WEBVTT - Franklin Templeton's Sonal Desai on Fixed Income 0:00:02.520 --> 0:00:11.879 Bloomberg Audio Studios, Podcasts, radio news. This is Masters in 0:00:11.960 --> 0:00:15.480 Business with Barry Ritholts on Bloomberg Radio. 0:00:16.480 --> 0:00:19.760 This week on the podcast, I have another extra special guest, 0:00:20.200 --> 0:00:23.360 So now, Decie. What can I say? She runs the 0:00:23.360 --> 0:00:26.960 Fixed Income Group as chief investment Officer for Franklin Templeton. 0:00:27.400 --> 0:00:31.680 She directly manages two hundred and fifteen billion dollars in assets. 0:00:32.040 --> 0:00:35.640 Soanal has been named to just about every most influential 0:00:35.680 --> 0:00:39.600 Woman in finance list Baron's five years in a row 0:00:39.800 --> 0:00:44.720 Forbes Pension Investments. If you are at all interested in 0:00:45.280 --> 0:00:49.400 fixed income, what the thought process is like, I'm trying 0:00:49.400 --> 0:00:53.240 to figure out how to structure a portfolio fixed income? 0:00:53.600 --> 0:00:57.040 What you think about, what affects the returns you're going 0:00:57.120 --> 0:00:59.680 to see? This is gonna be a great podcast for you. 0:00:59.840 --> 0:01:03.080 I thought this was interesting, really fascinating, and I think 0:01:03.160 --> 0:01:09.440 you will also with no further ado Franklin Templeton's Sanal Decide, 0:01:10.240 --> 0:01:11.640 Welcome to Blomberg. 0:01:12.319 --> 0:01:14.760 Thank you Barry that it's so kind of you to 0:01:14.800 --> 0:01:15.319 have me here. 0:01:15.319 --> 0:01:18.280 Well, it's a pleasure. I'm excited to talk to you. 0:01:19.000 --> 0:01:22.480 Let's start out with the background that you come from 0:01:23.120 --> 0:01:28.760 bachelors and economics from del High University. PhD from Northwestern, 0:01:28.959 --> 0:01:32.520 also in economics. What was the original career player? 0:01:32.800 --> 0:01:35.200 This is a really interesting one because I grew up 0:01:35.200 --> 0:01:39.119 in Indo. You know, there are two careers. At that time, 0:01:39.200 --> 0:01:42.679 there were two careers any good parent wanted from for 0:01:42.840 --> 0:01:45.440 his son or in my case daughter. You could be 0:01:45.440 --> 0:01:47.520 an engineer, or you could be a doctor. And if 0:01:47.560 --> 0:01:49.280 you really didn't want to do either of those, you 0:01:49.280 --> 0:01:51.280 could work for the government. I didn't want to do 0:01:51.320 --> 0:01:54.560 any of the three, and economics seemed at that time 0:01:54.800 --> 0:01:57.360 to be the one which left the most options open 0:01:57.400 --> 0:02:00.720 for me. So I did economics. At the end of 0:02:00.720 --> 0:02:05.080 my undergraduate degree, though I didn't feel like I'd really 0:02:05.360 --> 0:02:09.400 learned enough about economics, and so I decided, you know, 0:02:10.200 --> 0:02:13.760 not having understood the concept of sunk cost, I decided 0:02:13.840 --> 0:02:16.160 to do even more and I did a PhD. 0:02:16.800 --> 0:02:18.480 And was that two years? Three years? 0:02:18.639 --> 0:02:21.880 The PhD? Yeah, no, that was a full five four 0:02:22.400 --> 0:02:22.920 five years. 0:02:22.919 --> 0:02:25.640 So that's more than sun costs. That's double, more than 0:02:25.680 --> 0:02:29.519 double exactly. So you come out of Northwestern with a 0:02:29.600 --> 0:02:33.440 PhD in economics, What was your first job in finance 0:02:33.520 --> 0:02:34.960 or what was your first job out of school? 0:02:35.560 --> 0:02:39.480 I was assistant professor of economics at the University of Pittsburgh. 0:02:39.720 --> 0:02:44.280 And here's the deal. When I got that job, I 0:02:44.600 --> 0:02:48.079 had also interviewed with the IMF, and I had really 0:02:48.200 --> 0:02:50.560 liked the IMF. But you have to understand, I don't 0:02:50.600 --> 0:02:53.240 know if it's that way today, but at that time, 0:02:53.919 --> 0:02:55.640 there was no way I was going to my thesis 0:02:55.680 --> 0:02:59.000 advisor and telling him, yeah, I do have a tenure 0:02:59.040 --> 0:03:04.239 track offer from a decent university, but you know, I'm 0:03:04.240 --> 0:03:06.120 going to go to the dark side and work for 0:03:06.160 --> 0:03:08.639 the IMF. So I couldn't bring myself to do it. 0:03:09.080 --> 0:03:11.720 I went and I did the academia thing for a 0:03:11.760 --> 0:03:14.040 couple of years. And I was young enough that the 0:03:14.080 --> 0:03:16.160 IMF told me at that time that, look, if you 0:03:16.320 --> 0:03:19.040 change your mind within the next two years, let us. 0:03:19.000 --> 0:03:22.639 Know, huh. I mean, academia is in for everybody, and 0:03:22.680 --> 0:03:25.040 it might take a year or two to figure that out. 0:03:25.600 --> 0:03:28.720 I mean, if that lifestyle works for you, it certainly, 0:03:29.400 --> 0:03:33.560 you know, could be rewarding intellectually very much. 0:03:33.600 --> 0:03:36.880 So, Look, academia, I admire it. I think it is 0:03:36.920 --> 0:03:42.320 the pinnacle of what this country does brilliantly having academia, 0:03:42.800 --> 0:03:47.600 having those research universities, all of that is absolutely superb 0:03:47.920 --> 0:03:51.120 for me. The problem was I'd spent five years of 0:03:51.200 --> 0:03:54.480 my life essentially doing research, and now I wanted to 0:03:54.480 --> 0:03:57.480 get out there and do something with it. To me, 0:03:57.720 --> 0:04:02.800 getting into the IMF, it was mind bogglingly, ioway, it 0:04:02.840 --> 0:04:05.480 was fantastic. Remember this is in the mid nineties, so 0:04:05.560 --> 0:04:07.760 let's let me date myself. Yeah, so this is in 0:04:07.840 --> 0:04:10.600 the mid nineties. Eastern Europe is just coming in from 0:04:10.640 --> 0:04:14.600 the cold, right, and that was where I focused most 0:04:14.640 --> 0:04:15.160 of my time. 0:04:15.560 --> 0:04:19.039 So how long did you stay at Pittsburgh before you 0:04:19.120 --> 0:04:19.880 joined the IMF? 0:04:19.960 --> 0:04:21.440 Two years? It was two years. 0:04:21.720 --> 0:04:25.039 So what was the experience like in Europe in the 0:04:25.160 --> 0:04:28.040 nineties working for the International Monetary. 0:04:27.760 --> 0:04:30.400 No, no, no. So I worked out of Washington, DC. 0:04:30.760 --> 0:04:35.360 I worked on Eastern Europe. So I'm talking about countries 0:04:35.400 --> 0:04:41.440 like Bulgaria, Macedonia, Romania, Croatia. Prior it liter the wall 0:04:41.480 --> 0:04:44.200 had fallen in the late eighties, eighty nine, was it, 0:04:44.279 --> 0:04:46.760 you know? And so these countries, some of these countries 0:04:47.000 --> 0:04:51.000 didn't even have the concept of GDP as we know it. 0:04:51.040 --> 0:04:55.040 They had gross social product, they didn't have CPI in disease. 0:04:55.279 --> 0:04:57.960 So it was in some ways the initial piece was 0:04:58.000 --> 0:05:01.320 like an extension of being a university because we were 0:05:01.360 --> 0:05:04.200 bringing these concepts to them. It was. It was an 0:05:04.240 --> 0:05:05.280 amazing experience. 0:05:05.560 --> 0:05:09.560 So any lessons that you learn at IMF that ultimately 0:05:09.880 --> 0:05:12.360 influenced your investment philosophy. 0:05:13.200 --> 0:05:18.080 My enormous respect and belief in macroeconomics actually comes from 0:05:18.120 --> 0:05:20.640 my time at the IMF. Were you know that IMF 0:05:20.760 --> 0:05:23.839 got a lot of things for program countries, you know, 0:05:23.920 --> 0:05:26.839 for programs which are put into place around the world. 0:05:26.880 --> 0:05:29.720 Some were better than others. I get all of that, 0:05:30.040 --> 0:05:32.600 but here's the thing. We would go to these countries 0:05:32.720 --> 0:05:38.960 and the idea was really frankly orthodox fiscal and monetary policy. 0:05:39.120 --> 0:05:44.680 And sometimes when you're starting from a certain point, be 0:05:44.800 --> 0:05:49.400 it high perinflation, be it out of control physical balance, 0:05:49.520 --> 0:05:53.159 be it lack of any kind of international reserves, you 0:05:53.240 --> 0:05:55.440 need to go back to orthodoxy. It kind of works, 0:05:55.640 --> 0:05:58.960 and that carrying that forward, I think it's influenced a 0:05:59.000 --> 0:06:01.760 lot of how as thought about emerging markets through the 0:06:01.960 --> 0:06:02.640 through the years. 0:06:03.360 --> 0:06:05.479 How long did you stay at the IMF four. 0:06:06.080 --> 0:06:08.800 It was it was six years. It was six years 0:06:08.800 --> 0:06:13.640 in DC and then half a year. Basically my husband 0:06:13.640 --> 0:06:16.279 and I at that time we chose to move to 0:06:16.279 --> 0:06:18.640 the private sector right. He was moving to the private 0:06:18.680 --> 0:06:21.359 sector in London and I was following him, and I 0:06:21.400 --> 0:06:24.520 had accumulated six months of vacation. They let you do that. 0:06:25.040 --> 0:06:27.400 They wouldn't cash me out for six months, but they 0:06:27.400 --> 0:06:30.320 said take the holiday. You know what I did. I 0:06:30.360 --> 0:06:33.560 had the IMF pay for me to do a professional 0:06:33.600 --> 0:06:36.279 patisserie course in London because I had to take the holiday. 0:06:36.320 --> 0:06:38.039 I couldn't go out and work, but I was being 0:06:38.040 --> 0:06:40.600 paid and I couldn't not be paid. So I took 0:06:40.880 --> 0:06:42.560 a one year course question to. 0:06:42.600 --> 0:06:45.080 Six months full on pastry and. 0:06:45.080 --> 0:06:48.159 Court UNPLO, Basic, intermediate and superior. 0:06:48.680 --> 0:06:50.159 Do you still do a lot of cooking? 0:06:50.400 --> 0:06:51.719 So I do a lot of cooking, but I don't 0:06:51.760 --> 0:06:56.520 do much much baking anymore. My husband always complains. He says, 0:06:56.520 --> 0:06:59.400 I baked more before the partisiri course because after that, 0:07:00.000 --> 0:07:02.360 but I would come into our rental apartment and say, 0:07:02.360 --> 0:07:03.720 I can't work in these conditions. 0:07:04.920 --> 0:07:07.599 So you became a chef prima donna? 0:07:07.680 --> 0:07:10.560 Is that what I have to looking back at myself, 0:07:10.640 --> 0:07:12.480 I have to believe I became a prima donna. 0:07:12.600 --> 0:07:15.240 So you relocate with your husband to London, I'm going 0:07:15.280 --> 0:07:17.960 to assume that's how you end up at Thames River Capital, 0:07:18.000 --> 0:07:18.440 Is that right? 0:07:18.520 --> 0:07:20.280 First? Actually I was on the cell side, so I've 0:07:20.280 --> 0:07:22.680 done it all. I've done academia. Then I did the 0:07:22.680 --> 0:07:25.480 public sector at the IMF. Then I did the cell 0:07:25.560 --> 0:07:29.160 side Dresna Klein watwas Stein Investment Banking and I was 0:07:29.680 --> 0:07:32.280 in the research team there and that was in London. 0:07:32.640 --> 0:07:35.720 And then after six years with them, I moved to 0:07:35.840 --> 0:07:38.680 Thames River Capitol, which was a macro hedge fund in London. 0:07:39.640 --> 0:07:42.120 What was that experience like that you were there right 0:07:42.160 --> 0:07:44.160 through the Great Financial Crisis? 0:07:44.240 --> 0:07:49.280 Yeah? Actually, so I started with them in two thousand 0:07:49.320 --> 0:07:52.040 and six and in two thousand and nine I moved 0:07:52.240 --> 0:07:55.760 back to the long only by side. I think it 0:07:55.880 --> 0:07:59.840 was absolutely eye opening, all right, And I think one 0:07:59.840 --> 0:08:04.240 of great things about working with them small team, boutique 0:08:04.240 --> 0:08:07.400 firm hedge fund, but a macro hedge fund, so at 0:08:07.480 --> 0:08:10.360 every stage it felt like and I'd been on the 0:08:10.400 --> 0:08:12.560 cell side and now it's on the buy side. It 0:08:12.600 --> 0:08:15.160 gets you a little bit closer to the end point. 0:08:15.280 --> 0:08:19.360 I think it was a fascinating point of time because essentially, 0:08:20.480 --> 0:08:23.840 over the course of the two thousands, the private sector 0:08:23.880 --> 0:08:26.040 really came into its own, so in a sense, when 0:08:26.080 --> 0:08:28.440 we were at the IMF, A lot of these emerging markets, 0:08:28.680 --> 0:08:32.120 they came to the IMF because there wasn't a true alternative. 0:08:32.160 --> 0:08:36.120 Private markets, especially for em had not deepened enough. And 0:08:36.160 --> 0:08:40.080 now as as we got into eight nine, you started 0:08:40.120 --> 0:08:43.080 seeing the strength and power of the private sector. And 0:08:43.120 --> 0:08:47.319 then we had the global financial crisis. Holy cow, that 0:08:47.520 --> 0:08:51.720 was you know. That was when I would walk around 0:08:51.720 --> 0:08:55.160 and I used to walk home from my work and 0:08:55.240 --> 0:08:58.400 I was just thinking. Everyone keeps talking about, oh, you know, 0:08:58.840 --> 0:09:02.360 living an unprecedent times, living through history. I draw to 0:09:02.400 --> 0:09:08.560 read about it. You know, living through it was amazing. 0:09:09.040 --> 0:09:11.760 I remember waking up at three or four in the 0:09:11.760 --> 0:09:14.880 morning to find out what had happened overnight, what were 0:09:15.000 --> 0:09:19.600 markets doing. It was a whole different level. It was 0:09:19.640 --> 0:09:22.520 just amazing. And now I look back and it's like, great, 0:09:22.600 --> 0:09:25.360 we did that. We did that. But I will tell 0:09:25.400 --> 0:09:27.760 you one of the best things about that time was 0:09:27.800 --> 0:09:30.079 remembering to look out of the window we worked out 0:09:30.080 --> 0:09:33.320 of Berkeley Square, lovely officers, looking out of the window 0:09:33.360 --> 0:09:36.920 and watching people having normal lives and realizing, you know, 0:09:36.960 --> 0:09:39.560 the world doesn't begin or end with finance. 0:09:39.720 --> 0:09:43.360 For sure, it certainly has an impact, but yeah, it's 0:09:43.440 --> 0:09:46.080 kind of funny. Some of the younger folks who are 0:09:46.640 --> 0:09:51.240 late thirties, early forties, this is it's hard to imagine 0:09:51.280 --> 0:09:53.560 this is before their time. It is like they were 0:09:53.600 --> 0:09:56.000 in college. So I was in grad school during the 0:09:56.120 --> 0:10:00.920 eighty seven crash, and it was you really didn't pay 0:10:00.920 --> 0:10:06.120 attention to it. I imagine anybody who's an undergraduate or graduate 0:10:06.240 --> 0:10:09.880 or even just starting to work into eight o nine, 0:10:10.600 --> 0:10:15.319 you really don't understand how unusual and the force of 0:10:15.440 --> 0:10:19.160 that debacle across the entire economy. 0:10:19.240 --> 0:10:23.760 Barry, take it one step further and recognize that somebody, 0:10:24.440 --> 0:10:27.480 some kid who got into JP Morgan as a trader 0:10:27.720 --> 0:10:30.720 and was fortunate enough not to lose their job in 0:10:30.920 --> 0:10:36.640 eight or nine. This is somebody who probably through COVID, 0:10:36.800 --> 0:10:39.360 ended up being a senior trader and has never lived 0:10:39.440 --> 0:10:44.480 through truly non zero interest rates. I mean yet the 0:10:44.480 --> 0:10:48.160 FED started raising them, but through what I would consider normal, 0:10:48.840 --> 0:10:54.000 normal business cycles. It is remarkable. That's when you really realize, Wow, 0:10:54.040 --> 0:10:55.839 you've lived through interesting times. 0:10:55.960 --> 0:10:59.240 To say the very least. So you mentioned you joined 0:10:59.240 --> 0:11:03.520 Franklin in nine the long Only. Yes, pretty good timing 0:11:03.559 --> 0:11:07.080 to join a long only shop mid o nine. Tell 0:11:07.120 --> 0:11:10.400 us what that transition was like going from a long 0:11:10.480 --> 0:11:13.400 short hedge fund to a long only asset manager. 0:11:13.480 --> 0:11:17.840 So actually, you know, the reality is the team i 0:11:18.000 --> 0:11:22.160 joined at that time was the global macro team within 0:11:22.200 --> 0:11:27.600 Franklin Templeton, and in many respects that team works with 0:11:27.840 --> 0:11:33.520 deep value investing in a sense, looking for emerging markets 0:11:33.559 --> 0:11:36.320 which are totally out of favor, thinking in terms of 0:11:36.440 --> 0:11:40.480 long business cycles and really investing approach. So it was 0:11:40.520 --> 0:11:43.040 a bit of a natural transition. The part which was 0:11:43.840 --> 0:11:46.840 more complicated to get my head around was being part 0:11:47.000 --> 0:11:50.640 of an enormous organization after having basically been a part 0:11:50.720 --> 0:11:53.360 of a very small team, a small boutique team where 0:11:53.400 --> 0:11:54.840 if you want to do something you could be very 0:11:55.000 --> 0:11:57.000 entrepreneurial and go out and do it. At Franklin you 0:11:57.040 --> 0:12:00.840 have to to get your arms around a much bigger organization. 0:12:01.240 --> 0:12:02.120 But it was very good. 0:12:02.520 --> 0:12:06.760 Twenty eighteen you become chief investment officer for the fixed 0:12:06.800 --> 0:12:09.800 income group at Franklin Templeton. Is that the timing right, Yeah? 0:12:09.920 --> 0:12:11.560 Roughly, Yeah, that's the timing. 0:12:11.640 --> 0:12:14.200 That's got to be a pretty big change in enroll 0:12:14.360 --> 0:12:19.400 from had a research to yeah, running fixed income. 0:12:19.640 --> 0:12:22.720 So it was a big change. And now we get 0:12:22.760 --> 0:12:29.240 to the point where my predecessor was retiring, and Jenny 0:12:29.280 --> 0:12:31.040 asked if I thought. 0:12:30.800 --> 0:12:33.800 I could do this, and Jenny Johnson. 0:12:33.480 --> 0:12:37.120 Jenny Johnson, and she asked me if I if I 0:12:37.160 --> 0:12:41.120 thought I could take this role on. And I have 0:12:41.200 --> 0:12:44.720 to say my first reaction was that there's too many 0:12:44.760 --> 0:12:47.040 pieces that I can't do. And I tell you something. 0:12:47.080 --> 0:12:49.560 This is a difference between men and women. My husband 0:12:49.559 --> 0:12:51.880 when he looks at, you know, a job description, there 0:12:51.880 --> 0:12:54.800 are something like twenty things on that job and so 0:12:54.960 --> 0:12:57.040 I can apply for this. I said, but but, but 0:12:57.040 --> 0:12:59.960 but you know, you haven't done you haven't digged up 0:13:00.160 --> 0:13:02.000 one of these boxes. He says, I take that one. 0:13:02.760 --> 0:13:05.480 He will apply for it and he will likely get 0:13:05.520 --> 0:13:05.880 the job. 0:13:06.360 --> 0:13:10.280 When I had Jenny here for an interview, we talked 0:13:10.280 --> 0:13:13.560 about that exact thing, and did she mentioned, She goes, 0:13:13.600 --> 0:13:16.120 women will look at this and say, oh, I can't 0:13:16.120 --> 0:13:19.199 do that, like I don't have one seven and twelve, 0:13:19.520 --> 0:13:21.640 and guys are like, yeah, we'll figure it out as 0:13:21.679 --> 0:13:24.440 we go. It's a very genetic di It's. 0:13:24.320 --> 0:13:29.160 A real genetic difference because my instinct is, well, I 0:13:29.200 --> 0:13:33.040 haven't done that before, so I can't do it. And 0:13:33.840 --> 0:13:37.960 between between my husband and Jenny They basically kicked me 0:13:37.960 --> 0:13:39.400 in the pants and said, no, you can do it. 0:13:39.520 --> 0:13:43.000 Learn learn on the job. I guess I did. It 0:13:43.040 --> 0:13:45.720 was fantastic. It's been really fantastic. 0:13:45.280 --> 0:13:49.199 Really interesting. So let's talk a little bit about Franklin. 0:13:49.760 --> 0:13:54.160 So you've been chief investment officer for seven almost eight 0:13:54.240 --> 0:13:58.080 years now. What's been the most surprising thing about this role? 0:13:59.200 --> 0:14:04.360 Number One, When you challenge yourself, you really can step up. 0:14:04.720 --> 0:14:07.600 Number Two, there are parts of fixed income that I 0:14:07.679 --> 0:14:11.920 thought would be I'll just say it boring. They're not 0:14:12.559 --> 0:14:15.720 as exciting as going out and finding that emerging market. 0:14:15.880 --> 0:14:18.880 And what you find is actually everything is fascinating if 0:14:18.880 --> 0:14:21.640 you spend enough time looking at it. So that's been great. 0:14:22.360 --> 0:14:26.600 And I'd say the other part of it, which has 0:14:26.680 --> 0:14:31.520 been somewhat surprising to me, I'd say, is it goes 0:14:31.560 --> 0:14:34.360 actually into the broad into broader markets, not just my 0:14:34.600 --> 0:14:40.000 role within this within this group, it is the extent 0:14:40.240 --> 0:14:46.440 to which markets look at what is happening currently, and 0:14:46.480 --> 0:14:49.640 it's a very short step for analysts to look at 0:14:49.640 --> 0:14:52.880 what's happening extended into the future and give you a 0:14:52.960 --> 0:14:56.880 reason for why it happened. How difficult it is to 0:14:57.040 --> 0:15:01.040 break out of the mold and try to act genuinely 0:15:01.080 --> 0:15:03.680 look forward. Does this make sense? 0:15:03.960 --> 0:15:07.280 Yes, we you know, flick on the TV radio and 0:15:07.440 --> 0:15:11.840 people are constantly explaining what just happened when they had 0:15:11.840 --> 0:15:14.400 no idea what was going to happen. So a lot 0:15:14.400 --> 0:15:15.360 of hindsight bias. 0:15:15.600 --> 0:15:19.960 Yes, And there's also what just happened and therefore why 0:15:20.000 --> 0:15:23.120 it should continue happening. And I think that's something which 0:15:23.160 --> 0:15:27.120 I never realized how deeply ingrained it is and how 0:15:27.160 --> 0:15:29.880 difficult it is to break people out of that way of. 0:15:30.200 --> 0:15:33.840 Just extrapolating to infinity infinity. Yeah, that happens all the time. 0:15:34.160 --> 0:15:37.640 You recently were on with my colleague Shanali and you 0:15:37.960 --> 0:15:43.120 said to her, investors need to price risk more seriously. 0:15:43.640 --> 0:15:44.840 Explain what you mean by that. 0:15:45.200 --> 0:15:47.600 What I mean by that is, I said more than 0:15:48.280 --> 0:15:52.200 I'm looking now since the global financial crisis, and Barry 0:15:52.240 --> 0:15:55.720 we just talked about the fact that their entire entire 0:15:55.760 --> 0:15:58.920 generations of people who have never lived in a world 0:15:58.960 --> 0:16:03.880 where liquidity were anything other than hyperabundant. And by the way, 0:16:03.920 --> 0:16:05.920 we're still in that world. You look at the Fed's 0:16:05.920 --> 0:16:08.960 balance sheet, it's still enormous. I think it's very hard 0:16:09.000 --> 0:16:12.120 for people to even realize that the FED sat on 0:16:12.200 --> 0:16:16.040 a minuscule bald sheet prior to this, they were We 0:16:16.040 --> 0:16:21.720 were not in a situation where essentially there was always 0:16:22.160 --> 0:16:25.080 a get out of jail for free card out there. 0:16:25.240 --> 0:16:27.200 The classic FED put fed. 0:16:27.200 --> 0:16:30.480 The FED put. Eventually it was a FED put. Then 0:16:30.520 --> 0:16:33.080 people thought there was a Trump put. And quite frankly, 0:16:33.120 --> 0:16:35.080 over the over the last four or five years, we've 0:16:35.120 --> 0:16:38.320 had a fiscal policy put. We have put all over 0:16:38.360 --> 0:16:42.640 the place, and I think that what happens in that environment. 0:16:42.720 --> 0:16:45.720 You know, when I said that we need to price risk, 0:16:46.080 --> 0:16:50.400 start remembering again how to price risk appropriately. It is 0:16:50.440 --> 0:16:55.160 the fact that when financial markets started moving out along 0:16:55.160 --> 0:16:58.800 the yield curve, out along the risk spectrum. I've even 0:16:58.840 --> 0:17:01.520 seen the IMF talk about, oh, well, markets need to 0:17:01.560 --> 0:17:04.920 price risk correctly. Well, hello, they were forcing us into 0:17:04.960 --> 0:17:09.880 those positions explicitly. When the first set of Q one 0:17:09.960 --> 0:17:14.679 two threes happened, it was explicitly there to get financial 0:17:14.720 --> 0:17:18.040 markets to take risk again. Q one definitely Q one 0:17:18.080 --> 0:17:21.040 and two. Maybe you know markets had frozen up. We 0:17:21.119 --> 0:17:24.600 needed to liquefy frozen markets. And to me, if I 0:17:24.640 --> 0:17:28.240 look at that, that made sense. Problem is we hung 0:17:28.320 --> 0:17:30.560 on to it for too long. If I look at 0:17:30.640 --> 0:17:33.280 high yield credit, let's talk about fixed ink markets high 0:17:33.280 --> 0:17:37.440 heeld credit. Typically in a recession, spreads of high yield 0:17:37.520 --> 0:17:43.160 credit over treasuries equivalent treasuries should be at around six hundred, 0:17:43.240 --> 0:17:47.000 six fifty even higher. We've never gotten there were tight 0:17:47.320 --> 0:17:50.479 yet No, today we are close to record tights. Right 0:17:50.520 --> 0:17:53.120 by only looking at a few hundred basis points, we're 0:17:53.160 --> 0:17:58.119 sub three hundred. This to me means that while people 0:17:58.280 --> 0:18:00.960 like to talk the talk of recipession, what they're really 0:18:01.000 --> 0:18:05.080 saying is cut rates. We want more liquidity because we're 0:18:05.080 --> 0:18:07.000 not getting rid of four of all of our assets 0:18:07.280 --> 0:18:10.480 over here, the risky assets, which should sell off if 0:18:10.480 --> 0:18:12.160 people truly expected a recession. 0:18:13.040 --> 0:18:15.640 So I'm going to assume you're not in the recession 0:18:15.680 --> 0:18:16.120 camp here. 0:18:16.119 --> 0:18:19.119 I haven't been. I haven't been. I'd say that I 0:18:19.160 --> 0:18:21.920 can proudly say that it's been. You know, I'm on redquord. 0:18:22.320 --> 0:18:27.000 So I think it was in probably early twenty twenty one, 0:18:27.040 --> 0:18:29.840 when inflation started picking up here that I was saying, yeah, 0:18:29.880 --> 0:18:33.680 this isn't looking so good. This transitory stuff isn't looking 0:18:33.720 --> 0:18:36.560 so good. And most importantly, it wasn't at all clear 0:18:36.600 --> 0:18:40.080 to me why we were expanding fiscal while we also 0:18:40.240 --> 0:18:44.520 had this massively easy monetary policy and how that could 0:18:44.520 --> 0:18:48.040 possibly result in a recession. And we've been having recessions 0:18:48.080 --> 0:18:51.160 which are two quarters out now, I think rolling two 0:18:51.240 --> 0:18:53.360 quarters out for the better part of something like three 0:18:53.400 --> 0:18:56.399 and a half years. And I will say, we've not 0:18:57.200 --> 0:19:00.119 bought into that. I think it's a very strong economy. 0:19:00.400 --> 0:19:04.400 So it certainly has been. We continue to see consumer 0:19:04.480 --> 0:19:10.199 spending despite weak sentiment. Consumers continue to spend. The labor 0:19:10.240 --> 0:19:12.919 market is tight. Yeah, there are some warts on the 0:19:12.960 --> 0:19:16.480 housing markets, and you know, there's always some sector you 0:19:17.000 --> 0:19:20.320 could poke at, but by and large, this seems to 0:19:20.320 --> 0:19:24.040 be a fairly robust, fairly resilient economy. Fair statement. 0:19:24.200 --> 0:19:26.480 I think that is a fair statement because here's the thing. 0:19:27.160 --> 0:19:29.280 You know, in the first few months of this year, 0:19:29.359 --> 0:19:32.760 we saw sentiment tank and everyone said, well, hard data 0:19:32.800 --> 0:19:36.400 will follow. I wasn't so sure because sentiment was moving 0:19:36.880 --> 0:19:40.960 on something which was unusual. It wasn't moving on the 0:19:41.000 --> 0:19:45.080 back of weakness and labor markets or people feeling uncertain 0:19:45.080 --> 0:19:49.760 about their jobs. It was weakening on the back of pronouncements, 0:19:49.840 --> 0:19:52.399 you know, on top of policy pronouncements. I'd see the 0:19:52.480 --> 0:19:55.320 execution of that stuff was really bad and continues to 0:19:55.359 --> 0:20:00.000 not be particularly good in terms of tariffs that impacted sentiment. However, 0:20:00.560 --> 0:20:04.680 people continue to spend. They didn't stop spending, as you said. 0:20:04.840 --> 0:20:08.520 And I'm not suggesting that this economy's recession proof. I'm 0:20:08.560 --> 0:20:11.880 just saying, so far, we haven't got whatever we need 0:20:11.920 --> 0:20:12.760 to push us right. 0:20:12.960 --> 0:20:17.680 Interansas, any thoughts on the idea that perhaps sentiment measures 0:20:17.720 --> 0:20:22.280 are broken, that when you see Michigan sentiment worse than 0:20:22.320 --> 0:20:24.840 the pandemic, worse than the financial crisis, worse than the 0:20:24.920 --> 0:20:29.080 eighty seven crash, and yet you know you look at 0:20:29.119 --> 0:20:31.479 the data, you're just not seeing anything remotely. 0:20:31.640 --> 0:20:34.240 I have to say that I'm looking a little bit 0:20:34.400 --> 0:20:38.200 less at some of these indicators. I think they need 0:20:38.200 --> 0:20:41.000 to be leeve and we need to now do more digging. 0:20:41.400 --> 0:20:44.680 Our country has become very polarized, and that feeds into 0:20:44.680 --> 0:20:48.359 people's sentiment. It doesn't feed into their shopping habits. That's 0:20:48.440 --> 0:20:49.360 the reality, right. 0:20:49.600 --> 0:20:52.040 So I'm wondering how much of this is driven not 0:20:52.240 --> 0:20:55.760 just by media, but by social media and algorithms. It 0:20:55.960 --> 0:20:58.480 seems to send people to more extreme. 0:20:58.400 --> 0:21:03.800 Absolutely huge, and I think that the speed of the 0:21:03.840 --> 0:21:08.960 news cycle, the need for clickbait style, tweets, headlines, whatever 0:21:09.040 --> 0:21:15.800 it is. I think that exacerbates every sentiment. However, people 0:21:15.840 --> 0:21:19.000 still seem to be relatively sensible in terms of how 0:21:19.040 --> 0:21:23.160 they actually behave, because we're not hearing about people massively 0:21:23.240 --> 0:21:28.719 canceling their European vacations, which, according to Delta, we're taking 0:21:28.840 --> 0:21:29.840 in record numbers. 0:21:30.160 --> 0:21:33.280 Right, It's so funny you say that because last quarter 0:21:33.520 --> 0:21:37.959 they drop their guidance. Hey, everybody's frozen. JetBlue did something similar. 0:21:38.000 --> 0:21:41.199 We don't know what's happening. They just came out in 0:21:41.240 --> 0:21:45.960 the most recent few days talking about not only reinstating 0:21:46.040 --> 0:21:49.080 guidance but being pretty aggressive as to what they see 0:21:49.119 --> 0:21:54.760 going forward. That's fairly constructive kind of fights against the Oh, 0:21:54.800 --> 0:21:57.040 this tariff war is going to cause a vib session 0:21:57.160 --> 0:22:00.000 and crash everybody. Yeah. 0:22:00.000 --> 0:22:06.200 No, I really never bought the vibe session idea on tariffs. 0:22:06.280 --> 0:22:08.800 I mean, let's can we talk about tariffs? Sure? I 0:22:08.800 --> 0:22:11.240 mean it's been talked to death, but why not let's 0:22:11.280 --> 0:22:15.800 talk about tariffs briefly. Here's the thing. I look at 0:22:16.080 --> 0:22:19.600 our country and I'm gonna use big round numbers here. Right, 0:22:19.720 --> 0:22:23.320 We're about a thirty trillion economy. Okay, twenty nine call 0:22:23.359 --> 0:22:28.840 it thirty trillion economy. Seventy percent of our economy is consumption. Okay, 0:22:28.920 --> 0:22:31.440 so you get to around twenty one twenty twenty one trillion, 0:22:31.880 --> 0:22:36.080 Seventy percent of consumption is services. Guess what services aren't 0:22:36.080 --> 0:22:39.320 really impacted by tariffs? Now I go to Okay, I've 0:22:39.320 --> 0:22:42.199 got around six six six and a quarter trillion of 0:22:42.280 --> 0:22:45.320 consumption of goods. How much of this is actually imported? 0:22:45.359 --> 0:22:48.560 Around three point four trillion of goods are imported. So 0:22:48.600 --> 0:22:51.479 I'm looking at three point four trillion against all of 0:22:51.520 --> 0:22:55.200 this huge economy size, and I say, okay, they're talking 0:22:55.440 --> 0:22:59.000 about putting tariffs. You know, let's assume tariff revenue ends 0:22:59.080 --> 0:23:01.480 up being three hundred billion. Yeah it's not. Yeah, that's 0:23:01.680 --> 0:23:04.800