Do Magazine Covers Contain Market Signals?
There has been a lot of chatter about magazine covers lately; I thought I might clarify some of the with this post, originally published in Bloomberg on December 27, 2017, along with commentary from Ben and Josh addressing the sdame issue. The key takeaway: The value of the signal here is just about zero.… Read More The post Do Magazine Covers Contain Market Signals? appeared first on The Big Picture. There has been a lot of chatter about magazine covers lately; I thought I might clarify some of the with this post, originally published in Bloomberg on December 27, 2017, along with commentary from Ben and Josh addressing the sdame issue. The key takeaway: The value of the signal here is just about zero. The past weekend’s Barron’s cover showing Apple’s extravagant new headquarters and suggesting that the company’s market value would reach $1 trillion in 2018 generated some chatter from the usual suspects. An issue like this touches on several previously debunked ideas. In the holiday spirit, rather than call anyone out, I would rather use this as an opportunity to discuss the significance of magazine covers and what they might mean for investors.1 Magazine covers are the ultimate anecdote — it is too easy to cherry pick the ones that are memorable, and even easier to forget all the rest that had no special significance. This is a topic I have been tracking for 20 years; I have yet to see a comprehensive analysis of every magazine cover ever produced. Instead, the tendency is toward a combination of selective perception and hindsight bias. This is an especially pernicious way of fooling ourselves into believing something of great weight is occurring when in fact something of quite limited significance has happened. This is important. Why? Because separating reality from silliness is the key to making better-informed and more intelligent investment decisions. No less an authority than Bridgewater Associates chief Ray Dalio advocates that all investors become “hyperrealists”; risking capital based on a fundamentally false understanding of reality is dangerous and expensive. Which leads us to the general confusion that big splashy magazine covers create for wannabe contrarians. To help separate the signal from the noise, consider some of these factors: • Headquarters Indicator: First, the lavish corporate headquarters as a sign of a stock or market top is just so much spurious and intellectual back-dating. Selecting a few random examples of companies that built fancy headquarters followed by a corporate flop of some kind is simply junk analysis. And yet it persists. The plural of anecdote is not data.2 Choosing the 10 most correlated headquarters out of the many thousands that have been built during the past century actually are the exceptions that prove the point; the vast majority of headquarters that were built signaled precisely nothing. You can always cherry-pick spurious correlations as examples, but analyzing the full gamut of corporate headquarters yields a non-signal. • Magazine Cover Indicator: Originally created by money manager Paul Macrae Montgomery, this remains a widely misunderstood market signal. The basic premise of the cover indicator is that of a contrary sign of societal sentiment, reflecting when an investment theme has reached a crescendo. Said more plainly, by the time the editors of mass-media publications find out about some hot new investing trend, it has reached every corner of society and is ripe to end. According to Montgomery, there are three main rules for the classic magazine-cover indicator: It must be a mainstream publication, not a business or financial periodical We are looking for a well-understood concept that is reaching a climax There must have been significant asset-price gains leading up to the cover Let’s use some examples from the past 30 years of Time magazine covers as they relate to the stock market (an admittedly self-selected and incomplete list). Time named Amazon.com Inc. chief Jeff Bezos as Person of the Year in December 1999 as the dot-com bubble was about to burst (true, Amazon stock went nowhere for a decade, but since then the shares have increased roughly 15-fold). Housing was featured on the cover in 2005, which was near the top of the housing boom and bust. It isn’t just Time magazine, but any non-business publication — consider the New York Times magazine cover on gold3 in 2011 as yet another example. But no, there isn’t much of a contrarian signal in a financial weekly putting the largest market capitalization company on its cover. • Single Company Magazine Cover Indicator: Here is where people really go astray — any individual company on any cover generates little in the way of usable signal. I have discussed this repeatedly, but one graphic settles the argument. It is from Kuo Design, and it shows all 138 magazine covers that have Apple and/or co-founder Steve Jobs on the cover from 1981 until today. Can you identify which of those 138 covers is the actual sell signal? Yeah, me neither. The bottom line about magazine covers is that maybe they can be helpful in identifying when a broad trend reaches a top; they are much less helpful in telling investors when to unload the shares of any particular company. See also: Five Reasons to Ignore Magazine Cover Commentary (Josh Brown, March 16, 2024) So Much Money Everywhere (Ben Carlson, March 17, 2024) Previously: That Magazine Cover Doesn’t Make Apple Shares a ‘Sell’ (December 28, 2017) Misunderstanding the Magazine Cover Indicator (October 27, 2014) Magazine Cover Indicator (Archive) ____________________ 1. Barron’s cover coincided with reports that demand for the new iPhone X may be weaker than expected. 2. I would love to identify the original author of this quote; the history seems inconclusive. 3. Gold was more $1,500 an ounce during the week of the cover story in May 2011; during August and September of that year, gold almost hit $1,900; by December, it was back down to $1,500. It spent most of the next six years below that level and as of this writing is about $1,285. The post Do Magazine Covers Contain Market Signals? appeared first on The Big Picture......»»
MiB: Mark Wiedman, Blackrock’s Head of Global Client Business
This week, we speak with Mark Wiedman, head of global client business at investing giant Blackrock. We discuss the debate brewing inside the world’s largest asset manager over how quickly artificial intelligence will transform the economy, and the opportunities in decarbonization. He joined the firm in 2004 to help start the Financial… Read More The post MiB: Mark Wiedman, Blackrock’s Head of Global Client Business appeared first on The Big Picture. This week, we speak with Mark Wiedman, head of global client business at investing giant Blackrock. We discuss the debate brewing inside the world’s largest asset manager over how quickly artificial intelligence will transform the economy, and the opportunities in decarbonization. He joined the firm in 2004 to help start the Financial Markets Advisory business. He ran Blackrock’s iShares & Index Investments from 2011-19, an era where Blackrock’s assets scaled up to 8 trillion dollars, nearly half of which was its index and ETF business. Previously, he served as senior adviser to the undersecretary for domestic finance at the US Treasury. He also led BlackRock’s 2008 creation of PennyMac, now the No. 2 US mortgage bank, and served on its public board from 2013 to 2019. He also explains why the investing theme of ESG is being replaced with a move towards Decarbonization. Few know what the “S” or “G” stands for, where Decarbonization is self-explanatory. It presents a huge investing opportunity. Its become increasingly popular in Europe. A list of his favorite books is here; A transcript of our conversation is available here Tuesday. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. Be sure to check out our Masters in Business next week with Liz Ann Sonders, Chief Investment Strategist at Schwab. She also sits on the Investment Policy Committee. helping to oversee the $8.5 trillion on the Schwab platform. She is has been named one of the “25 Most Powerful Women in Finance” by American Banker. Mark Wiedman Favorite Books My Years with General Motors by Alfred Sloan Dune by Frank Herbert Pride and Prejudice by Jane Austen The post MiB: Mark Wiedman, Blackrock’s Head of Global Client Business appeared first on The Big Picture......»»
U.S. population distribution, 1975-2050
We sometimes say “Demographics is Destiny,” but that’s abstract. To get a visual sense of what that looks like, see the above chart (via Blackrock) showing the distribution of various age groups from 2075 to 2050. Note bars in Red are not in the workforce. The post U.S. population distribution, 1975-2050 appeared first on The Big Picture. We sometimes say “Demographics is Destiny,” but that’s abstract. To get a visual sense of what that looks like, see the above chart (via Blackrock) showing the distribution of various age groups from 2075 to 2050. Note bars in Red are not in the workforce. The post U.S. population distribution, 1975-2050 appeared first on The Big Picture......»»
Transcript: Sean Dobson, Amherst Holdings
The transcript from this week’s, MiB: Sean Dobson, Amherst Holdings, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ Bloomberg Audio Studios, podcasts, radio News. This is… Read More The post Transcript: Sean Dobson, Amherst Holdings appeared first on The Big Picture. The transcript from this week’s, MiB: Sean Dobson, Amherst Holdings, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ Bloomberg Audio Studios, podcasts, radio News. This is Masters in business with Barry Ritholtz on Bloomberg Radio. Barry Ritholtz: This week on the podcast, I have an extra special guest. Sean Dobson has really had a fascinating career as a real estate investor, starting pretty much at the bottom and working his way up to becoming a investor in a variety of mortgage backed securities, individual homes, commercial real estate, really all aspects of the finding, buying and investing in, in real estate. And on top of that, he’s pretty much a quantitative geek. So he’s looking at this not simply from the typical real estate investment perspective, but from a deep quantitative, analytical basis. If you’re interested in, in any aspect of commercial, residential, mortgage backed real estate, then you should absolutely listen to this. It’s fascinating and there are few people in the industry who not only have been successful as investors, but also very clearly saw and warned about the great financial crisis coming, because it was all there in the data. If you were looking in the right place and continues to build and expand, the Amherst grew into a real estate powerhouse. I found this conversation to be absolutely fascinating, and I think you will also, with no further ado, my discussion with Amherst Group, Sean Dobson. Sean Dobson: Thank you very much. It’s great to be here. Barry Ritholtz: So, so let’s talk a little bit about your career in real estate, but before we get to that, I just gotta ask on your LinkedIn under education, it says, didn’t graduate, none working for a living. What does that mean? Sean Dobson: Well, I think I answered questions of, of when did you graduate? And so I said, I didn’t graduate, and then that was your, what degrees did you achieve? And I said, none. Right? And then it, and then I think the question was, you know, what were you doing or what were your interest in? So I was working for a living, but I, but I didn’t go to college. Barry Ritholtz: Did not go to college. Right. So that leads to the next question. What got you interested in real estate? Sean Dobson: It was, it was happenstance. I, I took a temporary job at a brokerage firm in Houston, Texas, the summer after high school between high school and college, really as the office runner, you know, running around, picking up people’s dry cleaning, grabbing lunch, opening the mail, that sort of thing. And I took the job really because a friend of ours, a friend of the family’s had worked there and just said what an interesting sort of industry it was. This is the back when mortgages were sort of a backwater of the fixed income market. So they were traded a little bit like muni bonds. They’re not really well understood, not well followed. Most Barry Ritholtz: 1990s or before? [1987]. Wow. 1987. Sean Dobson: So after that it was, I later was given some opportunities to join the research team and then took over the research team and then took over the, eventually took over the trading platform. And then by 1994, a group of us had started, started our own business. And that’s, that’s the predecessor to Amherst, which we bought in 2000 and had been running it since then. Barry Ritholtz: So, when you say you were running the trading desk, you’re running primarily mortgage-backed securities? Anything else? Swaps, derivatives, anything along those lines? Sean Dobson: So back then it was really just mortgage-backed securities and structured products that were derivatives of mortgage-backed securities. We sort of carved out a name for ourselves in, in, in quant analytics around mortgage risk. And that’s still a big core competency of Amherst is understanding the risks of mortgages are kind of boring, but they’re also very complicated. The, the borrower has so many options around when to refinance, how to repay, if the repay. It takes quite a lot of, of research, quite a lot of modeling, quite a lot of data to actually keep up with the mortgage market. It’s really 40 million individual contracts, 40, 50 million individual contracts and a million different securities. So it takes quite a, it’s, we’ve built an interesting system to allow you to sort of monitor all that and price it in real time. Barry Ritholtz: So if you are running a desk in the 2000s and you’re looking at mortgage-backed and you’re looking at securitized product, one would think, especially from Texas as opposed to being in the thick of, of Wall Street, you might have seen some signs that, that perhaps the wheels are coming off the bus. Tell us about your experience in the 2000s. What did you see coming? Yeah, Sean Dobson: So, so from the late eighties until the really, the late nineties, we were focused primarily on prepayment-related risk in agency mortgage-backed securities. By the time you get to the early 2000s, Freddie Mac, Fannie Mae and me were losing market share. A lot of mortgages were coming straight from originators and going and being packaged into what later became the private-label securities market. So as part of our just growth, we attacked that market. And up until that moment in time, we didn’t spend a lot of time on credit risk in mortgages. We didn’t really have to model credit risk because that was, that risk was taken by the agencies. But in these private labels, you had the, the market was taking the credit risk. So we took the exact same modeling approach, which is loan level detail, borrower behavior, stochastic processes, options based modeling. And we said, let’s just take a little detour here and make sure we understand the credit risk of these things before we sort of travel, start making markets and banking and, and, and really making these a core part of our business. At that time, this market was about a third of all mortgages were the ones where the credit risk was going into the capital markets. So that little detour was in 2003. And, and we found a couple things we modeled pre, we modeled defaults the same way we modeled prepayments, which is a, an option for the consumer to not pay. Barry Ritholtz: Most people rarely hear it described that way. Sean Dobson: It’s, it’s, it’s a unique approach, right? And, and it was u unique at the time. And so we, we thought there were conditions under which the option probably should be exercised. You know, if you, if your upside down, if you have a $200,000 home and a hundred thousand dollars mortgage, and there’s, and the consequence for not paying is ding on your credit report, you’re probably not supposed to pay is, is the position we took. So through that lens, we said, okay, let’s price these securities. And we found a bunch of interesting things for, for example, we found that the follow on rating surveillance for mortgage-backed securities doesn’t follow the same ratings methodology that the initial rating does. So over time, the risk composition of the pool would, would change dramatically. So think about 2003 home prices had gone up a lot from 2000. So mortgage position in 2000 were way more valuable in 2003 than they were when they originated because they weigh less credit risk. Not the same, the same thing couldn’t be true as, as you went forward in time, Barry Ritholtz: Each subsequent vintage became riskier and riskier became riskier and riskier as prices went up because rates are gone lower and lower. Sean Dobson: And that’s the way we thought about it. The way we think about it, when you make someone a loan, this is, this is sort of the, the credit OAS world. So when, think about when you make someone a loan on a building, whether it’s this building or, or a home, you are implicitly the United States. You’re implicitly giving them the, the option to send you the keys, right? So Barry Ritholtz: Jingle mail is what we used, used to call it Sean Dobson:J mail. Exactly. And so we, we thought, we said, okay, we’ve been pricing complicated options our whole career, so let’s just price the option to default as if it is a financial option. When you do that, and then you looked at the types of loans that are being originated, and this is where Amherst’s story is a little different than some of the, the stories you’ve seen around the financial crisis. What we figured out was that the premium that you were being paid as this option seller was way below the fair market price of the premium, meaning that the, the default risk you were taking was way higher than the market had appreciated. So they were underpricing default risk dramatically. Then as we dug in and dug in and dug in, we realized that there were a lot of loans that were really experiments. There were financial experiments where the borrower hadn’t been through due diligence. The LTV was very high. The underlying risk of the home market was very high. Barry Ritholtz: By the way, these were the no doc or ninja loans. No income, no job, no assets were exactly ninja, Sean Dobson: No pulse seems reasonable. Barry Ritholtz: Exactly Sean Dobson: So you look back at these things you like, how could it happen? But we are, we’re loan level people, right? So we don’t see the mortgage backed securities market as a market. We see it as, like I said, about 50 million assets and we’re modeling up the value of every home in the country, every, every week, basically. And we’re modeling the value of every mortgage in the country, and we’re modeling up the value of every, every derivative of that mortgage, the structure, products and so forth. So through our lens, it was like, okay, we’ve made these financial experiments, the underlying real estate has become very volatile. So we could construct trades that had very, very low premiums to sell this volatility to, to basically join the consumer on their side of the trade, which is in essence buying insurance on, on the bonds that were exposed to these great risk. So we built, we did that for a lot of the markets. So a lot of the headline names, you see a lot of the stories you see about, about the financial crisis, a significant number of, of those investors we were helping in security selection, modeling, and analytics. So that, that sort of put Amherst on a different pact because prior to that, our core business model was investment banking, brokerage market making, and underwriting. By the time we got to 2005 and figured out that there was such a large sector that was so mispriced, we started hedge funds, opportunity funds, we took sub mandates from the big global macro hedge funds, and we started to build our model around investing in our research, co-investing our research and earning carried interest in sort of big complicated trades that we thought we had figured out the market. Maybe the market hadn’t priced something properly. Barry Ritholtz: How, how did that end up working out? Sean Dobson: It was a wild ride. It was a wild ride because by the time you got, well, so in 2005, we went on a road show trying to tell people what we had learned, and there wasn’t a lot of reception. We, we literally, Barry Ritholtz: Let me, let me interrupt you and ask you, did, did people laugh at you? Sean Dobson: They were more polite than that. Okay. But they didn’t invest, right? So, so there, there were very few people that thought because at, at that time, the trailing credit performers for us single family mortgages great. Was impeccable, right? Barry Ritholtz: I wanna say oh five was where we peaked in price and oh six is volume, or am I getting that better? Sean Dobson: ’05 ’06, it started to turn over. And our thesis on a lot of these mortgages and the very, very exposed securities within these structured products wasn’t that home prices needed to go down. It was that the only way that the loan was gonna perform is home prices is if the consumer could refinance out of it quickly. Right. So you really just wanted the music to stop. Right. And or if, I mean, this whole thing was gonna come down if the music stopped. Right? So the mu by the time the music stopped, it was pretty apparent, but we had it, there’s a, there’s a big industry conference called a FS that happens twice a year. And in the 2000 at the 2005 conference, it’s kind of wild. So these big brokerage firms get together and they set up a convention like, like plumbers, and they all give out tchotchkes and they have a, and then they give presentations in their businesses. So we participated in this, our tchotchke that year was a hard helmet, was a, was an orange hard hat. And it said, beware of falling home prices. And our whole thesis was, that was what I’m trying to describe, Barry Ritholtz: That’s some great swag. Do you, do you still have any? Sean Dobson: I have one in my office now. That’s awesome. I have, I have a, I have a helmet from Beware of Falling Home prices, and I have one for our new construction division where we build entire neighborhoods. So, and that’s really the, the, to sort of bring it all together with this core competency and analytics. And we’re probably the only, maybe not the only, but, but I don’t know of ano a competitor. We’re we’re the quant shop in real estate, in the quant shop in physical assets. So with that core competency, that’s the reason we’re in the single family rental business. So you followed that all the way through. There were amazing trades to do, amazing opportunities, wild, scary things to do. I got to spend a lot of time in DC consulting on the response to the financial crisis and trying to sort out sort of what was really going on. And what we figured out in 2009, really when we started buying homes is that we made the bet that it, I mean, it wasn’t a very exotic bet, but we made the bet that the subprime mortgage market wasn’t coming back at all. Barry Ritholtz: So wait, let, let me unpack some of that. Sure. ’cause there’s a lot of really interesting things. When you mentioned DC I’m aware of the fact that you briefed Congress, the Federal Reserve, the White House. Yeah. Who, who, who, who else did you speak to when you were there? What, so what was that experience like? Sean Dobson: I lived in Washington, DC for five years. My family and I moved to McLean, Virginia in, in 2008. So we were down the street and we were in a pretty interesting situation because we were the, we were one of the biggest, if not the only investment bank specializing in the core risk that the nation was facing. And we didn’t need any help, right? So we weren’t there looking for changing of a reg cap, you know, of anything. We weren’t looking for a bailout, we weren’t looking for recapitalization or anything. We were just there as a source of information. So we, we met a lot of of interesting people in DC and it was the whole gamut. We were consulted on the recapitalization of Freddie Mac and Fannie Mae. We participated in that with treasury and FHFA and the regulators, the White House. And I would say that Washington was pretty interesting because we had gone and, and spoken to people in 2005, 2006, and to kind of let people know that there was something, these are, this is a trillion dollars worth of misprice risk. Right? Right. 00:13:02 [Speaker Changed] And, and I, I very vividly recall, oh six, even oh seven people were, Hey, we’re in the middle of a giant boom. Why do you have to come, you know, reign on our permits? Yeah. It was what, what was your experience? It 00:13:15 [Speaker Changed] It was lonely. I I I tell you the analogy was something like this, is that we had seen what had happened and by 2006 it was over, right? The, the mortgages were defaulting, people were taking out mortgages and defaulting in the third payment, the fourth payment, 00:13:28 [Speaker Changed] 90 day warranty on those non-conforming non Fannie Mae mortgages from those private contractors, like a toaster comes with a longer warranty. It’s 00:13:38 [Speaker Changed] Amazing. Yeah. So, so eventually even that was go, even that they wouldn’t provide 90 day warranty. Eventually it was take it a cash for keys or cash to carry. So like, for us, it was weird though, because the analogy I give is that in 2006 it happened, it was over first quarter of 2006, the market was, was over. The market kept issuing securities. And, and I think the analogy that we, we think about is that if you’re standing, if you’re sitting in front of a bank and you know, a, a van rolls up and people with masks run in and they empty out the bank and they leave with all the money and you see it, and then people keep coming and going from the bank for another year, you’re like, you know, there’s no money. Keep 00:14:10 [Speaker Changed] Making deposits. There’s 00:14:11 [Speaker Changed] No money in that bank. Right? And so, so we sort of felt pretty stupid for a while because we did a lot of losing trades in 2006 that were the, you know, that obviously didn’t come to fruition until the actual people could see the losses. So in mortgages, the borrower can stop paying maybe a year to two years before the lenders actually book a loss. So there’s this great lag in, in housing that is affecting the market. It’s affecting today’s CPI numbers that the market doesn’t do a great job of adjusting the real time for information that they already have. So when the borrower hasn’t paid in 12 months, probably not gonna get back the loan, probably not gonna start paying again. And then you can model up what happens, like what’s the home home gonna sell it for? What are my expenses to sell it for how long it’s gonna take? And all of a sudden you have a loan that was worth, you know, a hundred cents on the dollar and now it’s worth 30 cents on the dollar, and you knew that eight months into the loan, or eight months, or maybe a year ago or two years ago. But it 00:15:03 [Speaker Changed] Takes that long to write it down. But 00:15:04 [Speaker Changed] It takes that long for the losses to get through to the securities. And so, I don’t know if it’s sort of just the fact that we’re so myopic into the mi minutiae of each little detail, or if it’s the fact that the market kind of doesn’t wanna buy a umbrella until it starts raining. Right? 00:15:18 [Speaker Changed] Huh. Really, really very fascinating. So, so coming out of this in oh nine home prices on average across the country, down over 30%, but really in the worst areas like Las Vegas and South Florida, and, you know, parts of California, Phoenix parts, Arizona, Phoenix, right? Two, 00:15:37 [Speaker Changed] Two thirds in Phoenix. 00:15:38 [Speaker Changed] Unbelievable. Yeah. So, so you say, I have an idea. Let’s buy all these distressed real estate and rent ’em out. Yeah, 00:15:44 [Speaker Changed] I had, I had a very good idea. So I have very good partners, very patient with me. And I said, okay, I, we don’t think the subprime mortgage market is coming back, which was a non-consensus view at the time. People were buying up mortgage originators and things, waiting for the machines to sort of get turned back on. We were thinking this is, investors are never gonna buy these loans again at any price. So what’s gonna happen? What’s gonna happen to the homes? And what’s gonna happen to the, to the people that were living in these homes? And what a lot of people I think didn’t follow is that, you know, there was a concept that job losses called mortgage caused mortgage defaults. But in the Amherst view, a a mortgage default can be rational as, as distasteful as it may sound, right? And when I give this presentation in Europe or the, or the e the EU or the uk, they look at me like, you’re crazy. Or in Australia or in Canada, they’re like, what do you mean mortgage is a recourse? And it’s like, well, not 00:16:28 [Speaker Changed] In the us. Well, actually, some states are recourse and some states are not. 00:16:32 [Speaker Changed] What I can tell people is that one person’s default, you have, you can handle, but when seven or 8 million people default, we don’t have debtors prisons, right? They’re, they’re recourse. They mean they’re not recourse. So in this, in this context of, of a mortgage now being clear to everyone that this default risk is present, it’s real, and it’s hard to price because following the borrower’s economic profile, there, there are defaults that are related to just life events, but there’s also defaults related to a macroeconomic event. So we took the position, you know what, investors are not gonna buy these loans anymore. The homes are here. And the, the job loss wasn’t as big as the mortgage defaults were, right? So the people still had jobs, they still had revenue, and the homes were very affordable. Now, because the prices have been reset. So we, we asked ourselves, okay, we’ve seen this movie before. 00:17:19 Can we at Amherst make a $300,000 home investible to a global financial investor? Which I, we spent our whole careers turning a 300,000 mortgage investible in the global capital markets. So we said, okay, this is probably not a long put for us because we’ve been following the mortgage with all this for 30 years now we’re just gonna follow the house the same way. So we took our same analytic and modeling team and we said, let’s press down one more level so we can actually price the home instead of the mortgage with precision. And then let’s set up an operating capability that allows us to acquire the homes, renovate the homes, manage the homes, and then more importantly, scale the homes into an investible pool. So we created pools of homes just the same way we created pools of mortgages in 1989. So 00:18:06 [Speaker Changed] Are you keeping these homes and leasing ’em out, or are they flips, for lack 00:18:11 [Speaker Changed] A better word? So they’re, so they’re kept and leased out. And so, so starting in 2009, we, we, there was no flip market. There was no, no one to sell ’em to because the mortgage market had basically for closed on a large, a large section of the consumer base. So think about, 00:18:23 [Speaker Changed] And that credit market was frozen pretty much, 00:18:26 [Speaker Changed] And it’s still frozen for most people, right? So really? Yes. 00:18:28 [Speaker Changed] Still 00:18:28 [Speaker Changed] Today, still today. Basically the barrier to entry to getting a mortgage became irreversibly higher. And we spent a lot of time, so you mentioned my time in DC I went, I got to go and brief the Federal reserve, which is kind of cool. I got to go into the FOMC room and I got to sit with, with Yellen, the Bernanki and walk ’em through, kind of in our view how we got here and the best way out. And I asked them not to shut down the subprime mortgage market because it does serve a large swath of the American public who has a slightly higher rent to income or debt to income ratio, or has defaulted on a credit card in the past or something. But they can pay, they’ve had a problem in the past, they’ve cured it. Well, those people now are pretty much blocked outta the mortgage market. 00:19:10 So I was unsuccessful in talking people in, and still to this day, unsuccessful into talking to people to get back into lending to lower credit quality consumers. Because you can do it, you can risk based pricing. So we took the, we took the view like, hey, that market’s not coming back. People are not gonna listen to us. They’re not gonna say there are some good subprime loans and some bad subprime loans. They’re just gonna, they’re just going to draw a line and say, you, you have to have a credit score above a certain level. You have to have income above a certain level. You have to have a debt load below a certain level, or the price for you is zero. You just, the answer is no. You’re 00:19:42 [Speaker Changed] Out of the market. 00:19:42 [Speaker Changed] Used to, you would say you would pay 1% more or 2% more right now. He said no, huh. So that, so that’s how we, so then we said, okay, well how’s this gonna work? And we had seen this movie before, aggregating mortgages, strapping services on them, getting them rated, getting them available to the global capital markets. So we also saw the conflicts and the frictions of the mortgage market when it went under duress. The, the problems with getting service to the consumers. The problem with getting service to investors, the litigation, a lot of people don’t know it, but we were, we represented a large swath of the US investor base and their litigation for buying these busted securities. So we said, you know what? Let’s just build under one platform. Everything you need to originate, manage, service, aggregate, and then long-term service these homes on behalf of the residents and the investors. So that’s the, that’s the single family rental platform we built. Huh, 00:20:35 [Speaker Changed] Absolutely. Fascinating. So let’s talk a little bit about who the clients are for Amherst. I’m assuming it’s primarily institutional and not retail. Te tell us who your clients are and, and what, what they wanna invest in. Sure. 00:20:49 [Speaker Changed] O over the years we’ve migrated really to what I would say is the largest customer base in the world, the largest in single investors. So we, we do business with most of the sovereign wealth funds, most of the big US national insurers, global insurers, the largest pension funds. And we, we try to position ourselves as an extension of their capabilities. And since we’re smaller, more nimble, we can kind of get in there and do some of the gritty things, the smaller things. Imagine setting up a platform with, you know, in 32 markets that has to buy each individual home and execute a CapEx plan on a 30, $40,000 CapEx plan on a home. So these large investors need someone like us to kind of make things investible in scale. And so that’s, that’s where we’ve been. So it’s all institutional investors. It’s, it’s the, call it 500 largest investors in the world. Is that 00:21:39 [Speaker Changed] Patient cap do, do they have the bandwidth to, Hey, we’re, we’re in this for decades at 00:21:44 [Speaker Changed] Time? Yeah, it’s super patient, it’s super sophisticated. They’re asset allocation model driven folks. The bulk of our investors are investing on behalf of consumers, on behalf of taxpayers. So we we’re partners with the state of Texas, the actual state of Texas, not one of the pension funds, but the state itself. So we have a lot of the, you know, sovereign wealth fund types that are investing on behalf of taxpayers. So it’s very long dated capital. They’re, they’re lower risk tolerance, I would say very high standards on quality of service and quality of, of infrastructure and decision making. So we’re very proud that we’re, you know, a partner to, to that type of capital. 00:22:21 [Speaker Changed] So, so let’s talk a little bit about the residential side before we look at the commercial side. You mentioned you are in 32 markets, buying single family homes. How many homes have you guys purchased? 00:22:32 [Speaker Changed] So the platform service is about 50,000 units now. So we’ve, we .....»»
At the Money: How To Know When The Fed Will Cut
At the Money: How To Know When The Fed Will Cut with Jim Bianco (March 13, 2024) Markets have been waiting for the Federal Reserve to begin cutting rates for over a year. What data should investors be following for insight into when they will begin? Jim Bianco discusses initial unemployment claims data… Read More The post At the Money: How To Know When The Fed Will Cut appeared first on The Big Picture. At the Money: How To Know When The Fed Will Cut with Jim Bianco (March 13, 2024) Markets have been waiting for the Federal Reserve to begin cutting rates for over a year. What data should investors be following for insight into when they will begin? Jim Bianco discusses initial unemployment claims data and wage gain to identify when the Fed will start lowering rates. Full transcript below. ~~~ About this week’s guest: Jim Bianco is President and Macro Strategist at Bianco Research, L.L.C. For more info, see: Personal Bio Professional website LinkedIn Twitter ~~~ Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg. TRANSCRIPT: At the Money: When Will The Fed Cut? Over the past few years, it seems as if markets have been obsessed with Federal Reserve action. First, the rate hiking cycle, and now, quote unquote, the inevitable rate cuts. Investors might find it useful to know when is the Fed going to start a new cycle of cutting rates. As it turns out, there’s specific data you should be looking at to know when that cycle might begin. I’m Barry Ritholtz, and on today’s edition of At The Money, we’re going to discuss how you can tell when the Fed is going to start cutting rates. To help us unpack all of this and what it means for your portfolio, let’s bring in Jim Bianco, Chief Strategist at Bianco Research, and His firm has been providing objective and unconventional research and commentary to portfolio managers since 1990, and it is top rated amongst institutional traders. So Jim, let’s just start with the basics. How significant are rate cuts or hikes to the typical market cycle? How much do they really matter? Jim Bianco: Thanks for having me, Barry. And the answer is they matter more now than they have, say, over the last 15 years for a very simple reason. There is a yield again in the bond market. And as my friend Jim Grant likes to say, who writes the newsletter Grant’s Interest Rate Observer, it’s nice to have an interest rate to observe again. And because of that, we’ve got a whole different dynamic. Well, in 2019, when your average money market fund was yielding zero and your average bond fund was yielding 2%, we used to scream, TINA — there is no alternative. You can’t sit there in a zero money market fund. You got to move up the risk curve to stocks and you’ve got to, you know, try and get some kind of a reward from it. Well, in 2024, now money market fund is yielding 5. 3 percent and a bond fund is yielding around 4. 8 to 5%. Yeah. Well, that’s two thirds of what you can expect out of the stock market. And especially if we wanted to stick with a money market fund and virtually no market risk, cause it has an NAV of 1 $ every day. And there’s a fair number of people who say 70%, two thirds of the stock market without any risk at all, market risk that is – sign me up for that. Barry Ritholtz: So let’s talk about raising and lowering rates. I have to go back to 2022 when the Fed began their rate hiking cycle. It seems like a lot of investors were blindsided by what was arguably the most aggressive tightening cycle since Paul Volcker – 525 basis points in about 18 months. Why, given what had happened with CPI inflation spiking, why were investors so blindsided by that? Jim Bianco: They had gone 40 years without seeing inflation. And they couldn’t believe that inflation was going to return. And the typical economist actually was arguing that there is no more inflation again. And I might add to this day, the typical economist still argues that we don’t have inflation. Now, I’m fond of saying the term two things could be true at once. And what you saw in 2021 and 2022 is transitory inflation that got us to 9 percent on CPI. But once that transitory element of 9 percent is settled out, what I believe we’re starting to see more and more of is: There is a new underlying higher inflation level. It is not 2%. It is more like 3 or 4 percent inflation. Not, as I like to say, it’s not 8, 10 or Zimbabwe, it’s 3 or 4%. And that 3 or 4% Is what’s got the Fed slow in cutting rates. It’s got people debating whether or not interest rates should come down more or go up more. So, yes, we had transitory inflation because of the lockdowns and the supply chain constraints. And that has gone away, but left in its wake is a higher level of inflation. And that is the debate that we’re having right now. And if we have a higher level of inflation, that is going to weigh heavily on monetary policy. He hasn’t done them any good. Barry Ritholtz: So in the mid-90s, where were rates, how high had they gone up? And then how much lower had the Fed taken them? Jim Bianco: So they were at 6 percent at their peak. In late 1994, and the Fed started to cut rates. And then they eventually wound up cutting them all the way down to 3%. At that point, we thought that 3 percent was a microscopically low interest rate. Little did we know what we were in store for over the next 20 years. So those rates were not very different than the rates that we’re seeing today, with the Fed being at 5, 5.25 and with the bond, with the yield and the 10 year treasury at around 4.15 to 4.20. So we’re kind of in the same range that we’ve seen then. Barry Ritholtz: So if I’m an investor and I want to know the best data series to track and the levels to pay attention to that are gonna give me a heads up that, hey, the Fed is really gonna start cutting rates now. What should I be looking at and what are the levels that suggest, okay, now the Fed is going to be comfortable, maybe not cutting them in half the way they did in the mid 90s, but certainly taking rates from 5,, 5.25 down to 4, 4.2. 4.50, something like that. Jim Bianco: So one forward-looking measure and one kind of backward-looking measure that matters for the Fed: The forward-looking measure is going to be probably the labor market. What the Fed is most concerned about is higher interest rates, are they going to weigh on business borrowing costs? and reduce their propensity or willingness to continue to hire workers. So let’s look at the Initial Claims for Unemployment Insurance. It’s a number that’s put out every Thursday for the previous week. Initial claims, everybody has unemployment insurance. It’s a state program. The Bureau of Labor Statistics just aggregates the 50 states and puts out that number on a seasonally adjusted basis. It’s in the low 200, 000s right now. That is, over the last 50 years, an extraordinarily low number. And so if it goes up to 225k or 240k, it’s still a low number. I think if you start seeing it, you know, start pushing 275 or above 300, 000 are in, that means new recipients for unemployment insurance that week. Then I start thinking that, there is a real problem starting to brew in the labor market. The Fed will see that too And the propensity for them to cut will grow and I want to emphasize here 200,000 Wall Street tends to kind of get themselves myopic here – “Oh, it went from 200,000 to 225,000 230,000 the labor market is weakening.” No, that’s all noise down near the lowest numbers that we’ve ever seen in 50 years It’s got to do something more significant than that. Barry Ritholtz: What’s the best inflation data to track that you know Jerome Powell is paying attention to? Jim Bianco: So, Powell likes this obtuse number, and he likes it because he made it up, called, SuperCORE. So, it’s, inflation less food, less energy, and less housing services. Now, before you roll your eyes and go, So you’re talking about inflation, provided I don’t eat, I don’t drive, and I don’t live anywhere. Barry Ritholtz: Inflation, ex-inflation, right? Right. Jim Bianco: What’s left over is driven by wages. And why he looks at that is he’s trying to say, Are we seeing a wage spiral? Now, why is a wage spiral important? No one is against anybody getting a raise. But the fact is, if everybody’s getting a 4 percent raise, you can afford 3 to 4 percent inflation. If everybody’s getting a 5 percent raise, you can afford 4 percent inflation. 4 percent inflation and that’s what they’re most concerned about is getting that inflation spiral going with a wage spiral. So they look at the super core number as a way to say, yes, we understand that there’s housing. We understand that there’s driving. We understand that there’s eating and there’s inflation in those three. We also understand that there’s weight inflation. And that’s what they’re trying to do, is look at wages. And so that’s probably the best measure to look at. Barry Ritholtz: So, I know what a data wonk and a market historian you are, but I, I suspect a lot of investors, a lot of listeners, may not know what happens to the bond market and the equity market once the Fed finally begins cutting rates. Jim Bianco: It depends on why because there are two scenarios in there. If the Fed starts cutting rates, like it did in 2020, or like it did in 2008, or like it did even in 2001, and it’s a panic. “Oh my god, the economy’s falling apart, people are losing their jobs, we’ve got to start to stimulate the economy, we have to stop a recession.” If they’re cutting rates because of a panic, it doesn’t work. We involved, we had recessions every time they started doing that last one being 2020, uh, when they saw what was happening with COVID. And, and because it is projecting a recession, which means less economic activity, lower earnings, it’s usually a difficult period for risk markets like the stock market or real estate prices and the like. If the Fed is cutting rates. Like they did in 1995 or like they did in 2019, it’s kind of a victory lap. “We did it! We stopped the bad stuff from happening. Our magic tool of interest rates accomplished everything that we need. Now we don’t need a restrictive rate anymore.” And they back off of that restrictive rate. Well, in 1995 and 2019, risk markets took off. Now, 2019 was short-lived because then COVID got in the way. And that was an exogenous event that was not financially related. But they were going right up until the moment that COVID hit. So why is the Fed cutting rates? It really matters more than when will they cut rates. And right now, what everybody’s hoping for is the why will be a victory lap. “We did it. We stopped that bad old inflation. It’s gotten back to our 2 percent target. We could go back to the way we were pre-pandemic.” And then once we’re there, we can now start to back off of this restrictive rate, and everybody will celebrate that, yay, we’re getting interest rate relief without it being a signal that the economy is falling. Barry Ritholtz: So to wrap up, investors hoping for rate cuts should be aware that sometimes there’s a positive response when it’s a victory lap. Sometimes when it’s revealing, uh, the economy is softening or a recession is coming, tends not to be good for stocks. Volatility tends to increase. It’s a classic case of be careful what you wish for. But if you want to know what the Fed is going to do. You should keep track of initial unemployment claims when they get up towards 300, 000 per week. That’s a warning sign. And follow Chairman Powell’s super core inflation where he looks at the rate of wage increases to determine when the Fed begins its newest rate-cutting cycle. I’m Barry Ritholtz, and you’ve been listening to Bloomberg’s At The Money. ~~~ The post At the Money: How To Know When The Fed Will Cut appeared first on The Big Picture......»»
MiB: Sean Dobson, Amherst Holdings
This week, I speak with Sean Dobson, chairman, CEO and CIO of Amherst Holdings LLC. The firm manages $16.8 billion in assets focused on single-family rentals, mortgage-backed securities and commercial real estate. He currently serves as a governing trustee for the Dana-Farber Cancer Institute in Boston and is a co-founder of CapCityKids. Amherst… Read More The post MiB: Sean Dobson, Amherst Holdings appeared first on The Big Picture. This week, I speak with Sean Dobson, chairman, CEO and CIO of Amherst Holdings LLC. The firm manages $16.8 billion in assets focused on single-family rentals, mortgage-backed securities and commercial real estate. He currently serves as a governing trustee for the Dana-Farber Cancer Institute in Boston and is a co-founder of CapCityKids. Amherst was managing a variety of public and private label loans in the 2000s, including mortgage-backed securities (MBS). They created a proprietary technology platform to help them evaluate and maintain a suite of residential and commercial real estate investments. Dobson advised the White House, senators, congressmen, the Federal Reserve Board and private investors during the global financial crisis, including their views on subprime mortgages, structured products, and derivatives. The firm began opportunistically purchasing distressed mortgage products during the financial crisis when few other buyers were doing so. They also began purchasing single family homes as home prices collapsed, repairing and renting them. They now manage more than 100,000 residences in 32 markets across the U.S. A list of his favorite books is here; A transcript of our conversation is available here Tuesday. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. Be sure to check out our Masters in Business next week with Mark Wiedman, BlackRock’s Head of the Global Client Business. He is responsible for commercial businesses worldwide, and has been with Blackrock since 2004. The firm manages over $10 trillion in client assets. Sean Dobson Favorite Books Books Barry Mentioned The post MiB: Sean Dobson, Amherst Holdings appeared first on The Big Picture......»»
At the Money: Claudia Sahm on How To Defeat Inflation
At the Money: Knowing When You’ve Whipped Inflation. (March 6, 2024) Investors hate inflation. How can they evaluate what inflation means to the Federal Reserve and possibly future rate cutes? Full transcript below. ~~~ About this week’s guest: Claudi Sahm is a former Federal Reserve economist best known for the rule bearing her… Read More The post At the Money: Claudia Sahm on How To Defeat Inflation appeared first on The Big Picture. At the Money: Knowing When You’ve Whipped Inflation. (March 6, 2024) Investors hate inflation. How can they evaluate what inflation means to the Federal Reserve and possibly future rate cutes? Full transcript below. ~~~ About this week’s guest: Claudi Sahm is a former Federal Reserve economist best known for the rule bearing her name. She runs Sahm Consulting. For more info, see: Sahm Consulting Stay-at-Home (SAHM) Macro! Substack LinkedIn Twitter ~~~ Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg. TRANSCRIPT Barry Ritholtz: Consumers hate inflation. It reduces the buying power of their cash, it sends rates higher, and it makes anything purchased with credit, even more expensive. During the COVID era, people locked down at home, shifted their consumption from services to goods; supply chains became snarled; then we had a massive fiscal stimulus. And THAT is what led to the giant inflation spike of 2021 and 22. The good news is inflation peaked in the Summer of 22 and seems to be on its way back to normal. But that raises an important question for investors: Is inflation over and is the Fed done? I’m Barry Ritholtz, and on today’s edition of At The Money, we are going to discuss how to look at the data and think about inflation. To help us unpack all of this and what it means for your portfolio, let’s bring in Claudia Sahm. She is a former Federal Reserve economist and creator of what is known as the Somm Rule. Claudia, let’s start with a basic definition. What is inflation? Claudia Sahm: Inflation is the increase in prices, the percent increase in prices. Barry Ritholtz: So, we hear about all sorts of different measures of inflation. There’s CPI, the Consumer Price Indicator. There’s PCE, the Personal Consumption Expenditure. There’s core inflation. There’s like half a dozen; which should we pay attention to? Claudia Sahm: It’s absolutely important that we have a pulse on where inflation is and where it’s going. So, If something is a complicated phenomenon, you’ve got to have multiple ways of looking at it. And the questions differ some. So the two, the Consumer Price Index versus the Personal Consumption Expenditure Index, the CPI is pretty close to out-of-pocket expenses. And, the difference then is the Personal Consumption Expenditure Index, which is the one the Fed uses and its 2% target. It takes a bigger picture on what’s the price of all the things that we quote-unquote consume. Healthcare is a big example of this. In CPI, it’s only out-of-pocket medical expenses. In PCE, it’s not. It’s also the prices of things bought on our behalf, like our health insurance, also by the government with Medicare. So, these are two different things. CPI matters a lot to people because, I mean, that’s really what’s coming out of their pocket directly. It’s also what’s used to index Social Security benefits every year. So these are both very important. And this issue of total versus core, and core is in the inflation taking out the food and energy. So the reason we talk about core, it’s not that the Fed is targeting core. The Fed’s mandate is with all prices. What CORE is, is it helps us have a sense of where inflation might be going. Food and energy can move all over the place, and you don’t want to get head faked by what’s happening with gasoline prices, per se. So, the Fed needs to have a sense of where things are headed with inflation — because rates are a tool that takes a little bit for it to work its way through the economy. That’s the reason that CORE gets as much attention as it does. Barry Ritholtz: So we saw inflation tick up through the 2% target, I wanna say first quarter of 2021. On its way up to just about 9%. It felt to me very different than the inflation we experienced in the 1970s. What does the data say? Is this inflation similar to what we saw in that decade or very different? Claudia Sahm: First in the 1970s, we had high inflation for many years. It was a kind of slow burn on the economy. We also had high unemployment at various times in that period. And it, it had this, there was a lot of demand behind it. There were some energy shocks. Like, there were other things going on. [Oil embargo in 73] Sure. But we talk about them, we had the guns and butter, as they call it. So there was a big effort with Vietnam, and then there was a big Great Society, like, a program of spending. This time, we did have massive fiscal relief. Everything from the CARES Act through the Rescue Plan was pushing out a lot of money to help people in small businesses and communities. We also had these very strange disruptions, and, and you talked about several of them. I would add to the list, that when we shut down the economy, not only did people switch from services to goods – they didn’t spend as much. And so you had this big pent-up demand, even from people who did not get the fiscal stimulus. So when the vaccine started rolling out in 2021, you had this massive pent-up demand that came out at the same time relief was going out. That, you know, the pent-up demand, we talk about the quote-unquote revenge travel. [Right, the summer of travel]. Yes, and so that had, that was, shutting down a 20 trillion-plus economy is just unfathomable. And it turns out that flipping the switch back on was really hard. And one place that that difficulty showed up was in inflation. Barry Ritholtz: So investors who are tracking these various measures of inflation. What should they be paying attention to when inflation is on the rise? Claudia Sahm: It’s very important right now to not get hung up in every single data release. We’ve seen a lot of progress with inflation coming down. There. is absolutely going to be turbulence on the way down – not every, not every data release is a good one. And the Fed knows that. So, I mean, this is not, uh, news to them. I do worry sometimes that investors get pulled around by the latest number. It’s about looking for the trajectory, like the momentum, and inflation is complicated. It is important to look under the hood at what’s going on. Barry Ritholtz: So you mentioned the Federal Reserve. Obviously, we can’t talk about inflation without mentioning them. They have a dual mandate, full employment, and stable prices. What does Jerome Powell, the Federal Reserve Chairman, pay attention to when he’s looking at inflation? Claudia Sahm: It’s coming down. I mean, the Fed is going to keep going until they have inflation at 2%. In December 2023 at their last meeting, for the first time, there was a little more of this tone like, “Oh, we’re watching unemployment too.” So they do realize they are making a lot of progress towards 2%. It is essential that they get both sides of their mandate. The Fed is not just about inflation and Jay Powell, in his entire tenure as Fed chair, has really emphasized, hey, we know we have that employment mandate. And that’s, that’s heartening. And that’s, that’s the law, right? That’s what Congress gave them as a dual mandate. And yet, right now, the Fed, in terms, of the decisions about when to cut interest rates, and how low they go next year, is all about the inflation data. Barry Ritholtz: So let’s talk about the Fed Open Market Committee and the raising of rates. Typically, when the Fed raises its rates, It slows the economy by making consumer credit more expensive. This is credit card debt, car loans, and mortgages, and that tends to slow the economy. But it also comes with what everybody calls “a long and variable lag.” Tell us about why it is so difficult to tell when Fed policy action makes its way into the economy. Claudia Sahm: The Fed’s policy tools are very blunt, and over time, they have made it even harder to figure out what’s going on. So the Federal Reserve right now has raised interest rates well over five percentage points. They did it very quickly. The discussion turned late last year to when are they going to cut, when are they going to reduce interest rates. Okay, Jay Powell goes out after the committee meeting in December 2023 and does a press conference – another one of the Fed’s new tools is communication policy, like what the, what J Powell says. As far as I was concerned, as someone who listens to a lot of Fed speak, J Powell’s press conference was basically, pop the champagne bottle. I mean, it was just a very, like, we’re headed towards this off landing, we’re going to cut. Without any specifics, right, I don’t want to oversell what he said, but I mean, markets, heard a lot of what I heard. Interest rates have moved down considerably. The Fed hasn’t even cut yet. This is where they say maybe those aren’t so long and variable lags. They might actually be some pretty short lags because the market’s already ahead of them But it’s because the Fed told them. Like, there’s communication. It’s not just the Fed or the markets made it up. Like, they’re listening. But the Fed doesn’t know what it’s going to do. Barry Ritholtz: So, I’m glad, glad you brought up that aspect of it, of the jawboning. For, for some younger listeners, I remember when I started. Forget press conferences, there wasn’t even an announcement that the Fed had changed interest rates. The only way you found out about it is you saw it in the bond market. The world today is so different than it was in the 1970s, and maybe that’s why so many of the economists who came of age in the 1970s seem to have gotten this inflation spike wrong – they saw it as a structural long-term issue, but it seems to have been transitory. Tell us a little bit about team transitory. Claudia Sahm: I’m a card-carrying member of team transitory. I would never have used the word transitory. Economists should not be allowed to give names to anything. Barry Ritholtz: Well, everything is transitory if you have a long enough timeline. Claudia Sahm: I had someone on Twitter ask me, aren’t we all transitory? And I’m just like, let’s, let’s stick to inflation. Barry Ritholtz: Eventually, heat death will take over the universe and everything will end. But on a shorter timeline, there’s a difference between structural inflation, like we saw in the 70s that lasted almost a decade, and this up and down inflation that seems to have lasted less than two years. Claudia Sahm: Absolutely. The concern in this cycle, that frankly, I think, that was frankly overplayed was the idea that we were getting embedded inflation. That we would have an inflation mentality like set in, after a decade in the 1970s. That was the big concern and that, that’s, the embedded inflation was (then Fed Chair) Volcker’s reason for just, really pushing up interest rates. And without a lot of warning, to your point. But this time, if you have temporary disruptions, and they’re the form of these supply disruptions that really aren’t about the Fed, typically, if you have those disruptions, like you would have during a hurricane. The Fed is supposed to look through it, in that they don’t react. That was what they were doing in 2021. They’re like, this is not us. Unfortunately, these disruptions took a much longer to unwind. Jay Powell talked about it as, yeah, it was two-year transitory, not one year. That was too long, right? And that’s why the Fed did get in. And they were concerned that as inflation stays high, people would get it in their mind. “Oh, this is just the way it is.” We never saw a sign of that. It’s extremely important. And the disruptions, the supply disruptions really have worked themselves out. Now there’s a question. I mean, the, the fear mongers will not go down without a fight that it could be that what is left in the inflation is demand driven and is about the Fed and could get embedded. That’s not my read of it, but it’s a risk people should pay attention to. Ed Yardeni has this really interesting observation: “Inflation tends to be a symmetrical phenomenon. It tends to come down as quickly or as slowly. as it went up when measured on a year over year basis. We see this consistent pattern in the CPI inflation rate for the US since 1921.” Really quite fascinating. Claudia Sahm: Yeah, I sure hope we get that. You know, I, I’m, I’ve become so skeptical of historical patterns just because the, you know, and, and the, it was the 1918 pandemic, so you gotta go back a little further to what we’ve seen. But it makes a lot of sense because inflation is not just this blob, like there are, there’s a lot of pieces under the hood, and if you have a very, like, quick shock, like we had, and if there’s supply, or something that’s very indicative of a temporary. You really jack it up, and then it comes back down quickly; as opposed to if it’s demand, you have the inflation mentality, it like, you slowly build that up, and then it can be hard to shake. Barry Ritholtz: So, last question. What should investors be on the lookout for when it comes to falling inflation? Claudia Sahm: Since the summer of 2022, we have seen steady declines in inflation, and even the momentum picking up some towards the end of last year. What we should be looking for is that momentum to continue. If we get stuck in the first quarter of this year, the Fed is going to react very differently, maybe could even raise rates. So what we’re watching is, hey, is this more of these disruptions unwinding? In which case, they could keep it down, coming down quickly, or have we gotten into a place where this somewhat above the target inflation is happening and the Fed is going to get two percent. The Fed knows how to get two percent and, but, but it may not be pretty. Barry Ritholtz: Really, really interesting. So to wrap up, investors and consumers who are concerned about inflation should be aware of a few things. First, Be aware of the recency effect: Don’t let any single month’s data point throw you off. Use a moving average. This data series is very noisy. At any given month, you can have a really good or a really bad number. You have to look at the trend. Second, when it comes to the level of inflation, Look at CPI on a year over year basis. That’ll give you a sense of where we are over the long term. And lastly, if you’re a consumer concerned about inflation, take an honest look at your wages. Sure, inflation has risen, but so too have salaries. In fact, the salary component of inflation is significant. Hopefully your salaries have risen enough or more than inflation to maintain your buying power. I’m Barry Ritholtz. You’re listening to Bloomberg’s At The Money. ~~~ The post At the Money: Claudia Sahm on How To Defeat Inflation appeared first on The Big Picture......»»
Transcript: David Snyderman, Magnetar Capital
The transcript from this week’s, MiB: David Snyderman, Magnetar Capital, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with… Read More The post Transcript: David Snyderman, Magnetar Capital appeared first on The Big Picture. The transcript from this week’s, MiB: David Snyderman, Magnetar Capital, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry Ritholtz on Bloomberg Radio. Barry Ritholtz: This week on the podcast, I have a fascinating and extra special guest. David Snyderman has put together an incredible career in fixed income, alternative credit, and really just an amazing way of looking at risk and trade structure and how to figure out probabilistic potential outcomes rather than playing the usual forecasting and macro tourist game. He is global head of alt credit and fixed income and managing partner at magnetar. They have an incredible track record. They’ve put together a string of huge, huge returns. They are not like any other fund that you’ll hear me talk about. They’re pretty unique and specific in the world. I found this conversation to be fascinating, and even though we kinda wander off into the weeds of private credit, it’s so informative and so interesting. I think you’ll, you’ll really enjoy it. With no further ado, my discussion with Magnetar. David Snyderman. David Snyderman: Thank you very much for having me, Barry. I really appreciate it. I’m looking forward to our conversation. Barry Ritholtz: I am also, I’m very familiar with Magnetar and, and its history. It’s really a fascinating firm in so many ways. Let’s start though, talking a little bit about your background. You, you grow up in suburban New Jersey and then you head to St. Louis for college. Tell us a little bit about where you went and what you studied. David Snyderman: Sure. I grew up in Freehold, New Jersey, so most people know home of Bruce Springsteen. You know, my focus coming out of high school was playing football. I wanted to play football really at the highest level I could. Barry Ritholtz: You are not much bigger than me. What made you think you could play on the grid iron? David Snyderman: I don’t know why I thought I could, but I definitely thought I could at the time and so I wanted to play at the highest level possible. My parents were much more focused on an academic institution and so WashU sort of met both criteria. Barry Ritholtz: Did you play Ball in college? David Snyderman: I did. All four years. It was a lot of fun. Barry Ritholtz: What position did you play? David Snyderman: I played strong safety and yeah, division three is the highest level I could play up at, but I loved it. Barry Ritholtz: Right. So safety, you have to be pretty fast and David Snyderman: That was the issue. Barry Ritholtz: So, but for that you would’ve gone pro. There you go. What did you study at WashU? David Snyderman: WashU back then was, it was a great, they had a great medical school and they still do today and in my family, being a doctor was the highest level of achievement. So I had a, I had an older sister starting medical school and I had a relative who’s actually the dean of Duke Medical School. So I had this nice glide path to be a doctor. Right. So I started off pre-Med, but I didn’t end pre-Med. I found out quickly that’s not what I wanted to do. The hardest part is telling my parents and especially my grandparents, you know, no more pre-med. So I switched to be an economics major. I graduated economics with, with a lot of coursework in accounting and finance. Huh, Barry Ritholtz: Interesting. So you come outta college, you go to Pricewaterhouse Cooper and then Koch Industries where you’re focusing on convertible securities, merger, arb, and special situations. How do you get from medical school to that? What, what was the career plan? David Snyderman: Yeah, my path was certainly non-traditional. I didn’t go to one of the East Coast Ivy League schools knowing I wanted to go to Wall Street. I didn’t even know what Wall Street working on Wall Street meant at the time. So for me it was much more around, you know, being around fantastic people and really taking advantage of opportunities. It’s like you said, I started at Pricewaterhouse and I went through a one year rotation there, so it started with audit. So I saw many companies then taxed and financial services. So it was a great training ground to understand how, you know, theoretics went, went into the practical business. From there, I went to Koch Industries and I had a great experience at Koch. I was there five years. I worked in three different places for ’em. So I started in Houston, Texas, and I worked on their natural gas business. Then this opportunity came up in Switzerland, so it’s a 13,000 person company and there were gonna be five people in Switzerland to manage about several hundred million dollars more in cash optimization. So I had the opportunity to be a junior person there. I’d never left the US before, so I was sat in the middle of Switzerland and sat there for two years and, and worked in that business and then went to Wichita, Kansas. Wichita, Kansas was the home office and there were sort of a dozen of us very simply situated, you know, all young and hungry, but they had great management at Koch. They really encouraged us to, to start businesses. So I remember writing the merger, our business plan there. Right. And then implementing the business. So a quick fun fact about, about Koch at Magnetar today we have three of my prior bosses that, you know, from Koch. So, so it’s pretty neat. But to answer your question, like I had a lot of broad experiences by the time I was in my mid twenties, but no real direction on what my career was gonna be. Barry Ritholtz: Where In Switzerland? Was it Geneva or somewhere else? It was, David Snyderman: It was Freeburg. So a town 20 minutes from Burn, it was a tax free Canton. So I was in a town that spoke, you know, half French and half German and, and I spoke English. So there yougGo. But no taxes, no income taxes or taxes for the company Barry Ritholtz: Then Koch Industries, I I, I don’t think a lot of people realize one of the largest private companies in the United States and maybe even the largest, they’re, they’re giant energy powerhouse. What, what else does Koch do? David Snyderman: Yeah, so when I was there, they had 13,000 people and that was before they bought Georgia Pacific. I think now it’s probably 35,000 people. Immense. It’s immense. And so they, they have many, many different business lines there. For me, I sat mostly in their internal, really an internal hedge fund. So it was their excess cash. They borrowed money at live bid at the time. So they borrowed money very cheaply and our job was to make money on that money. Barry Ritholtz: So you end up as head of global credit and senior managing director at Citadel Investment Group, was that right? From Koch Industries? That was seven years at Citadel. That’s supposed to be a tough shop to work at. What was your experience like there? David Snyderman: It was the perfect job for me at the time. So I always thought I worked at a high level of intensity. Right, right. But when I got there, I realized I was one of many, right. But I had the opportunity to work for a gentleman, Dave Bunning. He was one of the original few handful of people that, that started at, at Citadel. And Dave was fantastic in so many different ways. A great leader, a great investor, but really a great person. And he took me under his wing there. It was a lot of work, but a lot of formidable lessons came out of my time there. Right. So the, the first one that I think about is the investing business itself is an operating business. So we really have to understand what we’re gonna invest in, value everything in the universe, rank order ’em, and then only can we put together portfolios. And the second, and this is very credit specific, was when you own a credit portfolio, your short volatility. So what that simply means is if you have a dislocation, you’re gonna lose a lot of money. And so to put together credit portfolios, we have to find hedges that offset that short volatility. So really learning the value of options right, was, was probably the biggest lesson coming out of Citadel. Barry Ritholtz: I wanna rephrase that for, for some of the less option and, and vol savvy members of the audience. When we buy fixed income, we just want it to be steady and pay a dividend and not swing up and down. And if it does swing up and down, the odds are it’s not in your favor. That volatility you can look at as an insurance product. If the volatility goes up, hey, we can make a bet that will offset the drawdown in the bonds. David Snyderman: That, that’s exactly right. Barry Ritholtz: Alright. And, and you’ve, you at Citadel, you were running a convertible bond and credit trading desk. Is that that what you eventually ended up as head of global credit? David Snyderman: That’s Correct. I started there on the convertible bond arbitrage desk, and then we started capital structure arbitrage, which meant we were, you know, buying or selling credit and, and against that buying and selling equities. And finally we consolidated that together and, and I ran that business for, for Ken and Citadel and, Barry Ritholtz: And some of the folks, Ken being Ken Griffin, when people say Citadel is a lot of work, you don’t realize there’s a whole nother gear you have to move into and it’s next level. Was that your experience? David Snyderman: It was, and, and for me, I actually loved that part of Citadel. It was 16 hour days and it was six or seven days a week, but you really got to learn the financial markets there. Barry Ritholtz: Interesting. So Magnetar launches in 2005 with some capital, and you joined you, you weren’t one of the original founders, but you joined not long afterwards. David Snyderman: That’s correct. So Alec Lilitz and Ross Lazar founded the firm and, you know, I did join the day we launched our, our main fund. Now for me, Alec was a known quantity. He ran equities at Citadel with Dave Bunning, my, my my prior boss there. And then when I moved up into Dave’s spot, Alec moved out and, and they started and he spent I think two years on a non-compete. And then started, started Magnetar. Him and Ross Lazar co founded the firm and they had a vision to co-found the firm, and I bought into the vision immediately and Alec always did a great job of, of laying it out, right. And first was, we’re gonna have a culture of collaboration. So back then you, you probably remember in 2005, you know, there were a lot of what they called pod shops. So they’d give individual asset allocation to people and they’d go invest their money. This was gonna be a multi-strategy vehicle. So we’d have credit, we’d have equities, we’d have hedge fund strategies, but with no silos. So we’re gonna work together and put best opportunities into the portfolio. Barry Ritholtz: So you have people from Koch Industries with you, you have people from Citadel. Did those prior employees have a piece of you guys? Did they seed you, did they invest you? Or was it just a clean break and we’re off on our own? David Snyderman: It was a clean break and, and Ross Lazar came from the fund of funds world, and he was the primary money raiser and business builder there. And so he did a fantastic job, I think we’re the largest launch of 2005 with about $2.3 billion. Barry Ritholtz: How long did it take you to get up and running where you felt, oh, this is really all the pieces are in place? David Snyderman: Yeah, it’s a good question. And funny, funny you asked that question because we talk about it often around Magnetar. You know, I started and I, I hired three or four people that I started with, and Ross Lazar, right? And again, he’s a, he’s a my partner, my close friend, right? And and a great business builder. Two weeks into it, he came to me and said, what’s the first investment like? When are you gonna start investing? And I said to Ross, look, we we’re gonna build a systems and infrastructure to prepare to invest first, and I need Barry Ritholtz: A computer and an internet line and maybe a trader to help us out? David Snyderman: That’s exactly what what Ross was saying. And he, he very politely said to me, you know, you’re here to invest not to build software. And so he, I think he stopped by my, my desk for the next nine months, every single day and ask the same question. But it truly took us nine months to build the systems and infrastructure just to be investment ready. Barry Ritholtz:Wow, that’s amazing. Nine months. And I have to ask why Evanston in Illinois? I mean, I like Lou Malnati’s and Super Dog as much as the next guy, but why the middle of the Illinois suburbs? The Chicago suburbs? David Snyderman: So it was just north of the city and it’s across the street from Northwestern. So that would be the draw, you know, the train lines end there so you can recruit people from, from the city, but it, it was probably a little more selfish. Like we all lived on the north shore of Chicago, and so it was an easy commute for us to work. And so that, that’s where we started the firm. Barry Ritholtz: That is really a lovely part of the world on the lake. It’s such a manageable, easy city to operate within. I mean, the winters are a little cold, but still it’s a lovely place. David Snyderman: It’s a great quality of life in Chicago and, and outside of Chicago. Barry Ritholtz: So only a few years later we’re right in the teeth of the great financial crisis. How did you guys navigate that? David Snyderman: We were very fortunate and, and we performed quite well in our credit strategies, which, which certainly we can talk about. We had both long and short credit products and we had, we had a long volatility position, meaning, meaning we protected the balance sheet very well if there was a dislocation. And I think that went back to some, some of the prior lessons from, from prior firms. Like we really need to have portfolios that we protect the balance sheet and make sure that, that we’re able to stand up in, in difficult environments. 00:13:02 [Speaker Changed] Have noticed that a lot of firms that describe themselves as hedge funds really aren’t very hedged. You guys operated pretty fully hedged at most of the time, right? 00:13:13 [Speaker Changed] We really did. And, and the systems and infrastructure we built were not only to measure risk, but to manage that risk. And so we find good investments both on the long and short side. 00:13:27 [Speaker Changed] So even if you have a position that that’s long, you have an offsetting or matching position, or do you just hedge out that long position with a a short bet? 00:13:36 [Speaker Changed] So there’s a quality of earnings question embedded in, and I think what you said, and that’s, we’re trying not to take macro level bets. Those for us are low quality bets. And so what we’re trying to take is idiosyncratic bets, meaning we’re focused on one factor and we’re betting on that factor, then we’re gonna hedge out all of the macro risks around the portfolio. 00:13:58 [Speaker Changed] Huh, really interesting. So we were talking about, you guys launched a few years right before the financial crisis. I wanted to talk about a couple of trades from that era. Perhaps most famously you guys put on a CO bet, a collateralized debt obligation bet that was designed to do well if housing made some extreme moves and it was non-directional, it was hedged. Tell us a little bit about the magnetar CDO bet from the financial crisis. 00:14:30 [Speaker Changed] I talked about setting up the infrastructure to prepare to invest, and we looked at every asset class. So we looked at, at corporates, we looked at mortgages, we looked at credit cards. And what we found in the mortgage market is something you don’t read about in textbooks, we found that we could invest on the long side in what they call the equity piece or the most risky piece of of A CDO, right? And we could short the next level up. So the mezzanine piece, and we could short two or three times the amount, but what was super interesting was we were getting paid to hold an option that never happens. Right. 00:15:08 [Speaker Changed] Options cost you money. And that’s the old joke option. Traders never die, they just expire worthless. 00:15:13 [Speaker Changed] That’s exactly right. In this case, we were gonna hold an option that we were going to get paid 15 to 20% a year to hold. Oh, 00:15:21 [Speaker Changed] Really? That’s real money. 00:15:22 [Speaker Changed] So, so you never see that and you never read about that, but that’s the way the market’s set up. It was just too fragmented. You had people that were willing to buy pieces of, of these structured products because of the ratings and on things that weren’t rated, no one was willing to buy. So we took the other side of that, of that trade. 00:15:40 [Speaker Changed] So you bought the unrated portions and you shorted the rated portions? 00:15:44 [Speaker Changed] That’s correct. 00:15:45 [Speaker Changed] Huh. That’s very contrarian. That’s very interesting. How did you identify that opportunity? That’s such a talk about idiosyncratic niche trades. H how did you figure that out? 00:15:57 [Speaker Changed] The firm was built on finding white spaces. And so I remember back, back in 2005 when we first started, you know, we think about the banks. The banks would have an equity trading desk and they’d have a debt desk, right? And they both value the same companies and both sides of the firm would value ’em completely differently. And so for us, those were exactly the opportunities we were looking for, but we didn’t find it in the corporate markets. We found it in the mortgage market. It was so fragmented that the machine that sold rated products hit all the right buyers, but no one could sell the unrated piece. The unrated piece yielded 2020 5% where the rated piece would yield three to 5%. And so that difference was, was the arbitrage that we saw. 00:16:40 [Speaker Changed] Heading into oh 5, 0 6, we saw real estate peak in, I wanna say in in volume in oh five and price in oh six. So if you are getting paid 15, 20% to hold the unrated piece, isn’t there a lot of downside risk that hey, if some of these mortgages go south, you could see, you know, you get cut in half or worse. 00:17:01 [Speaker Changed] That’s exactly right. And so what our, what the modeling actually said though is if nothing happens in the world, we make this 20% return. But if, if anything happened, not only would our equity piece suffer, but the short side or our mezzanine pieces would make the money back, and that’s the ratio. And then, so that’s the ratio we had to be on. So what they call that is delta neutral in the options world, right? So 00:17:26 [Speaker Changed] We had a, we were hedging an option and that hedge made us a lot of money in downside, in downside scenarios. But that was never the focus. We didn’t know the housing market would crash. We had no idea what we had was a trade or an investment that we’d make 20% a year on. And if anything happened in the world, we’ve really protected the balance sheet. It just happened quite quickly. 00:17:48 [Speaker Changed] So let’s talk a little bit about what’s going on today, especially in, in some of the private alternative spaces. You’ve talked about pensions are now facing illiquidity issues because private equity and venture capital have gates up a lot, a lot of long term tie up. How has this affected your business? 00:18:09 [Speaker Changed] Yeah, that’s been the most challenging part of the business really. So it, it really has and, and pension funds, they’re on hold today. They’re, they’re not investing and it’s been not just a headwind for us, but for the entire industry. So I’ll step back and I’ll, I’ll give you my view on it. So pensions have this, this mandate, they have a diversified portfolio they invest in, they receive cash flow from the portfolio and that supports their retiree benefits. So they’re always making this judgment, will I produce enough cash to manage those liabilities? What happened over the last year and a half or so is rates went up and valuations went down. Now the handshake agreement with, with the venture firms and the private equity firms was give them a dollar today and in five years they’ll give you back two or $3. Right? Right. Depending on how, how the fund did, they’ve stopped giving back that capital today. Oh, really? And so the pension funds are faced with this illiquidity problem. And so they’re borrowing money against their portfolios, they’re selling positions in their portfolios, but what they’re not doing isn’t taking on new investments. Hmm. Now there’s a flip side to this. Whenever we, we have trouble raising capital, the investment opportunities are usually very good. Right. So our pipeline is extremely robust today. 00:19:22 [Speaker Changed] Huh. That, that’s really intriguing. Do you see this across the board or is it really just more generalized that when you have the dislocation of 500 plus basis points in 18 months, what does that do to the landscape? 00:19:37 [Speaker Changed] It always changes the landscape. And so no one’s ever prepared for moves of that size, even though everyone says, says they are. And so it’s opportunities that, that have come out of this mainly are around the banks today. Right. And so, so we can talk a little bit more about that. Well, 00:19:53 [Speaker Changed] Let’s, let’s talk a bit about, Magnetar has more of a specialty finance focus than other credit managers. Tell us about that, and how has the shift in rates impacted specialty finance? 00:20:06 [Speaker Changed] Yeah, so after the, after the GFC, these private credit markets really developed and they went in two different directions. They went in direct lending, right. And so 90% of the market went direct lending. So that’s going to middle market companies and disintegrating the banks and lending directly to them. For us, we went in a different direction. We went in specialty finance and specialty finance is, is a bit smaller, but it’s been around for ages and it touches our lives every day. 00:20:33 [Speaker Changed] Define it if you would. 00:20:34 [Speaker Changed] Yeah, so it’s, it’s the cars we drive. So auto loans, it’s the houses we buy or rent. So it’s mortgages, it’s the podcasts that we stream, right? So it’s all, it’s all the music royalties and streaming royalties. So it’s, it’s assets like that. Hmm. And the interesting part about these assets is there’s a very strong investment thesis around them because they have three attributes when combined together that most other asset classes don’t have. And certainly I don’t think direct lending has. So the first is you can find very stable payoff profiles. Second, you can find assets or these payoff profiles that don’t correlate to the overall market. So you’re not worried about them moving with the s and p or the high yield index. Right. And third, and most importantly, they don’t correlate to one another. And so I’ll give you an example of a three asset portfolio. So in our music royalty portfolio returns could be driven by an artist’s song downloads like Taylor Swift downloads. And in our solar finance portfolio, it’s by how much sunlight there is in a particular region. Or lately we’ve been lending a lot against Nvidia GPUs for cloud usage, and that’s driven by AI and machine learning growth. If I think about just those three assets, they shouldn’t correlate to, to the s and p, but they certainly shouldn’t correlate to one another. Huh. That’s how we can really produce a high quality of earnings for our investors. Huh. 00:21:58 [Speaker Changed] Really interesting. You mentioned banks earlier, I know that Magnetar has had opportunities to partner with banks via what some people call reg cap transactions. Tell us a little bit about those. 00:22:11 [Speaker Changed] So reg cap, or some people call ’em significant risk transfer transactions, that is a massive opportunity for credit funds today. And so a lot of people would think that the banks are selling assets, right. But in our experience, we’re seeing them efficiently transfer the credit risk of assets, but keeping the customer relationship, it’s a very important distinction. How do 00:22:33 [Speaker Changed] You do that? Either you have the asset and the credit risk, I would imagine. Or if you don’t, if it’s a mortgage, you sell the mortgage and you’re out, how do you have, how are you a little bit pregnant? 00:22:43 [Speaker Changed] E exactly. So the solution to that are these regulatory capital solutions. And so you’re taking a portfolio of credit risk and you’re transferring that credit risk to a private credit fund like us, but maintaining the customer relationship. And what what banks, I think eminently realize is the customer relationship is, is how they drive revenues. So traditional banking, FX advisory services, you know, high net worth. And so without that, they start to lose their franchise. This is the product that, that allows them to transfer credit risk. And for private credit firms, we all of a sudden have access to some of their highest quality lending. Right. It’s, it’s, it’s been the fastest growing part of our portfolio. 00:23:27 [Speaker Changed] So I’m trying to figure out if they’re transferring the credit risk to you. I’m assuming you’re taking some sort of contract with the bank that you’re gonna assume the liability if X happens and then you with your expertise are hedging out that risk through your options or credit desk. 00:23:48 [Speaker Changed] Yeah, and that’s exactly right. But importantly, the first thing we’re doing is we’re using data to really understand what the credit risk is. And with that data then we can start thinking about what the, what the likely hedges are for the macro risk of the portfolio. 00:24:03 [Speaker Changed] So, so let’s talk about that. What is your approach to data? How do you institutionalize data management and, and how do you leverage the idea of, hey, we know a lot about this, here’s how we monetize it. People 00:24:17 [Speaker Changed] Talk a lot about the importance of data, but it’s usually in a different context. It’s usually for these quantitative strategies or quantitative hedge funds, right? For us, data is the lifeblood of, of specialty finance. So for us, we use data to solidify our assumptions. What we do with the data is we forecast the performance of assets by matching statistically significant characteristics. So back to the, the red cap examples, we’ve looked at hundreds and hundreds of these types of, of investments and we’ve taken all the data from those transactions. Now, when we look at a new transaction, a bank comes to us and says, I need to produce more regulatory capital on this hundred to 10,000 loans. We can take the characteristics of their portfolio today and out of sample, price them through history that helps us price the credit right. And understand what risk we’re taking on. 00:25:11 [Speaker Changed] So this is really fairly sophisticated financial engineering that is, it sounds like it’s a way for the banks to meet the SEC requirements, the increased post-financial crisis, financial reserves that they’re required to have, but not have to sell off big parts of the business and not have to sell off the relationships you described. 00:25:33 [Speaker Changed] I think that’s exactly right. And, and even when you get to what happened earlier in 2023 with Credit Suisse, that again put pressure on the banks to really, to really think about how they’re gonna hedge their credit risk. This is their hedge to credit risk. 00:25:48 [Speaker Changed] And then related to the way you guys work with data management, tell us a little bit about Magnetar Labs. 00:25:54 [Speaker Changed] Yeah, Magnetar Labs has been a great initiative for us. It’s really the institutionalization of our data. So we’re trying to produce infrastructure where we can ingest large data sets very quickly and not only use them in specific business lines, but use it across business lines. So I’ll give you a few examples. In our merger arbitrage business, we’ve tracked every detail and every characteristic of every merger and acquisition for the last 20 plus years. Wow. And even our recent restaurant finance business, we have itemized bills of every customer. Right. This is really useful data. So here, here’s an example from just a couple of months ago, we were looking at an auto loan transaction and the servicer tried to overload information. So they gave us eight 80 million line items of information 00:26:43 [Speaker Changed] On purpose, or 00:26:45 [Speaker Changed] I don’t know if it’s on purpose or not, but 80 million line items, a hundred different files, you know, 40 gigabytes of memory. So that’s far too much for like Excel to handle or any local Python, right? Right. Or overload or any one machine. But our Magnetar Labs team was able to take that in, in just minutes. Right now we can analyze the data and then look at, look at the attributes to that investment and see if it fits in our portfolio. We, we actually made the, made the investment. 00:27:14 [Speaker Changed] So, so what sort of hardware are you using? Is this all cloud-based? Is this a I I think of like, oh, sounds like a mainframe. I don’t even know if mainframes still exist anymore. 00:27:22 [Speaker Changed] Yeah, everything’s gone to the cloud now, right. I mean, it, it, it is pretty amazing. And 00:27:26 [Speaker Changed] That sort of distributed computer has no ceiling in the real, essentially no capacity. Correct. Infinite capacity. Correct. Huh. Really, really interesting. So let’s talk a little bit about the status quo. I, I read something where you said it was important to not maintain the status quo. Explain what that means. 00:27:46 [Speaker Changed] We’re not efficient market theorists, but we certainly believe that in the medium to long term, the markets are efficient, 00:27:53 [Speaker Changed] Kind of mostly eventually efficient. 00:27:55 [Speaker Changed] Eventually efficient, right? So we know that what works today may not work several years forward. Right. And so I’ll give you the converts example. Like, like you mentioned, I’ve been in the convert market for 30 years now, and sometimes converts are very cheap, you know, convertible bond arbitrage. And when they are, we have a lot of our portfolio in it. But today we have less than 1% of our portfolio in the asset class. And it’s just because it, it’s not cheap or not cheap enough versus what we can invest in. 00:28:25 [Speaker Changed] And is the expectation is that whatever inefficiencies were there, the market’s figured it out, it’s arbitraged away and the odds are against that ever becoming really cheap. Or might it, you know, become a trade again. 00:28:38 [Speaker Changed] Yeah. Some of it’s supply demand, right. And driven. But I think the most important part is we’re not hiring desks of people to stay in an asset class. That’s the status quo. That’s not what we’re looking for. We’re looking to aggressively rotate our capital to get to the optimal portfolio to get to the best risk adjusted return. 00:28:58 [Speaker Changed] So does this mean you’re exploring new business areas and strategies? Or is it just that you are rolling through the various other opportunities that, that you’ve fished in before? Yeah, 00:29:09 [Speaker Changed] It’s a good question. We maintain our diligence on other strategies, but we always have a strong research and development pipeline. 00:29:16 [Speaker Changed] Huh. Real, really interesting. So let’s talk about some of the things that, that are going on today. Artificial intelligence, AI dominated the the 2023 narrative. You made investments in Core Weave, a specialized cloud provider. Tell us a little bit about what you’re doing in that space. Is that related at all to what we talked about earlier with Magnetar Labs? 00:29:40 [Speaker Changed] Yeah. Core Weave is, is such an exciting story for magnetar. I can’t say enough good things about it. Sometimes the stars just align. You have the right time, the right product, the right team. And for the listeners that don’t know who Core Weave is, core is the largest owner of GPUs outside of the hyperscalers, like Google or Amazon Web services. They sell as high performance compute, which is sort of the picks and shovels to enable ai. So if you are a new, you know, AI lab, you need somebody like Core Weave to host that specialized cloud for you. Now we were the first institutional investor, so all the way back in, in 2020. And at that point, Corey, we’ve had just $26 million of top line revenue. And I think we were the first firm to really get comfortable lending against that asset called high performance compute, right? So they’ve had explosive growth, but what we haven’t been is just a capital provider. We’ve really been a partner to them within the business. 00:30:41 [Speaker Changed] Are you guys also a customer of theirs? 00:30:43 [Speaker Changed] We’re a customer of theirs in Magnetar Labs. Just like, just like you, you intimated before. And so we use them for Magnetar Labs, but we have Ernie Rogers, our COO sits on their board. We have daily interaction between our management teams. This company is growing so quickly, right? They need all, all the help they can get around them. And what we try to help with is mostly balance sheet management. 00:31:06 [Speaker Changed] So for a firm that specializes in, in credit, this almost sounds like a venture investment. 00:31:12 [Speaker Changed] There are parts of this that, that are ish. But what’s interesting is the underlying asset, this high performance compute is something that we can really scale with. And so I think that’s been the innovation in the marketplace. So you mentioned in 2023 on the venture side, we actually led around for them a $400 million series B round, but we also led a $2.3 billion financing on their high performance compute assets. 00:31:38 [Speaker Changed] So it’s capital and credit, it’s equity and credit. 00:31:41 [Speaker Changed] It’s equity and credit. And it’s a true partnership between the firms. You know, towards the end of last year, you know, in December the firm got valued at $7 billion. Wow. And to me, it’s just a start. This company, just the you, you’re just gonna see it continue to grow over time. Well, let 00:31:59 [Speaker Changed] Me know about the C round when that comes up for sure. What, what do you guys, in all seriousness, what are you guys looking for? What sort of characteristics are you looking for when a company like this comes along? You mentioned idiosyncratic types of investment. This sounds very specific and not all that usual. 00:32:17 [Speaker Changed] It is, it’s very specific, but we always start with the assets. So it’s assets, it’s data, and it’s structure, right? So first on the assets, we’re usually focused on specialty finance because the assets drive the performance of the company, right? The next thing we need is data. We can’t predict the future. So what we’re trying to do is use historical data to predict how an asset reacts in different states of the economy. And finally we use structure around that to protect the downside of the investment itself. 00:32:47 [Speaker Changed] Huh. Sound sounds really intriguing. So, so as long as we’re talking about 2023, we saw a lot of bank failures last year. We saw, you know, the response to a, a rapid increase in rates. You had a front row seat to what transpired, share what that was like, and and what did you guys see in, in the space? Tell us about the opportunities that came up from those events. 00:33:10 [Speaker Changed] Those were stressful events for the entire community. You know, for Silicon Valley Bank in particular, I remember it was Friday night and the question of moral hazard appeared, appeared immediately, right? So it’s California based, right? It was a lot of venture funds that had accounts there. And the question started coming out, a is there cash safe? Will they be able to access it? If so, when, you know, will they be able to make payroll? A lot of these smaller companies were very worried about payroll. And in California specifically, will the board of directors be liable if they couldn’t make payroll? And then they started rolling it out to, what about all the similar situated banks? So we all know that by Monday morning the contagion risk was too high and, and the government did step in, but the opportunities really arose from that. And so the first opportunity, which is very similar to doing regulatory capital investments with large banks is being a risk capital provider to the small and regional banks. And I think we’re gonna see more and more of this over time. It’s credit firms partnering with banks where we have access to all the diligence around their customers. And together we can jointly underwrite and make loans. 00:34:20 [Speaker Changed] You, you mentioned moral hazard. Where was the moral hazard with Silicon Valley Bank? Was it the equity investors in the bank or was it the customers with, you know, way over the FDIC limits and if there isn’t a quarter million or half a million dollar ceiling, did, did the Federal Reserve essentially say, okay, FDIC insurance is now unlimited? Is that the moral hazard? We 00:34:45 [Speaker Changed] Found that to be the moral hazard. Who’s the governor of how much risk a bank can take? So the federal government came out and they said, you have a $250,000 limit, but people were putting in a hundred million dollars into the account, right? Because they got 25 basis points more of interest, right? So how do, how do you actually control that? That’s the moral hazard we saw. Now, I think at the end of the day, it was just too big of a risk to the economy. The 00:35:08 [Speaker Changed] The contagion risk was cont hey, there’s a moral hazard question to the depositors, but rather than stand on ceremony, let’s stop this before it spreads. 00:35:18 [Speaker Changed] That’s exactly right. 00:35:19 [Speaker Changed] Huh? That, that’s really, that’s really kind of intriguing. What else has been the result of this rapid spike in interest rates? What do you see in the private credit world that hey, blame the fed, but here, here’s what’s gone off the rails. 00:35:34 [Speaker Changed] Yeah. For credit investors, everyone thinks about fixed rate risk, right? But that’s easily hedgeable and that’s a choice that that credit investors make. So for people like magnetar, we swap everything back to floating rate. We don’t have any edge on, on a macro risk like that. But the second order effect is much, much more difficult. And that’s the business impact of rates changing. So when you, when we think about businesses, we think about do profit margins change as rates go up or down? Do originations change? What about the refinancing of their debt? I think those are the things that are gonna keep lawyers and restructuring advisors very busy for the foreseeable future. So, 00:36:13 [Speaker Changed] So given this current environment where first rates went up further and faster than it seemed like the consensus amongst analysts was they stayed higher longer than people expected. There’s no recession. People have been talking about that for two years. And the expected rate cuts, I guess, tied to that recession haven’t showed up yet. We were talking about March now we’re talking about May even June of 2024. How does this affect how you think about putting portfolios together, constructing portfolios? And I am very aware that you guys aren’t macro tourists, you don’t play that game. But given the volatility and the various probabilistic outcomes, how, how does that impact your thinking? 00:36:59 [Speaker Changed] Yeah, it’s a very good question. And, and for us, we think a lot about the affordability factor. So I’ll give, I’ll give you two examples at both extremes. So we have a partial ownership in an auto loan business in Ireland. And so when rates are at zero, we’re loaning to consumers, it’s somewhere between five and a five and 6%, and we’re gaining market share rapidly. All of a sudden risk-free rate goes to 5%. That equivalent loan, we’re gonna have to charge consumers 11%. It’s just, it’s simply unaffordable, right? 00:37:30 [Speaker Changed] Different calculus for 00:37:30 [Speaker Changed] Sure. Different calculus. And so we have a decision to make, we can stay at 11%, keep the same margin, but reduce our origination, or we can take our margin down and try to keep market share. Either way, the business is worth a lot less, right? That has a lot of affordability factor effect to it. On the other end of the stream is our music royalties business. So in music royalties, you know, the simplification is you get some small part of worldwide streaming revenue, right? So take Spotify, Spotify raised rates recently and they had no customer churn. So some percentage of that rate went directly to the royalty holder. There was very little affordability factor. So we’re veering away from things that the business impact on affordability is high and we’re investing in things where, where it’s lower private 00:38:20 [Speaker Changed] Credit seems to be getting a lot of attention these days. Why? Why is that? 00:38:24 [Speaker Changed] If you would’ve asked me going into the global financial crisis, I know we keep going back 15 years now, I would’ve said the banks had it all right. They controlled origination of all of the different asset classes, especially finance and lending. So whether it was credit cards or mortgages or loans to, to their customers. But after the finance, after, as the financial crisis happened, there was a spotlight flashed on their balance sheet. They just had too much risk. And so the regulators came into reduce that risk. So the simple question is that private credit came in and stepped in the shoes of banks and really took market share. But this scale was much larger than anyone could have anticipated. But for me, what what I think about a lot is the, the more profound effect is the talent transfer, the talent transfer from the banks that went to the credit providers, the private credit providers that set the stage for, for this mass, you know, growth in private credit. 00:39:21 [Speaker Changed] So let’s talk about talent a little bit. One of the things I know your firm is proud of is more than half of your workforce has been with the firm for five years or longer. So first I’m assuming that’s not typical in your space. And second, I have to ask, what contributed to that sort of retention? 00:39:41 [Speaker Changed] Yeah, I’m very proud and I think what we’re very proud of that fact, and I think it is very atypical, but the credit really goes to so many people at, at Magnetar. You know, we’re a global firm, but I think we’re the Midwestern ethos. So it’s work hard, stay humble, be a good teammate, be a good person. And I think if we can consistently demonstrate those qualities, we’ll attract people who value them. And it’s, it’s a virtuous circle. And what’s incredible about the firm is when we get, when we’re focused, how much we can get done. So I’ll give you a simple example. We started a summer internship program several years ago, and we started with two interns and we built a program around them. And this last summer we had 60 interns for a 200 person organization. You know, it, it’s pretty humbling when you think about all the exceptional people around Magor and how much we can get done. 00:40:34 [Speaker Changed] So one of the things we’ve been hearing a lot about as big companies try and get their staff back in the office five days a week is corporate culture. Tell us a little bit about what is differentiating magnetar from a cultural perspective. You know, starting with Evanston, Illinois, not a lot of private credit shops in the neighborhood. 00:41:00 [Speaker Changed] That’s true. You know, first principles, it’s always about integrity, but I think for most tenured firms, integrity is, is, is high. But for us, the North star is always creating the best portfolios to deliver to our clients. And we really have two foundational points there. One is we run a very flat organization and secondly we thought a lot about alignment. So on the flat organization, it doesn’t matter who has the right answer, we know we’re trying to reach the right answer. So I’ll, I’ll take our investment committees as an example. We, we have biweekly investment committees and it’s not the top two or three people that sit on the investment committee. We have 120 people in that meeting, you know, every two weeks. Wow. And we really want people to voice opinions, right? And that’s how we’re gonna get to the best answer. You know, we talk about it internally a lot. 00:41:51 We’re trying to manage investments by consensus. And so especially in private credit, if someone doesn’t like something, we can change it. We can change, you know, what a structure looks like. And so we’ll get to something that where we actually get consensus, you know, on the alignment point, it really goes back to not giving individual capital allocations, but incentivizing people to create the best portfolio. So you asked about retention before. I think the reason why people stay at Magnetar long term is because they believe in these philosophies and they believe if we get to the right portfolio that everyone wins in the long term. 00:42:28 [Speaker Changed] Huh, really very interesting. So we only have you for, for a limited amount of time. Let me jump to my favorite questions that I ask all of my guests. Starting with tell us what you’ve been streaming these days. What’s been keeping you entertained either video or audio, Netflix or, or podcasts? What, what’s keeping you entertained? 00:42:47 [Speaker Changed] Yeah, I think this will be different than, than most of the people that sit on this show, but for me it’s been flow sports 00:42:53 [Speaker Changed] Flow sports 00:42:54 [Speaker Changed] Flow sports. So I have, my older son is in between high school and college right now, and he’s playing hockey and juniors for a year. And so all of his games are on flow sports. So Christie and my son, Jake and I sit around and, and watch every game together. What, what 00:43:10 [Speaker Changed] Does he, what position does he play? 00:43:12 [Speaker Changed] He plays defense, huh? It’s been a lot of fun. 00:43:14 [Speaker Changed] Flow sports. Is that an like a YouTube channel? An internet channel? How do you find that? Yeah, 00:43:19 [Speaker Changed] It, we pull it up on Apple TV or on our phone and, and yeah, it’s, it’s been great for, for a lot of youth sports. 00:43:25 [Speaker Changed] Huh, interesting. And then 00:43:27 [Speaker Changed] On the podcast side, this podcast aside, obviously 00:43:30 [Speaker Changed] You never have to bring this podcast up of course. 00:43:32 [Speaker Changed] So I listened to one by Larry Bernstein, what happens next? And he’s been doing it since, since COVID and it’s sort of six minutes of, you know, really relevant topics that come out every weekend. 00:43:45 [Speaker Changed] What happens next? I’m going to check that out. I love the idea of these having done long form for a decade. I love the idea of 5, 10, 12 minutes and you’re done. Yeah. And there’s something very appealing about that. Let’s talk about your mentors who helped to shape your career. 00:44:02 [Speaker Changed] You know, it always starts with your parents and then, you know, football coaches like, like Larry Kimba, but I mentioned Dave Bunning before. I think most people would say, you know, I’m a product of, of his teachings over time. 00:44:13 [Speaker Changed] Huh. Interesting. How about books? What are some of your favorites? What are you reading right now? David Snyderman: You know, I always like Michael Lewis books. We, we had him at, at one of our offsites a few years ago. You remember, remember this book is one of my favorites, you know, memos from the Chairman by Alan Greenberg. Sure. That was a great book. Barry Ritholtz: Ace Greenberg right? A Greenberg from Bear Stearns Greenberg. David Snyderman: Correct. And what was so interesting about his book is, you know, he’s running the firm, but he’s really in the minutia of every detail. It, it was very interesting in oncluding the paperclips, recycling, the paper clips, Including every Expense. Barry Ritholtz: So let me interrupt you one second. I was at a lunch just with three people at a table, and he came in and sat like a table or two over and the whole meal, I mean, this was later in his life, the whole meal was a parade of people coming in to genuflect in front of him and just pay their respects. It was like the pope was having lunch. I don’t know how well you know of him and Yeah, and the book certainly is, interesting but you don’t get a sense of how other people perceived him, but fascinating guy. David Snyderman: I met him when he was at Bear Stearns and I felt the same way. It, he is a, he was a special person. Barry Ritholtz: What other books are you reading? Anything else you wanna mention? David Snyderman: So my, my colleague and the head of our London office, Alan Shaffrin, recommended the book, the Missing Billionaires and the reason I just started, but the reason it’s interesting is it’s, it’s very focused on it asset allocation and mistakes in asset allocation and how much that can cost a portfolio over time. So it has a lot of parallels to the way we think about asset allocation at Magnetar. , Barry Ritholtz: Really interesting. Our final two questions. What sort of advice would you give a recent college grad interest in the career in either private credit, alts, fixed income, any of the areas you specialize in? David Snyderman: It’s, it’s what we think about for the firm. And I know what I, what I tell my kids would be it’s people and platform. You need to be around good integris people that are great mentors and the platform needs to be growing over time. So each seat should be more, more than the person in it. Barry Ritholtz: Interesting. And our final question, what do you know about the world of investing of credit, of risk management today that you wish you knew when you were first getting started 30 years or so ago? David Snyderman: Yeah, this may be an atypical answer, but I think about luck versus skill a lot more than I ever did before. If you make a decision today and don’t have an outcome for 10 years, you don’t really know if you were good at it or not. Right? Whether you won or lost. If you’re able to have a much faster feedback loop now you can really hone your skills and understand whether you’re, whether you’re making, you know, good decisions or bad decisions. And so I think for me, and as we look at people’s track records, we really try to think about how often do they get to make a, make the same decision and what’s the process around that decision and how different is it over time? Barry Ritholtz: Very interesting. I have a book for you, but I’m gonna bet you’ve already read it, Michael Maubboison’s book, “Separating Skill From Luck in Investing Business and Sports” it is right up your alley. David Snyderman: I have not. thank you. You, David Snyderman: He’s a fascinating author and its a really a fascinating book. I would bet you you would appreciate it. Barry Ritholtz: Excellent. Thank you David for being so generous with your time. We have been speaking with David Snyderman. He is the global head of alternative Credit and fixed income and managing partner at Magnetar, a $15 billion multi-strategy, multi-product, alternative investment management firm. If you enjoy this conversation, well check out any of the previous 500 or so we’ve had. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. Be sure and check out my new podcast at the Money 10 minutes each week with an expert discussing a topic that’s relevant to you and your money. I would be remiss if I did not thank the crack team that helps me put these conversations together each week. Sarah Livesey is my audio engineer. Atika Verun is my project manager. Anna Luke is my producer. Sean Russo is my head of research. Sage Bauman is our head of podcasts. I am Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio. ~~~ The post Transcript: David Snyderman, Magnetar Capital appeared first on The Big Picture......»»
MiB: David Snyderman, Magnetar Capital
This week, we speak with David Snyderman, global head of Magnetar Capital LLC’s alternative credit and fixed-income business. He also serves as chairman of Magnetar’s investment committee and as a member of its management committee. Snyderman, who joined Magnetar in 2005 shortly after its launch, was previously the head of global credit and… Read More The post MiB: David Snyderman, Magnetar Capital appeared first on The Big Picture. This week, we speak with David Snyderman, global head of Magnetar Capital LLC’s alternative credit and fixed-income business. He also serves as chairman of Magnetar’s investment committee and as a member of its management committee. Snyderman, who joined Magnetar in 2005 shortly after its launch, was previously the head of global credit and a senior managing director at Citadel Investment Group, and he served as a member of the management, portfolio management and investment/risk committees. Prior to joining Citadel, he focused on convertible securities, merger arbitrage and special situations portfolios at Koch Industries Inc. We discuss how the firm was built to identify overlooked opportunities. Finding “idioosyncratic” bets leads to an asymmetric risk profile that reduces downside while maintaining upside. Snyderman explains how Magnetar’s approach was to both measure and manage risk, and operated mostly hedged, avoiding macro bets. A list of his favorite books is here; A transcript of our conversation is available here Tuesday. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. Be sure to check out our Masters in Business next week with Sean Dobson, Amherst Group CEO & CIO. The firm focuses on mortgage and securitized products, as well as a real estate investment, management and operating platform. They manage $16.8 billion in mortgage-backed securities (MBS), Commercial Real Estate CRE), and single-family rentals. David Snyderman’s favorite books The Missing Billionaires: A Guide to Better Financial Decisions by Victor Haghani and James White Memos from the Chairman by Alan Greenberg Books Barry mentioned The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael Mauboussin The post MiB: David Snyderman, Magnetar Capital appeared first on The Big Picture......»»
Making Complicated Ideas Simple
The one and only Howard Marks… The post Making Complicated Ideas Simple appeared first on The Big Picture. The one and only Howard Marks… The post Making Complicated Ideas Simple appeared first on The Big Picture......»»
U.S. Technology Adoption, 1900-2021
A century of tech adoption in less than 30 seconds: Blackrock: “The key to harnessing mega forces and their potential is to first identify the catalysts that can supercharge them and how they interact with each other. Rapid adoption of technology can change the path of transitions. Markets can underappreciate the speed… Read More The post U.S. Technology Adoption, 1900-2021 appeared first on The Big Picture. A century of tech adoption in less than 30 seconds: Blackrock: “The key to harnessing mega forces and their potential is to first identify the catalysts that can supercharge them and how they interact with each other. Rapid adoption of technology can change the path of transitions. Markets can underappreciate the speed of transitions, creating investment opportunities. Conversely, exuberance over their potential can also cause temporary price spikes. AI has been turbocharged by the roll-out of ChatGPT and other consumer-friendly tools. We think markets are still assessing the potential effects as AI applications could disrupt entire industries and bring greater cybersecurity risks across the board.” Good stuff! Source: Mega forces: An investment opportunity BlackRock Investment Institute, January 2024 The post U.S. Technology Adoption, 1900-2021 appeared first on The Big Picture......»»
Transcript: Andrew Slimmon, Morgan Stanley Investment Management
Transcript: The transcript from this week’s MiB: Andrew Slimmon, Morgan Stanley Investment Management, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is… Read More The post Transcript: Andrew Slimmon, Morgan Stanley Investment Management appeared first on The Big Picture. Transcript: The transcript from this week’s MiB: Andrew Slimmon, Morgan Stanley Investment Management, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry Ritholtz on Bloomberg Radio. 00:00:09 [Barry Ritholtz] This week on the podcast, I have another extra special guest. Andrew Lemons has pretty much done everything on the wealth management side of the business, starting at Brown Brothers Harriman before going on to Morgan Stanley, where he started out as a client facing wealth manager before moving into Portfolio Manager and eventually creating the Applied equity advisors team that uses a combination of quantitative and fundamental and behavioral thinking to create portfolios and funds that are sturdy and can survive any sort of change in investor sentiment. They look at geography, they look at cap size, they look at style, and they look at sector and try and keep a portfolio leaning towards what’s working best. These tend to be concentrated portfolios. The US versions are 30 to 60 holdings where the overseas versions are just 20 holdings. I, I found this conversation to be fascinating. There are a few people in asset management that have seen the world of investing from both the client’s perspective and a client facing advisor side to a PM and then a broader asset manager than Andrew has. He really comes with a wealth of knowledge, and he’s been with Morgan Stanley since 1991. That sort of tenure at a single firm is increasingly rare, rare these days. I, I found this discussion to be absolutely fascinating and I think you will also, with no further ado, Morgan Stanley’s, Andrew Slim. 00:02:01 [Andrew Slimmon] Thank you. It’s an honor to be here. 00:02:02 [Barry Ritholtz] Well, it’s a pleasure to have you. So let’s start at the beginning with your background. You get a BA from the University of Pennsylvania and an MBA from University of Chicago. Was finance always the plan? 00:02:15 [Andrew Slimmon] I think being in a competitive industry was all the plan. I played tennis competitively in juniors and went on and played in college and, and I always liked the, you know, you either won or lost and what I always liked about this industry, it was all about, you know, did you win or lose? There wasn’t a lot of gray area, and I think that’s what I do love about the stock market and investing in general, because there’s a scorecard and you can’t, there’s no room on the scorecard for the editorials. 00:02:41 [Barry Ritholtz]] No, no points for style or form. Exactly, exactly. It’s just did you win or lose? Exactly. So, so where did you begin? What was your first role within the industry? 00:02:48 [Andrew Slimmon] Sure. So, well, my first role was opening the, the mail at a brokerage firm in Hartford, Connecticut. But I started my career at Brown Brothers Herriman right here in, in New York, in a training program, which was great because they had commercial banking, they had capital markets, and they had the investment management side of the business. And that’s what getting exposure, all those led me to believe, gee, I really am interested in the stock market and how it works and investing in general. 00:03:16 [Barry Ritholtz] So what led you to Morgan Stanley? How’d you find your way to right to 00:03:21 [Andrew Slimmon] Ms? So I, yeah, I was a research analyst at, at Brown Brothers, and I was covering, you know, in healthcare stocks. I, I realized that there must be something more to investing than just what was going at the company level, because I noticed that the things that were moving my stocks on a day-to-day basis, weren’t just what was going at the company level. And University of Chicago where I went, got my MBA was obviously very focused on more the quantitative areas of investing. And I took Fama and French and so forth and Miller and all those that, that taught me that what drives a stock price is more than just the, you know, the company level. And so that’s, that was really how it, it rounded my knowledge of kind of investing the first steps and then coming out of, of business school. It was 91 and it was a recession. And I, I, I had met my wife in business school and she got a job at Kid or Peabody, if you remember that, investment banking in Chicago. And I couldn’t find kind of a buy side opportunity. And Morgan Stanley had a department called Prior Wealth Management that covered wealthy individuals and small institutions in Chicago. And I needed a job and I had a lot of student debt. So I said, Hey, as opposed to going the traditional buy side route, I’ll start in this area covering clients and investing for them. 00:04:49 [Speaker Changed] So 91, kind of a mild recession, mild and really halfway through what was a rampaging bull market. What was it like in the 1990s in New York in finance? 00:05:04 [Speaker Changed] Well, I mean, the thing that was amazing is we would have clients in the late nineties, they would come to us and they’d say, Andrew, I’m not greedy. I just want 15, 20% returns a year. 00:05:15 [Speaker Changed] Right. 00:05:15 [Speaker Changed] And no risk with, 00:05:16 [Speaker Changed] With limited risk risk, limited risk. Right. I knew you’re gonna go there. 00:05:19 [Speaker Changed] And, and that is what was so fascinating about today Yeah. Is today people say to me, Andrew, why would I invest in equities when I can get 5% in the money market? And what a difference in a mindset, which tells you where we are. In the late nineties, we had just gone through a roaring bull market optimism was just so rampant. And the worst year in the business I can remember was 1999, because as an investor covering clients, I was caught between doing the right thing for them, which was avoid these ridiculously priced stocks. Right. Or get on the train because the money is pouring through. And then it all came to an end in 2000, 2001. And I took a step back and said, thank God I never, you know, I I I just didn’t buy in the way some people did, and therefore save people a lot of money. It was a tremendously good learning experience for me to stay true to your values of investing. Ultimately, they work out. You, 00:06:16 [Speaker Changed] You are identifying something that I, I’m so fascinated by. The problem we run into with surveys or even the risk tolerance questionnaires is all you find out is, Hey, what has the market done for the past six months? If the market’s been good, Hey, every I, of course I want more risk. I’m, I’m, I’m more than comfortable with it. And if the market got shellacked, no, no, no. I, I can’t, I can’t suffer any more drawdowns. It’s just pure psychology. 00:06:42 [Speaker Changed] And, and I would go one step further. You know this, you’re in the business, but when you first meet someone, you never know the ones that are going to be truly risk averse or truly can withstand the volatility. And ones that can, some people say, don’t worry, I’m not worried about the drawdowns. And the minute it happens, they’re on the phone to you. And some people, I told you I wasn’t worried and I didn’t call you. Right. And you can never know. Just the first time you meet people who that’s going to be it, it’s 00:07:08 [Speaker Changed] A challenge figuring out who people really are. Not, not easy. So you started Morgan Stanley in 1991. You’re in that, that’s a long time ago. Yeah. You start on the private wealth side. What led you to becoming a portfolio manager with Morgan Stanley Wealth strategy? 00:07:24 [Speaker Changed] So if you think about my career, I learned to be a fundamental analyst. I went to University of Chicago and learned that, oh, there’s quantitative factors that drive a stock price beyond kind of what’s going on at the company level. The third part of my experience was being in prior wealth management, clients wanna believe they all buy low and sell high, but bear, you know, that doesn’t, isn’t the case. 00:07:45 [Speaker Changed] Somebody does accidentally someone randomly top ticks and bottom ticks to market. But nobody does that consistently. 00:07:51 [Speaker Changed] Exactly. And here’s a great example of what, I mean, if you think about the years 2020, in 2021, growth stocks took off. Right? But in 2022 they got crushed. Do you think more money went into growth managers and funds in 2021 or the end of 2022 after they got crushed? 00:08:10 [Speaker Changed] The flows are always a year behind where the market is. Exactly 00:08:13 [Speaker Changed] Right. So, so what I People 00:08:15 [Speaker Changed] Are backwards looking. 00:08:16 [Speaker Changed] What? Well, and that’s because there’s something called the tear sheet. If you were my client, I went to you and said, Barry, I think you should invest in emerging markets because look how terribly it’s done in the last five years. And I can you the tear sheet, you’re gonna go away. 00:08:28 [Speaker Changed] Everybody hates it, 00:08:29 [Speaker Changed] Right? Hate it. So the problem with this business is a stock price does not care what happened in the past. It only cares about what’s happened in the future. But as humans, we all suffer from recency buys. So what I observed in the nineties, it’s a long-winded answer. Your question is no, it’s 00:08:45 [Speaker Changed] An 00:08:46 [Speaker Changed] Interesting, what I observed in the nineties as a coverage offer, you can’t get clients to actually buy what’s out of favor. Right. And the flaw in the whole growth value us international is people frame, oh, maybe I should buy more growth because it’s working well, except it gets too expensive. So the reason I left being in wealth management, I was convinced that I could start strategies using more quantitative, but give us flexibility. So if we could start core strategies so that if growth got too expensive, we could tilt away from growth, or if Europe wasn’t working, we could tilt away from Europe. That gave us more flexibility as an active manager versus saying, I’m only a growth manager. And then I’m always trying to justify why you should buy growth. Or if I’m a value manager, all always justifying why I buy value. Remember, by 1999, a half of value managers had gone outta business in the last three years that just before they took off. That’s 00:09:48 [Speaker Changed] Unbelievable. I, I know folks who run short hedge funds and they say they could always tell when we’re due for a major correction. ’cause that’s when all of their redemptions and outflows it, it’s hit, hit a crescendo. 00:10:01 [Speaker Changed] And so that’s the problem with the dedicated style is you’re always fighting human behavior just at the juncture with which you should be investing. They’re selling, they’re selling their stocks. So, 00:10:14 [Speaker Changed] So let me ask you the flip side of the question. If you can’t get people, or if it’s really challenging to make people comfortable with buying outta favor styles or companies, can you get them to sell the companies that are in favor and have had, you know, an exorbitant runup and are really pricey? Or, or is that just the other side of the same coin? It’s 00:10:36 [Speaker Changed] The other side of the same coin, but, but I think what complicates, is it taxes? Sure. Because people don’t want to sell for taxes. And General Electric was a very important experience in my life in a, you know, back in the nineties, which was, it became the number one stock. Everyone loved it. And, and then, you know, it went through a can’t grow as quickly anymore. So the issue that I see in the industry is stocks never survive as the the number one company. And so eventually they, they decline and people don’t want to take money off the table when they’re the number one or tops because they have big gains. And then ultimately people sold a lot of General Electric with a lot less of a gain. So the trick is, is to reduce the exposures over time. So with, if I’m a core manager and I know that growth is expensive relative to its history versus value, we’ll tilt the portfolio. But we won’t go all into value, all into growth because timing these things is very, very tricky. 00:11:42 [Speaker Changed] So you’ve been with Morgan Stanley since 19 91, 3 decades with the same firm. Pretty rare these days. What makes the firm so special? What’s kept you there for all this time? 00:11:54 [Speaker Changed] Well, you have to remember that when I started in 9 19 91, wealth management was a, was a relatively small part of the, of the firm. And I give James Gorman tremendous credit. He really grew that area because of the stability of the cash flow. I ge I’m a pretty stable cash flow. And then when I progressed to and Morgan Stanley investment management, it was the same concept, which was we value the multiple on stable cash flows is higher than on capital market flows. And so that’s, I’ve kind of followed the progression of how Morgan Stanley’s changed and that’s been a great opportunity. And then I look and say, well, I was able to go from wealth management into the asset management because the firm grew in that era. So it’s a, it’s been a tremendously great firm to be with, but I’ve, you know, my career has changed over time as a firm’s changed over time. Sure. 00:12:47 [Speaker Changed] I, I had John Mack on about a year ago and he described that exact same thing, the appeal of, of wealth management. And part of the reason, what was it, Dean Witter, the big acquisition that was done was, hey, this allows us to suffer the ups and downs in the other side of the business, which has potential for great rewards but no stability. Right. Versus ready, steady, moderate gains from From the wealth management 00:13:12 [Speaker Changed] Side. Exactly. We bought Smith Barney, so on the wealth manage, that was another big one. Right. So then over the asset management side, there’s Eaton Vance E-Trade Wealth Management and with Eaton Vance came Parametric and Calvert. So the firm has grown in the areas that I’ve grown personally. So it’s been a great, great marriage for a long time. 00:13:30 [Speaker Changed] So your experience with General Electric? I had a similar experience with EMC and with Cisco late nineties trying to get people to recognize, hey, this has been a fantastic run, but the growth engine isn’t there. The trend has been broken. Don’t be afraid to ring the bell. And I’m not an active trader. Yeah. I’m a long-term holder. Getting people to sell their winners is not easy 00:13:54 [Speaker Changed] To do, is very, very hard. But, but also when stocks get very, very big, companies get very, very big. It just gets tougher to grow. In my experience, and this has nothing to do, GE just in general is when companies get big, usually the government starts looking into their business ’cause they might dominate too much. And so it’s a combination of why over time, and I know this is hard to believe given the last couple years, why the equal weighted s and p does actually outperform the cap weighted s and p because companies, mid-cap companies that are moving up, it’s easier to grow. That 00:14:30 [Speaker Changed] Hasn’t, what has it been 25 years since the Microsoft antitrust 00:14:34 [Speaker Changed] Boy? And that’s, that’s 00:14:35 [Speaker Changed] That’s that’s amazing. How often are equal weight s and p outperforming cap 00:14:40 [Speaker Changed] Weighted? It outperforms about half the time. It certainly had, I mean think about last year and through October, the cap weighted had outperformed the equated by 1100 base points. 00:14:50 [Speaker Changed] Wow. That’s a lot. 00:14:51 [Speaker Changed] But the thing that’s fascinating about this, Barry, and, and again, you know this is that it’s always the first year off of bear market, low investors sell. So retail flows were negative from the low of October 22 until for a year. And that’s until 00:15:06 [Speaker Changed] November 23. Exactly. 00:15:08 [Speaker Changed] But if you go back to 2020, March of 2020 flows were negative until February of 21. So it always takes about a year, 00:15:17 [Speaker Changed] February of 20. That’s amazing. ’cause from the lows in March percent, it was a huge set 00:15:22 [Speaker Changed] Of gains and net flows from mutual funds. ETFs were net they’re always negative the first year because of that rear view mirror recency bias. The reason why that’s relevant, Barry, is because when investors finally said, I can’t, I shouldn’t sell anymore, I should buy, they’re not gonna buy what’s already worked. They’re looking for other things. And that’s when the equated really started out before. Huh, 00:15:42 [Speaker Changed] Really interesting. So let’s talk a little bit about your concept of applied investing. What does that mean? What, what does applied investing involve? 00:15:53 [Speaker Changed] Okay, so there’s the theoretical story about it and then there’s the practical story. And I’m sure you’ll get a kick out of the practical, but the theoretical is that I don’t believe that a stock price return comes purely from what’s going on. Fundamentally, you have to decide should I own growth value, large cap, mid cap us versus non-US any stocks return about two thirds of return in any one year can be defined by those. So we have to get that right first. And that’s the quantitative size. So we use factor models to say, Hey, should we own growth stocks or value stocks? And so we tilt our portfolios quantitatively based on which of those factors are sending a signal that they’ll work in the future. 00:16:36 [Speaker Changed] So, so let me just make sure I understand this. Geography size, sector and style style are the four metrics exactly you’re looking at and trying to tilt accordingly into what you expect to be working and away from. 00:16:50 [Speaker Changed] Exactly. And the goal of that is to keep people in the game flip side is, you know, things are out of favor. They can stay out of favor. The problem in this business is styles and investing can stay out of favor longer than the client’s patient’s duration. 00:17:06 [Speaker Changed] Ju just look at value in the 2010s, right? I mean if you were not leaning into growth, you were left way behind. 00:17:13 [Speaker Changed] Exactly. And what I observed from my time being advisor is at the end of the day, clients don’t really care whether they own growth or value. They don’t care whether they own European US, they want to make money and they don’t want ’em go backwards. And if all you keep saying is yes, but you know, my value manager has outperformed the value index. And they’re like, yeah, but the s and p is going through the roof. Right? So you have to have some flexibility in your approach. So I wanted to start a group that at the core would use those quantitative metrics, but pure quantitative takes out kind of the fundamentals of investing because a certain portion of a stock’s return comes from what’s going at the company level. And the other thing is, if all I did was focus on the quantitative, you’d end up owning 300 securities. So 00:18:01 [Speaker Changed] Let’s, let’s 00:18:02 [Speaker Changed] Talk about SA and an SMA can’t do that or you don’t drive enough active share. 00:18:07 [Speaker Changed] MA is separately managed, managed, managed account account. Let, let’s talk about active share because your portfolios are fairly concentrated. The US core portfolio is 30 to 60 companies. That’s considered a modest holding, a concentrated holding. Tell us about the thinking behind that concentration. 00:18:28 [Speaker Changed] So it’s funny, going back to that first job at Brown Brothers, you know, at, in the time in the eighties, no one knew about passive investing. But I observed that, you know, they’d have these portfolios and they’d have kind of two or three stocks in every sector. So you’d end up with, you know, a hundred or 150 stocks and you know, they, it, not that they did poorly, but they never really, you know, it was really hard to drive a lot of active, you know, performance. 00:18:51 [Speaker Changed] Everything is one 2%. 00:18:52 [Speaker Changed] And at the time it wasn’t really, there wasn’t really passive investing. But then as, as time progressed, all these studies came out and said, well actually the most excess return in active management comes from managers that are very, very active. Right? And if you own a hundred, 150 stocks and you’re the benchmark is the s and p, you’re not active. So it was clear to me that we needed very concentrated portfolios but control the risk. And so that’s why we run these limited portfolios. The applied term is, so it gave some quantitative approach to what we do. But here’s the practical Barry, which is when the firm came to me and said, okay, you’re gonna become an asset management arm, you gotta come up with a name for your team. I knew that these firms show asset management companies alphabetically. 00:19:44 [Speaker Changed] So applied investing right 00:19:45 [Speaker Changed] There, I wasn’t gonna be Z applied. 00:19:48 [Speaker Changed] Right. 00:19:49 [Speaker Changed] I wanted to be at the top of 00:19:50 [Speaker Changed] The list. That’s very, that’s AAA exterminator always the first one. Exactly. To pull in the phone book. So let’s talk about two things you just mentioned. One is active share, but really what you’re implying are that a lot of these other funds with 200, 300 or more holdings, they’re all high fee closet indexers. What’s the value 00:20:10 [Speaker Changed] There? Right. And that’s why as an active manager, I have nothing against ETFs. I think it’s done great for the industry because shame on funds that own lots and lots of securities. You’re not doing a service to your investing. But at the end of the day, if I marginally underperform, not me, but in general, you know, it will take time to lose your assets. You know what’s right for the money management firm is not always what’s right for the, so the right thing is choose passive strategies, but there’s a place for active image, but it’s gotta be active 00:20:42 [Speaker Changed] Core and satellite. Exactly. You have a core of a passive index, but you’re surrounding it bingo with something that gives you a little opportunity for more upside. Exactly. Huh. Really, really interesting. So if the US holdings are 30 to 60 companies, the global portfolio is even more concentrated about 20 companies? 00:21:00 [Speaker Changed] Yeah, I mean, so, so taking a step back again, one of the, you know, remember I run mutual funds, but I start in the separate managed account business. So what it, what means is they would wealth manage would implement our portfolio for individuals by buying stock. And one of the things that I observed is that clients pull from the market faster than they pull from stocks. So in other words, when you’re worried about the market, if it’s about the market, some macro story, well do you wanna sell your Microsoft? Oh no, I like Microsoft, but I’m worried about the market. Okay, well owning individual securities is really powerful because it actually keeps people invested. 00:21:46 [Speaker Changed] There’s a brand name there that they relate to a 00:21:49 [Speaker Changed] Brand. Exactly. So people are more likely to pull from the market. So I believe in owning stocks, but the problem is, again, it goes back to, but if you own 200 stocks and they don’t have any wedded, so could we start a strategy? We started this oh eight where all the securities would be on one page. 00:22:04 [Speaker Changed] That’s amazing. So your global portfolio also has some international US companies. So in addition to things like LVMH and some other international stocks, you have Microsoft, you have Costco. Correct. What’s the thinking of putting those giant US companies in a global portfolio? 00:22:21 [Speaker Changed] It goes back to Barry, that concept, which is clients don’t care really where they make their money. And the problem with the, the benefit of global, a global strategies, I can own some US stocks and an international only I can’t own. And what happens if the US just so happens to do better than the rest of the world, then international doesn’t work as well. So it just gives us more flex. It’s that flexible flexibility to go where the opportunity set is. 00:22:51 [Speaker Changed] And to that point, your fund, the Morgan Stanley institutional global concentrated fund, which does have US stock trounce, the, the MSEI exactly X us, because the US has been outperforming international. That’s another style for 15. Since the financial crisis, the US has been crushing absolutely everyone else. 00:23:14 [Speaker Changed] But think about this way also, if I can own 20 stocks, okay, but they’re not all correlated to each other, right? So they’re, they have a lot of different themes. Like I really like this, the, the, the infrastructure stocks right now. But I also think there’s a place, as you said, Microsoft, but luxury brands only a few stocks, but have a different theme. Then I can control the risk in the portfolio. You, 00:23:38 [Speaker Changed] You’re diversified high act to share, but concentrated 00:23:41 [Speaker Changed] High act to share, but lower kind of risk. 00:23:44 [Speaker Changed] So when I look at the Morgan Stanley institutional US core, the description is we seek to outperform the benchmark regardless of which investment style, value, or growth is currently in favor. So your style agnostic, you want to just stay with what’s working. 00:24:02 [Speaker Changed] Exactly. And Philip Kim is the other portfolio manager. We’ve worked together 14 years. I started these quantitative models and then he really took it to the next level. And this was what has the likelihood of outperforming for the next 12 to 18 months from a style standpoint. That’s how we bias the portfolio. Things could get just too expensive, things get too cheap, but we need to see some migration in the opposite direction and then we buy us accordingly. We want to stay in the game. 00:24:29 [Speaker Changed] What about the Russell 3000 strategy? That’s not, it’s obviously more concentrated than the Russell, but it’s still a few hundred stocks. Tell us what goes into that thing. Well 00:24:39 [Speaker Changed] We noticed that our, just our quantitative factor model alone was doing well right beyond just adding the stock to buy. So we wanted to start a strategy that would add a little bit of excess return versus just buying an ETF that was just focused on that factor models. But we would diversify away the stock risk. 00:25:01 [Speaker Changed] Really intriguing. So let’s talk a little bit about Slimmons take, which is not only widely read at Morgan Stanley, it’s also pretty widely distributed on the street itself. Towards the end of 2023, you put out a piece, a few lessons from the year, and I I thought some of these were really fascinating. Starting with the s and p 500 has produced a positive return in 67 of the past 93 years, the market produced two consecutive down years, only 11 times. That’s amazing. I had no idea. 00:25:35 [Speaker Changed] Well, I mean, think about it. The, the, the likelihood over time in any one year, the market’s going to go up and if it, if it doesn’t go up, that’s irregular. But then to have another year in a row is very, very irregular. So that’s, that’s why I began 2023 saying, Hey, it’s, it’s highly likely it’s gonna be a good year just purely based on, based on the odds. And then you layer in that whole recency bias rear view mirror and people were way too negative. 00:26:02 [Speaker Changed] Yeah. At the end of 2022, the s and p peak to Trth was down about 25%. You point out there were only eight instances since 1960 where you had that level of drawdown and the average one year return was 22% following that. 00:26:21 [Speaker Changed] So I’ve put out a piece in September of 2022 saying, market’s down 20%, you should add money down 20%. And of course I felt like an idiot, you know, a month later because, and then the market was down 25%. And I produce a piece saying the average return is just over 20% if you buy into down 25%, which doesn’t necessarily mean it stops going down. Right? But what’s amazing about that is, you know what, the return off that October 22nd low of 2022 was 00:26:49 [Speaker Changed] 30 something. 00:26:50 [Speaker Changed] No, 21%. Oh 00:26:52 [Speaker Changed] Really? Dead on 00:26:53 [Speaker Changed] Right. Dead on in line. It’s uncanny how these things repeat itself. And that’s Barry again, it goes back to, you know, your experience, my experience is the macro changes, but behaviors don’t. Right. That’s the consistency of this business and that’s what I’m fascinated 00:27:08 [Speaker Changed] With. Human nature is perpetual. It’s, it’s, it’s Right. No, no doubt about it. 00:27:11 [Speaker Changed] And that’s what gave me confident that the fun flows would turn positive at some point in the fourth quarter because it was a year off the low. 00:27:18 [Speaker Changed] I really like that. Be dubious when a stock is declared expensive or cheap based on a singular valuation methodology like pe this is a pet peeve of mine. The e is an estimate at someone’s opinion. How can you rely on something, especially from someone who doesn’t have a great track record of making 00:27:39 [Speaker Changed] This forecast. It’s the, I think that’s the biggest error investors make over time is, well this stock is, you know, as you said, this stock is cheap or this market, think about Europe. Mar Europe has looked cheaper than the US for a number of years. The flaw in that is the e is a forward estimate. And it’s turned out that the E for Europe hasn’t been as good as what’s expected. And the E for the US especially the Nasdaq, has been a lot higher than was expected. So the denominator has come up in the us which makes a PE lower and the denominator come down you, which made it look more expensive. 00:28:18 [Speaker Changed] So that, that’s always amazing is if the estimates are are wrong to the downside, well then expensive stocks aren’t that expensive and vice versa. Exactly. If the estimates are too high, cheap stocks really ain’t cheap. Right. 00:28:31 [Speaker Changed] I watched that. But we also watched revisions and I’ve learned, learned also from being, you know, cynically in this business. Companies don’t always come clean right away and say, oh, our business really bad. It’s the, they drip out the news, right? Usually one bad quota follows another bad quote. I mean it’s very rare. So be careful that, and analysts are slow to adjust their numbers. Anytime someone says, I’m cutting my estimates, cutting my price target. But I think it’s bottomed, 00:29:00 [Speaker Changed] Right? 00:29:00 [Speaker Changed] Yeah. Be careful. 00:29:02 [Speaker Changed] Yeah. To that’s always, always amusing. I thought this was really very perceptive. Over 37 years in the investment business, I have become convinced that the most money is made when perceptions move from very bad to less bad. I love that because if you’ve lived through the.com implosion or the financial crisis or even the first quarter of 2020, you know how true that is. 00:29:26 [Speaker Changed] Think about last year, you know, it’s the old saying by Sir John Templeton bull markets are born on pessimism. They grow in skepticism, they mature on optimism and they die on euphoric. Well, we had a bear market bottom in October of 2022. And so we came into last year, 2023 with, it’s gonna be a hard landing, it’s gonna be bad. And so there’s high levels of pessimism. And now as you advance into the fourth quarter fund flows turned positive as people realize, well maybe it wasn’t gonna be so bad. We’ve moved into the skepticism phase. So that’s why the biggest return year is always the first year off the low because that’s the biggest pivot and it has the least volatility. We didn’t have a lot of volatility last year 00:30:16 [Speaker Changed] And, and we saw that in oh 8, 0 9 and we saw that in 2020. 2020. It was really, it was really quite amazing. The flip side of this is also true, which is most money is lost when things move from great to just good. 00:30:33 [Speaker Changed] Well, again, if I go back to kind of growth investing, it got expensive and the growth rates of companies wasn’t quite as good and you know, in 2022 and the Fed started raising rates and that was problematic. It was no different. It reminded me a little bit of the.com bubble. What brought down the.com bubble is that companies just couldn’t report the earnings that were expected. And you had plenty of time to get out. But the problem is, what I saw in the.com bubble, people wanted to kept buying these stocks as they’re going lower because they were, you know, rear view mirror investing. They were the previous the the loves. And what’s amazing is think about, I said before half the value managers went outta business in 99 by the year 2008. Do you know what the biggest sector of the s and p was? Financials they grew from nothing to 30% of the SP. So value worked all through the first period until we know what happened in great financial crisis. It 00:31:27 [Speaker Changed] It, it’s amazing that muscle memory when you’re rewarded for buying the dip for a decade, it’s a tough habit to break. Exactly. Exactly. So, so here’s another really interesting observation of yours. Whatever the hot product is rarely works the next 12 months. 00:31:43 [Speaker Changed] It’s because a hot product invariably pushes oftentimes valuations to extreme. And one of the things that we got very right in 2023 was in 2022 Bear Market, what did people buy into the lows of Bear Market? They bought defensive stocks, dividend oriented, low volatility type strategies became very popular in 2022 during a bear market. And so we could see that the defensive factor, safety became very expensive. So as we came out of this bear market, what lagged consumer staples, healthcare, utilities, all the safe things. So hot products pushes things to extreme and that usually, you know, unwinds itself badly 00:32:34 [Speaker Changed] Historically, once the fed stops hiking rates, equity rallies last longer and go higher than anyone expects. Explain the thinking 00:32:43 [Speaker Changed] Then. So I think it’s good news for this year, but also worries me about this year is if you look at the history of the period of time when the Fed said we’re done hiking till we’re going to cut that period does very, very well for equities. And we are kind of at a, a juncture where it, we’ve done pretty well. But if they’re not gonna cut rates until the summer, I think there’s more room to run for stocks. Now the flip side is, I hear a lot of people talk about when the Fed cuts the perception that that’s gonna be good for equities. I’m not so sure about that because if you look back in history, when the Fed cuts markets tend to go down initially not up. And you could argue yes, but Andrew, that’s because usually when they’re raising rates it’s an economic cycle, right? And therefore if they’re cutting, there’s a problem. And this time it was all about inflation. But what worries me is when the Fed does announce they’ll cut will people say, oh, they know something you don’t know. There’s a problem out there. And I think there’s an that will increase the anxiety. And so I think that’s, we’re in a good period right now, but it worries me when they do cut, will it be people start to worry about, there’s some, there’s a problem in the economy. 00:33:59 [Speaker Changed] See I I I’m a student of federal reserve history and I I could say with a high degree of confidence, they don’t know anything that you don’t know. They, they look at the same data, they’re populated by humans, none of whom have demonstrated any particular sort of prescient. And if we watched the past decade, they were late to get off their emergency footing. They were late to recognize inflation, they were late to recognize inflation peaked. And now it feels like they’re late to recognize, hey, you guys won, you beat inflation. Exactly. Take a victory lap. Right? They, they seem to always be talk about backwards looking. They always seem to be behind the curve. Right. 00:34:38 [Speaker Changed] But I just think the stock market is an emotional beast. Sure. And you know, and I look last year and the Bears people were too pessimistic every time they pop their head out of the den, they got stampeded. And so they’ll have a better year this year and I think it will scare investors and cynically, I can’t help but think, well people missed most, a lot of people missed last year and now they’re starting to get back in and after a very low volatility year, there’s always more volatility the next year. And so it’s inevitable it’s gonna be more, it doesn’t mean it’ll be a bad year for equities, it just will have more gut wrenching periods. 00:35:10 [Speaker Changed] I love this data point since 1940, markets have always gone up in the year when an incumbent president runs for reelection 17 for 17. Now if we break that down, what you’re really saying is, hey, if an incumbent isn’t running, the economy really has to be in the stinker roo and the stock market is following. But anytime an incumbent is running typically means we’re we’re doing pretty okay. Well 00:35:37 [Speaker Changed] And remember I said didn’t get reelected, just ran for reelection. Right. And so what happens, and I see it this year, is when presidents run for reelection, they want to juice the economy, they want the economy going well, right? And we have, Joe Biden has in his pocket the Infrastructure Act, the CHIPS Act and the Inflation Reduction Act. We own, the reason why we own industrial stocks is because they are telling us that the money is just starting to come in from the government. And these projects are getting just getting off way. We’ve seen this with the chips act, the money is just started poor. Right. That’s why the market tends to do well because the economy stays afloat during a reelection year. And 00:36:20 [Speaker Changed] And the really interesting thing about all this, you know, it’s funny, the 2020s is the decade of fiscal stimulus, whereas the 2010s were monetary stimulus, the first three cares acts. That was a, just a boatload of money that hit the market, hit the economy all at once. Each of the legislation packages you mentioned, that’s spending over a decade, that could be a pretty decent tailwind for a while. 00:36:43 [Speaker Changed] Very interesting between listen to Wall Street and what you listen to companies. And so I’m a company guy. I listen to companies and I’ll give you a great example. Right now people think the consumer is getting tapped out, but on the Costco call the other day, they say they see big ticket purchase items. Reaccelerating, well wait a minute, I thought the consumer well, which is it? Which is it? Right. And you know, and so the the point of this is, is that I go back to listen to what companies say. And I suspect as food inflation starts to come down and people have jobs, they actually could start to go buy, you know, higher ticket purchases. So, 00:37:15 [Speaker Changed] And we’ve seen some uptick in credit card use, but it nothing problematic with the ability to service that debt still seems to be very much intact. Correct. 00:37:24 [Speaker Changed] And that goes back to last year, one of the reasons I, the other reason I was optimistic is I kept hearing our companies say to me, I’m being told the recessions around the corner, but our business seems to be doing well. We don’t see it. Right. We 00:37:34 [Speaker Changed] Don’t see it. That’s really amazing. So, so let’s talk a little bit about who your clients are. You obviously are working with all the advisors at Morgan Stanley, but you’re managing mutual funds. Who, who are the buyers of, of those funds? Are they in-house? Are they the rest of the investing community? Who, who, who are your clients? 00:37:53 [Speaker Changed] Yeah, I mean, so that’s when, when I left being advisor in 2004, I started this group within Morgan Stanley. Wealth management with the products were only available to financial advisors at Morgan Ceiling. But when I left to go into Morgan Ceiling investment management in 2014, the purpose of that was to make my products available beyond Morgan Ceiling wealth management because I was getting calls from consultants and institutional investors saying, how do we get access to these funds? And I’d have to say, well you have to go through an advisor. So, so that, I wanted to broaden out the reach beyond. So I would say we’re on a number of platforms, you can buy our funds through the self-directed route. And so we’re broadening out the, the distribution. And you mentioned the slim and take before. That is a, a methodology that we use to reach out to our investor base. 00:38:49 Obviously I’d love to talk to each of every one of ’em, but I can’t. But I’ve learned in this business, if you communicate in a way that they can understand, and I don’t mean understand in, you know, in, in a bad way. Like, but writing a six page diatribe about why my stocks are so great and why the rest of the market stinks. No one’s gonna read that. They put it aside and say, I’ll read it tonight, then they don’t. But if you can provide short bullets of what’s going on in the market, why people should be bullish or bearish, you provide them with talking points. And that’s what we really try to do within the firm, but beyond the firm as well. 00:39:24 [Speaker Changed] Yeah. I I, one of the reasons I like lemon’s take is you really boil things down to brass tack. You’re not afraid to use third parties in some of your competitors research. You, you cite other people on the street when they have an interesting data point or, or, and and I very much appreciate that. ’cause a lot of people sort of take the, if it wasn’t invented here, it doesn’t exist to us. 00:39:51 [Speaker Changed] Yeah. I mean look, I’m, I’m, I want to grow the assets. I want to perform well, but I value the responses from the those who sit on the front lines dealing with clients every day because they’re the ones that feel kind of the emotional side of the business. Sure. If you sit back in, you know, my office and all, I’m looking at a company and just evaluating whether it’s PE is appropriate and earnings, you’re missing a huge part of this business. It’s a behavioral business. And so having access to advisors and listening to their feedback is so important. 00:40:27 [Speaker Changed] So you serve on Morgan Stanley’s Wealth Management’s Global Investment Committee. What is that experience like? I would imagine that’s a huge amount of capital and a tremendous responsibility. It 00:40:39 [Speaker Changed] Is a huge amount of capital and it drives kind of asset out suggested asset allocation for advisors. They don’t necessarily have to pursue it that way. My input is obviously on the equity side, but they have people in the, on the re the fixed income, high yield alternatives. And they all provide inputs into framing and overview. So I’m really, I sit in Morgan Stanley investment management, but I do provide that context and I think they like to have me on ’cause I actually have skin in the game and I run money for a, a living and I’m not always there saying you gotta buy growth or you gotta buy value. So I’m of agnostic. I’m just trying to figure out where the kind of the ball’s going. Do. 00:41:20 [Speaker Changed] So in the old days you used to speak with retail investors all the time, a as a pm Do you miss that back and forth because there is some signal in all of that noise, whether it’s fear or greed or Sure. Emotion. How, how do you, how do you operate being arm’s length away from that? 00:41:41 [Speaker Changed] I, that is a big concern I have is losing that access. So I still, I’m going to, I’m speaking in an event tonight with a, you know, a room full of advisors. So, and then, you know, we’re, we’ll, we’ll get together afterwards and I’ll listen to what they have to say. So I’m always interested in feedback that I get from advisors. Obviously I can’t spend all day talking on the phone. That’s the big reason why I left being an advisor was I recognize, hey, being an advisor, you gotta talk to your clients so forth. You can’t manage money and worry about both quarter can both. You can’t do both. And anyone that thinks you can, I, you know, it’s, it’s crazy and I really wanna develop these models, but I I, so, so all these communication ways, like slim and Take is a way to be in touch with advisors, encourage them, Hey, you think you, you disagree, send me an email. You know, I’m happy to, happy to hear from you because I think that’s very important. Huh. Really, 00:42:35 [Speaker Changed] Really 00:42:36 [Speaker Changed] Interesting. I really, behavioral finance, you know, the, the longer I’ve been in this business, I’ve been in this business a long time. It’s the behavioral finance that’s the consistency of this business. Geopolitics changes, right? But how people react is, is not, doesn’t 00:42:52 [Speaker Changed] Really change. Right. You, you, you can’t ch control what country is invading what other country. But you can manage your own behavior. Exactly. And people have a hard time with that. Exactly. It’s really interesting. I, I know only have you for another five minutes, so let me jump to my favorite questions. I ask all of my guests starting with what have you been screaming these days? Tell us what’s been either audio or video, what’s been keeping you entertained? 00:43:15 [Speaker Changed] Yeah, I, so if I think about my career, no one took me aside and said, this is how you manage money, right? Like, think about it. I learned about fundamental research, I learn about quantitative, I learn about the practicality of being in wealth management. And so I’ve always researched and watch and what does that got to do with your question is I’ve learned my way to being successful portfolio managers. So I’m obsessed with kind of always learning along the way. So I, you know, when I watch podcasts it’s always about, whoa. Or, or, or listen to podcasts or watch, you know, things. It’s, it’s always how to advance my knowledge base. Now I did play tennis, you know, in college and so I love all those, you know, break point, first tee, you know, the Formula one. I love all those things. But, but you know, as my wife gets frustrated with me, ’cause I’m probably gonna not gonna sit down and watch a three hour mindless movie because it’s kind of like not, not advancing. 00:44:13 [Speaker Changed] Huh. Really, really interesting. Tell, tell us about your mentors who helped to shape your career. 00:44:19 [Speaker Changed] So I mean, again, I look at points along the way were invaluable When I got to Morgan Stanley, Byron Ween, who, you know, I barely knew, but he was the first person that I recognized had this very good touch of fundamentals, but also the psychology, right? And so he was a great mentor even though he never really knew me, but listening and reading and understanding him was really important. But then I had a guy who ran our department named Glenn Regan, who had come from studying money management organizations and I didn’t know how to start a money management organization ’cause it was a team within and how do you grow and diversify. So there’s been different people along the way that have really shaped me. I came outta University of Chicago, gene Fama told me buy cheap stocks, but then William O’Neill said, yeah, but that doesn’t work and you need to have some momentum to, you know, like, he didn’t tell me that you 00:45:14 [Speaker Changed] Need a little can slim in that you 00:45:15 [Speaker Changed] Need to, you know, you had a little can so you need to cancel. Exactly. So there’s been people along the way that have been great influences on me that have mentioned me at the right time in my career. 00:45:26 [Speaker Changed] What are some of your favorite books and and what are you reading right now? 00:45:29 [Speaker Changed] I just finished same as Ever by Morgan Housel. Again, this concept of behavioral. I will eat up, you put a behavioral, anything about behaviors in front of me, I read it so like, you know, Richard Thaler mis misbehaving or you know, think fast, think slow, all those boats of books. Daniel Crosby is another one. All those books I just, but I just finished that and I just love it because again, all he spends the whole book is about these things. They just don’t change over time. 00:45:56 [Speaker Changed] Human nature, human perpetual, 00:45:58 [Speaker Changed] Human nature. Huh. 00:45:59 [Speaker Changed] Really interesting. I’ll tell you 00:46:00 [Speaker Changed] The last story. So, or I was tell a story. I was, I was on the floor of the New York stock change the day that Russian invaded Crimea. And one of my stocks was down ni my biggest position was down 8% that day. And I said, they don’t have any stores in Crimea. Why is the stock down? Well, because it was geopolitics. Well, you know, and within three days the stock came ro back. So I, it it’s, all it points to is sometimes fundamentals dislodged from, you know, the, the stock prices. And you have to understand that there’s a hu behavioral element. 00:46:32 [Speaker Changed] My favorite version of that story was, are you familiar with Cuba? Yeah, sure. So Obama announces we’re gonna normalize or start the process of normalizing relationships with Cuba. There’s a stock that trades under the symbol CUBA having nothing whatsoever. And it runs up 20% on just on the announcement. Correct. Because some algorithm picked up Cuba and bought it. And off, off we go. Correct. Amazing. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either investment management or finance? 00:47:07 [Speaker Changed] Yeah, so it’s interesting. I have four kids that are, you know, in the process of or have just come outta college or in the process of, and one of the dangers I see today is kids come outta school and they think they know exactly what, what they wanna do. You know, and then, and I’ll say, you don’t know your, what your capabilities are when you’re 22 years old. I mean, I was an introvert when I was 22. I’ve, I’ve realized in the early thirties I knew how to communicate. So I’m, I always say get into, if you can get into a firm that has a lot of opportunities, you know, today there’s less training programs, but those types of things with lots of opportunities. ’cause you don’t know what you’re gonna be good at and what you’re good at. Always follow what you think you’re interested in as long as it makes money, because that’s ultimately, but you don’t know initially. So I always encourage people initially don’t come out and say, I want to do this the rest of my life. You don’t know, that’s too narrow. Try to go to something broad. That’s the first advice. And, and I see today where people too narrow in their focus. 00:48:08 [Speaker Changed] I think that’s great advice. People, most of the folks I work with who are very successful, they’re not doing what they did right outta school. And to imagine that that’s gonna be your career. Very much misleading. And, and our final question, what do you know about the world of investing today that you wish you knew 30 plus years ago when you were first getting started? 00:48:29 [Speaker Changed] Well, I think, you know, 30 years ago I thought it was all about just what’s going at the company level. And then I realized, oh wait, that doesn’t really, you know, drive most of the stocks return. So you have to understand more about the broader implications of companies. I think 30 years ago there was less dissemination of fundamental news. Broadly today it’s much, you know, it’s much broader. So having information access fundamentally is more, more difficult. So I think the, the business has changed. But again, I go back to, I think the, the biggest change in my, how I think about it is behaviorally I’ve come to the real, that being an advisor sitting on the front line, I view that as a very key part of what’s shaped my career. Understanding that, you know, again, it doesn’t matter that the company didn’t have any stores in Crimea. 00:49:22 It went down for, you know, quite a bit. Or your Cuba story. I mean that, there’s just a behavioral element to this in investing, investing business. And look, you know, again, I go a, a great example which I mentioned before, which is it didn’t matter what growth stocks you own in 2022, they all went down, right? And so was it all the companies did poorly, no growth got too overbought. And so it had a correction. They all came back last year. You know, so understanding kind of those behaviors. I love that Warren Buffet quote investors frame their view looking solidly in the rear view mirror. Understanding that and having the ability to tack against that. That’s really what’s what’s worked for me over time. 00:50:03 [Speaker Changed] Hmm. Fa fa really fascinating stuff. Thank you Andrew for being so generous with your time. We have been speaking with Andrew Schleman. He’s managing director at Morgan Stanley Investment Management, where he is also lead portfolio manager for the long equity strategies for the Applied Equity Advisors team. If you enjoy this conversation, be sure and check out any of the 500 previous discussions we’ve done over the past nine and a half years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast. Sign up for my daily reading list@rithu.com. Follow me on Twitter at ritholtz. Follow all of the Bloomberg family of podcasts on, on Twitter at podcast, and be sure to check out my new podcast at the Money short. 10 Minute conversations with Experts about the most important topics affecting you and your money at the money can be found at the Masters in Business podcast feed. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Meredith Frank is my audio engineer. Atika Val Brown is my project manager. Shorten Russo is my head of research. Anna Luke is my producer. I’m Barry Ltz. You’ve been listening to Masters in Business on Bloomberg Radio. ~~~ The post Transcript: Andrew Slimmon, Morgan Stanley Investment Management appeared first on The Big Picture......»»
At the Money: Woke Investing vs. Values-Based Investing
At the Money: Woke Investing vs. Values-Based Investing Meir Statman, February 28, 2024 There’s been criticism of what some call “Woke Investing.” But “Value-based investing” is more politically agnostic than its critics realize. Used by Pro-life investors like the Catholic Church, it aligns capital with deeply held beliefs – be they left… Read More The post At the Money: Woke Investing vs. Values-Based Investing appeared first on The Big Picture. At the Money: Woke Investing vs. Values-Based Investing Meir Statman, February 28, 2024 There’s been criticism of what some call “Woke Investing.” But “Value-based investing” is more politically agnostic than its critics realize. Used by Pro-life investors like the Catholic Church, it aligns capital with deeply held beliefs – be they left or right. Full transcript below. ~~~ About this week’s guest: Meir Statman is Professor of Finance at Santa Clara University. His book “What Investors Really Want” has become a classic that explains what drives investors. For more info, see: Professional Bio LinkedIn Google Scholar Twitter ~~~ Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg. Transcript: Meir Statman Barry Ritholtz: There’s been a lot of talk lately about socially responsible investing and ESG, what’s been called woke Wall Street in political circles. But is it really woke to want your investment decisions to reflect your personal values, beliefs, and preferences? We know investors seek expressive benefits from their portfolios. They want their money to reflect their values as well as their financial goals. I’m Barry Ritholtz, and on today’s edition of At The Money, we are going to discuss values-based investing. To help us unpack this and what it means for your portfolio, let’s bring in Meir Statman. Professor of Finance at Santa Clara University. He’s an award-winning expert on investor behavior and financial decision-making. His book, What Investors Really Want, has become a classic that explains what drives investors. So, let’s just start with a basic definition. What is values-based investing? Meir Statman: Well, values-based investment is my preferred name to that movement. That includes values. in investments. It is called socially responsible investing. It is called ESG. Most prominently, it is called sustainability investing, and, so on. Each of them has some deficiencies because they tilt in a particular direction, liberal or conservative values. Based investing is a neutral term; people care about their values, and many don’t want to separate them from their investments. I use the analogy of advising an orthodox Jew, if you are a financial advisor, and you say, listen, pork costs less than kosher beef. It tastes pretty good. How about if you eat pork and donate the savings to your synagogue? Well, everybody understands that that is stupid. My point is that for some investors, having stocks of say a fossil fuel company feels like pork in the mouth of an Orthodox Jew. And if this is how you feel, then by all means stay away from having fossil fuel stocks in your portfolio or any others that really offends greatly your particular values. Barry Ritholtz: So let’s talk about some of the nuances that you’re describing between SRI or ESG and values-based investing. As I understand socially responsible investing, it’s centered on using your investment dollars to create quote “Positive social change.” How does values-based investing differ? It seems to be less focused on changing society and more, just being in sync with your own personal belief system. Is that a fair description? Meir Statman: Not entirely. So, I think it’s very important to distinguish two parts. One that I call “waving banners” and one that I call “pulling plows”. Waving banners as being true to your values. That is what socially responsible investing was, but pulling plows is about doing good for others. It’s about changing the world for the better, and they are really very different, and people confuse them all the time. And so, when an orthodox Jew refrains from eating pork, they don’t think that they’re going to affect the pork market much or change other people’s diets. They just want to be true to their own values. The same applies to somebody who stays away from say companies that employ child labor abroad or engage in poor employee relations or whatever that other thing is. They don’t change the world. They are true to their values. Barry Ritholtz: Your early research in the 1980s found no change really in performance between the socially responsible funds and the broader market indexes. How does that look today? Is there any impact of ESG or SRI on portfolio performance versus the broader market? Meir Statman: So there are a ton of studies, literally thousands and some find that ESG-type investments do better than conventional ones; some find that they do worse; some find that they’re about the same. So it is really hard to figure out that there are many things that can get in the way. Periods, for example, in the late 1990s with the tech boom because ESG portfolios tend to tilt towards growth, ESG portfolios did very well and then they slumped in the slump in the bust of the early 2000s. My own sense overall is that if you are investing in an ESG portfolio, you are going to lag, what you’re going to have in a conventional low-cost index investing. And the reason for that is really fees and expenses. Barry Ritholtz: So you’ve described value-based investing as a neutral term that allows investors to base their decisions on any specific value. It could be the doctrine of the Catholic Church, it could be environmental, it could be anything. If that’s the case, why has there been so much pushback to this if people just want their portfolios to reflect their personal values, be them left, right, or center? How come there’s so much, uh, so much pushback to this? Meir Statman: Well, there’s so much pushback because of the politics because of people’s values. That is, people do not take the approach I take, which says your values are yours and mine are mine, and we should not debate them. Uh, when, when you think about a bad value, like, like protecting the environment, well, if you are liberal, you think that’s good. If you are conservative, you say “Drill, baby, drill” you know. And so poor BlackRock got itself in deep doo doo because they were promoting ESG which, people, interpreted with, reason as tilting left, and they hated it. And, boy, I’ve heard financial advisors talk about it. And financial advisors tend to be Republicans and conservatives. And they are red in the face when they talk about that. And in fact, BlackRock decided that they are not going to talk about ESG anymore and move on to do other things. They said, look, you can choose whatever we want. You want, we in fact, we have, we have funds that are entirely in oil and gas. So if that’s what you want, invest in that. But of course, it didn’t do them much good because of course, conservatives understood that they are tilting towards Democrats and they hated it. Barry Ritholtz: So I’m glad you brought up financial advisors. For my last question, how should financial advisors deal with client preferences for value-based investing? Is this the same as other client preferences? Low risk, high income, anything along those lines? Or is this completely different? Meir Statman: It is, and it is somewhat different. So the last thing financial advisors should do when they have a prospect who says, I’d like to hire you to manage my portfolio. But you should know that I care deeply about the environment and I don’t want fossil fuel stocks in my portfolio. The worst answer for an advisor is to say, “Listen, I’m here to maximize your returns at the given level of risk. I will do that. And then you use the money I make for you to support the environment.” What a client, what the prospect hears, this advisor does not care about me at all. He has some kind of a solution for everyone. He’s going to shove it down my throat. He doesn’t listen to me. So don’t do that. That is even if you are a conservative and your prospect is obviously liberal. Put yourself in his shoes rather than asking to put himself in your shoes, and start conversations precisely on what are your values? What matters to you? I just gave a presentation to a whole bunch of financial advisors. And a woman asked, she said, “You know, isn’t it true that this easier for women to talk about those squishy things of values of family and so on, then, then men?” And I said, “Well, yes, it is true, but you can train yourself to act in this sense, like a woman, even if you are a man.” I said, “I am shy by nature, but here I stand in front of hundreds of advisors and speaking,” and if I might add a commercial for my forthcoming book, “A Wealth of Well Being” what it does, what a book like that does is help advisors and help their clients, uh, make that jump to speaking about things that are more than risk and return and portfolios. To speak about family, about friends, about community, about health, about religion, and all of those things, that especially men find it difficult to make this jump from, we are talking about the policy of the Fed, blah, blah, to, uh, how’s your family doing? Barry Ritholtz: Really, really interesting. So to wrap up, Many investors want more than just capital appreciation or income. They want their portfolios to stay true to their values. It’s perfectly fine if you want to do this. Just be aware of the factors that are influencing your decision making, including the costs. Be aware of what all of your goals are when you’re managing your money. I’m Barry Ritholtz. This is Bloomberg’s At The Money. ~~~ The post At the Money: Woke Investing vs. Values-Based Investing appeared first on The Big Picture......»»
MiB: Andrew Slimmon, Morgan Stanley Investment Management
This week, we speak with Andrew Slimmon, managing director at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors team. He is also the lead senior portfolio manager on all long equity strategies for the applied equity advisors team, as well as a member of the Morgan Stanley Wealth Management Global… Read More The post MiB: Andrew Slimmon, Morgan Stanley Investment Management appeared first on The Big Picture. This week, we speak with Andrew Slimmon, managing director at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors team. He is also the lead senior portfolio manager on all long equity strategies for the applied equity advisors team, as well as a member of the Morgan Stanley Wealth Management Global Investment Committee. He began his career at Morgan Stanley in 1991 as an adviser in private wealth management, and later served as chief investment officer of the Morgan Stanley Trust Co. Slimmon describes his concentrated portfolios — either 30 US stocks or 20 global stocks — as a way to avoid closet indexing. Owning 150-200 names invariably creates a portfolio with a low active share — meaning it is an expensive index-like product. His approach combines quantitative strategy with behavioral economics. He explains how his popular Slimmon’s TAKE is a way to stay in touch with his investors. A list of his favorite books is here; A transcript of our conversation is available here Tuesday. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. Be sure to check out our Masters in Business next week with David Snyderman, Global Head of Alternative Credit + Fixed Income for Magnetar Capital. The firm is a multi-strategy and multi-product alternative investment management firm, managing $14.9 billion in client assets, and has created over $11 billion of net P&L across all strategies since its 2005 inception. Andrew Slimmon’s Favorite Books The post MiB: Andrew Slimmon, Morgan Stanley Investment Management appeared first on The Big Picture......»»
At the Money: Why Self-Insight Is So Important
At the Money: David Dunning professor of psychology at the University of Michigan (January 10, 2024) How well do you understand yourself? For investors, it is an important question. We’re co-conspirators in self-deception and this prevents us from having accurate self-knowledge. This does not lead to good results in the markets. Full transcript below. ~~~ About this… Read More The post At the Money: Why Self-Insight Is So Important appeared first on The Big Picture. At the Money: David Dunning professor of psychology at the University of Michigan (January 10, 2024) How well do you understand yourself? For investors, it is an important question. We’re co-conspirators in self-deception and this prevents us from having accurate self-knowledge. This does not lead to good results in the markets. Full transcript below. ~~~ About this week’s guest: David Dunning is a professor of psychology at the University of Michigan. Dunning’s research focuses on decision-making in various settings. In work on economic games, he explores how choices commonly presumed to be economic in nature actually hinge more on psychological factors, such as social norms and emotion. For more info, see: Professional Bio Google Scholar Twitter ~~~ Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg. Transcript: David Dunning The financial writer Adam Smith once wrote, if you don’t know who you are, this is an expensive place to find out. He was writing about Wall Street and investing and his insight is correct. If you don’t know who you are — and if you don’t understand what you own, how much leverage you’re undertaking, how much risk you have — this is a very expensive place to learn that lesson the hard way. I’m Barry Ritholtz, and on today’s edition of At The Money, we’re going to discuss self-insight, our ability to know ourselves and understand our abilities. To help us unpack all of this and what it means for your portfolio, let’s bring in Professor David Dunning of the University of Michigan. He is the author of several books on the psychology of self. And if his name is familiar, he is the Dunning in Dunning Kruger. Welcome, professor. Let’s just ask a simple question. How come it’s so hard to know ourselves? David Dunning: There are many, many reasons (and thank you for having me). Well, in many reasons, there are problems in knowing ourselves in terms of our character and in knowing ourselves in terms of our competence. In terms of our character, we overplay how much agency we have over the world. We’re not as influential as we think. And in terms of confidence, we overestimate how much we know. Now now each of us knows a tremendous amount, but by definition, our ignorance is infinite. And the problem with that is our ignorance is also invisible to us. That creates an issue. Barry Ritholtz: So what other roadblocks and detours are there on the path to knowing thyself? David Dunning: Well, it’s the invisibility of our flaws and our foibles. Some of it is the world – it’s not a very good teacher. It doesn’t tell us. Its feedback is chancy. Often, its feedback is invisible. What doesn’t happen to you as opposed to what does happen to you. What people tell you, to your face is different from what they’re saying behind your back. So the information we get, our information environment is either incomplete or it’s misleading. And beyond that, we’re co-conspirators. We engage in self-deception. We protect our egos. We are active, in the duplicity in terms of getting to accurate self-knowledge. Barry Ritholtz: We’ve discussed before, any decision or plan we make requires not 1, but 2 judgments. The first judgment is what the item we’re deciding about is, and the second judgment is our degree of confidence in assessing whether or not our first judgment was valid. Which is the more important of the two David Dunning: It should be the second 1, but we tend to focus on the first 1. We tend to focus on our plans, the scenario. And we tend to ignore or neglect the second one, the fact that life happens and life tends to be unexpected. Um, we should expect the unexpected, We should be sure to think about what typically happens to other people and have plan Bs and plan Cs for when those sorts of things can happen. Or at least have plans for unknown things that can happen because the 1 thing we know is that unknown things will happen. And everything in the past has always been slower than we expected. We should expect everything in the future is going to be expected, but we tend to overweight, give too much attention to our plans and not think about the barriers and not think about the unknown barriers that are certainly gonna hit us in the future. That’s why what I mean by, the fact that we tend to give too much weight to our agency in the world, not give credit to the world and its deviousness in thwarting us. Barry Ritholtz: So let’s talk a little bit about how illusory our understanding of our own abilities are. Is it that we’re merely unskilled at evaluating ourselves, or are we just lying to ourselves? David Dunning: We’re actually doing both. I mean, there are two layers of issues. One layer of issues is, we’re not very skilled at knowing what we don’t know. I mean, think about it. It’s incredibly difficult to know what you don’t know. You don’t know it! How could you know what you don’t know? That’s a problem. We’re not very skilled at knowing how good our information environment is, how complete our information is. That’s one issue. The second issue is what psychologists refer to as the motivated reasoning issue, which is just simply then we go from there and we practice some motivated reasoning, self deception, wishful thinking. We actively deceive ourselves in how good we think our judgments are. We bias our reasoning or distort our reasoning toward preferred conclusion. That stock that stock will succeed. Our judgment is absolutely terrific. This will be a wonderful investment year. There’s nothing but a rosy stock market ahead for us. That’s the second layer. But there are issues before we even get that second layer, which is just simply, uh, we don’t know what we don’t know. And it’s very hard to know what we don’t know. Barry Ritholtz: So we live in an era of social media. Everybody walks around with their phones in their pockets. They’re plugged into everything from TikTok to Instagram to Twitter to Facebook. What’s the impact of social media on our self awareness of who we are, has it had a negative impact? David Dunning: I think, social media has had all sorts of impact, and I think what it’s done is create a lot of variance, a lot of spread in terms of the accuracy of what people think about themselves and the positivity and the negativity of what people think about themselves. There’s just a lot of information out there and people can truly become expert if they know what to look for. But there’s also a lot of possibility for people to come truly misled if they’re not careful or discerning in what they’re looking at. Because there’s a lot of misinformation and there’s a lot of outright fraud in social media as well. So people can think that they’re expert, because there’s a lot of plausible stuff out there, but there’s a lot more in the world that’s plausible than is true. And so, people can think they have good information where they don’t have good information. That involves issues like finance, that involves issues like health, that involves issues like national affairs and politics, that’s an issue. But it’s possible to become expert if you know what to look for. So there’s a lot of variance in terms of people becoming expert or thinking they’re expert and becoming anything, but. In terms of being positive or being negative, there’s a lot of tragedy on the Internet. So by comparison, you can think well of yourself. And it is a fact that when people go on the Internet, what they post are all the good things that happen in their life, all the good news that’s happened to them, but that’s the only thing they post. And if you’re sitting there in your rather good news/bad news life, you can think that you’re rather ordinary or you can think that you’re rather mundane when everybody else is having so much more of a best life than you are, you can think that you’re doing much worse than everybody else. So the Internet just can create a lot of different impacts on people that’s both good and bad, truthful and untruthful. It just turns up the volume and everything. Barry Ritholtz: Yeah, we certainly see, um, social status and wealth on display. You never see the bills and the debt that comes along with that. That that that’s a really good way of describing it. Talking about expertise, I cannot help but notice over the past few years, especially on social media, how blithely so many people proclaimed their own expertise. First, it was on epidemiology, then it was on vaccines, then it was constitutional law, more recently it’s been on military theory. Is this just the human condition where we’re wildly overconfident in our ability to become experts even if we don’t have that expertise? David Dunning: Well, I think it is. Aand if it’s not all of us, at least it’s some of us. That is we have a little bit of knowledge and it leads us to think that we can be expert in something that we’re quite frankly not expert in. We know a little bit of math. We can draw a curve and so we think we can become expert in epidemiology, when we’re a mathematician or maybe a lawyer or maybe we’ve heard a little bit about evolution. And so we think we can comment on the evolution of a virus when we’re not — we don’t study viruses, we’re not an epidemiologist, but we know a little bit and once again we don’t know what we don’t know. So we think we can comment on another person’s area of expertise because we know nothing about the expertise contained in that other person’s area of expertise. A philosopher friend of mine, Nathan Ballantyne, and I have written about “Epistemic Trespassing,” where people in one area of expertise who know a little bit about something decide that they can trespass into another area of expertise and make huge public proclamations because they know something that looks like it’s, relevant, looks like it’s informative, and it has a small slice of relevance, but it misses a lot in terms of really commenting on things like international affairs or economic policy or epidemiology. But people feel that they have license to comment on something that lies far outside of their actual area of expertise. Now, some of us give ourselves great license to do that, but I do want to mention that this is part of being human because part of being human – part of the way that we’re built is every day we do wander into new situations and we have to solve problems, we have to innovate, we have to figure out how do I handle this situation. So, we cobble together whatever expertise, whatever experience, whatever ideas we have, to try to figure out how do we handle this situation. This imagination is how we’re built. That’s part of our genius, but it’s a genius that we can over apply. And what you’re seeing in Epistemic Transpassing is a flamboyant way in which this genius is over applied in the public domain. Barry Ritholtz: So wrap this up for us, professor. What do we need to do to better understand ourselves, our capabilities, and our limitations? David Dunning: Well, I think when it comes to understanding information like the Internet, lik, reading someone who might be an epistemic trespasser for example or someone who is making grand statements about epidemiology or foreign policy or whatnot is – maybe it would be good to familiarize ourselves with the skills of journalism. And actually, I wish schools would teach journalism skills or at least fact checking skills more prominently in the American education system. That is as we progress in the 20 first century, dealing with information is going to be the skill that we all need. Finding experts and evaluating experts – Who is an expert? – is gonna be a skill that we all need. Figuring out if we’re expert enough is gonna be a skill that we all need. And a lot of that is really about being able to evaluate the information that we confront and a lot of that really boils down to fact checking and journalism. So, finding out how to do that, I wish we have a little bit more of those skills, as a country or at least that that that’s the the nudge that I would give people. Barry Ritholtz: Really, really very fascinating. So to wrap up, having a strong sense of self moderated with a dose of humility is a good way to avoid disaster on Wall Street. Adam Smith was right. If you don’t know who you are, Wall Street is an expensive place to find out. I’m Barry Ritholtz, and this is Bloomberg’s At The Money. The post At the Money: Why Self-Insight Is So Important appeared first on The Big Picture......»»
All-Time Highs Are Historically Bullish
A quick note to answer this question: What happens after markets make a new all-time high (after a year w/o one)? Check out the table above, via Warren Pies. He spoke with Batnick and Josh earlier this month. Going back to 1954, markets are always higher one year later – the only exception was… Read More The post All-Time Highs Are Historically Bullish appeared first on The Big Picture. A quick note to answer this question: What happens after markets make a new all-time high (after a year w/o one)? Check out the table above, via Warren Pies. He spoke with Batnick and Josh earlier this month. Going back to 1954, markets are always higher one year later – the only exception was 2007. That was after housing had peaked, subprime mortgages were defaulting, and the great financial crisis was about to start. This is the 15th time markets have made ATH highs after 12 months. Excluding 07, returns have ranged from 4.9% to 36.9% a year later, averaging about 14%; the bull market that followed ranges from 9.7% to 350%, with an average of 85%. Drawdowns following ATH tend to be shallower than other periods as well. Peter Mallouk points out that investments made on days of all-time highs outperform investments made on all other days, Technicians will tell you All-Time Highs are bullish because there is no selling resistance; behavioral economics suggests it’s bullish due to FOMO and plain old greed. Ask yourself this: Is 2024 more akin to 2007, or most other markets where new all-time highs were made? See also: Nothing is More Bullish than All-Time Highs (Michael Batnick, February 3, 2024) All-Time Highs in the Stock Market are Usually Followed by More All-Time Highs (Ben Carlson, February 8, 2024) Previously: How Bullish Were You in 2011? (November 29, 2023) The Most Hated Rally in Wall Street History (October 8, 2009) Bull & Bear Markets The post All-Time Highs Are Historically Bullish appeared first on The Big Picture......»»
MiB: Bill Dudley, NY Fed Chief
This week, we speak with Bill Dudley, former president and chief executive officer of the Federal Reserve Bank of New York, where he also served as vice chairman and a permanent member of the Federal Open Market Committee. He was executive vice president of the Markets Group at the New York Fed,… Read More The post MiB: Bill Dudley, NY Fed Chief appeared first on The Big Picture. This week, we speak with Bill Dudley, former president and chief executive officer of the Federal Reserve Bank of New York, where he also served as vice chairman and a permanent member of the Federal Open Market Committee. He was executive vice president of the Markets Group at the New York Fed, where he also managed the System Open Market Account. Previously, he was chief US economist at Goldman Sachs (the firm’s first) as well as a partner and managing director. He is the chair of the Bretton Woods Committee, and Chairman of the Committee on the Global Financial System of the Bank for International Settlements. Dudley explains how he became President of the NY Fed in January 2009 — right in the heart of the GFC. He guided the NYFed in providing support to financial markets and administering “stress tests” to banks — at a time when banks like Citi and Morgan Stanley were under enormous pressure — a very large job in the Spring of 2009. He describes that as a turning point in the banking crisis. A list of his favorite books is here; A transcript of our conversation is available here Tuesday. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. Be sure to check out our Masters in Business next week with Andrew Slimmon, Managing Director at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors team. His Slimmon’s TAKE is a popular and widely read commentary among Morgan Stanley advisors and on The Street as well. He also serves as Senior Portfolio Manager for all long equity strategies and is a member of Morgan Stanley Wealth Management’s Global Investment Committee. Bill Dudley’s Current Reading Project Hail Mary by Andy Weir Small Mercies: A Detective Mystery by Dennis Lehane The Cartel by Don Winslow Killing Floor by Lee Child Exhalation by Ted Chiang Books Barry Mentioned The Three-Body Problem by Cixin Liu Stories of Your Life and Others by Ted Chiang Intergalactic Refrigerator Repairmen Seldom Carry Cash: And Other Wild Tales by Tom Gerencer The post MiB: Bill Dudley, NY Fed Chief appeared first on The Big Picture......»»
2024 Aston Martin Vantage
Over the past few years, my automotive focus has been drawn from achingly beautiful classic cars, toward something newer: Hybrids, EVs, and assorted new technologies. I like to keep current, and that means tracking recent trends and developments in the automotive industry. But when the most beautiful car I have seen in decades… Read More The post 2024 Aston Martin Vantage appeared first on The Big Picture. Over the past few years, my automotive focus has been drawn from achingly beautiful classic cars, toward something newer: Hybrids, EVs, and assorted new technologies. I like to keep current, and that means tracking recent trends and developments in the automotive industry. But when the most beautiful car I have seen in decades comes along — and has a beastly 656+ HP — well, I revert to my default petrolhead status and drool something that sounds like arghgeghh… The photos are simply stunning: From the massive front grill to the muscular haunches, the eye-catching rear fenders, flowing indents, and that sexy tail bob, everything about this car screams Beauty AND Beast. Even the interior, long an Aston Martin weak spot, looks fantastic. Specs: -656BHP at 6000rpm -Maximum Torque: 800NM (2000-5000 rpm) -0-62 in 3.5 seconds (0-100km/h) -Top speed: 202mph (325kph) -All alloy quad overhead cam, 4.0 litre twin turbo V8 -Rear mid-mounted ZF eight-speed automatic transmission -Body: aluminium body structure with composite panels -Rear tires: Michelin Pilot Sport S 5: 325/30/ZR21 (Huge!); Front 275/35/ZR21 (Beefy!) What Aston calls “Podium Green and Lime” looks like a cross between AMG’s Green Magno Hell and British Racing Green with acid yellow trim is spectacular (Maybe it is Ion or Aston Martin Racing Green). The full palette of colors read wet, beautiful, and nuanced. It comes in the widest range of choices I can recall from AM, from in-your-face oranges and neon to subtle blacks, greys, and silvers. I tend to like cars in Blue, as they are less cliched and rarer — check out the low-key Ion Blue. I had no idea this was coming out until I watched it on Harry’s Garage. No rear wheel steer or heavy hybrid batteries, just a monster Mercedes-sourced twin-turbo AMG engine. I imagine the folks in Stuttgart are taking notice — anyone in the market for a Porsche 911 Turbo S now has to decide how much beauty they can handle. If this is the ICE era’s last hurrah, we are certainly going out on top… Source: Auto Car Source: Aston Martin, Goodwood, Evo The post 2024 Aston Martin Vantage appeared first on The Big Picture......»»
Transcript: Bill Dudley, NY Fed Chief
The transcript from this week’s, MiB: Bill Dudley, NY Fed Chief, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry… Read More The post Transcript: Bill Dudley, NY Fed Chief appeared first on The Big Picture. The transcript from this week’s, MiB: Bill Dudley, NY Fed Chief, is below. You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ This is Masters in business with Barry Ritholtz on Bloomberg Radio 00:00:09 [Barry Ritholtz] This week on the podcast, what can I say? Bill Dudley, former New York Fed President, multiple positions at Goldman Sachs on the Federal Reserve at the New York Fed. Really a masterclass in how monetary policy is not only made but executed and put into actual operations. There are few people in the world who understand the interrelationships between central banks, the economy, and markets like Bill Dudley does this, this is just a master class in, in understanding all the factors that affect everything from the economy to inflation, to the labor market, the housing market, and of course, federal Reserve policy. I, I could go on and on, but instead I, I’ll just say with no further ado my conversation with former New York Fed President, bill Dudley. 00:01:10 [Bill Dudley] Great to be here, Barry. It, 00:01:11 [Barry Ritholtz] It’s great to have you. So I feel like I have to call you Bill. 00:01:15 [Barry Ritholtz] Bill. That’s how, 00:01:15 [Barry Ritholtz] Because that’s what I always hear you described as not a William. Yep. Let, let’s talk a little bit about your background. You get an economics PhD from California, Berkeley in 82, and around the same time you become an economist at the Federal Reserve Board from 81 to 83. Tell, tell us a little bit about that role. 00:01:34 [Bill Dudley] I, I was there in the, what’s called, called the financial studies section, which is one of the very small places in the Fed that is not macroeconomics driven. It’s microeconomics. So we worked on things like payments policy, you know, regulatory policy. So all, all sorts of micro issues, not macro issues. It was a pretty interesting period because the, the congress had just passed what’s called the Monetary Control Act, where they were forcing the Fed to charge for all its services to, so, so, so to sort of level the playing field with the private sector. So we had to figure out how are we gonna price all these services in a way that we can still sort of stay in business and be a viable competitor to the private sector. Huh. 00:02:11 [Barry Ritholtz] That, that’s kind of bizarre. I would imagine in 1982, the Fed was a much smaller entity than it is today. What was a day in the life of a Fed economist like back then? 00:02:23 [Speaker Changed] So, I was working on issues, you know, on payments. I worked on issues on, you know, some, some, some, some of them were quite esoteric. So, for example, the treasury was thinking about moving to direct deposit, but they wanted to know how much it was gonna cost them because direct deposit, they, they, they, they, the money clears, you know, sorry, almost instantly, right? When you write a check, you get check float, it takes time for the checks to come back to the hit the treasury account. So they wanna know how many days does it take a, a treasury check to get back to us. So we actually set, set up this project where we went out to the reserve banks and sampled checks to find out how long did it actually take someone to get their treasury check and deposit it somewhere and have it get back to the Fed and debit the treasury of the county. It turned out to be like eight or nine days on average, 00:03:07 [Speaker Changed] And, and on a couple of billion dollars, that float is real money. 00:03:10 [Speaker Changed] It’s real money. So we wanted to make sure that under PE people understood what the cost was. Now, obviously, it’s a good thing to do. I mean, it does cost the treasury money, but it’s a much more efficient and more reliable payments medium. 00:03:23 [Speaker Changed] Did you overlap with Chairman Paul Volker when you were there? 00:03:27 [Speaker Changed] Yes, I did. I didn’t have a lot of interactions with him. I remember one time though, I did do a briefing of the, of the Board of Governors, and at the time they had, they had this very long table in the board in the main, you know, board of governor’s meeting room. And Volcker sat at one end and the, the briefer sat all the way at the other end, which was made it sort of complicated because Volcker had a, usually had a cigar stuck in his mouth, and he would actually quiet, like, and you could like straining to hear them. The, the senior staff was ready to rescue you if you said something inappropriate. I mean, right. They set the bar, the tension bar so high because you, you actually couldn’t actually do a briefing until you’ve actually taken a course. 00:04:08 [Speaker Changed] No kidding. So 00:04:08 [Speaker Changed] That means like, you’re not exactly relaxed when you’re going to, to brief the governors. I’m, it’s not a lot of give and take. It’s very, it was a very formal process 00:04:16 [Speaker Changed] And even without a cigar in his mouth, I only got to meet Tall Paul once, but he’s kind of gruff and mumbles, like not a clear projecting voice, kind of a, a horse mumbling voice. I can imagine with a cigar in his mouth, who could even tell what he’s saying. 00:04:31 [Speaker Changed] Well, I seem to have, have gotten it good enough. And you know, what’s interesting about that? I didn’t really have that much interaction with Paul over the next, you know, 15, 20 years. But once I got to the Fed, we started to actually see each other on a much more regular basis. I got involved with a group of 30, Paul was a member of the group of 30, and we gradually became pretty good friends. So it started like very slow and started it matured like fine wine. 00:04:56 [Speaker Changed] He’s a, he’s a fascinating guy. And what, what an amazing career. So before you come back to the Fed, there’s a private sector interval. Tell us a little bit about the 20 years you spent at Goldman Sachs, where you not only became a managing director and a partner, but you know, really very much rose through the ranks. 00:05:16 [Speaker Changed] Well, first I went to JP Morgan. I was their, the regulatory comm, JP Morgan at the time had one regulatory commiss. And so when the job came open and they approached me at the Fed, I thought, boy, if I don’t take this job, it’s not gonna be available, you know, a few years later. So I went to JB Morgan and I worked on a lot of bank regulatory matters, and that’s why I’m still very interested in bank regulatory issues. But that seemed to me like not a really great long-term career. ’cause as you know, bank regulation changes very slowly, and I sort of wanted a faster tempo. So Goldman Sachs had me into interview for a macroeconomics job, and I thought, well, I don’t really know a lot of macroeconomics, but I do know about how the Federal Reserve operates, how the payment system operates, how the plumbing works, how reserves, you know, move through the system. And I think they liked the fact that I knew about how things worked at sort of a micro level. So they hired me to do macroeconomics. 00:06:11 [Speaker Changed] You were chief US economist for, for a decade over a, a really fascinating period, really, the heart of the bull market. Tell us a little bit what you remember from that role in that era. 00:06:27 [Speaker Changed] Well, I remember how, how, how it was a period of sort of stars for, for, for, for equity analysts, much more than it is today. And one of the biggest stars was Abby, Joseph Cohen Sure. Who was the equity analyst for Goldman Sachs. So trying to find some space between Abby and your audience was a little bit challenging. But, but, you know, we, I focused mostly on fixed income and foreign exchange. So there was sort of room for me to, to, to do my business. Probably the highlight of my career at Goldman Sachs was that, I can’t remember exactly the year, but it was in the early two thousands when people in the markets were, couldn’t figure out if the Fed was going to move by 25 basis points or by 50 basis points. And unlike today going into the meeting, it really was 50 50. 00:07:13 Right. And Lloyd Blankfine called me up the night before and sort of said, you know, we have a lot of risk on, on this notion that they’re gonna do 50. How do you, how do you feel about that? And that was my call. I said, I, I told Lloyd, I said, I don’t know what’s gonna happen, but the probability of 50 is a lot more than 50 50 at this point. Next day I had to go to Boston for a client meeting. It was really sort of sad because I wasn’t on the floor at the time that the announcement came, but apparently people stood up and cheered for me, 00:07:40 [Speaker Changed] And it was a 50 point mark. 00:07:41 [Speaker Changed] Yeah, yeah. So I got that, that, so that, that was probably the highlight. And I sort of got to miss the best part of it actually. 00:07:47 [Speaker Changed] So, so after, you know, more than 20 years at Goldman, you joined the New York Fed in 2007, overseeing domestic and foreign exchange trading operations, 2007, that, that’s some timing. It’s really, it’s after real estate rolled over, but it’s kind of before the market peaked and the real trouble began in oh 8, 0 9. 00:08:11 [Speaker Changed] Yeah. Well, I had about I seven months of calm and then chaos started in August of 2007. I remember it really well because I just finished building this house in West Virginia and we, we were taking occupancy in early August, and it was, it was literally the same day that BMP Paraba shut off redemptions from some of their mutual funds, caused all sorts of chaos in Europe. And then the question is, well, what are we gonna do about adding liquidity in the us? So, didn’t get outta the house, my new house for the next two days as we tried to figure out how to calm markets after the BNP Paraba event 00:08:48 [Speaker Changed] And, and the US market kept going higher. I don’t think we peaked till like October oh seven, something like that. 00:08:53 [Speaker Changed] Yeah. People didn’t really understand the, the, the consequences of subprime, you know, I thought 00:09:00 [Speaker Changed] For years, I mean, literally for years if you mentioned it, you would be mocked on tv. 00:09:05 [Speaker Changed] Yeah. I mean, you know, one thing I am proud about when I joined the Fed is in January, 2007, that was my first briefing of the FOMC. And I, I actually talked about how this could turn out poorly. You know, that subprime was being supported by, you know, subprime was being, you know, the credit was flowing to subprime, subprime was enabling people to buy houses. Home prices were going up as, ’cause home prices were going up. Subprime wasn’t a problem, right? But at some point, supply was gonna increase in response to the higher home prices. And once prices stopped going up, subprime was gonna start to go the wrong direction. I said, this is a possibility. I didn’t say it was going to happen, but I said it was a possibility. So I was sort of pleased that I got off on the right track. 00:09:48 [Speaker Changed] And, and then in January, 2009, we we’re deep into the financial crisis. We’re post Lehman and post a IG you get named 10th president, CEO of the New York Fed. Again, fantastic timing. What was taking up your attention right in the midst of, of the CRI financial crisis? 00:10:08 [Speaker Changed] Well, you know, that was a tremendously fortunate event for me. I always tell people like, B Barack Obama had to become president. Tim Geitner had to become treasury secretary, and then the board of directors in your fed had to pick me. So it’s sort of like a low probability times, low probability times low probability. So I, 00:10:25 [Speaker Changed] So sometimes it works out. Yeah, 00:10:26 [Speaker Changed] Sort of a bank, a bank, a triple bank shot. You know, a lot, lot of things we were focused on at the time was trying to provide support to financial markets. So, if you remember, we were, we were still rolling out various facilities like the, the, the term asset backed, the lending facility, for example. We were running the commercial paper funding facility. We were trying to figure out how to do stress test, the first stress test of banks, right? So that was a big job in the spring of, of 2009. And those stress tests were probably the critical turning point in the financial crisis. I remember the, the day after we published the stress test, and for the Fed, we were actually pretty transparent about what we did and what our assumptions were. And here’s the results. Bridgewater published a piece, and I think the headline said something like, we agree. 00:11:13 And I, and I said, okay, we’ve, now that’s, that’s really important because if our analysis is viewed as credible, and we have the tarp money being able to supply the capital that’s needed, then people can start to rest assured that the banking system is, is gonna stabilize and, and it’s gonna stop deteriorating. Now, it also helped that the economy was showing signs of bottoming out, right? So it didn’t look like we’re just heading down into a, a deep hole. But, you know, it was very touch, touch, touch and go there in the first part of 2009. And there, you know, there were still some major financial firms that were pretty darn shaky. I mean, Citi was pretty shaky. Morgan Stanley was pretty shaky. Some of the banks were still pretty shaky. So it, you know, until you actually hit bottom and start to pull up, you’re really wondering, are you gonna get through this in, in one piece? 00:12:00 [Speaker Changed] So, so the Bridgewater piece raises a really interesting question. The New York Fed is kind of, I don’t know how to say this first, amongst the regional feds, because you’re located right in the heart of the financial community. What is the communication like back and forth between the New York Fed and major players in finance, especially in the midst of a crisis like that? 00:12:29 [Speaker Changed] So the New York Fed is sort of unique among central banking entities because most central banks, they, they do the policy and strategy and the operations all in the same place. But in the Fed is split. You have policy done in Washington, the operational implement implementation of that policy. Almost all of that takes place at, at the New York Fed. So the New York Fed is sort of the eyes and ears of, of the Federal Reserve for markets. I think that, you know, one thing that helped me a lot during the financial crisis is I knew a lot of people on Wall Street. And so when something was happening, I could call up people I knew and and just ask their opinion, recognizing that oftentimes their opinion does have a touch of self-interest. Sure. So you need to talk to three or four people to sort of triangulate and figure out what you think is really going on. 00:13:15 I mean, I’ll give you an example of one thing that really struck me during the, that period, I called up someone and I said, here, here’s a complex, you know, CDO obligation, you know, with, you know, with all these different mortgages and all these different tranches, how long would it take you to actually go through that and value it appropriately to come up with a appropriate valuation? He said, oh, it’d take at least two or three weeks, really? And I thought, oh boy, we’re in big trouble. Wow. You know, if you don’t really know what things are worth when you’re going through a period of financial stress, that’s gonna be, make things much, much more difficult, 00:13:49 [Speaker Changed] I would’ve guessed they would break that up into five parts, give it to a bunch of juniors, and they’d have an answer in three hours 00:13:55 [Speaker Changed] At the most. Well, it’s, it scared me. Wow. It scared 00:13:56 [Speaker Changed] Me. I, I, I can imagine. So, so from the New York Fed, you ultimately end up as vice chairman of the FOMC helping to formulate US monetary policy. What was that like going from New York to, to dc? 00:14:14 [Speaker Changed] Well, it wasn’t such a big change because I had already been going to the FMC meetings and briefing the, the, the, the, the FMC members as 00:14:21 [Speaker Changed] As president of the New York Fed. You have a seat on 00:14:23 [Speaker Changed] That. What what what what happened though is, is as I sort of switch sides, so there, so the, the, the day that Tim Geer was named Treasury Secretary was basically the day before an FOMC meeting. And I literally didn’t know when I went down to Washington that Monday evening, whether I was gonna be briefing the FOMC participants or whether I was gonna be an FOMC participant myself. So I actually prepared two sets of notes. Here’s my briefing notes, if I’m, I’m the so manager, and here’s my remarks if I’m the president of New York Feds. Wow. So I was ready for both. 00:14:56 [Speaker Changed] And what happened that day? 00:14:57 [Speaker Changed] He was, he was named on that Monday and so on Tuesday I was, I was the, I was the president of New York Fed. Wow. And, you know, I didn’t, you know, so I, and I, when I got back to New York on, you know, I think Thursday morning, I, we had a town hall and I gave my first remarks to the New York Fed people and had a very simple message for them. Best idea wins because I was really struck by how hierarchical central banks tend to be. And I wanted to sort of push aga against that idea and basically say, it doesn’t matter where the idea comes, if it’s the best idea, that’s the idea that should win out. 00:15:34 [Speaker Changed] Huh. Ma makes a lot of sense. And, and since then, you, you’ve gone on to do some work reforming L-I-B-O-R as the benchmark for rates. Tell us, I always get the name SOR the new one that replaced it. sofa. Yeah. So, so tell us a little bit about the work you did. ’cause L-I-B-O-R was probably the most important number, certainly in credit, maybe in all of finance. 00:16:00 [Speaker Changed] So LIBR for while was there was a real question whether Central banks were gonna take this on or not. And I remember I was in Basel for the BIS meetings and I wrote a one page memo to, to Ben Bernanke, to hand to Mervin King. Mervin King was the head of the, sort of the policymaking group at the BIS at the time. And the memo was basically arguing why Central banks needed to own the L-I-B-O-R problem. ’cause if they didn’t own it, it wouldn’t get fixed. It’d be a problem again. And then the central banks would be blamed for, well, why didn’t you fix that problem? So I don’t know how much import that memo had, but I was very pleased to see the central banks take it up. And as you know, it was a huge undertaking, which took, you know, many, many years to complete. 00:16:44 [Speaker Changed] And, and, and for those people who may not be familiar with the London Interbank offered rate offered rate literally was a survey where they call up various bond debts and say, so what are you charging for an overnight loan? And eventually traders figured out they could game that by, let’s just call it, talking their books, so to speak, in a way that would move the L-I-B-O-R in their direction. You could, you could do a bunch of things with derivatives and eventually L-I-B-O-R kind of spiraled outta control the new improved version. How do we prevent that from taking place? What, what were the structural changes? 00:17:26 [Speaker Changed] Well, the, the problem, I mean, the problem of of L-I-B-O-R was that you had a small cash lib i bor market that was, was referencing a very large futures market year at dollar futures market. And so you had a situation where you could take big positions in the euro dollar market, affect the price and the cash market and actually make a profit. So the sort of the tail was wagging the dog for SOFR, the secured overnight funding rate for repo. You have a big repo market. I mean it’s, you know, hundreds and hundreds of billions of dollars. So the idea, and it’s a real market. I mean, there’s real transactions that are traded and you can sort of track what the prices are and where trades are. So it’s, so it’s almost impossible to imagine someone manipulating the this so, so R market. 00:18:07 [Speaker Changed] Huh. Really, really interesting. So, so first, before we start talking about policy, I have to ask, you’re at Goldman Sachs for 20 years and, and you get the phone call to join the New York Fed. What was that like? Was that a tough call or was that an easy decision to make? 00:18:24 [Speaker Changed] Well, what happened actually is Tim Geer called me several months earlier and said, would you like to come over to be a senior advisor? And I said, I’d love to be a senior advisor to you, Tim, but what do I do with the rest of my, you know, 40, 50 hour work week? And he didn’t have a really good answer for that. 00:18:39 [Speaker Changed] Was this a full-time gig? I means he was economies position. 00:18:42 [Speaker Changed] He, he, he was per, well, I didn’t, when I left Goldman, I didn’t really know what my next thing was. So I did not have the next job. I was just assuming that I would, I, something would come along that would be 00:18:51 [Speaker Changed] Right. Fair assumption. 00:18:52 [Speaker Changed] It would be interesting. So he, he offered that. And I thought, well, you know, I I, you know, Tim and I had a very good relationship and you know, I, I sort of liked the idea of working for him, but I thought a senior advisor was a little bit too informed. And a couple months later he came back and said, can you run the markets group at the New York Fed? That’s completely different. You’re running the group that actually implements monetary policy, oversees market analysis, deal deals with the primary dealer community. That was a real opportunity. So that one I didn’t have to think very hard about. 00:19:21 [Speaker Changed] And, and what’s, what, not long after Tim gets elevated, you, you take the role of New York Fed President, what’s a day in the life of New York Fed Pres? Like 00:19:33 [Speaker Changed] There’s a lot to, to do because the New York Fed does lots of different things. So you, you know, we have supervision, we oversee some of the largest financial institutions in the world from a supervisory perspective. We’re the international arm of the Fed. So pretty much every two months I would go to B to to the BIS in Basel, be part of the Bank for International Settlement meetings. New York Fed President as, as well as the chairman of the FO of the Board of Governors is on the board of directors of the BIS. As Alan Blinder once joked to me, he says, New York Fed is the only only institution that’s treated it like their their own country because they have this board of directors position. You know, there’s lots of things and, you know, payments their Fed, New York Fed runs fed wire, the, the New York Fed runs Central Bank International Services for a bunch of foreign central banks. 00:20:24 They have, I don’t know, three, $4 trillion of custody assets from foreign. Wow. So there’s a lot, there’s lots of pieces to the Fed, and then there’s a research department and there’s a lot of outreach to try to get information about what’s really happening in the world. I mean, the one thing that I did that was probably a little new from the Fed’s perspective is I tried to broaden out the, the people that the New York Fed was talking to historically, the New York Fed had typically talked mainly to the primary dealer community. So that’s where they obtained their information from. And I thought that that was too narrow. We need, we need, we need a broader set of perspectives. And so I hired a, a woman named Hailey Bosky who came in and, and literally built out a whole operation so we could actually interact not just with the sell side, but also with the buy side. 00:21:10 And so we started an advisory group of people, you know, hedge funds, pension funds, insurance companies, you know, buy side investors. And so we have them in periodically to talk to. And so we got a much broader network of information that we could sort of take on board. And I think that’s valuable because, you know, where you sit really does influence your perspective and you sort of wanna understand what biases and, you know, self-promotion sometimes that people are talking their book that you want to be able to make sure you, you don’t get to fooled by that. 00:21:42 [Speaker Changed] Now, you could go back not all that far in the Fed history, and there was none of this communication. There wasn’t transcripts released, there wasn’t a reporter Scrum and, and a q and a. There wasn’t even an announcement of change in interest rates. You had to follow the bond market to see when rates changed. What are the pros and cons of being so clear and so transparent with market participants? Is the risk that maybe we’re too clear? 00:22:13 [Speaker Changed] Well, I think there’s a strong argument in favor of transparency as opposed to opacity. And, you know, this has been debated within the Fed for many years. I mean, Alan Greenspan, Paul Volcker definitely preferred to be opaque. I mean, Alan Greenspan famously said, if you understand, if you think you understand what I said, then I wasn’t, wasn’t unclear enough or something to that effect, right? So I, the, the value of transparency is, is if, if is that if markets understand how the Federal Reserve is gonna react to incoming information, the market can essentially price in what the Fed hasn’t even yet done. And so that can make monetary policy work much more rapidly. So let’s think about it today. So the market is pricing in roughly five to 6 25 basis point rate cuts between now and the end of the year. So that means monetary policy is easier, even though the Fed reserve hasn’t cut rates yet. So the, 00:23:06 [Speaker Changed] They do some of the work for the Fed for 00:23:08 [Speaker Changed] Them. Yeah. And, and it makes it, and it also means that as new coming information is coming in the market can reprice. And so that can cause the impulse of the economic news to be filtered into financial conditions much more, more quickly. I’m a big believer in financial conditions as a framework for thinking about monetary policy. You know, 20 something years ago, Jan Hottes and I introduced the Goldman Sachs Financial Conditions index, and it took about 20 plus years for the Federal Reserve to sort sort of endorse it. I mean, Jay Powell talks about financial conditions a lot more than any other chair of the Fed ever has. The reason why financial conditions are so important is in the United States, the economy doesn’t really run on short-term interest rates. It really runs on how short-term interest rates affect long-term rates, mortgage rates, stock market, the dollar credit spreads, you know, we have a big capital market compared to other countries. 00:23:58 And so short-term rates are not really the driver. Now, if short-term rates and financial conditions were, you know, rigidly connected, so if I move the short term rate by XI, I know exactly how much financial conditions are moved by y you wouldn’t have to worry about financial conditions, but there’s actually a lot of give between the two. And so financial conditions can move a lot, even as short- term interest rates haven’t changed very much. I mean, good example is just the last three months, last three months since the end of October till now, financial conditions have eased dramatically. I mean, the Goldman Sachs financial Conditions index has moved by about a one point half per points, which is a big move for that index, even as the Fed hasn’t done anything in terms of short term rates. So 00:24:39 [Speaker Changed] Part of the problem with everybody anticipating Fed actions is there’s a tendency for many people, sometimes most people to get it wrong. Wall Street has been anticipating a Fed cut for, what is it now? This, we’re in the seventh month, eighth month of, hey, if the Fed’s gonna start cutting any, any day now, what does it mean when anticipating Fed actions almost becomes a Wall Street parlor game and there’s less focus on, on what’s happening in the broad economy and more focus on, well, what does the second and third derivative of this mean to this economist advising this Fed governor and the impact on the FOMC? 00:25:23 [Speaker Changed] I mean, sometimes I think you’re right that there’s almost too much focus on what’s gonna happen at the next meeting. I mean, you know, when you go to the press conference now, if Powell’s just asked multiple different varieties of the question, okay, so what would cause you to move at, at, at, at the March meeting or at or at the May meeting? And of course, Powell’s not gonna answer that question, you know, because it depends, it depends on how the economy evolves between now and then. So I think, you know, one of the problems I think you, you have is that the Fed Reserve does publish a forecast, the Summary of economic projections, which is the forecast of all the 19 FMC participants. So that gives you an idea of what they sort of think is gonna happen at any given point in time. But those forecasts are, you know, not particularly reliable. And so as 00:26:06 [Speaker Changed] All forecasts are 00:26:07 [Speaker Changed] On, yeah, it’s all four kind stars. So you, you don’t want to, you don’t want to take it sort of literally, but it, you know, like right now there’s a bit of a, a gap, right? The feds is talking about three rate cuts in, in, in 2024, and the market’s got five to six priced in. So you know, what will happen is the economic news will come out and that will drive, make the Fed either go more quickly or more slowly, and that that will, will, what actually is, is important. So I, I always tell people, focus on the data more than what the Federal Reserve says beyond the next meeting. 00:26:39 [Speaker Changed] Although, to be fair, and I find this perplexing, say what people will say about Jerome Powell, he has said what his position is, is he has said what he’s going to do. And then he has done exactly that for the past three years. And it’s almost as if Wall Street just doesn’t believe him. Like, no, no, we’re not gonna cut this year. You got, you got three or four quarters, settle down, no, no, go cut next month says Wall Street. He has said what he meant and then stuck to it. And yet the street seems to doubt him. 00:27:10 [Speaker Changed] Well, there’s two reasons why the market could disagree with the Fed. One is they could misunderstand the Fed’s reaction function. So you give them the Fed have set of economic data, how are they gonna react to it? But it also could be a disagreement about how the economy itself is gonna evolve. The Fed might be more optimistic or more pessimistic on the economy than than market participants right now. It’s really hard to sort of say, what, what’s the, what’s the disagreement about, does Wall Street think that economy is gonna be weaker than the Fed does, or does the, or or does the market just think that the Fed is going to be more aggressive than the Fed thinks at this point? 00:27:44 [Speaker Changed] Right. Sometimes it just looks like pure wishful thinking. 00:27:48 [Speaker Changed] I think sometimes the markets are just gets ahead of itself. It’s almost like there’s, we’re now talking about easing, so the bell’s about to go off and I don’t want to miss out. And so I’m gonna be pretty aggressive about positioning for that. And I, I think there’s a little bit of, you know, and sometimes things tend to go too far because people get caught off size and then people have to close out the, the trades that went wrong. And so everyone’s sort of moving all, all at once to the other side of the boat. And so things can get overdone at the end of the day though. I mean the Fed Reserve, you know, writes the story, you know, the market has to converge to what the Fed ultimately does. And so this is why the Fed’s not parti.....»»
CPI Shelter Measures: 6-12 Month Lag
Last month, I mentioned that CPI inflation measures were based on lagging BLS measures of Owners’ Equivalent Rent (OER). BLS highlighted housing prices, headlining the CPI report as “CPI for all items rose 0.3% in January; shelter up” As the chart above shows, Shelter was 2/3rds of the increase in the most recent.… Read More The post CPI Shelter Measures: 6-12 Month Lag appeared first on The Big Picture. Last month, I mentioned that CPI inflation measures were based on lagging BLS measures of Owners’ Equivalent Rent (OER). BLS highlighted housing prices, headlining the CPI report as “CPI for all items rose 0.3% in January; shelter up” As the chart above shows, Shelter was 2/3rds of the increase in the most recent. (Chart thanks to Michael McDonough). We all know OER lags real-world prices — I used to spitball this at 3-6 months. But this week’s podcast guest, former NY Fed President Bill Dudley, tells me the lag is closer to 6-12 months. So BLS uses a measure of shelter for its inflation calculation that might actually lag behind actual prices by as much as a year. That puts this week’s big sell-off into proper perspective. It was a reaction to data that was either old or very old. It would not surprise me to see that as people figure this out, we claw back that sell-off over the next few days or weeks. The ever-present question: How much does the FOMC recognize how behind the curve this data is? Previously: CPI Increase is Based on Bad Shelter Data (January 11, 2024) How Everybody Miscalculated Housing Demand (July 29, 2021) The post CPI Shelter Measures: 6-12 Month Lag appeared first on The Big Picture......»»