1 00:00:02,200 --> 00:00:06,800 Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg Radio. 2 00:00:09,680 --> 00:00:12,280 Speaker 1: This week on the podcast, I have a special guest. 3 00:00:12,560 --> 00:00:15,400 Speaker 1: His name is Louise Mazel, and if you are at 4 00:00:15,440 --> 00:00:20,480 Speaker 1: all interested in a couple of areas of asset management 5 00:00:20,480 --> 00:00:24,160 Speaker 1: and allocation, you're gonna find this to be really quite intriguing. 6 00:00:24,680 --> 00:00:28,000 Speaker 1: He set up a firm thirty years ago to make 7 00:00:28,160 --> 00:00:33,479 Speaker 1: emerging market fixed income investments and LM Capital Group has 8 00:00:33,520 --> 00:00:37,680 Speaker 1: been doing that for the past three decades. Uh. They 9 00:00:37,720 --> 00:00:40,680 Speaker 1: basically do their own due diligence. They check out all 10 00:00:40,720 --> 00:00:45,000 Speaker 1: of the various bonds that they buy on behalf of clients, uh, 11 00:00:45,080 --> 00:00:50,360 Speaker 1: not relying on the traditional rating agencies, and um, they're 12 00:00:50,440 --> 00:00:54,560 Speaker 1: essentially owned by their employees. It's a very interesting shop. 13 00:00:54,920 --> 00:00:59,600 Speaker 1: And Louise does a wonderful job explaining why emerging market 14 00:01:00,040 --> 00:01:03,440 Speaker 1: yet has really become an asset class and to itself, 15 00:01:04,280 --> 00:01:09,800 Speaker 1: given how soft um actual yields are, and that half 16 00:01:09,959 --> 00:01:13,800 Speaker 1: of the sovereign wealth debt these days, over nine trillion dollars, 17 00:01:14,400 --> 00:01:19,080 Speaker 1: is actually holding a negative yield. Uh, he thinks e 18 00:01:19,280 --> 00:01:21,920 Speaker 1: M debt is going to be a not only a 19 00:01:21,959 --> 00:01:24,200 Speaker 1: distinct asset class, but it's going to attract a lot 20 00:01:24,200 --> 00:01:27,760 Speaker 1: of capital over the next decade, and he's very bullsh 21 00:01:28,080 --> 00:01:32,320 Speaker 1: So with no further ado, here's my conversation with LM 22 00:01:32,360 --> 00:01:40,200 Speaker 1: Capital Groups Louise Mazel. My special guest this week is 23 00:01:40,319 --> 00:01:44,160 Speaker 1: Louise Maizel. He is the co founder and senior managing 24 00:01:44,200 --> 00:01:48,760 Speaker 1: director at LM Capital Group, an emerging market fixed income 25 00:01:48,800 --> 00:01:52,040 Speaker 1: shop managing over four point two billion dollars in assets. 26 00:01:52,440 --> 00:01:56,400 Speaker 1: The firm was founded in and is privately held. It 27 00:01:56,600 --> 00:02:02,160 Speaker 1: is employee owned and provide It's a fixed income active 28 00:02:02,200 --> 00:02:08,040 Speaker 1: management approach with a global macro overlay. Louise Mazel, Welcome 29 00:02:08,080 --> 00:02:12,200 Speaker 1: to Bloomberg. Thank you very much. Berry, so you will 30 00:02:12,480 --> 00:02:15,760 Speaker 1: launched this firm in nine nine. You're pretty much in 31 00:02:15,800 --> 00:02:19,679 Speaker 1: the middle of a giant bullmarket. What made you decide 32 00:02:19,720 --> 00:02:23,960 Speaker 1: to go into bonds instead of stocks? I started a 33 00:02:24,040 --> 00:02:29,120 Speaker 1: second firm very actually, the first firm, Element Advisors, which 34 00:02:29,160 --> 00:02:33,120 Speaker 1: was managing money for high net worth individuals. Four July 35 00:02:33,160 --> 00:02:36,800 Speaker 1: eighteenth eighty four, the US eliminates the thirty percent withholding. 36 00:02:37,440 --> 00:02:40,919 Speaker 1: Up to then, foreign nationals could only invest tax free 37 00:02:41,520 --> 00:02:45,480 Speaker 1: in T bills or in bank CDs. All of a sudden, 38 00:02:45,560 --> 00:02:48,959 Speaker 1: they opened up the market. A lot of US brokers 39 00:02:49,360 --> 00:02:52,600 Speaker 1: fly out to Mexico City and try to grab some 40 00:02:52,680 --> 00:02:55,600 Speaker 1: of that money. And my friends started to call me saying, 41 00:02:55,600 --> 00:02:57,560 Speaker 1: you're in the States. We know you quite don't you 42 00:02:57,639 --> 00:03:01,880 Speaker 1: help us serve through these new way new market? So 43 00:03:01,919 --> 00:03:04,880 Speaker 1: we did. For five years we were managing high net 44 00:03:04,919 --> 00:03:09,239 Speaker 1: worth individuals, but they were being managed like pensure plants 45 00:03:09,240 --> 00:03:12,440 Speaker 1: because they were mostly taxed THEMPT And from there we 46 00:03:12,520 --> 00:03:18,280 Speaker 1: jumped into the institutional market. So that was um But 47 00:03:18,400 --> 00:03:22,480 Speaker 1: you bring a very different perspective to the management of assets. 48 00:03:23,040 --> 00:03:27,120 Speaker 1: How did growing up outside of the United States shape 49 00:03:27,240 --> 00:03:31,280 Speaker 1: your view of the world, be it developed or emerging markets? 50 00:03:31,919 --> 00:03:35,000 Speaker 1: Think of it as planets. People in the US thing 51 00:03:35,120 --> 00:03:38,120 Speaker 1: that they're sitting in the sun. The US is the 52 00:03:38,160 --> 00:03:41,400 Speaker 1: center of the universe. For US foreigners. We see the 53 00:03:41,520 --> 00:03:45,200 Speaker 1: US as the biggest planet, but it's part of a system. 54 00:03:45,200 --> 00:03:47,520 Speaker 1: So it's very interesting to see the impact of the 55 00:03:47,600 --> 00:03:50,720 Speaker 1: US on the other planets. But it's not the center 56 00:03:50,720 --> 00:03:53,560 Speaker 1: of the universe. It's just the biggest planet in the universe. 57 00:03:53,840 --> 00:03:57,200 Speaker 1: And now we have China becoming another very large planet. 58 00:03:57,240 --> 00:04:00,520 Speaker 1: How is that going to impact the way the US 59 00:04:00,640 --> 00:04:04,320 Speaker 1: is perceived? I think the US is still by far 60 00:04:04,480 --> 00:04:07,800 Speaker 1: the most important country in the world. The Chinese, just 61 00:04:07,840 --> 00:04:11,200 Speaker 1: because of the sheer size of population over four times 62 00:04:11,240 --> 00:04:14,520 Speaker 1: bigger than the US, will be very big. But in 63 00:04:14,560 --> 00:04:18,559 Speaker 1: the incompart capita they're still very small compared to the US, 64 00:04:19,440 --> 00:04:23,000 Speaker 1: and the model of growth, which was export to the 65 00:04:23,080 --> 00:04:27,760 Speaker 1: US makes them smaller. When you are gearing to become 66 00:04:27,800 --> 00:04:31,640 Speaker 1: the big one, you're far away from it. Quite quite interesting. 67 00:04:32,120 --> 00:04:35,839 Speaker 1: So academic studies have shown that passive management of stocks 68 00:04:35,839 --> 00:04:39,520 Speaker 1: has a tendency to outperform active over long periods of time. 69 00:04:40,160 --> 00:04:42,559 Speaker 1: But the opposite seems to be true in the fixed 70 00:04:42,560 --> 00:04:48,839 Speaker 1: income department. Active uh fixed income strategies outperformed passive. Why 71 00:04:48,960 --> 00:04:53,080 Speaker 1: is that, Well, you have a choice on what bonds 72 00:04:53,120 --> 00:04:56,320 Speaker 1: you buy. The bond market basically is like a landmine. 73 00:04:56,440 --> 00:04:59,440 Speaker 1: If you don't step on your mind, you're gonna do okay, 74 00:04:59,680 --> 00:05:03,640 Speaker 1: and the move along the yield curve will allow you 75 00:05:03,920 --> 00:05:07,479 Speaker 1: to react faster to what's happening in the economy. The 76 00:05:07,600 --> 00:05:12,600 Speaker 1: passive in the index does not take into account the 77 00:05:12,680 --> 00:05:16,919 Speaker 1: macro impact that's happening in the bond market. So how 78 00:05:16,960 --> 00:05:21,200 Speaker 1: do you go about creating a macro overlay for fixed 79 00:05:21,240 --> 00:05:26,080 Speaker 1: income investing? That has always been our approach. Verry we analyze. 80 00:05:26,800 --> 00:05:31,760 Speaker 1: For us, money is a commodity. When it's scarce, it's expensive. 81 00:05:31,920 --> 00:05:36,920 Speaker 1: When it's plentiful, it's cheap. So we analyze. We developed 82 00:05:36,960 --> 00:05:40,240 Speaker 1: the matrix. You know, going from a qualitative process to 83 00:05:40,320 --> 00:05:43,880 Speaker 1: a quantitative way of processing. It's not easy. If you 84 00:05:43,920 --> 00:05:46,360 Speaker 1: put three economies in the room, they're going to come 85 00:05:46,360 --> 00:05:48,960 Speaker 1: out with four different theories, probably all of them wrong. 86 00:05:49,800 --> 00:05:53,479 Speaker 1: So what we try to do is doing our macro analysis, 87 00:05:53,880 --> 00:05:57,880 Speaker 1: studying the growth of the company, of the country's growing, 88 00:05:58,200 --> 00:06:03,440 Speaker 1: understanding the inflation economic indicators. We assigned a value to 89 00:06:03,560 --> 00:06:06,600 Speaker 1: each of them. We created a matrix which gives us 90 00:06:06,600 --> 00:06:10,640 Speaker 1: a point count and we call it the trendscore, which 91 00:06:10,680 --> 00:06:15,200 Speaker 1: allows us then to go into the benchmark we're using, 92 00:06:15,320 --> 00:06:19,520 Speaker 1: which the client is requesting us to use, and the 93 00:06:19,520 --> 00:06:23,000 Speaker 1: trendscore will give us how long or short the benjamark 94 00:06:23,040 --> 00:06:25,320 Speaker 1: do we want to be. So when you say trends, 95 00:06:25,440 --> 00:06:29,080 Speaker 1: I tend to think of equity trends, where a market 96 00:06:29,200 --> 00:06:31,920 Speaker 1: or a stock is trending either higher for a long 97 00:06:31,960 --> 00:06:34,040 Speaker 1: period of time or trending lower for a long period 98 00:06:34,040 --> 00:06:37,279 Speaker 1: of time. Do you have the same meaning of the 99 00:06:37,320 --> 00:06:39,719 Speaker 1: word trend in fixed income or does it have a 100 00:06:39,760 --> 00:06:43,240 Speaker 1: slightly different. I think it's pretty similar. But what you're 101 00:06:43,279 --> 00:06:47,520 Speaker 1: trying to understand is the current and future needs of money. 102 00:06:48,360 --> 00:06:51,920 Speaker 1: If a country is growing very fast, you know there's 103 00:06:51,920 --> 00:06:55,279 Speaker 1: going to be competition for money. If the deficity of 104 00:06:55,320 --> 00:06:57,560 Speaker 1: the country is big, you know that the government is 105 00:06:57,560 --> 00:07:00,680 Speaker 1: going to place bonds and it's gonna cipher now money 106 00:07:00,680 --> 00:07:04,479 Speaker 1: from the economy. If unemployment is very high, then you 107 00:07:04,600 --> 00:07:07,440 Speaker 1: know that there's not gonna be a lot of need. 108 00:07:07,520 --> 00:07:10,240 Speaker 1: There's not gonna be a brick and mortar investment, so 109 00:07:10,360 --> 00:07:13,200 Speaker 1: money will be plentiful. In rates are going to come down. 110 00:07:13,440 --> 00:07:16,560 Speaker 1: So there is a trend on what's happened in the 111 00:07:16,640 --> 00:07:19,680 Speaker 1: past twelve months that will impact what will happen in 112 00:07:19,720 --> 00:07:22,640 Speaker 1: the next six or twelve. So when we look at 113 00:07:22,680 --> 00:07:26,240 Speaker 1: the great bullmarket in bonds in the US from the 114 00:07:26,360 --> 00:07:30,560 Speaker 1: days of Paul Vulker breaking the back of inflation in 115 00:07:30,560 --> 00:07:34,240 Speaker 1: the late seventies early eighties, we've enjoyed a I don't know, 116 00:07:34,320 --> 00:07:39,080 Speaker 1: let's call it thirty three thirty five year ballmarketing bonds. 117 00:07:39,200 --> 00:07:42,800 Speaker 1: Is that still in an effect? And second, how does 118 00:07:42,840 --> 00:07:45,840 Speaker 1: that ballmarket and bonds in the US affect the rest 119 00:07:45,840 --> 00:07:49,559 Speaker 1: of the UH world? We were in a secular trend 120 00:07:49,680 --> 00:07:52,840 Speaker 1: or slower rates. There was an enormous addition of liquidity 121 00:07:52,920 --> 00:07:55,840 Speaker 1: into the system, coming not only from these states, but 122 00:07:55,960 --> 00:07:59,840 Speaker 1: from all central banks. The European Union was placing in 123 00:08:00,040 --> 00:08:02,640 Speaker 1: enormous amount of money in the system, so was the 124 00:08:02,680 --> 00:08:05,920 Speaker 1: Bank of Japan, so was China. A couple of years 125 00:08:05,960 --> 00:08:09,560 Speaker 1: ago we saw a reversal in the trend. The announcement 126 00:08:09,680 --> 00:08:15,680 Speaker 1: of the reverse of the easing, the quantitative easing, and 127 00:08:16,080 --> 00:08:18,080 Speaker 1: the announcement by the fend that they were going to 128 00:08:18,200 --> 00:08:22,720 Speaker 1: start raising rates created a mentality that we had hit 129 00:08:22,800 --> 00:08:26,560 Speaker 1: bottom and we were starting to trend upwards. But now 130 00:08:26,600 --> 00:08:31,640 Speaker 1: we've seen that stopped. I think that the issue of 131 00:08:31,720 --> 00:08:35,520 Speaker 1: an upcoming recession, I don't believe it's coming. It's a 132 00:08:35,600 --> 00:08:38,360 Speaker 1: little bit like the wolf. You know, everybody keeps crying 133 00:08:38,400 --> 00:08:41,400 Speaker 1: the wolf is coming. We are not accustomed to a 134 00:08:41,440 --> 00:08:45,959 Speaker 1: long period without a recession. But ever since globalization started 135 00:08:46,000 --> 00:08:51,320 Speaker 1: in the world, the whole theory change. The formula of 136 00:08:51,360 --> 00:08:54,760 Speaker 1: the past is no longer appliable. So would you say 137 00:08:54,960 --> 00:08:58,360 Speaker 1: um tales of the death of the bundble market have 138 00:08:58,440 --> 00:09:03,000 Speaker 1: been greatly exaggerated. I think that we're gonna stay with 139 00:09:03,200 --> 00:09:08,240 Speaker 1: low interest rates, especially we have big deficits. If we 140 00:09:08,480 --> 00:09:11,920 Speaker 1: have an easy faith, I think we can go on 141 00:09:12,040 --> 00:09:15,400 Speaker 1: for several more years without a major increase in rates. 142 00:09:16,120 --> 00:09:19,960 Speaker 1: Quite quite fascinating. Let's go back to you have this 143 00:09:20,080 --> 00:09:23,720 Speaker 1: big set of tax changes. How much of a game 144 00:09:23,800 --> 00:09:28,360 Speaker 1: changer was that for launching affixed income firm. Actually, the 145 00:09:28,360 --> 00:09:34,120 Speaker 1: game changer for LM Capital was the growth of pension 146 00:09:34,160 --> 00:09:39,120 Speaker 1: plans wanting minority money managers. You know, the change in 147 00:09:41,880 --> 00:09:45,319 Speaker 1: Maxine Waters was at that time already you know, pushing 148 00:09:45,360 --> 00:09:48,440 Speaker 1: for it. She's still in the in the in Congress 149 00:09:48,480 --> 00:09:52,120 Speaker 1: and she's still doing the same the changing loss game 150 00:09:52,240 --> 00:09:55,680 Speaker 1: for the high networth individuals or foreigners, not for pension plans. 151 00:09:55,720 --> 00:10:00,360 Speaker 1: But there was this big push for hiring my minority 152 00:10:00,440 --> 00:10:04,840 Speaker 1: money managers. Actually, they were carving out small pieces from 153 00:10:04,880 --> 00:10:09,000 Speaker 1: the bigger locations, from the big rfpiece. The big funds 154 00:10:09,120 --> 00:10:13,000 Speaker 1: always have been very biased towards using the pimp costs 155 00:10:13,000 --> 00:10:16,520 Speaker 1: and one cost of the world. Sure black rocks, but 156 00:10:16,880 --> 00:10:21,960 Speaker 1: there was an desire to use African American Asian Hispanic companies. 157 00:10:22,520 --> 00:10:25,959 Speaker 1: So we saw an opportunity there being a Hispanic firm 158 00:10:26,520 --> 00:10:29,000 Speaker 1: to pick up some of that money. So that's the 159 00:10:29,000 --> 00:10:33,880 Speaker 1: way we started. Nowadays, it's emerging managers. It's no longer minority. 160 00:10:33,960 --> 00:10:38,079 Speaker 1: There was court case that stopped the use of minorities 161 00:10:38,120 --> 00:10:41,439 Speaker 1: as discriminatory, and by now we're a little bit too 162 00:10:41,440 --> 00:10:44,080 Speaker 1: big to be considered emerging, so we have to compete 163 00:10:44,120 --> 00:10:47,160 Speaker 1: on performance. So well, that's that's not the worst thing 164 00:10:47,200 --> 00:10:49,920 Speaker 1: in the world. So when you say ur fps by 165 00:10:49,960 --> 00:10:55,000 Speaker 1: big institutions, your clients and potential clients are these giant funds. 166 00:10:55,000 --> 00:10:58,240 Speaker 1: They put out a request for proposal and you respond 167 00:10:58,280 --> 00:11:01,400 Speaker 1: with a proposal, and that's the basis of either winning 168 00:11:01,400 --> 00:11:03,120 Speaker 1: the business or not. Is that a fair way to 169 00:11:03,120 --> 00:11:06,199 Speaker 1: describe it. That's correct. They will get probably thirty to 170 00:11:06,320 --> 00:11:10,479 Speaker 1: four responses. They will pick up five or six finalists, 171 00:11:10,480 --> 00:11:13,400 Speaker 1: and then you they visit you, and then they pick 172 00:11:13,480 --> 00:11:15,840 Speaker 1: up three or four that present to the boards, and 173 00:11:15,880 --> 00:11:18,320 Speaker 1: then the board decides who gets the money. So what 174 00:11:18,400 --> 00:11:21,240 Speaker 1: are those beauty contests as they've been called. What are 175 00:11:21,240 --> 00:11:24,240 Speaker 1: they like when when a firm comes in and starts 176 00:11:24,280 --> 00:11:28,240 Speaker 1: kicking the tires and looking around your shop, what's that 177 00:11:28,320 --> 00:11:31,720 Speaker 1: experience like? It's an interesting experience because you have the 178 00:11:31,800 --> 00:11:35,440 Speaker 1: numbers to show for performance, but they want to understand 179 00:11:35,440 --> 00:11:38,520 Speaker 1: the process. They want to understand the people. They want 180 00:11:38,559 --> 00:11:40,960 Speaker 1: to make sure you have the back office to support it. 181 00:11:41,559 --> 00:11:45,960 Speaker 1: Compliance has become so important. The most interesting part for 182 00:11:46,040 --> 00:11:49,600 Speaker 1: me has been that almost all the teams look identical. 183 00:11:50,360 --> 00:11:54,400 Speaker 1: Three men, one woman, everybody six one weighs two hundred 184 00:11:54,400 --> 00:11:59,760 Speaker 1: and three pounds, whereas Brooks brothers suits and in our 185 00:12:00,120 --> 00:12:03,440 Speaker 1: is where different. First, my accent doesn't well, it helps. 186 00:12:03,640 --> 00:12:06,560 Speaker 1: I don't think it hinders anything, but I'm not the 187 00:12:06,600 --> 00:12:10,080 Speaker 1: typical presenter that they normally have, and I tend to 188 00:12:10,880 --> 00:12:14,800 Speaker 1: joke with the boards and try to be more casual. 189 00:12:15,240 --> 00:12:18,240 Speaker 1: Probably when you are a smaller firm and your own 190 00:12:18,320 --> 00:12:23,160 Speaker 1: the firm, you feel that you don't have to explain 191 00:12:23,240 --> 00:12:25,800 Speaker 1: to anybody who you made it or you didn't make 192 00:12:25,840 --> 00:12:28,400 Speaker 1: the cut, or did you win the business or not. 193 00:12:28,960 --> 00:12:31,680 Speaker 1: So I like to enjoy this competition. I like to 194 00:12:32,720 --> 00:12:36,679 Speaker 1: I enjoy to to be fighting against the big boys 195 00:12:36,720 --> 00:12:40,040 Speaker 1: and hopefully sometimes winning. So is that an advantage to 196 00:12:40,080 --> 00:12:43,840 Speaker 1: be relaxed and casual and informal and joke around with 197 00:12:43,880 --> 00:12:48,080 Speaker 1: these people who are used to much more formal stiff 198 00:12:48,640 --> 00:12:53,000 Speaker 1: The group that you described sounds like they're all manufactured 199 00:12:53,400 --> 00:12:56,080 Speaker 1: in the same factory, and maybe that factory is Wharton 200 00:12:56,200 --> 00:12:58,720 Speaker 1: or Harvard Business School. But the fact that they all 201 00:12:58,760 --> 00:13:02,080 Speaker 1: look so similar and so similarly, does this give you 202 00:13:02,160 --> 00:13:05,360 Speaker 1: a tactical advantage when you're presenting. I think that in 203 00:13:05,400 --> 00:13:08,000 Speaker 1: many cases he does. In others, they expect to have 204 00:13:08,240 --> 00:13:13,840 Speaker 1: that and they want that traditional present presenter. I'm also 205 00:13:13,960 --> 00:13:18,960 Speaker 1: product of the same school, you know, part results. But 206 00:13:19,240 --> 00:13:22,480 Speaker 1: so there, my partner in the business went to the 207 00:13:23,080 --> 00:13:28,160 Speaker 1: to Annapolis. So you have the square American six one 208 00:13:28,440 --> 00:13:31,600 Speaker 1: blah blah blah, and you have this crazy Mexican coming 209 00:13:31,600 --> 00:13:34,200 Speaker 1: in and joking with the board. So I think the 210 00:13:34,240 --> 00:13:38,040 Speaker 1: combination makes them laugh and it makes you. It makes 211 00:13:38,080 --> 00:13:43,480 Speaker 1: you different in their eyes, and they remember you more memorable. Right. 212 00:13:44,000 --> 00:13:46,760 Speaker 1: So I have a friend who's at PIMCO, and uh, 213 00:13:46,800 --> 00:13:49,840 Speaker 1: he always he's now retired, but he used to complain 214 00:13:50,440 --> 00:13:54,680 Speaker 1: that he doesn't have time to um, to do anything, 215 00:13:54,760 --> 00:13:57,480 Speaker 1: or go to conferences or what have you, because they're 216 00:13:57,520 --> 00:14:01,760 Speaker 1: so busy managing a trillion dollars in fixed income. And 217 00:14:01,800 --> 00:14:05,200 Speaker 1: I used to bust his chops by saying, yeah, but 218 00:14:05,240 --> 00:14:09,000 Speaker 1: it's not stocks, it's bond that's that stuff practically manages itself, 219 00:14:09,559 --> 00:14:12,160 Speaker 1: which is a joke in the middle of a giant 220 00:14:12,840 --> 00:14:16,880 Speaker 1: bonds bull market. But the little tiny bit of truth 221 00:14:16,880 --> 00:14:20,520 Speaker 1: in that is how how much was it like shooting 222 00:14:20,520 --> 00:14:23,920 Speaker 1: fish in a barrel during the fat part of that 223 00:14:23,960 --> 00:14:28,240 Speaker 1: bull market you had rates coming down from what down 224 00:14:28,280 --> 00:14:34,160 Speaker 1: to practically zero? How challenging was it operating during that 225 00:14:34,920 --> 00:14:40,600 Speaker 1: giant long term trend. There are two problems managing fixed inco. 226 00:14:40,800 --> 00:14:43,720 Speaker 1: One is making sure you don't step on the mind. 227 00:14:43,760 --> 00:14:46,640 Speaker 1: As I said before, that you don't buy a world 228 00:14:46,680 --> 00:14:49,840 Speaker 1: Come bond or an end run bond or a Pacific 229 00:14:49,840 --> 00:14:54,440 Speaker 1: as an electric bond. On the other side, you have 230 00:14:55,600 --> 00:15:00,280 Speaker 1: the matter of liquid it the incise. It's not easy 231 00:15:00,360 --> 00:15:03,000 Speaker 1: to be a pimcoke when you have When you decide 232 00:15:03,040 --> 00:15:06,840 Speaker 1: to move and you have to sell five million or 233 00:15:06,880 --> 00:15:09,840 Speaker 1: a billion dollars worth of a bond, you have to 234 00:15:09,880 --> 00:15:13,320 Speaker 1: find another piece, another buyer on the other side. It 235 00:15:13,400 --> 00:15:16,800 Speaker 1: takes two to tango, and for them to find the 236 00:15:16,840 --> 00:15:20,880 Speaker 1: counterparty is very hard. For a firmlike Hours that you 237 00:15:20,960 --> 00:15:23,560 Speaker 1: move with ten or twenty million dollars, you can always 238 00:15:23,680 --> 00:15:27,840 Speaker 1: find the other side in a transaction. And after the 239 00:15:27,960 --> 00:15:32,200 Speaker 1: crisis in oh nine, they allocated much less capital to 240 00:15:32,280 --> 00:15:35,960 Speaker 1: the desks, so they don't have inventory. So when you 241 00:15:36,000 --> 00:15:38,120 Speaker 1: want to do a transaction, you have to go out 242 00:15:38,560 --> 00:15:42,200 Speaker 1: and beat it in the market, and it's very hard 243 00:15:42,400 --> 00:15:46,360 Speaker 1: to find a big chunk of of the same product. 244 00:15:46,400 --> 00:15:49,400 Speaker 1: If you want to be have commonality in your portfolios, 245 00:15:49,440 --> 00:15:51,480 Speaker 1: if you if you're a buyer, what about if you're 246 00:15:51,480 --> 00:15:54,480 Speaker 1: a seller. Story Like, my assumption is if I have 247 00:15:54,560 --> 00:15:56,280 Speaker 1: a ton of bonds to sell, I pick up the 248 00:15:56,280 --> 00:15:59,720 Speaker 1: phone like called black rock, and they buy whatever whatever 249 00:15:59,800 --> 00:16:02,720 Speaker 1: is out there. They will not. The thing is, they 250 00:16:02,720 --> 00:16:05,600 Speaker 1: don't want to allocate money to bonds, they don't want 251 00:16:05,600 --> 00:16:09,040 Speaker 1: to park money in bonds, so they will only do 252 00:16:09,080 --> 00:16:12,640 Speaker 1: the transaction if they want them at that precise moment, 253 00:16:13,160 --> 00:16:15,560 Speaker 1: and the broker dealers will only do them if they 254 00:16:15,640 --> 00:16:19,600 Speaker 1: find the buyer immediately. If not, they'll just tell you 255 00:16:19,720 --> 00:16:22,400 Speaker 1: there is no market for your bonds right now, and 256 00:16:22,440 --> 00:16:24,280 Speaker 1: I will keep you in mind, and that might take 257 00:16:24,320 --> 00:16:27,920 Speaker 1: three days or three weeks. So there's a little bit 258 00:16:28,000 --> 00:16:31,960 Speaker 1: of an illusion of liquidity in bonds when it's actually 259 00:16:32,920 --> 00:16:35,800 Speaker 1: harder to sell them than we tend to think. If 260 00:16:35,800 --> 00:16:38,240 Speaker 1: I go to sell a stock, there's a bid and 261 00:16:38,320 --> 00:16:41,160 Speaker 1: an ask. I can see the spread I know other 262 00:16:41,200 --> 00:16:44,200 Speaker 1: than giant size. I can move pretty much any stock 263 00:16:44,240 --> 00:16:47,560 Speaker 1: in my portfolio. But if I have a very specific 264 00:16:47,640 --> 00:16:51,600 Speaker 1: bond from a specific whether it's a corporate or a 265 00:16:51,680 --> 00:16:54,920 Speaker 1: sovereign or a state and local bonds. You're saying it's 266 00:16:55,000 --> 00:16:58,080 Speaker 1: not quite as easy to to hit that bid as 267 00:16:58,120 --> 00:17:00,960 Speaker 1: it is with a stock. You're absolutely clear, right, I mean, 268 00:17:01,160 --> 00:17:03,520 Speaker 1: that's why there are no time in sales in bonds. 269 00:17:04,119 --> 00:17:07,440 Speaker 1: You'll never see in stocks. You can say, I put 270 00:17:07,480 --> 00:17:09,960 Speaker 1: in my order the eleven fourteen in the morning, give 271 00:17:10,000 --> 00:17:13,280 Speaker 1: me all the transactions between eleven fourteen and eleven fifteen, 272 00:17:13,800 --> 00:17:16,679 Speaker 1: and your order has to be there. No time stamping. 273 00:17:16,880 --> 00:17:19,760 Speaker 1: No time stamping bonds. You know it might be three 274 00:17:19,840 --> 00:17:23,359 Speaker 1: days or three minutes later when the transaction is done, 275 00:17:24,200 --> 00:17:28,439 Speaker 1: and you want to have basically the same price if 276 00:17:28,480 --> 00:17:32,960 Speaker 1: you're selling or buying for different clients, so you cannot 277 00:17:32,960 --> 00:17:36,600 Speaker 1: buy little pieces and added up because it becomes very 278 00:17:36,640 --> 00:17:42,160 Speaker 1: complicated to allocate in the right way the different transactions. 279 00:17:42,600 --> 00:17:46,480 Speaker 1: Quite quite interesting. So let's talk a little bit about 280 00:17:46,560 --> 00:17:51,320 Speaker 1: that lack of liquidly. I'm I'm intrigued by your description 281 00:17:51,520 --> 00:17:56,040 Speaker 1: of the bond market. Um, is this something that's relatively new? 282 00:17:56,280 --> 00:18:00,160 Speaker 1: Was there always this much lack of liquidly? How as 283 00:18:00,200 --> 00:18:03,040 Speaker 1: the market changed over the past thirty years since you 284 00:18:03,160 --> 00:18:07,879 Speaker 1: launched LM Capital. I think that up to two thousand 285 00:18:08,000 --> 00:18:11,240 Speaker 1: and nine, the market was pretty stable and there was 286 00:18:11,400 --> 00:18:15,360 Speaker 1: enough money in the different broker dealers to make a market. 287 00:18:16,040 --> 00:18:18,280 Speaker 1: You know, they would buy the bond to keep it 288 00:18:18,320 --> 00:18:21,440 Speaker 1: there and wait for somebody to come up, meaning meaning 289 00:18:21,480 --> 00:18:24,080 Speaker 1: holding an inventory, and then when a buyer comes along, 290 00:18:24,119 --> 00:18:29,080 Speaker 1: they would now so much anymore, it's gone gone, you know, 291 00:18:29,880 --> 00:18:34,360 Speaker 1: probably went from Mary Lynch went from eight or ten 292 00:18:34,400 --> 00:18:37,040 Speaker 1: billion dollars to maybe a couple of hundred million. Is 293 00:18:37,080 --> 00:18:40,359 Speaker 1: that a risk management tool or they still suffering a 294 00:18:40,400 --> 00:18:44,040 Speaker 1: little post traumatic stress disorder after the crisis. Is this 295 00:18:44,280 --> 00:18:46,880 Speaker 1: is this smart of them or is this problematic by them? 296 00:18:47,000 --> 00:18:49,520 Speaker 1: I think that they're being smarter and the way they 297 00:18:49,520 --> 00:18:54,240 Speaker 1: allocate their capital. I think that the spreads in bonds 298 00:18:54,280 --> 00:18:57,880 Speaker 1: are not that high for them to make sense to 299 00:18:57,960 --> 00:19:01,320 Speaker 1: keep them in inventory and being much tighter with the 300 00:19:01,320 --> 00:19:05,240 Speaker 1: way they handle their money. Very very interesting. What about 301 00:19:05,280 --> 00:19:07,760 Speaker 1: the rise of e t f s, which are clearly 302 00:19:07,800 --> 00:19:11,560 Speaker 1: not just stocks, they're giant bondy tfs. How is that 303 00:19:11,640 --> 00:19:15,560 Speaker 1: affecting both the way you run LM capital and and 304 00:19:15,760 --> 00:19:20,439 Speaker 1: the way liquidity for specific bonds behaves in the in 305 00:19:20,480 --> 00:19:23,120 Speaker 1: the market. I think the tfs are not the right 306 00:19:23,200 --> 00:19:26,280 Speaker 1: way to play the bond market. I think that they 307 00:19:26,320 --> 00:19:28,840 Speaker 1: are very big, but I don't think they impact the 308 00:19:28,920 --> 00:19:32,119 Speaker 1: market that much. The problem is when it becomes a 309 00:19:32,200 --> 00:19:37,520 Speaker 1: herd mentality. If everybody is selling, you magnify the problem. Again. 310 00:19:38,560 --> 00:19:41,320 Speaker 1: When there's a trend to get out of the bonds 311 00:19:41,720 --> 00:19:44,000 Speaker 1: you need, you don't find the buyers. When there's a 312 00:19:44,040 --> 00:19:47,679 Speaker 1: trend to buy the bonds, it's hard to find these sellers. 313 00:19:47,760 --> 00:19:51,440 Speaker 1: So the e t fs magnify the problem instead of 314 00:19:51,720 --> 00:19:55,720 Speaker 1: making it less problematic. So I have a couple of 315 00:19:55,800 --> 00:20:00,800 Speaker 1: questions on that. That's really really intriguing. So first, when 316 00:20:00,840 --> 00:20:03,760 Speaker 1: there's that herd mentality like we saw in O eight 317 00:20:03,760 --> 00:20:08,000 Speaker 1: oh nine, isn't everything being sold regardless when when, when, 318 00:20:08,720 --> 00:20:13,080 Speaker 1: when the herd stampedes, everything seems to get run over. 319 00:20:13,600 --> 00:20:16,359 Speaker 1: Is that any different for bond stocks or ETF No, 320 00:20:16,440 --> 00:20:18,879 Speaker 1: it works the same way, but you don't have the 321 00:20:18,960 --> 00:20:23,280 Speaker 1: dramatic cratches they do. So in stokes, the bargain hunters 322 00:20:23,560 --> 00:20:26,200 Speaker 1: are probably not going to jump in because the bond 323 00:20:26,280 --> 00:20:29,119 Speaker 1: dropped two or three points. Two or three points is 324 00:20:29,200 --> 00:20:32,000 Speaker 1: huge in bonds. In stocks, you can see moves of 325 00:20:32,040 --> 00:20:34,760 Speaker 1: ten or twenty two or three points is a Tuesday. 326 00:20:34,840 --> 00:20:38,000 Speaker 1: Nothing's exactly. Here's the question that pops into my head. 327 00:20:38,400 --> 00:20:41,800 Speaker 1: Knowing that there's no guarantee of liquidly in the future, 328 00:20:42,440 --> 00:20:47,440 Speaker 1: how does that affect your process for selecting what bonds 329 00:20:47,920 --> 00:20:50,800 Speaker 1: you want to put into your portfolio. You you obviously 330 00:20:50,880 --> 00:20:54,080 Speaker 1: have an awareness, Hey, when the time comes, there may 331 00:20:54,119 --> 00:20:57,560 Speaker 1: not be the liquidly I'm hoping for if I have 332 00:20:57,680 --> 00:21:02,639 Speaker 1: to move these in a emergency. That's a very good question. 333 00:21:02,720 --> 00:21:05,440 Speaker 1: Very What we tried to do is buy global issues, 334 00:21:05,720 --> 00:21:09,960 Speaker 1: very big issues that a lot of people holding their portfolios. 335 00:21:10,680 --> 00:21:12,680 Speaker 1: You know, at one time you would find a good 336 00:21:12,680 --> 00:21:15,320 Speaker 1: issue of a hundred a couple of hundred million dollars. 337 00:21:15,400 --> 00:21:18,440 Speaker 1: We go for the billion dollar issues at least, and 338 00:21:18,560 --> 00:21:21,119 Speaker 1: we want the names that people want to hold in 339 00:21:21,160 --> 00:21:24,800 Speaker 1: their portfolio. There are some managers that try to create 340 00:21:25,119 --> 00:21:29,200 Speaker 1: alpha from buying smaller issues because the issue is forced 341 00:21:29,200 --> 00:21:31,840 Speaker 1: to pay a bit more because of the smaller sizes 342 00:21:31,920 --> 00:21:34,600 Speaker 1: of the issue. We don't like that. We want to 343 00:21:34,680 --> 00:21:38,960 Speaker 1: have the ability to get out whenever we want. So 344 00:21:39,000 --> 00:21:42,400 Speaker 1: the liquidly premium isn't worth the risk to you. It's 345 00:21:42,400 --> 00:21:47,040 Speaker 1: not quite quite interesting. So I've had this little personal 346 00:21:47,119 --> 00:21:50,040 Speaker 1: theory for the past couple of years that part of 347 00:21:50,080 --> 00:21:53,080 Speaker 1: the reason yields or as low as they are, is 348 00:21:53,119 --> 00:21:58,120 Speaker 1: that there's a shortage of quality sovereign bonds. We haven't 349 00:21:58,119 --> 00:22:01,359 Speaker 1: been running the usual and old deficits over the past 350 00:22:01,400 --> 00:22:04,639 Speaker 1: ten years, although clearly they've started to tick up post 351 00:22:04,640 --> 00:22:08,120 Speaker 1: crisis and and most recently, And that there's so much 352 00:22:08,200 --> 00:22:13,440 Speaker 1: capital around and such a demand for quality fixed income 353 00:22:13,960 --> 00:22:17,359 Speaker 1: that it gets hoovered up by all the buyers and 354 00:22:17,359 --> 00:22:20,879 Speaker 1: that helps to keep a lid on on rates. And 355 00:22:21,080 --> 00:22:24,439 Speaker 1: am I remotely accurate or is that crackpot theory? You 356 00:22:24,480 --> 00:22:27,919 Speaker 1: are accurate even though deficits have not been shrinking on 357 00:22:27,960 --> 00:22:31,840 Speaker 1: the country that have been growing bigger. Over half of 358 00:22:31,920 --> 00:22:35,560 Speaker 1: the sovereign bonds now have negative yields. Nine point seven 359 00:22:35,680 --> 00:22:40,720 Speaker 1: trillion dollars, mostly European bonds are negative, and we see 360 00:22:40,800 --> 00:22:45,800 Speaker 1: Japan frequently dips into So by negative yield you mean here, 361 00:22:45,840 --> 00:22:47,720 Speaker 1: I'm going to give you a pile of money, and 362 00:22:48,000 --> 00:22:51,040 Speaker 1: you're gonna give me most of it back, but not 363 00:22:51,080 --> 00:22:54,040 Speaker 1: all of it, because the yield is actually I'm gonna 364 00:22:54,440 --> 00:22:58,119 Speaker 1: I'm gonna pay you to hold my money, which makes 365 00:22:58,200 --> 00:23:00,960 Speaker 1: no sense. At one time, many years ago, the only 366 00:23:01,000 --> 00:23:05,480 Speaker 1: country that had This was Switzerland that showed that they 367 00:23:05,640 --> 00:23:09,440 Speaker 1: wanted to sell the concept of safety, and they said, 368 00:23:09,880 --> 00:23:12,400 Speaker 1: this is like a vault. Money that comes in here 369 00:23:12,480 --> 00:23:15,080 Speaker 1: is totally protected, So I'm going to charge you for 370 00:23:15,160 --> 00:23:19,760 Speaker 1: the use of my vault. Nowadays, it's Germany, it's Japan, 371 00:23:20,400 --> 00:23:25,800 Speaker 1: it's Northern Europe. It's nine point seven trillion dollars. So 372 00:23:25,880 --> 00:23:29,640 Speaker 1: the only play there if you're an investor, is hoping 373 00:23:29,680 --> 00:23:33,440 Speaker 1: that the currency. Because you're investing in the local currency, 374 00:23:34,000 --> 00:23:38,080 Speaker 1: it's mostly euros or yends. Your hope is that the 375 00:23:38,119 --> 00:23:41,280 Speaker 1: euro gains against the dollar, or the end gains against 376 00:23:41,320 --> 00:23:44,520 Speaker 1: the dollar. But there are much better ways to play 377 00:23:44,600 --> 00:23:47,680 Speaker 1: currencies than to buy bonds. You know, to invest a 378 00:23:47,760 --> 00:23:50,560 Speaker 1: million dollars in bonds hoping for an increase in the 379 00:23:50,640 --> 00:23:53,240 Speaker 1: value of the currency. You can do a fraction of 380 00:23:53,320 --> 00:23:56,760 Speaker 1: that investment and do futures and you're in the same game, 381 00:23:57,440 --> 00:24:02,560 Speaker 1: so with far less risk. Absolutely. Another interesting situation is 382 00:24:03,480 --> 00:24:07,479 Speaker 1: the l d I, the long duration management of pension plans. 383 00:24:08,800 --> 00:24:15,080 Speaker 1: They are buying bonds with the maturity that matches their liabilities, 384 00:24:16,119 --> 00:24:19,480 Speaker 1: but with bonds that are not growing in value, it's 385 00:24:19,600 --> 00:24:24,400 Speaker 1: incredibly expensive to match. I mean, because they're not growing 386 00:24:24,560 --> 00:24:28,280 Speaker 1: so you're going to pay a million dollars a year 387 00:24:28,480 --> 00:24:31,800 Speaker 1: thirty years from now, or a million euros. You have 388 00:24:31,920 --> 00:24:35,480 Speaker 1: to buy a million thirty thousand euros in order to 389 00:24:35,560 --> 00:24:39,520 Speaker 1: have a million back. So it's very hard to manage 390 00:24:39,560 --> 00:24:43,840 Speaker 1: money against with l d I when you have negative deals. 391 00:24:44,320 --> 00:24:49,600 Speaker 1: Quite quite fascinating. So your firm uses something called scenario 392 00:24:49,760 --> 00:24:55,239 Speaker 1: planning to mitigate against global event risk. Explain what that 393 00:24:55,400 --> 00:25:00,000 Speaker 1: is and how can you actually reduce risk about events overseas. 394 00:25:00,920 --> 00:25:03,600 Speaker 1: We think of all the weird things that could happen, 395 00:25:03,760 --> 00:25:06,320 Speaker 1: very all the weird things that could happen. I mean, 396 00:25:06,480 --> 00:25:09,639 Speaker 1: we have a scenario hopefully well it will never happen. 397 00:25:09,720 --> 00:25:17,000 Speaker 1: But for another we have a scenario for the bankruptcy 398 00:25:17,040 --> 00:25:19,919 Speaker 1: of a money center bank. We have a scenario for 399 00:25:20,000 --> 00:25:23,840 Speaker 1: oil going down to twenty or over a hundred. We 400 00:25:23,920 --> 00:25:29,160 Speaker 1: have a scenario of North Korea throwing the bomb, and 401 00:25:29,280 --> 00:25:32,640 Speaker 1: we tried to play through what our reaction would be 402 00:25:32,880 --> 00:25:37,800 Speaker 1: to that event, so we're not caught by surprise if 403 00:25:37,840 --> 00:25:42,520 Speaker 1: God forbid they happen. So we know that if X 404 00:25:42,600 --> 00:25:45,919 Speaker 1: or Y happens, we're gonna be selling or buying the 405 00:25:46,000 --> 00:25:49,560 Speaker 1: bonds or whether we're going to be shortening or lengthening 406 00:25:49,560 --> 00:25:56,280 Speaker 1: our duration, and we replay scenarios almost I mean formally 407 00:25:56,440 --> 00:26:01,160 Speaker 1: once a quarter. Informally it can be any you're driving 408 00:26:01,200 --> 00:26:05,520 Speaker 1: in and you hearing news in the radio and you say, well, 409 00:26:05,960 --> 00:26:10,040 Speaker 1: that might cause a change in the environment. What would 410 00:26:10,040 --> 00:26:14,160 Speaker 1: we do? So we go into the conference room, everybody participates, 411 00:26:14,480 --> 00:26:17,359 Speaker 1: we use the blackboard, and we try to develop a 412 00:26:17,480 --> 00:26:22,520 Speaker 1: response to the event. Mhm. So so you mentioned, um 413 00:26:22,600 --> 00:26:26,679 Speaker 1: that that's really quite interesting. So so you mentioned the 414 00:26:26,840 --> 00:26:32,280 Speaker 1: nine plus trillion dollars in negative yielding sovereign debt. Given 415 00:26:32,280 --> 00:26:37,000 Speaker 1: those liabilities that pension funds and really just retirement accounts 416 00:26:37,040 --> 00:26:40,560 Speaker 1: are going to have, where can people go to find 417 00:26:40,680 --> 00:26:44,840 Speaker 1: yields without adding leverage or adding a whole lot of 418 00:26:44,960 --> 00:26:49,119 Speaker 1: risk to their portfolios. That is something that's keeping a 419 00:26:49,119 --> 00:26:53,399 Speaker 1: lot of people awake at night. Pension plans have if 420 00:26:53,480 --> 00:26:57,240 Speaker 1: you do share responsibility, that grows at about eight percent 421 00:26:57,280 --> 00:27:01,240 Speaker 1: per year, and they're not getting those learns from their portfolios. 422 00:27:02,359 --> 00:27:06,359 Speaker 1: They need to have fixed income. It's like the retaining 423 00:27:06,359 --> 00:27:09,520 Speaker 1: world in the portfolio and the source of liquidity if needed. 424 00:27:10,600 --> 00:27:13,600 Speaker 1: But if that fixed income is yielding, say they have 425 00:27:14,440 --> 00:27:17,439 Speaker 1: in fixed income, if the yield there is two or 426 00:27:17,440 --> 00:27:20,320 Speaker 1: two and a half percent. The other eighty would have 427 00:27:20,400 --> 00:27:24,359 Speaker 1: to generate in order to make up for whether they're 428 00:27:24,359 --> 00:27:28,679 Speaker 1: not making in fixed income. So they're going more and 429 00:27:28,760 --> 00:27:33,480 Speaker 1: more to private equity, to venture capital areas that are 430 00:27:33,520 --> 00:27:37,320 Speaker 1: definitely much riskier. And we can see what happened in No. 431 00:27:37,560 --> 00:27:41,760 Speaker 1: Nine that the dropping value of individual accounts or pension 432 00:27:41,800 --> 00:27:47,280 Speaker 1: plants was dramatic. They're looking for alternatives in fixed income, 433 00:27:48,080 --> 00:27:51,960 Speaker 1: for example, bank loans, which in reality is just high yield. 434 00:27:51,960 --> 00:27:55,360 Speaker 1: With the floating rate, they're doing more and more high 435 00:27:55,480 --> 00:27:59,040 Speaker 1: yield and moving down in the rating two towards disease, 436 00:27:59,400 --> 00:28:03,240 Speaker 1: which again is very dangerous. Or an USA class that 437 00:28:03,280 --> 00:28:07,000 Speaker 1: has become much more interesting, which is emerging market debt. 438 00:28:07,960 --> 00:28:11,760 Speaker 1: At one time, these sovereign bonds in the emerging countries, 439 00:28:12,240 --> 00:28:18,159 Speaker 1: countries like Mexico, Colombia, Brazil, China, South Korea, we're paying 440 00:28:18,160 --> 00:28:22,119 Speaker 1: three to four hundred basis more than comparable risks in 441 00:28:22,160 --> 00:28:27,040 Speaker 1: the US. It has come down a lot, but you 442 00:28:27,080 --> 00:28:31,280 Speaker 1: can still find very very good corporate names in the 443 00:28:31,320 --> 00:28:35,480 Speaker 1: emerging world, both in local currency and daughter they nominated. 444 00:28:36,080 --> 00:28:39,840 Speaker 1: They can give you a very sizeable pickup and allow 445 00:28:39,920 --> 00:28:44,160 Speaker 1: your fixed income portfolio to be closer to your needs 446 00:28:44,200 --> 00:28:47,400 Speaker 1: in terms of growth than what you get out from 447 00:28:47,440 --> 00:28:51,880 Speaker 1: the traditional US based core fixed So if I'm a 448 00:28:52,040 --> 00:28:54,760 Speaker 1: US investor and I'm not happy with two and a 449 00:28:54,840 --> 00:29:00,960 Speaker 1: half percent yield on traditional treasuries, how much additional risk 450 00:29:01,000 --> 00:29:04,479 Speaker 1: am I assuming going to either emerging market bonds on 451 00:29:04,520 --> 00:29:07,560 Speaker 1: a sovereign basis or e M bonds on a corporate 452 00:29:07,560 --> 00:29:11,200 Speaker 1: basis to pick up another two D basis points? Is 453 00:29:11,200 --> 00:29:14,400 Speaker 1: that a fair amount? At least? To be honest, if 454 00:29:14,400 --> 00:29:17,280 Speaker 1: you ask me, I don't think you're picking any additional risk. 455 00:29:18,200 --> 00:29:21,760 Speaker 1: I think that if you buy a company that's solid 456 00:29:21,840 --> 00:29:27,720 Speaker 1: investment grade in their own country and that generates let's 457 00:29:27,720 --> 00:29:31,440 Speaker 1: say you bought daughter the nominated bonds and they generate 458 00:29:31,680 --> 00:29:37,000 Speaker 1: the dollars to pay you back, both interesting principle, so 459 00:29:37,120 --> 00:29:39,280 Speaker 1: they don't have to buy them in a tough time 460 00:29:39,400 --> 00:29:42,760 Speaker 1: when their currency could have the valued You are taking 461 00:29:42,800 --> 00:29:46,840 Speaker 1: no additional risk. Let me give an example. Bimbo, the 462 00:29:46,880 --> 00:29:52,120 Speaker 1: Mexican bread company. Almost sixty of their sales are abroad. 463 00:29:52,320 --> 00:29:55,760 Speaker 1: You know, they're the largest producer in fourteen countries and 464 00:29:55,800 --> 00:29:59,640 Speaker 1: they're present in about fifty five countries where they sell bread. 465 00:30:00,400 --> 00:30:02,520 Speaker 1: It's a staple, it's a company that's been in the 466 00:30:02,600 --> 00:30:06,680 Speaker 1: market for a hundred years. They are double A plus 467 00:30:06,720 --> 00:30:12,240 Speaker 1: in Mexico. Their paper is yielding almost five that if 468 00:30:12,280 --> 00:30:15,600 Speaker 1: I took away the name and showed you the financials, 469 00:30:15,760 --> 00:30:17,960 Speaker 1: you would say this is a double A company in 470 00:30:18,000 --> 00:30:21,400 Speaker 1: the US, and it would be paying maybe three ten, 471 00:30:21,560 --> 00:30:26,720 Speaker 1: three twenty. So you're picking up two hundred plus over 472 00:30:27,400 --> 00:30:32,200 Speaker 1: against a credit paper in the US and almost three 473 00:30:32,280 --> 00:30:36,880 Speaker 1: hundred over against a US equivalent from a Treasury bond. 474 00:30:37,360 --> 00:30:41,200 Speaker 1: So you really are gaining a lot in a company 475 00:30:41,200 --> 00:30:44,720 Speaker 1: that basically has no risk. So how much of this 476 00:30:44,840 --> 00:30:47,680 Speaker 1: is just the home country bias? If you live in 477 00:30:47,720 --> 00:30:50,000 Speaker 1: the US, you tend to buy US stocks and bonds, 478 00:30:50,040 --> 00:30:52,480 Speaker 1: If you live in Germany you tend to buy German 479 00:30:52,520 --> 00:30:54,880 Speaker 1: stocks and bonds, and the same as true in Australia 480 00:30:55,360 --> 00:31:01,080 Speaker 1: or wherever. How significant is that to that gap between 481 00:31:01,560 --> 00:31:07,120 Speaker 1: domestic and emerging market yields? That pride of national product 482 00:31:07,360 --> 00:31:09,920 Speaker 1: it used to be very prevalent, it's no longer there. 483 00:31:10,640 --> 00:31:14,280 Speaker 1: The markets have become so global that buyers in Singapore 484 00:31:14,400 --> 00:31:18,840 Speaker 1: or Berlin or New York are are buying from everywhere. 485 00:31:18,960 --> 00:31:21,720 Speaker 1: So so what accounts for that two hundred and fifty 486 00:31:21,720 --> 00:31:25,240 Speaker 1: basis point difference in yields. It's the perception of things 487 00:31:25,240 --> 00:31:27,959 Speaker 1: that happened in the late nineties and the beginning of 488 00:31:28,000 --> 00:31:31,520 Speaker 1: the two thousand's, where one country got in trouble and 489 00:31:31,520 --> 00:31:35,000 Speaker 1: all the other countries got in trouble. It has to 490 00:31:35,160 --> 00:31:40,120 Speaker 1: have more work done to understand what you're buying in 491 00:31:40,160 --> 00:31:43,120 Speaker 1: the US. And even the credibility of the rating agencies 492 00:31:43,160 --> 00:31:45,680 Speaker 1: in the US has dropped a lot after all. Nine 493 00:31:46,280 --> 00:31:48,840 Speaker 1: But here you see an A rated bond and you 494 00:31:48,920 --> 00:31:51,760 Speaker 1: don't get too much into analyzing whether they will pay 495 00:31:51,800 --> 00:31:55,479 Speaker 1: you back or not. You believe if standard important movies 496 00:31:55,480 --> 00:31:58,280 Speaker 1: said it's good to take it for granted, well I'm 497 00:31:58,360 --> 00:32:01,600 Speaker 1: I'm assuming or I'm saying that you don't put a 498 00:32:01,680 --> 00:32:04,720 Speaker 1: lot of stock. And with the credit rating agencies say 499 00:32:04,840 --> 00:32:08,040 Speaker 1: you guys do your own due diligence and all these absolutely, 500 00:32:08,160 --> 00:32:14,240 Speaker 1: and remember that emerging just taken back into crediting emerging countries. 501 00:32:14,520 --> 00:32:18,600 Speaker 1: Eight of the companies are still run by the founding family. 502 00:32:19,400 --> 00:32:22,600 Speaker 1: They took them public in order to create liquidity and 503 00:32:22,640 --> 00:32:26,000 Speaker 1: the state for state purposes. Go back a second. I 504 00:32:26,000 --> 00:32:29,320 Speaker 1: want to make sure I caught that statistic right. In 505 00:32:29,400 --> 00:32:36,600 Speaker 1: Emerging market nations eighty percent of the um businesses or 506 00:32:36,640 --> 00:32:40,080 Speaker 1: of the publicly traded businesses. The publicly traded businesses are 507 00:32:40,120 --> 00:32:44,240 Speaker 1: still run by the founding family. That's amazing, it's incredible. 508 00:32:44,400 --> 00:32:47,040 Speaker 1: There was a radio company that went public here in 509 00:32:47,120 --> 00:32:52,480 Speaker 1: the NYC and governance, I mean the eleven board members 510 00:32:52,640 --> 00:32:58,440 Speaker 1: last name was usually it was all brothers, nephews and nieces. 511 00:32:58,520 --> 00:33:01,160 Speaker 1: And the New York Stock Seans did not like it. 512 00:33:01,480 --> 00:33:03,920 Speaker 1: They said, you know, this is not good e s 513 00:33:04,000 --> 00:33:07,800 Speaker 1: g Y S is horrible governance when the whole families 514 00:33:07,840 --> 00:33:10,360 Speaker 1: in the board does not work. But that's pretty typical 515 00:33:10,400 --> 00:33:13,360 Speaker 1: you're saying it is. So what you have to understand 516 00:33:13,480 --> 00:33:18,280 Speaker 1: besides the financials is who those families are. So you 517 00:33:18,360 --> 00:33:22,080 Speaker 1: need to do social analysis. You have to understand whether 518 00:33:22,160 --> 00:33:25,200 Speaker 1: you're funding a new plant or you're funding a new 519 00:33:25,240 --> 00:33:30,640 Speaker 1: G five that the that the chair, you know, if 520 00:33:30,640 --> 00:33:33,760 Speaker 1: a new girls stream versus a new exact making plants. 521 00:33:33,920 --> 00:33:38,560 Speaker 1: You want to understand that they're investing your money into 522 00:33:38,720 --> 00:33:42,200 Speaker 1: something that will be productive and create more wealth for 523 00:33:42,400 --> 00:33:46,000 Speaker 1: the shareholders or the bond holders. And that's something that 524 00:33:46,080 --> 00:33:49,840 Speaker 1: will bring more satisfaction to the founding family. That that 525 00:33:49,960 --> 00:33:53,640 Speaker 1: is that is really um fascinating. I had no idea. 526 00:33:54,080 --> 00:33:58,640 Speaker 1: I'm learning a lot today. So I think people have 527 00:33:58,880 --> 00:34:02,480 Speaker 1: changed the way they view and and think about debt 528 00:34:02,640 --> 00:34:07,760 Speaker 1: over the past thirty years. Um, how do you see that? Well, 529 00:34:07,800 --> 00:34:09,400 Speaker 1: first of all, do you do you agree? Do you 530 00:34:09,440 --> 00:34:14,520 Speaker 1: see the perception of debt having changed in society? And 531 00:34:14,560 --> 00:34:18,839 Speaker 1: how does that affect building a bond portfolio. At some time, 532 00:34:19,120 --> 00:34:22,520 Speaker 1: dead was seen as a bad thing, and now some 533 00:34:22,600 --> 00:34:25,239 Speaker 1: of that's a little bit of a holdover from the 534 00:34:25,280 --> 00:34:30,440 Speaker 1: Great Depression generation who never wanted to risk having a 535 00:34:30,480 --> 00:34:33,879 Speaker 1: bank call something away from them. Exactly having debt meant 536 00:34:33,960 --> 00:34:39,560 Speaker 1: that you were at risk. Nowadays debt makes sense for corporations. 537 00:34:40,160 --> 00:34:45,560 Speaker 1: They don't delude their shareholders. Their EPs are higher and 538 00:34:46,400 --> 00:34:50,360 Speaker 1: management is basically paid by the Their bonuses are based 539 00:34:50,360 --> 00:34:53,160 Speaker 1: on the value of their stock. So if you can 540 00:34:53,200 --> 00:34:57,040 Speaker 1: borrow cheaply and buy back stock or do things without 541 00:34:57,080 --> 00:35:01,160 Speaker 1: selling more equity, the performance of your equity will probably 542 00:35:01,160 --> 00:35:06,759 Speaker 1: be better. So it's become a tool of growth without delusion. 543 00:35:07,800 --> 00:35:12,080 Speaker 1: And I so once the CFO of Mark being interviewed, 544 00:35:12,960 --> 00:35:16,160 Speaker 1: and he said they asked him why did he borrow 545 00:35:16,280 --> 00:35:21,960 Speaker 1: two billion dollars when he had in cash almost eleven billion, 546 00:35:22,640 --> 00:35:26,080 Speaker 1: And he said, you know, at two thirty for three 547 00:35:26,120 --> 00:35:30,080 Speaker 1: year paper, I couldn't and being a taxi doctor, I 548 00:35:30,080 --> 00:35:32,840 Speaker 1: could not sleep if I didn't take out that money. So, 549 00:35:32,840 --> 00:35:35,080 Speaker 1: in other words, the way the tax laws are set 550 00:35:35,160 --> 00:35:40,600 Speaker 1: up around debt versus equity, corporate management is incentivized to 551 00:35:40,680 --> 00:35:43,640 Speaker 1: borrow versus using exactly, I mean it makes a lot 552 00:35:43,680 --> 00:35:46,839 Speaker 1: of sense to borrow in them. Buy backstock dividends are 553 00:35:46,880 --> 00:35:51,280 Speaker 1: not tax deductible. Companies were borrowing or are borrowing below 554 00:35:51,440 --> 00:35:55,360 Speaker 1: when they're paying dividends, so if they retire that stock, 555 00:35:55,880 --> 00:35:58,840 Speaker 1: then they're making money in the spread that That is 556 00:35:58,920 --> 00:36:00,759 Speaker 1: quite fascinating. Can you still around a little bit? I 557 00:36:00,800 --> 00:36:03,720 Speaker 1: have some more questions for you. We have been speaking 558 00:36:03,719 --> 00:36:07,520 Speaker 1: with Louise Mazel of LM Capital Group. If you enjoy 559 00:36:07,560 --> 00:36:09,719 Speaker 1: this conversation, well be sure and come back for the 560 00:36:09,760 --> 00:36:13,000 Speaker 1: podcast extras, where we keep the tape rolling and continue 561 00:36:13,080 --> 00:36:17,279 Speaker 1: discussing all things fixed income and emerging market related. You 562 00:36:17,320 --> 00:36:21,640 Speaker 1: can find that wherever Finder podcasts are sold, Apple, iTunes, 563 00:36:21,719 --> 00:36:27,120 Speaker 1: Bloomberg dot Com, Stitcher, Overcast, et cetera. We love your comments, 564 00:36:27,160 --> 00:36:31,560 Speaker 1: feedback and suggestions right to us at m IB podcast 565 00:36:31,600 --> 00:36:35,040 Speaker 1: at Bloomberg dot net. You can follow my daily column 566 00:36:35,080 --> 00:36:38,520 Speaker 1: at Bloomberg dot com slash Opinion, or check me out 567 00:36:38,560 --> 00:36:42,160 Speaker 1: on Twitter at rit Holts. I'm Barry Ridlts. You're listening 568 00:36:42,200 --> 00:36:59,000 Speaker 1: to Masters and Business on Bloomberg Radio. Welcome to the podcast, Louise, 569 00:36:59,080 --> 00:37:00,800 Speaker 1: Thank you so much for doing this. This is really 570 00:37:00,840 --> 00:37:05,520 Speaker 1: an interesting conversation. I sometimes will chat with people, Um, 571 00:37:05,560 --> 00:37:07,000 Speaker 1: who do you have on the show this week? Oh, 572 00:37:07,040 --> 00:37:10,120 Speaker 1: I have Louise Mozelle. He's a you know, emerging market 573 00:37:10,160 --> 00:37:14,040 Speaker 1: bond manager, and I'll get that yawn back from them, 574 00:37:14,040 --> 00:37:15,640 Speaker 1: and it's like, well, tell me when you have somebody 575 00:37:15,680 --> 00:37:19,239 Speaker 1: interesting on. But this is really fascinating stuff. There is 576 00:37:19,280 --> 00:37:24,160 Speaker 1: so much more to emerging market bond analysis than I 577 00:37:24,200 --> 00:37:29,640 Speaker 1: think the average UM stock jockey really appreciates. UM, and 578 00:37:29,719 --> 00:37:31,799 Speaker 1: you you are expressing it in a way that I 579 00:37:31,880 --> 00:37:35,960 Speaker 1: find intriguing. Um. There are a few questions I did 580 00:37:36,000 --> 00:37:39,000 Speaker 1: not get to during the broadcast portion that I have 581 00:37:39,120 --> 00:37:41,720 Speaker 1: to run through. Let me let me run through those 582 00:37:41,719 --> 00:37:46,919 Speaker 1: before we get to our favorite questions. UM. I've heard 583 00:37:46,920 --> 00:37:50,480 Speaker 1: over the years that bond investors are the smart money, 584 00:37:50,520 --> 00:37:54,640 Speaker 1: that's where the bond vigilantes come from. Why is that? 585 00:37:54,719 --> 00:37:59,560 Speaker 1: Why is bond investing considered quote unquote the smart money. 586 00:37:59,800 --> 00:38:02,600 Speaker 1: I would not say smart money. It's the safe money. 587 00:38:02,719 --> 00:38:07,080 Speaker 1: It should be the save money. Nowadays, with leverage and 588 00:38:07,160 --> 00:38:10,439 Speaker 1: with what's happening in the markets, you need to have 589 00:38:10,600 --> 00:38:14,399 Speaker 1: a portion of your portfolio ready for events that might 590 00:38:14,520 --> 00:38:17,640 Speaker 1: alter the value of the whole portfolio. I mean you 591 00:38:17,719 --> 00:38:21,160 Speaker 1: have situations like the unicorns that the more money they lose, 592 00:38:21,200 --> 00:38:24,239 Speaker 1: the more valuable they are. That's literally true. There was 593 00:38:24,280 --> 00:38:28,600 Speaker 1: a column in Bloomberg that of all the past eighteen 594 00:38:28,600 --> 00:38:32,520 Speaker 1: months of I p o s, the worst the financials 595 00:38:32,560 --> 00:38:35,480 Speaker 1: were the better the first day I p O Pop was. 596 00:38:36,640 --> 00:38:40,600 Speaker 1: What you need to see is that bonds, bonds have 597 00:38:40,800 --> 00:38:44,719 Speaker 1: much more meat in them. It's less hope and it's 598 00:38:44,800 --> 00:38:48,920 Speaker 1: more reality. So when you say smart money, it means 599 00:38:49,160 --> 00:38:53,040 Speaker 1: people have to analyze that you are lending to somebody 600 00:38:53,080 --> 00:38:56,600 Speaker 1: that will pay you back. I mean, let's take Lift 601 00:38:56,680 --> 00:38:59,440 Speaker 1: for for example. We don't know what's gonna happen with 602 00:38:59,560 --> 00:39:02,239 Speaker 1: Lift five years from now. I would not buy a 603 00:39:02,280 --> 00:39:05,759 Speaker 1: bond from leaft a five year paper because as I 604 00:39:05,800 --> 00:39:08,279 Speaker 1: didn't buy a test LA bond, you know, if I 605 00:39:08,320 --> 00:39:11,400 Speaker 1: buy a test last talk, I'm betting the electric cars 606 00:39:11,480 --> 00:39:13,640 Speaker 1: or self driving cars are going to do very well. 607 00:39:14,600 --> 00:39:17,640 Speaker 1: Their bonds did very poorly. You know, they came out 608 00:39:17,680 --> 00:39:20,000 Speaker 1: a part. They're not trading at eighty eight cents on 609 00:39:20,040 --> 00:39:26,200 Speaker 1: the dollar. So it's a situation where leverage is dangerous 610 00:39:26,280 --> 00:39:31,040 Speaker 1: when you're not making any money. Bond analysis requires much 611 00:39:31,080 --> 00:39:35,480 Speaker 1: more substance than stock and alliss. So what about m 612 00:39:36,080 --> 00:39:39,040 Speaker 1: risk mitigation? What sort of tools do you use to 613 00:39:39,040 --> 00:39:43,840 Speaker 1: to control the risk you have? Well, we stress the 614 00:39:43,960 --> 00:39:48,520 Speaker 1: portfolio based on if rates move up a hundred peers 615 00:39:48,600 --> 00:39:53,040 Speaker 1: two hundred peers. We do it in either direction. We 616 00:39:53,239 --> 00:39:57,719 Speaker 1: try not to concentrate in one industry. We personally impose 617 00:39:57,840 --> 00:40:01,520 Speaker 1: some restrictions to our portfolio. We don't do casualty insurance 618 00:40:01,560 --> 00:40:04,800 Speaker 1: for example. Why not. We don't want to read about 619 00:40:04,800 --> 00:40:07,879 Speaker 1: the tsunami and all of a sudden it turned out 620 00:40:07,920 --> 00:40:10,880 Speaker 1: that the bonds of the company we hold, we're insuring 621 00:40:10,920 --> 00:40:14,400 Speaker 1: every single house that was destroyed by the tsunami. So 622 00:40:14,440 --> 00:40:19,920 Speaker 1: that's pretty much just a straightforward geographical diversification approach. We 623 00:40:20,000 --> 00:40:23,560 Speaker 1: don't do newly deregulated industries that saved us from and 624 00:40:23,719 --> 00:40:27,160 Speaker 1: run from World com We never did the airlines, for example. 625 00:40:28,600 --> 00:40:33,719 Speaker 1: Newly deregulated industries are a higher risk bond than as 626 00:40:33,760 --> 00:40:38,719 Speaker 1: widely perceived management. Let me give you an example. Pacific 627 00:40:38,760 --> 00:40:43,200 Speaker 1: Gas and Electric, or that the Pacific companies. They were 628 00:40:43,320 --> 00:40:46,920 Speaker 1: running a utility, they were selling power, and all of 629 00:40:46,960 --> 00:40:50,320 Speaker 1: a sudden they were deregulated. They went out and bought 630 00:40:50,360 --> 00:40:54,040 Speaker 1: the thrifty chain of drug stores. Wait, so when when 631 00:40:54,200 --> 00:40:58,759 Speaker 1: was PGN and California Utilities deregulated in the nineties and 632 00:40:59,840 --> 00:41:02,920 Speaker 1: the found out that selling crests toothpaste was not the 633 00:41:02,960 --> 00:41:06,880 Speaker 1: same as selling power to Two years later they sold 634 00:41:06,920 --> 00:41:08,600 Speaker 1: the company at a loss of one and a half 635 00:41:08,600 --> 00:41:11,799 Speaker 1: billion dollars and they had their bonds downgraded because of it. 636 00:41:13,200 --> 00:41:16,919 Speaker 1: If a manager was running an airline and he had 637 00:41:17,000 --> 00:41:20,239 Speaker 1: specific routes, he could not move from them. All of 638 00:41:20,239 --> 00:41:23,640 Speaker 1: a sudden he's competing with Joe and his brother who 639 00:41:23,680 --> 00:41:28,120 Speaker 1: both three planes and are doing the small cities. It 640 00:41:28,239 --> 00:41:31,360 Speaker 1: became very dangerous to compete in that market. We saw 641 00:41:31,520 --> 00:41:37,279 Speaker 1: every major airline go through bankruptcy. Communications you had the 642 00:41:37,320 --> 00:41:41,240 Speaker 1: Big I mean Big Mabel. You knew the Big Mobil 643 00:41:41,520 --> 00:41:45,320 Speaker 1: was the safest company in the world. Stuff. So when 644 00:41:45,520 --> 00:41:48,920 Speaker 1: when they broke them up, you know, they ended up. 645 00:41:49,000 --> 00:41:51,520 Speaker 1: I mean the world comes came up in the world 646 00:41:51,680 --> 00:41:55,520 Speaker 1: and the Worlcome ended up going broke, So that's another 647 00:41:55,640 --> 00:41:58,680 Speaker 1: one of the areas we don't do. And the third 648 00:41:58,719 --> 00:42:04,200 Speaker 1: one is nuclear power, and it's not for environmental reasons. 649 00:42:04,320 --> 00:42:08,200 Speaker 1: It's if some idiot forgot to close about the plant 650 00:42:08,320 --> 00:42:13,200 Speaker 1: might end up in a different state, so whoops, the 651 00:42:13,280 --> 00:42:18,720 Speaker 1: Washington State utility had a major problem with a nuclear plant. 652 00:42:19,800 --> 00:42:23,400 Speaker 1: Three my Leland is another example. We don't want to 653 00:42:23,440 --> 00:42:28,120 Speaker 1: take the risk of an error creating a situation where 654 00:42:28,120 --> 00:42:31,080 Speaker 1: our bonds would dramatically change in races. So if I 655 00:42:31,120 --> 00:42:33,200 Speaker 1: were to go around the country and look at the 656 00:42:33,320 --> 00:42:38,239 Speaker 1: utilities that have nuclear power plants on their books, their 657 00:42:38,280 --> 00:42:40,480 Speaker 1: bonds are going to be trading at a at a 658 00:42:40,520 --> 00:42:44,120 Speaker 1: discount to what non nuclear utilities or is this just 659 00:42:44,200 --> 00:42:47,920 Speaker 1: specifically specific to l M. Does anybody else do that? 660 00:42:48,120 --> 00:42:51,440 Speaker 1: I don't know, But for us that risk mitigation is 661 00:42:51,520 --> 00:42:56,200 Speaker 1: very important, and then we overlay our scenario planning so 662 00:42:56,480 --> 00:43:00,680 Speaker 1: we try to avoid anything that we have to get 663 00:43:00,680 --> 00:43:04,319 Speaker 1: out very quickly if something happened. I don't think you're 664 00:43:04,360 --> 00:43:07,239 Speaker 1: paid enough to take a little bit of an additional risk. 665 00:43:08,520 --> 00:43:12,400 Speaker 1: If you were paying me another three d beeps, I 666 00:43:12,400 --> 00:43:17,719 Speaker 1: mean three more in interest to taking to take additional risk, 667 00:43:17,840 --> 00:43:21,040 Speaker 1: I would consider it. If you pay me five beeps 668 00:43:21,400 --> 00:43:24,440 Speaker 1: point oh five of a percent more, it's not worth it. 669 00:43:24,560 --> 00:43:28,120 Speaker 1: Not worth it. So so you had mentioned the rating agencies. 670 00:43:28,640 --> 00:43:32,239 Speaker 1: Clearly they did a terrible job during the financial crisis. 671 00:43:32,680 --> 00:43:36,440 Speaker 1: We later learned that their whole business model had shifted 672 00:43:36,560 --> 00:43:41,000 Speaker 1: from the bond buyers paying their fees to the issuers 673 00:43:41,040 --> 00:43:44,160 Speaker 1: paying their fees, and it became a payola, pay for 674 00:43:44,280 --> 00:43:48,759 Speaker 1: play sort of situation. And if I walk into one 675 00:43:48,760 --> 00:43:50,600 Speaker 1: of them, if I walk into SMP and they don't 676 00:43:50,640 --> 00:43:52,960 Speaker 1: give me the double A rating I want, I'll just 677 00:43:53,040 --> 00:43:55,040 Speaker 1: say no thanks, and I'll go across the street to 678 00:43:55,120 --> 00:43:58,920 Speaker 1: Moody's and I will be able to purchase whatever rating 679 00:43:59,000 --> 00:44:02,920 Speaker 1: I I want. So given that, do you put any 680 00:44:03,120 --> 00:44:07,600 Speaker 1: consideration and to what the rating agencies do, either either 681 00:44:07,640 --> 00:44:11,560 Speaker 1: whether they cover a bond or a country or an industry, 682 00:44:11,719 --> 00:44:16,040 Speaker 1: or a specific upgrade or downgrade. How how important is that? Well, 683 00:44:16,120 --> 00:44:18,960 Speaker 1: we do follow them, we do read what they print, 684 00:44:19,120 --> 00:44:22,000 Speaker 1: and we do take into account their rating because they 685 00:44:22,040 --> 00:44:27,600 Speaker 1: have good analysis. After on nine, they've strengthened their their analysis. 686 00:44:28,400 --> 00:44:31,040 Speaker 1: I think that in the case of the mortgages, they 687 00:44:31,080 --> 00:44:33,920 Speaker 1: just did not understand the product so it was not 688 00:44:34,040 --> 00:44:36,080 Speaker 1: only the paid to play, but it was also a 689 00:44:36,200 --> 00:44:39,640 Speaker 1: lack of understanding how the different trenches would behave in 690 00:44:39,680 --> 00:44:44,320 Speaker 1: a crisis. But first of all, the change in rating 691 00:44:44,680 --> 00:44:48,279 Speaker 1: is not that impactful anymore. Now. When you went from 692 00:44:48,320 --> 00:44:51,920 Speaker 1: a triple B to a triple B minus, the bond 693 00:44:52,280 --> 00:44:55,279 Speaker 1: at one time would drop three points. Now it might 694 00:44:55,360 --> 00:44:58,040 Speaker 1: drop a quarter of a point. How much of that 695 00:44:58,239 --> 00:45:00,759 Speaker 1: is due to the fact that they did such a 696 00:45:00,840 --> 00:45:04,600 Speaker 1: terrible job when they were needed in the last last crisis. 697 00:45:05,120 --> 00:45:10,320 Speaker 1: It does impact what's happening, but the perception of whether 698 00:45:10,400 --> 00:45:13,359 Speaker 1: you cover your needs three point two times or three 699 00:45:13,400 --> 00:45:17,000 Speaker 1: times or two point nine does not make that big 700 00:45:17,000 --> 00:45:20,520 Speaker 1: a difference, even in the case of I mean and now, 701 00:45:20,680 --> 00:45:24,040 Speaker 1: triple beasts are the vast majority of bonds, you know, 702 00:45:24,080 --> 00:45:28,120 Speaker 1: their borderline between investment grade and high yield or low 703 00:45:28,200 --> 00:45:32,719 Speaker 1: investment grade, that's the nicest way of saying junk, you know, 704 00:45:33,160 --> 00:45:36,280 Speaker 1: But they're still considered an investment grade. They're investable for 705 00:45:36,719 --> 00:45:43,360 Speaker 1: anyone who's um charter or portfolio policy statement says only 706 00:45:43,440 --> 00:45:48,920 Speaker 1: investment grade exactly. But most pension plans, for example, today, 707 00:45:49,560 --> 00:45:52,760 Speaker 1: have a bunch of non investment grade bonds in their books. 708 00:45:53,239 --> 00:45:58,080 Speaker 1: At one time, you would think that that change would 709 00:45:58,080 --> 00:46:02,320 Speaker 1: eliminate basically who could by those bonds. And ever since 710 00:46:02,360 --> 00:46:08,080 Speaker 1: Michael Milken in the eighties the he created an industry 711 00:46:08,400 --> 00:46:11,759 Speaker 1: for non investment grade bonds. I mean, he did not 712 00:46:11,920 --> 00:46:15,719 Speaker 1: invent the hi yield bonds. He just invented who could 713 00:46:15,719 --> 00:46:19,359 Speaker 1: buy them. He went to the thrifties, thrifts, he went 714 00:46:19,400 --> 00:46:22,840 Speaker 1: to the savings and loans, he went to the insurance companies, 715 00:46:23,360 --> 00:46:26,560 Speaker 1: and then the patient plan said, well, let's make that 716 00:46:26,640 --> 00:46:30,040 Speaker 1: also an asset class in which we can invest. So 717 00:46:30,040 --> 00:46:32,600 Speaker 1: so let's talk about those pension funds for a moment. 718 00:46:33,080 --> 00:46:38,120 Speaker 1: You mentioned during the broadcast portion that their allocation has 719 00:46:38,160 --> 00:46:43,560 Speaker 1: been gearing more towards alternatives like venture capital and private 720 00:46:43,560 --> 00:46:48,600 Speaker 1: equity and hedge funds because they're looking for a higher 721 00:46:48,840 --> 00:46:53,120 Speaker 1: total expected return, which they're not just they apparently you're 722 00:46:53,160 --> 00:46:57,280 Speaker 1: not getting from stocks and bonds, but they also haven't 723 00:46:57,280 --> 00:47:01,480 Speaker 1: been getting them from the alternatives they've been They're expensive. 724 00:47:01,719 --> 00:47:05,120 Speaker 1: I like to jokingly say, come, come for the high fees, 725 00:47:05,200 --> 00:47:09,120 Speaker 1: stay for the under performance. But in all seriousness, they 726 00:47:09,200 --> 00:47:13,880 Speaker 1: have built out ten thirty sometimes even of their total 727 00:47:13,920 --> 00:47:19,919 Speaker 1: portfolios with these alternatives, and they've slapped a very high 728 00:47:20,200 --> 00:47:25,440 Speaker 1: expected return six eight, ten on these. Why is that? 729 00:47:25,480 --> 00:47:29,120 Speaker 1: How can they just say, even though we have decades 730 00:47:29,160 --> 00:47:31,520 Speaker 1: of data showing that these are not going to get 731 00:47:32,120 --> 00:47:35,000 Speaker 1: eight percent, we're still going to put an expected return 732 00:47:35,040 --> 00:47:37,239 Speaker 1: of eight percent on this. What? What does that due 733 00:47:37,280 --> 00:47:40,879 Speaker 1: to the allocations? They were getting those results years ago 734 00:47:41,040 --> 00:47:44,319 Speaker 1: in the eighties and nineties because there wasn't that much competition. 735 00:47:45,080 --> 00:47:48,880 Speaker 1: There's been so much money that has gone into alternatives 736 00:47:49,040 --> 00:47:52,000 Speaker 1: that now they're competing for deals and the yields are 737 00:47:52,080 --> 00:47:56,000 Speaker 1: are lower. It's just that's just market efficiency, isn't it. 738 00:47:56,120 --> 00:47:58,680 Speaker 1: You can't you can't have these big fat margins without 739 00:47:59,080 --> 00:48:01,839 Speaker 1: attracting other people to say I'd like a little bit 740 00:48:01,840 --> 00:48:05,759 Speaker 1: of that. I tend to joke saying that hope is 741 00:48:05,800 --> 00:48:11,160 Speaker 1: not a strategy, and a lot of the buying of 742 00:48:11,440 --> 00:48:17,000 Speaker 1: private equity adventure is hoping that in the future that 743 00:48:17,080 --> 00:48:20,000 Speaker 1: will be worth much more. If you own stocks or 744 00:48:20,040 --> 00:48:24,400 Speaker 1: your own bonds, the value is there every day you know, 745 00:48:24,520 --> 00:48:27,040 Speaker 1: you run a statement, you check what the value of 746 00:48:27,040 --> 00:48:29,759 Speaker 1: your stocks are. You can find out the value of 747 00:48:29,760 --> 00:48:33,359 Speaker 1: your portfolio every day. If you have private equity, you 748 00:48:33,360 --> 00:48:36,600 Speaker 1: have no clue how much is it worth when it 749 00:48:36,640 --> 00:48:40,480 Speaker 1: goes public when there's a liquidity event, then it's when 750 00:48:40,520 --> 00:48:43,320 Speaker 1: you know what happens. But it might take five or 751 00:48:43,400 --> 00:48:46,040 Speaker 1: ten years, and you never know the real value of 752 00:48:46,040 --> 00:48:50,680 Speaker 1: your investment. And you can always put any increased value 753 00:48:50,719 --> 00:48:54,680 Speaker 1: you want and it will show us though you're doing well, 754 00:48:55,440 --> 00:48:58,080 Speaker 1: and you might or might not get that value that 755 00:48:58,120 --> 00:49:00,759 Speaker 1: you put it down in your state. So the non 756 00:49:00,840 --> 00:49:05,279 Speaker 1: publicly traded assets give people the ability to mark, to 757 00:49:06,040 --> 00:49:09,840 Speaker 1: not mark the market, but mark two what hopes and 758 00:49:09,920 --> 00:49:12,160 Speaker 1: dreams is that what you suggest that it's not that bad. 759 00:49:12,239 --> 00:49:15,160 Speaker 1: But the answer is yes, you know, it's we used 760 00:49:15,160 --> 00:49:17,040 Speaker 1: to call it mark to make believe in the middle 761 00:49:17,080 --> 00:49:19,520 Speaker 1: of the crisis, but it's not. You know, we're not 762 00:49:19,600 --> 00:49:22,360 Speaker 1: suggesting that. You're saying it gives them a little bit 763 00:49:22,400 --> 00:49:26,480 Speaker 1: of accounting flexibility, exactly. I think that things are worth 764 00:49:26,520 --> 00:49:29,400 Speaker 1: what the buyer is willing to pay. I mean, I 765 00:49:29,440 --> 00:49:31,760 Speaker 1: think that if you ask them people who their house 766 00:49:31,880 --> 00:49:34,839 Speaker 1: is worth, you're going to get tent responses that are 767 00:49:34,960 --> 00:49:39,360 Speaker 1: higher than the actual market. But that's an emotional bias 768 00:49:39,480 --> 00:49:42,400 Speaker 1: that that makes some sense. It makes It's the same 769 00:49:42,440 --> 00:49:46,600 Speaker 1: as when they're valuing companies. Endowment effect is is certainly present. 770 00:49:46,840 --> 00:49:52,120 Speaker 1: You know, you want to believe that everybody is going 771 00:49:52,160 --> 00:49:55,560 Speaker 1: to see the same that you are seeing, and the buyer, 772 00:49:55,800 --> 00:49:57,839 Speaker 1: even if they perceive that the value is the same 773 00:49:57,880 --> 00:49:59,800 Speaker 1: as you do, they're going to fight to get a 774 00:50:00,440 --> 00:50:03,320 Speaker 1: They still want a discount of absolutely. You know, nobody 775 00:50:03,360 --> 00:50:07,920 Speaker 1: likes to pay retail sure, So you are really thinking 776 00:50:08,360 --> 00:50:10,840 Speaker 1: hoping that you're going to get the values you're putting 777 00:50:10,880 --> 00:50:14,200 Speaker 1: down in this statement, and that does not necessarily going 778 00:50:14,239 --> 00:50:17,680 Speaker 1: to happen. Sometimes you're going to be very pleasantly surprised, 779 00:50:18,200 --> 00:50:20,520 Speaker 1: but most of the time you won't. So I used 780 00:50:20,560 --> 00:50:22,680 Speaker 1: to joke with a friend who is at a pension 781 00:50:22,719 --> 00:50:28,560 Speaker 1: funds about what I perceived as their absurd expected returns 782 00:50:28,640 --> 00:50:32,600 Speaker 1: on their alternatives, and the response was, we need seven 783 00:50:32,680 --> 00:50:36,279 Speaker 1: or eight percent. So I used to say, well, let's 784 00:50:36,280 --> 00:50:38,400 Speaker 1: assume you get two and a half percent from your 785 00:50:38,400 --> 00:50:41,799 Speaker 1: bond portfolio and you get five percent from your equities, 786 00:50:41,880 --> 00:50:44,279 Speaker 1: and I'm up, there's your seven a half percent. And 787 00:50:44,320 --> 00:50:46,920 Speaker 1: it took him a moment to realize, well, that's not 788 00:50:46,960 --> 00:50:49,759 Speaker 1: how you do a blended portfolio. But it's every bit 789 00:50:49,760 --> 00:50:53,759 Speaker 1: as ridiculous as expecting ten percent from asset classes that 790 00:50:53,840 --> 00:50:57,480 Speaker 1: haven't returned. That sort of number for twenty or thirty years. 791 00:50:58,000 --> 00:51:01,560 Speaker 1: You're right, but you always kicking the can a little 792 00:51:01,560 --> 00:51:05,240 Speaker 1: bit further away. So probably by the time the pension 793 00:51:05,400 --> 00:51:08,959 Speaker 1: plan runs out of money, you will not be there, right, 794 00:51:09,040 --> 00:51:12,000 Speaker 1: So I mean that you say that half jokingly, but 795 00:51:12,160 --> 00:51:15,600 Speaker 1: we know that's true. Governments, state and local governments have 796 00:51:15,680 --> 00:51:18,960 Speaker 1: done that with their police pension funds and their fire 797 00:51:19,000 --> 00:51:22,600 Speaker 1: pension funds and their teacher funds that by the time 798 00:51:22,840 --> 00:51:27,200 Speaker 1: it's really problematic, the politicians responsible for that they're long 799 00:51:27,200 --> 00:51:30,200 Speaker 1: out of office. That someone else's headache. How can we 800 00:51:30,280 --> 00:51:33,440 Speaker 1: realign the incentives so that we're not just kicking the 801 00:51:33,480 --> 00:51:36,480 Speaker 1: can down the road or is that just human nature? 802 00:51:36,480 --> 00:51:38,320 Speaker 1: And this is what's going to happen. Look at the 803 00:51:38,400 --> 00:51:42,000 Speaker 1: state of Illinois. They have excellent managers managing the money 804 00:51:42,000 --> 00:51:45,200 Speaker 1: at the pension plans, and they're underfunded by I mean, 805 00:51:45,239 --> 00:51:49,759 Speaker 1: they probably are funded for thirty five it's politicians that 806 00:51:49,880 --> 00:51:53,800 Speaker 1: have not wanted to raise the contributions that are trying 807 00:51:53,840 --> 00:51:57,320 Speaker 1: to be re elected, so they don't pressure the public 808 00:51:57,640 --> 00:52:01,040 Speaker 1: workers to give more of their salary to their pension plan. 809 00:52:01,760 --> 00:52:04,839 Speaker 1: And you know, it's now a huge problem because they're 810 00:52:04,880 --> 00:52:07,480 Speaker 1: running out of money. So there are certain states that 811 00:52:07,560 --> 00:52:12,960 Speaker 1: have high taxes and big state spending, but seem to 812 00:52:13,000 --> 00:52:16,840 Speaker 1: have their budgets and their pension plans more under control. 813 00:52:16,960 --> 00:52:20,080 Speaker 1: California comes to mind, New York comes to mind. Amongst 814 00:52:20,120 --> 00:52:22,600 Speaker 1: the states a little better or or a lot better. 815 00:52:23,400 --> 00:52:27,720 Speaker 1: Clearly Chicago and Illinois have problems. I hear about problems 816 00:52:27,719 --> 00:52:31,799 Speaker 1: in New Jersey and Connecticut both have pension issues. How 817 00:52:31,960 --> 00:52:35,920 Speaker 1: significant is this going to be for funding UM in 818 00:52:35,960 --> 00:52:38,840 Speaker 1: the next twenty to thirty years. It's a huge problem, 819 00:52:39,120 --> 00:52:42,560 Speaker 1: huge huge Look at Detroit. Detroit had to file for 820 00:52:42,600 --> 00:52:45,160 Speaker 1: bankruptcy because of the pension place. So now what happens. 821 00:52:45,200 --> 00:52:49,040 Speaker 1: So now, if you're a company and you file for bankruptcy, 822 00:52:50,640 --> 00:52:53,960 Speaker 1: judges have a tendency. Courts have a tendency to say, 823 00:52:55,280 --> 00:52:59,719 Speaker 1: before you even get to the creditors, employee compensation, salary 824 00:52:59,800 --> 00:53:03,760 Speaker 1: and pensions is sacrosanct. We don't touch that. What happened 825 00:53:03,800 --> 00:53:09,560 Speaker 1: in Detroit with the the employee pensions post bankruptcy, some 826 00:53:09,680 --> 00:53:12,840 Speaker 1: of it were cut down. Cities can go bankrupt, states 827 00:53:12,880 --> 00:53:16,400 Speaker 1: cannot by law, right, But you know, they got to 828 00:53:16,400 --> 00:53:19,200 Speaker 1: the point where they were about to sell the paintings 829 00:53:19,239 --> 00:53:23,280 Speaker 1: from the museum in Detroit in order to pay pension plans. 830 00:53:23,680 --> 00:53:28,640 Speaker 1: The city is being revitalized, and they hope that eventually 831 00:53:28,640 --> 00:53:32,200 Speaker 1: they're gonna pull out, But again I hope. To me, 832 00:53:32,320 --> 00:53:35,600 Speaker 1: hope is not a strategy. Right, So, we know that 833 00:53:35,840 --> 00:53:39,600 Speaker 1: post hurricane, Puerto Rico has had or let's let's phrase 834 00:53:39,640 --> 00:53:43,600 Speaker 1: that a little differently. Post hurricane, it was revealed the 835 00:53:43,640 --> 00:53:48,240 Speaker 1: precarious state of Puerto Rico's finances, sort of like Greece 836 00:53:48,360 --> 00:53:51,560 Speaker 1: to the EU, Puerto Rico managed to borrow it rates 837 00:53:51,640 --> 00:53:54,680 Speaker 1: that were more suitable for the US than for Puerto Rico. 838 00:53:56,000 --> 00:53:59,600 Speaker 1: They're not a state, they're not a city, They're they're 839 00:53:59,640 --> 00:54:03,840 Speaker 1: a territory. What happens with that situation? Are they going 840 00:54:03,880 --> 00:54:06,960 Speaker 1: to be able to get a refinancing? Is bankruptcy even 841 00:54:07,000 --> 00:54:11,719 Speaker 1: an option for a non state, non city territory. Well, 842 00:54:11,880 --> 00:54:15,200 Speaker 1: first they can go to bankruptcy with the state owned enterprises, 843 00:54:16,360 --> 00:54:19,880 Speaker 1: but Puerto Rico had a big problem even before the hurricane, 844 00:54:20,600 --> 00:54:23,440 Speaker 1: and you know, the electric company had been in trouble 845 00:54:23,960 --> 00:54:29,240 Speaker 1: paying back even before the hurricane. So they are still 846 00:54:29,280 --> 00:54:33,920 Speaker 1: fighting it. They're still fighting with bond holders and the pain. 847 00:54:34,239 --> 00:54:38,480 Speaker 1: The public workers are crossing their fingers that their pension 848 00:54:38,520 --> 00:54:40,600 Speaker 1: will be there when they need. They were suffering a 849 00:54:40,680 --> 00:54:44,240 Speaker 1: brain drain before the hurricane. Because if you're in Puerto 850 00:54:44,320 --> 00:54:48,399 Speaker 1: Rico and you're making X, and you could just take 851 00:54:48,400 --> 00:54:50,960 Speaker 1: a plane to Florida or Texas or wherever you want 852 00:54:50,960 --> 00:54:54,200 Speaker 1: to go, because you're a US citizen, you could get 853 00:54:54,200 --> 00:54:57,239 Speaker 1: a job with that skill and make one and half 854 00:54:57,320 --> 00:54:59,680 Speaker 1: or two X. They seem to have lost a lot 855 00:54:59,719 --> 00:55:02,760 Speaker 1: of really talented people. They have, even though they created 856 00:55:02,800 --> 00:55:05,400 Speaker 1: a lot of incentives for people to go leave in 857 00:55:05,440 --> 00:55:08,399 Speaker 1: Puerto Rica. Very low taxes, very low taxes. The first 858 00:55:08,440 --> 00:55:13,000 Speaker 1: year you pay I think three percent income taxes. That's 859 00:55:13,040 --> 00:55:16,759 Speaker 1: not too shabby. A lot of big big money managers. 860 00:55:16,880 --> 00:55:20,000 Speaker 1: That's federal income tax, not state. So instead of a 861 00:55:20,040 --> 00:55:23,000 Speaker 1: top rate of thirty seven, your top rate is three. Yeah. 862 00:55:23,200 --> 00:55:26,560 Speaker 1: H fund managers have moved to Puerto Rico. Weather is 863 00:55:26,600 --> 00:55:29,480 Speaker 1: not too bad. It's not too bad. Good beaches. Huh. 864 00:55:29,960 --> 00:55:33,200 Speaker 1: So I only have you for a limited amount of time. 865 00:55:34,000 --> 00:55:35,960 Speaker 1: Let me get to some of my favorite questions I 866 00:55:36,000 --> 00:55:38,960 Speaker 1: asked all of my guests. It adds a little bit 867 00:55:39,000 --> 00:55:42,200 Speaker 1: of a sort of cinema verity when I move off 868 00:55:42,280 --> 00:55:44,960 Speaker 1: Mike and people can tell that I'm doing that. I 869 00:55:45,239 --> 00:55:47,759 Speaker 1: kind of like that especially at the end, not during 870 00:55:47,760 --> 00:55:50,960 Speaker 1: the broadcast portion. Um, but let's jump to these questions. 871 00:55:51,600 --> 00:55:54,600 Speaker 1: We'll call this our speed round. So what was the 872 00:55:54,680 --> 00:56:00,359 Speaker 1: first car you ever owned? Year make and model six 873 00:56:00,440 --> 00:56:04,440 Speaker 1: dog Dart dodged. They were My sister had one of those. 874 00:56:05,160 --> 00:56:08,280 Speaker 1: It was a sixty six or sixty seven. Those cars 875 00:56:08,320 --> 00:56:11,480 Speaker 1: could not be killed. They were three thousand mile cars 876 00:56:11,480 --> 00:56:14,120 Speaker 1: from the sixties. I wish it had been my sisters 877 00:56:14,120 --> 00:56:16,440 Speaker 1: in that mind. So you had a problem with it. 878 00:56:16,640 --> 00:56:19,359 Speaker 1: I did not like it, but because when my father 879 00:56:19,440 --> 00:56:21,799 Speaker 1: gave me it wasn't the prettiest car, but they were 880 00:56:21,880 --> 00:56:25,440 Speaker 1: kind of indestructible for that they were, Um tell us 881 00:56:25,480 --> 00:56:28,120 Speaker 1: the most important thing that your friends and family don't 882 00:56:28,120 --> 00:56:33,920 Speaker 1: know about you. I love red wine. That's my passion, 883 00:56:34,000 --> 00:56:37,480 Speaker 1: and I'm a collector. Very interesting. Who were some of 884 00:56:37,520 --> 00:56:40,799 Speaker 1: your early mentors who helped shape your view of the 885 00:56:40,840 --> 00:56:46,880 Speaker 1: fixed income markets and investing? A Nobel Prize winner professor 886 00:56:46,920 --> 00:56:53,560 Speaker 1: at Harvard before I really got to know him, Bill Gross, 887 00:56:55,840 --> 00:56:58,000 Speaker 1: before you got to know him, not after, not after, 888 00:56:58,960 --> 00:57:03,400 Speaker 1: And I would say that the mentor was my father, 889 00:57:03,560 --> 00:57:06,160 Speaker 1: not in terms of investing, but in terms of values. 890 00:57:06,960 --> 00:57:09,319 Speaker 1: Hard work is the only thing that makes you do 891 00:57:09,360 --> 00:57:13,560 Speaker 1: well makes it makes a lot of sense. Um, tell 892 00:57:13,640 --> 00:57:15,880 Speaker 1: us about your favorite books. What are you reading? What, 893 00:57:15,880 --> 00:57:19,880 Speaker 1: what do you recommend other people read? Fiction, nonfiction, investing 894 00:57:19,920 --> 00:57:25,360 Speaker 1: related whatever. In fiction, I love the Mill Nelson, The Mill, 895 00:57:25,720 --> 00:57:30,040 Speaker 1: I love the series by ken fall It. And in 896 00:57:30,160 --> 00:57:34,880 Speaker 1: nonfiction I'm reading now a great book of the woman 897 00:57:34,960 --> 00:57:37,640 Speaker 1: that ran the Spye Network for the French in the 898 00:57:37,720 --> 00:57:42,080 Speaker 1: Second World War, Madame for God, And I love Harari's 899 00:57:42,240 --> 00:57:47,320 Speaker 1: the Israeli guy that's part historian, part philosopher. The one 900 00:57:47,440 --> 00:57:51,000 Speaker 1: Questions for the twenty one Centuries an amazing book. Really. 901 00:57:51,200 --> 00:57:54,200 Speaker 1: I read same guy who wrote Sapiens Schapions, and then 902 00:57:54,320 --> 00:57:58,120 Speaker 1: Homo which was a little darker than say, and now 903 00:57:58,160 --> 00:58:01,440 Speaker 1: The Questions in Tours a great book. I'm gonna I'm 904 00:58:01,440 --> 00:58:04,800 Speaker 1: gonna put that one on my list. The the ken 905 00:58:04,800 --> 00:58:07,160 Speaker 1: Fileted series, He's had a number of different series, which 906 00:58:07,160 --> 00:58:09,720 Speaker 1: one you were find both the Piers of the Earth 907 00:58:09,800 --> 00:58:11,880 Speaker 1: they went about the building of the Cathedral, and then 908 00:58:11,920 --> 00:58:15,640 Speaker 1: the one that takes him through the Three Wars. I mean, 909 00:58:15,800 --> 00:58:20,240 Speaker 1: his writing is amazing. I love historic novels. That's really 910 00:58:20,280 --> 00:58:23,600 Speaker 1: quite interesting. Tell us about a time you failed and 911 00:58:23,640 --> 00:58:26,840 Speaker 1: what you learned from the experience When I was living 912 00:58:26,840 --> 00:58:32,560 Speaker 1: in Mexico. I found the smoking withdrawal system from water Peak, 913 00:58:33,200 --> 00:58:37,160 Speaker 1: so I flew to Fort Collins and negotiated with them. 914 00:58:37,320 --> 00:58:40,400 Speaker 1: The representation in Mexico brought it to Mexico, and then 915 00:58:40,440 --> 00:58:42,960 Speaker 1: found out that Mexicans did not want to stop smoking, 916 00:58:44,280 --> 00:58:47,520 Speaker 1: so it was not a good business. I just thought 917 00:58:47,560 --> 00:58:49,640 Speaker 1: that I could carry over what was happening in the 918 00:58:49,680 --> 00:58:53,760 Speaker 1: US new Mexico. And you have to understand local mentality 919 00:58:53,760 --> 00:58:57,000 Speaker 1: and local desires. Is that still true or Mexicans still 920 00:58:57,240 --> 00:59:00,760 Speaker 1: big tobacco smokers relative to what it was like thirty 921 00:59:00,840 --> 00:59:03,600 Speaker 1: years ago. It's lower, but it's much bigger than in 922 00:59:03,640 --> 00:59:05,560 Speaker 1: the U. S. I mean it's fallen. I grew up 923 00:59:05,560 --> 00:59:08,280 Speaker 1: in a I've never been a smoker. My parents were smokers. 924 00:59:08,280 --> 00:59:12,160 Speaker 1: They eventually stopped. But in the United States it's fallen 925 00:59:12,200 --> 00:59:16,600 Speaker 1: off a cliff like it's like it's almost noteworthy when 926 00:59:16,640 --> 00:59:19,320 Speaker 1: you see someone in the street with a cigarette. I'm 927 00:59:19,360 --> 00:59:23,360 Speaker 1: not even talking about vaping an actual tobacco cigarette. It's 928 00:59:23,400 --> 00:59:26,560 Speaker 1: almost like, you know, a rarity. It's like spotting a 929 00:59:26,600 --> 00:59:30,120 Speaker 1: wild unicorn. In Mexico, you cannot open your restaurant without it. 930 00:59:30,240 --> 00:59:32,960 Speaker 1: Darris for smokers, but they're not allowed to smoke in 931 00:59:33,000 --> 00:59:35,760 Speaker 1: the restaurant proper. That's a smaller part of the restaurant. 932 00:59:36,480 --> 00:59:39,280 Speaker 1: That's that's amazing. Um. What do you do for fun? 933 00:59:39,320 --> 00:59:41,120 Speaker 1: You mentioned red wine? What else do you do to 934 00:59:41,280 --> 00:59:45,680 Speaker 1: stay busy out of the office, traveling, reading, watching sports 935 00:59:45,720 --> 00:59:48,120 Speaker 1: on TV, and playing some golf? What what sports do 936 00:59:48,160 --> 00:59:54,000 Speaker 1: you watch? I watch basketball and I watch golf, and 937 00:59:54,040 --> 00:59:57,720 Speaker 1: my wife says I would watch Jackson if they show 938 00:59:57,760 --> 01:00:02,080 Speaker 1: the tournament. Um, what has you most excited about the 939 01:00:02,120 --> 01:00:05,240 Speaker 1: bond market these days? What? What are you enthusiastic about. 940 01:00:05,560 --> 01:00:08,680 Speaker 1: I love the idea that emerging market that has become 941 01:00:08,720 --> 01:00:11,680 Speaker 1: an asset class, and almost everybody is not pursuing it. 942 01:00:12,120 --> 01:00:14,160 Speaker 1: We've been at it for thirty years and I think 943 01:00:14,200 --> 01:00:17,720 Speaker 1: one of the stronger firms in the country. On So, 944 01:00:17,920 --> 01:00:20,960 Speaker 1: if a young college grad or millennial came up to 945 01:00:20,960 --> 01:00:23,480 Speaker 1: you and said they were interested in a career in 946 01:00:23,560 --> 01:00:27,000 Speaker 1: fixed income, what sort of advice would you give them? 947 01:00:27,240 --> 01:00:30,520 Speaker 1: Try to go beyond what you're reading the in the financials. 948 01:00:30,600 --> 01:00:34,280 Speaker 1: I mean, reading financials is one thing. Understanding what the 949 01:00:34,320 --> 01:00:37,400 Speaker 1: company does or who runs it is probably more important 950 01:00:37,400 --> 01:00:41,320 Speaker 1: than anything. And our final question, what do you know 951 01:00:41,400 --> 01:00:44,840 Speaker 1: about the world of bond investing today that you wish 952 01:00:44,840 --> 01:00:49,120 Speaker 1: you knew thirty years ago when you first launched the firm, 953 01:00:49,120 --> 01:00:53,200 Speaker 1: that the trend torch lower rates was gonna last thirty years. 954 01:00:53,280 --> 01:00:55,479 Speaker 1: I would have made a ton of money. I would 955 01:00:55,760 --> 01:00:59,439 Speaker 1: have bought only thirty year paper. It wasn't obvious back 956 01:00:59,440 --> 01:01:01,400 Speaker 1: then that this was the start of a three decade 957 01:01:01,440 --> 01:01:06,800 Speaker 1: long bullmarket. No, we were coming out, I mean from 958 01:01:06,840 --> 01:01:12,200 Speaker 1: the Jimmy Carter days with big inflation and globalization had 959 01:01:12,200 --> 01:01:16,240 Speaker 1: not taken over yet, so boom and bust was still 960 01:01:16,360 --> 01:01:18,760 Speaker 1: part of the story of the economy in the US. 961 01:01:19,400 --> 01:01:21,680 Speaker 1: The economy in the US has changed so much, you know, 962 01:01:21,880 --> 01:01:26,320 Speaker 1: it's no longer that globalization. If there's a crisis, all 963 01:01:26,360 --> 01:01:30,280 Speaker 1: you do is called your supplier and say in China 964 01:01:30,400 --> 01:01:32,680 Speaker 1: or in Mexico, and you tell them those ship the 965 01:01:32,720 --> 01:01:35,760 Speaker 1: next six months. You don't have to shut down the plant. Huh. 966 01:01:35,920 --> 01:01:39,640 Speaker 1: Quite quite interesting. We have been speaking to Louise Mazelle 967 01:01:39,720 --> 01:01:43,560 Speaker 1: of LM Capital Group. If you enjoy this conversation, well, 968 01:01:43,680 --> 01:01:45,240 Speaker 1: be sure to look Up an Inch or down an 969 01:01:45,280 --> 01:01:49,240 Speaker 1: Inch on Apple iTunes or wherever you have access to 970 01:01:49,320 --> 01:01:51,920 Speaker 1: this podcast, and you could check out any of the 971 01:01:51,960 --> 01:01:56,240 Speaker 1: other two hundred and fifty podcasts we have broadcast over 972 01:01:56,240 --> 01:01:59,560 Speaker 1: the past five years. We love your comments, feedback and 973 01:01:59,560 --> 01:02:04,000 Speaker 1: SIGG questions right to us at m IB podcast at 974 01:02:04,040 --> 01:02:07,200 Speaker 1: Bloomberg dot net. I would be remiss if I did 975 01:02:07,240 --> 01:02:10,960 Speaker 1: not thank the Crack staff who helps put these conversations 976 01:02:11,000 --> 01:02:17,200 Speaker 1: together each week. My producer slash audio engineer is Medina Parwanna. 977 01:02:17,760 --> 01:02:22,000 Speaker 1: Taylor Riggs and Michael Boyle are our bookers. Attica val 978 01:02:22,040 --> 01:02:25,720 Speaker 1: Brunn is our project manager. Michael Batnick is our head 979 01:02:25,760 --> 01:02:29,760 Speaker 1: of research. I'm Barry Results. You've been listening to Masters 980 01:02:29,800 --> 01:02:31,920 Speaker 1: in Business on Bloomberg Radio