THE FEDS HANDLING OF THE ECONOMY – Market Mondays w/ Ian Dunlap

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[Music] So let me ask you this Um what are your thoughts in the Handling of the economy um by the fed This year been my thoughts on what I'm Sorry can you speak up the feds handling Of the economy okay I should disclose That I hired a young man to work for me Years ago and he was at our firm for a Number of years and he left his name is Jay Powell and now he's the chairman of The Federal Reserve part but he doesn't Give me any insights the Federal Reserve Made a terrible mistake they Underestimated how serious the inflation Was going to be the United States Government injected five trillion Dollars into our economy Um to deal with covet and you put five Trillion dollars into an economy that's Roughly a 22 trillion dollar economy You're going to get inflation so we got A lot of inflation The FED said for a while it's transitory Which means it'll be gone soon they were Wrong so now they're going to increase Interest rates a fair bit to get Inflation down now as you may have seen Last week inflation came down a little Bit still at 7.7 percent the FED wants To get inflation down to two percent per Year that's what we had for the last 25 Years two percent a year it wasn't a big Factor getting it back to two percent is

Not easy Um I know a lot about inflation because I worked in the Carter White House when We got inflation to 19 nobody's ever do That again right so Please So uh I would say the FED is is now Serious about fighting inflation they're Going to keep increasing interest rates For a while and I said that in the December they will have another meeting And they'll increase interest rates by Another 75 basis points or almost one Full point so um you know I think the FED is uh probably made a mistake in the Beginning now they're trying to Compensate for it I think they're doing A reasonably good job now Um in light of the FTF Scandal um Looking back at the interview that you Did with Sam as an investor is there Anything in hindsight that made you say Something about him or the strategy of The company didn't feel right Which about who uh uh FTX Oh FDX yes Sam backman freed um well it Was the only interview ever I had where The guy showed up with a t-shirt shorts Uh and Tennis Shoes that's all he had Worried that's apparently that was his Normal draft so Um I was a little it was a little Unusual usually people dress a little Bit better for the interviews

Um he's um look you meet a lot of people In this world Who are brilliant young people and when You're a brilliant young person and you Haven't had a failure you think you Really are brilliant and you you walk on Water so he had never made a mistake Really he built a business where in the Age of 30 he's worth 22 billion dollars So when you were 30 years old you guys Looked like you're a little maybe a Little older than 30 I don't know but When you were 30 years old if you were Worth 22 billion dollars you would think You walk on water absolutely he uh may Have thought that yeah I would say it Appears that they made a terrible Mistake and whether it's criminal or not I don't know but they were taking Customer accounts and putting them into Other businesses that the customers Didn't know about so let's suppose you Have an account at Merrill Lynch and you Put a thousand dollars into it and they Told you later well guess what we took That thousand dollars we lent it to Something else and we'll give you a Thousand dollars back soon well before They could give it back to you it went Bankrupt so you're out your thousand Dollars that appears to be what they did And therefore there's a lot of Challenges there so he's a smart guy I've met him on a couple occasions

Um I would say you know you have to be Wary of people who are 30 years old and Think they walk on water because it Rarely happens Noted so there was there was one 33 year Old guy that did walk on water but that Was unusual So I can walk on water I love it I love It uh uh obviously one of the greatest Investors of our time um obviously the Carlo group like we said 400 billion uh Managing assets Prior to even get into Finance I know You studied law so what was that Transition like from you going into law To find it well let's be honest um if You're going to be good at something you Have to love it and I wasn't I didn't Love to practice the law and my clients Told me I wasn't that good at it So I went to law school to make my Mother happy because she said you'd Either be a doctor or a lawyer so I Didn't want to go to medical school so I Went to law school and I was really Interested in politics and so I was Really interested in working in Government and I went to work for Jimmy Carter at the White House for four years When I was in my 20s and um you know we Got in place in the 19 and the result Was we didn't lose we lost the election So I had to go back and practice a lot So I knew but I wasn't that good at it

My clients reminded me of that so I Decided to do something different and I Started a firm in Washington 1987 that Grew to be one of the largest private Equity firms in the world so I got lucky I surrounded myself with really smart People that knew more than I did and the Key to really building a great business Is surrounding yourself with smarter People than you so um that's what Happened I built it it's now one of the Largest firms in the world in this area But I I I was attracted to because I Thought if I'm going to be not in Government and government doesn't want Me because I didn't do a good job and I'm going to be in the private sector And I might as well make the most amount Of money I can make and business people And private Equity firms are making a Lot more money than lawyers and they Ought to actually seem to be more Enjoyable so that's why I started it and It worked So let me ask you this um you talk about Inflation a few times last week a report Came out and they said that they thought That inflation might have peaked and That that was good for the market do you Think that inflation has peaked Well um it's a it's an interesting Question Um last week the numbers came out that Said that inflation rate from month to

Month year to year was 7.7 now if I told Your inflation was going to be 7.7 Annualized you would run for the hills But because it was previously over eight Percent it was eight point six percent Seven point seven percent looking Wonderful so yes it may have peaked I Think it probably has but remember uh it Inflation was very high because we Injected so much money in the economy The war in Ukraine had a very high Effect on Energy prices and the food uh Supply chain so there are many things That produce this High inflation I think It probably has peaked but nobody really Knows for certain now I'd say if the war In Ukraine were to end in a couple Months that would be great for inflation And if um uh Ukraine can start producing And shipping wheat again that would be Great for inflation but I'd say it's a Little premature to say it's peaked Because we need a couple months of data Just one month isn't probably enough I'm looking forward to reading your book Can you share with us what's one lesson You learned from maybe Jim Simmons Ken Griffin and maybe John Paulson Um around how they invest in a very Impactful lesson that will help our Audience tonight Well Ken Griffin is a guy that built one Of the most successful hedge funds of All time he's also got a separate

Company called Citadel Securities and He's extremely wealthy he basically Believes in analyzing data very Carefully he has surrounds himself with Really really smart people and he tries Very hard to get the best people in the Country who are really good with numbers He tries to steal people from Google not Steal but recruit people from Google Facebook Microsoft Apple get really Smart people and know numbers and they Really analyze these things carefully Um John Paulson made one bet and was a Bet that the mortgage Market would Collapse and at the time people didn't Think it would be quite as bad as it Turned out to be so he made on one Investment 20 billion dollars 20 billion So you don't have to do anything the Rest of your life It's a good trade it sounds about right Well I'd say it was the greatest train Of all time and so he did pretty well But basically he analyzed the fact that Mortgage Market was probably over uh Inflated and he correctly uh bet on that Yeah most people say no risk no reward Obviously in your space we imagine People's money That that you know may not be true or Maybe it is can you talk about the Importance of risk management when you Talk about private equity Well I think one private Equity I'm

Sorry risk management Well Um You know risk management is a is uh is a Way of managing your money where you're You're basically um in effect hedging You're trying not to get the highest Rate of return but you're trying to Protect against the downside private Equity is different than that private Equity is basically saying we're going To fix a company make it better we're Not trying to hedge against it so it's Different I would say depends on what Somebody really wants out of life Um if you're you're you're 75 years old And you're living on a retirement income And you don't have a lot of money coming In you don't want to take a big risk so You probably have a more a risk Management kind of approach which is to Say Um you're protecting the downside if You're 25 years old and you can take a Lot of risk because if you make mistakes You can go make money again probably Private Equity might be better for you Because you're willing to take the Upside and you don't need to protect the Downside so much it depends on your Situation how much money can you afford To lose for example cryptocurrencies I Always told people don't put more in Than you can afford to lose and some

People did What's your economic outlook for 2023 I would say for 2023 I suspect the United States will probably go into a Recession that's a very common view and That's because if you go back from to 1960 almost every time the Federal Reserve has increased interest rates Dramatically the result has been a So-called hard Landing or recession so It's unlikely we're going to be able to Avoid it this time but it'll probably be Very modest I don't expect it to be a Serious inflation of the type we had in The a serious recession the type we had Uh in the in in the Great Recession of 2007-8-9 I suspect it'll be a Two-quarter recession and you know two Quarters is not that serious so I think Uh the economy will probably slip a bit In that period of time but I think Inflation will come down the Unemployment rate will go up I suspect The unemployment rate will probably go Up to about four four and a half percent Next year or something like that Um Congress is not going to do anything Not that anybody will notice or want Congress to do anything Congress isn't going to spend much money Because uh they're just not allowing Money left to spend we have 30 trillion Dollars of debt in this country this Country you and I owe other people 30

Trillion dollars that's a lot of money And we can't afford to borrow much more [Music] I know they can't stand it

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