Pod Insights Masters in Business Franklin Templeton's Sonal Desai on Fixed Income About this episode Barry speaks with Sonal Desai, executive vice president and chief investment officer for Franklin Templeton Fixed Income. She directly manages $215 billion in assets. A native of India, Desai earned a Ph. D. in economics from Northwestern University and briefly taught economics at the University of Pittsburgh. She then spent six years with the International Monetary Fund before entering the private sector as a director and senior economist for Dresdner Kleinwort Wasserstein in London and then at Thames River Capital.
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Transcript 10,599 words · 9 speakers
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1:17 Speaker 02 This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
1:23 Barry Ritholtz? This week on the podcast, I have another extra special guest. Sanaa Desai, what can I say? She runs the Fixed Income Group as Chief Investment Officer for Franklin Templeton. She directly manages $215 billion in assets. Sonal has been named to just about every Most Influential Woman in Finance list, Barron's five years in a row, Forbes Pension Investments. If you are at all interested in fixed income, what the thought process is like in trying to figure out how to structure a portfolio of fixed income? What you think about what affects the returns you're going to see? This is going to be a great podcast for you.
2:07 Barry Ritholtz? I thought this was interesting, really fascinating, and I think you will also. With no further ado, Franklin Templeton's Sonal Desai.
2:17 Barry Ritholtz? Welcome to Bloomberg.
2:19 Speaker 04 Thank you Barry, that's, it's so kind of you to have me here.
2:22 Barry Ritholtz? Well, it's a pleasure, I'm excited to talk to you. Let's start out with the background that you come from. Bachelor's in economics from Delhi University. PhD from Northwestern, also in economics. What was the original career plan?
2:40 Speaker 04 This is a really interesting one, because you know, I grew up in India. My, you know, there's a, there are two careers. At that time, there were two careers. Any good parent wanted from, for his son, or in my case, daughter. You could be an engineer, or you could be a doctor. And if you really didn't want to do either of those, you could work for the government. I didn't want to do any of the three. And economics seemed at that time to be the one which left the most options open for me. So I did economics. At the end of my undergraduate degree, though, I didn't feel like I'd really learnt enough about economics. And so I decided, you know, not having understood the concept of sunk cost, I decided to do even more, and I did a PhD.
3:23 Barry Ritholtz? And was that two years, three years?
3:26 Speaker 04 The PhD?
3:26 Barry Ritholtz? Yeah.
3:26 Speaker 04 No, that was a full five.
3:28 Barry Ritholtz? Five years, wow. So that's more than sunk cost, that's double, more than double.
3:33 Speaker 04 Exactly.
3:34 Barry Ritholtz? So you come out of Northwestern with a PhD in economics. What was your first job in finance? Or what was your first job out of school?
3:42 Speaker 04 I was assistant professor of economics at the University of Pittsburgh. And here's the deal. When I got that job, I had also interviewed with the IMF. And I had really liked the IMF, but you have to understand, I don't know if it's that way today. But at that time, there was no way I was going to my thesis advisor and telling him, "Yeah, I do have a tenure track offer from a decent university, but you know..."
4:11 Speaker 04 I'm gonna go to the dark side and work for the IMF. So I I couldn't bring myself to do it. I went and I did the academia thing for a couple of years. And I was young enough that the IMF told me at that time that, look, if you change your mind within the next two years, let us know.
4:26 Barry Ritholtz? Huh. I mean, academia isn't for everybody, and it might take a year or two to figure that out. I mean, if that lifestyle works for you, it certainly, you know, could be rewarding, uh, intellectually.
4:40 Speaker 04 Very much so. Look, academia, I admire it. I think it is the pinnacle of what this country does brilliantly. Having, uh, having academia, having those research universities, all of that is absolutely superb. For me, the problem was I'd spent five years of my life essentially doing research. And now I wanted to get out there and do something with it. To me, getting into the IMF, it was mind-bogglingly Iowa. It was fantastic. Remember, this is in the mid nineties, so let's let me date myself, yeah? So this is in the mid nineties. Eastern Europe is just coming in from the cold.
5:18 Barry Ritholtz? Right.
5:19 Speaker 04 And that was where I focused most of my time.
5:22 Barry Ritholtz? So how long did you stay in in at Pittsburgh before you joined the IMF?
5:27 Speaker 04 Two years. It was two years.
5:29 Barry Ritholtz? So what what was the experience like in Europe in the nineties, working for the International Monetary Fund?
5:35 Speaker 04 No, uh, no, no. So I worked out of Washington DC. I worked on Eastern Europe. So, uh, so I'm talking about countries like Bulgaria, Macedonia, Romania, Croatia. Prior, it lit- the wall had fallen in the late eighties, eighty-nine, was it? You know, and so these countries, some of these countries didn't even have the concept of GDP as we know it. They had gross social product. They didn't have CPI indices. So it was, in some ways, the initial piece was like an extension of being at university. Because we were bringing these concepts to them. It was, uh, it was an amazing experience.
6:12 Barry Ritholtz? So any lessons that you learned at IMF that ultimately influenced your investment philosophy?
6:20 Speaker 04 My enormous respect and belief in macroeconomics actually comes from my time at the IMF. We were, you know, the IMF got a lot of dings for program countries, you know, for programs which were put into place around the world. Some were better than others. I get all of that. But here's the thing. We would go to these countries and the idea was really frankly orthodox fiscal and monetary policy. And sometimes when you're starting from a certain point, be it hyperinflation, be it uh out of control fis- fiscal balance, be it lack of any kind of international reserves, you need to go back to orthodoxy. It kind of works.
7:03 Speaker 04 And that, carrying that forward, I think it's influenced a lot of how I've thought about emerging markets through the, through the years, for sure.
7:10 Barry Ritholtz? How long did you stay at the IMF for?
7:12 Speaker 04 Uh, it was, uh, it was six years. It was six years in DC. And then half a year, basically, uh, my husband and I, at that time, we, we, we chose to move to the private sector. Right? He was moving to the private sector in London and I was following him. And I had accumulated six months of vacation. They let you do that. They wouldn't cash me out for six months, but they said, take the holiday. You know what I did? I had the IMF pay for me to do a professional patisserie course in London. Because I had to take the holiday. I couldn't go out and work, but I was being paid and I couldn't not be paid. So I took a one-year course question to six months.
7:51 Barry Ritholtz? Full-on pastry and?
7:52 Speaker 04 Cordon bleu. Basic, intermediate and superior.
7:55 Barry Ritholtz? Wow. Do you still do a lot of cooking?
7:57 Speaker 04 So I do a lot of cooking, but I don't do much, much, much baking anymore. My husband always complains. He says I baked more before the patisserie course because after that, uh, I would come into our rental apartment and say, I can't work in these conditions.
8:12 Barry Ritholtz? So you became a chef prima donna, is that what you're suggesting?
8:16 Speaker 04 Pretty much. I have to, looking back at myself, I have to believe I became a prima donna.
8:19 Barry Ritholtz? So you relocate with your husband to London. I'm gonna assume that's how you end up at Thames River Capital, is that right?
8:25 Speaker 04 No, first, actually, I was on the sell side. So I've done it all. I've done academia, then I did the public sector at the IMF. Then I did the sell side, Dresdahl, Klein, Wart, Wassestein, investment banking, and I was in the research team there. And that was in London. And then, after six years with them, I moved to Thames River Capital, which was a macro hedge fund in London.
8:46 Barry Ritholtz? What was that experience like? You were there right through the great financial crisis.
8:51 Speaker 04 Yeah, actually, so I started with them in 2006, and in 2009, I moved back to the long-only buy side. I think it was absolutely eye-opening, right? And I think one of the great things about working with them, small team, boutique firm, hedge fund, but a macro hedge fund. So at every stage, it felt like, and I'd been on the sell side, and now I was on the buy side. It gets you a little bit closer to the end point. I think it was a fascinating point of time, because essentially, over the course of the 2000s, the private sector really came into its own. So in a sense, when we were at the IMF, a lot of these emerging markets,
9:36 Speaker 04 they came to the IMF because there wasn't a true alternative. Private markets, especially for EM, had not deepened enough. And now, as we got into 08, 09, you started seeing the strength and power of the private sector. And then we had the global financial crisis. Holy cow. That was, you know, that was when I would walk around, and I used to walk home from my work, and I was just thinking, everyone keeps talking about, oh, you know, living in unprecedented times, living through history, I'd rather read about it. Living through it was uh was was amazing. I remember waking up at three or four in the morning to find out what had happened overnight.
10:21 Barry Ritholtz? Right.
10:21 Speaker 04 What what were markets doing? It was a whole different level. It was just amazing. It and now I look back and it's like, great, we did that, we did that. But I will tell you, one of the best things about that time was remembering to look out of the window. We we worked out of Barclay Square, lovely offices, uh looking out of the window and watching people having normal lives. And realizing, you know, the world doesn't begin or end with finance.
10:47 Barry Ritholtz? For sure. Uh it certainly has an impact, but um.
10:50 Speaker 04 Yeah.
10:50 Barry Ritholtz? It's kind of funny, some of the younger folks who are late thirties, early forties.
10:55 Speaker 04 I know.
10:56 Barry Ritholtz? This is, it's hard to imagine, this is before their time.
11:00 Speaker 04 It is.
11:00 Barry Ritholtz? Like they were in college, so I was in grad school during eighty seven crash. And it was off on the side, you really didn't pay attention to it. I imagine anybody who's in undergraduate or graduate or even just starting to work into oh eight oh nine. You really don't understand how unusual and the force of that debacle uh across the entire economy.
11:26 Speaker 04 Barrett, take it one step further and recognize that somebody, uh some kid who got into JP Morgan as a trader. And was fortunate enough not to lose their job in oh eight oh nine. This is somebody who probably through covid ended up being a senior trader and has never lived through truly non-zero uh interest rates. I mean, yeah, the Fed started raising them, but through what I would consider.
11:54 Barry Ritholtz? Normal.
11:55 Speaker 04 Right. Normal business cycles. It is remarkable. It that's when you really realize, wow, you've lived through interesting times.
12:03 Barry Ritholtz? To say the very least. So you you mentioned you joined Franklin uh in oh nine, the long only.
12:09 Speaker 04 Yes.
12:10 Barry Ritholtz? Pretty good timing to join a long only shop uh mid mid oh nine. Tell us what that transition was like going from a long short hedge fund to a long only asset manager.
12:20 Speaker 04 So actually, you know, the reality is, uh the team I joined at that time was a was the global macro team within Franklin Templeton. And in many respects. That team works with deep value uh investing, in a sense, looking for emerging markets which are totally out of favor. Thinking in terms of long business cycles and really investing abroad. So it was a bit of a natural transition. The part which was more complicated to get my head around was being part of an enormous organization. After having basically been a part of a very small team, a small boutique team where if you wanted to do something, you could be very entrepreneurial and go out and do it.
13:03 Speaker 04 At Franklin, you had to get to get your arms around a much bigger organization, but it was very good.
13:09 Barry Ritholtz? Twenty eighteen, you become Chief Investment Officer for the Fixed Income Group at Franklin Templeton. Is that the timing right?
13:17 Speaker 04 Yeah, roughly. Yeah, that's that's a timing.
13:19 Barry Ritholtz? That's got to be a pretty big change in in role from head of research to.
13:24 Speaker 04 Yeah.
13:25 Barry Ritholtz? Running fixed income.
13:26 Speaker 04 So it was a big change and now we get to the point where my predecessor was uh retiring. And Jenny asked if I thought I could do this and.
13:40 Barry Ritholtz? Jenny Johnson.
13:40 Speaker 04 Jenny Johnson.
13:41 Barry Ritholtz? CEO of Franklin Templeton.
13:43 Speaker 04 And she asked me if I uh if I thought I could uh take this role on. And I have to say, my first reaction was that there's too many pieces that I can't do. And I tell you something, this is the difference between men and women. My husband, when he looks at, you know, a job description, there are something like twenty things on that job. And so I can apply for this. I said, but but but but, you know, you haven't done, you haven't ticked every one of these boxes. He says, I ticked that one. And he will apply for it and he will likely get the job.
14:13 Barry Ritholtz? When when I had Jenny here for an interview, we talked about that exact thing and she she mentioned. She goes, women will look at this and say, oh, I can't do that.
14:24 Speaker 04 Yeah.
14:24 Barry Ritholtz? Like, I don't have one, seven and twelve. And guys are like, yeah, we'll figure it out as we go. It's a very genetic difference.
14:31 Speaker 04 It's a real genetic difference because uh my uh instinct is, well, I haven't done that before, so I can't do it. And uh between between my husband and Jenny, they basically kicked me in the pants and said, no, you can do it. Learn, learn on the job. And I guess I did.
14:49 Speaker 00 It was fantastic. It's been really fantastic.
14:52 Barry Ritholtz? Really interesting.
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16:48 Barry Ritholtz? So let's talk a little bit about Franklin. So you've been Chief Investment Officer for seven, almost eight years now. What's been the most surprising thing about this role?
17:00 Speaker 04 Number one, when you challenge yourself, you really can step up. Number two, there are parts of fixed income that I thought would be, I'll just say it, boring. They're not as exciting as going out and finding that emerging market. And what you find is actually everything is fascinating if you spend enough time looking at it. So that's been great. And I'd say the other part of it, which has been somewhat surprising to me, I'd say, is it goes actually into broader markets, not just my role within this group.
17:40 Speaker 04 It is the extent to which markets look at what is happening currently. And it's a very short step for analysts to look at what's happening, extend it into the future and give you a reason for why it happened. How difficult it is to break out of the mold and try to actually genuinely look forward. Does this make sense?
18:05 Barry Ritholtz? Yes, we flick on the TV or radio and people are constantly explaining what just happened when they had no idea what was going to happen. It's a lot of hindsight bias.
18:17 Speaker 04 Yes, and there's also what just happened and therefore why it should continue happening. And I think that's something which I never realized how deeply ingrained it is and how difficult it is to break people out of that way of thinking.
18:31 Barry Ritholtz? Just extrapolating to infinity.
18:33 Speaker 04 Infinity.
18:34 Barry Ritholtz? Yeah, that happens all the time. You recently were on with my colleague, Shinali, and you said to her, "Investors need to price risk more seriously." Explain what you mean by that.
18:47 Speaker 04 What I mean by that is, I said more than, I'm looking now, since the global financial crisis. And Barry, we just talked about the fact that there are entire Entire generations of people who have never lived in a world where liquidity was anything other than hyperabundant. And by the way, we're still in that world. You look at the Fed's balance sheet, it's still enormous. I think it's very hard for people to even realize that the Fed sat on a minuscule balance sheet prior to this. They were, we were not in a situation where, uh, essentially, there was always a get out of jail for free card out there.
19:27 Barry Ritholtz? The classic Fed put.
19:28 Speaker 04 The Fed, the Fed put, eventually it was a Fed put, then people thought there was a Trump put, and quite frankly, over the, over the last four or five years, we've had a fiscal policy put. We have puts all over the place. And I think that what happens in that environment, you know, when I said that we need to price risk, start remembering again how to price risk appropriately, it is the fact that when financial markets started moving out along the yield curve, out along the risk spectrum, I've even seen the IMF talk about, oh, well, markets need to price risk correctly. Well, hello, they were forcing us into those positions explicitly. When the first set of QE one, two, threes happened,
20:13 Speaker 04 it was explicitly there to get financial markets to take risk again. QE one, definitely, QE one and two, maybe, you know, markets had frozen up, we needed to liquefy frozen markets. And to me, if I look at that, that made sense. Problem is, we hung on to it for too long. If I look at high yield credit, let's talk about fixed income markets, high yield credit, typically in a recession, spreads of high yield credit over treasuries, equivalent treasuries should be at around six hundred, six fifty, even higher.
20:47 Speaker 04 Ever gotten there.
20:48 Barry Ritholtz? Still very tight.
20:49 Speaker 04 Today, we are close to record tights, right? We're only looking at a few hundred basis points. We're sub three hundred. This to me means that while people like to talk the talk of recession, what they're really saying is cut rates. We want more liquidity because we're not getting rid of all of our assets over here, the risky assets, which should sell off. If people truly expected a recession.
21:14 Barry Ritholtz? Um. So I'm going to assume you're not in the recession camp here.
21:17 Speaker 04 I haven't been. I haven't been. Uh. I'd say that I can proudly say that it's been, you know, I'm on record. So I think it was in probably early twenty twenty one when inflation started picking up here. That I was saying, yeah, this, this, this isn't looking so good. This transitory stuff isn't looking so good. And most importantly. It wasn't at all clear to me why we were expanding fiscal while we also had this massively easy monetary policy. And how that could possibly result in a recession. And we've been having recessions which are two quarters out now, I think. A rolling two quarters out for the better part of something like three and a half years. And I will say, we've not bought into that. I think it's a very strong economy.
22:02 Barry Ritholtz? So uh it it certainly has been. We continue to see consumer spending despite weak sentiment. Consumers continue to spend. The labor market is tight. Yeah, there are some warts on the housing markets and. You know, there's always some sector you you could you could poke at, but by and large, this seems to be a fairly robust, fairly resilient economy. Fair fair statement?
22:25 Speaker 04 I think that is a fair statement because here's the thing, uh, you know, the, in the first few months of this year, we saw sentiment tank. And everyone said, well, hard data will follow. I wasn't so sure because sentiment was moving on something which was unusual. It wasn't moving on the back of weakness and labor markets or people feeling uncertain about their jobs. It was weakening on the back of uh pronouncements, you know, on top of policy pronouncements. I'd say the execution of that stuff was really bad and continues to not be particularly good in terms of tariffs. That impacted sentiment. However, people continue to spend. They didn't stop spending, as you said, and.
23:07 Speaker 04 I'm not suggesting that this economy is recession proof. I'm just saying so far, we haven't got. Whatever we need to push us.
23:14 Barry Ritholtz? Right.
23:14 Speaker 04 Into recession.
23:15 Barry Ritholtz? Right.
23:15 Speaker 04 Yeah.
23:16 Barry Ritholtz? Any thoughts on the idea that perhaps sentiment measures are broken? That when you see Michigan sentiment.
23:23 Speaker 04 Yeah.
23:23 Barry Ritholtz? Worse than the pandemic, worse than the financial crisis, worse than the eighty seven crash? And yet, you know, you look at the data, you're just not seeing anything remotely like that.
23:33 Speaker 04 I have to say that I'm looking a little bit less at some of these indicators. Uh, I think they need to be leavened. We need to now do more digging. Our country has become very polarized and that feeds into people's sentiment. It doesn't feed into their shopping habits.
23:49 Barry Ritholtz? Right.
23:50 Speaker 04 That's the reality, right?
23:51 Barry Ritholtz? So I'm wondering how much of this is driven not just by media, but by social media? And algorithms, it seems to send people to more extreme perspectives.
24:01 Speaker 04 Huge. And I think that the, the speed of the, of the news cycle, the need for clickbait style.
24:09 Barry Ritholtz? Right.
24:09 Speaker 04 Tweets, headlines, whatever it is, I think that exacerbates every sentiment. However, people still seem to be relatively sensible in terms of how they actually behave. Because we're not hearing about people massively cancelling their European vacations, which according to Delta, we're taking in record numbers, right?
24:32 Barry Ritholtz? It's so funny you say that because last quarter, they dropped their guidance. Hey, everybody's frozen.
24:38 Speaker 04 Yeah.
24:38 Barry Ritholtz? JetBlue did something similar. We don't know what's happening. They just came out, uh, in the most recent, uh, few days, talking about not only reinstating guidance, but being pretty aggressive as to what they see going forward. That's fairly constructive, kind of fights against the, oh, this tariff war is going to cause a vibe session and, and crash everybody.
25:01 Speaker 04 Yeah, you know, I really never bought the vibe session idea on tariffs. I mean, let's, can we talk about tariffs?
25:10 Barry Ritholtz? Sure.
25:10 Speaker 04 I mean, it's been talked to death, but why not? Let's, let's talk about tariffs briefly. Here's the thing. I look at our country, and I'm gonna use big round numbers here, right? We're about a thirty trillion economy, okay, twenty nine, call it thirty trillion economy. Seventy percent of our economy is consumption. Okay, so you get to around twenty one, twenty, twenty one trillion. Seventy percent of consumption is services. Guess what? Services aren't really impacted by tariffs.
25:39 Barry Ritholtz? Right.
25:39 Speaker 04 Now I go to, okay, I've got around six, six and a quarter, uh, six and a quarter trillion of consumption of goods. How much of this is actually imported? Around three point four trillion of goods are imported. So I'm looking at three point four trillion against all of this, this huge economy size. And I say, okay, they're talking about putting tariffs, you know, let's assume tariff revenue ends up being three hundred billion a year. It's not, you know, that's, it could be much lower. Three hundred billion, if I were to spread this out over all goods and services, like the Europeans do using a VAT. That's a two percent tax.
26:14 Barry Ritholtz? Right.
26:14 Speaker 04 Would we all be jumping up and down saying vibe session if magic happened and the federal government did something very intelligent? And put just a small consumption tax on the economy to lower the budget deficit, we wouldn't. So I guess what I'm trying to say is, I don't love tariffs. Please, tariffs are a highly inefficient form of raising revenue. Uh, they're, they're, they're distortionary because they randomly hit some products relative to other products. I don't love tariffs. I just don't think that they are as catastrophic for the US as they are for the rest of the world. The rest of the world, yeah, it is a big problem. The US doesn't depend, it's a huge economy, which is essentially a large closed economy.
26:57 Barry Ritholtz? Closed economy?
26:59 Speaker 04 Yeah, it is.
26:59 Barry Ritholtz? That's very interesting.
27:00 Speaker 04 No, how do I come back?
27:01 Barry Ritholtz? It seems like, look, our, our phones are made in China, I'm wearing a watch, we're in Switzerland. Cars are from Japan and Germany and Korea and elsewhere. It feels like we see so many imported goods, clothing, just all this stuff. But what you're really pointing out is the things we import are relatively small percentage.
27:22 Speaker 04 Exactly. I think you're totally right, you know, and here's the thing. Should we be manufacturing more in the US? This is actually a political decision and people vote for this. And don't, and you know, anybody who says that's a crazy idea, well, Germany does it, Japan does it, you know, it's a choice. It's a choice. It's a political choice and I think that it is up to the people of our country to decide. Which direction do they wish to go in? There's no right answer. It's a democracy. People need to choose. However, it is an incredibly wealthy country. And therefore, when we talk about imports and exports, I look at exports, which is how our GDP gets impacted via via tariffs or trade or anything.
28:06 Speaker 04 Imports are ten, twelve percent of of our overall GDP because we import around four and a half trillion of goods and services, three and a half of just goods. Four and a half trillion out of, you know, a thirty trillion economy, call it twelve, thirteen percent. That is where we are looking in terms of our imports and you compare this to a Germany. Germany, including its uh exports to the rest of the euro area, it's around forty-four percent of GDP.
28:33 Barry Ritholtz? Isn't that true throughout Europe? They're just like.
28:36 Speaker 04 They're much more.
28:38 Barry Ritholtz? I I look at Germany, France, Italy, Spain, sort of like New York, California, Texas, Florida. Cause they're substantial economies and they're right there. There's no ocean in between them.
28:51 Speaker 04 And they, no, and they also export outside, right? So they're very, very dependent on what the whims of the rest of the world are because they need, here's the, here's the reality of it. You know, every time um the administration talks about VAT as a trade barrier, any economist will tell you that's just plain wrong.
29:10 Barry Ritholtz? Yeah.
29:10 Speaker 04 It's not, because it's a trade.
29:12 Barry Ritholtz? It's paid in on an internal basis, right.
29:14 Speaker 04 Basically, it's not a barrier because it's a board, what we call a border adjusted tax. So, you know, we export a car to Germany, absolutely, you have to pay VAT there, but you'd have to pay the VAT on the BMW made in Germany.
29:27 Barry Ritholtz? Doesn't matter, right. Whatever you're gonna consume, you're paying the tax.
29:29 Speaker 04 Wrong. However, if you want to take uh again, that twenty thousand foot up in the air view to this, there is an economic model, which I think the Europeans have chosen to follow, which is to penalize consumption in Europe with the VAT. Twenty-two percent tax on average on consuming, which means. The Europeans aren't consuming not European stuff and not American stuff.
29:56 Barry Ritholtz? That's right.
29:56 Speaker 04 And we have some of the lowest taxes in the world and everyone, we consume everybody's production, so we are supporting global GDP via our desire for consumption.
30:07 Barry Ritholtz? We also have privatized things that the VAT tax subsidizes in Europe.
30:12 Speaker 04 Yeah, yeah.
30:13 Barry Ritholtz? So we pay our own healthcare and retirement and college.
30:16 Speaker 04 Yeah.
30:16 Barry Ritholtz? For many European countries, they're paying much higher taxes, but that's part of the sort of the so- social safety net, not part of the private sector.
30:26 Speaker 04 Totally agree. And again, I'd come back to the idea that these are choices made by democracies and there are no right and wrong answers. So it's wrong for us to say, get rid of your VAT. They made the choice to have that VAT.
30:40 Barry Ritholtz? I, I will tell you that I have a vivid recollection of being in London and Brussels during the dot com crash, like two thousands for business. And you leave New York where everybody's kind of freaked out and stressed and you go to London and people are a little more relaxed and then you go to Brussels and they're even more relaxed. And I guess there's no fear of losing your healthcare or co- owing college loans or saving for retirement. Kind of makes people a little more sanguine when it comes, comes to the economic cycle.
31:12 Speaker 04 It is. You know, there are trade offs on everything, right? So we could have an entire philosophical discussion in terms of the choices people make and everyone doesn't make the same choices. The other side, I would argue of the coin that you, you're pointing out correctly, which is the lack of stress associated with all these fundamental needs of life. The other side can and is a lack of innovation, which you see across the board.
31:45 Barry Ritholtz? There is no Apple, Microsoft, Nvidia in Europe.
31:48 Speaker 04 There isn't, there isn't a desire for risk taking, right?
31:52 Barry Ritholtz? Right.
31:52 Speaker 04 And that's what permeates the entire American dream, so to speak. You know, you work really hard, you, you can be entrepreneurial, you go out there, you do great things and you can make it. And I'm an immigrant, I'm a naturalized American and I have to tell you, that's what I bought into and I really believe in it. I love that about this country.
32:13 Barry Ritholtz? Huh. Really, really interesting.
32:17 Speaker 05 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume, so writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting
32:59 Speaker 05 and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.
33:40 Speaker 06 For big business, AI opened up a world of promise, but that world of promise turned into a world of pain. Costs spiraling, data scattered across disconnected systems, security and governance increasingly complex, AI initiatives struggling to scale, and ROI that remains frustratingly out of reach. The challenge isn't AI itself, it's having the infrastructure AI needs to succeed, which is right where Boomi says, "We got you." Tens of thousands of enterprises trust Boomi to connect data, applications, processes, and AI. With Boomi, businesses can eliminate silos, automate workflows, strengthen governance, and create the foundation AI needs to perform at scale. The result? Faster innovation,
34:23 Speaker 06 more efficiency, better business outcomes. Boomi turns a world of AI pain into a world of AI gain. As Boomi says, "We got you." Head to boomi.com to learn more. That's B-O-O-M-I.com.
34:38 Barry Ritholtz? You mentioned earlier all the liquidity that the Fed has flooded the system with. What's the implication of that for fixed income today?
34:48 Speaker 04 So I'd say the implication is when you're looking for, let's call them risky assets within the fixed income space to invest in. It's quite difficult. Like I said, typically, risk assets, you look at the premium you get for taking the risk over the risk-free asset, which is, of course, the treasury. And the reality is, there's clearly enough, to the point of complacency, I would say, comfort around what is going on within the economy and what the expectations are from the Fed, that those spreads, if I, again, I point to something like high yield, they're nowhere close
35:28 Speaker 04 to what I think would be reasonable. Nonetheless, you are getting close to seven percent, seven and a half percent, depending on the day you're looking at it, without, not in spread terms, but in all-in terms for a high-yield or a risky bond in the, for a high-yield corporate. Now, this, I think, remains reasonable if you are active. I wouldn't buy passively into this because when you have way too much liquidity, clearly some excesses are bound to creep up. And I think that probably they have. We are active managers, so we're literally doing bottom-up picking, uh, company by company. And I think you need to do that. So what do you do?
36:13 Speaker 04 I look at ten-year treasuries and I look at Fed funds and I try to decide at four forty, four fifty, we're range trading right now.
36:22 Barry Ritholtz? Mm-hmm.
36:23 Speaker 04 Uh, is this a screaming buy? Should you be jumping in because you think that treasuries are going to rally massively? And the answer is actually no. I would call myself aggressively neutral. I'm stealing that term from a colleague of mine. Aggressively neutral at this range. I think fair value for US treasuries actually is probably today at between four seventy-five and five. So in fact, I think there's more for US treasuries to sell off and thus this is, this is the backdrop. Now, why do I think this? I think all these complaints about where the Fed is, you know, the Fed should cut rates, cut rates, cut rates. Well, I think the neutral Fed funds rate is actually between four and four twenty-five or so. So I don't think the Fed has that much room.
37:05 Speaker 04 To cut rates. Why do I think it's four percent? Is this a magic number? Well, if I again abstract from these post-GFC fifteen seventeen years that we're looking at, where we've had this very abnormal, unorthodox monetary policy for a large part of this period. And I look at the decades prior to that. Neutral Fed funds was around four fifty five percent. That was what this economy took. What does that neutral Fed funds rate consist of? Inflation and what do you think productivity growth is going to be? I think inflation is around two, two and a quarter. And productivity growth, we're kind of cruising back towards that two percentish level that we were. Gives you your Fed funds.
37:49 Barry Ritholtz? So inflation is softening, productivity is gaining. That sounds like a very productive environment for both the economy and the fixed income market.
37:59 Speaker 04 Well, I think it's a good time for fixed income from the following perspective. You're getting yield from fixed income and I think you'd probably sell off a bit more. You're getting income from fixed income, let's put it that way. And again, talking about generations of people who were used to getting one or two, two and a half percent from that. You know, we, there was a point where, given where inflation was and given where ten year treasuries were, we were paying the government in real terms for the privilege of lending the government money, which is what you're doing every time you buy a treasury, right? But at least we're not there anymore. We're getting positive real returns. I think it is a constructive environment for fixed income, but you can't expect equity-like returns from fixed income. And again, because of liquidity flows and so on,
38:42 Speaker 04 people have become a little bit married to the idea of fixed income delivering massive outperformance. And what it should really be doing is giving you boring returns. You know, boring returns, it should be the ballast in your portfolio when your equity market delivers equity-like returns. And that is the future state that I anticipate for fixed income.
39:04 Barry Ritholtz? So, so let's stay with the issue of liquidity, which keeps coming up. How does that affect how you look at fixed income? Whether you want to go out for further duration or maybe even higher credit risk? What is all of this? Both from the Fed and elsewhere, what does all this liquidity do to how you construct a portfolio of fixed income products?
39:25 Speaker 04 I think it actually makes it a little bit more difficult. We talked earlier about the issue of pricing risk. When you have this much of liquidity, those spreads, people will get forced into riskier products. You can't stay out of the market because you need to clip that coupon. So you are present, but like I said, you're not getting massively over your skis in terms of adding on extra risk because things are priced to perfection in a market like this one. So what I mean by this is, my baseline is that we don't get a recession, as we spoke about it. Nobody has perfect foresight into what this looks like. You could get anything coming out of left field. Covid came from somewhere none
40:10 Speaker 04 of us anticipated. Very short recession, but it had very meaningful consequences. Clearly, there are many areas of uncertainty, and these are the reasons why, from my perspective, my baseline on the fundamentals, economic fundamentals, is no recession. But given how assets are priced right now, I would not go overboard loading up on risk at current levels. There are many reasons to anticipate, for example, additional corrections, including on the equity markets, frankly, just from a macro perspective, which we don't have right now.
40:44 Barry Ritholtz? We're gonna, we're gonna keep it modest on the credit risk side. What about duration?
40:49 Speaker 04 Yes.
40:49 Barry Ritholtz? We had, we had an inverted yield curve for a couple of years. The yield curve more or less uninverted.
40:55 Speaker 04 Yeah.
40:56 Barry Ritholtz? Um, so you're getting paid a little bit for a longer duration, but you're not getting paid a whole lot. How do you look at, at the long-term choices for, um, where's the sweet spot? Is it four to seven?
41:09 Speaker 04 No, I'd say it's, it's shorter. Right now, I'd say it's, it's shorter than four to seven. So I'd say I'd stay a little bit shorter right now because I, like I said, we're at four fourteen. I don't think it would take us very much to grind higher. Over here. And then if you've taken on a lot of duration, it will hurt you. Now, if you're taking some of that credit risk, should you be hedging it out? That is something which you can consider, but outright, simply going long, I wouldn't do too much. In terms of, we actually still think that there is an enormous amount of cash still sitting on the sidelines and everything from money markets onwards. And perhaps one of the best things to do is to at least dip your feet in and get at least to ultra short.
41:49 Speaker 04 Get yourself comfortable with ultra short so you could start moving out the yield curve as opportunities present themselves.
41:55 Barry Ritholtz? So one of the questions anytime we discuss hedging either credit or duration risk, what are the prices of that look like these days? Cause I recall pre-financial crisis, it was wildly mispriced and turned out to be really cheap to hedge credit risk. What about today in duration risk? Is it cheap or expensive to hedge that?
42:16 Speaker 04 It's still expensive.
42:17 Barry Ritholtz? Still expensive.
42:18 Speaker 04 I would say it's still, it's still expensive, but you can do it, you can do it in option space, for example, but yeah, I would say.
42:24 Barry Ritholtz? That, that's really, that's really interesting. We hinted at, but really didn't spend a lot of time talking about geopolitical risk. How do you factor that into your investment decisions? How does this drive fixed income choices?
42:41 Speaker 04 I think the interesting thing about geopolitics is increasingly it's become a backdrop. And I think that markets are not capable of remaining in a heightened state of panic and anticipation indefinitely. What I mean is when Russia went into Ukraine, we all thought this was going to be a short period. And you know geopolitics became very central to everyone's thinking. It's gone on for three years and it's unclear when, if ever, it's going to go away. And I think what's happening is that geopolitical uncertainty has become so much.
43:22 Speaker 04 A part of the backdrop that you can't actually manage your portfolio to that geopolitical risk. You can, when risks get sharply higher, you can try doing something, but you cannot position your portfolio for these geopolitical risks. So what are the geopolitical stress points? The Middle East is frankly, it was a forever geopolitical stress point which has to give this administration its due, come markedly lower based on what we have seen so far. I think actually things are looking a lot better in the Middle East than they have over a very long period of time. So that's, that's a positive.
44:03 Speaker 04 I think the issue of China, you have different geopolitical stress points, you have the trade tensions, but then separately, there's the eternal question of what happens with Taiwan. And that is always going to be a part of the backdrop. And I think a lot of people take a great deal of comfort from the fact that the Chinese authorities are extremely, extremely careful. And so we don't anticipate shooting from the hip, so to speak. You know, so this is something which we will continue to see stress points go up and down. And so I, I do think that in the early days of this administration, you know, certainly early days post Liberation Day, there was a thought that somehow you have a complete
44:48 Speaker 04 realigning of the geopolitical environment with the US not being credible or dependable. I don't, I think that was overstated. The US is more important than any one administration or any one single set of policies.
45:05 Barry Ritholtz? We talked a little bit about Europe and the euro area. At least in the equity side, Europe is finally outperforming the US after a long period of underperformance. What are your thoughts on the euro area and, and emerging markets in, in today's environment?
45:22 Speaker 04 So you know, the euro area, so if I look at the equity markets, I think you can't really talk about the equity markets without talking a little bit about the dollar. And that actually impacts EM as well. And I see a lot of discussion, again, and it's somewhat related to our previous comments on geopolitics, that somehow the dollar is no longer fit to be the world's reserve currency, it is the end of US exceptionalism, et cetera, et cetera. I think it's mixing up a whole bunch of things. Number one, when we entered this year, trade, in trade-weighted terms, the dollar was at its strongest level since the Plaza Accord.
45:57 Speaker 01 Right.
45:58 Speaker 04 Did you know that, since the Plaza Accord? I didn't realize. We're talking about the absolute strongest levels in trade-weighted terms since, in something like close to forty-five, fifty years. Really strong. Then what happened? We came into this year, and the first thing that happened, frankly, was deep-seak. You know, deep-seak burst, and somehow, oh my god, the US is not exceptional. And people were putting US exceptionalism hand in glove with the Mag Seven, I think. However, if you were a European investor, right, last two years, you got fifty-four percent just on the S and P, and then you got, what was it, ten, fifteen percent in dollar appreciation? You made out like a bandit!
46:43 Speaker 04 If you were smart, you took some profits, right? As soon as you got deep-seak happening. In short order afterwards, you got the Germans suddenly talking about one trillion euros over a ten-year period in terms of spending. So the last fiscal man standing, like I like to say, goes toppling down, and we all go, yay, yay, yay, that happened. But more seriously, it meant that potentially European growth would not look as lackluster, frankly, as it has been for a while. So that happened, and then you had Liberation Day. You had three sets of reasons, and the European equity market had been lagging so much, more than even the Nikkei in Japan. It was obviously a good time for people to go put money back there, and I think there's a little bit of catch-up going on.
47:27 Speaker 04 So I don't think it's anything deep and amazing. And quite frankly, if I look at European growth... European growth is not yet showing. German growth is not yet showing any impact from the one trillion ten year dollar spend. It's not yet showing up. I personally think that perhaps it's gone a bit too far because if I look at funds which had been approved during Covid.
47:54 Barry Ritholtz? Five years ago.
47:55 Speaker 04 Five years ago, they still have not been able to deploy them. The Europeans are tied up in red tape at a level which makes me have a certain degree of. I'm not going to go as far as saying skepticism, but caution in terms of how quickly this money will actually show up.
48:14 Barry Ritholtz? What about the defence spending that we're hearing about? That's probably weaponized Keynesianism. That's probably going to be a little quicker to find its way into the economy.
48:25 Speaker 04 I think it could be, but the only thing is the multiplier for defence spending is one of the lowest multipliers you have. Your highest multiplier is going to be what we did, which was to helicopter drop checks during Covid to everyone. That has a very high multiplier eventually. But if you look at defences, the multiplier is zero point four. It's a it's a low, low, low multiplier. Separately, you have other issues which I think are not discussed enough. And that is, I think there are some that somebody was telling me it's close to seventeen different arms manufacturers in Europe. How many arms manufacturers do you need? If you have multitudes of people making tanks, the problem is the demand for tanks is not infinite, right?
49:06 Speaker 04 And so you have a lot of relatively inefficient defence expenditure, which is likely to take place as well. I think it will make its way. I I don't want to come across as being overly negative. I think it's very positive that the Europeans are taking their own defence in hand.
49:25 Speaker 04 I think we and markets need to be cautious in terms of the speed at which we think this will show up.
49:31 Barry Ritholtz? Sure. So, the European Central Bank has cut rates. We've seen other central banks around the world cut rates. We talked a little bit about the Fed. What do you think they're paying attention to? Are they legitimately tight, especially now with QE ending and QT beginning? How do you look at the role of the Fed here?
49:53 Speaker 04 Barry, look, we talked a little bit about what I thought a reasonable Fed funds rate was. When I call it neutral, I mean, the economy is neither falling into recession or overheating, i.e. inflation accelerating. I think that number is four to four twenty five. Given where rates are right now, last year, before all of these ups, downs, and ins and outs, I thought the Fed had, within its gift, around one hundred and twenty five to one hundred and fifty basis points of rate cuts in all. And they did a hundred basis points already. So I think there isn't an unlimited amount that the Fed really can or should do. Will they do more? Probably. You know, I don't know whether it's this Fed or next year. At some stage, they can. It won't be catastrophic.
50:38 Speaker 04 I don't think it's particularly wise to cut rates dramatically. Are they messing up right now? No, actually. I don't think they're messing up. I, this is a very dovish Fed, by the way. Everyone says that, oh, markets will panic if we get a dovish Fed chair. Hello? The last non-dovish Fed chair we had was Paul Volcker. We haven't had a hawkish Fed chair in an enormous amount of time, and I don't see it happening now. It's not in the Fed's DNA.
51:07 Barry Ritholtz? Huh. Really, really interesting. Let me throw a curveball question at you. What do you think investors are not talking about, but perhaps should be?
51:18 Speaker 04 So that's a really excellent question. In this day and age, I think you can't talk about what's being overlooked without talking about time horizon.
51:28 Barry Ritholtz? Hmm.
51:28 Speaker 04 I think that uh we are all talking about fiscal but in very vague terms. And the mistake we are making is acting as if we suddenly got a fiscal deficit. We have been running ridiculous deficits for the last close to five years now. And it's very much like the excesses we saw with QE in the sense of monetary policy, which lasted long after it should have been withdrawn. And we're seeing that now. And I I don't see any uh desire on either party's side to do something serious about that deficit, which implies we won't fall into a recession. But I do think at some stage, there there needs to be some change in policy which reduces
52:12 Speaker 04 that deficit meaningfully. And I'm not sure you can do that without actually reducing growth. This is an additional reason why I don't think the Fed should go too far today. So are we no and I I think this is a long way of saying there's almost nothing that we don't talk about. It is a question of the timing. I think today we're probably looking at most of the important things uh that need to be looked at.
52:36 Barry Ritholtz? Huh, really interesting.
52:38 Speaker 05 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting
53:20 Speaker 05 and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.
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54:59 Barry Ritholtz? So I only have you for a certain amount of time, but let me jump to my favorite questions. Tell us about your early mentors who helped shape your career.
55:09 Speaker 04 So you know, my earliest mentor, I'd have to say, is my father. I grew up in India. In India, the path that I followed is not very traditional. And I have two brothers, and my father always treated me exactly the same as my brothers. And so, in a sense, when people ask me even today, "How do you get, you know, more women into the workplace?" And I get asked this question around the world when I go to our different offices. I tell everyone, you know, "Encourage your daughters, your sisters, your wives to be in finance, and they will be in finance." My father did not encourage me to be in finance. He did encourage me to think exactly the way
55:51 Speaker 04 Frankly, my brothers were thinking in terms of what the future held. So he was my earliest mentor. Second mentor, I would have to say, is one of my first mission chiefs at the IMF. Paul Thompson, who subsequently actually led missions to Greece and became the director of the European Department. He was my first mission chief and he is an amazing negotiator. And I still find myself using hand gestures that I've seen, I've learnt from him. And I still find myself doing this. How amazing is that? Because now you're talking about a very long time ago. And he definitely shaped how I work in the workplace.
56:35 Barry Ritholtz? Really, really interesting. Let's talk about books. What are some of your favourites? What are you reading right now?
56:41 Speaker 04 Okay, so some of my favourites, I've got an enormously varied. The only thing I don't read is horror of any kind. I, I, it scares me too much. My imagination's too real. But if I think about things I always go back to. I will throw, throw out, there's The Master and Margarita, which is Mikhail Bulkakov. Which was the first, first book which actually seen, it was transcendent, transcendental, I think. Love Pride and Prejudice. I love The Lord of the Rings. And currently I'm reading Urban Fantasy. It's called, the, the author's names are Ilona Andrews, Kate Daniels.
57:22 Speaker 04 It's very escapist. It's about as, as escapist as anything I think you would watch on Netflix. It is absolutely fantastic.
57:30 Barry Ritholtz? What's, what's the title?
57:31 Speaker 04 So it's a series of books. The protagonist is called Kate Daniels. And I think the first one was Magic Bites or something like that. It's set in a dystopian Atlanta where you have a mixture of various types of supernatural elements and things like that. It's really cool.
57:49 Barry Ritholtz? Really interesting. Our final two questions. What sort of advice would you give to a recent college grad interested in a career in either fixed income or investing?
58:01 Speaker 04 Number one, be extremely curious, right? Extremely curious. I would note that learn to do research. I'm not talking about research. What I'm saying is, especially today with Gen AI, uh, I think one of the worst things is immediately having answers. Because if you don't learn to spend the time to dig really, really deep into different areas, I don't think you're going to find answers. You're not going to be able to find the answers all written in the first three lines of a Google search. Actually, I do think that, uh, people coming fresh into the markets that we have,
58:45 Speaker 04 they need to read a little bit more about what has gone before them. I think there are some brilliant books out there. Uh, I would call out, uh, Ken Rogoff and Carmen Reinhardt have a couple of them. It's just a good.
58:58 Barry Ritholtz? This time is different?
58:59 Speaker 04 Yeah, this time, this time it's different. It's fantastic. And, uh, and your book, uh, Barry, I'm gonna give you that shout out because I think it's good to actually read practitioners' books because we live in bizarre times and many people will not have seen the various cycles.
59:16 Barry Ritholtz? His- history, you know, those of us who don't learn from history are condemned to, uh, to repeat it.
59:23 Speaker 04 There's that part of it. And I think the other piece I would say is it's very hard, I know, but try not to be too impatient. If you can't go through a few market cycles, it's very difficult to really understand my markets, right? So I, I don't believe in time and grade. I'm all for people jumping ahead, but sometimes nothing substitutes for actually living through different market cycles in our business.
59:55 Barry Ritholtz? Huh, really, really interesting. What do you know about the world of investing today? You wish you knew thirty years or so ago when you were first getting started.
1:00:04 Speaker 04 You know, the biggest thing I'd say is that nothing, while in the moment, it feels like the catastrophe is going to end the world. Number one, it won't.
1:00:17 Barry Ritholtz? Hmm.
1:00:18 Speaker 04 Number two, cycles end. I would have had a lot fewer sleepless nights if I could have just calmed myself down and said, okay, this too will pass. And so I think, I think that there is a, there is an element of just knowing that, you know, this is a part of what we do.
1:00:38 Barry Ritholtz? Really so interesting. Thank you, Sonal, for being so generous with your time. We have been speaking with Sonal Desai. She's Chief Investment Officer for Franklin Templeton's Fixed Income Group. If you enjoy this conversation, well, check out any of the 500 we've done over the past 11 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcast. And be sure and check out my new book, How Not to Invest: The Ideas, Numbers, and Behavior That Destroys Wealth and How to Avoid Them, How Not to Invest at Your Favorite Bookseller. I would be remiss if I did not thank the crack team that helps us put these conversations together each week.
1:01:22 Barry Ritholtz? Meredith Frank is my audio engineer. Anna Luke is my producer. Sean Russo is my researcher. Sage Baumann is the head of podcasts at Bloomberg. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
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