The Game is Rigged ( w/ Ben Hunt )
In this episode, Ben Hunt, Co-Founder of Second Foundation Partners and creator of Epsilon Theory, joins host Peter Hans to talk about how investors can make sense of markets that don’t make much sense. Using the lens of game theory, Hunt explores the role of narrative and the market machine, and offers investors a new way of thinking about Wall Street that can revolutionize their investment perspective.
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Ben Hunt, Co-Founder of Second Foundation Partners and creator of Epsilon Theory, joins host Peter Hans to talk about how investors can make sense of markets that don’t make much sense. Using the lens of game theory, Hunt explores the role of narrative and the market machine, and offers investors a new way of thinking about Wall Street that can revolutionize their investment perspective.
REAL VISION 0:00
Welcome to The Real vision Podcast Network.
Before we get going, we want to remind you that Peter Hans is ARCA fund's Managing Director. The commentary and opinions expressed in this podcast are solely those of the podcast participants and do not necessarily reflect the opinions of ARCA funds or its affiliates and are subject to change for any reason without notice. Any discussion of investments or investment strategies within this podcast are for informational purposes only, and not be construed as a recommendation to buy or sell any particular investment security, digital asset or strategy. Investing in digital assets involves a high degree of risk and volatility, including the risk of the total loss of principal. And now enjoy the show with your host, Peter Hans.
PETER HANS 0:52
Hi, this is Peter Hans, welcome to this week's episode of between 2 chains. This week, I'm really excited about our guest, I am joined by someone who I've known for probably a little over 10 years now and in a lot of different circumstances, man needs no introduction, Ben hunt.
BEN HUNT 1:08
Peter it's great. It's great to be here with you. Thanks for having me on.
PETER HANS 1:11
Yeah, my pleasure. I am incredibly excited to talk to you today. Because we had
BEN HUNT 1:16
it has been almost 10 years, hasn't it? I mean, that's crazy.
PETER HANS 1:18
It has Yeah, back we've, you know, multiple companies that go I guess for both of us probably
BEN HUNT 1:25
Yep, exactly right.
PETER HANS 1:27
not much has happened in that 10 years.
BEN HUNT 1:31
It's a wonderfully small world in that respect.
PETER HANS 1:34
Yeah, you could probably fit 10 years of events into the last six weeks, which I'm really excited to touch, you know, touch upon with you. You know, for I think most people are familiar with you. Obviously, if you're not following Ben on Twitter and getting, you know, Epsilon theory in your email box you need to be but you know, Ben maybe wanting to give a little background on on yourself. Whatever you feel is pertinent to sharing?
BEN HUNT 2:00
Sure, sure. Happy to you know, you're you're right. I seem to have found a knack. And, you know, pissing people off on on on Twitter. So it's a it's a it's an. No. You're right, you're absolutely right. Yeah, you know, I've done a lot of different things. I was a professor for 10 years, you know, a field was political science that oxymoron. Right? And, you know, I was I was on the science side of political science. So it was game theory, econometrics. As opposed to the history side of political science is funny kind of over over time. You know, as I've gone on to do other careers, I find myself so much more on the favoring the history side of things or the science side of things. But that's a that's a that's a whole nother story. So yeah, also professor for a long time, but I bet I think like a lot of your audience, I was an entrepreneur at heart. You know, I was a self taught coder. So left academia, left the Tinder job, right? Because if you got that bug of being an entrepreneur, you can't help yourself, you really can't help yourself. So I co founded a software company. This is I remember the day we started the company. We started the company in March of 2000. So the day that the NASDAQ bubble burst is the day that we started our software cup.
PETER HANS 3:34
I didn't know that.
BEN HUNT 3:36
Oh, yeah. Yeah. But fortunately, we had a nice little deal. I mean, it was very boring, the software, but turned out boring was good. When the when, when the bubble burst. So you know, did the software company for about three or four years, sold my stake in that, because it it is boring, and because if you know, if you are an entrepreneur, you're you're always going on to the next thing. So the next thing for me was the looking at on the investing side. So I did some, some private equity, some some venture capital for a while. And from there, really found my way into playing the biggest game of them all, which is the game of public markets and, and, and investing in public securities. So I had a buddy of mine, he was the head of research at up at a pretty large shop. And they had just started a little hedge fund. So that was my Baptism by fire. This was 2005. And, you know, it's one of those things that and again, I think a lot of your listeners will will find some familiarity here. And you said it yourself when you said yeah, it feels like a decade has happened in the last few weeks. That's an old line by you know, attributed To the limit, I think, but uh, you know, there's some points in time in the history of the world, where it's so important to have a different perspective to not come from the same background as everyone else. And it turned out that getting into markets and investing, and oh five, or six or seven, and then really hitting you know, eight, having that different background, not coming from a traditional Wall Street background, not seeing the world through the same lenses of by, by by, which is the informational flow of Wall Street. You know, that really made my career released that that career. And I think that that's happening in a lot of ways today, where people are finding that their perspective, whether it's on a specific technology or on the World War generally, is working in a in this kind of period of change, having this sort of, let's call it different perspective. I think it's really useful today. And it was useful for me and that kind of Oh, wait, oh, nine period with with my hedge fund, and it's, I think it's time for that again. So anyway, just to cut to the present, I, you know, the I wound down the answer, I gave all our money back in that the end of 2011. Because with the great financial crisis, you know, we did great and oh, five or six or seven or eight. And we did okay, and 910 11. But, you know, it's like our returns flatlined, you know, I never lost money for our clients. And we were pretty big fund that we were, we were about a billion dollars. I'm still really proud of that not losing money for your clients ever. But the fact is that what we were said we were doing, it didn't really work anymore. I mean, fundamental analysis and and trying to find these capitalists and these publicly traded companies. I think we did okay, but it was just off to me that there there there, there had to be something more. And so I needed to when you're managing other people's money.
And this is I've got, we've got one last I get piece of advice for people who are thinking about getting in this business, man, I know Peter, you guys are in this business. Now managing OPM other people's money. It really requires every ounce of your attention. Right? Your, your investors, your partners, absolutely deserved that of you. And so it's, it really is hard to reinvent the airplane while you're trying to fly it, particularly if you're if you're doing your best effort for your clients. So I to try to figure out well, how do markets work? What has changed? Why why why are we all feeling this disconnect between the real world and market world? I really had to step back and then go back and do the research and thinking and writing about how do you make money for for yourself or for other people in this world where there is this giant gulf between real world and market world. So that's what I've been doing for the last decade. And it's really taking the form both of writing, which is the the epsilon theory blog, where I write particularly about the role of narrative. And we'll call missionaries and game theory, the famous people who stand up there and shake their finger at you, and tell you how to think about the world. And then the way we react to that, and very, frankly, predictable ways. So the writing and then the research on how do you actually turn that into investment strategies? That's what I've been doing for the past decade. And that's what I'm doing now. You know, starting our own with my partner from the I think one of our former companies when we met you theater, you know, we started a company about two and a half years ago to just do that. That's all we do. We write we do research. We're independent. We're not, you know, backed by anybody. We're on our own. And that's sort of freedom. Again, I think it's familiar to a lot of your listeners. It's really liberating.
PETER HANS 9:29
BEN HUNT 9:30
So that as my story
PETER HANS 9:31
Yeah, I know. I love it. And I love the, the angle, the narrative. And, you know, I think frankly, it applies to just about everything nowadays, that, you know, in this kind of social media, high velocity of information world that we live in, it's invariably going to change almost every game. And and one of the things I'm really interested in which I would love to get your opinion on, before we dive into what I really want to hear your opinion on as well is you I think that, you know, I was reading a lot kind of, you know, probably around post financial crisis kind of this, this evolution of I've always looked at investing as more of a left brain activity. And you know, I started an interest rate derivatives, which is like pretty, pretty left brain. But more and more. I just looked at everything as a right brain skill now and and the truly high value skills are right brained activities and left brain activities could be more and more automated. And then especially in this kind of narrative driven world that we live in, where, you know, tweets from anyone from Elon Musk to Kim Kardashian can move markets like, Well, how do you think about that? And how do you think that that is what one of the factors that kind of changed the game to your to your point?
BEN HUNT 10:45
So short answer is yes. Right. So here's the here's the way I describe it, Peter. So you know that what I've said earlier, though, become more of a fan of the history side of the world, as opposed to the science side of thinking about our social environment. And by social environment. There are two giant games that we all play as social animals. We play the game of markets. And we play the game of politics. And these, these are two great social games that we played, I used that word game, and that the technical sense, right, that that what the what I do, my decisions depend on how I think you're going to interact with my decisions, knowing that how you're going to interact with my decisions, you're smart enough to figure out well, I'm thinking the same thing about right about me, right? Is that recursive back and forth thing. And, you know, markets and politics are like the Tango, it takes two. And it really is this strategic interaction that we call games, in that technical sense, that I think is so crucial to apply. Right? And you know, I've got a million kind of examples of how we all know this is true, but my favorite example is to think about poker, right? Where as you say, in poker, you don't just play the card. Yes, you play the player. And the better you get at poker, the more you realize how important playing the player is, as opposed to playing the card. Because at a certain level, everyone's good at playing the cards. Right? Everyone sees the fundamentals, and we all see the same things. And it's not. There's no edge there.
PETER HANS 12:31
Everyone can calculate the pot odds.
BEN HUNT 12:33
Yeah, exactly. Right.
PETER HANS 12:35
If they can't, they probably shouldn't be playing in the first place
BEN HUNT 12:37
they should know they should be at a certain level, right? Or, you know, playing for poker for blood as opposed to four or five, right? If you're going to be a professional in markets, or if you're going to be a professional in politics, you discover more and more that that playing the player, the strategic interaction of the players determines so much of the outcome, so much of the outcome. And then you start to realize, you know, what, you get that experience. You're you're a professional in markets or in politics. I yeah, that's, that's how the game is played. And then you look at it say, but, man, nobody really gets that. Why? What? Why is it so effective? to tell people that that's not really the game? Right? Why is it so effective to tell people No, no, no, look at the, you know, the price earnings multiple on this company that'll tell you how you should invest? Or this poll, it goes all road, oh, look at the poll result. And you can tell that this is the way that people are thinking is how you should think. And you start to realize that these stories, that's what Wall Street is, yep, that's where our political parties are, they are creating stories, to tell you how to think about something that happens in the real world, the whole idea of putting a multiple on something, that's a story. It's just a story, of course, right? How do you know that you should have invest on this basis or that basis, these are all stories so you start to focus on well, man, the real power here is in that storytelling, is in how you construct a story that has legs that has that pole on us as a social animal as a as a thinking strategic human being. And I've tried to put it all together by thinking about now like I've got a million examples of this, but think about this you know, in in, in physics, we have Newtonian physics, right? Which is described describes really well. You know, the apple falling from the tree you know, hitting Isaac Newton on the head and all the the basic three laws and basic Newtonian physics. And for most of our lived experience in the real world, Newtonian physics is all we need. It's all we need. But there are conditions, right? Where you start moving faster to the speed of light, or you start dealing with enormous objects like planets and stars and the like. And you think, Oh, wait, wait, wait, wait, are Newtonian physics is not working very well anymore. And so we have above that, encompassing that, let's call it Einsteinian physics, right? Which Einstein's physics explains everything that Newton's physics does. And yet it also explains more than that. So the example once I can say is that for our at least my adult life, you know, I grew up with this idea that this still what you see from like Ray Dalio at Bridgewater, it was just incredibly brilliant in that for my money. It's the best run best hedge fund in the world. Bridgewater, sure. But he talks about the market as the machine, the market machine, and he talks about everything being a machine. Well, when we think of a machine, we think of a clockwork, right, we think of, you know, gears moving, and if x then y and stimulus response. That's the whole nature of a machine. Well, I think that's kind of right, those stimulus response thing, but what I'm saying is that, just like Newtonian physics, is good most of the time, let's call it during normal times. But in abnormal times, extraordinary times, you need to have an encompassing something that encompasses Newtonian physics. But also, it comes as a lot more Einsteinian physics, I think what I would just describe as the narrative machine encompasses everything that we typically think of when we think about the voting machine, right, or the market machine. That
what we what we think are the kind of the effects, then why about oh, this company had earnings of that it beat expectations by that. So the stock market moves by, you know, whatever we think of that is kind of being the machine and the way we think about whether it's a macro or micro economics, we think about that. What I'm trying to say is, there is a larger narrative machine, which is the setting of these stories, to say, Oh, well, you should be looking at this, you should be paying attention to this aspect of things. Or when this happens that then you should do you know, XYZ you should buy you should sell. The creation of these narratives is like the Einsteinian physics, and I and I like of course, I'm putting myself in position of Einstein. But but but there really is this, this, this this bigger, deeper, more encompassing, social dimension, to what we do in our great games of markets and politics. That requires us to really study the creation, the distribution, the impact of stories of narratives of unstructured text. So that that's at the heart of what I try to write about and what I'm trying to think about. And and I think that once you start seeing the world in that way, once you kind of put your head through the, through the curtain or through the veil and see the larger world of why am I reading this now? Right? What why is that person shaking their finger at me, and telling me how to think about the results. It's an ongoing process. And for me, it's two steps forward, one step back, I mean, I like to think of myself I've had a professional career of studying this stuff rigorously. But it I still, we're all subject to it. We're all just, we're all just mammals, man theater, we're, we're hardwired to respond to this stuff. And I'm certainly no exception. But I, I do think you can really make a difference in your life as a citizen, your life as an investor, your life as a human being as, as, as a partner, to the to the people you love and trust, to think of the larger ways in which we are all being played. And we are all players in this world of narrative. That's that you know, once you start thinking in those ways it it'll really change your whole life.
PETER HANS 19:49
Yeah, that is when you when you when you frame it that way because you know, I'm clearly not to the extent that you are but I always think of The narrative because again, you know, just personally just the the interest in behavioral psychology of decision making and, and, you know, I tell everyone, you know, all the all my favorite, you know, Dan pink books to read and and a clue in psychology persuasion and then there's just like, because ultimately the market the market is a machine I think that's interesting. But at the end of the day, you know, machines or or even software is written and programmed by humans which which have subjective and emotional decision making process but once it's programmed, it generally runs as a machine should. The market is different, you know, especially around these narratives that you're saying as inputs. And at first, as you were talking, I'm like, well, maybe they're like bugs in the code that appear from time to time. But they're not maybe the market instead of a machine. It's more like a virus or a bacteria or something that's just constantly changing or growing.
BEN HUNT 20:51
But I think I bet you so so I think narratives you can absolutely think of them as, as as a virus, right? So the math we use to try to understand the the propagation of a meme or a narrative is is the math of viral spread? Right, right. When we say something went viral, you know, you're not absolutely you're being literal. Frankly, when you look at this stuff, I didn't know that for the the overall market operations, the analogy I really like to use to think about it. It's not a machine, right? It's a bonfire, the bonfire, right, and the fire fires are fascinating, because fire is one of the most complex things you can imagine, which is why Ray was to kind of recently with the massive computing processing power you have, you weren't able to do animation of you know, water, wind or fire very well. Today, you can write I mean, like some of the CGI effects on waves crashing or fog flowing or fire burning. It's, it's it's phenomenal, right. But it requires incredibly large computer processing power for a reason. And this is this is why so many of the advances in in understanding markets, they require incredibly incredible amounts of compute and processing power. The reason is, there is no formula, there is no machine if x that y to understand a system like a market, or a system like a bonfire, or a system like a wave. This is this is a famous thing, right that I wrote a pretty popular about a while back, it's called the three body problem, which is also the name of a wonderful science fiction trilogy, by Kesha in lieu of China. But the three body problem is so I'll repeat Wonka Ray came up with us in the in the 1800s. And he was saying, look, imagine you're out in outer space, or you know, you've got these three planets circling around? Well, there's got to be a formula, right? There's got to be a formula that if we know everything about these three bodies, these, you know, floating around, we know how big they are, right? We know their mass, we know their velocity, we know their position. We know their we know how gravity works. We know all of the forces and the interactions, and we can describe this system perfectly. There must be a formula right? That we can kind of plug in and say okay, 10 minutes from now or 10 years from now, we can predict exactly where each of these three bodies will be these three bodies circulate circling around and orbit of each other. And what Poincare a proved is that, with a very few exceptions for kind of starting positions, the answer is no. There is no formula. It doesn't mean it's chaotic, right? This is different from chaos. What is saying is there is no closed in solution. There is no algorithm that we can plug in the starting information. And we know all of it, and then turn the crank. And just Tada, here's the answer. And that seems insane to us as human beings because of course there's a formula. Of course, there's an answer. But what Parker Ray proved is that they're right.
So that's true, whether you're talking about those three bodies out in space where you know everything that's true about the molecules and a piece of wood that's burning. That's true. If you're talking about the water molecules in a wave that's crashing. It's true about markets as well. You can't predict you really can't there is no formula. There is no formula. All you can do is too much model or, or calculate for each individual actor. So each participant in the market write each little molecule in a in a in a wave, each atom within a nuclear explosion, that this is why all of the supercomputer research over the last 20 years, all the advances have happened in the Department of Energy, which oversees the US nuclear testing capability, because we don't explode actual weapons anymore nuclear weapons in war, thank God, we simulate them. And you can't simulate them with a formula, you have to simulate them by, okay, here's each individual atom. Here are the interactions. And now we're going to calculate. It's the difference between calculation and prediction, we can calculate, but we can't predict. And so when we think of winning again, this one of the things if you if you kind of turn your thinking around and say, I'm going to give up on the idea of coming up with the formula to make the lots of money in the market, and instead start thinking about No, no, I can't, I don't know, there's no magic formula. But what I can do is try to understand what I can do is observe, and here are the different actors, and here's how they interact with each other. And I'm going to calculate where the puck is going next. Now that we can do, and that's really interesting, to me, it's it, you know, gave us something that really famous successful investors have always known. And the same way that really successful famous politicians have already always known about the power of creating narratives. But you know, George Soros, you know, he's the most famous he and Stanley Druckenmiller for you know, quote, unquote, breaking the Bank of England, right more for making a big bet against the British pound, paid off handsomely made some billions of dollars of that. That's what Soros has done a number of times these kind of macro economic trades that he's put on, often focused on, on currencies of this nation or that, and some young Porter was asked him, you know, after Soros was describing, you know, what the trade was what he had on and that was amazing. He said, but but but but this was sort of, hey, how can you? How can you know that? How can I help you? How can you predict that that's going to happen, you know, in company x, I can't do the Hungarian accent anymore. I used to but you know, young man, you know, I'm not, I'm not predicting, I'm observing. And I quote is always stuck with me for so long. I'm not predicting, I'm observing. Sure, if you can be that sort of clear eyed observer of what's happening in the social world, again, whether it's politics or economics, or you know, your own family or friends, you understand that there is no magic formula here that the best we can do is try to understand and calculate what's going to happen next, and try to see a little bit farther into the future with our calculation here. While having the humility to know that we can't know what's going to happen at the end. Because markets a in a clockwork markets are a bonfire. And when you think of it that way, and you think of that, in terms of that larger narrative world in which all of this exists. And the great the amazing tools that we have at our disposal now, with the massive computing processing power that we have. And that's what starts to get really exciting.
PETER HANS 28:50
There's a lot there,
BEN HUNT 28:52
there's a lot, they're not gonna lie.
REAL VISION 28:57
You're listening to our show between 2 chains with your host, Peter Hans.
PETER HANS 29:05
The atomic particle side of it is really interesting to me where, you know, you can't you can't come up with a formula to predict tau, you know, different atoms will Oh, you know, essentially where there'll be but but as they interact with each other, you can you can predict that. So it says,
BEN HUNT 29:21
It's a Agent base, you know, modeling or programming, right, that, that that's what this is all about. An immense scale, as we see in these, these these great games we play, but that is why, right? The development of just massive computing processing power that's changed everything in my research. Right. I I'm doing the same research today as I was doing in my doctoral dissertation, you know, so could go right, you know, 30 40 years ago. It's the same research but today, instead of writing out code on a, you know, mostly reason I have no idea. I've never even heard of digital equipment, right? We'll call it we call a mini frames and, you know, writing out my Fortran code and and then you know, like turning a crank, right? You know that today that mini frame is in my is in my hand, it's in my it's my ability to tap into AWS or Azure or whoever, and get unlimited computing processing power to take these these models and these the these ideas that we've had floating around for 40 years, I mean, no, this is cold fusion. But now to be able to actually make it real time through this massive computing processing power. To me, that is what is changing the world. In every field of human endeavor, whether it's investing, whether it's politics, whether it's oil and gas, you name it, is the ability to apply massive computing processing power to this stuff. Not great some giant brain, right? artificial intelligence, this is a net, just some giant brain. Right? What it is, is that the ability to apply massively parallel processing on these questions that we've been asking for 1000s of years. So I am I'm hopeful that we can do a lot here and in every field of endeavor. But I think it all comes back to tapping into that massive computing processing power.
PETER HANS 31:33
Yeah, I mean, it gives you the ability to, I guess, observe far more stimuli, contextualize those stimuli. And those stimuli, I guess, your analogy, or probably equivalent to the atoms that are all interacting with you out. So then you can exactly kind of how those different stimuli and narratives.
BEN HUNT 31:52
I never used the word predict, but I can calculate the you know, is that, you know, adding increasingly kind of distant part points in time I can calculate, so it does require more and more computing processing power, the farther out in the future you're trying to calculate. But that's exactly what we have at our fingertips now. So it's, but it, I really do think it requires a real change in our very natural human ways of looking at the world, where we're always looking for that secret formula, where we're always looking for that sort of clockwork machine. And looking beyond those two issues, if it opens up so much, I think for all of us to again, to be like say boop. Better investors, but better citizens as well.
PETER HANS 32:48
Yeah, absolutely. I mean, there's, I guess, sorry, I keep saying there's a lot to digest here. But but there is. So let's take that framework and touch upon something you've recently written, because is
BEN HUNT 33:02
I guess what's been going on with GameStop? Wall Street bets? You know, all of that, look, look, let's bring this home to that.
PETER HANS 33:14
Right. Absolutely. And you, you know, you recently wrote a piece, and it's actually I think, pinned to the top of your Twitter as well, which I thought was very cleverly titled, you know, with the Hunger Games reference in terms of, you know, maybe I forgot even saying, like, maybe, basically, good luck, but I forgot the items on your favorites. That's right. That's right. And I think, you know, you made, you know, I reading through that, that, that, that the, the article you wrote, or the or the blog post, I mean, I thought it was really interesting that, you know, you kind of referenced that there were two kind of massive narrative events that occurred, narrative changing events that occurred kind of within the past couple of weeks, all around this entire GameStop short squeeze, and, and kind of, you know, how, you know, you know, kind of use another to, like, peel back the onion, how the system actually works. And the fact that, you know, regardless of what you think you can do as a power of collective, you can't because of how the game is structured. And then even within that there's all sorts of different like, Prisoner's Dilemma elements in Game Theory elements that I think are interesting.
BEN HUNT 34:25
Well, if you remember I said where we're, you know, the way to kind of think about how ideas and narratives and meme spread is really like thinking of him like a virus here. And, and so the, the, the virus that we've all been exposed to, right, where we have heard is not immunity, we have heard infection, right? We were we're all infected with one meme, right? All of us. And that is that and I'm talking about a market, meme or or narrative, and that in that market narrative is that if you Look at the real world really carefully. If you do your due diligence, if you do your homework, right, how many times have we heard that in crypto world? Right? Oh, you just need to do your homework. Right? Yeah, just you do your due diligence on this. Right? That if that if we look at something really hard, and we study it really hard. If we, it that it's like, that markets are like making a bet on a sports team? Right, where, where there's something happening outside of markets, right? companies are doing their thing. Right. And it's like, you know, the, you know, it's like, the Chiefs in the, in the box or play and right, these two teams are I think they're at the layer like companies and I depending on, you know, if you really do your research, do your due diligence, figure this out, then the companies will score points by, you know, what are their earnings? What's their free cash flow, you know, what's their, you know, network expansion rate, what, whatever that metric is for the game, you're playing, that you're watching and studying the outside world? You, aha, that tell you that? Yeah, I had that figured out. And so the way investing works is I make a bet. And if my team scores, you know, then then my bet pays off. And the smarter I am, and the harder I work, and the more I study of this, and the you know, the more I understand what that that that real world game, you know, the better my bets will be. And I think for most of us, you know, the last few years, we've been thinking, you know, man, I think maybe that was just kind of a crock. You know, it doesn't it because when you know, Dave Portnoy says, you know, that's not it. It's stocks to sell go up.He's not wrong. Is it? Dave Portnoy, he's not wrong. He's not. And we're all thinking, yeah, may man, all this stuff we've been told, you know, maybe that doesn't seem quite right. But then about, you know, a few weeks ago, we heard a different story. And this is a very, very let me more narrative. And it you know, it's, it's so enticing, right? I mean, I got into it, we all got into it, we're all human. And that was that, you know, what? We can take matters into our own hands by God, you know, that the people have subverted the way that the game should work, the you know, hedge fund guys, you know, we can, we can make, we can band together, we can democratize markets, and we can, we can, we can stick it to the man. And we can make a lot of money on the way as we're doing it. And what we've now you know, yeah, you look at anything well, boy, you know, you're looking at all those stocks, you know, AMC, or GMA or whoever, you know, and you think, Wow, one more thing, maybe that was a lie, too. And the fact is, those are both lies. There's the both of those are our, our, our narratives and stories. And once you think about it that way, you start thinking well, hmm, you know, how do those mares how those stories get started? You know, is it? Is it stories all the way or what, how should we think about markets and investing? And what I would say to you is that the way to think about it is not that Oh, markets are like something separate from the real world, right? And in the end, what you're doing with with, with markets, you're betting, you're really betting on the real world. No, no, no, no. The bets are the market. That's what the mark is, is the bats. And that's what we all saw. So So in, in some respects, I think nothing changed with GameStop. And the like, I mean, basically, we got played again. Again, and, and, you know, the rules got changed office midway, right, with, you know, shutting down Robin Hood, and you must have interactive brokers shutting down basically at least the ability to buy a lot of these stocks for a day, to give clearly the holders, the people on the wrong side of that trade, you know, a day to
get their ship in order so that they could survive that that wasn't an aberration. That wasn't weird. That wasn't something that can be reformed. That is Wall Street. And we all saw it. And because we all saw it I actually think that a lot changed over the last week. Nothing changed in terms of you know, oh, we're democratizing Wall Street bs none of that is right right and shum off and you know in the you know, the facts and oh, we're democratizing you know, Wall Street was facts. baloney just just just hogwash, right? And yet, a lot It changed because we all saw how the bets make the market, it wasn't something happening with GameStop. And their fundamentals that made the stock go up to $400. And now back down to $54. Right? It wasn't, it wasn't the real world, it was just the bets. It would be like if if, you know, New York Jets fan said, Hey, you know what, you know, I'm tired of losing to the Patriots. I think if we all just really bet a lot of money on the jets that will cause the jets to win the game. And then it did. That's exactly what happened. That's exactly what happened. But it anybody just goes to show that to this, this, this this narrative, the story that we've all grown up with that, oh, you really need to understand the company, or you need to understand x or understand why you need to play the cards, you know, to make money. It's baloney. It's baloney.
PETER HANS 40:59
Yeah, well, in that jets example, because I read that I thought that was that was that made me laugh one, but then two, I thought it was really interesting because in, you know, in embedding, right in sports betting, right, if you know, in a book maker is not unlike a market maker, and that they're trying to just, you know, ideally have no exposure to either side, have no principal risk, and just take this take this spread, just like Citadel, rarities is doing. And in the in the case of say, you know, everyone in in, you know, in a subreddit pushed, you know, bet on the Jets, and it was massively levered, maybe that line goes from, you know, jets, getting two touchdowns to jets favored by two touchdowns. You know, so it's gonna move the price, but it's not going to necessarily change the result? And, yeah, exactly and that's what we saw with GameStop. Right, you know, you saw the price move up temporarily. Now, granted, there were other factors at play, you know, in terms of in terms of, you know, the the system and the things that you mentioned, but, you know, ultimately then you get what you don't have in the in the, in the sports betting world just say is, is liquidity. So you had people in those sub reddits able to get out and, and, and do it's a you know, you have these, you know, elements of it, where it's, you know, almost like a massively coordinated, unintentional pump and dump, but you know, it because I'm sure some people made some money. You know, I,
BEN HUNT 42:33
I don't know, there was a there was someone ranch funds, right? Or, you know, rich guys. it wasn't.
PETER HANS 42:39
BEN HUNT 42:40
There are people, you know, turn, you know, $1,000 into $20,000. Fantastic. Good for you. I'm so pleased for you. But that does not explain all the volumes out there. Yeah. Right. That wasn't Yeah, it really isn't. And it's, yeah. But that is the game. Wall Street is the game. It's not you're not watching some football game and making bets. That's are the game? Yeah. The bets are the game. And, and, and we all saw that. And I think that really changes in in some kind of predictable ways. How, what happens in Wall Street going forward? I really do.
PETER HANS 43:22
So let's, let's um, let's touch upon the the kind of Citadel security side and the market maker side? Because I mean, you think about, I mean, that's a beautiful business model, right? I think you mentioned in your piece they generated, you know, almost just under 7 billion in revenue, essentially risk free just by, you know, by one order flow in one year by buying order flow from Robin Hood, and also from narratives and you talk about, you know, being able to look at how things might react, I mean, COVID for you know, your your your day fortnight Davey day trader not being able to get on sports, what does he do, he goes in bets on goes and bets on stocks on the market, you know, arms, the Robin Hood army, which is, you know, but that puts money directly in Citadel securities pocket, which, you know, whatever do that it's this business. It would be nice to be more transparent about it. But well, you know, one of my thoughts is, what about the concept of, you know, decentralized finance, especially automated market makers, and what that can mean when you take centralized entities out of the equation, and essentially are just looking at bids and ask supply demand, and automatically Justin, there's still a spread, right? But but one, the revenue generated off that spread goes back to the liquidity providers and goes back to the essence users of the platform. You can't compete with the established system in it over any reasonable timeframe. So what needs to happen for that to gain real, you know, steam?
BEN HUNT 44:54
Yeah, I think it has to happen. I'm gonna use an analogy of a crystal right because you Not a crystal grows, right? I mean, it starts very small. And then it It literally grows with the same kind of lattice framework. It says like a, it replicates and and I think it's impossible to
a defi system from the top down, I think it really has to start from the bottom up in frankly, some pretty small self contained, you know, financial ecosystems? And then the reason I say that is that, at the at the macro level, the aggregate level, the reason why it's so hard to set up a an automated or transparent, I'll just call it a rulebook. Right, is that all of all of the government's regulatory focus is on having someone to hold responsible if grandma loses her house. And if you don't have that return address, if you don't have that person that the government can say, No, you got to make good on that. This market maker or whoever you are involved in this, you got to make good on that. Then with without that sort of ultimate recourse, which is though the role for example, clearinghouses play today, the role that, you know, the, the capitalization of these market makers plays today is that they're there if you know, grantee chooses a wrong password or you know, you know, as misled by someone and loses her house, right, there's someone to hold accountable. And it's, it's the, for my strong belief is it is that that I call it that independence, that defi can have that hard coded rules that they can't be gamed by someone going forward. That is its greatest strength, but from this societal perspective, is a real real weakness. Because you mentioned this earlier. Everyone, everything in Wall Street can be gamed, high frequency trading can be gained. Market making can be gamed, you know, defi. I mean, I mean, talking about a wild west, right? I mean, defi can absolutely be gained, oh my god, If If everything can be gamed, for it to have that sort of societal wide presence, and not maybe bring a society down, as we ran the risk of happening in 2008, as we ran the risk of happening in the 1930s, right? This is what government I think wisely want, right? They don't want something that can bring the whole thing down, even though that can make a lot of people individually wealthy, they're looking for someone to hold accountable, so that it doesn't have that sort of volatility to it that has embedded gamification to it. Now, unfortunately, that's what Wall Street is, Wall Street is a big game itself, every aspect of it can be gamed, you're not going to fix that you're not going to democratize that. What I'm interested in doing is reducing the impact that Wall Street has on our democracy, which is which is a different question. I'm not interested in democratizing Wall Street, I am all for defi and ways to make the rulebook clearer, more transparent and the like, what I would describe to you is the bigger defi gets, the more it comes into conflict. I was kind of it seems like an an intractable conflict with government's overwhelming desire to have someone to hold accountable. If you know you need to also when accountable for the independence like say is both the five greatest strength and is and I think ultimately is going to be his biggest weakness. But I think the way you overcome that is in small areas where you are solving problems and getting that trust and narrative behind it in small ways and that that really does grow crystal like and takes over more and more of the financial system. But it is not. And it is really not a way to fix or reform Wall Street. I think it makes it better. It'll be a more fun game. I'm all for it. But it doesn't democratize Wall Street because wall st is inherently and democratize the Bible. It is a game that's not intended to be the game of democracy. And I just really think it's important to, you know, render unto Caesar that which is Caesar's, and, you know, render elsewhere was what's rendered elsewhere.
PETER HANS 50:17
Yeah, no, I think I think those are all very, very fair points in terms of the holding some one, which I guess I'll just assume you can have some sort of centralized entity accountable. You know, the, the, the alternative would be as if is if you know, a defi ecosystem, and I think this can, you know, I'm not necessarily saying a replacement for wall street, or it's the answer to democratize Wall Street, but even even Can you know, consumer lending and borrowing, right, you know, things that are, at the very least very inefficient to, you know, in its worst case, you know, have massive systemic societal problems around, you know, wealth and race and things like that, that can be solved in a much more objective, decentralized fashion. You know, if you get to the point where it's so kind of flat, you know, in terms of, you know, multiple different decentralized protocols that are all kind of just governed by collateral. Yeah, and I don't know, it's, it's a tough one, because, in some ways, who do you go? What can you do to this?
BEN HUNT 51:29
Peter, I'd say what I like is and I think you guys are involved with this, right? What I like is for example, in in let's use, I would call it I'll put it in the name of defi, right. But you know, securitization, right, so it's the legal side, everything to do with with you know, collateral and the like, once the closer you start getting to money, the you know, the more government such a Fiat issuing government is going to have real issues with it. And and and when I have all this, the they're, they're kind of tentacles in this. But But I think there are lots of these ecosystems, even within the financial system that are plumbing enough. Yep, settlements, one of them. Right, securitizations. Another one, I think these are issues where, you know, you can make some real advances here. And and not try to boil the entire ocean. But to try to find, okay, here, you know, here's a pretty decent way where we can move, you know, t plus two to, you know, t plus one and then t plus zero. I think that can really make a difference over time. And I think it all improves everything. I just, just so we're not thinking that that, you know, turns Wall Street into something that it's not.
PETER HANS 53:02
Yeah, totally into a game. Yeah, no. And I think that, so I would look at it. And I'm interested to hear your thoughts, where I'm, if and where I'm off base here. So, you know, I think t plus two was kind of a really powerful narrative that came out of all of this, this GameStop and Robin Hood stuff and, and, you know, blockchain or Bitcoin solves for that. Right. So, but at the end of the day, if you're talking about, you know, from a settlement vehicle, say because you know, blockchain is a ledger, you can do it much more efficiently and quickly. But at the end of the day, within a wall street ecosystem, it still has to be centrally driven, it has to be adopted by the current players in the game, who arguably don't have any motivation to change the game that they have such an inherent advantage in.
BEN HUNT 53:49
Oh, well, here's the motivation, Peter, and it's a motivation because the whole T+2 thing while it's interesting is escape code. Right? It's like saying, oh, the problem with Marcus today is high frequency trading. So let's put a transaction tax on I mean, HFT can be gained like I said, HFT is not the problem. payment for order flow, right. payment for order flow, can be and is absolutely gained by the participants. So you can have quote unquote reform to focus on Oh, we're going to do away with payment for order flow. You know, payment originally can be can be gained payment for order flow is not the problem. t plus two we can that can be gained, right. We saw it where, you know, the clearinghouses said, Oh, well, you need to Robin Hood, you know, we decided last night you've got to pony up $3 billion dollars now. Right? do that now. You know, it can be gamed, I don't think that T+2 is the problem.
PETER HANS 54:56
Sure. No, I agree.
BEN HUNT 54:57
would would would would reform and adjusting All those things, high frequency trading, payment for order flow, settlement issues? Do I think there are, you know, useful changes that could be made? And all of those do I think they're useful changes that that that that defi in particular with that the settlement issue could really play an important role. Absolutely. But the reason that the powers that be will say, Oh, yeah, yeah, let's focus on T+2, let's focus on the settlement issues, is because that leaves the larger game intact. Right. And the larger game is that the the impact that has on our democracy that it has on our attention, that has on everybody, who I know, I'm gonna spend my time now I'm going to spend my time and, you know, looking at my smartphone, looking at whether, you know, gmv went up two ticks in the last 10 seconds. Right. That's the power that I would like to break. And I don't think that, you know, a Bitcoin does not fix that defi doesn't fix that. That so that that's kind of what I'm focusing on, I think what fixes that, by the way is to reduce the leverage in the system to not allow borrowed money to flow through our system to the degree that it does. To not, yes, that means coming off of zero interest rates, yes, that means that asset prices will go down. But but but, but I think that's what would be helpful, again, for not for democratizing Wall Street or improving its workings, but for diminishing its impact on our democracy.
PETER HANS 56:32
But I mean, I guess the alternative would be just Wall Street need to exist, because that that would be my, my argument, I understand this is this is very, you know, pie in the sky. But you never know, over over over a long period of time, is this wall street as we know it today even need to exist? Do you know, do we need centralized entities doing all of the activities that we're getting?
BEN HUNT 56:55
Actually, that, Peter, I think this is maybe the most important thing to talk about, because this is a way forward for defi, and for what Wall Street means. Wall Street today does not mean what Wall Street used to mean, the meaning of Wall Street. The reason for wall street, the reason we call them capital markets, is a very simple reason. The The idea was we're going to create this entity and is going to be a transmission belt is going to be a transmission belt between private capital, my money and management teams, who can take that private capital and can be more productive with it than I can be. Hmm. That is what capital markets are a transmission built between private capital and publicly owned meaning not by the state. But you know, of course, in a, in a public trailer in a public market, companies that can be more productive without capital that I can be. That's what they are. That is not the meaning of Wall Street today, the meaning of Wall Street today is the casino. The meaning of Wall Street today is making bets. So I don't you know, can what can can can defi can make some difference in kind of had the casino of Wall Street. Yeah, people can make I'm sure you can make some good money with that. Right? That's frankly, my idea does what most crypto Bitcoin in particular is becoming another another game at the casino table when I'm so interested in in defi doing is taking over that original meaning of markets, right and providing that transmission belt between private capital and management teams who can do something with that private capital in more productive ways than the than the than that I could
PETER HANS 58:55
Right in a I think it is at its core, the the the primary tenant of defi is to make productive assets, unproductive assets more productive, or increase the productivity of different assets. And you can do it in a way that is outside of a of a centralized system. Right? There are no centralized and Sure. So, you know, like, I mean, I went through trying to refinance my house for the better part of nine months, which is something that you know, you're talking about 60, LTV, pretty good credit, credit worthiness, you know, plenty of assets shouldn't have taken me nine months, you know, I but but if but in a in a more, you know, decentralized fashion, not going through the, you know, the the, you know, the subjective nature, the bureaucracy, the different investors, the you know, the different the different hurdles for getting in the regulations, but just, you know, how hard is it to take an asset, you have the collateral on a system, you put Around a an immutable smart contract, you can even wrap insurance around it so that there is a bag holder at the end of the day. And, and, and an execute. I mean, and you do it, you know, person to person individual to individual. You know that that, to me is where I think this defi ecosystem gets very interesting
BEN HUNT 1:00:20
Yeah, I totally agree. And here's the problem with it being a problem. I don't want to be negative about this. This is what leads to great hope. Right is but the there's not as much money to be made in doing that, then there is in helping the casino system get more effective at collecting our beds. Right? there's not as much money in it.
PETER HANS 1:00:41
For sure and that's why it has to be decentralized.
BEN HUNT 1:00:46
Well, no, no, no, what what what, what I'm saying is that this decentralization narrative, is is a story, right. And it as it applies to our existing Wall Street infrastructure, Wall Street will co OPT and will suck in everything that it can, right, if it sees that as being a challenge to you know, Ken Griffin getting his you know, tax from from from from everyone in the globe, right? The challenge for keeping defi on this path of, Alright, we're going to be what capital markets used to mean that transmission belt between private capital and actual productive uses of that capital in the real world. The difficult part of that is that every step, the people involved, the efforts involved are going to be co opted to say no, no, no, come over here and play our casino game, because you're going to be a lot richer if you do that. So I don't I don't have an answer to that, except to try to be one of those people who's always out there saying, look, you can you can do pretty well, by doing good. You can't do as well as if you go over to the dark side. Right. And you develop a new algorithm for, you know, for fortress or whoever, you know, you won't make as much money. But man life is so much more fulfilling. If if you're, if you if you stay away from the dark side like.
PETER HANS 1:02:15
Yeah, I mean, So ultimately, what you're talking about is, is is going to be hard, right? The adoption curve is going to be hard because there are, you know, there's an existing system in place that does not have interests aligned with, in essence, the the the individual, the consumer, and in a decentralized ecosystem, right, there's too many profits to be lost.
BEN HUNT 1:02:37
Yeah, yeah. But but but but but the problem is that interests are aligned, in one way, which is that everybody's playing this game that wants to make money, everybody wants to be rich. Sure. And, you know, the, the, the siren call of come work for the casino, and you'll be rich, it's a pretty powerful siren call, that that's, that's, that's what's got to be there's got to be something else that's rewarding about this. And I think that what can be rewarding about it is the sense of community. And, and, and is a sense of belonging to a group that is also intentionally foregoing the big bucks from going over to the dark side for making some bucks, just not the big bucks. But, you know, frankly, being able to sleep a lot better at night. That's my hope. Anyway, that's the kind of community I'd like to try to build.
PETER HANS 1:03:38
And if it is, if you talk about going over to work, joining the evil empire instead of the rebellion, right, it literally so many people can work for the, for the, you know, for Citadel, you know, or a I agree if you know, someone gets a really nice job offer.
BEN HUNT 1:03:56
Look, look what just happened here, where were how successful with this narrative that, oh, you're sticking it to the man, but buying GameStop and downloading the Robin Hood app. And look how successful that was. And it's such an attractive narrative, right? It is why I called it The Hunger Games, I guess at the end of the Hunger Games. It's not the evil president Snow's the real villain. It's the it's the political leader of the Rebellion is the real, you know, she's just, she's worse than presidents. And that's, that's what is so difficult about this. It doesn't mean we shouldn't do it. And but but but, but at every step along the way, we got to have these, you know, come to Jesus talks with ourselves and and, and try not to get pulled off the path but when you're dealing in the realm of money, man, it's hard not to get pulled off the path.
PETER HANS 1:04:56
Yeah. At the end of the day, it has to come down to align incentives. transparent and aligned incentives and how you write those, how you write those rules, because there are ways to structure you know, take, take.
BEN HUNT 1:05:07
Oh no, no, no man, I see. cause with that, in a very fundamental sense, like between managers and investors, there is no perfect alignment of incentives, the incentives of managers, whether that's management of a company or management of an investment fund, are always going to be different from the people putting the money in. And they're always going to be different from the people doing the work. So, I, I love the I live in centers is a great thing, but it's not the end all and be all. What, what, what I think we have to understand is yes, alignment has said is important. But more important is to realize that our incentives are never going to be exactly aligned. And when that's the case, we've got to make it worth our while intrinsically, we've got to play on other playing fields, other than just the playing field of making the most money. And that's it, it's hard to get people to play on a couple of different playing fields like that. But I bet I think that is what we've got to encourage that sense of community and identity. That is what I call finding your pack, right? finding those other people who you work with, who you think with, you act with, who treats you not as a means to an end, but as an end in itself. And that ain't typically that that ain't gonna be your, your your multibillion dollar company, it sure as hell ain't going to be your political party, we got to find it in these decentralized PACs. That's, that's what we got to do.
PETER HANS 1:06:51
Yeah. And from an alignment, instead of point I get, I guess, the important point that I'm trying to make is, there's no one to align your incentives with, because if the entity is truly decentralized, there is no Board of Directors, there is no management team, there is no CEO, there's only the community. And, and the and the protocol, and, and everyone is ever, you know, and then you just have a big game of big thing of game theory where, you know, all these tokens represent everyone's voting power, and everyone's governance. And everyone has, I mean, granted, you can get a bunch of tokens. So to your point, you can, I guess, rigged the system by having more tokens than everyone else. But at least you're aligned the same way as every other token holder. They're all paruppu.
BEN HUNT 1:07:39
So this is probably a good place to kind of ended up I Peter, I, I, I am I'm so much in favor of these goals that you're describing. And and and what I would say kind of is I'll I'll say two things. One is important not to let the perfect be the enemy of the good, right, that the Yes, alignment of incentives are important. Yes. You know, setting up the transparency and all this is important. But at the end of all things, we have to realize that if it is anything to do with money, anything to do with these big social games that we play, the games can be gamed, and it's important to have in there, that sort of robustness, whether that's the appeal to a constitution, right? Like the the American political system has, whether that's appeal to a regulatory body, like that has actually teeth to it. Like, you know, the US markets currently do. All of those things have their own associated problems with them. But these are all issues that we need to think about as we're as we're forming this. Not to let any one issue be our Shibboleth be our be our you know the thing, we worship our idol. But to preserve that sort of flexibility in that recognition, that at the end, it's a narrative machine. And at the end, we can't create that algorithm that will predict a happy outcome for everything. We can only calculate along the way, and build in resilient, adaptive features as we do it.
PETER HANS 1:09:31
Yeah. Oh, Ben, I've kept you long enough. I can keep talking to you for hours. But I can't tell you how much I appreciate it. I hope everyone really enjoyed this conversation. Money. Tell everyone where they can they can find you and your writing.
BEN HUNT 1:09:46
Oh, epsilon theory all the time. So it's at epsilon theory. On Twitter. It's epsilon theory.com. And yeah, come check us out. All right.
PETER HANS 1:09:56
Well, thanks so much, Ben. And for everyone, please rate and review. You can find More at realvision.com you can follow me on twitter at @peterdhans82. Thanks so much everyone. And thank you, Ben.
BEN HUNT 1:10:06
You got it, Peter anytime.
REAL VISION 1:10:14
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