Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
Speaker 1: This week on the podcast what Can I Say? Funny story.
Speaker 1: Jeffrey Sherman, He's been on the podcast before. I've had
Speaker 1: been on his podcast, The Sherman Show before. The very
Speaker 1: first Masters in Business broadcast was just about a decade.
Speaker 2: Ago, and that was his boss.
Speaker 1: Jeffrey Gunlock, founder of Double Line Capital, back in July
Speaker 1: twenty fourteen. So he just flew in late yesterday. The
Speaker 1: calendar was a little tight. They got here a little late.
Speaker 1: They had to leave a little early. I apologize in
Speaker 1: advance if it sounds like I'm jumping in trying to
Speaker 1: get to the next question. I have pages and pages
Speaker 1: of topics to talk to him about. I had a
Speaker 1: very limited amount of time to get to it. So
Speaker 1: if it sounds like I am leaping into push him forwards,
Speaker 1: I am. He was super generous with his time. He
Speaker 1: was supposed to leave about twenty five minutes to go
Speaker 1: to his next appointment, but we just kept going. There
Speaker 1: are few people who understand both fixed income and equity
Speaker 1: investment and quantitative strategies to each better. Than Jeffrey Sherman.
Speaker 1: He really is one of the most knowledgeable people in
Speaker 1: this space, and not just knowledgeable in the abstract, but
Speaker 1: helping to oversee just about one hundred billion dollars in
Speaker 1: client assets. Really just a tour to forced discussion. I
Speaker 1: find his take very insightful, very refreshing. I love the
Speaker 1: approach of just throwing everything out the window and going
Speaker 1: back to first principles on occasion.
Speaker 2: Double Line is known for that.
Speaker 1: Just a delightful conversation, so informative, with no further ado.
Speaker 1: My discussion with Jeffrey Sherman, Double Lines Deputy Chief Investment Officer.
Speaker 2: Thanks, Barry, it's good to be back. It's good to
Speaker 2: have you.
Speaker 1: So, you know, the last time we spoke, we were
Speaker 1: really talking about funds and bonds and really got into
Speaker 1: the minutia. But I want to roll back a little
Speaker 1: bit and talk about your background, which is really kind
Speaker 1: of interesting. Undergraduate applied mathematics, master's degree in financial engineering,
Speaker 1: a little bit of teaching. What was the original career plan?
Speaker 2: What were you thinking so prior to going to graduate school,
Speaker 2: I was looking at becoming a teacher. Everybody told me
Speaker 2: that if you get a degree in mathematics the world's
Speaker 2: your oyster. And I didn't really see it, to be honest,
Speaker 2: originally really because I started off in what was the
Speaker 2: discipline of pure mathematics. So pure mathematics for the uninitiated,
Speaker 2: is essentially proving everything you've already learned, and so you
Speaker 2: go back and you have to go back to the
Speaker 2: basics and the principles, and it's just a lot of
Speaker 2: logic at the end of the day, and trying to
Speaker 2: make that connection to how to be employed very difficult
Speaker 2: for especially for like a nineteen twenty year old who
Speaker 2: has no clue what's out there in the world.
Speaker 1: And it's like studying philosophy. You could be philosophy professor,
Speaker 1: but that's pretty much it.
Speaker 2: Right, But also like there's a lot of overlap between
Speaker 2: philosophy and a pure mathematician as well. And again it
Speaker 2: comes down to logic and you know, the deduction of arguments.
Speaker 2: But you moved to applied mathematics, I did, and I
Speaker 2: did looking for something different, and I just didn't see
Speaker 2: much there. And further to that, I was on the
Speaker 2: track to become a teacher, so I was I thought,
Speaker 2: you know, hey, I'll be a high school baseball coach,
Speaker 2: high school teacher seems interesting, and I have to thank
Speaker 2: the university for forcing us to go actually sit in classrooms.
Speaker 2: And so I don't mean attending class for your own education,
Speaker 2: but I meant if you want to teach, you have
Speaker 2: to go to the local.
Speaker 1: School or did a course, watch a teacher do what
Speaker 1: you're studying to do, and say, hey, is this for me? Yeah?
Speaker 2: And I realized the repetition, the redundancy, also the lunacy
Speaker 2: of trying to babysit teenagers, and so I was very
Speaker 2: turned off by it. And so that was actually the
Speaker 2: transition to to applied mathematics to try to find a
Speaker 2: different career. And what they don't tell you about applied
Speaker 2: mathematics is you can apply it to things, but it's
Speaker 2: not blatantly obvious what said application is. And so effectively,
Speaker 2: by the time I became a senior, I didn't really
Speaker 2: know what I wanted to do, and time was rolling
Speaker 2: around and I really hadn't applied for a job. So
Speaker 2: the natural thing was, well, let's just stay in academia,
Speaker 2: and so that's what I did. I actually started off
Speaker 2: into PhD and applied mathematics, and I like to say,
Speaker 2: I'm a dropout. I didn't really see the path of
Speaker 2: becoming a professor at the kind of the university level,
Speaker 2: because again, I still felt there was that redundancy and
Speaker 2: it just didn't it didn't seem to, you know, elicit
Speaker 2: some spark inside of me.
Speaker 1: So, how do you go from a PhD program to
Speaker 1: financial engineering?
Speaker 2: Gusty, Well, what it was was, so, as I said,
Speaker 2: with applications, there's many applications of math, and the usually
Speaker 2: obvious one is physics. And I really hated physics. I
Speaker 2: never really liked physics, and it was just something that
Speaker 2: didn't intrigue me. So I spent a lot of time
Speaker 2: in probability and statistics, which probability is very wonky statistic
Speaker 2: people think they're the same, they're not really completely different,
Speaker 2: absolutely different fields. But I'd done a lot of econometrics
Speaker 2: and things like that, and so from the standpoint of statistics,
Speaker 2: that was one of my specialties, in addition to calculus,
Speaker 2: and so really I was focused on applied during the
Speaker 2: run of differential equations and calculus based stuff. And at
Speaker 2: the time, this was the late nineties, obviously quants were
Speaker 2: becoming bigger and bigger. Part of the financial industry, and
Speaker 2: so there was starting to become these programs on like
Speaker 2: financial math more applied. Usually it's like a you know,
Speaker 2: a University of Chicago, which again I didn't have a
Speaker 2: lot of exposure to these, you know, prestigious universities and
Speaker 2: didn't know about a lot of this, and so I
Speaker 2: was looking like a Carnegie mellon the likes. They ended
Speaker 2: up going back to a school in la called Clermont
Speaker 2: and they had a financial engineering program there, and so
Speaker 2: I was always concerned, well, I haven't studied accounting finance
Speaker 2: over the time, and the advisor there gave me some
Speaker 2: great advice, and we can teach mathematicians finance, we can't
Speaker 2: always teach finance majors math. And so it's so true.
Speaker 2: There is something about it. It's an easier transition. I
Speaker 2: won't say you can't teach them, it's just the finance
Speaker 2: was a lot easier when you've studied a lot of
Speaker 2: math for a long time and the applications were absolutely
Speaker 2: directly applicable.
Speaker 1: It seems that some people are math people and some
Speaker 1: people are not. And you know, if it comes to
Speaker 1: you naturally, you don't understand why other people don't get
Speaker 1: the fundamental like it. There's an internal logic that makes
Speaker 1: so much sense if you're one of those people, and
Speaker 1: if you're not, you know, it's Greek too.
Speaker 2: And also it was something that I was always kind
Speaker 2: of gifted with. Right, the math came easier. The reason
Speaker 2: I became a math major berry is that I actually
Speaker 2: disliked reading by the time I got to college. And
Speaker 2: it was really and obviously, think about it, finance never
Speaker 2: have to read, right, we don't have to read anything
Speaker 2: in there. But I was actually floored by when I
Speaker 2: got my first job as an intern and the amount
Speaker 2: of reading that I had to do in a given day.
Speaker 2: And I was like, wow, you know, I chose math
Speaker 2: because it was very simple. It came natural. It was like,
Speaker 2: you know, you read a couple of pages, you do
Speaker 2: some problems, it's over. I don't have to read, you know,
Speaker 2: hundreds of pages of a novel. But very quickly I
Speaker 2: learned that you definitely have to read day and day out.
Speaker 1: And a poorly written novel with a terrible narrative, plot structure,
Speaker 1: and awful characters.
Speaker 2: Right, that's finance in a nutshell, right, So so definitely,
Speaker 2: you know, again that's just being young and naive as well,
Speaker 2: But you know, you should always gravitate to some of
Speaker 2: your internal skill set, and that's what I did. But
Speaker 2: I think the people who told me that you can
Speaker 2: always do stuff with the math degree, but I also
Speaker 2: really cursed them for a while not tell me what
Speaker 2: that exactly was. And by the way, when I heard
Speaker 2: you can become an engineer, I never wanted to drive
Speaker 2: a train, right, and so no one ever told me
Speaker 2: what an engineer was actually doing. Is that the definition
Speaker 2: engineer is using math to solve problems exactly right, real
Speaker 2: world problems. And so I don't know if financial engineering
Speaker 2: holds up as well, because I don't know if there
Speaker 2: are the real world problems, but I definitely know there
Speaker 2: are problems there and there are things we can help
Speaker 2: in the world by doingthing.
Speaker 1: You mentioned you were an intern. Where did you start
Speaker 1: your internship? And wasn't in the World Definance?
Speaker 2: It was? It was so when I was in the
Speaker 2: master's program require an internship as part of it, and
Speaker 2: I got it. Trust come to the West, so tcw oh,
Speaker 2: and so that was your first job. My first job
Speaker 2: was there, and I've worked with the same crew effectively
Speaker 2: ever since. So that was in. That was in two
Speaker 2: thousand and one, early then, and then ultimately you know,
Speaker 2: I've been working with the same team around me for
Speaker 2: about twenty five years. Now.
Speaker 1: That's amazing. How did you bump into some kid named
Speaker 1: Jeff Gunlock though.
Speaker 2: Well he was he was a lot older than me,
Speaker 2: you know, he was not a kid at the time too,
Speaker 2: but he definitely had GRAVI toss around the firm. And
Speaker 2: I think there's something about finance too that you get
Speaker 2: defined into your roles as a function of essentially your
Speaker 2: entry point in the industry. And so I've noticed that
Speaker 2: me coming in two thousand and one, think about it
Speaker 2: not really a great equity market.
Speaker 1: Dot com implosion, right, I mean in.
Speaker 2: The middle of it, obviously we had nine to eleven.
Speaker 2: You had all kinds of crazy stuff that happened in
Speaker 2: the world. And so I've noticed that the people that
Speaker 2: came a few years after me tend to be more
Speaker 2: risk takers right where we were a little bit more
Speaker 2: risk verse. I think there's this anchoring of when you
Speaker 2: start one's career sometimes of how you get into a
Speaker 2: side of the business. Now, obviously we can read a
Speaker 2: fi in ourselves, right, but I do think that there
Speaker 2: is something to be said about that. So again, this
Speaker 2: is a world where interest rates. You know, you got
Speaker 2: paid unlike the last time we were here talking right
Speaker 2: when we had that financial true financial repression for like
Speaker 2: twelve years, and so there was something that was interesting
Speaker 2: about it. And inherently it's more mathematical nature. And so
Speaker 2: as I was doing like risk analytics and working to
Speaker 2: help support some of the marketing staff and do that,
Speaker 2: you know, I gravitated to that side of the business
Speaker 2: a little bit. So my goal was to work for
Speaker 2: mister Gunlog. I did not on day one, but I
Speaker 2: always felt that like there was something in there, just
Speaker 2: analyzing returns, looking at the history, looking at the team,
Speaker 2: and my goal was to try to get on that team,
Speaker 2: and effectively I did so.
Speaker 1: Just a little bit of a trivia footnote the very
Speaker 1: first Masters in Business that was broadcast just about ten
Speaker 1: years ago, July twenty fourteen, episode number one. Jeffrey Gunlock,
Speaker 1: double long capital. That's right, So you really really I
Speaker 1: owe him a special debt of gratitude.
Speaker 2: So so I do too, very yeah. So he still
Speaker 2: writes my paychecks today, signs that right, Yeah. Yeah.
Speaker 1: At TCW, you're at the Trust Company of the West.
Speaker 1: You're senior vice president, You're a portfolio manager, you're a
Speaker 1: quantitative analyst. It sounds like you're wearing a lot of
Speaker 1: different hats. Are these sequential positions or were these all
Speaker 1: at once?
Speaker 2: Yeah, No, it's sequential. You know, I started as a
Speaker 2: quant and then you know, you get these corporate titles
Speaker 2: as things go along. But ultimately, you know, I liked
Speaker 2: being on the fortflow management side and so devising strategies,
Speaker 2: coming up with ideas and trying to figure out different
Speaker 2: ways to execute them. That was always of interest, and
Speaker 2: so I worked a lot on the asslecation side. And
Speaker 2: so I've had a lot of roles throughout my career,
Speaker 2: even though it's it's very narrow team right Instead, I've
Speaker 2: worked at the same folks forever. You know, I've trafficked
Speaker 2: in a lot of markets. I mean, at one point
Speaker 2: I worked for a guy that wrote a very similar
Speaker 2: piece on commodities, and so we created commodity products. We
Speaker 2: ran those for a few years. Again, as I said,
Speaker 2: we've worked in at allocation. I've helped build a lot
Speaker 2: of our quantitative strategies. We run at double line as well,
Speaker 2: and so it's not just me. I have a good
Speaker 2: team around me too, and so I've always been able
Speaker 2: to surround myself with people who can think about these
Speaker 2: ideas and I are really kind of big picture folks,
Speaker 2: but it can also get into the minutia. And so
Speaker 2: not shockingly, I like quants, right, I feel like we vibe,
Speaker 2: you know, we can we can get together. But I
Speaker 2: like the way that the quants think, you know. And
Speaker 2: so I've never I struggled when I took the CFA exam,
Speaker 2: not not with the whole curriculum, but obviously the accounting.
Speaker 2: I mean, I have a degree in financial engineering and
Speaker 2: I took one accounting course, right, and so the statement
Speaker 2: analysis never made sense to me. It still doesn't, you know.
Speaker 1: Well, it doesn't have the same internal logic, the same
Speaker 1: You can't arrive mathematical rationality where you just have to
Speaker 1: start with a basic premise and so much things can
Speaker 1: be derived logically from that starting point. This is just rules,
Speaker 1: and it's just especially if you're a left brain person,
Speaker 1: the right brain stuff and vice versa. So you mentioned
Speaker 1: financial repression, You and the rest of the qants in
Speaker 1: your core group, including Gunlock, decide to stand up your
Speaker 1: own firm in two thousand and nine. It's pretty much
Speaker 1: in the midst of people. The worst of the market
Speaker 1: I think was somewhat behind us, but still people were
Speaker 1: shell shocked. What was it like standing up a new
Speaker 1: firm right in the financial crisis, right in the midst
Speaker 1: of nine with the Fed every week it seemed like
Speaker 1: there was a different new credit line, a different new
Speaker 1: way to unfreeze. What was going on in the credit markets?
Speaker 1: Tell us about that period.
Speaker 2: Yeah, well, actually the bulk of that period transpired at TCW,
Speaker 2: so the eight sure, but even in nine, even though
Speaker 2: nine there was there was still this was kind of
Speaker 2: the bounce back. As we all know. The lows were
Speaker 2: in March of nine. But what you found was that
Speaker 2: in we left in December of nine. At that point
Speaker 2: things were starting to have more clarity. Now massive uncertainty
Speaker 2: in the world, and there's the old adage that investors
Speaker 2: fight the last war. They're still fighting the last one
Speaker 2: right every time, right, And so trying to show people
Speaker 2: this idea that you know, investing in these mortgages that
Speaker 2: did go down fifty or sixty percent, that there was
Speaker 2: significant upside in this and really limited downside, and so
Speaker 2: there was something special about that time as well, where
Speaker 2: the opportunity set was extremely obvious. But it's never obvious.
Speaker 2: Right at the time, it wasn't obvious. We thought it
Speaker 2: was obvious. Looking back with hindsight, it was the best
Speaker 2: time to make money and fixation.
Speaker 1: Can I tell you something about obvious so we full disclosure.
Speaker 1: We used to own the way back in nine, ten, eleven, twelve,
Speaker 1: the Double Line mortgage backed portfolio, and it was obvious
Speaker 1: that hey, you're buying these deeply distressed mortgages with an
Speaker 1: implicit federal guarantee. How are you not gonna outperform plain
Speaker 1: vanilla mortgages and that product for I want to say,
Speaker 1: like the next seven eight years until you just couldn't
Speaker 1: buy any more mortgage. They just weren't available.
Speaker 2: They weren't They weren't available at those prices anymore. Anyone
Speaker 2: says when you buy them at par it's a lot
Speaker 2: different than buying them it's fifty, right, But.
Speaker 1: That that fund just destroyed old commerce for years and
Speaker 1: years and years. Am I overstating that? No?
Speaker 2: I mean, look, anybody who was in the space did similar,
Speaker 2: right as long as you.
Speaker 1: Had any guys were very aggressive, very early, and I
Speaker 1: want to say seventy five eighty five percent of the
Speaker 1: portfolio at least in the beginning was mortgage back.
Speaker 2: So no, it was almost one hundred how real at
Speaker 2: the time, very early on, because it was blatantly obvious
Speaker 2: that you had two sides of the markets. You had
Speaker 2: the government guaranteed side, which gave you interest rate risk,
Speaker 2: and you had this stuff that was so bombed out
Speaker 2: it had zero exposure to interest rate exposure. It was
Speaker 2: all about the credit. And as we said, you know,
Speaker 2: investors fighting the last war were saying, well, they went
Speaker 2: down to fifty, they must be going to twenty five, right,
Speaker 2: So where you just say, hey, I'm buying you know,
Speaker 2: wells Fargo's shelf paper with six coupons. Now, if you
Speaker 2: buy an asset with a six cupon at fifty cents
Speaker 2: on the dollar, and let's just think you think you're
Speaker 2: getting par back, that thing has an IRR like close
Speaker 2: to thirty, right, And that math probably doesn't jump out
Speaker 2: to a lot of people, but just think of current yield.
Speaker 2: It's got six you divided by fifty, that's a twelve
Speaker 2: current yield. That's the cash flow. Now you have to
Speaker 2: assume some losses and what we were doing was just running
Speaker 2: these bonds to like draconian scenarios where the world's ending
Speaker 2: if how these bonds are still profit and they don't
Speaker 2: break But they don't they don't, they don't lose money,
Speaker 2: especially at fifty cents on dollars. But the biggest challenge
Speaker 2: Barier that a lot of it investors had would say, well,
Speaker 2: you're buying this but and we tell them, look, we
Speaker 2: think we're going to get seventy five cents on the
Speaker 2: dollar back, Well, why the hell would you buy this bond?
Speaker 2: It doesn't Yeah, But but people don't think that way.
Speaker 2: They're like, but you're not going to get par back.
Speaker 2: And by the way, if you don't get par back,
Speaker 2: these bonds go deeper default in a range agency model.
Speaker 2: But who cares. But see, but that's not the mentality
Speaker 2: of it.
Speaker 1: And that was an unconstrained fund, right. It wasn't like
Speaker 1: we have to buy conforming fanning in front.
Speaker 2: It's like it was. It was all written in their perspectives.
Speaker 2: And by the way, the nice thing about starting a
Speaker 2: new firm is you can write perspectives the way you want.
Speaker 1: No legacy paper, no god, but you.
Speaker 2: Don't have to do it. You don't need a proxy
Speaker 2: for it. You say, this is how we want to
Speaker 2: run the portfolios. And so it was a great time.
Speaker 2: I would I advise people, you know, five years ago
Speaker 2: or six years ago to set up a bond shop. No,
Speaker 2: but at the time it was it was just everything
Speaker 2: was kind of in our favor. And the thing I
Speaker 2: remember is that the day we launched that total return
Speaker 2: fund at double on, it was actually April sixth of
Speaker 2: of twenty ten. The flash crash.
Speaker 1: Right around the flash it was a little bit.
Speaker 2: Prior to that, but why, yeah, that was later on. Yeah,
Speaker 2: I don't know exactly the day, but it was definitely later.
Speaker 2: But why I remember that is I used to tell
Speaker 2: people that was the last time we saw four percent tenure.
Speaker 2: That day that we launched that fun it was a
Speaker 2: four percent tenure and it took us until twenty twenty
Speaker 2: two to get back to that.
Speaker 1: Like, hey, what's it doesn't twice between friends?
Speaker 2: It's so funny.
Speaker 1: You specifically said what a great time it was in
Speaker 1: nine to launch a firm, to launch a fun I
Speaker 1: have a vivid recollection of walking into my training room
Speaker 1: in eight oh nine and just channeling DeValve from Apocalypse Now.
Speaker 2: Remember that, Charlie, don't surf the thing.
Speaker 1: At one point, he turns to Martin Sheen says, you know, son,
Speaker 1: someday this war is going to end with this bittersweet
Speaker 1: wistfulness like this is the time. You have to just
Speaker 1: recognize it. And I always thought it was much more
Speaker 1: applicable to markets than to war, because hey, when it's
Speaker 1: just a hell out there and there's blood on in
Speaker 1: the streets, that's when the greatest opportunities come.
Speaker 2: It really is. And unfortunately war never ends, as we know, right,
Speaker 2: we continue to see that left and right. But definitely
Speaker 2: markets are cyclical in nature. And you know, it's the
Speaker 2: same thing when valuation gets out of control too. It
Speaker 2: will come home to roost at some point. But doesn't
Speaker 2: mean the valuation can't get worse, right, it can't go higher.
Speaker 2: And so what you have to you have to realize
Speaker 2: is that you've got to stick to principles, you've got
Speaker 2: to think through things, and you know, regimes change, but
Speaker 2: they don't change that much, right, And so what I
Speaker 2: think in that is that if once you start hearing
Speaker 2: this time is different, this is the new era. Typically
Speaker 2: those things are the signs of excess in the market.
Speaker 2: And look, I think that we've been through one of
Speaker 2: those recently as well. I think we've had some accesses
Speaker 2: out there.
Speaker 1: On the fixed income shid or on the equ on
Speaker 1: both both.
Speaker 2: And so, look, corporate spreads are tight today, valuations are tight.
Speaker 2: They're tight for a reason. But it doesn't you know, Look,
Speaker 2: corporate bonds being a little bit over value doesn't mean
Speaker 2: they're going to crash, doesn't mean you're going to lose
Speaker 2: half your money. But the problem is in some equity
Speaker 2: markets you can have that experience right now. Granted, bonds
Speaker 2: had a significant draw down as we all saw in
Speaker 2: twenty two, but from the standpoint of thinking about valuation,
Speaker 2: you know, credit spreads are not really reflecting much of
Speaker 2: a default premium today, and I think that's reflective of
Speaker 2: the economy. I think that's reflective of kind of where
Speaker 2: we are. But also I think that's backward looking, not
Speaker 2: forward looking, right, And so from that standpoint, do I
Speaker 2: get excited about you know, when the oas on corporate
Speaker 2: bonds is like, you know, inside of ninety bases points
Speaker 2: not really high yield got inside of three hundred, you know,
Speaker 2: a couple of weeks ago. That's not exciting and what
Speaker 2: I hear from a lot of people is when I'll
Speaker 2: hear it from the credit team significantly at the firm
Speaker 2: yield buyer, there's a yield buyer, there's a yield buyer,
Speaker 2: and there's a threshold of yields. All they care about
Speaker 2: is yield. Well, if you only care about yield, just
Speaker 2: go buy treasuries. They have yield. Right, you have to
Speaker 2: get compensated for each risk. So when I say to
Speaker 2: the excess in valuation, some of it does apply to
Speaker 2: the corporate market, because look, the economy has been very strong, right.
Speaker 2: I mean last year was the recession. It was a
Speaker 2: massive recession. Member everybody forecasts it, and of course when
Speaker 2: everybody does it, it doesn't happen.
Speaker 1: Hey, it's in the price already. I used to hear
Speaker 1: that early in my career, early in the price, and
Speaker 1: it used to be so frustrating. And when that light
Speaker 1: goes on, it's like, hey, if everybody is discounting a recession,
Speaker 1: then the market's figured it out a little time.
Speaker 2: I also also think what happened is that you know,
Speaker 2: a lot of us are trained, especially from an economic background,
Speaker 2: to look at in financial markets, to look over year
Speaker 2: over year, data, and the year over year data was
Speaker 2: flashing very negative. And what a lot of us miss
Speaker 2: and I'll take some blame for this too, a lot
Speaker 2: of us missed it was that it was the amount
Speaker 2: of excesses that came into the system during the pandemic
Speaker 2: that haven't worked through. And the one I heard so
Speaker 2: much was excess savings. And I hated the phrase. The
Speaker 2: FED used it, and it was like, here's the savings rate,
Speaker 2: but we pumped all this money in, so thus there's
Speaker 2: this excess savings amount that's out there. And I always
Speaker 2: tell anybody, Barry, if you know anyone with excess savings,
Speaker 2: I can help them. We can take the excess off
Speaker 2: your hand. You can put it in bank some return. No,
Speaker 2: you can just put it in the bank of sureman.
Speaker 2: Because to me, it's not an excess. All my savings
Speaker 2: I need, right, It's what I'm going at. There is
Speaker 2: no excess savings in the world. And so from my standpoint,
Speaker 2: that's what I would say. So call me if you
Speaker 2: have excess savings, forget the investment. I'll just take it
Speaker 2: off your hands. It'll help all of us out.
Speaker 1: You sound like what I say every time someone tells
Speaker 1: me the dollar is being destroyed. Well, send me your
Speaker 1: worthless just dollars for proper disposal. I'll take care of those.
Speaker 2: Don't worry. I'll tell you what.
Speaker 1: You take care of the excess savings. I'll take care
Speaker 1: of the worthless dollars. We'll make sure no one has
Speaker 1: any crust.
Speaker 2: And we're just helping the world out here.
Speaker 1: Right.
Speaker 2: But but so that phrase I hated, but there is
Speaker 2: a there's kind of a corollary to it, and it's
Speaker 2: something that really I think is impactful, and it's still
Speaker 2: in the market today. And this was the amount of
Speaker 2: monetary growth. And this is what we call M two
Speaker 2: inside of in the wonky economics world. And this M
Speaker 2: two growth at one point, with all the you know,
Speaker 2: six to seven trillion dollars of money printed to all
Speaker 2: these support programs, led to an increase of the monetary
Speaker 2: base of twenty eight percent year over here. Two eight.
Speaker 2: I mean that's a promost a third increase increase in
Speaker 2: the amount of money out there, Okay, And so you
Speaker 2: can say that it was free money. You could say
Speaker 2: we gave free money to people, we gave it to corporations,
Speaker 2: we printed it. It existed. The fad bought some of
Speaker 2: it through you know.
Speaker 1: Now, and this is on top of you I'm not
Speaker 1: a big fan of the phrase financial repression, but to
Speaker 1: be fair, this is following about ten fifteen years of
Speaker 1: pretty aggressive monetary policy, including you know printer goes Burr
Speaker 1: was the meme. This isn't just an isolation. This follows
Speaker 1: a solid decade. Is that a fair number of expansion
Speaker 1: of the monetary base?
Speaker 2: It is, and it's these you know, what was it
Speaker 2: Friedman that said there's nothing more permanent than a temporary
Speaker 2: government program, right, And that's that's absolutely true. But when
Speaker 2: I think about it, what you was starting to see
Speaker 2: is the year over year numbers. We were starting to
Speaker 2: see the M two fall precipitously, and it was getting
Speaker 2: to a point where, you know, outsider war we are
Speaker 2: going into like these you know, coming off of these
Speaker 2: war page you've never really seen the monetary based shrink.
Speaker 2: We saw it shrink in late twenty two.
Speaker 1: To say, if that's what is the fallible recession forecast?
Speaker 1: You haven't even brought up the inverted yield coll hold on, but.
Speaker 2: Hold on, I'm not even done with this Berry. This
Speaker 2: is because I think this is way more important than
Speaker 2: the old curve.
Speaker 1: Oh really, I have.
Speaker 2: I have some ideas on the old curve too that
Speaker 2: we'll get to. But where I'm going with this monetary
Speaker 2: growth is that what you actually need to do is
Speaker 2: look at the two year number change, or look at
Speaker 2: the three year number change. What you need to do
Speaker 2: is look at the trend line over the last seven
Speaker 2: or eight years, not just ye over year. And what
Speaker 2: you would see if you did that trend line and
Speaker 2: I put it on a webcast recently, the gap is
Speaker 2: still so massively to the upside of how much we
Speaker 2: created relative to this trend. And you can talk, you
Speaker 2: can do it over many, many years and you get
Speaker 2: the same result. And so what that means is that
Speaker 2: there truly is liquidity in the market. We created these
Speaker 2: dollars and put them out there. And also I think
Speaker 2: you put together the consumer and what's happened there is
Speaker 2: that behavioral patterns have changed.
Speaker 1: So before we were talking about the expansion of the
Speaker 1: monetary base, I have to ask you, and we'll talk
Speaker 1: about the inverted yould government. But given the fall off
Speaker 1: in the monetary base you mentioned, how do you contextualize
Speaker 1: that against just we went I don't know fifteen years
Speaker 1: with kind of dominimus fiscal stimulus. Monetary was shouldering all
Speaker 1: of the burden. Come Come the Pandemic Cares Act one
Speaker 1: under a former president Trump, two trillion dollars biggest fiscal
Speaker 1: stimulus literally is a percentage of GDP about ten percent
Speaker 1: since World War Two. KARS Act two, eight hundred billion
Speaker 1: under Trump, Cares Act three, almost a trillion and a
Speaker 1: half under Biden.
Speaker 2: And then you have the.
Speaker 1: Infrastructure Bill, the Inflation Reduction Bill, the Semiconductor Bill, the.
Speaker 2: Packed VA Bill.
Speaker 1: These are giant ten year fiscal stimulus is the regime
Speaker 1: change from monetary policy to fiscal policy. Impacting equities more,
Speaker 1: is it impacting bonds more? Or is just it's a
Speaker 1: new day and you have to start over.
Speaker 2: Well, I think what you see here is we realize
Speaker 2: that the fiscal stimulus drives the consumer at the end
Speaker 2: of the day, and dumping money into the system has
Speaker 2: really really changed that dynamic where molnetary policy. You know,
Speaker 2: if you go back to Bernanky when they rolled out
Speaker 2: the QE, he always talked about the wealth effect. He's
Speaker 2: really telling you trickle down economics, right that if people
Speaker 2: feel wealthier, they're willing to spend money.
Speaker 1: By the way, the way the FED describes the wealth effects,
Speaker 1: do you buy that it always smells funny to me?
Speaker 2: No, I think it's I think it's stupid, like I
Speaker 2: think trickle down economics is stupid. Right, it's a theory,
Speaker 2: but in the real world it just do. That's what
Speaker 2: rich people say because they own assets, right, and they're like,
Speaker 2: if I own more money, you know, like you know, Barry,
Speaker 2: I'm going to probably give you some Barry, I haven't
Speaker 2: given you any more money as I made more money.
Speaker 2: But in theory, I'm going to do so right, cut
Speaker 2: my taxes, I'm going to help you out. And I
Speaker 2: just I don't think it has this broad economic impact.
Speaker 2: I think it sounds good. That's why we all argue
Speaker 2: in politics, but I just I'm not convinced that any
Speaker 2: of it works.
Speaker 1: I one hundred percent agree, and I can't help. But
Speaker 1: notice that wealthy people, and I mean very wealthy people,
Speaker 1: their spending happens whether the market's up thirty percent, flat down.
Speaker 1: Maybe during a crisis, some of the more conspicuous consumption
Speaker 1: gets throttled back because you know, Marie Antoinette and all
Speaker 1: of that. But for the most part, the wealth effect.
Speaker 1: Since eighty percent of stocks are own by five ten
Speaker 1: percent of people, how big of an impact can the
Speaker 1: wealth effect have on the bottom eighty percent of I.
Speaker 2: Think the only place that it could potentially happen is
Speaker 2: with the housing market. And so I think that's part
Speaker 2: of what you're seeing today and some of this as well.
Speaker 2: So we were talking about the M two growth and
Speaker 2: the money used to play out there, but don't forget.
Speaker 2: If people feel confident, they're willing to spend money. And
Speaker 2: I think part of this last push we've seen is that,
Speaker 2: you know, with the advent of Zillow and you know
Speaker 2: redfin and we can look up the price of our
Speaker 2: homes and we can creep on our neighbors and you know,
Speaker 2: our friends, what do they buy? I think that has
Speaker 2: created something in the psyche of people that they feel
Speaker 2: a little wealthier if they're a homeowner.
Speaker 1: Especially if the neighbors house went for a butt ton
Speaker 1: of money.
Speaker 2: Right, But you have to see that transaction. Now we
Speaker 2: have this algorithm and you can go log in every
Speaker 2: day and look at your house and it moves every
Speaker 2: day kind of or you know, it's I think there
Speaker 2: is something in there.
Speaker 1: But well, let me throw a curve ballet you because
Speaker 1: you mentioned psychology and sentiment. On the one hand, even
Speaker 1: though it's off the lows, consumer sentiment has been awful,
Speaker 1: like below, the financial crisis, below, the dot com below
Speaker 1: nine to eleven. But when we look around in the
Speaker 1: world of consumer spending, on the high end, you want
Speaker 1: to Porsche, Ferrari, Lamborghini, there's a wait list. On the
Speaker 1: upper medium end, you want to go buy a Rolex,
Speaker 1: you can't get them.
Speaker 2: They're they're getting cheaper though, right you probably can't buy
Speaker 2: a brand new one.
Speaker 1: So if you go to the certified pre owned or
Speaker 1: even just the use one. A watch that costs ten
Speaker 1: grand MSRP that was twenty two thousand dollars used is
Speaker 1: now down to seventeen, but it's still much more than
Speaker 1: new because you can't get new. There's no supply of
Speaker 1: homes or very at least dramatically reduced. You want to
Speaker 1: buy a boat or a jet ski, you'll wait a
Speaker 1: few months. It's it's or a big truck, all right,
Speaker 1: you could probably get the big truck.
Speaker 2: I got somebody you can buy. You can buy a
Speaker 2: Tesla right now. You know there's a lot of those.
Speaker 2: There's a lot of those on offer right now.
Speaker 1: You know, we maybe the takeaway from that is, if
Speaker 1: you're if the demographics of your primary customers are, you know,
Speaker 1: left of center, save the planet, anti.
Speaker 2: Global warming people, maybe owning.
Speaker 1: The LIBS is a bed marketing strategy.
Speaker 2: Yeah, but that who knows.
Speaker 1: And there's also a ton of competition today in that space.
Speaker 2: Sure, sure, but I guess where I'm going with this
Speaker 2: is consumer sentiment. Okay, So why why does it feel abysmal? Well,
Speaker 2: let's talk about inflation. So instead of doing what Jay
Speaker 2: Powell is doing or what all of us do, and
Speaker 2: they're going to cite the year over year inflation number.
Speaker 2: And by the way, the core PC is looking a
Speaker 2: little bit better after this last print. Sure two, But
Speaker 2: Jay has a problem. He's been talking about CPI for
Speaker 2: the last few years, so moving the goal sticks is
Speaker 2: just not good for him right now. And he doesn't
Speaker 2: need to do anything anyway, so he's we can talk
Speaker 2: about that later.
Speaker 1: Listen, inflation came down regardless of what the Fed, but
Speaker 1: here it was so late and by the time they
Speaker 1: started it was just about to peek and come down.
Speaker 2: But here's the problem. Now, let's go back on Europe.
Speaker 2: Not instead of year of year, let's go back two years,
Speaker 2: let's go back three years. And if you ask people
Speaker 2: what inflation looks like, usually the common person will give
Speaker 2: you one of two statistics. They'll talk about their grocery bill,
Speaker 2: but they'll talk about fuel pump prices. That's really how
Speaker 2: people think about inflation. But if you think about what's
Speaker 2: happening right now, I think people's anchor is pre pandemic and.
Speaker 1: We're what twenty percent generally you're.
Speaker 2: You're in the mid to high twenties now, and so
Speaker 2: that I think is weighing on sentiment, but it's not
Speaker 2: changing the dynamic of the spending. And I also think
Speaker 2: this is part of the whole fed's policy is that
Speaker 2: when you when you're hiking rates, you're trying to do
Speaker 2: two things to this transmission mechanism, make credit more expensive.
Speaker 2: They've done that, okay, mission accomplished, but also totail to
Speaker 2: curretail consumption. You also want incentive saving. That's the missing
Speaker 2: part in this, I believe. And I saw that you
Speaker 2: know the JP Morgan CFO come out of no disrespect there,
Speaker 2: but he's complaining about how clients want CDs, But why
Speaker 2: he's complaining is because they're paying a basis point on
Speaker 2: their savings account, and if you're you have a great relationship,
Speaker 2: you get two basis points. Well there's your repression, Barry.
Speaker 1: You move to a money market, you're getting about five percent.
Speaker 2: But that's called financial literacy, right, So that's the gap
Speaker 2: we have here, right. But it's true and this is
Speaker 2: not a US phenomenon. This is a global phenomenon, right,
Speaker 2: that there is just not this robust financial literacy. But
Speaker 2: so if you think about a person that I was
Speaker 2: contending probably two years ago going into twenty two or
Speaker 2: sorry going yeah, going into twenty three, after we had
Speaker 2: higher rates, that people are going to save money, I
Speaker 2: didn't realize that the banking system wasn't transmitting that megazine.
Speaker 2: We work in capital markets, right, right, so we know
Speaker 2: what rates are.
Speaker 1: That's what six or seven trillion dollars some crazy number.
Speaker 2: It was six trillion we got to in money market.
Speaker 2: It obviously went down because of tax payments a couple
Speaker 2: of weeks ago. But the thing is is that what
Speaker 2: you find is that that savings wasn't there. Now. I
Speaker 2: would have contended in twenty three that people thought inflation
Speaker 2: was going to continue at the nine handle, right or
Speaker 2: the eight handle, and so they didn't think that that
Speaker 2: money market account was enough. Now I think it's that
Speaker 2: they're not getting paid on their deposits either, right, Yes,
Speaker 2: sophisticated people do people we know do this, and our
Speaker 2: job is to educate more people. All my friends asked
Speaker 2: me about that don't work in markets? What side I
Speaker 2: was like, Janet Yellen's money market account, government money market.
Speaker 2: Don't worry about it. I promise you won't lose. What's
Speaker 2: the yield today? What's Janet pain? Janet's paying about five
Speaker 2: and five and the five and three eighty.
Speaker 1: Five right right, that's an impressive listen, especially coming on
Speaker 1: top of a decade of practically zero. That's that's an
Speaker 1: oasis in the desert.
Speaker 2: It is. But so let's continue on this path of
Speaker 2: of why the consumer, why the sentiments so bad? Is
Speaker 2: because I don't think that what we see in this
Speaker 2: slow down is the savings rate go up. Right, if
Speaker 2: you look at a percentage of disposable income, they're they're
Speaker 2: really at.
Speaker 1: An you took all their excess saving.
Speaker 2: I haven't yet. I'm making a plea, I'm making a
Speaker 2: please still, But where I'm going with this still is
Speaker 2: that I don't think people have been incentivized to save
Speaker 2: and you know what, we have the yolos, they have
Speaker 2: the there was the idea that we were locked down
Speaker 2: for a year or two, depending on where your jurisdic
Speaker 2: people died.
Speaker 1: It's fair to say. My big takeaway from the pandemic,
Speaker 1: aside from hey, these vaccines are a miracle, was life
Speaker 1: is short. Open that expensive bottle of wine. What are
Speaker 1: you waiting for people who were like otherwise fairly healthy
Speaker 1: suddenly dying. You know a lot of people had that
Speaker 1: moment of existential dread where hey, I only got so
Speaker 1: many years left, Let's go live life.
Speaker 2: That's right, And I think that that has changed the psyche.
Speaker 2: So if you want to talk about a regime change,
Speaker 2: I think that's changed. And I think that's missing in
Speaker 2: this FED transmission mechanism right now is that we're not
Speaker 2: curtailing this or we're not increasing the sailing savings and
Speaker 2: curtailing consumption. We are spending still. And so from that standpoint,
Speaker 2: as long as people stay employed, that's probably going to continue.
Speaker 2: And by the way, we're here in April, we're in
Speaker 2: New York. It's actually a beautiful day out that taculate, right,
Speaker 2: And this is the seasonal part where you guys on
Speaker 2: the East Coast start to go out and spend more
Speaker 2: money too. Out in LA We're justing it around all
Speaker 2: the time. We do it all the time. But so
Speaker 2: the seasonal component will probably kick in here too. So
Speaker 2: this is the idea of waiting for a catastrophe to happen.
Speaker 2: What's missing in a lot of this is also just
Speaker 2: the dynamic of the consumer. And look, people have criticized
Speaker 2: the labor market statistics, birth death models, all of that.
Speaker 2: But what I what I look at in the labor
Speaker 2: market today is I watch unemployment claims because we can argue.
Speaker 1: About weekly unemployment claim is about a two hundred K
Speaker 1: a week, And now why do I want low?
Speaker 2: But why do I watch that? The one thing I
Speaker 2: can say is that I'm pretty confident in our fellow Americans.
Speaker 2: I mean, Barry, You've worked a long time in your career,
Speaker 2: You've paid in the system. Right, Sure, if Bloomberg lets
Speaker 2: you go, Let's say Ritholtz doesn't want you anymore. That
Speaker 2: would be kind of weird, but it could happen. What
Speaker 2: are you probably about yourself? You may you may just
Speaker 2: get match up.
Speaker 1: If I decide to pick up golf and spend my
Speaker 1: time doing.
Speaker 2: That, but think it. But I want to go the
Speaker 2: other way, I would say, you lose your job. If
Speaker 2: you lose your job, I'm pretty sure that most people
Speaker 2: don't have an issue going and filing those claims. So
Speaker 2: when I look at it claims and not seeing spikes
Speaker 2: that were continuing claims not being out there, to me,
Speaker 2: it says something about that we can't dismiss the jobs data.
Speaker 1: Right well, the labor market is tight. During the previous administration,
Speaker 1: legal immigration I'm not talking about people coming under the
Speaker 1: fence at the Mexican border, but legal people coming in
Speaker 1: dropped off about a million persons per year.
Speaker 2: Then you have the pandemic took a couple million out
Speaker 2: of the WORKFORCET. But we've actually seen that that foreign
Speaker 2: born cohort starting to starting to grow up. It's above
Speaker 2: trend now.
Speaker 1: So you still have a very tight labor market with
Speaker 1: a shortage of available workers.
Speaker 2: That's going to keep wages.
Speaker 1: Up and that's going to keep the unemployment claims down.
Speaker 2: And if you keep wages up, if people are making
Speaker 2: it even though they may be living paycheck to paycheck,
Speaker 2: they are spending money. And so this is the thing
Speaker 2: you can't dismiss in the overall cycle. And so I
Speaker 2: think when you start to look at it and you
Speaker 2: take a different perspective versus year over year, and you
Speaker 2: go back a couple of years, you find that you're
Speaker 2: getting a different signal in the marketplace. And that's something
Speaker 2: that we had to recognize last year.
Speaker 1: Well, let's talk about that, because you came into this year,
Speaker 1: you came into twenty twenty four specifically saying, hey, rate
Speaker 1: cuts in March seems kind of optimistic to me. You
Speaker 1: were dead right. And I'm going to assume between the
Speaker 1: strength of the economy and sticky inflation at least in
Speaker 1: the services and apartment rental market was the basis for that.
Speaker 1: The market's caught up to you. I think the market
Speaker 1: has now.
Speaker 2: You got about one and a half. You got one
Speaker 2: and a half kind of cuts this year, and it's
Speaker 2: really back to law. It's way backloaded. You're talking about
Speaker 2: you're talking about probably fourth like September or something. A
Speaker 2: lot of people will say, well, the Fed can't cut
Speaker 2: right in front the election. They've cut every year during
Speaker 2: an election they cut it just crap. It's this thing
Speaker 2: where they're gonna be viewed politically. I tell it, people,
Speaker 2: if the FED cut one hundred bases points two months
Speaker 2: before the election, do you think it changed is the election?
Speaker 2: It does nothing?
Speaker 1: If everything's if anything that hurts the incumbent because it's saying, hey,
Speaker 1: look right, what's going on.
Speaker 2: I know you're a data.
Speaker 1: Wonk and you're not afraid to dive deep into the numbers.
Speaker 1: Let me ask you a kind of counterintuitive question. I
Speaker 1: read a fantastic stat half of the homes that are
Speaker 1: owned that have mortgages, so only about fifty sixty percent
Speaker 1: of homes have mortgages, But half of the homes with
Speaker 1: mortgages have mortgages at four percent or less. And I
Speaker 1: think it's like two thirds and five percent.
Speaker 2: I think it's well at least in the agency market,
Speaker 2: which is easy to look at. If you look at
Speaker 2: you can pull up the what's called the effective cupon
Speaker 2: of the agency mortgage market. So the effective just means
Speaker 2: that you're taking it all the game average and averaging
Speaker 2: it right, and that number is about three and three
Speaker 2: quarters today.
Speaker 1: So much refinancing took place.
Speaker 2: It took place, But this is Also another reason for
Speaker 2: that strength of the consumer is that like corporate America,
Speaker 2: who was smart and refined their death and of course
Speaker 2: so did homeowners. But here's what's caused an inventory problem
Speaker 2: because now, so.
Speaker 1: That's where I wanted to go, is how much has
Speaker 1: the FED taking rates up and bringing forcing mortgages to
Speaker 1: seven and a half percent created a sort of persistent
Speaker 1: inflation both in single family homes, apartment rentals, and of
Speaker 1: course owners equivalent rented in BLS data for CPI for
Speaker 1: Consumer Price Index, is it sort of perverse that the
Speaker 1: FED raising rates has raised inflation or at least made
Speaker 1: it sticky.
Speaker 2: Well, that's that's the whole that's the whole thing. If
Speaker 2: if I had told you rates were going to a
Speaker 2: seven handle on mortgagees, I don't think you would have
Speaker 2: said that house prices go up from where we were
Speaker 2: when we were talking about a two and a half
Speaker 2: percent mortgage.
Speaker 1: Well, it's because of exactly what they said.
Speaker 2: The supply is gone. So think about this way. One
Speaker 2: thing we've been thinking about, and we've been thrown around
Speaker 2: the table in some of our discussions, is that what
Speaker 2: if the FED cuts rates meaningfully and what if mortgage
Speaker 2: rates come down two hundred bases.
Speaker 1: Points, You'll free up a ton of inventory.
Speaker 2: Prices will go down. My contention is if if mortgage
Speaker 2: rates came down two hundred, prices go down because you
Speaker 2: have a people that are landlocked or they're stuck in this.
Speaker 1: Hold in handcuffs, correct.
Speaker 2: And on top of that, you have, you know, a
Speaker 2: boomer generation that ultimately is looking to maybe downsize and
Speaker 2: things like that, where they'll just say, at some point, well,
Speaker 2: now I can afford the mortgage on the smaller place, right,
Speaker 2: and I'm up so much on my home. I've doubled
Speaker 2: my price in.
Speaker 1: The or even we added a second or third kid.
Speaker 1: We want a little more space to go from three
Speaker 1: and three quarters to seven and a half is exorbitant
Speaker 1: on the same size house, you want to add a
Speaker 1: bedroom of two, My god, no.
Speaker 2: One could do it.
Speaker 1: So you know, you know, Nick Hanover of a second
Speaker 1: Wave Capital has been talking about this exact issue, which is,
Speaker 1: if the FED wants lower inflation, especially on the housing side,
Speaker 1: they need to lower rates. Yeah, the people's seem to
Speaker 1: not wrap their heads around, but you obviously get it.
Speaker 2: It's tough though, because on the other side, think about
Speaker 2: what happened starting in November one of last year, when
Speaker 2: the FED kind of authorized that, hey, let's start talking
Speaker 2: about cuts. And what you saw was really, I'm going
Speaker 2: to call it excess into the market. Right, Rates rallied meaningfully,
Speaker 2: Spreads came in meaningfully, Equity prices went up meaningfully. Gold
Speaker 2: went up strangely meaningfully. That's the one I can't get
Speaker 2: my head around as much. It's gold. Yeah, well, how
Speaker 2: it went up so much recently? Right went while it
Speaker 2: ignored dead printing, and yeah, we have these real yields
Speaker 2: that are positive. It's everything you know has kind of
Speaker 2: been thrown upside down. However, Crypto, all these speculative assets
Speaker 2: and again I'm not here to criticize any of them,
Speaker 2: are up. If the FED truly believes the wealth effect,
Speaker 2: they think if you cut rates more, you fuel that again.
Speaker 2: And so that's another reason why you coming into the year,
Speaker 2: I thought that we should be patient on the rate cuts.
Speaker 2: And you know, don't look that strange today, But a
Speaker 2: couple of months ago I was telling people the biggest
Speaker 2: risk to the market is that the FED doesn't cut
Speaker 2: this year, and people looked at me like I was insane, Barry, well,
Speaker 2: more insane than they usually usually right, Yeah, right, I mean,
Speaker 2: so there's a baseline there. But but I just said, like,
Speaker 2: why do we have to have cuts at this point?
Speaker 2: And what if the economy continues? Do you think the
Speaker 2: FED wants to cut to have to turn around and
Speaker 2: hike again later on? Now I'm not in the Larry
Speaker 2: Summers camp, but we should be hiking this year. I
Speaker 2: think we're just fine where we are.
Speaker 1: Who's left in the Larry Summers camp? He's been dead
Speaker 1: wrong for a couple of years.
Speaker 2: Now.
Speaker 1: At what point do people say, maybe the nineteen seventies
Speaker 1: and the twenty twenties are somehow different decades.
Speaker 2: You know, you know, maybe there's a thing called technology
Speaker 2: that's a little different. I don't know. But but where
Speaker 2: I'm thinking about all of this is that, you know,
Speaker 2: it's not just falling the path of what the market
Speaker 2: is telling you, because remember, the bond guys get a
Speaker 2: lot of credit for, you know, being smarter than other
Speaker 2: folks in the bond market knows more than other markets.
Speaker 2: But remember we're just people too. That forward curve is
Speaker 2: a bad indicator of where rates are going. It always
Speaker 2: has been, and you know, if you think about when.
Speaker 1: Rates are about that dot plot.
Speaker 2: Yeah. I mean, look at where rates were pinned down
Speaker 2: in the early twenty tens. Through the whole the whole
Speaker 2: decade of the tens, the market always had cut hikes
Speaker 2: are coming, hikes are coming so effectively. I thought the
Speaker 2: market got way too giddy at this point. You know,
Speaker 2: it's it's harder to make a decision now because it
Speaker 2: was very easy to say, look, I want to fade
Speaker 2: the forward cave. I want to continue to own some
Speaker 2: floaters in the market. There's nothing wrong with owning some
Speaker 2: floating rate debt. Yes, you got to be careful with
Speaker 2: it because they can be problematic. But I can buy
Speaker 2: floating rate mortgages, for instance, they're guaranteed by the government.
Speaker 2: They've got seven caps, meaning that mortgage you know the
Speaker 2: rates and member these these were issued before they would
Speaker 2: have to go up to over seven before you're penalized.
Speaker 2: You know, they trade one hundred over right, that seems
Speaker 2: like a no brain or trade for not taking credit
Speaker 2: risk right now, you know, it's kind of priced right
Speaker 2: into the market and so things aren't as exciting there.
Speaker 2: But as you as you look through it, I just
Speaker 2: think there was just so much fervor that everyone thinks
Speaker 2: the Fed's going to go down in rates. But as
Speaker 2: I as I tell people on the desk, what's wrong
Speaker 2: with yield? What is wrong with having a positive real yield?
Speaker 2: You sound like a bond manage I know. And you
Speaker 2: know what, It's kind of funny because you know, these
Speaker 2: these younger analysts and things, they just think it's okay
Speaker 2: to have zero real yield like that the rate should
Speaker 2: equal inflation, and I'm like, you have to have a premium.
Speaker 2: And I think that's also what's changed is because inflation
Speaker 2: has come back into the market, the bond folks are
Speaker 2: going to require an inflation premium, which means we need
Speaker 2: real yield.
Speaker 1: What was did you say this in one of your notes?
Speaker 1: Like the current crop of bond managers have never experienced
Speaker 1: a bond market where they were generating real returns, real
Speaker 1: yield relative.
Speaker 2: To to rates.
Speaker 1: They only know decades going back to the two thousand
Speaker 1: of pretty close to zero percent FED funds.
Speaker 2: Yeah, I think I said something like that. I won't
Speaker 2: say there's none out there because obviously we.
Speaker 1: Have I mean in here, but like a low generations,
Speaker 1: who are the under forty crowd has never seen higher rates?
Speaker 2: Well, they had never seen a hiking cycle either, they've
Speaker 2: never seen inflation, chiefly like eighteen Yeah, I mean, yeah,
Speaker 2: you got a little bit. And I think I said
Speaker 2: that back in the sixteen era, Like there's people out
Speaker 2: there haven't ever seen a hiking cycle that are making
Speaker 2: investment decisions. But you know the thing about it is
Speaker 2: is that that's why we have to be students of history, right,
Speaker 2: we have to know some of the dynamics. But I
Speaker 2: think that's a buffet quote, right, were not Jimmy but
Speaker 2: Warren where he says that if history was all there
Speaker 2: was or past his proluge, then the richest people in
Speaker 2: the world wuld be librarians, right, And so you have
Speaker 2: to have that in your toolkit. You have to have
Speaker 2: the behavioral side in your toolkit, but also you have
Speaker 2: to be willing to kind of just think about things differently.
Speaker 2: And you know, that's that's what's great about this business.
Speaker 2: And that's why I'm glad I didn't become a teacher, Barry.
Speaker 2: I think I teach through this, right. I try. I
Speaker 2: try to help our analysts. I try to educate our clients.
Speaker 2: And to me, it's solving these mysteries all the time.
Speaker 2: It's way more fun than just teaching you how to
Speaker 2: do pem doos and figure out the order operation.
Speaker 1: And it's pretty it's pretty clear you made the correct choice.
Speaker 1: So I want to talk about what you're doing at
Speaker 1: the firm with some of the new funds you have,
Speaker 1: but I have to talk a little bit about how
Speaker 1: this year has gone for bond investors.
Speaker 2: What are we looking at.
Speaker 1: We're off about two and a half percent in bonds,
Speaker 1: nothing like twenty twenty two, but it really seems like
Speaker 1: the bond market has been off sides. What's going on there?
Speaker 2: Yeah, well, you got to rewind the clock.
Speaker 1: Man.
Speaker 2: We were talking about year over year. You got to
Speaker 2: expand the windows. So yeah, we all look in calendar years.
Speaker 2: But let's go back to November one. You're up meaningfully
Speaker 2: in the bond portfolio, right, So, yeah, we got a
Speaker 2: little too excited, Like we cut a duration back back
Speaker 2: in January a little bit in our portfolios, especially on
Speaker 2: the intermediate term side. We did so because I was
Speaker 2: just adamant J. Powell was not going to let this
Speaker 2: thing keep going. We're not going to get rates down
Speaker 2: to you know, three percent on the ten year. It
Speaker 2: just seemed ridiculous.
Speaker 1: And that was like one hundred basis points very quickly came.
Speaker 2: Out of the market. Yeah, it did, it did, and
Speaker 2: Jay just added fuel to the fire in December, and
Speaker 2: so I was kind of licking my wounds for a
Speaker 2: little bit and say, man, that was a bad call.
Speaker 2: I'll own it here. It looks like a good call now.
Speaker 2: But the thing is is that, you know, if you
Speaker 2: roll back the clock, bonds have done very well in
Speaker 2: the last eighteen months or so since since we really
Speaker 2: got to those kind of peak levels. Yeah, we had
Speaker 2: that five percent tenure last year for about I don't
Speaker 2: know why you were in it, right, Yeah, it was
Speaker 2: it was overnight, really what you saw, and like, I
Speaker 2: think we're going to try to test it again. And
Speaker 2: so we've been in the stance that coming in the
Speaker 2: year that bonds probably have you know, rates probably fluctuate around.
Speaker 2: They probably go up in the first half of the year.
Speaker 2: Maybe you get something that stabilizes here. It just depends
Speaker 2: on the outcome of the economy. But as a bond investor,
Speaker 2: there's nothing wrong with having higher yields, you know. And
Speaker 2: so if you were patient and you weren't aggressive with
Speaker 2: this bond allocation, you got a good rally in January,
Speaker 2: don't forget. So we got rates pretty dang low in January,
Speaker 2: and then it just got sucked out all of a
Speaker 2: sudden because the inflation data came in still a little hot, right,
Speaker 2: And so ultimately, I look, if I'm syn at the fat,
Speaker 2: there is zero urgency of cutting rates at this point.
Speaker 2: You know.
Speaker 1: My my argument has been, Yeah, the CPI is coming
Speaker 1: in hot, but to quote George Box, all models are wrong,
Speaker 1: but some are useful. Oer the apartment side, it's on
Speaker 1: such a leg, but.
Speaker 2: Just take take the services exit. Let's look at the
Speaker 2: supercore stuff. It's it's not comforting, and that's because people
Speaker 2: are spending, right, they are spending, and so forget the
Speaker 2: oeer side. Strip it out. That's what That's what Jay
Speaker 2: was trying to do. But supercore is now like four
Speaker 2: percent if you take supercore pc CPI. So he has
Speaker 2: a problem still. And why if the economy is still performing,
Speaker 2: people aren't losing their jobs, what are we Why are we.
Speaker 1: Asking the R what is the incessant ubiquity of doing
Speaker 1: it now other than freeing up that supply of housing
Speaker 1: bringing rates down. And let me talk about something else
Speaker 1: that I want to ask you about. So it's pretty
Speaker 1: well understood that huge, huge advantage for equity index investors
Speaker 1: if you have a ten year time horizon. However, when
Speaker 1: we look at fixed income index investors, it seems that
Speaker 1: a skillful bond manager can do better than the Bloomberg
Speaker 1: Barclay's bond debt for a variety ways. You can make
Speaker 1: duration choices, you can make credit quality choices. Twenty twenty
Speaker 1: two was a tough year for bonds, down about fifteen
Speaker 1: percent across the Barclay agg You guys are our discretion
Speaker 1: unconstrained bond managers. What were you thinking during twenty twenty two?
Speaker 2: Well, look, remember, even though we have some of that,
Speaker 2: you have guardrails and you have to own some duration,
Speaker 2: and like there's there's limits to how unconstrained are unconstrained
Speaker 2: really is? And so you know what we were seeing
Speaker 2: in that market was just pain, right, And what you
Speaker 2: also have to remember, if you're running a bond fund,
Speaker 2: you're providing liquidity. And remember when bonds go down, people
Speaker 2: sell bonds, just like when stocks go down, they sell stocks.
Speaker 2: And so what happens during this too is that you're
Speaker 2: forced to sell everybody's forces out, there's no money to
Speaker 2: go buy things, and so we all complained about the
Speaker 2: same thing. Look at the value in some of this stuff,
Speaker 2: but it keeps going down, right, And so I think
Speaker 2: what you see in today's market, I don't think we're
Speaker 2: gonna have a repeat of twenty two at this point.
Speaker 2: Why we're not starting with a one percent tenure, right,
Speaker 2: you know, or FED funds at zero or FED funds
Speaker 2: at zero. You're starting where you get yield. So basic
Speaker 2: math today says, if I on a four and a
Speaker 2: half percent tenure and it has a duration, you call
Speaker 2: it seven and a half, Maybe it's closer to eight today.
Speaker 2: That says that, Okay, If I think about that ratio
Speaker 2: between the yield and the duration, that tells me how
Speaker 2: much yields can go up in a calendar year, and
Speaker 2: my yield will offset it. Right, So that's how I
Speaker 2: break even with a duration trade. And so from that standpoint,
Speaker 2: there is some value in it, because I do believe
Speaker 2: that if we do fall apart in the economy, if
Speaker 2: we have problems, I do think the tenure rallies. I
Speaker 2: don't know if it rallies like it has historically because
Speaker 2: of the debt loads that we see out there because
Speaker 2: of the big deficit, and this is the other side
Speaker 2: of it. We need some inflation, Barry, we need nominal
Speaker 2: GDP growth. We've got to grow ourselves out of these deficits.
Speaker 2: But the problem is is that we've changed the script
Speaker 2: and something changed under the previous administration. We're during the
Speaker 2: good times, which that era was pretty good. Right in
Speaker 2: the sixteen era, we actually expanded the deficit exactly historically
Speaker 2: we decrease the deficit.
Speaker 1: To be fair pandemic related.
Speaker 2: No no, no, no, no, no, I'm saying the path that Trump
Speaker 2: had us. I'd almost say Trump, let's say the entire
Speaker 2: Congress that we were spending more money. We were increasing
Speaker 2: the budget deficit on an annual basis, the first time
Speaker 2: really in the last seventy years we've seen it absent
Speaker 2: a war, okay and sair enough, and then we've continued
Speaker 2: it during this administration. So there's no change on which
Speaker 2: team you play on here. Politically, they're they're they're both
Speaker 2: bad for bond.
Speaker 1: Wait, people in DC spend money they don't have.
Speaker 2: That's right, And yeah, yeah, so I know Breaking News
Speaker 2: put put that on the marquee for blue book today.
Speaker 2: But the thing is is that you know, we aren't.
Speaker 2: We aren't keeping the house in order, and so I
Speaker 2: think it's going to be fearful next time we have
Speaker 2: a recession. So my boss has been talking about this
Speaker 2: for a while now. And it's not that this is
Speaker 2: a twenty twenty four problem. The deficit is not a
Speaker 2: twenty four problem. But when we have another recession, what
Speaker 2: if Congress sees what we did during the pandemic and says,
Speaker 2: you know, we should print fifteen percent.
Speaker 1: This fiscal stimulus things seems to.
Speaker 2: Work, and that's one's guy he's talking about. But also
Speaker 2: there isn't a ramification on the other side of inflation,
Speaker 2: and the bond mark will sniff that out quickly. So
Speaker 2: I think you can get a rally going into a recession.
Speaker 2: But once the fiscal authority start to act, you may
Speaker 2: not want to be owning that body. You may have
Speaker 2: wanted to rent it over that period.
Speaker 1: Let me ask you my pet peeve question, not so
Speaker 1: much from the prior administration, but from the era before
Speaker 1: the pandemic, when rates were zero for a decade. How
Speaker 1: big of a missed opportunity was it? So households refinanced
Speaker 1: cooperations refinanced. Congress said no, no, we have no you know,
Speaker 1: if we refinance, it'll just encourage more spending. Well, look,
Speaker 1: it's like the single dumbest thing I've ever heard in
Speaker 1: my life.
Speaker 2: Okay that is, but let me give them a little
Speaker 2: bit of credit. And I'm not here to give Congress
Speaker 2: credit or the Treasury at all, but historically the Fed,
Speaker 2: I'm sorry, and here I am screwing this up. Historically
Speaker 2: Treasury has issued more short than long right, and that's
Speaker 2: because of the shape of the old curve effectively. But
Speaker 2: also there's an argument that most people miss in this Barry,
Speaker 2: and what it is is, remember, the treasury market is
Speaker 2: one of the most liquid markets in the world. Except
Speaker 2: during March of twenty twenty. Nothing was liquid. Folks that
Speaker 2: traded in the eighties, by the way, they were telling
Speaker 2: us that they've never seen such.
Speaker 1: A horrible market, worse than you know, September eight worse.
Speaker 2: Absolutely, there was liquidity in that stuff. You couldn't trade
Speaker 2: off the runs. You couldn't trade, they wouldn't even trade.
Speaker 2: You couldn't make an appointment, you couldn't call someone to
Speaker 2: try to do it on the run. Stuff you were
Speaker 2: hard pressed to do ten million bucks. No desk wanted
Speaker 2: risk at all, and even treasuries. But where I'm going
Speaker 2: with this on the whole liquidity is, remember we have
Speaker 2: a term structure of rates. We advertise our auction calendars,
Speaker 2: right the quarterly refunding an outs which there's one coming up,
Speaker 2: by the way, and.
Speaker 1: They've been pretty mediocre the past few ones.
Speaker 2: Yeah, and this one looks a little scared Jane. It's
Speaker 2: got a lot of work to do there. She's issuing
Speaker 2: a lot of front and paper this week. We'll see
Speaker 2: how that gets digested. But let me just let's go
Speaker 2: back to the term structure. Okay, they need to have
Speaker 2: the market. You can't just say all we're going to
Speaker 2: do is issue fifty year treasuries. You can't just do
Speaker 2: all that. Should they have issued some yes, the market
Speaker 2: and the said was at zero and ten years were
Speaker 2: at one percent, and get it. But you can have
Speaker 2: done thirty years at three and basically changed the but
Speaker 2: you would have no liquidity for the next few years
Speaker 2: if you took the entire I'm saying at the extrema, right,
Speaker 2: So if you went out there, you could put some
Speaker 2: into it, but the treasury market you have to have
Speaker 2: this functioning market of people rolling paper and moving around.
Speaker 2: There are people that buy thirties and lock them up
Speaker 2: right there. They're called sovereign funds. But in general you've
Speaker 2: got to have some dynamic of providing that liquidity to
Speaker 2: different points on the curve and so and so there
Speaker 2: is something you said. Now, should they have done as
Speaker 2: much on the front end, Absolutely not, But they were
Speaker 2: short sighted thinking about the zero. Look you could have
Speaker 2: done You could have done a fifty year sub two
Speaker 2: at that really time. Oh yeah, you definitely could have
Speaker 2: been the market Remember the long bond in twenty twenty
Speaker 2: got to one right one exactly. That was the low
Speaker 2: in yields, and so you could have done stuff like
Speaker 2: that too, and the market clamored for that. So I remember,
Speaker 2: I mean there was there was like this Austrian hundred
Speaker 2: year paper that trade with almost a negative yield for
Speaker 2: a while, right one hundred years, and you know, so ultimately,
Speaker 2: when you pull it all back together, some of it
Speaker 2: is just the function of the market. They couldn't do,
Speaker 2: but they should have done some of it because there
Speaker 2: was a massive demand for it out there, specifically in
Speaker 2: the Eurozone, where a positive real yield or a positive
Speaker 2: nominal yield would have cleared the market very strongly. But
Speaker 2: you couldn't take the entire budget and do the whole thing,
Speaker 2: and the obviously you can't refine all of the United States,
Speaker 2: but you certainly could have made.
Speaker 1: The circumstances where we are today much you.
Speaker 2: Could have made it better. And again, I'm not trying
Speaker 2: to give them a lot of credit, but I'm giving
Speaker 2: you the reason why some of it is there. And
Speaker 2: it's also it's this entrench thinking that they have to
Speaker 2: issue short So let's come back to a couple of.
Speaker 1: Funds that you guys run. I gotta start with I
Speaker 1: don't know who coined this, but the first person I
Speaker 1: heard say.
Speaker 2: It was you. What do you make of the idea
Speaker 2: of T bill and chill? Oh, look, it's been a
Speaker 2: great place if you're a T bill and chill person,
Speaker 2: meaning that you just buy T bills forget your bond allocation.
Speaker 2: It's worked for you. Congratulations.
Speaker 1: When does that stop working?
Speaker 2: At some point? It does and it has risk. And
Speaker 2: I tell people that and they're like, well, yeah, we
Speaker 2: could default time now that that's not the risk I'm
Speaker 2: talking It has refinancing risks. Right, every month, your te
Speaker 2: bill and chill. If Jay cuts rates, you don't get
Speaker 2: to chill as much, and so at some point you
Speaker 2: got to you gotta move it out a little bit.
Speaker 2: But that phrase alone is working, and Jay has given
Speaker 2: you a renewed sense on life. There.
Speaker 1: Yeah, at least another six months, rest a.
Speaker 2: Few more months. But the question is what if they
Speaker 2: surprise you? Right? So again we all think we know,
Speaker 2: but what we'd all know is we don't know.
Speaker 1: Let's talk about surprise. Because the FED has been so
Speaker 1: transparent and there have been criticisms from a variety of
Speaker 1: quarters that hey, you know, the FED is more effective
Speaker 1: when it can occasionally shock the market. My fantasy is
Speaker 1: Jay cuts in June, startles the market, and then we
Speaker 1: have a little bit of a reset.
Speaker 2: If he did that, I think the knee jerk reaction
Speaker 2: would be to sell things. And because it would, it
Speaker 2: would the man mind. Yeah, the market would say that
Speaker 2: the FED right, that takes.
Speaker 1: The consumer, It does all these things that he says
Speaker 1: he wants. He wants to calm down the consumer. He
Speaker 1: wants to calm down. I know it was it isn't.
Speaker 1: But if I was a birdie whispering in his ear,
Speaker 1: just fifty bases.
Speaker 2: When the last time Jay shocked the market, they didn't
Speaker 2: even shock the market with the fifties and the seventy five.
Speaker 2: They went to Nicky leaks, right, it's right, you know
Speaker 2: one of the banks called him.
Speaker 1: And Nick timaraurosis at the Wall Street Journal.
Speaker 2: I don't even say that's why I call it that.
Speaker 2: I can't pronounce the last name that great. But what
Speaker 2: you see is that they don't and who shocks the
Speaker 2: market today? And look at what it creates. It's not
Speaker 2: what the FED wants because there's ripple effects. If the
Speaker 2: FED shocks, then the ECB does too. If you notice,
Speaker 2: the ECB follows our lead and all this right now,
Speaker 2: So it's much more dangerous for Jay to shock the market.
Speaker 2: And they feel like they want forward guidance to be there,
Speaker 2: and that's what they set off back in November. So
Speaker 2: all right, but what does it matter. It doesn't change anything.
Speaker 2: We're talking about twenty five big housing, not twenty five
Speaker 2: basis points. Did not change the housing market. Berry, come on,
Speaker 2: all right, here's the thing, t Bill and Chill. You
Speaker 2: should be moving out the curve a little bit. Look
Speaker 2: by one year, like we've run low duration funds for
Speaker 2: these reasons. You know, Look they've been great for clients.
Speaker 2: You can pick up yield. So from my standpoint, there's
Speaker 2: better things to do. But look, my cash sits in
Speaker 2: money market, right and look I'm ready to move some
Speaker 2: of that out, and look I'm looking for yields like
Speaker 2: four to seventy five on tens. I think is a
Speaker 2: great point. I think when we have our next conversation
Speaker 2: with every five or six years, you invite me, we
Speaker 2: could when we do that. When we do that, what
Speaker 2: we'll do is, uh, we'll review this and I know
Speaker 2: you have it all recorded, so I'll be on tape
Speaker 2: for that. But I think you're you're gonna want that
Speaker 2: for this period.
Speaker 1: All right, So let's talk about two other funds that
Speaker 1: you guys have launched. The equal Weighted ETF focused on
Speaker 1: Fortune five hundred, where you're ranking the holdings by revenue,
Speaker 1: very smart beta ish or fundamental beta, whatever you want
Speaker 1: to call it. Tell us the thinking behind the equal
Speaker 1: weight ETF with the Fortunite five hundred revenue basis.
Speaker 2: So, first of all, what it does. The Fortune five
Speaker 2: hundred list published annually, right, it includes public and private companies.
Speaker 2: So before I say that we're not investing in the
Speaker 2: private companies. Okay, so it's all public, but what happens
Speaker 2: is that it's US domiciled names, So you don't have
Speaker 2: any conglomerate you know, like a Schlumberge or something that's
Speaker 2: creeping into there like an SMP. And it's very you know,
Speaker 2: it's very rules based, right, you just rank on revenue.
Speaker 2: So what this does if you compare this to like
Speaker 2: the SMP five hundred, there's about on average in any
Speaker 2: given year it's called one hundred and ten to one
Speaker 2: hundred and thirty different names that are in the SMP,
Speaker 2: So we all know there's equally away to SMP out there. Sure,
Speaker 2: and what we find is that this through a cycle
Speaker 2: does significally better than equally weighted and in today's environment,
Speaker 2: and this is revenue ranked, not market cap, not market
Speaker 2: cap ranked on how they deduce it. You don't have
Speaker 2: some subjective committee like an SMP that comes in there.
Speaker 2: So names that are growing and actually generating revenue show
Speaker 2: up sooner in this index than it would in the SMP.
Speaker 1: And if they're not yet profitable because they're reinvesting, they still.
Speaker 2: Share their outs. So you're going to be way underweight,
Speaker 2: like services, software as a service. I always get that
Speaker 2: backwards software as a service, you're going to bender, you're
Speaker 2: gonna be wait, some of these tech names to unprofitable
Speaker 2: tech isn't in there, So you're going to have some
Speaker 2: more industrial type names. You're going to have more value
Speaker 2: kind of names over a cycle. But in general, these
Speaker 2: are still names, you know, and when you look at
Speaker 2: the list, it's like, okay, But what it ends up
Speaker 2: doing is it gives you a different cohort to play with.
Speaker 2: And what you find is that these names get overlooked
Speaker 2: because they're not in the s and P. Five hundred
Speaker 2: and so over time, you know, if you go back
Speaker 2: and compliance that hate me on a back test anything,
Speaker 2: but you can generate about one hundred and fifty over
Speaker 2: the SMP equal weight per annum. And look, if you
Speaker 2: can do something like that, and we all know over
Speaker 2: long term equal weight tends to do better than market cap. Now,
Speaker 2: we go through periods with the late nineties, we had
Speaker 2: the one we've just been through, and so for us,
Speaker 2: the timing perspective was very interesting because at the end
Speaker 2: of the day, we couldn't It's hard for us to
Speaker 2: really love the mag seven or now it's down to
Speaker 2: four or five. Who even knows what we changed it all?
Speaker 2: It was a fantastic four.
Speaker 1: We went from Fang double A to MAG seven. Offensive.
Speaker 1: So let's talk about another fund which is avoiding the
Speaker 1: MAG seven, which is the double line Chiller enhance Cape.
Speaker 2: And I know you.
Speaker 1: Can't say this becaust of compliance, but I could say
Speaker 1: top one percent of large cap value crushing fourteen percent
Speaker 1: a year for the past three years, beating the S
Speaker 1: and P five hundred. Why did you guys partner with
Speaker 1: Shield to come up with the enhanced cape? Other than
Speaker 1: the obvious.
Speaker 2: Performance, I mean it fills with us philosophical one. As
Speaker 2: a bond manager, we are sector rotators, right, so that's
Speaker 2: something we focus on. And the other thing we focus
Speaker 2: on is valuation. So what the Schiller methodology does is
Speaker 2: that it's looking at the relative cape ratio. So it
Speaker 2: takes the cape ratio of each sector and compares it
Speaker 2: to its own history. So it says, it's for each
Speaker 2: sector of the market, where are we in the cycle effectively?
Speaker 2: And it ranks them and just says which are the cheapest,
Speaker 2: which are the most rich? So you avoid the rich
Speaker 2: by the cheapest. Right, So you take the universe there's
Speaker 2: eleven sectors, cut it in half, call it five. Five
Speaker 2: cheapest what you want to look at, and you apply
Speaker 2: momentum like any good academic would do to control for
Speaker 2: the kind of the value trap, and you're left with
Speaker 2: four and uqually weight them. It's as simple as it
Speaker 2: gets here.
Speaker 1: You know, there's something to be said for bond managers
Speaker 1: being better pms on the equity side because of the
Speaker 1: focus on valuation, return of capital and just tracking the
Speaker 1: math in a way that the equity side tends not to.
Speaker 2: Yeah, but look, they'll beat us through different parts in
Speaker 2: time the lot. The goal is to have a long tenure.
Speaker 2: And if you can do it over a full cycle
Speaker 2: and you can do much better, then why wouldn't you
Speaker 2: do it?
Speaker 1: All?
Speaker 2: Right?
Speaker 1: So I have to get you out of here sooner
Speaker 1: rather than later. So let's turn our favorite five questions
Speaker 1: into a speed round perfect answer these as quickly as
Speaker 1: you can. Starting with tell us what you're streaming these days?
Speaker 1: What are you watching or listening to?
Speaker 2: One of my colleagues turned me on to something called
Speaker 2: the X Files and told me that you should watch
Speaker 2: this because and exactly that's what I was gonna end with,
Speaker 2: but yes, and it actually does hold up pretty well.
Speaker 2: So anyway, something that I've been revisiting. I don't have
Speaker 2: any of the new ones out there. It's it's kind
Speaker 2: of glad.
Speaker 1: Plus the company was Angillian. They're both so fantastic.
Speaker 2: And you got to remember the song David d'coveny, why
Speaker 2: don't you Love Me? Right?
Speaker 1: Tell us about your early mentors, although I kind of
Speaker 1: have a feeling who those are going to be, who
Speaker 1: helped guide and shape your career.
Speaker 2: Yeah, I think I mentioned this before when we were here,
Speaker 2: but there was a guy I worked with named Claude
Speaker 2: herb Too on the COMMANDITI side, really really a guy
Speaker 2: that taught me to question everything. And then there was
Speaker 2: this guy named Jeffrey Gunlock too, very very kind of
Speaker 2: prominent guy who said, not only question everything, but question
Speaker 2: it again, you know too, And that's very helpful. And
Speaker 2: also I think what was what's been very good about
Speaker 2: Gunlock and why he has such a loyal crew around him,
Speaker 2: is that all of us are really pushed to challenge
Speaker 2: each other and there's no dumb questions. Yeah, we'll call
Speaker 2: each other dumb at times, you know, we're like a
Speaker 2: family that way. But it's it's encouraging people to come
Speaker 2: up with ideas, and we're an idea of business. Right
Speaker 2: you have to create, you have to you have to
Speaker 2: have new things in the market, and we want people
Speaker 2: to poke holes. And I think that's something that's very
Speaker 2: good about the team is that it's not being a
Speaker 2: contrayer for the sake of being a contrarian. But what
Speaker 2: are we all missing when we're all nodding vertically up
Speaker 2: and down? You know, that's the time whirred question. And
Speaker 2: that's what we've been doing our last as the location meetings.
Speaker 2: It's like we've been sitting around going credit looks expensive,
Speaker 2: but we don't want to sell it, and we're all cringing,
Speaker 2: and we're all just saying, Okay, we're just gonna let
Speaker 2: it run for right now. And you know, Gunlock keeps saying,
Speaker 2: I just want to make anyone to wear it. We
Speaker 2: keep doing this each month. I'm not I don't have
Speaker 2: another idea right now, but it's starting to say we're
Speaker 2: maybe rates look pretty decent too.
Speaker 1: How do you hedge credit short of going out and
Speaker 1: buying credit to foulk swaps? And they're not cheap.
Speaker 2: Now, you really don't. If you're having to hedge your credit,
Speaker 2: you shouldn't known it. That's one thing I've learned, because
Speaker 2: the hedge costs you money. If you want to hedge
Speaker 2: the credit, maybe you should known it. And the best
Speaker 2: hedge out there I think today are longer data treasuries.
Speaker 2: I think they work. I think if we have a meltdown,
Speaker 2: and I'm not saying credit spreads wide and ten bases points.
Speaker 2: I'm saying extended duration isn't gonna hurt you. It's not
Speaker 2: gonna hurt you, and you get paid to do it.
Speaker 2: So that's a hedge that makes you money. It's what
Speaker 2: we call a positive carry hedge.
Speaker 1: There you go, Let's look at up books. What are
Speaker 1: some of your favorites.
Speaker 2: What are you reading it right now? Yeah? I think
Speaker 2: I said to you last time was against the gods
Speaker 2: of Bernstein. That hasn't changed. That's so it's a class
Speaker 2: everybody should read that out there. You know, I'm a
Speaker 2: big fan of the Michael Lewis stuff. I know he
Speaker 2: got a he got a bad rap with the latest
Speaker 2: one too, about going infinite. Yeah on SBFO, A lot
Speaker 2: of fun if you read it. I think a lot
Speaker 2: of people read like fifty pages and thought, oh, he's
Speaker 2: a fan boy. This is Michael Lewis. He's building a
Speaker 2: character first of exactly. You know, if you haven't read
Speaker 2: in his other stuff, then maybe you could get there.
Speaker 2: But if you read the whole book, he's pretty caustic
Speaker 2: at the end, right, I mean it was, It's total Lewis,
Speaker 2: and so I think that people that were criticized up front,
Speaker 2: but Chip Wars is the one that someone recommends to me.
Speaker 2: I love it and I think everybody should read it.
Speaker 2: That is where it's at. You talked about the chips
Speaker 2: at I think that's the only great thing that's come
Speaker 2: out of Congress, and this last you know, kind of rounds.
Speaker 2: I think building the chip plants, getting our own security
Speaker 2: that direction and being a pre eminent player there is
Speaker 2: extremely important. I've always hated the iPhone where it says
Speaker 2: designed in Coopertino, but it's manufactured somewhere else. They forgot
Speaker 2: that part out. They only kept the Cooper Tino part.
Speaker 2: I think this is something very powerful. Why would you
Speaker 2: not want to be the next TSMC? Why not?
Speaker 1: And well they're building a play in Arizona, right, we.
Speaker 2: Could call USMC, but we got a few of those already,
Speaker 2: you know, So yeah, the Marine Corps don't want to
Speaker 2: piss those guys off. You know. I'm a big fan
Speaker 2: of the Marine Corps. I do not want to say
Speaker 2: anything and shout out to the Marines out there that
Speaker 2: take care of us.
Speaker 1: By the way, I loved the Michael Lewis Going Infinite
Speaker 1: if you want a different perspective, that's every bit as
Speaker 1: well written and entertaining. Just a little more horrifying is
Speaker 1: Zeke Fox's number go up okay, which which is really
Speaker 1: a You read the two of those and now you
Speaker 1: know everything you need to know about about ftxcrypto And
Speaker 1: I got to fly back.
Speaker 2: To la later in the week, so I'll take a
Speaker 2: look at it.
Speaker 1: Our final two questions, what's sort of advice would you
Speaker 1: give a recent college grad interested in a career in
Speaker 1: either applied mathematics, bond management or investing.
Speaker 2: I think you need to stray from what you've learned
Speaker 2: thus far, meaning that if you're the mathematician, you need
Speaker 2: to learn another side of the business, learn the fundamental side,
Speaker 2: which is something that I didn't appreciate. Be a student
Speaker 2: of history that applies to everyone unless you're a history
Speaker 2: major then you already know that. But a student of history,
Speaker 2: financial markets rhyme a lot of times they're not the same.
Speaker 2: But you'll learn a lot through that, and you'll learn
Speaker 2: that a lot of things. We've experienced these things before,
Speaker 2: and most importantly, learn psychology, learn the behavioral side. Realize
Speaker 2: we're all people. There is no smart money dumb money.
Speaker 2: It's all ran by people. Institutions are ran by people.
Speaker 2: They behave a little differently because their own career risk.
Speaker 2: Your hedge fund's going to behave a little differently because
Speaker 2: of its career risk. But understand that all these dynamics
Speaker 2: are in play. So the last advice I have when
Speaker 2: it comes to this, and the cfasity hates it when
Speaker 2: I say this, you know, and I've given a couple
Speaker 2: of speech ob recently and I put that cabot out there.
Speaker 2: Fundamentals work. They just can be they can they can
Speaker 2: be off for a while and ultimately fundamentals come home
Speaker 2: to roost. Technicals teach you how to trade technicals. There's
Speaker 2: levels like that. They work relatively well because of the psychology.
Speaker 2: So that leads into psychology. But the one thing you
Speaker 2: can never ever ever ignore is money flow. Money flow
Speaker 2: is the most powerful thing. If people are buying price
Speaker 2: go up, people are selling price go down. And when
Speaker 2: you see that in the market, When you see that,
Speaker 2: that's called momentum. To the quants out there, that is
Speaker 2: the most powerful force in the universe ever a short
Speaker 2: term timeframe. So if you can marry those three things together,
Speaker 2: that's that can give you success.
Speaker 1: How do you track money flow?
Speaker 2: Well, you watch fun flows, We watch ETF flows, we
Speaker 2: watch ETF creation units. You watch also the demand from
Speaker 2: the institutional when it comes to RFP demand. So all
Speaker 2: of these things are somewhat in our toolkit. But remember
Speaker 2: we talked about M two. That's a powerful force as well.
Speaker 2: When we print money and create money that it has
Speaker 2: to go somewhere right right, and you've got to track
Speaker 2: where it's going.
Speaker 1: It goes where it's treated best.
Speaker 2: And water finds its levels.
Speaker 1: That's exactly right. Our final question, what do you know
Speaker 1: about the world of investing today? You wish you had
Speaker 1: in your toolkit, You wish you knew twenty five years
Speaker 1: or so ago when you were first getting stick.
Speaker 2: It's that behavioral aspect, hands down, hands down that you
Speaker 2: know when I came in as a naive quant I
Speaker 2: thought Mass solved the world. You can model everything, right,
Speaker 2: and I realized that you know, the models their guides.
Speaker 2: Everything we have in the toolkits a guide because it's
Speaker 2: people making decisions and we are inherently strange creatures. Right,
Speaker 2: we do not act in our best interest? Right, we don't.
Speaker 2: We are not utility maximizers, you know, to borrow the
Speaker 2: economic phrase. And so at the end of it, I
Speaker 2: think it's understanding that dynamic of psychology is very important.
Speaker 2: Does one model psychology? You don't, but you know it,
Speaker 2: you can can feel it. And there's something about markets
Speaker 2: where we say we feel something's happening that means we're
Speaker 2: talking about that psychology.
Speaker 1: Well, what's the famous Richard Fyneman quote. I know I'm
Speaker 1: going to mangle this, but if you think physics is difficult,
Speaker 1: now imagine what would happen if electrons had emotion.
Speaker 2: I mean, Fineman is amazing. There's actually something on Twitter
Speaker 2: where someone does find me quotes. I love that too,
Speaker 2: and Twitter still around.
Speaker 1: I've been, you know, said sadly watching it. Circle the drink.
Speaker 2: Yeah, I mean I think it something happened with the
Speaker 2: management there I don't know. It kind of changed the dynamic.
Speaker 2: So I actually haven't been using it as much as
Speaker 2: myself either.
Speaker 1: And so, but the glory days of Twitter peak Twitter
Speaker 1: was a fabulous period.
Speaker 2: It was. And I remember you giving me some advice Mary, Mary,
Speaker 2: so you can go on to the mentor list with this,
Speaker 2: I think you should wrap it up. Well, let's see
Speaker 2: this horrible advice. All right. So I was a young
Speaker 2: guy in here, sitting here because I was younger than
Speaker 2: I am today, and the thing you told me about
Speaker 2: I was like Twitter. I was like, it's so just
Speaker 2: a horrible it's a cesspool and all of this. You said, true,
Speaker 2: Which that's great advice, right. You were like, yeah, true,
Speaker 2: And you said, if you want to do it, block
Speaker 2: and curate, oh lot, Yes, you know what. It changed
Speaker 2: my life, blandly curate because I got what I was
Speaker 2: looking for. Now I have some self reference in there.
Speaker 2: And that's the other thing, going back to your previous question.
Speaker 2: Follow people who you don't want to follow. Follow, follow,
Speaker 2: get out out of your ideological bubble. Correct, understand the
Speaker 2: other side and you may not understand it, but listen
Speaker 2: to it, and it will make you better for doing
Speaker 2: that because You've got to realize that no one has
Speaker 2: your experience. They have their experience, and so to put
Speaker 2: yourself in someone else's shoes and try to try to
Speaker 2: grow from that. It's very important. And don't just read
Speaker 2: everyone who agrees with you. It's really fun for me
Speaker 2: to walk on the desk. I was like, yeah, yeah,
Speaker 2: great job. Sherman. Yeah, yeah, Well, if it's not truthful,
Speaker 2: it doesn't matter. Poke holes in it. And I think
Speaker 2: that's the thing we're all look it.
Speaker 1: It's as if every trade has a buyer and a seller.
Speaker 2: It's funny how that works, right, That's why prices went out.
Speaker 2: There's more buyers and sellers.
Speaker 1: By definition, there can't be by the way that, As
Speaker 1: someone who started on a trading desk, that expression has
Speaker 1: always annoyed me because the true expression is more buyers
Speaker 1: than what it wire. Stocks up today, more buyers than
Speaker 1: filers at this level. Once you exhaust the sellers at
Speaker 1: this level.
Speaker 2: Now you go up.
Speaker 1: Thank you Jeffrey for being so generous with your time.
Speaker 1: We have been speaking with double lines Jeffrey Sherman. He
Speaker 1: is deputy chief investment officer at the firm, helping to
Speaker 1: oversee about one hundred billion dollars in fixed income and equity.
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