Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg Radio.
Speaker 1: This week on the podcast, I have a special guest.
Speaker 1: His name is Louise Mazel, and if you are at
Speaker 1: all interested in a couple of areas of asset management
Speaker 1: and allocation, you're gonna find this to be really quite intriguing.
Speaker 1: He set up a firm thirty years ago to make
Speaker 1: emerging market fixed income investments and LM Capital Group has
Speaker 1: been doing that for the past three decades. Uh. They
Speaker 1: basically do their own due diligence. They check out all
Speaker 1: of the various bonds that they buy on behalf of clients, uh,
Speaker 1: not relying on the traditional rating agencies, and um, they're
Speaker 1: essentially owned by their employees. It's a very interesting shop.
Speaker 1: And Louise does a wonderful job explaining why emerging market
Speaker 1: yet has really become an asset class and to itself,
Speaker 1: given how soft um actual yields are, and that half
Speaker 1: of the sovereign wealth debt these days, over nine trillion dollars,
Speaker 1: is actually holding a negative yield. Uh, he thinks e
Speaker 1: M debt is going to be a not only a
Speaker 1: distinct asset class, but it's going to attract a lot
Speaker 1: of capital over the next decade, and he's very bullsh
Speaker 1: So with no further ado, here's my conversation with LM
Speaker 1: Capital Groups Louise Mazel. My special guest this week is
Speaker 1: Louise Maizel. He is the co founder and senior managing
Speaker 1: director at LM Capital Group, an emerging market fixed income
Speaker 1: shop managing over four point two billion dollars in assets.
Speaker 1: The firm was founded in and is privately held. It
Speaker 1: is employee owned and provide It's a fixed income active
Speaker 1: management approach with a global macro overlay. Louise Mazel, Welcome
Speaker 1: to Bloomberg. Thank you very much. Berry, so you will
Speaker 1: launched this firm in nine nine. You're pretty much in
Speaker 1: the middle of a giant bullmarket. What made you decide
Speaker 1: to go into bonds instead of stocks? I started a
Speaker 1: second firm very actually, the first firm, Element Advisors, which
Speaker 1: was managing money for high net worth individuals. Four July
Speaker 1: eighteenth eighty four, the US eliminates the thirty percent withholding.
Speaker 1: Up to then, foreign nationals could only invest tax free
Speaker 1: in T bills or in bank CDs. All of a sudden,
Speaker 1: they opened up the market. A lot of US brokers
Speaker 1: fly out to Mexico City and try to grab some
Speaker 1: of that money. And my friends started to call me saying,
Speaker 1: you're in the States. We know you quite don't you
Speaker 1: help us serve through these new way new market? So
Speaker 1: we did. For five years we were managing high net
Speaker 1: worth individuals, but they were being managed like pensure plants
Speaker 1: because they were mostly taxed THEMPT And from there we
Speaker 1: jumped into the institutional market. So that was um But
Speaker 1: you bring a very different perspective to the management of assets.
Speaker 1: How did growing up outside of the United States shape
Speaker 1: your view of the world, be it developed or emerging markets?
Speaker 1: Think of it as planets. People in the US thing
Speaker 1: that they're sitting in the sun. The US is the
Speaker 1: center of the universe. For US foreigners. We see the
Speaker 1: US as the biggest planet, but it's part of a system.
Speaker 1: So it's very interesting to see the impact of the
Speaker 1: US on the other planets. But it's not the center
Speaker 1: of the universe. It's just the biggest planet in the universe.
Speaker 1: And now we have China becoming another very large planet.
Speaker 1: How is that going to impact the way the US
Speaker 1: is perceived? I think the US is still by far
Speaker 1: the most important country in the world. The Chinese, just
Speaker 1: because of the sheer size of population over four times
Speaker 1: bigger than the US, will be very big. But in
Speaker 1: the incompart capita they're still very small compared to the US,
Speaker 1: and the model of growth, which was export to the
Speaker 1: US makes them smaller. When you are gearing to become
Speaker 1: the big one, you're far away from it. Quite quite interesting.
Speaker 1: So academic studies have shown that passive management of stocks
Speaker 1: has a tendency to outperform active over long periods of time.
Speaker 1: But the opposite seems to be true in the fixed
Speaker 1: income department. Active uh fixed income strategies outperformed passive. Why
Speaker 1: is that, Well, you have a choice on what bonds
Speaker 1: you buy. The bond market basically is like a landmine.
Speaker 1: If you don't step on your mind, you're gonna do okay,
Speaker 1: and the move along the yield curve will allow you
Speaker 1: to react faster to what's happening in the economy. The
Speaker 1: passive in the index does not take into account the
Speaker 1: macro impact that's happening in the bond market. So how
Speaker 1: do you go about creating a macro overlay for fixed
Speaker 1: income investing? That has always been our approach. Verry we analyze.
Speaker 1: For us, money is a commodity. When it's scarce, it's expensive.
Speaker 1: When it's plentiful, it's cheap. So we analyze. We developed
Speaker 1: the matrix. You know, going from a qualitative process to
Speaker 1: a quantitative way of processing. It's not easy. If you
Speaker 1: put three economies in the room, they're going to come
Speaker 1: out with four different theories, probably all of them wrong.
Speaker 1: So what we try to do is doing our macro analysis,
Speaker 1: studying the growth of the company, of the country's growing,
Speaker 1: understanding the inflation economic indicators. We assigned a value to
Speaker 1: each of them. We created a matrix which gives us
Speaker 1: a point count and we call it the trendscore, which
Speaker 1: allows us then to go into the benchmark we're using,
Speaker 1: which the client is requesting us to use, and the
Speaker 1: trendscore will give us how long or short the benjamark
Speaker 1: do we want to be. So when you say trends,
Speaker 1: I tend to think of equity trends, where a market
Speaker 1: or a stock is trending either higher for a long
Speaker 1: period of time or trending lower for a long period
Speaker 1: of time. Do you have the same meaning of the
Speaker 1: word trend in fixed income or does it have a
Speaker 1: slightly different. I think it's pretty similar. But what you're
Speaker 1: trying to understand is the current and future needs of money.
Speaker 1: If a country is growing very fast, you know there's
Speaker 1: going to be competition for money. If the deficity of
Speaker 1: the country is big, you know that the government is
Speaker 1: going to place bonds and it's gonna cipher now money
Speaker 1: from the economy. If unemployment is very high, then you
Speaker 1: know that there's not gonna be a lot of need.
Speaker 1: There's not gonna be a brick and mortar investment, so
Speaker 1: money will be plentiful. In rates are going to come down.
Speaker 1: So there is a trend on what's happened in the
Speaker 1: past twelve months that will impact what will happen in
Speaker 1: the next six or twelve. So when we look at
Speaker 1: the great bullmarket in bonds in the US from the
Speaker 1: days of Paul Vulker breaking the back of inflation in
Speaker 1: the late seventies early eighties, we've enjoyed a I don't know,
Speaker 1: let's call it thirty three thirty five year ballmarketing bonds.
Speaker 1: Is that still in an effect? And second, how does
Speaker 1: that ballmarket and bonds in the US affect the rest
Speaker 1: of the UH world? We were in a secular trend
Speaker 1: or slower rates. There was an enormous addition of liquidity
Speaker 1: into the system, coming not only from these states, but
Speaker 1: from all central banks. The European Union was placing in
Speaker 1: enormous amount of money in the system, so was the
Speaker 1: Bank of Japan, so was China. A couple of years
Speaker 1: ago we saw a reversal in the trend. The announcement
Speaker 1: of the reverse of the easing, the quantitative easing, and
Speaker 1: the announcement by the fend that they were going to
Speaker 1: start raising rates created a mentality that we had hit
Speaker 1: bottom and we were starting to trend upwards. But now
Speaker 1: we've seen that stopped. I think that the issue of
Speaker 1: an upcoming recession, I don't believe it's coming. It's a
Speaker 1: little bit like the wolf. You know, everybody keeps crying
Speaker 1: the wolf is coming. We are not accustomed to a
Speaker 1: long period without a recession. But ever since globalization started
Speaker 1: in the world, the whole theory change. The formula of
Speaker 1: the past is no longer appliable. So would you say
Speaker 1: um tales of the death of the bundble market have
Speaker 1: been greatly exaggerated. I think that we're gonna stay with
Speaker 1: low interest rates, especially we have big deficits. If we
Speaker 1: have an easy faith, I think we can go on
Speaker 1: for several more years without a major increase in rates.
Speaker 1: Quite quite fascinating. Let's go back to you have this
Speaker 1: big set of tax changes. How much of a game
Speaker 1: changer was that for launching affixed income firm. Actually, the
Speaker 1: game changer for LM Capital was the growth of pension
Speaker 1: plans wanting minority money managers. You know, the change in
Speaker 1: Maxine Waters was at that time already you know, pushing
Speaker 1: for it. She's still in the in the in Congress
Speaker 1: and she's still doing the same the changing loss game
Speaker 1: for the high networth individuals or foreigners, not for pension plans.
Speaker 1: But there was this big push for hiring my minority
Speaker 1: money managers. Actually, they were carving out small pieces from
Speaker 1: the bigger locations, from the big rfpiece. The big funds
Speaker 1: always have been very biased towards using the pimp costs
Speaker 1: and one cost of the world. Sure black rocks, but
Speaker 1: there was an desire to use African American Asian Hispanic companies.
Speaker 1: So we saw an opportunity there being a Hispanic firm
Speaker 1: to pick up some of that money. So that's the
Speaker 1: way we started. Nowadays, it's emerging managers. It's no longer minority.
Speaker 1: There was court case that stopped the use of minorities
Speaker 1: as discriminatory, and by now we're a little bit too
Speaker 1: big to be considered emerging, so we have to compete
Speaker 1: on performance. So well, that's that's not the worst thing
Speaker 1: in the world. So when you say ur fps by
Speaker 1: big institutions, your clients and potential clients are these giant funds.
Speaker 1: They put out a request for proposal and you respond
Speaker 1: with a proposal, and that's the basis of either winning
Speaker 1: the business or not. Is that a fair way to
Speaker 1: describe it. That's correct. They will get probably thirty to
Speaker 1: four responses. They will pick up five or six finalists,
Speaker 1: and then you they visit you, and then they pick
Speaker 1: up three or four that present to the boards, and
Speaker 1: then the board decides who gets the money. So what
Speaker 1: are those beauty contests as they've been called. What are
Speaker 1: they like when when a firm comes in and starts
Speaker 1: kicking the tires and looking around your shop, what's that
Speaker 1: experience like? It's an interesting experience because you have the
Speaker 1: numbers to show for performance, but they want to understand
Speaker 1: the process. They want to understand the people. They want
Speaker 1: to make sure you have the back office to support it.
Speaker 1: Compliance has become so important. The most interesting part for
Speaker 1: me has been that almost all the teams look identical.
Speaker 1: Three men, one woman, everybody six one weighs two hundred
Speaker 1: and three pounds, whereas Brooks brothers suits and in our
Speaker 1: is where different. First, my accent doesn't well, it helps.
Speaker 1: I don't think it hinders anything, but I'm not the
Speaker 1: typical presenter that they normally have, and I tend to
Speaker 1: joke with the boards and try to be more casual.
Speaker 1: Probably when you are a smaller firm and your own
Speaker 1: the firm, you feel that you don't have to explain
Speaker 1: to anybody who you made it or you didn't make
Speaker 1: the cut, or did you win the business or not.
Speaker 1: So I like to enjoy this competition. I like to
Speaker 1: I enjoy to to be fighting against the big boys
Speaker 1: and hopefully sometimes winning. So is that an advantage to
Speaker 1: be relaxed and casual and informal and joke around with
Speaker 1: these people who are used to much more formal stiff
Speaker 1: The group that you described sounds like they're all manufactured
Speaker 1: in the same factory, and maybe that factory is Wharton
Speaker 1: or Harvard Business School. But the fact that they all
Speaker 1: look so similar and so similarly, does this give you
Speaker 1: a tactical advantage when you're presenting. I think that in
Speaker 1: many cases he does. In others, they expect to have
Speaker 1: that and they want that traditional present presenter. I'm also
Speaker 1: product of the same school, you know, part results. But
Speaker 1: so there, my partner in the business went to the
Speaker 1: to Annapolis. So you have the square American six one
Speaker 1: blah blah blah, and you have this crazy Mexican coming
Speaker 1: in and joking with the board. So I think the
Speaker 1: combination makes them laugh and it makes you. It makes
Speaker 1: you different in their eyes, and they remember you more memorable. Right.
Speaker 1: So I have a friend who's at PIMCO, and uh,
Speaker 1: he always he's now retired, but he used to complain
Speaker 1: that he doesn't have time to um, to do anything,
Speaker 1: or go to conferences or what have you, because they're
Speaker 1: so busy managing a trillion dollars in fixed income. And
Speaker 1: I used to bust his chops by saying, yeah, but
Speaker 1: it's not stocks, it's bond that's that stuff practically manages itself,
Speaker 1: which is a joke in the middle of a giant
Speaker 1: bonds bull market. But the little tiny bit of truth
Speaker 1: in that is how how much was it like shooting
Speaker 1: fish in a barrel during the fat part of that
Speaker 1: bull market you had rates coming down from what down
Speaker 1: to practically zero? How challenging was it operating during that
Speaker 1: giant long term trend. There are two problems managing fixed inco.
Speaker 1: One is making sure you don't step on the mind.
Speaker 1: As I said before, that you don't buy a world
Speaker 1: Come bond or an end run bond or a Pacific
Speaker 1: as an electric bond. On the other side, you have
Speaker 1: the matter of liquid it the incise. It's not easy
Speaker 1: to be a pimcoke when you have When you decide
Speaker 1: to move and you have to sell five million or
Speaker 1: a billion dollars worth of a bond, you have to
Speaker 1: find another piece, another buyer on the other side. It
Speaker 1: takes two to tango, and for them to find the
Speaker 1: counterparty is very hard. For a firmlike Hours that you
Speaker 1: move with ten or twenty million dollars, you can always
Speaker 1: find the other side in a transaction. And after the
Speaker 1: crisis in oh nine, they allocated much less capital to
Speaker 1: the desks, so they don't have inventory. So when you
Speaker 1: want to do a transaction, you have to go out
Speaker 1: and beat it in the market, and it's very hard
Speaker 1: to find a big chunk of of the same product.
Speaker 1: If you want to be have commonality in your portfolios,
Speaker 1: if you if you're a buyer, what about if you're
Speaker 1: a seller. Story Like, my assumption is if I have
Speaker 1: a ton of bonds to sell, I pick up the
Speaker 1: phone like called black rock, and they buy whatever whatever
Speaker 1: is out there. They will not. The thing is, they
Speaker 1: don't want to allocate money to bonds, they don't want
Speaker 1: to park money in bonds, so they will only do
Speaker 1: the transaction if they want them at that precise moment,
Speaker 1: and the broker dealers will only do them if they
Speaker 1: find the buyer immediately. If not, they'll just tell you
Speaker 1: there is no market for your bonds right now, and
Speaker 1: I will keep you in mind, and that might take
Speaker 1: three days or three weeks. So there's a little bit
Speaker 1: of an illusion of liquidity in bonds when it's actually
Speaker 1: harder to sell them than we tend to think. If
Speaker 1: I go to sell a stock, there's a bid and
Speaker 1: an ask. I can see the spread I know other
Speaker 1: than giant size. I can move pretty much any stock
Speaker 1: in my portfolio. But if I have a very specific
Speaker 1: bond from a specific whether it's a corporate or a
Speaker 1: sovereign or a state and local bonds. You're saying it's
Speaker 1: not quite as easy to to hit that bid as
Speaker 1: it is with a stock. You're absolutely clear, right, I mean,
Speaker 1: that's why there are no time in sales in bonds.
Speaker 1: You'll never see in stocks. You can say, I put
Speaker 1: in my order the eleven fourteen in the morning, give
Speaker 1: me all the transactions between eleven fourteen and eleven fifteen,
Speaker 1: and your order has to be there. No time stamping.
Speaker 1: No time stamping bonds. You know it might be three
Speaker 1: days or three minutes later when the transaction is done,
Speaker 1: and you want to have basically the same price if
Speaker 1: you're selling or buying for different clients, so you cannot
Speaker 1: buy little pieces and added up because it becomes very
Speaker 1: complicated to allocate in the right way the different transactions.
Speaker 1: Quite quite interesting. So let's talk a little bit about
Speaker 1: that lack of liquidly. I'm I'm intrigued by your description
Speaker 1: of the bond market. Um, is this something that's relatively new?
Speaker 1: Was there always this much lack of liquidly? How as
Speaker 1: the market changed over the past thirty years since you
Speaker 1: launched LM Capital. I think that up to two thousand
Speaker 1: and nine, the market was pretty stable and there was
Speaker 1: enough money in the different broker dealers to make a market.
Speaker 1: You know, they would buy the bond to keep it
Speaker 1: there and wait for somebody to come up, meaning meaning
Speaker 1: holding an inventory, and then when a buyer comes along,
Speaker 1: they would now so much anymore, it's gone gone, you know,
Speaker 1: probably went from Mary Lynch went from eight or ten
Speaker 1: billion dollars to maybe a couple of hundred million. Is
Speaker 1: that a risk management tool or they still suffering a
Speaker 1: little post traumatic stress disorder after the crisis. Is this
Speaker 1: is this smart of them or is this problematic by them?
Speaker 1: I think that they're being smarter and the way they
Speaker 1: allocate their capital. I think that the spreads in bonds
Speaker 1: are not that high for them to make sense to
Speaker 1: keep them in inventory and being much tighter with the
Speaker 1: way they handle their money. Very very interesting. What about
Speaker 1: the rise of e t f s, which are clearly
Speaker 1: not just stocks, they're giant bondy tfs. How is that
Speaker 1: affecting both the way you run LM capital and and
Speaker 1: the way liquidity for specific bonds behaves in the in
Speaker 1: the market. I think the tfs are not the right
Speaker 1: way to play the bond market. I think that they
Speaker 1: are very big, but I don't think they impact the
Speaker 1: market that much. The problem is when it becomes a
Speaker 1: herd mentality. If everybody is selling, you magnify the problem. Again.
Speaker 1: When there's a trend to get out of the bonds
Speaker 1: you need, you don't find the buyers. When there's a
Speaker 1: trend to buy the bonds, it's hard to find these sellers.
Speaker 1: So the e t fs magnify the problem instead of
Speaker 1: making it less problematic. So I have a couple of
Speaker 1: questions on that. That's really really intriguing. So first, when
Speaker 1: there's that herd mentality like we saw in O eight
Speaker 1: oh nine, isn't everything being sold regardless when when, when,
Speaker 1: when the herd stampedes, everything seems to get run over.
Speaker 1: Is that any different for bond stocks or ETF No,
Speaker 1: it works the same way, but you don't have the
Speaker 1: dramatic cratches they do. So in stokes, the bargain hunters
Speaker 1: are probably not going to jump in because the bond
Speaker 1: dropped two or three points. Two or three points is
Speaker 1: huge in bonds. In stocks, you can see moves of
Speaker 1: ten or twenty two or three points is a Tuesday.
Speaker 1: Nothing's exactly. Here's the question that pops into my head.
Speaker 1: Knowing that there's no guarantee of liquidly in the future,
Speaker 1: how does that affect your process for selecting what bonds
Speaker 1: you want to put into your portfolio. You you obviously
Speaker 1: have an awareness, Hey, when the time comes, there may
Speaker 1: not be the liquidly I'm hoping for if I have
Speaker 1: to move these in a emergency. That's a very good question.
Speaker 1: Very What we tried to do is buy global issues,
Speaker 1: very big issues that a lot of people holding their portfolios.
Speaker 1: You know, at one time you would find a good
Speaker 1: issue of a hundred a couple of hundred million dollars.
Speaker 1: We go for the billion dollar issues at least, and
Speaker 1: we want the names that people want to hold in
Speaker 1: their portfolio. There are some managers that try to create
Speaker 1: alpha from buying smaller issues because the issue is forced
Speaker 1: to pay a bit more because of the smaller sizes
Speaker 1: of the issue. We don't like that. We want to
Speaker 1: have the ability to get out whenever we want. So
Speaker 1: the liquidly premium isn't worth the risk to you. It's
Speaker 1: not quite quite interesting. So I've had this little personal
Speaker 1: theory for the past couple of years that part of
Speaker 1: the reason yields or as low as they are, is
Speaker 1: that there's a shortage of quality sovereign bonds. We haven't
Speaker 1: been running the usual and old deficits over the past
Speaker 1: ten years, although clearly they've started to tick up post
Speaker 1: crisis and and most recently, And that there's so much
Speaker 1: capital around and such a demand for quality fixed income
Speaker 1: that it gets hoovered up by all the buyers and
Speaker 1: that helps to keep a lid on on rates. And
Speaker 1: am I remotely accurate or is that crackpot theory? You
Speaker 1: are accurate even though deficits have not been shrinking on
Speaker 1: the country that have been growing bigger. Over half of
Speaker 1: the sovereign bonds now have negative yields. Nine point seven
Speaker 1: trillion dollars, mostly European bonds are negative, and we see
Speaker 1: Japan frequently dips into So by negative yield you mean here,
Speaker 1: I'm going to give you a pile of money, and
Speaker 1: you're gonna give me most of it back, but not
Speaker 1: all of it, because the yield is actually I'm gonna
Speaker 1: I'm gonna pay you to hold my money, which makes
Speaker 1: no sense. At one time, many years ago, the only
Speaker 1: country that had This was Switzerland that showed that they
Speaker 1: wanted to sell the concept of safety, and they said,
Speaker 1: this is like a vault. Money that comes in here
Speaker 1: is totally protected, So I'm going to charge you for
Speaker 1: the use of my vault. Nowadays, it's Germany, it's Japan,
Speaker 1: it's Northern Europe. It's nine point seven trillion dollars. So
Speaker 1: the only play there if you're an investor, is hoping
Speaker 1: that the currency. Because you're investing in the local currency,
Speaker 1: it's mostly euros or yends. Your hope is that the
Speaker 1: euro gains against the dollar, or the end gains against
Speaker 1: the dollar. But there are much better ways to play
Speaker 1: currencies than to buy bonds. You know, to invest a
Speaker 1: million dollars in bonds hoping for an increase in the
Speaker 1: value of the currency. You can do a fraction of
Speaker 1: that investment and do futures and you're in the same game,
Speaker 1: so with far less risk. Absolutely. Another interesting situation is
Speaker 1: the l d I, the long duration management of pension plans.
Speaker 1: They are buying bonds with the maturity that matches their liabilities,
Speaker 1: but with bonds that are not growing in value, it's
Speaker 1: incredibly expensive to match. I mean, because they're not growing
Speaker 1: so you're going to pay a million dollars a year
Speaker 1: thirty years from now, or a million euros. You have
Speaker 1: to buy a million thirty thousand euros in order to
Speaker 1: have a million back. So it's very hard to manage
Speaker 1: money against with l d I when you have negative deals.
Speaker 1: Quite quite fascinating. So your firm uses something called scenario
Speaker 1: planning to mitigate against global event risk. Explain what that
Speaker 1: is and how can you actually reduce risk about events overseas.
Speaker 1: We think of all the weird things that could happen,
Speaker 1: very all the weird things that could happen. I mean,
Speaker 1: we have a scenario hopefully well it will never happen.
Speaker 1: But for another we have a scenario for the bankruptcy
Speaker 1: of a money center bank. We have a scenario for
Speaker 1: oil going down to twenty or over a hundred. We
Speaker 1: have a scenario of North Korea throwing the bomb, and
Speaker 1: we tried to play through what our reaction would be
Speaker 1: to that event, so we're not caught by surprise if
Speaker 1: God forbid they happen. So we know that if X
Speaker 1: or Y happens, we're gonna be selling or buying the
Speaker 1: bonds or whether we're going to be shortening or lengthening
Speaker 1: our duration, and we replay scenarios almost I mean formally
Speaker 1: once a quarter. Informally it can be any you're driving
Speaker 1: in and you hearing news in the radio and you say, well,
Speaker 1: that might cause a change in the environment. What would
Speaker 1: we do? So we go into the conference room, everybody participates,
Speaker 1: we use the blackboard, and we try to develop a
Speaker 1: response to the event. Mhm. So so you mentioned, um
Speaker 1: that that's really quite interesting. So so you mentioned the
Speaker 1: nine plus trillion dollars in negative yielding sovereign debt. Given
Speaker 1: those liabilities that pension funds and really just retirement accounts
Speaker 1: are going to have, where can people go to find
Speaker 1: yields without adding leverage or adding a whole lot of
Speaker 1: risk to their portfolios. That is something that's keeping a
Speaker 1: lot of people awake at night. Pension plans have if
Speaker 1: you do share responsibility, that grows at about eight percent
Speaker 1: per year, and they're not getting those learns from their portfolios.
Speaker 1: They need to have fixed income. It's like the retaining
Speaker 1: world in the portfolio and the source of liquidity if needed.
Speaker 1: But if that fixed income is yielding, say they have
Speaker 1: in fixed income, if the yield there is two or
Speaker 1: two and a half percent. The other eighty would have
Speaker 1: to generate in order to make up for whether they're
Speaker 1: not making in fixed income. So they're going more and
Speaker 1: more to private equity, to venture capital areas that are
Speaker 1: definitely much riskier. And we can see what happened in No.
Speaker 1: Nine that the dropping value of individual accounts or pension
Speaker 1: plants was dramatic. They're looking for alternatives in fixed income,
Speaker 1: for example, bank loans, which in reality is just high yield.
Speaker 1: With the floating rate, they're doing more and more high
Speaker 1: yield and moving down in the rating two towards disease,
Speaker 1: which again is very dangerous. Or an USA class that
Speaker 1: has become much more interesting, which is emerging market debt.
Speaker 1: At one time, these sovereign bonds in the emerging countries,
Speaker 1: countries like Mexico, Colombia, Brazil, China, South Korea, we're paying
Speaker 1: three to four hundred basis more than comparable risks in
Speaker 1: the US. It has come down a lot, but you
Speaker 1: can still find very very good corporate names in the
Speaker 1: emerging world, both in local currency and daughter they nominated.
Speaker 1: They can give you a very sizeable pickup and allow
Speaker 1: your fixed income portfolio to be closer to your needs
Speaker 1: in terms of growth than what you get out from
Speaker 1: the traditional US based core fixed So if I'm a
Speaker 1: US investor and I'm not happy with two and a
Speaker 1: half percent yield on traditional treasuries, how much additional risk
Speaker 1: am I assuming going to either emerging market bonds on
Speaker 1: a sovereign basis or e M bonds on a corporate
Speaker 1: basis to pick up another two D basis points? Is
Speaker 1: that a fair amount? At least? To be honest, if
Speaker 1: you ask me, I don't think you're picking any additional risk.
Speaker 1: I think that if you buy a company that's solid
Speaker 1: investment grade in their own country and that generates let's
Speaker 1: say you bought daughter the nominated bonds and they generate
Speaker 1: the dollars to pay you back, both interesting principle, so
Speaker 1: they don't have to buy them in a tough time
Speaker 1: when their currency could have the valued You are taking
Speaker 1: no additional risk. Let me give an example. Bimbo, the
Speaker 1: Mexican bread company. Almost sixty of their sales are abroad.
Speaker 1: You know, they're the largest producer in fourteen countries and
Speaker 1: they're present in about fifty five countries where they sell bread.
Speaker 1: It's a staple, it's a company that's been in the
Speaker 1: market for a hundred years. They are double A plus
Speaker 1: in Mexico. Their paper is yielding almost five that if
Speaker 1: I took away the name and showed you the financials,
Speaker 1: you would say this is a double A company in
Speaker 1: the US, and it would be paying maybe three ten,
Speaker 1: three twenty. So you're picking up two hundred plus over
Speaker 1: against a credit paper in the US and almost three
Speaker 1: hundred over against a US equivalent from a Treasury bond.
Speaker 1: So you really are gaining a lot in a company
Speaker 1: that basically has no risk. So how much of this
Speaker 1: is just the home country bias? If you live in
Speaker 1: the US, you tend to buy US stocks and bonds,
Speaker 1: If you live in Germany you tend to buy German
Speaker 1: stocks and bonds, and the same as true in Australia
Speaker 1: or wherever. How significant is that to that gap between
Speaker 1: domestic and emerging market yields? That pride of national product
Speaker 1: it used to be very prevalent, it's no longer there.
Speaker 1: The markets have become so global that buyers in Singapore
Speaker 1: or Berlin or New York are are buying from everywhere.
Speaker 1: So so what accounts for that two hundred and fifty
Speaker 1: basis point difference in yields. It's the perception of things
Speaker 1: that happened in the late nineties and the beginning of
Speaker 1: the two thousand's, where one country got in trouble and
Speaker 1: all the other countries got in trouble. It has to
Speaker 1: have more work done to understand what you're buying in
Speaker 1: the US. And even the credibility of the rating agencies
Speaker 1: in the US has dropped a lot after all. Nine
Speaker 1: But here you see an A rated bond and you
Speaker 1: don't get too much into analyzing whether they will pay
Speaker 1: you back or not. You believe if standard important movies
Speaker 1: said it's good to take it for granted, well I'm
Speaker 1: I'm assuming or I'm saying that you don't put a
Speaker 1: lot of stock. And with the credit rating agencies say
Speaker 1: you guys do your own due diligence and all these absolutely,
Speaker 1: and remember that emerging just taken back into crediting emerging countries.
Speaker 1: Eight of the companies are still run by the founding family.
Speaker 1: They took them public in order to create liquidity and
Speaker 1: the state for state purposes. Go back a second. I
Speaker 1: want to make sure I caught that statistic right. In
Speaker 1: Emerging market nations eighty percent of the um businesses or
Speaker 1: of the publicly traded businesses. The publicly traded businesses are
Speaker 1: still run by the founding family. That's amazing, it's incredible.
Speaker 1: There was a radio company that went public here in
Speaker 1: the NYC and governance, I mean the eleven board members
Speaker 1: last name was usually it was all brothers, nephews and nieces.
Speaker 1: And the New York Stock Seans did not like it.
Speaker 1: They said, you know, this is not good e s
Speaker 1: g Y S is horrible governance when the whole families
Speaker 1: in the board does not work. But that's pretty typical
Speaker 1: you're saying it is. So what you have to understand
Speaker 1: besides the financials is who those families are. So you
Speaker 1: need to do social analysis. You have to understand whether
Speaker 1: you're funding a new plant or you're funding a new
Speaker 1: G five that the that the chair, you know, if
Speaker 1: a new girls stream versus a new exact making plants.
Speaker 1: You want to understand that they're investing your money into
Speaker 1: something that will be productive and create more wealth for
Speaker 1: the shareholders or the bond holders. And that's something that
Speaker 1: will bring more satisfaction to the founding family. That that
Speaker 1: is that is really um fascinating. I had no idea.
Speaker 1: I'm learning a lot today. So I think people have
Speaker 1: changed the way they view and and think about debt
Speaker 1: over the past thirty years. Um, how do you see that? Well,
Speaker 1: first of all, do you do you agree? Do you
Speaker 1: see the perception of debt having changed in society? And
Speaker 1: how does that affect building a bond portfolio. At some time,
Speaker 1: dead was seen as a bad thing, and now some
Speaker 1: of that's a little bit of a holdover from the
Speaker 1: Great Depression generation who never wanted to risk having a
Speaker 1: bank call something away from them. Exactly having debt meant
Speaker 1: that you were at risk. Nowadays debt makes sense for corporations.
Speaker 1: They don't delude their shareholders. Their EPs are higher and
Speaker 1: management is basically paid by the Their bonuses are based
Speaker 1: on the value of their stock. So if you can
Speaker 1: borrow cheaply and buy back stock or do things without
Speaker 1: selling more equity, the performance of your equity will probably
Speaker 1: be better. So it's become a tool of growth without delusion.
Speaker 1: And I so once the CFO of Mark being interviewed,
Speaker 1: and he said they asked him why did he borrow
Speaker 1: two billion dollars when he had in cash almost eleven billion,
Speaker 1: And he said, you know, at two thirty for three
Speaker 1: year paper, I couldn't and being a taxi doctor, I
Speaker 1: could not sleep if I didn't take out that money. So,
Speaker 1: in other words, the way the tax laws are set
Speaker 1: up around debt versus equity, corporate management is incentivized to
Speaker 1: borrow versus using exactly, I mean it makes a lot
Speaker 1: of sense to borrow in them. Buy backstock dividends are
Speaker 1: not tax deductible. Companies were borrowing or are borrowing below
Speaker 1: when they're paying dividends, so if they retire that stock,
Speaker 1: then they're making money in the spread that That is
Speaker 1: quite fascinating. Can you still around a little bit? I
Speaker 1: have some more questions for you. We have been speaking
Speaker 1: with Louise Mazel of LM Capital Group. If you enjoy
Speaker 1: this conversation, well be sure and come back for the
Speaker 1: podcast extras, where we keep the tape rolling and continue
Speaker 1: discussing all things fixed income and emerging market related. You
Speaker 1: can find that wherever Finder podcasts are sold, Apple, iTunes,
Speaker 1: Bloomberg dot Com, Stitcher, Overcast, et cetera. We love your comments,
Speaker 1: feedback and suggestions right to us at m IB podcast
Speaker 1: at Bloomberg dot net. You can follow my daily column
Speaker 1: at Bloomberg dot com slash Opinion, or check me out
Speaker 1: on Twitter at rit Holts. I'm Barry Ridlts. You're listening
Speaker 1: to Masters and Business on Bloomberg Radio. Welcome to the podcast, Louise,
Speaker 1: Thank you so much for doing this. This is really
Speaker 1: an interesting conversation. I sometimes will chat with people, Um,
Speaker 1: who do you have on the show this week? Oh,
Speaker 1: I have Louise Mozelle. He's a you know, emerging market
Speaker 1: bond manager, and I'll get that yawn back from them,
Speaker 1: and it's like, well, tell me when you have somebody
Speaker 1: interesting on. But this is really fascinating stuff. There is
Speaker 1: so much more to emerging market bond analysis than I
Speaker 1: think the average UM stock jockey really appreciates. UM, and
Speaker 1: you you are expressing it in a way that I
Speaker 1: find intriguing. Um. There are a few questions I did
Speaker 1: not get to during the broadcast portion that I have
Speaker 1: to run through. Let me let me run through those
Speaker 1: before we get to our favorite questions. UM. I've heard
Speaker 1: over the years that bond investors are the smart money,
Speaker 1: that's where the bond vigilantes come from. Why is that?
Speaker 1: Why is bond investing considered quote unquote the smart money.
Speaker 1: I would not say smart money. It's the safe money.
Speaker 1: It should be the save money. Nowadays, with leverage and
Speaker 1: with what's happening in the markets, you need to have
Speaker 1: a portion of your portfolio ready for events that might
Speaker 1: alter the value of the whole portfolio. I mean you
Speaker 1: have situations like the unicorns that the more money they lose,
Speaker 1: the more valuable they are. That's literally true. There was
Speaker 1: a column in Bloomberg that of all the past eighteen
Speaker 1: months of I p o s, the worst the financials
Speaker 1: were the better the first day I p O Pop was.
Speaker 1: What you need to see is that bonds, bonds have
Speaker 1: much more meat in them. It's less hope and it's
Speaker 1: more reality. So when you say smart money, it means
Speaker 1: people have to analyze that you are lending to somebody
Speaker 1: that will pay you back. I mean, let's take Lift
Speaker 1: for for example. We don't know what's gonna happen with
Speaker 1: Lift five years from now. I would not buy a
Speaker 1: bond from leaft a five year paper because as I
Speaker 1: didn't buy a test LA bond, you know, if I
Speaker 1: buy a test last talk, I'm betting the electric cars
Speaker 1: or self driving cars are going to do very well.
Speaker 1: Their bonds did very poorly. You know, they came out
Speaker 1: a part. They're not trading at eighty eight cents on
Speaker 1: the dollar. So it's a situation where leverage is dangerous
Speaker 1: when you're not making any money. Bond analysis requires much
Speaker 1: more substance than stock and alliss. So what about m
Speaker 1: risk mitigation? What sort of tools do you use to
Speaker 1: to control the risk you have? Well, we stress the
Speaker 1: portfolio based on if rates move up a hundred peers
Speaker 1: two hundred peers. We do it in either direction. We
Speaker 1: try not to concentrate in one industry. We personally impose
Speaker 1: some restrictions to our portfolio. We don't do casualty insurance
Speaker 1: for example. Why not. We don't want to read about
Speaker 1: the tsunami and all of a sudden it turned out
Speaker 1: that the bonds of the company we hold, we're insuring
Speaker 1: every single house that was destroyed by the tsunami. So
Speaker 1: that's pretty much just a straightforward geographical diversification approach. We
Speaker 1: don't do newly deregulated industries that saved us from and
Speaker 1: run from World com We never did the airlines, for example.
Speaker 1: Newly deregulated industries are a higher risk bond than as
Speaker 1: widely perceived management. Let me give you an example. Pacific
Speaker 1: Gas and Electric, or that the Pacific companies. They were
Speaker 1: running a utility, they were selling power, and all of
Speaker 1: a sudden they were deregulated. They went out and bought
Speaker 1: the thrifty chain of drug stores. Wait, so when when
Speaker 1: was PGN and California Utilities deregulated in the nineties and
Speaker 1: the found out that selling crests toothpaste was not the
Speaker 1: same as selling power to Two years later they sold
Speaker 1: the company at a loss of one and a half
Speaker 1: billion dollars and they had their bonds downgraded because of it.
Speaker 1: If a manager was running an airline and he had
Speaker 1: specific routes, he could not move from them. All of
Speaker 1: a sudden he's competing with Joe and his brother who
Speaker 1: both three planes and are doing the small cities. It
Speaker 1: became very dangerous to compete in that market. We saw
Speaker 1: every major airline go through bankruptcy. Communications you had the
Speaker 1: Big I mean Big Mabel. You knew the Big Mobil
Speaker 1: was the safest company in the world. Stuff. So when
Speaker 1: when they broke them up, you know, they ended up.
Speaker 1: I mean the world comes came up in the world
Speaker 1: and the Worlcome ended up going broke, So that's another
Speaker 1: one of the areas we don't do. And the third
Speaker 1: one is nuclear power, and it's not for environmental reasons.
Speaker 1: It's if some idiot forgot to close about the plant
Speaker 1: might end up in a different state, so whoops, the
Speaker 1: Washington State utility had a major problem with a nuclear plant.
Speaker 1: Three my Leland is another example. We don't want to
Speaker 1: take the risk of an error creating a situation where
Speaker 1: our bonds would dramatically change in races. So if I
Speaker 1: were to go around the country and look at the
Speaker 1: utilities that have nuclear power plants on their books, their
Speaker 1: bonds are going to be trading at a at a
Speaker 1: discount to what non nuclear utilities or is this just
Speaker 1: specifically specific to l M. Does anybody else do that?
Speaker 1: I don't know, But for us that risk mitigation is
Speaker 1: very important, and then we overlay our scenario planning so
Speaker 1: we try to avoid anything that we have to get
Speaker 1: out very quickly if something happened. I don't think you're
Speaker 1: paid enough to take a little bit of an additional risk.
Speaker 1: If you were paying me another three d beeps, I
Speaker 1: mean three more in interest to taking to take additional risk,
Speaker 1: I would consider it. If you pay me five beeps
Speaker 1: point oh five of a percent more, it's not worth it.
Speaker 1: Not worth it. So so you had mentioned the rating agencies.
Speaker 1: Clearly they did a terrible job during the financial crisis.
Speaker 1: We later learned that their whole business model had shifted
Speaker 1: from the bond buyers paying their fees to the issuers
Speaker 1: paying their fees, and it became a payola, pay for
Speaker 1: play sort of situation. And if I walk into one
Speaker 1: of them, if I walk into SMP and they don't
Speaker 1: give me the double A rating I want, I'll just
Speaker 1: say no thanks, and I'll go across the street to
Speaker 1: Moody's and I will be able to purchase whatever rating
Speaker 1: I I want. So given that, do you put any
Speaker 1: consideration and to what the rating agencies do, either either
Speaker 1: whether they cover a bond or a country or an industry,
Speaker 1: or a specific upgrade or downgrade. How how important is that? Well,
Speaker 1: we do follow them, we do read what they print,
Speaker 1: and we do take into account their rating because they
Speaker 1: have good analysis. After on nine, they've strengthened their their analysis.
Speaker 1: I think that in the case of the mortgages, they
Speaker 1: just did not understand the product so it was not
Speaker 1: only the paid to play, but it was also a
Speaker 1: lack of understanding how the different trenches would behave in
Speaker 1: a crisis. But first of all, the change in rating
Speaker 1: is not that impactful anymore. Now. When you went from
Speaker 1: a triple B to a triple B minus, the bond
Speaker 1: at one time would drop three points. Now it might
Speaker 1: drop a quarter of a point. How much of that
Speaker 1: is due to the fact that they did such a
Speaker 1: terrible job when they were needed in the last last crisis.
Speaker 1: It does impact what's happening, but the perception of whether
Speaker 1: you cover your needs three point two times or three
Speaker 1: times or two point nine does not make that big
Speaker 1: a difference, even in the case of I mean and now,
Speaker 1: triple beasts are the vast majority of bonds, you know,
Speaker 1: their borderline between investment grade and high yield or low
Speaker 1: investment grade, that's the nicest way of saying junk, you know,
Speaker 1: But they're still considered an investment grade. They're investable for
Speaker 1: anyone who's um charter or portfolio policy statement says only
Speaker 1: investment grade exactly. But most pension plans, for example, today,
Speaker 1: have a bunch of non investment grade bonds in their books.
Speaker 1: At one time, you would think that that change would
Speaker 1: eliminate basically who could by those bonds. And ever since
Speaker 1: Michael Milken in the eighties the he created an industry
Speaker 1: for non investment grade bonds. I mean, he did not
Speaker 1: invent the hi yield bonds. He just invented who could
Speaker 1: buy them. He went to the thrifties, thrifts, he went
Speaker 1: to the savings and loans, he went to the insurance companies,
Speaker 1: and then the patient plan said, well, let's make that
Speaker 1: also an asset class in which we can invest. So
Speaker 1: so let's talk about those pension funds for a moment.
Speaker 1: You mentioned during the broadcast portion that their allocation has
Speaker 1: been gearing more towards alternatives like venture capital and private
Speaker 1: equity and hedge funds because they're looking for a higher
Speaker 1: total expected return, which they're not just they apparently you're
Speaker 1: not getting from stocks and bonds, but they also haven't
Speaker 1: been getting them from the alternatives they've been They're expensive.
Speaker 1: I like to jokingly say, come, come for the high fees,
Speaker 1: stay for the under performance. But in all seriousness, they
Speaker 1: have built out ten thirty sometimes even of their total
Speaker 1: portfolios with these alternatives, and they've slapped a very high
Speaker 1: expected return six eight, ten on these. Why is that?
Speaker 1: How can they just say, even though we have decades
Speaker 1: of data showing that these are not going to get
Speaker 1: eight percent, we're still going to put an expected return
Speaker 1: of eight percent on this. What? What does that due
Speaker 1: to the allocations? They were getting those results years ago
Speaker 1: in the eighties and nineties because there wasn't that much competition.
Speaker 1: There's been so much money that has gone into alternatives
Speaker 1: that now they're competing for deals and the yields are
Speaker 1: are lower. It's just that's just market efficiency, isn't it.
Speaker 1: You can't you can't have these big fat margins without
Speaker 1: attracting other people to say I'd like a little bit
Speaker 1: of that. I tend to joke saying that hope is
Speaker 1: not a strategy, and a lot of the buying of
Speaker 1: private equity adventure is hoping that in the future that
Speaker 1: will be worth much more. If you own stocks or
Speaker 1: your own bonds, the value is there every day you know,
Speaker 1: you run a statement, you check what the value of
Speaker 1: your stocks are. You can find out the value of
Speaker 1: your portfolio every day. If you have private equity, you
Speaker 1: have no clue how much is it worth when it
Speaker 1: goes public when there's a liquidity event, then it's when
Speaker 1: you know what happens. But it might take five or
Speaker 1: ten years, and you never know the real value of
Speaker 1: your investment. And you can always put any increased value
Speaker 1: you want and it will show us though you're doing well,
Speaker 1: and you might or might not get that value that
Speaker 1: you put it down in your state. So the non
Speaker 1: publicly traded assets give people the ability to mark, to
Speaker 1: not mark the market, but mark two what hopes and
Speaker 1: dreams is that what you suggest that it's not that bad.
Speaker 1: But the answer is yes, you know, it's we used
Speaker 1: to call it mark to make believe in the middle
Speaker 1: of the crisis, but it's not. You know, we're not
Speaker 1: suggesting that. You're saying it gives them a little bit
Speaker 1: of accounting flexibility, exactly. I think that things are worth
Speaker 1: what the buyer is willing to pay. I mean, I
Speaker 1: think that if you ask them people who their house
Speaker 1: is worth, you're going to get tent responses that are
Speaker 1: higher than the actual market. But that's an emotional bias
Speaker 1: that that makes some sense. It makes It's the same
Speaker 1: as when they're valuing companies. Endowment effect is is certainly present.
Speaker 1: You know, you want to believe that everybody is going
Speaker 1: to see the same that you are seeing, and the buyer,
Speaker 1: even if they perceive that the value is the same
Speaker 1: as you do, they're going to fight to get a
Speaker 1: They still want a discount of absolutely. You know, nobody
Speaker 1: likes to pay retail sure, So you are really thinking
Speaker 1: hoping that you're going to get the values you're putting
Speaker 1: down in this statement, and that does not necessarily going
Speaker 1: to happen. Sometimes you're going to be very pleasantly surprised,
Speaker 1: but most of the time you won't. So I used
Speaker 1: to joke with a friend who is at a pension
Speaker 1: funds about what I perceived as their absurd expected returns
Speaker 1: on their alternatives, and the response was, we need seven
Speaker 1: or eight percent. So I used to say, well, let's
Speaker 1: assume you get two and a half percent from your
Speaker 1: bond portfolio and you get five percent from your equities,
Speaker 1: and I'm up, there's your seven a half percent. And
Speaker 1: it took him a moment to realize, well, that's not
Speaker 1: how you do a blended portfolio. But it's every bit
Speaker 1: as ridiculous as expecting ten percent from asset classes that
Speaker 1: haven't returned. That sort of number for twenty or thirty years.
Speaker 1: You're right, but you always kicking the can a little
Speaker 1: bit further away. So probably by the time the pension
Speaker 1: plan runs out of money, you will not be there, right,
Speaker 1: So I mean that you say that half jokingly, but
Speaker 1: we know that's true. Governments, state and local governments have
Speaker 1: done that with their police pension funds and their fire
Speaker 1: pension funds and their teacher funds that by the time
Speaker 1: it's really problematic, the politicians responsible for that they're long
Speaker 1: out of office. That someone else's headache. How can we
Speaker 1: realign the incentives so that we're not just kicking the
Speaker 1: can down the road or is that just human nature?
Speaker 1: And this is what's going to happen. Look at the
Speaker 1: state of Illinois. They have excellent managers managing the money
Speaker 1: at the pension plans, and they're underfunded by I mean,
Speaker 1: they probably are funded for thirty five it's politicians that
Speaker 1: have not wanted to raise the contributions that are trying
Speaker 1: to be re elected, so they don't pressure the public
Speaker 1: workers to give more of their salary to their pension plan.
Speaker 1: And you know, it's now a huge problem because they're
Speaker 1: running out of money. So there are certain states that
Speaker 1: have high taxes and big state spending, but seem to
Speaker 1: have their budgets and their pension plans more under control.
Speaker 1: California comes to mind, New York comes to mind. Amongst
Speaker 1: the states a little better or or a lot better.
Speaker 1: Clearly Chicago and Illinois have problems. I hear about problems
Speaker 1: in New Jersey and Connecticut both have pension issues. How
Speaker 1: significant is this going to be for funding UM in
Speaker 1: the next twenty to thirty years. It's a huge problem,
Speaker 1: huge huge Look at Detroit. Detroit had to file for
Speaker 1: bankruptcy because of the pension place. So now what happens.
Speaker 1: So now, if you're a company and you file for bankruptcy,
Speaker 1: judges have a tendency. Courts have a tendency to say,
Speaker 1: before you even get to the creditors, employee compensation, salary
Speaker 1: and pensions is sacrosanct. We don't touch that. What happened
Speaker 1: in Detroit with the the employee pensions post bankruptcy, some
Speaker 1: of it were cut down. Cities can go bankrupt, states
Speaker 1: cannot by law, right, But you know, they got to
Speaker 1: the point where they were about to sell the paintings
Speaker 1: from the museum in Detroit in order to pay pension plans.
Speaker 1: The city is being revitalized, and they hope that eventually
Speaker 1: they're gonna pull out, But again I hope. To me,
Speaker 1: hope is not a strategy. Right, So, we know that
Speaker 1: post hurricane, Puerto Rico has had or let's let's phrase
Speaker 1: that a little differently. Post hurricane, it was revealed the
Speaker 1: precarious state of Puerto Rico's finances, sort of like Greece
Speaker 1: to the EU, Puerto Rico managed to borrow it rates
Speaker 1: that were more suitable for the US than for Puerto Rico.
Speaker 1: They're not a state, they're not a city, They're they're
Speaker 1: a territory. What happens with that situation? Are they going
Speaker 1: to be able to get a refinancing? Is bankruptcy even
Speaker 1: an option for a non state, non city territory. Well,
Speaker 1: first they can go to bankruptcy with the state owned enterprises,
Speaker 1: but Puerto Rico had a big problem even before the hurricane,
Speaker 1: and you know, the electric company had been in trouble
Speaker 1: paying back even before the hurricane. So they are still
Speaker 1: fighting it. They're still fighting with bond holders and the pain.
Speaker 1: The public workers are crossing their fingers that their pension
Speaker 1: will be there when they need. They were suffering a
Speaker 1: brain drain before the hurricane. Because if you're in Puerto
Speaker 1: Rico and you're making X, and you could just take
Speaker 1: a plane to Florida or Texas or wherever you want
Speaker 1: to go, because you're a US citizen, you could get
Speaker 1: a job with that skill and make one and half
Speaker 1: or two X. They seem to have lost a lot
Speaker 1: of really talented people. They have, even though they created
Speaker 1: a lot of incentives for people to go leave in
Speaker 1: Puerto Rica. Very low taxes, very low taxes. The first
Speaker 1: year you pay I think three percent income taxes. That's
Speaker 1: not too shabby. A lot of big big money managers.
Speaker 1: That's federal income tax, not state. So instead of a
Speaker 1: top rate of thirty seven, your top rate is three. Yeah.
Speaker 1: H fund managers have moved to Puerto Rico. Weather is
Speaker 1: not too bad. It's not too bad. Good beaches. Huh.
Speaker 1: So I only have you for a limited amount of time.
Speaker 1: Let me get to some of my favorite questions I
Speaker 1: asked all of my guests. It adds a little bit
Speaker 1: of a sort of cinema verity when I move off
Speaker 1: Mike and people can tell that I'm doing that. I
Speaker 1: kind of like that especially at the end, not during
Speaker 1: the broadcast portion. Um, but let's jump to these questions.
Speaker 1: We'll call this our speed round. So what was the
Speaker 1: first car you ever owned? Year make and model six
Speaker 1: dog Dart dodged. They were My sister had one of those.
Speaker 1: It was a sixty six or sixty seven. Those cars
Speaker 1: could not be killed. They were three thousand mile cars
Speaker 1: from the sixties. I wish it had been my sisters
Speaker 1: in that mind. So you had a problem with it.
Speaker 1: I did not like it, but because when my father
Speaker 1: gave me it wasn't the prettiest car, but they were
Speaker 1: kind of indestructible for that they were, Um tell us
Speaker 1: the most important thing that your friends and family don't
Speaker 1: know about you. I love red wine. That's my passion,
Speaker 1: and I'm a collector. Very interesting. Who were some of
Speaker 1: your early mentors who helped shape your view of the
Speaker 1: fixed income markets and investing? A Nobel Prize winner professor
Speaker 1: at Harvard before I really got to know him, Bill Gross,
Speaker 1: before you got to know him, not after, not after,
Speaker 1: And I would say that the mentor was my father,
Speaker 1: not in terms of investing, but in terms of values.
Speaker 1: Hard work is the only thing that makes you do
Speaker 1: well makes it makes a lot of sense. Um, tell
Speaker 1: us about your favorite books. What are you reading? What,
Speaker 1: what do you recommend other people read? Fiction, nonfiction, investing
Speaker 1: related whatever. In fiction, I love the Mill Nelson, The Mill,
Speaker 1: I love the series by ken fall It. And in
Speaker 1: nonfiction I'm reading now a great book of the woman
Speaker 1: that ran the Spye Network for the French in the
Speaker 1: Second World War, Madame for God, And I love Harari's
Speaker 1: the Israeli guy that's part historian, part philosopher. The one
Speaker 1: Questions for the twenty one Centuries an amazing book. Really.
Speaker 1: I read same guy who wrote Sapiens Schapions, and then
Speaker 1: Homo which was a little darker than say, and now
Speaker 1: The Questions in Tours a great book. I'm gonna I'm
Speaker 1: gonna put that one on my list. The the ken
Speaker 1: Fileted series, He's had a number of different series, which
Speaker 1: one you were find both the Piers of the Earth
Speaker 1: they went about the building of the Cathedral, and then
Speaker 1: the one that takes him through the Three Wars. I mean,
Speaker 1: his writing is amazing. I love historic novels. That's really
Speaker 1: quite interesting. Tell us about a time you failed and
Speaker 1: what you learned from the experience When I was living
Speaker 1: in Mexico. I found the smoking withdrawal system from water Peak,
Speaker 1: so I flew to Fort Collins and negotiated with them.
Speaker 1: The representation in Mexico brought it to Mexico, and then
Speaker 1: found out that Mexicans did not want to stop smoking,
Speaker 1: so it was not a good business. I just thought
Speaker 1: that I could carry over what was happening in the
Speaker 1: US new Mexico. And you have to understand local mentality
Speaker 1: and local desires. Is that still true or Mexicans still
Speaker 1: big tobacco smokers relative to what it was like thirty
Speaker 1: years ago. It's lower, but it's much bigger than in
Speaker 1: the U. S. I mean it's fallen. I grew up
Speaker 1: in a I've never been a smoker. My parents were smokers.
Speaker 1: They eventually stopped. But in the United States it's fallen
Speaker 1: off a cliff like it's like it's almost noteworthy when
Speaker 1: you see someone in the street with a cigarette. I'm
Speaker 1: not even talking about vaping an actual tobacco cigarette. It's
Speaker 1: almost like, you know, a rarity. It's like spotting a
Speaker 1: wild unicorn. In Mexico, you cannot open your restaurant without it.
Speaker 1: Darris for smokers, but they're not allowed to smoke in
Speaker 1: the restaurant proper. That's a smaller part of the restaurant.
Speaker 1: That's that's amazing. Um. What do you do for fun?
Speaker 1: You mentioned red wine? What else do you do to
Speaker 1: stay busy out of the office, traveling, reading, watching sports
Speaker 1: on TV, and playing some golf? What what sports do
Speaker 1: you watch? I watch basketball and I watch golf, and
Speaker 1: my wife says I would watch Jackson if they show
Speaker 1: the tournament. Um, what has you most excited about the
Speaker 1: bond market these days? What? What are you enthusiastic about.
Speaker 1: I love the idea that emerging market that has become
Speaker 1: an asset class, and almost everybody is not pursuing it.
Speaker 1: We've been at it for thirty years and I think
Speaker 1: one of the stronger firms in the country. On So,
Speaker 1: if a young college grad or millennial came up to
Speaker 1: you and said they were interested in a career in
Speaker 1: fixed income, what sort of advice would you give them?
Speaker 1: Try to go beyond what you're reading the in the financials.
Speaker 1: I mean, reading financials is one thing. Understanding what the
Speaker 1: company does or who runs it is probably more important
Speaker 1: than anything. And our final question, what do you know
Speaker 1: about the world of bond investing today that you wish
Speaker 1: you knew thirty years ago when you first launched the firm,
Speaker 1: that the trend torch lower rates was gonna last thirty years.
Speaker 1: I would have made a ton of money. I would
Speaker 1: have bought only thirty year paper. It wasn't obvious back
Speaker 1: then that this was the start of a three decade
Speaker 1: long bullmarket. No, we were coming out, I mean from
Speaker 1: the Jimmy Carter days with big inflation and globalization had
Speaker 1: not taken over yet, so boom and bust was still
Speaker 1: part of the story of the economy in the US.
Speaker 1: The economy in the US has changed so much, you know,
Speaker 1: it's no longer that globalization. If there's a crisis, all
Speaker 1: you do is called your supplier and say in China
Speaker 1: or in Mexico, and you tell them those ship the
Speaker 1: next six months. You don't have to shut down the plant. Huh.
Speaker 1: Quite quite interesting. We have been speaking to Louise Mazelle
Speaker 1: of LM Capital Group. If you enjoy this conversation, well,
Speaker 1: be sure to look Up an Inch or down an
Speaker 1: Inch on Apple iTunes or wherever you have access to
Speaker 1: this podcast, and you could check out any of the
Speaker 1: other two hundred and fifty podcasts we have broadcast over
Speaker 1: the past five years. We love your comments, feedback and
Speaker 1: SIGG questions right to us at m IB podcast at
Speaker 1: Bloomberg dot net. I would be remiss if I did
Speaker 1: not thank the Crack staff who helps put these conversations
Speaker 1: together each week. My producer slash audio engineer is Medina Parwanna.
Speaker 1: Taylor Riggs and Michael Boyle are our bookers. Attica val
Speaker 1: Brunn is our project manager. Michael Batnick is our head
Speaker 1: of research. I'm Barry Results. You've been listening to Masters
Speaker 1: in Business on Bloomberg Radio