The most popular candidate for U.S. Treasury Secretary: The yen is undervalued by 40%! The Federal Reserve's mistakes exacerbate economic difficulties

In April of this year, Scott Bessent was interviewed by Ash Bennington, the host of the financial podcast Real Vision. They discussed the challenges facing the U.S. economy, the Federal Reserve's policy missteps, analyzed the movements of the yen, and clarified his observations on the recent surge in the cryptocurrency market.

Currently, Bessent is the hottest chief candidate for Treasury Secretary in the Trump administration. As the founder of Key Square Group, Scott Bessent is one of the most respected figures in global finance. He previously served as a deputy advisor at Soros Fund Management, achieving great success by shorting the pound and the yen.

In the interview, Bessent stated that the U.S. economy faces serious challenges, particularly regarding debt issues and high inflation rates, and that the Federal Reserve's policy missteps have exacerbated the economic predicament. He believes that cryptocurrencies have great potential and that gold is favored in the current market environment due to its safe-haven function.

Bessent also reflected on his experience shorting the pound during Black Wednesday in 1992 and discussed his unique investment models and strategies. He noted that the key to investment models lies in establishing theories, data validation, and market validation. He emphasized that successful investing requires analyzing systemic risks and finding asymmetric risk-return opportunities.

He expressed disappointment over the collapse of Sam Bankman-Fried (SBF) and FTX, pointing out that SBF's fraudulent actions have damaged the trust in the cryptocurrency market.

Highlights from the interview are summarized as follows:

• Looking back at my career, aside from this year so far, I have made the most money in foreign exchange, followed by stocks, then fixed income, and finally other commodities.
• I would say Stanley Druckenmiller is a great professional player, perhaps the greatest fund manager of all time, who has never been in a slump. What is incredible about Druckenmiller is his ability to think about structural changes and the "tick-tock."
• Successful investing requires analyzing systemic risks and finding asymmetric risk-return opportunities. How do you identify asymmetries? You must keep an open mind.
• Polls are wrong, just like with Trump, there are some reluctant additional voters who lie to polling agencies.
• The U.S. economy is in an unstable state, with high debt, unreasonable monetary policy, and persistently high inflation posing potential risks. The Federal Reserve's policies are one of the causes of the current economic predicament.
• The Japanese market has been long undervalued, but there is skepticism about the Japanese government's monetary policy.
• I regret not having done much trading in cryptocurrencies. When people agree on a medium of exchange, it has value. One major advantage of cryptocurrencies is that they allow young people to participate in the market and provide them with ways to make money. They have always been willing to do so.
• Successful individuals often can identify major trends in industries or society ahead of time and seize opportunities The following is the full text of the interview, with some parts omitted:

Bessent: Druckenmiller is one of the greatest fund managers in history

Ash Bennington:

It’s a great honor to have this conversation with you. Today we will explore market and macro topics, but before that, we want to delve into your career and the wealth of experience you have accumulated as an investor over the years. Your career is legendary. Please share with us your starting point and what sparked your interest in the markets?

Scott Bessent:

Of course. I’m not sure if this can be called wisdom; perhaps it’s more about lessons learned and some unfortunate muscle memory. I often tell my team that we strive not to repeat past mistakes, but inevitably we will make new ones.

I was fortunate to join the hedge fund industry when it was just starting out. I studied at Yale University and was interested in both writing and computer science. I interned for a summer with Jim Rogers, the founding partner of George Services. That’s when I realized that investing, especially hedge fund investing, is a wonderful combination—you build a narrative and then apply quantitative techniques to turn it into investment opportunities.

My career started from that summer internship. Later, I joined Soros Fund Management in 1988 as a vice advisor. In macro investing, there are many different models. If you trace their origins, you will find fixed income RV models, Brevan Howard, Chris Rokos, etc., which gradually became more directional. Then there’s what I call the solo growth model. We all started with equity research.

We often say that micro drives macro. We never thought we could do better in constructing non-farm payroll data. I believe core PCE will round up. We had in-depth conversations with many companies in the real economy, observed the market conditions at the time, and then built a macro environment model. I think this is true for all of us. Then it gradually evolved into a larger enterprise. Looking back on my career, except for this year so far, I have made the most money in the foreign exchange market, followed by equities, then fixed income, and finally other commodities.

What I want to say is that much of my success in forex trading comes from thinking like a business—what makes a well-capitalized company cross borders into a country? What makes you reluctant to hold a currency? What makes them inclined not to repatriate profits?

I have been very fortunate to encounter some outstanding mentors. I believe Stanley Druckenmiller is a great professional player, perhaps the greatest fund manager of all time, who has never had a down period. He is an incredible person—a miracle, an outstanding thinker, a remarkable trader. Despite being one of the richest people in the world, he still sits at his desk every morning at 6 a.m. and loves basketball. I don’t know how old he is now, but he is still as dedicated as ever. I think I am very lucky not only because I met people who trained me well, but they also have a great passion for basketball I believe Michael Jordan may be the first NBA player to have a clause in his contract that allows him to play basketball because he loves the game so much. I think there is a group of us who believe that if we don't engage with the market in some way every day, our intellect, emotions, and even our bodies may wither away.

The investment model consists of three steps: establishing a theory, data validation, and market validation

Ash Bennington:

You could say that you have witnessed the birth of this industry. Some of the names you mentioned are legends in this field, such as Stanley Druckenmiller and Jim Rogers, both of whom are guests on Real Vision. You have mentioned the models you use several times; let’s explain that a bit. I’m referring to the three models you mentioned—how did you find them and apply them to your investment framework?

Scott Bessent:

Of course. I often say that we study history, observe the present, and try to imagine the future. I teach economic history and market structure at Yale University. Another saying of mine is to never give up, which has been very useful in some significant issues in my career, keeping me out of trouble. The way we conduct business is by observing what is happening, looking for anomalies, and searching for systems that are accelerating or may collapse. I think that’s where we all encounter a lot of trouble. But I do believe there is a process to follow.

We have a theory, then can we gather enough data and validate it with evidence? Next, how do we construct it? What is our theory? Is our framework correct? Are we looking at the issue in the right way? The first step is the theory. The second step is whether we can prove it and propose a framework.

Then comes the third step, we go back to the streets. Unlike most people, we won’t use things from the city or Wall Street to process our workflow, but we will use them as a final check. We may have this detailed theory, and when we go to the streets, we might find that others agree with our viewpoint. The positioning is high, and we might think that at some point we have diverged, and someone has been considering it for three to six months. It may indicate that this is an option. They got it, and it has been priced in. We are happy to put our work on the shelf and then come back. I want to say that a lot of what we do is compile research, and then we don’t trade.

Ash, to your question, I want to say that a lot of the outcomes of this process are patience. I am 61 years old now. The idea is not unimportant, but it is not undiscovered, nor is it a truly great idea. For example, what are we planning? What do we know that others don’t? We try to have a reasoning advantage because in today’s market, you can’t really gain a data advantage. You might not want an information advantage. But in terms of your framework, how do you think about this differently from others?

Risk and return have asymmetry

Ash Bennington: Let's talk about thinking about problems in different ways and your legendary background. One of the trades that frequently appears in Real Vision is one of the greatest legendary hedge fund trades of all time, which is, of course, the 1992 Black Wednesday pound crisis that you were involved in. Please share that story, as it is deeply embedded in the annals of hedge fund history.

Scott Bessent:

I want to emphasize again that I believe we have a framework advantage in this regard, and we are confident in our ability to meet challenges. My small contribution is to support this with data. Druckenmiller accurately analyzed the risks and rewards. At that time, the European Exchange Rate Mechanism (ERM) was based on a set of rules that required currency exchange rates to remain stable, while governments and central banks always tended to think about problems in a very linear way.

At that time, the exchange rate of the pound against the German mark fluctuated within a range of 2.5% between the upper and lower limits each quarter. If the pound performed weakly, they might wait until the end of the quarter to let the exchange rate rise by 2.5%; if the pound was strong, they would raise the exchange rate to the upper limit of the range. If the pound was very weak, below the central level by 2.5%, then there was a 5% fluctuation range. Druckenmiller correctly pointed out that we could operate within this range. When the exchange rate approached the lower limit, the Bank of England had to buy a large amount of pounds to support the exchange rate.

My contribution is that, from a framework perspective, we believed that the market did not understand the fragility of the British economy, especially how the British economy was linked to short-term interest rates. Margaret Thatcher came to power in the 1980s and pushed for Britain to become a society of widespread homeownership. The UK's mortgages were different from the long-term mortgages in the U.S., adopting floating rates, and the overnight rates were also different. The Bank of England raised interest rates every Wednesday, and homeowners would be notified on Friday that their mortgage rates were increasing.

We were confident that the Bank of England could not stabilize the currency by raising interest rates, but rather could destroy the UK real estate market, which was a core part of the British economy. It turned out that our judgment was correct. I can't recall the exact day, but we like to call it "White Wednesday" — that was the moment of liberation for the British economy and its people. The Bank of England and the Chancellor of the Exchequer tried to support the pound by raising interest rates, but the pound continued to fall. I believe that was the moment the British economy fell into trouble. Looking back, we will ultimately find that real turning points are often based on structural issues, and many times, the collapse of the levee happens much later than you expect.

However, the British government ultimately made the wise decision to stop supporting the pound. While this was a loss for the Treasury and the Bank of England, if they had continued to try to support a doomed policy, the eventual loss could have been much greater.

Ash Bennington:

I think there are two things that are truly milestones. The first point, as you described there, is that the market has the ability to influence sovereign nations, and sovereign nations can no longer control large industrialized countries like the UK; they simply evade it. They cannot stick to the policies they want. Secondly, perhaps it is a truly great moment in finance, where hedge funds were able to apply these real-world market forces in a way that contradicted the statements of the Bank of England and even the UK government For those in the hedge fund space, this is a shocking moment.

Scott Bessent:

I think this is actually just an acceleration. It will never work. It just brought the timing forward. And, obviously, it’s not just one hedge fund. It’s a wave of market forces, a wave of banks, a wave of companies trying to exit. Because, at the same time, the Italian currency is depreciating. Months later, they didn’t exit the ERM.

Ash Bennington:

The exchange rate mechanism is in place, right?

Scott Bessent:

So they didn’t leave the band. They recalibrated within the band because they might have entered the wrong position, or they obviously entered the wrong position. You’re trying to create this unified currency in a place where capital is very mobile. But the economic structures are very different.

The same goes for the U.S. If I think back to the 1980s, when the energy crisis happened, record numbers of college dorms moved from Texas to Ohio. Okay? Now it’s the opposite, so the labor force is completely mobile. There’s a central government that can calm this down. That doesn’t exist. So, back to the accelerating collapse of the system. It’s a flawed system. And then, as the economy diverges, it becomes more apparent.

Ash Bennington:

I know you say you played a small role, but this was a huge bet for the companies at the time. As far as I know, if Druckenmiller hadn’t provided a lot of data, you wouldn’t have taken this action.

Scott Bessent:

But you know, the asymmetry of risk and reward. Like some of the great investment trades in history, the famous subprime mortgage trade by John Paulson. He built it with a CDS portfolio. So, investors know. I don’t remember what the negative spread was. I would say it was 5%. 5% per year. This is a five-year fund. You could lose 25% if the real estate market adjusts, and then you could make 250-350%. So, how do you identify asymmetrical phenomena? They don’t occur often. You have to keep an open mind. This goes back to never say never.

But fortunately, if you think back. I remember during the real estate trades, or before the global financial crisis. There was a saying in the U.S. real estate market that the national real estate market had never had a down year. California was down, Arizona was down. But overall, that never happened. Well, we never had a national banking system. We never had a CDO machine like Wall Street. We never had such a high level of subprime mortgages. So, it’s always very interesting.

For me, it’s like when someone says, oh, this will never happen, this has never happened, this will never happen, or that everything will be fine, the U.S. is the reserve currency and can’t go wrong. Ash Bennington:

I think this concept of asymmetry, where the return on unit risk is disproportionate, is very interesting, and I’d love to explore this in conjunction with your current work background at Key Square Group, discussing the current macro situation, some of the views you just mentioned about the U.S., and the total global sovereign debt, let’s talk about that As you can see now, what are those deeply rooted assumptions that people always talk about, those things that will never happen, you see potential asymmetric return opportunities.

Scott Bessent:

In fact, if I could, I would go back to 2016 or 2017. Due to the presence of many asymmetries, sometimes institutions will send you to the grave, as the Bank of England, the German Central Bank, the Bank of Japan, and the Prime Minister's Office did. But other times, it becomes behavioral. If I think back to 2016, the world was shocked by the occurrence of Brexit. That event happened. There was a week. The markets and bond yields collapsed, and the UK's exit from the EU would destroy the financial markets. So, on the night of Brexit, I attended a macro large conference with everyone, and you may have interviewed many people, and the next morning, there was panic in the room. A week or two later, things calmed down, and the world did not end.

Fast forward to November 16, I wasn't sure Trump would win, but I thought he could win. I believed the market had not priced this in. Then they announced it. He won. The market crashed that night. I sat there thinking, this could be the most pro-business president in 100 years. I didn't know why that would be. So, we were able to accumulate very large positions.

Looking back to the French election in April or May 2017. This is where the behavior starts, and if you are a fund manager, if your prediction about Brexit was wrong, and your prediction about Trump was wrong, you wouldn't take any risks. Marine Le Pen was going to become the president of the French Republic and France. One of the things the French are very good at is polling. Very strong polls showed that Emmanuel Macron would plan to oppose Marine Le Pen. France has a silent period, which is 1 or 2 weeks before the election. So you enter this silent period, and it becomes everyone's horror shop.

In the end, the polls were wrong, just like with Trump, there were some reluctant additional voters lying to the polling agencies. So, I remember it like it was yesterday. I thought, on Sunday, that is, the Friday before the election, the voting results in France showed the euro to dollar exchange rate at 1:05, which is a 90 put option. Therefore, the euro would rise 15 big figures within a month, never before had such a large increase occurred. It was like SKU was out. I say again, I couldn't be 99% confident that Macron would win, but I knew the market was paying me to take that risk. Even on the night Macron won, the euro only dropped from 1:05 to 1:00. So we could buy more euros. So, a lot of it is a behavioral issue. So you asked a good question.

Now, I think we are at a very interesting point. From a macro perspective, opportunities are abundant, part of which is government policy, but a large part is how people interpret the behavior around the government.

The U.S. economy is facing serious challenges, and the Federal Reserve's policy missteps have exacerbated the economic predicament.

Ash Bennington:

Let's dive deeper into several topics you mentioned earlier, including the U.S. debt issue, as well as your latest views on the U.S. macroeconomic outlook, yield curve, inflation, and growth Scott Bessent:

If we pay attention to market signals, what information is the gold market conveying to us? We have always held a very positive attitude towards gold. What sets Druckenmiller apart is his insight into structural changes and market turning points.

Ash Bennington:

How is this different from other viewpoints?

Scott Bessent:

Others might say that we focus solely on the outcome from point A to point B while ignoring the process. It's like riding a rocket; although there will be bumps, the goal is clear. What Druckenmiller truly understands is when to pause and assess. For example, recently both real and nominal interest rates in the U.S. have started to rise, which is usually a signal for gold prices to increase. Even when gold prices are on an upward trend, there can be a pullback of 5% to 15%. However, gold prices have risen by 15%, indicating that central banks are continuously buying gold, and accumulation is taking place.

I firmly believe in the power of the market; Costco sells $100 million to $200 million worth of gold in the form of small bars every month. This indicates that significant changes are occurring in the market. I believe these changes are profound.

Asset holders understand that we are approaching some critical points. Key Square is the name of our company, symbolizing the final move in a chess game. When only the king and pieces are left on the board, and there is only one square to move, the game is over. I believe we are nearing such a critical point. The combination of monetary and fiscal policy has almost reached its end, and the market is unwilling to fund it. We must find a valve to release the pressure, and I suspect it may ultimately be the dollar. Initially, it may be interest rates, and gold has performed well against the dollar. Since 2000, gold has outperformed the S&P 500 index. It would be unfair if you exclude dividends, but if you exclude dividends, the appreciation of gold prices in the S&P since 1967 has been the same.

Ash, to answer your question, I believe the market has realized the instability of the world's largest economy. With a budget deficit of 7% without a financial crisis, recession, or war, this is unprecedented. I cannot explain why we are doing this.

However, Yellen is trying to stimulate the economy by shortening the debt maturity. So we not only have a massive deficit, but the completely wrong approach is to move the debt maturity to the short term. The U.S. is gradually becoming an emerging market, and we are rolling out 90-day Treasury bills. This goes back to what I believe she and her friends think they will lower interest rates. Clearly, this is a terrible misjudgment.

The Federal Reserve has let down the expectations of the American people, leading to inflation rates in the U.S. reaching 21% and 22%. They are very fond of raising interest rates. This is somewhat absurd. They were still implementing quantitative easing a month before the first rate hike.

In any case, I believe the market is seeing a rebound in yields. We see the gold-to-dollar exchange rate rising. We are now in a very unstable situation. This year, interest on U.S. debt will reach $1.1 trillion, with a defense budget of about $900 billion Essentially, our spending on interest is greater than our spending on national defense because too much debt is at the front end. Moreover, maturing debt has already come due. If interest rates are not lowered this year, the U.S. will spend $1.6 trillion on interest. Therefore, some concessions must be made here. Another thing is also in the fall. Yellen announced through the quarterly refinancing announcement that there would be a reduction in the issuance of coupon bonds and an increase in the issuance of short-term bonds, which once again boosted the market and relaxed the financial environment.

Then Jerome Powell, in the press conferences in November and December, made the actual Federal Open Market Committee (FOMC) statement quite bland. He felt it was necessary to ease the financial environment and stated that we are moving towards interest rate cuts. So ultimately, the financial environment was massively relaxed, the stock market rose by 25%, high-yield spreads narrowed, and I believe this revitalized the economy, especially in high-end consumption.

The Japanese market may be long undervalued, with great potential for economic recovery

Ash Bennington:

One of the challenges is how to express negative yields in trading. As you mentioned earlier, has Key Square Group considered how to implement this view in a manageable way and realize the asymmetric yield potential you discussed?

Scott Bessent:

I have a good relationship with Pat Riley, and I think he is the greatest basketball coach and general manager of all time. He has a famous saying about sticking to the main goal. Therefore, we always try to focus on trading; what is the trade? Where is the pivot? We try to stick to that.

So, only two things seem very boring. I like boring. I am boring. I want my portfolio to be boring too. I like to do simple things. I remember a few derivatives experts came in, including Soros, and those people would say, I’ve done this, I have a swap trade here. Soros would look at him and ask, does that mean you think it will go up or down?

One of my former partners was able to rent a huge leverage book and keep his entire portfolio on index cards. The downside is that you don’t always get it right; our fundamental analysis of Japan is very correct. Our forecast this year was wrong; I think it will lead to a strong yen rather than a weak yen. I think this is a composite factor. Looking back, we held Japanese stocks. This should have been our specialty. But the Japanese economy is recovering. There has been a 10-year lag in corporate governance.

Ash Bennington:

Let me explain for those who may not have been paying attention to the Japanese stock market. Throughout my time watching financial markets, the Nikkei 225 index reached a peak in the late 1980s that had not been surpassed for decades. That peak has now been broken.

Scott Bessent:

I remember in 2011, one of our advisors called me and said there was a guy named Abe. He was a former prime minister. He wanted to run for prime minister again. He wanted to get Japan out of deflation. The situation went back to the idea that it was never going to happen, another reason being their continuously declining population. They are burdened with massive debt Look. Ten years have passed, and we have undergone tremendous changes.

But back to your point. The Japanese yen is a terrifying chart. I would say it is undervalued by 40%. But as you know, in terms of currency, valuation has never been important. I am surprised that the Japanese government is willing to let it go this far. They intervened two days ago when the yen exchange rate fell to 160. When I think about our mental models or roadmaps, we rely on people to do rational things. As the yen continues to decline, its popularity continues to synchronize. If you overlay Fumio Kishida's popularity with the yen's popularity, they are closely related. But he chooses to do nothing.

I don't believe the yen will spiral upward in a controlled manner because our differing views here are that interest rate hikes actually stimulate Japan. Such huge personal savings, massive corporate savings. This is really a very interesting setup, and if the Bank of Japan enters an interest rate hike cycle, I actually think they will stimulate the economy. So I don't think they have to become a victim of fiscal dominance; fiscal dominance is simply that the government cannot raise interest rates because the scale of debt is so large, and that is exactly what we are facing in the United States.

Cryptocurrency has great potential, but disappointed by SBF's fraud

Ash Bennington:

I always have a lot of topics I want to discuss with you, and today we have limited time, but I particularly want to talk about a less-known neighbor you mentioned, Carol Sakalop from the Bahamas. When we had a brief call yesterday, you mentioned some things I had never heard before. Can you share with us your interactions with Sam Bankman-Fried?

Scott Bessent:

I have some biases against this person; I am fortunate to be part of an American family, but we have been producing natural gas in the Bahamas for four generations. I love the Bahamian people; besides the United States, the Bahamas is my favorite country. Through this crypto project, the Bahamian people are really working hard to create a better future for themselves, their children, and their country. And Sam Bankman-Fried is trying to destroy all of this. He held a meeting with the seven highest-ranking officials of the Bahamian government and many offshore investors. Ten minutes in, I clearly realized that I did not believe in what he was promoting.

Ash Bennington:

When many elite venture capitalists in Silicon Valley could not foresee this, how did you realize it so quickly? Was it his demeanor, the way he spoke, or the way he took immediate action that made you suspicious?

Scott Bessent:

Yes, he immediately claimed he could retain all customers. That was in February 2021; I wanted to do that, but that was in January or February before the FTX collapse and bankruptcy. He gave me the impression that his attitude was very agitated. Moreover, he felt it necessary to tell those present, without anyone prompting him, that he had invented a new model and that the old model, the old custody model, was wrong. You see, the custody model exists for insurance, to prevent fraudsters like him. He started trading, and when he spoke with investors and government officials, he would drop profanity every 30 seconds: "I have to go through the other five companies." "I don't need to. I don't need to do this, I can hold client funds, I can be an exchange, I can be my own risk engine, I can do my own risk management. I am one of those who won't send people out."

I asked him, and I once interrupted his lengthy discourse: "Sam, can I ask you four questions?" Four questions about how he does business. He told me, I don't know.

So the question arises. It's just about how strong a system is, what would he do if his bank faced a run? He basically told me, I don't know what you're talking about. I don't think you know what you're talking about. I know what I'm talking about. I teach you core or Senate at Yale University. You look like an American bank from 1907, without lenders, without a last resort.

Let's see what happens and then try to turn the conversation to more productive things, asking him, you have seven most important people here in the Bahamas, what can they do for you? His answer was, they can legalize Uber. We have a hard time doing things right. I messed it up.

Ash, you said we always try to maintain a skeptical attitude. I think the higher a person's credentials, the more you need to check them. I went to Yale, I don't believe in degrees. In the podcast in October, I actually stood up and said I would never hire a Harvard undergraduate again. I think it's a failed degree. So, back to your point, why did all these people believe? I think it's because of the high status of his parents.

So if you look at the investment memorandum, they will say, his parents are law professors at Stanford University. That's it, that's it, if his father were a truck driver in Ohio, he wouldn't be on the same path. I think Michael Lewis's career or the start of his career was achieved by satirizing Wall Street's excesses and frauds, which is shocking.

Ash Bennington:

This is truly an extraordinary story about Sam that I've never heard before. I actually co-wrote a book about him with others.

Scott Bessent:

As I told you yesterday, I think it would be very interesting if the kind of grand praise from Michael Lewis were exposed and then FTX collapsed. Again, for other reasons, Michael, even after the conviction, this thing would sink.

Regarding this conviction, I want to add that I said in the media that I think he should be sentenced to a long prison term. When people say this is the victims' fault, it is not the victims' fault. There are 400,000 people suffering in the Bahamas. Investors are also suffering. Investors deserve it. But those who did business with FTX, they clearly lost this cryptocurrency, these crypto games. Look at what.

I regret that I haven't done much cryptocurrency trading. My 14-year-old son seems to make ten times the money every three months. I wonder how a 14-year-old kid without a passport can have a ByteDance account. But if you are, stay away from the investment business and focus only on social affairs I am very concerned about this generation's view of capitalism; they have witnessed a series of market failures. They believe that capitalism is not actually capitalism. They have seen the worst side of crony capitalism. They have seen government intervention. They now see that the Green New Deal is pushing young people out of the real estate market because government spending has kept interest rates high. So, I do believe that one major advantage of cryptocurrency is that it allows young people to participate in the market and gives them a way to make money. They have always been willing to do so.

This is something new, but many older generations have not accepted it yet. So, people tell me that cryptocurrency has no value. I can tell you that when people agree on a medium of exchange, it has value.

In 1998, the Russian economy collapsed and fell into hyperinflation. A friend of my grandmother went out and bought 18 bicycles and then sold them. Because bicycles were her hedge against inflation. So, you never know what an inflation hedge will be. But I would invest in gold again. I keep coming back to the fact that both big and small agree that this is the hedge.

Ash Bennington:

That's interesting; you said something very casually, that if Sam Bankman’s parents were truck drivers, he might not have gotten a pass. Scott, that makes a lot of sense. I think at this moment in history, the feelings of Americans are so profound; you can see the anger and frustration from both the left and the right. Perhaps one thing that people across various sectors agree on is that this system does seem unfair.

Scott Bessent:

Look, I am very concerned about this. A few days ago, I gave a speech. If you think about it now, in America, there are two types of people: those who own assets and those who have debt. It’s easy to criticize the Federal Reserve, easy to criticize Jerome Powell. But I do believe there is a huge failure here that exacerbates what is happening because of the abuse of asset prices, which is what he did when loosening monetary policy. It has made the richest 20% better off. I believe the richest 20% account for 40% of consumption. Meanwhile, the poorest 50% have debt.

Last week, American Banker published an article stating that credit card default rates are currently at an all-time high. The Philadelphia Federal Reserve has measured credit card default rates since 2012, and they are at their highest level. Nancy is the cornerstone of our macroeconomics; she wrote a great article titled "The Forked Economy." That’s what you have. You either have assets or you have debt. What troubles me is that the bottom 1% have a voice, and they will have their time on the ballot.

I can imagine the candidates in 2028 being AOC and JD Vance. They agree with you about this left or right perspective. They are both populists, and no one on Wall Street will like what they have to say. I’m not sure I agree with his point, but JD Vance wants to get rid of stock buybacks. Of course. We know what AOC wants

Assessing Risks and Focusing on Trends

Ash Bennington:

Scott, for the young men and women who might be listening to this conversation today, they may hear some emotionally charged things. If you could clearly explain to them based on quantitative analysis, what would you say? What advice would you give them? What thought patterns have you used in your life that have allowed you to experience the kind of success you have, which they can also apply in their own lives?

Scott Bessent:

First, you have to be willing to take risks. I always tell everyone. I've said this in several other interviews; it looked bad at the time. And it was. But when I was a kid, my father went bankrupt twice, once when I was 7 and again when I was 17. So the status quo was not something I could stick to. For me, I was willing to take risks. Before my father decided to go bankrupt, we were quite wealthy. I kind of wanted to go back to that way of life, but I also didn't think I had to take the traditional route. I didn't want to take a two-year banking course.

So, just like you mentioned at the beginning of the interview, I saw something called hedge funds. I could, you know, the idea that no one in the past would take 15% or 20% of the profits. I thought, my gosh, that's a good idea. It's better than working at a trust company for 1% management.

So, I want to say, first, be willing to take risks and think about how much risk you are willing to take.

Second, what is changing? For example, where can you get ahead of the big trends? Like I often think I was ahead of the big trend in hedge funds. I was quite successful. Considering how I identified this trend, I probably should have been even more successful. But what are the big trends here? A few days ago, when I was speaking at a university, I said if I were 28, I might go to Japan. That could be very interesting. I think that's interesting.

I don't know where all this artificial intelligence is going, but I do know that people will have more free time. So what can you do? Is it to play games? What leisure activities can you engage in? I mean, look at the number of professional sports teams. So, what can you do to meet the demand for people having more leisure time? Would you want to travel more? Right? So, the real advice is to be willing to take risks. Know how much risk you are willing to take. Don't be too bound by too many fixed obligations and try to place it before the big things. I've made a lot of mistakes in my career. If you are in a big trend, the big trend will cover up a lot of mistakes