WEBVTT - Luis Maizel Discusses Diversity in Finance 0:00:02.200 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Boomberg Radio. 0:00:09.680 --> 0:00:12.280 This week on the podcast, I have a special guest. 0:00:12.560 --> 0:00:15.400 His name is Louise Mazel, and if you are at 0:00:15.440 --> 0:00:20.480 all interested in a couple of areas of asset management 0:00:20.480 --> 0:00:24.160 and allocation, you're gonna find this to be really quite intriguing. 0:00:24.680 --> 0:00:28.000 He set up a firm thirty years ago to make 0:00:28.160 --> 0:00:33.479 emerging market fixed income investments and LM Capital Group has 0:00:33.520 --> 0:00:37.680 been doing that for the past three decades. Uh. They 0:00:37.720 --> 0:00:40.680 basically do their own due diligence. They check out all 0:00:40.720 --> 0:00:45.000 of the various bonds that they buy on behalf of clients, uh, 0:00:45.080 --> 0:00:50.360 not relying on the traditional rating agencies, and um, they're 0:00:50.440 --> 0:00:54.560 essentially owned by their employees. It's a very interesting shop. 0:00:54.920 --> 0:00:59.600 And Louise does a wonderful job explaining why emerging market 0:01:00.040 --> 0:01:03.440 yet has really become an asset class and to itself, 0:01:04.280 --> 0:01:09.800 given how soft um actual yields are, and that half 0:01:09.959 --> 0:01:13.800 of the sovereign wealth debt these days, over nine trillion dollars, 0:01:14.400 --> 0:01:19.080 is actually holding a negative yield. Uh, he thinks e 0:01:19.280 --> 0:01:21.920 M debt is going to be a not only a 0:01:21.959 --> 0:01:24.200 distinct asset class, but it's going to attract a lot 0:01:24.200 --> 0:01:27.760 of capital over the next decade, and he's very bullsh 0:01:28.080 --> 0:01:32.320 So with no further ado, here's my conversation with LM 0:01:32.360 --> 0:01:40.200 Capital Groups Louise Mazel. My special guest this week is 0:01:40.319 --> 0:01:44.160 Louise Maizel. He is the co founder and senior managing 0:01:44.200 --> 0:01:48.760 director at LM Capital Group, an emerging market fixed income 0:01:48.800 --> 0:01:52.040 shop managing over four point two billion dollars in assets. 0:01:52.440 --> 0:01:56.400 The firm was founded in and is privately held. It 0:01:56.600 --> 0:02:02.160 is employee owned and provide It's a fixed income active 0:02:02.200 --> 0:02:08.040 management approach with a global macro overlay. Louise Mazel, Welcome 0:02:08.080 --> 0:02:12.200 to Bloomberg. Thank you very much. Berry, so you will 0:02:12.480 --> 0:02:15.760 launched this firm in nine nine. You're pretty much in 0:02:15.800 --> 0:02:19.679 the middle of a giant bullmarket. What made you decide 0:02:19.720 --> 0:02:23.960 to go into bonds instead of stocks? I started a 0:02:24.040 --> 0:02:29.120 second firm very actually, the first firm, Element Advisors, which 0:02:29.160 --> 0:02:33.120 was managing money for high net worth individuals. Four July 0:02:33.160 --> 0:02:36.800 eighteenth eighty four, the US eliminates the thirty percent withholding. 0:02:37.440 --> 0:02:40.919 Up to then, foreign nationals could only invest tax free 0:02:41.520 --> 0:02:45.480 in T bills or in bank CDs. All of a sudden, 0:02:45.560 --> 0:02:48.959 they opened up the market. A lot of US brokers 0:02:49.360 --> 0:02:52.600 fly out to Mexico City and try to grab some 0:02:52.680 --> 0:02:55.600 of that money. And my friends started to call me saying, 0:02:55.600 --> 0:02:57.560 you're in the States. We know you quite don't you 0:02:57.639 --> 0:03:01.880 help us serve through these new way new market? So 0:03:01.919 --> 0:03:04.880 we did. For five years we were managing high net 0:03:04.919 --> 0:03:09.239 worth individuals, but they were being managed like pensure plants 0:03:09.240 --> 0:03:12.440 because they were mostly taxed THEMPT And from there we 0:03:12.520 --> 0:03:18.280 jumped into the institutional market. So that was um But 0:03:18.400 --> 0:03:22.480 you bring a very different perspective to the management of assets. 0:03:23.040 --> 0:03:27.120 How did growing up outside of the United States shape 0:03:27.240 --> 0:03:31.280 your view of the world, be it developed or emerging markets? 0:03:31.919 --> 0:03:35.000 Think of it as planets. People in the US thing 0:03:35.120 --> 0:03:38.120 that they're sitting in the sun. The US is the 0:03:38.160 --> 0:03:41.400 center of the universe. For US foreigners. We see the 0:03:41.520 --> 0:03:45.200 US as the biggest planet, but it's part of a system. 0:03:45.200 --> 0:03:47.520 So it's very interesting to see the impact of the 0:03:47.600 --> 0:03:50.720 US on the other planets. But it's not the center 0:03:50.720 --> 0:03:53.560 of the universe. It's just the biggest planet in the universe. 0:03:53.840 --> 0:03:57.200 And now we have China becoming another very large planet. 0:03:57.240 --> 0:04:00.520 How is that going to impact the way the US 0:04:00.640 --> 0:04:04.320 is perceived? I think the US is still by far 0:04:04.480 --> 0:04:07.800 the most important country in the world. The Chinese, just 0:04:07.840 --> 0:04:11.200 because of the sheer size of population over four times 0:04:11.240 --> 0:04:14.520 bigger than the US, will be very big. But in 0:04:14.560 --> 0:04:18.559 the incompart capita they're still very small compared to the US, 0:04:19.440 --> 0:04:23.000 and the model of growth, which was export to the 0:04:23.080 --> 0:04:27.760 US makes them smaller. When you are gearing to become 0:04:27.800 --> 0:04:31.640 the big one, you're far away from it. Quite quite interesting. 0:04:32.120 --> 0:04:35.839 So academic studies have shown that passive management of stocks 0:04:35.839 --> 0:04:39.520 has a tendency to outperform active over long periods of time. 0:04:40.160 --> 0:04:42.559 But the opposite seems to be true in the fixed 0:04:42.560 --> 0:04:48.839 income department. Active uh fixed income strategies outperformed passive. Why 0:04:48.960 --> 0:04:53.080 is that, Well, you have a choice on what bonds 0:04:53.120 --> 0:04:56.320 you buy. The bond market basically is like a landmine. 0:04:56.440 --> 0:04:59.440 If you don't step on your mind, you're gonna do okay, 0:04:59.680 --> 0:05:03.640 and the move along the yield curve will allow you 0:05:03.920 --> 0:05:07.479 to react faster to what's happening in the economy. The 0:05:07.600 --> 0:05:12.600 passive in the index does not take into account the 0:05:12.680 --> 0:05:16.919 macro impact that's happening in the bond market. So how 0:05:16.960 --> 0:05:21.200 do you go about creating a macro overlay for fixed 0:05:21.240 --> 0:05:26.080 income investing? That has always been our approach. Verry we analyze. 0:05:26.800 --> 0:05:31.760 For us, money is a commodity. When it's scarce, it's expensive. 0:05:31.920 --> 0:05:36.920 When it's plentiful, it's cheap. So we analyze. We developed 0:05:36.960 --> 0:05:40.240 the matrix. You know, going from a qualitative process to 0:05:40.320 --> 0:05:43.880 a quantitative way of processing. It's not easy. If you 0:05:43.920 --> 0:05:46.360 put three economies in the room, they're going to come 0:05:46.360 --> 0:05:48.960 out with four different theories, probably all of them wrong. 0:05:49.800 --> 0:05:53.479 So what we try to do is doing our macro analysis, 0:05:53.880 --> 0:05:57.880 studying the growth of the company, of the country's growing, 0:05:58.200 --> 0:06:03.440 understanding the inflation economic indicators. We assigned a value to 0:06:03.560 --> 0:06:06.600 each of them. We created a matrix which gives us 0:06:06.600 --> 0:06:10.640 a point count and we call it the trendscore, which 0:06:10.680 --> 0:06:15.200 allows us then to go into the benchmark we're using, 0:06:15.320 --> 0:06:19.520 which the client is requesting us to use, and the 0:06:19.520 --> 0:06:23.000 trendscore will give us how long or short the benjamark 0:06:23.040 --> 0:06:25.320 do we want to be. So when you say trends, 0:06:25.440 --> 0:06:29.080 I tend to think of equity trends, where a market 0:06:29.200 --> 0:06:31.920 or a stock is trending either higher for a long 0:06:31.960 --> 0:06:34.040 period of time or trending lower for a long period 0:06:34.040 --> 0:06:37.279 of time. Do you have the same meaning of the 0:06:37.320 --> 0:06:39.719 word trend in fixed income or does it have a 0:06:39.760 --> 0:06:43.240 slightly different. I think it's pretty similar. But what you're 0:06:43.279 --> 0:06:47.520 trying to understand is the current and future needs of money. 0:06:48.360 --> 0:06:51.920 If a country is growing very fast, you know there's 0:06:51.920 --> 0:06:55.279 going to be competition for money. If the deficity of 0:06:55.320 --> 0:06:57.560 the country is big, you know that the government is 0:06:57.560 --> 0:07:00.680 going to place bonds and it's gonna cipher now money 0:07:00.680 --> 0:07:04.479 from the economy. If unemployment is very high, then you 0:07:04.600 --> 0:07:07.440 know that there's not gonna be a lot of need. 0:07:07.520 --> 0:07:10.240 There's not gonna be a brick and mortar investment, so 0:07:10.360 --> 0:07:13.200 money will be plentiful. In rates are going to come down. 0:07:13.440 --> 0:07:16.560 So there is a trend on what's happened in the 0:07:16.640 --> 0:07:19.680 past twelve months that will impact what will happen in 0:07:19.720 --> 0:07:22.640 the next six or twelve. So when we look at 0:07:22.680 --> 0:07:26.240 the great bullmarket in bonds in the US from the 0:07:26.360 --> 0:07:30.560 days of Paul Vulker breaking the back of inflation in 0:07:30.560 --> 0:07:34.240 the late seventies early eighties, we've enjoyed a I don't know, 0:07:34.320 --> 0:07:39.080 let's call it thirty three thirty five year ballmarketing bonds. 0:07:39.200 --> 0:07:42.800 Is that still in an effect? And second, how does 0:07:42.840 --> 0:07:45.840 that ballmarket and bonds in the US affect the rest 0:07:45.840 --> 0:07:49.559 of the UH world? We were in a secular trend 0:07:49.680 --> 0:07:52.840 or slower rates. There was an enormous addition of liquidity 0:07:52.920 --> 0:07:55.840 into the system, coming not only from these states, but 0:07:55.960 --> 0:07:59.840 from all central banks. The European Union was placing in 0:08:00.040 --> 0:08:02.640 enormous amount of money in the system, so was the 0:08:02.680 --> 0:08:05.920 Bank of Japan, so was China. A couple of years 0:08:05.960 --> 0:08:09.560 ago we saw a reversal in the trend. The announcement 0:08:09.680 --> 0:08:15.680 of the reverse of the easing, the quantitative easing, and 0:08:16.080 --> 0:08:18.080 the announcement by the fend that they were going to 0:08:18.200 --> 0:08:22.720 start raising rates created a mentality that we had hit 0:08:22.800 --> 0:08:26.560 bottom and we were starting to trend upwards. But now 0:08:26.600 --> 0:08:31.640 we've seen that stopped. I think that the issue of 0:08:31.720 --> 0:08:35.520 an upcoming recession, I don't believe it's coming. It's a 0:08:35.600 --> 0:08:38.360 little bit like the wolf. You know, everybody keeps crying 0:08:38.400 --> 0:08:41.400 the wolf is coming. We are not accustomed to a 0:08:41.440 --> 0:08:45.959 long period without a recession. But ever since globalization started 0:08:46.000 --> 0:08:51.320 in the world, the whole theory change. The formula of 0:08:51.360 --> 0:08:54.760 the past is no longer appliable. So would you say 0:08:54.960 --> 0:08:58.360 um tales of the death of the bundble market have 0:08:58.440 --> 0:09:03.000 been greatly exaggerated. I think that we're gonna stay with 0:09:03.200 --> 0:09:08.240 low interest rates, especially we have big deficits. If we 0:09:08.480 --> 0:09:11.920 have an easy faith, I think we can go on 0:09:12.040 --> 0:09:15.400 for several more years without a major increase in rates. 0:09:16.120 --> 0:09:19.960 Quite quite fascinating. Let's go back to you have this 0:09:20.080 --> 0:09:23.720 big set of tax changes. How much of a game 0:09:23.800 --> 0:09:28.360 changer was that for launching affixed income firm. Actually, the 0:09:28.360 --> 0:09:34.120 game changer for LM Capital was the growth of pension 0:09:34.160 --> 0:09:39.120 plans wanting minority money managers. You know, the change in 0:09:41.880 --> 0:09:45.319 Maxine Waters was at that time already you know, pushing 0:09:45.360 --> 0:09:48.440 for it. She's still in the in the in Congress 0:09:48.480 --> 0:09:52.120 and she's still doing the same the changing loss game 0:09:52.240 --> 0:09:55.680 for the high networth individuals or foreigners, not for pension plans. 0:09:55.720 --> 0:10:00.360 But there was this big push for hiring my minority 0:10:00.440 --> 0:10:04.840 money managers. Actually, they were carving out small pieces from 0:10:04.880 --> 0:10:09.000 the bigger locations, from the big rfpiece. The big funds 0:10:09.120 --> 0:10:13.000 always have been very biased towards using the pimp costs 0:10:13.000 --> 0:10:16.520 and one cost of the world. Sure black rocks, but 0:10:16.880 --> 0:10:21.960 there was an desire to use African American Asian Hispanic companies. 0:10:22.520 --> 0:10:25.959 So we saw an opportunity there being a Hispanic firm 0:10:26.520 --> 0:10:29.000 to pick up some of that money. So that's the 0:10:29.000 --> 0:10:33.880 way we started. Nowadays, it's emerging managers. It's no longer minority. 0:10:33.960 --> 0:10:38.079 There was court case that stopped the use of minorities 0:10:38.120 --> 0:10:41.439 as discriminatory, and by now we're a little bit too 0:10:41.440 --> 0:10:44.080 big to be considered emerging, so we have to compete 0:10:44.120 --> 0:10:47.160 on performance. So well, that's that's not the worst thing 0:10:47.200 --> 0:10:49.920 in the world. So when you say ur fps by 0:10:49.960 --> 0:10:55.000 big institutions, your clients and potential clients are these giant funds. 0:10:55.000 --> 0:10:58.240 They put out a request for proposal and you respond 0:10:58.280 --> 0:11:01.400 with a proposal, and that's the basis of either winning 0:11:01.400 --> 0:11:03.120 the business or not. Is that a fair way to 0:11:03.120 --> 0:11:06.199 describe it. That's correct. They will get probably thirty to 0:11:06.320 --> 0:11:10.479 four responses. They will pick up five or six finalists, 0:11:10.480 --> 0:11:13.400 and then you they visit you, and then they pick 0:11:13.480 --> 0:11:15.840 up three or four that present to the boards, and 0:11:15.880 --> 0:11:18.320 then the board decides who gets the money. So what 0:11:18.400 --> 0:11:21.240 are those beauty contests as they've been called. What are 0:11:21.240 --> 0:11:24.240 they like when when a firm comes in and starts 0:11:24.280 --> 0:11:28.240 kicking the tires and looking around your shop, what's that 0:11:28.320 --> 0:11:31.720 experience like? It's an interesting experience because you have the 0:11:31.800 --> 0:11:35.440 numbers to show for performance, but they want to understand 0:11:35.440 --> 0:11:38.520 the process. They want to understand the people. They want 0:11:38.559 --> 0:11:40.960 to make sure you have the back office to support it. 0:11:41.559 --> 0:11:45.960 Compliance has become so important. The most interesting part for 0:11:46.040 --> 0:11:49.600 me has been that almost all the teams look identical. 0:11:50.360 --> 0:11:54.400 Three men, one woman, everybody six one weighs two hundred 0:11:54.400 --> 0:11:59.760 and three pounds, whereas Brooks brothers suits and in our 0:12:00.120 --> 0:12:03.440 is where different. First, my accent doesn't well, it helps. 0:12:03.640 --> 0:12:06.560 I don't think it hinders anything, but I'm not the 0:12:06.600 --> 0:12:10.080 typical presenter that they normally have, and I tend to 0:12:10.880 --> 0:12:14.800 joke with the boards and try to be more casual. 0:12:15.240 --> 0:12:18.240 Probably when you are a smaller firm and your own 0:12:18.320 --> 0:12:23.160 the firm, you feel that you don't have to explain 0:12:23.240 --> 0:12:25.800 to anybody who you made it or you didn't make 0:12:25.840 --> 0:12:28.400 the cut, or did you win the business or not. 0:12:28.960 --> 0:12:31.680 So I like to enjoy this competition. I like to 0:12:32.720 --> 0:12:36.679 I enjoy to to be fighting against the big boys 0:12:36.720 --> 0:12:40.040 and hopefully sometimes winning. So is that an advantage to 0:12:40.080 --> 0:12:43.840 be relaxed and casual and informal and joke around with 0:12:43.880 --> 0:12:48.080 these people who are used to much more formal stiff 0:12:48.640 --> 0:12:53.000 The group that you described sounds like they're all manufactured 0:12:53.400 --> 0:12:56.080 in the same factory, and maybe that factory is Wharton 0:12:56.200 --> 0:12:58.720 or Harvard Business School. But the fact that they all 0:12:58.760 --> 0:13:02.080 look so similar and so similarly, does this give you 0:13:02.160 --> 0:13:05.360 a tactical advantage when you're presenting. I think that in 0:13:05.400 --> 0:13:08.000 many cases he does. In others, they expect to have 0:13:08.240 --> 0:13:13.840 that and they want that traditional present presenter. I'm also 0:13:13.960 --> 0:13:18.960 product of the same school, you know, part results. But 0:13:19.240 --> 0:13:22.480 so there, my partner in the business went to the 0:13:23.080 --> 0:13:28.160 to Annapolis. So you have the square American six one 0:13:28.440 --> 0:13:31.600 blah blah blah, and you have this crazy Mexican coming 0:13:31.600 --> 0:13:34.200 in and joking with the board. So I think the 0:13:34.240 --> 0:13:38.040 combination makes them laugh and it makes you. It makes 0:13:38.080 --> 0:13:43.480 you different in their eyes, and they remember you more memorable. Right. 0:13:44.000 --> 0:13:46.760 So I have a friend who's at PIMCO, and uh, 0:13:46.800 --> 0:13:49.840 he always he's now retired, but he used to complain 0:13:50.440 --> 0:13:54.680 that he doesn't have time to um, to do anything, 0:13:54.760 --> 0:13:57.480 or go to conferences or what have you, because they're 0:13:57.520 --> 0:14:01.760 so busy managing a trillion dollars in fixed income. And 0:14:01.800 --> 0:14:05.200 I used to bust his chops by saying, yeah, but 0:14:05.240 --> 0:14:09.000 it's not stocks, it's bond that's that stuff practically manages itself, 0:14:09.559 --> 0:14:12.160 which is a joke in the middle of a giant 0:14:12.840 --> 0:14:16.880 bonds bull market. But the little tiny bit of truth 0:14:16.880 --> 0:14:20.520 in that is how how much was it like shooting 0:14:20.520 --> 0:14:23.920 fish in a barrel during the fat part of that 0:14:23.960 --> 0:14:28.240 bull market you had rates coming down from what down 0:14:28.280 --> 0:14:34.160 to practically zero? How challenging was it operating during that 0:14:34.920 --> 0:14:40.600 giant long term trend. There are two problems managing fixed inco. 0:14:40.800 --> 0:14:43.720 One is making sure you don't step on the mind. 0:14:43.760 --> 0:14:46.640 As I said before, that you don't buy a world 0:14:46.680 --> 0:14:49.840 Come bond or an end run bond or a Pacific 0:14:49.840 --> 0:14:54.440 as an electric bond. On the other side, you have 0:14:55.600 --> 0:15:00.280 the matter of liquid it the incise. It's not easy 0:15:00.360 --> 0:15:03.000 to be a pimcoke when you have When you decide 0:15:03.040 --> 0:15:06.840 to move and you have to sell five million or 0:15:06.880 --> 0:15:09.840 a billion dollars worth of a bond, you have to 0:15:09.880 --> 0:15:13.320 find another piece, another buyer on the other side. It 0:15:13.400 --> 0:15:16.800 takes two to tango, and for them to find the 0:15:16.840 --> 0:15:20.880 counterparty is very hard. For a firmlike Hours that you 0:15:20.960 --> 0:15:23.560 move with ten or twenty million dollars, you can always 0:15:23.680 --> 0:15:27.840 find the other side in a transaction. And after the 0:15:27.960 --> 0:15:32.200 crisis in oh nine, they allocated much less capital to 0:15:32.280 --> 0:15:35.960 the desks, so they don't have inventory. So when you 0:15:36.000 --> 0:15:38.120 want to do a transaction, you have to go out 0:15:38.560 --> 0:15:42.200 and beat it in the market, and it's very hard 0:15:42.400 --> 0:15:46.360 to find a big chunk of of the same product. 0:15:46.400 --> 0:15:49.400 If you want to be have commonality in your portfolios, 0:15:49.440 --> 0:15:51.480 if you if you're a buyer, what about if you're 0:15:51.480 --> 0:15:54.480 a seller. Story Like, my assumption is if I have 0:15:54.560 --> 0:15:56.280 a ton of bonds to sell, I pick up the 0:15:56.280 --> 0:15:59.720 phone like called black rock, and they buy whatever whatever 0:15:59.800 --> 0:16:02.720 is out there. They will not. The thing is, they 0:16:02.720 --> 0:16:05.600 don't want to allocate money to bonds, they don't want 0:16:05.600 --> 0:16:09.040 to park money in bonds, so they will only do 0:16:09.080 --> 0:16:12.640 the transaction if they want them at that precise moment, 0:16:13.160 --> 0:16:15.560 and the broker dealers will only do them if they 0:16:15.640 --> 0:16:19.600 find the buyer immediately. If not, they'll just tell you 0:16:19.720 --> 0:16:22.400 there is no market for your bonds right now, and 0:16:22.440 --> 0:16:24.280 I will keep you in mind, and that might take 0:16:24.320 --> 0:16:27.920 three days or three weeks. So there's a little bit 0:16:28.000 --> 0:16:31.960 of an illusion of liquidity in bonds when it's actually 0:16:32.920 --> 0:16:35.800 harder to sell them than we tend to think. If 0:16:35.800 --> 0:16:38.240 I go to sell a stock, there's a bid and 0:16:38.320 --> 0:16:41.160 an ask. I can see the spread I know other 0:16:41.200 --> 0:16:44.200 than giant size. I can move pretty much any stock 0:16:44.240 --> 0:16:47.560 in my portfolio. But if I have a very specific 0:16:47.640 --> 0:16:51.600 bond from a specific whether it's a corporate or a 0:16:51.680 --> 0:16:54.920 sovereign or a state and local bonds. You're saying it's 0:16:55.000 --> 0:16:58.080 not quite as easy to to hit that bid as 0:16:58.120 --> 0:17:00.960 it is with a stock. You're absolutely clear, right, I mean, 0:17:01.160 --> 0:17:03.520 that's why there are no time in sales in bonds. 0:17:04.119 --> 0:17:07.440 You'll never see in stocks. You can say, I put 0:17:07.480 --> 0:17:09.960 in my order the eleven fourteen in the morning, give 0:17:10.000 --> 0:17:13.280 me all the transactions between eleven fourteen and eleven fifteen, 0:17:13.800 --> 0:17:16.679 and your order has to be there. No time stamping. 0:17:16.880 --> 0:17:19.760 No time stamping bonds. You know it might be three 0:17:19.840 --> 0:17:23.359 days or three minutes later when the transaction is done, 0:17:24.200 --> 0:17:28.439 and you want to have basically the same price if 0:17:28.480 --> 0:17:32.960 you're selling or buying for different clients, so you cannot 0:17:32.960 --> 0:17:36.600 buy little pieces and added up because it becomes very 0:17:36.640 --> 0:17:42.160 complicated to allocate in the right way the different transactions. 0:17:42.600 --> 0:17:46.480 Quite quite interesting. So let's talk a little bit about 0:17:46.560 --> 0:17:51.320 that lack of liquidly. I'm I'm intrigued by your description 0:17:51.520 --> 0:17:56.040 of the bond market. Um, is this something that's relatively new? 0:17:56.280 --> 0:18:00.160 Was there always this much lack of liquidly? How as 0:18:00.200 --> 0:18:03.040 the market changed over the past thirty years since you 0:18:03.160 --> 0:18:07.879 launched LM Capital. I think that up to two thousand 0:18:08.000 --> 0:18:11.240 and nine, the market was pretty stable and there was 0:18:11.400 --> 0:18:15.360 enough money in the different broker dealers to make a market. 0:18:16.040 --> 0:18:18.280 You know, they would buy the bond to keep it 0:18:18.320 --> 0:18:21.440 there and wait for somebody to come up, meaning meaning 0:18:21.480 --> 0:18:24.080 holding an inventory, and then when a buyer comes along, 0:18:24.119 --> 0:18:29.080 they would now so much anymore, it's gone gone, you know, 0:18:29.880 --> 0:18:34.360 probably went from Mary Lynch went from eight or ten 0:18:34.400 --> 0:18:37.040 billion dollars to maybe a couple of hundred million. Is 0:18:37.080 --> 0:18:40.359 that a risk management tool or they still suffering a 0:18:40.400 --> 0:18:44.040 little post traumatic stress disorder after the crisis. Is this 0:18:44.280 --> 0:18:46.880 is this smart of them or is this problematic by them? 0:18:47.000 --> 0:18:49.520 I think that they're being smarter and the way they 0:18:49.520 --> 0:18:54.240 allocate their capital. I think that the spreads in bonds 0:18:54.280 --> 0:18:57.880 are not that high for them to make sense to 0:18:57.960 --> 0:19:01.320 keep them in inventory and being much tighter with the 0:19:01.320 --> 0:19:05.240 way they handle their money. Very very interesting. What about 0:19:05.280 --> 0:19:07.760 the rise of e t f s, which are clearly 0:19:07.800 --> 0:19:11.560 not just stocks, they're giant bondy tfs. How is that 0:19:11.640 --> 0:19:15.560 affecting both the way you run LM capital and and 0:19:15.760 --> 0:19:20.439 the way liquidity for specific bonds behaves in the in 0:19:20.480 --> 0:19:23.120 the market. I think the tfs are not the right 0:19:23.200 --> 0:19:26.280 way to play the bond market. I think that they 0:19:26.320 --> 0:19:28.840 are very big, but I don't think they impact the 0:19:28.920 --> 0:19:32.119 market that much. The problem is when it becomes a 0:19:32.200 --> 0:19:37.520 herd mentality. If everybody is selling, you magnify the problem. Again. 0:19:38.560 --> 0:19:41.320 When there's a trend to get out of the bonds 0:19:41.720 --> 0:19:44.000 you need, you don't find the buyers. When there's a 0:19:44.040 --> 0:19:47.679 trend to buy the bonds, it's hard to find these sellers. 0:19:47.760 --> 0:19:51.440 So the e t fs magnify the problem instead of 0:19:51.720 --> 0:19:55.720 making it less problematic. So I have a couple of 0:19:55.800 --> 0:20:00.800 questions on that. That's really really intriguing. So first, when 0:20:00.840 --> 0:20:03.760 there's that herd mentality like we saw in O eight 0:20:03.760 --> 0:20:08.000 oh nine, isn't everything being sold regardless when when, when, 0:20:08.720 --> 0:20:13.080 when the herd stampedes, everything seems to get run over. 0:20:13.600 --> 0:20:16.359 Is that any different for bond stocks or ETF No, 0:20:16.440 --> 0:20:18.879 it works the same way, but you don't have the 0:20:18.960 --> 0:20:23.280 dramatic cratches they do. So in stokes, the bargain hunters 0:20:23.560 --> 0:20:26.200 are probably not going to jump in because the bond 0:20:26.280 --> 0:20:29.119 dropped two or three points. Two or three points is 0:20:29.200 --> 0:20:32.000 huge in bonds. In stocks, you can see moves of 0:20:32.040 --> 0:20:34.760 ten or twenty two or three points is a Tuesday. 0:20:34.840 --> 0:20:38.000 Nothing's exactly. Here's the question that pops into my head. 0:20:38.400 --> 0:20:41.800 Knowing that there's no guarantee of liquidly in the future, 0:20:42.440 --> 0:20:47.440 how does that affect your process for selecting what bonds 0:20:47.920 --> 0:20:50.800 you want to put into your portfolio. You you obviously 0:20:50.880 --> 0:20:54.080 have an awareness, Hey, when the time comes, there may 0:20:54.119 --> 0:20:57.560 not be the liquidly I'm hoping for if I have 0:20:57.680 --> 0:21:02.639 to move these in a emergency. That's a very good question. 0:21:02.720 --> 0:21:05.440 Very What we tried to do is buy global issues, 0:21:05.720 --> 0:21:09.960 very big issues that a lot of people holding their portfolios. 0:21:10.680 --> 0:21:12.680 You know, at one time you would find a good 0:21:12.680 --> 0:21:15.320 issue of a hundred a couple of hundred million dollars. 0:21:15.400 --> 0:21:18.440 We go for the billion dollar issues at least, and 0:21:18.560 --> 0:21:21.119 we want the names that people want to hold in 0:21:21.160 --> 0:21:24.800 their portfolio. There are some managers that try to create 0:21:25.119 --> 0:21:29.200 alpha from buying smaller issues because the issue is forced 0:21:29.200 --> 0:21:31.840 to pay a bit more because of the smaller sizes 0:21:31.920 --> 0:21:34.600 of the issue. We don't like that. We want to 0:21:34.680 --> 0:21:38.960 have the ability to get out whenever we want. So 0:21:39.000 --> 0:21:42.400 the liquidly premium isn't worth the risk to you. It's 0:21:42.400 --> 0:21:47.040 not quite quite interesting. So I've had this little personal 0:21:47.119 --> 0:21:50.040 theory for the past couple of years that part of 0:21:50.080 --> 0:21:53.080 the reason yields or as low as they are, is 0:21:53.119 --> 0:21:58.120 that there's a shortage of quality sovereign bonds. We haven't 0:21:58.119 --> 0:22:01.359 been running the usual and old deficits over the past 0:22:01.400 --> 0:22:04.639 ten years, although clearly they've started to tick up post 0:22:04.640 --> 0:22:08.120 crisis and and most recently, And that there's so much 0:22:08.200 --> 0:22:13.440 capital around and such a demand for quality fixed income 0:22:13.960 --> 0:22:17.359 that it gets hoovered up by all the buyers and 0:22:17.359 --> 0:22:20.879 that helps to keep a lid on on rates. And 0:22:21.080 --> 0:22:24.439 am I remotely accurate or is that crackpot theory? You 0:22:24.480 --> 0:22:27.919 are accurate even though deficits have not been shrinking on 0:22:27.960 --> 0:22:31.840 the country that have been growing bigger. Over half of 0:22:31.920 --> 0:22:35.560 the sovereign bonds now have negative yields. Nine point seven 0:22:35.680 --> 0:22:40.720 trillion dollars, mostly European bonds are negative, and we see 0:22:40.800 --> 0:22:45.800 Japan frequently dips into So by negative yield you mean here, 0:22:45.840 --> 0:22:47.720 I'm going to give you a pile of money, and 0:22:48.000 --> 0:22:51.040 you're gonna give me most of it back, but not 0:22:51.080 --> 0:22:54.040 all of it, because the yield is actually I'm gonna 0:22:54.440 --> 0:22:58.119 I'm gonna pay you to hold my money, which makes 0:22:58.200 --> 0:23:00.960 no sense. At one time, many years ago, the only 0:23:01.000 --> 0:23:05.480 country that had This was Switzerland that showed that they 0:23:05.640 --> 0:23:09.440 wanted to sell the concept of safety, and they said, 0:23:09.880 --> 0:23:12.400 this is like a vault. Money that comes in here 0:23:12.480 --> 0:23:15.080 is totally protected, So I'm going to charge you for 0:23:15.160 --> 0:23:19.760 the use of my vault. Nowadays, it's Germany, it's Japan, 0:23:20.400 --> 0:23:25.800 it's Northern Europe. It's nine point seven trillion dollars. So 0:23:25.880 --> 0:23:29.640 the only play there if you're an investor, is hoping 0:23:29.680 --> 0:23:33.440 that the currency. Because you're investing in the local currency, 0:23:34.000 --> 0:23:38.080 it's mostly euros or yends. Your hope is that the 0:23:38.119 --> 0:23:41.280 euro gains against the dollar, or the end gains against 0:23:41.320 --> 0:23:44.520 the dollar. But there are much better ways to play 0:23:44.600 --> 0:23:47.680 currencies than to buy bonds. You know, to invest a 0:23:47.760 --> 0:23:50.560 million dollars in bonds hoping for an increase in the 0:23:50.640 --> 0:23:53.240 value of the currency. You can do a fraction of 0:23:53.320 --> 0:23:56.760 that investment and do futures and you're in the same game, 0:23:57.440 --> 0:24:02.560 so with far less risk. Absolutely. Another interesting situation is 0:24:03.480 --> 0:24:07.479 the l d I, the long duration management of pension plans. 0:24:08.800 --> 0:24:15.080 They are buying bonds with the maturity that matches their liabilities, 0:24:16.119 --> 0:24:19.480 but with bonds that are not growing in value, it's 0:24:19.600 --> 0:24:24.400 incredibly expensive to match. I mean, because they're not growing 0:24:24.560 --> 0:24:28.280 so you're going to pay a million dollars a year 0:24:28.480 --> 0:24:31.800 thirty years from now, or a million euros. You have 0:24:31.920 --> 0:24:35.480 to buy a million thirty thousand euros in order to 0:24:35.560 --> 0:24:39.520 have a million back. So it's very hard to manage 0:24:39.560 --> 0:24:43.840 money against with l d I when you have negative deals. 0:24:44.320 --> 0:24:49.600 Quite quite fascinating. So your firm uses something called scenario 0:24:49.760 --> 0:24:55.239 planning to mitigate against global event risk. Explain what that 0:24:55.400 --> 0:25:00.000 is and how can you actually reduce risk about events overseas. 0:25:00.920 --> 0:25:03.600 We think of all the weird things that could happen, 0:25:03.760 --> 0:25:06.320 very all the weird things that could happen. I mean, 0:25:06.480 --> 0:25:09.639 we have a scenario hopefully well it will never happen. 0:25:09.720 --> 0:25:17.000 But for another we have a scenario for the bankruptcy 0:25:17.040 --> 0:25:19.919 of a money center bank. We have a scenario for 0:25:20.000 --> 0:25:23.840 oil going down to twenty or over a hundred. We 0:25:23.920 --> 0:25:29.160 have a scenario of North Korea throwing the bomb, and 0:25:29.280 --> 0:25:32.640