Masters in BusinessMasters in Business

Jeffrey Sherman on a Mathematician's Journey Into Finance

View descriptionShare
Published May 30, 2024, 9:48 PM

Bloomberg Radio host Barry Ritholtz speaks to Jeffrey Sherman, deputy chief investment officer at DoubleLine Capital LP. Sherman oversees and administers DoubleLine’s investment management subcommittee; serves as lead portfolio manager for multisector and derivative-based strategies; and is a member of the firm's executive management and fixed income asset allocation committees. Prior to joining DoubleLine in 2009, Sherman was a senior vice president at TCW Group Inc. He is host of the podcast The Sherman Show and a CFA charterholder. 

Bloomberg Audio Studios, Podcasts, radio news.

This is Master's in Business with Barry Ridholds on Bloomberg Radio.

This week on the podcast what Can I Say? Funny story. Jeffrey Sherman, He's been on the podcast before. I've had been on his podcast, The Sherman Show before. The very first Masters in Business broadcast was just about a decade.

Ago, and that was his boss.

Jeffrey Gunlock, founder of Double Line Capital, back in July twenty fourteen. So he just flew in late yesterday. The calendar was a little tight. They got here a little late. They had to leave a little early. I apologize in advance if it sounds like I'm jumping in trying to get to the next question. I have pages and pages of topics to talk to him about. I had a very limited amount of time to get to it. So if it sounds like I am leaping into push him forwards, I am. He was super generous with his time. He was supposed to leave about twenty five minutes to go to his next appointment, but we just kept going. There are few people who understand both fixed income and equity investment and quantitative strategies to each better. Than Jeffrey Sherman. He really is one of the most knowledgeable people in this space, and not just knowledgeable in the abstract, but helping to oversee just about one hundred billion dollars in client assets. Really just a tour to forced discussion. I find his take very insightful, very refreshing. I love the approach of just throwing everything out the window and going back to first principles on occasion.

Double Line is known for that.

Just a delightful conversation, so informative, with no further ado. My discussion with Jeffrey Sherman, Double Lines Deputy Chief Investment Officer.

Thanks, Barry, it's good to be back. It's good to have you.

So, you know, the last time we spoke, we were really talking about funds and bonds and really got into the minutia. But I want to roll back a little bit and talk about your background, which is really kind of interesting. Undergraduate applied mathematics, master's degree in financial engineering, a little bit of teaching. What was the original career plan?

What were you thinking so prior to going to graduate school, I was looking at becoming a teacher. Everybody told me that if you get a degree in mathematics the world's your oyster. And I didn't really see it, to be honest, originally really because I started off in what was the discipline of pure mathematics. So pure mathematics for the uninitiated, is essentially proving everything you've already learned, and so you go back and you have to go back to the basics and the principles, and it's just a lot of logic at the end of the day, and trying to make that connection to how to be employed very difficult for especially for like a nineteen twenty year old who has no clue what's out there in the world.

And it's like studying philosophy. You could be philosophy professor, but that's pretty much it.

Right, But also like there's a lot of overlap between philosophy and a pure mathematician as well. And again it comes down to logic and you know, the deduction of arguments. But you moved to applied mathematics, I did, and I did looking for something different, and I just didn't see much there. And further to that, I was on the track to become a teacher, so I was I thought, you know, hey, I'll be a high school baseball coach, high school teacher seems interesting, and I have to thank the university for forcing us to go actually sit in classrooms. And so I don't mean attending class for your own education, but I meant if you want to teach, you have to go to the local.

School or did a course, watch a teacher do what you're studying to do, and say, hey, is this for me? Yeah?

And I realized the repetition, the redundancy, also the lunacy of trying to babysit teenagers, and so I was very turned off by it. And so that was actually the transition to to applied mathematics to try to find a different career. And what they don't tell you about applied mathematics is you can apply it to things, but it's not blatantly obvious what said application is. And so effectively, by the time I became a senior, I didn't really know what I wanted to do, and time was rolling around and I really hadn't applied for a job. So the natural thing was, well, let's just stay in academia, and so that's what I did. I actually started off into PhD and applied mathematics, and I like to say, I'm a dropout. I didn't really see the path of becoming a professor at the kind of the university level, because again, I still felt there was that redundancy and it just didn't it didn't seem to, you know, elicit some spark inside of me.

So, how do you go from a PhD program to financial engineering?

Gusty, Well, what it was was, so, as I said, with applications, there's many applications of math, and the usually obvious one is physics. And I really hated physics. I never really liked physics, and it was just something that didn't intrigue me. So I spent a lot of time in probability and statistics, which probability is very wonky statistic people think they're the same, they're not really completely different, absolutely different fields. But I'd done a lot of econometrics and things like that, and so from the standpoint of statistics, that was one of my specialties, in addition to calculus, and so really I was focused on applied during the run of differential equations and calculus based stuff. And at the time, this was the late nineties, obviously quants were becoming bigger and bigger. Part of the financial industry, and so there was starting to become these programs on like financial math more applied. Usually it's like a you know, a University of Chicago, which again I didn't have a lot of exposure to these, you know, prestigious universities and didn't know about a lot of this, and so I was looking like a Carnegie mellon the likes. They ended up going back to a school in la called Clermont and they had a financial engineering program there, and so I was always concerned, well, I haven't studied accounting finance over the time, and the advisor there gave me some great advice, and we can teach mathematicians finance, we can't always teach finance majors math. And so it's so true. There is something about it. It's an easier transition. I won't say you can't teach them, it's just the finance was a lot easier when you've studied a lot of math for a long time and the applications were absolutely directly applicable.

It seems that some people are math people and some people are not. And you know, if it comes to you naturally, you don't understand why other people don't get the fundamental like it. There's an internal logic that makes so much sense if you're one of those people, and if you're not, you know, it's Greek too.

And also it was something that I was always kind of gifted with. Right, the math came easier. The reason I became a math major berry is that I actually disliked reading by the time I got to college. And it was really and obviously, think about it, finance never have to read, right, we don't have to read anything in there. But I was actually floored by when I got my first job as an intern and the amount of reading that I had to do in a given day. And I was like, wow, you know, I chose math because it was very simple. It came natural. It was like, you know, you read a couple of pages, you do some problems, it's over. I don't have to read, you know, hundreds of pages of a novel. But very quickly I learned that you definitely have to read day and day out.

And a poorly written novel with a terrible narrative, plot structure, and awful characters.

Right, that's finance in a nutshell, right, So so definitely, you know, again that's just being young and naive as well, But you know, you should always gravitate to some of your internal skill set, and that's what I did. But I think the people who told me that you can always do stuff with the math degree, but I also really cursed them for a while not tell me what that exactly was. And by the way, when I heard you can become an engineer, I never wanted to drive a train, right, and so no one ever told me what an engineer was actually doing. Is that the definition engineer is using math to solve problems exactly right, real world problems. And so I don't know if financial engineering holds up as well, because I don't know if there are the real world problems, but I definitely know there are problems there and there are things we can help in the world by doingthing.

You mentioned you were an intern. Where did you start your internship? And wasn't in the World Definance?

It was? It was so when I was in the master's program require an internship as part of it, and I got it. Trust come to the West, so tcw oh, and so that was your first job. My first job was there, and I've worked with the same crew effectively ever since. So that was in. That was in two thousand and one, early then, and then ultimately you know, I've been working with the same team around me for about twenty five years. Now.

That's amazing. How did you bump into some kid named Jeff Gunlock though.

Well he was he was a lot older than me, you know, he was not a kid at the time too, but he definitely had GRAVI toss around the firm. And I think there's something about finance too that you get defined into your roles as a function of essentially your entry point in the industry. And so I've noticed that me coming in two thousand and one, think about it not really a great equity market.

Dot com implosion, right, I mean in.

The middle of it, obviously we had nine to eleven. You had all kinds of crazy stuff that happened in the world. And so I've noticed that the people that came a few years after me tend to be more risk takers right where we were a little bit more risk verse. I think there's this anchoring of when you start one's career sometimes of how you get into a side of the business. Now, obviously we can read a fi in ourselves, right, but I do think that there is something to be said about that. So again, this is a world where interest rates. You know, you got paid unlike the last time we were here talking right when we had that financial true financial repression for like twelve years, and so there was something that was interesting about it. And inherently it's more mathematical nature. And so as I was doing like risk analytics and working to help support some of the marketing staff and do that, you know, I gravitated to that side of the business a little bit. So my goal was to work for mister Gunlog. I did not on day one, but I always felt that like there was something in there, just analyzing returns, looking at the history, looking at the team, and my goal was to try to get on that team, and effectively I did so.

Just a little bit of a trivia footnote the very first Masters in Business that was broadcast just about ten years ago, July twenty fourteen, episode number one. Jeffrey Gunlock, double long capital. That's right, So you really really I owe him a special debt of gratitude.

So so I do too, very yeah. So he still writes my paychecks today, signs that right, Yeah. Yeah.

At TCW, you're at the Trust Company of the West. You're senior vice president, You're a portfolio manager, you're a quantitative analyst. It sounds like you're wearing a lot of different hats. Are these sequential positions or were these all at once?

Yeah, No, it's sequential. You know, I started as a quant and then you know, you get these corporate titles as things go along. But ultimately, you know, I liked being on the fortflow management side and so devising strategies, coming up with ideas and trying to figure out different ways to execute them. That was always of interest, and so I worked a lot on the asslecation side. And so I've had a lot of roles throughout my career, even though it's it's very narrow team right Instead, I've worked at the same folks forever. You know, I've trafficked in a lot of markets. I mean, at one point I worked for a guy that wrote a very similar piece on commodities, and so we created commodity products. We ran those for a few years. Again, as I said, we've worked in at allocation. I've helped build a lot of our quantitative strategies. We run at double line as well, and so it's not just me. I have a good team around me too, and so I've always been able to surround myself with people who can think about these ideas and I are really kind of big picture folks, but it can also get into the minutia. And so not shockingly, I like quants, right, I feel like we vibe, you know, we can we can get together. But I like the way that the quants think, you know. And so I've never I struggled when I took the CFA exam, not not with the whole curriculum, but obviously the accounting. I mean, I have a degree in financial engineering and I took one accounting course, right, and so the statement analysis never made sense to me. It still doesn't, you know.

Well, it doesn't have the same internal logic, the same You can't arrive mathematical rationality where you just have to start with a basic premise and so much things can be derived logically from that starting point. This is just rules, and it's just especially if you're a left brain person, the right brain stuff and vice versa. So you mentioned financial repression, You and the rest of the qants in your core group, including Gunlock, decide to stand up your own firm in two thousand and nine. It's pretty much in the midst of people. The worst of the market I think was somewhat behind us, but still people were shell shocked. What was it like standing up a new firm right in the financial crisis, right in the midst of nine with the Fed every week it seemed like there was a different new credit line, a different new way to unfreeze. What was going on in the credit markets? Tell us about that period.

Yeah, well, actually the bulk of that period transpired at TCW, so the eight sure, but even in nine, even though nine there was there was still this was kind of the bounce back. As we all know. The lows were in March of nine. But what you found was that in we left in December of nine. At that point things were starting to have more clarity. Now massive uncertainty in the world, and there's the old adage that investors fight the last war. They're still fighting the last one right every time, right, And so trying to show people this idea that you know, investing in these mortgages that did go down fifty or sixty percent, that there was significant upside in this and really limited downside, and so there was something special about that time as well, where the opportunity set was extremely obvious. But it's never obvious. Right at the time, it wasn't obvious. We thought it was obvious. Looking back with hindsight, it was the best time to make money and fixation.

Can I tell you something about obvious so we full disclosure. We used to own the way back in nine, ten, eleven, twelve, the Double Line mortgage backed portfolio, and it was obvious that hey, you're buying these deeply distressed mortgages with an implicit federal guarantee. How are you not gonna outperform plain vanilla mortgages and that product for I want to say, like the next seven eight years until you just couldn't buy any more mortgage. They just weren't available.

They weren't They weren't available at those prices anymore. Anyone says when you buy them at par it's a lot different than buying them it's fifty, right, But.

That that fund just destroyed old commerce for years and years and years. Am I overstating that? No?

I mean, look, anybody who was in the space did similar, right as long as you.

Had any guys were very aggressive, very early, and I want to say seventy five eighty five percent of the portfolio at least in the beginning was mortgage back.

So no, it was almost one hundred how real at the time, very early on, because it was blatantly obvious that you had two sides of the markets. You had the government guaranteed side, which gave you interest rate risk, and you had this stuff that was so bombed out it had zero exposure to interest rate exposure. It was all about the credit. And as we said, you know, investors fighting the last war were saying, well, they went down to fifty, they must be going to twenty five, right, So where you just say, hey, I'm buying you know, wells Fargo's shelf paper with six coupons. Now, if you buy an asset with a six cupon at fifty cents on the dollar, and let's just think you think you're getting par back, that thing has an IRR like close to thirty, right, And that math probably doesn't jump out to a lot of people, but just think of current yield. It's got six you divided by fifty, that's a twelve current yield. That's the cash flow. Now you have to assume some losses and what we were doing was just running these bonds to like draconian scenarios where the world's ending if how these bonds are still profit and they don't break But they don't they don't, they don't lose money, especially at fifty cents on dollars. But the biggest challenge Barier that a lot of it investors had would say, well, you're buying this but and we tell them, look, we think we're going to get seventy five cents on the dollar back, Well, why the hell would you buy this bond? It doesn't Yeah, But but people don't think that way. They're like, but you're not going to get par back. And by the way, if you don't get par back, these bonds go deeper default in a range agency model. But who cares. But see, but that's not the mentality of it.

And that was an unconstrained fund, right. It wasn't like we have to buy conforming fanning in front.

It's like it was. It was all written in their perspectives. And by the way, the nice thing about starting a new firm is you can write perspectives the way you want.

No legacy paper, no god, but you.

Don't have to do it. You don't need a proxy for it. You say, this is how we want to run the portfolios. And so it was a great time. I would I advise people, you know, five years ago or six years ago to set up a bond shop. No, but at the time it was it was just everything was kind of in our favor. And the thing I remember is that the day we launched that total return fund at double on, it was actually April sixth of of twenty ten. The flash crash.

Right around the flash it was a little bit.

Prior to that, but why, yeah, that was later on. Yeah, I don't know exactly the day, but it was definitely later. But why I remember that is I used to tell people that was the last time we saw four percent tenure. That day that we launched that fun it was a four percent tenure and it took us until twenty twenty two to get back to that.

Like, hey, what's it doesn't twice between friends?

It's so funny.

You specifically said what a great time it was in nine to launch a firm, to launch a fun I have a vivid recollection of walking into my training room in eight oh nine and just channeling DeValve from Apocalypse Now.

Remember that, Charlie, don't surf the thing.

At one point, he turns to Martin Sheen says, you know, son, someday this war is going to end with this bittersweet wistfulness like this is the time. You have to just recognize it. And I always thought it was much more applicable to markets than to war, because hey, when it's just a hell out there and there's blood on in the streets, that's when the greatest opportunities come.

It really is. And unfortunately war never ends, as we know, right, we continue to see that left and right. But definitely markets are cyclical in nature. And you know, it's the same thing when valuation gets out of control too. It will come home to roost at some point. But doesn't mean the valuation can't get worse, right, it can't go higher. And so what you have to you have to realize is that you've got to stick to principles, you've got to think through things, and you know, regimes change, but they don't change that much, right, And so what I think in that is that if once you start hearing this time is different, this is the new era. Typically those things are the signs of excess in the market. And look, I think that we've been through one of those recently as well. I think we've had some accesses out there.

On the fixed income shid or on the equ on both both.

And so, look, corporate spreads are tight today, valuations are tight. They're tight for a reason. But it doesn't you know, Look, corporate bonds being a little bit over value doesn't mean they're going to crash, doesn't mean you're going to lose half your money. But the problem is in some equity markets you can have that experience right now. Granted, bonds had a significant draw down as we all saw in twenty two, but from the standpoint of thinking about valuation, you know, credit spreads are not really reflecting much of a default premium today, and I think that's reflective of the economy. I think that's reflective of kind of where we are. But also I think that's backward looking, not forward looking, right, And so from that standpoint, do I get excited about you know, when the oas on corporate bonds is like, you know, inside of ninety bases points not really high yield got inside of three hundred, you know, a couple of weeks ago. That's not exciting and what I hear from a lot of people is when I'll hear it from the credit team significantly at the firm yield buyer, there's a yield buyer, there's a yield buyer, and there's a threshold of yields. All they care about is yield. Well, if you only care about yield, just go buy treasuries. They have yield. Right, you have to get compensated for each risk. So when I say to the excess in valuation, some of it does apply to the corporate market, because look, the economy has been very strong, right. I mean last year was the recession. It was a massive recession. Member everybody forecasts it, and of course when everybody does it, it doesn't happen.

Hey, it's in the price already. I used to hear that early in my career, early in the price, and it used to be so frustrating. And when that light goes on, it's like, hey, if everybody is discounting a recession, then the market's figured it out a little time.

I also also think what happened is that you know, a lot of us are trained, especially from an economic background, to look at in financial markets, to look over year over year, data, and the year over year data was flashing very negative. And what a lot of us miss and I'll take some blame for this too, a lot of us missed it was that it was the amount of excesses that came into the system during the pandemic that haven't worked through. And the one I heard so much was excess savings. And I hated the phrase. The FED used it, and it was like, here's the savings rate, but we pumped all this money in, so thus there's this excess savings amount that's out there. And I always tell anybody, Barry, if you know anyone with excess savings, I can help them. We can take the excess off your hand. You can put it in bank some return. No, you can just put it in the bank of sureman. Because to me, it's not an excess. All my savings I need, right, It's what I'm going at. There is no excess savings in the world. And so from my standpoint, that's what I would say. So call me if you have excess savings, forget the investment. I'll just take it off your hands. It'll help all of us out.

You sound like what I say every time someone tells me the dollar is being destroyed. Well, send me your worthless just dollars for proper disposal. I'll take care of those.

Don't worry. I'll tell you what.

You take care of the excess savings. I'll take care of the worthless dollars. We'll make sure no one has any crust.

And we're just helping the world out here.

Right.

But but so that phrase I hated, but there is a there's kind of a corollary to it, and it's something that really I think is impactful, and it's still in the market today. And this was the amount of monetary growth. And this is what we call M two inside of in the wonky economics world. And this M two growth at one point, with all the you know, six to seven trillion dollars of money printed to all these support programs, led to an increase of the monetary base of twenty eight percent year over here. Two eight. I mean that's a promost a third increase increase in the amount of money out there, Okay, And so you can say that it was free money. You could say we gave free money to people, we gave it to corporations, we printed it. It existed. The fad bought some of it through you know.

Now, and this is on top of you I'm not a big fan of the phrase financial repression, but to be fair, this is following about ten fifteen years of pretty aggressive monetary policy, including you know printer goes Burr was the meme. This isn't just an isolation. This follows a solid decade. Is that a fair number of expansion of the monetary base?

It is, and it's these you know, what was it Friedman that said there's nothing more permanent than a temporary government program, right, And that's that's absolutely true. But when I think about it, what you was starting to see is the year over year numbers. We were starting to see the M two fall precipitously, and it was getting to a point where, you know, outsider war we are going into like these you know, coming off of these war page you've never really seen the monetary based shrink. We saw it shrink in late twenty two.

To say, if that's what is the fallible recession forecast? You haven't even brought up the inverted yield coll hold on, but.

Hold on, I'm not even done with this Berry. This is because I think this is way more important than the old curve.

Oh really, I have.

I have some ideas on the old curve too that we'll get to. But where I'm going with this monetary growth is that what you actually need to do is look at the two year number change, or look at the three year number change. What you need to do is look at the trend line over the last seven or eight years, not just ye over year. And what you would see if you did that trend line and I put it on a webcast recently, the gap is still so massively to the upside of how much we created relative to this trend. And you can talk, you can do it over many, many years and you get the same result. And so what that means is that there truly is liquidity in the market. We created these dollars and put them out there. And also I think you put together the consumer and what's happened there is that behavioral patterns have changed.

So before we were talking about the expansion of the monetary base, I have to ask you, and we'll talk about the inverted yould government. But given the fall off in the monetary base you mentioned, how do you contextualize that against just we went I don't know fifteen years with kind of dominimus fiscal stimulus. Monetary was shouldering all of the burden. Come Come the Pandemic Cares Act one under a former president Trump, two trillion dollars biggest fiscal stimulus literally is a percentage of GDP about ten percent since World War Two. KARS Act two, eight hundred billion under Trump, Cares Act three, almost a trillion and a half under Biden.

And then you have the.

Infrastructure Bill, the Inflation Reduction Bill, the Semiconductor Bill, the.

Packed VA Bill.

These are giant ten year fiscal stimulus is the regime change from monetary policy to fiscal policy. Impacting equities more, is it impacting bonds more? Or is just it's a new day and you have to start over.

Well, I think what you see here is we realize that the fiscal stimulus drives the consumer at the end of the day, and dumping money into the system has really really changed that dynamic where molnetary policy. You know, if you go back to Bernanky when they rolled out the QE, he always talked about the wealth effect. He's really telling you trickle down economics, right that if people feel wealthier, they're willing to spend money.

By the way, the way the FED describes the wealth effects, do you buy that it always smells funny to me?

No, I think it's I think it's stupid, like I think trickle down economics is stupid. Right, it's a theory, but in the real world it just do. That's what rich people say because they own assets, right, and they're like, if I own more money, you know, like you know, Barry, I'm going to probably give you some Barry, I haven't given you any more money as I made more money. But in theory, I'm going to do so right, cut my taxes, I'm going to help you out. And I just I don't think it has this broad economic impact. I think it sounds good. That's why we all argue in politics, but I just I'm not convinced that any of it works.

I one hundred percent agree, and I can't help. But notice that wealthy people, and I mean very wealthy people, their spending happens whether the market's up thirty percent, flat down. Maybe during a crisis, some of the more conspicuous consumption gets throttled back because you know, Marie Antoinette and all of that. But for the most part, the wealth effect. Since eighty percent of stocks are own by five ten percent of people, how big of an impact can the wealth effect have on the bottom eighty percent of I.

Think the only place that it could potentially happen is with the housing market. And so I think that's part of what you're seeing today and some of this as well. So we were talking about the M two growth and the money used to play out there, but don't forget. If people feel confident, they're willing to spend money. And I think part of this last push we've seen is that, you know, with the advent of Zillow and you know redfin and we can look up the price of our homes and we can creep on our neighbors and you know, our friends, what do they buy? I think that has created something in the psyche of people that they feel a little wealthier if they're a homeowner.

Especially if the neighbors house went for a butt ton of money.

Right, But you have to see that transaction. Now we have this algorithm and you can go log in every day and look at your house and it moves every day kind of or you know, it's I think there is something in there.

But well, let me throw a curve ballet you because you mentioned psychology and sentiment. On the one hand, even though it's off the lows, consumer sentiment has been awful, like below, the financial crisis, below, the dot com below nine to eleven. But when we look around in the world of consumer spending, on the high end, you want to Porsche, Ferrari, Lamborghini, there's a wait list. On the upper medium end, you want to go buy a Rolex, you can't get them.

They're they're getting cheaper though, right you probably can't buy a brand new one.

So if you go to the certified pre owned or even just the use one. A watch that costs ten grand MSRP that was twenty two thousand dollars used is now down to seventeen, but it's still much more than new because you can't get new. There's no supply of homes or very at least dramatically reduced. You want to buy a boat or a jet ski, you'll wait a few months. It's it's or a big truck, all right, you could probably get the big truck.

I got somebody you can buy. You can buy a Tesla right now. You know there's a lot of those. There's a lot of those on offer right now.

You know, we maybe the takeaway from that is, if you're if the demographics of your primary customers are, you know, left of center, save the planet, anti.

Global warming people, maybe owning.

The LIBS is a bed marketing strategy.

Yeah, but that who knows.

And there's also a ton of competition today in that space.

Sure, sure, but I guess where I'm going with this is consumer sentiment. Okay, So why why does it feel abysmal? Well, let's talk about inflation. So instead of doing what Jay Powell is doing or what all of us do, and they're going to cite the year over year inflation number. And by the way, the core PC is looking a little bit better after this last print. Sure two, But Jay has a problem. He's been talking about CPI for the last few years, so moving the goal sticks is just not good for him right now. And he doesn't need to do anything anyway, so he's we can talk about that later.

Listen, inflation came down regardless of what the Fed, but here it was so late and by the time they started it was just about to peek and come down.

But here's the problem. Now, let's go back on Europe. Not instead of year of year, let's go back two years, let's go back three years. And if you ask people what inflation looks like, usually the common person will give you one of two statistics. They'll talk about their grocery bill, but they'll talk about fuel pump prices. That's really how people think about inflation. But if you think about what's happening right now, I think people's anchor is pre pandemic and.

We're what twenty percent generally you're.

You're in the mid to high twenties now, and so that I think is weighing on sentiment, but it's not changing the dynamic of the spending. And I also think this is part of the whole fed's policy is that when you when you're hiking rates, you're trying to do two things to this transmission mechanism, make credit more expensive. They've done that, okay, mission accomplished, but also totail to curretail consumption. You also want incentive saving. That's the missing part in this, I believe. And I saw that you know the JP Morgan CFO come out of no disrespect there, but he's complaining about how clients want CDs, But why he's complaining is because they're paying a basis point on their savings account, and if you're you have a great relationship, you get two basis points. Well there's your repression, Barry.

You move to a money market, you're getting about five percent.

But that's called financial literacy, right, So that's the gap we have here, right. But it's true and this is not a US phenomenon. This is a global phenomenon, right, that there is just not this robust financial literacy. But so if you think about a person that I was contending probably two years ago going into twenty two or sorry going yeah, going into twenty three, after we had higher rates, that people are going to save money, I didn't realize that the banking system wasn't transmitting that megazine. We work in capital markets, right, right, so we know what rates are.

That's what six or seven trillion dollars some crazy number.

It was six trillion we got to in money market. It obviously went down because of tax payments a couple of weeks ago. But the thing is is that what you find is that that savings wasn't there. Now. I would have contended in twenty three that people thought inflation was going to continue at the nine handle, right or the eight handle, and so they didn't think that that money market account was enough. Now I think it's that they're not getting paid on their deposits either, right, Yes, sophisticated people do people we know do this, and our job is to educate more people. All my friends asked me about that don't work in markets? What side I was like, Janet Yellen's money market account, government money market. Don't worry about it. I promise you won't lose. What's the yield today? What's Janet pain? Janet's paying about five and five and the five and three eighty.

Five right right, that's an impressive listen, especially coming on top of a decade of practically zero. That's that's an oasis in the desert.

It is. But so let's continue on this path of of why the consumer, why the sentiments so bad? Is because I don't think that what we see in this slow down is the savings rate go up. Right, if you look at a percentage of disposable income, they're they're really at.

An you took all their excess saving.

I haven't yet. I'm making a plea, I'm making a please still, But where I'm going with this still is that I don't think people have been incentivized to save and you know what, we have the yolos, they have the there was the idea that we were locked down for a year or two, depending on where your jurisdic people died.

It's fair to say. My big takeaway from the pandemic, aside from hey, these vaccines are a miracle, was life is short. Open that expensive bottle of wine. What are you waiting for people who were like otherwise fairly healthy suddenly dying. You know a lot of people had that moment of existential dread where hey, I only got so many years left, Let's go live life.

That's right, And I think that that has changed the psyche. So if you want to talk about a regime change, I think that's changed. And I think that's missing in this FED transmission mechanism right now is that we're not curtailing this or we're not increasing the sailing savings and curtailing consumption. We are spending still. And so from that standpoint, as long as people stay employed, that's probably going to continue. And by the way, we're here in April, we're in New York. It's actually a beautiful day out that taculate, right, And this is the seasonal part where you guys on the East Coast start to go out and spend more money too. Out in LA We're justing it around all the time. We do it all the time. But so the seasonal component will probably kick in here too. So this is the idea of waiting for a catastrophe to happen. What's missing in a lot of this is also just the dynamic of the consumer. And look, people have criticized the labor market statistics, birth death models, all of that. But what I what I look at in the labor market today is I watch unemployment claims because we can argue.

About weekly unemployment claim is about a two hundred K a week, And now why do I want low?

But why do I watch that? The one thing I can say is that I'm pretty confident in our fellow Americans. I mean, Barry, You've worked a long time in your career, You've paid in the system. Right, Sure, if Bloomberg lets you go, Let's say Ritholtz doesn't want you anymore. That would be kind of weird, but it could happen. What are you probably about yourself? You may you may just get match up.

If I decide to pick up golf and spend my time doing.

That, but think it. But I want to go the other way, I would say, you lose your job. If you lose your job, I'm pretty sure that most people don't have an issue going and filing those claims. So when I look at it claims and not seeing spikes that were continuing claims not being out there, to me, it says something about that we can't dismiss the jobs data.

Right well, the labor market is tight. During the previous administration, legal immigration I'm not talking about people coming under the fence at the Mexican border, but legal people coming in dropped off about a million persons per year.

Then you have the pandemic took a couple million out of the WORKFORCET. But we've actually seen that that foreign born cohort starting to starting to grow up. It's above trend now.

So you still have a very tight labor market with a shortage of available workers.

That's going to keep wages.

Up and that's going to keep the unemployment claims down.

And if you keep wages up, if people are making it even though they may be living paycheck to paycheck, they are spending money. And so this is the thing you can't dismiss in the overall cycle. And so I think when you start to look at it and you take a different perspective versus year over year, and you go back a couple of years, you find that you're getting a different signal in the marketplace. And that's something that we had to recognize last year.

Well, let's talk about that, because you came into this year, you came into twenty twenty four specifically saying, hey, rate cuts in March seems kind of optimistic to me. You were dead right. And I'm going to assume between the strength of the economy and sticky inflation at least in the services and apartment rental market was the basis for that. The market's caught up to you. I think the market has now.

You got about one and a half. You got one and a half kind of cuts this year, and it's really back to law. It's way backloaded. You're talking about you're talking about probably fourth like September or something. A lot of people will say, well, the Fed can't cut right in front the election. They've cut every year during an election they cut it just crap. It's this thing where they're gonna be viewed politically. I tell it, people, if the FED cut one hundred bases points two months before the election, do you think it changed is the election? It does nothing?

If everything's if anything that hurts the incumbent because it's saying, hey, look right, what's going on.

I know you're a data.

Wonk and you're not afraid to dive deep into the numbers. Let me ask you a kind of counterintuitive question. I read a fantastic stat half of the homes that are owned that have mortgages, so only about fifty sixty percent of homes have mortgages, But half of the homes with mortgages have mortgages at four percent or less. And I think it's like two thirds and five percent.

I think it's well at least in the agency market, which is easy to look at. If you look at you can pull up the what's called the effective cupon of the agency mortgage market. So the effective just means that you're taking it all the game average and averaging it right, and that number is about three and three quarters today.

So much refinancing took place.

It took place, But this is Also another reason for that strength of the consumer is that like corporate America, who was smart and refined their death and of course so did homeowners. But here's what's caused an inventory problem because now, so.

That's where I wanted to go, is how much has the FED taking rates up and bringing forcing mortgages to seven and a half percent created a sort of persistent inflation both in single family homes, apartment rentals, and of course owners equivalent rented in BLS data for CPI for Consumer Price Index, is it sort of perverse that the FED raising rates has raised inflation or at least made it sticky.

Well, that's that's the whole that's the whole thing. If if I had told you rates were going to a seven handle on mortgagees, I don't think you would have said that house prices go up from where we were when we were talking about a two and a half percent mortgage.

Well, it's because of exactly what they said.

The supply is gone. So think about this way. One thing we've been thinking about, and we've been thrown around the table in some of our discussions, is that what if the FED cuts rates meaningfully and what if mortgage rates come down two hundred bases.

Points, You'll free up a ton of inventory.

Prices will go down. My contention is if if mortgage rates came down two hundred, prices go down because you have a people that are landlocked or they're stuck in this.

Hold in handcuffs, correct.

And on top of that, you have, you know, a boomer generation that ultimately is looking to maybe downsize and things like that, where they'll just say, at some point, well, now I can afford the mortgage on the smaller place, right, and I'm up so much on my home. I've doubled my price in.

The or even we added a second or third kid. We want a little more space to go from three and three quarters to seven and a half is exorbitant on the same size house, you want to add a bedroom of two, My god, no.

One could do it.

So you know, you know, Nick Hanover of a second Wave Capital has been talking about this exact issue, which is, if the FED wants lower inflation, especially on the housing side, they need to lower rates. Yeah, the people's seem to not wrap their heads around, but you obviously get it.

It's tough though, because on the other side, think about what happened starting in November one of last year, when the FED kind of authorized that, hey, let's start talking about cuts. And what you saw was really, I'm going to call it excess into the market. Right, Rates rallied meaningfully, Spreads came in meaningfully, Equity prices went up meaningfully. Gold went up strangely meaningfully. That's the one I can't get my head around as much. It's gold. Yeah, well, how it went up so much recently? Right went while it ignored dead printing, and yeah, we have these real yields that are positive. It's everything you know has kind of been thrown upside down. However, Crypto, all these speculative assets and again I'm not here to criticize any of them, are up. If the FED truly believes the wealth effect, they think if you cut rates more, you fuel that again. And so that's another reason why you coming into the year, I thought that we should be patient on the rate cuts. And you know, don't look that strange today, But a couple of months ago I was telling people the biggest risk to the market is that the FED doesn't cut this year, and people looked at me like I was insane, Barry, well, more insane than they usually usually right, Yeah, right, I mean, so there's a baseline there. But but I just said, like, why do we have to have cuts at this point? And what if the economy continues? Do you think the FED wants to cut to have to turn around and hike again later on? Now I'm not in the Larry Summers camp, but we should be hiking this year. I think we're just fine where we are.

Who's left in the Larry Summers camp? He's been dead wrong for a couple of years.

Now.

At what point do people say, maybe the nineteen seventies and the twenty twenties are somehow different decades.

You know, you know, maybe there's a thing called technology that's a little different. I don't know. But but where I'm thinking about all of this is that, you know, it's not just falling the path of what the market is telling you, because remember, the bond guys get a lot of credit for, you know, being smarter than other folks in the bond market knows more than other markets. But remember we're just people too. That forward curve is a bad indicator of where rates are going. It always has been, and you know, if you think about when.

Rates are about that dot plot.

Yeah. I mean, look at where rates were pinned down in the early twenty tens. Through the whole the whole decade of the tens, the market always had cut hikes are coming, hikes are coming so effectively. I thought the market got way too giddy at this point. You know, it's it's harder to make a decision now because it was very easy to say, look, I want to fade the forward cave. I want to continue to own some floaters in the market. There's nothing wrong with owning some floating rate debt. Yes, you got to be careful with it because they can be problematic. But I can buy floating rate mortgages, for instance, they're guaranteed by the government. They've got seven caps, meaning that mortgage you know the rates and member these these were issued before they would have to go up to over seven before you're penalized. You know, they trade one hundred over right, that seems like a no brain or trade for not taking credit risk right now, you know, it's kind of priced right into the market and so things aren't as exciting there. But as you as you look through it, I just think there was just so much fervor that everyone thinks the Fed's going to go down in rates. But as I as I tell people on the desk, what's wrong with yield? What is wrong with having a positive real yield? You sound like a bond manage I know. And you know what, It's kind of funny because you know, these these younger analysts and things, they just think it's okay to have zero real yield like that the rate should equal inflation, and I'm like, you have to have a premium. And I think that's also what's changed is because inflation has come back into the market, the bond folks are going to require an inflation premium, which means we need real yield.

What was did you say this in one of your notes? Like the current crop of bond managers have never experienced a bond market where they were generating real returns, real yield relative.

To to rates.

They only know decades going back to the two thousand of pretty close to zero percent FED funds.

Yeah, I think I said something like that. I won't say there's none out there because obviously we.

Have I mean in here, but like a low generations, who are the under forty crowd has never seen higher rates?

Well, they had never seen a hiking cycle either, they've never seen inflation, chiefly like eighteen Yeah, I mean, yeah, you got a little bit. And I think I said that back in the sixteen era, Like there's people out there haven't ever seen a hiking cycle that are making investment decisions. But you know the thing about it is is that that's why we have to be students of history, right, we have to know some of the dynamics. But I think that's a buffet quote, right, were not Jimmy but Warren where he says that if history was all there was or past his proluge, then the richest people in the world wuld be librarians, right, And so you have to have that in your toolkit. You have to have the behavioral side in your toolkit, but also you have to be willing to kind of just think about things differently. And you know, that's that's what's great about this business. And that's why I'm glad I didn't become a teacher, Barry. I think I teach through this, right. I try. I try to help our analysts. I try to educate our clients. And to me, it's solving these mysteries all the time. It's way more fun than just teaching you how to do pem doos and figure out the order operation.

And it's pretty it's pretty clear you made the correct choice. So I want to talk about what you're doing at the firm with some of the new funds you have, but I have to talk a little bit about how this year has gone for bond investors.

What are we looking at.

We're off about two and a half percent in bonds, nothing like twenty twenty two, but it really seems like the bond market has been off sides. What's going on there?

Yeah, well, you got to rewind the clock.

Man.

We were talking about year over year. You got to expand the windows. So yeah, we all look in calendar years. But let's go back to November one. You're up meaningfully in the bond portfolio, right, So, yeah, we got a little too excited, Like we cut a duration back back in January a little bit in our portfolios, especially on the intermediate term side. We did so because I was just adamant J. Powell was not going to let this thing keep going. We're not going to get rates down to you know, three percent on the ten year. It just seemed ridiculous.

And that was like one hundred basis points very quickly came.

Out of the market. Yeah, it did, it did, and Jay just added fuel to the fire in December, and so I was kind of licking my wounds for a little bit and say, man, that was a bad call. I'll own it here. It looks like a good call now. But the thing is is that, you know, if you roll back the clock, bonds have done very well in the last eighteen months or so since since we really got to those kind of peak levels. Yeah, we had that five percent tenure last year for about I don't know why you were in it, right, Yeah, it was it was overnight, really what you saw, and like, I think we're going to try to test it again. And so we've been in the stance that coming in the year that bonds probably have you know, rates probably fluctuate around. They probably go up in the first half of the year. Maybe you get something that stabilizes here. It just depends on the outcome of the economy. But as a bond investor, there's nothing wrong with having higher yields, you know. And so if you were patient and you weren't aggressive with this bond allocation, you got a good rally in January, don't forget. So we got rates pretty dang low in January, and then it just got sucked out all of a sudden because the inflation data came in still a little hot, right, And so ultimately, I look, if I'm syn at the fat, there is zero urgency of cutting rates at this point. You know.

My my argument has been, Yeah, the CPI is coming in hot, but to quote George Box, all models are wrong, but some are useful. Oer the apartment side, it's on such a leg, but.

Just take take the services exit. Let's look at the supercore stuff. It's it's not comforting, and that's because people are spending, right, they are spending, and so forget the oeer side. Strip it out. That's what That's what Jay was trying to do. But supercore is now like four percent if you take supercore pc CPI. So he has a problem still. And why if the economy is still performing, people aren't losing their jobs, what are we Why are we.

Asking the R what is the incessant ubiquity of doing it now other than freeing up that supply of housing bringing rates down. And let me talk about something else that I want to ask you about. So it's pretty well understood that huge, huge advantage for equity index investors if you have a ten year time horizon. However, when we look at fixed income index investors, it seems that a skillful bond manager can do better than the Bloomberg Barclay's bond debt for a variety ways. You can make duration choices, you can make credit quality choices. Twenty twenty two was a tough year for bonds, down about fifteen percent across the Barclay agg You guys are our discretion unconstrained bond managers. What were you thinking during twenty twenty two?

Well, look, remember, even though we have some of that, you have guardrails and you have to own some duration, and like there's there's limits to how unconstrained are unconstrained really is? And so you know what we were seeing in that market was just pain, right, And what you also have to remember, if you're running a bond fund, you're providing liquidity. And remember when bonds go down, people sell bonds, just like when stocks go down, they sell stocks. And so what happens during this too is that you're forced to sell everybody's forces out, there's no money to go buy things, and so we all complained about the same thing. Look at the value in some of this stuff, but it keeps going down, right, And so I think what you see in today's market, I don't think we're gonna have a repeat of twenty two at this point. Why we're not starting with a one percent tenure, right, you know, or FED funds at zero or FED funds at zero. You're starting where you get yield. So basic math today says, if I on a four and a half percent tenure and it has a duration, you call it seven and a half, Maybe it's closer to eight today. That says that, Okay, If I think about that ratio between the yield and the duration, that tells me how much yields can go up in a calendar year, and my yield will offset it. Right, So that's how I break even with a duration trade. And so from that standpoint, there is some value in it, because I do believe that if we do fall apart in the economy, if we have problems, I do think the tenure rallies. I don't know if it rallies like it has historically because of the debt loads that we see out there because of the big deficit, and this is the other side of it. We need some inflation, Barry, we need nominal GDP growth. We've got to grow ourselves out of these deficits. But the problem is is that we've changed the script and something changed under the previous administration. We're during the good times, which that era was pretty good. Right in the sixteen era, we actually expanded the deficit exactly historically we decrease the deficit.

To be fair pandemic related.

No no, no, no, no, no, I'm saying the path that Trump had us. I'd almost say Trump, let's say the entire Congress that we were spending more money. We were increasing the budget deficit on an annual basis, the first time really in the last seventy years we've seen it absent a war, okay and sair enough, and then we've continued it during this administration. So there's no change on which team you play on here. Politically, they're they're they're both bad for bond.

Wait, people in DC spend money they don't have.

That's right, And yeah, yeah, so I know Breaking News put put that on the marquee for blue book today. But the thing is is that you know, we aren't. We aren't keeping the house in order, and so I think it's going to be fearful next time we have a recession. So my boss has been talking about this for a while now. And it's not that this is a twenty twenty four problem. The deficit is not a twenty four problem. But when we have another recession, what if Congress sees what we did during the pandemic and says, you know, we should print fifteen percent.

This fiscal stimulus things seems to.

Work, and that's one's guy he's talking about. But also there isn't a ramification on the other side of inflation, and the bond mark will sniff that out quickly. So I think you can get a rally going into a recession. But once the fiscal authority start to act, you may not want to be owning that body. You may have wanted to rent it over that period.

Let me ask you my pet peeve question, not so much from the prior administration, but from the era before the pandemic, when rates were zero for a decade. How big of a missed opportunity was it? So households refinanced cooperations refinanced. Congress said no, no, we have no you know, if we refinance, it'll just encourage more spending. Well, look, it's like the single dumbest thing I've ever heard in my life.

Okay that is, but let me give them a little bit of credit. And I'm not here to give Congress credit or the Treasury at all, but historically the Fed, I'm sorry, and here I am screwing this up. Historically Treasury has issued more short than long right, and that's because of the shape of the old curve effectively. But also there's an argument that most people miss in this Barry, and what it is is, remember, the treasury market is one of the most liquid markets in the world. Except during March of twenty twenty. Nothing was liquid. Folks that traded in the eighties, by the way, they were telling us that they've never seen such.

A horrible market, worse than you know, September eight worse.

Absolutely, there was liquidity in that stuff. You couldn't trade off the runs. You couldn't trade, they wouldn't even trade. You couldn't make an appointment, you couldn't call someone to try to do it on the run. Stuff you were hard pressed to do ten million bucks. No desk wanted risk at all, and even treasuries. But where I'm going with this on the whole liquidity is, remember we have a term structure of rates. We advertise our auction calendars, right the quarterly refunding an outs which there's one coming up, by the way, and.

They've been pretty mediocre the past few ones.

Yeah, and this one looks a little scared Jane. It's got a lot of work to do there. She's issuing a lot of front and paper this week. We'll see how that gets digested. But let me just let's go back to the term structure. Okay, they need to have the market. You can't just say all we're going to do is issue fifty year treasuries. You can't just do all that. Should they have issued some yes, the market and the said was at zero and ten years were at one percent, and get it. But you can have done thirty years at three and basically changed the but you would have no liquidity for the next few years if you took the entire I'm saying at the extrema, right, So if you went out there, you could put some into it, but the treasury market you have to have this functioning market of people rolling paper and moving around. There are people that buy thirties and lock them up right there. They're called sovereign funds. But in general you've got to have some dynamic of providing that liquidity to different points on the curve and so and so there is something you said. Now, should they have done as much on the front end, Absolutely not, But they were short sighted thinking about the zero. Look you could have done You could have done a fifty year sub two at that really time. Oh yeah, you definitely could have been the market Remember the long bond in twenty twenty got to one right one exactly. That was the low in yields, and so you could have done stuff like that too, and the market clamored for that. So I remember, I mean there was there was like this Austrian hundred year paper that trade with almost a negative yield for a while, right one hundred years, and you know, so ultimately, when you pull it all back together, some of it is just the function of the market. They couldn't do, but they should have done some of it because there was a massive demand for it out there, specifically in the Eurozone, where a positive real yield or a positive nominal yield would have cleared the market very strongly. But you couldn't take the entire budget and do the whole thing, and the obviously you can't refine all of the United States, but you certainly could have made.

The circumstances where we are today much you.

Could have made it better. And again, I'm not trying to give them a lot of credit, but I'm giving you the reason why some of it is there. And it's also it's this entrench thinking that they have to issue short So let's come back to a couple of.

Funds that you guys run. I gotta start with I don't know who coined this, but the first person I heard say.

It was you. What do you make of the idea of T bill and chill? Oh, look, it's been a great place if you're a T bill and chill person, meaning that you just buy T bills forget your bond allocation. It's worked for you. Congratulations.

When does that stop working?

At some point? It does and it has risk. And I tell people that and they're like, well, yeah, we could default time now that that's not the risk I'm talking It has refinancing risks. Right, every month, your te bill and chill. If Jay cuts rates, you don't get to chill as much, and so at some point you got to you gotta move it out a little bit. But that phrase alone is working, and Jay has given you a renewed sense on life. There.

Yeah, at least another six months, rest a.

Few more months. But the question is what if they surprise you? Right? So again we all think we know, but what we'd all know is we don't know.

Let's talk about surprise. Because the FED has been so transparent and there have been criticisms from a variety of quarters that hey, you know, the FED is more effective when it can occasionally shock the market. My fantasy is Jay cuts in June, startles the market, and then we have a little bit of a reset.

If he did that, I think the knee jerk reaction would be to sell things. And because it would, it would the man mind. Yeah, the market would say that the FED right, that takes.

The consumer, It does all these things that he says he wants. He wants to calm down the consumer. He wants to calm down. I know it was it isn't. But if I was a birdie whispering in his ear, just fifty bases.

When the last time Jay shocked the market, they didn't even shock the market with the fifties and the seventy five. They went to Nicky leaks, right, it's right, you know one of the banks called him.

And Nick timaraurosis at the Wall Street Journal.

I don't even say that's why I call it that. I can't pronounce the last name that great. But what you see is that they don't and who shocks the market today? And look at what it creates. It's not what the FED wants because there's ripple effects. If the FED shocks, then the ECB does too. If you notice, the ECB follows our lead and all this right now, So it's much more dangerous for Jay to shock the market. And they feel like they want forward guidance to be there, and that's what they set off back in November. So all right, but what does it matter. It doesn't change anything. We're talking about twenty five big housing, not twenty five basis points. Did not change the housing market. Berry, come on, all right, here's the thing, t Bill and Chill. You should be moving out the curve a little bit. Look by one year, like we've run low duration funds for these reasons. You know, Look they've been great for clients. You can pick up yield. So from my standpoint, there's better things to do. But look, my cash sits in money market, right and look I'm ready to move some of that out, and look I'm looking for yields like four to seventy five on tens. I think is a great point. I think when we have our next conversation with every five or six years, you invite me, we could when we do that. When we do that, what we'll do is, uh, we'll review this and I know you have it all recorded, so I'll be on tape for that. But I think you're you're gonna want that for this period.

All right, So let's talk about two other funds that you guys have launched. The equal Weighted ETF focused on Fortune five hundred, where you're ranking the holdings by revenue, very smart beta ish or fundamental beta, whatever you want to call it. Tell us the thinking behind the equal weight ETF with the Fortunite five hundred revenue basis.

So, first of all, what it does. The Fortune five hundred list published annually, right, it includes public and private companies. So before I say that we're not investing in the private companies. Okay, so it's all public, but what happens is that it's US domiciled names, So you don't have any conglomerate you know, like a Schlumberge or something that's creeping into there like an SMP. And it's very you know, it's very rules based, right, you just rank on revenue. So what this does if you compare this to like the SMP five hundred, there's about on average in any given year it's called one hundred and ten to one hundred and thirty different names that are in the SMP, So we all know there's equally away to SMP out there. Sure, and what we find is that this through a cycle does significally better than equally weighted and in today's environment, and this is revenue ranked, not market cap, not market cap ranked on how they deduce it. You don't have some subjective committee like an SMP that comes in there. So names that are growing and actually generating revenue show up sooner in this index than it would in the SMP.

And if they're not yet profitable because they're reinvesting, they still.

Share their outs. So you're going to be way underweight, like services, software as a service. I always get that backwards software as a service, you're going to bender, you're gonna be wait, some of these tech names to unprofitable tech isn't in there, So you're going to have some more industrial type names. You're going to have more value kind of names over a cycle. But in general, these are still names, you know, and when you look at the list, it's like, okay, But what it ends up doing is it gives you a different cohort to play with. And what you find is that these names get overlooked because they're not in the s and P. Five hundred and so over time, you know, if you go back and compliance that hate me on a back test anything, but you can generate about one hundred and fifty over the SMP equal weight per annum. And look, if you can do something like that, and we all know over long term equal weight tends to do better than market cap. Now, we go through periods with the late nineties, we had the one we've just been through, and so for us, the timing perspective was very interesting because at the end of the day, we couldn't It's hard for us to really love the mag seven or now it's down to four or five. Who even knows what we changed it all? It was a fantastic four.

We went from Fang double A to MAG seven. Offensive. So let's talk about another fund which is avoiding the MAG seven, which is the double line Chiller enhance Cape.

And I know you.

Can't say this becaust of compliance, but I could say top one percent of large cap value crushing fourteen percent a year for the past three years, beating the S and P five hundred. Why did you guys partner with Shield to come up with the enhanced cape? Other than the obvious.

Performance, I mean it fills with us philosophical one. As a bond manager, we are sector rotators, right, so that's something we focus on. And the other thing we focus on is valuation. So what the Schiller methodology does is that it's looking at the relative cape ratio. So it takes the cape ratio of each sector and compares it to its own history. So it says, it's for each sector of the market, where are we in the cycle effectively? And it ranks them and just says which are the cheapest, which are the most rich? So you avoid the rich by the cheapest. Right, So you take the universe there's eleven sectors, cut it in half, call it five. Five cheapest what you want to look at, and you apply momentum like any good academic would do to control for the kind of the value trap, and you're left with four and uqually weight them. It's as simple as it gets here.

You know, there's something to be said for bond managers being better pms on the equity side because of the focus on valuation, return of capital and just tracking the math in a way that the equity side tends not to.

Yeah, but look, they'll beat us through different parts in time the lot. The goal is to have a long tenure. And if you can do it over a full cycle and you can do much better, then why wouldn't you do it?

All?

Right?

So I have to get you out of here sooner rather than later. So let's turn our favorite five questions into a speed round perfect answer these as quickly as you can. Starting with tell us what you're streaming these days? What are you watching or listening to?

One of my colleagues turned me on to something called the X Files and told me that you should watch this because and exactly that's what I was gonna end with, but yes, and it actually does hold up pretty well. So anyway, something that I've been revisiting. I don't have any of the new ones out there. It's it's kind of glad.

Plus the company was Angillian. They're both so fantastic.

And you got to remember the song David d'coveny, why don't you Love Me? Right?

Tell us about your early mentors, although I kind of have a feeling who those are going to be, who helped guide and shape your career.

Yeah, I think I mentioned this before when we were here, but there was a guy I worked with named Claude herb Too on the COMMANDITI side, really really a guy that taught me to question everything. And then there was this guy named Jeffrey Gunlock too, very very kind of prominent guy who said, not only question everything, but question it again, you know too, And that's very helpful. And also I think what was what's been very good about Gunlock and why he has such a loyal crew around him, is that all of us are really pushed to challenge each other and there's no dumb questions. Yeah, we'll call each other dumb at times, you know, we're like a family that way. But it's it's encouraging people to come up with ideas, and we're an idea of business. Right you have to create, you have to you have to have new things in the market, and we want people to poke holes. And I think that's something that's very good about the team is that it's not being a contrayer for the sake of being a contrarian. But what are we all missing when we're all nodding vertically up and down? You know, that's the time whirred question. And that's what we've been doing our last as the location meetings. It's like we've been sitting around going credit looks expensive, but we don't want to sell it, and we're all cringing, and we're all just saying, Okay, we're just gonna let it run for right now. And you know, Gunlock keeps saying, I just want to make anyone to wear it. We keep doing this each month. I'm not I don't have another idea right now, but it's starting to say we're maybe rates look pretty decent too.

How do you hedge credit short of going out and buying credit to foulk swaps? And they're not cheap.

Now, you really don't. If you're having to hedge your credit, you shouldn't known it. That's one thing I've learned, because the hedge costs you money. If you want to hedge the credit, maybe you should known it. And the best hedge out there I think today are longer data treasuries. I think they work. I think if we have a meltdown, and I'm not saying credit spreads wide and ten bases points. I'm saying extended duration isn't gonna hurt you. It's not gonna hurt you, and you get paid to do it. So that's a hedge that makes you money. It's what we call a positive carry hedge.

There you go, Let's look at up books. What are some of your favorites.

What are you reading it right now? Yeah? I think I said to you last time was against the gods of Bernstein. That hasn't changed. That's so it's a class everybody should read that out there. You know, I'm a big fan of the Michael Lewis stuff. I know he got a he got a bad rap with the latest one too, about going infinite. Yeah on SBFO, A lot of fun if you read it. I think a lot of people read like fifty pages and thought, oh, he's a fan boy. This is Michael Lewis. He's building a character first of exactly. You know, if you haven't read in his other stuff, then maybe you could get there. But if you read the whole book, he's pretty caustic at the end, right, I mean it was, It's total Lewis, and so I think that people that were criticized up front, but Chip Wars is the one that someone recommends to me. I love it and I think everybody should read it. That is where it's at. You talked about the chips at I think that's the only great thing that's come out of Congress, and this last you know, kind of rounds. I think building the chip plants, getting our own security that direction and being a pre eminent player there is extremely important. I've always hated the iPhone where it says designed in Coopertino, but it's manufactured somewhere else. They forgot that part out. They only kept the Cooper Tino part. I think this is something very powerful. Why would you not want to be the next TSMC? Why not?

And well they're building a play in Arizona, right, we.

Could call USMC, but we got a few of those already, you know, So yeah, the Marine Corps don't want to piss those guys off. You know. I'm a big fan of the Marine Corps. I do not want to say anything and shout out to the Marines out there that take care of us.

By the way, I loved the Michael Lewis Going Infinite if you want a different perspective, that's every bit as well written and entertaining. Just a little more horrifying is Zeke Fox's number go up okay, which which is really a You read the two of those and now you know everything you need to know about about ftxcrypto And I got to fly back.

To la later in the week, so I'll take a look at it.

Our final two questions, what's sort of advice would you give a recent college grad interested in a career in either applied mathematics, bond management or investing.

I think you need to stray from what you've learned thus far, meaning that if you're the mathematician, you need to learn another side of the business, learn the fundamental side, which is something that I didn't appreciate. Be a student of history that applies to everyone unless you're a history major then you already know that. But a student of history, financial markets rhyme a lot of times they're not the same. But you'll learn a lot through that, and you'll learn that a lot of things. We've experienced these things before, and most importantly, learn psychology, learn the behavioral side. Realize we're all people. There is no smart money dumb money. It's all ran by people. Institutions are ran by people. They behave a little differently because their own career risk. Your hedge fund's going to behave a little differently because of its career risk. But understand that all these dynamics are in play. So the last advice I have when it comes to this, and the cfasity hates it when I say this, you know, and I've given a couple of speech ob recently and I put that cabot out there. Fundamentals work. They just can be they can they can be off for a while and ultimately fundamentals come home to roost. Technicals teach you how to trade technicals. There's levels like that. They work relatively well because of the psychology. So that leads into psychology. But the one thing you can never ever ever ignore is money flow. Money flow is the most powerful thing. If people are buying price go up, people are selling price go down. And when you see that in the market, When you see that, that's called momentum. To the quants out there, that is the most powerful force in the universe ever a short term timeframe. So if you can marry those three things together, that's that can give you success.

How do you track money flow?

Well, you watch fun flows, We watch ETF flows, we watch ETF creation units. You watch also the demand from the institutional when it comes to RFP demand. So all of these things are somewhat in our toolkit. But remember we talked about M two. That's a powerful force as well. When we print money and create money that it has to go somewhere right right, and you've got to track where it's going.

It goes where it's treated best.

And water finds its levels.

That's exactly right. Our final question, what do you know about the world of investing today? You wish you had in your toolkit, You wish you knew twenty five years or so ago when you were first getting stick.

It's that behavioral aspect, hands down, hands down that you know when I came in as a naive quant I thought Mass solved the world. You can model everything, right, and I realized that you know, the models their guides. Everything we have in the toolkits a guide because it's people making decisions and we are inherently strange creatures. Right, we do not act in our best interest? Right, we don't. We are not utility maximizers, you know, to borrow the economic phrase. And so at the end of it, I think it's understanding that dynamic of psychology is very important. Does one model psychology? You don't, but you know it, you can can feel it. And there's something about markets where we say we feel something's happening that means we're talking about that psychology.

Well, what's the famous Richard Fyneman quote. I know I'm going to mangle this, but if you think physics is difficult, now imagine what would happen if electrons had emotion.

I mean, Fineman is amazing. There's actually something on Twitter where someone does find me quotes. I love that too, and Twitter still around.

I've been, you know, said sadly watching it. Circle the drink.

Yeah, I mean I think it something happened with the management there I don't know. It kind of changed the dynamic. So I actually haven't been using it as much as myself either.

And so, but the glory days of Twitter peak Twitter was a fabulous period.

It was. And I remember you giving me some advice Mary, Mary, so you can go on to the mentor list with this, I think you should wrap it up. Well, let's see this horrible advice. All right. So I was a young guy in here, sitting here because I was younger than I am today, and the thing you told me about I was like Twitter. I was like, it's so just a horrible it's a cesspool and all of this. You said, true, Which that's great advice, right. You were like, yeah, true, And you said, if you want to do it, block and curate, oh lot, Yes, you know what. It changed my life, blandly curate because I got what I was looking for. Now I have some self reference in there. And that's the other thing, going back to your previous question. Follow people who you don't want to follow. Follow, follow, get out out of your ideological bubble. Correct, understand the other side and you may not understand it, but listen to it, and it will make you better for doing that because You've got to realize that no one has your experience. They have their experience, and so to put yourself in someone else's shoes and try to try to grow from that. It's very important. And don't just read everyone who agrees with you. It's really fun for me to walk on the desk. I was like, yeah, yeah, great job. Sherman. Yeah, yeah, Well, if it's not truthful, it doesn't matter. Poke holes in it. And I think that's the thing we're all look it.

It's as if every trade has a buyer and a seller.

It's funny how that works, right, That's why prices went out. There's more buyers and sellers.

By definition, there can't be by the way that, As someone who started on a trading desk, that expression has always annoyed me because the true expression is more buyers than what it wire. Stocks up today, more buyers than filers at this level. Once you exhaust the sellers at this level.

Now you go up.

Thank you Jeffrey for being so generous with your time. We have been speaking with double lines Jeffrey Sherman. He is deputy chief investment officer at the firm, helping to oversee about one hundred billion dollars in fixed income and equity. If you enjoy this conversation, be sure to check out any of the five hundred plus discussions we've had over the past almost ten years. You can find those at Apple Podcasts, Spotify, YouTube, wherever you find your favorite podcast, be sure and check out my new podcast at the Money Expert Conversations about earning, spending, and most importantly, investing your money. Find that wherever you find your favorite podcasts, or in the Master's in Business feed. I would be remiss if I did not thank the Cracked team that helps put these conversations together each week. John Wasserman is my audio engineer. Attika Valbrun is my project manager. Sean Russo is my researcher. Ann Alouke is my producer. I'm Barry Renholts. You've been listening to Masters in Business on Bloomberg Radio.

In 1 playlist(s)

  1. Masters in Business

    658 clip(s)

Masters in Business

Bloomberg Radio host Barry Ritholtz has in-depth discussions with the people and ideas that shape ma… 
Social links
Follow podcast
Recent clips
Browse 658 clip(s)