One of the first decisions that Trump made after winning the second term was naming Scott Bessent as the nominee for the position of Secretary of Treasury. Bessent was also a major donor to Trump’s campaign and his economic advisor. His extensive experience, first as George Soros’ Soros Fund Management. At Sorors, Bessent along with Stan Druckenmiller were credited with the famous trade which “broke” Bank of England, which netted Soros a $1 billion profit. Later Bessent worked for famous short seller Jim Chanos. He later rose to fame his own hedge fund, Key Square Group, which made him an influential name in the broader global economic landscape.
Scott Bessent with his team in January 2024 came up with three high-conviction ideas based on the so-called thematic anomalies. In previous cases when their convictions were correct the investments brought in significant gains. He discussed them in Key Square’s January letter made available to Hedge Fund Alpha (the full letter can be found below).
Some noted examples of successful themes from the past were:
- The result of Abenomics was the reflation of Japanese assets and the depreciation of the yen
- Greece will not leave the eurozone and European assets will recover
- The new Argentine government under Javier Milei would repay its defaulted debt
- A mini-crash after Trump’s first victory it would later turn into a positive outcome
- In 2017 the market wrongly made a bet on the Marine Le Pen victory
- The Federal Reserve would not hesitate to use similar methods that Volcker made between 1980 and 1982.
According to Bessent, these are not contrarian views but rather market participants used the wrong information to make investment decisions. As a result, they created attractive entry points and underpriced option opportunities.
Essentially ideas above are from the macro playground, and it takes the ability to look through imperfect information to find asymmetric gains. While these plans do not always come with perfect scores, at some time the tide can shift in the right direction.
The three ideas that Key Square had in mind were:
- The Trump Rally – Making US Equities Great Again
- Fire Then Ice – The move of the US economy from the fire of inflation towards the ice of good price deflation
- The Case for the Reverse, Reversal Rate – A rate rise by BOJ will stimulate growth.
