Individual Economists

Returning to Camp Kotok

The Big Picture -

 

 

I am up in Maine discussing economics and markets; bandwidth is hard to come by, as is reception. In the meanwihle, enjoy this 2019  Businessweek piece about the event

 

 

Talking Rates in the Maine Woods With Economists Over Good Wine
Taking place right before the Jackson Hole Economic Symposium, the gathering is a chance for money managers, traders, and economists to discuss crucial issues without restraint.
Businessweek, August 27, 2019

 

 

Let’s get this out of the way upfront: There is no such entity as the “Shadow Kansas City Federal Reserve Board.”

This isn’t a “The first rule of Fight Club” situation. No one denies that a gathering of money managers, bond traders, and economists has been taking place at Leen’s Lodge in Grand Lake Stream, Maine, for several decades. It’s just that most of the conversations are off the record or governed by the Chatham House Rule, which doesn’t allow identification of speakers without their permission. Many attendees have an affiliation with the Federal Reserve, as current or former employees, but aren’t authorized to speak on the Fed’s behalf.

The long weekend in Maine takes place shortly before the Jackson Hole Economic Symposium, an event dating to 1982, held in Wyoming and hosted by the Kansas City Federal Reserve. Hence, the gathering became known in some circles as the “Shadow Kansas City Federal Reserve Board” because of the Fed affiliation of many attendees, more than a few of whom head off to Jackson Hole right after the gathering.

The group makes no claim to any official imprimatur. Instead, “Camp Kotok,” as it has become known—after David Kotok, chairman and cofounder of Cumberland Advisors, who began holding the meetings more than 20 years ago—has fishing and drinking and hiking and shooting and smoking of cigars in the pristine wilds of Maine, all of which may be great fun, but it’s hardly the reason to gather each year.

The main draw is the opportunity to discuss and debate the big issues of monetary policy, economics, and finance, with a like-minded group of serious policy wonks and high-profile money managers, away from the usual routines of the office. At dinner the dining room represents about $2 trillion in capital, not counting attendees from various governments and central banks from around the world.

In the past, discussion topics ranged far and wide; but this year, the focus was all Fed all the time: whether it should cut rates and by how much; if the inverted yield curve is signaling a recession; whether negative bond rates from Japan and Europe would make their way here. Perhaps the most passionate discussions were on the independence of the Federal Reserve in the face of unceasing pressure from President Trump.

Almost all attendees related similar anecdotes about presidential pressure on the Federal Reserve. Harry Truman famously called the entire Federal Open Market Committee to lunch at the White House, warning, “If you don’t cut rates, you are doing Stalin’s bidding.” Lyndon Johnson invited Fed Chairman William McChesney Martin to his ranch in Texas. LBJ threw Martin against the wall, saying, “Boys are dying in Vietnam, and Bill Martin doesn’t care.” Ronald Reagan’s chief of staff, Jim Baker, invited Fed Chairman Paul Volcker to the president’s library, adjacent to the Oval Office in the White House. With Reagan sitting next to him, Baker told Volcker, “The president is ordering you not to raise interest rates before the election.”

In each of these examples, pressure from the U.S. president was private, personal—and mostly effective. The very concept of a public dispute between a president and his own appointed Fed chair was unthinkable. Not only because it might roil the markets, but simply because adults don’t behave that way.

Alas, those were simpler times, decades before presidential tweeting was a thing. Before public bullying and harassment campaigns, there was direct and personal persuasion. The record suggests it was an effective way for presidents to influence monetary policy. Attendees at Camp Kotok repeatedly noted the current approach was not only unseemly but also had not ever been effective. The president calling out his hand-selected FOMC chair to an audience of 60 million-plus Twitter followers doesn’t seem to be having the desired result.

At the Jackson Hole gathering, Fed Chairman Jerome Powell’s  speech was a refresher on the history of monetary policy in the post-world war era. The section on current circumstances gave little comfort to a president apparently concerned about a possible recession and its potential effects on his reelection chances. Powell appears to have figured out three important things:

1. In the current era of low rates, low inflation, and modest economic expansion, the Fed’s rate policy is having little to no impact on stimulating the broader economy. Consumers have been buying big-ticket items such as houses and cars, regardless of modest increase in rates we’ve seen the past two years; we are still at historically low and accommodative levels. It’s noteworthy that corporations have been borrowing large sums of capital not to invest and hire, but to buy back their own shares. Lowering rates won’t change that behavior; if anything, it will only encourage more of it.

2. The Fed cannot offset an ill-advised trade war. The economy is having the expected textbook reaction to tariffs, treating them as an unnecessary tax on consumer spending, both here and abroad. If there was any expectation on the part of the occupants of the White House that this would cause the Fed to blink and cut rates, they appear to have been mistaken. “While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rule book for international trade,” Powell said.

3. Perhaps No. 2 above occurred because of the following: Powell seems to have deduced that Trump can’t fire him—at least, not without causing a constitutional crisis. This last conclusion allows the chairman to focus on protecting his institution from undue pressure from the president.

Simply stated, the Fed believes cutting rates is not the panacea the president believes it to be. Therefore the Fed would rather wait to cut rates when it would be much more effective—in a mild recession—than risk an increase in inflation from an even more accommodative stance than we’re in at present.

~~~

To be invited to Camp Kotok, you must check three boxes: First, a group member must nominate you as someone capable of adding to the conversation. Original ideas, thoughtful disagreement, and intelligent variant perspectives are all welcome.

Second, you must get the thumbs-up from Kotok.

Third, the rules mandate that each attendee brings a case of wine. The group contains some serious oenophiles, and you’d best bring your A-game. Lots of thought goes into the wine selection—along with 20-year-old Scotch whisky, rare tequila, and the occasional brandy. This year I brought two cases of a delightful Spanish albariño from Ramón Bilbao; it was a cheap (so two cases) and unexpected delicious treat. It made a surprisingly good impression in the face of overrepresented—and overpriced—Napa Valley cabernets.

Most evenings there is a featured discussion before dinner. Senators, governors, and representatives have made appearances. Every Saturday night there’s robust debate. The topics include currency issues, the latest crises, and economic philosophy. The theme of this year’s Jackson Hole Economic Symposium was Challenges for Monetary Policy. So it was no coincidence that the debate, in Maine this year, ably moderated by Jim Bianco of Bianco Research LLC, was on Modern Monetary Theory, also called MMT. The surprising consensus was that whether it comes from the political Left or Right, MMT is inevitable. Expect future infrastructure projects, Medicare for all, and/or tax cuts to be funded by bonds authorized by Congress, issued by the Treasury, and purchased by the Federal Reserve. The group takeaway was as simple as it was snarky: “Free money! Whatever could possibly go wrong with that?!”

One cannot gather 50 economists and their ilk and not expect forecasting to occur. All participants answer 25 questions on where they think various prices and economic indicators will be one year hence. The stock market, unemployment, bond yields, gold, gross domestic product, yen, euro, inflation, oil, and other questions are not only discussed and forecast but gambled upon at $5 per prediction. I usually do pretty well, and this year I won $52. (Ties change the payouts.) Sizable side bets occur, and some people have been known to make rather large and ill-advised wagers under the influence of alcohol. I have done that, too, but thankfully, the rules preclude me from going into details.

There is a stable core of about 35 to 40 people, with a few newbies showing up each year to shake things up. Not everyone gets invited back. My slot opened up a dozen years ago when a Chicago currency trader decided to stand up in his canoe, flipping it over, sending everyone and everything on board into the lake.

My own tenure almost came to a premature end when I left a wet towel on a radiator to dry; it instead smoldered. Camp Kotok lore is that I almost burned down the cabin, and bank analyst Josh Rosner led a mock prosecution that evening to have me tossed out for my recklessness and negligence. My defense: This was no accident; I was trying to murder Rosner and his snoring bunkmate and fellow bank analyst Christopher Whalen, so the rest of us could get a night’s sleep. That this argument carried the day gives you some sense of the gallows humor of the dismal set who gather—and why I still get an annual invitation.

For a few years, electronic media were present in large numbers (including Bloomberg Radio and TV). One Friday evening, on Aug. 5, 2011, a television truck was accidentally still present—it couldn’t exit the narrow parking area because a car with a missing set of keys blocked the way—when Standard & Poor’s unexpectedly downgraded the credit quality of the U.S. It was a television producer’s dream, a huge news event scoop, with a live TV feed and a few dozen tipsy economists happy to chat about it, alcohol-induced buzz be damned. These were the first people to share their views with the world about what the downgrade meant. The consensus that it mattered much less than people feared was borne out by the subsequent course of history.

This year the concerns were focused on the many conundrums of monetary policy. The inverted yield curve—when short-term bonds pay a higher yield than the rates paid on longer-term bonds—is worrying, and the main question being debated was whether it was foreshadowing a recession or a sign that interest rates are still too low.

Yet the U.S. has the highest rates in the developed world, which is not ideal, in several economists’ view. The risk is a “giant flow of currency to the U.S.” to capture that yield, and an “overvalued dollar that is way too strong.”

Negative interest rates were even more worrying to the group. The entire economic system, it was pointed out, is based on positive interest rates. And if rates flip negative in the U.S., as they already have in Germany and Japan, no one knows what will happen.

 

 

Photos and videos here

 

 

 

Source:
Talking Rates in the Maine Woods With Economists Over Good Wine
Barry Ritholtz
Businessweek, August 27, 2019

 

The post Returning to Camp Kotok appeared first on The Big Picture.

10 Thursday AM Reads

The Big Picture -

My morning pre-fishing reads:

• Your phone is the most intricate machine you’ve ever held. Let’s take it apart.Fingerprint Resistant Coating, Chemically hardened glass armour, An invisible grid that senses your fingers, and Millions of lights forming everything you see… (Everything Machine)

• The Investing Heavyweights That Backed Situational Awareness Before It Blew Up: The Wall Street Journal’s exclusive on Aschenbrenner’s imploding fund — the marquee names who piled in at the top, and the redemption queue forming now. Hedge fund behind aggressive AI bets tapped into roster of big-name investors; some warned the founder about the risks of heavy borrowing (Wall Street Journal) see also Situational awareness – do we have it? The companion research note on markets’ collective blind spots. Leverage in ETFs, margin accounts and hedge fund books that was encouraged by more than a decade of low and stable rates. Indeed, reports that over 3% of Korea’s adult population received a margin call over the last two weeks is deeply concerning if true.  (Deutsche Bank Research Institute)

• The Anatomy of a Blow-Up: Ted Seides dissects how funds die — the leverage, the crowding, the redemption spirals, and the pattern that repeats from LTCM to the present. (Capital Allocators with Ted Seides)

• US diesel prices overtake Biden-era average in blow to Trump: The Financial Times on the inconvenient fuel data — diesel is now more expensive than the average under the administration Trump ran against on energy prices. (Financial Times)

• Uber’s Strategy for Fighting Sexual Assault Suits: ‘What Were You Wearing?’ Emily Steel on a company that promised to handle claims “in a way that is best for the survivor” while its lawyers pursued a far more aggressive strategy. The ride-hailing giant promised to handle legal claims “in a way that is best for the survivor.” Its lawyers are pursuing a far more aggressive strategy. (New York Times)

• The Great Romance Slump: Faith Hill at a candlelit Manhattan loft for a “mindful singles event” designed as the antidote to dating apps. Ninety seconds into a three-minute hug with a stranger, she began to think dying alone might not be so bad. Why are so few young people finding love? (The Atlantic)

• How Does the Qatar-Donated Air Force One Compare With Other Presidential Jets?: The donated aircraft lacks midair refueling and nuclear hardening, and goes in for more modifications this fall. Boeing’s two next-gen planes are due in 2028, more than $3 billion in losses later. From laser weapons to color schemes, transporting the president around the world is a study in details (Wall Street Journal)

• GOP Staffers Say the Party Has a Groyper Problem: In group chats and at happy hours, party veterans fret that the pipeline of young Republican talent is veering into terminally online extremism. Party veterans are concerned that the pipeline of young Republican talent is veering off course — and into terminally online extremism. (Politico) see also Let’s Be Clear: Todd Blanche Is an Unqualified Hack Who Shouldn’t Be U.S. Attorney General: Esquire’s Charles Pierce holds nothing back on the AG nomination — the résumé, the conflicts, and the Senate Republicans pretending not to notice. If Congressional Republicans had any spine at all, they wouldn’t let something like this happen (Esquire)

• Why ‘super movers’ have healthier brains — and how to be one: Defined as people who are able to walk significantly faster than most of their aging peers, they are about half as likely to experience cognitive decline, a study found. The Washington Post on the research linking movement variety to cognitive health — it’s not just exercise volume, it’s the range of ways you move. (Washington Post)

• On ‘Ted Lasso,’ She’s Ruthless. Off Camera, She’s ‘Quite a Goofy Nugget.’: The New York Times profiles Hannah Waddingham ahead of the show’s fourth season — the West End years, the late-breaking stardom, and the Rebecca Welton evolution. Waddingham is a rare British actor to beat a path from musical theater to the screen. (New York Times)

Video of the day: I Asked Michelin Chefs How They Cook Steak

Be sure to check out a special bonus episode of Masters in Business interview with Mike Kelly, chief investment officer of Future Standard, a $90 billion multi-strategy platform for wealth management clients. Previously, he was at Omega Advisors and Tiger Management.

 

YouTube is now bigger than Netflix and Disney’s streaming services combined in terms of TV viewership in the US

Source: Nielsen via Bloomberg Screentime

 

Sign up for our reads-only mailing list here.

 

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Iraq-Syria Pipeline to Bypass Hormuz Could Be Revived Within 3 Years

Zero Hedge -

Iraq-Syria Pipeline to Bypass Hormuz Could Be Revived Within 3 Years

By Tsvetana Paraskova of OilPrice

An old Iraq-to-Syria oil pipeline that bypasses the Strait of Hormuz could be up and running within three years, a senior Syrian official has said.

The Hormuz crisis that cut off most of Iraq’s crude oil exports has accelerated plans by Iraq and Syria to rebuild a damaged oil pipeline to ship crude oil from the Iraqi fields in Kirkuk to Syria’s Mediterranean coast.

The completion of the renovation of the pipeline from Haditha in Iraq to the Syrian port of Baniyas would take “three years at most,” said Youssef Qablawi, CEO of the state-owned Syrian Petroleum Company.

Syria and Iraq have started negotiations to finalize the contract, and are also in discussions with companies that will invest in this pipeline, the executive said, as carried by Iraqi news outlet The New Region.

“Engineering studies and the purchase of materials will then begin, followed by construction. Implementation will take between 30 months and three years at most, after which the pipeline will be ready,” Qablawi told reporters.

The project is expected to consist of two pipelines with a capacity of between 1.5 million barrels per day (bpd) and 2 million bpd, according to the executive.

Last month, the United States voiced its support for the plan. The U.S. backs the Iraqi and Syrian efforts to rebuild the Kirkuk-Baniyas oil pipeline and diminish Iran’s potential to disrupt Hormuz traffic in the future, an official at the U.S. State Department told Reuters.

The United States also expects U.S. companies to play a role in the reconstruction of the Kirkuk-Baniyas oil route, according to reports. The pipeline would be crucial for Iraq’s oil exports not depending on Hormuz, Syria’s post-war economy, and reduced Iranian leverage in the Strait.

Iraq desperately needs export routes not depending on the Strait of Hormuz, whose closure exposed this key Iraqi vulnerability, forced OPEC’s second-largest producer to slash upstream production, and led to billions of U.S. dollars of lost revenues for Baghdad.

Tyler Durden Thu, 08/06/2026 - 05:00

Why On Earth Are They Doing This?

Zero Hedge -

Why On Earth Are They Doing This?

Authored by Steve Watson via Modernity News,

The Spanish Red Cross is treating the military-age men who swam around the border fence and stormed Ceuta like victims of an earthquake.

Volunteers in red vests are lining up on the sand at Playa del Trampolín, handing out bread, milk, biscuits, water, cans of tuna and pastries to the thousands who remain after last week's deliberate mass invasion from Morocco. Police stand by to keep the queues orderly while the same people who refused to go home sit and eat.

This is not a natural disaster. These men crossed into Spanish territory because the opportunity was created for them. There is nothing stopping Spanish authorities from sending them straight back. Instead the humanitarian apparatus has arrived with supplies.

Cadena SER and local outlets confirmed the first organised distribution of food since the crisis began. Cruz Roja and the local branch of Cooperación Sur-Sur handed out the packages to around 2,000 migrants, the majority from sub-Saharan Africa.

National Police managed the lines so the recipients stayed seated until their turn, then returned to the beach to eat. One Nigerian man named Genesis told reporters he was "happy to finally have something to eat and drink." He said he had been trying to cross for months and now hopes for asylum.

A Sudanese man named Malik Alher said he had gone five days without food, then added that he wants to "learn Spanish, live in Madrid and work in a supermarket."

The volunteers doing the handing-out look exactly like the usual crowd: white European leftist women. Locals watching the scene are furious, and for good reason. Feeding the people who just overran your city does not encourage them to leave.

This comes after Spanish officials spent days insisting the problem had solved itself. Foreign Minister José Manuel Albares claimed the "practical totality" of those who entered had returned to Morocco.

The Spanish Embassy in London repeated the line. Reality on the ground never matched the press releases. Streets remained full, facilities were stormed, and thousands simply stayed put on the beaches and around the CETI reception centre.

Local estimates of those left behind ranged from 2,000 to 15,000. But it's anyone's guess. Many of the remaining group are now openly declaring they will not go back. They are waiting for the next step toward the Spanish mainland and the wider European welfare systems.

Some, have already been sent to mainland Spain.

Vox leader Santiago Abascal has called the episode an "invasion and an act of war promoted by Morocco and allowed by Sánchez." He demanded the prime minister face legal proceedings.

The People's Party has accused Sánchez of being on holiday while sovereignty was tested. Ceuta's own president Juan Jesús Vivas described the situation as "absolutely unsustainable" for a city of just 83,000.

Handing out free meals does not change the fundamental facts. These men were not shipwrecked, they did not come from a war zone. They walked and swam into Spanish territory in a coordinated surge that Morocco facilitated and Spain failed to stop.

Every ration distributed on that beach signals that the cost of illegal entry will be met with care packages rather than immediate removal. Carrots do not deter the next wave. Only the credible threat of being sent straight home does.

Spain's government can still choose enforcement over theatre. Until it does, the Red Cross will keep unpacking boxes for the people who invaded, and the residents of Ceuta will keep watching their city turned into a holding pen for those who refuse to leave.

Your support is crucial in helping us defeat mass censorship. Please consider donating via Locals or check out our unique merch. Follow us on X @ModernityNews.

Tyler Durden Thu, 08/06/2026 - 02:00

The West Is Winning The Information War While Russia Prevails On The Battlefield

Zero Hedge -

The West Is Winning The Information War While Russia Prevails On The Battlefield

Authored by former CIA officer Larry Johnson

I stumbled across something pretty bizarre today when I queried one of the AI-search engines about Russia’s capture of territory in Ukraine in 2026. Here is what the Chinese KIMI claimed:

The evidence from multiple sources — including Ukrainian official claims, Western think tanks, and Ukrainian independent trackers — suggests that Ukraine recaptured substantially more territory than Russia captured during the first half of 2026, driven by the southern counteroffensive. However, the pace of Ukrainian gains has slowed since spring, and Russia has made small net gains in recent months (June–July). The overall net for the full year so far appears to still favor Ukraine, but the margin and the exact numbers depend heavily on whose methodology you use.

There you have it… Ukraine is winning the war on the ground according to AI. Let me emphasize that you will find this same propaganda on GROK or Claude. The Western propaganda effort is paying dividends on the information operation side of the house. Even the Chinese-coders who created KIMI are pushing Western propaganda.

via Al Jazeera

So let me give you the actual rundown for 2026. Russia started 2026 with Gerasimov’s report to Putin announcing the liberation of Pokrovsk (Krasnoarmeysk) — the Donetsk logistics hub under siege for nearly two years — and of Vovchansk in Kharkiv. Through November of 2025 the MoD had reported a steady run of captures, including Petrovskoye in the DPR and Tikhoye and Otradnoye in Dnepropetrovsk.

Moving into the spring of 2026, TASS reported that Russian forces liberated 63 settlements from March through May 2026 — 20 in March, 16 in April, and 27 in May, the strongest month. The regional breakdown was 21 in Kharkiv Region, 19 in the DPR, 14 in Sumy, six in Zaporozhye, and three in Dnepropetrovsk. The Sumy and Kharkiv gains are framed by Moscow as building a “security zone” along the Russian border.

By early summer (June), Gerasimov reported that Russian forces were continuing the liberation of “Donbass and Novorossiya,” advancing on all fronts. The 3rd Army was advancing toward Slavyansk and Kramatorsk — liberating Piskunovka, reaching the outskirts of Nikolayevka, and reported to be less than 5 km from the eastern edge of Kramatorsk, with the capture of Krasny Liman (Lyman) said to be due soon.

Battlegroup West advanced on a broad front; in the Kupyansk area, having repelled Ukrainian attempts to break through to western Kupyansk, with assault units pushing west toward Shevchenkovo. In the Dobropolye area north of Krasnoarmeysk, fighting in Dobropolye and Annovka, with Lenina (Ukrainian name Mirnoye) taken and Shevchenko, Krasnoyarskoye, and Svetloye reported as liberated.

In July TASS counted 32 settlements liberated, with 22 of them — over 68 percent — in Kharkiv Region and the DPR. By battlegroup: North took ten, Center eight, West six, East five, and South three, and the month’s most significant developments were the liberation of Konstantinovka in the DPR by Battlegroup East and the capture of Belitskoye by Battlegroup Center. Konstantinovka is one of the four Donetsk fortress belt cities.

At present the Russians are driving on the last major Ukrainian-held Donetsk agglomeration — the Konstantinovka–Druzhkovka–Kramatorsk–Slavyansk belt — alongside the Sumy/Kharkiv border zone and consolidation in Zaporozhye and Dnepropetrovsk.

Along with the ground operations in eastern Ukraine, Russia has ended Ukraine's ability to conduct maritime and trade operations from Odessa and Nikolaev since July 22nd.

Ukrainian farmers will not be able to export products via the Black Sea ports and western supplies, which once flowed freely through Odessa. Ukraine’s maritime lifeline is severed and will not be in operation until after the war with Ukraine is over.

Finally, there is the daily Russian missile and drone attacks on Kiev and other key Ukrainian logistics and military hubs. The destruction of factories and warehouses is effectively bleeding Ukraine dry. The West persists in painting the war in Ukraine as a crusade that sits on the threshold of victory, but the realities on the ground tell a dramatically different, grim story… Ukraine is losing.

Tyler Durden Wed, 08/05/2026 - 23:25

End Of Cheap Food? Five Forces Set To Drive Grocery Bills Even Higher

Zero Hedge -

End Of Cheap Food? Five Forces Set To Drive Grocery Bills Even Higher

UBS analysts identified five long-term forces likely to keep global food inflation "structurally higher" above its pre-pandemic average of about 2.5%, crushing consumer hopes that price pressures will simply fade.

"While food inflation globally has fallen from the COVID peak, a new debate is emerging: is the c2.5% LT average obsolete?" London-based managing director and equity-research analyst Sreedhar Mahamkali asked in a note penned on Monday.

Mahamkali and his team outlined five long-term drivers of global food inflation:

1. Climate risk is global, although its intensity differs by geography and commodity. Academic research suggests climate change could add around 0.9 to 3.2 percentage points to annual global food inflation by 2035.

2. Weak farm profitability limits investment and supply responsiveness globally. The pressure is most visible where farms are small, fragmented or exposed to volatile inputs, although scale, subsidies and access to credit can provide greater protection in some markets.

3. Higher welfare standards are lifting costs in animal protein. UK and European poultry provide the clearest current evidence, but similar changes in stocking density, housing, biosecurity and traceability are emerging across several markets.

4. Labor costs are rising across the food chain. The effect is strongest in labour- intensive farming, processing, logistics, food service as well as the front-end retail, although productivity, automation and the availability of lower-cost labour produce meaningful regional differences.

5. Supply flexibility is constrained globally: some markets face limited land expansion and tighter standards, while others contend with underinvestment and climate vulnerability.

"We expect food-at- home to start regaining share from historical lows, suggesting higher spend in the Food Retail channel with potential tailwinds as we demonstrate with a UK case study. On the other hand, wallet share compression of the discretionary categories means food-away- from-home and non-food retail are more vulnerable," the analyst pointed out.

He expects food inflation to run above historical levels in the UK, Europe, Australia, Southeast Asia and China, while remaining broadly unchanged in the US and Latin America and declining in India:

The UK faces all five drivers, but a rational competitive landscape enables better pass- through, leaving it as the best-positioned retail market.

Europe too faces many of the pressures, but greater fragmentation dilutes pricing power. In the fragmented US, structural cost pressure is largely offset by competition, likely leaving inflation in line with history.

In Latam, Brazil is relatively insulated with moderate impacts from labour cost inflation, welfare standards and a better supply outlook aided by technology with the outlook the same as history.

By contrast, ASEAN sees a sticky underlying cost base and a potential El Niño in H2 suggesting sustained pressure. China is likely to see a gradual increase in food inflation as external cost pressures are effectively transmitted.

Higher operating costs persist in Australia with regulation/welfare standards leading to higher inflation with some costs likely absorbed by retailers. India is the exception, benefiting from policy intervention and productivity gains with lower inflation than in the past.

Visualizing: Food prices could keep rising faster than they did before Covid, remaining above the historical average of about 2.5% annual inflation. Several long-term pressures are making food permanently more expensive.

For the food inflation narrative to continue, the analysts outlined what they are tracking over the next six months:

Here are the winners and losers under different food inflation scenarios:

Five out of eight regions are likely to see higher inflation:

The era of cheap food may be ending. Food inflation could further ignite as other Wall Street desks warn about El Niño risk developing and Professional subscribers can read those notes here at our new Marketdesk.ai portal. 

Tyler Durden Wed, 08/05/2026 - 23:00

US Lifts Sanctions On Iraqi Airline Blacklisted Over IRGC Ties

Zero Hedge -

US Lifts Sanctions On Iraqi Airline Blacklisted Over IRGC Ties

Via The Cradle

The US Office of Foreign Assets Control (OFAC) lifted sanctions on Iraq's Fly Baghdad Airlines and two of its aircraft on Wednesday, clearing a carrier Washington had blacklisted in January 2024 over alleged support for Iran's Islamic Revolutionary Guard Corps (IRGC) Quds Force. 

The Baghdad-based carrier was delisted from the Specially Designated Nationals (SDNs) list under each of its three registered names, Fly Baghdad Airlines Company, Fly Baghdad, and Iraq Express.

@JetPhotos

Two Boeing 737 aircraft flown by the airline, carrying the tail numbers YI-BAF and YI-BAN, were removed from the list at the same time.

A US Treasury official, who spoke anonymously, told AFP that the airline had cleared the department's administrative reconsideration process.

"FBA (Fly Baghdad Airlines) has demonstrated major changes to their operations such that their listing is no longer warranted," the official said.

The same official said the delisting is "not indicative of any shift in US policy toward the Government of Iran, the Islamic Revolutionary Guard Corps-Qods Force, any designated terrorist organization, or any person who supports or acts on behalf of any of these."

Not every restriction tied to the airline has been dropped. Basheer Abdulkadhim Alwan al-Shabbani, the Iraqi national identified as the company's owner when the sanctions were first imposed, remains blacklisted.

His entry was rewritten so that the designation now cites the IRGC Quds Force directly instead of Fly Baghdad.

Washington first designated the airline, its aircraft, and its owner in January 2024, alleging the company supported Iran’s Quds Force and allied groups in Iraq, Syria, and Lebanon.

The delisting comes amid a broader US sanctions campaign that continues to target Iran’s IRGC-linked logistics and aviation networks. 

Just last week, Washington sanctioned entities tied to Mahan Air, which it alleges helps move weapons, personnel and equipment for the IRGC Quds Force. 

The action also hit support firms in China, India and Russia that Treasury says served as the airline’s sales agents and logistics intermediaries.

Tyler Durden Wed, 08/05/2026 - 22:35

China Is Betting AI, Hypersonic Missiles And Quantum Technology Will Define The Next Era Of Warfare

Zero Hedge -

China Is Betting AI, Hypersonic Missiles And Quantum Technology Will Define The Next Era Of Warfare

As China races to modernize its armed forces, its strategy is increasingly centered on developing technologies that could offset America's traditional military advantages instead of matching the U.S. system for system, according to the South China Morning Post.

That philosophy dates back to Unrestricted Warfare, a book published in 1999 by former PLA strategist Qiao Liang. Rather than copying America's arsenal, Qiao argued China should focus on capabilities Washington lacks. Nearly three decades later, he says the concept still applies. Modern militaries, he said, are now "building weapons for the wars they expect to fight, rather than fighting wars with the weapons they possess."

With the People's Liberation Army approaching its 100th anniversary next year, Beijing is expected to unveil another round of modernization goals as it works toward Xi Jinping's objective of creating a "world class military" by 2049. Analysts say the focus has shifted beyond simply catching the United States. China wants to help define the next era of warfare through artificial intelligence, quantum technology, hypersonic missiles, laser weapons and autonomous systems.

That ambition is perhaps most visible in aviation. The public appearance of China's tailless sixth generation fighter prototypes has fueled speculation that Beijing could be setting the pace in next generation air combat. Military analyst Fu Qianshao called the development "a landmark event," arguing that China is no longer just following trends established by the United States and Russia.

SCMP writes that future battlefields, analysts say, will revolve around connected, intelligent systems rather than individual weapons. Piloted aircraft may direct fleets of drones, armored vehicles could become mobile command and sensing platforms, and combat operations will increasingly link forces across land, sea, air, space and cyberspace with artificial intelligence playing a growing role in decision making.

China is investing heavily across that spectrum. The PLA has accelerated work on advanced aircraft carrier technology, AI powered drone swarms, underwater autonomous vehicles, electronic warfare and high performance computing. Much of that development is supported through Beijing's military civilian fusion strategy, which combines military research with universities and private technology companies.

Among the most closely watched programs are hypersonic weapons, quantum communications and artificial intelligence. China is widely regarded as a leader in hypersonic missile development and has spent years building quantum communication networks that could strengthen secure military communications. AI is already being tested for intelligence analysis, battlefield planning and autonomous drone operations.

Chinese planners have also closely studied the wars in Ukraine and the Middle East, where drones have transformed modern combat. That has accelerated work on laser and microwave based air defense systems designed to defeat large drone swarms before they can reach their targets.

Even so, analysts caution that emerging technologies are unlikely to replace traditional military power on their own. Instead, they are expected to strengthen existing forces by making conventional ships, aircraft, missiles and ground units faster, more connected and more effective while introducing new opportunities and new risks.

Tyler Durden Wed, 08/05/2026 - 22:10

Former Haitian Police Officer And Naturalized US Citizen Pleads Guilty To Gun Running

Zero Hedge -

Former Haitian Police Officer And Naturalized US Citizen Pleads Guilty To Gun Running

Authored by Michael Clements via The Epoch Times,

A naturalized U.S. citizen and former Haitian National Police officer pleaded guilty to smuggling at least 140 firearms to Haiti.

Soldiers patrol amid the sound of gunshots heard in the distance in Port-au-Prince, Haiti, on Oct. 17, 2024. Odelyn Joseph/AP Photo

Jean Robert Casimir, 53, of Lauderhill, Florida, pleaded guilty in U.S. District Court for the District of Columbia to conspiracy, smuggling, and violation of the Export Control Reform Act on Tuesday, Aug. 4.

According to court records, Casimir admitted to engaging in an extensive firearms trafficking operation since 2020.

He was arrested on Dec. 16, 2024, in Lauderhill and indicted on Jan. 23, 2025. His sentencing is set for Dec. 4.

Casimir told the court that from August 2020 through December 2024, he illegally exported guns from the United States to Haiti without the required license from the Department of Commerce's Bureau of Industry and Security.

He told the court he purchased the guns for his security business, which hires off-duty Haitian National Police officers to provide armed security for people visiting the island.

According to an arrest warrant affidavit, Homeland Security investigators saw photographs of firearms used by Haitian gangs in which serial numbers were clearly visible. The affidavit stated that the guns were traced back to legal purchases Casimir made at a Florida gun store in 2020.

Casimir denied selling guns to gang members. He said the guns were stolen from one of his employees during a robbery.

To smuggle the firearms, Casimir and his co-conspirators disassembled the guns, encased them in a foam insulating material and sealed them in industrial air compressors they had cut open and welded back together. They shipped the air compressors to Haiti from Miami.

The investigation was a combined effort by the FBI Miami Field Office, Homeland Security Investigations (HSI) Washington, D.C., and HSI Miami with assistance from the Bureau of Alcohol, Tobacco, Firearms and Explosives and U.S. Customs and Border Protection.

The case is being prosecuted by U.S. Attorneys from the District of Columbia and the U.S. Department of Justice (DOJ) National Security Division, with assistance from the U.S. Attorney's Office for the Southern District of Florida.

According to a DOJ press release, the case is part of a Homeland Security Task Force (HSTF) initiative to eliminate criminal cartels, foreign gangs, transnational criminal organizations, and human smuggling and trafficking rings operating in the United States and abroad.

"Through historic interagency collaboration, the HSTF directs the full might of U.S. law enforcement towards identifying, investigating, and prosecuting the full spectrum of crimes committed by these organizations," the press release states.

According to data released by the United Nations Human Rights Office, there are an estimated 270,000 to 500,000 illegal weapons in circulation in Haiti, even though country does not manufacture guns or ammunition.

Haiti has been overrun by armed gangs and vigilante groups for more than a decade.

Political corruption and natural disasters have destabilized the country. As the government struggled to deal with the crises, powerful gangs took control of various areas, including the capital, Port au Prince.

Armed off-duty police officers take cover during an exchange of gunfire with army soldiers as they protest over police pay and working conditions in Port-au-Prince, Haiti, on Feb. 23, 2020. Dieu Nalio Chery/Ap Photo Tyler Durden Wed, 08/05/2026 - 21:45

Declassified Documents Show FBI Probed Whether Trump Fired Comey At Russia's Direction

Zero Hedge -

Declassified Documents Show FBI Probed Whether Trump Fired Comey At Russia's Direction

Authored by Zachary Stieber via The Epoch Times,

Newly declassified documents show the FBI probed President Donald Trump's termination of the agency's director as part of an effort to substantiate allegations that Trump colluded with Russia.

Former FBI Director James Comey in Berlin, Germany, on June 19, 2018. Carsten Koall/Getty Images

The documents, declassified by a White House task force on Aug. 5, refer to Trump's firing of FBI Director James Comey on May 9, 2017.

In one of the documents, dated May 16, 2017, the FBI said it was opening an investigation "based on an articulable factual basis that reasonably indicates that President Donald J. Trump may be or has been, wittingly or unwittingly, involved in activities for or on behalf of the Government of the Russian Federation which may constitute violations of federal criminal law or threats to the national security of the United States."

The goal of the investigation "is to determine if President Trump is or was directed by, controlled by, and/or coordinated activities with, the Russian Federation in a manner constituting a threat to the national security of the United States and/or a violation of federal criminal statutes," the document states.

The investigation, codenamed Oxferd Comma, would also look into whether Trump and "others yet to be named" obstructed or conspired to obstruct any related FBI investigations, according to the document.

That included whether Trump's firing of Comey was linked to the FBI probing Russian efforts to influence the 2016 election, the document said.

Comey was fired after officials determined he mishandled a probe into then-Secretary of State Hillary Clinton's use of a personal server to send classified emails, including announcing without clearance from the attorney general that the case should be closed without prosecution, according to a memorandum from then-Deputy Attorney General Rod Rosenstein to the attorney general that was later made public.

Trump said shortly after Comey's termination that he fired Comey due to his mishandling the probe of Clinton, who ran against Trump in the 2016 election.

The document opening the probe said that Trump's rationale for firing Comey "has changed over time."

While Trump initially in public attributed the decision to conclusions from Rosenstein and then-Attorney General Jeff Sessions, and the White House said in a statement that the firing had "nothing to do with Russia," Trump said in a television interview several days later that he was going to fire Comey regardless of the recommendation from Department of Justice officials because "this Russia thing with Trump and Russia is a made up story."

James Baker, the FBI's general counsel at the time, and William Priestap, the FBI's assistant director for counterintelligence at the time, signed off on the probe, and other top FBI officials, such as acting FBI Director Andrew McCabe, were aware of the investigation, according to the document and other papers.

The White House Government Transparency Task Force declassified and released the documents.

Trump created the task force in May to advise him on documents "that should be declassified and/or released to the public to further his administration's priorities of transparency and accountability," according to a July 13 statement from the task force.

John Solomon, chairman of the task force, said in a statement released by the White House that evidence when the investigation was opened already undercut suspicions that Trump was acting as a Russian asset, including testimony from FBI special agent William Barnett.

The White House declined to comment.

The FBI did not respond to a request for comment by publication time.

The probe into Trump's termination of Comey was closed on April 9, 2019, after special counsel Robert Mueller concluded that there was no evidence to support claims that Trump and his campaign colluded or coordinated with Russia.

"The Special Counsel provided the Attorney General with a confidential report explaining his prosecution and declination decisions," the document outlining the closing of the investigation reads.

Tyler Durden Wed, 08/05/2026 - 20:55

Fresh Panic As Pentagon Has Used 'Virtually All' Its Long-Range Precision Missiles On Iran

Zero Hedge -

Fresh Panic As Pentagon Has Used 'Virtually All' Its Long-Range Precision Missiles On Iran

US forces "used up virtually all" of their precision, long-range missiles during the course of the Iran war, and during the earlier heavy US-Israeli campaign of Operation Epic Fury, Reuters reported Tuesday.

This has raised serious "concerns about the military's ​readiness for future conflicts," informed sources told the outlet. In particular it is the Army Tactical Missile Systems (ATACMS) and Precision Strike Missiles (PrSM) which are said to be running critically low.

US Army file image

"Washington has used virtually all of these weapons," two sources told Reuters, after several media reports and think tank studies had already sounded the alarm over dwindling missiles amid both the Iran war and in the years-long process of supplying Ukraine. Low Patriot defense missile supplies have also been a persisting issue in the headlines.

They are costly and time-consuming in terms of manufacturing replacements. For example a single ATACMS munition costs about $1 million.

One immediate consequence could be that if heavy bombardment of Iran starts up again, the US would have to conduct riskier piloted aerial bombings - instead relying on longer range precision strikes afforded by the land-based systems at safer distances.

And another, somewhat obvious consequence, is highlighted in the following: "But as ​the war drags on, the three people familiar with the matter expressed worry that the falling missile supplies could limit the U.S. ability to deter adversaries, including Russia and China."

The report added: "A fourth person ⁠familiar with the matter said that while Central Command — which oversees U.S. forces in the Middle East — has nearly used up the land-based missiles it had before the war began, it has been able to reload from U.S. military supplies elsewhere in the ​world."

President Trump has of late responded to these now widespread reports of badly depleted advanced munitions, explaining that "Our defense companies are, at this moment, making more munitions than they have ever made before, ​in addition to expanding their plants and equipment at record levels."

Additionally,  Secretary of War Pete Hegseth took to social media to refute the report, calling it false news.

“That banner is NOT TRUE, CNN. Shame on you,” the Pentagon chief said in a post on X. “We don’t hate the Fake News media enough.”

Hegseth was specifically referring to a CNN on-screen banner that read: “Sources: U.S. has used nearly 80% of key missile interceptors in Iran war, top commanders warn stockpiles dangerously low.”

However, the Reuters report has set off speculation that Trump's weekend backtracking on planned 'harder' Iran strikes could have been in part because the Pentagon has warned of waning supplies and capabilities regarding conventional way of doing long-range missile strikes.

Critics of the decision to go to war in the first place have warned over this very scenario of exhausting Pentagon stockpiles. Those against this war of choice say that it's the opposite of America First - and that ultimately the war is about protecting Israel and not necessarily American security and interests.

The reality also is that in the opening days of Operation Epic Fury, the US seemed underprepared for the ferocity of the Iranian response. At least 13 American bases in the region were hit and damaged in just the opening weeks of the war, to the point that US forces across the region had to be moved back from front line Gulf areas, and energy sites across the region were pummeled and suffered billions of dollars in damage.

Tyler Durden Wed, 08/05/2026 - 20:30

China's Power Demand Hits Records As Heatwave Grips Key Regions

Zero Hedge -

China's Power Demand Hits Records As Heatwave Grips Key Regions

By Irina Slav of OilPrice.com

Electricity demand in much of China hit a record this week due to scorching summer temperatures, driving grid loads to all-time highs, the State Grid Corporation of China said today, as cited by Reuters.

On Monday and Tuesday, the company said, electricity loads reached a record in the country’s northern, northeastern, and eastern regions. No blackouts have been reported, however, as the grid operator moves in time to direct more baseload electricity where it is needed for air-conditioning.

According to forecasts from the Chinese state meteorological agency, temperatures across much of China will remain high, in some cases potentially reaching or even exceeding historical peaks, the Reuters report also noted.

In January this year, State Grid Corporation of China, the world’s largest utility enterprise covering 88% of China’s land area and serving over 1.1 billion people, said it planned to spend $574 billion (4 trillion Chinese yuan) on fixed-asset investments for the five years to 2030, as part of its 2026-2030 investment plan.

The sum is 40% higher than what the State Grid Corporation of China spent in the previous five-year investment period to 2025. The company will use the money to upgrade and expand the power transmission and distribution systems amid a surge in renewable energy capacity installations and a continued rise in electricity demand.

China is the world’s biggest builder of wind and solar, but it has also expanded its coal-powered generation capacity to ensure stable supply that can respond to demand changes in a timely fashion. Yet the country is also building out its battery storage capacity to be able to utilize more of its wind and solar electricity output. China plans to have its battery storage capacity more than double to 180 gigawatts by 2027 in a new plan aimed at attracting $35.1 billion (250 billion yuan).

Tyler Durden Wed, 08/05/2026 - 20:05

Federal Operation Takes More Than 800 Dangerous Truckers Off US Highways

Zero Hedge -

Federal Operation Takes More Than 800 Dangerous Truckers Off US Highways

Authored by Kimberly Hayek via The Epoch Times,

Federal authorities took more than 800 dangerous truckers off America's roads in a three-day enforcement action, officials revealed Tuesday. In the operation, they targeted unqualified foreign drivers and unsafe commercial vehicles.

A truck drives through the Port of Oakland in Oakland, Calif., on Nov. 14, 2025. California has revoke 17,000 commercial driver’s licenses improperly issued to foreign drivers, about 2.5 percent of all commercial licenses in the state. Justin Sullivan/Getty Images

The most recent wave of Operation Highway Shield was conducted from July 28 to July 30. Inspectors from U.S. Immigration and Customs Enforcement's Homeland Security Investigations collaborated with the Federal Motor Carrier Safety Administration and state highway patrols. They conducted roadside checks on illegal, unvetted drivers and vehicles that failed basic safety standards.

Officers detained 51 illegal immigrants over the course of three days, including 21 drivers holding non-domiciled commercial driver licenses issued by California and New York. Authorities placed 766 unsafe drivers and vehicles out of service. They arrested 86 operators for dangerous behavior, such as road rage and domestic violence. Officials issued 36 violations for failing English language proficiency tests, and nearly $1 million in stolen cargo was recovered.

Department of Homeland Security (DHS) Secretary Markwayne Mullin and Department of Transportation (DOT) Secretary Sean Duffy announced the early results. Mullin underscored the risks unqualified drivers pose when they are behind the wheel of large trucks.

"When illegal aliens are behind the wheels of semi-trucks, they are putting American lives in danger," DHS Secretary Markwayne Mullin said in an X post.

Duffy said the effort was part of President Trump's directive to secure roads, eliminate fraud, and restore integrity to the trucking industry.

"Every life lost from an illegal trucker behind the wheel of a big rig is a completely preventable tragedy - and this administration will not stand for it," Duffy said.

"If you continue to illegally operate a big rig - your days on America's streets are numbered," the Secretary warned.

Last month, DHS and DOT announced a partnership in an effort to probe fraudulent and illegal practices at commercial driver license schools. Officials have said the schools issue credentials to unqualified individuals, including illegal immigrants, allowing them to drive semi-trucks on public highways.

Roadside inspections entail officers checking licenses, testing language proficiency required for reading road signs and understanding instructions, examining vehicle condition, and reviewing driver records. Failures in any of those areas can lead to immediate out-of-service orders. The targeted driver or vehicle can no longer be operated until deficiencies are fixed or the driver is removed from the road.

English language proficiency has become a key area of focus. Federal rules require commercial drivers to be capable of communicating sufficiently in English to understand highway signs, respond to law enforcement, and handle emergencies.

Tyler Durden Wed, 08/05/2026 - 19:15

Tit-For-Tat: China Hits Back At US With Tighter Drone Export Controls

Zero Hedge -

Tit-For-Tat: China Hits Back At US With Tighter Drone Export Controls

Sino-US relations are showing renewed signs of deterioration ahead of President Xi Jinping's expected visit to the US in late September. Beijing is retaliating against a series of recent U.S. trade restrictions.

The Financial Times reports that the Commerce Ministry is set to review exports of drones, critical components, and related dual-use technologies on a "case-by-case basis." The report did not mention the exact details.

The ministry also barred Chinese companies from dealing with Applied DNA Sciences and five other U.S. entities accused of "supporting illegal U.S. sanctions concerning Xinjiang."

The ministry's announcements come as the Trump administration has added 43 Chinese companies to its forced-labor import blacklist and imposed tighter Federal Communications Commission restrictions on Chinese drones, routers, telecommunications equipment, and other high-tech devices.

Here's the reporting on US restrictions:

The "measures seriously violate the important consensus reached by the two heads of state and severely damage China's legitimate rights and interests. China has no choice but to take necessary countermeasures in response," the ministry wrote in a statement.

Uncertainty surrounding Beijing's drone export controls should concern U.S. hobbyists and commercial operators. China remains the epicenter of the global drone industry and is home to major manufacturers, including DJI, Autel Robotics, and XAG, leaving US buyers exposed to potential disruptions in drones, components, and replacement parts.

Looking ahead, Xi is expected to arrive at the White House on September 24 for a meeting with President Trump.

"President Xi is coming over on September 24, and ‌we talked about it (artificial intelligence) when I was over in Beijing, and we'll be talking about it again," Trump recently said.

Polymarket odds have Xi's US visit at 93% odds.

//--> //--> Will Xi Jinping visit US before 2027?
Yes 93% · No 8%
View full market & trade on Polymarket

The only problem here is that shell companies and intermediaries can often find workarounds to corporate sanctions. That became clear earlier this year when banned Nvidia AI chips ended up in China.

Tyler Durden Wed, 08/05/2026 - 18:50

Argentina's Milei: Ending the Debt State By Holding Politicians Personally Accountable For Fiscal Excess

Zero Hedge -

Argentina's Milei: Ending the Debt State By Holding Politicians Personally Accountable For Fiscal Excess

Submitted by Thomas Kolbe

Only contrast reveals one's own mistakes. Javier Milei is the antithesis of Germany's political class, and the comparison could hardly be starker.

While Germany continues to expand the state, Argentina is slashing subsidies and radically reducing the size of its public bureaucracy. While Berlin piles up enormous amounts of public debt, Buenos Aires is posting a primary budget surplus. Friedrich Merz believes in the healing powers of state intervention, whereas Milei is deregulating markets and paving the way for an investment boom.

Argentina has achieved an economic turnaround while Germany continues its economic decay. Argentina's economy is growing steadily, private-sector employment is expanding, and the poverty rate is falling rapidly.

At a time when Germany is doubling down on debt, the arms industry, and green state planning, Milei appears like a comet defying both political gravity and conventional doctrines of government.

The Argentine president's latest initiative is the so-called "Grillete Fiscal"—literally, the "Fiscal Shackles."

Behind the martial name lies what amounts to a fiscal revolution. Milei first unveiled the proposal in his characteristically entertaining style during a televised address to the Argentine people. The bill must still be approved by Congress, where his party, La Libertad Avanza, is expected to secure the support of allied parliamentary factions in both chambers.

Although Milei lacks a parliamentary majority of his own, his alliances have thus far proved remarkably resilient.

If enacted, the legislation would break with one of modern politics' unwritten rules: the assumption that governments can always buy votes with higher spending, higher taxes, and ever more debt. The business of burdening future generations and taxpayers with politically manufactured credit expansion would, at least for the time being, come to an end.

Milei's idea is straightforward: future Argentine governments should have their wings clipped before they are even able to take flight on another debt-financed spending spree.

The mechanism is equally straightforward. Should the federal budget remain in deficit for several consecutive months, Congress would be given a deadline to restore fiscal balance. Failure to do so would automatically trigger a U.S.-style government shutdown. Non-essential government activities would be suspended automatically—without further parliamentary debate or political horse-trading. The President, Vice President, cabinet ministers, state secretaries, and every member of both houses of Congress would receive not a single peso in salary until the budget is balanced once again.

Furthermore, all new spending would be frozen. No new contracts could be awarded, and no additional public employees could be hired. Even more striking, discretionary transfers from the federal government to Argentina's provinces would also be suspended.

At the same time, the law deliberately protects the state's core responsibilities. Pension payments, healthcare services, unemployment benefits, as well as the salaries of police officers, members of the armed forces, and correctional staff would remain fully exempt from these austerity measures.

For Germany's statists, such a proposal is almost unthinkable. Rather than engaging with Milei's ideas or his policies, they prefer to ignore him altogether. For Chancellor Friedrich Merz, Milei has become something of a red flag. On one occasion during a televised interview, Merz claimed that the Argentine president was ruining his country and trampling on its people.

A typical Merz response. The German chancellor views the world through a prism that distorts reality. He speaks like a genuine believer in the omnipotent state—a conviction that has never been shaken by a lifetime spent safely within the political establishment.

Then, every once in a while, someone breaks ranks within Germany's left-wing consensus and says out loud what many of them truly think about Milei. He is supposedly "authoritarian," they claim, and a threat to human rights. In April of this year, Germany's Left Party even introduced a parliamentary motion describing Milei as "ultra-neoliberal." Coming from one of Germany's most statist political parties, such a label should be taken as a compliment. It says far more about the intellectual limitations of its authors than about Milei himself.

What is both striking and disturbing is how closely the German chancellor's rhetoric has drifted toward the coarse vocabulary traditionally associated with the political left.

Yet even Javier Milei cannot truly satisfy Germany's libertarians. Their intellectual figurehead, Hans-Hermann Hoppe, the former University of Nevada, Las Vegas professor and a student of Murray Rothbard, complained only months into Milei's presidency that he had failed to deliver on his central campaign promise: abolishing the central bank.

The criticism exposes a fundamental weakness of many libertarians: they inhabit the theoretical world of textbook logic. Within that framework, it seems inconceivable that abolishing the central bank overnight could derail Milei's entire presidency. It requires little imagination to picture the alternative—a financial collapse followed by the fall of the government, precisely the kind of scenario that would jeopardize Milei's entire reform project.

But it is not Milei's job to please everyone. In the end, every successful political leader disappoints almost every constituency. He hands out no favors and makes no empty promises. His uncompromising austerity program is detoxifying the state, restoring market economics, dismantling subsidies—and turning into losers all those who had long lived off the public purse without productive contribution, sustained by political patronage rather than genuine economic necessity.

If Milei stays the course and Argentina continues to regain stability, he is likely to go down in the nation's history as a libertarian reformer who combined conviction with prudence. Germany's statists—from Friedrich Merz and Lars Klingbeil to Ursula von der Leyen—would do well to prepare themselves. They may ignore him, ridicule him, or insult him, but reality has a habit of quietly making its way into people's minds.

As Nietzsche wrote in Thus Spoke Zarathustra: "Thoughts that come on dove's feet guide the world." Sometimes, however, they arrive accompanied by the roar of a chainsaw.

* * * 

About the author Thomas Kolbe, a German graduate economist, has worked for over 25 years, he has worked as a journalist and media producer for clients from various industries and business associations. As a publicist, he focuses on economic processes and observes geopolitical events from the perspective of the capital markets. His publications follow a philosophy that focuses on the individual and their right to self-determination.

Tyler Durden Wed, 08/05/2026 - 18:25

Japan Looks To Palantir For Battlefield AI

Zero Hedge -

Japan Looks To Palantir For Battlefield AI

Japan is preparing to introduce AI into the command-and-control systems of its Self-Defense Forces as part of a wider military modernization effort aimed at improving operational speed and interoperability with the United States, according to Nikkei. 

Under the proposal, multiple U.S.-developed AI platforms would support commanders by processing battlefield data, assisting with tactical decisions, and coordinating operations across missions such as missile defense, counterstrikes, and drone deployments. The initiative is expected to be incorporated into revisions of Japan's national security strategy later this year as the government reshapes its defense posture over the next five years.

Among the technologies under consideration are Palantir's Maven Smart System, which analyzes intelligence and recommends targets and tactics, and Anduril's Lattice AI, which fuses information from sensors into a single operational picture while enabling autonomous coordination of drones and other assets in contested environments.

Nikkei reports that Japan currently lacks AI-enabled command systems, but officials see the technology as essential for keeping pace with increasingly data-intensive and fast-moving military operations. As cooperation with U.S. forces deepens, particularly following the launch of the Joint Operations Command in 2025, narrowing the gap in decision-making speed has become a growing priority.

At the same time, Tokyo is seeking to avoid long-term dependence on foreign technology. One proposal would place a Japanese-developed AI layer above the U.S. systems to determine which model is best suited for a given task. Sakana AI's Fugu, designed to orchestrate multiple AI models, has emerged as a leading option for this role and already works with Japan's Defense Ministry.

The government also plans to host the supporting data infrastructure within Japan to better protect sensitive military information. Even so, officials acknowledge that maintaining compatibility with U.S. AI platforms will be critical, creating a balance between rapidly adopting proven foreign technology and preserving the flexibility to transition to domestic AI capabilities in the future.

Tyler Durden Wed, 08/05/2026 - 18:00

OpenAI, Anthropic Models Created Fake Profiles, Tried To Trick Humans During Cyber Tests

Zero Hedge -

OpenAI, Anthropic Models Created Fake Profiles, Tried To Trick Humans During Cyber Tests

Authored by Naveen Athrappully via The Epoch Times,

Artificial Intelligence (AI) models from Anthropic and OpenAI carried out unsanctioned actions targeting multiple people and organizations during a cyber evaluation, according to the UK AI Security Institute (AISI).

Illustration of Anthropic on June 18, 2026. Riccardo Milani/Hans Lucas via AFP via Getty Images

AISI, which receives access to advanced AI models under voluntary agreements from major labs, put the agents through a fictional cybersecurity scenario to test capabilities.

The organization tested multiple AI models on two cyber challenges between July 25 and 28. In total, the challenges were run 122 times across several models, and in 19 cases, the AI models took "unsanctioned action on the live internet, including cases that targeted real people and organisations," AISI said in an Aug. 4 report.

Out of these, 17 were done by Anthropic's Mythos 5 model and two by OpenAI's GPT 5.6 Sol model.

"This is the first time AISI has seen deception of this severity that was targeted at a real person, unprompted, in the real world. It is uncertain to what extent the model recognised it was taking actions against real people," AISI stated in the report.

In the most serious incident, Mythos 5 tried to solve a cyber challenge by attacking GitHub, a cloud service that allows developers to store and manage code. The AI created a GitHub account and tried to get a malicious code approved by humans. Mythos 5 also created a second GitHub account, masquerading as another human user endorsing the malicious code. When a human reviewer caught the activity, the AI agent "falsely claimed to have made an honest mistake" and then repeatedly tried to reintroduce the malicious content by claiming the code was fixed.

Mythos 5 also sent multiple emails to two developers in an attempt to manipulate the recipients into running its malicious code.

According to AISI, the test runs of the various models did not result in any real-world harm. The organization said it was treating the AI actions as a "serious security incident" that requires further scrutiny.

AISI listed multiple factors that could have led to AI models acting in a concerning manner. The AIs were provided with internet access during the tests, which allowed them to carry out the unsanctioned actions.

AISI had also deliberately disabled the models' cyberclassifiers during tests. Cyberclassifiers are systems aimed at preventing misuse.

The AI models were also not explicitly told what they were prohibited from doing on the internet, AISI said, adding that clearer instructions may have prevented the unsanctioned actions.

In an Aug. 4 blog post, AISI said that since the behavior of AI models happened under specific conditions, it cannot say how likely such behavior will be in different contexts.

"What we can say is that the behaviour was possible, sustained, and new; that alone warrants attention," the organization said.

In an Aug. 4 post on X, Anthropic said that Mythos 5 and ChatGPT 5.6 Sol models attempted to complete their assignments in an environment where they were deliberately provided internet access and their normal safeguards were removed.

Due to the absence of specific restrictions on how the internet must be navigated and lack of safeguards, the models were tested under conditions that are "not representative of any of our production models," Anthropic said, adding that there was no evidence in these tests of an AI escaping from a secure environment.

According to the company, it was closely working with AISI to access more details on the incident while carrying out an internal investigation on the matter.

OpenAI said in an Aug. 4 statement that it appreciated AISI's partnership throughout the evaluation process, including the organization's work to identify, investigate, and share details about the activity of the GPT 5.6 Sol model in their tests.

"We look forward to continuing our collaboration together," the company said.

The Epoch Times reached out to Anthropic and OpenAI for comment but did not receive a response by publication time.

OpenAI was in the midst of another controversy last month after it admitted on July 28 that its models bypassed restrictions during an evaluation. In this case, the company was testing its models' capabilities in carrying out cyberattacks.

AI startup Hugging Face was impacted in the test. On July 16, the startup said it detected an intrusion into its data processing systems. It was only later that the startup learned that the intrusion was carried out by an OpenAI model.

HuggingFace then worked with OpenAI to contain the attack, the startup's CEO, Clement Delangue, said in a July 22 post on X, calling it "an attack unlike anything we've seen before."

"This is day one for cybersecurity in the age of agents & we're all learning that secrecy is not the answer & that all defenders (not just a few selected ones) everywhere need more powerful models without restrictions, especially open ones," Delangue said.

A robot hand reaches out to the letters AI (Artificial Intelligence) in an image taken at an undisclosed location on June 23, 2023. Dado Ruvic/Reuters Tyler Durden Wed, 08/05/2026 - 17:40

Jim Cramer Just Sold His Bitcoin And Bulls Couldn't Be Happier

Zero Hedge -

Jim Cramer Just Sold His Bitcoin And Bulls Couldn't Be Happier

Looks like $100,000 bitcoin may be on deck, because Cramer is selling.

The ultimate inverse indicator Jim Cramer says he is selling all of his bitcoin, warning that rapid advances in quantum computing could threaten the cryptocurrency’s security within the next three to four years, according to Cointelegraph and Coindesk.

The CNBC host made the decision after interviewing IBM CEO Arvind Krishna, who urged investors to be "paranoid" about the potential impact of quantum computers on modern cryptography. Cramer said the conversation convinced him it was time to exit his bitcoin position.

Crypto traders, however, largely shrugged off the warning. Instead, many celebrated the announcement, reviving the long-running "inverse Cramer" meme, which jokingly treats his bearish calls as bullish signals. "If Cramer is selling, it's time to start buying," one trader wrote on X.

Bitcoin barely reacted, continuing to trade around $64,000 despite Cramer's comments, a recent Coldcard security incident, and signs that large bitcoin holders have begun moving or selling coins as overall crypto trading volumes decline.

The quantum computing debate itself remains unsettled. Some analysts believe bitcoin may need to transition to quantum-resistant cryptography within the next several years, while others argue practical quantum computers capable of breaking Bitcoin's encryption are still decades away. Even if such a breakthrough occurs, experts note it would threaten far more than cryptocurrencies, potentially disrupting banks, governments, and nearly every digital system that relies on modern encryption.

Cramer's latest warning also comes with plenty of historical baggage. The television personality has become famous for making high-profile market calls that later proved spectacularly wrong, from recommending Silicon Valley Bank shortly before its collapse to repeatedly changing his stance on bitcoin over the years.

That track record has turned "inverse Cramer" into one of Wall Street's favorite running jokes, with many investors instinctively betting against his latest prediction rather than following it.

Tyler Durden Wed, 08/05/2026 - 17:20

MiB: Mike Kelly, President and CIO, Future Standard

The Big Picture -

 

This week, a special bonus episode!

I speak with Mike Kelly. He’s president and chief investment officer of Future Standard and a member of the firm’s management committee. We discuss his career on Wall Street, from his time at Omega Advisors and Tiger Management to his work today, including how he helped build Future Standard, a $90 billion multi-strategy platform for wealth management clients.

A transcript of our conversation is available below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, , YouTube (audio), and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business this weekend with Jack Raines, author of the new book, “Young Money: A Field Guide to Wealth and Purpose in Your Twenties.”

 

 

 

Transcript:

 

MASTERS IN BUSINESS: Mike Kelly
President and Chief Investment Officer, Future Standard
Host: Barry Ritholtz  ·  Bloomberg Radio  ·  Episode air date: August 5, 2026  ·  Running time 1:24

ANNOUNCER  00:00:02
Bloomberg Audio Studios, podcasts, radio, news. This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ  00:00:16
This week on the podcast, an extra special guest, Mike Kelly, has an absolutely fascinating career from Omega to Tiger, currently President and Chief Investment Officer at Future Standard. Really about as knowledgeable an individual as you’ll find covering private credit, infrastructure, and the wealth channel, and what the future of what we broadly call alternatives looks like. I thought this was fascinating, and I think you will also. With no further ado, my conversation with Mike Kelly.

Mike Kelly, welcome to Bloomberg.

MIKE KELLY  00:00:52
Thanks, Barry. It’s great to be here.

BARRY RITHOLTZ  00:00:54
So I’m fascinated by both your background and your career path, which is really, really interesting. But let’s roll back a little bit. Bachelor’s at Cornell, MBA from Stanford. What was the original career plan?

MIKE KELLY  00:01:12
So, taking a step back, I grew up on the border of Queens and Long Island. My dad was an NYPD cop in the South Bronx and in Queens. Mom raised the five of us kids in a traditional Irish American household and valued education.

I knew from a pretty early part of my life that I wanted to go into investing. I’ll tell you a little story. So when we turned 13 in my family, you got the big gift, and at the time I was a nerdy kid. I was into computers. My dad would drop me off at the Queens Village Public Library, and I would learn how to program on this Apple computer. They had just gotten the Apple IIe in. And for my 13th birthday, I asked my parents for — you got up to $300 — $300 of Apple stock. That was my request.

BARRY RITHOLTZ  00:02:07
Really? Wow.

MIKE KELLY  00:02:07
And the big day came. They gave me an envelope. I was really excited. I opened it up, and it was a savings bond for a local bank. And my parents noted the disappointment in my face and said, “You know what, Michael? We’re sorry, we don’t know how to buy stock.”

BARRY RITHOLTZ  00:02:25
This is, like, late eighties?

MIKE KELLY  00:02:26
This is ’83.

BARRY RITHOLTZ  00:02:26
’83, okay.

MIKE KELLY  00:02:26
So I said then and there, I am going to teach myself how to do this, how to invest in these companies. And I set out — I still have it, I have the notebook over here, I actually brought it with me — about stocks and all the things that I would read about investing and investing in the stock market. And so from an early, early part of my life, I wanted to go into investing.

And so throughout the years at Cornell, at the time, I did some great internships. One at a boiler room — they made a movie about that. One for Steve Wynn at the Mirage, which was exciting. And then I studied in Japan, studying the banking system there for one summer. And as I was coming back, the only firm that actually would interview me was Salomon Brothers. And so I wound up, fortunately, getting a job at Salomon Brothers.

BARRY RITHOLTZ  00:03:27
In what capacity? What would you do?

MIKE KELLY  00:03:27
In the financial institutions banking group.

BARRY RITHOLTZ  00:03:30
Okay. So you started as an i-banker, then—

MIKE KELLY  00:03:31
Started as an i-banker. Loved Salomon Brothers. Wound up going to the 42nd floor of Seven World Trade Center, which is where Michael Lewis wrote the book Liar’s Poker. So I wound up going to the fixed income trading floor for my third year and really got bit by the bug of markets. I knew I wanted to make the transition from investment banking over to the buy side. So as I headed off to Stanford Business School, that was my mission — to find my way into the buy side.

BARRY RITHOLTZ  00:04:05
So there’s a sort of urban legend that you kind of cold-called your way from Salomon Brothers into an internship with hedge fund legend Lee Cooperman at Omega. First of all, is that a true story? And if it is, walk us through that call.

MIKE KELLY  00:04:23
Right. So I was at Stanford and I knew I wanted to make this transition into the buy side. And in looking at the careers of the greatest minds in investing, they all seemed to be relegated to this corner of the market of hedge funds and private equity firms. We’re talking about the mid-nineties here, when people didn’t have a lot of understanding of what these firms actually did. But it struck me as an incredibly intense and exciting career path. Many of the people were very young and seemingly making a lot of money doing it, and really working on some dynamic investing strategies.

And so I had a directory. It was called the Van Hedge Fund directory. It was a printed-out piece of paper, like from a fax machine, and it had the names and addresses of, at the time, the top 25 hedge funds. So it had Bruce Kovner in there, and Paul Tudor Jones and George Soros. And so I went through this directory and literally called, from a payphone, these individuals.

BARRY RITHOLTZ  00:05:37
Come on. “Hey, Druckenmiller, it’s Mike Kelly.” That sort of call?

MIKE KELLY  00:05:42
Now, the disadvantage is most people were screening their calls. Their assistants were like, “Yeah, he’ll never call you back.” The advantage for me was one of those individuals, Lee Cooperman, often didn’t use an assistant and answered his own phone.

BARRY RITHOLTZ  00:05:58
He’s there at five in the morning, he’s there at eight at night. If you call outside of business hours, Lee’s the only guy in the office.

MIKE KELLY  00:06:05
And he picks up and goes, “Lee.” And that’s how he starts the conversation. “Mr. Cooperman, I’m a kid from the boroughs like you. I just want to break into the industry. I’ve worked at Salomon, but I’ve never been an investor before. I am willing to do whatever it takes. I am willing to sleep on my parents’ couch and work for you for free.”

And he said, “I only hire PhDs.”

BARRY RITHOLTZ  00:06:30
Really?

MIKE KELLY  00:06:30
And I said, “Well, I’m getting my MBA right now.” And he said, “No — poor, hungry, and driven.” And I was like, “Well, I’m all three of those. I check those boxes.” And he said, “Well, I’m a value investor and I like the price. You can come work for me for free.”

BARRY RITHOLTZ  00:06:47
No kidding. “I like the price.” Oh my God.

MIKE KELLY  00:06:50
I show up day one at Omega and Lee comes to me and says, “Let’s go to breakfast.” And I thought, this is amazing. I’m—

BARRY RITHOLTZ  00:07:00
In heaven.

MIKE KELLY  00:07:01
First day, and I’m going to breakfast with the legendary Lee Cooperman. So we go across the street — 100 Wall Street — we go across the street to an Au Bon Pain for breakfast, and we get to the counter, we order, and Lee turns to me and says, “You are buying.” So here I am, day one, and I’m already $30 in the hole in my illustrious investment career. But it turned out okay.

And that was how I got my start in the investment business, and in particular in hedge funds and the alternative investment business.

BARRY RITHOLTZ  00:07:36
That’s unbelievable. So after Omega, you leaped from Lee Cooperman to working under Julian Robertson at Tiger Management. How did that come about?

MIKE KELLY  00:07:47
So I had worked full-time after business school for Lee and for Omega Advisors. I received a phone call a few years later from Tiger Management. They were looking for someone in their macro trading and analyst group. And at that time, getting a call from Tiger was like getting a call from the New York Yankees. It was the illustrious, incredible firm. Was very honored and flattered, interviewed there.

BARRY RITHOLTZ  00:08:14
Let me interrupt you a second just to remind listeners that the 1980s and 1990s were peak hedge fund years. They were masters of the universe. They put up the best numbers. For any investor that wanted to allocate to them, it was not easy to get into any of those funds. The world changed after the financial crisis, but that was the golden era of hedge funds, wasn’t it?

MIKE KELLY  00:08:41
Most definitely. And I think what I appreciated the most about those first few firms I worked at — Salomon, Omega Advisors, Tiger Management — there was a commonality of culture, in that these were very intense work environments with very intellectually curious individuals who were super smart but liked to have fun, and were a joy to be around and learn from. And so I really enjoyed the aspects of the culture of those environments in my early career and really got a lot out of it. And it really appealed to my personality, kind of an obsessive, intense personality. So I really enjoyed that.

But going to Tiger was incredible. A very young group of people who have obviously gone on to do great things in their investment careers, a really intellectually challenging place to work. But I learned a ton about investing from Lee and from Julian and from the other individuals that I worked with, and it sort of shaped my investment philosophy as time went on.

BARRY RITHOLTZ  00:09:52
I’m curious, because there are obviously such different styles. Lee is a deep value guy. Tiger is known as momentum and growth and technology — a very, very different opportunity set. What did you learn from each of those? How different were Julian’s and Lee’s approaches?

MIKE KELLY  00:10:13
Well, I think Julian and Lee, at the inception of it, both had a very value-oriented approach. I think within Tiger there was an evolution over time and an adaptation — even with some of the Tiger Cubs — of adopting a more growth-oriented strategy. But it was a time when doing real intense work could uncover really great long and short opportunities. I do think years later, decades later, it became much more difficult with indexation and ETFs, and the market structure changed.

But back then, I would say from an investment philosophy standpoint, there was a view that every single day you rebuy your portfolio. It doesn’t matter if you’re losing money or you’re in the money, you’ve made a double already. If you own it, think about it and re-underwrite it as if you just bought it today. And are you as excited, from a long and short perspective, about that opportunity in the go-forward period? And I think that discipline of re-underwriting your holdings every single day is something that’s remained with me.

I think secondly, I would say what I would call a variant perception — or what is called a variant perception, something that Michael Steinhardt popularized — of, when you make an investment, how is your view different from the market? Because if you want to outperform the market, you can’t just agree with the thesis that’s already embedded in the price or value of an investment. And so that variant perception of, how do you look at it differently — you’re either more bullish about that opportunity, or you think that opportunity is overdone and so you’re either selling or you’re shorting, or what have you.

And so I think that variant perception is really, really an important aspect of the philosophy. Having investment conviction is another principle. Go all in, do your work, get to a high-conviction thesis, but hold it loosely. Hold on loosely, like—

BARRY RITHOLTZ  00:12:13
“Strong opinions, loosely held” is the expression I heard years ago.

MIKE KELLY  00:12:17
Right, that’s exactly right. Because if you have disconfirming evidence, don’t ignore it. Don’t double down with your escalation of commitment. Re-underwrite it and ask yourself, well, maybe I have to change my mind. The greatest investors, in my mind — someone like Stanley Druckenmiller — is willing to change his mind all the time based on new information. And so I think these principles form an investment philosophy that, if you don’t know what your competitive advantage is in making an investment, whether you’re a private market investor or a public market investor, you probably don’t have a reason to be in that investment in the first place.

BARRY RITHOLTZ  00:12:50
That’s exactly right. I love the concept of re-underwriting. So many new investors — and I started on a trading desk — any position you had, you had to justify every moment you owned it. Hey, this is capital. I can turn this into capital in a millisecond. Would you buy this if this was back as cash and not as a holding? Where you bought it, whether you are underwater or ahead, is totally irrelevant. Would you continue to re-underwrite that? That’s a great way to describe that. I’m really impressed with that.

So from Tiger, you go to FrontPoint Partners and helped turn it into a truly institutionalized hedge fund. Tell us a little bit about FrontPoint.

MIKE KELLY  00:13:34
So I got a call from the two original founders of FrontPoint and they asked me to look at the business plan and to give them a critique, which I did. I thought it was fascinating. At the time, a lot of hedge funds were frankly run almost like family offices as a business.

BARRY RITHOLTZ  00:13:51
A third of the capital was the founders’, half the time anyway, not precisely.

MIKE KELLY  00:13:55
Right. And most of the investment capital came from ultra-high-net-worth and family offices, like the Memphis mafia and others. And so there was a view that institutions would begin to embrace alternative strategies, and for them to embrace alternative strategies, the firms they would allocate capital to would need to look like the institutional asset managers they were used to, like in the traditional mutual fund business. But a lot of hedge funds didn’t look and feel that way. They were run more like family offices.

And so we had a view that by forming a real institutional-quality asset management firm that would house diversified strategies and managers who could provide absolute return strategies to these institutional clients, that that would be embraced — embraced because of the excellence of the investment teams, but also by the world-class asset management infrastructure that we would build with FrontPoint. And so that was the thesis. You’re going back to 2000 now, and to be invited to join a firm — and these guys were in their fifties, I was 29, 30 years old — to build a company was an exciting thing for me at the time.

I still wanted to become Paul Tudor Jones. I wanted to be a macro investor, I wanted to be an investment manager, but I thought I’ll start by helping these individuals build this firm, and then I’ll go back to running a fund, probably at FrontPoint.

BARRY RITHOLTZ  00:15:29
Didn’t you begin at FrontPoint as CIO and eventually become co-CEO? Is that right?

MIKE KELLY  00:15:34
I was the head of manager selection and overseeing the investment teams. Then I became chief investment officer and head of the multi-strategy, and then I became co-CEO of the firm. So it was an evolution over time. But at the outset, hiring the investment teams, overseeing what they were doing, picking and selecting them, was a fascinating job for me. I loved learning about different approaches — Market Wizards, Stock Market Wizards, all the different ways you could skin a cat with investing. So it was like a kid in a candy store.

And I began to reflect on my career at that time, in that everyone goes into the investment business with the mindset of, I want to become a great investor. I want to become Warren Buffett, I want to become Julian Robertson, I want to become Paul Tudor Jones. I was no different. That is a very crowded pond, and a lot of luck and things have to go your way to conspire to result that way, to become one of the top decile, quartile managers out there.

And I thought at the time, building an asset management company like this, like I’m doing with my partners at FrontPoint — I’m a young guy, I’ve got my whole career ahead of me — no one ever sets out in the investment world wanting to become Larry Fink, right? Or Chip Mason, who built Legg Mason. They want to become Warren Buffett or Julian Robertson. And I thought, actually, if I spent my career building asset management companies and managing them, that could be a pretty robust career. I could really enjoy myself. And it’s a pond no one seems to be fishing in, and maybe 20 years from now this might result in something. And so it was at that moment, within FrontPoint, that I began to move away from investing professionally in the markets and more toward building investment organizations and overseeing investment managers and strategies.

BARRY RITHOLTZ  00:17:21
So the next step along your career path, you joined ORIX Asset Management as CEO?

MIKE KELLY  00:17:28
Right. So we had sold FrontPoint to Morgan Stanley. I had run it with my partner there for a few years. I was hired away by ORIX to be the CEO of their asset management unit. It’s a Japanese holding company. They were looking to diversify their holdings into the US and into various industries, one of them being asset management. They had a lot of capital to deploy and a low cost of capital, being a Japanese holding company, and I thought I could exceed that hurdle and build something here.

So it was back in 2012, and it was during the PIGS crisis, in thinking about where could we acquire compelling asset management capabil—

BARRY RITHOLTZ  00:18:07
Capabilities. Let me interrupt you. For the people who might not have been trading through it — whatever the PIGS crisis was: Portugal, Italy, Greece, Spain, is that right? Spain?

MIKE KELLY  00:18:19
That’s correct, that’s correct. And at that time, the European Central Bank and some of the local national banks of these European countries were encouraging financial parties to divest of their non-core holdings. And so as we were thinking about where in the world could we deploy capital to acquire asset management capabilities, Europe seemed a logical place because there was forced selling happening. And so there was a jewel in the crown of Rabobank Holdings, the private bank in the Netherlands. And they needed to divest of Robeco, which had been around for—

BARRY RITHOLTZ  00:18:58
Which was giant back then.

MIKE KELLY  00:18:59
$300 billion plus. And they had purchased that historically and had owned it, but it was non-core to their private bank. And so we positioned ourselves as an advantageous buyer to them. We purchased it at a very attractive valuation. It was the largest in ORIX’s history.

BARRY RITHOLTZ  00:19:22
Wow.

MIKE KELLY  00:19:22
We acquired that capability. And at the time it was exciting to get that deal done. We had bought other stakes in other managers in the alternative space, but really I wanted to do something more entrepreneurial again. And so I began to look at, what is the next business within asset management — like FrontPoint — that I could set my career out to build? And that is how the inception of coming across what was then Franklin Square, now Future Standard, came about.

BARRY RITHOLTZ  00:19:58
So when you joined, did you join as CIO or president, or what was the initial role?

MIKE KELLY  00:20:04
Yeah, so I was introduced to Michael Forman, the founder of Franklin Square, through a headhunter friend of mine, Scott Fletcher. And I was also introduced by Bennett Goodman and Doug Ostrover at GSO in Blackstone. And they had encouraged me to go meet with their partner who they had partnered with. As I was describing what I thought the next big thing in asset management would be, it would be the arc of history of bringing alternatives from family offices and ultra-high-net-worth throughout the eighties and nineties, and then the endowment model with David Swensen, and eventually institutions began adopting it. The one constituency that was still left out were the individual investors below ultra-high-net-worth and family offices. And so I had a view that at some point that would change, and I wanted to help effectuate that change. And that is where I was introduced to Michael Forman and his vision for what he was doing with Franklin Square, and had been doing.

And he had built this incredible chassis around productizing and distributing income strategies, and convinced me to join up with him as president — to go join him and be the chief investment officer, help build out the asset management capability. Now, at the time, Franklin Square was a product and distribution firm, so they were creating the wrappers and distributing them, but other external parties — at the time, Blackstone — were the ones sub-advising and providing all of the investment acumen.

And as I would describe it today, and I use this analogy of Netflix: it was like seeing the red envelopes and DVDs. But Michael had created this incredible distribution engine, a hundred-million-person mailing list type of distribution capability. And just like Netflix figured out how to digitize their business and create their own in-house TV and movie studio, that was my pitch to Michael — you could eventually diversify this product base and you could bring in-house capabilities, so long as the quality is still very high. You can put it through these channels and offer them to private wealth clients. And so that’s what we set out to do.

BARRY RITHOLTZ  00:22:27
Really, really fascinating. Coming up, we continue our conversation with Mike Kelly, Chief Investment Officer and President of Future Standard, discussing how he helped build the company into a $90 billion multi-strategy platform for wealth management clients. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.

BARRY RITHOLTZ  00:23:01
I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Mike Kelly. He’s president and Chief Investment Officer of Future Standard. They are an alternatives manager focused on the wealth channel, running over $90 billion in client assets.

When you joined, what was Franklin Square — before it became Future Standard, FS Investments? They effectively had one credit strategy plus whatever they were reselling on behalf of other people. A little over $10 billion. You’re almost 10 times the size now, with a full multi-strategy platform. How did that evolution come about? What were the key inflection points? Was that a tough sale to get everybody in-house to accept that, hey, we have a nice little business here, Mike, why do you want to mess with it?

MIKE KELLY  00:23:56
Right. Well, there was a nice business there, and change comes with resistance. But I think we’ve had a fortuitous progress of change over the last 12 years. And I would say it started out with forming multiple partnerships with various outside firms that Michael and I had relationships with — the likes of KKR and GoldenTree, Rialto in real estate, EIG, Magnetar, Wilshire — in order to create some diversified strategies that we could offer to clients with best-of-breed managers across various disciplines.

And so that was the first stage of evolution, moving into more of a multi-manager architecture. Concurrent to that, I began to hire internal talent, which is something similar to what I had done at FrontPoint, and brought in individuals like Andrew Beckman and helped him build out his internal private credit team. We made some acquisitions as well — Chiron Asset Management, Portfolio Advisors, Post Road Group — in various disciplines. And so it was a combination of an evolution of external partnerships, in-house hiring and talent and development and growing those, and inorganic acquisitions of capabilities and managers to bring on.

And I’d say, starting from this inception of packaging and distribution, we then evolved into a diversified asset manager. And then, after the series of in-house capabilities and acquisitions, we adapted the firm into what I would call a true alternative platform. And I’ll distinguish a platform from a diversified asset manager, because I do think they are different. A diversified asset manager, you have different strategies that you offer to clients, but those strategies don’t have to interrelate at all with one another, and there may be no shared set of relationships or gleaned insights or what have you. A platform, as I would call it, is more interwoven. There’s more collaboration, there’s shared underwriting, there’s shared origination and relationships for deal flow, there’s an exchange of insights and specializations, all with the intention of improving outcomes for clients. And that evolution, if you will — it’s easy to whiteboard that out and describe, we’re going to do this. To your point, it’s really hard to actually execute on that.

BARRY RITHOLTZ  00:26:52
So there’s an underlying thesis in this. Once this full platform is built out, hey, there is a giant wealth channel that a lot of alts are not tapping into. It’s the next great frontier. High-net-worth, mass affluent want the same sort of access to strategies that they see foundations, endowments, institutions having access to. Tell us a little bit about how you see that opportunity. How large is it? How much has already been captured? Where are we in the cycle of this getting pushed out to mom-and-pop investors?

MIKE KELLY  00:27:30
So, backing up to when Michael first started Franklin Square — this is now back in ’07, ’08, launched the fund in January of ’09. So auspicious, great timing for a credit strategy and delivering income to individual investors through the independent broker-dealer channel. And if you remember that time, you had this declining yield environment and the Fed cutting rates over that course of time. And so there was a search for income, particularly for retirement accounts.

And so in the early days, a lot of our offerings were income strategies, income-oriented — whether it’s middle market lending, CLOs, offering real estate lending strategies and so forth. So, generating income. And I think we saw that post the great financial crisis, banks would begin to withdraw from those lending activities and cede those over to asset managers and direct lenders like ourselves, but also that private wealth and individual investors would begin to embrace these strategies to pick up income sources. And so those two trends, I think we got correct.

What we probably didn’t foresee was the adoption curve. I think we probably assumed it would be more linear than it actually turned out to be. It took longer. You think about it — this is now going back, I mean, Franklin Square was started almost 20 years ago. It’s very topical today and we’ve seen a lot of flows in the last five-plus years, but it has been more recent that adoption is picking up and being spoken about across the entire industry. So I do think there’s been this arc of evolution and adoption, but I would tell you, Barry, it’s still very much in the early days, given the dynamics of private companies and their capital needs.

BARRY RITHOLTZ  00:29:27
So let’s put that into a little context. The 2010s — you not only had zero interest rate policy, ZIRP, you had QE, you had Operation Twist. The Fed did everything it could do to make cash trash and force people off the sidelines. Hence TINA, there is no alternative, became popular. In hindsight, it’s kind of surprising that it took private credit as long as it did to really find a bid. You would think that in that era of zero interest rates, hey, we’re going to give you 7%, but it’s variable — if the Fed raises rates, we should see a bump up in yields. What was it like building out into that environment, not just as an executive but also as an investor, as a CIO?

MIKE KELLY  00:30:17
Yeah, I would say two things. One’s a market backdrop issue and one’s more of an operational issue. On the market backdrop issue, I define this golden era of investing as post-Volcker, like 1987 up until 2021 as we’re coming out of COVID. And if you look at a chart of spectacular US stocks and bond prices, 60/40 made incredible sense. You had disinflationary forces, you had benign demographics, you had globalization, and it was great to set it and forget it with a 60/40 mix.

BARRY RITHOLTZ  00:30:54
That era was a 35-year bull market in bonds. It’s incredible — there are long stretches where fixed income is outperforming equity in that run.

MIKE KELLY  00:31:05
Right. So why do you need an alternative, right? If the music sounds great, you don’t need alternative music. When the music is all crap, Nirvana comes along, right? And so I think the experience that investors had was, prove to me I need something else. And it hasn’t really been — particularly with fixed income, right, when you think about the experience of the last six years or so, where high duration fixed income has not been great at all. That’s 40% of your traditional portfolio, right? That just stopped working overnight. And so that catalyzed a lot more inquiry into diversified sources of private market income, private returns, and so forth.

The other issue that slowed the adoption curve is on the operational infrastructure side. And it’s something that the likes of Lawrence at iCapital and Matt at CAIS had been solving for, but it was really clunky in the early days. You had double layers of fees, you had feeder funds, you had high loads, K-1s. K-1s, nightmare. It’s just not something that the individual investor and their advisors wanted to embrace, understandably, because you had to fill out by hand a sub doc for every single investor.

And so both the market backdrop changing and morphing and opening up people’s minds, as well as access and operational infrastructure — and we’ll get to this, but education, which we’re clumsily getting our way to, educating on these strategies, how they work, these structures, how to embrace them, how to incorporate them into portfolios — that took time. It just took time for the whole industry to get there. And I feel like we’re finally at the point where we’re arriving. But as I said earlier, I still look at this adoption and penetration from these investors as very early.

BARRY RITHOLTZ  00:33:03
How much of an accelerant was 2022 with the — what was it, 550 basis points of rate hikes? If you’re long duration, well, that’s going to really leave a mark. What did that year do to acceptance of alternatives from that wealth channel?

MIKE KELLY  00:33:23
So, two things. One was positive and one was more of a challenge. The positive side of things was that with the backup of duration, of long yields, that began to challenge the traditional fixed income side of the portfolio. So if you think about the traditional fixed income portfolio — I think about credit, fixed income risk in three ways: liquidity, credit risk, and duration. And so most people had very long duration, highly liquid, low credit risk investments in treasuries and agency bonds and mortgage securities, municipal securities, that began to fail them and not provide the ballast against equities it had been. And it didn’t provide the income, because duration was working against you. So that was a positive force for, let’s find something else.

The negative force was going from zero to 5%. People went from not earning anything on their cash and needing to deploy it to make any money, to, oh wait a minute, I haven’t made money on my cash in a long time. 5% sounds pretty good.

BARRY RITHOLTZ  00:34:28
Money market five and change was great. It was especially—

MIKE KELLY  00:34:32
When you hadn’t had that for a long time. Yeah, for sure. And so you began to see some hoarding of cash balances that only began to be deployed as the Fed started to cut those rates again.

BARRY RITHOLTZ  00:34:45
I would imagine the inverted yield curve around that time was problematic also. Why do I want to tie up money if liquid money market is yielding even more?

MIKE KELLY  00:34:54
Most definitely.

BARRY RITHOLTZ  00:34:55
Really interesting. So you’ve described the current environment as having created a new investing imperative — focus, research, flexibility to change course, conviction. Tell us about what you see as the modern investing imperative around alternatives.

MIKE KELLY  00:35:18
Right. So we all know about the decline in the number of publicly traded companies. If we were coming out of college, it was 9,000; today, barely 4,000. Both the number of private companies and the size of private companies has exploded. And the opportunity to invest in these private companies has increased dramatically, as well as the access and the availability, and those companies taking advantage of access to private equity and direct lending sources of financing.

And that allows for a much broader palette for investors to build portfolios with, by accessing those companies. And I would say, Barry, increasingly, in order to get diversification — to build diversification — you do have to look outside of public stocks and bonds. The stock market is becoming less and less representative of the total economy than it used to be. It’s very concentrated right now in AI infrastructure, in the Mag Seven and the buildout there.

And you have a myriad number of private companies of small to midsize and some larger size that provide you access to what’s really driving the US economy. We call that the middle market. And the middle market is a couple hundred thousand plus companies that drive the US economy that are not publicly traded. We define the middle market as companies of a billion dollars of enterprise value and down, so sort of lower and core middle market. And these are businesses that frankly are fast growing. They’re a fragmented ecosystem, they’re hard to find. But if you can navigate and invest directly in these businesses, or lend to these businesses, it’s a very attractive access for investors.

BARRY RITHOLTZ  00:37:10
So let’s talk a little bit about that. I like to step back and take the 30,000-foot view to kind of get a sense of how this evolved. My general sense was you had a lot of consolidation with big money center banks following the financial crisis, even the decade leading up to it, and it felt like much of Wall Street, much of the giant banks, just kept moving up market and left these huge swaths of billion-dollar companies behind. Because let’s be honest, what’s a billion-dollar company? It’s small change to them, right? Is that what created the opening for all of this private credit, real estate financing, private debt? There’s this whole world that used to be traditional banks. Explain that transition a little bit.

MIKE KELLY  00:38:01
So, as I spoke about earlier, I started my career at Salomon in FIG banking, and we would talk about merging banks, and we had these old CDs that you would take with bank information and merge the banking world and pitch banks on why they should consolidate. Well, they did, throughout the eighties, nineties, and two thousands. The banking world became much more consolidated into these four mega banks that hoovered up a number of regional banks. So this is a confluence of factors — that was one factor. The great financial crisis and Dodd-Frank and risk capital rules was another big factor, of driving higher capital requirements for banks and their activities.

You also had banks increasingly looking towards generating fee income versus making loans on their balance sheet. In other words, they wanted to be in the moving business, not the storage business, because that’s what their publicly traded shareholders were valuing. And so they answered that call. And so increasingly they began to step back from those lending activities, particularly to midsize private companies and real estate activities.

And that allowed for asset management companies — who, I would estimate, have very attractive asset-liability matches within their lending activities — to step into that opportunity and provide that financing capital through closed-end funds, through BDCs, through different structures, to be able to lend and provide access to the individual investor to generate income off those lending activities. And so I think all of those things provided the opening, and it’s been a market share shift from the banking system to the direct lending and asset management world in private lending.

BARRY RITHOLTZ  00:39:57
Really interesting. Last question on the evolution of Future Standard. You’ve served roles both as chief investment officer and CEO, co-CEO. As CIO, you think about generating returns. As a CEO, you have to think about everything else — people, infrastructure, clients, culture, systems, right? How do you integrate those two very different sets of responsibilities?

MIKE KELLY  00:40:29
Right. So in terms of thinking about the role, overseeing the investment teams and investment strategies is a big part of what I do as chief investment officer. I like to use the analogy of — I like to be the Rick Rubin in the room of really talented professionals, provide an environment by which they can do their best work, and then get the hell out of the way. And so you have to identify the talent, you help to work and develop them, you have to work with their process, how and why they make decisions as individuals and teams of individuals, make sure that their priorities align with our clients and the firm overall, give them all the resources that they need to do their job — and increasingly their more sophisticated resource requests, like around AI deployment and things of that nature — and then get out of their way, allow them to do their best work.

And, as you pointed out, designing incentives, designing culture, reinforcing behavior is a big part of all of that. So that’s one big part of my job. Also interfacing with clients, both private wealth clients and institutional clients; strategy for the firm, internal strategy; corporate development, but also M&A and new deployment of acquisition of different strategies and products; and launching new products and new extensions of existing products is a big part of my role. And then reinforcing the culture overall of what we’re trying to build.

BARRY RITHOLTZ  00:42:01
And you mentioned earlier that the firm was selling into the broker-dealer networks. That seems to have evolved into more of RIA networks. Even the big shops like UBS and Morgan Stanley have kind of pivoted away from transactions to more fees. How has that transition affected who you’re selling products to?

MIKE KELLY  00:42:31
So over the last 15-plus years, there has been an evolution and a broadening of the types of platforms that have been embracing private market strategies, alternative investment strategies. There’s the wirehouses, so the big four names — Morgan Stanley, UBS, Merrill Lynch, Wells Fargo. There are the large RIAs like Rockefeller and Cerity that are building out their capabilities for independent advisors and growing quite tremendously. And then you have the independent broker-dealer channel, the LPLs of the world.

And so there’s an ecosystem of wealth platforms just here in the US that oversee 300,000 financial advisors and brokers in the United States. And all of those channels are increasingly embracing and hosting onto their platforms access to these types of strategies, through various phases of development within those platforms. I would say there’s a real spectrum of adoption.

When I started at what was then Franklin Square, talking to a big wirehouse like Morgan Stanley, they would tell you that a very small group of their advisors were doing the vast majority of alternatives business. Now, across 15,000-plus advisors, there’s a much broader and wider democratization of adoption of alternatives across theirs and other people’s platforms. But there are still a lot of individual investors and advisors who are still at 0% allocated to something other than a stock, bond, or cash. And that evolution is — that’s why I think we’re still in the very early innings.

BARRY RITHOLTZ  00:44:17
Really, really interesting. Coming up, we continue our conversation with Mike Kelly, president and Chief Investment Officer of Future Standard, discussing the state of alternatives today. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.

BARRY RITHOLTZ  00:44:48
I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio. My extra special guest today is Mike Kelly. He is president and Chief Investment Officer of Future Standard. They are a $90 billion alternative platform focusing on private credit, private equity, real estate, infrastructure, and multi-asset strategies.

So it’s hard not to look at private credit today and not think this is becoming a juggernaut. Is that a sign of maturity, or is this just a lot of capital chasing not a lot of loans?

MIKE KELLY  00:45:23
So I’d start by saying that there is a misconception that private credit generally is becoming a bubble. And I consider myself a student of history and calamities, and I try to think about — if you look at the build of what we call private credit, the asset management’s direct lending to private companies, matching up against various situations in the past where we had true bubbles, you had an outgrowth of capital versus the economic driver of activity. We don’t have that today.

If you actually add up the pockets of what we really call private credit — which is not just direct lending, but high yield strategies, broadly syndicated loans and bank C&I loans, that’s private credit provision — it’s grown lockstep with the economy. The economy had gone from 12, 13 trillion before the great financial crisis. It’s 30 trillion today. And so it’s grown in lockstep. It’s just the market share has shifted to direct lenders and asset management away from banks, high yield, and broadly syndicated loans.

And so the opportunity in private credit is not outgrowing the underlying opportunities. These private companies are availing themselves of this private form of financing from asset management companies, and there’s a lot more of these private companies demanding this capital. So there is a balance between the supply and demand of this capital for the opportunity.

Now, having said that, in this search for yield that we talked about, there was an outgrowth of evergreen strategies and selling to the private wealth community, particularly within private credit strategies, in this demand for income. And we did see an explosion in a concentration, in crowdedness, in particular funds and pockets of large-cap lending that did result in very tight spreads, covenants being loosened, an increase in pay-in-kind, or PIK, over cash financing. And we also saw a concentration of lending to software companies. As rates were being cut and distributions were being cut within BDCs and private credit, we began to see that, coupled with the concerns about software exposure, begin to result in some redemptions. And that is where a lot of the headlines have been focused on private credit and negative sentiment around private credit, trying to get out of these structures when they’re having difficulty doing so.

I think the backdrop, though, is private credit is still a very valuable and value-enhancing component for most portfolios to generate income, despite some of the indigestion and negative headlines that have been developing.

BARRY RITHOLTZ  00:48:23
Let’s talk about those redemptions, because they always crack me up. We saw this a couple of years ago with BREIT and BCRED, which is — which part of five-year lockup is confusing to you? I don’t understand. And for the listener, a lot of these illiquid alternatives have a tiny gate, a 5% gate, which is really there as an accommodation when — I call it the widows and orphans clause, right? If the surgeon is hit by a bus and he leaves behind wife and kids, they perhaps shouldn’t be in an illiquid alternative in those circumstances.

But given that, let’s talk a little bit about the illiquidity premium, which some people look at as a bug but I think as a feature of this sort of investment. Tell us a little bit about how you think about illiquidity, and how do you communicate illiquidity or liquidity issues to potential investors?

MIKE KELLY  00:49:27
Well, I’d start by saying investing is all about trade-offs. There’s no right or wrong, no black or white. Alternatives aren’t better than traditional forms of investing. There’s just trade-offs. And the trade-offs within private market strategies and the structures that offer them is that you have the advantages of the potential for enhanced return through an illiquidity premium, or enhanced diversification from your public holdings. The trade-off of that is these are illiquid strategies, they are complex, and they are higher fees than public market strategies, ETFs and indices and things of that nature. And so you have to balance those before determining whether or not the trade-offs make sense for you, for your clients, for an institution, what have you.

And I really mentioned the illiquid part of it because these strategies are illiquid. Evergreen structures as wrappers around these illiquid underlying strategies did not make an illiquid private asset class liquid. It was just an access point. It provides its own advantages of continuous compounding and no capital calls and 1099s and so forth. But it didn’t turn an illiquid asset class into liquid. I never understood the term “semi-liquid,” which implies half liquid, which it’s not. These are not half-liquid private investments.

And so that, as a backdrop — a lot of it comes down to managing the expectations of what the trade-offs are. Going back to the advantages, you are providing capital, and in our case at Future Standard, we’re providing capital to a very fragmented ecosystem. We cherry-pick a handful of the best middle market, midsize private businesses, and we provide them with capital either through equity capital or through loans that we make to these companies. These companies are not massive in size and they can’t dictate final terms. And so we can lend to them at very advantageous prices that work for them, because they’re growing businesses. They need capital to grow, to acquire new businesses, to fund their operations. And so they’re not going to negotiate to the final basis point on spread. So we can provide a very attractive form of financing to them and pass along that income to individual investors for the private wealth community.

And so it works for both sides. And that form of income does come with an expectation of higher returns than what you’ll be able to replicate in the sort of mega-cap market or in the public fixed income market.

BARRY RITHOLTZ  00:52:12
Makes a lot of sense. Back in the day, this was thought of as an institutional product and a family office product. It began migrating downstream to ultra-high-net-worth and then high-net-worth. Now the question is, is this going to be marketed to mass affluent, 401(k)s, things like that? Who do you see as appropriate buyers of a variety of private credit products?

MIKE KELLY  00:52:42
So, we’ll start by saying, one of the reasons that at Future Standard we like working with advisors is nobody has a better finger on the pulse of suitability than the advisor to their clients. They will know, for their client base, risk preferences, liquidity preferences, their ability to understand these strategies and have them incorporated into their portfolio. We say that if you are going to allocate to a private market strategy like the ones we offer, if you’re not looking to allocate for at least the next four or five years or beyond, don’t make the allocation. If you need the liquidity in the next few years, there’s no guarantee — to our earlier point — that you’ll be availed of that liquidity.

And so the determination of suitability is at the advisor level, and I think that’s where it sits. You could make the argument that this should be relegated to those with net worth or income of a certain bracket or level. The regulators have their policies on that. But when it gets a little bit fuzzy, where someone is accredited but may or may not be suitable, I think the advisor is most positioned to be able to — and we would rather have fewer but more suitable investors as our client base than more and less suitable investors as our client base.

You asked the question about retirement accounts. I think there’s been a lot of headlines written about the big numbers that are being thrown around, 12 to 15 trillion of DC 401(k) plans. This, in my view, should be among the least controversial of places to think about incorporating less liquid private market strategies.

BARRY RITHOLTZ  00:54:27
Because you’re not tapping it for years—

MIKE KELLY  00:54:28
Or decades. You don’t need it for decades, right? Usually, for a young person in the retirement account, I think about my little brother, who’s a schoolteacher in Queens, and if he has a 30-year horizon or a 20-year horizon, why shouldn’t he have some allocation incorporated in, say, a target date fund, to long duration investments that might pick up an illiquidity premium if he doesn’t need the capital for a very long time?

BARRY RITHOLTZ  00:54:56
And that’s a couple hundred basis points over treasury easily. That’s the assumption.

MIKE KELLY  00:54:59
Easily. And also, let’s face it, a lot of the best investors in the world are still occupied in this world we call alternatives. And so why not avail yourself of the best investment minds and teams and firms that are out there and their capability sets? And so I do think there will be incorporation of private market strategies into retirement plans, into DC 401(k) plans. I think it’s going to be a much longer evolution than maybe some would like. It will also only be a subset of the 12 to 15 trillion out there, because you have to get the plan sponsors comfortable, right? And other constituents and players up to speed and comfortable with the risks and the fees and the liabilities and so forth. And so it’s going to be a small allocation, say 15% of a target date fund, and that’s going to be a subset of all of the capital out there.

So in the end, it’s an opportunity long term. It will be something that people can elect to have or not have. In the QDIA, it may be a qualified default; they may elect in, or so forth. That will evolve over time. But I do think the headlines are getting a little bit ahead of themselves, that there’s this wave of trillions of dollars that are about to go into alternatives.

BARRY RITHOLTZ  00:56:19
So you mentioned 60/40 earlier. I’m kind of hearing, hey, 60/40 is going to be changing over the next decade to something that’s maybe 60/25/15. Is that sort of a reasonable number set?

MIKE KELLY  00:56:35
So this will now get into my view on portfolios and portfolio allocation generally, which — I have a view that doesn’t match up with those numbers.

BARRY RITHOLTZ  00:56:47
Can I, before you say something — I always get into trouble when I say this, but hey, if you’re 20, 30, 40 and you have a reasonable risk tolerance, what the hell do you need bonds for, right? Like, people don’t like hearing that. But 60/40 — how about 90/10, if you have a 50-year time horizon? You just have to not mess it up at the worst possible moment. Where are you going with your pushback to 60/40?

MIKE KELLY  00:57:17
So, even though I’ve used the term “alternatives” throughout the discussion here, I don’t really like it. I think there’s a point in the future where we won’t call these strategies alternatives.

BARRY RITHOLTZ  00:57:30
Because they’re not all the same. There’s a broad dispersion of risk and returns there.

MIKE KELLY  00:57:36
That’s exactly right. And to use that other analogy, when everyone’s wearing a Nirvana T-shirt, it’s no longer alternative music, right? And let’s face it, there’s a much broader embrace of the strategies. Although it’s early, 88% of advisors surveyed have indicated that they plan to allocate capital for their clients to private market strategies. So this is not a niche embrace, this is a broad embrace, and so it’s becoming more mainstream.

And the reason I don’t like the numbers of 60/40 versus 50/30/20 is, when you think about alternatives as just this little peg — like a Trivial Pursuit peg on a circle — it doesn’t match up with how I think about portfolios. So if you think about private equity, private equity rhymes and looks a lot more, from a risk standpoint, like stocks than it does real estate credit.

BARRY RITHOLTZ  00:58:40
It’s right there in the name.

MIKE KELLY  00:58:42
Right. It’s equity, it’s for growth. And yet we relegate private equity into a bucket with things like real estate credit, even though they do very, very different things for your portfolio.

So the way I like to look at it is, there’s a part of your portfolio for growth, and those are all forms of equity, from public stocks and stock indices through to private equity and private company access through to venture capital and other forms of growth equity. You have your income portfolio, and that’s your lower risk, high duration, high liquidity treasuries and agency bonds through to other forms of income like less liquid private credit and other shorter duration, higher credit risk investment strategies. And then you have what I think is probably an introduction of something that we haven’t had to think about since the seventies, with a real asset category — commodities-based and precious metals, raw land and real estate, and things that in a more inflationary world, and a world where you need a more diversification of sources, you probably need. Infrastructure would be another example of that real asset category.

And within each of those three buckets of a portfolio, you have a spectrum of illiquidity and risk profile. And so for each allocator, they will need to determine, within their growth bucket, how much liquidity they need to generate the kind of growth, and how much risk they’re willing to bear into private equity and venture capital to build that growth bucket. And the same thing for their fixed income bucket, with degrees of credit risk, liquidity, duration, and then within their real asset bucket. And so I do believe, even though the world doesn’t really look at it that way, that we will eventually get to that point and no longer talk about the term “alternatives.”

BARRY RITHOLTZ  01:00:42
It’s going to be different types of income-producing properties and growth-producing products. Makes a lot of sense.

You mentioned earlier we saw a big uptick in interest rates, which suddenly is a double-edged sword — you’re getting yield. We now have a new Fed chair who seems to have surprised everybody by being a little bit hawkish, in the current environment of oil prices and tariffs and hopefully the end of war. But how do you think about the role of rates and the Fed? How does that impact the yield-producing portion of the alternative portfolios?

MIKE KELLY  01:01:24
Well, as I said earlier, I do think we’ve exited this golden era that ended roughly five years ago, into a more inflationary, deglobalized, less benign demographic backdrop. It will result in a higher resting heart rate for inflation. I’m not suggesting we’re going back to the seventies by any means, but there’s a dozen or so factors that will keep inflation more elevated, particularly in this deglobalized, localized world of supply chain breakdowns and so forth.

BARRY RITHOLTZ  01:01:54
The post-GFC zero rates — that’s it for our lifetime. Nobody really expects to see that again.

MIKE KELLY  01:02:00
I don’t expect to see that anytime soon, barring—

BARRY RITHOLTZ  01:02:04
A meteor from outer space, right? So what does that mean for the potential for various types of private credit to generate—

MIKE KELLY  01:02:14
Right. In that backdrop, you’re going to have higher rate uncertainty, higher volatility, and a need to look for other forms of income, other forms of floating rate exposure, right? If rates go up, floating rate exposure pays you more. It works against you with high duration investments; you begin to lose money on those. And so it does act as a balance to your traditional fixed income sources.

You will need diversification just generally in the world, given this economic backdrop and the need for obtaining resources and how you build out a diversified portfolio. And so these types of income strategies and private equity strategies and real asset, real estate, and infrastructure strategies are, again, a broader palette to paint from in a different environment than the one in which 60/40 was the perfect answer and a simplified answer of set it and forget it, and be able to have diversified, low volatility outcomes.

And so I do think the role of the Fed is trying to navigate this tug of war between the inflationary forces and perhaps the deflationary forces that AI may introduce to pockets of that economy. And so it’s a tougher job for Kevin Warsh, and he wants to go back potentially to less disclosure, maybe more Alan Greenspan-like communication style, where we have to divine the tea leaves a little bit more, right, and try to anticipate what’s going to happen. And that makes it trickier.

And if you’re building portfolios for the long term, incorporating these strategies in a diversified way, you will have countervailing balance within your portfolio. It won’t matter if the Fed’s going to raise or lower interest rates by 25 or 50 basis points if you’ve built a truly diversified portfolio.

BARRY RITHOLTZ  01:04:09
Makes a lot of sense. You mentioned some of the headline risk, and we’ve had a couple of minor blowups over the past year or so. Some people look at that as the first cockroach — I don’t know if that’s the right metaphor. I’m curious, what data points do you look at to just keep an eye on the health of private credit underwriting?

MIKE KELLY  01:04:32
So when you’re looking at private credit underwriting, you’re looking at default rates versus history. You’re looking at the situations where there are defaults and what losses ensue post those defaults. You’re looking at interest rate coverage ratios — so, the extent to which the businesses that you’re underwriting in a diversified portfolio can cover their interest payments. So you’re watching all of these metrics. You look at the value of the collateral underlying those businesses.

And I would say there is no systemic crisis broad-based within private credit today. We’re not seeing that. There are idiosyncratic stories, and when you have hundreds and hundreds of credits being underwritten, you’re always going to have individual circumstances of companies that are going bad or undertaking — you know, a fraud comes, a normal default rate comes. And it doesn’t, by the way — just because a company defaults doesn’t mean you lose money. I mean, historically, if you had a default rate of two or 3% and you lose half your money on that, you can do the math on how much your actual losses will translate over a period of time against the income that you’re generating in return. And so if you factor in the loss of 50 or a hundred basis points of loss against the ability to generate nine or 10% returns, you can do the math as to what that on a net basis will return for you.

Defaults today are well within historical ranges and are being well managed. Interest rate coverage ratios are well within historical ranges and are in a healthy range today. What we are seeing are pockets of weakness, pockets of vulnerability. And again, over the course of — we haven’t had an economic cycle since the great financial crisis. I don’t even count COVID, because it wasn’t an economic cycle. Even 2022 kind of came and went. It was barely a blip. And yet we’re always going to have some areas that are experiencing some disruption or some indigestion.

Right now you have software, which is an issue that AI is disrupting, but you have to sort through that. And healthcare services — there are some labor and reimbursement issues that have hit certain healthcare companies. Within software, no one knows. No one knows what the true impact of AI is going to be on software. My view is most companies will be fine and adapt and evolve their business models. There will be a subset of those companies that will be truly disrupted and where your collateral will not be worth very much.

But again, if you look at a mega-cap or large-cap lent private credit portfolio and you said 20% is allocated to software, and you thought 15% of that was going to have disruption and trouble, so now you’re relegating this down to about 3% of your portfolio — and even if that all went to zero and there was no collateral value and no recovery on any of those, that’s going to ensue over the next three to five years — three points of loss. So assume a straight-line amortization of those losses: about a point a year, or less than a point a year, off of a portfolio that generates 9%, 10%. So instead of nine or 10, it’s eight or nine, if all of that gets disrupted as expected.

In other words, this is not a catastrophe. This is a normal course of business with a pocket of sector weakness. I think that the private credit industry is still healthy. It still provides very attractive general returns. And this is all assumptions-based, and assumptions can change.

BARRY RITHOLTZ  01:08:08
And of course, of course.

MIKE KELLY  01:08:08
But as I look at the fundamental health of the private credit business, it’s still very much intact.

BARRY RITHOLTZ  01:08:18
Really, really interesting. I have one or two more questions before we get to our favorites. And I have to ask you, a 30,000-foot view: step back and look at the private credit landscape three years, five years, 10 years from now. What does it look like in terms of ongoing growth? How much do you think this is going to penetrate into the wealth channels? What does the industry look like out a couple of years?

MIKE KELLY  01:08:50
So when we talk about private credit — and often when you read about private credit in the press, it seems like one monolithic category — within private credit there are a Baskin-Robbins series of flavors that all get defined as private credit. And so you have senior credit, junior debt, mezz; you have CLOs; you have sponsored, non-sponsored, opportunistic credit; you have asset-backed finance; you have royalties and so forth. And so there are many different forms of credit to private entities and companies that we call private credit.

My expectation is those flavors will develop, they will begin to grow in size. The demands for that capital by those companies and entities will increase. We’re seeing the growth of insurance capital and an investment grade — most of what we call private credit is non-investment grade, but there’s the investment grade demand for private capital for these companies that is exploding in size. And Marc talks about that at Apollo. And there is all of this that’s developing over time, and I expect that to continue.

And then on the demand side, I expect that private wealth will continue to demand income. They will continue to struggle with traditional forms of fixed income and high duration assets. If my view on the macro world transpires as I think it will, they will continue to need to search for income through different sources. That’s both corporate income and real estate income and other forms of asset-backed income. And so that supply and demand will continue to grow lockstep with one another. And we will have a much larger ecosystem of what we call private credit in the future.

BARRY RITHOLTZ  01:10:51
So you were a trustee at the Stanford Graduate School of Business. You’re currently a trustee of the Tiger Foundation, as well as a board member at the Spotlight Foundation. Tell us a little bit about the work you do with these foundations.

MIKE KELLY  01:11:06
Yeah. So one of the things that Julian Robertson imparted on all of us at Tiger from a young age was, give back as much as you can as early as you can. Don’t wait until you’re about to die. And so I joined the Tiger Foundation probably over 20 years ago, which was Julian’s foundation at Tiger Management that funds not-for-profit initiatives in New York City to fight poverty. And have been doing that now — the Tiger Foundation’s been around at least 25 years or more. And so that’s been an exciting legacy for Julian and for all of us that worked together at Tiger. And I’m a trustee on that and work hand in hand with the other trustees in undertaking funding those initiatives.

The Spotlight Foundation was a group of Stanford Business School friends of ours. After we graduated, we decided to memorialize our friendship through a foundation that would fund not-for-profit entrepreneurs that were funding education initiatives — seeing how important education was in all of our lives personally, wanting to impact those people that didn’t have the same advantages and opportunities that we had. And so we fund a lot of education initiatives, particularly in less advantaged communities, and we fund the entrepreneurs, the ones who are doing earlier stage startups that could become the next KIPP charter schools of the world. Or we’ve funded the Seattle Girls School to bring science initiatives to girls within the inner city Seattle community. And so that’s something that is very near and dear to my heart.

BARRY RITHOLTZ  01:12:57
Sounds really interesting. All right, let’s jump to our favorite questions we ask all of our guests, starting with: tell us about your mentors who helped shape your career.

MIKE KELLY  01:13:09
Yeah. Well, I’ve had various mentors over time. Certainly would put Lee and Julian in that category — not as a personal mentorship, but more as individuals I observed and admired as investors. But also, when you’re looking at someone like Julian, how philanthropic he was and giving, and the way he treated people — I really admired that about him.

There was another individual who’s a mentor to me to this day, Gil Caffray. Gil was a partner at Tiger. He was my partner at FrontPoint as we built that firm. And Gil is an incredible human being. He’s smart and he has the highest integrity. He always treated everyone with respect. He was a direct individual — or is a direct individual — but he was never emotional. He just showed you how to treat clients with respect, how to treat your coworkers with respect. And it’s just somebody who mentored me personally and who I try to emulate every day.

BARRY RITHOLTZ  01:14:26
Really, really good answer. Let’s talk about books. What are some of your favorites? What are you reading currently?

MIKE KELLY  01:14:34
Book I’m reading currently, London Falling, by Patrick Radden Keefe, who wrote Empire of Pain and Say Nothing. He’s an incredible investigative journalist, writing this wild story, a true story, about a boy and a family within London in the eighties, nineties, and in the backdrop of London undergoing the changes it had. It is a fascinating piece of work. It’s one of the best books I’ve read, and I try to read a lot. In the last five years, I’ve really enjoyed that.

Best book all time, I would say, Man’s Search for Meaning. I read it in high school.

BARRY RITHOLTZ  01:15:17
Viktor—

MIKE KELLY  01:15:18
Viktor Frankl. I read it in high school, I reread it every year. It’s amazing that Viktor had the ability to have the mind frame he had through the horrors he faced, and how that mindset and your ability to attach meaning to what goes on in your life — you can’t control what happens to you, but you can control how you respond to it. I love all things stoicism.

BARRY RITHOLTZ  01:15:49
I was going to say, classic Marcus—

MIKE KELLY  01:15:52
Aurelius. Yeah, sure. But Viktor Frankl’s writing — I still have the torn pages of my high school copy with my pen marks. And I reread it every year. It’s an amazing book.

BARRY RITHOLTZ  01:16:06
Really, really interesting. What are you streaming these days? Tell us what sort of podcasts or Netflix, Amazon Prime you’re watching.

MIKE KELLY  01:16:15
So my wife and I love documentaries. We are watching The Dark Wizard right now, about Dean Potter, who was an extreme climber and extreme athlete. I love watching depictions of obsessive personalities. I think probably because I see some of that in myself, but I like watching people who are in other fields. So whether they’re athletes or extreme athletes or musicians or chefs, like Jiro Dreams of Sushi. The Bear is coming back out. The Last Dance — I love Kobe Bryant and Michael Jordan. Just people who pour themselves into what they do, because I always learn something about how they think about the world and pour themselves into what they do, as it applies to what I do and what I love to do. And so it’s one of the reasons I love watching some of these documentaries.

BARRY RITHOLTZ  01:17:17
So I have a couple of things I have to share with you. Have you ever read the book Endurance, about the Shackleton journey?

MIKE KELLY  01:17:17
Oh, absolutely.

BARRY RITHOLTZ  01:17:17
It reads like it’s fiction. It’s just — so, one of the best. And I’m drawing a blank. I think it was called Open, Andre Agassi’s—

MIKE KELLY  01:17:35
Also one of the best sports biographies, or autobiographies—

BARRY RITHOLTZ  01:17:37
Ever written. It’s just really, really interesting. And then I have to slip over to music, because you mentioned Nirvana twice, you mentioned Rick Rubin. You’re a big music fan, I assume. What genres? What ponds do you fish in?

MIKE KELLY  01:17:54
When I was younger, I was really into heavy metal. I still am — Rush and heavy metal and bands like that. And I played bass in a band. And nowadays it’s really — I’ll listen to Miles Davis, I’ll listen to Burning Spear and reggae, I’ll listen to Radiohead. I just finished Michael McDonald’s autobiography.

BARRY RITHOLTZ  01:18:26
I know what you’re about to say. Did you see — it’s on HBO — the Yacht Rock—

MIKE KELLY  01:18:31
Yacht documentary, or something they called it. It was—

BARRY RITHOLTZ  01:18:34
It’s just a yacht rock documentary.

MIKE KELLY  01:18:36
I love yacht music, yacht rock.

BARRY RITHOLTZ  01:18:38
It was so surprisingly good. I’m a big Steely Dan fan, so I expected to hate it. And there’s a brilliant line where he gets Donald Fagen on the phone and he’s just like—

MIKE KELLY  01:18:50
And he hated the fact that he called him yacht rock and he hung up on him, right? But like in the Michael McDonald autobiography, he talks about Steely Dan and their process. They were super obsessive. Every note counted. They would do take after take after take. It was very sort of Beatles, Beach Boys, right? For certain musicians — Miles Davis probably — who were just so intense about the process of creating music. And I love seeing that and I love learning from that.

BARRY RITHOLTZ  01:19:21
So there’s a YouTube series, or it’s a series that ended up on YouTube, called Classic Albums, and the making of Steely Dan’s Aja is insane. But they also give you a little history and show you — hey, you like my old solo? Here’s the 43 different guitar solos before they — and then they didn’t just take one, they patched 12 together. It’s pretty amazing. I think it’s called Classic Albums, and you could find a bunch of other stuff. But I thought the Steely Dan stuff was really—

MIKE KELLY  01:19:57
Oh yeah.

BARRY RITHOLTZ  01:19:57
Really interesting.

MIKE KELLY  01:19:57
The solo on “Kid Charlemagne.”

BARRY RITHOLTZ  01:19:59
It catches you every time. And I have a couple of years on you, but I’ll make you a tiny little bit jealous. I was in — I want to say high school — I saw Black Sabbath at Madison Square Garden, and this unknown band opened for them named Van Halen.

MIKE KELLY  01:20:16
Oh gosh.

BARRY RITHOLTZ  01:20:16
And it was insane. I’m not exaggerating.

MIKE KELLY  01:20:19
You did make me jealous just then.

BARRY RITHOLTZ  01:20:20
Is this what every concert is supposed to be like? I want to say I was 14, something like that.

MIKE KELLY  01:20:26
Wow.

BARRY RITHOLTZ  01:20:26
Head blown. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either alternative investments, private credit, what have you?

MIKE KELLY  01:20:44
So, in my view — and I have two young sons, well, 20 and 17, and it’s kind of the advice that I’ve given them — I believe the greatest definition or criteria of success going forward is going to be adaptation. So learn to adapt. Everything is being disrupted. Jobs are being disrupted, not replaced. They’re being disrupted. Careers, the world, your ability to try and fail and get up again. As the Japanese say, rise eight, fall seven. You’re actually supposed to put yourself out there and be resilient and adapt. And you’re going to need to. I think in the future that’s a really important mindset to have in the world we’re entering into and that is going to transpire.

Obsess about what you do as much as you can. Read everything you can get your hands on. Network to whatever extent you can. Meet people, put yourself out there, and do it in person. Don’t do it over Zoom. Get out there and immerse yourself in whatever it is that you’re doing.

And then finally, I would say, be the man or woman in the arena. I think there’s an over-fixation on likes and the comment section. Forget the comment section, forget the number of likes you have. Put yourself in the arena. There are always going to be weak critics sitting in the stands throwing rocks at you. Ignore them.

BARRY RITHOLTZ  01:22:29
That’s the famous quote from — was it Theodore Roosevelt? Teddy, right. The man in the arena. And our final question: what do you know about the world of alternative investments and private credit today that might have been helpful when you were first getting started, 30 or so years ago?

MIKE KELLY  01:22:48
So when I was starting out in the business, I viewed the markets as this giant puzzle that needed to be solved. And I like puzzles. So I thought, all right, I’ll take all of the classes and read all of the books on cracking the code and quantitative finance and derivative math and all of these things. And yes, over the years, I’ve used those.

But if I could go back and do it all over again, I would have taken far more psychology and philosophy classes and maybe fewer classes on building DCF models. Because as I think about my career and how it’s evolved, and my daily interactions, and even observing the markets, it’s far more driven by behavior than it is by math. At least the world I’ve occupied — I don’t work at Rentec. But it’s irrationality and incentives and behavior, for better or worse, that creates opportunities, that creates management challenges, what have you. But I would have studied more of the psychology and philosophy.

BARRY RITHOLTZ  01:23:59
Really, really interesting answer. Thank you, Mike, for being so generous with your time. We have been speaking with Mike Kelly, president and Chief Investment Officer at Future Standard.

If you enjoy this conversation, well, check out any of the 649 we’ve done over the past 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. I would be remiss if I didn’t thank our crack staff that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer. I’m Barry Ritholtz. You are listening to Masters in Business on Bloomberg Radio.

 

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