♪ 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.
