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Maria Vassalou on the Small-Cap Effect · Masters in Business

0:01
Speaker 1: This is Mesters in Business with very Rid Holds on
0:06
Speaker 1: Bloomberg Radio. This week on the podcast, I have an
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Speaker 1: extra extra special guest. Maria Vassalu has a fascinating history
0:17
Speaker 1: and background London School of Economics to Columbia School of Business,
0:21
Speaker 1: where she actually was a professor for over a decade
0:24
Speaker 1: and started consulting to the hedge fund and financial services industry,
0:29
Speaker 1: and that led her to various jobs at Washerstein, Perella
0:34
Speaker 1: McKenzie's asset management group. She worked with George Soros, she
0:39
Speaker 1: worked with Steve Cohen at ZAC Capitol, and ultimately ends
0:43
Speaker 1: up joining Goldman Sachs Asset Management Group as cocio. A
0:49
Speaker 1: fascinating approach to macro, very quantitatively driven and very academic
0:54
Speaker 1: research oriented. She wants to know exactly when this, that
0:59
Speaker 1: and the other thing happens, What does it mean for
1:02
Speaker 1: this segment of the market. When do you own growth?
1:05
Speaker 1: When do you own equity? Why is certain anomalies persistent?
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Speaker 1: And why do some seem to get arbitraged away fairly quickly.
1:14
Speaker 1: I found this to be an absolutely fascinating conversation and
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Speaker 1: I think you will also with no further ado Goldman Sachs,
1:23
Speaker 1: Maria Vassalu tell us a little bit about the sort
1:28
Speaker 1: of work you did. How relevant was the academic research
1:33
Speaker 1: to what you're actually doing today. Well, actually, it sounds
1:38
Speaker 1: very unusual to go from academia to the industry, and
1:43
Speaker 1: usually it's not considered a very successful path. But in
1:48
Speaker 1: my case it was very helpful because I had the
1:51
Speaker 1: opportunity to spend over ten years doing intensive research in
1:57
Speaker 1: the intersection of macro and fine and as surprising and
2:01
Speaker 1: all these questions that I was trying to answer had
2:06
Speaker 1: direct applications to Hedgemund strategies and portfolio management, and so
2:12
Speaker 1: actually part of the reason I moved to the industry
2:15
Speaker 1: was because while I was doing this research and presenting
2:19
Speaker 1: it around and publishing it in academic journals, it was
2:23
Speaker 1: attracting attention from the industry, and I had the opportunity
2:27
Speaker 1: to be a retained consultant for Citadel, for Deutsche Acid
2:32
Speaker 1: Management and then eventually also for Saurusmund Management, and so
2:36
Speaker 1: along the way I was getting offers to join the industry,
2:40
Speaker 1: and finally I decided to join the SOURS. So it
2:44
Speaker 1: wasn't like a big Eureka moment. It just gradually became
2:48
Speaker 1: apparent that you were working in a space that was
2:51
Speaker 1: very valuable to people managing capital on a very let's
2:56
Speaker 1: call it aggressive basis, just a hey, we're looking for
3:00
Speaker 1: we're looking to outperform, and what Maria does could be
3:03
Speaker 1: really useful to us. That was certainly part of it.
3:06
Speaker 1: There was also an intellectual like curiosity aspect to it,
3:11
Speaker 1: because when I was doing that work, it was also
3:15
Speaker 1: the time where behavioral finance became more prevalent, if you like.
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Speaker 1: And I was always on the camp of rational risk
3:27
Speaker 1: based explanations for various surprising phenomena. And my view was
3:33
Speaker 1: always if some if an anomaly persist and it doesn't
3:38
Speaker 1: go away, then maybe it's not an anomaly, maybe it's
3:44
Speaker 1: risk based. Then it's a risk factor that we haven't
3:46
Speaker 1: really accounted for. And so a lot of my research
3:50
Speaker 1: was related to trying to uncover what were the underlying
3:55
Speaker 1: risk factors. And the place where I was looking for
3:58
Speaker 1: those risk factors was in the real economy. So I
4:01
Speaker 1: was relating our surprises to GDP growth, to investment growth,
4:08
Speaker 1: to default rest factors like this, and so I was
4:17
Speaker 1: providing explanations for our surprising anomalists, such as the small
4:21
Speaker 1: cap effect or the value effect. Those were the first
4:25
Speaker 1: two that popped into my mind when you said, Hey,
4:28
Speaker 1: is this truly anomalous or is there a risk factor?
4:31
Speaker 1: Some people have said small caps tend to be more volatile,
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Speaker 1: more risky. That's where the additional performance comes from. When
4:39
Speaker 1: we look at value, a lot of people say, well,
4:41
Speaker 1: they're widely disliked, that's why they're cheap. So there's a
4:44
Speaker 1: behavioral side. How do you crunch the numbers on that?
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Speaker 1: And where do you come out on small cap and value? Yeah,
4:51
Speaker 1: it was actually very interesting because when I looked at
4:54
Speaker 1: the small caps, it's actually if you dissect the small caps,
5:00
Speaker 1: you see that the small cap effect always exists in
5:03
Speaker 1: the smallest of the small caps and it's related to
5:06
Speaker 1: default risk. Wait a second, so there's a small cap effect,
5:10
Speaker 1: and then within small caps there's a microcap effect and
5:14
Speaker 1: even smaller cap effect. Yes, and what happens is this
5:20
Speaker 1: small cap effect is related to the default probability. So
5:24
Speaker 1: I have a paper where I computed default probabilities based
5:28
Speaker 1: on Merton's model, and I did this for the whole
5:31
Speaker 1: Crows section of assets, and then I started them and
5:35
Speaker 1: created desiles and so on and tracked how the behavior
5:39
Speaker 1: is over time, and of course you see that depending
5:43
Speaker 1: on the part of the business cycle you're going through,
5:47
Speaker 1: the default probability varies over time, and it increases during
5:52
Speaker 1: downturns of the business cycle and so on. And when
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Speaker 1: when that happens, then the small cap effect becomes much
6:01
Speaker 1: more prominent, And so you see it in the whole
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Speaker 1: cross section of small caps. But when the default probabilities
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Speaker 1: are lower and you look at the whole cross section
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Speaker 1: of small caps, it's not so apparent. So people say
6:15
Speaker 1: that it goes away, but it doesn't really go away.
6:19
Speaker 1: It's just it's a matter of magnitude. Then where are
6:22
Speaker 1: you're looking for it? Well, that's really interesting. What about
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Speaker 1: in the value space? Do you see the same issue
6:29
Speaker 1: of what used to be called Benjamin grab called stubs
6:33
Speaker 1: or cigar stubs. Is that the same default risk when
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Speaker 1: stocks become very very cheap or is there something else
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Speaker 1: at play there In the case of value versus growth,
6:45
Speaker 1: it was it's more related to the level of GDP
6:48
Speaker 1: growth and investment growth in different sectors of the economy,
6:54
Speaker 1: So it's not so much a default aspect, but it's
6:58
Speaker 1: more has to do with a variation of real GDP growth.
7:05
Speaker 1: So when GDP is growing rapidly, I would assume you
7:09
Speaker 1: would want growth stocks, and when things are going sideways,
7:12
Speaker 1: there's a greater margin of safety with value and that
7:16
Speaker 1: and that's why you So last year, for instance, when
7:19
Speaker 1: GDP growth started becoming a little bit more muted and
7:23
Speaker 1: expectations were for a lower GDP growth going forward, value
7:28
Speaker 1: stocks outperformed growth but by a huge margin, right, big
7:32
Speaker 1: big disparity. Yeah, So at that time I would go
7:36
Speaker 1: to conferences and publish papers and make those arguments, and
7:40
Speaker 1: then I had other colleagues that I would try to
7:43
Speaker 1: provide behavior explanations. And similarly with the momentum effect which
7:52
Speaker 1: I had related to corporate innovation as I was calling it,
7:57
Speaker 1: which was separate innovation, which was really a firm level
8:02
Speaker 1: total factor productivity. So how much innovation companies produce and
8:08
Speaker 1: how long they can remain leaders in that innovation to
8:13
Speaker 1: really maintain that momentum. So a company becomes very innovative,
8:18
Speaker 1: you get a little bit of a flywheel effect and
8:21
Speaker 1: that innovation DNA starts to spill over into everything they do.
8:25
Speaker 1: Is it just that simple? Right? And then but then
8:27
Speaker 1: it's it's a matter of being able to maintain this
8:31
Speaker 1: um and can companies maintain this indefinitely or is there
8:35
Speaker 1: a sly? Not? Usually not um, And so they go
8:40
Speaker 1: into cycles. And it also relates to when they are losers, um,
8:48
Speaker 1: you know, what's the probability of recovering And it really
8:52
Speaker 1: has to do with whether they have the ability to
8:55
Speaker 1: innovate and get out of that trap. So so you
8:59
Speaker 1: can see a very high correlation between losers and winners
9:03
Speaker 1: with respect to how they perform on that measure. But anyway,
9:08
Speaker 1: so we had all these ideas of about how all
9:13
Speaker 1: this different phenomena were formed and what was driving them,
9:17
Speaker 1: And of course my colleagues on the behavioral site had
9:20
Speaker 1: different ideas, and so we were always debating these topics
9:25
Speaker 1: at conferences and through publications, and at some time, at
9:30
Speaker 1: some point it became to me a little bit repetitive,
9:33
Speaker 1: and I felt like nobody could equivocally prove their point
9:39
Speaker 1: as to who is really right. And so at some
9:43
Speaker 1: point I thought, well, if I can go and manage
9:46
Speaker 1: money based on this risk based explanations and based on
9:51
Speaker 1: the way I understand how the world functions, how the
9:55
Speaker 1: market's functions, if that works, then that's one form of
10:01
Speaker 1: justification of what I'm doing really really intriguing. It's um.
10:07
Speaker 1: It sort of is like the John Sex poem about
10:12
Speaker 1: the blind men describing the elephant. They don't have to
10:16
Speaker 1: be one doesn't have to be right or wrong. They
10:18
Speaker 1: could both be right. You're just approaching it from a
10:20
Speaker 1: different angle. Is that fair? Or is clearly one is
10:24
Speaker 1: right and one is wrong? And that's that. I think
10:26
Speaker 1: it's much more nuanced, and as the time goes by,
10:30
Speaker 1: I think the two lines get blurred. Also because of technology,
10:35
Speaker 1: because of the increase presence of retail investors in the markets,
10:42
Speaker 1: the market microstructure has changed, and so UM, it's much
10:47
Speaker 1: more common now to see prolonged deviations from fundamentals in
10:53
Speaker 1: the in the market. And we've seen that recently as well.
10:58
Speaker 1: And so I wouldn't say that the one approach is
11:02
Speaker 1: right and the other one is wrong. But maybe it's
11:04
Speaker 1: a matter of timing. I think the risk based explanations
11:08
Speaker 1: need longer time to play out some of this behavioral driver,
11:14
Speaker 1: some more short term drivers. So you were consulting to
11:18
Speaker 1: the industry while you're an academia that had to make
11:22
Speaker 1: that transition. When you finally decided to jump in with
11:25
Speaker 1: both feet, I'm assuming you were prepared for what you
11:29
Speaker 1: were jumping into. It wasn't a big shock or am
11:33
Speaker 1: I wrong? Once you left the quiet confines of academia
11:37
Speaker 1: Wall Street is still a shock to the system. Well,
11:40
Speaker 1: it was certainly not exactly a shock, but I had
11:44
Speaker 1: to get adapted to it. But I am someone who
11:48
Speaker 1: is quite adaptable. I left my country. I lived in
11:52
Speaker 1: six different countries. I came to the US, and so
12:00
Speaker 1: you know, I'm used to changing environments and try to
12:04
Speaker 1: adapt to these new environments. Suddenly going to Sarus was
12:09
Speaker 1: a big eye opener. And also I was there during
12:14
Speaker 1: a very interesting time in the markets. What years were
12:18
Speaker 1: those I joined in the summer of two thousand and six?
12:22
Speaker 1: Were you there for the financial crisis? Pretty much? And
12:27
Speaker 1: I started, actually I developed my strategies and built the
12:32
Speaker 1: Quantitative Strategiest group from the summer of two thousand and
12:36
Speaker 1: six onwards. And I started running my strategies with money
12:43
Speaker 1: in March of oh seven, so soon before the quant meltdown, right,
12:49
Speaker 1: which was interesting, and so I suddenly I had a
12:54
Speaker 1: baptism by fire in the markets. But they was a
12:59
Speaker 1: great experience. We did very well during the quant meltdown,
13:04
Speaker 1: and it was also an opportunity to see up close
13:08
Speaker 1: what was happening behind the scenes in the markets, how
13:11
Speaker 1: the financial crisis was developing. And also it was very
13:17
Speaker 1: interesting because even though George Sarrows had retired from active
13:22
Speaker 1: in investing, when he saw what was happening in the markets,
13:26
Speaker 1: he came back and so I'm excited. Yeah, And so
13:30
Speaker 1: I had the opportunity to observe him up close, to
13:34
Speaker 1: listen to his views, to interact with him, and that
13:37
Speaker 1: was certainly a great experience I can imagine. So when
13:41
Speaker 1: you go through a substantial macro event, whether it was
13:46
Speaker 1: the quantz crash or the financial crisis or even the pandemic,
13:51
Speaker 1: does that send you back to your models to tweak them.
13:54
Speaker 1: Do those giant events affect how markets behave subsequently leads
14:00
Speaker 1: you to have to make some changes or hey, the
14:04
Speaker 1: model is going to do what the model does and
14:06
Speaker 1: it doesn't matter what happens out there. Well, que models
14:09
Speaker 1: always need to be evolved, so you kind of staled it. Yes,
14:14
Speaker 1: you can just build it and forget it, but it
14:17
Speaker 1: has to be done in a way that keeps up
14:21
Speaker 1: with the developments in the markets. So, for instance, when
14:27
Speaker 1: the British referendum happened, Well, we didn't have such an
14:31
Speaker 1: event before in the market, So that's not something where
14:35
Speaker 1: you want to make your model adapted to because we're
14:39
Speaker 1: not going to be having these events all the time.
14:42
Speaker 1: But that's an instance where you want to take your
14:45
Speaker 1: model and stress tested to see how it will behave
14:49
Speaker 1: depending on different scenarios that may transpire as a result
14:54
Speaker 1: of this event. So that's what we would do, and
14:58
Speaker 1: then we will ey'd whether to take down risk or
15:02
Speaker 1: leave the risk on and so on. If you have
15:05
Speaker 1: other phenomenon, like you know, changes and correlations between assets
15:11
Speaker 1: or changes in the level of volatilities, these are things
15:15
Speaker 1: that you want the model to adapt to going forward
15:20
Speaker 1: and incorporate this information into the model. So in that
15:24
Speaker 1: case you want to evolve it. Or there maybe factors
15:28
Speaker 1: that were not present before and you want to inform
15:33
Speaker 1: the model with it. For instance, how the monetary policy
15:38
Speaker 1: changes over time, the fact that we had QE for
15:42
Speaker 1: a long period of time. All these things are things
15:45
Speaker 1: you want to include in the model, but you have
15:48
Speaker 1: to be selective and really treat each case separative. So
15:53
Speaker 1: you're working with George Soros, known as a big macro trader,
15:58
Speaker 1: he makes big bets about these large events, you end
16:01
Speaker 1: up going to Steve Cohen and Zach Capitol. He's much
16:05
Speaker 1: more of a granular trader. He is not necessarily looking
16:10
Speaker 1: at the big events. He's looking at things on really
16:13
Speaker 1: where the rubber meets the road, so to speak. What
16:16
Speaker 1: was that transition like to go from a very top
16:19
Speaker 1: down approach to somebody who's you know, right there in
16:22
Speaker 1: the weeds with the rest of the trading desk. Yes,
16:27
Speaker 1: and now the great lesson. And I was still a
16:30
Speaker 1: global macro portfolio manager with my own silo at the
16:35
Speaker 1: SAC Capital. But as you said, at Sorrows it was
16:39
Speaker 1: all about big macro beds, and at the SAC Capitol
16:47
Speaker 1: it was all about risk management. So even though when
16:51
Speaker 1: I came from academia to Sorrows, I would look at
16:54
Speaker 1: how they were running the portfolios, and I was constantly
16:58
Speaker 1: scared because I felt they were taken in way too
17:00
Speaker 1: much risk compared to what I thought from an academic
17:04
Speaker 1: perspective they should be doing. Of course, I was novice
17:07
Speaker 1: at that time in the profession. Then I went to
17:13
Speaker 1: SAC and I realized that actually being careful with risk
17:20
Speaker 1: management is very much respected and even more than what
17:24
Speaker 1: I thought should have been happening at Sorrows, and so
17:30
Speaker 1: I spent the subsequent years trying to refine my models,
17:36
Speaker 1: make them much more smooth in terms of their return stream,
17:43
Speaker 1: focused much more on risk management downside the risk hedging,
17:49
Speaker 1: and I think the models became better as a result.
17:53
Speaker 1: So let's talk a little bit about how you ended
17:55
Speaker 1: up at Goldman. You were at Columbia School of Business
17:58
Speaker 1: where you were teaching, you were at Soros and zach Capital.
18:03
Speaker 1: What attracted you to government, Well, it's actually, um, the
18:07
Speaker 1: whole asset management business is changing. So we went from
18:13
Speaker 1: a period where hedge funds was really the hot area
18:19
Speaker 1: to be and of course there are all this big
18:22
Speaker 1: hedge funds that were developed over time. Um. But over time,
18:27
Speaker 1: as you know, there was this big shift or was
18:32
Speaker 1: passive investing, and so that was a big challenge for
18:37
Speaker 1: for hedge funds. At the same time, we had all
18:41
Speaker 1: this decrease in volatility and financial repression because of the
18:46
Speaker 1: QE and the extra liquidity that was in the markets
18:51
Speaker 1: that made them trading in in hedge funds much more difficult,
18:58
Speaker 1: if you like, in terms of provide superior returns. I'm
19:02
Speaker 1: glad you brought that up because if you look at
19:06
Speaker 1: hedge fund performance before the Financial crisis, there's a lot
19:10
Speaker 1: of alpha generators. The hedge fund industry generally is outperforming
19:14
Speaker 1: their benchmarks. I mean, not just the top decile. As
19:17
Speaker 1: a group, they seem to have done very well. And
19:20
Speaker 1: then post financial crisis it became very hard to generate
19:24
Speaker 1: alpha and there was a huge gap between the big
19:28
Speaker 1: winners and the losers. Are you attributing that to zero
19:32
Speaker 1: interest rate and quantitative easing or did things just change
19:37
Speaker 1: so much people didn't adapt quickly enough. Well, there were
19:40
Speaker 1: two things. I mean, my strategies were always in the
19:44
Speaker 1: space of relative value across SASA classes, so there there
19:49
Speaker 1: was all Yes, there was always some volatility to pick up,
19:54
Speaker 1: and so the strategies kept working. But by and large
19:58
Speaker 1: in the overall industry, if you look at long short equity,
20:02
Speaker 1: there was very little, you know, within us a class
20:07
Speaker 1: volatility to pick up. And also you have a period
20:11
Speaker 1: that because of this extremely liquidity and quantitative easing, equities
20:20
Speaker 1: were performing extremely well and so being passive and just
20:24
Speaker 1: holding the index you were doing great. So what was
20:29
Speaker 1: the point of getting into hedge funds having a zero
20:34
Speaker 1: beta exposure? Or going into other strategies. And so you
20:40
Speaker 1: saw that the hedge fund industry started changing over time.
20:44
Speaker 1: A lot of traditional macro funds actually started becoming more
20:49
Speaker 1: equity oriented funds or including a lot of equity exposure
20:54
Speaker 1: just to try to pick up beta in their strategies.
20:58
Speaker 1: And also there was an increased consolidation of the industry
21:03
Speaker 1: towards the bigger managers. But to me, at the same time,
21:09
Speaker 1: I was finding this uh, this uh concentration on passive
21:16
Speaker 1: investing also problematic because passive investing works when the markets
21:21
Speaker 1: are efficient, and the markets are efficient when there is
21:25
Speaker 1: enough trading happening for new information to be incorporated in
21:30
Speaker 1: the prices. If everybody is a passive investor, then you
21:34
Speaker 1: don't have this mechanism in place to incorporate information in
21:39
Speaker 1: prices right away to really benefit from them. So, so
21:45
Speaker 1: how much active management does there have to be for
21:49
Speaker 1: price discovery to really take place? And I've asked people
21:53
Speaker 1: like Andrew Lowe and MIT who said, you can have
21:57
Speaker 1: ninety percent passive, the remaining ten percent as we're all
22:00
Speaker 1: your price discovery will take place. Does that sound like
22:03
Speaker 1: it's a lot or do you agree with that perspective?
22:06
Speaker 1: That's Andrews answer. I think derives from the idea of
22:12
Speaker 1: the marginal investor, as we're saying academia. So all you
22:16
Speaker 1: need is the marginal investor is rational and always ready
22:20
Speaker 1: to take advantage of opportunities. Yes, but it's not very
22:23
Speaker 1: clear who the marginal investor is in practice. If they exist,
22:28
Speaker 1: then what I have noticed through the fifteen years that
22:33
Speaker 1: I've been managing my own strategies is that the markets
22:38
Speaker 1: have become a little bit less efficient over time, in
22:42
Speaker 1: the sense that they have become that you seem longer
22:46
Speaker 1: deviations from fundamentals. Eventually they do correct, but you seem
22:51
Speaker 1: longer deviations from fundamentals. Sometimes you see more intra day
22:56
Speaker 1: volatility in certain events, especially around announcements and so on.
23:03
Speaker 1: And so maybe this is attributable to an increased exposure
23:09
Speaker 1: to passive management. Maybe it's attributable to more noise traders
23:14
Speaker 1: what we use to call noise traders, which are effectively
23:18
Speaker 1: retail investors. Right, well, let me let's stay with this
23:21
Speaker 1: a second, because I'm intrigued by the concept of the
23:24
Speaker 1: market becoming less efficient. When I look at the sixties,
23:30
Speaker 1: the seventies, the eighties, and the nineties, it seems as
23:33
Speaker 1: if we've gotten more and more heavily focused on technology
23:37
Speaker 1: and program training and now algorithmic and high frequency training,
23:42
Speaker 1: and I would assume that that would make the market
23:46
Speaker 1: more efficient and harder to spot arbitrage opportunities and these
23:53
Speaker 1: various anomalies. You're suggesting passive is creating less efficiency. Does
24:00
Speaker 1: that mean there's more opportunity for active traders. I think
24:04
Speaker 1: there is more intradate trading now than it used to be.
24:07
Speaker 1: So you have the passive trade, the passive investors, and
24:10
Speaker 1: then you have a lot of intradate trading, and that's
24:14
Speaker 1: based on algos that are looking for short term trends
24:18
Speaker 1: to capitalize. Some of them are AI based, so they
24:23
Speaker 1: may be looking for particular words and then they will
24:27
Speaker 1: extrapolate from that. For instance, it was interesting to notice
24:32
Speaker 1: in the last FAT meeting, Jare Powell used the word
24:39
Speaker 1: disinflation a few times. And disinflation, yes, a deflation, just
24:44
Speaker 1: a slower rate of inflation. Yeah, So that means that
24:48
Speaker 1: the inflation is coming down and the markets will start
24:52
Speaker 1: rallying as soon as he would pronounce that, not because
24:56
Speaker 1: he was suggesting an inflation by and large is coming down,
25:00
Speaker 1: but he did say that in certain segments of the
25:03
Speaker 1: CPI we were observing disinflation, such as in the goods markets,
25:09
Speaker 1: and that could have been a case of you know,
25:15
Speaker 1: AI based the algorithms that were utilizing words to really
25:22
Speaker 1: take advantage of developments in the markets, and the following
25:26
Speaker 1: day the market will reverse the rally once people will
25:30
Speaker 1: digest what he actually said. So perhaps some of these
25:34
Speaker 1: algorithms are making markets less efficient then because they're keen
25:39
Speaker 1: on a word, but not necessarily the full meaning of
25:41
Speaker 1: the speech is that what we're thinking. They certainly create
25:46
Speaker 1: more intra day volatility. It's hard to say whether they
25:50
Speaker 1: maybe in some cases they make the more efficient, maybe
25:54
Speaker 1: in some cases less efficient, but I think what is
25:58
Speaker 1: likely the case is that they create more intra day volatility.
26:02
Speaker 1: So let's bring this back to how does this attract
26:05
Speaker 1: you to Goldman Sachs. You know, back in the eighties
26:09
Speaker 1: and nineties, it seemed like these young hotshots would start
26:13
Speaker 1: at Goldman, they put together a trading record, Goldman would
26:18
Speaker 1: basically seen them become their prime broker and send them
26:22
Speaker 1: out to be hedge funds. Now it almost sounds as
26:25
Speaker 1: if the opposite is happening. Hey had a big firm.
26:27
Speaker 1: With Goldman, we have so many different tools that you
26:31
Speaker 1: can use that you don't get at a small hedge fund.
26:35
Speaker 1: You're better off working at the big firm. Did that
26:37
Speaker 1: play into your thought process? Tell us a little bit
26:40
Speaker 1: about that. I think the future of the industry is
26:43
Speaker 1: really in the solutions space. Solutions space, Yes, that's really
26:48
Speaker 1: what institutional investors need and what let's define that a
26:53
Speaker 1: little bit. In other words, they're not just looking for alpha.
26:57
Speaker 1: We have a problem and we're looking for a solution
26:59
Speaker 1: to that issue. Well, yes, we're looking for particular solutions,
27:03
Speaker 1: whether that's a liability, whether it's a completion of existing portfolio,
27:09
Speaker 1: whether it's a particular return target they have, whether there
27:13
Speaker 1: is a particular liquidity profile that they need to achieve.
27:19
Speaker 1: There are all kinds of needs that institutional investors have
27:25
Speaker 1: that they cannot satisfy by just investing in the hedge
27:30
Speaker 1: fund industry because the assets they manage are many times
27:35
Speaker 1: larger than what the hedge fund industry can absorb. At
27:38
Speaker 1: the same time, just being passive is not really the
27:43
Speaker 1: way to go, and so what I think is happening
27:47
Speaker 1: is the two areas are merging somewhere in the middle
27:51
Speaker 1: where you're really what the demand is for creating holistic
27:57
Speaker 1: portfolios that incorporate as classes from the whole spectrum of
28:02
Speaker 1: assets out there, whether it's in public markets or private markets.
28:09
Speaker 1: Focus on portfolio construction with good the risk management framework
28:16
Speaker 1: and try to provide the right the profile of risk
28:21
Speaker 1: adjusted returns for the particular needs of the investor, incorporating
28:26
Speaker 1: alpha in there, but not just focusing on the alpha component.
28:32
Speaker 1: And I think this is interesting in many respects. You're
28:36
Speaker 1: really fulfilling and big need of this institutional investors. You're
28:41
Speaker 1: bringing together skills from the whole spectrum of the industry,
28:47
Speaker 1: and you get to create the bespoke customized solutions. So
28:54
Speaker 1: for someone like me who started my career in academia
28:58
Speaker 1: and spend my research years thinking about porfolic construction, asset
29:06
Speaker 1: the location macro as surprising, and then I went into
29:11
Speaker 1: the headge funding industry, this is an area that really
29:16
Speaker 1: straddles the whole spectrum of things that I have done,
29:20
Speaker 1: and I think it's really where the future is. So
29:24
Speaker 1: when you talk about clients, I'm assuming the bulk of
29:27
Speaker 1: your clients are institutional foundations and Dawman's family offices, things
29:32
Speaker 1: along those lines, and sovereigns as well, central banks. Oh really,
29:37
Speaker 1: so that runs the gamut of the largest of a
29:40
Speaker 1: large sort of clients. I'm going to assume that each
29:43
Speaker 1: of those clients have a very different profile and are
29:47
Speaker 1: looking for very different sorts of solutions. That's true. So
29:51
Speaker 1: we were talking about when you joined Goldman, you picked
29:55
Speaker 1: quite a time to come into Goldman, just about the
29:59
Speaker 1: top of the market. Tell us a little bit about
30:01
Speaker 1: what that transition was like when you started a government.
30:06
Speaker 1: It's certainly a time when we need to rethink the
30:10
Speaker 1: way we approach investing. That's because now we are dealing
30:15
Speaker 1: with much higher volatility than we did in the past.
30:19
Speaker 1: We have, instead of ample liquidity in the markets and
30:26
Speaker 1: accommodative monetary policy, we have a reversal of the monetary
30:33
Speaker 1: policy and actually withdrawal of accommodation. At the same time,
30:39
Speaker 1: we are going through uh tectonic changes in the world
30:44
Speaker 1: economic order. We're going through a deglobalization process where we
30:52
Speaker 1: see that actually on shore in becoming more and more
30:57
Speaker 1: a topic of discussion. There is fragmentation in the goods markets.
31:04
Speaker 1: There is this distabilization that we are observing in the
31:10
Speaker 1: geopolitical front that can significantly change also trade patterns, but
31:17
Speaker 1: it also affects alliances at the political level. We have
31:25
Speaker 1: changeing demographics, we have the decurbanization process that it's also
31:30
Speaker 1: affecting investment production processes across the board. And we also
31:41
Speaker 1: have the digitalization process that has been going on for
31:46
Speaker 1: a long time and it got accelerated with a pandemic.
31:50
Speaker 1: So there is a whole host of factors that affect
31:55
Speaker 1: the background of the environment in which we operate and
32:00
Speaker 1: how growth and inflation is going to evolve over time.
32:05
Speaker 1: And at the same time, we have also a number
32:07
Speaker 1: of short term drivers to the markets to take into account.
32:13
Speaker 1: Before we get to the short term, let's stick with
32:15
Speaker 1: these big long term macro deglobalization and geopolitical unrest and
32:22
Speaker 1: a new rate regime and on and on. How do
32:24
Speaker 1: you work these big factors into your process? Do you
32:29
Speaker 1: create a model where each of these factors have a
32:33
Speaker 1: specific weight when you're looking at the world from a
32:36
Speaker 1: top down perspective, How does that find its way to
32:41
Speaker 1: be expressed in an investment posture. We have a dual approach,
32:47
Speaker 1: so we certainly have our research process that it's based
32:50
Speaker 1: on models that we have created and we keep evolving.
32:54
Speaker 1: But we also have a qualitative approach in investing that
33:00
Speaker 1: comes through the experience of our analysts and researchers on
33:05
Speaker 1: particular asset classes, but also in terms of our ability
33:10
Speaker 1: to think through the macro environment and the implications that
33:15
Speaker 1: they may have on the investment environment and the various
33:20
Speaker 1: asset classes. So one of the things that I do
33:23
Speaker 1: is to really try to think through all these developments
33:27
Speaker 1: that are happening and the effects that may have on
33:33
Speaker 1: the markets and on our investments. And then you mentioned
33:38
Speaker 1: there are shorter term inputs that dry volatility and obviously
33:43
Speaker 1: affect price. How do you incorporate that into your process?
33:47
Speaker 1: Those are easier to incorporate into the process because there
33:51
Speaker 1: are things that you can observe at higher frequencies and
33:55
Speaker 1: you can incorporate into the models through quantity native approaches.
34:01
Speaker 1: The hardest part is to incorporate the bigger picture, and
34:06
Speaker 1: that's really where the qualitative overlay comes into play. Huh,
34:12
Speaker 1: very very intriguing. So you're looking at the world's late
34:17
Speaker 1: twenty twenty one markets are just about at their all
34:21
Speaker 1: time high, and yet it's pretty clear inflation is ticked up.
34:25
Speaker 1: The Fed hasn't begun raising rates, but they're talking about it.
34:30
Speaker 1: At what point do you start to say the twenty
34:34
Speaker 1: twenty two and forward era is look very different than
34:39
Speaker 1: the decade from twenty twenty one back. Where do you say,
34:45
Speaker 1: all right, this is the line in the sands and
34:48
Speaker 1: we have to very much adapt to what's coming well.
34:51
Speaker 1: I joined the Goldman in July of twenty twenty one,
34:56
Speaker 1: and it was a pretty good year in the equity markets, yes,
35:00
Speaker 1: But by the fall of twenty twenty one, and particularly
35:04
Speaker 1: in November, I was convinced that we needed to start
35:08
Speaker 1: cutting risk in our portfolios because we had a period
35:14
Speaker 1: of the pandemic where we sow a reversal of monetary
35:19
Speaker 1: policy back to zero rates and increased KWEE at the
35:23
Speaker 1: same time as we had massive fiscal accommodation, and that
35:28
Speaker 1: had to be inflationary, and so I was very concerned
35:33
Speaker 1: about this effects and how inflation will play out and
35:39
Speaker 1: how growth will react. Only a handful of people were
35:43
Speaker 1: saying that in mid to late twenty twenty one. Jeremy
35:48
Speaker 1: Siegal of Wharton was warning about it, mostly on the
35:51
Speaker 1: fiscal side, but and some of the people who've been
35:54
Speaker 1: complaining about inflation for a decade, warned about it, but
35:58
Speaker 1: they I think they were generally ignored. When you bring
36:03
Speaker 1: up this regime change to your investment committee, that your
36:08
Speaker 1: cocio of what sort of pushback do you get we've
36:12
Speaker 1: had no inflation for decades or are people very much
36:16
Speaker 1: looking at the data and saying, well, rates haven't gone
36:19
Speaker 1: up yet, but they have to. How is that internal discussion,
36:23
Speaker 1: like what are the key points that everybody focuses on
36:26
Speaker 1: when the market is still going higher week after week.
36:30
Speaker 1: But we had a reagorous discussion on the topic. Not
36:35
Speaker 1: everybody was on the same page, but we have a
36:39
Speaker 1: collaborative approach. So it was also part of my task
36:43
Speaker 1: or to try to convince people that, you know, we
36:49
Speaker 1: had to moderate risk, and so eventually we did do that.
36:56
Speaker 1: But it's always good to have a plurality of use
37:00
Speaker 1: and debate them because that's how we all become better
37:04
Speaker 1: at what we do. And your title is multi asset Solutions.
37:10
Speaker 1: What sort of assets are we looking at or is
37:12
Speaker 1: it completely unconstrained and you could look at anything, or
37:16
Speaker 1: are there certain things you're really focused on. We can
37:19
Speaker 1: invest across solassa classes, both in private and public markets,
37:24
Speaker 1: It depends very much on the mandates that we have
37:29
Speaker 1: and individual trained individual investor. We have different channels that
37:35
Speaker 1: we cluster the mandates, but effectively we can provide any
37:40
Speaker 1: solution that an investor may need. Huh really, And we
37:44
Speaker 1: can tap on all the capabilities of golment sacs across
37:51
Speaker 1: the firm and really service our investors using the one
37:57
Speaker 1: GS approach. So let's talk about one GS approach. I
38:02
Speaker 1: kind of found I'm a fan of the Goman soft
38:05
Speaker 1: landing basket. I just love the name of that. Tell
38:08
Speaker 1: us a little bit about that. It's been doing really
38:11
Speaker 1: well because it looks like the economy is holding up
38:16
Speaker 1: better than a lot of people expected last year. Tell
38:19
Speaker 1: us a little bit about the soft landing basket. Yeah,
38:22
Speaker 1: at the Multi Asset Solutions, we are not in the
38:25
Speaker 1: camp of soft landing. That's where we disagree with our
38:29
Speaker 1: friend in the recession camp. Right, Yes, we are in
38:32
Speaker 1: the recession camp. That's where we disagree with our colleagues
38:36
Speaker 1: at the GIR. But that's a healthy disagreement. We think
38:43
Speaker 1: that given where inflation is and where the forces of
38:48
Speaker 1: inflation are, and given how stubborn inflation seems to be
38:52
Speaker 1: on the services sector A housing. It's going to be
38:58
Speaker 1: almost impossible for this to to be reduced without loosening
39:05
Speaker 1: up the labor market significantly. And if you loosen up
39:10
Speaker 1: the labor market significantly, you're likely to see negative GDP
39:17
Speaker 1: growth at some point. We don't expect it to be
39:21
Speaker 1: a deep recession because we are starting from a good
39:25
Speaker 1: initial conditions. So balance sheets are not overexpanded, consumers are
39:31
Speaker 1: not over leveraged, and so on. But we do think
39:36
Speaker 1: that we're likely to see a recession eventually. So let's
39:41
Speaker 1: take that apart a little bit. So the soft landing basket.
39:44
Speaker 1: Those folks are saying, Look, consumer spending is robust. Unemployment
39:49
Speaker 1: is that, you know, near record loves the economy looks
39:52
Speaker 1: pretty good. But I suspect your perspective is something along
39:57
Speaker 1: the lines of but inflation is sticky. The Fed keeps
40:00
Speaker 1: telling you they're not done raising rates, and at five
40:03
Speaker 1: and a half or six percent, that's going to cause
40:06
Speaker 1: an increase in unemployment and a short, shallow recession. Is
40:11
Speaker 1: that what you're looking for in twenty three or twenty four.
40:15
Speaker 1: I don't know if it's going to be short. I
40:18
Speaker 1: hope it's going to be shallow. For the reasons we
40:20
Speaker 1: discuss that we are not getting into this environment with
40:25
Speaker 1: high leverage and high you know, low unemployment and household
40:32
Speaker 1: wealth seems to be doing pretty well back half of
40:34
Speaker 1: twenty three or twenty four. It could be the second
40:38
Speaker 1: half of twenty three. It could be we could still
40:42
Speaker 1: have a scenario where the GDP for twenty three is
40:46
Speaker 1: not negative, but we have started undering a recession. We
40:51
Speaker 1: don't expect the FED to cut rates this year. We
40:56
Speaker 1: think that right now the market is pricing a terminal
40:59
Speaker 1: rate of around point five point three percent, right, which
41:03
Speaker 1: is above where we are today. Yes, we may actually
41:07
Speaker 1: go higher than that. I had said a few weeks
41:10
Speaker 1: ago that we may go up to five point five
41:14
Speaker 1: percent before we are done with the rate hikes. And again,
41:21
Speaker 1: I think what the FACT will do is so it
41:23
Speaker 1: will continue hiking and then pause, and depending on how
41:30
Speaker 1: inflation evolves, they may have to do more. I think
41:34
Speaker 1: that inflation will come down to around three to four percent,
41:38
Speaker 1: and then it's going to get very sticky, and that
41:41
Speaker 1: saying is done. We're done with that, right. I think
41:44
Speaker 1: it's really hard for them to get back to two percent,
41:47
Speaker 1: and I'm not sure that two percent is the right
41:50
Speaker 1: target level anymore because of all the other factors we discuss,
41:54
Speaker 1: the deglobalization, all this segmentation in the markets that we
42:02
Speaker 1: are observing, the geopolitical developments decurbanization, etc. I think all
42:09
Speaker 1: this developments are inflationary. So given the past decade of
42:18
Speaker 1: zero interest rate policy and quantitative easing versus the current
42:22
Speaker 1: policy for you as a top down macro strategist, which
42:27
Speaker 1: is the more challenging period because I recall a lot
42:31
Speaker 1: of macro strategists couldn't wrap their head around how positive
42:37
Speaker 1: Zerop and Quee were for equity markets, and they seem
42:41
Speaker 1: to be fighting the tape quite a bit. Which is
42:44
Speaker 1: the easier environment to navigate through. I don't know if
42:48
Speaker 1: it is a matter of easy versus heart environment. I
42:52
Speaker 1: would say that the investment approach has to be different.
42:55
Speaker 1: So which one do you find? You could go to
42:59
Speaker 1: the playbook and I have a solution for this, as
43:02
Speaker 1: opposed to we've never seen this before, and let's see
43:06
Speaker 1: if we can figure out what we can do. One
43:08
Speaker 1: of the things we've been doing common sexes and in
43:13
Speaker 1: my team is really to rethink our playbook. So what
43:18
Speaker 1: we are seeing now also means lower correlations across different markets,
43:24
Speaker 1: so there may be more opportunities for relative value trads
43:28
Speaker 1: or more opportunities for diversification. You need the lower leverage
43:32
Speaker 1: than you used to need before. You have to lean
43:36
Speaker 1: on diversifying strategies and uncorrelated strategies. We think this is
43:42
Speaker 1: a great environment for alpha, it's a great environment for
43:46
Speaker 1: active management, but you cannot run the size of assets
43:50
Speaker 1: that we are running with just active management, and so
43:55
Speaker 1: so you marry beta and alpha together. Yes, and the
44:01
Speaker 1: importance of risk management and downside, the risk control becomes
44:07
Speaker 1: even more important in this environment. You have to be
44:10
Speaker 1: very conscious of the potential for external shocks and constantly
44:17
Speaker 1: evaluate what the probability of the shocks to materialize is
44:22
Speaker 1: and how they will affect your portfolio. So it's a
44:26
Speaker 1: little bit of a different environment than the previous one
44:30
Speaker 1: where we were in a low volatility environment, correlations were
44:36
Speaker 1: pretty stable, and really the way to play that market
44:42
Speaker 1: was very different, really quite fascinating. Let's talk about how
44:47
Speaker 1: to apply your discipline within the current environment. And I
44:52
Speaker 1: want to start by giving you a quote from you,
44:56
Speaker 1: which is, we expect the US economy to enter recession
45:01
Speaker 1: in twenty twenty three, as the Federal Reserve pushes borrowing
45:05
Speaker 1: costs of five percent or higher. So clearly a lot
45:10
Speaker 1: of Wall Street things we're gonna duck now a recession
45:14
Speaker 1: that will end up with a soft landing. You were
45:16
Speaker 1: firmly in the recession camp, in the hard landing camp. Yes,
45:21
Speaker 1: and we talked earlier. You said we can see a
45:23
Speaker 1: terminal rate of about five and a half percent. Now,
45:28
Speaker 1: is that historically a very high number? You go back
45:30
Speaker 1: to the forget the seventies, even the eighties and nineties
45:34
Speaker 1: mortgages were seven percent. Five and a half percent doesn't
45:38
Speaker 1: sound that bad, No, it doesn't. And actually, you know
45:41
Speaker 1: a lot of people were talking about being in a
45:44
Speaker 1: restrictive territory already in terms of the monetary policy. Most
45:50
Speaker 1: likely we're not at the restrictive territory yet because so
45:55
Speaker 1: see how strong the labor market is. Labor market strong,
45:59
Speaker 1: Consumer spending is strong. The one area we really seem
46:03
Speaker 1: to the rubber meets the road in terms of rates
46:06
Speaker 1: having a negative impact. Is housing? Housing really is doing
46:09
Speaker 1: as poorly as it's done in a long time. How
46:13
Speaker 1: does that translate into future economic contractions? Well, housing is
46:20
Speaker 1: having some cooling effects manifesting recently. But at the same time,
46:30
Speaker 1: we haven't really seen the housing rawl over in the
46:34
Speaker 1: way that it did during the financial crisis. And that's
46:37
Speaker 1: because most US households have thirty year mortgages. They had
46:43
Speaker 1: the opportunity to refinance while the rates were at zero,
46:50
Speaker 1: and so they don't necessarily need to tap the mortgage
46:54
Speaker 1: markets right now, and others are really waiting for prices
46:58
Speaker 1: to come down before buying. So I think the number
47:01
Speaker 1: is seventy five percent of households with a mortgage or
47:04
Speaker 1: paying four percent or less. Is that keeping people locked
47:08
Speaker 1: in place? Is that part of the inventory shortfall? As
47:12
Speaker 1: long as they have jobs that pay decently, I think that,
47:17
Speaker 1: you know, they don't really need to sell and they
47:20
Speaker 1: don't need to relocate. So but for real estate, the
47:24
Speaker 1: rest of the economy seems to be doing pretty well
47:27
Speaker 1: this year. The market started out really hot. What we
47:29
Speaker 1: were up ten percent in January. What do you make
47:33
Speaker 1: of that? Is that just a reaction to how oversold
47:36
Speaker 1: we got in twenty twenty two, or how do you contextualize?
47:40
Speaker 1: You know, that's a ten percent is a good year
47:42
Speaker 1: forget a good month? Yes, one of the things I
47:45
Speaker 1: had said, and another interview was that we had a
47:50
Speaker 1: year in January and now we should focus on alpha.
47:54
Speaker 1: But yeah, the January performance was largely driven by thin
48:00
Speaker 1: trading positioning, shark covering, and also a number of very
48:06
Speaker 1: strong economic news. But I think in a way, the
48:10
Speaker 1: market is misinterpreting the fat here because strong economic numbers,
48:19
Speaker 1: strong labor market data do not imply to me that
48:26
Speaker 1: we're going to have a soft landing. What it implies
48:30
Speaker 1: is that the FAT will have to go higher, and
48:33
Speaker 1: therefore we're going to see, you know, a higher probability
48:39
Speaker 1: of recession going forward because the segment of the CPI
48:44
Speaker 1: where inflation is concentrated is in core services ex. Housing,
48:50
Speaker 1: and that's directly related to disposable income and to the
48:56
Speaker 1: labor markets. So what do you make of the market
49:00
Speaker 1: not taking Jerome Powell at his word. They've been pretty clear, Hey,
49:06
Speaker 1: we're going higher and we're going to keep it higher
49:08
Speaker 1: for longer. And anybody who thinks we're done raising rates
49:11
Speaker 1: isn't listening to what we're saying. And the market says, yeah, yeah,
49:15
Speaker 1: you'll cut later this year. How are we supposed to
49:18
Speaker 1: interpret the both the equity and the bond market really
49:23
Speaker 1: not listening to what FED chair Jerome pal is saying
49:27
Speaker 1: the equity markets have been a conditioned to always buy
49:31
Speaker 1: the dip and to really not fight the fat in
49:36
Speaker 1: the sense of not fighting the fat when the FAT
49:40
Speaker 1: kept doing quee and accommodating, increasing the monetary accommodation. But
49:47
Speaker 1: now they're doing the opposite. So right now, not fighting
49:51
Speaker 1: the fat means actually selling, doesn't mean buying, because the
49:57
Speaker 1: FAT wants to tighten financial conditions, the FED wants to
50:02
Speaker 1: loosen up the labor market. So in fact, what the
50:06
Speaker 1: market is doing is fighting the Fed. The bond market
50:11
Speaker 1: is doing better than the equity market, so I think
50:14
Speaker 1: what the two markets are pricing, it's not exactly the
50:17
Speaker 1: same thing. So the odds of a RAID cut in
50:20
Speaker 1: twenty twenty three, they've gone down a lot since that
50:24
Speaker 1: big move up in January. I'm going to assume you
50:28
Speaker 1: are definitely not in the FED will be cutting in
50:31
Speaker 1: twenty twenty three camp. You think they're going to continue
50:34
Speaker 1: tightening and perhaps tightened too far. I don't see any
50:40
Speaker 1: reason for the FAT to cut this here. We are
50:45
Speaker 1: not seeing any loosening up of the labor markets, which
50:49
Speaker 1: means that the monetary policy hasn't really become restrictive enough
50:55
Speaker 1: to have an effect on the real economy in a
50:58
Speaker 1: profound way. Yet inflation continues to be elevated, still very
51:05
Speaker 1: far away from their target. The only case in my
51:11
Speaker 1: mind in which the FACT may cut rates is if
51:14
Speaker 1: we have some significant extent of shock that necessitates them
51:19
Speaker 1: to intervene in the markets, something like what happened in
51:24
Speaker 1: the UK with the LDI crisis, or God forbids some
51:28
Speaker 1: geopolitical event of great significance. In other cases, I don't
51:34
Speaker 1: expect them to cut huh. So I look at rates
51:39
Speaker 1: alone as a very blunt tool, especially when we're looking
51:43
Speaker 1: at the labor market, where we have a shortage of
51:45
Speaker 1: workers now across all sorts of skill levels. Housing, there's
51:50
Speaker 1: a giant inventory shortfall by some estimates, where two to
51:53
Speaker 1: three million single family home short Even things like inflation
51:57
Speaker 1: in cars and use cars, you know, semiconductors are still
52:02
Speaker 1: way beyond the sort of yields that we're used to.
52:05
Speaker 1: How much can the FED really fix the things that
52:09
Speaker 1: are broken and are causing prices and wages to be
52:14
Speaker 1: as elevated as they are. Are these things really that
52:18
Speaker 1: susceptible to ongoing rate increases? Short of a full recession. Well,
52:25
Speaker 1: the FED can help with certain things, they can't fix everything,
52:29
Speaker 1: and I think the factors that you pointed out suggest
52:34
Speaker 1: that it may be very difficult for them to go
52:38
Speaker 1: back to two percent. Under all these conditions, they can
52:41
Speaker 1: instantantly go down to three to four percent of inflation.
52:45
Speaker 1: The question is whether they will be satisfied with that,
52:49
Speaker 1: and they will declare at that point that because of
52:53
Speaker 1: all this changing geopolitical economic conditions, the two percent is
52:58
Speaker 1: no longer irrelevant and they will move their target, or
53:02
Speaker 1: whether they will insist on continuing to reach two percent
53:06
Speaker 1: and then the process overtighten and really damage the economy.
53:11
Speaker 1: There is a question of credibility of the FAT, and
53:15
Speaker 1: so they will have to be very careful with how
53:19
Speaker 1: they message that in order not to damage the credibility
53:23
Speaker 1: of the FAT in the long run. In terms of
53:26
Speaker 1: the wages, it's interesting to see. It's also the evolution
53:31
Speaker 1: of the share of labor as a percentage of real
53:35
Speaker 1: GDP over time. And what you see is that the
53:39
Speaker 1: share of labor was much higher in the nineties, and
53:43
Speaker 1: as globalization started expanding, the share of labor went down,
53:48
Speaker 1: and obviously the share that would go to capital increased,
53:53
Speaker 1: But since the pandemic, this process has reversed and the
53:58
Speaker 1: share of labor is increased again, which means that it
54:02
Speaker 1: compresses the share of real GDP that goes to capital.
54:08
Speaker 1: Now that makes it less attractive for capital to invest
54:15
Speaker 1: and obviously less profitable for them. And part of what
54:21
Speaker 1: the changing FED policy is doing is redressing the balance
54:26
Speaker 1: of the shares between labor and capital in real GDP.
54:31
Speaker 1: So what we're likely to see is a decreased again
54:35
Speaker 1: of the share of real GDP that goes to labor,
54:40
Speaker 1: which in the short run will be negative for risk
54:45
Speaker 1: assets spend. In the medium to long run, it will
54:48
Speaker 1: actually increase the profitability of companies and also the incentive
54:53
Speaker 1: to invest. So let's fast forward a year out, first
54:57
Speaker 1: or second quarter twenty twenty four. Are CPI has come
55:01
Speaker 1: down to let's call it three and a half percent
55:04
Speaker 1: and the FED is at five and a quarter and
55:07
Speaker 1: they are no longer raising rates. What does that mean
55:11
Speaker 1: for the equity and bond markets? A year out? Can
55:15
Speaker 1: you think in those terms like do you have a
55:18
Speaker 1: sense of where the FED wants to navigate? Two? And
55:22
Speaker 1: what does that mean for the outlook? Barring exogenous events?
55:25
Speaker 1: And all sorts of unanticipated surprises. I think that as
55:30
Speaker 1: inflation is coming down and stabilizes around the levels that
55:36
Speaker 1: you mentioned, around three three and a half percent, the
55:41
Speaker 1: FED will become much more attuned to its dual mandate
55:47
Speaker 1: and start focusing on how the labor market is evolving.
55:52
Speaker 1: And I think that's obviously one of the factors that
55:56
Speaker 1: they're very focused on already, but at the moment, and
56:00
Speaker 1: because the labor market is so tight, they're single handedly
56:04
Speaker 1: focused on the inflation side of their mandate. Once inflation
56:09
Speaker 1: starts coming down and to the extended unemployment starts rising,
56:14
Speaker 1: they will start balancing out the two sides of their mandate.
56:20
Speaker 1: And that's really where the policy will be determined. If
56:24
Speaker 1: an employment starts rising rapidly, then they will give up
56:30
Speaker 1: part of their inflation fighting in order to stabilize the
56:34
Speaker 1: labor markets. If labor markets react more positively and we
56:42
Speaker 1: don't see a massive increase in unemployment, they're more likely
56:47
Speaker 1: to persist with their inflation fighting mandate. And then last
56:52
Speaker 1: inflation question, China has ended their zero COVID policy, they're
56:57
Speaker 1: reopening how potentially impactful as China on global GDP and
57:04
Speaker 1: to some degree, global inflation. Suddenly, the reopening of China
57:10
Speaker 1: has a positive effect on global GDP. It will also
57:14
Speaker 1: potentially have a positive effect on inflation in the sense
57:18
Speaker 1: that the demand for commodities will increase as a result
57:22
Speaker 1: of China's reopening. The question is whether that will translate
57:29
Speaker 1: into more inflationary pressures that will see a backup in
57:34
Speaker 1: inflation in the goods markets, or whether demand will have
57:39
Speaker 1: moderated enough in other places to keep prices contained there. Lastly,
57:48
Speaker 1: as a multi asset manager, what are you looking at
57:51
Speaker 1: in this current environment that you think today you're suddenly
57:57
Speaker 1: much more appealing and exciting than have been last decade.
58:01
Speaker 1: What asset classes suddenly have become or not so suddenly
58:05
Speaker 1: have become much more interesting given the world warn't well.
58:09
Speaker 1: Suddenly fixed income is more interesting now than it was
58:13
Speaker 1: in the past because real yields are positive, we are
58:19
Speaker 1: getting closer to pick rates and so locking in some
58:23
Speaker 1: of this rates makes sense. Credit will become an interesting
58:31
Speaker 1: area as we're going through this process. We expect default
58:36
Speaker 1: rates to rise a bit, but not at levels that
58:40
Speaker 1: we saw in previous crisis. But it's also interesting now
58:45
Speaker 1: because we need less leverage to achieve our return goals
58:51
Speaker 1: and so in a way, cash is kink again whereas
58:56
Speaker 1: before it was not. So the way we we look
59:00
Speaker 1: at portfolios how we invest is different, and I think
59:06
Speaker 1: it is an environment that favors active management. So stock
59:12
Speaker 1: picking will be a really important component, but they will
59:17
Speaker 1: also be a lot As we are going through this
59:21
Speaker 1: deglobalization process and restructuring of supply chains, there will be
59:27
Speaker 1: opportunities across the board in different industries to capitalize on
59:33
Speaker 1: this changes in the economic structure of different countries. And
59:38
Speaker 1: some of these opportunities will manifest themselves in the public
59:42
Speaker 1: markets and some in the private markets. So the way
59:46
Speaker 1: we look at portfolios is holistically across private and public
59:51
Speaker 1: markets and really focus on the opportunities that may exist.
59:55
Speaker 1: Really interesting. So let me jump to my favorite questions
59:59
Speaker 1: that I ask all of our guests. Tell us what
1:00:02
Speaker 1: you did to stay entertained during the lockdown and afterwards?
1:00:07
Speaker 1: What were you streaming? What was keeping you occupied? Well,
1:00:11
Speaker 1: one of the things I used to do was go
1:00:15
Speaker 1: for long runs in Central Park, so that was one
1:00:19
Speaker 1: of the things that was keeping me sane during the lockdown,
1:00:25
Speaker 1: and otherwise I watched all the usual shows that everybody
1:00:30
Speaker 1: was watching. At that time on Netflix and Amazon and
1:00:36
Speaker 1: the various other streaming platforms. Tell us about some of
1:00:41
Speaker 1: your mentors who helped to shape your career. I had
1:00:44
Speaker 1: the opportunity to meet a number of very interesting people
1:00:48
Speaker 1: through my career. And I can't say that I had
1:00:53
Speaker 1: mentors early on in my career, but suddenly was around
1:00:59
Speaker 1: a very interesting and impressive people that I was able
1:01:04
Speaker 1: to observe and learn from them in a way because
1:01:09
Speaker 1: of my process. Because of my path starting doing my
1:01:14
Speaker 1: PhD at London Business School, then coming to the US
1:01:18
Speaker 1: without having studied in the US, I was a little
1:01:21
Speaker 1: bit of an orphan when I came here, and so
1:01:24
Speaker 1: I didn't have an obvious mentor through the process, and
1:01:30
Speaker 1: perhaps that's one of the reasons why I tried to
1:01:34
Speaker 1: find my path on my own. But over the years,
1:01:39
Speaker 1: I actually as I became more advanced in my career,
1:01:44
Speaker 1: I started meeting people who have been acting as mentors.
1:01:49
Speaker 1: Suddenly at Parella Weinberg Partners, Joe Perella was someone who
1:01:55
Speaker 1: spent a lot of time talking with me, and I
1:02:00
Speaker 1: learned a lot from him, both about the profession and
1:02:04
Speaker 1: his experience. And I'm fascinated by the interest of my
1:02:10
Speaker 1: colleagues at golment Sacks to guide me through the farm,
1:02:15
Speaker 1: make my transition easier, mentor me and I find this
1:02:20
Speaker 1: extremely impressive. I'm very grateful that they are willing to
1:02:27
Speaker 1: spend the time to do that. So I must say,
1:02:31
Speaker 1: not so many mentors earlier in my career, but actually
1:02:35
Speaker 1: more mentors later on. Very interesting. Let's talk about books.
1:02:39
Speaker 1: What are some of your favorites and what are you
1:02:41
Speaker 1: reading right now. In the old days, I was reading
1:02:44
Speaker 1: a lot of literature, and so my favorite book was
1:02:50
Speaker 1: prost Remembrance of Times Past, which I read both in
1:02:56
Speaker 1: French and English, and also various books by Dostojski. My
1:03:02
Speaker 1: life very much. But these days I read a lot
1:03:07
Speaker 1: about what's going on in the markets the world, and
1:03:10
Speaker 1: I'm trying to think about those things. So one of
1:03:13
Speaker 1: the last books I read was unrelated to that, was
1:03:20
Speaker 1: Artists Therapy, which I found very interesting. And it's one
1:03:24
Speaker 1: of those topics where once you read the book, you
1:03:28
Speaker 1: think that it makes a lot of sense and you
1:03:30
Speaker 1: should have known this all along, but obviously I didn't before.
1:03:35
Speaker 1: And now some of the books that I have on
1:03:39
Speaker 1: my side and starting reading is twenty one Lessons for
1:03:43
Speaker 1: the twenty first Century by Yuval Harari and also Leadership
1:03:50
Speaker 1: by Henry Kissinger, because I think we are in a
1:03:55
Speaker 1: very important time for global world order, and I think
1:04:05
Speaker 1: geopolitics will be really important, and the leadership that world
1:04:10
Speaker 1: leaders will show now and in the coming months and
1:04:15
Speaker 1: years could shape our world in a profound way. Very interesting.
1:04:20
Speaker 1: What sort of advice would you give to a recent
1:04:22
Speaker 1: college graduate who is interested in a career in macro
1:04:28
Speaker 1: or multi asset investment. I think they need to have
1:04:35
Speaker 1: both good technical skills but also understand macros. So I
1:04:42
Speaker 1: think this combination used to be rare. I think it
1:04:46
Speaker 1: becomes more and more important to be able to combine
1:04:52
Speaker 1: stem skills with more of the economic science and thinking
1:05:00
Speaker 1: that will help you understand the markets better. And our
1:05:05
Speaker 1: final question, what do you know about the world of
1:05:08
Speaker 1: investing today? You wish you knew twenty five or so
1:05:11
Speaker 1: years ago when you were first getting started. When I
1:05:16
Speaker 1: first got started, the world was different that it is now.
1:05:20
Speaker 1: I think what is important is to be cognizant of
1:05:25
Speaker 1: the fact that conditions change. The world changed, and we
1:05:28
Speaker 1: need to evolve with those conditions. So obviously I learned
1:05:36
Speaker 1: along the way, But I think what I know now
1:05:42
Speaker 1: was not necessarily applying twenty years ago, and vice versas.
1:05:48
Speaker 1: So if there is a lesson for all of us
1:05:52
Speaker 1: to learn is that we need to keep evolving, we
1:05:55
Speaker 1: need to keep learning, and we need to keep adapting
1:05:58
Speaker 1: to our environment. Very interesting, Maria, Thank you for being
1:06:02
Speaker 1: so generous with your time. We have been speaking with
1:06:05
Speaker 1: Maria Vassalu. She is cocio at Goldman Sachs Asset Management.
1:06:10
Speaker 1: If you enjoy this conversation, well please check out any
1:06:14
Speaker 1: of the previous four hundred and seventy something we've done
1:06:19
Speaker 1: over the past nine years. You can find those at YouTube, Spotify, iTunes, Bloomberg,
1:06:26
Speaker 1: wherever you feed your podcast fix. Sign up from my
1:06:30
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1:06:33
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1:06:38
Speaker 1: podcasts at podcast on Twitter. I would be remiss if
1:06:44
Speaker 1: I did not thank the crack team that helps put
1:06:46
Speaker 1: these conversations together each week. Attika val Bron is my
1:06:50
Speaker 1: project manager. Sarah Livesey is my audio engineer. Sean Russo
1:06:56
Speaker 1: is my head of research. Paris Wald is my producer.
1:07:00
Speaker 1: I'm Barry Results. You're listening to Masters in Business on
1:07:04
Speaker 1: Bloomberg Radio