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This is Master's in Business with Barry red Holts on Bloomberg Radio.
This week on the podcast, another extra special guest. If you are at all interested in fixed income, in cross asset management, in intermarket analysis, in understanding the many moving parts that go into putting together a near trillion dollar fixed income portfolio, well then strap yourself in Greg Peters. Really, I don't know who's better to discuss this. He's been with Pgum for the past decade, where he helps oversee a giant pile of capital on behalf of a variety
of institutional investors. He's kind of uniquely situated in having spent a lot of his career not only overseeing fixed income portfolios, but also part of a multisector team. Pigum is kind of unique that they have a very different approach than a lot of companies do. I found the conversation to be fascinating and I think you will also. With no further ado my discussion with pagam's Greg Peters.
Thanks for having me back.
So let's start out with your background. You get a BA in Finance from the College of New Jersey and an MBA from Fordham University. Sounds like finance was always the career plan.
Yeah, I don't know about that.
You know, what was the original thinking.
I don't know what my original thinking was. I kind of fancied myself as more of a liberal arts type of individual, Like I had a English minor. I studied as much as I could around literature and art, and then really just did finance because I felt I needed something engible. So it's not a great story, you know, as if you're on the show, but I.
Hear people saying, well, you know, economics, business was my backup and they end up being very successful in those fields. So let's talk a little bit about your experience at the US Treasury Department. How'd you get there and what'd you do while you were there?
Yeah, so I was part of After I graduated college, I took some time off. I traveled through Europe. I bartended over the summer prior to so I could fund my trip abroad. I came back, I realized I needed to get a job, and or more importantly, my father told me I needed to get a job. And he's the one who actually cut the ad out of the paper. I'm dating myself but that's when I was put as in the paper, and and the role was for a bank examiner, so on the regulatory side with the Office
of Thrift Supervision. So if you recall that was the agency that was created. It is a cleanup for the SNL crisis. And so I was fortunate to land a job there, and I gotta tell you, Barry, it was a fantastic, fantastic training ground. I learned so much and I'm really quite grateful for it.
So when we look at US treasuries right that they're about forty percent of the Bloomberg Barclays AG, the largest set of holdings by far. Any of your experience at Treasury help you when you're looking at a bond portfolio that very often is contains a lot of treasuries themselves.
I would say my bank regulatory background was more instructive and how I think about the financial system writ large, the flow of money so to speak, and credit right and that was probably more of a defining characteristic of that rain or that time than kind of the impact on the US treasury market, so that that came later.
Next up, you're at Solomon Smith Barney. What was the energy like there? I recall them, you know, Liar's Poker the eighties and nineties. They were a bond powerhouse for a long time.
That was a real experience, so being on that trading floor. So I started out on the mortgage trading, mortgage derivative side. I moved or was moved into research, which was really quite a blow for me at the time. You know, moving from a trading seat to a research seat was not something that one desired. It took me a while to kind of get over that, to be quite frank, but I realized, man, that was the best thing for me. It was the best thing for my personality. It allowed
me to zoom out understand markets more critically. But Solomon itself was such a unique institution. It was excellent personified in the bond market. From a research perspective, from a trading perspective, it was by far the best trading operation I've ever seen. The investment grade trading desk of Brian Eckerson, of Brian Rianno and John Eckerson was just fantastic. So it really really just showed me what greatness is about and what swagger is about.
Swagger to say the least, were you at Solomon during the financial crisis, and what was that desk like back then?
Now, So I moved in two thousand almost if you mark the all time high Morgan Stanley's stock, you know, pre adjusted, it was trading like an Internet. That's the day I joined Morgan Stanley and so that was that was the Internet bubble blowing up.
So I joined March two thousand something like.
Yeah, it was early two thousand, and that was also a fantastic experience. So I had the financial crisis through the Morgan Stanley lens.
So you had a couple of really interesting titles in Morgan Stanley. The first is pretty straightforward Director of Fixed Income and Economic Research. I don't think there's anything especially unusual about that. But the second title, Chief Global cross Asset Strategist. You don't hear that all that often tell us about that role. And what'd you do there in the two.
Thousand Yeah, so that was basically a derivative, no pun intended of a global strategist role that really focused on the linkages across markets. And so the thought.
Meaning intermarket analysis. If this happens in oil, here's what it means for.
Bonds precisely right, And I actually think that is possibly the most important aspect of investing. I think investors are very narrowly focused, and rightfully so, expertise is awarded, but what happens away from you matters a whole heck of a lot to what your current investment look like and your own portfolio and your own trading. And so that
role was emblematic of the importance of that. And so it's a terrible title, right, but it's one that I think is quite important and made me a much better investor.
You were there during the John mac era. He was a guest on the show last year. What a fascinating guy and fascinating career. What was it like working under his stewardship?
John Mac defined leadership I think of Morgan Stanley and John macus anonymous. I think he was a fantastic leader. We worked very closely together during the crisis. I remember, you know, during the kind of the darkest days of the financial crisis, we have our morning risk meeting and he comes in, sits on a dais and we're talking and you know, Lehman was basically you know, just just
gone under. It's about to and I make this comment, I don't think it's about Lehman, It's about aig and he just went crazy on me, just yelling at me in front of like all these people. But I have nothing but the utmost respect for John. I think he's just embodies leadership and all.
And I think history proved you right, Leman. I like to describe Lehman Brothers as the first trailer that was in the trailer park that was hit by the tornado. But the tornado was coming regardless of what happened.
To Leman, absolutely, and you know, I stand by that statement. But he definitely dressed me down in a real strong emotional way.
Huh. So let's talk a little bit about you're at Morgan Stanley for a better part of a decade. How did that experience all ltimately help you doing what you're doing today, which is co head of the multi sector team.
Yeah, so I was fortunate. So I left Morgan Stanley in twenty thirteen. I took some took some time off, but essentially I was just tired of the self side. I wanted to really begin to invest on my own, so I took some time off. I looked at different options, starting up my own fund, creating a new multi asset business at a pe firm and then PGIM came about, and I do have some new Jersey roots and it kind of felt, you know, natural, and they really took
a chance on me. As you know, Mike Lillard, who is my recently retired boss, is like, what you were doing at Morgan Stanley is directly applicable to what we're doing here. It just has a different rapper or a different name to it. And so they really with me in a position to succeed because what PGM is really about is a team construct. So was really helped by that. So that was really the move.
I'm glad you brought up the team construct because one of things when you look at the org chart for PGM, you can't help but notice all of the co positions. So your co CIO, the company itself has co CEOs and when you go down that chart, there are cos here and there pretty regularly. What's the thought process of having dual leadership in all these different departments?
Yeah, you know, coming from the street, it's a hard pill to swallow oftentimes because many think of cos as a game of thrones exercise, Right, who's going to win, who's going to lose? At PGM and in our fixed income organization is very different. It is shared responsibility, shared leadership.
We do think we're better together than a part, and there's a lot of responsibility, and you could make an argument that as a fiduciary to your clients and the stewards of capital, that that actually is what is a better outcome. So I think it really works for us. We typically have complementary skill sets and it's additive and it works really well for us as an organization, really really interesting.
A lot of people seem to assume that, oh, pgeum, they're running money for crudential insurance, but it's not just prue. You guys are running money for a lot of institutional clients, aren't you.
Absolutely, So the way our AOM is broken out, a little under a third is the insurance company. We think about them as a very important client, of course, but outside of that, the other two thirds is outside capital, so whether it's on the retail or institutional side. So it's a very diverse group group of investors. I think we have over eleven hundred different investors, and not including
the small retail I just mean institutionally. So yes, it's a broad swath of clients that we cover from pension funds, sovereign wealth funds, retail, you name it.
So that's over half a trillion dollars in non prudential just bonds. We're not talking about anything else. Let's talk about what it's like being a co CIO for fixed income. How do you share the responsibilities, who is in charge of what? And do you ever kind of run into complications with that?
Yeah, So my co is Craig Dueling, who incidentally was my boss since the day I joined. Oh yeah, he's a fantastic boss. So I feel very fortunate. We've been sitting next to each other since the day I joined, and we have a real complementary skill set. So he focuses largely on insurance company Japan. You know, multisector is you know, part of my remit because I'm on the fund.
So I'm a portfolio manager on those funds. So you know that is a you know, big responsibility of course, but we we really work together and try to critically assess the process and how do we improve the process of investing across the entire floor.
So I could see how having two sets of eyes is advantageous when you have co heads for the department. What are the challenges I can imagine it's not easy when you sort of have to reach a happy consensus on all major decisions.
You know, I'll take the other side of that to a degree. I think conflict is a good thing, and so I'm not you know, saying Game of Thrones type of conflict to go back to that reference. But but you know, I'm very much into the idea of pre mortem. So I want to suss out the issues I want to debate. We have a real culture of debate, you know, at the firm, and so I think having that in the mix prior to whether getsing a portfolio or making decision,
I think is critically important. You know, command and control oftentimes has lots of blind spots to it right, It suffers from that individual's biases, and I think that's dangerous. So having that, you know, checks and balances, I think is incredibly powerful. And you know, you have to trust each other as an individual and as an organization as it's not malicious. Someone disagreeing with you is not a
malicious act exactly quite the opposite. And you know, if you think that you're all in it together, working for a common and purposed and I think it works pretty well.
I love the concept of doing the pre mortems while you're unemotional and objective, because once something hits the fan and you're trying to figure out, hey, what do we do here, it's a very different set of analyzes, isn't it.
Absolutely? And you know, I'm a very big fan of looking at a probabilistic scenario based approach, and I think the important part of that exercise is to analyze those different possibilities, right, and think about what your portfolio would look like, what a certain trade will look like before it happens, right, And so you shouldn't be so surprised
by it. And of course you're always surprised because you can never kind of put the proper scenarios around everything, of course, But at the same time, I think looking at it through a multiple scenario lens is incredibly powerful.
So last year twenty twenty three, we saw treasure yields hit their highest levels since I don't know, I want to say seven since right before the financial crisis. How are you guys managing your duration? Here? Are you short term? Are you long term? Where you relative to where Pgum's fixed income duration was in the twenty tens.
Yeah, so we were known as the lower for longer institution. So you know, when the world thought rates would rise, we were like, no, rates are here to stay last decade on the yeah, before twenty twenty, and so that was kind of our calling card and that worked really, really well, that transition from you know, twenty twenty post pandemic. Quite candidly, we were a little slow to react on
the secular shift. So if I had to, you know, go back and revisit, you know, items that we didn't get right, that would be one that we did not get right. At the same time, though, looking forward, we've really moved from lower to longer to higher for longer, right, which doesn't have the same ring to it, of course, but you know, we do think the world has changed and we see a little more growth, kind of secular growth, a little more inflation on a secular basis as well,
and that should translate to a higher bond yields. So long winded ways saying we've been short duration, so we've felt that our rates have been poised to rise all else equal and stay high. And that's where we are today.
At what point in the cycle. Do you say, okay, it feels pretty safe to go out on the duration curve and instead of being three to five years of five to seven years, maybe we could be ten, seven to ten years.
Here's the irony is that given where yields are, you actually get paid to be out there, whether yields rally or even sell off a little, right, So we were suffering from such a recency bias where so many investors haven't seen the world pre GFC the you know, yields weren't supposed to be that low, right, and so you know, all the modeling that well, you know, the fan has to bring back rates to zero again and so on
and so forth. I think is really really miscast. And so you know, I think having duration in a portfolio, and we got a whiff of that at the end of last year, right when there was this ferocious rally for whatever reason I don't recall necessarily it didn't make a lot of sense to me, but it just tells you have duration on you're getting paid carried to do it, and you have this protective measure where if the world does go around, if a recession does hit, growth does
slow for whatever reason, it has that protective characteristic. Importantly, it didn't have that before, right, So when rates were effectively at zero, it was a didn't make sense to be long that instrument because there was no positive carry. And then if a recession did hit, there was no room or scope for rates to rally. So bonds lost their way, and which is why everyone was questioning the
sixty forty efficacy. And it was a good question. But I think we're in a very different place today, and I think bonds have a tremendous amount of value in a balanced portfolio.
The great irony is prior to the twenty twenty two to twenty three rate hiking cycle, there was an entire generation of bond managers, traders, analysts who really have never lived through a rising rate environment. They've been at zero practically since September eleventh. Since dot Com implosion, rates have only trended lower and stayed low for forever. As you said, that really isn't very normal, isn't How far are we from what you would think of as fairly normalized rates.
I think we are finally in a normal zone. But you're quite right, you need to zoom out. So financial history didn't start in two thousand, right as well before that, So we have this chart that has one hundred and fifty years of yields, right, you know, so you know, looking at different regime chefs. So I think we are finally in a more normal environment. I also believe that, you know, history will continue to shine a really unfavorable light on a central bank policy of zero rates and
negative rates. Right if you kind of asked the common person, you know, why is a bond yield negative? I don't think anyone could come up with a great reason. Kind of us, in a professional realm, convince ourselves why. But was that really true? Probably not? So, So I think we're more normal now, and I think it makes sense, and I feel pretty good about it.
So we're talking about rates, but let's go beyond rates. What do you see on the credit quality side? How significant is that? I've noticed the gap between high yields and riskless seems to be kind of tight these days. How do you look at the credit quality side?
Credit's tricky. So it's important to note that we have not had a credit cycle, you know, since the early two thousands, right, so kind of the late nineties cycle. As a consequence of that, we really haven't experienced credit losses, right, We've had these the these swoons of liquidity risk, and obviously we have the GFC. But what we've seen is that central banks have stepped in very quickly to kind of rescue. But you haven't seen a real uptick in
to faults, right, distressing the faults. You're starting to see that pick up, and I believe that distressing default activity will remain high, just given so many balance sheets were built on the backs of zero interest rates, and as that gets refinanced, that puts more pressure on these businesses to survive, and that just leads to more handing over the keys type of you know situations.
So two questions about that. First, is that an early warning sign of something untoward in the economy? And second, if we're seeing these defaults take up, why is there such a tight spread between high quality corporates and high risk corporates.
I think it is an early warning sign, for sure. I also think it's a resumption of normalcy, so we're in a more normal environment. I also think it's incredibly opportunistic for investors like us as well, so I'm excited
about it. But your point around the compression, though, is an excellent one, and so I still believe, we still believe a PGM that investors are overpaying for credit risk, whether it's down the capital stack in a structured product, whether it's single B versus a triple B as I think once again the recency bias aspect of it, right, So you know, I see a lot more value on the higher quality scale than the lower quality. I think
the relative value is inverted. And if you look at just kind of broad index levels, we're in the tightest decile for investment grade corpus as well as high yield. So there's not a lot of room to tighten more from here.
So some of the criticism I've seen of private debt and private credit is exactly what you've said generally, which is some investors are overpaying for risk. Do you look at the world of private credit and in terms of intermarket analysis, how does that make you think about publicly traded fixed income?
Yeah, so I do look at the world of private credit, and I look across the broad spectrum of credit, and so what you've seen over the past is called seven to ten years is obviously this tremendous growth in private credit, but that has actually taken risk out of the public markets, right, And I think the most important market to focused on focus on is the lever loan market, right because it's kind of private, but it's kind of public, so it's
kind of the fulcrum point. And so what we've seen is leverage really ramp up on the levered loan side, and so kind of the LBO transactions, the pro forma leverage and ibadah has been heroic, it hasn't come through. So that is I think the Canary and the coal mine. Interestingly enough, that has been the best performing fixed income
an asset over the past eighteen months or so. So you know, the joke's kind of been on me for a little bit, but I do think that gives you a gateway into where the leverage is, and the leverage in the system is in a more opaque area and not the public area, and that is quite worrisome for me for me when we think about kind of the next recession.
So I'm going to assume that in the current environment, you're not looking to dial up credit risk.
No, No, So I would say two things. One is that kind of broad kind of macro credit risk we've we've taken now we've continue to you know, take down just kind of risk reward. Risk adjusted returns don't look really that attractive to us. At the same time, though, I talked about the increase in distressed and you know, quasi distressed, and that's creating dispersion, and dispersion's good for
active managers. So on one end, the broad macro credit risk looks kind of fully valued, not that exciting, but the dispersion in the market creates a lot of value for active managers. Now it's incumbent upon active managers like us to capture it, but that's exciting. Whereas before it was everything was very compressed and it traded kind of all together and it was hard to add a lot of value in that.
That's really interesting. So first quarter of twenty twenty four or you said something that I thought was really intriguing. Investors need to figure out how to bulletproof their bond portfolio. How does one bulletproof your bond portfolio?
Yeah, you know, I think that was taken a little out of context if I remember, but the idea behind it essentially was don't take unnecessary risk. The world has changed. Investors aren't incentivized or rewarded to take the same kind of risk that they were before. So move up the quality curve, don't move down. So I still believe, as I mentioned before, that investors are still stuck in this old world and they're overpaying for real credit risk and
underpaying light credit risk. And so that's really what I mean by it. So you don't have to take the risk now that you had to a few years back.
You were very early when you were told about higher for longer, you know, last decade, not a lot of people got that right, and you totally did. What were you seeing at that time that led you to the conclusion the FED is in no hurry to get off its emergency footing, and there's no impulse to raise rates. Expect lower rates for the rest of this decade.
Yeah. So you know, as I mentioned before, we pivoted in twenty twenty one from our low for longer to hire the longer, And that was just a realization that you know, post COVID, you're in an environment where infl inflationary pressures are very different. Right. You talk about or you hear about near shoring, friend shoring, the adjacencies, proximity, so on and so forth. That's less efficient, that puts more pressure on inflationary forces. You know, in every other
aspect that we look at seems inflationary to me. So that's the one side. The other side is I do really feel like we're finally out of this secular stagnation store. And so if you just take those two items, that's our premise. It's not factor course, but that's our premise. Then that should lead to a higher rate environment, not a lower rate environment. And so we're in a series of secular shifts, I believe, and I think that manifests itself through higher rates, not lower rates, and so that's
been our thesis. At the same time, there's been this tendency in the market where any data print, it doesn't matter if it's good, better and different, it could be deciphered however you like, seems to want to resort back to the world that it was, and I think that misses the bigger pictures. So that's that's kind of our thinking. It's going to be a volatile ride. So this is not a point estimate like tenures X, but I think it'll be in a volatile yet higher range.
So let me follow up with a couple of questions. Some things I find really intriguing. You know, I've heard a number of people say, hey, this, if globalization is efficient and deflationary, well near Suring is going to be inflationary. But wasn't the spark that lit this entire inflationary cycle
the lack of supply chain logistics? We were unable to get things because we couldn't get masks or or you know, alcohol rubs or anything like that, toilet or toilet paper, or semiconductors or what have you because it was coming from overseas. Doesn't Near Suring create a little more resiliency
and tipe fragility. And if the broken supply chains was the early spike of inflation, well removing that shouldn't that give us a little bit of a shield against the next inflationary cycle, at least a supply chain driven cycle.
Yeah. I mean, if you think about how businesses were running, it was just in time, inventory in extremists.
Super super efficient, super low cost.
And the supply chains were exceedingly complicated, right, So it wasn't a one jurisdiction supply chain. It was multiple jurisdictions across the supply chain. And so yeah, maybe you eked out additional efficiencies and I'm using air quotes that means costs by doing that, But you lose control at the same time. So you know, I think what CEOs and you know, business leaders decided is that, you know, it's better to have a little more control than a few sins.
Everything is a series of trade offs. The other thing that we were talking about earlier, the lower for longer. In the twenty tens, let's talk about the twenty tens versus the twenty twenties. Twenty tens obviously monetary policy driven. Suddenly we have the pandemic, we have the Cares Act one and two, this giant fiscal stimulus under President Trump. You have the Cares Act three under President Biden, plus
a whole bunch of other longer term tenuere spends. Is the twenty twenties the decade of fiscal stimulus, and how does fixed and income adapt to that.
Fiscal has been incredibly powerful, no doubt about it. If you look at I think the durability of the US economy and the outperformance of the US economy, I think a lot of that has to do with fiscal of course, But you know, at the same time, you look at the Chips Act and some other I think notable industrial policy measures. You know that money hasn't really been put in the system either, right, and.
That's over ten years. Yeah, that's going to be a tailwind right now.
So yeah, so I think there's lots of focus on the deficit, and that's precisely right. We should focus on the deficit. But I do believe that having a more cohesive fiscal policy around industrial measures is important, and that actually is leading us to believe that there's hope on the horizon to get a little more efficiencies out of the economy and we can grow at a higher plane.
So in January twenty twenty four, you had a quote that quote, my attention, yield is destiny for fixed income. Explain what you mean by that.
So, essentially what we mean by that is the yield itself is the value proposition, right, So earning that carry the income. Right, So the income out of fixed income was taken out of the equation post DFC, but having
that income, having that carry is incredibly powerful. And so if you look at you know, over the course of many decades, the key driver to performance and returns is the starting yield, right, so I know it sounds trite to say, but starting point matters, and so when you're starting with a higher yield, that that allows investors a higher possible return.
So you mentioned in December there was an extreme disconnect between the FED and the markets. What are you referring to that?
Yeah, So I was really besides myself at that time, and so I was looking at the inflation picture, looking at growth, and I couldn't understand why the market was so aggressively pricing in rate cuts. I just couldn't, for the life of me, understand it. And it's funny story. I was down at some hedge fund conference in Miami, of course, in January, and the whole room was I'm not sure if it's bared up or bulled up, but they were basically in the camp that March is a
done deal. Fifty they have to cut cut and it didn't matter whether it was because of disinflation or the job market was rolling over. It was all about cuts. And it just really struck me as a bizarre thought process, I guess. And so you can't have you know, head, you win tells you when right, and so it really kind of emboldened us to take the other side of it, it was too much. It's too much.
Is this the same crowd and maybe this is the thought process there. Look, all we heard in twenty twenty two is the US is inner recession or about to fall into a recession, and we heard the same thing in twenty twenty three, not that you could tell by looking at the equity markets. The equity markets made it pretty clear we don't see any sort of recession. And then we go into the first five months of twenty twenty four, bonds continue to just kind of drift lower.
Or how related is the we're expecting fed cuts now and we expect a recession any day.
I don't know. I can't figure it out. I mean, I think many, many made a mistake, you know, myself included just thinking about the ability of this economy or any economy to withstand higher rates. It goes back to the narrative where we were so accustomed to living in this low rate world that we couldn't fathom the fact that the economy could survive on higher rates. So I think that was just just kind of a mistake that many made, which is why recession probabilities were so high.
What's notable to me, is so on the macro side, that was the narrative, and so I PGM fixing. Come. We have like one hundred and thirty credit analysts, right, so we have a tremendous micro team, and they weren't seeing it boots on the ground level, right, And so there was this macro narrative based on this premise that the world can't live with higher rates, not kind of pulling it back and saying, well, rates are highed because growth is pretty good, Yeah, a little inflation rates are
there for a reason, right. And at the same time, our analysts were saying, you know, the companies are really doing well. So I think you know, that was a real lesson for us and really embold in us to believe once again that this whole fed cunning narrative was definitely overplay.
But what do you make of the latest thing that I've been hearing from. I want to say, it's the same crowd. We're concerned about stagflation. What do you see in terms of a slowing economy and rising interest rates, rising inflation rates?
Yeah, so we do a bunch of scenarios. Stagflation is one that we don't assign really any weight to at this point, I think it was more of a European possibility or probability than a US one. So everything's possible, of course, but I don't know mortal density scenario. I don't see that. I don't see that as a real risk here.
What's the Elroy Dimson quote. Risk means more things can happen, will happen. So, and I think Jerome Powell came out and said, I don't see the stag and I don't see the inflation. So I'm kind of surprised that that has sort of found a life of its own in the US. Hey, if you want to talk about Europe, that's a very different set of circumstances, both fiscally and in terms of their growth rates. But let's bring this back to inflation generally. Beginning of the year, you said
markets are writing off inflation a little prematurely. What's the disconnect between what the markets are seeing or wishing for and what's actually happening in the economy.
Yeah, So the first way to think about it is just kind of mechanically, right. So the measure of inflation is the rate of change, right. So the reason why I think, you know, the polling numbers are so poor around inflation is because you know, once milk rises to you know, whatever, it is nine dollars for organic milk, it's not moving lower, right, just doesn't keep rising, and so you're feeling the full effect of that nine dollars, whereas us in the markets, we're looking at the delta.
So the reason why I mentioned that is because some of the easy comps are starting to roll off. So just mechanically, we would expect to see inflation just rise because it's those easy comps rolling off. But to me, I think it's important to dissect and decompose where inflation is coming from. And it's about labor. Right, So core services is I think fifty six percent of core PCEE
and that's about labor. So how can you really forecast a meaningful decline in inflation when the job market is as strong as it is?
All Right, So we're seeing a slight decrease in immigration in twenty twenty four, What did it looked like last year? What it looked like in twenty twenty three?
So immigration last year skyrocketed?
Oh really, legal immigration.
Legal immigration and illegal properly as well. It's a really difficult measure but either way that that helped expand the labor supply, and that expansion of labor supply allowed two things to unfold. One, it allowed i think disinflation to come through the entire system last year.
Less pressure on rising wages because there are more bodies and you're not just competing on price correct.
And the second is it allowed that economic activity to actually occur. So it was a twofold benefit. What you've seen this is the labor market is much more in balance, and at the same time, you've seen immigration really dep pre election, so you're seeing just the labor market in a more natural state.
Really interesting. Let's stick with inflation for a minute, So we're recording this in the middle of May twenty twenty four. We had a two point two percent year of a year producer price index sort of soft, and then a very soft consumer price index below consensus. Is it too soon to declare victory over inflation? Can we say, hey, we're at a three handle, and if you back out some of the adlies of owner's equivalent rent and the
shelter component's CPI were really at a two handle. Why can't the Fed just plant the flag in the ground and say we're good here.
Well, I think they can't plant the flag because their mandate is two percent, right, And you could argue whether two percent is a made up number, which it.
Is from New Zealand in the nineteen eighties.
So there's no scientific evidence to support two percent, but it's two percent because we said it's two percent. That's the beauty of economic theory oftentimes. So I think it's really hard to back away from that because you start to lose credibility. But the way to think about the FEDS mandate in that construct is not around easing necessarily, but around being less restrictive. And so is there room for them to adjust policy rates lower to be less restrictive. I think there is, but not a lot.
Like in the mid fes and hopefully that frees up a lot of this frozen housing supply.
Yeah, but exactly the issue I think is that it's already prebate and you know, if you look at kind of real estate prices, you look at you know, corporate credit as well, kind of those beliefs are already factored in. And so what happens if the FED doesn't adjust policy rate it's lower, then I think there's more bumps in the road.
I find it ironic than in the twenty tens, an era we described as driven by monetary policy, we couldn't get inflation up to two percent, and now in the twenty twenties, an era defined by fiscal stimulus, we can't seemingly get inflation down to two percent. It just kind of makes you wonder about these targets and the background
that they're in. I understand they don't want to say, well, we can't get to two percent, we'll go to three percent, But if we get more housing supply out there, maybe that drives the apartment rental index a little lower.
Well, you know, what you described is the imputence of central bank policy right on inflation itself. So fiscal is much more powerful tool, not only from an economic growth perspective, but from an inflation or disinflation standpoint as well. So it actually calls in the question how much central banks can really do it?
Right?
They're very, very limited, I think.
Especially when you look at the fiscal stimulus, especially from the Cares Act under both Trump and Biden. It wasn't like the Semiconductor Act or the Infrastructure Act or the Inflation Reduction Act that spread out over a decade. That was trillions of dollars dumped into the economy in twenty
and twenty one. One would assume that by twenty twenty two the pig was through the python and you're still just dealing with whatever money's left over, and everybody's savings account is the biggest part of the fiscal stimulus behind us. Now can we start thinking in terms of so we've normalized monetary policy, are we almost normalizing fiscal policy?
Well? I think the big rush of cash into consumers' wallets is definitely behind us. We talked earlier about the Chips Act and how very little of it has actually been put into the system yet. So I do think a lot of the fiscal thrust though, is behind us. But the real question on the table is what does fiscal look like going forward? Are we going to continue
to run such large deficits. There's lots of focus on the election, of course, but the item on the table for many is what's the contours of fiscal look like. I don't think anyone believes that you'll see a real pullback in fiscal spending, but you know, Republican led Trump victory that probably keeps the tax cuts in place, and that adds you know, one and a half percent to the deficit instantaneously.
What would that mean for inflation if we saw either a renewal of the tax cuts or more task.
I think it's inflationary right now. I think the multiplier effect is much lower, so I don't think you have the same kind of economic impulse effect necessarily. But it's inflationary. And you know, everything that we look at on the margin is inflationary, not this inflationary.
That's really interesting.
You know. The counter to that is China. But China is less influential in that way than they were before. And I think that's another real secular story that investors are are kind of slow to kind of grasp onto. It's the influence of China kind of you know, post wto admission is very different today than where we were the past twenty years, and I think that matters a lot.
They were exporting deflation for a good couple of decades. Are you suggesting that's much more moderate than it once was?
I think it is moderate, more moderate, And if you think about the areas where you know they are exporting deflation, and some areas like solar evs and whatnot. Tires are slapped on top of that, so it's trying to level the playing field as far as that's concerned. So I think it's a different environment bottom line, and I think that matters a lot. And I think it's inflationary. I think it means bond yield will remain higher, not lower. ALSEQL.
You know, you just put an interesting thought in my mind thinking about the different tax policies and the different import export policies of each of these candidates. But it dawned on me that no matter who gets elected, they're both lame duck presidents. They're both second term presidents. It makes you wonder what they'll be able to get accomplished either way.
Yeah, and it's all about Congress, right as you know. So there's intense focus on the presidential race. But you know, I think we all know that, you know, having full control of the House matters a lot. I think that'll be a more driver of policy domestically. Foreign policy. You can do more by presidential edict, but domestic policy has to go through Congress.
All right, One last curveball question before we get to our favorite questions. We ask all of our guests so you're a member of the Fixed Income Analyst Society and the Bond Market Association. Tell us a little bit about those two organizations. I don't hear those names all that often these days.
Yeah. So look, I mean that's just a forum for investors from all parts of the industry, right whether you're from the rating agencies, the buyside sell side, to debate share information around you know, pertinent issues, market issues, and I guess the takeaway there is the diversity of expertise, perspectives and kind of just thought processes, uh, just make
you a better investor. So it's a so it's a shared environment where we're like minded fixed income professionals, but with different lens and different backgrounds, can debate.
Really really interesting. So let's jump to our favorite questions, starting with what have you been streaming these days? What are you watching or listening? What's keeping you entertained?
Yeah, well, you know I do like a good streaming, so you know, it's hard to narrow. So I just started, well I'm in you know, it just started means last week, which means I'm almost done with season two Succession. So I was a late adopter to Succession, So I enjoy that greatly and thankful that I'm not in that family. The other one I'm streaming is Masters of Air on Apple TV.
It's next up in Mike Cue. It looks fascinating, it's very good.
It's you know, it's very good. I love I love history, and you know, it's a good story. And what I'm enjoying it greatly.
It just looks if you watch the preview visually, it's stunning. It just looks great.
It is visually excellent. Absolutely. The problem is I watch it on my iPad, so it's like I'm not getting the full experience. But this story is really quite good. And then I am a nerd at the end of the day and I'm the lord of the Rings, the Rings of Power. So I'm waiting for season two to come out, I think next week. And then podcast wise, there's a few that I like. What I really like
the Tim Ferriss Show. So what I like about that podcast is that it's about process and gets in the minds no matter the discipline, what the process is to you know, your expertise. So I really find that to be quite excellent. And then I also like invest like the best podcast. Yeah, yeah, very good, really exceptional.
Yeah, yep, absolutely. Tell us about your mentors who helped shape your career.
Yeah, so you know mentors. I think of mentors as a mosaic, you know. I I have lots of positive mentors, and I also have you know, the anti mentor. Right you go back to my Solomon days. Uh, I was really shaped by some leaders that like man, I don't want to be like that person, so that could be equally as powerful. I'm not trying to be negative about it. There's informational content and everything that we do positive and negative, but there's a few that stand out to me.
Uh.
The The first is a gentleman, Dan Lancelotti. I worked with him at Solomon Smith Barney and he really taught me around kind of operational workflow and design product design and you know, everything is an operational management project and really helped me think through that. When when I got to Morgan stan Only, I worked for a gentleman Steve Zamski. He taught me about creativity and cross market application into practice. And so what's interesting there is the story that most
people don't know. So Steve and I was part of that group, so I can't really claim credit it was really his design. Created this product product called tracers in two thousand and one, and that was the first index bond product tradable, so very early stages. Lehman kind of quickly replicated to call the trains. We launched it in the middle of nine to eleven, so that was, you know,
quite a difficult time. But the ingenuity and beauty Morgan Stanley is that we took that product and turned into trace X, that turned into CDX, and so a gentleman on her CDs trading desk, Jared Epstein, had the vision of, like, managing this from a bond perspective was was really really difficult. Let's turn it into kind of a bunch of CDs contracts and that launch CDX and CDX is the most liquid, largest instrument and uh and uh and credit. So I'm
kind of happy to be part of that transformation. Uh. And then the last is kind of funny. It was my boss at Morgan Stanley who used to run research, Juan Luis Perez uh, and so what he taught me was just the importance of probabilistic scenario based approaches. You know, I really hold on to that. I believe in that. I believe the root of all evil is kind of point estimates, so to speak. Uh. And he also taught me about kind of evidence based investing, So there's you know,
taking the outside, whether there's data mining and whatnot. So it's you know, really quite powerful. And then last is my boss who just retired at PGM, you know, Mike Lillard, who was just an unbelievable analytical mind, the smartest person I probably ever met. And so you just you know, you learn all these aspects from you know, people throughout the years, and so I feel quite fortunate.
Really interesting. Let's talk about books. What are some of your favorites? What are you reading right now?
Yeah, so books, you know, you know, you have to go with the classics. So uh, you know when Genius failed. I think you're talking about one podcast earlier. Yeah, just uh, but I I'm a big fan of studying history, as I mentioned, and I believe like studying like like Napoleon, Alexander the Great, Caesar Churchill, kind of Washington, Lincoln, Grant, all those things have been incredibly instructive for me as I think about, you know, my role and you know, my life, I guess. And then kind of one of
the books I'm reading now. I finished Chip War, which is a much created course, but then I rolled it into this book called The New Fire, The War Piece and Democracy in the Age of AI. It's just a
fantastic read, really well written, highly recommended. And then I just finished up The Alchemy of Air by Thomas Hager was it's a fascinating, fantastic, fascinating book on it's the haber Bosch method which basically turns air into ammonium right and used it as a fertilizer, but also fueled the war in Nazi Germany, and now it's creating kind of this other type of crisis, this OBCD crisis, and so
it's a it's it's a fantastic read. And then I think from a credit perspective, a must read is Caesar's Palace Coup. So that basically goes through the Caesar Palace bankruptcy and it just highlights that weren't a very different world today than we were in the past with respect to workouts and bankruptcy. You have different players in the mix, different incentive structures, and to me, it's a cautionary tale. So when you're getting involved in low risk credit and
distress investing. That that should be something you should fully understand because you realize how fraught it is.
All right, our final two questions, what sort of advice would you give a recent college grad interested in a career in either investing or fixed income or a multi strategy approach to investing.
Yes, so you know, I would would. I think it's a manifold. But the first is, you know, be open to ideas, don't be quick to narrow your focus. I think of experience as a set of building blocks, and with any foundation, having a broad foundation is a more stable foundation than a narrow one. I would also say,
play chess, not checkers. And what I mean by that is, you know, think several moves ahead, right, think about your career of where you want to be, and you know, maybe your current move in a certain area is not exactly what you thought. But you know, knowledge is portable and often applicable. And I think about my own career and how much I learned from being in other areas and how it applies to what I do today. Is
incredibly powerful. Ask questions relentlessly, you know, I think it's important to know what you don't know, and I think that's a sign of strength not weakness, right, you know, particularly at the kind of more early stages of your career. And then finally, something that we just talked about is just you have to read, right, you have to read
financial history, so you have to study and understand. You know, these books are incredibly powerful and important, and so I think you know, reading those sets of books like you know, when Genius failed, Manius Panics and crashes, those types of things are highly instructive and will really allow you to accelerate in your career.
And our final question, what do you know about the world of fixed income and investing today you wish you knew twenty five thirty years ago when you were first starting out.
Yeah, other than everything, right, Barry, I would start by saying, don't be afraid to be a contrarian. And that don't mean be a contrarian for contraeran's sake. I mean think about things differently and critically. And you know, it is a slippery slope sometimes because it kind of drives me mad when folks just throw out contraaring things to try to be controversial. And I don't mean it that way. I just mean think critically in a contraran way. I would also say it's a marathon and not a sprint.
And I think long term investing is the key to success. And so thinking about you know, not only your own career, but market wise from a longer term perspective, I think pays dividends, you know, no pun intended, you know, I say process, process, process, I think those are the three most important things. So you know, whether it's organizing an argument on a you know, particular trade, or your view
on the secular themes, like, have a thought process around it. Oftentimes, what's more powerful than the output is how you get there. And I think that is that organizing principle is quite quite important. I would also say think like an investor. So I'm biased here because I don't really have a tremendous trader mindset, but I think conflating the two is not appropriate. But I think investing is very different than trading, and so you know, I try to think like an investor.
And then just lastly, you know, embrace adversity, right, you know, rally from your failures. You know, I think about the Michael Jordan Hall of Fame speech, right, you know, just he failed over and over again, and that's why he succeeded. I'm sure there's other reasons why he succeeded too, but but you know, some of the most defining moments in my career have been on things that haven't worked out, and I think it's important to pick yourself up, dust
yourself off, and learn from it. And I think the learning is that's the most powerful part.
Really interesting stuff. Greg, thank you for being so generous with your time. We have been speaking with Greg Peters. He is co chief investment officer of Pigeum's fixed income as well as co head of the multi sector team. If you enjoy this conversation, well check out any of the five hundred previous discussions we've had over the past ten years. You can find those at iTunes, Spotify, YouTube,
wherever you find your favorite podcasts. Speaking of which, check out my new podcast At the Money, short ten minute conversations with experts about issues that affect you and your portfolio, earning your money, spending it, and most importantly, investing it. At the Money, in your Master's and business feed or wherever you find your favorite podcasts. I would be remiss if I did not thank the Crack team that helps me put these conversations together each week. John Wasserman is
my audio engineer. Attika of Albron is my project manager. Sean Russo is my head of research. Anna Luke is my producer. Sage Bauman is the head of podcasts. Here Bloomberg, I'm Barry Riddolts. You've been listening to Masters in Business on Bloomberg Radio.