Latest / Masters in Business / Interview With Michael Zezas: Masters in Business (Audio)

Transcript

Interview With Michael Zezas: Masters in Business (Audio) · Masters in Business

0:00
Speaker 1: The future may not be clear, but our commitment is
0:02
Speaker 1: so when you sit with an advisor at Merrill Lynch,
0:04
Speaker 1: will put your interests first. Visit mL dot com and
0:07
Speaker 1: learn more about Merrill Lynch, an affiliative Bank of America.
0:09
Speaker 1: Mery Lynch makes available products and services offered by Merrill
0:12
Speaker 1: Lynch Pierce Veneran Smith Incorporated or Registered Broker Dealer remember
0:14
Speaker 1: s I PC. This is Master's in Business with Barry
0:20
Speaker 1: Ridholts on Bloomberg Radio. This week. On the podcast, I
0:26
Speaker 1: have Michael Jesus. You may not have heard of him,
0:28
Speaker 1: but he is Morgan Stanley's chief strategist for public policy
0:34
Speaker 1: and municipal bonds. If you are at all an investor
0:38
Speaker 1: in the fixed income portion of assets, if you're curious
0:43
Speaker 1: as to what goes into the bond buying decision, how
0:48
Speaker 1: how the by side actually thinks about tracks and makes
0:53
Speaker 1: allocation decisions, you will find this conversation fascinating, as did I.
0:59
Speaker 1: It's a little wonky, it's a little in the weeds.
1:02
Speaker 1: It's very very specific, but you would be amazed at
1:06
Speaker 1: how many different subjects have to come under the data
1:10
Speaker 1: set that muni bond investors look at. Everything from politics
1:15
Speaker 1: and public policy, to credit quality, to local economics, to
1:21
Speaker 1: macro economics. It's really as well as the federal reserve
1:25
Speaker 1: and interest rates, which we didn't even touch on. I
1:27
Speaker 1: think everybody has heard enough of that. Obviously, if rates
1:30
Speaker 1: are going up or not, it becomes a fairly significant question. UM.
1:34
Speaker 1: All told, Mike is a really knowledgeable guy about these things. Obviously.
1:39
Speaker 1: Morgan Stanley is a giant firm UH, both in equities
1:43
Speaker 1: and UH fixed income and muni bonds. UH. The muti
1:47
Speaker 1: bond market is almost four trillion dollars in the United States.
1:51
Speaker 1: Other countries have their own version of municipal bonds. UH.
1:56
Speaker 1: It's it's really very interesting and it touches on areas
2:00
Speaker 1: you might not have been aware of. So, with no
2:03
Speaker 1: further ado, here is my conversation with Michael Jesus. This
2:09
Speaker 1: is Masters in Business with Barry Ridholts on Bloomberg Radio.
2:16
Speaker 1: My special guest today is Michael Zesus. He is Morgan
2:20
Speaker 1: Stanley's chief US public policy and municipal bond strategist. He
2:26
Speaker 1: joined Morgan Stanley about a decade ago in the role
2:29
Speaker 1: of head of credit analysis for their US investment group.
2:34
Speaker 1: Previous to that, he worked at Fitch Ratings as a
2:38
Speaker 1: credit analyst, and he began his career focusing on the
2:42
Speaker 1: public sector capital budgeting and economic development. He comes to
2:46
Speaker 1: us with a b a. From Georgetown and a master's
2:50
Speaker 1: of Public Affairs from the lb J School of Public
2:54
Speaker 1: Affairs at the University of Texas at Austin. Michael Jesus,
2:58
Speaker 1: Welcome to Bloomberg. Hey, thanks for having so. We were
3:00
Speaker 1: just in Austin. What a fantastic town. Every time I'm
3:03
Speaker 1: I'm in there, I'm like, wow, this is really Someone
3:06
Speaker 1: described it to me as the blueberry in the middle
3:09
Speaker 1: of the Texas raspberry pie. Which or the or the
3:12
Speaker 1: third coast, the third Coast, Yeah, definitely, definitely not Dallas
3:16
Speaker 1: or Houston the least. You have a really interesting background
3:20
Speaker 1: and the transitions that you've gone through are really quite fascinating.
3:25
Speaker 1: How do you go from looking at public affairs and
3:29
Speaker 1: analyzing credit to running a muni bond portfolio? I would
3:34
Speaker 1: say by accident, inadvertently for the most part. So the
3:38
Speaker 1: public policy, public affairs was sort of my first intellectual love,
3:42
Speaker 1: so to speak. Um through let's say, kind of a
3:45
Speaker 1: series of experiences, work experiences, both in college and afterwards
3:49
Speaker 1: where I decided and really like the pace um of
3:54
Speaker 1: public policy a little too slow, a little yeah, not
3:58
Speaker 1: much competition. Um. There were a lot of smart people
4:02
Speaker 1: who worked in those areas, but I think the sort
4:04
Speaker 1: of pace of bureaucracy, um, it just just wasn't what
4:08
Speaker 1: you would want if you were a very ambitious person.
4:10
Speaker 1: Let's not say it's not worthwhile work, but it's it's
4:13
Speaker 1: kind of academic and slow as opposed to market based
4:16
Speaker 1: and and it sort of fall fell into the markets
4:19
Speaker 1: based work when I was in grad school or try
4:22
Speaker 1: to make a little extra money working for one of
4:24
Speaker 1: the credit rating agencies that worked for Fitch down in Austin.
4:27
Speaker 1: And that was kind of my first taste. Even though
4:29
Speaker 1: rating agencies are not terribly fast placed to work, it
4:31
Speaker 1: was my kind of my first taste of kind of
4:33
Speaker 1: translating public policy because I was working in munies then
4:36
Speaker 1: translating public policy into kind of market based analytics. And
4:41
Speaker 1: I got hooked. I got hooked. I stayed there. I
4:43
Speaker 1: didn't go into government like I intended to, and you know,
4:46
Speaker 1: one thing led to another. I ended up on the
4:48
Speaker 1: by side within Morgan Stanley and a couple of years
4:51
Speaker 1: later in the role that I have now which is
4:54
Speaker 1: running a research and strategy team for munis and now
4:56
Speaker 1: public policies. So so let's talk about when you joined
4:59
Speaker 1: Morgan Stan Like, you start pretty much right in the
5:02
Speaker 1: midst of the credit bubble. You're on a buy side,
5:05
Speaker 1: your meaning you're not on the brokeren side selling individual
5:10
Speaker 1: bonds to investors, your buying bonds on behalf of investors.
5:15
Speaker 1: What was it like to start right in the middle
5:17
Speaker 1: of that storm. It was it was scary. It was well, first,
5:23
Speaker 1: there's the shock of having a responsibility of managing other
5:26
Speaker 1: people's money, which to someone who at the time was
5:30
Speaker 1: pretty broke. Um, it felt this kind of huge burden
5:34
Speaker 1: that uh, you know, it didn't really completely understand or
5:38
Speaker 1: was having trouble grapple with. On top of that, you
5:40
Speaker 1: had this kind of big crisis that was just getting
5:42
Speaker 1: bigger and bigger. Oh seven. Yet really the very early
5:46
Speaker 1: stages of the housing market rolling over, early stages of
5:50
Speaker 1: the default starting on on mortgages in some prime starting
5:54
Speaker 1: to pick up. Markets were still going higher. You stock
5:57
Speaker 1: markets were going higher, as we're bond markets. At what
6:00
Speaker 1: point in that baptism of fire did you say, hey,
6:04
Speaker 1: this is really an unusual set of circumstances. I was
6:08
Speaker 1: initially focused just on Muni's when I was there, so
6:11
Speaker 1: we saw some of the telltale signs, were able to
6:13
Speaker 1: identify some of them early in the sense that when
6:15
Speaker 1: you see corporate credit markets starting to show signs of weakness,
6:19
Speaker 1: because there's a lag effect right where government revenues tend
6:23
Speaker 1: to kind of trail the real economy. You know, if
6:25
Speaker 1: you think about it, if you go buy something at
6:29
Speaker 1: your drug store, the sales tax you pay on it
6:31
Speaker 1: might not make it into the state's coffers for a while,
6:33
Speaker 1: or effectively be spent for a while, So not on
6:36
Speaker 1: income tax takes forever. So yea. So the point there,
6:41
Speaker 1: we could kind of see what was happening in corporate
6:43
Speaker 1: credit markets and it was appropriate to kind of be
6:46
Speaker 1: more defensive. So from that perspective, it was easy for
6:49
Speaker 1: us to be a little bit defensive. And then that environment,
6:52
Speaker 1: you weren't getting paid too much to take a lot
6:54
Speaker 1: of credit risk anyway, So so you were buying bonds,
6:57
Speaker 1: primarily MUNI bonds primarily for their tax for yields. Was
7:02
Speaker 1: that the thinking back then? I mean, yeah, boring, So
7:06
Speaker 1: it was a boring approach, but design it's bored, right,
7:09
Speaker 1: I was gonna say it's boring, but they're bill to
7:10
Speaker 1: be boring. And how big is the muni market in
7:14
Speaker 1: the United States. It's tremendous three point seven trillion dollars.
7:17
Speaker 1: If you want risk, you can find it in that market.
7:20
Speaker 1: Just that wasn't that wasn't the That wasn't the place
7:22
Speaker 1: at the time where we went looking on purpose or
7:24
Speaker 1: by accident. I mean, we could talk about we can
7:26
Speaker 1: talk about Illinois, we could talk about Puerto Rico. Or
7:28
Speaker 1: do you mean there's risk that people are wholly unaware
7:31
Speaker 1: of because of inflation, credit risk, duration, etcetera. I guess
7:35
Speaker 1: I would say all of the above. What you're saying,
7:38
Speaker 1: uh there, I mean in any market, there there are
7:40
Speaker 1: investors taking risks they don't completely understand, and you know
7:44
Speaker 1: that that's what kind of makes them interesting. The muni market.
7:47
Speaker 1: The most misunderstood risks that I think are now beginning
7:50
Speaker 1: to be better understood are the risks of basically sovereign
7:55
Speaker 1: political risk. Right Puerto Rico, Illinois, These are places they
7:59
Speaker 1: tell you that the same type of sovereign political risk
8:02
Speaker 1: that exists in other countries they exist in the MUNI market.
8:05
Speaker 1: Also So what was your take on on the very
8:09
Speaker 1: famous Meredith Whitney claim that we're gonna see hundreds of
8:13
Speaker 1: of muni bond default state cities, etcetera. That really rocked
8:18
Speaker 1: the muni bond market for a while. I I'd say
8:21
Speaker 1: that she was right in spirit, but really wrong in magnitude.
8:25
Speaker 1: And when I say right in spirit, what I mean
8:27
Speaker 1: is that there are some very meaningful long term credit
8:30
Speaker 1: challenges to the muni market that, uh, if they're not
8:34
Speaker 1: addressed politically, uh, they're going to express themselves in a
8:38
Speaker 1: meaningfully negative way, you know, over the medium term, let's
8:41
Speaker 1: call it kind of five cent years from now, or
8:43
Speaker 1: maybe if they're catalyzed with a big recession. But she
8:47
Speaker 1: was wrong in magnitude and timing, and that means a
8:50
Speaker 1: lot in market for sure, to say the least. Take
8:53
Speaker 1: if you give a forecast. The old joke is you
8:55
Speaker 1: could give a dollar level or a date, but never
8:58
Speaker 1: both at the same time. Coming up, we continue our
9:01
Speaker 1: conversation with Michael Jesus Morgan, Stanley's chief muni bond strategist,
9:05
Speaker 1: discussing investing in municipal bonds. I'm Barry Rehults. You're listening
9:11
Speaker 1: to masters in Business on Bloomberg Radio. My special guest
9:15
Speaker 1: today is Michael Jesus. He is Morgan Stanley's chief Muni
9:19
Speaker 1: bond strategist. Let's talk a little bit about the bond world.
9:23
Speaker 1: Why do people say the bond market is the smart money.
9:28
Speaker 1: I think that there's this kind of romantic romantization. I'm
9:31
Speaker 1: not sure if I'm saying it right, but of kind
9:34
Speaker 1: of the contrarian right of the person who can kind
9:37
Speaker 1: of see risks before they develop and see disasters before
9:41
Speaker 1: they develop. And I think bond investors, generally speaking, are
9:45
Speaker 1: kind of always looking for that because they've got the
9:48
Speaker 1: same price incentive positive price incentive that a stock investor has.
9:52
Speaker 1: You know, if you want to see stock prices go up,
9:54
Speaker 1: you tend to kind of ignore looming risks. If you
9:56
Speaker 1: want to see bond prices go up, you tend to
9:58
Speaker 1: focus on those looming risks as you're focused on whether
10:00
Speaker 1: or not you're gonna get paid back. It's basically like
10:02
Speaker 1: making a loan. So I think in the times that
10:06
Speaker 1: the that markets around risk markets take a downturn and
10:09
Speaker 1: bond investors look smart, there is this kind of you know,
10:12
Speaker 1: lionizing of the bond investor. But the problem is if
10:15
Speaker 1: you kind of give in to that kind of perma
10:18
Speaker 1: bearish view, you end up losing a lot of money
10:20
Speaker 1: in the interim. You know, the opportunity costs of being
10:22
Speaker 1: permanently bearish is negative. So I'd say early in my
10:25
Speaker 1: career and yesked earlier about what it meant to kind
10:27
Speaker 1: of start in the middle of the financial crisis and
10:29
Speaker 1: say that was kind of hammered into me just by
10:31
Speaker 1: market conditions early that being bearished was kind of the
10:34
Speaker 1: right thing to do. It took a while for me
10:36
Speaker 1: to kind of unwind that view and embrace a more
10:39
Speaker 1: risk taking view, which I think is more having a
10:42
Speaker 1: more balanced and sort of flexible approach. It has to
10:44
Speaker 1: be more appropriate. So so let's address that perma bear attitude.
10:49
Speaker 1: We see it in stocks, but we've been seeing it
10:51
Speaker 1: in bonds for forever. I can't count how long I've
10:55
Speaker 1: been told we're in a bond market bubble. Interest rates
10:58
Speaker 1: have nowhere to go but up. I've heard that literally
11:02
Speaker 1: for decades, pretty much my entire career. Uh, this is
11:06
Speaker 1: as low as yields are gonna go, the bondbill market
11:09
Speaker 1: is over, when in fact it's thirty two years in
11:11
Speaker 1: the making, and I don't think we can officially say
11:14
Speaker 1: it's ended yet. Yeah, I mean there are mathematical reasons,
11:19
Speaker 1: uh to sort of to discount that argument, and then
11:22
Speaker 1: there's kind of fundamental economic reasons. You know. The mathematical
11:25
Speaker 1: reasons are basically bond investment. You're clipping a coupon. You've
11:29
Speaker 1: got some cushion against negative price movement. History tells you
11:32
Speaker 1: that if you're underweight bonds, or you're you just own
11:37
Speaker 1: very short maturity bonds within a balanced portfolio, that is
11:41
Speaker 1: the riskier choice as opposed to something longer that's a
11:44
Speaker 1: good credit rating or a good credit risk that you
11:47
Speaker 1: could hold to mature. The income you give up by
11:49
Speaker 1: doing that in order to make it up later. You
11:52
Speaker 1: have to be really right, really fast about bond yields
11:56
Speaker 1: going up. And it's not typical that that happens. There
12:00
Speaker 1: are the obvious exceptions throughout history. You got your late seventies,
12:04
Speaker 1: early eighties, but those are exceptions to the rule. So
12:08
Speaker 1: that's kind of mathematical reason. Fundamental reason is unless there
12:12
Speaker 1: is some type of exogenous shock to the economic system
12:16
Speaker 1: that kind of shocks us into a higher growth rate,
12:18
Speaker 1: we're still looking at real growth rates and inflation that
12:22
Speaker 1: are relatively low. So the fundamentals don't necessarily support real
12:27
Speaker 1: bond yields meaningfully higher from here. And so you know,
12:30
Speaker 1: the the big debate this year and sort of the
12:33
Speaker 1: end of last year after the election, was where we're
12:34
Speaker 1: going to get that exogen a shock because President Trump
12:38
Speaker 1: and Republican Congress we're going to deliver a big tax cut,
12:40
Speaker 1: big expansion of infrastructure spending. And so if that happens,
12:44
Speaker 1: then sure, I think it's valid to say that bond
12:47
Speaker 1: yields are are going to go up, But um, you
12:50
Speaker 1: have to have a lot of confidence in that view
12:52
Speaker 1: and a lot of evidence behind it. Right now we
12:55
Speaker 1: don't see either. I can't say I disagree. Let's let's
12:57
Speaker 1: fast forward to the current circumstance. I want to pull
13:02
Speaker 1: a quote from one of your recent UH notes. The
13:05
Speaker 1: prospect of a FED taper to its balance sheet raises
13:09
Speaker 1: obvious questions about long term rates. Justice tax reform threatens
13:16
Speaker 1: long end MUNI rates, Exactly what you were just discussing about.
13:19
Speaker 1: Explain why that is. What is it about tax reform
13:23
Speaker 1: that impacts the muni rates, and what is it about
13:26
Speaker 1: um the Feds taper that's going to affect shorter term rates.
13:31
Speaker 1: So so this this is kind of two components of
13:33
Speaker 1: what we call the Trump triple threat to Muni's what
13:36
Speaker 1: what's the third threat? So it's fed it's tax reform,
13:40
Speaker 1: and well there's basically there's two components of tax reform.
13:42
Speaker 1: One is lowering the tax rate, the other is changing
13:44
Speaker 1: the tax exempt treatment of MUNI bonds. And is that
13:49
Speaker 1: legitimately on the table. We think so? We think so.
13:52
Speaker 1: It's not part of any formal plan right now, but
13:56
Speaker 1: it's been part of previous formal plans like the Dave
13:59
Speaker 1: Camp Plan. It was part of almost every single one
14:02
Speaker 1: of Barack Obama's budgets. The not the idea of eliminating
14:07
Speaker 1: tax exempt interest, but capping it for high income individuals,
14:10
Speaker 1: meaning you can't just buy billions of dollars worth of
14:14
Speaker 1: munies and expect to get that income tax. Right there,
14:16
Speaker 1: there's basically, without boring you the death on the details,
14:19
Speaker 1: you would have to pay staff. Well, think about it
14:23
Speaker 1: this way. If you have let's let's look at Barack
14:26
Speaker 1: Obama's original plan on this. You want to cap itemize
14:29
Speaker 1: deductions and exclusions for high in commuters. So it wasn't
14:32
Speaker 1: that what dollar amount. So his proposal was based on
14:37
Speaker 1: the tax rate that you pay, so and it was
14:39
Speaker 1: for everything. It wasn't muni focus. But think about this way.
14:42
Speaker 1: If you are earning a hundred thousand dollars of muni
14:44
Speaker 1: interest and you're in the h thirty five percent tax bracket,
14:48
Speaker 1: but he wanted to cap the way the amount you
14:50
Speaker 1: could enjoy that just the same as someone in the
14:52
Speaker 1: twenty percent bracket. Right, hundred thousand dollars muni interest THTC.
14:57
Speaker 1: Tax bracket, you're shielded from a thirty five thousand dollar
15:00
Speaker 1: tax liability. But if instead they said we want to
15:02
Speaker 1: cap you at PENT and you're only shielded from a
15:07
Speaker 1: thousand dollar liability, that's seven thousand dollar differences attacks you
15:10
Speaker 1: have to pay. So I said, differently, less attractive. Yeah,
15:14
Speaker 1: so there's still very much a tax preference in that
15:17
Speaker 1: scenario because you're still being shielded from twenty eight thou
15:19
Speaker 1: dollars at tax, but there's some level of tax that
15:22
Speaker 1: you have to pay, and that's a that would be
15:24
Speaker 1: very different to the market where you had something that
15:28
Speaker 1: felt purely tax free before. Now there's some level of
15:30
Speaker 1: taxation applied to it. But That's just one example. I mean,
15:33
Speaker 1: and our view of the reason it's hypothetically on the
15:36
Speaker 1: table is because there is a drive to make tax reform,
15:41
Speaker 1: to push tax reform as a republican only plan through
15:44
Speaker 1: budget reconciliation. Right, that's the procedure by which you can get. Right.
15:51
Speaker 1: In order to do that and make the tax cut permanent,
15:55
Speaker 1: you have to raise a bunch of money to offset
15:57
Speaker 1: the money you're losing by lowering tax To explain that,
16:00
Speaker 1: you can do it on a simple majority, if it's
16:03
Speaker 1: revenue neutral, if it actually course revenue you need sixty
16:07
Speaker 1: votes or is that correct, or if you allow it
16:10
Speaker 1: to sunset, so you think about the Bush tax. So
16:14
Speaker 1: what you have here is a plan at least the
16:17
Speaker 1: one that Paul Ryan is following right now, which he
16:20
Speaker 1: claims his revenue neutral based on the assessment, and it
16:22
Speaker 1: got from the Tax Foundation, which is a conservative leaning
16:25
Speaker 1: think tank. Coming up, we continue our conversation with Michael
16:28
Speaker 1: Jesus Morgan, Stanley's chief UNI bond strategists, discussing public policy
16:33
Speaker 1: and tax reform. I'm Barry Hilts. You're listening to Masters
16:37
Speaker 1: in Business on Bloomberg Radio. My special guest today is
16:40
Speaker 1: Michael Jesus. He is chief strategist at Morgan Stanley for
16:45
Speaker 1: Municipal Bonds and Public Policy. UH. Previous to that, he
16:49
Speaker 1: was a credit analyst at Fitch Ratings. Let's talk a
16:53
Speaker 1: little bit about the prospects for tax reform. One of
16:56
Speaker 1: your recent notes did something that I don't think you
17:00
Speaker 1: guys have done a whole lot in the past. You
17:02
Speaker 1: put some fairly specific probabilities on the odds of of
17:07
Speaker 1: tax reform actually passing. Tell us about that. So I'm
17:13
Speaker 1: always very reticent to put specific probabilities on things because
17:17
Speaker 1: what what I worry about is that it implies a
17:20
Speaker 1: kind of false precision. Um the old joke about economists
17:24
Speaker 1: using two decimal places, it's just to show they have
17:27
Speaker 1: a sense of humor. Yeah, exactly. So Yeah, I would
17:31
Speaker 1: say two things. One, Investors really kind of demand that
17:34
Speaker 1: from us um and too. I sort of understand that
17:38
Speaker 1: because what probabilities, as long as they're well defensed and logical,
17:42
Speaker 1: will help you do as they help you build some
17:45
Speaker 1: logic into your portfolio, into your portfolio strategy. And if
17:48
Speaker 1: you have that type of consistency with how you build
17:50
Speaker 1: probabilities of different event risks, Um across your portfolio. Then
17:55
Speaker 1: whatever story you're trying to tell as an investor is coherent,
17:59
Speaker 1: and then the easier to manage risks. So that that's
18:02
Speaker 1: the rationale for why we do it. I'd say the
18:04
Speaker 1: way that we try and keep our probabilities sane um
18:08
Speaker 1: is we you know, we we try and we whatever problem,
18:11
Speaker 1: whatever event we're trying to to to forecast here, we
18:15
Speaker 1: first try and establish what are the rules of this event,
18:19
Speaker 1: like really what how far can this go one way
18:21
Speaker 1: or another? We try and established data that kind of
18:24
Speaker 1: help us measure kind of prior probabilities, and then we
18:27
Speaker 1: try and iterate on those prior probabilities. So you know,
18:30
Speaker 1: if you take tax reform for example, um, the sort
18:34
Speaker 1: of operative um uh, you know, the the the the
18:39
Speaker 1: operative theme that we had to focus on was what's
18:42
Speaker 1: possible through budget reconciliation, which is the process that would
18:47
Speaker 1: allow Republicans to basically ignore Democrats. And then on we
18:52
Speaker 1: had the layer on top of that, given the current
18:55
Speaker 1: political conditions, how likely is it that a president and
18:59
Speaker 1: the same party can actually execute on their policy priorities.
19:03
Speaker 1: So we had to go back and reconstruct data. We went,
19:06
Speaker 1: we looked all the way back to presidential elections, going
19:09
Speaker 1: all the way back to World War Two. We catalogued
19:12
Speaker 1: UM what the main promises were of each candidate eventually
19:15
Speaker 1: one and what was the execution rate in their first
19:17
Speaker 1: year on office. It was about six, and so we
19:20
Speaker 1: were able to iterate UM above and below six based
19:24
Speaker 1: on other conditions party agree on on the goals, etcetera. Yeah,
19:28
Speaker 1: and I'm simplifying it a bit, and I'm a big
19:31
Speaker 1: fan of using kind of too sanity check ourselves. I'm
19:34
Speaker 1: a big fan of using Bayes' theorem. I'm also a
19:36
Speaker 1: big fan of just kind of asking some of the
19:38
Speaker 1: other smart people that we work with UM to find
19:41
Speaker 1: base theorem for listeners who may not have a mathematical
19:44
Speaker 1: or statistical background. So, I mean, Bayes' theorem is just
19:47
Speaker 1: a way of calculating the probability, or at least the
19:50
Speaker 1: way we use it, it's the way of calculating the
19:52
Speaker 1: probability of an event given given uh the sort of
19:57
Speaker 1: prior baseline probability, then relating it to new evidence. So
20:02
Speaker 1: if if in any given year, knowing nothing else, the
20:05
Speaker 1: probability of a tax reform was five percent, based on
20:09
Speaker 1: just how many years you've got the tax reform divided
20:12
Speaker 1: by how many years we've been in existence, um, and
20:16
Speaker 1: then you sort of iterate for new information, Well, what's
20:18
Speaker 1: new information here? New information is that Republicans control the
20:21
Speaker 1: White House and both Houses of Congress, and we know
20:23
Speaker 1: that sixty percent of the time they can ext you
20:25
Speaker 1: on their top priorities. We know that, um, they that
20:30
Speaker 1: the reforms they want to pass can go through the
20:32
Speaker 1: reconciliation process, so that ups the probability and on and
20:35
Speaker 1: on and on. So let me let me throw a
20:37
Speaker 1: curve ball at you. What did the failure of Obamacare
20:42
Speaker 1: repeal and replace due to your probability stick studies on
20:47
Speaker 1: corporate tax reform? So you know, a part of this
20:50
Speaker 1: for US is defining a timeline to UM in the
20:53
Speaker 1: sense that we think that a failure to pass a
20:58
Speaker 1: tax reform and timely fashion this potentially is disappointing to
21:02
Speaker 1: investors as just an outright failure. So better late than never,
21:07
Speaker 1: but sooner was much better than Yeah. So what happened
21:10
Speaker 1: after the kind of let's call it the hereto for
21:13
Speaker 1: failure to repeal and replace Obamacare was, uh, it was
21:18
Speaker 1: it's sort of failure to pivot on the part of
21:19
Speaker 1: the Republicans right, we said they need to fisher cut bait,
21:23
Speaker 1: whether or not the fish or cut bait, and moved
21:25
Speaker 1: to tax reform. Is going to tell you a lot
21:26
Speaker 1: about the timing of tax reform and the content of it,
21:30
Speaker 1: and they appear to have tried to do both. They
21:32
Speaker 1: said they're going to focus on tax reform, but they
21:34
Speaker 1: haven't given up on the legislative process, and so that
21:37
Speaker 1: that pushes the timing of tax reform back. They've also,
21:41
Speaker 1: in our view, tried to overcorrect for what happened um
21:46
Speaker 1: in A c A by opening up the process. So
21:48
Speaker 1: now they're gonna have hearings. Now they're going to engage
21:51
Speaker 1: Democrats in at least try a bipartisan or at least
21:54
Speaker 1: they say they're going to try a bart who knows
21:55
Speaker 1: what they really want to do. All of that adds
21:58
Speaker 1: time to the clock. All of that rolls the possible
22:01
Speaker 1: details of tax reform. None of it improves the probability
22:05
Speaker 1: of success, but because it pushes back timing, the probability
22:08
Speaker 1: of success within a timely manner has gone down in
22:11
Speaker 1: our view. Coming up, we continue our conversation with Michael
22:14
Speaker 1: Jesus Morgan Stanley's chief muni bond strategist discussing the municipal
22:20
Speaker 1: bond market. I'm Barry rid Helts. You're listening to Masters
22:23
Speaker 1: in Business on Bloomberg Radio. My guest today is Michael Jesus.
22:27
Speaker 1: He is Morgan Stanley's chief strategist for municipal bonds and
22:32
Speaker 1: public policy. Let's talk a little bit about the muni
22:35
Speaker 1: bond market. When you're analyzing municipal bonds, where do you
22:40
Speaker 1: even begin? How does that what does that process look like?
22:43
Speaker 1: So we always start with fundamentals, and it's both top
22:47
Speaker 1: down and bottom up. The process I like is to
22:51
Speaker 1: sort of sequence them that way top down, then bottom up,
22:54
Speaker 1: top down, meeting where are we in the economic cycle?
22:57
Speaker 1: What's driving the economic cycle? Um where the weak sectors
23:01
Speaker 1: of the economy the strong sectors of the economy, and
23:04
Speaker 1: then go bottom up to see where are their credit
23:06
Speaker 1: vulnerabilities within the municipal bond system are the regional economic vulnerabilities?
23:12
Speaker 1: Is of the vulnerability in terms of types of security.
23:16
Speaker 1: So to give you an example, a couple of years back,
23:19
Speaker 1: when oil prices were dropping like a stone and seemed
23:23
Speaker 1: like the energy sector if there was gonna be another
23:25
Speaker 1: recession in the short term is gonna be driven by
23:27
Speaker 1: the energy sector. So then we had to do was
23:30
Speaker 1: go around and say where the regional economy is that
23:33
Speaker 1: haven't outsized UM exposure too energy sector, and you know, realistically,
23:41
Speaker 1: not not just the economic impact, but what does the
23:43
Speaker 1: revenue impact to state and local budgets. And what we
23:46
Speaker 1: found there was that you had mostly higher, higher rated
23:50
Speaker 1: areas of the country were exposed. But outside of a
23:53
Speaker 1: few uh kind of smaller um Oklahoma, North Dakota, they
23:59
Speaker 1: don't have a lot of that outstanding. So the risk
24:01
Speaker 1: of this being a systemic problem was quite low. There
24:04
Speaker 1: was a risk of these places kind of underperforming, and
24:08
Speaker 1: you know, net net, we didn't think it would be
24:09
Speaker 1: a big problem for the market. So we said, all right, well,
24:11
Speaker 1: this is not going to drive our view. There are
24:13
Speaker 1: other things that are going to drive our view, but
24:15
Speaker 1: not necessarily this. So so if you look at a
24:18
Speaker 1: region like Texas or or Houston, I remember the eighties
24:22
Speaker 1: was a disaster when oil prices fell, it seems like
24:25
Speaker 1: they're much more diversified and much better capable of withstanding
24:29
Speaker 1: that sort of press a state like Texas, that's certainly true,
24:33
Speaker 1: and Texas was one of the more conservative states in
24:37
Speaker 1: terms of projecting oil prices for so a lot of
24:41
Speaker 1: these states have what they call severance taxes. Right when
24:44
Speaker 1: you take some oil out of the ground or anything else,
24:46
Speaker 1: you charge at tax on it, and that taxes based
24:48
Speaker 1: on the prevailing market price for that oil. And Texas,
24:52
Speaker 1: I remember the exact numbers, but amongst the major states
24:56
Speaker 1: uh that are oil producers, so you know, Texas, Oklahoma, Louisiana, Alaska, um,
25:02
Speaker 1: North Dakota, Texas had among the more conservative estimates of
25:05
Speaker 1: what the price would be, so the revenue shortfall for
25:08
Speaker 1: them was far smaller. On top of the fact that
25:10
Speaker 1: they were much more economically diversified. You know, you look
25:13
Speaker 1: at the place like North Dakota, which is focused on
25:15
Speaker 1: shale and therefore needs that price to be higher. The
25:18
Speaker 1: revenue shortfalls there, at least the risk of revenue shortfalls
25:21
Speaker 1: were really substantial. But ultimately, like the state, North Dakota
25:26
Speaker 1: has about two billion dollars of dead outstanding, and that's
25:29
Speaker 1: including all of the local debts, so that's not even
25:31
Speaker 1: the state level debt. Really kind of a drop in
25:33
Speaker 1: the bucket relative to a three point seven trillion market.
25:36
Speaker 1: So how many different municipalities in the United States, do
25:40
Speaker 1: you guys cover Well, it's gotta be a lot, right,
25:44
Speaker 1: So here's our team is the sort of strategy team
25:48
Speaker 1: from the municipal market. It's akin to having strategist who
25:52
Speaker 1: covers the SMP five hundred inequities. So the single name
25:56
Speaker 1: analysis is largely done by our desk analyst team. Um,
26:00
Speaker 1: we are more sort of trend watchers and sort of
26:04
Speaker 1: we build up sector trends. So we do a lot
26:06
Speaker 1: of single name analysis in the aggregate where we try
26:09
Speaker 1: and build up what trends are driving. Um. Uh, you know,
26:13
Speaker 1: credit quality moving up and down. But give us an example.
26:16
Speaker 1: I mean you mentioned Indiana before. In Puerto Rico, what
26:19
Speaker 1: what is other than far too much spending relative to
26:22
Speaker 1: their income? What what's driving those trends? So I'll give you,
26:26
Speaker 1: I'll give you. I'll give you a a couple of secular
26:29
Speaker 1: trends that are important. The one that gets talked about
26:32
Speaker 1: all the time is pensions and retire reliabilities. Right, and uh,
26:39
Speaker 1: the you know that is a problem most acutely being
26:42
Speaker 1: experienced in states like Illinois, but it's certainly not absent
26:46
Speaker 1: in other geographies. Is a perfect example. Yeah, yeah, of course,
26:52
Speaker 1: And you know that the question there is about when
26:55
Speaker 1: are those funds depleted such that it actually impacts the
26:59
Speaker 1: operating budget and therefore there's less money to pay for
27:01
Speaker 1: schools and roads and the type of stuff that voters
27:04
Speaker 1: care about, which then catalyzes the political risk. Right in
27:07
Speaker 1: Puerto Rico, the willingness to pay was high until it wasn't,
27:11
Speaker 1: And it wasn't because all of a sudden, people it
27:13
Speaker 1: was not politically popular to pay the bond holders anymore
27:16
Speaker 1: because they would rather not pay the bond holders than
27:18
Speaker 1: shut down another hospital. So that's the that's the kind
27:22
Speaker 1: of secular burden of debt generally, but the sort of
27:26
Speaker 1: soft debt of pensions. But but there's still enough kind
27:29
Speaker 1: of life in those funds that this is probably not
27:32
Speaker 1: a problem for another five years or so. Um. The
27:35
Speaker 1: other secular trend, which is it's not about state and
27:37
Speaker 1: locals whatsoever. It's just one example, really, UM that I
27:41
Speaker 1: find really interesting and really timely given what's happening in
27:44
Speaker 1: d C. Is the secular shift in how healthcare is
27:47
Speaker 1: provided this country. When Obamacare came to be, there was
27:52
Speaker 1: in the muni bond market. So hospital debt is basically
27:56
Speaker 1: about a let ten to eleven the Muni bond mark
27:59
Speaker 1: when Pomacare was being debated and initially passed, the spreads
28:03
Speaker 1: on those bonds really widened quite a bit. And this
28:06
Speaker 1: was a great in my opinion, this was kind of
28:08
Speaker 1: a great example of where people kind of conflated their
28:11
Speaker 1: public opinions, their their political opinions, with market views, because
28:16
Speaker 1: what was really happening was, regardless of whether or not
28:18
Speaker 1: you think Obamacare is a disaster, it was creating a
28:21
Speaker 1: massive amount of government spending that was going to take
28:24
Speaker 1: a whole bunch of uninsured people and make them insured.
28:27
Speaker 1: In other words, you created twenty to thirty million new
28:29
Speaker 1: consumers for hospital services, that's right, and consumers anyway, as
28:33
Speaker 1: opposed to emergency room consumers who may not pay you
28:37
Speaker 1: an often don't. So that was that was a great
28:39
Speaker 1: opportunity to buy hospital bonds. And you even saw kind
28:43
Speaker 1: of a mini opportunity around that emerge UH in the
28:47
Speaker 1: first quarter because it looked like, you know, the train
28:50
Speaker 1: was really rolling. The Republicans were going to get rid
28:52
Speaker 1: of the Affordable Care Act, and all of that revenue
28:55
Speaker 1: and margin expansion that happened with Obamacare was going to
28:58
Speaker 1: be totally unwound, so it spreads why ning again and
29:01
Speaker 1: then as soon as you could tell the political prospects
29:03
Speaker 1: for this, we're just not going to work out. Jim
29:05
Speaker 1: Chanos of of Chemicals Partners was the first person I
29:09
Speaker 1: recall hearing say, I know they have both houses, but
29:14
Speaker 1: if you look at these stocks, look at the hospital
29:17
Speaker 1: stocks and bonds, they're trading as if this is gonna fail,
29:20
Speaker 1: as if this is not going to go through. The
29:22
Speaker 1: market arguably saw this before the political analysts seem to
29:27
Speaker 1: have noticed. Yeah, I mean, I think that's right, and
29:31
Speaker 1: I think that the if you, I think the political
29:36
Speaker 1: analysts were probably very focused on the idea that the
29:40
Speaker 1: intent of Republicans and sort of the motivation was really
29:44
Speaker 1: high to get this done right, that there were that
29:46
Speaker 1: there were going the wings of the party, though they
29:49
Speaker 1: disagreed on how to replace Obamacare, we're not going to
29:52
Speaker 1: risk not doing this because it would be a political blunder.
29:55
Speaker 1: But the market was telling you was that they were
29:58
Speaker 1: just irreconcilable differ perences within the Republican Party as to
30:02
Speaker 1: how you replace this. The conservative wing of the party
30:05
Speaker 1: wants a very market based approach where you reduce coverage
30:08
Speaker 1: and but then lower costs and the moderate wing of
30:10
Speaker 1: the party, it's unclear how much different they want things
30:14
Speaker 1: relative to what the current system is. So those two
30:17
Speaker 1: things really can't be reconciled. I think Paul Ryan did
30:19
Speaker 1: his best to try and reconcile them, but almost impossible job.
30:24
Speaker 1: And so let's let's apply this to to our previous
30:27
Speaker 1: discussion on comprehensive tax reform. Tell us about what the
30:33
Speaker 1: odds are today, what they were, and what was the
30:36
Speaker 1: impact of the failure of repeal and replace. So with
30:41
Speaker 1: comprehensive tax reform, the first thing we like to tell
30:44
Speaker 1: people is that there are a lot of different things
30:47
Speaker 1: which could hypothetically count as comprehensive tax reform. And some
30:51
Speaker 1: of them are really good market outcomes, some of them
30:54
Speaker 1: are really risky market outcomes, and some are just kind
30:56
Speaker 1: of neutral. So right now we're saying that you've basically
30:59
Speaker 1: had about a six chance in the next twelve months
31:02
Speaker 1: that you will see a tax reform. How has that
31:05
Speaker 1: number change from from our last iteration. It's down about
31:09
Speaker 1: ten percent. But the outcomes within um within tax reform
31:15
Speaker 1: are kind of skewing somewhat worse from a market standpoint,
31:19
Speaker 1: because what you have is a higher probability of delays
31:23
Speaker 1: because of what happened with the Affordable Care Act and
31:26
Speaker 1: the fact that they're going to follow a more deliberative
31:28
Speaker 1: process now, and then b you have um less of
31:35
Speaker 1: a path towards a tax reform that doesn't include some
31:40
Speaker 1: of the elements that the markets would probably consider somewhat
31:43
Speaker 1: disruptive in the near term, things like limiting corporate bond
31:46
Speaker 1: interest for limiting deduction of corporate interests, for example. So
31:50
Speaker 1: if we're just looking at let's let's talk corporate tax reform,
31:54
Speaker 1: If we're looking at a thirty nominal rate, everybody pays
31:59
Speaker 1: much lower, if anything at all. But one of the
32:01
Speaker 1: key aspects of the Trump campaign was lowering that too,
32:05
Speaker 1: depending on the speech, whatever the number is, what are
32:10
Speaker 1: the odds of seeing that lowered to Let's be rational
32:13
Speaker 1: and say, how do you how do you see that
32:16
Speaker 1: taking place? Yeah, I mean, I think, reasonably speaking, we
32:20
Speaker 1: think is the lowest they can go at this point.
32:22
Speaker 1: There there are scenarios really kind of so we think
32:25
Speaker 1: fifteen is pretty much off the table. I think the
32:29
Speaker 1: actual rate is sixteen or seventeen percent that people realistically
32:34
Speaker 1: pay on a thirty nominal rate. Is that a fair number.
32:38
Speaker 1: I think the average effective tax rate of an SMP
32:42
Speaker 1: five companies around it is that much. Okay, So to
32:46
Speaker 1: get down to there are a lot of loopholes and
32:50
Speaker 1: a lot of deductions that would have to go away.
32:52
Speaker 1: That's right. And on top of that, if you want
32:55
Speaker 1: to do it in a revenue neutral way, you have
32:57
Speaker 1: to consider things that would be and the new taxes.
33:01
Speaker 1: We have been speaking with Michael Jesus Morgan, Stanley's chief
33:05
Speaker 1: muni bond strategist. Be sure and check out the rest
33:09
Speaker 1: of our conversation, which we put up on Apple iTunes,
33:13
Speaker 1: Bloomberg dot com and SoundCloud, where we keep the tape
33:17
Speaker 1: rolling and continue discussing all things muni bonds. Check out
33:21
Speaker 1: my daily column at Bloomberg View dot com or follow
33:25
Speaker 1: me on Twitter at rid Halts. I'm Barry Hults. You're
33:29
Speaker 1: listening to Masters in Business on Bloomberg Radio. What could
33:33
Speaker 1: your future hold? More than you think because at Merrill Lynch,
33:36
Speaker 1: we work with you to create a strategy built around
33:38
Speaker 1: your priorities. Visit mL dot com and learn more about
33:40
Speaker 1: Merrill Lynch. An affiliated Bank of America. Mery Lynch makes
33:43
Speaker 1: available products and services offered by Merrill Lynch Pierce feder Smith, Incorporated,
33:46
Speaker 1: a registered broker dealer. Remember s I PC. Welcome to
33:48
Speaker 1: the podcast. Thank you Michael for doing this. I really
33:51
Speaker 1: appreciate your time. And I'm a little bit of a
33:54
Speaker 1: want and and you know you you said earlier. UM,
33:58
Speaker 1: you know, I don't want to bore people with the
33:59
Speaker 1: details when it's not if you are looking for tax
34:03
Speaker 1: free income, and that is an enormous aspect of the
34:07
Speaker 1: investing community. Muni bonds are amongst assuming you're not in
34:12
Speaker 1: a tax deferred vehicle, is one of the best options
34:15
Speaker 1: that that people have. Yeah, yes, agreed. And as you said,
34:20
Speaker 1: it's nearly a four trillion dollar UH sector, which which
34:25
Speaker 1: is nothing, uh, nothing to sneeze at. So I know
34:28
Speaker 1: I only have you for a finite amount of time
34:30
Speaker 1: because you're catching a plane down to d C. Let's
34:33
Speaker 1: let's jump into some of my favorite questions I asked
34:37
Speaker 1: all of my guests, tell us about some of your
34:40
Speaker 1: early mentors who helped guide your career. So it's a
34:45
Speaker 1: it's a great question, and I wish I had a
34:49
Speaker 1: more um, I don't know, sort of corporate answer for it.
34:53
Speaker 1: But the answer that that pops to my mind is
34:56
Speaker 1: my dad. You're not the first person who said that. Well,
34:59
Speaker 1: you know, and it's not that I haven't had great
35:01
Speaker 1: people guiding me throughout my career, but you know, the
35:04
Speaker 1: voice in my head when it comes to being a
35:07
Speaker 1: critical thinker and working hard and and sort of persevering,
35:11
Speaker 1: and I mean, we deal with these sort of tough,
35:13
Speaker 1: ambiguous analytical challenges all the time, so it's really easy
35:16
Speaker 1: to kind of throw your arms up and just walk
35:17
Speaker 1: away from it. And so, um, you know, that voice
35:22
Speaker 1: in my head kind of keeps me going, gives me confidence,
35:24
Speaker 1: and that's that's where that's who it comes from. But interesting, um,
35:30
Speaker 1: tell us about some investors who influenced your approach to
35:34
Speaker 1: investing in in the credit and bond markets. Well, you know, here,
35:39
Speaker 1: I'd say that I rely a lot on the people
35:43
Speaker 1: I work with. I think Morgan Stanley has a a
35:46
Speaker 1: brilliant research department UM with a lot of experience, And
35:51
Speaker 1: you know here I actually also kind of give a
35:53
Speaker 1: shout out to my friend Colin Roache, who we talked
35:56
Speaker 1: about earlier, who I think you can by the the process.
36:00
Speaker 1: We use a very evidence based process, right. We try
36:03
Speaker 1: as much to kind of ignore what we think should
36:06
Speaker 1: happen and look at what we think will happen. Right,
36:09
Speaker 1: If someone wants to sit down with me over a
36:11
Speaker 1: beer and talk about ideally what would I want to
36:13
Speaker 1: happen in a perfect world, that's fine. But for investors, ultimately,
36:15
Speaker 1: what happens happened, what matterage is what will happen. And
36:20
Speaker 1: that's more or less the philosophy that you know that
36:22
Speaker 1: Colin uses when he um when he's taking approach to
36:25
Speaker 1: what's happening with the economy was having the financial system.
36:28
Speaker 1: And I think there's something really refreshing about that, sort
36:30
Speaker 1: of free from the constricts of the you know, having
36:34
Speaker 1: a consistent academic theology as opposed to you know, are
36:38
Speaker 1: really pragmatic, uh, you know, kind of functionary and and
36:42
Speaker 1: uh and full disclosure. We host an evidence based Investing
36:46
Speaker 1: conference twice a year, once in New York in the
36:48
Speaker 1: fall and then in in June and California, and Colin
36:51
Speaker 1: is a panelist on one of our conversations about the
36:55
Speaker 1: role of data in making investment decisions. And I had
36:59
Speaker 1: no idea you got is uh yeah, no, we uh
37:02
Speaker 1: we lived together in college for a few years. Really,
37:05
Speaker 1: I would not have guessed that he would end up
37:08
Speaker 1: being the kind of responsible guru that he is. I
37:12
Speaker 1: think you could. I think you could take any weekend
37:15
Speaker 1: of anybody's college life and then juxtapose it twenty years
37:20
Speaker 1: down the road, and it's like, really, that doesn't seem
37:22
Speaker 1: to make a home a lot of sense that that's
37:25
Speaker 1: that's pretty pretty standard. Um, let me talk about books.
37:29
Speaker 1: This is the question I get asked the most from listeners.
37:35
Speaker 1: So and so, what what books did you listen to?
37:37
Speaker 1: So we always work this in. Tell us about some
37:40
Speaker 1: of your favorite books, be they fiction or nonfiction, investing
37:44
Speaker 1: related or or unrelated. So what I like from what
37:49
Speaker 1: book that's really helped me from a work perspective? Is? Um?
37:53
Speaker 1: Thinking fast and slow? So it's you know, identifying, Yeah,
37:58
Speaker 1: identifying psychological biases and and being aware of them and
38:03
Speaker 1: the kind of role that data can play and sort
38:06
Speaker 1: of training your mind to be aware of those probably
38:08
Speaker 1: makes me a much more boring person, but I think
38:10
Speaker 1: it makes me better at my job. Um, you know,
38:13
Speaker 1: on the more leisurely side, UM, a book that I
38:16
Speaker 1: really like and I still reread every so often is
38:19
Speaker 1: Friday Night Lights. Really Yeah, so not the not the
38:22
Speaker 1: TV school football. Yeah, I mean it's sports, I think, right, right,
38:27
Speaker 1: So it's basically UM. So the the author's Bissinger, and
38:31
Speaker 1: he goes and lives with a high school football team
38:34
Speaker 1: in West Texas for a season and kind of file
38:37
Speaker 1: follows their trials and tribulations. But the book is less
38:40
Speaker 1: about football, and it's more about kind of the experience
38:44
Speaker 1: that the team has, kind of focusing on um following
38:49
Speaker 1: one dream. And it's also about kind of the social
38:51
Speaker 1: and economic stresses of the area and how they interact.
38:54
Speaker 1: And I mean the reason I think it appeals to
38:56
Speaker 1: me is that, I mean sports have played a really
38:59
Speaker 1: big role in my life. I basically played organized sports
39:01
Speaker 1: all the way through college. And what did you play
39:03
Speaker 1: in college? Rugby? Um? And you still have all your
39:07
Speaker 1: own teeth. That's very impressive. I do. But I've had
39:11
Speaker 1: I'd probably be smarter if I hadn't had a few concussions.
39:14
Speaker 1: And I have had to have shoulder surgery and I
39:17
Speaker 1: definitely took off for something else laborham. Oh yeah, that's
39:20
Speaker 1: not a fun surgery, is it. No? And I had
39:22
Speaker 1: to have that surgery basically about four weeks before my
39:26
Speaker 1: first daughter was born, which my wife was not happy,
39:30
Speaker 1: not too happy, not too happy about but it's amazing
39:32
Speaker 1: what they can do with modern medicine. I could hold
39:34
Speaker 1: the beat. I was good enough to hold the baby
39:36
Speaker 1: when so so. Friday Night Lights somewhat reminds me of
39:39
Speaker 1: The blind Side by Michael Lewis, which is ostensibly about football,
39:44
Speaker 1: but really football is just the McGuinty that's used to
39:48
Speaker 1: tell a story about everything you just described, race, poverty, economics, hope, streams, etcetera. Yeah,
39:55
Speaker 1: And I think for me, I kind of I feel like,
39:58
Speaker 1: on some level kind of share an experi orients with
40:02
Speaker 1: the people in that story, in the sense that there
40:05
Speaker 1: is sort of a shared purpose that comes with organized
40:08
Speaker 1: sports and teamwork, and there's also a kind of shared
40:11
Speaker 1: experience of what it means to persevere, you know, six
40:14
Speaker 1: succeed or fail, and uh, you know, having those experiences
40:20
Speaker 1: helps you later in life to you also persevere. I've
40:23
Speaker 1: I've made the argument that the reason Wall Street desks
40:26
Speaker 1: are so populated with college athletes is exactly what you
40:29
Speaker 1: just described. I think there's some truth to that, you know,
40:32
Speaker 1: I think you know, Muni bond desks in particular to
40:35
Speaker 1: end to have a lot of ex college athletes Um.
40:38
Speaker 1: It definitely makes for good intram real sports. We had
40:40
Speaker 1: a dodgeball team a few years ago which was undefeated.
40:43
Speaker 1: Yeah yeah, Um. Any of the books before we move
40:47
Speaker 1: on to our next few questions. Um, you know, I
40:50
Speaker 1: mean it's corny, but the Bible. I still read the Trial. Yeah,
40:54
Speaker 1: I every couple of years I try and grind through
40:57
Speaker 1: this sort of chronological there's a version of the Bible, um,
41:02
Speaker 1: which attempts to kind of reorganize the Bible and chronological order.
41:06
Speaker 1: And what's the name of that. Well, it's just called
41:08
Speaker 1: the Chronological Bible. That's interesting. Yeah. And then it's set
41:12
Speaker 1: up so that you read it about fifteen minute increments
41:15
Speaker 1: every day and you get through it and in a
41:17
Speaker 1: year in a year, right, Um, and uh that's interesting. Yeah,
41:23
Speaker 1: I think I think, how does how does this shift
41:26
Speaker 1: take place? Because you know now that I think I
41:29
Speaker 1: always assume the Bible is chronological, but I guess it
41:32
Speaker 1: really isn't. You start with Genesis, you're talking Old Testament,
41:37
Speaker 1: and then eventually you do kind of jump around a
41:39
Speaker 1: bit later on you do. I mean I would say
41:41
Speaker 1: it's more or less chronological. But you know, the the
41:45
Speaker 1: interesting thing is, you know when you get to Psalms, right,
41:48
Speaker 1: which is more or less poems that they can kind
41:51
Speaker 1: of pair them with the events that are happening, whereas
41:54
Speaker 1: the Book of Psalm stands on its own. That's right.
41:56
Speaker 1: So some of that stuff, it gives you a new perspective.
41:59
Speaker 1: Also for me, it's just a way that kind of,
42:01
Speaker 1: you know, keep on task, right. So I think it's helpful.
42:04
Speaker 1: And let's I think there's a lot of I'm not
42:07
Speaker 1: trying to proselytize here about religion or anything, but I
42:10
Speaker 1: think there's a lot of sort of encouragement of truth
42:14
Speaker 1: telling and truth seeking that that you know that I
42:18
Speaker 1: think you need that inspiration, particularly when you're in financial markets,
42:22
Speaker 1: which is, you know, every day is a puzzle where
42:24
Speaker 1: you're really trying to figure out what the kind of
42:26
Speaker 1: most truthful, neuggative information is that you can rely on.
42:29
Speaker 1: And I think that inspiration really helps. So tell us
42:32
Speaker 1: about a time, by the way, this is another question
42:34
Speaker 1: that comes from listeners. Tell us about a time that
42:36
Speaker 1: you failed and what you learned from the experience. Um,
42:40
Speaker 1: I'm kind of embarrassed to admit this because I'm the
42:44
Speaker 1: chief MUNI bond strategist From Marian Stanley I'll tell you this, Um,
42:50
Speaker 1: I have one C on my college transcript and it's
42:53
Speaker 1: in public finance. Really yeah, so you just redoubled your
42:58
Speaker 1: effort and overcame. Um. I think that's one way to
43:02
Speaker 1: look at it. Or drunk during the test, is he? No? No,
43:06
Speaker 1: I mean to me, it was. It was a big
43:08
Speaker 1: failure in the sense that I believe it was my
43:11
Speaker 1: sophomore year of college and I was always able to
43:14
Speaker 1: until then kind of reach back kind of based on
43:19
Speaker 1: raw intellect and and and get by right. And in
43:22
Speaker 1: that class. It was very humble experience because I left
43:25
Speaker 1: that class and it finally sunk into like there are
43:27
Speaker 1: things that I just know nothing about and and I
43:31
Speaker 1: really knew nothing about what this professor is teaching me.
43:33
Speaker 1: And I think after that, I decided that's not gonna
43:36
Speaker 1: happen again. And so it wasn't about public finance per se,
43:39
Speaker 1: but it was about not being afraid to ask for help,
43:42
Speaker 1: not being afraid that I to admit that I don't
43:45
Speaker 1: know something and ask for help. Um, and you know,
43:49
Speaker 1: kind of putting your ego aside, right, I mean, you
43:52
Speaker 1: don't have to be the smartest person in the room.
43:54
Speaker 1: You're not a failure if you're not the smartest person
43:56
Speaker 1: in the room on everything. But you can be a
43:58
Speaker 1: failure if you try and pretend you are and ultimately
44:02
Speaker 1: don't know what you're talking about. I share a similar
44:06
Speaker 1: college experience in terms of being able to get by
44:09
Speaker 1: on just raw processing power and then when you're confronted
44:14
Speaker 1: with a set of circumstances where that is insufficient to
44:18
Speaker 1: coast through. I wish I handled it as gracefully as
44:21
Speaker 1: it sounds like that was really a significant life lesson. Well,
44:25
Speaker 1: you know, it's good because part of my job is
44:28
Speaker 1: to sit in front of people, and you know they
44:31
Speaker 1: want you to have all the answers, and so it's
44:33
Speaker 1: tempting to pretend like you do have all the answers.
44:36
Speaker 1: But I think what's better and more genuine, and you
44:39
Speaker 1: often get rewarded for, is admitting that you don't know
44:43
Speaker 1: the answer you're thinking and brainstoring about how you might
44:45
Speaker 1: get that answer and come back with it later, because
44:49
Speaker 1: no doubt, the smartest investors know that no one has
44:51
Speaker 1: the answers, so they're going to know your fake if
44:53
Speaker 1: you try and fake it makes a whole lot of sense.
44:56
Speaker 1: Um tell us about you work with a bunch of
45:00
Speaker 1: younger folks as well as people more senior. What sort
45:03
Speaker 1: of advice would you give to a millennial or someone
45:07
Speaker 1: just beginning their career if they said to you, Amac,
45:10
Speaker 1: I'm interested in going into Muni bonds. What what would
45:13
Speaker 1: you say to them? So I'd say a couple of things.
45:17
Speaker 1: And this is interesting. I was like the millennial question
45:20
Speaker 1: because I'm I'm not sure if I'm a millennial or not.
45:22
Speaker 1: I feel like a straddle. I'm like right there. So
45:25
Speaker 1: it's so funny. I'm the exact same way. I'm not
45:27
Speaker 1: a baby boomer. They're all older than me, but I'm
45:30
Speaker 1: too old to be gen X. I get to look
45:33
Speaker 1: in both directions, you might be find yourself similarly situated
45:37
Speaker 1: on the cusp, right, I got the technology aspect of it,
45:40
Speaker 1: but maybe a little bit of a different world view.
45:42
Speaker 1: But I would say two things. One on the Muni issue, specifically,
45:47
Speaker 1: because Muni's have this, or at least had this reputation
45:50
Speaker 1: of being boring asset class you kind of put the charismatic,
45:55
Speaker 1: but people who are considered less intellectual on that product
45:58
Speaker 1: in terms of sales and rating. And you know, one
46:02
Speaker 1: of the early phrases I heard about the muni industry.
46:05
Speaker 1: Was the muni jocks right? And I think the the
46:10
Speaker 1: post crisis realization is that this is a market that
46:13
Speaker 1: incorporates elements of sovereign risk analysis, corporate credit analysis, um,
46:19
Speaker 1: you know, traditional bond math analysis. I mean, there there
46:22
Speaker 1: are a lot of similarities to the mortgage rates, inflation, convexity,
46:27
Speaker 1: so and therefore there are macro elements. I have to
46:30
Speaker 1: know as much about what's going on with the FED
46:32
Speaker 1: as I do have to know what's going on in Springfield,
46:34
Speaker 1: Illinois with the state legislature. So I think it challenges
46:38
Speaker 1: you on a number of different levels. So, um, don't
46:41
Speaker 1: let the fact that it tends to be something for
46:45
Speaker 1: mom and pop as opposed to you know, derivatives or
46:47
Speaker 1: f X or something like that, kind of shy away
46:49
Speaker 1: from it. And then I mean the other bit of
46:51
Speaker 1: advice I would have is more just general career advice
46:55
Speaker 1: than something that worked really well for me, even though
46:57
Speaker 1: I didn't seek it out. Which is kind of kind
47:00
Speaker 1: a job where you're probably gonna get too much responsibility
47:04
Speaker 1: too early, um, probably out of necessity. And this was
47:07
Speaker 1: something that was born of being a mortgage Stanley in
47:09
Speaker 1: the financial crisis right where you know, in the in
47:12
Speaker 1: the crisis, in the immediate aftermath, there weren't a lot
47:15
Speaker 1: of resources to go around. A lot of people kind
47:17
Speaker 1: of forced into duty that was a little bit above
47:19
Speaker 1: their heads. It was kind of like an Apollo thirteen moment,
47:22
Speaker 1: like we all have to fix this problem, but you
47:24
Speaker 1: only have the things that are being thrown on the
47:25
Speaker 1: desk right now to fix it with, you know, do
47:27
Speaker 1: your best mcgeiver impersonation. And that was great. That was great.
47:32
Speaker 1: I mean, you know, you had, you know, spreadsheets, Bloomberg
47:35
Speaker 1: machine and uh and your wits, and you go and
47:39
Speaker 1: you you learn how to innovate, you learn how to
47:41
Speaker 1: take responsibility. It's a sink or swim kind of moment.
47:44
Speaker 1: And I think if you have those moments earlier in
47:46
Speaker 1: your career, it gives you a lot of confidence later.
47:49
Speaker 1: And our final that's a really interesting answer, um, And
47:52
Speaker 1: our final question, what is it that you know today
47:56
Speaker 1: about municipal bond investing that you wish you knew ten
48:00
Speaker 1: or fifteen years ago when your career was just ramping up.
48:06
Speaker 1: M hmm um that I guess that the rules are
48:11
Speaker 1: made to be broken in the sense that a lot
48:13
Speaker 1: of the define that before compliance in their office when
48:18
Speaker 1: they hear that, because I know what you mean, but
48:20
Speaker 1: they don't know what you mean. What I mean, and
48:22
Speaker 1: I mean this in terms of bond covenants. So in
48:24
Speaker 1: a more boring way, right, there are um stresses that
48:30
Speaker 1: are so big that the things that are being promised
48:32
Speaker 1: to you as an investor, you know, can be broken
48:35
Speaker 1: for reasons outside of your control. That shouldn't scare you.
48:39
Speaker 1: What it means is that you should demand some extra
48:42
Speaker 1: compensation for it, and you should take that into account
48:45
Speaker 1: when you analyze it. And here we go back again
48:48
Speaker 1: to something like Puerto Rico. You know, the mantra before
48:52
Speaker 1: the financial crisis and even for years afterwards, were general
48:56
Speaker 1: obligation bonds don't default, can't default. The law says that you,
49:00
Speaker 1: as the bondholder, are entitled to any and all resource
49:03
Speaker 1: that the municipality has at its disposal to pay you
49:05
Speaker 1: back before anyone else. And if you think about it,
49:09
Speaker 1: that doesn't make much sense because what political constituency or
49:14
Speaker 1: group of citizens anywhere is going to allow the bondholders
49:17
Speaker 1: to completely suck dry the resources of a municipality just
49:21
Speaker 1: to uh, just to uphold the law, particularly when states
49:24
Speaker 1: are sovereign entities. Puerto Rico is not sovereign, but Congress was,
49:28
Speaker 1: and Congress saw that the only way to effectively solve
49:32
Speaker 1: this crisis was to exercise its sovereign authority. And what
49:35
Speaker 1: I mean by that is the sovereign authority means they
49:37
Speaker 1: get to write the rules, they get to write the
49:39
Speaker 1: contract laws. And you know, I'm not a lawyer, so
49:43
Speaker 1: I think there are a lot of lawyers who could
49:44
Speaker 1: get in here a debate that say that what's happening
49:46
Speaker 1: in some of these situations is unconstitutional. But you create
49:50
Speaker 1: facts on the ground beforehand that create losses for bondholders first,
49:55
Speaker 1: So you know, So going back to the question itself,
50:00
Speaker 1: I think you have to take all rules and all laws, um,
50:04
Speaker 1: you know, with some kind of grain of salt. You
50:05
Speaker 1: always have to figure out what your blind spot is
50:08
Speaker 1: and at least account for how this could go against
50:10
Speaker 1: you and not take for granted some of the kind
50:12
Speaker 1: of standard rules of you know, of any market, right
50:16
Speaker 1: or the standard kind of rules of thumb. Anyway, Yeah,
50:19
Speaker 1: you mentioned Michael Lewis earlier. I mean he basically lionizes
50:23
Speaker 1: the type of people who just don't take things for granted, right,
50:25
Speaker 1: and you know the h I think that's just a
50:29
Speaker 1: good general lesson fascinating stuff. We have been speaking with
50:33
Speaker 1: Michael Jesus. He is Morgan Stanley's chief strategist for public
50:38
Speaker 1: policy municipal bonds. If people want to have access to
50:41
Speaker 1: your research notes, I assume they must be a Morgan
50:44
Speaker 1: Stanley client or is anything public? Uh, they should be
50:49
Speaker 1: a Morgan Stanley clients. Um. You know that every once
50:52
Speaker 1: in a while we can get we do get media.
50:54
Speaker 1: We do get media coverage from Bloomberg and others. If
50:57
Speaker 1: you have enjoyed this conversation, be you want to look
51:00
Speaker 1: upward down on Apple iTunes or on our SoundCloud or
51:04
Speaker 1: Bloomberg View dot com page and you can see all
51:07
Speaker 1: of our previous hundred and forty one or so such conversations.
51:12
Speaker 1: I would be remiss if I did not thank Taylor Riggs,
51:16
Speaker 1: my booker, Michael bat Nick, my head of research, and
51:20
Speaker 1: Medina Parwana are recording engineer. I'm Barry Ritults. You've been
51:26
Speaker 1: listening to Masters in Business on Bloomberg Radio. Our world
51:30
Speaker 1: is always moving, so with Mery Lynch, you can get
51:32
Speaker 1: access to financial guidance online, in person or through the app.
51:35
Speaker 1: Visit mL dot com and learn more about Mery Lynch.
51:37
Speaker 1: An affiliated Bank of America, Mary Lynch makes available products
51:40
Speaker 1: and services offered by Merrill Lynch, Pierce Federan Smith, Incorporated
51:42
Speaker 1: or Registered Broker Dealer remember s I PC