The transcript from this week’s, MiB: Gregory Peters, Co-CIO of PGIM Fixed Income, 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.
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00:00:02 [Speaker Changed] Bloomberg Audio Studios, podcasts, radio News.
00:00:09 [Speaker Changed] This is Masters in business with Barry Ritholtz on Bloomberg Radio.
00:00:16 [Barry Ritholtz] This week on the podcast, another extra special guest, if you are at all interested in fixed income in cross asset management, in intermarket analysis, in understanding the many moving parts that go into putting together a near trillion dollar fixed income portfolio will then strap yourself in. Greg Peters really, I don’t know who’s better to discuss this, he’s been with PGIM for the past decade where he helps oversee a giant pile of capital on behalf of a variety of institutional investors. He’s kind of uniquely situated in having spent a lot of his career not only overseeing fixed income portfolios, but also part of a multi-sector. Team. PGIM is kind of unique. They, they have a very different approach than a lot of companies do. I, I found the conversation to be fascinating and I think you will also, with no further ado, my discussion with PGIM. Gregory Peters.
00:01:22 [Gregory Peters] Thanks for having me back.
00:01:23 [Barry Ritholtz] So, so let’s start out with your, your background. You get a BA in finance from the College of New Jersey and an MBA from Fordham University. Sounds like finance was always the career plan.
00:01:35 [Gregory Peters] Yeah, I don’t know about that. You know, so what,
00:01:37 [Barry Ritholtz] What was the original thinking?
00:01:39 [Gregory Peters] I Don’t know what my original thinking was. I kind of fancied myself as more of a liberal arts type of individual. Like I had a English minor, I studied as much as I could around literature and art, and then really just did finance. ’cause I felt I needed something tangible. So it’s not a great story, you know, as you on the show…
00:02:05 [Barry Ritholtz] I hear people saying, well, you know, economics business was my backup. And they end up being very successful in those fields. So. So let’s talk a little bit about your experience at the US Treasury Department. How’d you get there and what’d you do while you were there?
00:02:20 [Gregory Peters] Yeah, so I was part of, after I graduated college, I took some time off. I traveled through Europe, I bartended over the summer prior to, so I could fund my trip abroad. I came back, I realized I needed to get a job and or more importantly, my father told me I needed to get a job and he’s the one who actually cut the ad out of the paper. I’m dating myself, but that’s when, right. He just put ads in the paper and, and the role was for a bank examiner, so on the regulatory side with the Office of Thrift Supervision. So if you recall, that was the agency that was created as a cleanup for the SNL crisis. Yeah. And so I was fortunate to land a job there. And I gotta tell you, Barry, it was a fantastic, fantastic training ground. I learned so much and I’m really quite grateful for it.
00:03:16 [Barry Ritholtz] So when we look at US treasuries, right, that they’re about 40% of the Bloomberg Barclays Ag, the largest set of holdings by far. Any of your experience at Treasury help you when you’re looking at a bond portfolio that very often is, contains a lot of treasuries themselves.
00:03:37 [Speaker Changed] I would say my bank regulatory background was more instructive in how I think about the financial system writ large, the flow of money, so to speak, and credit. Right. And that was probably a more of a defining characteristic of that reign or that time than kind of the impact on the US treasury market. So that, that came later.
00:04:04 [Speaker Changed] Next up, you’re at Solomon Smith, Barney. What was the energy like there? I recall them, you know, liars Poker, the eighties and nineties. They were a bond powerhouse for a long time.
00:04:15 [Speaker Changed] That was a real experience. So being on that trading floor, so I started out on the mortgage trading mortgage derivative side. I moved or was moved into research, which was really quite a blow for me at the time. You know, moving from a trading seat to a research seat was not something that one desired it. It took me a, a while to kind of get over that, to be quite frank. But I realized, man, that was the best thing for me. It was the best thing for my personality. It allowed me to zoom out, understand markets more critically. But Solomon itself was such a unique institution. It was excellence personified in the bond market from a research perspective, from a trading perspective. It was by far the best trading operation I’ve ever seen. The investment grade trading desk of Brian Eckerson, of Brian Riano and John Eckerson was just fantastic. So it really, really just showed me what greatness is about and what swagger is about.
00:05:25 [Speaker Changed] Swagger to say the least. Were you at Solomon during the financial crisis and what was that desk like back then?
00:05:33 [Speaker Changed] No. So I moved in 2000, almost if you mark the all time high of Morgan Stanley stock, you know, pre adjusted, it was trading like an internet. That’s the day I joined Morgan Stanley. And so that was, that was the internet bubble blowing up. So I joined
00:05:51 [Speaker Changed] Like March, 2000, something like that.
00:05:54 [Speaker Changed] Yeah, it was early 2000. And, and that was also a fantastic experience. So I had the financial crisis through the Morgan Stanley lens. So
00:06:04 [Speaker Changed] You had a couple of really interesting titles at Morgan Stanley. The first is pretty straightforward, director of fixed income and economic research. I, I don’t think there’s anything especially unusual about that. But the second title, chief global Cross Asset Strategist, you don’t hear that all that often. Tell us about that role and, and what’d you do there in the two thousands? Yeah,
00:06:28 [Speaker Changed] So that was basically a derivative, no pun intended, of a global strategist role that really focused on the linkages across markets. And so the, the thought process,
00:06:40 [Speaker Changed] Meaning, meaning intermarket analysis Yeah. If this happens in, in oil, here’s what it means for bonds.
00:06:46 [Speaker Changed] Precisely. Right. And I actually think that is possibly the most important aspect of investing. Huh. I think investors are very narrowly focused and rightfully so. Expertise is rewarded, but what happens away from you matters a whole heck of a lot to what your current investment look like and your own portfolio and your own trading. And so that role was emblematic of the importance of that. And so it’s a, it’s a terrible title, right. But, but it’s one that I think is quite important and made me a much better investor. You
00:07:29 [Speaker Changed] Were there during the John Mack era, he was a guest on the show last year. What a fascinating guy and fascinating career. What was it like working u under his stewardship?
00:07:40 [Speaker Changed] John Mack defined leadership. I, I think of Morgan Stanley and John m as anonymous. I think he was a fantastic leader. You know, we worked very closely together during the crisis. I remember, you know, during the, kind of the darkest days of the financial crisis, we, we have our morning risk meeting and he comes in, sits on the dais and we’re talking and you know, Lehman was basically, you know, just, just gone under, or it’s about to, and I make this comment, I don’t think it’s about Lehman, it’s about a IG and he just went crazy on me just yelling at me in front of like all these people. But I have nothing but the utmost respect for John. I think he’s just embodies leadership in all.
00:08:29 [Speaker Changed] And I think history proved you right, Lehman, I like to describe Lehman Brothers as the first trailer that was in the trailer park that was hit by the tornado, but the tornado was coming regardless of what happened to Lehman.
00:08:44 [Speaker Changed] Absolutely. And you know, I stand by that statement, but he definitely dressed me down in a real strong emotional way.
00:08:52 [Speaker Changed] Huh. So, so let’s talk a little bit about, you’re at Morgan Stanley for the better part of a decade. How did that experience ultimately help you doing what you’re doing today, which is co-head of the multi-sector team?
00:09:06 [Speaker Changed] Yeah, so I was fortunate. So I left Morgan Stanley in 2013. I took some time off, but essentially I was just tired of the self side. I wanted to really begin to invest on my own. So I took some time off, I looked at different options starting up my own fund, creating a new multi-asset business at a PE firm. And then PGM came about and, and I do have some New Jersey roots and it kind of felt, you know, natural and they really took a chance on me. As you know, Mike Lillard, who is my recently retired boss, is like what you were doing at Morgan Stanley is directly applicable to what we’re doing here. It just has a different wrapper, a different name to it. And so they really put me in a position to succeed because what PGM is really about is a team construct. So as really helped by that. So that was really the move.
00:10:11 [Speaker Changed] I’m, I’m glad you brought up the team construct. ’cause one of the things when you look at the org chart for PGIM, you can’t help but notice all of the co positions. So your CO CIO, the company itself has co-CEOs and when you go down that chart, there are cos here and there pretty regularly. What’s the thought process of having dual leadership in all these different departments?
00:10:36 [Speaker Changed] Yeah, you know, coming from the street, it’s a hard pill to swallow oftentimes because many think of COS as a Game of Thrones exercise, right? Who’s going to win? Who’s gonna lose at PGM And in our fixed income organization is very different. It is shared responsibility, shared leadership. We do think we’re better together than a part. And there’s a lot of responsibility and you could make an argument that as a fiduciary to your clients and a stewards of capital, that that actually is what is a better outcome. So I think it really works for us. We typically have complimentary skill sets and it’s additive and it works really well for us as an organization. Really,
00:11:26 [Speaker Changed] Really interesting. A lot of people seem to assume that oh PGIM, they’re running money for Prudential insurance, but it’s not just Pru, you guys are running money for a lot of institutional clients, aren’t you?
00:11:38 [Speaker Changed] Absolutely. So the way our a UM is broken out a little under a third is the insurance company. We think about them as a very important client of course. But outside of that, the other two thirds is outside capital. So whether it’s on the retail or institutional side. So it’s a very diverse group of investors. I think we have over, you know, 1100 different investors and not including the small retail, I just mean institutionally. So yeah, it’s a broad swath of clients that we cover from pension funds, sovereign wealth funds, retail, you name it.
00:12:17 [Speaker Changed] So that’s over half a trillion dollars in non prudential just bonds. We’re not talking about anything else. Correct. Let’s talk about what it’s like being a co CIO for fixed income. How do you share the responsibilities? Who, who is in charge of what and do you ever kind of run into complications with that?
00:12:38 [Speaker Changed] Yeah, so my, my CO is Craig dueling, who incidentally was my boss since the day I joined pg. Oh really? Yeah, he’s a fantastic boss. So I feel very fortunate. We’ve been sitting next to each other since the day I joined and we have a real complimentary skill set. So he, he focuses largely on the insurance company, Japan, you know, multi-sector is, you know, part of my remit ’cause I’m on the fund, so I’m a portfolio manager on those funds. So, you know, that is a, you know, big responsibility of course. But we, we really work together and try to critically assess the process and how do we improve the process of investing across the entire floor.
00:13:28 [Speaker Changed] So I could see how having two sets of eyes is advantageous when you have co heads for the department. What, what are the challenges? I, I can imagine it’s not easy when you sort of have to reach a, a happy consensus on all major decisions.
00:13:48 [Speaker Changed] Yeah. You know, I’ll take the other side of that to a degree, I think conflict is a good thing. And so I, I’m, I’m not, you know, saying Game of Thrones type of conflict to go back to that reference. But, but you know, I’m very much into the idea of pre-mortem. So I wanna suss out the issues I wanna debate. We have a real culture of debate, you know, at the firm. And so I think having that in the mix prior to whether guessing in a portfolio or making decision, I think is critically important. You know, command and control oftentimes has lots of blind spots to it, right? It, it suffers from that individual’s biases. And I think that’s dangerous. So having that, you know, checks and balances I think is incredibly powerful. And you know, you have to trust each other as a individual and as an organization, as it’s not malicious, someone disagreeing with you is not a malicious act. It’s actually quite the opposite. And, you know, if you think that you’re all in it together working for a common purpose, then I think it works pretty well.
00:15:02 [Speaker Changed] I I, I love the concept of doing the pre-mortems while you’re unemotional and objective. ’cause once something hits the fan and you’re trying to figure out, hey, what do we do here? It’s a very different set of analyses, isn’t it?
00:15:17 [Speaker Changed] Absolutely. And you know, I’m a very big fan of looking at a probabilistic scenario based approach. And I think the important part of that exercise is to analyze those different possibilities, right? And think about what your portfolio would look like, what a certain trade would look
like before it happens, right? And so you shouldn’t be so surprised by it. And of course you’re always surprised ’cause you can never kind of put the proper scenarios around everything of course. But, but at the same time, I think looking at it through a multiple scenario lens is incredibly powerful.
00:16:00 [Speaker Changed] So last year, 2023 we saw treasury yields hit their highest levels since, I don’t know, I wanna say oh seven since right before the financial crisis, how are you guys managing your duration here? Are you short term, are you long term, where are you relative to where P GM’s fixed income duration was in the 2010s? Yeah,
00:16:21 [Speaker Changed] So we were known as the lower for longer institution. So you know, when the world thought rates would rise, we were like, no rates are here to stay
00:16:34 [Speaker Changed] Last decade
00:16:35 [Speaker Changed] On the, yeah, before 2020. And so that was kind of our calling card and that worked really, really well. That transition from, you know, 2020 post pandemic, quite candidly, we were a little slow to react on the secular shift. So if I had to, you know, go back and revisit, you know, items that we didn’t get right, that would be one that we did not get. Right. At the same time though, looking forward, we’ve really moved from lower to longer to higher for longer. Right? Which doesn’t have the same ring to it of course. Right? But, but you know, we do think the world has changed and we see a little more growth kind of secular growth, a little more inflation on a secular basis as well. And that should translate to a higher bond yield. So long-winded way of saying we’ve been short duration, so we’ve felt that rates have been poised to rise all else equal and stay high. And that’s where we are today.
00:17:42 [Speaker Changed] At what point in the cycle do you say, okay, it feels pretty safe to go out on the duration curve and instead of being three to five years, or five to seven years, maybe we could be 10, seven to 10 years.
00:17:55 [Speaker Changed] Here’s the irony is that given where yields are, you actually get paid to be out there whether yields rally or even sell off a little, right? So we we’re suffering from such a recency bias where so many investors haven’t seen the world pre GFC, right? The, you know, yields weren’t supposed to be that low, right? And so, you know, all the modeling that, well, you know, the Fed has to bring back rates to zero again and so on and so forth. Not gonna happen I think is really, really miscast. And so, you know, I I I think having duration in a portfolio and we got a whiff of that at the end of last year, right? When there was this ferocious rally for whatever reason, I don’t recall necessarily, it didn’t make a lot of sense to me, but it just tells you have duration on, you’re getting paid carry to do it.
00:18:55 And you have this protective measure where if the world does go awry, if a recession does hit growth does slow for whatever reason, it has that protective characteristic. Importantly, it didn’t have that before, right? So when rates were effectively at zero, it was a, didn’t make sense to be long that instrument ’cause there was no positive carry. And then if a recession did hit, there was no room or scope for rates to rally. So bonds lost their way and which is why everyone was questioning the 60 40 efficacy. And it was a good question, but I think we’re in a very different place today and I think bonds have a tremendous amount of value in a balanced portfolio.
00:19:40 [Speaker Changed] The, the great irony is prior to the 20 22, 23 rate hiking cycle, there was an entire generation of bond managers, traders, analysts who really have never lived through a rising rate environment. They’ve been at zero practically since September 11th, since the.com implosion rates have only trended lower and stayed low for forever. As you said, that really isn’t very normal, isn’t it? How far are we from what you would think of as fairly normalized rates?
00:20:13 [Speaker Changed] I think we are finally in a normal zone. But you’re quite right, you need to zoom out. So financial history didn’t start in 2000, right? It was well before that. So we have this chart that has 150 years of yields, right? You know, so, you know, looking at different regime shifts. So I think we are finally in a more normal environment. I also believe that, you know, history will continue to shine a really unfavorable light on a central bank policy of zero rates and negative rates, right? If you kind of ask the common person, you know, why is a bond yield negative? I don’t think anyone could come up with a great reason, kind of us in the professional realm convince ourselves why, but was that really true? Probably not. So, so I think we’re more normal now and I think it makes sense and I feel pretty good about it.
00:21:19 [Speaker Changed] So we’re talking about rates, but, but let’s go beyond rates. What do, what do you see on the credit quality side? How significant is that? I, I’ve noticed the gap between high yield and, and riskless seems to be kinda tight these days. How do you look at the credit quality side?
00:21:39 [Speaker Changed] Credit’s tricky. So it’s important to note that we have not had a credit cycle, you know, since the early two thousands, right? So kind of the late nineties cycle. As a consequence of that, we really haven’t experienced credit losses, right? We’ve had these, these swoons of liquidity risk and obviously we had the GFC, but what we’ve seen is that central banks have stepped in very quickly to kind of rescue, but you haven’t seen a real uptick in defaults right? Distress and defaults. You’re starting to see that pick up. And I believe that distress and default activity will remain high just given so many balance sheets were built on the backs of zero interest rates. And as that gets refinanced, that puts more pressure on these businesses to survive. And that just leads to more handing over the keys type of, you know, situations. So, so
00:22:40 [Speaker Changed] Two questions about that. First, is that an early warning sign of something untoward in the economy? And second, if we’re seeing these defaults tick up, why is there such a tight spread between high quality corporates and and high risk corporates?
00:22:57 [Speaker Changed] I, I think it is a early warning sign for sure. I also think it’s a resumption of normalcy. So we’re in a more normal environment. I also think it’s incredibly opportunistic for investors like us as well. So I’m excited about it. But your point around the compression though is an excellent one. And so I still believe, we still believe at PGM that investors are overpaying for credit risk, whether it’s down the capital stack in a structured product, whether it’s, you know, single B versus a triple B as I think once again the recency bias aspect of it, right? So, you know, I see a lot more value on the higher quality scale than the lower quality. I think the relative value is inverted and if you look at just kind of broad index levels, we’re in the tightest decile for investment grade corpus as well as high yield. So there’s not a lot of room to tighten more from here. So
00:24:01 [Speaker Changed] Some of the criticism I’ve seen of private debt and private credit is exactly what you said generally, which is some investors are overpaying for, for risk. Do you, do you look at the world of private credit and in terms of intermarket analysis, how does that make you think about publicly traded fixed income?
00:24:23 [Speaker Changed] Yeah, so I do look at the world of private credit and I look across the broad spectrum of credit. And so what you’ve seen over the past, just call seven to 10 years is obviously this tremendous growth in private credit, but that has actually taken risk out of the public markets, right? And I think the most important market to focus on, focus on is the levered loan market, right? Because it’s kind of private but it’s kind of public. So it’s kind of the fulcrum point. And so what we’ve seen is leverage really ramp up on the levered loan side. And so kind of the LBO transactions, the proforma leverage in EBITDA has been heroic, it hasn’t come through. So that is I think the canary in the coal mine, interestingly enough that has been the best performing fixed income asset over the past 18 months or so. So, you know, the joke’s kind of been on me for a little bit, but, but I do think that gives you a gateway into where the leverage is and the leverage in the system is in a more opaque area, not the public area. And that is quite worrisome for me, for me, when we think about kind of the next recession.
00:25:48 [Speaker Changed] So I’m gonna assume that in the current environment you’re not looking to dial up credit risk?
00:25:55 [Speaker Changed] No, no. So I would say two things. One is that kind of broad kind of macro credit risk. We’ve, we’ve taken down, we’ve continued to, you know, take down just kind of risk, risk reward, risk adjusted returns don’t look really that attractive to us. At the same time though, I talked about the increase in distressed and, and you know, quasi distressed and that’s creating dispersion and dispersion’s good for active managers. So on one end, the broad macro credit risk looks kind of fully valued, not that exciting, but the dispersion in the market creates a lot of value for active managers. Now it’s incumbent upon active managers like us to capture it, but that’s exciting. Whereas before it was everything was very compressed and it traded kind of all together and it was hard to add a lot of value in that
00:26:55 [Speaker Changed] Environment. That’s really interesting. So first quarter of 2024, you said something that I thought was really intriguing, investors need to figure out how to bulletproof their bond portfolio. How does one bulletproof your bond portfolio?
00:27:12 [Speaker Changed] Yeah, you know, I think that was taken a little outta context if I remember, but the idea behind it essentially was don’t take unnecessary risk. The world has changed. Investors aren’t incentivized or rewarded to take the same kind of risk that they were before. So move up the quality curve, don’t move down it. So I still believe, as I mentioned before, that investors are still stuck in this old world and they’re overpaying for, for real credit risk and underpaying light credit risk. And so that’s really what I mean by it. So you don’t have to take the risk now that you, you know, had to a, a few years back,
00:27:57 [Speaker Changed] You were very early when you were talking about hire for longer, you know, last decade, not, not a lot of people got that right and, and you totally did. What were you seeing at that time that led you to the conclusion the Fed is in no hurry to get off its emergency footing and there’s no impulse to raise rates, expect lower rates for the rest of this decade?
00:28:22 [Speaker Changed] Yeah, so you know, as I mentioned before, we pivoted in 2021 from our low for longer to higher to longer. And that was just a realization that, you know, post covid, I you’re in an environment where inflation inflationary pressures are very different, right? You talk about, or you hear about nearshoring friend shoring, the adjacencies proximity, so on so forth that that’s less efficient. That puts more pressure on inflationary forces, you know, in every other aspect that we look at. Seems inflationary to me. So that’s the one side. The other side is I do really feel like we’re finally out of this secular stagnation story. And so if you just take those two items, that’s our premise. It’s not fact of course, but that’s our premise then that should lead to a higher rate environment, not a lower rate environment. And so we’re in a series of secular shifts, I believe, and I think that manifests itself through higher rates, not lower rates. And so that, that’s been our thesis. At the same time there’s been this tendency in the market where any data print it, it doesn’t matter, it’s good, better indifferent, it could be deciphered however you like, seems to want to resort back to the world that it was. And I think that misses the bigger picture. So that’s, that’s kind of our thinking. It’s gonna be a volatile ride. So this is not a point estimate like right, 10 years x but I think it’ll be in a volatile yet higher range.
00:30:12 [Speaker Changed] So let me follow up with a couple of questions. Some things I find really intriguing, you know, I’ve heard a number of people say, Hey this, if globalization is efficient and deflationary, well nearshoring is gonna be inflationary, but wasn’t the spark that lit this entire inflationary cycle, the lack of supply chain logistics, we were unable to get things ’cause we, we couldn’t get masks or, or you know, alcohol rubs or anything like that. Toilet paper or, or toilet paper or semiconductors or what have you. ’cause it was coming from overseas. Doesn’t nearshoring create a little more resiliency, anti-fragility And if, if the broken supply chains was the early spike of inflation, well removing that, shouldn’t that give us a little bit of a, a shield against the next inflationary cycle, at least a supply chain driven cycle?
00:31:17 [Speaker Changed] Yeah, I mean if you think about how businesses were running, it was just in time inventory in extremists, right? Super,
00:31:25 [Speaker Changed] Super efficient, super low cost
00:31:27 [Speaker Changed] And, and the supply chains were exceedingly complicated, right? So it was, it wasn’t a one jurisdiction supply chain, it was multiple jurisdictions across the supply chain. And so yeah, maybe you, you eked out additional efficiencies and I’m using air quotes that means costs by doing that. But you lose control at the same time, right? So, you know, I think what CEOs and you know, business leaders decided is that, you know, it’s better to have a little more control than, than save a few cents.
00:32:01 [Speaker Changed] E everything is a series of trade-offs. The other thing that we were talking about earlier, the lower for longer in the 2010s, let, let’s talk about the 2010s versus the 2020s, 2010s obviously monetary policy driven. Suddenly we have the pandemic, we have the CARES Act one and two, this giant fiscal stimulus under President Trump. You have the CARES Act three under President Biden plus a whole bunch of other longer term 10 year spends is is the 2020s, the decade of fiscal stimulus? And how does fixed income adapt to that
00:32:42 [Speaker Changed] Fiscal has been incredibly powerful, no doubt about it. If you look at I think the durability of the US economy and the outperformance of the US economy, I think a lot of that has to do with fiscal of course. But you know, at the same time you look at the CHIPS act and some other, I think notable industrial policy measures, you know, that money hasn’t really been put in the system either, right?
00:33:11 [Speaker Changed] And that’s over 10 years, you know, that’s gonna be a tailwind, right?
00:33:14 [Speaker Changed] So yeah, so I think I I there’s lots of focus on the deficit and that’s precisely right, we should focus on the deficit. But I do believe that having a more cohesive fiscal policy around industrial measures is important. And that actually is leading us to believe that there’s hope on the horizon to get a little more efficiencies outta the economy and we can grow at a higher plane.
00:33:46 [Speaker Changed] So in January, 2024, you had a quote that caught my attention, yield is destiny for fixed income. Explain what you mean by that.
00:33:56 [Speaker Changed] So, so essentially what we mean by that is the yield itself is the value proposition, right? So earning that carry the income, right? So the income out of fixed income was taken outta the equation post GFC. But having that income, having that carry is incredibly powerful. And so if you look at, you know, over the course of many decades, the key driver to performance and returns is the starting yield, right? So I know it sounds trite to say, but starting point matters. And so when you’re starting with a higher yield that that allows investors a higher possible return.
00:34:42 [Speaker Changed] So you mentioned in December there was an extreme disconnect between the Fed and the markets. What, what are you referring to there?
00:34:50 [Speaker Changed] Yeah, so I was really, besides myself at that time. And so I was looking at the inflation picture, I was looking at growth and I couldn’t understand why the market was so aggressively pricing in rate cuts. I just couldn’t for the life of me understand it. And it’s funny story, I was down at some hedge fund conference in Miami, of course in January, and the whole room was, I’m, I’m not sure if it was bared up or bulled up, but they were basically in the camp that March is a done deal, 50, they have to cut, cut, cut. And it didn’t matter whether it was because of disinflation or the job market was rolling over, it was all about cuts. And it just really struck me as a bizarre thought process I guess. And so you can’t have, you know, hedge you win tells you win, right? And so, so it really kind of emboldened us to take the other side of it. I just, it was too much. It was too much.
00:35:58 [Speaker Changed] Is this the same crowd? And, and maybe this is the thought process there. Look, all we heard in 2022 is the US is in a recession or about to fall into a recession. And we heard the same thing in 2023. Not that you could tell by looking at the equity markets, the equity markets made it pretty clear we don’t see any sort of recession and then we go into the first five months of, of 2024 bonds continue to just kind of drift lower. Or how related is the, we are expecting fed cuts now and the, we expect a recession any day.
00:36:36 [Speaker Changed] I don’t know, I can’t figure it out. I mean, I think many, many made a mistake, you know, myself included, just thinking about the ability of this economy or any economy to withstand higher rates. It goes back to the narrative where we were so accustomed to living in this low rate world that we, we couldn’t fathom the fact that the economy could survive on higher rates. So I think that was just, just kind of a mistake that many made, which is why recession probabilities were so high. What’s notable to me is, so on the macro side, that was the narrative. And so at PGM fixed income, we have like 130 credit analysts, right? So we have a tremendous micro team and they weren’t seeing it boots on the ground level, right? Right. And so
00:37:31 [Speaker Changed] There
00:37:32 [Speaker Changed] Was this macro narrative based on this premise that the world can’t live with higher rates, not kind of pulling it back and saying, well, rates are higher because growth is pretty good. And yeah, a little inflation like rates are there for a reason, right? And at the same time our analysts were saying, you know, the companies are really doing well. So I think, you know, that was a real lesson for us and really embolden us to believe once again that this whole fed cunning narrative was, was definitely overplayed.
00:38:08 [Speaker Changed] What, what do you make of the latest thing that I’ve been hearing from, I, I wanna say it’s the same crowd, we’re concerned about stagflation. What, what do you see in terms of, of a slowing economy and rising interest rates? Rising inflation rates?
00:38:26 [Speaker Changed] Yeah, so, so we do a bunch of scenarios. Stagflation is one that we don’t assign really any weight to at this point. I think it was more of a, a European possibility or probability than a US one. So everything’s possible, of course, right? But I don’t know, modal density scenario, I don’t see that I, IIII don’t see that as a real risk here.
00:38:55 [Speaker Changed] What, what, what’s the Elroy Dimson quote? Risk means more things can happen than will happen.
00:39:01 So I, and I think Jerome Powell came out and said, I don’t see the stag and I don’t see the fla. So I, I’m kind of surprised that that has sort of found a life of its own in, in the us Hey, if you wanna talk about Europe, that’s a very different set of circumstances, both fiscally and, and in terms of their, their growth rates. But let’s bring this back to inflation generally, beginning of the year, you said markets are writing off inflation a little prematurely. What’s the disconnect between what the markets are, are seeing or, or wishing for and what’s actually happening in the economy?
00:39:43 [Speaker Changed] Yeah, so the, the first way to think about it is just kind of mechanically, right? So the measure of inflation is the rate of change, right? So the reason why I think, you know, the polling numbers are so poor around inflation is because, you know, once milk rises to, you know, whatever it is, $9 for organic milk, it’s not moving lower, right? Right. It just doesn’t keep rising, right? And so you’re feeling the full effect of that $9. Whereas us in the markets, we’re looking at the delta. So the reason why I mentioned that is because some of the easy comps are starting to roll off. So just mechanically, we, we, we would expect to see inflation just rise because it’s those easy comps rolling off. But to me, I think it’s important to dissect and decompose where inflation is coming from. And it’s about labor, right? So core services is I think 56% of core PCE and that’s about labor. So how can you really forecast a meaningful decline in inflation when the job market is as strong as it is?
00:41:05 [Speaker Changed] Alright, so we’re seeing a, a slight decrease in immigration in 2024. What did it look like last year? What did it look like in 2023?
00:41:15 [Speaker Changed] So immigration last year skyrocketed.
00:41:18 [Speaker Changed] Oh really? Legal immigration. Legal
00:41:19 [Speaker Changed] Immigration and illegal probably as well. It’s a really difficult measure, but either way that that helped expand the labor supply and that expansion of labor supply allowed two things to unfold. One, it allowed I think, disinflation to come through the entire system last year.
00:41:45 [Speaker Changed] Less pressure on rising wages ’cause there are more bodies and you’re not just competing on price. Correct.
00:41:51 [Speaker Changed] And the second is it allowed that economic activity to actually occur. So it was a twofold benefit. What you’ve seen this year is the labor market is much more I balance and at the same time you’ve seen immigration really dip pre-election. So you’re seeing just the labor market in a more natural state.
00:42:16 [Speaker Changed] Hmm. Really interesting. Let, let’s stick with inflation for a minute. So we’re recording this in the middle of May, 2024, we had a 2.2% year over year producer price index sort of soft and then a very soft consumer price index below consensus. Is it too soon to declare victory over inflation? Can we say, hey, we’re, we’re at a three handle and if you back out some of the oddities of owners equivalent rent and the shelter component in CPI, we’re really at a two handle, why, why can’t the Fed just plant the flag in the ground and say we’re good here?
00:42:55 [Speaker Changed] Well I think they can’t plant the flag because their mandate is 2%, right? And you could argue whether 2% is a made up number, which it is
00:43:05 [Speaker Changed] From New Zealand in the 1980s.
00:43:07 [Speaker Changed] So there’s no scientific evidence to support 2%, but it’s 2% because we said it’s 2%, right? That’s the beauty of economic theory oftentimes. So I think it’s really hard to back away from that because you start to lose credibility. But the way to think about the Fed’s mandate in that construct is not around easing necessarily, but around being less restrictive. And so is there room for them to adjust policy rates lower to be less restrictive? I think there is, but not a lot
00:43:42 [Speaker Changed] Like in the mid fours. And hopefully that frees up a lot of this frozen housing supply. Yeah,
00:43:48 [Speaker Changed] It what exactly the the, the issue I think is that it’s already pre-baked and you know, if you look at kind of real estate prices, you look at, you know, corporate credit as well, kind of those, those, those beliefs are already factored in. Yeah. And so what happens if the Fed doesn’t adjust policy rates slower then I think there’s more bumps in the road. I,
00:44:12 [Speaker Changed] I find it ironic that in the 2010s an era we described as driven by monetary policy, we couldn’t get inflation up to 2%. And now in the 2020s an era defined by fiscal stimulus, we can’t seemingly get inflation down to 2%. It just kind of makes you wonder about these targets and the background that they’re in. I understand they don’t wanna say, well we can’t get the 2%, we’ll go to 3%, but if we get more housing supply out there, maybe that drives the apartment rental index a little lower.
00:44:50 [Speaker Changed] Well, you know, what you describe is the impotence of central bank policy, right? On inflation itself. So fiscal is a much more powerful tool, not only from the economic growth perspective, but from an inflation or disinflation standpoint as well. So it actually calls in into question how much central banks can really do, right? Right. Like they’re very, very limited. I
00:45:12 [Speaker Changed] Think especially when, when you look at the fiscal stimulus, especially from the CARES act under both Trump and Biden, it wasn’t like, like the semiconductor act or the Infrastructure Act or the inflation reduction act that spread out over a decade, that was trillions of dollars dumped into the economy in 20 and 21. One would assume that by 2022 the pig was through the Python and you’re still just dealing with whatever money’s left over in everybody’s savings account is the biggest part of the fiscal stimulus behind us. Now can we start thinking in terms of, so we’ve normalized monetary policy, are we almost normalizing fiscal policy?
00:45:58 [Speaker Changed] Well I think the big rush of cash into consumer’s wallets is definitely behind us. We talked earlier about the CHIPS act and how very little of it has actually been put into the system yet. So I do think a lot of the fiscal thrust though is behind us. But the real question on the table is what does fiscal look like going forward? Are we going to continue to run such large deficits? There’s lots of focus on the election of course, but the item on the table for many is what’s the contours of fiscal look like? I don’t think anyone believes that you’ll see a real pullback in fiscal spending, but you know, Republican led Trump victory that probably keeps the tax cuts in place and that adds, you know, 1.5% to the deficit instantaneously. So what
00:46:54 [Speaker Changed] Would, what would that mean for inflation if we saw either a renewal of tax cuts or more tax cuts?
00:47:01 [Speaker Changed] I think it’s inflationary right now. I think the multiplier effect is much lower. So I don’t think you have the same kind of economic impulse effect necessarily, but it’s inflationary and you know, everything that we look at on the margin is inflationary, not disinflationary. Huh.
00:47:21 [Speaker Changed] That’s really
00:47:22 [Speaker Changed] Interesting. It’s, you know, the counter to that is China, but China’s less influential in that way than they were before. And I think that’s another real secular story that investors are, are kind of slow to kind of grasp onto. It’s like the influence of China kind of, you know, post WTTO admission is very different today than where we were the past 20 years. And I think that matters a lot.
00:47:49 [Speaker Changed] They were exporting deflation for a good couple of decades. Are you suggesting that’s much more moderate than it once was?
00:47:57 [Speaker Changed] I think it is moderate, more moderate. And if you think about the areas where, you know, they are exporting deflation in some areas like solar EVs and whatnot, tariffs are, are slapped on top of that. So it’s trying to level the playing field as far as that’s concerned. So I think it’s a different environment bottom line. And I think that matters a lot. And I think it’s inflationary. I think it means bond yield will remain higher, not lower all sql
00:48:30 [Speaker Changed] Y You know, you just put an interesting thought in my mind thinking about the different tax policies and the different import export policies of each of these candidates. But it dawned on me that no matter who gets elected, they’re both lame duck presidents, they’re both second term presidents makes you wonder what they’ll be able to get accomplished either way.
00:48:50 [Speaker Changed] Yeah, and it’s all about congress, right? As you know. So there’s intense focus on the presidential race, but you know, I think we all know that, you know, having full control of the house matters a lot. I think that’ll be a more driver of policy. Domestically foreign policy, you can do more by presidential edict, but domestic policy has to go through Congress.
00:49:12 [Speaker Changed] Alright, one last curveball question before we get to our favorite questions. We ask all of our guests. So you’re a member of the Fixed Income Analyst Society and the Bond Market Association. Tell us a little bit about those two organizations. I don’t hear those names all that often these days.
00:49:30 [Speaker Changed] Yeah, so look, I mean that’s just a forum for investors from like all parts of the industry, right? Whether you’re from the rating agencies, the buy side, sell side to, you know, debate, share information around, you know, pertinent issues, market issues. And I guess the takeaway there is the diversity of expertise, perspectives and kind of just thought processes just make you a better investor. So it’s a, so it’s a shared environment where, where like-minded fixed income professionals but with different lens and different backgrounds can debate. Hmm.
00:50:15 [Speaker Changed] Really, really interesting. So let’s jump to our favorite questions, starting with what have you been streaming these days? What are you watching or listening? What’s keeping you entertained?
00:50:24 [Speaker Changed] Yeah, well, you know, I do like a good streaming, so, you know, it’s hard to narrow. So I just started, well I’m in, you know, just started means last week, which means I’m, I’m almost done with season two succession, so, so I was a late adopter to, to succession. So I enjoy that greatly and thankful that I’m not in that family. The, the other one I’m streaming is masters of Air on Apple tv.
00:50:52 [Speaker Changed] It’s next up in my queue. It looks fascinating. It’s very
00:50:54 [Speaker Changed] Good. It’s, you know, it’s very good. I love, I love history and you know, it’s a good story and what I’m enjoying it greatly. It just
00:51:02 [Speaker Changed] Looks, if you watch the preview visually, it’s stunning. It just looks great. It
00:51:08 [Speaker Changed] Is visually excellent. Absolutely. The problem is I watch it on my iPad, so it’s like I’m not getting the full experience, but this story is really quite good. And then I am a nerd at the end of the day and I’m the lord of the rings, the rings of power. So I’m waiting for season two to come out, I think next week. And then podcast wise, there’s a, a few that I like what I really like the Tim Ferris show. So what I like about that podcast is that it it’s about process and gets in the minds, no matter the discipline, what the process is to, you know, your expertise. So I really find that to be quite excellent. And then I also like invest, like the best podcast as well.
00:51:56 [Speaker Changed] Patrick Oay. Yeah, he’s very good. Really
00:51:58 [Speaker Changed] Good. She’s exceptional. Yeah. Yep.
00:51:59 [Speaker Changed] Absolutely. Tell us about your mentors who helped shape your career.
00:52:04 [Speaker Changed] Yeah, so, you know, mentors, I think of mentors as a mosaic. You know, I I I have lots of positive mentors and I also have, you know, the anti mentor, right? You go back to my Solomon days, I, I was really shaped by some leaders that like, man, I don’t wanna be like that person, huh? So that could be equally as powerful. I’m not trying to be negative about it, I’m saying
00:52:28 [Speaker Changed] No, I, I totally get what you’re saying. Hundred
00:52:30 [Speaker Changed] Percent. There’s informational content in everything that we do, positive and negative. But there’s a a, a few that stand out to me. The, the first is a gentleman Dan Ti. I worked with him at Solomon Smith Barney, and he really taught me around kind of operational workflow and design, product design and, you know, everything is a operational management project. And really helped me think through that. When, when I got to Morgan Stanley, I worked for a gentleman, Steve
Zaki, he taught me about creativity and cross market application into practice. And so what’s interesting there is a story that most people don’t know. So Steve and I was part of that group, so I can’t really claim credit, it was really his design created this product, product called Tracers in 2001. And, and, and that was the first index bond product tradable. So very early stages, Lehman kind of quickly replicated to call it trains.
00:53:34 We launched it in the middle of nine 11. So that was, you know, quite a difficult time. But the ingenuity and beauty of Morgan Stanley is that we took that product and turned into Trace X, that turned into CDX. And so a gentleman on our CDS trading desk, Jared Epstein had the vision of like, managing this from a bond perspective was, was really, really difficult. Let’s turn it into kind of a bunch of CDS contracts and that launched CDX and CDX is the most liquid, largest instrument and, and in credit. So I’m kind of happy to be part of that transformation. And then the last is kind of funny, was my boss at Morgan Stanley who used to run research, Juan Luis Perez. And so what he taught me was just the importance of probabilistic scenario based approaches. You know, I really hold onto that.
00:54:39 I believe in that, I believe the root of all evil is kind of point estimate, so to speak. Right. And he also taught me about kind of evidence-based investing. So there’s, you know, take in the outside where there’s data mining and whatnot. So it’s, you know, really quite powerful. And then last is my boss who just retired at PGM, you know, Mike Lillard, who was just a, a, a unbelievable analytical mind. The smartest person I’ve probably ever met. Wow. And so you just, you know, you learn all these aspects from, you know, people throughout the years. And so I feel quite fortunate. Huh. Really
00:55:14 [Speaker Changed] Interesting. Let’s talk about books. What are some of your favorites? What are you reading right now?
00:55:19 [Speaker Changed] Yeah, so books, you know, you know, you have to go with the classics. So, you know, when Genius failed, I think you were talking about one podcast earlier, Roger Lowenstein. Yeah. Just, but I, I’m a big fan of studying history as I mentioned. And I, I believe like studying like, like Napoleon, Alexander de Great Caesar Churchill, kind of Washington Lincoln Grant, all those things have been incredibly instructive for me as I think about, you know, my role and, you know, my life I guess. And then kind of the books I’m reading now. I finished Chip War, which I just got that must read a course, but then I rolled it into this book called The New Fire War Piece and Democracy in the Age of ai. Just a fantastic read, really well written, highly recommended. And then I just finished up The Alchemy of Air by Thomas Hager.
00:56:28 It was, it’s a fascinating fines, fascinating book on, it’s the Haber Bosch Method, which basically turns air into ammonium, right? And use it as a fertilizer, but also fueled the war in Nazi Germany. And, and now it’s creating kind of this other types of crisis, this obesity crisis. And so it’s a, it’s, it’s a, a fantastic greed. And then I think from a credit perspective, a must read is Caesar’s Palace coup. So that basically goes through the Caesar Palace bankruptcy and it just highlights that we’re in a very different world today than we were in the past with respect to workouts and bankruptcy. You have different players in the mix, different incentive structures, and to me it’s a cautionary tale. So when you’re getting involved in low risk credit and distress investing, that, that should be something you should fully understand. ’cause you realize how, how fraught it is. Alright,
00:57:38 [Speaker Changed] Our final two questions. What sort of advice would you give a recent college grad interested in a career in either investing or fixed income or a multi strategy approach to investing?
00:57:52 [Speaker Changed] Yeah, so, you know, I would, what I think is manifold, but the first is, you know, be open to ideas. Don’t be quick to narrow your focus. I think of experience as a set of building blocks and with any foundation, having a, a broad foundation as a more stable foundation than a, than a narrow one. I would also say play chess, not checkers. And what I mean by that is, you know, think several moves ahead, right? Think about your career of where you wanna be and you know, maybe your current move in a certain areas, not exactly what you thought, but, you know, knowledge is portable and often applicable. And I think about my own career and how much I learn from being in other areas and how it applies to what I do today is incredibly powerful. Ask questions relentlessly. You know, I think it’s important to know what you don’t know, and I think that’s a sign of strength, not weakness, right? You know, particularly at the kind of more early stages of your career. And then finally, something that we just talked about is just you, you have to read, right? You have to read financial history. So you have to study and understand, you know, these books are incredibly powerful and important. And so I think, you know, reading those sets of books like, you know, when Genius failed, mania, panics and crashes, those types of things are highly instructive and will really allow you to accelerate in your career. Hmm.
00:59:35 [Speaker Changed] And our final question, what do you know about the world of fixed income and investing today? You wish you knew 25, 30 years ago when you were first starting out? Yeah.
00:59:45 [Speaker Changed] Other than everything, right Barry? I I would start by saying don’t be afraid to be a contrarian. And I don’t mean be a contrarian for contrarian’s sake. I, I mean, think about things differently and critically and, you know, it is a slippery slope sometimes because it kind of drives me mad when folks just throw out contrarian things to try to be controversial. And I don’t mean it that way, I just mean think critically in a contrarian way. I would also say it’s a marathon and not a sprint. And I think long-term investing is, is the key to success. And so thinking about, you know, not only your own career, but market-wise from a longer term perspective, I think pays dividends. You know, no pun intended.
01:00:35 You know, I I say process, process, process. I think those are the three most important things. So, you know, whether it’s organizing an argument on a, a, you know, particular trade or your view on the secular themes, like have a thought process around it. Oftentimes what’s more powerful than than the output is how you get there. And I think that is, that organizing principle is, is quite, quite important. I would also say think like an investor. So I’m biased here ’cause I, I, I, I, I don’t really have a tremendous trader mindset, but I think conflating the two is not appropriate. But I think investing is very different than trading. And so, you know, I try to think like an investor and then just lastly, you know, embrace adversity, right? You know, rally from your failures. You know, I think about the Michael Jordan Hall of Fame speech, right? You know, just he felt over and over again and that’s why he succeeded. I’m sure there’s other reasons why he succeeded too, but, but you know, some of the most defining moments in my career have been on things that haven’t worked out. And I think it’s important to pick yourself up, dust yourself off, and learn from it. And I think the learning is what’s the most powerful part.
01:02:01 [Speaker Changed] Real, really interesting stuff. Greg, thank you for being so generous with your time. We have been speaking with Greg Peters. He is co-chief investment officer of PGI M’s. Fixed Income, as well as co-head of the multi-sector team. If you enjoyed this conversation, well check out any of the 500 previous discussions we’ve had over the past 10 years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcasts. Speaking of which, check out my new podcast at the Money Short, 10 minute conversations with experts about issues that affect you and your portfolio, earning your money, spending it, and most importantly, investing it at the money in your Masters in Business feed or wherever you find your favorite podcasts. I would be remiss if I did not thank the crack team that helps me put these conversations together each week. John Wasserman is my audio engineer. Atika Val Brown is my project manager. Sean Russo is my head of research. Anna Luke is my producer. Sage Bauman is the head of podcast here at Bloomberg. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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