Latest / Masters in Business / Franklin Templeton's Sonal Desai on Fixed Income

Transcript

Franklin Templeton's Sonal Desai on Fixed Income · Masters in Business

• 0:02
  Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
• 0:11
  Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
• 0:16
  Speaker 2: This week on the podcast, I have another extra special guest,
• 0:20
  Speaker 2: So now, Decie. What can I say? She runs the
• 0:23
  Speaker 2: Fixed Income Group as chief investment Officer for Franklin Templeton.
• 0:27
  Speaker 2: She directly manages two hundred and fifteen billion dollars in assets.
• 0:32
  Speaker 2: Soanal has been named to just about every most influential
• 0:35
  Speaker 2: Woman in finance list Baron's five years in a row
• 0:39
  Speaker 2: Forbes Pension Investments. If you are at all interested in
• 0:45
  Speaker 2: fixed income, what the thought process is like, I'm trying
• 0:49
  Speaker 2: to figure out how to structure a portfolio fixed income?
• 0:53
  Speaker 2: What you think about, what affects the returns you're going
• 0:57
  Speaker 2: to see? This is gonna be a great podcast for you.
• 0:59
  Speaker 2: I thought this was interesting, really fascinating, and I think
• 1:03
  Speaker 2: you will also with no further ado Franklin Templeton's Sanal Decide,
• 1:10
  Speaker 2: Welcome to Blomberg.
• 1:12
  Speaker 3: Thank you Barry that it's so kind of you to
• 1:14
  Speaker 3: have me here.
• 1:15
  Speaker 2: Well, it's a pleasure. I'm excited to talk to you.
• 1:19
  Speaker 2: Let's start out with the background that you come from
• 1:23
  Speaker 2: bachelors and economics from del High University. PhD from Northwestern,
• 1:28
  Speaker 2: also in economics. What was the original career player?
• 1:32
  Speaker 3: This is a really interesting one because I grew up
• 1:35
  Speaker 3: in Indo. You know, there are two careers. At that time,
• 1:39
  Speaker 3: there were two careers any good parent wanted from for
• 1:42
  Speaker 3: his son or in my case daughter. You could be
• 1:45
  Speaker 3: an engineer, or you could be a doctor. And if
• 1:47
  Speaker 3: you really didn't want to do either of those, you
• 1:49
  Speaker 3: could work for the government. I didn't want to do
• 1:51
  Speaker 3: any of the three, and economics seemed at that time
• 1:54
  Speaker 3: to be the one which left the most options open
• 1:57
  Speaker 3: for me. So I did economics. At the end of
• 2:00
  Speaker 3: my undergraduate degree, though I didn't feel like I'd really
• 2:05
  Speaker 3: learned enough about economics, and so I decided, you know,
• 2:10
  Speaker 3: not having understood the concept of sunk cost, I decided
• 2:13
  Speaker 3: to do even more and I did a PhD.
• 2:16
  Speaker 2: And was that two years? Three years?
• 2:18
  Speaker 3: The PhD? Yeah, no, that was a full five four
• 2:22
  Speaker 3: five years.
• 2:22
  Speaker 2: So that's more than sun costs. That's double, more than
• 2:25
  Speaker 2: double exactly. So you come out of Northwestern with a
• 2:29
  Speaker 2: PhD in economics, What was your first job in finance
• 2:33
  Speaker 2: or what was your first job out of school?
• 2:35
  Speaker 3: I was assistant professor of economics at the University of Pittsburgh.
• 2:39
  Speaker 3: And here's the deal. When I got that job, I
• 2:44
  Speaker 3: had also interviewed with the IMF, and I had really
• 2:48
  Speaker 3: liked the IMF. But you have to understand, I don't
• 2:50
  Speaker 3: know if it's that way today, but at that time,
• 2:53
  Speaker 3: there was no way I was going to my thesis
• 2:55
  Speaker 3: advisor and telling him, yeah, I do have a tenure
• 2:59
  Speaker 3: track offer from a decent university, but you know, I'm
• 3:04
  Speaker 3: going to go to the dark side and work for
• 3:06
  Speaker 3: the IMF. So I couldn't bring myself to do it.
• 3:09
  Speaker 3: I went and I did the academia thing for a
• 3:11
  Speaker 3: couple of years. And I was young enough that the
• 3:14
  Speaker 3: IMF told me at that time that, look, if you
• 3:16
  Speaker 3: change your mind within the next two years, let us.
• 3:19
  Speaker 2: Know, huh. I mean, academia is in for everybody, and
• 3:22
  Speaker 2: it might take a year or two to figure that out.
• 3:25
  Speaker 2: I mean, if that lifestyle works for you, it certainly,
• 3:29
  Speaker 2: you know, could be rewarding intellectually very much.
• 3:33
  Speaker 3: So, Look, academia, I admire it. I think it is
• 3:36
  Speaker 3: the pinnacle of what this country does brilliantly having academia,
• 3:42
  Speaker 3: having those research universities, all of that is absolutely superb
• 3:47
  Speaker 3: for me. The problem was I'd spent five years of
• 3:51
  Speaker 3: my life essentially doing research, and now I wanted to
• 3:54
  Speaker 3: get out there and do something with it. To me,
• 3:57
  Speaker 3: getting into the IMF, it was mind bogglingly, ioway, it
• 4:02
  Speaker 3: was fantastic. Remember this is in the mid nineties, so
• 4:05
  Speaker 3: let's let me date myself. Yeah, so this is in
• 4:07
  Speaker 3: the mid nineties. Eastern Europe is just coming in from
• 4:10
  Speaker 3: the cold, right, and that was where I focused most
• 4:14
  Speaker 3: of my time.
• 4:15
  Speaker 2: So how long did you stay at Pittsburgh before you
• 4:19
  Speaker 2: joined the IMF?
• 4:19
  Speaker 3: Two years? It was two years.
• 4:21
  Speaker 2: So what was the experience like in Europe in the
• 4:25
  Speaker 2: nineties working for the International Monetary.
• 4:27
  Speaker 3: No, no, no. So I worked out of Washington, DC.
• 4:30
  Speaker 3: I worked on Eastern Europe. So I'm talking about countries
• 4:35
  Speaker 3: like Bulgaria, Macedonia, Romania, Croatia. Prior it liter the wall
• 4:41
  Speaker 3: had fallen in the late eighties, eighty nine, was it,
• 4:44
  Speaker 3: you know? And so these countries, some of these countries
• 4:47
  Speaker 3: didn't even have the concept of GDP as we know it.
• 4:51
  Speaker 3: They had gross social product, they didn't have CPI in disease.
• 4:55
  Speaker 3: So it was in some ways the initial piece was
• 4:58
  Speaker 3: like an extension of being a university because we were
• 5:01
  Speaker 3: bringing these concepts to them. It was. It was an
• 5:04
  Speaker 3: amazing experience.
• 5:05
  Speaker 2: So any lessons that you learn at IMF that ultimately
• 5:09
  Speaker 2: influenced your investment philosophy.
• 5:13
  Speaker 3: My enormous respect and belief in macroeconomics actually comes from
• 5:18
  Speaker 3: my time at the IMF. Were you know that IMF
• 5:20
  Speaker 3: got a lot of things for program countries, you know,
• 5:23
  Speaker 3: for programs which are put into place around the world.
• 5:26
  Speaker 3: Some were better than others. I get all of that,
• 5:30
  Speaker 3: but here's the thing. We would go to these countries
• 5:32
  Speaker 3: and the idea was really frankly orthodox fiscal and monetary policy.
• 5:39
  Speaker 3: And sometimes when you're starting from a certain point, be
• 5:44
  Speaker 3: it high perinflation, be it out of control physical balance,
• 5:49
  Speaker 3: be it lack of any kind of international reserves, you
• 5:53
  Speaker 3: need to go back to orthodoxy. It kind of works,
• 5:55
  Speaker 3: and that carrying that forward, I think it's influenced a
• 5:59
  Speaker 3: lot of how as thought about emerging markets through the
• 6:01
  Speaker 3: through the years.
• 6:03
  Speaker 2: How long did you stay at the IMF four.
• 6:06
  Speaker 3: It was it was six years. It was six years
• 6:08
  Speaker 3: in DC and then half a year. Basically my husband
• 6:13
  Speaker 3: and I at that time we chose to move to
• 6:16
  Speaker 3: the private sector right. He was moving to the private
• 6:18
  Speaker 3: sector in London and I was following him, and I
• 6:21
  Speaker 3: had accumulated six months of vacation. They let you do that.
• 6:25
  Speaker 3: They wouldn't cash me out for six months, but they
• 6:27
  Speaker 3: said take the holiday. You know what I did. I
• 6:30
  Speaker 3: had the IMF pay for me to do a professional
• 6:33
  Speaker 3: patisserie course in London because I had to take the holiday.
• 6:36
  Speaker 3: I couldn't go out and work, but I was being
• 6:38
  Speaker 3: paid and I couldn't not be paid. So I took
• 6:40
  Speaker 3: a one year course question to.
• 6:42
  Speaker 2: Six months full on pastry and.
• 6:45
  Speaker 3: Court UNPLO, Basic, intermediate and superior.
• 6:48
  Speaker 2: Do you still do a lot of cooking?
• 6:50
  Speaker 3: So I do a lot of cooking, but I don't
• 6:51
  Speaker 3: do much much baking anymore. My husband always complains. He says,
• 6:56
  Speaker 3: I baked more before the partisiri course because after that,
• 7:00
  Speaker 3: but I would come into our rental apartment and say,
• 7:02
  Speaker 3: I can't work in these conditions.
• 7:04
  Speaker 2: So you became a chef prima donna?
• 7:07
  Speaker 3: Is that what I have to looking back at myself,
• 7:10
  Speaker 3: I have to believe I became a prima donna.
• 7:12
  Speaker 2: So you relocate with your husband to London, I'm going
• 7:15
  Speaker 2: to assume that's how you end up at Thames River Capital,
• 7:18
  Speaker 2: Is that right?
• 7:18
  Speaker 3: First? Actually I was on the cell side, so I've
• 7:20
  Speaker 3: done it all. I've done academia. Then I did the
• 7:22
  Speaker 3: public sector at the IMF. Then I did the cell
• 7:25
  Speaker 3: side Dresna Klein watwas Stein Investment Banking and I was
• 7:29
  Speaker 3: in the research team there and that was in London.
• 7:32
  Speaker 3: And then after six years with them, I moved to
• 7:35
  Speaker 3: Thames River Capitol, which was a macro hedge fund in London.
• 7:39
  Speaker 2: What was that experience like that you were there right
• 7:42
  Speaker 2: through the Great Financial Crisis?
• 7:44
  Speaker 3: Yeah? Actually, so I started with them in two thousand
• 7:49
  Speaker 3: and six and in two thousand and nine I moved
• 7:52
  Speaker 3: back to the long only by side. I think it
• 7:55
  Speaker 3: was absolutely eye opening, all right, And I think one
• 7:59
  Speaker 3: of great things about working with them small team, boutique
• 8:04
  Speaker 3: firm hedge fund, but a macro hedge fund, so at
• 8:07
  Speaker 3: every stage it felt like and I'd been on the
• 8:10
  Speaker 3: cell side and now it's on the buy side. It
• 8:12
  Speaker 3: gets you a little bit closer to the end point.
• 8:15
  Speaker 3: I think it was a fascinating point of time because essentially,
• 8:20
  Speaker 3: over the course of the two thousands, the private sector
• 8:23
  Speaker 3: really came into its own, so in a sense, when
• 8:26
  Speaker 3: we were at the IMF, A lot of these emerging markets,
• 8:28
  Speaker 3: they came to the IMF because there wasn't a true alternative.
• 8:32
  Speaker 3: Private markets, especially for em had not deepened enough. And
• 8:36
  Speaker 3: now as as we got into eight nine, you started
• 8:40
  Speaker 3: seeing the strength and power of the private sector. And
• 8:43
  Speaker 3: then we had the global financial crisis. Holy cow, that
• 8:47
  Speaker 3: was you know. That was when I would walk around
• 8:51
  Speaker 3: and I used to walk home from my work and
• 8:55
  Speaker 3: I was just thinking. Everyone keeps talking about, oh, you know,
• 8:58
  Speaker 3: living an unprecedent times, living through history. I draw to
• 9:02
  Speaker 3: read about it. You know, living through it was amazing.
• 9:09
  Speaker 3: I remember waking up at three or four in the
• 9:11
  Speaker 3: morning to find out what had happened overnight, what were
• 9:15
  Speaker 3: markets doing. It was a whole different level. It was
• 9:19
  Speaker 3: just amazing. And now I look back and it's like, great,
• 9:22
  Speaker 3: we did that. We did that. But I will tell
• 9:25
  Speaker 3: you one of the best things about that time was
• 9:27
  Speaker 3: remembering to look out of the window we worked out
• 9:30
  Speaker 3: of Berkeley Square, lovely officers, looking out of the window
• 9:33
  Speaker 3: and watching people having normal lives and realizing, you know,
• 9:36
  Speaker 3: the world doesn't begin or end with finance.
• 9:39
  Speaker 2: For sure, it certainly has an impact, but yeah, it's
• 9:43
  Speaker 2: kind of funny. Some of the younger folks who are
• 9:46
  Speaker 2: late thirties, early forties, this is it's hard to imagine
• 9:51
  Speaker 2: this is before their time. It is like they were
• 9:53
  Speaker 2: in college. So I was in grad school during the
• 9:56
  Speaker 2: eighty seven crash, and it was you really didn't pay
• 10:00
  Speaker 2: attention to it. I imagine anybody who's an undergraduate or graduate
• 10:06
  Speaker 2: or even just starting to work into eight o nine,
• 10:10
  Speaker 2: you really don't understand how unusual and the force of
• 10:15
  Speaker 2: that debacle across the entire economy.
• 10:19
  Speaker 3: Barry, take it one step further and recognize that somebody,
• 10:24
  Speaker 3: some kid who got into JP Morgan as a trader
• 10:27
  Speaker 3: and was fortunate enough not to lose their job in
• 10:30
  Speaker 3: eight or nine. This is somebody who probably through COVID,
• 10:36
  Speaker 3: ended up being a senior trader and has never lived
• 10:39
  Speaker 3: through truly non zero interest rates. I mean yet the
• 10:44
  Speaker 3: FED started raising them, but through what I would consider normal,
• 10:48
  Speaker 3: normal business cycles. It is remarkable. That's when you really realize, Wow,
• 10:54
  Speaker 3: you've lived through interesting times.
• 10:55
  Speaker 2: To say the very least. So you mentioned you joined
• 10:59
  Speaker 2: Franklin in nine the long Only. Yes, pretty good timing
• 11:03
  Speaker 2: to join a long only shop mid o nine. Tell
• 11:07
  Speaker 2: us what that transition was like going from a long
• 11:10
  Speaker 2: short hedge fund to a long only asset manager.
• 11:13
  Speaker 3: So actually, you know, the reality is the team i
• 11:18
  Speaker 3: joined at that time was the global macro team within
• 11:22
  Speaker 3: Franklin Templeton, and in many respects that team works with
• 11:27
  Speaker 3: deep value investing in a sense, looking for emerging markets
• 11:33
  Speaker 3: which are totally out of favor, thinking in terms of
• 11:36
  Speaker 3: long business cycles and really investing approach. So it was
• 11:40
  Speaker 3: a bit of a natural transition. The part which was
• 11:43
  Speaker 3: more complicated to get my head around was being part
• 11:47
  Speaker 3: of an enormous organization after having basically been a part
• 11:50
  Speaker 3: of a very small team, a small boutique team where
• 11:53
  Speaker 3: if you want to do something you could be very
• 11:55
  Speaker 3: entrepreneurial and go out and do it. At Franklin you
• 11:57
  Speaker 3: have to to get your arms around a much bigger organization.
• 12:01
  Speaker 3: But it was very good.
• 12:02
  Speaker 2: Twenty eighteen you become chief investment officer for the fixed
• 12:06
  Speaker 2: income group at Franklin Templeton. Is that the timing right, Yeah?
• 12:09
  Speaker 3: Roughly, Yeah, that's the timing.
• 12:11
  Speaker 2: That's got to be a pretty big change in enroll
• 12:14
  Speaker 2: from had a research to yeah, running fixed income.
• 12:19
  Speaker 3: So it was a big change. And now we get
• 12:22
  Speaker 3: to the point where my predecessor was retiring, and Jenny
• 12:29
  Speaker 3: asked if I thought.
• 12:30
  Speaker 2: I could do this, and Jenny Johnson.
• 12:33
  Speaker 3: Jenny Johnson, and she asked me if I if I
• 12:37
  Speaker 3: thought I could take this role on. And I have
• 12:41
  Speaker 3: to say my first reaction was that there's too many
• 12:44
  Speaker 3: pieces that I can't do. And I tell you something.
• 12:47
  Speaker 3: This is a difference between men and women. My husband
• 12:49
  Speaker 3: when he looks at, you know, a job description, there
• 12:51
  Speaker 3: are something like twenty things on that job and so
• 12:54
  Speaker 3: I can apply for this. I said, but but, but
• 12:57
  Speaker 3: but you know, you haven't done you haven't digged up
• 13:00
  Speaker 3: one of these boxes. He says, I take that one.
• 13:02
  Speaker 3: He will apply for it and he will likely get
• 13:05
  Speaker 3: the job.
• 13:06
  Speaker 2: When I had Jenny here for an interview, we talked
• 13:10
  Speaker 2: about that exact thing, and did she mentioned, She goes,
• 13:13
  Speaker 2: women will look at this and say, oh, I can't
• 13:16
  Speaker 2: do that, like I don't have one seven and twelve,
• 13:19
  Speaker 2: and guys are like, yeah, we'll figure it out as
• 13:21
  Speaker 2: we go. It's a very genetic di It's.
• 13:24
  Speaker 3: A real genetic difference because my instinct is, well, I
• 13:29
  Speaker 3: haven't done that before, so I can't do it. And
• 13:33
  Speaker 3: between between my husband and Jenny They basically kicked me
• 13:37
  Speaker 3: in the pants and said, no, you can do it.
• 13:39
  Speaker 3: Learn learn on the job. I guess I did. It
• 13:43
  Speaker 3: was fantastic. It's been really fantastic.
• 13:45
  Speaker 2: Really interesting. So let's talk a little bit about Franklin.
• 13:49
  Speaker 2: So you've been chief investment officer for seven almost eight
• 13:54
  Speaker 2: years now. What's been the most surprising thing about this role?
• 13:59
  Speaker 3: Number One, When you challenge yourself, you really can step up.
• 14:04
  Speaker 3: Number Two, there are parts of fixed income that I
• 14:07
  Speaker 3: thought would be I'll just say it boring. They're not
• 14:12
  Speaker 3: as exciting as going out and finding that emerging market.
• 14:15
  Speaker 3: And what you find is actually everything is fascinating if
• 14:18
  Speaker 3: you spend enough time looking at it. So that's been great.
• 14:22
  Speaker 3: And I'd say the other part of it, which has
• 14:26
  Speaker 3: been somewhat surprising to me, I'd say, is it goes
• 14:31
  Speaker 3: actually into the broad into broader markets, not just my
• 14:34
  Speaker 3: role within this within this group, it is the extent
• 14:40
  Speaker 3: to which markets look at what is happening currently, and
• 14:46
  Speaker 3: it's a very short step for analysts to look at
• 14:49
  Speaker 3: what's happening extended into the future and give you a
• 14:52
  Speaker 3: reason for why it happened. How difficult it is to
• 14:57
  Speaker 3: break out of the mold and try to act genuinely
• 15:01
  Speaker 3: look forward. Does this make sense?
• 15:03
  Speaker 2: Yes, we you know, flick on the TV radio and
• 15:07
  Speaker 2: people are constantly explaining what just happened when they had
• 15:11
  Speaker 2: no idea what was going to happen. So a lot
• 15:14
  Speaker 2: of hindsight bias.
• 15:15
  Speaker 3: Yes, And there's also what just happened and therefore why
• 15:20
  Speaker 3: it should continue happening. And I think that's something which
• 15:23
  Speaker 3: I never realized how deeply ingrained it is and how
• 15:27
  Speaker 3: difficult it is to break people out of that way of.
• 15:30
  Speaker 2: Just extrapolating to infinity infinity. Yeah, that happens all the time.
• 15:34
  Speaker 2: You recently were on with my colleague Shanali and you
• 15:37
  Speaker 2: said to her, investors need to price risk more seriously.
• 15:43
  Speaker 2: Explain what you mean by that.
• 15:45
  Speaker 3: What I mean by that is, I said more than
• 15:48
  Speaker 3: I'm looking now since the global financial crisis, and Barry
• 15:52
  Speaker 3: we just talked about the fact that their entire entire
• 15:55
  Speaker 3: generations of people who have never lived in a world
• 15:58
  Speaker 3: where liquidity were anything other than hyperabundant. And by the way,
• 16:03
  Speaker 3: we're still in that world. You look at the Fed's
• 16:05
  Speaker 3: balance sheet, it's still enormous. I think it's very hard
• 16:09
  Speaker 3: for people to even realize that the FED sat on
• 16:12
  Speaker 3: a minuscule bald sheet prior to this, they were We
• 16:16
  Speaker 3: were not in a situation where essentially there was always
• 16:22
  Speaker 3: a get out of jail for free card out there.
• 16:25
  Speaker 2: The classic FED put fed.
• 16:27
  Speaker 3: The FED put. Eventually it was a FED put. Then
• 16:30
  Speaker 3: people thought there was a Trump put. And quite frankly,
• 16:33
  Speaker 3: over the over the last four or five years, we've
• 16:35
  Speaker 3: had a fiscal policy put. We have put all over
• 16:38
  Speaker 3: the place, and I think that what happens in that environment.
• 16:42
  Speaker 3: You know, when I said that we need to price risk,
• 16:46
  Speaker 3: start remembering again how to price risk appropriately. It is
• 16:50
  Speaker 3: the fact that when financial markets started moving out along
• 16:55
  Speaker 3: the yield curve, out along the risk spectrum. I've even
• 16:58
  Speaker 3: seen the IMF talk about, oh, well, markets need to
• 17:01
  Speaker 3: price risk correctly. Well, hello, they were forcing us into
• 17:04
  Speaker 3: those positions explicitly. When the first set of Q one
• 17:09
  Speaker 3: two threes happened, it was explicitly there to get financial
• 17:14
  Speaker 3: markets to take risk again. Q one definitely Q one
• 17:18
  Speaker 3: and two. Maybe you know markets had frozen up. We
• 17:21
  Speaker 3: needed to liquefy frozen markets. And to me, if I
• 17:24
  Speaker 3: look at that, that made sense. Problem is we hung
• 17:28
  Speaker 3: on to it for too long. If I look at
• 17:30
  Speaker 3: high yield credit, let's talk about fixed ink markets high
• 17:33
  Speaker 3: heeld credit. Typically in a recession, spreads of high yield
• 17:37
  Speaker 3: credit over treasuries equivalent treasuries should be at around six hundred,
• 17:43
  Speaker 3: six fifty even higher. We've never gotten there were tight
• 17:47
  Speaker 3: yet No, today we are close to record tights. Right
• 17:50
  Speaker 3: by only looking at a few hundred basis points, we're
• 17:53
  Speaker 3: sub three hundred. This to me means that while people
• 17:58
  Speaker 3: like to talk the talk of recipession, what they're really
• 18:01
  Speaker 3: saying is cut rates. We want more liquidity because we're
• 18:05
  Speaker 3: not getting rid of four of all of our assets
• 18:07
  Speaker 3: over here, the risky assets, which should sell off if
• 18:10
  Speaker 3: people truly expected a recession.
• 18:13
  Speaker 2: So I'm going to assume you're not in the recession
• 18:15
  Speaker 2: camp here.
• 18:16
  Speaker 3: I haven't been. I haven't been. I'd say that I
• 18:19
  Speaker 3: can proudly say that it's been. You know, I'm on redquord.
• 18:22
  Speaker 3: So I think it was in probably early twenty twenty one,
• 18:27
  Speaker 3: when inflation started picking up here that I was saying, yeah,
• 18:29
  Speaker 3: this isn't looking so good. This transitory stuff isn't looking
• 18:33
  Speaker 3: so good. And most importantly, it wasn't at all clear
• 18:36
  Speaker 3: to me why we were expanding fiscal while we also
• 18:40
  Speaker 3: had this massively easy monetary policy and how that could
• 18:44
  Speaker 3: possibly result in a recession. And we've been having recessions
• 18:48
  Speaker 3: which are two quarters out now, I think rolling two
• 18:51
  Speaker 3: quarters out for the better part of something like three
• 18:53
  Speaker 3: and a half years. And I will say, we've not
• 18:57
  Speaker 3: bought into that. I think it's a very strong economy.
• 19:00
  Speaker 2: So it certainly has been. We continue to see consumer
• 19:04
  Speaker 2: spending despite weak sentiment. Consumers continue to spend. The labor
• 19:10
  Speaker 2: market is tight. Yeah, there are some warts on the
• 19:12
  Speaker 2: housing markets, and you know, there's always some sector you
• 19:17
  Speaker 2: could poke at, but by and large, this seems to
• 19:20
  Speaker 2: be a fairly robust, fairly resilient economy. Fair statement.
• 19:24
  Speaker 3: I think that is a fair statement because here's the thing.
• 19:27
  Speaker 3: You know, in the first few months of this year,
• 19:29
  Speaker 3: we saw sentiment tank and everyone said, well, hard data
• 19:32
  Speaker 3: will follow. I wasn't so sure because sentiment was moving
• 19:36
  Speaker 3: on something which was unusual. It wasn't moving on the
• 19:41
  Speaker 3: back of weakness and labor markets or people feeling uncertain
• 19:45
  Speaker 3: about their jobs. It was weakening on the back of pronouncements,
• 19:49
  Speaker 3: you know, on top of policy pronouncements. I'd see the
• 19:52
  Speaker 3: execution of that stuff was really bad and continues to
• 19:55
  Speaker 3: not be particularly good in terms of tariffs that impacted sentiment. However,
• 20:00
  Speaker 3: people continue to spend. They didn't stop spending, as you said.
• 20:04
  Speaker 3: And I'm not suggesting that this economy's recession proof. I'm
• 20:08
  Speaker 3: just saying, so far, we haven't got whatever we need
• 20:11
  Speaker 3: to push us right.
• 20:12
  Speaker 2: Interansas, any thoughts on the idea that perhaps sentiment measures
• 20:17
  Speaker 2: are broken, that when you see Michigan sentiment worse than
• 20:22
  Speaker 2: the pandemic, worse than the financial crisis, worse than the
• 20:24
  Speaker 2: eighty seven crash, and yet you know you look at
• 20:29
  Speaker 2: the data, you're just not seeing anything remotely.
• 20:31
  Speaker 3: I have to say that I'm looking a little bit
• 20:34
  Speaker 3: less at some of these indicators. I think they need
• 20:38
  Speaker 3: to be leeve and we need to now do more digging.
• 20:41
  Speaker 3: Our country has become very polarized, and that feeds into
• 20:44
  Speaker 3: people's sentiment. It doesn't feed into their shopping habits. That's
• 20:48
  Speaker 3: the reality, right.
• 20:49
  Speaker 2: So I'm wondering how much of this is driven not
• 20:52
  Speaker 2: just by media, but by social media and algorithms. It
• 20:55
  Speaker 2: seems to send people to more extreme.
• 20:58
  Speaker 3: Absolutely huge, and I think that the speed of the
• 21:03
  Speaker 3: news cycle, the need for clickbait style, tweets, headlines, whatever
• 21:09
  Speaker 3: it is. I think that exacerbates every sentiment. However, people
• 21:15
  Speaker 3: still seem to be relatively sensible in terms of how
• 21:19
  Speaker 3: they actually behave, because we're not hearing about people massively
• 21:23
  Speaker 3: canceling their European vacations, which, according to Delta, we're taking
• 21:28
  Speaker 3: in record numbers.
• 21:30
  Speaker 2: Right, It's so funny you say that because last quarter
• 21:33
  Speaker 2: they drop their guidance. Hey, everybody's frozen. JetBlue did something similar.
• 21:38
  Speaker 2: We don't know what's happening. They just came out in
• 21:41
  Speaker 2: the most recent few days talking about not only reinstating
• 21:46
  Speaker 2: guidance but being pretty aggressive as to what they see
• 21:49
  Speaker 2: going forward. That's fairly constructive kind of fights against the Oh,
• 21:54
  Speaker 2: this tariff war is going to cause a vib session
• 21:57
  Speaker 2: and crash everybody. Yeah.
• 22:00
  Speaker 3: No, I really never bought the vibe session idea on tariffs.
• 22:06
  Speaker 3: I mean, let's can we talk about tariffs? Sure? I
• 22:08
  Speaker 3: mean it's been talked to death, but why not let's
• 22:11
  Speaker 3: talk about tariffs briefly. Here's the thing. I look at
• 22:16
  Speaker 3: our country and I'm gonna use big round numbers here. Right,
• 22:19
  Speaker 3: We're about a thirty trillion economy. Okay, twenty nine call
• 22:23
  Speaker 3: it thirty trillion economy. Seventy percent of our economy is consumption. Okay,
• 22:28
  Speaker 3: so you get to around twenty one twenty twenty one trillion,
• 22:31
  Speaker 3: Seventy percent of consumption is services. Guess what services aren't
• 22:36
  Speaker 3: really impacted by tariffs? Now I go to Okay, I've
• 22:39
  Speaker 3: got around six six six and a quarter trillion of
• 22:42
  Speaker 3: consumption of goods. How much of this is actually imported?
• 22:45
  Speaker 3: Around three point four trillion of goods are imported. So
• 22:48
  Speaker 3: I'm looking at three point four trillion against all of
• 22:51
  Speaker 3: this huge economy size, and I say, okay, they're talking
• 22:55
  Speaker 3: about putting tariffs. You know, let's assume tariff revenue ends
• 22:59
  Speaker 3: up being three hundred billion. Yeah it's not. Yeah, that's
• 23:01
  Speaker 3: it could be much lower three hundred billion. If I
• 23:04
  Speaker 3: were to spread this out over all goods and services
• 23:08
  Speaker 3: like the Europeans do, using a vat that's a two
• 23:11
  Speaker 3: percent tax, right, would we all be jumping up and
• 23:14
  Speaker 3: down saying vibe session If magic happened and the federal
• 23:18
  Speaker 3: government did something very intelligent and put just a small
• 23:21
  Speaker 3: consumption tax on the economy to lower the budget deficit,
• 23:25
  Speaker 3: we wouldn't. So I guess what I'm trying to say
• 23:27
  Speaker 3: is I don't love tariffs, please. Tariff's are a highly
• 23:31
  Speaker 3: inefficient form of raising revenue that they there distortionary because
• 23:37
  Speaker 3: they randomly hit some products relative to other products. I
• 23:41
  Speaker 3: don't love tariffs. I just don't think that they are
• 23:44
  Speaker 3: as catastrophic for the US as they are for the
• 23:48
  Speaker 3: rest of the world. The rest of the world. Yeah,
• 23:49
  Speaker 3: it is a big problem. The US doesn't depend It's
• 23:52
  Speaker 3: a huge economy, which is essentially a large closed economy.
• 23:56
  Speaker 2: Closed economy, it is. That's very interesting.
• 23:58
  Speaker 3: How do I come back?
• 24:00
  Speaker 2: It seems like, look, our phones are made in China.
• 24:03
  Speaker 2: I'm wearing a watch. We're in Switzerland. Cars are from
• 24:06
  Speaker 2: Japan and Germany and Korea and elsewhere. It feels like
• 24:11
  Speaker 2: we see so many imported goods, clothing, just all this stuff.
• 24:15
  Speaker 2: But what you're really pointing out is the things we
• 24:18
  Speaker 2: import are relatively small percent way exactly.
• 24:21
  Speaker 3: I think you're totally right, you know, And here's the thing.
• 24:25
  Speaker 3: Should we be manufacturing more in the US? This is
• 24:28
  Speaker 3: actually a political decision, and people vote for this, don't
• 24:32
  Speaker 3: And you know, anybody who says that's a crazy idea, well,
• 24:35
  Speaker 3: Germany does it, Japan does it. You know, it's a choice.
• 24:38
  Speaker 3: It's a choice, it's a political choice, and I think
• 24:41
  Speaker 3: that it is up to the people of our country
• 24:43
  Speaker 3: to decide which direction do they wish to go, And
• 24:45
  Speaker 3: there's no right answer. It's a democracy. People need to choose. However,
• 24:50
  Speaker 3: it is an incredibly wealthy country. And therefore when we
• 24:55
  Speaker 3: talk about imports and exports, I look at exports, which
• 24:59
  Speaker 3: is how our gd HE gets impacted via tariffs or
• 25:03
  Speaker 3: trade or anything. Imports are ten twelve percent of our
• 25:07
  Speaker 3: overall GDP because we import around four and a half
• 25:10
  Speaker 3: trillion of goods and services three and a half of
• 25:13
  Speaker 3: just goods four and a half trillion out of you know,
• 25:16
  Speaker 3: a thirty trillion economy called it twelve thirteen percent. That
• 25:20
  Speaker 3: is where we are looking in terms of our imports.
• 25:23
  Speaker 3: And you compare this to a Germany. Germany, including its
• 25:28
  Speaker 3: exports to the rest of the euro Area, it's around
• 25:30
  Speaker 3: forty four percent of GDP.
• 25:32
  Speaker 2: Isn't that true throughout Europe? There they're much like I
• 25:37
  Speaker 2: look at Germany, France, Italy, Spain, sort of like New York, California, Texas, Florida,
• 25:44
  Speaker 2: because there are substantial economies and they're right there. There's
• 25:48
  Speaker 2: no ocean in between them.
• 25:49
  Speaker 3: And they know and they also export outside, right, so
• 25:51
  Speaker 3: they're very, very dependent on what the wins of the
• 25:55
  Speaker 3: rest of the world are because they need Here's the
• 25:58
  Speaker 3: reality of it. You know, Well, every time the administration
• 26:03
  Speaker 3: talks about VAT as a trade barrier, any economists will
• 26:07
  Speaker 3: tell you that's just plain wrong. It's not it because
• 26:09
  Speaker 3: it's a trade it's a trade adjustment. No, no, and
• 26:12
  Speaker 3: it basically it's not a barrier because it's a board
• 26:16
  Speaker 3: what we call a border adjusted tax. So you know,
• 26:19
  Speaker 3: we export a car to Germany, absolutely you have to
• 26:21
  Speaker 3: pay VAT there, but you'll have to pay the VAT
• 26:23
  Speaker 3: on the BMW may.
• 26:25
  Speaker 2: That's whatever you're going to say, that's just wrong.
• 26:28
  Speaker 3: However, if you want to take again that twenty thousand
• 26:31
  Speaker 3: foot up in the air view to this, there is
• 26:35
  Speaker 3: an economic model which I think the Europeans have chosen
• 26:39
  Speaker 3: to follow, which is to penalize consumption in Europe with
• 26:44
  Speaker 3: the VAT twenty two percent tax on average on consuming,
• 26:48
  Speaker 3: which means the Europeans aren't consuming not European stuff and
• 26:53
  Speaker 3: not American stuff. And we have some of the lowest
• 26:56
  Speaker 3: taxes in the world and everyone we consume everybody's production,
• 26:59
  Speaker 3: so you're supporting global GDP, buyo our desire for consumption.
• 27:05
  Speaker 2: We also have privatized things that the VAT tax subsidizers
• 27:10
  Speaker 2: in Europe.
• 27:10
  Speaker 3: Yeah, yeah, so we.
• 27:12
  Speaker 2: Pay our own healthcare and retirement in college. For many
• 27:15
  Speaker 2: European countries, they're paying much higher taxes. But that's part
• 27:19
  Speaker 2: of the sort of the social safety net, not part
• 27:22
  Speaker 2: of the private sector.
• 27:25
  Speaker 3: Totally agree, And again I'd come back to the idea
• 27:28
  Speaker 3: that these are choices made by democracies, and there are
• 27:32
  Speaker 3: no right and wrong answers. So it's wrong for us
• 27:35
  Speaker 3: to say get rid of your VAT. They made the
• 27:36
  Speaker 3: choice to have that.
• 27:37
  Speaker 1: Eight.
• 27:38
  Speaker 2: I will tell you that I have a vivid recollection
• 27:41
  Speaker 2: of being in London and Brussels during the dot com crash,
• 27:45
  Speaker 2: like two thousands for business. And you leave New York
• 27:48
  Speaker 2: where everybody's kind of freaked out and stressed, and you
• 27:51
  Speaker 2: go to London and people are a little more relaxed.
• 27:54
  Speaker 2: Then you go to Brussels and they're even more relaxed.
• 27:57
  Speaker 2: And I guess there's no fear of losing your healthcare
• 28:01
  Speaker 2: or owing college loans or saving for retirement. Kind of
• 28:05
  Speaker 2: makes people a little more sanguine when it comes to
• 28:09
  Speaker 2: the economic.
• 28:10
  Speaker 3: Cycle, it is you know, there are trade offs on everything, right,
• 28:14
  Speaker 3: So we could have an entire philosophical discussion in terms
• 28:21
  Speaker 3: of the choices people make, and everyone doesn't make the
• 28:25
  Speaker 3: same choices. The other side, I would argue, of the
• 28:28
  Speaker 3: coin that you're pointing out correctly, which is the lack
• 28:32
  Speaker 3: of stress associated with all these fundamental needs of life.
• 28:37
  Speaker 3: The other side can and is a lack of innovation,
• 28:42
  Speaker 3: which you see across the boards. There is a desire
• 28:48
  Speaker 3: of a risk taking right, and that's what permeates the
• 28:51
  Speaker 3: entire American dream, so to speak. You know, you work
• 28:55
  Speaker 3: really hard, you can be entrepreneurial, You go out there,
• 28:58
  Speaker 3: you do things, and you can make it. And I'm
• 29:03
  Speaker 3: an immigrant, I'm a naturalized American, and I have to
• 29:06
  Speaker 3: tell you that's what I bought into and I really
• 29:09
  Speaker 3: believe in it. I love that about this country.
• 29:12
  Speaker 2: Huh. Really really interesting. You mentioned earlier all the liquidity
• 29:17
  Speaker 2: that the FED has flooded the system with. What's the
• 29:21
  Speaker 2: implication of that for fixed income today?
• 29:24
  Speaker 3: So I'd say the implication is when you're looking for
• 29:29
  Speaker 3: let's call them risky assets within the fixed income space
• 29:32
  Speaker 3: to invest in it's quite difficult. Like I said, typically
• 29:35
  Speaker 3: risk assets, you look at the premium you get for
• 29:39
  Speaker 3: taking the risk over the risk Free Act, which is
• 29:42
  Speaker 3: of course the Treasury. And the reality is there's clearly
• 29:47
  Speaker 3: enough to the point of complacency. I would say comfort
• 29:51
  Speaker 3: around what is going on within the economy and what
• 29:55
  Speaker 3: the expectations are from the FED that those spreads. If
• 29:59
  Speaker 3: I again I point to something like high yield, they're
• 30:02
  Speaker 3: nowhere close to what I think would be reasonable. Nonetheless,
• 30:07
  Speaker 3: you are getting close to seven percent seven and a
• 30:10
  Speaker 3: half percent depending on the day you're looking at it,
• 30:12
  Speaker 3: without not in spread terms, but all in terms for
• 30:17
  Speaker 3: a high yield or a risky bond in the for
• 30:20
  Speaker 3: a high yeld corporate. Now, this I think remains reasonable
• 30:25
  Speaker 3: if you are active. I wouldn't buy passively into this
• 30:29
  Speaker 3: because when you have way too much liquidity, clearly some
• 30:33
  Speaker 3: excesses are bound to creep up, and I think that
• 30:37
  Speaker 3: probably they have. We are active managers, so we're literally
• 30:40
  Speaker 3: doing bottom up picking a company by company, and I
• 30:46
  Speaker 3: think you need to do that. So what do you do.
• 30:49
  Speaker 3: I look at ten your treasuries, and I look at
• 30:51
  Speaker 3: FED funds, and I try to decide at four forty
• 30:55
  Speaker 3: four p. Fifty. We're range trading right now. Is this
• 30:59
  Speaker 3: a sing by? Should you be jumping in because you
• 31:02
  Speaker 3: think that treasuries are going to rally massively? And the
• 31:05
  Speaker 3: answer is, actually, though I would call myself aggressively neutral,
• 31:08
  Speaker 3: I'm stealing that term from a colleague of mine. Aggressively neutral.
• 31:12
  Speaker 3: At this range, I think fair value for US treasuries
• 31:16
  Speaker 3: actually is probably today at between four seventy five and five. So,
• 31:20
  Speaker 3: in fact, I think there's more for US treasuries to
• 31:22
  Speaker 3: sell off, and thus this is this is the backdrop.
• 31:27
  Speaker 3: Now why do I think this? I think all these
• 31:29
  Speaker 3: complaints about where the FED is, you know, the FED
• 31:31
  Speaker 3: should cut rates, cut rates, cut rates, Well, I think
• 31:34
  Speaker 3: the neutral Fed funds rate is actually between four and
• 31:37
  Speaker 3: four twenty five or so. So I don't think the
• 31:39
  Speaker 3: Fed is that much room to cut rates. Why do
• 31:43
  Speaker 3: I think it's four percent? Is there a magic number? Well,
• 31:46
  Speaker 3: if I again abstract from these POSTGFC fifteen seventeen years
• 31:52
  Speaker 3: that we're looking at where we've had this very abnormal,
• 31:56
  Speaker 3: unorthodox monetree policy for a large part of this period,
• 31:59
  Speaker 3: and I look at the decades prior to that, neutral
• 32:02
  Speaker 3: FED funds was around four p fifty five percent. That
• 32:06
  Speaker 3: was what this economy took. What does that neutral FED
• 32:10
  Speaker 3: funds rate consist of inflation and what you think productivity
• 32:14
  Speaker 3: growth is going to be. I think inflation is around
• 32:16
  Speaker 3: two two and a quarter and productivity growth we're kind
• 32:19
  Speaker 3: of cruising back towards that two percent is level that
• 32:22
  Speaker 3: we were gives you your FED funds.
• 32:24
  Speaker 2: So inflation is softening, productivity is gaining. That sounds like
• 32:29
  Speaker 2: a very productive environment for both the economy and the
• 32:34
  Speaker 2: fixed income market.
• 32:35
  Speaker 3: Well, I think it's a good time for fixed income.
• 32:37
  Speaker 3: From the following perspective, You're getting yield from fixed income,
• 32:41
  Speaker 3: and I think you'd probably sell off a bit more.
• 32:42
  Speaker 3: You're getting income from fixed income. Let's put it that way,
• 32:45
  Speaker 3: and again talking about generations of people who were used
• 32:48
  Speaker 3: to getting one or two two and a half percent
• 32:50
  Speaker 3: from their you know, there was a point where, given
• 32:53
  Speaker 3: where inflation was and given where tenure treasuries were, we
• 32:57
  Speaker 3: were paying the government in real terms for the privilege
• 33:00
  Speaker 3: of lending the government money, which is what you're doing
• 33:02
  Speaker 3: every time you buy a treasury. Right, But at least
• 33:04
  Speaker 3: we're not there anymore. We're getting positive real returns. I
• 33:07
  Speaker 3: think it is a constructive environment for fixed income, but
• 33:10
  Speaker 3: you can't expect equity like returns from fixed income. And again,
• 33:15
  Speaker 3: because of liquidity flows and so on, people have become
• 33:19
  Speaker 3: a little bit married to the idea of fixed income
• 33:22
  Speaker 3: delivering massive outperformance. And what it should really be doing
• 33:26
  Speaker 3: is giving you boring returns. You know, boring returns. It
• 33:29
  Speaker 3: should be the ballast in your portfolio when your equity
• 33:33
  Speaker 3: market delivers equity like returns. And that is the future
• 33:37
  Speaker 3: state that I anticipate for fixed income.
• 33:40
  Speaker 2: So let's stay with the issue of liquidity, which keeps
• 33:43
  Speaker 2: coming up. How does that affect how you look at
• 33:46
  Speaker 2: fixed income, whether you want to go out for further
• 33:49
  Speaker 2: duration or maybe even higher credit risk. What is all
• 33:53
  Speaker 2: of this, both from the FED and elsewhere. What does
• 33:56
  Speaker 2: all this liquidly do to how you construct a portfolio
• 34:00
  Speaker 2: fixed thing comet?
• 34:01
  Speaker 3: I think it actually makes it a little bit more difficult.
• 34:05
  Speaker 3: We talked earlier about the issue of pricing risk. When
• 34:09
  Speaker 3: you have this much of liquidity, those spreads, people will
• 34:13
  Speaker 3: get forced into risky your products. You can't stay out
• 34:17
  Speaker 3: of the market because you need to clip that coupon.
• 34:20
  Speaker 3: So you are present. But like I said, you're not
• 34:24
  Speaker 3: getting massively over your skis in terms of adding on
• 34:28
  Speaker 3: extra risk, because things are priced to perfection in a
• 34:32
  Speaker 3: market like this one. So what I mean by this
• 34:34
  Speaker 3: is my baseline is that we don't get a recession.
• 34:36
  Speaker 3: As we spoke about it, nobody has perfect foresight into
• 34:41
  Speaker 3: what this looks like. You could get anything coming out
• 34:43
  Speaker 3: of left field. COVID came from somewhere. None of us
• 34:46
  Speaker 3: anticipated very short recession, but it had very meaningful consequences. Clearly,
• 34:51
  Speaker 3: there are many areas of uncertainty, and these are the
• 34:54
  Speaker 3: reasons why. From my perspective, my baseline on the fundamental
• 35:00
  Speaker 3: economic fundamentals is no recession. But given how assets are
• 35:05
  Speaker 3: priced right now, I would not go overboard loading up
• 35:09
  Speaker 3: on risk at current levels. There are many reasons to anticipate,
• 35:13
  Speaker 3: for example, additional corrections, including on the equity markets. Frankly,
• 35:17
  Speaker 3: just from a macro perspective, which we don't have right now.
• 35:20
  Speaker 2: We're gonna We're gonna keep it modest on the credit side.
• 35:23
  Speaker 2: What about duration, we had we had an inverted yield
• 35:26
  Speaker 2: curve for a couple of years. The yield curve more
• 35:30
  Speaker 2: or less uninverted, so you're getting paid a little bit
• 35:34
  Speaker 2: for longer duration, But you're not getting paid a whole lot.
• 35:38
  Speaker 2: How do you look at at the long term choices
• 35:41
  Speaker 2: for where's the sweet spot?
• 35:43
  Speaker 3: Is it forty No, I'd say it's it's shorter right now.
• 35:47
  Speaker 3: It's shorter than fourty seven, So I'd say I'd stay
• 35:50
  Speaker 3: a little bit shorter right now because I, like I said,
• 35:53
  Speaker 3: we're at four forty. I don't think it would take
• 35:55
  Speaker 3: us very much to grind higher over here. And then
• 35:58
  Speaker 3: if you've taken on a lot of duration, it will
• 36:00
  Speaker 3: hurt you. Now if you're taking some of that credit risks,
• 36:03
  Speaker 3: should you be hedging it out? That is something which
• 36:05
  Speaker 3: you can consider, But outright simply going long I wouldn't
• 36:10
  Speaker 3: do too much in terms of we actually still think
• 36:14
  Speaker 3: that there is an enormous amount of cash still sitting
• 36:16
  Speaker 3: on the sidelines and everything from money markets onwards. And
• 36:20
  Speaker 3: perhaps one of the best things to do is to
• 36:22
  Speaker 3: at least dip your feet in and get at least
• 36:24
  Speaker 3: to ultra short, get yourself comfortable with ultra short, so
• 36:27
  Speaker 3: you could start moving out the yield curve as opportunities
• 36:31
  Speaker 3: present themselves.
• 36:31
  Speaker 2: So one of the questions anytime we discuss hedging, either
• 36:34
  Speaker 2: credit or duration risk, what are the prices of that
• 36:38
  Speaker 2: look like these days curse. I recall pre financial crisis
• 36:42
  Speaker 2: it was wildly miss priced then turned out to be
• 36:45
  Speaker 2: really cheap to hedge credit risk. What about today in
• 36:49
  Speaker 2: duration risk? Is it cheap or expensive to hedge that.
• 36:52
  Speaker 3: It's still expensive still? I would say, it's still expensive,
• 36:55
  Speaker 3: but you can't do it. You can do it in
• 36:57
  Speaker 3: option space, for example.
• 36:58
  Speaker 2: But that's that's really interesting. We hinted at but really
• 37:04
  Speaker 2: didn't spend a lot of time talking about geopolitical risk.
• 37:09
  Speaker 2: How do you factor that into your investment decisions? How
• 37:12
  Speaker 2: does this drive fixed income choices?
• 37:16
  Speaker 3: I think the interesting thing about geopolitics is increasingly it's
• 37:22
  Speaker 3: become a backdrop, and I think that markets are not
• 37:27
  Speaker 3: capable of remaining in a heightened state of panic and
• 37:33
  Speaker 3: anticipation indefinitely. What I mean is, when Russia went into Ukraine,
• 37:39
  Speaker 3: we all thought this was going to be a short period,
• 37:42
  Speaker 3: and you know, geopolitics became very central to everyone's thinking.
• 37:46
  Speaker 3: It's gone on for three years and it's not unclear when,
• 37:50
  Speaker 3: if ever, it's going to go away. And I think
• 37:53
  Speaker 3: what's happening is that geopolitical uncertainty has become so much
• 37:58
  Speaker 3: a part of the backdrop that you can't actually manage
• 38:02
  Speaker 3: your portfolio to that geopolitical risk. You can when risks
• 38:08
  Speaker 3: get sharply higher, you can try doing something, but you
• 38:12
  Speaker 3: cannot position your portfolio for these geopolitical risks. So what
• 38:16
  Speaker 3: are the geopolitical stress points? The Middle East is frankly,
• 38:21
  Speaker 3: it was a forever geopolitical stress point, which has to
• 38:24
  Speaker 3: give this administration it's due come markedly lower. Based on
• 38:30
  Speaker 3: what we have seen so far, I think actually things
• 38:33
  Speaker 3: are looking a lot better in the Middle East than
• 38:35
  Speaker 3: they have over a very long period of time, So
• 38:38
  Speaker 3: that's a positive. I think the issue of China, you
• 38:42
  Speaker 3: have different geopolitical stress points. You have the trade tensions,
• 38:46
  Speaker 3: but then separately there's the eternal question of what happens
• 38:49
  Speaker 3: with Taiwan, and that is always going to be a
• 38:52
  Speaker 3: part of the backdrop. And I think a lot of
• 38:54
  Speaker 3: people take a great deal of comfort from the fact
• 38:56
  Speaker 3: that the Chinese authorities are extremely, extremely careful, and so
• 39:05
  Speaker 3: we don't anticipate shooting from the hips, so to speak,
• 39:09
  Speaker 3: you know. So this is something which we will continue
• 39:11
  Speaker 3: to see stress points go up and down, and so
• 39:15
  Speaker 3: I do think that in the early days of this administration,
• 39:18
  Speaker 3: you know, certainly early days post Liberation Day, there was
• 39:22
  Speaker 3: a thought that somehow you have a complete realigning of
• 39:26
  Speaker 3: the geopolitical environment with the US not being credible or dependable.
• 39:31
  Speaker 3: I don't I think that was overstated. The US is
• 39:35
  Speaker 3: more important than any one administration or any one single
• 39:40
  Speaker 3: set of policies.
• 39:41
  Speaker 2: We talked a little bit about Europe and the euro Area,
• 39:44
  Speaker 2: at least in the equity side. Europe is finally outperforming
• 39:48
  Speaker 2: the US after a long period of underperformance. What are
• 39:52
  Speaker 2: your thoughts on the Euro Area and emerging markets in
• 39:56
  Speaker 2: today's environment?
• 39:58
  Speaker 3: So you know the euro so if I look at
• 40:01
  Speaker 3: the equity markets, I think you can't really talk about
• 40:03
  Speaker 3: the equity markets without talking a little bit about the dollar,
• 40:07
  Speaker 3: and that actually impacts em as well. And I see
• 40:11
  Speaker 3: a lot of discussion again, and it's somewhat related to
• 40:14
  Speaker 3: our previous comments on geopolitics, that somehow the dollar is
• 40:17
  Speaker 3: no longer fit to be the world's reserve currency. It
• 40:21
  Speaker 3: is the end of US exceptionalism, et cetera, et cetera.
• 40:24
  Speaker 3: I think it's mixing up a whole bunch of things.
• 40:26
  Speaker 3: Number One, when we entered this year trade in trade
• 40:29
  Speaker 3: weighted terms, the dollar was at its strongest level since
• 40:32
  Speaker 3: the Plaza code, right, do you know that since the
• 40:35
  Speaker 3: Plaza Corde I didn't realize we're talking about the absolute
• 40:38
  Speaker 3: strongest levels in trade weighted terms since in something like
• 40:42
  Speaker 3: close to forty five fifty years, really strong. Then what happened.
• 40:48
  Speaker 3: We came into this year and the first thing that happened,
• 40:52
  Speaker 3: frankly was deep Seek you know, Deep Seek burst, and somehow,
• 40:56
  Speaker 3: oh my god, the US is not exceptional and people
• 40:59
  Speaker 3: were put us exceptionalism hand in glove with the mag seven.
• 41:03
  Speaker 3: I think, however, if you were a European investor right
• 41:08
  Speaker 3: last two years, you got fifty four percent just on
• 41:12
  Speaker 3: the S and P, and then you got what was it,
• 41:15
  Speaker 3: ten to fifteen percent in dollar appreciation? You made not
• 41:18
  Speaker 3: like a bandit. If you were smart, you took some profits.
• 41:21
  Speaker 3: Right as soon as you got deep Sea happening. In
• 41:24
  Speaker 3: short order afterwards, you got the Germans suddenly talking about
• 41:27
  Speaker 3: one trillion euros over the ten year period in terms
• 41:29
  Speaker 3: of spending. So the last fiscal man standing, like I
• 41:32
  Speaker 3: like to say, goes toppling down and we will go yeah, yay,
• 41:36
  Speaker 3: that happened. But more seriously, it meant that potentially European
• 41:40
  Speaker 3: growth would not look as lackluster, frankly as it has
• 41:43
  Speaker 3: been for a while. So that happened, and then you
• 41:46
  Speaker 3: had Liberation Day. You had three sets of reasons. And
• 41:49
  Speaker 3: the European equity market had been lagging so much more
• 41:53
  Speaker 3: than even the Nike in Japan. It was obviously a
• 41:57
  Speaker 3: good time for people to go put money back there.
• 42:01
  Speaker 3: And I think there's a little bit of catch up
• 42:03
  Speaker 3: going on. So I don't think it's anything deep and amazing,
• 42:06
  Speaker 3: and quite frankly, if I look at European growth, European
• 42:11
  Speaker 3: growth is not yet showing German growth is not yet
• 42:15
  Speaker 3: showing any impact from the one trillion ten year dollars spend.
• 42:20
  Speaker 3: It's not yet showing up. I personally think that perhaps
• 42:24
  Speaker 3: it's gone a bit too far, because if I look
• 42:26
  Speaker 3: at funds which had been approved during COVID time five
• 42:31
  Speaker 3: years ago, five years ago, they still have not been
• 42:33
  Speaker 3: able to deploy them. The Europeans tied up in red
• 42:37
  Speaker 3: tape at a level which makes me have a certain
• 42:42
  Speaker 3: degree of I'm not going to go as far as
• 42:44
  Speaker 3: saying skepticism, but caution in terms of how quickly this
• 42:48
  Speaker 3: money will actually show up.
• 42:50
  Speaker 2: What about the defense spending that we're hearing about. That's
• 42:53
  Speaker 2: probably weaponized Knesenism. That's probably going to be a little
• 42:58
  Speaker 2: quicker to find its way into the economy.
• 43:00
  Speaker 3: I think it could be. But the only thing is
• 43:03
  Speaker 3: the multiplier for defense spending is one of the lowest
• 43:06
  Speaker 3: multipliers you have. Your highest multiplier is going to be
• 43:09
  Speaker 3: what we did, which was to helicopter drop checks during
• 43:12
  Speaker 3: co COVID to everyone. That has a very high multiplier eventually,
• 43:16
  Speaker 3: But if you look at defenses, the multiplier zero point four,
• 43:19
  Speaker 3: it's a low, low, low multiplier. Separately, you have other
• 43:23
  Speaker 3: issues which I think are not discussed enough, and that
• 43:26
  Speaker 3: is I think there are that somebody who's telling me
• 43:29
  Speaker 3: it's close to seventeen different arms manufacturers and europe haamny
• 43:32
  Speaker 3: arms manufacturers. You need if you have multitudes of people
• 43:37
  Speaker 3: making tanks. The problem is the demand for tanks is
• 43:40
  Speaker 3: not infinite, right right, And so you have a lot
• 43:43
  Speaker 3: of relatively inefficient defense expenditure which is likely to take
• 43:48
  Speaker 3: place as well. I think it will make its way.
• 43:51
  Speaker 3: I don't want to come across as being overly negative.
• 43:54
  Speaker 3: I think it's very positive that the Europeans are taking
• 43:57
  Speaker 3: their own defense in hand, and I think we and
• 44:02
  Speaker 3: markets need to be cautious in terms of the speed
• 44:05
  Speaker 3: at which we think this will show up.
• 44:07
  Speaker 2: Sure, so the European Central Bank has cut rates. We've
• 44:11
  Speaker 2: seen other central banks around the world cut rates. We
• 44:15
  Speaker 2: talked a little bit about the FED. What do you
• 44:17
  Speaker 2: think they're paying attention to? Are they legitimately tight, especially
• 44:23
  Speaker 2: now with q E ending and QT beginning. How do
• 44:27
  Speaker 2: you look at the role of the FED.
• 44:28
  Speaker 3: Here, Barry, Look, we talked a little bit about what
• 44:32
  Speaker 3: I thought a reasonable FED funds rate was. When I
• 44:35
  Speaker 3: call it neutral, I mean the economy is neither falling
• 44:38
  Speaker 3: into recession or overheating ie inflation accelerating. I think that
• 44:43
  Speaker 3: number is four to four twenty five given where rates
• 44:46
  Speaker 3: are right now. Last year, before all of these ups
• 44:50
  Speaker 3: downs and ins and outs, I thought the FED had
• 44:53
  Speaker 3: within its gift around one hundred and twenty five to
• 44:55
  Speaker 3: one hundred and fifty basis points of rate cuts in all,
• 44:58
  Speaker 3: and they did a hundred basis points already. So I
• 45:01
  Speaker 3: think there isn't an unlimited amount that the FED really
• 45:05
  Speaker 3: can or should do. Will they do more? Probably, you know,
• 45:08
  Speaker 3: I don't know whether it's this Fed or next year.
• 45:10
  Speaker 3: At some stage they can it won't be catastrophic. I
• 45:13
  Speaker 3: don't think it's particularly wise to cut rates dramatically. Are
• 45:19
  Speaker 3: they messing up right now? No? Actually, I don't think
• 45:22
  Speaker 3: they're messing up. This is a very dubbish FED by
• 45:25
  Speaker 3: the way, everyone says that, oh, markets will panic if
• 45:28
  Speaker 3: we get a dubbish FED chair. Hello, the last non
• 45:31
  Speaker 3: dubbish FED chair we had was Paul Volca. We haven't
• 45:35
  Speaker 3: had a hawkish FED chair in an enormous amount of time,
• 45:39
  Speaker 3: and I don't see it happening now. It's not in
• 45:41
  Speaker 3: the Fed's DNA.
• 45:42
  Speaker 2: Huh, really really interesting. Let me throw a curveball question
• 45:47
  Speaker 2: at you. What do you think investors are not talking
• 45:50
  Speaker 2: about but perhaps should be.
• 45:53
  Speaker 3: So that's a really excellent question. In this day and age,
• 45:58
  Speaker 3: I think you can't talk about what's being overlooked without
• 46:02
  Speaker 3: talking about time horizon. I think that we are all
• 46:07
  Speaker 3: talking about fiscal but in very vague terms, and the
• 46:11
  Speaker 3: mistake we are making is acting as if we suddenly
• 46:15
  Speaker 3: got a fiscal deficit. We have been running ridiculous deficits
• 46:19
  Speaker 3: for the last close to five years now, and it's
• 46:23
  Speaker 3: very much like the excesses we saw with QE in
• 46:26
  Speaker 3: the sense of monetary policy which lasted long after it
• 46:30
  Speaker 3: should have been withdrawn, and we're seeing that now. And
• 46:33
  Speaker 3: I don't see any desire on either party's side to
• 46:37
  Speaker 3: do something serious about that deficit, which implies we won't
• 46:40
  Speaker 3: fall into a recession. But I do think at some
• 46:42
  Speaker 3: stage there needs to be some change in policy which
• 46:47
  Speaker 3: reduces that deficit meaningfully. And I'm not sure you can
• 46:51
  Speaker 3: do that without actually reducing growth. This is an additional
• 46:54
  Speaker 3: reason why I don't think the FED should go too
• 46:56
  Speaker 3: far today. So I I think there is a long
• 47:00
  Speaker 3: way of saying there's almost nothing that we don't talk about.
• 47:03
  Speaker 3: It is a question of the timing. I think today
• 47:06
  Speaker 3: we're probably looking at most of the important things that
• 47:10
  Speaker 3: need to be looked at.
• 47:11
  Speaker 2: Huh, really interesting. So I only have you for a
• 47:14
  Speaker 2: certain amount of time, But let me jump to my
• 47:16
  Speaker 2: favorite questions. Tell us about your early mentors who helped
• 47:20
  Speaker 2: shape your career.
• 47:22
  Speaker 3: So you know, my earliest mentor, I'd have to say,
• 47:25
  Speaker 3: is my father. I grew up in India. In India,
• 47:30
  Speaker 3: the path that I followed is not very traditional, and
• 47:34
  Speaker 3: I have two brothers, and my father always treated me
• 47:37
  Speaker 3: exactly the same as my brothers, and so in a sense,
• 47:41
  Speaker 3: when people ask me, even today, how do you get
• 47:44
  Speaker 3: more women into the workplace? And I get asked this
• 47:47
  Speaker 3: question around the world when I go to our different offices,
• 47:50
  Speaker 3: I tell everyone, you know, encourage your daughters, your sisters,
• 47:55
  Speaker 3: your wives to be in finance, and they will be
• 47:58
  Speaker 3: in finance. My father didn't encouraged me to be in finance.
• 48:01
  Speaker 3: He did encourage me to think exactly the way frankly
• 48:05
  Speaker 3: my brothers were thinking in terms of what the future held.
• 48:08
  Speaker 3: So he was my earliest mentor second mentor, I would
• 48:11
  Speaker 3: have to say, is one of my first mission chiefs
• 48:14
  Speaker 3: at the IMF, Paul Thompson, who subsequently actually led missions
• 48:19
  Speaker 3: to Greece and became the director of the European Department.
• 48:22
  Speaker 3: He was my first mission chief and he is an
• 48:27
  Speaker 3: amazing negotiator. And I still find myself using hand gestures
• 48:34
  Speaker 3: that I see I've learnt from him, and I still
• 48:37
  Speaker 3: find myself doing this. How amazing is that, because now
• 48:40
  Speaker 3: you're talking about a very long time ago, and he
• 48:43
  Speaker 3: definitely shaped how I work in the workplace.
• 48:49
  Speaker 2: Really interesting. Let's talk about books. What if some are
• 48:53
  Speaker 2: your favorites? What are you reading right now?
• 48:55
  Speaker 3: Okay, so some of my favorites. I've got an enormously
• 48:59
  Speaker 3: very The only thing I don't read is horror of
• 49:02
  Speaker 3: any kind. It scares me too much. My imagination is
• 49:06
  Speaker 3: too real. But if I think about things I always
• 49:09
  Speaker 3: go back to I will throw out. There's the Master
• 49:13
  Speaker 3: in Margarita, which is Mikhail Bulkrakov, which was the first
• 49:17
  Speaker 3: first book which actually seen It was transcendental. I think
• 49:21
  Speaker 3: love pride and prejudice. I love The Lord of the Rings.
• 49:25
  Speaker 3: And currently I'm reading urban fantasy. It's called The author's
• 49:31
  Speaker 3: names are Ilona Andrews, Kate Daniels. It's very escapist. It's
• 49:37
  Speaker 3: about as as escapist as anything I think you would
• 49:40
  Speaker 3: watch on Netflix. It is absolutely fantastic.
• 49:43
  Speaker 2: What's the title.
• 49:44
  Speaker 3: So it's a series of books. The protagonist is called
• 49:48
  Speaker 3: Kate Daniels, and I think the first one was Magic
• 49:52
  Speaker 3: Bites or something like that, set in a dystopian Atlanta
• 49:56
  Speaker 3: where you have a mixture of various types of supernatural
• 50:01
  Speaker 3: elements and things like that.
• 50:02
  Speaker 2: It's really cool, huh, really interesting. Our final two questions,
• 50:06
  Speaker 2: what sort of advice would you give to a recent
• 50:08
  Speaker 2: college grad interested in the career in either fixed income
• 50:13
  Speaker 2: or investing.
• 50:14
  Speaker 3: Number one, be extremely curious, right, extremely curious. I would
• 50:21
  Speaker 3: note that learn to do research. I'm not talking about research.
• 50:26
  Speaker 3: What I'm saying is, especially today with gen Ai, I
• 50:31
  Speaker 3: think one of the worst things is immediately having answers,
• 50:35
  Speaker 3: because if you don't learn to spend the time to
• 50:38
  Speaker 3: dig really, really deep into different areas, I don't think
• 50:44
  Speaker 3: you're going to find answers. You're not going to be
• 50:48
  Speaker 3: able to find the answers all written in the first
• 50:51
  Speaker 3: three lines of Google search. Actually, I do think that
• 50:55
  Speaker 3: people coming fresh into the markets that we have, they
• 50:58
  Speaker 3: need to read a little bit more about what has
• 51:01
  Speaker 3: gone before them. I think there are some brilliant books
• 51:04
  Speaker 3: out there. I would call out Ken Rogoff and Carmen
• 51:08
  Speaker 3: Reinhart have a couple of them. It's just a good
• 51:11
  Speaker 3: this time is different, Yeah, this time, this time it's different.
• 51:14
  Speaker 3: It's fantastic. And and your book, I'm gonna give you
• 51:18
  Speaker 3: that shout out because I think it's good to actually
• 51:20
  Speaker 3: read practitioners books because we live in bizarre times and
• 51:26
  Speaker 3: many people will not have seen the various cycles history.
• 51:31
  Speaker 2: You know, those of us who don't learn from history
• 51:33
  Speaker 2: are condemned to repeat it.
• 51:36
  Speaker 3: There's that part of it, and I think. The other
• 51:41
  Speaker 3: piece I would say is it's very hard, I know,
• 51:44
  Speaker 3: but try not to be too impatient. If you can't
• 51:47
  Speaker 3: go through a few market cycles, it's very difficult to
• 51:53
  Speaker 3: really understand my markets, right. So I don't believe in
• 51:57
  Speaker 3: time and grade. I'm all for people umping ahead, but
• 52:01
  Speaker 3: sometimes nothing substitutes for actually living through different market cycles
• 52:07
  Speaker 3: in our business.
• 52:08
  Speaker 2: Huh, really really interesting. What do you know about the
• 52:11
  Speaker 2: world of investing today? You wish you knew thirty years
• 52:14
  Speaker 2: or so ago when you were first getting started.
• 52:17
  Speaker 3: You know, the biggest thing I'd say is that nothing.
• 52:24
  Speaker 3: While in the moment it feels like the catastrophe is
• 52:28
  Speaker 3: going to end the world number one, it won't number
• 52:31
  Speaker 3: two cycles end. I would have had a lot fewer
• 52:35
  Speaker 3: sleepless nights if I could have just calmed myself down
• 52:38
  Speaker 3: and said, Okay, this too will pass. So I think
• 52:43
  Speaker 3: I think there is an element of just knowing that
• 52:48
  Speaker 3: you know, this is a part of what we do.
• 52:51
  Speaker 2: Really so interesting. Thank you Sanal for being so generous
• 52:54
  Speaker 2: with your time. We have been speaking with Sonal Dasai.
• 52:58
  Speaker 2: She's chief investment serve for Franklin Templeton's fixed income group.
• 53:03
  Speaker 2: If you enjoy this conversation. Well, check out any of
• 53:06
  Speaker 2: the five hundred we've done over the past eleven years.
• 53:09
  Speaker 2: You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever
• 53:14
  Speaker 2: you find your favorite podcast, And be sure and check
• 53:18
  Speaker 2: out my new book How Not to Invest The ideas, numbers,
• 53:23
  Speaker 2: and behavior that destroys wealth and how to avoid them
• 53:27
  Speaker 2: How Not to Invest at your favorite bookseller. I would
• 53:30
  Speaker 2: be remiss if I did not thank the Crack team
• 53:32
  Speaker 2: that helps us put these conversations together each week. Meredith
• 53:36
  Speaker 2: Frank is my audio engineer. Anna Luke is my producer.
• 53:39
  Speaker 2: Sean Russo is my researcher. Sage Bauman is the head
• 53:43
  Speaker 2: of podcasts at Bloomberg. I'm Barry Riholts. You're listening to
• 53:47
  Speaker 2: Masters in Business on Bloomberg Radio. Y