Latest / Masters in Business / Assessing Asset Volatility and Iran War Threats With BlackRock's Mike Pyle

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Assessing Asset Volatility and Iran War Threats With BlackRock's Mike Pyle · Masters in Business

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Masters in
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Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
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Speaker 2: This week on the podcast Wow, this is another banger.
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Speaker 2: Strip yourself in Mike Pile, deputy head of black Rocks
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Speaker 2: Portfolio Management Group. They oversee about five trillion dollars in
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Speaker 2: client assets. Not only is its systematic and discretionary investment strategies,
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Speaker 2: but he also oversees the black Rock Investment Institute as
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Speaker 2: well as their hedge funds. You may not know Blackrock
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Speaker 2: globally is one of the top ten hedge fund over
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Speaker 2: portfolio managers about ninety four billion dollars. One little note,
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Speaker 2: we're recording this on Tuesday, April seventh. Supposedly something is
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Speaker 2: happening tonight eight o'clock. You'll know what happened by the
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Speaker 2: time you hear this.
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Speaker 3: We want.
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Speaker 2: We don't know if something terrible is happening or if
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Speaker 2: it's another Taco Tuesday, but we'll find out soon enough.
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Speaker 2: In the meantime, with no further ado, my conversation with
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Speaker 2: Mike Pyle, deputy head of black Rocks Portfolio Management Group.
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Speaker 2: Before we get into both your market and government experience,
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Speaker 2: let's let's take a look at your background. You graduate
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Speaker 2: summa cum laude and economics from Dartmouth, You get a
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Speaker 2: j d from Yale, and then a master's an LLM
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Speaker 2: from Cambridge.
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Speaker 3: What was the original career plan?
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Speaker 4: So I maybe go back before higher education. You know,
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Speaker 4: I'm from a little town in the Midwest and six
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Speaker 4: hundred people in the middle of Illinois, no stop whites
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Speaker 4: in the little town where I grew up. And you know,
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Speaker 4: I had a sense from a pretty early age that
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Speaker 4: I wanted to do something out beyond the horizon, help
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Speaker 4: pass the fields. And I was lucky enough when I
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Speaker 4: was in high school there was this competition sponsored by
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Speaker 4: the local community college called Running the US Economy, where
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Speaker 4: you could set monetary policy. You'd set government spending levels,
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Speaker 4: you'd set taxation rates, basically the big tools of monetary
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Speaker 4: and fiscal policy, and over a ten year period you'd
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Speaker 4: set those variables and you'd see what came out the
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Speaker 4: other side in terms of GDP growth, in terms of unemployment,
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Speaker 4: in terms of the stock market. And for me, I
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Speaker 4: had never really grappled with a more interesting set of
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Speaker 4: problems than that. When I was fourteen, fifteen, sixteen years
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Speaker 4: old and I didn't really have the words to express
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Speaker 4: what it is that would take me to but I
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Speaker 4: knew that problems at the heart of economic policy, what
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Speaker 4: that meant for ordinary people, what that meant for markets,
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Speaker 4: were the most fascinating things that ever encountered. And how
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Speaker 4: I wanted to spend my career.
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Speaker 2: Huh, And how you spent your career is moving back
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Speaker 2: and forth between government and the private sector. You have
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Speaker 2: two instants at Blackrock, including the current one. You were
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Speaker 2: in the Obama administration, you were in the Biden administration.
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Speaker 3: How do you.
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Speaker 2: Shift back and forth between these two worlds? And how
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Speaker 2: does working in government affect how you perceive investing risk
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Speaker 2: policy from the private side.
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Speaker 4: Yeah, so I'd say I try to view my time
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Speaker 4: in government and my time as an investor in a
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Speaker 4: black Rock is really two sides of the same coin.
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Speaker 4: You know, the job in government, at least as I
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Speaker 4: understood it, was to whether through economic policy or national
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Speaker 4: security policy, had the pleasure to work on both of
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Speaker 4: those through the years, you know, provide a predictable, stable
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Speaker 4: foundation for prosperity for the US and hopefully the world beyond,
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Speaker 4: and recognize that the job in government is to provide
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Speaker 4: that stable foundations, So businesses, so families, so individuals can
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Speaker 4: you know, live their lives, make their choices economically, can
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Speaker 4: take risks in the economy to build businesses, expand businesses,
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Speaker 4: invest and grow knowing that there's some basic stability and
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Speaker 4: predictability that they get from government. And so for me,
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Speaker 4: like I said, you know that that time in government
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Speaker 4: was one side of that coin. That time as an
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Speaker 4: investor is the other side of that coin. How do
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Speaker 4: you try to take that output from policymakers and make
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Speaker 4: sense of the world, makes sense of the economy, makes
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Speaker 4: sense of markets, and then make sound choices for clients.
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Speaker 2: We're going to talk a little later about the state
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Speaker 2: of government policy. I want to just stick with your
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Speaker 2: background before we get into the nitty gritty. So you
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Speaker 2: are at the Treasury and the White House from two
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Speaker 2: thousand and nine to twenty thirteen, really the midst of
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Speaker 2: the Great Financial Crisis recovery. Tell us about that experience.
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Speaker 3: What was that like?
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Speaker 4: So it's a pretty extraordinary thing to be a part of,
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Speaker 4: had a chance to learn from, be seasoned by, you know,
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Speaker 4: a set of extraordinary and my judgment, policymakers, whether that
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Speaker 4: was Secuary Geitner, Liil Brainer, Peter Orzag, Jason Furman, others
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Speaker 4: folks that early in my career, you know, I just
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Speaker 4: learned a lot about what it meant to make sound
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Speaker 4: policy choices, consider policy choices in the midst of crisis.
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Speaker 2: You know.
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Speaker 4: I think one of the things I also took away
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Speaker 4: from that experience is this recognition that you know, there's
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Speaker 4: there's kind of there's no other room that you know,
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Speaker 4: these are very accomplished policy makers making choices with imperfect information,
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Speaker 4: with not enough time, with incredibly high stakes, and there's
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Speaker 4: no other room where the hyper confident people who know
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Speaker 4: everything and have the luxury of time are. There's just
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Speaker 4: the human being sitting in front of you, and you've
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Speaker 4: got to do your role to support them in the
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Speaker 4: way you can. And you know, for me, that was
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Speaker 4: a very you know, empowering experience or recognition that from
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Speaker 4: an early stage in my career I needed to take responsibility.
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Speaker 4: I needed to offer my best day in and day out, because,
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Speaker 4: like I said, there's no other room with the hyper
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Speaker 4: confident people. There's just the role you get to play
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Speaker 4: with people acting with not enough time and not enough
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Speaker 4: information to make high consequence judgments.
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Speaker 2: So let's talk about those judgments. What do you think
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Speaker 2: policymakers got right and what was the biggest mistake would
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Speaker 2: we get wrong as a nation?
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Speaker 4: So, I mean, I think that the I think one
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Speaker 4: of the principal lessons coming out of the Global Financial
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Speaker 4: Crisis is that in the face of a large economics
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Speaker 4: a shock that impacts the balance sheets of households and businesses,
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Speaker 4: the government needs to act speedily and with size to
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Speaker 4: prevent the labor market damage, the economic damage from being
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Speaker 4: an overhang that lasts for a long time. And I
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Speaker 4: think one of the things that a lot of policymakers
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Speaker 4: concluded coming out of the GFC is we just didn't
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Speaker 4: do enough quickly enough, and as a result, we had
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Speaker 4: a very slow recovery, you know, that didn't last just
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Speaker 4: a couple of years, but ten twelve years, and had
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Speaker 4: labor market damage that lasted for longer than it needed
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Speaker 4: to because we didn't ask with the force and speed
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Speaker 4: that we needed to.
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Speaker 2: So when you say we didn't do enough, the FED
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Speaker 2: was at zero, every type of credit, alphabet, soup of
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Speaker 2: organizational government entities came into effect. Are you referring to
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Speaker 2: the fiscal side, Because it felt like the fiscal stimulus
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Speaker 2: was very, very modest. About a third was temporary tax cuts,
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Speaker 2: a third was temporary extension of unemployment shovel ready stuff
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Speaker 2: was one hundred, one hundred and eighty billion dollars. It
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Speaker 2: almost seems like we overcompensated in the start of the
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Speaker 2: pandemic and went huge to make up for that. But
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Speaker 2: I'm assuming you're talking about a very underfunded fiscal stimulus.
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Speaker 4: I think that's principle A. Yes, you know what I mean.
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Speaker 4: I mean, I think one thing I would you know
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Speaker 4: highlight here is in some ways the United States only
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Speaker 4: got out of the dol drums post the GFC during
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Speaker 4: the first Trump administration. And you know President Trump and
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Speaker 4: that that Republican Congress passed that the twenty seventeen tax bills. Now,
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Speaker 4: coming from where I come from, I wouldn't necessarily have
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Speaker 4: signed off on every particular of that bill. But I
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Speaker 4: think what you saw was fiscal stimulus at size going
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Speaker 4: through the economy as a result of those uh as,
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Speaker 4: there's all that tax bill, and as a result, an
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Speaker 4: economy that long last began to see full employment, began
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Speaker 4: to see that higher velocity, began to see really the
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Speaker 4: US get out of those post GFC doldrums. Again, not
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Speaker 4: how I would have necessarily designed the fiscal stimulus myself,
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Speaker 4: but I think the fact that that's really perhaps the
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Speaker 4: moment when we came out of the Droit doldrums highlights
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Speaker 4: that that fiscal lever was one that perhaps we should
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Speaker 4: have pulled sooner and at greater size earlier post the crisis.
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Speaker 2: Really interesting. So let's talk about some of your other
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Speaker 2: roles within government.
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Speaker 3: You were a law clerk from Merrick Garland. That's fascinating.
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Speaker 3: Tell us about that experience.
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Speaker 4: Yes, so Judge Garland was my very first boss in Washington,
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Speaker 4: you know, in some ways the perfect way to begin
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Speaker 4: a career, somebody that I continue to regard as the
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Speaker 4: model of public servant. I say, listen, I learned three
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Speaker 4: things from the judge. I learned what it meant to
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Speaker 4: love the law. I learned that I didn't love the
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Speaker 4: law the way the judge did. And that three, I
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Speaker 4: needed to find something that I loved as much as
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Speaker 4: Judge Garland loved being a lawyer being a judge. And
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Speaker 4: so that brought me back to what I'd done talking
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Speaker 4: about a moment ago in high school when you know,
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Speaker 4: I really fell in love with economics, economic policy, the
10:36
Speaker 4: impact on people and markets, what I'd studied as an
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Speaker 4: undergrad and a graduate school, and so what I really
10:43
Speaker 4: took away from that experience is I wanted there to
10:45
Speaker 4: be a strong public service component to what I did,
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Speaker 4: and also that I needed to put myself to work
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Speaker 4: in a space that I really loved and felt passion for,
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Speaker 4: and that was the space of economics, domestic economic policy,
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Speaker 4: international economic policy, and working to make the US and
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Speaker 4: the world more prosperous place.
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Speaker 2: So you were the President's personal envoy to groups like
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Speaker 2: the G seven, the G twenty, Apex summits. When you
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Speaker 2: look around the world and see US channel relations, the
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Speaker 2: Russia's war in the Ukraine, Israel and America's war with
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Speaker 2: Imran Ai and just energy security, trade and investment in tariffs,
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Speaker 2: all these things, it seems like it's just an overwhelming
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Speaker 2: amount of things taking place. How effective are these global organizations,
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Speaker 2: what do they actually accomplish? It just seems like the
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Speaker 2: fire hose is so overwhelming it's impossible to know where
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Speaker 2: to even begin.
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Speaker 4: Yeah, So you know, I work for two years as
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Speaker 4: President Biden's deputy National Security Advisor. I think President Biden
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Speaker 4: started from the place of believing that, you know, the
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Speaker 4: I in the United States acts with greatest impact in
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Speaker 4: the world when it acts alongside our close to stallies
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Speaker 4: and partners. And I think that's part of the reason
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Speaker 4: why the G seven during the years I was serving,
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Speaker 4: was perhaps at the height of its impact and influence
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Speaker 4: across time. I mean, I think of two things that
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Speaker 4: really highlight this. You know, one was after a Russia's
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Speaker 4: invasion of Ukraine, really acting with force with one voice,
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Speaker 4: not just as the United States, but as a set
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Speaker 4: of allies, to put a historic set of sanctions on Russia,
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Speaker 4: to put historic economic pressure on Russia, and to do
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Speaker 4: that in a way that made sure that it wasn't
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Speaker 4: just the United States acting, but all of our allies
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Speaker 4: and partners together around the world, acting in concert, delivering
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Speaker 4: a stronger force a policy than the United States, for
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Speaker 4: all of its power and might, could have delivered by itself. Similarly,
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Speaker 4: I think with respect to you know, a kind of
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Speaker 4: different type of problem, you know, thinking about our the
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Speaker 4: United States competition with China, like in domains such as
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Speaker 4: technology and artificial intelligence, the type of thing that's very
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Speaker 4: front of mine today. You know, a lot of our
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Speaker 4: European allies came to that with with more skepticism. They
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Speaker 4: have a different perspective on their relations with China than
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Speaker 4: you know, we had in the United States, had both
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Speaker 4: across frankly, the Trump administration and the Bide administration. And
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Speaker 4: it was you know, the hard diplomatic work day in,
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Speaker 4: day out, week in week out, you know, persuading skeptical
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Speaker 4: allies to join us in some of the policy steps
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Speaker 4: that we thought were important to protect our technologies, to
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Speaker 4: protect the national security applications that they offered, to protect
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Speaker 4: our economic well being against that competitive threat, and bringing
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Speaker 4: those allies along through. Like I said, the hard work
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Speaker 4: of diplomacy, through the hard work of persuasion day and
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Speaker 4: day out, week and week out, I think was ultimately
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Speaker 4: quite fruitful. And you know something that was an important
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Speaker 4: part of how I spent those years.
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Speaker 2: So, given all that policy experience and being in the
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Speaker 2: room where it happens, how does that affect how you
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Speaker 2: look at markets and investing? Did your government experience affect
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Speaker 2: how you think about risk, uncertainty and various opportunities?
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Speaker 3: Yeah?
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Speaker 4: So, I mean I would say a couple of things there,
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Speaker 4: you know. One, you know, I do think that investing
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Speaker 4: and policy making are different exercises and need to be
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Speaker 4: kept separate. Policy Making is an exercise of attempting to
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Speaker 4: make a world as you want it to be, or
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Speaker 4: at least as the people's elected representatives want it to be.
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Speaker 4: Investing as exercise of taking the world as it is,
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Speaker 4: uh and making sound judgments about how to invest client
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Speaker 4: capital that is their capital, that is their savings on
15:11
Speaker 4: their behalf. UH. So it's to help them achieve what
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Speaker 4: they've set out to achieve. And so to me, the
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Speaker 4: framework I've used to think about investing is, you know,
15:23
Speaker 4: kind of comes back to some of the blocking and
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Speaker 4: tackling of of of active management. I think about, you know,
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Speaker 4: my my mentor at black Rock, Ron con uh one
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Speaker 4: of the authors of the literally the Bible of quantitative
15:36
Speaker 4: investing in the fundamental of law of active management, and
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Speaker 4: you know, it's really all about making forecasts that are
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Speaker 4: right about the world, having a wide set of those
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Speaker 4: forecasts so you can build a diversified portfolio, and then
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Speaker 4: translating those insights efficiently into portfolios through the assets you own.
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Speaker 4: So again, for me, these these these these these exercises
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Speaker 4: overlapped to some degree, but I really try to keep
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Speaker 4: the distinct because one's about the world as you might
16:02
Speaker 4: hope it to be, and the other is about the
16:04
Speaker 4: world as it is. And being sure that you don't
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Speaker 4: confuse those two things is really part and parcel of
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Speaker 4: what it means. I think to do you know the job,
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Speaker 4: you're meant to do.
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Speaker 2: It each that I like that framework between the two.
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Speaker 2: Coming up, we continue our conversation with Mike Pile, deputy
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Speaker 2: head at black Rocks PMG, discussing the Portfolio Management Group.
16:26
Speaker 3: I'm Barry Ritholts.
16:27
Speaker 2: You're listening to Masters in Business on Bloomberg Radio.
16:42
Speaker 3: I'm Barry D Halts.
16:43
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
16:47
Speaker 2: extra special guest today is Mike Pile. He is the
16:50
Speaker 2: deputy head of black Rocks Portfolio Management Group. The group
16:55
Speaker 2: overseas ninety four billion dollars in hedge fund assets and
16:59
Speaker 2: another three hundred and ninety four billion in systematic investments.
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Speaker 2: So let's talk a little bit about the Portfolio management Group.
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Speaker 2: So let's talk a little bit about the Portfolio Management Group.
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Speaker 3: Tell us about the various strategies you oversee. What does
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Speaker 3: the deputy head of PMG actually do Yeah.
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Speaker 4: So the Portfolio Management Group, as you talked about, is
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Speaker 4: really the organization within Blackrock that oversees our active investing
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Speaker 4: strategies in public markets. You know, been entrusted with over
17:37
Speaker 4: just about five trillion dollars and client assets to manage
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Speaker 4: through those strategies, but really spans asset classes, fixed income, equities,
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Speaker 4: multi assets, span styles as you say, both discretionary and systematic,
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Speaker 4: spans both long only as well as long short, hedge
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Speaker 4: fund and liquid alternative strategies. So really it's it's it's
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Speaker 4: that full umbrella of active strategies in public markets. You know,
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Speaker 4: in terms of what do I do well, I directly
18:06
Speaker 4: oversee what we do on the hedge funds and look
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Speaker 4: at alternative side, directly oversee our efforts and fundamental equities,
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Speaker 4: and directly oversee our internal think tank, the black Rock
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Speaker 4: Investment Institute. But what does that mean, you know day
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Speaker 4: to day? You know, I'd say it's a mix, you know,
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Speaker 4: with some share my time, I am working with our
18:25
Speaker 4: portfolio managers, working with our lead researchers to try to
18:28
Speaker 4: offer what I can to help them frame what's happening
18:32
Speaker 4: in the world to help them. As we talked about
18:34
Speaker 4: understand the world as it is and what that might
18:36
Speaker 4: meet from markets and help them think about the choices
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Speaker 4: they're making in portfolios on behalf of clients. But you know,
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Speaker 4: really the lion share of my time is about making sure,
18:47
Speaker 4: you know, we've got the right portfolio managers and teams,
18:51
Speaker 4: the right strategies, the right investment process and research process
18:55
Speaker 4: sitting beneath those teams so that we can deliver for
18:59
Speaker 4: clients and a lot of respects. It's, you know, about
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Speaker 4: a lot more about being the GM or the coach
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Speaker 4: than being the player.
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Speaker 2: Uh.
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Speaker 4: And I think that's a it's a it's a pretty
19:09
Speaker 4: exciting mix of things that I get to do as
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Speaker 4: a result.
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Speaker 2: So I think everybody understands what hedge funds are, what
19:15
Speaker 2: are liquid alternatives?
19:17
Speaker 3: Explain that a little bit.
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Speaker 4: Yeah, sure, So maybe to take a take a step back,
19:22
Speaker 4: you know, if I think about the challenge that investors
19:26
Speaker 4: face today, and this is true whether we're talking about
19:30
Speaker 4: the most sophisticated large asset owners on the planet or
19:34
Speaker 4: you know, mom and pop investors saving for their retirement,
19:38
Speaker 4: it's where can they find a versification?
19:41
Speaker 2: You know?
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Speaker 4: A Obviously one of the core precepts of investing is
19:46
Speaker 4: the free lunch of diversification, the value of diversification, and
19:50
Speaker 4: yet uh, it is increasingly hard to find out there.
19:53
Speaker 4: And I think that's true in a couple of ways.
19:55
Speaker 4: You know. One, you know, traditionally we think about government
20:00
Speaker 4: bonds being an important hedge against stocks in a portfolio.
20:04
Speaker 4: When stocks go down, bonds go up in value. You know,
20:08
Speaker 4: that's not what we saw in twenty twenty two, that's
20:10
Speaker 4: not what we saw in March of this year. And
20:13
Speaker 4: so finding tools that can help diversify portfolios in a
20:16
Speaker 4: world where bonds aren't perhaps serving that role as well
20:20
Speaker 4: as they have at different points in history. And secondly,
20:22
Speaker 4: on the equity side, you know, feacing markets that are
20:26
Speaker 4: increasingly concentrated. You know, we see what a large share
20:30
Speaker 4: of indices, you know, those big megacap tech names are today.
20:35
Speaker 4: That means that when you own the index, you're owning
20:38
Speaker 4: a less diversified equity portfolio than has historically been the case.
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Speaker 4: So what does that mean about where liquid alternatives step in?
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Speaker 4: You know, I think one of the ways in which
20:49
Speaker 4: investors can find diversification is by having exposures that are
20:55
Speaker 4: neutral to broad markets, neutral to those beta in stocks
21:01
Speaker 4: and bonds that drive the line and share of portfolios,
21:04
Speaker 4: and being neutral to the markets means having strategies that
21:09
Speaker 4: can be long and short in an asset class that
21:14
Speaker 4: can be long, individual stocks can be short individual stocks
21:19
Speaker 4: the same on the bond side, in order to generate alpha,
21:22
Speaker 4: an investment return that is independent of the movements in
21:26
Speaker 4: the broad markets. Liquid alternatives are our vehicles that have
21:33
Speaker 4: exactly those types of strategies. They're very similar in this
21:36
Speaker 4: respect to the types of strategies that we deploy in
21:39
Speaker 4: our direct hedge funds and offer similar types of uncorrelated return.
21:45
Speaker 4: Now an important difference between something like a direct hedge
21:48
Speaker 4: fund and a liquid alternative. These are different types of
21:51
Speaker 4: vehicles meant for different types of investors. They offer daily
21:55
Speaker 4: liquidity as opposed to hedge funds, which have different liquidity terms.
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Speaker 4: That means, you know, running strategies that at their core
22:03
Speaker 4: are the same across liquid alts and hedge funds, but
22:07
Speaker 4: are designed to be in daily liquid vehicles that are
22:12
Speaker 4: designed to be run with much less leverage to recognize
22:16
Speaker 4: the types of clients and the types of needs that
22:18
Speaker 4: those clients have, which are for greater diversification but also
22:22
Speaker 4: liquidity transparency availability that is different from an institutional hedge
22:27
Speaker 4: fund clients help.
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Speaker 2: So from your seat, what sort of trends are you observing,
22:33
Speaker 2: either in hedge funds or liquid alts. What kind of
22:36
Speaker 2: strategies are resonating with investors?
22:40
Speaker 4: Yeah, so I think that exactly as we were talking about,
22:43
Speaker 4: what's resonating is the availability of diversification, of diversifying the diversifiers.
22:52
Speaker 2: Meaning beyond just sixty forty, just beyond just stocks and
22:55
Speaker 2: bonds exactly.
22:57
Speaker 4: And I think you know, some war that my colleagues,
23:01
Speaker 4: the Blackrock Investment Institute, did you know, highlighted the type
23:04
Speaker 4: of world that we're investing in now, and they basically
23:07
Speaker 4: made the point which goes to why we don't see
23:09
Speaker 4: the diversification across stocks and bonds we have historically that
23:12
Speaker 4: you know, some of the macroeconomic and the macro underpinnings
23:16
Speaker 4: of markets have become unmoored in recent years. It is
23:19
Speaker 4: a less predictable framework, whether it's around trends on growth
23:24
Speaker 4: of inflation, trends around monetary and fiscal policy frameworks, the
23:28
Speaker 4: geopolitical environment and the like. And as a result, hedge
23:33
Speaker 4: funds and liquid alternative strategies provide tools that allow managers
23:38
Speaker 4: to navigate that environment either you know, like with my
23:41
Speaker 4: colleagues on the systematic side, you know, running strategies that
23:45
Speaker 4: are not just market neutral, but neutral to broad market
23:49
Speaker 4: factors like momentum, like low volatility, like some of these
23:53
Speaker 4: other kind of well known factor exposures, and really focusing
23:56
Speaker 4: on you know, true uncorrelated alpha and also macroeconomic strategies,
24:02
Speaker 4: macro strategies where skilled managers are navigating a much more
24:06
Speaker 4: complicated macrotomic environment to deliver alpha through that skillful navigation.
24:12
Speaker 4: Those from our research are the two types of strategies
24:15
Speaker 4: that are perhaps best poised to offer that different type
24:18
Speaker 4: of return, that different type of diversification. And that's what
24:22
Speaker 4: we're seeing not just in the firmat across the industry.
24:24
Speaker 4: The places that are attracting client interest are systematic strategies,
24:30
Speaker 4: are macro strategies, and we think precisely because they best
24:34
Speaker 4: correspond to the opportunity set that markets are offering us.
24:37
Speaker 2: So let's talk a little bit about that systematic approach.
24:42
Speaker 2: That team began in nineteen eighty five with a grand
24:45
Speaker 2: total of three investment signals, used more than a thousand
24:49
Speaker 2: investment signals I'm kind of fascinated. This came along with
24:53
Speaker 2: the BGI acquisition in nine which everybody room members for
24:57
Speaker 2: I shares, but this is still almost foe hundred billion OS.
25:02
Speaker 2: This is a substantial chunk of capital. Tell us a
25:05
Speaker 2: little bit about how the systematic team thinks about adding
25:10
Speaker 2: a signal, how they integrate all these various signals, And
25:15
Speaker 2: I'm legally obligated to ask, how is AI contributing to
25:19
Speaker 2: these signals?
25:20
Speaker 4: Yeah, I mean so, I'd take a couple of things.
25:23
Speaker 4: I mean one, you know, this is a team that
25:27
Speaker 4: really is at the forefront of pulling in a bunch,
25:33
Speaker 4: you know, taking advantage of the fact that the availability
25:37
Speaker 4: of data in the world, structured data, unstructured data, you know,
25:41
Speaker 4: is step wise different than it has been ever before
25:45
Speaker 4: in history. And the techniques available to analyze, process, identify consistent,
25:53
Speaker 4: valuable investment signals from that data is also given expanded
25:58
Speaker 4: compute given the changes in techniques, including around generative and
26:03
Speaker 4: agentic AI, you know, to make sense of that data
26:05
Speaker 4: and bring order to it. You know, this is you know,
26:08
Speaker 4: really at the heart of what our systematic researchers do
26:13
Speaker 4: in building signals and portfolios. I sort of add a
26:17
Speaker 4: couple of additional points. I mean one, building on what
26:20
Speaker 4: you said, they've been at this for now forty one years,
26:24
Speaker 4: so you know they are not new to using data
26:32
Speaker 4: using tools of AI machine learning to generate you know,
26:35
Speaker 4: alpha for clients. This is something they've been at really
26:39
Speaker 4: defining the frontier for four decades. You know, they were
26:41
Speaker 4: doing natural language processing more than ten years ago. They
26:44
Speaker 4: were doing portfolio optimization with machine learning more than ten
26:48
Speaker 4: years ago. This is not a Johnny Come Lately story
26:51
Speaker 4: of the moment. This is a story of a crude
26:54
Speaker 4: excellence and expertise built over decades. The everything I'd say,
26:57
Speaker 4: and maybe it's funny to talk about it with respect
26:59
Speaker 4: to a quant team, to a you know, a kind
27:02
Speaker 4: of hardcore systematic team, but I think one of the
27:04
Speaker 4: things that really sets it apart, you know, within Blackrock
27:07
Speaker 4: within the industry is, you know, the culture that they've built.
27:12
Speaker 4: This is you know, a core set of investors and
27:14
Speaker 4: researchers that, as you say, have been together for decades,
27:18
Speaker 4: that have been together in many cases since before BGI
27:22
Speaker 4: became a part of Blackrock became Blackrock Systematic, and so
27:26
Speaker 4: there's that kind of continuity, that legacy across time, and
27:29
Speaker 4: at the same time, they're also every year adding young professionals,
27:35
Speaker 4: young researchers fresh off their PhD, with new perspectives, new
27:39
Speaker 4: innovative techniques, new ways of looking at the data, new
27:42
Speaker 4: ways of looking at AI. And I think that really
27:44
Speaker 4: special balance between experience, continuity, depth of knowledge built over
27:51
Speaker 4: decades with new voices, new perspectives, new ways of solving
27:55
Speaker 4: hard computational and hard data problems. That's what's pretty special
28:00
Speaker 4: about the culture they built as well.
28:02
Speaker 2: So you guys sit very much at an intersection between
28:06
Speaker 2: quantitative and fundamental data. Become quantitative and fundamental investors. When
28:12
Speaker 2: you're thinking about systematic signals, how do you manage when
28:20
Speaker 2: what comes out of out of the data conflicts with
28:26
Speaker 2: the fundamental narrative that seems to be driving most of
28:29
Speaker 2: the conversations.
28:31
Speaker 3: How do you contextualize that? Who wins that debate?
28:36
Speaker 4: I think it's a great question. I'd say a few observations.
28:38
Speaker 4: I mean, one, you know, Blackrock, we believe in individual
28:44
Speaker 4: pms and teams that are empowered to make you know
28:48
Speaker 4: judgments that they are accountable for, and so it may
28:50
Speaker 4: be that our systematic investors are coming to a different
28:54
Speaker 4: view on markets on a range of stocks than our
28:57
Speaker 4: fundamental teams are. That's okay. You know, we believe in
29:01
Speaker 4: empowered like I said, portfolio managers who are making the
29:04
Speaker 4: best decisions they can for our clients, but are armed
29:08
Speaker 4: with a common set of tools to come to judgments.
29:11
Speaker 4: But I think, to abstract away from that further, i'd say,
29:15
Speaker 4: you know, I really do think that in some pretty
29:18
Speaker 4: important ways, what systematic investors do is just a different
29:23
Speaker 4: kind of thing altogether from what fundamental investors do. If
29:26
Speaker 4: I think about the work that our fundamental investors do, it's,
29:30
Speaker 4: you know, really harnessing all potential sources of insight to
29:35
Speaker 4: go as deep as humanly possible, as technologically possible with
29:41
Speaker 4: respect to understanding an individual company, an individual asset, and
29:45
Speaker 4: its likelihood of outperforming or underperforming the market in the
29:48
Speaker 4: years ahead. That's different than the type of I think
29:53
Speaker 4: insight that our systematic investors tend to kind of think about.
29:58
Speaker 4: They think about sort of what they call high breadth insights,
30:02
Speaker 4: so insights that you know, basically apply to a wide
30:07
Speaker 4: range of stocks three hundred, four hundred and five hundred stocks.
30:09
Speaker 4: You know, we found an insight that we think on
30:12
Speaker 4: balance over time across the universe of many hundreds of
30:15
Speaker 4: stocks is going to outperform. That's not about deep research
30:20
Speaker 4: in one company and coming to a highly convicted view
30:22
Speaker 4: on one company. That's coming to a view about what
30:26
Speaker 4: is statistically likely to be the case across the full
30:28
Speaker 4: universe of stocks on balance across time. Now, where do
30:32
Speaker 4: I think these things can be complementary to one another?
30:35
Speaker 4: You know? One I would say is, you know, these
30:37
Speaker 4: are just kind of pretty different sources of insight. And
30:40
Speaker 4: again we've talked about diversification. You know, putting yourself in
30:43
Speaker 4: a place to put different types of insights into a
30:46
Speaker 4: single portfolio can be additive, can be diversifying, can mean
30:50
Speaker 4: that the alpha that you're generating is more diversified and resilient.
30:54
Speaker 4: I'd say another thing, and this is something we're spending
30:56
Speaker 4: a lot of time on with our fundamental teams by
31:00
Speaker 4: virtue of what systematic investors do insights that apply across
31:05
Speaker 4: many hundreds of stocks, packaging as you talked about many hundreds,
31:09
Speaker 4: if not a thousand, types of signals into one portfolio.
31:13
Speaker 4: They think a lot about portfolio construction. They think a
31:15
Speaker 4: lot about how do I take those different insights and
31:19
Speaker 4: size them versus one another to come up with a
31:22
Speaker 4: portfolio that is optimized to achieve client results. I think
31:26
Speaker 4: that taking some of those lessons of portfolio construction into
31:29
Speaker 4: the fundamental realm with a set of investors that, at
31:31
Speaker 4: the end of the day, I think unbalanced view themselves
31:33
Speaker 4: of having conviction about companies more than portfolios and having
31:38
Speaker 4: them kind of take some of those portfolio optimization frames
31:41
Speaker 4: of mind and apply it to how they build portfolios
31:43
Speaker 4: on the fundamental side. There, I think is also a
31:45
Speaker 4: real source of complementarity and something we're spending a lot
31:47
Speaker 4: of time on in PMG.
31:50
Speaker 2: And the black Rock Investment Institute also sits under your umbrella.
31:56
Speaker 2: Tell us about what sort of research they produce, Who
32:00
Speaker 2: consumes the output of this? Is it internal? Is it external?
32:03
Speaker 3: Is it both? Give us a little color on the
32:05
Speaker 3: Blackrock Investment Institute.
32:08
Speaker 4: Yeah, I mean, it's a really powerful tool at Blackrock.
32:12
Speaker 4: I mean I think maybe to take a step back,
32:15
Speaker 4: as I've been doing a couple times in this conversation,
32:18
Speaker 4: you know, I think one of our observations about the
32:21
Speaker 4: asset management industry, the hedge fund industry over the last
32:24
Speaker 4: ten or fifteen years is that ten or fifteen years ago,
32:29
Speaker 4: people viewed hedge fund alpha alpha more broadly, perhaps as
32:34
Speaker 4: the province of small, niche players who understood some corner
32:39
Speaker 4: of the market deeper and better than anybody else. I
32:42
Speaker 4: think ten or fifteen years on, I think we've come
32:45
Speaker 4: to see that alpha is more the province of scale.
32:50
Speaker 4: This is the story of the rise of the multi
32:53
Speaker 4: strategy hedge funds of the Citadel's millenniums. But we think
32:56
Speaker 4: it's also true of the asset management industry at large
32:58
Speaker 4: that there are a lot of benefits of scale that
33:01
Speaker 4: come from you know, insight that come from risk management,
33:05
Speaker 4: that come from trading, and liquidity that come from operational backbone.
33:08
Speaker 4: And you know, a big piece of that is something
33:10
Speaker 4: like the Blackrock Investment Institute that's able to you know,
33:14
Speaker 4: really dedicate itself to the question of how do we
33:18
Speaker 4: research and source valuable insight across a full platform and
33:22
Speaker 4: deliver that to our portfolio managers. And so the purpose
33:25
Speaker 4: of the Blackrock Investment Ensuit is one to inform those
33:29
Speaker 4: helpha research discussions, to really inform and drive the investment
33:34
Speaker 4: debate within the firm, but then also to you know,
33:37
Speaker 4: open up the curtain and let our clients see and
33:40
Speaker 4: consume a lot of the research that our portfolio managers
33:43
Speaker 4: are using day in and day out to inform their
33:46
Speaker 4: own thinking, their own investment decision making. So to answer
33:50
Speaker 4: your question, it's a little both, and it's about driving
33:53
Speaker 4: the investment debate, driving the alpha discussion within the firm,
33:57
Speaker 4: but then saying we've benefited from this, we want our
34:00
Speaker 4: clients to benefit from it too, and let's produce work
34:04
Speaker 4: that based on what we use internally allows our clients
34:07
Speaker 4: to enjoy the fruits of that research as well.
34:10
Speaker 3: Really interesting.
34:11
Speaker 2: Coming up, we continue our conversation with Mike Pile, Deputy
34:15
Speaker 2: head of black Rocks Portfolio Management Group, discussing the state
34:20
Speaker 2: of the world economy and markets in an era of
34:24
Speaker 2: geopolitical uncertainty.
34:26
Speaker 3: I'm Bury Redults.
34:27
Speaker 2: You're listening to Masters in Business on Bloomberg Radio.
34:44
Speaker 3: I'm Barry Dults.
34:45
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. My
34:48
Speaker 2: extra special guest today is Mike Pile, deputy head of
34:52
Speaker 2: black Rocks Portfolio Management Group, responsible for I don't know
34:57
Speaker 2: about five trillion dollars in inves assets. So we are
35:02
Speaker 2: living through an era, especially under this administration of seemingly
35:10
Speaker 2: challenging geopolitical turmoil and unexpected policy shifts. I want to
35:16
Speaker 2: start with something positive, which was a quote from you.
35:20
Speaker 2: US resilience is underestimated. So tell us what that means.
35:25
Speaker 2: What does the market miss price about the US economy
35:30
Speaker 2: or the US markets? And we're recording this in the
35:33
Speaker 2: first week in April. You know, despite everything that's happened
35:37
Speaker 2: tariffs and war in Iran, markets are barely five percent
35:41
Speaker 2: off their recent highs. Tell us a little bit about
35:46
Speaker 2: US resilience.
35:48
Speaker 4: Sure, well, you know, first i'd say, we're taping this
35:52
Speaker 4: on Tuesday midday.
35:54
Speaker 3: Eight o'clock tonight.
35:55
Speaker 2: Who knows what will happen, And for all we know
35:57
Speaker 2: that's a misdirection and it's going to start as soon
35:59
Speaker 2: as it gets stark.
36:00
Speaker 4: Who knows we will We will all find out together.
36:05
Speaker 4: But I do think that this point about US resilience
36:09
Speaker 4: is an important one. You know, we've seen it on
36:13
Speaker 4: display in many moments over the past number of years,
36:17
Speaker 4: including the last twelve months. You know, the you know, diversity,
36:22
Speaker 4: the breadth, the innovative potential of the US economy, the
36:26
Speaker 4: quality of our corporate sector. You know, these are all
36:30
Speaker 4: things that are are pretty extraordinary. I think one of
36:33
Speaker 4: the things that I would highlight in the here now
36:36
Speaker 4: with respect to you know, what I think is fairly
36:39
Speaker 4: described as a historic energy set shock, a energy shock,
36:44
Speaker 4: the dimensions of which I think are going to only
36:47
Speaker 4: become even more clear in the weeks and months ahead.
36:50
Speaker 4: And we're seeing physical supply disruptions in a way that
36:53
Speaker 4: for example, we didn't you know, see in twenty twenty
36:56
Speaker 4: two post Russia's invasion. And this is a global shock,
37:00
Speaker 4: this is a global supply chain shock. It is going
37:02
Speaker 4: to have impacts on the United States. But I do
37:05
Speaker 4: think it's fair to say that in a real economic sense,
37:09
Speaker 4: the US is relatively more insulated from this shock than
37:14
Speaker 4: other economies around the world, whether that's in Europe, whether
37:17
Speaker 4: that's in East and Southeast Asia, whether that's in the
37:20
Speaker 4: emerging markets broadly. You know, and and you know, you
37:24
Speaker 4: can look at you know, one number which which you
37:26
Speaker 4: know I spend a fair amount of time looking at
37:29
Speaker 4: and marveling at in some respects, which is, you know,
37:31
Speaker 4: the price of natural gas in the US. And if
37:33
Speaker 4: you look at a chart of the last three four
37:36
Speaker 4: months of the natural gas contract in the US, basically
37:38
Speaker 4: hasn't Budge, you would be hard pressed to identify where
37:41
Speaker 4: on that chart the military intervention in Iran began. And
37:46
Speaker 4: I think that highlights, you know, the extent to which
37:48
Speaker 4: this critical input to electricity production the United States, this
37:52
Speaker 4: critical input to industrial production in the United States, this
37:54
Speaker 4: critical input to the way houses kind of heat themselves
37:58
Speaker 4: and cook. You know, all of this is you know,
38:01
Speaker 4: basically untouched by what we've seen in the war over
38:05
Speaker 4: the last five weeks. Again, I think that's in some
38:07
Speaker 4: ways the most dramatic data point, but it highlights the
38:11
Speaker 4: extent to which, even in the face of this global shock,
38:14
Speaker 4: there are very important dimensions of the US that look
38:17
Speaker 4: different than other economies around the world and makes us, unbalance,
38:21
Speaker 4: more resilient than than those other commies.
38:24
Speaker 2: That guest tends to be moved around by pipeline, and
38:29
Speaker 2: it's more local.
38:31
Speaker 4: Unlike oil, it is not a globally integrated.
38:32
Speaker 2: Right and right before we stepped in here, I checked
38:35
Speaker 2: the price of crude was one hundred and thirteen. So
38:38
Speaker 2: by the time this comes out, it's either much higher
38:40
Speaker 2: and much lower or.
38:42
Speaker 3: Maybe the same. But you mentioned supply, let's delve into that.
38:47
Speaker 2: You know, we saw a giant supply chain shock during
38:50
Speaker 2: the pandemic, the war with Iran, and the straight offmuz
38:54
Speaker 2: is creating a new energy supply shock. This seems to
38:57
Speaker 2: be an ongoing issue. You would have thought by now
39:01
Speaker 2: we would have solved this problem, but it continues to
39:04
Speaker 2: be significant to the global economy.
39:07
Speaker 3: To tell us your views on this.
39:10
Speaker 4: Yeah, I mean you asked about the role that the
39:12
Speaker 4: Blackrock investment ins to two plays. I mean, I think
39:15
Speaker 4: one of the things that they have done and built
39:19
Speaker 4: on over the last four years, you know, is a
39:22
Speaker 4: piece of work they did back in twenty twenty two
39:24
Speaker 4: called a World Shape by Supply, which basically talked about
39:28
Speaker 4: the ways in which you know, the twenty tens in particular,
39:32
Speaker 4: you know, is a world defined by agrit demand. I mean,
39:35
Speaker 4: this goes back to the very start of our conversation
39:37
Speaker 4: when we talked about the struggles that the US and
39:40
Speaker 4: global economy had after the GFC because perhaps of the
39:44
Speaker 4: lack of a forceful fiscal policy lever being pulled. That's
39:48
Speaker 4: a story about agrit demand. That's a story about there
39:50
Speaker 4: being insufficient demand in the macroeconomy to achieve full employment
39:55
Speaker 4: and inflation at target. The story post COVID is not
40:00
Speaker 4: that it's a world as they've said, you know, shape
40:03
Speaker 4: by supply, and you know, I think that wasn't true.
40:05
Speaker 4: That was true, not just in twenty twenty one, twenty
40:09
Speaker 4: twenty two, after COVID, after Russia's invasion, you know, it's
40:13
Speaker 4: true today as well. And I would sort of draw
40:15
Speaker 4: attention to, you know, really two episodes that we've seen
40:19
Speaker 4: already in twenty twenty six that highlight this point. One
40:22
Speaker 4: and most obviously, you know, is what we've seen in
40:24
Speaker 4: markets since the beginning of the military intervention in Iran
40:29
Speaker 4: and the world pricing to a greater or lesser extent,
40:32
Speaker 4: you know, a pretty traditional negative energy supply shock, higher
40:37
Speaker 4: inflation expectations, lower growth expectations, a pullback and risk really
40:41
Speaker 4: across different types of asset classes. But if you roll
40:45
Speaker 4: the clock back just a couple of weeks before the
40:48
Speaker 4: beginning of hostilities in Iran, you know, you saw market
40:53
Speaker 4: priced for a different type of supply shock, a positive
40:56
Speaker 4: technology supply shock from AI. We saw that disinflationary even
41:01
Speaker 4: deflationary trend in the way government bonds were getting priced.
41:06
Speaker 4: We saw big cross sectional moves and the equity market
41:09
Speaker 4: reflecting the potential disruption from AI around a range of
41:13
Speaker 4: business models, and so really twenty twenty six I think
41:16
Speaker 4: highlights both on the positive side and on the negative side,
41:20
Speaker 4: from the in terms of supply shocks, what it means
41:23
Speaker 4: to be living in a world shape I supply.
41:25
Speaker 2: So abundance on the one hand, scarcity on the other,
41:29
Speaker 2: and logistical interruptions determining which way we.
41:33
Speaker 4: Go, yeah, and the thing I need to put on
41:37
Speaker 4: my sort of policy observer had at a minimum. These, however,
41:44
Speaker 4: hard financial problems are to solve, and they are hard
41:48
Speaker 4: to solve, as the GFC is the year Zone crisis
41:52
Speaker 4: made clear. They are fundamentally not engineering problems. They are
41:57
Speaker 4: problems of political and policy. Well, supply chain problems, those
42:02
Speaker 4: are a different beast. Entirely, this is about rewiring the
42:06
Speaker 4: way physical things atoms get produced, get transported, get consumed,
42:13
Speaker 4: and that is a much harder, much slower, much more
42:16
Speaker 4: difficult economic and market problem, much different and harder policy problem.
42:21
Speaker 4: I think again, I would highlight this is one of
42:23
Speaker 4: the ways in which I think the US has proven
42:25
Speaker 4: itself more resilience. Again, the kind of quality, the innovative capacity,
42:30
Speaker 4: the flexibility of the US corporate sector to solve through
42:34
Speaker 4: the supply chain problems that we've seen since the advent
42:36
Speaker 4: of COVID. That's a genuine source of resilience for economy.
42:42
Speaker 4: But also I think highlights that these are hard problems
42:45
Speaker 4: and a different set of problems in kind than what
42:48
Speaker 4: we saw post the GFC.
42:49
Speaker 2: So let me have you put on your policy wonk
42:52
Speaker 2: cap and look out three years, five years.
42:57
Speaker 3: What is the result of this war.
42:59
Speaker 2: Going to mean? Or things like alternative energy supplies. It
43:03
Speaker 2: turns out China is fairly insulated for different reasons than
43:07
Speaker 2: the United States. We have fracking in that gas. They
43:11
Speaker 2: seem to have a ton of solar and wind and geothermal,
43:16
Speaker 2: which we've sort of neglected the past couple of years.
43:21
Speaker 2: What's the end result of this war gonna be?
43:25
Speaker 3: I don't mean in terms of.
43:26
Speaker 2: Military or political alignment. I mean in terms of global econology,
43:31
Speaker 2: in terms of global economy, energy consumption, things like that.
43:36
Speaker 4: You know, well, i'd say, you know, you talk about
43:40
Speaker 4: three or five years out, you know, to to quote
43:45
Speaker 4: the potentially apocryphal story about Joe and Lae, I think
43:49
Speaker 4: it's too soon to tell. We're gonna find out again
43:52
Speaker 4: together in the in the years maybe even the hours
43:55
Speaker 4: and days ahead. But I will say I think we're
43:57
Speaker 4: spending a fair amount of time trying to think about
44:00
Speaker 4: some of these questions in Blackrock. What are the more
44:05
Speaker 4: durable economic themes going to be coming out of the shock?
44:08
Speaker 4: I mean, I guess I might you know, highlight three,
44:13
Speaker 4: you know one. You know, I think energy security, which
44:16
Speaker 4: I think post COVID, post Russia's invasion was already front
44:21
Speaker 4: of mind for countries, companies, economies around the world is
44:25
Speaker 4: only going to become more so.
44:28
Speaker 1: Uh.
44:28
Speaker 4: This is I think one of the important trends of
44:33
Speaker 4: our moment. Secondly, you know, I think what we're going
44:36
Speaker 4: to see both from countries and from companies is increased
44:41
Speaker 4: focus on strategic stockpiling. You know, obviously we're seeing economies
44:46
Speaker 4: make use of things like strategic petroleum reserves. I suspect
44:52
Speaker 4: that in spaces like energy, but much more broadly, across
44:56
Speaker 4: a much wider set of critical inputs of raw materials,
45:00
Speaker 4: You're going to see companies and countries really turned to
45:03
Speaker 4: using resources to build stock biles of those of those
45:07
Speaker 4: critical inputs. And that is again we've talked for a
45:11
Speaker 4: long time about the ways in which there's been a
45:13
Speaker 4: turn in the world from just in time supply chains
45:16
Speaker 4: to resilient supply chains. That type of stockpiling behavior is
45:21
Speaker 4: what it means in important ways to be spending more
45:25
Speaker 4: resources than you otherwise would to day for an efficient
45:28
Speaker 4: outcome today in service of greater resilience over the long term.
45:32
Speaker 4: And then I think the third is, you know, I
45:35
Speaker 4: do think that countries and companies around the world are
45:38
Speaker 4: going to be looking at their energy mix, and I think,
45:42
Speaker 4: you know, to one of the points we've made about investing,
45:44
Speaker 4: diversification is a really important precept in investing. It is
45:50
Speaker 4: perhaps the only free lunch that's out there, and I
45:52
Speaker 4: would expect a lot of different players to be thinking
45:56
Speaker 4: as they think about their energy securities, they think about
45:58
Speaker 4: how to build strategic stockpililes, what's the right diversification to
46:02
Speaker 4: ensure that I'm not subject to show points to supply shortages,
46:07
Speaker 4: to disruptions looking ahead.
46:09
Speaker 2: I like the concept of the framework of this shift
46:13
Speaker 2: that's taking place in the twenty twenties in a lot
46:16
Speaker 2: of ways, where the regime today is so much different
46:20
Speaker 2: than the twenty tens, more fiscal stimulus, higher rates that
46:25
Speaker 2: seem to be structural and built in higher inflation rates,
46:29
Speaker 2: more geopolitical actions, more volatility. Does this decade require us
46:37
Speaker 2: to fundamentally, fundamentally rethink how we build portfolios, how we
46:42
Speaker 2: manage risk? How different are the twenty twenties from the
46:47
Speaker 2: twenty tens.
46:48
Speaker 4: Yeah, I mean, I think this gets to some of
46:50
Speaker 4: the themes we were talking about earlier. That you diversification
46:56
Speaker 4: is an extraordinarily important tool as an investor, and diversification
47:01
Speaker 4: is harder to come by today than it was in
47:05
Speaker 4: the twenty tens and than has been historically. You know,
47:08
Speaker 4: again that's true around the role that government bonds can
47:11
Speaker 4: be relied upon to play in portfolios, like in months
47:16
Speaker 4: such as March twenty twenty six, like in twenty twenty two.
47:20
Speaker 4: It's also true as we were talking about in terms
47:22
Speaker 4: of equity markets and how concentrated equity markets, especially in
47:26
Speaker 4: the United States, have become. And so, you know, building
47:30
Speaker 4: portfolios means building portfolios that achieve diversification in a world
47:36
Speaker 4: where diversification is less available than it has been in
47:40
Speaker 4: the past through straightforward means like balance sixty forty fourtfolios.
47:44
Speaker 4: What does that mean? You know, my boss Thery Fink
47:46
Speaker 4: has talked about the role that private assets can play
47:50
Speaker 4: in building more resilient, more diversified portfolios. And I think
47:54
Speaker 4: as part of that, talking about the role that hedge
47:57
Speaker 4: funds and look at alternative strategies can play in public markets,
48:00
Speaker 4: as we've done here, that role that uncorrelated alpha alpha
48:05
Speaker 4: that's not exposed to broad market directionality can play in portfolios.
48:10
Speaker 4: These are the types of solutions that I think investors
48:14
Speaker 4: of all types are going to need to reach for
48:16
Speaker 4: to build those portfolios that are designed for a world
48:20
Speaker 4: shape I supply designed for a world of geopolitical shocks,
48:23
Speaker 4: designed for a world where diversification is harder to come by.
48:27
Speaker 4: And the answer isn't as straightforward as the traditional sixty forty.
48:32
Speaker 4: The world is going to have to be thought of
48:34
Speaker 4: in terms of that broader set of tools.
48:36
Speaker 2: So we've spent a lot of time talking about the
48:38
Speaker 2: Middle East. Let's look around the rest of the world,
48:42
Speaker 2: starting with this attempt to sort of decouple from China.
48:47
Speaker 2: Is that achievable or are these just political aspirations that
48:52
Speaker 2: don't reflect economic reality.
48:57
Speaker 4: So I think that's a very good question. I will say,
49:01
Speaker 4: you know, it is clear that President Trump and the
49:07
Speaker 4: administration have been working to achieve a stable economic footing
49:15
Speaker 4: between the US and China. I think that that if
49:19
Speaker 4: it were to be achieved, would be positive. Again from
49:22
Speaker 4: the perspective of the type of stability, the type of
49:24
Speaker 4: predictability that allows businesses, households, individuals to plan and make choices.
49:32
Speaker 4: I think that plays into you know, you know, one
49:36
Speaker 4: of the things that we've been talking about, what I've
49:38
Speaker 4: been talking about last week, even with some of your colleagues, is,
49:42
Speaker 4: you know, the summit between President Trump, President Trump and
49:46
Speaker 4: President she is scheduled for May fourteenth and May fifteenth.
49:49
Speaker 4: You know, I think that as we look about events
49:51
Speaker 4: in the Middle East, that's a date that I have
49:54
Speaker 4: in my own I as I think about when hostilities
49:59
Speaker 4: in the Middle least would likely need to be winding down.
50:03
Speaker 4: I think hard press to see how a summit happens.
50:05
Speaker 4: They've already rescheduled once. How does hard Press see how
50:07
Speaker 4: some it happens in the event of ongoing active hostilities
50:11
Speaker 4: in the Middle East. And I do wonder hard whether
50:14
Speaker 4: that's a backstop around the Middle East, because I do
50:17
Speaker 4: think that there's a strong priority from this president, I
50:20
Speaker 4: think from the Chinese side as well, to find that
50:22
Speaker 4: stability between the US and China, And I think the
50:25
Speaker 4: summit is meant to be the culmination of a lot
50:28
Speaker 4: of that work.
50:29
Speaker 2: So I have to talk about AI a little bit.
50:33
Speaker 2: What's the potential there for a possible supply shock and
50:37
Speaker 2: impact on the labor markets, the ability to accelerate productivity
50:42
Speaker 2: and corporate earnings growth? How does Blackrock think about what
50:48
Speaker 2: AI is really doing across everything?
50:52
Speaker 4: Sure? I mean, I would say the uncertainty bands here
50:58
Speaker 4: are extraordinarily high, and so I think in some ways
51:03
Speaker 4: it's hard to venture a forecast around what this means
51:07
Speaker 4: for productivity, what this means for the labor market, what
51:12
Speaker 4: this means for geopolitics one year from now, much less five, eight,
51:17
Speaker 4: ten years from now. You know, I think what I
51:19
Speaker 4: might healthily do is zero in a little bit within
51:23
Speaker 4: a within a domain that I know better, namely namely
51:26
Speaker 4: black Rock, And I think about kind of what are
51:29
Speaker 4: we doing? And I make maybe a couple of observations. One,
51:32
Speaker 4: we've already talked about the work ongoing in the systematic platform,
51:37
Speaker 4: and really, you know, they continue day in and day
51:39
Speaker 4: out to define that frontier of what technology, what AI
51:43
Speaker 4: means in terms of how to manage portfolios and generate
51:47
Speaker 4: investment insight. You know, I look across our active investment platform.
51:50
Speaker 4: More broadly, we are very busily deploying tools that empower
51:55
Speaker 4: individual researchers to access more of the collective intelligent of Blackrock,
52:01
Speaker 4: to go deeper, to go broader, more rapidly around researching
52:06
Speaker 4: individual securities, researching individual companies, researching macroeconomic trends, and come
52:12
Speaker 4: to more judgments, better judgments, more rapidly in ways that
52:16
Speaker 4: we think can help them drive in best performance. Third,
52:19
Speaker 4: I think one of the ways in which Blackrock continues
52:22
Speaker 4: to seek to provide solutions that make sense for our
52:27
Speaker 4: clients is to do what we call customization at scale,
52:31
Speaker 4: to be able to look at an individual investor, listen
52:35
Speaker 4: to their concerns, listen to their needs, and design a
52:37
Speaker 4: solution that's customized for their particular circumstances. Again, whether that's
52:42
Speaker 4: an institution or an individual, technology AI is opening up
52:48
Speaker 4: the prospect of being able to do that with more granularity,
52:51
Speaker 4: at greater speed, and allow us to get in front
52:54
Speaker 4: of our clients with solutions that are really oriented to
52:57
Speaker 4: their goals, their dreams, their ambitions, their concerns in a
53:00
Speaker 4: way that's different than before Last one to make is
53:04
Speaker 4: one of the cool things about being a black Rock is,
53:07
Speaker 4: you know, it's a big place filled with a lot
53:09
Speaker 4: of smart people, and a lot of the excitement is
53:12
Speaker 4: just giving tools to our researchers, to our professionals and
53:18
Speaker 4: seeing organically, you know, what they come up with. And
53:21
Speaker 4: I think a lot of the excitement of the moment
53:23
Speaker 4: is seeing so much innovation, seeing so much experimentation, seeing
53:28
Speaker 4: so many cool applications of this technology and our data
53:31
Speaker 4: to solve problems for clients. You know, now we're at
53:34
Speaker 4: the stage where we're kind of saying, as a farm, okay,
53:37
Speaker 4: what are the handful of things that have bubbled up
53:40
Speaker 4: organically that we think can really move the needle for
53:43
Speaker 4: our clients, really move the needle for the farm, and
53:46
Speaker 4: think about what it means to put our shoulder behind
53:48
Speaker 4: those as an organization.
53:50
Speaker 2: So last question before I get to my favorites, I asked, well,
53:53
Speaker 2: our guests, given all this geopolitical turmoil and market volatility
53:58
Speaker 2: and uncertainty, what do you think investors are not thinking
54:03
Speaker 2: about or talking about but perhaps should be. What topics, assets, geography, policy,
54:09
Speaker 2: data point, what's getting overlooked but shouldn't.
54:13
Speaker 4: So there I mean, I'll offer an answer that kind
54:16
Speaker 4: of puts on, you know, both of my hats and say,
54:19
Speaker 4: we've obviously been talking about AI or just talking about
54:22
Speaker 4: it as applied to Blackrock. You know, I think that
54:25
Speaker 4: the investment implications of AI, as I said, have huge
54:29
Speaker 4: kind of uncertainty bands around them. Where value is going
54:34
Speaker 4: to accrue at what pace, What transformations to the macroeconomy,
54:38
Speaker 4: to the labor market, of geopolitics. These are all extraordinarily
54:42
Speaker 4: first order questions for investors, you know. I'd say one
54:45
Speaker 4: piece that I think is being underappreciated is the degree
54:49
Speaker 4: to which, you know, I think AI is going to
54:51
Speaker 4: become a first order political and policy issue in the
54:55
Speaker 4: quarters couple of years ahead. We're seeing the beginnings of that.
55:00
Speaker 4: You know, talk about you know, data center moratoriums, talk
55:04
Speaker 4: about you know, things like you know, chip access for China,
55:10
Speaker 4: something I worked on. But I think if you talk
55:13
Speaker 4: to you know, polsters, they would say AI is rocketing
55:17
Speaker 4: up the list of issues that voters are focused on
55:20
Speaker 4: in the United States and more broadly, And I think
55:22
Speaker 4: an important dimension of what it's going to mean to
55:25
Speaker 4: invest in AI is understanding that this is going to
55:28
Speaker 4: become a risingly important political and policy issue and an
55:32
Speaker 4: additional dimension of uncertainty that investors are going to have
55:36
Speaker 4: to confront as we make choices around where impact is
55:39
Speaker 4: going to be felt and value is going to accrue.
55:42
Speaker 2: Really really interesting answer. All right, let's jump to my
55:44
Speaker 2: favorite questions I ask all of my guests, starting with
55:48
Speaker 2: and I really have to split this question into two.
55:51
Speaker 2: Who are the mentors who helped shape your career, both
55:54
Speaker 2: from an investing standpoint as well as a government and
55:57
Speaker 2: policy perspective.
56:00
Speaker 4: Yeah, so had off a couple of thoughts here, you know, Uh,
56:06
Speaker 4: parapeters in my life again, I'm Peter Fisher, who who's
56:11
Speaker 4: responsible for bringing me into Blackrock? Uh? As an investor,
56:15
Speaker 4: you know, to me he had been a senior official
56:18
Speaker 4: in George W. Bush's Treasure departmental legendary Federal Reserve official,
56:22
Speaker 4: had led the fixed income platform at Blackrock. Had really
56:26
Speaker 4: that type of career bringing together public and private.
56:29
Speaker 2: Uh.
56:29
Speaker 4: And as the person kind of most responsible for bringing
56:32
Speaker 4: me into Blackrock. And somebody who's been an important counselor
56:34
Speaker 4: to me through the years, you know, spent some time
56:36
Speaker 4: yesterday with my very first economic policy Boston, Washington. Peter Orzag.
56:41
Speaker 4: I was part of President Obama's cabinet as the director
56:44
Speaker 4: of the White House Budget Office, now the CEO of Bizard. Similarly,
56:48
Speaker 4: somebody to me who's brought together public service with UH
56:52
Speaker 4: financial and UH commercial UH service UH as well, and
56:58
Speaker 4: somebody who's again been an important source of council advice.
57:01
Speaker 4: But I would say beyond that, I mean, you know,
57:05
Speaker 4: my mentors both in governments and Black Rock, you know,
57:08
Speaker 4: I'd really look into those organizations at large. You know,
57:11
Speaker 4: when I was in government, the career civil servants at
57:14
Speaker 4: the Office Management Budget, the career civil servants at the
57:17
Speaker 4: Treasure Department, they knew more about their corner of the
57:20
Speaker 4: federal governments, their corner of the world than anybody else
57:23
Speaker 4: in the world, and if you just sat down and listen,
57:26
Speaker 4: they had so much to share and offer. Similarly, a Blackrock,
57:29
Speaker 4: my attitude when I walked in it's a kind of
57:31
Speaker 4: new investor in my mid thirties, having never been in
57:33
Speaker 4: financial markets before, was I've got as much to learn
57:36
Speaker 4: from the analysts associates as I do from those peters,
57:40
Speaker 4: as I do from the senior leadership of the farm
57:43
Speaker 4: and being open to this idea that there is knowledge
57:46
Speaker 4: to be gleaned all in all places, in these organizations,
57:50
Speaker 4: as I think how I think about how I've been
57:53
Speaker 4: mentored by these places as much as individual people.
57:56
Speaker 2: Let's talk about books. What are some of your favorites?
57:59
Speaker 2: What are you reading currently?
58:00
Speaker 4: So I've been revisiting a favorite of mine called Wise
58:07
Speaker 4: Men by Walter Isaacson. I was listening to a podcast
58:10
Speaker 4: that Tyler Cowen did a couple of weeks ago where
58:13
Speaker 4: he talked about, you know, AI, the geopolitical changes that
58:18
Speaker 4: we're seeing means that you know, the world is going
58:21
Speaker 4: to have to be reinvented a new, not unlike perhaps
58:25
Speaker 4: was the case after the Second World War. That's a
58:27
Speaker 4: book about, you know, the group of Americans that really
58:30
Speaker 4: constructed the post war world, constructed the security architecture, constructed
58:36
Speaker 4: a world built on American leadership and integrated global markets,
58:40
Speaker 4: and helped to build that, you know, eighty years of
58:43
Speaker 4: a peace of prosperity that we as Americans and have
58:47
Speaker 4: have enjoyed. And I think that revisiting that is a
58:51
Speaker 4: reminder of what it takes to rebuild a world, what
58:55
Speaker 4: it takes to invent a world, a new And I
58:56
Speaker 4: do think that Tyler's right, that this is a moment that,
58:59
Speaker 4: because of tech logical transformation, because of changes in the
59:02
Speaker 4: world at large, is going to require that type of
59:05
Speaker 4: thinking again. And so revisiting that book and revisiting some
59:09
Speaker 4: of its lessons is something that's been important to me
59:11
Speaker 4: in the past couple of weeks.
59:13
Speaker 2: You mentioned Tyler Cowens podcast. What else is youre streaming
59:17
Speaker 2: these days? Other podcasts or Netflix or Amazon type stuff?
59:22
Speaker 4: Yeah, so I would put in a pitch for my
59:26
Speaker 4: friends Jake Sullivan and John Fine are their new podcast
59:30
Speaker 4: called The Long Game about US national security and foreign policy.
59:35
Speaker 4: I'd say I'd like it for three reasons. I mean, one,
59:40
Speaker 4: you know, I think they really try to offer a
59:42
Speaker 4: pretty just the facts perspective on the choices confronting policymakers
59:48
Speaker 4: here in the United States and more broadly too, It's
59:51
Speaker 4: a real window into the craft of foreign policy. I mean,
59:54
Speaker 4: I think there's a lot to be learned from the
59:56
Speaker 4: craft of how professionals, whether they're policymakers or investor or
1:00:00
Speaker 4: business leaders, kind of think about doing what they do,
1:00:03
Speaker 4: and this is a window in that. And third is
1:00:04
Speaker 4: a personal one. You know, I spent two years of
1:00:06
Speaker 4: my life, spent many years on top of that, being
1:00:09
Speaker 4: in dialogue with both of those guys, and for me
1:00:11
Speaker 4: once a week to kind of tune in for an
1:00:13
Speaker 4: hour and hear two familiar voices talking about stuff that
1:00:16
Speaker 4: I care about is a pretty comforting thing to get
1:00:18
Speaker 4: to do as well.
1:00:19
Speaker 2: So our final two questions, what sort of advice would
1:00:22
Speaker 2: you give to a recent college graduate interested in a
1:00:26
Speaker 2: career in either investing or government policy.
1:00:32
Speaker 4: Yeah, so I'd say, you know, a mix of the
1:00:37
Speaker 4: timeless and the timely. You know, I think on the
1:00:39
Speaker 4: timely side, you know, it is clearly the case that
1:00:44
Speaker 4: working to be at the frontier of how the tools
1:00:49
Speaker 4: of technology, the tools of AI are getting used to
1:00:52
Speaker 4: expand and augment the productivity of workers in finance and
1:00:57
Speaker 4: government is kind of table stakes. But I'd also emphasize
1:01:01
Speaker 4: the time less. You know, in investing, it is still
1:01:06
Speaker 4: going to be the case that the net amount of
1:01:08
Speaker 4: alpha in the market, NETA fees is you know, zero,
1:01:14
Speaker 4: or gross e fees is zero. It is still going
1:01:16
Speaker 4: to be the case that the fundamental law of active management,
1:01:18
Speaker 4: that that mix of forecasting skill, breadth and the abasiability
1:01:23
Speaker 4: to translate in the portfolio is what's going to define
1:01:25
Speaker 4: active management, you know, being steeped in those timeless truths
1:01:29
Speaker 4: I think is valuable. Last point to make is, you know,
1:01:32
Speaker 4: you can never emphasize enough what is always going to
1:01:36
Speaker 4: be human. You know. Trust is hard to build. It
1:01:39
Speaker 4: is built on the back of relationships and relationships across time,
1:01:44
Speaker 4: you know, spending time building your relationships, building trust, being
1:01:48
Speaker 4: seen as somebody who acts with trust and integrity. You know,
1:01:51
Speaker 4: it's not just a way to live a good life.
1:01:54
Speaker 4: It is also a pretty good piece of I think
1:01:57
Speaker 4: career advice as well.
1:01:58
Speaker 2: I like that advice and our final question, what do
1:02:01
Speaker 2: you know about the world of investing today?
1:02:04
Speaker 3: Might have been useful to know thirty years or so ago.
1:02:08
Speaker 4: Yeah, I mean, you know, I would say, you know,
1:02:12
Speaker 4: we've talked a lot about diversification and portfolio construction across
1:02:17
Speaker 4: this conversation, and that, to me, I think is the
1:02:19
Speaker 4: piece that I've most climbed up a curve around that
1:02:25
Speaker 4: I've been kind of most struck by learning about during
1:02:28
Speaker 4: my time at Black Rock. Across the stints in the
1:02:30
Speaker 4: part one, what I expected to learn when I left
1:02:32
Speaker 4: government the first time was Okay, how do I do
1:02:35
Speaker 4: deep macroeconomic research? What I expected when I left government
1:02:39
Speaker 4: the first time around, is how do I take deep
1:02:41
Speaker 4: macroeconomic research and turn that into an insight that I
1:02:45
Speaker 4: can put on as an individual position or individual trade.
1:02:49
Speaker 4: What I hadn't appreciated and came to really love learning
1:02:53
Speaker 4: about was, Okay, how do you actually take five or
1:02:57
Speaker 4: six or seven of those insights, put them into portfolio,
1:03:01
Speaker 4: Understand how much return each conngenerate, Understand how they're correlated,
1:03:05
Speaker 4: how they move with one another, and then you know,
1:03:08
Speaker 4: build a portfolio of those insights that is going to
1:03:11
Speaker 4: deliver the right risk, the right return for clients. And
1:03:14
Speaker 4: that's the art and science of portfolio construction, which to
1:03:17
Speaker 4: me is at the end of the day, the art
1:03:19
Speaker 4: and science of what it means to be a good
1:03:21
Speaker 4: investor into server clients.
1:03:22
Speaker 2: Well, well, this has been absolutely fascinating. Thank you, Mike
1:03:26
Speaker 2: for being so generous with your time. We have been
1:03:29
Speaker 2: speaking with Mike Pile, deputy head of black Rocks Portfolio
1:03:33
Speaker 2: Management Group, helping to oversee about five trillion dollars in
1:03:38
Speaker 2: client assets. If you enjoy this conversation, well be sure
1:03:43
Speaker 2: and check out any of the six hundred we've done
1:03:44
Speaker 2: over the past twelve years. You can find those at iTunes, Spotify,
1:03:49
Speaker 2: Bloomberg YouTube, wherever you get your favorite podcasts. I would
1:03:54
Speaker 2: be remiss if I didn't thank the crack team that
1:03:56
Speaker 2: helps put these conversations together each week. Alexis Noriega is
1:04:01
Speaker 2: my video producer. Sean Russo is my researcher. Anna Luke
1:04:06
Speaker 2: is my producer. I'm Barry Rutolts. You've been listening to
1:04:10
Speaker 2: Masters in Business on Bloomberg Radio