Cumberland Advisors David Kotok: Masters in Business (Audio)

a long time, but is super plugged in UM. You'll hear him discuss some of the Federal Reserve chairman that he's met. He's pretty much met every FED chair since the nineteen seventies. He's really an interesting guy, very knowledgeable, especially about active bond management and muni bonds. He's an interesting runs an interesting portfolio passive h E T F index equity these but active bonds and and there's a very specific reason for that that we we talked about UM.

David hosts something which has become known as the Shadow Federal Reserve Meetings. He's also the chairperson of the Global Interdependence UM Committee and basically puts together a series of conferences UM around the world where heads of state and head heads of various central banks come and debate economic issues and policies and monetary policy. It's really a fascinating group.

I'm fortunate enough to participate in the the what's become what's become known as Camp co Talk, but it really began as the Shadow Federal Reserve Committee, which similarly debates issues of the Federal Reserve and interest rate policy, as well as monetary and fiscal policy, investing issues, investing posture is regulation, all sorts of things like that. It's a fascinating collection of of people, UM, A number of whom

have appeared on the show over the past year. But about fifty or sixty people from all walks of life from all over the world come by and and meet in Maine, from as far as away as Abu Dhabi and and as close as um New York City, and essentially five or six dozen of us get together in cabins and and have these fascinating uh discussions. A little bit of fishing and a little bit of drinking takes place as well. But I find David just to be one of these old school guys. He does things the

right way. He came up through um a very rough period in markets and in the nineteen seventies, and I think his approach is very circumspect and and very reasonable, and there are a lot of things to be learned from him. So, without any further ado, here is my conversation David Kotok. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest today is an

old friend, someone I've known for a long time. His name is David Kotok, and he is the co founder and chief investment officer of Cumberland Advisors, a firm now located in Florida that manages a couple of billion dollars um. Quick background on David. Uh. Bachelor's from University of Pennsylvania, n eventually gets both an m S and an m A master's in philosophy from University of Pennsylvania. Is that correct?

That is correct? Author of four books, including the best selling From bar to Bull with ETFs, soon to be the author of the upcoming Adventures and Uni Lands. Uh. David, Welcome to Bloomberg, Barry. It's so nice to be with you. We've chases for a while and here we are and we don't have fishing rods in our hands. Know we're normally normally when I'm with you, I I usually have a speckled trout on the line showing off a wide

mouth bass um. We consider. I don't like to brag, you know how humble I am, but I consistently am the top performing angler in camp co talk, which we will will talk about in a little later. Let's let's start out talking a bit about your background. So you have a somewhat unusual background. In addition to all that academic training, you are an army captain in from sixty six to sixty nine. Is that? Is that correct? Well,

that's right. I I finished undergraduate school at Wharton in sixty five and at that period in our history Vietnam War, full full throw, full throat, and um. I spent three years in the Army in sixty six to sixty nine, and then got out and came back to New Jersey and invent I became registered as a solo investment advisor under the Forties Act. Before we fast forward, I find the fact that you were a captain in the army fascinating. What was that training like and and is any of

that applicable to your day job. Well, the the army is a great experience under most circumstances. Most people would not repeat it, right, but they would also say, and many of my friends would say, I'm glad I did it, and number two, I'm glad I'm here. So that's the Dorothy Parker quote. I hate writing, but love having written.

So well, there you go. That's right. And the thing about that that the army experience, a military experience that helps me is it creates a hierarchical structure in your thinking, a reporting system, a system in which you follow directives, and so when you think in terms of that structure, it helps you in a business environment. And it actually helps me when I look at businesses and I look at governance, and I look at situations around the world

in terms of investment, advice and decisions. Because I can measure them in the context of their structure, you understand how the decision making process is implemented in a similar military style at places like central banks and other sort of governmental entities. Sure, because the experience is not only the textbook experience in the study of organizations and businesses, but in the army, you have somebody above you and

somebody below. You have to transmit a directive and you have to see the see it through and accomplish something. So it's very helpful to me. So let's talk a little bit about government. You were on the transition teams for both New Jersey Governor Tom Keane and New Jersey Governor Christy Women. Did you see that same sort of hierarchical structure and ability to follow directives at the state level. We saw it and we also saw the absence of it.

And therefore the structure of a new government is to try to create order. In the transition you have chaos. Creating a order out of chaos is always a difficult thing to do, and that's what the world's about. So my prior experience helped me in both transition teams. You know, you set up a new government, you have a lot

of new personalities. There's a very rapid change in personalities, and the leader at the top, the new governor, is like an electronic machine with people banging at them and pinging at them every second, trying to put together and in New Jersey's case, the governor of New Jersey very powerful. So there are a couple of thousand appointed positions in the government and so it was a lot to do, was great experience transition teams. So let's fast forward to what you do for a living today. You run a

m that's primarily known as an active bond shop. How does that differ from just more passive bond ownership. Well, we we we have a forty year plus history in active management of bonds. We do our own credit work. We look at what rating agencies do, but we do our own credit work as well. And we also have a pretty good E t F segment, although that that has a lot of growing prominence. But we're known for long time as a bond shop. So let me ask

you a question about active bonds. That the rub on active equities is, Hey, you're probably in the longhould, better off just being passive, low cost and just leave it go. But the studies say the same isn't true for bonds. You're better off being somewhat active, or at least that's

the the academic math. Explain why that works and how well we think, So Barry that the yield curve, the distribution of interest rates over maturities, shifts all the time, so it by itself is active for variety of reasons having nothing to do with the bond uh buyers daily activity. Those are functions of government and central banks and economic activity.

But because they're there, you can take advantage of them in an active bond approach rather than just buy a bond, hold it, collect the interest, and get the principle when the bond matures. So the yield curve shift is one of the issues. The directions of each of those policy pieces, Central banks, governance deficits are also big pieces. I'm Barry rich Helps. You're listening to Masters in Business on Bloomberg Radio.

My special guest today is David Kotok. He is the c i O of Cumberland Advisers with about two point three billion in assets under management, and I want to start this segment with a quote of yours that I find intriguing. Said quote. We believe the value of stocks and bonds is enduringly linked to interest rates and the cost of money. Interest rates eventually dominate that valuation process and are the market's way of restoring equilibrium. So there's

a lot in that. Let's let's discuss it. What Why do you believe that interest rates are so crucial to stocks and bonds. The valuation of every financial asset is a discounting mechanism, some sort of attempt to estimate what it's going to be worth tomorrow, and at what rate do you discount tomorrow to today? And that is the fundamental interest rate. Now you can argue is that the nominal interest rate? Is it the real interest rate? You have to adjust for risk. But the bottom the bottom

line is an interest rate. It's the cost of money. It's the host of of risk free what you would get if you were just putting money in treasuries well, or something that is essentially risk free. And the fact is every single financial decision has to be compared with the risk free rate and the maturity that coincides with the financial decision you're making. So if you're buying stocks, for example, you have a very long term asset pool.

If you take all the stocks and lump them together and call them stock market, and you bought one share of stock market, it's a very long lived pool. The same thing might be true with a very long term bond. So you say to yourself, Okay, do I expect the long term bond maturity or the outcome of the long term share of stock market to produce a result, What is the result I expect and how do I discount that result to today? To decide whether or not to

do it? That discounting mechanyms mechanism is an interest rate. So you add to the part initial part of the quote that eventually interest rates are part of the valuation process. That are the market's way of restoring equilibrium. Explain what that means well, markets move up and down. They represent the consensus pricing view of all the agents in the market at any given minute. Agents meaning all the buyers

and sells, all the buyers and sellers. Anybody who's a player has a way to buy or sell at a price every second, and they all have information. How does this whole mass clear? In the end, it clears because it reverts to some basic discounted price. And the basic discounted pricing mechanism is the interest rate. Now, the market interest rate maybe belower above what would be natural rate.

We don't know. So therefore the market interesting may be influenced by other forces, and they have to be examined. A good example right now is you have this crazy idea in Europe of a negative interest rate Switzerland getting switz. That's right. I that we're accustomed to saying to a bank, here's my money, pay me interest, and give it to me when we agree, either tomorrow or a year from now. Now we have a new concept. Here's my money, store

it for me electronically. I will pay you a fee, and at the end of the term, you're gonna give me back less than I gave you. That is counterintuitive to any saver or lender. We don't think that way. We never have. And so this is a negative interest Now you say to yourself, is that going to go on forever? The answers no, it's not a sustainable system. So can you use the negative interest rate in the

marketplace today to discount the value of something? I don't think. So, therefore you have to guess, estimate, guest estimate at what the interest rate ought to be if it reflected as much as you know, and you would get something other than a negative rate. Because you know, a negative interest rate is not a sustainable model, even though it is being applied in one of the largest economic blocks in the world. So let me throw a quote at you

from a guest of hours a few weeks ago. I s I s ed Hyman and we were talking about Japan practically at zero, Switzerland is negative, Germany is close to one percent, the US is over two percent, all of them on their tenure bonds. And when I asked ed, what is the difference between these countries? Is it a function of risk? Is it a function function of something else? And he said interest rates on government bonds reflect expected

growth rates. Do you agree with that? Well? I used to say that would have been very accurate, but I think today to say that by itself is insufficient because you're leaving out central bank action absolutely and the we we now have extraordinary central bank action unlike anything we have in the history of man in modern financial time. So let me flash back with you, because you started

in the nineteen seventies and that was an era. I was a wee lad, but I very vigorously remember don't get gas with my guests container for the lawnmower, and not having the right um license plate number to to carry it home. I had to beg the guy for guess to mow the lawn. Uh. Inflation was off the charts. You launched your business in that era. What was it like during the nineteen seventies, and both inflation was high and the interest rates the seventies. The seventies were remarkable.

You started out in a rocky period at the end of the sixties, you got into the seventies. Then you had the war in the Middle East. The price of oil went from three bucks to twelve I remember it, well, not a gallon, not a gallon. I was in this business managing portfolios when that happened. And the rate of inflation in the seventies went to double digits. It was remarkable. Interest rates had been at levels and at the time of the First Shock they hit the highest interest rates

since the Civil War in the United States. Can you imagine a hundred year period and now you have a new all time high interest rate. The prime rate hit twelve, never thinking that six or seven years later it would be higher. Higher. Still in the last minute, we have what ended up happening with rates there and how did that set off the next cycle in bonds. Well, we had a big inflation. Rates went up, they were double digits. Inflation went to double digits. It was the end of

the Carter regime. Incomes Paul Vulker, who deserves a medal as a national hero for the United States. He said in nineteen seventy nine, I will stop this inflation no matter what I have to do, and he did it. Bonds peaked and the Long Bond Rally started in one I'm Barry rid Hoults. You're listening to Masters in Business on Bloomberg Radio. My special guest today is David Kotak.

He is the chief investment officer of Cumberland Advisers, managing two point three billion dollars and a fly fisherman extraordinary. We'll we'll talk more about that in a in a later segment. Let's get right into the Federal Reserve. You have known personally and met with every re FED chairman going back to nineteen seventy. Tell us how that came about. Well, I met Arthur Burns twice. I had two meetings with Arthur Burns in his office, and so he was the

FED chief from of nineteen seventy to nineteen seventy eight. Um. Yeah, I never met Miller that that preceded him. I never met Martin and I never met Miller, who was there for a very short period of time in the Carter administration. He was replaced quickly by Vulcar, which was a good thing.

I met Arthur Burns. Arthur Burns really was was a smart economist, very skilled, knew his history, and he in he takes on the chairing of the Federal Reserve when the first energy shock happened in the Seven Days where seventy four we just talked about it. So you think of yourself there you are as a FED chairman. Your economy goes into a recession. The price of oil has gone up four fold, People are in gas lines, people

aren't flying, there are no airplanes, no automobiles. That the US economy has been clobbered on the head by this rising energy. We were very energy dependent since the end of World War two, and we had a massive adjustment. Interest rates are up, inflation is rate. How do you balance all of this with monetary policy? That is what Burns faced. Now. Critics would say Burns tried to do everything, balance the middle, and therefore accomplish some of each and

not enough of any. And that's easy to do in retrospect. It's always easy to judge the game on a Monday, as you know hindsight, you bet. So here's Burns facing raising interest rates because he wants to fight inflation, very counterintuitive when you have a very weak economy, and he's got auto manufacturers not making autos, people not flying on planes, and people not order planes, airlines not ordering planes because the energy prices spiking up. So you have this cross current.

That was Burns period at the FED, and he did some of each, but not enough to keep the inflation from rising. So in the mid seventies the economy started to recover, but the inflation rate was then accelerating, and it accelerated to above ten percent at the peak, and the tenure was yielding. If if memory serves well, it went into well into double digits at the end. And every time you ratcheted up interest rates, they were a new high level and people said, oh my gosh, I

want to buy bonds, these bonds. I've never seen yields like this in our shop. We said, wait a minute, there's a force driving up these bonds, and it is too soon to buy bonds. When you have an acceleration of inflation, you must be able to see the end of the tunnel because you have no idea where that is. So rates are going higher, bonds are going cheaper, yes, And when did we well we stood aside on the bond market, and we entered the bond market in ninety

nine when Volker came in and became chairman. I believe Paul Volcker meant what he said. That was my personal view. And I remember the first bond I bought after years, It was a Pacific Telephone and Telegraph pac TELL was then a sub of a T and T. It was twelve point one five percent thirty year telephone bond rated triple A. That was the first bond that we had bought for clients in years. And you know, twelve on triple A from the telephone company. People would kill Oh, yeah,

for sure. Little did I know that at the end of the Slam, when the bond market was in a free fall, that bond would trade below eighty cents on a dollar. It, by the way, bounce back was subsequently called and everybody that we bought it four had a twelve income flow and got their money back on the call. So Vulcer comes in and he had warned everybody, I will do whatever it takes, and he proceeds to ratchet up rates to unprecedented level, pauses the recession by design.

What was that You're like to to manage money through. I lost all my hair, my beard turned gray. Look so you look just like you do today, exactly that's I aged. I aged everything in eighteen months. But that was thirty five years ago. You're telling me this, I haven't changed. This is how you looked when you were thirty five. That's exactly right. I haven't changed since since

the Volker Slam. Volker was was dead on. He said, we will lose the country if we have double digit inflation, and we must reverse it, no matter where it takes. So he took the short term pain and within a year it turned. Within a year, interest rates started the fall, and they fell for the next thirty years. Inflation went back to single digits and continued to decline. Real growth and accelerated, and we've had a glorious story for the

last thirty years. I'm Barrier Hults. You're listening to Masters in Business on Bloomberg Radio. My guest today is David Kotok. He is the co founder and chief investment officer of Cumberland Advisors, as well as being a fisher and buddy for for many, many years. Let's let's start out the segment by talking about camp ko Talk as it's uh now become known. It kind of started out as the

Shadow Federal Reserve um committee. Tell us about those uh those events, Well, the Shadow Federal Reserve Kansas City Fed Shadows thing was a nickname that John Hills and Wrath gave us when he came up one time. And so that's how Wall Street Journal reporter now kinda known as the Fed with took over Greg ip Slot as the FEDS liaison to the Wall Street Journal exactly. So anyway, Hills and Wrath was there for a day and a

half and he coined that nickname. The Camp Coo Talk nickname came from Becky Quick and uh, Becky Quick put it up on a screen during an interview. So, um, that's how it stuck. She she originated the name. The name is stuck and it's grown, I guess now to become fairly commonly known. So tell us a little bit about Camp Coo Talk. What was the genesis of this? How did it come about? I've been fortunate enough to be going to Camp Coo Talk for almost a decade.

It feels like it just started. Well, you keep it up, you'll get tenure. That's what I'm hoping for Look, we were a couple of guys saying, we need to get away, go out in the woods somewhere and just think about the world finance, economics, markets without all the minute by minute interrupted by daily pressure. And I had been going to Grand Lake Stream Main It's this is my twenty five year so I said, I know a place we can come fishing. We can stay in a kid It

was a different camp. It wasn't Lean's Lodge at the time. I said, so let's go up there for a weekend. And that's how it started, and it grew. How many people were in this was a handful. This was half a half a dozen people or fewer. On nine eleven, when a group of us were at the Name meeting and got out of the second Tower and in that group where people like Harvey Rosenbloom, Dallas Fed, Stu Hoffman, a lot of folks, you know, and we were having

this discussion. I had invited wait, wait, wait, back up. So you're at a meeting in the second World Trade Center building. To what floor was this? Well, we had come down and we were on the ground floor. Very fortunate, so we were out in six minutes, eight minutes we were very, very lucky to get out. But during that time, up until then, I'd said, Harvey, come on, we'll go away somewhere we'll be able to talk. I don't want to go fishing. I don't want to go in the

woods often, I don't want to go fishing. I don't want to go in the woods, all of them. Brush with death changes your perspective, sure did, and that changed it and the group the following year was the largest ever, which might have been twelve, and it has grown ever since. And you know, give us you've been there, give us some names of people who attend, because it's really a

collection of a list names. Well, it's a collection of people who like economics, financial markets, geopolitics, government, who have diverse views. Who are Democrats, republic begins, liberals, conservative. We've had last year we had Gary Schilling with his views, Paul McCulley with his views, Jack Rivkin with his views, uh, Natalie Cohen from Wales who's got expertise and municipal credit.

We have men and women from around the world. Martin Barnes comes from Vancouver, Paul O'Brien came from Abu Dhabi. So you have a mix of people from all over the world, and what do we do. We have no power point, none, none, whatsoever. I can attest to that. The speeches are limited to five or six minutes, and even that exactly. And we have dialogue and we talked to each other, and we have visitors who are professionals. In the governor the page last year. The governor's coming

back this Friday. He this is his fourth year. On Thursday, we've got a congressman who's on the House Financial Serve US Committee and he was a State Treasures Bruce poll Quinn, you may remember he was there. And we'll have a debate on some issue probably on Saturday night. And we'll have gatherings. Now, the gatherings are discussions. You've been in the thick of them. You solve the world's problems in the more repeatedly. At the end of the weekend, they're

still there. Someone's gotta do. They just don't enact my policies. Otherwise all these things, if they would only listen to you. So so it's a great discussion in an environment which is informal. It's in pristine water, in a watershed, in forest with wild it's like no other land I've ever been on him, and it's it's absolutely this is no other than a couple of cabins here and there. There's no difference than what this was like a hundred thousand

or a million years ago. It's other than the withdrawing glaciers are what actually created these lakes. But it's absolutely pristine, wild, amazing land, nothing like I've ever seen anywhere in the United States. And it's protected. There's a huge, complex, huge acreage which is in a land trust, so that will never develop. And it adjoins the past McQuade Indian Reservation land, which is in a separate configuration, and therefore it's impossible to see the kind of resort erosion that that the

inroads of resorts that would take away this setting. So that's good for the economic development of Maine if that happened, but it would be bad for all this pristine land. I think so. And so I mean, if you look at what we do, we hire every guide within fifty miles. We bring in a group were we may be the biggest economic activity all summer. Yeah. We people joke, they say you're ten percent of the GDP of the whole county. I don't know what it is, but it would be

you know. And I think by the way we do good things, we spend we pay people, they have jobs, so we make donations to the land Trust. People are fair. There's an active philanthropic arm to this as well. And and so so let's talk a little bit about the debates and the discussions. I could tell from personal experience everything is off the record. It's all Chatham House rules where you can describe what was said, but you can't identify Paul McCully said what. You're not allowed to do that.

It's all on the on the download. But some of the conversations are really quite fascinating, especially when you realize, hey, you have the number four guy at PIMCO debating someone from the Philadelphia Fed and this guy. It's really very high level debates and conversations. Well, I think the conversations are great, and the people who come have a basic platform of information so you can cut right to the issue and dissected immediately. And we do this. I mean,

there's a media that cover it. So as you know, if you have somebody's permission, you can quote them, you can interview them. But if you don't then you can take the takeaway from the group, but you can't quote somebody unless you get their permission first, and that that creates a sort of level of comfort where people say things that they wouldn't say if they were on camera or on the record. There's a very much let your hair down and say what you really think environment, which

is relatively rare these days. I think so. And I think the second part is that if you walk by a conversation and you hear something you really shouldn't have heard, you ignore it. Now you may remember it. This is like telling the jury to disregard the Testament, but you don't go quote it in the newspaper. Because you walk by a conversation and there's Barry Ridholt's talking to somebody in a private conversation. You heard something that Ridholt said.

That's nobody else's business us. So by agreement, we we apply a modified version of the Chatham House rule and the Jackson Hole rule. And therefore whatever it's public from the weekend is by agreement with the permission of the person who said it, and it's really just the tip of the iceberg. So so let's talk a little bit about the global Interdependence Center. You're now chairman emeritus, but

you ran their programs for a long time. And this is really an even higher level version of of a much more sophisticated First of all, aren't you housed in the in the Philadelphia offices are in the Philadelphia Federal Reserve Building. Actually I'm program chairs program chair, no longer the program chair, and Dunkelberg is the chairman Americus. Bill Dunkelberg economist a nationalization independent business and George Chichecos, who is the former dean of the Business School at Drexel,

is also a chairman of America. This I was the program chair, and I chaired the Central Banking series. John Sylvia at Wells Fargo's now chairing Central Banking, Michael Drury and mcvain Trading in Memphis is now chairman, and don Ris Miller and Strategus is now the program chair. And I'm just the old goat getting in the way and stern the pot So so tell us about because this

is all around the world. Tell us about what these meetings are and who attends these and what policy and information comes out of these kind The Global Interdependent Center idea was to convene dialogue in a neutral way and allow different points of view to be discussed, and hopefully you get people of goodwill together in such a discussion

and some good outcome occurs. That was behind the thinking of it, convene dialogue with a neutral platform that enabled us, by the way, to invite people who otherwise wouldn't go to other platforms, because here was a place that said, just by coming and having a discussion, you created the way in which things may get better. And that was mostly in economic trade, monetary affairs, but it was also in health and in water. And that's and here I

was the program chair. We've been speaking with David Kotok. He is the co founder and chief investment officer of Cumberland Advisors. If you want to read more of David's work, you can go to cumber dot com. And I haven't noticed you tweeting very much. I don't think there's a Twitter handle fairs at Cumberland, a d V at Cumberland, a DV on Twitter. Uh. If you want to check out the rest of our conversation, be sure and go to either Apple iTunes or Bloomberg dot com and you'll

hear uh. David and I continuing talking about fishing and other such stuff. Be sure and check out my daily column on Bloomberg View dot com or follow me on Twitter at Rid Halts. I'm Barry Ridhults. You've been listening to Masters and Busines this on Bloomberg Radio. Welcome to the podcast portion of our show. I'm here with an old friend, David ko Talk. David, how long have we known each other? A hundred and fifty years? I'm not you have a couple of years on me, but it

certainly feels like it's. It's that you and I had done a number of television hits and a couple of things, different things. I want to say, early two thousands, so it's got to be well over a decade. And when I first went to Camp Ko Talk, when I first got invited, I tell four or five stories about that first weekend. I'll never forget. This is a true story, So this will I have a ton of questions for you,

but I have to share this one story. So I get invited to Camp ko Talk and I'm like, do I really want to slip all the way up to me? You gotta fly an hour and then you drive three hours. Really in the middle of nowhere. I had never been there before. And um, someone I asked, goes, you got an invitation to that? How did you get invited? No, David, he said, you gotta do, you gotta go. Okay, so I go. So we we get up there. You finally get there, and the property in the lake and everything.

It's insane. I'll never forget the first time we take a fish. We you know, it's catch and release. We throw it back and this eagle swoops down the fishes in the water for eight seconds, fifty feet from the from the canoe, this eagle swoops down, grabs the fish, flies away. It was the most dumbfounding thing I had ever seen. I'm like, this is really the wilderness, isn't it.

And then Saturday night we're playing poker, and I'll never forget Scott Frew and I are at the table and I don't remember who the fourth person was, but Scott Frew and I are, We're each we're all drinking. By the way, everyone should know, the cost of admission is everybody has to bring a half a case of of good wine or in John Moulden's case, a case of crabby wine. But basically it's half a ca is a wine and is a ton of drinking, but responsibly. And Paul McCulley of PIMCO gets up and says to me,

can I Can I refill your sure? Absolutely? And then somebody else gets up to Scott gets up and says to Scott Frew, who runs Rockingham Capital, which is edge fund, can I refill your glass? Sure? And I They two of them walk away, and I just turned to Scott and say, my waiter manages five hundred billion dollars more than your waiter. And because his waiter was only a five hundred billion dollar farm as opposed to a trillion dollar farm, it was like one of the most bizarre

things I've ever seen in my life. And it's we just everybody at the table left, not because it was so funny, but because it was so it's such an unusual grouping and so fascinating. Well, it's a wonderful grouping. Absolutely. You came in the beginning and I talked to myself, way, here's a New York City boy. He's coming up to me, and his experience with fishing is to go buy locks and z bars, and now he's going to have a fishing rod in his hand. This will be interesting to see.

And of course you had a famous episode at Camp Coked Well, which one the one where you nearly burned down the entire well hold the first year before we nearly burned the cabin down the first year. So I was a ringer. You didn't know. I spent my summer's upstate New York fishing my childhood into my twenties and thirties. So it was the first day of our first year, and everybody was complaining they weren't catching any fish. And everyone should know. We meet in this island in the

center of the lake. The guides clean all the fish. We have a giant fish fry, and and everybody eats fantastically. We gained too much weight, so Scott and I pull up um in the canoe and one of the guides said, hey, I hope you guys caught something, because we got no fish. We each had thirty plus on a on a straight I'm holding my hand up because it was a as tall as i I'm standing home, just under six feet. We had that much fish. And after that, nobody, oh,

here's a New York boy not able to fish. We we we held our own that you did. We also had John Brown, who I still think is the best guide there. So he's the one who deserves. Everybody falls in love with their guide on the first nearly everything. Is that true? Yes, everybody's guide the first time becomes their favorite guide. And by the way, that's probably true of all kinds of things like this. But I've seen

it over and over again and and that's okay. So so the other episode you you mentioned about nearly burning the cabin down was I'm in a Cabinet's me and Scott Frew, Chris Whalen. Chris Whalen was Josh Rosener. So these are guys fairly well known on Wall Street. Barry from nas Deck, the Nobel from nas Deck. And we're using the same towels over and over again. And here's where the New York City boy gets into trouble. So you're an apartment in New York City, the radiators or

ten thousand degrees. You come out of the before you're engaged, while you're still a disgusting single guy. You come out of the shower with a wet towel. You throw it over the radiator. By the time you get home, Hey, I got a clean, dry, warm towel. It's fantastic. Um My wife basically cringes every time she hears that story. But meanwhile, it turns out if you do that up at camp Ko talk, unless it's really a hundred apply cotton towels, you run into a little trouble. And apparently

these were not cotton fly towels. They it started to smoke. The room filled up with a thick, noxious I was already in the main lodge working on whatever I was working on that day, on the because that was the best place for WiFi. Apparently Barry Nobel wakes up, can't see anything through the smoke, crawls on his hands and knees, finds the smoldering towel, drags it outside and rescued everybody from a fate worse than death. The funny part of

it was that towel smoldered for three days. I don't know what it was made of, but it did not go out for three days. It just sat outside smolder. The story got embellished because of course, pretty soon we are we get the report about you your towel right and and almost burning down the cabin, which was probably exaggeration, but from almost burning down the cabin became the rid Holts forest fire right curse, and it just every year

gets better. I think it's like a fish. Josh Rosener once said something to me and he goes, rid Hols, are there gonna be any more accidents this year? And I go, Josh, you still think that was an accident? He eventually figured out not to mess with me or else I would that was. That was good natured teasing. There was. It was pretty hilarious and and it was one of those things that when you tell I tell the story. I get home and tell it to my wife and she's like, what else did you do? What

am I not hearing about? If I'm only hearing about the fire? What was the real big problem? So I actually this is my favorite trip of the year. I look forward to it every year. It's it's so relaxing, and it's such a great crowd of people. And I always learn Um, the chief economist at Freddie mack I had such a fast dun dun, duncan's such? Are you sure? I want to say Freddie mack Um? But he's he's a fascinating, fascinating guy understands not just housing but the

economy better than just about anybody I know. And there's a two dozen people that when when I introduced them to a newbie, almost always is and he understands this space better than anybody I know. It's it's really an amazing uh collection of folks. You deserve kudos for nice up and and we also have media personalities. Kathleen Hayes has been up sure from Bloomberg, Mike McKee, he's coming up this year, as Mike is coming up this year.

So you you have folks who either our journalists and study the world have to report on the world, they have to be thinking about it, or you have folks who have to analyze it because their financial market types or their money managers, or we have academics or economists. We mix them all up. From Dartmouth Tuck. Last year we had he was that's right, who was on the uk UH, their central bank, the Bank Bank of England.

And another year we had Mike Dooley. Mike Dooley, when he was I m F World Bank in his career was the guy who designed the Brady bond that solved the South American financial crisis. In fact, the original name for that Bond was a Dully Bond and Nick Brady co opted the name because he was the Treasury secretary. Well that's that's, you know, one of the great great advantage of power. So so let's talk a little bit about about you and some of your um early mentors

and and things like that. Who who were your early mentor? Now you you asked me that in the notes ahead of time, you said, I'm going to ask you about you and I will give you a name. But it may not be familiar. Doesn't matter. Okay, we have Google. We can track people down. I don't know if we'll be interesting. I never googled him, but in thinking about it, there was an economist in New York. His name was

Gabriel Karakesh rhymes with Marrakech. He was Hungarian. He his history was back to the good body era, way back in which is what good body is? How long? Oh gosh, I mean this is a long time ago, decades, many decades. And he was a mentor to me when I was starting out in this business. In fact, the first serious work that I published was with a journal that's no longer in existence, and we co authored it together, and it was a piece about long cycles. You're refreshing. All

this memory is flooding back now. And we talked about the condratif cycle in the kitchen cycle. Lord, this is fifty years ago. It still comes up every time there's a market crash. Always it pops up. All right, now we're we're mired in health. Ye. Gabby was the first serious economist who mentored me in the early stages of

this business. And he had a wonderful He spoke with a deep Hungarian accent, and he had a wonderful line I learned from him, and it was something like this, I'm going to massacre the accident, but he said, you're going to have a PhD and still be an s ob and that was That was a line I learned from him. But I also learned a lot of very good economic thinking from him. So let's talk a little bit about investors. What investors out there do you appreciate

like and who influenced your approach to invest in? Ah? Wow, this is an accumulation of decades, so there's not such an easy question. I don't like to talk about others because I don't want to say anything negative. And therefore if I only say positive things, well, don't tell us who's terrible, tell us who you've learned from. But but what I've learned is this. What I've learned is this.

We talked about the enduring nature of interest rates and how important I've been a student of central banking monetary economics all of my adult life. I chaired the Central Banking series of the Globally Interdependent Center, and it's been something that's been of interest to me in in more than it's been a passionate in passion in terms of study. So you look at central banking and monetary economics and you say, well, how do you put together policies in systems?

How do central banks ever get true independence? And is there such a thing? And what are the political forces that are always trying to influence monetary policy? And there are many, and so I've studied that in great depth. I think it is the most serious input into asset pricing, and therefore, if it's a serious input into asset pricing, it's a serious input into the management of stocks and bonds.

And that's been an enduring theme for me. So of we're we're by the way, I'm playing with the phone because I'm gonna set up a little periscope so people can watch for a few minutes exactly what we're what we're doing. Let's see if I can make this happen. Um, what are you thinking now? Nothing? Um, So let's talk a little bit about the specific investors that you think

you learned so much from. Who were the guys that you basically said, I really admire what this person does, even if it's different from from what what you do or um, currently unavailable. All right, so much if you look at it a theme, Okay, interesting themes in investing. The first theme that I think is it has had a massive influence is Bogel and Vanguard. Tremendous, tremendous. He set a platform in place and essentially took a passive

approach and said I'm gonna do it. I'm gonna do it by waiting the market capitalization waiting was the theme, and the SMP five index became the anchor. And now you think about the fact that that translated into the first exchange traded fund in spider right, and it goes back twenty years with the SPI index in a mutual fund as a method of investment. Absolutely, so you say, okay, if there was one single idea that has now dominated stock market investing. It's the notion of a cap weighted

large cap group of companies. There is a filtering mechanism, it's Standard and Poors. They decide who's in and out of the index and a basket by weight, and that has had a profound influence. SMP five index cap weighted is the benchmark of the American stock market and has been four years now. Whether you like it or not. You wanted the Dow Jones, you want the Nasdack, you whatever you want. Every single money manager in the US stock market space either has to use it as a

benchmark and refer to it or explain why not. Well, if they're not big cap, they can use the rustle. If they're international they can. But there's always an explanation. There's always an explanation. And if you ask, if you line up a hundred people and say what is the premier benchmark for the American stock market, it's the SMP five index. So that notion and therefore the notion of passive baskets, accumulations, not trying to do a single stock

choice started. Really it it galloped ahead with Bogle, right, that's forty years ago and today two thirds of what Vanguard does is passive indexes and they're running over three trillion dollars. Something worked to that may be one of the single greatest investment success stories of all time because for for I want to say, the first twenty years, there was an a whole lot of acceptance to that concept.

It was it was there was a small group of people who understood and appreciated it, but a lot of folks just didn't get it. Well, there's an element to it, and that is very low running costs. So it's a low cost passive structure and will cost low turnover, low taxes. Absolutely, And what do we find. We find that two thirds of the managers, three quarters of the managers over time

failed to match that index. And they do it. And if you take the total cost structure that it takes to manage and attracted from the index, you get where the managers are, which is what you would expect if you measure the whole crowd. So I think if there's one single investment concept creator person that puts something in place, it would be vocal. Now you say where are we today? We're a shop that ownly that does no single stock picking.

We manage a few hundred million in the E t F space, and we provide models of ets for other managers and so the the amounts involved are larger, but we directly handle i would say, under a half a billion in in E t F s in a number of different styles. But we have taken that same fundamental principle, low cost, low turnover or turnover when you have to, don't turn over when you don't, and craft portfolio using E t F s. I think that is a well

established principle now that didn't exist fifteen or twenty years ago. Fascinating, I would I would say that it existed twenty years ago, but it really didn't have the following. It wasn't as embraced as it's become. Well, it was in the mutual fun complex. So at two o'clock in the afternoon you had to decide if you wanted to sell. At four o'clock in the afternoon, you'd find out what the price was. E t F changed all totally completely changed, changed all

of that. Um So that that leads me to my next question, what has changed since you've joined the industry? Well aside from that, but the E t F changes monumental still underway and it's growing. That's number one. In the municipal bond space. We used to have a notion that if it's insured, it's triple A. You don't even know have to know who the issuer is, you don't

have to know what the call provision is. You don't give me the coupon and tell me it's insured and it's triple A. And that's all I need to know. That change with the financial christ clearly triple A doesn't have the same weight. And we have a survivor in the insurance space that didn't get beaten up by going out of the read and butter business assured guarantee and

a second one MBIA. But as a practical matter, remember we used to have a dozen that credit enhanced and had triple A run right, So what did how did they? What did they do? By the way, there's a new one that's now a mutual and in theory is owned by bond on the writers, So everybody's the incentives are now better lines. Right, So you sit think of a

major change. Here's a major change. You've got this three and a half trillion dollar space financing state and local governments throughout the United States, ninety thousand different entities, forty thousand different bond issuers, and all of a sudden, the method of finance has turned upside down with a shock. People don't trust the bond insurance, they don't trust the rating agencies. Congress comes along passes this massive piece of legislation.

We still don't know what it's gonna end. Frank dot Frank, and people on their own have to evaluate the sewer company, the turnpike, the airport, the school board. They don't know how to do it. They've never done it. And so for us, this has been a great thing for Cumberland because we had our own credit back and we're in a new business. We get hired now by institutions to be the backup credit surveillance in addition to the rating agency ratings, and those are institutions that have to manage.

They have constraints, but under Dodd Frank, they have to have a second opinion. We're qualified second opinion on municipal credit. How how big of a business line is that for? Because I know you guys mostly as asset managers and active bond managers, I think you memory serves you became an r I A and a registered investor andvisor the new Cumberland and I registered in nineteen seventies. David Kotar as an r right, So why did you go from

Kotak to Cumberland? Had had a partner in nineteen seventy three, he's no longer with us, Chef Goldberg, and he and I founded a firm. We came up with a name. We lived in Cumberland County. No great searches on this name, and we named it Cumberland Advisors, And that's how we got the name. Nineteen seventy three. So you guys, since we're talking about Cumberland County, you guys essentially decamped a few years ago from Florida, from New Jersey to Florida.

What motivated that move? You know, the old, the old Seinfeld joke is, well, he's Jewish, he lives in the northeast. It's the law, he has to go to Florida. But you were really there were not only that we went to the west coast. So it's a whole different to visit New York go too, this West coast. It's a little different. So so what was the motivation between not an easy thing to up and move an entire company. I give you the story in a in a abbreviated form.

We had looked at Florida for some time. We found ourselves on airplanes every week to some city from Philadelphia. We made a series of a series of inquiries and decisions. East Coast versus West Coast? Which city on the East coast? Palm Beach for lauder day out? Where do you go? Where are the airports? How do you get up and down between the airports and the West coast. We had a person working for us on the East coast, so

we already had a presence. We said, why don't we go to the West coast and be in both places. One thing led to another. We ended up in Sarah. But that's that's the destination. What happened with the departure because you had been in New Jersey for decades. I still am. We still have a satellite office in New Jersey. We have two people in New Jersey. We have a legacy of you had several dozen people and the headquarters were in New Jersey's We now have thirty four people

and two of them are in New Jersey. And we maintained an office and address in New Jersey, and we have a client based in New Jersey because we were there for almost half a century. But our operations are mostly in Sarasota, Florida. Um, there's a lot of good reasons to be there. People say, oh, you moved because of the Texas I said, well, yes, taxes were one, lifestyle is another. All of my people took us four years buried move the human capital of the firm, and

we did. We we help people relocate. That took cost uh not one of them wants to move back and they are satisfied with the move we hired in Florida. Combination of things where at an all time head count high, where an all time assets high, where it's been a marvelous experience for five years. Did you expect it to go as smoothly as it did, because that's a hugely disruptive thing to organization, especially it was around Was it

after the financial crisis or during? Oh this is all in the last five years, So was it after so post crisis? It seems I'm going to make an observation. It seems that whenever there is a massive events, it could be the financial crisis, It could be nine eleven. It galvanizes your thinking and you subsequently take action. Is that a fair observation. I think it's a fair observation on human nature. For sure. We tend to like stasis. We have inertia. What does it take to move us?

We have to have a shock. Shock comes along. We move any kind of shock, and whether it's a shock of smoke in your cabin and leads a lodge, or it's a financial crisis. In two thousand and eight, in Lehmann fails, we have a shock, you change. It takes a shock. Our view was motivated post shock, but it was motivated because we did some serious examination on our clients,

our base, our growth, and what did we find. We found wealth and older people are in Florida and people from New Jersey who were our clients were now in Florida. And so we were back and forth and back and forth, and we said we need to be in two places, and so we were in both places. Now, once we're in both places, where do you put the next element in the old place or the new place? Well, the people involved said, we'd like to put that element in Florida.

And the people who wanted to service and support it work in it said, let's let I want to go and one at a time. Now, we had to move people when housing was difficult to sell, when you had economic difficulties in New Jersey, when you had a seventeen year old daughter who was going to the prom and she her boyfriend. If she moved there would be a crisis in the household. And I said, okay, wait till after the prom, wait till after graduation. Will be in

two places. We want you, We want our human capital intact. And so we did that. By the way, she went to the problem with somebody else. She broke up with the boyfriend. So but the point is that's what we did. We moved human capital by making it easy for them to solve their problems. That's a pretty good description of just about everything I know. We we have to get you out of here in about fifteen minutes to go do some television. So let me plot through my last

handful of questions. Um. One of the things I've been finding about this podcast about speaking with people who I know and respect and have followed for years. They've all read a fascinating number of books, many of which I am not familiar with. I'm always surprised when someone says. A guest last week suggested the Marine Corps uh War Fighting, which is a book on planning and management, which you would think has nothing to do with investing, but turns

out to be a fascinating book. Tell me about some of your favorite books, whether it's finance related or not. Well, there's a book by Kennedy, a Yale professor, and it's been around for a while, and it's The Decline and Fall of Great Powers. He has a sequel, but the Decline and Fall of Great Powers studies that very subject. I found that something to think about, whether it's Rome or Washington, and so it set me thinking in a more strategic framework and helped crystallize that few There are

all kinds of books of history. I've read many of them, and I find that the reflection on history and how things happen and why are very important. And I'm I favor some classical things, such as give us some names. You're educating the next generation of investors and traders. Well, i'll tell you. I'll tell you something that's struck me.

I came down from Maine to be here with you and to have some things in New York and then the first gathering at Lean's Lodge is coming up the weekend after Father's Day, and we were about forty people.

And in the course of the discussions up there with Randy Spencer, as you know, one of our guides and others and and musical entertainment and musical entertainment, we started to talk about the region and how the region and the former Acadians who lived there because that was Acadia, and the history of this region which go back before the Revolutionary War and deal with the war between the British and the French, which we called the French Indian War,

but it was really war between the British and the French. And when you get into that history, you find that the tribes of Indians were used by either side, sometimes they switch sides, and you learn some of the history of a region which is now not taught in schools. It's a history of the United States which has escaped. There are many books on the French Indian War, the early part of America, the pre revolutionary period of America, UH,

and they are missing in the literary realm. Now there's another series of books written by Beverly Swirling Swirling has best seller ranking. She's got a number of books, and she's written about New York and she starts with the period before the Revolutionary War s W E R L I n G. And the first book of hers. I've read them all. I think they're six, if I recall correctly, five or six. I've read them all. And the first one is City of Dreams. And she's a very skilled writer.

And well, it's historical fiction, so she has taken New York at the time it was settled by the Dutch Ins Stevenson. Stevenson was the first leader, and she wrote the story about the very tip of this island as she was able to glean from a study of history. And then she weaves a tale. And her sequence of books give a view of New York through this lens of historical fiction. But it's very lively writing. It grasps grabs you, and when it does, it clasps you to

the book and you don't put it down. I found that way. City of Dreams is the place to start. And if you do like it, there's three or four more, and any other books, any investing relating books that um stand out in your mind. Well, I read Ben Graham many years ago. The classics, the classics, the classic. Now there is a new book, Adventures in Muni Land, the story of the municipal bond crisis from two thousand seven to two thousand and fourteen, and it's in galley Proof

right now. My co authors, my colleagues are Michael Comas and John Musso and I had a little bit to do. And it's a great book. And it is going to be out in July, and it will be available in August, and Bloomberg Radio is going to help us launch the

book on August from our offices in Sarasota, Florida. That's fantastic, you know, I remember there being a m everybody knows Meredith Whitney came out with her famous sixty minutes prediction about a hundred billion in failures and unimmuni bond market. When crazy you came out. I want to say, I don't remem if it was that week or the next day, but you were on TV the next day saying this is reckless, this is irresponsible. There is just no inditie that this is going to happen. How did that, how

did that come about? And what was the pushback that you got Well, I can't speak for Meredith. She made her forecast and she's had to live with it. Um no, I mean, how did your response come about to Well, we we looked at this and we said, it's absurd to things that a hundred billion of defaults in the municipal bonds space can happen in one year on the forecast by the end of the year, and by the way, it hasn't happened in ten years. There are some defaults

every year and there always will be. But as a practical matter, the municipal bond space is very good grade credits is very transparent. By the way, you think about your school board budget, you can go to the hearing, you can read it. You're there, you know the people who are voting yes or no. Transparency is embedded in state and local government. We may not like the people making the government decisions, but the financial information is mostly clear most of the time, and we have a pretty

sound distribution of government throughout the fifty states. Now we have also poster children for trouble Puerto Rico, Detroit, Stockton, California. It does happen, but as a practical matter, most of the time. The muting space is very dependable, and it's under the radar screen of a lot of investors. Shouldn't

be in my view. Right now today, the thirty year Treasury bond of the United States fully taxable to an American citizen is a little over three and a very high grade tax free bond to an American citizen is a little over four percent. That's upside down and backwards. Four percent is the equivalent of almost six percent or seven. It's seven depends on where your tax including you're in a high tech state California, Massachusetts, Yes, New York. That's

like getting a seven percent. So you're looking at where would you go today and have a double or triple A level of credit? Very solid history, never failed to pay and pay you seven percent a year return on your investment, year after year after year. You can't find it, and you can get it. It's available right now. You can say to yourself, yeah, but you know what about other kinds of institutions. I'll give you an example. Triple a credit three hundred year institution. Total funds in the

endowment fund exceed the total debt of the institution. Tax free bond. It's issued by an education bond structure by Yale University. Believe me, they will pay you. And what is that yielding? About four today? Tax free? There you go? All right, So I only have you for another six minutes. So let me go through my last few questions. Um, what are some of the enduring investing myths that you know, get your goat that that you see in this Like

what sort of stuff? Maybe that muni bond thing is one, but what what are the classic myths that you are offended by? Well, I don't like when I see legal meaning the law protects it being used as ethical meaning there's a judgment, and if it's legal, it's okay to do, even if it's going to impose financial pain on somebody. Because I'm really structuring something that is legal, give us taking advantage of them. We saw it in a financial crisis. We saw it in derivatives and some of the mortgage

backed securities. We saw it used in the restatements of values. We saw things where banks had an off balance sheet liability that was criminal. It's amazing that there have not been prosecuted. If it were criminal in our system, there would be a criminal prosecution. And I don't think I've

seen one. We have a new game. Well, don't draw the conclusion that it wasn't criminal just because some projects was talked into, Hey, if you prosecute this, you're gonna crash they that's the nonsense that the prosecutors failed to do their jobs. Well, there was no penalty imposed at some symmetrical balance equivalent to the damage done by people who hurt millions and millions of people. There wasn't even

a clawback of past. And this latest game, this latest game of will impose and negotiate and force a big fine on a bank and show how strongly we're regulating and cleaning the system is a farce. Well, you basically make the shareholders pay for the bad actions of some and those people don't really suffer the path. So it's an embarrassment that there's an ethical breach. Offends me. I'm a boy scout. That's the way I grew up. I learned.

I learned business methods in a grocery store. And in a grocery store, if you want your customer to come back, you don't put the soiled fruit in the bottom of the peck. And when they take the top tomato off, underneath is so last two questions, Um, what advice would you give to a recent college graduate or a millennial who is just starting out his career today? Read history and study hard and be patient and keep smiling. That

that's pretty good advice. And my last question that I ask all of our guests what do you know about investing today that you wish you knew when you began in nineteen seventies. The older I get, Barry, and the more I do this, the more I realize how little I know, and that makes it so exciting. I love what I do. I love it. I get up in the morning. I said, you are in the midst of extraordinary financial times. You spent the last fifty years of your life as an adult, mostly as an adult, preparing

yourself off to be in the asset management business. In these remarkable times, you are now writing the textbooks and will be and they will be used thirty years from now. It's a very, very exciting time to be in financing economics. I love every minute of it. David, thank you so much for being so generous with your time. I know we've got to scoot you out of here. In forty five seconds. You've been listening to my interview with David Kotak.

He is the founder and chief investment officer of Cumberland Advisers and author of the forthcoming book ad Ventures in muni Land. I will see you up in Maine. In you do have you've been listening to Masters in Business on Bloomberg Radio. I'm Barry Rihults. Be sure and check out all of our other interviews. Look an inch up or down on iTunes. You'll see all these and be sure and check us out next week. I'm Barry Ridhults. Thanks for coming by.