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US Treasuries to Bond Market Portfolio With PGIM · Masters in Business

• 0:02
  Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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  Speaker 2: This is Master's in Business with Barry red Holts on
• 0:13
  Speaker 2: Bloomberg Radio.
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  Speaker 1: This week on the podcast, another extra special guest. If
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  Speaker 1: you are at all interested in fixed income, in cross
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  Speaker 1: asset management, in intermarket analysis, in understanding the many moving
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  Speaker 1: parts that go into putting together a near trillion dollar
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  Speaker 1: fixed income portfolio, well then strap yourself in Greg Peters. Really,
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  Speaker 1: I don't know who's better to discuss this. He's been
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  Speaker 1: with Pgum for the past decade, where he helps oversee
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  Speaker 1: a giant pile of capital on behalf of a variety
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  Speaker 1: of institutional investors. He's kind of uniquely situated in having
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  Speaker 1: spent a lot of his career not only overseeing fixed
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  Speaker 1: income portfolios, but also part of a multisector team. Pigum
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  Speaker 1: is kind of unique that they have a very different
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  Speaker 1: approach than a lot of companies do. I found the
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  Speaker 1: conversation to be fascinating and I think you will also.
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  Speaker 1: With no further ado my discussion with pagam's Greg Peters.
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  Speaker 2: Thanks for having me back.
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  Speaker 1: So let's start out with your background. You get a
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  Speaker 1: BA in Finance from the College of New Jersey and
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  Speaker 1: an MBA from Fordham University. Sounds like finance was always
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  Speaker 1: the career plan.
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  Speaker 2: Yeah, I don't know about that.
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  Speaker 1: You know, what was the original thinking.
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  Speaker 2: I don't know what my original thinking was. I kind
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  Speaker 2: of fancied myself as more of a liberal arts type
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  Speaker 2: of individual, Like I had a English minor. I studied
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  Speaker 2: as much as I could around literature and art, and
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  Speaker 2: then really just did finance because I felt I needed
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  Speaker 2: something engible. So it's not a great story, you know,
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  Speaker 2: as if you're on the show, but I.
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  Speaker 1: Hear people saying, well, you know, economics, business was my
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  Speaker 1: backup and they end up being very successful in those fields.
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  Speaker 1: So let's talk a little bit about your experience at
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  Speaker 1: the US Treasury Department. How'd you get there and what'd
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  Speaker 1: you do while you were there?
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  Speaker 2: Yeah, so I was part of After I graduated college,
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  Speaker 2: I took some time off. I traveled through Europe. I
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  Speaker 2: bartended over the summer prior to so I could fund
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  Speaker 2: my trip abroad. I came back, I realized I needed
• 2:34
  Speaker 2: to get a job, and or more importantly, my father
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  Speaker 2: told me I needed to get a job. And he's
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  Speaker 2: the one who actually cut the ad out of the paper.
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  Speaker 2: I'm dating myself but that's when I was put as
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  Speaker 2: in the paper, and and the role was for a
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  Speaker 2: bank examiner, so on the regulatory side with the Office
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  Speaker 2: of Thrift Supervision. So if you recall that was the
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  Speaker 2: agency that was created. It is a cleanup for the
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  Speaker 2: SNL crisis. And so I was fortunate to land a
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  Speaker 2: job there, and I gotta tell you, Barry, it was
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  Speaker 2: a fantastic, fantastic training ground. I learned so much and
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  Speaker 2: I'm really quite grateful for it.
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  Speaker 1: So when we look at US treasuries right that they're
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  Speaker 1: about forty percent of the Bloomberg Barclays AG, the largest
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  Speaker 1: set of holdings by far. Any of your experience at
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  Speaker 1: Treasury help you when you're looking at a bond portfolio
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  Speaker 1: that very often is contains a lot of treasuries themselves.
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  Speaker 2: I would say my bank regulatory background was more instructive
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  Speaker 2: and how I think about the financial system writ large,
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  Speaker 2: the flow of money so to speak, and credit right
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  Speaker 2: and that was probably more of a defining characteristic of
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  Speaker 2: that rain or that time than kind of the impact
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  Speaker 2: on the US treasury market, so that that came later.
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  Speaker 1: Next up, you're at Solomon Smith Barney. What was the
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  Speaker 1: energy like there? I recall them, you know, Liar's Poker
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  Speaker 1: the eighties and nineties. They were a bond powerhouse for
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  Speaker 1: a long time.
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  Speaker 2: That was a real experience, so being on that trading floor.
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  Speaker 2: So I started out on the mortgage trading, mortgage derivative side.
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  Speaker 2: I moved or was moved into research, which was really
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  Speaker 2: quite a blow for me at the time. You know,
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  Speaker 2: moving from a trading seat to a research seat was
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  Speaker 2: not something that one desired. It took me a while
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  Speaker 2: to kind of get over that, to be quite frank,
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  Speaker 2: but I realized, man, that was the best thing for me.
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  Speaker 2: It was the best thing for my personality. It allowed
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  Speaker 2: me to zoom out understand markets more critically. But Solomon
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  Speaker 2: itself was such a unique institution. It was excellent personified
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  Speaker 2: in the bond market. From a research perspective, from a
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  Speaker 2: trading perspective, it was by far the best trading operation
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  Speaker 2: I've ever seen. The investment grade trading desk of Brian Eckerson,
• 5:14
  Speaker 2: of Brian Rianno and John Eckerson was just fantastic. So
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  Speaker 2: it really really just showed me what greatness is about
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  Speaker 2: and what swagger is about.
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  Speaker 1: Swagger to say the least, were you at Solomon during
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  Speaker 1: the financial crisis, and what was that desk like back then?
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  Speaker 2: Now, So I moved in two thousand almost if you
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  Speaker 2: mark the all time high Morgan Stanley's stock, you know,
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  Speaker 2: pre adjusted, it was trading like an Internet. That's the
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  Speaker 2: day I joined Morgan Stanley and so that was that
• 5:48
  Speaker 2: was the Internet bubble blowing up.
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  Speaker 1: So I joined March two thousand something like.
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  Speaker 2: Yeah, it was early two thousand, and that was also
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  Speaker 2: a fantastic experience. So I had the financial crisis through
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  Speaker 2: the Morgan Stanley lens.
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  Speaker 1: So you had a couple of really interesting titles in
• 6:06
  Speaker 1: Morgan Stanley. The first is pretty straightforward Director of Fixed
• 6:12
  Speaker 1: Income and Economic Research. I don't think there's anything especially
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  Speaker 1: unusual about that. But the second title, Chief Global cross
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  Speaker 1: Asset Strategist. You don't hear that all that often tell
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  Speaker 1: us about that role. And what'd you do there in
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  Speaker 1: the two.
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  Speaker 2: Thousand Yeah, so that was basically a derivative, no pun
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  Speaker 2: intended of a global strategist role that really focused on
• 6:36
  Speaker 2: the linkages across markets. And so the thought.
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  Speaker 1: Meaning intermarket analysis. If this happens in oil, here's what
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  Speaker 1: it means for.
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  Speaker 2: Bonds precisely right, And I actually think that is possibly
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  Speaker 2: the most important aspect of investing. I think investors are
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  Speaker 2: very narrowly focused, and rightfully so, expertise is awarded, but
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  Speaker 2: what happens away from you matters a whole heck of
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  Speaker 2: a lot to what your current investment look like and
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  Speaker 2: your own portfolio and your own trading. And so that
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  Speaker 2: role was emblematic of the importance of that. And so
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  Speaker 2: it's a terrible title, right, but it's one that I
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  Speaker 2: think is quite important and made me a much better investor.
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  Speaker 1: You were there during the John mac era. He was
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  Speaker 1: a guest on the show last year. What a fascinating
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  Speaker 1: guy and fascinating career. What was it like working under
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  Speaker 1: his stewardship?
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  Speaker 2: John Mac defined leadership I think of Morgan Stanley and
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  Speaker 2: John macus anonymous. I think he was a fantastic leader.
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  Speaker 2: We worked very closely together during the crisis. I remember,
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  Speaker 2: you know, during the kind of the darkest days of
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  Speaker 2: the financial crisis, we have our morning risk meeting and
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  Speaker 2: he comes in, sits on a dais and we're talking
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  Speaker 2: and you know, Lehman was basically you know, just just
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  Speaker 2: gone under. It's about to and I make this comment,
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  Speaker 2: I don't think it's about Lehman, It's about aig and
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  Speaker 2: he just went crazy on me, just yelling at me
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  Speaker 2: in front of like all these people. But I have
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  Speaker 2: nothing but the utmost respect for John. I think he's
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  Speaker 2: just embodies leadership and all.
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  Speaker 1: And I think history proved you right, Leman. I like
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  Speaker 1: to describe Lehman Brothers as the first trailer that was
• 8:37
  Speaker 1: in the trailer park that was hit by the tornado.
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  Speaker 1: But the tornado was coming regardless of what happened.
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  Speaker 2: To Leman, absolutely, and you know, I stand by that statement.
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  Speaker 2: But he definitely dressed me down in a real strong
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  Speaker 2: emotional way.
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  Speaker 1: Huh. So let's talk a little bit about you're at
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  Speaker 1: Morgan Stanley for a better part of a decade. How
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  Speaker 1: did that experience all ltimately help you doing what you're
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  Speaker 1: doing today, which is co head of the multi sector team.
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  Speaker 2: Yeah, so I was fortunate. So I left Morgan Stanley
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  Speaker 2: in twenty thirteen. I took some took some time off,
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  Speaker 2: but essentially I was just tired of the self side.
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  Speaker 2: I wanted to really begin to invest on my own,
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  Speaker 2: so I took some time off. I looked at different options,
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  Speaker 2: starting up my own fund, creating a new multi asset
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  Speaker 2: business at a pe firm and then PGIM came about,
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  Speaker 2: and I do have some new Jersey roots and it
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  Speaker 2: kind of felt, you know, natural, and they really took
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  Speaker 2: a chance on me. As you know, Mike Lillard, who
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  Speaker 2: is my recently retired boss, is like, what you were
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  Speaker 2: doing at Morgan Stanley is directly applicable to what we're
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  Speaker 2: doing here. It just has a different rapper or a
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  Speaker 2: different name to it. And so they really with me
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  Speaker 2: in a position to succeed because what PGM is really
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  Speaker 2: about is a team construct. So was really helped by that.
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  Speaker 2: So that was really the move.
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  Speaker 1: I'm glad you brought up the team construct because one
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  Speaker 1: of things when you look at the org chart for PGM,
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  Speaker 1: you can't help but notice all of the co positions.
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  Speaker 1: So your co CIO, the company itself has co CEOs
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  Speaker 1: and when you go down that chart, there are cos
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  Speaker 1: here and there pretty regularly. What's the thought process of
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  Speaker 1: having dual leadership in all these different departments?
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  Speaker 2: Yeah, you know, coming from the street, it's a hard
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  Speaker 2: pill to swallow oftentimes because many think of cos as
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  Speaker 2: a game of thrones exercise, Right, who's going to win,
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  Speaker 2: who's going to lose? At PGM and in our fixed
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  Speaker 2: income organization is very different. It is shared responsibility, shared leadership.
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  Speaker 2: We do think we're better together than a part, and
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  Speaker 2: there's a lot of responsibility, and you could make an
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  Speaker 2: argument that as a fiduciary to your clients and the
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  Speaker 2: stewards of capital, that that actually is what is a
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  Speaker 2: better outcome. So I think it really works for us.
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  Speaker 2: We typically have complementary skill sets and it's additive and
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  Speaker 2: it works really well for us as an organization, really
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  Speaker 2: really interesting.
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  Speaker 1: A lot of people seem to assume that, oh, pgeum,
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  Speaker 1: they're running money for crudential insurance, but it's not just prue.
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  Speaker 1: You guys are running money for a lot of institutional clients,
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  Speaker 1: aren't you.
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  Speaker 2: Absolutely, So the way our AOM is broken out, a
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  Speaker 2: little under a third is the insurance company. We think
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  Speaker 2: about them as a very important client, of course, but
• 11:50
  Speaker 2: outside of that, the other two thirds is outside capital,
• 11:53
  Speaker 2: so whether it's on the retail or institutional side. So
• 11:57
  Speaker 2: it's a very diverse group group of investors. I think
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  Speaker 2: we have over eleven hundred different investors, and not including
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  Speaker 2: the small retail I just mean institutionally. So yes, it's
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  Speaker 2: a broad swath of clients that we cover from pension funds,
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  Speaker 2: sovereign wealth funds, retail, you name it.
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  Speaker 1: So that's over half a trillion dollars in non prudential
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  Speaker 1: just bonds. We're not talking about anything else. Let's talk
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  Speaker 1: about what it's like being a co CIO for fixed income.
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  Speaker 1: How do you share the responsibilities, who is in charge
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  Speaker 1: of what? And do you ever kind of run into
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  Speaker 1: complications with that?
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  Speaker 2: Yeah, So my co is Craig Dueling, who incidentally was
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  Speaker 2: my boss since the day I joined. Oh yeah, he's
• 12:45
  Speaker 2: a fantastic boss. So I feel very fortunate. We've been
• 12:48
  Speaker 2: sitting next to each other since the day I joined,
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  Speaker 2: and we have a real complementary skill set. So he
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  Speaker 2: focuses largely on insurance company Japan. You know, multisector is
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  Speaker 2: you know, part of my remit because I'm on the fund.
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  Speaker 2: So I'm a portfolio manager on those funds. So you
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  Speaker 2: know that is a you know, big responsibility of course,
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  Speaker 2: but we we really work together and try to critically
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  Speaker 2: assess the process and how do we improve the process
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  Speaker 2: of investing across the entire floor.
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  Speaker 1: So I could see how having two sets of eyes
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  Speaker 1: is advantageous when you have co heads for the department.
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  Speaker 1: What are the challenges I can imagine it's not easy
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  Speaker 1: when you sort of have to reach a happy consensus
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  Speaker 1: on all major decisions.
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  Speaker 2: You know, I'll take the other side of that to
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  Speaker 2: a degree. I think conflict is a good thing, and
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  Speaker 2: so I'm not you know, saying Game of Thrones type
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  Speaker 2: of conflict to go back to that reference. But but
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  Speaker 2: you know, I'm very much into the idea of pre mortem.
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  Speaker 2: So I want to suss out the issues I want
• 14:09
  Speaker 2: to debate. We have a real culture of debate, you know,
• 14:14
  Speaker 2: at the firm, and so I think having that in
• 14:18
  Speaker 2: the mix prior to whether getsing a portfolio or making decision,
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  Speaker 2: I think is critically important. You know, command and control
• 14:27
  Speaker 2: oftentimes has lots of blind spots to it right, It
• 14:32
  Speaker 2: suffers from that individual's biases, and I think that's dangerous.
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  Speaker 2: So having that, you know, checks and balances, I think
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  Speaker 2: is incredibly powerful. And you know, you have to trust
• 14:44
  Speaker 2: each other as an individual and as an organization as
• 14:49
  Speaker 2: it's not malicious. Someone disagreeing with you is not a
• 14:52
  Speaker 2: malicious act exactly quite the opposite. And you know, if
• 14:56
  Speaker 2: you think that you're all in it together, working for
• 14:59
  Speaker 2: a common and purposed and I think it works pretty well.
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  Speaker 1: I love the concept of doing the pre mortems while
• 15:06
  Speaker 1: you're unemotional and objective, because once something hits the fan
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  Speaker 1: and you're trying to figure out, hey, what do we
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  Speaker 1: do here, it's a very different set of analyzes, isn't it.
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  Speaker 2: Absolutely? And you know, I'm a very big fan of
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  Speaker 2: looking at a probabilistic scenario based approach, and I think
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  Speaker 2: the important part of that exercise is to analyze those
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  Speaker 2: different possibilities, right, and think about what your portfolio would
• 15:38
  Speaker 2: look like, what a certain trade will look like before
• 15:41
  Speaker 2: it happens, right, And so you shouldn't be so surprised
• 15:45
  Speaker 2: by it. And of course you're always surprised because you
• 15:46
  Speaker 2: can never kind of put the proper scenarios around everything,
• 15:51
  Speaker 2: of course, But at the same time, I think looking
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  Speaker 2: at it through a multiple scenario lens is incredibly powerful.
• 16:01
  Speaker 1: So last year twenty twenty three, we saw treasure yields
• 16:04
  Speaker 1: hit their highest levels since I don't know, I want
• 16:07
  Speaker 1: to say seven since right before the financial crisis. How
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  Speaker 1: are you guys managing your duration? Here? Are you short term?
• 16:15
  Speaker 1: Are you long term? Where you relative to where Pgum's
• 16:18
  Speaker 1: fixed income duration was in the twenty tens.
• 16:21
  Speaker 2: Yeah, so we were known as the lower for longer institution.
• 16:27
  Speaker 2: So you know, when the world thought rates would rise,
• 16:31
  Speaker 2: we were like, no, rates are here to stay last
• 16:34
  Speaker 2: decade on the yeah, before twenty twenty, and so that
• 16:40
  Speaker 2: was kind of our calling card and that worked really,
• 16:43
  Speaker 2: really well, that transition from you know, twenty twenty post pandemic.
• 16:50
  Speaker 2: Quite candidly, we were a little slow to react on
• 16:53
  Speaker 2: the secular shift. So if I had to, you know,
• 16:56
  Speaker 2: go back and revisit, you know, items that we didn't
• 16:59
  Speaker 2: get right, that would be one that we did not
• 17:01
  Speaker 2: get right. At the same time, though, looking forward, we've
• 17:06
  Speaker 2: really moved from lower to longer to higher for longer, right,
• 17:10
  Speaker 2: which doesn't have the same ring to it, of course,
• 17:13
  Speaker 2: but you know, we do think the world has changed
• 17:17
  Speaker 2: and we see a little more growth, kind of secular growth,
• 17:22
  Speaker 2: a little more inflation on a secular basis as well,
• 17:26
  Speaker 2: and that should translate to a higher bond yields. So
• 17:29
  Speaker 2: long winded ways saying we've been short duration, so we've
• 17:33
  Speaker 2: felt that our rates have been poised to rise all
• 17:37
  Speaker 2: else equal and stay high. And that's where we are today.
• 17:42
  Speaker 1: At what point in the cycle. Do you say, okay,
• 17:45
  Speaker 1: it feels pretty safe to go out on the duration
• 17:48
  Speaker 1: curve and instead of being three to five years of
• 17:51
  Speaker 1: five to seven years, maybe we could be ten, seven
• 17:54
  Speaker 1: to ten years.
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  Speaker 2: Here's the irony is that given where yields are, you
• 18:00
  Speaker 2: actually get paid to be out there, whether yields rally
• 18:04
  Speaker 2: or even sell off a little, right, So we were
• 18:08
  Speaker 2: suffering from such a recency bias where so many investors
• 18:12
  Speaker 2: haven't seen the world pre GFC the you know, yields
• 18:20
  Speaker 2: weren't supposed to be that low, right, and so you know,
• 18:23
  Speaker 2: all the modeling that well, you know, the fan has
• 18:26
  Speaker 2: to bring back rates to zero again and so on
• 18:29
  Speaker 2: and so forth. I think is really really miscast. And
• 18:32
  Speaker 2: so you know, I think having duration in a portfolio,
• 18:37
  Speaker 2: and we got a whiff of that at the end
• 18:39
  Speaker 2: of last year, right when there was this ferocious rally
• 18:43
  Speaker 2: for whatever reason I don't recall necessarily it didn't make
• 18:47
  Speaker 2: a lot of sense to me, but it just tells
• 18:49
  Speaker 2: you have duration on you're getting paid carried to do it,
• 18:55
  Speaker 2: and you have this protective measure where if the world
• 18:59
  Speaker 2: does go around, if a recession does hit, growth does
• 19:02
  Speaker 2: slow for whatever reason, it has that protective characteristic. Importantly,
• 19:08
  Speaker 2: it didn't have that before, right, So when rates were
• 19:12
  Speaker 2: effectively at zero, it was a didn't make sense to
• 19:17
  Speaker 2: be long that instrument because there was no positive carry.
• 19:20
  Speaker 2: And then if a recession did hit, there was no
• 19:22
  Speaker 2: room or scope for rates to rally. So bonds lost
• 19:26
  Speaker 2: their way, and which is why everyone was questioning the
• 19:31
  Speaker 2: sixty forty efficacy. And it was a good question. But
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  Speaker 2: I think we're in a very different place today, and
• 19:37
  Speaker 2: I think bonds have a tremendous amount of value in
• 19:39
  Speaker 2: a balanced portfolio.
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  Speaker 1: The great irony is prior to the twenty twenty two
• 19:43
  Speaker 1: to twenty three rate hiking cycle, there was an entire
• 19:48
  Speaker 1: generation of bond managers, traders, analysts who really have never
• 19:52
  Speaker 1: lived through a rising rate environment. They've been at zero
• 19:57
  Speaker 1: practically since September eleventh. Since dot Com implosion, rates have
• 20:02
  Speaker 1: only trended lower and stayed low for forever. As you said,
• 20:06
  Speaker 1: that really isn't very normal, isn't How far are we
• 20:10
  Speaker 1: from what you would think of as fairly normalized rates.
• 20:14
  Speaker 2: I think we are finally in a normal zone. But
• 20:18
  Speaker 2: you're quite right, you need to zoom out. So financial
• 20:22
  Speaker 2: history didn't start in two thousand, right as well before that,
• 20:27
  Speaker 2: So we have this chart that has one hundred and
• 20:30
  Speaker 2: fifty years of yields, right, you know, so you know,
• 20:36
  Speaker 2: looking at different regime chefs. So I think we are
• 20:41
  Speaker 2: finally in a more normal environment. I also believe that,
• 20:46
  Speaker 2: you know, history will continue to shine a really unfavorable
• 20:49
  Speaker 2: light on a central bank policy of zero rates and
• 20:53
  Speaker 2: negative rates. Right if you kind of asked the common person,
• 20:59
  Speaker 2: you know, why is a bond yield negative? I don't
• 21:03
  Speaker 2: think anyone could come up with a great reason. Kind
• 21:06
  Speaker 2: of us, in a professional realm, convince ourselves why. But
• 21:11
  Speaker 2: was that really true? Probably not? So, So I think
• 21:15
  Speaker 2: we're more normal now, and I think it makes sense,
• 21:18
  Speaker 2: and I feel pretty good about it.
• 21:19
  Speaker 1: So we're talking about rates, but let's go beyond rates.
• 21:23
  Speaker 1: What do you see on the credit quality side? How
• 21:26
  Speaker 1: significant is that? I've noticed the gap between high yields
• 21:32
  Speaker 1: and riskless seems to be kind of tight these days.
• 21:36
  Speaker 1: How do you look at the credit quality side?
• 21:39
  Speaker 2: Credit's tricky. So it's important to note that we have
• 21:44
  Speaker 2: not had a credit cycle, you know, since the early
• 21:49
  Speaker 2: two thousands, right, so kind of the late nineties cycle.
• 21:54
  Speaker 2: As a consequence of that, we really haven't experienced credit losses, right,
• 21:58
  Speaker 2: We've had these the these swoons of liquidity risk, and
• 22:01
  Speaker 2: obviously we have the GFC. But what we've seen is
• 22:05
  Speaker 2: that central banks have stepped in very quickly to kind
• 22:09
  Speaker 2: of rescue. But you haven't seen a real uptick in
• 22:12
  Speaker 2: to faults, right, distressing the faults. You're starting to see
• 22:16
  Speaker 2: that pick up, and I believe that distressing default activity
• 22:21
  Speaker 2: will remain high, just given so many balance sheets were
• 22:25
  Speaker 2: built on the backs of zero interest rates, and as
• 22:29
  Speaker 2: that gets refinanced, that puts more pressure on these businesses
• 22:33
  Speaker 2: to survive, and that just leads to more handing over
• 22:36
  Speaker 2: the keys type of you know situations.
• 22:39
  Speaker 1: So two questions about that. First, is that an early
• 22:43
  Speaker 1: warning sign of something untoward in the economy? And second,
• 22:48
  Speaker 1: if we're seeing these defaults take up, why is there
• 22:50
  Speaker 1: such a tight spread between high quality corporates and high
• 22:56
  Speaker 1: risk corporates.
• 22:58
  Speaker 2: I think it is an early warning sign, for sure.
• 23:01
  Speaker 2: I also think it's a resumption of normalcy, so we're
• 23:06
  Speaker 2: in a more normal environment. I also think it's incredibly
• 23:10
  Speaker 2: opportunistic for investors like us as well, so I'm excited
• 23:13
  Speaker 2: about it. But your point around the compression, though, is
• 23:17
  Speaker 2: an excellent one, and so I still believe, we still
• 23:20
  Speaker 2: believe a PGM that investors are overpaying for credit risk,
• 23:25
  Speaker 2: whether it's down the capital stack in a structured product,
• 23:29
  Speaker 2: whether it's single B versus a triple B as I
• 23:36
  Speaker 2: think once again the recency bias aspect of it, right,
• 23:39
  Speaker 2: So you know, I see a lot more value on
• 23:42
  Speaker 2: the higher quality scale than the lower quality. I think
• 23:44
  Speaker 2: the relative value is inverted. And if you look at
• 23:48
  Speaker 2: just kind of broad index levels, we're in the tightest
• 23:52
  Speaker 2: decile for investment grade corpus as well as high yield.
• 23:56
  Speaker 2: So there's not a lot of room to tighten more
• 24:00
  Speaker 2: from here.
• 24:01
  Speaker 1: So some of the criticism I've seen of private debt
• 24:05
  Speaker 1: and private credit is exactly what you've said generally, which
• 24:10
  Speaker 1: is some investors are overpaying for risk. Do you look
• 24:15
  Speaker 1: at the world of private credit and in terms of
• 24:18
  Speaker 1: intermarket analysis, how does that make you think about publicly
• 24:22
  Speaker 1: traded fixed income?
• 24:23
  Speaker 2: Yeah, so I do look at the world of private credit,
• 24:27
  Speaker 2: and I look across the broad spectrum of credit, and
• 24:31
  Speaker 2: so what you've seen over the past is called seven
• 24:35
  Speaker 2: to ten years is obviously this tremendous growth in private credit,
• 24:41
  Speaker 2: but that has actually taken risk out of the public markets, right,
• 24:46
  Speaker 2: And I think the most important market to focused on
• 24:49
  Speaker 2: focus on is the lever loan market, right because it's
• 24:52
  Speaker 2: kind of private, but it's kind of public, so it's
• 24:55
  Speaker 2: kind of the fulcrum point. And so what we've seen
• 24:58
  Speaker 2: is leverage really ramp up on the levered loan side,
• 25:04
  Speaker 2: and so kind of the LBO transactions, the pro forma
• 25:08
  Speaker 2: leverage and ibadah has been heroic, it hasn't come through.
• 25:12
  Speaker 2: So that is I think the Canary and the coal mine.
• 25:16
  Speaker 2: Interestingly enough, that has been the best performing fixed income
• 25:22
  Speaker 2: an asset over the past eighteen months or so. So
• 25:25
  Speaker 2: you know, the joke's kind of been on me for
• 25:27
  Speaker 2: a little bit, but I do think that gives you
• 25:29
  Speaker 2: a gateway into where the leverage is, and the leverage
• 25:34
  Speaker 2: in the system is in a more opaque area and
• 25:39
  Speaker 2: not the public area, and that is quite worrisome for
• 25:44
  Speaker 2: me for me when we think about kind of the
• 25:47
  Speaker 2: next recession.
• 25:48
  Speaker 1: So I'm going to assume that in the current environment,
• 25:51
  Speaker 1: you're not looking to dial up credit risk.
• 25:55
  Speaker 2: No, No, So I would say two things. One is
• 26:00
  Speaker 2: that kind of broad kind of macro credit risk we've
• 26:04
  Speaker 2: we've taken now we've continue to you know, take down
• 26:08
  Speaker 2: just kind of risk reward. Risk adjusted returns don't look
• 26:12
  Speaker 2: really that attractive to us. At the same time, though,
• 26:16
  Speaker 2: I talked about the increase in distressed and you know,
• 26:22
  Speaker 2: quasi distressed, and that's creating dispersion, and dispersion's good for
• 26:27
  Speaker 2: active managers. So on one end, the broad macro credit
• 26:31
  Speaker 2: risk looks kind of fully valued, not that exciting, but
• 26:36
  Speaker 2: the dispersion in the market creates a lot of value
• 26:40
  Speaker 2: for active managers. Now it's incumbent upon active managers like
• 26:44
  Speaker 2: us to capture it, but that's exciting. Whereas before it
• 26:48
  Speaker 2: was everything was very compressed and it traded kind of
• 26:51
  Speaker 2: all together and it was hard to add a lot
• 26:54
  Speaker 2: of value in that.
• 26:56
  Speaker 1: That's really interesting. So first quarter of twenty twenty four
• 27:00
  Speaker 1: or you said something that I thought was really intriguing.
• 27:04
  Speaker 1: Investors need to figure out how to bulletproof their bond portfolio.
• 27:10
  Speaker 1: How does one bulletproof your bond portfolio?
• 27:12
  Speaker 2: Yeah, you know, I think that was taken a little
• 27:14
  Speaker 2: out of context if I remember, but the idea behind
• 27:16
  Speaker 2: it essentially was don't take unnecessary risk. The world has changed.
• 27:24
  Speaker 2: Investors aren't incentivized or rewarded to take the same kind
• 27:29
  Speaker 2: of risk that they were before. So move up the
• 27:33
  Speaker 2: quality curve, don't move down. So I still believe, as
• 27:39
  Speaker 2: I mentioned before, that investors are still stuck in this
• 27:41
  Speaker 2: old world and they're overpaying for real credit risk and
• 27:46
  Speaker 2: underpaying light credit risk. And so that's really what I
• 27:50
  Speaker 2: mean by it. So you don't have to take the
• 27:52
  Speaker 2: risk now that you had to a few years back.
• 27:57
  Speaker 1: You were very early when you were told about higher
• 28:00
  Speaker 1: for longer, you know, last decade, not a lot of
• 28:04
  Speaker 1: people got that right, and you totally did. What were
• 28:09
  Speaker 1: you seeing at that time that led you to the
• 28:11
  Speaker 1: conclusion the FED is in no hurry to get off
• 28:14
  Speaker 1: its emergency footing, and there's no impulse to raise rates.
• 28:18
  Speaker 1: Expect lower rates for the rest of this decade.
• 28:22
  Speaker 2: Yeah. So you know, as I mentioned before, we pivoted
• 28:25
  Speaker 2: in twenty twenty one from our low for longer to
• 28:29
  Speaker 2: hire the longer, And that was just a realization that
• 28:36
  Speaker 2: you know, post COVID, you're in an environment where infl
• 28:41
  Speaker 2: inflationary pressures are very different. Right. You talk about or
• 28:45
  Speaker 2: you hear about near shoring, friend shoring, the adjacencies, proximity,
• 28:52
  Speaker 2: so on and so forth. That's less efficient, that puts
• 28:56
  Speaker 2: more pressure on inflationary forces. You know, in every other
• 29:02
  Speaker 2: aspect that we look at seems inflationary to me. So
• 29:07
  Speaker 2: that's the one side. The other side is I do
• 29:11
  Speaker 2: really feel like we're finally out of this secular stagnation store.
• 29:16
  Speaker 2: And so if you just take those two items, that's
• 29:20
  Speaker 2: our premise. It's not factor course, but that's our premise.
• 29:23
  Speaker 2: Then that should lead to a higher rate environment, not
• 29:27
  Speaker 2: a lower rate environment. And so we're in a series
• 29:31
  Speaker 2: of secular shifts, I believe, and I think that manifests
• 29:34
  Speaker 2: itself through higher rates, not lower rates, and so that's
• 29:39
  Speaker 2: been our thesis. At the same time, there's been this
• 29:43
  Speaker 2: tendency in the market where any data print, it doesn't
• 29:47
  Speaker 2: matter if it's good, better and different, it could be
• 29:49
  Speaker 2: deciphered however you like, seems to want to resort back
• 29:57
  Speaker 2: to the world that it was, and I think that
• 29:59
  Speaker 2: misses the bigger pictures. So that's that's kind of our thinking.
• 30:03
  Speaker 2: It's going to be a volatile ride. So this is
• 30:05
  Speaker 2: not a point estimate like tenures X, but I think
• 30:09
  Speaker 2: it'll be in a volatile yet higher range.
• 30:12
  Speaker 1: So let me follow up with a couple of questions.
• 30:16
  Speaker 1: Some things I find really intriguing. You know, I've heard
• 30:19
  Speaker 1: a number of people say, hey, this, if globalization is
• 30:23
  Speaker 1: efficient and deflationary, well near Suring is going to be inflationary.
• 30:29
  Speaker 1: But wasn't the spark that lit this entire inflationary cycle
• 30:35
  Speaker 1: the lack of supply chain logistics? We were unable to
• 30:41
  Speaker 1: get things because we couldn't get masks or or you know,
• 30:47
  Speaker 1: alcohol rubs or anything like that, toilet or toilet paper,
• 30:51
  Speaker 1: or semiconductors or what have you because it was coming
• 30:54
  Speaker 1: from overseas. Doesn't Near Suring create a little more resiliency
• 30:59
  Speaker 1: and tipe fragility. And if the broken supply chains was
• 31:04
  Speaker 1: the early spike of inflation, well removing that shouldn't that
• 31:10
  Speaker 1: give us a little bit of a shield against the
• 31:13
  Speaker 1: next inflationary cycle, at least a supply chain driven cycle.
• 31:17
  Speaker 2: Yeah. I mean, if you think about how businesses were running,
• 31:21
  Speaker 2: it was just in time, inventory in extremists.
• 31:24
  Speaker 1: Super super efficient, super low cost.
• 31:27
  Speaker 2: And the supply chains were exceedingly complicated, right, So it
• 31:32
  Speaker 2: wasn't a one jurisdiction supply chain. It was multiple jurisdictions
• 31:36
  Speaker 2: across the supply chain. And so yeah, maybe you eked
• 31:42
  Speaker 2: out additional efficiencies and I'm using air quotes that means
• 31:46
  Speaker 2: costs by doing that, But you lose control at the
• 31:49
  Speaker 2: same time. So you know, I think what CEOs and
• 31:53
  Speaker 2: you know, business leaders decided is that, you know, it's
• 31:56
  Speaker 2: better to have a little more control than a few sins.
• 32:01
  Speaker 1: Everything is a series of trade offs. The other thing
• 32:05
  Speaker 1: that we were talking about earlier, the lower for longer.
• 32:08
  Speaker 1: In the twenty tens, let's talk about the twenty tens
• 32:11
  Speaker 1: versus the twenty twenties. Twenty tens obviously monetary policy driven.
• 32:18
  Speaker 1: Suddenly we have the pandemic, we have the Cares Act
• 32:22
  Speaker 1: one and two, this giant fiscal stimulus under President Trump.
• 32:26
  Speaker 1: You have the Cares Act three under President Biden, plus
• 32:29
  Speaker 1: a whole bunch of other longer term tenuere spends. Is
• 32:35
  Speaker 1: the twenty twenties the decade of fiscal stimulus, and how
• 32:39
  Speaker 1: does fixed and income adapt to that.
• 32:42
  Speaker 2: Fiscal has been incredibly powerful, no doubt about it. If
• 32:46
  Speaker 2: you look at I think the durability of the US
• 32:49
  Speaker 2: economy and the outperformance of the US economy, I think
• 32:54
  Speaker 2: a lot of that has to do with fiscal of course,
• 32:59
  Speaker 2: But you know, at the same time, you look at
• 33:02
  Speaker 2: the Chips Act and some other I think notable industrial
• 33:05
  Speaker 2: policy measures. You know that money hasn't really been put
• 33:10
  Speaker 2: in the system either, right, and.
• 33:11
  Speaker 1: That's over ten years. Yeah, that's going to be a
• 33:13
  Speaker 1: tailwind right now.
• 33:14
  Speaker 2: So yeah, so I think there's lots of focus on
• 33:19
  Speaker 2: the deficit, and that's precisely right. We should focus on
• 33:23
  Speaker 2: the deficit. But I do believe that having a more
• 33:28
  Speaker 2: cohesive fiscal policy around industrial measures is important, and that
• 33:36
  Speaker 2: actually is leading us to believe that there's hope on
• 33:39
  Speaker 2: the horizon to get a little more efficiencies out of
• 33:42
  Speaker 2: the economy and we can grow at a higher plane.
• 33:47
  Speaker 1: So in January twenty twenty four, you had a quote
• 33:49
  Speaker 1: that quote, my attention, yield is destiny for fixed income.
• 33:54
  Speaker 1: Explain what you mean by that.
• 33:56
  Speaker 2: So, essentially what we mean by that is the yield
• 34:01
  Speaker 2: itself is the value proposition, right, So earning that carry
• 34:07
  Speaker 2: the income. Right, So the income out of fixed income
• 34:11
  Speaker 2: was taken out of the equation post DFC, but having
• 34:15
  Speaker 2: that income, having that carry is incredibly powerful. And so
• 34:21
  Speaker 2: if you look at you know, over the course of
• 34:23
  Speaker 2: many decades, the key driver to performance and returns is
• 34:28
  Speaker 2: the starting yield, right, so I know it sounds trite
• 34:31
  Speaker 2: to say, but starting point matters, and so when you're
• 34:34
  Speaker 2: starting with a higher yield, that that allows investors a
• 34:39
  Speaker 2: higher possible return.
• 34:42
  Speaker 1: So you mentioned in December there was an extreme disconnect
• 34:46
  Speaker 1: between the FED and the markets. What are you referring
• 34:50
  Speaker 1: to that?
• 34:50
  Speaker 2: Yeah, So I was really besides myself at that time,
• 34:54
  Speaker 2: and so I was looking at the inflation picture, looking
• 35:00
  Speaker 2: at growth, and I couldn't understand why the market was
• 35:04
  Speaker 2: so aggressively pricing in rate cuts. I just couldn't, for
• 35:08
  Speaker 2: the life of me, understand it. And it's funny story.
• 35:12
  Speaker 2: I was down at some hedge fund conference in Miami,
• 35:15
  Speaker 2: of course, in January, and the whole room was I'm
• 35:21
  Speaker 2: not sure if it's bared up or bulled up, but
• 35:23
  Speaker 2: they were basically in the camp that March is a
• 35:28
  Speaker 2: done deal. Fifty they have to cut cut and it
• 35:32
  Speaker 2: didn't matter whether it was because of disinflation or the
• 35:37
  Speaker 2: job market was rolling over. It was all about cuts.
• 35:40
  Speaker 2: And it just really struck me as a bizarre thought process,
• 35:45
  Speaker 2: I guess. And so you can't have you know, head,
• 35:49
  Speaker 2: you win tells you when right, and so it really
• 35:53
  Speaker 2: kind of emboldened us to take the other side of it,
• 35:56
  Speaker 2: it was too much. It's too much.
• 35:58
  Speaker 1: Is this the same crowd and maybe this is the
• 36:01
  Speaker 1: thought process there. Look, all we heard in twenty twenty
• 36:04
  Speaker 1: two is the US is inner recession or about to
• 36:07
  Speaker 1: fall into a recession, and we heard the same thing
• 36:10
  Speaker 1: in twenty twenty three, not that you could tell by
• 36:13
  Speaker 1: looking at the equity markets. The equity markets made it
• 36:16
  Speaker 1: pretty clear we don't see any sort of recession. And
• 36:19
  Speaker 1: then we go into the first five months of twenty
• 36:23
  Speaker 1: twenty four, bonds continue to just kind of drift lower.
• 36:28
  Speaker 1: Or how related is the we're expecting fed cuts now
• 36:32
  Speaker 1: and we expect a recession any day.
• 36:36
  Speaker 2: I don't know. I can't figure it out. I mean,
• 36:38
  Speaker 2: I think many, many made a mistake, you know, myself
• 36:42
  Speaker 2: included just thinking about the ability of this economy or
• 36:48
  Speaker 2: any economy to withstand higher rates. It goes back to
• 36:52
  Speaker 2: the narrative where we were so accustomed to living in
• 36:55
  Speaker 2: this low rate world that we couldn't fathom the fact
• 36:59
  Speaker 2: that the economy could survive on higher rates. So I
• 37:03
  Speaker 2: think that was just just kind of a mistake that
• 37:08
  Speaker 2: many made, which is why recession probabilities were so high.
• 37:13
  Speaker 2: What's notable to me, is so on the macro side,
• 37:17
  Speaker 2: that was the narrative, and so I PGM fixing. Come.
• 37:20
  Speaker 2: We have like one hundred and thirty credit analysts, right,
• 37:23
  Speaker 2: so we have a tremendous micro team, and they weren't
• 37:27
  Speaker 2: seeing it boots on the ground level, right, And so
• 37:31
  Speaker 2: there was this macro narrative based on this premise that
• 37:35
  Speaker 2: the world can't live with higher rates, not kind of
• 37:41
  Speaker 2: pulling it back and saying, well, rates are highed because
• 37:44
  Speaker 2: growth is pretty good, Yeah, a little inflation rates are
• 37:47
  Speaker 2: there for a reason, right. And at the same time,
• 37:51
  Speaker 2: our analysts were saying, you know, the companies are really
• 37:55
  Speaker 2: doing well. So I think you know, that was a
• 37:58
  Speaker 2: real lesson for us and really embold in us to
• 38:01
  Speaker 2: believe once again that this whole fed cunning narrative was
• 38:07
  Speaker 2: definitely overplay.
• 38:08
  Speaker 1: But what do you make of the latest thing that
• 38:11
  Speaker 1: I've been hearing from. I want to say, it's the
• 38:14
  Speaker 1: same crowd. We're concerned about stagflation. What do you see
• 38:20
  Speaker 1: in terms of a slowing economy and rising interest rates,
• 38:24
  Speaker 1: rising inflation rates?
• 38:26
  Speaker 2: Yeah, so we do a bunch of scenarios. Stagflation is
• 38:32
  Speaker 2: one that we don't assign really any weight to at
• 38:36
  Speaker 2: this point, I think it was more of a European
• 38:40
  Speaker 2: possibility or probability than a US one. So everything's possible,
• 38:45
  Speaker 2: of course, but I don't know mortal density scenario. I
• 38:50
  Speaker 2: don't see that. I don't see that as a real
• 38:55
  Speaker 2: risk here.
• 38:55
  Speaker 1: What's the Elroy Dimson quote. Risk means more things can happen,
• 39:00
  Speaker 1: will happen. So, and I think Jerome Powell came out
• 39:04
  Speaker 1: and said, I don't see the stag and I don't
• 39:07
  Speaker 1: see the inflation. So I'm kind of surprised that that
• 39:11
  Speaker 1: has sort of found a life of its own in
• 39:14
  Speaker 1: the US. Hey, if you want to talk about Europe,
• 39:17
  Speaker 1: that's a very different set of circumstances, both fiscally and
• 39:21
  Speaker 1: in terms of their growth rates. But let's bring this
• 39:25
  Speaker 1: back to inflation generally. Beginning of the year, you said
• 39:30
  Speaker 1: markets are writing off inflation a little prematurely. What's the
• 39:34
  Speaker 1: disconnect between what the markets are seeing or wishing for
• 39:41
  Speaker 1: and what's actually happening in the economy.
• 39:43
  Speaker 2: Yeah, So the first way to think about it is
• 39:48
  Speaker 2: just kind of mechanically, right. So the measure of inflation
• 39:51
  Speaker 2: is the rate of change, right. So the reason why
• 39:54
  Speaker 2: I think, you know, the polling numbers are so poor
• 39:59
  Speaker 2: around inflation is because you know, once milk rises to
• 40:03
  Speaker 2: you know, whatever, it is nine dollars for organic milk,
• 40:09
  Speaker 2: it's not moving lower, right, just doesn't keep rising, and
• 40:12
  Speaker 2: so you're feeling the full effect of that nine dollars,
• 40:15
  Speaker 2: whereas us in the markets, we're looking at the delta.
• 40:19
  Speaker 2: So the reason why I mentioned that is because some
• 40:24
  Speaker 2: of the easy comps are starting to roll off. So
• 40:26
  Speaker 2: just mechanically, we would expect to see inflation just rise
• 40:32
  Speaker 2: because it's those easy comps rolling off. But to me,
• 40:37
  Speaker 2: I think it's important to dissect and decompose where inflation
• 40:41
  Speaker 2: is coming from. And it's about labor. Right, So core
• 40:46
  Speaker 2: services is I think fifty six percent of core PCEE
• 40:53
  Speaker 2: and that's about labor. So how can you really forecast
• 40:58
  Speaker 2: a meaningful decline in inflation when the job market is
• 41:04
  Speaker 2: as strong as it is?
• 41:06
  Speaker 1: All Right, So we're seeing a slight decrease in immigration
• 41:09
  Speaker 1: in twenty twenty four, What did it looked like last year?
• 41:12
  Speaker 1: What it looked like in twenty twenty three?
• 41:15
  Speaker 2: So immigration last year skyrocketed?
• 41:18
  Speaker 1: Oh really, legal immigration.
• 41:19
  Speaker 2: Legal immigration and illegal properly as well. It's a really
• 41:24
  Speaker 2: difficult measure but either way that that helped expand the
• 41:32
  Speaker 2: labor supply, and that expansion of labor supply allowed two
• 41:37
  Speaker 2: things to unfold. One, it allowed i think disinflation to
• 41:42
  Speaker 2: come through the entire system last year.
• 41:45
  Speaker 1: Less pressure on rising wages because there are more bodies
• 41:48
  Speaker 1: and you're not just competing on price correct.
• 41:51
  Speaker 2: And the second is it allowed that economic activity to
• 41:55
  Speaker 2: actually occur. So it was a twofold benefit. What you've
• 41:59
  Speaker 2: seen this is the labor market is much more in balance,
• 42:05
  Speaker 2: and at the same time, you've seen immigration really dep
• 42:08
  Speaker 2: pre election, so you're seeing just the labor market in
• 42:14
  Speaker 2: a more natural state.
• 42:16
  Speaker 1: Really interesting. Let's stick with inflation for a minute, So
• 42:19
  Speaker 1: we're recording this in the middle of May twenty twenty four.
• 42:24
  Speaker 1: We had a two point two percent year of a
• 42:26
  Speaker 1: year producer price index sort of soft, and then a
• 42:31
  Speaker 1: very soft consumer price index below consensus. Is it too
• 42:36
  Speaker 1: soon to declare victory over inflation? Can we say, hey,
• 42:40
  Speaker 1: we're at a three handle, and if you back out
• 42:44
  Speaker 1: some of the adlies of owner's equivalent rent and the
• 42:47
  Speaker 1: shelter component's CPI were really at a two handle. Why
• 42:51
  Speaker 1: can't the Fed just plant the flag in the ground
• 42:53
  Speaker 1: and say we're good here.
• 42:55
  Speaker 2: Well, I think they can't plant the flag because their
• 42:59
  Speaker 2: mandate is two percent, right, And you could argue whether
• 43:02
  Speaker 2: two percent is a made up number, which it.
• 43:04
  Speaker 1: Is from New Zealand in the nineteen eighties.
• 43:07
  Speaker 2: So there's no scientific evidence to support two percent, but
• 43:10
  Speaker 2: it's two percent because we said it's two percent. That's
• 43:14
  Speaker 2: the beauty of economic theory oftentimes. So I think it's
• 43:18
  Speaker 2: really hard to back away from that because you start
• 43:21
  Speaker 2: to lose credibility. But the way to think about the
• 43:25
  Speaker 2: FEDS mandate in that construct is not around easing necessarily,
• 43:30
  Speaker 2: but around being less restrictive. And so is there room
• 43:35
  Speaker 2: for them to adjust policy rates lower to be less restrictive.
• 43:40
  Speaker 2: I think there is, but not a lot.
• 43:43
  Speaker 1: Like in the mid fes and hopefully that frees up
• 43:45
  Speaker 1: a lot of this frozen housing supply.
• 43:47
  Speaker 2: Yeah, but exactly the issue I think is that it's
• 43:52
  Speaker 2: already prebate and you know, if you look at kind
• 43:56
  Speaker 2: of real estate prices, you look at you know, corporate
• 43:58
  Speaker 2: credit as well, kind of those beliefs are already factored in.
• 44:05
  Speaker 2: And so what happens if the FED doesn't adjust policy
• 44:09
  Speaker 2: rate it's lower, then I think there's more bumps in
• 44:12
  Speaker 2: the road.
• 44:12
  Speaker 1: I find it ironic than in the twenty tens, an
• 44:16
  Speaker 1: era we described as driven by monetary policy, we couldn't
• 44:20
  Speaker 1: get inflation up to two percent, and now in the
• 44:24
  Speaker 1: twenty twenties, an era defined by fiscal stimulus, we can't
• 44:29
  Speaker 1: seemingly get inflation down to two percent. It just kind
• 44:33
  Speaker 1: of makes you wonder about these targets and the background
• 44:37
  Speaker 1: that they're in. I understand they don't want to say, well,
• 44:41
  Speaker 1: we can't get to two percent, we'll go to three percent,
• 44:44
  Speaker 1: But if we get more housing supply out there, maybe
• 44:47
  Speaker 1: that drives the apartment rental index a little lower.
• 44:51
  Speaker 2: Well, you know, what you described is the imputence of
• 44:54
  Speaker 2: central bank policy right on inflation itself. So fiscal is
• 44:59
  Speaker 2: much more powerful tool, not only from an economic growth perspective,
• 45:03
  Speaker 2: but from an inflation or disinflation standpoint as well. So
• 45:07
  Speaker 2: it actually calls in the question how much central banks
• 45:09
  Speaker 2: can really do it?
• 45:11
  Speaker 1: Right?
• 45:11
  Speaker 2: They're very, very limited, I think.
• 45:13
  Speaker 1: Especially when you look at the fiscal stimulus, especially from
• 45:16
  Speaker 1: the Cares Act under both Trump and Biden. It wasn't
• 45:21
  Speaker 1: like the Semiconductor Act or the Infrastructure Act or the
• 45:24
  Speaker 1: Inflation Reduction Act that spread out over a decade. That
• 45:28
  Speaker 1: was trillions of dollars dumped into the economy in twenty
• 45:31
  Speaker 1: and twenty one. One would assume that by twenty twenty
• 45:35
  Speaker 1: two the pig was through the python and you're still
• 45:39
  Speaker 1: just dealing with whatever money's left over, and everybody's savings
• 45:43
  Speaker 1: account is the biggest part of the fiscal stimulus behind us.
• 45:48
  Speaker 1: Now can we start thinking in terms of so we've
• 45:52
  Speaker 1: normalized monetary policy, are we almost normalizing fiscal policy?
• 45:59
  Speaker 2: Well? I think the big rush of cash into consumers'
• 46:03
  Speaker 2: wallets is definitely behind us. We talked earlier about the
• 46:08
  Speaker 2: Chips Act and how very little of it has actually
• 46:12
  Speaker 2: been put into the system yet. So I do think
• 46:17
  Speaker 2: a lot of the fiscal thrust though, is behind us.
• 46:21
  Speaker 2: But the real question on the table is what does
• 46:23
  Speaker 2: fiscal look like going forward? Are we going to continue
• 46:27
  Speaker 2: to run such large deficits. There's lots of focus on
• 46:32
  Speaker 2: the election, of course, but the item on the table
• 46:35
  Speaker 2: for many is what's the contours of fiscal look like.
• 46:39
  Speaker 2: I don't think anyone believes that you'll see a real
• 46:42
  Speaker 2: pullback in fiscal spending, but you know, Republican led Trump
• 46:47
  Speaker 2: victory that probably keeps the tax cuts in place, and
• 46:49
  Speaker 2: that adds you know, one and a half percent to
• 46:52
  Speaker 2: the deficit instantaneously.
• 46:54
  Speaker 1: What would that mean for inflation if we saw either
• 46:57
  Speaker 1: a renewal of the tax cuts or more task.
• 47:00
  Speaker 2: I think it's inflationary right now. I think the multiplier
• 47:05
  Speaker 2: effect is much lower, so I don't think you have
• 47:09
  Speaker 2: the same kind of economic impulse effect necessarily. But it's inflationary.
• 47:15
  Speaker 2: And you know, everything that we look at on the
• 47:18
  Speaker 2: margin is inflationary, not this inflationary.
• 47:21
  Speaker 1: That's really interesting.
• 47:22
  Speaker 2: You know. The counter to that is China. But China
• 47:25
  Speaker 2: is less influential in that way than they were before.
• 47:29
  Speaker 2: And I think that's another real secular story that investors
• 47:33
  Speaker 2: are are kind of slow to kind of grasp onto.
• 47:37
  Speaker 2: It's the influence of China kind of you know, post
• 47:41
  Speaker 2: wto admission is very different today than where we were
• 47:47
  Speaker 2: the past twenty years, and I think that matters a lot.
• 47:49
  Speaker 1: They were exporting deflation for a good couple of decades.
• 47:53
  Speaker 1: Are you suggesting that's much more moderate than it once was?
• 47:57
  Speaker 2: I think it is moderate, more moderate, And if you
• 47:59
  Speaker 2: think about the areas where you know they are exporting deflation,
• 48:08
  Speaker 2: and some areas like solar evs and whatnot. Tires are
• 48:14
  Speaker 2: slapped on top of that, so it's trying to level
• 48:17
  Speaker 2: the playing field as far as that's concerned. So I
• 48:19
  Speaker 2: think it's a different environment bottom line, and I think
• 48:22
  Speaker 2: that matters a lot. And I think it's inflationary. I
• 48:25
  Speaker 2: think it means bond yield will remain higher, not lower. ALSEQL.
• 48:30
  Speaker 1: You know, you just put an interesting thought in my
• 48:32
  Speaker 1: mind thinking about the different tax policies and the different
• 48:35
  Speaker 1: import export policies of each of these candidates. But it
• 48:40
  Speaker 1: dawned on me that no matter who gets elected, they're
• 48:43
  Speaker 1: both lame duck presidents. They're both second term presidents. It
• 48:47
  Speaker 1: makes you wonder what they'll be able to get accomplished
• 48:50
  Speaker 1: either way.
• 48:51
  Speaker 2: Yeah, and it's all about Congress, right as you know.
• 48:53
  Speaker 2: So there's intense focus on the presidential race. But you know,
• 48:57
  Speaker 2: I think we all know that, you know, having full
• 48:59
  Speaker 2: control of the House matters a lot. I think that'll
• 49:02
  Speaker 2: be a more driver of policy domestically. Foreign policy. You
• 49:07
  Speaker 2: can do more by presidential edict, but domestic policy has
• 49:11
  Speaker 2: to go through Congress.
• 49:12
  Speaker 1: All right, One last curveball question before we get to
• 49:15
  Speaker 1: our favorite questions. We ask all of our guests so
• 49:19
  Speaker 1: you're a member of the Fixed Income Analyst Society and
• 49:22
  Speaker 1: the Bond Market Association. Tell us a little bit about
• 49:25
  Speaker 1: those two organizations. I don't hear those names all that
• 49:29
  Speaker 1: often these days.
• 49:30
  Speaker 2: Yeah. So look, I mean that's just a forum for
• 49:32
  Speaker 2: investors from all parts of the industry, right whether you're
• 49:36
  Speaker 2: from the rating agencies, the buyside sell side, to debate
• 49:44
  Speaker 2: share information around you know, pertinent issues, market issues, and
• 49:51
  Speaker 2: I guess the takeaway there is the diversity of expertise,
• 49:57
  Speaker 2: perspectives and kind of just thought processes, uh, just make
• 50:02
  Speaker 2: you a better investor. So it's a so it's a
• 50:05
  Speaker 2: shared environment where we're like minded fixed income professionals, but
• 50:11
  Speaker 2: with different lens and different backgrounds, can debate.
• 50:15
  Speaker 1: Really really interesting. So let's jump to our favorite questions,
• 50:19
  Speaker 1: starting with what have you been streaming these days? What
• 50:22
  Speaker 1: are you watching or listening? What's keeping you entertained?
• 50:24
  Speaker 2: Yeah, well, you know I do like a good streaming,
• 50:28
  Speaker 2: so you know, it's hard to narrow. So I just started,
• 50:31
  Speaker 2: well I'm in you know, it just started means last week,
• 50:34
  Speaker 2: which means I'm almost done with season two Succession. So
• 50:38
  Speaker 2: I was a late adopter to Succession, So I enjoy
• 50:42
  Speaker 2: that greatly and thankful that I'm not in that family.
• 50:47
  Speaker 2: The other one I'm streaming is Masters of Air on
• 50:51
  Speaker 2: Apple TV.
• 50:52
  Speaker 1: It's next up in Mike Cue. It looks fascinating, it's
• 50:54
  Speaker 1: very good.
• 50:55
  Speaker 2: It's you know, it's very good. I love I love history,
• 50:58
  Speaker 2: and you know, it's a good story. And what I'm
• 51:00
  Speaker 2: enjoying it greatly.
• 51:02
  Speaker 1: It just looks if you watch the preview visually, it's stunning.
• 51:07
  Speaker 1: It just looks great.
• 51:08
  Speaker 2: It is visually excellent. Absolutely. The problem is I watch
• 51:11
  Speaker 2: it on my iPad, so it's like I'm not getting
• 51:13
  Speaker 2: the full experience. But this story is really quite good.
• 51:16
  Speaker 2: And then I am a nerd at the end of
• 51:18
  Speaker 2: the day and I'm the lord of the Rings, the
• 51:20
  Speaker 2: Rings of Power. So I'm waiting for season two to
• 51:23
  Speaker 2: come out, I think next week. And then podcast wise,
• 51:28
  Speaker 2: there's a few that I like. What I really like
• 51:33
  Speaker 2: the Tim Ferriss Show. So what I like about that
• 51:37
  Speaker 2: podcast is that it's about process and gets in the
• 51:41
  Speaker 2: minds no matter the discipline, what the process is to
• 51:47
  Speaker 2: you know, your expertise. So I really find that to
• 51:50
  Speaker 2: be quite excellent. And then I also like invest like
• 51:55
  Speaker 2: the best podcast. Yeah, yeah, very good, really exceptional.
• 51:59
  Speaker 1: Yeah, yep, absolutely. Tell us about your mentors who helped
• 52:02
  Speaker 1: shape your career.
• 52:04
  Speaker 2: Yeah, so you know mentors. I think of mentors as
• 52:07
  Speaker 2: a mosaic, you know. I I have lots of positive mentors,
• 52:13
  Speaker 2: and I also have you know, the anti mentor. Right
• 52:16
  Speaker 2: you go back to my Solomon days. Uh, I was
• 52:19
  Speaker 2: really shaped by some leaders that like man, I don't
• 52:23
  Speaker 2: want to be like that person, so that could be
• 52:25
  Speaker 2: equally as powerful. I'm not trying to be negative about it.
• 52:29
  Speaker 2: There's informational content and everything that we do positive and negative,
• 52:33
  Speaker 2: but there's a few that stand out to me.
• 52:36
  Speaker 1: Uh.
• 52:37
  Speaker 2: The The first is a gentleman, Dan Lancelotti. I worked
• 52:40
  Speaker 2: with him at Solomon Smith Barney and he really taught
• 52:44
  Speaker 2: me around kind of operational workflow and design product design
• 52:50
  Speaker 2: and you know, everything is an operational management project and
• 52:54
  Speaker 2: really helped me think through that. When when I got
• 52:59
  Speaker 2: to Morgan stan Only, I worked for a gentleman Steve Zamski.
• 53:04
  Speaker 2: He taught me about creativity and cross market application into practice.
• 53:09
  Speaker 2: And so what's interesting there is the story that most
• 53:12
  Speaker 2: people don't know. So Steve and I was part of
• 53:15
  Speaker 2: that group, so I can't really claim credit it was
• 53:17
  Speaker 2: really his design. Created this product product called tracers in
• 53:22
  Speaker 2: two thousand and one, and that was the first index
• 53:27
  Speaker 2: bond product tradable, so very early stages. Lehman kind of
• 53:32
  Speaker 2: quickly replicated to call the trains. We launched it in
• 53:35
  Speaker 2: the middle of nine to eleven, so that was, you know,
• 53:39
  Speaker 2: quite a difficult time. But the ingenuity and beauty Morgan
• 53:43
  Speaker 2: Stanley is that we took that product and turned into
• 53:46
  Speaker 2: trace X, that turned into CDX, and so a gentleman
• 53:51
  Speaker 2: on her CDs trading desk, Jared Epstein, had the vision of, like,
• 53:57
  Speaker 2: managing this from a bond perspective was was really really difficult.
• 54:03
  Speaker 2: Let's turn it into kind of a bunch of CDs
• 54:07
  Speaker 2: contracts and that launch CDX and CDX is the most liquid,
• 54:12
  Speaker 2: largest instrument and uh and uh and credit. So I'm
• 54:17
  Speaker 2: kind of happy to be part of that transformation. Uh.
• 54:20
  Speaker 2: And then the last is kind of funny. It was
• 54:23
  Speaker 2: my boss at Morgan Stanley who used to run research,
• 54:26
  Speaker 2: Juan Luis Perez uh, and so what he taught me
• 54:32
  Speaker 2: was just the importance of probabilistic scenario based approaches. You know,
• 54:37
  Speaker 2: I really hold on to that. I believe in that.
• 54:40
  Speaker 2: I believe the root of all evil is kind of
• 54:44
  Speaker 2: point estimates, so to speak. Uh. And he also taught
• 54:47
  Speaker 2: me about kind of evidence based investing, So there's you know,
• 54:51
  Speaker 2: taking the outside, whether there's data mining and whatnot. So
• 54:54
  Speaker 2: it's you know, really quite powerful. And then last is
• 54:57
  Speaker 2: my boss who just retired at PGM, you know, Mike Lillard,
• 55:00
  Speaker 2: who was just an unbelievable analytical mind, the smartest person
• 55:05
  Speaker 2: I probably ever met. And so you just you know,
• 55:08
  Speaker 2: you learn all these aspects from you know, people throughout
• 55:12
  Speaker 2: the years, and so I feel quite fortunate.
• 55:14
  Speaker 1: Really interesting. Let's talk about books. What are some of
• 55:17
  Speaker 1: your favorites? What are you reading right now?
• 55:19
  Speaker 2: Yeah, so books, you know, you know, you have to
• 55:24
  Speaker 2: go with the classics. So uh, you know when Genius failed.
• 55:30
  Speaker 2: I think you're talking about one podcast earlier. Yeah, just uh,
• 55:36
  Speaker 2: but I I'm a big fan of studying history, as
• 55:41
  Speaker 2: I mentioned, and I believe like studying like like Napoleon,
• 55:46
  Speaker 2: Alexander the Great, Caesar Churchill, kind of Washington, Lincoln, Grant,
• 55:50
  Speaker 2: all those things have been incredibly instructive for me as
• 55:54
  Speaker 2: I think about, you know, my role and you know,
• 55:57
  Speaker 2: my life, I guess. And then kind of one of
• 56:00
  Speaker 2: the books I'm reading now. I finished Chip War, which
• 56:04
  Speaker 2: is a much created course, but then I rolled it
• 56:07
  Speaker 2: into this book called The New Fire, The War Piece
• 56:12
  Speaker 2: and Democracy in the Age of AI. It's just a
• 56:16
  Speaker 2: fantastic read, really well written, highly recommended. And then I
• 56:23
  Speaker 2: just finished up The Alchemy of Air by Thomas Hager
• 56:28
  Speaker 2: was it's a fascinating, fantastic, fascinating book on it's the
• 56:33
  Speaker 2: haber Bosch method which basically turns air into ammonium right
• 56:40
  Speaker 2: and used it as a fertilizer, but also fueled the
• 56:43
  Speaker 2: war in Nazi Germany, and now it's creating kind of
• 56:47
  Speaker 2: this other type of crisis, this OBCD crisis, and so
• 56:50
  Speaker 2: it's a it's it's a fantastic read. And then I
• 56:56
  Speaker 2: think from a credit perspective, a must read is Caesar's
• 57:00
  Speaker 2: Palace Coup. So that basically goes through the Caesar Palace
• 57:07
  Speaker 2: bankruptcy and it just highlights that weren't a very different
• 57:11
  Speaker 2: world today than we were in the past with respect
• 57:15
  Speaker 2: to workouts and bankruptcy. You have different players in the mix,
• 57:19
  Speaker 2: different incentive structures, and to me, it's a cautionary tale.
• 57:24
  Speaker 2: So when you're getting involved in low risk credit and
• 57:28
  Speaker 2: distress investing. That that should be something you should fully
• 57:34
  Speaker 2: understand because you realize how fraught it is.
• 57:38
  Speaker 1: All right, our final two questions, what sort of advice
• 57:41
  Speaker 1: would you give a recent college grad interested in a
• 57:44
  Speaker 1: career in either investing or fixed income or a multi
• 57:50
  Speaker 1: strategy approach to investing.
• 57:52
  Speaker 2: Yes, so you know, I would would. I think it's
• 57:56
  Speaker 2: a manifold. But the first is, you know, be open
• 57:59
  Speaker 2: to ideas, don't be quick to narrow your focus. I
• 58:04
  Speaker 2: think of experience as a set of building blocks, and
• 58:08
  Speaker 2: with any foundation, having a broad foundation is a more
• 58:12
  Speaker 2: stable foundation than a narrow one. I would also say,
• 58:19
  Speaker 2: play chess, not checkers. And what I mean by that is,
• 58:23
  Speaker 2: you know, think several moves ahead, right, think about your
• 58:26
  Speaker 2: career of where you want to be, and you know,
• 58:29
  Speaker 2: maybe your current move in a certain area is not
• 58:33
  Speaker 2: exactly what you thought. But you know, knowledge is portable
• 58:37
  Speaker 2: and often applicable. And I think about my own career
• 58:40
  Speaker 2: and how much I learned from being in other areas
• 58:43
  Speaker 2: and how it applies to what I do today. Is
• 58:45
  Speaker 2: incredibly powerful. Ask questions relentlessly, you know, I think it's
• 58:50
  Speaker 2: important to know what you don't know, and I think
• 58:56
  Speaker 2: that's a sign of strength not weakness, right, you know,
• 58:59
  Speaker 2: particularly at the kind of more early stages of your career.
• 59:05
  Speaker 2: And then finally, something that we just talked about is
• 59:07
  Speaker 2: just you have to read, right, you have to read
• 59:10
  Speaker 2: financial history, so you have to study and understand. You know,
• 59:15
  Speaker 2: these books are incredibly powerful and important, and so I
• 59:21
  Speaker 2: think you know, reading those sets of books like you know,
• 59:24
  Speaker 2: when Genius failed, Manius Panics and crashes, those types of
• 59:28
  Speaker 2: things are highly instructive and will really allow you to
• 59:33
  Speaker 2: accelerate in your career.
• 59:35
  Speaker 1: And our final question, what do you know about the
• 59:37
  Speaker 1: world of fixed income and investing today you wish you
• 59:41
  Speaker 1: knew twenty five thirty years ago when you were first
• 59:44
  Speaker 1: starting out.
• 59:44
  Speaker 2: Yeah, other than everything, right, Barry, I would start by saying,
• 59:50
  Speaker 2: don't be afraid to be a contrarian. And that don't
• 59:53
  Speaker 2: mean be a contrarian for contraeran's sake. I mean think
• 59:56
  Speaker 2: about things differently and critically. And you know, it is
• 1:00:01
  Speaker 2: a slippery slope sometimes because it kind of drives me
• 1:00:04
  Speaker 2: mad when folks just throw out contraaring things to try
• 1:00:07
  Speaker 2: to be controversial. And I don't mean it that way.
• 1:00:09
  Speaker 2: I just mean think critically in a contraran way. I
• 1:00:14
  Speaker 2: would also say it's a marathon and not a sprint.
• 1:00:17
  Speaker 2: And I think long term investing is the key to success.
• 1:00:23
  Speaker 2: And so thinking about you know, not only your own career,
• 1:00:27
  Speaker 2: but market wise from a longer term perspective, I think
• 1:00:30
  Speaker 2: pays dividends, you know, no pun intended, you know, I
• 1:00:36
  Speaker 2: say process, process, process, I think those are the three
• 1:00:39
  Speaker 2: most important things. So you know, whether it's organizing an
• 1:00:45
  Speaker 2: argument on a you know, particular trade, or your view
• 1:00:50
  Speaker 2: on the secular themes, like, have a thought process around it. Oftentimes,
• 1:00:54
  Speaker 2: what's more powerful than the output is how you get there.
• 1:00:58
  Speaker 2: And I think that is that organizing principle is quite
• 1:01:05
  Speaker 2: quite important. I would also say think like an investor.
• 1:01:10
  Speaker 2: So I'm biased here because I don't really have a
• 1:01:13
  Speaker 2: tremendous trader mindset, but I think conflating the two is
• 1:01:19
  Speaker 2: not appropriate. But I think investing is very different than trading,
• 1:01:24
  Speaker 2: and so you know, I try to think like an investor.
• 1:01:27
  Speaker 2: And then just lastly, you know, embrace adversity, right, you know,
• 1:01:32
  Speaker 2: rally from your failures. You know, I think about the
• 1:01:35
  Speaker 2: Michael Jordan Hall of Fame speech, right, you know, just
• 1:01:39
  Speaker 2: he failed over and over again, and that's why he succeeded.
• 1:01:42
  Speaker 2: I'm sure there's other reasons why he succeeded too, but
• 1:01:46
  Speaker 2: but you know, some of the most defining moments in
• 1:01:48
  Speaker 2: my career have been on things that haven't worked out,
• 1:01:52
  Speaker 2: and I think it's important to pick yourself up, dust
• 1:01:55
  Speaker 2: yourself off, and learn from it. And I think the
• 1:01:59
  Speaker 2: learning is that's the most powerful part.
• 1:02:02
  Speaker 1: Really interesting stuff. Greg, thank you for being so generous
• 1:02:05
  Speaker 1: with your time. We have been speaking with Greg Peters.
• 1:02:09
  Speaker 1: He is co chief investment officer of Pigeum's fixed income
• 1:02:13
  Speaker 1: as well as co head of the multi sector team.
• 1:02:17
  Speaker 1: If you enjoy this conversation, well check out any of
• 1:02:20
  Speaker 1: the five hundred previous discussions we've had over the past
• 1:02:24
  Speaker 1: ten years. You can find those at iTunes, Spotify, YouTube,
• 1:02:28
  Speaker 1: wherever you find your favorite podcasts. Speaking of which, check
• 1:02:33
  Speaker 1: out my new podcast At the Money, short ten minute
• 1:02:37
  Speaker 1: conversations with experts about issues that affect you and your portfolio,
• 1:02:42
  Speaker 1: earning your money, spending it, and most importantly, investing it.
• 1:02:46
  Speaker 1: At the Money, in your Master's and business feed or
• 1:02:50
  Speaker 1: wherever you find your favorite podcasts. I would be remiss
• 1:02:53
  Speaker 1: if I did not thank the Crack team that helps
• 1:02:56
  Speaker 1: me put these conversations together each week. John Wasserman is
• 1:03:01
  Speaker 1: my audio engineer. Attika of Albron is my project manager.
• 1:03:05
  Speaker 1: Sean Russo is my head of research. Anna Luke is
• 1:03:08
  Speaker 1: my producer. Sage Bauman is the head of podcasts. Here Bloomberg,
• 1:03:13
  Speaker 1: I'm Barry Riddolts. You've been listening to Masters in Business
• 1:03:17
  Speaker 1: on Bloomberg Radio.