1 00:00:01,960 --> 00:00:06,040 Speaker 1: This is Mesters in Business with very Rid Holds on 2 00:00:06,200 --> 00:00:11,560 Speaker 1: Bloomberg Radio. This week on the podcast, I have an 3 00:00:11,640 --> 00:00:17,040 Speaker 1: extra extra special guest. Maria Vassalu has a fascinating history 4 00:00:17,040 --> 00:00:21,080 Speaker 1: and background London School of Economics to Columbia School of Business, 5 00:00:21,160 --> 00:00:24,120 Speaker 1: where she actually was a professor for over a decade 6 00:00:24,600 --> 00:00:29,120 Speaker 1: and started consulting to the hedge fund and financial services industry, 7 00:00:29,600 --> 00:00:34,559 Speaker 1: and that led her to various jobs at Washerstein, Perella 8 00:00:34,880 --> 00:00:38,920 Speaker 1: McKenzie's asset management group. She worked with George Soros, she 9 00:00:39,000 --> 00:00:42,920 Speaker 1: worked with Steve Cohen at ZAC Capitol, and ultimately ends 10 00:00:43,040 --> 00:00:49,000 Speaker 1: up joining Goldman Sachs Asset Management Group as cocio. A 11 00:00:49,040 --> 00:00:54,760 Speaker 1: fascinating approach to macro, very quantitatively driven and very academic 12 00:00:54,840 --> 00:00:59,120 Speaker 1: research oriented. She wants to know exactly when this, that 13 00:00:59,240 --> 00:01:01,600 Speaker 1: and the other thing happens, What does it mean for 14 00:01:02,160 --> 00:01:05,280 Speaker 1: this segment of the market. When do you own growth? 15 00:01:05,319 --> 00:01:10,280 Speaker 1: When do you own equity? Why is certain anomalies persistent? 16 00:01:10,319 --> 00:01:14,040 Speaker 1: And why do some seem to get arbitraged away fairly quickly. 17 00:01:14,440 --> 00:01:18,600 Speaker 1: I found this to be an absolutely fascinating conversation and 18 00:01:18,760 --> 00:01:23,240 Speaker 1: I think you will also with no further ado Goldman Sachs, 19 00:01:23,680 --> 00:01:28,120 Speaker 1: Maria Vassalu tell us a little bit about the sort 20 00:01:28,160 --> 00:01:33,199 Speaker 1: of work you did. How relevant was the academic research 21 00:01:33,560 --> 00:01:38,399 Speaker 1: to what you're actually doing today. Well, actually, it sounds 22 00:01:38,520 --> 00:01:43,040 Speaker 1: very unusual to go from academia to the industry, and 23 00:01:43,360 --> 00:01:48,000 Speaker 1: usually it's not considered a very successful path. But in 24 00:01:48,040 --> 00:01:51,520 Speaker 1: my case it was very helpful because I had the 25 00:01:51,560 --> 00:01:57,000 Speaker 1: opportunity to spend over ten years doing intensive research in 26 00:01:57,120 --> 00:02:01,360 Speaker 1: the intersection of macro and fine and as surprising and 27 00:02:01,560 --> 00:02:05,960 Speaker 1: all these questions that I was trying to answer had 28 00:02:06,360 --> 00:02:12,560 Speaker 1: direct applications to Hedgemund strategies and portfolio management, and so 29 00:02:12,760 --> 00:02:15,640 Speaker 1: actually part of the reason I moved to the industry 30 00:02:15,840 --> 00:02:19,200 Speaker 1: was because while I was doing this research and presenting 31 00:02:19,200 --> 00:02:23,400 Speaker 1: it around and publishing it in academic journals, it was 32 00:02:23,440 --> 00:02:27,639 Speaker 1: attracting attention from the industry, and I had the opportunity 33 00:02:27,720 --> 00:02:32,000 Speaker 1: to be a retained consultant for Citadel, for Deutsche Acid 34 00:02:32,080 --> 00:02:36,480 Speaker 1: Management and then eventually also for Saurusmund Management, and so 35 00:02:36,560 --> 00:02:40,480 Speaker 1: along the way I was getting offers to join the industry, 36 00:02:40,520 --> 00:02:44,639 Speaker 1: and finally I decided to join the SOURS. So it 37 00:02:44,680 --> 00:02:48,120 Speaker 1: wasn't like a big Eureka moment. It just gradually became 38 00:02:48,160 --> 00:02:51,480 Speaker 1: apparent that you were working in a space that was 39 00:02:51,680 --> 00:02:56,720 Speaker 1: very valuable to people managing capital on a very let's 40 00:02:56,720 --> 00:02:59,760 Speaker 1: call it aggressive basis, just a hey, we're looking for 41 00:03:00,240 --> 00:03:03,280 Speaker 1: we're looking to outperform, and what Maria does could be 42 00:03:03,320 --> 00:03:06,240 Speaker 1: really useful to us. That was certainly part of it. 43 00:03:06,320 --> 00:03:10,480 Speaker 1: There was also an intellectual like curiosity aspect to it, 44 00:03:11,280 --> 00:03:15,440 Speaker 1: because when I was doing that work, it was also 45 00:03:15,520 --> 00:03:21,600 Speaker 1: the time where behavioral finance became more prevalent, if you like. 46 00:03:22,080 --> 00:03:27,400 Speaker 1: And I was always on the camp of rational risk 47 00:03:27,480 --> 00:03:33,480 Speaker 1: based explanations for various surprising phenomena. And my view was 48 00:03:33,560 --> 00:03:38,920 Speaker 1: always if some if an anomaly persist and it doesn't 49 00:03:38,920 --> 00:03:44,000 Speaker 1: go away, then maybe it's not an anomaly, maybe it's 50 00:03:44,160 --> 00:03:46,920 Speaker 1: risk based. Then it's a risk factor that we haven't 51 00:03:46,960 --> 00:03:50,280 Speaker 1: really accounted for. And so a lot of my research 52 00:03:50,560 --> 00:03:54,960 Speaker 1: was related to trying to uncover what were the underlying 53 00:03:55,080 --> 00:03:58,680 Speaker 1: risk factors. And the place where I was looking for 54 00:03:58,720 --> 00:04:01,840 Speaker 1: those risk factors was in the real economy. So I 55 00:04:01,920 --> 00:04:08,240 Speaker 1: was relating our surprises to GDP growth, to investment growth, 56 00:04:08,440 --> 00:04:17,280 Speaker 1: to default rest factors like this, and so I was 57 00:04:17,320 --> 00:04:21,359 Speaker 1: providing explanations for our surprising anomalists, such as the small 58 00:04:21,400 --> 00:04:25,239 Speaker 1: cap effect or the value effect. Those were the first 59 00:04:25,240 --> 00:04:28,400 Speaker 1: two that popped into my mind when you said, Hey, 60 00:04:28,480 --> 00:04:31,400 Speaker 1: is this truly anomalous or is there a risk factor? 61 00:04:31,880 --> 00:04:34,880 Speaker 1: Some people have said small caps tend to be more volatile, 62 00:04:34,920 --> 00:04:39,400 Speaker 1: more risky. That's where the additional performance comes from. When 63 00:04:39,400 --> 00:04:41,600 Speaker 1: we look at value, a lot of people say, well, 64 00:04:41,640 --> 00:04:44,760 Speaker 1: they're widely disliked, that's why they're cheap. So there's a 65 00:04:44,839 --> 00:04:47,800 Speaker 1: behavioral side. How do you crunch the numbers on that? 66 00:04:48,120 --> 00:04:51,600 Speaker 1: And where do you come out on small cap and value? Yeah, 67 00:04:51,600 --> 00:04:54,400 Speaker 1: it was actually very interesting because when I looked at 68 00:04:54,440 --> 00:04:59,880 Speaker 1: the small caps, it's actually if you dissect the small caps, 69 00:05:00,160 --> 00:05:03,480 Speaker 1: you see that the small cap effect always exists in 70 00:05:03,560 --> 00:05:06,760 Speaker 1: the smallest of the small caps and it's related to 71 00:05:06,880 --> 00:05:10,520 Speaker 1: default risk. Wait a second, so there's a small cap effect, 72 00:05:10,839 --> 00:05:14,600 Speaker 1: and then within small caps there's a microcap effect and 73 00:05:14,680 --> 00:05:20,120 Speaker 1: even smaller cap effect. Yes, and what happens is this 74 00:05:20,240 --> 00:05:24,480 Speaker 1: small cap effect is related to the default probability. So 75 00:05:24,520 --> 00:05:28,600 Speaker 1: I have a paper where I computed default probabilities based 76 00:05:28,640 --> 00:05:31,360 Speaker 1: on Merton's model, and I did this for the whole 77 00:05:31,400 --> 00:05:34,840 Speaker 1: Crows section of assets, and then I started them and 78 00:05:35,040 --> 00:05:39,320 Speaker 1: created desiles and so on and tracked how the behavior 79 00:05:39,560 --> 00:05:43,320 Speaker 1: is over time, and of course you see that depending 80 00:05:43,320 --> 00:05:46,920 Speaker 1: on the part of the business cycle you're going through, 81 00:05:47,240 --> 00:05:51,640 Speaker 1: the default probability varies over time, and it increases during 82 00:05:52,600 --> 00:05:56,159 Speaker 1: downturns of the business cycle and so on. And when 83 00:05:56,400 --> 00:06:01,039 Speaker 1: when that happens, then the small cap effect becomes much 84 00:06:01,080 --> 00:06:03,960 Speaker 1: more prominent, And so you see it in the whole 85 00:06:04,000 --> 00:06:07,640 Speaker 1: cross section of small caps. But when the default probabilities 86 00:06:07,680 --> 00:06:11,160 Speaker 1: are lower and you look at the whole cross section 87 00:06:11,200 --> 00:06:15,760 Speaker 1: of small caps, it's not so apparent. So people say 88 00:06:15,839 --> 00:06:18,719 Speaker 1: that it goes away, but it doesn't really go away. 89 00:06:19,160 --> 00:06:22,240 Speaker 1: It's just it's a matter of magnitude. Then where are 90 00:06:22,240 --> 00:06:25,599 Speaker 1: you're looking for it? Well, that's really interesting. What about 91 00:06:25,640 --> 00:06:29,200 Speaker 1: in the value space? Do you see the same issue 92 00:06:29,279 --> 00:06:32,960 Speaker 1: of what used to be called Benjamin grab called stubs 93 00:06:33,120 --> 00:06:36,840 Speaker 1: or cigar stubs. Is that the same default risk when 94 00:06:36,920 --> 00:06:40,320 Speaker 1: stocks become very very cheap or is there something else 95 00:06:40,360 --> 00:06:43,719 Speaker 1: at play there In the case of value versus growth, 96 00:06:45,160 --> 00:06:48,600 Speaker 1: it was it's more related to the level of GDP 97 00:06:48,839 --> 00:06:54,560 Speaker 1: growth and investment growth in different sectors of the economy, 98 00:06:54,839 --> 00:06:58,400 Speaker 1: So it's not so much a default aspect, but it's 99 00:06:58,480 --> 00:07:05,720 Speaker 1: more has to do with a variation of real GDP growth. 100 00:07:05,880 --> 00:07:09,600 Speaker 1: So when GDP is growing rapidly, I would assume you 101 00:07:09,640 --> 00:07:12,920 Speaker 1: would want growth stocks, and when things are going sideways, 102 00:07:12,960 --> 00:07:15,840 Speaker 1: there's a greater margin of safety with value and that 103 00:07:16,640 --> 00:07:19,520 Speaker 1: and that's why you So last year, for instance, when 104 00:07:19,800 --> 00:07:23,600 Speaker 1: GDP growth started becoming a little bit more muted and 105 00:07:23,800 --> 00:07:28,480 Speaker 1: expectations were for a lower GDP growth going forward, value 106 00:07:28,480 --> 00:07:32,400 Speaker 1: stocks outperformed growth but by a huge margin, right, big 107 00:07:32,480 --> 00:07:36,200 Speaker 1: big disparity. Yeah, So at that time I would go 108 00:07:36,320 --> 00:07:40,480 Speaker 1: to conferences and publish papers and make those arguments, and 109 00:07:40,520 --> 00:07:43,360 Speaker 1: then I had other colleagues that I would try to 110 00:07:43,600 --> 00:07:51,720 Speaker 1: provide behavior explanations. And similarly with the momentum effect which 111 00:07:52,240 --> 00:07:57,000 Speaker 1: I had related to corporate innovation as I was calling it, 112 00:07:57,040 --> 00:08:01,920 Speaker 1: which was separate innovation, which was really a firm level 113 00:08:02,120 --> 00:08:08,720 Speaker 1: total factor productivity. So how much innovation companies produce and 114 00:08:08,760 --> 00:08:12,960 Speaker 1: how long they can remain leaders in that innovation to 115 00:08:13,120 --> 00:08:18,400 Speaker 1: really maintain that momentum. So a company becomes very innovative, 116 00:08:18,440 --> 00:08:20,920 Speaker 1: you get a little bit of a flywheel effect and 117 00:08:21,000 --> 00:08:25,200 Speaker 1: that innovation DNA starts to spill over into everything they do. 118 00:08:25,320 --> 00:08:27,440 Speaker 1: Is it just that simple? Right? And then but then 119 00:08:27,480 --> 00:08:30,120 Speaker 1: it's it's a matter of being able to maintain this 120 00:08:31,280 --> 00:08:35,480 Speaker 1: um and can companies maintain this indefinitely or is there 121 00:08:35,480 --> 00:08:39,920 Speaker 1: a sly? Not? Usually not um, And so they go 122 00:08:40,040 --> 00:08:47,439 Speaker 1: into cycles. And it also relates to when they are losers, um, 123 00:08:48,160 --> 00:08:52,440 Speaker 1: you know, what's the probability of recovering And it really 124 00:08:52,480 --> 00:08:55,160 Speaker 1: has to do with whether they have the ability to 125 00:08:55,200 --> 00:08:59,040 Speaker 1: innovate and get out of that trap. So so you 126 00:08:59,080 --> 00:09:03,040 Speaker 1: can see a very high correlation between losers and winners 127 00:09:03,400 --> 00:09:08,760 Speaker 1: with respect to how they perform on that measure. But anyway, 128 00:09:08,880 --> 00:09:13,200 Speaker 1: so we had all these ideas of about how all 129 00:09:13,240 --> 00:09:17,680 Speaker 1: this different phenomena were formed and what was driving them, 130 00:09:17,800 --> 00:09:20,800 Speaker 1: And of course my colleagues on the behavioral site had 131 00:09:20,880 --> 00:09:25,760 Speaker 1: different ideas, and so we were always debating these topics 132 00:09:25,800 --> 00:09:30,320 Speaker 1: at conferences and through publications, and at some time, at 133 00:09:30,320 --> 00:09:33,560 Speaker 1: some point it became to me a little bit repetitive, 134 00:09:33,640 --> 00:09:39,040 Speaker 1: and I felt like nobody could equivocally prove their point 135 00:09:39,320 --> 00:09:43,000 Speaker 1: as to who is really right. And so at some 136 00:09:43,120 --> 00:09:46,400 Speaker 1: point I thought, well, if I can go and manage 137 00:09:46,440 --> 00:09:51,440 Speaker 1: money based on this risk based explanations and based on 138 00:09:51,480 --> 00:09:55,720 Speaker 1: the way I understand how the world functions, how the 139 00:09:55,800 --> 00:10:00,880 Speaker 1: market's functions, if that works, then that's one form of 140 00:10:01,040 --> 00:10:06,720 Speaker 1: justification of what I'm doing really really intriguing. It's um. 141 00:10:07,040 --> 00:10:12,800 Speaker 1: It sort of is like the John Sex poem about 142 00:10:12,800 --> 00:10:16,160 Speaker 1: the blind men describing the elephant. They don't have to 143 00:10:16,200 --> 00:10:18,439 Speaker 1: be one doesn't have to be right or wrong. They 144 00:10:18,480 --> 00:10:20,760 Speaker 1: could both be right. You're just approaching it from a 145 00:10:20,800 --> 00:10:24,439 Speaker 1: different angle. Is that fair? Or is clearly one is 146 00:10:24,520 --> 00:10:26,800 Speaker 1: right and one is wrong? And that's that. I think 147 00:10:26,840 --> 00:10:30,840 Speaker 1: it's much more nuanced, and as the time goes by, 148 00:10:30,920 --> 00:10:35,400 Speaker 1: I think the two lines get blurred. Also because of technology, 149 00:10:35,480 --> 00:10:41,959 Speaker 1: because of the increase presence of retail investors in the markets, 150 00:10:42,360 --> 00:10:47,280 Speaker 1: the market microstructure has changed, and so UM, it's much 151 00:10:47,360 --> 00:10:53,599 Speaker 1: more common now to see prolonged deviations from fundamentals in 152 00:10:53,760 --> 00:10:57,600 Speaker 1: the in the market. And we've seen that recently as well. 153 00:10:58,040 --> 00:11:01,959 Speaker 1: And so I wouldn't say that the one approach is 154 00:11:02,080 --> 00:11:04,319 Speaker 1: right and the other one is wrong. But maybe it's 155 00:11:04,320 --> 00:11:07,959 Speaker 1: a matter of timing. I think the risk based explanations 156 00:11:08,160 --> 00:11:14,680 Speaker 1: need longer time to play out some of this behavioral driver, 157 00:11:14,960 --> 00:11:18,360 Speaker 1: some more short term drivers. So you were consulting to 158 00:11:18,400 --> 00:11:22,240 Speaker 1: the industry while you're an academia that had to make 159 00:11:22,320 --> 00:11:25,719 Speaker 1: that transition. When you finally decided to jump in with 160 00:11:25,760 --> 00:11:29,440 Speaker 1: both feet, I'm assuming you were prepared for what you 161 00:11:29,480 --> 00:11:33,400 Speaker 1: were jumping into. It wasn't a big shock or am 162 00:11:33,400 --> 00:11:37,160 Speaker 1: I wrong? Once you left the quiet confines of academia 163 00:11:37,760 --> 00:11:40,480 Speaker 1: Wall Street is still a shock to the system. Well, 164 00:11:40,480 --> 00:11:44,800 Speaker 1: it was certainly not exactly a shock, but I had 165 00:11:44,840 --> 00:11:48,480 Speaker 1: to get adapted to it. But I am someone who 166 00:11:48,640 --> 00:11:52,360 Speaker 1: is quite adaptable. I left my country. I lived in 167 00:11:52,400 --> 00:11:59,440 Speaker 1: six different countries. I came to the US, and so 168 00:12:00,280 --> 00:12:03,960 Speaker 1: you know, I'm used to changing environments and try to 169 00:12:04,000 --> 00:12:09,520 Speaker 1: adapt to these new environments. Suddenly going to Sarus was 170 00:12:09,600 --> 00:12:14,440 Speaker 1: a big eye opener. And also I was there during 171 00:12:14,480 --> 00:12:18,120 Speaker 1: a very interesting time in the markets. What years were 172 00:12:18,120 --> 00:12:22,480 Speaker 1: those I joined in the summer of two thousand and six? 173 00:12:22,800 --> 00:12:26,200 Speaker 1: Were you there for the financial crisis? Pretty much? And 174 00:12:27,800 --> 00:12:32,480 Speaker 1: I started, actually I developed my strategies and built the 175 00:12:32,880 --> 00:12:36,640 Speaker 1: Quantitative Strategiest group from the summer of two thousand and 176 00:12:36,640 --> 00:12:42,920 Speaker 1: six onwards. And I started running my strategies with money 177 00:12:43,400 --> 00:12:49,360 Speaker 1: in March of oh seven, so soon before the quant meltdown, right, 178 00:12:49,960 --> 00:12:54,360 Speaker 1: which was interesting, and so I suddenly I had a 179 00:12:54,360 --> 00:12:59,480 Speaker 1: baptism by fire in the markets. But they was a 180 00:12:59,520 --> 00:13:03,880 Speaker 1: great experience. We did very well during the quant meltdown, 181 00:13:04,440 --> 00:13:07,880 Speaker 1: and it was also an opportunity to see up close 182 00:13:08,160 --> 00:13:11,760 Speaker 1: what was happening behind the scenes in the markets, how 183 00:13:11,800 --> 00:13:17,120 Speaker 1: the financial crisis was developing. And also it was very 184 00:13:17,120 --> 00:13:22,040 Speaker 1: interesting because even though George Sarrows had retired from active 185 00:13:22,120 --> 00:13:25,920 Speaker 1: in investing, when he saw what was happening in the markets, 186 00:13:26,000 --> 00:13:30,120 Speaker 1: he came back and so I'm excited. Yeah, And so 187 00:13:30,200 --> 00:13:34,080 Speaker 1: I had the opportunity to observe him up close, to 188 00:13:34,160 --> 00:13:37,640 Speaker 1: listen to his views, to interact with him, and that 189 00:13:37,760 --> 00:13:41,240 Speaker 1: was certainly a great experience I can imagine. So when 190 00:13:41,280 --> 00:13:46,080 Speaker 1: you go through a substantial macro event, whether it was 191 00:13:46,120 --> 00:13:50,560 Speaker 1: the quantz crash or the financial crisis or even the pandemic, 192 00:13:51,080 --> 00:13:54,160 Speaker 1: does that send you back to your models to tweak them. 193 00:13:54,160 --> 00:14:00,360 Speaker 1: Do those giant events affect how markets behave subsequently leads 194 00:14:00,360 --> 00:14:04,080 Speaker 1: you to have to make some changes or hey, the 195 00:14:04,160 --> 00:14:05,920 Speaker 1: model is going to do what the model does and 196 00:14:06,000 --> 00:14:09,560 Speaker 1: it doesn't matter what happens out there. Well, que models 197 00:14:09,640 --> 00:14:14,680 Speaker 1: always need to be evolved, so you kind of staled it. Yes, 198 00:14:14,800 --> 00:14:17,640 Speaker 1: you can just build it and forget it, but it 199 00:14:17,720 --> 00:14:21,440 Speaker 1: has to be done in a way that keeps up 200 00:14:21,440 --> 00:14:27,040 Speaker 1: with the developments in the markets. So, for instance, when 201 00:14:27,920 --> 00:14:31,640 Speaker 1: the British referendum happened, Well, we didn't have such an 202 00:14:31,720 --> 00:14:35,200 Speaker 1: event before in the market, So that's not something where 203 00:14:35,320 --> 00:14:39,160 Speaker 1: you want to make your model adapted to because we're 204 00:14:39,200 --> 00:14:41,880 Speaker 1: not going to be having these events all the time. 205 00:14:42,560 --> 00:14:45,720 Speaker 1: But that's an instance where you want to take your 206 00:14:45,760 --> 00:14:49,360 Speaker 1: model and stress tested to see how it will behave 207 00:14:49,800 --> 00:14:54,040 Speaker 1: depending on different scenarios that may transpire as a result 208 00:14:54,160 --> 00:14:58,480 Speaker 1: of this event. So that's what we would do, and 209 00:14:58,520 --> 00:15:02,200 Speaker 1: then we will ey'd whether to take down risk or 210 00:15:02,320 --> 00:15:05,760 Speaker 1: leave the risk on and so on. If you have 211 00:15:05,920 --> 00:15:11,080 Speaker 1: other phenomenon, like you know, changes and correlations between assets 212 00:15:11,200 --> 00:15:15,160 Speaker 1: or changes in the level of volatilities, these are things 213 00:15:15,160 --> 00:15:19,800 Speaker 1: that you want the model to adapt to going forward 214 00:15:20,440 --> 00:15:24,560 Speaker 1: and incorporate this information into the model. So in that 215 00:15:24,640 --> 00:15:28,760 Speaker 1: case you want to evolve it. Or there maybe factors 216 00:15:28,760 --> 00:15:33,760 Speaker 1: that were not present before and you want to inform 217 00:15:33,800 --> 00:15:37,680 Speaker 1: the model with it. For instance, how the monetary policy 218 00:15:38,360 --> 00:15:42,240 Speaker 1: changes over time, the fact that we had QE for 219 00:15:42,320 --> 00:15:44,920 Speaker 1: a long period of time. All these things are things 220 00:15:45,040 --> 00:15:48,600 Speaker 1: you want to include in the model, but you have 221 00:15:48,720 --> 00:15:53,840 Speaker 1: to be selective and really treat each case separative. So 222 00:15:53,880 --> 00:15:58,280 Speaker 1: you're working with George Soros, known as a big macro trader, 223 00:15:58,400 --> 00:16:01,840 Speaker 1: he makes big bets about these large events, you end 224 00:16:01,920 --> 00:16:05,760 Speaker 1: up going to Steve Cohen and Zach Capitol. He's much 225 00:16:05,800 --> 00:16:10,200 Speaker 1: more of a granular trader. He is not necessarily looking 226 00:16:10,240 --> 00:16:13,640 Speaker 1: at the big events. He's looking at things on really 227 00:16:13,640 --> 00:16:16,120 Speaker 1: where the rubber meets the road, so to speak. What 228 00:16:16,320 --> 00:16:19,520 Speaker 1: was that transition like to go from a very top 229 00:16:19,560 --> 00:16:22,680 Speaker 1: down approach to somebody who's you know, right there in 230 00:16:22,720 --> 00:16:26,120 Speaker 1: the weeds with the rest of the trading desk. Yes, 231 00:16:27,040 --> 00:16:30,960 Speaker 1: and now the great lesson. And I was still a 232 00:16:30,960 --> 00:16:34,880 Speaker 1: global macro portfolio manager with my own silo at the 233 00:16:35,480 --> 00:16:39,880 Speaker 1: SAC Capital. But as you said, at Sorrows it was 234 00:16:39,960 --> 00:16:46,840 Speaker 1: all about big macro beds, and at the SAC Capitol 235 00:16:47,040 --> 00:16:51,040 Speaker 1: it was all about risk management. So even though when 236 00:16:51,120 --> 00:16:54,800 Speaker 1: I came from academia to Sorrows, I would look at 237 00:16:54,880 --> 00:16:58,000 Speaker 1: how they were running the portfolios, and I was constantly 238 00:16:58,080 --> 00:17:00,600 Speaker 1: scared because I felt they were taken in way too 239 00:17:00,680 --> 00:17:04,280 Speaker 1: much risk compared to what I thought from an academic 240 00:17:04,359 --> 00:17:07,840 Speaker 1: perspective they should be doing. Of course, I was novice 241 00:17:07,960 --> 00:17:12,720 Speaker 1: at that time in the profession. Then I went to 242 00:17:13,480 --> 00:17:20,400 Speaker 1: SAC and I realized that actually being careful with risk 243 00:17:20,440 --> 00:17:24,439 Speaker 1: management is very much respected and even more than what 244 00:17:24,640 --> 00:17:29,840 Speaker 1: I thought should have been happening at Sorrows, and so 245 00:17:30,359 --> 00:17:35,879 Speaker 1: I spent the subsequent years trying to refine my models, 246 00:17:36,800 --> 00:17:43,480 Speaker 1: make them much more smooth in terms of their return stream, 247 00:17:43,920 --> 00:17:48,760 Speaker 1: focused much more on risk management downside the risk hedging, 248 00:17:49,359 --> 00:17:52,680 Speaker 1: and I think the models became better as a result. 249 00:17:53,080 --> 00:17:55,280 Speaker 1: So let's talk a little bit about how you ended 250 00:17:55,359 --> 00:17:58,399 Speaker 1: up at Goldman. You were at Columbia School of Business 251 00:17:58,800 --> 00:18:02,760 Speaker 1: where you were teaching, you were at Soros and zach Capital. 252 00:18:03,400 --> 00:18:07,720 Speaker 1: What attracted you to government, Well, it's actually, um, the 253 00:18:07,800 --> 00:18:13,440 Speaker 1: whole asset management business is changing. So we went from 254 00:18:13,440 --> 00:18:19,159 Speaker 1: a period where hedge funds was really the hot area 255 00:18:19,280 --> 00:18:22,040 Speaker 1: to be and of course there are all this big 256 00:18:22,080 --> 00:18:27,639 Speaker 1: hedge funds that were developed over time. Um. But over time, 257 00:18:27,680 --> 00:18:31,199 Speaker 1: as you know, there was this big shift or was 258 00:18:32,960 --> 00:18:37,520 Speaker 1: passive investing, and so that was a big challenge for 259 00:18:37,520 --> 00:18:41,480 Speaker 1: for hedge funds. At the same time, we had all 260 00:18:41,480 --> 00:18:46,359 Speaker 1: this decrease in volatility and financial repression because of the 261 00:18:46,480 --> 00:18:51,240 Speaker 1: QE and the extra liquidity that was in the markets 262 00:18:51,359 --> 00:18:58,040 Speaker 1: that made them trading in in hedge funds much more difficult, 263 00:18:58,080 --> 00:19:02,560 Speaker 1: if you like, in terms of provide superior returns. I'm 264 00:19:02,560 --> 00:19:06,000 Speaker 1: glad you brought that up because if you look at 265 00:19:06,359 --> 00:19:10,400 Speaker 1: hedge fund performance before the Financial crisis, there's a lot 266 00:19:10,400 --> 00:19:14,640 Speaker 1: of alpha generators. The hedge fund industry generally is outperforming 267 00:19:14,680 --> 00:19:17,880 Speaker 1: their benchmarks. I mean, not just the top decile. As 268 00:19:17,920 --> 00:19:20,360 Speaker 1: a group, they seem to have done very well. And 269 00:19:20,400 --> 00:19:24,680 Speaker 1: then post financial crisis it became very hard to generate 270 00:19:24,720 --> 00:19:28,480 Speaker 1: alpha and there was a huge gap between the big 271 00:19:28,480 --> 00:19:32,920 Speaker 1: winners and the losers. Are you attributing that to zero 272 00:19:32,960 --> 00:19:37,639 Speaker 1: interest rate and quantitative easing or did things just change 273 00:19:37,640 --> 00:19:40,800 Speaker 1: so much people didn't adapt quickly enough. Well, there were 274 00:19:40,800 --> 00:19:44,800 Speaker 1: two things. I mean, my strategies were always in the 275 00:19:44,880 --> 00:19:48,919 Speaker 1: space of relative value across SASA classes, so there there 276 00:19:49,040 --> 00:19:53,960 Speaker 1: was all Yes, there was always some volatility to pick up, 277 00:19:54,400 --> 00:19:58,080 Speaker 1: and so the strategies kept working. But by and large 278 00:19:58,119 --> 00:20:02,159 Speaker 1: in the overall industry, if you look at long short equity, 279 00:20:02,680 --> 00:20:07,080 Speaker 1: there was very little, you know, within us a class 280 00:20:07,160 --> 00:20:11,760 Speaker 1: volatility to pick up. And also you have a period 281 00:20:11,960 --> 00:20:19,960 Speaker 1: that because of this extremely liquidity and quantitative easing, equities 282 00:20:20,040 --> 00:20:23,920 Speaker 1: were performing extremely well and so being passive and just 283 00:20:24,080 --> 00:20:29,199 Speaker 1: holding the index you were doing great. So what was 284 00:20:29,240 --> 00:20:34,439 Speaker 1: the point of getting into hedge funds having a zero 285 00:20:34,600 --> 00:20:40,399 Speaker 1: beta exposure? Or going into other strategies. And so you 286 00:20:40,600 --> 00:20:44,520 Speaker 1: saw that the hedge fund industry started changing over time. 287 00:20:44,880 --> 00:20:48,960 Speaker 1: A lot of traditional macro funds actually started becoming more 288 00:20:49,119 --> 00:20:53,320 Speaker 1: equity oriented funds or including a lot of equity exposure 289 00:20:54,080 --> 00:20:58,480 Speaker 1: just to try to pick up beta in their strategies. 290 00:20:58,640 --> 00:21:03,200 Speaker 1: And also there was an increased consolidation of the industry 291 00:21:03,359 --> 00:21:09,080 Speaker 1: towards the bigger managers. But to me, at the same time, 292 00:21:09,359 --> 00:21:16,720 Speaker 1: I was finding this uh, this uh concentration on passive 293 00:21:16,800 --> 00:21:21,960 Speaker 1: investing also problematic because passive investing works when the markets 294 00:21:21,960 --> 00:21:25,760 Speaker 1: are efficient, and the markets are efficient when there is 295 00:21:25,880 --> 00:21:29,919 Speaker 1: enough trading happening for new information to be incorporated in 296 00:21:30,000 --> 00:21:34,320 Speaker 1: the prices. If everybody is a passive investor, then you 297 00:21:34,400 --> 00:21:39,199 Speaker 1: don't have this mechanism in place to incorporate information in 298 00:21:39,320 --> 00:21:45,280 Speaker 1: prices right away to really benefit from them. So, so 299 00:21:45,320 --> 00:21:49,320 Speaker 1: how much active management does there have to be for 300 00:21:49,480 --> 00:21:53,720 Speaker 1: price discovery to really take place? And I've asked people 301 00:21:53,760 --> 00:21:56,919 Speaker 1: like Andrew Lowe and MIT who said, you can have 302 00:21:57,040 --> 00:21:59,960 Speaker 1: ninety percent passive, the remaining ten percent as we're all 303 00:22:00,160 --> 00:22:03,320 Speaker 1: your price discovery will take place. Does that sound like 304 00:22:03,400 --> 00:22:06,040 Speaker 1: it's a lot or do you agree with that perspective? 305 00:22:06,480 --> 00:22:12,399 Speaker 1: That's Andrews answer. I think derives from the idea of 306 00:22:12,440 --> 00:22:16,560 Speaker 1: the marginal investor, as we're saying academia. So all you 307 00:22:16,640 --> 00:22:20,000 Speaker 1: need is the marginal investor is rational and always ready 308 00:22:20,000 --> 00:22:23,440 Speaker 1: to take advantage of opportunities. Yes, but it's not very 309 00:22:23,440 --> 00:22:28,600 Speaker 1: clear who the marginal investor is in practice. If they exist, 310 00:22:28,800 --> 00:22:32,879 Speaker 1: then what I have noticed through the fifteen years that 311 00:22:33,000 --> 00:22:38,120 Speaker 1: I've been managing my own strategies is that the markets 312 00:22:38,119 --> 00:22:42,720 Speaker 1: have become a little bit less efficient over time, in 313 00:22:42,760 --> 00:22:46,399 Speaker 1: the sense that they have become that you seem longer 314 00:22:46,440 --> 00:22:51,200 Speaker 1: deviations from fundamentals. Eventually they do correct, but you seem 315 00:22:51,320 --> 00:22:56,080 Speaker 1: longer deviations from fundamentals. Sometimes you see more intra day 316 00:22:56,240 --> 00:23:02,359 Speaker 1: volatility in certain events, especially around announcements and so on. 317 00:23:03,080 --> 00:23:09,000 Speaker 1: And so maybe this is attributable to an increased exposure 318 00:23:09,000 --> 00:23:14,480 Speaker 1: to passive management. Maybe it's attributable to more noise traders 319 00:23:14,600 --> 00:23:17,959 Speaker 1: what we use to call noise traders, which are effectively 320 00:23:18,040 --> 00:23:21,600 Speaker 1: retail investors. Right, well, let me let's stay with this 321 00:23:21,680 --> 00:23:24,760 Speaker 1: a second, because I'm intrigued by the concept of the 322 00:23:24,840 --> 00:23:29,960 Speaker 1: market becoming less efficient. When I look at the sixties, 323 00:23:30,000 --> 00:23:33,440 Speaker 1: the seventies, the eighties, and the nineties, it seems as 324 00:23:33,520 --> 00:23:37,800 Speaker 1: if we've gotten more and more heavily focused on technology 325 00:23:37,880 --> 00:23:42,520 Speaker 1: and program training and now algorithmic and high frequency training, 326 00:23:42,520 --> 00:23:46,000 Speaker 1: and I would assume that that would make the market 327 00:23:46,119 --> 00:23:52,200 Speaker 1: more efficient and harder to spot arbitrage opportunities and these 328 00:23:53,160 --> 00:24:00,280 Speaker 1: various anomalies. You're suggesting passive is creating less efficiency. Does 329 00:24:00,280 --> 00:24:04,040 Speaker 1: that mean there's more opportunity for active traders. I think 330 00:24:04,040 --> 00:24:07,479 Speaker 1: there is more intradate trading now than it used to be. 331 00:24:07,520 --> 00:24:10,879 Speaker 1: So you have the passive trade, the passive investors, and 332 00:24:10,920 --> 00:24:14,560 Speaker 1: then you have a lot of intradate trading, and that's 333 00:24:14,600 --> 00:24:18,800 Speaker 1: based on algos that are looking for short term trends 334 00:24:18,920 --> 00:24:23,840 Speaker 1: to capitalize. Some of them are AI based, so they 335 00:24:23,880 --> 00:24:27,400 Speaker 1: may be looking for particular words and then they will 336 00:24:27,520 --> 00:24:32,680 Speaker 1: extrapolate from that. For instance, it was interesting to notice 337 00:24:32,840 --> 00:24:39,040 Speaker 1: in the last FAT meeting, Jare Powell used the word 338 00:24:39,080 --> 00:24:44,640 Speaker 1: disinflation a few times. And disinflation, yes, a deflation, just 339 00:24:44,680 --> 00:24:48,040 Speaker 1: a slower rate of inflation. Yeah, So that means that 340 00:24:48,119 --> 00:24:52,639 Speaker 1: the inflation is coming down and the markets will start 341 00:24:52,760 --> 00:24:56,160 Speaker 1: rallying as soon as he would pronounce that, not because 342 00:24:56,240 --> 00:24:59,960 Speaker 1: he was suggesting an inflation by and large is coming down, 343 00:25:00,119 --> 00:25:03,760 Speaker 1: but he did say that in certain segments of the 344 00:25:03,840 --> 00:25:09,200 Speaker 1: CPI we were observing disinflation, such as in the goods markets, 345 00:25:09,280 --> 00:25:13,640 Speaker 1: and that could have been a case of you know, 346 00:25:15,160 --> 00:25:21,679 Speaker 1: AI based the algorithms that were utilizing words to really 347 00:25:22,080 --> 00:25:26,120 Speaker 1: take advantage of developments in the markets, and the following 348 00:25:26,200 --> 00:25:29,920 Speaker 1: day the market will reverse the rally once people will 349 00:25:30,040 --> 00:25:34,800 Speaker 1: digest what he actually said. So perhaps some of these 350 00:25:34,800 --> 00:25:39,200 Speaker 1: algorithms are making markets less efficient then because they're keen 351 00:25:39,320 --> 00:25:41,879 Speaker 1: on a word, but not necessarily the full meaning of 352 00:25:41,880 --> 00:25:46,679 Speaker 1: the speech is that what we're thinking. They certainly create 353 00:25:46,800 --> 00:25:51,360 Speaker 1: more intra day volatility. It's hard to say whether they 354 00:25:50,800 --> 00:25:54,840 Speaker 1: maybe in some cases they make the more efficient, maybe 355 00:25:54,840 --> 00:25:58,159 Speaker 1: in some cases less efficient, but I think what is 356 00:25:58,480 --> 00:26:02,359 Speaker 1: likely the case is that they create more intra day volatility. 357 00:26:02,760 --> 00:26:05,880 Speaker 1: So let's bring this back to how does this attract 358 00:26:05,960 --> 00:26:09,240 Speaker 1: you to Goldman Sachs. You know, back in the eighties 359 00:26:09,240 --> 00:26:13,200 Speaker 1: and nineties, it seemed like these young hotshots would start 360 00:26:13,200 --> 00:26:18,280 Speaker 1: at Goldman, they put together a trading record, Goldman would 361 00:26:18,359 --> 00:26:22,200 Speaker 1: basically seen them become their prime broker and send them 362 00:26:22,200 --> 00:26:25,080 Speaker 1: out to be hedge funds. Now it almost sounds as 363 00:26:25,119 --> 00:26:27,760 Speaker 1: if the opposite is happening. Hey had a big firm. 364 00:26:27,760 --> 00:26:31,399 Speaker 1: With Goldman, we have so many different tools that you 365 00:26:31,440 --> 00:26:34,639 Speaker 1: can use that you don't get at a small hedge fund. 366 00:26:35,040 --> 00:26:37,720 Speaker 1: You're better off working at the big firm. Did that 367 00:26:37,800 --> 00:26:40,359 Speaker 1: play into your thought process? Tell us a little bit 368 00:26:40,400 --> 00:26:43,679 Speaker 1: about that. I think the future of the industry is 369 00:26:43,720 --> 00:26:48,160 Speaker 1: really in the solutions space. Solutions space, Yes, that's really 370 00:26:48,240 --> 00:26:53,560 Speaker 1: what institutional investors need and what let's define that a 371 00:26:53,560 --> 00:26:56,919 Speaker 1: little bit. In other words, they're not just looking for alpha. 372 00:26:57,200 --> 00:26:59,640 Speaker 1: We have a problem and we're looking for a solution 373 00:26:59,720 --> 00:27:03,840 Speaker 1: to that issue. Well, yes, we're looking for particular solutions, 374 00:27:03,880 --> 00:27:09,320 Speaker 1: whether that's a liability, whether it's a completion of existing portfolio, 375 00:27:09,520 --> 00:27:13,640 Speaker 1: whether it's a particular return target they have, whether there 376 00:27:13,760 --> 00:27:18,760 Speaker 1: is a particular liquidity profile that they need to achieve. 377 00:27:19,880 --> 00:27:24,760 Speaker 1: There are all kinds of needs that institutional investors have 378 00:27:25,800 --> 00:27:30,040 Speaker 1: that they cannot satisfy by just investing in the hedge 379 00:27:30,040 --> 00:27:34,960 Speaker 1: fund industry because the assets they manage are many times 380 00:27:35,040 --> 00:27:38,760 Speaker 1: larger than what the hedge fund industry can absorb. At 381 00:27:38,800 --> 00:27:43,359 Speaker 1: the same time, just being passive is not really the 382 00:27:43,480 --> 00:27:47,119 Speaker 1: way to go, and so what I think is happening 383 00:27:47,440 --> 00:27:50,800 Speaker 1: is the two areas are merging somewhere in the middle 384 00:27:51,320 --> 00:27:57,480 Speaker 1: where you're really what the demand is for creating holistic 385 00:27:57,600 --> 00:28:02,639 Speaker 1: portfolios that incorporate as classes from the whole spectrum of 386 00:28:02,880 --> 00:28:07,240 Speaker 1: assets out there, whether it's in public markets or private markets. 387 00:28:09,080 --> 00:28:16,120 Speaker 1: Focus on portfolio construction with good the risk management framework 388 00:28:16,240 --> 00:28:21,560 Speaker 1: and try to provide the right the profile of risk 389 00:28:21,600 --> 00:28:26,679 Speaker 1: adjusted returns for the particular needs of the investor, incorporating 390 00:28:26,880 --> 00:28:32,399 Speaker 1: alpha in there, but not just focusing on the alpha component. 391 00:28:32,560 --> 00:28:36,800 Speaker 1: And I think this is interesting in many respects. You're 392 00:28:36,960 --> 00:28:41,760 Speaker 1: really fulfilling and big need of this institutional investors. You're 393 00:28:41,760 --> 00:28:46,720 Speaker 1: bringing together skills from the whole spectrum of the industry, 394 00:28:47,160 --> 00:28:53,680 Speaker 1: and you get to create the bespoke customized solutions. So 395 00:28:54,760 --> 00:28:58,480 Speaker 1: for someone like me who started my career in academia 396 00:28:58,600 --> 00:29:06,080 Speaker 1: and spend my research years thinking about porfolic construction, asset 397 00:29:06,120 --> 00:29:11,440 Speaker 1: the location macro as surprising, and then I went into 398 00:29:11,640 --> 00:29:15,120 Speaker 1: the headge funding industry, this is an area that really 399 00:29:16,960 --> 00:29:20,600 Speaker 1: straddles the whole spectrum of things that I have done, 400 00:29:20,800 --> 00:29:24,200 Speaker 1: and I think it's really where the future is. So 401 00:29:24,480 --> 00:29:27,960 Speaker 1: when you talk about clients, I'm assuming the bulk of 402 00:29:27,960 --> 00:29:32,640 Speaker 1: your clients are institutional foundations and Dawman's family offices, things 403 00:29:32,640 --> 00:29:37,160 Speaker 1: along those lines, and sovereigns as well, central banks. Oh really, 404 00:29:37,240 --> 00:29:40,400 Speaker 1: so that runs the gamut of the largest of a 405 00:29:40,520 --> 00:29:43,120 Speaker 1: large sort of clients. I'm going to assume that each 406 00:29:43,160 --> 00:29:47,760 Speaker 1: of those clients have a very different profile and are 407 00:29:47,840 --> 00:29:51,280 Speaker 1: looking for very different sorts of solutions. That's true. So 408 00:29:51,560 --> 00:29:54,600 Speaker 1: we were talking about when you joined Goldman, you picked 409 00:29:55,520 --> 00:29:59,040 Speaker 1: quite a time to come into Goldman, just about the 410 00:29:59,080 --> 00:30:01,840 Speaker 1: top of the market. Tell us a little bit about 411 00:30:01,920 --> 00:30:05,120 Speaker 1: what that transition was like when you started a government. 412 00:30:06,960 --> 00:30:10,480 Speaker 1: It's certainly a time when we need to rethink the 413 00:30:10,560 --> 00:30:15,480 Speaker 1: way we approach investing. That's because now we are dealing 414 00:30:15,520 --> 00:30:18,920 Speaker 1: with much higher volatility than we did in the past. 415 00:30:19,920 --> 00:30:25,520 Speaker 1: We have, instead of ample liquidity in the markets and 416 00:30:26,920 --> 00:30:32,920 Speaker 1: accommodative monetary policy, we have a reversal of the monetary 417 00:30:33,000 --> 00:30:38,960 Speaker 1: policy and actually withdrawal of accommodation. At the same time, 418 00:30:39,480 --> 00:30:44,200 Speaker 1: we are going through uh tectonic changes in the world 419 00:30:44,600 --> 00:30:52,880 Speaker 1: economic order. We're going through a deglobalization process where we 420 00:30:52,960 --> 00:30:57,400 Speaker 1: see that actually on shore in becoming more and more 421 00:30:57,520 --> 00:31:04,120 Speaker 1: a topic of discussion. There is fragmentation in the goods markets. 422 00:31:04,560 --> 00:31:10,000 Speaker 1: There is this distabilization that we are observing in the 423 00:31:10,080 --> 00:31:17,760 Speaker 1: geopolitical front that can significantly change also trade patterns, but 424 00:31:17,920 --> 00:31:24,520 Speaker 1: it also affects alliances at the political level. We have 425 00:31:25,160 --> 00:31:30,560 Speaker 1: changeing demographics, we have the decurbanization process that it's also 426 00:31:30,880 --> 00:31:41,800 Speaker 1: affecting investment production processes across the board. And we also 427 00:31:41,920 --> 00:31:46,400 Speaker 1: have the digitalization process that has been going on for 428 00:31:46,480 --> 00:31:50,560 Speaker 1: a long time and it got accelerated with a pandemic. 429 00:31:50,920 --> 00:31:55,440 Speaker 1: So there is a whole host of factors that affect 430 00:31:55,760 --> 00:31:59,840 Speaker 1: the background of the environment in which we operate and 431 00:32:00,120 --> 00:32:04,240 Speaker 1: how growth and inflation is going to evolve over time. 432 00:32:05,240 --> 00:32:07,960 Speaker 1: And at the same time, we have also a number 433 00:32:07,960 --> 00:32:13,480 Speaker 1: of short term drivers to the markets to take into account. 434 00:32:13,600 --> 00:32:15,680 Speaker 1: Before we get to the short term, let's stick with 435 00:32:15,720 --> 00:32:22,080 Speaker 1: these big long term macro deglobalization and geopolitical unrest and 436 00:32:22,160 --> 00:32:24,840 Speaker 1: a new rate regime and on and on. How do 437 00:32:24,920 --> 00:32:29,600 Speaker 1: you work these big factors into your process? Do you 438 00:32:29,920 --> 00:32:33,440 Speaker 1: create a model where each of these factors have a 439 00:32:33,520 --> 00:32:36,520 Speaker 1: specific weight when you're looking at the world from a 440 00:32:36,560 --> 00:32:41,000 Speaker 1: top down perspective, How does that find its way to 441 00:32:41,120 --> 00:32:47,200 Speaker 1: be expressed in an investment posture. We have a dual approach, 442 00:32:47,360 --> 00:32:50,719 Speaker 1: so we certainly have our research process that it's based 443 00:32:50,760 --> 00:32:54,400 Speaker 1: on models that we have created and we keep evolving. 444 00:32:54,760 --> 00:33:00,520 Speaker 1: But we also have a qualitative approach in investing that 445 00:33:00,880 --> 00:33:05,720 Speaker 1: comes through the experience of our analysts and researchers on 446 00:33:05,880 --> 00:33:10,360 Speaker 1: particular asset classes, but also in terms of our ability 447 00:33:10,640 --> 00:33:14,600 Speaker 1: to think through the macro environment and the implications that 448 00:33:15,320 --> 00:33:20,200 Speaker 1: they may have on the investment environment and the various 449 00:33:20,240 --> 00:33:23,360 Speaker 1: asset classes. So one of the things that I do 450 00:33:23,600 --> 00:33:27,040 Speaker 1: is to really try to think through all these developments 451 00:33:27,080 --> 00:33:33,560 Speaker 1: that are happening and the effects that may have on 452 00:33:33,600 --> 00:33:37,960 Speaker 1: the markets and on our investments. And then you mentioned 453 00:33:38,040 --> 00:33:43,120 Speaker 1: there are shorter term inputs that dry volatility and obviously 454 00:33:43,160 --> 00:33:46,920 Speaker 1: affect price. How do you incorporate that into your process? 455 00:33:47,360 --> 00:33:51,400 Speaker 1: Those are easier to incorporate into the process because there 456 00:33:51,400 --> 00:33:55,760 Speaker 1: are things that you can observe at higher frequencies and 457 00:33:55,840 --> 00:34:01,120 Speaker 1: you can incorporate into the models through quantity native approaches. 458 00:34:01,280 --> 00:34:06,440 Speaker 1: The hardest part is to incorporate the bigger picture, and 459 00:34:06,560 --> 00:34:12,040 Speaker 1: that's really where the qualitative overlay comes into play. Huh, 460 00:34:12,320 --> 00:34:17,759 Speaker 1: very very intriguing. So you're looking at the world's late 461 00:34:17,800 --> 00:34:21,319 Speaker 1: twenty twenty one markets are just about at their all 462 00:34:21,440 --> 00:34:25,279 Speaker 1: time high, and yet it's pretty clear inflation is ticked up. 463 00:34:25,640 --> 00:34:30,040 Speaker 1: The Fed hasn't begun raising rates, but they're talking about it. 464 00:34:30,560 --> 00:34:34,000 Speaker 1: At what point do you start to say the twenty 465 00:34:34,239 --> 00:34:39,719 Speaker 1: twenty two and forward era is look very different than 466 00:34:39,760 --> 00:34:44,680 Speaker 1: the decade from twenty twenty one back. Where do you say, 467 00:34:45,200 --> 00:34:48,879 Speaker 1: all right, this is the line in the sands and 468 00:34:48,920 --> 00:34:51,759 Speaker 1: we have to very much adapt to what's coming well. 469 00:34:51,760 --> 00:34:55,879 Speaker 1: I joined the Goldman in July of twenty twenty one, 470 00:34:56,360 --> 00:34:59,560 Speaker 1: and it was a pretty good year in the equity markets, yes, 471 00:35:00,800 --> 00:35:04,480 Speaker 1: But by the fall of twenty twenty one, and particularly 472 00:35:04,520 --> 00:35:08,360 Speaker 1: in November, I was convinced that we needed to start 473 00:35:08,400 --> 00:35:14,120 Speaker 1: cutting risk in our portfolios because we had a period 474 00:35:14,200 --> 00:35:19,520 Speaker 1: of the pandemic where we sow a reversal of monetary 475 00:35:19,600 --> 00:35:23,440 Speaker 1: policy back to zero rates and increased KWEE at the 476 00:35:23,520 --> 00:35:28,560 Speaker 1: same time as we had massive fiscal accommodation, and that 477 00:35:28,800 --> 00:35:33,680 Speaker 1: had to be inflationary, and so I was very concerned 478 00:35:33,719 --> 00:35:39,279 Speaker 1: about this effects and how inflation will play out and 479 00:35:39,480 --> 00:35:43,480 Speaker 1: how growth will react. Only a handful of people were 480 00:35:43,520 --> 00:35:48,160 Speaker 1: saying that in mid to late twenty twenty one. Jeremy 481 00:35:48,200 --> 00:35:51,040 Speaker 1: Siegal of Wharton was warning about it, mostly on the 482 00:35:51,040 --> 00:35:54,759 Speaker 1: fiscal side, but and some of the people who've been 483 00:35:54,760 --> 00:35:58,719 Speaker 1: complaining about inflation for a decade, warned about it, but 484 00:35:58,880 --> 00:36:02,880 Speaker 1: they I think they were generally ignored. When you bring 485 00:36:03,000 --> 00:36:08,000 Speaker 1: up this regime change to your investment committee, that your 486 00:36:08,120 --> 00:36:12,480 Speaker 1: cocio of what sort of pushback do you get we've 487 00:36:12,480 --> 00:36:16,759 Speaker 1: had no inflation for decades or are people very much 488 00:36:16,800 --> 00:36:19,759 Speaker 1: looking at the data and saying, well, rates haven't gone 489 00:36:19,800 --> 00:36:23,040 Speaker 1: up yet, but they have to. How is that internal discussion, 490 00:36:23,480 --> 00:36:26,520 Speaker 1: like what are the key points that everybody focuses on 491 00:36:26,920 --> 00:36:29,439 Speaker 1: when the market is still going higher week after week. 492 00:36:30,280 --> 00:36:34,800 Speaker 1: But we had a reagorous discussion on the topic. Not 493 00:36:35,040 --> 00:36:39,040 Speaker 1: everybody was on the same page, but we have a 494 00:36:39,080 --> 00:36:43,160 Speaker 1: collaborative approach. So it was also part of my task 495 00:36:43,280 --> 00:36:48,520 Speaker 1: or to try to convince people that, you know, we 496 00:36:49,000 --> 00:36:55,000 Speaker 1: had to moderate risk, and so eventually we did do that. 497 00:36:56,320 --> 00:36:59,839 Speaker 1: But it's always good to have a plurality of use 498 00:37:00,080 --> 00:37:03,880 Speaker 1: and debate them because that's how we all become better 499 00:37:04,000 --> 00:37:09,680 Speaker 1: at what we do. And your title is multi asset Solutions. 500 00:37:10,400 --> 00:37:12,560 Speaker 1: What sort of assets are we looking at or is 501 00:37:12,560 --> 00:37:16,320 Speaker 1: it completely unconstrained and you could look at anything, or 502 00:37:16,480 --> 00:37:19,560 Speaker 1: are there certain things you're really focused on. We can 503 00:37:19,600 --> 00:37:24,120 Speaker 1: invest across solassa classes, both in private and public markets, 504 00:37:24,200 --> 00:37:29,120 Speaker 1: It depends very much on the mandates that we have 505 00:37:29,320 --> 00:37:34,719 Speaker 1: and individual trained individual investor. We have different channels that 506 00:37:35,080 --> 00:37:39,959 Speaker 1: we cluster the mandates, but effectively we can provide any 507 00:37:40,040 --> 00:37:44,680 Speaker 1: solution that an investor may need. Huh really, And we 508 00:37:44,760 --> 00:37:51,120 Speaker 1: can tap on all the capabilities of golment sacs across 509 00:37:51,239 --> 00:37:57,799 Speaker 1: the firm and really service our investors using the one 510 00:37:57,840 --> 00:38:01,960 Speaker 1: GS approach. So let's talk about one GS approach. I 511 00:38:02,080 --> 00:38:05,200 Speaker 1: kind of found I'm a fan of the Goman soft 512 00:38:05,320 --> 00:38:08,640 Speaker 1: landing basket. I just love the name of that. Tell 513 00:38:08,719 --> 00:38:11,520 Speaker 1: us a little bit about that. It's been doing really 514 00:38:11,640 --> 00:38:16,040 Speaker 1: well because it looks like the economy is holding up 515 00:38:16,080 --> 00:38:19,200 Speaker 1: better than a lot of people expected last year. Tell 516 00:38:19,280 --> 00:38:22,479 Speaker 1: us a little bit about the soft landing basket. Yeah, 517 00:38:22,600 --> 00:38:25,640 Speaker 1: at the Multi Asset Solutions, we are not in the 518 00:38:25,680 --> 00:38:29,839 Speaker 1: camp of soft landing. That's where we disagree with our 519 00:38:29,960 --> 00:38:32,320 Speaker 1: friend in the recession camp. Right, Yes, we are in 520 00:38:32,360 --> 00:38:36,520 Speaker 1: the recession camp. That's where we disagree with our colleagues 521 00:38:36,560 --> 00:38:43,360 Speaker 1: at the GIR. But that's a healthy disagreement. We think 522 00:38:43,480 --> 00:38:48,120 Speaker 1: that given where inflation is and where the forces of 523 00:38:48,160 --> 00:38:52,719 Speaker 1: inflation are, and given how stubborn inflation seems to be 524 00:38:52,920 --> 00:38:58,520 Speaker 1: on the services sector A housing. It's going to be 525 00:38:58,600 --> 00:39:05,600 Speaker 1: almost impossible for this to to be reduced without loosening 526 00:39:05,680 --> 00:39:10,279 Speaker 1: up the labor market significantly. And if you loosen up 527 00:39:10,360 --> 00:39:17,640 Speaker 1: the labor market significantly, you're likely to see negative GDP 528 00:39:17,840 --> 00:39:21,399 Speaker 1: growth at some point. We don't expect it to be 529 00:39:21,840 --> 00:39:25,600 Speaker 1: a deep recession because we are starting from a good 530 00:39:25,640 --> 00:39:31,440 Speaker 1: initial conditions. So balance sheets are not overexpanded, consumers are 531 00:39:31,480 --> 00:39:36,320 Speaker 1: not over leveraged, and so on. But we do think 532 00:39:36,400 --> 00:39:40,840 Speaker 1: that we're likely to see a recession eventually. So let's 533 00:39:41,080 --> 00:39:43,520 Speaker 1: take that apart a little bit. So the soft landing basket. 534 00:39:44,160 --> 00:39:49,279 Speaker 1: Those folks are saying, Look, consumer spending is robust. Unemployment 535 00:39:49,440 --> 00:39:52,799 Speaker 1: is that, you know, near record loves the economy looks 536 00:39:52,800 --> 00:39:57,520 Speaker 1: pretty good. But I suspect your perspective is something along 537 00:39:57,520 --> 00:40:00,800 Speaker 1: the lines of but inflation is sticky. The Fed keeps 538 00:40:00,800 --> 00:40:03,439 Speaker 1: telling you they're not done raising rates, and at five 539 00:40:03,480 --> 00:40:06,120 Speaker 1: and a half or six percent, that's going to cause 540 00:40:06,960 --> 00:40:11,640 Speaker 1: an increase in unemployment and a short, shallow recession. Is 541 00:40:11,640 --> 00:40:14,480 Speaker 1: that what you're looking for in twenty three or twenty four. 542 00:40:15,280 --> 00:40:18,000 Speaker 1: I don't know if it's going to be short. I 543 00:40:18,040 --> 00:40:20,719 Speaker 1: hope it's going to be shallow. For the reasons we 544 00:40:20,920 --> 00:40:24,600 Speaker 1: discuss that we are not getting into this environment with 545 00:40:25,480 --> 00:40:32,000 Speaker 1: high leverage and high you know, low unemployment and household 546 00:40:32,000 --> 00:40:34,480 Speaker 1: wealth seems to be doing pretty well back half of 547 00:40:34,520 --> 00:40:38,880 Speaker 1: twenty three or twenty four. It could be the second 548 00:40:38,880 --> 00:40:42,080 Speaker 1: half of twenty three. It could be we could still 549 00:40:42,160 --> 00:40:46,719 Speaker 1: have a scenario where the GDP for twenty three is 550 00:40:46,760 --> 00:40:51,640 Speaker 1: not negative, but we have started undering a recession. We 551 00:40:51,760 --> 00:40:56,160 Speaker 1: don't expect the FED to cut rates this year. We 552 00:40:56,320 --> 00:40:59,560 Speaker 1: think that right now the market is pricing a terminal 553 00:40:59,680 --> 00:41:03,640 Speaker 1: rate of around point five point three percent, right, which 554 00:41:03,719 --> 00:41:07,320 Speaker 1: is above where we are today. Yes, we may actually 555 00:41:07,360 --> 00:41:10,640 Speaker 1: go higher than that. I had said a few weeks 556 00:41:10,640 --> 00:41:14,080 Speaker 1: ago that we may go up to five point five 557 00:41:14,160 --> 00:41:20,880 Speaker 1: percent before we are done with the rate hikes. And again, 558 00:41:21,239 --> 00:41:23,759 Speaker 1: I think what the FACT will do is so it 559 00:41:23,840 --> 00:41:30,200 Speaker 1: will continue hiking and then pause, and depending on how 560 00:41:30,239 --> 00:41:34,479 Speaker 1: inflation evolves, they may have to do more. I think 561 00:41:34,480 --> 00:41:38,640 Speaker 1: that inflation will come down to around three to four percent, 562 00:41:38,840 --> 00:41:41,520 Speaker 1: and then it's going to get very sticky, and that 563 00:41:41,800 --> 00:41:44,120 Speaker 1: saying is done. We're done with that, right. I think 564 00:41:44,160 --> 00:41:47,080 Speaker 1: it's really hard for them to get back to two percent, 565 00:41:47,160 --> 00:41:50,120 Speaker 1: and I'm not sure that two percent is the right 566 00:41:50,239 --> 00:41:54,680 Speaker 1: target level anymore because of all the other factors we discuss, 567 00:41:54,840 --> 00:42:02,279 Speaker 1: the deglobalization, all this segmentation in the markets that we 568 00:42:02,320 --> 00:42:09,440 Speaker 1: are observing, the geopolitical developments decurbanization, etc. I think all 569 00:42:09,520 --> 00:42:17,799 Speaker 1: this developments are inflationary. So given the past decade of 570 00:42:18,160 --> 00:42:22,920 Speaker 1: zero interest rate policy and quantitative easing versus the current 571 00:42:22,960 --> 00:42:27,240 Speaker 1: policy for you as a top down macro strategist, which 572 00:42:27,320 --> 00:42:31,240 Speaker 1: is the more challenging period because I recall a lot 573 00:42:31,280 --> 00:42:36,880 Speaker 1: of macro strategists couldn't wrap their head around how positive 574 00:42:37,719 --> 00:42:41,319 Speaker 1: Zerop and Quee were for equity markets, and they seem 575 00:42:41,400 --> 00:42:43,960 Speaker 1: to be fighting the tape quite a bit. Which is 576 00:42:44,000 --> 00:42:48,359 Speaker 1: the easier environment to navigate through. I don't know if 577 00:42:48,400 --> 00:42:52,040 Speaker 1: it is a matter of easy versus heart environment. I 578 00:42:52,080 --> 00:42:55,440 Speaker 1: would say that the investment approach has to be different. 579 00:42:55,880 --> 00:42:59,279 Speaker 1: So which one do you find? You could go to 580 00:42:59,320 --> 00:43:02,640 Speaker 1: the playbook and I have a solution for this, as 581 00:43:02,680 --> 00:43:06,359 Speaker 1: opposed to we've never seen this before, and let's see 582 00:43:06,360 --> 00:43:08,719 Speaker 1: if we can figure out what we can do. One 583 00:43:08,719 --> 00:43:13,080 Speaker 1: of the things we've been doing common sexes and in 584 00:43:13,120 --> 00:43:18,560 Speaker 1: my team is really to rethink our playbook. So what 585 00:43:18,600 --> 00:43:24,360 Speaker 1: we are seeing now also means lower correlations across different markets, 586 00:43:24,480 --> 00:43:28,160 Speaker 1: so there may be more opportunities for relative value trads 587 00:43:28,280 --> 00:43:32,719 Speaker 1: or more opportunities for diversification. You need the lower leverage 588 00:43:32,760 --> 00:43:36,640 Speaker 1: than you used to need before. You have to lean 589 00:43:36,760 --> 00:43:42,680 Speaker 1: on diversifying strategies and uncorrelated strategies. We think this is 590 00:43:42,719 --> 00:43:45,960 Speaker 1: a great environment for alpha, it's a great environment for 591 00:43:46,080 --> 00:43:50,640 Speaker 1: active management, but you cannot run the size of assets 592 00:43:50,640 --> 00:43:55,400 Speaker 1: that we are running with just active management, and so 593 00:43:55,400 --> 00:44:00,120 Speaker 1: so you marry beta and alpha together. Yes, and the 594 00:44:01,880 --> 00:44:06,960 Speaker 1: importance of risk management and downside, the risk control becomes 595 00:44:07,000 --> 00:44:10,520 Speaker 1: even more important in this environment. You have to be 596 00:44:10,719 --> 00:44:17,000 Speaker 1: very conscious of the potential for external shocks and constantly 597 00:44:17,040 --> 00:44:22,680 Speaker 1: evaluate what the probability of the shocks to materialize is 598 00:44:22,760 --> 00:44:26,960 Speaker 1: and how they will affect your portfolio. So it's a 599 00:44:26,960 --> 00:44:30,280 Speaker 1: little bit of a different environment than the previous one 600 00:44:30,440 --> 00:44:36,200 Speaker 1: where we were in a low volatility environment, correlations were 601 00:44:36,480 --> 00:44:42,280 Speaker 1: pretty stable, and really the way to play that market 602 00:44:42,480 --> 00:44:47,680 Speaker 1: was very different, really quite fascinating. Let's talk about how 603 00:44:47,719 --> 00:44:52,840 Speaker 1: to apply your discipline within the current environment. And I 604 00:44:52,920 --> 00:44:56,440 Speaker 1: want to start by giving you a quote from you, 605 00:44:56,640 --> 00:45:01,239 Speaker 1: which is, we expect the US economy to enter recession 606 00:45:01,280 --> 00:45:05,400 Speaker 1: in twenty twenty three, as the Federal Reserve pushes borrowing 607 00:45:05,440 --> 00:45:10,440 Speaker 1: costs of five percent or higher. So clearly a lot 608 00:45:10,480 --> 00:45:14,040 Speaker 1: of Wall Street things we're gonna duck now a recession 609 00:45:14,080 --> 00:45:16,399 Speaker 1: that will end up with a soft landing. You were 610 00:45:16,800 --> 00:45:20,960 Speaker 1: firmly in the recession camp, in the hard landing camp. Yes, 611 00:45:21,360 --> 00:45:23,640 Speaker 1: and we talked earlier. You said we can see a 612 00:45:23,760 --> 00:45:27,919 Speaker 1: terminal rate of about five and a half percent. Now, 613 00:45:28,040 --> 00:45:30,719 Speaker 1: is that historically a very high number? You go back 614 00:45:30,719 --> 00:45:34,320 Speaker 1: to the forget the seventies, even the eighties and nineties 615 00:45:34,760 --> 00:45:38,000 Speaker 1: mortgages were seven percent. Five and a half percent doesn't 616 00:45:38,000 --> 00:45:41,920 Speaker 1: sound that bad, No, it doesn't. And actually, you know 617 00:45:41,960 --> 00:45:44,440 Speaker 1: a lot of people were talking about being in a 618 00:45:44,560 --> 00:45:50,520 Speaker 1: restrictive territory already in terms of the monetary policy. Most 619 00:45:50,600 --> 00:45:54,719 Speaker 1: likely we're not at the restrictive territory yet because so 620 00:45:55,680 --> 00:45:59,520 Speaker 1: see how strong the labor market is. Labor market strong, 621 00:45:59,560 --> 00:46:03,040 Speaker 1: Consumer spending is strong. The one area we really seem 622 00:46:03,120 --> 00:46:06,760 Speaker 1: to the rubber meets the road in terms of rates 623 00:46:06,800 --> 00:46:09,879 Speaker 1: having a negative impact. Is housing? Housing really is doing 624 00:46:09,920 --> 00:46:13,439 Speaker 1: as poorly as it's done in a long time. How 625 00:46:13,480 --> 00:46:19,839 Speaker 1: does that translate into future economic contractions? Well, housing is 626 00:46:20,680 --> 00:46:29,400 Speaker 1: having some cooling effects manifesting recently. But at the same time, 627 00:46:30,120 --> 00:46:34,319 Speaker 1: we haven't really seen the housing rawl over in the 628 00:46:34,400 --> 00:46:37,879 Speaker 1: way that it did during the financial crisis. And that's 629 00:46:37,960 --> 00:46:43,759 Speaker 1: because most US households have thirty year mortgages. They had 630 00:46:43,800 --> 00:46:49,800 Speaker 1: the opportunity to refinance while the rates were at zero, 631 00:46:50,280 --> 00:46:54,360 Speaker 1: and so they don't necessarily need to tap the mortgage 632 00:46:54,400 --> 00:46:58,719 Speaker 1: markets right now, and others are really waiting for prices 633 00:46:58,760 --> 00:47:01,640 Speaker 1: to come down before buying. So I think the number 634 00:47:01,760 --> 00:47:04,719 Speaker 1: is seventy five percent of households with a mortgage or 635 00:47:04,719 --> 00:47:08,400 Speaker 1: paying four percent or less. Is that keeping people locked 636 00:47:08,400 --> 00:47:12,640 Speaker 1: in place? Is that part of the inventory shortfall? As 637 00:47:12,680 --> 00:47:17,040 Speaker 1: long as they have jobs that pay decently, I think that, 638 00:47:17,680 --> 00:47:20,200 Speaker 1: you know, they don't really need to sell and they 639 00:47:20,200 --> 00:47:24,040 Speaker 1: don't need to relocate. So but for real estate, the 640 00:47:24,040 --> 00:47:26,520 Speaker 1: rest of the economy seems to be doing pretty well 641 00:47:27,040 --> 00:47:29,919 Speaker 1: this year. The market started out really hot. What we 642 00:47:29,840 --> 00:47:32,879 Speaker 1: were up ten percent in January. What do you make 643 00:47:33,080 --> 00:47:36,279 Speaker 1: of that? Is that just a reaction to how oversold 644 00:47:36,320 --> 00:47:40,440 Speaker 1: we got in twenty twenty two, or how do you contextualize? 645 00:47:40,880 --> 00:47:42,799 Speaker 1: You know, that's a ten percent is a good year 646 00:47:42,920 --> 00:47:45,719 Speaker 1: forget a good month? Yes, one of the things I 647 00:47:45,719 --> 00:47:50,120 Speaker 1: had said, and another interview was that we had a 648 00:47:50,239 --> 00:47:53,840 Speaker 1: year in January and now we should focus on alpha. 649 00:47:54,560 --> 00:48:00,359 Speaker 1: But yeah, the January performance was largely driven by thin 650 00:48:00,520 --> 00:48:06,839 Speaker 1: trading positioning, shark covering, and also a number of very 651 00:48:06,880 --> 00:48:10,879 Speaker 1: strong economic news. But I think in a way, the 652 00:48:10,920 --> 00:48:19,760 Speaker 1: market is misinterpreting the fat here because strong economic numbers, 653 00:48:19,920 --> 00:48:26,000 Speaker 1: strong labor market data do not imply to me that 654 00:48:26,400 --> 00:48:29,360 Speaker 1: we're going to have a soft landing. What it implies 655 00:48:30,120 --> 00:48:33,680 Speaker 1: is that the FAT will have to go higher, and 656 00:48:33,760 --> 00:48:39,560 Speaker 1: therefore we're going to see, you know, a higher probability 657 00:48:39,560 --> 00:48:44,440 Speaker 1: of recession going forward because the segment of the CPI 658 00:48:44,640 --> 00:48:50,560 Speaker 1: where inflation is concentrated is in core services ex. Housing, 659 00:48:50,840 --> 00:48:55,960 Speaker 1: and that's directly related to disposable income and to the 660 00:48:56,040 --> 00:49:00,000 Speaker 1: labor markets. So what do you make of the market 661 00:49:00,480 --> 00:49:06,000 Speaker 1: not taking Jerome Powell at his word. They've been pretty clear, Hey, 662 00:49:06,320 --> 00:49:08,480 Speaker 1: we're going higher and we're going to keep it higher 663 00:49:08,480 --> 00:49:11,719 Speaker 1: for longer. And anybody who thinks we're done raising rates 664 00:49:11,760 --> 00:49:15,319 Speaker 1: isn't listening to what we're saying. And the market says, yeah, yeah, 665 00:49:15,360 --> 00:49:18,719 Speaker 1: you'll cut later this year. How are we supposed to 666 00:49:18,760 --> 00:49:23,760 Speaker 1: interpret the both the equity and the bond market really 667 00:49:23,920 --> 00:49:26,680 Speaker 1: not listening to what FED chair Jerome pal is saying 668 00:49:27,560 --> 00:49:31,399 Speaker 1: the equity markets have been a conditioned to always buy 669 00:49:31,400 --> 00:49:36,759 Speaker 1: the dip and to really not fight the fat in 670 00:49:36,800 --> 00:49:39,880 Speaker 1: the sense of not fighting the fat when the FAT 671 00:49:40,000 --> 00:49:47,040 Speaker 1: kept doing quee and accommodating, increasing the monetary accommodation. But 672 00:49:47,200 --> 00:49:51,239 Speaker 1: now they're doing the opposite. So right now, not fighting 673 00:49:51,280 --> 00:49:57,279 Speaker 1: the fat means actually selling, doesn't mean buying, because the 674 00:49:57,320 --> 00:50:02,200 Speaker 1: FAT wants to tighten financial conditions, the FED wants to 675 00:50:02,320 --> 00:50:06,160 Speaker 1: loosen up the labor market. So in fact, what the 676 00:50:06,239 --> 00:50:10,440 Speaker 1: market is doing is fighting the Fed. The bond market 677 00:50:11,040 --> 00:50:13,920 Speaker 1: is doing better than the equity market, so I think 678 00:50:14,000 --> 00:50:17,120 Speaker 1: what the two markets are pricing, it's not exactly the 679 00:50:17,160 --> 00:50:20,319 Speaker 1: same thing. So the odds of a RAID cut in 680 00:50:20,360 --> 00:50:24,640 Speaker 1: twenty twenty three, they've gone down a lot since that 681 00:50:24,719 --> 00:50:28,480 Speaker 1: big move up in January. I'm going to assume you 682 00:50:28,560 --> 00:50:31,960 Speaker 1: are definitely not in the FED will be cutting in 683 00:50:31,960 --> 00:50:34,760 Speaker 1: twenty twenty three camp. You think they're going to continue 684 00:50:34,800 --> 00:50:40,360 Speaker 1: tightening and perhaps tightened too far. I don't see any 685 00:50:40,840 --> 00:50:45,200 Speaker 1: reason for the FAT to cut this here. We are 686 00:50:45,280 --> 00:50:49,640 Speaker 1: not seeing any loosening up of the labor markets, which 687 00:50:49,719 --> 00:50:54,959 Speaker 1: means that the monetary policy hasn't really become restrictive enough 688 00:50:55,160 --> 00:50:58,640 Speaker 1: to have an effect on the real economy in a 689 00:50:58,680 --> 00:51:05,719 Speaker 1: profound way. Yet inflation continues to be elevated, still very 690 00:51:05,760 --> 00:51:11,040 Speaker 1: far away from their target. The only case in my 691 00:51:11,200 --> 00:51:14,239 Speaker 1: mind in which the FACT may cut rates is if 692 00:51:14,280 --> 00:51:19,359 Speaker 1: we have some significant extent of shock that necessitates them 693 00:51:19,440 --> 00:51:24,360 Speaker 1: to intervene in the markets, something like what happened in 694 00:51:24,400 --> 00:51:28,560 Speaker 1: the UK with the LDI crisis, or God forbids some 695 00:51:28,840 --> 00:51:34,200 Speaker 1: geopolitical event of great significance. In other cases, I don't 696 00:51:34,200 --> 00:51:39,160 Speaker 1: expect them to cut huh. So I look at rates 697 00:51:39,320 --> 00:51:43,719 Speaker 1: alone as a very blunt tool, especially when we're looking 698 00:51:43,719 --> 00:51:45,840 Speaker 1: at the labor market, where we have a shortage of 699 00:51:45,840 --> 00:51:50,160 Speaker 1: workers now across all sorts of skill levels. Housing, there's 700 00:51:50,200 --> 00:51:53,759 Speaker 1: a giant inventory shortfall by some estimates, where two to 701 00:51:53,840 --> 00:51:57,719 Speaker 1: three million single family home short Even things like inflation 702 00:51:57,840 --> 00:52:01,839 Speaker 1: in cars and use cars, you know, semiconductors are still 703 00:52:02,000 --> 00:52:05,000 Speaker 1: way beyond the sort of yields that we're used to. 704 00:52:05,920 --> 00:52:09,719 Speaker 1: How much can the FED really fix the things that 705 00:52:09,800 --> 00:52:14,880 Speaker 1: are broken and are causing prices and wages to be 706 00:52:14,920 --> 00:52:18,400 Speaker 1: as elevated as they are. Are these things really that 707 00:52:18,600 --> 00:52:25,000 Speaker 1: susceptible to ongoing rate increases? Short of a full recession. Well, 708 00:52:25,200 --> 00:52:28,960 Speaker 1: the FED can help with certain things, they can't fix everything, 709 00:52:29,480 --> 00:52:34,480 Speaker 1: and I think the factors that you pointed out suggest 710 00:52:34,600 --> 00:52:38,000 Speaker 1: that it may be very difficult for them to go 711 00:52:38,080 --> 00:52:41,560 Speaker 1: back to two percent. Under all these conditions, they can 712 00:52:41,600 --> 00:52:45,160 Speaker 1: instantantly go down to three to four percent of inflation. 713 00:52:45,600 --> 00:52:49,239 Speaker 1: The question is whether they will be satisfied with that, 714 00:52:49,520 --> 00:52:53,120 Speaker 1: and they will declare at that point that because of 715 00:52:53,160 --> 00:52:58,400 Speaker 1: all this changing geopolitical economic conditions, the two percent is 716 00:52:58,440 --> 00:53:02,200 Speaker 1: no longer irrelevant and they will move their target, or 717 00:53:02,200 --> 00:53:06,520 Speaker 1: whether they will insist on continuing to reach two percent 718 00:53:06,600 --> 00:53:10,719 Speaker 1: and then the process overtighten and really damage the economy. 719 00:53:11,120 --> 00:53:15,879 Speaker 1: There is a question of credibility of the FAT, and 720 00:53:15,960 --> 00:53:19,200 Speaker 1: so they will have to be very careful with how 721 00:53:19,239 --> 00:53:23,480 Speaker 1: they message that in order not to damage the credibility 722 00:53:23,480 --> 00:53:26,799 Speaker 1: of the FAT in the long run. In terms of 723 00:53:26,840 --> 00:53:31,319 Speaker 1: the wages, it's interesting to see. It's also the evolution 724 00:53:31,440 --> 00:53:35,479 Speaker 1: of the share of labor as a percentage of real 725 00:53:35,600 --> 00:53:39,799 Speaker 1: GDP over time. And what you see is that the 726 00:53:39,920 --> 00:53:43,320 Speaker 1: share of labor was much higher in the nineties, and 727 00:53:43,520 --> 00:53:48,680 Speaker 1: as globalization started expanding, the share of labor went down, 728 00:53:48,800 --> 00:53:52,839 Speaker 1: and obviously the share that would go to capital increased, 729 00:53:53,880 --> 00:53:58,319 Speaker 1: But since the pandemic, this process has reversed and the 730 00:53:58,400 --> 00:54:02,200 Speaker 1: share of labor is increased again, which means that it 731 00:54:02,239 --> 00:54:07,840 Speaker 1: compresses the share of real GDP that goes to capital. 732 00:54:08,360 --> 00:54:14,680 Speaker 1: Now that makes it less attractive for capital to invest 733 00:54:15,320 --> 00:54:20,959 Speaker 1: and obviously less profitable for them. And part of what 734 00:54:21,120 --> 00:54:26,280 Speaker 1: the changing FED policy is doing is redressing the balance 735 00:54:26,360 --> 00:54:31,280 Speaker 1: of the shares between labor and capital in real GDP. 736 00:54:31,880 --> 00:54:35,720 Speaker 1: So what we're likely to see is a decreased again 737 00:54:35,800 --> 00:54:39,360 Speaker 1: of the share of real GDP that goes to labor, 738 00:54:40,320 --> 00:54:45,319 Speaker 1: which in the short run will be negative for risk 739 00:54:45,440 --> 00:54:48,799 Speaker 1: assets spend. In the medium to long run, it will 740 00:54:48,880 --> 00:54:53,279 Speaker 1: actually increase the profitability of companies and also the incentive 741 00:54:53,360 --> 00:54:57,560 Speaker 1: to invest. So let's fast forward a year out, first 742 00:54:57,640 --> 00:55:01,759 Speaker 1: or second quarter twenty twenty four. Are CPI has come 743 00:55:01,840 --> 00:55:04,280 Speaker 1: down to let's call it three and a half percent 744 00:55:04,920 --> 00:55:07,319 Speaker 1: and the FED is at five and a quarter and 745 00:55:07,360 --> 00:55:10,640 Speaker 1: they are no longer raising rates. What does that mean 746 00:55:11,000 --> 00:55:15,600 Speaker 1: for the equity and bond markets? A year out? Can 747 00:55:15,640 --> 00:55:18,880 Speaker 1: you think in those terms like do you have a 748 00:55:18,960 --> 00:55:22,160 Speaker 1: sense of where the FED wants to navigate? Two? And 749 00:55:22,239 --> 00:55:25,680 Speaker 1: what does that mean for the outlook? Barring exogenous events? 750 00:55:25,680 --> 00:55:30,200 Speaker 1: And all sorts of unanticipated surprises. I think that as 751 00:55:30,200 --> 00:55:36,640 Speaker 1: inflation is coming down and stabilizes around the levels that 752 00:55:36,719 --> 00:55:41,680 Speaker 1: you mentioned, around three three and a half percent, the 753 00:55:41,800 --> 00:55:46,319 Speaker 1: FED will become much more attuned to its dual mandate 754 00:55:47,120 --> 00:55:52,120 Speaker 1: and start focusing on how the labor market is evolving. 755 00:55:52,600 --> 00:55:56,200 Speaker 1: And I think that's obviously one of the factors that 756 00:55:56,320 --> 00:56:00,160 Speaker 1: they're very focused on already, but at the moment, and 757 00:56:00,320 --> 00:56:04,160 Speaker 1: because the labor market is so tight, they're single handedly 758 00:56:04,239 --> 00:56:09,560 Speaker 1: focused on the inflation side of their mandate. Once inflation 759 00:56:09,680 --> 00:56:14,240 Speaker 1: starts coming down and to the extended unemployment starts rising, 760 00:56:14,640 --> 00:56:19,719 Speaker 1: they will start balancing out the two sides of their mandate. 761 00:56:20,080 --> 00:56:24,879 Speaker 1: And that's really where the policy will be determined. If 762 00:56:24,920 --> 00:56:30,520 Speaker 1: an employment starts rising rapidly, then they will give up 763 00:56:30,880 --> 00:56:34,880 Speaker 1: part of their inflation fighting in order to stabilize the 764 00:56:34,960 --> 00:56:41,920 Speaker 1: labor markets. If labor markets react more positively and we 765 00:56:42,040 --> 00:56:47,400 Speaker 1: don't see a massive increase in unemployment, they're more likely 766 00:56:47,520 --> 00:56:52,400 Speaker 1: to persist with their inflation fighting mandate. And then last 767 00:56:52,440 --> 00:56:57,239 Speaker 1: inflation question, China has ended their zero COVID policy, they're 768 00:56:57,280 --> 00:57:03,640 Speaker 1: reopening how potentially impactful as China on global GDP and 769 00:57:04,360 --> 00:57:10,000 Speaker 1: to some degree, global inflation. Suddenly, the reopening of China 770 00:57:10,080 --> 00:57:14,400 Speaker 1: has a positive effect on global GDP. It will also 771 00:57:14,560 --> 00:57:18,680 Speaker 1: potentially have a positive effect on inflation in the sense 772 00:57:18,760 --> 00:57:22,680 Speaker 1: that the demand for commodities will increase as a result 773 00:57:22,760 --> 00:57:29,560 Speaker 1: of China's reopening. The question is whether that will translate 774 00:57:29,720 --> 00:57:34,160 Speaker 1: into more inflationary pressures that will see a backup in 775 00:57:34,200 --> 00:57:39,120 Speaker 1: inflation in the goods markets, or whether demand will have 776 00:57:39,600 --> 00:57:47,760 Speaker 1: moderated enough in other places to keep prices contained there. Lastly, 777 00:57:48,040 --> 00:57:51,800 Speaker 1: as a multi asset manager, what are you looking at 778 00:57:51,840 --> 00:57:56,960 Speaker 1: in this current environment that you think today you're suddenly 779 00:57:57,120 --> 00:58:01,280 Speaker 1: much more appealing and exciting than have been last decade. 780 00:58:01,320 --> 00:58:05,560 Speaker 1: What asset classes suddenly have become or not so suddenly 781 00:58:05,760 --> 00:58:09,520 Speaker 1: have become much more interesting given the world warn't well. 782 00:58:09,600 --> 00:58:13,560 Speaker 1: Suddenly fixed income is more interesting now than it was 783 00:58:13,680 --> 00:58:19,720 Speaker 1: in the past because real yields are positive, we are 784 00:58:19,720 --> 00:58:23,480 Speaker 1: getting closer to pick rates and so locking in some 785 00:58:23,560 --> 00:58:30,240 Speaker 1: of this rates makes sense. Credit will become an interesting 786 00:58:31,200 --> 00:58:36,440 Speaker 1: area as we're going through this process. We expect default 787 00:58:36,560 --> 00:58:40,320 Speaker 1: rates to rise a bit, but not at levels that 788 00:58:40,400 --> 00:58:44,840 Speaker 1: we saw in previous crisis. But it's also interesting now 789 00:58:45,440 --> 00:58:51,040 Speaker 1: because we need less leverage to achieve our return goals 790 00:58:51,120 --> 00:58:56,680 Speaker 1: and so in a way, cash is kink again whereas 791 00:58:56,800 --> 00:59:00,720 Speaker 1: before it was not. So the way we we look 792 00:59:00,760 --> 00:59:05,280 Speaker 1: at portfolios how we invest is different, and I think 793 00:59:06,280 --> 00:59:12,200 Speaker 1: it is an environment that favors active management. So stock 794 00:59:12,240 --> 00:59:17,640 Speaker 1: picking will be a really important component, but they will 795 00:59:17,720 --> 00:59:21,600 Speaker 1: also be a lot As we are going through this 796 00:59:21,800 --> 00:59:27,400 Speaker 1: deglobalization process and restructuring of supply chains, there will be 797 00:59:27,440 --> 00:59:33,720 Speaker 1: opportunities across the board in different industries to capitalize on 798 00:59:33,840 --> 00:59:38,560 Speaker 1: this changes in the economic structure of different countries. And 799 00:59:38,720 --> 00:59:42,440 Speaker 1: some of these opportunities will manifest themselves in the public 800 00:59:42,520 --> 00:59:46,000 Speaker 1: markets and some in the private markets. So the way 801 00:59:46,080 --> 00:59:51,120 Speaker 1: we look at portfolios is holistically across private and public 802 00:59:51,240 --> 00:59:55,160 Speaker 1: markets and really focus on the opportunities that may exist. 803 00:59:55,880 --> 00:59:59,600 Speaker 1: Really interesting. So let me jump to my favorite questions 804 00:59:59,600 --> 01:00:02,440 Speaker 1: that I ask all of our guests. Tell us what 805 01:00:02,520 --> 01:00:07,120 Speaker 1: you did to stay entertained during the lockdown and afterwards? 806 01:00:07,160 --> 01:00:11,800 Speaker 1: What were you streaming? What was keeping you occupied? Well, 807 01:00:11,840 --> 01:00:15,160 Speaker 1: one of the things I used to do was go 808 01:00:15,400 --> 01:00:19,760 Speaker 1: for long runs in Central Park, so that was one 809 01:00:19,800 --> 01:00:24,080 Speaker 1: of the things that was keeping me sane during the lockdown, 810 01:00:25,200 --> 01:00:30,400 Speaker 1: and otherwise I watched all the usual shows that everybody 811 01:00:30,560 --> 01:00:36,160 Speaker 1: was watching. At that time on Netflix and Amazon and 812 01:00:36,560 --> 01:00:41,160 Speaker 1: the various other streaming platforms. Tell us about some of 813 01:00:41,200 --> 01:00:44,720 Speaker 1: your mentors who helped to shape your career. I had 814 01:00:44,760 --> 01:00:48,440 Speaker 1: the opportunity to meet a number of very interesting people 815 01:00:48,560 --> 01:00:53,479 Speaker 1: through my career. And I can't say that I had 816 01:00:53,800 --> 01:00:59,200 Speaker 1: mentors early on in my career, but suddenly was around 817 01:00:59,280 --> 01:01:04,640 Speaker 1: a very interesting and impressive people that I was able 818 01:01:04,680 --> 01:01:09,080 Speaker 1: to observe and learn from them in a way because 819 01:01:09,080 --> 01:01:14,080 Speaker 1: of my process. Because of my path starting doing my 820 01:01:14,160 --> 01:01:18,680 Speaker 1: PhD at London Business School, then coming to the US 821 01:01:18,840 --> 01:01:21,880 Speaker 1: without having studied in the US, I was a little 822 01:01:21,880 --> 01:01:24,840 Speaker 1: bit of an orphan when I came here, and so 823 01:01:24,960 --> 01:01:29,720 Speaker 1: I didn't have an obvious mentor through the process, and 824 01:01:30,000 --> 01:01:34,080 Speaker 1: perhaps that's one of the reasons why I tried to 825 01:01:34,120 --> 01:01:38,880 Speaker 1: find my path on my own. But over the years, 826 01:01:39,040 --> 01:01:43,640 Speaker 1: I actually as I became more advanced in my career, 827 01:01:44,000 --> 01:01:49,040 Speaker 1: I started meeting people who have been acting as mentors. 828 01:01:49,760 --> 01:01:54,120 Speaker 1: Suddenly at Parella Weinberg Partners, Joe Perella was someone who 829 01:01:55,800 --> 01:02:00,280 Speaker 1: spent a lot of time talking with me, and I 830 01:02:00,360 --> 01:02:03,560 Speaker 1: learned a lot from him, both about the profession and 831 01:02:04,280 --> 01:02:09,800 Speaker 1: his experience. And I'm fascinated by the interest of my 832 01:02:10,000 --> 01:02:14,960 Speaker 1: colleagues at golment Sacks to guide me through the farm, 833 01:02:15,080 --> 01:02:20,080 Speaker 1: make my transition easier, mentor me and I find this 834 01:02:20,360 --> 01:02:27,480 Speaker 1: extremely impressive. I'm very grateful that they are willing to 835 01:02:27,520 --> 01:02:30,960 Speaker 1: spend the time to do that. So I must say, 836 01:02:31,400 --> 01:02:35,160 Speaker 1: not so many mentors earlier in my career, but actually 837 01:02:35,280 --> 01:02:39,840 Speaker 1: more mentors later on. Very interesting. Let's talk about books. 838 01:02:39,880 --> 01:02:41,720 Speaker 1: What are some of your favorites and what are you 839 01:02:41,800 --> 01:02:44,920 Speaker 1: reading right now. In the old days, I was reading 840 01:02:44,960 --> 01:02:50,160 Speaker 1: a lot of literature, and so my favorite book was 841 01:02:50,760 --> 01:02:56,120 Speaker 1: prost Remembrance of Times Past, which I read both in 842 01:02:56,200 --> 01:03:02,440 Speaker 1: French and English, and also various books by Dostojski. My 843 01:03:02,520 --> 01:03:06,959 Speaker 1: life very much. But these days I read a lot 844 01:03:07,000 --> 01:03:10,040 Speaker 1: about what's going on in the markets the world, and 845 01:03:10,200 --> 01:03:13,560 Speaker 1: I'm trying to think about those things. So one of 846 01:03:13,600 --> 01:03:18,600 Speaker 1: the last books I read was unrelated to that, was 847 01:03:20,040 --> 01:03:24,880 Speaker 1: Artists Therapy, which I found very interesting. And it's one 848 01:03:24,920 --> 01:03:28,360 Speaker 1: of those topics where once you read the book, you 849 01:03:28,400 --> 01:03:30,280 Speaker 1: think that it makes a lot of sense and you 850 01:03:30,320 --> 01:03:35,280 Speaker 1: should have known this all along, but obviously I didn't before. 851 01:03:35,920 --> 01:03:39,080 Speaker 1: And now some of the books that I have on 852 01:03:39,120 --> 01:03:43,720 Speaker 1: my side and starting reading is twenty one Lessons for 853 01:03:43,880 --> 01:03:50,680 Speaker 1: the twenty first Century by Yuval Harari and also Leadership 854 01:03:50,800 --> 01:03:55,320 Speaker 1: by Henry Kissinger, because I think we are in a 855 01:03:55,520 --> 01:04:04,960 Speaker 1: very important time for global world order, and I think 856 01:04:05,000 --> 01:04:10,480 Speaker 1: geopolitics will be really important, and the leadership that world 857 01:04:10,640 --> 01:04:15,080 Speaker 1: leaders will show now and in the coming months and 858 01:04:15,240 --> 01:04:19,520 Speaker 1: years could shape our world in a profound way. Very interesting. 859 01:04:20,240 --> 01:04:22,680 Speaker 1: What sort of advice would you give to a recent 860 01:04:22,920 --> 01:04:28,080 Speaker 1: college graduate who is interested in a career in macro 861 01:04:28,600 --> 01:04:35,280 Speaker 1: or multi asset investment. I think they need to have 862 01:04:35,480 --> 01:04:42,640 Speaker 1: both good technical skills but also understand macros. So I 863 01:04:42,680 --> 01:04:46,560 Speaker 1: think this combination used to be rare. I think it 864 01:04:46,640 --> 01:04:52,040 Speaker 1: becomes more and more important to be able to combine 865 01:04:52,240 --> 01:04:59,600 Speaker 1: stem skills with more of the economic science and thinking 866 01:05:00,520 --> 01:05:05,160 Speaker 1: that will help you understand the markets better. And our 867 01:05:05,200 --> 01:05:08,120 Speaker 1: final question, what do you know about the world of 868 01:05:08,160 --> 01:05:11,600 Speaker 1: investing today? You wish you knew twenty five or so 869 01:05:11,800 --> 01:05:15,560 Speaker 1: years ago when you were first getting started. When I 870 01:05:16,000 --> 01:05:20,600 Speaker 1: first got started, the world was different that it is now. 871 01:05:20,960 --> 01:05:25,120 Speaker 1: I think what is important is to be cognizant of 872 01:05:25,160 --> 01:05:28,880 Speaker 1: the fact that conditions change. The world changed, and we 873 01:05:28,920 --> 01:05:36,600 Speaker 1: need to evolve with those conditions. So obviously I learned 874 01:05:36,640 --> 01:05:42,520 Speaker 1: along the way, But I think what I know now 875 01:05:42,760 --> 01:05:48,480 Speaker 1: was not necessarily applying twenty years ago, and vice versas. 876 01:05:48,600 --> 01:05:52,440 Speaker 1: So if there is a lesson for all of us 877 01:05:52,480 --> 01:05:55,000 Speaker 1: to learn is that we need to keep evolving, we 878 01:05:55,080 --> 01:05:58,520 Speaker 1: need to keep learning, and we need to keep adapting 879 01:05:58,560 --> 01:06:02,280 Speaker 1: to our environment. Very interesting, Maria, Thank you for being 880 01:06:02,320 --> 01:06:05,320 Speaker 1: so generous with your time. We have been speaking with 881 01:06:05,360 --> 01:06:10,240 Speaker 1: Maria Vassalu. She is cocio at Goldman Sachs Asset Management. 882 01:06:10,920 --> 01:06:14,600 Speaker 1: If you enjoy this conversation, well please check out any 883 01:06:14,640 --> 01:06:18,560 Speaker 1: of the previous four hundred and seventy something we've done 884 01:06:19,000 --> 01:06:26,680 Speaker 1: over the past nine years. You can find those at YouTube, Spotify, iTunes, Bloomberg, 885 01:06:26,760 --> 01:06:30,760 Speaker 1: wherever you feed your podcast fix. Sign up from my 886 01:06:30,920 --> 01:06:33,800 Speaker 1: daily reading list at Riholtz dot com. Follow me on 887 01:06:33,840 --> 01:06:38,480 Speaker 1: Twitter at Ritholtz, follow all of the Bloomberg family of 888 01:06:38,960 --> 01:06:44,440 Speaker 1: podcasts at podcast on Twitter. I would be remiss if 889 01:06:44,440 --> 01:06:46,560 Speaker 1: I did not thank the crack team that helps put 890 01:06:46,600 --> 01:06:50,560 Speaker 1: these conversations together each week. Attika val Bron is my 891 01:06:50,680 --> 01:06:55,800 Speaker 1: project manager. Sarah Livesey is my audio engineer. Sean Russo 892 01:06:56,240 --> 01:06:59,600 Speaker 1: is my head of research. Paris Wald is my producer. 893 01:07:00,240 --> 01:07:04,360 Speaker 1: I'm Barry Results. You're listening to Masters in Business on 894 01:07:04,560 --> 01:07:06,040 Speaker 1: Bloomberg Radio