27 minutes | Apr 16, 2020

[PMR121] Mark Yusko | This is a Perversion of Capitalism

Recorded: April 15, 2020 Mark Yusko is the founder, CEO and CIO of Morgan Creek Capital Management. Contact: http://morgancreekcap.com Twitter @MarkYusko INTERVIEW TRANSCRIPT (EDITED) Albert Lu: Welcome to The Power & Market Report. I'm Albert Lu. My guest this morning is Mark Yusko, the founder, CEO and chief investment officer of Morgan Creek Capital Management, which manages close to $2 billion in assets. Mark, thank you very much for joining The Power & Market Report. It's nice to meet you. Welcome. How are you?   Mark Yusko: Thanks, Albert. It’s great to be with you this morning. Everybody's doing well here in North Carolina. I hope you guys are doing well in California as well.   AL: We are, considering all. We're very lucky here. Lots to cover, not a lot of time, so let's get into it. [The] Dow rebounded nicely this morning; it's up 600 points. We're getting some good news on the health front — meaning that this thing is reaching peak. Are you willing to say that we put in the bottom and, if so, do you expect a retest of those levels any time? MY: You know, I'm actually not. I'm one of the few that's still in the camp that the worst is yet to come. You know Bob Farrell, the famous Maryland strategist, talked about bear markets. And his rule number 8 of his 10 investing rules was: Every bear market has a sharp down, a reflexive rebound, and then the fundamental downturn. And I think we're in the middle of this reflexive rebound and people are focused on kind of what's happening with every little piece of headline. And they're not really focusing on the big picture, which is, you know, we're going to have a pretty sharp downdraft in economic activity, already seeing that global trade is collapsing, profits are going to fall dramatically. And I just don't think you can increase P/E multiples in a world where interest rates are zero and global economic trade and growth are falling. But you know everyone else is doing that right now.   AL: Mark, is it a mistake to focus too much on the exogenous shock that caused this, rather than the fact that we're in this now and we have to deal with maybe some excesses that built up over the years? MY: Yeah, look, I think that's the great insight of all insights, right? Which is, everyone is focused on this shock and they're saying, oh, it's going to be temporal and it's going to go away. And look, I believe it. I believe the virus is a novel coronavirus. I don't think it's a bio-weapon. I think it will fade. I think it will disappear over one flu cycle the same way that, you know, other novel coronaviruses, like SARS or MERS, have faded away. So, I do think it will be a short-term shock. But to your point, which is again the great insight, it's not about the shock. It's about these epic bubbles that were created by a decade of abusive monetary and fiscal policy globally. And now, the day of reckoning is coming and you can't displace the entire global economic system. You can't lock everybody down for months and then expect it to just magically restart perfectly and go back to where you were. And, look, we've been conditioned over the past 10 years to buy every dip. And if you did, that worked out, because the Fed had your back. I think this time what we're going to find is the economic calamity on the other side overwhelms the opportunity for the Fed — through monetary policy or even a little bit of fiscal policy from the governments — to stimulate demand, because you can't fix a solvency problem with liquidity.   AL: Right. You know, I like the use of the word temporal. So this sort of is a temporal problem, in the sense that there's going to be a duration to it. And we're going to have to work our way through it. But to borrow a little bit from the “Star Trek” vernacular, Mark, they want a wormhole to, sort of, bypass this problem that we have. They did it in ’08. They did it, in my opinion, a few times since then, bypassing [it], sidestepping it, cheating in a way. They're obviously trying to do it again. How many times are they going to be able to do it? MY: Look, it's a really important question. And to your point, you know 2015, you know we started to have a normal cyclical recession on that seven-year cycle like we should have. And, you know, first quarter 2016. If you remember, the markets were collapsing down double digits in January, and then magically the first week of February, everything turned around. We had this cyclical rebound and that was because China pumped $4 trillion into the global economy and turned things around. And so that, like you say, is kind of cheating, in the sense that all you're really doing is pushing out the future day of reckoning by pulling forward economic growth in the form of incentivizing consumption today at the expense of tomorrow. And now, you look at car sales, for example. Car sales are collapsing globally. Why? Well, because we incent[iviz]ed people to pull those purchases forward by basically giving away free cars, right? No money down, no payments, no interest. Eventually you had to pay. But the real problem was that about 38% of car loans now have negative equity on the day they issue the loan. Think about that. You're trading in a clunker, you're financing more than 100% of value of the car and you're underwater on day one. So it's just a bad situation. Look, you can do that for some period of time and we've been doing it, as you mentioned, for years. And I think that day of reckoning is around the corner. I don't know if it's tomorrow because, look, the Fed, the Treasury, or the “Freasury” – like, you know, somebody said the other day, like Frankenstein — they've created this boomlet in expectations around the amount of capital that's going to seep into the economy. I think the problem is [that] most of that capital is going to go to retire debt, some of it's going to get saved, not as much of it's going to get spent, and old habits aren't going to return right away after people realize, huh, I got by with spending less, I got by with traveling less, I got by with eating out less. So that consumptive boom that we've been experiencing for the last couple decades, I think, is going to shift. And whether it's as big a shift as — remember the Depression-era babies? We had a whole generation [that thought] debt was evil, right? Saving was good and spending was bad. … When I bought my first house, my wife and I were young marrieds, [and] our next-door neighbor was an older couple. They still had the original pots and pans from when they got married 45 years ago. I think we'd only been married about four years and we were already on our third set of pots and pans, because, you know, they're disposable, right? So I think that shift generationally may occur here and the idea that we're going to get magically back to that consumption-fueled boom, I think, is a pipe dream.   AL: Yeah, good observation on the auto front. Looks like prices for autos are declining. Stocks are reflecting those declines. I want to talk about the banks now. Back in the last big crisis the Fed and the government bailed these guys out and it looked like it was a gift. But I always thought that maybe they were just fattening them up for Thanksgiving. And I wonder if Thanksgiving is here, because you look at [the] playbook that they're running. They're cutting the dividends. Wells Fargo, you know, EPS of 1 cent versus, what, 33. The stocks are down. They seem to be preparing for something bad and I'm wondering. I've had guests on here that said, look, this is the standard garden-variety recessionary playbook. This is the smart thing to do — that's exactly what it looks like on the surface. But I'm wondering if they're preparing for something more than that. That they're going to be marched out and asked to do things and they sort of already have, right? To do things that they don't want to do, that don't make sense from a, you know, orthodox banking point of view. What do you think the bank's role is going to be in the continued bailout of pretty much everything now?   MY: Yeah, like, again, lots to unpack there. And again, really, really important in good points. If you go back to, you know, the history of banking and fractional reserve banking, in particular. You know, it all kind of changed at two important points in U.S. history. One was 1913, with the creation of the Fed. Look, the Fed has one job: It's to enrich the bankers, right? The bankers own the Fed. The big banks and the big banking families around the world, they own the Fed. And that pays a dividend to them. And their job, if you look over history, is to bail out the banks when they're struggling and to enrich them over time. The second big change was 1971, when we went off the gold standard and we started this nominal inflation of things, of assets, that I talk about as the dictator playbook, right? If you're the dictator, you surround yourself with cronies and you get all the assets in the hands of the cronies. And then you devalue the currency. And that's exactly what happens around the world. If you look at primary dictatorships, that's what they do. A small number of people own all the assets. They devalue the currency. Those assets appreciate. The poor get really, really poor. The rich get really, really rich — in nominal terms, maybe not in absolute terms. And I think the same thing’s happening today. If you go back to 2008, as you said, what did they do, right? The banks back to 1994. We got rid of — shoot, I always forget the name of the bill — but we got rid of the famous bill that Clinton did away with. It separated. [The bill was] Glass-Steagall, sorry. It separated investment banking from traditional banking because original banking is guaranteed by the FDIC. And so, these banks got over levered — Lehman, Bear Stearns, Goldman Sachs, Morgan Stanley — and basically they were all done, right? They were
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