Over 300 CFA Society Chicago members and investment professionals gathered virtually on October 15, 2020, for the latest event in the Distinguished Speaker Series. The featured “Distinguished Speaker” was hedge fund manager Anthony Scaramucci. Perhaps best known to a general audience for his brief term (just eleven days) as White House Communications Director in 2017, Scaramucci is much better known in financial circles as the co-managing partner of Skybridge Capital, a hedge fund-of-funds alternative manager he founded in 2005. He shared his thoughts on the current investment environment characterized by turmoil related to the COVID-19 pandemic and a contentious election campaign.
To begin, Scaramucci noted the numerous global crises that have occurred just since he got involved in finance in the late 1980’s. These include the Long Term Capital Management failure, Gulf War, tech bubble and subsequent bust, 9/11, Afghan War, great financial crisis, and now the pandemic. Managing through these has taught him lessons that he summarized with three aphorisms:
- People are very emotional about their money. In order to succeed in asset management, we need to recognize and control (or eliminate) this tendency.
- Markets are weighing machines in the long term, but voting machines in the short term. This follows from the first point and was illustrated dramatically in the first half of this year with the very quick, sharp drop in financial markets followed by a recovery that was nearly a mirror image.
- When new information proves your position is wrong, admit it quickly. This will allow you to adapt, change course, and avoid falling into a deeper hole.
Scaramucci used the immediate effect of the pandemic to illustrate these rules. In January, he attended the World Economic Forum in Davos and came away certain (like other people he met there) that the warnings of the coming pandemic were overblown. They all expected China to contain the virus within its borders. As a consequence, Skybridge positioned client portfolios to benefit from a healthy global economy. Of course, it soon became apparent that this was terribly wrong. The firm had to change course quickly. The fact that they have generated returns of about 50% in the past six months and were able to fund redemption requests without delay attest to the firm’s success.
A final observation Scaramucci made on the investment scene was the top-heavy nature of the equity market, by which he meant that the largest firms in the S&P 500 Index are generating much better returns than all the smaller ones. He implied this cannot continue and managers should be prepared to react to a change.
Finally, before taking questions, Scaramucci made a few comments on his brief career in politics. Early in his career, as a new wealth advisor at Goldman Sachs, he got involved in fundraising for Republican politicians as a means of developing his network. His quick exit from the Trump White House taught him two lessons:
- Don’t get involved in politics, and more generally
- Don’t let your pride or ego interfere with your decision making (otherwise emotions will take control).
The remainder of the event (about 40 minutes) was devoted to answering questions which R. J. Knezevic, CFA, fielded from participants.
What is the state of the U.S. military relative to its role in the 21st century?
Scaramucci first recommended two books he has read recently:
U.S. defense forces are still designed for the world as it was for several decades following World War II. That is no longer appropriate. We have too many assets in places where they are unlikely to have a purpose (like Germany, Japan, and the Philippines). Aircraft carriers are not as effective as they once were because they are easy targets for new weapons technology (such as sub-sonic missiles). We should have a smaller, nimbler navy. More specifically, the U.S. needs to decide on if, and how, it will defend Taiwan before China makes an aggressive move toward the island.
Why have hedge funds underperformed for at least a decade?
In two words: Federal Reserve. More particularly, the unusually easy monetary policy the Fed has followed for most of the period since 2008. This has made most hedge fund strategies, for example long-short, very difficult to execute. A reasonable return from alternative strategies for the near term is 5-6%, or 8-9 times the risk-free rate. Despite these modest expectations, hedge funds remain an important component of a well-diversified portfolio.
How do you vet new investment managers?
Start with the assumption that every candidate is a poor one until thorough analysis proves otherwise. Consider them “guilty until proven innocent”. Look for managers who will “eat glass” to further their strategy and dismiss failure as an option.
What is your prediction for the election?
The race will tighten in the last few weeks. Despite the polls showing Biden ahead by low double digits, Trump could win because people vote on emotions more than reason. Being the incumbent will also help, but this time he is the polarizing candidate, the position that hurt Hillary Clinton in 2016. If he loses, Trump will leave office quietly. He would only have a chance to object to the election results if he had strong support from the military and he is the most disliked Commander in Chief ever. They see him as a threat to our democratic system.
A recent article in the New York Times alleged that President Trump had been advised that the pandemic would be bad but he maintained to the public that it would not be. How important is this?
The writer, Kate Kelly, is highly regarded and known as a good fact-checker. The story probably contains more truth than falsehoods making it a negative for Trump.
What are the investment implications of the election?
While there will be gyrations in the financial markets in the short term, the economy will do about as well under either Biden or Trump. There will be more continuity in economic policies regardless of who wins than most people expect. A transition to Biden will be similar to the one in 2009 from Bush to Obama. Monetary policy will remain easy and large deficits will continue. Biden as president will not raise taxes as much as is feared.
How will the recent news stories about Hunter Biden attempting to arrange a meeting with his father and Ukrainian businessmen influence the election?
It’s only a slight negative for Biden’s candidacy. The biggest impact would be that it disqualifies Hunter from serving in a Biden administration. It could lead some people who didn’t vote in 2016 to come out and vote for Trump, a factor he needs badly to win.
Is Joe Biden’s cognition an election issue?
No. It’s not very obvious, and given their ages, it’s just as likely to affect Trump in the next four years as Biden.
Is China’s presence in the global economy and geopolitics a growing problem for the U.S.?
Here Scaramucci referenced another book, Destined for War by Graham Allison, which identified 16 historical examples of rising superpowers threatening the old order. Twelve of the 16 ended in wars. The transition from Great Britain to the U.S. in the early 20th century was one that did not end in war, but the relationship between the U.S. and China now is more adversarial than what the U.S. had enjoyed with Great Britain. The implication: war is a more likely resolution but still not a certainty. Note that the U.S. and China are both aging powers and one could decline before the relationship leads to violence. One party systems have tended to die or break-up within seventy years, and China passed that age last year. The U.S., at nearly 250 years, is well past the historical “expiration date” for republics of 200 years. Biden is more likely to embrace multi-party institutions like TPP to restrain China rather than challenging it alone.
Is ESG investing a fad or a structural change?
It’s something in between but it will last.
Could Trump’s negative leadership style spill over into the private sector?
No, corporate boards would prevent that. Donald Trump would not last long if he answered to a board of directors.
What are your recommendations for closing the wealth gap?
We need a 10-12 year plan from government to include features such as:
- Improvements in K-12 education
- A national program for equalizing opportunities
- More jobs training
- More infrastructure investment, perhaps including a quasi-government institution to provide support as we have in the mortgage market (i.e., FNMA, FHLMC)
What books do you recommend for college students to prepare them for the world we face?
In addition to the Allison book, The World, a Brief Introduction by Richard Haass.
What are the long-term implications of constant, large budget deficits?
Not much because of several unique advantages the U.S. Government enjoys:
- It issues the preeminent global reserve currency
- It has taxing power over the world’s largest economy
- It owns 20% of the land in the country which contains vast natural resources
For more on the topic see The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kilton. To watch a replay of the event please visit CFA Society Chicago’s website or YouTube channel.