Rob's Corner Archives

Thoughts for the future 

Rob Johnson, President of the Institute for New Economic Thinking, is not your average economist. He’s got heart and soul, or if you’ll have it, the blues! With his deep connection to the arts and humanities, Rob leads the new economic thinking not just with a sharp mind, but also with sensibility.

This article is part of an ongoing series in which Rob shares his life experiences, and biggest lessons learned. If you’re an aspiring expert in economics or a related field, this is for you. It might mitigate the depth and duration of your mid-life crisis. Earlier articles in this series can be found here.

13 – Thoughts for the future 

I’m a parent of four children. But for my generation, the handoff to younger people doesn’t look very appealing right now. We’ve got work to do, while we’re here together. It’s your generation that can save my children, my nieces and nephews, kids everywhere. The Young Scholars Initiative is the bridge in the middle. It’s you who can make it so that my third-grader comes into a better world. 

You know, there are stages in the evolution of career building where there is a focus on conformity and getting on the team, observing what people do. But now more and more people in your generation feel like they don’t want to get on that ship. They can tell that ship is sinking! We’ve got to build our own ship. 

For my generation, it is now crucial to contribute to your generation. We have to break down the resistance to the evolving of economics. What’s happening in the world is already breaking it down a lot. But we need to do more. How do we stimulate new education products? How do we build that 13000 person army of young scholars who give each other strength and do not feel the need to conform?

We have to do it, because nobody can afford to conform to that which produces misery. It’s not dignified. But it’s also not dignified for my generation to lay back and watch you struggle. We have got to fortify you, as you embrace the challenge. We have to be teammates across generations. So, together, we can rebuild the ship and navigate towards more wholesome waters.

The pandemic is showing what’s at stake. It has violently unmasked the contradictions between the ideologies that were used to justify the deficient outcomes. If you were to be of religious orientation, you might say God delivered this pandemic to wake us all up. That’s to say, we are in a time of reckoning. And again, the most dangerous thing is to despair. Despondency is not a way forward. That only creates a void for demagoguery to fill. 

I want to help inspire you. To help you fortify your inspiration. To strengthen you, so that you can withstand the siren songs of temptation brought on by fear. That’s not always easy. The option is always there to just go alone, get published, get a chair, make money as a consultant. All those things might make your family feel safer for a month or a couple of weeks or a year. But they take you off course from providing the public good. 

I want to help you gain the courage to not give in to that, so you can become a real expert. Healthy, high integrity experience is part of restoring hope and faith in governance, and in society. It’s a big part of the way forward. And the danger now is more severe and more acute than when we started. Your generation is going to carry this on your back. We have to help you. That’s what we’re meant to do. 

We have to help you all fill the void.

Earlier articles in this series can be found here.

Subscribe to receive the next article directly to your inbox! And in the meantime, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

How INET Evolved

12 – How INET Evolved

So INET started off with a focus on finance. Of course that’s what Soros and I understood best, and it needed fixing. But that was not all. Inequality, political economy, the environment, race, it all came to the surface. If we were to be effective, we had to enlarge our scope. So we started drawing on a wider range of experts.

Tom Ferguson was extremely well equipped to be at the vanguard of political economy. With his direction, we learned about how representation in a democracy is destroyed by the ability to buy and sell policy, which is necessary for the survival of incumbent politicians. 

People like Andrew Sheng were of great influence in building allegiances with Asia. I had done a lot of work in the region in earlier years, and found that the Indian or Chinese philosophical systems are in marked contrast to the Cartesian enlightenment. They are much more in tune with the notion of radical uncertainty. So I found great enthusiasm, in China in particular, partly because I’d worked a lot there, but partly because philosophically, people like Andrew Sheng, Yu Yongding and others were really quite amenable to the notion of radical uncertainty. I had spent a lot of time in the area, and I could feel allegiance. In 2012, we did our plenary in Hong Kong with the Fung Global Institute, now called the Asian Global Institute, and recently, we have begun work with Luohan Academy.

Then, of course, people like George Akerlof were able to address the flawed notion preferences. In Identity Economics, which he wrote with Rachel Kranton, he says that instead of having an identity that’s like ice frozen in your preferences, you have this dynamic identity that is shaped over time. Also the late Rene Girard; he had a notion called Mimetic Desire, where you formulate your preferences by learning from the people you admire. It relates to belonging. Not me feeding something into the market from my utility function. Instead, what I want is actually manipulable by marketing. Like the people in David Brooks’ Bobos in Paradise, buying certain things to signal their belonging to a particular group and or set of values that they wanted to be associated with.

Then we had my friend john powell join our board; he is very knowledgeable about race and inequality. There’s nothing, when you really study the data, that can justify the degree of inequality that exists in the United States. Black people, even with master’s degrees from Ivy League institutions have no leverage or momentum relative to their white male counterparts. We had a very profound conference on race inequality in Detroit, Michigan in November of 2016, which is not only my base, but also a good place to observe the fault lines of race and economy unfolding. If you look at the geography of economic distress, it maps out. You can then look at surveys of economic distress, and see that they fit like a glove with the rise and fall of racial animosity. 

Another way in which we broadened our scope was with the launch of the Commission on Global Economic Transformation. Lead by Mike Spence and Joe Stiglitz, this group would explore what economics isn’t getting right, and what the world needs to take command of.  What we ended up with was what I’ll call four disrupters and an induced disruptor:

First, globalization created an erosion of the power and the control of the nation state. There’s this dilemma. You can have global governance where everything’s under one roof. But how sensitive are you to any people in any region from on high? Similarly, you can have local governments. Then you’re very sensitive, but you have no control over the things that are disrupting people’s life. It strengthens factors of production that can move around, like technology and finance, and weakens the relative power of people.
Second is related to climate and the dynamics of distress, how it exacerbates inequality, how you would handle a full scale transformation, how people who are in power have to be responsive to the fossil fuel industry, even if it’s suicidal.
Third is the initial one: financialization. Deregulation was sold as something that created more potential for growth and more efficient allocation of funding. But what happened is a pumping up of collateralized assets. As Adair Turner says, it had very little to do with the growth of productivity. So why are we protecting all of these things that actually don’t contribute to progress at all?
Fourth is the relationship of technology; automation, machine learning to the future of work and the structure of society. 
Fifth is what we call the induced disruptor: migration. It came from the commission’s study of Africa, because what we could see is that over the next 40 years, we have a situation where the working age population of Africa will probably double. But climate change will destroys arable lands for subsistence farming, and the development models of the past are not available anymore. You’ve got global supply chains and automation. The relative price of manufacturers is way down. What are these people going to do? We know how scared the world is of migration.

So now we have a more multifaceted approach with which to slowly break down all these flawed building blocks of economics. Take a recent one: economic justice. What does that mean? Economics says your wage should equal your marginal productivity. If you get paid more, you’re being subsidized. If you get paid less, you’re being exploited. If your marginal productivity and what you’re getting paid are aligned, you have economic justice. But what if your marginal productivity is such that you can’t support yourself or a family in a decent life? Then people blame you. You didn’t stay in school, you didn’t persevere, you were stupid. But the fact of the matter is that the productivity of a person depends upon social institutions like health systems, nutrition systems, and education systems. We cannot blame it on the victims.

My mind continues to be flooded with these contradictions. The ideology of economics vs the radical uncertainty, the instability, where preferences come from, the notion of collective versus individual responsibility, the questions of race, migration, technological change, the political economy, money in politics, who is represented in the design of our society. 

There’s still a long way to go.

Reading list:

Nicholas Lehmann – The Promised Land

Brendan O’Flaherty – The Economics of Race in the United States

Peter Temin – The Vanishing Middle Class

George Akerlof and Rachel Kranton – Identity Economics

Earlier articles in this series can be found here.

Subscribe to receive the next article directly to your inbox! And in the meantime, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

The Early INET Days

11 – The Early INET Days

After we realized what was at stake, and traveled around to gain an understanding, we came together in Bedford, NY. Soros held an event there with 30 leading economists, seven of which were Nobel laureates. We set out to determine what INET’s approach should be, and landed on four things: 

To build relationships with elite universities; places like Oxford and Princeton and Harvard. We figured they might see us as rebels, threatening the profession. But we would make connections, offer support, and work together.
To commission research ourselves, and add to the critical discourse. 
To convene and build community. Our plenaries were central to that. 
The fourth was what is now the Young Scholars Initiative. To educate and support the people who will 20 years from now be at the vanguard of the profession. To give them the spinal strength needed to step away from conformity.

We didn’t yet think of what later became the fifth piece: the critique of the peer review journals as a constraining device. Jim Heckman and others would later build quantitative evidence of the cronyism and the constriction of the issue space.

So, we got started. For our first INET conference, we invited a skillful Italian minister, Tomasso Padoa-Schioppa, to give a speech. He said, “when I look at what’s going on, I think of three types of sustainability. Financial sustainability, social sustainability and resource sustainability. Resource sustainability is on the horizon. Financial Sustainability is right on top of us now, and if it’s mishandled, people won’t just lose faith in the governance of finance. They’ll lose faith in the governance of resource sustainability, and social sustainability, too. So the stakes are very high.” As everyone clapped, Tommaso sat down next to me, leaned over, and said “all of this is going to flow into social sustainability.” That insight foreshadowed a lot.

As we got going, support arose quickly. Scholars of the highest level started to attack various facets of economics. I came to work very closely with Joe Stiglitz on his book The Price of Inequality, and with the scholars at Oxford led by David Hendry. They, too, found the rational expectations to be statistically unstable, and said that the past is not prologue; we live in a world of radical uncertainty. Roman Frydman, George Soros. They all believe that it madness to think that you can confidently project finance into the future. We were building alliances.

But in the meantime, things kept unraveling. At first, I thought it was mostly the faith in the governance of our financial system that was collapsing. But it was as the Obama administration took hold, it showed that it was broader than that. It became clear that things will not be fair here. The Obama team could not pass everything they wanted to pass, and we had an exacerbation of inequality. 

As Atif Mian says, if they had restructured mortgages, people would not have been under water, and they would have had a much higher marginal propensity to consume. You wouldn’t have needed as big a bailout. With required capital injection into the banks, you would have driven their equity down, and would have replaced their management. The people, the perpetrators of the crisis would have paid the price. Instead, the people with underwater mortgages were struggling. Our fiscal capacity was used to pump up aggregate demand where mortgage restructuring would have done the same thing. But the incidents of who bore the burden would have been different. 

So you had this wider sense that the government worked for the rich; for the banks and the corporations, not the people. Obama tried to restore confidence but we lost a lot. You started out with Obama, a Democratic House, a Democratic Senate in 2010. But that changed. When Martha Coakley lost to Scott Brown in Massachusetts, pollster Celinda Lake, who’s a friend of mine, called me and said, Robert, I’d worked with her on a couple of Senate campaigns and this has nothing to do with Massachusetts. This is the anger that Goldman Sachs and JP Morgan paid enormous bonuses two weeks ago. By that fall, the House turned Republican. Subsequently, the Senate turned Republican. 

It was reinforced by the Fed’s quantitative easing, and OMT in Europe: those practices pump up the asset prices. But who owns all the assets? A fraction of the people. Inequality rose, and along with it, despondency. As Angus Deaton and Anne Case shows, diseases of despair start to rise: opioid addiction, alcoholism, suicide. Shannon Monnat and others who studied geography saw that those diseases exploded exactly where society was being disrupted by globalization, automation, austere state, and local budgets or financial predation.

These are examples from the US. But similar things happened in the UK. It was areas outside of London, with austere state local budgets, that resulted in Brexit votes. You have the AFD in Germany, Marine Le Pen in France. 

Then Donald Trump was elected. Who was superb in reinforcing the notion of perceived corruption of expertise. And to some degree it’s fair; expertise has indeed been corrupted.*

So this unraveling moved INET from the themes of finance to inequality, political economy, and more. If we were to address the challenges, we realized we’d have to broaden our scope…

Reading list:

Atif Mian and Amir Sufi – House of Debt 

Adair Turner – Between Debt and the Devil

David Brooks – Bobos in Paradise

Joseph Stiglitz – The Price of Inequality

* I used to have this notion I used to call the four corruptions of economics:

1. The corruption of commission: doing marketing for the powerful. Doing something not to find truth, but to get paid, get power, or get promoted. 
2. The corruption of omission: when you avoid studying things that confront power.
3. The ritual of hiding in the monastery: emphasizing your acumen with mathematics and statistics to demonstrate your brilliance. 
4. The promulgation of false certainty when people are anxious. If somebody convincingly says “this is where we’re going”, they can reduce people’s anxiety until what they are saying is proven to be a lie. Lots of economists do this by pretending they can see the future; it’s a sophisticated form of demagoguery. The audience is complicit because they yearn to be reassured. But it’s false; it’s not what an expert or scholar is meant to do.

Earlier articles in this series can be found here.

Subscribe to receive the next article directly to your inbox! And in the meantime, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

The 2008 Crisis

10 – The 2008 Crisis

In 2007, I was no longer working in finance but I could see something was wrong in the mortgage market; I kind of smelled a rat. 

So, I got my own money out of harm’s way, and I started having conversations. I sat on the board of a couple of foundations, so I went to meet with the foundation’s leader, Bob Borosage, who arranged for me to meet with Nancy Pelosi. She was hesitant. “This is an election year, she said; we might not be able to deal with this.” I pointed out that we may have to. I warned her that it could all blow up before the election. And it did.

It was similar to what happened in 1987. Then, too, rocket scientists had been crunching numbers on Wall St, with the management going home each night, happy to know what two standard deviations look like. Financiers were convinced that they didn’t need to be regulated and could control things themselves. But they had divorced from reality. The same mechanical derivatives that Soros had been skeptical of in the late 80s had reared their head again, except worse. It was a collective feeding frenzy on an even larger scale.

So, now I was back in the scene. Not to make money, but to help scrutinize things. A lot of my former colleagues from when I worked in the US Senate were getting stormed by lobbyists. It was a crisis. We went to work–all hands on deck. But things did not move in the right direction. The TARP legislation that was supposed to avert the crisis was very unsatisfying. As Joe Stiglitz said, “it was paying the polluters.” It was going to put the necessary money out, but they were not taking over firms, the equity wasn’t wiped out, and the managements weren’t going to be fired. 

The financial sector got 800 billion dollars, and the mortgage holders who were under water got nothing. Usually the financiers are the ones who tell you to be prudent; that you can’t afford things. But now that they screwed up, they snapped their fingers and said “give me eight hundred billion dollars because we’ve gotta get out of this mess, or else you’re all going down with us.” And the government went ahead. They didn’t invest in infrastructure, in health care, or in schooling. But they were ready to buy the toxic mortgage bonds off the balance sheets of these perpetrators. 

As this was unfolding, I went to dinner with George Soros and Rob Dugger. Soros, having spent his formative years in Hungary, told us about the parallels he observed. Because in 1930, Austria and Germany had a financial crisis, too, and that really accelerated the rise of the Nazis. There, too, the financial leaders had  been considered the stewards of society. So when they blew it, there was a vacuum made everyone more anxious and to fill that void the Nazis stepped in. Soros was afraid that the handling of the 2008 crash could create a similar loss of credibility for finance, economics, and government. All of which might be deserved. But such turmoil could give rise to an authoritarian reaction. 

So the three of us discussed how we could make a difference. How could we stop people from defending bag ideas? How could we fill the void with good ideas?

To start, Soros sent me on tour. I went all over the world to meet leading economists. London, Sydney, Australia, Tokyo, Hong Kong. I just flew around and talked to everybody. Leading government officials, leading investors, many of whom I knew. I was looking to answer what came to be called “the queen’s question”: how did you all miss this? It became clear that it had been the unconstrained financial sector. The financiers had been able to make money on the upside, while the risks on the downside were mitigated by their capture of the the regulatory apparatus.

The issue was not just in the US. Europe was in trouble too. They had been doing repurchase agreements (”repos”) with the ECB. So you’ve got German bonds? Well, Greek, Spanish, Portuguese, Greek, and Italian bonds all yield about 400 basis points more. You could repo them at the same rate, and gain the difference. What that did was it facilitated a tremendous amount of capital flow to the southern European countries. Then the Lehman crisis hit, and everybody wanted to shrink their balance sheet. It was what economist Guillermo Calvo called “a sudden stop” for Southern Europe.

At the same time, China had been developing fast. This had consequences for Europe, too. Servaas Storm showed that places like Scandinavia, Germany, and Netherlands, benefited from this. They could sell capital goods to build the infrastructure of China. But the labor-intensive industries in southern Europe got a negative shock. The result was that in much of Europe, the 2008 crisis was greater than the Great Depression of the 30s. Many people do not realize this.

So the tension was building. There was a schism between what people were supposed to put their trust in, and what they saw happening. Right away it spawned the Tea Party and Occupy Wall Street in the United States.

Trust was faltering, and we needed to fill the void that Soros saw emerging. That’s what gave rise to INET.

Earlier articles in this series can be found here.

Subscribe to receive the next article directly to your inbox! And in the meantime, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

On Reviving the Arts

9 – On Reviving the Arts

When I left the hedge fund industry and started working in music, I walked into a different world. 

Right after acquiring a label, I got together with one of the artists in Chicago. I said, hey there’s no proper contract here, let’s set this up. So he said “well listen to me play this set and come to the stage and we’ll talk.” So I came up with a contract; it basically said he’d get a check for three thousand dollars advance, and then royalties quarterly. And he goes “you see that A.T.M? I will play this next set, and you will pull out three hundred dollars. You don’t have to be doing this in his contract, because nobody ever pays that stuff anyway.” That was a surprise; in the hedge fund industry, I used to trade five hundred million dollars based on word, and now this! 

The thing I loved most, by far, was being a producer in the studio–because of the emotional context. When people play music, they can be very vibrant, free and creative. But when they are recording music, that doesn’t always come out. Often there is a dread to be putting down something that people can hear for all time. There’s a fear around that. So as a producer, the question is how do you get past that? How do you unleash the genius that’s within them? I wanted to help them realize that which they’d be most proud of. But I had to get them into the right state of mind. They had to feel that there was no downside to really go for it. That’s hard to do, but I found creative ways.

With this one artist, while we were in the studio, his ex-wife called him and he got in a fight. He was really pissed and he just kept on talking to her. I was getting annoyed because I was paying $400/hour for the studio while he was fighting. But he had a song called “I Gave You What You Wanted, Too Damn Bad You Didn’t Like What You Got” which was about them splitting up. So I said “I think we gotta try I Gave You What You Wanted” tonight, and everybody started grinning. When he took the mic it was like a leopard came out; he just crushed it.

Other times, we’d be in a juke joint, doing a performance and I’d be keeping an eye out for songs to be recorded live. I knew if the band leader had a certain fondness for a lady in the audience. So sometimes,  rather than going up and asking him if he would play a certain song, I’d write it on a piece of paper and give it to her, so she could ask him to do it. That worked! He played with so much more passion because it wasn’t me, the producer, coercing him. It was the people he wanted to energize who came with the request. 

So in that environment, the currency of motivation was different than logic. Music is an expression of the spirit; it’s not quite as literal as math and models and sense of proportion and all those other things. I think both are valuable. Your question is just in what place do you employ which methods to get the results you’re looking for. 

Later on, music also opened a door to documentary film. It started because PBS wanted to make a series on the Blues. Martin Scorsese was involved and he hired a man named Alex Gibney to run with it. At that point, Bob Dylan’s manager, Jeff Rosen, who is a good friend of mine, told me about the series because I had a number of blues artists that were active that could be featured. So, Jeff made sure Alex and I got together.

Not only did we end up working together for the series, but over time we really developed a kinship. I ended up moving my offices in with his offices and started working on documentary film. About this time was the Iraq War and the notion of financial issues. He was making a movie called Enron The Smartest Guys in the Room based on a very well known book. I could advise him because I knew some of the stories about how Enron was discovered; one of the members of INET’s Global Partners Council was one of the short sellers who’d seen it coming. 

Then, Alex and I got interested in this torture film. The journalist Bill Moyers used to work with Alex’s father, and I knew Bill very well. There was this group called the Democracy Alliance and Bill and I had talked about torture. Alex’s father had been an interrogator not using torture under General Douglas MacArthur after the Japanese were apprehended, so he was very interested. I went out, put some money in, got some money from other people, and we built a film called Taxi to the Dark Side. It won the Oscar for best feature documentary for 2007! It was a very grim film, obviously. We used to tease each other and say, you know, you come home, you say to your wife, “hey, honey, let’s get some sushi, go to the torture movie!”

I learned a lot about film editing, camera work, and story development from Alex Gibney and his team; it was great. But in the meantime, the global economy was headed for a cliff…

Earlier articles in this series can be found here.

Subscribe to receive the next article directly to your inbox! And in the meantime, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

On  Shedding a Wall Street Ego

8 – On Shedding a Wall Street Ego

When I worked with Soros on the famous British pound evaluation, I lived in Greenwich, Connecticut. This was the time of Newt Gingrich, the Republican Speaker of the House at the time. And because I was a financier, everybody thought I loved Newt Gingrich. But I really didn’t! I kept thinking “these people all act like they know me, but they don’t know me at all.”

That discomfort was amplified by the fact that everyone wanted to do business deals all the time, wherever I’d go. I’d go to my son’s soccer games, and I’d just want to watch the match. But everyone would come up to me trying to talk business. Thankfully my neighbor was Diana Ross, the famous mo-town artist. She had two sons the same age as mine, who played soccer, too. So I’d go talk to her during the matches. Because with her being so famous, people would keep their distance. Next to her, I could hide, and just watch soccer.

But the discomfort lingered. You have to imagine what it was like being in this position. People were always wanting to meet me, to visit my home, to talk. They’d come from New Zealand and Australia and France, you name it. They always wanted to be around me. When I would walk out of the office, our nanny at home knew I was on the way because the minute I would shut down my office phone, everyone would start calling the house. There was all this activity, but it was weirdly lonely. I often went kayaking by myself just so no one could bug me.

Eventually, with the help of a life coach, I ended up deciding that I needed to make the hedge fund era a chapter in my life, not the book. But I knew that breaking out of it would mean a part of me would have to die. Not physically, of course. But I had to shed a personality.

At some point I was ready to do it. I broke away and began building my own sailboat, in a nearby town called Larchmont, NY. That was about a 13 mile bike ride; I called that my methadone clinic. By going up and down to Larchmont and working on the boat, I was getting rid of the addiction to Wall Street and was reconnecting with wanting to be a naval architect; reconnecting with old interests, old friends, and old passions.

I also volunteered in a nursing home, anonymously. I went in every day, and wiped people’s bottoms and set up beds and scooped ice cream and wore a green suit. Nobody including the directors had any idea who I was. There’s two things I got from the experience. One is that I saw people dying. While at the same time I was processing the death of a personality. So I had some really beautiful conversations taking care of these folks. The second thing is that instead of all this false adulation, I could go in there and if I fucked up something, these seniors would yell at me. “I don’t want vanilla ice cream, I want lemon sherbet!” And you try to serve them, comfort them, get them into a wheelchair, and there was one night we did a concert there. It helped me process the transition, and be reborn as something more authentic. Such change is not easy. But if you maintain faith in your ability to regenerate yourself, you can do it. And you can have a very satisfying life.

It may also have helped that during my youth in Detroit, I had some exposure to 1960s alternative culture hippies, along with Indian philosophy, meditation, Taoism, etc. Detroit was very tuned in to that, and the turmoil I saw there made me, too, search for a better philosophy. The stuff I looked for then, from the East, was about breaking with your ego; about breaking your clinging to things. That also means breaking with the sources of comfort that you seek when you’re afraid and anxious. You have to feel the fear and do it anyway. You have to realize that what you let yourself perceive, and what you do about it, are different things. You’re in control.

All that led me to a whole new chapter. I got back in touch with my interest in music. And I came to set up a record label…”

Read along with the story!

Carol Pearson
Awakening the Heroes Within

Read along with the story!

Pema Chödrön
When Things Fall Apart

Earlier articles in this series can be found here.

Subscribe to receive the next article directly to your inbox! And in the meantime, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

On Doing Structural Analysis Before the Internet 

7 – On Doing Structural Analysis Before the Internet 

My time as a trader taught me a few important lessons.  

One, economics can show you where the questions and opportunities are. But, two, you got to get on an airplane and go see it with the whites of your eyes, because it’s about timing. If you short the Spanish peseta and you’re three months early, then you’re paying twenty-four percent interest and earning five; you’ll lose a lot! You have to be mindful of timing, and in those days, that meant being close to things.  

Back then, there were very few people who did real, structural analysis, especially of the intra-Asian economy. So, when I was working on that region, we looked at the commodity composition of the economies; the exports and imports of each of the Asian countries, and the geographic composition of who their trading partners were. So, if, say, the Japanese economy is going up and the U.S. is decelerating, you could see that one country would be affected more negatively than another. Or when the terms of trade would change in a particular sector, you could tell who would get hurt or benefit. 

During my time at Bankers Trust, I met a guy named Rodney Jones, who understood this well. He was based in Malaysia, and I had taken a position against the Malaysian ringgit. When we first got talking, he was at an equity firm. He asked me “are you actually interested in this macro stuff?” And I said, yes, let’s talk. So over cocktails, Rodney told me that what he does is he gets on an airplane every month and he goes around twelve different countries, collects all the data on budgets and central bank reserves, and builds his own structural database! I hired him, first to Bankers Trust and then I brought him with me to Soros. He now runs a major consulting firm based out of Beijing. He’s brilliant.  

In the end, speculation is about knowing what the world thinks, seeing something that’s different, and then: timing. You have to know when the world will come around and see what you’re seeing; you have to know what the catalyst for that will be.  

When I was in this business, with Rodney and others, we knew that the insights we produced with our own models were not yet reflected in the prices. And a significant part of it was about being well-connected and having access to the information. I used to have a foreign exchange dealer I relied on in New Zealand because they’d open on Sunday morning. I could call them and find out what everyone is lining up to do that week. They’d have their finger on the pulse.  

At times, it almost felt like taking candy from a baby. Because you could just see it. You could work with a handful of people very quietly, and figure out the insights you needed to make a profitable trade. But the times did change, and the world did catch up.

Already when ERM blew up, Reuters came to focus on that, which made me lose my edge in Europe a bit. So that’s what made me think, let me go into Asia, and build that out. That was great. But then the Asian crisis rolled around, and with that, I lost my edge there, too. At that point, I’d joke, saying, “I try to go where other people don’t understand what’s going on. I guess I wish they had asset prices on Mars because it seems like Earth was running out of places.” 

Now, things are different. You can set up spreadsheets in Bloomberg, and when you wake up in the morning, there’s all this new data, updated for you, and the communication flows go everywhere. In my days, we had a fax machine. It was more about fieldwork.

And for me, personally, I never really thought of myself as an investor. I was focused on deepening my understanding of planet earth. But all of a sudden, people did put me on first-class airplanes,  bought me electronic machines, and wanted to make deals left and right. I was meeting everybody all over the world.  

It was a hell of a learning platform. But at some point, it was exhausting, and stressful for my family. So, ultimately,  I chose to make the hedge-fund industry a chapter of my life, not the book… 

Earlier articles in this series can be found here.

Subscribe to receive the next article directly to your inbox! And in the meantime, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

On Working with George Soros, and Breaking the British Pound

6 – On Working with George Soros, and Breaking the British Pound

As I began working with the Soros equity team in 1992, I was watching the British economy. They had floating rate mortgages, a highly leveraged economy, and lots of people with exposure to the stock market. You could see that if the Germans wouldn’t cut rates, then Britain would be in trouble. They’d either have to devalue or raise rates. With an election coming up, they were in a tough spot.  

As they got under more stress, Britain’s Prime Minister, John Major, tried to restore confidence. He said the British pound would remain the reserve currency of Europe for the foreseeable future. That was like putting a red flag in front of a German bull. We had a consultant friend, David Smith, who was very well-connected in Germany, who knew from the German central bank that they’d never cut rates to let the UK out of turmoil. So, we had our hypothesis for the ERM, and the British pound. 

Because I was leaving Bankers Trust to Soros in the midst of this, I tried to help Bankers Trust understand the same strategy; I felt some responsibility to them. 

Things progressed quickly. When Italy devalued, the Germans cut interest rates a quarter-point. And they told our contact, David Smick, that they won’t cut anymore. Not for the British, or anyone else.  

At this point, we did not yet have a very big position on.  So George and Stan and I had a meeting, and George said, “how big a position do you think you ought to take?” Stan asked me “What do you think you make on the downside?” I said, “well, 18 to 20 percent if there’s a devaluation.” 

And how much would we lose? “Well, I said, we’d stay within the band. So you might lose one and a quarter percent, but it would be very liquid if they hold the system together.” 

Now it became very clear. They asked me, “so you mean that’s like 18 or 20 to one shot!? This is the bet of a lifetime!” 

George asked me how much leverage I would have used on this at Bankers Trust. I said three to five times capital. Then George just said, “okay, guys, let’s start at least three times capital.”  

At that point, that was 15 billion dollars. And Britain only had around twenty-two billion in reserves. 

That’s what led to Black Wednesday. Britain ended up having to withdraw the British pound from the ERM, after the British pound had long been the store of value. There was a sense of embarrassment for Britain, absolutely. But after they devalued the economy, they started recovering, and interest rates came down. So, some actually call it White Wednesday.  

After this major trade, it was off to the races. I focused more on other places. I built up a four billion dollar position short the Swedish kroner. And that dropped almost 55 percent. Not 15 or 18 percent, but 55! That was another very profitable trade.  

George was an incredible coach throughout all this. He was not directly involved, it was Stanley who was in charge, and I was the deputy, but George would act as a coach; he wanted you to learn, and it showed in the way he interacted. 

In 1993, when I was working on Spanish bonds, he called me into his office and said “I don’t like what you’re doing.” I explained myself, and he said, “well, I gave you the keys to run these positions. You should stick to your guns and we’ll find out what happens.” That time, I was right, and I made a lot of money. So, George walked into my office and he said, “Way to go. You were right!” But in another instance, I lost money. It went wrong, and I went to his office, admitting my mistake. All he said was “well, what did you learn?” No scolding, whatsoever. That’s so great about George. 

He was, and still is, a big presence, but not an intimidating one. He was always trying to bring our creativity out; he was not making us into subordinates. He was focused on us performing well; on his team making money. 

Stanley, too, was incredible to work with. For his birthday, I once gave him a photograph of Coltrane and Miles Davis playing together. Because I so relished the pleasure of the teamwork with him. We did a lot together; and he taught me so much. His expertise in bonds, and in equities; I got to learn from him through example and conversation.  

Read along with the story!

Sebastian Mallaby’s book More money than god  tells the story of the British Pound in great detail, drawing from extensive interviews with Rob.

Earlier articles in this series can be found here.

Subscribe to receive the next article directly to your inbox! And in the mean time, take a look at Rob’s podcast Economics and Beyond, available wherever you get your podcasts.

13 – Thoughts for the future

12 – How INET Evolved

11 – The Early INET Days

10 – The 2008 Crisis

9 – On Reviving the Arts

8 – On Shedding a Wall Street Ego

Read along with the story!

Read along with the story!

7 – On Doing Structural Analysis Before the Internet

6 – On Working with George Soros, and Breaking the British Pound

Read along with the story!

13 – Thoughts for the future 

9 – On Reviving the Arts

8 – On Shedding a Wall Street Ego

7 – On Doing Structural Analysis Before the Internet 