Latest / Masters in Business / Balancing Conviction and Risk: Masters in Business with Maria Vassalou

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Balancing Conviction and Risk: Masters in Business with Maria Vassalou · Masters in Business

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  Speaker 1: Bloomberg Audio Studios.
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  Speaker 2: Podcasts.
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  Speaker 1: Radio.
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  Speaker 2: News.
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  Speaker 1: I'm Barry Ritholtz. You're listening to Masters in Business on
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  Speaker 1: Bloomberg Radio. My extra special guest is Dr. Maria Vassalu.
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  Speaker 1: She is head of PICTE Research Institute, which she joined
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  Speaker 1: in 2024 to help build a staff of PhD-level researchers
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  Speaker 1: that collaborate with outside academics and think tanks to PICTE's
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  Speaker 1: long-term strategic mandate covers asset allocation, portfolio construction, risk premia,
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  Speaker 1: capital market structures, global economic, and investment trends. The firm
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  Speaker 1: manages nearly a trillion dollars.
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  Speaker 2: Dr.
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  Speaker 1: Vasalu arrived from Goldman Sachs Asset Management, where she was
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  Speaker 1: co-CIO and SAC Capital. She also served as president of
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  Speaker 1: the European Finance Association. PICTE was founded in 1805 as
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  Speaker 1: a partnership of managers and owners, which it still is
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  Speaker 1: to this day. I thought this conversation was utterly fascinating,
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  Speaker 1: and I think you will also. With no further ado,
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  Speaker 1: my sit-down with PICTE researchers, Maria Vassallo. PICTE Dr. Maria Vassalu,
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  Speaker 1: welcome back to Bloomberg.
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  Speaker 2: Thank you, Barry. Thank you for having me. Always a
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  Speaker 2: great pleasure to be here.
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  Speaker 1: The last time you were here, you were co-CIO at GSAM.
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  Speaker 1: We'll talk a little bit about your career in a minute,
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  Speaker 1: but I got to roll back to the academics. Bachelor's
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  Speaker 1: in economics at the University of Athens, PhD in financial
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  Speaker 1: economics at the London School of Business. which leads to
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  Speaker 1: you becoming a professor of finance at Columbia for over
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  Speaker 1: a decade, 1995 to 2006. Academia, was that always the
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  Speaker 1: career plan?
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  Speaker 2: When you do a PhD, you're expected to go to academia.
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  Speaker 2: And the reason I did a PhD was because I
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  Speaker 2: wanted to delve deeper into the various topics. I didn't
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  Speaker 2: want to have a superficial understanding of economics and finance.
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  Speaker 2: That's what made me get into it. And then I
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  Speaker 2: had this wonderful opportunity to join Columbia. As a European PhD,
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  Speaker 2: this is, at least at the time, it was a
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  Speaker 2: very rare occurrence. I was actually, at the time, probably
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  Speaker 2: the first or second PhD from Europe that was ever
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  Speaker 2: hired at the Ivy League school. And so, of course,
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  Speaker 2: it was an offer I couldn't turn down.
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  Speaker 1: And you spent a good 11 years there. I'm fascinated
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  Speaker 1: by your work history. It's like a who's who of investing.
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  Speaker 1: You're head of quant at Soros. You're a portfolio manager
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  Speaker 1: at SAC Capital. You consult for Citadel. You're head of
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  Speaker 1: asset allocation at McKinsey. PM at Perella Weinberg. Co-CIO at GSAM.
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  Speaker 1: That's an incredible run. How different were each of those shops?
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  Speaker 1: What were the big takeaways? What did you learn?
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  Speaker 2: Well, they were very different, as you know. And also
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  Speaker 2: coming out of academia, going into the industry, you know,
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  Speaker 2: to some extent you don't really know the cultures of
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  Speaker 2: all these places. But the reason I made this transition
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  Speaker 2: was because my research in academia was in empirical asset
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  Speaker 2: pricing and how macro factors affect asset returns. So I
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  Speaker 2: was always working on this interrelation of macro and finance,
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  Speaker 2: which at that time was not a very big area.
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  Speaker 2: There were a few other people doing it, obviously. And
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  Speaker 2: it started finding applications to hedge fund strategists. So I
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  Speaker 2: started being approached by various hedge funds to consult. And
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  Speaker 2: so over time, of course, that led to job offers,
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  Speaker 2: and I was very reluctant to make the switch because
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  Speaker 2: it's a big change.
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  Speaker 1: To say the very least, the first gig out of Columbia,
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  Speaker 1: was that with Soros Capital Management?
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  Speaker 2: Actually, it was with another hedge fund that approached me as...
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  Speaker 2: to consult for them, and then... Was that Citadel? No,
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  Speaker 2: it was a smaller hedge fund at Connecticut, DSD Capital,
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  Speaker 2: I think it was called. And then I had various
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  Speaker 2: others that approached me, and then Citadel... approach. I was
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  Speaker 2: a retained consultant. They wanted me to join full-time, but
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  Speaker 2: I was very scared to leave academia, if you like.
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  Speaker 1: Well, it's safe and secure, and out in the real world,
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  Speaker 1: they're very demanding.
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  Speaker 2: Yeah. So I said, I'm not ready to leave academia,
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  Speaker 2: but I'm happy to consult. So we had this arrangement
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  Speaker 2: where I would spend one or two days a week
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  Speaker 2: in Chicago in their offices. At that time, that's where
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  Speaker 2: their main offices were. And then Soros approached me, and
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  Speaker 2: I started consulting for them. Eventually, I joined them to
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  Speaker 2: start this quantitative strategies group. But as we started developing
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  Speaker 2: the strategies and I was presenting it to the management there,
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  Speaker 2: Robert Soros was the CIO at the time. He liked
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  Speaker 2: the idea, so he said, OK, take 20 million to
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  Speaker 2: try this one, take 30 million to try the other one.
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  Speaker 2: And at the end, I was managing about 200 million
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  Speaker 2: for them, which was not a lot of money for SARS.
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  Speaker 2: But it was an opportunity for me to, you know,
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  Speaker 2: to dip my toes into the markets and start seeing
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  Speaker 2: how things work. And these strategies were quantitative in nature.
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  Speaker 2: So eventually, when I left Soros, I was able to
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  Speaker 2: take the code with me, and I moved to SAC,
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  Speaker 2: and then I was a full-blown PM with my own
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  Speaker 2: silo and team and so on and so forth. So
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  Speaker 2: that launched my career as a global macro PM.
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  Speaker 1: So I have to ask about how different is teaching
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  Speaker 1: at a place like Columbia versus managing money at, Soros, Citadel, SAC.
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  Speaker 1: What's the biggest gap between academic theory and real-world practice?
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  Speaker 2: Ego.
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  Speaker 1: Is that a big part of it?
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  Speaker 2: I think it's a big part, and one of the
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  Speaker 2: biggest hurdles I had to overcome when I moved to industry,
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  Speaker 2: when I was meeting different people or people were approaching
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  Speaker 2: me for positions, was the first question would be, academics
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  Speaker 2: don't succeed on Wall Street. what do you think is
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  Speaker 2: different about you? Because it was, you know, LTCM was
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  Speaker 2: very recent. Sandy Grossman hadn't done well. I mean, he
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  Speaker 2: had done initially, but then he didn't. There were a
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  Speaker 2: couple of other examples.
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  Speaker 1: Here's the pushback. Dimensional Funds is a trillion dollars, academically driven.
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  Speaker 1: Vanguard is 12 trillion. BlackRock is 13 trillion. I mean,
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  Speaker 1: those are big, academically driven shops.
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  Speaker 2: But these are not hedge funds. They're long-only shops. So
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  Speaker 2: in the hedge fund world, the perceptions are different. And
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  Speaker 2: I think they were very much colored by the failure
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  Speaker 2: of LTCM, because there you had all these big names
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  Speaker 2: in academia.
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  Speaker 1: And 100x leverage.
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  Speaker 2: Yes, exactly.
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  Speaker 1: It's less academia than a bad.
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  Speaker 2: Exactly.
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  Speaker 1: That's more inexperienced. And here we are, fast forward, and
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  Speaker 1: situational awareness... blows up for the same reason. So you
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  Speaker 1: mentioned ego. I saw a study, I don't know, about
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  Speaker 1: five years ago, women PMs tend to outperform male PMs
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  Speaker 1: by something like 80 basis points. And my immediate thought was, oh,
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  Speaker 1: I don't even have to read this. It's testosterone poisoning
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  Speaker 1: and male ego. Is that an exaggeration or how accurate
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  Speaker 1: is that?
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  Speaker 2: Well, you know, at some level in academia, the stakes
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  Speaker 2: are not as high in the sense that you can
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  Speaker 2: have your views and go with them. And there is
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  Speaker 2: most of the time there is no way to equivocally
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  Speaker 2: prove whether you're right or wrong. I mean, in some cases,
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  Speaker 2: you can.
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  Speaker 1: But there's no P & L where at.
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  Speaker 2: The end of the quarter, you're... point, I have to
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  Speaker 2: cut risk. And there, you know, it doesn't matter how
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  Speaker 2: strongly you feel about the idea, you get your scorecard
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  Speaker 2: every day that says how well you've done. And that's
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  Speaker 2: the case, at least in public markets. If you're in
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  Speaker 2: private markets, you have a longer runway. But in public markets,
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  Speaker 2: it's very brutal. You get a scorecard every day. When
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  Speaker 2: you make money, you're happy, but you're not as happy
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  Speaker 2: as you're sad. When you lose money.
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  Speaker 1: Isn't that Kahneman-Tversky's classic finding that the reason we have
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  Speaker 1: such loss aversion is we feel the pain twice as
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  Speaker 1: much as we enjoy the pleasure?
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  Speaker 2: Yeah, exactly.
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  Speaker 1: So how do you balance, I'm hearing a mix of theory, conviction,
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  Speaker 1: and risk management How does a PM balance that when,
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  Speaker 1: all right, the risk says 5%, I'm out, but I
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  Speaker 1: know that this trade is going to work out and
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  Speaker 1: I would love to reenter it? How does a PM
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  Speaker 1: like yourself, that's so quantitative and theoretical in nature, how
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  Speaker 1: do you balance those out?
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  Speaker 2: Well, the premise of my strategy was having a view
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  Speaker 2: in the markets and expressing it through many different trades
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  Speaker 2: in many different ways. So no particular trade was dominant
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  Speaker 2: in the portfolio. And always I was focused very much
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  Speaker 2: on protecting the downside. So in that sense, the risk
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  Speaker 2: management was integrated into the portfolio construction phase of the strategy.
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  Speaker 2: And I must say, going from SARS to SAC, in
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  Speaker 2: each of these places, I learned different things. So SARS
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  Speaker 2: was a big macro shop, so it was a great
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  Speaker 2: school from that perspective. But SAC was so focused on
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  Speaker 2: risk management. So even someone like me coming from academia
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  Speaker 2: where risk management is an obvious thing to focus on,
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  Speaker 2: I had to spend a lot of time refining that
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  Speaker 2: part of my strategy in order to be able to
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  Speaker 2: do well and, you know, succeed there. So that's really
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  Speaker 2: how it was happening. It would be small trades, and
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  Speaker 2: then I would do volatility targeting at the portfolio level.
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  Speaker 2: And then if I would see that I had many
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  Speaker 2: metrics by which I was tracking volatility in the markets,
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  Speaker 2: and if I would expect that the volatility going forward
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  Speaker 2: would be elevated, then I would cut the risk across
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  Speaker 2: the board at a portfolio level. So I would basically
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  Speaker 2: target the lower vol.
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  Speaker 1: Let's stay with the macro because I want to relate
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  Speaker 1: it back to some of your academic work. One of
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  Speaker 1: the things you focused on was analyzing how news about
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  Speaker 1: future economic growth relates to equity returns. But as anybody
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  Speaker 1: who's invested or traded for any length of time, getting
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  Speaker 1: the economy right is not enough to get the market right.
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  Speaker 1: How do you reconcile those two?
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  Speaker 2: Well, the market is a predictor of future economic growth.
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  Speaker 1: Mm-hmm.
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  Speaker 2: So that's the case. And actually, relating it... And so
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  Speaker 2: it depends on the horizon over which you trade. So
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  Speaker 2: my approach was never, you know, day trading. It was
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  Speaker 2: more longer-term themes that were playing in the portfolio. And
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  Speaker 2: so from that perspective, having this more long-term aspect in
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  Speaker 2: the portfolio construction was helpful, but it was complemented with
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  Speaker 2: shorter-term themes. So we had a blend of different ideas
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  Speaker 2: that were playing out over different horizons.
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  Speaker 1: Really, really interesting. Coming up, we continue our conversation with
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  Speaker 1: Maria Vassalu, head of PICTE's Research Institute, discussing the academic
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  Speaker 1: theory behind investing. I'm Barry Ritholtz. You're listening to Masters
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  Speaker 1: in Business on Bloomberg Radio. I'm Barry Ritholtz. You're listening
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  Speaker 1: to Masters in Business on Bloomberg Radio. My guest is Dr.
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  Speaker 1: Maria Vasalu. She is head of PICTE's Research Institute, which
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  Speaker 1: runs essentially all of the academic market research for the firm,
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  Speaker 1: which manages nearly a trillion dollars in assets. So you
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  Speaker 1: joined PICTE in January 2020. I mentioned earlier the firm
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  Speaker 1: was founded in 1805, but you joined specifically to build
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  Speaker 1: the research institute from scratch. What was that like, starting from,
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  Speaker 1: you know, the ground floor? That sounds like quite a lift.
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  Speaker 2: Yes, and that was really the attraction of this opportunity,
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  Speaker 2: the fact that PICTE had this vision of creating this
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  Speaker 2: institute for quite a while. And being a firm that
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  Speaker 2: has been around for a long time, they have weathered
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  Speaker 2: many cycles in the markets and the geopolitical developments, obviously.
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  Speaker 2: So they're very careful and deliberate about the decisions they make.
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  Speaker 2: But once they make a decision, they really go for
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  Speaker 2: it in a very... high conviction way. So eventually, you know,
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  Speaker 2: they were looking for someone for a while. Eventually we
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  Speaker 2: met and I found the idea fascinating to start this
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  Speaker 2: internal think tank effectively that would be focused on the
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  Speaker 2: study of long-term trends that can affect the way we
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  Speaker 2: approach investing. So effectively, we focus on three areas, geopolitics,
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  Speaker 2: macro and portfolio implementation issues. We have a team of
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  Speaker 2: PhDs that are dedicated to the Institute, and we do
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  Speaker 2: academic-level research. We don't focus on short-term themes, so we're
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  Speaker 2: not going to be the ones to tell you whether
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  Speaker 2: the market will go up or down next month or
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  Speaker 2: where S & P will end the year or things
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  Speaker 2: like that. But we focus more on long-term themes that
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  Speaker 2: could be important for how we approach investing, how we
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  Speaker 2: develop our investment processes, how we develop our product offerings,
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  Speaker 2: if you like, and really provide new insights to our
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  Speaker 2: clients and investment professionals.
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  Speaker 1: So I'm fascinated about how you balance all this. So
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  Speaker 1: you've said, both here and elsewhere, The focus is long-term.
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  Speaker 1: It's macro. It's geopolitical. How do you prevent your whole
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  Speaker 1: research team from getting sucked into the daily news cycle,
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  Speaker 1: especially here in the U.S.? But globally, there's so much news.
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  Speaker 1: It's so noisy and distracting. How do you keep everybody focused?
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  Speaker 2: Well, first of all, the Institute is a group-level function.
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  Speaker 2: We cut across all the different businesses of Big Tech.
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  Speaker 2: But under us or in parallel to us, each business
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  Speaker 2: line has its own economists and strategists that focus more
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  Speaker 2: on the short term and the news flow. So this
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  Speaker 2: is not our job. We have other people doing that.
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  Speaker 2: So we take a step back. All the members of
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  Speaker 2: my team are PhDs. And we have an agenda of
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  Speaker 2: different topics we work on. And we do basically academic
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  Speaker 2: level work. But it's not academic in terms of its rigor.
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  Speaker 2: But it's not academic in the sense of being abstract.
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  Speaker 2: We always ask the question, what does this mean for investing?
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  Speaker 2: What does this mean for our business? What does this
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  Speaker 2: mean about how we should plan our future as a firm?
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  Speaker 2: So that's the main difference. And then I cooperate with
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  Speaker 2: the different businesses.
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  Speaker 1: So I want to talk about some of the academic
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  Speaker 1: and PICTE research you've done and how all of this
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  Speaker 1: eventually is expressed in portfolio allocations. Your 04 paper is
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  Speaker 1: one of the best known in the Journal of Finance,
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  Speaker 1: Default Risk and Equity Returns, where you effectively argue that
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  Speaker 1: size and value is a default effect, meaning the small
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  Speaker 1: cap and value premium show up in the high default
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  Speaker 1: risk corners of the market, if I'm not oversimplifying that.
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  Speaker 1: Walk us through what you found. How was it received
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  Speaker 1: at the time, and how do you express that with
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  Speaker 1: actual dollars?
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  Speaker 2: Well, that's part of my academic work. It's not part
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  Speaker 2: of the institute work that we're doing now. Back then,
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  Speaker 2: my focus in academia was to explain asset pricing anomalies
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  Speaker 2: through economic factors. So what we've done there was, and
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  Speaker 2: I did it with a PhD student of mine, So
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  Speaker 2: what we've done was to create a measure of default risk,
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  Speaker 2: which was effectively the Mertens measure of risk. We're calculating
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  Speaker 2: probabilities of default and creating a measure about it and
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  Speaker 2: using this measure to basically show that that there was
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  Speaker 2: this big debate about small-cap effects at the time and
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  Speaker 2: what is driving it. Is it an anomaly? Is there
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  Speaker 2: a risk-based explanation? And our approach was to develop a
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  Speaker 2: default probability measure based on Merton's model, where we would
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  Speaker 2: measure the default risk of different types of stocks and
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  Speaker 2: focus then on the small caps. And what we would
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  Speaker 2: show is that the small caps will always... load highly
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  Speaker 2: on this default measure. But as the default probability in
• 20:29
  Speaker 2: the markets will vary over time with the business cycle,
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  Speaker 2: when default risk was low in the economy, the effect
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  Speaker 2: will be diluted. So you wouldn't really see the small
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  Speaker 2: cap effect. And when the default probability will rise, then
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  Speaker 2: that will become more pronounced. And once we were using
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  Speaker 2: that measure, we could effectively explain away all the small-cap effects.
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  Speaker 2: So that was part of this research. Now, at the Institute,
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  Speaker 2: we are focusing on other work, and we are also
• 21:05
  Speaker 2: going through a transformative time in our history because we
• 21:13
  Speaker 2: are moving away from the world of globalization, the dominance
• 21:18
  Speaker 2: of the U.S. and the world in a way that
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  Speaker 2: was established after the end of the Cold War to
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  Speaker 2: a new equilibrium that is yet to be defined. And
• 21:30
  Speaker 2: this is really a period of high uncertainty, a period
• 21:36
  Speaker 2: where a lot of things are happening and where, to
• 21:39
  Speaker 2: be a good investor, you need to also focus on
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  Speaker 2: geopolitics and macro. You cannot do your job well by
• 21:47
  Speaker 2: just focusing on the particular asset class that you manage.
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  Speaker 2: And this is where the institute comes in. We developed
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  Speaker 2: a framework to understand what is happening in the world
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  Speaker 2: and how the different pieces fit together from geopolitical initiatives
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  Speaker 2: and policies to economic policies to what is happening in
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  Speaker 2: terms of the competition between China and the US, the
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  Speaker 2: rest of the world, the position of the US, the
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  Speaker 2: role of technology, the role of demographics. industrial policies and
• 22:29
  Speaker 2: so on.
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  Speaker 1: So let's talk about some of the Pictet Institute's published
• 22:33
  Speaker 1: studies over the past couple of years. In 2024, the
• 22:39
  Speaker 1: study was titled The Critical Role of U.S. Debt Sustainability
• 22:43
  Speaker 1: in World Financial Architecture. And that was before we had
• 22:48
  Speaker 1: the tariffs, before we had the Iran War, before the
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  Speaker 1: current administration repositioned the U.S. in a somewhat aggressively isolationist way.
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  Speaker 1: Tell us what you found. What is the contested leadership?
• 23:06
  Speaker 1: What is the power battle, the dynamic between U.S. and China?
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  Speaker 1: How does that all manifest in markets? What does it
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  Speaker 1: mean for the average investor?
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  Speaker 2: After the end of the Cold War, there was a
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  Speaker 2: global financial arrangement that was put in place by which
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  Speaker 2: the rest of the world will produce surpluses. They will
• 23:32
  Speaker 2: ship those surpluses to the US. And in exchange, the
• 23:36
  Speaker 2: US will provide to the rest of the world the
• 23:39
  Speaker 2: US dollar as a reference currency, US safe assets in
• 23:45
  Speaker 2: terms of US treasuries, and US equity returns. And this
• 23:51
  Speaker 2: arrangement was working so long as the US was the
• 23:57
  Speaker 2: undisputable leader in technology. Why? Because for the US to
• 24:02
  Speaker 2: play that role, it had to issue debt. It had
• 24:06
  Speaker 2: to run deficits. And as we know from economics and
• 24:11
  Speaker 2: the Triffin Dilemma, this is what eventually leads to the
• 24:17
  Speaker 2: demise of the currency, reference currency providers, because you have
• 24:24
  Speaker 2: to issue debt in order to become a dominant hegemon
• 24:31
  Speaker 2: in the global financial system. But as you issue more
• 24:36
  Speaker 2: and more debt, you erode your own credit worthiness, and
• 24:40
  Speaker 2: eventually you lose that privilege.
• 24:42
  Speaker 1: Is that inevitable for, because we saw it, Go back
• 24:46
  Speaker 1: over the centuries. First it was Amsterdam, then it was London,
• 24:49
  Speaker 1: then it was New York. There was dalliances with Tokyo,
• 24:55
  Speaker 1: and people have talked about Beijing as possibly the next leader.
• 24:59
  Speaker 1: Is it just inevitable that all empires crumble and every
• 25:05
  Speaker 1: country with the mantle of leadership eventually puts itself in
• 25:10
  Speaker 1: so much debt they no longer can lead the global economy? Well.
• 25:14
  Speaker 2: This is exactly the point of this paper, and this
• 25:16
  Speaker 2: is what is different with the U.S. The U.S. has
• 25:20
  Speaker 2: done all these things, but the smart thing that the U.S.
• 25:24
  Speaker 2: has done over its history is to focus on innovation
• 25:28
  Speaker 2: and technology. And that effectively works as a collateral for
• 25:34
  Speaker 2: the debt it issues because What is the problem with
• 25:39
  Speaker 2: issuing a lot of debt? Well, beyond a certain point,
• 25:42
  Speaker 2: the markets start doubting whether you will ever be able
• 25:45
  Speaker 2: to repay that debt. But if you have a great
• 25:49
  Speaker 2: machinery of producing innovation and technology that fuels economic growth,
• 25:55
  Speaker 2: then that effectively will be your guarantee that you will
• 25:59
  Speaker 2: be able to service your debt. And so U.S. has
• 26:03
  Speaker 2: been the indisputable leader in technology all these years until recently, well,
• 26:11
  Speaker 2: we were seeing this coming, But it has become a
• 26:14
  Speaker 2: real issue in the recent years. Now we see China
• 26:21
  Speaker 2: seriously challenging the leadership of the US as a technology provider.
• 26:28
  Speaker 2: And the moment the US loses its leadership, the whole
• 26:34
  Speaker 2: global financial architecture and this arrangement that we describe crumbles.
• 26:43
  Speaker 2: And so for the US to maintain its leadership in
• 26:47
  Speaker 2: technology and innovation is not an ego-driven pursuit. It's really
• 26:54
  Speaker 2: existential in nature. And I think this is what a
• 26:58
  Speaker 2: lot of people are missing. So this competition between the
• 27:02
  Speaker 2: US and China is not going to go away when
• 27:07
  Speaker 2: the administration changes, for instance.
• 27:10
  Speaker 1: So that's really fascinating. When I look at the history
• 27:14
  Speaker 1: of the past, I don't know, the entire post-war era,
• 27:18
  Speaker 1: it began with U.S. as an industrial power. Eventually that migrated, Germany, Japan,
• 27:26
  Speaker 1: and then Korea. Then it was a technology, semiconductor software, Internet.
• 27:33
  Speaker 1: That still the U.S. has maintained somewhat of a lead.
• 27:37
  Speaker 1: Now we look at A.I., And yet in every one
• 27:41
  Speaker 1: of these areas, China has very aggressively pushed into the space.
• 27:46
  Speaker 1: The central government has funded lots and lots of entrepreneurs
• 27:51
  Speaker 1: and businesses. There's a big industrial policy there. Let's say
• 27:58
  Speaker 1: in the next 10 years, China passes the U.S. in
• 28:01
  Speaker 1: terms of technological leadership. What does that mean for the U.S.
• 28:08
  Speaker 1: as an economic power What does it mean for the
• 28:11
  Speaker 1: people who are sitting on a lot of bonds and
• 28:13
  Speaker 1: fixed income, the debt of the U.S.
• 28:16
  Speaker 2: Government? Well, that's really the risk ahead. And how we
• 28:22
  Speaker 2: manage the period between now and the next five to
• 28:26
  Speaker 2: ten years, I'm not even sure we have. 10 years
• 28:30
  Speaker 2: ahead of us. I think a lot of things will
• 28:32
  Speaker 2: play out over the next five years. So how we
• 28:36
  Speaker 2: manage this period will be key in terms of the
• 28:40
  Speaker 2: standing of the US and the global geopolitical pecking order.
• 28:47
  Speaker 2: which will have profound implications for the global financial system,
• 28:51
  Speaker 2: the standing of the U.S., the standing of the U.S. dollar,
• 28:55
  Speaker 2: of U.S. Treasuries, and so on. So I think we
• 28:59
  Speaker 2: are really under pressure to make the right decisions now. Now,
• 29:07
  Speaker 2: how did we get to that point? We got to
• 29:11
  Speaker 2: that point because the emphasis was globalization, on economic efficiency.
• 29:18
  Speaker 2: So it was all driven by low cost of production. U.S.
• 29:24
  Speaker 2: was happy to produce the ideas but then generate the goods,
• 29:30
  Speaker 2: produce the goods at the lowest cost wherever that may
• 29:34
  Speaker 2: have been. China was always very far in terms of
• 29:41
  Speaker 2: its policies. So it always insisted that when they produce something,
• 29:48
  Speaker 2: There will be a knowledge transfer. They would learn from that.
• 29:53
  Speaker 2: There will be JVs with local firms. So it had
• 29:56
  Speaker 2: always a very strong industrial policy as part of its agenda.
• 30:02
  Speaker 2: So it managed to learn and evolve over time. And
• 30:06
  Speaker 2: the other thing that happened was China was very strategic
• 30:12
  Speaker 2: in accumulating key resources around the world. that either it
• 30:18
  Speaker 2: control directly or indirectly or control the processing of these
• 30:23
  Speaker 2: resources that are important for industrial production, for innovation, for
• 30:30
  Speaker 2: the new technologies and so on. So now we are
• 30:33
  Speaker 2: in a situation where China is not at the same
• 30:38
  Speaker 2: level as the U.S. in terms of innovation production, even
• 30:43
  Speaker 2: though the patterns, the number of patterns may give a
• 30:46
  Speaker 2: different idea, but I would say this is misleading. But
• 30:51
  Speaker 2: it controls so many of the factors that one needs
• 30:57
  Speaker 2: to be a producer of these technologies going forward that
• 31:02
  Speaker 2: effectively it controls a lot of this process. And so
• 31:07
  Speaker 2: a lot of the developments we see also at the
• 31:09
  Speaker 2: geopolitical level have to do with that, how to address this.
• 31:15
  Speaker 1: So for most of my lifetime, the U.S. deficit and
• 31:20
  Speaker 1: debt has been expanding, and it more or less, there
• 31:25
  Speaker 1: were the usual deficit hawks, chicken hawks always complaining about it,
• 31:30
  Speaker 1: but it felt manageable. It's only in recent years... And
• 31:36
  Speaker 1: I want to talk about policy, not politics. But it's
• 31:39
  Speaker 1: only in recent years where we saw a couple of
• 31:42
  Speaker 1: giant tax cuts that really opened up the deficit. The
• 31:47
  Speaker 1: tariffs sent inflation higher. The war in Iran sent inflation higher.
• 31:53
  Speaker 1: That made servicing the debt much more challenging and at
• 31:57
  Speaker 1: the same time created even more spending on the military side.
• 32:03
  Speaker 1: It kind of sounds like The risk factor you envision
• 32:09
  Speaker 1: is the result of a series of unforced errors. Is
• 32:12
  Speaker 1: that a fair policy analysis? Did we shoot ourselves in
• 32:17
  Speaker 1: the foot over the past couple of years?
• 32:18
  Speaker 2: I think the U.S. and Europe have been very naive
• 32:22
  Speaker 2: in terms of their long-term economic policies, letting their countries deindustrialize.
• 32:30
  Speaker 1: In other words, just outsourcing manufacturing products. To China, to Korea,
• 32:36
  Speaker 1: to Turkey, to Vietnam, to anyone that would do it cheaper.
• 32:40
  Speaker 2: Yes.
• 32:40
  Speaker 1: Well, we saw it during COVID where you couldn't even
• 32:43
  Speaker 1: buy masks or toilet paper because nothing was made here.
• 32:47
  Speaker 2: Exactly. So I think if I remember correctly, after the
• 32:50
  Speaker 2: Second World War, U.S. manufacturing accounted for about 45 percent
• 32:57
  Speaker 2: of global manufacturing. And now it's down to 19 percent.
• 33:01
  Speaker 2: Europe is in the process of also de-industrializing. It's not
• 33:06
  Speaker 2: just that all this manufacturing moves to other countries and
• 33:09
  Speaker 2: primarily to China, but it's also that increases the vulnerabilities
• 33:15
  Speaker 2: of this economy. So now we have moved to a
• 33:18
  Speaker 2: world where the focus has moved from economic efficiency to
• 33:23
  Speaker 2: economic resilience. And that means that the mixture of services
• 33:29
  Speaker 2: and manufacturing has to be redressed. And actually, the current
• 33:34
  Speaker 2: technologies help in that respect. At the same time, you
• 33:41
  Speaker 2: see that the demographics are also changing around the world,
• 33:45
  Speaker 2: and that also has an effect.
• 33:48
  Speaker 1: Let's talk about that because you've published several studies on that.
• 33:52
  Speaker 1: What's going on both in the U.S. and Europe demographically?
• 33:56
  Speaker 1: We've seen the fertility rates plummet, the number of people
• 34:01
  Speaker 1: having children drop significantly, and the whole society aging. What
• 34:06
  Speaker 1: does that mean from an investment perspective?
• 34:09
  Speaker 2: What it means from an investment perspective is that Successful
• 34:15
  Speaker 2: investments going forward would have to basically fulfill three criteria.
• 34:24
  Speaker 2: First of all, they should use technology to improve productivity.
• 34:30
  Speaker 2: Productivity has been low at various parts of the world,
• 34:33
  Speaker 2: particularly in Europe. But with the current technologies, there is
• 34:38
  Speaker 2: an opportunity to increase productivity even with reduced use of labor,
• 34:45
  Speaker 2: which in a way mitigates some of the effects of
• 34:49
  Speaker 2: the declining demographics, these new investments should cater to the
• 34:54
  Speaker 2: evolving demographics in the sense that It should cater to
• 34:58
  Speaker 2: the needs of this cohort of people that age over time.
• 35:04
  Speaker 2: And they should be developed in an economic environment that
• 35:10
  Speaker 2: has the infrastructure to allow this potential productivity gains to
• 35:18
  Speaker 2: get realized. So as an investor, you can invest at
• 35:23
  Speaker 2: various points of this process. It could be in the infrastructure,
• 35:27
  Speaker 2: it could be in the development of the technologies, it
• 35:30
  Speaker 2: could be applications of these technologies and so on. But
• 35:35
  Speaker 2: when we talk about technology, we shouldn't just think in
• 35:38
  Speaker 2: terms of the tech firms. A lot of the productivity
• 35:43
  Speaker 2: gains will be in the use of these technologies in
• 35:47
  Speaker 2: other products. And I think some of the more, you know,
• 35:51
  Speaker 2: old economy sectors, for instance, can greatly benefit from these
• 35:57
  Speaker 2: technologies and become very attractive in terms of their investment potential.
• 36:03
  Speaker 1: That's Joseph Davis at Vanguard's book, which is technology arrives
• 36:08
  Speaker 1: in two waves. First, the tech companies, then everybody else
• 36:11
  Speaker 1: that sees productivity gains. But I want to stay focused
• 36:16
  Speaker 1: on Europe and how different they are from the U.S.
• 36:21
  Speaker 1: in terms of productivity. First, how much of that is
• 36:25
  Speaker 1: purely cultural knowledge? And second, do you really want to
• 36:28
  Speaker 1: give that up? I'm so envious of the lifestyle in
• 36:33
  Speaker 1: Italy and France and Greece where it just feels so
• 36:37
  Speaker 1: much more relaxed and less stressful than the United States,
• 36:41
  Speaker 1: especially New York, San Francisco, L.A., Chicago, any of the
• 36:45
  Speaker 1: big cities, just a go, go, go. I don't get
• 36:48
  Speaker 1: that vibe in the major cities in Europe.
• 36:52
  Speaker 2: Yeah, so I think there is a middle road. It
• 36:55
  Speaker 2: doesn't mean that these countries have to change their culture,
• 36:59
  Speaker 2: but they have to improve their efficiency. They have to
• 37:04
  Speaker 2: invest in productivity gains, which have been very low. Even
• 37:09
  Speaker 2: if you look at Germany, for instance, which is the
• 37:12
  Speaker 2: manufacturing heart of Europe, productivity has been effectively zero.
• 37:19
  Speaker 1: No gains at all for the past couple of decades.
• 37:22
  Speaker 2: Yeah, very, very low gains and certainly not in total
• 37:27
  Speaker 2: factor productivity.
• 37:29
  Speaker 1: Even with automation and software improvements and robotics, Germany hasn't
• 37:35
  Speaker 1: seen an uptick in productivity. That's amazing.
• 37:37
  Speaker 2: Not really. And you can see that also in real
• 37:41
  Speaker 2: wages that haven't gone up. And so that increases the
• 37:46
  Speaker 2: income inequality in the country. But they can, I think
• 37:52
  Speaker 2: there is the realization that they need to invest in
• 37:56
  Speaker 2: those things. And at the same time, there are also
• 38:00
  Speaker 2: certain constraints because these technologies also require sufficient cheap energy.
• 38:09
  Speaker 2: And Europe hasn't really invested enough.
• 38:13
  Speaker 1: They seem to have embraced more electrification and solar and
• 38:17
  Speaker 1: wind and geothermal than the U.S. has, but not nearly
• 38:21
  Speaker 1: as much as China has.
• 38:22
  Speaker 2: Yes, and this is all nice and good. I don't
• 38:27
  Speaker 2: have anything against the green forms of energy, but just
• 38:34
  Speaker 2: like in the case of the structure of an economy,
• 38:38
  Speaker 2: you need to have a diversified pool of energy resources.
• 38:44
  Speaker 2: You need effectively a portfolio approach to energy resources, and
• 38:49
  Speaker 2: that should include also other sources of energy, including nuclear.
• 38:55
  Speaker 2: And it was a mistake that Germany got out of
• 38:59
  Speaker 2: nuclear power. We see the benefits of nuclear power in France,
• 39:04
  Speaker 2: for instance.
• 39:05
  Speaker 1: 90 plus percent of their energy comes from nuclear.
• 39:08
  Speaker 2: Exactly. For the foreseeable future, I don't think we can
• 39:12
  Speaker 2: walk away completely from fossil fuel. This is going to
• 39:16
  Speaker 2: be in the mix. But we see now what's happening
• 39:19
  Speaker 2: with Hormuz and.
• 39:22
  Speaker 2: And Russia. And Russia. So having alternative ways to provide
• 39:27
  Speaker 2: cheap energy is very, very important. And you can really
• 39:32
  Speaker 2: invest in automation technology if you don't have access to
• 39:38
  Speaker 2: cheap energy and abandoned energy.
• 39:40
  Speaker 1: Last question about Europe. The changes in the United States
• 39:44
  Speaker 1: have been leading Europe to consider reinvesting and raising their
• 39:51
  Speaker 1: own defense spending, and especially with homegrown manufacturing and their
• 40:00
  Speaker 1: own various defense products, what does that mean? They've been
• 40:06
  Speaker 1: reliant on the U.S. for so long. The change in
• 40:10
  Speaker 1: the U.S. relationship to NATO and just who the U.S.,
• 40:15
  Speaker 1: or at least who this administration is, considers an ally.
• 40:18
  Speaker 1: What does this mean for spending if more and more
• 40:22
  Speaker 1: of European spending has to be steered towards defense?
• 40:27
  Speaker 2: Well, first of all, in terms of U.S. interests, Europe
• 40:34
  Speaker 2: is not as strategic as it used to be. It's
• 40:37
  Speaker 2: important to have it as an ally. But in the past,
• 40:42
  Speaker 2: the main adversary of the U.S. was Russia or the
• 40:45
  Speaker 2: USSR before that. Now the competition has moved to China.
• 40:51
  Speaker 2: So the role of Europe in that respect has been degraded.
• 40:56
  Speaker 2: That's number one. Number two, Europe is a very affluent
• 41:01
  Speaker 2: part of the world. It doesn't need this military power.
• 41:06
  Speaker 2: subsidy that he has been receiving since the Second World War.
• 41:12
  Speaker 2: Not spending 3% of their GDP over 80 years on
• 41:16
  Speaker 2: military has allowed them to build their social safety net,
• 41:24
  Speaker 2: free education at a very high level. free health care
• 41:29
  Speaker 2: and so on. On the other hand, of course, Europe
• 41:33
  Speaker 2: has been investing a lot of its surpluses to the U.S.,
• 41:37
  Speaker 2: but most of these surpluses were invested in the stock
• 41:42
  Speaker 2: market and in treasuries. So they have been receiving the
• 41:47
  Speaker 2: dividends from them that have been supplementing the growth rates
• 41:51
  Speaker 2: of Europe. And this effort from US administrations to really
• 41:57
  Speaker 2: convince Europe to increase their spending on military is not
• 42:02
  Speaker 2: a new thing. It started with President Obama, even with
• 42:06
  Speaker 2: President Bush, I would say, before that. But the tone
• 42:10
  Speaker 2: was gentler and less pushy, I would say. The current
• 42:18
  Speaker 2: administration has been much more vocal about it. And in
• 42:22
  Speaker 2: a way, I think it led to an overdue wake-up
• 42:28
  Speaker 2: call for Europe because Europe now starts debating how they
• 42:33
  Speaker 2: are going to structure their economies going forward, what they
• 42:38
  Speaker 2: need to do to become more self-sufficient. And in a way,
• 42:43
  Speaker 2: when you have a reordering of countries in terms of
• 42:48
  Speaker 2: their geopolitical importance, Being able to stand on your own
• 42:54
  Speaker 2: makes you also more valuable as an ally to other
• 42:59
  Speaker 2: countries and especially to the U.S. So I don't think
• 43:03
  Speaker 2: that this is necessarily a bad thing. Now, in terms
• 43:07
  Speaker 2: of the military, if you leave aside the fronts where
• 43:12
  Speaker 2: the French defense system is independent of NATO, the rest
• 43:17
  Speaker 2: are all linked to the center command of NATO. So
• 43:21
  Speaker 2: they can't really function on their own unless they go
• 43:25
  Speaker 2: through the NATO command, which is controlled by the US.
• 43:29
  Speaker 2: So this is a major issue they have. So of course,
• 43:33
  Speaker 2: they can produce some drones or some other equipment, but
• 43:37
  Speaker 2: they can't really work together as different countries as they
• 43:43
  Speaker 2: stand now unless they build a new framework to integrate
• 43:48
  Speaker 2: their military.
• 43:49
  Speaker 1: Really interesting. Coming up, we continue our conversation with Maria Vassallo,
• 43:55
  Speaker 1: head of Pictet's Research Institute, discussing how to turn theory
• 44:00
  Speaker 1: into practice. I'm Barry Ritholtz. You're listening to Masters in
• 44:04
  Speaker 1: Business on Bloomberg Radio. I'm Barry Ritholtz. You're listening to
• 44:09
  Speaker 1: Masters in Business on Bloomberg Radio. My extra special guest
• 44:13
  Speaker 1: is Dr. Maria Vasalu. She's head of Pictet's Research Institute.
• 44:18
  Speaker 1: The firm was founded in 1805 and manages nearly a
• 44:22
  Speaker 1: trillion dollars in assets. So I'm fascinated by the concept
• 44:28
  Speaker 1: of taking all of this original academic research and expressing
• 44:33
  Speaker 1: it in a portfolio. Walk us through the process.
• 44:37
  Speaker 2: How does a.
• 44:38
  Speaker 1: Research finding actually become a portfolio decision?
• 44:43
  Speaker 2: So the role of the Institute is to provide some
• 44:47
  Speaker 2: new insights or a new way of looking at what's
• 44:51
  Speaker 2: happening in the world. And then one of my functions
• 44:57
  Speaker 2: is also to discuss those findings with our investment teams
• 45:03
  Speaker 2: and see how they can affect a different products, the
• 45:09
  Speaker 2: different ways we invest, and so on. I'm not a
• 45:14
  Speaker 2: risk taker anymore, so I'm not going to incorporate them
• 45:19
  Speaker 2: into a particular strategy. But I am working with our
• 45:23
  Speaker 2: investment professionals to help them understand what we are doing
• 45:29
  Speaker 2: or express those findings into potentially useful things for their
• 45:40
  Speaker 2: investment process. So, for instance, a lot of our work
• 45:47
  Speaker 2: points to the fact that this compartmentalization we have in
• 45:52
  Speaker 2: countries between developed markets and emerging markets becomes increasingly obsolete.
• 45:59
  Speaker 1: Explain that, because that's so fascinating. You would think there's
• 46:03
  Speaker 1: a huge difference between Greece and Japan, between Turkey and
• 46:08
  Speaker 1: the United States. How are those distinctions becoming less important?
• 46:14
  Speaker 2: Well, there are big differences among those countries that you mentioned,
• 46:20
  Speaker 2: but it's not a matter of where they are now,
• 46:22
  Speaker 2: but it's a matter of what is likely to affect
• 46:26
  Speaker 2: growth going forward. So we have those important factors that
• 46:34
  Speaker 2: are affecting growth that have to do with... productivity, with
• 46:40
  Speaker 2: access to important commodities, with access to energy, with demographics.
• 46:51
  Speaker 2: And so the mix is changing. And that's why it's
• 46:55
  Speaker 2: also important for Europe or other parts of the world
• 46:59
  Speaker 2: not to neglect how their economic structure evolves over time,
• 47:06
  Speaker 2: because the fact that this part of the world is
• 47:10
  Speaker 2: developed does not necessarily mean that it will always stay
• 47:14
  Speaker 2: at that high level of development going forward. So what
• 47:19
  Speaker 2: defines a developed economy? It's their GDP growth. It's their trade.
• 47:28
  Speaker 2: it's their manufacturing, it's their use of technology. But those
• 47:35
  Speaker 2: five elements are changing. So technology is not necessarily produced
• 47:43
  Speaker 2: all in the currently defined developed markets. There are economists
• 47:49
  Speaker 2: that consider emerging. China shouldn't be an emerging economy, but
• 47:55
  Speaker 2: it is still considered that it's a leader economy. in technology.
• 48:01
  Speaker 2: On the other hand, you have various bottlenecks in economic growth,
• 48:08
  Speaker 2: which have to do with access to minerals, to commodities,
• 48:13
  Speaker 2: to energy. So some of the emerging markets that have
• 48:18
  Speaker 2: control over such resources can become much more important going forward.
• 48:26
  Speaker 2: So there is a change in that respect. We think
• 48:31
  Speaker 2: that if you look at what defines a middle power
• 48:36
  Speaker 2: or a great power, the factors that define them are
• 48:41
  Speaker 2: changing going forward.
• 48:43
  Speaker 1: So let's stay with that for a second because you've
• 48:45
  Speaker 1: said the investment playbook needs a complete reset. What we've
• 48:51
  Speaker 1: been dancing around is little changes around the edges, but
• 48:55
  Speaker 1: you're really saying, hey, we need a clean sheet. We
• 48:58
  Speaker 1: have to rethink the geopolitics of the world are changing.
• 49:02
  Speaker 1: The macro side of the world is changing. So what
• 49:06
  Speaker 1: are the assumptions that the old playbook had built into
• 49:11
  Speaker 1: it that have to be thrown away? What is that
• 49:13
  Speaker 1: clean sheet, new investment playbook look like?
• 49:18
  Speaker 2: So first of all, there is a reordering of countries
• 49:22
  Speaker 2: in terms of their geopolitical economic importance. And what one
• 49:26
  Speaker 2: needs to focus is not what has happened in the past.
• 49:29
  Speaker 2: The past is becoming increasingly less helpful in predicting the future.
• 49:36
  Speaker 2: One needs to see what are the driving forces of
• 49:39
  Speaker 2: growth going forward and which countries control or have already
• 49:45
  Speaker 2: in their possession or have the ability to develop those
• 49:50
  Speaker 2: elements that will lead to growth going forward. So this
• 49:53
  Speaker 2: is really the key. And so one needs to focus
• 49:58
  Speaker 2: on who is likely to grow going forward. Commodities and
• 50:04
  Speaker 2: technology are important factors in the standing of these countries
• 50:12
  Speaker 2: going forward. So that's one thing. The second element is
• 50:18
  Speaker 2: where you're standing in the spectrum of technology. Are you
• 50:21
  Speaker 2: a producer of innovation? Are you a competent adapter of innovation?
• 50:26
  Speaker 2: Are you someone who is providing the inputs for the
• 50:32
  Speaker 2: development of this innovation? And so on. And the third
• 50:37
  Speaker 2: one is demographics. How you use your demographics to promote
• 50:44
  Speaker 2: your growth and effectively ensure that productivity growth will continue
• 50:52
  Speaker 2: going forward.
• 50:53
  Speaker 1: One of the themes I'm hearing over and over from
• 50:55
  Speaker 1: you is economic growth seems to cure a lot of problems.
• 51:00
  Speaker 2: Yes.
• 51:00
  Speaker 1: And if you can grow fast enough, it offsets geopolitics,
• 51:06
  Speaker 1: it offsets deficits, it offsets almost everything.
• 51:09
  Speaker 2: Exactly. And that has always been the case for the U.S.
• 51:13
  Speaker 1: U.S.
• 51:13
  Speaker 2: Has never really paid off its debt even after the
• 51:16
  Speaker 2: Second World War. It just grew at high rates and
• 51:21
  Speaker 2: reduces debt-to-GDP ratio. And actually, in all fairness, U.S. has
• 51:26
  Speaker 2: been the only developed economy that has grown a 2%
• 51:32
  Speaker 2: real growth rate for the past several decades. So this
• 51:38
  Speaker 2: is quite spectacular. And when you look also at the debt,
• 51:43
  Speaker 2: as you mentioned before, of the U.S., U.S. had a
• 51:47
  Speaker 2: pretty modest level of debt until the financial crisis. So
• 51:52
  Speaker 2: there have been two episodes that led to the increase
• 51:56
  Speaker 2: of debt. One is the financial crisis, and the second
• 51:59
  Speaker 2: one is COVID. And I would say that the second time,
• 52:04
  Speaker 2: that was a bit of a misguided increase of debt.
• 52:09
  Speaker 2: I think there was way too much accommodation, fiscal accommodation
• 52:15
  Speaker 2: thrown in the economy together with a lot of monetary
• 52:19
  Speaker 2: accommodation that eventually led to this inflationary episode.
• 52:25
  Speaker 1: I want to just jump in because the criticism... of
• 52:29
  Speaker 1: the spending post-financial crisis was it was all focused on
• 52:34
  Speaker 1: Wall Street banks and brokers, and they ignored the average person, homeowners,
• 52:41
  Speaker 1: mortgage owners, who were also suffering from the same problem.
• 52:47
  Speaker 1: The overcompensation in COVID was, let's just flood the economy,
• 52:51
  Speaker 1: and I want to remind people The CARES Act 1
• 52:57
  Speaker 1: and CARES Act 2 under President Trump, CARES Act 3
• 53:01
  Speaker 1: and the infrastructure bill under President Biden was the single
• 53:05
  Speaker 1: biggest fiscal stimulus as a percentage of GDP since World
• 53:09
  Speaker 1: War II. I mean, it was people don't realize how
• 53:12
  Speaker 1: unprecedented that fiscal surge was.
• 53:15
  Speaker 2: Yes. And at the same time, the Fed cut rates
• 53:18
  Speaker 2: to zero. They started QE. And so you had stimulus
• 53:24
  Speaker 2: on both sides. And there's no surprise that we ended
• 53:31
  Speaker 2: up with inflation.
• 53:33
  Speaker 1: So let's stay with the U.S. and debt. You've called
• 53:38
  Speaker 1: the United States the ultimate too big to fail. And
• 53:42
  Speaker 1: I've said the main risk to U.S. debt sustainability is geopolitical,
• 53:47
  Speaker 1: not simply numbers. Explain that a little bit. What does
• 53:51
  Speaker 1: that mean for fixed income investors?
• 53:54
  Speaker 2: First of all, we were used to very low rates
• 53:58
  Speaker 2: because of financial repression. So the yield curves that most
• 54:02
  Speaker 2: people active in the markets are currently used to are
• 54:07
  Speaker 2: rates that were established under the involvement of the Fed
• 54:15
  Speaker 2: by buying at the different parts of the curve, treasuries,
• 54:20
  Speaker 2: and so on. the rates weren't really reflecting reality. The
• 54:25
  Speaker 2: purpose was to push investors out the yield curve and
• 54:29
  Speaker 2: take risks. So as the Fed started stepping back, it's
• 54:35
  Speaker 2: normal to expect the yield curve to start becoming upward sloping.
• 54:40
  Speaker 2: I don't personally find the stiffness of the curve particularly worrisome.
• 54:48
  Speaker 2: in terms of how steep it is. The problem is that,
• 54:53
  Speaker 2: of course, we have a high debt that needs to
• 54:56
  Speaker 2: be rolled over. And now, if you look at the
• 55:01
  Speaker 2: budget deficits, a greater part of the budget deficits goes
• 55:06
  Speaker 2: to servicing the debt. And obviously, as the yields go up,
• 55:10
  Speaker 2: that becomes more onerous. But in terms of this, if
• 55:16
  Speaker 2: you remember before the financial crisis, the 10-year was at 6%.
• 55:23
  Speaker 1: So let's talk about that because all my friends who
• 55:27
  Speaker 1: were bond managers have said, now we're just reverting back
• 55:31
  Speaker 1: to long-term average. These rates aren't high. They're just higher
• 55:36
  Speaker 1: than the financial repression rates. And a 5% 10-year yield
• 55:40
  Speaker 1: and a 6.5% or 7%. Mortgage rates, that's the average
• 55:44
  Speaker 1: for the past 50 years. It's not a crisis. Yeah.
• 55:47
  Speaker 1: It just feels that way relative to zero.
• 55:50
  Speaker 2: I agree. I completely agree. The difference is that back then,
• 55:55
  Speaker 2: the debt to GDP in the U.S. was, I don't remember.
• 55:58
  Speaker 1: Off the top of my head. 80%, 90%.
• 56:00
  Speaker 2: Even less, I think. It was, I think, even less
• 56:04
  Speaker 2: than that.
• 56:05
  Speaker 1: And now it's well over 100.
• 56:06
  Speaker 2: Yeah, so that's the main problem that we have.
• 56:11
  Speaker 1: Although, where's Japan? 220, 240?
• 56:14
  Speaker 2: Yeah, but it's different because 90% of the debt in
• 56:17
  Speaker 2: Japan is internally held.
• 56:20
  Speaker 1: Yeah.
• 56:21
  Speaker 2: And so you don't worry about refinancing that debt. In
• 56:25
  Speaker 2: the US, the foreigners hold close to 28% of US debt.
• 56:33
  Speaker 2: So there is a bit more risk. However, people only
• 56:37
  Speaker 2: focus on the extent of debt of the US. If
• 56:40
  Speaker 2: you look at all the obligations of the federal governments
• 56:44
  Speaker 2: or the governments in different parts of the world, and
• 56:47
  Speaker 2: we do that in a new study I'm working on
• 56:51
  Speaker 2: with Professor Donaldson from Columbia, where we look at reindustrialization,
• 56:57
  Speaker 2: the fiscal space that exists in different parts of the world,
• 57:00
  Speaker 2: and so on. And you add, for example, the pension
• 57:04
  Speaker 2: obligations that exist across the world. Europe scores actually higher
• 57:13
  Speaker 2: than the US. So it's one thing to focus on
• 57:18
  Speaker 2: external debt. It's another thing to focus on the total
• 57:24
  Speaker 2: obligations that these governments have.
• 57:28
  Speaker 1: So as long as we're talking about debt, I feel
• 57:30
  Speaker 1: obligated to talk about the US dollar as the reserve
• 57:35
  Speaker 1: currency of the world. As the geopolitics change, as China
• 57:41
  Speaker 1: continues to ascend, as we continue to make a series
• 57:46
  Speaker 1: of unforced errors, What does it mean for the dollar?
• 57:50
  Speaker 1: Are there any other currencies that are potential replacement? I've
• 57:54
  Speaker 1: heard people float a basket of everybody versus it. That's
• 57:58
  Speaker 1: not really reserve currency. Is it the dollar for the
• 58:01
  Speaker 1: foreseeable future?
• 58:03
  Speaker 2: There is no obvious alternative to the dollar. And it's
• 58:07
  Speaker 2: not in China's interest to make the remedy be a
• 58:12
  Speaker 2: reference currency.
• 58:13
  Speaker 1: Why is that?
• 58:14
  Speaker 2: Because they will have to run deficits. And China is
• 58:21
  Speaker 2: doing exactly the opposite. And they have capital controls. If
• 58:26
  Speaker 2: China lifts capital controls, a lot of money will leave China. And,
• 58:33
  Speaker 2: you know, then they cannot really be the manufacturer of
• 58:36
  Speaker 2: the world and produce all these surpluses. So what they
• 58:41
  Speaker 2: are doing is effectively just some trade it does with
• 58:46
  Speaker 2: other BRICS countries or other emerging market countries. They do
• 58:52
  Speaker 2: them instantly at the Remnibi. But then, you know, whether
• 58:57
  Speaker 2: this is attractive to the other side depends also... to
• 59:01
  Speaker 2: the extent that they trade, both countries trade with each other.
• 59:06
  Speaker 2: Because if China doesn't want to import anything from the
• 59:10
  Speaker 2: rest of the world, then the rest of the world
• 59:13
  Speaker 2: can't really do anything with the remedy they receive for selling.
• 59:19
  Speaker 1: Uh.
• 59:19
  Speaker 2: or from uh... you know from selling to china in
• 59:22
  Speaker 2: other words.
• 59:22
  Speaker 1: You need to be a big importer in order to
• 59:24
  Speaker 1: be the reserve currency you need.
• 59:27
  Speaker 2: To be a big importer uh... so and you need
• 59:32
  Speaker 2: to be a producer of safe assets because if you
• 59:36
  Speaker 2: hold the remnibus you don't have anything to invest them
• 59:39
  Speaker 2: in whereas if you receive dollars then you you invest
• 59:44
  Speaker 2: them in treasuries you you earn a yield.
• 59:49
  Speaker 1: All this is so fascinating and so incredible. I'm simultaneously
• 59:55
  Speaker 1: hearing from you that on the one hand, there are
• 59:58
  Speaker 1: huge changes happening geopolitically. We really haven't even barely touched
• 1:00:03
  Speaker 1: on AI and what that might do for productivity. At
• 1:00:07
  Speaker 1: the same time, there's no substitute for the reserve currency
• 1:00:13
  Speaker 1: of the U.S., the the safe asset of US Treasuries,
• 1:00:19
  Speaker 1: it would probably be in our interest to not alienate
• 1:00:24
  Speaker 1: a lot of our allies, but the world really doesn't
• 1:00:27
  Speaker 1: seem like it has any other choices, does it?
• 1:00:29
  Speaker 2: It doesn't have any other choices. Of course, you know,
• 1:00:33
  Speaker 2: weaponizing the dollar beyond a certain point is not a
• 1:00:38
  Speaker 2: good strategy because countries and people have memories. But I
• 1:00:44
  Speaker 2: think what is key is for the U.S. to remain,
• 1:00:48
  Speaker 2: if not the world's leader in technology, but certainly one
• 1:00:52
  Speaker 2: of the main producers of technology. And it has to
• 1:00:57
  Speaker 2: improve its economic resilience. So I think the U.S. needs
• 1:01:02
  Speaker 2: to some extent reindustrialize, not produce T-shirts and plastic toys,
• 1:01:09
  Speaker 2: but be a self-sufficient industry. In certain key industries.
• 1:01:15
  Speaker 1: Semiconductors, everything from solar cells.
• 1:01:18
  Speaker 2: Chemicals, pharmaceuticals, you know, certain equipment and so on. So
• 1:01:25
  Speaker 2: things where at a pinch they can be self-sufficient, but
• 1:01:30
  Speaker 2: they can also, it's not just that. It's also that
• 1:01:35
  Speaker 2: the process of producing innovation passes through the production of
• 1:01:40
  Speaker 2: the product. And there is a lot of knowledge acquired
• 1:01:44
  Speaker 2: there that then feeds into new innovation. And it also
• 1:01:50
  Speaker 2: creates a pool of labor that can migrate from one
• 1:01:56
  Speaker 2: subsector of the economy to another and cross-pollinate and enhance
• 1:02:03
  Speaker 2: the production of further innovation.
• 1:02:05
  Speaker 1: The Silicon Valley flywheel.
• 1:02:07
  Speaker 2: Exactly. China is benefiting from that, and we are missing out.
• 1:02:15
  Speaker 1: So I only have you for a few more minutes.
• 1:02:18
  Speaker 1: I'm going to jump to my favorite questions that I
• 1:02:20
  Speaker 1: ask all of my guests. Starting with, tell us who
• 1:02:24
  Speaker 1: your mentors are who helped shape your career.
• 1:02:27
  Speaker 2: A lot of people, but I'm not the typical case
• 1:02:32
  Speaker 2: where I had one person that was my mentor through
• 1:02:35
  Speaker 2: my career. because I moved around a lot. I moved,
• 1:02:40
  Speaker 2: as we said, from academia to the industry. But I'm
• 1:02:45
  Speaker 2: someone who likes to study people. And whether they are
• 1:02:50
  Speaker 2: officially my mentors or not, I try to learn from
• 1:02:54
  Speaker 2: them and, you know, try to emulate their good sides
• 1:03:00
  Speaker 2: and try to avoid things that I find... that potentially
• 1:03:05
  Speaker 2: were not very helpful. So there were professors at the
• 1:03:10
  Speaker 2: various schools I went, my thesis advisor, people I worked
• 1:03:16
  Speaker 2: with at different firms.
• 1:03:18
  Speaker 1: I'll let you in on a little secret. That's the
• 1:03:21
  Speaker 1: motivation of this whole podcast for 12 years. Let's talk
• 1:03:25
  Speaker 1: about books. What are you reading? What are some of
• 1:03:27
  Speaker 1: your favorites?
• 1:03:28
  Speaker 2: Well, I spend most of my life studying the themes
• 1:03:34
  Speaker 2: we just discussed. So my spare time now, I've started
• 1:03:39
  Speaker 2: a new book by Romain Garry, La Promesse des Lobes.
• 1:03:46
  Speaker 2: It's a book in French.
• 1:03:50
  Speaker 1: You speak several languages, right?
• 1:03:52
  Speaker 2: Yeah. Well, three. Not too many, but yeah. So I'm
• 1:03:58
  Speaker 2: reading it in French. And it's a very nice, partly
• 1:04:04
  Speaker 2: autobiographical book that also talks about his relationship with his mother.
• 1:04:10
  Speaker 2: And it seems like a very nice book to change
• 1:04:15
  Speaker 2: ideas from everything that is going on in the world.
• 1:04:19
  Speaker 1: A good break. Anything you're streaming these days? Are you
• 1:04:22
  Speaker 1: listening to anything or watching anything in particular?
• 1:04:26
  Speaker 2: I must say that since I moved to Geneva, I
• 1:04:29
  Speaker 2: have much more opportunity to be outdoors and do sports.
• 1:04:33
  Speaker 2: So that means less streaming after work. And so it's
• 1:04:39
  Speaker 2: a really wonderful city, very livable, very inhumane dimensions. So
• 1:04:46
  Speaker 2: you can be from one side to the other in
• 1:04:49
  Speaker 2: 20 minutes. Very walkable. And so after work, I try
• 1:04:54
  Speaker 2: to spend some time doing sports and then limit my
• 1:05:00
  Speaker 2: screen time so I don't stream very much these days.
• 1:05:04
  Speaker 1: I'm jealous. We were in Lake Geneva a couple of
• 1:05:07
  Speaker 1: falls ago, and it was just spectacular. It's like an
• 1:05:10
  Speaker 1: hour or two from Geneva. Have you spent much time
• 1:05:13
  Speaker 1: up there?
• 1:05:14
  Speaker 2: Oh, yeah. I mean, even 20 minutes, you're in the countryside.
• 1:05:18
  Speaker 1: It really is very spectacular. Our final two questions. What
• 1:05:23
  Speaker 1: sort of advice would you give to a recent college
• 1:05:25
  Speaker 1: graduate interested in a career in either financial academics or
• 1:05:33
  Speaker 1: actual research and hedge fund asset management?
• 1:05:37
  Speaker 2: I don't envy the people who are starting their career now.
• 1:05:41
  Speaker 2: I think every generation has its own challenges. I think
• 1:05:46
  Speaker 2: people now have to remain very agile, very adaptable. You
• 1:05:52
  Speaker 2: have to continue learning all the time. That has always
• 1:05:56
  Speaker 2: been the case for everyone. But I think the pace
• 1:06:00
  Speaker 2: of change is so much higher now.
• 1:06:03
  Speaker 1: So fast.
• 1:06:04
  Speaker 2: And so all these people need to constantly re-educate themselves.
• 1:06:10
  Speaker 2: They have to be very proficient with the development of technologies,
• 1:06:14
  Speaker 2: with the implications of their technology, of these technologies for
• 1:06:19
  Speaker 2: their own career. But I think my view is, in general, technology...
• 1:06:25
  Speaker 2: in a sense, eliminates certain jobs, but that also pushes
• 1:06:29
  Speaker 2: people to use their creativity and intellect at a higher level.
• 1:06:37
  Speaker 2: And I think these technologies that we're facing now will
• 1:06:42
  Speaker 2: lead people to be more creative, to try to come
• 1:06:47
  Speaker 2: up with new ideas. And so I think they need
• 1:06:50
  Speaker 2: to invest in that process and also invest not just
• 1:06:54
  Speaker 2: in the technology, but on the full set of their skills.
• 1:06:59
  Speaker 1: And our final question, what do you know about the
• 1:07:01
  Speaker 1: world of investing and research and just looking at all
• 1:07:08
  Speaker 1: the opportunities that any allocator of capital has to manage?
• 1:07:14
  Speaker 1: What do you know today might have been useful 25,
• 1:07:16
  Speaker 1: 30 years ago when you were really first starting out?
• 1:07:20
  Speaker 2: I think we live in a very different world now
• 1:07:23
  Speaker 2: than 25 years ago. 25 years ago, you could study
• 1:07:28
  Speaker 2: the past and learn something about the future. Now we
• 1:07:32
  Speaker 2: are in a phase of our history where the future
• 1:07:36
  Speaker 2: will look very different. We are in a transformational, pivotal time.
• 1:07:41
  Speaker 2: So I would put less emphasis on the past. and
• 1:07:45
  Speaker 2: more in understanding the drivers of the future. So sitting
• 1:07:51
  Speaker 2: now here and looking at what happened in the past
• 1:07:54
  Speaker 2: hundred years, yes, there may be some elements you can
• 1:07:58
  Speaker 2: extract from that, but there is so much innovation also
• 1:08:01
  Speaker 2: in the markets, in the asset classes, in the drivers
• 1:08:06
  Speaker 2: of those asset classes, that you can actually come up
• 1:08:11
  Speaker 2: with very misleading ideas you know, conclusions if you put
• 1:08:18
  Speaker 2: too much weight on the past.
• 1:08:21
  Speaker 1: Maria, this has been absolutely fascinating. Thank you so much
• 1:08:24
  Speaker 1: for coming back. We have been speaking with Dr. Maria Vasallo.
• 1:08:29
  Speaker 1: She's head of PICTE's Research Institute. If you enjoy this conversation, well,
• 1:08:35
  Speaker 1: check out any of the 667 we've done. over the
• 1:08:40
  Speaker 1: past 12 years. You can find those at iTunes, Spotify, Bloomberg, YouTube,
• 1:08:46
  Speaker 1: wherever you get your favorite podcasts from. I would be
• 1:08:50
  Speaker 1: remiss if I didn't thank the crack team that helps
• 1:08:52
  Speaker 1: me put these conversations together each week. Elizabeth Sedrin is
• 1:08:57
  Speaker 1: my video producer. Sean Russo is my researcher. Anna Luke
• 1:09:02
  Speaker 1: is my podcast producer. I'm Barry Ritholtz. You've been listening
• 1:09:07
  Speaker 1: to Masters in Business on Bloomberg Radio.