Speaker 1: M. This is Mesters in Business with very renaults on
Speaker 1: Bloomberg Radio this weekend. On the podcast, I have an
Speaker 1: extra special guest, Tina vander Steel. She heads the entire
Speaker 1: Emergent Country Debt team over at GMO located in Boston,
Speaker 1: the venerable investing firm that's head by Jeremy Grantham, He's
Speaker 1: the g and GMO UH myself and vander Steel talk
Speaker 1: about everything from the risks involved in EM investing, how
Speaker 1: you can hedge whether or not you should be investing
Speaker 1: in the local currency or in dollar denominated in debt.
Speaker 1: This is really a deep dive into a fascinating and
Speaker 1: under followed sector of the marketplace. It's trillions and trillions
Speaker 1: of dollars UH and yet most of us are fairly
Speaker 1: unfamiliar with what goes on UH in e M and
Speaker 1: and really Tina gives us a master class in what
Speaker 1: you should be looking for and how you should be
Speaker 1: thinking about the risks and potential rewards in e M.
Speaker 1: I really enjoyed the conversation and I think you will
Speaker 1: also so with no further ado, my interview with GMOs
Speaker 1: Tina vander Steele, this is Masters in Business with very
Speaker 1: results on Bloomberg Radio. My extra special guest this week
Speaker 1: is Tina vander Steel. She is the head of the
Speaker 1: Emerging country Debt team at GMO, which she is also
Speaker 1: a partner. She joined the firm in two thousand and four,
Speaker 1: coming from JP Morgan's Fixed income Research, where she developed
Speaker 1: quantitative arbitrage strategies for emerging market debt and high yield bonds.
Speaker 1: Teter vander Steel, Welcome to Bloomberg. You. So, so let's
Speaker 1: talk a little bit about your background, which kind of
Speaker 1: surprises me. You graduate Washington and Lee University not only
Speaker 1: with a BA in economics, but a BA in journalism.
Speaker 1: How do you go from journalist them to emerging market debt? Well,
Speaker 1: that one is an easy one. Um. My dad set
Speaker 1: my expectations early in life that he would pay for
Speaker 1: my existence through undergraduate or twenty one years old, whichever
Speaker 1: came first. So I graduated at twenty and I figured
Speaker 1: that a path and economics had higher lifetime earning potential,
Speaker 1: and I wanted to live in New York City. So, um,
Speaker 1: I chose that path. Of course, at the time, if
Speaker 1: you think about emerging debt, this is so the fall
Speaker 1: of communism. We had just finished in economic studying Nancar
Speaker 1: Olson's famous comparative economic systems. So now is here a
Speaker 1: chance to really get to know some of the countries
Speaker 1: that we had been studying. And my economics professors had said, listen,
Speaker 1: you get kind of a free m b A if
Speaker 1: you join any of the Wall Street banks that go
Speaker 1: through their training program, and free sounded like a good thing.
Speaker 1: So I applied to a couple of them, to Goldman
Speaker 1: and JP Morgan, and planted a job with both. But
Speaker 1: my dad convinced me I should definitely take the JP
Speaker 1: Morgan job, the lesser earnings notwithstanding, he said, the culture
Speaker 1: will would be more of a fit for somebody like me,
Speaker 1: And so that's how I got there. Quite quite interesting.
Speaker 1: You spent two years working at JP morgan San Paulo
Speaker 1: office in the mid nineties. That had to be a
Speaker 1: fascinating experience. Tell us a little bit about that. What
Speaker 1: did you learn from your time in sal Palo uh
Speaker 1: So Paulo was amazing. I mean, if I had been
Speaker 1: the kind of journalist that Michael Lewis was, I would
Speaker 1: have written a whole book just about that experience. I mean,
Speaker 1: if you think about it, So Plana Heal so At
Speaker 1: Fernando Hikkardo Soos elected president. He introduces Plan of Hell,
Speaker 1: which he had devised when he was Finance minister, and
Speaker 1: a hyperinflation, introduced a new currency that is still the
Speaker 1: currency to this day, which is quite an achievement for Brazil.
Speaker 1: UM And as an employee of JP Morgan, they gave
Speaker 1: you just a crazy amount of power. So I'm in
Speaker 1: my mid twenties. My job at the time, my name
Speaker 1: job was to be a strategist, which I didn't really
Speaker 1: know what a strategist was, but apparently what it meant
Speaker 1: was I would take my little Vice president card and
Speaker 1: I would travel up to Brazilia and I would get
Speaker 1: to know the congressman. Because this was during the whole
Speaker 1: constitutional reform effort, which is actually still ongoing today. UM
Speaker 1: and all of the votes that went on in Congress
Speaker 1: were super important to the future of the country. So
Speaker 1: I would get to know the congressman, figure out which
Speaker 1: way the vote was going to go, fly back to
Speaker 1: sell Pollo, get on the houton holler, tell JP Morgan's
Speaker 1: worldwide clients how that was going to go. And at
Speaker 1: the time, I guess that was really the origins of
Speaker 1: sales color, which is something I don't read these days,
Speaker 1: but at the time, I guess I was in charge
Speaker 1: of producing sales color, which he was pretty funny. That's
Speaker 1: really quite interesting that today sun Pala was something like
Speaker 1: twelve million people, it's one of the world's most populous cities,
Speaker 1: and it's now a Brazil's vibrant financial center. Was it
Speaker 1: clear in that this was going to be a financial powerhouse?
Speaker 1: This location, well, it would spend several locations actually since then,
Speaker 1: um at the time that I moved there, the center
Speaker 1: was actually in Chant like the actual center of the city,
Speaker 1: but had already moved to Avanita Paulista, and since I moved,
Speaker 1: has now moved to a new section of Salpalla called
Speaker 1: sari Alima. And I think it was pretty clear. If
Speaker 1: you got to know any of the Brazilians at that time,
Speaker 1: many of them are very famous even today. Adam Fraga
Speaker 1: and a whole bunch of people they were. They're very
Speaker 1: very smart people. If you think about how crazy hyper
Speaker 1: inflation is and the uncertainties of investing in hyper inflation,
Speaker 1: these people were crack. I mean the to give you
Speaker 1: a sense, if I wrote a check in Salpolo, it
Speaker 1: cleared the next day, where back in the US it
Speaker 1: would be several days, and that was because you know,
Speaker 1: inflation was very high. And uh, some people are probably
Speaker 1: aware that Brazil has a very unusual interest rate compounding system.
Speaker 1: So whereas we here in the US use simple interests
Speaker 1: because inflation and hisstrates are low, in Brazil they use
Speaker 1: daily compounded interest because their history is that inflation is
Speaker 1: very high because a very sophisticated financial system there. I'm
Speaker 1: not surprised at all. Really interesting, So how did the
Speaker 1: experience living abroad, working abroad affect how you view the
Speaker 1: world of emerging market debt? And you know what were
Speaker 1: the big takeaways for you? Well, one thing I can say,
Speaker 1: and I've only lived in Brazil as an emerging market,
Speaker 1: is that the locals are the most pessimistic. And I've
Speaker 1: often wondered why is that the case? And I have
Speaker 1: a theory, and the theory is part of my journalism background,
Speaker 1: which is I remember back in journalism school, we used
Speaker 1: to say, if it bleeds, it leads, or fire, rape,
Speaker 1: incest film at eleven right, So whatever was the most tragic,
Speaker 1: the most awful thing, that was what you were going
Speaker 1: to learn about. Now this is the so we don't
Speaker 1: have Internet yet, but there is a very vibrant press
Speaker 1: in Brazil. There were five daily newspapers worth reading. There
Speaker 1: were two weekly magazines that were also worth reading, and
Speaker 1: of course they only brought you the most pessimistic version
Speaker 1: of anything that was happening. Cardos so he was going
Speaker 1: to fail and inflation was going to come back. It
Speaker 1: was just this constant parade of bad news. That may
Speaker 1: sound familiar. That's true everywhere, right, the Internet makes it worse,
Speaker 1: but it's true everywhere. And the only exception that I
Speaker 1: found to that is briefly, we had a fellow who
Speaker 1: were for us who eventually he was Chinese and he
Speaker 1: eventually moved back to China unfortunately, so we didn't necessary
Speaker 1: had to move on. But he was super optimistic about China,
Speaker 1: and I thought to myself, well, maybe that's related to
Speaker 1: the fact that press freedom in China is poor. In
Speaker 1: other words, they're pessimistic because of what they read. Schools
Speaker 1: don't really teach us anything about information hygiene or how
Speaker 1: to evaluate what you see, unless you go to law school,
Speaker 1: where they teach you how to, you know, cross examin
Speaker 1: a witness and look at all their motivations and biases, etcetera.
Speaker 1: Most people don't don't approach media that way. So that's
Speaker 1: really fascinating about um, not just em but media in general.
Speaker 1: So spending time abroad has this led you to sort
Speaker 1: of discount the terrible media stories you might see about,
Speaker 1: be it Argentina or Venezuela or Brazil, or not even
Speaker 1: just South America, if you look at Africa, cun parts
Speaker 1: of Asia. There's a constant drumbeat of terrible news coming
Speaker 1: out of places like that. Yes, I definitely discounted. There's
Speaker 1: a there's a wonderful article by Michael Crichton called Why Speculate,
Speaker 1: and in it it talks about this idea and he's
Speaker 1: probably not the only person who's thought about this or
Speaker 1: talked about this idea of Gelman and Nisia. So imagine
Speaker 1: that you're an expert in your field and you open
Speaker 1: up today's newspaper whatever it is, you read something online,
Speaker 1: and you realize that what's being written there is completely false. Absolutely,
Speaker 1: you know firsthand that what's written there is just wrong.
Speaker 1: And then you turn the paper and you turn the
Speaker 1: page and you read the next article and you've completely
Speaker 1: forgotten what you've just experienced. Right, So the next article
Speaker 1: is about something you don't really know anything about, and
Speaker 1: you just trust the source. So I took away from
Speaker 1: that article that, you know what, it's very rare, especially
Speaker 1: if you think about news. News is happening real time,
Speaker 1: and what's the old adage? We don't even know the
Speaker 1: the genesis of the French Revolution? So how could you
Speaker 1: expect that anybody in real time has the correct interpretation
Speaker 1: about anything? So you're better off, I think, just not
Speaker 1: reading most things, the first draft of history, so to speak,
Speaker 1: the first draft of history that's right, really really the
Speaker 1: financial markets where you get a price, and the price
Speaker 1: has a lot of information content in it, so you
Speaker 1: don't really need to hear about market color or interpretations.
Speaker 1: You just have to witness the price. I'm intrigued. So
Speaker 1: let's talk about a place like Venezuela. How do you
Speaker 1: manage the risks of investing in a space like that
Speaker 1: when it's pretty clear you can't rely on the media.
Speaker 1: Is it just a matter of boots on the ground
Speaker 1: and seeing what's going on for stand How do you
Speaker 1: um come up with some sort of investment thesis and
Speaker 1: then try and verify it? Well, I would say in
Speaker 1: the way we invest in the way we approach emerging
Speaker 1: debt markets, we try to de emphasize needing to know
Speaker 1: anything about the country. So my background is in relative
Speaker 1: value analysis and arbitrage analysis, and it's kind of a
Speaker 1: widget way of looking at things. It's it's independent of
Speaker 1: whatever the country is, or the company is, or whatever
Speaker 1: that is. And what's nice about it is imagining that
Speaker 1: the same risk is priced it differently into markets and
Speaker 1: trying to arbitrage that difference of opinions for that same risk.
Speaker 1: That's a lucky thing to be able to do, because
Speaker 1: otherwise you would have to have some knowledge or be
Speaker 1: able to come up with an opinion about places like Venezuela,
Speaker 1: and I would say that's very, very, very hard to do.
Speaker 1: I mean, Venezuela is an interesting case in so far
Speaker 1: as they did something that no other country has ever done.
Speaker 1: And what I mean by that is we work in
Speaker 1: default sensitive markets. Right every year we get it a
Speaker 1: fault or two, and usually the way that works out
Speaker 1: is the classic Hemingway way, which is, how did you
Speaker 1: go bankrupt gradually and then suddenly right people refused to
Speaker 1: roll over your debt at reasonable prices and then you
Speaker 1: either go to the I M F for you to
Speaker 1: fall to whatever it is. Venezuela ran out of money
Speaker 1: in and continued to pull oil out of the ground
Speaker 1: and starve its population to pay foreign creditors for four
Speaker 1: more years. Crazy. So you know, could we have predicted
Speaker 1: that they would have done that? Of course not. I
Speaker 1: don't think anyone would have predicted anyone would do something
Speaker 1: so insane. So let me ask you an obvious question
Speaker 1: I probably should have asked you earlier, And that's simply
Speaker 1: what do we mean by emerging market? What makes a
Speaker 1: particular country an emerging market versus a frontier market or
Speaker 1: a developed market. So taxonomy, it varies, so we distinguish
Speaker 1: between emerging countries and emerging markets. So classically, the definition
Speaker 1: of emerging countries, which includes frontier countries, are those countries
Speaker 1: that are either low or middle income countries and therefore
Speaker 1: may run out of the money to pay you back
Speaker 1: or have defaulted in the past and have demonstrated that
Speaker 1: they are willing to default on you. So those are
Speaker 1: those are what we referred to as emerging countries. Emerging
Speaker 1: market has much more to do with the accessibility by
Speaker 1: foreigners into a market, So can you act fess the
Speaker 1: local market? Um, what are the tax implications of being
Speaker 1: a foreigner in the local market? So, for example, you
Speaker 1: might have a Gainaian bond in dollars which is from
Speaker 1: an emerging country, but it clears in euroclear, So it's
Speaker 1: a developed market emerging country bond as opposed to its
Speaker 1: local currency bonds which are emerging country emerging market bond.
Speaker 1: Does that make sense? Sure? And this is whether or
Speaker 1: not it's corporate debt government debt. There they can all
Speaker 1: be out of an emerging country. There's no distinction other
Speaker 1: than the specific corporate risk for any given company. If
Speaker 1: you're buying e M private debt as opposed to e
Speaker 1: M public debt, is that a fair statement? That is
Speaker 1: a fair statement. The way we think about corporate debt
Speaker 1: within e M is that the sovereigns are the very
Speaker 1: powerful agent. Doesn't matter if you're emerging or developed, the
Speaker 1: sovereign are the powerful agent, and so the corporates are
Speaker 1: really a compound risk with respect to their sovereign So
Speaker 1: corporate in the US, with the rule of law and
Speaker 1: all of that and transparency is not that risky. But
Speaker 1: a corporate in Ghana, where you know the assets are
Speaker 1: in Ghana subject to Ghana law. Doesn't matter if the
Speaker 1: bond is a US law bomb in UK or in
Speaker 1: the US. The assets are still in Ghana, so we
Speaker 1: think of them as a compound risk. So I want
Speaker 1: to ask you about a piece you wrote in twelve
Speaker 1: titled the What, Why, when and How Guide to Owning
Speaker 1: Emerging country Debt? What motivated that piece and and how
Speaker 1: was it received by various investors? Sure? Um, I think
Speaker 1: every asset manager eventually has to produce something along these
Speaker 1: lines that asks why emerging debt? Like, what's the purpose
Speaker 1: of this thing? And so this was our shelf piece
Speaker 1: to describe to a hypothetical allocator what they should be
Speaker 1: on the lookout for. And I would say GMO takes
Speaker 1: a very very standard traditional approach to thinking about an
Speaker 1: allocator's problem, if for no other reason than GMO is
Speaker 1: most famous for its ASDA Allocation division headed by Benninker
Speaker 1: and founded by Jeremy Grantham. So what do they care about?
Speaker 1: They care about value, diversification and alpha, And so we
Speaker 1: describe in the paper, well, how do you determine if
Speaker 1: something represents value? Right? How do you think about the
Speaker 1: spread you earn on a sovereign relative to losses you
Speaker 1: might experience, or on a corporate or how do you
Speaker 1: think about currency risk in local currency denominated death? So
Speaker 1: that's the value section diversification is how do these subasset
Speaker 1: classes present with respect to develop markets? Uh? You know,
Speaker 1: if if you think about a portfolio optimization, how does
Speaker 1: this new asset play with respect to your existing assets?
Speaker 1: And then finally alpha, which is the most fun space. Um,
Speaker 1: the alpha in this asset class is very high. The
Speaker 1: median manager beats the benchmark. So um, it's a super
Speaker 1: inefficient asset class and that's one of the reasons that
Speaker 1: we really like it. Huh. Interesting. So so this leads
Speaker 1: me to the obvious question, how does GMO approach emerging
Speaker 1: market debt, say US corporate debt or US distress debt,
Speaker 1: and how does that differ from some of your competitors. Well,
Speaker 1: I would say that GMO takes a very unusual approach,
Speaker 1: and I knew that when I worked at JP Morgan because,
Speaker 1: as I think I said earlier, I did relative value arbitrage.
Speaker 1: And so as a strategist, you know, the salespeople want
Speaker 1: to take you around and visit clients, and after a
Speaker 1: while they realized that the big asset managers weren't interested
Speaker 1: in hearing my spiel, if for no other reason, and
Speaker 1: they were so big that the you know, ten by
Speaker 1: ten million trade that I proposed was rounding error for them.
Speaker 1: So the only people who are really interested in this
Speaker 1: were GMO and a small set of hedge funds, among
Speaker 1: them long Term Capital, which is its own interesting, fascinating story.
Speaker 1: And now that I work at GMO, I find how
Speaker 1: unusual it is because people approach us and say, wow,
Speaker 1: what you've just described is totally different than what other
Speaker 1: people describe, and so what is it that we do differently?
Speaker 1: It's really this emphasis on relative value, so trying to
Speaker 1: find cheap securities, thinking about it from a long short perspective,
Speaker 1: and emphasizing that rather than emphasizing what most managers emphasize,
Speaker 1: which is the fun stuff to talk about, right the
Speaker 1: what do we think about Venezuela to your earlier point,
Speaker 1: or what do we think about Brazil or what we
Speaker 1: think about the FED or any of these other very
Speaker 1: very challenging questions to ask an answer. And it's not
Speaker 1: that we don't try, By the way, we have some
Speaker 1: extremely experienced people thinking about those questions, but we all
Speaker 1: collectively agree that if you can find an arbitrage, you
Speaker 1: should put all your alpha chips there first and then
Speaker 1: worry about the rest later, which leads to an obvious question.
Speaker 1: You spend some time developing strategies using quant aarb um,
Speaker 1: do we really care what someone's opinion is on something like?
Speaker 1: It seems that the work you did um on the
Speaker 1: quant side was pretty empirical versus the hey, give me
Speaker 1: your squishy gut reaction to what's going on there. In
Speaker 1: other words, when when people are asking for that color commentary,
Speaker 1: what is it? What's the value of that other than
Speaker 1: you know, making casual chit chat. Well, from an investment perspective,
Speaker 1: the value is generally low, right. I mean, we can
Speaker 1: all sit around and have opinions about things, But are
Speaker 1: you going to buy or sell something based on those
Speaker 1: opinions in the presence of by the way, very high
Speaker 1: transactions costs. The weighted average price bid offer of bonds
Speaker 1: in my market is seventy five basis points. These aren't treasuries,
Speaker 1: so you better have a real sharp view, and you
Speaker 1: better hope that that view obtains for some period of time,
Speaker 1: because otherwise you're going to cross that bid offer twice,
Speaker 1: so we really try to avoid that. I think we
Speaker 1: are not only the lowest turnover manager of any of
Speaker 1: the active managers, are turnovers lower than the ETF. So
Speaker 1: we buy and hold arbitrage like positions in and out that.
Speaker 1: That's some big just just for the spread. Let's talk
Speaker 1: about another spread that's out there. So so you join
Speaker 1: GMO and oh four and then worked on a strategy,
Speaker 1: you know six that was the Emerging market FX total
Speaker 1: return strategy. Tell us about that, What are the local
Speaker 1: currency debt strategies like in in that develop out of that,
Speaker 1: and what are the currency spreads like So local currency
Speaker 1: debt investing is a really fascinating one. It's i'd say
Speaker 1: the largest bundle of risks that we analyze. So when
Speaker 1: we think about positioning, it's always with respect to well,
Speaker 1: what risk are we addressing, and it's any collection of
Speaker 1: credit risk, right, all of them have sovereign credit risk
Speaker 1: combebted within that, there's a question of selective sovereign default.
Speaker 1: So a sovereign can choose, Okay, I'm in a corner,
Speaker 1: I'm only going to default on my foreign currency debt.
Speaker 1: I'm only going to default on my local currency debt
Speaker 1: or I'm going to default on them all, And we've
Speaker 1: seen examples of both. In fact, our sovereign analysts just
Speaker 1: went to a fascinating conference at Georgetown this week about
Speaker 1: the possibility of selective domestic debt default. There's a whole
Speaker 1: very interesting topic. Um On top of that, if it's
Speaker 1: a corporate it can have idiosyncratic corporate risk, and if
Speaker 1: it's a local currency bond, then it has interest rate
Speaker 1: risk and up to two types of currency risk. So
Speaker 1: currency volatility risk, that's the one you see crawl across
Speaker 1: your Bloomberg screen. But currency convertibility risk is a very
Speaker 1: serious one. What if I take my my foreign investors
Speaker 1: dollars or euros or or Swiss Franks and I convert
Speaker 1: them into Argentine pesos, to take a recent example, and
Speaker 1: then Argentina says, I'm sorry, you can't get them out
Speaker 1: at the official rate. You have to go to the
Speaker 1: parallel rate, and that's a depreciated from the official rate.
Speaker 1: These are serious risks, and we price each one of
Speaker 1: them independently, and we take and hedge the risks that
Speaker 1: we don't think are priced appropriately. How do you hedge
Speaker 1: a risk like that. Is it just purely currency hedging
Speaker 1: or are there default hedges and other such insurance or
Speaker 1: derivative products. There is one of each flavor, and believe
Speaker 1: you me, we make sure the documentation or whatever we're
Speaker 1: hedging is air tight with respect to whatever we're trying
Speaker 1: to hedge. So to take an interesting example from the nineties, actually,
Speaker 1: when Russia defaulted and devalued the ruble, those who had
Speaker 1: hedged their ruble exposure in Chicago found out that that
Speaker 1: hedge was worthless because it was a nondlibable currency and
Speaker 1: the Russians could just manipulate that market independent of the
Speaker 1: actual ruble spot exchange rates. So we are very careful
Speaker 1: to make sure whatever asset we own, however, the fixing
Speaker 1: mechanism is for that lines up with our hedge. We
Speaker 1: don't want to have any basis risks. So when you
Speaker 1: say non deliverable, that entire hedge was just a complete
Speaker 1: waste of of capital and failed. It just did nothing.
Speaker 1: What was that? I recall the long term capital management
Speaker 1: blow up and I always thought of it as a
Speaker 1: problem that was based on leverage did hedging, And I
Speaker 1: know I'm asking you this out of left field, but
Speaker 1: was hedging a factor in the Russian default for an
Speaker 1: entity like LTCM. I don't know if Ruble was part
Speaker 1: of their problem. Leverage was certainly part of their problem. Yeah,
Speaker 1: what's what's a hundred and one amongst friends? Right, Well,
Speaker 1: here's how I experienced it. So I'm a you know,
Speaker 1: twentysomething year old kid producing these relative value analytics, which
Speaker 1: is a lot of math but not a lot of
Speaker 1: practical experience, right, I'm just a Wall Street strategist. And
Speaker 1: the salesperson who covered GMO also covered long term capital,
Speaker 1: and he would say, oh, I need a trade sheet
Speaker 1: for this Paris trade that you're recommending, and I'm like, okay,
Speaker 1: well who's it for. And the choice there was how
Speaker 1: it was going to be levered, and GMO used very
Speaker 1: conservative leverage because we cared about well they cared now
Speaker 1: I care about default risk, and long term Capital would
Speaker 1: use a lot of leverage because they were trying to
Speaker 1: hedge market risk, right, And that simple choice turned out
Speaker 1: to be fatal for one and not the other. And
Speaker 1: so so that was what led me to be interested
Speaker 1: in GMO. I thought, Wow, gosh, these guys are smarter
Speaker 1: than those Nobel laureates. You know, they're very simplistic, twenty
Speaker 1: year old view of the thing. That's really interesting. Although
Speaker 1: although I don't think you need a Nobel prize to
Speaker 1: know that one leverage probably isn't a great idea or
Speaker 1: is probably you know, the concern about about tail risk
Speaker 1: if it hedges market risk of the time. But but
Speaker 1: that one percent you don't make the curve and smash
Speaker 1: into the wall doesn't really work, does it? Apparently it doesn't.
Speaker 1: Before we get into the details of some of the
Speaker 1: currency issues, I have to ask how big is the
Speaker 1: opportunity in e M bonds. How large is this market?
Speaker 1: I don't know compared to let's say, US corporates or treasuries.
Speaker 1: So round numbers for dollar denominated bonds, UH sovereign and
Speaker 1: Quality sovereign external debt in the MBI Global Index, it's
Speaker 1: around one point four trillion. For the Corporate e M
Speaker 1: Index SEMBI it's also around one point four trillion, and
Speaker 1: for local currency e M debt it's around two and
Speaker 1: a half trillion. Now that's just the index eligible stuff.
Speaker 1: I think you could safely multiply that by another to
Speaker 1: capture all possible investible debt. Has this been exped ending,
Speaker 1: because what we seem to have seen over the past
Speaker 1: I don't know, a decade or two, is really a
Speaker 1: bit of a shortage of of high quality sovereign debt.
Speaker 1: What's the growth rate of of emerging market debt look like?
Speaker 1: So from memory, I would say each of these were
Speaker 1: probably about half again this size or half the size
Speaker 1: maybe fifteen years ago. So it's growing um for sure,
Speaker 1: there's more interest in it. I was looking this morning
Speaker 1: at the Bloomberg Global Aggregate Index and they produced the
Speaker 1: sub index of negative yielding debt. That's about fourteen trillion,
Speaker 1: So folks are acced to find things with positive yields,
Speaker 1: and I think that's uh where e M debt has
Speaker 1: been coming in. Huh quite interesting. So we started talking
Speaker 1: a little bit about the spread in the e M
Speaker 1: debt and some of the currency risk. How do you
Speaker 1: measure different currencies? You know, are the I know about
Speaker 1: the textbook models, but what's it like in the real world.
Speaker 1: It's funny that you say the textbook models. I gave
Speaker 1: a talk. We have a fall client conference, and in
Speaker 1: I wanted to give a talk about arbitrage, and that
Speaker 1: is an extremely dry topic, especially at a firm where
Speaker 1: you know, plausibly, I am following Jeremy Grantham himself on
Speaker 1: on the stage. Now you have a bunch of people
Speaker 1: interested in equities and as dellocation, and I'm gonna try
Speaker 1: and get them to be really interested on Japanese cross
Speaker 1: currency basis and this kind of idea. And I started
Speaker 1: off with a quote because at this point it was
Speaker 1: just around the time that Japan was entering yield curve control.
Speaker 1: And the quote that struck me was from I remember
Speaker 1: going to the I M F meaning so ostensibly just
Speaker 1: to think about em but if you think about the
Speaker 1: time period of European sovereign debt crisis is sort of
Speaker 1: coming to a day new mall on um. You know,
Speaker 1: the Cypriots had just defaulted on bank debts, so there's
Speaker 1: a lot of interesting stuff going on. And the most
Speaker 1: crowded room at that I M S in was the
Speaker 1: Bank of Japan. So the assistant governor, the fellow MoMA
Speaker 1: says stakes are high if we fail. Economics textbooks might
Speaker 1: be wrong. That's uncertainty. And I could never forget that
Speaker 1: quot because I thought to myself, well, gosh, it seems
Speaker 1: like economics textbooks have been wrong for some time now.
Speaker 1: But what I'm interested in is the fact that the
Speaker 1: finance textbooks are also wrong. Right. And um Olivier Blanchard
Speaker 1: gave a talk called how to teach intermediate Macroeconomics after
Speaker 1: the Crisis is after the Great Financial Crisis, and he says,
Speaker 1: I used to derive movements of exchange rates from uncovered
Speaker 1: interest rate parity conditions, and that was precise see the
Speaker 1: point of my talk. It used to be that you
Speaker 1: could look at interest rate differentials and price currency boards
Speaker 1: in developed marketings, right, not always an emerging markets, especially
Speaker 1: in non deliverable emerging markets. But by this point in
Speaker 1: and for sure in developed markets were no longer following
Speaker 1: this right, there are huge cross currency bases going on,
Speaker 1: only eventually capped by the growing use of central bank
Speaker 1: swap lines right and lately repo lines in the case
Speaker 1: of say the People's Republic of China. So Um, I
Speaker 1: would say finance and macroeconomic textbooks are actually not all
Speaker 1: that useful these days because what you would have learned
Speaker 1: hardly applies anymore. And there's an argument to be made
Speaker 1: that the same is true across all the various chapters
Speaker 1: in that those economic books, except for the most um
Speaker 1: reason updates that that they seem to be catching up
Speaker 1: a little bit. So let's talk about how you hedge
Speaker 1: in the real world some of the currency risk you're taking,
Speaker 1: and can you do that at reasonable prices? If you
Speaker 1: want to invest as a US investor in Brazil or
Speaker 1: or in a place like Thailand, how can you do
Speaker 1: that without assuming too much currency risk? Well, you have
Speaker 1: a number of choices you can. If you're a dollar
Speaker 1: based investor, you can simply buy dollar Brazilian bombs, right,
Speaker 1: there aren't that many dollar Thai bombs, but you can
Speaker 1: buy dollar bombs. You can buy local currency denominated bombs
Speaker 1: and hedge the currency risk associated with those bombs. Um.
Speaker 1: And you know, to take a recent example, we found
Speaker 1: fascinating Brazilian real denominated instrument. It's actually guaranteed by you
Speaker 1: and me the U S TASH pair and it was
Speaker 1: paying local Brazilian treasury so nt N plus forty basis points.
Speaker 1: So you could hedge out the currency risk and the
Speaker 1: interest rate risk of that thing and be left with
Speaker 1: a US guaranteed thing at sort of treasuries plus a hundred.
Speaker 1: That's a great bond. So so here's the question that
Speaker 1: I'm kind of intrigued by how do you determine whether
Speaker 1: to invest in the local currency or dollar based if
Speaker 1: you're here in the US. Are there specific advantages and disadvantages,
Speaker 1: or does all the currency risk essentially wash out at
Speaker 1: the end. So this is a very very difficult question
Speaker 1: as an arbitrage focused person. When I think about naked
Speaker 1: currency risk, it's so far away from an arbitrage I
Speaker 1: of course lean on my team who are much smarter
Speaker 1: than I am in THEWS dimensions. So we we bucket
Speaker 1: the emerging currencies in two different buckets. On our floating
Speaker 1: rate currencies and the investment pieces. There is the broad
Speaker 1: dollar goes up and down and takes all of them
Speaker 1: up and down with it, right, So we're going to
Speaker 1: pick relative winners and losers among that pack of floating
Speaker 1: rate currencies. That way, we insulate ourselves from broad dollar moves.
Speaker 1: So it's a relative value program for the very highly
Speaker 1: managed and pegged currencies. We have a program that UM,
Speaker 1: one of the people on my team, developed, which tried
Speaker 1: to answer the question, given the ambient fundamentals of this
Speaker 1: particular country in terms of its balance of payments, it's
Speaker 1: place in the economic cycle, and so forth, what's the
Speaker 1: likelihood that we'll get to keep whatever the ex anti
Speaker 1: carry of the currency is. And so you know, if
Speaker 1: this is a pegged currency. We were looking most recently
Speaker 1: at the Uzbek psalme and that currency is more managed
Speaker 1: against the Russian rouble than against the dollar per se,
Speaker 1: but it has very high yields for ten twelve percent,
Speaker 1: And so the question is is is that high enough
Speaker 1: or will we see a devaluation in the film that
Speaker 1: would wipe out that ex anti kerry. So that's how
Speaker 1: we think about the problem. So let's talk a little
Speaker 1: bit about the state of e M investing today. So
Speaker 1: looking at this from an equity market perspective, I look
Speaker 1: at what took place in China and the change in
Speaker 1: the government and the change and attitudes towards companies like
Speaker 1: Ali Baba kind of makes me look at the country
Speaker 1: at least now and say they appear to be frightening.
Speaker 1: From an equity perspective, I'm would be reluctant to put
Speaker 1: capital at risk there. What do you make of the
Speaker 1: geopolitical worlds and the various risks they present. Are there
Speaker 1: certain countries that, hey, there's no respect for the rule
Speaker 1: of law or sanctity of contract or private property for
Speaker 1: that matter, and therefore, regardless of the potential upside in
Speaker 1: the dead instruments, we just don't believe that any money
Speaker 1: is safe there because of that. It's a good question,
Speaker 1: and I would say for the fundamental credit analysts who
Speaker 1: we have on the team, we rely a lot on precedence. Frankly,
Speaker 1: so I'll take an example from a few years ago
Speaker 1: in well, first I guess in Kazakhstan, and then later
Speaker 1: a few years later in in Azerbaijan, where we weren't
Speaker 1: involved in the kazak one Um. There was a big
Speaker 1: bank in Kazakhstan, and I actually don't know the name
Speaker 1: of it, but the ticker was Betas, and over the
Speaker 1: course of a weekend they rewrote their bankruptcy laws and
Speaker 1: basically wiped out the bank creditors. H And so you
Speaker 1: you look at that and you say, gosh, that's a
Speaker 1: serious risk that you know we should take into account.
Speaker 1: If I said we weren't involved, because the risk premium
Speaker 1: that you were being paid over Kazakhstan wasn't enough to
Speaker 1: even contemplate such a day at the time. In that case,
Speaker 1: they went on to have quite a lot of debt
Speaker 1: relief for the country. So this is after that oil
Speaker 1: market collapse, and so oil sensitive countries like Kazakhstan needed
Speaker 1: debt relief and so forth. You fast forward to Azerbaijan
Speaker 1: and there was a fascinating case that we were involved,
Speaker 1: and we owned some bonds from this bank called the
Speaker 1: International Bank of Azerbaijan. It was nineties something present government owned,
Speaker 1: so we considered it a state owned enterprise. That followed
Speaker 1: that same playbook. Over the weekend they wrote, rewrote their
Speaker 1: bankruptcy laws and so forth, and they gave a very
Speaker 1: mild haircut to creditors. It actually was more or less
Speaker 1: MPV newt role. So they got all the reputational hit
Speaker 1: of doing this, but they got none of the debt
Speaker 1: relief that kazakh stile that under a head scratcher. Why
Speaker 1: on earth would they do this. It's still in the
Speaker 1: London courts. By the way, UM actually wrote to the
Speaker 1: Finance Minister of Azerbaijan. I said, this just doesn't make
Speaker 1: any sense. Conditional on your writing off creditors, you should
Speaker 1: at least get some debt worthy for doing it. Um.
Speaker 1: But to your point, all you can do is file
Speaker 1: these away and understand what's happened in the past and
Speaker 1: make some educated judgment about how likely the current administration
Speaker 1: or dictator or whatever it is of the country is
Speaker 1: likely to do that in the future. That's an art.
Speaker 1: Like I said that the credit research people on my
Speaker 1: team have a very hard job. It sounds like they
Speaker 1: got some bad counsel at AER that. That's kind of interesting.
Speaker 1: Let's go in the opposite direction. When you look around
Speaker 1: the world, where is there safe E M debt? And
Speaker 1: I'm assuming the safer the debt, perhaps the lower the
Speaker 1: potential alpha you're going to see from that. Is that
Speaker 1: a fair way to look at this? You're asking about
Speaker 1: a cake and eating it too question? Pretty much? Yeah,
Speaker 1: So earlier we talked about fourteen trillion in negative yielding debt,
Speaker 1: So we ask ourselves the purpose of holding a certain
Speaker 1: class of government debt We used to refer to it
Speaker 1: as the anchor to windward portfolio right at the hell
Speaker 1: or high water portfolio is to have ballast in your
Speaker 1: portfolio in the event that there's a supere equity market
Speaker 1: decline or risk assets have their own decline. Whatever that
Speaker 1: is the cost of holding that debt right now. In
Speaker 1: many of the major markets, whether it's you know, buns
Speaker 1: or oats or jgbs or so forth, is holding a
Speaker 1: negative yielding asset right it's an insurance premium almost. So
Speaker 1: the question is is can you choose from the group
Speaker 1: of positive yielding e M local markets on a currency
Speaker 1: hedged or unhedged basis in the event that you're willing
Speaker 1: to take some currency risk and you think it's well
Speaker 1: priced that has the defensive properties of these developed markets
Speaker 1: bonds but with positive yields. And the answer to that
Speaker 1: is yes, there's a small clutch of these things. They
Speaker 1: are not UM countries for the most part. They're not
Speaker 1: the poor countries. They are the Taiwans and Koreas of
Speaker 1: the world. But those markets do present as relatively safe now.
Speaker 1: Not safe from financial repression, none of us is safe
Speaker 1: from financial repression, but safe in a anchor to winward
Speaker 1: statistical sense, really really kind of interesting. What parts of
Speaker 1: the world are you excited about any any countries that
Speaker 1: you're looking at and thinking, wow, this is underprised. Then
Speaker 1: there's a ton of upside here. I would say the
Speaker 1: thing that's glaring right now are the stressed and distressed
Speaker 1: UM emerging countries so we're at a if you take
Speaker 1: out the the real wives of the pandemic, the difference
Speaker 1: between the high yield sub piece of our hard currency
Speaker 1: benchmark versus the investment grade one, it's at very very
Speaker 1: wide levels, right, so not pandemic levels, but very wide
Speaker 1: levels about five over investment grades. Within that subset, there
Speaker 1: are arbitrage like positions that can be set up and
Speaker 1: buy that. What I mean is, these are countries whose
Speaker 1: bond prices indicate a high likelihood of default. So can
Speaker 1: you ensure the default case while holding on for the
Speaker 1: no default case? And in a handful of those of
Speaker 1: those countries, the answer to that is yes, And I
Speaker 1: think those makes some of the most interesting opportunities. You
Speaker 1: want to name names, what what countries UH present those
Speaker 1: sort of opportunities, I would say Ivory Coast is one,
Speaker 1: Ghana is one, um El Salvador is one. So there's
Speaker 1: some interesting ones, really interesting. You mentioned the response to
Speaker 1: the pandemic. How did various emerging market countries and their
Speaker 1: governments respond to COVID and the financial crisis were in
Speaker 1: O eight oh nine? Was this really developed world issue
Speaker 1: in terms of UH the Great Financial Crisis? Or did
Speaker 1: an impact e M significantly also, well, both crises really
Speaker 1: are exogenous shocks from the perspective of the emerging markets, right,
Speaker 1: Unlike where we were the epicenter. Let's say in two
Speaker 1: thousand and eight, emerging markets were run over as bystanders, right,
Speaker 1: and I would say the whole world was run over
Speaker 1: as as part of COVID. So whenever you have these
Speaker 1: external crises that impinge upon the markets, there are some
Speaker 1: very well established programs out there for the sovereigns in
Speaker 1: our markets to make sure it doesn't become a systemic crisis.
Speaker 1: So if you think about two thousand and eight, there
Speaker 1: was a very standard playbook already in place to help
Speaker 1: some of the weaker credit um whose debt was sustainable
Speaker 1: in the medium term, they just had to rollover problem,
Speaker 1: and the I m F was there to help them
Speaker 1: roll over their deaths until market access was regained. Some
Speaker 1: of them, of course, their debt was not sustainable in
Speaker 1: the medium term and so they elected to default. So
Speaker 1: in Ecuador defaulted in two thousand eight, for example. What
Speaker 1: about the early when we saw a lot of Southern
Speaker 1: Europe running into problems. Do we really think about Greece
Speaker 1: as an emerging market or is that more of a
Speaker 1: developed nation with long history of credit problems. It's a
Speaker 1: great question. So earlier, when I was trying to lay
Speaker 1: out the taxonomy of what's considered an emerging country from
Speaker 1: an investment perspective, I said, it's usually lower middle income
Speaker 1: countries or countries that have defaulted, even if they're high income,
Speaker 1: and I would put Greece in that louder category. How
Speaker 1: did that Southern European crisis, and I remember it seemed
Speaker 1: like it was never going to end. How did that
Speaker 1: affect the rest of the universe. I don't want to
Speaker 1: use a dirty word like contains, but was that primarily
Speaker 1: focused in Europe? Or did the tremors from that radiate
Speaker 1: outwards to all the various emerging market debt? Well, it's
Speaker 1: a as a relative value construct, of course it would
Speaker 1: radiate out. I mean, if you're going to get paid
Speaker 1: five over bunds for BTPs or Spanish government bonds, why
Speaker 1: on earth would you buy emerging markets debt? Right? So,
Speaker 1: of course our spreads widened in sympathy. And I used
Speaker 1: to say that you know it's it's Spain default. Right.
Speaker 1: If a major developed markets government elects to default, the
Speaker 1: signaling for our markets will be very very bad. Right.
Speaker 1: Just think about how terrible that would be. Argentina would
Speaker 1: just default because they would say, well, if the Spanish
Speaker 1: aren't going to pay, we're not going to pay, even
Speaker 1: if they could pay right. Um, But I thought one
Speaker 1: of the most interesting things in two thousand and ten,
Speaker 1: Mexico issued its first century bond, hundred year bond and
Speaker 1: the Mexican Hacienda. The Debt Capital Markets group there was
Speaker 1: very very clever, and they figured out which in vestors
Speaker 1: would be most likely to dip their toes into this
Speaker 1: hundred year Mexican bond, and they offered it shockingly cheap
Speaker 1: to the Mexican curve for those of us brave enough
Speaker 1: to do it. And by the way, they issued it
Speaker 1: at a large original issue discount, whichman and had a
Speaker 1: lot of default protection relative to other Mexican bonds. It
Speaker 1: was nirvana of a bond for us. We bought as
Speaker 1: much of it as we could. We were the largest
Speaker 1: holder of this bond, even though we weren't a very
Speaker 1: large emerging debt asset manager, and we couldn't figure out, like,
Speaker 1: why why would Mexico give us such a free lunch?
Speaker 1: It just doesn't make any sense. And our sovereign analysts
Speaker 1: came up with a theory, which I think is a
Speaker 1: reasonable one. He said, here's the thing. Us rates are low,
Speaker 1: interest rates are low, so while the spread is very wide,
Speaker 1: the yield is one of the lowest that Mexico is
Speaker 1: ever issued at. And that's politically popular. On top of that,
Speaker 1: it's politically popular to say we Mexico can borrow for
Speaker 1: a hundred years while Fain is struggling. So a little
Speaker 1: bit of political populism and national pride allows them to
Speaker 1: offer this, and and it's relatively in expensive money for
Speaker 1: for them, isn't it. That's right, that's right. That was
Speaker 1: our only Mexican holding for years until Brexit came along
Speaker 1: and a Sterling version of that bond became shockingly cheap
Speaker 1: to it, so we got rid of all of our
Speaker 1: dollar bonds and bought Sterling bonds relative value playing so
Speaker 1: from Azerberjan to the Ivory Coast, to Mexico to to
Speaker 1: all around the world. It kind of raises an interesting question.
Speaker 1: So you mentioned you had an analyst who covered Mexican debt.
Speaker 1: How do you analyze governments or companies for that matter,
Speaker 1: that are halfway around the world and presents a risk
Speaker 1: of all sorts of upheaval, politics, currency crisis, defaults on debts.
Speaker 1: Do you have to have boots on the ground in
Speaker 1: each country or can you do this? You know from Afar?
Speaker 1: What do you lose not participating on the ground. In
Speaker 1: my opinion, this is more of a marketing question than
Speaker 1: an investing question. Really interesting tell us more so if
Speaker 1: you think through the process that I've just described, where
Speaker 1: you load your chips, your alpha chips on arbitrage like
Speaker 1: things where you don't even really care which country you're
Speaker 1: talking about. Frankly, right, then from that perspective, no, you
Speaker 1: don't need boots on the ground because you are emphasizing
Speaker 1: that activity and de emphasizing what you think you know
Speaker 1: about any particular country. And so the country tilts that
Speaker 1: we remain with are mostly a function of whether or
Speaker 1: not there are arbitrage like things to do in that country.
Speaker 1: You know, if I take Papa New Guinea or t Jikistan,
Speaker 1: there's there's nothing to do there. You either buy the
Speaker 1: one bond they have or you don't. It's pure country selections.
Speaker 1: So we just don't bother. Right, So you're saying this
Speaker 1: is really a quantitative form of analytics and not a
Speaker 1: squish your qualitative approach. That's correct. Correct if you've marketed
Speaker 1: yourself as you know, boots on the ground and we
Speaker 1: think we can get more information than other people, which,
Speaker 1: by the way, regulation f D wasn't just for equities,
Speaker 1: it's for everybody. Everybody gets the same information at the
Speaker 1: same time, the same road shows the same everything. It's
Speaker 1: not true even overseas. I mean, I would think that
Speaker 1: if you're issuing a bond and equador or what the
Speaker 1: hell do you care about the SEC rules? Oh, these
Speaker 1: are SEC registered bonds. None of the market is euro clear,
Speaker 1: US law, UK law. The country is emerging, gotcha. That's
Speaker 1: really the idea of the nineties, where I go and
Speaker 1: find out the vote and I tell the US you know,
Speaker 1: the worldwide JAW Oregon salesforce. What the thing is going
Speaker 1: to be? That kind of inside knowledge that doesn't exist anymore, right, right?
Speaker 1: That makes that makes a lot of sense um to
Speaker 1: other questions about what's going on today. So inflation seems
Speaker 1: to be the watchword in one along with interest rates
Speaker 1: that seem to follow. Uh, these are popular subjects of
Speaker 1: at the moment. What do you make of inflation as
Speaker 1: a risk both to the rate regime we see and
Speaker 1: and how does that impact emerging market debt. So inflation
Speaker 1: is a form of default where you don't have to
Speaker 1: declare it. Mm hmm. Right. So, from everything I know
Speaker 1: about sovereigns, when they get their backs against the wall
Speaker 1: and eventually have to make a political choice to default,
Speaker 1: it's a very it's to really a very unpopular decision.
Speaker 1: And if you can, you want to, you know, conditional
Speaker 1: on being in that position, you want to heap the
Speaker 1: losses on foreigners. Right. That's why it used to be
Speaker 1: that countries would default on their foreign currency debt because
Speaker 1: that's where the foreigners were, right. Russia changed that calculus
Speaker 1: because they defaulted on local currency debt, which is where
Speaker 1: the foreigners were, and paid dollar debt, which is where
Speaker 1: the Russian ologogums were. So once you're in that position,
Speaker 1: if you can use financial repression in the form of
Speaker 1: negative real interest rates partially through higher inflation, right, then
Speaker 1: you can default slowly without having to make a political
Speaker 1: decision to say we're not going to pay. And that's
Speaker 1: how that's why, in my opinion, you see shadow assets
Speaker 1: trying to pop up so if all the developed markets
Speaker 1: are all using financial repression simultaneously, you can't escape. You
Speaker 1: can escape by going to emerging market, but they're going
Speaker 1: to try and do the same thing. If you're China,
Speaker 1: you used to have a closed capital system. So it's
Speaker 1: very hard for people to say, I don't like negative
Speaker 1: real interest rates here, I'm going to go by you know,
Speaker 1: US dollar bonds or something like that. Was hard for
Speaker 1: citizens to change their currency. That's evolved a little bit,
Speaker 1: but it's still fairly hard. So you see people playing
Speaker 1: hope as a strategy. I would say cryptocurrency is hope
Speaker 1: is a strategy, and I don't I know. I'm a
Speaker 1: sitting duck for financial repression, so I'm going to hope
Speaker 1: that this other thing is better because there's nowhere else
Speaker 1: to escape. Do you want to define financial repression? I
Speaker 1: hear that phrase constantly, and I always get the sense
Speaker 1: people use it very differently. So what I mean by
Speaker 1: financial repression is a running down of debts by allowing
Speaker 1: than the earnings, so whether it's corporate earnings or or
Speaker 1: personal earnings or government earnings to be inflated through the
Speaker 1: inflation process, while the debts that are owed, whether it's
Speaker 1: m zero in the form of your bank note in
Speaker 1: your wallet or in your bank account all the way
Speaker 1: out to your US tenure bond yielding one forty something.
Speaker 1: If inflation is higher than that, then you're eroding the
Speaker 1: real value of those debts, which is somebody else's assets, right,
Speaker 1: And that's how you run down your debt GDP slowly
Speaker 1: over time. But you don't actually default, you don't. You
Speaker 1: don't fail to pay, you just fail to pay in
Speaker 1: real terms. Really quite quite interesting. So you have decades
Speaker 1: of experience looking at emerging markets. You've lived through economic,
Speaker 1: financial credit crisis, all manner of mayhem in these markets.
Speaker 1: What have you learned about these type of situations over
Speaker 1: the course of your career? What what's your big take
Speaker 1: away here? Well, you've probably read Tolstoy, so the idea
Speaker 1: that every family is unhappy in its own way, every
Speaker 1: crisis is unhappy in its own way. Right. There are
Speaker 1: elements that may be the same, but each one is
Speaker 1: slightly different. And an early book that was given to
Speaker 1: me when I started, while there were two books when
Speaker 1: I started in the emerging debt markets about the relationship
Speaker 1: between creditors and debtors and what happens when they get
Speaker 1: into crisis. One is called Banks, Borrowers and the Establishment,
Speaker 1: which is great book, and the other one is called
Speaker 1: Debt Games. And in Debt Games they look through all
Speaker 1: the crises up until the moment that book was written,
Speaker 1: and they use a game theoretic approach to the strategic
Speaker 1: game of creditors and debtors as they head into a
Speaker 1: failure to pay moment. And so you can try and
Speaker 1: conceptualize things that way and say, Okay, what are the
Speaker 1: facts that we have? Are the known unknowns about this
Speaker 1: particular situation and how does it line up with our
Speaker 1: past experience? But again, there's still some unknown unknowns every
Speaker 1: time you do that, so you just have to be
Speaker 1: humble about what is really knowable in any given situation.
Speaker 1: So so I see Debt Games. Um, that's a vin
Speaker 1: odd Aga wild debt game, strategic international interaction in international
Speaker 1: debt rescheduling. Is that the book you're referring to? Yes?
Speaker 1: And what was the other book? I'm sorry I missed it.
Speaker 1: It's called Banks, Borrowers and the Establishment. It's I want
Speaker 1: to say, oh, I found it right here, it is,
Speaker 1: got it? It was I was It's Banks borrowers and
Speaker 1: the establishment or revisionist account of the international debt crisis
Speaker 1: is that it yes, quite interesting. Um So go on,
Speaker 1: I'm sorry, know I interrupted you about that. I just
Speaker 1: wanted to track these because they sound intrigue. Yeah, I know,
Speaker 1: they're super It's it's mostly about how to take these
Speaker 1: strategic interactions and map them onto the utility functions of
Speaker 1: the people involved. Right, So, my utility function as an
Speaker 1: investor on behalf of you know, endowments and pensions and
Speaker 1: foundations or whatever, is to maximize alpha relative to my benchmark.
Speaker 1: That's I have a very very transparent utility function. The
Speaker 1: the borrower, right, let's say it's a government borrower, may
Speaker 1: not be so transparent, and their utility function can shift
Speaker 1: quickly over time. And so just thinking about how that
Speaker 1: evolves and trying to make some guesses. And by the way,
Speaker 1: this administration might get voted out of office over the
Speaker 1: term of the debt of the bonds that you own,
Speaker 1: and so you know, your opinion is only good so
Speaker 1: long as so and so is in office. You know
Speaker 1: a great example of that was Ecuador earlier this year,
Speaker 1: where you vote in the new guy, and the new
Speaker 1: guy is more investor friendly and the bonds go up.
Speaker 1: So you know that's that's a it's a pretty big change. Huh.
Speaker 1: So you you've seen a lot over the course of
Speaker 1: your career. I'm gonna throw you a curve ball now
Speaker 1: and ask. In two thousand and two, you leave JP
Speaker 1: Morgan to train for a spot on the US national
Speaker 1: rowing team to compete at the Olympics in Athens and
Speaker 1: four tell us about that. What motivated it? I'm gonna
Speaker 1: assume you weren't just going to Athens to check out
Speaker 1: their debt. What what got you involved in in crew
Speaker 1: and rowing? Yeah? So after I moved back from Brazil
Speaker 1: and I took over a pretty big job at EPE
Speaker 1: Morigan and it was right as the Asian financial crisis came,
Speaker 1: and that was a hellish period for about eighteen months
Speaker 1: through Russia's default and I just burned out a lot.
Speaker 1: And one of my clients, who was a prop trader
Speaker 1: at Banker's Trust, said, I think you need to take
Speaker 1: up a sport. You know, you work all the time.
Speaker 1: And I said, well, I live in Manhattan, I live
Speaker 1: in a village. What am I like? What sport am
Speaker 1: I going to take up? He says, why don't you
Speaker 1: take up rowing? Nobody needs you at four in the morning.
Speaker 1: And so I bought a car, I joined a rowing club.
Speaker 1: I loved it. I got more serious. I transferred to
Speaker 1: the New York Athletic Club and had a great coach
Speaker 1: there who watched an evolution that was very subtle. And
Speaker 1: this is partially a story of JP Morgan. So JP
Speaker 1: Morgan had an extremely special culture. It's hard to describe
Speaker 1: until it was gone right. That was the only job
Speaker 1: I've ever had, but spot JP Morgan and that culture
Speaker 1: fell apart. And so my coach, who was watching me
Speaker 1: get faster and faster simultaneously saw me not love my
Speaker 1: job anymore. He's like, you used to be first off
Speaker 1: the water, jump in your little car, get to your job,
Speaker 1: be at your desk at seven in the morning. Now
Speaker 1: I see you hang out, you have breakfast with the team.
Speaker 1: What's going on? And I said, I don't love my
Speaker 1: job anymore. And he says, you're so talented. Why don't
Speaker 1: you quit your job then and try and train for Athens?
Speaker 1: And so I said, you know what, You're right, and
Speaker 1: I did. And this was the woman's double event, which
Speaker 1: is really a challenging event. Isn't it. Well, this is
Speaker 1: the women's lightweight double. Yeah. So in Olympic women's rowing,
Speaker 1: if you're an open weight, there's the single, the double,
Speaker 1: the four, the quad, and the eight, and lightweight rowing
Speaker 1: there's the double. So you're either number one and two
Speaker 1: in the country or you're not so and plus it's
Speaker 1: a lot of dieting. You had to weigh a very
Speaker 1: small amount. He was really intense to do. And my coach,
Speaker 1: you know, when I showed up for practice the next
Speaker 1: day and I said, I quit my job, Benny, I'm
Speaker 1: ready to go. He says, all right, now you have
Speaker 1: to move to Boston because that's where all the lightweight rowers.
Speaker 1: I couldn't believe it. I was like, what I thought
Speaker 1: I was going to row for you. He says, no,
Speaker 1: you're rowing for Athens. So you moved to Boston. So
Speaker 1: that's amazing. Sorry, so that's what led you to Boston,
Speaker 1: and I guess ultimately to g m O. Yep, yep. I.
Speaker 1: I mean, I didn't make the team, and I was
Speaker 1: very desponded about that. But I didn't meet a guy
Speaker 1: who's now my wonderful and long suffering husband, and I said,
Speaker 1: I'm not moving back to New York. So then I thought,
Speaker 1: what am I going to do? So I called up
Speaker 1: g M O and said, hey, you remember me, and
Speaker 1: they're like, yeah, I remember you said I need a job.
Speaker 1: They said, okay, did they ask what have you been
Speaker 1: doing for the past two years since you left JPM?
Speaker 1: And they did. And fortunately the head of the team
Speaker 1: at the time himself is really big into sports. We
Speaker 1: still follow each other on Strava now that he's retired,
Speaker 1: and so most of my interview with him was about
Speaker 1: my power to weight ratio. I'm not kidding, that's amazing.
Speaker 1: That's really that's really amazing. So how how competitive were
Speaker 1: you in the women's lightweight doubles? Did how close did
Speaker 1: you come to actually go on to Athens? Because that's
Speaker 1: supposed to be an incredibly competitive slot. So in two
Speaker 1: thousand and three, which is the year leading up where
Speaker 1: they're going to decide the likely national teams the following year,
Speaker 1: we came in second at trials. Now, interestingly enough, I
Speaker 1: still row every day and on the weekends. We have
Speaker 1: a house at the Cape and I've started rowing down there,
Speaker 1: and one of the guys I now row with is
Speaker 1: the coach of the other women's double and I remember
Speaker 1: the first day that I showed up. I was so nervous.
Speaker 1: I thought, oh my god, I'm gonna Jim Deeps and
Speaker 1: I you know, I said hi, Mr Deets and he says,
Speaker 1: vander Steel, you wrote against you know Stacy. I'm like, yes,
Speaker 1: He's like you you did a good job. I was
Speaker 1: so pleased. And then this year at the head of
Speaker 1: the child we raised my partner and I raced against
Speaker 1: a couple of the open weight women from Athens, Hillary
Speaker 1: and Marion. We just lost. So it's fun to still
Speaker 1: race these women all of these years later. Of course
Speaker 1: we have kids and jobs and other stuff going on.
Speaker 1: What do you work out on at home? Are you
Speaker 1: using a rowing machine or you're not in the water
Speaker 1: every day? Certainly not this time a year. We were
Speaker 1: out on Saturday and Sunday. This morning. I have a
Speaker 1: group called the Early Birds. It's all of these fabulous women.
Speaker 1: Um and at the race starts, so you just hit
Speaker 1: the faith time. Whoever shows up today it was Sam
Speaker 1: and Alex and you know, we had to work out
Speaker 1: it agreed to yesterday. Normally we would do it at
Speaker 1: the rowing club on the rowing machines, but right now
Speaker 1: with COVID, we just do it over the face time. Huh,
Speaker 1: what machine didn't get out of bed without these women?
Speaker 1: By the way, is this any particular machine or you?
Speaker 1: How are you actually doing this? The reason I ask
Speaker 1: is I have a hydro which I kind of get
Speaker 1: very lax when the weather is nice and I'd rather
Speaker 1: be outside. But around this time a year, it's like, okay,
Speaker 1: it's time to start, and I'm just about ready to
Speaker 1: mid December, just about ready to say all right, no
Speaker 1: more goofing around, let's let's hit the machine. Well, that
Speaker 1: looks like a very very sticky machine I've seen not
Speaker 1: only have I seen the advertisement for it, but the
Speaker 1: people who do the videos, Yeah, they're great. They're out
Speaker 1: on the Charles all the time, so we see them
Speaker 1: go by. That's funny. But what we row on concept twos,
Speaker 1: which are just the basic equipment, well, you know, I went.
Speaker 1: I learned recently that one of the women in from
Speaker 1: back in the day, and it's woman could Trine's working
Speaker 1: on an improvement to what we have going, which is
Speaker 1: just literally FaceTime. So we're you know, got video chat
Speaker 1: going on, but we can't see each other's monitors as
Speaker 1: that we were all there together. So she's working on
Speaker 1: an enhancement where it'll be FaceTime plus your ability to
Speaker 1: see other people's scores, which really gets your juices going.
Speaker 1: You know, that's the secret source of Peloton and other
Speaker 1: you know, competitive machines like Hydro and I'm sure there's
Speaker 1: a Nordic Trek has something similar. Um. At a certain point,
Speaker 1: it just you know, becomes I just want a little
Speaker 1: piece and quiet, and the videos are very it's a
Speaker 1: relaxing workout. Even if you work out work up a sweat. Um,
Speaker 1: you're much more competitive in that space. So I don't dare,
Speaker 1: but it sounds like it's really fascinating. It's amazing you've
Speaker 1: stayed with it all these times. I know, it's amazing
Speaker 1: you stayed with it all this time. I know I
Speaker 1: only speaking of time. I know only have for a
Speaker 1: few more moments. Let's jump to our favorite questions that
Speaker 1: we ask all of our guests, starting with tell us
Speaker 1: what you're streaming these days? Would have been keeping you entertained?
Speaker 1: You and the family entertained during the lockdown. Well, my
Speaker 1: two teenage daughters include me, and the other day they said, Mom,
Speaker 1: you haven't opened your Spotify wrapped yet m hm, So
Speaker 1: I don't know if you know what that is, but
Speaker 1: that's where Spotify tells you what you most listen to,
Speaker 1: so it's perfect timing. Um. So according to Spotify, what
Speaker 1: I most listened to is eminem, Jay, z n F
Speaker 1: and Rihanna. So these are all upbeat workout music, upbeat
Speaker 1: workout stuff. Yeah, I listened to a lot of the
Speaker 1: dred and eight beat per minute running workout stuff. So
Speaker 1: that's my hypothesis where that comes from. Um, in terms
Speaker 1: of watching stuff, the girls have gotten us into a show.
Speaker 1: It's I don't even think it's on Netflix. I think
Speaker 1: it's on the YouTube called The try Hi Guys. So
Speaker 1: it's these four hilarious guys who are on a cooking
Speaker 1: show where they're not allowed to use any recipes and
Speaker 1: they just make stuff up. So it's very very funny.
Speaker 1: We laugh a lot about that, The Try Guys. All right,
Speaker 1: I see this on YouTube that does look amusing. Um,
Speaker 1: tell us about your early mentors who helped to shape
Speaker 1: your career. Well, UM, certainly my parents, my older half
Speaker 1: brothers and sisters. Um, they're much much older than I am,
Speaker 1: and you know they had interesting careers that I learned
Speaker 1: about growing up. Uh. I would say my high school
Speaker 1: math teacher, one of my college journalism professors who was
Speaker 1: at my wedding. I'm still very good friends with um
Speaker 1: at JP Morgan. My god, there would be too many
Speaker 1: to mention there was. The place was just teeming with
Speaker 1: unbelievable people. But one really comes to mind as fellow
Speaker 1: with Mike Symbolist, who still works there. Um he he
Speaker 1: taught me all about relative value. He was there, he
Speaker 1: you know, watched the GMO versus long term UH outcomes.
Speaker 1: He was the person who suggested I go to Brazil.
Speaker 1: You know, he said, listen, this relative value work is
Speaker 1: really interesting and we all really like it. But you're
Speaker 1: not going to win any I awards or get paid
Speaker 1: much for doing it. You need to be one of
Speaker 1: these strategists. You need you need to be a person
Speaker 1: who can talk about the country. And so he said,
Speaker 1: just take the job in Brazil. I didn't. I couldn't
Speaker 1: speak Portuguese and know anything about Brazil. He's like, uh,
Speaker 1: it'll be fine, and it was so fine. Um. Interesting.
Speaker 1: Let's let's talk about books you mentioned too. What are
Speaker 1: some of your favorite what do what do you reading currently?
Speaker 1: So Um, when I thought about what books do I
Speaker 1: most love, I thought of it more in a desert
Speaker 1: island books. So you're stranded on a desert island, you
Speaker 1: can only bring so many books with you. And if
Speaker 1: that were the case, the ones that come to mind
Speaker 1: top are Throws, Pillars of Hercules, or O'donchy's Running in
Speaker 1: the Family, or the English Patients. Um. I love Ann Patchett,
Speaker 1: she wrote Belle Conto and Patron Sainted Liars. And then
Speaker 1: I think I would always need to have a copy
Speaker 1: of Hofstadter's godel esher Bach, which keeps your mind sharp. Um,
Speaker 1: I'm looking at a copy that right now. That was
Speaker 1: a college book that I keep swearing I'm going to reread,
Speaker 1: and I have yet to honor that promise. It's it's
Speaker 1: a great book, right written by my one of my researches,
Speaker 1: JP Morgan's mom's boyfriend. Interesting, any of the books you
Speaker 1: want to mention or I didn't want to cut you off? Yeah,
Speaker 1: I know. After that, like, you know, the usual reading stuff.
Speaker 1: I like to read literature. I love Barnes McEwen. That
Speaker 1: kind of stuff sounds sounds like that's a quite a
Speaker 1: great list. What sort of advice would you give to
Speaker 1: a recent college grad who was interested in a career
Speaker 1: in either fixed income or emerging market, Well, definitely try
Speaker 1: and get yourself a job at one of the big
Speaker 1: banks and go through the training program experience. I mean,
Speaker 1: you get a free m b A, you get to
Speaker 1: rotate around and figure out what you like, because I
Speaker 1: think it's very hard to imagine what you're going to
Speaker 1: like without actually doing it right. Um. After that, I
Speaker 1: would say, I think very very carefully about cultural fit.
Speaker 1: I didn't know that that mattered so much, like I said,
Speaker 1: until it was gone. So if you're not feeling it,
Speaker 1: move on. Really interesting, and our final question, what do
Speaker 1: you know about the world of investing today, be it
Speaker 1: emerging market, dead heads, funds, large corporate um investing strategies
Speaker 1: that you wish you knew thirty years or so ago
Speaker 1: when you were first getting started. Mm hmm, Well, I
Speaker 1: would say, in line with the last question, you've got
Speaker 1: to try stuff, right. I think it's hard for me
Speaker 1: to say what do I wish that I had known?
Speaker 1: I think you've got to try stuff, fail, try again.
Speaker 1: That's how you learn, and I can tell you to
Speaker 1: avoid mistakes, but until you make them yourself. It's going
Speaker 1: to be really difficult. I remember considering going to get
Speaker 1: a PhD actually while I was at Shaping Morgan, thinking oh,
Speaker 1: that would be something useful to have. And I went
Speaker 1: out to Stanford and met with a person who I
Speaker 1: thought I wanted to study under. And I explained the
Speaker 1: use case, like why do I want to have this PhD?
Speaker 1: And I explained to what I did for a living.
Speaker 1: He says, you don't need this PhD to do what
Speaker 1: you're doing for a living. If that's your use case,
Speaker 1: forget it. You are a practitioner already. So um, I'm
Speaker 1: not sure that I would have known that without actually
Speaker 1: practicing it. Huh. That's really kind of intriguing. We've been
Speaker 1: speaking to Tina vander Steel. She is the head of
Speaker 1: Emerging Country Debt at GMO, where she is also a partner.
Speaker 1: If you enjoy this conversation, check out any of our
Speaker 1: previous three hundred and seventy seven discussions we've had. You
Speaker 1: can find those at iTunes, Spotify, wherever you buy your
Speaker 1: favorite podcasts. We love your comments, feedback and suggestions right
Speaker 1: to us at m IB podcast at Bloomberg dot net.
Speaker 1: Sign up from my daily reads at rid Halts dot com,
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Speaker 1: remiss if I did not thank the correct team that
Speaker 1: helps me put together this conversation each week. Mohammed Ramaui
Speaker 1: is my audio engineer. Paris Wald is my you Sir.
Speaker 1: Michael Batnick is my head of research. A ticket of
Speaker 1: Alberoni is our project manager. I'm Barry Ritolts. You've been
Speaker 1: listening to the asker's business on Bloomberg, Brady