Tina Vandersteel on Emerging-Country Debt (Podcast)

extra special guest, Tina vander Steel. She heads the entire Emergent Country Debt team over at GMO located in Boston, the venerable investing firm that's head by Jeremy Grantham, He's the g and GMO UH myself and vander Steel talk about everything from the risks involved in EM investing, how you can hedge whether or not you should be investing in the local currency or in dollar denominated in debt. This is really a deep dive into a fascinating and

under followed sector of the marketplace. It's trillions and trillions of dollars UH and yet most of us are fairly unfamiliar with what goes on UH in e M and and really Tina gives us a master class in what you should be looking for and how you should be thinking about the risks and potential rewards in e M. I really enjoyed the conversation and I think you will also so with no further ado, my interview with GMOs Tina vander Steele, this is Masters in Business with very

results on Bloomberg Radio. My extra special guest this week is Tina vander Steel. She is the head of the Emerging country Debt team at GMO, which she is also a partner. She joined the firm in two thousand and four, coming from JP Morgan's Fixed income Research, where she developed quantitative arbitrage strategies for emerging market debt and high yield bonds. Teter vander Steel, Welcome to Bloomberg. You. So, so let's talk a little bit about your background, which kind of

surprises me. You graduate Washington and Lee University not only with a BA in economics, but a BA in journalism. How do you go from journalist them to emerging market debt? Well, that one is an easy one. Um. My dad set my expectations early in life that he would pay for my existence through undergraduate or twenty one years old, whichever came first. So I graduated at twenty and I figured that a path and economics had higher lifetime earning potential,

and I wanted to live in New York City. So, um, I chose that path. Of course, at the time, if you think about emerging debt, this is so the fall of communism. We had just finished in economic studying Nancar Olson's famous comparative economic systems. So now is here a chance to really get to know some of the countries

that we had been studying. And my economics professors had said, listen, you get kind of a free m b A if you join any of the Wall Street banks that go through their training program, and free sounded like a good thing. So I applied to a couple of them, to Goldman and JP Morgan, and planted a job with both. But my dad convinced me I should definitely take the JP Morgan job, the lesser earnings notwithstanding, he said, the culture will would be more of a fit for somebody like me,

And so that's how I got there. Quite quite interesting. You spent two years working at JP morgan San Paulo office in the mid nineties. That had to be a fascinating experience. Tell us a little bit about that. What did you learn from your time in sal Palo uh So Paulo was amazing. I mean, if I had been the kind of journalist that Michael Lewis was, I would have written a whole book just about that experience. I mean, if you think about it, So Plana Heal so At

Fernando Hikkardo Soos elected president. He introduces Plan of Hell, which he had devised when he was Finance minister, and a hyperinflation, introduced a new currency that is still the currency to this day, which is quite an achievement for Brazil. UM And as an employee of JP Morgan, they gave you just a crazy amount of power. So I'm in

my mid twenties. My job at the time, my name job was to be a strategist, which I didn't really know what a strategist was, but apparently what it meant was I would take my little Vice president card and I would travel up to Brazilia and I would get to know the congressman. Because this was during the whole constitutional reform effort, which is actually still ongoing today. UM and all of the votes that went on in Congress

were super important to the future of the country. So I would get to know the congressman, figure out which way the vote was going to go, fly back to sell Pollo, get on the houton holler, tell JP Morgan's worldwide clients how that was going to go. And at the time, I guess that was really the origins of sales color, which is something I don't read these days, but at the time, I guess I was in charge

of producing sales color, which he was pretty funny. That's really quite interesting that today sun Pala was something like twelve million people, it's one of the world's most populous cities, and it's now a Brazil's vibrant financial center. Was it clear in that this was going to be a financial powerhouse?

This location, well, it would spend several locations actually since then, um at the time that I moved there, the center was actually in Chant like the actual center of the city, but had already moved to Avanita Paulista, and since I moved, has now moved to a new section of Salpalla called sari Alima. And I think it was pretty clear. If you got to know any of the Brazilians at that time, many of them are very famous even today. Adam Fraga and a whole bunch of people they were. They're very

very smart people. If you think about how crazy hyper inflation is and the uncertainties of investing in hyper inflation, these people were crack. I mean the to give you a sense, if I wrote a check in Salpolo, it cleared the next day, where back in the US it would be several days, and that was because you know, inflation was very high. And uh, some people are probably aware that Brazil has a very unusual interest rate compounding system.

So whereas we here in the US use simple interests because inflation and hisstrates are low, in Brazil they use daily compounded interest because their history is that inflation is very high because a very sophisticated financial system there. I'm not surprised at all. Really interesting, So how did the experience living abroad, working abroad affect how you view the world of emerging market debt? And you know what were

the big takeaways for you? Well, one thing I can say, and I've only lived in Brazil as an emerging market, is that the locals are the most pessimistic. And I've often wondered why is that the case? And I have a theory, and the theory is part of my journalism background, which is I remember back in journalism school, we used to say, if it bleeds, it leads, or fire, rape, incest film at eleven right, So whatever was the most tragic, the most awful thing, that was what you were going

to learn about. Now this is the so we don't have Internet yet, but there is a very vibrant press in Brazil. There were five daily newspapers worth reading. There were two weekly magazines that were also worth reading, and of course they only brought you the most pessimistic version of anything that was happening. Cardos so he was going to fail and inflation was going to come back. It was just this constant parade of bad news. That may

sound familiar. That's true everywhere, right, the Internet makes it worse, but it's true everywhere. And the only exception that I found to that is briefly, we had a fellow who were for us who eventually he was Chinese and he eventually moved back to China unfortunately, so we didn't necessary had to move on. But he was super optimistic about China, and I thought to myself, well, maybe that's related to the fact that press freedom in China is poor. In

other words, they're pessimistic because of what they read. Schools don't really teach us anything about information hygiene or how to evaluate what you see, unless you go to law school, where they teach you how to, you know, cross examin a witness and look at all their motivations and biases, etcetera. Most people don't don't approach media that way. So that's really fascinating about um, not just em but media in general.

So spending time abroad has this led you to sort of discount the terrible media stories you might see about, be it Argentina or Venezuela or Brazil, or not even just South America, if you look at Africa, cun parts of Asia. There's a constant drumbeat of terrible news coming

out of places like that. Yes, I definitely discounted. There's a there's a wonderful article by Michael Crichton called Why Speculate, and in it it talks about this idea and he's probably not the only person who's thought about this or talked about this idea of Gelman and Nisia. So imagine that you're an expert in your field and you open up today's newspaper whatever it is, you read something online,

and you realize that what's being written there is completely false. Absolutely, you know firsthand that what's written there is just wrong. And then you turn the paper and you turn the page and you read the next article and you've completely forgotten what you've just experienced. Right, So the next article is about something you don't really know anything about, and you just trust the source. So I took away from that article that, you know what, it's very rare, especially

if you think about news. News is happening real time, and what's the old adage? We don't even know the the genesis of the French Revolution? So how could you expect that anybody in real time has the correct interpretation

about anything? So you're better off, I think, just not reading most things, the first draft of history, so to speak, the first draft of history that's right, really really the financial markets where you get a price, and the price has a lot of information content in it, so you don't really need to hear about market color or interpretations. You just have to witness the price. I'm intrigued. So

let's talk about a place like Venezuela. How do you manage the risks of investing in a space like that when it's pretty clear you can't rely on the media. Is it just a matter of boots on the ground and seeing what's going on for stand How do you um come up with some sort of investment thesis and then try and verify it? Well, I would say in the way we invest in the way we approach emerging debt markets, we try to de emphasize needing to know

anything about the country. So my background is in relative value analysis and arbitrage analysis, and it's kind of a widget way of looking at things. It's it's independent of whatever the country is, or the company is, or whatever that is. And what's nice about it is imagining that the same risk is priced it differently into markets and trying to arbitrage that difference of opinions for that same risk.

That's a lucky thing to be able to do, because otherwise you would have to have some knowledge or be able to come up with an opinion about places like Venezuela, and I would say that's very, very, very hard to do. I mean, Venezuela is an interesting case in so far as they did something that no other country has ever done. And what I mean by that is we work in

default sensitive markets. Right every year we get it a fault or two, and usually the way that works out is the classic Hemingway way, which is, how did you go bankrupt gradually and then suddenly right people refused to roll over your debt at reasonable prices and then you either go to the I M F for you to fall to whatever it is. Venezuela ran out of money in and continued to pull oil out of the ground and starve its population to pay foreign creditors for four

more years. Crazy. So you know, could we have predicted that they would have done that? Of course not. I don't think anyone would have predicted anyone would do something so insane. So let me ask you an obvious question I probably should have asked you earlier, And that's simply what do we mean by emerging market? What makes a particular country an emerging market versus a frontier market or a developed market. So taxonomy, it varies, so we distinguish

between emerging countries and emerging markets. So classically, the definition of emerging countries, which includes frontier countries, are those countries that are either low or middle income countries and therefore may run out of the money to pay you back or have defaulted in the past and have demonstrated that they are willing to default on you. So those are

those are what we referred to as emerging countries. Emerging market has much more to do with the accessibility by foreigners into a market, So can you act fess the local market? Um, what are the tax implications of being

a foreigner in the local market? So, for example, you might have a Gainaian bond in dollars which is from an emerging country, but it clears in euroclear, So it's a developed market emerging country bond as opposed to its local currency bonds which are emerging country emerging market bond. Does that make sense? Sure? And this is whether or not it's corporate debt government debt. There they can all be out of an emerging country. There's no distinction other

than the specific corporate risk for any given company. If you're buying e M private debt as opposed to e M public debt, is that a fair statement? That is a fair statement. The way we think about corporate debt within e M is that the sovereigns are the very powerful agent. Doesn't matter if you're emerging or developed, the sovereign are the powerful agent, and so the corporates are really a compound risk with respect to their sovereign So corporate in the US, with the rule of law and

all of that and transparency is not that risky. But a corporate in Ghana, where you know the assets are in Ghana subject to Ghana law. Doesn't matter if the bond is a US law bomb in UK or in the US. The assets are still in Ghana, so we think of them as a compound risk. So I want to ask you about a piece you wrote in twelve titled the What, Why, when and How Guide to Owning Emerging country Debt? What motivated that piece and and how

was it received by various investors? Sure? Um, I think every asset manager eventually has to produce something along these lines that asks why emerging debt? Like, what's the purpose of this thing? And so this was our shelf piece to describe to a hypothetical allocator what they should be

on the lookout for. And I would say GMO takes a very very standard traditional approach to thinking about an allocator's problem, if for no other reason than GMO is most famous for its ASDA Allocation division headed by Benninker and founded by Jeremy Grantham. So what do they care about? They care about value, diversification and alpha, And so we describe in the paper, well, how do you determine if

something represents value? Right? How do you think about the spread you earn on a sovereign relative to losses you might experience, or on a corporate or how do you think about currency risk in local currency denominated death? So that's the value section diversification is how do these subasset classes present with respect to develop markets? Uh? You know, if if you think about a portfolio optimization, how does this new asset play with respect to your existing assets?

And then finally alpha, which is the most fun space. Um, the alpha in this asset class is very high. The median manager beats the benchmark. So um, it's a super inefficient asset class and that's one of the reasons that we really like it. Huh. Interesting. So so this leads me to the obvious question, how does GMO approach emerging market debt, say US corporate debt or US distress debt,

and how does that differ from some of your competitors. Well, I would say that GMO takes a very unusual approach, and I knew that when I worked at JP Morgan because, as I think I said earlier, I did relative value arbitrage.

And so as a strategist, you know, the salespeople want to take you around and visit clients, and after a while they realized that the big asset managers weren't interested in hearing my spiel, if for no other reason, and they were so big that the you know, ten by ten million trade that I proposed was rounding error for them. So the only people who are really interested in this were GMO and a small set of hedge funds, among them long Term Capital, which is its own interesting, fascinating story.

And now that I work at GMO, I find how unusual it is because people approach us and say, wow, what you've just described is totally different than what other people describe, and so what is it that we do differently?

It's really this emphasis on relative value, so trying to find cheap securities, thinking about it from a long short perspective, and emphasizing that rather than emphasizing what most managers emphasize, which is the fun stuff to talk about, right the what do we think about Venezuela to your earlier point, or what do we think about Brazil or what we think about the FED or any of these other very

very challenging questions to ask an answer. And it's not that we don't try, By the way, we have some extremely experienced people thinking about those questions, but we all collectively agree that if you can find an arbitrage, you should put all your alpha chips there first and then worry about the rest later, which leads to an obvious question. You spend some time developing strategies using quant aarb um, do we really care what someone's opinion is on something like?

It seems that the work you did um on the quant side was pretty empirical versus the hey, give me your squishy gut reaction to what's going on there. In other words, when when people are asking for that color commentary, what is it? What's the value of that other than you know, making casual chit chat. Well, from an investment perspective,

the value is generally low, right. I mean, we can all sit around and have opinions about things, But are you going to buy or sell something based on those opinions in the presence of by the way, very high transactions costs. The weighted average price bid offer of bonds

in my market is seventy five basis points. These aren't treasuries, so you better have a real sharp view, and you better hope that that view obtains for some period of time, because otherwise you're going to cross that bid offer twice, so we really try to avoid that. I think we are not only the lowest turnover manager of any of the active managers, are turnovers lower than the ETF. So we buy and hold arbitrage like positions in and out that. That's some big just just for the spread. Let's talk

about another spread that's out there. So so you join GMO and oh four and then worked on a strategy, you know six that was the Emerging market FX total return strategy. Tell us about that, What are the local currency debt strategies like in in that develop out of that, and what are the currency spreads like So local currency debt investing is a really fascinating one. It's i'd say

the largest bundle of risks that we analyze. So when we think about positioning, it's always with respect to well, what risk are we addressing, and it's any collection of credit risk, right, all of them have sovereign credit risk combebted within that, there's a question of selective sovereign default. So a sovereign can choose, Okay, I'm in a corner, I'm only going to default on my foreign currency debt.

I'm only going to default on my local currency debt or I'm going to default on them all, And we've seen examples of both. In fact, our sovereign analysts just went to a fascinating conference at Georgetown this week about the possibility of selective domestic debt default. There's a whole very interesting topic. Um On top of that, if it's a corporate it can have idiosyncratic corporate risk, and if it's a local currency bond, then it has interest rate

risk and up to two types of currency risk. So currency volatility risk, that's the one you see crawl across your Bloomberg screen. But currency convertibility risk is a very serious one. What if I take my my foreign investors dollars or euros or or Swiss Franks and I convert them into Argentine pesos, to take a recent example, and then Argentina says, I'm sorry, you can't get them out at the official rate. You have to go to the parallel rate, and that's a depreciated from the official rate.

These are serious risks, and we price each one of them independently, and we take and hedge the risks that we don't think are priced appropriately. How do you hedge a risk like that. Is it just purely currency hedging or are there default hedges and other such insurance or derivative products. There is one of each flavor, and believe you me, we make sure the documentation or whatever we're hedging is air tight with respect to whatever we're trying

to hedge. So to take an interesting example from the nineties, actually, when Russia defaulted and devalued the ruble, those who had hedged their ruble exposure in Chicago found out that that hedge was worthless because it was a nondlibable currency and the Russians could just manipulate that market independent of the actual ruble spot exchange rates. So we are very careful to make sure whatever asset we own, however, the fixing mechanism is for that lines up with our hedge. We

don't want to have any basis risks. So when you say non deliverable, that entire hedge was just a complete waste of of capital and failed. It just did nothing. What was that? I recall the long term capital management blow up and I always thought of it as a problem that was based on leverage did hedging, And I know I'm asking you this out of left field, but was hedging a factor in the Russian default for an entity like LTCM. I don't know if Ruble was part

of their problem. Leverage was certainly part of their problem. Yeah, what's what's a hundred and one amongst friends? Right, Well, here's how I experienced it. So I'm a you know, twentysomething year old kid producing these relative value analytics, which is a lot of math but not a lot of

practical experience, right, I'm just a Wall Street strategist. And the salesperson who covered GMO also covered long term capital, and he would say, oh, I need a trade sheet for this Paris trade that you're recommending, and I'm like, okay,

well who's it for. And the choice there was how it was going to be levered, and GMO used very conservative leverage because we cared about well they cared now I care about default risk, and long term Capital would use a lot of leverage because they were trying to hedge market risk, right, And that simple choice turned out to be fatal for one and not the other. And so so that was what led me to be interested in GMO. I thought, Wow, gosh, these guys are smarter

than those Nobel laureates. You know, they're very simplistic, twenty year old view of the thing. That's really interesting. Although although I don't think you need a Nobel prize to know that one leverage probably isn't a great idea or is probably you know, the concern about about tail risk if it hedges market risk of the time. But but that one percent you don't make the curve and smash into the wall doesn't really work, does it? Apparently it doesn't.

Before we get into the details of some of the currency issues, I have to ask how big is the opportunity in e M bonds. How large is this market? I don't know compared to let's say, US corporates or treasuries. So round numbers for dollar denominated bonds, UH sovereign and Quality sovereign external debt in the MBI Global Index, it's around one point four trillion. For the Corporate e M Index SEMBI it's also around one point four trillion, and for local currency e M debt it's around two and

a half trillion. Now that's just the index eligible stuff. I think you could safely multiply that by another to capture all possible investible debt. Has this been exped ending, because what we seem to have seen over the past I don't know, a decade or two, is really a bit of a shortage of of high quality sovereign debt. What's the growth rate of of emerging market debt look like? So from memory, I would say each of these were probably about half again this size or half the size

maybe fifteen years ago. So it's growing um for sure, there's more interest in it. I was looking this morning at the Bloomberg Global Aggregate Index and they produced the sub index of negative yielding debt. That's about fourteen trillion, So folks are acced to find things with positive yields, and I think that's uh where e M debt has been coming in. Huh quite interesting. So we started talking a little bit about the spread in the e M debt and some of the currency risk. How do you

measure different currencies? You know, are the I know about the textbook models, but what's it like in the real world. It's funny that you say the textbook models. I gave a talk. We have a fall client conference, and in I wanted to give a talk about arbitrage, and that is an extremely dry topic, especially at a firm where you know, plausibly, I am following Jeremy Grantham himself on

on the stage. Now you have a bunch of people interested in equities and as dellocation, and I'm gonna try and get them to be really interested on Japanese cross currency basis and this kind of idea. And I started off with a quote because at this point it was just around the time that Japan was entering yield curve control.

And the quote that struck me was from I remember going to the I M F meaning so ostensibly just to think about em but if you think about the time period of European sovereign debt crisis is sort of coming to a day new mall on um. You know, the Cypriots had just defaulted on bank debts, so there's a lot of interesting stuff going on. And the most crowded room at that I M S in was the Bank of Japan. So the assistant governor, the fellow MoMA

says stakes are high if we fail. Economics textbooks might be wrong. That's uncertainty. And I could never forget that quot because I thought to myself, well, gosh, it seems like economics textbooks have been wrong for some time now. But what I'm interested in is the fact that the

finance textbooks are also wrong. Right. And um Olivier Blanchard gave a talk called how to teach intermediate Macroeconomics after the Crisis is after the Great Financial Crisis, and he says, I used to derive movements of exchange rates from uncovered interest rate parity conditions, and that was precise see the point of my talk. It used to be that you could look at interest rate differentials and price currency boards in developed marketings, right, not always an emerging markets, especially

in non deliverable emerging markets. But by this point in and for sure in developed markets were no longer following this right, there are huge cross currency bases going on, only eventually capped by the growing use of central bank swap lines right and lately repo lines in the case of say the People's Republic of China. So Um, I would say finance and macroeconomic textbooks are actually not all that useful these days because what you would have learned

hardly applies anymore. And there's an argument to be made that the same is true across all the various chapters in that those economic books, except for the most um reason updates that that they seem to be catching up a little bit. So let's talk about how you hedge in the real world some of the currency risk you're taking, and can you do that at reasonable prices? If you want to invest as a US investor in Brazil or or in a place like Thailand, how can you do

that without assuming too much currency risk? Well, you have a number of choices you can. If you're a dollar based investor, you can simply buy dollar Brazilian bombs, right, there aren't that many dollar Thai bombs, but you can buy dollar bombs. You can buy local currency denominated bombs and hedge the currency risk associated with those bombs. Um. And you know, to take a recent example, we found

fascinating Brazilian real denominated instrument. It's actually guaranteed by you and me the U S TASH pair and it was paying local Brazilian treasury so nt N plus forty basis points. So you could hedge out the currency risk and the interest rate risk of that thing and be left with a US guaranteed thing at sort of treasuries plus a hundred. That's a great bond. So so here's the question that I'm kind of intrigued by how do you determine whether to invest in the local currency or dollar based if

you're here in the US. Are there specific advantages and disadvantages, or does all the currency risk essentially wash out at the end. So this is a very very difficult question as an arbitrage focused person. When I think about naked currency risk, it's so far away from an arbitrage I of course lean on my team who are much smarter than I am in THEWS dimensions. So we we bucket the emerging currencies in two different buckets. On our floating

rate currencies and the investment pieces. There is the broad dollar goes up and down and takes all of them up and down with it, right, So we're going to pick relative winners and losers among that pack of floating rate currencies. That way, we insulate ourselves from broad dollar moves. So it's a relative value program for the very highly

managed and pegged currencies. We have a program that UM, one of the people on my team, developed, which tried to answer the question, given the ambient fundamentals of this particular country in terms of its balance of payments, it's place in the economic cycle, and so forth, what's the likelihood that we'll get to keep whatever the ex anti carry of the currency is. And so you know, if

this is a pegged currency. We were looking most recently at the Uzbek psalme and that currency is more managed against the Russian rouble than against the dollar per se, but it has very high yields for ten twelve percent, And so the question is is is that high enough or will we see a devaluation in the film that would wipe out that ex anti kerry. So that's how we think about the problem. So let's talk a little

bit about the state of e M investing today. So looking at this from an equity market perspective, I look at what took place in China and the change in the government and the change and attitudes towards companies like Ali Baba kind of makes me look at the country at least now and say they appear to be frightening. From an equity perspective, I'm would be reluctant to put capital at risk there. What do you make of the

geopolitical worlds and the various risks they present. Are there certain countries that, hey, there's no respect for the rule of law or sanctity of contract or private property for that matter, and therefore, regardless of the potential upside in the dead instruments, we just don't believe that any money is safe there because of that. It's a good question, and I would say for the fundamental credit analysts who

we have on the team, we rely a lot on precedence. Frankly, so I'll take an example from a few years ago in well, first I guess in Kazakhstan, and then later a few years later in in Azerbaijan, where we weren't involved in the kazak one Um. There was a big bank in Kazakhstan, and I actually don't know the name of it, but the ticker was Betas, and over the course of a weekend they rewrote their bankruptcy laws and

basically wiped out the bank creditors. H And so you you look at that and you say, gosh, that's a serious risk that you know we should take into account. If I said we weren't involved, because the risk premium that you were being paid over Kazakhstan wasn't enough to even contemplate such a day at the time. In that case, they went on to have quite a lot of debt relief for the country. So this is after that oil market collapse, and so oil sensitive countries like Kazakhstan needed

debt relief and so forth. You fast forward to Azerbaijan and there was a fascinating case that we were involved, and we owned some bonds from this bank called the International Bank of Azerbaijan. It was nineties something present government owned, so we considered it a state owned enterprise. That followed that same playbook. Over the weekend they wrote, rewrote their bankruptcy laws and so forth, and they gave a very mild haircut to creditors. It actually was more or less

MPV newt role. So they got all the reputational hit of doing this, but they got none of the debt relief that kazakh stile that under a head scratcher. Why on earth would they do this. It's still in the London courts. By the way, UM actually wrote to the Finance Minister of Azerbaijan. I said, this just doesn't make any sense. Conditional on your writing off creditors, you should

at least get some debt worthy for doing it. Um. But to your point, all you can do is file these away and understand what's happened in the past and make some educated judgment about how likely the current administration or dictator or whatever it is of the country is likely to do that in the future. That's an art. Like I said that the credit research people on my team have a very hard job. It sounds like they got some bad counsel at AER that. That's kind of interesting.

Let's go in the opposite direction. When you look around the world, where is there safe E M debt? And I'm assuming the safer the debt, perhaps the lower the potential alpha you're going to see from that. Is that a fair way to look at this? You're asking about

a cake and eating it too question? Pretty much? Yeah, So earlier we talked about fourteen trillion in negative yielding debt, So we ask ourselves the purpose of holding a certain class of government debt We used to refer to it as the anchor to windward portfolio right at the hell or high water portfolio is to have ballast in your portfolio in the event that there's a supere equity market decline or risk assets have their own decline. Whatever that

is the cost of holding that debt right now. In many of the major markets, whether it's you know, buns or oats or jgbs or so forth, is holding a negative yielding asset right it's an insurance premium almost. So the question is is can you choose from the group of positive yielding e M local markets on a currency hedged or unhedged basis in the event that you're willing to take some currency risk and you think it's well priced that has the defensive properties of these developed markets

bonds but with positive yields. And the answer to that is yes, there's a small clutch of these things. They are not UM countries for the most part. They're not the poor countries. They are the Taiwans and Koreas of the world. But those markets do present as relatively safe now. Not safe from financial repression, none of us is safe from financial repression, but safe in a anchor to winward

statistical sense, really really kind of interesting. What parts of the world are you excited about any any countries that you're looking at and thinking, wow, this is underprised. Then

there's a ton of upside here. I would say the thing that's glaring right now are the stressed and distressed UM emerging countries so we're at a if you take out the the real wives of the pandemic, the difference between the high yield sub piece of our hard currency benchmark versus the investment grade one, it's at very very wide levels, right, so not pandemic levels, but very wide

levels about five over investment grades. Within that subset, there are arbitrage like positions that can be set up and buy that. What I mean is, these are countries whose bond prices indicate a high likelihood of default. So can you ensure the default case while holding on for the no default case? And in a handful of those of those countries, the answer to that is yes, And I

think those makes some of the most interesting opportunities. You want to name names, what what countries UH present those sort of opportunities, I would say Ivory Coast is one, Ghana is one, um El Salvador is one. So there's some interesting ones, really interesting. You mentioned the response to the pandemic. How did various emerging market countries and their governments respond to COVID and the financial crisis were in O eight oh nine? Was this really developed world issue

in terms of UH the Great Financial Crisis? Or did an impact e M significantly also, well, both crises really are exogenous shocks from the perspective of the emerging markets, right, Unlike where we were the epicenter. Let's say in two thousand and eight, emerging markets were run over as bystanders, right, and I would say the whole world was run over

as as part of COVID. So whenever you have these external crises that impinge upon the markets, there are some very well established programs out there for the sovereigns in our markets to make sure it doesn't become a systemic crisis. So if you think about two thousand and eight, there was a very standard playbook already in place to help some of the weaker credit um whose debt was sustainable in the medium term, they just had to rollover problem, and the I m F was there to help them

roll over their deaths until market access was regained. Some of them, of course, their debt was not sustainable in the medium term and so they elected to default. So in Ecuador defaulted in two thousand eight, for example. What about the early when we saw a lot of Southern Europe running into problems. Do we really think about Greece as an emerging market or is that more of a developed nation with long history of credit problems. It's a

great question. So earlier, when I was trying to lay out the taxonomy of what's considered an emerging country from an investment perspective, I said, it's usually lower middle income countries or countries that have defaulted, even if they're high income, and I would put Greece in that louder category. How did that Southern European crisis, and I remember it seemed like it was never going to end. How did that

affect the rest of the universe. I don't want to use a dirty word like contains, but was that primarily focused in Europe? Or did the tremors from that radiate outwards to all the various emerging market debt? Well, it's a as a relative value construct, of course it would radiate out. I mean, if you're going to get paid five over bunds for BTPs or Spanish government bonds, why on earth would you buy emerging markets debt? Right? So, of course our spreads widened in sympathy. And I used

to say that you know it's it's Spain default. Right. If a major developed markets government elects to default, the signaling for our markets will be very very bad. Right. Just think about how terrible that would be. Argentina would just default because they would say, well, if the Spanish aren't going to pay, we're not going to pay, even

if they could pay right. Um, But I thought one of the most interesting things in two thousand and ten, Mexico issued its first century bond, hundred year bond and the Mexican Hacienda. The Debt Capital Markets group there was very very clever, and they figured out which in vestors would be most likely to dip their toes into this hundred year Mexican bond, and they offered it shockingly cheap to the Mexican curve for those of us brave enough

to do it. And by the way, they issued it at a large original issue discount, whichman and had a lot of default protection relative to other Mexican bonds. It was nirvana of a bond for us. We bought as much of it as we could. We were the largest holder of this bond, even though we weren't a very large emerging debt asset manager, and we couldn't figure out, like, why why would Mexico give us such a free lunch?

It just doesn't make any sense. And our sovereign analysts came up with a theory, which I think is a reasonable one. He said, here's the thing. Us rates are low, interest rates are low, so while the spread is very wide, the yield is one of the lowest that Mexico is ever issued at. And that's politically popular. On top of that, it's politically popular to say we Mexico can borrow for

a hundred years while Fain is struggling. So a little bit of political populism and national pride allows them to offer this, and and it's relatively in expensive money for for them, isn't it. That's right, that's right. That was our only Mexican holding for years until Brexit came along and a Sterling version of that bond became shockingly cheap to it, so we got rid of all of our dollar bonds and bought Sterling bonds relative value playing so from Azerberjan to the Ivory Coast, to Mexico to to

all around the world. It kind of raises an interesting question. So you mentioned you had an analyst who covered Mexican debt. How do you analyze governments or companies for that matter, that are halfway around the world and presents a risk of all sorts of upheaval, politics, currency crisis, defaults on debts. Do you have to have boots on the ground in each country or can you do this? You know from Afar?

What do you lose not participating on the ground. In my opinion, this is more of a marketing question than an investing question. Really interesting tell us more so if you think through the process that I've just described, where you load your chips, your alpha chips on arbitrage like things where you don't even really care which country you're

talking about. Frankly, right, then from that perspective, no, you don't need boots on the ground because you are emphasizing that activity and de emphasizing what you think you know about any particular country. And so the country tilts that we remain with are mostly a function of whether or not there are arbitrage like things to do in that country. You know, if I take Papa New Guinea or t Jikistan, there's there's nothing to do there. You either buy the

one bond they have or you don't. It's pure country selections. So we just don't bother. Right, So you're saying this is really a quantitative form of analytics and not a squish your qualitative approach. That's correct. Correct if you've marketed yourself as you know, boots on the ground and we think we can get more information than other people, which, by the way, regulation f D wasn't just for equities, it's for everybody. Everybody gets the same information at the

same time, the same road shows the same everything. It's not true even overseas. I mean, I would think that if you're issuing a bond and equador or what the hell do you care about the SEC rules? Oh, these are SEC registered bonds. None of the market is euro clear, US law, UK law. The country is emerging, gotcha. That's really the idea of the nineties, where I go and find out the vote and I tell the US you know, the worldwide JAW Oregon salesforce. What the thing is going

to be? That kind of inside knowledge that doesn't exist anymore, right, right? That makes that makes a lot of sense um to other questions about what's going on today. So inflation seems to be the watchword in one along with interest rates that seem to follow. Uh, these are popular subjects of at the moment. What do you make of inflation as a risk both to the rate regime we see and and how does that impact emerging market debt. So inflation is a form of default where you don't have to

declare it. Mm hmm. Right. So, from everything I know about sovereigns, when they get their backs against the wall and eventually have to make a political choice to default, it's a very it's to really a very unpopular decision. And if you can, you want to, you know, conditional on being in that position, you want to heap the losses on foreigners. Right. That's why it used to be that countries would default on their foreign currency debt because

that's where the foreigners were, right. Russia changed that calculus because they defaulted on local currency debt, which is where the foreigners were, and paid dollar debt, which is where the Russian ologogums were. So once you're in that position, if you can use financial repression in the form of negative real interest rates partially through higher inflation, right, then you can default slowly without having to make a political

decision to say we're not going to pay. And that's how that's why, in my opinion, you see shadow assets trying to pop up so if all the developed markets are all using financial repression simultaneously, you can't escape. You can escape by going to emerging market, but they're going to try and do the same thing. If you're China, you used to have a closed capital system. So it's very hard for people to say, I don't like negative real interest rates here, I'm going to go by you know,

US dollar bonds or something like that. Was hard for citizens to change their currency. That's evolved a little bit, but it's still fairly hard. So you see people playing hope as a strategy. I would say cryptocurrency is hope is a strategy, and I don't I know. I'm a sitting duck for financial repression, so I'm going to hope that this other thing is better because there's nowhere else to escape. Do you want to define financial repression? I hear that phrase constantly, and I always get the sense

people use it very differently. So what I mean by financial repression is a running down of debts by allowing than the earnings, so whether it's corporate earnings or or personal earnings or government earnings to be inflated through the inflation process, while the debts that are owed, whether it's m zero in the form of your bank note in your wallet or in your bank account all the way out to your US tenure bond yielding one forty something.

If inflation is higher than that, then you're eroding the real value of those debts, which is somebody else's assets, right, And that's how you run down your debt GDP slowly over time. But you don't actually default, you don't. You don't fail to pay, you just fail to pay in real terms. Really quite quite interesting. So you have decades of experience looking at emerging markets. You've lived through economic, financial credit crisis, all manner of mayhem in these markets.

What have you learned about these type of situations over the course of your career? What what's your big take away here? Well, you've probably read Tolstoy, so the idea that every family is unhappy in its own way, every crisis is unhappy in its own way. Right. There are elements that may be the same, but each one is

slightly different. And an early book that was given to me when I started, while there were two books when I started in the emerging debt markets about the relationship between creditors and debtors and what happens when they get into crisis. One is called Banks, Borrowers and the Establishment, which is great book, and the other one is called

Debt Games. And in Debt Games they look through all the crises up until the moment that book was written, and they use a game theoretic approach to the strategic game of creditors and debtors as they head into a failure to pay moment. And so you can try and conceptualize things that way and say, Okay, what are the facts that we have? Are the known unknowns about this particular situation and how does it line up with our

past experience? But again, there's still some unknown unknowns every time you do that, so you just have to be humble about what is really knowable in any given situation. So so I see Debt Games. Um, that's a vin odd Aga wild debt game, strategic international interaction in international debt rescheduling. Is that the book you're referring to? Yes? And what was the other book? I'm sorry I missed it.

It's called Banks, Borrowers and the Establishment. It's I want to say, oh, I found it right here, it is, got it? It was I was It's Banks borrowers and the establishment or revisionist account of the international debt crisis is that it yes, quite interesting. Um So go on, I'm sorry, know I interrupted you about that. I just

wanted to track these because they sound intrigue. Yeah, I know, they're super It's it's mostly about how to take these strategic interactions and map them onto the utility functions of the people involved. Right, So, my utility function as an investor on behalf of you know, endowments and pensions and foundations or whatever, is to maximize alpha relative to my benchmark.

That's I have a very very transparent utility function. The the borrower, right, let's say it's a government borrower, may not be so transparent, and their utility function can shift quickly over time. And so just thinking about how that evolves and trying to make some guesses. And by the way, this administration might get voted out of office over the term of the debt of the bonds that you own, and so you know, your opinion is only good so

long as so and so is in office. You know a great example of that was Ecuador earlier this year, where you vote in the new guy, and the new guy is more investor friendly and the bonds go up. So you know that's that's a it's a pretty big change. Huh. So you you've seen a lot over the course of your career. I'm gonna throw you a curve ball now and ask. In two thousand and two, you leave JP Morgan to train for a spot on the US national rowing team to compete at the Olympics in Athens and

four tell us about that. What motivated it? I'm gonna assume you weren't just going to Athens to check out their debt. What what got you involved in in crew and rowing? Yeah? So after I moved back from Brazil and I took over a pretty big job at EPE Morigan and it was right as the Asian financial crisis came, and that was a hellish period for about eighteen months through Russia's default and I just burned out a lot.

And one of my clients, who was a prop trader at Banker's Trust, said, I think you need to take up a sport. You know, you work all the time. And I said, well, I live in Manhattan, I live in a village. What am I like? What sport am I going to take up? He says, why don't you take up rowing? Nobody needs you at four in the morning. And so I bought a car, I joined a rowing club. I loved it. I got more serious. I transferred to the New York Athletic Club and had a great coach

there who watched an evolution that was very subtle. And this is partially a story of JP Morgan. So JP Morgan had an extremely special culture. It's hard to describe until it was gone right. That was the only job I've ever had, but spot JP Morgan and that culture fell apart. And so my coach, who was watching me get faster and faster simultaneously saw me not love my job anymore. He's like, you used to be first off the water, jump in your little car, get to your job,

be at your desk at seven in the morning. Now I see you hang out, you have breakfast with the team. What's going on? And I said, I don't love my job anymore. And he says, you're so talented. Why don't you quit your job then and try and train for Athens? And so I said, you know what, You're right, and I did. And this was the woman's double event, which is really a challenging event. Isn't it. Well, this is

the women's lightweight double. Yeah. So in Olympic women's rowing, if you're an open weight, there's the single, the double, the four, the quad, and the eight, and lightweight rowing there's the double. So you're either number one and two in the country or you're not so and plus it's a lot of dieting. You had to weigh a very small amount. He was really intense to do. And my coach, you know, when I showed up for practice the next day and I said, I quit my job, Benny, I'm

ready to go. He says, all right, now you have to move to Boston because that's where all the lightweight rowers. I couldn't believe it. I was like, what I thought I was going to row for you. He says, no, you're rowing for Athens. So you moved to Boston. So that's amazing. Sorry, so that's what led you to Boston, and I guess ultimately to g m O. Yep, yep. I. I mean, I didn't make the team, and I was

very desponded about that. But I didn't meet a guy who's now my wonderful and long suffering husband, and I said, I'm not moving back to New York. So then I thought, what am I going to do? So I called up g M O and said, hey, you remember me, and they're like, yeah, I remember you said I need a job. They said, okay, did they ask what have you been doing for the past two years since you left JPM? And they did. And fortunately the head of the team

at the time himself is really big into sports. We still follow each other on Strava now that he's retired, and so most of my interview with him was about my power to weight ratio. I'm not kidding, that's amazing. That's really that's really amazing. So how how competitive were you in the women's lightweight doubles? Did how close did you come to actually go on to Athens? Because that's

supposed to be an incredibly competitive slot. So in two thousand and three, which is the year leading up where they're going to decide the likely national teams the following year, we came in second at trials. Now, interestingly enough, I still row every day and on the weekends. We have a house at the Cape and I've started rowing down there, and one of the guys I now row with is the coach of the other women's double and I remember the first day that I showed up. I was so nervous.

I thought, oh my god, I'm gonna Jim Deeps and I you know, I said hi, Mr Deets and he says, vander Steel, you wrote against you know Stacy. I'm like, yes, He's like you you did a good job. I was so pleased. And then this year at the head of the child we raised my partner and I raced against a couple of the open weight women from Athens, Hillary and Marion. We just lost. So it's fun to still race these women all of these years later. Of course we have kids and jobs and other stuff going on.

What do you work out on at home? Are you using a rowing machine or you're not in the water every day? Certainly not this time a year. We were out on Saturday and Sunday. This morning. I have a group called the Early Birds. It's all of these fabulous women. Um and at the race starts, so you just hit the faith time. Whoever shows up today it was Sam and Alex and you know, we had to work out it agreed to yesterday. Normally we would do it at the rowing club on the rowing machines, but right now

with COVID, we just do it over the face time. Huh, what machine didn't get out of bed without these women? By the way, is this any particular machine or you? How are you actually doing this? The reason I ask is I have a hydro which I kind of get very lax when the weather is nice and I'd rather be outside. But around this time a year, it's like, okay, it's time to start, and I'm just about ready to mid December, just about ready to say all right, no

more goofing around, let's let's hit the machine. Well, that looks like a very very sticky machine I've seen not only have I seen the advertisement for it, but the people who do the videos, Yeah, they're great. They're out on the Charles all the time, so we see them go by. That's funny. But what we row on concept twos, which are just the basic equipment, well, you know, I went.

I learned recently that one of the women in from back in the day, and it's woman could Trine's working on an improvement to what we have going, which is just literally FaceTime. So we're you know, got video chat going on, but we can't see each other's monitors as that we were all there together. So she's working on an enhancement where it'll be FaceTime plus your ability to see other people's scores, which really gets your juices going.

You know, that's the secret source of Peloton and other you know, competitive machines like Hydro and I'm sure there's a Nordic Trek has something similar. Um. At a certain point, it just you know, becomes I just want a little piece and quiet, and the videos are very it's a relaxing workout. Even if you work out work up a sweat. Um, you're much more competitive in that space. So I don't dare, but it sounds like it's really fascinating. It's amazing you've

stayed with it all these times. I know, it's amazing you stayed with it all this time. I know I only speaking of time. I know only have for a few more moments. Let's jump to our favorite questions that we ask all of our guests, starting with tell us what you're streaming these days? Would have been keeping you entertained?

You and the family entertained during the lockdown. Well, my two teenage daughters include me, and the other day they said, Mom, you haven't opened your Spotify wrapped yet m hm, So I don't know if you know what that is, but that's where Spotify tells you what you most listen to, so it's perfect timing. Um. So according to Spotify, what I most listened to is eminem, Jay, z n F and Rihanna. So these are all upbeat workout music, upbeat workout stuff. Yeah, I listened to a lot of the

dred and eight beat per minute running workout stuff. So that's my hypothesis where that comes from. Um, in terms of watching stuff, the girls have gotten us into a show. It's I don't even think it's on Netflix. I think it's on the YouTube called The try Hi Guys. So it's these four hilarious guys who are on a cooking show where they're not allowed to use any recipes and they just make stuff up. So it's very very funny. We laugh a lot about that, The Try Guys. All right,

I see this on YouTube that does look amusing. Um, tell us about your early mentors who helped to shape your career. Well, UM, certainly my parents, my older half brothers and sisters. Um, they're much much older than I am, and you know they had interesting careers that I learned about growing up. Uh. I would say my high school math teacher, one of my college journalism professors who was at my wedding. I'm still very good friends with um at JP Morgan. My god, there would be too many

to mention there was. The place was just teeming with unbelievable people. But one really comes to mind as fellow with Mike Symbolist, who still works there. Um he he taught me all about relative value. He was there, he you know, watched the GMO versus long term UH outcomes. He was the person who suggested I go to Brazil. You know, he said, listen, this relative value work is really interesting and we all really like it. But you're not going to win any I awards or get paid

much for doing it. You need to be one of these strategists. You need you need to be a person who can talk about the country. And so he said, just take the job in Brazil. I didn't. I couldn't speak Portuguese and know anything about Brazil. He's like, uh, it'll be fine, and it was so fine. Um. Interesting. Let's let's talk about books you mentioned too. What are some of your favorite what do what do you reading currently?

So Um, when I thought about what books do I most love, I thought of it more in a desert island books. So you're stranded on a desert island, you can only bring so many books with you. And if that were the case, the ones that come to mind top are Throws, Pillars of Hercules, or O'donchy's Running in the Family, or the English Patients. Um. I love Ann Patchett, she wrote Belle Conto and Patron Sainted Liars. And then I think I would always need to have a copy

of Hofstadter's godel esher Bach, which keeps your mind sharp. Um, I'm looking at a copy that right now. That was a college book that I keep swearing I'm going to reread, and I have yet to honor that promise. It's it's a great book, right written by my one of my researches, JP Morgan's mom's boyfriend. Interesting, any of the books you want to mention or I didn't want to cut you off? Yeah, I know. After that, like, you know, the usual reading stuff.

I like to read literature. I love Barnes McEwen. That kind of stuff sounds sounds like that's a quite a great list. What sort of advice would you give to a recent college grad who was interested in a career in either fixed income or emerging market, Well, definitely try and get yourself a job at one of the big

banks and go through the training program experience. I mean, you get a free m b A, you get to rotate around and figure out what you like, because I think it's very hard to imagine what you're going to like without actually doing it right. Um. After that, I would say, I think very very carefully about cultural fit. I didn't know that that mattered so much, like I said, until it was gone. So if you're not feeling it,

move on. Really interesting, and our final question, what do you know about the world of investing today, be it emerging market, dead heads, funds, large corporate um investing strategies that you wish you knew thirty years or so ago when you were first getting started. Mm hmm, Well, I would say, in line with the last question, you've got to try stuff, right. I think it's hard for me to say what do I wish that I had known? I think you've got to try stuff, fail, try again.

That's how you learn, and I can tell you to avoid mistakes, but until you make them yourself. It's going to be really difficult. I remember considering going to get a PhD actually while I was at Shaping Morgan, thinking oh, that would be something useful to have. And I went out to Stanford and met with a person who I thought I wanted to study under. And I explained the use case, like why do I want to have this PhD? And I explained to what I did for a living.

He says, you don't need this PhD to do what you're doing for a living. If that's your use case, forget it. You are a practitioner already. So um, I'm not sure that I would have known that without actually practicing it. Huh. That's really kind of intriguing. We've been speaking to Tina vander Steel. She is the head of Emerging Country Debt at GMO, where she is also a partner. If you enjoy this conversation, check out any of our

previous three hundred and seventy seven discussions we've had. You can find those at iTunes, Spotify, wherever you buy your favorite podcasts. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Sign up from my daily reads at rid Halts dot com, follow me on Twitter at rit Halts. I would be remiss if I did not thank the correct team that helps me put together this conversation each week. Mohammed Ramaui is my audio engineer. Paris Wald is my you Sir.

Michael Batnick is my head of research. A ticket of Alberoni is our project manager. I'm Barry Ritolts. You've been listening to the asker's business on Bloomberg, Brady