Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Jerome Schneider. He's the head of short
Speaker 1: term portfolio Management of Pimco. If you were remotely interested
Speaker 1: in fixed income bonds trading, the plumbing of how finance works,
Speaker 1: this is a master class in tremendous details of how
Speaker 1: the fixed income market works. It's absolutely fascinating. If you
Speaker 1: are remotely considering any sort of fixed income investing, working
Speaker 1: on a bond desk, being a portfolio manager of any sort,
Speaker 1: then this is a conversation you have to listen to.
Speaker 1: It's absolutely um fascinating. With no further ado, my conversation
Speaker 1: with pimco's Jerome Schneider. My special guest today is Jerome Schneider.
Speaker 1: He is the head of short term portfolio Management and
Speaker 1: Funding at PIMCO, which manages about one point seven five
Speaker 1: trillion dollars as of the end of seventeen. Prior to
Speaker 1: joining Pimco in two thousand and eight, he was a
Speaker 1: senior managing director at bear Sterns, specializing in credit and
Speaker 1: mortgage related funding transactions. He held a number of various
Speaker 1: positions on the municipal and fixed income trading desks at Bear.
Speaker 1: Morning Star named him the fixed income Fund Manager of
Speaker 1: the Year for fifteen. He manages three separate funds, one
Speaker 1: over fourteen billion dollars, the other over eight billion, the
Speaker 1: smallest a mere two point two billion dollars. Jerome Schneider,
Speaker 1: Welcome to Bloomberg. Thanks very much, very it's great to
Speaker 1: be here. Um, this is the perfect time to be
Speaker 1: speaking with you, given everything that's going on in with
Speaker 1: the FED, with rising rates, with yield curve. But let
Speaker 1: me start with a little bit of backgrounds. How did
Speaker 1: you first get interested in finance? Uh, pretty easily on.
Speaker 1: I had a great uncle who was always sort of
Speaker 1: fascinated with the stock market at that point in time,
Speaker 1: and had bought me a handful of shares, you know,
Speaker 1: like everybody does. And from that fascination you quickly realized
Speaker 1: that you know the power of capital. And I think
Speaker 1: the at the age of eleven, I had I had
Speaker 1: asked my dad, you know, this stock market thing is
Speaker 1: pretty interesting, let's read about it. Let's read about in
Speaker 1: the Wall Street drawal. And for my twelfth birthday he
Speaker 1: actually took me to the Stock Exchange on the floor.
Speaker 1: And for a young chap from Oklahoma, Oklahoma City, that
Speaker 1: is that's a pretty pretty empowering thing to you know,
Speaker 1: see your dream location come true. So for me, it
Speaker 1: was a trip to the Stock Exchange and to see
Speaker 1: the Yankees, who I loved at that point in time,
Speaker 1: and uh and and really put together in your mind
Speaker 1: how you actually get to that point from being twelve
Speaker 1: to being a young professional and the steps it takes.
Speaker 1: So that was a that was a magical moment my
Speaker 1: in my formative years. And that was back in the
Speaker 1: day when you could both a get on the floor
Speaker 1: of the Stock Exchange. You can't do that really today.
Speaker 1: And b it's not just the front for a television studio.
Speaker 1: That was where stocks were actually traded back there. Yeah,
Speaker 1: and and amazing and thinking about it, you know, I
Speaker 1: was I was probably hardly five feet tall at that
Speaker 1: point in time. You know, it was a scrum and
Speaker 1: this is the mid early eighties. And I look back
Speaker 1: at the photos who took in. The funniest thing obviously
Speaker 1: is the people and how they're dressed and and and
Speaker 1: the second of all it was it was a functioning,
Speaker 1: uh entity and a physical sense not just a literal
Speaker 1: sense and of a spiritual sense as it as it
Speaker 1: as it is now along with computers, but it's a physical,
Speaker 1: breathing entity. And today obviously it's changed in m Y
Speaker 1: s c IS and all the stock exchanges have changed
Speaker 1: their their functioning perspective to co adapt to technology. Um.
Speaker 1: But I think more importantly, and this is the thing
Speaker 1: that I would say, is that as a young person,
Speaker 1: having the ability to have that experience and learning from
Speaker 1: people what it took takes to get there, and then
Speaker 1: putting those stepping stones in place, seeing the right people
Speaker 1: understanding what they took to get there, even though they
Speaker 1: might be forty years or senior, that's a very powerful thing.
Speaker 1: And I think one of the one of the key
Speaker 1: things for people who whether they're interested in finance or otherwise,
Speaker 1: is to find people that will serve as mentors, rabbis,
Speaker 1: whatever it is to help empower them to achieve their
Speaker 1: goals in that kind of way. And I was just
Speaker 1: fortunate to have a ton of people around me. Sounds
Speaker 1: like that was a formative experience for you. Yeah, it was.
Speaker 1: It was great, and I think you know, people recognize
Speaker 1: that at that point in time as as odd as
Speaker 1: it might be if from a young kid in in
Speaker 1: Oklahoma City, you know, it might have been one of
Speaker 1: those things that it was a way out, so to speak.
Speaker 1: And so for me, Oklahoma is a great place to
Speaker 1: be from, and it's a great place to be going
Speaker 1: back to his family. But at the same time, I
Speaker 1: haven't lived there since high school. No interest in being
Speaker 1: a roughneck and working in the oil fields or any
Speaker 1: of that, uh not at this point of enough. Well,
Speaker 1: I mean, that was the other formative experience in my life,
Speaker 1: actually being being exposed to the roughnecks. And when you
Speaker 1: grow up in Oklahoma and Texas and your whole family
Speaker 1: is exposed to the oil industry. In the late seventies
Speaker 1: and early eighties, the oil the oil bust basically was
Speaker 1: an eye opening experience and and frankly that was one
Speaker 1: of the things that led me to want to understand
Speaker 1: capital markets, because you know, when you're in the oil business,
Speaker 1: you're putting together a ton of capital, a lot of
Speaker 1: it's not your money, and and so your incentives are
Speaker 1: very different. And at the same time, when you think
Speaker 1: about the ramifications of a repricing event, in that case,
Speaker 1: it's oil and everybody when you're sitting in the oil patch,
Speaker 1: thinks oil prices only go up. But as a young kid,
Speaker 1: you see everybody going from having literally lear jets and
Speaker 1: third and fourth lake homes and multiple cars to nothing overnight.
Speaker 1: And you look around and we had a very modest upbringing,
Speaker 1: you know, I would say that, you know, in retrospect,
Speaker 1: it was we are downside was fairly limited compared to
Speaker 1: some people. Not a lot of leverage, well not a
Speaker 1: lot of leverage so to speak, but at the same time,
Speaker 1: not a lot of the different upside. But I or
Speaker 1: learned at that point in time the strength of leverage
Speaker 1: and the danger of leverage, which probably as my professional
Speaker 1: career evolved in the fixed income that obviously became a
Speaker 1: keystones that. So so you go to University of Pennsylvania
Speaker 1: and then you get your m b a. At n
Speaker 1: y U stern Um and what was your first job
Speaker 1: right out of school? So when I graduated pen I
Speaker 1: wanted to sort of a degree that was related to finance,
Speaker 1: but really more economics related into I had a more
Speaker 1: customized degree in international finance, economics, and international relations, and
Speaker 1: so penn was a perfect place to do that. Unfortunately,
Speaker 1: when I was graduating and was starting interview in h
Speaker 1: My background was a series of internships for small uh
Speaker 1: from small a small shop in Oklahoma City called stephil
Speaker 1: Nicholas and then which is now not such a such
Speaker 1: a small shop, but they were really focused on muni
Speaker 1: bonds back then, which is a good and bad thing.
Speaker 1: And the other one was running a guy's campaign for
Speaker 1: State Treasurer of Oklahoma, which was successful, but that was
Speaker 1: both both took me back to Oklahoma and and so
Speaker 1: as a result at Penn you're looking around for internships.
Speaker 1: Most of the kids from the East Coast had your
Speaker 1: connections to New York and Wall Street and things like that,
Speaker 1: and I didn't have any of those connections, so to speak.
Speaker 1: So I was really trying to find my way to
Speaker 1: get to Wall Street at that point in time, and
Speaker 1: it took a little bit more effort. That combined with
Speaker 1: the fact that when I was graduating, wasn't the best
Speaker 1: job market in the world, and when you think about it,
Speaker 1: you had to get in on any floor whatsoever. So
Speaker 1: I interviewed. I interviewed with people who are trying to
Speaker 1: sell limited partnerships, limited people who are trying to trade
Speaker 1: stocks and being the Operations group. And oddly coincidentally, the
Speaker 1: job I took was with bear Stearns and I joined
Speaker 1: the operations training program UH at that tender young age
Speaker 1: for a very small salary, but a great opportunity to learn.
Speaker 1: Let's talk a little bit about the Federal Reserve today
Speaker 1: and the impact they have on the fixed income market.
Speaker 1: First off, what do you think about today's Federal Reserve? Yeah,
Speaker 1: I think today's Federal Reserve is one thing is very
Speaker 1: different than it was before. You know, they try to
Speaker 1: be as transparent as possible. Is that a good thing
Speaker 1: or a bad It's a good thing because the purpose
Speaker 1: of the Federal Reserve is to communicate effective monetary policy,
Speaker 1: and unlike federal reserves of two decades three decades ago,
Speaker 1: who used to do things in the silence and night
Speaker 1: or effect open money market operations and then you simply
Speaker 1: I saw the cash mover in or out at specific
Speaker 1: time during the day because they were adjusting the the
Speaker 1: access reserves in the repo markets. UH. Now it actually
Speaker 1: is quite effective because what they hope to do is
Speaker 1: manage expectations over the medium term. One in terms of
Speaker 1: clearly in terms of growth of the economy. UH and
Speaker 1: also unemployment clearly, but also in terms of inflation. And
Speaker 1: that second metric is what's incredibly important to the communication
Speaker 1: uh effort, and so being communicative obviously comes to this criticism.
Speaker 1: It comes to this criticism because people want when they
Speaker 1: people communicate, want them to be succinct and clear and precise.
Speaker 1: And if you don't have those three things, which aren't
Speaker 1: necessarily the same um, people start to offer their own criticism.
Speaker 1: Let's go over that succincts clear and precise meaning you
Speaker 1: want it short and sweet, right, you want it accurate.
Speaker 1: Although there's a difference between precision and precision, and precision
Speaker 1: is the accountability the That's the thing about the FED, though,
Speaker 1: and people fail to realize, is that the FED wants
Speaker 1: to maintain its optionality, and that's what it's continued to do,
Speaker 1: not only during this hiking cycle but really since the
Speaker 1: financial crisis, and in doing so, they want to find
Speaker 1: themselves to basically point a direction, but they want to
Speaker 1: alter the course and speed of that direction over a
Speaker 1: period of time. And I think one of the failures
Speaker 1: of the market, quite honestly, is understanding and comprehending that
Speaker 1: reconciliation process. Frankly, because much of the market can't imagine
Speaker 1: themselves as being that central baker in that seat. But
Speaker 1: if you were, you know, like any good parent, you
Speaker 1: wouldn't necessarily want to be painted in the corner by
Speaker 1: your kid. You know, the kids comes home and says,
Speaker 1: you know, mom, Dad, I only eat junk food for
Speaker 1: the next year, they're gonna say, well, let's try to
Speaker 1: have a balance of it. Let's figure out I have
Speaker 1: some days that are healthy, some days that you you
Speaker 1: can go and eat potato chips all day. In this situation,
Speaker 1: the FED wants to simply be as clear as they
Speaker 1: possibly can at that point in time without being fully
Speaker 1: committed to an ingredient mix, which they can't fully bake,
Speaker 1: you know, a masterpiece in the future. And and that's
Speaker 1: ultimately what they want to do is try to be
Speaker 1: as clear as they can at this point in time
Speaker 1: and balance it to manage the expectations of the marketplace
Speaker 1: without upsetting him. And that's what people have called the
Speaker 1: put of you know, bern Yankee, greed, spin and whatever,
Speaker 1: yell and put. And I think that there's a there's
Speaker 1: a there's a trade off in that, and that's the
Speaker 1: insurance policy or the cost if you will of the
Speaker 1: policy measure of trying to be as open, open minded
Speaker 1: and communicative as they have been. Some people have said
Speaker 1: that the transparency of the FED and this constant communication
Speaker 1: has made the job of the balance manager easier, and
Speaker 1: others have said, no, they say one thing and it
Speaker 1: turns out not to be true, and they do another.
Speaker 1: It's made it more challenging. Where do you fall on
Speaker 1: that continue? I honestly think that the marketplace is has
Speaker 1: has evolved in such a way that you're not simply
Speaker 1: looking at a single variable at this point in time,
Speaker 1: being the FED. In fact, there's other influences you have
Speaker 1: to look at, which is obviously the global influence. We
Speaker 1: can see that. You know, just because you have a
Speaker 1: view on US interest rates or US monetary policy doesn't
Speaker 1: mean that it's not influenced by other policies around the world.
Speaker 1: We saw that basically two years ago at the end
Speaker 1: of two thousand and fifteen, when global financial conditions worsened,
Speaker 1: it obviously effectuated a FED policy. So as a trader,
Speaker 1: as a portfolio manager, as a as a manager of
Speaker 1: capital for our clients, the thing we want to be
Speaker 1: most mindful of is these inputs, These variables and mitigating
Speaker 1: these risks in a way that produces positive risk adjusted returns.
Speaker 1: The bottom line is is that there's just as much
Speaker 1: forecasting that we're going to do and think about it
Speaker 1: PIMCO looking at the macroeconomics, which has clearly been the
Speaker 1: baseline of our forecasting for forty years plus at our firm,
Speaker 1: but you also have to incorporate at the evolving market
Speaker 1: dynamics and most importantly, the market perception of the market
Speaker 1: pricing meaning sometimes sometimes understanding where the market is, whether
Speaker 1: it's overpriced, mispriced, whatnot. Is actually just as important to
Speaker 1: your portfolio positioning as anything else in the policy measures
Speaker 1: that you might observe from the FED or the data
Speaker 1: that comes every week or whatnot. So let's let's stay
Speaker 1: with the Fed, because you're really the right person to
Speaker 1: ask this question. The work you did in the back
Speaker 1: office in the early parts of your career, UH, doing
Speaker 1: the settlements and DTC and all that other stuff, explain
Speaker 1: what the FED is actually doing mechanically when they raise
Speaker 1: or lower rates. I don't think the average person understands
Speaker 1: what this process is. Like, Yeah, it actually you know,
Speaker 1: it actually isn't as complicated now as it probably once
Speaker 1: was simply because of the magic of computers and electronic money,
Speaker 1: so to speak. But effectively, what you're doing is effectuating
Speaker 1: monetary reserves access reserves in multiple ways. The first one
Speaker 1: basically being that you know, as we've seen over the
Speaker 1: past few years, even with the emergency monetary stimulus, that
Speaker 1: they're able to grow their balance sheet, which creates access
Speaker 1: reserves into the system and in a variety of ways.
Speaker 1: And that means they're purchasing bonds, purchasing mortgages, purchasing treasuries,
Speaker 1: which increases the amount of monetary supply, the money available
Speaker 1: to help. I'll set, you know, I'll set the conditions
Speaker 1: that they're trying to count, meaning they take these paper
Speaker 1: um assets and bring them onto their balance sheet in
Speaker 1: exchange for actual dollars correct. And I think this is
Speaker 1: important because that's a semi permanent way of establishing reserves,
Speaker 1: whereas what they used to do is what they referred
Speaker 1: to as open market operations, which possibly are you know,
Speaker 1: are returning more to the cloaquial. But open market operations
Speaker 1: for decades was simply the FED coming in and purchasing
Speaker 1: bonds on short short term operations REPO operations, to buy
Speaker 1: bonds effectively versus lending out cash to the marketplace, and
Speaker 1: by doing that they would make small incremental adjustments to
Speaker 1: the effective FED funds rador the FED Funds target rate
Speaker 1: at that point in time. And actually, because it wasn't
Speaker 1: posted on Bloomberger, wasn't set at a point in time,
Speaker 1: you for in late seventies, early eighties, you wouldn't actually
Speaker 1: know that the Fed was actually targeting or adjusting interest
Speaker 1: rates until you actually saw those processes are felt them
Speaker 1: in the marketplace occurring in the short term markets. So
Speaker 1: you said semi permanent earlier when discussing um what we
Speaker 1: can I guess called quantitative easing. Why semi permanent because
Speaker 1: some of these asset classes have a maturity date and
Speaker 1: eventually run off, or they could always decide to unwind
Speaker 1: at a later date. What makes it permanent versus semi perament. Well,
Speaker 1: we've evolved now over the past two years into an
Speaker 1: acceptance and and actually implementation of a normalization process of
Speaker 1: our of our monetary policy. We're moving from emergency emergency
Speaker 1: measures to one that's more normalized and going trying to
Speaker 1: go back to where we were to priest crisis mode.
Speaker 1: So what does that mean we have to take our
Speaker 1: balance sheet from what it was and it's now grown
Speaker 1: to four point two trillion in size, and generally decrease
Speaker 1: it over time through basically um through basically letting it
Speaker 1: amortized down mortgages that the FED owns will pay down,
Speaker 1: treasuries will eventually go off the balance sheet, and then
Speaker 1: doing so, that's gonna gradually tighten monitor monetary conditions as
Speaker 1: those access reserves, as those access moneys get removed from
Speaker 1: the marketplace, and the repurchases of and and and the
Speaker 1: FED doesn't re purchase as much of the securities as
Speaker 1: are maturing in their portfolio. So it's a passive reduction
Speaker 1: in that process. And it's very important because for the marketplace,
Speaker 1: because it is a it's it's a it's a mile marker.
Speaker 1: Effectively that we are heading towards not just higher rates,
Speaker 1: but a normalization process which is going to generally move
Speaker 1: real rates higher over over a period of time. It's
Speaker 1: not shortly, it's gently because because it's just such a
Speaker 1: gradual it's a gradual thing. And as Jennet Yellen likes
Speaker 1: to say, hey it's in the background, nothing to see here,
Speaker 1: Just move on and an ideal world, that's what's going
Speaker 1: to happen, and I actually think it will work out
Speaker 1: that way. People at the beginning, we're very concerned that
Speaker 1: the FED was going to come in and sell all
Speaker 1: their assets and needs to do it all overnight. But
Speaker 1: what we've learned from the FED, and this is what
Speaker 1: I think is, you know, getting back to my point
Speaker 1: about the market reacting in the market's perception that that
Speaker 1: would be fullhardy because the mark because the FED wants
Speaker 1: to always maintain their optionality, and so the reality is
Speaker 1: is that the FED wants to keep those assets on
Speaker 1: his bounce sheet, not only to not upset the market,
Speaker 1: but also to maintain genalogy for the future. But as
Speaker 1: it's right now, they've been pretty clear about the prescription
Speaker 1: of how much they're going to increase that reduction. I
Speaker 1: guess that's an oxymoron, but increase that reduction of their
Speaker 1: balance sheet over the next few quarters by a prescribed amount,
Speaker 1: and and that has been forecasted and digested by the market,
Speaker 1: and it's not that that upsetting at all to the marketplace.
Speaker 1: As we've seen over the pastime. I was always stunned
Speaker 1: at the the claims in the beginning of quee. Hey,
Speaker 1: you know they're gonna have to unline this and it's
Speaker 1: gonna be so disruptive, and it just didn't make any sense.
Speaker 1: All these all this paper has a maturity date. You
Speaker 1: could just let it and and they're not all the
Speaker 1: same date. There is a curve, the that duration curve.
Speaker 1: You could just let that run off naturally. Why was
Speaker 1: there such fear that, oh, you know, when the fed
Speaker 1: on wines, it's gonna be really problematic. Well, the question
Speaker 1: is who is the incremental buyer? And that's actually a
Speaker 1: real question to pose it today, but in a different
Speaker 1: a different size and different scale. There's one thing that
Speaker 1: if you're gonna let you know, an entire four trillion
Speaker 1: dollars with the assets run off the balance sheet of
Speaker 1: access reserves very quickly, and is another thing just to
Speaker 1: have incremental supply coming to the market. One is a
Speaker 1: five five billion dollar plus question and the other is
Speaker 1: a four trillion dollar question. But the question in both
Speaker 1: of them is who is the incremental buyer of treasuries?
Speaker 1: Is at four in central banks? Is their retail investors,
Speaker 1: is their corporate cash investors who need to buy this um?
Speaker 1: Their banks who need to buy it for regulatory purposes
Speaker 1: not so much anymore. But what about just the maturity issue?
Speaker 1: Is if hey, I'm holding twenty twenty papers around, all right,
Speaker 1: the paper matures, it goes away, I get cash. Nothing
Speaker 1: actually hits the market unless they decide to reinvest that
Speaker 1: right that that is correct, So well, what hits the market?
Speaker 1: They have to reinvest. Their reinvesting a certain amount, but
Speaker 1: not all of their maturities. And so they're doing it
Speaker 1: in a pro rated portion across the curve. And so
Speaker 1: they're trying not to disrupt that allocation of what is
Speaker 1: already coming to market. And and and that was the
Speaker 1: key is they're not trying to shape This is not
Speaker 1: an operation Twist, So they're not trying to reshape the
Speaker 1: yield curve here. What they are simply trying to do
Speaker 1: is reduced their overall footprint to the treasury market over
Speaker 1: time in a methodical manner. We're deep in the weeds.
Speaker 1: This is pure fixed income walkery, and there is an
Speaker 1: audience that will really appreciate that it is wonkery. But
Speaker 1: it's important. The one takeaway for for for your listeners
Speaker 1: is that the wonkery is the magic of how people
Speaker 1: are going to think about adapting to higher rates going forward.
Speaker 1: And that is the facet which is most most of
Speaker 1: misunderstood when you get to these periods of monetary policy.
Speaker 1: Monetary policy is fascinating, but if you don't understand what's
Speaker 1: going on, it can be pretty dangerous. How many times
Speaker 1: over the past ten years have have we heard, oh,
Speaker 1: the bullmarket and bonds is over. Is this multi decade
Speaker 1: bond bull market finally over? Well? I think it's truly
Speaker 1: to say, first of all, there's so many factors in
Speaker 1: the bond market that led to the bull conditions as
Speaker 1: as we knew it for many years, UM, the dollar,
Speaker 1: the view of the dollar, the United States, the reemergence
Speaker 1: of of other factors on the on the global forces, UM.
Speaker 1: And I think that when we think about this, it's
Speaker 1: not a pivot point that you can simply say this
Speaker 1: is the exact pivot that we're moving back the other way.
Speaker 1: In fact, I think there's more factors today that come
Speaker 1: into that condition that we need to be brought into one.
Speaker 1: So obviously, treasury supply, we're dealing with larger fiscal stimulus
Speaker 1: at this point in time, tax cuts, things like that,
Speaker 1: they're going to impact Um, you know, the fiscal side
Speaker 1: of the equation and the need to borrow more money
Speaker 1: in the United States. Uh, do you think that is
Speaker 1: a recipe for higher rates or or does all that
Speaker 1: supply hitting the market? Um, have other factors. It's one,
Speaker 1: it's one, it's one factor in this. The other factor
Speaker 1: is the demand side. And I think that that is
Speaker 1: the other factor, as we mentioned previously, whether it comes
Speaker 1: from foreign central banks or foreign investors or even US investors,
Speaker 1: you know, that is an important factor in condition. And
Speaker 1: more specifically, the demographics which people and we have PIMCO
Speaker 1: spent a lot of time thinking about. The demographic factor
Speaker 1: is actually one that is in favor of bonds over
Speaker 1: the next few years as people look to de risk
Speaker 1: and move into higher asset classes, you know, the higher
Speaker 1: rates right now, or something to incentivize people to finally
Speaker 1: reallocate potentially out of higher risk allocations and moving to
Speaker 1: the safety of bonds for that current income and current
Speaker 1: yield that that they offer. And so there is a
Speaker 1: there's there's a variety of factors on the pro and concite,
Speaker 1: but to simply declare this as the as the pivot
Speaker 1: point of the end of the bull market is it's
Speaker 1: too early to it's too early to determine, and and
Speaker 1: more more importantly, there is a growing awareness in the
Speaker 1: in the global economy of the improving factors globally that
Speaker 1: are going into the data, not just in the United States,
Speaker 1: the Eurozone, even Japan is starting to see that. So
Speaker 1: as we have evolved over the past thirty years from
Speaker 1: the bull market into the bull market, it's the global
Speaker 1: forces that will ultimately decide whether this was the end
Speaker 1: of the bull market or not. So you reference supply,
Speaker 1: let's go back to that a second. It seems like
Speaker 1: there has been I don't know if the word shortage
Speaker 1: is the right word, but when you look at high
Speaker 1: quality sovereign fixed income products, doesn't seem like there's been
Speaker 1: an overwhelming supply of that, right. So the key to
Speaker 1: this is the plumbing. When people think about where have
Speaker 1: bonds gone? Where has safety gone? It's all on the plumbing.
Speaker 1: The repo markets have basically been uh detrimentally affected by
Speaker 1: regulation globally that have put constraints on bank balloties to
Speaker 1: which basically function as the grease for treasury markets and
Speaker 1: and and high quality bond markets around the world. So
Speaker 1: if you put a constraint on the amount of grease
Speaker 1: in the system the repo markets. That affects liquidity and
Speaker 1: that affects pricing in another wise. So that's one element ultimately,
Speaker 1: you know, when you also think about it on the
Speaker 1: on the supply side, or that is also the demand side,
Speaker 1: and the demand over the past five six seven years,
Speaker 1: as we've gone into emergency stimulus mode globally, has been
Speaker 1: the central banks buying the safe assets and so they've
Speaker 1: been buying bonds to help produce this warm blanket around
Speaker 1: risk assets globally for the past five to ten years,
Speaker 1: and as a result, there's a dearth of high quality
Speaker 1: safe assets that people have been searching for. So they've
Speaker 1: been the number one buyer, being the central banks of
Speaker 1: these assets over a period of time. And as they
Speaker 1: reduced that footprint, there are people who have actually needed
Speaker 1: to buy these safe assets will actually emerge as a
Speaker 1: marginal buyer and over the next few years, so it
Speaker 1: could be a nice and nice handoff, you know, if
Speaker 1: things go according to plan, although nothing ever goes smoothly,
Speaker 1: as you know Berry, so we have to be prepared
Speaker 1: for those ree pricings, and that's and that's what's as
Speaker 1: active managers at PIMCO, that's what we're poists to take
Speaker 1: advantage of. So you mentioned that we we haven't been
Speaker 1: running giant deficits um other immediately after the financial crisis
Speaker 1: there was a huge set of deficits, but that seemed
Speaker 1: to work its way down pretty quickly over seven years
Speaker 1: or so. The new tax bill is at least a
Speaker 1: trillion and a half dollars. They're talking about a big
Speaker 1: infrastructure spends, all of which raises the question, should there
Speaker 1: be a reissuance of much longer term bonds be at
Speaker 1: treasuries at thirty years, fifty years? Some people have talked
Speaker 1: about hundred year bonds. Should we do that? And what
Speaker 1: are the odds of that actually happened? Yeah, I mean
Speaker 1: optically people would say, take advantage of the low rates
Speaker 1: and issue up and turn out the debt. And there's
Speaker 1: obviously been a lot of countries who have done that.
Speaker 1: Mexico issued a hundred your bonds. You know, there's there's
Speaker 1: a good variety of precedent for this, but ultimately you
Speaker 1: have to go where the demand is. And when you
Speaker 1: look at the committees, the Treasury borrowing a committee, the
Speaker 1: TEA back um, they've actually assessed this. And while it
Speaker 1: was floated in the very beginning by the Treasury Secretary Revolution,
Speaker 1: you know, the reality is that there wasn't a good
Speaker 1: demand assessment concluded at that point in time, and so
Speaker 1: you don't want to issue and to avoid no issuer,
Speaker 1: whether corporate or sovereign, wants to issue and to avoid
Speaker 1: where there's not enough demand, because that means your execution
Speaker 1: is not gonna be good. And more importantly, the secondary
Speaker 1: liquidity will be debt or will be it will be marginalized.
Speaker 1: And so what they're gonna do is simply add on
Speaker 1: to existing maturities and more slightsely. And this is what
Speaker 1: is important for investors at this point in time is
Speaker 1: increase allocations to the front end of the YEO curve,
Speaker 1: specifically in the T bill space. And I think what's
Speaker 1: noteworthy that happens, which happens to be my playground, and
Speaker 1: I always love more people in my playground. But they're
Speaker 1: gonna add five hundred billion dollars worth of supply over
Speaker 1: the course of the next year, probably backloaded the second
Speaker 1: half of this year to that playground. And so what
Speaker 1: does that mean, Well, it's great for those investors looking
Speaker 1: for safety, looking for you marginal increase in yields as
Speaker 1: that new supply hits, but it doesn't do a lot
Speaker 1: to the asset liability. The caution are the urge of
Speaker 1: people wanting to turn out the liability structure to the US.
Speaker 1: Although what is noteworthy is the fact that when you
Speaker 1: look at the overall construct, the average life of the
Speaker 1: US debt is actually not that much different than than
Speaker 1: what was previously prescribed. So you know, they've done a
Speaker 1: pretty good job about about managing that asset liability mismatch.
Speaker 1: Let's talk a little bit about what's going on in
Speaker 1: the modern markets, and in particular on the equity side,
Speaker 1: we've seen a fair at least substantial shift away from
Speaker 1: active management towards passive management. And yet the data shows
Speaker 1: on the bond side active management actually adds alpha. What
Speaker 1: why or the bond equivalent of alpha? But what is
Speaker 1: there a different name for that or do we just
Speaker 1: call that alpha? We call it alpha? Call it alpha? Um,
Speaker 1: why does active management generate alpha on the bond side. Well,
Speaker 1: it's not magic, and it takes a lot of work
Speaker 1: to to have that, to have that, and the data
Speaker 1: does quite clearly point to the fact that in fixed income,
Speaker 1: active management does clearly add benefits to clients portfolios, and
Speaker 1: some of it comes from offensive meaning learned to how
Speaker 1: to create better risk adjusted portfolios, i e. There's income
Speaker 1: that you can have in your portfolio and some capital
Speaker 1: appreciation when times are good by picking the right sectors
Speaker 1: and creating a diversity portfolio. But Barry, this is the
Speaker 1: more important thing as we give it pivot into this
Speaker 1: type of the cycle when we don't have quantitative easing
Speaker 1: and the warm blanket and monetary policies global really supporting
Speaker 1: all asset valuations. The ability to differentiate risk asset classes
Speaker 1: is incredibly powerful, and in fixed income we need to
Speaker 1: be thinking about the ways to create that diversification and
Speaker 1: steering clear of those pitfalls that might might be in
Speaker 1: portfolio construction. We saw that clearly in two thousand five,
Speaker 1: two thousand and six, and two thousand and seven, when
Speaker 1: you had the evolution of structured products, the evolution of
Speaker 1: abundant leverage in the marketplace. Even in my own, my
Speaker 1: own lovely repo markets, you had mispriced bonds and structured
Speaker 1: products that simply weren't sound to the triple A Moniker
Speaker 1: that many many radi agencies gave them um. But if
Speaker 1: you have the ability to discern, re underwrite, and distinguish
Speaker 1: between these different credit risks, whether it's corporate credit risk
Speaker 1: or structured credit risks, and then understand how they interplay
Speaker 1: with each other, you can actually steer clear of a
Speaker 1: lot of dangers and pitfalls that passive management would steer
Speaker 1: right into. And the case in point I would point
Speaker 1: to is even in my own domain, the short term universe,
Speaker 1: and I call short term zero to five years, we
Speaker 1: manage on our team two hundred plus billion dollars in
Speaker 1: that sector. Right now. The vote, the vote of confidence
Speaker 1: that we have is that we had steered clear of
Speaker 1: a lot of credits that were miss priced in two
Speaker 1: thousand five, two six, and two seven. We had steered
Speaker 1: clear of asset back commercial paper that many folks were
Speaker 1: just simply buying an additional bait because it was an
Speaker 1: additional one basis point one. That's but that's the way
Speaker 1: the market was functioning in the cash equivalent space. And
Speaker 1: when you've gotten to the crisis, people were basically underwriting
Speaker 1: liquidity risk for marginal income. They didn't understand the downside risk.
Speaker 1: They have, and to this day I hear still people
Speaker 1: when I go visit into retail branches, which I do
Speaker 1: quite honestly because I want to hear about people's experience
Speaker 1: with managing their cash. When I hear about that, they'll say,
Speaker 1: you know what, I still have these auction rate securities
Speaker 1: in my portfolio because they're still frozen or this that
Speaker 1: the other still some are on are. But you you know,
Speaker 1: once a year somebody will come up to me with
Speaker 1: a story. And the thing about it is, in order
Speaker 1: to understand the value and the perception of where the
Speaker 1: marketplace is going, you have to take a step back
Speaker 1: and understand what the influences are and more importantly, have
Speaker 1: the resources to discern and understand that. And so my
Speaker 1: background while being formatively in operations and the rebo desk
Speaker 1: and the drivative desk that bear sterns and understanding structured
Speaker 1: products because we ran at that point in time a
Speaker 1: funding vehicle related to structured investment vehicles or two vehicles.
Speaker 1: That was a magical time because it allowed me to
Speaker 1: understand and have a good array of of knowledge and
Speaker 1: build that array and arsenal knowledge that when I came
Speaker 1: to PIMCO as a portfolio manager, I understood all these
Speaker 1: different markets and underplayed and and more importantly, as we
Speaker 1: think about our team construction, the portfolio management team around me,
Speaker 1: we have people who are specialized in corporate bonds, in
Speaker 1: understanding non dollar events. We have a person who's focused
Speaker 1: solely on funding and the beauty of this. And you
Speaker 1: mentioned this in my title on ahead of our short
Speaker 1: term portfolio management and funding. The key element to understanding
Speaker 1: liquidity management is funding. The key element to understanding short
Speaker 1: term markets, which is interest rates, is funding in liquidity.
Speaker 1: They're all the same. And if you are an interest
Speaker 1: rate if you're an interest rate practitioner, if you're a saver,
Speaker 1: if you are thinking about ways to manage your capital
Speaker 1: for capital preservation plus an income, and you don't have
Speaker 1: an insight to where funding markets are trading, meaning the
Speaker 1: cost of capital. That's like baking a cake without any flour.
Speaker 1: So it doesn't it might look good, but it doesn't
Speaker 1: taste very good and it might fall on you. So
Speaker 1: let's let's talk a little bit about the mechanics of
Speaker 1: of some of these processes, specifically at bear Sterns. Was
Speaker 1: it at bear Sterns you worked on repoke conduit financing companies.
Speaker 1: Correct that that sounds and we're gonna go a little
Speaker 1: bit into the weeds here, but that sounds like that
Speaker 1: is really the specific plumbing of how dollars find their
Speaker 1: way to specific assets. Describe a little bit of exactly
Speaker 1: what that that is. So the premise of what we
Speaker 1: were trying to do was you have to have a
Speaker 1: fundamental belief and understand what a repo agreement is a
Speaker 1: repurchase agreement, and all the repurchase agreement is is a
Speaker 1: borrowing of your basically borrowing dollars or borrowing funds in
Speaker 1: exchange for collateral, and that collateral is usually bonds. But
Speaker 1: the beauty of a repo agreement is that it's overcollateralized,
Speaker 1: so you might be posting on the bonds but only
Speaker 1: get seventy cents worth of cash away. Sound safe. So
Speaker 1: the beauty of a repo, and I still believe this
Speaker 1: to this day, and I think it's one of the
Speaker 1: most underappreciated assets in the entire world, is that repos
Speaker 1: in general are marked to market daily, so your risk
Speaker 1: is limited, and the fact is you can calibrate them
Speaker 1: the haircuts the excess margin to what you think the
Speaker 1: risk is. And so if you're a good practitioner, your
Speaker 1: understanding of the marketplace is simply what does the value
Speaker 1: of the cloudal you hold on any given point in time,
Speaker 1: and do you have enough excess margin. The idea here
Speaker 1: is that with any experience and understand ending, you can
Speaker 1: actually back into what you think is a superb asset,
Speaker 1: even better than a treasury because you have the over collateralization.
Speaker 1: So what we were doing in that marketplace is looking
Speaker 1: and lending through what we what we called liquid funding,
Speaker 1: which was a structured investment vehicle at that point in time,
Speaker 1: to borrow money in the in the funds market and
Speaker 1: lend it to a variety of clients and do it
Speaker 1: on over a cloud realized basis. And and it worked
Speaker 1: very well, very triffic until about, you know, until about
Speaker 1: two thousand seven. And at that point in time, the
Speaker 1: funding markets, not the asset markets, but the funding markets
Speaker 1: did turiate to the point that the the optics and
Speaker 1: and frankly the economics didn't work out. And so we
Speaker 1: had we closed that business, you know, and all our
Speaker 1: equity holders got their capital back when did Bear close
Speaker 1: up business. So we closed it in early two thousand seven,
Speaker 1: really and you were at Bear you want to git
Speaker 1: through the entire crisis. Was I was actually there? I was.
Speaker 1: I was there until the very end, and actually worked
Speaker 1: one day at JP Morgan and retired from JP Morgan
Speaker 1: and then went to went out to California after Uh.
Speaker 1: Two things. One my life wanted me to move out
Speaker 1: there for a family. But a gentleman by the name
Speaker 1: of Paul McCulley called me up on the phone, who
Speaker 1: guest on the show. And Paul is a great friend
Speaker 1: of mine and an avid fisherman and a great economist
Speaker 1: who who obviously you know, coined the term Minsky moment
Speaker 1: and everything else. But to have him sitting there, you know,
Speaker 1: as my partner, sitting on the desk and welcome me,
Speaker 1: was an opportunity that I simply couldn't pass, that would
Speaker 1: not could not say no. And he's now at Cornell
Speaker 1: I think in the fall, teaching and then back in
Speaker 1: Newport piece. That is correct, he's he's teaching me to it.
Speaker 1: He's a great teacher, and more importantly, he's a great communicator.
Speaker 1: And he was a great great mentor and and and
Speaker 1: and sponsored me at PIMCO. Uh. You only the very
Speaker 1: early years because I walked in from one storm into
Speaker 1: and obviously at PIMCO you're on the defensive at that
Speaker 1: point in time. So so before we leave Bear, I
Speaker 1: have to ask what was it like at Bear Sterns
Speaker 1: in that sort of storm, that that be just a
Speaker 1: wild experience. So I think what you when you think
Speaker 1: about Bear, Bear was a meritocracy. Pimco's a meritocracy in
Speaker 1: a way. You work hard, you try to drive, you
Speaker 1: try to put all the pieces together. And I think
Speaker 1: people at that point in time, uh, we're We're focused
Speaker 1: on the markets and the market perception. And I'm not
Speaker 1: here to rehash history per se, but I think it's
Speaker 1: important that there is a tremendous amount of lessons to
Speaker 1: be learned from that whole experience. Unfortunately for me and
Speaker 1: actually a lot of my other expert brethren. You can
Speaker 1: look around the street now, they're everywhere, and there was
Speaker 1: such a lot of quality people there. There was a
Speaker 1: tremendous amount of quality people. And more importantly, we all
Speaker 1: learned from each other, and we learned from the experience,
Speaker 1: and we were able to grow out of it. And
Speaker 1: and and whether it was market forces or internal issues
Speaker 1: or whatnot, I think there's a lot of experiences and
Speaker 1: a lot of history that we can go back and
Speaker 1: read from and glean information from. And and I'm actually
Speaker 1: fortunate and I I you know, Bear was a great sponsor.
Speaker 1: My upbringing allowed me to allowed me to grow. And
Speaker 1: every time I got, you know, I got I needed
Speaker 1: some more challenge. That gave me an incremental bit, a
Speaker 1: bit of a line to go and run with and
Speaker 1: and and PIMCO is the same way we try to
Speaker 1: groom young people to do the same and that I
Speaker 1: think is a very strong parallel to the success. It
Speaker 1: looks like that the Airston's acquisition by Jamie Diamond at
Speaker 1: JP Morrigan turned out to be a really good fit.
Speaker 1: Is that your perspective from the outside, or because I
Speaker 1: haven't heard any stories of usually there's a takeover, there's
Speaker 1: all sorts of turmult and turmoil and you hear, I
Speaker 1: haven't really heard a lot of that sort of chat.
Speaker 1: Being being the fact that I worked there for all
Speaker 1: of one day, I probably don't have that much insight
Speaker 1: insight to that. But but but I would say that
Speaker 1: you know, for most people, um, you know, ten years
Speaker 1: on almost now, I think it's one of the things
Speaker 1: that people take it as a as a learning as
Speaker 1: a learning lesson, and and and and the market as
Speaker 1: a whole clearly has. So we've heard the expression over
Speaker 1: the years, Um, the bond market is supposed to be
Speaker 1: the smart money. What's your take on that? I would
Speaker 1: hope so. UM. I'm not saying that's no, it's no
Speaker 1: pat on the back to myself, but I think that
Speaker 1: when you look at how capital markets function, we try
Speaker 1: to be more proactive than most in terms of allocating
Speaker 1: capital on the active management side than most. And I
Speaker 1: think that's a pretty power whole thing when you think
Speaker 1: about the smart money aspect, and a lot of that
Speaker 1: smart money is because smart money are not central banks,
Speaker 1: and some of them are very very smart and they're
Speaker 1: very sophisticated. Um are are in that realm as well,
Speaker 1: and so they're not necessarily you know, with the exception
Speaker 1: of one or two central banks in the equity realm.
Speaker 1: Uh yet but Japan other than Japan, who else is
Speaker 1: in Sweden? I was good? Um, I'm sorry, but I
Speaker 1: would say those two, Um, those two are probabmarily you know,
Speaker 1: the ETFs and Japan are clearly the big one. But
Speaker 1: the smart money there's probably a smart a lot more
Speaker 1: smart people in that fixed income market. Now. What it
Speaker 1: means though, is that that's institutional side. As a retail investor,
Speaker 1: you can't be complacent about how you're thinking about your
Speaker 1: fixed and commalocation, especially amongst rising rates. And so the
Speaker 1: challenge for the retail investor now is to challenge their
Speaker 1: financial advisors kick the tires, understand how their portfolios performed
Speaker 1: and upward rate environments, albeit slowly, and more importantly, where
Speaker 1: on the interst rate curve their they're destined. Then the
Speaker 1: second element to pay attention to just because you've earned
Speaker 1: a very handsome coupon, very handsome income over the past
Speaker 1: three or four or five years in your in your portfolios,
Speaker 1: because you've reached out the curve in terms of risk.
Speaker 1: Maybe you're invested in a high yield funds something like that.
Speaker 1: Take that into consideration now and take that in a coistration,
Speaker 1: how you've derived that income, what kind of risks are
Speaker 1: you're taking, and do some homework and maybe it's time
Speaker 1: to de risk a little and look in the yield
Speaker 1: curve shorter in the short term side and take advantage
Speaker 1: of mutual funds or et s out there that may
Speaker 1: might offer better risk adjusted returns. We haven't talked much
Speaker 1: about inflation, obviously a key factor for the Fed and
Speaker 1: for the bond market. What are your thoughts on tips
Speaker 1: treasury and inflation protected securities. Yeah, they've moved up quite
Speaker 1: a bit over the break even, so that's the inflation
Speaker 1: expectation has moved up quite a bit over the past
Speaker 1: few weeks, and they're probably fair and value at this
Speaker 1: point in time. The key factor here is is that
Speaker 1: what does that mean to the Fed itself? And to
Speaker 1: the Fed itself, that's actually probably a positive sign that
Speaker 1: the market is repricing in a expectation of inflation similar
Speaker 1: to their own, similar to their own views moving forward,
Speaker 1: meaning the low periods of inflation were transitory. Now the
Speaker 1: market sort of agreeing with that, and that's a positive
Speaker 1: thing for the Fed to basically accept the fact that
Speaker 1: we're probably gonna have higher rates to come, because if
Speaker 1: the market can accept higher inflation, then that basically says
Speaker 1: the market is also accepting the notion that we're going
Speaker 1: to get higher rates to come. But the key here
Speaker 1: is is not just higher real rates meaning risk adjusted rates,
Speaker 1: but it's higher nominal rates. And for a fixed a
Speaker 1: con investor. When they hear about higher rates, they tend
Speaker 1: to get scared. But this isn't a time to get
Speaker 1: scared because the high rates is actually a time to
Speaker 1: embrace those higher rates going forward. We have been speaking
Speaker 1: with Jerome Snyder, head of Short Term Portfolio Management and Funding.
Speaker 1: If you enjoy this conversation, be sure and check out
Speaker 1: our podcast extras. Will we keep the tape rolling and
Speaker 1: continue discussing all things bond related. You can find that
Speaker 1: wherever finer podcasts are sold iTunes, Overcast, SoundCloud, Bloomberg dot com. Uh.
Speaker 1: We love comments, feedback and suggestions right to us at
Speaker 1: m IB podcast at Bloomberg dot net. Check out my
Speaker 1: daily column on Bloomberg View dot com. Follow me on
Speaker 1: Twitter at rid Halts. I'm Barry rid Halts. You're listening
Speaker 1: to Masters in Business on Bloomberg Radio. Welcome to the
Speaker 1: podcast Drum. Thank you so much for doing this. This
Speaker 1: is really fascinating stuff and I love going deep into
Speaker 1: the weeds on some of these issues. I had no
Speaker 1: idea you knew Paul McCullough. You know I know Paul
Speaker 1: pretty well? Right we uh we fish in Maine every year.
Speaker 1: Although um lately he's been sort of all around the
Speaker 1: world and and and hasn't I don't think he's been
Speaker 1: doing all that much fishing. I remember when he went
Speaker 1: from clean cut pim cut to the Jesus version of
Speaker 1: Paul McCulley had hair passed the shoulders and long beard,
Speaker 1: and then kind of came back to the clean cut version.
Speaker 1: It was kind of an interesting um transition. Well, you
Speaker 1: I think he was trying to scare the fish out
Speaker 1: of the water at that time. I think he scared
Speaker 1: everybody else. Uh, you know, a few questions I didn't
Speaker 1: get to. We we touched upon bare Sterns. I was
Speaker 1: really fortunate that I got a little lucky and I
Speaker 1: was pretty much out of equities and heavily into bonds
Speaker 1: and shorts, so the financial crisis wasn't emotionally painful. However,
Speaker 1: I had, you know, I had friends that were getting
Speaker 1: fired everywhere. I used to send down an email list
Speaker 1: of about two thousand people, and it was astonishing. Starting
Speaker 1: in late I want to say, late oh seven, earlyer eight,
Speaker 1: I could track the economy based on the amount of
Speaker 1: bad email bounces that out of this list of two thousand.
Speaker 1: By the time the crisis was done, was down till
Speaker 1: nine hundred that many people had either switch jobs or
Speaker 1: lost their jobs. You were right in the eye of
Speaker 1: the hurricane. What was that like? You know, I remember obviously,
Speaker 1: I remember like it was yesterday. But I think the
Speaker 1: important factor that we all think about is is that
Speaker 1: the market we were an unpresident in times, and the playbook,
Speaker 1: so to speak, was it was one that had to
Speaker 1: be consistently evolving, and in history will try to reconstruct
Speaker 1: all the minutia that happened, you know, during the financial crisis,
Speaker 1: you know, starting with the the funds that basically we're
Speaker 1: gated at parablele in two thousand seven, and obviously the
Speaker 1: bear Sterns bear Sterns asset management funds and things like that.
Speaker 1: But I think what we recognize as the fact that
Speaker 1: there was a structural breakage, and that structural breakage was
Speaker 1: number one, investors failed to understand risk, and that was
Speaker 1: institutional and retail investors. And number two, the central bankers
Speaker 1: themselves weren't doing anything help to weren't doing anything to
Speaker 1: provide guard rails to sufficient enough to offset the leverage
Speaker 1: points that they saw in the marketplace on a real
Speaker 1: time basis. They were aware of them. But at the
Speaker 1: same time, so I'll interrupt you right there, because I
Speaker 1: hear from the same people depending on what's going on
Speaker 1: in the market. The FED is that, you know, this
Speaker 1: is in a free market anymore, there's too much intervention.
Speaker 1: The FED should just let the market do its thing
Speaker 1: and stop distorting it. But a few years earlier, it's like,
Speaker 1: when is the FED going to step in and fix this?
Speaker 1: It's a disaster. It seems they wanted both ways. Am
Speaker 1: I overstating that or I think that you know? And
Speaker 1: this goes on sort of talking both sides of the
Speaker 1: coin here. From Pimcoast perspective there, we were clearly, clearly
Speaker 1: early to the game. We were starting to see signs
Speaker 1: of the housing market in two thousand five, two thousand six,
Speaker 1: and we sort of pulled it in our our reins
Speaker 1: with regard to that, and that risk actually a bear
Speaker 1: at that same point in time, we you know, from
Speaker 1: our perspective in many of the businesses we ran, we
Speaker 1: actually were we we resisted doing transactions that we saw
Speaker 1: guoding done in the marketplace because we thought they were
Speaker 1: overlevered and simply did not make sense. The irony, the
Speaker 1: whole thing. Even though we were prudent in many regards,
Speaker 1: we were obviously the first ones to take it a
Speaker 1: huge express the mortgages and housing that was their specialty.
Speaker 1: But at the same time, it wasn't just mortgages than housing,
Speaker 1: it was equities. It was the correlation trades and things
Speaker 1: like that that basically brought the entire market to to
Speaker 1: where we became. And so the mark to market issues,
Speaker 1: just generally speaking, was one because of incremental leverage requires
Speaker 1: whenever there is a mark to market too, that you
Speaker 1: have to pony at additional capital and or sell assets
Speaker 1: or sell assets, and that's the digital spin. So it
Speaker 1: wasn't necessarily one asset class. It wasn't just mortgages, it
Speaker 1: was everything. And so that's the correlation that you have
Speaker 1: to understand when you get into these situations that are
Speaker 1: that's pretty you know, it's pretty damaging to portfolio. So
Speaker 1: leverage works great assuming that you understand the cost of
Speaker 1: that leverage and you can play defense against it, which
Speaker 1: is why us understanding that cost, that capital and funding
Speaker 1: cost most importantly is incredibly important to understanding why fixed
Speaker 1: income is value the way it is today. So so
Speaker 1: that's been the criticism of a screenberg. It's not the
Speaker 1: paper clips, which are an insignificant round ding era. It's
Speaker 1: the focus on the minutia and at the same time
Speaker 1: ignoring the giant exposure. Although really, to be fair to him,
Speaker 1: by the time oh five oh six came around, he
Speaker 1: was chairman emeritus. He wasn't really running things day to day?
Speaker 1: Was he? That? That? I mean, that's that's a great
Speaker 1: case in point. And you know, I'm not here to
Speaker 1: point fingers, but I do think that number one. There
Speaker 1: there's a fantastic book that he wrote which is called
Speaker 1: Memos from the Chairman and in it he has a
Speaker 1: Mammos from the Chairman and you and you should pick
Speaker 1: up a copy. It's a quick read. But there is
Speaker 1: a fictional character which he called him Jankle, and him
Speaker 1: Jankle was the guy who came around and said, you know,
Speaker 1: why does anybody need things? You know tomorrow? Meaning why
Speaker 1: do you do FedEx? Why? Why do you what? You know?
Speaker 1: When I walked into bear Stearns um in in you know,
Speaker 1: in they handed me two things I think, a firewarden
Speaker 1: hat um in a direction where to get out, how
Speaker 1: to get out of the building, and a and a
Speaker 1: and a paper bag that was probably three inches by
Speaker 1: two inches that had a box of paper clips, ten
Speaker 1: rubber bands, um and and uh some tape and they
Speaker 1: said this is all you'll need in your entire career.
Speaker 1: And literally I think I still I didn't even get
Speaker 1: through the paper clips. But the idea behind it was
Speaker 1: is that you know, saving the money is it goes
Speaker 1: into the partner's pocket. So that's clearly and at that
Speaker 1: point in time Barrow was a public company, but it
Speaker 1: was the mentality that you are an owner, you want
Speaker 1: to protect capital. You want to protect your capital, and
Speaker 1: in doing so, you want to make sure that your
Speaker 1: business is profit motivated to generate the highest returns and
Speaker 1: best risk adjusted returns. And that creates adverse situations as well,
Speaker 1: because people are going to try to shoot the moon
Speaker 1: at various points of time, and that's just not a
Speaker 1: bare thing. It was. It's Wall Street of absolutely. So
Speaker 1: I think that that was one one element, but it
Speaker 1: also takes macro management and risk. We had actually very
Speaker 1: strong risk management at bear um or around the Horn,
Speaker 1: but when you put it all together in terms of
Speaker 1: thinking about how it was related to the boardroom, etcetera,
Speaker 1: there's now much more rigid input from a risk management
Speaker 1: group in every bank, in every portfolio management, in every
Speaker 1: by side shop today than there probably ever has been.
Speaker 1: And that simply increase the stake and makes make sure
Speaker 1: that capital was allocated by and more importantly criticized those
Speaker 1: allocations by independent party. So risk management became something that
Speaker 1: was you know, from the back office or maybe not
Speaker 1: appreciated to actually pretty glamorous in the spotlighter of the
Speaker 1: past ten years. I don't know if glamorous is the
Speaker 1: right word, but certainly it's a focus on every bank. Now.
Speaker 1: Compliance and risk management are the two fastest growing departments,
Speaker 1: to say the least. But I'll tell you this, even
Speaker 1: at PIMCO, you know when we come in and have
Speaker 1: due diligences, we have entire sectors, segments hours plus with
Speaker 1: the rich risk mans roteam that's global like the robust
Speaker 1: and and there, and they're your sophisticated and they need
Speaker 1: to understand and do stress testing for portfolios and they
Speaker 1: want to. They're gonna offer their objective you in terms
Speaker 1: of how your report positioned what you know, what idiucing
Speaker 1: credic events you could be defensive or offensively position for.
Speaker 1: And and it's a critical element to our to our
Speaker 1: teams and PIMCO success to protect capital for our clients.
Speaker 1: So let me let me shift gears a little bit
Speaker 1: on you. We talked about the FED earlier. UM. Some people, well,
Speaker 1: let me start with this question. Some people have said
Speaker 1: the FED is distorting the bond market. Doesn't the FED
Speaker 1: always distort the bond market? Isn't that what raising the
Speaker 1: lowing rates does? No, it's more, it's not that the
Speaker 1: FED is distorting the bondo market. It's that the they're
Speaker 1: trying to adjust the market's perceptions of the fair pricing
Speaker 1: of the bond market. And it's nuanced. But but it
Speaker 1: seems to make sense. Well, I mean, it depends if
Speaker 1: you think that the tail is wagging the dog or
Speaker 1: the other way around. You know, the reality is when
Speaker 1: you look at how the bond market functions, irrational things
Speaker 1: happen all the time almost any market. UM as an example.
Speaker 1: UM two examples, one being you know, the pricing of
Speaker 1: dollar funding over year end. There are certain constraints that
Speaker 1: for that forbid banks from lending dollars over a year.
Speaker 1: And as a result, if you have excess dollars, it's
Speaker 1: a great time because you're able to earn a huge
Speaker 1: excess premium to lend those dollars to foreign investors who
Speaker 1: need to borrow those dollars every year end. The same
Speaker 1: thing goes on with regard to treasuries and fixed income securities.
Speaker 1: There's a premium assigned to fixed income securities as a
Speaker 1: safe haven asset. And it used to be that treasuries
Speaker 1: were the golden child of safe haven assets, and they
Speaker 1: still are to some extent. But when you got to
Speaker 1: a zero bound in terms of yield, when you had
Speaker 1: the tenure at you know, sub sub two percent, when
Speaker 1: you had the two year, you know, the two year
Speaker 1: note at sub one cent, those weren't really attractive safe
Speaker 1: haven assets because you couldn't necessarily squeeze anymore juice out
Speaker 1: of those And and the reality is it's hard to make,
Speaker 1: you know, when during times of stress, it's hard to
Speaker 1: make lemonade all those lemons because you already squeeze all
Speaker 1: the juice out. We call that basically the term premium
Speaker 1: these days. And when you think about it, the marketplace
Speaker 1: right now still has a excess amount of term premium
Speaker 1: assigned to owning a treasury, meaning they're willing to pay
Speaker 1: up earn less yield by owning a treasury than they
Speaker 1: typically would otherwise. That's the key metric. And with the
Speaker 1: fedtestring to do is influence what they view to be
Speaker 1: that term premium to be over time. Do they want
Speaker 1: to reduce that term premium, Well, they want to reduce
Speaker 1: it because they ultimately think the inflation is going higher
Speaker 1: over a period of time and shape the you O
Speaker 1: curve accordingly to those inflation expectations. So that's one element.
Speaker 1: The other element, well, wait before we move, let's talk
Speaker 1: about inflation, because we really didn't get to that as
Speaker 1: much as I wanted. Um, it seems to be that
Speaker 1: there's not a lot of inflation, and inflation has been
Speaker 1: preternaturally low for lord knows how long are we going
Speaker 1: to see an uptick in inflation? The the best description
Speaker 1: I've heard, and I this may have started yet another
Speaker 1: thing that started with mccaully was we have we have
Speaker 1: inflation and the things we need, and deflation and the
Speaker 1: things we want. And if it's not poll it certainly
Speaker 1: sounds like him. Um, so where are we in the
Speaker 1: process of inflation, disinflation, deflation or all of the above.
Speaker 1: The number one metric, and this gets back into my
Speaker 1: comments about optionality for the FED. But the number one
Speaker 1: metric that the FED is going to be focused on
Speaker 1: is the tightness of the job market and wage pressures
Speaker 1: on a go forward basis. So sure inflation, headline inflation
Speaker 1: is perked up a little bit. A lot of that
Speaker 1: has to do with energy pricing over the past few months,
Speaker 1: and when you approach seventy bucks of barrel oil, there's
Speaker 1: gonna be some headline pressure, so to speak. But what
Speaker 1: they really want to see is an increase in wage pressures,
Speaker 1: an increase in growth, and we're starting to see that.
Speaker 1: Some of it's in relation to the job or to
Speaker 1: the tax tax reform. You're seeing some some of the
Speaker 1: just immediately come through in terms of bonus payments, some
Speaker 1: some increase in wages. But they want to see on
Speaker 1: a sustained basis, and so getting some of those wage
Speaker 1: under caters, average hour, really earnings, things like that on
Speaker 1: a upward trajectory, not just flat, but upper trajectory over
Speaker 1: the next quarter or two will actually give some sustenance
Speaker 1: to the FED to actually continue to move forward, which
Speaker 1: they likely will. But I'm saying that's really what they're
Speaker 1: focused on in terms of that wage in terms of
Speaker 1: that inflation metric into eighteen, we've seen eighteen states and
Speaker 1: I believe it's twenty two or twenty three municipalities raise
Speaker 1: their minimum wage. What does that do to quote unquote
Speaker 1: wage pressure, How it trickles up the pay scale? And
Speaker 1: how does the FED perceive that sort of legislative attempt
Speaker 1: to drive wages higher. That's one side of it. You know,
Speaker 1: they clearly want you know, that's clearly one mandated wage
Speaker 1: pressure so to speak, so that that's that's going to
Speaker 1: play into that, But they actually want to see you know,
Speaker 1: other things go into it. You know, they're going to
Speaker 1: see UM obviously unemployment go clearly below four percent probably
Speaker 1: this year. Yeah, and what does that And they're gonna
Speaker 1: also look at the broader employment measures, you know, which
Speaker 1: are covering you just north of eight percent UM, you know,
Speaker 1: looking to see those dips. But it's again it's simply
Speaker 1: you know, is there hidden capacity in terms of jobs
Speaker 1: in the economy. Maybe some, but we're getting to a diminished,
Speaker 1: diminished size right now. And in fact, there's articles about
Speaker 1: about employment employers looking for employees who they probably would
Speaker 1: have never talked to UM over the past few years
Speaker 1: people with prison records. I read that same thing, and
Speaker 1: so I mean that sort of gets you scratching your head, like,
Speaker 1: you know, actually, maybe maybe my fift you know, maybe
Speaker 1: my kid this summer can actually get a job because
Speaker 1: he's not competing with someone who is you know, forced
Speaker 1: forced earlier retirements, you know, over the summer. But you know,
Speaker 1: I think that that is that is what we're ultimately
Speaker 1: looking at. So, yes, you can legislate minimum wage, but
Speaker 1: they're also looking at the growth segment across the breath
Speaker 1: of the across the breath and the breath of the
Speaker 1: breath of the employment sector is really what they're going
Speaker 1: to be focused on. So they're pretty sophisticated in this regard.
Speaker 1: So here's the pushback to that. It's, well, we've created
Speaker 1: all these jobs, but a lot of them are in
Speaker 1: low paying sectors without benefits or very modest benefits like
Speaker 1: hospitality and the lower end of healthcare and and the
Speaker 1: lower end of retail. Has the quality of the US
Speaker 1: labor market affected how the FED perceives wages and inflation, perhaps,
Speaker 1: But let me offer something else to that, is that
Speaker 1: if there is the man to employ people and people can't,
Speaker 1: and those employers can't find people to employ. What what
Speaker 1: is going to happen gets back to my whole supply
Speaker 1: demand to bring some people in who have left the
Speaker 1: labor for us and theoretically HB one visas another qualified
Speaker 1: immigrants um. But eventually you start running out of bodies, right.
Speaker 1: And that's the point is that eventually, when you start
Speaker 1: running out of that supply, you're gonna have to facilitate
Speaker 1: it by getting people to move back to your arena.
Speaker 1: And the way you do that is you increase your wages.
Speaker 1: And so that's the key what they want to and
Speaker 1: and this is we have one thing that hasn't even
Speaker 1: entered our discussion here today Verry is productivity. And I
Speaker 1: think that's something that we have to focus on. Okay,
Speaker 1: so let's talk about that because that's one of my
Speaker 1: favorite questions I have long been So some of this
Speaker 1: has to do with my particular lens in the world
Speaker 1: of finance. Uh, I see just a huge uptick in
Speaker 1: productivity and the benefits of software and automation and the
Speaker 1: technology in my job, which you don't necessarily see in
Speaker 1: the data. So I'm forced to either say, hey, am
Speaker 1: I just in a field that happens to be unusually productive.
Speaker 1: So my view was skewed. Or is there something wrong
Speaker 1: with the measurements where we're missing a ton of these
Speaker 1: productivity gains in broader society. Maybe you're just productive where
Speaker 1: you're more productive as you Yeah, but it's not just me.
Speaker 1: I keep coming back to it. It's not just me.
Speaker 1: Is there is there a it could be both. Is
Speaker 1: there a a productivity softness or is there a measurement
Speaker 1: there's both. I mean, let's be fair. I mean, it's
Speaker 1: just like any politics. You get it, you get evangelists
Speaker 1: on both sides of the aisle. But like you know,
Speaker 1: I think at this point we have to be rational
Speaker 1: as we get older, life start now. Well we get
Speaker 1: a whole different discussion, uh, and perhaps a separate podcast.
Speaker 1: But the reality is is that you have to as
Speaker 1: you get older, you want to adapt to product things
Speaker 1: that ake you more productive. That's clearly one side, one
Speaker 1: side of the equation, and it's very important. So the
Speaker 1: willingness to adapt to things that will make you more
Speaker 1: productive is actually something that we as human beings are
Speaker 1: going to have to be um, you know, open minded
Speaker 1: to over the over the next few decades, um and
Speaker 1: I think that that's one in regard, but the measurement side,
Speaker 1: the measurement side is a key element, and that's very
Speaker 1: difficult to handicap, you know, personally, I think when you
Speaker 1: look at things that um that are are are misguided
Speaker 1: in terms of productivity, technology, things like that. We're gonna
Speaker 1: look back in twenty thirty years just as we did,
Speaker 1: you know, I remember, you know, just as we did
Speaker 1: ten twenty years ago about the impact of the Internet,
Speaker 1: impact of of robotics, impact of simply um, you know,
Speaker 1: even in portfolio management, for goodness sake, you know, we're
Speaker 1: doing more more stuff, you know, out of you know,
Speaker 1: that's that's not less with less bodies and and and
Speaker 1: not as many fingers in the air. Um. You know,
Speaker 1: you can pull a lot of charts and and do
Speaker 1: a lot of analysis and read a lot of reams
Speaker 1: of paper. But there's some pretty interesting things we're doing,
Speaker 1: you know, with with computer power, some really smart analytics
Speaker 1: that we weren't doing three, four or five years ago,
Speaker 1: and that and that's and that makes us all that
Speaker 1: more productive. But that doesn't necessarily show up in the
Speaker 1: actual measurements. And I think that we have to, like
Speaker 1: any piece of data. It's open to interpretation and you
Speaker 1: have to be rational. And unless you're willing to do that,
Speaker 1: then you're simply driving down the road at fifty no
Speaker 1: matter the traffic conditions. And you know what, that's a
Speaker 1: terrifying place to be. There are two questions I want
Speaker 1: to get to my favorite questions, but there are two
Speaker 1: things I didn't um come back to. I have to
Speaker 1: ask about. One is the liquidity issue with trading. The
Speaker 1: number of trading bonddesks on Wall Street and trading farms
Speaker 1: on Wall Street has declined dramatically. What does this mean
Speaker 1: for liquidly in the bond market or is everybody just
Speaker 1: forced to trade with black Rocks bonddesk and and they've
Speaker 1: replaced Wall Street. Yeah, you're too You guys are coming
Speaker 1: up on two trillions and income. So I would say
Speaker 1: this is that it's a great thing for our clients.
Speaker 1: And the reason is that we are able to understand
Speaker 1: and assess good opportunities and entry points into bond markets
Speaker 1: and opportunities and most importantly, earn liquidity premiums for our clients.
Speaker 1: And what I mean by that is, in the old days,
Speaker 1: everything used to be sort of locked markets liquidity. You know,
Speaker 1: liquidity was very open. You know, everybody had a bond desk,
Speaker 1: things like that. We might, we might get back there,
Speaker 1: but not to that point. I don't think. I don't
Speaker 1: see that move going back in that surrection. But you
Speaker 1: have to admit that the regulatory winds have changed official
Speaker 1: six months and so you're not gonna get all the
Speaker 1: way back there. But the point I would make is
Speaker 1: that when you have inefficiencies and markets, it is an
Speaker 1: ideal time for fixed and comme asset managers or asset
Speaker 1: managers who can who can influence and most importantly understand
Speaker 1: and participate in those inefficiencies. And so for clients of PIMCO,
Speaker 1: that is a great asset in and of itself because
Speaker 1: as a portfolio manage You're sure I'm telling people how
Speaker 1: to position themselves. But Barry, I'm spending sixt of my
Speaker 1: day trading. I get in the office at three thirty
Speaker 1: in the morning and I'm looking at markets in London,
Speaker 1: and I stayed until six six, seven o'clock at night
Speaker 1: looking at how Asia opens. Those are great opportunities for
Speaker 1: global investors to really take advantage of. So for our
Speaker 1: clients over the past five to ten years, as markets,
Speaker 1: market conditions have evolved or devoulved, however you want to
Speaker 1: look at it, that's been really powerful. Uh. What's the
Speaker 1: most important thing? People don't know about your background. They
Speaker 1: don't know about my background. Uh, they clearly know I'm
Speaker 1: from Oklahoma. And and so I view that as being
Speaker 1: a view that as being a um a huge attribute.
Speaker 1: I would say, uh, being self you know, being a
Speaker 1: self starter, understanding and understanding um, sort of how things
Speaker 1: are put together in a very simplistic term. Not to
Speaker 1: say I'm simple minded, but that upbringing was very powerful. Um,
Speaker 1: you know, I think the transition really uh. And and
Speaker 1: I guess being being being a minority in Oklahoma was
Speaker 1: one of the few Jews in Oklahoma. I think that
Speaker 1: that actually was a h an open minding experience in
Speaker 1: a lot of ways. And you had friends from all
Speaker 1: different religions, um sort of come you know, coming forth.
Speaker 1: And it wasn't until I moved to the East Coast
Speaker 1: that I actually had a h an ability to reconcile
Speaker 1: my heritage effectively with that. And so, um, I would
Speaker 1: say that for me, you know, just sort of being
Speaker 1: that minority for many years was a positive and a
Speaker 1: negative influence and experience. Um. But it also was very
Speaker 1: very formative. That's quite interesting. UM, tell us about some
Speaker 1: of your mentors. So you're early mentors. We know who
Speaker 1: your ladder mentor was. Yeah. Um, so there's there's a
Speaker 1: couple that come to mind here. Of course, you have, um,
Speaker 1: you know my you know, a speech and debate teacher
Speaker 1: who pulls you out of you know who, who says
Speaker 1: you probably have a good gift for gab or at
Speaker 1: least extempering and speaking. So that's when Glinda Ferguson was
Speaker 1: her name, and she sort of molded helped to mold
Speaker 1: me at least to say something coherent in probably ninth grade. Um.
Speaker 1: But you also have other people, and there was a gentleman.
Speaker 1: There's two people that I always had jobs in my
Speaker 1: entire life, and I had owned a lawnmowing business, but
Speaker 1: the summer before my senior of high school, I had
Speaker 1: two people influenced me. The first one was a gentleman
Speaker 1: by the name of Leroy Gilmer. And Leroy was not
Speaker 1: anybody who was who who who was significant in a
Speaker 1: noteworthy way, but he was significant in my life because
Speaker 1: he was a hard worker. He worked three jobs and
Speaker 1: we worked at a basically a sports bar is what
Speaker 1: we worked at, and he hired me on a whim
Speaker 1: because he thought I was probably from the right side
Speaker 1: of right side of the tracks, but hard enough working
Speaker 1: that I would work in the hours I wanted to.
Speaker 1: So my hours were five to two thirty in the morning,
Speaker 1: five pm to two thirty in the morning. And what
Speaker 1: he taught me was the ability to prioritize an industrial
Speaker 1: kitchen and what to do when you get slammed. So
Speaker 1: there's nothing like a sporting event where you have fifty
Speaker 1: tickets of food sitting in front of you and you
Speaker 1: have to prioritize all those hungry, possibly drunk patrons at
Speaker 1: a very quick point in time. And for me, Leroy
Speaker 1: was the epitome of hard work and diligence and the
Speaker 1: understanding how to logically put sequencing together during times of stress.
Speaker 1: What happened during that sounds like it's applicable to future.
Speaker 1: So one of the first things that I asked people
Speaker 1: is what is your first job? Um when they interview
Speaker 1: of them, probably laying the calibat, and if they said
Speaker 1: internship at x y Z Investment Bank is my first job,
Speaker 1: it's a very short interview, because the reality is is
Speaker 1: that you want people to have real experiences who can
Speaker 1: understand how to adapt and and that's an important thing.
Speaker 1: And so I'm more real world than probably even most
Speaker 1: of my brethren at PIMCO in terms of the types
Speaker 1: of questions they asked, because they all wanted to try
Speaker 1: to stump people with some intellectual like quantitative thing. That's
Speaker 1: one element. But the other other person who molded my
Speaker 1: life was a joan by the name of Tom Love.
Speaker 1: And Tom Love Tom Love and so you probably don't
Speaker 1: know Tom, but Tom's worth several billion dollars and what
Speaker 1: it's it's interesting about Tom Love. And as you you
Speaker 1: get into the gas industry, I had two people who
Speaker 1: are very close to me in that. But Tom Love
Speaker 1: had a had a had a series of truck stops
Speaker 1: called Love's Country Store, and you might see him on
Speaker 1: the interstates, and there's now tons of them, but back
Speaker 1: in the early nineties there there was a good few,
Speaker 1: but it was more of a regional type of situation. Anyway,
Speaker 1: I had worked at a He had very few bad
Speaker 1: investments in his life, I think um but he had
Speaker 1: one investment which was in a car wash and the
Speaker 1: car wish. Business is very tough business. But I was.
Speaker 1: I worked my daytime shifts at the car wash, and
Speaker 1: I was a salesman and I did some of those
Speaker 1: cleaning the cars of course, and things like that. But
Speaker 1: it was he lost money on it, and and he
Speaker 1: was so perturbed by this. He actually showed up every
Speaker 1: day in is um aulsomobile truck, I remember at that
Speaker 1: point in time, and here I was, and he, you know,
Speaker 1: he was very frustrated by the fact that this was
Speaker 1: a money losing operation. At that point time, he had
Speaker 1: invested a million dollars in this property and another million
Speaker 1: in the plant, and it never came to fruition. And
Speaker 1: he kept every day coming in to see what was
Speaker 1: going on and talking to the employees at the ground level.
Speaker 1: And I made a couple of suggestions to him, but
Speaker 1: he was open minded in my suggestions. And number two,
Speaker 1: no matter how big his business became, he was actually
Speaker 1: very hands on in terms of understand ending how to
Speaker 1: learn from this failure. And so I learned two things
Speaker 1: from it. It's important to be not an absentee owner,
Speaker 1: number one. And number two learned from your failures. And
Speaker 1: and Tom Toes, you know, to this day is obviously
Speaker 1: quite successful. Let's talk about books. This is everybody's favorite question.
Speaker 1: Tell us some books that you think you've read recently
Speaker 1: or you think are important. Yeah, there's a couple here,
Speaker 1: but um, you know, obviously you know it's funny. I
Speaker 1: still to this day ask people interviewing, have you read
Speaker 1: Liars Poker? And clearly, uh, that was sort of formative
Speaker 1: in the in the beginning of the year. Or there's
Speaker 1: one called The Bombardiers by Paul Paul Bronson, and those
Speaker 1: are just sort of industry books, but Peul Bronson was
Speaker 1: the biggest little con value, right. Yeah, yeah, but but
Speaker 1: it's amazing to me that people who are just coming
Speaker 1: this industry have no understanding of that history and and
Speaker 1: I literally will buy it for them just to give
Speaker 1: them that sense of history. Not that it was the
Speaker 1: right or the wrong, is just the sense of history. Um. Philosophically,
Speaker 1: you have to think about the places like ann Rand
Speaker 1: and the Fountain Head in places like that, not necessarily
Speaker 1: that you coveted, but I think it was who eye
Speaker 1: opening experience for me to read it as a young adult. Um.
Speaker 1: But I actually go back to my upbringing in the
Speaker 1: oil bust, and there was a book by by a
Speaker 1: gentleman name of Mark singer Um called Funny Money, and
Speaker 1: it was the the beginning of the end of the
Speaker 1: savings and loan crisis. And what you don't realize actually
Speaker 1: is that the savings loan crisis. Everybody thinks of Continental
Speaker 1: of Illinoise being the pinnacle of it, but it started
Speaker 1: from literally a bank branch in the middle of a
Speaker 1: parking lot called Penn Square in Oklahoma City. Penn Square
Speaker 1: Bank did so many bad oil deals that it was
Speaker 1: out of a branch. There's probably no bigger than an
Speaker 1: average house, you know, a couple of couple of thousand
Speaker 1: square feet, but yet that was ground zero for the
Speaker 1: savings and loan crisis. And it's often misunderstood about how
Speaker 1: things grow become misproportioned and misaligned in terms of risk,
Speaker 1: and that, as I mentioned before, it was the upbringing
Speaker 1: I had was how to react to ultimately the oil bust,
Speaker 1: and that was very formative. But that book really gets
Speaker 1: into the detail of of how, you know, how euphoria
Speaker 1: and you know, caltivate itself, and more importantly, personalities captivate people,
Speaker 1: and that's an important factor tell us what you do
Speaker 1: outside of the office to either relax or stay fit
Speaker 1: or mentally unwind. H I love to spend time with
Speaker 1: my family, my wife. You know, that's a that's a
Speaker 1: good balance, uh, and you know, try to work out.
Speaker 1: You know, I'm pretty I've been doing cross fit for
Speaker 1: ten years and so that's ah. They're great, They're not familiar.
Speaker 1: I've had a handful of surgeries, but not because of that.
Speaker 1: But I do it as a stress relief. There's admittedly
Speaker 1: some movements that I will clearly stare away from. But
Speaker 1: the people that you deal, that you train with and
Speaker 1: you work out with, are not in your everyday life,
Speaker 1: and it's fascinating to hear their stories. And you know,
Speaker 1: my my goal isn't too you know, back squat five
Speaker 1: hundred pounds, but it's to stay you know, stay fit,
Speaker 1: and more importantly, you sweat a little and have a
Speaker 1: good time. And that's what I find. So if a
Speaker 1: millennial or someone just graduating college comes up to you
Speaker 1: and says they're interested in the career in fixed income,
Speaker 1: what sort of advice would you give them? Two pieces
Speaker 1: of advice, be patient. I just had this conversation with
Speaker 1: a colleague not so long the expectation is that somebody's
Speaker 1: making more money around you, and you should make as
Speaker 1: much money around it where they've given more priority. The
Speaker 1: reality is that careers take a long time to build,
Speaker 1: and your firm is likely investing in your career in
Speaker 1: a variety of way, shape, or form. They will be
Speaker 1: rewarded over time, and so patients is essential. Believe me,
Speaker 1: people told me that along the way at an old
Speaker 1: boss's name is Lennie Feeder, who basically helped me to
Speaker 1: get me under my way. And you know it took
Speaker 1: me places from London to double in Ireland, where I
Speaker 1: lived for a couple of years, back to New York.
Speaker 1: The reality is that patience is an incredibly powerful thing
Speaker 1: in a career. And and and I think that's someber
Speaker 1: one and number two. If you really want to be
Speaker 1: in finance these days, UM no offense to New York
Speaker 1: because I love New York and spent many years here.
Speaker 1: Global finances a global industry. And if somebody's going to
Speaker 1: hand you an opportunity, and that could be in London
Speaker 1: or Munich or Singapore, Tokyo or Sydney or our Newport Beach,
Speaker 1: um run with it. And you've got to be open
Speaker 1: mind enough for you and your significant other to take
Speaker 1: those opportunities when they come, because oppert tunities don't fall
Speaker 1: in your lap very often, and the most successful people
Speaker 1: are the ones who can capitalize on that and then
Speaker 1: grow beyond that. And our our final question, what is
Speaker 1: it that you know about the fixed income market today
Speaker 1: that you wish you knew twenty years ago when you
Speaker 1: were getting started? Um? Well, one of the things that
Speaker 1: Ace Greenberg was was very mad at me about was
Speaker 1: the fact that I was actually in the fixed income market.
Speaker 1: He wanted me to be in the equity markets. He
Speaker 1: was not a bond guy, believe it. And so one
Speaker 1: of the things, and I got to be honest with you,
Speaker 1: my being in the fixed and cort was was market
Speaker 1: was a little bit by chance. Um but it's something
Speaker 1: that I became fascinated with. I think one of the
Speaker 1: things that would have been really useful in understanding is
Speaker 1: is how leverage really plays itself into this system, and
Speaker 1: more importantly, have a better mapping tool to understand how
Speaker 1: leverage proliferate is proliferate prolifer rates throughout the entire global
Speaker 1: system at this point time. It's something that you think
Speaker 1: you know, but it's very difficult to map out in
Speaker 1: any articulate way. And no matter what people think, that's
Speaker 1: something that's you know, more of a more of a
Speaker 1: more of an educated guest as opposed to precise measurement factor.
Speaker 1: We have been speaking with Jerome Schneider. He is the
Speaker 1: head of short term portfolio Management and Funding at PIMCO.
Speaker 1: If you enjoy this conversation, be sure and look up
Speaker 1: an inch or down an inch at any of the
Speaker 1: other hundred in G eighty or so such conversations. We
Speaker 1: love your comments, feedback and suggestions right to us at
Speaker 1: M I B Podcast. That's M I B Podcast at
Speaker 1: Bloomberg dot net. I would be remiss if I did
Speaker 1: not thank my crack team who helps to put together
Speaker 1: these weekly conversations. Taylor Riggs is our booker. Mike Batnick
Speaker 1: is our head of research. Medina Parwanna is our audio
Speaker 1: engineer slash producer. I'm Barry Ritolts. You've been listening to
Speaker 1: Masters in Business on Bloomberg Radio. The PAK