Interview With Michael Zezas: Masters in Business (Audio)

have Michael Jesus. You may not have heard of him, but he is Morgan Stanley's chief strategist for public policy and municipal bonds. If you are at all an investor in the fixed income portion of assets, if you're curious as to what goes into the bond buying decision, how how the by side actually thinks about tracks and makes allocation decisions, you will find this conversation fascinating, as did I. It's a little wonky, it's a little in the weeds.

It's very very specific, but you would be amazed at how many different subjects have to come under the data set that muni bond investors look at. Everything from politics and public policy, to credit quality, to local economics, to macro economics. It's really as well as the federal reserve and interest rates, which we didn't even touch on. I think everybody has heard enough of that. Obviously, if rates are going up or not, it becomes a fairly significant question. UM.

All told, Mike is a really knowledgeable guy about these things. Obviously. Morgan Stanley is a giant firm UH, both in equities and UH fixed income and muni bonds. UH. The muti bond market is almost four trillion dollars in the United States. Other countries have their own version of municipal bonds. UH. It's it's really very interesting and it touches on areas you might not have been aware of. So, with no

further ado, here is my conversation with Michael Jesus. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest today is Michael Zesus. He is Morgan Stanley's chief US public policy and municipal bond strategist. He joined Morgan Stanley about a decade ago in the role of head of credit analysis for their US investment group. Previous to that, he worked at Fitch Ratings as a credit analyst, and he began his career focusing on the

public sector capital budgeting and economic development. He comes to us with a b a. From Georgetown and a master's of Public Affairs from the lb J School of Public Affairs at the University of Texas at Austin. Michael Jesus, Welcome to Bloomberg. Hey, thanks for having so. We were just in Austin. What a fantastic town. Every time I'm I'm in there, I'm like, wow, this is really Someone described it to me as the blueberry in the middle

of the Texas raspberry pie. Which or the or the third coast, the third Coast, Yeah, definitely, definitely not Dallas or Houston the least. You have a really interesting background and the transitions that you've gone through are really quite fascinating. How do you go from looking at public affairs and analyzing credit to running a muni bond portfolio? I would say by accident, inadvertently for the most part. So the public policy, public affairs was sort of my first intellectual love,

so to speak. Um through let's say, kind of a series of experiences, work experiences, both in college and afterwards where I decided and really like the pace um of public policy a little too slow, a little yeah, not much competition. Um. There were a lot of smart people who worked in those areas, but I think the sort of pace of bureaucracy, um, it just just wasn't what you would want if you were a very ambitious person.

Let's not say it's not worthwhile work, but it's it's kind of academic and slow as opposed to market based and and it sort of fall fell into the markets based work when I was in grad school or try to make a little extra money working for one of the credit rating agencies that worked for Fitch down in Austin.

And that was kind of my first taste. Even though rating agencies are not terribly fast placed to work, it was my kind of my first taste of kind of translating public policy because I was working in munies then translating public policy into kind of market based analytics. And I got hooked. I got hooked. I stayed there. I didn't go into government like I intended to, and you know,

one thing led to another. I ended up on the by side within Morgan Stanley and a couple of years later in the role that I have now which is running a research and strategy team for munis and now public policies. So so let's talk about when you joined Morgan Stan Like, you start pretty much right in the midst of the credit bubble. You're on a buy side, your meaning you're not on the brokeren side selling individual bonds to investors, your buying bonds on behalf of investors.

What was it like to start right in the middle of that storm. It was it was scary. It was well, first, there's the shock of having a responsibility of managing other people's money, which to someone who at the time was pretty broke. Um, it felt this kind of huge burden that uh, you know, it didn't really completely understand or was having trouble grapple with. On top of that, you had this kind of big crisis that was just getting

bigger and bigger. Oh seven. Yet really the very early stages of the housing market rolling over, early stages of the default starting on on mortgages in some prime starting to pick up. Markets were still going higher. You stock markets were going higher, as we're bond markets. At what point in that baptism of fire did you say, hey,

this is really an unusual set of circumstances. I was initially focused just on Muni's when I was there, so we saw some of the telltale signs, were able to identify some of them early in the sense that when you see corporate credit markets starting to show signs of weakness, because there's a lag effect right where government revenues tend

to kind of trail the real economy. You know, if you think about it, if you go buy something at your drug store, the sales tax you pay on it might not make it into the state's coffers for a while, or effectively be spent for a while, So not on income tax takes forever. So yea. So the point there, we could kind of see what was happening in corporate credit markets and it was appropriate to kind of be more defensive. So from that perspective, it was easy for

us to be a little bit defensive. And then that environment, you weren't getting paid too much to take a lot of credit risk anyway, So so you were buying bonds, primarily MUNI bonds primarily for their tax for yields. Was that the thinking back then? I mean, yeah, boring, So it was a boring approach, but design it's bored, right, I was gonna say it's boring, but they're bill to be boring. And how big is the muni market in the United States. It's tremendous three point seven trillion dollars.

If you want risk, you can find it in that market. Just that wasn't that wasn't the That wasn't the place at the time where we went looking on purpose or by accident. I mean, we could talk about we can talk about Illinois, we could talk about Puerto Rico. Or do you mean there's risk that people are wholly unaware of because of inflation, credit risk, duration, etcetera. I guess

I would say all of the above. What you're saying, uh there, I mean in any market, there there are investors taking risks they don't completely understand, and you know that that's what kind of makes them interesting. The muni market. The most misunderstood risks that I think are now beginning to be better understood are the risks of basically sovereign

political risk. Right Puerto Rico, Illinois, These are places they tell you that the same type of sovereign political risk that exists in other countries they exist in the MUNI market. Also So what was your take on on the very famous Meredith Whitney claim that we're gonna see hundreds of of muni bond default state cities, etcetera. That really rocked the muni bond market for a while. I I'd say that she was right in spirit, but really wrong in magnitude.

And when I say right in spirit, what I mean is that there are some very meaningful long term credit challenges to the muni market that, uh, if they're not addressed politically, uh, they're going to express themselves in a meaningfully negative way, you know, over the medium term, let's call it kind of five cent years from now, or maybe if they're catalyzed with a big recession. But she was wrong in magnitude and timing, and that means a lot in market for sure, to say the least. Take

if you give a forecast. The old joke is you could give a dollar level or a date, but never both at the same time. Coming up, we continue our conversation with Michael Jesus Morgan, Stanley's chief muni bond strategist, discussing investing in municipal bonds. I'm Barry Rehults. You're listening to masters in Business on Bloomberg Radio. My special guest today is Michael Jesus. He is Morgan Stanley's chief Muni bond strategist. Let's talk a little bit about the bond world.

Why do people say the bond market is the smart money. I think that there's this kind of romantic romantization. I'm not sure if I'm saying it right, but of kind of the contrarian right of the person who can kind of see risks before they develop and see disasters before they develop. And I think bond investors, generally speaking, are kind of always looking for that because they've got the same price incentive positive price incentive that a stock investor has.

You know, if you want to see stock prices go up, you tend to kind of ignore looming risks. If you want to see bond prices go up, you tend to focus on those looming risks as you're focused on whether or not you're gonna get paid back. It's basically like making a loan. So I think in the times that the that markets around risk markets take a downturn and bond investors look smart, there is this kind of you know,

lionizing of the bond investor. But the problem is if you kind of give in to that kind of perma bearish view, you end up losing a lot of money in the interim. You know, the opportunity costs of being permanently bearish is negative. So I'd say early in my career and yesked earlier about what it meant to kind of start in the middle of the financial crisis and say that was kind of hammered into me just by market conditions early that being bearished was kind of the

right thing to do. It took a while for me to kind of unwind that view and embrace a more risk taking view, which I think is more having a more balanced and sort of flexible approach. It has to be more appropriate. So so let's address that perma bear attitude. We see it in stocks, but we've been seeing it in bonds for forever. I can't count how long I've been told we're in a bond market bubble. Interest rates have nowhere to go but up. I've heard that literally

for decades, pretty much my entire career. Uh, this is as low as yields are gonna go, the bondbill market is over, when in fact it's thirty two years in the making, and I don't think we can officially say it's ended yet. Yeah, I mean there are mathematical reasons, uh to sort of to discount that argument, and then there's kind of fundamental economic reasons. You know. The mathematical reasons are basically bond investment. You're clipping a coupon. You've

got some cushion against negative price movement. History tells you that if you're underweight bonds, or you're you just own very short maturity bonds within a balanced portfolio, that is the riskier choice as opposed to something longer that's a good credit rating or a good credit risk that you could hold to mature. The income you give up by doing that in order to make it up later. You have to be really right, really fast about bond yields going up. And it's not typical that that happens. There

are the obvious exceptions throughout history. You got your late seventies, early eighties, but those are exceptions to the rule. So that's kind of mathematical reason. Fundamental reason is unless there is some type of exogenous shock to the economic system that kind of shocks us into a higher growth rate, we're still looking at real growth rates and inflation that are relatively low. So the fundamentals don't necessarily support real

bond yields meaningfully higher from here. And so you know, the the big debate this year and sort of the end of last year after the election, was where we're going to get that exogen a shock because President Trump and Republican Congress we're going to deliver a big tax cut, big expansion of infrastructure spending. And so if that happens, then sure, I think it's valid to say that bond yields are are going to go up, But um, you have to have a lot of confidence in that view

and a lot of evidence behind it. Right now we don't see either. I can't say I disagree. Let's let's fast forward to the current circumstance. I want to pull a quote from one of your recent UH notes. The prospect of a FED taper to its balance sheet raises obvious questions about long term rates. Justice tax reform threatens long end MUNI rates, Exactly what you were just discussing about.

Explain why that is. What is it about tax reform that impacts the muni rates, and what is it about um the Feds taper that's going to affect shorter term rates. So so this this is kind of two components of what we call the Trump triple threat to Muni's what what's the third threat? So it's fed it's tax reform, and well there's basically there's two components of tax reform. One is lowering the tax rate, the other is changing the tax exempt treatment of MUNI bonds. And is that

legitimately on the table. We think so? We think so. It's not part of any formal plan right now, but it's been part of previous formal plans like the Dave Camp Plan. It was part of almost every single one of Barack Obama's budgets. The not the idea of eliminating tax exempt interest, but capping it for high income individuals, meaning you can't just buy billions of dollars worth of

munies and expect to get that income tax. Right there, there's basically, without boring you the death on the details, you would have to pay staff. Well, think about it this way. If you have let's let's look at Barack Obama's original plan on this. You want to cap itemize deductions and exclusions for high in commuters. So it wasn't that what dollar amount. So his proposal was based on the tax rate that you pay, so and it was for everything. It wasn't muni focus. But think about this way.

If you are earning a hundred thousand dollars of muni interest and you're in the h thirty five percent tax bracket, but he wanted to cap the way the amount you could enjoy that just the same as someone in the twenty percent bracket. Right, hundred thousand dollars muni interest THTC. Tax bracket, you're shielded from a thirty five thousand dollar

tax liability. But if instead they said we want to cap you at PENT and you're only shielded from a thousand dollar liability, that's seven thousand dollar differences attacks you

have to pay. So I said, differently, less attractive. Yeah, so there's still very much a tax preference in that scenario because you're still being shielded from twenty eight thou dollars at tax, but there's some level of tax that you have to pay, and that's a that would be very different to the market where you had something that felt purely tax free before. Now there's some level of

taxation applied to it. But That's just one example. I mean, and our view of the reason it's hypothetically on the table is because there is a drive to make tax reform, to push tax reform as a republican only plan through budget reconciliation. Right, that's the procedure by which you can get. Right.

In order to do that and make the tax cut permanent, you have to raise a bunch of money to offset the money you're losing by lowering tax To explain that, you can do it on a simple majority, if it's revenue neutral, if it actually course revenue you need sixty votes or is that correct, or if you allow it

to sunset, so you think about the Bush tax. So what you have here is a plan at least the one that Paul Ryan is following right now, which he claims his revenue neutral based on the assessment, and it got from the Tax Foundation, which is a conservative leaning think tank. Coming up, we continue our conversation with Michael Jesus Morgan, Stanley's chief UNI bond strategists, discussing public policy and tax reform. I'm Barry Hilts. You're listening to Masters

in Business on Bloomberg Radio. My special guest today is Michael Jesus. He is chief strategist at Morgan Stanley for Municipal Bonds and Public Policy. UH. Previous to that, he was a credit analyst at Fitch Ratings. Let's talk a little bit about the prospects for tax reform. One of your recent notes did something that I don't think you guys have done a whole lot in the past. You put some fairly specific probabilities on the odds of of

tax reform actually passing. Tell us about that. So I'm always very reticent to put specific probabilities on things because what what I worry about is that it implies a kind of false precision. Um the old joke about economists using two decimal places, it's just to show they have a sense of humor. Yeah, exactly. So Yeah, I would say two things. One, Investors really kind of demand that

from us um and too. I sort of understand that because what probabilities, as long as they're well defensed and logical, will help you do as they help you build some logic into your portfolio, into your portfolio strategy. And if you have that type of consistency with how you build probabilities of different event risks, Um across your portfolio. Then whatever story you're trying to tell as an investor is coherent, and then the easier to manage risks. So that that's

the rationale for why we do it. I'd say the way that we try and keep our probabilities sane um is we you know, we we try and we whatever problem, whatever event we're trying to to to forecast here, we first try and establish what are the rules of this event, like really what how far can this go one way or another? We try and established data that kind of help us measure kind of prior probabilities, and then we

try and iterate on those prior probabilities. So you know, if you take tax reform for example, um, the sort of operative um uh, you know, the the the the operative theme that we had to focus on was what's possible through budget reconciliation, which is the process that would

allow Republicans to basically ignore Democrats. And then on we had the layer on top of that, given the current political conditions, how likely is it that a president and the same party can actually execute on their policy priorities. So we had to go back and reconstruct data. We went, we looked all the way back to presidential elections, going

all the way back to World War Two. We catalogued UM what the main promises were of each candidate eventually one and what was the execution rate in their first year on office. It was about six, and so we were able to iterate UM above and below six based on other conditions party agree on on the goals, etcetera. Yeah, and I'm simplifying it a bit, and I'm a big fan of using kind of too sanity check ourselves. I'm

a big fan of using Bayes' theorem. I'm also a big fan of just kind of asking some of the other smart people that we work with UM to find base theorem for listeners who may not have a mathematical or statistical background. So, I mean, Bayes' theorem is just a way of calculating the probability, or at least the way we use it, it's the way of calculating the probability of an event given given uh the sort of

prior baseline probability, then relating it to new evidence. So if if in any given year, knowing nothing else, the probability of a tax reform was five percent, based on just how many years you've got the tax reform divided by how many years we've been in existence, um, and then you sort of iterate for new information, Well, what's

new information here? New information is that Republicans control the White House and both Houses of Congress, and we know that sixty percent of the time they can ext you on their top priorities. We know that, um, they that the reforms they want to pass can go through the reconciliation process, so that ups the probability and on and on and on. So let me let me throw a curve ball at you. What did the failure of Obamacare repeal and replace due to your probability stick studies on

corporate tax reform? So you know, a part of this for US is defining a timeline to UM in the sense that we think that a failure to pass a tax reform and timely fashion this potentially is disappointing to investors as just an outright failure. So better late than never,

but sooner was much better than Yeah. So what happened after the kind of let's call it the hereto for failure to repeal and replace Obamacare was, uh, it was it's sort of failure to pivot on the part of the Republicans right, we said they need to fisher cut bait, whether or not the fish or cut bait, and moved to tax reform. Is going to tell you a lot about the timing of tax reform and the content of it,

and they appear to have tried to do both. They said they're going to focus on tax reform, but they haven't given up on the legislative process, and so that that pushes the timing of tax reform back. They've also, in our view, tried to overcorrect for what happened um in A c A by opening up the process. So now they're gonna have hearings. Now they're going to engage Democrats in at least try a bipartisan or at least they say they're going to try a bart who knows

what they really want to do. All of that adds time to the clock. All of that rolls the possible details of tax reform. None of it improves the probability of success, but because it pushes back timing, the probability of success within a timely manner has gone down in our view. Coming up, we continue our conversation with Michael Jesus Morgan Stanley's chief muni bond strategist discussing the municipal bond market. I'm Barry rid Helts. You're listening to Masters

in Business on Bloomberg Radio. My guest today is Michael Jesus. He is Morgan Stanley's chief strategist for municipal bonds and public policy. Let's talk a little bit about the muni bond market. When you're analyzing municipal bonds, where do you even begin? How does that what does that process look like? So we always start with fundamentals, and it's both top

down and bottom up. The process I like is to sort of sequence them that way top down, then bottom up, top down, meeting where are we in the economic cycle? What's driving the economic cycle? Um where the weak sectors of the economy the strong sectors of the economy, and then go bottom up to see where are their credit vulnerabilities within the municipal bond system are the regional economic vulnerabilities? Is of the vulnerability in terms of types of security.

So to give you an example, a couple of years back, when oil prices were dropping like a stone and seemed like the energy sector if there was gonna be another recession in the short term is gonna be driven by the energy sector. So then we had to do was go around and say where the regional economy is that haven't outsized UM exposure too energy sector, and you know, realistically, not not just the economic impact, but what does the

revenue impact to state and local budgets. And what we found there was that you had mostly higher, higher rated areas of the country were exposed. But outside of a few uh kind of smaller um Oklahoma, North Dakota, they don't have a lot of that outstanding. So the risk of this being a systemic problem was quite low. There was a risk of these places kind of underperforming, and you know, net net, we didn't think it would be a big problem for the market. So we said, all right, well,

this is not going to drive our view. There are other things that are going to drive our view, but not necessarily this. So so if you look at a region like Texas or or Houston, I remember the eighties was a disaster when oil prices fell, it seems like they're much more diversified and much better capable of withstanding that sort of press a state like Texas, that's certainly true, and Texas was one of the more conservative states in terms of projecting oil prices for so a lot of

these states have what they call severance taxes. Right when you take some oil out of the ground or anything else, you charge at tax on it, and that taxes based on the prevailing market price for that oil. And Texas, I remember the exact numbers, but amongst the major states uh that are oil producers, so you know, Texas, Oklahoma, Louisiana, Alaska, um, North Dakota, Texas had among the more conservative estimates of what the price would be, so the revenue shortfall for

them was far smaller. On top of the fact that they were much more economically diversified. You know, you look at the place like North Dakota, which is focused on shale and therefore needs that price to be higher. The revenue shortfalls there, at least the risk of revenue shortfalls were really substantial. But ultimately, like the state, North Dakota has about two billion dollars of dead outstanding, and that's including all of the local debts, so that's not even

the state level debt. Really kind of a drop in the bucket relative to a three point seven trillion market. So how many different municipalities in the United States, do you guys cover Well, it's gotta be a lot, right, So here's our team is the sort of strategy team from the municipal market. It's akin to having strategist who covers the SMP five hundred inequities. So the single name analysis is largely done by our desk analyst team. Um, we are more sort of trend watchers and sort of

we build up sector trends. So we do a lot of single name analysis in the aggregate where we try and build up what trends are driving. Um. Uh, you know, credit quality moving up and down. But give us an example. I mean you mentioned Indiana before. In Puerto Rico, what what is other than far too much spending relative to their income? What what's driving those trends? So I'll give you, I'll give you. I'll give you a a couple of secular trends that are important. The one that gets talked about

all the time is pensions and retire reliabilities. Right, and uh, the you know that is a problem most acutely being experienced in states like Illinois, but it's certainly not absent in other geographies. Is a perfect example. Yeah, yeah, of course, And you know that the question there is about when are those funds depleted such that it actually impacts the operating budget and therefore there's less money to pay for schools and roads and the type of stuff that voters

care about, which then catalyzes the political risk. Right in Puerto Rico, the willingness to pay was high until it wasn't, And it wasn't because all of a sudden, people it was not politically popular to pay the bond holders anymore because they would rather not pay the bond holders than shut down another hospital. So that's the that's the kind of secular burden of debt generally, but the sort of

soft debt of pensions. But but there's still enough kind of life in those funds that this is probably not a problem for another five years or so. Um. The other secular trend, which is it's not about state and locals whatsoever. It's just one example, really, UM that I find really interesting and really timely given what's happening in d C. Is the secular shift in how healthcare is provided this country. When Obamacare came to be, there was

in the muni bond market. So hospital debt is basically about a let ten to eleven the Muni bond mark when Pomacare was being debated and initially passed, the spreads

on those bonds really widened quite a bit. And this was a great in my opinion, this was kind of a great example of where people kind of conflated their public opinions, their their political opinions, with market views, because what was really happening was, regardless of whether or not you think Obamacare is a disaster, it was creating a massive amount of government spending that was going to take a whole bunch of uninsured people and make them insured.

In other words, you created twenty to thirty million new consumers for hospital services, that's right, and consumers anyway, as opposed to emergency room consumers who may not pay you an often don't. So that was that was a great opportunity to buy hospital bonds. And you even saw kind of a mini opportunity around that emerge UH in the first quarter because it looked like, you know, the train

was really rolling. The Republicans were going to get rid of the Affordable Care Act, and all of that revenue and margin expansion that happened with Obamacare was going to be totally unwound, so it spreads why ning again and then as soon as you could tell the political prospects

for this, we're just not going to work out. Jim Chanos of of Chemicals Partners was the first person I recall hearing say, I know they have both houses, but if you look at these stocks, look at the hospital stocks and bonds, they're trading as if this is gonna fail, as if this is not going to go through. The market arguably saw this before the political analysts seem to

have noticed. Yeah, I mean, I think that's right, and I think that the if you, I think the political analysts were probably very focused on the idea that the intent of Republicans and sort of the motivation was really high to get this done right, that there were that there were going the wings of the party, though they disagreed on how to replace Obamacare, we're not going to risk not doing this because it would be a political blunder.

But the market was telling you was that they were just irreconcilable differ perences within the Republican Party as to how you replace this. The conservative wing of the party wants a very market based approach where you reduce coverage and but then lower costs and the moderate wing of the party, it's unclear how much different they want things relative to what the current system is. So those two

things really can't be reconciled. I think Paul Ryan did his best to try and reconcile them, but almost impossible job. And so let's let's apply this to to our previous discussion on comprehensive tax reform. Tell us about what the odds are today, what they were, and what was the impact of the failure of repeal and replace. So with comprehensive tax reform, the first thing we like to tell people is that there are a lot of different things

which could hypothetically count as comprehensive tax reform. And some of them are really good market outcomes, some of them are really risky market outcomes, and some are just kind of neutral. So right now we're saying that you've basically had about a six chance in the next twelve months that you will see a tax reform. How has that number change from from our last iteration. It's down about

ten percent. But the outcomes within um within tax reform are kind of skewing somewhat worse from a market standpoint, because what you have is a higher probability of delays because of what happened with the Affordable Care Act and the fact that they're going to follow a more deliberative process now, and then b you have um less of a path towards a tax reform that doesn't include some of the elements that the markets would probably consider somewhat

disruptive in the near term, things like limiting corporate bond interest for limiting deduction of corporate interests, for example. So if we're just looking at let's let's talk corporate tax reform, If we're looking at a thirty nominal rate, everybody pays

much lower, if anything at all. But one of the key aspects of the Trump campaign was lowering that too, depending on the speech, whatever the number is, what are the odds of seeing that lowered to Let's be rational and say, how do you how do you see that taking place? Yeah, I mean, I think, reasonably speaking, we think is the lowest they can go at this point. There there are scenarios really kind of so we think

fifteen is pretty much off the table. I think the actual rate is sixteen or seventeen percent that people realistically pay on a thirty nominal rate. Is that a fair number. I think the average effective tax rate of an SMP five companies around it is that much. Okay, So to get down to there are a lot of loopholes and a lot of deductions that would have to go away.

That's right. And on top of that, if you want to do it in a revenue neutral way, you have to consider things that would be and the new taxes. We have been speaking with Michael Jesus Morgan, Stanley's chief muni bond strategist. Be sure and check out the rest of our conversation, which we put up on Apple iTunes, Bloomberg dot com and SoundCloud, where we keep the tape rolling and continue discussing all things muni bonds. Check out my daily column at Bloomberg View dot com or follow

me on Twitter at rid Halts. I'm Barry Hults. You're listening to Masters in Business on Bloomberg Radio. What could your future hold? More than you think because at Merrill Lynch, we work with you to create a strategy built around your priorities. Visit mL dot com and learn more about Merrill Lynch. An affiliated Bank of America. Mery Lynch makes available products and services offered by Merrill Lynch Pierce feder Smith, Incorporated, a registered broker dealer. Remember s I PC. Welcome to

the podcast. Thank you Michael for doing this. I really appreciate your time. And I'm a little bit of a want and and you know you you said earlier. UM, you know, I don't want to bore people with the details when it's not if you are looking for tax free income, and that is an enormous aspect of the investing community. Muni bonds are amongst assuming you're not in a tax deferred vehicle, is one of the best options

that that people have. Yeah, yes, agreed. And as you said, it's nearly a four trillion dollar UH sector, which which is nothing, uh, nothing to sneeze at. So I know I only have you for a finite amount of time because you're catching a plane down to d C. Let's let's jump into some of my favorite questions I asked all of my guests, tell us about some of your

early mentors who helped guide your career. So it's a it's a great question, and I wish I had a more um, I don't know, sort of corporate answer for it. But the answer that that pops to my mind is

my dad. You're not the first person who said that. Well, you know, and it's not that I haven't had great people guiding me throughout my career, but you know, the voice in my head when it comes to being a critical thinker and working hard and and sort of persevering, and I mean, we deal with these sort of tough, ambiguous analytical challenges all the time, so it's really easy to kind of throw your arms up and just walk

away from it. And so, um, you know, that voice in my head kind of keeps me going, gives me confidence, and that's that's where that's who it comes from. But interesting, um, tell us about some investors who influenced your approach to investing in in the credit and bond markets. Well, you know, here, I'd say that I rely a lot on the people

I work with. I think Morgan Stanley has a a brilliant research department UM with a lot of experience, And you know here I actually also kind of give a shout out to my friend Colin Roache, who we talked about earlier, who I think you can by the the process. We use a very evidence based process, right. We try as much to kind of ignore what we think should

happen and look at what we think will happen. Right, If someone wants to sit down with me over a beer and talk about ideally what would I want to happen in a perfect world, that's fine. But for investors, ultimately, what happens happened, what matterage is what will happen. And that's more or less the philosophy that you know that Colin uses when he um when he's taking approach to what's happening with the economy was having the financial system.

And I think there's something really refreshing about that, sort of free from the constricts of the you know, having a consistent academic theology as opposed to you know, are really pragmatic, uh, you know, kind of functionary and and uh and full disclosure. We host an evidence based Investing conference twice a year, once in New York in the fall and then in in June and California, and Colin is a panelist on one of our conversations about the

role of data in making investment decisions. And I had no idea you got is uh yeah, no, we uh we lived together in college for a few years. Really, I would not have guessed that he would end up being the kind of responsible guru that he is. I think you could. I think you could take any weekend of anybody's college life and then juxtapose it twenty years down the road, and it's like, really, that doesn't seem to make a home a lot of sense that that's

that's pretty pretty standard. Um, let me talk about books. This is the question I get asked the most from listeners. So and so, what what books did you listen to? So we always work this in. Tell us about some of your favorite books, be they fiction or nonfiction, investing related or or unrelated. So what I like from what book that's really helped me from a work perspective? Is? Um?

Thinking fast and slow? So it's you know, identifying, Yeah, identifying psychological biases and and being aware of them and the kind of role that data can play and sort of training your mind to be aware of those probably makes me a much more boring person, but I think it makes me better at my job. Um, you know, on the more leisurely side, UM, a book that I really like and I still reread every so often is Friday Night Lights. Really Yeah, so not the not the

TV school football. Yeah, I mean it's sports, I think, right, right, So it's basically UM. So the the author's Bissinger, and he goes and lives with a high school football team in West Texas for a season and kind of file follows their trials and tribulations. But the book is less about football, and it's more about kind of the experience that the team has, kind of focusing on um following one dream. And it's also about kind of the social and economic stresses of the area and how they interact.

And I mean the reason I think it appeals to me is that, I mean sports have played a really big role in my life. I basically played organized sports all the way through college. And what did you play in college? Rugby? Um? And you still have all your own teeth. That's very impressive. I do. But I've had I'd probably be smarter if I hadn't had a few concussions. And I have had to have shoulder surgery and I definitely took off for something else laborham. Oh yeah, that's

not a fun surgery, is it. No? And I had to have that surgery basically about four weeks before my first daughter was born, which my wife was not happy, not too happy, not too happy about but it's amazing what they can do with modern medicine. I could hold the beat. I was good enough to hold the baby when so so. Friday Night Lights somewhat reminds me of The blind Side by Michael Lewis, which is ostensibly about football, but really football is just the McGuinty that's used to

tell a story about everything you just described, race, poverty, economics, hope, streams, etcetera. Yeah, And I think for me, I kind of I feel like, on some level kind of share an experi orients with the people in that story, in the sense that there is sort of a shared purpose that comes with organized sports and teamwork, and there's also a kind of shared experience of what it means to persevere, you know, six succeed or fail, and uh, you know, having those experiences

helps you later in life to you also persevere. I've I've made the argument that the reason Wall Street desks are so populated with college athletes is exactly what you just described. I think there's some truth to that, you know, I think you know, Muni bond desks in particular to end to have a lot of ex college athletes Um. It definitely makes for good intram real sports. We had a dodgeball team a few years ago which was undefeated. Yeah yeah, Um. Any of the books before we move

on to our next few questions. Um, you know, I mean it's corny, but the Bible. I still read the Trial. Yeah, I every couple of years I try and grind through this sort of chronological there's a version of the Bible, um, which attempts to kind of reorganize the Bible and chronological order. And what's the name of that. Well, it's just called

the Chronological Bible. That's interesting. Yeah. And then it's set up so that you read it about fifteen minute increments every day and you get through it and in a year in a year, right, Um, and uh that's interesting. Yeah, I think I think, how does how does this shift take place? Because you know now that I think I always assume the Bible is chronological, but I guess it really isn't. You start with Genesis, you're talking Old Testament, and then eventually you do kind of jump around a

bit later on you do. I mean I would say it's more or less chronological. But you know, the the interesting thing is, you know when you get to Psalms, right, which is more or less poems that they can kind of pair them with the events that are happening, whereas the Book of Psalm stands on its own. That's right. So some of that stuff, it gives you a new perspective. Also for me, it's just a way that kind of, you know, keep on task, right. So I think it's helpful.

And let's I think there's a lot of I'm not trying to proselytize here about religion or anything, but I think there's a lot of sort of encouragement of truth telling and truth seeking that that you know that I think you need that inspiration, particularly when you're in financial markets, which is, you know, every day is a puzzle where you're really trying to figure out what the kind of most truthful, neuggative information is that you can rely on.

And I think that inspiration really helps. So tell us about a time, by the way, this is another question that comes from listeners. Tell us about a time that you failed and what you learned from the experience. Um, I'm kind of embarrassed to admit this because I'm the chief MUNI bond strategist From Marian Stanley I'll tell you this, Um, I have one C on my college transcript and it's in public finance. Really yeah, so you just redoubled your effort and overcame. Um. I think that's one way to

look at it. Or drunk during the test, is he? No? No, I mean to me, it was. It was a big failure in the sense that I believe it was my sophomore year of college and I was always able to until then kind of reach back kind of based on raw intellect and and and get by right. And in that class. It was very humble experience because I left that class and it finally sunk into like there are things that I just know nothing about and and I really knew nothing about what this professor is teaching me.

And I think after that, I decided that's not gonna happen again. And so it wasn't about public finance per se, but it was about not being afraid to ask for help, not being afraid that I to admit that I don't know something and ask for help. Um, and you know, kind of putting your ego aside, right, I mean, you don't have to be the smartest person in the room. You're not a failure if you're not the smartest person

in the room on everything. But you can be a failure if you try and pretend you are and ultimately don't know what you're talking about. I share a similar college experience in terms of being able to get by on just raw processing power and then when you're confronted with a set of circumstances where that is insufficient to coast through. I wish I handled it as gracefully as

it sounds like that was really a significant life lesson. Well, you know, it's good because part of my job is to sit in front of people, and you know they want you to have all the answers, and so it's tempting to pretend like you do have all the answers.

But I think what's better and more genuine, and you often get rewarded for, is admitting that you don't know the answer you're thinking and brainstoring about how you might get that answer and come back with it later, because no doubt, the smartest investors know that no one has the answers, so they're going to know your fake if you try and fake it makes a whole lot of sense. Um tell us about you work with a bunch of

younger folks as well as people more senior. What sort of advice would you give to a millennial or someone just beginning their career if they said to you, Amac, I'm interested in going into Muni bonds. What what would you say to them? So I'd say a couple of things. And this is interesting. I was like the millennial question because I'm I'm not sure if I'm a millennial or not. I feel like a straddle. I'm like right there. So it's so funny. I'm the exact same way. I'm not

a baby boomer. They're all older than me, but I'm too old to be gen X. I get to look in both directions, you might be find yourself similarly situated on the cusp, right, I got the technology aspect of it, but maybe a little bit of a different world view.

But I would say two things. One on the Muni issue, specifically, because Muni's have this, or at least had this reputation of being boring asset class you kind of put the charismatic, but people who are considered less intellectual on that product in terms of sales and rating. And you know, one of the early phrases I heard about the muni industry.

Was the muni jocks right? And I think the the post crisis realization is that this is a market that incorporates elements of sovereign risk analysis, corporate credit analysis, um, you know, traditional bond math analysis. I mean, there there are a lot of similarities to the mortgage rates, inflation, convexity, so and therefore there are macro elements. I have to know as much about what's going on with the FED as I do have to know what's going on in Springfield,

Illinois with the state legislature. So I think it challenges you on a number of different levels. So, um, don't let the fact that it tends to be something for mom and pop as opposed to you know, derivatives or f X or something like that, kind of shy away from it. And then I mean the other bit of advice I would have is more just general career advice than something that worked really well for me, even though

I didn't seek it out. Which is kind of kind a job where you're probably gonna get too much responsibility too early, um, probably out of necessity. And this was something that was born of being a mortgage Stanley in the financial crisis right where you know, in the in the crisis, in the immediate aftermath, there weren't a lot of resources to go around. A lot of people kind of forced into duty that was a little bit above

their heads. It was kind of like an Apollo thirteen moment, like we all have to fix this problem, but you only have the things that are being thrown on the desk right now to fix it with, you know, do your best mcgeiver impersonation. And that was great. That was great. I mean, you know, you had, you know, spreadsheets, Bloomberg machine and uh and your wits, and you go and you you learn how to innovate, you learn how to take responsibility. It's a sink or swim kind of moment.

And I think if you have those moments earlier in your career, it gives you a lot of confidence later. And our final that's a really interesting answer, um, And our final question, what is it that you know today about municipal bond investing that you wish you knew ten or fifteen years ago when your career was just ramping up.

M hmm um that I guess that the rules are made to be broken in the sense that a lot of the define that before compliance in their office when they hear that, because I know what you mean, but they don't know what you mean. What I mean, and I mean this in terms of bond covenants. So in a more boring way, right, there are um stresses that are so big that the things that are being promised to you as an investor, you know, can be broken for reasons outside of your control. That shouldn't scare you.

What it means is that you should demand some extra compensation for it, and you should take that into account when you analyze it. And here we go back again to something like Puerto Rico. You know, the mantra before the financial crisis and even for years afterwards, were general obligation bonds don't default, can't default. The law says that you, as the bondholder, are entitled to any and all resource that the municipality has at its disposal to pay you

back before anyone else. And if you think about it, that doesn't make much sense because what political constituency or group of citizens anywhere is going to allow the bondholders to completely suck dry the resources of a municipality just to uh, just to uphold the law, particularly when states are sovereign entities. Puerto Rico is not sovereign, but Congress was, and Congress saw that the only way to effectively solve

this crisis was to exercise its sovereign authority. And what I mean by that is the sovereign authority means they get to write the rules, they get to write the contract laws. And you know, I'm not a lawyer, so I think there are a lot of lawyers who could get in here a debate that say that what's happening

in some of these situations is unconstitutional. But you create facts on the ground beforehand that create losses for bondholders first, So you know, So going back to the question itself, I think you have to take all rules and all laws, um, you know, with some kind of grain of salt. You always have to figure out what your blind spot is and at least account for how this could go against you and not take for granted some of the kind of standard rules of you know, of any market, right

or the standard kind of rules of thumb. Anyway, Yeah, you mentioned Michael Lewis earlier. I mean he basically lionizes the type of people who just don't take things for granted, right, and you know the h I think that's just a good general lesson fascinating stuff. We have been speaking with Michael Jesus. He is Morgan Stanley's chief strategist for public policy municipal bonds. If people want to have access to your research notes, I assume they must be a Morgan

Stanley client or is anything public? Uh, they should be a Morgan Stanley clients. Um. You know that every once in a while we can get we do get media. We do get media coverage from Bloomberg and others. If you have enjoyed this conversation, be you want to look upward down on Apple iTunes or on our SoundCloud or Bloomberg View dot com page and you can see all of our previous hundred and forty one or so such conversations.

I would be remiss if I did not thank Taylor Riggs, my booker, Michael bat Nick, my head of research, and Medina Parwana are recording engineer. I'm Barry Ritults. You've been listening to Masters in Business on Bloomberg Radio. Our world is always moving, so with Mery Lynch, you can get access to financial guidance online, in person or through the app. Visit mL dot com and learn more about Mery Lynch.

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