Speaker 1: This is Masters in Business with Barry Ridholtz on Boomberg Radio.
Speaker 1: This week on the podcast, I have a special guest
Speaker 1: and this was so much fun. His name is Jeffrey Sherman.
Speaker 1: He is the I'm gonna make him see I O
Speaker 1: of Double Line and uh, one of the people who
Speaker 1: came over from Trust Company of the West with Jeff
Speaker 1: Gunlock to help set up. He actually is Deputy c
Speaker 1: i O as well as sitting on a number of
Speaker 1: different executive management committees UM fixed Income Financial Allocation Committee.
Speaker 1: He runs a number of farm funds as well as
Speaker 1: co runs some funds with Jeff Gunlock UH, and is
Speaker 1: as about as knowledgeable a quants working in the fixed
Speaker 1: income and equity and commodity space uh as as you'll
Speaker 1: ever want to meet. UM. We really don't go too
Speaker 1: deep into the weeds on the wonky quant stuff, but
Speaker 1: it's really a fascinating, roll up your sleeve sort of conversation.
Speaker 1: He understands this as well as anybody out in finance.
Speaker 1: He also hosts his own podcast, which we talked a
Speaker 1: little bit about. So I found the conversation to be
Speaker 1: absolutely uh fascinating and intriguing, and I think you will too,
Speaker 1: so with no further ado, my conversation with Double Lines
Speaker 1: Other Jeff Jeffrey Sherman. My special guest today is Jeff
Speaker 1: Sherman of Double Line Capital, where he serves as Deputy
Speaker 1: Chief Investment Officer UH. The c i O of Double
Speaker 1: Line is Jeff Gunlock, who coincidentally was the very first
Speaker 1: broadcast guest on Masters and Business UM. Jeff Sherman, previous
Speaker 1: to Double Line, worked as a senior VP at Trust
Speaker 1: Company of the West, where he was a portfolio manager
Speaker 1: and quant analysts focused on fixed income and real asset portfolios.
Speaker 1: He has a b s and applied mathematics from the
Speaker 1: University of Pacific and a master's degree in financial engineering
Speaker 1: from Claremont Graduate University. He is also a c f
Speaker 1: A charter holder as well as a financial podcaster. Jeff Sherman,
Speaker 1: Welcome to Bloomberg. Thanks for having me, Barry. So I
Speaker 1: have to start with the the education applied mathematics and
Speaker 1: financial engineering. Did you know you wanted to go into
Speaker 1: asset management earlier in your life? Not at all, not whatsoever, really,
Speaker 1: because that would suggest, oh, here's the path to Wall Street.
Speaker 1: That's right, and um, what happened is is Um. Naturally,
Speaker 1: I guess I was. I was more inclined towards mathematics
Speaker 1: along the way. I started off actually as a pure mathematician,
Speaker 1: which is a lot of abstract math and just trying
Speaker 1: to prove concepts, a lot of logic. Really, um and uh,
Speaker 1: although it was okay to me, it just didn't really
Speaker 1: seem to have a long term path. Obviously, you can
Speaker 1: be a professor. I mean talking about ring theory and groups.
Speaker 1: I mean you're already falling asleep. No, I love them. Okay, good,
Speaker 1: so um, so let's talk deeper about that. Everybody else, Oh,
Speaker 1: there we go, so we'll transition them. But the idea
Speaker 1: was the applications of of mathematics. It typically it's applied
Speaker 1: to a lot of physics, right, and engineering concepts, And um,
Speaker 1: I was always kind of curious by statistics, and for
Speaker 1: some reason, I like the probabilition statistics course is a
Speaker 1: little more and so I'd actually changed my major around
Speaker 1: the middle of my junior year to become an applied mathematician.
Speaker 1: But unlike the traditional folks, I didn't use the engineering
Speaker 1: and physics physics as the application actually used its stats
Speaker 1: and probability. So, um, you know, I forgot to really
Speaker 1: apply for a job as I was going through my Yeah, well,
Speaker 1: you know, you kind of get stuck in that academic
Speaker 1: lifestyle and so decided to take the g r S
Speaker 1: and just try to keep going to school. So ended
Speaker 1: up applying to grad school UM, and ended up down
Speaker 1: in Florida State, down in Tallahassee and uh, interesting place.
Speaker 1: UM didn't really have a lot of application towards statistics
Speaker 1: and probability as you might think of them. They're they're
Speaker 1: pretty well honed on a meteorological tilt. Uh. There's these
Speaker 1: things called hurricanes that they study, and they're well known
Speaker 1: for that. So my application got thrown out the window
Speaker 1: of statistics, not my application for grad school. But they
Speaker 1: said everybody learns fluid mechanics here. Um and by the way,
Speaker 1: here's fifth semester physics. Figure it out, and so um
Speaker 1: it was doing that along the way. It's kind of late.
Speaker 1: This was like late ninety nine early two thousand. Realized
Speaker 1: there are this quand jobs on Wall Street, and there's
Speaker 1: these programs that actually had a financial tilt and so
Speaker 1: similar types of equations like um, uh kind of like
Speaker 1: think in those areas and started taking simulation and things
Speaker 1: like that, and UH ended up transferring back to Claremont,
Speaker 1: closer to home, back in California, and UM went from
Speaker 1: there financial engineering. Speaking of another mathematician, You're working at
Speaker 1: the Trust Company of the West with a gentleman named
Speaker 1: Jeff Gunlock. UM, what was that like when you were there?
Speaker 1: Tell us about about your relationship. Well, Um, it was
Speaker 1: non existent when I started. UM, it's worked in a
Speaker 1: different department. And I remember at the time. It's probably
Speaker 1: a story a lot of people haven't heard. Is Mr
Speaker 1: Gunlock would go around and put out puzzles of the
Speaker 1: month and they were always some quirky, very deep in
Speaker 1: thought puzzle and it was always the rumor was if
Speaker 1: you could solve it within the month and turned into him,
Speaker 1: you could get a job in his department. I'm not
Speaker 1: here to tell you I solved one of those, by
Speaker 1: the way, UM, but it was always curious to me. UM.
Speaker 1: You know someone that's kind of challenging folks in the workplace.
Speaker 1: And obviously as I was, I was working in the
Speaker 1: risk type of group and kind of the middle office
Speaker 1: type analyzing things and just seeing kind of tracker of
Speaker 1: the team and and how the team had some autonomy.
Speaker 1: It's always something that I wanted to do. Um, and
Speaker 1: so UM just kind of started hanging around the oaks
Speaker 1: on the team trying to, uh, you know, get my
Speaker 1: name known or something that, to try to get in
Speaker 1: the group. So you never solve one of his puzzles.
Speaker 1: Negative and then he I don't know if he actually
Speaker 1: for fairness, I'm not sure if anyone ever did. I
Speaker 1: believe he probably did, but I'm not sure if anyone
Speaker 1: ever did and actually got rewarded with that. It could
Speaker 1: have just been a rumor. But the puzzles were available.
Speaker 1: I do know that it's an interesting crowdsourcing. They could
Speaker 1: be puzzles he couldn't solve and say, let's see if
Speaker 1: we can find someone else who can. Uh. Again, I
Speaker 1: don't know the answer to that, but you know, again
Speaker 1: you have to ask him next time you see. I
Speaker 1: will so so he leaves to launch double line on
Speaker 1: his own. How did you go about saying, hey, Jeff,
Speaker 1: I think you need another Jeff in the shop right? Well, Um,
Speaker 1: you know I was on the team at that point
Speaker 1: in time. I've been with the team probably at least
Speaker 1: around five years, four to five years at the time,
Speaker 1: and Um, it was. It was a very quick kind
Speaker 1: of movement and a bunch of people on the desk
Speaker 1: we're talking about, you know, what should we do? And
Speaker 1: it was a pretty easy decision. I was in my
Speaker 1: early thirties, Um, and I said, you know, if there's
Speaker 1: a risk to take, this is the time to do it.
Speaker 1: One and you know, one of the most respected investors
Speaker 1: in the world. Why wouldn't you take a risk to
Speaker 1: join this person on a new venture? And so from
Speaker 1: that perspective, it's it's almost one of those things people
Speaker 1: call a no brainer. Obviously there's a little bit of
Speaker 1: you know, strife and turmoil and internally and again look
Speaker 1: back and the rest is history. You have a lot
Speaker 1: of different subject areas you cover your deputy c I, oh,
Speaker 1: you're on the executive committee. Uh, you're a fund manager.
Speaker 1: What takes the most of your time? What do you
Speaker 1: focus on the most? Well, I'll clarify that I don't
Speaker 1: run the executive Did I say it sounded like tend
Speaker 1: to give people promotion? You know, Hey, it's good to
Speaker 1: be here. But that said, um, most of my day,
Speaker 1: you know, is spent between you know, facing clients, you know,
Speaker 1: portfolio review, strategy, reviews UM, giving outlooks and forecasts of
Speaker 1: how we're thinking about the markets UM and obviously you know,
Speaker 1: coming up with ideas for implementation. So UM our team
Speaker 1: works on the astilication side, So we're trying to kind
Speaker 1: of find relative valuation across various sectors of the bond market. UM. Additionally,
Speaker 1: you know, we run our commodity strategy all quantitatively. Orned
Speaker 1: my team also helps run the equity products that we
Speaker 1: have on the UH. It's kind of a blend of
Speaker 1: an index with some active fixed income management. And so
Speaker 1: again it's it's UM. It's every day is different, but
Speaker 1: that's what makes it interesting, right, It's UM. You don't
Speaker 1: come in and do the same thing day and day out. UM.
Speaker 1: And it's I always viewed as a problem solving exercise, right, UH.
Speaker 1: The ideas you're trying to find, you know, inefficiencies in
Speaker 1: the markets, something that looks attractive, perhaps something that people
Speaker 1: are missing in the puzzle, and more importantly, trying to
Speaker 1: poke holes in what we own today. Right. So that's
Speaker 1: a that's a big part of it, is that are
Speaker 1: we missing some risk out there? Obviously the exogenous ones
Speaker 1: you can ever figure out to after the fact, but
Speaker 1: It's also are we are we getting lulled into, you know,
Speaker 1: an environment like today which is complacent, low volatility, not
Speaker 1: much going on? UM, Are we being lulled to sleep
Speaker 1: as well? And is there something we can do in
Speaker 1: our portfolios to help kind of offset that, or you know,
Speaker 1: try to think about something that's UM again, somewhat exogenous
Speaker 1: to the process today. Here's a rumor that I just
Speaker 1: love Bob Schiller visits Double Lines Los Angeles office and
Speaker 1: more or less starts pitching Cape as a way to
Speaker 1: manage equities more safely, and then somehow this becomes a
Speaker 1: portfolio How how exaggerated? Is that there's some truth in it? Um?
Speaker 1: The facts are that we don't want fake news right,
Speaker 1: want facts right. The facts are that Professor Schiller was
Speaker 1: in our office and Professor Schiller was talking about his
Speaker 1: Cape Index family of the products he had partnered with
Speaker 1: Barclays to work on UM. And I don't know if
Speaker 1: he pitched as a more safe way or that he
Speaker 1: was actually there truly pitching the product, because that's not
Speaker 1: that's not really Professor Schiller's style. You know. Yeah, he's
Speaker 1: he's very humble and he likes to talk about ideas,
Speaker 1: But I don't believe it was a full blown pitch.
Speaker 1: The bankers with them, well, I think perhaps they were
Speaker 1: pitching um. And the question became, okay, this is great.
Speaker 1: We run a lot of fixed income assets, we have
Speaker 1: a macro fund, we have a hedge fund that we
Speaker 1: do things where we could body these types of products.
Speaker 1: But so do you want us to just trade this
Speaker 1: or what's the idea here? So from there what we
Speaker 1: ended up doing was taking a look at the at
Speaker 1: the family in disease and thinking about is there a
Speaker 1: merit here? And at first, looking at it cursory glance, think,
Speaker 1: you know, just another value product, you know, So okay, great,
Speaker 1: good job, you know, yeah, using like a cape cape ratio,
Speaker 1: which is a tenure price. Duran's racist And because the
Speaker 1: longer time you got inflation adjust of course, full cycle
Speaker 1: blah blah blah. Well, who knows if it's a full
Speaker 1: cycle anymore? Here? Where are you're eight? You know? Will
Speaker 1: we uh? You know the low? I know, I know
Speaker 1: you're about that right the bull market starts with the
Speaker 1: new high. I get it, um, But that being said,
Speaker 1: I've read, I've I've read enough and heard enough about it.
Speaker 1: But what we did is started to do some kind
Speaker 1: of statistical work on it, look at kind of factory
Speaker 1: decomposition and things, and I gotta The story I like
Speaker 1: to tell is that the first blush through, I just said,
Speaker 1: this is wrong. These these results make no sense. You
Speaker 1: still have like residual return of alpha in there after
Speaker 1: this process of adjusting for factors. So in ways I'm
Speaker 1: saying there's something to this another when you say it's wrong, Hey,
Speaker 1: this is identifying an inefficiency that you hadn't previously considered. However,
Speaker 1: you don't know me well enough, Barry the first thing,
Speaker 1: I say, that's gonna be wrong, Right, it's gotta be wrong,
Speaker 1: um and so um. So crank through it again. And
Speaker 1: then the next step, after we see it again, go
Speaker 1: for monthly to daily, start looking at different time periods
Speaker 1: like go, now, give me the data set. I want
Speaker 1: to make sure. Let me look through how you're doing it,
Speaker 1: and yeah, you're absolutely correct. It's that there seems to
Speaker 1: be something beyond what's in the factors. And there's nothing
Speaker 1: wrong with factory decomposition or factory portflows. They're great. But
Speaker 1: if everybody can deliver to you and it's commoditized, what's
Speaker 1: my edge, right. So well, we ended up finding out
Speaker 1: there is that this this excess return seemed to exist,
Speaker 1: and we started going through regime changes and look at
Speaker 1: different rate environments and different growth and recessionary areas. What
Speaker 1: we found is it seems to be relatively robust. And
Speaker 1: so now the big question becomes, we have this equity
Speaker 1: inducts that we've seen that appears to deliver something different
Speaker 1: in the value space or even just in core large
Speaker 1: cap equity in the US. What do you do with it? Right?
Speaker 1: Double Line historically have been known for being more fixed
Speaker 1: income oriented, So what do we do with him? And
Speaker 1: so first thing I think about is why not do
Speaker 1: it as an overlay? Right? So, an overlay means that
Speaker 1: you can get this exposure through a derivative like a swap,
Speaker 1: and you can put that on top of let's say
Speaker 1: a treasure report foil that will replicate the total return
Speaker 1: um and you can deliver that. But that's no fun,
Speaker 1: that's just an index business um. And if you're not familiar,
Speaker 1: we run about a hundred and seventeen billion dollars of
Speaker 1: actively managed product. So from the standpoint of what to
Speaker 1: do with it, why not be a little active with
Speaker 1: that treasury PORTFOLIL, and why not run things beyond treasuries.
Speaker 1: Why not do what we do well and try to
Speaker 1: build a diversified kind of lower risk fixed income probably
Speaker 1: don't look like the traditional intermediate term bond funds, but
Speaker 1: run something that'll will take a little bit of interest risk,
Speaker 1: take a little bit of credit risk, and use our
Speaker 1: macro forecasting to blend that together for the right environment.
Speaker 1: And if you do it right, you can add let's
Speaker 1: call it, a couple hundred basis points a year over
Speaker 1: the index. So if you have a good product in
Speaker 1: a process that you believe in from the equity side,
Speaker 1: which UM really resonated with us, so you buy the
Speaker 1: four cheapest s and P five hundred sectors as measured
Speaker 1: by the ten year cape not precisely. So there's a
Speaker 1: couple of things different there. One is UM. Instead of
Speaker 1: using just the cap ratio to identify the value, think
Speaker 1: about like for instance, tech, the technology sector, and think
Speaker 1: about utilities. Historically, utilities have always really traded a lower
Speaker 1: multiple than technology, right, and then there's reasons for that.
Speaker 1: Vall Um. You know, highly regulated industries versus high flying
Speaker 1: growthy stocks. David, Yeah, all the traditional kind of metrics
Speaker 1: you would think for that. So if you just used
Speaker 1: the cap ratio, you would always buy utilities, for instance, right,
Speaker 1: because it would be one of those lower valuation sectors
Speaker 1: as at least in a historical context, and that would
Speaker 1: introduce bias to the portfolio. So to normalize this, or
Speaker 1: to try to standardize it, what you do is you
Speaker 1: compare each sector's cap ratio to its own historical average.
Speaker 1: So think about it's normalizing it for its own trading range.
Speaker 1: Now you have a basis to compare them. So in
Speaker 1: other words, you're picking the four least expensive sectors relative
Speaker 1: to their own history. You're almost there getting and thus far,
Speaker 1: that's all the information you have that is correct um.
Speaker 1: So you rank these each month, and you're gonna pick
Speaker 1: the bottom five. And then of those five, which is
Speaker 1: the cheapest Because it's valuation, you want to avoid value traps,
Speaker 1: cheap getting cheaper, right, falling knife, all those you know,
Speaker 1: sexy adages we put to the to the to that
Speaker 1: process which you do is apply momentum. So the five sectors,
Speaker 1: whicheveryone is the worst performer, you throw it away. So
Speaker 1: think about you're sitting in two thousand fourteen energy is
Speaker 1: extremely cheap on a on a multiple basis, especially real
Speaker 1: to its own history on this CAPE basis. And all
Speaker 1: of a sudden, oil starts declining in the middle of
Speaker 1: the second half of fourteen and by a couple of
Speaker 1: months because of such negative performance in the equities, it
Speaker 1: kicks it out of the index. So you're left with
Speaker 1: the other four. Well, this actually would have saved you
Speaker 1: if you if you just only focus on the five,
Speaker 1: it saves you approximately six hundred basis points PERU over
Speaker 1: the next couple of years. Right, So that's just when
Speaker 1: those CAPE plus a factor plus plus a factor. But
Speaker 1: you're not trying to emphasize the factor, right, So I
Speaker 1: like to say that we're not factor investors. The factors
Speaker 1: are a result of the process. And who came up
Speaker 1: with this really interesting way to use CAPE as a
Speaker 1: basis of creating an equity like product. Not me. First
Speaker 1: of all, I'm not going to take credit for that,
Speaker 1: even though you want to give me a promotion on No, no, no,
Speaker 1: not gonna do that. But this was a joint effort
Speaker 1: between Professor Schiller and the folks at Barclays. So after
Speaker 1: I think it was in early two thousand and ten,
Speaker 1: they started getting together working on this project to try
Speaker 1: to use the CAPE ratio to do something investable. You know,
Speaker 1: there's all these critics out there about the KPE ratio. Oh,
Speaker 1: it doesn't work right, Uh, it's been above average for
Speaker 1: a long period. Well, you can't just use it as
Speaker 1: a buy or cell decision at face value. That's why
Speaker 1: people say it doesn't work, but they're really not looking
Speaker 1: at it correctly. I would agree with that, and I
Speaker 1: would agree that what what is KPE? It is a
Speaker 1: valuation metric? What do evaluation metrics to They don't tell
Speaker 1: you when to time the market, They tell you how
Speaker 1: to think about prospective returns, right, And that's exactly what
Speaker 1: the cap ratio does. When it's above average, it says
Speaker 1: you should expect below average returns. Wow, that's not very hard.
Speaker 1: But people want to say, oh, it's at this level,
Speaker 1: the market hasn't crashed. It's stupid, right, Um, But if
Speaker 1: you look at any valuation metric today, they are and
Speaker 1: apply it to the US equity market, at least as
Speaker 1: many as I'm aware of, They all say the market
Speaker 1: is overvalued, But it doesn't say it's gonna crash. But
Speaker 1: for some reason people get uh fascinated by this cape
Speaker 1: ratio and just want to attack it. And again it
Speaker 1: does have, um, some good credibility of of of talking
Speaker 1: about forward looking returns. In fact, it has one of
Speaker 1: the highest our squares of the metrics out there. However,
Speaker 1: it doesn't say when to get out of the market.
Speaker 1: I'm fond of reminding people that stocks were cheap in
Speaker 1: the seventies and they did poorly, and they were expensive
Speaker 1: in the nineties and they did really well. Right well, Um,
Speaker 1: And you know the level we see on the KP
Speaker 1: ratio at the US equity market day large cap U
Speaker 1: has had. This is the third time we've been here,
Speaker 1: and both times, once it's hit this level, at some
Speaker 1: point it collapsed. You you had the great depression which
Speaker 1: you lost about between friends. Yeah, especially if you compounded
Speaker 1: how it doesn't take it doesn't take much but five
Speaker 1: to get back to break even, that is, and then
Speaker 1: getting your bowl market as you'd like to say, right, um.
Speaker 1: But then the second time was in the technology kind
Speaker 1: of boom and it went up like another before it
Speaker 1: ultimately did crash. Putting us all together, there's nothing that said,
Speaker 1: you know, we have two data points not very robust
Speaker 1: statistically set right, but it does, you know, it does
Speaker 1: strike some fear. But you know, if you want to
Speaker 1: get bullish, I just think of the Japanese stocks in
Speaker 1: the late eighties. I mean they traded with a high
Speaker 1: ninety cape multiple. So I mean, look, we've got in
Speaker 1: a couple percent to run without even earnings growing if
Speaker 1: you believe in the Japanese model. Let's talk a little
Speaker 1: bit about the two Jeff's, which is how you and
Speaker 1: the other Jeff. Jeff Gunlock is known. Uh, he has
Speaker 1: a pretty wild origin story. He's a board drummer in
Speaker 1: hair bands, watching the television show Lifestyles are the Rich
Speaker 1: and Famous. When he decides he's tired of being broke
Speaker 1: and takes a phone book and just literally starts reaching
Speaker 1: out to finance companies. More or less, he looked at
Speaker 1: the word investment banker. That's right, And it wasn't in
Speaker 1: the Yellow Pages. It was not in the Yellow Pages. Um,
Speaker 1: what was your origin story like? Uh? Nothing dramatic like that. Um.
Speaker 1: After I was in grad school and obviously one of
Speaker 1: the things you have to do as an internship, you know,
Speaker 1: to get some hands on experience. And I did my
Speaker 1: internship at a place called Trust Company in the West
Speaker 1: and so as an intern there. UM I accepted a
Speaker 1: full time position. Why I finished up the last piece
Speaker 1: of my graduate work. So unfortunately, nothing really sexy like
Speaker 1: using the phone book at the time. I guess the
Speaker 1: if you could, if you want to get nostalgic the
Speaker 1: way I got the internship. UM, I actually accepted an
Speaker 1: internship back at Florida Power and Light down in West
Speaker 1: Palm Beach. I knew some people there from my Florida
Speaker 1: State days, and so looking for an internship, I tried
Speaker 1: some local companies and then getting calls back, and I
Speaker 1: drove my Ford Ranger pick up you know, the two
Speaker 1: seat or not the extended cat and you can see
Speaker 1: I'm you know, I'm about six three, not the most
Speaker 1: comfortable ride cross country, UM in that four cylinder beasts
Speaker 1: that I had there, and drove to West Palm Beach
Speaker 1: from California. From California, I was because like a week
Speaker 1: driving four days, four days. I mean, look, there's not
Speaker 1: a lot of money to go around internships. You get
Speaker 1: there as soon as you can. What those motels are
Speaker 1: expensive across the country at like thirty bucks a night.
Speaker 1: So anyway, I get there and why I say it's
Speaker 1: a little nostalgic. Is I get a call from my
Speaker 1: roommate back in l A who says, Hey, it's this
Speaker 1: guy from tc W who left you a voicemail, you know,
Speaker 1: on the answering machine, right, this isn't cell phone days. Um,
Speaker 1: and so, UM, they're talking about interviewing you for internships.
Speaker 1: I said, great, I'll call them. So I ended up
Speaker 1: actually calling them. UH, did the interview, and at the
Speaker 1: end of it, I was like, you know, kind of
Speaker 1: what's your time frame, A couple of weeks or something
Speaker 1: like that, I said, I started, I started a job
Speaker 1: in like four days. Um, but if you guys can
Speaker 1: offer me the internship, I'll come back. So I had
Speaker 1: to meet with someone else and um, fortunately they did,
Speaker 1: and I made the trek back three days this time, uh,
Speaker 1: because again no funds are coming into so those are
Speaker 1: like fourteen fifteen hour days. But that's how I came
Speaker 1: back to start my internship. That's a pretty good origin story,
Speaker 1: that one. That's not terrible. That's that's an interesting Uh.
Speaker 1: Cross country and back in a week essentially, I mean
Speaker 1: essentially like five thousand miles over the course of a week,
Speaker 1: week and a half. Um, not the most pleasant experience.
Speaker 1: There was a lot of pit stops along the way.
Speaker 1: I think I was doing, you know, because of my
Speaker 1: legs aching no more than like ninety minutes. I was
Speaker 1: getting getting up in a corner tank at gas each
Speaker 1: time just to do something. Um that's uh. You know,
Speaker 1: you gotta have a good playlist on your CDs. So
Speaker 1: the other Jeff, which is what people used to call you,
Speaker 1: the primary Jeff, is Gunlock. What'sh it like working with
Speaker 1: a guy who is a force of nature like him? Um,
Speaker 1: it's what I know. You know, Um, this this is
Speaker 1: the team I've worked with the majority of my career.
Speaker 1: I've been around this team, you know, in my entire
Speaker 1: formidable years of an as being an investor, and so
Speaker 1: you know, he's human like anybody else. Um, you know,
Speaker 1: we we collaborate, we all work together. Um. He fosters
Speaker 1: a very great environment. Um you think about you know,
Speaker 1: the amount of talent we have surrounding from our emerging markets.
Speaker 1: Team are loan team are high yield folks are mortgage people.
Speaker 1: You know a BS we I mean we we span
Speaker 1: the entire universe and he provides folks with a lot
Speaker 1: of autonomy you know, UM foster growth, UM constructive criticism
Speaker 1: when necessary. But I think one thing that should be
Speaker 1: noted is he he is very a very good listener.
Speaker 1: You know, if there's ideas, there's different ways to do something,
Speaker 1: he's always open to them. But if they're wrong, he'll
Speaker 1: tell you. You know. So it's it's a fair relationship.
Speaker 1: And I think that's why you see very limited turnover
Speaker 1: the investment staff is it's it's a good environment. What
Speaker 1: do you think when he goes on TV and says
Speaker 1: sell everything? How how do you guys respond to that
Speaker 1: school or what happens? Well, my team's office, we don't
Speaker 1: sit on the trading desk with everybody else. We're kind
Speaker 1: of removed. I kind of like that low close knit
Speaker 1: with my team. But our team is right outside the
Speaker 1: media room. So we're going, that's happening right there, right now, now,
Speaker 1: sell everything. You know. I'm not gonna say that he's
Speaker 1: always hyperbolic, but I think he's trying to get a
Speaker 1: point across. And what he's saying is that at the time,
Speaker 1: this was right around Brexit, where everyone is telling you
Speaker 1: that this is right prior to Brexit, that disinflation is
Speaker 1: taking over GDPs collapsing, we're gonna be stuck in this
Speaker 1: highly levered economy with no growth. I mean, it was
Speaker 1: just very negative time. And the idea is that we
Speaker 1: can't break really new lows on the tenure. These markets
Speaker 1: aren't responding in a way that's consisting it with the
Speaker 1: message and to sell everything is that if you feel
Speaker 1: that you have too much risk on and you're nervous
Speaker 1: by the phrase sell everything, Barry, what that means is
Speaker 1: you probably own too much risk. And that was really
Speaker 1: the message behind it. Um. Again, clients don't take it
Speaker 1: as well as that. They're like, should I just sell everything? Um?
Speaker 1: But it's like you tell people when you have a
Speaker 1: great market going on, like we have an the equity market,
Speaker 1: people get extremely nervous and they want to sell everything,
Speaker 1: sell a piece, monetize something. Um. But you gotta be
Speaker 1: able to get back in the game too, So let's
Speaker 1: sell everything mantra. I think I'm not gonna call it hyperbolic,
Speaker 1: but it's meant to be there to try to drive
Speaker 1: a message home is that, look, there's a lot of
Speaker 1: risk out there you're not seeing reduce your risk levels,
Speaker 1: and anytime you sell something, you have to have a
Speaker 1: line in the sands to get back in. I assume
Speaker 1: it's exactly right. And we were really focused on the
Speaker 1: bond market, and the thing wasn't just sell everything, you know,
Speaker 1: it was really related to an art piece too, where
Speaker 1: it was sell the house, sell the wife, sell the kids.
Speaker 1: And so I think he used that and he said
Speaker 1: just sell everything. Uh. And I think he used it
Speaker 1: on a webcast a few few days earlier. And you know,
Speaker 1: we we heard him staying it around the office. Didn't
Speaker 1: think it'd really go on TV and say it, but
Speaker 1: he did. Um. And you know, look he was right
Speaker 1: at the time. I mean there was a lot of
Speaker 1: risk brewing, specifically in the blonde market and you'll shut
Speaker 1: up pretty quickly post Brexit, and so um there was
Speaker 1: the entry point to you know, we weren't really doing
Speaker 1: a lot of trains that time. We just hated the
Speaker 1: price levels and so it was time to start putting
Speaker 1: things back to work. So it's being patient to making
Speaker 1: sure that you don't stray, don't let the central bankers
Speaker 1: force you into the box in the positions you're not
Speaker 1: comfortable with. UM, don't don't have the fomo, the fear
Speaker 1: of missing out with everybody else, and you know, make
Speaker 1: sure you're you're investing for your philosophy and what you're
Speaker 1: trying to achieve. And that's really what it is, is
Speaker 1: that people have gotten accustomed to taking a lot of
Speaker 1: risk UM that's really not in their normal zones. I
Speaker 1: would say, let's talk a little bit about stocks and
Speaker 1: bonds and commodities, which is telling us where we are
Speaker 1: in the financials now. Well, I think each of those
Speaker 1: three sectors of the market, those asset classes have a
Speaker 1: different time perspective UM. And I think of the bond
Speaker 1: market as being more contemporaneous. It's digesting macro day as
Speaker 1: it comes through. It tells us essentially where we are currently. Uh.
Speaker 1: The equity market, obviously, the forward discounting mechanism you think
Speaker 1: about when we're in the midst of a recession, Equity
Speaker 1: prices tend to be rising somewhat um when you're in
Speaker 1: the middle to the back end of the recession, as
Speaker 1: it's thinking about the prospects looking forward um. And then
Speaker 1: we call commodities the more of the laggard. They actually
Speaker 1: tell you what has happened, uh. And the reason for
Speaker 1: that commodity is being on that kind of backward looking
Speaker 1: thing is because you're talking about already have consuming, already
Speaker 1: have consumed uh, the commodity of itself, and so you
Speaker 1: you kind of see this forward looking to it, the
Speaker 1: supply demanding balance gets out of whack and so UM,
Speaker 1: they all tell you different things, except or they have
Speaker 1: different time horizons. Except right now you're getting a little
Speaker 1: contradictory efference between UM these markets. And in fact, with
Speaker 1: the commodity story, what you've seen is it's been based
Speaker 1: on a lot of growth, uh specifically industrial metals very
Speaker 1: very strong this year. So let me push back on
Speaker 1: you the immediate response on commodities. I hear from traders
Speaker 1: all the time, Oh, it's a weak dollar story. Well,
Speaker 1: you know the dollar has been weak, but if eight
Speaker 1: percent is going to spike, you know, industrial mother's prices,
Speaker 1: I think there's a little disconnect the UM. So the
Speaker 1: strength of the dollar is not gonna pull if we
Speaker 1: we rallied back to you know, the early two thousand
Speaker 1: seventeen levels, I don't think it's gonna pull down. UM.
Speaker 1: You know industrial metal prices, copper nickels specifically UM and
Speaker 1: in that manner to to reset those prices. So UM,
Speaker 1: it's a good story, um, but we'll keep it as
Speaker 1: a narrative that's not necessarily factually correct. What about the
Speaker 1: flattening yield curve. I keep hearing people say, you know,
Speaker 1: this yield curve is flattening, and that's a just a
Speaker 1: recession is not that far off, that's right. But they
Speaker 1: when they pull you the chart out, they start either
Speaker 1: in two thousand seventeen or they go back to really
Speaker 1: December of thirteen, at the end of the Taper tantrum,
Speaker 1: remember the Taper tantrum, although not December. If you go
Speaker 1: back time, the peak what the tenure kind of close
Speaker 1: at three oh two, and what we're two is at
Speaker 1: that time like thirty basis points, right, I mean massively
Speaker 1: steep curve. Um. But if you actually pull the data
Speaker 1: set back respect history, um, what you see is the
Speaker 1: average experiences and you know kind of the high ninety
Speaker 1: basis points, like nineties seven basis points average, kind of
Speaker 1: using monthly data. The shape between two twos and tens. Yeah,
Speaker 1: it's actually a differential between ten and the tube. We
Speaker 1: call it two s tens um. But today yeah, yeah,
Speaker 1: you're sitting in the mid seventies. UM. But that's not
Speaker 1: a recession indicator. In fact, we have some charts we
Speaker 1: use in a lot of our webcast UM that we
Speaker 1: show that this is an endemic of a FED tightening cycle,
Speaker 1: and so when the FED tightens, the yield curve tends
Speaker 1: to flatten. UM. Where people get fearful is that if
Speaker 1: the yield curve inverts at the end of that Right,
Speaker 1: and so I hear I read a lot about oh,
Speaker 1: this is portending recession, recession, but it's barely below average
Speaker 1: to see a little bit this flatting could take place.
Speaker 1: But what about the gross story, Barry? What about the
Speaker 1: idea that you know we're growing on a nominal basis
Speaker 1: in the four handles, right, I real GDP is about
Speaker 1: two point three percent on a year over year basis.
Speaker 1: We've been growing in the low two since the financial crisis. UM,
Speaker 1: And you have this inflation print. And if Camani has
Speaker 1: actually put you on the verge of getting a little
Speaker 1: more inflation system, perhaps the yeld curve actually does steep
Speaker 1: in a little bit. So we'll have to see kind
Speaker 1: of the inflation side, because the back end of the
Speaker 1: curve is gonna be priced closer to nominal GDP and
Speaker 1: we haven't been talked about the FEDS unwinding of their
Speaker 1: balance So let's talk a little bit about the FED
Speaker 1: unwanting their balance sheet. I keep, by the way, every
Speaker 1: time I reference they said, I hear trading and say,
Speaker 1: you know the rumors that bounce around desks. One of
Speaker 1: the things we hear is, hey, you know, the Fed
Speaker 1: is behind the curve. They should have tightened much further already.
Speaker 1: What what are your thoughts on that? Well, if you
Speaker 1: want a recession, yes they shouldn't. They should have tightened
Speaker 1: sooner um. But the behind the curve is garbage. I mean,
Speaker 1: the fact that we can't print a two handle inflation consistently.
Speaker 1: The fact that we can't print a to handle inflation
Speaker 1: print consistently. It really just destroys that thesis. Yes, unemployment
Speaker 1: is low, but there's no wage inflation behind it. Um.
Speaker 1: People use the hurricane spike at the you know, the
Speaker 1: two point nine percent average hourly growth a couple of
Speaker 1: months back, the month post hurrican, the hurricanes that it was,
Speaker 1: Oh my gosh, here it comes, here, it comes. It's
Speaker 1: revised down a little bit. The next print to five.
Speaker 1: We're back in the in the middle of the range.
Speaker 1: And so the idea that the Feds behind the curve,
Speaker 1: I think once again it's just a myth. The Fed
Speaker 1: is pushed this year. I mean they've they've raised race twice.
Speaker 1: They're on their path to third the third hike. And
Speaker 1: you know what you've seen though, is because it's put
Speaker 1: pressure on the front of the curve, which you know,
Speaker 1: the FED funds ties into live or prime all those rates,
Speaker 1: which you've actually done is constrict some parts of the consumer.
Speaker 1: When they talk about credit cards, loans that are tied
Speaker 1: on the front end of the curve. Almost everything outside
Speaker 1: of housing is tied to war right or some derivative
Speaker 1: of via prime rate. So you've actually seen some constriction
Speaker 1: and consumer spending. Um. So it's a it's a little
Speaker 1: bit strange the bond market. You know, if you talk
Speaker 1: about term financing through Corporate America, yields are lower today
Speaker 1: than they were at the beginning here, but the consumer
Speaker 1: is paying you know, fifty plus basis points higher. So
Speaker 1: for consumer driven economy, they have to be very careful.
Speaker 1: If it's sevent GDPs coming from the consumer, we've got
Speaker 1: to be careful of of like tightening net spigot too quickly.
Speaker 1: And so I don't buy the idea that the fits
Speaker 1: behind the curve. In fact, they're doing a double dose
Speaker 1: of tightening for the fact that they're going to raise
Speaker 1: rates there in the process of a hiking regime that's undeniable,
Speaker 1: and they're reducing their balance sheet. They've already started last
Speaker 1: month in October, they started taking off ten billion dollars
Speaker 1: a month out of the balance sheet by lack of reinvestment.
Speaker 1: But stop there, because I've been discussing this with people,
Speaker 1: and you get that thousand yard stare when it starts.
Speaker 1: Explain what it means for them not to roll over paper.
Speaker 1: They have, how their balance sheet shrined by them doing
Speaker 1: nothing right. So they have there's there's a maturity wall
Speaker 1: each month, there's securities that mature prior to October of seventeen.
Speaker 1: They reinvested those proceeds at some point along the curve,
Speaker 1: both through treasuries and agency mortgages government guaranteed mortgages, so
Speaker 1: buy them, not reinvesting the securities. That means those securities
Speaker 1: instead of being held in what I would call a
Speaker 1: price taker hands that the Fed buys bindly does not
Speaker 1: care what the yield is. Right, it now gets put
Speaker 1: out in the float of the market. So from an
Speaker 1: equity perspective, if we draw that parallel, imagine insiders putting
Speaker 1: securities out in the marketplace. So those bonds need to
Speaker 1: be digested by price discrimination or people who are priced
Speaker 1: discriminatory when it comes to the price and yield those securities,
Speaker 1: as opposed to the FED that buys it any price. Finally,
Speaker 1: so you can think of the e c B sixty
Speaker 1: billion euros is still a month that they're doing until
Speaker 1: the end of the year. So by the FED putting
Speaker 1: these securities out in supply in the market, it needs
Speaker 1: to be digested by investors, and so that means there's
Speaker 1: a net supply of new bonds in the marketplace. Without
Speaker 1: even discussing the budget, discussing the shortfalls there the the
Speaker 1: deficit neutral one point five trillion dollars that the new
Speaker 1: tax plan is gonna cost every ten years. So at
Speaker 1: the margin, it's not much on their balance sheet. It's
Speaker 1: only ten billion dollars. You know, some firms get that
Speaker 1: in a month in terms of bond flows. So but
Speaker 1: the plan is yeah, right, that that's that's the elephant
Speaker 1: in the room, right. But what we're saying about the
Speaker 1: FED is don't take that money and roll it into
Speaker 1: a new bond, which means that bond is now those
Speaker 1: um what would have been purchased and put back on
Speaker 1: the FED balance sheet is now in the out in
Speaker 1: the market plans out in the market one, so the
Speaker 1: market to digest it. But don't forget it goes from
Speaker 1: ten billion a month, and in January it's on schedule
Speaker 1: to go to twenty billion a month, and then in
Speaker 1: April thirty billion a month, and then July forty billion,
Speaker 1: and in October fifty billions. So this isn't them selling.
Speaker 1: This is simply them not renewing, not rolling over bonds
Speaker 1: that mature in order to strength their balance sheet. That's correct,
Speaker 1: and so that's has stated today. Remember the game plan
Speaker 1: can change, UM. So what that means is is that
Speaker 1: these securities were set to mature anyway. And if you
Speaker 1: actually look at the Fed's balance sheet and the maturity schedule,
Speaker 1: it always is above this threshold. So they will be
Speaker 1: barring any changes in the plan UM putting these securities
Speaker 1: out in the marketplace effectively. However, they do have a
Speaker 1: little thing and they'd say up to doesn't say exactly,
Speaker 1: And there are a few months which I can't recall
Speaker 1: off the top of my head, if there's one month
Speaker 1: in eighteen or it starts a nine team where there's
Speaker 1: not enough to actually dump the fifty billion a month.
Speaker 1: So we'll have to see how that plays out. But
Speaker 1: let's talk about what happens at the FED continues to
Speaker 1: press rates because they're behind the curve and we're putting
Speaker 1: these these more more of these bonds in the marketplace. Um,
Speaker 1: we just feel that it has to be at the
Speaker 1: margin negative for yields me and they should go up
Speaker 1: because there's more float in the market, And yet yields
Speaker 1: have not really ticked up all that much. How do
Speaker 1: you explain that up to this point late in right,
Speaker 1: I think I'm gonna call it super Mario, you know. Um,
Speaker 1: And that's I'm referring to the CCP president And UM,
Speaker 1: you know, Droggy has he's really got himself a conundrum. Um.
Speaker 1: He's got nominal GDP similar to ours. Right, he's got
Speaker 1: German Boone's the tenure trading sub forty basis points. You
Speaker 1: know what, we're sitting closer to HU forty basis points.
Speaker 1: Um so, and he's got overnight lending rates negative forty
Speaker 1: basis points. Um. You know, we're talking today at like
Speaker 1: one in three eights here in the US. UM, So
Speaker 1: what is the disconnect between their economy which is growing,
Speaker 1: they have margins expanding, you know, they never had this recession, um,
Speaker 1: and they're contained to grow similar rates. Why are there yields?
Speaker 1: So why would he say they never had this recession.
Speaker 1: They had a bad up of the years, and they
Speaker 1: certainly suffered during the Great Great Recession. Sure, but also
Speaker 1: we did too, really in profitability in the US. It
Speaker 1: was highly correlated to energy, right, it infected the entire world.
Speaker 1: But I mean we had a profit recession here in
Speaker 1: the US, which I'm defined as declining corporate profits consecutively,
Speaker 1: so I it was proxibly five quarters. We saved that off, right,
Speaker 1: And really they did too. Rite they never had the
Speaker 1: true economic recession that's typically associate with And that's that's
Speaker 1: one of the first times in history you've actually seen,
Speaker 1: even in the US go through the profit recession not
Speaker 1: leading to a true economic recession. So when you when
Speaker 1: you actually look at kind of spreads and everything, I
Speaker 1: do believe if you look at yields, there's been such
Speaker 1: correlation in global bond yields. That the reason you have
Speaker 1: some of this um kind of I won't call it
Speaker 1: a ceiling, but the fact that you have yields in
Speaker 1: the US a little too low relative historical standards as
Speaker 1: measured by g d p UM. I think a lot
Speaker 1: of it stemps in the fact that you had this
Speaker 1: compression because they continue to buy bonds. It's not just
Speaker 1: that they won't hike rates negative forty basis points and
Speaker 1: overnight lending, but they also buying sixty billion euros. So
Speaker 1: Draggy cuts thirty billion of that out in January. That's
Speaker 1: thirty less that thirty billion euros less he's buying, and
Speaker 1: the FEDS dumping more into the market, so we could
Speaker 1: see an increase in rates. And that's that's kind of
Speaker 1: our stance at this point, is that yield should push
Speaker 1: higher from these levels and historically long bonds and you know,
Speaker 1: trade around nominal GDP, so that says, you know, maybe
Speaker 1: they're about a hundred basis points too rich today and
Speaker 1: long bomb being thirty. We have been speaking with Jeff Sherman.
Speaker 1: He is the deputy c i O at Double Line Capital.
Speaker 1: If you enjoy this conversation, we love your comments. Feedback
Speaker 1: end suggestions right to us at m IB podcast at
Speaker 1: Bloomberg dot net. You can check out my daily column
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Speaker 1: at Rid Halts. Be sure and check out our podcast
Speaker 1: extras where we keep the tape rolling and continue discussing
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Speaker 1: and Bloomberg dot com. I'm barrier It Holts. You're listening
Speaker 1: to Masters in Business on Bloomberg Radio. Welcome to the podcast.
Speaker 1: Thank you Jeff for doing this. I had so much
Speaker 1: fun on your podcast earlier this year, and I knew
Speaker 1: I've wanted to have you here for a while. UM,
Speaker 1: let's talk about a few things we didn't get to
Speaker 1: some questions I wanted to ask you, um during the
Speaker 1: regular broadcast portion, and then we'll jump into some more
Speaker 1: fun stuff. So you mentioned super Mario, we were talking
Speaker 1: about the FED. We left out the third player in
Speaker 1: Central Bank Corona Thon. Yes, what what do you think
Speaker 1: about Albanomics and what's going on in Japan? And can
Speaker 1: you ever recall a period where the US Japan and Europe.
Speaker 1: We're so out of phase with their recoveries and or
Speaker 1: economic stimuli. Yeah, that's that's a lot to digest there.
Speaker 1: So um Essentially, I don't know how the bo j
Speaker 1: gets out of their policy. I mean, they own so
Speaker 1: many equities. I mean, the the data we see is
Speaker 1: like sixty percent of the equity market roughly the same
Speaker 1: as their et F market. Like you could let you
Speaker 1: could let bonds just mature and roll off, you can't
Speaker 1: do that with equities, right. And the other thing is
Speaker 1: is that they're supposedly targeting the rate. The rate isn't
Speaker 1: the rate they're targeting. I mean, it's it's flat out
Speaker 1: trying to manipulate the curve. Um. But you know, the
Speaker 1: thing is is that they believe it's working. The ABBE
Speaker 1: got re elected, got the majority, which is the economy
Speaker 1: isn't bad, and you know, they think they're going to
Speaker 1: get their inflation. So we'll have to see, um. But
Speaker 1: I think they're the ones that are on cruise control.
Speaker 1: They're not going to peel this back until they get
Speaker 1: their desire to fact, how do we explain that of
Speaker 1: all the major economies, they're the ones that's the most
Speaker 1: problematic in terms of their balance sheets, their demographics, their
Speaker 1: heavily export dependent economy. And yet what is the ten
Speaker 1: year in Japan? Now it's roughly it's usually in a
Speaker 1: single digit basis point. It's amazing. So so how do
Speaker 1: we explain that. Is Japan more credit worthy than Germany
Speaker 1: or the US or is something else going on? I
Speaker 1: think it's something else going on to I mean, look,
Speaker 1: it's it's the home of the carry trade. It has
Speaker 1: been for so long. Um, it turns into the flight
Speaker 1: to quality asset when there's crisis because as Japanese based investors,
Speaker 1: they have to invest overseas to get any semblance of
Speaker 1: a return right. And so what you find is in
Speaker 1: when things go bad, they repatriate the money back home,
Speaker 1: get the strength in the yam um. So I think
Speaker 1: the dynamics have changed over time, but I think what
Speaker 1: we should learn from it it's a precursor of things
Speaker 1: to come in developed world and Europe is on that track.
Speaker 1: The US is on that track. When you look at
Speaker 1: birth rates were barely at replacement rates here in the US,
Speaker 1: way ahead of Japan, though, I mean the US maybe
Speaker 1: the best birth rate of industrialize that that's why I
Speaker 1: say Europe is going to have the problem next, right,
Speaker 1: And there's one way to hear the birth rate, have kids. Um.
Speaker 1: Immigration is another thing that you need workers. It's not
Speaker 1: necessarily you know, having children, because that takes a while.
Speaker 1: If we start tonight, Barry, it's gonna take you know,
Speaker 1: eighteen twenty years to get that thing going. So immigration
Speaker 1: is a is a good stop gap too for that time.
Speaker 1: But you look at things like Saudi Arabia, I mean
Speaker 1: their workforce in prime working age. It's like of their
Speaker 1: area has in prime working age. So I think what
Speaker 1: you see in the Japan, it goes to Europe next, um,
Speaker 1: and then the US without changing its ways. Ultimately we
Speaker 1: go that direction. But you're talking decades, many decades down
Speaker 1: the road. But again we we shouldn't just turn a
Speaker 1: blind eye to what's going on in Japan. And that's
Speaker 1: what happens when you have a closed off immigration system
Speaker 1: and you don't have the birthrate, and again the demography
Speaker 1: is horrible, you know, and yet they continue just puttering along.
Speaker 1: It's it's it's good to control your own printing press well,
Speaker 1: to say, to say the least I have to push
Speaker 1: back against something you said or or I may have
Speaker 1: misheard previously you had said this is the only profit
Speaker 1: recession we've seen where there wasn't a subsequent economic recession.
Speaker 1: I believe that to be true. But so US unemployment
Speaker 1: doubled from five to ten percent, GDP dropped to zero.
Speaker 1: How is that not a I'm talking and I'm talking recently,
Speaker 1: so you're not to the financial forever. Come on, Barry, alright,
Speaker 1: so it I've been around at least that low, right,
Speaker 1: So that's really when you had a drop in residing,
Speaker 1: drop in profits throughout most of the fifteen, at least sixteen,
Speaker 1: and then you start to see the recovery. So those
Speaker 1: are the five quarters I'm referring to. Got it so
Speaker 1: you can fact check it later too, But a number
Speaker 1: of I think it was Um, I'm trying to remember
Speaker 1: who Eckery was forecasting that as a recession, and it
Speaker 1: never showed up, never materialized. And if you look at
Speaker 1: the conference Board leading Indicator, which is a great indicator recession,
Speaker 1: what you had in fifteen is we got close when
Speaker 1: it rolled over at least six team. We got almost
Speaker 1: to zero on that. And the negative area tends to
Speaker 1: be recessionary, not always, but again it's one point and
Speaker 1: that rebound there, so that indicator still looks pretty good.
Speaker 1: That UM. That is the Ryan Hart and rogue Off
Speaker 1: um explanation is following financial crises, you get a very
Speaker 1: subpart GDP, very subpart employment and wage gains, and it
Speaker 1: looks like you're parent lee on the verge of a recession,
Speaker 1: but you're just slowly recovering and and there is no
Speaker 1: credit available to push you away from that, and there's
Speaker 1: sub one percent GDP, very little credit. I should say,
Speaker 1: then there's two things that I kind of um gleamed
Speaker 1: from that UM. One is is that, um, you you
Speaker 1: also have this high debt burden, right, And that's the
Speaker 1: other part of the Reinhardt Rogoff study is that essentially
Speaker 1: when you hit certain debt to GDP ratios, you can
Speaker 1: just never recover. So and the second point I was
Speaker 1: trying to make too, is that ultimately or historically should say,
Speaker 1: when you had a nominal GDP sub five in the
Speaker 1: US that led to a recession and we've been perennial there,
Speaker 1: sub five percent nominal not real? Okay, yeah, sorry I
Speaker 1: wasn't clear there, so including inflation, but that has to
Speaker 1: be tossed out. We've we've been sub five for a
Speaker 1: long time time, so I think it's consistent with the
Speaker 1: Rhino Rugoff study as well. And then the other thing
Speaker 1: I wanted to ask you about that I didn't get
Speaker 1: too while we were doing the broadcast portion was on
Speaker 1: the Schiller cap portfolio. There are a handful of questions. Um, First,
Speaker 1: this model, you guys at double one and now running
Speaker 1: a billion dollars or so? Is that right? It's a
Speaker 1: little more than that's about six billion today six billion?
Speaker 1: So and who is the fun manager of that? Myself?
Speaker 1: All right? So the two jeffs are running this as
Speaker 1: a six billion dollar portfolio. You have the original version?
Speaker 1: Was us? I understand there's a European version of Yes,
Speaker 1: that's correct. Um, So the same basic models, same model.
Speaker 1: Instead of using the SMP five decomposing its sectors, take
Speaker 1: the MSCI Europe and decomposion did sectors. So if you're
Speaker 1: taking ms A your ms C I Europe, could you
Speaker 1: do the same thing for ms CI Emerging Markets or
Speaker 1: Asia or what have you. You are correct? And there
Speaker 1: are other versions there is, um there's a Japanese version.
Speaker 1: We do not have a product on that today. Um.
Speaker 1: There is the Asia x Japan version as well. Um,
Speaker 1: and most people the first question is what about emerging markets?
Speaker 1: And so remember we're using earnings data to build a ratio.
Speaker 1: So how do you think earnings ten years ago looked
Speaker 1: in the emerging market? Where the credibility of it? And so,
Speaker 1: although we've tried to gravitate to these international standards, um,
Speaker 1: the you know, I'm I'm skeptical of the data set
Speaker 1: and the actually how good the data is? So um,
Speaker 1: perhaps at sometimes someone will be able to create a
Speaker 1: standard methodology for that, but again it's I think it's
Speaker 1: too early to apply this in its form as it
Speaker 1: exists today. So that's a really interesting product that that
Speaker 1: you helped to to create based on Bob Schiller's work.
Speaker 1: What is the process like for thinking about developing and
Speaker 1: rolling out new models, new funds? Knew? What have you? Yeah,
Speaker 1: I have a whiteboard in the office. Um, you know
Speaker 1: typically you know, when people have ideas, our team looks
Speaker 1: at it. You know. Um, you know, you know, what's
Speaker 1: the tar going to market? What's our edge? How do
Speaker 1: we what what's what differentiates this from other things? And
Speaker 1: so um, although you know, we have probably seventeen strategies
Speaker 1: that we offer out to the public today. Um, when
Speaker 1: you look across them, they are different, but they're all
Speaker 1: consistent their macro consistent. There same thinkers, are the same
Speaker 1: portfolio managers, and it's different risk profiles. And so what
Speaker 1: I like to say is that it answers the question
Speaker 1: I get whenever I give a talk in front of
Speaker 1: an audience. You know, if you had a hundred dollars, Barry,
Speaker 1: how would you allocate across your funds? And so instead
Speaker 1: of doing a good question, it is a great question.
Speaker 1: And so my response now is tell me a risk profile,
Speaker 1: what what kind of draw down do you like? What's
Speaker 1: your objective here? And we can give you probably a strategy.
Speaker 1: It's a one stop shop for it, right and so, Um,
Speaker 1: the idea is that if we find new things, you know,
Speaker 1: we're happy to get involved with them. Um. But again,
Speaker 1: we don't want to saturate the market with products that
Speaker 1: we don't think has some different edge than something that
Speaker 1: currently exists. And so you know, we've rolled out ETFs
Speaker 1: over the years where we sub advise them UM different channels.
Speaker 1: We've built a use of complex starting last year starting
Speaker 1: to take it's trying to take hold of the European
Speaker 1: markets and so um, right now we're looking at kind
Speaker 1: of you know, that horizontal type of distribution where trying
Speaker 1: to bring our services to more people, right and not
Speaker 1: not necessarily got to have new products to do that.
Speaker 1: So the the biggest theme in in the world of
Speaker 1: investing for the past I don't know year decade fill
Speaker 1: in the blank, has been the shift towards passive investing
Speaker 1: on the equity side versus active stock picking. But I
Speaker 1: think a lot of people make the assumption that the
Speaker 1: same is true on the bond side, and from what
Speaker 1: most of the academic data shows is that active investing
Speaker 1: on bonds actually generates alpha. Tell us about um, why
Speaker 1: active on bonds is so much more effective than active
Speaker 1: on equities more a little question tiny topics, yea, how
Speaker 1: much time do you have for the rest of the day.
Speaker 1: I think what's what's amazing about it is the bonds industries,
Speaker 1: first of all, historically have been kind of poorly constructed,
Speaker 1: and what they did is over inclusive, regardless of quality. Regardless,
Speaker 1: it's not necessarily overly inclusive. What I would argue is
Speaker 1: the it's the thesis pointed the fact that they use
Speaker 1: market value of debt to index it. So the more
Speaker 1: you borrow, the larger position you are in the index.
Speaker 1: So trying to bring that market capitalization idea from the
Speaker 1: equity market and turn into market value in fixed income
Speaker 1: and so it doesn't make sense. So very as you
Speaker 1: borrow more money for me, you know, we more investors
Speaker 1: should give you more money and put a higher allocation
Speaker 1: because you're more credit worthy. No, you're absolutely less credit worthy.
Speaker 1: So it's actually inherently incorrect the way that in the
Speaker 1: traditional industries have looked at that. And obviously there's other
Speaker 1: people trying to build new new models behind that. But
Speaker 1: I think if you look across the universe, there's a
Speaker 1: lot of SMP data that shows active fixedment income management
Speaker 1: tends out perform the indices over very long periods of time. Um,
Speaker 1: it just is such a different set of data versus equities.
Speaker 1: We'll look at We'll look at the e t F
Speaker 1: world the passive ETFs um, not the active ones, but
Speaker 1: the passive ones relative to active manage either E t
Speaker 1: s or funds. It's the same things, is true. They're
Speaker 1: I'm not saying that people are picking off the E
Speaker 1: t F investors, but there you know what they're gonna buy.
Speaker 1: When the big new issue comes out, you don't want
Speaker 1: to participate in it because you know they're gonna gobble
Speaker 1: it down and their price takers. Once again just like
Speaker 1: the ft and so UM it's you can move the
Speaker 1: bond price a lot more than you can probably the
Speaker 1: equity prices. That said this, this fervor for indexation on
Speaker 1: the equity side, there's gotta be a limit to it.
Speaker 1: Obviously the whole world can't be in Well, we're at
Speaker 1: thirty in the US, and if you listen to UM
Speaker 1: Bill McNab or Tim Buckley, the Income CEO, they point
Speaker 1: out that globally it's five. So so wherever that limit is,
Speaker 1: we're still fairly early days. He agreed. But I also
Speaker 1: also think back to how the products sold. The product
Speaker 1: isn't sold buy and hold cheap. A lot of people,
Speaker 1: I know you profess that your team people say that,
Speaker 1: but a lot of people are saying active management doesn't work.
Speaker 1: So what the what the corell area is that they're
Speaker 1: telling people that indexing outperforms active management? So what happens
Speaker 1: when it doesn't? Are the people still going to stay there?
Speaker 1: One Secondly, we we take this idea that if you index,
Speaker 1: you're going to be buy and hold, you're going to
Speaker 1: be Now, your job as an advisor is to help
Speaker 1: people stay invested. But let's be honest, a market correction,
Speaker 1: a legit kind of draw down, people are going to
Speaker 1: run for the hills too. Yes, but here's the pushback.
Speaker 1: So first, I don't disagree with anything you're saying. Accept
Speaker 1: The way it's best phrased is hey, active equity stock
Speaker 1: picking and or market timing can beat indexing. However, it's
Speaker 1: expensive and NETTA fees and costs, there's a there's a
Speaker 1: bog you to overcome, and what makes you think that
Speaker 1: you're gonna find Bill Miller in not Bill Miller No. Seven.
Speaker 1: So those are the challenges, right, But I think that's
Speaker 1: that's I think that's also that's a different argument. It is,
Speaker 1: and and the thing about it is maybe what it
Speaker 1: is is maybe there's too many poor managers, maybe there's
Speaker 1: too many people hugging. The index itself actually comes out
Speaker 1: and says, I think that why are you paying up
Speaker 1: for closet index? Right? And I think those people should
Speaker 1: be exposed and they slowly are. You know what people
Speaker 1: got upset about the d o L rule. But maybe
Speaker 1: we have too many bad advisors too that are flipping
Speaker 1: things and doing no doubt, so we're cleaning these all things.
Speaker 1: We're cleaning these things up. And if you're going to
Speaker 1: get an index product, pay index fees. I'm with you there.
Speaker 1: But I do think there are good stock pickers. I'm
Speaker 1: probably not one of them at this stage of the game,
Speaker 1: but there are people that you should reward there and
Speaker 1: the activists, and you know, people have targeted niches. Those
Speaker 1: those people always be able to generate alpha because you
Speaker 1: have to identify them, yes, in advance, right in advance.
Speaker 1: The size you know that you have to pay four
Speaker 1: and forty four to get in, but and they won't
Speaker 1: even take you. And they won't take you, they'll close down,
Speaker 1: only run their own money. But not to mention any name.
Speaker 1: I don't know anyone that's done that, you know, so maybe,
Speaker 1: but so so let's talk about podcasting a little bit.
Speaker 1: But active passive. We've beaten the death over the years everywhere.
Speaker 1: So you by the way, for those of you listening,
Speaker 1: Jeff has a podcast which is misnamed The Sherman Show.
Speaker 1: I have internally renamed it Sherman Says, which is what
Speaker 1: it should be called it and when you do when
Speaker 1: you when you were privileged to be invited on Jeff's podcast,
Speaker 1: they he has the word association and that segment is
Speaker 1: called Sherman says, and your job in word association is
Speaker 1: to come up with a word one word response, which
Speaker 1: I actually think I was pretty pretty true too. Um,
Speaker 1: but you you were one of the successful people and
Speaker 1: only using one word. But when I've listened to other
Speaker 1: people's answers, they're like, paragraph long, how is this word
Speaker 1: association if you're giving me a storyline on it? So
Speaker 1: I did not want to do word association with you,
Speaker 1: because that's your thing. But I did something I'm going
Speaker 1: to name drop here at at a recent conference, I
Speaker 1: did something with Cliff Astness, who is always amusing and
Speaker 1: fascinating and in very sharp tongued and witty right not
Speaker 1: only not only a math guy, but like a really
Speaker 1: funny um right side of the brain as well, and
Speaker 1: that his work is phenomenal, absolutely definitely a so, so
Speaker 1: for for a live Q and A I did with him,
Speaker 1: I came up with lightning rounds, which was you can
Speaker 1: answer these longer short, you could do one word, you
Speaker 1: could do a sentence, but the idea is whatever comes
Speaker 1: into your head quick answer. All right, all right, you're
Speaker 1: ready for the for the lightning round with Jeff Sherman.
Speaker 1: Uh two year or ten for what? For anything? UM
Speaker 1: two's hires tens higher spread, relatively similar, Star Treker, Star Wars,
Speaker 1: Star Wars Europe or Emerging markets, emerging market. Still doll
Speaker 1: dollar will continue some weakness, and I think that's very
Speaker 1: supportive l A Lakers, Golden State Warriors. I'm a Lakers fan,
Speaker 1: all right. I just wanted to give you an opportunity
Speaker 1: to I like everything else. Barry Santrancis good Giants, Samranson's
Speaker 1: good Niners. But I grew up watching the Lake Show,
Speaker 1: you know, with the magic and so and so. Look,
Speaker 1: I do root for Golden State in the playoffs because
Speaker 1: the Lakers can't ever make it anymore. Um so again,
Speaker 1: maybe one day with Lonzo we can get to get
Speaker 1: back together. Smart data or factor investing, Factor investing, you're
Speaker 1: going to go that way. Taco or burrito taco. I'm
Speaker 1: a big taco fan, Yes, Bill Miller or Peter Lynch,
Speaker 1: Peter Lynch, that's interesting, Tesla P one BMW I eight.
Speaker 1: I'm a beamer guy. Okay, so I didn't know which
Speaker 1: way you're gonna go. Yeah, yeah, I don't feel it's
Speaker 1: still that much of pollution in there. So tax reform
Speaker 1: or infrastructure spending, infrastructure spinning. If you're going to do
Speaker 1: one point five trillion dollars, at least, let's put it
Speaker 1: to work. Let's let's get some paved roads. And if
Speaker 1: you're gonna drive that I eight or that Tesla, you
Speaker 1: don't want to bounce down this, let me tell you
Speaker 1: they both have tight suspensions. What is your favorite pet peeve?
Speaker 1: When people just state things as facts with no evidence
Speaker 1: behind them. And so I know you do the Evidence
Speaker 1: based Investing conference and I'm a big fan of that.
Speaker 1: We hear so many rumors. We talked about the flattening
Speaker 1: the eel currentlyze things today and people just say it
Speaker 1: with blatant fact, with a lot of confidence. It's not
Speaker 1: That's why it's called a con game, right, It's a
Speaker 1: confidence game. You gotta come across the sharp so um.
Speaker 1: You know, again, sometimes we misstate facts, but I'm always
Speaker 1: willing to retract the statement if that's indeed the case.
Speaker 1: But at least if you're gonna, you know, spread something around.
Speaker 1: Let's try to make it somewhat factual, and our our
Speaker 1: last lightning round, um, give us words to live by
Speaker 1: or your favorite motto. It's out of I mean, you
Speaker 1: should at least prep me on that one. I will
Speaker 1: prep I prep you on the next section. This one.
Speaker 1: I wanted. I wanted this to be surprised as as
Speaker 1: you do. Yeah, I mean, I think you know, simply
Speaker 1: as honestly is the best policy. We're in the business
Speaker 1: of being fiduciaries, and when you we see these things
Speaker 1: where people are you know, conning clients and things, it
Speaker 1: makes our jobs harder. We're trying to come out factual.
Speaker 1: We're trying to give things, so you know, maybe it's
Speaker 1: the golden rules like do onto others as It sounds
Speaker 1: kind of of corny, but it's a compliance friendly answer
Speaker 1: to right, So there we go. Let's jump to our
Speaker 1: longer form favorite questions that we ask all of our guests.
Speaker 1: Tell us the most important thing that people don't know
Speaker 1: about your background, the most important thing about the background.
Speaker 1: You know that I had no intention of getting this business,
Speaker 1: you know, I mean I was just a lost um,
Speaker 1: you know, teenager into a young adult and just looking
Speaker 1: for something to do. And um, and that was grad school.
Speaker 1: Grad school, I've found it. And actually at Florida State,
Speaker 1: I really found it because I started to really, um,
Speaker 1: kind of all of all the maths really started to
Speaker 1: click finally. You know, people talk about the aha Eureka
Speaker 1: moment and I finally had it where these subjects kind
Speaker 1: of started tying together all of a sudden and I
Speaker 1: felt like, I, Okay, now it all makes sense. Perhaps
Speaker 1: I was teaching too right, I was. I was a
Speaker 1: teaching assistant, which I taught calculus and the likes. And
Speaker 1: I think that really helped to try and explain to
Speaker 1: people not just you know, do they have to be
Speaker 1: visual or the a oral? Um, you know, what kind
Speaker 1: of learner are you? And trying to get different perspectives
Speaker 1: so um, you know again, and I think that's what
Speaker 1: helps with this job is you know, we are narrators
Speaker 1: at times, right, we're giving out ideas, we're trying to
Speaker 1: explain why we're thinking what we're thinking. And um, you know,
Speaker 1: if you want to go back to the Pet Peeves
Speaker 1: question that you asked earlier, you know, I hate when
Speaker 1: people say, well, you're just talking your book the answers
Speaker 1: you're absolutely right talking our book. Why Because we did
Speaker 1: a lot of analysis to position that book and here's
Speaker 1: the data. You're absolutely I'm telling you why we it's
Speaker 1: a chicken and egg thing. You're not talking your book
Speaker 1: to just go out and sell it. The book exists
Speaker 1: because of the underlying philosophy and the data behind. Absolutely right,
Speaker 1: and take it or leave it. If you like the
Speaker 1: way we think, then maybe you should invest with us.
Speaker 1: If you don't, it's fine. Um, you know other people
Speaker 1: may so. Who are some of your early mentors? Yeah,
Speaker 1: I mean from a financial perspective. Have I had various
Speaker 1: layers of bosses too over time? Obviously admired Jeffrey Gunlock,
Speaker 1: you know, being there, I worked for one of his
Speaker 1: guys named Claude Herb for a while. Um. Taught me
Speaker 1: how to read a lot of financial literacy. He's written
Speaker 1: a lot, he's won like a Graham Dat award. Um.
Speaker 1: You know he's running some scrolls over the years to
Speaker 1: good researcher and really taught me to think about every
Speaker 1: single asset class and you know, don't trust the day
Speaker 1: to keep grinding through it. Um. Good lessons there. Um.
Speaker 1: And you know there's the people that I've read like
Speaker 1: I would even say, like one guy I've only met
Speaker 1: once in person, Cliff Assess, reading materials from UM and
Speaker 1: so UM. I spent a lot of time on SSR
Speaker 1: and you know, checking out what's what's the new stuff
Speaker 1: out there and so UM. There's a lot of people
Speaker 1: that I'm forgetting right now. But you know again that
Speaker 1: probably don't even know who the heck I am, but
Speaker 1: have been big fans of their work and what they
Speaker 1: put out. So your referenced Cliff Assness, tell me some
Speaker 1: other investors who influenced your approach to investment. Yeah, I
Speaker 1: think you know, you gotta pull out Rob or not
Speaker 1: in there too, with what he's done and kind of valuation,
Speaker 1: and I'm gonna go before the factor stuff. You know,
Speaker 1: a lot of his stuff on on valuation I think
Speaker 1: was very very groundbreaking at the time too. Um you
Speaker 1: just just pre smart data, smart beta. So if you
Speaker 1: go back to the eighties, I mean he was always
Speaker 1: talking about multiples and really how those of driving sorry,
Speaker 1: how those drove returns over years. A lot of people
Speaker 1: don't think about it's all divid and discount model. They
Speaker 1: don't think about the valuation components. And he's tried to
Speaker 1: apply that to smart beta factors too. There's a you know,
Speaker 1: there's a big debate between him and Asnes today about
Speaker 1: you know, well, really if the baskets turnover snifflely, is
Speaker 1: it really evaluation expands? According to Cliff, the debate is over. Um.
Speaker 1: I think in the last piece Cliff sent it's over
Speaker 1: unless you want more, you know. Um. But again, uh,
Speaker 1: you know, there's been a lot of just kind of
Speaker 1: academic works like the uh the studies like from Ibbotson
Speaker 1: and Seeking phil things like that. Um. I'm just kind
Speaker 1: of a student of history of the financial markets too,
Speaker 1: because I think there's a lot to be gleamed there.
Speaker 1: It's not this cutting edge piece that really gives you
Speaker 1: the most information. It's respecting other periods that have similarities.
Speaker 1: And no two crises look the same. Uh, so don't
Speaker 1: expect the last one to hit in the next time. So,
Speaker 1: speaking of history, let's let's talk about some of your
Speaker 1: favorite books. What do you read for fun, be it
Speaker 1: finance or nonfinance, fiction or nonfiction. Yeah, I think one
Speaker 1: of the best books. Um. Early on in my career,
Speaker 1: I was trying to read all these financial literature, you know,
Speaker 1: so you start the Michael Lewis is and you know,
Speaker 1: like monkey business, all these things, and one of the
Speaker 1: ones that really got a hold of me was Bernstein,
Speaker 1: Peter Bernstein's book Against the Gods. Man, is that an
Speaker 1: amazing book? It is? And the perspectives I think is
Speaker 1: what is what really struck me within it? And what
Speaker 1: you're talking about, well, you know, five hundred thousands of
Speaker 1: years ago, people just blame the gods. There's no risk, right,
Speaker 1: it's the god's fault. And then man, I kind of
Speaker 1: think that today almost right, there's some people out there
Speaker 1: still say it's not me that did something wrong. Gets
Speaker 1: you know, let's blame someone else. And the evolution of
Speaker 1: probability theory. And you know, again it's funny how it's
Speaker 1: always gambling that starts our station and probability theory, but
Speaker 1: trying to quantify things and understand it, and if you're
Speaker 1: going to get in the financial business or the investment
Speaker 1: management business, I mean this is thinking about risk is imperative.
Speaker 1: And again it leads you to the cliffhanger at the end.
Speaker 1: It doesn't ever give you the answer. But I think
Speaker 1: that's the right answer to risk management, is that there
Speaker 1: is no perfect answer. We have all these models. Everybody
Speaker 1: has all these great data points and they're overfitted. Right,
Speaker 1: we don't know what the next thing is. Most people
Speaker 1: aren't predicting the crash. When it happens, you're always gonna
Speaker 1: get someone who's been so against the gods. That's by
Speaker 1: the way, I've never read his other one of his
Speaker 1: other books called The Power of Gold. That's literally sitting
Speaker 1: next up. I'll take it as a recommendation. I liked
Speaker 1: Bookstaber's book on a Demon of Our Own Design Interesting,
Speaker 1: that was a really good one to um. And again
Speaker 1: that was trying to quantify things more so the parallels
Speaker 1: here kind the wrist side to the effect of of
Speaker 1: derivatives and how completely unanticipated the average investor unaware the
Speaker 1: average investor was. Yeah, and so um, you know, I
Speaker 1: don't read a lot of fiction, you know, I spend
Speaker 1: more time, as I said, kind of the SSR in
Speaker 1: and things. But those those are kind of two things
Speaker 1: that really resonated. Well, um, you know the recent financial
Speaker 1: books I've read recently and have give me one more.
Speaker 1: We have to have a third book. Oh I didn't
Speaker 1: know yet, have three? Well, I've just made that rule up. Okay, well,
Speaker 1: if we're gonna go three, I'll go back to Uh,
Speaker 1: I'll take Michael Lewis's money Ball though. Yeah yeah, but
Speaker 1: I'm a baseball guy, so you know, from a standpoint,
Speaker 1: I liked the stats. Um, there's something about it, so
Speaker 1: it's fantastic. And then he I, actually, i've never seen
Speaker 1: the movie. Uh, the movie is great. I should only recommended.
Speaker 1: Lewis says that he missed the major point of money Ball,
Speaker 1: which Richard Taylor and Cass Sunstein reminded him, was Hey,
Speaker 1: using all this work from Amos Tversky and Danny Kahneman,
Speaker 1: which is what led him to the most, which is
Speaker 1: really if you haven't read that, I have read that one.
Speaker 1: It didn't really string. It's very different. It didn't resonate
Speaker 1: as much with me. Um. But I do like the
Speaker 1: Taylor school of thought too, you know, talking more and
Speaker 1: Mortar Professor Schiller love the Behavioral Side too, and did
Speaker 1: you speak But speaking of Lewis, did you ever read
Speaker 1: The blind Side? I did? Would you think of it?
Speaker 1: I did like it, um, except that you know the
Speaker 1: opening scene you know, didn't resonate well with me as
Speaker 1: a forty Niners fan. Um, you know, with lt taking
Speaker 1: out you know, the career of Montana. So I got
Speaker 1: through that and I thought it was a good book. Again,
Speaker 1: not a movie. I never watched the movie though, so
Speaker 1: I only have you for a few more minutes. Let
Speaker 1: me jump through my last favorite questions. Tell us about
Speaker 1: a time you failed and what you learned from the experience. Well, um,
Speaker 1: you know, the failure stuff is hard to recognize. But
Speaker 1: you know, oh no, no, I mean I think it's
Speaker 1: the best thing you do to learn. Um. But you know,
Speaker 1: as an investor to just um you know again starting
Speaker 1: probably with the personal accounts to just um, you know,
Speaker 1: getting over confident, you know, as a young young trader,
Speaker 1: you know, you think you know everything. Um. You know,
Speaker 1: I love the options market because you don't have much money,
Speaker 1: so it's a good way to leverage a bat um
Speaker 1: and you find the undoings of things, and um, how
Speaker 1: other people can corner you in positions um think about
Speaker 1: you know, kind of during the financial crisis, people step
Speaker 1: in and back companies too, and probably should have been
Speaker 1: playing around with some of those trades too. But you know,
Speaker 1: um in you know personal life too, you know, I
Speaker 1: mean I've been moderately successful, never was you know, the
Speaker 1: top student in in things. And so I guess probably
Speaker 1: one of the biggest failings too, was when I was
Speaker 1: in the pure uh abstract math or pure math mathematics. Um,
Speaker 1: you know, there was some just tough times there where
Speaker 1: your brain doesn't click. You just don't get it. There's
Speaker 1: no examples. You're talking about proving these delta epsilon proofs,
Speaker 1: which everybody's already sleep by now. Um, but just you know,
Speaker 1: really just getting my teeth kicked in and that stuff
Speaker 1: and bouncing back, you know, and so you know, some
Speaker 1: of it is hard work. You know, as all the
Speaker 1: sports athletes say adversity, I don't think in a game's
Speaker 1: adversity by the way. I think it's a little overused there.
Speaker 1: But there is something to be said from from failing
Speaker 1: and learning from it and picking up and brushing itself
Speaker 1: off and yeah, and you have to do that and
Speaker 1: so again, and then just recognizing that, Look, you can't
Speaker 1: be an expert at everything, right, There's certain things you
Speaker 1: can only there's only so much time and there's so
Speaker 1: much brain capacity we have unless maybe our cliff um,
Speaker 1: you know that you can absorb all these topics and
Speaker 1: so you know, dedicate yourself to something. And you know,
Speaker 1: I think I've you know, I've tried sports some I'm
Speaker 1: not good at, you know, and I'm never gonna try
Speaker 1: them again. So, so, speaking of that, what do you
Speaker 1: do to stay mentally and physical really fit outside of
Speaker 1: the office? What do you you cold right now? Outside
Speaker 1: of of the bubonic plague? When when you're not typhoid? Mary,
Speaker 1: what do you do to relax out of the office? Yeah,
Speaker 1: I just um, you know, I do some reading here
Speaker 1: and there. Um, you know, I just um, I live
Speaker 1: in Santa Monica, just kind of kick back, enjoy kind
Speaker 1: of lifestyle there and signs check out or you know,
Speaker 1: I don't know how to surf. It's embarrassing. You're right
Speaker 1: by meb you should have met I know. I he
Speaker 1: did offer, he did offer the past. Yeah, And I
Speaker 1: don't know if he wants to see me. I'm the
Speaker 1: only the only thing I'm really good at sinking. So
Speaker 1: I have been doing some scuba diving lately. Um, you know.
Speaker 1: But the thing about the scuba diving is I'm still
Speaker 1: just getting familiar with the environment. You want to talk about.
Speaker 1: Something scary is watching those those things just move around
Speaker 1: in their own environments. So quickly. Which anything, I'll say,
Speaker 1: even a sea turtle. These big sea turtles probably the
Speaker 1: most feared I've ever been scuba dives. Not the little sharks.
Speaker 1: It's the hundred pound a hundred fifty pound sea turtle.
Speaker 1: Just with the turbo jets go and buy you buzzing
Speaker 1: the tower. So and I feel helpless. So um, at
Speaker 1: least I won't call it a failure. Yes, I was
Speaker 1: a wiss at the time, and UM, I'm better now.
Speaker 1: You gotta put yourself in someone's environments. So and then um,
Speaker 1: our last two questions, What sort of advice would you
Speaker 1: give a millennial who was interested in a career in finance. Yeah,
Speaker 1: you gotta be good. It's highly competitive now. Um, there's
Speaker 1: a lot of consolidation in the in the industry. Be
Speaker 1: well read in history, um, you know, specially political events. Um.
Speaker 1: Financial history is extremely important. It's one great thing about
Speaker 1: you know, grad school and thing you learn history of
Speaker 1: subjects to. I think that's very pertinent. And you know,
Speaker 1: be open and listen. Um. You know, I think there's
Speaker 1: a lot of good people in the industry around you.
Speaker 1: Be the sponge, you know, make sure you you you
Speaker 1: kind of absorb that and you know, read scholarly articles.
Speaker 1: You may not understand everything, but just press through. And
Speaker 1: the best thing to do when you find something you like,
Speaker 1: you find article like look at the footnotes. Education is
Speaker 1: the key here. And our final question, what is it
Speaker 1: that you know about investing today that you wish you
Speaker 1: knew twenty years ago that you're never gonna know at all? One? Um,
Speaker 1: mathematical models are not perfect. They are tools. They're not
Speaker 1: that albeit end game to everything. Um. And there's going
Speaker 1: to be things that behave outside of your control. Um.
Speaker 1: You know, so that can be the security you buy
Speaker 1: that just tanks, it can be you know, um, the
Speaker 1: thesis you have and you realize all your bets are correlated,
Speaker 1: they're all the same thesis. Um, that's something very important.
Speaker 1: I see that a lot on these top ten lists
Speaker 1: in here. I know you have your what I did
Speaker 1: right and wrong kind of stuff or yeah right the
Speaker 1: mayapa and so UM. You know understand that you know
Speaker 1: you've got to have that diversity in there, and that
Speaker 1: that's very important too, because sometimes you think you talk
Speaker 1: yourself and this idea that you have all these trades
Speaker 1: on but they're all just being long the dollar right
Speaker 1: when you really break them down or something like that.
Speaker 1: So make sure that you actually have those um you know,
Speaker 1: different exposure, your portfolio and m you know again, I
Speaker 1: think the best thing is, you know you come out cocky.
Speaker 1: You studied all this math. I got the perfect model
Speaker 1: for this. No way such no such things. So thank
Speaker 1: you Jeff for being so generous with your time. Appreciated, Barry. Thanks.
Speaker 1: We have been speaking with Jeff Sherman. He is the
Speaker 1: deputy Chief investment officer at Double Aligned Capital. UH. If
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Speaker 1: feedback and suggestions right to us at m IB podcast
Speaker 1: at Bloomberg dot net. Medina Partwana is our producer and
Speaker 1: audio engineer. Taylor Riggs as our booker. Michael bat Nick
Speaker 1: is our head of research. I'm Barry Ritolts. You've been
Speaker 1: listening to Masters in Business on Bloomberg Radio.