#349 - Mark Hart - CEO/CIO Corriente Advisors - How He Predicted The ‘08 Housing Market Crash (And Won BIG)

Chris Powers: All right, Mark, thanks for joining me today. 

Mark Hart: Happy to be here.

Chris Powers: For those listening, one of the most fun I've had over the last decade was when you invited me to hang out with you on the trading floor. We've been doing that for about ten years, so getting to do this today is calm.

Let's start with a real career. How did you get into macro hedge fund investing? 

Mark Hart: That's a good question. I started my career as an investment banker, and my goal has been to manage money since I was a little kid. I grew up in Fort Worth, where Richard Rainwater, the most significant investor of the 20th century, lived.

His son was in my class in school. My father grew up with his father, Richard, who was his lawyer. And so, David Bonder man moved to town later on. A little later, you had Harlan Corn's face and HPK here. Some Clint Carlson, even a little later, but I'm a legendary money manager. We're here in Fort Worth, and I was aware of something new, so it was funny.

We had 35 boys in my high school class, and 1. 7 of the 35 worked at hedge funds on the investment side. So, many people in my class were influenced by Rainwater and wanted to get into that. And so, in college, my goal was to get a job on Wall Street, doing M and A investment banking, to put myself on the track to eventually get into money management.

I worked as an investment banker for about three years and then transitioned to working. Kerry Stokes was an Australian media slash-mining magnate. He had bought MGM studios with Kirk Kerkorian. I mainly understood MGM as an entertainment M and A company.

Once he bought it, he hired me to help oversee it, get it public, etc. So, I worked closely with some of the C-level executives there. It didn't last that long, but a friend from high school, who's a few years older than me, and another guy in Dallas.

I've been managing a little bit of money and wanted to start an official hedge fund, and they recruited me to come over and be their junior partners, like CFO and COO, and provide some fundamental research for them. That was the opportunity I was looking for, and what was interesting to me was that these guys were excellent traders, money-makers, absolute money-makers. Still, they differed from your traditional Harvard MBA, which was deep, like fundamental, build models, and whatnot.

They were much more top-down. And I used a lot of technical analysis. My passion has always been macroeconomics and geopolitics. And so, what they were doing was much more interesting to me, and they're making money. And so, I kind of, I don't know, a little bit of an autodidact, I guess, just trying to figure out how things went and just kind of constantly reading tons of books and paying attention to the world and seeing how it fit together and started, type of development strategy, I guess that way.

After a few years of working with them, I sold my stake in that fund back to my partners and started Corriente in July 2001. I have been done with it since, with a brief hiatus. 

Chris Powers: You remember how old you were when you first thought, I'm going to manage money? Is this like a ten-year-old or? 

Mark Hart: Yeah, probably, or younger.

I mean, I never thought. I had no other career goals other than running money. 

Chris Powers: Rainwater is the most iconic investor. You said your dad was his attorney, so there's only one, the son of Rainwater's attorney. What do you think you had to observe from that position to see what an icon looked like in the investing world at that early stage?

I'm sure your dad, just being around, brought it—stories home or vibes that made you want to manage money. 

Mark Hart: Well, yeah. I mean, I'm sure Rainwater has plenty of lawyers, but, yeah, there was one like a crazy story; I guess I can reason I can't tell this, but, So, and if I get the details off it, I apologize, but it was when the Bass family ended up buying, a significant stake of, of Disney and the way they had done it, they bought a company called Our Vita land, which is big land company and a lot of land and Florida.

And then, there was a green mailer who essentially had been buying a bunch of Disney shares. He threatened to take it unless they bought him out at a premium. And so Rainwater, I guess, conceived of this plan to sweep in as it was like a white squire. It was a white knight who would come in and buy the company. A white squire would buy enough of the company to make it too expensive for the green mailer.

My dad worked on writing whatever legal documents it was. Raise your hand in the water at about three or four in the morning that night. He arrived at our house, picked up the documents, took a plane, and flew to New York. At eight or eight-thirty in the morning, he went to the board meeting at Disney to propose how to save the company and the rest of its history.

They bought a massive portion of Disney, a wild success over many years. 

Chris Powers: I've heard bits and pieces of that story. Wasn't it something like Disney also treating the land on their books at ten dollars an acre or something, and it was worth thousands per acre? So, just that alone, there was this vast value addition.

Mark Hart: That could be it. I don't know how it worked, and I am still waiting for its details. It was just this sort of story. It was awesome working on middle-of-the-night drafts; these docs are like bursting into the board meeting.

It's like an eighties Wall Street drama. 

Chris Powers: What's a green mailer? 

Mark Hart: Well, it's just a green mailer—somebody who would buy a significant stake in a company and then threaten to take over it unless the company buys back the shares at a premium.

While that may be common, it has been a long time since I heard about it. 

Chris Powers: That's probably a good lead into Corriente, and macro is, like, there's always something going on in macro. Even in the middle of the night, macro stories don't stop when we go to bed.

Okay, so you start in 2001. How do you think about research before we get into how Corriente evolved? A lot is happening in the world, or there's not a lot going on; there are always just a few things going on, but you have to know what they are. What do you think about it when I ask you what macro is?

Mark Hart: Well, it's a good question. I tried to think of what are the main driving forces off of the world of, the geopolitics of macro, whether it's, I mean, if some of the big things, like the biggest probably right now is this rivalry that's, I would call it at minimum a cold war, with China and the Chinese axis and Russia, North Korea, Iran, et cetera.

And not that; it affects how governments act, and trade happens. There are a million different things that something like that would impact. Marc Andreessen, a decade or so ago, maybe 12 years ago, wrote an essay called Software is Eating the World, and this whole concept of how software is transforming, like lots of other different types of companies. So these are the tailwinds that will stay there, constants, and the economy that will not stop.

What are those enormous forces that continue to drive social behaviour? That's a vast picture. And then, where are the inefficiencies in the market? A lot of times, inefficiencies are caused by bad policy, and they're a function of, this is going to last for a while, but when will it unwind?

And how do I figure that out? It's been finding specific themes where I see considerable inefficiencies, maybe that has been there for a long time, and then figuring out when they will happen, how to become efficient again, and how to time that more. 

Chris Powers: Are you looking for things in a macro view that nobody's seeing? Or are you okay with diving into what's already known but finding your spot in that theme? 

Mark Hart: Yeah, I mean, I guess it doesn't have to be something that nobody's seen, although it feels a lot better not to be with the crowd, like to feel like you're really onto something that not many people are talking about or thinking about. I always thought I was relatively bright but could be more intelligent.

I'm a hard worker, but I'm not the hardest worker. So, how can I be the best at it, and what can I do? And the answer is that you have to be different. You have to take a different approach. I always felt that it was like Ned Davis or somebody who wrote something along the lines of, Could have been William O'Neill, who wrote something along the lines of, most of the work that people do on equities is spent, bottoms up research of the individual companies.

Yet the vast majority of the move in any individual stock price results from macroeconomic forces, liquidity, and whatever affects that industry specifically; it's not company-specific alpha. So if everybody's spending their efforts on that small move in an individual stock and I spend all my efforts on the big picture, I can be more correct.

Chris Powers: It's a lonely?

Mark Hart: I don't find it lonely 

Chris Powers: Or maybe it is lonely to be so convicted of something the world has yet to see? Or do you like that feeling of isolation??

We will talk about 08 a bit, but there was a time when housing prices went wild. And you're like if anybody's seen The Big Short or read any of these books, it was clear as day to you that it would crash, but there was probably a year or two where everybody was laughing at you.

Like, look at Mark over there betting against the housing.

Mark Hart: We were lucky in that specific instance because we got the bet immediately. It started working and didn't go against us for very long. We watched it for a long time, but it had; I've suffered significant drawdowns and losses that weren't recouped because either the timing or the thesis was wrong.

And, yeah, that's tough. It's been lonely, and I don't know if it's lonely. I mean, I've always had excellent and professional support from people with him, and I've collaborated. And so I guess, if misery loves company, there's always a little bit of company with me when things aren't right, but I mean, you want people to agree with you later, so that's part of the deal.

Chris Powers: Okay. Well, let's go back a second. How did the research begin, or how did the theme against housing begin? You started betting or investing in 06 in a collapse, but that thesis probably started in what, 04, 05? 

Mark Hart: Well, even before then, although I wasn't betting against housing, I had been thinking about it since at least January of 03, maybe, or so I can't remember.

You can go back and look. There's an article in the Wall Street Journal by Patrick Barta, a good friend of mine in college. It was in January of 03, but we were having drinks in New York, and I explained this housing thesis to him, like an 03. He wrote a story about it and didn't mention my name, but it was pretty early on.

I was wrong at the time, but I was very long. There were a lot of commodities in the ought, and I knew that a lot of that demand was coming from the booming housing market. I realized that that was a significant risk to my thesis, so I was always out looking for signs that would be turning.

I was expecting signs that something would happen at some point. That was my friend Kyle Bass. We talked all the time back then. We were both doing well in this commodities trade, and both were very nervous, and people knew that.

And so we could see, and I mean, the signs were there, it was really.

Chris Powers: What were the signs to you? 

Mark Hart: God, I can't remember all the signs. You started seeing credit spreads move wider on some of the riskiest names. Still, you're delinquent, and I mean a lot of this. The credit data was deteriorating even before you saw the credit markets reflected.

The sentiment was very extreme. And I always look to, I always say that everybody wants to be a contrarian, you know. A lot of times, you'll be in a room, and you ask a group of people, bears, why they're bearish, and they'll say because everybody else is bullish.

And then bulls, at the same time, will say they're bullish because everybody else is bearish. But maybe there's not a straightforward read from sentiment at being at an extreme. But it's kind of like the Supreme Court's definition of pornography. It's like, you know it when you see it.

It was a time when everybody in the mortgage market and all the loan departments at different banks would swear up and down that, on a nationwide basis, on average, housing prices couldn't drop. Like their models, they didn't even go negative; it's like, yeah, if one pocket of the housing market weakens out in California, we'll be strong in Texas, but never across the board.

These securitizations include loans from all over the country, giving them geographic diversity. There's this view that it was pervasive that the worst-case scenario was slow growth, so we had that perfect sentiment right when all the data was deteriorating. And I guess people were flying a little bit blind.

Chris Powers: But you were like in the 0. 001 per cent of people that still saw you make, I mean, you're from your advantage. It's easy, so what gave you the, like, all right, we're going to raise money around this idea, and we're convicted, and we're going, was there another inflexion point, or it was just a series of all these kinds of seeing of data.

Mark Hart: Well, to me, it was seeing the optionality in credit default swaps, getting into the instrument, and seeing that, the payoff. If you were right, the risk-reward was entirely out of whack. You could buy insurance policies on bonds. Where is your worst-case scenario?

It's just a spending premium, but your upside is epic. The way that bond waterfalls flow, you would have the lowest-grade bonds get entirely wiped out before the next grade would even get impaired. So, it would take a little carnage to have total defaults.

Some of the lower-rated tranches of these are subprime RMBS. So, the key was that the instrument was so compelling that we found it to give us an incredible risk-reward set-up. 

Chris Powers: So when you're going around, your pitch is like Sim, like the world's about to fall apart or the housing market.

Maybe you didn't know the gravity of what 08 would turn into, but you at least knew housing was going to. You're sitting in front of investors who are probably enjoying an up into the right thing where most people are investing with you as a hedge against their optimism, or was everybody like, Oh, we see it too?

Or we like Mark like I have to imagine. To have the guts to put money into that investment where the world was in 06, you're taking a, you, if you're not already as deep into it as you like, you're feeling like, okay, I guess this is a hedge on my optimism. 

Mark Hart: Yeah. Well, a lot of people did see it that way.

They saw, okay, well, look. The pay-outs are so huge if they're right about the housing market, and the pay-outs are epic, but the consequences for the rest of my portfolio are so dire. It makes sense. We did have a good number of hedgers, and then we've probably had a lot of individual investors who just loved the risk-reward set-up, which was so good.

Chris Powers: Do you think it was good that you were right so quickly, just psychologically? 

Mark Hart: Well, it was. I was right quickly on that trade and then, right after it, the European trade. That probably made me try to keep my ego in check as much as possible.

It's not like I just came up with these collaborative efforts. More of it was my willingness to go big and my personality instead of being brilliant. I didn't think of it that way.

It may have made me overconfident. Later, I had the big, short on the Chinese Yuan that cost me a lot of money. And I don't think I was; I was wrong, and the thesis still may play out. You had the Shanghai Accord; 2016 was a massive intervention by Western powers to avoid a Chinese Yuan devaluation.

But at the same time, I had put this trade on about six years before that, anyway. So it's way early at best, or I was completely wrong, but there's no question that, thinking back, I would have won it. I should have waited for more cards to come out of the deck before pressing that next bet.

Chris Powers: What's the quote? The difference between being wrong and being early is indiscernible. 

Mark Hart: I mean, that's right. It's wrong. It was a total wipeout or virtually a total life out my China bet, and you still, and then there was a devaluation. And it wasn't enough to move the needle. 

Chris Powers: Besides being early on China, though, what did the whole China thing maybe teach you about the world? Or how governments work? Or, because eventually, you were right. You were just early in making the call of what happened.

Now, as you sit and look at the macro, which is a new tool you bring to the table when you're looking at a situation where things can probably take a lot longer to play out, was there something you left that situation with that will be a tool in your tool chest in the future? 

Mark Hart: Well, it's a good question.

 Chris Powers: I've got a lot of good questions. 

Mark Hart: Yeah. Well, you can always learn a lot from yourself. Everything has to be a victory or a lesson. I learned a lot of lessons. Unfortunately, some more critical lessons involve investing as much as three little kids in a two-dying parent.

For a long time, I was obsessed with these trades that were out of my hands, whether they worked. And so I think maybe that helped wake me up to pursuing a quality of life, health, and that sort of thing, like a little more family time. After that China trade, I took a hiatus to focus primarily on family and health. 

Chris Powers: Let's go back a second to Europe. So you, and then we're going to get back to where we just were, but you run a great trade on the housing decline, and, as that trade was going on, you were already beginning the trade on Europe. Is that correct, and what do you see there? 

Mark Hart: Well, I saw that there were a lot of credit bubbles in the world, and it wasn't just us housing. And I'd always, Interestingly, since college, thought about the European divergence trade in a sense. I was in a finance class, and it was happening when the Maastricht treaty was signed, and it was a small class of four or five students.

One of the students in our class was from Germany, and we spent a lot of time discussing it. This idea of multiple fiscal policies and a single monetary policy can only last for a while if you have these countries with different economic fundamentals. Still, the goal is to drive borrowing costs to the same level.

The convergence trade lasted for a long time, but I assumed that eventually, it would not last, so it was the kind of thing in the back of my mind for a long time that this would happen. I wasn't thinking about playing it or anything. But then, I read a short little book; I can't remember the book's name, but the author was Louis Vincent Gave, a close friend and a great macro thinker.

He had moved. He and his family moved to Hong Kong from France and thought that Asia was the future. In his book, he discussed some of the risks and problems in the European sovereign bond market. So, I read the book and started doing a deep dive.

The more I read and figured out how the sausage was made over there, the more convinced I was that it had to blow up. So, I started to prepare for that fund. I recruited Louie to join me in managing that fund, and then it was slow-moving.

I don't know if I'm answering your question exactly, but it was slow-moving until that summer of 08. I watched the credit spreads, not of the countries in the EMU and the economic and monetary union, but of the countries that had hoped to get down to the EMU, such as Bulgaria, Romania, and Latvia.

And suddenly, that July you just had, spreads over German bonds were blowing out. So, I remember, seven years ago, Bulgaria over Germany went from trading flat to trading 15 or 20 basis points over, and nobody was paying attention. And you look at these charts after a convergence for decades.

It may not have been quite decades, but borrowing costs suddenly went out of nowhere, right on the heels of the subprime. With all the banking crises here, suddenly, those credit spreads widened, and it seemed like the dam had broken or was about to break. That was the catalyst for raising the money fast and putting it to work.

Chris Powers: Maybe we can pick on this, returning to the research question. It is just for me. I buy real estate around Texas. My research is kind of down the street. I can drive to my research, but when you're researching something, to the average person, that's complex. It's across the world.

You're dealing with government policy. How are you doing that? Are you calling people over in Europe? You read a book, which led you to other things, like what goes into complete research to where you come out of going, okay, green light. 

Mark Hart: Yeah. I mean, we had analysts, reading, bond prospectuses.

We spent a lot of time with the trading desks of all the big firms that traded these sovereign bonds and traded. Sovereign CDS, we had to dive deep into the instrument; how does it default, like become official? How does it trigger a CDS? We spent time talking to the sovereign credit rating analysts, like at Moody's and various places; it was just learning everything you can, your whole team and knowing, getting to know the people on the trading desks that trade this stuff.

What was exciting and mind-boggling was that European sovereign bonds had no risk weighting. It is not the process; this is like a light bulb. So, you could buy a European sovereign bond, if it's an EMU bond, immediately take it to the ECB, and borrow money against it at its hundred per cent face value.

There's zero haircut, so there's zero risk weighting. So, what banks in Europe had been doing the same stuff as the banks here in the United States, lending to bad credit for a long time? And so,  what they were able to do, and these are the banks in Europe, have much larger balance sheets than the banks in the United States, but what they could do is create tier-one capital.

In other words, the equivalent of equity is selling CDS because you're selling an insurance product, right? When you sell it, you get a stream of payments. And so they could take their stream of payments and present value. Since the bonds had zero risk, as determined by the ECB, you could create a net positive value that counted essentially as equity to one capital on your balance sheet.

And so that's what these banks, particularly land banks in Germany, are doing, but many of them were. So, what happened is that the banks—maybe the ECB looks at it that way—started to wonder about the counterparties, and when credit started to blow out, they began to ask for more collateral, which they didn't have.

Chris Powers: Okay. You talked about being at the top of your game, and then a few years later, you, we'll call it. Maybe not rock bottom, but you hit a low. I want to talk about what you did. You hired a, and one thing you always say is, I've noticed I wrote this down. Every author that you read that you like becomes like one of your friends.

Butt you essentially read a book. I have it here by Josh Waitzkin. Who introduced you to Tim Ferris? And when we talked a couple of weeks ago at lunch, you said, I invited these guys into my life to help me rebuild. It's kind of my process and the way I approach life. Can we discuss what that all looked like and how your life changed? 

Mark Hart: Yeah. So, I just knew that I had to. I was very spread out, had a lot of employees, and had a lot of chaos, and I didn't feel like I was on top of it. And so, I read Josh Waitzkin's book The Art of Learning, and I was blown away by it, and Josh was.

He was the subject of the movie Searching for Bobby Fisher. So he was this phenomenal chess player, the seven-time scholastic champion in the U.S., and he had this movie come out, and it was a big hit. It was a book. His father wrote it.

It caused him to lose his love of chess. So, he got into martial arts, long story short, and ended up becoming a world champion and writing a book about his learning process. I realized that I needed that. And so, they made a lot of recommendations.

They looked at my life, how I broke my day down, and how my team broke their day down. They divided it into exercise, work, family, whatever it was, and then made many recommendations about how I could improve many of those processes, diet, exercise, how to get the most quality out of research time, and whatnot.

Chris Powers: And so what's the biggest needle mover? If you had to say that there's probably a lot, what was the one big thing that changed? Is it exercise? 

Mark Hart: Yeah. I mean, jujitsu is like the big thing. I mean, I just became completely obsessed, as you know.

Chris Powers: Why do you think that is? Why do you think so many guys on Wall Street get into jujitsu?

Mark Hart: Well, it's uncomfortable, and it can be when you're getting choked or twisted around, you can't move, you can't breathe, or you can't breathe well. And it's easy to panic, but you have to get your mind to a place you're not. And I mean, you immediately shut out everything, and you just become the ego, all of it.

You just become in that moment, and it's super complicated. It looks pretty basic, maybe if you're watching it, but the more you get into it, the more there is to it, and it keeps getting deeper and deeper. And so it's puzzling. It's a challenge. I mean, people call it 3D chess.

Or whatnot, and then, I mean, I'm not a chess player, but that makes intuitive sense to me. It's exhausting, and you get in phenomenal shape, and it unlocks the athleticism that, I guess, I didn't know that I had, and I loved the people that do it, 

Chris Powers: How long did you become a black belt? 

Mark Hart: It took me eight years to become a black belt, which is fast, but I did spend four and a half years doing it twice a day for three or four hours a day, five days a week. So it was just like, and I was a wrestler before, in high school, and did some other martial arts, such as judo, as a kid.

Chris Powers: I will have memories of you forever. Every time I'd visit, you'd be walking out of the dojo,  sweaty, like you had been doing. And then we'd walk right onto the trading floor, and you'd start checking what's going on there. And then we'll talk about your one wheel. But I thought it was one of the most unique setups I've seen.

You would; you can train next door and then walk straight into work. I'm assuming that's had a substantial positive impact on your work. 

Mark Hart: Absolutely, the jujitsu slack lines. I don't know if you ever do a slack line, like a little tightrope type thing. They're fantastic for balance and just something to take your mind off everything happening.

So I have Slacklines at the office, Matt's, and Jim's; sometimes, I clear the head with some of that. 

Chris Powers: What can a black belt do? How do you know you've become a black belt? Well, aside from getting, do you have to? There's a specific checklist you have to be able to do X, Y, and Z. How do you prove that?

Like obviously, you have to get every belt before that, but what defines a black belt? 

Mark Hart: Yeah. I mean, there may be, I don't know. I don't know the specifics, like if there's something specific. I mean, there are different definitions. People may have other definitions, but you have to be proficient, and I don't know what.

I specifically mentioned dead or skills I had; there wasn't a test that I went through. However, to some extent, there is, and my teachers ensured I  was there. Multiple agreed that this time. 

Chris Powers: All right. I want to go back now, maybe to China, but not necessarily to talk about the trade.

It's now like 2024. You said we've been in a cold war and many of our discussions over the years. When we're talking just about the world, has China been involved in it? You probably think about China a lot. What do you think about him today in 2024? 

Mark Hart: That's a long answer. 

Chris Powers: We have time. You don't have to give me the hour-long answer. We'll do it at lunch, but give me as much as you want. 

Mark Hart: Well, conflict is heating up, and it has been for a long time, and China has been building up its military capabilities for a very long time. It's allied with a lot of countries who are increasingly at war or, whether it's Venezuela threatening to take parts of Guyana or Hamas, attacking Israel's proxy of Iran, in a sense.

All these conflicts serve China's interests, and the United States is spreading out simultaneously. The United States hasn't invested in maintaining many of its military strengths, and indeed, our allies are even more guilty of not investing in their strengths.

So I don't know if it means we go to a hot war, if the U.S. ever gets to that, or if it just puts the U.S. in a weaker negotiating position. Still, I think that one of the things that have happened that's kind of scary is China's model has been to suck in capital from the West and then use that to build out its industries to compete with the West and then also use that to invest in other countries to, gain allies and to make those other countries dependent, on China.

Capital flows into China have stopped in many ways. There's still capital going on, but it's still more and more through the trade account, running more significant and extensive trade surpluses. And so, that is a little scary because maybe the game's up slightly in terms of people starting to recognize that it's a roach motel.

If you send your investments in, the money doesn't come out, and so China needs to, I guess, make up for it with the lack of dollars with a merchant list and trade policies. And so, of course, that is not politically palatable to countries in Europe or the United States car manufacturers.

And suddenly, that's reversing, and they're importing many cars from China. Tensions are rising, and they're going to continue to rise. I don't know, how it comes to a head or if we reach a state of, they taught, I think that it's, I mean, I guess, I'm a believer in this, kind of forth turning type idea where, I think we're in that for turning where a lot of, institutions of the prior, several generations are destroyed, and new ones are created.

And it's happening; many things are causing that to happen. China's, one of them, so it's, I think that really part of it is, you have to think about, with it as an investor, not so much, it's more like how do you invest in this environment when the geopolitical risks are rising? And that's maybe the best answer.

Chris Powers: When Xi Jinping came over to San Francisco a couple of months ago,  they cleared downtown, and that had been riddled with homelessness and drugs. And then that we were told forever, well, it just kind of, that's the state. Then, in 24 hours, it was cleaned up for the communist party from a trader macro perspective.

Well, how did you read that? Does that appear to be a weakness? Why did we do that? 

Mark Hart: Well, I guess that's the practice. I mean, it's for foreign leaders, but it does seem like it's not a good look. I don't think you can clean up for a foreign adversary who wants to take you down, but you can't clean up for your citizens.

I guess the main thing, the most prominent macro theme that's investable outside of Bitcoin, is migration to Texas and other states. And I think it is like being a taxpayer: When you pay taxes, you make an investment where you love it.

You have to, but it's still, that's what you're doing. And, I can go into why, but, yeah, so, like, think about countries like Monaco or the Caymans or Switzerland or Ireland, their tax havens and a lot of businesses or elite, global elite people have moved their assets and moved physically to some extent to some of these tax havens.

But that hasn't been much of an issue for less mobile non-elites. Generally speaking, you're tied into where you are, and I think the pandemic really changed a lot. One of the significant changes is that we realized that we didn't have to spend as much time in the office to be efficient.

So, a new kind of equilibrium is figured out. I think the pandemic suddenly created more demand for residential real estate and, at the same time, less demand for commercial real estate. In other words, individuals thought, Oh my God, I don't have enough space at home because of lockdowns, or the businesses realized I have too much space at the office.

So suddenly, we were short residential real estate and long commercial real estate, which also unlocks the possibility of not having more behave more people. It somewhat sets off a bit of a tax arbitrage, where taxpayers can suddenly say, okay, if I'm not getting a good return on my tax statement and where I live, I go somewhere else.

I think that there's migration, like to Texas and other states. It started with the advent of air conditioning. We have much better weather here, except when it gets boiling. If you have air conditioning, it's great. So that started it. But now, this is this new wave.

 I think  Governor Rick Perry was very focused, for instance, on his job as governor; he thought I put words into his mouth. I thought it was great. His view was, let's attract companies and people who come here because we have a better business environment for people to work in.

But the pandemic set that loose.   Xi Jinping's visit to San Francisco was a stark reminder of how poorly taxpayers are treated in California, specifically in San Francisco, where there's not a good return on investment.

In other words,  this big theme is the first thing I think about, and yes, that theme is correct. It is a long-term thing. It's going to continue to happen. It's cheaper to live here. There are other weird little things, like cities like San Francisco and port cities, which used to be necessary.

All the populations congregated in ports because that was where the trade met. But then you've had advances in communication and other things that have not required everybody to be right there where the trade happens. And so, the negative downside is that you're limited in how you can spread out your population.

You have oceans or mountains or whatever that limits. If you want more people, you must grow up or go out. And so, typically, the wealthiest people can stay in the city centre, and the rank and file have to move further away and have longer commutes.

And, in Texas, for instance, you don't have that like Fort Worth, Dallas; you've got lots of pockets of industry and wealth spread out all over. And anybody can live pretty close to where they work, regardless of how much money they have. So, I think many things are pushing this, such as migration trade, which will continue for a long time. I don't know, but coherent.

Chris Powers: You're making my heart patter owning real estate in Texas. What do you think real quick about inflation? 

Mark Hart: Well,  inflation is how, I mean, we've run up huge debts and are running huge deficits government-wide, and inflation is how those debts are historically paid off.

I always think of inflation as a tax on owning a currency. The tax on owning a currency is inflation plus productivity in the economy. Another way of saying it is if you had a dollar or 100 basket of goods at the end of a month.

If the end of the year, the end of the following year is 102, then you've had 2% inflation. But if you've had non-farm productivity growth of 1%, then that basket theoretically should have dropped to 99. So, that delta is the tax that you pay in dollars. Well, now we're experiencing high growth and high inflation, natural growth and high inflation.

Another way of thinking about it is that the cost of holding a dollar is the nominal rate of nominal GDP. It's real GDP plus whatever values are added. So, the tax on holding dollars has increased significantly with inflation. It's much higher than being one, two and a half per cent or something.

And that's caused people to move into other things like Bitcoin, gold, or out-of-kind long-duration reserve assets. But this is how most people probably don't realize it, like in 2020, at the pandemic's peak. The S government debt to GDP hit something like 137%.

Do you know what it is now? It's like 120. So, debt to GDP has decreased significantly over those last four years, even though we've been running significant deficits the whole time. The reason is that the GDP has gone up. Because of inflation, the actual debt burden has been dropping, and that's the game.

That's always been the game to reduce the value of the debt obligations through inflation. And so I think it does risk getting slightly out of control; supply chains are stretched, and we've seen that they can be broken and set off inflation.

And it's the banks that are loaded up with a lot of commercial real estate that is probably not appropriately marked that will have to suffer losses, and the Fed will have to be aware of that as well.

So yeah, you've seen, but the underlying economy is strong.  Many productivity gains come from things like AI and the benefits of investing in technology for a long time. So, I don't know how out of control it gets.

But I guess the Fed, so far, everybody was expecting cuts in interest rates, and they haven't come. So, on the surface, it looks like the Fed is tight or playing tight monetary policy, but that's not the case. Global liquidity has been expanding for about a year and a half.

A reason for that is the rate at which the Fed has been tapering its balance sheet. They did not taper it nearly as fast. So you've got this issue of maybe being a little tighter at the front end with interest rates but providing plenty of liquidity to the economy in the back end through effective quantitative easing.

Chris Powers: Yeah, yesterday's print. It was up. I think we're not in our office—again, I don't know what will happen. I don't know what will happen tomorrow, but after yesterday, we're no longer planning for any cuts this year. And I think I had Barry Stern on a few months ago.

He probably said it in a way that made them easy to understand, but he was like, high-interest rates don't kill government jobs. They don't kill healthcare jobs. They don't kill our education jobs. They usually kill the business sector, specifically construction and construction-related activities.

But when you have a 6 trillion infrastructure bill that you're also pumping into the system, all the big contractors around the country would tell you our business was 80, 20 private to public jobs, and now it's just 20, 80. And guess who pays the most? The government. So, all these employees would be laid off in a typically higher interest rate environment. They're not only not getting laid off, but they're getting paid more to work on government projects. And so his whole point was, you can keep raising them and raising them, but it's not; you're pushing on a rope. It does not have the intended consequences of inflation that we would hope for.

Mark Hart: Yeah, it's true. Well, they're not tightening, though, like through, so we track global liquidity. The best is this: cross border capital, Michael Howell, who monitors it, which is a great, free Twitter follow. 

Chris Powers: Who is it? 

Mark Hart: Michael Howell tracks cross-border capital. But he'll also track global liquidity, not just money supply. It'd also be BondBond and stock volatility, like the lower the volatility, the more, the better. The lower the volatility and asset, the better collateral it is. So you can borrow more, you can leverage more against it.

Global liquidity has been expanding for a while and will continue to grow to pay for many of the programs, and the debt has to be monetized. So, if it's not, I'm saying they're not like pushing on a string.

They're not just; it appears that they're operating in a tighter manner than they are. 

Chris Powers: Okay. Let's talk about Bitcoin. You've been in it for seven or eight years, maybe longer.

Mark Hart: Ten. 

Chris Powers:

Mark Hart: Yeah. 

Chris Powers: Good. Those 2014 prices feel good. But you said you think about that a lot. My first question is, do you think about Bitcoin differently today than in 2014?

Now that you've seen how the world has interacted with it for ten years, is it still the same thesis? 

Mark Hart: Well, it's the same. I started watching Bitcoin when it was around a dollar, and I didn't do it. I watched it increase by 40,000 per cent before I bought any, but it was fascinating to me, just as a project.

Chris Powers: How did you get introduced to it?

Mark Hart: My brother-in-law, Blake Lipscomb, my partner at the time, somehow came upon something written about it, and he just started diving into it. And I was fascinated by it. It made me create a framework I use for investing because it was funny. 

There was so much hate for Bitcoin, which made no sense. I always needed the religious vibe on both sides. Still, it seemed like everybody who loved it was religious about it, and people who hated it were religious about it to the point that they weren't rationally thinking. I saw you had a picture of Charlie Munger out there, but Charlie Munger would never apply any of his actual rules of investing to analyzing it. He just called it double rat poison. And I pointed out to a friend that that was the worst trade ever.

He's been calling it double rat poison since a hundred. And the friend said to me, well, he wasn't saying it was a bad investment. He was saying it's not good. And I said, well, maybe that's the case. Although he wanted people to think it was a bad investment, I came up with what gives: Bitcoin doesn't return anything; it's like the gold case.

Right. So I sat there and said, okay, what gives any asset value? Is there any investment? It's different from most of the time; it's a discounted stream of future cash flows. That's a component of it, but I've identified the six factors that give an asset value, and it's just changed in these six factors that move the price of a good.

I built this framework specifically around Bitcoin. The six are access, awareness, security, Patina, uses collateral, intrinsic value, and discounted cash flow. So, getting through that access, you could have a great asset out there, but if you can't buy it, then it's not going to go up in value.

If it's not easy for people to buy, only techies can access it. You will only have broad access if it's straightforward wallets. However, awareness is another way companies spend billions of dollars on marketing campaigns to create awareness around their products.

The more aware people are, the more likely they are to own something. It applies to anything, whether it's an investment or not. Security is a big one. It is how I came up with my idea of taxing a dollar. Dollars are super secure, but they're only partially secure.

Like they lose value, they lose value because you pay a tax for holding them. But it's worth it. You pay your taxes in dollars, and you buy stuff in dollars. It's not like you don't get anything for it. You have to pay a tax to own it. Or like gold is another one where, from a security perspective, like there's a relatively limited amount of gold out there, but if the price goes up 10 X, they'll start digging up all of Colorado to get more of it, or they'll crash a satellite into an asteroid that's got a bunch of gold on it, move it into the orbit here eventually.

But security is one. You could buy a bond from Namibia that yields a lot, but you need to know whatever the currency there is; in other words, security plays a role. And then, Patina is one like, you can think about how, I mean like GameStop, for instance, or some of these different, meme type stocks, or it could be people may like Bitcoin because it shows that you're tech-forward or libertarian thinking or whatever it is. So they may like euros because they believe in the project or like whatever it is. They may like Tesla stock because they want to be like Elon.

So Patina can drive things. Its emotion can drive holding stuff because you like it. Baseball cards have value because people want to own them. And then, obviously, you would get the return. But if you think about it, a bond gives you a certain amount of interest, but if it's priced in dollars and you're getting paid interest in dollars, then you really need to subtract the tax that you pay on dollars from the interest to see what you get, and maybe a negative. So, in that sense, maybe Bitcoin yielded more than a BondBond, even though it didn't have an interest rate, because it was priced in Bitcoin, not in dollars. And then the biggest one is used collateral.

For a long time, people have talked about Bitcoin as being similar to tulips. It was the constant narrative, particularly early on, and it was the most absurd argument because Bitcoin had no leverage. You couldn't borrow against it.

You couldn't go to your bank and say, Hey, I've got a million dollars of Bitcoin in this wallet. Will you lend me money against it? They laugh at you, right? There needed to be leveraging it up. Well, the tulip mania came because people were able to take tulip bulbs and use them as collateral to borrow money, which is entirely absurd; of course, it's going to blow up, but it's that process of leveraging something up that gives it that considerable value. 

So, like the European sovereign debt crisis, there was a massive supply of all these things because they were so leverageable. The ECB would apply a zero haircut to them, so vast amounts of every BondBond were perfect collateral.

There's demand for those bonds because you can turn them in for cash immediately. Micro Strategy was an exciting company because it was the first to demonstrate that you can, as a corporation, use Bitcoin as collateral. They borrowed money and used 100% of the proceeds to buy Bitcoin.

So, those are the six things that give value. And as it applies to Bitcoin, all those are trending for more positive access. How many billions of dollars would it cost to launch a marketing campaign to get as much awareness for your product as Bitcoin gets for free access? It's improved dramatically with ETFs, security that there's a meagre tax on Bitcoin that monetary policy continues to tighten. Only some people can secure their wallets, or there are other security risks, but all these things, including each one of those items, can continue to improve.

Does that make sense? 

Chris Powers: That makes a lot of sense. Okay, let's finish on AI. Do you have any thoughts about it? Are we in a hype bubble right now? And are we beginning the era of dramatic job loss and deflation because everything will be automated?

And how is AI playing into your view of the world? 

Mark Hart: Okay. 

So it's just epic, like massive, revolutionary technology. And it's a bottoms-up tech. So, think about things like electricity. We figured out how to manipulate electricity, but it still took over a generation before we started saying, Oh, wait a minute, we can electrify factories over here and make them much more productive.

Then, the infrastructure required to do all that takes many years before you start to get the productivity benefits of harnessing electricity or railroads; these are massive upfront investments or canals. And then you have to wait for a long time before you start to get the productivity boosts from them, or the last mile of high-speed cable, data, going from dial-up to high speed, I mean, that took considerable digging and infrastructure before you got that.

But AI is the opposite. Those are all top-down technological transformations that require vast amounts of capital upfront. Then, they permeate over time, and you get the productivity benefits. Still, with AI and chat GPT, the most productive people in the economy suddenly become much more productive simply by downloading an app.

That's why Silicon Valley had so many layoffs a few years ago. The narrative at the time was that things were getting bad, and so they were battening down the hatches when it was more a function of them becoming so much more efficient because they were the earlier adopters of AI.

I don't know where it goes in the future. The only thing we know is that technological change has been happening. It's been happening at an accelerating rate for generations now, and it's likely to continue absent some great filter hitting a great filter, like a world war, or we destroy ourselves or something like that.

In many ways, you don't have a choice but to embrace the coming changes. It'll get more challenging to Compete and gain an edge as a human.

I'd like to know if I'm prepared to. I’m glad I'm my age and not super young coming out. Although right now, I'm sure it's interesting to see if you are coming out. 

Chris Powers: Bill Gurley and Brad Gerstner said on their podcasts that they were talking about what you told traditionally: companies get big, and then they slow down, and they get bloated, and they start to die. And for the first time in history, you look at Fang or whatever it is now, and they're gaining speed and velocity at their size, which is interesting. It tends to be still like one of the best trades is to keep betting on the big seven.

Mark Hart: Yeah, it has been. They can utilize these new technologies more quickly than the rest. Technology is growing faster, and software is growing faster than the economy overall. And that'll continue.

Chris Powers: So, is there any theme I didn't ask you about cannabis? 

Mark Hart: Yeah. Cannabis is just another one of these that interests me. It's like the United States, with about a hundred billion dollars in the market. And, or so, it's more extensive, and roughly 70 per cent of that is illicit.

Thirty per cent is legal, like state legal, whether for medical or adult use and in various states. So, you have this competitive landscape where the legal players pay more taxes than other businesses in the United States. They're more highly regulated and pay higher taxes than any other businesses.

 So, the cost of doing business is extremely high, and they're the low-cost or marginal producers in the illicit market. These are criminal enterprises; they're not looking, adhering to strict labour or environmental standards, or paying taxes.

So, legal companies have a tough time competing, and it's been a challenging theme. On the flip side, some companies are at this point, but some can survive and thrive in a world where the playing field is not level. The playing field will likely level out.

And one of the things that's happened is as cannabis has become more socially accepted, it's become de facto legal. You don't have the crackdowns that you used to have on players. That's made the competitive environment even more difficult for legal players.

But as you get, enforcement's improving. The incentives for governments are very high in Illinois. For instance, cannabis producers pay more taxes than alcohol producers. They, than the state, get from alcohol. And so, incentives for governments to enforce laws are high. And then, there's the potential for federal reform, whether it's banking or rescheduling, that there's constant other reform, just state-level legalization, whatnot.

The tailwinds for the legal sector are starting to pick up. You've got this market share for the legal industry. That's about 30 percent right now. But over time, whether two or ten years, that goes to a hundred percent.

It's kind of like alcohol. You don't have illicit alcohol makers out there. It's highly taxed, but you still don't have many. Maybe there are some, but effectively, it's all coming into the legal scenario. And so basically what you're talking about over time is the, the marginal producers, the low-cost producers of cannabis are like destined to go away.

It means hundreds of per cent growth, but if you have the same size pie, it's hundreds of per cent growth for the legal players. And then, of course, there is the potential for that market to expand. I think young people are much more likely to consume cannabis than they are.

I don't know if they're more likely to consume cannabis than they are alcohol, but there's a shift. The younger you get, the more biased you are in favour of cannabis over alcohol. It's not as harmful. So, I think there are a lot of significant tailwinds for the sector.

It's not that easy to invest in. but it's a long-term theme that I have a lot of confidence in. I don't have as much confidence in that as I do in Bitcoin in the long term or in this migration trade that will continue, particularly into Texas. 

Chris Powers: It's an excellent place to wrap up.

Mark Hart: Awesome. 

Chris Powers: Thanks for joining me today, Mark. 

Mark Hart: Thank you. I hope I didn't babble on too much. 

Chris Powers: You're the best. Yeah. 

Mark Hart: I appreciate it.