324: Former Public Pension Chairman Marc Levine On Investing During The Pension Crisis

Marc Levine is the Former Chairman of the Illinois State Board of Investment. He also started Chicago Asset Funding, which navigated the 2008 financial crisis very profitably. In this conversation, we discuss runaway pension liabilities, the disciplined systematic approach Illinois used to go from 3rd quartile of performance to top 8% in 3 years, the importance of overweighting tech and innovation, the index model of pensions, and what it will take to get Bitcoin in every pension portfolio. =============================== Our second sponsor is choice, a new self-directed IRA product that I'm really excited about. If you are listening to this, you are likely part of the 7.1 million bitcoin owners who have retirement accounts with dollars in them, but not bitcoin. I was in that situation too. Now you can actually buy real Bitcoin in your retirement account. I'm talking about owning your private keys and using tax-advantaged dollars to do it too. Absolute game changer. https://www.retirewithchoice.com/pomp =============================== Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Mark Levine is the former chairman of the Illinois State Board of Investment. He also started Chicago Asset Funding, which navigated the 2008 global financial crisis very profitably. In this conversation, we discuss runaway pension liabilities, the disciplined systematic approach Illinois used to go from third quartile of performance to top 8% in three years, the importance of overweighting tech and innovation, the index model of pensions,

• 0:38Anthony Pompliano?

  and what it will take to get Bitcoin in every pension portfolio. I really enjoyed this conversation with Mark, and I hope you do as well. Before we get into the episode though, I want to quickly talk about our sponsors. The first is BlockFi. I'm a really happy user and an investor in the company. They currently have three products. The first allows you to buy and sell cryptocurrencies. The second allows you to deposit crypto and take out a US dollar loan against your collateral. And the third is my favorite product, which allows you to deposit crypto or a stablecoin and earn up to 8.6% interest in an interest-bearing account. BlockFi has been growing super fast,

• 1:16Anthony Pompliano?

  and they've got a ton of cool products on the horizon, including a Bitcoin's reward credit card. So go check them out at blockfi.com/pomp. Again, blockfi.com/pomp. Next is Choice. They're our second sponsor. Choice is a new self-directed IRA product that I'm really excited about. If you're listening to this, you're probably part of the 7.1 million Bitcoin owners who have retirement accounts with dollars in them, but not Bitcoin. I was in that situation too, but that's no longer the case. I'm now a Choice user. You can now actually buy Bitcoin, real Bitcoin, in your retirement account. I'm talking about owning your private keys and using tax advantaged dollars to do it too. Absolute game changer.

• 2:00Anthony Pompliano?

  So go check out Choice, a new self-directed IRA product that allows you to buy Bitcoin, hold the private keys, and use tax advantaged dollars to do it. Retire. Withchoice.com/pomp. Again, retirewithchoice.com/pomp. And then lastly, don't forget that I write a daily letter to over 50,000 investors about business technology and finance. I break down complex topics into easy to understand language while sharing my opinion on various aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. All right, let's get into this episode with Mark. I hope you guys enjoy it.

• 2:37Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 3:02Anthony Pompliano?

  All right, guys. Bang, bang. I am super excited to have Mark here today. He has, he's the first person to come on the podcast who's actually sat on the pension side of the table and made all of the decisions and kind of looked through everything that we spent a lot of time talking with here. So, Mark, thanks so much for doing this.

• 3:21Speaker 02

  Thank you for having me, Bob.

• 3:22Anthony Pompliano?

  Yeah. For the like, three people who watch this who don't know who you are, let's just start with kind of your background and what did you do before you got to the Board of Investments?

• 3:32Speaker 02

  Sure, sure, sure. So, I come out of the financial world. I, back in 1990, which is literally a lifetime ago, I came out of Calog and actually worked for a couple of banks in Chicago that Continental, which is now part of B of A. And I got in very, very early days. Okay, I got into securitization. So, the kind of creation of asset-backed securities. And so, this is like five years after Lurinieri invented the mortgage-backed security. So, it was the great, it was the most fun thing in the world because you were like inventing, with every deal, you were inventing something. And, you know, and it was, you know, so it was

• 4:15Speaker 02

  really a blast. Pretty quickly, my, at the time, boss and later partner figured out that...

• 4:23Speaker 02

  Going through the whole process with rating agencies, et cetera, creating a beautiful investment-grade bond was an enormous amount of work. And then we would like double the work and go to investors and actually frankly, give them all the upside. So we developed, we actually invented a structured investment vehicle, which were basically initially Merrill and later Solomon, which became Citi, would raise capital for us really off of our credit ratings and our track record as it got built up. And so we really financed all of our paper through the structured investment vehicle. In about 2004, I started with a new partner,

• 5:03Speaker 02

  Jim Kostakis. We started Chicago Asset Funding to essentially do the same thing. And, you know, so before we get kind of get to 08, 09, which was quite a, quite an experience, you know, I, so I invented all sorts of new asset classes in asset securities, only because I was kind of the first one doing that, among the first people doing it. One of them, funny enough, was precious metals, which sort of plays a role in your world, right? And so I did the first ever securitization of gold, silver, platinum, both, you know, kind of the physical metal and warehouse receipts and loans secured by that did feature films and equipment leases, et cetera, et cetera. So, so then you kind of pop up like 08, 09,

• 5:48Speaker 02

  and Chicago Asset Funding is kind of churning along, doing fine, not so great, not so bad, making a decent living. And, and then, you know, the sort of storm came. And the way our vehicle worked is we match funded our assets, which was quite unique, right? Because hedge funds, of course, have like redemption, like, you know, sort of rapid redemption. And, and most structured investment vehicles had a lot of commercial paper funding, like short-term, you know,

• 6:18Speaker 02

  Kind of super risky balance sheet. All right. And so we had our capital in, let's call it late 08, lasted through 2012, 2013, which at that time, literally was forever. All right. We're talking right after Lehman failed. So that was permanent capital. And what we did was we moved, so we had nice corporate paper. We were able to sell for 97 cents on the dollar, which was gold, right? And we're talking like September, October, 2008, right when Lehman's failing. And what we did was, we did a few things with the money,

• 6:59Speaker 02

  but 80 to 90% of what we invested in was a thing called a CLO, which still exists big time today. Actually, it's funny. In fact, my first boss and later partner in securitization invented the CLO back in 1989. Or the way he would describe it, he exported financial disaster to the Japanese by selling them the kind of B pieces. But what a CLO is, is a portfolio of senior secured loans, mostly to private equity owned businesses. And then the funding comes from bonds in different tranches. So maybe the first 60 cents, 70 cents is a triple A first pay, total money good, no matter, like the world

• 7:43Speaker 02

  could come to an end. Then you have some mezz pieces, junior capital, and finally, some equity. And we did buy some first base, but we bought a heck of a lot of the kind of junior, the sort of riskier, but was still with lots. We didn't buy the equity. We really couldn't, based on our kind of investment guidelines. So we had nice capital underneath us, portfolio of senior secured loans, right? So, right? So high yields unsecured, high yield can get crushed, okay, in a, like what we're living through with COVID, and we maybe should talk about that a little bit later. But senior secured loans, like, so these things, initially we were buying, they were 50, 60 cents. Later, they were like 10 cents. There were days, Pomp, where

• 8:29Speaker 02

  Literally days where Wachovia is one of our trading partners would tell me, "Mark, you're the only bid in the world for Mess CLO paper." Okay, seven cents. And, right, for literally, we argued was these are par bonds, we're going to get through this. There's a lot of garbage paper out there. The mortgage derivative paper was complete garbage and was five cents and deserved to be five cents, right? It was best kind of six, like you could spend five and make six. We were spending ten to make a hundred. And then, you know, kind of mid '09, late, kind of late second quarter 2009, I got kind of handed to him, like Geithner's, you know, those stress tests,

• 9:14Speaker 02

  if you recall that, that then led to a bunch of, that kind of went on the back of TARP and led to a bunch of equity offerings by all the big banks. That completely reliquified everything in our world, okay? So all the stuff that was getting crushed, not on solvency, but on just illiquidity. All right, just, it's so beautiful, like the clouds parted and our 10 cent bonds were back to 60 cents like that. You know, like, and all of a sudden, it's like, holy shit, like we, you know, we, and this wasn't a 2 and 20 vehicle, like we owned the equity, so we were making the money and it was just freaking awesome. So that's kind of what led me,

• 9:57Speaker 02

  I know I'm talking at you a lot here, I could, you know, so to transition now to how I ended up at the pension. All right, so I pop out of that whole thing and I go from a guy making, you know, 20, 30 bips on a few dollars to, you know, really having some money. And so I kind of wanted to give back and, you know, and you sort of want to use your skill set and capabilities to, right? That's the way I think kind of everyone should approach this kind of thing. And so, yeah, I met this guy who ended up running for governor and, you know, and I started actually writing about, so here in Illinois, as you know, and I know we're going to talk quite a bit about the, right,

• 10:42Speaker 02

  we have a pension system that on the liability front, okay?

• 10:48Speaker 02

  Right, was, you know, all these promises that could never be kept and is literally just a complete, you know, train wreck that has been in process and very obvious for 25 years. I started writing about that. I even did, I did a little bit of TV, which worked out quite well because I kind of got the nerves out in local TV and for sort of what happened later on. And then, so Bruce Rauner gets elected governor and he asked me if I, you know, want to serve on the pension, which we, of course, chatted about previously. He knew what the answer would be. And so that starts in 2015. So it's really, that's kind of how I got started there.

• 11:26Anthony Pompliano?

  And so let's talk about the Illinois pension, because I think that it is used constantly as like the poster child, usually in a, in a negative connotation, especially before you got there, right? And so maybe let's just start with, how does a pension like that, that is so large, that was like 24, 25 billion dollars when, when you were there? How does it get so underfunded? Like, what are the structural issues that end up leading to, kind of when you step in, you're like, hey, we're already underfunded, like, like we're already here, we got to try and dig ourselves out of this hole. But how does that happen?

• 12:00Speaker 02

  Okay. So first off, so Illinois has, it's three large state pensions at this, sorry, at the state level. Then there's a bunch of local pensions. So throughout kind of the government world, like a local police force might have its own pension. A, now normally with teachers, there's usually a unified pension per state, which is why things, places like, you know, Illinois teachers and CalSTRS, which is a California state teacher pension, how they get so freaking enormous. And so what a pension is, is you take money out of, well, first they're negotiating collective bargaining. The, you'll take money

• 12:44Speaker 02

  out of a paycheck of a state employee, a teacher, maybe a university worker, and there are some corporate pensions as well, but now they mostly reside in the, kind of in the, you know, kind of government world. They are, those... The way it should work and the way it really hasn't, yeah, maybe it has in certain places, certainly not in Illinois, is then in a methodical way, okay, the state would match that contribution, okay, and that money, so that money's getting collected throughout a career and it gets invested professionally, hopefully, and, by the way, the problems in pensions really, I would all, I really say this across the country, the problems in pensions really hasn't been on the asset side. It has not been on the asset side. It's

• 13:29Speaker 02

  been on the liability side, and here's why. There was, there was no connection between the, the funding that was coming in through the employees and through, and through, more importantly, the employers, right, the states and the local, you know, local governments, et cetera, and the benefits that were being promised. They were completely disconnected. So what you had was negotiations, all right, where on one side table you had union leadership doing exactly what they should be doing. I don't, I don't quibble at all. They're trying to get as much money as they can for the people they represent, and on the other side you had buffoons. You know, you had, like, like, come on, dude, have a calculator, like,

• 14:10Speaker 02

  so no math on one side and perfect math, perfect math on the other side. So what happened was the promises could have never been kept, and then you add on that, the tonic, which we're all very familiar with, and, you know, this happens big time in Illinois, and this happened other, it has happened other places, Illinois is a poster child for, for kind of screwing around with the formulas to fund the pension, where politicians love spending their budgets, okay, on things for, you know, kind of current, you know, maybe that, and a lot of good things, transportation, education, police, I mean, things that have to be done and are, you know, necessary and, right, but, but, so what they would do with these pensions

• 14:54Speaker 02

  is they'd come up with all kinds of ridiculous excuses to not fund them. And here's the thing, when you, as your viewers know extremely well, when you start compounding, okay, and you take a holiday in like 1997, all right, 2020 comes along, you're 23, I mean, you compounded that, that's how you end up at 40% funding.

• 15:16Anthony Pompliano?

  And so really what you're talking about here is you've got multiple sources of inflow, right? So you've got the employees paycheck, there's a portion of that that's an inflow. The state or the government is supposed to match. In many cases, they either don't fully match, they don't match at all, or whatever it is. So there should be inflow, but you're not getting that capital. And then once you get the inflows into what I'll just call kind of the asset management pool, that asset management pool then has grown through the investments that are made, right? And so you're basically making the argument, which I tend to agree with, that like, step one was, we told employees, hey, you're going to get X, but it was impossible to deliver on X. And then step two was, when we took

• 15:59Anthony Pompliano?

  the employees' capital and put it into the pool, the states didn't provide 100% of what they should have provided. And now you kind of have a double win. So just starting out, the pool of capital that the investment team at the pension has is lower than what they should have had, and also the expectations of what they need to deliver are merely impossible, given what the union was able to negotiate. Is that kind of a fair setting of the scenario?

• 16:24Speaker 02

  That's exactly right. That's exactly right.

• 16:27Anthony Pompliano?

  So you step in, and what was the underfunding status when you took over as the chairman?

• 16:36Speaker 02

  So under, this will sound better. I really don't deserve the, how good this might sound, although the whole thing is at such a ridiculous level. I came in, it was probably 30%, I ended, it was 40%. And so the reasons for that aren't, it's not any magic that I did. I mean, I did, I will say this, when I got there, to take a further step back, the $24 billion that is being managed now, which is about what it managed a year ago when I left, a little over a year ago. When I got there, we managed 18 billion. So we had a nice four-year run. We didn't do stupid things, and we did some good stuff. And although I think really the great things we did are even more so sort of in the future. We'll

• 17:20Speaker 02

  talk about kind of rankings and kind of the evidence of the success we had. But the other piece of it is, Is that the truth of the matter is that states, Illinois, big time, and I'd say states across the country have done a much, much better job. They fell super behind, but they've done a better job keeping up over the last, let's call it 10 years. Okay, so Illinois hasn't missed a pension contribution in quite a while. Now, so we had some asset growth. We had, we had, okay, we had, at least they were running on the treadmill where you sort of hope to stay in the same place. So that occurred and that's kind of where we are.

• 18:02Anthony Pompliano?

  Okay. And so what was the actuary rate of return? And for those that don't know, actuary rate of return basically is there's an outside group that comes in and would say, Mark, you, the board, the investment team, you guys need to hit 7% or whatever the number is every year for the next 10, 20 years. And if you do that, we can compound this money at a rate that will make sure we have enough to pay out the liabilities in the future. What was your guys' actuary rate of return?

• 18:31Speaker 02

  Okay. So when I took over, the rate was, the discount rate was 8.5%. All right. When I left, I know it's ridiculous. So when I left, it was, so I used, some of the stuff I used to write back, you know, way back in the day, kind of before I ran the pension, would be like, come on, guys, like, that's completely absurd. Like, let's at least use six, like the corporate pension plans do. Like, I mean, and by the way, Pop, the biggest joke of this is that, and this is, you know, shame on the accountants, I think, big shame on the accountants, is that that rate is determined based on an expected rate of return

• 19:11Speaker 02

  on the assets. Okay. We're, at the time, right, 30 to, let's, you know, 30 to 40% funded. We don't have assets. We don't have assets. So we're using a rate of return on assets and we don't have assets. And the accountants are okay with this. Like, in fact, the accounts force you to do it. Like, I complained and then it was, well, I mean, the accounts, this is how accounts tell us to compute, you know, pension liabilities. And by the way, what the, that, you really hit on the key, key point because that discount rate, for all of the actuarial assumptions, and there's plenty of totally goofy ones, all right, life expectancy, they always get wrong. They always get wrong because they never assume innovation and people are going to live longer. But, but the key variable is always the discount rate because

• 19:57Speaker 02

  What comes out of those collective bargaining negotiations and contracts is actuaries absolutely can estimate what the stream of cash flows are required. Okay. And by the way, that's so that's a number that I would always use. I say, look, you want to discount 80%, that's your freaking business. Okay. I'm not doing that. I'm going to just add the cash flows, which by the way, in Illinois is about is between kind of 550, 600 billion dollars with about 90 billion dollars set aside. Okay. Right. So that's if you just add the cash flows now, right now, when they're discounted, that's how you end up at 120 billion dollars, right? Because that 600 comes down to 320 ish, whatever the number is. And right, so that's, yeah.

• 20:41Anthony Pompliano?

  You said earlier that the pensions have done a good job over the last 10 years. My first thought is, well, that also happened to nicely coincide with the longest bull market in history. How much of what I will call the structural issues or aspects of the financial system and kind of the inflating through QE, et cetera, of those asset prices over a full decade? Do you kind of contribute the fact that pensions have done better at keeping up versus is there some other change that pensions have had in terms of they've gotten smarter or they've changed their strategy? Or is it literally just, hey, we got in the right position and the market kind of carried us from there?

• 21:22Speaker 02

  No, no, no. So I don't really think it has anything to do on the asset side or, you know, inflation of asset prices, which you and I don't exist. That's one place we won't exactly see eye to eye because I, you know, I'm not as sort of skeptical of valuations and, but we'll get to that later. Really though, where your question does come into play though, is that you had a, you had a nice economy that kind of just kept chugging along, right? The kind of, yo, was it the sort of work, kind of like a workhorse, right? You never had the beautiful 3, 4% growth, but you had nice to steady 2% growth. And so tax revenues grew and so what, what, what governors Quinn, Rauner, and now Pritzker

• 22:04Speaker 02

  all did, you gotta sort of tip your hat to them is.

• 22:10Speaker 02

  Well, you would have liked to seen them reform the pension because you can never really catch up. But what they did do was they took kind of all the additional kind of tax revenues, starved the rest of state government, which which may or may not have been a good idea. And probably not. And and all that money just got sucked into this freaking big, you know, pension hairball just sucks in everything. And and I think that really explains. So I think it was they had the money.

• 22:40Anthony Pompliano?

  Yeah. And so when you stepped in, I actually remember this, there was a huge focus on historically pension managers have essentially gone out, found the best asset managers, you know, in the world, and they give them the money. And there's all these questions about fees and structure and risk they're taking and kind of all the things that come with, who are we giving our money to? And, you know, what is the probability they're going to give us back a great return? You took a very different approach, and one that I think now has become one replicated in other places. But two, also, more and more people are starting to say, wait a second, like, that may be something that makes a lot of sense. So let's talk through

• 23:22Anthony Pompliano?

  just kind of at a high level, like, what the philosophy of the investment strategy is, and then we can get into some more of the tactical things that you guys did.

• 23:30Speaker 02

  Awesome. Okay. So here's the philosophy is, for starters, so pensions allocate asset, right? We have an asset allocation to exactly what you expect, right, to stocks, bonds, real estate, other, you know, some pensions might have commodities, might have diversifying strategies. I mean, also, there's all different things. And then, of course, there are subclasses within those. Okay. The now within so so that's kind of the top of the stack, let's say, are the are the asset classes, then sub asset classes. And then how do you get those invested?

• 24:09Speaker 02

  Most pensions allocate, invest that money, which we'll call allocating, okay, invest that money through third-party managers. That is smart. That is a smart way to do it. Okay, that is smart. If I didn't mention it three times already. What you, I, I, you don't want to build some big investment team to be picking stocks, finding private equity investments. God help you. Pensions have done all right in direct investing in real estate. And I saw you had a tweet last night. Somebody wants to talk about real estate absolutely in a little bit when we're drilling down. They've done okay in that. And there's a sort of limited kind of trouble you can get in, let's say, with real estate,

• 24:53Speaker 02

  unless the brother-in-law, one of the trustees, right, is a developer. And, you know, you're laughing, pal.

• 25:02Anthony Pompliano?

  I'm laughing because I've read the stories. I know what happens. So, but like when, so when you took over, right? There's 24 or 18 to 24 billion dollars, somewhere in there. You guys are actually not doing well. Third, third percent or quartile of performance. And you basically, from what I understand, walked in and just started saying, look, let's get into kind of a, just start slashing fees. Make sure that we're not spending a bunch of money to actually get our capital invested. And then you took this kind of disciplined, systematic approach that was really focused on innovation. So kind of explain what that means when you say a disciplined, systematic approach with an overweight or focus on kind of technology and innovation.

• 25:41Speaker 02

  Got it, got it. Okay. So, um, so the portfolio that I inherited had two, 300 managers across, right? So no, could you imagine like, and by the way, it was volunteer. So I was willing to really kind of get in. I was going to be, you know, I was. Soon to be elected chairman and but I mean, what are you going to do with 200 or 300? You can't possibly wrap your arms around it. And really, we should be focusing on the top of the stack on allocation. And so right away, you know, I often say I had no preconceived notions on things like hedge funds, private equity, credit, you know, opportunistic credit,

• 26:24Speaker 02

  real estate, etc. But I did have a preconceived notion that you want to simplify, you want to be able to understand what the hell it is you have, right? You have board meetings quarterly, we maybe you'll have six a year, right? So, and you got a lot to do in them, and you've got a limited staff. So you want to simplify. And it's fine, in a million, so I love indexing, I index about half my own assets. The beautiful thing about indexing is, once you you take that allocation to top of the stack I was telling you about, you know, public market equities, domestic, right, domestic, internationally, right?

• 27:08Speaker 02

  If you do index, there's nothing to do. Like, you're done. You don't need a staff, you don't need, the board doesn't need to discuss it, you are going to get the market return, right? And there's all this attacking of, you know, that it's, you know, terrible, and you end up owning a bunch of stuff, you know, I mean, look at the assets that to this day are the concentrations in the S and P 500. So, which, again, we can get to a little bit later, is like, sort of go through your question. So, so index, what I didn't realize, though, is I had no idea. So, all pensions, pensions operate around, around the government, right? They're funded by governments, you know, the state pension, which is most of pension assets. Anytime you have government around, you're going

• 27:50Speaker 02

  to have politics around. And early on, like, I got, it's unbelievable, I'm driving somewhere, I get a call, and I don't recognize the number, but it's a lobbyist.

• 28:05Speaker 02

  It's a lobbyist calling me about some manager that they hear that we're going to be you know, reducing, shortening, you know, simplifying the manager roster. And I'm like, do you realize you're calling me is a material piece of data, right, that will support getting rid of whoever you're calling me about? Please don't tell me the name. Like, are you kidding me? Like, I mean, that happened. And that, by the way, happened more than once. And so I was, I was fortunate in that I had, you know, the governor, governor's staff were super supportive of what, kind of whatever it is I did, I think. And so as soon as those calls went in over there,

• 28:48Speaker 02

  they're like, deal with Mark. It was a brick wall. Okay?

• 28:53Anthony Pompliano?

  And it feels like, as you step in as the chairman, like, really, you said it already, right? Like, the goal is, do we get the asset allocation right? Meaning, we're going to take 10%, put it in real estate. We're going to put, you know, 60% in stocks. We're going to put in, you know, here's how we break it down across all the different indices, whatever it ends up being. Most people will then spend tons and tons of time on, well, which manager do we select within this bucket? Well, you're basically making the argument for, and you guys did, was, you basically said, look, if most of people aren't going to beat the industry benchmark, then why don't we just invest in the industry benchmark? And therefore, yes, there might be one or two people who beat it, but we're going to beat 80, 90% of the managers in this space anyways, by just investing in the benchmark. It's easier. We just buy it. We don't have to

• 29:38Anthony Pompliano?

  go and check on a manager, do all that kind of stuff. And then also, it's usually much cheaper on top of that, right?

• 29:44Speaker 02

  And there's an, and there's an additional advantage, which is, so the meeting that I was elected chairman of, we terminated, so there were four managers out of the hundreds that were on watch. So like, surely, if we had like 200 managers, we can, we can at least terminate the four that are on watch, and have been on watch for a year, or more than a year. So, so sure enough, of course, the media was there, and there was a, you know, articles written later, yada, yada, which I think actually, to me, they, I think, started out as hit pieces. I think they made us look terrific. But here's what I noticed, though. So in the investment committee meeting, when we were really getting into the guts of this,

• 30:24Speaker 02

  One of the trustees on the other side of the table got pretty pissed of like, you know, we got an RFP for General Consultant, which was kind of part of all of this. And you terminate these managers, like, and got really pissed. And I could say, this is kind of thing that I think happens over and over, often happens behind closed doors, maybe with a staffer, okay, who needs a board to like that. Anyway, once, sort of people chilled a little bit, and then we had a board meeting, and same kind of, you know, kind of energy entered the room, lots of heat. And then, so at one point, the vote was going to be the vote, and the vote ended up being six to three, and eight to one, actually, on a couple of determinations.

• 31:08Speaker 02

  So, this trustee sits down, it's like, all right, Mark, what are you putting the money into? And I'm like, it's going to be indexed. And all the heat came out of the room. And that's what gave me the idea to write that first Wall Street Journal op-ed. Indexing not only is a terrific way to invest, okay? It also is a beautiful, beautiful governance tool to keep people out of trouble. Okay, like, just recently, that North Carolina senator, you know, or Georgia, wherever the hell they are, and this has happened kind of over and over, where, right, it's like, if you index, you really become impenetrable from the peanut gallery shooting at you.

• 31:52Speaker 02

  And in this case, where some manager were getting terminated, and by the way, the manager are perfectly good people doing a professional job, I never once suggested that wasn't the case, and it wasn't the case. They were just kind of a little under their benchmark, at best, they'd be at their benchmark. And I was just trying to simplify things, and that's where our board ended up. And so by indexing, you take the insult out of it. And the other piece of this, Tom, is, and actually, so there's a professor, actually, is at Arizona State, Sunil Wahal, who I've quoted a couple of times in some of my materials, who's done great, great academic research, which I kind of got obsessed with, on institutional investor decisions. By the way, this is not just pensions, this is endowments, foundations,

• 32:35Speaker 02

  everyone suffers from this, of you're constantly firing managers and hiring other ones, okay? Flavor of the month, all right? And so, it's like, beautiful academic research, that in like, 80, 90% of the cases, the manager you replace that came in, is kind of underperforming their benchmark, as, you know, within sort of a year or two, and you're just running on a treadmill, you're wasting your time.

• 33:03Anthony Pompliano?

  And I think that, maybe it was Nevada, is where there was a CIO, and he like, fired every, like, literally the entire investment staff, and he like, put, I don't remember exactly, like, 80, 90% of the capital was all in indexes, and then he would just kind of check on it, like, once a week, and the article I read, it kind of made it seem like, you know, he had a pretty easy life, right? He was managing quite a bit of money.

• 33:25Speaker 02

  So, yeah, so I spent some time with him, actually, at a, we met at a conference, and, you know, I gave him the big, you know, fist pump, right out of the blocks, and so, he's kind of the opposite of, we're very similar, he's sort of the opposite of me, because I'm this kind of wild, you know, right? I love talking about what I'm doing. He's kind of the shy guy in the back of the room, but the guy's awesome. And so, Tim Martin is a reporter for Wall Street Journal, who covered pensions, and is now in Asia, and he's the guy, actually, who put sort of me on the map, and our, and the, more importantly, the Illinois Approach, on the map, as, you know, when he wrote, he wrote the article in kind of March 8, he wrote the, by the way, he's the one who wrote the article you're referring to.

• 34:10Speaker 02

  So he put me on the map with this article of Mark Levine answering a question for a hedge fund executive, at working last week, "Why do I need you?" And, oh, I don't know if you remember that article. But, um, right, and so then the full quote there, by the way, was, you know, this hedge fund guy, you know, literally with two, two, one of our board members says, you know, I got the smartest guys in the world, you know, why would you invest in a brain dead index fund? I'm like, dude, I got Apple, I got Microsoft, I got Facebook, I got Amazon, I got Jamie Dimon and Warren Buffett allocating my capital. It's like, why do I need you? So he used, anyway.

• 34:43Anthony Pompliano?

  And so as part of this.

• 34:45Speaker 02

  The one who wrote the Nevada.

• 34:47Anthony Pompliano?

  Yeah. Got it. And so would it be fair to say that pretty much the approach that you've looked at is, unless you were able to invest in the top, you know, point one of the point one of the point one percent, kind of, there's probably, you know, three asset managers in each category. Unless you're an LP in those funds that are the absolute cream of the crop.

• 35:06Speaker 02

  Yeah.

• 35:07Anthony Pompliano?

  Everyone, anything else, you're better off going into the index for all the reasons that you described, right? It's kind of like that there is, you know, some point one of point one percent that is that cream of the crop, everything else indexing, and you're pretty much golden at that point if you get the asset allocation right. Is that fair?

• 35:23Speaker 02

  Yes, that is absolutely fair. And the first thing I always say is, um,

• 35:31Speaker 02

  by the way, you're getting some, some noise out.

• 35:35Anthony Pompliano?

  A little bit, but you're fine.

• 35:37Speaker 02

  Oh, good. Okay, okay, okay. Sorry. So, um, the first thing I always say, Pop, is, is if, if all you do is index, there's, there's just nothing wrong with that. And you're probably going to be better off than getting it. In most cases, you're going to be better. We actually thought that we had an approach. Remember, we're $24 billion, like we have access to various resources.

• 36:03Speaker 02

  And had an approach that we believed in, which we'll get to soon, right? The outs, this outsourcing model.

• 36:09Speaker 02

  But there's nothing wrong with indexing. That's of course what like Nevada does, like index 90% of portfolio and 10% equity. And by the way, when I met him, he's like, I don't, I'm not sure about that 10%. But, um, uh, but anyway, the, um, uh, if, if I could riff a bit on public market equity allocation, um, which is kind of where your question's going, here's kind of the way I see it. Um, if, if you have.

• 36:35Speaker 02

  I sort of like to break it up into sort of structurally. And to me, the perfect public market equity portfolio is you start off with a big, big hawk and bunch of index, get that, you know, kind of get that core index. And yeah, so that, you know, one thing is you don't want to screw up so bad, right? From, you know, from sort of doing things on the periphery, which by the way, would include just hiring any active manager, where you end up so far from normal equity returns that it's sort of that that is actually kind of super material to return to the fund. Right? So, um, so I think you start off with a big chunk of passive, no matter what.

• 37:18Speaker 02

  Then I layer on top of that kind of three different sort of three areas. First would be factors, right? So factor, so Fama French Factors, the 1991 paper, right? Won Nobel Prize, led to their, their Nobel Prize. That there are a few factors that are highly predictive, right? Of, um, right, of potential outperformance. Now, I don't necessarily believe that those factors are value, low vol, momentum, momentum was actually the sixth one. And, uh, anyway, small caps, so, um, uh, so, so you can invest in factors actually very, very inexpensively.

• 38:00Speaker 02

  There's, and by the way, there's ETFs, et cetera, um, for, you know, for individual investors, you know, we could pay like two bits to BlackRock or something like that. Uh, and, um, you know, which is free. And, um, and you have, that goes to the licensing, the, you know, the factor. Um, and, um, uh, so what I, I like, there's two things I like about factors, not to do a ton of, but to maybe do 10%, 10, 15%. Number one, it's a nice diversification off of your market cap weighted index. Right? So, look, there is some truth that the, the weights at the top of the, you know, the top of the stack of the S and P 500, right, is, you know, now 20, 22%. It's kind of been there in the past. That's okay, all right, but a nice little diversification away from that,

• 38:45Speaker 02

  which I almost kind of use like sort of a diversification free lunch. The other piece, which maybe you'll get a sort of kick out of is so board members come on to these boards and they have views and that's good. There's nothing wrong with having a view. What you want to make sure is there isn't a view accompanied by a brother in law whom happens to manage money in a way that is consistent with that view. So factors give a staff and a board a very systematic way to sort of express views. So that's factors. Chapter, part two, which we did, so I'm going to sort of change the order just a bit on how I view

• 39:29Speaker 02

  it personally, but what we got this idiosyncratic investing, so more kind of private equity style investing. There are some guys out there, Seth Klarman, Chris Hahn, who, and we had some of these guys in our portfolio who are just, it's just weird, Warren Buffett back in the day. Okay, I'm as disappointed as everybody, believe me, with the way things have gone the last, particularly that annual meeting this year, but very disappointed. But idiosyncratic investors who don't, who are, all they're looking at is absolute return. Okay, and concentrate, they will tend to concentrate like crazy.

• 40:11Speaker 02

  Chris Hahn, which is TCI, might have two names in his top 50, half his portfolio. He does that all the time. Okay. And so that's something that we did quite a bit of, we did that. Drifted over to technology, which is where innovation. So the other piece which we didn't do, which had I stayed on, which I'd had enough, believe me. But

• 40:33Speaker 02

  The third piece, when you're thinking about the structure of a public market equity portfolio, is a kind of themes. And this is where, where actually like your interview with Kathy Woods, I just loved, right? So think Kathy and that like this theme of innovation. And so that's actually why I invest my own money. So I have this theme that I just, I happen to believe in that the IT departments across the world are going to be completely restructured over the next 10 years. They're going to move from on-prem to cloud. Like it's, so that's a theme, biotext. There's all sorts of different things. And right now, a theme is COVID, right? So it's funny, I see like these ETFs with like COVID ETF bullshit marketing, pardon my language, where you're investing these vaccine management.

• 41:17Speaker 02

  No, no, no. A COVID portfolio is cruise lines and real estate. Like, come on, guys. So anyway, so that's up to me, a public market portfolio.

• 41:26Anthony Pompliano?

  And so when you do that, you've got kind of the core in the indexes, and then you've got factors, right? You've got idiosyncratic, and then you've got the other themes. One of the big themes that I think you guys did over the four years, and so for people that don't know, is under your guidance and the rest of the board, the pension went from that third quartile to top 8% over kind of the three-year period of all pension performance. So kind of it worked would be the takeaway from that. You guys had an overweight and a focus on technology and innovation. And so maybe kind of talk a little bit about how you kind of arrived at technology and innovation being that theme, and then what you guys tactically did to get exposure in technology and innovation?

• 42:10Speaker 02

  Okay. I wish I could tell you. I'm a total genius and right in the staff. What we did was we had, so we As I said, when we started, we had actually 80 hedge fund managers when I started and we got rid of almost all of them. The ones that survived and really were part of, came through, this is actually a pretty decent segue into the outsourcing side of our model. So we used a firm called Rock Creek to pick all of our active managers. Back and later, we did an RFP and we added Hyvista to, and by the way, the portfolio today is like literally diversified portfolio, 1,000 base points of alpha, public market. I mean, crazy. That's how you end up

• 42:55Speaker 02

  top 8% last three years, top 3% last year. The, so Rock, the Rock Creek portfolio, and there was a little bit of nudging from me with, with the folks over there of, come on, let's concentrate, like, I don't want you to have 16 managers. That's too, like, narrow, narrow, narrow. And, and that's where some of these idiosyncratic guys, like, again, like a TCI, a Parvis, but also some, some managers. So these are managers that were in our portfolio for quite a while. Guys like Tiger Global, Co2, I wish, you know, some firms that I like, like Will Rock and Sequoia weren't, Sequoia weren't in there.

• 43:37Speaker 02

  But, but we had enough of it that, right, so those guys, they, they thematically invested in tech and we sort of watched it and liked it. And, and it produced terrific returns. And, you know, at the beginning, I'm like cracking jokes. I'm like, oh, you know, thanks for investing in Google for us. Like, I don't think we could have, I don't think we could have spotted that one. But the truth of the matter is, it was great that they had these big, big overweights, you know, across technology, and in fact, going into small cap as well.

• 44:14Anthony Pompliano?

  Yeah. And so one of the things that's really interesting to me is, and we've talked about a million times on the podcast, of just the best performing institutions, whether they're foundations, endowments, pensions, whatever it is, they tend to be overweight innovation, like you're talking about here. And normally, the way that they're doing that, a little bit of private equity, but really venture capital is where they're finding a lot of that. And you're kind of mentioning it here, to the tune of, you know, if you look at Dietrich Foundation, they're like 80, 90%. If you look at something like GMO, I think Jeremy Granton recently said he's like 70% his personal portfolio of venture capital, like such outrageous allocations to the private markets around venture capital that obviously a pension can't go do that. But where do you think about in terms of,

• 44:57Anthony Pompliano?

  when you say overweight, like, what does that look like? Are we talking 5, 10%? Are we talking getting to, you know, kind of 20, 30% in venture capital? Like, where do you think for a conservative organization like a pension is actually realistic if they want to be overweight, they could get to?

• 45:11Speaker 02

  Right. So for starters, as far as venture capital goes, you're exactly right that the endowments and Yale, of course, is the poster child of this, right? That, you know, going back 30, 40 years, right? What happened, I think, I assume, was a lot of these venture capital firms were operating with the universities, with like the, you know, the academics at the universities, and that drifted over to the endowment. Thank God for those universities. I mean, because, right, some of these endowments pay, right, I actually met with Tim Sullivan, who works for David Swinton at Yale, and has been with him, you know, almost from day one, right? They pay 40% of Yale's operating expenses while they're growing $1 billion

• 45:55Speaker 02

  to $30 billion, while they're doing that, okay, with a lot, with a heavy venture capital. So the problem, though, which you sort of touched on, is that public pensions, so the great venture capital funds are one of two things. They might be sort of larger guys, and those guys, even a guy who's raising half a billion, billion dollars, he wants to do it $10 million at a time. He doesn't want to be dependent on one source. Okay? So that's number one. So you can't get big dollars out if, if you can get in. And by the way, we were able to get into some. And the other thing is, again, even the smaller guys Right, the problem is the byte sizes.

• 46:37Speaker 02

  This goes to my point of you've got to have a structure. You've got to be able to manage the damn thing. So you can't have 800 different managers. Could you do sort of a fund of funds approach? That's not a crazy idea at all. And so where we ended up getting our innovation exposure, not from necessarily my decision, but the result of our decisions. We're more in the public market space. Which, by the way, there's amazing, like, I don't know that it's any worse. I mean, the, right? If you're focusing on a micro to small cap, public market portfolio on the innovation front.

• 47:15Anthony Pompliano?

  Makes sense. And then I guess one of the things that people are paying attention to now, and we have a lot of asset managers come on and talk about it, but nobody from the pension side, is there is complete structural change, manipulation, whatever, going on in the markets out of necessity. So you get interest rates dropping to zero right through emergency cuts. You get tons of quantitative easing and kind of the, you know, Fed balance sheet expanding at a very aggressive rate. How does that change the way that pensions think about managing their assets? And part of that ends up, will eventually lead us into the corporate bailouts and who holds the corporate debt and all that kind of stuff. But just from the structural stuff, so interest rates going to zero and tons of money printing,

• 47:56Anthony Pompliano?

  like, how does that actually change the way a pension thinks about allocating their capital?

• 48:01Speaker 02

  Okay, so I'm really glad you asked that. The most important thing, I've talked about this so much, like, over the years. The most important thing, frankly, whether you're a pension, an endowment, frankly, an individual, is the way to win at investing is to be a long-term investor. By the way, in this innovation space, God help you. God help you if you think you're going to like day trade or even have like a one-year time horizon because you're going to get nailed. Like, you could own the best freaking thing in the world, but you can get nailed at any time. And I tell people, if they've got like a three... I view, if you have a three-year time horizon, that's really not long enough. Now, five-year, I think, is long enough, okay?

• 48:45Speaker 02

  But, you know, and certainly, I prefer like never, like, imagine that you'll never sell. So, I think it's really important for the managers of pension funds, endowments, et cetera, to understand that they are, right, they are a, they're a long-term investor. It's a long game. And what matters in 2020 really isn't that decisive, right? It's what, the way the world looks, looks in 2050. And I sort of feel like you have to be optimistic. And, and I am actually extremely optimistic. And, and the reason why I'm so happy you asked this is this fixation on, and I'm sure I'm going counter now to many of your guests, this fixation on standard deviation, what

• 49:30Speaker 02

  a effing joke! What a joke! Standard deviation is your friend as a pension investor. It's your friend.

• 49:38Anthony Pompliano?

  Explain that. Explain that, yeah. Explain why that is.

• 49:41Speaker 02

  Okay. So, and by the way, that entire hedge fund universe, right, sold themselves as a standard, like, just horrible. So, what standard, right, so value risk, standard deviation is your daily fluctuations in a stock price, in a bond price, in what, you know, kind of whatever asset is your Bitcoin, and whatever asset you're talking about, okay? And, right, so, what, now, what the, what that volatility, first of all, there's, standard deviation normally is measuring this daily volatility that in, you know, right, eight out of every nine quarters is completely irrelevant, okay? And, and then gets, maybe gets relevant in like the quarter we just ended, right?

• 50:26Speaker 02

  Where the horrible, like, big, big volatility. Okay? The, the stuff that happens day to day is just total noise, and yet it's discussed, right? Frankly, sadly, on places like CNBC, Bloomberg, and, right, and across the hedge fund world, and in boardrooms, I even think, you know, standard deviation at a time like today, where it's, you know, cranked up big time because massive volatility, right? You have an S and P dropping by, by like 37%, then popping back up by, like, a month down, a month, oh my God. And, but even that, it's...

• 51:03Speaker 02

  It'll end up being transitory because it's all about what the earnings are, what the power of the economy and these companies you're investing in or the real estate projects that you build or invest in in 2040 and 2050. Okay, that's, that's the game you're playing. Right, and so this, if I might riff a bit here, hedge funds, the reason for hedge funds are volatility dampening, right, right, diversifying strategy. It's like, and they charge, you know, charging ridiculous amounts for no returns and it's all about the standard deviation portfolio. It's like, so, like, what are you getting? Like, what, the way hedge funds, and, you know, with hedge funds, you gotta separate

• 51:46Speaker 02

  them into the stock pickers and the derivative books. So I'm really talking about the derivative books who have like returns of like 1%, right? I mean, over the last three years, five years, 10 years, they're horrible, right? And, right, fees have come down a bit. It's like, it's still a total waste of time and, right, but they have, but they dampen volatility. It's like, we have bonds for that, there's all sorts of things for that. And you know what? Even if you believe in having a diversifying strategy, as like I talked about with factors and the public market, public market equity book, you know, having a 5%, yeah, it's like, we pay our bond guys like eight basis points, like, that's what it's worth.

• 52:27Speaker 02

  So if somebody is gonna, you know, is gonna have, dampen your volatility, that's, it's not, this is not a 2 and 25. You pay, you pay big fees, okay, for big returns, right? You actually want volatility. You want what's called tracking error, right? You have, your board better be ready, and as an individual, you better be ready for a really nasty quarter, right? If you have a concentrated portfolio, or you have a, that might be concentrated in certain stocks, okay, like TCI, that might be concentrated in a theme like what, like what our, you know, what Kathy does, or what Koto or Tygo Gold, you know, what those guys do. So, um, right, so that's, anyway, that's.

• 53:06Anthony Pompliano?

  And what you're basically talking, this is always something that, and we'll talk about Bitcoin here in a second, but like, this is always. My point when it comes to Bitcoin and people say, oh, Bitcoin's too volatile. Right. And I always use kind of two examples. Let's say one volatility is not a negative thing. You need volatility to drive returns over long periods of time. Right. So if something's not volatile, you'll never get a return from it. And yet, and yes, it won't go down, but it won't go up either. So volatility isn't necessarily bad. When it goes against you, it's nasty. When it goes with you, then, you know, it's your friend. But the example, the example I always go back to is Amazon, right? So people have heard me say this a million times, but Amazon, since it went public for 20 something years, has had a double digit drawdown every single year.

• 53:47Anthony Pompliano?

  The average intra-year drawdown is over 30% and it drew down over 90% one time. But it's one of the best performing stocks over the last 20 years. And so what I think you're talking about here is basically if you have high concentration and there is volatility, the shorter your timeframe that you're looking at, the more likely it is you're going to see a bad quarter, a bad week, a bad month, whatever it is. But over long periods of time, if you made the right asset allocation and something is hyper volatile, you should see a very large appreciation. And it's actually probably likely to be one of your best performance in your portfolio, right?

• 54:21Speaker 02

  I agree 100% with every word you just said.

• 54:25Anthony Pompliano?

  Okay, so why, why should pensions not put Bitcoin in their portfolio?

• 54:32Anthony Pompliano?

  What's your thoughts, just Bitcoin in general? And how pensions, one, are looking at it right now? And two, either the argument for or against what that looks like putting, you know, such a hyper volatile asset that is new, right? It's only 10 years old or so into what is normally a pretty conservative asset management environment.

• 54:54Speaker 02

  Right. All right. So let's carve this up into various parts. Okay.

• 55:03Speaker 02

  So, and so I do want your audience to do like, I'm actually a friend in this. Although there may be some things I say that aren't exactly what you want to hear. So Bitcoin really isn't ready yet for sure to be.

• 55:20Speaker 02

  A full-blown kind of asset class. So almost view it like an assembly line, okay? To get into, to be asset class status. And I think we're years and years away from that at a public pension, at an endowment. And here's why. Is the first thing that has, that would need to happen. And let's leave the merits to the side, okay? So we'll just talk about Bitcoin as a, as investable asset, okay? Which I do believe it is. Though I don't own any myself. So the first thing is, um, the managers, you remember, you're hiring managers to make your decisions. Okay? So within the asset classes that you've established.

• 56:03Speaker 02

  And I, when I think about it, there's sort of several different asset classes you could imagine Bitcoin going in. Um, and we'll get to that in just a sec. So the, the way this would work is first, some managers would put some Bitcoin in. It'll need to do well. Unfortunately, like the, this is the way it is, pal. Like, um, if, uh, right, so if a manager puts in some Bitcoin and it drops by 50%, they're not going to be talking about it, right? And, and by the way, and I'm okay with, I'm totally okay with all that and, um, right? But, um, so it almost needs to start becoming an interesting story to, to even just register

• 56:42Speaker 02

  beyond some manager you happen to have hired who you let do whatever it is they do, invested in it. And I, by the way, I, so I'll tell you this, I'll give you, okay, I'm gonna give you a win here. Is if a, if, if, if one of our managers had, assuming it was appropriate within their mandate, had invested in something like Bitcoin, I wouldn't have been upset at all. Not at all. I was, hey dude, it's on you. And, and by the way, that's kind of the way you need to operate, right? I mean, you've got, again, a lot to manage. You can't fixate to, all right? So next up, would, so we're talking about a sort of an assembly, assembly line or funnel, whatever you want to call it. The next stage, in my view, would be

• 57:27Speaker 02

  Does a board actually, right, and actually take, let's say, a, create a sub-asset class? So, take one of their categories, and I'll bring up three, as, I'll just sort of throw them at you, and maybe, I'm sure you have some views. Take, us, take, create a sub-asset class for, whether it's cryptocurrency, digital currency, Bitcoin in particular, right, graduate, that would be a full graduation, okay? From, managers happen to do it to actually say, "I'm gonna do this, okay? I'm gonna do this." And, and the asset classes I think about there, commodities feel good to me, but, of course, funny thing about Bitcoin is if guys like you are right, and the $7.5 trillion

• 58:12Speaker 02

  gold asset, right, is ready for this, like, right, and you, you got a 30x or, of value discrepancy in store of value, uh, that's why, that I don't think I need to explain to your audience. Um, maybe, maybe you're kind of innovation buckets, right? So, whether that's private or public, maybe an innovation manager, you could see it fitting in there. And then, of course, the last piece is if you have a diversifying strategy, which is where these hedge funds are, you could totally see it fitting in there as well.

• 58:48Anthony Pompliano?

  Yeah, so, we went through this exercise, we, as we were creating a fund, we knew we wanted to go talk to all pensions, and this whole question of like, they have preset buckets of capital, and if you just walk in and say, "Hey, we're gonna do Bitcoin, uh, by itself," basically, every single investment team looks around and goes, "Okay, what bucket should we take, from if we wanted to do this?" Right? It was exactly what we were talking about. And, uh, we thought that it's almost like a paralysis by analysis, right? That they just, they'll never be able to pick because it could go in each, any of one of the buckets, whatever. So, what we decided to do was, we actually created a venture capital fund, and then we said, "Hey, look, we're gonna put, you know, 70, 80% of the capital into traditional venture capital investments, and equity of companies, blah, blah, whatever, and then

• 59:30Anthony Pompliano?

  we will have 20 to 30% in Bitcoin as an innovation investment, right? There's no company that owns Bitcoins, can't invest there, we'll just buy Bitcoin and hold it in the fund." And what we found was, uh, it had pros and cons. So, the pros were, now people knew, "Okay, venture capital fund, I know exactly where my pool of capital for venture capital is, I know how to underwrite this, it looks very similar to other things I've done, like, I don't have to kind of build new muscle memory." What it brought into question, which was kind of one of the cons and not really a total con, but definitely was an obstacle, was people saying, hey, do I actually want to have an illiquid vehicle that has a liquid investment in it, right? So do I want to venture capital investment that's got a liquid asset in it? And so it was very funny to

• 1:00:14Anthony Pompliano?

  kind of see while solving for one thing, you now bring up another question. But, you know, obviously, we've got the two public pensions in Virginia that who kind of came across the line, but they're the only two. So out of the, you know, hundreds of pensions in the United States, there's only two, you know, we kind of sit back and think all the time and say, look, is that a win? Or is that you found two very forward thinking CIOs who kind of happen to be the tip of the spear? And then everybody else is, you know, it's going to take five years for them to cross the, uh, cross the line.

• 1:00:41Speaker 02

  Okay, so let me carve that up again. First of all, I think you've found some innovative thinkers. I think that's what I think that explains 100% explanation. Okay.

• 1:00:52Anthony Pompliano?

  Yeah, for sure.

• 1:00:53Speaker 02

  You happen to find open minded people. All right. And I'm not casting any dispersions on everybody else. It's hard when you're managing, you know, a ton of money to, but here's where I will actually take on some of the, because the conversations you had, I have, I banged my head against the wall equally on different topics. So for example, like we built an 8% allocation to an asset class called opportunistic credit, where, and there was, we, there was all this hand wringing of like, what, you know, is it fixed, you know, it's illiquid, is it fixed income? That's mostly liquid? Is it private equity?

• 1:01:34Speaker 02

  It's not equity? I'm like, guys, we're targeting 15% returns. It's unleveraged. It's mostly first lien. Come on, like, you can't let accountants run the world. Like, let, and I would say that in Jahar Faraday, our wonderful CIO and now executive director, we like, Mark, that's just not the way. And so she sort of managed me. It's like, I'm chairman of the board. And, but, but the accountants sadly do have enormous power. And, and those challenges also, like consultants, you know, are so, so important in that whole. So for what it's worth, by the way, as I just a quick segue, there are many, many pensions where consultants.

• 1:02:16Speaker 02

  Consultants might run the pension, really, where the boards are and staff are almost kind of just evaluating, just really rubber stamping. And I'm not even saying that's bad, okay, but it is. I mean, it's just the way it is. But in any event, okay, every board, and so when Warren Buffett attacks rightfully and hysterically attacks consultants, you know, he'll talk to, you know, pension board about like, why, yeah, why didn't you just simplify your life? And why are you hiring all those consultants? And they nod, nod, nod, and they go, no, it's all business. And but consultants, where Buffett's wrong, though, is you need consultants.

• 1:02:58Speaker 02

  The board needs consultants to get a piece of paper. So that when, you know, right, the media comes, you know, potential litigation, whatever it is, you gotta have that piece of paper. And that is of value. And you're not going to find somebody that wasn't more kind of shake the system up than me, and I believe that. So

• 1:03:16Anthony Pompliano?

  Yeah. And I think Buffett, to your point, I think Buffett is talking specifically about the financial investment perspective. What you're talking about is, that's only one piece of it, because you also kind of have to cover your ass as well, to make sure that you've got other people looking at it, right?

• 1:03:30Speaker 02

  That's right. So it is total nonsense. And it's, I mean, it's particularly nonsense in what you what you had, where you're trying to go into a private market portfolio, and something happens to be more liquid. It's like, that's a good thing. Like, use your brain a little tiny bit. The fact it's liquid, if you're targeting, you know, if you got targeted returns, you got, like, and, right, and look, venture capital firms are holding public stocks all the time, right? When they have post-IPO, they're not, they're locked up, and then sometimes they hold even longer than that, the private equity fund. So that's complete nonsense. I mean, come on, give me a break there. So, so, yeah, but there is this

• 1:04:14Speaker 02

  Right, this, this, now, so, so what are the pension funds that, that, that invested?

• 1:04:19Anthony Pompliano?

  Fairfax County Police Pension and the Fairfax County Employee Retirement Pension.

• 1:04:25Speaker 02

  Okay, terrific. So, so that's good. So, now, you've got like a, right, you got a beachhead. And, and what?

• 1:04:33Anthony Pompliano?

  And to your point, they invested in the first fund and Bitcoin went up almost 100%. So, so there's a story around, hey, that was actually a pretty good decision that we made, right? And, and I, I think that they already believe, kind of like you do, overweight technology innovation, private market, you know, like, like, like, there's a, a kind of a, a culture of doing that internally. And so, again, when they first made the investment, you know, you're talking 20 basis points, 30 basis points of the portfolio, like, literally, they, they've never said this to me, right? And, and I'm forever grateful for them, but I, I gotta imagine at some point, they were like, stop bothering me with, you know, the 20%, the 20 basis point, you know, problems, right? I got much bigger things on the horizon.

• 1:05:18Speaker 02

  Not to, we'll come back to this in a sec, but, but I have to use that point as a tangent to, I, I just saw the Forbes piece I wrote a few years ago on this topic of, well, you just described point 0.3 or 0.4%, that's actually what pension fund boards, who meet quarterly, okay, will spend all of their time on is 0.3% of this are totally immaterial. This is why actually we outsource, so the, the third of our portfolio that we didn't index that were, you know, mostly private market assets, but also, you have some public market, as we've discussed, you know, with what turned out to be an innovation bias, right? The, what we ended up doing with those guys, because we, right, we, we know that there are

• 1:06:02Speaker 02

  two fundamental problems to public pension. There's the risk of political meddling, and there's also this, this resource constraint that you just can't spend, you know, you can't build some huge team. If you do, it'll probably get, they'll all get fired when the next governor's elected or something like that. It just is not a sustainable strategy. So, my view was, let's find two or three great Great firms that do this all day long, pay them, and it's a great, the greatest value in the world. We pay them a few basis points, okay? And we end up in also, again, like I said, we're actually top 3% last, you know, trailing year. I mean, you know, thousands of basis, like, I shouldn't, hundreds of basis points of alpha.

• 1:06:44Speaker 02

  And through sort of, so it's, anyway, the 0.3, that's actually the business model pension funds, which is ridiculous. So we can, of course, head back.

• 1:06:53Anthony Pompliano?

  Let me ask this about Bitcoin. What do you think has to happen? If you had to say, like, here are the milestones that, for those that don't understand the pension world very well, that have ever met with somebody in the pension world, like, what do you think the milestones are that Bitcoin has to hit in order for pension investors to take it more seriously, is how I'll play it, right? People hate when I say that, but that's essentially what it is. Right now, it's this, you know, 150 to 200 billion dollar asset, makes a lot of noise, but it's pretty small compared to everything else they're looking at. And there's some teams maybe that have started to get up to speed on it, but not a lot. And so what do you think has to happen in order for it to be taken as kind of a more serious opportunity with the largest capital allocators in the world?

• 1:07:36Speaker 02

  Okay, so I'm going to answer that question for how I would look at it. But I, but I kind of think that that would, I think what you'd end up with is, once it got adopted, once you had a, let's say, a bigger beachhead, what could happen? I mean, and this is what happened within the hedge fund space, which is very, very similar. Right, because no one kind of understands what the hell's going on there. Is once, is there's a lot of copycat, right? So once it's accepted, maybe with a, one of the grades, so that could be a Yale endowment, one of the, like, major endowments, or better, two or three, or four or five, a Texas Teachers,

• 1:08:20Speaker 02

  I'd like to think Illinois State Board of Investment is be my, right, maybe a state of Wisconsin, whatever, like a sort of respected investor, okay? So what does it take to get it there, right? To me is the question, right? To get that real, heavy, heavy beachhead.

• 1:08:40Speaker 02

  And I thought a little bit about that, actually, just over, in fact, over the past couple of weeks. So these use cases, to me, to me, okay?

• 1:08:52Speaker 02

  Look at Amazon. So, Amazon starts out selling books.

• 1:08:57Speaker 02

  And people make fun of them. Yeah, you're putting, like, I used to joke, it's like Jeff, you know, puts a $5 bill into books and sends it to his customers, right? And then went to CDs and toys and boom, like, and then like selling, right? I think AWS might be the most important business in the world, right? It was, right, just kind of kept knocking off use case, like, and you all, like, all the greats, all the greats did that. And I give Bitcoin exactly the same way, like, so I was watching that the Anderson Horowitz woman, it's some beautiful 30-minute, which, God, everyone should watch,

• 1:09:40Speaker 02

  go through some use cases of like remittances, like, remittances. And so, seeing that, like, in size, you know, diversity, like, to me, diversity of usage, right? So, so that would be one, right? And, you know, so there's stories of, like, all the underbanked, right? And so I'm a square investor, so I have, I guess, sort of, kind of Bitcoin exposure, sort of, that way.

• 1:10:09Speaker 02

  The, so, like, having use cases that are really robust, that are, that you have metrics, that you can really prove, okay? You can prove. Now, the things you've already knocked off, I'm saying you, as the human Bitcoin.

• 1:10:27Speaker 02

  What you've already knocked off is you do have, I think, a really thriving, like, infrastructure on the technology investment side, that's fabulous, right? Think about it, actually, how stupid is it? Sorry, I'm sorry, I'm getting negative, but how stupid is that?

• 1:10:46Speaker 02

  You do have pensions and endowments dying to get into some of these venture capital funds that are making these Bitcoin infrastructure investments, right? That really, if you're a true investor, which I fancy myself as, they're not going to work if Bitcoin doesn't work, okay? It's just, so you're sort of doing it already, and that's a, but that, my friend, is a good fact, okay? That is a good fact to ultimately get to that kind of case too, let's say, of, right, sub asset class status, so robust, multiple use cases. I mean, you're talking my language when you say volatility, no sweat, okay? No problem at all.

• 1:11:27Speaker 02

  Volatility is, you should expect, and is a good thing. You want to get lucky, okay? And have good experiences for people. And I know some people are worried about things. It sounds like this criminal stuff is complete BS, that that's some kind of concentrated usage. The, you want to definitely be able to pound, like, when people bring up this, there's a few whales that control this thing and they manipulate the market, you gotta just be able to beat the crap out of that, right? You can't have those negative stories. That will screw you, okay? You, right, you want to, you gotta get rid of impediments, so yes.

• 1:12:09Speaker 02

  And again, just like you did, I think you did a nice job of finding, you gotta find a home for it. These are different, you gotta make the accounts happy, you gotta make the consultants happy, and so does, hopefully that...

• 1:12:22Anthony Pompliano?

  Yeah, no, I think you nailed it. And I think part of it too is, what we've seen, not in the pension world, but I think in the more like endowment foundation world, is there's almost this sense of, this is the ultimate venture bet. It's either worth incredible amounts of money, or it's not going to work at all, right? And so...

• 1:12:43Anthony Pompliano?

  If you go to them and you say, hey, take 10% of your assets and go put it in this ecosystem, they're like, get out of my, you know, get out of my room, right? If you instead say to them, put 50 basis points to 100 basis points in this, and it's going to not only go just into Bitcoin itself, but it's going to go into the ecosystem right there. I think the way that most people are looking at it is, over the last five, six years, that has been an incredible investment because it's appreciated so much. It's been a non-correlated asset, kind of all the things you want in a portfolio. Maybe that continues, maybe it doesn't. But if I put 50 basis points of my assets in and it goes to zero, I'm mad, right? Because I don't want to lose money, but, you know, my, my life's not over. We didn't lose all the money.

• 1:13:26Anthony Pompliano?

  If that 50 basis points now provides 500-plus basis points of alpha in my portfolio, now I look like a genius, right? And so I think that it's this really interesting asset that provides a lot of opportunity. But to your point, I do think that it tends to kind of find an audience with people who already have an innovation kind of mindset, technology, that, that type of interest, that's where Bitcoin is really kind of finding the institutional world.

• 1:13:58Speaker 02

  Yeah, and that's really what Bitcoin is. Like it, right? I mean, that's how Bitcoin would become successful is when you, right? This, so I've actually watched your debate with Schiff with, like this, this asinine argument about gold. The gold guys are way weirder than, they're way weirder than you guys, okay? The gold guy, like, he's talking about jewelry, jewelry. It's like $7.5 trillion, and you're talking about jewelry. Like jewelry's pretty, but it ain't $7.5 trillion pretty, okay? And the industrial uses are tiny, I mean, come on. So we already have an example, right? Of why is gold worth what it's worth? Because it is, right? Because there's enough buyers and sellers on both sides

• 1:14:42Speaker 02

  that you're creating diversification, right? Big, I mean, that's, that's kind of where I go, where I keep going, is having lots and lots and lots of places to go for liquidity, let's say. Diversity of uses, diversity of, right? Of buyers and sellers and negative and positive. It's all sort of beautiful and, and. For sure, it would be idiotic to go in and pitch 10%, you know, put 10% of an institutional investor's money, right? Because think about it, they're definitely going to be on the front page of the newspaper, okay? If they're going to be on the front page when they make the investment, God help you if the thing drops by 10%. Like, then it's like, you're

• 1:15:27Speaker 02

  an idiot, you threw away the money, what's he doing? And you're right, so no one's going to do that. It's like you walk before you can run. And that's where also, that's why I kind of bring up sub-asset class is, and by the way, you could thrive as a sub-asset class. There's an argument, private equity is a sub-asset class of equities, and here they're, those guys are doing okay. So, 1%, you could have a 1% allocation. What I kind of like, in a sick way, is this nonsense about paying like, let's think about like diversifying strategies, or even commodities, that of paying like a 2 and 20, or 1 and 10,

• 1:16:09Speaker 02

  or whatever. Bitcoin is something you could get exposure to virtually for free, you could just open an account, or you can have a manager. There's so many different ways to do it, it's not necessarily like a promotional vehicle, which I hate, okay? And I think that's, I think that's actually quite helpful, as I think about, I've never really thought about that before. So.

• 1:16:32Anthony Pompliano?

  Yeah, no, I love it. The last thing I want to finish up talking about is, there's pensions across the country that are super underfunded, and, you know, I think you nailed it on the head earlier. You can have literally the best investors in the world invest in the capital, it's going to be very difficult, if not impossible, to actually get to fully funded status in the next 10, 15, maybe even 20 years. What, how do you think about, we've now seen a number of calls for government bailouts of the pension system, right? And I've seen a couple of different kind of proposals, if you will, or informal proposals as to how it would happen. But the general idea is, hey, the pension doesn't have enough money

• 1:17:13Anthony Pompliano?

  to pay its liabilities, and therefore, if the airlines are going to get bailouts, and, you know, the MTA is going to get bailouts, and basically, the government's just going to become the sugar daddy for a bunch of these different industries, why not bail out local governments and pensions, and state pensions, and things like that? Like, how do you just think about that? And do you think that's possible? Like, do you think that actually could happen?

• 1:17:35Speaker 02

  I think it will happen.

• 1:17:40Speaker 02

  But not exactly the way you're describing, or it'll be, the Republicans will all call it a bailout, and the Dems will be pissed about various other things, and it's the only way. Here's the, here's the thing, is potholes must be repaired, traffic lights and streetlights have to work, like, governments have to operate, children need to be educated, okay? Police, like, yeah, so, so ultimately, they have, you can have water, whatever waterfall you want, okay? That's happening first, all right? By the way, bondholders are always gonna get screwed, and maybe should be screwed.

• 1:18:23Speaker 02

  In the kind of, I view the waterfall as being, you know, that's the potholes, and all that comes first, the pensions come second, whether you agree or not, I'm not saying I, I want that, I'm just saying that's just the way it is. And then, and then bondholders come third. The fact, the truth is that it's not just Illinois, that many, many, many states, and on the local level, it's even worse, like, they had, they were even worse at math, if that's possible. And so you have these situations where, all across the country, services are being cut, like, you're firing active policemen to pay a pension to his dad who was a, who was retired 10 years ago. It's so stupid.

• 1:19:04Speaker 02

  And, and, right, and so, there are, so that, so somehow, but, you do have a contract with these people, and they do depend on the pension, like, I get the other side of the equation too, it's not, this is not, you gotta kind of try to put the politics to the side a little bit, to get to a fix, and the fix would be, would be reducing pension benefits, almost like a sort of a, like a PBGC type thing, okay? Where, for sure, some baseline gets protected, the first $30,000, $40,000, something, right, people have to eat, and, right?

• 1:19:44Speaker 02

  The, I don't, I sure as hell wouldn't want to be dependent on a cola on these 3% raises, which is a big part of how pension, well, maybe we'll do this again one day, we'll go into, really into the freaking weeds on all this stuff. But... Yeah, certainly pensions that are over $7,500,000, certainly all these raises. I mean, all this stuff, anything that was gimmicky, like the end of career spiking, which we'll talk about maybe on a future show, right? That would, there's no way you can get, right, Washington to come in for a bailout, okay?

• 1:20:24Speaker 02

  If you're not pounding the, you know, really pounding this thing so that it's not some freebie. And the other thing you'd really have to do is exactly what PBGC does, which is you'd have to like lock the pension down where it's, you know, kind of, it doesn't continue to grow. Stop digging the hole deeper, which is something I used to write and talk about a lot. So you stop digging the hole deeper, you work on the benefit side, the state has to do whatever it was gonna do. I mean, you know, so stupid. Like, we had this pretty good pension reform bill that ended up getting tossed, and, but naturally, because it's legislators, they cut the pension contributions from the state.

• 1:21:06Speaker 02

  This is back in like 2000, I think 13 or 14. They cut the contribution while they were doing very sensible things kind of around the edges, which even some union guys have come to me and said, "That was actually fair." But, and then the Illinois Supreme Court just tossed the whole thing and we're back to the square one, which is just absolutely horrible, which is why the only, and by the way, the way they tossed it, and this is a really important fact, is that our, the Illinois state constitution, which was amended after the Beatles broke up, so 1970, so these are, this is not like James Madison and Thomas Jefferson, okay? These are the state legislators, a bunch of clowns, okay?

• 1:21:47Speaker 02

  Anyway, the, so the state constitution and many others around the country say pensions can't be diminished or impaired. So they're literally saying that a local school board, okay, this is the magnitude of the problem, a local school board can give a raise to a teacher, can pay a superintendent $400,000, give a raise to a teacher in their last year to $200,000, have one year of bad, right? And that a legislature, state legislature and a governor can't undo what is local, it's insane. It's, even Jerry Brown, the former governor of California, totally, like, totally agrees with that. So, what would, so... All the things I'm talking about in exchange for federal money.

• 1:22:29Speaker 02

  Okay, and I know now you're, I bet your Twitter is just gonna go nuts on that. But I'm not saying it should be a bailout. I'm just saying a grand bargain of freeze, reduce fairly, protect. Okay, and in exchange for, right, for, for some freaking meaningful federal money.

• 1:22:52Anthony Pompliano?

  Yeah, and, and part of this is, I, I think that I go to the mindset of like, if I could choose anything, don't print any money, right? Don't bail anybody out, whatever. But if you're gonna do it, right, which at this point is a foregone conclusion, find a way to give it to the people rather than go stuffing it in every corner of the, the nooks and crannies of the financial system where, you know, who knows what the hell happens to it? And it feels like a pension, right, is actually a pretty fair way to, and a pretty obvious way to get money into the hands of people who frankly do a job in many cases, whether you're a fireman, a policeman, a teacher, whoever, you've done a job that is essential to society, but doesn't get paid like it is in many cases, right?

• 1:23:38Speaker 02

  I, I, I a hundred percent agree. What we're really talking is the human side of the equation where, right, you wanna go after the excess, right? Nobody agrees that somebody who was a teacher for 25 years making 80K, let's say, great, fantastic, then becomes a superintendent for their last five years, makes 400K a year, and now has a $400,000 pension the rest of their life. If you went to a New York Life or Vanguard or somewhere for that annuity, that's a 10, 15 million dollar annuity, okay? Like, no one thinks that's right. So, um, right, so I, but I totally agree with you. Like, keep it fair. The money's actually gonna get pumped. It's so unfair to like the policeman or a teacher where they're making some normal

• 1:24:22Speaker 02

  amount of money, they kind of live their whole life. My mom is a teacher, okay, long retired now, right? Her, she always knew that pension was there. It was a major part of her decision making. And she was a teacher in Florida, so she shouldn't get sort of the beautiful pensions that you get in kind of other places, but it's, it's good. So, I completely agree. And what I'm saying is I say these things and everyone like, everyone hates me. Yeah, but, but I think they want to cut our benefits. And then the, you know, and the Republicans are like, you want to bail out. It's like, no, something's got to be done.

• 1:25:01Anthony Pompliano?

  Yeah. And I think that's the key piece, right? It's like, hey, what is going on right now is unsustainable, obviously. And so what you're really almost saying is like, what's the saying? A great deal is where both sides walk away feeling like they gave up a little too much.

• 1:25:13Speaker 02

  Yeah.

• 1:25:14Anthony Pompliano?

  And it's like, that's actually probably what happens in that scenario, right? Is, you know, look, you're not going to get the 100% of ridiculous things that you've been promised. Instead, you may only get 85%, which by the way, 85% means pretty damn good deal, right? And then also there is some government funding that ends up coming in and kind of making up the difference of whatever needs to be done. And then I think to your point on top of that is if you can also then improve the management of assets, not really by doing crazy things, it's actually by doing really basic things, right? And kind of doing that across the board, you actually might have kind of light at the end of the tunnel. You

• 1:25:55Anthony Pompliano?

  may be able to get there or at least get much closer to where you need to be. And it kind of feels a little rational, right? Like, it doesn't feel like anything in there is that crazy in terms of how it would play out.

• 1:26:08Speaker 02

  I always say it's like you just want to, this is like running a pension. You just want to make more good decisions than bad ones. Right. And you just want to, the thing, the first day I met with the executive director after I was appointed to the board, I said, the only thing, the one and only thing I will promise you, I will at all times be massively rational. And that's all we're talking about here. Just be, try to be smart. None of this is actually like super like rocket science, right?

• 1:26:33Anthony Pompliano?

  Yeah, absolutely. Uh, listen, I appreciate you taking so much time. This is absolutely amazing and I think that your track record, uh, while, uh, while there as the chairman was, uh, was incredible. Obviously speaks for itself in terms of going from the third quartile to a top eight percent, top three percent. Um, what, uh, if you could leave one piece of advice for, uh, investors sitting at home who haven't had the experience you've had, kind of managing large capital pools and, uh, going across, uh, asset allocations. Like, what's the one thing that you've learned over your career that you, it's like, this is the number one piece of advice I'd give to every single investor? Um, if I could.

• 1:27:08Speaker 02

  I'd actually keep saying what I was just saying, like, just use your common sense, long-term perspective. Don't try, if, if you're confused, don't do it. Right. Just use, right. And, um, and you're actually going to probably, you're going to probably get to a good place. If you just use your common sense, this is not, if some, if something sounds super complicated, it's probably not great.

• 1:27:32Anthony Pompliano?

  I, I love that. That's such a simple but important piece of advice that I think people would do well, listen to that. Uh, I finish up each episode asking two questions. The first is, uh, what is the most important book you've ever read?

• 1:27:44Speaker 02

  Uh, uh, I'll give you two, um, if I could, um, Atlas Shrugged. Um, and the, I think it was the Making of American Capitalists, which was Roger Lowenstein's Warren Buffett. Um, like look through all the transitory, right? And, um, yeah.

• 1:28:05Anthony Pompliano?

  I, I love both of those. Uh, and the last question, uh, is a little bit more fun and then you get to ask me a question to end it. But the, uh, the last question is aliens, believer or non-believer?

• 1:28:17Speaker 02

  Wow.

• 1:28:21Speaker 02

  Believer.

• 1:28:22Anthony Pompliano?

  Why?

• 1:28:23Speaker 02

  What a great question.

• 1:28:25Anthony Pompliano?

  Why a believer? I'm a believer as well, but why?

• 1:28:29Speaker 02

  Just mathematics. You multiply something a billion times a billion times a billion times billion. At some point, there has to be some cell that combined with another cell somewhere, right? Like, we can't be the only ones with these thermal vents or whatever the heck it is.

• 1:28:50Anthony Pompliano?

  I couldn't agree more. I couldn't agree more. What one question do you have for me to finish this up?

• 1:28:56Speaker 02

  So yeah, my question for you would just be, so you know, my sort of my Bitcoin point. So I'll go to your, to, you know, sort of your sweet spot is how far do you think we are from really having robust diversified use cases and real being able to walk into a room with, you know, across the table from an institutional investor and like this, you know, this is real.

• 1:29:20Anthony Pompliano?

  So I'll give you two answers. One is on the use case side in terms of users themselves. If you go and you look at the adjusted on-chain annual volume, so this is basically people using Bitcoin on the Bitcoin network, doesn't include any of the exchange traded volume, and it also accounts for anything where it's being used on-chain, but it goes to like these large exchange wallets or anything like that. So it's really trying to get at like true, what you and I would consider like users of Bitcoin as a medium of exchange. If you take that number, it is larger on an annual basis than Venmo's annual volume and PayPal's annual volume and also Apple Pay.

• 1:30:03Anthony Pompliano?

  So basically you have an asset that if it's just a medium of exchange, right, a currency, it's bigger than many things that you and I probably use on a, you know, daily, weekly or monthly basis, right, in terms of technology that we understand. Now, the big question is where is that happening? So I always joke and I say, you know, look, in the United States, the dollar-based system works pretty damn well for you and I, right? Like, we don't have a, I don't have a fear waking up tomorrow that like the money's not going to be in the bank, right? Or that the dollar's going to fail and drop by 50%. Of course, we're very fortunate in that sense, but there's a lot of people elsewhere in the world that are either worried about somebody seizing their assets, the currency failing, like all this crazy stuff, right? And so I think that actually Bitcoin becomes this like no brainer when you need it, right?

• 1:30:45Anthony Pompliano?

  And so I recently had a woman come on the podcast, who's a founder in the space and investor, but her family lives in Lebanon. And so right now, the Lebanon currency, the Lebanese currency has fallen off a cliff, right? And so there's a bunch of capital controls being put in place, like literally there's protests in the street, they burnt down banks, like all this stuff. And she's like, look, the conversation throughout the entire country is two things. One, they want dollars, but they can't get them, right? So they, they, they understand the quality and the stability of the dollar and everything that comes with it. They just can't get access to it, right? They can't find it, there's a dark market, like all this kind of stuff, it's dangerous to go get it, whatever. So the next thing is like, hey, I got an internet connection, like what is this Bitcoin thing? And so it's this weird thing where like, that's a fringe use case, right?

• 1:31:30Anthony Pompliano?

  Cause there's only so many places in the world where the currency is failing or there's issues. What I do think will happen over a long period of time, and again, that might be 20 plus years, is every day, there's a couple more people that end up opting in, opting in, opting in, some of them out of necessity, some out of the, out of kind of interest or intrigue. So I think that that use case where the, the volumes and the user base will continue to grow pretty, uh, pretty aggressively over the coming years. In terms of walking into the institutional world, there's two things that have surprised me. So I probably last year, I took 120 flights. So I don't know how many meetings I did, but you know, American Airlines, they did 120 flights. I knew I flew a lot of places, talked to a lot of people.

• 1:32:10Anthony Pompliano?

  And the two things that surprised me were, one, how many CIOs I talked to at endowments, foundations and pensions that held Bitcoin individually, but did not have it in their portfolio at work. And I would ask them, why? And they're like, well, I basically, I believe in it, I kind of, you know, speculate a bunch of different things. But there's zero chance I could go to my board right now and have a conversation about Bitcoin, right? So kind of that, that kind of cover your ass, everything we talked about, like that was one piece that surprised me that they had it, but they, they didn't go to the boards with it. The second thing was I was surprised at how many CIOs and investment teams were more interested actually

• 1:32:53Anthony Pompliano?

  in the equity of the infrastructure than the asset itself. And so I asked them why, and then it made sense of they're like, "Look, we've just seen this a million times before. Every time that there's some new thing, when we invest in the infrastructure, we end up making money." And so like, I don't know if this asset, meaning Bitcoin, is going to end up being successful or not, but like, the infrastructure always works for us and that's where we're comfortable. We can cover our ass because we're buying equity in a private company and yada, yada, or whatever. I think you make a great point of like, well, if the infrastructure ends up being valuable, that means that the asset is probably going to be valuable. I don't think that that connection has necessarily been made yet. And so I see a lot of capital flowing into the venture capital firms and things like that. I don't see, especially at the pension level, I don't see a lot of people buying Bitcoin itself either through managers or directly.

• 1:33:38Speaker 02

  The kind of shame of that, in a way, is that there's then this drag, this fee drag, right? And also, and there's boatloads of execution risk, right? Surely not every Bitcoin infrastructure play is going to work. I mean, more than half of them will fail guaranteed, right? So why not just sort of have the thing itself, if that's your thesis, cut out the noise? And again, there's nothing wrong, I'm afraid there's nothing at all wrong with investing Bitcoin infrastructure, obviously, but I'm saying that it's sort of, that's so inconsistent. But you know what it is? They have a basket for it. The account, the damn accountants win again.

• 1:34:18Anthony Pompliano?

  I couldn't agree more, man. All right, Mark, listen, thank you so, so much for doing this. This is fantastic. I think people will learn a ton. You've got some, some life experience and career experience that, that people just don't get. So we'll have to do this again in the future, for sure.

• 1:34:32Speaker 02

  Beautiful. Thanks so much for having me. I really, really enjoyed it. Great.