Speaker 1: M. This is Mesters in Business with very renaults on
Speaker 1: Bluebird Radio. This weekend. On the podcast, I have an
Speaker 1: extra special guest, somebody who I consider to be one
Speaker 1: of my mentors and someone I've looked up to for
Speaker 1: a long time. David Kotok, Chairman, Chief Investment Officer of
Speaker 1: Cumberland Advisors. David is just one of those people who
Speaker 1: his name comes up all the time in all sorts
Speaker 1: of funny and unexpected ways. And what I mean by
Speaker 1: funny is is not ha funny, but just unusual funny. Uh.
Speaker 1: He is the nexus of a network of people, very
Speaker 1: influential folks within the world of finance, asset management, economics,
Speaker 1: public policy uh, Federal Reserve and monetary policy. Uh. He
Speaker 1: international relations and global interdependent inns. Uh. He has really
Speaker 1: created one of these careers where he is a very
Speaker 1: consequential individual, far over what you might expect just from
Speaker 1: you know, a quick read of his bio. I've been
Speaker 1: going to his events. I don't know how I managed
Speaker 1: to wrangle an invitation all the way back in oh
Speaker 1: eight or oh nine. Maybe it was when I was
Speaker 1: writing about the financial crisis before the financial crisis that
Speaker 1: got me somehow an invite, but it really became one
Speaker 1: of my favorite things I do each year as we
Speaker 1: go up to Maine every August and and go fishing.
Speaker 1: And I have met people who have become lifelong friends
Speaker 1: from from this event. I have engaged in in deals
Speaker 1: and transactions and media events and all manner of things
Speaker 1: that came out of this sort of miniature VOS that
Speaker 1: takes place in private on the lakes and streams and
Speaker 1: in the woods of Maine. It's it's really an amazing
Speaker 1: legacy that he's created for himself from this experience. And uh,
Speaker 1: I find him to just be one of those rare
Speaker 1: and unique individuals who just makes everybody around him that
Speaker 1: much better. So rather than me just babbling on and on,
Speaker 1: let me just say, with no further ado, my conversation
Speaker 1: with Cumberland's David Kotok. This is Mesters in Business with
Speaker 1: Very Renaults on Bloomberg Radio. My extra special guest this
Speaker 1: week is one of my favorite people world of finance.
Speaker 1: David Kotok is co founder, chairman, and chief investment officer
Speaker 1: of Cumberland Advisers, which runs about four billion dollars in
Speaker 1: plying assets. He is the author of numerous books, including
Speaker 1: Adventures in Muni Land, from Bull to Bear with ETFs.
Speaker 1: His most recent publications include Lessons from Fucidities and Zeka
Speaker 1: Lessons from a Pandemic. He comes to us with three
Speaker 1: degrees from the Wharton School at the University of Pennsylvania.
Speaker 1: David Kotok, Welcome back to Bloomberg, Barry. It took pleasure. Indeed,
Speaker 1: we made it this far through the pandemic, and we've
Speaker 1: made it on a number of fishing trips and experiences
Speaker 1: for many years. And so I'm delighted to be here
Speaker 1: one and to be on the conversation, in the conversation
Speaker 1: with you, and that you were here as well. So
Speaker 1: we're going to circle back to some of the writings
Speaker 1: you've done, but let's just start out talking about what
Speaker 1: you were referencing these past two years. Market and an
Speaker 1: economy working its way through a global pandemic. As an investor,
Speaker 1: what do you make of this whole period, Well, you know,
Speaker 1: it's an interesting, um, it's an interesting way to start
Speaker 1: the discussion. I've studied pandemics as from you, and I
Speaker 1: spoke about folks want some normalcy, they want business cycles,
Speaker 1: they want the traditional metrics. Pandemics don't work that way.
Speaker 1: They never have throughout history, and this one is no different.
Speaker 1: And therefore market agents and people who do this type
Speaker 1: of analysis and examination of this COVID pandemic who haven't
Speaker 1: studied history miss the degree of the shock of a pandemic.
Speaker 1: And so what I make of this is how few
Speaker 1: people have really studied the history. There are some, of
Speaker 1: course who have. You and I spoke about that, but uh,
Speaker 1: not a lot. They don't read history. I guess if
Speaker 1: it doesn't fit within the Twitter limits it's too much
Speaker 1: to read, or who could possibly ask for more than
Speaker 1: characters on any subject? That seems excessive. So you and
Speaker 1: I have been chatting about this big research piece you've
Speaker 1: been working on on the history of market shocks, especially
Speaker 1: pandemics and health crises through history. Tell us about what
Speaker 1: some of your preliminary research has found. Well, we've really
Speaker 1: divided the market, Chucksberry, into sort of three segments. So
Speaker 1: antiquity UM, post medieval period UM. Think of that as
Speaker 1: the Black Death plague seven hundred years ago up through
Speaker 1: UM maybe the century or two centuries ago, and then
Speaker 1: the modern period and particularly the modern period during the
Speaker 1: Spanish flu misname Spanish flu but John Barry has made
Speaker 1: the name famous with his book UM in nineteen eighteen,
Speaker 1: which was really a pandemic of nineteen seventeen, eighteen ninety
Speaker 1: and twenty one, and and the Asian Flu period, which
Speaker 1: was the end of the Eisenhower administration, that's nineteen fifty
Speaker 1: seven and fifty eight. And we looked at the Federal
Speaker 1: Reserve Bank of San Francisco's study of pandemics for seven
Speaker 1: hundred years. They derived some macro economic data. It also
Speaker 1: provided us with a little bit of bibliography. We also
Speaker 1: went looking for more um and that's how we are
Speaker 1: assembling this piece that I have to write in three
Speaker 1: sections about pandemic shocks, not the disease. We know a
Speaker 1: lot about the disease. Part about interest rates, inflation rates, wages,
Speaker 1: economic changes, growth curves, reallocation of labor to capital. And
Speaker 1: what we've kind of find is every single pandemic shock
Speaker 1: delivers a similar sequence and this one is no different. Alright,
Speaker 1: So hold on, I have to interrupt you. So so
Speaker 1: when I think about that list that you gave us,
Speaker 1: the Black plague, the pandemic of the nineteen fifties, these
Speaker 1: are all very different environments, and I want you to
Speaker 1: walk me through them. First, the Black Plague in the
Speaker 1: middle of the last millennia. Yeah, how do we even
Speaker 1: have any sort of data from the hundreds and sixteen hundreds?
Speaker 1: Tell us a little bit about the economic impact of
Speaker 1: the bubonic plague? Okay, So what we did is this,
Speaker 1: how do you find economic data? That was a real challenge.
Speaker 1: And you can't go to Wikipedia or uh some other source.
Speaker 1: You've got to open a book. It's an old fashioned
Speaker 1: kind of research. So I have books sitting around now
Speaker 1: in my office. Um, they are references, historical references, and
Speaker 1: they helped me, and they helped me in this search
Speaker 1: for information. And they also helped me by saying what
Speaker 1: isn't in them? So a good example is Sydney Homer's
Speaker 1: Treatise on the History of Interest Rates, because I can
Speaker 1: look at interest rate data that he accumulated in his
Speaker 1: research and find information that corresponds with the time periods
Speaker 1: of plagues and pandemics. At the same time, I went
Speaker 1: into Allan Meltzer's History of the Federal Reserve, which covered
Speaker 1: the period of the creation of the fad from nineteen
Speaker 1: thirteen to nineteen fifty one. It was the first of
Speaker 1: the two volumes. Unfortunately, Allan Meltzer died and never completed
Speaker 1: the second volume, and I looked at Milton Friedman's Treatise
Speaker 1: about Monetary Policy with Anna Schwartz, two marvelous books that cover,
Speaker 1: in the case of Meltzer, the Spanish flu pandemic period
Speaker 1: and in the case of Friedman, both the Spanish flu
Speaker 1: pandemic period and the nineteen fifty seven fifty eight Asian
Speaker 1: Flu period. Neither one mentions disease, neither one mentions pandemic shock.
Speaker 1: The minutes of the Federal Reserve, the history don't talk
Speaker 1: about it. They talk about the war loans and the
Speaker 1: interest rates and the slowdown, and they attribute to war
Speaker 1: or geopolitical risk characteristics that also exists in pandemics. And
Speaker 1: what's very interesting is that when you look at history
Speaker 1: you see pandemics and shocks, you also see wars. They
Speaker 1: go together, and that becomes a fascinating linkage. In modern time.
Speaker 1: We couldn't find the references, but we did find the data.
Speaker 1: For example, in the fifty fifty eight Asian Flu period,
Speaker 1: interest rates and federalies are of activity. Then was a
Speaker 1: very narrowly defined operation of a central bank. And what
Speaker 1: we found was by nineteen fifty nine inflation had rolled
Speaker 1: over and was back down towards zero and interest rates
Speaker 1: were falling, and there was a shock. Sure was it
Speaker 1: attributed by the central Bank to a disease shock? No?
Speaker 1: Was the disease shock a cause? Maybe? I remember the
Speaker 1: fifty seven fifty eight Asian flu I was a teenager.
Speaker 1: How how did that compare to either the current um
Speaker 1: pandemic we're going through with covid or And I know
Speaker 1: this is before your time, the pandemic of n eighteen
Speaker 1: and the years before and after. Okay, so if you
Speaker 1: look if you look at the World War One period,
Speaker 1: and you look at the Spanish flu pandemic, which was
Speaker 1: a worldwide event, and you say, I'm going to really
Speaker 1: combine them because actually the war in part was part
Speaker 1: of the re in the spread we're so severe. What
Speaker 1: happened after the shock? Was it only the recovery from
Speaker 1: a post war environment? What triggered inflation to go down
Speaker 1: to zero? In What triggered a period of no inflation
Speaker 1: even as credit was expanding in the roaring twenties? What
Speaker 1: was the change? And the change was when you have
Speaker 1: a demographic shock and you have fewer people. You get
Speaker 1: two things. You get a rise in wages because of
Speaker 1: the remaining people get paid more, meaning literally, the death
Speaker 1: rate affects the labor pool that much fewer bodies, same
Speaker 1: demand equals higher wages exactly, and people begin to compete
Speaker 1: to pay more to get minimal or scared labor. At
Speaker 1: the same time, something else happens. Entrepreneurial folks. Governments too,
Speaker 1: reallocate capital away from labor to capital investment because they
Speaker 1: don't have a choice. They they change what they do
Speaker 1: because they don't have the people to do them. We
Speaker 1: now have that going on in this pandemic, whether it's
Speaker 1: telemedicine or a robot that carries a patient or a
Speaker 1: pronating bed in the hospital. And we're going to soon
Speaker 1: have it with self driving trucks because we don't have
Speaker 1: people to drive the trucks. Who knows where this goes.
Speaker 1: So what do you do when you when you get
Speaker 1: capital investment instead of labor, you get productivity gains, which
Speaker 1: means you can get growth without the inflation shock. You
Speaker 1: get the inflation shock at the front end. We've got it.
Speaker 1: We've had it every single pandemic habit. Interesting data in
Speaker 1: the European post medieval shocks. You can see some of
Speaker 1: this in historical references. You can see a government in
Speaker 1: your act to try to maintain wage controls because the
Speaker 1: price of labor was rising, and obviously the power that
Speaker 1: be was in trying to influence to suppress the ability
Speaker 1: of people to get paid more. If you look at
Speaker 1: interest rates on some loans, you can find they rolled
Speaker 1: over and declined post shock. And if you look at
Speaker 1: prices you can see the price shocks coming from foods
Speaker 1: or from agriculture changes which are observable in the antiquity period.
Speaker 1: You can't find any history why labor with slave labor.
Speaker 1: So during during the plague in Athens, HM, it was
Speaker 1: interesting I tried to find a wage change. First of all,
Speaker 1: it's hard to find what the wages were in Athens. Secondly,
Speaker 1: you know, I I looked everywhere. I looked in A
Speaker 1: professor ed Cohen, who studied Greek history, actually wrote a
Speaker 1: marvelism book on prostitution in Athens. Can you imagine writing
Speaker 1: such a book and you can't find the prices in Athens.
Speaker 1: You can't find changes in prices. For example, I was
Speaker 1: able to find that a mercenary who was hired to
Speaker 1: fight a war. And those days you had mercenaries and
Speaker 1: you're hired him to fight wars and they were paid
Speaker 1: one drachma a day. But when they were in battle,
Speaker 1: they were paid too. And that was the rate at
Speaker 1: which you went to hire people to fight war for
Speaker 1: you one drama. Normally combat pay was to drop. Now
Speaker 1: what's the conversion rate from drachma to dollars? Do we do?
Speaker 1: We know what? Well, this is ancient Greece, so so so,
Speaker 1: no bls, no monthly data. We're really trying to reconstruct
Speaker 1: this from broken fragments. Uh and papyrus reads from two
Speaker 1: thousand years ago. My pyrus were reads and thucidities translated
Speaker 1: with a good English translation. It's not so easy to do,
Speaker 1: but it's fascinating because there are references. So I've broken
Speaker 1: the references into three pieces. Antiquity, which is really a
Speaker 1: history lesson medieval period. To think of it, it's four
Speaker 1: or five years starting with the Great Plague, and the
Speaker 1: most recent period which is Spanish Flu period in Asian
Speaker 1: Flu period. And the message is always the same. Anecdotes
Speaker 1: are different, but they all tell the same story. You
Speaker 1: get a shock, you get wages up, you get an
Speaker 1: reallocation to capital. Because you have fewer people, you have
Speaker 1: to replace the functions. You get a productivity game. Inflation
Speaker 1: is transitory. Transitory needs definition of time because it's an
Speaker 1: intertemporal relationship. But it does happen. Yeah. I find that
Speaker 1: whenever people talk about transitory, the the audience says, all right,
Speaker 1: you've got three days, and then if I don't see
Speaker 1: my results in three days, then it's not transitory. When
Speaker 1: you use the phrase transitory. And you and I have
Speaker 1: discussed this before. I'm in the same camp as you.
Speaker 1: You're talking about um anywhere from two four, six quarters
Speaker 1: or more. Well, I would agree, and I would like
Speaker 1: to add the shock isn't even over yet. Only we
Speaker 1: got a bunch of people walking around the state saying, oh,
Speaker 1: I want it to be over. Okay, you can want
Speaker 1: it to be over. The virus doesn't care what you want.
Speaker 1: So so let me let me follow up with one
Speaker 1: other period I have to ask you about. So the
Speaker 1: Greeks two thousand years ago, Medieval five hundred years ago,
Speaker 1: what you've described as modernity in terms of the early
Speaker 1: nineteen teens, UM and under Eisenhower in the late nineteen fifties,
Speaker 1: between Eisenhower and today though uh was Zeka and you
Speaker 1: also did a study of the impact of Zeka. Tell
Speaker 1: us what you learned from that was that consistent with
Speaker 1: these other health related pandemic shocks. What was your takeaway
Speaker 1: the takeaway from Zeke? And you know, I wrote a
Speaker 1: nine chapter I think it was pamphlett about it, and
Speaker 1: did did some research about SEEK. In fact, it was fascinating.
Speaker 1: I actually took a trip to Cuba, which had UM,
Speaker 1: a preventive medicine only its a poor country, and I
Speaker 1: was able with gratuity or two to actually walk. You
Speaker 1: notice I'm being polite when I said a gratuity or UM.
Speaker 1: I was able to actually walk with mosquito spraying units
Speaker 1: in the morning and see how they managed this mosquito
Speaker 1: born because it's a mosquito factor. And and what ZEKA
Speaker 1: did was have the early stage pandemic disease fear risk component,
Speaker 1: but it never evolved into a pandemic or a large spread.
Speaker 1: So you saw signs of it in South American countries
Speaker 1: and it was a mosquito vector, and you saw cases
Speaker 1: of it, but it never got big enough to be
Speaker 1: pandemic risk. The early stage had the fear component Ebola,
Speaker 1: by the way, did the same. It was so fatal.
Speaker 1: And therein lies what's an alarming lesson or trajectory that
Speaker 1: history teaches. History says, these things mutate and mutate and mutation,
Speaker 1: and some of those mutations of them, I don't know
Speaker 1: the exact number, but a huge number have no material change,
Speaker 1: and therefore they don't get a Greek letter called delta
Speaker 1: or macron or alpha or other name. But every once
Speaker 1: in a while the mutations become extraordinarily different O macron
Speaker 1: is very transmissible, but not as dangerous in terms of
Speaker 1: f although if you're not vaccinated, it'll get you. It's
Speaker 1: simple is that what we don't know is is a
Speaker 1: mutation in front of us which has the killer cytokine
Speaker 1: storm trigger that made the Spanish flu what it really was,
Speaker 1: and we don't know. That's the unknown. And it was
Speaker 1: the unknown with Stars and two thousand and three, it
Speaker 1: was the unknown with mirrors, it was the unknown with Zeka,
Speaker 1: it was the unknown with Ebola, and it is the
Speaker 1: unknown with COVID. And it seems that throughout history there
Speaker 1: is a period in a pandemic where some mutation or
Speaker 1: alteration makes it very deadly that changes behaviors because a
Speaker 1: lot of people who in history said, oh it's it's
Speaker 1: it's religiously based, or God is punishing knows, or God
Speaker 1: is punishing the ones who got sick, or whatever the
Speaker 1: reasons were in history, suddenly say, wait a minute, this
Speaker 1: is really serious and can affect me. And we've reached
Speaker 1: maybe some of that in the US. We've got all
Speaker 1: approximately a million excess deaths in the United States, but
Speaker 1: we've got a whole population that still doesn't get it.
Speaker 1: It's I don't know where this inc it. Will talk
Speaker 1: a little bit more about the anti vax or movement later.
Speaker 1: I wanna stick with the impact of these shocks on
Speaker 1: the economy and the market, because essentially we're a financial
Speaker 1: if nothing else. So you mentioned that wages go up
Speaker 1: um inflation, am I'm interpreting this right. You're saying inflation
Speaker 1: spikes but then eventually rolls over as do rates. What
Speaker 1: what is the impact on equities? We we we get
Speaker 1: the impact on bonds there, but what is the impact
Speaker 1: in the world of equities. Well that's not easy to
Speaker 1: do because we don't have a lot of history. But
Speaker 1: we have some history. We have a century in the
Speaker 1: United States to two pandemics and now this one. And
Speaker 1: we have some references in Europe, but not very much, um.
Speaker 1: But the impact is that when you reallocate from labor
Speaker 1: to capital, that means you go to entrepreneurial businesses. Entrepreneurial
Speaker 1: businesses get productivity gains. That's how the growth takes place
Speaker 1: in the new demographically adjusted population and it becomes more profitable.
Speaker 1: And we see that in the US equity response so far,
Speaker 1: and we I believe once we get posts pandemic shock
Speaker 1: in other places in the world, we'll see it there
Speaker 1: as well. So are the US has had a leadership role.
Speaker 1: Look at how well we did in trying to roll
Speaker 1: out vaccines and by the way, we're now lagging, no
Speaker 1: longer leading. That's a shame, um, But that's the case.
Speaker 1: Our companies are leading. Our population isn't. So equities do
Speaker 1: well owning survivors the winners. There are winners and losers
Speaker 1: in every shock, and the winners really do well. H
Speaker 1: quite fascinating. Let's talk a little bit about Cumberland, because
Speaker 1: you guys were a little bit of ahead ahead of
Speaker 1: the carve. The company is founded in seventy three, so
Speaker 1: you're just about g almost almost fifty years old, but
Speaker 1: about a decade ago you relocated Cumberland from the Tri
Speaker 1: state area to Florida. Tell us a little bit about
Speaker 1: what the motivation of that relocation was. It turned out
Speaker 1: that you were on the leading edge of a lot
Speaker 1: of financial firms looking to relocate to places where the
Speaker 1: cost structure is cheaper and the taxes are lower. Well,
Speaker 1: we we were looking at the move in late two
Speaker 1: thousand six, seven and eight, and the financial crisis was
Speaker 1: unfolding at the time. What we found is my colleagues
Speaker 1: and I were on airplanes to Florida all the time,
Speaker 1: so that became a trigger. I at that point it
Speaker 1: was my company, and now I have seventeen shareholders and
Speaker 1: the majority of them are employees. But I was the
Speaker 1: driver in two thousand and eight two thousand nine, and
Speaker 1: um I was the caregiver for my mother who died
Speaker 1: in two thousand and eight, So it was a restraining
Speaker 1: a situation for me. Before I moved, the move commenced
Speaker 1: seriously to Florida in two thousand and nine, we had
Speaker 1: examined it for a number of years and we started
Speaker 1: to transition the entire company and we still have a
Speaker 1: little office in New Jersey. We still have a person
Speaker 1: um and sometimes two people in the New Jersey office,
Speaker 1: but everything is in Florida. Took us four years to
Speaker 1: move people. It was literally during the financial crisis and aftermaths.
Speaker 1: It was very difficult. Um. And there's a long story
Speaker 1: as to how we got to Sarasota instead of the
Speaker 1: East coast, and that's another story. But the bottom line
Speaker 1: is we're now here. We're about forty six people, UM,
Speaker 1: and we do most of the activities in Florida. The
Speaker 1: motivation was not just taxes. Everybody says, oh, yeah, you
Speaker 1: went there to cut your taxes, Well, that was part
Speaker 1: of it. And certainly in New Jersey after John Corzine
Speaker 1: high taxes, he encouraged us to leave. I jokingly say,
Speaker 1: John Corzine bought my condo for me. That's what I
Speaker 1: was laughing about, because I remember that exact line coming
Speaker 1: from you, you know, eight years ago. Well, we moved
Speaker 1: into a very nice place that Corsne paid for, meaning
Speaker 1: what you're not paying in state taxes basically covers your
Speaker 1: the cost of your very nice housing on on the intercoastal. Yeah.
Speaker 1: Well here's the here's the thing, though, we had our
Speaker 1: accounts at the time, and I said, look at the
Speaker 1: company and give me the picture if this were in Florida,
Speaker 1: and so, well, that's easy. We just change the income tax.
Speaker 1: And Business to Act said, no, no, no, no, no,
Speaker 1: take all these people. Have them live in the same
Speaker 1: value house, have them insure their cars in Florida. Give
Speaker 1: me a full picture. The full picture was really compelling
Speaker 1: because the cost structure totally besides just the direct taxes
Speaker 1: was was an enormous amount. So I said, so if
Speaker 1: I move people and I can give them real incentives,
Speaker 1: and those incentives give them an opportunity to really examine
Speaker 1: a full picture. And that's what we created. And we
Speaker 1: had a very strong incentive package of moving expenses. We
Speaker 1: reimbursed bonuses if you make the move. If you choose
Speaker 1: not to make the move, you stay at your desk
Speaker 1: in New Jersey. Um and all but two eventually made
Speaker 1: the move, and we had to deal with a whole
Speaker 1: lot of issues. People to sell houses and buy houses,
Speaker 1: and then the deal with families, and I had. The
Speaker 1: biggest crisis I had was somebody's daughter had a date
Speaker 1: for the prom and couldn't come them. And by the way,
Speaker 1: she broke up and went to the problem with somebody else.
Speaker 1: But I mean, we went through it all, but we
Speaker 1: got everybody here. So so that was way before the pandemic.
Speaker 1: The question I'm leading you towards is, so now with
Speaker 1: the pandemic the past two years, you and I have
Speaker 1: talked about hiring people having never met them in person
Speaker 1: and having never had them step into your office, but
Speaker 1: having them work remote raises the question, how has the
Speaker 1: pandemic and the work from home era changed the entire
Speaker 1: calculus of where a firm like yours can can elect
Speaker 1: to locate itself. Well, it's massive. You've written about it
Speaker 1: in describing your own experiences work from home. I have to.
Speaker 1: Work from home can be in Idaho or in Florida.
Speaker 1: It has it can be for many people where you
Speaker 1: want it to be, and what you and I would add,
Speaker 1: it's made us much more productive, our capacity to do
Speaker 1: things and accomplish units of work if you will, it's
Speaker 1: so much improved depending on what you do. So, um,
Speaker 1: work from home. Why Florida, if it's so attractive, is
Speaker 1: not growing as fast as Idaho? Why is this change
Speaker 1: taking place? So you have to ask yourself, are people
Speaker 1: rethinking location and lifestyle. And I think that you look
Speaker 1: at place of the Guidaho, Montana, you look at sections
Speaker 1: of the country, and you say, something's going on here
Speaker 1: because they want to get out of the center of
Speaker 1: the big city. You and I have friends who have
Speaker 1: moved out of center city in downtown New York. Worry
Speaker 1: and are they going to come back? I mean, we
Speaker 1: we have. This is all part of what I call
Speaker 1: pandemic shock disruption. So let's let's go into let's delve
Speaker 1: into that a little more deeply. And I want to
Speaker 1: talk about wages and I want to talk about real estate.
Speaker 1: The first question is if and let's not count the
Speaker 1: dozen partners and or people whose names are on the
Speaker 1: door at a firm like yours or mine. Um, we're
Speaker 1: talking about you know, either new hires or or administrative staff.
Speaker 1: If you can locate them anywhere in the country. Do
Speaker 1: you pay the same wages in Idaho that you do
Speaker 1: in San Francisco or New York? Or is it a
Speaker 1: cost savings having a person remote in an area where
Speaker 1: the cost of living is so much lower. Well, that's
Speaker 1: your that's that's a good question. But is it just
Speaker 1: savings or can you obtain and higher, better skill set,
Speaker 1: and more productivity, Yes, and more productivity, and so paying
Speaker 1: more really obtains you a better bargain, and both of
Speaker 1: those things are happening, and that this whole notion. There
Speaker 1: was a book I have a book in my library
Speaker 1: from nineteen thirty five or that area is by a
Speaker 1: German economist by the name of Lersh unknown mostly and
Speaker 1: he wrote about the economics of location, and did it
Speaker 1: in those days in the form of concentric circles to
Speaker 1: a center point and distance. The concept in that book
Speaker 1: not the location itself, because in those days yet to
Speaker 1: think about a horse or a chart, or maybe a railroad.
Speaker 1: But the concept of location was discussed in valuing distance.
Speaker 1: Work from home in the modern environment eliminates the distance,
Speaker 1: but it identifies the values which were just articulated a
Speaker 1: century ago in that book, and there at work today.
Speaker 1: You use them. I use them, a lot of us
Speaker 1: who can use them. And so what we now have
Speaker 1: is this divide, another disruption between those of us who
Speaker 1: can gain these advantages and do so and those who
Speaker 1: are unable to. And they are the ones who have
Speaker 1: a problem, and they suffer. And so we get this
Speaker 1: divided community in which we live and we find our
Speaker 1: neighbor cannot take advantage of the positives but has to
Speaker 1: confront in daily life the risks and the negatives. That's
Speaker 1: a political discussion in the United States as well as
Speaker 1: a societal risk that comes out of pandemics. Bury every
Speaker 1: pandemic shot also had disruption in government. Really interesting. But
Speaker 1: before we we moved to politics, I want to stick
Speaker 1: with real estate because what you were just discussing the
Speaker 1: concentric circles around urban areas. I literally had this conversation
Speaker 1: over the weekend with Jonathan Miller, who's the famed real
Speaker 1: estate appraiser and data wong at Miller Samuel and we
Speaker 1: were talking about rings around cities and my frame of
Speaker 1: references in New York City. But it's true in Chicago,
Speaker 1: although it's a partial ring because it's up against the
Speaker 1: Great Lake or or San Francisco or l A or
Speaker 1: really any city you want to think about. You have
Speaker 1: this ring immediately around the city. The bedroom communities that
Speaker 1: are less than a thirty minute commute, those are some
Speaker 1: of the most expensive real estate today. And then the
Speaker 1: next ring thirty to forty five minutes a little less expensive,
Speaker 1: but still you know, not cheap. Pretty pretty expensive, and
Speaker 1: as you get out past sixty minutes no longer real
Speaker 1: estate prices start to drop appreciably. What is that dynamic
Speaker 1: that Lurcher observed and that Jonathan and I observed. As
Speaker 1: the pandemic wears on and as people find the ability
Speaker 1: to locate themselves anywhere, I can imagine that inner ring
Speaker 1: is going to be the partners and the people who
Speaker 1: were at the top of the income scale and they
Speaker 1: want a fast, easy commute into the city. For the
Speaker 1: two or three days they're probably going into the city
Speaker 1: to work, or maybe every day if they're on a
Speaker 1: trading desk or at a hedge, Fondora, private equity or
Speaker 1: VC type of shop. But what about the next rings,
Speaker 1: the forty five minutes away, the ninety minutes away. Are
Speaker 1: those areas going to be at a disadvantage to places
Speaker 1: like Idaho and Wyoming. Well, we don't know, but history
Speaker 1: history says that what we had up until January, February
Speaker 1: or March of has changed, and the change is structural,
Speaker 1: not temporary, and it will unfold over the next few years.
Speaker 1: And history would say those who longed to go back
Speaker 1: to what was before the pandemic are going to be
Speaker 1: disappointed because it isn't going to be there. The world
Speaker 1: has changed. Every pandemic in history introduced change, and the change,
Speaker 1: which was geographical when transportation was on a horse or cart,
Speaker 1: is now electronic. For whatever portion of economic activity takes
Speaker 1: place in the virtual space. And that's a lot. And
Speaker 1: it's also more and more, not just finance. We think
Speaker 1: of it in finance because we're in the finance area.
Speaker 1: But if I get some spot and I need a dermatologist,
Speaker 1: what do I do today? I take a picture of it.
Speaker 1: I sent it to the dermatologist. He looks at it,
Speaker 1: He text or emails or calls me on the phone,
Speaker 1: and we talked about it. I don't have to go
Speaker 1: to this office. I can be a thousand miles away.
Speaker 1: So this is a massive disruption of what we had,
Speaker 1: huge introduction of productivity gain in every single sphere, every
Speaker 1: single thing we think about, and we've only begun to
Speaker 1: see it. And I keep saying, you know, I had
Speaker 1: a conversation with John Farah last month in an interview
Speaker 1: on surveillance, and he said, what's your takeaway from this?
Speaker 1: And I said, the takeaway is it is a huge shock.
Speaker 1: It's not busines as usual and we end it's still
Speaker 1: going on. It's not over yet. So monstrous. So so
Speaker 1: I want to get to politics, but before I do,
Speaker 1: I have to stick with the technology question that you're
Speaker 1: dancing around a little bit. The pushback to the shock
Speaker 1: thesis is not so much that this changes everything and
Speaker 1: we're gonna start with a clean sheet of paper. But
Speaker 1: we actually had all these trends in place pre pandemic,
Speaker 1: and this accelerated them and brought them all forward by
Speaker 1: a decade. So think about what we're doing currently. Zoom
Speaker 1: calls or Google hand calls. We've been doing that in
Speaker 1: my office for a decade now. Everybody is very comfortable
Speaker 1: with its screen shares, FaceTime on your iPhone, delivery of food,
Speaker 1: delivery of supermarket's just everything grab vitating so rapidly towards
Speaker 1: online and Amazon. What do you take of the claim that, hey,
Speaker 1: none of this is new, you've just moved us to
Speaker 1: instead of in terms of where we are technology wise
Speaker 1: dealing with the pandemic, Uh, I would I would say
Speaker 1: that history would show that every pandemic accelerated procedures and
Speaker 1: directions and trajectories which were under way. That's what a
Speaker 1: shock would do. It also had another impact. If the
Speaker 1: trajectory was in the direction of something that was going
Speaker 1: to fail, it accelerated the failure. Both happened, so it
Speaker 1: speeds things up in addition to introducing a new dis
Speaker 1: option simultaneity of both speed and form of disruption. So
Speaker 1: what you've described I totally agree with. But you were
Speaker 1: in a place and in a business. I'm in a
Speaker 1: place in a business where we were in a very
Speaker 1: adaptive phase. The rest of the world didn't have to adapt.
Speaker 1: The shock forced them to. That was the accelerator. Yeah,
Speaker 1: we're fortunate that when we launched back in we were
Speaker 1: built for virtual from day one, so this transition was
Speaker 1: really very easy for us, and and I very much
Speaker 1: empathize with people. My neighbor is an orthopedic surgeon. He says, I,
Speaker 1: you know, we're not at the point where I could
Speaker 1: log into my computer and manipulate a robot remotely. I
Speaker 1: have to go to the hospital to do surgeries, and
Speaker 1: there was a period in where any elective surgery was canceled,
Speaker 1: So you know, he was setting bones and and fixing
Speaker 1: other things. But that's you know, a third of his practice.
Speaker 1: He said, for about six months he was afraid he
Speaker 1: was gonna have to lay off all his people. I'm
Speaker 1: I'm very empathetic for people, especially frontline workers, who were
Speaker 1: putting their own health and safety at risk dealing dealing
Speaker 1: with the public. Which brings us to the politics of this.
Speaker 1: What do you make of of some of the pushback.
Speaker 1: I know we're all exhausted and tired of the pandemic,
Speaker 1: but this started from day one. What do you make
Speaker 1: of the pushback to government interventions, mandates, masks, vaccine requirements.
Speaker 1: How do you how do you interpret this stuff? Well,
Speaker 1: history of pandemics would suggest that finger pointing, political um distraction,
Speaker 1: governance was of victim in every pandemic. Behaviors are being
Speaker 1: repeated now in various ways, and part of the pandemic
Speaker 1: history is the pandemic. The disease doesn't have a political party,
Speaker 1: and it eventually gets those who are more likely not
Speaker 1: to be wary of it, or whose behaviors expose them more.
Speaker 1: That's what disease does, and this is no different. It's
Speaker 1: a political it's just opportunistic. Look in Milan in sixteen
Speaker 1: thirty two, I don't remember exactly, Um the governor UM
Speaker 1: heard about. This is during the plagues that went through
Speaker 1: the Italians states in the seventeenth century, and the governor
Speaker 1: of Milan heard about what was going on. He sent
Speaker 1: to emissaries. He said, you guys, go over to Sienna.
Speaker 1: In those days, you had to ride there in a
Speaker 1: horse and look around, see what you see, and come
Speaker 1: back and tell me. So they do, if you can
Speaker 1: bring the disease back with you. Yeah, well they come
Speaker 1: back and they say, Governor, people are dying and lying
Speaker 1: in the streets. They can't pick up the bodies fast enough.
Speaker 1: He says, we cannot tell the people. Listen, now we
Speaker 1: have documentation, because at this point we have some written documentations.
Speaker 1: What does he do? He says, Number one, get the
Speaker 1: governing council, let's report. Number two, let's not tell the people.
Speaker 1: We don't want to scare them. Number three, we have
Speaker 1: a new princess. We'll have a celebration, in a joyful celebration.
Speaker 1: So he convenes it and he hosts a super spreader,
Speaker 1: and three months later he's got dead people all over
Speaker 1: his town. That was thirty Barry. Yeah, well, you would
Speaker 1: hope we have learned over the ensuing five years how
Speaker 1: to behave in a panza. Although arguably many of us
Speaker 1: have not well the nature of the human being. Well,
Speaker 1: let me ask you this question. And as someone who's
Speaker 1: vaxed and boosted, and as soon as they give me
Speaker 1: the green light cross um boost, I'm fiser up till
Speaker 1: now I will happily go get the maderna. As number four,
Speaker 1: I'm not worried about you know, I'm trying to avoid
Speaker 1: getting catching it, but I'm not worried about a terrible
Speaker 1: outcome of of hospitalization, ventilator and death. However, this long
Speaker 1: COVID is quite a scary proposition. What do you think
Speaker 1: about this? And and how has this to bring it
Speaker 1: back from the human element to the economy, how has
Speaker 1: this impacted uh, the labor force and and the overall
Speaker 1: impact of of you know how we're dealing with the pandemic. Well,
Speaker 1: I believe long COVID is really a monster issue in
Speaker 1: front of us. A little disclosure, I sponsored am sponsoring
Speaker 1: for the Global Interdependent Center a webinar series on long
Speaker 1: COVID and the health issues. Um, I'm part of a
Speaker 1: group which is a long COVID initiative. And here's what
Speaker 1: we know. In the UK. We've now identified over a
Speaker 1: million by their definition long COVID patients, they have a
Speaker 1: population of sixty seven million. If we use that reference
Speaker 1: for the United States, we're due for five or six
Speaker 1: million cases. The numbers grow every single reporting period. In
Speaker 1: the United States. We now have about a hundred and
Speaker 1: fifty long COVID clinics in America. We had zero a
Speaker 1: year ago. We have about fifty pediatric long COVID clinics.
Speaker 1: We had zero a year ago. What are we finding.
Speaker 1: People think of COVID as a respiratory disease, that's how
Speaker 1: you get it, But there's more and more evidence that
Speaker 1: it's a blood disease. Gets into you, then you get
Speaker 1: micro cloths, and it gets to all your organs. So
Speaker 1: long COVID, I think, is a big issue. That estimates
Speaker 1: for the United States are somewhere between ten and twenty
Speaker 1: million cases before this is over, and again back to
Speaker 1: the political question. The vaccines tend so far to reduce
Speaker 1: enormously the risk of long COVID. If you get sick,
Speaker 1: the unvaccinated are going to be the victims. If they
Speaker 1: didn't die, they are the most likely to get long
Speaker 1: COVID symptoms. It's a terrible circumstance, but long COVID is here.
Speaker 1: It's big, and it's going to be bigger and bigger.
Speaker 1: Think of it as people who are temporarily, partially or
Speaker 1: permanently disabled. That's a cohort of million ms, and many
Speaker 1: of them are labor force age. So let me ask
Speaker 1: you about that exact question, because following the financial crisis
Speaker 1: in O eight oh nine, I think people were somewhat
Speaker 1: surprised at the big surge, the big uptick in disability
Speaker 1: applications that took place. A shocking large slice of the
Speaker 1: labor force moved to disability. Are you suggesting we're gonna
Speaker 1: see the same sort of thing post COVID. Yes, I
Speaker 1: think we're gonna see it. I think it's going to
Speaker 1: be bigger than people think. I think there's going to
Speaker 1: be all the fights with the insurance company and who's
Speaker 1: going to pay and what are the definitions? Right now,
Speaker 1: the World Health Organization, the UK and the U s
Speaker 1: h h S have three different They're similar, but they're
Speaker 1: not identical. And we have to remember this is a
Speaker 1: worldwide disease, which means disabled here is also disabled in
Speaker 1: all the countries of the world. Wow, amazing, there seems
Speaker 1: to be a ton of focus on the Federal Reserve
Speaker 1: and inflation and rising interest rates. But before we dive
Speaker 1: deep into the FED, let's start with its chairman. What
Speaker 1: do you make of J. Pale? What sort of job
Speaker 1: has he been doing, uh navigating over the past six years. Well,
Speaker 1: my opinion is that J. Pal has been a terrific
Speaker 1: Central Bank chairman in the midst of this pandemic. Number One,
Speaker 1: he's a student of history. Number two, he knows the
Speaker 1: degrees through and he has a lens which is deeper
Speaker 1: than just monetary economics. So he sees it in the
Speaker 1: in the full sense of financial markets, look at all
Speaker 1: the different programs that were implemented along the way. And
Speaker 1: he also sees it in terms of community impact and
Speaker 1: people impact on three d and thirty five million Americans.
Speaker 1: And so I applaud Pal and those who criticize him
Speaker 1: after the fact that it's easy to quarterback a game
Speaker 1: on a Monday, if I could use the cliche, miss
Speaker 1: what it's like to have to make real time decisions
Speaker 1: in the midst of such a shock. Pal has done that,
Speaker 1: and he's done it really well. Under the circumstances. There's
Speaker 1: an entire committee in the FED which is reaching to
Speaker 1: community elements that are outside the banking system, philanthropy, community activities,
Speaker 1: support systems, and it's advising the FED on impacts. It's
Speaker 1: not well known. The minutes are published, people don't know
Speaker 1: about it. What has pal done? He said, the Federal
Speaker 1: reserves position must be much broader than this. The narrowly
Speaker 1: defined banking system financial stability. Those are important, that's our
Speaker 1: bread and butter business. But if we don't get to
Speaker 1: the full impact in the country, we're missing this shock
Speaker 1: and its effects. And that's something that Pale has done
Speaker 1: very quietly, no fanfare. I've had occasion to speak to
Speaker 1: people who are on that committee, and some of the
Speaker 1: programs from the Federal Reserve, which narrowed to very small
Speaker 1: balances to be able to give financial support and system
Speaker 1: too smaller businesses, conduit structures came out of that sensitivity.
Speaker 1: Let me pick up on that. Because the consistent criticism
Speaker 1: we've heard about the FED and and we have at
Speaker 1: some of the events we go to. You know the
Speaker 1: exact people. I won't mention it by name, but you
Speaker 1: know the people who bring up Look at how giants
Speaker 1: the Federal Reserve balance sheet has become, Look at the
Speaker 1: rate of change over the past ten twenty thirty years.
Speaker 1: This is unprecedented and then's badly. How do you respond
Speaker 1: to the folks who say the accumulation of assets on
Speaker 1: the Federal Reserve balance sheet is problematic and will result
Speaker 1: in subsequent crises. Well, I would answer two ways with
Speaker 1: two elements, because in our dialogue, in the business that
Speaker 1: we're both in, we get those kinds of conversations all
Speaker 1: the time. And I say to somebody, show me number one,
Speaker 1: a study which is curated that determines the optimal size
Speaker 1: of the Fed's balance sheet, produced to study to criticize
Speaker 1: its size. Produce the study to say this is how
Speaker 1: large it should be, and this is why now we
Speaker 1: do know. There's some elements in the Fed's balance sheet.
Speaker 1: For example, currency in circulation, it's a liability. The treasury balances,
Speaker 1: it's a liability necessary bank reserves. It's a liability. To
Speaker 1: do that, you need assets. On the other side, you
Speaker 1: have to support the international balances, so that's global Central
Speaker 1: rank repot redeposits at the FED. So that's a liability.
Speaker 1: So you can add up some elements and say, gee,
Speaker 1: I can get to four or five or six trillion immediately,
Speaker 1: and I haven't gone beyond it. Now the question becomes
Speaker 1: how much cushion should you have and how big should
Speaker 1: it be? And ben Bonanke himself said, if you wait
Speaker 1: long enough, the balance sheet will abs orb any size
Speaker 1: over time as long as you have nominal growth. He's right.
Speaker 1: So this favor pointing about the size of the bid
Speaker 1: FEDS balance sheet and hand ringing about it, to me,
Speaker 1: is a great way to introduce hyperbole without curated facts.
Speaker 1: Why if it's so bad and so inflationary and so destructive,
Speaker 1: is the Japanese central bank balance sheet larger than the
Speaker 1: GDP of the country and there's no inflation? And to
Speaker 1: be fair, to be fair about the US Central Bank
Speaker 1: and the current bout of inflation, Hey, it's been twelve
Speaker 1: years with very very low inflation. To blame the post
Speaker 1: pandemic period on the FED balance sheet to blame that
Speaker 1: inflation really seems to be an unfair accusation. I completely agree.
Speaker 1: I think it's taking advantage of a shock to throw
Speaker 1: a political barb. Well, central banks are always fair game
Speaker 1: because they cannot defend themselves in political environment, so they're
Speaker 1: an easy target for a politician or critic. It's a
Speaker 1: hold different story when you have to sit in the
Speaker 1: room in real time and make a decision and you
Speaker 1: don't have a full plate of facts because you're in
Speaker 1: a moving environment. So I'm a defender of PAL. I
Speaker 1: think the fit has done as good a job as
Speaker 1: you could ever expect under these extraordinary circumstances. So so
Speaker 1: what do you make of the current move where we're
Speaker 1: actually recording this early January Poal is as literally testifying
Speaker 1: to Congress as as we speak, so you don't get
Speaker 1: to hear what he is currently saying. What do you
Speaker 1: make of the current move towards the taper and the
Speaker 1: idea that quantitative easements and purchase is of bonds have
Speaker 1: run their course. We we won't even get to zero
Speaker 1: interest rate policy just yet. What do you think of
Speaker 1: quie in the idea of the taper, Well, to taper
Speaker 1: from some level to some lower level and then eventually
Speaker 1: to zero is something that eventually had to happen, and
Speaker 1: the forces that require the Fed to do that, which
Speaker 1: are both political and economic in the face of evidence
Speaker 1: of this shorter term You're quite right, inflation shock require
Speaker 1: them to do that. My biggest fear is the Federal
Speaker 1: try to do two things at once. It will try
Speaker 1: to reset an interest rate to a higher level than zero.
Speaker 1: I never like zero because it's such a distortion. I
Speaker 1: don't mind if it was a quarter of a point
Speaker 1: or a half a point floor, but zero destroy did
Speaker 1: things and we were in a long time. To do
Speaker 1: that and also alter the composition in size of the
Speaker 1: balance sheet at the same time is to try to
Speaker 1: do two very difficult things simultaneously. It's hard enough for
Speaker 1: the central Bank to do one of them, and so
Speaker 1: my view is they should tackle one before they tackle
Speaker 1: the other. And if I were sitting in that room,
Speaker 1: I would tackle the interest rate first. I'd take a
Speaker 1: hike in March or April or may get the rate
Speaker 1: above zero. Clear markets, clear, repo, clear sofa, get an
Speaker 1: operating system above zero, so anybody who's got any cash
Speaker 1: anywhere in the world can put it to work and
Speaker 1: get more than a single basis point at some place.
Speaker 1: And now you have a market clearing mechanism, and then
Speaker 1: when you get interest rate trip, then you can tackle
Speaker 1: the size of the balance sheet. I'm afraid, though the
Speaker 1: pressure is such, they're going to do both at once,
Speaker 1: and to me, that's a recipe for trouble. Huh, that's
Speaker 1: really uh, that's really interesting. So what does this mean
Speaker 1: for your business? You're essentially known humbling is known as
Speaker 1: a bond shop. At one point, mini bonds were super
Speaker 1: attractive on an after tax basis as a source of
Speaker 1: yield versus treasuries or even high grade corporates. Given everything
Speaker 1: that's taken place for us with the financial crisis and
Speaker 1: then subsequently with the pandemic, how should bond investors be
Speaker 1: operating in this environment? Well, I don't know what others
Speaker 1: should do, but I can say what we do do.
Speaker 1: We've been running a Barbel. Barbell means you got a
Speaker 1: slug of a portfolio, depending on the type of portfolio,
Speaker 1: in the shortened earlier shorter duration maturities, and you get
Speaker 1: very low yield there, and then you have a piece
Speaker 1: in the longer maturities, which is how you get some
Speaker 1: yield by blending them. Our duration in the morning meeting
Speaker 1: yesterday was approximately four. That is relatively short. So we've
Speaker 1: been rolling duration around four, waiting for the opportunity for
Speaker 1: markets to deliver a higher yield. Now today you can,
Speaker 1: as we're speaking, you can look at the market and say, well,
Speaker 1: I could get about three percent in a high grade
Speaker 1: tax free bond, depending on what state and jurisdiction. But
Speaker 1: my guess is as rates rise, and it looks like
Speaker 1: they're going to, we may get close to three and
Speaker 1: a half or four in a municipal yield out of four.
Speaker 1: This becomes very attractive rate, really interesting. So we're recording
Speaker 1: this early in January. The tenure yield has just tipped
Speaker 1: up about one eight percent or so. Do you think
Speaker 1: the bond markets are seeing inflation as a structural element
Speaker 1: of the economy looking forward or did they see this
Speaker 1: as transitory? UM. Bond markets are adjusting upward of view,
Speaker 1: away from much lower inflation expectations to something higher. UM.
Speaker 1: The shock inflation measures we see at six and seven
Speaker 1: are inconsistent with the yields and the bond market of
Speaker 1: one point eight or two or two and a half
Speaker 1: or even three. So what the bond market is saying
Speaker 1: is we're going to have an adjustment. It's not going
Speaker 1: to be anywhere near this high single digit perpetual rate
Speaker 1: of inflation. Is the temporary shock now where it comes
Speaker 1: out two, two and a half, three maybe, but not
Speaker 1: a lot more. That's what the bottom market is saying,
Speaker 1: and history would say, if we have a transition and
Speaker 1: we get beyond the shock, that's the more likely outcome.
Speaker 1: Really really interesting. So if we think this shock eventually passes,
Speaker 1: what's the best definition of transitory? Are you implying it's
Speaker 1: twelve to twenty four months before we're back to a
Speaker 1: more normal footing, albeit at higher federal funds rate and
Speaker 1: higher yield on the tenure? I think so it's an opinion.
Speaker 1: We'll find out in a couple of years. But my
Speaker 1: worry is central banks, in their hurry to renormalize policy,
Speaker 1: make the transitory rollover worse. Huh. They are under pressures
Speaker 1: to do so everywhere in the world, and so my
Speaker 1: worry is they go too far, too fast. So you
Speaker 1: want a more gradual shift towards away from the emergency
Speaker 1: footing and towards a more normal footing from central banks
Speaker 1: around the world. Which raises an interesting question, what do
Speaker 1: you think about what's been going on from a macro
Speaker 1: perspective in China well as well as the rest of
Speaker 1: the non Chinese emerging market world. Well, China is a story.
Speaker 1: We have an emerging dictatorship, we have a model, the
Speaker 1: Malsa tongue model modernized. And we see behaviors in China,
Speaker 1: in the second largest economy in the world, and they
Speaker 1: are alarming. Um where this leads I don't know. My
Speaker 1: hope is that behaviors don't get to war, which I
Speaker 1: don't think anybody wants. It doesn't serve a purpose. But
Speaker 1: the relationship between the United States and China is permanently changed,
Speaker 1: permanently meaning for at least a generation, and it's evolving.
Speaker 1: In the United States, politics drive a hard China line
Speaker 1: both parties. In China, politics drive more isolationism, a different
Speaker 1: internal structure, no dissent permitted, a suppression of whatever forces
Speaker 1: of descent or outspokenness or existing, and the forced initiatives
Speaker 1: of Beijing on a population at one point four billion people.
Speaker 1: And that's underway. So that's what That's the world that
Speaker 1: we live in and are probably going to live in
Speaker 1: for the rest of our lives. And what about doing
Speaker 1: are only you and I are only thirty nine years old,
Speaker 1: like Jack Benny, so we you know we have UM,
Speaker 1: what about the rest of the emerging markets outside of China?
Speaker 1: How do you look at those parts of the world
Speaker 1: when China has become so such an outsized contributor to
Speaker 1: global GDP. What's your perspective there, Well, I think there
Speaker 1: are some places that are are a real interest. So
Speaker 1: I think Vietnam is a frontier market um that has
Speaker 1: entrepreneurial characteristics independent of China. Uh South Korea is an
Speaker 1: example of developed market. There are plenty of places that
Speaker 1: are not China. In Taiwan, of course, emerges as a
Speaker 1: mature market, although it's out geopolitical risk with the China
Speaker 1: so close. But what we see is many places which
Speaker 1: have the ability to modernize, highly productive, contribute to world
Speaker 1: economic activity and do so with with modern skills, and
Speaker 1: they will supplant China. They will go to places for
Speaker 1: capital investment, and China is less and less a safe place.
Speaker 1: I've been to China several times. I wouldn't travel to
Speaker 1: China now, not because of COVID, because I would feel
Speaker 1: at risk being there. Others say the same thing. You
Speaker 1: and I have a lot of colleagues who have business
Speaker 1: relationships and analytical relationships with China, and they are afraid
Speaker 1: they physically wouldn't go now. Oh yeah, we and you
Speaker 1: know we speak to when we're together in Maine. We
Speaker 1: we meet and talk up these things is as you're
Speaker 1: you're an old timer, you're a tenured professor of it.
Speaker 1: I am, I am, but I'm kind of surprised that
Speaker 1: people would you mean, fear physically for their safety as
Speaker 1: an American in China, Yes, I would. I wouldn't go
Speaker 1: from the public or from the government. Well, I would
Speaker 1: be afraid of the government. And I'm not sure how
Speaker 1: welcome I would be now as an American from the public.
Speaker 1: When I was in China, it was a very welcoming experience.
Speaker 1: When I was in China with a group of economists,
Speaker 1: when we traveled around, it was a welcoming experience. Hong
Speaker 1: Kong a welcoming experience. Beijing a welcoming experience today not
Speaker 1: the same. To go there. They describe it and they
Speaker 1: say it's different. You go and and the way you're treated,
Speaker 1: greeted and viewed is different. Things have changed last things
Speaker 1: in China you have changed because the people are afraid
Speaker 1: of their government and understandable reasons. So for me, I think,
Speaker 1: you know, I watch a lot of our colleagues and
Speaker 1: a lot of investment firms, and they're placing money at
Speaker 1: risk in China, and they're developing things in China, and Okay,
Speaker 1: that's their decision. My view is China is a growing
Speaker 1: risk for capital investment, entrepreneurial investment UM and physically dangerous
Speaker 1: for some people. So you're preaching to the choir about
Speaker 1: capital risk. I asked the question a year ago. Is
Speaker 1: China becoming uninvestable when you see what they did to
Speaker 1: Ali Baba and the rest of the tech space, And
Speaker 1: some people try to draw a parallel to what Donald
Speaker 1: Trump did. Trump was mostly noise and tweets about companies.
Speaker 1: This is actually government action in China UM affecting how
Speaker 1: companies operate and behave not just noise but rules. So
Speaker 1: so I understand where you're coming from saying you would
Speaker 1: be reluctant to put capital at risk there. UM. But
Speaker 1: you brought something else up that I'm I'm eager to
Speaker 1: talk about. You mentioned fishing and what we've done in Maine.
Speaker 1: So let's talk a little bit about what's become known
Speaker 1: as Camp COO talk, where you gather four or five
Speaker 1: dozen economists, fund managers, commentators, analysts, etcetera, for what what
Speaker 1: some people have described as a more productive miniature version
Speaker 1: of of Davos tell us a little bit about camp
Speaker 1: Ko talk. Well, it's interesting now you're you've been irregular
Speaker 1: there for a lot of years. So going back to
Speaker 1: I think oh eight was my first year. So you're
Speaker 1: a tenured professor, ampoke. You think about you think about
Speaker 1: the history. We're twenty years since um the towers in
Speaker 1: the attack in New York. And it was the year
Speaker 1: after the World Trade Center event that ratcheted up the
Speaker 1: discussion and the number of people who would say, all right,
Speaker 1: I'll come with you will go out in the woods
Speaker 1: and we'll spend a weekend and I don't care about fishing.
Speaker 1: I remember Harvey Rosenbloom from the Dallas Fed the first
Speaker 1: time he held a fishing rod in his hand, and
Speaker 1: I said, Harvey, you're not supposed to hit the fish
Speaker 1: over the head. You actually have to use a hook
Speaker 1: and line. And Harvey's head was head of research at
Speaker 1: the Dallas Fed. Not an inconsequential economist. Well, he was
Speaker 1: director of research at the Dallas Fed for a long time.
Speaker 1: Said a lot of federal open market committees of the
Speaker 1: Fed and everything else. But he came, and before that
Speaker 1: he never would have never would have come. What me
Speaker 1: go out the main fishing? What are you talking about.
Speaker 1: So it's changed. We've created an environment I think, where
Speaker 1: there are periods of conversation under Chatham House rule where
Speaker 1: people are comfortable and they can speak privately, and they
Speaker 1: can talk about their views of the world, and they
Speaker 1: can exchange views and take a takeaway. Um, those conversations
Speaker 1: are rare anymore, so so let's let's the place that
Speaker 1: we can hold them. So so let's stay with that.
Speaker 1: Because I was discussing Maine with another friend of ours.
Speaker 1: We're gonna be name dropping everywhere. David Noddig, who who
Speaker 1: his takeaway was being outside with people in nature, engaging
Speaker 1: in holistic thinking, being able to have these important, meaningful
Speaker 1: discussions in private, not in the public square. He says,
Speaker 1: that's a completely different experience than than something like Vos
Speaker 1: or anywhere else where everything is televised and it's just
Speaker 1: completely a public spectacle. Was that the intention from the
Speaker 1: beginning or it did? Did it just an evolve into
Speaker 1: this wonderful outdoor experience? Well, evolution I think is the
Speaker 1: right word. You know, Dave told me he's already in
Speaker 1: communication with you to figure out how to ride together
Speaker 1: or something like that. So did that last year? Also? Yeah?
Speaker 1: So I mean we we've we've created something, it's evolved
Speaker 1: over time, we've changed lodges, and we've modified the program.
Speaker 1: Some people say, gee, why do you have thirty minutes
Speaker 1: of a panel before dinner? And why not do it
Speaker 1: in the afternoon. People don't want to do it in
Speaker 1: the afternoon. The fact is, if you do thirty minutes
Speaker 1: before dinner, Barry, you've been a moderator, you've been a seeker,
Speaker 1: a part of those sessions. We talk about a topic
Speaker 1: for thirty minutes in a structured environment. Thirty minutes enough,
Speaker 1: and then the dinner conversation, more sent all kinds of
Speaker 1: things for the next two hours. That's right. And the
Speaker 1: secret is you close the bar during the panel discussion
Speaker 1: so you have everybody's attention, and as soon as it's over,
Speaker 1: the bar reopens and and the conversation really starts. And
Speaker 1: we do it before dinner. Remember, they're hungry, they've been
Speaker 1: out in the woods all day, so you get them wet,
Speaker 1: then you close the bar. Then you keep them hungry
Speaker 1: for thirty minutes and everybody and you as you know
Speaker 1: you were, you were you ran a panel and you
Speaker 1: said and the rules were seven minutes. I remember you
Speaker 1: standing in the front of the dining hall and said
Speaker 1: seven minutes, I'm going to shut you down. Go to
Speaker 1: the next one. You were, that's what you have. People
Speaker 1: through rolls at me. They wanted to keep going. It
Speaker 1: was it's very unruly group to enforce discipline, especially by
Speaker 1: the time you roll around to the second or third
Speaker 1: night and the second or third glass of wine. Uh.
Speaker 1: It's amazing how people you think of as button down,
Speaker 1: stiff economists turned out to be uh, a little more
Speaker 1: free flowing when when the time is right, no question
Speaker 1: for sure. So so I when I think of you,
Speaker 1: when I describe David Ko talk, there's a lot of
Speaker 1: different ways I think of you. But I think the
Speaker 1: legacy of camp Ko Talk has probably had the greatest
Speaker 1: impact on the greatest number of people, even those people
Speaker 1: three and four and five steps removed from the event,
Speaker 1: to the point where where people have asked me, Hey,
Speaker 1: what do I have to do to get on the
Speaker 1: camp COO talk list? And my enter is always, you're
Speaker 1: sucking up to the wrong guy. You gotta go suck
Speaker 1: up to David, not me. It's called camp Ko Talk,
Speaker 1: not camp Rid Halts. He's the guy that's off too. Well,
Speaker 1: thank you very much. There are a lot of folks
Speaker 1: who raise that question. Interesting mix of folks because we
Speaker 1: was trying to mix it up and where you know,
Speaker 1: also involved with the Global Interdependence Center now and that
Speaker 1: helps with what we try to organize and do the
Speaker 1: programming for it. It's interesting if I can just say,
Speaker 1: the name camp cook Talk was not coined by me. Um.
Speaker 1: Steve Leashman was up there and he was interviewing me
Speaker 1: on the deck. I don't know if I can do
Speaker 1: Amazy's gimbals thing here, but whatever. No, absolutely Leastman was
Speaker 1: not only was he there for CNBC UM and CBC
Speaker 1: and Bloomberg have both been up there with cameras, but
Speaker 1: he's a pretty well known dead head and a singer musician,
Speaker 1: and he would bring a guitar and entertain people. Yes,
Speaker 1: and if he comes back this year and I've invited
Speaker 1: him and he can bring it again, I would tell
Speaker 1: you he's also an excellent fly fisherman. We've fish together.
Speaker 1: But when Liceman was interviewing me on the deck and
Speaker 1: they broke to a commercial break, it was Becky Quipp
Speaker 1: who coined the name camp co Talk. That's where the
Speaker 1: name came from. I didn't create the name. When I
Speaker 1: first heard the name, I heard the Shadow Federal Reserve
Speaker 1: Committee was how it initially was approached to me. And
Speaker 1: I had enough people asked me about it that eventually
Speaker 1: I wrote this long, two thousand word missive for Business
Speaker 1: Week about it that I still get emails about. You know,
Speaker 1: it was a couple of years ago. Ready. That name
Speaker 1: came from John Hilton Rath when he was writing a column.
Speaker 1: He was up there and he wrote a column in
Speaker 1: the Journal, and he called it the Shadow Kansas City Fit.
Speaker 1: That's hilarious. Well, I know I only have you for
Speaker 1: a limited amount of time, and I want to get
Speaker 1: to my favorite questions. As much as I would love
Speaker 1: to wax nostalgic about all things camp Cot talk, I
Speaker 1: do have to share one for any story, and I'm
Speaker 1: not going to mention names. But we're playing poker one night,
Speaker 1: me and a buddy who's a hedge fund manager. On
Speaker 1: his right is uh, an equity manager at a you know,
Speaker 1: bold face name brand shop. On on my left is
Speaker 1: a bond manager at also a name face you know,
Speaker 1: a bold faced name brand shop. And they both get
Speaker 1: up to go get more drinks, and they each ask us, Hey,
Speaker 1: would would you like another class? I'm sure I bring
Speaker 1: each of us say yes. And I turned to my
Speaker 1: hedge fund buddy, and I say, I just want to
Speaker 1: point out that my waiter manages a trillion dollars. Your
Speaker 1: waiter only manages five billion dollars. And that's like a
Speaker 1: typical camp co talk type of a story. And and
Speaker 1: I have we all have endless, endless versions of that.
Speaker 1: With that said, let's jump to some of our favorite
Speaker 1: questions we ask all of our guests darting with. Given
Speaker 1: the pandemic and the lockdown, tell us what you're streaming
Speaker 1: these days? What's entertaining you on either Netflix or Amazon Prime. Okay,
Speaker 1: so you gave me warning about the five questions. I
Speaker 1: had time to think about them, and I know we're
Speaker 1: up against the clock with only a few minutes. So
Speaker 1: I thought about that and I said, okay, I'll pick
Speaker 1: one and that Don't Look Up. And I believe the
Speaker 1: Meryl Street movie Don't Look Up, which is a parody
Speaker 1: on the politics of the country in so many ways,
Speaker 1: is a wonderful, wonderful modern parody. I enjoyed it, thought
Speaker 1: about it. I particularly liked some of the characters who
Speaker 1: depicted those which we're part of our political scene. So
Speaker 1: I would say, don't look up makes the movie lift. Huh,
Speaker 1: really really good. Let's talk about mentors. What who were
Speaker 1: some of your mentors who helped to shape your career? Well?
Speaker 1: I thought about two an economist, probably not widely known,
Speaker 1: Hungarian economist, Gabriel Carrakesh, that many many years ago, and
Speaker 1: he was a mentor for me in many ways, and
Speaker 1: with him I actually joined in publishing the first editorial
Speaker 1: piece in a publication that was nineteen seven three, maybe
Speaker 1: something like that. Gabriel Rakish and I had a great
Speaker 1: political mentorship from Governor Tom Kane. I was able to
Speaker 1: be part of his administration and work with him and
Speaker 1: get to know them, and he affirms for me to
Speaker 1: this day. I spoke with them just a few weeks ago,
Speaker 1: um that there is a hope for this great experiment
Speaker 1: called democracy in the United States. It's a glass half full.
Speaker 1: It's under a lot of stress these days. But Caine
Speaker 1: is a person who doesn't give up, and and he
Speaker 1: he was able to teach me something. He said, when
Speaker 1: people get the right information these days, that's a tough one,
Speaker 1: and they get the facts presented so they're clear the
Speaker 1: electorate makes valid decisions. Sometimes it's tough to get to him,
Speaker 1: but he has confidence in the American system. That's something
Speaker 1: that has stayed with me. Tom Kane was a great mentor.
Speaker 1: Is was it really interesting? He's x and he's still going.
Speaker 1: So let's talk books. You mentioned you're surrounded by books.
Speaker 1: I'm gonna ask you this in two parts. What are
Speaker 1: some of your all time favorite books and what are
Speaker 1: you reading currently? Well, I read The Peloponnesian War again
Speaker 1: with slucidity, so I had to dig into that all
Speaker 1: time favorite books. I've got a lot, but reading now
Speaker 1: two books. One you know the author written on Water.
Speaker 1: It's his third book, Randy Spencer, and he's a fishing
Speaker 1: guide up in Grand Lake Street, Maine. He's written several
Speaker 1: books and he's got one it's got a bunch of
Speaker 1: stories about the region. And the other book I'm reading
Speaker 1: now and I think you would know the author is
Speaker 1: Vito Racanelli. Sure it was at Barns for two decades.
Speaker 1: First novel. It's a murder mystery, the Man in Milan.
Speaker 1: So good for Vito. He's ventured away from financial writing.
Speaker 1: And Randy has a good third book, which is what's
Speaker 1: name of the third one? Written on water? Written on water?
Speaker 1: That that makes a lot of sense. Uh. What sort
Speaker 1: of advice would you give to a recent college graduate
Speaker 1: who was interested in a career in either investment management
Speaker 1: or finance? Um one that Winston Churchill gave two students
Speaker 1: when asked about this similar question, and he said, study history,
Speaker 1: study history, study history, and when you're done, study more history.
Speaker 1: And I think that sound advice. It's a guide we
Speaker 1: learned from history. I'm saddened that the fact that our
Speaker 1: our education system doesn't teach enough history. Huh. And our
Speaker 1: final question that we ask all of our guests, tell
Speaker 1: us what you know about the world of investing today
Speaker 1: you wish you knew fifty years or so ago when
Speaker 1: you were first starting out. Well, there there's a statistical
Speaker 1: basis Bayesian theory. And Bayesian theory was something we were
Speaker 1: taught in abstract. It's applicable. We use it in our
Speaker 1: conotative work in our shop. We use it a lot. Uh.
Speaker 1: I didn't give it in the earlier times the respect
Speaker 1: that Tom Bays deserves. And I think if there's one
Speaker 1: single thing two articulate in a mathematical sense, that requires
Speaker 1: you to be adaptive. It's Bayesian theory applied in finance
Speaker 1: and economics and probably a whole bunch of other things too.
Speaker 1: So let me let me drill down into this a
Speaker 1: little bit, because when I think of Bay's theorem, I
Speaker 1: I we typically think of the traditional Bell curve. Are
Speaker 1: you focusing more on that right tail and black swan
Speaker 1: events or are you focusing more on the traditional fat
Speaker 1: part of of the most likely outcomes? Well, I would
Speaker 1: start with the Bell curve, which was a Gaussian depiction
Speaker 1: data points name for Gus who created it, And the
Speaker 1: notion we have is the shape of that curve and tails.
Speaker 1: But as a practical matter, no curve looks like a bill.
Speaker 1: It's scattered plot. And so what I think base suggests
Speaker 1: in modern times is the data points in those scatter
Speaker 1: plots are moving, and you have to examine those shifts
Speaker 1: and the rates of change in them. So whether it's
Speaker 1: right tailor left hail, or how flat the curve is,
Speaker 1: if you try to depict it, the fact is it's
Speaker 1: not constant. It's vibrating. If you will, it has it
Speaker 1: has features which are adjusting constantly to new metrics and
Speaker 1: new events. So it's a living thing, not a static thing.
Speaker 1: And what base math does and when you incorporated in
Speaker 1: the math is attempt to measure or estimate the rates
Speaker 1: of those changes. Huh. Quite fascinating, David, Thank you so
Speaker 1: much for being so generous with your time. We have
Speaker 1: been speaking with David Kotak, chairman and chief investment officer
Speaker 1: at Cumberland Investors. If you enjoy this conversation, well, be
Speaker 1: sure and check out any of the previous four hundred
Speaker 1: or so such interviews we've done over the past eight years.
Speaker 1: You can find that at Spotify, iTunes, Bloomberg dot com,
Speaker 1: wherever you get your favorite podcasts. We love your comments,
Speaker 1: feedback and suggestions right to us at m IB podcast
Speaker 1: at Bloomberg dot net. You can sign up for my
Speaker 1: daily reading list each morning at Dhalts dot com. Follow
Speaker 1: me on Twitter at rid Halts. I would be remiss
Speaker 1: if I did not thank the correct team that helps
Speaker 1: put these conversations together each week. Mohammed Ramaui is my
Speaker 1: audio engineer. Paris Wold is my producer. Michael Batnick is
Speaker 1: my head of research. Attica val Broun is our project manager.
Speaker 1: I'm Barry Hults. You've been listening to Master's business on
Speaker 1: Bloomberg Radio