Speaker 1: This is Masters in Business with Barry Ridholds on Bloomberg Radio.
Speaker 1: This week on Masters in Business, I have an old
Speaker 1: friend as a guest. His name is David Kotak. He
Speaker 1: has been on the street for over forty years. He's
Speaker 1: the co founder and chief an investment officer of Cumberland Advisers.
Speaker 1: I know David for a decade plus, and David pretty
Speaker 1: much knows everybody on the street. He's one of these
Speaker 1: guys who have been around, not only been around for
Speaker 1: a long time, but is super plugged in UM. You'll
Speaker 1: hear him discuss some of the Federal Reserve chairman that
Speaker 1: he's met. He's pretty much met every FED chair since
Speaker 1: the nineteen seventies. He's really an interesting guy, very knowledgeable,
Speaker 1: especially about active bond management and muni bonds. He's an
Speaker 1: interesting runs an interesting portfolio passive h E T F
Speaker 1: index equity these but active bonds and and there's a
Speaker 1: very specific reason for that that we we talked about UM.
Speaker 1: David hosts something which has become known as the Shadow
Speaker 1: Federal Reserve Meetings. He's also the chairperson of the Global
Speaker 1: Interdependence UM Committee and basically puts together a series of
Speaker 1: conferences UM around the world where heads of state and
Speaker 1: head heads of various central banks come and debate economic
Speaker 1: issues and policies and monetary policy. It's really a fascinating group.
Speaker 1: I'm fortunate enough to participate in the the what's become
Speaker 1: what's become known as Camp co Talk, but it really
Speaker 1: began as the Shadow Federal Reserve Committee, which similarly debates
Speaker 1: issues of the Federal Reserve and interest rate policy, as
Speaker 1: well as monetary and fiscal policy, investing issues, investing posture
Speaker 1: is regulation, all sorts of things like that. It's a
Speaker 1: fascinating collection of of people, UM, A number of whom
Speaker 1: have appeared on the show over the past year. But
Speaker 1: about fifty or sixty people from all walks of life
Speaker 1: from all over the world come by and and meet
Speaker 1: in Maine, from as far as away as Abu Dhabi
Speaker 1: and and as close as um New York City, and
Speaker 1: essentially five or six dozen of us get together in
Speaker 1: cabins and and have these fascinating uh discussions. A little
Speaker 1: bit of fishing and a little bit of drinking takes
Speaker 1: place as well. But I find David just to be
Speaker 1: one of these old school guys. He does things the
Speaker 1: right way. He came up through um a very rough
Speaker 1: period in markets and in the nineteen seventies, and I
Speaker 1: think his approach is very circumspect and and very reasonable,
Speaker 1: and there are a lot of things to be learned
Speaker 1: from him. So, without any further ado, here is my
Speaker 1: conversation David Kotok. This is Masters in Business with Barry
Speaker 1: Ridholts on Bloomberg Radio. My special guest today is an
Speaker 1: old friend, someone I've known for a long time. His
Speaker 1: name is David Kotok, and he is the co founder
Speaker 1: and chief investment officer of Cumberland Advisors, a firm now
Speaker 1: located in Florida that manages a couple of billion dollars um.
Speaker 1: Quick background on David. Uh. Bachelor's from University of Pennsylvania,
Speaker 1: n eventually gets both an m S and an m
Speaker 1: A master's in philosophy from University of Pennsylvania. Is that correct?
Speaker 1: That is correct? Author of four books, including the best
Speaker 1: selling From bar to Bull with ETFs, soon to be
Speaker 1: the author of the upcoming Adventures and Uni Lands. Uh. David,
Speaker 1: Welcome to Bloomberg, Barry. It's so nice to be with you.
Speaker 1: We've chases for a while and here we are and
Speaker 1: we don't have fishing rods in our hands. Know we're
Speaker 1: normally normally when I'm with you, I I usually have
Speaker 1: a speckled trout on the line showing off a wide
Speaker 1: mouth bass um. We consider. I don't like to brag,
Speaker 1: you know how humble I am, but I consistently am
Speaker 1: the top performing angler in camp co talk, which we
Speaker 1: will will talk about in a little later. Let's let's
Speaker 1: start out talking a bit about your background. So you
Speaker 1: have a somewhat unusual background. In addition to all that
Speaker 1: academic training, you are an army captain in from sixty
Speaker 1: six to sixty nine. Is that? Is that correct? Well,
Speaker 1: that's right. I I finished undergraduate school at Wharton in
Speaker 1: sixty five and at that period in our history Vietnam War,
Speaker 1: full full throw, full throat, and um. I spent three
Speaker 1: years in the Army in sixty six to sixty nine,
Speaker 1: and then got out and came back to New Jersey
Speaker 1: and invent I became registered as a solo investment advisor
Speaker 1: under the Forties Act. Before we fast forward, I find
Speaker 1: the fact that you were a captain in the army fascinating.
Speaker 1: What was that training like and and is any of
Speaker 1: that applicable to your day job. Well, the the army
Speaker 1: is a great experience under most circumstances. Most people would
Speaker 1: not repeat it, right, but they would also say, and
Speaker 1: many of my friends would say, I'm glad I did it,
Speaker 1: and number two, I'm glad I'm here. So that's the
Speaker 1: Dorothy Parker quote. I hate writing, but love having written.
Speaker 1: So well, there you go. That's right. And the thing
Speaker 1: about that that the army experience, a military experience that
Speaker 1: helps me is it creates a hierarchical structure in your thinking,
Speaker 1: a reporting system, a system in which you follow directives,
Speaker 1: and so when you think in terms of that structure,
Speaker 1: it helps you in a business environment. And it actually
Speaker 1: helps me when I look at businesses and I look
Speaker 1: at governance, and I look at situations around the world
Speaker 1: in terms of investment, advice and decisions. Because I can
Speaker 1: measure them in the context of their structure, you understand
Speaker 1: how the decision making process is implemented in a similar
Speaker 1: military style at places like central banks and other sort
Speaker 1: of governmental entities. Sure, because the experience is not only
Speaker 1: the textbook experience in the study of organizations and businesses,
Speaker 1: but in the army, you have somebody above you and
Speaker 1: somebody below. You have to transmit a directive and you
Speaker 1: have to see the see it through and accomplish something.
Speaker 1: So it's very helpful to me. So let's talk a
Speaker 1: little bit about government. You were on the transition teams
Speaker 1: for both New Jersey Governor Tom Keane and New Jersey
Speaker 1: Governor Christy Women. Did you see that same sort of
Speaker 1: hierarchical structure and ability to follow directives at the state level.
Speaker 1: We saw it and we also saw the absence of it.
Speaker 1: And therefore the structure of a new government is to
Speaker 1: try to create order. In the transition you have chaos.
Speaker 1: Creating a order out of chaos is always a difficult
Speaker 1: thing to do, and that's what the world's about. So
Speaker 1: my prior experience helped me in both transition teams. You know,
Speaker 1: you set up a new government, you have a lot
Speaker 1: of new personalities. There's a very rapid change in personalities,
Speaker 1: and the leader at the top, the new governor, is
Speaker 1: like an electronic machine with people banging at them and
Speaker 1: pinging at them every second, trying to put together and
Speaker 1: in New Jersey's case, the governor of New Jersey very powerful.
Speaker 1: So there are a couple of thousand appointed positions in
Speaker 1: the government and so it was a lot to do,
Speaker 1: was great experience transition teams. So let's fast forward to
Speaker 1: what you do for a living today. You run a
Speaker 1: m that's primarily known as an active bond shop. How
Speaker 1: does that differ from just more passive bond ownership. Well,
Speaker 1: we we we have a forty year plus history in
Speaker 1: active management of bonds. We do our own credit work.
Speaker 1: We look at what rating agencies do, but we do
Speaker 1: our own credit work as well. And we also have
Speaker 1: a pretty good E t F segment, although that that
Speaker 1: has a lot of growing prominence. But we're known for
Speaker 1: long time as a bond shop. So let me ask
Speaker 1: you a question about active bonds. That the rub on
Speaker 1: active equities is, Hey, you're probably in the longhould, better
Speaker 1: off just being passive, low cost and just leave it go.
Speaker 1: But the studies say the same isn't true for bonds.
Speaker 1: You're better off being somewhat active, or at least that's
Speaker 1: the the academic math. Explain why that works and how
Speaker 1: well we think, So Barry that the yield curve, the
Speaker 1: distribution of interest rates over maturities, shifts all the time,
Speaker 1: so it by itself is active for variety of reasons
Speaker 1: having nothing to do with the bond uh buyers daily activity.
Speaker 1: Those are functions of government and central banks and economic activity.
Speaker 1: But because they're there, you can take advantage of them
Speaker 1: in an active bond approach rather than just buy a bond,
Speaker 1: hold it, collect the interest, and get the principle when
Speaker 1: the bond matures. So the yield curve shift is one
Speaker 1: of the issues. The directions of each of those policy pieces,
Speaker 1: Central banks, governance deficits are also big pieces. I'm Barry
Speaker 1: rich Helps. You're listening to Masters in Business on Bloomberg Radio.
Speaker 1: My special guest today is David Kotok. He is the
Speaker 1: c i O of Cumberland Advisers with about two point
Speaker 1: three billion in assets under management, and I want to
Speaker 1: start this segment with a quote of yours that I
Speaker 1: find intriguing. Said quote. We believe the value of stocks
Speaker 1: and bonds is enduringly linked to interest rates and the
Speaker 1: cost of money. Interest rates eventually dominate that valuation process
Speaker 1: and are the market's way of restoring equilibrium. So there's
Speaker 1: a lot in that. Let's let's discuss it. What Why
Speaker 1: do you believe that interest rates are so crucial to
Speaker 1: stocks and bonds. The valuation of every financial asset is
Speaker 1: a discounting mechanism, some sort of attempt to estimate what
Speaker 1: it's going to be worth tomorrow, and at what rate
Speaker 1: do you discount tomorrow to today? And that is the
Speaker 1: fundamental interest rate. Now you can argue is that the
Speaker 1: nominal interest rate? Is it the real interest rate? You
Speaker 1: have to adjust for risk. But the bottom the bottom
Speaker 1: line is an interest rate. It's the cost of money.
Speaker 1: It's the host of of risk free what you would
Speaker 1: get if you were just putting money in treasuries well,
Speaker 1: or something that is essentially risk free. And the fact
Speaker 1: is every single financial decision has to be compared with
Speaker 1: the risk free rate and the maturity that coincides with
Speaker 1: the financial decision you're making. So if you're buying stocks,
Speaker 1: for example, you have a very long term asset pool.
Speaker 1: If you take all the stocks and lump them together
Speaker 1: and call them stock market, and you bought one share
Speaker 1: of stock market, it's a very long lived pool. The
Speaker 1: same thing might be true with a very long term bond.
Speaker 1: So you say to yourself, Okay, do I expect the
Speaker 1: long term bond maturity or the outcome of the long
Speaker 1: term share of stock market to produce a result, What
Speaker 1: is the result I expect and how do I discount
Speaker 1: that result to today? To decide whether or not to
Speaker 1: do it? That discounting mechanyms mechanism is an interest rate.
Speaker 1: So you add to the part initial part of the
Speaker 1: quote that eventually interest rates are part of the valuation process.
Speaker 1: That are the market's way of restoring equilibrium. Explain what
Speaker 1: that means well, markets move up and down. They represent
Speaker 1: the consensus pricing view of all the agents in the
Speaker 1: market at any given minute. Agents meaning all the buyers
Speaker 1: and sells, all the buyers and sellers. Anybody who's a
Speaker 1: player has a way to buy or sell at a
Speaker 1: price every second, and they all have information. How does
Speaker 1: this whole mass clear? In the end, it clears because
Speaker 1: it reverts to some basic discounted price. And the basic
Speaker 1: discounted pricing mechanism is the interest rate. Now, the market
Speaker 1: interest rate maybe belower above what would be natural rate.
Speaker 1: We don't know. So therefore the market interesting may be
Speaker 1: influenced by other forces, and they have to be examined.
Speaker 1: A good example right now is you have this crazy
Speaker 1: idea in Europe of a negative interest rate Switzerland getting switz.
Speaker 1: That's right. I that we're accustomed to saying to a bank,
Speaker 1: here's my money, pay me interest, and give it to
Speaker 1: me when we agree, either tomorrow or a year from now.
Speaker 1: Now we have a new concept. Here's my money, store
Speaker 1: it for me electronically. I will pay you a fee,
Speaker 1: and at the end of the term, you're gonna give
Speaker 1: me back less than I gave you. That is counterintuitive
Speaker 1: to any saver or lender. We don't think that way.
Speaker 1: We never have. And so this is a negative interest
Speaker 1: Now you say to yourself, is that going to go
Speaker 1: on forever? The answers no, it's not a sustainable system.
Speaker 1: So can you use the negative interest rate in the
Speaker 1: marketplace today to discount the value of something? I don't think. So,
Speaker 1: therefore you have to guess, estimate, guest estimate at what
Speaker 1: the interest rate ought to be if it reflected as
Speaker 1: much as you know, and you would get something other
Speaker 1: than a negative rate. Because you know, a negative interest
Speaker 1: rate is not a sustainable model, even though it is
Speaker 1: being applied in one of the largest economic blocks in
Speaker 1: the world. So let me throw a quote at you
Speaker 1: from a guest of hours a few weeks ago. I
Speaker 1: s I s ed Hyman and we were talking about
Speaker 1: Japan practically at zero, Switzerland is negative, Germany is close
Speaker 1: to one percent, the US is over two percent, all
Speaker 1: of them on their tenure bonds. And when I asked ed,
Speaker 1: what is the difference between these countries? Is it a
Speaker 1: function of risk? Is it a function function of something else?
Speaker 1: And he said interest rates on government bonds reflect expected
Speaker 1: growth rates. Do you agree with that? Well? I used
Speaker 1: to say that would have been very accurate, but I
Speaker 1: think today to say that by itself is insufficient because
Speaker 1: you're leaving out central bank action absolutely and the we
Speaker 1: we now have extraordinary central bank action unlike anything we
Speaker 1: have in the history of man in modern financial time.
Speaker 1: So let me flash back with you, because you started
Speaker 1: in the nineteen seventies and that was an era. I
Speaker 1: was a wee lad, but I very vigorously remember don't
Speaker 1: get gas with my guests container for the lawnmower, and
Speaker 1: not having the right um license plate number to to
Speaker 1: carry it home. I had to beg the guy for
Speaker 1: guess to mow the lawn. Uh. Inflation was off the charts.
Speaker 1: You launched your business in that era. What was it
Speaker 1: like during the nineteen seventies, and both inflation was high
Speaker 1: and the interest rates the seventies. The seventies were remarkable.
Speaker 1: You started out in a rocky period at the end
Speaker 1: of the sixties, you got into the seventies. Then you
Speaker 1: had the war in the Middle East. The price of
Speaker 1: oil went from three bucks to twelve I remember it, well,
Speaker 1: not a gallon, not a gallon. I was in this
Speaker 1: business managing portfolios when that happened. And the rate of
Speaker 1: inflation in the seventies went to double digits. It was remarkable.
Speaker 1: Interest rates had been at levels and at the time
Speaker 1: of the First Shock they hit the highest interest rates
Speaker 1: since the Civil War in the United States. Can you
Speaker 1: imagine a hundred year period and now you have a
Speaker 1: new all time high interest rate. The prime rate hit twelve,
Speaker 1: never thinking that six or seven years later it would
Speaker 1: be higher. Higher. Still in the last minute, we have
Speaker 1: what ended up happening with rates there and how did
Speaker 1: that set off the next cycle in bonds. Well, we
Speaker 1: had a big inflation. Rates went up, they were double digits.
Speaker 1: Inflation went to double digits. It was the end of
Speaker 1: the Carter regime. Incomes Paul Vulker, who deserves a medal
Speaker 1: as a national hero for the United States. He said
Speaker 1: in nineteen seventy nine, I will stop this inflation no
Speaker 1: matter what I have to do, and he did it.
Speaker 1: Bonds peaked and the Long Bond Rally started in one
Speaker 1: I'm Barry rid Hoults. You're listening to Masters in Business
Speaker 1: on Bloomberg Radio. My special guest today is David Kotak.
Speaker 1: He is the chief investment officer of Cumberland Advisers, managing
Speaker 1: two point three billion dollars and a fly fisherman extraordinary.
Speaker 1: We'll we'll talk more about that in a in a
Speaker 1: later segment. Let's get right into the Federal Reserve. You
Speaker 1: have known personally and met with every re FED chairman
Speaker 1: going back to nineteen seventy. Tell us how that came about. Well,
Speaker 1: I met Arthur Burns twice. I had two meetings with
Speaker 1: Arthur Burns in his office, and so he was the
Speaker 1: FED chief from of nineteen seventy to nineteen seventy eight. Um. Yeah,
Speaker 1: I never met Miller that that preceded him. I never
Speaker 1: met Martin and I never met Miller, who was there
Speaker 1: for a very short period of time in the Carter administration.
Speaker 1: He was replaced quickly by Vulcar, which was a good thing.
Speaker 1: I met Arthur Burns. Arthur Burns really was was a
Speaker 1: smart economist, very skilled, knew his history, and he in
Speaker 1: he takes on the chairing of the Federal Reserve when
Speaker 1: the first energy shock happened in the Seven Days where
Speaker 1: seventy four we just talked about it. So you think
Speaker 1: of yourself there you are as a FED chairman. Your
Speaker 1: economy goes into a recession. The price of oil has
Speaker 1: gone up four fold, People are in gas lines, people
Speaker 1: aren't flying, there are no airplanes, no automobiles. That the
Speaker 1: US economy has been clobbered on the head by this
Speaker 1: rising energy. We were very energy dependent since the end
Speaker 1: of World War two, and we had a massive adjustment.
Speaker 1: Interest rates are up, inflation is rate. How do you
Speaker 1: balance all of this with monetary policy? That is what
Speaker 1: Burns faced. Now. Critics would say Burns tried to do everything,
Speaker 1: balance the middle, and therefore accomplish some of each and
Speaker 1: not enough of any. And that's easy to do in retrospect.
Speaker 1: It's always easy to judge the game on a Monday,
Speaker 1: as you know hindsight, you bet. So here's Burns facing
Speaker 1: raising interest rates because he wants to fight inflation, very
Speaker 1: counterintuitive when you have a very weak economy, and he's
Speaker 1: got auto manufacturers not making autos, people not flying on planes,
Speaker 1: and people not order planes, airlines not ordering planes because
Speaker 1: the energy prices spiking up. So you have this cross current.
Speaker 1: That was Burns period at the FED, and he did
Speaker 1: some of each, but not enough to keep the inflation
Speaker 1: from rising. So in the mid seventies the economy started
Speaker 1: to recover, but the inflation rate was then accelerating, and
Speaker 1: it accelerated to above ten percent at the peak, and
Speaker 1: the tenure was yielding. If if memory serves well, it
Speaker 1: went into well into double digits at the end. And
Speaker 1: every time you ratcheted up interest rates, they were a
Speaker 1: new high level and people said, oh my gosh, I
Speaker 1: want to buy bonds, these bonds. I've never seen yields
Speaker 1: like this in our shop. We said, wait a minute,
Speaker 1: there's a force driving up these bonds, and it is
Speaker 1: too soon to buy bonds. When you have an acceleration
Speaker 1: of inflation, you must be able to see the end
Speaker 1: of the tunnel because you have no idea where that is.
Speaker 1: So rates are going higher, bonds are going cheaper, yes,
Speaker 1: And when did we well we stood aside on the
Speaker 1: bond market, and we entered the bond market in ninety
Speaker 1: nine when Volker came in and became chairman. I believe
Speaker 1: Paul Volcker meant what he said. That was my personal view.
Speaker 1: And I remember the first bond I bought after years,
Speaker 1: It was a Pacific Telephone and Telegraph pac TELL was
Speaker 1: then a sub of a T and T. It was
Speaker 1: twelve point one five percent thirty year telephone bond rated
Speaker 1: triple A. That was the first bond that we had
Speaker 1: bought for clients in years. And you know, twelve on
Speaker 1: triple A from the telephone company. People would kill Oh, yeah,
Speaker 1: for sure. Little did I know that at the end
Speaker 1: of the Slam, when the bond market was in a
Speaker 1: free fall, that bond would trade below eighty cents on
Speaker 1: a dollar. It, by the way, bounce back was subsequently
Speaker 1: called and everybody that we bought it four had a
Speaker 1: twelve income flow and got their money back on the call.
Speaker 1: So Vulcer comes in and he had warned everybody, I
Speaker 1: will do whatever it takes, and he proceeds to ratchet
Speaker 1: up rates to unprecedented level, pauses the recession by design.
Speaker 1: What was that You're like to to manage money through.
Speaker 1: I lost all my hair, my beard turned gray. Look
Speaker 1: so you look just like you do today, exactly that's
Speaker 1: I aged. I aged everything in eighteen months. But that
Speaker 1: was thirty five years ago. You're telling me this, I
Speaker 1: haven't changed. This is how you looked when you were
Speaker 1: thirty five. That's exactly right. I haven't changed since since
Speaker 1: the Volker Slam. Volker was was dead on. He said,
Speaker 1: we will lose the country if we have double digit inflation,
Speaker 1: and we must reverse it, no matter where it takes.
Speaker 1: So he took the short term pain and within a
Speaker 1: year it turned. Within a year, interest rates started the fall,
Speaker 1: and they fell for the next thirty years. Inflation went
Speaker 1: back to single digits and continued to decline. Real growth
Speaker 1: and accelerated, and we've had a glorious story for the
Speaker 1: last thirty years. I'm Barrier Hults. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My guest today is David Kotok.
Speaker 1: He is the co founder and chief investment officer of
Speaker 1: Cumberland Advisors, as well as being a fisher and buddy
Speaker 1: for for many, many years. Let's let's start out the
Speaker 1: segment by talking about camp ko Talk as it's uh
Speaker 1: now become known. It kind of started out as the
Speaker 1: Shadow Federal Reserve um committee. Tell us about those uh
Speaker 1: those events, Well, the Shadow Federal Reserve Kansas City Fed
Speaker 1: Shadows thing was a nickname that John Hills and Wrath
Speaker 1: gave us when he came up one time. And so
Speaker 1: that's how Wall Street Journal reporter now kinda known as
Speaker 1: the Fed with took over Greg ip Slot as the
Speaker 1: FEDS liaison to the Wall Street Journal exactly. So anyway,
Speaker 1: Hills and Wrath was there for a day and a
Speaker 1: half and he coined that nickname. The Camp Coo Talk
Speaker 1: nickname came from Becky Quick and uh, Becky Quick put
Speaker 1: it up on a screen during an interview. So, um,
Speaker 1: that's how it stuck. She she originated the name. The
Speaker 1: name is stuck and it's grown, I guess now to
Speaker 1: become fairly commonly known. So tell us a little bit
Speaker 1: about Camp Coo Talk. What was the genesis of this?
Speaker 1: How did it come about? I've been fortunate enough to
Speaker 1: be going to Camp Coo Talk for almost a decade.
Speaker 1: It feels like it just started. Well, you keep it up,
Speaker 1: you'll get tenure. That's what I'm hoping for Look, we
Speaker 1: were a couple of guys saying, we need to get away,
Speaker 1: go out in the woods somewhere and just think about
Speaker 1: the world finance, economics, markets without all the minute by
Speaker 1: minute interrupted by daily pressure. And I had been going
Speaker 1: to Grand Lake Stream Main It's this is my twenty
Speaker 1: five year so I said, I know a place we
Speaker 1: can come fishing. We can stay in a kid It
Speaker 1: was a different camp. It wasn't Lean's Lodge at the time.
Speaker 1: I said, so let's go up there for a weekend.
Speaker 1: And that's how it started, and it grew. How many
Speaker 1: people were in this was a handful. This was half
Speaker 1: a half a dozen people or fewer. On nine eleven,
Speaker 1: when a group of us were at the Name meeting
Speaker 1: and got out of the second Tower and in that
Speaker 1: group where people like Harvey Rosenbloom, Dallas Fed, Stu Hoffman,
Speaker 1: a lot of folks, you know, and we were having
Speaker 1: this discussion. I had invited wait, wait, wait, back up.
Speaker 1: So you're at a meeting in the second World Trade
Speaker 1: Center building. To what floor was this? Well, we had
Speaker 1: come down and we were on the ground floor. Very fortunate,
Speaker 1: so we were out in six minutes, eight minutes we
Speaker 1: were very, very lucky to get out. But during that time,
Speaker 1: up until then, I'd said, Harvey, come on, we'll go
Speaker 1: away somewhere we'll be able to talk. I don't want
Speaker 1: to go fishing. I don't want to go in the
Speaker 1: woods often, I don't want to go fishing. I don't
Speaker 1: want to go in the woods, all of them. Brush
Speaker 1: with death changes your perspective, sure did, and that changed
Speaker 1: it and the group the following year was the largest ever,
Speaker 1: which might have been twelve, and it has grown ever since.
Speaker 1: And you know, give us you've been there, give us
Speaker 1: some names of people who attend, because it's really a
Speaker 1: collection of a list names. Well, it's a collection of
Speaker 1: people who like economics, financial markets, geopolitics, government, who have
Speaker 1: diverse views. Who are Democrats, republic begins, liberals, conservative. We've
Speaker 1: had last year we had Gary Schilling with his views,
Speaker 1: Paul McCulley with his views, Jack Rivkin with his views, uh,
Speaker 1: Natalie Cohen from Wales who's got expertise and municipal credit.
Speaker 1: We have men and women from around the world. Martin
Speaker 1: Barnes comes from Vancouver, Paul O'Brien came from Abu Dhabi.
Speaker 1: So you have a mix of people from all over
Speaker 1: the world, and what do we do. We have no
Speaker 1: power point, none, none, whatsoever. I can attest to that.
Speaker 1: The speeches are limited to five or six minutes, and
Speaker 1: even that exactly. And we have dialogue and we talked
Speaker 1: to each other, and we have visitors who are professionals.
Speaker 1: In the governor the page last year. The governor's coming
Speaker 1: back this Friday. He this is his fourth year. On Thursday,
Speaker 1: we've got a congressman who's on the House Financial Serve
Speaker 1: US Committee and he was a State Treasures Bruce poll Quinn,
Speaker 1: you may remember he was there. And we'll have a
Speaker 1: debate on some issue probably on Saturday night. And we'll
Speaker 1: have gatherings. Now, the gatherings are discussions. You've been in
Speaker 1: the thick of them. You solve the world's problems in
Speaker 1: the more repeatedly. At the end of the weekend, they're
Speaker 1: still there. Someone's gotta do. They just don't enact my policies.
Speaker 1: Otherwise all these things, if they would only listen to you.
Speaker 1: So so it's a great discussion in an environment which
Speaker 1: is informal. It's in pristine water, in a watershed, in
Speaker 1: forest with wild it's like no other land I've ever
Speaker 1: been on him, and it's it's absolutely this is no
Speaker 1: other than a couple of cabins here and there. There's
Speaker 1: no difference than what this was like a hundred thousand
Speaker 1: or a million years ago. It's other than the withdrawing
Speaker 1: glaciers are what actually created these lakes. But it's absolutely pristine, wild,
Speaker 1: amazing land, nothing like I've ever seen anywhere in the
Speaker 1: United States. And it's protected. There's a huge, complex, huge
Speaker 1: acreage which is in a land trust, so that will
Speaker 1: never develop. And it adjoins the past McQuade Indian Reservation land,
Speaker 1: which is in a separate configuration, and therefore it's impossible
Speaker 1: to see the kind of resort erosion that that the
Speaker 1: inroads of resorts that would take away this setting. So
Speaker 1: that's good for the economic development of Maine if that happened,
Speaker 1: but it would be bad for all this pristine land.
Speaker 1: I think so. And so I mean, if you look
Speaker 1: at what we do, we hire every guide within fifty miles.
Speaker 1: We bring in a group were we may be the
Speaker 1: biggest economic activity all summer. Yeah. We people joke, they
Speaker 1: say you're ten percent of the GDP of the whole county.
Speaker 1: I don't know what it is, but it would be
Speaker 1: you know. And I think by the way we do
Speaker 1: good things, we spend we pay people, they have jobs,
Speaker 1: so we make donations to the land Trust. People are fair.
Speaker 1: There's an active philanthropic arm to this as well. And
Speaker 1: and so so let's talk a little bit about the
Speaker 1: debates and the discussions. I could tell from personal experience
Speaker 1: everything is off the record. It's all Chatham House rules
Speaker 1: where you can describe what was said, but you can't
Speaker 1: identify Paul McCully said what. You're not allowed to do that.
Speaker 1: It's all on the on the download. But some of
Speaker 1: the conversations are really quite fascinating, especially when you realize, hey,
Speaker 1: you have the number four guy at PIMCO debating someone
Speaker 1: from the Philadelphia Fed and this guy. It's really very
Speaker 1: high level debates and conversations. Well, I think the conversations
Speaker 1: are great, and the people who come have a basic
Speaker 1: platform of information so you can cut right to the
Speaker 1: issue and dissected immediately. And we do this. I mean,
Speaker 1: there's a media that cover it. So as you know,
Speaker 1: if you have somebody's permission, you can quote them, you
Speaker 1: can interview them. But if you don't then you can
Speaker 1: take the takeaway from the group, but you can't quote
Speaker 1: somebody unless you get their permission first, and that that
Speaker 1: creates a sort of level of comfort where people say
Speaker 1: things that they wouldn't say if they were on camera
Speaker 1: or on the record. There's a very much let your
Speaker 1: hair down and say what you really think environment, which
Speaker 1: is relatively rare these days. I think so. And I
Speaker 1: think the second part is that if you walk by
Speaker 1: a conversation and you hear something you really shouldn't have heard,
Speaker 1: you ignore it. Now you may remember it. This is
Speaker 1: like telling the jury to disregard the Testament, but you
Speaker 1: don't go quote it in the newspaper. Because you walk
Speaker 1: by a conversation and there's Barry Ridholt's talking to somebody
Speaker 1: in a private conversation. You heard something that Ridholt said.
Speaker 1: That's nobody else's business us. So by agreement, we we
Speaker 1: apply a modified version of the Chatham House rule and
Speaker 1: the Jackson Hole rule. And therefore whatever it's public from
Speaker 1: the weekend is by agreement with the permission of the
Speaker 1: person who said it, and it's really just the tip
Speaker 1: of the iceberg. So so let's talk a little bit
Speaker 1: about the global Interdependence Center. You're now chairman emeritus, but
Speaker 1: you ran their programs for a long time. And this
Speaker 1: is really an even higher level version of of a
Speaker 1: much more sophisticated First of all, aren't you housed in
Speaker 1: the in the Philadelphia offices are in the Philadelphia Federal
Speaker 1: Reserve Building. Actually I'm program chairs program chair, no longer
Speaker 1: the program chair, and Dunkelberg is the chairman Americus. Bill
Speaker 1: Dunkelberg economist a nationalization independent business and George Chichecos, who
Speaker 1: is the former dean of the Business School at Drexel,
Speaker 1: is also a chairman of America. This I was the
Speaker 1: program chair, and I chaired the Central Banking series. John
Speaker 1: Sylvia at Wells Fargo's now chairing Central Banking, Michael Drury
Speaker 1: and mcvain Trading in Memphis is now chairman, and don
Speaker 1: Ris Miller and Strategus is now the program chair. And
Speaker 1: I'm just the old goat getting in the way and
Speaker 1: stern the pot So so tell us about because this
Speaker 1: is all around the world. Tell us about what these
Speaker 1: meetings are and who attends these and what policy and
Speaker 1: information comes out of these kind The Global Interdependent Center
Speaker 1: idea was to convene dialogue in a neutral way and
Speaker 1: allow different points of view to be discussed, and hopefully
Speaker 1: you get people of goodwill together in such a discussion
Speaker 1: and some good outcome occurs. That was behind the thinking
Speaker 1: of it, convene dialogue with a neutral platform that enabled us,
Speaker 1: by the way, to invite people who otherwise wouldn't go
Speaker 1: to other platforms, because here was a place that said,
Speaker 1: just by coming and having a discussion, you created the
Speaker 1: way in which things may get better. And that was
Speaker 1: mostly in economic trade, monetary affairs, but it was also
Speaker 1: in health and in water. And that's and here I
Speaker 1: was the program chair. We've been speaking with David Kotok.
Speaker 1: He is the co founder and chief investment officer of
Speaker 1: Cumberland Advisors. If you want to read more of David's work,
Speaker 1: you can go to cumber dot com. And I haven't
Speaker 1: noticed you tweeting very much. I don't think there's a
Speaker 1: Twitter handle fairs at Cumberland, a d V at Cumberland,
Speaker 1: a DV on Twitter. Uh. If you want to check
Speaker 1: out the rest of our conversation, be sure and go
Speaker 1: to either Apple iTunes or Bloomberg dot com and you'll
Speaker 1: hear uh. David and I continuing talking about fishing and
Speaker 1: other such stuff. Be sure and check out my daily
Speaker 1: column on Bloomberg View dot com or follow me on
Speaker 1: Twitter at Rid Halts. I'm Barry Ridhults. You've been listening
Speaker 1: to Masters and Busines this on Bloomberg Radio. Welcome to
Speaker 1: the podcast portion of our show. I'm here with an
Speaker 1: old friend, David ko Talk. David, how long have we
Speaker 1: known each other? A hundred and fifty years? I'm not
Speaker 1: you have a couple of years on me, but it
Speaker 1: certainly feels like it's. It's that you and I had
Speaker 1: done a number of television hits and a couple of things,
Speaker 1: different things. I want to say, early two thousands, so
Speaker 1: it's got to be well over a decade. And when
Speaker 1: I first went to Camp Ko Talk, when I first
Speaker 1: got invited, I tell four or five stories about that
Speaker 1: first weekend. I'll never forget. This is a true story,
Speaker 1: So this will I have a ton of questions for you,
Speaker 1: but I have to share this one story. So I
Speaker 1: get invited to Camp ko Talk and I'm like, do
Speaker 1: I really want to slip all the way up to me?
Speaker 1: You gotta fly an hour and then you drive three hours.
Speaker 1: Really in the middle of nowhere. I had never been
Speaker 1: there before. And um, someone I asked, goes, you got
Speaker 1: an invitation to that? How did you get invited? No, David,
Speaker 1: he said, you gotta do, you gotta go. Okay, so
Speaker 1: I go. So we we get up there. You finally
Speaker 1: get there, and the property in the lake and everything.
Speaker 1: It's insane. I'll never forget the first time we take
Speaker 1: a fish. We you know, it's catch and release. We
Speaker 1: throw it back and this eagle swoops down the fishes
Speaker 1: in the water for eight seconds, fifty feet from the
Speaker 1: from the canoe, this eagle swoops down, grabs the fish,
Speaker 1: flies away. It was the most dumbfounding thing I had
Speaker 1: ever seen. I'm like, this is really the wilderness, isn't it.
Speaker 1: And then Saturday night we're playing poker, and I'll never
Speaker 1: forget Scott Frew and I are at the table and
Speaker 1: I don't remember who the fourth person was, but Scott
Speaker 1: Frew and I are, We're each we're all drinking. By
Speaker 1: the way, everyone should know, the cost of admission is
Speaker 1: everybody has to bring a half a case of of
Speaker 1: good wine or in John Moulden's case, a case of
Speaker 1: crabby wine. But basically it's half a ca is a
Speaker 1: wine and is a ton of drinking, but responsibly. And
Speaker 1: Paul McCulley of PIMCO gets up and says to me,
Speaker 1: can I Can I refill your sure? Absolutely? And then
Speaker 1: somebody else gets up to Scott gets up and says
Speaker 1: to Scott Frew, who runs Rockingham Capital, which is edge fund,
Speaker 1: can I refill your glass? Sure? And I They two
Speaker 1: of them walk away, and I just turned to Scott
Speaker 1: and say, my waiter manages five hundred billion dollars more
Speaker 1: than your waiter. And because his waiter was only a
Speaker 1: five hundred billion dollar farm as opposed to a trillion
Speaker 1: dollar farm, it was like one of the most bizarre
Speaker 1: things I've ever seen in my life. And it's we
Speaker 1: just everybody at the table left, not because it was
Speaker 1: so funny, but because it was so it's such an
Speaker 1: unusual grouping and so fascinating. Well, it's a wonderful grouping. Absolutely.
Speaker 1: You came in the beginning and I talked to myself, way,
Speaker 1: here's a New York City boy. He's coming up to me,
Speaker 1: and his experience with fishing is to go buy locks
Speaker 1: and z bars, and now he's going to have a
Speaker 1: fishing rod in his hand. This will be interesting to see.
Speaker 1: And of course you had a famous episode at Camp
Speaker 1: Coked Well, which one the one where you nearly burned
Speaker 1: down the entire well hold the first year before we
Speaker 1: nearly burned the cabin down the first year. So I
Speaker 1: was a ringer. You didn't know. I spent my summer's
Speaker 1: upstate New York fishing my childhood into my twenties and thirties.
Speaker 1: So it was the first day of our first year,
Speaker 1: and everybody was complaining they weren't catching any fish. And
Speaker 1: everyone should know. We meet in this island in the
Speaker 1: center of the lake. The guides clean all the fish.
Speaker 1: We have a giant fish fry, and and everybody eats fantastically.
Speaker 1: We gained too much weight, so Scott and I pull
Speaker 1: up um in the canoe and one of the guides said, hey,
Speaker 1: I hope you guys caught something, because we got no fish.
Speaker 1: We each had thirty plus on a on a straight
Speaker 1: I'm holding my hand up because it was a as
Speaker 1: tall as i I'm standing home, just under six feet.
Speaker 1: We had that much fish. And after that, nobody, oh,
Speaker 1: here's a New York boy not able to fish. We
Speaker 1: we we held our own that you did. We also
Speaker 1: had John Brown, who I still think is the best
Speaker 1: guide there. So he's the one who deserves. Everybody falls
Speaker 1: in love with their guide on the first nearly everything.
Speaker 1: Is that true? Yes, everybody's guide the first time becomes
Speaker 1: their favorite guide. And by the way, that's probably true
Speaker 1: of all kinds of things like this. But I've seen
Speaker 1: it over and over again and and that's okay. So
Speaker 1: so the other episode you you mentioned about nearly burning
Speaker 1: the cabin down was I'm in a Cabinet's me and
Speaker 1: Scott Frew, Chris Whalen. Chris Whalen was Josh Rosener. So
Speaker 1: these are guys fairly well known on Wall Street. Barry
Speaker 1: from nas Deck, the Nobel from nas Deck. And we're
Speaker 1: using the same towels over and over again. And here's
Speaker 1: where the New York City boy gets into trouble. So
Speaker 1: you're an apartment in New York City, the radiators or
Speaker 1: ten thousand degrees. You come out of the before you're engaged,
Speaker 1: while you're still a disgusting single guy. You come out
Speaker 1: of the shower with a wet towel. You throw it
Speaker 1: over the radiator. By the time you get home, Hey,
Speaker 1: I got a clean, dry, warm towel. It's fantastic. Um
Speaker 1: My wife basically cringes every time she hears that story.
Speaker 1: But meanwhile, it turns out if you do that up
Speaker 1: at camp Ko talk, unless it's really a hundred apply
Speaker 1: cotton towels, you run into a little trouble. And apparently
Speaker 1: these were not cotton fly towels. They it started to smoke.
Speaker 1: The room filled up with a thick, noxious I was
Speaker 1: already in the main lodge working on whatever I was
Speaker 1: working on that day, on the because that was the
Speaker 1: best place for WiFi. Apparently Barry Nobel wakes up, can't
Speaker 1: see anything through the smoke, crawls on his hands and knees,
Speaker 1: finds the smoldering towel, drags it outside and rescued everybody
Speaker 1: from a fate worse than death. The funny part of
Speaker 1: it was that towel smoldered for three days. I don't
Speaker 1: know what it was made of, but it did not
Speaker 1: go out for three days. It just sat outside smolder.
Speaker 1: The story got embellished because of course, pretty soon we
Speaker 1: are we get the report about you your towel right
Speaker 1: and and almost burning down the cabin, which was probably exaggeration,
Speaker 1: but from almost burning down the cabin became the rid
Speaker 1: Holts forest fire right curse, and it just every year
Speaker 1: gets better. I think it's like a fish. Josh Rosener
Speaker 1: once said something to me and he goes, rid Hols,
Speaker 1: are there gonna be any more accidents this year? And
Speaker 1: I go, Josh, you still think that was an accident?
Speaker 1: He eventually figured out not to mess with me or
Speaker 1: else I would that was. That was good natured teasing.
Speaker 1: There was. It was pretty hilarious and and it was
Speaker 1: one of those things that when you tell I tell
Speaker 1: the story. I get home and tell it to my
Speaker 1: wife and she's like, what else did you do? What
Speaker 1: am I not hearing about? If I'm only hearing about
Speaker 1: the fire? What was the real big problem? So I
Speaker 1: actually this is my favorite trip of the year. I
Speaker 1: look forward to it every year. It's it's so relaxing,
Speaker 1: and it's such a great crowd of people. And I
Speaker 1: always learn Um, the chief economist at Freddie mack I
Speaker 1: had such a fast dun dun, duncan's such? Are you sure?
Speaker 1: I want to say Freddie mack Um? But he's he's
Speaker 1: a fascinating, fascinating guy understands not just housing but the
Speaker 1: economy better than just about anybody I know. And there's
Speaker 1: a two dozen people that when when I introduced them
Speaker 1: to a newbie, almost always is and he understands this
Speaker 1: space better than anybody I know. It's it's really an
Speaker 1: amazing uh collection of folks. You deserve kudos for nice
Speaker 1: up and and we also have media personalities. Kathleen Hayes
Speaker 1: has been up sure from Bloomberg, Mike McKee, he's coming
Speaker 1: up this year, as Mike is coming up this year.
Speaker 1: So you you have folks who either our journalists and
Speaker 1: study the world have to report on the world, they
Speaker 1: have to be thinking about it, or you have folks
Speaker 1: who have to analyze it because their financial market types
Speaker 1: or their money managers, or we have academics or economists.
Speaker 1: We mix them all up. From Dartmouth Tuck. Last year
Speaker 1: we had he was that's right, who was on the
Speaker 1: uk UH, their central bank, the Bank Bank of England.
Speaker 1: And another year we had Mike Dooley. Mike Dooley, when
Speaker 1: he was I m F World Bank in his career
Speaker 1: was the guy who designed the Brady bond that solved
Speaker 1: the South American financial crisis. In fact, the original name
Speaker 1: for that Bond was a Dully Bond and Nick Brady
Speaker 1: co opted the name because he was the Treasury secretary.
Speaker 1: Well that's that's, you know, one of the great great
Speaker 1: advantage of power. So so let's talk a little bit
Speaker 1: about about you and some of your um early mentors
Speaker 1: and and things like that. Who who were your early mentor?
Speaker 1: Now you you asked me that in the notes ahead
Speaker 1: of time, you said, I'm going to ask you about
Speaker 1: you and I will give you a name. But it
Speaker 1: may not be familiar. Doesn't matter. Okay, we have Google.
Speaker 1: We can track people down. I don't know if we'll
Speaker 1: be interesting. I never googled him, but in thinking about it,
Speaker 1: there was an economist in New York. His name was
Speaker 1: Gabriel Karakesh rhymes with Marrakech. He was Hungarian. He his
Speaker 1: history was back to the good body era, way back
Speaker 1: in which is what good body is? How long? Oh gosh,
Speaker 1: I mean this is a long time ago, decades, many decades.
Speaker 1: And he was a mentor to me when I was
Speaker 1: starting out in this business. In fact, the first serious
Speaker 1: work that I published was with a journal that's no
Speaker 1: longer in existence, and we co authored it together, and
Speaker 1: it was a piece about long cycles. You're refreshing. All
Speaker 1: this memory is flooding back now. And we talked about
Speaker 1: the condratif cycle in the kitchen cycle. Lord, this is
Speaker 1: fifty years ago. It still comes up every time there's
Speaker 1: a market crash. Always it pops up. All right, now
Speaker 1: we're we're mired in health. Ye. Gabby was the first
Speaker 1: serious economist who mentored me in the early stages of
Speaker 1: this business. And he had a wonderful He spoke with
Speaker 1: a deep Hungarian accent, and he had a wonderful line
Speaker 1: I learned from him, and it was something like this,
Speaker 1: I'm going to massacre the accident, but he said, you're
Speaker 1: going to have a PhD and still be an s
Speaker 1: ob and that was That was a line I learned
Speaker 1: from him. But I also learned a lot of very
Speaker 1: good economic thinking from him. So let's talk a little
Speaker 1: bit about investors. What investors out there do you appreciate
Speaker 1: like and who influenced your approach to invest in? Ah? Wow,
Speaker 1: this is an accumulation of decades, so there's not such
Speaker 1: an easy question. I don't like to talk about others
Speaker 1: because I don't want to say anything negative. And therefore
Speaker 1: if I only say positive things, well, don't tell us
Speaker 1: who's terrible, tell us who you've learned from. But but
Speaker 1: what I've learned is this. What I've learned is this.
Speaker 1: We talked about the enduring nature of interest rates and
Speaker 1: how important I've been a student of central banking monetary
Speaker 1: economics all of my adult life. I chaired the Central
Speaker 1: Banking series of the Globally Interdependent Center, and it's been
Speaker 1: something that's been of interest to me in in more
Speaker 1: than it's been a passionate in passion in terms of study.
Speaker 1: So you look at central banking and monetary economics and
Speaker 1: you say, well, how do you put together policies in systems?
Speaker 1: How do central banks ever get true independence? And is
Speaker 1: there such a thing? And what are the political forces
Speaker 1: that are always trying to influence monetary policy? And there
Speaker 1: are many, and so I've studied that in great depth.
Speaker 1: I think it is the most serious input into asset pricing,
Speaker 1: and therefore, if it's a serious input into asset pricing,
Speaker 1: it's a serious input into the management of stocks and bonds.
Speaker 1: And that's been an enduring theme for me. So of
Speaker 1: we're we're by the way, I'm playing with the phone
Speaker 1: because I'm gonna set up a little periscope so people
Speaker 1: can watch for a few minutes exactly what we're what
Speaker 1: we're doing. Let's see if I can make this happen. Um,
Speaker 1: what are you thinking now? Nothing? Um, So let's talk
Speaker 1: a little bit about the specific investors that you think
Speaker 1: you learned so much from. Who were the guys that
Speaker 1: you basically said, I really admire what this person does,
Speaker 1: even if it's different from from what what you do
Speaker 1: or um, currently unavailable. All right, so much if you
Speaker 1: look at it a theme, Okay, interesting themes in investing.
Speaker 1: The first theme that I think is it has had
Speaker 1: a massive influence is Bogel and Vanguard. Tremendous, tremendous. He
Speaker 1: set a platform in place and essentially took a passive
Speaker 1: approach and said I'm gonna do it. I'm gonna do
Speaker 1: it by waiting the market capitalization waiting was the theme,
Speaker 1: and the SMP five index became the anchor. And now
Speaker 1: you think about the fact that that translated into the
Speaker 1: first exchange traded fund in spider right, and it goes
Speaker 1: back twenty years with the SPI index in a mutual
Speaker 1: fund as a method of investment. Absolutely, so you say, okay,
Speaker 1: if there was one single idea that has now dominated
Speaker 1: stock market investing. It's the notion of a cap weighted
Speaker 1: large cap group of companies. There is a filtering mechanism,
Speaker 1: it's Standard and Poors. They decide who's in and out
Speaker 1: of the index and a basket by weight, and that
Speaker 1: has had a profound influence. SMP five index cap weighted
Speaker 1: is the benchmark of the American stock market and has
Speaker 1: been four years now. Whether you like it or not.
Speaker 1: You wanted the Dow Jones, you want the Nasdack, you
Speaker 1: whatever you want. Every single money manager in the US
Speaker 1: stock market space either has to use it as a
Speaker 1: benchmark and refer to it or explain why not. Well,
Speaker 1: if they're not big cap, they can use the rustle.
Speaker 1: If they're international they can. But there's always an explanation.
Speaker 1: There's always an explanation. And if you ask, if you
Speaker 1: line up a hundred people and say what is the
Speaker 1: premier benchmark for the American stock market, it's the SMP
Speaker 1: five index. So that notion and therefore the notion of
Speaker 1: passive baskets, accumulations, not trying to do a single stock
Speaker 1: choice started. Really it it galloped ahead with Bogle, right,
Speaker 1: that's forty years ago and today two thirds of what
Speaker 1: Vanguard does is passive indexes and they're running over three
Speaker 1: trillion dollars. Something worked to that may be one of
Speaker 1: the single greatest investment success stories of all time because
Speaker 1: for for I want to say, the first twenty years,
Speaker 1: there was an a whole lot of acceptance to that concept.
Speaker 1: It was it was there was a small group of
Speaker 1: people who understood and appreciated it, but a lot of
Speaker 1: folks just didn't get it. Well, there's an element to it,
Speaker 1: and that is very low running costs. So it's a
Speaker 1: low cost passive structure and will cost low turnover, low taxes. Absolutely,
Speaker 1: And what do we find. We find that two thirds
Speaker 1: of the managers, three quarters of the managers over time
Speaker 1: failed to match that index. And they do it. And
Speaker 1: if you take the total cost structure that it takes
Speaker 1: to manage and attracted from the index, you get where
Speaker 1: the managers are, which is what you would expect if
Speaker 1: you measure the whole crowd. So I think if there's
Speaker 1: one single investment concept creator person that puts something in place,
Speaker 1: it would be vocal. Now you say where are we today?
Speaker 1: We're a shop that ownly that does no single stock picking.
Speaker 1: We manage a few hundred million in the E t
Speaker 1: F space, and we provide models of ets for other
Speaker 1: managers and so the the amounts involved are larger, but
Speaker 1: we directly handle i would say, under a half a
Speaker 1: billion in in E t F s in a number
Speaker 1: of different styles. But we have taken that same fundamental principle,
Speaker 1: low cost, low turnover or turnover when you have to,
Speaker 1: don't turn over when you don't, and craft portfolio using
Speaker 1: E t F s. I think that is a well
Speaker 1: established principle now that didn't exist fifteen or twenty years ago. Fascinating,
Speaker 1: I would I would say that it existed twenty years ago,
Speaker 1: but it really didn't have the following. It wasn't as
Speaker 1: embraced as it's become. Well, it was in the mutual
Speaker 1: fun complex. So at two o'clock in the afternoon you
Speaker 1: had to decide if you wanted to sell. At four
Speaker 1: o'clock in the afternoon, you'd find out what the price was.
Speaker 1: E t F changed all totally completely changed, changed all
Speaker 1: of that. Um So that that leads me to my
Speaker 1: next question, what has changed since you've joined the industry?
Speaker 1: Well aside from that, but the E t F changes
Speaker 1: monumental still underway and it's growing. That's number one. In
Speaker 1: the municipal bond space. We used to have a notion
Speaker 1: that if it's insured, it's triple A. You don't even
Speaker 1: know have to know who the issuer is, you don't
Speaker 1: have to know what the call provision is. You don't
Speaker 1: give me the coupon and tell me it's insured and
Speaker 1: it's triple A. And that's all I need to know.
Speaker 1: That change with the financial christ clearly triple A doesn't
Speaker 1: have the same weight. And we have a survivor in
Speaker 1: the insurance space that didn't get beaten up by going
Speaker 1: out of the read and butter business assured guarantee and
Speaker 1: a second one MBIA. But as a practical matter, remember
Speaker 1: we used to have a dozen that credit enhanced and
Speaker 1: had triple A run right, So what did how did they?
Speaker 1: What did they do? By the way, there's a new
Speaker 1: one that's now a mutual and in theory is owned
Speaker 1: by bond on the writers, So everybody's the incentives are
Speaker 1: now better lines. Right, So you sit think of a
Speaker 1: major change. Here's a major change. You've got this three
Speaker 1: and a half trillion dollar space financing state and local
Speaker 1: governments throughout the United States, ninety thousand different entities, forty
Speaker 1: thousand different bond issuers, and all of a sudden, the
Speaker 1: method of finance has turned upside down with a shock.
Speaker 1: People don't trust the bond insurance, they don't trust the
Speaker 1: rating agencies. Congress comes along passes this massive piece of legislation.
Speaker 1: We still don't know what it's gonna end. Frank dot Frank,
Speaker 1: and people on their own have to evaluate the sewer company,
Speaker 1: the turnpike, the airport, the school board. They don't know
Speaker 1: how to do it. They've never done it. And so
Speaker 1: for us, this has been a great thing for Cumberland
Speaker 1: because we had our own credit back and we're in
Speaker 1: a new business. We get hired now by institutions to
Speaker 1: be the backup credit surveillance in addition to the rating
Speaker 1: agency ratings, and those are institutions that have to manage.
Speaker 1: They have constraints, but under Dodd Frank, they have to
Speaker 1: have a second opinion. We're qualified second opinion on municipal credit.
Speaker 1: How how big of a business line is that for?
Speaker 1: Because I know you guys mostly as asset managers and
Speaker 1: active bond managers, I think you memory serves you became
Speaker 1: an r I A and a registered investor andvisor the
Speaker 1: new Cumberland and I registered in nineteen seventies. David Kotar
Speaker 1: as an r right, So why did you go from
Speaker 1: Kotak to Cumberland? Had had a partner in nineteen seventy three,
Speaker 1: he's no longer with us, Chef Goldberg, and he and
Speaker 1: I founded a firm. We came up with a name.
Speaker 1: We lived in Cumberland County. No great searches on this name,
Speaker 1: and we named it Cumberland Advisors, And that's how we
Speaker 1: got the name. Nineteen seventy three. So you guys, since
Speaker 1: we're talking about Cumberland County, you guys essentially decamped a
Speaker 1: few years ago from Florida, from New Jersey to Florida.
Speaker 1: What motivated that move? You know, the old, the old
Speaker 1: Seinfeld joke is, well, he's Jewish, he lives in the northeast.
Speaker 1: It's the law, he has to go to Florida. But
Speaker 1: you were really there were not only that we went
Speaker 1: to the west coast. So it's a whole different to
Speaker 1: visit New York go too, this West coast. It's a
Speaker 1: little different. So so what was the motivation between not
Speaker 1: an easy thing to up and move an entire company.
Speaker 1: I give you the story in a in a abbreviated form.
Speaker 1: We had looked at Florida for some time. We found
Speaker 1: ourselves on airplanes every week to some city from Philadelphia.
Speaker 1: We made a series of a series of inquiries and decisions.
Speaker 1: East Coast versus West Coast? Which city on the East coast?
Speaker 1: Palm Beach for lauder day out? Where do you go?
Speaker 1: Where are the airports? How do you get up and
Speaker 1: down between the airports and the West coast. We had
Speaker 1: a person working for us on the East coast, so
Speaker 1: we already had a presence. We said, why don't we
Speaker 1: go to the West coast and be in both places.
Speaker 1: One thing led to another. We ended up in Sarah.
Speaker 1: But that's that's the destination. What happened with the departure
Speaker 1: because you had been in New Jersey for decades. I
Speaker 1: still am. We still have a satellite office in New Jersey.
Speaker 1: We have two people in New Jersey. We have a
Speaker 1: legacy of you had several dozen people and the headquarters
Speaker 1: were in New Jersey's We now have thirty four people
Speaker 1: and two of them are in New Jersey. And we
Speaker 1: maintained an office and address in New Jersey, and we
Speaker 1: have a client based in New Jersey because we were
Speaker 1: there for almost half a century. But our operations are
Speaker 1: mostly in Sarasota, Florida. Um, there's a lot of good
Speaker 1: reasons to be there. People say, oh, you moved because
Speaker 1: of the Texas I said, well, yes, taxes were one,
Speaker 1: lifestyle is another. All of my people took us four
Speaker 1: years buried move the human capital of the firm, and
Speaker 1: we did. We we help people relocate. That took cost
Speaker 1: uh not one of them wants to move back and
Speaker 1: they are satisfied with the move we hired in Florida.
Speaker 1: Combination of things where at an all time head count high,
Speaker 1: where an all time assets high, where it's been a
Speaker 1: marvelous experience for five years. Did you expect it to
Speaker 1: go as smoothly as it did, because that's a hugely
Speaker 1: disruptive thing to organization, especially it was around Was it
Speaker 1: after the financial crisis or during? Oh this is all
Speaker 1: in the last five years, So was it after so
Speaker 1: post crisis? It seems I'm going to make an observation.
Speaker 1: It seems that whenever there is a massive events, it
Speaker 1: could be the financial crisis, It could be nine eleven.
Speaker 1: It galvanizes your thinking and you subsequently take action. Is
Speaker 1: that a fair observation. I think it's a fair observation
Speaker 1: on human nature. For sure. We tend to like stasis.
Speaker 1: We have inertia. What does it take to move us?
Speaker 1: We have to have a shock. Shock comes along. We
Speaker 1: move any kind of shock, and whether it's a shock
Speaker 1: of smoke in your cabin and leads a lodge, or
Speaker 1: it's a financial crisis. In two thousand and eight, in
Speaker 1: Lehmann fails, we have a shock, you change. It takes
Speaker 1: a shock. Our view was motivated post shock, but it
Speaker 1: was motivated because we did some serious examination on our clients,
Speaker 1: our base, our growth, and what did we find. We
Speaker 1: found wealth and older people are in Florida and people
Speaker 1: from New Jersey who were our clients were now in Florida.
Speaker 1: And so we were back and forth and back and forth,
Speaker 1: and we said we need to be in two places,
Speaker 1: and so we were in both places. Now, once we're
Speaker 1: in both places, where do you put the next element
Speaker 1: in the old place or the new place? Well, the
Speaker 1: people involved said, we'd like to put that element in Florida.
Speaker 1: And the people who wanted to service and support it
Speaker 1: work in it said, let's let I want to go
Speaker 1: and one at a time. Now, we had to move
Speaker 1: people when housing was difficult to sell, when you had
Speaker 1: economic difficulties in New Jersey, when you had a seventeen
Speaker 1: year old daughter who was going to the prom and
Speaker 1: she her boyfriend. If she moved there would be a
Speaker 1: crisis in the household. And I said, okay, wait till
Speaker 1: after the prom, wait till after graduation. Will be in
Speaker 1: two places. We want you, We want our human capital intact.
Speaker 1: And so we did that. By the way, she went
Speaker 1: to the problem with somebody else. She broke up with
Speaker 1: the boyfriend. So but the point is that's what we did.
Speaker 1: We moved human capital by making it easy for them
Speaker 1: to solve their problems. That's a pretty good description of
Speaker 1: just about everything I know. We we have to get
Speaker 1: you out of here in about fifteen minutes to go
Speaker 1: do some television. So let me plot through my last
Speaker 1: handful of questions. Um. One of the things I've been
Speaker 1: finding about this podcast about speaking with people who I
Speaker 1: know and respect and have followed for years. They've all
Speaker 1: read a fascinating number of books, many of which I
Speaker 1: am not familiar with. I'm always surprised when someone says.
Speaker 1: A guest last week suggested the Marine Corps uh War Fighting,
Speaker 1: which is a book on planning and management, which you
Speaker 1: would think has nothing to do with investing, but turns
Speaker 1: out to be a fascinating book. Tell me about some
Speaker 1: of your favorite books, whether it's finance related or not. Well,
Speaker 1: there's a book by Kennedy, a Yale professor, and it's
Speaker 1: been around for a while, and it's The Decline and
Speaker 1: Fall of Great Powers. He has a sequel, but the
Speaker 1: Decline and Fall of Great Powers studies that very subject.
Speaker 1: I found that something to think about, whether it's Rome
Speaker 1: or Washington, and so it set me thinking in a
Speaker 1: more strategic framework and helped crystallize that few There are
Speaker 1: all kinds of books of history. I've read many of them,
Speaker 1: and I find that the reflection on history and how
Speaker 1: things happen and why are very important. And I'm I
Speaker 1: favor some classical things, such as give us some names.
Speaker 1: You're educating the next generation of investors and traders. Well,
Speaker 1: i'll tell you. I'll tell you something that's struck me.
Speaker 1: I came down from Maine to be here with you
Speaker 1: and to have some things in New York and then
Speaker 1: the first gathering at Lean's Lodge is coming up the
Speaker 1: weekend after Father's Day, and we were about forty people.
Speaker 1: And in the course of the discussions up there with
Speaker 1: Randy Spencer, as you know, one of our guides and
Speaker 1: others and and musical entertainment and musical entertainment, we started
Speaker 1: to talk about the region and how the region and
Speaker 1: the former Acadians who lived there because that was Acadia,
Speaker 1: and the history of this region which go back before
Speaker 1: the Revolutionary War and deal with the war between the
Speaker 1: British and the French, which we called the French Indian War,
Speaker 1: but it was really war between the British and the French.
Speaker 1: And when you get into that history, you find that
Speaker 1: the tribes of Indians were used by either side, sometimes
Speaker 1: they switch sides, and you learn some of the history
Speaker 1: of a region which is now not taught in schools.
Speaker 1: It's a history of the United States which has escaped.
Speaker 1: There are many books on the French Indian War, the
Speaker 1: early part of America, the pre revolutionary period of America, UH,
Speaker 1: and they are missing in the literary realm. Now there's
Speaker 1: another series of books written by Beverly Swirling Swirling has
Speaker 1: best seller ranking. She's got a number of books, and
Speaker 1: she's written about New York and she starts with the
Speaker 1: period before the Revolutionary War s W E R L
Speaker 1: I n G. And the first book of hers. I've
Speaker 1: read them all. I think they're six, if I recall correctly,
Speaker 1: five or six. I've read them all. And the first
Speaker 1: one is City of Dreams. And she's a very skilled writer.
Speaker 1: And well, it's historical fiction, so she has taken New
Speaker 1: York at the time it was settled by the Dutch
Speaker 1: Ins Stevenson. Stevenson was the first leader, and she wrote
Speaker 1: the story about the very tip of this island as
Speaker 1: she was able to glean from a study of history.
Speaker 1: And then she weaves a tale. And her sequence of
Speaker 1: books give a view of New York through this lens
Speaker 1: of historical fiction. But it's very lively writing. It grasps
Speaker 1: grabs you, and when it does, it clasps you to
Speaker 1: the book and you don't put it down. I found
Speaker 1: that way. City of Dreams is the place to start.
Speaker 1: And if you do like it, there's three or four more,
Speaker 1: and any other books, any investing relating books that um
Speaker 1: stand out in your mind. Well, I read Ben Graham
Speaker 1: many years ago. The classics, the classics, the classic. Now
Speaker 1: there is a new book, Adventures in Muni Land, the
Speaker 1: story of the municipal bond crisis from two thousand seven
Speaker 1: to two thousand and fourteen, and it's in galley Proof
Speaker 1: right now. My co authors, my colleagues are Michael Comas
Speaker 1: and John Musso and I had a little bit to do.
Speaker 1: And it's a great book. And it is going to
Speaker 1: be out in July, and it will be available in August,
Speaker 1: and Bloomberg Radio is going to help us launch the
Speaker 1: book on August from our offices in Sarasota, Florida. That's fantastic,
Speaker 1: you know, I remember there being a m everybody knows
Speaker 1: Meredith Whitney came out with her famous sixty minutes prediction
Speaker 1: about a hundred billion in failures and unimmuni bond market.
Speaker 1: When crazy you came out. I want to say, I
Speaker 1: don't remem if it was that week or the next day,
Speaker 1: but you were on TV the next day saying this
Speaker 1: is reckless, this is irresponsible. There is just no inditie
Speaker 1: that this is going to happen. How did that, how
Speaker 1: did that come about? And what was the pushback that
Speaker 1: you got Well, I can't speak for Meredith. She made
Speaker 1: her forecast and she's had to live with it. Um no,
Speaker 1: I mean, how did your response come about to Well,
Speaker 1: we we looked at this and we said, it's absurd
Speaker 1: to things that a hundred billion of defaults in the
Speaker 1: municipal bonds space can happen in one year on the
Speaker 1: forecast by the end of the year, and by the way,
Speaker 1: it hasn't happened in ten years. There are some defaults
Speaker 1: every year and there always will be. But as a
Speaker 1: practical matter, the municipal bond space is very good grade
Speaker 1: credits is very transparent. By the way, you think about
Speaker 1: your school board budget, you can go to the hearing,
Speaker 1: you can read it. You're there, you know the people
Speaker 1: who are voting yes or no. Transparency is embedded in
Speaker 1: state and local government. We may not like the people
Speaker 1: making the government decisions, but the financial information is mostly
Speaker 1: clear most of the time, and we have a pretty
Speaker 1: sound distribution of government throughout the fifty states. Now we
Speaker 1: have also poster children for trouble Puerto Rico, Detroit, Stockton, California.
Speaker 1: It does happen, but as a practical matter, most of
Speaker 1: the time. The muting space is very dependable, and it's
Speaker 1: under the radar screen of a lot of investors. Shouldn't
Speaker 1: be in my view. Right now today, the thirty year
Speaker 1: Treasury bond of the United States fully taxable to an
Speaker 1: American citizen is a little over three and a very
Speaker 1: high grade tax free bond to an American citizen is
Speaker 1: a little over four percent. That's upside down and backwards.
Speaker 1: Four percent is the equivalent of almost six percent or seven.
Speaker 1: It's seven depends on where your tax including you're in
Speaker 1: a high tech state California, Massachusetts, Yes, New York. That's
Speaker 1: like getting a seven percent. So you're looking at where
Speaker 1: would you go today and have a double or triple
Speaker 1: A level of credit? Very solid history, never failed to
Speaker 1: pay and pay you seven percent a year return on
Speaker 1: your investment, year after year after year. You can't find it,
Speaker 1: and you can get it. It's available right now. You
Speaker 1: can say to yourself, yeah, but you know what about
Speaker 1: other kinds of institutions. I'll give you an example. Triple
Speaker 1: a credit three hundred year institution. Total funds in the
Speaker 1: endowment fund exceed the total debt of the institution. Tax
Speaker 1: free bond. It's issued by an education bond structure by
Speaker 1: Yale University. Believe me, they will pay you. And what
Speaker 1: is that yielding? About four today? Tax free? There you go?
Speaker 1: All right, So I only have you for another six minutes.
Speaker 1: So let me go through my last few questions. Um,
Speaker 1: what are some of the enduring investing myths that you know,
Speaker 1: get your goat that that you see in this Like
Speaker 1: what sort of stuff? Maybe that muni bond thing is one,
Speaker 1: but what what are the classic myths that you are
Speaker 1: offended by? Well, I don't like when I see legal
Speaker 1: meaning the law protects it being used as ethical meaning
Speaker 1: there's a judgment, and if it's legal, it's okay to do,
Speaker 1: even if it's going to impose financial pain on somebody.
Speaker 1: Because I'm really structuring something that is legal, give us
Speaker 1: taking advantage of them. We saw it in a financial crisis.
Speaker 1: We saw it in derivatives and some of the mortgage
Speaker 1: backed securities. We saw it used in the restatements of values.
Speaker 1: We saw things where banks had an off balance sheet
Speaker 1: liability that was criminal. It's amazing that there have not
Speaker 1: been prosecuted. If it were criminal in our system, there
Speaker 1: would be a criminal prosecution. And I don't think I've
Speaker 1: seen one. We have a new game. Well, don't draw
Speaker 1: the conclusion that it wasn't criminal just because some projects
Speaker 1: was talked into, Hey, if you prosecute this, you're gonna
Speaker 1: crash they that's the nonsense that the prosecutors failed to
Speaker 1: do their jobs. Well, there was no penalty imposed at
Speaker 1: some symmetrical balance equivalent to the damage done by people
Speaker 1: who hurt millions and millions of people. There wasn't even
Speaker 1: a clawback of past. And this latest game, this latest
Speaker 1: game of will impose and negotiate and force a big
Speaker 1: fine on a bank and show how strongly we're regulating
Speaker 1: and cleaning the system is a farce. Well, you basically
Speaker 1: make the shareholders pay for the bad actions of some
Speaker 1: and those people don't really suffer the path. So it's
Speaker 1: an embarrassment that there's an ethical breach. Offends me. I'm
Speaker 1: a boy scout. That's the way I grew up. I learned.
Speaker 1: I learned business methods in a grocery store. And in
Speaker 1: a grocery store, if you want your customer to come back,
Speaker 1: you don't put the soiled fruit in the bottom of
Speaker 1: the peck. And when they take the top tomato off,
Speaker 1: underneath is so last two questions, Um, what advice would
Speaker 1: you give to a recent college graduate or a millennial
Speaker 1: who is just starting out his career today? Read history
Speaker 1: and study hard and be patient and keep smiling. That
Speaker 1: that's pretty good advice. And my last question that I
Speaker 1: ask all of our guests what do you know about
Speaker 1: investing today that you wish you knew when you began
Speaker 1: in nineteen seventies. The older I get, Barry, and the
Speaker 1: more I do this, the more I realize how little
Speaker 1: I know, and that makes it so exciting. I love
Speaker 1: what I do. I love it. I get up in
Speaker 1: the morning. I said, you are in the midst of
Speaker 1: extraordinary financial times. You spent the last fifty years of
Speaker 1: your life as an adult, mostly as an adult, preparing
Speaker 1: yourself off to be in the asset management business. In
Speaker 1: these remarkable times, you are now writing the textbooks and
Speaker 1: will be and they will be used thirty years from now.
Speaker 1: It's a very, very exciting time to be in financing economics.
Speaker 1: I love every minute of it. David, thank you so
Speaker 1: much for being so generous with your time. I know
Speaker 1: we've got to scoot you out of here. In forty
Speaker 1: five seconds. You've been listening to my interview with David Kotak.
Speaker 1: He is the founder and chief investment officer of Cumberland
Speaker 1: Advisers and author of the forthcoming book ad Ventures in
Speaker 1: muni Land. I will see you up in Maine. In
Speaker 1: you do have you've been listening to Masters in Business
Speaker 1: on Bloomberg Radio. I'm Barry Rihults. Be sure and check
Speaker 1: out all of our other interviews. Look an inch up
Speaker 1: or down on iTunes. You'll see all these and be
Speaker 1: sure and check us out next week. I'm Barry Ridhults.
Speaker 1: Thanks for coming by.