Latest / Masters in Business / Financing In The AI Boom: Masters in Business with Bob Michele

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Financing In The AI Boom: Masters in Business with Bob Michele · Masters in Business

• 0:02
  Speaker 1: Bloomberg Audio Studios, podcasts, radio, news. This week on the podcast,
• 0:09
  Speaker 1: another fantastic conversation. Bob Michael has had an amazing career,
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  Speaker 1: could be one of the most informed, influential managers in
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  Speaker 1: the whole world of fixed income. In his perch as
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  Speaker 1: chief investment officer and head of global fixed income currency
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  Speaker 1: and commodities at J.P. Morgan Asset Management, He oversees a
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  Speaker 1: lot of assets and a lot of people, not just
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  Speaker 1: for corporate America and for central banks, but for regular investors,
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  Speaker 1: for pretty much everybody in the world. Few people know
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  Speaker 1: as much about what drives the fixed income markets as
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  Speaker 1: Bob does. I thought the conversation was fantastic. And I
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  Speaker 1: think you will also, with no further ado, my conversation
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  Speaker 1: with J.P. Morgan Asset Management's Bob Michael. Bob Michael, welcome
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  Speaker 1: to Bloomberg.
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  Speaker 2: I'm thrilled to be here.
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  Speaker 1: I'm thrilled to have you. The timing couldn't be better.
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  Speaker 1: Before we talk about what you've built at J.P. Morgan
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  Speaker 1: and the state of the fixed income markets, I want
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  Speaker 1: to dive into your background, which is so interesting. University
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  Speaker 1: of Pennsylvania classical languages degree. That is not the traditional
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  Speaker 1: route to managing fixed income. What was the original career plan?
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  Speaker 2: Well, it's a good point. I'm here by accident. So
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  Speaker 2: that's how the career plan worked out. Actually, I was
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  Speaker 2: a dual major. I also majored in natural sciences. Both
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  Speaker 2: my parents were doctors. My father was a surgeon. My
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  Speaker 2: mother was an orthodontist. Every job I had over the
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  Speaker 2: summer was pretty much working in a hospital or lab somewhere.
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  Speaker 2: I was doing pre-med studies at Penn, ready to go
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  Speaker 2: to medical school. Unfortunately, my father died my junior year,
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  Speaker 2: and I decided maybe I should take a break before
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  Speaker 2: I do all of that. You're at Penn. Wharton's right there.
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  Speaker 2: Everyone's talking about business, going to work for a bank.
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  Speaker 2: And I said, why not me? I'll do that for
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  Speaker 2: a year. Everyone laughed at me. You have absolutely no
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  Speaker 2: business courses. Give me one to take. I said. And
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  Speaker 2: they said, take accounting. So I took accounting second term
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  Speaker 2: my senior year, didn't understand anything about it, interviewed with
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  Speaker 2: a load of banks, and someone was foolish enough to
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  Speaker 2: hire me, Bankers Trust. I'll tell you, Barry, after one
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  Speaker 2: week in banking in New York City, I knew I
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  Speaker 2: was never going to medical school.
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  Speaker 1: Really? That's fascinating. So it was just dumb luck you
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  Speaker 1: ended up at Bankers Trust right out of college?
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  Speaker 2: Pretty much. I wrote to a lot of firms. I
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  Speaker 2: And maybe this is a complaint for the University of Pennsylvania.
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  Speaker 2: I went to College Hall and pulled Lehman out of
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  Speaker 2: the folder and sent them a letter. But Lehman was
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  Speaker 2: spelled L-E-G-H-M-A-N for some reason. So there was a typo.
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  Speaker 2: I didn't know. I wasn't a business major. I was
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  Speaker 2: doing sciences. I was doing classics, Latin and Greek. So
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  Speaker 2: I sent it off. They must have had a good laugh.
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  Speaker 2: I never heard back from them.
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  Speaker 1: Well, they assumed you were too risky, right? So you
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  Speaker 1: start on the investment management side at Bankers Trust as
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  Speaker 1: an analyst, eventually a portfolio manager. Then you shift to
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  Speaker 1: managing taxable and total return portfolios at Brown Brothers Harriman.
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  Speaker 1: You were never an economist. You were never a market strategist.
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  Speaker 1: You went straight from the classics to an analyst to
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  Speaker 1: a PM. Tell us about that progression.
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  Speaker 2: Well, there are a couple things along the way that
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  Speaker 2: I learned. The first is I took the CFA. I
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  Speaker 2: figured if I didn't have the background and the CFA
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  Speaker 2: was becoming popular, I could learn it then. I also
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  Speaker 2: had a lot of confidence in myself. I sat there
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  Speaker 2: and I figured if going to a class a couple
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  Speaker 2: times a week for one term, you can learn organic chemistry.
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  Speaker 2: What if you're doing something eight to 12 hours a day,
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  Speaker 2: five days a week for 30 days. Can you learn
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  Speaker 2: it as quickly as you could organic chemistry? And the
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  Speaker 2: reality is, yeah, you could pick up a lot. You
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  Speaker 2: could teach yourself a lot. What did appeal to me
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  Speaker 2: was the mathematical aspect behind investments. Doing the sciences, there's
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  Speaker 2: a lot of math involved, and there it is, right
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  Speaker 2: in investments.
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  Speaker 1: So people always bring up that, It's not a science.
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  Speaker 1: It's not quite an art. It's a little bit of
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  Speaker 1: a mix of both. Is the same true for fixed income?
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  Speaker 2: I think it's a little bit more of a science
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  Speaker 2: than an art. Perhaps equities is a bit more art
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  Speaker 2: than science. I did a lot of equity work until
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  Speaker 2: the early 90s, and I switched purely to fixed income.
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  Speaker 2: And the attraction for me is the valuation metric that
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  Speaker 2: goes along with fixed income. You could model it. There
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  Speaker 2: was a maturity. All the dynamics behind the cash flows
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  Speaker 2: could be calculated. There was a finality to somebody with
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  Speaker 2: a mass background, with a sciences background, that was appealing.
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  Speaker 2: When I looked at the equity market and one of
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  Speaker 2: my early roommates in New York City, he and I
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  Speaker 2: would debate late in the evening about, how do you
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  Speaker 2: value a stock? And he was working in corporate finance
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  Speaker 2: at Baish at the time. And it would become very theoretical.
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  Speaker 2: And this would go on for a year. And we
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  Speaker 2: could never figure out what was the proper way to
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  Speaker 2: value a stock. There were dozens of ways. And every
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  Speaker 2: one of them seemed to be a different valuation. So
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  Speaker 2: I'm very happy with the choice I made.
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  Speaker 1: So you lead me to a really interesting recognition. It's
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  Speaker 1: pretty well settled, at least amongst the academics, active stock
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  Speaker 1: selection is ultimately a very difficult game over the long haul. Passive,
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  Speaker 1: it's very difficult to be passive on the equity side.
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  Speaker 1: But more math than more science than art on the
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  Speaker 1: fixed income side, it seems that active managers and fixed
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  Speaker 1: income very much bring value. And there's an advantage to
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  Speaker 1: active on the bond side over just a broad passive index.
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  Speaker 1: Do you credit the fact that it's more science than art?
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  Speaker 1: Or does it have something to do with the fact that, hey,
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  Speaker 1: equity folks are stuck picking 3,500 stocks. You have tens
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  Speaker 1: of millions of products to pick from.
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  Speaker 2: I think there's a strong element of sciences. I think
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  Speaker 2: when you step back and look at the bond market,
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  Speaker 2: you can calculate yield. Most of the time, you're going
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  Speaker 2: to find investors gravitate to higher yielding instruments, that gives
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  Speaker 2: you a bit of a cushion. You know that over time,
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  Speaker 2: if your portfolio yields more than a benchmark, you're likely
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  Speaker 2: to outperform the benchmark. So my expectation of my team
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  Speaker 2: is that almost all the time they will outperform the benchmark. Now,
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  Speaker 2: competitor universe, that's a very different dynamic because a lot
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  Speaker 2: of competitors outperform benchmarks. So we have to think of
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  Speaker 2: ourselves not only as outperforming a benchmark, but also outperforming
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  Speaker 2: a competitor universe.
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  Speaker 1: So you run U.S. fixed income at First Boston, better
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  Speaker 1: known as Credit Suisse today. You're a managing director at
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  Speaker 1: BlackRock before ultimately leading fixed income in London for Schroeder
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  Speaker 1: Investment Management. I'm curious, what was your experience like in
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  Speaker 1: the U.K. and in the Eurozone? Did that have any
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  Speaker 1: impact on how you look at fixed income markets?
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  Speaker 2: It was a fantastic experience. It absolutely has a dynamic
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  Speaker 2: on how I look at the fixed income markets, I
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  Speaker 2: do think, globally. But if you look at the period
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  Speaker 2: that I went to London, it was 2001 until 2010.
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  Speaker 2: It was really the creation and the buildup of the Europe.
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  Speaker 2: So I wasn't in London on my own. In fact,
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  Speaker 2: in 2000, when the thought about going to London to
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  Speaker 2: run the fixed income platform first came up, the thought was, well,
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  Speaker 2: maybe you're going to wind up in Frankfurt because that's
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  Speaker 2: the home of the Euro. The European Central Bank is
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  Speaker 2: in Frankfurt. But a funny thing happened on the way
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  Speaker 2: to Frankfurt. Thousands and thousands and thousands of Americans went
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  Speaker 2: to London in banking, and we rather like London. So
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  Speaker 2: we all stayed there. And it was an incredible 10-year run.
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  Speaker 1: So was all 10 years at Schroeder's or did you
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  Speaker 1: move over to J.P. Morgan in the middle of that run?
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  Speaker 2: Towards the end in 2008, I moved over to J.P.
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  Speaker 2: Morgan and actually it came through one of your earlier guests,
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  Speaker 2: Seth Bernstein, was actually head of fixed income at J.P. Morgan.
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  Speaker 2: They were having some problems at the end of 2007,
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  Speaker 2: early 2008. He pinged me. He was in London. And said,
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  Speaker 2: here's an opportunity to come, be chief investment officer. Are
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  Speaker 2: you interested or not? And I sat back and thought
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  Speaker 2: for a second, well, J.P. Morgan is the big deal.
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  Speaker 2: And they've got a huge platform. And I remember early
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  Speaker 2: on in my career. understanding that they managed a lot
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  Speaker 2: of the central bank assets in fixed income, which was
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  Speaker 2: the flagship accounts back in the early 90s. So at
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  Speaker 2: some point, I realized we're headed back to the New
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  Speaker 2: York area. I'm going with JP Morgan.
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  Speaker 1: A second? A second sounds like it was a long time.
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  Speaker 1: That seems like really one of the ultimate positions in
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  Speaker 1: your space.
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  Speaker 2: In all fairness, Schroders was a fantastic place. And I
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  Speaker 2: loved everything about Schroders. I was there for ten years.
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  Speaker 2: They were fantastic to me and my family. And we
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  Speaker 2: helped build a real quality franchise there. We were winning business. everywhere,
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  Speaker 2: not just in fixed income in a lot of areas.
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  Speaker 2: But time moves on and opportunities come and go and
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  Speaker 2: I didn't feel that that opportunity would come around again
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  Speaker 2: if I didn't take it.
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  Speaker 1: Yeah, absolutely. So you joined JP Morgan in 08, just
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  Speaker 1: as the great financial crisis is starting to ramp up.
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  Speaker 1: What was that like trying to get your footing in
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  Speaker 1: a new firm when the credit world is falling apart?
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  Speaker 2: When we were at Schroeder's, when I was at Schroeder's,
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  Speaker 2: we had pretty clean, pristine portfolios. So we were performing
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  Speaker 2: exceptionally well. When I got to J.P. Morgan, it's interesting.
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  Speaker 2: I was on a U.S. contract. Back then, it was
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  Speaker 2: only two weeks. So in the two-week period from when
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  Speaker 2: I resigned from Schroeder's and then started at J.P. Morgan,
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  Speaker 2: Lehman came and went. It was gone. That's leaning with
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  Speaker 2: a G, right? A G and H, all of them,
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  Speaker 2: were gone. So it was gone, and I walk into J.P. Morgan,
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  Speaker 2: and I'm sitting down with Seth, and he's giving me
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  Speaker 2: the lay of the land, and there were some problems there.
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  Speaker 2: But they were things that were insurmountable. They were just
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  Speaker 2: over-allocations in some areas. But you saw there was an
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  Speaker 2: opportunity to go in and make a change, put in
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  Speaker 2: place a process that you had confidence in, something that
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  Speaker 2: was disciplined, and control the way the business looked going forward.
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  Speaker 2: So it was an exciting time to be in the markets.
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  Speaker 1: Yeah, to say the very least. And to give credit
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  Speaker 1: where credit is due, there was a subprime derivative issue
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  Speaker 1: that had flared up at JPM years earlier. And Jamie
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  Speaker 1: Dimon said, get all that crap off our balance sheets.
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  Speaker 1: We're not in the speculative business. We're a major money-centered bank,
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  Speaker 1: not a gambling house. I'm paraphrasing, but famously kind of
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  Speaker 1: read people the Riot Act. So when a lot of
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  Speaker 1: other big banks ran into trouble, J.P. Morgan was in
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  Speaker 1: a beautiful position to pick up a lot of assets cheap.
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  Speaker 1: Bear Stearns, Washington Mutual, go down the list. They really
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  Speaker 1: came out.
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  Speaker 2: Of that era.
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  Speaker 1: Really well. I'm curious, what did that era teach you
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  Speaker 1: as a bond investor? What should we all have learned
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  Speaker 1: about risk, about fixed income, and about leverage?
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  Speaker 2: It forced you to be a fiduciary. It forced you
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  Speaker 2: to put yourself in your client's shoes and think about,
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  Speaker 2: are these the things that they want to own in
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  Speaker 2: their bond portfolio? Or are they looking for you to
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  Speaker 2: put investments in place that will give them some yield,
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  Speaker 2: but they'll get their capital back. The whole thing won't
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  Speaker 2: be at risk. They may not get the yield or
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  Speaker 2: return they were expecting. So that's the first thing that
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  Speaker 2: we all understood. I'd say the second is you learn
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  Speaker 2: that every bond is different. There are a lot of
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  Speaker 2: different dynamics. You have to roll up your sleeves. You
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  Speaker 2: have to do your own research. You can't outsource your research.
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  Speaker 2: You have to understand everything about the bond. You have
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  Speaker 2: to understand the underlying collateral of the bond. You have
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  Speaker 2: to understand who's obligated to pay you back. You have
• 14:16
  Speaker 2: to understand the cash flow dynamics, any prioritization, covenants, all
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  Speaker 2: of that. So it really changed the way I believe
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  Speaker 2: the market looked at fixed income.
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  Speaker 1: And hopefully for the better. Coming up, we continue our
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  Speaker 1: conversation with Bob Michael, Chief Investment Officer at and head
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  Speaker 1: of global fixed income currency and commodity, discussing building out
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  Speaker 1: those departments at J.P. Morgan Asset Management. I'm Barry Ritholtz.
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  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. I'm
• 14:51
  Speaker 1: Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
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  Speaker 1: My extra special guest this week is Bob Michael. He
• 14:59
  Speaker 1: is chief investment officer and head of global fixed income.
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  Speaker 1: at J.P. Morgan Asset Management. He joined the firm in 08.
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  Speaker 1: So let's talk about what you cover there, the businesses
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  Speaker 1: you cover there. It's fixed income, it's currencies and commodities.
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  Speaker 1: I'm curious, what's the intermarket relationships between those three, what
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  Speaker 1: we think of as separate asset classes?
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  Speaker 2: Well, there's a big macroeconomic driver to them. They're all
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  Speaker 2: predicated on how the global business environment is doing. If
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  Speaker 2: it's a healthy business, then probably there are going to
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  Speaker 2: be some growth and inflationary pressures. Bond yields will be
• 15:41
  Speaker 2: a little higher. Commodities will price that in. There's probably
• 15:45
  Speaker 2: some demand for commodities. They'll be a little bit higher
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  Speaker 2: in price. And when you look at currencies, you'll have
• 15:51
  Speaker 2: to figure out which sovereigns are doing better than others,
• 15:55
  Speaker 2: and those currencies will tend to do better. So I'd
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  Speaker 2: say the first thing is to step back and think
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  Speaker 2: about the global macro environment, and then you start to
• 16:04
  Speaker 2: figure out where the value is in each of those markets.
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  Speaker 1: So I've always looked at currencies, especially the U.S. dollar,
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  Speaker 1: as inverse to commodities. When the dollar does well, commodities
• 16:15
  Speaker 1: sell off a little bit and vice versa. Although lately,
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  Speaker 1: the U.S. dollar seems to be holding up pretty well,
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  Speaker 1: and commodities have enjoyed quite a bit. How do you
• 16:23
  Speaker 1: look at the current relationship today? Is that being driven
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  Speaker 1: by other factors, or is it just part of the cycle?
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  Speaker 2: Yeah, and I had a similar view over my career
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  Speaker 2: that gold was the anti-dollar. And if you didn't like dollar,
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  Speaker 2: you held gold and vice versa. And that generally held
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  Speaker 2: true for quite some period of time. I would say today,
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  Speaker 2: one of the advantages I have is that I meet
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  Speaker 2: with a lot of official institutions globally. And a lot
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  Speaker 2: of the conversation always is, we're over-allocated to U.S. dollar assets, U.S.
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  Speaker 2: fixed income. Is there an alternate reserve currency we should
• 17:06
  Speaker 2: be looking at? And it's a real head-scratcher because for
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  Speaker 2: the first time in my career, I can't really think
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  Speaker 2: of one. And if you go back over history and
• 17:17
  Speaker 2: think about alternate reserve currencies to the dollar, I think
• 17:21
  Speaker 2: back to the late 80s when yen was considered the
• 17:25
  Speaker 2: alternate reserve currency to the dollar. Remember, the Japanese were
• 17:30
  Speaker 2: buying Pebble Beach. They were buying Rockefeller Center.
• 17:33
  Speaker 1: They were bringing it back to Tokyo with them. Right?
• 17:35
  Speaker 2: Pretty much.
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  Speaker 1: That's what people were concerned about.
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  Speaker 2: And then that came and went. We talked about my
• 17:41
  Speaker 2: moving to London. That was the advent of the euro.
• 17:45
  Speaker 2: And for the first time, people said, finally, a United
• 17:49
  Speaker 2: States of Europe. We have a euro that's going to
• 17:53
  Speaker 2: be a reserve currency. It's going to match the size
• 17:57
  Speaker 2: and scope of the U.S. There you go. And for
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  Speaker 2: a while, it looked like it. And then ultimately, we
• 18:04
  Speaker 2: learned monetary union without fiscal union isn't so good. And
• 18:09
  Speaker 2: then coming out of the great financial crisis, remember, it
• 18:13
  Speaker 2: was China. It was the renminbi. China did what the
• 18:17
  Speaker 2: world needed it to do in 2009. It borrowed and
• 18:21
  Speaker 2: it spent and it created aggregate final demand in a
• 18:25
  Speaker 2: world which didn't have a lot of aggregate final demand.
• 18:29
  Speaker 2: And yeah, I know there's a talk about the highways
• 18:32
  Speaker 2: to nowhere and the ghost cities. Those have eventually been populated,
• 18:37
  Speaker 2: but people talked about the Rim NIMBY. And then that
• 18:40
  Speaker 2: came and went. And then it became gold. And you
• 18:43
  Speaker 2: talk to central banks, they've acquired some gold. It's really
• 18:47
  Speaker 2: hard for them to use gold to manage and deliver
• 18:52
  Speaker 2: on their primary objective, which is price stability, inflation. Gold's
• 18:56
  Speaker 2: more a reflection of the outcome of their policies than
• 19:00
  Speaker 2: allowing them to alter their policies. So today we sit
• 19:04
  Speaker 2: here and really the dollar is the only reserve currency
• 19:08
  Speaker 2: out there. Nobody wants to fight it for now.
• 19:10
  Speaker 1: I always wondered, why should Economic growth be dependent on
• 19:14
  Speaker 1: how much yellow metal we scrape out of the ground
• 19:17
  Speaker 1: each year, but hold that aside You didn't mention Bitcoin
• 19:21
  Speaker 1: or any of the crypto currencies is that is that
• 19:24
  Speaker 1: a fantasy that some people hold that we can replace
• 19:28
  Speaker 1: the US dollar with either central bank issued currencies or
• 19:35
  Speaker 1: Crypto currencies or perhaps Bitcoin.
• 19:38
  Speaker 2: I know bitcoins been controversial. I know a lot of
• 19:41
  Speaker 2: the controversy about has to do with what does it
• 19:45
  Speaker 2: actually represent. I'm going to talk to that. And I
• 19:48
  Speaker 2: know a lot of it is concerned that if it's untracked, unregulated,
• 19:53
  Speaker 2: it gets used for criminal enterprise. And yes, of course,
• 19:56
  Speaker 2: that's a concern. Let me go back to store of value.
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  Speaker 2: From the time it was created, I stepped back and thought,
• 20:05
  Speaker 2: I can see this as a store of value. I
• 20:08
  Speaker 2: can see the millennial generation and surrounding cohorts coming along,
• 20:14
  Speaker 2: and this is something they would like to have as
• 20:17
  Speaker 2: a store of value. What does it represent? A mathematical formula? Okay,
• 20:21
  Speaker 2: I have a math background. I kind of get that.
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  Speaker 2: I'm okay with that. When I get into debates with
• 20:28
  Speaker 2: clients about, but you own nothing, and it just goes
• 20:32
  Speaker 2: on and on, I bring up fine art. And I
• 20:35
  Speaker 2: bring up the thought that, look at some of the
• 20:39
  Speaker 2: fine art. A few months ago, a Jackson Pollock painting
• 20:43
  Speaker 2: sold at Christie's for close to $ 200 million. And I
• 20:48
  Speaker 2: went to see it because I wanted to see it.
• 20:50
  Speaker 2: It was beautiful. It was like squiggly lines. Probably you
• 20:54
  Speaker 2: can do it. You can take a Monet. And with
• 20:59
  Speaker 2: AI today and with 3D printers, you can replicate a
• 21:04
  Speaker 2: Monet perfectly. Every color, every brush stroke. And yet the original,
• 21:09
  Speaker 2: I don't know, is probably worth $ 100 million. Who are
• 21:12
  Speaker 2: we to tell our collectors that that's not what they
• 21:15
  Speaker 2: want as their store of value? That it can be
• 21:19
  Speaker 2: replicated today almost exactly. Why would you pay that much
• 21:23
  Speaker 2: when you can have a copy where most people can't
• 21:26
  Speaker 2: tell the difference? So I've always appreciated what Bitcoin represented
• 21:32
  Speaker 2: and crypto represented. I think it's an alternate asset class.
• 21:37
  Speaker 2: And I think it is a store of value. And
• 21:39
  Speaker 2: I'm not here to lecture people on what they want
• 21:42
  Speaker 2: to put their money into.
• 21:44
  Speaker 1: An alternative to fiat currency. Could that ever be an
• 21:50
  Speaker 1: alternative to the dollar?
• 21:52
  Speaker 2: I'm not sure. I think you would need central banks
• 21:57
  Speaker 2: to come in. You would need treasuries to come in.
• 21:59
  Speaker 2: I think there's a big difference between and the confusion
• 22:04
  Speaker 2: between crypto and a stable coin and what can be
• 22:09
  Speaker 2: tracked and regulated and what has the full faith and
• 22:12
  Speaker 2: credit of the u.s behind it and is it a
• 22:15
  Speaker 2: digital currency all of those things i agree with i
• 22:19
  Speaker 2: don't know if crypto can become mainstream i don't know
• 22:22
  Speaker 2: if it's bitcoin but i do see a digital dollar
• 22:27
  Speaker 2: in the stable coin world with the backing of the
• 22:30
  Speaker 2: treasury the support of the federal reserve To me, that's
• 22:33
  Speaker 2: almost inevitable.
• 22:35
  Speaker 1: So I'm glad you brought up stable coins. And I
• 22:38
  Speaker 1: don't want to spend too much time talking about currencies,
• 22:40
  Speaker 1: but I've always thought of the dollar more as a
• 22:44
  Speaker 1: medium of exchange than a store of value, if only
• 22:48
  Speaker 1: because we tend to have inflation at 2%, 3% or
• 22:52
  Speaker 1: higher over longer periods of time. And I could swap
• 22:55
  Speaker 1: my dollars for true stores of value, whether it's businesses,
• 22:59
  Speaker 1: real estate, stocks, bonds. etc. Is that a fair description?
• 23:03
  Speaker 2: I think it is, which is why we have our careers,
• 23:07
  Speaker 2: because if you just sit there with a load of dollars,
• 23:10
  Speaker 2: as you say, they're depreciating by at least the rate
• 23:13
  Speaker 2: of inflation. If you get the dollars invested, then you
• 23:19
  Speaker 2: hopefully are generating at least a return equal to inflation
• 23:23
  Speaker 2: and something that's a premium to that. And that helps
• 23:27
  Speaker 2: you save and that helps you buy a home down
• 23:29
  Speaker 2: the road. And it protects your assets, your cash from
• 23:33
  Speaker 2: eroding in value.
• 23:35
  Speaker 1: So you've been doing this for quite a while. You
• 23:38
  Speaker 1: were fairly verbal heading into 08, warning people about the crisis.
• 23:43
  Speaker 1: And then again in 2023 about regional bank stress. You're
• 23:48
  Speaker 1: a reader of fixed income markets. How different are they
• 23:52
  Speaker 1: today than, you know, 20 plus years ago heading into
• 23:56
  Speaker 1: the GFC?
• 23:57
  Speaker 2: I think And don't mistake this for there's another GFC brewing.
• 24:03
  Speaker 2: I think we are back to an environment that reminds
• 24:06
  Speaker 2: me of the aughts. And I think it's a healthy
• 24:10
  Speaker 2: environment where there's a demand for capital because there's a
• 24:14
  Speaker 2: productive use of that capital. And because of that, there's
• 24:18
  Speaker 2: going to be a competition for capital and a cost
• 24:22
  Speaker 2: of that capital. And it ain't going to be zero anymore.
• 24:26
  Speaker 2: It's going to have a real value to it. And
• 24:29
  Speaker 2: I go back to 2012 a lot when the Fed
• 24:32
  Speaker 2: started with its summary of economic projections and the nefarious
• 24:36
  Speaker 2: dot plot. If you go back to the very first
• 24:39
  Speaker 2: one and look at their estimate of the long-term neutral
• 24:44
  Speaker 2: rate for the Fed funds rate, it was 4.25%. How
• 24:48
  Speaker 2: did they get there? They looked at over that time period,
• 24:51
  Speaker 2: the 99-year history of the Fed, The real Fed funds
• 24:54
  Speaker 2: rate with 2.25%, you're targeting 2%. Inflation, there's your 4.25%
• 25:01
  Speaker 2: Fed funds rate. I think that's a world we're headed
• 25:05
  Speaker 2: back to and we're in. I like it. It reflects
• 25:09
  Speaker 2: a dynamic economy. It reflects that we're leaving the post-great
• 25:14
  Speaker 2: financial crisis behind where, frankly, us baby boomers kind of
• 25:18
  Speaker 2: broke things. We took the one asset that never went
• 25:21
  Speaker 2: down in value... which was housing, and figured a way
• 25:24
  Speaker 2: to oversupply it so that it went down and created
• 25:27
  Speaker 2: a crisis.
• 25:28
  Speaker 1: So let's talk about that. You and I have both
• 25:30
  Speaker 1: discussed normalization. In anticipation of talking to you, I pulled
• 25:35
  Speaker 1: some data, and it's really eye-opening. Over the last 25 years,
• 25:40
  Speaker 1: from 2001 to 2026, the 10-year averaged about three and
• 25:42
  Speaker 1: a quarter, a touch less. 30-year fixed rate mortgage, a
• 25:50
  Speaker 1: little over 5%. If you look at the 25 years
• 25:53
  Speaker 1: prior to that, it's double. You're over 8% on the 10-year,
• 25:59
  Speaker 1: and mortgages from 76 to 2,000 averaged about 10%. So
• 26:04
  Speaker 1: how much of what we've been experiencing over the past
• 26:07
  Speaker 1: five years is just, hey, the past quarter century has
• 26:11
  Speaker 1: been aberrational, and now we're getting back to normal.
• 26:16
  Speaker 2: I think a lot of it. And by the way,
• 26:19
  Speaker 2: when my wife and I bought our first house, our
• 26:22
  Speaker 2: first mortgage was 10.58%. And being the smart bond guy
• 26:27
  Speaker 2: that I am, at 10.25%, we refinanced. So there's an
• 26:32
  Speaker 2: entirely different thinking out there when I look at mortgage
• 26:37
  Speaker 2: rates today. I think the two periods you highlighted, the
• 26:40
  Speaker 2: truth is somewhere in between. Certainly the early part of that,
• 26:44
  Speaker 2: we were coming off of the Volcker shock. when he
• 26:46
  Speaker 2: raised rates to 20%.
• 26:47
  Speaker 1: 81, 82? Yeah, I was in the market.
• 26:51
  Speaker 2: I've seen both 20% Fed funds and 0% Fed funds.
• 26:55
  Speaker 2: I don't think 10%, you just take the median, that's it.
• 26:59
  Speaker 2: I do think somewhere in the 3% to 6% range
• 27:03
  Speaker 2: strikes me as where the Fed should be. So is
• 27:07
  Speaker 2: it 4.5%? Is it a neutral point? I think that's
• 27:11
  Speaker 2: a good bogey to put out there. right now as
• 27:15
  Speaker 2: we kind of feel around for what is normal again.
• 27:19
  Speaker 2: And again, I consider that healthy. I like the ability
• 27:24
  Speaker 2: to give our client base businesses and households bond portfolios
• 27:29
  Speaker 2: that have yields above 6% in the investment grade space.
• 27:34
  Speaker 2: And if you take a little below investment grade, you
• 27:36
  Speaker 2: get close to 7%. That's very different than delivering a
• 27:40
  Speaker 2: portfolio with the yield of 2% on it.
• 27:43
  Speaker 1: So we're going to talk a lot more about bonds
• 27:45
  Speaker 1: and and fixed income investing i want to stay with
• 27:48
  Speaker 1: these various regimes uh... the federal reserve has made a
• 27:54
  Speaker 1: number of changes under the new chairman uh... what do
• 27:57
  Speaker 1: you think their uh... perspective is uh... about higher for
• 28:02
  Speaker 1: longer everybody uses that phrase to me it feels more
• 28:05
  Speaker 1: like normalization as opposed to hire for longer uh.
• 28:09
  Speaker 2: uh.
• 28:11
  Speaker 1: is this a brand new federal reserve regime, and we
• 28:14
  Speaker 1: have to stop thinking about it the way we thought
• 28:17
  Speaker 1: about either the Bernanke regime or the Yellen regime?
• 28:20
  Speaker 2: Well, you started off by asking me what I did
• 28:23
  Speaker 2: when I got to J.P. Morgan, so I appreciate you're
• 28:26
  Speaker 2: put into a role. You have to be given the
• 28:29
  Speaker 2: flexibility and the ability to organize things the way that
• 28:32
  Speaker 2: you want. And when I look at Chair Warsh and
• 28:35
  Speaker 2: he stepped into the Fed, he's doing that. There are
• 28:38
  Speaker 2: things that he doesn't like. There are things he'd like
• 28:41
  Speaker 2: to get more information on. He probably has a plan.
• 28:44
  Speaker 1: It's fine.
• 28:45
  Speaker 2: He's not going to break anything. And we'll just have
• 28:49
  Speaker 2: to learn to adapt. We adapted from Volcker to Greenspan.
• 28:54
  Speaker 2: We're now adapting from Powell to Warsh. It will all
• 28:59
  Speaker 2: be okay. What do I think about some of the
• 29:02
  Speaker 2: things he's doing? I actually think we had gotten to
• 29:06
  Speaker 2: a pretty good place where when you looked at the transparency,
• 29:10
  Speaker 2: all the central banks had gotten to They look at
• 29:13
  Speaker 2: a lot of models. They have models that tell them
• 29:16
  Speaker 2: about the economy, inflation, interest rates, yada, yada, yada, credit spreads.
• 29:21
  Speaker 2: And they're pretty transparent about them. So we got to
• 29:23
  Speaker 2: see those models. They put out a lot of minutes.
• 29:28
  Speaker 2: So there was a lot of commentary in the minutes
• 29:32
  Speaker 2: about what they were doing. And then there were a
• 29:34
  Speaker 2: lot of publications that they put out there. What they
• 29:37
  Speaker 2: were doing is pretty much activating millions of people in
• 29:42
  Speaker 2: the industry to focus on the issues they were concerned
• 29:45
  Speaker 2: about and get all that feedback. And in an AI world,
• 29:49
  Speaker 2: you could probably process it. I would have thought that
• 29:52
  Speaker 2: was valuable. I don't know why central banks would want
• 29:55
  Speaker 2: to get away from that. So I'm hoping that there's
• 29:57
  Speaker 2: some in between there. what do I expect from this Fed?
• 30:02
  Speaker 2: I expect this Fed to be more vigilant on inflation
• 30:06
  Speaker 2: than growth. I think the central banks and the Fed
• 30:09
  Speaker 2: that were more vigilant on growth had to be after
• 30:13
  Speaker 2: the great financial crisis. Now you've got the next demographic
• 30:18
  Speaker 2: coming along. The 1991 births are now the largest population cohort.
• 30:24
  Speaker 2: They've replaced the 1959 births. So they're going to want things.
• 30:28
  Speaker 2: They're going to be the dominant earner, spender, and saver.
• 30:32
  Speaker 2: All of those things have a growth and inflation element
• 30:35
  Speaker 2: to it. And again, it's not around zero. It's a
• 30:39
  Speaker 2: much higher rate. And I think we're going to have
• 30:43
  Speaker 2: central banks that will have to be more focused on
• 30:46
  Speaker 2: inflation vigilance, and they're catching on to that.
• 30:50
  Speaker 1: That makes a whole lot of sense to me. I
• 30:52
  Speaker 1: always thought the transparency, here are the models, here are
• 30:56
  Speaker 1: what we're thinking about, here are the important issues, was
• 30:59
  Speaker 1: a way the Fed communicated to the market, hey, here's
• 31:03
  Speaker 1: what we're going to do. Why don't you guys go
• 31:05
  Speaker 1: do our heavy lifting for us? When we've heard about
• 31:10
  Speaker 1: less guidance, less communication, it sounds like less transparency. Are
• 31:17
  Speaker 1: they losing that mechanism of the Fed informing the markets hey,
• 31:22
  Speaker 1: here's what you guys need to go do?
• 31:24
  Speaker 2: A little bit. And look, it hasn't been perfect, right?
• 31:28
  Speaker 2: They were forecasting rate cuts this year. When you go
• 31:32
  Speaker 2: back to the start of the year, that's never materialized.
• 31:35
  Speaker 2: But they pointed the industry at, here are the things
• 31:39
  Speaker 2: we're looking at. So they started to get an early
• 31:42
  Speaker 2: feedback loop. I think those of us in the business,
• 31:47
  Speaker 2: particularly working for large firms with a lot of resources,
• 31:50
  Speaker 2: We're always going to do our own research. We're always
• 31:53
  Speaker 2: going to talk to businesses. We're always going to look
• 31:56
  Speaker 2: at what households are doing. We're always going to build
• 31:58
  Speaker 2: our own models. We'll put them out there. We'll say
• 32:01
  Speaker 2: this is what we're thinking. This is where the risks are.
• 32:04
  Speaker 2: This is where the value is. And it's not going
• 32:08
  Speaker 2: to change that. And then we'll wait to see how
• 32:10
  Speaker 2: the Fed reacts to those things.
• 32:12
  Speaker 1: Did the Fed send the markets a, hey, don't worry
• 32:15
  Speaker 1: about this earlier this year when we saw inflation and
• 32:20
  Speaker 1: tariffs and then the war in Iran. Did they kind
• 32:24
  Speaker 1: of underestimate the impact of all those elements?
• 32:28
  Speaker 2: I don't think so. I think they learned from 2022
• 32:32
  Speaker 2: that you can't say that it's transitory. You can't always
• 32:38
  Speaker 2: look through. You can to some extent. So perhaps their
• 32:42
  Speaker 2: initial inclination is this could be wound up pretty quickly.
• 32:47
  Speaker 2: Let's wait and see what happens. But the reality is
• 32:51
  Speaker 2: within six months' time, they shifted gears. They've started the
• 32:54
  Speaker 2: hiking cycle. Like all of us, they're just going to
• 32:57
  Speaker 2: watch events in the Middle East and look at where
• 33:00
  Speaker 2: oil is, see if there are second, third round effects
• 33:03
  Speaker 2: to it in the broader inflation metrics. And if they
• 33:06
  Speaker 2: have to respond with much higher rates, they will. I
• 33:09
  Speaker 2: think that's a good place for them to be.
• 33:11
  Speaker 1: Makes a lot of sense. Coming up, we continue our
• 33:13
  Speaker 1: conversation with Bob Michael. CIO and Head of Global Fixed
• 33:17
  Speaker 1: Income at J.P. Morgan Asset Management, discussing the current rate
• 33:22
  Speaker 1: and credit environment around the world. I'm Barry Ritholtz. You're
• 33:26
  Speaker 1: listening to Masters in Business on Bloomberg Radio. I'm Barry Ritholtz.
• 33:31
  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
• 33:35
  Speaker 1: extra special guest this week is Bob Michael. He's Chief
• 33:38
  Speaker 1: Investment Officer and Head of Global Fixed Income Currency and
• 33:41
  Speaker 1: Commodities at at JPMorgan Asset Management. So let's talk about
• 33:47
  Speaker 1: some of the things that are driving the markets, driving
• 33:50
  Speaker 1: the economy. It's been pretty clear. Artificial intelligence and the
• 33:55
  Speaker 1: hyperscalers are just a house of fire. Big part of GDP,
• 34:03
  Speaker 1: AI data center built out, are using everything from euros
• 34:07
  Speaker 1: to yen to hybrid structures for the credit on this.
• 34:10
  Speaker 1: I'm curious, what are your thoughts about this? Is the
• 34:13
  Speaker 1: market pricing it correctly? Have we over-allocated to the space?
• 34:19
  Speaker 1: What's going on over there in credit?
• 34:20
  Speaker 2: Well, I'm fortunate to have worked in a franchise that
• 34:25
  Speaker 2: saw and believed in AI early. And I go back
• 34:29
  Speaker 2: three or so years ago before really the buildup. And
• 34:33
  Speaker 2: I think of Jamie Dimon and Mary Erdos pretty much
• 34:37
  Speaker 2: pushing us, dragging us, kicking and screaming into AI. You
• 34:42
  Speaker 2: don't understand. It's greater than anything that happened in the
• 34:46
  Speaker 2: dot-com era. You have to go back to the Industrial Revolution.
• 34:50
  Speaker 2: It may even be greater than that. And initially, we
• 34:54
  Speaker 2: looked at it. We weren't sure. We had people come in,
• 34:56
  Speaker 2: talk to us about it. Is it like an amped-up
• 35:01
  Speaker 2: Google on steroids or something like that? And you begin
• 35:06
  Speaker 2: to then use it very quickly. Like any technology, once
• 35:10
  Speaker 2: you're introduced to it, you can't put it away. You
• 35:12
  Speaker 2: start to use it. So we've been on this journey
• 35:15
  Speaker 2: within JPMorgan Chase for over three years now. It's everywhere.
• 35:20
  Speaker 2: It's all-consuming. And the differentiation in how we do things
• 35:27
  Speaker 2: today versus what we did two or three years ago
• 35:30
  Speaker 2: is extraordinary, even from the start of the year. It's
• 35:34
  Speaker 2: everywhere in fixed income. We actually just did a shark tank.
• 35:38
  Speaker 2: We had the analysts and associates submit proposals to us.
• 35:41
  Speaker 2: There were 11 of them. Three were finalists. And we've
• 35:44
  Speaker 2: decided we're going to fund two of them. And this
• 35:47
  Speaker 2: was just in the last week or so. So within
• 35:50
  Speaker 2: the bank, I see it. I understand it. It's real.
• 35:55
  Speaker 2: When I talk to our client base, I am a
• 35:58
  Speaker 2: little bit surprised. Perhaps I shouldn't be. How many businesses
• 36:02
  Speaker 2: are just starting that journey? So then I step back. Clearly,
• 36:07
  Speaker 2: we invest in all the hyperscalers. We do so across
• 36:11
  Speaker 2: the capital structure, both in asset management and then on
• 36:15
  Speaker 2: the banking side. So we're seeing all facets of it.
• 36:18
  Speaker 2: We're all seeing the same thing. Demand is super high.
• 36:23
  Speaker 2: The ability to deliver capacity to meet that demand is
• 36:27
  Speaker 2: super low. So you have a couple choices. You can
• 36:31
  Speaker 2: either borrow today on your very pristine balance sheet and
• 36:35
  Speaker 2: start delivering the capacity quickly so you can monetize the demand,
• 36:41
  Speaker 2: or you can build it out of excess cash flow,
• 36:44
  Speaker 2: which a lot of these hyperscalers have. Not all of them,
• 36:47
  Speaker 2: but most of them. If you do that, don't you become,
• 36:52
  Speaker 2: don't you risk becoming the next Blackberry or Nokia? Somebody
• 36:56
  Speaker 2: else is going to get there faster than you are.
• 36:59
  Speaker 2: You're going to be content harvesting the revenue and profits
• 37:03
  Speaker 2: you have, and you're going to miss the next dynamic.
• 37:05
  Speaker 2: So We get it from all aspects. We get it
• 37:08
  Speaker 2: from the use case. We get it from the demand
• 37:12
  Speaker 2: for capital case. We see an end game. We don't
• 37:17
  Speaker 2: actually know what AI will do five, ten years from now.
• 37:22
  Speaker 2: But I feel we live that in the internet. I
• 37:24
  Speaker 2: only say, pull out your iPhone today or whatever your
• 37:28
  Speaker 2: smartphone is. And imagine if you had that in 2000.
• 37:33
  Speaker 2: It didn't come along until seven years later. How big
• 37:36
  Speaker 2: would the dot-com bubble have been? We didn't know what
• 37:40
  Speaker 2: could exist. We're open to that journey with AI, but
• 37:43
  Speaker 2: today it's making radical changes in how we operate the business.
• 37:48
  Speaker 2: I'm excited about what it could do five years from now,
• 37:51
  Speaker 2: and I'm happy to finance a lot of these borrowers
• 37:54
  Speaker 2: in this space.
• 37:55
  Speaker 1: You know, as a consumer of JPMorgan Chase, I have
• 37:58
  Speaker 1: noticed when I get fraud alerts are very different currently
• 38:04
  Speaker 1: than years ago. If it's a hotel I've booked before
• 38:08
  Speaker 1: or travel, even overseas, it used to be a red flag.
• 38:12
  Speaker 1: Now it's not. And yet somebody bought $ 25 worth of
• 38:16
  Speaker 1: something at a Walmart in Nebraska on my credit card,
• 38:20
  Speaker 1: and obviously that got flagged right away. So I suspect
• 38:25
  Speaker 1: this is being integrated throughout not only your shop but everywhere.
• 38:30
  Speaker 1: It's going to be really fascinating to see what happens.
• 38:34
  Speaker 1: I'm really intrigued about the thought of allocating across all
• 38:39
  Speaker 1: sorts of ways and across every various hyperscaler. Is that
• 38:45
  Speaker 1: just the nature of being one of four giant money
• 38:48
  Speaker 1: center banks? You're going to have a finger in every pie?
• 38:51
  Speaker 1: Is that just how that goes?
• 38:53
  Speaker 2: Okay. I wouldn't phrase it like that. I would phrase
• 38:57
  Speaker 2: it that you have these very large companies out there
• 39:01
  Speaker 2: that have financing needs. And this is a seismic financing need.
• 39:07
  Speaker 2: And they know they can come to JPMorgan Chase and
• 39:11
  Speaker 2: we can offer them a lot of ways to finance it.
• 39:14
  Speaker 2: Just on the debt side, do you want to tap
• 39:17
  Speaker 2: a bank line of credit? Do you want us to
• 39:19
  Speaker 2: arrange some sort of direct loan and club it out?
• 39:22
  Speaker 2: Maybe asset management is a part of that. Or do
• 39:25
  Speaker 2: you want us to raise capital in the public markets
• 39:28
  Speaker 2: for you, in the debt markets for example? If you
• 39:31
  Speaker 2: want to do that, do you want it all in
• 39:33
  Speaker 2: dollars or do you want some in euro, some in yen,
• 39:36
  Speaker 2: some in Canada dollar? That opportunity is also available. Or
• 39:41
  Speaker 2: if you're concerned that everyone may be crowding out the
• 39:44
  Speaker 2: debt markets all at once, had you thought about equity?
• 39:48
  Speaker 2: Look at where your equity is trading. Look at the multiple.
• 39:50
  Speaker 2: Look at the stock level. At JPMorgan Chase, you can
• 39:54
  Speaker 2: offer all of those. So when I meet with some
• 39:58
  Speaker 2: of the hyperscalers who are looking to borrow, I'm just
• 40:01
  Speaker 2: a tiny sliver of the solution. I know they're having
• 40:05
  Speaker 2: other conversations across JPMorgan Chase.
• 40:08
  Speaker 1: So you mentioned the public bond market. We've seen tremendous
• 40:12
  Speaker 1: growth in the private credit market alongside public markets. What
• 40:16
  Speaker 1: are your thoughts on that? This has become a giant
• 40:21
  Speaker 1: addition to public equities and public fixed income.
• 40:25
  Speaker 2: I love it. I love the fact that a legitimate
• 40:30
  Speaker 2: non-bank lending channel has been opened up. And yes, because
• 40:35
  Speaker 2: I work within a bank that might otherwise like to
• 40:38
  Speaker 2: have all that loans on its balance sheet and have
• 40:41
  Speaker 2: originated them, there is an acceptance that markets evolved. If
• 40:46
  Speaker 2: I go back early in my career and I think
• 40:49
  Speaker 2: about the mortgage market, I've seen this before. If you
• 40:52
  Speaker 2: took out a mortgage in the 80s, it was from
• 40:55
  Speaker 2: a bank. And then, of course, the bank sold it
• 40:58
  Speaker 2: on to Fannie Mae or Freddie Mac, Ginnie Mae, who
• 41:01
  Speaker 2: then gave them capital to continue extending loans into the
• 41:05
  Speaker 2: mortgage market. Today, it's not banks that are the largest
• 41:08
  Speaker 2: mortgage lender. It's Rocket Mortgage is the largest mortgage lender. Yet,
• 41:14
  Speaker 2: Banks and non-bank lenders have learned to coexist in that space.
• 41:18
  Speaker 2: I think the same thing is happening in private credit
• 41:22
  Speaker 2: and direct lending. There's also a convergence now. We were
• 41:26
  Speaker 2: meeting with a lot of the borrowers in our space
• 41:29
  Speaker 2: and they wanted to understand, was it better for them
• 41:33
  Speaker 2: to access the public debt markets or should they access
• 41:36
  Speaker 2: a direct loan? And a lot of the larger, bigger
• 41:40
  Speaker 2: borrowers were going through that dynamic So we've created a
• 41:45
  Speaker 2: partnership between my group in asset management and the commercial bank,
• 41:51
  Speaker 2: where the commercial bank, which is the largest lender to
• 41:55
  Speaker 2: corporate America, the largest banker to corporate America, will source
• 41:58
  Speaker 2: and originate loans. We'll have a look at them and
• 42:02
  Speaker 2: do a fiduciary look. If they make sense for some
• 42:05
  Speaker 2: of our client base, then we'll put it into our portfolios.
• 42:09
  Speaker 2: The convergence between public and private is happening everywhere. I
• 42:15
  Speaker 2: think it's healthy for the bond markets.
• 42:17
  Speaker 1: So let's talk about a few other things besides inflation
• 42:21
  Speaker 1: that are driving yields higher. How do you look at
• 42:25
  Speaker 1: the current set of deficits? How significant has that been
• 42:29
  Speaker 1: to what's going on in bond markets? And is that
• 42:33
  Speaker 1: a key factor with yield or is that just one
• 42:36
  Speaker 1: of many factors?
• 42:38
  Speaker 2: I think it's one of many factors. I think you
• 42:41
  Speaker 2: have to go back to our bonds giving you some
• 42:46
  Speaker 2: sort of premium to inflation. If I think about debt
• 42:51
  Speaker 2: and deficits, for sure, there's a level of righteous indignation
• 42:57
  Speaker 2: we should all have. We're all going to go home
• 43:00
  Speaker 2: and balance our checkbooks. We all say we'd like to
• 43:03
  Speaker 2: have that, can't afford it. Don't want to borrow. Let's
• 43:08
  Speaker 2: do with something else. Would like to go there. Too expensive.
• 43:12
  Speaker 2: Let's go here and sell. Do we need to go
• 43:15
  Speaker 2: out for dinner? No, probably not. We can eat at home.
• 43:19
  Speaker 2: Everyone is doing that, yet we look at governments and
• 43:22
  Speaker 2: they don't seem to have that discipline anymore. And it's
• 43:26
  Speaker 2: not just the U.S. We're learning it's happening in France.
• 43:29
  Speaker 2: We're learning that it's about to happen in Germany. Has
• 43:33
  Speaker 2: it gone on in Japan and China for a while?
• 43:36
  Speaker 2: It has. I'm over it. I'm over it. You look
• 43:41
  Speaker 2: at debt to GDP in Japan, it's closing in on 300%.
• 43:45
  Speaker 2: You look at China, it's closing in on 200%. We're
• 43:49
  Speaker 2: just over 100%. I don't know what the structural speed
• 43:53
  Speaker 2: limit is, but it's not here. Perhaps a more interesting
• 43:58
  Speaker 2: measure is to look at debt service to GDP. Where
• 44:01
  Speaker 2: does that become a problem? Where does it look stretched?
• 44:04
  Speaker 2: Maybe the total amount of debt service payments to GDP
• 44:10
  Speaker 2: at close to 5% is a historic high level for
• 44:13
  Speaker 2: the US. But we're in the mid threes right now.
• 44:17
  Speaker 2: To me, that's still pretty reasonable. So there was a
• 44:21
  Speaker 2: lot of low coupon financing that's gone on at the
• 44:24
  Speaker 2: government level.
• 44:25
  Speaker 1: And if memory serves, I'm doing this off the top
• 44:27
  Speaker 1: of my head, 10% is where countries really run into trouble.
• 44:31
  Speaker 1: If their debt service is 10%, of their gdp that's
• 44:35
  Speaker 1: really problematic.
• 44:36
  Speaker 2: Yeah and and then you're hunting the math on how
• 44:40
  Speaker 2: much debt the u s would have to issue to
• 44:42
  Speaker 2: get there i don't even know if we could spend
• 44:45
  Speaker 2: it all you're not given five thousand dollar checks terry
• 44:48
  Speaker 2: what i don't maybe you're given five million dollar checks
• 44:50
  Speaker 2: to everyone.
• 44:51
  Speaker 1: That would be inflationary we would have to worry about
• 44:54
  Speaker 1: that so so there has been some hesitancy uh... when
• 44:59
  Speaker 1: we look at these treasury auctions from foreign buyers I
• 45:02
  Speaker 1: know you've pushed back on the sell America narrative. What
• 45:06
  Speaker 1: are your thoughts on how attractive U.S. treasuries are today
• 45:11
  Speaker 1: around the world?
• 45:13
  Speaker 2: The U.S. doesn't own the best bonds in the global
• 45:19
  Speaker 2: bond market. It has some of them, but not all
• 45:23
  Speaker 2: of them. There are other good borrowers out there. And
• 45:27
  Speaker 2: when we step back and look at the repricing that's
• 45:30
  Speaker 2: gone on, particularly over the last year, yields have gone
• 45:34
  Speaker 2: up to extreme levels in several places. And recently, we
• 45:38
  Speaker 2: talked about Australia and Japan. And for us, it's the
• 45:42
  Speaker 2: discipline of the central bank and the willingness to lean
• 45:45
  Speaker 2: into that, maybe create a little bit of pain for
• 45:48
  Speaker 2: the longer-term good to try and rein in some of
• 45:52
  Speaker 2: the inflation rather than leave monetary policy so accommodative that
• 45:56
  Speaker 2: you effectively finance the higher price level of energy in
• 46:00
  Speaker 2: the pass-through, and that becomes an inflation problem. So markets
• 46:04
  Speaker 2: like that, we tend to like. Emerging market debt, we love.
• 46:09
  Speaker 2: We look at the local emerging market debt that's been
• 46:14
  Speaker 2: issued over the last decade, and it looks terrific to us. Historically,
• 46:21
  Speaker 2: and early in my career, I looked at Brady Bonds.
• 46:25
  Speaker 2: I was taught that emerging markets Borrowed your money, then confiscated,
• 46:31
  Speaker 2: and then you have to go after them to get
• 46:32
  Speaker 2: them back. That's the wrong way to think about it.
• 46:35
  Speaker 2: And happily, early in my career, back in the early 90s,
• 46:39
  Speaker 2: whether it was at Brown Brothers or First Boston Asset Management,
• 46:45
  Speaker 2: we would bring in junior central bankers from around the world,
• 46:50
  Speaker 2: and they would do an internship with you. And you
• 46:52
  Speaker 2: got to meet people from other central banks. Well, guess what?
• 46:55
  Speaker 2: Those guys are back running the central banks. So the
• 46:58
  Speaker 2: local emerging markets are now financing themselves in local currency debt.
• 47:05
  Speaker 2: They have full yield curves. The yield curves, the domestic bonds,
• 47:11
  Speaker 2: aren't dependent on cross-border flows. They don't need us. They
• 47:15
  Speaker 2: have pension funds and insurance companies that support the long end.
• 47:18
  Speaker 2: They have wealth management platforms that support the front end
• 47:23
  Speaker 2: and the intermediate part of the curve. When we look
• 47:25
  Speaker 2: at the ownership of local emerging market debt, close to 90%
• 47:30
  Speaker 2: of it is owned by locals. The other 10% are
• 47:33
  Speaker 2: crossover buyers like us coming in with portfolios that aren't
• 47:37
  Speaker 2: dedicated there. The central banks are doing a fantastic job.
• 47:42
  Speaker 2: They're every bit as good as the developed market central banks.
• 47:45
  Speaker 2: You could argue if you go back to 2021, when
• 47:48
  Speaker 2: they started hiking rates a year before the developed market
• 47:51
  Speaker 2: central banks, they're actually a little bit sharper. So that's
• 47:56
  Speaker 2: the hidden gem in our portfolios today is local emerging
• 47:59
  Speaker 2: market debt. The authorities are doing a great job in
• 48:02
  Speaker 2: those countries.
• 48:03
  Speaker 1: What regions of EM debt do you like? What specific countries?
• 48:07
  Speaker 2: It's a combination. There are a lot that we like
• 48:10
  Speaker 2: in Latin America. We own Mexico. We own Colombia. We
• 48:16
  Speaker 2: own Brazil. Then you mix in a little Eastern European,
• 48:21
  Speaker 2: so Czech and Poland. There was a new issue that
• 48:25
  Speaker 2: just came for South Africa, close to a 10% yield.
• 48:28
  Speaker 2: We bought some of that. 10%?
• 48:30
  Speaker 1: That's real yield.
• 48:34
  Speaker 2: It's a lot of real yield. And when I look
• 48:36
  Speaker 2: at that basket that we put together, you're looking at
• 48:40
  Speaker 2: a real yield that's close to 5% and a nominal
• 48:44
  Speaker 2: yield that's close to 9%. So that's pretty attractive for
• 48:50
  Speaker 2: Sovereign that I think, have pretty diligent central banks. I
• 48:55
  Speaker 2: also heard the president of Paraguay at a conference last week.
• 49:01
  Speaker 2: And then you just start thinking and wondering, well, maybe
• 49:05
  Speaker 2: the hard currency debt makes sense for that. So every
• 49:09
  Speaker 2: time I listen to an emerging market, I don't think,
• 49:13
  Speaker 2: is it good debt or bad debt? I think, what
• 49:15
  Speaker 2: debt is there? What's the price of that debt? Does
• 49:18
  Speaker 2: it make sense? Where would I be interested a lot
• 49:21
  Speaker 2: of good stuff going on there as well?
• 49:23
  Speaker 1: So let's talk tips Here in the US what what
• 49:27
  Speaker 1: are your thought on on? inflation indexed bonds.
• 49:32
  Speaker 2: Well tips are a great way to tell you what's
• 49:35
  Speaker 2: priced into the market and if I look at tips
• 49:38
  Speaker 2: today and It's telling us that despite the concern over
• 49:42
  Speaker 2: oil in the second and third round of facts, actually,
• 49:46
  Speaker 2: TIPS are embedding in inflation expectations of 2.35%. That's really
• 49:52
  Speaker 2: well anchored. What's become a little bit unanchored is the
• 49:56
  Speaker 2: real yield embedded within TIPS. That's at 2.9%. You have
• 50:01
  Speaker 2: to go back to the dot-com era to find real
• 50:04
  Speaker 2: yields that high. What's actually become priced into bond markets
• 50:10
  Speaker 2: is less about inflation concern and the ability of central
• 50:15
  Speaker 2: banks to handle that and more concern about the mix
• 50:18
  Speaker 2: of policies out there. You've got monetary policy we talked about.
• 50:23
  Speaker 2: We don't know the reaction functions anymore. You've got fiscal policy.
• 50:27
  Speaker 2: There's a lot of borrowing going on. We don't really
• 50:29
  Speaker 2: understand that. Of course, we have the geopolitics of what's
• 50:33
  Speaker 2: going on in the Middle East, Russia, Ukraine. And then
• 50:37
  Speaker 2: just politics in general. You're going to have an election
• 50:40
  Speaker 2: in France, and you have midterms coming up in the U.S.
• 50:43
  Speaker 2: I think all of that uncertainty is pushing bond investors
• 50:48
  Speaker 2: to demand compensation for that, and that's being reflected in
• 50:52
  Speaker 2: higher real yields.
• 50:53
  Speaker 1: Really interesting observation. We haven't talked about muni bonds. If
• 50:59
  Speaker 1: you're a New York resident and you're in a national
• 51:03
  Speaker 1: New York combination muni portfolio, Today, we're recording this right
• 51:08
  Speaker 1: before October starts. You're getting 4.5% yield. That's the taxable,
• 51:13
  Speaker 1: I'm sorry, close to 5% yield. That's taxable equivalent of
• 51:18
  Speaker 1: over 8%. If I would have told somebody you could
• 51:21
  Speaker 1: get 8% five years ago, they would, you know, throw
• 51:25
  Speaker 1: me a parade. What are your thoughts on munis, especially
• 51:28
  Speaker 1: if you're in a high-tax state like New York, California, Connecticut,
• 51:33
  Speaker 1: New Jersey, Massachusetts? Love them. Love them.
• 51:36
  Speaker 2: Absolutely love them. Exactly for what you say. The yield
• 51:42
  Speaker 2: is there. It's high. The markets come under a little
• 51:47
  Speaker 2: bit of pressure. Of course, the backup in yields makes
• 51:50
  Speaker 2: everyone a little bit apprehensive about putting money into the
• 51:54
  Speaker 2: bond market, particularly munis. You don't want to try and
• 51:56
  Speaker 2: catch a falling knife. We think it's gone too far.
• 51:59
  Speaker 2: There's been a lot of supply. Munis typically like to
• 52:03
  Speaker 2: fund themselves before we get into year end. And of course,
• 52:06
  Speaker 2: if you have had a backup in yields over the
• 52:08
  Speaker 2: course of the year, bond prices are going to be down.
• 52:12
  Speaker 2: As you know, we're entering the taxed harvesting season, tax
• 52:15
  Speaker 2: loss harvesting. So we're seeing a lot of that. We're
• 52:19
  Speaker 2: seeing a lot of meanies being sold to harvest losses,
• 52:23
  Speaker 2: to offset gains somewhere else in somebody's portfolio. That's created
• 52:27
  Speaker 2: a pretty good buying opportunity for us. One of the
• 52:30
  Speaker 2: things we look at, too, try to measure the overall
• 52:34
  Speaker 2: health and the municipal bond market are the rainy day
• 52:37
  Speaker 2: funds that they have. And if you go back 10
• 52:40
  Speaker 2: years or so, they didn't really have any rainy day funds.
• 52:43
  Speaker 2: They had blown through a lot of their budgets and
• 52:48
  Speaker 2: fiscal discipline was a problem for them. Enter COVID, enter
• 52:53
  Speaker 2: the payouts that they received, and suddenly those rainy day
• 52:58
  Speaker 2: funds are flush again.
• 52:59
  Speaker 1: So you really like munis. I'm thrilled to hear that.
• 53:03
  Speaker 1: I'm a fan as well. So let's talk a little
• 53:06
  Speaker 1: bit about the state of the economy. Your fourth quarter
• 53:10
  Speaker 1: 2026 outlook puts the probability of economic expansion at 85%.
• 53:16
  Speaker 1: That's as close to certainty that we're not getting a
• 53:20
  Speaker 1: recession as I think any one of us that are
• 53:23
  Speaker 1: in the public eye would be wanting to do. What
• 53:27
  Speaker 1: are the drivers of this? We've seen a whole lot
• 53:31
  Speaker 1: of concerns about inflation and food and energy and we've
• 53:34
  Speaker 1: certainly you've mentioned geopolitics is all this uh... concerns about
• 53:38
  Speaker 1: various elections and yet the economy is so resilient what
• 53:44
  Speaker 1: what are the big drivers there.
• 53:45
  Speaker 2: I think there are a couple of things uh... one
• 53:48
  Speaker 2: is the capex cycle when we talk to businesses they
• 53:52
  Speaker 2: are investing uh... and and to us you can look
• 53:56
  Speaker 2: across industries and say okay it It may all be
• 54:00
  Speaker 2: around AI currently, but the interesting thing is when we
• 54:05
  Speaker 2: talk to sovereign borrowers and ask them about their spending plans,
• 54:10
  Speaker 2: technology is one of them, of course, but they also
• 54:13
  Speaker 2: talk about investing in their military, defense of their borders.
• 54:17
  Speaker 2: You're going to see more of that CapEx come through.
• 54:20
  Speaker 2: Of course, they're talking about energy independence and security. You're
• 54:24
  Speaker 2: going to see more investment there. And of course, in
• 54:28
  Speaker 2: the aftermath of tariffs, everyone's concerned about manufacturing and their
• 54:32
  Speaker 2: supply lines, and they're interested in investing in that. So
• 54:36
  Speaker 2: we see CapEx as being more broadly based than simply AI.
• 54:41
  Speaker 2: When you look at corporate earnings and corporate profitability, they
• 54:45
  Speaker 2: look pretty good, and they actually look pretty good globally.
• 54:49
  Speaker 1: So you've watched both professionals and individuals invest in the
• 54:53
  Speaker 1: fixed income space for decades. What do you think the
• 54:57
  Speaker 1: biggest mistake people make in this area? And what sort
• 55:02
  Speaker 1: of errors are you concerned about the potential of people
• 55:05
  Speaker 1: making in this environment?
• 55:08
  Speaker 2: That's a really interesting question. I'm going to give you
• 55:12
  Speaker 2: a kind of different answer. I tell people, particularly new
• 55:19
  Speaker 2: to the industry, those that we're hiring out of colleges
• 55:23
  Speaker 2: and universities, to understand managing money is a two-edged sword.
• 55:30
  Speaker 2: It's a privilege to manage somebody else's money. You need
• 55:35
  Speaker 2: to understand that. But it comes with an enormous responsibility.
• 55:40
  Speaker 2: It's not a game. It's serious. You have individual clients
• 55:46
  Speaker 2: who have dreams, who have aspirations. They're saving for a home.
• 55:50
  Speaker 2: They're going to send their kids to college. They're saving
• 55:53
  Speaker 2: for retirement. They want to go on a holiday, something
• 55:56
  Speaker 2: like that. It's important. We deal with big businesses. We
• 55:59
  Speaker 2: deal with pension funds. They have retirees who are dependent
• 56:04
  Speaker 2: on the retirement plan paying out and giving them a
• 56:09
  Speaker 2: healthy stream of income to live off of. We deal
• 56:12
  Speaker 2: with insurance companies. We deal with monetary authorities, central banks,
• 56:16
  Speaker 2: official institutions. There isn't an individual at the end of
• 56:20
  Speaker 2: all of that that it's important to understand is dependent
• 56:25
  Speaker 2: on the returns you generate. It's not a game. It's real.
• 56:29
  Speaker 2: Accept that with the privilege, the responsibility. I think when
• 56:34
  Speaker 2: you step back and look at the markets today, you
• 56:37
  Speaker 2: have to approach it that way. Am I making rational investments?
• 56:42
  Speaker 2: Am I stretching too much? Am I taking too much risk?
• 56:47
  Speaker 2: What am I actually here to do? For us in
• 56:50
  Speaker 2: fixed income, It's to ensure that you get your capital back,
• 56:54
  Speaker 2: plus you get a reasonable income stream, coupon payments, and
• 56:59
  Speaker 2: the total package is some premium to inflation. So I
• 57:03
  Speaker 2: don't want to reach too far for the marginal borrower
• 57:06
  Speaker 2: that has a problematic business model and roll the dice.
• 57:10
  Speaker 2: Maybe I'll get my money back. Maybe I'll make another
• 57:13
  Speaker 2: percent on income than I might have by lending to
• 57:18
  Speaker 2: another borrower. I want to do the smart, prudent thing
• 57:21
  Speaker 2: Because I know it's not a game. I know there's
• 57:24
  Speaker 2: a real expectation at the end of this.
• 57:27
  Speaker 1: Serious answer. Last question before I jump to my favorites
• 57:30
  Speaker 1: that I ask all of my guests. What do you
• 57:33
  Speaker 1: think fixed income investors or just investors generally are not
• 57:38
  Speaker 1: really thinking about but perhaps should? It could be a topic.
• 57:43
  Speaker 1: It could be a region. It could be a data point.
• 57:45
  Speaker 1: What's getting overlooked in this environment that shouldn't?
• 57:49
  Speaker 2: There's the near term. which is what happens in the
• 57:54
  Speaker 2: last 18 months of the Trump presidency? It looks unlikely
• 58:00
  Speaker 2: that he's going to retain Congress. Will he lose the House,
• 58:03
  Speaker 2: the House and the Senate, one or the other? What
• 58:06
  Speaker 2: happens if you have a split Congress and an administration?
• 58:11
  Speaker 2: What do they do and what does he do? Everything's
• 58:15
  Speaker 2: cruising along pretty well right now. Does that dynamic change?
• 58:19
  Speaker 2: So I think we need to start looking at that
• 58:23
  Speaker 2: more closely and wondering what happens when there's no more
• 58:28
  Speaker 2: fiscal stimulus. The One Big Beautiful Bill Act has sort
• 58:31
  Speaker 2: of come and gone. If we're left with higher energy
• 58:34
  Speaker 2: prices and with tariffs and there's nothing that will provide
• 58:39
  Speaker 2: the stimulus and Congress is unable to deliver it, do
• 58:43
  Speaker 2: we have a soft landing or is it something that's
• 58:45
  Speaker 2: a little bit harder? So that's one thing that we're
• 58:48
  Speaker 2: focused on. From the longer term, we talked a little
• 58:51
  Speaker 2: bit about the demographics. The 1991 births are around. I
• 58:56
  Speaker 2: think we have to understand what that looks like. I
• 59:01
  Speaker 2: talked about they replaced the 1959 births. I am one.
• 59:06
  Speaker 2: I saw that in my career, how we dominated earning, spending,
• 59:10
  Speaker 2: and saving. The 1991 births and surrounding cohorts, they're 35
• 59:14
  Speaker 2: this year. So they are on that journey for the
• 59:18
  Speaker 2: next 20 years. The interesting thing is, as a baby boomer,
• 59:22
  Speaker 2: as near as I can tell looking at me and you,
• 59:24
  Speaker 2: we're living longer. So we're not going to de-asset We're
• 59:28
  Speaker 2: probably going to retain our assets. We're going to hold
• 59:31
  Speaker 2: them longer than historical metrics would tell them. What does
• 59:35
  Speaker 2: that world look like? Where will the demand be? What
• 59:38
  Speaker 2: will inflation and growth look like? How will policymakers have
• 59:41
  Speaker 2: to respond? So that's something we constantly wrestle with.
• 59:45
  Speaker 1: So if I'm hearing you correctly, and my historically divided
• 59:51
  Speaker 1: government has always been good for the equity market, if
• 59:56
  Speaker 1: we don't get more stimulus it sounds like that's potentially
• 1:00:00
  Speaker 1: disinflationary maybe we see yields come down not back to
• 1:00:04
  Speaker 1: zero but uh... maybe under down to four percent on
• 1:00:08
  Speaker 1: the ten-year uh... is is this a goldilocks scenario you're
• 1:00:12
  Speaker 1: you're laying out plus the gen z and gen alpha
• 1:00:17
  Speaker 1: spending uh... run over the next twenty years this sounds
• 1:00:20
  Speaker 1: like this is a really good for everybody.
• 1:00:24
  Speaker 2: It's sort of like 1980 or 81 to 2000. When
• 1:00:30
  Speaker 2: you look at it on a line, it looks pretty
• 1:00:34
  Speaker 2: good from the equity market. There was that stock market
• 1:00:37
  Speaker 2: crash in 87. And then there was 89, which.
• 1:00:40
  Speaker 1: Was the mini crash.
• 1:00:41
  Speaker 2: Then you had long-term capital and the whole dot com.
• 1:00:43
  Speaker 1: So Plus the Asian contagion right in the middle of that.
• 1:00:53
  Speaker 2: Yeah. And then you go back to, remember that random
• 1:00:58
  Speaker 2: county in California, Orange County defaulted.
• 1:01:01
  Speaker 1: In- Orange County, yes. 90, 91, something like that.
• 1:01:03
  Speaker 2: I think it was 94, 95, the tequila crisis. So
• 1:01:08
  Speaker 2: I think you're right. I think the next decade plus
• 1:01:11
  Speaker 2: looks pretty good, but it's not going to be a
• 1:01:15
  Speaker 2: perfect straight line. And I wonder if in the second
• 1:01:20
  Speaker 2: half of the Trump term the last 18 months without
• 1:01:23
  Speaker 2: the fiscal impulse. Yeah, you'll have a gridlock Congress, but
• 1:01:27
  Speaker 2: we're used to the adrenaline rush from capital flowing in.
• 1:01:31
  Speaker 2: If you don't get that, do we get a soft
• 1:01:33
  Speaker 2: landing or a hard landing? We really haven't had a
• 1:01:36
  Speaker 2: recession in seven years.
• 1:01:37
  Speaker 1: Seven years. I mean, other than the brief COVID, it's
• 1:01:42
  Speaker 1: been closer to 17 since TFC. I mean, COVID, I
• 1:01:45
  Speaker 1: kind of think of as not the normal business cycle contraction.
• 1:01:50
  Speaker 1: It was a pandemic. So somewhere out there, we probably do.
• 1:01:56
  Speaker 1: And it always looks better in retrospect. You don't remember.
• 1:01:59
  Speaker 1: I was on a trading desk in the 90s. I
• 1:02:01
  Speaker 1: remember how painful 96, 97, 98. And those were big
• 1:02:06
  Speaker 1: double-digit gains those years. They were.
• 1:02:09
  Speaker 2: They were.
• 1:02:09
  Speaker 1: So let me... I only have you for a few
• 1:02:11
  Speaker 1: more minutes. Let me jump to my favorite questions I
• 1:02:13
  Speaker 1: ask all my guests. Starting with, who are your mentors?
• 1:02:18
  Speaker 1: Who helped shape your career? You mentioned... Seth Bernstein, tell
• 1:02:23
  Speaker 1: us about the folks that really put you on the
• 1:02:26
  Speaker 1: career path you've been on.
• 1:02:27
  Speaker 2: Do you know, it's another thing I tell people joining
• 1:02:30
  Speaker 2: the industry, look at senior leaders. You learn a lot
• 1:02:33
  Speaker 2: from what made them successful. You also learn what's holding
• 1:02:37
  Speaker 2: some of them back. And along the way, I've tried
• 1:02:40
  Speaker 2: to do that. I go back to when I was
• 1:02:42
  Speaker 2: at Brown Brothers Harriman, the partner in charge of fixed income,
• 1:02:46
  Speaker 2: Gene Raines, love the guy. He did all his own research.
• 1:02:51
  Speaker 2: The Fed Tan book at the time, I think it's
• 1:02:53
  Speaker 2: now the Beige book, would come out. He would get
• 1:02:56
  Speaker 2: a copy and he would comb through it and read everything.
• 1:02:59
  Speaker 2: So from him, I learned, do your own research. And
• 1:03:03
  Speaker 2: I do that. I go online. I get all the
• 1:03:05
  Speaker 2: publications from the IMF, from central banks, and read them.
• 1:03:10
  Speaker 2: When I was at BlackRock from Larry and Rob, I
• 1:03:14
  Speaker 2: learned win. Winning is fun. You outperform benchmarks. You win
• 1:03:19
  Speaker 2: new mandates. It's a lot more fun than losing. And
• 1:03:24
  Speaker 2: I've tried to build that into J.P. Morgan, where we
• 1:03:29
  Speaker 2: position ourselves as being a winner that will outperform benchmarks,
• 1:03:33
  Speaker 2: will win client mandates. Everyone participates in the upside. When
• 1:03:40
  Speaker 2: I got to J.P. Morgan and I watch Jamie Dimon
• 1:03:46
  Speaker 2: and Mary Erdos win, What you learn is there is
• 1:03:50
  Speaker 2: an obligation and an expectation that if you work at
• 1:03:54
  Speaker 2: JPMorgan Chase, you do first class business in a first
• 1:03:58
  Speaker 2: class way. The clients expect it and they expect it.
• 1:04:02
  Speaker 2: So deliver on that. So there is a very high standard,
• 1:04:07
  Speaker 2: which I like. And I think people have to wear
• 1:04:10
  Speaker 2: that badge at JPMorgan Chase. They do expect. to deliver
• 1:04:16
  Speaker 2: higher than they have previously, but they see that they're
• 1:04:20
  Speaker 2: winning and that's all good.
• 1:04:22
  Speaker 1: Really interesting answer. Let's talk about books. What are you reading?
• 1:04:25
  Speaker 1: What are some of your favorites?
• 1:04:27
  Speaker 2: I do read a lot. It's funny, once you leave
• 1:04:30
  Speaker 2: college and university and you don't have to do the
• 1:04:32
  Speaker 2: required reading, you wander off into things that are interesting you.
• 1:04:37
  Speaker 2: I've read a trio of good books over the summer.
• 1:04:40
  Speaker 2: I read 1929. which was terrific, Andrew Ross Sorkin. I
• 1:04:47
  Speaker 2: also read Empire of Pain. Very good read. It's about
• 1:04:53
  Speaker 2: the Sackler Empire.
• 1:04:55
  Speaker 1: Oh, that's right.
• 1:04:56
  Speaker 2: So that's pretty interesting.
• 1:04:58
  Speaker 1: That also won a few awards, if I recall.
• 1:05:00
  Speaker 2: I think so. And then also because I'm a Philadelphian,
• 1:05:04
  Speaker 2: I've always wanted to read Walter Isaacson's Ben Franklin, and
• 1:05:08
  Speaker 2: I just finished that up, and that was a great read.
• 1:05:11
  Speaker 2: Next on my list is a fabulous debt.
• 1:05:14
  Speaker 1: I'm halfway through it.
• 1:05:16
  Speaker 2: Is it good?
• 1:05:18
  Speaker 1: First of all, when you tell someone you're reading a
• 1:05:20
  Speaker 1: history of bonds, the first reaction is, oh, that must
• 1:05:23
  Speaker 1: be boring as hell. I'm like, no, it's absolutely fascinating.
• 1:05:27
  Speaker 1: You go back to Venice and then you go to
• 1:05:29
  Speaker 1: the Dutch and then London. And, you know, we think
• 1:05:32
  Speaker 1: of all the big crashes as equity, but through history...
• 1:05:37
  Speaker 1: it's mostly been bonds. And you, you of all people,
• 1:05:41
  Speaker 1: you're going to love this book. Deeply researched, really well written.
• 1:05:44
  Speaker 2: Do you know, last week I had lunch with Robin.
• 1:05:48
  Speaker 2: He told me he has a signed copy of the
• 1:05:50
  Speaker 2: book for me. It's in Oslo. What am I supposed
• 1:05:53
  Speaker 2: to do with that? You're right. I don't think bonds
• 1:05:57
  Speaker 2: are boring. If you step back and think about it,
• 1:06:00
  Speaker 2: what I love is we can finance anything. Businesses, households, governments.
• 1:06:05
  Speaker 2: Who else can do that?
• 1:06:06
  Speaker 1: And, and, Not only did they finance making the Netherlands,
• 1:06:13
  Speaker 1: which is below sea level, habitable, but it's why the
• 1:06:18
  Speaker 1: British were able to beat Napoleon, the greatest general in Europe,
• 1:06:22
  Speaker 1: because his financing costs were so much higher than theirs.
• 1:06:26
  Speaker 1: I don't want to spoil anything. You're going to enjoy
• 1:06:29
  Speaker 1: this book. I knew a lot of stuff in it,
• 1:06:31
  Speaker 1: but it was just presented in such a fascinating way.
• 1:06:35
  Speaker 1: Who would have guessed? What else are you doing for
• 1:06:39
  Speaker 1: entertainment these days? What are you listening to or streaming
• 1:06:42
  Speaker 1: or watching?
• 1:06:43
  Speaker 2: What am I streaming? I like sort of the spy
• 1:06:47
  Speaker 2: espionage stuff.
• 1:06:48
  Speaker 1: Same.
• 1:06:49
  Speaker 2: Lioness is really good this year. Falda is shockingly good. Um,
• 1:06:56
  Speaker 2: you know, it, it's, it's a tough watch, but it's
• 1:06:59
  Speaker 2: really good.
• 1:06:59
  Speaker 1: So stressful. You can't go to sleep after Fowda.
• 1:07:02
  Speaker 2: Yeah.
• 1:07:03
  Speaker 1: Lioness, that was some cliffhanger at the end. Have you
• 1:07:05
  Speaker 1: finished the season?
• 1:07:06
  Speaker 2: Yeah, I have. Yeah. Keep you coming back. Yep. You know,
• 1:07:10
  Speaker 2: Reacher is kind of in that covert ops. That's interesting.
• 1:07:14
  Speaker 2: And then of course, because I spent time in England,
• 1:07:18
  Speaker 2: I like some of the British stuff, slow horses to me.
• 1:07:22
  Speaker 2: How does Gary Oldman do it?
• 1:07:23
  Speaker 1: He's great.
• 1:07:24
  Speaker 2: How is he that character? That's great. And then Ted Lasso,
• 1:07:28
  Speaker 2: of course.
• 1:07:30
  Speaker 1: So my wife doesn't watch Slow Horses, but I like it.
• 1:07:36
  Speaker 1: And she just sucked me into the new Reacher spinoff.
• 1:07:40
  Speaker 2: Neely? Yeah. Very good. Of course we're watching that.
• 1:07:43
  Speaker 1: We watched the first one. We just watched the first
• 1:07:46
  Speaker 1: Ted Lasso. Because we always wait for the whole season
• 1:07:49
  Speaker 1: to drop.
• 1:07:49
  Speaker 2: Oh, you got to binge it, huh?
• 1:07:51
  Speaker 1: Well, one a night. I don't want to wait 10 weeks.
• 1:07:54
  Speaker 1: That was the problem with Reacher. Last two questions. Normally here,
• 1:07:58
  Speaker 1: I would ask what sort of advice you would give
• 1:08:01
  Speaker 1: to a college grad interested in your space. Instead, I'm
• 1:08:05
  Speaker 1: going to give your own quote back to you. This
• 1:08:07
  Speaker 1: is something you say to interns, and I want you
• 1:08:10
  Speaker 1: to comment on it. The way to differentiate yourself now...
• 1:08:14
  Speaker 1: is mastering AI tools the way a previous generation mastered spreadsheets.
• 1:08:21
  Speaker 1: Explain that.
• 1:08:22
  Speaker 2: You have a technology advantage coming out of university because
• 1:08:28
  Speaker 2: it's a way of life. And those of us who
• 1:08:30
  Speaker 2: have been in business for a while are generally still
• 1:08:34
  Speaker 2: on legacy systems, eyeing what will be coming along. When
• 1:08:39
  Speaker 2: I started at Bankers Trust in 1981, we did everything
• 1:08:41
  Speaker 2: on yellow ledger paper and HP 12Cs. And then the
• 1:08:49
  Speaker 2: first sort of electronic spreadsheet came along, VisiCalc. And I
• 1:08:53
  Speaker 2: had done some basic programming back in high school and
• 1:08:58
  Speaker 2: at Penn. So I had some sort of background and
• 1:09:01
  Speaker 2: immediately started crunching numbers with VisiCalc and looking at dozens
• 1:09:06
  Speaker 2: of companies at once instead of spending the whole day
• 1:09:10
  Speaker 2: trying to look at one company. And it created a
• 1:09:13
  Speaker 2: step change in my career. It differentiated what I was
• 1:09:19
  Speaker 2: doing relative to what everyone else is doing. Those that
• 1:09:23
  Speaker 2: we're interviewing for our platform now who are in college
• 1:09:26
  Speaker 2: or university, we're seeing how AI-enabled they are. We can
• 1:09:30
  Speaker 2: teach them the finance. I taught myself that, going to
• 1:09:34
  Speaker 2: CFA class and being in the business. We're all there.
• 1:09:38
  Speaker 2: But we want them to come in and give us
• 1:09:40
  Speaker 2: the aha moment, like, why aren't you doing it this
• 1:09:43
  Speaker 2: way using this GPT or this tool? Why are you
• 1:09:48
  Speaker 2: doing it that way? So to me, that's the most
• 1:09:50
  Speaker 2: critical thing.
• 1:09:52
  Speaker 1: And our final question, what do you know about the
• 1:09:54
  Speaker 1: world of fixed income investing today? Might have been useful
• 1:09:58
  Speaker 1: back in the 90s when you were really first getting started.
• 1:10:01
  Speaker 2: I think it's OK to take risks. I think the
• 1:10:04
  Speaker 2: bond market presents loads of different risks to you. There
• 1:10:09
  Speaker 2: are new instruments that come along. There are new vehicles.
• 1:10:14
  Speaker 2: There are new tools to use. Take some risk.
• 1:10:19
  Speaker 1: Really, really good advice. We have been speaking with Bob Michaels.
• 1:10:25
  Speaker 1: He is the head of global fixed income and currency
• 1:10:28
  Speaker 1: and commodities, as well as chief investment officer at J.P.
• 1:10:32
  Speaker 1: Morgan Asset Management. If you enjoy this conversation, well, be
• 1:10:37
  Speaker 1: sure and check out any of the previous 664 we've
• 1:10:40
  Speaker 1: done over the past 12 years. You can find those
• 1:10:45
  Speaker 1: at iTunes, Spotify, Bloomberg, YouTube, wherever you get your favorite
• 1:10:50
  Speaker 1: podcasts from. I would be remiss if I didn't thank
• 1:10:53
  Speaker 1: the crack team that helps put these conversations together each week.
• 1:10:57
  Speaker 1: Elizabeth Sedrin is my video producer. Anna Luke is my
• 1:11:02
  Speaker 1: podcast producer. Sean Russo is my researcher. I'm Barry Ritholtz.
• 1:11:08
  Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.