before we went on the air, but what are the chances of a Harvath movie or TV show?

Brad Thor: (34:56)
Some great questions. Right before late fall, early winter, we had one of the top producers in Hollywood come to us and say, "Love these books. I've got an awesome idea, because Brad, you've got 19 Scot Harvath books, and yeah we could do them in any order. You've got the one Athena Project. This is like buying the Marvel Universe. I mean we could do films, we could do television, we could spin off characters. It is an amazing package."

Brad Thor: (35:24)
And the producer was fantastic. Done some amazing deals. Been recognized with Oscar nominations and all this kind of stuff, and I said, "Okay, well you and I both know that the big thing is the director." And he said, "Well who do you want as the director, Brad?" I said, "I get to pick?" He goes, "Yeah." And I said, "Well, who are you looking at?" He goes, "Well, here is my top three." And his number one guy was the guy I want. And I said, "You can really get this guy?" He says, "What are you doing tomorrow at two o'clock? I'll get him on the phone."

Brad Thor: (35:50)
I had a talk with this director. I love this guy's stuff. I guarantee you John, you, Anthony, everybody at SALT, everybody who is watching has seen this director's work. And I get on the phone with him and he's like, "Brad, long time fan. I love the Scot Harvath..." And it has just worked out great.

Brad Thor: (36:05)
So what we're trying to do now, is to get all the pieces lined up. I can't say who the director or the producer is and that kind of stuff, because they want to make the big splashy press announcement and be the first ones out of the gate and into production as soon as COVID disappears or who go overseas to shoot some place where there's no COVID.

Brad Thor: (36:20)
That's the one big thing we're working on now is putting the writers together and all this kind of stuff so that everything is in place, so when the financing drops in, either we go to someplace like in New Zealand and start shooting, or the minute California fully opens up or... My books are so international, we could go anywhere. We could go to Iceland and shoot one of the books if we wanted to. And that's what they said is really the blessing of my books, is that we don't have to let COVID dictate to us. We can let the book dictate where we go and when we start. So fingers crossed we'll find a place and we can go to work soon.

John Darsie: (36:53)
All right, well good news for Scot Harvath fans. You talked about how from a topical perspective you've pivoted a little bit from focusing on Islamic terrorism to focusing on things like Russia, Crimea, things of that nature. Do you see anything on the horizon that might become an increasing focus of yours? Or as a specific question about sort of the domestic threats as well, the rise of domestic militia groups and social unrest taking place in the country. But generally, where do you see maybe where the puck is moving in terms of your storyline?

Brad Thor: (37:26)
That's always my favorite Gretzky quote, which is, "Don't go to where the puck is. Skate to where the puck is going to be," which is precisely what I like to do. Listen, I think we've got a lot of problems that have gone way too long unaddressed with China, but I think that as tensions rise with China there's a chance for a mistake to happen, whether that's in the South China Sea, who knows?

Brad Thor: (37:48)
We have a lot of influence operations that are happening right now with China and Russia trying to exploit all the cultural and political divisions in the United States right now. And one of the things I complain the most about is how many Americans get their news from Facebook, because you're not really getting the news, you are siloing yourself in areas where you feel comfortable. So you're going to places within Facebook where you are getting your beliefs reinforced, not challenged. And the Russians and Chinese know that, and they are exploiting that. So they're going in where people feel comfortable and unchallenged, and they're giving them bogus information and trying to manipulate them.

Brad Thor: (38:22)
It's a big problem there. I don't know how you spin that into a thriller, but I am concerned with what happens... I'm really good John, I pride myself in being able to peer over the horizon and tell you what's going to happen next, but COVID has kind of wobbled my radar a little bit, because a lot is going to depend on, "Is there a vaccine? Does it burnout? How bad do things get?" And we've also got a pretty major election coming up in November, which is going to impact what certain adversarial powers are going to feel good doing.

Brad Thor: (38:52)
China and Russia are going to feel comfortable doing certain things under a Biden administration or under a Trump administration, and that's the one item that is just kind of hanging out there, and I don't know how that ball is going to come over to the plate. It could be a little outside, right down the middle, I'm still trying to focus in. Ask me again in 45 days. I'll see if I can have a better answer for you.

John Darsie: (39:12)
All right. Amazing. Well Anthony, do you have a last word for Brad? As I mentioned earlier, Anthony is a huge fan of your books.

Anthony Scaramucci: (39:19)
Well yeah. Well, I love your books. I look forward to your book, Daniel Silva's book during the summer. I think that it's phenomenal writing Brad. I hope that we can get you back on when your next book comes out. I'm going to recommend it again, and I love the cover. Probably not great to see it here on a Zoom call, but it captures everything that's inside the book and more. We wish you great success with the book, and I hope I get a chance to see you in a non-COVID environment. Hopefully, somewhere in Nashville where we can listen to some great music and get a beer together.

Brad Thor: (39:52)
I love it. Sounds like a plan.

Anthony Scaramucci: (39:54)
All right. God bless you, sir. Have a great success with the book, and we'll see you soon.

Brad Thor: (39:58)
Thanks Anthony.

Kirstjen Nielsen: How Cyber Security Has Evolved Over the Last Decade | SALT Talks #28

“A collective defense model is what we’re talking about when addressing cyber.“

Kirstjen Nielsen is an internationally recognized expert and proven leader on critical security issues facing governments and institutions. She served as the sixth Secretary of the United States Department of Homeland Security (DHS) from 2017-2019, directing widespread actions to increase the security and resilience of the nation against evolving threats across land, air, sea and cyber domains.

There has been significant progress in cyber security over the last 4-6 years, and the discussions are the same around the world: how to better share information, make our responses more automatic and what the government should do regarding the private sector. The difficulty with cyber is that it is at rue weak-link problem. Ultimately, it will only be as secure as the systems that touch your systems.

“It’s past time to give the DACA population a permanent status. Congress needs to act and give them status.” What went wrong with child separation at the border? The three departments in charge (Department of Justice, Department of Health and Human Services, and Department of Homeland Security) didn’t have the resources to process the influx of migrants. Child separation was an “indirect result” of an inefficient system, not “policy.”

LISTEN AND SUBSCRIBE

SPEAKER

Secretary Kirstjen M. Nielsen.jpeg

Kirstjen Nielsen

Secretary of Homeland Security

(2017-2019)

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. The SALT Talks are a series of digital interviews we've been doing during this work from home period in lieu of our global conference series, the SALT Conference. And, really, our goal is to provide a window into the mind of subject matter experts that are leading investors, creators, and thinkers. And also, to provide a platform for big, important ideas that we think are changing and shaping the world.

John Darsie: (00:39)
We're very pleased today to welcome Secretary Kirstjen M. Nielsen to SALT Talks. Secretary Nielsen is an internationally recognized expert and proven leader on critical security issues facing governments and institutions. Her breadth of experience stands at a crossroads of policy, strategy, and operations, so it's a very apt guest for our SALT Talks series. And, she provides a unique perspective across complex enterprise environments and influencing her position on the importance of stakeholder engagement, the role of technology as a force multiplier, and the need to address today's threats, while still assessing and preparing for those of tomorrow.

John Darsie: (01:17)
Secretary Nielsen was sworn in as the 6th Secretary of the US Department of Homeland Security in December of 2017, I believe we were talking to Secretary Nielsen before we went live and we asked, "Did you overlap at all with Anthony?" And she remarked that she actually did overlap with Anthony for about half of a day. She walked in with secretary, excuse me, General Kelly the day that he was sworn in, and the next thing he did after being sworn in, was he walked downstairs and fired Anthony. So, hopefully we can get a little bit of a conversation about that during today's talk. Anyways, during her tenure-

Anthony Scaramucci: (01:50)
That's fake news. He didn't walk downstairs. He went from the Oval Office to his office, he called me in, and then he fired me. Don't give out fake news on SALT Talks.

John Darsie: (01:58)
There were no stairs.

Anthony Scaramucci: (01:59)
Okay. There were no stairs. Are you enjoying yourself while you're telling that story?

John Darsie: (02:06)
I figured I had to bring it up.

Anthony Scaramucci: (02:08)
All right. Go ahead go, enjoy yourself, Darsie.

John Darsie: (02:11)
During her tenure... This is about Secretary Nielsen, Anthony.

Anthony Scaramucci: (02:13)
Let me just get SkyBridge payroll on the phone here. Yeah, that cut for John Darsie, yeah, let's talk about that after this is over. Yeah, keep going, Darsie. Go ahead.

John Darsie: (02:25)
She directed during her tenure wide spread actions to increase the security and resilience of the nation against evolving threats across land, air, sea, and the cyber domain, which is something we'll get into in depth today. She was previously commissioned to serve as the White House Principal Deputy Chief of Staff and the DHS Chief of Staff. Secretary Nielsen has also advised government agencies, private sector companies, international organizations, and NGOs on assessing their risk posture, and increasing their resiliency, developing crisis communication plans, and understanding various policy environments, and identifying and mitigating hazards.

John Darsie: (03:02)
She's the former president and founder of Sunesis, which is a security management firm. And, she currently serves as the president of Lighthouse Strategies. A reminder, if you have any questions for Secretary Nielsen during today's talk, you can enter them in the Q&A box at the bottom of your video screen. And now, I will turn it over to the aforementioned Anthony Scaramucci, the one-time White House Communications Director. He's also the founder and managing partner of SkyBridge Capital, a global alternative investment firm, and the chairman of Salt. And with that, I'll kick it to Anthony.

Anthony Scaramucci: (03:33)
Thanks, John. But, the one thing that you forgot to mention, which is also important to all of us is that Secretary Nielsen joined us in Abu Dhabi last December, where you gave a masterful performance on so many different things, masterful dissertation on cyber security, et cetera. So, I want to get into a little bit of that with you this afternoon. But, before we go there, Madam Secretary, take us back into your background, your college years, and the odyssey that you took prior to becoming the secretary for the Department of Homeland Security.

Kirstjen M. Nielsen: (04:10)
First of all, what a pleasure to see you all. It's both exciting when video works, and with the added opportunity to see other humans. So, thanks for pulling this together. Homeland Security at a high level, at least the way I think of it, it's a team sport. I mean, there's just way too many threats that we face today. They're constantly emerging for any one entity to be able to address them. No one entity has all of the capabilities as of these authorities' resources. When I look back, what I did rather unintentionally, because at first, we didn't necessarily have a discipline called Homeland Security until after 9/11.

Kirstjen M. Nielsen: (04:47)
But looking back, I tried to play every role, every position, if you will, in the team that is Homeland Security. So, I worked on the Hill. I'm a lawyer by training. I helped private sector companies that provide technologies and services to the federal government. I helped private sector companies protect themselves, and understand how to do that, and protect their customers, clients and functions. I've played different roles in the government, the executive branch, worked with international organizations, allies, really trying to pull together that whole concept of public private partnership. And then, of course, after 9/11 I helped start up TSA, which was then in the Department of Transportation, and then went to the White House. And so, between the multiple of roles, much of the early Homeland Security doctrine I either led the development of, or was very intimately involved in directly. So, very familiar, it's a very broad mission space as you know.

Anthony Scaramucci: (05:46)
But it's by in large, Madam Secretary, it's been very successful because the precursor of it was 9/11. It's been 19 years since that tragedy, and I would say that we've done a reasonably good job of containing terrorism, reasonably good job of eliminating internal threats in the United States. What were some of the main threats and issues that you were focusing on when you were the secretary?

Kirstjen M. Nielsen: (06:14)
Yeah. So, it's always a great question, and you know me, I love to talk, but this is a particular one where it's hard to be brief. DHS is the third largest department in our government 240000 law enforcement, civilian, and military employees. It spans everything from counter terrorism, as you mentioned, to a branch of the US military. The Coast Guard probably is in the Department of Homeland Security. We respond to natural disasters, we prevent activist terrorists from different kinds of soft target attacks. So, it's very broad.

Kirstjen M. Nielsen: (06:53)
And then, there's all sorts of parts that we don't talk about as much, election security, we might talk about that today, but that's certainly an expansion of the mission space. And so, under my watch we really focused on what are the emerging threats? We need to double down on today's threats, but how can we look at the horizon and what should be anticipating. So, I spent a lot of time on new explosive devices that had been developed by those who seek to do us harm in the aviation sector, obviously spent a lot on cyber, worked with Congress to get some authority to counter drones, which are ubiquitous now unfortunately, and we really need to all come together and figure out how to address that. WMD, unfortunately there are still new and developing weapons of mass destruction. We got to make sure we stay on top of that.

Kirstjen M. Nielsen: (07:41)
We also did quite a bit to change the authorities. A focus of mine was to make sure with this expanding mission space that the employees and great men and women of DHS really had the tools, and resources, and authorities they needed. So, we worked with Congress to create the Cybersecurity and Infrastructure Security Agency, which I'm very proud of. We actually did create a WMD entity, we strengthened other entities that existed, and then we did a lot of policy changes to make sure that all across the homeland, and with our international partners, we raised the bar of security in every realm that we touch. So, quite a few things, but I would just say at a high level, it's so important in this day and age to really keep your eye on that horizon, and be very aware of the emerging threats. Because once they're here, it's too late. Bureaucracy does not move quickly enough, so you have to be able to anticipate.

Anthony Scaramucci: (08:34)
So, let's go right into the cybersecurity space then, how do you feel we are in terms of cybersecurity, private, public, governmental cybersecurity? And then, secondary to that, what are your thoughts on addressing the risk of things like TikTok, or Zoom, facial recognition, Huawei, in the umbrella of cybersecurity?

Kirstjen M. Nielsen: (08:58)
Yeah. At a high level, I would say that we have made tremendous progress over the last, four, five, six years with respect to cyber security. We really needed to take the time to set the roles and responsibilities within the US context of who was going to do what, who is best positioned to do what, and strengthen that public-private partnership. It's interesting, I just was part of a group that was advising Australia as they worked to put out their new cybersecurity strategy, and the debates are the same everywhere in the world, how do we better share information? How do we make our response more automatic? What should the government be doing vis-à-vis the private sector, and vice versa? What do citizens need to do?

Kirstjen M. Nielsen: (09:46)
I think the difficulty with cyber is that it's a true weak link problem. I mean, you can do everything that an expert would tell you to do to protect your own system, but ultimately, it's only going to be as secure as the systems that touch yours. So, a collective defense model is really what we're talking about, when we talk about cyber. Your risk is mine, and my risk is now your risk. And, that's very different than in the traditional physical world. So, we have to continue to expand. There's a lot more that we need to do. I really personally welcome the work that the Cyber Solarium did. I'm anxious to see many of their recommendations adopted in the NDAA, I hope that they are. We really did need to pause and assess where we are, and I think they did a tremendous job.

Kirstjen M. Nielsen: (10:37)
With respect to the tech that you brought up. It's so interesting, because it's a great list in that they're all so different. I mean, my short answer would be, we have to look at all of these from a risk management perspective. So, if you look at something like Zoom, that's a perfect example, among other things of a risk around concentrated dependency. When we all are depending on Zoom for our daily lives, for conferences, for the work that we do, for education, it puts tremendous, not only strain on the infrastructure bandwidth, if you will, but it also opens up a new vulnerability. Because if Zoom should go down, or something like that, then we have tremendous ripple effects in terms of everyone's ability to function.

Kirstjen M. Nielsen: (11:22)
If you look at something like facial rec, that's very interesting because as a disruptive and still in some minds, cutting edge technology throughout the world, we don't yet have the legal and regulatory frameworks in place for customers and the public to feel comfortable that facial rec is doing what it should, and not doing what it shouldn't do. That it's protecting our privacy, and that it is being used in appropriate manner. So, it puts stress on the system and the companies to say, "Okay. How can we demonstrate we're being good citizens?" And so, you're seeing an example of this, you've seen all of the big companies that use facial rec actually go to governments and say, "Please regulate us. Please pass a law. We want something to be able to measured it against to show..."

Kirstjen M. Nielsen: (12:07)
Trying to go, perhaps it's on your list, Huawei and TikTok, I read somewhere the other day, somebody was asking, "Well, is this really about China, or is it really about the technologies?" I think the answer is yes and yes. They're very different technologies, one is more of a supply chain risk, and perhaps the ability and control that gives to the China's government by virtue of the infrastructure. And, the other is a similar problem, but a very different risk. It's more about data, geotargeting keystrokes, and who then would have access to that data. But, I think as citizens and particularly as a government, we have to look at each one of these technologies within some sort of a risk framework, and then figure out the best way to mitigate and manage it.

Anthony Scaramucci: (12:57)
You mentioned in Abu Dhabi, something that stuck with me. I want to see if I get it right. But, you basically said that data and identity are the two currencies of the future. And, I was wondering if you could elaborate on that a little bit, and how are they in danger, effectively?

Kirstjen M. Nielsen: (13:19)
And, to be even more specific on the data front, I really think it's, if you will, it's data quantity, and data speed, perhaps in particular, that will actually be traded as new currencies. Companies will rise and fall based on those concepts. And of course, the related concept that data without insight is noise. There's so much data out there that if whatever it is that you're doing, providing, integrating doesn't have that analytical piece, it doesn't mean anything. But, back to data. I think I said it runs everything we do. It runs the SCADA systems that run all of our critical functions. It enables us to relate to one another. It manages the way that we see the world. It really is the lifeblood of how our society functions digitally these days.

Kirstjen M. Nielsen: (14:09)
The reason it's at risk is because of the exact same reason. We spent years talking about data confidentiality, and rightly so, and we still should. I mean, protecting our data and ensuring that we understand who has access to it for what purpose. But, the concepts of integrity and availability we have seen come to the fore over the last three to four years in a way that many did not expect between ransomware attacks, wiper attacks, and just anything that questions the integrity of information. I often feel that reality itself these days, is up for debate. Between geo-spoofing, between deep fakes, between... And, that's even before we get to issues with point interference.

Kirstjen M. Nielsen: (14:55)
So, if what you see is not necessarily true, if what you read is not necessarily true, then what does that mean? And of course, to take it another level, if we have false data fed into, through an injection or a supervisory and control system, the function would perform as it should, but not the way we want it to perform. That's of course what we worry about when we talk about electricity and water, et cetera. Identity is interesting, because we have a real question about identity these days. Do you own your identity? I don't know. And, I think we're seeing them in COVID. It's a strong argument from a public health perspective that at some point here, if this virus continues on the propagation path it is, that governments around the world will want to understand who has it, who has been tested, who has recovered for purposes of protecting others. But, if you think of it in that context, those attributes that are once personal to you, are now could be by some country's propositions owned and operated, if you will, by a government entity.

Kirstjen M. Nielsen: (16:06)
So, what does that mean? How do you prove you are you, Anthony? If someone else popped up, or look at the Twitter hijacking that just occurred. How do you demonstrate that you are who say you are, you are saying what you're saying? And, that brings in the deep fakes and other things. And, putting aside all the possible misinterpretation in the present and other places. So, there's a real need for new technology to authenticate you, and to be able to audit the identity, if you will, so that we can be confident we're talking to Anthony, as opposed to-

Anthony Scaramucci: (16:42)
I just want you to know that situation that happened when I was the White House Communications Director, that was a deep fake, Madam Secretary. I mean, no one realized that-

Kirstjen M. Nielsen: (16:50)
A body bubble.

Anthony Scaramucci: (16:52)
Yeah, I just thought I would throw that out there. But in any event, I totally get what you're saying. And I think it's got to be a concern if you're a civil libertarian, and you want to protect people's privacy, and the privacy of their health. Obviously, all the stuff that we try to do to do that as well. But then, the flip side is, particularly with a pandemic going on, it could be helpful in containing the pandemic, if we know where people stand related to that disease. So, it's going to be a struggle. I want to flip to something that I would love to give you an opportunity to comment on. And, that is the President's policy related to separating families at the border, which became a hot button issue during your time as secretary. And, I wanted to give you an opportunity to address some of that, and potentially some of the misconceptions around it. And, I would also be remiss if I didn't ask about DACA, and what do you believe should happen next?

Kirstjen M. Nielsen: (17:52)
Let's see. So, let me take the last one first. It's time, it's so past time. I mean, for the moment that I was going through the confirmation process until now, I firmly believe personally, that it's time to give the DACA population a permanent status. And, the debate back and forth between the executive branch, and the legislative branch, and the judicial branch is not helping any of the DACA recipients. It's time for Congress to act and give them a status. The misconception that is very unfortunate is that, with the recent Supreme Court ruling, there is a belief that Supreme Court ruled in favor of DACA.

Kirstjen M. Nielsen: (18:35)
I don't know what that means. All the Supreme Court did was say that the DACA status from now will continue, but that's not a status, it's a deferred prosecution. So, they still do not have access to some of the benefits that they would have if they had a permanent status. They still don't have access to some of the assistance programs. So, I won't soapbox in it too much, but it's time for Congress to act. I mean, it's just time to do it. And, if you talk to most folks politically, there are some that disagree with that statement for sure. I do think the vast majority agree with it. It's just a clear... Unfortunately, it's an abdication of congressional responsibility. Congress passes laws on immigration, and Congress needs to do that. So, DACA, I feel very strongly we are way past-

Anthony Scaramucci: (19:27)
So, do you predict that that will happen, or do you think we'll be in a stalemate for an interminable period of time?

Kirstjen M. Nielsen: (19:34)
Yeah. I'd like to say that I was hopeful. I'd like to, in an optimistic moment believe that nothing is too hard for the Congress of the United States of America to handle. But, I'm also a bit of a realist on this, and we've seen the inaction now for years and years and years. I think what it will take is either a next action by the President, which I have no insight into, but he has said that he will do something on DACA, or another court case. There's still other lawsuits out there to my knowledge, and one or more could be a trigger event that then will push Congress to act. You hope it doesn't take that, and you hope if it does take that it all happens quickly. But, I think anybody that actually cares in any way about that population should continue to put pressure on the Congress, so that Congress can fix it.

Kirstjen M. Nielsen: (20:25)
The question you asked, it's a much larger issue. And bear with me, let me just try to frame it a little bit. Immigration in general is very complex, it's not well understood. I've found many, many times people wanted a binary answer, and the difficulty is often, it's not, it's a patchwork of rules, it's terribly, terribly broken system. The incentives are wrong, anyway. We should have a system where we can protect the sovereignty of this country, and protect vulnerable populations. We should be able to counter drugs and counter criminals while also welcoming those who seek asylum. And by the way, in the context of all of that we should be able to welcome legal immigrants. And, that's what our country is. It's what makes us strong. I know many of us believe that, but we need to separate the two. One shouldn't necessarily reflect directly in the other.

Kirstjen M. Nielsen: (21:24)
So, with the families, the truth is, there was no policy to separate families. And, let me walk you through, but let me tell you why that's really personally important to me. Such a policy was requested of me. It was requested of General Kelly as well, when he was secretary, and we both dismissed it out of hand. There was no direction to separate families who legally entered the United States. What happened is the attorney general in seeing an increase in law breaking, because it is law to enter the United States between ports of entry, a law that Congress has continued to uphold. As he saw increases of that law being broken, he decided to increase the law enforcement of that law. And so, he put out a policy of zero tolerance, meaning that the prosecutions should be done to anybody who chose to break that law, in this case entering the United States illegally.

Kirstjen M. Nielsen: (22:28)
So, the rest of us then we're in discussions of, "How do we do that?" Requires a tremendous amount of resources, given the numbers at that time of those entering illegally. And, the truth of it is, that if somebody came in illegally with a child as that adult went to a prosecutorial setting, we don't send children to jail in the United States. In most places they have very limited circumstances for that. But, there is no way to do that within the immigration setting. So, what happens is that after a certain period of time, if the adult does not come back from prosecution, the child is sent to the Department of Health and Human Services. And again, that's by law, that's not a choice.

Kirstjen M. Nielsen: (23:11)
So, the family separations resulted from the fact that a law was broken, an adult was being prosecuted, and the children as a result had to go into a different setting the family was thereby separated. And, let me just stress, the reason it's so important to me personally, that it not be called the policy is because there are still those today who advocate for a policy of family separation. What that would look like is, any family that was encountered anywhere in the United States, or at a legal port of entry, would be separated by virtue of the fact that they presented as a family unit. That is not a policy that has been adopted in the United States, and one that I will continue in any way that I can as a civilian citizen now to be against. I just think that's entirely and completely wrong.

Kirstjen M. Nielsen: (24:06)
So, what went wrong? What went wrong is that the three agencies, departments that are responsible for this, which is the Department of Justice, HHS, and DHS, we did not have the resources needed to quickly and efficiently prosecute the adults, and either reunite, or keep the families together in the sense that the child, or children would not have been sent HHS. And, when that became clear, when it became clear that those resources were not there, I did advocate with the president to end the practice, and he did. It was a terrible period for all involved, but it has been made more difficult by the fact that there is so much misunderstanding about it. At the end of the day, it's a law enforcement decision. We were a law enforcement agency, and law enforcement officials enforce the law.

Anthony Scaramucci: (25:04)
Well, and I think it's a big learning lesson for everybody on this Salt Talk that you have a lot of different interagency decisions that are going on, a lot of different policies. And, sometimes the government is ponderous, and it's obviously imperfect as all human beings are. I want to ask a follow-up question, if that's okay. Not that this is even possible, but I'm just curious about your ideas. Let's say you were a policy czar, or you were somebody that could create policy to prevent this from happening. Maybe you could do it through the Congress or et cetera. What would your recommendation be based on your experiences in this issue?

Kirstjen M. Nielsen: (25:47)
Yeah. So again, let me try to be succinct because it is very complex. Nobody who cares about a migrant should ever encourage them in any way, indirectly, or directly to cross into the United States illegally. And, the reason I say that is because the vast, vast majority of those who travel that way do it at the hands of smugglers, transnational criminal organizations, and others who prey on them. I mean, they're not DHS figures when the Doctors Without Borders say that, two thirds to three quarters of the women are raped along that journey. It's not us, it's the NGO community who says that. Children are recruited into gangs, people are attacked for their organs. I mean, it's a very, very dangerous journey.

Kirstjen M. Nielsen: (26:40)
So, the way the system should work is, if you need to claim asylum, or you have another legal right to come to United States, you should go to a port of entry, where you can be documented as entering legally, and you can go into a process. If we do not have the resources we need at the ports of entry, that's what we should fix. But, we ended up in a situation where... And, it's a crazy catch-22 to be in, the one hand the Department of Homeland Security is the biggest law enforcement agency in the world. And, what happens there is, we all take an oath to enforce the law. So, you have one side of the debate, saying you must enforce the law, and if you don't enforce it enough, if you will, you're soft on law enforcement, you're soft on immigration, you are not following the law, in that you're choosing to not enforce it.

Kirstjen M. Nielsen: (27:43)
On the other side, you have those in Congress and others who rather than doing their job, tell another branch of government, "You don't enforce the law." It's too hard for us to fix it, essentially, so just you don't enforce it. And, when you step back, Anthony, that's crazy. That's got to be the beginning of the unraveling of the democracy, when you have Congress saying to the executive, "Just don't enforce the law." So, what I would do is, I would ensure that we have enough resources at the ports, I would revise the way that we do asylum. One of my big pushes was, I don't understand why we can't help protect vulnerable populations sooner in their journey. Why do we make them come all the way to the US border? Why couldn't we find a way for them to go to an embassy, or other safe place along their journey to make their case for asylum along the way? I mean, the system itself doesn't make any sense if you're trying to protect vulnerable populations.

Kirstjen M. Nielsen: (28:37)
So, I spent a tremendous amount of time in the Northern Triangle working with those countries. We signed quite a few agreements to protect children, to protect families, to protect those from smugglers and traffickers. And, all of that needs to be cemented, that cooperation needs to be cemented so that we can help them protect vulnerable populations. But it's past time, Congress needs to fix it. I mean, there's been lots of legislation floating back and forth. Let's just do it.

Anthony Scaramucci: (29:04)
So once again, it's this farce, and it's back to congressional inertia. If you notice, I've been big-footing John Darsie since he mentioned by firing, so I'm going to ask one more question before I turn it over to him. And, I want to go to Portland, Oregon, and the acting DH secretary has marshaled unmarked law enforcement to put down some of the protests in Portland, and I was just wondering what your response would have been, same or different than the approach that the administration is currently taking.

Kirstjen M. Nielsen: (29:35)
So, this is another example where just watching it, there seems to be a lot of misunderstanding, and then I think like most Americans trying to understand what exactly is happening. What I can tell you is that, it is a part of the mission set of the Department of Homeland Security to protect federal facilities. There's an entire operating agency within DHS called the Federal Protective Service, and that's their mission. The law says DHS shall, it's not voluntary. So, that part of the mission exists. What happens next, and how far that authority goes, again, I'm not I'm not as familiar with the specific facts on the ground, but I do you think it's important to start by saying where the mission is.

Kirstjen M. Nielsen: (30:23)
In my opinion the mission should be limited to what the mission is. And then, in a traditional law enforcement way we support state and locals upon request for other mission sets within our authorities. I think there's also a lot of misunderstanding around what's marked and what's not marked. The uniforms of the folks from DHS, so viewed in the news, that is the uniform that some of the unique law enforcement entities within DHS wear. They're marked police, they have patches. The ones who are in fatigues. It looks to me like they are a part of a border unit, and that's what they wear every day at the border to blend in.

Kirstjen M. Nielsen: (31:09)
So, there's a lot of misunderstanding. But I think, to me, mostly what this shows is the very important need for state and local governments and law enforcement to find a way to work with the federal government and vice versa. I can tell you in 2018, we had an ice facility, we still do, in that area. And, we did have some protesters, it had been under attack, and about 28 days in, we acted through our federal law enforcement means to protect the building. But, that was because the local law enforcement and political leadership would not do that, and somebody had to protect the employees who were just trying to do their job and get into work.

Kirstjen M. Nielsen: (31:54)
So, I have not talked to the mayor. I haven't talked to the political leadership, obviously within Portland. I don't know what the actual situation is there. But, I would just offer that law enforcement needs to be provided to all communities within a community. And in this case, if that's not occurring, part of the federal mission of the federal government is to protect federal buildings and those inside. So, we'll have to see how it works, what happens next, but I do think we have to start with what are the facts, and then let's try to understand the best way to move forward. There's also a huge difference by the way, between the peaceful protesters...

Kirstjen M. Nielsen: (32:33)
I mean, my understanding of what some of the press is describing is the violence or what appears to be violent activities happening at night. During the day it looks like they're peaceful protesters exercising their First Amendment rights. And then, there is another, either a separate group, or a different time of the day at night when they do throw things at the buildings, either using firecrackers, or using frozen water bottles, they're trying to attack. And again, violence is violence, hate is hate, it doesn't have any place. So, we should all be working together to limit that.

Anthony Scaramucci: (33:13)
And, you didn't mention the terrorist attack by Timothy McVeigh 25 years ago on a federal building in Oklahoma, which is one of the main reasons why you have to have some level of security around these buildings. Okay. I'm dominating the conversation, Madam Secretary, so I have to turn it over to the erstwhile John Darsie, and he's got a whole series of questions that are coming in from our audience. So, go ahead, John.

John Darsie: (33:39)
Yeah. I want to pivot to COVID for a moment. And, I think it's fair to say, as a society, both on the government level, and how they've interacted with the private sector, our response to the virus has been somewhat discombobulated, is the nice word I'll use. How do we need to reexamine how governments and private sector companies execute risk assessments and manage risk in today's environment using something like a pandemic as a example? Obviously, there was a lot of hand wringing about President Trump's decision regarding the Defense Production Act, and whether he should invoke it. But, what do we need to do to be more prepared for future pandemics, and for similar types of situations that might arise in the homeland that might require a more coordinated response?

Kirstjen M. Nielsen: (34:28)
Yeah. So first of all, I'm sure there will be various entities that do a lessons learned review. And, I do think that'll be extraordinarily important to more tactically and technically answer your question, which is, do we have the right entities? Do they have the right authorities? Do we have the right mechanisms in place? What I would say is, there are a couple different things at play here. One, unfortunately, is a lack of information. Risk assessments and risk making management really only work when you have data. When you don't, when the basis of a risk management profile is uncertainty itself, it's very difficult. And, I think we've seen that with the markets. I mean, the markets crave data to the extent that the data keeps changing, the markets have a hard time interpreting that, just as every citizen in every country does, as they try to make their own risk assessment each day as to what to do, what to engage in, whether to wear masks.

Kirstjen M. Nielsen: (35:28)
So, first of all, the data is very important. And, I think we will find out more about the data that's available as we go forward. But, I would just offer that it's really important with a pandemic or any cascading events to understand its origin, and to very quickly share that information in a transparent way so that others can prepare and respond. And, I think the delay with getting the information from China certainly has contributed to this. The delay in calling it pandemic certainly has contributed to this. The debates between international organizations with respect to the epidemiology leaves all of us scratching our heads as to what should we do? What's the answer?

Kirstjen M. Nielsen: (36:12)
I think the asymptomatic transmission has caught many off guard. That wasn't necessarily something we heard a lot about say in February or March. So, as we learn more, the way in which we respond should change. But again, that adds another level of uncertainty. Why are we changing the way that we do this as we go? I think we're also seeing federalism play out. It's the age old debate in any homeland security or other national security event, who's on first? Who's in charge? What are they doing? And, we're seeing that play out at state and local levels. We're seeing that play out between state and local levels, and then we're seeing that in the private sector. You've mentioned the DPA and that's where that mix hits of, what should the private sector be doing? What is the federal government and other governments have access to?

Kirstjen M. Nielsen: (37:05)
You asked me so much in the question, I'm trying to get to at all. But, on the business side, I would just say, we all have to be adaptable. I mean, this is demonstrating that if part of your business plan, if part of your culture is not to anticipate and adapt, you're not going to survive, you won't have a sustainable business model. And, some companies have done that quite well. I think we've seen that, others are slow, whole industries are slow to adjust. But, this is a difficult event because the orientation very much like a mass scale cyber event, the orientation, if you will, of left and right a boom doesn't exist. It's not a hurricane that comes and goes, it's not a chemical attack that comes and goes, although chemical attacks of course have lasting effects as do recover from hurricane.

Kirstjen M. Nielsen: (37:52)
But, this is much more an active situation. We're very similar to what I would tell you in cyber. We have to look at it more for how long can we withstand attack? If you will. If this is a new normal, how do we learn to innovate while under attack? I mean, that's something I would see in cybersecurity, but is very applicable here, because it's an ongoing event. So, how do you adjust in midstream, and then from a resilience perspective, that's really where we're all headed. We can't prepare for everything. We have to focus on being resilient. Part of what that means is, not only learning to innovate while under attack, but learning how to bounce forward, it's not just bounce back. What can we do to anticipate tomorrow, while we're addressing today? So, I think the orientations have to change, or we won't be able to continue to move forward. Pick a topic, whether it's education, whether it's work, whether it's different industries, whether it's government.

John Darsie: (38:53)
I want to pivot to another question from the audience. It's about election security, excuse me, and hacking. So, our intelligence agencies basically produced a report after the 2016 election that confirmed that there was interference in our election, mainly from Russia. And, there's early reports heading into the 2020 election that there seem to be similar ambitions from Russia, and other actors to interfere in our elections. From my perspective, this is a bipartisan issue, today that interference could be taking place on the side of one party, tomorrow it could be taking place on the side of another party. What do we need to do to secure our elections? And, how worried are you about the 2020 election, and the threat of the hacking, cyber warfare, and interference?

Kirstjen M. Nielsen: (39:43)
First of all, I'm happy to say we are vastly more prepared from election security perspective than we were for the last presidential election. The 2018 election was a great midpoint in the preparedness. But, I think as you described, there's two separate parts of it. One is the hacking, if you will, to generically use that term, of the systems, of the infrastructure of the elections. And, that's a role that DHS plays in terms of helping state and locals prepare and prevent any nefarious activity.

Kirstjen M. Nielsen: (40:18)
The other part is the malign interference from foreign governments. The FBI has lead on that, that's the misinformation campaigns. DHS and the rest of the interagency support them in that. But, there's two parts to it, so on the first part, the DHS role, DHS is working with over 6000 jurisdictions, they're working with all 50 states, we have sensors in all 50 states. DHS has a whole panoply of tools that they're offering. CISA and Director Krebs have just done tremendous work in building the partnerships, and taking time to understand how individual states do elections to make sure that they have what they need, in support.

Kirstjen M. Nielsen: (40:58)
On the foreign interference side, my personal opinion is, we got to shine a sunlight. If I read something, and somebody says, "Okay. You're your neighbor or your good friend just said that." I will think of it one way. If I read that exact same thing, and then you say to me, John, "Okay. That was written by a Russian bot." Or, "That was written by the Chinese government." I'm going to feel differently about it. It's exact same sentence that were a piece of paper information. So, the more that we can communicate, and declassify in appropriate ways, the intel to help Americans understand that there is a misinformation campaign, then hopefully Americans will take the time to look at sources, and really think through what it is they're reading. But, we have to do that part, we have to raise the awareness to help them know the job that we expect them to do.

John Darsie: (41:51)
We have two more questions, and then we'll let you go. We have a ton of engagement from the audience, which we really appreciate. As Secretary of Department of Homeland Security, you deal with threats, both foreign and domestic, and there's been a rise in homebred militia type groups that have felt empowered to go out and try to enforce some semblance of law enforcement on a private basis. Does that concern you as a former government official, the idea that some of these threats we're facing now are more homegrown and domestic?

Kirstjen M. Nielsen: (42:25)
Absolutely. In fact, one of the things while I was secretary I did, was I asked that all of our strategies that addressed Islamic extremism be expanded to address targeted violence in general, to include domestic extremist. Again, under that theory, I mentioned earlier, not theory, but belief that that hate is hate. Violence is violence. It does not have a place in our society. So, DHS has undergone a lot of policy and strategy work to expand the aperture, if you will, to make sure that they include domestic terrorists, and other targeted hate groups along and in conjunction with the departments of the FBI, and state locals.

Kirstjen M. Nielsen: (43:08)
But, I would say, absolutely, because it is a different type of pernicious threat, it's not a threat emanating, if it's domestic in the way I think you meant. It's not necessarily a threat emanating from over there. It's within our cultures, within our societies, within the schools, within... And so, the partnership that's required to address that needs to be expanded. But yes, I remain very concerned about it.

John Darsie: (43:34)
So, the last question we'll ask you is, there's some former members of the Trump administration that have had commentary about the way things have worked internally. We're not going to sit here and ask you who you're voting for, or something like that. But, as we evaluate leaders going forward in this country, what are the types of qualities that you look for in a leader especially for a President of the United States.

Kirstjen M. Nielsen: (44:00)
That's a great question. And, I hope all Americans really take it to heart, and really do their homework, and really think through at the federal, state and local level, who they're going to vote for in this next election. I think we need to look at what's happening. We need to, whether it's COVID, whether it's the... There's so many, many issues, I won't take all the time, you know what they are. But, when we look at them all, we have to think about who is best to lead us through it, and to continue to help us all recover, and move forward.

Kirstjen M. Nielsen: (44:33)
And, my experience with this is, we have a real institutional memory problem in government right now. There's been so much turnover. Personally, I think some of the issues in the interagency with respect to the pandemic, is just there's not very many people left who were there from the extensive planning that was done in 2005, 2006, and under the last administration. And so, the continuity, the understanding of government, how it works, the laws, the restrictions, the international partnerships, all of that is part and parcel with governing, and we have to make sure that we elect leaders who have those capabilities, who understand...

Kirstjen M. Nielsen: (45:13)
I know many have come on Salt Talks and talked about the importance of vets, of former military members. And, I think that's because they do have that. They're schooled in that, they're trained in that. But, it's not just that, it's people who have taken the time to understand how our constitution works, how federalism works, and how that plays out within a given construct. During a crisis, you have to be crisis ready, you have to have a personality and ability to stay steady through a crisis. My biggest fear right now is in the middle of corona, something else will happen. We'll have a Cat 5 hurricane, or we'll have another pandemic, or a nation state will choose to look at our weakness, and decide that it's time to more aggressively attack, or terrorist organization. So, you have to have steady leaders that have the knowledge, and the ability to lead. And so, as we all look towards this election in the fall, I hope everyone does their homework, and really gives it a good think. It's important.

John Darsie: (46:14)
Well, Secretary Nielsen, thanks so much for joining us. Anthony, do you have any final word for the secretary? Very grateful for your time.

Anthony Scaramucci: (46:20)
We appreciate your time, Secretary Nielsen. If I didn't get John in there I would have had to hear it later in the day. So, thank you for tolerating him and his questions. But in the meantime, I hope we can get you back to one of our live events, which we expect to kick off again as soon as the pandemic is over. But with that, thank you so much, and we hope to see you soon.

Kirstjen M. Nielsen: (46:43)
Oh, my pleasure to you both. Thank you so much.

Dr. Richard Haass: Top Foreign Policy Issues Facing the U.S. | SALT Talks #27

“What we’ve learned, also the hard way, is that our respect for sovereignty can’t be absolute.“

Dr. Richard Haass is the President of the Council on Foreign Relations, an independent, nonpartisan membership organization, think tank, publisher and educational institution dedicated to being a resource to help people better understand the world and the foreign policy choices facing the United States and other countries.

What went wrong following World War I? The United States embraced isolationism and protection. We rejected the League of Nations and global trade, and from the Depression came the rise of populism and extreme nationalism. By the 1930s, we were back at war despite our best efforts. Fortunately, those in charge of the United States following World War II studied post-WWI decisions. “They were old enough in many cases to have lived through it and were determined not to repeat the mistakes.”

It’s also important to distinguish between populism and nationalism. The former derives from living standards that are drifting or declining, whereas the latter is a response to feeling like people are losing out on trends and identity. As we see with the Presidency of Donald Trump, both are options in the playbook of what a leader can draw upon in response to difficult times.

LISTEN AND SUBSCRIBE

SPEAKER

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Dr. Richard Haass

President

Council on Foreign Relations

MODERATOR

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Anthony Scaramucci

Founder & Managing Partner

SkyBridge

EPISODE TRANSCRIPT

Anthony Scaramucci: (00:08)
Richard. It's a real honor to have you on with us today. I think you gave amazing presentation at our conference in Abu Dhabi and fortunately we were going to have you in May at our conference, but here we are virtually. And I thought this book was very timely because it came out right around graduation. And I remember hearing you speak about the book and suggesting for people to read the book upon graduation, it would give them a primer on what is going on around the world, but also starting at a spot where people could understand how these world order that we're living in now, and it's obviously changing, but how the world order sort of got constructed.

Anthony Scaramucci: (00:51)
And some people think that we're still fighting the first world war, some people think we're still fighting that in the Middle East and so forth. So I would love to have you start first with your background. I think you have one of the more fascinating American stories where you were raised here in New York, but you went on to become this internationalist and great geopolitical thinker. And then I want to talk about where we are today and how we got there, but tell us a little bit you first.

Dr. Richard Haass: (01:22)
Well, thank you, Anthony, and thank you, John. Great to be back with you. Sorry, it's only that it's virtual rather than in-person. Look I've been really lucky. I've had the kind of career that you can only have in the United States. In most other countries, you pretty much have to decide early on what you're going to do when you grow up. And one of the good things, many good things about this country is that there's flexibility. And I've been able to go in and out of government. So I worked for different presidents and on the outside I've been at various think tanks and universities. Now I'm at the Council on Foreign Relations. So in that sense, it's been incredibly interesting.

Dr. Richard Haass: (02:08)
I got into this field really for two reasons. One is when I came of age, Vietnam was a big debate in the '60s. I was too young for civil rights to be the formative debate so I got interested in the world. And what really led me in this direction, I was a head of professor of religion at Oberlin. When I got to campus in '69, I said, " Who's the best professor?" People said, " It's professor Frank." And I said, "Okay, what does he teach?" And they said, " New Testament." And I said, "Well, that's interesting. That's not the one we read in our house, but I'm willing to try it."

Dr. Richard Haass: (02:39)
I did, as you know, a good teacher can make any subject fantastic. He was a great teacher. I got involved from there, I spend time in the Middle East and so forth. And one thing led to another led to another. And if there's anyone young watching this, I'd say don't over-plan your life. Just do interesting things. And it'll add up to be an interesting life. And I've been going in and out of government ever since. So when I'm out, my life is two halves. One half is the running of institutions now for nearly 18 years to Council on Foreign Relations. And the other half is essentially putting ideas out into the public conversation. Whether in books, articles, TV, podcasts, Twitter, events like this, what have you. But I just think, right now it's an important time to do these things because there's so many things in play. That it's not a time to sit back. I really do think it's a time to jump in.

Anthony Scaramucci: (03:40)
So tell us why you wrote this book. What was the idea behind it? You've written obviously many different books 2017, The World in Disarray, but this is a different book. This is a book where somebody could pick it up if they landed from Mars, and say, "Okay. What's going on planet earth. And how is the geopolitical system set up? And what are the challenges for the people of earth?" Tell us about that.

Dr. Richard Haass: (04:04)
Well, you're right. All my previous books were books written, how do I put this, for people one way or another kind of like me, people in the foreign policy debate, people who had made this a big interest or even their careers. And it's a kind of insider's debate. Every field has some economists have them, scientists have them. Where you're writing at a level where you can assume a lot of knowledge, assume a lot of background. And you're essentially making arguments. You want to change the thinking of people. This is fundamentally different. I came to the conclusion a few years ago. I guess two things. One is, I'd said a lot of what I had to say, particularly in the Disarray book and some other books, Foreign Policy Begins at Home. And at some point as an academic, you've got to avoid the temptations to rewrite your books. You got to move on.

Dr. Richard Haass: (04:53)
And that also in this country and around the world, you had an extraordinary number of people who simply didn't have the basic knowledge and understanding in order to be an informed citizen. And in that I'm a Jeffersonian. I believe democracy thrives only when its citizens are informed and I hate the idea that people say this November are going to vote for a candidate without having thought hard about the issues or harder about their stances on some of the foreign policy issues. Even though what that person would do, if they're elected, would have tremendous consequences for all of us.

Dr. Richard Haass: (05:27)
And the problem is you can go to Harvard or Stanford or any other elite university, not to mention the non-elite universities and colleges, not to mention high schools and you can graduate essentially illiterate unknowing about the world. These courses either are not offered in high school, or if they're offered in college and university, they're not required. And way, way too many Americans are leaving campus, essentially not equipped to deal with this global world we find ourselves in. Or if you're my age and you may be studied at 40 or 50 years ago, whatever you studied was obsolete. Technology has changed. The Cold War has been over for three decades.

Dr. Richard Haass: (06:07)
If you watch the nightly news, you're not going to pick up much of anything about the world. If you go on the internet, the problem is it's all there, but so is a ton of other stuff that's junk. And there's nobody there to point you to the right sites and say, read this, ignore that. So what I decided to do was to try to write a primmer or the rich call a primer that would essentially be one-stop shopping that would give you the foundation, make you a more informed citizen, help you navigate all that's going on. Hopefully would also lead you to read other books. But even if not, my goal was to kind of bring people to a level where they, again, could be more informed citizens make better decisions politically and personally, and what this is, is a relatively short 300+ page book assumes nothing, explains everything. And the idea is to make an interesting and accessible and hopefully I will have succeeded.

Anthony Scaramucci: (07:02)
Well listen, it's a great narrative as well. And I love reading the book and we were talking before we went on the air live about certain chapters. But when you go back to World War I, in some ways we're still fighting World War I, as you point out and World War I, we got the treaty wrong. Obviously you point that out as well. And the Middle East, the Sykes-Picot Treaty and the evacuation of the Ottoman Empire from the Middle East is still with us today. So what would you say to people about how we got to where we are today and what do we need to do to, I think we would both acknowledge we've had 75 reasonably good years of peace and prosperity as a result of the post World War II architecture. But that is fraying. And obviously President Trump is dismantling parts of it, but take us back World War I, World War II, the architecture and where we are today.

Dr. Richard Haass: (08:03)
I think you set it up exactly right. Now, we came out of World War I, which was meant to be the war to end all wars. And two decades later, the world was back at war. So something went drastically wrong. And what went wrong was the United States embraced isolationism. We rejected the League of Nations. We rejected trade. We embraced protectionism. With the depression, you had the rise of populism and extreme nationalism. Countries weren't serious about security, didn't react to threats when they happen. And like I said, by the late '30s, we were back in a global war and the United States for all of its efforts, couldn't avoid the consequences. Couldn't stay out.

Dr. Richard Haass: (08:52)
So there's lots of lessons in this. There's lots of lessons about the falling isolationism. There's the lessons that like it or not, the world matters. There's the importance of working with others rather than unilaterally. There's the risks of protectionism. We want to both the reasons of wealth, but also to create connections. We want trade to be a vibrant thing. Coming out of World War II, what was so interesting is the people who led the United States after World War II, beginning with President Harry Truman and those around them, they went to school on the lessons of after World War I. They read that stuff. They were old enough in many cases to have lived through it. And they were determined not to repeat the mistakes. So you didn't have a return to isolation.

Dr. Richard Haass: (09:37)
As we did an escape back behind the Atlantic and Pacific oceans. We entered into alliances, including NATO. We built great global institutions, the World Bank, the IMF, the precursor of the World Trade Organization, the UN and so forth. We got the American people to support an American role in the world. You know, Acheson wrote his memoirs under the title Present at the Creation, well, it's not modest, but it's actually accurate. This was a truly indeed the most creative moment in American foreign policy. And we've been riding their wave for 70, 75 years. And as you say, it's framed, a lot of these institutions were never designed for this year. Lots of challenges that we now had didn't exist then. You didn't have climate change. Didn't have cyberspace, North Korea, Iran didn't have any nuclear materials. The world was a couple of billion people. Now it's nearly eight billion people and on and on.

Dr. Richard Haass: (10:36)
So we don't have the institutional basis anymore. I think what's also happened is now a lot of Americans don't see the benefits because they don't know this history or don't see it the same way I do. Don't see the benefits of America's involvement in the world. They only see the cost. They look selectively at the mistakes we've made, the Iraq's or Vietnam's rather than the larger areas where we've got it right. And suddenly once again, we find ourselves in debates where against the backdrop of rising great power rivalry against all these global challenges we have the United States, again, flirting with isolationism, flirting with unilateralism, flirting with protectionism.

Dr. Richard Haass: (11:21)
So I'm not saying a war is inevitable. I'm not saying we're at 1936 now. I'm not making that argument, but there are certain echoes. Mark Twain's line history doesn't repeat itself, but it rhymes. There's some rhyming about the post-World War I era, and we need to take its lessons to heart because good things just don't happen. Peace and order don't just happen because they're inevitable or they're the natural way of things. To the contrary, they're the unnatural way of things. And if we want peace and prosperity to happen, we have to work hard with others to make them happen.

Anthony Scaramucci: (11:55)
I mean, one of the points that I've heard you make on television, you make it on Twitter, you lace it into the book. And I think it's in quote. I want to get your reaction to this. See, the precursor to the World Trade Organization was the General Agreements of Trade and Tariffs. And when that was designed, there was a coordinated effort by the State Department and Treasury and more or less a bipartisan effort to make those straight deals uneven. United States being the last industrial superpower of existing capitalist superpower after World War II, we wanted to have a burgeoning middle class and rising living standards around the world.

Anthony Scaramucci: (12:32)
I saw your interview with, I think it was Dr. Steele who wrote the Marshall Plan at the Council Foreign Relations. It was a brilliant book about us rebuilding infrastructure outside the United States to shore up prosperity around the world, to not only protect it from communism, but also to create a flourishing, a dynamic market for people. And that unevenness caught up to us a little bit. President Trump obviously has challenged that unevenness. So let's say you were the foreign policies are, let's say you were present at a new creation and you had Dean Atkinson's role today. What type of infrastructure architecture would you discard that you think is obsolete? And what type of things would you build for the world that you think would help us into the 21st Century?

Dr. Richard Haass: (13:26)
There's a zillion things I could say, but let me focus on two. One is I would probably think about architectures in the plural rather than the singular one. There's not going to be a UN or anything else that's going to solve or manage our problems for us. Instead, we're going to have to think about separate arrangements for separate challenges. Might be different, not might be, will be your needs to be different participants. So for example, if you're worried about climate change, you might say let's bring the most important, significant industrial countries into this. We don't need 190 countries. We can probably get by with 15. So we'll do it with them and we'll set up an arrangement there that would encourage certain types of behaviors. In cyber, I would say we would begin with the more open societies, because we're more likely to have something in common about what the rules of the road ought to be.

Dr. Richard Haass: (14:20)
We've done certain things, I would say Iran or North Korea. And that way we bring together a handful of countries to provide negotiating forum. So what I would have is a kind of designer multi-lateralism. And in some cases, by the way, if say I was going to deal with global health, Anthony, I would have maybe the Gates Foundation, some of the big pharma companies. I don't think you should limit yourself to countries. If you're dealing with cyberspace, you'd want to have Google and Facebook and Apple and Twitter in the room.

Dr. Richard Haass: (14:52)
So one would be, I'd spend a lot of time designing a new set of architectures that would be multilateral and would be in each case, bring together those who are willing, able, relevant to deal with the challenge. So that'd be one thing I would do, but it would need to be a creative situation led by the United States, working with others, that'd be one thing. The other is, and this goes back even further in history, you talking about World War I, going back to the rise of the modern era. It's actually the 17th century. The rise of the idea of sovereignty of sovereign states, respecting one another's borders, not changing them by force. I think that's still important.

Dr. Richard Haass: (15:34)
We learned the hard way once Saddam Hussein went into Kuwait 30 years ago, when Russia went into Ukraine. We need respect for borders. We don't want to live in a world of mayhem. And even now we want to have respect for borders also against cyber. What Russia is doing is outrageous and shouldn't be able to get away with that sort of thing. But I would argue that's not enough. What we've learned also the hard way is that our respect for sovereignty can't be absolute. We already acknowledged that with genocide, if a country wants to kill or allow millions of people to be killed within their borders, I don't think sovereignty gives them that right.

Dr. Richard Haass: (16:08)
If a country wants to harbor terrorists within its borders and those terrorists mount attacks against us or anybody else as the Taliban learned after 9/11, sovereignty doesn't protect you. If Brazil wants to destroy the Amazon rainforest, that would have cataclysmic consequences for global efforts against climate change. I don't see why Brazil should have the right, just because the rainforest largely falls on its territory. Countries need to meet certain obligations in dealing with the outbreaks of disease. China didn't, we're all paying a price for it. Just because North Korea wants to have nuclear weapons, I don't believe they should have the right to do it.

Dr. Richard Haass: (16:48)
So what think we need to do is begin the conversation about a world that has a different operating system. And it includes sovereignty, the good parts of it, but it can't be absolute. We need to start to condition sovereignty on responsible obligate behavior on countries meeting certain agreed upon obligations. So those would be the two things I'd emphasize. A new operating system for the world and new institutions to deal with global challenges. The rest of it we know how to deal with. We know how to deal with rising great powers and the rest. We have a playbook for that. But these other two things I think need to be new.

Anthony Scaramucci: (17:25)
Well, I mean, but there's another thing that's unspoken that we, you and I are always talking about, which is the specter of nationalism. And it's the specter of politicians that seize on nationalism rather than being transformative in trying to calm things down. They use that jingoism as a way to gain power. And so there's an issue related to that. We don't have to go into it today. I want to turn it over to questions. Before I get there, though, I saw you on Morning Joe, this morning discussing the incident with China and the situation in Houston with the Chinese Consulate.

Anthony Scaramucci: (18:01)
I thought you said something very interesting about you could use a sledgehammer or you could bring a scalpel to a situation like this. And so for people that maybe are not as aware of this issue as you and I are, tell us a little bit about the issue and tell us about what's going on in the China-US relationship and what you're concerned about and what we need to do to improve that relationship.

Dr. Richard Haass: (18:22)
This is for those who slept in this morning, and didn't watch Morning Joe. What China is doing-

Anthony Scaramucci: (18:30)
That's you John Darsie, pay attention. Okay. I know you missed it this morning. Ll right.

John Darsie: (18:32)
I don't have cable. I'm not one of these baby boomers that still has their cable box. I'm a streamer.

Dr. Richard Haass: (18:37)
John was clearly, he was clearly organizing his room. So Room Rater would give him a higher rating. That is how it was.

John Darsie: (18:41)
Exactly right.

Anthony Scaramucci: (18:44)
I just have to say, Dr. Haass, I was so happy when you blend with a room that crushed John Darsie. And what I said to Dr. Haass is I gave him an 11 over a Scaramucci, which is an 11 out of 11, John. Okay. So you can take the fake George Washington picture down now. Okay. He's crushed you with the globe and even like the beautiful lighting and everything. But let's go to China and tell us where you think we are and tell us about that issue and how is it going to play out or how would you like to see it play out?

Dr. Richard Haass: (19:16)
China's doing lots of things that we have every right to be strongly opposed to. Whether it's theft of intellectual property, at times using students to do espionage, getting access to American laboratories associated with American universities or the private sector. So there's lots that China is doing here that should give us pause. Obviously same holds for the rest of the world. But closing a consulate is not the response. If I had been in the State Department, I would have said, okay, we would go to the Chinese foreign minister or to their ambassador in Washington and say, "Look, we have the goods on these guys. So you either withdraw them or we're going to kick them out. And we're not going to do this publicly, we're not going to embarrass you, but this is unacceptable behavior."

Dr. Richard Haass: (20:06)
If we have real problems with their students, we would go to the Chinese ambassador or foreign minister and say, "Hey, we're all in favor of your students coming here to study. We're not in favor of your students coming here to do espionage. So we're going to force these students to leave, or we're going to start denying your certain students from China, access to certain types of laboratories and all that because we just don't trust that they're legitimate students. Again, we would do it quietly. We're not out to start a major cycle of action and a reaction of tit for tat."

Dr. Richard Haass: (20:38)
The fact that we didn't do that. We made this public, this guarantees the Chinese are going to shut down at least one of our consulate. We each have a half dozen consulates. So what are they going to do? Shut our consulates, say in Hong Kong? How is that going to help us? How is that going to help us monitor events there? We use other consulates in China to keep an eye not just on China, but on some of its neighbors. How is that going to help us? It's a lot easier for China to have people in the United States, moving about keeping an eye on us than it is us to have Americans in China. We need these consulates.

Dr. Richard Haass: (21:14)
So it seems to me, this is really self-defeating in the narrow sense that we're going to make ourselves a little bit more blind, shall we say. We're not going to fundamentally affect China's ability to monitor what we are doing. And this is going to contribute to the momentum of the breakdown of the most important relationship in this year of history and call me cynical, but it looks to me, this is far more about American politics and the run up to the November election to look, "tough on China" than it is about anything in terms of foreign policy.

Anthony Scaramucci: (21:49)
Right. Let's roll over to John.

John Darsie: (21:50)
So we're going to go to questions, Dr. Haass. You talked about the crumbling of these global supernational organizations and the rise of nationalism, especially in the United States. Is that rise in nationalism and the erosion of that global order, is that a disease that's born out of rising income inequality? Is it disease born out of just the lack of education about history? Is it a disease that's born out of the fact that the greatest generation is dying off? Bob Dole just turned 97 yesterday, and I think it reminded people of sort of an era that's gone. And is Trump a symptom of the disease or is he the disease itself that's causing the crumbling of these organizations?

Dr. Richard Haass: (22:37)
I think to some extent it's useful, John, to distinguish between populism and nationalism. And I think a lot of the populism does derive from a living standards that are either drifting or actually in some cases going down. I think nationalism is something that's also a response at times to a sense of losing out. People aren't comfortable with trends, with their own trajectory and they're looking for other things to grab onto. I think political leaders at times put them out there because they can be popular lame scapegoat immigrants, scapegoat, foreign competition, and so forth.

Dr. Richard Haass: (23:18)
So I think all of these are pretty much in the playbook of responses to difficult times. It's one of the reasons that it's important to have things like growing economies and the rest. I think Donald Trump is both a reflection of this and a driver of it. I think Trumpism, when you think about the context he got elected, it was after Iraq and Afghanistan. The sense that we'd overreached after the 2007/8 economic crisis, the financial crisis. I think it was a general sense of the establishment and elites had let the country down. So people were willing to take a flyer on this outsider. And what I think we're realizing is that bad situations can get worse.

Dr. Richard Haass: (23:57)
And the question is whether we self-correct or not, and we're seeing it around the world. We saw it in Brazil, we're seeing it in Mexico, but we're also seeing on a lot of these places is that whosever is in power is being held to responsible and to account. So when people in power do well and there's challenge, say like Angela Merkel, in Germany, or say the governor of Rhode Island, Gina Raimondo, or the prime minister of New Zealand, their numbers go way up. And when Bolsonaro or Lopez Obrador does bad in Brazil or Mexico respectively, their numbers will go down. The Iranian government is under pressure from below because their performing. Donald Trump's numbers have gone down dramatically because he has performed badly on COVID-19.

Dr. Richard Haass: (24:51)
So I think these things go in waves. I just think the danger now is when the things begin to get out of hand, that countries are that the normal stuff of foreign policy and diplomacy breaks down and that leaders become prisoners either of the nationalism and populism in some ways that brought them to power. And I think particularly in the US-Chinese relationship right now, both countries were paying enormous price from further deterioration in the relationship. But I can't sit here and tell you it's not going to happen. At the moment, the momentum is bad.

John Darsie: (25:24)
You write in the book that climate change may be, and this is a quote, "the defining issue of this century". And you touched on it briefly earlier about how we might be able to tackle that issue in a multinational international type of framework. Do you believe that in the current environment, we're going to be able to marshal a global response? And in your opinion, what exactly should that global response look like to tackle climate change?

Dr. Richard Haass: (25:48)
The reason I think climate change could be that defining is I think the potential of it to change so many dimensions of life on earth are great. Shortages of water, loss of access to arable land. There's a great piece by the way, in today's New York Times, and it's one of those graphics dynamic, and I don't know what they're called interactive, but it talks about the hundreds of millions of people who are likely to be turned into forced migrants because of climate change over the next 50 years. And just think of that. If we have hundreds of millions of people, where are they going to go? What's going to be implications of that not just for human life, for disease, for political stability in the countries they go to? So I think climate change in of itself is really bad and it will set in motion other trends.

Dr. Richard Haass: (26:36)
I think there's two ways to deal with it. And by the way, we've knocked on the right way. So far, we've done what I call the UN General Assembly approach. We try to get everybody together and we try to get them to agree to a formula. And historically, we've now had three formulas. We've had cap and trade, we've had a global carbon tax, and now we have the Paris Approach. Not one has worked at all. And even if the United States were part of Paris it's such an inadequate framework. It not worth the effort really. So I think there's two answers on climate change. One is the top-down approach. And as I said, if United States or in something like TPP, that'd be a great place to start. And you'd basically say, if you want to export to a TPP country, we represent nearly half the world's markets. Great. But if you're using coal to produce something, uh-uh (negative), there's going to be a tariff on it. There's ways to incentivize people to improve their climate performance, things like that.

Dr. Richard Haass: (27:33)
And then I think the other thing is from below the ground up, which is fuels, and I would be putting massive amounts of money into research through the energy department and otherwise. Everything from working on hydrogen as a fuel to renewables and so forth. And to some extent, some of this has happened. We're beginning to see the market, regulatory policy. I would be very demanding of automobiles and trucks, and with so-called cafe standards. In my experience, Detroit responds well so long as they know what the rules are and they know what they're not going to change. They're able to meet demanding guidelines. So I would essentially create a framework where we make tremendous innovation and I would make this a priority for innovation. And then I'd be thinking about when we do have breakthroughs, how we share them with the rest of the world, almost like we did with HIV medications.

Dr. Richard Haass: (28:22)
If we have certain technologies that are major assets in the battle against climate change, we should think about making them globally available. And then we should also create these trade related frameworks for incentivizing countries to, "clean up their acts." And so I would have a two-pronged or three-pronged approach, regulation, innovation, and a different approach to global frameworks. But we better get going on this. This is one of the things, sorry to go on too long,

John Darsie: (28:51)
No problem.

Dr. Richard Haass: (28:51)
This is a really hard issue to deal with because it's a slow motion crisis. And in my experience, governments and particularly democracies don't do well with slow motion crises. A little bit of like a lot of the businessmen and women who are part of us all. We all face the pressure of the urgent crowding out the important. So like right now, for example, we're dealing with PPP and putting people back to work in this country because of a COVID-19 and issues dealing with climate are pushed off. We don't have the luxury of dealing with them, but why wouldn't we marry PPP with climate change? Why couldn't we say, if you're going to get X billions of dollars from the government, you can't use coal or you're going to have to adopt these set of regulatory standards. So I think it's a mistake not to deal with this now, to think we can wait till tomorrow because this is not a good bottle of Bordeaux. It ain't get better if we lay it down for a day, a week, a month, a year or 10 years. The options are only going to get worse.

John Darsie: (29:56)
Another great primer you offer in the book is the idea of why having the US dollar as the global reserve currency is such a powerful weapon for the United States, both from an economic and the State Department uses it as a weapon and pulling lever of powers in certain parts of the world? Could you explain to our audience why that global reserve currency status is so important for the United States?

Dr. Richard Haass: (30:20)
Sure, Valery Giscard d'Estaing became the president of France, when he was their finance minister, the phrase he called, it was it conveyed on us, conferred on us, exorbitant privilege. Essentially means we can do what we need to do in terms of the Fed can do what it needs to do in terms of managing the American economy. And the whole world basically goes, responds to it. It means that if we chalk up debt and we've obviously chalked up a lot of it, it's in dollars. We don't have to worry about changing rates. I mean, imagine if all of our debt were in some other currency and suddenly the dollar weakened against it, our debt would go up by whatever percentage the dollar weekend against it.

Dr. Richard Haass: (31:04)
It means if we do want to introduce certain types of sanctions, the dollar is the mechanism by which we do it. So it gives us tremendous economic and political advantage. The problem is the rest of the world is beginning to grow a little bit uncomfortable with it. One is we've overly weaponized it. Two, we've amassed this enormous debt. Three, we've politicized the Fed to some extent, president's attacks on Jay Powell. Four, our response to COVID-19 has raised questions about our competence. Fifth, the worst thing of relations with allies over trade and with Chinese over everything has made others less willing to live in a dollar-dominated world, plus willing to live with the dollar as a reserve currency in part because it does give us influence and advantage. So I think what we're doing is hastening the emergence, not of an alternative world, but of rivals. And my guess is in a number of years, the dollar won't be nearly as dominant as it is now. And that we will pay a political and economic price because we'll lose some of our advantage, some of our influence.

John Darsie: (32:11)
So we have multiple questions on China. We'll wrap up with this question, then I'm going to aggregate into one. And you touched on US-China relations, but let's envision a scenario whereby Joe Biden wins the election in November. Obviously the tone and the approach that the Trump administration has taken towards China has weakened China economically. And frankly it's weakened the United States economically, to some extent. What do you see as the future direction of US-China relations? What's your view on the risk of military conflict in the South China sea, where tensions are rising? Do you think China might take a little bit more of an appeasement type of approach as it relates to the United States to sort of hit the reset button on relationship with the new administration?

Dr. Richard Haass: (32:54)
It's a good question. I've been thinking about it a lot. My own view is US-Chinese relations are going to be difficult and troubled, regardless of what happens this November. If you look at the people advising Vice President Biden, if anything, they care far more and they've been far more consistent in their concerns about Hong Kong, the regards human rights in China. They have been far more consistent about their concerns about the South China sea. On economics, they've been less preoccupied with the level of American exports to China, the kind of phase one trade deals sort of stuff that's animated the president. So my point is simply I think US-Chinese relations are going to be troubled regardless.

Dr. Richard Haass: (33:39)
I think the problem, probably the difference in a Biden approach is it'll list allies a lot more in Asia and in Europe. And it would be less by Twitter or more by classical diplomacy. And I think that's important. So I think the fundamental differences would be there. No one should kid themselves. This is going to be awfully difficult, but I think the approach might increase the odds that you have a slightly better chance of at least lowering the temperature, but we shouldn't kid ourselves. The differences particularly on trade are profound about everything from intellectual property protection, to the role of the state in the economy. These are fundamental differences to what I can and I said over human rights over China. And China is clearly entering what seems to be a new phase of its foreign policy. China's come a long way since Deng Xiaoping the idea of hiding and biding your time.

Dr. Richard Haass: (34:36)
Well, it's clear to me that Xi Jinping has essentially said, we're done hiding, we're done biding. We're here. The future is now. We're more assertive. Look at it like what they did with India. Look at the South China sea with Vietnam. Look at what they've done in Hong Kong. Look at what they're saying and doing this with Taiwan. So I think we have to begin from the assumption that this is going to be both the most important and in some ways the most challenging relationship we have. And I think it will be difficult and challenging under regardless of what happens this November.

John Darsie: (35:15)
Dr. Haass, we're going to leave it there. Thanks so much for taking the time to join us again. We really enjoyed having you at SALT Abu Dhabi, and we look forward to having you at a future SALT Conference, either in Vegas or elsewhere. But thanks again for doing this.

Anthony Scaramucci: (35:28)
Richard before you go, what is the next book? Have you thought about it yet?

Dr. Richard Haass: (35:33)
First, you're great to ask. I can produce one about every three years since I have a day job at the Council on Foreign Relations. First, I'll produce a paperback for this and a new edition of The World in Disarray. I'll put those out next spring, and then I'll start thinking seriously about the next book. So I need a little...I think when you write books, you kind of go through a cycle of decompression after you finish, you finish it, you go out and promote it. I'll do the forwards to the paperback edition of this one and the last one. And then I'll put my feet up and I don't know about you, but I walk a lot when I think about books. So I'll increase my step count and that'll help me come up with the next book.

Anthony Scaramucci: (36:22)
All right. Well, a terrific rendition of what's going on. I'm going to hold the book up one more time before we say goodbye, a fantastic book. I recommend it to all the college kids that are listening in on this. And Richard, I hope I get a chance to see you in person soon. We get back to Breakfast. You're a great voice in the debate and we loved having you on. Thank you again.

Dr. Richard Haass: (36:42)
Thank you. Thank you, Anthony, thank you, John. Be safe and well all of you.

John Darsie: (36:45)
Take care.

Anthony Scaramucci: (36:45)
Thank you. You too, sir.