Pomp Podcast #242: Michael Novogratz on Consumer Confidence in Markets

Absolutely. Yeah, look, I think one of the big things right now people want to know is just what's going on. So how do you think through, given the fact you've lived through so many of these, you've traded through so many, how do you evaluate what's going on in the global market right now? You know, every once in a while, when it's happened, I don't know, three or four times in my 25-30 year trading career, you get a category 7 hurricane where it becomes just global risk off and the system goes through a massive deleveraging. And that's what you're seeing right now. It's usually, you know, comes from intense uncertainty. Sometimes it comes from intense leverage. This one I think is really from intense uncertainty, you know, with the coronavirus and how it's going to end up. And we've never really had the economy going into complete shutdown on a global scale, almost like a rolling blackout. And so, you know, things that totally should make sense necessarily don't because it's where people have positions, they are selling them to get to cash, and it becomes a self-fulfilling prophecy. And so you think, look, like things like risk parity which is being unwound at an immense pace, and so the Bridgewater hedge fund posted 20% down, you know, for the year so far. It's the worst drawdown I think in, you know, 20 years. Crypto, which you know a lot of people were talking, you know, Bitcoin and I was a big advocate of Bitcoin as this digital gold, this hard money asset which should do well when central banks flood the world with liquidity, when fiscal becomes irresponsible, and you know we just start opening up the checkbook. I mean, that's exactly what's happening. Yes, it's a leveraged risk asset, right? We forget that it's still mostly retail held, and a lot of retail buys on leverage out in, you know, BitMEX and Finance and all the great Asian exchanges, machine casinos. And, you know, people are having a hard time, they need to make their bills, they're losing money in other things, they start selling, and you just have a rolling snowball. And new money is scared. Like, even if you have a ton of cash on the sidelines, you're in the middle of a shitstorm and you're not going, "Yeah, let me step in right now and buy some Bitcoin which I've never bought before." And so you got some old hats that maybe were smart enough to sell it that are buying some, but you don't have a whole lot of new money coming in, and you're not gonna have new money come in for a while. And so I think as far as crypto's concerned, you know, this probably sets the story, the narrative of new adoption in Bitcoin as a store of value or in the other coins as part of the future of building a decentralized internet, you know, it sets it back 12 to 18 months. You can kind of tell because it's gonna, we're gonna have to get through this and then you gotta rebuild confidence.

I think in a credit equation and a liquidity crisis, anything people are long is gonna get sold. And so people were max long gold and they're selling now. You can with hindsight look back and say, well, this is one of the greatest deflationary impulses we've ever seen in our lives. And so you're going to go through a period of intense deflation. And crypto and gold were supposed to be inflation hedges. And even if they cut rates to zero and print money and drop it out of helicopters, can they beat deflation, which we've had a hard time beating, you know, in Japan for 30 years now, and the rest of the world we've been trying? And so, you know, we might look back and say this moving in gold and this moving in Bitcoin wasn't as irrational as it felt. You won't know until the dust settles. I personally think you're gonna have a brief period of deflation, and you're stoking the fires for inflation because I think the economies will come back faster than you think once we get through this flu, God willing. And there's gonna be a ton of liquidity and a real fiscal profligacy that we already had that's now going to be exaggerated.

So I think listen, I think the Fed did what they're gonna do and they'll do more, and they're doing a great job. Lots of liquidity. They're gonna, my guess is the next step they'll come into the commercial paper market. There is no, they want to make sure there's no sand in the gears. But this is gonna take fiscal. And in some ways, they set up Mnuchin and Trump with the blessing of, you know, Nancy Pelosi to open the checkbook for a ton. And the Fed is going to monetize, they're gonna basically monetize the fiscal stimulus, right? You've got zero rates and unlimited repos. And so in a lot of ways, this should make yield curves go steeper, it should make the dollar weaken, it should make crypto go higher over time. But in the short run, what's gonna get the economy back isn't monetary, it's fiscal. And so we really got to watch what the package that, you know, again, it's Mnuchin-led, Mnuchin, Trump, but you know, Pelosi is gonna have to bless it. That they get through some of that. They want to do the macro, the payroll tax cut. There's a lot of pressure to just put money into the system. I mean, everybody, rightfully including myself, is worried about, you know, this gig economy that we have. If you're a Pilates instructor, a yoga instructor, a delivery guy — well, maybe delivery guys are alright — but a waiter, a bartender, you know, all of those jobs go to, you know, cash flow negative real fast, and they don't have normal salaries. And if you think about 40% of America has less than $400 of savings, you know, we go to three weeks of this, forget not paying your rent, people are not gonna have money for food. And so there's a fear of social unrest. I mean, I have really smart, rational friends who are, you know, leaving the city, buying 30, you know, 90 days' worth of food and holing up, not because they're worried about the virus, because they're worried about rioting. And I think that's a little extreme, honestly. I think our social safety structure is better than that, and that we will have food available for people, and the authorities are already planning on all this stuff. But these are not irrational guys, these are smart investors. And so you can tell where fear has gone.

Listen, there's two angles that I think I would do, and I think the administration actually is gonna do. I have rarely got on board with this administration, you read my Twitter, but I think in this case they probably are gonna end up, you know, stumbling into the right movement. I mean, the first is get money out quick. And so the most radical would be some form of UBI for people that need it. Just, you know, Hong Kong did it, I believe Australia is doing it, where you literally just cut checks to people. Ask you, boy, that give people money so they can buy their food, so they can pay their rent, right? Just keep the economy going. You know, you can do that with a payroll tax as well on a broad scale. The second, and I think the administration was already playing this, I mean, one way Trump was going to try to get reelected is he was planning a massive, massive infrastructure build, or at least a prop, it's a prop, an infrastructure build. A trillion-dollar infrastructure bill he wanted to originally unveil it right around the Democratic convention as his to steal their thunder and, you know, ride that into the election. That wouldn't surprise me if that gets, you know, brought forward in its timeline and they still push that. So kind of on one hand, how do you get money into the system quickly? On the other hand, how do you actually start this big build where those are big contracts that get put in place over time? And you can see at least people say, "Hey, these industrial businesses aren't going to go out of business, they're gonna have to do."

It always has an impact. And so I would say, I mean, my son was supposed to go to Jackson Hole for spring break skiing, and he was going with other family. And so they were gonna leave on Saturday, but he was supposed to take his SATs, so they decided to leave on Sunday. And on Saturday we were talking about it, and the SATs got cancelled, but alright, yeah, they're still going, they're still going, they're still going, even though they're gonna maybe close one of the tram. And it went from Sunday morning, "Oh, we're not going to go because it looks like they could close down the mountain," to the hotel on a piece of literally being shuttered all in like a 24-hour period. And so we went from sending our kid to the whole mountain being closed. And I think there was a psychological shift this weekend where Saturday night, New Orleans, to Sunday, people say, "No, no, no, no, no, no, no, don't leave your freaking house." And so there was a gigantic fear shift between Saturday and Sunday that I saw. And it was a wake-up call, I think, where people finally got it. That translated into the market this morning, and I don't think anything the Fed would have done, you know, would have created a different environment. I do think we'll see how the market closes today. You know, sometimes that initial panic has to happen. We saw VIX go to almost 80. You know, VIX at 80 doesn't stay up there that often. You know, there's only one other time I remember in my career that it was above 80, and that was '08. And so we're getting close to panic. And I think that Fed liquidity will help. I do still think there's more to do. They need to unclog the commercial paper market, and they really need on the fiscal side to speak to all these small businesses. I mean, every single hotel in America is going to go to zero occupancy. And so how do you throw the lifeline to businesses that need the money, you know, and then not throw a lifeline to businesses that are gonna go out of business no matter what you do? It's a tricky game.

I think if you haven't gotten to cash, it's too late. Like, could the stock market go lower? Yet, could the S&P, S&P is at 2500 right now, or was when I walked into this office, could it go to 2200? It certainly could. So that's another 10%, you know, little, it's 8-10%. I could go lower, right? Way to guess in here, 8 to 10% that I think would be the ultimate low if you just look on the charts. There's a lot of support down there. And so I would, if I was an investor, a, not take a lot of leverage yet, right? We're still in a danger zone. But if there's a good time to take a lot of leverage, and I would start looking at individual stories that are so bombed out that, you know, it's a good company that you know it's not going out of business, say that it's got a good cash flow, and you're buying it at 50 cents on the dollar versus where you were, you know, two months ago. And there are lots of individual stocks. One of my worries for crypto, quite frankly, and as I look at my own money, you know, I was, I acted decently on the macro side and slow on the crypto side. Stubborn, you know, it's a core position, and so I lost a lot of Bitcoin all the way down. And now I'm looking, okay, where do you add? There are so many individual stock stories that you feel like even if you get in it's a little early, you know, in a few months there's no way you're losing on this thing because they got cash flow, you're buying it at a discount, a big discount. And so I think there are probably easier investment opportunities in the stock market than there are in more speculative markets. You know, speculative markets take a story, they take confidence. I look back, I want to kick myself in the freaking nose because I was always saying Bitcoin and all the crypto is a story of confidence, right? It's a confidence game. Stores of value are only worth things because we say they are. And gold's a confidence game right now. And we had just, and we're in the middle of the greatest confidence-kicking in the gut that I've ever seen, right? Confidence is shaken in institutions, it's shaken in, you like it, and it's just shaking our ability to understand things. And so that's why the markets all sold off, and it makes all the sense in the world with hindsight that crypto got the baby. I'm hoping the liquidation in Bitcoin is coming close to an end. You know, we've had two big pukes, and I'm guessing a lot of the leverage is getting, you know, squeezed out of the market real quick. And so I'd love to see Bitcoin, for instance, stabilize. You know, I'd love to see it close over 5,000 and kind of stabilize even between 5 and 6,000, you know, for a while. Because the long run, the story doesn't go away. And why I don't think it goes to zero ever. There is a core group of developers, they don't care if the world's blowing up, they're still developing on it. There are most of the guys I know that own, you know, kind of 10,000 plus coin positions, they haven't sold, they don't plan on selling. These guys are ready for the long haul, that's part of their portfolio. And so, you know, it's a damn shame. You would have felt a lot smarter to have sold a lot at 10,000 and have firepower to be buying it down here. But I don't see that. So I'm hoping for Bitcoin, as you get stability, for all the crypto. And I think you're going to see better opportunities literally in some of the bombed-out equity markets.

You know, for the first time in life, I don't know, you know, since I started crypto, I would now, in this brief moment, consider myself a hodler. I'm good at, you know, I'm gonna hold our Bitcoin. I do think it comes back. I believe in it in the long run. I think it's, you know, listen, this was a test that it did, it didn't look great, and you know, but I think it didn't behave much different than most of the other assets that were risk assets. And so it wasn't a magic bullet by any stretch. But I do think the story continues. And so, you know, from an investing perspective, we'll hold, hold a bit of Bitcoin. And listen, though, it's not like our whole industry is going away. Like I said, it's probably been set back 12 to 18 months in terms of people's excitement to put new capital in it. And so I do think underneath, outside of Bitcoin, you know, the blockchain space itself continues to grow. You know, more and more companies are getting involved. And so the venture business around blockchain continues to be interesting. I think the blockchain, you know, SaaS or consulting businesses are still busy. And so that technology shift isn't gonna change. How that translates in the markets and crypto and us trading these coins as a store of value or as a forward look on what will come, right? If you think about Ethereum or any of the other protocol tokens, they have some core value, but they really are more of a venture bet on this ecosystem being built. That's still going to happen. It's just you're not going to see the value in the coin until the ecosystem really starts humming a little bit.

Listen, I think it's gonna be so, you know, fool me once, shame on me, fool me twice, you know, I feel dumb. People bought gold and would have bought Bitcoin back after '08 because you believed in an inflationary impulse, right? And it took a long time. And so we're gonna need this, and we didn't really get it. We were only just starting to get some inflation, not a lot, but we were just starting to before this virus hit us. And so I mean, I always thought it was crazy that Trump was running a 5% fiscal deficit while he had full employment and low rates, right? It was, we were juicing the thing as much as we could. Now you're gonna have a deflationary impulse, but you're gonna have all the embers to see if you get the fire going again. I think the natural inclination will be for gold to bounce some, maybe around 1,400. That would be my target for gold for the liquidations to end. And you know, Bitcoin, I hope we've already hit below it, you know, 4,000 or 4,500, whatever you want to call the tradable low, that that flashed, hey, that will start going up. I don't think it will really accelerate until we actually see, you know, the basement of currency, a real inflation, you know, because people are bought into this deflationary environment, and this is a big deflationary. We certainly might, we're gonna see unprecedented fiscal. It would shock me if we go to an 8% fiscal deficit, right? We're at 5, and God forbid, who knows what this is going to cost us? Maybe it's a 10% fiscal deficit at zero rates and a Fed monetizing. And so you'll have some people jump on that, "Here it comes." But I don't think you're really going to see the acceleration of gold or Bitcoin until you see the inflation, so you can start smelling this, you know, the fire.

Yeah, so this time, this is just a capital a t-shirt that my friend Paul Jones gave to me. You know, he's the chairman of this group that has been trying to tell this new story that we really need multi-stakeholder capitalism as opposed to just shareholder value driven. And he put a letter out, it didn't really get well read because we're in the middle of a crisis. He looked at the Russell 1000, and you looked at there are 20 million employees in the Russell 1000, and 10 million of the 20 million people make less than the living wage. And so the letter was asking CEOs to look at their own company and treat their people better, you know, both with equity and with compensation, because those are your resources. And it was co-written by the CEO of eBay, I'm sorry, PayPal. You know, so that kind of in mind, and you're seeing that in our politics, right? How do we have a capitalism that actually benefits more people? This is just gonna exacerbate that. All of those workers are gonna hurt a lot more than you or I will in an environment like this. The uncertainty feels worse, the medical bills could feel worse. And so I do think our politicians get that, and you're hearing it every time they're talking, "We've got to take care of that, you know, the people below." But I, you know, as we come out of this, maybe it gives us a chance to kind of look and say, "Hey, what kind of capitalism do we want in our country?" You know, this the baby, do socialism and capitalism is kind of horseshit. You know, what the center has been pushing, if it's Larry Fink or Jamie Dimon or Paul Jones or Marc Andreessen, all has been this multi-stakeholder capitalism. Somewhere, capitalism got way too skewed to the shareholder, and how do you balance that a little bit? I've got four young kids, well, not so young anymore, but Gen Z, Millennials, and you know, their whole generation says this doesn't work. From the environment to the community you work in, to your employee, to your customer, and your shareholder, they kind of want that balance. And so I think, you know, this might get lost a little in the crisis, but hopefully coming out of this, people say, "Hey, how do we build something that is a little more sustainable?" You know, then when it comes to the prison reform stuff, we're really, really worried about our prison populations getting coronavirus. You're stuck, you know, the exact reason they send kids home from college, right? Because they don't want people stuck in these dormitories where you can transmit the thing so quickly. Think about what a prison is and think of the sanitary conditions in a prison. And so we have been pushing and advocating for, to start with, people not getting sent back to prison for a technical parole violation. We have a shocking amount of people, right? A million and a quarter people a year get sent back to prison for a technical violation. That means you've got a speeding ticket while you're out on parole, or you've got an illegal U-turn, or you've showed up late for a parole meeting, and they send you back to the can. That makes absolutely no sense. It makes no sense any time, but especially in this environment where you're putting someone and a whole community at risk. Same thing with pretrial, right? Bail reform. You know, until people are guilty, keep them out of the prisons. And so, you know, we're pushing those things. People are looking at them. You know, hopefully some of that gets done. But this virus in general, any crisis always highlights the most vulnerable people in society. And you know, you're nervous, and I'm nervous, and you've got all the resources in the planet, and you think, "If I'm nervous with these resources, how are the people with no resources?" And so, you know, it's a, I'm surprised the government hasn't set up a charity already where people can donate to, you know, helping this gig economy world. I mean, it's not just the gig economy, I use that as a, but this group of people that without their paychecks coming in, without their income coming in, are really going to suffer. You know, put George Bush and Bill Clinton in charge or something like that, or Obama.

Yeah, I think you're gonna have to give them, you know, I mean, they're good, they're gonna try SBA loans, you know, so loans or grants. I mean, you think about, you run a sports store and you sell sporting goods, you know, if you're the local Main Street sporting goods store and all of a sudden you go with zero sales for two months. Now there are a hundred examples. I keep thinking of the small restaurants. I thought of a Chinese restaurant on the way back from the Hamptons yesterday in one strip mall, and yeah, we were the only people in there, and I was talking to the guy, he at least had a delivery hope. But yeah, I think this is really going to be complicated on how you get money into those businesses. And, you know, and there's got to be some sense of fairness on how it happens. You're not going to be perfectly fair, but you got to have some blanket sense of fairness. I made a gallows joke after Bitcoin went from whatever 8,000 to 4,000 that night, if Galaxy was able to get a small business loan because we were becoming smaller, you know, and that was a bad joke maybe. But, you know, it's painful for big businesses with payrolls, and you know, because business is all businesses are gonna slow down, right? Let me tell you, there's a lot less, even if the trading business is going on, there's a lot less happening in the advisory business and the banking business. And you know, talking to someone about a new token, no one wants to talk about anything right now except being safe and, you know, or what's this virus going? So productivity collapses. So I think all businesses are gonna have a hard time. We got to be really worried about, you know, the small ones because they employ a ton of people and that's where all our growth comes from. And B, it's, you know, again, they're in the more vulnerable place.

You don't have a theta, more of a version of UBI. And I don't think it's a terrible idea. If you gave everyone in the country a thousand dollars, you know, a month for three months, right? That's a trillion dollars. That's a pretty big stimulus right there. It's fairly distributed. If you want, you kind of cut out the rich people, but there's not enough rich people that it really makes a big difference in the number. And so to kind of do it consistently, Hong Kong did that, Australia's doing that. That gives people some spending money. I don't believe in MMT. I do think at one point, if you keep printing money, you're gonna get rip-roaring inflation. You know, I just see it as an emerging market investor my whole life. You know, it's a catchy way to justify running monster fiscal deficits. There's a thing in economics called the Minsky moment. It's another confidence game. It's you're okay until you're not. And so there's, you know, the old adage, "It's flat until it stands on its head," or "There's no inflation until it rips up." So you have this sense that, well, Japan has done it, we can do it. We're running 5% deficits and the yield curve is still low, you know, long bonds are at 1.35, you know, we should be borrowing more and more. Well, at one point, confidence breaks. Confidence, as we just saw with Bitcoin, is a very fickle game. And so if you lose confidence in people's desire to hold long-term Treasuries, game over, right? Then we're in it, we're going back to the Stone Ages, or we're going into the Bitcoin age. And so you got to be pretty careful when you swing around. And MMT as an ethos, as a short-term fix with UBI, makes some sense right now. 100%.

Yes, the biggest mistake people make is when a crisis starts in a market breaks, everyone thinks, "Oh, it's time to get back in," way too early. Right? And, "Oh, it's a three-standard-deviation move, it's time to buy," and, you know, "Time to buy the airlines." It's time to, always gets much worse than you think it's going to get. And so I tell myself, I sometimes make the same mistake, but I tell myself, "Hey, we got an instinct to buy something. Go take a long walk, come back a week later and look at it. Go take a long walk, come back a week later and look at it." And it's usually worse off. So once things start going bad, they tend to stay going bad for a while until you get a real zenith. And so, you know, if it's, you know, and you looked at dollar Brazil at 4, it looked pretty good, and once at 5, you know, pick a story where the fundamentals are turning positive. And in America's markets, it's the first derivative that matters. It's not the absolutes. Are things getting better at the margin or worse at the margin? And so if you can see things turning better at the margin, right, that usually starts the cycle of where things get better. And so, you know, that doesn't mean you can buy bombed-out things and sell them. But what you're really trying to do when there's this evisceration is buy things that you can hold for a long time. Look at, you know, Churchill Downs, Kentucky Derby, is a stock, CHDN. The thing went from 160 to 80 in the last six weeks. So half. And they're gonna cancel the Kentucky Derby. They make about a hundred million dollars a year on the Derby. It was a five billion dollar company. So you're like, "Wait, they're gonna lose 100 million of revenue one year, and the company is now worth half as much?" And so companies like that, you know, you do your homework, you find that where the fundamental value is, then you can scale in. You don't have to, even if it jumps right away, you don't have to sell it. And you're like, "Okay, this is a real business that's gonna." So if it's a country that the country is on the right footing, if it's a business, if the business is on the right footing, and don't go early.

We have this crypto business, Galaxy Digital, and then downstairs I have a private equity business that I'm a part owner of called Rational Capital. And, you know, we've been looking in the food space. Like, people are gonna have to keep eating. And so there's some really interesting plays in protein we've been looking at, putting big cattle to work in. And I looked like I got through the Kentucky Derby out there. I had been a big owner of it two years ago with the hope that maybe we could find some way to take it private. It was an ambitious idea. We could have made a whole lot of money on it.

Anthony, hey, thanks. Thanks a lot.