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ERIK: GOOD MORNING. DAWN: GOOD MORNING. ERIK:
GOOD MORNING, EVERYONE. I THINK THE BEST PLACE FOR US
TO START IS BY GIVING EVERYBODY CONTEXT, BECAUSE THE MORE THEY
UNDERSTAND ABOUT YOU AND THE MORE THEY UNDERSTAND THE NATURE
OF SOROS FUND MANAGEMENT THE BETTER THEY WILL UNDERSTAND AND
APPRECIATE HOW YOU LOOK AT THE WORLD AND THE IMPORTANCE WERE
NOT. AS YOU SAY, I THINK OF YOUR JOB
AS UNIQUE. YOU HAVE A LOT OF FREEDOM.
YOU CAN BE HIGHLY OPPORTUNISTIC, YOU CAN BE
UNCONSTRAINED IN THE INVESTMENT DECISIONS YOU MAKE.
HIGHLY UNUSUAL FOR A POOL OF CAPITAL AS LARGE AS YOURS,
RIGHT? IN THE ORDER OF $30 BILLION?
DAWN: JUST SHY OF THAT. ERIK: IT ENABLES YOU TO RESPOND
IMMEDIATELY AND POUNCE ON MARKET DISLOCATIONS, AND AS I
UNDERSTAND THAT THAT IS WHY YOU ARE ALWAYS STUDYING THE MARKET
FOR POTENTIAL CAUSE AND EFFECT SCENARIOS. IS THAT RIGHT? DAWN:
THAT IS RIGHT. WE HAVE A REALLY OPEN
INVESTMENT MANDATE, SO WE HAVE ONE TEAM, ONE POOL OF CAPITAL,
REALLY ONE SOPHISTICATED CLIENT, SO WE CAN MOVE ACROSS
ASSET CLASSES, ACROSS LIQUIDITY IN WAYS I THINK VERY FEW OTHER
POOLS OF CAPITAL CAN DO. WE HAVE A VERY INTEGRATED TEAM,
SO WE CONNECT A LOT OF DOTS THAT I THINK ARE HARDER FOR
OTHERS, AND IN A TIME LIKE THIS I THINK THAT BECOMES
EXPONENTIALLY MORE VALUABLE. ERIK:
JUST TO AVOID ANY CONFUSION, THAT CLIENT IS GEORGE. DAWN:
AND HIS FOUNDATIONS. ERIK:
I DO WANT TO SPEND OUR CONVERSATION TALKING ABOUT
THESE SCENARIOS, THE ONES YOU SEE UNFOLDING IN THE NEAR TERM
AND MAY BE FURTHER OUT. WHAT EXCITES YOU MOST RIGHT NOW?
WHAT DO YOU SEE HAPPENING? DAWN: SO, RIGHT NOW THE ASSET CLASS
WE THINK IS MOST INTERESTING IS TYPICALLY A BORING ASSET CLASS.
THAT IS AGENCY MORTGAGE-BACKED SECURITIES.
THE REASON FOR THAT IS TWO THIRDS OF CURRENT HOLDERS, IT
IS THE CENTRAL BANKS AND BANKS, HAVE TURNED THE SELLERS -- TURN
THE SELLERS.
WE HAVE EXTRAORDINARY INTEREST RATE VOLATILITY.
THE EVALUATIONS IN THAT SPACE, HAVE GOTTEN WE WOULD
SAY DISPROPORTIONATELY CHEAP, RELATIVE TO OTHER ASSET CLASSES
BECAUSE OF THOSE TECHNICALS.
ALSO YOU HAD OBVIOUSLY SOME HIGH-PROFILE REGIONAL BANK
FAILURES, WHERE YOU HAD THE SEC AUCTIONING OFF A GOOD PORTION
OF SIZABLE PORTFOLIOS. THAT IS ADDING TO THE TECHNICAL
BACKDROP, BUT WE THINK THAT ASSET CLASSES PROBABLY UNIQUELY
INTERESTING RIGHT NOW. ERIK: ERIK:
YOU ARE NOT THE ONLY PERSON TO SAY THAT RMBS LOOKS ATTRACTIVE.
FOR AGENCY, MORTGAGE BONDS LOOK ATTRACTIVE.
IF EVERYBODY SEES THE VALUE IN THE TRADE, SURELY THE SPREAD
HAS TO COLLAPSE. DAWN: A COUPLE OF THINGS.
FIRST OF ALL, WHEN IT COMES TO EQUITIES, I HATE BEING IN A
CONSENSUS TRADE, BECAUSE YOU ARE AT THE MERCY OF THE GREATER
FOOL OR NEXT MARGINAL BUYER. WHEN YOU BUY FIXED INCOME YOU
JUST HAVE TO BE RIGHT, BECAUSE EVENTUALLY YOU HAVE A MATURITY.
I THINK YOU ARE RIGHT, THERE ARE A LOT OF PEOPLE WHO ARE
CITING THIS ASSET CLASS AS CHEAP.
WHEN SOMETHING IS CHEAP I WANT TO KNOW WHY IT IS CHEAP.
AGAIN, THERE IS SOME REALLY CLEAR TECHNICAL REASONS WHY
THIS ASSET CLASS IS CHEAP. EITHER WAY, I THINK YOU ARE
GOING TO SEE MORE BANK FAILURES. LATELY IN THE SMALL BANKS.
IT IS NOT GOING TO BE THE SIZE OF THE FAILURES WE HAVE HAD SO
FAR, BUT I THINK THERE IS MORE PROBLEMS UNDER THE SURFACE.
YOU WILL SEE CONTINUED SALES. THE OTHER THING THAT IS, YOU
KNOW, UNDENIABLE, IS IN AGGREGATE TANKS HAVE TO REDUCE
BALANCE SHEETS AND SHORTENED THE DURATION OF PORTFOLIOS HERE.
THERE IS REGULATION COMING THAT IS GOING TO BE PRETTY PUNITIVE.
ERIK: TALK A BIT MORE ABOUT THAT.
DAWN: I THINK THE FEDERAL RESERVE HAS
SAID THEY ARE DOING A COMPREHENSIVE REVIEW OF BANK
REGULATION. I THINK WHAT THAT IS GOING TO
LOOK LIKE HIS ENHANCED STRESS TEST, A OIC EXEMPTIONS.
THAT IS WHERE PEOPLE DID NOT HAVE TO MARK THINGS TO MARKET.
I THINK WHEN IT COMES TO LIQUIDITY MANAGEMENT THERE IS
GOING TO BE A LOT MORE SCRUTINY ON THAT.
ONE OF THE INTERESTING THINGS IS, COMING OUT OF THE FINANCIAL
CRISIS THERE WAS A LOT OF FOCUS ON ASSET QUALITY, SO THINGS
LIKE STRESS TESTS, AND NOT AS MUCH ON LIABILITY MANAGEMENT.
BUT NOW WE KNOW DEPOSIT ASSUMPTIONS WERE JUST WRONG.
BY THE WAY, I WILL NOT MENTION THE NAME, BUT A BANK YESTERDAY
SAID THEY LOST ONE OF THEIR BIGGEST DEPOSITORS BECAUSE
ANOTHER BANK WAS PAYING FED FUNDS PLUS 70 BASIS POINTS FOR
DEPOSITS. THAT IS NOT A HEALTHY BACKDROP.
BY THE WAY, PART OF THE REASON THEY CAN DO THAT IS BECAUSE YOU
HAVE A QUASI-GOVERNMENT GUARANTEE RIGHT NOW ON BANK
DEPOSITS. ERIK: IN ADDITION TO AGENCY MORTGAGE
BONDS, WHATEVER -- WHAT OTHER KINDS OF TRADES OR INVESTMENTS
SEEM ATTRACTIVE TO YOU WITH THAT AS THE BACKDROP? DAWN:
SO, WE ARE FINALLY -- WITH THAT AS THE BACKDROP YOU ARE SEEING
A CREDIT CONTRACTION.
I THINK THE RECENT LOAN DATA, YOU KNOW, DOES NOT ACTUALLY
SURPRISE A LITTLE BIT BETTER TO THE UPSIDE, BUT THIS
CONTRACTION IS INVARIABLY COMING.
BANKS WILL JUST BE ABLE TO LOAN LESS IN THE LEVERED LOAN SPACE.
70% OF LEVERED LOANS HAVE BEEN BOUGHT RECENTLY BY CLOS.
CLO INSTRUMENTS RIGHT NOW ARE AT 20 LEVELS, AND ALSO
TYPICALLY CLOS HAVE A RESET WHERE THEY CAN EXTEND DURATION.
THIS IS ANOTHER UNINTENDED CONSEQUENCE OF HIGHER RATES.
NOW WITH HIGHER RATES THOSE RESETS DO NOT MAKE ECONOMIC
SENSE, SO YOU WERE 40% OF EXISTING CLOS ENDING THEIR
REINVESTMENT. BY THE END OF THIS YEAR.
SO, YOU ARE JUST GOING TO HAVE LESS CREDIT AVAILABLE.
AND THERE IS A LOT OF PEOPLE WHO THINK PRIVATE CREDIT HAS
GROWN EXPONENTIALLY, WE WILL JUST FILL IN THE GAP.
I THINK THAT IS NOT GOING TO PROVE TO BE ACCURATE.
THEY CAN DO MORE THAN THEY COULD HAVE DONE 10 YEARS AGO,
BUT IT IS TOO BIG A GAP TO FILL IN. SO, IN PRIVATE CREDIT WE ARE
FINALLY SEEING THINGS BEGIN TO REPRICE.
AND I THINK YOU ARE GOING TO SEE A DEFAULT CYCLE THAT IS
ABOUT TO EMERGE, AND THE MAGNITUDE, AND PROBABLY MORE
INTERESTING, THE DURATION OF THAT DEFAULT CYCLE, IS GOING TO
SURPRISE PEOPLE. ERIK: HOW DO WE SEE THAT PLAY OUT
THEN? THERE IS CLEARLY A BOND MARKET,
THERE IS A LEVERAGED LOAN MARKET, BUT THERE ISN'T MUCH OF
A SECONDARY MARKET FOR LOANS THAT LATELY HAVE BEEN
DOMINATING THE GROWTH OF THE PRIVATE CREDIT MARKET. DAWN:
YEAH, SO, AGAIN, I THINK PRIVATE CREDIT FIRMS ARE
OPPORTUNISTICALLY TRYING TO RAISE CAPITAL.
I THINK WHEN YOU LOOK AT ALTERNATIVE ASSET MANAGEMENT
CAPITAL RAISES THEY ARE GENERALLY CHALLENGED.
MAYBE PRIVATE CREDIT IS LESS CHALLENGE, BUT THEY ARE ALL
CHALLENGED. IN THE PRIVATE CREDIT ROLLED
ONE OF THE THINGS YOU ARE GOING TO SEE IS THE MOST VULNERABLE
LOANS ARE GOING TO BE THE ONES THAT PRIVATE EQUITY TOOK OUT.
SO, SPONSOR LOANS. I THINK YOU ARE GOING TO SEE
THOSE PRIVATE EQUITY COMPANIES BE REALLY AGGRESSIVE AROUND
LIQUIDITY AND MATURITY ISSUES. SO I THINK YOU ARE GOING TO SEE
A LOT OF, KIND OF, EXTEND AND PRETEND.
THAT ALSO REDUCES THE AMOUNT OF REAL DRY POWDER OUT THERE. ERIK:
FOR YOU IS THIS A MATTER OF WAITING FOR THE THINGS THAT YOU
FIND INTERESTING TO GET CHEAP ENOUGH? OR ARE YOU -- ARE THERE
OPPORTUNITIES TO SHORT ALONG THE WAY?
DAWN: SO, RIGHT NOW OUR BALANCE SHEET
IS REALLY CLEAN. ONE OF THE THINGS I HAVE BEEN
STRESSING IS IT IS A LITTLE BIT ABOUT BEING PATIENT.
I THINK SOMETIMES THAT IS SOMETHING THAT INVESTORS DO
POORLY, BOTH INSTITUTIONAL AND RETAIL.
IT IS, JUST BE PATIENT AND LET THE OPPORTUNITIES THAT COME TO
YOU.
I THINK WHERE WE ARE HEADED, IN SOME WAYS THE GREAT FINANCIAL
CRISIS AND COVID WERE NOT THAT PAINFUL, BECAUSE THEY WERE
REALLY DEEP CORRECTIONS, AND REALLY QUICK RECOVERIES.
I THINK THIS IS SET UP FOR SOMETHING THAT IS GOING TO TAKE
A REALLY LONG TIME TO PLAY THROUGH.
I THINK THERE IS A LOT OF PRIVATE EQUITY AND BORROWERS
AND PEOPLE WHO OWN BIG BUILDINGS WHO ARE BETTING RATES
COME DOWN QUICKLY, AND I DO NOT SEE THAT HAPPENING. ERIK:
DO NOT SEE IT HAPPENING WITH ENOUGH CONVICTION THAT YOU ARE
WILLING TO TAKE THE OTHER SIDE OF THE RATE TRAY? DAWN:
WE HAVE GOT BET ON IN RATES, FOR SURE.
I THINK ONE OF THE THINGS THAT
IS DIFFERENT ABOUT THIS TIME IS, YOU HAD CENTRAL BANKS AND
FISCAL AUTHORITIES THROW THEIR ENTIRE FINANCIAL CRISIS
PLAYBOOK, PLUS $6 TRILLION, AT THE PANDEMIC RECESSION.
IN HINDSIGHT IT WAS TOO MUCH, AND IT CAUSED OVERLY ABUNDANT
CREDIT AND ASSET INFLATION. AND THE WORK OUT ON THE OTHERS
IS JUST GOING TO TAKE A REALLY LONG TIME.
AND WHAT WE SEE IS, YOU STILL HAVE A LOT OF UNDERLYING
DISTORTIONS, SO WITHIN SECTORS YOU HAVE BOOM-BUST CYCLES.
SO, AT THE SURFACE THINGS LOOK GOOD, BELOW THE SURFACE ALL
HELL IS BREAKING OUT, BUT THINK ABOUT THAT.
THAT IS GOING TO MAKE THE FED'S JOB REALLY, REALLY DIFFICULT.
AND YOU COULD HAVE A REALLY BIG DEFAULT CYCLE WITHOUT GDP
ROLLING OVER. ERIK:
MUCH OF THIS IS THE CONSEQUENCE OF POLICYMAKING.
BOTH AT THE FISCAL AND MONETARY LEVEL.
HOW MUCH CONFIDENCE DO YOU HAVE IN MARKET REGULATION RIGHT NOW?
WHEN YOU SEE WHAT IS GOING ON IN CRYPTO, FOR EXAMPLE, OVER
THE PAST COUPLE OF DAYS? FOLKS, I THINK YOU ARE GOING TO
HEAR ABOUT THAT IN A FEW MINUTES.
ALSO ANTITRUST. HE MENTIONED BANKING. DAWN:
I WILL START WITH CRYPTO, WHICH ALWAYS GETS ME INTO TROUBLE.
BUT I THINK, YOU KNOW, ESPECIALLY THE HEADLINES OF THE
LAST COUPLE OF DAYS, IT IS CLEAR THESE CRYPTO NATIVE
PLATFORMS WOULD HAVE BENEFITED FROM HAVING AN ADULT IN THE
ROOM. [LAUGHTER] ERIK: SOMEBODY MIGHT HAVE SOMETHING
TO SAY ABOUT THAT. DAWN: TO STATE THE OBVIOUS.
BUT THERE ARE JUST LONG-HELD & NORMS ABOUT HOW YOU TREAT
CUSTOMER ASSETS, FOR EXAMPLE. AND I THINK CRYPTO IS HERE TO
STAY. I THINK WHAT HAS HAPPENED IS
CLEARLY A SETBACK. BUT RIGHT NOW I THINK IT IS A
HUGE OPPORTUNITY FOR THE INCUMBENT FINANCIAL FIRMS TO
ACTUALLY TAKE THE LEAD. ERIK:
THE ONES THAT ARE ALREADY REGULATED AND RUN REGULATED
EXCHANGES? DAWN: AND KNOW HOW TO SEGREGATE
CLIENT ASSETS. I THINK THAT IS WHAT IS GOING
TO HAPPEN. ERIK: WOULDN'T THAT BE IRONIC, GIVEN
THE DISRUPTION CRYPTO PROMISED? DAWN: THERE IS SOME IRONY TO IT.
IT IS IRONIC, BUT I THINK THAT IS GOING TO BE THE EVOLUTION.
IN TERMS OF HEDGE FUNDS AND PRIVATE EQUITY, YOU KNOW, WHEN
I LOOK AT THE FINANCIAL STABILITY OVERSIGHT COMMITTEE,
WHICH SITS ON TOP OF ALL OF THE U.S.
REGULATORY APPARATUS, WHICH HOW U.S.
REGULATORY SETUP IS REALLY TOO FRACTURED TO BE WHOLLY
EFFECTIVE, IN MY OPINION, BUT WHEN YOU LOOK AT WHAT THEY ARE
FOCUSED ON, IT IS CLEAR THEY KNOW POST THE FINANCIAL CRISIS,
BECAUSE OF REGULATION THEY SHIFTED AN EXPONENTIAL AMOUNT
OF RISK INTO THE NONREGULATED, NONBANKING SECTOR.
AND THEY ARE TRYING TO FIGURE OUT WAYS TO GET AROUND THAT.
BECAUSE THAT IS WHERE YOUR NEXT SYSTEMIC RISK IS GOING TO OCCUR.
AND THEIR ABILITY TO SPOT IT AND COURSE CORRECT RIGHT NOW, I
THINK, IS PRETTY LIMITED. SO, YOU SEE THINGS COMING OUT,
LIKE THE AMENDMENT. ERIK: WHERE THEY HAVE TO ALERT THE
SEC TO SO-CALLED TRIGGER EVENTS? DAWN: YEAH, IN SHORT DURATION.
ERIK: 72 HOURS, I THINK. DAWN:
IN MANY WAYS THAT IS BETTER THAN IN 2011, THIS HUGE DATA
DUMP THAT I'M CANDIDLY NOT SURE THE SEC KNEW WHAT TO DO IT.
SO, THIS ALERT SYSTEM, I THINK, IS REALLY INTERESTING, AND
ELEGANT IN ITS SIMPLICITY, BUT I WORRY IT WILL ALLOW THEM TO
SEE IDIOSYNCRATIC RISKS AND PROBABLY HELP THOSE.
BUT WHEN IT COMES TO SYSTEMIC EVENTS I THINK THEY MIGHT SEE
IT, BUT THEY ARE GOING TO SEE IT TOO LATE. ERIK:
SO, A SYSTEMIC EVENT OF WHAT NATURE?
HIGHLY-LEVERED MULTI-STRATEGY HEDGE FUND ALL OF A SUDDEN HAS
SERIOUS PROBLEMS? DAWN: YEAH, SO IF YOU LOOK AT THE TOP
FOUR PUBLIC MARKET -- HEDGE FUNDS RIGHT NOW, THEIR BALANCE
SHEETS ARE WELL IN EXCESS OF $1 TRILLION.
AGAIN, YOU HAVE YOUR REGULATED DEALER COMMUNITY, WHERE THE
BALANCE SHEETS HAVE DONE NOTHING BUT GO DOWN.
ANOTHER STAT THAT IS INTERESTING, YOUR PUBLICLY
TRADED ALTS, ASSETS UNDER MANAGEMENT, HAVE DOUBLED SINCE
2020.
AND I WOULD ARGUE THERE IS BIG MULTI-STRATEGY PLATFORMS, THEY
DON'T DO THINGS THAT ARE ALL THAT DIFFERENT FROM ONE ANOTHER.
SO, WHEN YOU HAVE AN UNWIND OF A TRADE, FINDING THAT MARGINAL
BUYER IS JUST GOING TO BE THAT MUCH MORE DIFFICULT.
IT IS ONE OF THE THINGS AT SOROS FUND MANAGEMENT WE THINK
ABOUT EVERY DAY, IN THAT WE WANT TO POSITION OURSELVES TO
TAKE ADVANTAGE OF THOSE DISLOCATIONS, BUT, BY THE WAY,
YOU SAW IT ON THE BACK OF SILICON VALLEY BANK FAILURE
WHEN YOU HAD TWO YEAR TREASURY RATES GO FROM, YOU KNOW, ABOVE
5% TO BELOW 360. THAT IS A CRAZY ENORMOUS MOVE
FOR A TWO-YEAR GOVERNMENT BOND.
>> THERE ARE ANY NUMBER OF DIFFERENT KINDS OF DISLOCATIONS.
WE TALKED ABOUT SOME OF THEM. TECHNICAL, STRUCTURAL, CYCLICAL.
THERE IS TECHNOLOGICAL TOO. YOU THINK A I IS GOING TO
CREATE MARKET DISRUPTIONS? DISLOCATIONS? DAWN: POTENTIALLY.
I THINK, YOU KNOW, WHEN WE SEE WHAT IS GOING ON IN AI, FIRST
OF ALL WHEN YOU LOOK AT WHAT JUST CAME OUT OF THE RECENT
EARNINGS REPORT IT IS CLEAR THAT WE ARE AT THE BEGINNING OF
A MEGACYCLE IN SPENDING IN AI. THE REAL BENEFICIARIES ARE THE
APPLICATIONS. SO, YOUR SAS COMPANIES AND
INFRASTRUCTURE. SO, IT IS CLOUDY AND YOUR
HIGH-PERFORMING SHOULD COMPANIES.
THOSE STOCKS RIGHT NOW ARE EXTRAPOLATING PRETTY ENORMOUS
COMPOUNDING GROWTH. WE WOULD NOT NECESSARILY CHASE
THAT, BUT, TO YOUR POINT, WHAT IS REALLY STRIKING ABOUT WHERE
WE ARE RIGHT NOW IS, AI ALLOWS US TO TALK TO COMPUTERS LIKE
OURSELVES, AND THE ABILITY TO TAP INTO MASSIVE COMPUTER
POWER, AND PROBABLY EVEN MORE IMPORTANTLY, ENTERPRISE DATA
AND GLOBAL DATA GENERALLY IS GOING TO BE SEISMIC.
AND THE CAPABILITIES ARE JUST GOING TO BE EXPONENTIAL. ERIK:
LAST QUESTION FOR YOU. THERE IS A LONG TRADITION OF
PROMINENT INVESTORS WHO SPEAK OUT ABOUT ECONOMIC POLICY.
IN MUCH OF THE COMMENTARY WE GET FROM THEM, I THINK, IS
GENUINELY ALTRUISTIC. OUT OF THE GOOD OF THE COUNTRY,
OR PERHAPS THE WORLD. SOROS IS NEAR THE TOP OF THAT
LIST. STAN DRUCK AND MILLER, WHO ONCE HELD THE ROLE YOU HOLD
NOW. RAY DALIO, KEN GRIFFIN ON OCCASION. PAUL TUDOR JONES.
THEY ARE ALL MEN. I WOULD LOVE TO ADD A WOMAN TO
THAT LIST. COULD IT BE DAWN FITZPATRICK? DAWN:
HOPEFULLY ONE DAY. GEORGE IS ACTIVE, AND I THINK
IT IS IMPORTANT TIME DIFFERENTIAL TAMPERING I DO
SERVE ON ADVISORY COMMITTEES. ERIK: WORKING BEHIND THE SCENES?
DAWN: I TRY TO WORK BEHIND THE SCENES, BUT ONE DAY. ERIK:
LADIES AND GENTLEMAN, JOIN ME IN THANKING DAWN FITZPATRICK.