RenMac hosted an interview with Scott Bessent, who is Trump’s announced nominee for Treasury Secretary, in early 2021. While Bessent did not talk about policy or politics, I found it highly insightful as he described his career path and his investment process.
The interview is useful to listen to in its entirety, but here are some highlights.
Global macro manager
Bessent is a global macro hedge fund manager who apprenticed with some hedge fund legends, such as Jim Chanos, Stan Druckenmiller, George Soros, and others. He described his career path in the interview and what he learned from each of his mentors.
What stood out for me was his process in looking for investment ideas, which consists of:
- Forming a theory;
- Looking at the data to see if it confirms the theory; and
- Consider the charts and market positioning to see if they are early or late in the trade.
Bessent related the story of an “aha” moment in 1997-98, when he was in the Soros London office watching a U.S. tech bubble forming. Looking at the charts, he found that the European telecoms were all breaking out to the upside. Analysts told him that there where AOLs embedded in European telecoms, which meant that it was a signal to be buying France Telecom, Telecom Italia, Telefonica, and others. The rest, as they say, is history. It was a case of listening to the market through the charts to form a theory and using the rest of the process to validate the theory.
He was also open-minded as an investor and politically agnostic. Even though he heavily supported Trump in his latest campaign, he related the story of a speech he went to by Stephanie Kelton, the high priestess of Modern Monetary Theory (MMT), which posits that deficits aren’t as big a constraint on fiscal policy as conventional wisdom would have it. Kelton rhetorically asked if 5% inflation for the next 10 years would be too high a price to pay if the earth were to burn up in year 11. Bessent was prepared to jump on the inflation trade if the political consensus were to shift in that direction, which it didn’t.
These are all approaches that I have aspired to and I can admire. It also shows his financial pragmatism, which is a quality that will comfort Wall Street during his term as Treasury Secretary.
The first year of a new presidency is usually the worst for the stock market because the new administration tackles the unpopular deficit fighting cutback early. By the time the next election comes in four years, the electorate forgets the bad medicine. If the new administration keeps stimulating, the risk is an inflationary boom when the next election rolls around.
Trying to reduce a 6% deficit to 3% might tip the economy into recession. Whenever the Japanese tried to balance their budget by less spending, they found the deficit surprised by going up not down.. That’s because tax revenue fell and unemployment insurance went up.
All expert strategists understand we are in a mathematical march to a government debt and deficit cliff. It may be too late to fix the bubble. When you try, the bubble bursts and the fiscal situation blows up. Bessent looks like a guy that will try to stop the deficits and end up crashing the stock market and economy.
First three of his mentors all have great success despite some big blowups in some positioning. That’s how TA got put into the process later on, which is Soros’ ducks lining up. If the trend is already clear and everything has lined up nicely the game has changed. But it remains an art on when the run is over. So when we do macro we must understand how the time series evoles. Not everyone will buy into the analysis to the same degree. And valuation is certainly not the key metric.
At this moment it is clear that AI tools will have at least 10 years of boosting produtivity. There are also a lot of doubters out there, which is good. So AI counts as macro du jour. Perhaps Argentina is another macro candidate.
So usually we can put a portion of portfolio dedicated to macro themes and the rest doing Jim Simons quant trading. That makes the path more fun. MMT is facing its big moment very soon. Let’s see what unfolds. It certainly made Kelton a celebrity and she made a lot of money on the books and on the speaking circuit.